Sep 132016
 
 September 13, 2016  Posted by at 9:03 am Finance Tagged with: , , , , , , , , , ,  


Harris&Ewing Calvin Coolidge Inaugural Ball. March 4, Washington DC 1925

Energy Exploration & Production Debt Recoveries Hit ‘Catastrophic’ Level (BBG)
Oil Bankruptcies Leave Lenders With ‘Catastrophic’ Recovery Rate (BBG)
Strategist: If Trump Wins, ‘The U.S. Economy Would Take Off in a Big Way’ (BBG)
A Homerun For The Donald – Attack The Fed’s War On Americans (Stockman)
Fed Looks Unlikely To Hike Next Week After Brainard Warning (R.)
The Expansion in Developed Markets Might Be Over (BBG)
China’s Infrastructure Planners are on a Road to Nowhere (BBG)
Michael Pettis: Surplus Trade Statements by Schäuble “Utter Lunacy” (Mish)
ECB Lets Banks Offload Bad Loans At Own Speed (R.)
Greek Prices Keep Rising as Household Incomes Keep Shrinking (Kath.)
US Funds And Iceland Square Up Over Bond Freeze (R.)
Australia 6 Weeks From A Housing Collapse, US Report Warns (ZH)
NZ PM Wary Of Policies That Could Cause Catastrophic Housing Slump (Hickey)
Signs of Desperation (Jim Kunstler)
The Tropical Paradise The US Wants To Turn Into A War Zone (G.)

 

 

We’ve warned on just this for a long time. The US oil casino.

“Senior unsecured bondholders were hammered even more, averaging just 6 cents on the dollar.”

Energy Exploration & Production Debt Recoveries Hit ‘Catastrophic’ Level (BBG)

Creditors of energy exploration and production companies that went bankrupt last year recouped less than half the usual amount for their claims, and 2016 is shaping up just as bad, according to Moody’s Investors Service. Recovery rates for 15 U.S. E&P bankruptcies averaged a “catastrophic” 21% last year, well below the historical average of 59%, Moody’s said in a report released Monday. Senior unsecured bondholders were hammered even more, averaging just 6 cents on the dollar. Collectively, the debacle could be worse than the telecom industry’s collapse in the early 2000s, measured by both the number of companies that go bust and the recoveries, Moody’s said.

Many of the E&P firms that went bankrupt in 2015 were smaller companies with less flexibility to maneuver as energy prices crumbled, while larger companies were able to stave off failure with debt exchanges and new second-lien issuance, analysts led by David Keisman wrote. But more than half of those swaps were followed by bankruptcy, according to the report. “I don’t expect the recoveries for the companies that went bankrupt in the first half of 2016 to be any better,” Moody’s analyst Amol Joshi said in an interview. “The worst may be behind them, but the sector still remains quite stressed.”

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So who’s going to jump in to save the lenders in the “worst bust of any industry this century”?

Oil Bankruptcies Leave Lenders With ‘Catastrophic’ Recovery Rate (BBG)

U.S. oil bankruptcies haven’t been this “catastrophic” for lenders in a long time, in what may be the worst bust of any industry this century, according to Moody’s Investors Service. Creditors are recovering an average 21% of what they lent, compared with about 59% in past decades, the credit-rating agency said Monday in a report that looks into lending to 15 exploration and production companies that filed for bankruptcy protection in 2015. That may be on par with, or worse than, the telecommunications industry collapse in 2001 and 2002, the study led by David Keisman said. High-yield bonds recovered a mere 6%, compared to 30% in previous years going back to 1987.

Defaults in the oil and natural gas industry have been rising through a market slump that has exceeded two years as companies lacked the cash to make interest payments on their debt. Bankruptcies among U.S. producers so far this year are about twice the number among companies rated by Moody’s in all of 2015, the report said. The oil and gas figures have helped propel U.S. corporate defaults to the highest since 2009. Less than half of the companies that negotiated distressed-debt exchanges in 2015 to try to stave off bankruptcy succeeded, the analysts wrote.

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The opposite of what was a popular view until recently, and probably still is among many.

Strategist: If Trump Wins, ‘The U.S. Economy Would Take Off in a Big Way’ (BBG)

Financial markets are starting to “wake up” to the possibility of a Donald Trump presidency in the wake of Hillary Clinton’s recent health concerns and tightening polls, according to Bank of America Merrill Lynch Head of Global Rates and Currencies Research David Woo. He says investors are still underestimating the real estate mogul’s chances of ascending to the highest office in the land, and what a seismic change this could be for markets and the world’s largest economy. While the outsider candidate poses a risk to one of 2016’s hot investment strategies, he could prove to be a massive boost for the greenback and U.S. economy.

“The U.S. economy would take off in a big way” if Trump were elected and Republicans control both legislative houses next year, said Woo, thanks to the fiscal stimulus that Trump would enact. Trump has pledged to spend at least twice as much as the Democratic nominee on infrastructure and also enact a massive tax cut, two measures that would entail a renewed issuance of Treasuries. Against this backdrop, the greenback would strengthen and U.S. Treasury yields would rise, a view shared by Woo and other fixed income veterans as well.

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Spot on from Stockman.

A Homerun For The Donald – Attack The Fed’s War On Americans (Stockman)

The central banks have gone so far off the deep-end with financial price manipulation that it is only a matter of time before some astute politician comes after them with all barrels blasting. As a matter of fact, that appears to be exactly what Donald Trump unloaded on bubble vision this morning: By keeping interest rates low, the Fed has created a “false stock market,” Donald Trump argued in a wide-ranging CNBC interview, exclaiming that Fed Chair Janet Yellen and central bank policymakers are very political, and should be “ashamed” of what they’re doing to the country… He’s completely correct.

After all, they are crushing real wages with their 2% inflation targeting; destroying savers with NIRP and sub-zero rates; and burying unborn taxpayers in monumental debts that today’s politicians are pleased to issue with reckless abandon because the short-run carry cost is nil. Interest on the Uncle Sam’s $19.4 trillion of debt, for example, is easily $500 billion lower than its true economic cost based on a normal yield after inflation and taxes and elimination of the phony $100 billion per year in so-called Fed “profits” that are booked by the treasury as negative interest expense. Alas, when interest rates eventually normalize, the Treasury’s debt service costs will soar by hundreds of billions.

At the same time, the entirety of the Fed’s “profits”, which are conjured from thin air because it buys interest-yielding government and GSE debt with printing press liabilities which cost virtually nothing, will disappear. That’s because it will be forced to take reserve charges for giant principal losses on the falling prices of its $4.5 billion portfolio of government and GSE bonds. At that moment, the long-abused citizens of Flyover America, who have already been clobbered as savers and wage earners, will get hit with the triple whammy of soaring Federal tax bills. And this is not a matter of if or even when; it’s really just a question of how soon. When it comes to the establishment’s monetary lunacy, of course, Mario Draghi’s is always leading the charge.

So just consider what has been happening after his inartful punt during last week’s ECB meeting. First, the casino cheerleaders have insisted that there is nothing to sweat about with respect to the incredible anomaly that now plagues the euro-bond markets. To wit, socialist Europe has apparently not issued enough qualifying debt (with a yield not below the negative 0.4% threshold) to fill the ECB’s $90 billion per month purchase target. The solution is real simple according to Draghi’s acolytes in the casino. In addition to lowering the bond yield threshold as deep into the subzero freezer as necessary, they have proffered an even better solution. Just buy up the stock market, too!

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What, that was the highly anticipated speech?

Fed Looks Unlikely To Hike Next Week After Brainard Warning (R.)

The Federal Reserve should avoid removing support for the U.S. economy too quickly, Fed Governor Lael Brainard said on Monday in comments that solidified the view the central bank would leave interest rates unchanged next week. Brainard said she wanted to see a stronger trend in U.S. consumer spending and evidence of rising inflation before the Fed raises rates, and that the United States still looked vulnerable to economic weakness abroad. “Today’s new normal counsels prudence in the removal of policy accommodation,” Brainard, one of six permanent voters on the Fed’s rate-setting committee, told the Chicago Council on Global Affairs. She said the U.S. labor market was not yet at full strength, which means “the case to tighten policy preemptively is less compelling.”

Brainard did not comment on the specific timing of future rate policy changes but she held firm in arguing for caution in what could be the last word from a Fed policymaker before the central bank’s Sept. 20-21 meeting. Policymakers will go into the meeting divided, with some concerned current low rates will fuel a surge in inflation while another camp, which includes Brainard, has argued that the Fed should not rush to raise rates. Many other policymakers think the U.S. job market is near full strength and Fed Chair Janet Yellen argued in July the case for rate increases has strengthened. “I think circumstances call for a lively discussion next week,” said Atlanta Fed President Dennis Lockhart, who will not be a voter at next week’s policy review but will participate in discussions.

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How predictable would you like it?

The Expansion in Developed Markets Might Be Over (BBG)

As traders are settling back into their routine after the slow summer months, things have started taking a turn for the worse in global markets. Now one indicator is even pointing to the end of the expansion in developed markets. According to new research from Morgan Stanley, so many developed countries are showing enough signs of slowing, that its cycle indicators — which take macro, credit and corporate factors into account — are leading analysts led by Chief Cross-Asset Strategist Andrew Sheets to conclude that a downturn could be coming sooner than some may think.

“The Morgan Stanley Cycle Indicators across the U.S., eurozone and Japan have stalled, highlighting the increasing risk that we have moved from ‘expansion’ to ‘downturn’ in [developed markets], even as our economics team flags upside risks to its macro outlook,” the team said in a note published on Sundayy. The team points out that if this is in fact the start of a cycle change, it would represent the shallowest recovery for the U.S. in more than 30 years. Here’s a look how these cycles have played out in the past, with recessions shaded.

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“..for over half of the infrastructure investments in China made in the last three decades the costs are larger than the benefits they generate..”

China’s Infrastructure Planners are on a Road to Nowhere (BBG)

For all the roads, bridges and railways that China builds every year in an effort to keep the economy humming, the massive splurge may not be having the desired effect. That’s because more than half of China’s infrastructure investment has destroyed economic value instead of generating it, according to a study from the University of Oxford’s Saïd Business School. “The evidence suggests that for over half of the infrastructure investments in China made in the last three decades the costs are larger than the benefits they generate,” according to Atif Ansar, one of the study’s co-authors.

What’s more, unless China shifts its focus to fewer and higher quality types of public works that leave a positive legacy “the country is headed for an infrastructure-led national financial and economic crisis, which is likely also to be a crisis for the international economy,” according to the analysis that’s published in the Oxford Review of Economic Policy. China spent more than $10.8 trillion in infrastructure in the last decade alone, according to Bloomberg calculations based on official data of investment in categories such as transport, storage, power supply and water conservation. The Oxford study’s findings jar with views that China’s aggressive government-led infrastructure spending is vital to keep growth on track.

Researchers examined 21 large rail projects and 74 road projects whose starting dates ranged from 1984 to 2008. They then compared the economic value of those to 806 transport projects built in rich democracies. Instead of finding a long lasting, positive economic legacy, the Oxford study found that 75% of the transport projects in China exceeded budget. While one third of the roads built were congested, 41% of them have low usage. Both extremes are equally undesirable because “large unused capacity equals waste, as does too little capacity,” according to the paper. The buildup has also exacerbated China’s swelling debt as cost overruns equal about a third of the nation’s $28.2 trillion debt mountain, according to the paper.

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Once more, why the euro will fail: All eurozone countries get punished for not being enough like Germany. But the only way Germany can be Germany is for the others not to be.

Michael Pettis: Surplus Trade Statements by Schäuble “Utter Lunacy” (Mish)

A few days ago I pinged global trade expert Michael Pettis with my post Germany’s Finance Minister Blames ECB For German Trade Surplus; Why the Eurozone Will Destruct. His reply was interesting but not at all unexpected. Pettis labeled Wolfgang Schaeuble’s comments “utter lunacy”. Germany has no plans to reduce its export surplus, Finance Minister Wolfgang Schaeuble said on Friday, as the ECB has not changed its monetary policy which has led to a weaker euro which in turn boosts German exports. “Even before the European Central Bank decided its policies of unusual monetary policy, which also led to the euro exchange rate falling significantly, I said that we will increase German export surplus,” Schaueble told reporters. When asked whether he had any plans to decrease Germany’s export surplus, Schaeuble said: “I haven’t heard that the ECB is changing its monetary policy.”

Pettis Comments “What utter lunacy. It is one thing to defend the existing surplus by pretending to believe that it was not caused by income distortions at home but rather by foreign laziness, but to say that it is German policy to grow the surplus further is outrageous. Now that they have bankrupted Europe, and developing countries are in trouble, who but the US can possibly be forced into absorbing it? If the US were ever to decide that it cannot continuing absorbing everyone else’s deficient demand at the expense of becoming more like peripheral Europe, the consequences for Germany (and China and Japan) would be devastating.”

Target2 stands for Trans-European Automated Real-time Gross Settlement System. It is a reflection of capital flight from the “Club-Med” countries in Southern Europe (Greece, Spain, and Italy) to banks in Northern Europe. [..] Target2 is also a measure of capital flight. The Italian banking system is effectively bankrupt, and outflows from Italy have been picking up.

Six Largest Target2 Deficit Countries

Six Largest Target2 Creditor Countries

Look closely at the six countries with the highest balances. Only four countries are positive: Germany, Luxembourg, the Netherlands, and Finland. The six largest deficit countries owe a collective 797.3 billion euros to the four creditor countries. The ECB itself is in hock for another 133.5 billion euros. Monetary policy can help external balances but it cannot fix internal target2 balances. Every county in the Eurozone is stuck with the Euro and the ECB’s interest rates whether it makes any sense or not (and it doesn’t). Rates suitable for Germany were not suitable for Spain, Ireland, Greece, and many other countries.

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This sounds like the ECB is desperate (and fighting Germany). Unlike the US, European banks often still have 10+ year-old bad loans on their books, and now they get 3+ more years to get rid of them. Meanwhile the same ECB, through its NIRP and ZIRP policies, makes the banks bleed more cash. There’s no way this can end well.

ECB Lets Banks Offload Bad Loans At Own Speed (R.)

Euro zone banks will get to set their own targets for cutting the €900 billion of bad loans left over from the financial crisis, facing sanctions only if they fall way short of the mark, new guidance by the ECB showed on Monday. Banks in weak economies such as Greece, Portugal and Italy are still struggling under the burden of unpaid loans extended before the crisis, which reduce their ability to lend and undermine investor confidence. The ECB, as the euro zone’s top bank supervisor, is trying to get banks to manage down that mountain of soured credit. But it cannot push them too hard if it doesn’t want them to incur hefty losses, which would also strangle lending. Under new guidance disclosed on Monday, banks will be asked to set numerical targets for the levels of non-performing loans they aim to reach in one and three years, and follow a number of other guidelines.

Failure to comply may lead to so-called ‘supervisory measures’ by the ECB, such as higher capital requirements. But the ECB said the new guidelines would be non-binding and only “significant” deviations from them may trigger action, while solving the problem would take longer than three years in many cases. [..] When the ECB disclosed plans to work on new guidelines for non-performing loans in January, some banks worried that it would force a fire sale of those assets. That would push down their selling price and hurt bank profits. However, the guidelines showed banks will be given three years or, in many cases, longer. “We chose a three-year target because most banks have a three-year projection in their business plans … for a number of banks, this will not be the end of the story, it will likely take longer,” Donnery said.

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How the EU has designed the impossibility of a Greek recovery. If you kill consumption, you kill the economy and eventually the society. A whole range of food products went from 13% VAT to 24% since last summer. In the same time-frame pensions and wages were cut multiple times.

Greek Prices Keep Rising as Household Incomes Keep Shrinking (Kath.)

While households’ disposable income keeps shrinking, consumers also face the constant increase of prices in dozens of commodities, particularly food products, making Greece one of the most expensive countries in the EU in this domain. Successive value-added tax hikes, and particularly one imposed last summer shifting a series of food commodities from the 13% to the 23% bracket and now to 24%, have led to a decline in consumption. This means that the industry and retail commerce, in turn, raise their prices in order to offset losses from the domestic market’s downturn. Although Greece has experienced deflation in the last three-and-a-half years, data published by Eurostat are revealing:

Food prices in Greece were up 2.3% compared with the same month in 2015, while the respective rise across the eurozone averaged at 0.9%. The hikes in fruit, vegetables and various vegetable oils are reminiscent of periods when the Greek economy suffered under the burden of inflationary pressures a few decades ago. Vegetable oils, including olive oil that is dominant in Greek households, were sold at a price 9.5% higher than a year earlier, while the rise in the eurozone amounted to 2.9%. Fruit prices grew 4.2% year-on-year, just below the eurozone average of 4.9%, while vegetable prices went up 7% against 5.6% in the eurozone. The prices of bread and cereals increased 2% on an annual basis, whereas in the eurozone the hike was no more than 0.2%.

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“..barring any sudden change of tack the situation looks set to escalate.”

US Funds And Iceland Square Up Over Bond Freeze (R.)

A group of U.S. funds battling with Iceland after it froze $1.4 billion of the government’s bonds they own are limbering up for a legal fight if Reykjavik continues to stonewall efforts at a deal. While the players and amounts of money involved mean the situation is unlikely to develop into an years-long Argentina-style standoff, it is overshadowing Iceland’s comeback from one of the world’s most extreme banking crises. A few weeks ago it took a big step in dismantling its 8-year old capital controls and the smooth progress so far has earned the country a double-notch credit rating upgrade and has been driving up its currency.

One headache, however, is that it remains deadlocked with funds Autonomy Capital, Eaton Vance, Loomis Sayles and Discovery Capital Management – whose frozen bonds are worth roughly 10% of Iceland’s annual economic output – after they spurned what they saw as low-ball government offer to unlock them back in June. Two of the funds, Autonomy and Eaton Vance, have filed a complaint to the European Free Trade Association (EFTA) in Brussels which is ongoing, saying that the quarantining of their bonds amounts to a discrimination against foreign investors. Autonomy has made a separate approach to a court in Iceland. Iceland rejects the claims saying that some domestic investors are also affected and that the moves are necessary to allow a smooth lifting of capital controls, so barring any sudden change of tack the situation looks set to escalate.

[..] One of the world’s top sovereign debt lawyers, Cleary Gottlieb’s Lee Buchheit, who represented Iceland’s government in cases over its failed banks but says he is not involved in the current squabble, is skeptical of the funds’ legal chances. “I don’t want to predict the outcome but it is going to be a challenge I think for these people to mount an effective legal complaint before EFTA here,” he said, adding that it would also be difficult to pursue the case in another country’s courts. “Anyone challenging what they have done is going to have to say that it was unnecessary or disproportionate.” “And if you have got the IMF saying: no, what they are doing is perfectly necessary and perfectly proportional to protect their balance of payments and exchange rate, it is going to be a tough argument to make.”

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Let’s hope Australians take this to heart.

Australia 6 Weeks From A Housing Collapse, US Report Warns (ZH)

U.S. based think tank International Strategic Studies Association (ISSA), is warning that similar efforts to restrict Chinese investment in Australian real estate could send prices tumbling there as well. In speaking with news.com.au, Greg Copley, President of ISSA, predicted that Australia has about 6 weeks before real estate prices start to collapse.

“We estimate that Australia has about six weeks or so to turn this situation around, otherwise there would be a massive hit on property valuations and the building trades.” The urgency is, I believe, based on the fact that this is about how long it will take for the banks’ policies to start switching off a lot of existing and planned contracts for Australian properties.” “The banks clearly believe Australian real estate values will decline, so they are attempting to avoid that risk. They’ve learned from the US collapse that seizing real estate collateral is a no-win scenario when the volume is great and the market slow.” “In so doing, they precipitate the market collapse but are less exposed to it.”

Real estate prices in Australia’s largest housing markets have soared over the past couple of years fueled, in no small part, by demand from Chinese buyers looking for offshore locations to park cash. The Sydney and Melbourne markets have been the largest beneficiaries of foreign capital with real estate prices up 53% and 51%, respectively, since 2012. That said, based on data from the Australian Bureau of Statistics it looks like home prices in Australia have already started their descent.

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Key knows a lot of real estate is bought with ‘dirty money’. And chooses not to act. Time to get rid of him.

NZ PM Wary Of Policies That Could Cause Catastrophic Housing Slump (Hickey)

Prime Minister John Key has warned against any strong Government policy moves to restrict or tax foreign buyers, saying he did not want to cause a catastrophic slump in the market. Referring to moves in Australia that some say have pushed the apartment market there to the brink of collapse, Key said Government’s role was to protect the value of equity in home owners’ homes. He also talked down the prospect of urgent action to roll out a second round of Anti-Money-Laundering (AML) requirements to real estate agents, solicitors and accountants, saying it could significantly increase compliance costs and therefore increase costs for first home buyers.

[..] “Like any public policy in the area of housing, it’s always a delicate balance between being effective in trying to slow prices going up, and making sure you don’t have some catastrophic reaction you’re not expecting,” Key said. “Years ago Australia bought in a vendor’s tax in Australia and it had such a significant impact they actually cancelled it. There’s always a happy medium,” he said. “Anyone in Government has to be a bit careful, because for most people their primary asset is their house and for most people, a significant amount of the home is borrowed from the bank, so you do have to protect their equity.”

[..] in response to a NZ Herald article on Saturday detailing police concerns about money laundering in real estate and delays in a long-mooted second round of anti-money laundering (AML) reforms to include real estate agents and solicitors, Key defended the pace of reforms, which Labour Leader Andrew Little has described as “chain dragging.” The report detailed how Justice Minister Amy Adams went against a recommendation last year from her officials for an immediate start to policy work on the reforms after a warning from police that up to NZ$1.6 billion a year of dirty money was being pumped into housing markets.

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“Eliminating currency as a medium of exchange can only lead to the repudiation of “money” — which will beat a quick path to the repudiation of all authority.”

Signs of Desperation (Jim Kunstler)

Does the public understand the rationale behind zero interest rate policy (ZIRP)? Not any more than they understand the interaction of gluons and quarks or the doctrine of the Holy Trinity. It is one of the abiding mysteries of our time, for instance, that a group like AARP, purporting to represent the interests of retired persons, has offered not a peep of pushback to ZIRP, which has pounded retired people dependent on savings into penury. Of course, this might be explained by the pervasive racketeering feature of our current national life: AARP is an insurance racket masquerading as a citizen interest group. Or, stretching credulity to suppose that AARP is honest, perhaps the org’s executives don’t understand that zero interest on savings equals zero income to savers.

