Banks Archives - Page 4 of 5 - The Automatic Earth

Just because the doors of Greek banks are open today, don’t be fooled into thinking they and the Greek economy are anywhere near back to recovery. There are still major restrictions on the ability of their customers to obtain their cash or move it around: a) withdrawals per week are capped at €420; b) there is a ban on using deposits to repay loans early (because many Greeks would rather repay debts than risk seeing their savings wiped out in a bank crash or in a so-called bail-in which would see savings converted to bank shares of dubious value); c) it is still incredibly difficult for small and medium size businesses to purchase vital raw materials or other goods from abroad, because banks won’t make new loans and there are severe restrictions on foreign payments.

The symbolic importance of the ECB turning on the emergency lending tap again was important, but it has only been turned on a fraction. It has given enough additional Emergency Liquidity Assistance, €900m, to keep the banks alive in a technical sense. There is no possibility of them thriving for months and even possibly years. To put it in a Hellenic nutshell, the banks and the Greek economy remain in intensive care. The transmission of money is being facilitated in the most basic way, but there is no creation of new credit; and this credit freeze is a major impediment to consumer spending, and – perhaps more importantly – will lead to many businesses going bust in the coming weeks and months.

Which gives a certain frisson to a statement made only in May by Europe’s top banking supervisor, Daniele Nouy, chair of the so-called Single Supervisory Mechanism, the bank supervisory arm of the ECB. She said of Greek banks, in an interview with the Wall Street Journal, that “these banks have gone through important restructuring, important recapitalisations and a redefinition of their business models. They have never been better equipped to go through this kind of stressful situation”. Really? Just a few days ago, eurozone leaders and the IMF more or less pronounced the entire Greek banking system kaput, with their declaration that the banks need additional capital of €25bn euros – which, relative to the size of the Greek economy, represents one of the biggest banking black holes in the history of capitalism.

“The Greek banks, stripped of many of their assets by the ECB, will need the ECB to make a reappearance in Athens to aid their recovery.”

• Greek Banks Face Stress Tests At The Worst Time (Guardian)

Plenty of dangers lie in wait for Greek banks. Already short of cash, they may need lots more when stress tests of their solvency are carried out in a month or two. And unable to access the international money markets, they will be in a similar position to the Greek god Telephus, who was wounded by Achilles and yet needed Achilles to return as a doctor before he could be healed. The Greek banks, stripped of many of their assets by the ECB, will need the ECB to make a reappearance in Athens to aid their recovery. On a day when the Greek banks opened their doors for the first time in three weeks, the debate about future funding needs seemed far away.

Allowing access to the unknown treasures found in countless deposit boxes triggered a cheer, especially among the better off over-60s, if a quick glance at the queues outside branches was anything to go by. A couple of months from now, the story could take a grim turn. Not only will hundreds of millions of deposits have been withdrawn in that time, the weakening effects of a broader economic slowdown will have taken their toll. For one thing, the economy is likely to be another 5% smaller by the autumn than when the banks were stress-tested last time. Many businesses and personal customers will have acquired bigger debts with their banks. Others will have declared themselves bankrupt.

And this deterioration in loan quality will be reflected in a lower credit rating and a bigger need for replacement funding. The big four – Piraeus, Alpha Bank, Eurobank and National Bank of Greece – are already underpinned by €130bn of ECB funds. As their liquidity squeeze intensifies, that figure could soar. Swiss investment bank UBS warned that the stress tests may reveal a situation that is so bad the government will be forced to follow Cyprus and impose a haircut on all deposit accounts containing more than €100,000 . Even the hint of such a move will cause more panic. No doubt the ECB is working hard to limit any further harm.

“As sophisticated investors in financial institutions, our clients would consider increasing their financial commitments to NBG under appropriate circumstances..” Appropriate meaning “All Your Base Are Belong To Us”

• National Bank of Greece Creditors Offer Funds to Prevent Losses (Bloomberg)

A group of senior creditors to National Bank of Greece said they’ll consider recapitalizing the troubled lender to avoid incurring losses on their bonds. “As sophisticated investors in financial institutions, our clients would consider increasing their financial commitments to NBG under appropriate circumstances,” Shearman & Sterling LLP, the law firm representing the group, wrote in a July 17 letter to international creditors including the ECB and obtained by Bloomberg. “Our clients intend to ensure that their rights under all applicable laws are fully respected.” Greece’s tentative bailout deal puts senior bank bondholders explicitly in line for losses because it requires the country to adopt the EU’s Bank Resolution and Recovery Directive as a condition for aid.

Greece’s existing insolvency law excludes a bail-in of the debt, according to Fitch Ratings. The bondholders are seeking to ensure that Greece explores private-sector solutions before resorting to a bank resolution and that senior creditors are protected should it come to that, according to the letter, which was also addressed to the European Stability Mechanism, the vehicle set up to finance loans to distressed euro area countries, the president of the Eurogroup and the governor of the Bank of Greece. The group holds about 25% of NBG’s €750 million of senior bonds due April 2019, according to a person familiar with the matter who asked not to be identified because the information is private.

The bonds rose to 37 cents on the euro today after dropping by more than 70% since the start of the year to a record 21 cents on July 8, according to data compiled by Bloomberg. The notes represent about 40% of the €1.9 billion of privately-held senior debt issued by Greece’s four major banks, according to data compiled by Bloomberg. “The recent crisis arose entirely from decisions made by Greek and European political and monetary authorities that were wholly outside of NBG’s control,” the letter said. “Before additional capital and liquidity can be made available to Greek banks such as NBG, investors such as our clients, must have confidence in the Greek and European supervisory and resolution frameworks, and be assured of fair treatment.”

“What worries me is that some people still think that there would be no austerity if we were out of the euro. This argument is absolutely false,” said state minister Nikos Pappas.”

• Greece: Plea For Unity As Banks Reopen (Guardian)

The reopening of banks and repayment of debts returned Greece to a semblance of normality on Monday but the ruling Syriza party admitted it faced considerable political challenges in pushing through reforms. After a drama-filled month that saw the country come close to being ejected from the eurozone, the government, led by the prime minister, Alexis Tsipras, appealed for unity as it faced another make-or-break vote in Athens on Wednesday. As customers queued outside banks – after lenders opened their doors for the first time in three weeks – officials warned that the left-led coalition could fall if dissidents failed to endorse reforms set by international creditors as the price of further aid.

“What worries me is that some people still think that there would be no austerity if we were out of the euro. This argument is absolutely false,” said state minister Nikos Pappas, one of Tsipras’s closest aides. Addressing reporters, the foreign minister Nikos Kotzias said he believed fresh elections were “inevitable” in September or October because the government could not continue depending on the political opposition for support. The first package of reforms voted through by the Greek parliament last week was passed with the backing of three opposition parties, which have argued that Greece must be kept in the eurozone at any cost. But government officials have said elections could be held as early as 13 September amid fears that such an arrangement cannot last in the long term.

Amid mounting talk of early elections, Nikos Filis, the ruling Syriza party’s chief parliamentary representative, highlighted the dangers that lay ahead, saying the government would collapse if rebels rejected the measures. “When a government does not have [the support of] 120 MPs, legally there is no issue but politically there is,” he said. Last week, Syriza saw its support being whittled down from 149 to 123 MPs as lawmakers broke ranks over the controversial terms of an aid package worth as much as €86bn (£60bn) to keep the insolvent country afloat. The reforms included changes to the Greek pension system and VAT regime. The loss of support has meant that Tsipras now has a two-pronged battle on his hands: to meet the exacting terms of creditors while convincing increasingly hostile members of his own party to back them.

By Wednesday, the Greek parliament must, as requested by creditors, pass a law to overhaul its civil justice system, with the aim of speeding up processes and reducing costs. The government must also transpose the EU’s bank recovery and resolution directive into law. This law was part of Europe’s response to the 2008 banking crisis and should have been put into national law months ago.

Excuse me? “Savers formed long queues in front of ATMs..”? Huh? How stupid does that sound?

• How Bad Things Were for Greek Banks When Capital Controls Were Introduced (BBG)

Today the Greek central bank released its monthly balance sheet for June 2015. The balance sheet is dated to June 30—the day after capital controls were introduced in Greece. The seven-month jog on Greek lenders was about to turn into a full blown bank run during that last weekend of June, after Prime Minister Alexis Tsipras broke talks with creditors and called a referendum over the terms attached to the country’s bailout. Savers formed long queues in front of ATMs as doubts over the country’s place in the euro area spurred them to withdraw their cash from banks. The new data from the central bank shows that the total value of banknotes in circulation in Greece reached an all time high of €50.5 billion. That’s an increase of more than €5 billion in the month of June alone.

Tsipras was forced to impose a limit on withdrawals on June 28, after the ECB capped Emergency Liquidity Assistance (ELA) for Greek lenders, refusing to plug the hole from continuing deposit outflows. Much of the damage had been done already as Greek bank reliance on ECB operations, including ELA, meant that Greek Target2 liabilities with the rest of the eurosystem reached an all-time high at the end of the month. With the ECB limit on ELA, nobody, not even ordinary depositors, wanted to be exposed to Greek banks. Capital controls were the only option. That Tsipras and his then-finance minister were willing to allow things to get this serious before introducing capital controls underscores the high-risk strategy they were engaged in at the time.

Greek banks reopened this Monday, following a three-week forced holiday and only after Tsipras capitulated to creditors’ demands and committed to more austerity measures and structural economic overhauls. Still, draconian capital controls, including restrictions on withdrawals and transfers of money abroad, remain in place, and Greeks queued outside branches to get only basic services from their lenders.

“Syriza inherited a non-state, a completely dilapidated administrative apparatus with civil servants shivering in fear over who will be next to lose his/her job..”

• Syriza Inherited A Non-State (Fouskas and Dimoulas)

Obviously, without Keynesian instruments at the national level and without a European federal state at the European level you cannot have any form of Keynesian policies. Too much reliance on the ECB – which, first and foremost, is a bank – and the “good will of European partners”, coupled with lack of institutional preparation to return to a national currency, has brought Syriza’s negotiating team to a standstill. Others, quite rightly, have argued that there has been no real negotiation since Syriza assumed office back in January 2015. The Germans, this argument goes, wanted regime change as they could not agree with the Greek Finance Minister’s reasonable demands – which included restructuring of the debt, ie debt relief.

In fact, this insight is correct: after the referendum of 5 July, the Greek PM sacked Finance Minister, Yanis Veroufakis, in order to keep his cabinet in place and avoid being pushed out by the creditors (mainly via financial and media warfare and permanently blocking liquidity to the Greek banks). Yet, what we have not seen being tackled is the following really dramatic issue. The creditors seem to be of the opinion that there is a Greek state in place that can implement and a Greek society that can accept the new austerity measures. This is reminiscent of the gruelling rationale behind America’s various wars post-9/11, but also before: we go to Afghanistan, Iraq and elsewhere to bring about the lights of liberal democracy, human rights and free market freedom capitalism.

This indicates total ignorance of the concrete societies and states they supposedly want to change and improve. In fact, wherever American power went, it only made things worse. Greece and the European periphery should be seen in the same light. Greek political elites, mixed with big comprador and corrupt interests, as well as the institutional materiality of the state as such, have always been fragmented, deeply inefficient and in the service of clientelist, corrupt and nepotistic deals and practices. But Syriza did not inherit just this. Syriza inherited a non-state, a completely dilapidated administrative apparatus with civil servants shivering in fear over who will be next to lose his/her job. Society itself, with 27% unemployment and 57% youth unemployment and unpaid salaries for months, swims in this strange mixed mood of anger, radicalization and demoralisation.

Recent administrative reforms in municipalities (the “Kapodistrias” and “Kallikratis” plans) caused havoc, further distancing the citizen from the state. Add to this the factional warfare within Syriza and the government and you will have one of the most inefficient ‘ruling’ machines in the west. In other words, Syriza’s state cannot reach the 1% primary surplus fiscal target; it will be unable to effect privatizations and other neo-liberal reforms required by the creditors in order to receive bail-out funds. The new anti-austerity package will fail. Even Syriza MPs who voted for it in the parliament may well boycott it. The PM himself said publicly that he does not believe it is a good deal.

Equally and arguably, for the same reason, a debtor-led default and exit from the Euro-zone will fail. A transition to the national currency requires a strong and well-organised state apparatus to lead an impoverished society through hardship to eventually achieve renewal and something positive at the end of a long and arduous journey. We argue that there is not enough state capacity in place to hold sway over the implementation of a new austerity package or indeed to buttress and deliver Grexit. So what is to be done now and in order to avoid a new election in Greece that is bound to achieve nothing of substance?

Zombie money going “Poof”… Or, if you will, liquidity is drying up fast.

• Commodity Rout Worsens as Prices Tumble to Lowest Since 2002 (Bloomberg)

The rout in commodities deepened with prices touching the lowest since 2002 as the prospect of higher U.S. interest rates sent gold tumbling. Raw materials are losing favor with investors as the dollar gains amid signals from Federal Reserve Chair Janet Yellen that the central bank may raise rates this year on the back of an improving U.S. economy. Higher borrowing costs curb the attractiveness of commodities such as gold, which doesn’t pay interest or give returns like assets including bonds and equities. The Bloomberg Commodity Index dropped as much as 1.4%, falling for a fifth day in the longest stretch of declines since March.

Gold futures sank to the weakest in more than five years while industrial metals, grains, Brent crude and U.S. natural gas also slid as a measure of the dollar climbed to the highest since April 13. “Any increase in U.S. interest rates should further strengthen the dollar, prompting more fund outflows from commodities, metals and emerging-market assets,” Vattana Vongseenin, the chief executive officer of Phillip Asset Management in Bangkok, said by phone. The Bloomberg Commodity Index slid 1.3% to 96.2949 at 10:10 a.m. New York time, after touching 96.1913, the lowest since June 2002. With raw materials fetching lower prices, shares of commodity producers are tumbling. The 15-member Bloomberg Intelligence Global Senior Gold Valuation Peers Index, which includes AngloGold Ashanti Ltd. and Newcrest Mining Ltd., dropped as much as 8.4%.

Not a lot of objective opinions about why this is happening.

• Gold, Silver Near Five-Year Lows in Asia Trade (WSJ)

Gold and silver prices continued to trade close to their lowest level in five years in Asia trade Tuesday amid rising expectations the U.S. Federal Reserve will raise interest rates later this year. Gold dipped below the psychological mark of $1,100 an ounce in early Asia hours, but quickly nudged above that level on bargain hunting. It was recently trading at $1,104.08/oz. “I think there is still going to be a little bit of pressure,” said Victor Thianpiriya, a commodity strategist at ANZ Bank. “Prices could head lower.” Mr. Thianpiriya said the yellow metal could test $1,000/oz in the near term, a level at which several mining companies might find it difficult to profit from extracting the commodity.

The gold market has turned bearish, with hedge funds that invest huge sums in gold futures reducing their long positions to nine-year lows. At the same time, speculators’ short positions—bets that gold could be bought cheaper in the future—have jumped in recent days. Analysts say a sustained rebound in gold prices is unlikely any time before the U.S. raises interest rates, a decision that is expected later this year after comments from U.S. Federal Reserve Chairwoman Janet Yellen last week. A rising dollar makes raw materials less affordable to overseas investors, while higher interest rates tend to draw money into yield-bearing assets and away from commodities, which pay their holders nothing and often carry storage costs.

Gold gained investors’ favor because of its safe-haven appeal after the 2008 financial crisis, but investors’ risk appetite seems to have increased with a modest economic recovery under way in the U.S. Moreover, the cost of holding gold looks set to increase because of an expected rise in U.S. interest rates. Other precious metals such as silver, platinum and palladium have fallen in gold’s slipstream. Silver prices nudged up from the opening price of $14.63 a troy ounce to $14.76 Tuesday, close to levels seen in early 2010. Platinum prices are at $974.70 a troy ounce, close to a six-and-half-year low, while palladium is near its lowest level since November 2012 at $605/oz.

This is just one opinion. We are far more neutral.

• Why Gold Is Falling And Won’t Get Up Again (MarketWatch)

Do you remember gold? It was kind of an analog bitcoin. It was a universal legal tender. Governments held it in forts. Your bank kept it in a safe. It was the most precious of precious metals. And investors bought gold GCQ5, -0.11% for safety’s sake when markets and economies crashed and the value of paper currency was in doubt. But that was a long time ago. Gold is down 40% from its financial-crisis peak in 2011. As Jeff Reeves notes in his column Monday: “The long-term trend remains decidedly against gold.” Reeves honorably calls himself a gold “agnostic” because he doesn’t want to get into conspiracy theories and some of the nonsense that surrounds the gold market. He wants to talk about the investment. I want to talk about the investors.

Because I don’t think it’s possible to separate the two. Gold has always been the favorite commodity of a fringe crowd that doesn’t trust governments, central banks, politicians and the financial system. This part of the gold market drives a lot of the buying and selling; it whips up a lot of frenzy. I don’t have any hard evidence, but I’d argue that gold’s value is inflated by people who aren’t investing in a commodity but in a belief system that may or may not include black helicopters and a U.S. invasion of Texas. The sad part is that gold always has been a sucker’s bet. It’s supposed to protect against inflation. It doesn’t. It’s supposed to retain its value. It doesn’t. For those reasons, gold is supposed to be the ultimate currency. It’s not. As fund manager and blogger Barry Ritholtz said of gold’s fundamentals: “It has none.”

Wall Street, of course, welcomes the business. Gold, after all, is hardly a useful commodity. If it had significant real purpose, it wouldn’t be sitting in vaults around the world. But, hey, we’ll trade it. We’ll trade anything. By and large, these special breed of gold bugs have ignored history. In the past century, gold has bubbled and popped at least a half dozen times, with crashes coming in 1915-20, 1941, 1947, 1951-66, 1974-76, 1981, 1983-85, 1987-2000 and 2008. If many of those dates seem to have a common thread, it’s because they do. They were, for the most part, periods of economic expansion. Who wants gold, when the stock market is booming or housing prices are soaring? Fundamentally, today’s gold market is no different. Stocks are holding near all-time highs. Interest rates could rise before the end of the year. Gold, on the other hand, is slip-sliding away.

What is different is how deep and long this gold bottom could go. As we move into an ever-techier world, gold has more competition: namely cryptocurrencies such as bitcoin that cater to the new generation of skeptics. The bitcoin market touts itself as an alternative to the currency markets and a hedge against inflation. Bitcoin’s value, like gold, is based on the confidence of the buyer, nothing more. Cryptocurrencies may also even prove to be useful (at which point they most likely will be unattractive to bitbugs).

“When everything costs me 10% more, isn’t my pension’s buying power much weaker? It’s like a pension cut..”

• Greek VAT Rise Hurts As Bailout Terms Start To Bite (Reuters)

To tourists wandering the narrow streets of central Athens, 20 cents on the price of souvlaki – a Greek favourite of grilled meat on a skewer – may not seem much. But for waiter Stavros Giokas, Monday’s jump in value-added tax is a big worry. The VAT rise, demanded by Greece’s lenders in return for a rescue deal, forced the restaurant where Giokas works to push up the price of souvlaki – wrapped in flatbread with salad and drizzled in tzatziki garlic yogurt – to €2.40 from €2.20. While a bargain for well-to-do northern European visitors, for Greeks worn down by years of austerity, the price increase is one more reason not to eat out. “People are counting every cent, not just for souvlakis,” Giokas said as he waited for customers, surrounded by empty tables decked in yellow and green tablecloths.

Some big, foreign-owned firms will absorb the rise in VAT on processed food and public transport from 13 to 23% without passing it on to customers. Other businesses may simply try to dodge paying the tax on some of their sales, a widespread practice that has contributed to Greece’s economic problems. But for many of those that do pay, there may be no other option than to pass on the rise to clients. “We can’t absorb the cost. Everything is getting more expensive: tomatoes, onions, tzatziki,” Giokas said. The tax hike will affect not only the cost of restaurant meals, processed food in shops and even salt, but also taxi fares and private school fees.

VAT jumped less than a week after the rise was approved in parliament as the leftist government of Prime Minister Alexis Tsipras tries to show other euro zone countries he is serious about reforms required to start talks on an 86 billion euro bailout deal that Greece needs to stay afloat. But across the country, workers, pensioners and economists alike worried about the impact of the increase on a population suffering from unemployment of over 25% and on an economy that was already forecast to contract this year. “When everything costs me 10% more, isn’t my pension’s buying power much weaker? It’s like a pension cut,” 65-year-old Nikos Koulopoulos said.

“It’s not true we did not have a Plan B. We had a Plan B.” “We, in the Ministry of Finance, developed it. Under the egis of the Prime Minister, who ordered us to do this, even before we came in the Ministry of Finance.”

• Yanis Varoufakis: Greece ‘Made Mistakes, There’s No Doubt’ (CNN)

Greece’s divisive former finance minister, Yanis Varoufakis, admitted on Monday that Greece made mistakes over its bailout negotiations, but he continued to lay the preponderance of blame for the Greek woes on the country’s creditors. “We made mistakes, there’s no doubt about that,” he told CNN’s Christiane Amanpour in his first international TV interview since stepping down earlier this month. “And I hold myself responsible for a number of them.” “But the truth of the matter, Christiane, is that the very powerful troika of creditors were not interested in coming a sensible, honorable, mutually beneficial agreement,” he said, referring to the IMF, the ECB, and the EC.

“I think that close inspection is going to reveal the truth of what I am saying: They were far more interested in humiliating this government and overthrowing it, or at least making sure that it overthrows itself in terms of its policies, than they were interested in an agreement that would for instance ensure that they would get most of their money back.” “It’s very hard for me, however much I would like to, to take responsibility for a policy over which I resigned.” Greece last week accepted terms for a third bailout that many say was on harsher terms than the potential deal that was on the table earlier this year. Varoufakis’ casual style, leather jackets, and motorcycle riding won him newspaper covers, but his negotiating style grated on his counterparts. He made sure to emphasize that he “resigned,” and was not “dismissed.”

He stepped down on the night of a controversial referendum, introduced by Prime Minister Alexis Tsipras, in which the majority of Greeks rejected the harsh austerity the government would later accept. “The people voted ‘no’ to this extending and pretending, but it became abundantly clear to me on the night of the referendum that the government’s position was going to be to say yes to it.” Despite his resignation of conscience, Varoufakis said he had sympathy for his former boss. “He was faced with a choice: Commit suicide or be executed.” “Alexis Tsipras decided that it [would] be best for the Greek people for this government to stay put and to implement a program which the very same government disagrees with.” “People like me thought that it would be more honorable, and in the long term more appropriate, for us to resign. This is why I resigned. But I recognize his arguments as being equally powerful as mine.”

[..] “It’s not true we did not have a Plan B. We had a Plan B.” “We, in the Ministry of Finance, developed it. Under the egis of the Prime Minister, who ordered us to do this, even before we came in the Ministry of Finance.” “Of course, you realize that these plans – Plan Bs – are always, by definition, highly imperfect, because they have to be kept within a very small circle of people, otherwise if they leak, a self-fulfilling prophecy emerges.” That plan, he said, was not for Greece to leave the Eurozone, a Grexit, but rather for the government to create “euro-denominated currency” – in other words, for the government to print its own, temporary currency, pegged to the value of the euro. “The fact of the matter is that that Plan B was not energized — I didn’t get the green light to effect it, to push the button, if you want.” That, he said, was one of the “main reasons why I resigned.”

I love the absurdity embedded in the term “predictable chaos”.

• In Greek Crisis, One Big Unhappy EU Family (Reuters)

The latest paroxysm of Greece’s debt crisis has exposed growing rifts in the euro zone which, unless addressed soon, could lead to the break-up of European monetary union, the EU’s most ambitious project. The most worrying sign for European leaders is that public opinion and domestic politics are pulling them increasingly in opposing directions – not just between Greece and Germany, the biggest debtor and the biggest creditor, but almost everywhere. Germans, Finns, Dutch, Balts and Slovaks no longer want taxpayers’ money to go to bail out Greeks, while the French, Italians and Greeks feel the euro zone is all about austerity and punishment and lacks solidarity and economic stimulus.

With central and east European states growing more assertive and the Dutch and Finns facing mounting domestic constraints, a compromise between euro zone leaders Germany and France, increasingly hard to find over Greece, is no longer sufficient to settle the problems. There are so many stakeholders with divergent views that crisis management is becoming ever more difficult. A far-reaching reform of the 19-nation currency area’s flawed structure seems a remote prospect. After weeks of late-night emergency meetings of leaders and finance ministers, culminating in a tense all-night summit, the euro zone produced a fragile deal to keep Greece afloat by making it a virtual protectorate under intrusive supervision. Few, if any, of the main protagonists think it will work.

Greek Prime Minister Alexis Tsipras said it was a bad deal that would make life worse for Greece but he had swallowed it because the alternative was worse. German Finance Minister Wolfgang Schaeuble said Athens would have done better to leave the euro zone – “temporarily” – to get a debt write-off. Chancellor Angela Merkel, Europe’s dominant leader, made clear the main virtue of the deal was to avoid something worse. “The alternative to this agreement would not be a ‘time-out’ from the euro … but rather predictable chaos,” she said. A senior EU official involved in brokering the compromise, who spoke on condition of anonymity, said there was now a “20, maybe 30% chance of success”. “When I look at the next two to three years, the next three months, I see only black clouds,” the official said. “All we succeeded in doing was to avoid a chaotic Grexit.”

“..if implemented this plan, the streets of Athens will sound tracks of tanks.”

• “Athens Streets Will Fill With Tanks”: Kathimerini Reveals Grexit Shocker (ZH)

And it wasn’t just outside observers drawing up Grexit plans. Despite the fact that EU officials denied the existence of a “Plan B” right up until German FinMin Wolfgang Schaeuble’s “swift time-out” alternative was “leaked” last weekend, no one outside of polite eurocrat circles pretends that a Greek exit wasn’t contemplated all along and indeed Yanis Varoufakis contends that Athens was threatened with capital controls as early as February if it did not acquiesce to creditor demands. Now, in what is perhaps the most shocking revelation yet about what EU officials really thought may happen in the event Greece crashed out of the EMU and unceremoniously reintroduced the drachma, Kathimerini is out with a description of what the Greek daily calls the “Grexit Black Book,” which purportedly contained the suggestion that civil war would breakout in Greece in the event the country was forced out of the currency bloc. Here’s more (Google translated):

“On the 13th floor of the building Verlaymont in Brussels, a few meters from the office of the European Commission President, Jean-Claude Juncker, stored in a special security room and in a safe Greece’s exit plan from the Eurozone. There, in a multi-page volume, written in less than a month from 15-member team of the European Commission, answered questions on how to tackle such an outflow, including, as shocking as it may sound, even the possibility of the country out of the Schengen Treaty, and not only being driven outside the euro, but also outside the EU.

According to European official, in that the European Commission Summit already had a bound volume, a multi-page document, which described the Greek prime minister, before the start of the session, by the same Mr. Juncker with all the details of a Grexit , giving him to understand the legal and political context of such a decision. In multipage document in accordance with European official who has the ability to know its contents, there are detailed answers to 200 questions that would arise in case Grexit. These questions, as he explains official, are interrelated, as an exit from the euro would create a cascade of events, which would evolve in a relatively short time. From the drachmopoiisi economy to foreign exchange controls that would take place at the country’s borders and which will ultimately lead at the exit of Greece from the Schengen Treaty.

The authors of the draft, according to European official, conducted under conditions of absolute secrecy. A special group of 15 people of the European Commission, by direct contact with Greece started to prepare, and was also in direct contact with a number of senior officials and DGs in the European Commission who had expertise in specific areas. The writing of the project started when the expiry date of the program (end of June) was approaching, so it is the Commission prepared for every eventuality, and by the time the referendum was announced, Friday, June 26, the relevant procedures were accelerated. The weekend of the work referendum intensified, so now two days later, Tuesday of that Synod, the project has been finalized.

According to well-informed source, involved in creating the plan worked “suffer the pain” as typically describe the “K” and “overwhelmed” because they could not believe that things had reached this point, and most of them had direct involvement with the Greek rescue programs. The European Commission also was hoped that even until the last minute solution would be found as members of this group knew better than anyone the consequences exit of Greece from the Eurozone and understand the cost of such a decision. One of those involved with direct knowledge of Greek reality in the critical phase of the training, he said the rest of the group that “if implemented this plan, the streets of Athens will sound tracks of tanks.”

Merkel equals spineless.

• German Government Divided Over Greece (Handelsblatt)

Angela Merkel was understandably cautious in her response: “Nobody came to me and asked for any kind of dismissal,” the German chancellor said in an interview with public broadcaster ARD on Sunday. The question was about Wolfgang Schäuble, her finance minister and fellow Christian Democratic Party (CDU) member, who in an interview with Germany’s Der Spiegel magazine on Sunday said he was prepared to resign if ever forced to take a position on Greece that he didn’t agree with. “We have a joint result, and the finance minister will now lead these negotiations just as I will,” Ms. Merkel said. She added, firmly: “We will now work together in this coalition and of course together in the [Christian Democratic] Union.”

These words were aimed as much at her fiercely independent finance minister as anyone else, and were designed to smooth over the massive gulf of opinion within her own party over Greece. The issue of Greece, and whether or not the troubled country deserves its third bailout in five years to stave off bankruptcy, has opened up a chasm in Ms. Merkel’s governing coalition. On the one side is Mr. Schäuble and the right wing of the CDU party. While Ms. Merkel says a “Grexit” has been off the table since euro zone leaders agreed to give Greece a third, final bailout last week, her finance minister believes it remains very much in the cards. On the other side is Ms. Merkel’s junior coalition partner, the Social Democrats, led by deputy chancellor and economics minister Sigmar Gabriel.

Sources in Berlin say that the relationship between Mr. Schäuble and Mr. Gabriel has been irreparably damaged by the Greece crisis. For now, Ms. Merkel’s coalition is holding. The German parliament, the Bundestag, voted overwhelmingly on Friday in favor of the E.U. starting talks with Greece over a third bailout aimed at keeping Greece inside the 19-nation currency bloc. The vote removed a final stumbling block, allowing E.U. negotiators to this week get down to the business of ironing out the details of the bailout package. But, like Mr. Schäuble, many parliamentarians remain hugely skeptical that the negotiations will really bear fruit. Significantly 65 members of the CDU did not back the government on Friday in the Greek vote.

More of the “Greece should be like Germany” meme.

• How Can Greece Take Charge? (New Yorker)

Even if Greece gets the debt relief that the IMF is recommending, the next few years will be grim. As James Galbraith, an economist at the University of Texas at Austin, who assisted the former Greek finance minister during this year’s negotiations, told me, “What’s going to happen in Greece is going to be very sad.” So what can Greece do? It really has only one option—to make the economy more productive and, above all, to export more. It’s easy to focus on Greece’s huge pile of debt, but, according to Yannis Ioannides, an economist at Tufts University, “debt is ultimately the lesser problem. Productivity and the lack of competitive exports are the much more important ones.”

