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America Can’t Afford to Rebuild

Sep 092017
 
 September 9, 2017  Posted by at 1:21 pm Finance Tagged with: , , , , , , , , , ,  8 Responses »


Adolphe Yvon Genius of America c1870

 

A number of people have argued over the past few days that Hurricane Harvey will NOT boost the US housing market. As if any such argument would or should be required. Hurricane Irma will not provide any such boost either. News about the ‘resurrection’ of New Orleans post-Katrina has pretty much dried up, but we know scores of people there never returned, in most cases because they couldn’t afford to.

And Katrina took place 12 years ago, well before the financial crisis. How do you think this will play out today? Houston is a rich city, but that doesn’t mean it’s full of rich people only. Most homeowners in the city and its surroundings have no flood insurance; they can’t afford it. But they still lost everything. So how will they rebuild?

Sure, the US has a National Flood Insurance Program, but who’s covered by it? Besides, the Program was already $24 billion in debt by 2014 largely due to hurricanes Katrina and Sandy. With total costs of Harvey estimated at $200 billion or more, and Irma threating to cause far more damage than that, where’s the money going to come from?

It took an actual fight just to push the first few billion dollars in emergency aid for Houston through Congress, with four Texan representatives voting against of all people. Who then will vote for half a trillion or so in aid? And even if they do, where would it come from?

 

 

Trump’s plans for an infrastructure fund were never going to be an easy sell in Washington, and every single penny he might have gotten for it would now have to go towards repairing existing roads and bridges, not updating them -necessary as that may be-, let alone new construction.

Towns, cities, states, they’re all maxed out as things are, with hugely underfunded pension obligations and crumbling infrastructure of their own. They’re going to come calling on the feds, but Washington is hitting its debt ceiling. All the numbers are stacked against any serious efforts at rebuilding whatever Harvey and Irma have blown to pieces or drowned.

As for individual Americans, two-thirds of them don’t have enough money to pay for a $500 emergency, let alone to rebuild a home. Most will have a very hard time lending from banks as well, because A) they’re already neck-deep in debt, and B) because the banks will get whacked too by Harvey and Irma. For one thing, people won’t pay the mortgage on a home they can’t afford to repair. Companies will go under. You get the picture.

There are thousands of graphs that tell the story of how American debt, government, financial and non-financial, household, has gutted the country. Let’s stick with some recent ones provided by Lance Roberts. Here’s how Americans have maintained the illusion of their standard of living. Lance’s comment:

This is why during the 80’s and 90’s, as the ease of credit permeated its way through the system, the standard of living seemingly rose in America even while economic growth rate slowed along with incomes. Therefore, as the gap between the “desired” living standard and disposable income expanded it led to a decrease in the personal savings rates and increase in leverage. It is a simple function of math. But the following chart shows why this has likely come to the inevitable conclusion, and why tax cuts and reforms are unlikely to spur higher rates of economic growth.

 

 

There’s no meat left on that bone. There isn’t even a bone left. There’s only a debt-ridden mirage of a bone. If you’re looking to define the country in bumper-sticker terms, that’s it. A debt-ridden mirage. Which can only wait until it’s relieved of its suffering. Irma may well do that. A second graph shows the relentless and pitiless consequences of building your society, your lives, your nation, on debt.

 

 

It may not look all that dramatic, but look again. Those are long-term trendlines, and they can’t just simply be reversed. And as debt grows, the economy deteriorates. It’s a double trendline, it’s as self-reinforcing as the way a hurricane forms.

 

Back to Harvey and Irma. Even with so many people uninsured, the insurance industry will still take a major hit on what actually is insured. The re-insurance field, Munich RE, Swiss RE et al, is also in deep trouble. Expect premiums to go through the ceiling. As your roof blows off.

We can go on listing all the reasons why, but fact is America is in no position to rebuild. Which is a direct consequence of the fact that the entire nation has been built on credit for decades now. Which in turn makes it extremely vulnerable and fragile. Please do understand that mechanism. Every single inch of the country is in debt. America has been able to build on debt, but it can’t rebuild on it too, precisely because of that.

There is no resilience and no redundancy left, there is no way to shift sufficient funds from one place to the other (the funds don’t exist). And the grand credit experiment is on its last legs, even with ultra low rates. Washington either can’t or won’t -depending on what affiliation representatives have- add another trillion+ dollars to its tally, state capitals are already reeling from their debt levels, and individuals, since they have much less access to creative accounting than politicians, can just forget about it all.

Not that all of this is necessarily bad: why would people be encouraged to build or buy homes in flood- and hurricane prone areas in the first place? Why is that government policy? Why is it accepted? Yes, developers and banks love it, because it makes them a quick buck, and then some, and the Fed loves it because it keeps adding to the money supply, but it has turned America into a de facto debt colony.

If you want to know what will happen to Houston and whatever part of Florida gets hit worst, think New Orleans/Katrina, but squared or cubed -thanks to the 2007/8 crisis.

 

 

Debt Rattle April 9 2017

Apr 092017
 
 April 9, 2017  Posted by at 8:32 am Finance Tagged with: , , , , , , , , ,  7 Responses »


Paul Gauguin Avenue de Clichy 1889

 

• Central Banks “Took Over” Markets In 2009; In December “Unwind” Begins (ZH)
• ‘No Bubble, No Pop’: Why Banks Are As Safe As Houses (WAus)
• Greek Gloom As Economy Stalls Amid Latest Bout Of EU Wrangling (G.)
• The Picture Of Our Economy Looks A Lot Like A Rorschach Test (NYT)
• Steve Keen And Michael Hudson: Fixing The Economy (EI)
• Trump’s ‘Wag the Dog’ Moment (Robert Parry)
• Former DIA Colonel: “US Strikes On Syria Based On A Lie” (IntelT)
• Congresswoman Tulsi Gabbard On Syria (Fox)
• How Marine Le Pen Could Win (Pol.)
• Privacy Experts Say CIA Left Americans Open To Cyber Attacks (IBT)
• Rising Waters Threaten China’s Rising Cities (NYT)

 

 

“What do credit traders look at when they mark their books? Well, these days it is fair to say that they have more than one eye on the equity market.”

• Central Banks “Took Over” Markets In 2009; In December “Unwind” Begins (ZH)

Citigroup’s crack trio of credit analysts, Matt King, Stephen Antczak, and Hans Lorenzen, best known for their relentless, Austrian, at times “Zero Hedge-esque” attacks on the Fed, and persistent accusations central banks distort markets, all summarized best in the following Citi chart… have come out of hibernation, to dicuss what comes next for various asset classes in the context of the upcoming paradigm shift in central bank posture. In a note released by the group’s credit team on March 27, Lorenzen writes that credit’s “infatuation with equities is coming to an end.” “What do credit traders look at when they mark their books? Well, these days it is fair to say that they have more than one eye on the equity market.”

Understandable: after all, as the FOMC Minutes revealed last week, even the Fed now openly admits its policy is directly in response to stock prices. As the credit economist points out, “statistically, over the last couple of years both markets have been influencing (“Granger causing”) each other. But considering the relative size, depth and liquidity of (not to mention the resources dedicated to) the equity market, we’d argue that more often than not, the asset class taking the passenger seat is credit. Yet the relationship was not always so cosy. Over the long run, the correlation in recent years is actually unusual. In the two decades before the Great Financial Crisis, three-month correlations between US credit returns and the S&P 500 returns tended to oscillate sharply and only barely managed to stay positive over the long run..

Rudolf E. Havenstein@RudyHavenstein
Replying to @zerohedge
Here is a chart of the well being of the American middle-class and poor over the same period.

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“Tell a European you think there’s a housing bubble and you’ll have a reasonable discussion,” Grantham said. “Tell an Australian and you’ll have World War III…”

• ‘No Bubble, No Pop’: Why Banks Are As Safe As Houses (WAus)

The housing sector is therefore picking up the slack, and as far as the Westpac chair can discern the underlying demand is real. “That’s why I believe there is no bubble — there is huge demand from local and offshore buyers,” he says. “But that doesn’t mean we’re not looking at things like the capacity to pay interest and repay principal, so we don’t have any issues with the measures announced (on March 31). “APRA has its mandate; we have ours. But we have no interest in lending to people who can’t repay.” That’s the reasoned analysis from Norris and Maxsted, and Henry mostly concurs. If you’re after the full Catherine wheel experience, try taking the alternative position as a market-leading fund manager or economist and warning the public about an inflating property bubble. Legendary US investor Jeremy Grantham did just that, vowing in 2012 he would never do it again. “Tell a European you think there’s a housing bubble and you’ll have a reasonable discussion,” Grantham said. “Tell an Australian and you’ll have World War III. Been there, done that!”

Local economist Steve Keen entered the fray in 2009, likening the experience to “having my genitals cut off”, while hedge fund managers have lost so much money short-selling Australian banks because they expected the bubble to pop that it’s been called the “widow maker’s” trade. True to his word, Grantham failed to respond to an email inviting him to trigger World War III. Keen, who has relocated to Britain but was in Australia this week, has no such hesitation, saying it is abundantly clear that we’re in a debt-fuelled housing bubble that has only a year or two to run before it pops. “We’re in hock to the banks and we depend on endless rising levels of credit,” the economics professor says. “Credit can continue rising but eventually you reach a peak and the gas runs out.”

Denmark, according to Keen, reached its world-record peak in 2010 at a household debt-to-GDP ratio of 139 per cent. While Australia is currently at 123 per cent, the country has some headroom because the corporate sector has deleveraged and the RBA still has some policy ammunition with the 1.5 per cent cash rate. Keen reckons we have two years, at most, before unravelling in a similar, catastrophic way to Ireland in the financial crisis. However Phil Ruthven, the experienced forecaster and founder of IBISWorld, says low interest rates mean that debt servicing is the lowest it’s been in 50 years. “But we do need to increase supply, and we do need to warn home buyers of the dangers of going too deep into debt when interest rates are rising,” Ruthven says.

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“They no longer have the means to meet basic needs, with consumption of milk and bread right down and payment of electricity bills at an all-time low.”

• Greek Gloom As Economy Stalls Amid Latest Bout Of EU Wrangling (G.)

Eight years into Greece’s ordeal to escape bankruptcy, thousands of Communist party sympathisers packed into Syntagma Square in Athens on Friday to protest at the latest concessions made by Alexis Tsipras’s leftist government to keep the country afloat. Massed before parliament in the fading light of day, they did what they had come to do: rail against the cuts that loom in return for further disbursement of the emergency aid now needed to avert economic collapse. The serial drama of Greece’s debt repayments will reach a climax again when loans of €7.5bn mature in July. That communist-aligned unionists can still muster such protests is testament to the party’s zealous determination to make itself heard. Most Greeks gave up demonstrating long ago.

Two years short of a decade in freefall, and with little prospect of recovery, the nation has succumbed to protest fatigue. With the exception of pensioners – the great losers in Greece’s assault by austerity – anger has been replaced by malaise, the lassitude that strikes when loss becomes commonplace. Friday’s protest, one of more than 60 nationwide, came within hours of Europe escaping another dose of Greek drama after eurozone finance ministers announced that bailout talks – stalled as Athens bickered over the terms of its latest compliance review with lenders – could finally resume. International auditors representing the bodies behind the three bailout packages the country has received since May 2010 are expected to return to Greece on Monday. Once technical issues are addressed, the delayed bailout payment will be disbursed, ensuring default is averted in July.

In exchange, the once fiercely anti-austerity Tsipras has signed up to further reforms worth €3.6bn, the equivalent of 2% of GDP, to be put into effect once the current programme ends next year. “It is in the nature of every agreement for there to be compromises,” said Greek finance minister Euclid Tsakalotos, who faces the thankless task of having to sell the prospect of more pension cuts and tax rises to sceptical leftists in the ruling Syriza party when it convenes on Sunday. “There are things that will upset … the Greek people.” After more than a year of hard talk and bluster – the review was meant to have been concluded in February 2016 – the government once again conceded on its own red lines, reflecting Athens’s overarching policy of keeping Greece in the heart of the eurozone. Tsipras, who fought hard to ensure countermeasures can also be taken to offset losses if economic indicators are better than expected, was quick to sound optimistic. “The Greek economy,” he announced, “is ready to leave the crisis behind it.”

But the breakthrough falls far short of the all-inclusive package the government was hoping for. Once again, promises of reducing the country’s staggering debt pile – at 180% of GDP, the biggest impediment to real economic recovery – will have to wait. [..] Unemployment has increased from 23.2% to 23.5%, with investors – the only guarantee of soaking up such an oversupply of labour – staying away. In a repeat of the chaos that beset the country’s financial system at the height of the crisis in 2015, an estimated €2.5bn of deposits left Greek banks in January and February. Consumption is also down. “The 37% of Greeks at risk of poverty and social exclusion really cannot make ends meet,” said Aliki Mouriki, a leading Greek sociologist. “They no longer have the means to meet basic needs, with consumption of milk and bread right down and payment of electricity bills at an all-time low.”

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That’s what you get for publishing made-up reports all the time, NYT.

• The Picture Of Our Economy Looks A Lot Like A Rorschach Test (NYT)

Economics has a foundation in hard numbers – employment, inflation, spending – that has largely allowed it to sidestep the competing partisan narratives that have afflicted American politics and culture. But not anymore. Since Donald J. Trump’s victory in November, consumer sentiment has diverged in an unprecedented way, with Republicans convinced that a boom is at hand, and Democrats foreseeing an imminent recession. “We’ve never recorded this before,” said Richard Curtin, who directs the University of Michigan’s monthly survey of consumer sentiment. Although the outlook has occasionally varied by political party since the survey began in 1946, “the partisan divide has never had as large an impact on consumers’ economic expectations,” he said.

At the same time, familiar economic data points have become Rorschach tests. That was evident after the government’s monthly jobs report on Friday; Republicans’ talking points centered on a 10-year low in the unemployment rate, while Democrats focused on a sharp decline in job creation. “I find it stunning, to be honest. It’s unreal,” said Michael R. Strain, director of economic policy studies at the conservative American Enterprise Institute in Washington. “Things that were less politicized in the past, like how you feel about the economy, have become more politicized now.” Indeed, the night-and-day views underscore yet another front on which Americans remain polarized five months after the election, and with President Trump nearing his 100th day in office.

[..] The University of Michigan researchers have their own way of measuring the gulf between the two viewpoints and how quickly it has flipped. Among Republicans, the Michigan consumer expectations index was at 61.1 in October, the kind of reading typically reported in the depths of a recession. Confident that Mrs. Clinton would win, Democrats registered a 95.4 reading, close to the highs reached when her husband was in office in the late 1990s and the economy was soaring. By March, the positions were reversed, with an even more extreme split. Republicans’ expectations had soared to 122.5, equivalent to levels registered in boom times. As for Democrats, they were even more pessimistic than Republicans had been in October.

As at the voting booth, the split in perceptions could have real-world consequences. If behavior tracks the recession-era sentiment among Democrats, who account for 32% of respondents in the survey, prophecies could quickly become self-fulfilling by affecting spending and investing decisions. “If one-third of the population cut their consumer spending by 5%, you get a recession,” said Alan Blinder, a Princeton economist who served in the Clinton administration and advised Al Gore and Hillary Clinton on economic policy during their Democratic presidential campaigns. “I don’t think it will happen, but it’s not beyond the realm of the possible.”

To be sure, even if Democratic consumers pulled back, that wouldn’t necessarily bring on a recession. A burst of spending by bullish Republicans, who equal 27% of those polled by the Michigan researchers, could counteract much of that drag. And independents, who are the largest cohort in the survey, at 41%, remain fairly optimistic about future growth. It is rare for “rising optimism to coexist with increasing uncertainty,” said Mr. Curtin, the Michigan expert. “The current level of optimism clearly indicates that no economywide spending retrenchment is underway, but the prevailing level of uncertainty will limit growth in discretionary spending.”

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Great conversation between two great economists. Very much worth a full read.

• Steve Keen And Michael Hudson: Fixing The Economy (EI)

Michael Hudson: If you don’t cancel the debts, they’re going to keep growing, and all of the growth and national income is going to go to the creditors. So the fact is that the debts aren’t owed to the “we” – the 99%. The debts are owed to the 1%. 1% of the population has 75% of the financial assets. All their growth has occurred since 1980. So the question is, who are you going to save? The economy or the banks? If you don’t cancel the debts, they’re going to keep growing, and all of the growth and national income is going to go to the creditors. When President Obama came in, he promised that he was going to write down the debts – especially the junk mortgages – to the actual real value of the homes that the junk mortgage people had taken out.

Or and set the debt service – the money you have to pay every month to pay the mortgage, amortization, and principal, and interest to what the normal rental value of this would be. Well, as soon as he was elected, he dropped it all. He invited the bankers to the White House and said, boys, I’m the only guy standing between you and the pitchforks out there. Don’t worry, I can deliver my constituency to you. So, basically, the Democratic Party broke its voters into a black constituency, a women’s constituency, a LGBTQ constituency, and they’re all for Wall Street. Instead of saving the economy, Obama bailed out and saved the banks by keeping the debts in place. And once you have to pay that, it’s curtains. In the end, everybody’s going to end up in Greece. Greece is where you’re going, if you don’t.

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“I’m hearing from sources on the ground in the Middle East, people who are intimately familiar with the intelligence that is available who are saying that the essential narrative that we’re all hearing about the Syrian government or the Russians using chemical weapons on innocent civilians is a sham.”

“People in both the agency [the CIA] and in the military who are aware of the intelligence are freaking out about this because essentially Trump completely misrepresented what he already should have known – but maybe he didn’t – and they’re afraid that this is moving toward a situation that could easily turn into an armed conflict..”

• Trump’s ‘Wag the Dog’ Moment (Robert Parry)

On Thursday night, Secretary of State Rex Tillerson said the U.S. intelligence community assessed with a “high degree of confidence” that the Syrian government had dropped a poison gas bomb on civilians in Idlib province. But a number of intelligence sources have made contradictory assessments, saying the preponderance of evidence suggests that Al Qaeda-affiliated rebels were at fault, either by orchestrating an intentional release of a chemical agent as a provocation or by possessing containers of poison gas that ruptured during a conventional bombing raid. One intelligence source told me that the most likely scenario was a staged event by the rebels intended to force Trump to reverse a policy, announced only days earlier, that the U.S. government would no longer seek “regime change” in Syria and would focus on attacking the common enemy, Islamic terror groups that represent the core of the rebel forces.

The source said the Trump national security team split between the President’s close personal advisers, such as nationalist firebrand Steve Bannon and son-in-law Jared Kushner, on one side and old-line neocons who have regrouped under National Security Adviser H.R. McMaster, an Army general who was a protégé of neocon favorite Gen. David Petraeus. In this telling, the earlier ouster of retired Gen. Michael Flynn as national security adviser and this week’s removal of Bannon from the National Security Council were key steps in the reassertion of neocon influence inside the Trump presidency. The strange personalities and ideological extremism of Flynn and Bannon made their ousters easier, but they were obstacles that the neocons wanted removed.

[..] Alarm within the U.S. intelligence community about Trump’s hasty decision to attack Syria reverberated from the Middle East back to Washington, where former CIA officer Philip Giraldi reported hearing from his intelligence contacts in the field that they were shocked at how the new poison-gas story was being distorted by Trump and the mainstream U.S. news media. Giraldi told Scott Horton’s Webcast: “I’m hearing from sources on the ground in the Middle East, people who are intimately familiar with the intelligence that is available who are saying that the essential narrative that we’re all hearing about the Syrian government or the Russians using chemical weapons on innocent civilians is a sham.” Giraldi said his sources were more in line with an analysis postulating an accidental release of the poison gas after an Al Qaeda arms depot was hit by a Russian airstrike.

“The intelligence confirms pretty much the account that the Russians have been giving … which is that they hit a warehouse where the rebels – now these are rebels that are, of course, connected with Al Qaeda – where the rebels were storing chemicals of their own and it basically caused an explosion that resulted in the casualties. Apparently the intelligence on this is very clear.” Giraldi said the anger within the intelligence community over the distortion of intelligence to justify Trump’s military retaliation was so great that some covert officers were considering going public. “People in both the agency [the CIA] and in the military who are aware of the intelligence are freaking out about this because essentially Trump completely misrepresented what he already should have known – but maybe he didn’t – and they’re afraid that this is moving toward a situation that could easily turn into an armed conflict,” Giraldi said before Thursday night’s missile strike. “They are astonished by how this is being played by the administration and by the U.S. media.”

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The picture is pretty clear by now.

• Former DIA Colonel: “US Strikes On Syria Based On A Lie” (IntelT)

Donald Trump’s decision to launch cruise missile strikes on a Syrian Air Force Base was based on a lie. In the coming days the American people will learn that the Intelligence Community knew that Syria did not drop a military chemical weapon on innocent civilians in Idlib. Here is what happened.

• The Russians briefed the United States on the proposed target. This is a process that started more than two months ago. There is a dedicated phone line that is being used to coordinate and deconflict (i.e., prevent US and Russian air assets from shooting at each other) the upcoming operation.

• The United States was fully briefed on the fact that there was a target in Idlib that the Russians believes was a weapons/explosives depot for Islamic rebels.

• The Syrian Air Force hit the target with conventional weapons. All involved expected to see a massive secondary explosion. That did not happen. Instead, smoke, chemical smoke, began billowing from the site. It turns out that the Islamic rebels used that site to store chemicals, not sarin, that were deadly. The chemicals included organic phosphates and chlorine and they followed the wind and killed civilians.

• There was a strong wind blowing that day and the cloud was driven to a nearby village and caused casualties.

• We know it was not sarin. How? Very simple. The so-called “first responders” handled the victims without gloves. If this had been sarin they would have died. Sarin on the skin will kill you. How do I know? I went through “Live Agent” training at Fort McClellan in Alabama.

• There are members of the U.S. military who were aware this strike would occur and it was recorded. There is a film record. At least the Defense Intelligence Agency knows that this was not a chemical weapon attack. In fact, Syrian military chemical weapons were destroyed with the help of Russia.

This is Gulf of Tonkin 2. How ironic. Donald Trump correctly castigated George W. Bush for launching an unprovoked, unjustified attack on Iraq in 2003. Now we have President Donald Trump doing the same damn thing. Worse in fact. Because the intelligence community had information showing that there was no chemical weapon launched by the Syrian Air Force. Here’s the good news. The Russians and Syrians were informed, or at least were aware, that the attack was coming. They were able to remove a large number of their assets. The base the United States hit was something of a backwater. Donald Trump gets to pretend that he is a tough guy. He is not. He is a fool.

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Tulsi is being drowned out by the trigger happy Democrats. But she actually served in the Middle East.

• Congresswoman Tulsi Gabbard On Syria (Fox)

The cost of war is profound. I’m opposed to the escalation of the counterproductive regime change war in Syria because it will lead to the deaths of more innocent men, women and children. Terrorist groups like al-Qaeda and ISIS, the strongest forces on the ground in Syria, will continue to increase their strength and influence over the region in the vacuum of a central government.

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The French detest their political system even more than Americans do theirs. It’s very possible abstentions will decide the elections. And Le Pen voters WILL go to the ballot box.

• How Marine Le Pen Could Win (Pol.)

Could Marine Le Pen become France’s next president? A quick look at polling trends suggests that at first blush at least, the answer is “no.” [..] But for Serge Galam, a French physicist who predicted Donald Trump’s election in the United States, polls are missing out on an important factor: abstention — and specifically, how it affects voter turnout for different candidates. He argues that abstention, which a poll by CEVIPOF showed could be as high as 30%, is likely to be decisive in a “dirty” campaign dominated by scandals. “Obviously, nothing is done yet but her election is becoming very likely,” said Galam, a researcher with the French National Center for Scientific Research who also studies public opinion at the CEVIPOF political science institute. “I’m taking a scientific view of this — she needs a turnout differential of about 20% to win.”