Kenneth Rogoff tries to justify his war on cash by invoking two of the era’s favorite bogymen: terrorists and drug dealers. Cash, he says, allows this axis of evil to do its thing(s). This is a ruse, of course. If currency is eliminated, these outfits will turn to gold and silver, it’s that simple. And so will everybody else, by the way. The real reason to abolish cash and herd all money into central banks is to permit the authorities to confiscate it one way or another, either by unavoidable taxation or by “bail-ins” – declaring deposits to be “unsecured loans” that can be repudiated in the event of a financial “accident.” The results are already in for this experiment: “money” becomes more and more dishonest, that is, it cannot be trusted to represent what it pretends to stand for: an index of account and a store of value.

Its role as the basis of capital formation is so impaired that real capital (i.e. wealth) cannot be generated, meaning that none of the credit issued as “money” will ever be paid back. Zero interest rate policy eventually equals zero interest paid. “Money” based on loans that won’t be paid back loses its legitimacy. Herding all the “money” onto central bank computers only allows for more three-card-monte maneuvers to conceal the bezzle. It would be much harder to hide the destruction of value in circulating paper currency. Eliminating currency as a medium of exchange can only lead to the repudiation of “money” — which will beat a quick path to the repudiation of all authority. And there is your recipe for really suicidal political disorder.

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As long as there are things left to destroy, we’ll destroy them.

The Tropical Paradise The US Wants To Turn Into A War Zone (G.)

Even here, in a region bursting with natural beauty, it is hard to imagine a more idyllic scene than Green Beach on Pagan island. Azure waters roll ashore before disappearing into the volcanic sand on a perfectly shaped horseshoe beach; on the horizon, cliffs plunge into darker open water that stretches, unhindered, more than 1,600 miles to the north-east coast of the Philippines. But in just a few years, Pagan’s tranquility could be shattered by the sound of heavy artillery, ending any hopes the displaced people of this 10-mile-long speck in the western Pacific have of returning to their ancestral home, more than three decades after a volcanic eruption forced all 300 residents to flee.

According to plans outlined by the US Department of Defence, as many as 5,000 marines will descend on the island to conduct war games as part of the Obama administration’s pivot towards the Asia-Pacific. The exercises will not only make human settlement impossible; campaigners say it will lead to the destruction of ancient cultural relics and threaten wildlife, including indigenous endangered animals such as fruit bats and tree snails. The marines will be among more than 8,000 who are due to be relocated to Guam and Hawaii from Okinawa as part of a controversial agreement between Washington and Tokyo to reduce the US military footprint on the southern Japanese island.

Faced with the near-certain destruction of their homeland – part of the US Commonwealth of the Northern Marianas – dozens of former residents have joined forces with environmental campaigners to launch a lawsuit they hope will expose the folly of the Pentagon’s plans to transform Pagan and Tinian, an inhabited island 200 miles to the south, into simulated theatres of war. The whole of Pagan would be turned into a simulated war zone to enable troops from the US, and regional allies Japan, South Korea and Australia, to prepare for possible confrontations sparked by China’s military buildup in the South China Sea and its claims to Japanese-administered islands in the East China Sea.

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Sep 082016
 
 September 8, 2016  Posted by at 9:27 am Finance Tagged with: , , , , , , , , , ,  Comments Off on Debt Rattle September 8 2016


Harris&Ewing The Post Office building in Washington DC 1911

US Recession Jitters Stoke Fears of Impotent Fed and Fiscal Paralysis (AEP)
One In Six Prime-Age American Men Has No Job (NPR)
GDP – Even Less Than Meets The Eye (720 Global)
It Won’t Be Long Now – The End Game Of Central Banking Is Nigh (Stockman)
China’s $1 Trillion Makeover Of Bloated SOEs Attracts Skeptics (BBG)
China’s Massive Infrastructure Investment Is A Model To Avoid (MW)
P2P Lenders Push Chinese Students To Borrow At Exorbitant Rates (BBG)
Collapse Of Hanjin Leaves $14 Billion Worth Of Goods Adrift (BBG)
EU Regulators: Bad Loans Are Systemic Challenge for European Banks (BBG)
America’s Quiet War on Cash (TAM)
FBI Records on Financial Crisis Requested by U.S. Lawmaker (BBG)
Clinton Foundation: False Philanthropy (Ortel)
Former Japan PM Accuses Abe Of Lying Over Fukushima (G.)

 

 

Picture of failure.

US Recession Jitters Stoke Fears of Impotent Fed and Fiscal Paralysis (AEP)

An ominous paper by the US Federal Reserve has become the hottest document in high finance. It was intended to reassure us that the world’s hegemonic central bank still has ample firepower to overcome the next downturn. But the author was too honest. He has instead set off an agitated debate, and rattled a lot of nerves. David Reifschneider’s analysis – ‘Gauging the Ability of the FOMC to Respond to Future Recessions’ – more or less concedes that the Fed has run out of heavy ammunition. The Federal Open Market Committee had to cut interest rates by an average of 550 basis points over the last nine recessions in order to break the fall and stabilize the economy. It could not possibly do so right now, or next year, or the year after.

QE in its current form cannot compensate, and nor can forward guidance. They are largely exhausted in any case. “One cannot rule out the possibility that there could be circumstances in the future in which the ability of the FOMC to provide the desired degree of accommodation using these tools would be strained,” he wrote. This admission is painfully topical as a plethora of data suggest that the US economy may have hit a brick wall in August. The ISM gauge of manufacturing plunged below the boom-bust line to 49.4, and the services index dropped to a six-year low, with new orders crashing nine points. My own tentative view is that these ISM readings are rogue surveys. The Atlanta Fed’s ‘GDPNow’ tracker points to robust US growth of 3.6pc in the third quarter. The New York Fed version is coming in at 2.8pc. 

Yet the US expansion is already long in the tooth after 87 months, and late-cycle chemistry is notoriously unpredictable. Warning signs certainly abound. Corporate profits have been slipping for six quarters, the typical precursor to an abrupt slump in business spending. “The only thing keeping the US out of recession is the US consumer. If consumption stalls then we really are in trouble,” says Albert Edwards from Societe Generale. I am willing to bet against him for now. The M1 money supply – often a good leading indicator – has picked up after a weak patch earlier this year and is now surging at a rate of 10.1pc. This pace would normally signal burst of torrid growth a few months later. It is in stark contrast to the monetary contraction before the Lehman crisis.

My presumption is that the day of reckoning has been pushed well into 2017, but in the dead of the night I have a horrible sweaty feeling that Mr Edwards may be right. It is not a time to be chasing stock markets already at vertiginous levels. The Reifschneider paper argues that the Fed can probably muddle through, so long as it succeeds in pushing interest rates back up to 3pc or so before the next recession hits. Even then it might have to launch a further $4 trillion of QE and stretch its balance sheet to a once unthinkable $8.5 trillion.

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” In the 1960s, nearly 100% of men between the ages of 25 and 54 worked..”

One In Six Prime-Age American Men Has No Job (NPR)

At 4.9%, the nation’s unemployment rate is half of what it was at the height of the Great Recession. But that number hides a big problem: Millions of men in their prime working years have dropped out of the workforce — meaning they aren’t working or even looking for a job. It’s a trend that’s held true for decades and has economists puzzled. In the 1960s, nearly 100% of men between the ages of 25 and 54 worked. That’s fallen over the decades. In a recent report, President Obama’s Council of Economic Advisers said 83% of men in the prime working ages of 25-54 who were not in the labor force had not worked in the previous year. So, essentially, 10 million men are missing from the workforce.

“One in six prime-age guys has no job; it’s kind of worse than it was in the depression in 1940,” says Nicholas Eberstadt, an economic and demographic researcher at American Enterprise Institute who wrote the book Men Without Work: America’s Invisible Crisis. He says these men aren’t even counted among the jobless, because they aren’t seeking work. Eberstadt says little is known about the missing men. But there are factors that make men less likely to be in the labor force — a lack of college degree, being single, or being black. So, why are men leaving? And what are they doing instead?

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“GDP as most commonly used can be a flawed measurement if one tries to infer that the size or growth of economic activity is well correlated to the prosperity of its people..”

GDP – Even Less Than Meets The Eye (720 Global)

The most common statistic used to measure the size and growth rate of a nation’s economy is Gross Domestic Product (GDP). However, GDP as most commonly used can be a flawed measurement if one tries to infer that the size or growth of economic activity is well correlated to the prosperity of its people. Consider China and the United States for example. The U.S. has a GDP of approximately $16.5 trillion and a population of roughly 325 million while China has a GDP of nearly $11 trillion and a population of approximately 1.4 billion.

One could say that China’s economy is about two-thirds the size of the U.S. economy, however when one considers how that activity is spread amongst the citizens, China’s economy is only one-seventh that of the U.S. Accordingly, Chinese citizens are clearly less productive and prosperous than U.S. citizens GDP per capita (per citizen), as demonstrated above, is a valid way to measure the efficiency of one nation’s economic output versus another and is also an important statistic to gauge the productivity and prosperity trends in one country. We have frequently shown the declining trend in secular GDP growth in charts like those shown below.

Above, GDP is plotted on an absolute basis and does not take into account the amount of economic activity or economic growth per person. Below, we show the ten-year growth rate of GDP per capita.

As one easily notices GDP on a per capita basis is more worrisome than when viewed on a total basis as in the first two graphs. The economic growth rate per person is currently below one half of one%. More concerning, it is below levels seen during the great financial crisis in 2008 and it is still trending lower. This graph confirms our macroeconomic concerns and helps explain, in part, why so many U.S. citizens feel like they are being left behind. Factor in that many of the economic spoils are not evenly distributed, as assumed in this analysis, but are largely accruing to the wealthy, and the problem only worsens. As such, the growing social anxiety and trend towards populism, be it conservative or liberal leaning, will not likely dissipate if the aforementioned economic trends continue.

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Centralization as a whole is going the way of the dodo.

It Won’t Be Long Now – The End Game Of Central Banking Is Nigh (Stockman)

As Contra Corner readers recognize the only consistent way forward for America at this late stage of the game is a return to free markets, fiscal rectitude, sound money, constitutional liberty, non-intervention abroad, minimalist government at home and decentralized political rule. Unfortunately, that is not about to happen any time soon—–even if by some miracle Donald Trump is elected President. But what the book does claim is that the tide is turning against the failed Wall Street/Washington bipartisan consensus. I call this insurrection the “revolt of the rubes” in Flyover America. This uprising against the rule of the financial and political elites has counterparts abroad among those who voted for Brexit in the UK, against Merkel in the recent German elections in her home state, and among the growing tide of anti-Brussels sentiment reflected in polls throughout the EC.

Needless to say, the political upheaval now underway is largely an inchoate reaction to the policy failures and arrogant pretensions of the establishment rulers. Like Donald Trump himself, it does not reflect a coherent programmatic alternative. But my contention is that liberation from our current ruinous policy regime has to start somewhere—and that’s why the Trump candidacy is so important. He represents a raw insurgency of attack, derision, impertinence and repudiation. If that leads to throwing out the beltway careerists, pettifoggers, hypocrites, ideologues, racketeers, power seekers and snobs who have brought about the current ruin then at least the decks will be cleared.

So doing, the Trump candidacy—win or lose—is paving the way for an honest debate about the Fed’s war on savers and wage earners, the phony Bubble Finance prosperity it has bestowed on the bicoastal elites and Imperial Washington’s delusionary addiction to debt, war and special interest racketeering. In addition to the political revolt of the rubes, the establishment regime is now imperiled by another existential threat. To wit, the world’s central bankers have finally painted themselves into the mother of all corners. Literally, they dare not stop their printing presses because the front-runners and robo-traders have taken them hostage. Recent developments at all three major central banks, in fact, provide powerful evidence that the end of the current Bubble Finance regime is near.

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Beijing control trumps efficiency, and that’s not going to change.

China’s $1 Trillion Makeover Of Bloated SOEs Attracts Skeptics (BBG)

To grasp the scale of the challenges facing Chinese leaders in revamping their sprawling and inefficient state-owned enterprises, consider this: The combined revenue of 100-plus government-owned firms, spanning from train makers to banks and power companies, rivals Japan’s entire $4.1 trillion economy. China’s SOE sector, traditionally a source of political patronage and economic power for the Communist Party, accounts for about 40% of China’s industrial assets and 18% of total employment, according to Bloomberg Intelligence economists Fielding Chen and Tom Orlik. These government creations are also dragging down growth, with their return on assets in 2015 estimated to be at 2.8%, versus 10.6% for private sector-firms.

Cutting SOEs down to size and improving their profitability is critical to President Xi Jinping and Premier Li Keqiang’s signature economic policy of rebalancing the $10 trillion economy away from an over-reliance on debt-fueled infrastructure investment and exports to one powered more by services and consumer spending. One strategy has been to embrace mergers – about $1 trillion of asset combinations have been announced since late 2014. The broad government sector overhaul adds up to a major triage effort, keeping healthy or strategic state firms like banks, energy and telecoms under tight control while orchestrating supersized consolidation among ailing giants in shipping, cement and metals to improve efficiency and slash over-capacity. Without a major overhaul, China’s low labor productivity growth – now less than a tenth of European, Japanese and U.S. levels – isn’t likely to improve.

[..] Despite the pressure to turn around, there are about 50 or so “too-big-to-fail” state enterprises in energy, technology and defense that are deemed to be so strategic that they will continue to receive generous government support, according to Lin Boqiang, director of Xiamen University’s energy economics research center. For the rest, Xi’s SOE makeover will be a gradual process with progress coming in fits and starts. Combing two inefficient firms doesn’t necessarily create a healthy one without some forceful leadership to eliminate overlap and excess capacity, as could be the case in the steel industry. “When you combine BaoSteel and Wuhan Steel, two companies thousands of kilometers apart, I’m not sure what they could do together that they couldn’t do separately,” according to Lardy.

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Too much wasted.

China’s Massive Infrastructure Investment Is A Model To Avoid (MW)

Some leading U.S. politicians and economists including President Obama have admired China’s massive investment in new transportation projects and wished America could do the same. Yet a new research paper suggests China’s approach is “a model to avoid” and one that could trigger a global crisis unless dramatically altered. In a paper, four professors at Oxford University assert that a majority of large Chinese investment projects over the past three decades have underestimated costs, failed to deliver the promised benefits and played a smaller role than conventional wisdom suggests in making the country more prosperous.

“China is not a model to follow for other economies – emerging or developed – as regards infrastructure investing, but a model to avoid,” wrote professors Atif Ansar, Bent Flyvbjerg, Alexander Budzier and Daniel Lunn. Many Western lawmakers and economists have long praised China’s investment in new roads, rail, bridges and airports as means to improve the nation’s growth and reduce unemployment. Some have also suggested authoritarian governments are better able than democracies to get projects off the ground. “How do we sit back and watch China and Europe build the best bridges and high-speed railroads and gleaming new airports, and we’re doing nothing?” Obama complained in a speech several years ago urging Congress to spend more on infrastructure.

Jim Millstein, a former Treasury Department official from 2009-2011, makes a similar argument Wednesday, in a Washington Post column. “A well-designed program of new infrastructure spending can be just the catalyst the U.S. economy needs to get out of its rut,” he argued. Yet the Chinese approach is much costlier and less beneficial than it appears, the researchers contend. In many cases projects are subject to special-interest manipulation, poorly designed or shoddily implemented to meet political edicts. Quality, safety and environmental issues are not uncommon and the Chinese government is heavy-handed when obtaining land, even displacing masses of citizens from seized homes and property.

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The power of shadow banks.

P2P Lenders Push Chinese Students To Borrow At Exorbitant Rates (BBG)

Across college campuses in China, a small army of marketers is recruiting students to borrow money at interest rates many times that charged by the nation’s banks. Those without a credit history or parental approval can borrow money to buy a smartphone, pay for holidays, or get the latest sneakers through a raft of apps such as Fenqile. The market leader, whose name literally means Happy Installment Payments, has 50,000 part-time marketers across more than 3,000 universities and proudly touts the slogan “Wait no more; love what I love.” Welcome to the regulatory gray area where peer-to-peer lending meets e-commerce in China.

In the last three years, tens of millions of students have taken out micro-loans with the tap of a button to buy things. Once just the realm of startups, the sector has attracted heavy hitters in China’s online industry, including Alibaba’s finance affiliate and JD.com, which are pouring hundreds of millions of dollars into the lending model. In a nation with 37 million college students, the market is expected to reach $15 billion, according to the Beijing-based market research firm Analysys. While traditional banks, the biggest of which are state-owned, have long been regulated, such peer-to-peer lenders have not, though Fenqile at least says it welcomes more oversight.

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Sounds like a huge global overcapacity. Which of course is in line with shrinking global trade.

Collapse Of Hanjin Leaves $14 Billion Worth Of Goods Adrift (BBG)

Suppliers to companies such as Nike Inc. and Hugo Boss AG are scrambling to ensure their T-shirts and sneakers reach buyers in time for the year-end holiday season after the collapse of Hanjin Shipping Co. left an estimated $14 billion worth of goods adrift. Esquel Group, a Hong Kong-based manufacturer for fashion brands including Nike, Hugo Boss and Ralph Lauren, is hiring truckers to move four stranded containers of raw materials to its factories near Ho Chi Minh City as soon as they can be retrieved from ports in China. Liaoning Shidai Wanheng, a Chinese fabrics importer and a supplier to Marks & Spencer, has made alternative arrangements for shipments that were scheduled with Hanjin.

“Our production lines are waiting,” said Kent Teh, who runs Esquel’s Vietnam business. “We potentially have to take airfreight to deliver the garment items to clients in the U.S. and U.K.” Apparel, handbags, televisions and microwave ovens are among goods stranded at sea after Korea’s largest shipping company filed for bankruptcy protection last week, setting off a series of events that roiled the global supply chain. A U.S. Court on Tuesday provided a temporary reprieve, which may help vessels call on ports such as Los Angeles without the fear of getting impounded. Any major bottlenecks ahead of Thanksgiving and Christmas could put a dent in the two-month shopping season, which netted some $626 billion of sales last year in the U.S.

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“The ratio varies widely, from close to 50% in Cyprus to around 1% in Sweden.” Italy is the big fish here.

EU Regulators: Bad Loans Are Systemic Challenge for European Banks (BBG)

European regulators are sounding the alarm about the persistence of bad loans weighing on the balance sheets of banks in the region. In a report Wednesday on financial risks, the European Union agencies that set rules and technical standards for banks, insurers and markets called for a joint effort to tackle non-performing loans. “Insufficiently addressed asset quality concerns and persistent high level of NPLs are a significant driver of uncertainty in the EU banking sector,” they said. “Given the widespread, and thus systemic, nature of the significant challenges related to NPL, European supervisors, regulators and legislators should consider pursuing a coordinated, articulated and more decisive approach to this matter.”

Supervisors such as the European Central Bank need to raise pressure on banks to account for and reduce NPLs “in a more proactive and bold fashion,” the report says. Banks should adopt “a conservative provisioning policy, a prudent valuation of loans and collateral” and commit “to a NPL resolution plan with time-bound targets.” [..] European banks have the highest ratio of bad loans among developed countries, and progress to lower the share has been slow. According to the report, 5.7% of all loans were overdue on average in the first quarter, more than three times the ratio in the U.S. or Japan. The ratio varies widely, from close to 50% in Cyprus to around 1% in Sweden. High NPL levels are a capital constraint, hurt profits and limit new lending, according to the agencies.

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In line with Nicole’s article series we’re currently running.

America’s Quiet War on Cash (TAM)

Government campaigns of intimidation – like the wars on drugs, terror, and poverty – have been used to extort the public for decades. Despite the previous failures of institutional “wars,” a new war on cash is being waged that threatens freedom in a more subversive way than ever before. Banks and governments around the world are cracking down on the use of paper money, and in turn, eliminating any anonymity left in the current system. Through strict rules on cash transactions and civil asset forfeiture laws, for example, the system has already instituted penalties for using cash. But as payments evolve into a purely digital network, the consequences of this new paradigm are being brought into the spotlight.

The ability to track, record, and mediate transactions of all individuals is a power dictators throughout history could have only dreamed of. Those who value privacy are turning to alternatives like cash, cryptocurrencies, and precious metals, but these directly threaten central bank dominance. This ongoing tug-of-war in financial innovation will determine whether we enter an age of individual empowerment or centralized enslavement. As mundane as it may seem, the main reason for this push to go cashless is directly tied to what world central banks are doing to prop up their economies. The manipulation of interests rates to zero or even negative has left central banks no ammunition to fight off the next recession. Without the ability to cut interest rates even further, stimulating economic growth is nearly impossible.

The decisions made in response to the 2008 crisis have led to a perverted environment in which customers could be charged just for holding money in their accounts. As long as individuals have the ability to move their funds into paper currency and escape the losses, banks are still limited to how far they can push the envelope. Regardless, the federal government continues to pressure banks into issuing “Suspicious Activity Reports” for withdrawals of even as little as $5,000. That amount will undoubtedly decrease if and when more people resort to stuffing cash under their mattresses.

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Perhaps a little late?

FBI Records on Financial Crisis Requested by U.S. Lawmaker (BBG)

FBI files on the firms that contributed to the 2008 financial crisis should be released to help the public understand why no senior executives were charged, a U.S. congressman from New Jersey said. Democrat Bill Pascrell asked FBI Director James Comey for witness interview transcripts, notes, reports and memos from the agency’s probes into the crisis, according to a letter dated Tuesday. Pascrell said the FBI initiated criminal inquiries into at least 14 companies as part of its investigation into the origins of the crisis, which was ignited when prices of subprime-mortgage bonds plummeted after home-loan defaults soared. “Here we are eight years later – do you think the public knows how this happened? Do you think the public knows all of the recommendations made to the Justice Department?” Pascrell said Wednesday in an interview.

“Why are Hillary Clinton’s e-mails any more important?” The FBI earlier this month released a summary investigation and interview with Clinton to provide context on its recommendation that the Justice Department not prosecute Clinton or her aides for using a private e-mail system. The Democratic presidential nominee was interviewed by FBI agents and federal prosecutors for 3 1/2 hours on July 2 in Washington. Pascrell, who sits on both the budget and ways and means committees, said in many cases it would be too late to bring legal actions. Releasing the information would increase transparency and provide a public service, he said.

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“..it is a case study in international charity fraud, of mammoth proportions…”

Clinton Foundation: False Philanthropy (Ortel)

To informed analysts, the Clinton Foundation appears to be a rogue charity that has neither been organized nor operated lawfully from inception in October 1997 to date–as you will grow to realize, it is a case study in international charity fraud, of mammoth proportions. In particular, the Clinton Foundation has never been validly authorized to pursue tax-exempt purposes other than as a presidential archive and research facility based in Little Rock, Arkansas. Moreover, its operations have never been controlled by independent trustees and its financial results have never been properly audited by independent accountants.