There are structural issues that make this challenging. Greece is never going to be a manufacturing powerhouse: almost half of all Greek manufacturers have fewer than fifty employees, which limits productivity and efficiency, since they don’t enjoy economies of scale. Greece also has a legal and business environment that discourages investment, particularly from abroad. Contractual disputes take more than twice as long to resolve as in the average E.U. country. Greece has been among the most difficult European countries in which to start and run a business, and it has myriad regulations designed to protect existing players from competition. All countries have rules like this, but Greece is an extreme case. Bakeries, for instance, can sell bread only in a few standardized weights.

Recently, Alexis Tsipras, the Greek Prime Minister, had to promise that he would “liberalize the market for gyms.” The scale of these problems makes Greece’s task sound hopeless, but simple reforms could have a big impact. Contrary to its image in Europe, Greece has already made moves in this direction: between 2013 and 2014, it jumped a hundred and eleven places in the World Bank’s “ease of starting a business” index. And reform doesn’t mean Greece needs to abandon the things that make it distinctive. In fact, in the case of exports, the country has important assets that it hasn’t taken full advantage of. Greek olive oil is often described as the best in the world. Yet 60% of Greek oil is sold in bulk to Italy, which then resells it at a hefty markup.

Greece should be processing and selling that oil itself, and similar stories could be told about feta cheese and yogurt; a 2012 McKinsey study suggested that food products could add billions to Greece’s G.D.P. Similarly, tourism, though it already accounts for 18% of G.D.P., has a lot more potential. Most tourists in Greece are Greek themselves, a sign that the country could do a much better job of tapping the booming global tourism market. Doing so would require major investments in improving ports and airports, and in marketing. But the upside could be huge. Greece also needs to stem its current brain drain. It produces a large number of scientists and engineers, but it spends little on research and development, so talent migrates abroad. And there are other ways that Greece could capitalize on its climate and its educated workforce; as Galbraith suggests, it’s an ideal location for research centers and branches of foreign universities.

“People turn away because they have been bypassed..” So you just bypass them some more?

• Hollande Calls For Vanguard Of States To Lead Strengthened Eurozone (EUOberver)

French president Francois Hollande has called for a stronger more harmonised eurozone following a politically turbulent few weeks in which crisis with Greece has exposed the fault-lines in how the single currency is managed. “What threatens us is not too much Europe, but too little Europe,” he said in a letter published in the Journal du Dimanche. He called for a vanguard of countries that would lead the eurozone, which should have its own government, a “specific budget” and its own parliament. “Sharing a currency is much more than wanting convergence. It is a choice that 19 countries have made because it is in their interest,” he wrote adding that this “choice” requires a “strengthened” organisation.

French prime minister Manuel Valls Sunday said the vanguard should include the six founding countries of the EU: France, Germany, Italy, Belgium, Luxembourg and the Netherlands. He said France would prepare “concrete proposals” in the coming weeks. “We must learn the lessons and go much further,” he added, referring to the Greek crisis. “Europe has let its institutions weaken and the 28 governments struggle to agree to move forward. Parliaments are too far from decisions. People turn away because they have been bypassed,” said Hollande. He added that “populists” have seized upon this “disenchantment” with Europe. Hollande’s calls come as the eurozone is locked in recriminations over its handling of Greece.

The country is set to get a third bailout following eleventh hour negotiations last week however neither the Athens government nor Berlin, the main architect of the bailout programme, believe it will be a success. It exposed divisions between a camp of hardliners led by Germany, whose finance minister advocated a eurozone exit for Greece, and a camp led by France and Italy, which argued that the EU as a whole would be damaged if Greece left the euro.

” The Fed “clearly intends the very largest U.S. banks to buckle under this new capital regime, restructuring quickly and dramatically..”

• Fed Tells Big Banks to Shrink (WSJ)

Federal Reserve sent a message to the largest U.S. financial firms: Staying big is going to cost you. The Fed’s warning, articulated in a pair of rules it finalized Monday, is among the central bank’s starkest postcrisis regulatory moves pressing Wall Street banks to reconsider their size and appetite for risk. The Fed completed one rule stating that the eight largest banks in the country should maintain an additional layer of capital to protect against losses, its plainest effort yet to encourage them to shrink. At the same time, it offered a reprieve to General Electric’s finance unit from more-intensive regulation, after the company promised to cut its assets by more than half. The moves reinforce the central mandate of the Dodd-Frank financial overhaul law signed by President Barack Obama five years ago.

Regulators have pushed big banks to expand their capital buffers to better absorb losses, reduce their reliance on volatile forms of funding, improve their risk management and cut back on risky assets. So-called stress tests measure banks’ resilience each year and can restrict shareholder payouts at firms that don’t pass. For Wall Street banks and their investors, the emerging regime presents a series of choices: specifically whether to pay the cost of new regulation, which will fall to the bottom line, or change their business models by shedding businesses or withdrawing from certain markets, such as owning commodities. The Fed “clearly intends the very largest U.S. banks to buckle under this new capital regime, restructuring quickly and dramatically,” said Karen Petrou at Federal Financial Analytics.

J.P. Morgan Chase, the largest U.S. bank with assets worth $2.449 trillion, will have to maintain more capital than any of its peers, with its minimum capital requirement raised by 4.5% of assets under management as a result of the new rule. J.P. Morgan has resisted calls from lawmakers and others to break up its operations, and instead has jettisoned or adjusted businesses to comply with the new mandates. “Everything’s doable—it just costs money,” said Glenn Schorr, a banking-industry analyst with Evercore ISI. Mr. Schorr said banks could hold less capital but would have to cut parts of their business.

You’d be forgiven for presuming they already did that.

• US Banks Prepare For Oil And Gas Company Loans To Worsen (Reuters)

U.S. banks are setting aside more money to cover bad loans to energy companies after oil prices plunged over the last year, raising the possibility that deteriorating loans could start to weigh on their earnings, some analysts said. Loan credit quality for U.S. banks has been improving since the financial crisis. In the first quarter, 2.49% of loans on banks’ books were delinquent, the lowest level since the fourth quarter of 2007, according to the Federal Reserve, which hasn’t released second quarter data. The rate peaked at 7.4% in the first quarter of 2010. Weakness among energy company loans could be a sign that overall credit quality among U.S. banks has little room to improve, analysts said.

Executives from both JPMorgan Chase and Wells Fargo told investors last week, when posting earnings, that they were increasingly concerned about loans to oil and gas companies. Texas bank Comerica on Friday set aside about three times as much money to cover bad loans as analysts had expected, sending the regional bank’s shares lower by more than 6% after the bank reported earnings Friday. Setting aside more money, known as “provisioning,” hurts earnings. “The banks really have very low credit costs and those can go higher,” said Fred Cannon, who heads research at Keefe Bruyette & Woods. While “energy overall is not a life threatening issue for the banks, it is earnings threatening,” he said.

JPMorgan said on Tuesday it provisioned another $252 million to cover potentially bad wholesale business loans in the quarter, with $140 million of that related to oil and gas lending. Oil prices rallied in March and April, but in recent weeks have fallen again on expectations that loosened sanctions against Iran create the potential for greater supplies. U.S. crude oil prices fell below $50 a barrel on Monday for the first time since April.

This could come back to hurt the west a lot.

• BRICS Countries Launch New Development Bank In Shanghai (BBC)

The Brics group of emerging economies on Tuesday launched its New Development Bank (NDB) in Shanghai. The bank is backed by Brazil, Russia, India, China and South Africa – collectively known as Brics countries. The NDB will lend money to developing countries to help finance infrastructure projects. The bank is seen as an alternative to the World Bank and the IMF, although the group says it is not a rival. “Our objective is not to challenge the existing system as it is but to improve and complement the system in our own way,” NDB President Kundapur Vaman Kamath said. The Brics nations have criticised the World Bank and the IMF for not giving developing nations enough voting rights. The bank is expected to issue its first loans early next year.

The opening comes two weeks after the last Brics summit in the Russian city Ufa, where the final details were discussed. At the time, Russian Foreign Minister Sergei Lavrov said that the five countries “illustrate a new polycentric system of international relations”.
The bank is to start out with a capital of $50bn though the amount is to be doubled in the coming years. The biggest contributor will be the world’s second largest economy China, which also led the establishment of another new international bank, the Beijing-based Asian Infrastructure Development Bank. The NDB is to be headed by a rotating leadership with the first president, Mr Kamath, coming from India. It was first proposed in 2012 but protracted negotiations over headquarters, management and funding have long delayed the actual launch.

Farrell keeps at it.

• Pope Francis Leading The New American (Socialist) Revolution (Paul B. Farrell)

Yes, Pope Francis is encouraging civil disobedience, leading a rebellion. Listen closely, Francis knows he’s inciting political rebellion, an uprising of the masses against the world’s superrich capitalists. And yet, right-wing conservatives remain in denial, tuning out the pope’s message, hoping he’ll just go away like the “Occupy Wall Street” movement did. Never. America’s narcissistic addiction to presidential politics is dumbing down our collective brain. Warning: Forget Bernie vs. Hillary. Forget the circus-clown-car distractions created by Trump vs. the GOP’s Fab 15. Pope Francis is only real political leader that matters this year. Forget the rest. Here’s why:

Pope Francis is not just leading a “Second American Revolution,” he is rallying people across the Earth, middle class as well as poor, inciting billions to rise up in a global economic revolution, one that could suddenly sweep the planet, like the 1789 French storming the Bastille. Unfortunately, conservative capitalists — Big Oil, Koch billionaires, our GOP Congress and all fossil-fuel climate-science deniers — are blind to the fact their ideology is on the wrong side of history, that by fighting a no-win battle they are committing suicide, self-destructing their own ideology. The fact is: The era of capitalism is rapidly dying, a victim of its own success, sabotaged by greed and a loss of a moral code. In 1776 Adam Smith’s capitalism became America’s core economic principle.

We enshrined his ideal of capitalism in our constitutional freedoms. We prospered. America became the greatest economic superpower in world history. But along the way, America forgot Smith’s original foundation was in morals, values, doing what’s right for the common good. Instead we drifted into Ayn Rand’s narcissistic “mutant capitalism,” as Vanguard’s founder Jack Bogle called the distortion of Adam Smith’s principles in his classic, “The Battle for the Soul of Capitalism.” The battle is lost. In the generation since the Reagan Revolution, America’s self-centered, consumer-driven, mutant capitalism lost its moral compass, drifting: Inequality explodes, income growth stagnates, the poor keep getting poorer. Yet across the world, billionaires have explode from 322 in 2000 to 1,826 in 2015, with 11 trillionaire capitalist families predicted to control the planet by 2100.

But not for much longer, as Pope Francis’ revolution accelerates, as his relentless socialist message of sacred rights for all people makes clear. Why? Our mutating capitalist elite have triggered a massive backlash, a “profound human crisis, the denial of the primacy of the human person. The worship of the ancient golden calf has returned in a new and ruthless guise in the idolatry of money.”

“..sea level rise of at least 10 feet in as little as 50 years.”

• Earth’s Most Famous Climate Scientist Issues Bombshell Sea Level Warning (Slate)

In what may prove to be a turning point for political action on climate change, a breathtaking new study casts extreme doubt about the near-term stability of global sea levels. The study—written by James Hansen, NASA’s former lead climate scientist, and 16 co-authors, many of whom are considered among the top in their fields—concludes that glaciers in Greenland and Antarctica will melt 10 times faster than previous consensus estimates, resulting in sea level rise of at least 10 feet in as little as 50 years. The study, which has not yet been peer reviewed, brings new importance to a feedback loop in the ocean near Antarctica that results in cooler freshwater from melting glaciers forcing warmer, saltier water underneath the ice sheets, speeding up the melting rate.

Hansen, who is known for being alarmist and also right, acknowledges that his study implies change far beyond previous consensus estimates. In a conference call with reporters, he said he hoped the new findings would be “substantially more persuasive than anything previously published.” I certainly find them to be. To come to their findings, the authors used a mixture of paleoclimate records, computer models, and observations of current rates of sea level rise, but “the real world is moving somewhat faster than the model,” Hansen says. Hansen’s study does not attempt to predict the precise timing of the feedback loop, only that it is “likely” to occur this century. The implications are mindboggling: In the study’s likely scenario, New York City—and every other coastal city on the planet—may only have a few more decades of habitability left.

That dire prediction, in Hansen’s view, requires “emergency cooperation among nations.”We conclude that continued high emissions will make multi-meter sea level rise practically unavoidable and likely to occur this century. Social disruption and economic consequences of such large sea level rise could be devastating. It is not difficult to imagine that conflicts arising from forced migrations and economic collapse might make the planet ungovernable, threatening the fabric of civilization.”

How The IMF Can Save Greece And Itself

Jun 112015

June 11, 2015 Posted by Raúl Ilargi Meijer at 2:06 pm Finance Tagged with: AIIB, Banks, EU, Greece, IMF, relevance, reputation, Troika, US 1 Response »

G.G. Bain Auto polo, somewhere in New York 1912

There’s a Reuters article by Paul Taylor today that’s thought provoking, but not along the same line of thought that the writer follows (or the twist he gives to it). Taylor concludes that the IMF would love to wash its hands off Greece, but can’t because it’s subservient to German and Brussels interests (a junior partner). However, he also describes, without realizing it, why and how the Fund can rectify that.

Not that we’re not under the illusion the IMF is prone to latch on to the following, but that it would nevertheless be an extremely wise move for the Fund, and especially for its reputation. Which, no matter how you see it, is under threat from its Asian ‘competitor’, the Asian Infrastructure Investment Bank (AIIB), not in the least because the non-western world has long found that the west has far too much power in the IMF, which after all is a global organization.

In that vein, let’s start off with an article the FT published in April 2013, by Ousmène Mandeng, who also features in Taylor’s piece. This former IMF deputy division chief pointed out what unease the IMF role in Greece caused, and how that role undermined its role as an international institution. Today, nothing has changed.

The IMF Must Quit The Troika To Survive

There are many victims of the eurozone crisis but one loser is seldom mentioned: the IMF has suffered considerable collateral damage. It has been dragged along in an unprecedented set-up as a junior partner within Europe, used as a cover for the continent’s policy makers and its independence lost. The monetary fund was set up as a technocratic institution. That, indeed, is why it was brought into Europe: it was felt that a neutral broker was needed to fix the eurozone’s problems.

It is an outsider that would seem less biased in its assessments of peripheral eurozone countries than, say, the chancellor of Germany or the president of the European Commission. While the distribution of voting power within the IMF has been controversial for some time, it is a consensus-driven body. Its independence from any one region or power has provided the basis for efficient decision-making – and is essential to it.

That last sentence sounds more like wishful dreaming than an assessment of reality.

So the fact that decisions about IMF-supported adjustment programmes are seemingly being taken in Berlin, Frankfurt and Brussels should horrify its members.

The commission and the ECB are not even members of the IMF yet they seem to be running the show.

Together with the IMF, they are the troika running the continent’s rescues. Being part of this approach means political meddling has been institutionalised. The approach to the eurozone crisis also undermines the long-running efforts to reform the governance of the IMF, which were, after all, intended to reduce the disproportionate influence of western European governments.

The interests of other eurozone countries or institutions dominate proceedings unduly, so it is often unclear whether the interests of the IMF, the global economy, the eurozone or individual countries are being protected by its work.

For the neutral observer, it seems very clear whose interests the IMF ‘protects’.

[..] troika adjustment programmes have been guided often by the needs of neighbouring European governments rather than global economic considerations. It would surely already have walked away from Greece had it not been held back by political inconvenience. The eurozone has further undermined the IMF by setting up its own crisis resolution institution. The European Stability Mechanism is for all practical purposes a European monetary fund.

Proposals for an Asian monetary fund during the Asian crisis were attacked with good reason: there was real concern that a regional fund would reduce the effectiveness of multilateral co-operation. These concerns seem to have been forgotten.

Well, those concerns are back.

It is not hard to imagine a scenario where a country has suffered a considerable economic shock and requires significant financial resources to avoid a painful and disruptive adjustment – say a large debt restructuring. In such circumstances, the interests of that nation, the world and neighbouring countries might not be aligned.

The fund cannot be seen as neutral and at the same time serve the immediate interests of the eurozone. [..] the eurozone debacle risks destroying the credibility of the IMF – and therefore the foundations for multilateral economic co-operation.

The IMF’s potential effectiveness has suffered and countries may be less willing to seek assistance from the fund, possibly prolonging future economic pain. This will come to matter a great deal if a larger eurozone country should come to require its help. To save itself, the IMF needs to leave the troika.

The main take-away from this should perhaps be that the IMF has not even so much served the interests of the eurozone, but exclusively those of its richest members, Germany, Britain and France. That this can be damaging in the long term is obvious. But there may be a way it can redeem itself, as we will argue. First, though, let’s go to Taylor’s article today:

IMF’s ‘Never Again’ Experience In Greece May Get Worse

For the IMF, five years of playing junior partner in European bailouts for Greece has been a “never again” experience, and the worst may be yet to come. The global lender has lent far more to Athens than to any other borrower, contributing nearly one-third of the total €240 billion.

But it has sat uncomfortably in the side-car of the Greek rescue. Called in by EU paymaster Germany to try to keep the European institutions and the Greeks honest, the IMF has never had control of the program.

Critics say the IMF has damaged its credibility by going along with political fudges to keep Greece in the euro zone rather than insisting on write-offs, first by private creditors and now by European governments..

Keep that in mind: uncharacteristically, the IMF has not made restructuring debts a priority for Greece. Or, one could argue, debts were restructured, but too late and in the wrong way. That, too, may prove very damaging for the Fund.

“One of the most important lessons for the IMF from the Greek program should be that a multilateral institution should not institutionalize special interests of a subset of its membership,” said Ousmene Mandeng, a former IMF official.. “The interest of the IMF is not necessarily aligned with the EU/ECB,” he said.

In 2013, the IMF published a critical evaluation of its own role in the first Greek bailout in 2010, arguing that it should have insisted on a “haircut” on Greece’s debt to private creditors from the outset. Instead it went along with European governments frightened of a Lehman-style market meltdown and keen to shield their banks from losses.

A 2010 IMF staff position note described default on any debt in advanced economies as “unnecessary, undesirable and unlikely”, yet 18 months later the IMF advocated a 70% “haircut” on Greek government debt as a condition for continued involvement in lending to Athens.

Now IMF chief Christine Lagarde is hinting that European governments need to give Greece debt relief to make the numbers add up, but since this is politically unacceptable in Germany, she has had to talk in code in public. “Clearly, if there were to be slippages from those (fiscal) targets, for the whole program to add up, then financing has to be considered,” Lagarde told a news conference last week.

In other words, politically unacceptable in Germany trumps politically unacceptable in Greece by seven leagues and a boot and a half. That is not just damning for the IMF’s image, it damages that of the EU just as much. The leaders of neither seem to care much. But internally in the IMF, the discussions have always been there, and always provided the right approaches. It’s just that third-party considerations prevailed.

Behind closed doors, IMF officials are telling the Europeans that Greece will not survive without a third bailout program, which will require debt restructuring by European governments. The IMF insists on being repaid in full and is not expected to lend any more to Athens. But Berlin and its allies want the Fund to remain involved..

[..]The Fund prefers to see its role as that of a truth-teller, making an objective assessment of a country’s ability to sustain its debt based on economic criteria such as interest rates and loan maturities, growth, productivity and the fiscal balance. Insiders say privately it would love to get out of the Greek program for good, but the Europeans may not let it.

Summarized: the IMF is a political tool. Nothing new there. But it’s being a tool that threatens for the Fund to become a bit-player in the global scene. China and Russia have seen enough, as, obviously, has Greece. Though Athens whould have been justified in venting a lot more anger about what happened to it than it has, even to this -Syriza- day.

In its various ‘critical evaluations’, the IMF will probably use a term like ‘mistake’. But there is a large difference between ‘mistake’ and fault’ or ‘blunder’ or even ‘criminal neglicence’. And the IMF needs to admit that it has been at fault, and seek to retroactively rectify that fault. If it wants to undo the damage to its reputation, that is.

The 2010 -first- Greek bailout, worth €110 billion, happened without any debt restructuring. Of course that should never have been accepted inside the IMF offices. It was a gross departure from established policy.

But the reason why is crystal clear: 90% of the money didn’t go to Greece, it went to save German, Dutch and French banks who had gambled and lost big-time, largely with loans to an Athens government serving the interests of the country’s existing oligarchic elite. The proper term is ‘collusion’.

After the troika had bailed out the European banks and thus further indebted the Greek people to the tune of another €100 billion, obviously a second bailout became necessary. After all, Greek debt had neither been relieved not restructured. It took just 18 months for that second bailout to enter the scene, stage left.

Meanwhile, those same European banks, handily helped along by the €100 billion they received courtesy of the Greek people, had reduced their exposure to Greek debt from €122 billion to €66 billion. Which put a further € 56 billion pressure on Athens.

In July 2011, Dominique Strauss-Kahn, who had overseen the first bailout, was forced out of the IMF governor role through some ‘bizarre incidents’, and in came Wall Street darling Christine Lagarde. A second bailout package for € 100 billion was agreed, but Greek PM Papandreou didn’t feel secure enough politically to accept its terms without calling a referendum. The EU, though, doesn’t like referendums (it tends to lose out in those).

In short order, Berlin/Paris/London had Papandreou replaced by Yale and Federal Reserve clone Lucas Papademos as Greek PM on November 10 2011. Just 6 days later, they also toppled Silvio Berlusconi as Italian PM, and replaced him with another banking technocrat, Mario Monti. Europe and democracy, it’s a strange-bed-fellows relationship.

That second bailout, agreed to in October 2011, but ratified only in February 2012, included a 53.5% face value loss for bondholders. But since the big ‘foreign’ banks had pulled out, that loss was mainly forced upon Greek banks and funds. Dragging the country’s economy even further down. The pattern is deceptively simple and even almost elegant in its destructiveness.

And that is why we find ourselves where we are today.

The whole point of this long history lesson is that what the IMF can do today to restore its reputation, its independence and indeed its very relevance, is to go back to the first Greek bailout of 2010 – it can simply claim that any deals agreed to under Strauss-Kahn were illegal for, by lack of a better term, pimping reasons-, and to retroactively undo the damage done by any and all deals under the troika umbrella.

That is to say, since the IMF is on the hook for €80 billion, a third of the €240 billion Greece ‘owes’, it can go to the ‘systemic’ European banks that were the recipients of this unjustified largesse, and demand its money back from them, instead of from the Greek people.

That would instantly solve the whole Greek debt issue everyone’s been talking about for forever and a day, the Athens government could go to work on reforms aimed at alleviating the misery forced upon its people instead of having to focus on troika talks 24/7, and all the false narratives about lazy Greeks living above their means could be thrown out the window in one fell swoop.

And the IMF could, make that would, regain its reputation, its credibility and its -global- relevance. Just like that. Overnight.

Like stated at the beginning, we don’t expect it to happen. But the opportunity is there. And it makes a lot more sense than just about anyone in the west will be willing to admit. The IMF can’t just serve only the EU and US and their banking sectors, or its days are numbered. It can either try and restore its reputation by doing what’s right or it can become yet another ingredient in history’s long gone and forgotten alphabet pea soup.

Debt Rattle May 17 2015

May 172015

May 17, 2015 Posted by Raúl Ilargi Meijer at 10:35 am Finance Tagged with: Amazon, arctic, Banks, bubble, crash, debt, equality, gold, Greece, IMF, manufacturing, pope, recession, ZIRP 2 Responses »

Harris&Ewing Painless Dentist, Washington, DC 1918

• Most of US Domestic Manufacturing Now in Technical Recession (Tonelson)

• When Fools Rush In… (Reuters)

• The Coming Crash of All Crashes – but in Debt (Martin Armstrong)

• Are You Ready For The Coming Debt Revolution? (Bill Bonner)

• Exit Strategy, Part One: ZIRP (Mehrling)

• Why Most Gold Bugs Are Dead Wrong (Jim Rickards)

• US Wakes Up To New -Silk- World Order (Pepe Escobar)

• Tsipras Told Lagarde Greece Could Not Pay IMF (Kathimerini)

• Alexis’s Choice (Macropolis)

• German EconMin Says Greece Can Only Get More Aid If It Reforms (Reuters)

• Top German Judge Says Greece Has Valid Claim Over WWII Forced Loan (Kathimerini)

• The 2012 Greek-German Breakthrough That Didn’t Come (Kathimerini)

• Banks Rule the World, but Who Rules the Banks? (Katasonov)

• Pope Francis Extends Agenda Of Change To Vatican Diplomacy (Reuters)

• China’s Amazon Railway Threatens ‘Uncontacted Tribes’ And Rainforest (Guardian)

• ‘Paddle in Seattle’ Arctic Oil Drilling Protest Targets Shell (BBC)

• Early Human Societies Had Gender Equality (Guardian)

Not looking good.

• Most of US Domestic Manufacturing Now in Technical Recession (Tonelson)

[..] the durable goods sub-sector – which represents more than half of domestic manufacturing – entered a technical recession (six months or more of cumulative real output decline), and several industries within durable goods extended their slumps. Here are the manufacturing highlights of the Federal Reserve’s new release on April industrial production:

• According to the Fed, constant dollar manufacturing production in April topped March’s level by just 0.01%. March’s real manufacturing output growth was revised up from 0.13% to 0.29%, but February’s initially revised 0.22% decrease was revised down to a 0.24% drop.

• As a result, after-inflation manufacturing output is 0.54% smaller than last November. Moreover, since January, this production has advanced by only 0.05%.

• The April Fed figures also show that durable goods manufacturing entered a technical recession (with real production down cumulatively by 0.32% since October), and such downturns grew longer in several critical durable goods sub-sectors. In particular,

• although inflation-adjusted automotive output rose by a healthy 1.30% on month in April, its production is still 4.22% lower than in July, 2014;

• thanks to a 0.85% monthly decrease in real output in April, machinery production is now down 0.52% since last August;

“The thing about bubbles is that speculators often realize stocks are overpriced, but think they’ll get out before the crash.”

• When Fools Rush In… (Reuters)

If you want to see the greater fool theory in action, look no further than at what’s happening in the stock market. Since the year 2000 the average small-cap stock in the Russell 2000 Index is up 151% while the average blue chip in the Dow Jones Industrial Average has gained only 57%. As a result, small-cap stocks now seem absurdly overpriced. According to investment research firm MSCI, the average small-cap stock’s price-earnings ratio is 29. The historical average P/E for stocks is about 15.

That’s why GMO, a well-respected mutual fund shop, recently put out one of its grimmest forecasts for small stocks — returns of -1% annualized for the next seven years or -3.2% after deducting inflation. High quality blue chips, by contrast, are expected to deliver 2.7% a year. Yet investors keep pouring money into small-caps. According to Morningstar, small-cap exchange traded funds have experienced $3.3 billion in inflows in 2015 while large-cap ones have seen $35.9 billion in outflows in 2015. The thing about bubbles is that speculators often realize stocks are overpriced, but think they’ll get out before the crash. Both fools and angels know that’s always easier said than done.

“Banks will give secured car loans at around 4% while their cost of funds is really 0%. This is the widest spread since the Panic of 1899.”

• The Coming Crash of All Crashes – but in Debt (Martin Armstrong)

Why are governments rushing to eliminate cash? During previous recoveries following the recessionary declines from the peaks in the Economic Confidence Model, the central banks were able to build up their credibility and ammunition so to speak by raising interest rates during the recovery. This time, ever since we began moving toward Transactional Banking with the repeal of Glass Steagall in 1999, banks have looked at profits rather than their role within the economic landscape. They shifted to structuring products and no longer was there any relationship with the client. This reduced capital formation for it has been followed by rising unemployment among the youth and/or their inability to find jobs within their fields of study.

The VELOCITY of money peaked with our ECM 1998.55 turning point from which we warned of the pending crash in Russia. The damage inflicted with the collapse of Russia and the implosion of Long-Term Capital Management in the end of 1998, has demonstrated that the VELOCITY of money has continued to decline. There has been no long-term recovery. This current mild recovery in the USA has been shallow at best and as the rest of the world declines still from the 2007.15 high with a target low in 2020, the Federal Reserve has been unable to raise interest rates sufficiently to demonstrate any recovery for the spreads at the banks between bid and ask for money is also at historical highs. Banks will give secured car loans at around 4% while their cost of funds is really 0%. This is the widest spread between bid and ask since the Panic of 1899.

We face a frightening collapse in the VELOCITY of money and all this talk of eliminating cash is in part due to the rising hoarding of cash by households both in the USA and Europe. This is a major problem for the central banks have also lost control to be able to stimulate anything.The loss of traditional stimulus ability by the central banks is now threatening the nationalization of banks be it directly, or indirectly. We face a cliff that government refuses to acknowledge and their solution will be to grab more power – never reform.

“..grandparents prey on their grandchildren..”

• Are You Ready For The Coming Debt Revolution? (Bill Bonner)

There is a specter haunting America… and all the developed nations of the world. It is the specter of a debt revolution. We left off yesterday talking about how the economy of the last 30 years – and especially that of the last six years – has favored the old over the young. “Rise up, ye young’uns,” we as much as said, “you have nothing to lose but your parents’ debts.” We showed how the value of U.S. corporate equity, mainly held by older people, had multiplied by 28 times since 1981. That was no honest bull market in stocks; it was a market sent soaring by an explosion of credit. But what did it do for young people whose only assets are their time and their youthful energy? Alas, the real economy has increased by only five times over the same period.

And when you look more closely at work and wages, the specter grows grimmer and more menacing. Average hourly wages have barely budged in the last 30 years. And average household incomes have fallen – from $57,000 to $52,000 – in the 21st century. But as our fingers came to rest yesterday, there was one question hanging in the air, like the smoke from an exploded hand grenade: Why? Was this huge shift – of trillions of dollars of wealth from young working people to old asset holders – an accident? Was it just the maturing of a market economy in the electronic age? Was it because China took the capitalist road in 1979? Or because robots were competing with young people for jobs? Nope… on all three counts.

First, old people, not young people, control government. Ultra-wealthy campaign funders like Sheldon Adelman and the Koch brothers were all born in the 1930s. The big money comes from wealthy geezers like these, eager to buy candidates early in the season when they are still relatively cheap. Old companies fund most Washington lobbyists, too. And old people decide elections: There are a lot of them… and they vote. They know where the money is. Second, the government – doing the bidding of old people – restricts competition, subsidizes well-entrenched industries, raises the cost of employing young people, and directs its bailouts, cheap credit, and contracts to the graybeards. Third, the credit-based money system increases the profits and prices of existing capital. It encourages borrowing and spending.

This rewards the current generation while pushing the costs into the future. None of this was an accident. None of it would have happened without the active intervention of the old folks, using the government to get what they could never have gotten honestly. This is not the same as saying they were completely aware of what they were doing and what consequences their actions would have. We doubt the Nixon administration had any idea what would happen after it tore up the Bretton Woods monetary system in 1971. It was behind the eight ball, fearing foreign governments would call away America’s gold. Few in the White House realized they had made such a calamitous mistake when the president ended the convertibility of the dollar into gold.