[..] If Le Pen is projected to lose the runoff by 41 to 59%, for example, Galam argues that Le Pen could still win if the turnout rate for her voters is 90% versus 70% for her rival, for an overall turnout rate of 79%. In other words, the National Front leader could benefit because a substantial number of people who say they will vote for her rival may not actually go to the polls. Equally, if Le Pen is projected to lose by 45 to 55% in the runoff, she could win if turnout for her is 85% versus 70% for her rival, for an overall turnout of 77%. If overall turnout is 76%, then Le Pen would need a turnout of 90% versus 65% for her rival, and so on.

Some polls have Le Pen lagging behind Macron or Fillon by more than 30 percentage points, which would make her victory near impossible. But others show her within striking distance, with a lag of less than 20 points. If she can shrink the gap, then the challenge for Le Pen will be to mobilize a greater proportion of her supporters than her rivals. In this regard, Galam argues that Le Pen has a shot. For different reasons, he says, both Macron and Fillon aroused intense feelings of “aversion” among some voters, with a large proportion of Macron voters saying they could change their mind on election day. Negative or ambivalent feelings could translate into weaker turnout for them on election day.

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Newsweek wakes up to a 2 week old report from IBT.

• Privacy Experts Say CIA Left Americans Open To Cyber Attacks (IBT)

WikiLeaks release of the latest cache of confidential C.I.A. documents as part of an ongoing “Vault 7” operation exposed some of the U.S. government’s hacking and digital espionage capabilities—this time having to do with iPhones and other smart devices used by hundreds of millions of people across the globe. But cyber security experts and computers scientists are raising concerns over the C.I.A.’s disregard of safety measures put in place for discovering these dangerous flaws in smart gadgets. The federal agency has kept its discovery of many exploits (software tools targeting flaws in products, typically used for malicious hacking purposes) a secret, “stockpiling” that information rather than reporting it to multinational corporations, throwing millions of Americans into the crosshairs of a dangerous, intergovernmental spying game in the process.

“What’s critical to understand is that these vulnerabilities can be exploited not just by our government but by foreign governments and cyber criminals around the world, and that’s deeply troubling,” said Ashley Gorski, an American Civil Liberties Union staff attorney working on the civil rights group’s national security project. “Our government should be working to help the companies patch vulnerabilities when they are discovered, not stockpiling them.” The C.I.A. knew its own classified documents had been floating around the dark web for at least a year and was well aware the hacking capabilities it was using to break into everyday tech could also have been employed by hostile foreign networks. Russian President Vladimir Putin’s Kremlin reportedly orchestrated a sprawling governmental operation in an attempt to influence the 2016 U.S. presidential election, which featured several cyber attacks on email servers and devices used by members of the Democratic Party.

The government enacted the Vulnerabilities Equities Process to reduce the unnecessary stockpiling of exploits. The procedure was meant to provide guidelines for agencies like the C.I.A. for notifying companies when dangerous issues are discovered in their devices. The measure was put in place during the Obama administration to prevent cyber attacks from terrorist networks and foreign governments, including Russia and China. But the C.I.A. completely ignored the Vulnerabilities Equity Process, instead exploring ways to use exploits for their own purposes, according to the Electronic Frontier Foundation, an international nonprofit digital rights group that reviewed a copy of the practice after filing a Freedom of Information Act request. “It appears the CIA didn’t even use the [Vulnerabilities Equity Process],” said Cindy Cohn, executive director of the Electronic Frontier Foundation. “That’s worrisome, because we know these agencies overvalue their offensive capabilities and undervalue the risk to the rest of us.”

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There is so much wrong in China’s urbanization it’s hard to decide where to start.

• Rising Waters Threaten China’s Rising Cities (NYT)

The rains brought torrents, pouring into basements and malls, the water swiftly rising a foot and a half. The city of Dongguan, a manufacturing center here in the world’s most dynamic industrial region, was hit especially hard by the downpour in May 2014. More than 100 factories and shops were inundated. Water climbed knee-high in 20 minutes, wiping out inventory for dozens of businesses. Next door in Guangzhou, an ancient, mammoth port city of 13 million, helicopters and a fleet of 80 boats had to be sent to rescue trapped residents. Tens of thousands lost their homes, and 53 square miles of nearby farmland were ruined. The cost of repairs topped $100 million. Chen Rongbo, who lived in the city, saw the flood coming. He tried to scramble to safety on the second floor of his house, carrying his 6-year-old granddaughter. He slipped. The flood swept both of them away.

Flooding has been a plague for centuries in southern China’s Pearl River Delta. So even the rains that May, the worst in the area in years, soon drifted from the headlines. People complained and made jokes on social media about wading through streets that had become canals and riding on half-submerged buses through lakes that used to be streets. But there was no official hand-wringing about what caused the floods or how climate change might bring more extreme storms and make the problems worse. A generation ago, this was mostly farmland. Three vital rivers leading to the South China Sea, along with a spider’s web of crisscrossing tributaries, made the low-lying delta a fertile plain, famous for rice. Guangzhou, formerly Canton, had more than a million people, but by the 1980s, China set out to transform the whole region, capitalizing on its proximity to water, the energy of its people, and the money and port infrastructure of neighboring Hong Kong.

Rushing to catch up after decades of stagnation, China built a gargantuan collection of cities the size of nations with barely a pause to consider their toll on the environment, much less the future impact of global warming. Today, the region is a goliath of industry with a population exceeding 42 million. But while prosperity reshaped the social and cultural geography of the delta, it didn’t fundamentally alter the topography. Here, as elsewhere, breakneck development comes up against the growing threat of climate change. Economically, Guangzhou now has more to lose from climate change than any other city on the planet, according to a World Bank report. Nearby Shenzhen, another booming metropolis, ranked 10th on that World Bank list, which measured risk as a percentage of GDP.


Shenzhen was transformed in a few decades from a small fishing village into a city of millions.

Read more …

Our Economies Run On Housing Bubbles

Mar 302017
 
 March 30, 2017  Posted by at 2:40 pm Finance Tagged with: , , , , , , , ,  9 Responses »


Rene Magritte Memory 1948

 

We are witnessing the demise of the world’s two largest economic power blocks, the US and EU. Given deteriorating economic conditions on both sides of the Atlantic, which have been playing out for many years but were so far largely kept hidden from view by unprecedented issuance of debt, the demise should come as no surprise.

The debt levels are not just unprecedented, they would until recently have been unimaginable. When the conditions for today’s debt orgasm were first created in the second half of the 20th century, people had yet to wrap their minds around the opportunities and possibilities that were coming on offer. Once they did, they ran with it like so many lemmings.

The reason why economies are now faltering invites an interesting discussion. Energy availability certainly plays a role, or rather the energy cost of energy, but we might want to reserve a relatively larger role for the idea, and the subsequent practice, of trying to run entire societies on debt (instead of labor and resources).

 

 

It almost looks as if the cost of energy, or of anything at all really, doesn’t play a role anymore, if and when you can borrow basically any sum of money at ultra low rates. Sometimes you wonder why people didn’t think of that before; how rich could former generations have been, or at least felt?

The reason why is that there was no need for it; things were already getting better all the time, albeit for a briefer period of time than most assume, and there was less ‘want’. Not that people wouldn’t have wanted as much as we do today, they just didn’t know yet what it was they should want. The things to want were as unimaginable as the debt that could have bought them.

It’s when things ceased getting better that ideas started being floated to create the illusion that they still were, and until recently very few people were not fooled by this. While this will seem incredible in hindsight, it still is not that hard to explain. Because when things happen over a period of decades, step by step, you walk headfirst into the boiling frog analogy: slowly but surely.

 

At first, women needed to start working to pay the bills, health care and education costs started rising, taxes began to rise. But everyone was too busy enjoying the nice slowly warming water to notice. A shiny car -or two, three-, a home in the burbs with a white picket fence, the American -and German and British etc.- Dream seemed to continue.

Nobody bothered to think about the price to pay, because it was far enough away: the frog could pay in installments. In the beginning only for housing, later also for cars, credit card debt and then just about anything.

Nobody bothered to look at external costs either. Damage to one’s own living environment through a huge increase in the number of roads and cars and the demise of town- and city cores, of mom and pop stores, of forest land and meadows, basically anything green, it was all perceived as inevitable and somehow ‘natural’ (yes, that is ironic).

 

 

Damage to the world beyond one’s own town, for instance through the exploitation of domestic natural resources and the wars fought abroad for access to other nations’ resources, only a very precious few ever cared to ponder these things, certainly after the Vietnam war was no longer broadcast and government control of -or cooperation with- the media grew exponentially.

Looking at today’s world in a sufficiently superficial fashion -the way most people look at it-, one might be forgiven for thinking that debt, made cheap enough, tapers over all other factors, economic and otherwise, including thermodynamics and physics in general. Except it doesn’t, it only looks that way, and for a limited time at that. In the end, thermodynamics always beats ‘financial innovation’. In the end, thermodynamics sets the limits, even those of economics.

 

That leads us into another discussion. If not for the constraints, whether they emanate from energy and/or finance, would growth have been able to continue at prior levels? Both the energy and the finance/political camps mostly seem to think so.

The energy crowd -peak oilers- appear to assume that if energy would have been more readily available, economic growth could have continued pretty much unabated. Or they at least seem to assume that it’s the limits of energy that are responsible for the limits to economic growth.

The finance crowd mostly seems to think that if we would have followed different economic models, growth would have been for the taking. They tend to blame the Fed, or politics, loose regulation, the banking system.

Are either of them right? If they are, that would mean growth can continue de facto indefinitely if only we were smart enough to either make the right economic and political decisions, or to find or invent new sources of energy.

But what kind of growth do both ‘fields’ envision? Growth to what end, and growth into what? 4 years ago, I wrote What Do We Want To Grow Into? I have still never seen anyone else ask that question, before or since, let alone answer it.

We want growth by default, we want growth for growth’s sake, without caring much where it will lead us. Maybe we think unconsciously that as long as we can secure growth, we can figure out what to do with it later.

But it doesn’t work that way: growth changes the entire playing field on a constant basis, and we can’t keep up with the changes it brings, we’re always behind because we don’t care to answer that question: what do we want to grow into. Growth leads us, we don’t lead it. Next question then: if growth stops, what will lead us?

Because we don’t know where we want growth to lead us, we can’t define it. The growth we chase is therefore per definition blind. Which of necessity means that growth is about quantity, not quality. And that in turn means that the -presupposed- link between growth and progress falls apart: we can’t know if -the next batch of- growth will make us better off, or make our lives easier, more fulfilling. It could do the exact opposite.

 

And that’s not the only consequence of our blind growth chase. We have become so obsessed with growth that we have turned to creative accounting, in myriad ways, to produce the illusion of growth where there is none. We have trained ourselves and each other to such an extent to desire growth that we’re all, individually and collectively, scared to death of the moment when there might not be any. Blind fear brought on by a blind desire.

As we’ve also seen, we’ve been plunging ourselves into ever higher debt levels to create the illusion of growth. Now, money (debt) is created not by governments, as many people still think, but by -private- banks. Banks therefore need people to borrow. What people borrow most money for is housing. When they sign up for a mortgage, the bank creates a large amount of money out of nothing.

So if the bank gets itself into trouble, for instance because they lose money speculating, or because people can’t pay their mortgages anymore that they never could afford in the first place, the only way out for that bank, other than bailouts, is to sign more people up for mortgages -or car loans-, preferably bigger ones all the time.

 

 

What we have invented to keep big banks afloat for a while longer is ultra low interest rates, NIRP, ZIRP etc. They create the illusion of not only growth, but also of wealth. They make people think a home they couldn’t have dreamt of buying not long ago now fits in their ‘budget’. That is how we get them to sign up for ever bigger mortgages. And those in turn keep our banks from falling over.

Record low interest rates have become the only way that private banks can create new money, and stay alive (because at higher rates hardly anybody can afford a mortgage). It’s of course not just the banks that are kept alive, it’s the entire economy. Without the ZIRP rates, the mortgages they lure people into, and the housing bubbles this creates, the amount of money circulating in our economies would shrink so much and so fast the whole shebang would fall to bits.

That’s right: the survival of our economies today depends one on one on the existence of housing bubbles. No bubble means no money creation means no functioning economy.

 

What we should do in the short term is lower private debt levels (drastically, jubilee style), and temporarily raise public debt to encourage economic activity, aim for more and better jobs. But we’re doing the exact opposite: austerity measures are geared towards lowering public debt, while they cut the consumer spending power that makes up 60-70% of our economies. Meanwhile, housing bubbles raise private debt through the -grossly overpriced- roof.

This is today’s general economic dynamic. It’s exclusively controlled by the price of debt. However, as low interest rates make the price of debt look very low, the real price (there always is one, it’s just like thermodynamics) is paid beyond interest rates, beyond the financial markets even, it’s paid on Main Street, in the real economy. Where the quality of jobs, if not the quantity, has fallen dramatically, and people can only survive by descending ever deeper into ever more debt.

 

 

Do we need growth? Is that even a question we can answer if we don’t know what we would need or use it for? Is there perhaps a point, both from an energy and from a financial point of view, where growth simply levels off no matter what we do, in the same way that our physical bodies stop growing at 6 feet or so? And that after that the demand for economic growth must necessarily lead to The Only Thing That Grows Is Debt?

It’s perhaps ironic that the US doesn’t appear to be either first or most at risk this time around. There are plenty other housing markets today with what at least look to be much bigger bubbles, from London to China and from Sydney to Stockholm. Auckland’s bubble already looks to be popping. The potential consequences of such -inevitable- developments are difficult to overestimate. Because, as I said, the various banking systems and indeed entire economies depend on these bubbles.

The aftermath will be chaotic and it’s little use to try and predict it too finely, but it’ll be ‘interesting’ to see what happens to the banks in all these countries where bubbles have been engineered, once prices start dropping. It’s not a healthy thing for an economy to depend on blowing bubbles. It’s also not healthy to depend on private banks for the creation of a society’s money. It’s unhealthy, unnecessary and unethical. We’re about to see why.

 

Debt Rattle August 30 2016

Aug 302016
 
 August 30, 2016  Posted by at 8:19 am Finance Tagged with: , , , , , , , , , ,  3 Responses »


Wynand Stanley Ice-packed Buick motor stunt, San Francisco 1922

• Banks Get Ready For ‘Economic Nuclear Winter’ (CNBC)
• The “Devastating” Truth Behind America’s Record Household Net Worth (ZH)
• We Have Passed The Peak Of The Bubble (Maloney)
• Oil Discoveries at 70-Year Low (BBG)
• House Price Gloom In Canada A Lesson For Australia (AFR)
• Unemployed Italians Lead Europe in Abandoning Job Hunt (BBG)
• Apple Facing Back Taxes Running Into Billions Over Ireland Deal (G.)
• Life After Community Death: A Food Bank (G.)
• Judge: Kim Dotcom Can Livestream Legal Fight Against The US (AP)
• 60% Of South Asia’s Groundwater Too Contaminated To Use (AFP)
• China Regulator To Curb News That Promotes ‘Western Lifestyles’ (R.)
• EU Seeks To Protect Greek Statistics Office From Its Own Government (BBG)
• Greek GDP Contraction In First Half 2016 Was Worse Than Thought (Kath.)
• Turkey Warns Refugee Deal To Collapse Unless EU Grants Visa-Free Travel (Kath.)
• 6,500 Migrants Rescued Off Libya Coast Overnight By Italian Coastguard (AFP)

 

 

Beautiful Brexit as the bubble burster.

• Banks Get Ready For ‘Economic Nuclear Winter’ (CNBC)

The first half of 2016 has been a roller-coaster for financial markets. A combination of uncertainties surrounding the U.K.’s vote to leave the European Union and weaker-than-expected corporate earnings results across the region means a tough second half looms. European banks, in particular, have had a very tough six months as the shock and volatility around Brexit sent banking stocks south. Major European banks like Deutsche Bank and Credit Suisse saw their shares in free-fall after the referendum’s results were announced. In the U.K., RBS was the worst-hit, with its shares plunging by more than 30% since June 24. The current uncertainty over when the U.K. will start the process of quitting the EU has banks on tenterhooks. But a source told CNBC that banks are “preparing for an economic nuclear winter situation.”

Speaking on the condition of anonymity due to the sensitive nature of the topic, a source from a major investment bank told CNBC that financial services firms have put together a strategy in place that takes into account the worst-case scenario that could happen by the end of this year. “This could mean triggering Article 50, referendum in other European nations leading to a break-up of the euro or sterling hitting below $1.20 or lower. The banks are ready for anything now,” the source said. The source further explained that the challenge in 2016 is nothing compared to when the Lehman Brothers collapsed in 2008 and the banking sector is this time a lot more resilient. “Markets hate uncertainty and the events this year have unfortunately created a lot of mystery around what is going to happen next.”

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It’s all a bubble.

• The “Devastating” Truth Behind America’s Record Household Net Worth (ZH)

Every quarter, as part of its Flows of Funds statement, the Fed releases a detailed breakdown of America’s assets and liabilities, of which the most interesting section is the one dealing with US household wealth and debt, and most importantly, their net worth. The last such release in June showed that as of March 31, total US household assets rose decidedly above $100 trillion, hitting an all time high $102.6 trillion, offset by $14.5 trillion in liabilities, resulting in $88.1 trillion in household net worth. It is worth noting that of this $100+ trillion in assets, 69% was in the form of financial assets (stocks, mutual funds, pensions, deposits, etc), and only $31.5 trillion was real, tangible assets including $26 trillion worth of real estate.

[..] as Pedro da Costa points out, when one looks beneath the surface, a “devastating” picture emerges: US inequality like no-one has seen it before. To help with this peek behind the scenes, we look at the latest, just released CBO report on Trends in Family Wealth, which shows that far from equitable, US wealth has never been so skewed. The picture in question:

Here are the CBO report’s summary findings: In 2013, aggregate family wealth in the United States was $67 trillion (or about four times the nation’s gross domestic product) and the median family (the one at the midpoint of the wealth distribution) held approximately $81,000, the Congressional Budget Office estimates. For this analysis, CBO calculated that measure of wealth as a family’s assets minus its debt. CBO measured wealth as marketable wealth, which consists of assets that are easily tradable and that have value even after the death of their owner. Those assets include home equity, other real estate (net of real estate loans), financial securities, bank deposits, defined contribution pension accounts, and business equity. Debt is nonmortgage debt, including credit card debt, auto loans, and student loans, for example.

But to get to the stunning punchline, one has to read The section on How Is the Nation’s Wealth Distributed? Here is the answer: In 2013, families in the top 10% of the wealth distribution held 76% of all family wealth, families in the 51st to the 90th percentiles held 23%, and those in the bottom half of the distribution held 1%. Average wealth was about $4 million for families in the top 10% of the wealth distribution, $316,000 for families in the 51st to 90th percentiles, and $36,000 for families in the 26th to 50th percentiles. On average, families at or below the 25th percentile were $13,000 in debt.

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“These people are just absolutely dangerous. They are going to drag the entire world economy down.”

• We Have Passed The Peak Of The Bubble (Maloney)

What the central banks are doing has never worked and they keep on trying – you just hit that nail a little bit harder each time because it isn’t working. They have these theories and they think that the theory is correct that this – and no matter what the results are they say well, we just didn’t do enough of it. Japan has been trying this for 30 years now and it hasn’t worked. These people are just absolutely dangerous. They are going to drag the entire world economy down. You talked about the helicopter money that is now happening in Europe and so on. That is going to be coming to the United States soon. Coming to a Central Bank near you. It always has damaging results. They don’t look at this. It is a huge wealth transfer.

The immorality of an entity and everywhere I go I take a look at – when I would go speak in Singapore or Australia, New Zealand, Malaysia, Colombia, Peru doesn’t matter – Russia – everywhere I go I take a look, I go on the websites of the central bank for that country and I start gathering information. I haven’t found a central bank that is part of the government. They are all private. Here is a private entity that is allowed to create currency and now they are buying bonds from corporations? They can buy stocks. When they write a check and they buy something, currency is created and it enters circulation. A very large portion of it is Fanny Mae and Freddy Mac stuff. It is the mortgage backed securities. And so that means that they own real estate. This private corporation is able to counterfeit and purchase real estate legally. The morality of this is insane.

Keynesian economics isn’t even remotely plausible. But it’s what is taught all over the world. They don’t understand fundamental economics. This is the problem that we have: all economies on the planet are being run by economists that don’t understand economics. The purchasing power that is contained in currency is basically the agreement that we have as a society that we are all going to use that currency and we trust that currency and we store hours of our lives. We trade hours of our lives for currency. We work. That is the purchasing power. Then that currency measures the goods and services in a society. The true wealth.

They think that they can actually print wealth. When they print new units of currency, the only way it can get purchasing power is the moment that it is spent in the circulation – it has to steal it from somewhere else because it is empty when it comes into existence. There is no work that went into it. There are no hours of life traded for it. There is no product or service that it represents until it is spent in circulation and then it steals that purchasing power from all other units of currency. It is fraud. It is theft. They can’t actually stimulate an economy. All they can do is warp it. They can steal purchasing power from some areas of the economy and transfer it to another area of the economy pushing that area into a bubble. It is very, very disruptive.

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“EIA estimates that global oil demand will grow from 94.8 million barrels a day this year to 105.3 million barrels in 2026. “ I do not.

• Oil Discoveries at 70-Year Low (BBG)

Explorers in 2015 discovered only about a tenth as much oil as they have annually on average since 1960. This year, they’ll probably find even less, spurring new fears about their ability to meet future demand. With oil prices down by more than half since the price collapse two years ago, drillers have cut their exploration budgets to the bone. The result: Just 2.7 billion barrels of new supply was discovered in 2015, the smallest amount since 1947, according to figures from consulting firm Wood Mackenzie. This year, drillers found just 736 million barrels of conventional crude as of the end of last month. That’s a concern for the industry at a time when the U.S. EIA estimates that global oil demand will grow from 94.8 million barrels a day this year to 105.3 million barrels in 2026.

While the U.S. shale boom could potentially make up the difference, prices locked in below $50 a barrel have undercut any substantial growth there. New discoveries from conventional drilling, meanwhile, are “at rock bottom,” said Nils-Henrik Bjurstroem at Oslo-based consultant Rystad Energy. “There will definitely be a strong impact on oil and gas supply, and especially oil.” Global inventories have been buoyed by full-throttle output from Russia and OPEC. They’ve flooded the world with oil despite depressed prices as they defend market share. But years of under-investment will be felt as soon as 2025, Bjurstroem said. Producers will replace little more than one in 20 of the barrels consumed this year, he said.

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We rapidly get used to seeing bubbles as new normal.

• House Price Gloom In Canada A Lesson For Australia (AFR)

A commodity economy with record-breaking property prices, fuelled by ultra-low interest rates and Chinese buyers, raises taxes on foreign homebuyers. While the scenario is eerily similar to Australia, it is actually Canada and early signs are the property market is rapidly cooling. The unravelling could offer insight for Australians contemplating the state of the expensive local real estate market. A record one in five Canadians expect house prices to fall. The number of property price pessimists has nearly doubled since a 15% foreign buyer tax on Vancouver homes took effect on August 2. In the first two weeks since the tax came into effect, home sales fell 51% in the metropolitan area, the Real Estate Board of Greater Vancouver said.

Nanos Research chairman Nik Nanos told The Australian Financial Review that real estate was the “canary in the mine” for the Canadian economy and the foreign acquirer tax has had an immediate “chill” effect on confidence. “If we see a significant slide in confidence in real estate there will be an immediate negative knock-on effect on the Canadian economy because right now there is no energy [oil] economy to fall back on,” he said. The price of Canada’s biggest export, oil, has crashed over the past two years, much like iron ore and coal prices in Australia. Like Sydney and Melbourne, real estate prices in Canada’s most-liveable cities have surged in recent years.