In contrast to this stark reality, Bill Clinton recently continued a long pattern of dissembling, likening himself to Robin Hood and dismissing critics of his “philanthropic” post-presidency, despite mounting concerns over perceived conflicts of interest and irregularities. Normally, evaluating the efficacy of a charity objectively is performed looking closely into hard facts only -specifically, determining whether monies spent upon “program service expenditures” actually have furthered the limited, authorized “tax-exempt purposes” of entities such as the Bill, Hillary, and Chelsea Clinton Foundation, its subsidiaries, its joint ventures, and its affiliates (together, the “Clinton Charity Network”).

But, popular former presidents of the United States retain “bully pulpits” from which they certainly can spin sweet-sounding themes to a general audience and media that is not sufficiently acquainted with the strict laws and regulations that do, in fact , tether trustees of a tax-exempt organization to following only a mission that has been validly pre-approved by the Internal Revenue Service, on the basis of a complete and truthful application. This Executive Summary carries forward a process of demonstrating that the Clinton Foundation illegally veered from its IRS-authorized mission within days of Bill Clinton’s departure from the White House in January 2001, using publicly available information which, in certain cases, has been purposefully omitted or obscured in disclosures offered through the Clinton Foundation website, its principal public portal.

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Fukushima is too big to be papered over. But that’s all that happens.

Former Japan PM Accuses Abe Of Lying Over Fukushima (G.)

Japan’s former prime minister Junichiro Koizumi has labelled the country’s current leader, Shinzo Abe, a “liar” for telling the international community that the situation at the wrecked Fukushima Daiichi nuclear power plant is under control. Koizumi, who became one of Japan’s most popular postwar leaders during his 2001-06 premiership, has used his retirement from frontline politics to become a leading campaigner against nuclear restarts in Japan in defiance of Abe, a fellow conservative Liberal Democratic party (LDP) politician who was once regarded as his natural successor. Abe told members of the International Olympic Committee (IOC) in Buenos Aires in September 2013 that the situation at Fukushima Daiichi nuclear power plant was “under control”, shortly before Tokyo was awarded the 2020 Games.

IOC officials were concerned by reports about the huge build-up of contaminated water at the Fukushima site, more than two years after the disaster forced the evacuation of tens of thousands of residents. “When [Abe] said the situation was under control, he was lying,” Koizumi told reporters in Tokyo. “It is not under control,” he added, noting the problems the plant’s operator, Tokyo Electric Power (Tepco), has experienced with a costly subterranean ice wall that is supposed to prevent groundwater from flowing into the basements of the damaged reactors, where it becomes highly contaminated. “They keep saying they can do it, but they can’t,” Koizumi said. He went on to claim that Abe had been fooled by industry experts who claim that nuclear is the safest, cleanest and cheapest form of energy for resource-poor Japan.

“He believes what he’s being told by nuclear experts,” Koizumi said. “I believed them, too, when I was prime minister. I think Abe understands the arguments on both sides of the debate, but he has chosen to believe the pro-nuclear lobby.” After the Fukushima crisis, Koizumi said he had “studied the process, reality and history of the introduction of nuclear power, and became ashamed of myself for believing such lies”. [..] Koizumi, 74, has also thrown his support behind hundreds of US sailors and marines who claim they developed leukaemia and other serious health problems after being exposed to Fukushima radiation plumes while helping with relief operations

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May 302016
 
 May 30, 2016  Posted by at 7:59 am Finance Tagged with: , , , , , , , , , ,  


Jack Delano Foggy night in New Bedford, Massachusetts 1941

The Mystery of Weak US Productivity (Luce)
China Default Chain Reaction Threatens Products Worth 35% of GDP (BBG)
China’s Veiled Loans May Prove Lethal (BBG)
How Many Bad Loans Might China Have? (BBG)
Easy Money = Overcapacity = Trade Wars = Deflation (Rubino)
Negative Rates Fail to Spur Investment for Corporate Europe (BBG)
Saudi Arabia’s Petrodollar Reserves Fall to 4-Year Low (BBG)
CEO of No. 1 Asian Commodity Trader Noble Group Resigns In Surprise Move (R.)
Japan Must Delay Sales-Tax Rise to Recover, Abe Aide Says (BBG)
The Butterfly Effect: Cheap Oil Means Fewer Nose Jobs (BBG)
The Source of Failure: We Optimize What We Measure (CH Smith)
30.4% Of Americans Were Obese In 2015 (Forbes)
Tory Turmoil Escalates With Open Call For Cameron To Quit (G.)
Half Of Central, Northern Great Barrier Reef Corals Are Dead (SMH)

“This year, for the first time in more than 30 years, US productivity growth will almost certainly turn negative..”

“Unless we become smarter at how we work, growth will start to exhaust itself too.” Er, no, that has already happened.

“For the first time the next generation of US workers will be less educated than the previous..”

The Mystery of Weak US Productivity (Luce)

Look around you. From your drone home delivery to that oncoming driverless car, change seems to be accelerating. Warren Buffett, the great investor, promises that our children’s generation will be the “luckiest crop in history”. Everywhere the world is speeding up except, that is, in the productivity numbers. This year, for the first time in more than 30 years, US productivity growth will almost certainly turn negative following a decade of sharp slowdown. Yet our Fitbits seem to be telling us otherwise. Which should we trust — the economic statistics or our own lying eyes? A lot hinges on the answer. Productivity is the ultimate test of our ability to create wealth. In the short term you can boost growth by working longer hours, for example, or importing more people.

Or you could lift the retirement age. After a while these options lose steam. Unless we become smarter at how we work, growth will start to exhaust itself too. Other measures bear out the pessimists. At just over 2%, US trend growth is barely half the level it was a generation ago. As Paul Krugman put it: “Productivity isn’t everything, but in the long run it is almost everything.” It is possible we are simply mismeasuring things. Some economists believe the statistics fail to capture the utility of setting up a Facebook profile, for example, or downloading free information from Wikipedia. The gig economy has yet to be properly valued. Yet this argument cuts both ways. Productivity is calculated by dividing the value of what we produce by how many hours we work — data provided by employers.

But recent studies — and common sense — say our iPhones chain us to our employers even when we are at leisure. We may thus be exaggerating productivity growth by undercounting how much we work. The latter certainly fits with the experience of most of the US labour force. It is no coincidence that since 2004 a majority of Americans began to tell pollsters they expected their children to be worse off — the same year in which the internet-fuelled productivity leaps of the 1990s started to vanish. Most Americans have suffered from indifferent or declining wages in the past 15 years or so. A college graduate’s starting salary today is in real terms well below where it was in 2000. For the first time the next generation of US workers will be less educated than the previous, according to the OECD, which means worse is probably yet to come. Last week’s US productivity report bears that out.

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“All the risks are accumulating in an overcrowded financial system.”

China Default Chain Reaction Threatens Products Worth 35% of GDP (BBG)

The risk of a default chain reaction is looming over the $3.6 trillion market for wealth management products in China. WMPs, which traditionally funneled money from Chinese individuals into assets from corporate bonds to stocks and derivatives, are now increasingly investing in each other. Such holdings may have swelled to as much as 2.6 trillion yuan ($396 billion) last year, based on estimates from Autonomous Research this month. The trend has China watchers worried. For starters, it means that bad investments by one WMP could infect others, causing a loss of confidence in products that play an important role in bank funding. It also suggests WMPs are struggling to find enough good assets to meet their return targets.

In the event of widespread losses, cross-ownership will create more uncertainty over who’s vulnerable – a key source of panic in 2008 when soured U.S. mortgage securities triggered a global financial crisis. Those concerns have become more pressing this year after at least 10 Chinese companies defaulted on onshore bonds, the Shanghai Composite Index sank 20% and China’s economy showed few signs of recovery from the weakest expansion in a quarter century. “There’s abundant liquidity in the financial system, but a scarcity of high-yielding assets to invest in,” said Harrison Hu, the chief Greater China economist at RBS in Singapore. “All the risks are accumulating in an overcrowded financial system.”

Issuance of WMPs, which are sold by banks but often reside off their balance sheets, exploded over the past three years as lenders competed for funds and fees while savers sought returns above those offered on deposits. The products, which offer varying levels of explicit guarantees, are regarded by many as having the implicit backing of banks or local governments. The outstanding value of WMPs rose to 23.5 trillion yuan, or 35% of China’s gross domestic product, at the end of 2015 from 7.1 trillion yuan three years earlier, according to China Central Depository & Clearing Co. An average 3,500 WMPs were issued every week last year, with some mid-tier banks, such as China Merchants Bank and China Everbright Bank, especially dependent on the products for funding.

Interbank holdings of WMPs swelled to 3 trillion yuan as of December from 496 billion yuan a year earlier, according to figures released by the clearing agency last month. As much as 85% of those products may have been bought by other WMPs, according to Autonomous Research, which based its estimate on lenders’ public disclosures and data on interbank transactions. The firm speculates that in some cases the products are being “churned” to generate fees for banks. “We’re starting to see layers of liabilities built upon the same underlying assets, much like we did with subprime asset-backed securities, collateralized debt obligations, and CDOs-squared in the U.S.,” Charlene Chu, a partner at Autonomous who rose to prominence in her former role at Fitch Ratings by warning of the risks of bad debt in China, said in an interview on May 17.

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“The unconsolidated structured entities managed by the Group consist primarily of collective investment vehicles (“WMP Vehicles”) formed to issue and distribute wealth management products (“WMPs”), which are not subject to any guarantee by the Group of the principal invested or interest to be paid.”

China’s Veiled Loans May Prove Lethal (BBG)

Credit is a risky business, but loans that dare not speak their name? They are possibly even more dangerous, as China is about to find out.As many as 15 publicly traded Chinese lenders, large and small, report roughly $500 billion of such debt between them, which they hold not as loans but as receivables from shadow banking products. While the traditional credit business of these banks is 16 times bigger, receivables have jumped sixfold in three years. Explosive growth of this type usually ends badly. It’s hard to see why it’ll be different for the People’s Republic. Before they can brace themselves – or embrace the risk, if they think the rewards are worth it – equity investors need to know where to look. Flitting from one explanatory note to another in dense annual reports isn’t everybody’s idea of a day well spent.

But the effort may be worth it. For instance, page 184 of Agricultural Bank’s 2015 annual report informs us that the bank has 557 billion yuan ($85 billion) worth of assets tied in “debt instruments classified as receivables.” On page 245, we further learn that most of this is old hat, and the only fast-growing portion is an 18.7 billion yuan chunk helpfully titled as “Others.” A footnote adds that the category primarily consists of “unconsolidated structured entities managed by the group.” Give up? Then you miss the big reveal that occurs 34 pages later: “The unconsolidated structured entities managed by the Group consist primarily of collective investment vehicles (“WMP Vehicles”) formed to issue and distribute wealth management products (“WMPs”), which are not subject to any guarantee by the Group of the principal invested or interest to be paid.” That’s broadly how Chinese lenders disclose their cryptic linkages with shadow banks.

The names keep changing, from “investment management products under trust scheme” and “investment management products managed by securities companies” to “trust beneficiary rights” and “wealth management products.” The latter have swelled to the equivalent of 35% of GDP, and account for 3 trillion yuan of interbank holdings. The common thread to these products is that they’re all exposed to corporate credit and designed to get around lenders’ minimum capital requirements and maximum loan-to-deposit norms, with scant loss provisioning in case things go wrong.There’s plenty that could. The reported nonperforming loan ratio of 1.75% is a joke. CLSA says bad loans have already snowballed to 15 to 19% of the loan book; Autonomous Research partner Charlene Chu estimates the figure will reach 22% by the end of this year. A 20% loss on a $500 billion portfolio of loans masquerading as receivables would wipe out 58% of annual profit of the 15 banks under our scanner.

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” In the basic resources sector, 46% of loans are with firms without enough income to cover interest payments. ”

How Many Bad Loans Might China Have? (BBG)

How many of China’s loans could turn bad? The official data show a non-performing loan ratio of 1.75%, but that’s widely believed to reflect optimistic accounting. Bloomberg Intelligence Economics has estimated the %age of “at risk” loans – those where the borrower doesn’t have sufficient earnings to cover interest payments. The results show 14% of corporate borrowing at risk of default, up from a low of 5% in 2010. By sector, the basic resources, retail and industrial sectors are among the highest risk. In the basic resources sector, 46% of loans are with firms without enough income to cover interest payments.

Telecommunications, utilities, and travel and leisure sectors look more secure, reflecting stronger earnings and lower debt. The methodology is based on an approach used by the IMF. For a universe of 2,865 Chinese listed firms (excluding financial companies), we screened for firms with interest costs higher than their EBITDA. We then calculated total debt of those firms as a %age of total debt of all listed firms. We assume that the ratio of “at risk” loans for the corporate sector as a whole is the same as for listed companies.

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“..over-investment produces slow growth and falling prices while ever-more-aggressive monetary policy distorts markets beyond recognition and encourages new over-investment in different sectors, which then proceed to follow oil and steel into the deflationary abyss.”

Easy Money = Overcapacity = Trade Wars = Deflation (Rubino)

So what happens to all that Chinese steel that was on its way to the US and EU before slamming into those prohibitively high tariffs? One of three things: Either it’s sold elsewhere, probably at even steeper discounts, thus pricing US and EU steel exports out of those markets. Or it’s stockpiled in China for future use, thus lowering future demand for new steel production and, other things being equal, depressing tomorrow’s prices. Or many of China’s newly-built steel mills will close, and China will eat the losses related to this malinvestment. Each scenario results in lower prices and financial losses somewhere. Put another way, as far as steel is concerned, the world’s fiat currencies are rising in value, which is the common definition of deflation.

And since steel is just one of many basic industries burdened with massive overcapacity, it’s safe to assume that the process which began with oil and recently spread to steel will continue to metastasize throughout the developed and developing worlds. Next up: real estate. “Modern” monetary policy, designed to achieve exactly the opposite outcome (that is, rising prices for real things), will in response be ratcheted up to ever-more-extreme levels — which in this analytical framework is like trying to douse a fire with gasoline. The result is a world in which past over-investment produces slow growth and falling prices while ever-more-aggressive monetary policy distorts markets beyond recognition and encourages new over-investment in different sectors, which then proceed to follow oil and steel into the deflationary abyss. And so on, until the system collapses under the weight of its own absurdity.

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Because they are deflationary.

Negative Rates Fail to Spur Investment for Corporate Europe (BBG)

A prolonged period of negative interest rates is failing to revive investment at Europe’s companies, with the vast majority of businesses in the region saying the stimulus measures have had no affect at all on their growth plans. Some 84% of the 9,440 companies surveyed by Swedish debt collector Intrum Justitia AB for its European Payment Report 2016 say low interest rates haven’t affected their willingness to invest. And perhaps more alarmingly, the number is up from 73% last year. “Creating economic growth requires stability and optimism,” Intrum Justitia Chief Executive Officer Mikael Ericson said in the report. “Evidently, the strategy of keeping interest rates record low for more than a year has not created the much sought-after stability.”

Signs of stalling investment mark a blow to central banks hoping to revive growth across Europe through negative rates and quantitative easing. Europe needs its businesses to invest more if it’s to create the jobs needed to spur growth. In the euro area, where interest rates have been negative since mid-2014, gross domestic product will slow to 1.6% this year, compared with 2.3% in the U.S., the European Commission estimates. “A calculation of an investment includes assumptions of the future,” Intrum said. “To get the calculation to go together those assumptions need to include a belief in stability and prosperity in that future. Perhaps the negative interest rates do not signal that stability at all – rather that we are still in an extraordinary situation?”

The survey also identified another threat to growth, namely late payments. Some 33% of survey participants said they regard not being paid on time as a threat to overall survival while 25% said they are likely to cut jobs if clients pay late or not at all. That problem is more pronounced among Europe’s 20 million small and medium-sized companies, with many reporting that bigger firms are forcing them to accept late payments. “It is a market failure that costs job opportunities for millions of Europeans that big corporations deliberately force SMEs to finance their cash flow,” Ericson said. “As much as two out of five SMEs say late payments prohibit growth of the company. That large corporations use their much smaller sub-suppliers to act as financier of their own cash-management processes is not only wrong, it also creates an imbalance in society.”

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Might as well devalue now.

Saudi Arabia’s Petrodollar Reserves Fall to 4-Year Low (BBG)

Saudi Arabia’s net foreign assets fell for a 15th month in April, as the kingdom announced its “vision” for a post-oil future. The Saudi Arabian Monetary Agency said on Sunday net foreign assets declined 1.1% to $572 billion, the lowest level in four years. The slump in crude prices has forced the government to sell bonds and draw on its currency reserves, still among the world’s largest. Net foreign assets fell by $115 billion last year, when the kingdom ran a budget deficit of nearly $100 billion.

The fiscal crunch has pushed Saudi Arabia’s rulers to look beyond oil, consider new taxes, and plan an initial public offering of state giant Saudi Arabian Oil Co. Deputy Crown Prince Mohammed bin Salman sketched out the planned changes dubbed Saudi Vision 2030 on April 25. The strain on reserves has also fueled speculation that the kingdom will adjust its decades-old riyal peg to the dollar. New central bank Governor Ahmed Alkholifey told Al-Arabiya on Thursday that Saudi Arabia doesn’t plan to change its exchange rate policy.

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Firesale. Given what’s happened in commodities the past year, not surprising.

CEO of No. 1 Asian Commodity Trader Noble Group Resigns In Surprise Move (R.)

Embattled commodity trader Noble Group announced the surprise resignation of CEO Yusuf Alireza on Monday and said it planned to sell a U.S. unit to bolster its balance sheet as it seeks to regain investor confidence. Alireza, a former Goldman Sachs banker had steered Asia’s biggest commodity trader to sell assets, cut business lines and take big writedowns as it battled weak commodity markets and the fallout from an accounting dispute. “With this transformation process now largely complete, Mr. Alireza considered that the time was right for him to move on,” Noble said in a statement. It appointed senior executives William Randall and Jeff Frase as co-chief executive officers and said it would begin a sale process for Noble Americas Energy Solutions, “expected to generate both significant cash proceeds and profits to substantially enhance the balance sheet.”

Noble came under the spotlight in February last year when it was accused by Iceberg Research of overstating its assets by billions of dollars, claims which Noble rejected. Its shares have since plunged by about 75% and its debt costs have risen as the company has been hit hard by credit rating downgrades and weak investor confidence. “The first task is to stabilize the situation and convey stability and continuity,” said Nirgunan Tiruchelvam at Religare Capital Markets. “That would be the immediate task of somebody in this business which has volatility,” he said. Noble won the backing of banks earlier this month to refinance its debt. In February, Noble reported its first annual loss since 1998, battered by a $1.2 billion writedown for weak coal prices. The company’s shares slumped 65% last year, knocking it out of the benchmark Straits Times index.

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So a delay in the tax hike would trigger elections. And Abe counts on the Japanese to be blind enough to re-elect him.

Japan Must Delay Sales-Tax Rise to Recover, Abe Aide Says (BBG)

Japan needs to delay increasing its sales tax until late 2019 to sustain its economic recovery, an aide to Prime Minister Shinzo Abe said Sunday. There is a possibility that such a move could trigger a general election. The government will probably hold off raising the tax because it needs to give priority to economic growth, Abe aide Hakubun Shimomura said on Fuji television. Japan’s lower house of parliament would need to be dissolved for a general election if the planned increase is delayed again, Finance Minister Taro Aso was cited by Kyodo News as saying on Sunday at a meeting of the ruling party’s members. Abe has said he’ll make a decision before an upper-house election this summer on whether to go ahead with a planned increase in the levy next April to 10%, from 8% at present.

He had previously said the matter would be decided at an appropriate time and that it would be postponed only if there was a shock on the scale of a major earthquake or a corporate collapse like that of Lehman Brothers. An increase in the levy in 2014 pushed Japan into a recession. “We have no other options but to postpone the sales-tax increase,” Shimomura said. “If the increase means a decline in tax revenue for the government, that would threaten the achievement of the goals under Abenomics.” The prime minister told Finance Minister Taro Aso and LDP’s Secretary General Sadakazu Tanigaki on Saturday to delay the sales-tax increase to October 2019, NHK reported.

Aso advised the prime minister to be cautious about the idea, NHK said. “If the tax increase is delayed, a general election is needed to put the plan to the public,” Aso was quoted by Kyodo News as saying on Sunday. Kyodo reported later that Abe doesn’t plan to call snap elections on the same day as the Upper House vote. If Abe fails to go ahead with his plan of raising the tax in April, it means his economic policies have failed and he and his cabinet members should resign to take responsibility, Tetsuro Fukuyama, vice secretary general of the opposition Democratic Party of Japan, said in a program aired by public broadcaster NHK on Sunday.

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Unexpected advantages.

The Butterfly Effect: Cheap Oil Means Fewer Nose Jobs (BBG)

Oil slumps. Middle Eastern patients cancel treatments abroad. Thai hospital stocks slide. It’s the butterfly effect in action. Weak growth outlooks in the Gulf states are prompting greater competition from local clinics, stemming the flow of visitors to the world’s top medical tourism destination. That’s clouding the outlook for Thailand’s health-care shares, which surged more than 800% over the past seven years, as valuations start to look stretched amid the falling demand. Bangkok’s Bumrungrad Hospital, known as the grandaddy of international clinics, has slumped 16% since early March after patient volumes from the United Arab Emirates, its second-biggest source of overseas visitors, fell 20% in the first quarter.

Thailand attracted as many as 1.8 million international patients in 2015, many of whom stayed on afterward for a beach holiday. More than one in three foreigners treated at Bumrungrad are from the Gulf states and Kasikorn Securities says declining growth in the region and a rise in competition from clinics in the U.A.E., where the government is encouraging its citizens to stay home for medical care, are curbing demand. “In the short term, the economic slowdown in the the Middle East will weaken some investors’ confidence on earnings growth for domestic hospital operators,” said Jintana Mekintharanggur at Manulife Asset Management. “We are still bullish on the sector” in the long term as it will benefit from growth in countries like Myanmar and Vietnam that have less-developed health systems, she said.

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Hey, look, we are born as liars. And we will lie to ourselves about that, too.