And yet it created a world in which parents and grandparents could prey on their grandchildren… for the next 44 years. And it’s still not over. The new credit money – which could be borrowed into existence with no need for any savings or gold backing – was just what old people needed. We have estimated that it increased spending by about $33 trillion over and above what the old, gold-backed system would have allowed.

Rates must rise first.

• Exit Strategy, Part One: ZIRP (Mehrling)

The Fed has announced plans to raise rates in the imminent future, but the market does not believe it. Why not? Conventional wisdom appears to be that the Fed will chicken out, just as it did during the so-called Taper Tantrum. The Fed has signaled its appreciation that “liftoff” will involve increased volatility, and has stated its resolve this time simply to let that volatility happen, but markets don’t believe it. I want to suggest a slightly different source of disconnect, concerning expectations about what exactly will happen in the monetary plumbing when the Fed raises rates. Case in point is the recent Credit Suisse memo, apparently the first of a series, that forecasts “a much larger RRP facility–think north of a trillion” whereas the FOMC itself “expects that it will be appropriate to reduce the capacity of the [RRP] facility soon after it commences policy firming”.

That’s a pretty big disconnect. Pozsar and Sweeney (authors of the CS memo) think about the exit from ZIRP (Zero Interest Rate Policy) from the perspective of wholesale money demand, which they insist is “a structural feature of the system” and “the dominant source of funding in the US money market”. Before the crisis, that money demand was funding the shadow banking system, largely through the intermediation of repo dealer balance sheets. Now, it is funding the Fed’s balance sheet, largely through the intermediation of prime money funds and US bank balance sheets, both of which issue money-like liabilities and invest the proceeds in excess reserves held at the Fed. The big problem that now looms is that neither prime money funds nor banks want that business any more.

Capital regulations have made the bank side of the business unprofitable, and looming requirements that prime money funds mark to market (so-called floating NAV rather than constant NAV) will force them out of the business as well. Where is that money demand going to go? Pozsar and Sweeney say it will go directly to the Fed, causing the swelling of the Reverse Repo Facility pari passu with the shrinking of excess reserves. The mechanism will be a shift from prime money funds and bank deposits into government-only money funds, which will absorb the flow by accumulating RRP.

In other words, the Fed will not be able to shrink its balance sheet as part of this first stage of exit from quantitative easing. It will only be able to shift the way that balance sheet is funded–much less excess reserves held by banks, much more RRP held by government-only money funds. Nevertheless, because this shift will allow the Fed to regain control over the Fed Funds rate, it will accept that consequence. Exit from ZIRP comes before exit from QE.

“China is not trying to destroy the old boys’ club — they are trying to join it.”

• Why Most Gold Bugs Are Dead Wrong (Jim Rickards)

One of the most persistent story lines among gold bugs and market participants who foresee the collapse of the dollar goes something like this: China and many emerging markets including the other BRICS are looking for a way out of the global fiat currency system. That system is dominated today by the U.S. dollar. This dollar dominance allows the U.S. to force certain kinds of behavior in foreign policy and energy markets. Countries that don’t comply with U.S. wishes find themselves frozen out of global payment systems and find their banks unable to transact in dollars for needed imports or to get paid for their exports. Russia, Iran, and Syria have all been subjected to this treatment recently. China does not like this system any more than Russia or Iran but is unwilling to confront the U.S. head-on.

Instead, China is quietly accumulating massive amounts of gold and building alternative financial institutions such as the Asia Infrastructure Investment Bank, AIIB, and the BRICS-sponsored New Development Bank, NDB. When the time is right, China will suddenly announce its actual gold holdings to the world and simultaneously turn its back on the Bretton Woods institutions such as the IMF and World Bank. China will back its currency with its own gold and use the AIIB and NDB and other institutions to lead a new global financial order. Russia and others will be invited to join the Chinese in this new international monetary system. As a result, the dollar will collapse, the price of gold will skyrocket, and China will be the new global financial hegemon. The gold bugs will live happily ever after. The only problem with this story is that the most important parts of it are wrong. As usual, the truth is much more intriguing than the popular version.

Here’s what’s really going on. As with most myths, parts of the story are true. China is secretly acquiring thousands of tons of gold. China is creating new multilateral lending institutions. No doubt, China will announce an upward revision in its official gold holdings sometime in the next year or so. In fact, Bloomberg News reported on April 20, 2015, under the headline “The Mystery of China’s Gold Stash May Soon Be Solved,” that “China may be preparing to update its disclosed holdings…” But the reasons for the acquisition of gold and the updated disclosures, if they happen, are not the ones the blogosphere believes. China is not trying to destroy the old boys’ club — they are trying to join it.

Precious little has been reported on Kerry’s trip to Sochi, even though it was a big turnaround.

• US Wakes Up To New -Silk- World Order (Pepe Escobar)

The real Masters of the Universe in the U.S. are no weathermen, but arguably they’re starting to feel which way the wind is blowing. History may signal it all started with this week’s trip to Sochi, led by their paperboy, Secretary of State John Kerry, who met with Foreign Minister Lavrov and then with President Putin. Arguably, a visual reminder clicked the bells for the real Masters of the Universe; the PLA marching in Red Square on Victory Day side by side with the Russian military. Even under the Stalin-Mao alliance Chinese troops did not march in Red Square. As a screamer, that rivals the Russian S-500 missile systems. Adults in the Beltway may have done the math and concluded Moscow and Beijing may be on the verge of signing secret military protocols as in the Molotov-Ribbentrop pact.

The new game of musical chairs is surely bound to leave Eurasian-obsessed Dr. Zbig “Grand Chessboard” Brzezinski apoplectic. And suddenly, instead of relentless demonization and NATO spewing out “Russian aggression!” every ten seconds, we have Kerry saying that respecting Minsk-2 is the only way out in Ukraine, and that he would strongly caution vassal Poroshenko against his bragging on bombing Donetsk airport and environs back into Ukrainian “democracy”. The ever level-headed Lavrov, for his part, described the meeting with Kerry as “wonderful,” and Kremlin spokesman Dmitry Peskov described the new U.S.-Russia entente as “extremely positive”.

So now the self-described “Don’t Do Stupid Stuff” Obama administration, at least apparently, seems to finally understand that this “isolating Russia” business is over – and that Moscow simply won’t back down from two red lines; no Ukraine in NATO, and no chance of popular republics of Donetsk and Lugansk being smashed, by Kiev, NATO or anybody else. Thus what was really discussed – but not leaked – out of Sochi is how the Obama administration can get some sort of face-saving exit out of the Russian western borderland geopolitical mess it invited on itself in the first place.

Who leaks what, and why?

• Tsipras Told Lagarde Greece Could Not Pay IMF (Kathimerini)

The Greek government is hoping that it will be able to reach a technical agreement with lenders this week, paving the way for it to receive the funds that would allow it to continue meeting its obligations. The difficulty the coalition is facing in servicing its debt and paying pensions and salaries was highlighted by events a few days ago, when – as Kathimerini can reveal – Prime Minister Alexis Tsipras wrote to IMF Managing Director Christine Lagarde to inform her that Athens would not be able to pay the €750 million due to the Fund on May 12 unless the ECB allowed Greece to issue T-bills. Kathimerini understands that the letter, sent on Friday, May 8, was also delivered to European Commission President Jean-Claude Juncker and ECB President Mario Draghi.

Sources also said that Tsipras called US Treasury Secretary Jack Lew to inform him of the situation. It was only over the weekend that a decision to pay the IMF was taken after it emerged that Greece could use some €650 million denominated in Special Drawing Rights issued by the IMF and held in a reserve account to meet the debt repayment. The government provided another €90 millions from other sources to make the payment on May 12. An internal IMF memo leaked by Channel 4 in the UK indicated that Fund officials see Greece’s negotiations with its lenders as being finely balanced. They note that some progress has been made but that the “process is still problematic” as Greek negotiators seem to have “limited room” for maneuver and staff at the institutions do not have access to ministers in Athens.

The note sees progress in the areas of value-added tax, tax administration and an insolvency framework but says that there have been no advances at all in other areas, including on setting new fiscal targets. The IMF officials also express concern that the government is reversing some of the reforms implemented in previous years, especially in terms of the labor market. The memo also raises again the issue of the sustainability of Greece’s debt, saying that there is an “inverse relationship” between the reforms being asked of Greece and the sustainability of its debt. The note, however, says that the Fund is not “pushing European partners to consider a debt relief.”

He had always already chosen his path.

• Alexis’s Choice (Macropolis)

Alexis Tsipras seems to have chosen his path. Whether he will manage to reach the end of it is another matter, but the prime minister’s decision to shake up Greece’s negotiating team and to issue a common statement with European Commission President Jean-Claude Juncker last week made it clear that he prefers the option of agreeing with lenders rather than being left in limbo, or worse. Securing a deal will be some feat. The suggestion last week that the red lines on pensions and labour market reform may be crossed would mean Tsipras entering treacherous territory. It is worth remembering that less than six months ago, his predecessor Antonis Samaras was unwilling – or not able – to pass pension and labour reforms through Parliament, triggering the early presidential election and national vote.

If Tsipras is somehow able to agree to a package that includes policies in these two areas, but is also able to pass it through Parliament and keep his government intact, he will have perhaps completed the most impressive balancing act in modern Greek political history. Whether he is able to do it will depend on the content of the agreement. If most of the measures agreed are seen as restoring fairness in the way that the burden of Greece’s fiscal and structural adjustment is shared, he will have some grounds to argue with SYRIZA MPs and members that the compromise is worth making and the anxiety of the last few months has not been in vain.

However, while the party may accept some of the measures – even the creation of a single VAT rate of around 18% for almost all goods and services – it is difficult to imagine SYRIZA’s most radical personalities sitting back and accepting changes that will affect the majority of pensioners or working Greeks. There is a world of difference between slashing high-end supplementary pensions and having to implement a zero deficit rule that will lead to all of these auxiliary payments being cut or abolished – even though the vast majority come to less than €200 per month. Once Tsipras and his party go behind closed doors to mull the details of an agreement with the institutions (if one actually comes about), there can be no guarantee of what state they will be in when they come out.

There may be a mass walkout, or a few of the more principled or ideologically driven MPs could decide to turn their back on the prime minister. The first scenario would probably lead to the collapse of the government (Tsipras is unlikely to turn to PASOK or Potami to save his administration), while the second would allow the wounded prime minister to hobble on. The third option of holding a referendum to throw the decision back to the Greek electorate is a popular idea among many within SYRIZA but is unlikely to be a risk that Tsipras wants to take.

Regurgitating parrots.

• German EconMin Says Greece Can Only Get More Aid If It Reforms (Reuters)

German Economy Minister Sigmar Gabriel warned the Greek government that Greece could only get further funds if it carried out reforms in a German newspaper interview published on Sunday. Greece’s cash reserves are dwindling and negotiations between Prime Minister Alexis Tsipras’s new left-led government and its lenders over a cash-for-reforms deal have been fraught with delays for months. Asked if Greece could still be saved, Gabriel told Bild am Sonntag that this was up to Athens and said a referendum on the necessary reforms could perhaps speed up decisions. On Monday German Finance Minister Wolfgang Schaeuble suggested Greece might need a referendum to approve painful economic reforms on which its creditors are insisting, but Athens said it had no such plan for now.

Gabriel stressed that the government needed to take action in any case: “A third aid package for Athens is only possible if the reforms are implemented. We can’t simply send money there.” He warned about the consequences of Greece quitting the single currency bloc, saying: “A Greek exit would not only be highly dangerous economically but also politically.” Gabriel said if one country were to leave the euro zone, the rest of the world would look at Europe differently: “Nobody would have any confidence in Europe anymore if we break up in our first big crisis. We shouldn’t talk ourselves into a Grexit.”

There are videos playing in Athens subway stations that deal with war reparations.

• Top German Judge Says Greece Has Valid Claim Over WWII Forced Loan (Kathimerini)

A top German judge has said that Greece has a just claim in its demands for Berlin to repay a loan Athens was forced to issue its Nazi occupiers during World War II. In an interview with Der Spiegel magazine published on Saturday, Dieter Deiseroth, a judge at the Supreme Administrative Court, said that the Greek claim for compensation regarding the money given by the Bank of Greece (estimated at some 11 billion euros in today’s money) has a strong basis as “there’s a lot of evidence to suggest it was a loan.” Deiseroth also argued that private claims for compensation are also valid. “Greece has not waived its demands,” said the judge, who added that an absence of legal action from Athens so far does not constitute an abandoning of claims.

Part 3 in a series on Merkel and Greece.

• The 2012 Greek-German Breakthrough That Didn’t Come (Kathimerini)

Even after the formation of the pro-bailout government under Antonis Samaras following the June 2012 elections, eurozone hawks continued to press for a clean break from Greece. The same pressure was also being applied within the German government: The “infected limb” camp, led by Finance Minister Wolfgang Schaeuble, tried to convince Chancellor Angela Merkel that a Greek exit from the eurozone was not only manageable but also in Europe’s long-term interest. This was the time the so-called Plan Z (leaked to the Financial Times last year) was also put forward. The circle of officials who knew about this contingency plan for handling a Greek eurozone exit was tiny. Joerg Asmussen, Germany’s former state secretary at the Finance Ministry and a member of the ECB’s executive board since the start of 2012, was one of its main overseers.

Asmussen had briefed Merkel on the plan, but the Chancellery had played no role in designing it. In the opposing camp were those who feared a domino effect, arguing that a Greek exit would lead to the collapse of the eurozone. Asmussen and Merkel’s former adviser, Bundesbank chief Jens Weidmann, told the chancellor that they could not know which of the two camps was right. They questioned whether it was possible to shield Portugal from possible Grexit. Merkel became convinced that the risks of a rupture were unpredictably high. By the time she returned from her summer hiking holiday in northern Italy in mid-August, the chancellor had decided to put an end to all discussion of a Greek exit. However, she still needed a partner in Athens she could count on. A few days later she was due to meet with Samaras in Berlin, to ascertain whether he was someone she could do business with.

A circle jerk that leaves the highest levels invisible.

• Banks Rule the World, but Who Rules the Banks? (Katasonov)

These days, it is already a truism that the hegemony of the US is based on the Federal Reserve System’s (FRS) printing press. It is also more or less clear that the shareholders of the FRS are major international banks. These include not just US (Wall Street) banks, but also European banks (London City banks and several in continental Europe). During the 2007-2009 global financial crisis, the FRS quietly gave out more than $16 trillion worth of credit (virtually interest free) to various banks. The owners of the money gave out the credit to themselves, that is to the main shareholder banks of the Federal Reserve. Under strong pressure from US Congress, a partial audit of the FRS was carried out at the beginning of this decade and the results were published in the summer of 2011. The list of credit recipients is also a list of the FRS’ main shareholders.

They are as follows (the amount of credit received is shown in brackets in billions of dollars): Citigroup (2,500); Morgan Staley (2,004); Merrill Lynch (1,949); Bank of America (1,344); Barclays PLC (868); Bear Sterns (853); Goldman Sachs (814); Royal Bank of Scotland (541); JP Morgan (391); Deutsche Bank (354); Credit Swiss (262); UBS (287); Leman Brothers (183); Bank of Scotland (181); and BNP Paribas (175). It is interesting that a number of the recipients of FRS credit are not American, but foreign banks: British (Barclays PLC, Royal Bank of Scotland, Bank of Scotland); Swiss (Credit Swiss, UBS); the German Deutche Bank; and the French BNP Paribas. These banks received nearly $2.5 trillion from the Federal Reserve. We would not be mistaken in assuming that these are the Federal Reserve’s foreign shareholders.

While the makeup of the Federal Reserve’s main shareholders is more or less clear, however, the same cannot be said of the shareholders of those banks who essentially own the FRS’ printing press. Who exactly are the shareholders of the Federal Reserve’s shareholders? To begin with, let us take a good look at the leading US banks. Six banks currently represent the core of the US banking system. The ‘big six’ includes Bank of America, JP Morgan Chase, Morgan Stanley, Goldman Sachs, Wells Fargo, and Citigroup. They occupy the top spots in US bank ratings in terms of indices such as amount of capital, controlled assets, deposits attracted, capitalisation and profit. If we were to rank the banks in terms of assets, then JP Morgan Chase would be in first place ($2,075 billion at the end of 2014), while Wells Fargo is in the lead in terms of capitalisation ($261.7 billion in the autumn of 2014).

In terms of this index, incidentally, Wells Fargo came out on top not only in America, but in the world (although in terms of assets, the bank is only fourth in America and does not even figure in the world’s top twenty). There is some shareholder information on the official websites of these banks. The bulk of the big six US banks’ capital is in the hands of so-called institutional shareholders – various financial companies. These include banks, which means there is cross shareholding. At the beginning of 2015, the number of institutional shareholders of each bank were: Bank of America – 1,410; JP Morgan Chase – 1,795; Morgan Stanley – 826; Goldman Sachs – 1,018; Wells Fargo – 1,729; and Citigroup – 1,247. Each of these banks also has a fairly clear group of major investors (shareholders). These are investors (shareholders) with more than one per cent of capital each and there are usually between 10 and 20 such shareholders. It is striking that exactly the same companies and organisations appear in the group of major investors for every bank.

Above all parties, and above all politics. A unique position.

• Pope Francis Extends Agenda Of Change To Vatican Diplomacy (Reuters)

Pope Francis’ hard-hitting criticisms of globalization and inequality long ago set him out as a leader unafraid of mixing theology and politics. He is now flexing the Vatican’s diplomatic muscles as well. Last year, he helped to broker an historic accord between Cuba and the United States after half a century of hostility. This past week, his office announced the first formal accord between the Vatican and the State of Palestine — a treaty that gives legal weight to the Holy See’s longstanding recognition of de-facto Palestinian statehood despite clear Israeli annoyance. The pope ruffled even more feathers in Turkey last month by referring to the massacre of up to 1.5 million Armenians in the early 20th century as a “genocide”, something Ankara denies.

After the inward-looking pontificate of his scholarly predecessor, Pope Benedict, Francis has in some ways returned to the active Vatican diplomacy practiced by the globetrotting Pope John Paul II, widely credited for helping to end the Cold War. Much of his effort has concentrated on improving relations between different faiths and protecting the embattled Middle East Christians, a clear priority for the Catholic Church. However in an increasingly fractured geopolitical world, his diplomacy is less obviously aligned to one side in a global standoff between competing blocs than that of John Paul’s 27-year-long papacy.

This is reinforced by his status as the world’s first pope from Latin America, a region whose turbulent history, widespread poverty and love-hate relationship with the United States has given him an entirely different political grounding from any of his European predecessors. “Under this pope, the Vatican’s foreign policy looks South,” said Massimo Franco, a prominent Italian political commentator and author of several books on the Vatican. He said the pope has been careful to avoid taking sides on issues like Ukraine, where he has never defined Russia as an aggressor, but has always referred to the conflict between the government and Moscow-backed rebels as a civil war.

China buys the world as its economy is self-destructing. How do you explain that to your grandchildren?

• China’s Amazon Railway Threatens ‘Uncontacted Tribes’ And Rainforest (Guardian)

Chinese premier Li Keqiang is to push controversial plans for a railway through the Amazon rainforest during a visit to South America next week, despite concerns about the possible impact on the environment and on indigenous tribes. Currently just a line on a map, the proposed 5,300km route in Brazil and Peru would reduce the transport costs for oil, iron ore, soya beans and other commodities, but cut through some of the world’s most biodiverse forest. The six-year plan is the latest in a series of ambitious Chinese infrastructure projects in Latin America, which also include a canal through Nicaragua and a railway across Colombia. The trans-Amazonian railway has high-level backing.

Last year, President Xi Jinping signed a memorandum on the project with his counterparts in Brazil and Peru. Next week, during his four-nation tour of the region starting on Sunday, Li will, according to state-run Chinese media, suggest a feasibility study. Starting near Açu Port in Rio de Janeiro state, the proposed track would connect Brazil’s Atlantic coast with Peru’s Pacific coast, via the states of Goiás, Mato Grosso and Rondônia. The logistical challenges are considerable because the line will pass through dense forest, swamps and then either desert or mountains (there are two options for the Peruvian end of the route), as well as areas of conflict between tribes and drug traffickers.

Near the Bolivian border, it will come close to the “Devil’s Railway”, an ill-fated link built in 1912 between Porto Velho in Brazil and Guajará-Mirim in Bolivia. It cost 6,000 lives and was barely used after the collapse of the rubber industry. Financing is likely to come from the China Development Bank, with construction carried out by local firms and the China International Water and Electric Corporation. China’s involvement is partly explained by a desire to reduce freight costs, but it also hopes to create business for domestic steel and engineering firms that have been hit by the slowdown of the Chinese economy.

Done deal. Unless prices go to $20.

• ‘Paddle in Seattle’ Arctic Oil Drilling Protest Targets Shell (BBC)

Hundreds of people in kayaks and small boats have staged a protest in the north-western US port city of Seattle against oil drilling in the Arctic by the Shell energy giant. Paddle in Seattle was held by activists who said the firm’s drilling would damage the environment. It comes after the first of Shell’s two massive oil rigs arrived at the port. The firm wants to move them in the coming months to explore for oil off Alaska’s northern coast. Earlier this week, Shell won conditional approval from the US Department of Interior for oil exploration in the Arctic. The Anglo-Dutch company still must obtain permits from the federal government and the state of Alaska to begin drilling. It says Arctic resources could be vital for supplying future energy needs.

A solar-powered barge – The People’s Platform – joined the protesters, who chanted slogans and also sang songs. “This weekend is another opportunity for the people to demand that their voices be heard,” Alli Harvey, Alaska representative for the Sierra Club’s Our Wild America campaign, was quoted as saying by the Associated Press news agency. “Science is as clear as day when it comes to drilling in the Arctic – the only safe place for these dirty fuels is in the ground.” The protesters later gathered in formation and unveiled a big sign which read “Climate justice now”. They mostly stayed outside the official 100-yard (91m) buffer zone around the Polar Pioneer, the Seattle Times newspaper reports. Police and coastguard monitored the flotilla, saying it was peaceful.

The demonstrators are now planning to hold a day of peaceful civil disobedience on Monday in an attempt to shut down Shell operations in the port, the newspaper adds. The port’s Terminal 5 has been at the centre of a stand-off between environmentalists and the city authorities after a decision earlier this year to allow Shell use the terminal as a home base for the company’s vessels and oil rigs. Shell stopped Arctic exploration more than two years ago after problems including an oil rig fire and safety failures. The company has spent about $6bn on exploration in the Arctic – a region estimated to have about 20% of the world’s undiscovered oil and gas.

Agriculture killed off women’s equal status. And we’re still paying a dear price for that.

• Early Human Societies Had Gender Equality (Guardian)

Our prehistoric forebears are often portrayed as spear-wielding savages, but the earliest human societies are likely to have been founded on enlightened egalitarian principles, according to scientists. A study has shown that in contemporary hunter-gatherer tribes, men and women tend to have equal influence on where their group lives and who they live with. The findings challenge the idea that sexual equality is a recent invention, suggesting that it has been the norm for humans for most of our evolutionary history. Mark Dyble, an anthropologist who led the study at University College London, said: “There is still this wider perception that hunter-gatherers are more macho or male-dominated. We’d argue it was only with the emergence of agriculture, when people could start to accumulate resources, that inequality emerged.”

Dyble says the latest findings suggest that equality between the sexes may have been a survival advantage and played an important role in shaping human society and evolution. “Sexual equality is one of a important suite of changes to social organisation, including things like pair-bonding, our big, social brains, and language, that distinguishes humans,” he said. “It’s an important one that hasn’t really been highlighted before.” The study, published in the journal Science, set out to investigate the apparent paradox that while people in hunter-gatherer societies show strong preferences for living with family members, in practice the groups they live in tend to comprise few closely related individuals.

The scientists collected genealogical data from two hunter-gatherer populations, one in the Congo and one in the Philippines, including kinship relations, movement between camps and residence patterns, through hundreds of interviews. In both cases, people tend to live in groups of around 20, moving roughly every 10 days and subsisting on hunted game, fish and gathered fruit, vegetables and honey. [..] The authors argue that sexual equality may have proved an evolutionary advantage for early human societies, as it would have fostered wider-ranging social networks and closer cooperation between unrelated individuals. “It gives you a far more expansive social network with a wider choice of mates, so inbreeding would be less of an issue,” said Dyble. “And you come into contact with more people and you can share innovations, which is something that humans do par excellence.”

Debt Rattle May 9 2015

May 092015

May 9, 2015 Posted by Raúl Ilargi Meijer at 11:07 am Finance Tagged with: Banks, betrayal, crash, deflation, democracy, jobs, pensions, spying, volatility 11 Responses »

Arthur Rothstein Steam shovels on flatcars, Cherokee County, Kansas 1936

• Wall Street Soars On Hopes Of Fed Reprieve, Yet Sting In The Tail (AEP)

• Wall Street Is One Sick Puppy (David Stockman)

• Currencies’ Wild Ride to Get Wilder as US Rate Rise Beckons (Bloomberg)

• Low Productivity Alarms US Policy Makers (FT)

• Countdown To The Stock-Market Crash Of 2016 Is Ticking Louder (Paul B. Farrell)

• ‘Good’ Jobs Report? 15 Million Unemployed People Want To Work (MarketWatch)

• UK Braces for Battle Over Europe After Cameron’s Victory (Bloomberg)

• The $364 Billion Real Estate Threat Inside China’s Biggest Banks (Bloomberg)

• Deflation Works! (Bill Bonner)

• Documents Distributed by Greece’s Varoufakis ‘Baffle’ Eurozone Officials (WSJ)

• Illinois Supreme Court Strikes Down Law to Rein in Public Sector Pensions (WSJ)

• Democracy Is A Religion That Has Failed The Poor (Guardian)

• Petrobras: The Betrayal of Brazil (Bloomberg)

• The Clintons and Their Banker Friends- The Wall Street Connection (Nomi Prins)

• Germany Spies, US Denies (Bloomberg)

• Trans-Pacific Partnership Will Lead To A Global Race To The Bottom (Guardian)

• Is There Such A Thing As A Skyscraper Curse? (Economist, March 28)

• Global Crime Syndicates Are Buying Expensive Australia Real Estate (Domain)

• Australian PM Adviser Exposes Cimate Change As Hoax, Shames All of Science (SBS)

“Markets keep treating weak data as “good news” (because it delays Fed tightening), but there comes a point when the macro-economic malaise does so much damage to earnings that reality catches up.”

• Wall Street Soars On Hopes Of Fed Reprieve, Yet Sting In The Tail (AEP)

Pay packets have fallen across the gamut of US industry, manufacturing, and trade over the last two months, greatly reducing the likelihood of any rise in interest rates by the US Federal Reserve until later this year. The Dow Jones index of stocks soared by 260 points to 18,186 in early trading after the US non-farm payrolls report for April revealed that wage pressures remain all but dead in the American labour market. Contracts on the futures markets immediately pushed out the first rate rise for several months, pricing in a 51pc chance of ‘lift-off’ in December. The long-feared inflexion point for the global monetary cycle may have been delayed once again. Emerging market equities rallied strongly on hopes of another six-month reprieve for dollar debtors across the world.

Companies and state entities outside the US have borrowed a record $9 trillion in dollars, leaving them acutely vulnerable to a currency “margin call” triggered by Fed tightening. This dollar leverage has jumped from $2 trillion fourteen years ago. It is heavily concentrated in Brazil, Russia, South Africa, Turkey, China and the rest of emerging Asia. The US generated 223,000 jobs in April and the unemployment rate fell to a 7-year low of 5.4pc, yet the underlying trend remains disappointingly weak. Both overtime and the number of hours worked edged down. The jobs figure for March was revised down sharply to 85,000. The labour participation rate for men is still stuck at 69.4pc, six percentage points lower than it was fifteen years ago and the lowest level since modern data began after WWII.

Had it not been for a surge in pay for financial services – the spill-over from an increasingly frothy asset boom – overall weekly earnings would have dropped for a second month in a row. It is unclear how the Fed will respond this soggy data. Dennis Lockhart, head of the Atlanta Fed, remained hawkish this week, insisting that the economy would soon return to growth rates of 2.5pc to 3pc after grinding to halt in the first quarter. He warned that a rate rise in June was still “in play”, contrary to market assumptions. “I’m still of the view that the conditions will be appropriate in the middle of the year, which we are getting closer to,” he said. Yet the US economy has not yet recovered from a winter shock.

Mr Lockhart’s own advance indicator – the Atlanta Fed’s GDPNow series – suggests that growth has been running at a pace of just 0.8pc in the five weeks to early May. It is below the Fed’s stall speed gauge. China’s exports fell 6.9pc in April from a year earlier and remain shockingly weak. The eurozone’s retail sales unexpectedly slid 0.8pc in March, and Germany’s index of core industrial orders has turned negative. Markets keep treating weak data as “good news” (because it delays Fed tightening), but there comes a point when the macro-economic malaise does so much damage to earnings that reality catches up.

“..the number of full-time jobs dropped by 252,000 in April – hardly an endorsement of the awesomeness theme.”

• Wall Street Is One Sick Puppy (David Stockman)

The robo-traders – both the silicon and carbon based varieties – were raging again today in celebration of a “goldilocks” jobs report. That is, the headline number for April was purportedly strong enough to sustain the “all is awesome” meme, while the sharp downward revision for March to only 85,000 new jobs will allegedly enable the Fed to kick-the-can yet again – this time until its September meeting. As one Cool-Aid drinker put it, ‘“Probably best scenario in which the market was hoping for growth but not (so strong) that the Fed needs to hike in June,” said Ryan Larson at RBC Global Asset Management.’ Today’s knee jerk rip, of course, is the fifth one of roughly this magnitude since February 20th, but its all been for naught.

The headline based rips have not been able to levitate the S&P 500 for nearly three months now.In fact, however, the incoming data since February 20 has been uniformly bad. The chop depicted in the graph, therefore, only underscores that the market is desperately churning as it attempts to sustain an irrationally exuberant high. Indeed, today’s jobs data was not bullish in the slightest once you get below the headline. Specifically, the number of full-time jobs dropped by 252,000 in April – hardly an endorsement of the awesomeness theme. True enough, the monthly number for this important metric bounces around considerably. Yet that’s exactly why the algo fevers stirred by the incoming data headlines are just one more piece of evidence that the stock market is completely broken.

What counts is not the headline, but the trend; and when it comes to full time jobs there are still 1.1 million fewer now than at the pre-crisis peak in Q4 2007. Needless to say, a net shrinkage of full-time jobs after seven and one-half years is not exactly something that merits a 20.5X multiple on the S&P 500 or 75X on the Russell 2000. That’s the case especially when that same flat lining jobs trend has been underway for nearly a decade and one-half. To wit, since April 2000 the BLS’ full time job count has grown at only 0.35% annually. Now how in the world do you capitalize earnings at a rate which implies gangbusters growth of output and profits as far as the eye can see, when the US economy is self-evidently trapped in a deep rut that represents a drastic downshift from all prior history?