A combination of low borrowing costs, strong demand, limited housing supply because of red tape and, anecdotally, foreign buyers mainly from China seeking to park their money in perceived safe havens offshore, pushed up values. Vancouver house prices soared 30% in the year ended May 31, and prices shot up 15% in Canada’s biggest city of Toronto. The median price for detached houses in Vancouver jumped to $C1.6 million.

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And you think this Union can stay together?

• Unemployed Italians Lead Europe in Abandoning Job Hunt (BBG)

Going from the final quarter of 2015 through March of this year, 37% of unemployed Italians gave up their job search, while only 13% landed new work and a full half found their status unchanged. On the opposite end of the scale, very few Greeks – just 1% – gave up their job hunt while only 4% found new employment in the economically hard-pressed nation.

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Deductible from its US taxes.

• Apple Facing Back Taxes Running Into Billions Over Ireland Deal (G.)

Apple could face back taxes running into billions with the European commission expected to rule against the company on Tuesday over its arrangements with the Irish government. A ruling by Margrethe Vestager, the European competition commissioner, could make Apple liable for billions of euros. Irish officials expect the commission to declare the arrangements unlawful under state aid rules. A decision against Apple and Ireland after a two-year investigation would rebuff US efforts to persuade the commission to drop its interest amid warnings about retaliation from Washington. The commission has been investigating whether Apple’s tax deals with Ireland, which have allowed the company to pay very little tax on income earned throughout Europe, amounted to state aid.

The commission opened a formal inquiry in September 2014 after publishing preliminary findings suggesting deals between Apple and Ireland in 1991 and 2007 involved state aid that was incompatible with the EU’s internal market. Apple and Ireland have denied repeatedly that they have a special deal. Tim Cook, Apple’s chief executive, has called the investigation “political crap” and said his company and Ireland would appeal against a ruling that Apple received state aid. The investment bank JP Morgan has warned that if the commission requires Apple to retroactively pay the Irish corporate tax rate of 12.5% on the pre-tax profits it collected via Ireland it could cost the company as much as $19bn.

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Of course I can’t read a story like this about a food bank in Britain without thinking about the project you and I are supporting in Greece -all over Greece. Where conditions are much worse still. I hope the Brits who read this realize that.

• Life After Community Death: A Food Bank (G.)

I never expected to leave a food bank feeling optimistic. To visit a kitchen serving hundreds of free summer-holiday meals to kids who might otherwise go hungry – and come away pondering the lessons Westminster, and especially Jeremy Corbyn’s Labour party, should learn. But then, until last week, I hadn’t met the two women who run the Neo cafe. To understand what an achievement Neo is, you have to see what it’s up against. There’s the area, for a start: Birkenhead, now practically a byword for social deprivation. In parts of this town the life expectancy for baby boys is lower than in North Korea. Since the Brexit vote there’s been a boom in hand-waving commentary on “left-behind” Britain.

The columnists and studio guests should come here for a day, and see what their talking points look like as lived experience. Industrial decline? The once great shipbuilder Cammell Laird still clings on, but many of the other big employers have been wiped out. Insecure work? The usual features of an exploitative jobs market are all present, from zero-hours contracts and temp agencies to, most of all, low wages. And of course austerity, from benefit sanctions to multimillion pound cuts at Wirral council. Impose such conditions on a family and you create misery. Push them across an entire community and you get breakdown.

Widespread economic insecurity produces social instability. Relationships fail. Colin, a twentysomething on temp work, describes how his partner had to move out because “I couldn’t make my pay packet feed two”. Stop-start work makes planning budgets hard enough – it makes planning families impossible. Neighbours move in then move out, so you never know who’s living next door – and you’d all rather leave. One grandmother, Wendy, remembers how she cried on being offered a council house in Rock Ferry, the patch of town that’s home to Neo. Then Anne and Trish chip in with other problems: druggies and no-go areas, so that a kid from this estate can’t go to that one. Here, the horizons have shrunk so far that the neighbourhood can seem like a trap.

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Good. Let’s hear it.

• Judge: Kim Dotcom Can Livestream Legal Fight Against The US (AP)

Internet entrepreneur Kim Dotcom will be allowed to livestream his legal bid to halt his extradition to the United States, a New Zealand judge ruled Tuesday. Dotcom and three of his colleagues are appealing a December lower-court decision which allows them to be extradited to the U.S. to face conspiracy, racketeering and money-laundering charges. If found guilty, they could face decades in jail. Dotcom’s lawyer Ira Rothken told AP he was pleased with the decision. “It provides everybody in the world with a seat in the gallery of the New Zealand courtroom,” Rothken said. “It’s democracy at its finest.” Rothken said the livestreaming would begin Wednesday on YouTube. He said there would be a 20-minute delay to prevent any evidence that was protected by the court from becoming public. The appeal is expected to last six weeks.

Justice Murray Gilbert, the New Zealand judge hearing the appeal, had asked other media about Dotcom’s request and didn’t receive any objections. Rothken said the U.S. had opposed the plan on the basis it could taint a potential jury pool and could cede court control over evidence. December’s lower-court ruling came nearly four years after the U.S. shut down Dotcom’s file-sharing site Megaupload, which prosecutors say was widely used by people to illegally download songs, television shows and movies. Megaupload was once one of the internet’s most popular sites. Prosecutors say it raked in at least $175 million and cost copyright holders more than $500 million. But Dotcom and colleagues Mathias Ortmann, Bram van der Kolk and Finn Batato argue they can’t be held responsible for people who chose to use the site for illegal purposes.

Rothken said the lower-court judge made an error of law in his ruling, and that broad safe-harbor provisions protect internet service providers from the types of charges his clients face.

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750 million people. Add China’s polluted water, and you get well over a billion.

• 60% Of South Asia’s Groundwater Too Contaminated To Use (AFP)

60% of the groundwater in a river basin supporting more than 750 million people in Pakistan, India, Nepal and Bangladesh is not drinkable or usable for irrigation, researchers have said. The biggest threat to groundwater in the Indo-Gangetic Basin, named after the Indus and Ganges rivers, is not depletion but contamination, they reported in the journal Nature Geoscience. “The two main concerns are salinity and arsenic,” the authors of the study wrote. Up to a depth of 200m (650ft), some 23% of the groundwater stored in the basin is too salty, and about 37% “is affected by arsenic at toxic concentrations”, they said.

The Indo-Gangetic basin accounts for about a quarter of the global extraction of groundwater – freshwater which is stored underground in crevices and spaces in soil or rock, fed by rivers and rainfall. Fifteen to twenty million wells extract water from the basin every year amid growing concerns about depletion. The new study – based on local records of groundwater levels and quality from 2000 to 2012 – found that the water table was in fact stable or rising across about 70% of the aquifer. It was found to be falling in the other 30%, mainly near highly populated areas.

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Xi trying to assert power he doesn’t have.

• China Regulator To Curb News That Promotes ‘Western Lifestyles’ (R.)

China will crack down on social and entertainment news that promotes improper values and “Western lifestyles”, the country’s broadcasting regulator said, the latest effort at censorship in an already strictly regulated media environment. President Xi Jinping has embarked on an unprecedented drive to censor media that do not reflect the views of Communist Party leaders. Authorities have already issued rules limiting “foreign-inspired” television shows and put tougher penalties on the spread of rumors via social media. Social and entertainment news must be dominated by mainstream ideologies and “positive energy”, the official Xinhua news agency said late on Monday, citing the State Administration of Press, Publication, Radio, Film and Television (SAPPRFT).

News content should not make improper jokes, defile classics, or “express overt admiration for Western lifestyles”, the regulator said in a circular, according to Xinhua. “They should also avoid putting stars, billionaires or Internet celebrities on pedestals”, and not advocate overnight fame or hype family disputes, Xinhua said. China’s legislature this week is also reviewing a draft law that would require film industry workers to maintain excellent “moral integrity”, after recent cases in which celebrities had been arrested for drug offences and prostitution, Xinhua said in a separate report. Xi has been explicit that media must follow the party line, uphold the correct guidance on public opinion and promote “positive propaganda”. The term “positive energy” is a catch phrase that has been favored by China’s propaganda and internet authorities under Xi, referring to content that is morally uplifting and patriotic.

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A curious case of Brussels intervention. There’s nary a soul in Greece who doubts that Georgiou greatly exaggerated the Greek budget deficit in 2009 in order to make an EU bailout inevitable. Now the EU wants to label Greece’s scrutiny of this as “political interference in administrative matters”. But matters such as these can be investigated in simple ways: an objective look at the numbers. That’s not politics, but accounting. Thing is, if Georgiou did this, it was in collusion with the EU.

• EU Seeks To Protect Greek Statistics Office From Its Own Government (BBG)

Greece’s finance chief said the next international aid payout to the country may be delayed as the European Union stepped up warnings about domestic political meddling in the Greek state. Finance Minister Euclid Tsakalotos raised the possibility of the government in Athens failing to qualify on time for a €2.8 billion disbursement due in September from the euro area. That’s what remains of a €10.3 billion tranche that finance ministers approved in principle three months ago. “If there is a delay, it’ll be days not weeks,” Tsakalotos told Bloomberg News in Brussels on Monday before a meeting with EU Economic Affairs Commissioner Pierre Moscovici. “Part of the reason for the meeting is to discuss the process to ensure there aren’t delays.”

Slipping timetables have been a regular feature of loan payouts to Greece since it first turned to the euro area and the IMF for a rescue in 2010. Now in it’s third bailout, the country faces continued creditor warnings about backsliding on overhauls that are a condition for aid. The European Commission sent the latest salvo to Athens, saying on Monday that criticism of the former head of Greece’s statistical agency by allies of Prime Minister Alexis Tsipras risks undermining the credibility of Greek fiscal data. The commission, the EU’s executive arm, said the Greek government must push ahead under its aid program with commitments to curb political interference in administrative matters.

“The commission has long urged the implementation of the pillar of the program related to the modernization of the Greek state and public administration,” Margaritis Schinas, chief spokesman at the 28-nation body, told reporters in Brussels. “This also includes the need to depoliticize the Greek administration.” The political controversy centers on Andreas Georgiou, who faces felony charges in Greece for reporting a 2009 budget deficit that was more than five times the EU limit and that unleashed the euro-area debt crisis. The EU has vouched for data submitted by the Hellenic Statistical Authority under Georgiou from 2010 to 2015 and validated by EU statistics office Eurostat.

Greek Minister of State Nikos Pappas, Tsipras’s closest aide, asked publicly in early August whether Georgiou inflated the spending gap to force the country into a rescue. Avgi, a newspaper affiliated with Tsipras’s anti-austerity Syriza party, labeled Georgiou an “executioner” in an Aug. 4 editorial.

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And the Troika ensures it can only go downhill from here.

• Greek GDP Contraction In First Half 2016 Was Worse Than Thought (Kath.)

The contraction of the Greek economy in the first half of the year has turned out to be greater than originally estimated. The revised data released on Monday by the Hellenic Statistical Authority (ELSTAT) recorded a bigger drop in GDP on an annual basis, which will make it even more difficult for the government to meet the fiscal targets set for this year. Using previously unavailable data, ELSTAT has now calculated that first quarter GDP declined by 1% and not 0.8% year-on-year, while in the April-June period it fell by 0.9% and not 0.7% as originally thought.

That was the fourth consecutive quarter with a GDP contraction. Consumer spending fell 1.9% in the second quarter on an annual basis, exports of goods and services contracted 11.4% (with goods increasing 2.98% and exports dropping 26.5%), while imports declined 7.1%. Gross capital investments posted a 7% increase. On a quarterly basis, consumer expenditure dropped 0.2% from the first quarter, investment rose 1%, exports fell 1% and imports shrank 0.4%, ELSTAT data showed.

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Any attempt at granting visa-free travel now would break up the EU.

• Turkey Warns Refugee Deal To Collapse Unless EU Grants Visa-Free Travel (Kath.)

In an interview with Kathimerini published on Tuesday, Turkish Foreign Minister Mevlut Cavusoglu has warned the EU that if it doesn’t grant Turkish citizens via-free travel to Europe by October “at the latest,” then Ankara will not continue implementing a deal struck in March with Brussels to stem the flow of migrants to Europe. “Despite the fact that irregular migration in the Aegean is now under control, we do not see the EU keen on delivering its promises,” he said, insisting that Turkey cannot continue on its own to stop irregular migration toward the EU while the latter does not assume its obligations. “We expect visa liberalization for Turkish citizens at the latest in October 2016,” said Cavusoglu, who was on an unofficial visit to Crete yesterday and held talks with his Greek counterpart Nikos Kotzias, stressing the potential to further develop Greek-Turkish relations.

Visa liberalization was one of the conditions set by Turkey to sign up to the agreement, which was criticized by human rights groups, to stop the influx of migrant arrivals to Europe which reached more than a million last year. “We did our share in this cooperation… We have prevented new loss of lives and crushed migrant smuggling rings.” The EU missed a deadline late June for the granting of visa-free travel for Turks, saying it had not met all 72 pre-conditions set by Brussels to grant visa-fee travel. The EU also demanded Ankara review its anti-terrorism law. Ankara refused, saying it is critical in its fight against Islamic State and Kurdish militants.

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Numbers are rising again. This will stop only when we stop bombing and squeezing these people.

• 6,500 Migrants Rescued Off Libya Coast Overnight By Italian Coastguard (AFP)

Around 6,500 migrants were rescued off the coast of Libya, the Italian coastguard said, in one of its busiest days of life-saving in recent years. Dramatic images of one operation showed about 700 migrants crammed onto a fishing boat, with some of them jumping off the vessel in life jackets and swimming towards rescuers. A five-day-old baby was among those rescued along with other infants and was airlifted to an Italian hospital, according to Doctors Without Borders (MSF), which took part in operations.

“The command centre coordinated 40 rescue operations” that included vessels from Italy, humanitarian organisations as well as the EU’s border agency Frontex, saving 6,500 migrants, the coastguard wrote on Twitter. “We’ve been particularly busy today,” a spokesman for the Italian coastguard told AFP. On Sunday more than 1,100 migrants were rescued in the same area. The total number of arrivals in Italy this year now stands at 112,500, according to the UN’s refugee agency and the coastguard, slightly below the 116,000 recorded by the same point in 2015.

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Debt Rattle August 12 2016

Aug 122016
 
 August 12, 2016  Posted by at 10:17 am Finance Tagged with: , , , , , , , , ,  2 Responses »


G. G. Bain At Casino, Belmar, Sunday, NJ 1910

• Private Lenders Increase the Risk of a Global Debt Crisis (TeleSur)
• US Homeownership Dips to Lowest Rate Since 1960 (RCM)
• The Next Huge American Housing Bailout Could Be Coming (TAM)
• China’s Stimulus Efforts Show ‘Malinvestment Is Still Hard at Work’ (BBG)
• The UK Is the New Engine of Bond-Market Distortion (WSJ)
• A Really Vicious Circle Is Threatening UK Pension Pots (BBG)
• IMF to ECB: Forget Negative Rates, Or You’ll Do More Harm Than Good (MW)
• Global Shipping Giant Moller-Maersk Reports 90% Fall In Net Profit (CNBC/R.)

 

 

Warning against vulture funds. Then again, isn’t the IMF one of them too?

• Private Lenders Increase the Risk of a Global Debt Crisis (TeleSur)

Private creditors have replaced the public sector as lead borrower to developing countries, which has contributed to a new borrowing and lending boom. Private financial institutions are responsible for prompting a potential “new wave” of debt crises among developing nations, according to a new report carried out by European Think Tank Eurodad. Public debt in developing countries is increasingly being borrowed from private lenders, which the authors argue has meant that an increasing portion of credit is not effectively monitored or regulated. “Private borrowers, in particular private corporations, have used this regulation gap to throw a big borrowing party, a debt party, and thus have contributed disproportionately to the external debt burden that developing countries carry now,” the report warned.

As part of its findings, the authors of the report concluded that, “while relative debt burdens decreased between 2000 and 2010, these trends have reversed in 2011. Since then debt is on an upward path, also when measured in relative terms.” Developing countries total external debt burden reached US$5.4 trillion in 2014 and over half of this amount is now owed by private debtors, according to data from the report titled,“The Evolving Nature of Developing Country Debt and Solutions for Change.” The study attributed the recent increase in private creditors to the heavy public borrowing that took place during the 1980’s and 1990’s, which prompted sharper restrictions on public lending institutions such as the International Monetary Fund.

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Remember affordable housing?

• US Homeownership Dips to Lowest Rate Since 1960 (RCM)

The US homeownership rate, as recently reported by the Census Bureau, dropped to 62.9% in the second quarter of 2016, a rate about equal to the rate of 61.9% reported over a half century ago for 1960. This stagnation compares unfavorably to 1900 to 1960 when the non-farm homeownership rate increased from 36.5% to 61%.-a period encompassing rampant urbanization, immigration, and population growth. For example, the non-farm population quadrupled from about 42 million to 166 million, yet the non-farm homeownership rate increased by 67%. Except for the interruption caused by the Great Depression, the rate of increase was moderate to strong throughout the period.

How can this be? Isn’t there an alphabet soup of federal agencies-FHA, HUD, FNMA, FHLMC, GNMA, RHS, FHLBs-all with the goal of increasing homeownership by making it more “affordable”? Don’t these agencies fund or insure countless trillions of dollars in home loan lending–most with very liberal loan terms? Could it be the federal government massive liberalization of mortgage terms creates demand pressure leading to higher prices? Could it be federal, state, and local governments’ implement land use policies that constrain supply and drive prices up even further? Could it be government housing policies have made homeownership less, not more affordable or accessible?

The answer is an unequivocal yes. Since the mid-1950, liberalized federal lending policies have fueled a massive and dangerous increase in leverage-one that continues to this day. For example, in 1954 FHA loans had an average loan term of 22 years vs. 29.5 years today, an average loan-to-value of 80% vs. 97.5%, average housing debt-to-income ratio of 15% vs. 28%. Only the average borrowing cost in 1954 of 4.5% is the same as it is today. The result is today’s FHA borrower can purchase a home selling for twice as much as one with the underwriting standards in place in 1954-but without a dollar’s increase in income!

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It’s all a big rip-off. Get the government out of housing once and for all.

• The Next Huge American Housing Bailout Could Be Coming (TAM)

The failures of government intervention in the economy have made headlines yet again. Recent stress tests by the Federal Housing Finance Agency found something sinister brewing under the surface at notorious mortgage giants Fannie Mae and Freddie Mac. The results show that these puppet companies could need up to a $126 billion bailout if the economy continues to deteriorate. That’s right — the two companies that were taken over by the government and that sucked $187 billion from the treasury could be entitled to more taxpayer money. The toxic home loans bought during the last crisis coupled with a lack of liquidity have suddenly become serious risk factors.

The so-called “recovery” that has been trumpeted for years by countless politicians and economists is falling apart in plain view. The media will do just about anything to assure the public that this is all isolated and overblown, but the canary in the coal mine has just dropped dead. The tests ran a scenario eerily similar to warnings we’ve heard about what the economic future might hold: “The global market shock involves large and immediate changes in asset prices, interest rates, and spreads caused by general market dislocation and uncertainty in the global economy.” In the throes of the 2008 crisis, the government took many unprecedented actions, but one of the most notable was seizing control of the two largest mortgage loan holders in the country.

Since then, Fannie Mae and Freddie Mac have been converted from subsidized private organizations into some of the biggest government-sponsored enterprises ever created. These institutions have been used to prop up the entire real estate market by purchasing trillions of dollars in home loans from other banks to keep prices elevated. Without Fannie and Freddie, the supply of houses on the market would have far exceeded the number of buyers. This glut in supply and low demand would have forced sellers to lower prices until a deal was made. Instead, these wards of the state were able to buy up properties at artificially high prices using government-issued blank checks, allowing for the manipulation of home values back up to desired levels.

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Debt at work.

• China’s Stimulus Efforts Show ‘Malinvestment Is Still Hard at Work’ (BBG)

It was supposed to be different this time. Ahead of looming fiscal stimulus from China, analysts were quick to emphasize that this would be a leaner, smarter government spending program. There would be a new method of financing to try to keep the debt burdens for local governments from becoming too onerous. And, above all, it would be targeted to avoid exacerbating the excess capacity that’s abundant in many industries. While the scale of the expenditures certainly pales in comparison to those that followed the Great Recession, the story remains the same. A Morgan Stanley team, led by Chief China Economist Robin Xing, noted that fixed-asset investment growth among state-owned enterprises (or SOEs) has accelerated across the board in 2016, with the exception of mining.

This same trend also holds for investment in services sectors, Xing observed. These data suggest that stimulus efforts have not been as targeted as proponents hoped, belie the narrative of rotation of growth from credit-driven infrastructure projects to activity linked to domestic demand, and raise the specter of further malinvestment in the world’s second largest economy. “We know a) in real terms rebalancing isn’t advancing as much as the government protests citing nominal data and b) the restimulation this last year of investment via credit and fiscal policies will certainly have slowed it down further,” writes George Magnus, senior economic adviser at UBS. “Capital accumulation isn’t all or always wrong but if it’s largely debt financed and SOE provided, I’d say that malinvestment is still hard at work.”

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Lest we forget: There is no market. There is only distortion.

• The UK Is the New Engine of Bond-Market Distortion (WSJ)

Britain has taken over from Japan as the world’s wildest bond market, raising new questions about the distortions being caused by central banks. The soaring price (and so plunging yield) of the 30-year gilt means it has now returned the same 31% over the past 12 months as the Japanese 30-year note, even as some of the excess in long-dated Japanese bonds falls away. The race into gilts partly anticipated and was accelerated by the Bank of England’s resumption of bond purchases this week, part of a package of monetary easing designed to offset damage to the economy from June’s Brexit vote. Lower gilt yields are in turn contributing to demand for global bonds, helping keep U.S. Treasury yields depressed even as other market moves suggest a revival of hopes for growth and inflation.

This again raises a long-running problem for investors. Should they regard low yields as a sign of how grim a future is in store for the world economy? Or are central banks distorting the signal so much through bond purchases that yields no longer carry much information about the economy? The rally in gilts has been extraordinary, with the yield on the U.K.’s longest-dated bond, the 2068 maturity, almost halving from 2% on the day of the referendum to 1.06% on Thursday. The price of the bond is up 53% this year, the sort of gains usually produced by risky stocks, not rock-solid government paper.

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Consolation: it happens everywhere.

• A Really Vicious Circle Is Threatening UK Pension Pots (BBG)

As the Bank of England seeks to ease Brexit angst by injecting money into the U.K. economy, pension managers and insurers are finding themselves caught up in a vicious circle. Britain’s new quantitative-easing program, combined with monetary easing around the world, is crushing yields, leaving these long-term investors ever more desperate to hold on to their 20-, 30- and 50-year bonds to meet return targets and liabilities. That forces protagonists like the BOE, which is buying 60 billion pounds ($78 billion) of government debt over six months, to bid higher prices – driving yields down even further.

This may explain the crunch this week, when the central bank failed to find enough investors to sell it longer-maturity gilts, the part of the debt market dominated by pensions and insurers. While the revival of QE is intended to reduce the risk of a Brexit-fueled slump, the shortfall raises the question of whether debt purchases with newly created money are becoming part of the problem as well as the solution. “We recognize the Bank’s concern and the need to protect the economy,” said Helen Forrest Hall, defined-benefit policy lead at the Pensions and Lifetime Savings Association in London. “But the challenge we have is that the QE programs do have an impact on pension funds’ liabilities.”