The Source of Failure: We Optimize What We Measure (CH Smith)

The problems we face cannot be fixed with policy tweaks and minor reforms. Yet policy tweaks and minor reforms are all we can manage when the pie is shrinking and every vested interest is fighting to maintain their share of the pie. Our failure stems from a much deeper problem: we optimize what we measure. If we measure the wrong things, and focus on measuring process rather than outcome, we end up with precisely what we have now: a set of perverse incentives that encourage self-destructive behaviors and policies. The process of selecting which data is measured and recorded carries implicit assumptions with far-reaching consequences. If we measure “growth” in terms of GDP but not well-being, we lock in perverse incentives to boost ‘growth” even at the cost of what really matters, i.e. well-being.

If we reward management with stock options, management has a perverse incentive to borrow money for stock buy-backs that push the share price higher, even if doing so is detrimental to the long-term health of the company. Humans naturally optimize what is being measured and identified as important. If students’ grades are based on attendance, attendance will be high. If doctors are told cholesterol levels are critical and the threshold of increased risk is 200, they will strive to lower their patients’ cholesterol level below 200. If we accept that growth as measured by GDP is the measure of prosperity, politicians will pursue the goal of GDP expansion.

If rising consumption is the key component of GDP, we will be encouraged to go buy a new truck when the economy weakens, whether we need a new truck or not. If profits are identified as the key driver of managers’ bonuses, managers will endeavor to increase net profits by whatever means are available. The problem with choosing what to measure is that the selection can generate counterproductive or even destructive incentives. This is the result of humanity’s highly refined skill in assessing risk and return. All creatures have been selected over the eons to recognize the potential for a windfall that doesn’t require much work to reap.

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Can’t leave out the ones that are diabetic without knowing it. Oh, and: “..these obesity rates are calculated from self-reported heights and weights.”

30.4% Of Americans Were Obese In 2015 (Forbes)

If recent headlines are to be believed, we are rapidly approaching the future depicted in Wall-E, with a morbidly obese population that can get from place to place only with the help of a hover-scooter. “Americans are fatter than ever, CDC finds,” trumpets CNN. “This Many Americans Need To Go On A Diet ASAP, According To New CDC Report,” content farm Elite Daily smugly proclaims. But is it really that cut-and-dried? The report both articles refer to is succinctly titled “Early Release of Selected Estimates Based on Data from the National Health Interview Survey, 2015.” It was released on Tuesday, and it provides an early look at annual data from the titular survey on 15 different points, from health insurance and flu shots to smoking rates and, yes, obesity.

The publication says 30.4% of Americans were obese in 2015, with a 95% confidence interval (so somewhere between 29.62% and 31.27%). That’s compared to 19.4% in 1997. Obesity rates were higher among middle-aged people (ages 40 to 59), with the rate for that group hitting 34.6%. Ages 20 to 39, perhaps predictably, were the least obese, with 26.5% of that population having a BMI of 30 or more. Obesity was highest for black women (45%), followed by black men (35.1%), Latina women (32.6%), Latino men (32%), white men (30.2%) and white women (27.2%). The data in the release didn’t provide any information on other ethnic or racial groups, nor did it break obesity rates down by household income.

In concert with rising obesity rates, Americans are getting more diabetic. In 1997, 5.1% of U.S. adults had been diagnosed with diabetes. By 2015, that number had nearly doubled, to 9.5%. Although, again, the data here don’t break everything down to my satisfaction–there are no numbers for each specific type of diabetes, for instance–it’s safe to say that these correlations are the consequence of rising obesity, as 95% of people diagnosed with diabetes have type 2.

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Managed to monopolize the entire Brexit debate, but they can’t leave well enough alone…

Tory Turmoil Escalates With Open Call For Cameron To Quit (G.)

David Cameron’s hopes of being able to avoid terminal damage to Conservative party unity after the EU referendum campaign were dented on Sunday when two rebel MPs openly called for a new leader and a general election before Christmas. The attacks came from Andrew Bridgen and Nadine Dorries – both Brexiters, and longstanding, publicity-hungry opponents of the prime minister – and their claim that even winning the EU referendum won’t stop Cameron facing a leadership challenge in the summer was dismissed by fellow Tories. But their comments coincided with the ministers in charge of the leave campaign launching some of their strongest personal attacks yet on Cameron, prompting Labour’s Alan Johnson to say that the Tory infighting was getting “very ugly indeed”.

Bridgen told the BBC’s 5 Live that Cameron had been making “outrageous” claims in his bid to persuade voters to back remain and that, as a consequence, he had effectively lost his parliamentary majority. “The party is fairly fractured, straight down the middle and I don’t know which character could possibly pull it back together going forward for an effective government. I honestly think we probably need to go for a general election before Christmas and get a new mandate from the people,” he said. Bridgen said at least 50 Tory MPs – the number needed to call a confidence vote – felt the same way about Cameron and that a vote on the prime minister’s future was “probably highly likely” after the referendum.

Dorries told ITV’s Peston on Sunday she had already submitted her letter to the chairman of the Tory backbench 1922 committee expressing no confidence in the prime minister. “[Cameron] has lied profoundly, and I think that is actually really at the heart of why Conservative MPs have been so angered. To say that Turkey is not going to join the European Union as far as 30 years is a lie.”

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Australia will keep debating this while the last bits die off.

Half Of Central, Northern Great Barrier Reef Corals Are Dead (SMH)

More than one-third of the coral reefs of the central and northern regions of the Great Barrier Reef have died in the huge bleaching event earlier this year, Queensland researchers said. Corals to the north of Cairns – covering about two-thirds of the Great Barrier Reef – were found to have an average mortality rate of 35%, rising to more than half in areas around Cooktown. The study, of 84 reefs along the reef, found corals south of Cairns had escaped the worst of the bleaching and were now largely recovering any colour that had been lost. Professor Terry Hughes, director of the ARC Centre of Excellence for Coral Reef Studies at James Cook University, said he was “gobsmacked” by the scale of the coral bleaching which far exceeded the two previous events in 1998 and 2002.

“It is fair to say we were all caught by surprise,” Professor Hughes said. “It’s a huge wake up call because we all thought that coral bleaching was something that happened in the Pacific or the Caribbean which are closer to the epicentre of El Nino events.” The El Nino of 2015-16 was among the three strongest on record but the starting point was about 0.5 degrees warmer than the previous monster of 1997-98 as rising greenhouse gas emissions lifted background temperatures. Reefs in many regions, such as Fiji and the Maldives, have also been hit hard. Bleaching occurs when abnormal conditions, such as warm seas, cause corals to expel tiny photosynthetic algae, called zooxanthellae. Corals turn white without these algae and may die if the zooxanthellae do not recolonise them.

The northern end of the Great Barrier Reef was home to many 50- to 100-year-old corals that had died and may struggle to rebuild before future El Ninos push tolerance beyond thresholds. “How likely is it that they will fully recover before we get a fourth or a fifth bleaching event?” Professor Hughes said. The health of the reef has been a contentious political issue, with Environment Minister Greg Hunt pledging more funds in the May budget to improve water quality – one aspect affecting coral health. But Mr Hunt has also had to explain why his department instructed the UN to cut out a section on Australia from a report that dealt with the threat of climate change to World Heritage sites including the Great Barrier Reef and Kakadu.

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Jan 292016
 
 January 29, 2016  Posted by at 9:01 am Finance Tagged with: , , , , , , , , ,  


DPC Grand Central Station and Hotel Manhattan, NY 1903

Nikkei Ends Up After Roller-Coaster Ride On BOJ’s Rate Cut (CNBC)
US Durable Goods Orders Tumbled 5.1% in December (WSJ)
Amazon Shares Plunge 13% As Profit Misses Estimates (Reuters)
The Shipping News Says the World Economy Is Toast (BBG)
Red Ponzi Ticking (David Stockman)
China’s Debt-To-GDP Rises To A Gargantuan 346% (ZH)
The $29 Trillion Corporate Debt Hangover That Could Spark a Recession (BBG)
Capital Flight Is The Evil Twin Brother Of Currency War (MW)
Hundreds of Billions of Dollars Have Fled China. Now What? (WSJ)
China’s January Outflows Soar To Second Highest Ever (ZH)
Cracks In America’s Economy Are Growing (CNN)
How Italy’s Bad Loans Built Up (FT)
Brexit Vote To Turn UK Into ‘Safe Haven’ Triggering EU Disintegration (Tel.)
Germany Tightens Refugee Policy, Finland Joins Sweden In Deportations (Guar.)
Mass Expulsions Ahead For Europe As Refugee Crisis Grows (AP)
Why Europe’s Refugee Crisis May Be Getting Worse (BBG)
Twelve Refugees Drown As Boat Sinks Off Greek Island (Reuters)
24 Iraqi Kurdish Refugees Drown Off Greek Island (NY Times)
Italy Navy Recovers Six Bodies, Rescues 209 From Migrant Boats (Reuters)

Right. Stability is the goal.

Nikkei Ends Up After Roller-Coaster Ride On BOJ’s Rate Cut (CNBC)

Asian markets climbed, with most indexes trading up, after Japan shares took a roller-coaster ride in the immediate aftermath of the Bank of Japan’s decision to adopt a negative interest rate policy. The Nikkei 225, which traded down 0.6% before the announcement, surged as much as 3.51% soon after, before tumbling as much as 1%. It then surged to close up 2.80%, or 476.85 points, at 17,518.30. After the BOJ move, the yield on the benchmark 10-year Japan government bond (JGB) fell to a record low of 0.11% from around 0.22% before the decision. There was no quick agreement on why the market outlook on the move shifted so quickly.

Gavin Parry at Parry International Trading, suggesting that a move to negative deposit rates just after a supplementary increase in Japan’s qualitative and quantitative easing (QQE) program could have been read to mean the BOJ was running out of bullets. In its statement on Friday, the central bank said it would continue with the QQE and negative interest rate policies for “as long as it is necessary for maintaining that target in a stable manner.” Marcel Thieliant at Capital Economics thought the overall complexity of the BOJ’s move may have spurred the midday selloff. “What they did announce today will be effective. It will lead to lower rates in the money market. But some people had second thoughts once they read the statement,” he said.

He noted that the BOJ had imposed a “three-tier” system on negative rates. With the huge amount of bank reserves currently sitting with the central bank, “if they impose a negative rate on all these balances, it would have a big impact on banks’ profitability,” he said, noting that existing reserves were going to be exempted, but there was likely confusion about how the amounts subject to negative rates would be increased. The dollar-yen pair gained as much as 1.52% in the aftermath of the BOJ announcement, trading as high as 121.35, from around 118.50 before the news. The pair trimmed gains to trade around 120.82 after the Japan stock market closed.

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Recovery.

US Durable Goods Orders Tumbled 5.1% in December (WSJ)

A key measure of U.S. manufacturers’ health suffered its largest annual decline since the recession ended more than six years ago, showing how global headwinds are eroding a onetime pillar of the economy. Demand for long-lasting manufactured products made in the U.S. fell 5.1% in December from a month earlier, and declined 3.5% for all of 2015, the Commerce Department said Thursday. The annual decline in durable-goods orders is the largest outside a recession on records back to 1992. The figures add to mounting evidence the manufacturing sector is contracting. And with the dollar strengthening further this month and financial-market tumult likely threatening business confidence, a factory slowdown could last well into this year. “The entire year of 2015 was pretty much a bust for durable-goods makers,” said Michael Montgomery at IHS Global Insight.

“Industries faced stiff competition from foreign rivals for U.S. market share, and exporters faced intense pressures abroad.” Thursday’s release is in line with data from Institute for Supply Management, a group of purchasing managers, showing a nearly three-year-long expansion in manufacturing came to an end in November. And the Federal Reserve’s reading on industrial production has declined in 10 of the past 12 months, putting it off nearly 2% from its peak in December 2014. A number of forces hampered U.S. factories last year. An economic slowdown in China, Brazil and other markets for U.S. goods limited foreign demand. Meanwhile, a stronger dollar made U.S. goods more expensive overseas and foreign products relatively more affordable for American consumers. And a pullback in U.S. oil production last year reversed a recent source of strength for many metal and equipment makers.

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Plenty bubbles created by cheap money are still around.

Amazon Shares Plunge 13% As Profit Misses Estimates (Reuters)

Amazon.com posted its most profitable quarter ever on Thursday but the world’s No. 1 online retailer still managed to disappoint Wall Street by badly missing estimates, sending its shares down more than 13% in after-hours trading. The results, as well as the company’s determination to invest more in new areas and its extremely low profit margins, brought back perennial questions for investors about the company’s ability to consistently earn money. “By comparative retail standards, Amazon’s level of profitability is still painfully weak,” said Neil Saunders, head of retail analyst firm Conlumino, who is still positive on Amazon’s prospects. “For every dollar the company takes, it makes just 0.75 of a cent in profit.”

Amazon’s net profit for the fourth quarter, which includes the holiday shopping season, rose to $482 million, or $1.00 per share, in the quarter ended Dec. 31, up from $214 million, or 45 cents per share, a year earlier. That figure was held back by rising operating costs. It was well below analysts’ average forecast of $1.56 per share, according to Thomson Reuters. The company’s shares plunged 13% to $551.50 after hours on Thursday, following a 9% increase in regular trading. They are still up 80% over the past 12 months. Amazon notched its third consecutive profitable quarter for the first time since 2012, but it still left Wall Street wanting more. “The growth story that investors were looking for… clearly Amazon has not been able to live up to the hype,” said Adam Sarhan, chief executive of Sarhan Capital.

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But China grows 7%?

The Shipping News Says the World Economy Is Toast (BBG)

In October 2008, as the repercussions of the financial crisis were starting to ripple through the global economy, I noticed a press release from Swedish truckmaker Volvo saying that its European order book had fallen by more than 99% between the third quarters of 2007 and 2008 – to just 155 from 41,970. That prompted me to study various other real-world activity measures ranging from shipping to air freight, and to conclude that “the news is all bad and getting worse, fast.” The same exercise today, I’m afraid to say, leads me to a similar conclusion about the growth outlook. Here’s a chart showing what’s happening to the volume of goods being shipped in containers from China’s ports, one for the country and one for Shanghai. Both indexes are compiled by the Shanghai Shipping Exchange, and cover shipments to the rest of the world including Europe, the U.S. and Africa; activity is down more than 40% from its peak in mid-2012:

The traditional global shipping measure is called the Baltic Dry Index. Shipping purists (who rival gold bugs in their dedication to minutiae) will tell you it mostly reflects how many vessels are afloat on the world’s oceans; a glut of shipbuilding means more boats available, which drives down the cost of shipping bulk raw materials such as iron ore, steel and coal. But given the fragile state of the global economy, it’s hard to shake the feeling that the index has been trying to tell us something important about global demand in recent years:

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Dave in fine form:..China is the rotten epicenter of the world’s two decade long plunge into an immense central bank fostered monetary fraud..”

Red Ponzi Ticking (David Stockman)

There is something rotten in the state of Denmark. And we are not talking just about the hapless socialist utopia on the Jutland Peninsula – even if it does strip assets from homeless refugees, charge savers 75 basis points for the deposit privilege and allocate nearly 60% of its GDP to the Welfare State and its untoward ministrations. In fact, the rot is planetary. There is unaccountable, implausible, whacko-world stuff going on everywhere, but the frightful part is that most of it goes unremarked or is viewed as par for the course by the mainstream narrative. The topic at hand is the looming implosion of China’s Red Ponzi; and, more specifically, the preposterous Wall Street/Washington presumption that it’s just another really big economy that overdid the “growth” thing and is now looking to Beijing’s firm hand to effect a smooth transition.

That is, an orderly migration from a manufacturing, export and fixed investment boom-land to a pleasant new regime of shopping, motoring, and mass consumption. Would that it could. But China is not a $10 trillion growth miracle with transition challenges; it is a quasi-totalitarian nation gone mad digging, building, borrowing, spending and speculating in a magnitude that has no historical parallel. So doing, It has fashioned itself into an incendiary volcano of unpayable debt and wasteful, crazy-ass overinvestment in everything. It cannot be slowed, stabilized or transitioned by edicts and new plans from the comrades in Beijing. It is the greatest economic trainwreck in human history barreling toward a bridgeless chasm.

And that proposition makes all the difference in the world. If China goes down hard the global economy cannot avoid a thundering financial and macroeconomic dislocation. And not just because China accounts for 17% of the world’s $80 trillion of GDP or that it has been the planet’s growth engine most of this century. In fact, China is the rotten epicenter of the world’s two decade long plunge into an immense central bank fostered monetary fraud and credit explosion that has deformed and destabilized the very warp and woof of the global economy. But in China the financial madness has gone to a unfathomable extreme because in the early 1990s a desperate oligarchy of despots who ruled with machine guns discovered a better means to stay in power. That is, the printing press in the basement of the PBOC – and just in the nick of time (for them).

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What did I say about that devaluation bomb?

China’s Debt-To-GDP Rises To A Gargantuan 346% (ZH)

In early 2015, after years of China’s massive debt pile being roundly ignored by most so-called experts (despite being profiled here many years prior), McKinsey released a report showing that not only has the world not delevered since the financial crisis, adding well over $60 trillion in debt (through 2016), but also revealing in a format so simple even an economist could grasp it, just how massive China’s all-in leverage has become. Many were shocked when they read that China’s total debt/GDP had risen by 125% in under 7 years, hitting 282% as of Q2 2014. Those same people may be just as shocked to learn that according to the head of financial markets research Asia Pacific at Rabobank, Michael Every, not only has China not begun to delever at all, but since McKinsey’s update, its debt has risen by another 70% of GDP!

According to Every, China’s 2015 debt-to-GDP might be as high as 346%, and while that is in line with wealthier developed economies but is “vastly higher” than any EM peer. Cited by Bloomberg, Every adds that the time-frame for debt accumulation pre-crisis varies, but what always follows is a major currency drop afterwards, as has happened even with reserve currencies such as dollar, yen, euro and pound. He also adds that nominal GDP needs to rise faster than debt for a sustained period if deleveraging is to truly be under way, aka Dalio’s beautiful deleveraging thesis. The problem, however, is that with even Goldman admitting that China’s real GDP growth rate is about 4.5%, China’s debt load is rising orders of magnitude faster than its underlying economy and is on the daily verge of entering the final phase of the Minsky Moment breakdown.

While no surprise to people with common sense, Every concludes that debt must be repaid with interest, which acts as a drag on economic activity, and is the reason why such monstrous debt loads always lead to an economic collapse; making matters worse is that in China cheap credit is channeled to state-owned firms with low or no profitability. So what happens next? Every believes that China has no choice but to proceed with a massive devaluation, far bigger than the prevailing consensus, and expects the Yuan to plunge to 7.60 against the dollar over the next year.

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But wait: if we make interest rates negative, we can make money on being in debt, right?

The $29 Trillion Corporate Debt Hangover That Could Spark a Recession (BBG)

There’s been endless speculation in recent weeks about whether the U.S., and the whole world for that matter, are about to sink into recession. Underpinning much of the angst is an unprecedented $29 trillion corporate bond binge that has left many companies more indebted than ever. Whether this debt overhang proves to be a catalyst for recession or not, one thing is clear in talking to credit-market observers: It’s a problem that won’t go away any time soon. Strains are emerging in just about every corner of the global credit market. Credit-rating downgrades account for the biggest chunk of ratings actions since 2009; corporate leverage is at a 12-year high; and perhaps most worrisome, growing numbers of companies – one third globally – are failing to generate high enough returns on investments to cover their cost of funding.

Pooled together into a single snapshot, the data points show how the seven-year-old global growth model based on cheap credit from central banks is running out of steam. “We’ve never been in a cycle quite like this,” said Bonnie Baha, a money manager at DoubleLine Capital in Los Angeles, which oversees more than $80 billion. “It’s setting up for an unhappy turn.” While not as pronounced as the rout in global equity markets, losses are beginning to pile up in the bond market too. The average spread over benchmark government yields for highly rated debt has widened to 1.84 percentage points, the most in three years, from 1.18 percentage points in March, according to Bank of America Merrill Lynch indexes.

Investors lost 0.2% on global corporate bonds in 2015, snapping a string of annual gains that averaged 7.9% over the previous six years, the data show. Debt at global companies rated by Standard & Poor’s reached three times earnings before interest, tax, depreciation and amortization in 2015, the highest in data going back to 2003 and up from 2.8 times last year, according to the ratings company. Total debt at listed companies in China, the world’s second-largest economy, has climbed to the highest level in three years, according to data compiled by Bloomberg. Worsening debt profiles contributed to S&P downgrading 863 corporate issuers last year, the most since 2009. More than a third of commodity and energy companies have ratings with negative outlooks or are on credit watch with negative implications, S&P said.

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“The problem, however, is that China’s competitors are employing the same tactics and their currencies have more or less shadowed the yuan’s movements against the dollar..”

Capital Flight Is The Evil Twin Brother Of Currency War (MW)

A currency war is not all it’s cracked up to be. That is the verdict from Citi’s currency expert Steven Englander, who argues that efforts by central banks to devalue their currencies to maintain an edge over competing economies are not as effective as many are led to believe. “Policy makers and investors talk about currency depreciation as if it is the ultimate weapon of economic policy, but that overstates its importance in driving activity,” said Englander in a report. “The economic bang for the depreciating buck, or yen or euro is relatively small.” The currency strategist stressed that engaging in a currency war is mostly an exercise in futility, in part because it is not all that effective as a monetary tool. “You have to go much further than you think for much longer than you think,” he said.

And if a country has to rely on manipulating the exchange rate to prop up the economy, then it may be in worse trouble than those in charge want to admit, according to Englander. While the criticism was not specifically directed at China, the observation coincides with a continuing debate over how far Beijing will go to weaken its currency in a bid to prop up its flagging economy. Economists generally expect the Chinese government to depreciate the renminbi to bolster export competitiveness to combat a sharp economic slowdown. The People’s Bank of China officially projected GDP to grow 6.8% in 2016 versus 6.9% last year with some economists projecting GDP growth to decelerate to around 6.5%. The problem, however, is that China’s competitors are employing the same tactics and their currencies have more or less shadowed the yuan’s movements against the dollar, according to Englander.

“If the trading partners keep matching CNY depreciation at this pace, CNY will have to go a long way before any material competitive advantage emerges,” he said. That has not deterred the Chinese authorities from pushing the currency lower after its dramatic devaluation in August and analysts project the yuan-dollar pair to soften to 7 by the end of the year from 6.57 currently. Ironically, in a bid to buttress the economy via the cheap yuan, China faces the risk of accelerating capital outflows. “Capital flight is the evil twin brother of currency war,” Englander said. “If currency war is typically capital outflows encouraged by government policy, capital flight is currency war driven by the private sector with policy makers typically on the other side.”

The Institute of International Finance last week estimated that $676 billion exited China in 2015 and outflows are likely to continue this year, further exposing the yuan to speculative attacks.