Rollercoaster ahead.

• Currencies’ Wild Ride to Get Wilder as US Rate Rise Beckons (Bloomberg)

If you thought the past week in the foreign-exchange market was wild, you haven’t seen anything yet. That’s the outlook from investors and strategists ranging from State Street Global Advisors to Cambridge Global Payments after price swings in the euro versus the dollar approached the highest level in more than three years. Volatility surged as traders unwound bets for gains in European bonds and stocks that had been funded in euros, prompting demand for the shared currency to close out what are known as carry trades. Price swings accelerated Friday after a lackluster U.S. employment report, raising more questions than answers about the timing of Federal Reserve interest-rate increases. “This unusual backdrop is going to create some turmoil,” Dan Farley at State Street.

“The next several weeks are likely to be choppy as things continue to be absorbed, bouncing off the good and the bad news.” The euro’s one-month implied volatility jumped as high as 13.2%, inching toward the 14% level where it last closed in December 2011. The common currency was unchanged on the week at $1.1199 as of 5 p.m. on Friday in New York. The Bloomberg Dollar Spot Index slid 0.7%, falling a fourth week in its longest run of declines since October 2013. The greenback weakened 0.3% to 119.76 yen. Europe’s bond rout wiped more than $400 billion from the value of the region’s debt in the past two weeks as investors questioned whether the ECB will continue its program of asset purchases through September 2016 amid signs the region’s economy is picking up.

The selloff eroded the premium Treasuries pay over bunds to the narrowest since February, lessening the attractiveness of dollar-denominated assets. “You’re going to see continued volatility driven by the bond markets,” said Karl Schamotta at Cambridge Global Payments in Toronto. “Investors are increasingly concerned that they could be caught in the exits when everyone rushes out of the theater.”

Apparently these people find it hard to see what’s wrong.

• Low Productivity Alarms US Policy Makers (FT)

US innovators claim they have never been busier, but their ideas are persistently failing to transform the country’s economic data. Labour productivity fell an annual 1.9% in the first three months of the year, while unit labour costs rose sharply, official figures showed on Wednesday. The output per hour figures came as the country’s gross domestic product barely grew during the quarter even as it added an average of nearly 200,000 jobs a month. The numbers confirm a longer-run trend of slowing productivity that is alarming policy makers and complicating Federal Reserve decision-making. “It has slowed in quite a worrying way,” said Torsten Slok, chief international economist at Deutsche Bank.

Productivity, which measures how efficiently inputs such as labour and capital are used, evolves over years and decades. This means a single quarter’s data should not be over-interpreted — especially one that was hit by one-time factors including freezing temperatures. The first quarter dive mirrors a weather-affected first quarter in 2014. But the numbers, which follow a 2.1% annual productivity drop in the fourth quarter, confirm a broader tendency that has been mirrored in a number of advanced economies and has perplexed economists. Analysis from the San Francisco Federal Reserve shows there was a surge in US productivity between 1995 and 2003, driven by the IT boom, with growth doubling from the annualised average of 1.5% set in the 1970s, 1980s and early 1990s.

The picture then reversed, however, and the US has been stuck in a lower-productivity growth trend since. Internationally comparable figures from the Conference Board show a broader slowdown among advanced economies including the UK and Japan over recent decades. Some economists say these weak numbers are jarring given the inventiveness being displayed in sectors such as software, medicine, and advanced manufacturing, and the rapid advance of robotics. “People are saying the pace of innovation has never been higher,” says Martin Neil Baily, an economist at Brookings, the think-tank.

“2016 sounds more and more like McCain/Palin’s 2008 loss when the GOP was also deep in denial about the coming market crash..”

• Countdown To The Stock-Market Crash Of 2016 Is Ticking Louder (Paul B. Farrell)

Warning bells just keep getting louder and louder as the countdown to the Crash of 2016 keeps ticking. Wall Street’s in denial, but the Washington Post warns: “U.S. economic growth slows to 0.2%, grinding nearly to a halt.” USA Today hears “Bubble Talk” at the Vegas “Davos for Geeks.” Earlier the Wall Street Journal warned, “declining population could reduce global economic growth by 40%.” Then recently the “slow-growth Fed” was blamed. Wrong, former Fed chief Ben Bernanke counterattacked: “I’m waiting for the Journal to argue for a well-structured program of public infrastructure development, which would support growth in the near term by creating jobs and in the longer term by making our economy more productive.”

But for years the Fed “has been pretty much the only game in town as far as economic policy goes.” Today “we should be looking for a better balance between monetary and other growth-promoting policies, including fiscal policy.” Fiscal policy? No, Ben, not a chance. The GOP controls economic policy. And they will never give “growth-promoting fiscal policy” victories to President Obama and Hillary Clinton before the presidential election of 2016. Never. In spite of Bernanke’s obviously rational solution to the core problems of the American economy, one that would help the American people, the GOP will never, ever agree to fiscal stimulus programs that give the Democrats bragging rights and make Obama and Clinton look good before the elections.

The GOP is hungry for power, very hungry. They lost the presidency twice to Obama. They want it back. And now their collective ego is convinced that with the $889 million backing from the Koch Empire they can beat Hillary and take absolute control of the American democracy: win the presidency, hold Congress, gain the power to issue executive orders and veto legislation, appoint more than 6,000 insiders including cabinet officers, regulatory heads, federal judges, ambassadors, staff bureaucrats, and more. Yes, the GOP knows all that power is on the line in 2016. Listen: 2016 sounds more and more like McCain/Palin’s 2008 loss when the GOP was also deep in denial about the coming market crash. Money manager Jeremy Grantham’s predictions see beyond the Big Oil-funded GOP’s gross denial, he sees that “around the presidential election or soon after, the market bubble will burst, as bubbles always do, and will revert to its trend value, around half of its peak or worse.”

Only 15 million out of 93 million not in labor force? So 78 million bluntly refuse to work? Hard to believe.

• ‘Good’ Jobs Report? 15 Million Unemployed People Want To Work (MarketWatch)

There is good news in the jobs market, just not enough of it. The Bureau of Labor Statistics reported Friday that the U.S. economy continued to create jobs at a healthy pace of nearly 200,000 per month in the first four months of the year, and the unemployment rate dipped to 5.4% in April, the lowest since May 2008. But we are still far from achieving an economy that offers a job for everyone who wants one. And wages are barely growing for the 148 million who do have a job. Nearly 15 million jobless people say they want to work, but the Federal Reserve seems nearly ready to declare victory, figuring that the unemployment rate can’t go much lower without setting off a harmful inflationary spiral.

There is scant evidence that tight labor markets are putting any pressure on companies to raise their prices: Unit labor costs are up just 1.1% in the past year. Inflation — no matter how you measure it — is not a risk in the near term, or even in the medium term. There’s little evidence that workers have gotten those hefty raises that economists insisted were coming any day now. Growth in average hourly earnings is stuck in the same tight range of about 2% per year that it’s been at for the past five years. In April, average hourly earnings rose only 0.1%, bringing the change over the past year to 2.2%. And the “average” wage overstates the reality for most workers.

The average is boosted by rapid pay increases for just a few, including executives, whose “salaries” include bonuses and the receipt of shares of the company’s stock or options to buy shares. The encouraging acceleration in compensation that was reported in the employment cost index last week was largely due to sales commissions and bonuses collected by only a few. Most workers aren’t seeing that 2.2% pay increase. For the median full-time worker, usual weekly earnings are up just 1.5% in the past year, far below the 4% pay raise they got the last time that the unemployment rate was as low as 5.4%. (The “median” means that half of the workers got less than a 1.5% pay raise, and half got more.)

“While the U.K. Independence Party, which campaigns for an EU exit, has only won one seat, the party won 13% of the popular vote..”

• UK Braces for Battle Over Europe After Cameron’s Victory (Bloomberg)

David Cameron persuaded U.K. voters to give him a second term as prime minister. Now he needs to persuade them to stay in the European Union. The Conservatives’ surprise win came after a campaign that saw Cameron’s pledge of a referendum on EU membership by 2017 share almost equal billing with his record of delivering economic stability. Cameron, who has said he wants the country to stay in the EU, will first seek to renegotiate Britain’s membership terms. The Conservatives “may even try and bring things forward to stop this wrecking the next two years for them,” said Tim Bale, professor of politics at Queen Mary University in London.

“It’s a very tight majority which means he will have to make promises to people and do things to keep them on board on Europe, in particular as Cameron has a record of backing down under pressure to euro skeptics.” While the pound surged on Cameron’s victory amid optimism that an economic recovery will solidify under his administration, some investors warned that the euphoria could be short lived as a EU referendum draws closer into view. The vote is intended to settle a question that’s divided the nation since the U.K. joined Europe’s common market in 1973, and split the Conservatives for a generation. “Initial short-term cheer could be followed by a medium-term chill,” said Fabrice Montagne at Barclays.

“The referendum is likely to generate a substantial amount of uncertainty, particularly if polls fail to show more substantial support for EU membership in the coming weeks and months.” With most seats declared, the BBC forecast the Tories to take 331 of Parliament’s 650 seats to Labour’s 232 seats, a result that would allow Cameron to govern alone. While the U.K. Independence Party, which campaigns for an EU exit, has only won one seat, the party won 13% of the popular vote, according to the BBC. Last year, UKIP won the most votes in elections for the European Parliament, taking almost a third of Britain’s seats.

That’s just China’s biggest four banks. “Property prices in 70 Chinese cities have fallen for more than a year..” “Loans backed by properties now comprise 40% of all facilities held by Fitch-rated banks..”

• The $364 Billion Real Estate Threat Inside China’s Biggest Banks (Bloomberg)

Fitch Ratings has called real estate the “biggest threat” to Chinese banks as surging loans tied to properties coincide with defaults and falling sales. Corporate loans backed by buildings have grown almost fivefold since 2008 and residential mortgages have more than tripled in the period among lenders rated by Fitch, the company said Friday. That’s seen property loans held by China’s four biggest lenders soar to a total 2.26 trillion yuan ($364 billion), according to their annual reports. “Collateral is supposed to reduce bank risk – but the rise of property collateral in corporate loans may actually increase the chance of bank failure,” Fitch analysts Jack Yuan and Grace Wu said in the report.

“This is because the widespread use of such collateral has lowered the perceived risks of lending, fueling China’s credit build-up and spreading real-estate risk to other sectors of the economy.” Alarm bells sounded last month when Kaisa Group Holdings Ltd. became the first Chinese developer to default on offshore bonds, putting more scrutiny on a sector that made up a third of the nation’s economy in 2013, according to Gavekal Dragonomics. Property prices in 70 Chinese cities have fallen for more than a year, the worst losing streak in at least a decade, while sales have dropped for 11 of the past 24 months, Bloomberg-compiled data show. Loans backed by properties now comprise 40% of all facilities held by Fitch-rated banks, according to the report. Total credit to real estate could be as high as 60% if other types of financing besides direct loans are included, Fitch said.

“The property market is usually one of the main revenue contributors to the state,” said Raymond Chia, the head of credit research for Asia ex-Japan at Schroder Investment Management Ltd. “With the weakness in the sector, especially with excess inventory overhang as well as weak earnings by developers, economic growth will be affected.” Industrial & Commercial Bank of China, the world’s biggest bank by assets, held 443.5 billion yuan of real estate loans, or 6.6% of all facilities, at the end of last year, according to its annual report. The portion for Bank of China, the nation’s second-largest, was 714.6 billion yuan of advances, or 8.4% of its credit book.

“Today, a long depression in the US would be unbearable. The public couldn’t stand it. Six out of ten households live paycheck to paycheck. Can you imagine what would happen if those paychecks ceased?”

• Deflation Works! (Bill Bonner)

As we have seen, Japan has already had a 25-year slump. The US is now in Year 8 of its slump, with fragile growth at only half the rate of the last century. They could get better… or worse. Negative rates could keep the cronies in business. The slump itself – combined with peak debt and 500 million Chinese laborers – could keep inflation in check. But the point comes when investors see that the risk of loss (because something can always go wrong) is greater than the hope of gain. That moment must be approaching in the US stock market. Prices are near record highs, even as the economy flirts with recession. One day, perhaps soon, we will see stocks falling – as much as 1,000 points in 24 hours. Jacking up the stock market has been the Fed’s singular success. Activism has been its creed.

Interventionism is its modus operandi. It will not sit tight as the market falls apart and the economy goes into recession. Instead, it will announce QE 4. It will try to enforce negative interest rates. And it will move – as will the Japanese – to “direct monetary funding” of government deficits. That is, it will dispense with the fiction of “borrowing” from its own central bank. It will simply print the money it needs. The US Fed of 1930 was not nearly as ambitious and assertive as the Fed of 2015. In the ‘30s, it watched as the economy chilled into a Great Depression. As Ben Bernanke told Milton Friedman, “We won’t do that again.” It couldn’t if it wanted to. Back in the ‘30s, consumer debt had barely been invented. Most people still lived on or near farms, where they could take care of themselves even if the economy was in a depression.

Few people had credit. Instead, they had savings. There were no food stamps. No disability. No rent assistance. No zombie industries. No student debt. No auto debt. No cash-back mortgages. And cash was real money, backed by gold. Today, a long depression in the US would be unbearable. The public couldn’t stand it. Six out of ten households live paycheck to paycheck. Can you imagine what would happen if those paychecks ceased? Supposedly, the US economy is still growing… with the stock market near record highs. Yet, one out of every five households in America has not a single wage-earner. Among inner-city black men, ages 20-24, only 4 out of 10 have jobs. Half the households in the US count on government money to make ends meet. And 50 million get food stamps. What would happen to the cities – and the suburbs – in a real depression?

They try to act as if Yanis were stupid, but they themselves lack understanding of the matter at hand.

• Documents Distributed by Greece’s Varoufakis ‘Baffle’ Eurozone Officials (WSJ)

Economic plans and growth estimates distributed by Greek Finance Minister Yanis Varoufakis to some of his eurozone counterparts have baffled officials involved in the talks over its international bailout. Officials say that the files differ greatly from what has been discussed at the technical level in Brussels in recent days and underline how Mr. Varoufakis continues to complicate progress toward a financing deal. The 36-page document, entitled “Greece’s recovery: A blueprint” and seen by The Wall Street Journal, was presented by Mr. Varoufakis to his counterparts in Paris and Rome, as well as senior officials in Brussels, while he was touring European capitals over the past week, according to four European officials.

The Greek Finance Ministry said the document was a first draft of a new plan “for the recovery and growth of the country in the [post-bailout] era,” which it said Mr. Varoufakis had discussed informally with some of his counterparts. “This is a long-term project that goes well beyond the limits of the negotiation that is currently underway in the Brussels Group,” as the group of experts representing Greece and its creditors is known, the ministry said. Greece’s leftist-led government is locked in negotiations with the European Union and the International Monetary Fund over its next slice of financial aid as part of a €245 billion rescue package. Disagreements over cuts to Greece’s pension system and changes to its labor rules that would make it easier to dismiss workers have held up a deal on further loans.

While the talks have become more constructive, differences remain wide, European officials say. The paper focuses on the Greek economy and how it can return to growth. “Perhaps it is time to visualize a recovering Greece before we unlock the present impasse,” the document says, before going into areas where the country plans overhauls. While some of the outlined measures are the same as those agreed to in the negotiations—such as the creation of an independent tax commissioner—the paper differs in other areas. One significant difference is the creation of a so-called bad bank that would house and wind down Greek lenders’ bad loans. “Conveniently, the financing of the bad bank is not treated,” an EU official said.

Prelude to multiple bankruptcies.

• Illinois Supreme Court Strikes Down Law to Rein in Public Sector Pensions (WSJ)

The Illinois Supreme Court struck down the state’s 2013 pension overhaul, unraveling an effort by lawmakers to rein in benefits for the consistently underfunded public-sector system. The current pension shortfall is estimated at $111 billion, one of the largest nationally. The high court affirmed a decision in November by a state circuit court that the legislative changes violated pension protections written into the state constitution. The decision is a victory for a consortium of public-sector unions while creating a huge challenge for new Republican Gov. Bruce Rauner, who already faces a yawning budget deficit for the coming fiscal year.

“The financial challenges facing state and local governments in Illinois are well known and significant,” said Justice Lloyd Karmeier, writing for the entire court. “It is our obligation, however, just as it is theirs, to ensure that the law is followed.” Illinois joins Oregon and Arizona as recent examples of high courts peeling back pension overhauls. Other states, including Colorado and Florida, have upheld laws cutting benefits. Mr. Rauner’s office urged a constitutional amendment to help fix the problem. Otherwise, the state will be forced to turn to tax increases, budget cuts or, as Mr. Rauner discussed earlier this year, municipal bankruptcy. Recent federal bankruptcy cases in Detroit and Stockton, Calif., have raised the question of whether pension benefits are fully protected.

After the ruling, Standard & Poor’s Ratings Services put the state’s credit ratings on watch for potential downgrade, saying Illinois faces “profound credit challenges.” The Illinois law would have reduced retirement costs by shrinking cost-of-living increases for retirees, raising retirement ages for younger workers, and capping the size of pensions. “The court’s ruling confirms that the Illinois Constitution ensures against the government’s unilateral diminishment or impairment of public pensions,” said Michael Carrigan, president of the Illinois ALF-CIO, speaking on behalf of the We Are One Illinois coalition of unions.

It’s not democracy, it’s what is not democracy but is still called by that name.

• Democracy Is A Religion That Has Failed The Poor (Guardian)

Right now I feel ashamed to be English. Ashamed to belong to a country that has clearly identified itself as insular, self-absorbed and apparently caring so little for the most vulnerable people among us. Why did a million people visiting food banks make such a minimal difference? Did we just vote for our own narrow concerns and sod the rest? Maybe that’s why the pollsters got it so badly wrong: we are not so much a nation of shy voters as of ashamed voters, people who want to present to the nice polling man as socially inclusive, but who, in the privacy of the booth, tick the box of our own self-interest. Rewind 24 hours and it felt so different. Thursday morning was lovely in London, full of the promise of spring. Even the spat I had with the man outside my polling station shouting at “fucking immigrants” didn’t disrupt an overall feeling of optimism.

Were people walking just a little bit more purposefully? Was I mistaken in detecting some calm excitement, almost an unspoken communal bonhomie? Perhaps also a feeling of empowerment, a sense that it was “the people” that could now make a difference. But by bedtime the spell had been broken. Things were going to stay the same. No real difference had been made. The utterly miserable thought strikes me that Russell Brand just might have been right. What difference did my vote make? Why indeed do people vote, and care so passionately about voting, particularly in constituencies in which voting one way or the other won’t make a blind bit of difference? And why do the poor vote when, by voting, they merely give legitimacy to a system that connives with their oppression and alienation?

The anthropologist Mukulika Banerjee suggests a fascinating answer: elections are like religious rituals, often devoid of rational purpose or efficacy for the individual participant, but full of symbolic meaning. They are the nearest thing the secular has to the sacred, presenting a moment of empowerment. But is this empowerment illusory? Is, as Banerjee asks, “the ability to vote … a necessary safety valve which allows for the airing of popular disaffection, but which nevertheless ultimately restores the status quo. In such a reading, elections require the complicity of all participants in a deliberate mis-recognition of the emptiness of its procedures and the lack of any significant changes which this ritual brings about, but are a necessary charade to mollify a restless electorate.”

The numbers are insane and growing. This may well make the country ungovernable.

• Petrobras: The Betrayal of Brazil (Bloomberg)

Since March 2014, prosecutors have accused more than 110 people of corruption, money laundering, and other financial crimes. Six construction and engineering firms have been accused of illegal enrichment in what is known as a noncriminal misconduct action. On April 22, Moro delivered the first convictions. He found Costa and Youssef guilty of money laundering, including the Land Rover purchase. Moro gave both men reduced sentences two years house arrest for Costa and three years in prison for Youssef for cooperating with prosecutors. All of that is something of a preview of the big show: Prosecutors say they may accuse some of Brazil s largest builders with running an illegal cartel.

It’s been clearly proven in this case that there was a criminal scheme inside Petrobras that involved a cartel, bid rigging, bribes to government officials and politicians, and money laundering, Moro wrote in sentencing Costa and Youssef. There will be a cartel indictment, says Carlos Lima, a lead prosecutor in the case. I do’ t like to get ahead of myself and say this will happen, but it will. It’s just a matter of time. In filings in Judge Moro’s court, prosecutors have named 16 companies that allegedly formed a cartel to fix Petrobras contracts between 2006 and 2014. The list includes some of Brazil s largest construction and engineering firms, including Camargo Correa, OAS, UTC Engenharia, and the biggest of them all, Construtora Norberto Odebrecht. All of these companies deny being part of a cartel, except Camargo Correa, which declined to comment.

Petrobras says it knew nothing about the bid rigging and is collaborating with authorities in the investigation. As to whether it was the victim of a cartel, the company is certain, Mario Jorge Silva, Petrobras’s executive manager for performance, said at an April 22 news conference. In financial filings, Petrobras says 199.6 billion reais worth of contracts were rigged by the alleged cartel. For years, a co-owner of the engineering firm UTC called members to meetings at his offices in Sao Paulo via text messages, according to testimony and documents submitted in Moro’s court. The participants were greeted by an assistant, who handed out name tags. At the meetings, executives took copious notes detailing how the alleged cartel would divvy up Petrobras contracts, at inflated prices. One builder put together a 2 1/2-page encoded guide for group members that describes contract bidding as a soccer tournament, with leagues and teams.

Another document drawn up by a group member lists the chosen winners of upcoming bidding for 14 contracts for a refinery, with the title Fluminense Final Bingo Proposal, using a nickname for the state of Rio de Janeiro. Prosecutors say the builders got away with it by paying kickbacks, usually 3%, on every contract. Petrobras estimates that the graft added up to at least 6.2 billion reais, much of which, prosecutors say, was funneled into the war chests of the parties that backed Luiz In·cio Lula da Silva, president of the country from 2003 to 2010, and his handpicked successor, Dilma Rousseff. Lula and Rousseff haven t been charged with wrongdoing, but special prosecutors have opened criminal investigations into more than 50 members of congress and other politicians implicated in the corruption scheme.

“..in all these years, Hillary Clinton has not publicly condemned Wall Street or any individual Wall Street leader.”

• The Clintons and Their Banker Friends- The Wall Street Connection (Nomi Prins)

The past, especially the political past, doesn’t just provide clues to the present. In the realm of the presidency and Wall Street, it provides an ongoing pathway for political-financial relationships and policies that remain a threat to the American economy going forward. When Hillary Clinton video-announced her bid for the Oval Office, she claimed she wanted to be a “champion” for the American people. Since then, she has attempted to recast herself as a populist and distance herself from some of the policies of her husband. But Bill Clinton did not become president without sharing the friendships, associations, and ideologies of the elite banking sect, nor will Hillary Clinton. Such relationships run too deep and are too longstanding.

To grasp the dangers that the Big Six banks (JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, and Morgan Stanley) presently pose to the financial stability of our nation and the world, you need to understand their history in Washington, starting with the Clinton years of the 1990s. Alliances established then (not exclusively with Democrats, since bankers are bipartisan by nature) enabled these firms to become as politically powerful as they are today and to exert that power over an unprecedented amount of capital. Rest assured of one thing: their past and present CEOs will prove as critical in backing a Hillary Clinton presidency as they were in enabling her husband’s years in office.

In return, today’s titans of finance and their hordes of lobbyists, more than half of whom held prior positions in the government, exact certain requirements from Washington. They need to know that a safety net or bailout will always be available in times of emergency and that the regulatory road will be open to whatever practices they deem most profitable. Whatever her populist pitch may be in the 2016 campaign – and she will have one – note that, in all these years, Hillary Clinton has not publicly condemned Wall Street or any individual Wall Street leader. Though she may, in the heat of that campaign, raise the bad-apples or bad-situation explanation for Wall Street’s role in the financial crisis of 2007-2008, rest assured that she will not point fingers at her friends.

She will not chastise the people that pay her hundreds of thousands of dollars a pop to speak or the ones that have long shared the social circles in which she and her husband move. She is an undeniable component of the Clinton political-financial legacy that came to national fruition more than 23 years ago, which is why looking back at the history of the first Clinton presidency is likely to tell you so much about the shape and character of the possible second one.

Deepening.

• Germany Spies, US Denies (Bloomberg)

Reports of German spying on European corporate targets at the behest of the U.S. have led to calls that Chancellor Angela Merkel was hypocritical for complaining about U.S. spying on Germany. Well, yes — but the hypocrisy of politicians hardly comes as a shock. What’s more striking about the recent revelations is their targets – and what they say about U.S. government claims that it doesn’t spy on behalf of private U.S. corporations. Start with a rather obvious question: Why would the U.S. government rely on Germany to spy on European corporations? Why not just do the spying directly? It’s not as if the U.S. lacks the intelligence capacity to do it. After all, the U.S. spied directly on Merkel in the episode that made her object so strongly and publicly and hypocritically.

It’s hard to know for sure, and the answer may conceivably lie in complex interstate agreements that aren’t public. But there’s a highly plausible alternative answer, one connected to the recent history of U.S. efforts to vilify Chinese government’s industrial espionage. The U.S. may be using Germany to do industrial spying because it wants to claim that, unlike other countries, the U.S. doesn’t do spying on behalf of its corporations. In August 2013, a National Security Agency spokesman told the Washington Post in an e-mail that the Department of Defense “does ***not*** engage in economic espionage in any domain, including cyber.” In case you’re wondering, the six asterisks appeared in the original e-mail. Notice that the NSA statement didn’t say that other agencies avoid economic espionage, just those that are part of the Department of Defense.

Notice, too, that the statement didn’t say that no one shares stolen information with the U.S. The next month, after a fresh round of Edward Snowden revelations, the director of national intelligence, James Clapper, issued a further statement. He acknowledged that “the Intelligence Community” (his capitalization) “collects information about economic and financial matters.” But he insisted that: “What we do not do … is use our foreign intelligence capabilities to steal the trade secrets of foreign companies on behalf of – or give intelligence we collect to – U.S. companies to enhance their international competitiveness or increase their bottom line.” A close, retrospective reading of this statement reveals it to be completely consistent with the U.S. relying on foreign intelligence organizations, such as the Germans, to spy on private targets – and then share the proceeds with American companies for whatever reason.

All globalization does.

• Trans-Pacific Partnership Will Lead To A Global Race To The Bottom (Guardian)

At a time when economic inequality around the globe continues to widen, the Trans-Pacific Partnership (TPP) will only make things worse. Unlike what President Obama claims, the agreement will only encourage a race to the bottom, in which a small percentage of people get ridiculously rich while most workers around the globe stay miserably poor. We can’t let that happen. Today, President Obama is visiting Nike’s headquarters in Beaverton, Oregon to garner support for the trade deal, which would be signed by the US and 11 Pacific Rim countries. That’s an apt place for Obama to beat the free-trade drum – Nike, like the TPP, is associated with offshoring American jobs, widening the income inequality gap, and increasing the number of people making slave wages overseas.

Since the passage of NAFTA in 1993, we’ve seen the loss of nearly five million US manufacturing jobs, the closure of more than 57,000 factories, and stagnant wages. This deal won’t be any different. In November, Zachary Senn, a college student reporter at the Modesto Bee, spent three weeks in Indonesia living with and interviewing workers who make goods for Nike, Adidas, Puma and Converse. When you hear Obama talking about those “high-quality jobs,” think of RM, a 32-year-old mother who told Senn that she works 55 hours, six days a week and makes just $184 a month after 12 years at the PT Nikomas factory, a Nike subcontractor that employs 25,000 people. That’s 83 cents an hour or $2,208 a year. RM works in the sewing department and is expected to process 100 shoes an hour.

“If we don’t meet our quotas, we get yelled at”, she told Senn. “And then the quotas are piled into the next day”. Eating lunch is difficult because the food “smells bad,” and worse yet, RM said there is only one restroom, with 15 stalls, for 850 women. RM told Senn that she doesn’t want Nike to leave Indonesia; she wants an end to verbal abuse and a 50% raise, which would allow her to better provide for her family. Is $368 a month too much to ask from a multinational corporation that posted $27.8 billion in revenue and spent $3 billion on advertising and promotions in fiscal 2014? Nike CEO Mark Parker was paid $14.7 million in compensation last year. That’s $7,656 an hour. Wages in Vietnam, a key TPP partner, are even lower than Indonesia. Nike’s largest production center is in Vietnam where 330,000 mostly young women workers with no legal rights earn just 48 to 69 cents an hour.

6 weeks old, but too good to leave behind.

• Is There Such A Thing As A Skyscraper Curse? (Economist, March 28)

The world is in the middle of a skyscraper boom. Last year nearly 100 buildings over 200 metres tall were built—more than ever before. This year China’s business capital will welcome the Shanghai Tower, which will be the world’s second-tallest building. Saudi Arabia is building Kingdom Tower, which will be the world’s tallest (and twice the height of One World Trade Centre in New York, the tallest building in the Americas). Does this frenzy of building augur badly for the world economy? Various academics and pundits, many of them cited by The Economist, have long argued as much, but new research casts doubt on it.

In 1999 Andrew Lawrence, then of Dresdner Kleinwort Benson, an investment bank, identified what came to be known as the “skyscraper curse”.* Mr Lawrence noticed a curious correlation between the construction of the world’s tallest buildings and economic crises. The unveiling of the Singer Building and the Metropolitan Life Tower in New York, in 1908 and 1909 respectively, roughly coincided with the financial panic of 1907 and subsequent recession. The Empire State Building opened its doors in 1931, as the Great Depression was getting going (it was soon dubbed the “Empty State Building”). Malaysia’s Petronas Towers became the world’s tallest building in 1996, just before the Asian financial crisis. Dubai’s Burj Khalifa, currently the world’s tallest building, opened in 2010 in the middle of a local and global crash.

Skyscrapers can be hugely profitable, since by building upwards developers can rent out more floor space on a given plot of land. But at some point extra storeys are no longer a good deal, since marginal costs—for more lifts and extra steel to stop the building from swaying in the wind, for example—increase faster than marginal revenues (rents or sales). William Clark and John Kingston, an economist and an architect writing in 1930, found that the profit-maximising height for a skyscraper in midtown New York in the 1920s was no more than 63 storeys. (The ideal height is probably not much different today.) Record-breaking skyscrapers could therefore be seen as an indication that gung-ho investors are overestimating the probable future returns from new construction.

Indeed, developers may be building record-breaking towers even though they know they are economically inefficient. There is, after all, a certain cachet to having a very tall building with your name on it. In 1998 Donald Trump, a magnate, presented a plan to build the world’s tallest residential building in New York as the righting of a historical wrong, not a shrewd business move. “I’ve always thought that New York should have the tallest building in the world,” he proclaimed. If such vanity projects can secure funding, the theory goes, financial markets must be out of control and will soon suffer a sharp correction. Mr Trump’s tower opened just as the dotcom bubble was bursting.

And London, New York etc. Real estate is a great way to launder cash.