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Yeah, can’t risk bank profits, can we?

• IMF to ECB: Forget Negative Rates, Or You’ll Do More Harm Than Good (MW)

Economists at the IMF are urging the ECB to stop yanking interest rates further into negative territory, warning it will take a toll on the region’s already struggling banks and reduce lending to businesses and households. In a blog post on the IMF website, economists Andy Jobst and Huidan Lin say any additional cuts that would push rates further below zero will encounter diminishing returns and threaten, at this point, to do more harm than good. “Further policy rate cuts could bring into focus the potential trade-off between effective monetary transmission and bank profitability. Lower bank profitability and equity prices could pressure banks with slender capital buffers to reduce lending, especially those with high levels of troubled loans,” the analysts said on the blog.

“The prospect of prolonged low policy rates has clouded the earnings outlook for most banks, suggesting that the benefits from a negative interest rate policy might diminish over time,” they said. The warning comes as expectations are rising the central bank will announce fresh stimulus at its September meeting to offset the negative impact on the eurozone from the U.K.’s Brexit vote on June 23. At its July meeting, ECB boss Mario Draghi stopped short of pledging more measures, saying the policy makers will reassess in September when it will have fresh economic forecasts that factor in the impact of the U.K.’s referendum on ending its EU membership.

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New normal: Profit falls 90%, shares up 5.3%.

• Global Shipping Giant Moller-Maersk Reports 90% Fall In Net Profit (CNBC/R.)

Moller-Maersk kept its downbeat 2016 profit forecast on Friday as the Danish shipping and oil giant reported net profit way under expectations as it struggles to cope with a shipping recession and tough oil markets. The Danish shipping and oil group said net profit fell to $101 million in April-June, lagging a forecast of $196 million. It was also around 90% lower than the $1.069 billion reported for the same period last year. The company maintained its outlook for an underlying profit for the full year significantly below last years $3.1 billion. Shares of the group were up 5.3% Friday morning.

Trond Westlie, chief financial officer of Maersk Group, told CNBC on Friday that the shipping industry faced turbulent times as a result of the “very difficult” oil market and decline in freight rates. “When we look at the overall market and when we look at supply and demand and the growth in the world, we still think it’s going to be low-growth and volatile.” “For us, like always, we have a view on a couple of weeks or a four weeks’ indication on where the market is going but after that it’s very opaque for us as well.”

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Debt Rattle August 6 2016

Aug 062016
 
 August 6, 2016  Posted by at 9:00 am Finance Tagged with: , , , , , , , , , , ,  Comments Off on Debt Rattle August 6 2016


Ben Shahn Sideshow, county fair, central Ohio 1938

• UK’s Four Biggest Banks £155 Billion Short Of Safety (Ind.)
• Want To Avoid Recession? Then Shower UK Households With Cash (G.)
• A Realistic Look at July’s Nonfarm Payrolls (M2)
• The Politically Incorrect Jobs Numbers Everyone is Hushing Up (WS)
• Hacked Bitcoin Firm Plans To Spread Losses Across All Users (CNBC)
• In China, When in Debt, Dig Deeper (WSJ)
• Only In China: Companies Become Banks To ‘Solve’ Financial Difficulties
• Galbraith Says Critics Have It All Wrong Over Greece ‘Plan X’ (Kath.)
• Stiglitz Quits Panama Papers Probe, Cites Lack Of Transparency (R.)
• Is Hillary Clinton Corrupt? An Archive of Financial Improprieties (Medium)
• Average American 15 Pounds Heavier Than 20 Years Ago (HDN)

 

 

“That sum is not far away from the present market capitalisation of these banks, implying that they are massively overexposed.”

• UK’s Four Biggest Banks £155 Billion Short Of Safety (Ind.)

The UK’s four biggest banks would need to raise another £155bn in fresh capital to withstand a new financial crisis, despite the view of the Bank of England Governor that lenders have an adequate cushion to cope with further turmoil. Those are the results of research from three respected financial academics – and add to a growing feeling that the Bank of England is dangerously undercooking its capital requirements on UK lenders in the face of swelling instability in financial markets. UK banks had to be rescued in 2008 and 2009 at massive cost to British taxpayers. Capital represents the shareholder funds in banks available to absorb losses. When losses are greater than the capital cushion the bank is bust and may need to tap state support if deemed to be systemically important by politicians and regulators.

In a new paper Viral Acharya of New York University, Diane Pierret of the University of Lausanne and Sascha Steffen of the University of Mannheim calculate that HSBC, Barclays, Lloyds and the Royal Bank of Scotland would need to raise $185bn (£155bn) of new equity between them to retain a 5.5% capital cushion in a crisis, which is the benchmark of safety used in the past by the European Banking Authority. That sum is not far away from the present market capitalisation of these banks, implying that they are massively overexposed. The EBA’s stress test exercise last Friday showed the UK’s major lenders would see their capital diminished in another European economic crisis, but not below the 5.5% level of so-called “risk-weighted assets” that would have created pressure for more equity injections.

[..] Acharya, Pierret and Steffen argue that the broader European banking sector could be undercapitalised to the tune of around €890bn – a figure they calculated using stock market valuations of banks’ equity rather than the sums reported by lenders themselves. Bank share prices have continued to fall since last Friday’s EBA stress test, implying investors are far from reassured by the fact that most lenders received a clean bill of health from the regulators.

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Would it even help anymore?

• Want To Avoid Recession? Then Shower UK Households With Cash (G.)

Just give people the money. Give them cash, dole it out, increase benefits, slash VAT, hand it to those most likely to spend it: the poor. Put £1,000 into every debit account. Whatever you do, don’t give it to banks. They will just hoard it or use it to boost house prices. Britain is suffering from a classic liquidity trap. There is insufficient demand. Yet all the Bank of England did on Thursday was wring its hands, blame Brexit and go on digging the same old holes. They are labelled lower interest rates, quantitative easing and more cash for banks. Those policies have been in place for some seven years. They have failed, failed, failed. Not one commentator yesterday thought cutting interest rates to 0.25% would make any difference to the threat of recession.

Worse, by cutting annuity yields it would impoverish many old people who would otherwise spend. The Bank’s cumbersome monetary bureaucracy was set up to keep inflation under control by curbing bank lending. That failed during the credit crunch. Now it is failing in the opposite direction. Channelling policy through the banks has proved useless in protecting the economy from deflation and recession. The Bank is trapped intellectually in the world in which it lives, that of the City and the banking system. Like chateau generals at the Somme, it never ventures to the economy’s frontline, where buyers meet sellers and generate growth. It thinks of bonds, investments and the only glamour spending it recognises, on infrastructure. It believes that an economy can be regenerated through middle-class home ownership and state mega-projects.

But there is no shortage of funds to invest. Companies, like banks, are awash in cash. The problem is that savers are not spending; if they spend on anything it is on property, and that, too, may now slide. It is irresponsible to await the chancellor’s autumn statement and a political fiddle with tax rates. The engine of the economy must crash into forward gear. Money must be got into bank accounts, cash cards, shops tills and revenues. The plea from 35 economists published in the Guardian this week for “unconventional measures” made only one mistake. It suggested more spending on state infrastructure, which is just spending delayed. Where the economists were right was in suggesting “an immediate increase in household disposable incomes”.

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“..the U-6 unemployment number is 10.7% of the nation’s workforce..”

• A Realistic Look at July’s Nonfarm Payrolls (M2)

The Bureau of Labor Statistics (BLS) released its nonfarm payroll data this morning, showing that 255,000 jobs were created in July. The unemployment rate remained at 4.9%. May data was revised up from the eyebrow-raising low number of 11,000 jobs to 24,000 jobs while June was also revised upward from 287,000 jobs to 292,000. That brought the monthly average to 190,000 jobs over the past three months. Unfortunately, drilling down into the more granular details, a far less rosy picture emerges; a picture which is far more consistent with an economy feeling the continued weight of unprecedented wealth and income inequality; a picture that is far more correlated to an economy where “58% of all new income since the Wall Street crash has gone to the top 1%,” to quote Senator Bernie Sanders.

The data for July shows that the U-6 unemployment number is 10.7% of the nation’s workforce, more than double the official number of 4.9%. The U-6 unemployment rate includes the number of people unemployed; plus individuals just marginally attached to the labor force; plus those employed part-time for economic reasons. (The Bureau of Labor Statistics provides the following definition of marginally attached: “Persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not currently looking for work.)

But a far bigger problem with the BLS data is what constitutes an “employed” worker to our Federal government’s numbers crunchers. According to the Bureau of Labor Statistics, you could be an out of work MBA graduate but if you help your brother in his deli for 15 hours in a week while living in his home, you’re counted as employed. (The BLS says that a worker who makes no money at all donating his or her services to a family business for 15 hours or more per week is considered employed.)

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The US keeps addding more people than jobs.

• The Politically Incorrect Jobs Numbers Everyone is Hushing Up (WS)

On its population clock, the Census Bureau estimates that the US population on August 5, 2016, at 4:49 p.m. ET (yup, down to the minute) was 324.17 million. That’s up from 308.76 million in April 2010. Since the darkest days of the Great Recession, the US population has grown by 15.4 million. The Census Bureau also estimates that there are currently 8.6 births per minute, minus 4.6 deaths per minute, plus 2 arriving immigrants (“net”) per minute, for a gain of nearly 6 folks per minute. Everyone ages, so the young ones move into the labor force, but the baby boomers are fit and healthy and don’t feel like retiring, and so they hang on to their jobs for as long as they can, despite the rampant age discrimination they face in many sectors, particularly in tech, though obviously not in politics.

In 2010, 24% of the people were under 18. That was 74 million people. Millions of them have since moved into the labor force, elbowing each other while scrambling for jobs, as have those millions who were then between 18 and their twenties and in college or grad school. These millennials have arrived on the job market in very large numbers. In April 2010, there were 130.1 million nonfarm payrolls. In today’s July report, there were 144.4 million. Hence, 14.3 million jobs have been added to the economy over the time span, even as the total population has grown by 15.4 million. So that’s not working out very well. On average, 205,300 jobs need to be created every month just to keep up with population growth and not allow the unemployment situation to get worse.

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Maybe they should be forced to pay back all their clients and close?

• Hacked Bitcoin Firm Plans To Spread Losses Across All Users (CNBC)

The bitcoin exchange Bitfinex has said it is considering sharing losses among all its users after around $70 million worth of bitcoin was stolen earlier in the week. “We are still working out the details so nothing is set in stone, however we are leaning towards a socialized loss scenario among bitcoin balances and active loans to (bitcoin/dollar) positions,” the Hong-Kong based company said on its website on Friday. Bitfinex revealed it had been hacked on Tuesday and suspended trading, causing prices of the digital currency to fall significantly. A total of 119,756 bitcoins, worth $68 million at current prices, were reportedly stolen as a result of a security breach.

The company added in its latest statement that nothing had yet been decided and it was still settling positions and account balances. Bitfinex’s “socialized loss scenario” most likely means it will distribute its losses among all of the platform’s users, according to Charles Hayter, chief executive and founder of digital currency comparison website CryptoCompare. This would mean users whose bitcoins were never originally stolen would be affected. “In essence, (this is) a haircut for all users on their deposits. To what degree depends on the devil in the details and what the total capital held by BitFinex is,” Hayter told CNBC via email.

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A heavily indebted company gets permission to open a bank, to rival another bank that has 25% of its loans off-balance-sheet and non-performing. What could go wrong?

• In China, When in Debt, Dig Deeper (WSJ)

When the going gets tough in China, just get a bank. With profits headed south, heavily indebted Chinese heavy-machinery giant Sany Heavy Industries said this week it won approval to set up a bank in the Hunan province city of Changsha. With 3 billion yuan ($450 million) of registered capital, it will be a relatively large institution as Chinese city-based banks go. Sanyplans to join forces with a pharmaceutical company and an aluminum company.

In recent months several city commercial banks in China have been taken over by the likes of tobacco and travel companies, recapitalized and renamed. Banking licenses are scarce in China, and rarely are new banks set up from scratch. Sany’s Sanxiang Bank will be up and running in six months. It will go up against crosstown rival Bank of Changsha, which at the end of last year had substantial 90 billion yuan book of off-balance-sheet loans, more than a quarter of them nonperforming. Sany had better ramp up quickly.

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Comment on the WSJ piece above.

• Only In China: Companies Become Banks To ‘Solve’ Financial Difficulties

China is desperate to solve several problems it has due to its debt to GDP ratio being north of 300%. It may have found a pretty unconventional one by letting companies become banks, according to a report by the Wall Street Journal. “With profits headed south, heavily indebted Chinese heavy-machinery giant Sany Heavy Industries said this week it won approval to set up a bank in the Hunan Province city of Changsha. With 3 billion yuan ($450 million) of registered capital, it will be a relatively large institution as Chinese city-based banks go. Sany plans to join forces with a pharmaceutical company and an aluminum company. Sany already operates an insurance and finance division with the goal of internal financing and insurance services for clients.”

One problem is that companies are defaulting on bond payments and there is no adequate resolution mechanism for bad debts, at least according to Goldman Sachs. “A clearer debt resolution process (for example, how debt restructuring on public bonds can be achieved, how valuation and recovery on defaulted bonds are arrived at, the timely disclosure of information and clarity on court-sanctioned processes) would help to pave the way for more defaults, which in our view are needed if policymakers are to deliver on structural reforms,” the investment bank writes in a note. By becoming or owning banks, the companies can just shift debt around different balance sheets to avoid a default, although this is probably not the resolution that Goldman Sachs had in mind when talking about structural reforms.

Another problem is that the regime has more and more difficulties pushing more debt into the economy to grease the wheels and keep GDP growth from collapsing entirely. China needs 11.9 units of new debt to create one unit of GDP growth. At the same time, the velocity of money or the measure of how often one unit of money changes hands during a year has fallen to below 0.5, another measure of how saturated the economy is with uneconomical credit. If the velocity of money goes down, the economy needs a higher stock of money to keep the same level of activity.

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Kathimerini is going off the rails, as are a group of Greeks. Accusing Varoufakis and Galbraith of planning a military coup is so far beyond the pale, it’s reason to look at legal action.

• Galbraith Says Critics Have It All Wrong Over Greece ‘Plan X’ (Kath.)

University of Texas professor James Galbraith, a close associate of Yanis Varoufakis, has urged the 23 US-educated Greeks who recently criticized him for his part in last year’s negotiations with Greece’s creditors to read his book. Galbraith’s response came in the form of a letter to Kathimerini, which had published a story on July 29 on the letter from the 23 academics, addressed to the president of the University of Texas. In his own letter, Galbraith mentions the fact that his critics say they learned of his work as head of the team that worked on the so-called “Plan X” from interviews in the Greek press and excerpts of the Greek translation of his book, “Welcome to the Poisoned Chalice” (Yale University Press).

He asks why, given their knowledge of English, they did not read the original: “Had they done so, they would have found that the allegations they made are factually false.” Galbraith characterizes Plan X as “preliminary,” admitting that “the work of a small team cannot fully prepare for such a dramatic event.” He repeats that it would only have been activated if the Europeans had carried out their threat to cut off emergency liquidity via the ECB to Greek banks. “This would have triggered a forced exit of Greece from the euro, against the will of the government,” he notes. “The threat had been delivered by the president of the Eurogroup, Jeroen Dijsselbloem, in late January,” he adds, mentioning also the suggestion by German Finance Minister Wolfgang Schaeuble that Greece take a “holiday from the euro.”

Galbraith further rejects the claim made by the 23 that his plan constituted a “monetary-cum-military coup d’etat” and that it would involve “mobilizing the Greek armed forces to suppress possible civil disorder.” “We did not suggest using the military inappropriately or outside the Constitution. The only use of the word ‘mobilization’ in my book refers to the civil service.” He also denies that the plan included a plot to arrest the governor of the central bank. The memo on Plan X, as Galbraith repeats in his letter, “was prepared at the request of the prime minister” and “at no time was the working group engaged in advocating exit or any policy choice. The job was strictly to study the operational issues that would arise if Greece were forced to issue scrip or if it were forced out of the euro.”

Finally, Galbraith responds to claims in the letter from the 23 that he regretted the non-activation of Plan X. “This claim also is false,” he writes, making reference to his interview with Kathimerini on July 6, 2016, in which he had stated that “we were preparing for a scenario that everyone hoped to avoid.”

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“..even as an expert on economic and organized crime, I was amazed to see so much of what we talk about in theory was confirmed in practice..”

• Stiglitz Quits Panama Papers Probe, Cites Lack Of Transparency (R.)

The committee set up to investigate lack of transparency in Panama’s financial system itself lacks transparency, Nobel Prize-winning economist Joseph Stiglitz told Reuters on Friday after resigning from the “Panama Papers” commission. The leak in April of more than 11.5 million documents from the Panamanian law firm Mossack Fonseca, dubbed the “Panama Papers,” detailed financial information from offshore accounts and potential tax evasion by the rich and powerful. Stiglitz and Swiss anti-corruption expert Mark Pieth joined a seven-member commission tasked with probing Panama’s notoriously opaque financial system, but they say they found the government unwilling to back an open investigation.

Both quit the group on Friday after they say Panama refused to guarantee the committee’s report would be made public. “I thought the government was more committed, but obviously they’re not,” Stiglitz said. “It’s amazing how they tried to undermine us.” The Panamanian government defended the committee’s “autonomous” management in a statement issued later on Friday, and while it said it regretted the resignations of Stiglitz and Pieth, it chalked them up to unspecified “internal differences.”

[..] In addition to embarrassing leaders worldwide who had interests tied to secretive business concerns, the leak heaped pressure on Panama, well-known for its lax financial laws, to clean up its act. “I have had a close look at the so called Panama Papers, and I must admit that even as an expert on economic and organized crime, I was amazed to see so much of what we talk about in theory was confirmed in practice,” Pieth said in a telephone interview. In the papers he said he found evidence of crimes such as money laundering for child prostitution rings. “We’re being asked to do this as a courtesy for them and we’re paraded in front of the world media first, and then we’re told to shut up when they don’t like it,” Pieth, a criminal law professor at Basel University, said.

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Long and strong summary by Kristi Culpepper. Damning.

• Is Hillary Clinton Corrupt? An Archive of Financial Improprieties (Medium)

[..] Under Clinton’s leadership, the State Department approved $165 billion worth of commercial arms sales to 20 nations whose governments have given money to the Clinton Foundation, according to an IBTimes analysis of State Department and foundation data. That figure – derived from the three full fiscal years of Clinton’s term as Secretary of State (from October 2010 to September 2012) – represented nearly double the value of American arms sales made to the those countries and approved by the State Department during the same period of President George W. Bush’s second term.

The Clinton-led State Department also authorized $151 billion of separate Pentagon-brokered deals for 16 of the countries that donated to the Clinton Foundation, resulting in a 143% increase in completed sales to those nations over the same time frame during the Bush administration. These extra sales were part of a broad increase in American military exports that accompanied Obama’s arrival in the White House. The 143% increase in U.S. arms sales to Clinton Foundation donors compares to an 80% increase in such sales to all countries over the same time period.

[..] It’s really not all that difficult to see why Clinton hasn’t given a press conference in 244 days and avoids the media at her campaign events, is it? Asking her to explain every ethically questionable deal she has been involved in would probably take longer than the State Department requires to vet her emails.

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In just 20 years. Wow.

• Average American 15 Pounds Heavier Than 20 Years Ago (HDN)

There’s no doubt about it: Americans are getting heavier and heavier. But new U.S. estimates may still come as a shock – since the late 1980s and early 1990s, the average American has put on 15 or more additional pounds without getting any taller. Even 11-year-old kids aren’t immune from this weight plague, the study found. Girls are more than seven pounds heavier even though their height is the same. Boys gained an inch in height, but also packed on an additional 13.5 pounds compared to two decades ago. When looked at by race, blacks gained the most on average. Black women added 22 pounds despite staying the same average height. Black men grew about one-fifth of an inch, but added 18 pounds, the study found.

[..] According to the report, the average weight of men in the United States rose from 181 pounds to 196 pounds between 1988-1994 and 2011-2014. Their average height remained the same at about 5 feet, 9 inches. The average woman, meanwhile, expanded from 152 pounds to 169 pounds while her height remained steady at just under 5 feet, 4 inches.

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Debt Rattle July 9 2016

Jul 092016
 
 July 9, 2016  Posted by at 8:25 am Finance Tagged with: , , , , , , , , , ,  Comments Off on Debt Rattle July 9 2016


Jack Delano Mike Evans, welder, Proviso Yard, Chicago & North Western RR 1940

• The Decline & Fall Of The Biggest Bond Market In The World (ZH)
• More Than 20% Of Americans Are Simply Too Poor To Shop (NYPost)
• What If I Told You Employment Actually Declined 119,000 In June (Rosenberg)
• Chicken Little Economists Are Wrong About Brexit (MW)
• UK Property Hits Levels Of Unaffordability Not Seen Since 2007 (TiM)
• If Bank Stocks Are Linked to Bank Lending, Europe Should Worry (BBG)
• Italy PM’s Tuscan Nightmare: The Fall Of ‘Daddy Monte’ (R.)
• Albert Edwards: Brexit Is Old News, Time To Worry About Italy (VW)
• Italy’s In An Economic Straitjacket, Needs To Be Freed: Albert Edwards (CNBC)
• Only Europe’s Radicals Can Save The EU: Yanis Varoufakis (Newsweek)
• Worst. Coup. Ever. (TeleSur)
• The Persian Gulf’s Huge New Export: Debt (WSJ)
• Greek Exports Record Major Decline In May (Kath.)
• Russia Hits Back At ‘Anti-Russian’ NATO ‘Hysteria’ (CNBC)

 

 

Stop it already!

• The Decline & Fall Of The Biggest Bond Market In The World (ZH)

Government bonds are themselves becoming more illiquid, most particularly, as CLSA’s Chris Wood notes, in a country like Japan where the Bank of Japan has been buying more than the net issuance. Monthly trading of JGBs by lenders and insurers has collapsed from a peak of ¥123tn in April 2012 to a record low of ¥15tn in May 2016. This raises the pertinent issue of whether the Bank of Japan has reached the practical limit of its government buying programme in terms of its current purchase programme of ¥80tn relative to estimated annual JGB net new issuance of ¥34tn.

In this respect, the Japanese central bank has from a potentially monetisation standpoint always defended the integrity of its JGB purchase programme by stressing that it only buys JGBs in the secondary market, which means that the seller of the JGB to the BoJ forfeits a claim to that asset. This is contrasted to what would happen if the BoJ bought JGBs in the primary market on an open-ended basis. Such a process would be highly inflationary and, sooner or later, would be viewed by the market as such. And as Wood concludes, the next step is obvious…

“This is why Japan, as well as America, is also a candidate for monetisation of infrastructure stimulus or for what Bernanke has called a “money-financed fiscal programme”, or what has been called in other quarters “overt monetary financing”. This is because Bank of Japan governor Haruhiko Kuroda is now looking for a new alternative form of monetary easing, given he has probably reached the practical limits of responsible JGB buying, as already discussed, while his initial move to impose negative rates in January led to the opposite market reaction than expected (ie, a stronger yen and a weaker stock market) while also proving politically very unpopular. This probably explains why Kamikaze Kuroda has not expanded the negative rate policy further since January even though inflation and inflation expectations have moved in the opposite direction of what he has been targeting.”

The latest data will make it harder for Kuroda to do nothing at the next BoJ policy meeting due to be held on 28-29 July given the stress he has put on monitoring inflation expectations. That is unless he just admits he has failed! Given the unattractive options of buying still more JGBs or ETFs, or risking an undoubtedly unpopular expansion of negative rates, Kuroda and indeed Abe will be looking for a new approach. Monetisation of infrastructure stimulus may be the option. Meanwhile, in an effort to calm potential concerns about the integrity of the fiscal budget central bankers implementing such a future monetisation of infrastructure spending will doubtless be at pains to describe the process as a “one off” though, as the ever theoretical Bernanke stated in his blog: “To have its full effect, the increase in the money supply must be perceived as permanent by the public.”