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“..the $700 billion decline in China’s foreign-currency reserves is bigger than the total foreign-currency reserves of all but three other central banks in the world—Japan, Switzerland and Saudi Arabia..”

Hundreds of Billions of Dollars Have Fled China. Now What? (WSJ)

For lovers of dramatic numbers, China has long been a gift. The flood of cash leaving the country has produced another impressive statistic: We are witnessing the greatest episode of capital flight in history. China’s foreign-exchange reserves fell by $700 billion last year. The flood of cash across its borders is complicating the country’s economic transformation and is raising the risks of problems in other emerging markets, where cash already is flowing outward. “What happened in 2015 coming out of China was unprecedented in magnitude,” said Charles Collyns, chief economist for the Institute of International Finance, a global trade group for the financial industry. The size of China’s $10 trillion economy and its still-huge foreign reserves means the outflow won’t cause an immediate crisis in the country, though there are risks.

According to World Bank data, the $700 billion decline in China’s foreign-currency reserves is bigger than the total foreign-currency reserves of all but three other central banks in the world—Japan, Switzerland and Saudi Arabia. China’s outflows are the biggest in absolute terms, although other countries have had larger outflows relative to the size of their economies. The big worry is that China devalues its currency, which would come at a time that money already is flowing out of emerging markets as investors grow more risk averse and the U.S. Federal Reserve slowly begins to raise interest rates. If the yuan does fall further, it makes the economies of its Asian neighbors less competitive. That could lead to more capital flight from emerging markets, which could drain foreign-currency reserves in countries trying to keep their currencies from falling.

Places that do see their currencies tumble also could face inflation, slowing investment and tapering growth. Most historical cases of capital flight have one main cause—economic turmoil, political instability or an outside crisis that leads investors to pull their cash home. In China, however, there are several interconnected reasons that both locals and foreigners are pulling out their money, and the combination appears to be making the situation worse.

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“..nearly $1.6 trillion in Quantiative Tightening is taking place just due to China’s attempts to stem capital flight..”

China’s January Outflows Soar To Second Highest Ever (ZH)

While China’s currency devaluation has, alongside the price of commodities, become one of the two key drivers of market volatility and tubulence around the globe, when it comes to risk, one far more important Chinese metric is the actual amount of capital that leaves the nation. The reason for this is that as explained over the weekend, in a world where Quantitative Tightening by EMs and SWFs has emerged as a powerful counterforce to Quantitative Easing – or liquidity injections – by developed central banks, what matters for global risk levels is the net effect of these two opposing money flows. Of all the global “quantitative tighteners”, the biggest culprit is China, which has seen over $1 trillion in reserve selling since the summer of 2014, the direct result of a virtually identical amount in capital outflows.

Furthermore in for a “closed’ Capital Account system like is China, the selling of FX reserves is a direct function of capital outflows, so the only real data needed to extrapolate not only the matched reserve selling and thus Quantitative Tightening, but also the direct impact onglobal risk assets, is how much capital outflow has taken place. This takes place in one of two ways: by relying on official Chinese historical data, or by estimating how much outflows take place on a concurrent basis, thus allowing one to estimate how much capital is flowing out in real time. Indicatively, China’s SAFE released onshore FX settlement data for the whole banking system (PBoC+banks), suggesting some $97bn of FX outflows in Dec, which is broadly in line with the fall in official reserves.

But much more important is the question what is taking place right now, the answer to which can either wait until SAFE releases January data in several weeks… or rely on day to day estimates of outflows in the form of central bank FX intervention. Luckily, we have just that. According to a Goldman report, so far in January “there has been around $USD 185bn of intervention (with the recent intervention predominantly taking place in the onshore market)” split roughly $143 billion on the domestic side and $42 billion on the offshore Yuan side. This would make January the month with the second largest amount of intervention since August 2015, and thus the second highest month of capital outflows, and would explain the ongoing deterioration across global asset classes as China’s various FX reserve managers have been forced to sell not just government bonds but equities as well.

Goldman also calculates that “total intervention over the last 6 months, using our estimates, sums to USD 775bn.” Run-rating this amount would suggest that nearly $1.6 trillion in Quantiative Tightening is taking place just due to China’s attempts to stem capital flight. This number excludes the hundreds of billions in reserves that all other petrodollar and EM nations have to liquidate as well to prevent the rapid devaluation of their own currencies as the world remains caught in the global dollar margin call we first explained in early 2015.

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Even CNN gets alarmed. Graph is not from article, but seems a good fit.

Cracks In America’s Economy Are Growing (CNN)

America’s economy hit the brakes during the holidays. Some recent economic data even raises fears that we might be heading towards a possible U.S. recession in 2016. Big banks like Morgan Stanley estimate there’s a 20% chance of recession this year. On Friday, the government will release data that show how the U.S. economy fared in the last three months of the year. Many experts forecast that the U.S. economy barely grew – about 1% or less – between October and December of 2015 compared to a year ago. Even the Federal Reserve admitted Wednesday that the economy “slowed” at the end of last year. On Thursday, the bad news continued. A key sign of confidence is orders for new products and equipment – known as “durable goods” – placed by companies to power their business.

Orders for durable goods fell 5% between November and December, according to the Commerce Department. That was a lot below expectations that orders would be flat. It shows that some companies are delaying or deciding not to purchase any new piece of equipment they need. The news on durable goods caused Barclays (BCS) to lower its GDP forecast to 0.4% on Thursday. Capital Economics, a research firm, admitted the new data posed risks “firmly to the downside” for its estimate of 1%. Here are 3 more warning signs that the U.S. economy is heading in the wrong direction:

1. American are not spending much U.S. economic growth depends on shoppers. Consumer spending makes up two-thirds of the nation’s economic engine. Yet they’re sending mixed signals: U.S. retail sales declined a bit in December and they were negative or flat seven times last year. Consumer confidence has wavered too. It peaked at 98% in January 2015 but has since drifted down in general. Consumer confidence is currently 93%. While it’s a lot better than what it was just a few years ago, any downward movement is still a cause for concern.

2. U.S. manufacturing already in recession American factories are suffering from the global economic slowdown. Manufacturing makes up 10% of the U.S. economy, according to Morgan Stanley. The key ISM manufacturing index has declined for six straight months, and its been negative – below 50% – for the last two months. The strong dollar is making products manufactured in the U.S. more expensive overseas, lowering demand for American made goods. The slowdown in emerging market economies isn’t helping trade either.

3. Corporate America is hurting Earnings season isn’t over yet but one thing is clear: American companies are making less money than a year ago. Put together, when America’s biggest companies – and employers – suffer, the economy follows suit. The S&P 500 is down 7% so far in January. Apple, the nation’s biggest company by market size, just announced record profits with a gloomy outlook ahead. It believes iPhone sales will decline in the first quarter of this year for the first time in 13 years. Apple CEO Tim Cook expressed serious caution about the global economy. When a major American CEO raises the warning flag that’s not good for the U.S. economy. “We’re seeing extreme conditions unlike anything we have experienced before just about everywhere we look,” Cook said Tuesday.

Read more …

Waiting for the final whistle..

How Italy’s Bad Loans Built Up (FT)

The EU agreed a deal with Italy on Wednesday to help Italian banks sell off their large portfolios of non-performing loans to private investors, in the hope it will restore confidence in the country’s troubled banking system. The move came as concerns over the loans — worth 21% of GDP— sent Italian banks’ share prices into freefall, heaping pressure on the sector. A logjam of bad loans has built up over the past decade as economic stagnation, multiple recessions and a weak recovery have weighed on companies, particularly smaller businesses that account for the majority of Italy’s business make-up. According to the Italian Association of Banks, the ratio of bad loans is higher for loans to small companies than the large ones. These charts show how Italy grew as a lender of bad loans, and the banks that have been most affected.

Since the onset of the financial crisis, Italian banks have accrued a much larger exposure to non-performing loans than other large European countries. The EU average for non-performing loans as a percentage of total loans is 6%; in Italy the proportion has reached 17%. Slow growth has been a big setback. In the fourth quarter last year, Italian GDP was at the same level as at the beginning of 2000, while that of Germany and France grew 20%. Italy returned to growth at the start of 2015, but the recovery has been anaemic with quarterly growth rates below 0.5%. Until economic growth picks up strongly, any decline in the relative proportion of non-performing loans held by Italy’s banks is likely be marginal, as it was in 2015.

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I’m all for it.

Brexit Vote To Turn UK Into ‘Safe Haven’ Triggering EU Disintegration (Tel.)

A British exit from the European Union could see the UK becoming a “safe haven” amid a disintegrating Europe, Barclays has said. Analysis from the bank said a ‘leave’ vote would open a “Pandora’s Box” in the crisis-hit continent, and could dissuade Scotland from breaking away from the relative safety of the UK. Barclays said financial markets had failed to grasp the sheer “breadth” of the British vote, calling it one of “the most significant global risks of the year”, and one which could lead to the collapse of the European project. Investors have been selling off the pound in anticipation of an EU referendum, which could take place as early as the summer. Sterling has depreciated by 9pc against the single currency since November.

But if Britain voted for an EU exit, the political and institutional reverberations on the continent would be far greater than any economic fall-out, said the bank, who compared the implications to that of a “Grexit”. A number of European countries would be caught in the grip of extremist left-wing and right-wing populist parties, pushing them towards leaving the EU, they said. “If politics in the EU turned for the worse, the UK may be seen as a safe haven from those risks, reversing the euro’s exchange rate appreciation”, said the report’s authors. “In that environment, Scottish voters could be even less inclined to leave the relative safety of the UK for an increasingly uncertain EU”. The warning echoes fears that Europe, rather than the UK, would suffer the worst consequences of a Brexit.

Deutsche Bank’s chief economist said earlier this week that Brexit would be “devastating” for the continent, consigning Europe to the status of a “second rank” power. “The referendum is generally seen as a ‘UK’ issue, when it is better seen as a European issue” said Philippe Gudin of Barclays. Analysts highlighted the “emotionally charged” immigration debate as a “wildcard” which could see the UK leave the EU. Survey data shows concerns about immigration have surged to become the most important issue facing the EU, according to voters – elicpsing fears over economy, terrorism, and unemployment since the start of 2015. Should Brexit occur, this would embolden other member states who are struggling to control immigration and unleash a fresh wave of turmoil in the EU, said Barclays.

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Give them something to go back to.

Germany Tightens Refugee Policy, Finland Joins Sweden In Deportations (Guar.)

Germany has moved to toughen its asylum policies as Finland and Sweden announced plans to deport tens of thousands of people in a bid to contain the migrant crisis. Sigmar Gabriel, the vice chancellor, announced that Germany would place Algeria, Morocco and Tunisia on a list of “safe countries of origin” – meaning that migrants from those countries would have little chance of winning asylum. Some migrants would also be blocked from bringing their families to join them in Germany for two years, Gabriel said. The tougher rules come after Germany, the European Union’s powerhouse economy, took in some 1.1 million migrants in 2015 – many of them refugees fleeing conflict in Syria.

German chancellor Angela Merkel has come under fierce pressure in recent months to reverse her open-arms policy to those fleeing war and persecution, including opposition from within her own conservative camp. Finland meanwhile joined Sweden on Thursday in announcing plans to deport tens of thousands of refused asylum seekers. The two Nordic countries are both struggling to cope with an influx of refugees and migrants fleeing misery in the Middle East and elsewhere – receiving amongst the highest numbers of arrivals per capita in the EU. The Finnish government expects to deport around two thirds of the 32,000 asylum seekers that arrived in 2015, Paivi Nerg, administrative director of the interior ministry, told AFP.

“In principle we speak of about two-thirds, meaning approximately 65% of the 32,000 will get a negative decision (on their asylum applications),” she told AFP. In neighbouring Sweden, interior minister Anders Ygeman said on Wednesday that the government was planning over several years to deport up to 80,000 people whose asylum applications are set to be rejected. “We are talking about 60,000 people but the number could climb to 80,000,” he told Swedish media, adding that, as in Finland, the operation would require the use of specially chartered aircraft. He estimated that Sweden would reject around half of the 163,000 asylum requests received in 2015.

Swedish migration minister Morgan Johansson said authorities faced a difficult task in deporting such large numbers, but insisted failed asylum seekers had to return home. “Otherwise we would basically have free immigration and we can’t manage that,” he told news agency TT. The clampdown came as at least 31 more people died trying to reach the EU. Greek rescuers found 25 bodies, including those of 10 children, off the Aegean island of Samos, in the latest tragedy to strike migrants risking the dangerous Mediterranean crossing hoping to start new lives in Europe. The Italian navy meanwhile said it had recovered six bodies from a sinking dinghy off Libya – and in Bulgaria, the frozen bodies of two men, believed to be migrants, were found near the border with Serbia.

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This will fail.

Mass Expulsions Ahead For Europe As Refugee Crisis Grows (AP)

Dazzled by an unprecedented wave of migration, Sweden on Thursday put into words an uncomfortable reality for Europe: If the continent isn’t going to welcome more than 1 million people a year, it will have to deport large numbers of them to countries plagued by social unrest and abject poverty. Interior Minister Anders Ygeman said Sweden could send back 60,000-80,000 asylum seekers in the coming years. Even in a country with a long history of immigration, that would be a scale of expulsions unseen before. “The first step is to ensure voluntary returns,” Ygeman told Swedish newspaper Dagens Industri. “But if we don’t succeed, we need to have returns by coercion.” The coercive part is where it gets uncomfortable.

Packing unwilling migrants, even entire families, onto chartered airplanes bound for the Balkans, the Middle East or Africa evokes images that clash with Europe’s humanitarian ideals. But the sharp rise of people seeking asylum in Europe last year almost certainly will also lead to much higher numbers of rejections and deportations. EU officials have urged member countries to quickly send back those who don’t qualify for asylum so that Europe’s welcome can be focused on those who do, such as people fleeing the war in Syria. “People who do not have a right to stay in the EU need to be returned home,” said Natasha Bertaud, a spokeswoman for the EU’s executive Commission.

“This is a matter of credibility that we do return these people, because you don’t want to give the impression of course that Europe is an open door,” she said. EU statistics show most of those rejected come from the Balkans including Albania and Kosovo, some of Europe’s poorest countries. Many applicants running away from poverty in West Africa, Pakistan and Bangladesh also are turned away. Even people from unstable countries like Iraq, Afghanistan and Somalia can’t count on getting asylum unless they can prove they, personally, face grave risks at home.

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Just numbers. That’s all you need to know.

Why Europe’s Refugee Crisis May Be Getting Worse (BBG)

More than 50,000 refugees fleeing violence and unrest in the Middle East and Africa have arrived on Europe’s shores already this month — almost 10 times as many as in January 2015. This unrelenting influx will add to the pressure on leaders who are already reeling from the impact of the crisis. With European Union countries reintroducing border controls, chaos at Europe’s external frontiers and the threat of terrorism associated with the civil war in Syria looming over the continent’s largest cities, the dilemma has fractured European politics and frayed the social fabric. The following charts show why the worst may yet be to come.

The number of refugees fleeing to Greece by sea this month is almost 10 times what it was this time last year, according to UNHCR data through Jan. 27. Normally the winter months are quieter as migrants wait for better weather but with this January’s total almost as high as that of last June, the figures suggest that Europe will continue to face a huge inflow. As the crisis in Syria has intensified, the makeup of the refugees has changed. Whereas in 2015 more than half of the migrants arriving in Greece were men, that’s now slipped to 44% as whole families follow them to seek asylum in Europe.

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And we keep on going.

Twelve Refugees Drown As Boat Sinks Off Greek Island (Reuters)

Twelve migrants drowned when their boat sank off a Greek island close to Turkey, the Greek coastguard said on Thursday, as people continue to make crossings to Europe despite the harsh winter conditions. “A man who managed to swim to the shore told Greek authorities the boat carried 40 to 45 people,” a coastguard official said. The sinking occurred late on Wednesday north of the island of Samos in the eastern Aegean Sea, close to the Turkish coast. Nine people have been rescued so far, and Frontex and coastguard vessels are looking for other survivors. “We are not sure if the nine rescued were among the 45 or if they were on a different boat,” the official said.

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On average, 8 people have reportedly drowned every single day this year.

24 Iraqi Kurdish Refugees Drown Off Greek Island (NY Times)

At least 24 people drowned and 11 others were missing after a boat carrying Iraqi Kurds sank off the Greek island of Samos in the Aegean Sea, close to Turkish coast, the authorities said on Thursday. More than 3,700 migrants died while trying to enter Europe via the Mediterranean last year, and the latest sinking was a reminder that the flow has not stopped in the dead of winter. Kelly Namia, an Athens-based representative of the International Organization for Migration, confirmed the death toll. According to accounts provided to the organization at a hospital, the wooden vessel was carrying 65 people, when it sank on Wednesday night, even though it had a maximum capacity of 30 people. The passengers were all Iraqi Kurds, aside from the smugglers, who were believed to be Afghans. At least one smuggler is believed to have drowned, but his body has not been located, Ms. Namia said. The Greek Coast Guard continued to search for survivors Thursday afternoon, using vessels and a helicopter.

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Number of refugees fleeing to Italy rises sharply again.

Italy Navy Recovers Six Bodies, Rescues 209 From Migrant Boats (Reuters)

Italy’s navy rescued 290 migrants and recovered six bodies from the water near a half-sunken rubber boat on Thursday, the first sea deaths recorded on the North Africa to Italy route this year, a spokesman said. The navy rescued 109 migrants from a large rubber boat in the morning, and then 107 from a second boat a few hours later. When the navy arrived at a third rubber craft, it was sinking. They managed to pull 74 to safety, but six bodies were recovered from the water. A navy helicopter is continuing to search for survivors, the spokesman said.

Italy and Greece are on the frontline of Europe’s biggest immigration crisis since World War Two, with overcrowded boats packed with migrants reaching their shores from North Africa and Turkey by the hundreds. The sea route to Italy from Africa is the most dangerous border for migrants in the world. Of the more than 3,700 migrant deaths in the Mediterranean in 2015, about 2,000 perished on the way to Italy from North Africa. After a lull in arrivals during the first three weeks of this year, Libya-based people smugglers have taken advantage of recent mild weather to send out boats. Italy’s coastguard said 1,271 migrants were rescued on Tuesday.

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Nov 192015
 
 November 19, 2015  Posted by at 11:28 am Finance Tagged with: , , , , , , , , ,  


Robert Capa Anti-fascist militia women at Barcelona street barricade 1936

Looking through a bunch of numbers and graphs dealing with China recently, it occurred to us that perhaps we, and most others with us, may need to recalibrate our focus on what to emphasize amongst everything we read and hear, if we’re looking to interpret what’s happening in and with the country’s economy.

It was only fair -perhaps even inevitable- that oil would be the first major commodity to dive off a cliff, because oil drives the entire global economy, both as a source of fuel -energy- and as raw material. Oil makes the world go round.

But still, the price of oil was merely a lagging indicator of underlying trends and events. Oil prices didn‘t start their plunge until sometime in 2014. On June 19, 2014, Brent was $115. Less than seven months later, on January 9, it was $50.

Severe as that was, China’s troubles started much earlier. Which lends credence to the idea that it was those troubles that brought down the price of oil in the first place, and people were slow to catch up. And it’s only now other commodities are plummeting that they, albeit very reluctantly, start to see a shimmer of ‘the light’.

Here are Brent oil prices (WTI follows the trend closely):

They happen to coincide quite strongly with the fall in Chinese imports, which perhaps makes it tempting to correlate the two one-on-one:

But this correlation doesn’t hold up. And that we can see when we look at a number everyone seems to largely overlook, at their own peril, producer prices:

About which Bloomberg had this to say:

China Deflation Pressures Persist As Producer Prices Fall 44th Month

China’s consumer inflation waned in October while factory-gate deflation extended a record streak of negative readings [..] The producer-price index fell 5.9%, its 44th straight monthly decline. [..] Overseas shipments dropped 6.9% in October in dollar terms while weaker demand for coal, iron and other commodities from declining heavy industries helped push imports down 18.8%, leaving a record trade surplus of $61.6 billion.

44 months is a long time. And March 2012 is a long time ago. Oil was about at its highest since right before the 2008 crisis took the bottom out. And if you look closer, you can see that producer prices started ‘losing it’ even earlier, around July 2011.

Something was happening there that should have warranted more scrutiny. That it didn’t might have a lot to do with this:

China’s debt-to-GDP ratio has risen by nearly 50% in the past four years.

The producer price index seems to indicate that trouble started over 4 years ago. China dug itself way deeper into debt since then. It already did that before as well (especially since 2008), but the additional debt apparently couldn’t be made productive anymore. And that’s an understatement.

Now, if you want to talk correlation, compare the producer price graph above with Bloomberg’s global commodities index:

World commodities markets, like the entire global economy, were propped up by China overinvestment ever since 2008. Commodities have been falling since early 2011, after rising some 60% in the wake of the crisis. And after the 2011 peak, they’ve dropped all the way down to levels not seen since 1999. And they keep on falling: steel, zinc, copper, aluminum, you name it, they’re all setting new lows almost at a daily basis.

Moreover, if we look at how fast China imports are falling, and we realize how much of those imports involve (raw material) commodities, we can’t escape the conclusion that here we’re looking at not a lagging, but a predictive indicator. What China doesn’t purchase in raw materials today, it can’t churn out as finished products tomorrow.

Not as exports, and not as products to be used domestically. Neither spell good news for the Chinese economy; indeed, the rot seems to come from both sides, inside and out. And no matter how much Beijing points to the ‘service’ economy it claims to be switching towards, with all the debt that is now deflating, and the plummeting marginal productivity of new debt, most of it looks like wishful thinking.

And that is not the whole story either. Closely linked to the sinking marginal productivity, there is overleveraged overcapacity and oversupply. It’s like the proverbial huge ocean liner that’s hard to turn around.

There are for instance lots of new coal plants in the pipeline:

China Coal Bubble: 155 Coal-Fired Power Plants To Be Added To Overcapacity

China has given the green light to more than 150 coal power plants so far this year despite falling coal consumption, flatlining production and existing overcapacity. [..] in the first nine months of 2015 China’s central and provincial governments issued environmental approvals to 155 coal-fired power plants — that’s 4 per week. The numbers associated with this prospective new fleet of plants are suitably astronomical. Should they all go ahead they would have a capacity of 123GW, more than twice Germany’s entire coal fleet; their carbon emissions would be around 560 million tonnes a year, roughly equal to the annual energy emissions of Brazil; they would produce more particle pollution than all the cars in Beijing, Shanghai, Tianjin and Chongqing put together [..]

And new car plants too:

China’s Demand For Cars Has Slowed. Overcapacity Is The New Normal.