• Global Crime Syndicates Are Buying Expensive Australia Real Estate (Domain)

Some of Australia’s most expensive real estate is being bought by global crime syndicates, one of the country’s top crime-fighting bodies says. So worried are they about the influx of dirty money that the Australian Crime Commission has launched an investigation looking at money laundering and terrorism financing through property. Concerns that criminals may be targeting real estate were raised within the commission about six months ago, according to an ACC spokeswoman. The Targeting Criminal Wealth Special Investigation is expected to run until June next year. “Taskforce investigations have uncovered information about organised crime entities investing in high-value commodities, such as real estate, to help launder illicit funds into the legitimate economy,” said ACC chief executive Chris Dawson, APM.

“The Australian real estate sector is perceived as stable and at low risk of significant depreciation in the short term, and potential for growth in the long term. It is likely that organised crime are exploiting these conditions to invest in the Australian real estate market to launder the proceeds of illicit activity including drug profits.” The ACC declined to specify countries of concern because the investigation is ongoing. Parliamentary secretary to the Treasurer Kelly O’Dwyer said the federal government was being forced to play catch-up on the issue because there had been no co-ordinated data matching scheme on property records to date. The recently announced data-matching scheme set to start from December 1 as part of the federal government’s crackdown on foreign investment would be a big help to agencies like the ACC in these investigations, Ms O’Dwyer said.

Brilliant.

• Australian PM Adviser Exposes Cimate Change As Hoax, Shames All of Science (SBS)

Business Adviser Maurice Newman has been praised today for his stellar work uncovering that climate change was a hoax perpetrated by the United Nations and the vast majority of the entire scientific community from all around the world. Newman, who also managed to expose the New World Order as something that actually exists and isn’t just made up by conspiracy theorising weirdos, has been widely praised for his efforts in bringing down what is thought to be the most elaborate conspiracy of all time. “Of course he will be in consideration for the Nobel Prize,” said one science observer. “To completely humiliate the vast majority of the scientific community like this on such a huge issue is almost unprecedented.

“In years to come we’ll say Maurice Newman in the same breath as we say Albert Einstein and Isaac Newton. To think, thousands of scientists and millions upon millions of dollars of resources couldn’t uncover this conspiracy but one guy with no expertise managed to bring it all down on a lark.” The world’s scientists have reacted with abject shame at being found out after all this time. “I always knew we’d be found out,” said one scientist. “It’s only so long you can keep something like this up when you have to independently incorporate every person studying climate, sea levels, soil, and thousands of other aspects. The paper trail alone was incredibly obvious. Not to mention our connection with the United Nations meaning we had to have every nation on board with tricking Australia for some reason.

Debt Rattle May 1 2015

May 012015

May 1, 2015 Posted by Raúl Ilargi Meijer at 10:54 am Finance Tagged with: Banks, China, extinction, fossil fuels, Greece, Japan, oil, pensions, QE 4 Responses »

Lewis Hine A heavy load for an old woman. Lafayette Street below Astor Place, NYC 1912

• Japan Is Bust: “More QE – Everywhere!” (Albert Edwards)

• Marc Faber: Stocks Are About To Fall 40%—At Least! (CNBC)

• Britain’s Scandal-Battered Banks Paralyzed as Election Looms (Bloomberg)

• Chinese Banks Are Clobbering The US (CNBC)

• Greece’s Decade-Long Relationship With Merkel (Kathimerini)

• Greece Signals Concessions In Crunch Talks With Lenders (Reuters)

• Greece Struggles To Make Payments To More Than 2 Million Pensioners (FT)

• Why’s Europe QE Might End Sooner Than Thought (CNBC)

• Why Did The US Pay A Former Swiss Banker $104 Million? (CNBC)

• The Public Sector is a Milk Cow For Private Enterprise (Paul Craig Roberts)

• Hookers, Kidneys & Nose Jobs: Most Searched Cost Obsessions By Country (RT)

• The Day After Damascus Falls (Robert Parry)

• The U.S. Oil Production Decline Has Begun (Art Berman)

• The Traumatic Restructuring Of Austria’s Cooperative Banking System (Coppola)

• Public Accounts Should Be Approved By The Citizens (Beppe Grillo’s blog)

• Could You Live In A 320-Square-Foot Home? (Yahoo!)

• Monsanto Approaches Syngenta Again About a Takeover (Bloomberg)

• Church of England Dumps Fossil-Fuel Investments (Bloomberg)

• Study Finds Climate Change Threatens 1 in 6 Species With Extinction (NY Times)

“it’s only after you’ve lost everything that you are free to do endless, unlimited QE. After all, what’s the downside?”

• Japan Is Bust: “More QE – Everywhere!” (Albert Edwards)

“one area though where Abenomics has undoubtedly failed is that the Bank of Japan has not achieved its 2% core inflation target. When the BoJ started QE in April 2013 they stated that they wanted to hit their 2% inflation target for core CPI at the earliest possible time, with a time horizon of about two years?. Well that is now! Yet most key measures of CPI inflation are set to crash to, or even below, zero in the months ahead as the estimated 2% effect of last year’s VAT hike is set to drop out of the yoy calculations. Core CPI inflation that the BoJ targets, which excludes just fresh food, has been running at 2% yoy in February (March data out this Friday).

But I prefer to focus of the readily available CPI ex food and energy (known in Japan as core core CPI), which for some peculiar reason does not get followed that closely by the market. At the same time as the March national CPI is published, April’s CPI data for the Tokyo area also will be released. The headline and core (ex fresh food) CPI will be just above zero yoy. But the core core Tokyo CPI (ex food and energy) is likely to have dipped below zero as VAT drops out as the rate in March was already only running at 1.7%.[..] Regular readers will know that I am pretty horrified by the global Quantitative floodgates that have been opened since the 2008 Great Recession.

Once an emergency measure of dubious effect, it is now a never ending stream of confetti money being thrown around the world to inflate asset prices. QE has now become the policy variable of first resort. Personally I think this will all end very badly. But why, I often asked, am I so much more positive about the Japanese outcome than I am the US, UK or eurozone? To be sure I would agree with the Japan sceptics. But I am bullish because I believe that the Japanese fiscal situation is so bad that the authorities had no option but to begin their QQE in April 2013 and there is indeed, as Peter Tasker says, no turning back. Russell Jones is also correct that the BoJ will become more and more aggressive and inventive for the simple reason that Japan is bust.

“The market is in a position where it’s not just going to be a 10% correction.”

• Marc Faber: Stocks Are About To Fall 40%—At Least! (CNBC)

After years of forecasting gloom and doom for stocks only to watch them surge, Marc Faber is sounding the alarm as loud as ever. Faber, editor of The Gloom, Boom & Doom Report, believes that stocks in the U.S. and in many places around the globe are in a central bank-fueled bubble. And while he can’t put a time on when that perceived bubble will pop, he prognosticates that once it does, the outcome will be horrifying. “For the last two years, I’ve been thinking that U.S. stocks are due for a correction,” Faber said Wednesday on CNBC’s “Trading Nation.” “But I always say a bubble is a bubble, and if there’s no correction, the market will go up, and one day it will go down, big time.”

“The market is in a position where it’s not just going to be a 10% correction. Maybe it first goes up a bit further, but when it comes, it will be 30% or 40% minimum!” Faber asserted. A 40% decline from Wednesday’s close would take the S&P 500 to 1,264, a level that hasn’t been seen since the early days of 2012. Faber says low yields and stimulative central bank policies around the world have led to a condition in which “all assets are grossly overvalued … and eventually this will unwind and cause some problems.” Despite his massively bearish call, Faber said he’s “not short the market yet,” since he doesn’t know how high stocks could go in the interim. Still, he makes clear that “I’m not interested to buy momentum, I’m interested to buy value.”

“U.K. taxpayers sunk about $1.5 trillion into banks in 2008 and 2009 to prop up the nation’s failing system..” Of banks that collected many billions in fines since.

• Britain’s Scandal-Battered Banks Paralyzed as Election Looms (Bloomberg)

Whatever the outcome of Britain’s election next week, the outlook for the country’s banks is worsening. Almost seven years since the industry received the biggest taxpayer bailout in history, public confidence in banks is near an all-time low and lenders’ efforts to boost profit are being frustrated by investigations into alleged currency and interest rate-rigging. Since the coalition government took power in 2010, U.K. bank stocks have lost 7%. Their U.S. counterparts have returned 46%. “You can hardly believe we are now seven years into this crisis, and we’ve still got billions in fines to come and virtually none of the major banks predicting decent returns for at least another three to four years,” said Ed Firth at Macquarie. “If you told us that in 2007, we just wouldn’t have believed it.”

The industry’s prospects look to be getting worse as both major political parties distance themselves from the City, London’s financial district, before the May 7 election. The Bank of England is preparing harsher stress tests this year that may force firms to bolster capital buffers and new rules require expensive firewalls to be created around consumer operations. A levy on banks’ balance sheets has been increased eight times since 2010. U.K. taxpayers sunk about $1.5 trillion into banks in 2008 and 2009 to prop up the nation’s failing system, and still own 79% of money-losing RBS and a fifth of Lloyds. Before the election, the tarnished reputation of the industry has taken another battering with HSBC embroiled in allegations it aided tax evasion. The Asian-focused lender said last week it may leave London because of rising tax and regulatory costs and Standard Chartered may join them.

“In 2004, the U.S. side had assets double those of China and net income equal to 339%; now those respective numbers are 71.6% and 50.8%..”

• Chinese Banks Are Clobbering The US (CNBC)

China’s banks are taking over the world, or at least pushing their U.S. counterparts out of the leadership role. Bank earnings this week in the world’s second largest economy paint a dour picture for American financial institutions, according to analyst Dick Bove at Rafferty Capital Markets. “The Chinese government is now following a policy to allow its banks to expand faster. It has reduced their required reserve ratios,” Rafferty’s vice president of equity research said in a note to clients. “The United States continues to follow a policy to shrink the biggest banks in this country.”

The picture gets especially ugly when comparing the “Big Four” U.S. banks—JPMorgan, Citigroup, Bank of America and Wells Fargo—to their Chinese counterparts, the Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China and Bank of China. In 2004, the U.S. side had assets double those of China and net income equal to 339%; now those respective numbers are 71.6% and 50.8%, according to Bove. That precipitous slide comes as direct result of regulators trying to hamstring banks through excessive regulation, even though the four institutions in question have managed to gain a historically high share of the U.S. industry. In fact, the top five now control 45% of the entire industry’s assets, according to SNL Financial (the list also includes U.S. Bancorp).

Even so, Bove said U.S. bank operations are being confined through tighter regulations, such as those from the Dodd-Frank provisions. “The fact that U.S. banks are unable to lend as much as they did historically as a% of capital is not good for the U.S. economy,” he said. “Moreover, there are growing signs that the liquidity that characterized U.S. financial markets is being harmed by current policy.” Despite the strongest earnings of any sector in the S&P 500—a 16.1% annualized gain in the first quarter for financials—banks stocks are struggling, collectively down about 1.8%. Bove said that’s no coincidence. He also worries that the implementation of the Asian Infrastructure Investment Bank—essentially a development fund that will provide capital to developing Asian economies to which the U.S. does not belong—is another shot against U.S. international finance standing.

Angela Palin: “Her southbound trips usually ended in the Pirin Mountains in Bulgaria, from where she could see Greece..”

• Greece’s Decade-Long Relationship With Merkel (Kathimerini)

Last week, hopes of an honest compromise between Athens and its international creditors rested on a meeting between Greek Prime Minister Alexis Tsipras and German Chancellor Angela Merkel on the sidelines of an emergency European Union summit on immigration. In her 10th year at the helm of Germany, the low-key East German physicist – with patience and persistence, skill in tactical maneuvering, and in-depth knowledge of the key European issues and the role of her country – has emerged as the uncontested protagonist of the European stage. It is ironic that, to a great extent, Merkel owes her prominence to Greece. As she said in a speech in 2012 (mentioned in Alan Crawford and Tony Czuczka’s biography “Angela Merkel: A Chancellorship Forged in Crisis”), as a young woman she would spend her summers traveling all over that part of the Eastern bloc where she was allowed access.

Her southbound trips usually ended in the Pirin Mountains in Bulgaria, from where she could see Greece, just a few kilometers away, and wished that one day she would be able to visit. If she sensed that one day she would come to the country as an honored guest, it is less likely she believed that she would be treated more or less like a conqueror. Before the Greek crisis, the German chancellor had no strategic vision for Europe. After its outbreak, she had to cook up a basic recipe: austerity and structural reform as a means of adapting Europe to a globalized world, mechanisms for supporting indebted countries with strict conditionality and no option for debt mutualization, and the involvement of the IMF.

For many, this is an ineffective and unjust policy which places the lion’s share of the adjustment burden on the countries of Europe’s south, yet it has prevailed, becoming the action that determines every reaction. Speaking with high-ranking officials in Greece and Germany, Kathimerini attempts to trace the evolution of bilateral relations in the Merkel era and how the chancellor emerged from the shadow of Helmut Kohl to step into the limelight of European developments.

Hollow talk: “(Is) the euro zone prepared for eventualities, the answer to that is: ‘yes’.”

• Greece Signals Concessions In Crunch Talks With Lenders (Reuters)

Greece’s government signaled the biggest concessions so far as talks with lenders on a cash-for-reforms package started in earnest on Thursday, but tried to assure leftist supporters it had not abandoned its anti-austerity principles. Prime Minister Alexis Tsipras’s three-month-old government is under heavy pressure at home and abroad to reach an agreement with European and IMF lenders to avert a national bankruptcy. A new poll showed over three-quarters of Greeks feel Athens must strike a deal at any cost to stay in the euro. An enlarged team of Greek negotiators began talks with the so-called Brussels Group representing the euro zone, the IMF and the ECB to discuss which reforms Greece will turn into legislation rapidly in exchange for aid.

The talks are expected to continue through the May Day holiday weekend until Sunday, with Tsipras willing to step in to speed things up if necessary, a Greek official said. In a sign of seriousness, both sides agreed on a news blackout at the meeting, a euro zone official said. Greece wants an interim deal by next week, hoping this will allow the ECB to ease liquidity restrictions before a €750 million payment to the IMF falls due on May 12. Athens has suggested it will struggle to pay the installment. Before that, it also has to repay €200 million to the IMF by May 6, although this is expected to be less of a problem. The head of the Eurogroup, Jeroen Dijsselbloem, said at a meeting with members of the Dutch parliament that the bloc was prepared for any outcome. Asked whether there was a “plan B” should Greece default or be forced out of the euro zone, he said: “(Is) the euro zone prepared for eventualities, the answer to that is: ‘yes’.”

Curiously leading from the FT.

• Greece Struggles To Make Payments To More Than 2 Million Pensioners (FT)

The Greek government was struggling on Thursday to complete payments to more than 2 million pensioners after claiming that a “technical hitch” had delayed an earlier disbursement. Elderly Athenians waited at branches of the National Bank of Greece, the state-controlled lender handling the bulk of pension payments, which are staggered over several days. “Normally I only withdraw half the money at the end of the month, but today I’m taking it all,” said Sotiria Zlatini, 75, a former civil servant. “There are so many rumors going round because of the government’s problems and what happened two days ago.”

The left-wing Syriza-led government scrambled to pay pensions and public sector salaries in February and March after failing to reach agreement with international lenders on unlocking €7.2 billion of bailout aid. On Tuesday, the main state social security fund, IKA, delayed pension payments by almost eight hours. The heavily loss-making fund relies on a monthly subsidy from the budget to be able to cover its obligations. “I went to the ATM in the morning before going to the supermarket but the money wasn’t there… I went back at eight in the evening feeling quite anxious, but it had arrived,” said Socrates Kambitoglou, a retired civil engineer.

Dimitris Stratoulis, deputy minister for social security, said a technical problem with the interbank payment system had caused the delay. Payments were made normally on Wednesday, said a senior Greek banker. But an official with knowledge of the government’s cash position denied there had been a technical hitch. He said the payments were held up because the state pension funds “were still missing several hundred million euros on Tuesday morning”. Another official said inflows of €500 million on Wednesday had eased the situation and €300 million was due to be paid on Thursday. “We’re probably going to make it this month,” he said.

Draghi blows the bubble so hard he may have to stop?!

• Why’s Europe QE Might End Sooner Than Thought (CNBC)

A constant supply of strong economic data has come out of the euro zone this month, just weeks after the European Central Bank President Mario Draghi launched of a much-anticipated bond-buying plan. So strong, in fact, that analysts are expecting that the ECB’s quantitative easing program might be over sooner than originally thought. Draghi’s original plan was to maintain the asset purchase program until the end of September 2016, or until there is a “sustained adjustment in path of inflation”. The central banker even expressed his surprise at last month’s Governing Council meeting when questioned on the potential of an early exit from QE, but investors are also suggesting he may not be faced with much of a choice.

Since the March launch of the €60 billion-a-month program, loans to the private sector in the euro area, a gauge of economic health, have started growing again, ECB data released this week showed. Retail sales in the region have seen a revival, as a dip in February was preceded by four successive monthly increases. Meanwhile German unemployment plummeted to a 24-year low and the euro zone ended four months of deflation in April, official data revealed on Thursday. With unemployment falling and wages starting to pick up in some parts of the currency area, consumer spending will also likely rise during 2015.

This record jobless data from Europe’s largest economy could put the September 2016 QE deadline into question, but not until later in the year, analysts suggest. “Compared to a year ago, the number of persons registered as unemployed has declined by 2.9 million people, indicating that the trend in labor market improvement remains firm,” said chief euro zone economist at Pantheon Economics, Claus Vistesen. “The German unemployment rate is currently at its lowest level since 1991 raising the risk of wage pressures, which could also make life difficult for the ECB in terms of continuing QE, but this is unlikely to become a story for the market until the end of Q3 at the earliest.

Good story on a guy who isn’t done with either Washington or New York.

• Why Did The US Pay A Former Swiss Banker $104 Million? (CNBC)

Bradley Birkenfeld was released from federal prison in August 2012 after serving 2Ω years for his role as a Swiss banker hiding millions of dollars for wealthy American clients. Five weeks later, he found himself in the kitchen of a small rental house in Raymond, New Hampshire. At that moment, Birkenfeld was an ex-con. He was out of work, infamous in a famously discreet profession, and probably unemployable as a private banker anywhere. But then his lawyer walked into the room, carrying a check from the U.S. Treasury to Birkenfeld for $104 million minus taxes. On the face was a picture of the Statue of Liberty. It was Birkenfeld’s cut as a whistleblower of the massive settlement his former employer the Swiss bank UBS had paid to the United States government in a settlement for helping Americans dodge taxes.

As Birkenfeld signed the check, he was transformed from convicted felon to government-made multimillionaire. “It was vindication,” Birkenfeld said. “I am glowing. I love it.” Today, Birkenfeld has a new rental house by the ocean in New Hampshire, two Porsches, and a collection of pricy vintage hockey gear to display in his own Boston Bruins luxury box. He’s made charitable contributions in his community. And he’s planning to open a sports museum. You’d think he’d be happy. But Birkenfeld, 50, a big man with a brash style and a temper, isn’t done with the U.S. Department of Justice. He’s on a quest, he said, to force the government to explain why it was so aggressive in prosecuting him, but let nearly everyone else involved in the scam get off with light penalties or none at all.

Now Birkenfeld is telling his story exclusively to CNBC. Wealthy, out of prison and soon to be removed from federal probation, he says he’s now free to explain how he came to be the man who ended the tradition of bank secrecy and got rich in the process. The reverberations from Birkenfeld’s disclosures have been titanic, playing out on a global stage. The United States in 2009 forced UBS to pay a $780 million penalty and admit it conspired to defraud the United States by impeding the IRS from obtaining information on American taxpayers hiding money in Switzerland. In 2014, banking giant Credit Suisse pleaded guilty and said it would pay $2.6 billion in penalties. American investigators soon followed the trail of hidden money to banks in Israel, India and around the world.

“The real Social Security crisis is that the government does not have the money to redeem its IOUs.”

• The Public Sector is a Milk Cow For Private Enterprise (Paul Craig Roberts)

Social Security and Medicare are under attack from Wall Street, conservatives, and free market economists. The claims are that these programs are unaffordable and that the programs can be run more efficiently and at less cost if privatized. The programs are disparaged as “entitlements.” The word has come to imply that entitled people are getting something at great cost to everyone else. Indeed, entitlements have become conflated with welfare. In fact, Social Security and Medicare are financed by an earmarked payroll tax paid by employees. (Economists regard the part of the payroll tax that is paid by employers as part of the employee’s wage.)

According to the Social Security and Medicare trustees, Social Security as presently configured can pay full promised benefits for the next two decades and with current payroll tax and demographic trends can pay 75% of benefits thereafter. Medicare can pay full benefits for 12 more years and 90% of promised benefits thereafter. It makes sense to look ahead–something that democracies seldom do–but there is no current crisis. The Carter administration did look ahead and put in place a series of future increases in the payroll tax sufficient to keep the programs in the black for several decades into the future. Shortly thereafter in 1981 there was a claim that there was a short-term financing problem.

The National Commission on Social Security Reform was created. Alan Greenspan was appointed chairman, and the commission is known as the Greenspan Commission. What the commission did was to accelerate in time the payroll tax increases that were already in place. In my opinion, this was done in order to reduce projected federal budget deficits that concerned Wall Street and Republicans. The consequence of the accelerated payroll tax increases is that over the next decades the programs accrued large surpluses in the trillions of dollars that the federal government spent on other programs, substituting for the surplus payroll revenues non-marketable Treasury IOUs to Social Security and Medicare.

Far from entitlements worsening the federal deficit, entitlement surpluses have reduced it. The real Social Security crisis is that the government does not have the money to redeem its IOUs. The government, of course, will print money to bail out the banks’ uncovered casino bets, but not to bail out the elderly from the theft of their funds. The government has wasted trillions of dollars on wars that have enriched the military/security complex by killing, maiming, and displacing millions of peoples in seven countries, but Washington “cannot afford” Social Security and Medicare. Representing the people is not something “our” representatives do. They are too busy representing a handful of private interest groups such as the financial sector, the military/security complex, and agribusiness.

Entertaining and then some.

• Hookers, Kidneys & Nose Jobs: Most Searched Cost Obsessions By Country (RT)

The cost of flying a MiG fighter in Russia, buying kidneys in Iran, prostitutes in Ukraine and rhinoplasty in S. Korea are just a few of the most popular Google requests worldwide, a new map shows. It does give some weird insights into the countries. Fixr.com, a cost-estimating website has put together a map of the world with the most-Googled things in each country, using the autocomplete formula of “How much does * cost in [x country].” The search results turned out to be hilarious and informative, and gave a peek into humanity’s cost obsessions per country. “Looking at some of the most popular Google searches throughout the World reveals some cultural differences, but also many key similarities. It also provides insights into the sometimes strange things people think about when they are alone,” says fixr.com website.

Russians are most interested in “How much does it cost to fly a MiG [military aircraft] in Russia?” Iranians are eager to sell or to buy kidneys, while the South Koreans are obsessed with their appearance and fixated on rhinoplasty (nose plastic surgery) costs. The Chinese, Apple’s biggest iPhone market, desire iPhones, of course. On Tuesday, Apple said it sold more iPhones in China than in the US. The cost of a prostitute is the most Googled demand in a range of countries, such as in Brazil, Ukraine, Bulgaria, Hong Kong, Colombia and Latvia. Slaves crop up in Mauritania, diamonds shine in Sierra Leone and cocaine fires up Honduras, Chile and Taiwan – these are some of the most Googled and weird demands in each of these countries. Why Japanese people want watermelons or Armenians are obsessed with carpets is as yet a mystery.

When choaos backfires on the empire…

• The Day After Damascus Falls (Robert Parry)

If Syrian President Bashar al-Assad meets the same fate as Libya’s Muammar Gaddafi or Iraq’s Saddam Hussein, much of Official Washington would rush out to some chic watering hole to celebrate – one more “bad guy” down, one more “regime change” notch on the belt. But the day after Damascus falls could mark the beginning of the end for the American Republic. As Syria would descend into even bloodier chaos – with an Al-Qaeda affiliate or its more violent spin-off, the Islamic State, the only real powers left – the first instinct of American politicians and pundits would be to cast blame, most likely at President Barack Obama for not having intervened more aggressively earlier.

A favorite myth of Official Washington is that Syrian “moderates” would have prevailed if only Obama had bombed the Syrian military and provided sophisticated weapons to the rebels. Though no such “moderate” rebel movement ever existed – at least not in any significant numbers – that reality is ignored by all the “smart people” of Washington. It is simply too good a talking point to surrender. The truth is that Obama was right when he told New York Times columnist Thomas L. Friedman in August 2014 that the notion of a “moderate” rebel force that could achieve much was “always … a fantasy.”

As much fun as the “who lost Syria” finger-pointing would be, it would soon give way to the horror of what would likely unfold in Syria with either Al-Qaeda’s Nusra Front or the spin-off Islamic State in charge – or possibly a coalition of the two with Al-Qaeda using its new base to plot terror attacks on the West while the Islamic State engaged in its favorite pastime, those YouTube decapitations of infidels – Alawites, Shiites, Christians, even some descendants of the survivors from Turkey’s Armenian genocide a century ago who fled to Syria for safety.

Such a spectacle would be hard for the world to watch and there would be demands on President Obama or his successor to “do something.” But realistic options would be few, with a shattered and scattered Syrian army no longer a viable force capable of driving the terrorists from power. The remaining option would be to send in the American military, perhaps with some European allies, to try to dislodge Al-Qaeda and/or the Islamic State. But the prospects for success would be slim. The goal of conquering Syria – and possibly re-conquering much of Iraq as well – would be costly, bloody and almost certainly futile.

“Unless oil prices rebound above $75 or $85 per barrel, the rig count won’t matter because there will not be enough money to complete more wells..”

• The U.S. Oil Production Decline Has Begun (Art Berman)

The U.S. oil production decline has begun. It is not because of decreased rig count. It is because cash flow at current oil prices is too low to complete most wells being drilled. The implications are profound. Production will decline by several hundred thousand of barrels per day before the effect of reduced rig count is fully seen. Unless oil prices rebound above $75 or $85 per barrel, the rig count won’t matter because there will not be enough money to complete more wells than are being completed today. Tight oil production in the Eagle Ford, Bakken and Permian basin plays declined approximately 111,000 barrels of oil per day in January. These declines are part of a systematic decrease in the number of new producing wells added since oil prices fell below $90 per barrel in October 2014.

Deferred completions (drilled uncompleted wells) are not discretionary for most companies. Producers entered into long-term rig contracts assuming at least $90 oil prices. Lower prices result in substantially reduced cash flows. Capital is only available to fulfill contractual drilling commitments, basic costs of doing business, and to complete the best wells that come closest to breaking even at present oil prices. Much of the new capital from junk bonds and share offerings is being used to pay overhead and interest expense, and to pay down debt to avoid triggering loan covenant thresholds. Hedges help soften the blow of low oil prices for some companies but not enough to carry on business as usual when it comes to well completions.

The decrease in well completions provides additional evidence that the true break-even price for tight oil plays is between $75 and $85 per barrel. The Eagle Ford Shale is the most attractive play with a break-even price of about $75 per barrel. Well completions averaged 312 per month from January through September 2014 when WTI averaged $100 per barrel. When oil prices dropped below $90 per barrel in October, November well completions fell to 214. As prices fell further, 169 new producing wells were added in December and only 118 in January.

Very little scrutiny in the press of Austria’s banking troubles. Which is strange considering the tight links to Germany and Eastern Europe.

• The Traumatic Restructuring Of Austria’s Cooperative Banking System (Coppola)

Austria’s banking system is undergoing traumatic restructuring. This has been forced upon it by the legacy of the financial crisis and by the progressive removal of sovereign and sub-sovereign guarantees to comply with EU legislation. So far, we have seen the failures of Hypo Alpe Adria and its “bad bank” Heta, the forced rescue of Pfandbriefbank by its regional bank owners, some of which in turn will probably need rescuing by their provincial governments, and the forcible sale of Eastern European assets by Raffeisenbank and Erste Bank. The first of these is still suffering terrible losses: the second says it is slowly returning to profit. We shall see. The latest domino to fall is Austria’s system of cooperative banks, the Volksbanken. There are about 40 Volksbanken, which collectively own an “umbrella bank”, Volksbank AG, known as VBAG.

VBAG was originally created as a central clearing “hub” for its Volksbanken member-owners. It became a private limited company in 1974 and a commercial bank in 1991, after which it developed a life of its own, lending on its own account and acquiring interests not only within Austria but in Central and Eastern Europe. It rapidly built up a substantial portfolio of risky assets backed by insufficient equity. In the 2007-8 financial crisis in Europe, VBAG was initially damaged by the failure of Austria’s infrastructure bank Kommunalkredit AG, in which VBAG had a 50.78% stake: the other principal shareholder was the Belgian/French bank Dexia which was nationalized in 2008 after heavy losses following the fall of Lehman Brothers. VBAG’s stake in Kommunalkredit AG was bought by the Austrian Federal Government in November 2008 for a symbolic €1.

VBAG reported a full-year loss in 2008 of €420m, largely as a result of Kommunalkredit’s nationalization. But worse was to come. Central and Eastern Europe (CEE) was badly affected by the 2008 financial crisis. As investors spooked by the turmoil in the markets moved money to safe havens, several CEE countries slid into deep recession: the worst affected were Romania, Hungary and Latvia, all of which required EU/IMF assistance. Banks exposed to CEE suffered collapsing asset values and destruction of shareholder value. VBAG was one of the worst hit. It lost €1.1bn in 2009 due to losses on CEE loans and real estate. It was bailed out by the Austrian federal government, which provided it with €1bn of subordinated debt.

Governments and derivatives.

• Public Accounts Should Be Approved By The Citizens (Beppe Grillo’s blog)

It works like this. The public authorities are gambling with our taxes. The casino is managed by the commercial banks that provide money up front in return for hypothetical future gains using derivatives. Thus, the public authority gets money in advance on the basis of presumed gains and it uses this money to get by – until the end of the derivative contract. If things go wrong with the derivatives (something that regularly happens), the public accounts end up drastically in the red. Here we’re talking about billions and not just chicken feed. Obviously the citizens are unaware of all this and they find themselves deeper and deeper in debt. For example, the city of Milan has debts of about four billion. Who has authorised AlbertiniMorattiPisapia to get the people of Milan into debt?

The ones that do well out of this are the commercial banks together with the current politician who starts off useless public works (and/or brown envelopes stuffed with money) or, in the best case scenario, they do some temporary patching up of the accounts. The accounts should be approved by the tax-paying citizens who are the only true bank of the State. They shouldn’t be approved by the functionaries that play with our taxes. We want administrators, not croupiers. “For years, the government and the public authorities have been betting billions of euro at the expense of the citizens. They’ve been using derivatives, betting on the future, and regularly losing. The tax payer is always playing the part of the unfortunate citizen “Pantalone”.