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But the jobs report?!

• More Than 20% Of Americans Are Simply Too Poor To Shop (NYPost)

Retailers have blamed the weather, slow job growth and millennials for their poor results this past year, but a new study claims that more than 20% of Americans are simply too poor to shop. These 26 million Americans are juggling two to three jobs, earning just around $27,000 a year and supporting two to four children — and exist largely under the radar, according to America’s Research Group, which has been tracking consumer shopping trends since 1979. “The poorest Americans have stopped shopping, except for necessities,” said Britt Beemer, chairman of ARG. Beemer has been tracking this subgroup for two years, ever since his weekly surveys of 15,000 consumers picked up that 21% of consumers did not finish their Christmas shopping in 2014 due to being too busy working.

That number grew to 29% last year, and Beemer dug in to learn more about them, calling them on holidays. He estimates that this group has swelled from 6 million households four years ago, because their incomes have not kept pace with expenses like medical costs. Nearly half of all Americans have not seen an increase in salary over the last five to seven years, and another 28% have seen their take-home pay reduced by higher medical insurance deductions or switching to part-time jobs, ARG found. “It’s scary when you start to see things that you’ve never seen before,” said Beemer. “People are so pessimistic about their future.” Most of those living on the edge — 68% are women between the ages of 28 and 38 — work in retail or in call centers, according to Beemer.

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Rosenberg flip flop. “This is otherwise known as looking at the big picture.”

• What If I Told You Employment Actually Declined 119,000 In June (Rosenberg)

David Rosenberg: What if I told you that employment actually declined 119,000 in June and has been faltering now for three months in a row? Yes, that is indeed the case. Of course, the focus, as always is on the non-farm payroll report but keep in mind that while this is the data series that moves markets, it does not necessarily have the final word on how the labor market is truly faring. Okay, so let’s get the pablum out of the way first. Nonfarm payrolls surprised yet again but this time to the upside — surging 287,000 in the best showing since last October and again making a mockery of the consensus economics community which penned in a 180,000 bounce….

…as if the Household sector ratified the seemingly encouraging news contained in the payroll data as this survey showed a tepid 67,000 job gain last month and rather ominously, in fact, has completely stagnated since February. Historians will tell you that at turning points in the economy, it is the Household survey that tends to get the story right.

[..] The simple fact of the matter is that May and June were massive statistical anomalies. The broad trends tell the tale. Go back to June 2014 and the six-month trend in payrolls is running at a 2.2% annual rate and the three-month trend at 2.4%. A year ago, as of June 2015, the six-month pace was 1.9% and the three-month at 2.2%. Fast forward to today, and the six-month annualized rate is 1.4% and the three-month has slowed all the way down to a 1.2%. This is otherwise known as looking at the big picture.

When the Household survey is put on the same comparable footing as the payroll series (the payroll and population-concept adjusted number), employment fell 119,000 in June – again calling into question the veracity of the actual payroll report — and is down 517,000 through this span. The six-month trend has dipped below the zero-line and this has happened but two other times during this seven-year expansion.

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“..the E.U.’s “free-trade zones” have become classic Orwellian nomenclature. Flip it: “Free-trade zone” means “unfree-trade zone.”

• Chicken Little Economists Are Wrong About Brexit (MW)

A few years ago when Grexit was the E.U. crisis du jour, I explained why Greece just didn’t matter to the world’s economies or the U.S. stock markets in columns like this one called, “Apple is bigger than the entire Greek economy.” Did you know that Great Britain’s GDP is 10 times larger than Greece’s? Unlike with Apple vs Greece’s entire GDP, at $2.7 trillion per year, Britain’s economy is equal to the combined market cap of Apple, Google, Microsoft, Exxon Mobil, Berkshire Hathaway, Amazon and Facebook. The total market cap of the DJIA is only (?) about $5.5 trillion, or twice Britain’s GDP. Clearly, Brexit has a much bigger potential to impact the broader economy and the financial markets than Greece ever did.

Which, in my opinion, is a good thing. Greece’s economy has shrunk 20% since the great Greek Financial Crises Du Jour was hitting the markets and the country chose to stay in the E.U. rather than getting out. Staying in the E.U. has created a Great Depression kind of decline in the economy there. Now I don’t think Great Britain has ever been positioned as poorly as Greece has been inside the E.U., so I certainly don’t think its economy is about to crash 20% in the next two or three years whether in or out of the E.U. But I like the prospects for the country to unwind the cumbersome red tape, regulations and control from the E.U.’s central powers, thereby unleashing entrepreneurship, innovation and freer trade,

One of the great ironies that Brexit has highlighted is that the E.U.’s “free-trade zones” have become classic Orwellian nomenclature. Flip it: “Free-trade zone” means “unfree-trade zone.” As LunaticTrader put it in a discussion about all of this on Scutify: “The E.U. worked well until the late 1990s when it was mainly a free-trade zone. It has gradually morphed into an ‘unfree trade zone’ because that ‘free’ has been gradually replaced by 80000 laws and regulations, combined with the euro, which took away the weaker countries’ (Greece, Italy, Spain…) main tool to manage their own economy. This doesn’t offer any economic benefits to the weaker E.U. members, as has become abundantly clear.”

From this corner’s perspective, Great Britain’s leaving the E.U. gives the nation itself a much higher probability of creating economic growth and prosperity for its citizens than staying in the E.U. ever did. That new upside potential, plus the fact that its economy is large enough to impact the global and U.S. economies nets out to Brexit being a positive, despite all the handwringing in the media and Chicken Little politicians, economists, pundits and traders who are basically begging you to freak out about it.

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What Brexit will correct.

• UK Property Hits Levels Of Unaffordability Not Seen Since 2007 (TiM)

UK house prices continued to rise in June, adding almost £3,000 in a month, stretching affordability to levels not seen since the run-up to the financial crisis in 2007, a new survey suggests. Halifax said it was too early to say how the referendum that sanctioned the UK’s decision to leave the EU will impact the housing market, but added there were signs the pace of growth is easing. The price of the average home in the UK rose by 1.3% between May and June, or by £2,708, to hit £216,823, up from 0.6% the previous month, according to the latest index by the mortgage lender. Meanwhile, the ratio of house prices to earnings rose to 5.70 in June from 5.65 in May, marking its highest level since October 2007.

This means that buying a new home will cost the average workers close to six years of their earnings before tax. On an annual basis, however, prices grew by 8.4%, down from 9.2% in May, posting the lowest growth since July last year. Martin Ellis, Halifax housing economist, said: ‘There is evidence that the underlying pace of house growth may be easing.’ And added: ‘House prices continue to increase, albeit at a slower rate, but this precedes the EU referendum result, therefore it is far too early to determine any impact since.’ The Bank of England this week warned that property prices ‘had become stretched’ in recent months – meaning a cooling of the market was likely at some point regardless of the Brexit vote.

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“..if banks decide to keep their balance sheets unchanged until the end of 2017, this could halve economic growth in the euro area next year.”

• If Bank Stocks Are Linked to Bank Lending, Europe Should Worry (BBG)

Don’t underestimate the toll that the post-Brexit bank equity rout can take on the euro-area economy. Initial calculations of the effect of the U.K. referendum on the region’s recovery have suggested that the blow will be relatively mild, with ECB President Mario Draghi telling European Union leaders that the impact from direct trade could add up to 0.5 %age point over three years. But such scenarios don’t take into account the consequence of the 23% decline in bank stocks since the Brexit vote. Historically, bank equities have correlated strongly with bank lending, with about a year’s lag, as the chart below shows.

Deutsche Bank analysts led by Marco Stringa argue in a July 5 paper that there’s also a causal link: As banks are now under regulatory pressure to raise capital, slumping stock prices and low profitability make it very difficult to build up funds either externally or internally. Deutsche Bank’s own share price has fallen by more than 25% since June 23. If banks struggle to raise capital, they may come under extra pressure to shrink assets. That could mean less lending to the economy. Bankers often claim that asking them to have more funds of their own instead of borrowing from the market hampers their ability to extend credit. Regulators retort that higher capital requirements in fact strengthen a bank’s ability to make loans, not the opposite.

Even so, it might mightn’t take much for Brexit to put a stop to the timid pick-up in euro-area bank lending that started just last year. That’s not least because of the impact of uncertainty on households’ and companies’ investment choices. The impact of a renewed credit crunch on Europe’s largely bank-dependent companies could be severe. Not by chance, fixing the banks to restart credit to the real economy has been one of the main goals of the ECB’s policies since the crisis. Stringa estimates that if banks decide to keep their balance sheets unchanged until the end of 2017, this could halve economic growth in the euro area next year. Worse still, if lenders only manage to raise half of the funds they need to meet what the economists refer to as “Basel IV” requirements, this could force them to reduce their loan book’s risk-weighted assets.

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May have co-financed Columbus: “In 1624, the Medici Grand Duke of Tuscany rushed to the defense of depositors of a bank that was by then already 152 years old..”

• Italy PM’s Tuscan Nightmare: The Fall Of ‘Daddy Monte’ (R.)

In 1624, the Medici Grand Duke of Tuscany rushed to the defense of depositors of a bank that was by then already 152 years old, Monte dei Paschi di Siena, guaranteeing their savings at a time of economic crisis. Nearly 400 years later, Italian Prime Minister and fellow Tuscan Matteo Renzi aims to do something similar as the world’s oldest bank and Italy’s third-largest lender again threatens the region’s savers. This time the stakes are much higher. The collapse of Monte dei Paschi could not only impoverish thousands of ordinary Italians, it could lead to a wider banking crisis, help tip Renzi from power and provide another strong jolt to the European Union, already reeling from Britain’s referendum vote to leave the group.

“The government must assume its responsibilities, save the bank and its investors, otherwise this gangrene will spread to the rest of the system,” said Romolo Semplici, a 58-year-old real estate entrepreneur whose 22,000-euro investment in the bank’s shares is now worth less than 200 euros. “I’ve always been pro-European, but if Europe doesn’t protect its own citizens then we should think twice if this the kind of Europe that we want to be in.” Government sources say Italy is considering options to prop up the bank, including a state guarantee that would enable the bank to raise money it would otherwise struggle to secure from skeptical investors. Many bankers say the bank will inevitably have to raise around €3-4 billion.

Officials in Brussels, a world away from the medieval cobble-stoned alleys of Siena, one of Italy’s most popular tourist centers, may stand in Renzi’s way. A state rescue of Monte dei Paschi would be the first real test of EU rules limiting the use of taxpayers’ money to bail out investors. The rules require holders of the bank’s shares and junior debt to bear some of the losses. Depositors with more than €100,000 would also be hit. The bank’s share price has halved since Britain voted on June 23 to leave the EU, as investors stampede out of Italian banks on concerns that Brexit could send Italy back into recession and saddle them with even more bad debts.

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“..Italy may fall in October or may not, but it will eventually occur..”

• Albert Edwards: Brexit Is Old News, Time To Worry About Italy (VW)

Edwards looks at the 2008 financial crisis and says it was not Lehman Brothers that was causation. Lehman was a symptom of an economic engine already in decline. Likewise there is Brexit, an issue he notes has been accompanied by some of the most emotional ranting he’s seen – on both sides of the argument, including his own. Brexit will be used as an excuse for all sorts of economic ills, but it is only a symptom, a benchmark for a larger trend. When he takes off the emotional hat, he says the real issue is the continued dismantling of the European Union that is upon which savvy investors should focus. There is a game of dominoes being played out and Brexit was just the latest move in a trend.

“In the aftermath of the Brexit vote there is an increasing fear of other dominoes falling within the heart of the EU – the eurozone,” Edwards wrote. “Italy is bleeping very loudly on most people’s radars with its banking crisis and impending referendum seen as leaving the country on a knife-edge.” The Italian banking crisis is important, but it is not the primary problem. “It is a symptom of the problem that problem being a perpetually stagnant economy and deflation,” he wrote. “Italy simply does not appear to be able to grow inside the eurozone and more importantly probably never will.” But it is not just Italy that could be part of the trend extension, the trend could be extended across Europe.

In making this analysis, Edwards does not cite all too simple issues of immigration, fear of globalization or a lack of foresight by the slovenly masses who vote. He looks at economic numbers and notes that it’s not just Italy that is at risk of withdrawing from a marriage. There have been economic winners and losers, and they are clear and documentable. “Indeed the Italian economy has barely grown one jot since it joined the eurozone at the start of 1999 while Germany has grown rich,” he said, pointing to one clear winner with many clear losers. “As inevitably people compare their fortunes with that of their neighbours, the Italians are mighty pissed off.”

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“..the country is “condemned to perpetual economic stagnation within the strictures of the euro zone..”

• Italy’s In An Economic Straitjacket, Needs To Be Freed: Albert Edwards (CNBC)

The citizens of Italy will vote to leave the euro zone after an impending recession and a shift in power inside the country’s political system, according to Societe Generale’s notoriously bearish strategist, Albert Edwards. “The people are angry,” Edwards said in a note Friday, highlighting a poll in May by IPSOS Global that showed almost half of Italians would vote “out” in a referendum on their country’s EU membership. “Italy simply does not appear to be able to grow inside the euro zone and more importantly probably never will … after the next recession I believe a majority of Italians will have had enough of the euro zone experiment and vote in the radical Five Star Movement,” he added.

Anti-establishment Five Star Movement (M5S) is now Italy’s most popular party after a poll on Wednesday showed that it would win an election over Prime Minister Matteo Renzi’s Democratic Party (PD), according to Reuters. This comes at a time when Renzi is trying to deal with a fragile banking system, bogged down by non-performing loans. A referendum on constitutional reform this October is also looming and could well usher in new elections. But Edwards suggests that the Italian bank crisis – and also Brexit – are not a cause of the world’s economic problems, but just symptoms. The real issue is that the country is “condemned to perpetual economic stagnation within the strictures of the euro zone,” he said, suggesting that recapitalizing the Italian banks will not solve their problems.

With a slew of figures, the Societe Generale strategist detailed in his research note how unemployment has risen since the mid-2000s and how productivity has stagnated. Going forward, he believes Renzi should announce an “aggressive fiscal pump” despite the complaints that might arise from Germany and the European Commission. “Italy has played by the fiscal austerity rules for too long. Although its problems are structural in nature, after running an underlying primary fiscal surplus for some 20 years it is time to break free from its self-imposed deflationary fiscal chains,” he added.

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Question is: why save the EU?

• Only Europe’s Radicals Can Save The EU: Yanis Varoufakis (Newsweek)

Spaniards went to the polls three days after the shock of Brexit to produce a result that, ostensibly, delivers victory to the status quo. However, the status quo is tired, fragmenting, and prone to vicious unraveling unless the EU’s deconstruction is impeded. But, the Spanish establishment, which is determined to maintain the status quo, lacks both the analytical power and the political will to impede the EU’s disintegration. And so an electoral result in favor of continuity becomes the harbinger of deep uncertainty. Reeling under the British voters’ radical verdict, “official” Europe took solace from Spain’s general election outcome. They read into it evidence that the post-Brexit fear factor may help knock some “sense” into voters, putting them off “populist” parties.

But, even if this is so, for how long will fear keep voters loyal to a crumbling status quo? The threat of a pyrrhic victory for Spain’s establishment is, thus, clear and present. Spain and the U.K. differ in one crucial sense. While EU policies and institutions have damaged the Spanish economy a great deal more than Britain’s, Spain’s political system remains largely free of euroskepticism. The paradox dissolves quickly when one considers the traditional lack of legitimacy of the Spanish elites in their own country. British Tories, like Michael Gove and Boris Johnson, knew they could draw mass support from a slogan like “We want our country back!” The Spanish establishment cannot do this.

And they cannot do it because, over the last four decades, they managed to retain control by offering voters an unlikely deal: “You keep us in government and we shall do what is necessary to rid you of us, by transferring power to Brussels and to Frankfurt.” Calling for a restoration of sovereignty now would strike Spanish voters as backtracking on the promise to rid them of their local rulers. But, then again, this promise is under increasing strain at a time when the process of Europeanization is in serious trouble.

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As you may have noticed, I find it ever harder to stay away from politics. This is because the economic collapse increasingly spils over into what is after all a fully integrated politico-economic system. In this case, what caused Brexit is also what makes Corbyn strong. But Britons are not nearlly far enough along in the Kübler-Ross cycle to understand this. They’re still stuck in blaming other people for the perceived injustices that befall them.

• Worst. Coup. Ever. (TeleSur)

As the Chilcot Inquiry report is released to the public, those MPs attempting to depose Labour leader Jeremy Corbyn—their leading lights inescapably sullied by having supported the war—are suing for peace. Over a week of high-profile resignations, statements, demands, pleas and threats have seemingly done little but consolidate Corbyn’s position. In record time, it has gone from being a coup to a #chickencoup to a #headlesschickencoup. This could be the biggest own-goal in the history of British politics. Journalists steeped in the common sense of Westminster, assumed that it was all over for Labour’s first ever radical socialist leadership. How can he lead, they reasoned, if his parliamentary allies won’t work with him?

This, in realpolitik terms, merely encoded the congealed entitlement and lordly presumption of Labour’s traditional ruling caste. Even some of Corbyn’s bien-pensant supporters went along with this view. They should have known better. The putschists’ plan, such as it was, was to orchestrate such media saturation of criticism and condemnation aimed at Corbyn, to create such havoc within the Labour Party, that he would feel compelled to resign. The tactical side of it was executed to smooth perfection, by people who are well-versed in the manipulation of the spectacle. And yet, in the event that Corbyn was not wowed by the media spectacle, not intimidated by ranks of grandees laying into him, and happy to appeal over the heads of party elites to the grassroots, their strategy disintegrated.

This was not politics as they knew it. The befuddlement was not for want of preparation. From even before his election as Labour Party leader, there were briefings to the press that a coup would be mounted soon after his election. And in the weeks leading up to the European Union referendum, Labour Party activists reported that they were expecting a coup to be launched after the outcome was announced, regardless of what the result was. This seemed like a half-baked idea—there was still no overwhelming crisis justifying a coup attempt—and so it turned out to be.

Undoubtedly, part of the rationale for hastening the attempted overthrow was the looming publication of the findings of the Chilcot Inquiry, which was expected to be harshly critical of former Prime Minister Tony Blair, of the justification for the invasion of Iraq, and of the relationship with the Bush administration. Given the role of the Parliamentary Labour Party in leading Britain into that war, against fierce public and international opposition, and given its role in supporting the subsequent occupation, this was a bad moment to have Corbyn at the helm. In the event, Corbyn survived to make a dignified statement apologizing for Labour’s role in the disaster and promising to embark upon a different foreign policy—one quite at odds with that supported by the pro-Trident, pro-bombing backbenchers.

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The world needs more debt!

• The Persian Gulf’s Huge New Export: Debt (WSJ)

The energy-producing states of the Persian Gulf are issuing bonds at the fastest clip ever, showing how the oil bust is reshaping the region’s finances despite a near doubling of crude prices this year. The Gulf Cooperation Council states of Saudi Arabia, United Arab Emirates, Bahrain, Kuwait, Qatar and Oman together have raised a record $18 billion in 2016, according to Dealogic, helping refill coffers depleted by sharp revenue declines. Investors expect issuance to increase further, as governments brace for lower prices than they were budgeting only a few years ago. Saudi Arabia is expected to raise up to $15 billion more in the coming weeks, and total issuance by the Gulf nations could reach $35 billion this year, according to JP Morgan Chase, more than doubling the previous high set in 2009.

The issuers are paying slightly higher costs than other emerging countries with similar ratings, reflecting uncertainty over how successful they will be in opening up their economies, the region’s geopolitical risks and the murky outlook for oil prices, analysts and portfolio managers said. But the bond sales generally have been successful, driven by strong demand from local investors and banks, improving market sentiment due to the oil rebound, and a persistent decline in global interest rates that is putting a premium on securities with better yields. In May, Qatar raised $9 billion in an offering that drew more than twice that sum in orders. The five-year notes issued by the nation of 2.5 million trade at 2.13%. That is more attractive when compared with 1.83% on the comparably rated bonds issued by Korea National Oil, according to Anita Yadav at Emirates NBD.

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-12.4% YoY

• Greek Exports Record Major Decline In May (Kath.)

Exports posted a significant decline in May, reflecting to a great extent the impact of the uncertainty from Athens’s months-long negotiations with its creditors, as well as of the industrial action at the ports of Piraeus and Thessaloniki. According to Hellenic Statistical Authority (ELSTAT) figures issued on Friday, exports contracted 12.4% compared with May 2015, amounting to 2.02 billion euros. The decline came to 6.4% not including fuel products, as exports recorded their first decline in the last four months.

“This decline, besides the general problems and the continued uncertainty in the Greek economy, is partly due to the situation in the country in recent months, as the industrial action at the ports of Thessaloniki and Piraeus started in May,” noted the Greek International Business Association (SEVE) in a statement. Panhellenic Exporters Association chief Christina Sakellaridi added that “an entire year has passed since the capital controls were imposed without normality having been restored to the market. The only favorable impact is expected from the repayment of the state’s dues to private parties, the activation of the investment incentives law, the restoration of cheap liquidity flows to banks, the developments concerning bad loans and privatizations, and the attraction of new investments.”

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“..absurd to talk about any threat coming from Russia at a time when dozens of people are dying in the center of Europe and when hundreds of people are dying in the Middle East daily..”

• Russia Hits Back At ‘Anti-Russian’ NATO ‘Hysteria’ (CNBC)

At a NATO summit in Warsaw, Poland on Friday, the military alliance is expected to formally agree to deploy four battalions with a total of 3,000 to 4,000 troops to the Baltic states (Estonia, Latvia and Lithuania) and Poland on a rotational basis. The deployment comes amid increasing concerns in those areas (all of which were under Soviet control during the Cold War) that Russia could be prepared to try to increase or regain its sphere of influence. In a statement on Thursday, NATO also said it would “strengthen political and practical cooperation with Ukraine, Georgia and the Republic of Moldova” – all former Soviet republics experiencing increasing tensions with Russia due to their political and economic relations with the EU.

In addition, the EU and NATO signed a declaration on Friday aimed at bolstering the region’s security ahead of the full NATO summit Friday afternoon. Left out in the cold from NATO and ostensibly the reason for such a deployment, Kremlin spokesman Dmitry Peskov reportedly hit back at the alliance, saying its actions were akin to “anti-Russian hysteria.” “If one needs badly to look for an enemy image so that [one can] promote anti-Russian, so to say, hysteria, and then, with this emotional background, to deploy more and more air force units, ground troop units, getting them closer to Russian borders, then one can hardly find any common ground for cooperation,” he was quoted by Russia’s Itar Tass news agency as saying.

Peskov was also quoted by Reuters as telling reporters that it was “absurd to talk about any threat coming from Russia at a time when dozens of people are dying in the center of Europe and when hundreds of people are dying in the Middle East daily,” adding that “you have to be extremely short-sighted to twist things in that way.”