For much of the past decade, China’s auto industry seemed to be a perpetual growth machine. Annual vehicle sales on the mainland surged to 23 million units in 2014 from about 5 million in 2004. [..] No more. Automakers in China have gone from adding extra factory shifts six years ago to running some plants at half-pace today—even as they continue to spend billions of dollars to bring online even more plants that were started during the good times.

The construction spree has added about 17 million units of annual production capacity since 2009, compared with an increase of 10.6 million units in annual sales [..] New Chinese factories are forecast to add a further 10% in capacity in 2016—despite projections that sales will continue to be challenged. [..] “The players tend to build more capacity in hopes of maintaining, or hopefully, gain market share. Overcapacity is here to stay.”

These are mere examples. Similar developments are undoubtedly taking place in many other sectors of the Chinese economy (how about construction?!). China has for example started dumping its overproduction of steel and aluminum on world markets, which makes the rest of the world, let’s say, skittish. The US is levying a 236% import tax on -some- China steel. The UK sees its remaining steel industry vanish. All US aluminum smelters are at risk of closure in 2016.

The flipside, the inevitable hangover, that China will wake up to sooner rather than later, is the debt that its real growth, and then it’s fantasy growth, has been based on. We already dealt extensively with the difference between ‘official’ and real growth numbers, let’s leave that topic alone this time around.

Though we can throw this in. Goldman Sachs recently said that even if the official Beijing growth numbers were right -which nobody believes anymore- ”Chinese credit growth is still running at roughly double the rate of GDP growth”. And even if credit growth may appear to be slowing a little, though we’d have to know the shadow banking numbers to gauge that (and we don’t), that hangover is still looming large:

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

[..] 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 [..] 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.”

Looking at the producer price graph, we see that the downfall started at least 44 months ago, and that 52 months is just as good an assumption. And we know that debt rose 50% or more since the downfall started. That does put things in a different perspective, doesn’t it? (Probably) the majority of pundits and experts will still insist on a soft landing at worst.

But for those who don’t, please consider the overwhelming amount of deflationary forces that is being unleashed on the world as all that debt goes sour. As the part of that debt that was leveraged vanishes into thin air.

It’s ironic to see that it’s at this very point in time that the IMF (Christine Lagarde seems eager to take responsibility) seeks to include the yuan in its SDR basket. Xi Jinping’s power over the exchange rate can only be diminished by such a move, and we’re not at all sure he realizes to what extent that is true. Chinese politics are built on hubris, and that goes only so far when you free float but don’t deliver.

To summarize, do you remember what you were doing -and thinking- in mid-2011 and/or early 2012? Because that’s when this whole process started. Not this year, and not last year.

China’s producers couldn’t get the prices they wanted anymore, as early as 4 years ago, and that’s where deflationary forces came in. No matter how much extra credit/debt was injected into the money supply, the spending side started to stutter. It never recovered.

Nov 022015
 
 November 2, 2015  Posted by at 12:27 pm Finance Tagged with: , , , , , , , , , ,  


Just another 6-year old dead boy washed up on Lesbos Nov 2 2015

Industrial-Scale Misery As Soaked Refugees Pour Onto Greece’s Lesbos (CBC)
Record 218,000 Migrants Crossed Mediterranean In October, Says UN (AFP)
Total Of 19 Dead Recovered From Aegean Sea On Sunday (AP)
Plastic Boat Sinks Off Greece, Killing 11 Refugees (NY Times)
Refugee Crisis Was Not Unexpected, Top UN Official Says (Kath.)
Merkel’s Refugee Troubles Mount as Allies Clash on Border Plans (Bloomberg)
Bonds Send Same Ominous Signs No Matter Where in the World (Bloomberg)
Apocalypse Now: Has The Next Giant Financial Crash Already Begun? (Paul Mason)
Down $4 Trillion, China Faithful Buy Stocks That Hurt Them Most (Bloomberg)
Enlargement And The Euro Are Two Big Mistakes That Ruined Europe (Münchau)
Eurozone Banks Still Swamped With Bad Loans (Telegraph)
Europe Prolongs Its Diesel Problem (Bloomberg Ed.)
Puerto Rico Doesn’t Need Bankruptcy (WSJ)
Brexit Is A Life Or Death Matter For Britain’s Farmers (AEP)
Greece Sets Terms for Aiding $15.9 Billion Bank Recapitalization (Bloomberg)
IMF Pushes Europe For Formal Restructuring Accord On Greek Debt (Bloomberg)
Things Can Get Even Worse For Renewable Energy Companies (Dizard)

“We lost a baby and until now the sea didn’t give it us back.”

Industrial-Scale Misery As Soaked Refugees Pour Onto Greece’s Lesbos (CBC)

A young man just plucked from the sea between Turkey and the island of Lesbos sits wet and shivering on the deck of the coast guard ship that has just brought him and a dozen or so other survivors to the port of Mytilene. Their boat had just capsized. He was draped in the crackling gold of an emergency blanket, huddled amongst the others, and wanted to stand up. But the sailors told them all to stay seated until a gangplank was put in place. “Are you okay?,” I asked him from the dock. “Yeah, we are okay.” “Did everybody survive?” “We think so,” he said. And then he added: “Thank you very much for asking.” The polite afterthought in the moments following what must have been a terrifying ordeal stayed with me.

It was a kind of ordinary courtesy delivered in the midst of the most un-ordinary situation imaginable, and was as if to say “please forgive me if my desperate journey inconveniences in any way, that’s not my intention.” But here on this island of some 80,000 people in the Aegean Sea off the coast of Turkey, the extraordinary, the distressing and the nearly unbelievable are happening so constantly that they are in danger of becoming ordinary. That is, until the next boat full of asylum seekers sinks and startles everyone out of their torpor. And even then the rescue efforts have begun to take on a terrible sameness when it comes to the drownings, of children more often than not.

“It’s hard because I’m human,” a Palestinian doctor volunteering with an Israeli aid organization tells me as we stand next to the shore and as yet another boat disgorges its tattered passengers earlier this week. “It was crazy. We lost a baby and until now the sea didn’t give it us back.” Here in Lesbos, the daily arrivals of waterlogged boats tossing up their human cargo have reached a near industrial scale. One morning last week we watched dozens of boats docking here in a matter of hours. By nightfall, an estimated 10,000 people had crossed from Turkey to this Greek enclave. The view from the hills down on to the shoreline looks like nothing so much as a major travel terminus. It is a hive of activity. People tumble out of boats, helped to shore by a steady supply of volunteers, including a band of dashing lifeguards from Spain.

Dressed in wet suits in the orange and yellow of the Spanish flag, they plunge into the sea to steady boats and wade to shore with babies held high over their heads, the infants’ tiny arms spread out wide to the skies, as if in supplication, by the too-big life jackets they’re packed into by their parents. Some parents have tied ropes around their waists and those of their children so they don’t become separated in the event of a capsize. Once ashore people pray, collapse, cheer, hug. They’re offered blankets and bananas and a doctor’s care if needed. They take off their wet clothes and untie the plastic bags they’ve secured around their shoes. Or they look for new shoes from volunteers handing them out because they’ve lost their own or they’re too wet.

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Times twelve is 2,620,728 million.

Record 218,000 Migrants Crossed Mediterranean In October, Says UN (AFP)

More than 218,000 migrants and refugees crossed the Mediterranean to Europe in October -a monthly record and nearly the same number of crossings for all of 2014, the United Nations said Monday. “Last month was a record month for arrivals,” UN refugee agency spokesman Adrian Edwards told AFP, pointing out that “arrivals in October parallelled the entire 2014.” In October, 218,394 people made the perilous crossing — all but 8,000 of them landing in Greece – compared to 219,000 arrivals during all of last year, UN figures showed.]

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These are just the ones that are counted.

Total Of 19 Dead Recovered From Aegean Sea On Sunday (AP)

Greek authorities confirm that the bodies of four more migrants, all men, have been recovered north of the island of Farmakonissi in the eastern Aegean Sea. Four others were rescued and seven are missing. This brings the total number of dead recovered Sunday in the Aegean Sea to 19, in three separate incidents. The number of smuggling boats crossing over to Greece from the nearby Turkish coast fell Sunday as strong winds raked the eastern Aegean Sea, but some still attempted the dangerous crossing.

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Even the NYT wakes up.

Plastic Boat Sinks Off Greece, Killing 11 Refugees (NY Times)

A week of drownings in the Aegean Sea was capped on Sunday by more tragedy when a plastic boat carrying migrants from Turkey capsized and sank off the Greek island of Samos in high winds, killing 11 people including six children, according to Greek officials. Another two bodies were pulled out of the sea off the small island of Farmakonisi, south of Samos, a few hours later, and seven migrants were found dead off the island of Lesbos, according to a Greek Shipping Ministry official. The seven bodies could be from a large wreck on Wednesday in which more than 20 people died, according to the official who spoke on the customary condition of anonymity. “We had several rescue operations today, in several parts of the Aegean,” the official said.

The first instance on Sunday occurred at around 9 a.m., when a plastic boat flipped over in near-gale force winds just 20 meters from the coastline of Samos. Rescuers recovered the body of a woman from nearby rocks and divers found another 10 people trapped in the cabin of the sunken boat, the official said. “There were four women in there, as well as two children and four babies,” she said, adding that 15 people were rescued. Winds were still strong at around noon when the two bodies were found near Farmakonisi. With such strong winds, the Greek Coast Guard ordered vessels to remain anchored in many ports across the country on Sunday. The bad weather has not discouraged migrants from risking the short but dangerous sea crossing from Turkey to Greece. More than 60 have died over the last week after their boats sank in choppy waters, nearly half of them children.

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“The leaders of Europe were told it was going to happen at least two years ago.” “We are going to have more of these things and a lot worse.”

Refugee Crisis Was Not Unexpected, Top UN Official Says (Kath.)

Director-General of the United Nations office in Geneva, Denmark’s Michael Moller, expresses optimism that the agency’s sustainable development goals (SDGs) will help toward ending extreme poverty but he has no illusions about the refugee crisis, stressing that such phenomena will continue. On a recent visit to Athens to celebrated the UN’s 70th anniversary, he recommended that we remember the 1980s.

Does the UN Refugee Agency (UNHCR) have adequate funding? Over 60 million people depend on the UNHCR getting the right funding. But it doesn’t. The needs have grown exponentially over the past several years. There’s donor fatigue, the humanitarian system is now dealing with four or five top-level crises, what we call Level 3, which is testing the system to its limits. The lack of funding has to do with the decreasing quality of our leadership, the fact that we see more and more inwardness, and it has to do with the fact that our approach hasn’t evolved in synch with reality. A very, very deep rethink about the relationship between development aid and humanitarian aid is needed. A lot of the stuff happening now in humanitarian aid really ought to be in development aid, in the prevention side of development aid, long-term stuff. The average time a refugee is in a camp is ridiculous, it’s between 14 and 17 years.

The collective thinking about migration, refugees, doesn’t have a locus, there’s no one place where somebody is sitting thinking about new policies. The UNHCR is a technical organization, the International Organization for Migration (IOM) also. Except for Sir Peter Sutherland, the secretary-general’s special representative for migration and development, but he’s a one-man show, he’s not even supported financially, he hasn’t got a secretary, he pays for his own tickets. It’s at that level of ridiculousness. The crisis we have today, we knew it was going to happen. The leaders of Europe were told it was going to happen at least two years ago. So a little prevention and a little preparation in terms of the narrative to their voters would have gone a long way.

[..] looking at this crisis as an isolated incident doesn’t make any sense whatsoever. We are going to have more of these things and a lot worse. The moment climate refugee problems kick in we are going to be in real trouble, unless we sit down globally and figure out structures and ways to deal with this in the future. Not to reinvent the wheel every damn time that happens, but to rethink completely the humanitarian system, because I guarantee you that it will happen again.

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“..there can be neither caps on asylum seekers nor can the German border be closed to migrants.”.

Merkel’s Refugee Troubles Mount as Allies Clash on Border Plans (Bloomberg)

German Chancellor Angela Merkel faces further coalition discord over the refugee crisis after weekend talks with fellow party leaders failed to identify a common government stance on tackling the biggest influx of migrants since World War II. The continued coalition disagreement threatens another stormy week for the beleaguered chancellor as lawmakers prepare to return to Berlin for a parliamentary session that will again be dominated by the projected arrival of as many as a million asylum seekers in Germany this year. With public concern mounting and party support on the slide, Merkel and Horst Seehofer, the Bavarian state premier and Christian Social Union chief who has demanded she stem the flow of migrants, will address their joint parliamentary caucus Tuesday on efforts to tackle the crisis.

“It worries people that well over 10,000 people come every day across the German-Austrian border without us being able to control this in any way,” Jens Spahn, deputy finance minister and a member of Merkel’s Christian Democratic Union, said late Sunday on ARD television. “We must send a signal that we can’t help everyone in this world who is somehow in need, as hard as it is.” Merkel met for a total of some 10 hours on Saturday evening and throughout Sunday with Seehofer, who heads the CDU’s Bavarian sister party and is her chief coalition critic. Bavaria is the main gateway to Germany for the refugees pouring over the border from Austria, and Seehofer had said the Bavarian state government would take unspecified action if Merkel didn’t meet his demands to curb the number of migrants.

The two leaders agreed on the main goals of controlling immigration and combating the root causes of the crisis “so as to reduce the number of refugees,” and to help integrate those in need, according to a joint position paper e-mailed after the talks. The “most urgent” measure was to pursue the setting up of so-called transit zones along the border with the aim of filtering out economic migrants from those such as Syrian refugees with a genuine claim to asylum. Those arriving from “safe” countries, such as Kosovo or Albania, would be subject to an accelerated asylum process to send them home. A decision on transit zones should be made this week before a Nov. 5 meeting of Germany’s 16 state prime ministers and the three coalition leaders, according to the joint CDU/CSU paper.

That suggests coalition strife ahead. Social Democratic Party chief Sigmar Gabriel, who attended the Chancellery talks on Sunday morning, dismissed the concept of transit zones as “inappropriate” and legally doubtful. “Rather than huge and uncontrollable prison zones on the country’s borders, we need lots of registration and immigration centers inside Germany,” Gabriel told a party meeting on Saturday, according to the SPD website. Steffen Seibert, Merkel’s chief spokesman, said that experts from the federal government and the states will work on the topic of transit zones in preparation for the three party heads’ meeting on Thursday. While the coalition tone on refugees appears to be hardening, Merkel held to her core principles that there can be neither caps on asylum seekers nor can the German border be closed to migrants.

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“Where are the animal spirits to turn us around?” said Charles Diebel at Aviva Investors. “What you see in the bond market is “a lack of confidence in the future.”

Bonds Send Same Ominous Signs No Matter Where in the World (Bloomberg)

Ask any bond trader in Tokyo, London or New York what their view on the global economy is, and you’re likely to get a similar, decidedly downbeat answer. That’s not just because fixed-income types are a dour bunch at the best of times. A quick scan across government debt markets suggests that investors are pricing in the likelihood that growth and inflation around the world will remain tepid for years to come. In Europe, bonds yielding less than zero have ballooned to $1.9 trillion, with the average yield on an index of euro-area sovereign notes due within five years turning negative for the first time. Worldwide, the bond market’s outlook for inflation is now close to levels last seen during the global recession. And even in the U.S., the bright spot in the global economy, 10-year Treasury yields are pinned near 2% – well below what most on Wall Street expected by now.

“Where are the animal spirits to turn us around?” said Charles Diebel at Aviva Investors. “What you see in the bond market is “a lack of confidence in the future.” Diebel says his firm favors sovereign bonds issued by countries that are loosening monetary policy and betting against debt from nations that produce commodities. With the risk of deflation lingering in Europe, China slashing interest rates to combat flagging growth and a raft of indicators fueling concern the U.S. economy is losing steam, it’s not hard to understand why many investors are pessimistic. And the persistent demand for the safety of government bonds also raises thorny questions about whether the Federal Reserve should be raising interest rates when central banks in Europe, Asia and many emerging markets are struggling to revive their own economies.

Appetite for safe assets is so strong in Europe that about 30% of the $6.3 trillion of sovereign bonds in the euro area have negative yields, index data compiled by Bloomberg show. That means buyers who hold to maturity are willing to accept small losses in return for the promise that most of their money will be returned. In the past week alone, yields on about $500 billion of the bonds fell below zero, pushing the average yield for the region’s bonds due within five years to minus 0.025%, the lowest on record, data compiled by Bloomberg show.

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Mason sees the signs but doesn’t understand them.

Apocalypse Now: Has The Next Giant Financial Crash Already Begun? (Paul Mason)

The 1st of October came and went without financial armageddon. Veteran forecaster Martin Armstrong, who accurately predicted the 1987 crash, used the same model to suggest that 1 October would be a major turning point for global markets. Some investors even put bets on it. But the passing of the predicted global crash is only good news to a point. Many indicators in global finance are pointing downwards – and some even think the crash has begun. Let’s assemble the evidence. First, the unsustainable debt. Since 2007, the pile of debt in the world has grown by $57tn. That’s a compound annual growth rate of 5.3%, significantly beating GDP. Debts have doubled in the so-called emerging markets, while rising by just over a third in the developed world.

John Maynard Keynes once wrote that money is a “link to the future” – meaning that what we do with money is a signal of what we think is going to happen in the future. What we’ve done with credit since the global crisis of 2008 is expand it faster than the economy – which can only be done rationally if we think the future is going to be much richer than the present. This summer, the Bank for International Settlements (BIS) pointed out that certain major economies were seeing a sharp rise in debt-to-GDP ratios, which were well outside historic norms. In China, the rest of Asia and Brazil, private-sector borrowing has risen so quickly that BIS’s dashboard of risk is flashing red. In two thirds of all cases, red warnings such as this are followed by a major banking crisis within three years.

The underlying cause of this debt glut is the $12tn of free or cheap money created by central banks since 2009, combined with near-zero interest rates. When the real price of money is close to zero, people borrow and worry about the consequences later. Next, let’s look at the price of real things. Oil collapsed first, in mid 2014, falling from $110 a barrel to $49 now, despite a slight rebound in the interim. Next came commodities. Copper cost $4.50 a pound in 2011, but was half that in September. Inflation across the entire G7 is barely above zero, and deflation stalks the southern eurozone. World trade volumes have contracted tangibly since December 2014, according to the Dutch government index, while the value of global trade in primary commodities, which scored 150 on the same index a year ago, now stands at 114.

In these circumstances, the only way in which the expanding credit mountain can be an accurate signal about the future is if we are about to go through a spectacular productivity boom. The technology is there to do that, but the social arrangements are not. The market rewards companies that create labour exchanges for minicab drivers with multibillion-dollar valuations. Hot money chases after computing graduates with good ideas, but that is – at this phase of the cycle – as much an indicator of the stupidity of the money as the brightness of the ideas.

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“I lost most of my money investing in ChiNext stocks, but they are still worth buying..”

Down $4 Trillion, China Faithful Buy Stocks That Hurt Them Most (Bloomberg)

Wu Xin says she’s got a sure-fire plan to recoup losses from the $4 trillion selloff in China’s stock market: pile into equities that hurt her the most. The 28-year-old from Hangzhou has been snapping up shares in China’s small-cap ChiNext Index, undeterred by a tumble earlier this year that erased half the measure’s value in three months. “I lost most of my money investing in ChiNext stocks, but they are still worth buying,” said Wu, an ad saleswoman in the media industry. “I can make the most money from them in a rally, too.” Doubling down on the most volatile equities has become a go-to strategy for China’s 96 million individual investors as the stock market shows early signs of recovery. The ChiNext has rallied 38% from this year’s low in September – three times as much as the benchmark Shanghai Composite Index – and volumes on the small-cap bourse surged to an all-time high last month.

The rush back into the bear market’s biggest losers shows Chinese investors are still embracing risk, even as the economy heads for its weakest annual expansion since 1990. The danger is that another market downturn could saddle individuals with even deeper losses – a double whammy that Bocom International Holdings Co. says could do lasting damage to investors’ appetite for stocks. “If the ChiNext plunges again, it’s going to hurt,’’ said Hao Hong, the chief China strategist at Bocom in Hong Kong, who predicted the stock-market rout in June. When small-cap shares are rising this fast, buying is hard to resist. Zhu Zujuan, a 60-year-old retiree, says she purchased shares of Dingli Communications, a maker of wireless network testing gear, last Tuesday at 27.2 yuan apiece.

After a tea date with friends, she came back home to find the stock had rallied to 30 yuan – a 10% gain in a few hours, without any obvious news. “The market cap of ChiNext stocks is usually small, so it’s easy for them to rise,” Zhu said from Hangzhou. “I know the risk is high, but so is the return.” The ChiNext’s rally from its September low has extended this year’s gain to 68%, despite a tumble of as much as 55% from its June peak. Investors are increasingly trying to lock in quick gains. Average daily turnover in ChiNext shares surged 64% in October from the previous month, with about 3.5% of the entire market capitalization changing hands on Oct. 23. That was a record proportion relative to Shanghai, where turnover amounted to 1.5% of bourse’s market value.

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No, the structure of the EU is the one big mistake that outdoes them all.

Enlargement And The Euro Are Two Big Mistakes That Ruined Europe (Münchau)

There has hardly been a year when the EU has not been on the brink of some crisis: banking, sovereign debt, Russia’s annexation of Crimea and now refugees. You can always point fingers at individual politicians and assign blame. But it is highly implausible that the EU’s serial failures can always be explained as the product of accident and malice. I put it down to two catastrophic errors committed during the 1990s and at the beginning of this millennium. The first was the introduction of the euro; the second, the EU’s enlargement to 28 members from 15 a couple of decades ago. You might agree with one or other of these statements, or with neither of them. But few people will agree with both. I was among those who supported monetary union at the time of its introduction.

Advocates of the euro at the time came from two different groups, who struck a Faustian Pact. Members of the first group believed the euro as constructed would fail, and hoped it would somehow be fixed. The others thought the system would stay rigid, and bend the economies of its members into a new shape. This latter group knew that, to withstand the rigours of a fixed-exchange system that resembles nothing so much as the gold standard, countries would have to adjust to economic shocks through shifts in wages and prices — a course, they believed, that the euro’s members would be forced to take. The admission that the euro was a mistake should not be confused with a desire to dissolve it. That would be even more catastrophic. It is merely a recognition that we are trapped in a dysfunctional monetary system.