For the commercial banks that set up these bets – and who often welcome into the ranks of their senior management, former ministers and high level functionaries thrown out of the government, the money is always to be found. Always! On 31 December 2014, the potential loss – the “mark-to-market” value was €42 billion, and that’s getting continuously worse. For months, the 5 Star MoVement has been asking for access to the public contracts containing derivatives, but they continue to be kept under lock and key. Hidden away. We want to see all the contracts made with the commercial banks. We want to really get to understand if it’s possible to defuse these atomic bombs that have been slipped in underneath us. It’s a citizen’s right.”

The future of housing?

• Could You Live In A 320-Square-Foot Home? (Yahoo!)

What if you said goodbye to the McMansion, man cave and fourth bathroom – and moved into a home that could fit in your garage? Would a minimalist lifestyle ease your anxiety and bolster your bank account? Or would the claustrophobia have you crawling out of your skin? In a new documentary premiering online today, Australian filmmaker Jeremy Beasley explores the tiny house movement. The film “Small is Beautiful” follows four people in Portland, Ore., at different stages of building and living in their own tiny homes. Tiny houses must be fewer than 320 square feet, the minimum size for manufactured housing, determined by HUD. They’re hand-built, using primarily wooden beams and constructed on a utility trailer. These structures are mobile but not intended to be driven from place to place.

Tiny homes come in all shapes and sizes and Beasley says you can find them all over the world. The average cost of one of these diminutive homes is around $23,000 and the average size is 186 square feet, according to The Tiny Life, a website focused on the tiny home way of life. Compare that to the median price of a new home in the U.S. at more than $277,000 as of March, with an average size of almost 2,600 square feet. This infographic has more statistics on tiny homes, but Beasley says for tiny house owners it’s often less about facts and figures and more about all-encompassing lifestyle. The tiny house movement began in the U.S. about 15 years ago. Beasley estimates there are between 500 and 1,000 people living in tiny homes.

He says it’s difficult to get an exact number of tiny home owners in the U.S. and abroad because many live “under the radar.” But he says they share some characteristics: “Freedom is definitely something a lot of people have in common,” he says, “as well as living sustainability and trying to lessen their footprint on earth.” Beasley says the tiny house movement is significant in a few states, including North Carolina, Texas and Vermont. Their presence is so well-known in Portland that it was parodied by the hit IFC comedy “Portlandia.” While it might be easy to make a good-natured joke about living in small spaces – New Yorkers certainly get their fair share of ribbing for living in “shoeboxes” – the film takes on some weighty topics.

The empire of evil.

• Monsanto Approaches Syngenta Again About a Takeover (Bloomberg)

Monsanto, the world’s largest seed company, has approached Syngenta about a takeover, almost a year after a previous attempt fell apart, according to people familiar with the matter. Monsanto has discussed its interest with Syngenta in recent weeks, said two of the people, asking not to be identified discussing private information. Syngenta, which has a market value of about 29 billion Swiss Francs ($31 billion), has concerns about a combination, which would face antitrust hurdles, the people said, and the companies may fail to reach an agreement, they said. Combined with Syngenta, Monsanto would become the largest player in the world for both seeds and crop chemicals and a formidable competitor to Bayer, BASF and Dow Chemical.

Basel-based Syngenta is the world’s largest maker of crop chemicals whereas St. Louis-based Monsanto is the largest maker of seeds and dominates the global market for genetically modified crops like corn and soybeans. Monsanto jumped as much as 3.6% in afterhours trading, after closing at $113.96 in New York, giving the company a market value of $54 billion. The companies held preliminary talks last year with advisers about a combination, before Syngenta’s management decided against negotiations, people familiar with the matter said at the time. No agreement was made after concerns were raised about the strategic fit, antitrust issues and relocating the company.

How about the Vatican?

• Church of England Dumps Fossil-Fuel Investments (Bloomberg)

It appears coal mining isn’t God’s work. The Church of England will dump its holdings in coal and oil-sand producers and has ruled out backing companies with exposure to the most polluting fossil fuels, joining the movement that wants investors to help fight climate change. The church’s investment arm said on Thursday that it will sell its £12 million ($18.4 million) coal and tar sands investments. The church also vowed not to invest in any business that get more than 10% of its revenues from the fuels, ruling out companies from Glencore to Suncor. The move by the church, created by Henry VIII’s split from the Roman Catholic Church in the 16th century and still headed by the Queen, is a victory for environmental activists seeking to stigmatize oil and coal companies in the way South Africa and tobacco companies have previously been targeted.

“Climate change is already a reality,” said the Reverend Richard Burridge, who is deputy chair of the church’s ethical investment advisory group. “The church has a moral responsibility to speak and act on both environmental stewardship and justice for the world’s poor who are most vulnerable to climate change.” About 200 institutions worldwide have pledged to scale back investments in polluting industries, including Glasgow University in Scotland and Stanford University in California. The Rockefeller Brothers Fund, built with profits from Standard Oil, said last year it will sell its coal and tar-sand investments.

Prince Charles, who will become head of the Church of England when his mother dies and has long campaigned on environmental issues, has ensured his private investments and charitable foundations do not have any fossil fuel holdings, the Financial Times reported on April 26. Still, many big institutions are continuing to support such industries. Last month Oxford University refused to join the movement, joining Harvard and Yale universities, which control the biggest endowments in the U.S., in sidestepping requests to remove oil and coal companies from their investment funds.

Only roaches will be left.

• Study Finds Climate Change Threatens 1 in 6 Species With Extinction (NY Times)

Climate change could drive to extinction as many as one in six animal and plant species, according to a new analysis. In a study published Thursday in the journal Science, Mark Urban, an ecologist at the University of Connecticut, also found that as the planet warms in the future, species will disappear at an accelerating rate. “We have the choice,” he said in an interview. “The world can decide where on that curve they want the future Earth to be.” As dire as Dr. Urban’s conclusions are, other experts said the real toll may turn out to be even worse. The number of extinctions “may well be two to three times higher,” said John J. Wiens, an evolutionary biologist at the University of Arizona.

Global warming has raised the planet’s average surface temperature about 1.5 degrees Fahrenheit since the Industrial Revolution. Species are responding by shifting their ranges. In 2003, Camille Parmesan of the University of Texas and Gary Yohe of Wesleyan University analyzed studies of more than 1,700 plant and animal species. They found that, on average, their ranges shifted 3.8 miles per decade toward the planet’s poles. If emissions of carbon dioxide and other greenhouse gases continue to grow, climate researchers project the world could warm by as much as 8 degrees Fahrenheit. As the climate continues to change, scientists fear, some species won’t be able to find suitable habitats.

For example, the American pika, a hamsterlike mammal that lives on mountains in the West, has been retreating to higher elevations in recent decades. Since the 1990s, some pika populations along the species’ southernmost ranges have vanished. Hundreds of studies published over the past two decades have yielded a wide range of predictions regarding the number of extinctions that will be caused by global warming. Some have predicted few extinctions, while others have predicted that 50% of species face oblivion. There are many reasons for the wide variation. Some scientists looked only at plants in the Amazon, while others focused on butterflies in Canada. In some cases, researchers assumed just a couple of degrees of warming, while in others they looked at much hotter scenarios.

Because scientists rarely were able to say just how quickly a given species might shift ranges, they sometimes produced a range of estimates. To get a clearer picture, Dr. Urban decided to revisit every climate extinction model ever published. He threw out all the studies that examined just a single species, such as the American pika, on the grounds that these might artificially inflate the result of his meta-analysis. (Scientists often pick out individual species to study because they already suspect they are vulnerable to climate change.) Dr. Urban ended up with 131 studies examining plants, amphibians, fish, mammals, reptiles and invertebrates spread out across the planet. He reanalyzed all the data in those reports.

Debt Rattle April 17 2015

Apr 172015

April 17, 2015 Posted by Raúl Ilargi Meijer at 9:21 am Finance Tagged with: Banks, Beijing Put, China, derivatives, Finland, Germany, Greece, Grexit, housing, migrants, sovereign bonds, Ukraine 3 Responses »

Jack Delano Myrtle Beach, S.C. Air Service Command Technical Sergeant Choken 1943

• The REAL Issue With a Grexit/Greek Default is Derivatives (Phoenix)

• Grexit Dangers Mount: Yanis Varoufakis Warns Of ‘Liquidity Asphyxiation’ (AEP)

• Germany: Has Any Country Ever Had It So Good? (Bloomberg)

• Greece To Raid Coffers As IMF Dashes Hopes Of Resolving Crisis (Telegraph)

• Greece Deal Appears Distant Amid Deadlock In Reform Talks (Kathimerini)

• Finland: ‘Not As Bad As Greece, Yet, But It’s Only Matter Of Time’ (Guardian)

• China’s Incredible Shrinking Factory (Reuters)

• ‘Beijing Put’ May Be Driving China’s Stock-Market Fever (MarketWatch)

• China’s Smart Money Is Riding the Stock Boom as Amateurs Rush In (Bloomberg)

• China’s Kaisa Keeps Creditors Guessing as Dollar Default Looms (Bloomberg)

• Australia Steeled For China Slowdown As Iron Ore Prices Fall (FT)

• New Zealand Housing: Human Rights Commisioner Calls For Drastic Action (NZH)

• New Zealand Government, Central Bank Clash On Housing (CNBC)

• 5 Financial Crisis Regulators Cashing In On New Careers (Fortune)

• Stephen F. Cohen: U.S./Russia/Ukraine History The Media Won’t Tell You (Salon)

• Why A Greek Call For German War Reparations Might Make Sense (MarketWatch)

• BP Dropped Green Energy Projects Worth Billions, Prefers Fossil Fuels (Guardian)

• Saudi Arabia Adds Half a Bakken to Oil Market in a Month (Bloomberg)

• Italy Calls For Help Rescuing Migrants As 40 More Reportedly Drown (Guardian)

It’s all derivatives all the way down.

• The REAL Issue With a Grexit/Greek Default is Derivatives (Phoenix)

The situation in Greece boils down to the single most important issue for the financial system, namely collateral. Modern financial theory dictates that sovereign bonds are the most “risk free” assets in the financial system (equity, municipal bond, corporate bonds, and the like are all below sovereign bonds in terms of risk profile). The reason for this is because it is far more likely for a company to go belly up than a country. Because of this, the entire Western financial system has sovereign bonds (US Treasuries, German Bunds, Japanese sovereign bonds, etc.) as the senior most asset pledged as collateral for hundreds of trillions of Dollars worth of trades. Indeed, the global derivatives market is roughly $700 trillion in size. That’s over TEN TIMES the world’s GDP. And sovereign bonds… including even bonds from bankrupt countries such as Greece… are one of, if not the primary collateral underlying all of these trades.

Lost amidst the hub-bub about austerity measures and Debt to GDP ratios for Greece is the real issue that concerns the EU banks and the EU regulators: what happens to the trades that EU banks have made using Greek sovereign bonds as collateral? This story has been completely ignored in the media. But if you read between the lines, you will begin to understand what really happened during the previous Greek bailouts. Remember: 1) Before the second Greek bailout, the ECB swapped out all of its Greek sovereign bonds for new bonds that would not take a haircut. 2) Some 80% of the bailout money went to EU banks that were Greek bondholders, not the Greek economy. Regarding #1, going into the second Greek bailout, the ECB had been allowing European nations and banks to dump sovereign bonds onto its balance sheet in exchange for cash.

This occurred via two schemes called LTRO 1 and LTRO 2 which happened in December 2011 and February 2012 respectively. Collectively, these moves resulted in EU financial entities and nations dumping over €1 trillion in sovereign bonds onto the ECB’s balance sheet. Quite a bit of this was Greek debt as everyone in Europe knew that Greece was totally bankrupt. So, when the ECB swapped out its Greek bonds for new bonds that would not take a haircut during the second Greek bailout, the ECB was making sure that the Greek bonds on its balance sheet remained untouchable and as a result could still stand as high grade collateral for the banks that had lent them to the ECB. So the ECB effectively allowed those banks that had dumped Greek sovereign bonds onto its balance sheet to avoid taking a loss… and not have to put up new collateral on their trade portfolios.

Which brings us to the other issue surrounding the second Greek bailout: the fact that 80% of the money went to EU banks that were Greek bondholders instead of the Greek economy. Here again, the issue was about giving money to the banks that were using Greek bonds as collateral, to insure that they had enough capital on hand. Piecing this together, it’s clear that the Greek situation actually had nothing to do with helping Greece. Forget about Greece’s debt issues, or protests, or even the political decisions… the real story was that the bailouts were all about insuring that the EU banks that were using Greek bonds as collateral were kept whole by any means possible. This is why the current negotiations in Greece boil down to one argument: whether or not it will involve an actual restructuring of Greek debt that will affect bondholders across the board.

Greece wants this. The ECB and EU leaders don’t for the obvious reasons that any haircut of Greek debt that occurs across the board will: 1) Implode a small, but significant amount of EU bank derivatives trades. 2) Be immediately followed by Spain, Italy and ultimately France asking for similar deals… at which point you’re talking about over $3 trillion in high grade collateral being restructured (collateral that is likely backstopping well over $30 trillion in derivatives trades at the large EU banks). Remember, EU banks as a whole are leveraged at 26-to-1. At these leverage levels, even a 4% drop in asset prices wipes out ALL of your capital. And any haircut of Greek, Spanish, Italian and French debt would be a lot more than 4%. The next round of the great crisis is coming. The ECB bought two years of time with its pledge to do “whatever it takes,” but the global bond bubble is still going to burst. And when it does, it’s going to make 2008 look like a joke.

“I would willingly, eagerly, accept any terms offered to us if they made sense.”

• Grexit Dangers Mount: Yanis Varoufakis Warns Of ‘Liquidity Asphyxiation’ (AEP)

Greek finance minister Yanis Varoufakis has acknowledged that his country is desperately short of funds, accusing Europe’s creditor powers of trying to force his country to its knees by “liquidity asphyxiation”. “Liquidity is drying up in Greece. It is true,” he told a gathering at the Brookings Institution in Washington. Mr Varoufakis said a conspiracy of forces was trying to “snuff out” Greece’s Syriza government but warned that this could have devastating effects. “Toying with Grexit, or amputating Greece, is profoundly anti-European. Anybody who says they know what will happen if Greece is pushed out of the euro is deluded,” he said.

The warnings were echoed by Eric Rosengren, head of the Boston Federal Reserve, who said Europe risks sitting off uncontrollable contagion if it mishandles the Greek crisis, even though Greece may look too small to matter. “I would say to some European analysts who assume that a Greek exit would not be a problem, people thought that Lehman wouldn’t be a problem. If you measured the size of Lehman relative to the size of the US economy it was quite small,” he told a group at Chatham House. “I wouldn’t be overly confident that just because the Greek economy is small relative to the size of the European economy that something like that wouldn’t be a major dislocation. I think everybody should be a little bit concerned,” he said.

Christine Lagarde said the IMF is worried about the “liquidity situation” in Greece but made it clear that the institution would not give the country any leeway on €1bn of debt repayments coming due in early May. “We have never had an advanced economy asking for payment delays. It is clearly not a course of action that would be fit or recommended,” she said. Mrs Lagarde insisted that the the Fund would defend the interests of its contributors, many of them much poorer countries than Greece. Mr Varoufakis said the ECB and the EMU authorities were deliberately tightening the tourniquet on Greece until the arm was “gangrenous” in order to pressure his Syriza government to give in.

“I would willingly, eagerly, accept any terms offered to us if they made sense. Insisting on a primary budget surplus of 4.5pc in a depressed economy with no functioning banking system is absurd. We have the right to challenge the logic of a programme that has failed,” he said. He was speaking before a reception to celebrate Greek independence at the White House. It is understood that he spoke privately with President Barack Obama, though not at the Oval Office.

Greece’s almost nieghbor lives off the fat of the rest of Europe’s land.

• Germany: Has Any Country Ever Had It So Good? (Bloomberg)

How much good news can one country handle? If you work in the German Ministry of Finance—the Bundesfinanzministerium—you might be wondering that at the moment. This morning the average yield on German sovereign debt turned negative for the first time ever. This wasn’t the only good news today. The German economy is built on manufacturing, and it is by far the largest car builder in the euro area. So data released this morning showing that European car sales were up 11% in March, the fastest growth in 15 months, is certainly welcome. That is not to say the German export sector has been waiting on tenterhooks for an increase in European car sales for a boost; Germany has been running a positive trade balance for decades.

Unemployment is at an all-time low, and employment in the economy has never been higher. Which is great for the German economy. Even better, it has the added benefit of a falling currency. Importantly for Germany, it has managed all this without stoking inflation. With this background, it should come as no surprise that Germany is determined (and able) to balance its budget. So no shortage of customers, no shortage of jobs for its citizens, and no shortage of revenue. Has any country ever had it so good? In fact, as projections released by Eurostat this morning show that the only thing Germany is likely to have a shortage of soon is Germans. Germany currently has the lowest proportion of population under the age of 15 of any country in the European Union, and Eurostat’s projections indicate that will continue to be the case for the foreseeable future.

“..labour relations, the social security system, the VAT increase and the rationale regarding the development of state property.”

• Greece To Raid Coffers As IMF Dashes Hopes Of Resolving Crisis (Telegraph)

Cash-strapped Greece is planning to resort to drastic measures to stay afloat, as the country’s bail-out drama moves to Washington today. Finance minister Yanis Varoufakis is due to drum up support for his debt-stricken nation when he meets with President Obama at the White House later today. The meeting with the world’s most powerful leader comes as a desperate Athens could raid the country’s pensions funds in order to continue paying out its social security bill. Greece’s deputy finance minister Dimitris Mardas hinted that state-owned enterprises may have to transfer their cash balances to the Bank of Greece if the state was to avoid going bankrupt. The government has long protested it will run out of funds to continue paying out a €1.7bn monthly wage and pension bill if a release of cash is not arranged in the next few days.

With their coffers running dry, Greek officials reportedly made an informal request to delay loan repayments to the IMF, but were rebuffed, according to reports in the Financial Times, However, the Fund’s managing director Christine Lagarde said a moratorium on repayments was “not a course of action that would be fit or recommended”. “We have never had an advanced economy asking for payment delays,” Ms Lagarde said today, adding that any period of clemency would constitute additional financial aid to a debtor economy. “This would mean additional contributions by the international community and some of these countries are in a dearer situation than those seeking the delays,” said Ms Lagarde, who will meet with Mr Varoufakis today. “We will do everything we can so lending to the Fund remains the safest lending route any debtor can adopt.”

Greece came to the brink of falling into an arrears process with its senior creditor last month, but avoided the ignominy of becoming the first developed country to ever fall into an IMF default. The debtor nation, which has received no emergency cash since August 2014, faces a €2.5bn IMF loan bill over May and June. Hinting at the gulf between Greece and its creditors, Greek Prime Minister Alexis Tsipras said “political disagreements” were continuing to block a bail-out extension. Mr Tsipras said there were four areas of disagreement over its reform programme. These were ” labour relations, the social security system, the VAT increase and the rationale regarding the development of state property.” However, the Leftist premier added he was confident Europe would not “choose the path of an unethical and brutal financial blackmail” and ensure Greece remained in the monetary union.

They just throw everything out that Greece proposes.

• Greece Deal Appears Distant Amid Deadlock In Reform Talks (Kathimerini)

With negotiations between Greece and its creditors effectively deadlocked, a potential deal that could unlock crucially needed funding appeared more distant than ever on Thursday with doubts appearing about whether an agreement can be reached in time for a Eurogroup planned for May 11, well after the next scheduled eurozone finance ministers’ summit in Riga next Friday, which had been the original deadline. Even representatives of the European Commission, which has been Greece’s closest ally in the talks, appeared to be losing their patience. In comments on Thursday spokesman Margaritis Schinas said the EC was “not satisfied” with the level of progress in talks and called for work to “intensify” ahead of next week’s Eurogroup summit.

Sources indicated that the so-called Brussels Group, comprising officials from the government and Greece’s creditors, was to convene in the Belgian capital on Saturday. But a European official told Kathimerini he had no such information and that talks were likely to resume on Monday. The aim is for that meeting to yield a detailed list of reforms that could form the basis for a staff-level agreement and potentially lead to the disbursement of much-needed aid. But the two sides remain far apart. In a statement to Reuters on Thursday Tsipras highlighted several points of agreement – on areas such as tax collection, corruption and redistributing the tax burden – but also conceded that the two sides disagreed on four major issues: labor rules, pension reform, a hike in value-added taxes and privatizations, which he referred to as “development of state property” rather than asset sales.

Despite the differences and “the cacophony and erratic leaks and statements in recent days from the other side,” Tsipras said he was “firmly optimistic” his government would reach an agreement with its creditors by the end of April. “Because I know that Europe has learned to live through its disagreements, to combine its parts and move forward.” Finance Minister Wolfgang Schaeuble, who has leveled some of the harshest criticism against Greece in recent days, indicated that creditors remained ready to help but expected concessions. “If Greece wants support, we will give this support as in recent years, but of course within the framework of what we agreed,” he told Bloomberg. “Whatever happens, we know that Greece is part of the European Union and that we also have a responsibility for Greece and we will never disregard this solidarity.”

In a speech at the Brookings Institution in Washington on Thursday, Schaeuble said Greece was welcome to seek other sources of funding but might have difficulties. “If you find someone else, whether it’s in Beijing, in Moscow, in Washington DC, or in New York who will lend you money, OK, fine, we would be happy. But it’s difficult to find someone who is lending you in this situation amounts [of] 200 billion euros.” He added that Greece must seek to boost competitiveness and its primary surplus.

“The public finances are completely screwed, it can’t go on like this..”

• Finland: ‘Not As Bad As Greece, Yet, But It’s Only Matter Of Time’ (Guardian)

A sudden flurry of spring snow has dusted the steps of an evangelical church in central Oulu, northern Finland, where about 100 people are crowded together for a Friday sermon. But perhaps the true object of their devotion is inside black binliners by the door. Once a week, food parcels and a free meal attract a mix of unemployed men, single mothers and pensioners to the church. The most highly prized items are packs of sausages just within their sell-by date. Shops used to donate meat, but now they too are feeling the pinch. “There is a group of people in Finland that has dropped out of the employment market,” says pastor Risto Wotschke, whose example has encouraged other churches to offer food handouts.

The weakest economy in the eurozone this year might not prove to be Greece or Portugal, but Finland. The Nordic country is entering its fourth year of recession, with output still well below its 2008 peak. The north of Finland, home to the “Oulu miracle” that was built on the twin pillars of plentiful timber and mobile phone technology, has been hit in particular. Although a paper mill still dominates Oulu’s skyline, jobs in pulp and cellulose have moved abroad, while the collapse of Nokia’s handset business knocked the guts out of the local economy. With unemployment officially at more than 17% – almost twice the Finnish average – this once-booming city of 200,000 people has gone from a poster child of prosperity to a symbol of deepening cracks in the Nordic model.

“It’s not yet as bad here as Greece, but that’s only a matter of time,” says Seppo, a 43-year-old software engineer who lost job along with 500 others last summer after Microsoft, the new owner of Nokia’s mobile devices and services division, abandoned Oulu. Seppo, who asked that his full name not be used, has since found work, but it is 375 miles (600km) away. Every Sunday night he leaves his family for a rented room. “The public finances are completely screwed, it can’t go on like this,” he says, as he stands outside a polling booth on the outskirts of Oulu, where people are already queuing to vote early in Finland’s general election on Sunday. “The politicians are promising everything to everybody, but they won’t take any hard decisions until we are in a really deep crisis.”

Their markets have dried up.

• China’s Incredible Shrinking Factory (Reuters)

Eight years ago, Pascal Lighting employed about 2,000 workers on a leafy campus in southern China. Today, the Taiwanese light manufacturer has winnowed its workforce to just 200 and leased most of its space to other companies: lamp workshops, a mobile phone maker, a logistics group, a liquor brand. “It used to be as long as you had more orders, you could get everything you needed to expand your factory, and you could expand,” says Johnny Tsai, Pascal’s general manager. No longer. The Chinese factory – an institution that was once so large, it was measured in football fields – is shrinking. Rising labor costs, higher real estate prices, less favorable government policies and smaller order volumes are forcing Chinese plants to downsize just to survive.

Their contraction suggests a new model of light manufacturing emerging from China’s economic slowdown: smaller plants are replacing the vertically integrated behemoths that defined Chinese manufacturing in the early 2000s. Cankun, an appliances factory in southern China featured in the documentary Manufactured Landscapes, had more than 22,000 manufacturing employees in 2005, according to its annual report. Today, that number has shrunk to just 3,000. Some Hong Kong-owned factories in southern China have cut their staff numbers by 50-60%, according to Stanley Lau, chairman of the Federation of Hong Kong Industries. To be sure, the giant Chinese factory is hardly extinct. Taiwan’s Foxconn still employs about 1.3 million people during peak production times, many of them piecing together Apple iPhones.

And factories that can afford to, including Foxconn, are increasing automation. But for industries where the product design changes frequently, such as lighting, robots add little value. Chinese factories’ contraction illustrates how much the advantages they once enjoyed have eroded. In the 1990s and early 2000s, cities in Chinese coastal regions competed to offer investors discounted land. Today, the same land is scarce, and dear. New labor and environmental laws have been introduced, too, making life tougher for employers. And the workforce has changed. China’s working age population began to contract in 2012.

The number of strikes more than doubled last year compared to 2013. Jobs have shifted into the services sector. And labor costs have more than quadrupled in US dollar terms since 2005. Nor are orders what they used to be. On Monday, China announced that export volumes fell 15% in March compared to the same period the year before. China’s manufacturing PMI, which measures activity in the industrial sector, has been hovering around 50, the inflection point between expansion and contraction, for nearly two years.

Beijing is playing with pitchforks. From housing bubble to stock bubble to..?

• ‘Beijing Put’ May Be Driving China’s Stock-Market Fever (MarketWatch)

China’s stock markets are climbing to feverish heights as a record number of ordinary Chinese, including teenagers, flood into equities. But in the eyes of many, the share-buying frenzy and wild bull market are all due to one thing: The Chinese government wants it that way. Like the “Greenspan put” of the dot-com era, in which U.S. investors believed then Federal Reserve chairman Alan Greenspan was backstopping the market, Shanghai now seems to be surging on the belief in a “Beijing put.” Although emerging markets have been doing quite well recently — the MSCI EM Index has risen by more than 10% so far this year – the surge in China markets is particularly prominent.

By the close of Thursday trade, the benchmark Shanghai Composite Index was up 30% year-to-date, and it has more than doubled in just the past 10 months. The boom has also spilled over to the nearby Hong Kong equity market, where the city’s benchmark Hang Seng Index has surged nearly 18% since the start of January, while the mainland-China-tracking Hang Seng China Enterprises Index has climbed by 22% over the same period. Emboldened by the astounding advance, an increasing number of ordinary Chinese have joined what the state-run China News Service has called the “great army of stock investors,” lining up outside of brokerage firms to open new trading accounts.

The sharp increase in new investors and market volume has even caused system breakdowns for China Securities Depository and Clearing Corp. (CSDC) — the national clearing house — as well as individual securities firms. Statistics from CSDC show that last week the number of new stock-trading accounts opened hit a fresh all-time high of 1.68 million, beating the previous 1.67 million recorded for the week of March 27. In only the past month, mainland Chinese investors opened more than 6 million such accounts, according to the data. The CSDC said that this “steep rise” in new stock-account applications left it unable for a while on Tuesday to handle the barrage of requests, while Haitong Securities, the second-largest securities firm in the country, also encountered “a system breakdown” the same day, according to a report in the Beijing Youth Daily.

For professionals, it’s fish in a barrel. Clean out grandma.

• China’s Smart Money Is Riding the Stock Boom as Amateurs Rush In (Bloomberg)

Individual investors aren’t the only ones pouring cash into Chinese stocks after they surged faster than any other market worldwide. Five of the 11 professional money managers from mainland China, Hong Kong and Taiwan surveyed by Bloomberg from April 8 to 16 said they plan to boost holdings of yuan-denominated A shares this quarter, while four will maintain positions and just two will reduce their stakes. Technology, consumer, health-care and financial shares were preferred industries among the managers, who oversee a combined $41 billion. The responses show the Shanghai Composite Index’s 99% surge over the past year, driven by a record pace of new stock-account openings, still has support outside the Chinese individuals who comprise at least 80% of trading.

Institutional investors are betting that sustained inflows, interest rate cuts and prospects for an improving economy will keep the rally going. “New funds have been continuing to flow into the market and I need to follow the trend,” Dai Ming, a money manager at Hengsheng Asset Management said in Shanghai. “Furthermore, China’s economy will make headway going forward.” Mainland investors have opened a record 10.8 million new stock accounts this year, more than the total number for all of 2012 and 2013 combined, data from China Securities Depository and Clearing show.

The flood of money from these rookie stock pickers has helped feed market momentum after policy makers stepped up efforts to bolster an economy expanding at the slowest pace since the global financial crisis six years ago. The government won’t allow growth to fall below this year’s target of 7%, said Hao Hong, head of China research at Bocom International in Hong Kong, who forecasts at least three more interest-rate cuts in 2015 following reductions in November and March. Premier Li Keqiang said this week that China will accelerate targeted measures to support the economy after it expanded at the slowest pace since 2009 in the first quarter.

Yeah, let the no. 1 developer default, see what happens then.

• China’s Kaisa Keeps Creditors Guessing as Dollar Default Looms (Bloomberg)

Kaisa has until Monday to find $52 million for missed payments on two of its dollar bonds as it seeks to avoid default. The troubled developer must pay the interest on its 2017 and 2018 notes that was due on March 18 and March 19 respectively after the expiry of a 30-day grace period. The delay is the latest twist in a saga that has seen Kaisa’s founder Kwok Ying Shing make an unexpected return to the company, projects in Shenzhen blocked, a near default on a loan in December and a takeover offer from Sunac. Standard & Poor’s doesn’t expect Kaisa to pay and downgraded it to default last month. “Kaisa in the last four months has been mysterious and unpredictable, and Kwok coming back is equally surprising,” said Ashley Perrott at UBS. “It wouldn’t be a good signal if they didn’t pay the coupon.”

The mishaps threaten to make Kaisa the first Chinese developer to default on its dollar-denominated bonds as it seeks ways to service interest-bearing debt to onshore and offshore lenders that totaled 65 billion yuan ($10.5 billion) as of Dec. 31. Kaisa has also been tied to a corruption probe amid President Xi Jinping’s crackdown on graft, called the harshest since the 1949 founding of the People’s Republic of China by official Chinese media. Kwok exited the company he founded more than 15 years ago on Dec. 31, citing health reasons. Kaisa said in a Hong Kong stock exchange filing April 13 that he’d been appointed chairman and executive director.