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Debt Rattle April 12 2016

Apr 122016
 
 April 12, 2016  Posted by at 9:38 am Finance Tagged with: , , , , , , , , , ,  5 Responses »


Gottscho-Schleisner Fulton Market pier, view to Manhattan over East River, NY 1934

• US Bank Stocks Are Having A Terrible 2016 (WSJ)
• BofA Warns “Europe Looks Frightening” (ZH)
• The Party’s Over (BBG)
• Olivier Blanchard Eyes Ugly ‘End Game’ For Japan On Debt Spiral (AEP)
• Smash The Mafia Elite, Treat Offshore Wealth As Terrorist Finance (Mason)
• Aussie Hazards From Mortgages to Mines Lift Bond Risk (BBG)
• Australia’s Housing Bubble And The Road To Private Serfdom (Soos)
• Scientists Unveil New ‘Tree of Life’ (NY Times)
• How Kim Kardashian Gets Elected President (Jim Kunstler)
• Greece, Troika Adjourn Bailout Review Till After IMF Spring Meet (R.)
• Ten Billion Risks in Greece’s Summer of Discontent (BBG)
• ‘Europe Has To Change Course’: Greece and Portugal Unite To Lambast EU (Tel.)
• Tsipras Aiming For Debt Relief But Slams IMF (Kath.)
• Greece Hopes To Move Refugees From Piraeus, But Tension At Elliniko (Kath.)
• 95,000 Unaccompanied Children Applied For Asylum In Europe In 2015 (EUO)
• Italy Rescues 1,850 Migrants In Strait Of Sicily (AFP)

Luckily they’re TBTF. They don’t have to worry. We do.

• US Bank Stocks Are Having A Terrible 2016 (WSJ)

Bank stocks are having a terrible 2016, as central-bank policies, which for years lifted asset prices, are hurting the financial sector. The impact of economic stimulus efforts on lenders will get a fresh airing this week, as big U.S. banks begin reporting their earnings for the first quarter. Trading revenue is expected to have taken a hit, but the more enduring problem will be visible in the lenders’ net interest margins, the basic measure of bank profitability that gets flattened by low interest rates. The broader U.S. stock market has shaken off a steep slump at the beginning of the year and is back in positive territory. But banks and other financial companies are lagging far behind. The divergence highlights the dilemma facing central banks. Easy-money policies have fueled a rally in risky assets.

They are also squeezing profits at financial companies, inflicting pain on a sector that is fundamental to the health of the economy. Earnings for S&P 500 financial companies during the quarter ended March are expected to be down 8.5% from the same period last year, according to FactSet. Analysts have cut their projections for almost three-quarters of the companies in the financial sector, including J.P. Morgan Chase and Bank of America, both of which are scheduled to release earnings this week. “At the end of the day, it’s just a more difficult earnings environment for financials,” said Jeremy Zirin at UBS Wealth Management Americas. Bank shares face an array of challenges. Low and in some cases negative interest rates globally have eroded banks earnings, while a steep decline in commodity prices at the start of the year raised concerns over lenders exposure to soured loans in the energy and mining sectors.

In Europe, the picture has been complicated further by concerns over nonperforming loans broadly, particularly in economically stressed Southern Europe. Financial companies are the worst performers in the S&P 500, down 7.6% in 2016 as the broader index has risen 0.2%. The KBW Nasdaq Bank Index of large U.S. commercial lenders has fallen 15% this year. Some big banks have done even worse. Morgan Stanley has fallen 25% this year, giving up roughly three years of stock-price gains in the process. Bank of America is in a similar position, with its shares down 23%. Citigroup shares have dropped 22%.

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Very scary graph.

• BofA Warns “Europe Looks Frightening” (ZH)

"Europe looks concerning" warns BofAML's Stephen Suttmeier, pointing out, rather ominously that the broad European index – STOXX 600 – is trading like it did in 2001 & 2008.

 

 

The STOXX Europe 600 (SXXP) is trending below declining and bearishly positioned 26 and 40-week moving averages. ECB quantitative easing has not reversed this bearish trend. The 2016 set-up is similar to early 2001 and early 2008 with 350 important resistance and 300 important support. Both 2001 and 2008 saw rebounds into bearishly positioned and falling 26/40-week MAs that formed important lower tops in May.

We think this pattern could repeat or at least rhyme moving into May 2016. The breaks below 300 in September 2011 and June 2008 led to much deeper weakness and a similar break in 2016 could see the SXXP trend down toward 200.

Source: BofAML

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“Some of the more exotic activities from major corporations of late make much more sense when considered against a landscape of deteriorating returns.”

• The Party’s Over (BBG)

It’s when a party’s been going on too long that it’s most at risk of getting out of hand. The more interesting guests fade away, leaving the field dominated by a sketchier crowd. Behavior considered beyond the pale earlier in the evening is excused to inject more vigor into flagging spirits.Financial markets, which former Federal Reserve Chairman William McChesney Martin once likened to a drunken debauch, exhibit similar dynamics. Seven years into the current global economic recovery, the punch bowl is almost drained. The remaining revelers are starting to raid the cupboards for stronger stuff. For evidence that the balloons are bursting and the dance-floor lights are coming up, take a look at the return on equity of the S&P 500 Index.

The measure dropped below 12% on March 21 – the first time it’s crossed the line in that direction since June 2008. The occasions prior to that were May 2001 and April 1991, and all three instances coincided closely with U.S. recessions. You see a similar pattern in the FTSE 100 Index. Just 11 trading days during the 2009 nadir of global markets saw returns on equity slip below the current level of 5.5%. In Asia, the Hang Seng Index, Shanghai Composite and CSI 300 have all touched their lowest levels since 2009 this year, and remain just a sliver above their rock-bottom points.Among major equity indexes, only the Nikkei, which is not far below its highest levels since 2008, and Europe’s Stoxx 50, which has been bumping along at low levels since 2011, break the pattern.

Some of the more exotic activities from major corporations of late make much more sense when considered against a landscape of deteriorating returns. Take inversions, where U.S. companies carry out reverse takeovers of foreign businesses in order to benefit from low corporate tax rates overseas.Such deals, which activist investor Carl Icahn estimates have exceeded half a trillion dollars in recent years, don’t come cheap. Pfizer, the global pharmaceutical giant that dropped its $160 billion attempt to hop into bed with Allergan after the U.S. Treasury promised to claw back the lost revenue, will pay a $400 million break fee to its spurned partner, people familiar with the matter said last week. There’s also an estimated $120 million to $150 million Pfizer will have to shell out for the work its own bankers and lawyers have done.

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“The BoJ is soaking up the entire budget deficit under Governor Haruhiko Kuroda as he pursues QE a l’outrance.”

• Olivier Blanchard Eyes Ugly ‘End Game’ For Japan On Debt Spiral (AEP)

Japan is heading for a full-blown solvency crisis as the country runs out of local investors and may ultimately be forced to inflate away its debt in a desperate end-game, one of the world’s most influential economists has warned. Olivier Blanchard, former chief economist at the IMF, said zero interest rates have disguised the underlying danger posed by Japan’s public debt, likely to reach 250pc of GDP this year and spiralling upwards on an unsustainable trajectory. “To our surprise, Japanese retirees have been willing to hold government debt at zero rates, but the marginal investor will soon not be a Japanese retiree,” he said. Prof Blanchard said the Japanese treasury will have to tap foreign funds to plug the gap and this will prove far more costly, threatening to bring the long-feared funding crisis to a head.

“If and when US hedge funds become the marginal Japanese debt, they are going to ask for a substantial spread,” he told the Telegraph, speaking at the Ambrosetti forum of world policy-makers on Lake Como. Analysts say this would transform the country’s debt dynamics and kill the illusion of solvency, possibly in a sudden, non-linear fashion. Prof Blanchard, now at the Peterson Institute in Washington, said the Bank of Japan will come under mounting political pressure to fund the budget directly, at which point the country risks lurching from deflation to an inflationary denouement. “One day the BoJ may well get a call from the finance ministry saying please think about us – it is a life or death question – and keep rates at zero for a bit longer,” he said.

“The risk of fiscal dominance, leading eventually to high inflation, is definitely present. I would not be surprised if this were to happen sometime in the next five to ten years.” Arguably, this is already starting to happen. The BoJ is soaking up the entire budget deficit under Governor Haruhiko Kuroda as he pursues quantitative easing a l’outrance. The central bank owned 34.5pc of the Japanese government bond market as of February, and this is expected to reach 50pc by 2017.

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But the mob owns the house..

• Smash The Mafia Elite, Treat Offshore Wealth As Terrorist Finance (Mason)

Amid the cobbled passageways and tumbling tenements of the Italian city of Perugia, it’s possible to daydream you are in the middle ages. You are surrounded by medieval art and architecture. And then you think: hold on, what happened to the Renaissance? Sure, there are some imposing private palaces from the period 1300-1500, and sure Raphael left half a fresco in a tiny chapel. But it’s not Florence. The money was clearly here at some point but, some time after 1300, the artistic, cultural and scientific riches moved somewhere else. By 1500, the city was “smaller, poorer and politically narrower” than 200 years before, writes historian Sarah Rubin Blanshei. Why? Because the rich did not pay their taxes.

The Perugian elite became a closed stratum of mafiosi, earning their money from mercenary work abroad, jealously guarding their family inheritance, stifling social mobility. Sound familiar? As David Cameron’s fiasco over the Panama Papers collides with George Osborne’s over the budget, the danger is that we frame these merely as political scandals. In fact, the Panama Papers point to a deeper sickness. Globalised capitalism has become an organised and legalised form of corruption, in which the work of the manager, the inventor and the entrepreneur come second to that of people whose wealth “works for them” – preferably in a jurisdiction nobody can see. If you listen to Cameron’s defenders, their logic follows three contours: he did nothing illegal, nothing unparliamentary and nothing wrong.

I do not doubt his decision to invest in an offshore fund was legal. That he failed to register his shares in Blairmore on becoming an MP, and lobbied for the protection of offshore trusts while being an undeclared beneficiary of one, does merit investigation by Parliament. But it’s the insistence by the apopleptic right that he should not be criticised over tax avoidance – that “everybody does it” – that we should register as a kind of collective Marie Antoinette moment for the UK’s social elite.

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MO: “..the acquisition of defaulted debt at a discount..”

• Aussie Hazards From Mortgages to Mines Lift Bond Risk (BBG)

Those Australians struggling with mortgage payments and the possibility of damage from the global commodity price slump are helping to inflate bond risk for Macquarie Group’s banking unit. The cost of insuring Macquarie Bank notes against non-payment climbed to as much as 172 basis points last month, the highest since June 2013, after the lender flagged a rise in overdue home loans. The Sydney-based bank’s credit-default swaps have increased 39 basis points in 2016, the second most in the benchmark Markit iTraxx Australia index, and were at 155 basis points April 8. While Macquarie Group is predicted to post a record full-year profit, there’s increasing speculation about how well Australia’s lenders will cope with a mining downturn that’s already causing some resource-related firms to default on loans.

Large gyrations in global markets in the first quarter helped drive out credit spreads for banks, and there’s concern that home-loan books will be hurt by a stuttering Australian housing market. “Macquarie’s CDS was caught up in the February selloff with the big four banks and whilst the latter have regained ground in March, Macquarie remains at wides,” said Simon Fletcherat National Australia Bank. “This is likely to be in part due to some market nerves” after Macquarie revealed an increase in overdue loans in one of its recent regulatory filings, he said. While Macquarie’s total impaired mortgages fell in the final three months of 2015 compared with the previous quarter, the lender on Feb. 19 flagged an increase in overdue loans over the same timeframe. The bank’s 90-days-plus overdue residential mortgages almost doubled to A$476 million ($360 million) in the quarter ended Dec. 31. The main “driver” of the increase was due to the acquisition of defaulted debt at a discount, the lender said in a statement on its website last month.

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Do let it sink in: “With total household sector liabilities at $2.2 trillion dollars as of 2015, Q4, Australians are so indebted that the majority of principal will never be repaid.”

• Australia’s Housing Bubble And The Road To Private Serfdom (Soos)

Over the last 20 years, housing has developed a reputation as a risk-free and high-gain asset. Property remains a coveted asset and can now be purchased with a small deposit; the rest borrowed from banks. It certainly is an attractive investment: since 1996, housing prices, adjusted for inflation and quality, have soared by 141% through to 2015.

Many global housing markets corrected after the GFC, but Australia’s continued to boom, especially in Sydney and Melbourne. This resilience is attributable to the vested interests: the FIRE (finance, insurance and real estate) sector, numerous Federal and state government interventions, and leveraged home owners and investors, who believe housing price inflation benefits them.Almost every residential owner wants the gravy train to continue running to escape the drudgery of wage labour and achieve the coveted status of property baron.

Australia has one of the world’s most expensive housing markets, but unlike an Olympic gold medal, the nation should feel shame rather than pride in achieving this dubious feat. Residential property is so highly leveraged that even a small fall in its value would have adverse consequences, placing heavily-geared owners in the position of negative equity. Falling prices and credit defaults can reverberate throughout the economy, leading to a recession or worse. After all, a real estate slump drove other wealthy economies into a major downturn during the GFC, not the other way around.

The largest and most important purchase the average person will make is not even financed with their own money. Relative to GDP, the Australian household sector vies with Switzerland for accumulating the largest debt burden globally. As of 2015, Q4, this amounts to 124%, which is much higher than what many other nations peaked at before the bursting of their housing bubbles.

This massive indebtedness is ignored by both political parties, who endlessly claim we need to transition the Federal Government budget back to surplus as this represents “fiscal responsibility”. The reason is because nobody wants the value of their properties to sink and, instead, is supposed to repeat the hysteria about the “budget emergency”, “runaway public debt”, “record deficit” and so on. Public debt peaked in 1932 at 173% of GDP, when the economy was far less productive. Today, it is low compared to historical and global trends. With total household sector liabilities at $2.2 trillion dollars as of 2015, Q4, Australians are so indebted that the majority of principal will never be repaid. With nominal rent growth now turning negative and wage growth at record lows, it will become increasingly difficult to finance repayments, especially for first home buyers.

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“The “great Tree of Life,” he said, “fills with its dead and broken branches the crust of the earth, and covers the surface with its ever branching and beautiful ramifications.”

• Scientists Unveil New ‘Tree of Life’ (NY Times)

A team of scientists unveiled a new tree of life on Monday, a diagram outlining the evolution of all living things. The researchers found that bacteria make up most of life’s branches. And they found that much of that diversity has been waiting in plain sight to be discovered, dwelling in river mud and meadow soils. “It is a momentous discovery – an entire continent of life-forms,” said Eugene V. Koonin of the National Center for Biotechnology Information, who was not involved in the study. The study was published in the journal Nature Microbiology. In his 1859 book “On the Origin of Species,” Charles Darwin envisioned evolution like a branching tree. The “great Tree of Life,” he said, “fills with its dead and broken branches the crust of the earth, and covers the surface with its ever branching and beautiful ramifications.”

Ever since, biologists have sought to draw the tree of life. The invention of DNA sequencing revolutionized that project, because scientists could find the relationship among species encoded in their genes. In the 1970s, Carl Woese of the University of Illinois and his colleagues published the first “universal tree of life” based on this approach. They presented the tree as three great trunks. Our own trunk, known as eukaryotes, includes animals, plants, fungi and protozoans. A second trunk included many familiar bacteria like Escherichia coli. The third trunk that Woese and his colleagues identified included little-known microbes that live in extreme places like hot springs and oxygen-free wetlands. Woese and his colleagues called this third trunk Archaea.

[..] The scientists needed a supercomputer to evaluate a vast number of possible trees. Eventually, they found one best supported by the evidence. It’s a humbling thing to behold. All the eukaryotes, from humans to flowers to amoebae, fit on a slender twig. The new study supported previous findings that eukaryotes and archaea are closely related. But overshadowing those lineages is a sprawling menagerie of bacteria. Remarkably, the scientists didn’t have to go to extreme places to find many of their new lineages. “Meadow soil is one of the most microbially complex environments on the planet,” Dr. Hug said.

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How crazy it can get is anybody’s guess.

• How Kim Kardashian Gets Elected President (Jim Kunstler)

[..] It must be obvious that the next occupant of the White House will preside over the implosion of all these arrangements since, in the immortal words of economist Herb Stein, if something can’t go on forever, it will stop. So the only individuals left seeking the position are 1) An inarticulate reality TV buffoon; 2) a war-happy evangelical maniac; 3) a narcissistic monster of entitlement whose “turn” it is to hold the country’s highest office; and 4) a valiant but quixotic self-proclaimed socialist altacocker who might have walked off the set of Welcome Back Kotter, 40th Reunion Special. These are the ones left standing halfway to the conventions. Nobody else in his, her, it, xe, or they right mind wants to be handed this schwag-bag of doom.

On Saturday, the unstoppable Democratic shoo-in Hillary lost her 7th straight contest to the only theoretically electable Vermont Don Quixote, Bernie Sanders. This was a week after it was reported in The Huff-Po that her campaign crew literally bought-and-paid for the entire 50-state smorgasbord of super-delegates who will supposedly compensate for Hillary’s inability to otherwise win votes the old-fashioned way, by ballots cast. Wonder why that didn’t make nary a ripple in the media afterward? Because this is the land where anything goes and nothing matters, and that’s really all you need to know about how things work in the USA these days.

The Republican mandarins are apparently delirious over loose cannon Donald Trump’s flagging poll numbers in the remaining primary states. Should Trump fall on his face, do you think they’ll just hand Ted Cruz the Ronald Reagan Crown-and-Scepter set. (They’d rather lock Ted in the back of a Chevy cargo van with five Mexican narcos and a chain saw.) The GOP establishment insiders are already lighting cigars in preparation for the biggest smoke-filled room in US political history, Cleveland, July 20. But what poor shmo will they have to drag to the podium to get this odious thing done? Who wants to be the guy in the Oval Office when Janet Yellen comes in some muggy DC morning and says, “Uh, sir (ma’am)… that sucker you heard was gonna go down…? Well, uh, it just did.”

As for the Dems: they are about to anoint the most unpopular candidate of our lifetimes. The BLM mobs have promised to deliver mayhem to the streets of the party conventions and don’t think they will spare Hillary in Philary, no matter how many chitlins she scarfed down last month in Carolina. The action in Philly will unleash and reveal all the deadly power of President Obama’s NSA goon squads when the militarized police put down the riots, and Hillary will be tagged guilty by association. And that is how Kim Kardashian gets elected president.

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The Troika always only intended to hang Greece out to dry.

• Greece, Troika Adjourn Bailout Review Till After IMF Spring Meet (R.)

Greece and its international lenders adjourned talks on a crucial bailout review early on Tuesday and will resume them immediately after this week’s IMF spring meeting, the Greek finance minister said. Lenders, who had been in Athens for just over a week, will return next Monday after the IMF spring meeting in Washington with a view to concluding an agreement by April 22, when eurozone finance ministers are scheduled to meet, Finance Minister Euclid Tsakalotos told reporters. “The Greek government and the four institutions agreed there was progress,” Tsakalotos said, referring to European institutions and the IMF.

Greece’s review of progress, under a bailout deal reached in July, has dragged on for months mainly because of differences among the lenders over its projected fiscal shortfall by 2018 – initially seen at 3% by the EU and 4.5% by the IMF – and resistance from Athens on unpopular measures. The differences among the lenders themselves remained. With Athens, divergences hinged on the depth of pension reform and regulating non-performing loans, particularly those involving primary home mortgages, sources close to the talks have said. “It would have been good to conclude on a deal today … we have made many concessions until now,” a Greek government official participating in the Athens-based talks said. A source close to the talks said ‘most issues’ remained open. A positive review will unlock up to €5 billion in aid. Athens needs the money to repay €3.5 billion to the IMF and the ECB in July, as well as unpaid domestic bills.

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June 23: UK referendum.

• Ten Billion Risks in Greece’s Summer of Discontent (BBG)

Europe is gearing up for a summer of discontent. There’s the U.K. referendum on EU membership, a simmering refugee crisis and an increasingly desperate ECB. Taken together, this list gives reason enough to be fearful about the health of the European project in the coming months. But there is also Greece, which is caught in a spat between Germany and the IMF over debt relief as it seeks yet more bailout money. Greece – whose economic crisis already threatened to destroy the irrevocable nature of euro membership – still seems to be dragging its feet over state asset sales and pension reform. It is hemorrhaging cash from its banking system. Athens has to find more than €5 billion to meet its debts in June – and another €5 billion in July.

That’s €10 billion Greece doesn’t have; not, perhaps, a princely sum for a larger, healthier European state but that’s 20% of Greece’s annual tax income. Now, there’s an argument that with so much else going on in the European theatre, Brussels will be keen to fudge a solution just to get Greece off the agenda. IMF may not be so willing to oblige, however. If May comes and goes without a deal – be it because of German intransigence on debt relief, IMF stubbornness on budget targets, or Greek brinksmanship — Greece and its creditors may run out of time to avoid default. As Greece’s debt repayment deadlines approach, EU officials may be busy fighting fires kindled by Britain’s June 23 referendum on EU membership. The outcome of that vote is far from certain.

Bloomberg’s composite tracker of opinion polls puts votes to remain in the EU at 39 points, those wanting to leave at 38, with “don’t knows” holding the balance of power at 23. With Prime Minister David Cameron embroiled in a domestic row about his personal taxes in the wake of the so-called Panama Papers, government popularity is likely to take a hit. That can only help the anti-EU campaign; it won’t take many undecided voters to swing the outcome. The European Commission’s regular survey of attitudes to the EU, known as the eurobarometer, has already taken a turn for the worse, with the most recent poll showing rising discontent: The proportion of Europeans for whom the EU conjures up a negative image has risen to 23% (+4); before this, it had declined continuously in the four previous surveys.

Renewed concern about the European project is just starting to surface in the bond market. Investors are now charging Portugal 3.3 percentage points more for 10-year money than they demand from Germany, a spread that’s well above its six-month average of 2.2 points. Italy’s risk premium rose to 1.3 points last week, up from December’s low of 0.9 points, while Spain is at 1.4 points, up from 1.2 points a month ago. That’s not enough to ring alarm bells; but it’s odd at a time when the ECB is increasing its sovereign bond purchases.

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But Europe won’t. So what’s next?

• ‘Europe Has To Change Course’: Greece and Portugal Unite To Lambast EU (Tel.)

Europe must move away from “self-defeating” austerity and embrace “progressive” reform, the prime ministers of Greece and Portugal have declared. Europe is at “a critical crossroads” and needs to decide whether to embrace “closer political, fiscal and social integration” or pursue fragmentation and “narrow national interest”, Greek prime minister Alexis Tsipras and his Portuguese counterpart António Costa said in a joint statement. Both Portugal and Greece have received bail-outs from the European Union following the crash of 2008. Portugal exited its €78bn bail-out programme in May 2014, while Greece is struggling to close a crucial review of its third bail-out in five years.

“We, as prime ministers of two countries with a similar policy experience in the context of their respective adjustment programmes, share the conviction that austerity-only policies are wrong and insufficient to overcome the existing challenges,” said Mr Tsipras and Mr Costa. They added: “Europe has to change course. Instead of merely adjusting to self-defeating competitiveness and austerity measures, our two countries take the decision to closely co-operate at all levels, bilateral and European, to put forward a progressive programme of democratic Eurozone Governance, economic revival, employment creation, centered on quality jobs, and socially just and environmentally responsible growth in Europe and in our countries.”

The prime ministers also criticised the response of some EU member states to the migrant crisis, with Mr Tsipras saying that the use of teargas and plastic bullets by Macedonian police during clashes with refugees at the Idomeni makeshift camp was a disgrace to European civilisation. The Portuguese prime minister is in Athens on an official visit. Speaking after his meeting with Mr Costa, the Greek prime minister slammed the role of the IMF in Greece’s bail-out talks. “In Greece wrong policies were applied and it is a paradox that those who recognized that there were wrong policies, admitting their mistake, insist on applying the mistake,” said Mr Tsipras.

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Does Tsipras still have meaning?

• Tsipras Aiming For Debt Relief But Slams IMF (Kath.)