But how does enlargement play into this? This is not an argument about any particular member state with whose actions one happens to disagree. Nor is it an argument about the principle of enlargement, which is fundamental to the EU. My quarrel is with the speed of accession, and the criteria that aspiring members have to meet. Just as countries have maximum absorption capacities for migrants, the EU has a maximum absorption capacity for new members. I have no idea what that number is in any given time period, but it surely is not 13 members in a single decade. Enlargement affected Europe’s ability to respond to the shocks of subsequent years in two ways. First, it forced the EU to take its eye off the ball at a critical time when it should have focused on building the institutions needed to make the euro work.

Second, enlargement meant that EU countries that were not in the eurozone suddenly found themselves in the majority. That shift naturally shaped the EU’s own agenda. I recall the obsession during those years with competitiveness, a typical small-country economic issue. Debates on the reform of Europe’s treaties during those years focused on voting rights and the protection of minorities. It was the overwhelming view of European officials and members of the European Parliament that the eurozone itself did not need to be fixed. At that time it would have been comparatively easy to set up a banking union. But once the crisis set in, and banks suffered huge losses, countries could no longer share their deposit insurance schemes, let alone to create a single one for everybody.

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“It is a sick sector, having to nurse their own capital positions.”

Eurozone Banks Still Swamped With Bad Loans (Telegraph)

European banks are failing to cut their exposures to bad loans, according to a study from law firm Linklaters, leaving the sector weak and barely able to support economic growth. Banks had scrambled to cut bad loan levels and improve their capital buffers in the run up to tough stress tests in 2014, but have failed to make progress since then. The eurozone lenders are sitting on bad loans totalling €826bn, down just €15bn from €841bn in November of last year. The banks have tried to sell off portfolios of non-performing loans to investors who want to take on the assets. Funds have raised €40bn to buy up those assets but banks are still racking up more bad loans themselves, meaning the overall level is falling only very slowly. So far banks have “barely touched the tip of the iceberg,” said Linklaters’ Edward Chan. “It still means you don’t have the banks as a credible engine for growth. It is a sick sector, having to nurse their own capital positions.”

“You don’t have any source of funding for growth, which if you look at wider eurozone picture is a bit depressing.” Banks in Greece and Italy have the highest proportions of bad loans on their books, Linklaters found. A total of 3.92pc of all European bank assets are non-performing loans. By contrast the American banking system is in much better health – only 2pc of its assets are non-performing loans, just half as bad as the eurozone’s rate. The ECB has taken over much of the regulation of the biggest eurozone banks, which had led to expectations of more rapid action on banks’ balance sheets. Linklaters’ Andreas Steck believes the authority will soon get tougher on weak banks. “The ECB is clearly working hard to deal with non-performing loans resolution and with a working group now in place to tackle these loans, we will see them engaging in a much stronger fashion with national competent authorities and banks to ensure that further action is taken ahead of next year’s stress test,” he said.

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Brussels is truly an insane city.

Europe Prolongs Its Diesel Problem (Bloomberg Ed.)

Responding to public outrage over the Volkswagen diesel emissions scandal, the European Union rightly pledged to toughen emissions testing and enforce limits on nitrogen oxides (NOx), a hazardous type of diesel pollutant. But those moves amount to very little, now that the EU is giving the auto industry until 2020 to comply, and then only partially. The delay will just prolong the shift away from diesel. While it will be useful to have on-road testing, starting in 2017, EU regulators decided Wednesday to allow new car models to exceed legal levels of NOx by 110% until the beginning of 2020. Even after that, they can go over the limit by 50%. The adjustment period for existing car models is still longer. The concessions might make sense if the technology to meet the limit had yet to be developed. But selective catalytic reduction and other NOx-limiting mechanisms have been available for years.

Carmakers argue that they impose an added hassle and expense on consumers. But it is precisely the kind of burden that consumers must consider in deciding whether to buy a diesel car rather than an electric or a hybrid. Delaying the emissions limits compounds the market-distorting effects of the Europe’s initial decision, in the mid-1990s, to promote diesel engines with lower excise taxes and relatively lax environmental standards. These benefits explain why 35% of cars in the EU are diesel. American carmakers may be quietly cheering Europe’s folly, as it could prompt China to drop European car emissions standards in favor of stricter U.S. ones. What’s worse for Europe is that the delay on diesel rules undermines its credibility on limiting emissions. With key environmental talks coming up in Paris in just over a month, Europe has promised ambitious greenhouse gas reductions by 2030. But can it be trusted to follow through?

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Puerto Rico needs debt restructuring.

Puerto Rico Doesn’t Need Bankruptcy (WSJ)

Debt service will consume less than 17% of Puerto Rico’s consolidated budget this fiscal year. In the general-fund budget, which does not include government-owned corporations and agencies, debt service is below 16%. Neither number sounds like grounds for declaring bankruptcy. Factor in all the fat in government spending that could be cut, and the case for walking away from obligations to creditors is even weaker. But the U.S. is entering a presidential-election year and pollsters say voters tend to choose the candidate who “cares about people like me.” Puerto Ricans living on the island don’t vote, but those on the mainland do. What could say “caring” to these Hispanic voters in places like Florida, Ohio and Pennsylvania more than federal permission to write-down Puerto Rico’s $73 billion in debt?

Right on cue, Treasury wants Congress to approve legislation that would allow Puerto Rico to declare bankruptcy. In an analysis posted on its website, Treasury finds debt service as a%age of the general-fund budget is actually 38%, which is to say that it believes the way Puerto Rico has been calculating its debt-service burden for the last 40 years is wrong. It would be interesting to know how that got by all the credit-rating firms, lawyers and bond underwriters. It is also worth noting that Puerto Rico’s debt burden includes $18.5 billion in debt that under the island’s constitution must be serviced before any other payments come out of the general fund.

In a July 28 letter to Senate Finance Committee Chairman Orrin Hatch, Treasury Secretary Jacob Lew wrote, “I am deeply concerned that a protracted and disorderly restructuring process will cause long-term damage to the health, safety, and financial well-being of the families living and working in Puerto Rico.” Treasury counselor Antonio Weiss ratcheted up the alarm in Oct. 22 Senate testimony. “Puerto Rico’s fiscal crisis is escalating,“ he said, adding “that without federal action it could easily become a humanitarian crisis as well.” Such hyperbole is designed to rush Congress into approving the bankruptcy law.

Yet there is little evidence that Puerto Rico faces a humanitarian crisis any more than the heavily indebted states of California or Illinois. And as to the deteriorating fiscal environment, it seems to be largely the work of Gov. Alejandro García Padilla, who has been signaling markets that default is a policy goal. As Carlos Colón de Armas, a professor of finance at the Graduate School of Business at the University of Puerto Rico, told me last week, “If, instead of doing everything it can do in order not to pay, the government of Puerto Rico were doing everything it could do in order to pay, things would be very different.”

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Farmers are addicted to cheap handouts. Not even their fault.

Brexit Is A Life Or Death Matter For Britain’s Farmers (AEP)

Land prices will crash. British agriculture will face a traumatic shock, and 90pc of the country’s farmers will be ruined. There will be a wave of debt foreclosures by banks, akin to the America Dustbowl and the Grapes of Wrath. A fresh seed of discord will be sown between England, Scotland, and Wales, imperilling the UK. This is what is likely to happen if Britain votes to leave the EU next year, according to a confidential 70-page report issued to clients by the specialist consultants Agra Europe. It is not a propaganda document. It is a detailed text, carefully researched, written for industry insiders. It is not to be dismissed lightly. British farmers currently receive 60pc of their income from EU subsidies and environmental subsidies. They would lose most of this at a stroke unless the British government guaranteed compensating support of one kind or another, and so far it has clarified nothing.

Yet like all Brexit and counter-Brexit assertions, the Devil is in the assumption. Agra Europe takes it as a given that David Cameron or any other British prime minister will do little to prevent such a bloodbath running its course if the British people vote to withdraw from Europe, and say goodbye to the Common Agricultural Policy (CAP). “What is certain is that no UK government would subsidise agriculture on the scale operated under the CAP,” it states. This is conjecture. Few Brexit advocates – including ardent free-traders – suggest that subsidies should be slashed. They accept that agriculture is strategic, even iconic, and that society has a special duty of care to farmers. Let us call it ‘une certaine idée de l’Anglettere’, to borrow from Charles de Gaulle.

“Our view is that no farmer in the UK should left out of pocket as a result of Brexit. Preserving our farms and countryside is a very high priority,” says Ian Milne from Global Britain. “Farmers and fishermen should receive exactly what they received before, for at least five years. We should recruit the excellent agricultural colleges of Cirencester, Reading, and Manchester, and those in Scotland, to invent a new model of subsidies. We paid £12.3bn into the EU budget in 2014, which we would no longer have to pay, so there would be more than enough money.” Agra Europe’s report is worth reading. It is part of the “political discovery” that forces us to confront the hard realities the Brexit. We are all weary of rhetoric at this point. Direct CAP payments to Britain will average £2.88bn a year from 2014-2020.

This is a trivial sum for those who live and breath the world of global finance, almost a rounding error for Apple, Exxon, or JP Morgan. In 2013, these subsidies were worth €200 a hectare (£58 an acre) and made up 35-50pc of total gross income. “Only the super-efficient, top 10pc could survive without them,” it said. Most farmers have thin margins, if they have any at all. DEFRA figures for 2013-2014 show that a fifth of cereal and grazing livestock farms failed to make a profit, and this was before the latest leg down in global commodity prices. Average cereal farms earn around £100,000, and £55,000 of this comes from the EU single farm payment. The European Commission estimates that land prices would fall 30pc across the EU if CAP subsidies were abolished. “For farmers who have taken out debt against the value of their land, a loss of value could be fatal. 18pc of farms have current liabilities that exceed current assets,” says the Agra Europe report.

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This looks far too easy given that over half of loans are non-performing and austerity bakes more into the cake each passing day.

Greece Sets Terms for Aiding $15.9 Billion Bank Recapitalization (Bloomberg)

Greece’s government detailed how it will help banks plug the €14.4 billion hole in their books identified by the ECB, paving the way for the lenders to seek cash from investors for the second time in 18 months. The ECB expects the banks to raise at least €4.4 billion from shareholders and bondholders, sufficient to meet the shortfall identified under baseline macroeconomic assumptions in its Asset Quality Review, the central bank said Saturday. The state-owned Hellenic Financial Stability Fund is ready to inject the €10 billion identified in the ECB’s adverse scenario, offering 25% through common shares with full voting rights in the lenders, and the rest via contingent convertible securities, according to a government statement released late on Sunday night, in Athens.

The mix between shares and CoCos for the state’s participation in the capital raising plans will largely determine the ownership structure of battered lenders, and therefore investors’ appetite to chip in. U.S. billionaire Wilbur Ross, who holds a stake in Eurobank Ergasias, said Saturday Greece should only inject funds through CoCos to prevent the dilution of the stakes held by existing shareholders, which have already dropped more than 70% this year. “Investors will not be comfortable with committing new equity capital to banks that are effectively nationalized,” Ross said in a statement. “Since it was the actions of government that caused the imposition of capital controls and since these in turn have led to the need for equity, it would be nonsensical for the government now to dilute shareholders.”

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Starting to sound like a he said she said story.

IMF Pushes Europe For Formal Restructuring Accord On Greek Debt (Bloomberg)

Eurozone countries must commit to a formal restructuring of Greece’s debt before the IMF will lend new money to the country, according to one of the IMF’s top officials. Pledges to review Greece’s debt servicing won’t be enough unless they’re accompanied by specific terms for paring back the borrowing burden, David Lipton, the IMF’s first deputy managing director, said in an interview in Washington. Greece received an €86 billion bailout in August from the 19-nation currency bloc, which now wants the IMF to provide further support. “We want a debt operation agreed between Greece and its creditors,” Lipton said. “For us to go forward, we want more than a general assurance that the matter will be handled, with enough specific details on how it will be handled to assure the fund that Greece’s debt service will be on a sustainable path.”

Greek Prime Minister Alexis Tsipras has requested a new IMF program, which would replace a dormant one that’s on track to expire in March. Any new IMF program would have to be approved by an executive board representing the fund’s 188 member nations. Lipton said the amount of new IMF funding hasn’t been decided. Germany and other creditor nations say the Washington-based IMF, which lends to countries with balance-of-payments troubles, should play a financial and technical role in shoring up Greece’s economy and restoring the nation’s access to financial markets. As a result, fund participation is a central goal in the euro area’s bid to make Greece’s third bailout its last. The bailout loans Greece has amassed over its three rescues are the focus in the debt relief talks, since Greece’s private sector debt was already restructured in early 2012.

Many euro- area nations have said writing down the principal of the loans would be a “red line,” while indicating they might agree to better servicing terms like lower rates and longer loan maturities that would reduce how much Greece has to pay back over time. A technical group in Brussels is studying details. Greece in June became the first advanced country to miss a debt payment to the IMF. The country cleared its arrears to the fund in July. In 2010, worried that a Greek default might trigger a European banking crisis, the fund’s board agreed to waive a condition of IMF bailouts that required Greece’s debt to be sustainable. But member countries outside the euro zone are unlikely to give Greece special treatment this time. Lipton said the IMF has four priorities for a new program: implementation of policy pledges, fiscal structural policies needed for medium-term sustainability, fixing the banking sector, and addressing the debt.

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You bet.

Things Can Get Even Worse For Renewable Energy Companies (Dizard)

Perhaps the most immediate threat to renewables is developing at the state level, where elected legislators and appointed regulators are beginning to chip away at the biggest source of support for the US solar industry: “net metering”. These are schemes, most prominently in California, but also in Arizona, New Jersey and Hawaii, under which you could be paid at the retail power rate if your solar panels were sending back more power to the electric company than you were using. Net metering sounds virtuous, but in its simple formulation it leaves the cost of maintaining back-up power, i.e. that runs at night and on windless days, including all those fossil fuel generators, substations and transmission and distribution lines, spread over the other ratepayers.

In Arizona, a public power authority that serves Phoenix has already started charging solar panel users about $50 per month for the fixed costs of maintaining the traditional grid. Even in California, hearings are under way on whether to change the net-metering law to impose fixed charges on solar panel owners or renters who rely on the grid for back-up. Along with the social equity case being made against renewables net metering, there is a small but influential group of transmission engineers who are worried about prospective decreases in the reliability of the grid caused by the increased penetration of intermittent renewables. One such problem is “overgeneration”, which is created when the grid operator must balance incoming energy that it is in effect required to purchase, against insufficient demand.

This occurs frequently in California during sunny days, when rooftop solar panels, large solar farms and wind turbines push energy to consumers who do not need all of it. Also, the grid operators are finding that getting a renewables-intensive grid to recover from a blackout, never mind a massive cascading one, will be much more challenging than it has been with a fossil-fuel dependent grid. So a massive, weeks-long shutdown is another potential risk for renewables investors. Un-air conditioned Americans would shed their green covering very quickly.

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Nov 172014
 
 November 17, 2014  Posted by at 12:34 pm Finance Tagged with: , , , , , , , , , , ,  


NPC US Naval Research Lab, Bellevue, DC 1925

Japan Falls Into Recession As Consumers ‘Stop Spending’ (BBC)
China Bad Loans Jump Most Since 2005 (Bloomberg)
China’s Shadow Banking Grinds To A Halt As Bad Debt Surges (Zero Hedge)
UK PM Cameron Warns On Second Global Crash (CNBC)
Global Markets ‘Living On Borrowed Time’: Wilbur Ross (CNBC)
G20 Final Communique Lists 800 Measures For Economic Growth (Guardian)
The G20 Small Print: Summits Promise More Than They Deliver (Guardian)
Cracks Widen At OPEC As Oil Prices Tumble (CNBC)
Companies Scouring Europe for Best Tax Deals Are Turning to France (Bloomberg)
The Explosive Ascent Of The Podemos Party In Spain (Guardian)
Ukraine Finances In Jeopardy: IMF (CNBC)
Russia Claims Satellite Image Shows Moment MH17 Shot Down By Fighter Jet (Mirror)
Putin Rebukes Ukraine for Cutting Links With East Regions (Bloomberg)
How Almonds Are Sucking California Dry (BBC)
Are We Really Interested In Saving Time? (John Gray)
The Trouble With the Genetically Modified Future (Bloomberg)
World Is Crossing Malnutrition Red Line (BBC)

And Abe will use his self wrought crisis to grab more power through an election in which he has no real competition.

Japan Falls Into Recession As Consumers ‘Stop Spending’ (BBC)

Japan’s economy unexpectedly shrank for the second consecutive quarter, marking a technical recession in the world’s third largest economy. GDP fell at annualised 1.6% from July to September, compared with forecasts of a 2.1% rise. That followed a revised 7.3% contraction in the second quarter, which was the biggest fall since the March 2011 earthquake and tsunami. Tokyo Correspondent Rupert Wingfield-Hayes says, “ordinary people in Japan have stopped spending money”. Economists said the weak economic data could delay a sales tax rise. Prime Minister Shinzo Abe is widely expected to call a snap election to seek a mandate to delay an increase in the sales tax to 10%, scheduled for 2015.

The tax increase was legislated by the previous government in 2012 to curb Japan’s huge public debt, which is the highest among developed nations. April saw the first phase of the sales tax increase, from 5% to 8%, which hit growth in the second quarter and still appears to be having an impact on the economy. The economy shrank 0.4% in the third quarter from the quarter previous. The data also showed that growth in private consumption, which accounts for about 60% of the economy, was much weaker than expected. The next tax rise had already been put in question by already weak economic indicators.

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I think these numbers are grossly lowballing the problems.

China Bad Loans Jump Most Since 2005 (Bloomberg)

China’s bad loans jumped by the most since 2005 in the third quarter, fueling concern that a cooling economy will be further weakened as banks limit lending to avoid credit risks. Nonperforming loans rose by 72.5 billion yuan ($11.8 billion) from the previous quarter to 766.9 billion yuan, the China Banking Regulatory Commission said in a statement on Nov. 15. Soured credit accounted for 1.16% of lending, up from 1.08% three months earlier. As China heads for the weakest economic expansion since 1990, Communist Party leaders have discussed lowering the nation’s growth target for 2015, according to a person with knowledge of their talks. Bankers’ low appetite for risk and their rising concerns about asset quality are leading to a “sluggish” expansion in credit, according to UBS AG.

“We are still suffering from the aftermath of the credit binge and massive stimulus measures put in place in 2008,” said Rainy Yuan, a Shanghai-based analyst at Masterlink Securities Corp. “Banks have accelerated recognition of their bad loans in the last two quarters so that they could start the clean-up process.” Still, the pace of debt souring may have reached its peak, Jim Antos, a Hong Kong-based analyst at Mizuho Securities Asia, said in a note today. He estimated that nonperforming loans at Hong Kong-listed banks will probably increase by 18% in 2015, slowing from an estimated 31% gain in 2014.

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The potential fall-out from the demise of shadow banking in China is like that of a nuclear bomb.

China’s Shadow Banking Grinds To A Halt As Bad Debt Surges (Zero Hedge)

[..] as China finally reveals little by little the true extent of its gargantuan bad debt problem (which is far worse than ever in history, although Beijing is taking its time in making the necessary revelations: and after all Chinese banks are all SOEs – if needed they can all just get a few trillions renminbi in in liquidity injections a la the “developed west”), it is also slamming the breaks on the shadow banking system that for years what the sector where marginal credit creation, and thus growth as well as bad debt formation, was rampant. And as Japan showed so clearly just 48 hours after the end of America’s own QE3, reserves, like credit and money, are infinitely fungible in the global interconnected market. And infinitely, no pun intended, in demand, because if one central bank ends the goosing of risky assets, another has to immediately step in its place.

So while it has been widely documented that Japan is doing all in its power to crush the Japanese economy and in the process to send the Nikkei to all time highs, little has been said about a far greater slowdown in domestic (and indirectly global) credit creation using the “China” channel, where shadow banking has just slammed shut. Finally recall: it was the epic collapse in America’s own shadow banking liabilities in the aftermath of the Fannie and Freddie, and shortly thereafter, Lehman bankruptcy, which wiped out $8 trillion from the US shadow banking peak, that was the main reason for the Fed’s relentless intervention and attempts to reflate systemic funding since then. If the shadow banking collapse virus has finally jumped to China, there is no saying just how far Chinese GDP can drop if it is now constrained on the top side by surge in bad debt. One thing is certain: Japan’s paltry, in the grand scheme of things, expansion in its own QE will barely be felt if the record Chinese credit creation dynamo is indeed slamming shut.

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Cameron’s set-up for more policies that enrich the rich.

UK PM Cameron Warns On Second Global Crash (CNBC)

The global economy is again showing worrying signs of an imminent financial crisis, according to David Cameron, the prime minister of the United Kingdom, who has warned of a dangerous backdrop of instability and uncertainty. Writing in the U.K.’s Guardian newspaper, he said that this weekend’s G-20 summit in Brisbane had further underlined the problems facing the global economy. “Six years on from the financial crash that brought the world to its knees, red warning lights are once again flashing on the dashboard of the global economy,” he said in the article, published late Sunday. Global trade talks have stalled, the eurozone is teetering on the brink of recession and emerging markets are now slowing down, he said.

The spread of Ebola, the conflict in the Middle East and Russia’s “illegal” actions in Ukraine are all adding to the global insecurity, according to Cameron. His words echo those of the Bank of England last week, which said that there were downside risks for the U.K. from weaker euro area activity which could also weigh on exports and be associated with rising market volatility. The U.K. is heavily indebted compared to most of its peers but has been praised by organizations like the IMF for being the fastest growing G-7 economy since the financial crash of 2008. The government – majority-led by the right-of-center Conservative Party – has followed a path of austerity and fiscal restraint since coming to power in 2010, although it has still missed deficit targets during that period.

Criticized at first, the austerity policies have come at the same time as a significant drop in unemployment in the U.K., with the Bank of England now looking to raise interest rates next year. Opposition policymakers argue the country has become unbalanced, with poorer citizens bearing the brunt of the cuts in spending. This thesis gained some backing on Monday with a new report that showed that the poorest groups in U.K. society lost the biggest share of their incomes on average following the benefit and direct tax changes since 2010. The research, by the London School of Economics and the University of Essex, also showed that the changes have not contributed to cutting the deficit and have instead been spent on tax breaks.

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No kidding.

Global Markets ‘Living On Borrowed Time’: Wilbur Ross (CNBC)

Global financial markets are living on borrowed time with geopolitical crises and deflationary risks still a concern, private-equity billionaire Wilbur Ross told CNBC. “I think [markets] are living on borrowed time because investors have no alternatives,” the chairman and chief executive of private equity firm WL Ross & Co told CNBC Europe’s “Squawk Box” on Monday. “Everyone’s scared to death of long-term fixed income because we know rates will be going up, short-term fixed income doesn’t give you any yield, commodities are going no place except down [so] where else can you put money unless you want to buy a $100 million [Alberto] Giacometti sculpture,” he said.