In the interim, Sunac agreed to buy a controlling 49.3% stake from the Kwok family on Jan. 30, subject to a debt restructuring that would require investors to accept lower coupons and defer repayment by up to five years. Kaisa has said offshore creditors would stand to recover just 2.4% in a liquidation. Independent research firm CreditSights said Kwok’s reappointment should boost confidence and may be good news for debt investors, while Citigroup Inc. said he’s likely to regain control of the builder. Sunac Chairman Sun Hongbin said on April 15 his company’s takeover of Kaisa is still proceeding. Kaisa was to pay $16.1 million of interest on its $250 million of 2017 notes on March 18 and $35.5 million on its $800 million of 2018 securities March 19. Given the end of the 30-day grace period falls over a weekend, Kaisa technically has until Monday.

Steeled my ass.

• Australia Steeled For China Slowdown As Iron Ore Prices Fall (FT)

The last time Western Australia was engaged in a dispute with Canberra of this magnitude, it threatened to secede during a financial crisis sparked by the 1930s Depression. The current friction is linked to China’s slowdown — a sign of how closely Australia’s fortunes are tied to Beijing’s appetite for its commodity exports. “It’s not secession but it is tension and disengagement,” Colin Barnett, Western Australia’s premier, said this week when Canberra and other states rejected a request to help plug a widening hole in the state budget caused by plunging iron ore prices. Western Australia is a mining state that enjoyed a decade-long boom selling iron ore — a key ingredient in steel — to China. Known by some as “China’s quarry”, the state hosts BHP Billiton, Rio Tinto and Fortescue, which have spent billions of dollars building mines, railways and ports to almost double iron ore production to 717 million tons over the past five years.

But just as global supply hits record levels, China’s economy is slowing and its desire for the reddish-brown ore may have plateaued. Since peaking at US$190 in 2011, iron ore prices have slid more than 70% to about US$50 a ton. This is denting tax revenues, forcing smaller mining companies to close and lay off thousands of employees. “Western Australia was the big beneficiary of the China boom,” says Chris Richardson at Deloitte. “But it is suffering now as the mine construction phase ends and commodity prices fall amid a surge in iron ore supply and faltering demand.” In 2013 the state lost its triple-A credit rating. On Tuesday, Standard & Poor’s warned it may face a further downgrade because of its budget problems.

Western Australia says that if iron ore prices stay at US$50 per ton it would wipe out A$4 billion (US$3 billion) in projected royalty revenues in 2015-16, 12% of the state budget. Unemployment in the state, although still modest at 5.8%, has risen from 3.8% when iron ore prices peaked. House prices have started to fall in the state capital Perth, while they continue to grow in Sydney and Melbourne. Mr Barnett wants other states to give Western Australia a greater share of revenues from a nationwide goods and services tax. But so far Canberra and other states have rejected his pleas. On Friday, state premiers will discuss the dispute. Weak Chinese data are fueling concerns that Western Australia’s problems could spread across a country that has avoided recession for two decades by riding China’s commodities boom.

Smart guy. But why doesn’t he know it’s the – Australian-owned – banks that control the country, and they want to continue as is?

• New Zealand Housing: Human Rights Commisioner Calls For Drastic Action (NZH)

New Zealand’s human rights watchdog has added its voice to those calling for drastic action to tackle New Zealand’s housing problems. Chief human rights commissioner David Rutherford said today all political parties should make a cross-party accord to tackle the “very serious” issues of adequate housing in this country. His comments followed a warning by the Reserve Bank this week that Government needed to do more to dampen demand in the face of increasing housing pressures. Mr Rutherford said the housing issues in New Zealand were “many and varied” and there was no co-ordinated plan to address them.

“We’re seeing housing issues being talked about as separate issues when in fact they need to be addressed as a whole: housing affordability in Auckland and Canterbury, the provision of adequate housing in Northland, South Auckland and other places throughout the country, which would reduce the incidence of childhood illnesses due to cold, damp, overcrowded accommodation, and the call for more of our elderly to be cared for in homes which are in many cases likely to be unsuitable for elderly habitation to name just a few of the issues.” He said the human right to adequate housing was a binding legal obligation for the state, which meant the Government had a duty to protect this right and a responsibility to provide remedies.

Mr Rutherford said it would take decades to solve myriad problems but immediate action was needed, beginning with a cross-party accord. “We have had a talkfest about these issues for over 30 years, mainly centred on how many State-owned houses should or should not be built. “In that time, a state like Singapore has surpassed New Zealand in providing adequate housing and that in turn has led to higher levels of wealth and health in Singapore than New Zealand.” The Green Party hailed the Chief Commissioner’s message, saying a lack of action was denying New Zealanders the basic human right of adequate housing. “The Government’s do-nothing approach hasn’t worked,” housing spokesman Kevin Hague said. “It is time for all parties to put their political colours aside and work together to find enduring solutions to the housing crisis.”

Politicians want bubbles to keep going.

• New Zealand Government, Central Bank Clash On Housing (CNBC)

Increasing supply is the only way to cool off New Zealand’s red-hot housing market, the country’s deputy prime minister told CNBC, ignoring the central bank’s call for a capital gains tax. Property markets across New Zealand’s major cities are steadily climbing, prompting fears of a sharp correction. Sales volume in March rose to an eight-year high, with median prices in the capital city of Auckland soaring 13% on year, nearly double the nation’s 8% gain, the Real Estate Institute of New Zealand (REINZ) said on Tuesday. New Zealand is one of the few advanced economies that hasn’t experienced a major price correction in the past 45 years. Those statistics prompted an unusually aggressive warning from the Reserve Bank of New Zealand (RBNZ).

In a speech on Wednesday, deputy governor Grant Spencer said he “would like to see fresh consideration of possible policy measures to address the tax-preferred status of housing, especially investor related housing.” That’s a clear reference to a capital gains tax on the sale of investment properties, economists widely agreed. However, Bill English, deputy prime minister & minister of finance of New Zealand, told CNBC on Thursday that he believes increased housing supply is the best way to fix the issue. “We just need more houses on the ground faster to deal with the inflows from migration and the positive attitudes of many New Zealand households in a world of lower interest rates,” adding that the government is going through a deliberate, long and complicated process to improve supply.

But the RBNZ believes supply-side solutions are unlikely to yield quick results, noting that increased supply will take a number of years to eliminate the housing shortage. Waiting that long has severe risks, the bank said: “Rising house price inflation, particularly in Auckland, represents a risk to financial and economic stability. The longer excess demand persists, the further prices will depart from their underlying fundamental determinants and the greater the potential for a disruptive correction.”

More revolving doors. They want the Bernank for who he knows, not his brilliant insights.

• 5 Financial Crisis Regulators Cashing In On New Careers (Fortune)

The man who occupied one of the most important economic posts in the U.S. during the financial crisis will soon be collecting his paychecks from one of the largest hedge funds on Wall Street. Former Federal Reserve board chairman Ben Bernanke, who oversaw the country’s central bank from 2006 until last year, will be a senior adviser to Citadel, the hedge fund announced Thursday morning. Founded by billionaire Kenneth Griffin, Citadel manages $25 billion in assets. Bernanke, a former economics professor at Princeton University, left the Fed more than a year ago at which point he was succeeded by current chair Janet Yellen. Bernanke’s new role will find him advising Citadel on global economic and financial matters and monetary policy.

Speaking with The New York Times about his new career path, Bernanke said he had spent the past year scouting job opportunities, and that Citadel represented the prudent choice due to the fact that the asset manager is not regulated by the Fed. Bernanke also told the Times that he is well aware of the public’s poor reception to the so-called “revolving door” that escorts so many Washington regulators to cushy Wall Street positions. That is exactly why he chose Citadel over various banking and lobbying positions he was offered elsewhere in the industry, Bernanke said.

After all, Bernanke’s tenure at the Fed will primarily be remembered for his role helping to engineer the government bailout of the financial industry, as well as for implementing the Fed’s economic stimulus program. As the former Fed chair alluded to, though, Bernanke is far from the only high-profile government employee to have spent the late-2000’s fiscal crisis trying to right the Wall Street ship only to eventually land a lucrative gig in the financial industry. Here are five former regulators from the financial crisis who left the government to make millions.

Fascinating read.

• Stephen F. Cohen: U.S./Russia/Ukraine History The Media Won’t Tell You (Salon)

Salon: What is your judgment of Russia’s involvement in Ukraine? In the current situation, the need is for good history and clear language. In a historical perspective, do you consider Russia justified?

Cohen: Well, I can’t think otherwise. I began warning of such a crisis more than 20 years ago, back in the ’90s. I’ve been saying since February of last year [when Viktor Yanukovich was ousted in Kiev] that the 1990s is when everything went wrong between Russia and the United States and Europe. So you need at least that much history, 25 years. But, of course, it begins even earlier. As I’ve said for more than a year, we’re in a new Cold War. We’ve been in one, indeed, for more than a decade. My view [for some time] was that the United States either had not ended the previous Cold War, though Moscow had, or had renewed it in Washington. The Russians simply hadn’t engaged it until recently because it wasn’t affecting them so directly. What’s happened in Ukraine clearly has plunged us not only into a new or renewed—let historians decide that—Cold War, but one that is probably going to be more dangerous than the preceding one for two or three reasons.

The epicenter is not in Berlin this time but in Ukraine, on Russia’s borders, within its own civilization: That’s dangerous. Over the 40-year history of the old Cold War, rules of behavior and recognition of red lines, in addition to the red hotline, were worked out. Now there are no rules. We see this every day—no rules on either side. What galls me the most, there’s no significant opposition in the United States to this new Cold War, whereas in the past there was always an opposition. Even in the White House you could find a presidential aide who had a different opinion, certainly in the State Department, certainly in the Congress. The media were open—the New York Times, the Washington Post—to debate. They no longer are. It’s one hand clapping in our major newspapers and in our broadcast networks. So that’s where we are.

“The Hague ruled that the Greek party’s right for reparations remains intact but the capacity to execute that right against German property was rejected..”

• Why A Greek Call For German War Reparations Might Make Sense (MarketWatch)

German officials have dismissed the Greek war reparations claim for Nazi atrocities as a “dumb” attempt to distract from Greece’s looming debt crisis. However, the truth is that a group of Greek citizens, all relatives of people murdered by the Nazis in 1944, have been seeking war reparations from the German government for almost 20 years – and have won rulings in Greek and Italian courts. Germany fought the claims, bringing the case in 2012 all the way to the International Court of The Hague, where the Greek side scored a hollow victory.

The Hague ruled that the Greek party’s right for reparations remains intact but the capacity to execute that right against German property was rejected, due to a legal principle called “sovereign immunity,” which protects one sovereign country from being sued before the court of another country. It is important to note that Germany brought its case against Italy, not Greece, invoking “sovereign immunity.” Germany argued that Italy should not have allowed Greeks to foreclose against property of the German government on Italian soil. Ultimately, The Hague agreed. It ruled in favor of Germany, stating that Italy had in fact violated international law. But the international court never resolved the underlying issue of reparations – it merely issued a judgment on sovereign immunity.

Even as that case was pending in The Hague, Italian Prime Minister Silvio Berlusconi issued a decree that suspended all civil-enforcement procedures against foreign countries on Italian territory. Almost three years have elapsed since the case was closed in The Hague, and as the Greek bailout negotiations continue to drag on and tensions build, the war reparations issue is coming into focus again. Germany’s counterargument has more or less remained the same over the years. Berlin claims the issue was settled in 1960 when West Germany paid 115 million Deutschmarks to Athens in compensation and was finally closed in 1990 with a final settlement, when West and East Germany reunified.

It’s about the bottom line. Companies are supposed to be in the way we set them up.

• BP Dropped Green Energy Projects Worth Billions, Prefers Fossil Fuels (Guardian)

BP pumped billions of pounds into low-carbon technology and green energy over a number of decades but gradually retired the programme to focus almost exclusively on its fossil fuel business, the Guardian has established. At one stage the company, whose annual general meeting is in London on Thursday, was spending in-house around $450m (£300m) a year on research alone – the equivalent of $830m today. The energy efficiency programme employed 4,400 research scientists and R&D support staff at bases in Sunbury, Berkshire, and Cleveland, Ohio, among other locations, while $8bn was directly invested over five years in zero- or low-carbon energy. But almost all of the technology was sold off and much of the research locked away in a private corporate archive.

Facing shareholders at its AGM, company executives will insist they are playing a responsible role in a world facing dangerous climate change, not least by supporting arguments for a global carbon price. But the company, which once promised to go “beyond petroleum” will come under fire both inside the meeting and outside from some shareholders and campaigners who argue BP is playing fast and loose with the environment by not making meaningful moves away from fossil fuels. In 2015, BP will spend $20bn on projects worldwide but only a fraction will go into activities other than fossil fuel extraction. An investigation by the Guardian has established that the British oil company is doing far less now on developing low-carbon technologies than it was in the 1980s and early 1990s. Back then it was engaged in a massive internal research and development (R&D) programme into energy efficiency and alternative energy.

Jeffrey Brown’s Export Land Model in action.

• Saudi Arabia Adds Half a Bakken to Oil Market in a Month (Bloomberg)

Saudi Arabia boosted crude production to the highest in three decades in March, with a surge equal to half the daily output of the Bakken formation in North Dakota. The kingdom boosted daily crude output by 658,800 barrels in March to an average of 10.294 million, according to data the country communicated to OPEC’s secretariat in Vienna. The Bakken formation, among the fastest-growing shale oil regions in the U.S., pumped 1.1 million barrels a day in February, according to data from the North Dakota Industrial Commission. Oil prices have rallied about 16% in New York this month on stronger fuel demand and as a record decline in U.S. rigs fanned speculation that the nation’s production will slow from its highest pace in three decades.

Prices collapsed almost 50% last year as Saudi Arabia led OPEC in maintaining production in the face of a global glut rather than make way for booming U.S. output. “It confirms the new strategy of the Saudis,” Giovanni Staunovo at UBS said. “If OPEC isn’t balancing the market any more, why should the Saudis hold so much spare capacity when they can use it to make money? Production is still likely to increase in the near term as domestic demand will increase.” In the space of 31 days, Saudi Arabia managed a production boost that took drillers in North Dakota’s Bakken almost 3 years to achieve, according to data compiled by Bloomberg. Output from the Bakken shale increased by about 668,000 barrels a day from February 2012 to December 2014, according to data from the state’s industrial commission.

The increase reflects Saudi Arabia’s own growing requirements rather than an attempt to defend market share, according to Harry Tchilinguirian at BNP Paribas in London. “It’s a big jump in Saudi production but it is commensurate with the increase in their domestic needs,” Tchilinguirian said by e-mail. “Saudi Arabia has made large capacity additions in refining, and they’ll probably want to build up crude stocks before demand from local utilities peaks in the summer.” The output figure for Saudi Arabia is in line with a level of 10.3 million a day announced by Oil Minister Ali Al-Naimi in Riyadh on April 7.

“..this year’s death toll has already reached 909, compared with about 50 deaths in the same period in 2014, when Italy’s Mare Nostrum rescue mission was still in effect. That programme has since been replaced by Europe’s Triton, a far less ambitious border patrol..”

• Italy Calls For Help Rescuing Migrants As 40 More Reportedly Drown (Guardian)

Italy has called on the rest of Europe to share the burden of the growing migration crisis in the Mediterranean as news of yet another tragedy emerged, with 41 migrants feared dead after their boat capsized just off the Sicilian coast. Four people survived the disaster, according to witnesses who interviewed them. The demand for Europe-wide action comes just days after 400 people were killed after a boat capsized on its way from Libya, and as the Italian coastguard brought two vessels with an estimated 1,100 rescued migrants on board to Sicily. There were also unconfirmed reports that Italian authorities had arrested 15 people following allegations that 12 migrants had intentionally been killed after a fight broke out on one of the ships.

According to interviews with the four survivors of the most recently capsized boat conducted by the Organisation for Migration (OIM), which follows the issue closely, the inflatable boat left Libya on Sunday with 45 people on board and was at sea for four days when the boat capsized. A spokesperson for OIM said it was likely that the vessel had trouble finding the correct route to Italy, given how long they were at sea. According to the men, who were picked up by the Italian navy vessel Foscari after they were spotted by an aircraft, the boat quickly began losing air forcing the migrants into the water.

Italy’s foreign minister, Paolo Gentiloni, appealed for help in coming to grips with the humanitarian crisis, saying that 90% of the rescue effort in recent weeks had fallen on the Italian navy, which responds to calls for help from migrant boats in international waters close to Libya. “The emergency is not just about Italy,” he said. “We have a duty to save lives and welcome people in a civilised manner, but we also have a duty to seek international engagement.” Another Italian ship, the Fiorillo, arrived in Sicily with about 301 people on board following the rescue of a vessel in distress, and the Dattilo had at least 592 following six separate rescue operations that took place over two days.

Survivors of the disaster earlier this week in which 400 people died said the vessel sank after passengers surged to one side to catch the attention of a passing commercial ship. About 8,500 migrants were rescued in the Mediterranean between Friday and Monday alone. The warm weather and good sea conditions have led to a sharp increase in attempted crossings. According to some estimates, this year’s death toll has already reached 909, compared with about 50 deaths in the same period in 2014, when Italy’s Mare Nostrum rescue mission was still in effect. That programme has since been replaced by Europe’s Triton, a far less ambitious border patrol that monitors incoming vessels within 30 miles of the Italian coast.

Can The US Bail Out Its Oil Industry?

Dec 102014

December 10, 2014 Posted by Raúl Ilargi Meijer at 10:03 pm Finance Tagged with: bail-out, Banks, Fed, oil, Saxobank, US 7 Responses »

Christopher Helin Fisk Service garage, San Francisco 1934

Interesting – if not outrageous – remarks today from Steen Jakobsen at Saxo Bank in Denmark, always good for some fresh insights, and a statement from him that I would like to decorate with a few question marks. As WTI oil looks threatening to break through $60 a barrel with another 5% loss today, let’s first take a look at Saxo’s, and hence Steen’s, Outrageous Predictions, via Tyler Durden. We can take it from there.

Saxobank’s 10 Outrageous Predictions For 2015 – A Reckoning’s Coming

Low volatility has given investors a false sense of security that could lead to the biggest upset in 2015. Central bankers meanwhile have become the generals in an economic war in which the final tool in the box – competitive currency devaluations – merely exports problems overseas. Nowhere exemplifies this better than Japan after the latest bazooka launch by Shinzo Abe threatens to become an out-of-control, inflation-stoking missile. Japan may have bought the global markets a further quarter or two of protection but the real world will have its say.

We saw it for one week of mayhem in October. If that’s anything to go by, we are in for a rollercoaster ride in 2015. Tangible assets and production sit at all-time lows. Paper money investment has crowded out productive capital while societies are dominated by hairdressers and bankers. We’re losing the art of manufacturing. Meanwhile the power of the US of A is waning as China rises and when the superpower pecking order changes, volatility and war ensue.

Nothing is ever given and Outrageous Predictions remains an exercise in finding ten relatively controversial and unrelated ideas which could turn your investment world upside. And we at Saxo Bank remain convinced higher volatility and a potential move towards a mandate for change is upon us as macro thinking enters a final fight to the death before we can again put our faith in people, ideas, education and change rather than hollow promises. 2015 will be a tough year but potentially also the year we look back at as the nadir.

That’s the intro, now let’s get to the predictions themselves, and I’ll give my version.

10 Outrageous Predictions…

• Russia defaults again

Possible, but I wouldn’t want to rule out Russia’s preparedness for what is happening today. They’ve seen the neocons coming from miles away, and they surely have considered today’s reality in their planning. But, again, a default is possible. If Putin thinks it’s a smart thing to do.

• Volcano eruption decimates crops

That’s not really a prediction, it’s more of a crazy wager made at 11.59 pm on New Year’s Eve after a few bottles of bubbly.

• Japanese inflation to hit 5%

That would not only mean a great success for Abe, Kuroda and Abenomics (which has been an abject failure to date), it would also mean they find a way to get the Japanese people to start spending like a bunch of Jewish American Princesses, and I really can’t see that. So a no for me.

• Draghi quits ECB

Absolutely. Draghi is stuck between desperate spend spend spend forces on the one side and the Germans on the other. It’s clear he would love to do the former’s bidding, but the Germans really don’t want anything to do with it, and that’s not because they’re traumatized over what happened 80 years ago in Weimar, a silly argument thrown around far too easily. They simply don’t believe in letting debt take over an economy and hold it hostage, which is what the rest of the world is doing.

Interesting question is who’ll succeed the future Italian president. Another Goldmanite like Mario would appear useless, it would just lead to another case of being stuck in a Mexican stand-off. So a more Berlin-friendly chair? Germans have no room to move, if they go for broad asset purchases, they’d be voted out of office and voted down by their domestic court system.

My guess would be that if and when Mario leaves, the EU has a big problem, because a replacement that everyone can agree on will be hard to find, And that in turn may be a danger to the union itself. Which it should be too. It’s an unholy union between partners that are far too far apart from each other.

• Corporate bond spreads to double in 2015

Entirely possible. What’s happening today with oil is already affecting other commodities, and will spread to stocks sooner rather than later. Bonds can’t be far behind, be they sovereign, corporate or just plain junk. Wash out, bloodbath, pick your favorite term.

• Internet hacks smash online shopping

Perhaps. Hackers seem to be more focused on ‘loftier’ goals for now, but who knows? Who knows where the main hacker communities are located in the world to begin with?

• China devalues yuan 20%

I’m guessing Saxo means a deliberate move here, as in an announced one. And I’m not sure they’d need that. They can do it by stealth. It matters of course whether you mean devaluation vs the USD, or another currency. They probably mean the USD, and then it’s not so hard. I wouldn’t be at all surprised if the euro loses another 20% vs the USD in 2015, the yen seems a given, so why not the yuan? Lots of dollars will be looking for a way ‘home’. The question becomes: can the Fed still drive the dollar down?

• Cocoa futures hit USD 5,000/tonne

Now I’m outta my league. I’ll have to pass. I do know, of course, that chocolate has been threatened for a while, but that’s the extent of my ‘expertise’.

• UK house sector to crash

Along with quite a few others. Central banks have focused on housing in Australia, New Zealand, Canada, the US itself, and all these markets are facing a lot of pressure. The UK may be even crazier than all the rest, London surpassed Hong Kong as the most expensive city only recently. Which is where my thoughts turn to all the Londoners who’ve been chased out of their own city by the insane dreams of Cameron and Boris Johnson. They are the ones who should be chased out.

• Brexit in 2017

That’s not really a 2015 prediction, is it? But, you know what, let’s make it a broader issue: I bet you there’s going to be a lot more pressure, from multiple sides, on the European unity. Which is good: Brussels is a power game gone horribly wrong over the backs of nice, sweet, decent ordinary people all across the ill-fated ‘union’.

And we’re not done yet. Steen Jakobsen also did an interview at CNBC, in which he has an 11th prediction, namely that the US might bail out its energy sector. I find that curious, because I’ve said a few times recently that I don’t think that’s going to happen. But first, Steen:

Steen Jakobsen: The US Could Bail Out Its Own Oil Sector (CNBC)

An economist who correctly predicted the fall in oil price this year has told CNBC that the U.S. government could look to bail out its energy sector in 2015 as the commodity’s low price starts hitting the country’s economy. “The U.S. energy sector is clearly important,” Steen Jakobsen, the chief economist at Danish investment bank Saxo Bank, told CNBC Wednesday. “They are paramount to the long-term strategic issue that the U.S. will be self-dependent on oil.”

[..]Jakobsen believes the [US energy] headwind could soon become a tailwind despite gas becoming cheaper at the pump for U.S. citizens. “It will subtract 0.5% from GDP, bare minimum,” he said. “There’s a precedent here, back in the 80s we also had an oil crisis and that led to bank recoveries.” He added that oil companies are in for a “massive correction,” similar to the downtrend seen in mining stocks, explaining that exploration was getting “hugely expensive” with energy majors having little free cash flow available. The S&P 500 index has clocked gains of around 11% so far this year but the energy sector within the benchmark is currently down nearly 12%.

One of Jakobsen’s “outrageous” predictions this time last year was for the commodity to drop below $80 per barrel which was achieved in November with oil now trading at around $65. BP sounded the alarm on Wednesday morning by saying that it is implementing a cost-cutting program due to the tumbling prices. Any potential bailout for the sector, or even the banks that lend to them, would prove vastly unpopular in the U.S.

Dennis Gartman, commodities investor and editor of The Gartman Letter, told CNBC that any bailout is simply inconceivable “We bailed the banks out and the public’s anger has been very real and very long standing,” [..] “Bailing out the oil companies would be even more seriously hated.”

BNP Paribas’ Global Head of Commodity Strategy, Harry Tchilinguirian, was equally in incredulous at the possibility of the U.S. government stepping in. “In the event that oil prices fall further into 2016 and hurt smaller un-hedged independent operators as their free cash flow declines and their ability to raise finance is curbed, it is possible to see closures or consolidation in the sector,” “But is this reason enough for the government to intervene?” Christian Schulz, the senior economist at Berenberg Bank, agreed that U.S. oil producers, and their lenders, could get into trouble if lower oil prices remain but said they are not “systemically important enough” to be bailed out by the government.

I don’t think public anger would be the major issue, and I also don’t think the industry is not “systemically important enough” (that seems a bit ignorant even for a ‘senior economist’, the entire edifice runs on oil).

I think the problem, the reason why America cannot bail out its oil industry, at least not overtly, lies elsewhere. Bailing out the US housing industry is one – expensive – thing. Bailing out Wall Street banks is another – closely related, and infinitely more expensive – , but still close. The latter involved bailing out foreign banks, but they’re still primary dealers, or in other words, part of the ‘family’.

Oil is a whole different piece of cake. The Fed or Treasury could try and lower exploration costs, or something in that vein, but in the end the only measure that would be really effective is raising revenue, and that can only be accomplished with higher prices. And since oil prices are set globally. that in turn means that bailing out US oil also means bailing out Russian, Libyan, Venezuelan oil. And that would be hard to defend in today’s American political climate, helping Putin and Maduro get back on their feet.

It’s of course a ‘curious conundrum’, to find that by helping your own you also help your ‘enemy’. But it is, from where I’m sitting, a very real issue when it comes to oil. On top of that, there’s of course the fact that the US shale oil industry is already falling to leveraged bits, and has never been a viable industry, just a land speculation Ponzi. And how or why could the US bail out that kind of scheme out, and at the same time, don’t let’s forget, save the whole financial world from the fall-out of what’s happening to oil? What to do when that plunge starts to infect stocks and bonds, which seems an inevitable next step?

I am of course ready to stand corrected, but I simply don’t see what Steen Jakobsen suggests. Oil is too shattered an industry within the US, and also, though in a different way, globally, to be bailed out and saved by the Fed’s bell.

Debt Rattle November 21 2014

Nov 212014

November 21, 2014 Posted by Raúl Ilargi Meijer at 12:47 pm Finance Tagged with: Abe, ABS, Banks, China, CO2, commodities, consumer debt, Draghi, emissions, Krugman, rhino 1 Response »

Russell Lee Hammond Ranch general store, Chicot, Arkansas Jan 1939

• Americans, With Record $3.2 Trillion Consumer Debt, Borrow More (Guardian)

• How Wall Street Banks Traded Lending For Oil, Gas And Nukes (MarketWatch)

• Citigroup Ejected From ECB FX Group for Rigging (Bloomberg)

• China ‘Triple Bubble’ Points To Long Slide For Commodities (MarketWatch)

• ECB Dips Toe Into Dead Sea Of Rebundled Debt (Reuters)

• ECB’s Draghi: ‘Strong Recovery Unlikely’ (CNBC)

• Draghi Says ECB Must Raise Inflation as Fast as Possible (Bloomberg)

• Greece To Submit Contentious Budget For 2015 (CNBC)

• Hanging Around: Why Abe’s Holding an Election in a Recession (Bloomberg)

• Abe Listening to Krugman After Tokyo Limo Ride on Abenomics Fate (Bloomberg)

• US Federal Reserve To Review How It Supervises Major Banks (Reuters)

• Hugh Hendry: “QE ‘Worked’ By Redistributing Wealth Not Creating It” (Zero Hedge)

• Britain Abandons Banker Bonus Fight After EU Court Blow (Bloomberg)

• Russia Warns US Against Supplying ‘Lethal Defensive Aid’ To Ukraine (RT)

• EuroMaidan Anniversary: 21 Steps From Peaceful Rally To Civil War (RT)

• Dutch Government Refuses To Reveal ‘Secret Deal’ Into MH17 Crash Probe (RT)

• Creativity, Companies, And The Wisdom Of Crowds (Robert Shiller)

• China Starts $2 Trillion Leap Forward to Slash Pollution (Bloomberg)

• The Magical Thought That’s Assumed in Climate Studies (Bloomberg)

• Rhino Poaching Death Toll Reaches Record in South Africa (Bloomberg)

• Growth First. Then These Other Things Can Be Dealt With (Clarke&Dawe)

This is going to end well, right?

• Americans, With Record $3.2 Trillion Consumer Debt, Borrow More (Guardian)

Americans are borrowing more even as they have racked up enormous amounts of consumer debt, Federal Reserve data show. The newly released minutes of the last Federal Reserve meeting in October give a wider picture of the US economy. A weak housing market weighed on the US economy, while the fear of Ebola put some brief pressure on the stock markets, the Fed found. The interesting trend, however, is the growing indebtedness of US consumers now that banks have loosened the spigots on lending. The Federal Reserve customarily releases the minutes of its meetings, where the board of governors and staff discuss the major forces at work in the US economy, including employment, housing, borrowing and inflation. The Fed took a positive view of overall economic progress, noting a low unemployment rate, low inflation and, generally, “a continued improvement in labor market conditions”. While the minutes provide a big-picture view of the economy, there are some specific – and strange – worries that make it into the Fed’s discussions.

“Worries about a possible spread of Ebola also appeared to weigh on market sentiment somewhat at times,” the Fed said. The Fed’s meeting was shortly after the first American Ebola patients were being admitted to hospitals. Elsewhere in the economy, the Fed acknowledged that the housing market had slowed. After new home prices hit record highs in 2013, prices have been drifting downward as homeowners still struggle to get mortgages. “Housing market conditions seemed to be improving only slowly,” the central bank said, noting that new home sales were flat in September after moving up in August, and sales of existing single-family homes had not showed much progress and “moved essentially sideways” over the past several months. Banks also loosened the reins and started extending more credit to consumers, particularly through credit cards and auto loans, which some have suggested may be a bubble.

“The three financial holding companies chose to engage in commodity-related businesses that carried potential catastrophic event risks.”

• How Wall Street Banks Traded Lending For Oil, Gas And Nukes (MarketWatch)

A U.S. Senate subcommittee investigation into bank commodities trading has produced some eye-popping findings: Goldman Sachs owned a uranium business that carried the liability of a nuclear accident. J.P. Morgan operated as if it were Con Edison. It owned multiple power-generation plants, exposing it to potential accidents there. Morgan Stanley played the role of Exxon Mobil, stockpiling storage, pipelines, and other natural gas and oil infrastructure.