As negotiations between Greece and its quartet of lenders dragged on into Monday night, Prime Minister Alexis Tsipras again took aim at the International Monetary Fund for its “mistaken policies,” saying it was “time to get serious as the livelihoods of millions of people were at stake.” His remarks follow similar comments made by government officials last week to the effect that the IMF’s demands for more reforms were an obstacle to a deal. Tsipras said the Fund’s policies were damaging not only Greece but Europe as well. The stakes, he said, are too high for the third bailout program not to succeed, otherwise not just Greece but Europe will suffer as well – at a time when it is faced with three parallel crises – financial, security and refugees.

“And right before a crucial referendum [in Britain], I think what is most important is stability and recovery and the prospects of its [Europe’s] people.” But IMF chief Christine Lagarde was adamant on Monday that Greece must implement more reforms, even though she admitted that the Fund had made mistakes in its handling of the Greek crisis. “Greece cannot just continuously tag along and expect that things will be sorted out. The Greek leaders will need to take more ownership of re-establishing their country,” she said. The government is racing against time to complete the first review of its third bailout package by Easter so as to push for debt relief discussions at the IMF’s Spring Meeting in Washington this weekend.

According to the Greek government, last July’s bailout deal clearly stipulates that debt relief would be on the table for discussion once the first review was concluded. “[The deal] is absolutely clear: It says that after the successful conclusion of the first review, the discussion on the debt will begin without terms and preconditions,” Tsipras said during a joint press conference with his Portuguese counterpart Antonio Costa, who is on an official visit to Athens.

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Our friend Kostas and his Social Kitchen crew serve a lot of meals at Ellliniko, among other sites. The situation is fluent and volatile, but they keep trying every day.

• Greece Hopes To Move Refugees From Piraeus, But Tension At Elliniko (Kath.)

Authorities are hoping to convince hundreds of refugees and migrants to leave the unofficial camps at Idomeni and Piraeus in the coming days, as tension builds up at other facilities. The government aims to transport around 1,500 people from the camp at the Piraeus passenger terminal by the end of the week and said that four buses full of migrants had left Idomeni in northern Greece on Monday. The refugees from Piraeus will be taken to Skaramagas, west of Athens, where the army has created another temporary facility to house the migrants who have found themselves trapped in Greece. Officials are hoping the fact that some refugees have already moved to the camp and found conditions to be good will help them persuade others to leave the overcrowded site at Piraeus, where more than 4,100 people are currently camped.

However, concerns mounted on Monday over the situation at a reception center for refugees and migrants at the site of the capital’s old airport in Elliniko, southern Athens, where thousands of desperate people are living in cramped and tense conditions. In a letter to the Interior, Immigration and Defense ministries, the head of the real estate company designated to oversee the management of the Elliniko plot described the situation at the site as “out of control and harboring serious risks.” In the letter, Soultana Spyropoulou noted that a three-month agreement to host migrants at the site expired at the end of March and had envisaged 700 people, not the approximately 6,000 currently residing there. Police officers who have been assigned to guard the site report daily brawls between groups of migrants as well as thefts and even cases of rape.

Read more …

Some 10% of whom are already lost. European values.

• 95,000 Unaccompanied Children Applied For Asylum In Europe In 2015 (EUO)

At least 95,000 unaccompanied children applied for asylum in Europe last year, four times the numbers for 2014. The huge increase was discovered by the Bureau of Investigative Journalism during an investigation into the level of migration among unaccompanied children, defined as those under 18 years old, in Europe and the stark inconsistencies in the way they are treated. From approaching 29 different governments for statistics, the investigators found that at least 95,070 applied for asylum in Europe in 2015, up from 23,572 in 2014. The figure is much higher than previous estimates, and provides the clearest picture yet of the actual scale of migration among unaccompanied minors during last year’s refugee crisis. Only 17 of the 29 countries provided data. Spain refused to cooperate, while France said publication of official data would be later this year.

Eurostat will also complete its own figures later this year. The children are treated very differently by national authorities, with some using controversial methods such as wrist bone X-rays to determine age. The numbers raise serious questions, not only for the ability of countries to cope with the influx, but also around the children’s welfare and their uncertain future. The UK-based Bureau of Investigative Journalism has been investigating the issues faced by unaccompanied minors for two years. The focus had been on the UK but was expanded to continental Europe late last year. It approached 27 EU member states for numbers, plus Norway and Switzerland. Almost all of the larger countries were among the 17 that provided details. Of those 17, Sweden registered the most asylum applications by lone children in 2015 – 35,369. This was followed by 14,439 in Germany, 9,331 in Austria and 8,804 in Hungary.

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The Big Shift.

• Italy Rescues 1,850 Migrants In Strait Of Sicily (AFP)

The Italian coastguard Monday rescued 1,850 migrants in eight operations in the Strait of Sicily, as a wave of boats departing from the Libyan coast intensifies. Two small boats carrying a total of 740 people were intercepted by the coastguard ship Diciotti, while Italian Navy vessel Cigala Fulgosi came to the aid of two inflatable dinghies with 255 people on board, a coastguard statement said. A merchant ship was diverted to help another 117 people, while an EU naval force vessel picked up 738 migrants trying to cross on two barges and a small boat.

According to UN refugee agency data at the end of March, some 17,500 people have arrived in Italy since the start of the year. Two weeks ago nearly 1,600 migrants were rescued in the same area, adding to fears that calmer seas at the onset of spring are encouraging greater numbers of migrants to attempt the perilous crossing after a winter lull. There are also concerns that European efforts to shut down the migrant sea crossing from Turkey to Greece will encourage more people to attempt the more dangerous Mediterranean passage from Libya to Italy.

Read more …

The Balkanization of Europe

Feb 252016
 
 February 25, 2016  Posted by at 2:58 pm Finance Tagged with: , , , , , , , , ,  4 Responses »


Danae Stratou, Ilargi, Yanis Varoufakis and Steve Keen Feb 16 2016

When my mate Steve Keen took me to meet Yanis Varoufakis for dinner last week when we all happened to find ourselves in Athens together, I at least sort of regretted not having the time and space to talk to Yanis about his DiEM25 project for the democratization of Europe. It was a private occasion, there were other people at the dinner table, Steve and Yanis had no seen each other for a while, it was simply not about that.

I did think afterward that it would be great to do this kind of get together more often, and get ideas running, but then realized we are all workaholics and we all live thousands of miles apart, so the odds of that happening are slim at best. And that in turn made me think of how inspiring the years were when I toured the world with my Automatic Earth partner in crime Nicole Foss, how important it is to have people around to bounce off your ideas of what’s going on, how much faster that crystallizes your own ideas.

But as things are, and as they happened, I didn’t have that time with Yanis. And not nearly enough with Steve either, for that matter, who has/is a brain that I would love to pick for days if not weeks, he’s such a brilliant mind. When you have just a few hours, though, the time is filled with drinking wine and catching up with what’s happened in each other’s personal lives, it had been 3 years since we met, and professionally, since Steve knows Nicole very well, they did quite a few presentations together, yada yada.

Immensely gratifying, of course, to be able to renew a friendship like that, but almost as frustrating to not be able to expand on it.

But to get back to Yanis: I think I have two major problems with his DiEM25 project. One is that, as I have written umpteen times before, the very structure of the EU (self-)selects for sociopaths to take up its leading positions. None of them have been democratically elected, and that would be very hard to begin with because no Greek or Portuguese has ever heard of, or has any connection with, some guy from Finland or Poland with a name they can’t pronounce. It wouldn’t just take democratization, you’d have to rewrite the entire machine from scratch.

The second is that I don’t think the EU will last long enough to pull through the democratization process he envisions, and appear at the ‘other end of the tunnel’ in 2025. I just don’t see it. For one thing, because the whole world is set to be hit with the most severe financial crisis in its history between now and then, and Europe will be in the eye of the storm center of that crisis. Talk about democratization, well-intended and needed as it may seem, will be on a back-back burner when that hits.

I first said about a year ago that Angela Merkel should call a UN emergency meeting over the refugee crisis, but she still hasn’t yet. The EU problem in a nutshell: Merkel is the de facto leader of both the EU and Germany. When EU interests, or interests of one or more other EU nations clash with German ones, she has no choice but to pick the German side. Because the Germans elected her, not Europe.

You can either hand over German sovereignty to Brussels or you can fall into trap after trap. These traps will not hurt Germany most -since Merkel calls the shots-, they will hurt the poorer nations first and most. But it is still the worst model one could ever have invented. And since neither Germany nor any other EU member is willing -or ever will be- to give up that sovereignty, there’s only one option: leave the EU.

There are many ways in which European sovereign nations can work together, open borders, promote trade and all these things. The worst possible way is through a bureaucracy like the EU, which may promise an equal voice and treatment and opportunities for all countries, but down the line will always be controlled by the biggest ones. It’s not a coincidence that Germany has a trade surplus.

The clampdown on Greece to keep French and German banks safe should have made clear once and for all where the EU fails. If it’s any consolation: the big economies, too, will fall.

But chances are that before that happens, the union will have splintered apart back into its separate member states. Britain toys with the Brexit idea, the Czechs say if Britain leaves there’ll be a Czexit, Holland wants a referendum on EU membership (Hexit), Marine Le Pen patiently waits for the French economy to go south so she can be elected president and fulfill her promise to take France into a Frexit. And those are just a few examples. Trouble brews just about everywhere.

And there is of course no bigger trouble than the refugee situation. If only European nations would stop bombing the places the refugees were from, that would send a signal that they’re serious about this. But instead after the Paris attacks France and Britain increased their bombing efforts in Syria, supported by Germany and Holland. If that doesn’t say enough about where their priorities lie, what can?

The Balkanization of Europe is well on its way in, appropriately, the Balkan area and surrounding nations. A conference on closing borders in Austria yesterday was attended by Albania, Bosnia, Bulgaria, Kosovo, Croatia, Macedonia, Montenegro, Serbia and Slovenia. But not Greece or Germany. These are not all EU members, but most would like to be. Greece doesn’t like it one bit, it has threatened to block all EU decision until this is resolved, and recalled its ambassador to Vienna today..

Six countries has (re-)introduced border checks: Belgium, France, Austria, Denmark, Norway and Sweden. Many more have have erected razor wire fences. Hungary has the loudest voice; it announced a referendum on refugee quota yesterday. Quota that by the way are not worth the paper they’re written and translated into 20-odd languages on. Out of 160,000 agreed on, only some 500 refugees have been relocated.

The EU’s response so far has been a sort of para-military police force, Frontex, and now even NATO. As if refugees are a military threat. It’s amusing to see that many nations accuse Greece of not closing its borders properly, but never explain how that should be done when that border happens to be at sea. Just like they’ve never sent the people or equipment they vowed to make available. The EU in the end is proving to be toothless.

A German newspaper reports that a government document in Berlin talks about 3.6 million refugees in the country by 2020. That can only make one wonder what Europe will look like in 2020. But more importantly, we should wonder what Greece will look like in, say, a month from now. Since Frontex and NATO can’t stop the refugee flow any more than Greece itself can, and borders to countries to the north are closed, tens if not hundreds of thousands of people may get stranded in the country.

Europe has played a major role in turning Ukraine into a failed state, and did the same in Libya, Iraq and Syria. Unless someone shows some leadership soon and the chaos is stopped from spreading further, Greece could well be next on the list.

What I personally find deep black hilarious is that many if not all of the countries involved have signed a whole slew of both European and international laws, but even something as elementary as the Geneva convention gets thrown out the window seemingly at will. Just as black is the question: do refugees also have the right to asylum when they’re fleeing your own bombs?

The worst choice the EU -and Berlin- have made is to ally with Turkey’s Erdogan the way they have. And to force this inane alliance on Greece too. Erdogan plays everyone off against everyone while pocketing millions from ISIS oil sales to refugee smuggling, and now stands to be paid €3 billion per year to -not- stop refugees from ‘sailing’ from Turkey to Greece. Erdogan will soon start talking about Aegean territorial rights too.

There are bad partnerships -the US and EU with Saudi Arabia, just to name another example-, but relying on Turkey to stop the refugee flow is a real whopper. You could just not bomb Syria, and ask Jordan and Lebanon how you can assist with the refugee situation that’s overwhelming their nations, and even rebuild what you’ve just bombed.

Making a deal with Erdogan only seems to highlight that Europe really couldn’t care less. That they truly see the crisis as their crisis, and not that of the refugees. That it’s the people living in Berlin and Vienna and Amsterdam who get the short end of the stick, not those no longer living in Aleppo.

So when do we get to see a real Balkanization, with armies in streets and confronting each other on borders? And what will the EU ‘leadership’ and Hollande and Merkel do when that time comes?

No, I don’t see an EU left in 2025 ‘to be democratized’. I see a lot of old rifts in Europe’s future. And that’s without even having asked how Europe is going to ‘save’ its banks -and banking system- this time around. Or how they’re planning to tell their present and future pensioners that sorry, but the coffers are empty.

These things will start to play out well before 2025. It won’t be a good time to be a refugee living in Europe.

Debt Rattle February 17 2016

Feb 172016
 
 February 17, 2016  Posted by at 10:49 am Finance Tagged with: , , , , , , ,  3 Responses »


DPC Snow removal – Ford tractor Washington, DC 1925

• Banks’ Balance Sheets Are Poor Guides To Actual Risks And Uncertainties (FT)
• Banks Are Still The Weak Links In The Economic Chain (FT)
• The Eurozone Can’t Survive Another Banking Crisis (MW)
• I’m in Awe at Just How Fast Global Trade is Unraveling (WS)
• Tilting At Windmills: The Faustian Folly Of Quantitative Easing (Steve Keen)
• If Zero Interest Rates Fixed What’s Broken, We’d Be in Paradise (CHS)
• China Turns on Taps and Loosens Screws in Bid to Support Growth (BBG)
• China Debt Binge Spurs S&P Warning (BBG)
• China Loses Control of the Economic Story Line (WSJ)
• China’s Big Bet On Latin America Is Going Bust (CNN)
• Pimco’s $12 Billion Standoff Over Austria Bad Bank (BBG)
• Things Are Coming Unglued for Canadian Investors (WS)
• Calgary Housing Market Collapses As “Three-Alarm Blaze” Burns In Vancouver (ZH)
• What Are We Smelling? (Dmitry Orlov)
• Not a game (Papachelas)

Good piece on derivatives. I’m always suspicious of claims that outstanding contracts are down $150 trillion or so. Derivatives, and certainly swaps, are a great way to hide risks and losses. Why let go of that? Who can even afford to do it?

• Banks’ Balance Sheets Are Poor Guides To Actual Risks And Uncertainties (FT)

According to the latest data from the Bank for International Settlements, the central bankers’ central bank, the total amount of outstanding derivative contracts has declined from a 2012 peak of $700tn to about $550tn. To put this into perspective, the figure has fallen from just under three times the value of all the assets in the world to a little over twice the value. The largest element is interest rate swaps followed by foreign exchange derivatives. Credit default swaps, the instrument at the heart of the 2008 global financial crisis, are now relatively small – if you can accustom yourself to a world in which $15tn is a small number. It is only slightly less than US GDP (a little more than $18tn in the final quarter of 2015). Two banks, JPMorgan and Deutsche Bank, account for about 20% of total global derivatives exposure.

Each has more than $50tn potentially at risk. The current market capitalisation of JP Morgan is about $200bn (roughly its book value); that of Deutsche, $23bn (about one third of book value). From one perspective, Deutsche Bank is leveraged 2,000 times. Imagine promising to buy a house for $2,000 with assets of $1. Before you head for the hills, or the bunker, understand that there is no possibility that these banks could actually lose $50tn. The risks associated with these exposures are largely netted out — that is, they offset each other. As you promised to buy the house in question, you also promised to sell it: though not necessarily at just the same time or price or to the same person. That mismatch is the source of potential profit. How effectively are these positions netted? Your guess is as good as mine, and probably not much worse than those in charge of these institutions.

We are reliant on their risk modelling but these models break down in precisely the extreme situations they are designed to protect us against. You will not find these figures for derivative exposures in the balance sheets of banks nor do such exposures enter directly into capital adequacy calculations. The apparent lack of impact on balance sheet totals is the product of the combination of fair value accounting and the tradition of judging the security of a bank by the size of its credit exposure (counterparty risk) rather than its economic exposure (loss from market fluctuation). The fair value today of an agreement that has an equal chance of you paying me £100 or me paying you £100 is zero. Since your promise to pay or receive £100 is marked to market at nil there is no credit risk: you cannot default on a liability to pay nothing.

Under generally accepted accounting principles in the US, you are allowed even to net out exposures to the same counter party in declaring your derivative position. This is not permitted under international financial reporting standards, which is why the balance sheets of American banks appear (misleadingly) to be smaller than those of similar European institutions. The fundamental problem is accounting at “fair value” when that fair value is the average of a wide range of possible outcomes. The mean of a distribution may itself be an impossible occurrence — there are no families with 1.8 children, for example. And netting offsetting positions may also mislead. There is a large difference between being a dollar millionaire and having assets of $100m and liabilities of $99m.

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“..a vital consideration, particularly in the US market, is that Robert Shiller’s cyclically adjusted price-earnings ratio is at levels substantially exceeded only in the stock market bubbles that peaked in 1929 and 2000..”

• Banks Are Still The Weak Links In The Economic Chain (FT)

Why have the prices of bank shares fallen so sharply? A part of the answer is that stock markets have declined. Banks, however, remain the weak link in the chain, fragile themselves and able to generate fragility around them. Between January 4 and February 15 2016, the Standard & Poor 500 index fell 7.5% while the index of bank stocks fell 16.1%. Over the same period, the FTSE Eurofirst 300 fell 9.5%, while the index of bank stocks fell 19.5%. The decline of European stocks was a little bigger than that of US ones but the underperformance of the European banking sector was similar. Relative to the overall US market, the index of shares in US banks fell 9.1%, while that of European banks fell 11% relative to European markets — and so only a bit more. The dire performance of European banks becomes more evident if one takes a longer view.

Bank stocks have failed to recover the huge losses they suffered in the wake of the financial crisis of 2007-09. On February 15 2015, the S&P 500 was 23% higher than on July 2 2007 but the US banking sector was still 51% below where it had been then; the FTSE Eurofirst was 21% below its 2007 level, reflecting the botched European recovery, but its banking sector was down by 71%. In the European case a decline of 40% in the value of bank stocks would return them to the 2009 nadir. So what might explain what is going on? The short answer is always: who knows? Mr Market is subject to huge mood swings. Yet a vital consideration, particularly in the US market, is that Robert Shiller’s cyclically adjusted price-earnings ratio is at levels substantially exceeded only in the stock market bubbles that peaked in 1929 and 2000. Investors might simply have realised that the downside risks to stocks outweigh the upside possibilities. Plausible worries could also have triggered such a realisation. Of such worries, there is no lack.

One might be anxious about a slowdown in the American economy, partly driven by the strong dollar, weakening corporate profits and a misguided commitment to tightening by the US Federal Reserve. One might fear the short-term damage being done by collapsing commodity prices, which are imposing economic and fiscal stresses on commodity-exporting countries and financial pressures on commodity-producing companies. One might be concerned over the need for sovereign wealth funds to liquidate assets to fund fiscally stressed governments, particularly of the oil exporters. One might worry about a big slowdown in China and the ineffectiveness of its government’s policies. One might fear a new crisis in the eurozone. One might be worried about geopolitical risks, including the threat of war between Russia and Nato, disintegration of the EU and the chance that the next US president will be a hardline populist.

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And that crisis is inevitable.

• The Eurozone Can’t Survive Another Banking Crisis (MW)

In the end, it was not quite another 2008. There were no queues around the block in Hanover or Dusseldorf as people tried to withdraw their life savings from the bank, and there was no Lehman moment where angry and bewildered looking bankers were turfed out onto the streets of Frankfurt. Even so, the wobble in the German banking system over the last week, centered in particular over the stability of the mighty Deutsche Bank, was still a troubling moment for the eurozone. Why? Because it now looks like the single currency would find it very hard to survive another banking crisis. That is not because the central bank would not step up to the plate. There can be no question that Mario Draghi would print all the euros needed to bail out the banks if he had to. It is because the politics would make it impossible.

The Greek banks were allowed to close for a long period last year, and capital controls were introduced, so if the ECB were to fully rescue French and German banks while it placed restrictions on Greek ones, the contrast would become too painful to ignore. If any banks go down, they will take the euro with them. This has certainly been a bad month to be a shareholder in Deutsche Bank, or indeed any of the major eurozone lenders. Last week, shares in Deutsche fell off a cliff. From more than €20 last month, they slumped all the way down to slightly more than €13. The prices of its convertible bonds sank to an all-time low, and the cost of its credit default swaps soared, as at least some people in the market seemed to want to make a bet against its survival.

The situation became so bad that at one point its chief executive John Cryan was wheeled out to reassure everyone the bank was “rock solid,” the kind of statement that could have been purposefully designed to put everyone on edge. The carnage was even worse in the Italian banking system, always fragile at the best of times, and by the close of the week started to spread to France as well. It was not quite 2008 all over again, but it was also too close to it for comfort. The reasons for the nervousness were not hard to work out. The one thing we learned in 2008 is that the financial system is interconnected, and that losses in one market can easily turn up somewhere else. Oil and commodity prices have slumped across the world, and it would be surprising if at least some of those losses were not showing up in the banking system somewhere.

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“The decline in exports is particularly troubling for Abenomics. It never cared about consumers. To heck with them. It’s all about exports and Japan Inc. ”

• I’m in Awe at Just How Fast Global Trade is Unraveling (WS)

It simply doesn’t let up. Global trade is skidding south at a breath-taking speed. China produced a doozie: The General Administration of Customs reported on Monday that in yuan terms, exports dropped 6.6% in January from a year ago while imports plunged 14.4%. In dollar terms, it was even worse due to the depreciation of the yuan since August: exports plunged 11.2% and imports 18.8%, far worse than economists had expected. And so the trade surplus, powered by those plunging imports, jumped 12.2% to a record $63.3 billion. This came on top of China’s deteriorating trade numbers last year, when exports had fallen 1.8% in yuan terms while imports had plunged 13.2%. Imports have now declined for 15 months in a row. That’s tough for the world economy.

OK, Chinese trade data can be heavily distorted by fake invoicing of “imports” from Hong Kong, a practice used to maneuver around capital controls and send money out of China. Imports from Hong Kong in January soared 108% from a year ago, even as shipments from other major trading partners declined. Bloomberg: “China has acknowledged a problem with fake invoicing in the past. In 2013, the government said export and import figures were overstated due to the phony trade to bring money into the mainland. Trade data for December suggested the practice had flared up again, this time to get money out.” In January, we have the additional fudge factor of the Lunar New Year. Chinese companies were closed all last week. It caused all kinds of front-loading in December and early January followed by a wind-down in late January and early February.

Oh, and India: “On Monday, the Ministry of Commerce and Industry in Asia’s third largest economy reported that exports of goods plunged 13.6% in January year-over-year, the 14th month in a row of declines. To blame are crummy global demand, including in the US and Europe, and as always a weaker currency somewhere, this time in China. And Japan. The economy shrank in the October through December quarter, the second quarterly decline so far this fiscal year, which started April 1. Over the past nine quarters, five booked declines; over the past 20 quarters, 10 showed declines. Most sectors got hit: consumption, housing investment, exports…. The decline in exports is particularly troubling for Abenomics. It never cared about consumers. To heck with them. It’s all about exports and Japan Inc.

But two weeks ago, the Ministry of Finance reported that in December exports had dropped 8% year over year while imports had plunged 18%. In the first half of 2015, exports still rose 7.9%; but in the second half, they declined 0.6%. Turns out, the bottom fell out during the last three months of the year: exports dropped 2.2% in October, 3.3% in November, and 8.0% in December. In December, exports to the rest of Asia plunged 10.3%! Within that, exports to China plunged 8.6%. Asia is Japan’s largest export market by far, accounting for over 52% of total exports and dwarfing exports to the US and Canada, at 23% of total exports.