So far, it has been a calm November for global stock markets when compared to the sharp selloff and volatility seen in October on the back of global growth worries. In the last thirty days, for instance, the FTSE100 has gained 7.4% and the S&P 500 and Dow Jones almost 10% – and the Nasdaq over 11% – from the market plunge seen in mid-October. Ross told CNBC earlier in the year that his company had been selling six times as much as it had been buying on the back of attractive stock valuations in the U.S. “We have been a seller on balance, not because we think a terrible crash is coming but we need to sell opportunistically because we tend to have relatively large stakes in relatively thin securities so we have to sell when the markets are very strong.”

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” … the IMF and the OECD had calculated the commitments “if fully implemented” would deliver an additional 2.1% to the GDP of G20 economies.” How crazy does that sound to you?

G20 Final Communique Lists 800 Measures For Economic Growth (Guardian)

G20 leaders have approved a package of 800 measures estimated to increase their economic output by 2.1% by 2018 if fully implemented. At the end of the two-day summit in Brisbane, Australia, leaders representing 85% of the world’s economy also called for “strong and effective action” on climate change, with countries urged to reveal new emissions reduction targets in the first few months of next year. Australia, the host nation, had wanted to keep the summit focused on economic growth rather than climate change, but new commitments by China, the US and Japan helped build momentum for stronger global action to curb greenhouse gases. The host prime minister, Tony Abbott, said the summit had “very substantially delivered” on the goals of Australia’s presidency: boosting growth and employment, enhancing global economic resilience and strengthening global institutions. “We have signed off on a peer-reviewed growth package that, if implemented, will achieve a 2.1% increase in global growth over the next five years, on top of business as usual,” he said.

“This year the G20 has delivered real and practical outcomes. Because of the efforts the G20 has made this year, culminating in the last 48 hours, people right around the world are going to be better off … through the achievement of inclusive growth and jobs.” G20 finance ministers and central bank governors who gathered in Sydney in February agreed to develop policies “to lift our collective GDP [gross domestic product] by more than 2% above the trajectory implied by current policies over the coming five years”. The communique, issued after the leaders’ summit in Brisbane on Sunday said the IMF and the OECD had calculated the commitments “if fully implemented” would deliver an additional 2.1% to the GDP of G20 economies compared with baseline forecasts issued last year. “This will add more than US$2tn to the global economy and create millions of jobs,” the communique said. It said countries would hold one another to account for implementing the commitments spelled out in the Brisbane action plan and comprehensive growth strategies. But the IMF and OECD analysis sounded a note of caution, pointing to “the high degree of uncertainty entailed in quantifying the impact of members’ policies”. G20 members had set out “close to 1,000 individual structural policy commitments, of which more than 800 are new”.

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“What’s not clear is whether the long drama that has been the global financial crisis will end happily or with bodies littering the stage.” Excuse me, but that is painfully clear.

The G20 Small Print: Summits Promise More Than They Deliver (Guardian)

The G20 is going to boost living standards and create better jobs. It has an 800-point action plan that will increase the size of the global economy by more than 2% over the next four years. It is going to step up the fight against climate change, make banks safer, modernise infrastructure, crack down on tax evasion and win the battle against Ebola. Not bad for a weekend in Brisbane. A word of advice: read the small print. Summits invariably promise more than they deliver; commitments made in communiqués are forgotten as soon as leaders have jetted out of the country. A quick look at the document pieced together in Brisbane suggests it is the familiar wishlist of pledges, most of which will not be met. Did the G20 sign up to numerical targets for cutting carbon emissions? No it did not. Did it put extra money on the table for tackling Ebola? No.

Is it expecting the private sector to produce most of the money for infrastructure projects? Yes. Is the action against tax evasion weakened by the failure to make registers of beneficial ownership open to public scrutiny? Most definitely. Is the G20 complacent in thinking that it has fixed the banks? Almost certainly. The G20 is right when it says the global recovery is “slow, uneven and not delivering the jobs needed”. The assessment that the global economy is being held back by a lack of demand is bang also on the money. Few would dispute the conclusion that there are both financial and geopolitical risks out there. It was something of a triumph for Barack Obama to get climate change in the communiqué at all given the opposition of Tony Abbott, the summit’s host. What’s clear is that the world is at a critical juncture. What’s not clear is whether the long drama that has been the global financial crisis will end happily or with bodies littering the stage.

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They’re meeting in 10 days. And no-one is going to volunteer to produce less. At current prices, they need to pump full blast.

Cracks Widen At OPEC As Oil Prices Tumble (CNBC)

Oil prices firmly below $80 a barrel are rattling nerves within OPEC and calls are mounting for concrete action at the group’s crucial next meeting this month. Over the weekend oil-producing countries Kuwait and Iran raised concerns about oil’s worrying lows and what OPEC should be doing to help protect its members’ economies. Kuwait’s cabinet and the country’s Supreme Petroleum Council held an “extraordinary” joint meeting Sunday to consider measures to stop the slide in prices. According the official KUNA news agency, the meeting “discussed the steps that have to be taken on all levels…including having consultations with fellow OPEC member states for maintaining interests of all parties”.

This comes as a surprise considering the country’s earlier statements of confidence in a rebound of prices and that there was no reason to panic Only last week Kuwait’s oil minister stressed that he did not believe there would be a reduction in output by OPEC when its 12 members gather in November 27 in Vienna. Also Sunday Iran’s oil minister criticized countries of trying to justify keeping oil production at the current level – which were set before countries such as Iran were allowed to return to selling oil in the global marketplace. Iran is already tapping its sovereign wealth fund to mitigate the impact of the oil price slump.

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Holland, Luxembourg, Ireland, now France. We add one per day.

Companies Scouring Europe for Best Tax Deals Are Turning to France (Bloomberg)

Move over, Ireland. Companies from Microsoft to China’s Huawei scouring Europe for fiscally attractive shores are turning to an unlikely country: France. As a base for research and development teams, that is. Tax breaks for R&D, €5.6 billion ($7 billion) this year alone, combined with world-class scientists are making France a honey pot for technology companies. As the French parliament debates how to shrink the country’s budget deficit this month some lawmakers are demanding reining in the R&D credits, saying some companies are abusing them. President Francois Hollande has pledged it’s a budget line he won’t touch. “The research tax breaks are decisive — they make France economically more attractive,” said Olivier Piou, who heads Gemalto, an Amsterdam-based developer of security products for bank cards, mobile phones and passports.

The fiscal breaks offset a significant part of Gemalto’s R&D budget, making it more compelling to keep 30% of its 2,000 researchers worldwide in France, Piou said. Ireland’s corporate tax of 12.5%, less than half France’s 33.3%, ensures companies from Google to Apple keep their European headquarters in the Celtic nation. Still, for R&D, global companies are increasingly beefing up their teams in France, transforming the country into a European technology hub, mirroring the U.K.’s dominance in the financial industry and Germany’s manufacturing prowess. Hollande boasted about the “edge” the measure gives France during his nationally televised interview on Nov. 6. “Often we have our handicaps, but here we have an advantage,” he said.

The jobs being created and the technological ecosystem the tax breaks are spawning is just what Hollande needs as he struggles to rekindle growth and reverse record-high joblessness. The measure, introduced in the 1980s, was expanded by former President Nicolas Sarkozy. It is among the few of his predecessor’s policies retained by Hollande. More than 17,000 companies, ranging from biotechnology and energy to software and gaming, are cashing in on the tax advantages and subsidies for innovation this year in France, with an average break of about €323,500. The R&D tax break is France’s second-biggest behind a payroll credit, a measure to spur competitiveness, according to the Budget Ministry. The move, meant to keep the brightest minds and high-value jobs at home, is also prompting foreign companies to set-up laboratories or hire French algorithm whizzes.

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This is what Europe needs: fresh blood in politics, new parties, different visions. And truly sovereign countries.

The Explosive Ascent Of The Podemos Party In Spain (Guardian)

Spain is in a mess, with unemployment at almost 25%, and over half its young people without work, a plight that can damage an individual for life. And in comparison with Britain it has been transformed by immigration at lightning speed: in the early 90s fewer than one in every hundred Spaniards were immigrants; in the noughties, the number surged sixfold, from 924,000 immigrants officially registered in 2000 to 5.6 million in 2009. Yet, despite rampant joblessness, poverty and insecurity, parties that have prioritised clampdowns on immigrants have failed to thrive. Instead, disaffection has found a different expression: a party whose premise is that ordinary Spaniards should not have to pay for a crisis they had nothing to do with.

Podemos is founded on the politics of hope: its English translation is “we can”. It was founded only this year but won 1.2m votes and five seats in May’s European elections. And now it has topped opinion polls, eclipsing the governing rightwing People’s party and the ostensibly centre-left PSOE – the Spanish Socialist Workers’ party. There are few precedents for such an explosive political ascent in modern western Europe; in Spain, a discredited political elite appears to be tottering. Not that Podemos simply materialised out of nowhere. In the buildup to Spain’s 2011 general election, hundreds of thousands of indignados took to the streets in protest at the political elite. Yet without political leadership and direction, such movements – although they can mobilise the disengaged – invariably fizzle out.

As Iñigo Errejón, the Podemos election supremo, has written, before May’s European elections, “social mobilisation had been in retreat. Among large sections of the left the most pessimistic assumptions prevailed.” But Podemos was the child of the indignados movement, a party that emphasises bottom-up democratic participation: where the indignados had neighbourhood assemblies, Podemos has “circles” that take similar forms. There are even circles among Britain’s Spanish diaspora in London and Manchester. The funding for its European campaign was largely crowdsourced, and its policies and priorities are decided partly through online voting.

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That winter may yet be awfully hard.

Ukraine Finances In Jeopardy: IMF (CNBC)

A $17 billion loan may not be enough for Ukraine to manage its finances if the conflict with Russia continues, the International Monetary Fund warned over the weekend. All parties involved in the Crimean crisis must work together, “because it’s very hard to imagine how the finances of Ukraine can be kept under control [otherwise],” the group’s deputy managing director David Lipton told CNBC at the G-20 summit in Brisbane. In April, the group agreed to a $17 billion two-year rescue package for Kiev with the aim of restoring macroeconomic stability. Yet that goal remains far off with the country in the midst of a currency crisis and facing an 8% contraction in GDP this year. The hryvnia plunged to record lows against the U.S. dollar in recent days, slumping nearly 90% in value year-to-date. Meanwhile, the World Bank estimates that economic growth may only return in 2016.

“We are working with Ukraine to try and stabilize their economy, which has become destabilized by what’s happened, including this conflict. This program stabilization really is now under threat from the flaring up of conflict,” said Lipton. “We’ve been presuming that Ukraine and the separatists would make some progress after the ceasefire, [and] that Russia would co-operate with that.” However, signs of co-operation remain to be seen. A ceasefire deal between pro-Russian rebels and government forces in September has been repeatedly violated as both groups accuse each other of launching fresh offensives in eastern Ukraine. At the G-20 summit, Russian president Vladimir Putin said “there was a good chance of resolution” in the eight-month old conflict even as Reuters reported fresh rounds of artillery file in Donetsk over the weekend.

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Report immediately ridiculed.

Russia Claims Satellite Image Shows Moment MH17 Shot Down By Fighter Jet (Mirror)

These sensational new pictures allegedly show Malaysia Airlines flight MH17 being shot down by a fighter jet. The photographs were broadcast tonight by Russian state media as evidence the passenger plane was shot down in July by a Ukrainian warplane and not a ground to air missile as previously believed. It was claimed that the images were produced by a British or US satellite. The “leaked” pictures show a missile streaking towards the MH17 flight which was downed, killing all 298 people on board, it was claimed.  TV presenter Mikhail Leontiev claimed the mysterious source who provided the images concluded they showed “how a Mig-29 fighter plane destroys the Boeing passenger plane”.

The West has repeatedly suggested the plane was shot down by pro-Moscow rebels using a Russian-made BUK missile system. Russia has argued an unidentified plane was in vicinity at the time of the crash, and that Ukraine and the West have hushed up this fact.  The Kremlin-owned channel’s presenter said: “Today we have all grounds to suppose that a State crime was committed by those who deliberately destroyed the plane. And by those who are cynically hiding it, having the full information.” The extraordinary broadcast came ahead of Western leaders including David Cameron confronting Vladimir Putin over the crash at a summit in Australia. Channel One claimed: “We have at our disposal a sensational shot, supposedly made by foreign satellite spy during the final seconds of MH17 above Ukraine.” The reported disputed a BUK missile as the cause of the tragedy. “To cut it short, it looks like there was no BUK and no launch from the ground. There were dozens professional and thousands of amateur witnesses, and no-one registered it,” claimed Leontiev.

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They even threw out a human rights treaty.

Putin Rebukes Ukraine for Cutting Links With East Regions (Bloomberg)

Russian President Vladimir Putin responded to his isolation at a global summit over his role in fomenting fighting in Ukraine by chastising authorities in Kiev. Putin said his counterpart in Ukraine, Petro Poroshenko, made a “big mistake” by moving to sever banking services and pull out state companies from two breakaway regions. He spoke after Group of 20 leaders berated Russia over the conflict at a summit in Brisbane, Australia. “Why are the authorities in Kiev now cutting off these regions with their own hands?” Putin told reporters. “I do not understand this. Or rather, I understand that they want to save money, but this is not the right occasion and the right time to do this.” Putin, who was told by fellow leaders to stop arming pro-Russian rebels, said he was leaving the G-20 gathering early to get some sleep on the flight home before tomorrow’s meetings. Russia has rejected accusations that it’s supplying manpower and weapons to support the insurgents who have carved out separatist republics in eastern Ukraine.

The government in Kiev is moving to revoke the special status and cut off links with rebel-held areas of the regions of Luhansk and Donetsk after they held elections two weeks ago that Ukraine considers illegitimate. Under a presidential decree issued yesterday, state companies and institutions were ordered to suspend work and evacuate employees with their consent. The central bank must stop Ukrainian lenders from servicing accounts used by individuals and companies in the breakaway areas, according to the document on Poroshenko’s website. “This is a big mistake because in this way they are cutting off these regions with their own hands,” Putin said, adding that he wants to discuss the decision with Poroshenko. “I do not think this a fatal blow though. I hope that life and practice in reality will yet make their adjustments to these plans.”

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” .. what this place is witnessing is a dust bowl of truly Steinbeckian proportions .. comedians joke that it’s so dry in California these days that the longest lines at Disneyland are for the water fountains – or ponder replacing the bear on the California state flag with a camel.”

How Almonds Are Sucking California Dry (BBC)

California’s worst drought for more than a century is causing huge problems for farmers, who need a trillion gallons of water per year for their almond orchards alone. But it also leaves homeowners facing difficult choices about what to do with their lawn I have a neighbour, Deborah, and ever since I’ve lived here, her front lawn has been luxuriant and green. But wandering by the other day I did a double take. Mounds of earth were piled up where the grass had once been, and an army of workmen had set about installing succulent plants and ground cover, and the kind of prickly cactus you normally see in children’s cartoons. By the time Deborah had finished explaining why she was doing it, I could hardly believe I hadn’t done the same thing myself. Aside from the satisfaction of knowing you are planting something that is actually meant to grow in these desert-like conditions – as opposed to grass, which sucks up water with the zeal of an inebriate who has stumbled upon the keys to the drinks cabinet – she also stands to save a fortune on her water bill.

She even avoids having to confront a sorry, burned-out apology-for-a-front-lawn every time she leaves the house. Added to which, the city of Los Angeles actually paid her to do it – generously too, by all accounts. And if paying people to rip up their lawns and replace them with drought-tolerant plants strikes you as an odd use of government resources, then all I can say to you is that desperate times call for desperate measures – and these are desperate times. California is now in its third year of drought. The reservoirs are running dry and so too are the ground water supplies. While comedians joke that it’s so dry in California these days that the longest lines at Disneyland are for the water fountains – or ponder replacing the bear on the California state flag with a camel – what this place is witnessing is a dust bowl of truly Steinbeckian proportions. It’s so dry, in fact, that officials were reportedly thinking of adding a fifth level to the current four-tiered drought scale, which currently rates 99% of the state as “abnormally dry”.

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Intriguing piece by brilliant philosopher John Gray.

Are We Really Interested In Saving Time? (John Gray)

A new food substitute has been advertised as time-saving. But when we say we want to save time, is this a lie we tell ourselves to mask other desires, asks John Gray. It might seem an extreme step to give up eating meals in order to save time, but this is how a new food substitute is being promoted. Soylent is a drink made by adding oil and water to a specially prepared powder that the manufacturers claim contains all the nutrients the human body needs. It’s described as creamy and faintly sweet-tasting, and enthusiasts who have given up regular meals to live on the fluid say it’s quite satisfying. With a month’s supply costing around £40, it’s cheaper than ordinary food and if it becomes widely popular will be even cheaper in future. The suggestion is that you can give your body the nourishment it needs without thought or bother, just by knocking back a drink of the fluid two or three times a day. Invented by a 24-year old American software engineer, Soylent is being promoted as a solution to what many people like to think is the bane of their lives – a perpetual shortage of time.

The name of the new food has a curious history. In Soylent Green, an unsettling film that appeared in 1973, the Soylent in question was a green wafer supposedly made from plankton algae. Taking its theme from a novel Make Room! Make Room!, published by the American science fiction writer Harry Harrison in 1966, the film is set in a heavily overpopulated world in which much of humankind lives by consuming the wafer. The action takes place in New York City, by then an overcrowded megalopolis containing 40 million people. The film’s story line tells how a New York City Police Department detective investigating a suspicious death eventually discovers that the wafer on which the world’s population lives is in fact made from human remains. The film ends with the detective, by now a broken-down figure, exclaiming, “Soylent Green is people!”

Human numbers have greatly increased over the past 40 years – from just under four billion when the film was made to well over seven billion now. At the same time concern about overpopulation, which was widespread when the film was made, has become distinctly unfashionable. Nowadays many would view as heresy the idea that there could be too many human beings on the planet, and I’ve not come across any mention of overpopulation in the publicity surrounding the Soylent that’s being marketed today. The new meal replacement isn’t being presented as a remedy for world hunger or an overcrowded planet. It’s an affliction of the well-fed that the liquid food is meant to cure.

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Losing the precautionary principle is never a good idea. But we definitely lost it. And it’s very hard to get it back, that probably requires a disaster to happen.

The Trouble With the Genetically Modified Future (Bloomberg)

Like many people, I’ve long wondered about the safety of genetically modified organisms. They’ve become so ubiquitous that they account for about 80% of the corn grown in the U.S., yet we know almost nothing about what damage might ensue if the transplanted genes spread through global ecosystems. How can so many smart people, including many scientists, be so sure that there’s nothing to worry about? Judging from a new paper by several researchers from New York University, including “The Black Swan” author Nassim Taleb, they can’t and shouldn’t. The researchers focus on the risk of extremely unlikely but potentially devastating events. They argue that there’s no easy way to decide whether such risks are worth taking – it all depends on the nature of the worst-case scenario.

Their approach helps explain why some technologies, such as nuclear energy, should give no cause for alarm, while innovations such as GMOs merit extreme caution. The researchers fully recognize that fear of bad outcomes can lead to paralysis. Any human action, including inaction, entails risk. That said, the downside risks of some actions may be so hard to predict – and so potentially bad – that it is better to be safe than sorry. The benefits, no matter how great, do not merit even a tiny chance of an irreversible, catastrophic outcome. For most actions, there are identifiable limits on what can go wrong. Planning can reduce such risks to acceptable levels. When introducing a new medicine, for example, we can monitor the unintended effects and react if too many people fall ill or die.

Taleb and his colleagues argue that nuclear power is a similar case: Awful as the sudden meltdown of a large reactor might be, physics strongly suggests that it is exceedingly unlikely to have global and catastrophic consequences. Not all risks are so easily defined. In some cases, as Taleb explained in “The Black Swan,” experience and ordinary risk analysis are inadequate to understand the probability or scale of a devastating outcome. GMOs are an excellent example. Despite all precautions, genes from modified organisms inevitably invade natural populations, and from there have the potential to spread uncontrollably through the genetic ecosystem. There is no obvious mechanism to localize the damage.

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Overeating is malnutrition too.

World Is Crossing Malnutrition Red Line (BBC)

Most countries in the world are facing a serious public health problem as a result of malnutrition, a report warns.The Global Nutrition Report said every nation except China had crossed a “malnutrition red line”, suffering from too much or too little nutrition. Globally, malnutrition led to “11% of GDP being squandered as a result of lives lost, less learning, less earning and days lost to illness,” it added. The findings follow on from last year’s Nutrition from Growth summit in London. At the 2013 gathering, 96 signatories made “significant and public commitments to nutrition-related actions” and this report was an assessment of the work that still needed to be done and the progress made. “Malnutrition is an invisible thing, unless it is very extreme,” explained Lawrence Haddad, co-chairman of the independent expert group that compiled the report. “This invisibility stops action happening but it does not stop bad things happening to the children, ” he told BBC News. “It does not stop preventing the children’s brains from developing; it does not stop their immune systems from not developing. “It is a silent crisis and we are trying to raise the awareness of the extent of malnutrition and the damage it does.”

The UN World Food Programme estimates that poor nutrition causes nearly half of deaths in children aged under five – 3.1 million children each year. Dr Haddad, a senior research fellow for the International Food Policy Research Institute, highlighted three areas that the report focused on. “The first thing we did was to say that we were not just going to focus on undernutrition, which is closely related to hunger, but also overnutrition and obesity,” he explained. “Malnutrition just means bad nutrition.” The second thing we did was focus on not just the outcomes, we also focused on the drivers. We looked at underlying factors, such as sanitation, water quality, food security, spending on nutrition and women’s status etc. “The third thing we did was to look at a very specific set of commitments that were made in the 2013 summit that David Cameron hosted in London.”

The expert group’s assessment on global nutrition drew a number of conclusions. “First of all, it is really interesting when you put all the data together you find out that nearly every country in the world has crossed a red line on nutrition in terms of it being a serious public health issue,” Dr Haddad observed. “In fact, the only country that has not is China… [but] they are very close to crossing a red line and that data is four to five years old. He added: “Often you read that it is just a problem that happens in Asia and Africa but, actually, every country in the world is grappling with malnutrition.” “The second big headline is almost half of the countries are grappling with more than one type of malnutrition. About half of the countries in the world are not just grappling with the undernutrition problem but also the overnutrition problem as well. “Countries like the UK dealt with the undernutrition problem, then there was a bit of a respite but then had to start dealing with overnutrition.

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