Read more …

Not only is he a great guy to hang out with, everything Steve writes is must read because he corrects so many fallacies spread by economists and media.

• Tilting At Windmills: The Faustian Folly Of Quantitative Easing (Steve Keen)

As I explained in my last post, banks can’t “lend out reserves” under any circumstances, which undermines a major rationale that Central Bank economists gave for undertaking Quantitative Easing in the first place. Consequently, the hope that Bernanke expressed in 2009 is “To Dream The Impossible Dream”:
To dream the impossible dream
To fight the unbeatable foe
To bear with unbearable sorrow
To run where the brave dare not go

But without the poetry: Large increases in bank reserves brought about through central bank loans or purchases of securities are a characteristic feature of the unconventional policy approach known as quantitative easing. The idea behind quantitative easing is to provide banks with substantial excess liquidity in the hope that they will choose to use some part of that liquidity to make loans or buy other assets. (Bernanke 2009, “The Federal Reserve’s Balance Sheet: An Update”)

What a folly this was—almost. The one out that Bernanke gives himself from pure delusional babble is the phrase “or buy other assets”—because that’s the one thing that banks can actually do with the excess reserves that QE has generated. But rather than rescuing Central Bankers from folly, this escape clause is an unwitting pact with the devil: they are now caught in a Faustian bargain. Any attempt to terminate QE is likely to end in deflating the asset markets that it inflated in the first place, which will cause the Central Banks to once more come “riding to the rescue” on their monetary Rocinante.

While Central Bankers can personally still join Faust and ascend to Heaven—thanks to their comfortable public salaries and pensions—the rest of us have been thrust into the Hell of expanding and bursting speculative bubbles, hoist on the ill-designed lance of QE. Bernanke is a rich man’s incompetent Frank N. Furter: confronting a wet and shivering couple, he promises to remove the cause—but not the symptom:

So, come up to the lab,/ and see what’s on the slab!/ I see you shiver with antici… …pation./ But maybe the rain/ isn’t really to blame,/ so I’ll remove the cause…/ [chuckles] but not the symptom. (“Sweet Transvestite”)

Bernanke’s QE instead maintains the symptoms of the crisis, but does nothing about its cause. It generates rampant inequality, drives asset prices sky-high and causes frequent financial panics—while doing nothing to reduce the far too high a level of private debt that caused the crisis. Let’s put QE on the slab in my lab—my Minsky software—and track the logic of the monetary flows that QE can trigger.

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Crush depth is a great metaphor.

• If Zero Interest Rates Fixed What’s Broken, We’d Be in Paradise (CHS)

Rather than fix what’s broken with the real economy, ZIRP/NIRP has added problems that only collapse can solve. The fundamental premise of global central bank policy is simple: whatever’s broken in the economy can be fixed with zero interest rates (ZIRP). And the linear extension of this premise is equally simple: if ZIRP hasn’t fixed what’s broken, then negative interest rates (NIRP) will. Unfortunately, this simplistic policy has run aground on the shoals of reality: if zero or negative interest rates actually fixed what’s broken in the economy, we’d all be living in Paradise after seven years of zero interest rates. The truth that cannot be spoken is that zero interest rates (ZIRP) and negative interest rates (NIRP) cannot fix what’s broken–rather, they have added monumental quantities of risk that have dragged the global financial system down to crush depth:

“Crush depth, officially called collapse depth, is the submerged depth at which a submarine’s hull will collapse due to pressure. This is normally calculated; however, it is not always accurate.” Indeed, the risk that has been generated by ZIRP and NIRP cannot be calculated with any accuracy. The sources of risk arising from NIRP are well-known:

1. Zero interest rates force investors and money managers to chase yield, i.e. seek a positive return on their capital. In a world dominated by central bank ZIRP/NIRP, this requires taking on higher risk, as higher yields are a direct consequence of higher risk. The problem is that the risk and the higher yield are asymmetric: to earn a 4% return, investors could be taking on risks an order of magnitude higher than the yield.

2. To generate fees in a ZIRP/NIRP world, lenders must loan vast sums to marginal borrowers–borrowers who would not qualify for loans in more prudent times. This forces lenders to either forego income from lending or take on enormous risks in lending to marginal borrowers.

3. The income once earned by conventional savers has been completely destroyed by ZIRP/NIRP, depriving the economy of a key income stream. Please consider this chart of the Fed Funds Rate and tell me precisely what’s been fixed by seven years of zero interest rates:

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There’s a few screws loose, alright.

• China Turns on Taps and Loosens Screws in Bid to Support Growth (BBG)

China is stepping up support for the economy by ramping up spending and considering new measures to boost bank lending. The nation’s chief planning agency is making more money available to local governments to fund new infrastructure projects, according to people familiar with the matter. Meantime, China’s cabinet has discussed lowering the minimum ratio of provisions that banks must set aside for bad loans, a move that would free up additional cash for lending. Officials are upping their rhetoric too. Premier Li Keqiang said policy makers “still have a lot of tools in the box” to combat the slowdown in the world’s No. 2 economy, days after People’s Bank of China Governor Zhou Xiaochuan broke a long silence to talk up confidence in the nation’s currency, the yuan.

And to ram the message home, the biggest economic planning agencies on Tuesday promised to reduce financing costs as they rein in overcapacity. Throw in a record surge in lending in January and a picture emerges of an administration determined to put a floor under growth. “Policymakers are battling to prevent any further slowdown, which could escalate into a hard landing,” said Rajiv Biswas at IHS Global Insight in Singapore. “These additional measures will act to boost liquidity in the banking sector and increase local government spending on infrastructure development.”

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They’ll just start their own ratings agency.

• China Debt Binge Spurs S&P Warning (BBG)

China’s unprecedented jump in new loans at the start of 2016 is fueling concern that excessive credit growth is piling up risks in the nation’s financial system. The increase in China’s debt relative to gross domestic product could pressure the country’s credit rating, Standard & Poor’s said on Tuesday, less than a week after the cost to insure Chinese bonds against default rose to a four-year high. Credit growth is storing up “big problems” in the economy that will weigh on the yuan and stocks, said George Magnus, an economic adviser to UBS. Mizuho Bank. warned that the threat of bad loans is rising and Marketfield Asset Management said China’s central bank may be losing its regulatory grip on credit growth.

While part of January’s surge in new debt to a record 3.42 trillion yuan ($525 billion) was caused by seasonal factors and a switch into local-currency liabilities from overseas borrowings, the risk is that bad debts will jump as companies find fewer profitable projects amid the slowest economic expansion in a quarter century. Soured loans at Chinese commercial banks rose to the highest level since June 2006 at the end of last year and the country’s biggest lenders trade at a 33% discount to net assets in the stock market — a sign that investors see further writedowns to banks’ loan books. The jump in credit growth “may help to sustain the pace of economic momentum in the short term, but it’s storing up big problems,” said Magnus, who correctly predicted in July that the rout in Chinese stocks would deepen.

“I’m not anticipating an imminent meltdown, but we’ve got a lot of warnings going on that should make us cautious about how we see the situation developing for the course of this year.” China’s ratio of corporate and household borrowing versus gross domestic product rose to 209% at the end of 2015, the highest level since Bloomberg Intelligence began compiling the data in 2003. Nonperforming loans increased 7% in the fourth quarter to 1.27 trillion yuan, data from the China Banking Regulatory Commission showed Monday.
“While corporate financial risks are not as high as what the leverage level suggests – as companies tend to hold a lot of liquid assets – the increase in the debt-to-GDP ratio still poses a systemic risk, which could potentially add pressure to ratings,” Kim Eng Tan at S&P said in an interview in Shanghai.

[..] “Although the government and other senior officials do talk about deleveraging and slowing credit creation, a lot of it is talk,” Magnus said. “We don’t see very much in the way of concrete actions to try to limit the amount of new credit going into the economy.” Marketfield Asset’s Michael Shaoul said the PBOC’s ability to prevent excessive credit growth may be waning as the country loosens regulatory control over the financial system. “How much of this is a result of deliberate policy rather than extreme moves made by the private sector is open to argument,” Shaoul said. “We increasingly suspect that the PBOC has lost substantial control of the events we are witnessing, with both the partial deregulation of financial markets and multiple conflicting policy aims making regulatory control increasingly difficult without massive unintended consequences.”

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They never had that control, but never understood that either.

• China Loses Control of the Economic Story Line (WSJ)

Sentiment on China among global investors has always veered between exaggerated optimism and excessive pessimism. Even so, the latest bout of gloom is unusually severe. The economic slowdown doesn’t properly explain it. Although the official 6.9% growth last year was the slowest in a quarter century—and many economists believe the real number is more like 6%–China is still expanding faster than almost any other major economy. Banks are flush with savings. The government retains plenty of financial firepower. Unemployment is low. The reason for the startling mood swing this time goes well beyond the performance of the economy. It’s fundamentally about leadership—how the world’s second-largest economy is run.

When President Xi Jinping rose to power in 2012, investors knew the economy was ailing—“unstable, unbalanced, uncoordinated and unsustainable,” as former Premier Wen Jiabao famously described it in 2007. His blunt diagnosis of China’s broken growth model was also a kind of confessional; Mr. Wen, together with President Hu Jintao, recognized the problems early but made them much worse with wasteful government investment in heavy industry and infrastructure. Mr. Xi pledged to do vastly better. Styling himself as a reformer on a par with Deng Xiaoping, he unveiled a 60-point plan to roll back the state and cede a “decisive role” to markets as China set out to switch from investment to consumption-led growth. Yet entering year four—out of an expected 10—of Mr. Xi’s administration, the reforms are largely on hold.

Capital flooding out of China is one sign that some investors are giving up the wait. Today’s disillusion is focused largely on China’s future prospects, not its current condition. Absent the reassurance of reform progress, the expectation is that growth will stall. Only the timing is in doubt. Why the delay? Some say Mr. Xi has been too busy consolidating his power, or that he’s been consumed by his anticorruption campaign. It takes time, they point out, to build consensus on controversial overhauls to rejuvenate state-owned enterprises, open the financial system to greater competition and liberalize land and labor markets.But evidence is building that reforms have stalled for a more basic reason: Mr. Xi, despite the early hype, sees only a limited role for markets.

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“They’re so overexposed in Venezuela.”

• China’s Big Bet On Latin America Is Going Bust (CNN)

China is pumping billions into Latin America, but many of its investments are tanking. Last year alone, China offered $65 billion to Latin America, it biggest bet yet. Many see the move as a power play to counter the U.S. influence in the region. Perhaps the best example of China’s growing ambitions – and problems – in the region is its plan to construct a railroad stretching 3,300 miles from Brazil’s Atlantic coast to Peru’s Pacific Coast. It’s a massive area that’s equivalent to the distance between Miami and Seattle. The Chinese government is used to implementing its vision quickly at home. Latin America moves much slower. The railroad project is fraught with challenges, such as dealing with indigenous groups and environmental concerns, not to mention the sheer scale of laying that much track.

China has tried – and failed – with this game plan before. China had “quite advanced” plans in 2011 for a railway connecting connecting Colombia’s Pacific and Atlantic coasts, according to an interview Colombia’s President Juan Manuel Santos gave the FT that year. Five years later, no such railway exists. It isn’t even under construction. This smaller railroad would be one of China’s most explicit power plays against the United States, creating direct competition with the Panama Canal. Colombia should have been easy to work with. It is one of the best-performing economies in Latin America, and it’s politically stable. “Culturally, we are very different and sometimes it stops the projects,” says Julian Salamanca, executive director of the Chamber of Colombian-Chinese Investment and Commerce.

From Mexico to Brazil, Chinese government and private projects have suffered extensive delays, been suspended or never even gotten off the ground. Corruption, cultural differences and bureaucracy in Latin America have halted momentum for many of them. China “realized that some of these projects…ended up in very unstable political destinations,” IMF economist Alejandro Werner said recently at the Council of Americas in New York. Werner has a point: China has dumped much of its cash into Brazil and Venezuela. Both are in deep recessions, and both have growing political instability. There are factions that want to impeach the current presidents, Nicolas Maduro in Venezuela and Dilma Rousseff in Brazil.

China targeted Venezuela because it has the world’s largest oil reserves. China sees a long-term energy partner. Since 2007, China has loaned $65 billion to Venezuela alone, more than any other country in the region, according to the Inter-American Dialogue, a Washington non-profit. That cash isn’t doing much. Its economy is “imploding,” says Werner. Falling oil prices have crushed Venezuela’s oil-dependent economy. Now China is trying to make sure its oil bet in Venezuela doesn’t go belly up. “They’re now giving loans to protect their previous loans,” says Boston University professor Kevin Gallagher, an expert on China-Latin America. “They’re so overexposed in Venezuela.”

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The HETA blow-up will happen at some point.

• Pimco’s $12 Billion Standoff Over Austria Bad Bank (BBG)

As the health of banks roils markets anew, the last financial crisis is still playing out in Austria, with Pacific Investment Management Co. on the hook. Pimco has teamed up with hedge funds and German banks to reject an €11 billion ($12 billion) offer of 75 cents on the euro for their holdings in what remains of Hypo Alpe-Adria-Bank International AG. A multiyear Argentina-style standoff looms a month before the government-set deadline. “We’re now in a period of psychological warfare,” Austrian central bank Governor Ewald Nowotny told reporters in Brussels last week. “In a purely economic view, everybody would be well advised to take the offer. I think it’s a fair offer, and it’s an adequate offer.”

The confrontation stems from Austria’s most painful bank failure of the 2008 financial crisis: Hypo Alpe was taken over by authorities after an ill-fated expansion in the former Yugoslavia. Once it sold the assets it could, the rest was turned into Heta Asset Resolution AG to be wound down. Austrian regulator FMA moved in March 2015 after an asset review revealed a larger hole in Heta’s finances. It then halted payments on the bonds. The settlement offer came from the southern province of Carinthia, which guaranteed Hypo Alpe’s debt when it was majority owner of the bank. It needs creditors representing two-thirds of the bonds to accept its offer by the March 11 deadline so that it can impose it on the rest. Currently just under half object; the group mounting the opposition says it accounts for about €5 billion, or 45%, of Heta’s debt.

“I was surprised a broad bondholder group rejected the offer so quickly since it didn’t seem too bad,” said Otto Dichtl at Stifel Financial Corp. “Some might have committed at least for the time being to stick together, but it doesn’t necessarily always make sense and the interests differ.” Pimco, which is owned by German insurer Allianz AG, is the only major buyer of the debt in the secondary market that has disclosed ownership, according to data compiled by Bloomberg. It took a bet on the distressed securities in 2014, based on regulatory filings.

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“Canadians know that this is a bubble, that these prices are unsustainable. They know that this bubble, like all bubbles, will eventually get pricked.”

• Things Are Coming Unglued for Canadian Investors (WS)

The oil price plunge is mauling Canada’s oil producers, particularly those active in the high-cost tar-sands. It’s tripping up the oil-patch economy, and contagion is spreading beyond the oil patch. The Canadian dollar has lost one third of its value against the US dollar since 2012. One of the most magnificent housing bubbles the world has ever seen appears to be peaking and is already deflating in some cities. And the Toronto stock index is down 25% since August 2014. No wonder Canadian investors are frazzled. And the semi-annual Manulife’s Investor Sentiment Index put a number on it: Canadians’ investment sentiment fell another 3 points from its beaten-down levels six months ago to 16, the lowest level since March 2009.

The index is a composite of investor perception about six asset classes – stocks, fixed income, cash, balanced funds, investment property, and investors’ own home. It has ranged from an all-time high of 34 in 2006, during the halcyon days just before the Financial Crisis when everything was still possible, to its all-time low of 5 at the end of 2008, at the depth of the Financial Crisis. By March 2009, it was at 11. Since then, it has hovered in the mid to high 20s. The survey, conducted in December, doesn’t yet include the impact of the sharp decline in oil prices to new cycle lows and the decline in stock prices since the holidays. At this point, the index hasn’t yet reached the level of desperation during the depths of the Financial Crisis, but it’s getting closer. The report:

Along with eroding investor sentiment is the feeling among Canadians that they are in a worse financial position than they were two years ago (26%). Canadians are increasingly viewing housing as a less attractive investment having dropped three points in the last year. The two largest drops were in British Columbia (13 point decrease since November 2014) and Ontario (decreased six points in the same time period).

Those two provinces are the epicenters of the Canadian housing bubble. According to the Teranet National Bank House Price Index, since the peak of the prior insane housing bubble in 2008, home prices in Vancouver have soared another 40% and in Toronto another 54%. Canadians know that this is a bubble, that these prices are unsustainable. They know that this bubble, like all bubbles, will eventually get pricked. It’s just a questions of when. In some cities, home prices are already declining. And investors, according to the report, are no longer blind to it.

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What can one do but laugh out loud?

• Calgary Housing Market Collapses As “Three-Alarm Blaze” Burns In Vancouver (ZH)

New data out on Tuesday shows average property values on resold homes in the Greater Vancouver area rising by 30.9% in January while average prices in the Greater Toronto Area and in the abovementioned Waterloo rose 14.2% and 9% for the month, respectively. But oh what a difference a province makes. While the Canadian housing bubble is alive and well in Ontario and British Columbia, in the heart of Canada’s dying oil patch the picture isn’t pretty. We’ve documented the glut of vacant office space in downtown Calgary on a number of occasions. Calgary is of course in Alberta, where collapsing crude has driven WCS down to just CAD1 above marginal operating costs. That’s led employers to cut jobs. In fact, last year was the worst year for provincial job losses since 1982.

This has had a profound effect on Calgary and on Tuesday we learn that it isn’t just office space that’s sitting unoccupied. According to data from Altus Group sales of condos in the city fell a whopping 38% from 3,000 units to 4,805 units in 2015, marking the largest y/y drop since 2008. “The drop-off doesn’t bode well for 2016,” Bloomberg notes. “Calgary, the biggest city in the oil-producing province of Alberta, ended 2015 with one of the highest inventories of unsold condos, at 3,356 suites in the fourth quarter, according to Altus.” If you want to understand all of the above you need only look at the following chart which contrasts home prices in Calgary with those in Vancouver and Toronto:

Clearly, one of those things isn’t like the others. “While we continue to believe that things just can’t any hotter, markets in B.C. and Ontario continue to prove us wrong,” TD economist Diana Petramala said. “[For Toronto and Vancouver], every month of double-digit home price growth raises the risk of a deeper home price correction down the road.” “Hot doesn’t quite describe Vancouver’s three-alarm fire of a housing market,” Bank of Montreal chief economist Doug Porter remarked. So while you can’t give condos and office space away in Calgary, you for all intents and purposes have to be a millionaire to afford to live in British Columbia and especially in Vancouver which, judging by the parabolic chart shown above, is one of the most desirable locales on the face of the planet. We close by noting that the Canadian real estate “bargain” we profiled three weeks ago has indeed sold – for $102,000 more than the original asking price…

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“Donald the T-bomber.”

• What Are We Smelling? (Dmitry Orlov)

On the Democratic side, we have Hillary the Giant Flying Lizard, but she seems rather impaired by just about everything she has ever done, some of which was so illegal that it will be hard to keep her from being indicted prior to the election. She seems only popular in the sense that, if she were stuffed and mounted and put on display, lots of folks would pay good money to take turns throwing things at her. And then we have Bernie, the pied piper for the “I can’t believe I can’t change things by voting” crowd. He seems to be doing a good job of it—as if that mattered.

On the Republican side we have Donald and the Seven Dwarfs. I previously wrote that I consider Donald to be a mannequin worthy of being installed as a figurehead at the to-be-rebranded Trump White House and Casino (it is beneath my dignity to mention any of the Dwarfs by name) but Donald has a problem: he sometime tells the truth. In the most recent debate with the Dwarfs he said that Bush lied in order to justify the invasion of Iraq. Candidates must lie—lie like, you know, like they are running for office. And the problem with telling the truth is that it becomes hard to stop. What bit of truthiness is he going to deliver next? That 9/11 was an inside job? That Osama bin Laden worked for the CIA, and that his death was faked? That the Boston Marathon bombing was staged, and the two Chechen lads were patsies?

That the US military is a complete waste of money and cannot win? That the financial and economic collapse of the US is now unavoidable? Even if he can stop himself from letting any more truthiness leak out, the trust has been broken: now that he’s dropped the T-bomb, how can he be relied upon to lie like he’s supposed to? And so we may be treated to quite a spectacle: the Flying Lizard, slouching toward a federal penitentiary, squaring off against the Donald the T-bomber. That would be fun to watch. Or maybe the Lizard will implode on impact with the voting booth and then we’ll have Bernie vs. the T-bomber. Being a batty old bugger, and not wanting to be outdone, he might drop some T-bombs of his own. That would be fun to watch too.

Not that any of this matters, of course, because the country’s trajectory is all set. And no matter who gets elected—Bernie or Donald—on their first day at the White House they will be shown a short video which will explain to them what exactly they need to do to avoid being assassinated. But I won’t be around to see any of that. I’ve seen enough. This summer I am sailing off: out Port Royal Sound, then across the Gulf Stream and over to the Abacos, then a series of pleasant day-sails down the Bahamas chain with breaks for fishing, snorkeling and partying with other sailors (I know, life is so hard!), then through the Windward Passage, a stop at Port Antonio in Jamaica, and then onward across the Caribbean to an undisclosed location. Please let me know if you want to crew. I guarantee that there will be absolutely no election coverage aboard the boat.

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Europe must side with Greece, not Turkey. Big mistake.

• Not a game (Papachelas)

Greece’s relations with Turkey require deft handling and caution. Responsibility for this, of course, lies with Prime Minister Alexis Tsipras. One does not need to be a geostrategic analyst to see that things aren’t going at all well at the moment. Turkish President Recep Tayyip Erdogan is out of control. He is not willing to listen to anyone and has thrown himself into risky gambits. Meanwhile, the US under President Barack Obama has essentially been absent from the region and is seemingly reluctant to play its traditional role. Even if Washington did want to step in, I’m not sure that Erdogan would take a call from the US leader. The rest of Europe is treating Erdogan with a mix of panic and awe. Deep down European leaders know that they don’t have any really effective ways of putting pressure on Turkey. Erdogan knows this and is acting accordingly.

That said, our fellow Europeans are to some extent ignorant of Greek-Turkish disputes, and this carries some risk. They have no in-depth knowledge of the issues dividing the two Aegean neighbors and their response is along the following lines: “Well, if you have differences, why don’t you just sit around a table and talk them through?” Indeed, judging from the manner in which European leaders have dealt with the ongoing refugee and migrant crisis, I don’t even want to know how they would deal with a Greek-Turkish crisis. All that is happening as Greece is going through one of its worst periods. The volatile regional environment combined with Greece’s image of a powerless state inspires little optimism for the future. Some observers suggest that Greece has some strong cards up its sleeve, a reference to Israel and Russia.

Perhaps they know something that remains elusive to us mortals. However, if one thing is certain, it is that changing a country’s foreign policy dogma and interpreting international alliances or the balance of power must come with a good deal of caution and restraint. This not a game. Every time Greek leaders have made a mistake, the country has paid a heavy price. Every time they have done a good job of figuring out who our allies are and gauging outside developments, the country has moved forward. These are crucial times for the broader region. It is crucial that we play our cards right and avoid any damage to our national sovereignty. Fortunately Greece can depend on some people who have in-depth knowledge of the issues and who combine determination with wisdom.

I once asked Tsipras, while he was still in the opposition, who he would call first call in case of an incident in the Aegean. “Surely that would be Erdogan,” he said. I was not sure what to make of his answer back then and I would be interested to know what his response would be today.

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