Together, the report found that banks not only were out of their comfort zone, but put the financial system at risk because they turbo-charged these investments with derivative contracts. They ended up with “huge commodity inventories and participating in outsized transactions,” the Senate Permanent Subcommittee for Investigations said. “The three financial holding companies chose to engage in commodity-related businesses that carried potential catastrophic event risks.” The overreaching foray into commodities underscores how bank “innovation” can take simple services for clients and create massive risk. Banks entered the commodities markets to provide hedges for providers, traders and other market participants. They ended up with huge stakes and, according to the committee, were able to corner at least parts of the market.

This is a far cry from simple brokerage services and investment banking. It is a quantum leap from deposit-taking and lending institutions that are backed by the Federal Reserve and the Federal Deposit Insurance Corp. And it all took place in a market supposedly regulated by the Commodity Futures Trading Commission, which should have at least raised red flags, even if its powers were limited by Congress. While many banks have either left, reduced or signaled they want to exit commodities, the pattern in which simple banking and brokerage products become suddenly dangerous and enormous quagmires may be the larger problem. Regulators can’t put a cop in every division and office on Wall Street, much less every power plant across the country.

“Citigroup is the world’s biggest foreign-exchange dealer ..”

• Citigroup Ejected From ECB FX Group for Rigging (Bloomberg)

The European Central Bank ejected Citigroup from its foreign-exchange market liaison group after the U.S. bank was fined for rigging the institution’s own currency benchmark, two people with knowledge of the move said. The ECB removed Citigroup from the panel, which advises the central bank on market trends, after regulators fined the lender $1 billion for rigging currency benchmarks including the ECB’s 1:15 p.m. fix, said the people, who asked not to be identified because the decision hasn’t been made public. Citigroup was one of six banks fined $4.3 billion by U.S. and U.K. regulators last week and is the only one that also sits on the ECB Foreign Exchange Contact Group. About 20 firms with large foreign-currency operations, ranging from Airbus to Deutsche Bank sit on the committee. The panel’s agenda includes how to improve currency benchmarks.

Citigroup is the world’s biggest foreign-exchange dealer, with a 16% market share, according to a survey by London-based Euromoney Institutional Investor Plc. A spokesman for the New York-based bank declined to comment. The panel isn’t involved in how the ECB’s daily fix is calculated. Currency benchmarks such as the ECB fix and the WM/Reuters rates are used by asset managers and pension funds to value their holdings, including $3.6 trillion in index tracker funds around the world. According to documents released with the settlements, senior traders at the firms shared information about their positions with each other and coordinated trading strategies to the detriment of their clients. They’d congregate in electronic chat rooms an hour or so before benchmark rates were set to discuss their orders and how to execute them to their mutual benefit.

China’s share for some commodities is insane. And it won’t last.

• China ‘Triple Bubble’ Points To Long Slide For Commodities (MarketWatch)

The “commodity super cycle” is dead. Now, it’s time to get used to the “commodity super down cycle, and China is the biggest reason why, warn strategists at Credit Suisse in a Thursday note. Commodity demand tends to be very cyclical. Commodities, however, have been underperforming cyclical indicators of growth, including industrial production and new manufacturing orders (as measured by Institute for Supply Management survey data), they say. Much of the blame is on China, the strategists argue, noting that the country remains the “most significant source” of demand for most industrial commodities. Moreover, they see China on track for a “hard landing” at some point in the next three years. The report adds to some of the recent gloom around China, where the fate of the economy remains a topic for debate.

Standard & Poor’s Ratings Services on Wednesday said its negative outlook for Chinese property developers is casting a pall on the rest of the Asia-Pacific region, though it sees prospects for the sentiment to recover next year thanks to looser government policies, particularly on mortgages. The Credit Suisse strategists, meanwhile, see a “triple bubble” in credit, real estate and investment. On credit, they highlight a private-sector to GDP ratio that is 30%age points above trend. China’s investment share of GDP is 48%, much higher than Japan or Korea at similar stages of industrialization, Credit Suisse says. Real estate, meanwhile, is in a “classic bubble.” Prices have dropped six months in a row. A drop of another 20% or more will make for a “hard landing,” they write.

The headline tells the story.

• ECB Dips Toe Into Dead Sea Of Rebundled Debt (Reuters)

The European Central Bank is set to embark this week on a scheme to buy the kind of rebundled debt that sparked the global economic crash. With sparse investor interest its efforts could fall short. Asset backed securities (ABS), reparcelled debt that mixes high-risk loans with safer credit, gained notoriety when rebundled home loans in the United States unravelled to spark financial turmoil. Seven years on, seeking to pump money into a moribund euro zone economy, the ECB believes the same type of debt may make it easier to get credit to companies. It will be safe, the ECB argues, because such European debt, whether car loans or credit cards, is typically repaid and its repackaging should be simpler to understand. The programme is one plank in a strategy which ECB chief Mario Draghi hopes will increase its balance sheet by up to €1 trillion.

If it falls short and fails to boost the economy significantly, pressure to launch full quantitative easing will reach fever pitch. Regulators and investors are sceptical and even within the ECB expectations are muted, people familiar with its thinking say. To limit its risk, the ECB will buy only the most secure part of such loans in the hope that others pile in behind it to buy riskier credit. It is a strategy with little prospect of success, says Jacques de Larosiere, the former head of the International Monetary Fund who has pushed for the repackaging and sale of loans. “While I welcome the ECB’s initiative … it cannot work if it is alone in buying the senior tranches,” he told Reuters. “That is the very area where there is no problem in finding buyers. In order to have an impact, the ECB or other buyers must also be able to buy the lower-quality riskier tranches of ABS.”

Gee, we had no idea.

• ECB’s Draghi: ‘Strong Recovery Unlikely’ (CNBC)

TThe euro zone economy is likely to remain stagnant in the short-to-medium term and the European Central Bank stands ready to act fast to combat low inflation, President Mario Draghi said on Friday. “A stronger recovery is unlikely in the coming months,” Draghi said in an opening speech at the Frankfurt European Banking Congress, referring to the latest flash euro area Purchasing Managers Index (PMI). The PMI, published on Thursday, showed that new orders in the euro zone fell this month for the first time since July 2013. The composite index read 51.4—below forecasts and below October’s final reading of 52.1.

The ECB has launched a slew of measures to ease credit conditions in the region in order to boost growth and combat dangerously low inflation. These include cutting interest rates to record lows and announcing plans to purchase covered bonds and asset-backed securities (ABS). The latest reading for headline inflation in the euro zone was 0.4%—well below the close to 2% level targeted by the ECB and down from 0.9% a year ago. “The inflation situation in the euro area has also become increasingly challenging,” said Draghi on Friday. “We see that it has been essential that the ECB has acted —and is continuing to act—to bring inflation back towards 2%.” Speculation has been rife as to if and when the ECB will start a U.S -style sovereign bond-buying program, as a further measures to ease monetary conditions.

Mario must be needing tranquilizers by now.

• Draghi Says ECB Must Raise Inflation as Fast as Possible (Bloomberg)

Mario Draghi said the European Central Bank must drive inflation higher quickly, and will broaden its asset-purchase program if needed to achieve that. “We will do what we must to raise inflation and inflation expectations as fast as possible, as our price-stability mandate requires,” the ECB president said at a conference in Frankfurt today. Shorter-term inflation expectations “have been declining to levels that I would deem excessively low,” he said. Any new action would follow a flurry of activity since June that has included interest-rate cuts, long-term bank loans, and covered-bond purchases, with buying of asset-backed securities due to start as soon as today.

Draghi has declined to rule out large-scale government-bond buying and said after this month’s monetary policy meeting that staff are studying further measures to boost the economy if needed. “Draghi is sending a clear signal that more stimulus is coming,” said Lena Komileva, chief economist at G Plus Economics . in London. “If the ECB’s current measures prove underwhelming and inflation expectations fail to recover, the ECB will act to expand quantitative easing.”

When will the next bond attack start?

• Greece To Submit Contentious Budget For 2015 (CNBC)

Greece’s proposed budget for 2015 has put it at loggerheads again with the “Troika” of international monitors, who are worried the plan will land it with a bigger fiscal gap than forecast. The coalition government led by Antonis Samaras has promised the budget will include no further austerity measures—on which its bailout is contingent— in an effort to combat the risk of snap national elections next year. The latest polls show that the anti-austerity left-wing opposition party SYRIZA would win an election, if it was held now. Greek Finance Minister Gikas Hardouvelis will submit the final plan for 2015 to the President of the Parliament at 10 a.m. GMT on Friday. Negotiations in Parliament on the Greek budget for 2015 will then start December 4.

The Troika—the European Commission, International Monetary Fund and European Central Bank – is worried that the budget will land Greece with a much bigger fiscal gap next year than the government says. The disagreement has already delayed the country’s review by the Troika and Greece risks missing a December 8 deadline to receive the final instalment of its bailout from Europe, which is worth 144.6 billion euros. This completion of the review would also pave the way for talks on a possible financial backstop for Greece after the European part of its bailout expires at the end of this year.”Only once a staff-level agreement has been reached for the conclusion of the review can discussions on the follow-up to the program take place. The full staff mission will return to Athens as soon as the conditions are there,” Margaritis Schinas, chief spokesperson of the European Commission told CNBC.

Power games save faces, but not countries.

• Hanging Around: Why Abe’s Holding an Election in a Recession (Bloomberg)

The economy’s in recession, his support is sliding, and he has two years left in office with a big majority. Hardly surprising Japanese voters say they don’t understand why Prime Minister Shinzo Abe has called an election. Abe dissolved the lower house of parliament today for the vote to be held in mid-December. His coalition isn’t likely to lose its majority as the opposition is in disarray. A solid win now would snuff out potential threats from within his own party in a leadership election set for next year. Abe is taking a page out of his family’s history. His great-uncle Eisaku Sato, the longest-serving prime minister since the war, twice called early elections during his eight years in office from 1964-1972 to consolidate his grip on power.

While Abe has already closed the revolving door of one-year prime ministers that began with his own resignation in 2007, he needs to be seen as keeping his pledges to revive the economy to be able to challenge Sato’s record. “Tradition is that as soon as a prime minister’s popularity goes down, you put in another guy,” said Steven Reed, professor of political science at Chuo University in Tokyo. Each of the last six prime ministers “lost popularity rapidly because they didn’t keep any promises,” he said. The risk is that Abe’s plan backfires and he loses enough seats to fuel a challenge from his own allies, who in Japanese politics are often a more formidable threat to a sitting prime minister than the opposition. 63% of respondents in a Kyodo News poll yesterday said they didn’t understand his reasons for calling an election.

Say sayonara Nippon.

• Abe Listening to Krugman After Tokyo Limo Ride on Abenomics Fate (Bloomberg)

When Japanese economist Etsuro Honda heard that Paul Krugman was planning a visit to Tokyo, he saw an opportunity to seize the advantage in Japan’s sales-tax debate. With a December deadline approaching, Prime Minister Shinzo Abe was considering whether to go ahead with a 2015 boost to the consumption levy. Evidence was mounting that the world’s third-largest economy was struggling to shake off the blow from raising the rate in April, which had triggered Japan’s deepest quarterly contraction since the global credit crisis. Honda, 59, an academic who’s known Abe, 60, for three decades and serves as an economic adviser to the prime minister, had opposed the April move and was telling him to delay the next one. Enter Krugman, the Nobel laureate who had been writing columns on why a postponement was needed.

“That nailed Abe’s decision – Krugman was Krugman, he was so powerful,” Honda said in an interview yesterday in the prime minister’s residence, where he has an office. “I call it a historic meeting.” It was in a limousine ride from the Imperial Hotel — the property near the emperor’s palace that in a previous construction was designed by Frank Lloyd Wright — that Honda told Krugman, 61, what was at stake for the meeting. The economist, who’s now heading to the City University of New York from Princeton University, had the chance to help convince the prime minister that he had to put off the 2015 increase. Confronting Honda and fellow members of Abe’s reflationist brain-trust – such as Koichi Hamada, a former Yale University economist, and Kozo Yamamoto, a senior ruling-party lawmaker — were Ministry of Finance bureaucrats.

Timing is everything. What year is today?

• US Federal Reserve To Review How It Supervises Major Banks (Reuters)

The U.S. Federal Reserve said on Thursday it has launched a review of how it oversees major banks, calling on its inspector general to help with the probe after a series of critical reports. Separate studies to be undertaken by the Fed’s Washington-based Board of Governors and its Office of Inspector General are meant to ensure that “divergent views” about the state of large banks are adequately aired. The reviews will determine whether frontline supervisors and other officials at the regional Federal Reserve banks, as well as at the board level, “receive the information needed to ensure consistent and sound supervisory decisions,” the Fed said in a press release.

That includes being made aware of “divergent views” about a bank’s operations, a reference to criticism that supervisors at the Fed’s regional banks have sometimes suppressed the views of staff members considered too critical of the banks they examine. The issue will be the focus of a Senate Banking committee hearing on Friday that features New York Fed President William Dudley as the chief witness. Several Fed regional banks are involved in supervising the country’s 15 largest financial institutions, including Citigroup and Bank of America, that generally have more than $50 billion in assets. But the New York Fed in particular has come under fire for being lax with the banks it oversees and for not reacting forcefully enough in the run-up to the 2007-2009 financial crisis.

A recent inspector general’s report said supervision at the New York Fed was hampered by the loss of key personnel and an inadequate plan for succession into important positions. Secret recordings made by former New York Fed supervisor Carmen Segarra also portrayed the bank as cozy with major institutions like Goldman Sachs. In testimony prepared for the Senate hearing but released on Thursday afternoon, Dudley said “it is undeniable that banking supervisors could have done better in their prudential oversight of the financial system” in advance of the financial crisis.

More Hugh. He has very original insights.

• Hugh Hendry: “QE ‘Worked’ By Redistributing Wealth Not Creating It” (Zero Hedge)

Hendry: This is almost unparalleled in being the most exciting moment for global macro today. And I predicate that upon making an analogy with the Central Bank coordinated policy intervention, in the foreign exchange markets, after the Plaza Accord in, I believe, 1985. There was a profound unease at the current account and particularly the trade deficit that America was running up, especially against the Japanese, which was deemed to be contentious. The real economy is composed of slow-moving prices, wages are slow and the notion of having to wait for productivity improvements and wage price negotiations to work their course, via the U.S. corporate landscape in Japan, such as those deficits would be resolved successfully and become less politically contentious. It was just too long. Politicians just don’t have that time and so they jumped into the world of macro. Macro’s all about fast-moving prices. Foreign exchange is fast. Stock markets prices are fast.

So the notion then was that the Yen and the Deutschmark would appreciate. Now for hedge funds that was amazing. This is the period of the alchemy of finance, as George Soros has celebrated in very successful financial adventures. They just run the biggest long positions. No one stopped to say “Well, the Deutschmark’s getting expensive.” It didn’t really enter into the vernacular of trading in that market. It was macro, there was a policy impulse, a sponsorship by the world’s monetary authorities and you were trending and you had to have that position. By and large it succeeded. So what I would said to you today is that the policy response can’t be found in foreign exchange markets. It’s been muted somewhat by the “Beggar thy neighbour” way that everyone can pursue the same policy. So currencies, up until very lately, haven’t really moved that much. Instead the drama is unfolding in the stock market.

Cameron keeps on losing against the EU.

• Britain Abandons Banker Bonus Fight After EU Court Blow (Bloomberg)

Britain abandoned a bid to overturn a European Union ban on banker bonuses of more than twice fixed pay after it suffered a setback in the EU’s top court. Chancellor of the Exchequer George Osborne said he wouldn’t “spend taxpayers’ money” pursuing the legal challenge any further after Britain’s arguments were rebuffed by a senior official at the EU Court of Justice yesterday. The U.K. government will instead redirect its efforts toward countering the effects of the “badly designed rules,” which include an increase in bankers’ overall pay, Osborne said in a statement. The U.K. Treasury said it may be necessary to “develop standards that ensure that non-bonus or fixed pay is put at risk,” echoing remarks this week by Bank of England Governor Mark Carney.

U.K. banks face a running battle with regulators over the EU remuneration rules, with Barclays, HSBC, Lloyds and Royal Bank of Scotland among more than 30 lenders that have tried to circumvent it by introducing so-called role-based pay. The four banks declined to comment on the court opinion. The European Banking Authority, which brings together financial watchdogs from throughout the 28-nation EU, said in October that role-based allowances violate EU rules in “most cases,” and urged regulators to ensure compliance. Osborne and Carney have criticized the EU bonus curb as counterproductive. Britain started the legal fight against the measure last year.

“Lethal assistance “remains on the table. It’s something that we’re looking at …”

• Russia Warns US Against Supplying ‘Lethal Defensive Aid’ To Ukraine (RT)

Moscow has warned Washington a potential policy shift from supplying Kiev with “non-lethal aid” to “defensive lethal weapons”, mulled as US Vice President visits Ukraine, would be a direct violation of all international agreements. A Russian Foreign Ministry spokesperson said that reports of possible deliveries of American “defensive weapons” to Ukraine would be viewed by Russia as a “very serious signal.” “We heard repeated confirmations from the [US] administration, that it only supplies non-lethal aid to Ukraine. If there is a change of this policy, then we are talking about a serious destabilizing factor which could seriously affect the balance of power in the region,” Russian Foreign Ministry spokesman Aleksandr Lukashevich cautioned.

His remarks follow US deputy National Security Advisor Tony Blinken Wednesday’s statement at a hearing before the Senate Committee for Foreign Affairs, in which he said that Biden may offer the provision of “lethal defensive weapons” as he visits Ukraine. Lethal assistance “remains on the table. It’s something that we’re looking at,” Blinken said. “We paid attention not only to such statements, but also to the trip of representatives of Ukrainian volunteer battalions to Washington, who tried to muster support of the US administration,” Lukashevich said.

Useful timeline.

• EuroMaidan Anniversary: 21 Steps From Peaceful Rally To Civil War (RT)

Protesters who went out to Kiev’s Maidan Square exactly a year ago have their goal – a deal with the EU – achieved. However, they hardly expected the protest would also trigger a bloody civil war which has already claimed 4,000 lives. RT takes a look at the milestone events of the past 365 days, which brought Ukraine – and the world – to where it is now.

1) Then-President Victor Yanukovich’s unwillingness to sign an Association Agreement with the EU led to Maidan (Independence Square) in Ukraine’s capital Kiev filling with protesters on November 21, 2013. The rally participants were holding hands, waving flags and chanting slogans like “Ukraine is Europe!”

2) The brutal dispersal of a protest camp on the morning of November 30 was a turning point in the ensuing events. It’s still unclear whose idea it was to use force against demonstrators. Yanukovich laid the blame on the city’s police chief and sacked him. But that was not enough for the Maidan protesters, who switched from demands of signing the EU deal to calls for the toppling of the government.

3) Over the course of several weeks, which followed the face of Maidan started to change – peaceful protesters were more and more giving way to masked and armed rioters, often from far-right groups. A collective of radicals called the Right Sector were among the most prominent. Peaceful protests evolved into a continuous stand-off between the rallying people and riot police.

4) The deadliest day of the Maidan protests came on February 20 when over a hundred people were killed in the center of Kiev, most of them by sniper fire. The ongoing official investigation blamed a group of elite soldiers from the Berkut riot police for the killings. But there is a lingering suspicion that the massacre was committed by somebody among the anti-government forces.

More secrets, just what the situation needed.

• Dutch Government Refuses To Reveal ‘Secret Deal’ Into MH17 Crash Probe (RT)

The Dutch government has refused to reveal details of a secret pact between members of the Joint Investigation Team examining the downed Flight MH17. If the participants, including Ukraine, don’t want information to be released, it will be kept secret. The respected Dutch publication Elsevier made a request to the Dutch Ministry of Security and Justice under the Freedom of Information Act to disclose the Joint Investigation Team (JIT) agreement, along with 16 other documents. The JIT consists of four countries – the Netherlands, Belgium, Australia and Ukraine – who are carrying out an investigation into the MH17 disaster, but not Malaysia. Malaysian Airlines, who operated the flight, has been criticized for flying through a war zone.

Part of the agreement between the four countries and the Dutch Public Prosecution Service, ensures that all these parties have the right to secrecy. This means that if any of the countries involved believe that some of the evidence may be damaging to them, they have the right to keep this secret. “Of course [it is] an incredible situation: how can Ukraine, one of the two suspected parties, ever be offered such an agreement?” Dutch citizen Jan Fluitketel wrote in the newspaper Malaysia Today. Despite the air crash taking place on July 17 in Eastern Ukraine, very little information has been released about any potential causes. However, rather than give the public a little insight into the investigation, the Dutch Ministry of Security and Justice is more worried about saving face among the members of the investigation.

“I believe that this interest [international relations] is of greater importance than making the information public, as it is a unique investigation into an extremely serious event,” the Ministry added, according to Elsevier. Other reasons given for the request being denied included protecting investigation techniques and tactics as well as naming the names of officials who are taking part in the investigation. The Ministry said it would be a breach of privacy if they were revealed. “If the information was to be released then sensitive information would be passed between states and organizations, which would perhaps mean they would be less likely to share such information in the future,” said the Ministry of Security and Justice. Dutch MP Pieter Omtzigt, who is a member of the Christian Democratic Party, has made several requests for the information to be released to the public. “We just do not know if the Netherlands has compromised justice,” he said in reaction to the ministry’s decision. The MP was surprised that this agreement was even signed, never mind kept secret.

Shiller is a blind man: “If we are to encourage dynamism, we need Keynesian stimulus and other policies that encourage creativity”.

• Creativity, Companies, And The Wisdom Of Crowds (Robert Shiller)

Economic growth, as we learned long ago from the works of economists like MIT’s Robert M. Solow, is largely driven by learning and innovation, not just saving and the accumulation of capital. Ultimately, economic progress depends on creativity. That is why fear of “secular stagnation” in today’s advanced economies has many wondering how creativity can be spurred. One prominent argument lately has been that what is needed most is Keynesian economic stimulus – for example, deficit spending. After all, people are most creative when they are active, not when they are unemployed. Others see no connection between stimulus and renewed economic dynamism. As German Chancellor Angela Merkel recently put it, Europe needs “political courage and creativity rather than billions of euros.” In fact, we need both. If we are to encourage dynamism, we need Keynesian stimulus and other policies that encourage creativity – particularly policies that promote solid financial institutions and social innovation.

In his 2013 book Mass Flourishing, Edmund Phelps argues that we need to promote “a culture protecting and inspiring individuality, imagination, understanding, and self-expression that drives a nation’s indigenous innovation.” He believes that creativity has been stifled by a public philosophy described as corporatism, and that only through thorough reform of our private institutions, financial and others, can individuality and dynamism be restored. Phelps stresses that corporatist thinking has had a long and enduring history, going back to Saint Paul, the author of as many as 14 books of the New Testament. Paul used the human body (corpus in Latin) as a metaphor for society, suggesting that in a healthy society, as in a healthy body, every organ must be preserved and none permitted to die. As a public-policy credo, corporatism has come to mean that the government must support all members of society, whether individuals or organizations, giving support to failing businesses and protecting existing jobs alike.

Throw a big number out there and see if it sticks.

• China Starts $2 Trillion Leap Forward to Slash Pollution (Bloomberg)

China, which does nothing in small doses, is planning an environmental makeover in keeping with the political, cultural and market revolutions it has pursued over the past six decades. In his agreement last week with President Barack Obama, Chinese President Xi Jinping committed to cap carbon emissions by 2030 and turn to renewable sources for 20% of the country’s energy. His pledge would require China to produce either 67 times more nuclear energy than the country is forecast to have at the end of 2014, 30 times more solar or nine times more wind power – – more non-fossil fuel energy than almost the entire U.S. generating capacity. That means building roughly 1,000 nuclear reactors, 500,000 wind turbines or 50,000 solar farms. The cost will run to almost $2 trillion, holding out the potential of vast riches for nuclear, solar and wind companies that get in on the action.

“China is in the midst of a period of transition, and that calls for a revolution in energy production and consumption, which will to a large extent depend on new energy,” Liang Zhipeng, deputy director of the new energy and renewable energy department under the National Energy Administration, said at a conference in Wuxi outside of Shanghai this month. “Our environment is facing pressure and we must develop clean energy.” By last year, China had already become the world’s largest producer of wind and solar power. Now, with an emerging middle class increasingly outspoken about living in sooty cities reminiscent of Europe’s industrial revolution, China is looking at radical changes in how its economy operates. “China knows that their model, which has done very well up until recent times, has run its course and needs to shift, and they have been talking about this at the highest levels,” said Paul Joffe, senior foreign policy counsel at the World Resources Institute.

Interesting concept: to meet official goals, ‘We’ll have to suck the carbon out of the air’. We won’t.

• The Magical Thought That’s Assumed in Climate Studies (Bloomberg)

Here’s one way to phrase the basic climate change conundrum: There’s a huge gap between the volume of pollution emitted every year and how much scientists say we can safely send aloft. This has a weird implication for potential fixes governments may need in the future. Emission levels in 2020 could end up about 23% higher than what scientists suggest is safe, according to an annual study of the so-called “emissions gap” put out by the UN Environment Program. The carbon overshoot could grow by 2030 to 40%. “Safe” means what the UN-led climate negotiators have defined it to mean: warming of less than two degrees Celsius above global average temperatures from the beginning of the record, or around 1880. But two degrees doesn’t say much to normal people when you’re talking about the temperature of a planet. That’s why scientists have been beating their heads against walls the last several years to translate “two degrees Celsius” into something incrementally more intelligible – more intelligible even than 3.6 degrees Fahrenheit.

They’ve come up with the idea of a carbon budget, or the volume of pollution we can put into the atmosphere and still have a halfway decent chance of containing the problem. At the rate we’re going, the budget may burn up by the 2040s. Now, in finance, the notion of a budget deficit make sense. When someone overspends, he pays the money back at a later date. Ecological deficits make less sense. How do you pay the ground back in carbon minerals once they’ve been vaporized and are hanging in the atmosphere? Here’s what’s weird, what the Emissions Gap report calls out. It has to do with these “carbon deficits” that result. We’re burning through so much of the budget today that in “safe” projections of the 2070s and 2080s, greenhouse gas emissions must go negative for the climate to stay safe. Smokestacks will have to start inhaling rather than exhaling. We’ll have to suck the carbon out of the air, through reforestation or some as-yet unproven airborne-carbon removal technology.

This is who we are. This is mankind.

• Rhino Poaching Death Toll Reaches Record in South Africa (Bloomberg)

A record 1,020 rhinos have been killed by poachers for their horns in South Africa this year, more than all of 2013 and triple the number four years ago. Kruger National Park, a reserve the size of Israel, has seen 672 rhinos killed since Jan. 1. A total of 1,004 were slaughtered throughout the country in 2013, the Department of Environmental Affairs said today in a statement. The horns are more valuable than gold by weight. Prices for a kilogram of rhino horn range from $65,000 to as much as $95,000 in Asia. “The South African government recognizes that the ongoing killing of the rhino for its horns is part of a multi-billion dollar worldwide illicit wildlife trade and that addressing the scourge is not simple,” the department said. Demand for rhino horns has climbed in Asian nations including China and Vietnam because of a belief that they can cure diseases such as cancer.

South Africa has taken measures including setting up an protection zone within Kruger Park, using new technology, intelligence, and moving rhinos to safe areas within South Africa and other countries where they live. Poachers killed 333 rhinos in 2010 and 668 in 2012, Albi Modise, spokesman for the Department of Environmental Affairs, said today in a mobile-phone text message. “Government will continue to strengthen holistic and integrated interventions and explore new innovative options to ensure the long-term survival of the species,” the department said. Authorities have made a record number of arrests for poaching and related activities, according to the department. A total of 344 alleged rhino poachers, couriers and poaching syndicate members have been apprehended this year, compared with 343 in all of last year, Modise said. Most rhinos in South Africa are white rhinos, the bigger of the two types of the animal found in Africa. They can weigh more than 2 metric tons. The horns are largely made up of keratin, a substance similar to human hair.

The world’s best economic analysts are two Australian comedians. Fitting.

• Growth First. Then These Other Things Can Be Dealt With (Clarke&Dawe)

Japan Is Dying And We Still Don’t Get It?!

Nov 182014

November 18, 2014 Posted by Raúl Ilargi Meijer at 8:30 am Finance Tagged with: Abe, Banks, deflation, Draghi, GDP, Japan, QE, spending, stimulus 6 Responses »

Dorothea Lange Miserable poverty, Hooverville, Elm Grove, Oklahoma County, OK Aug 1936

What is it with us? Don’t we WANT to understand? Japan announced on Monday that its economy is in hopeless trouble and back in recession (as if it was ever out). And what do we see? ‘Experts’ and reporters clamoring for more stimulus. But if Japan has shown us anything over the past years, and you’re free to pick any number between 2 and 20 years, it’s that the QE-based kind of stimulus doesn’t work. Not for the real economy, that is.

The land of the setting sun has during that time thrown so much stimulus into its financial system that Krugman-esque calls for even more of the same look even more ludicrous today than they did all along. Abenomics is a depressing failure, just as we knew it would be since it started almost two years ago. It’s not complicated, and it never was.

Japan’s stimulus has achieved the following: banks get to pretend they’re healthy and stocks rise to heights that are fundamentally disconnected from underlying real values. On the flipside of that, citizens are being increasingly squeezed and ‘decide’ not to spend (not much of a decision if you have nothing to spend). Since Japan’s ‘consumer’ spending makes up about 60% of GDP, things can only possibly get worse as time passes. If ‘consumers’ don’t spend, deflation is the inevitable result – and that has nothing to do with the much discussed sales tax, it’s been going on for decades -.

Therefore, the sole thing QE stimulus has achieved is a wealth transfer from poorer to rich. And that’s not only the case in Japan. Mario Draghi yesterday hinted – again – at all the stuff he could start buying next year, including sovereign bonds, even though that would violate EU law. And whether or not Germany will let him in the end, the fact that he keeps the option alive even if only in theory, tells us plenty about the mindset at the ECB.

That is, it’s the same as in Japan. And doing the same can only lead to the same results. A poorer population, a richer toplayer and an economy that continues to shrink, which will and must lead to the same deflationary trend. The idea that an economy can be rescued by pushing public funds into its finance system and stock markets has been forever thrown out by Japan’s experiences.

Draghi said yesterday that ‘monetary policy has done a lot’, and while that may be correct, it says nothing about WHAT it has done. From where I’m sitting, Germany’s recent drift into negative territory and the ongoing record unemployment rates around the Mediterranean certainly tell us a lot about what it has NOT done. QE, no matter how big and how crazy, doesn’t heal real economies, it makes them sicker.

If consumer spending makes up 60% of GDP, as in Japan, or even 70%, as in the US, then you need to boost that spending. And you don’t do that by handing over what financial wiggle room you have left, to banks so they can pile it on to the reserves they hold at central banks.

It is accepted as gospel that it’s a good thing to give banks free money, but it would be the devil’s work to give it to consumers. Instead, the latter must be squeezed from all sides, through austerity, the loss of services, benefits, wages and jobs, in order to prop up the financial system. How and where is it not clear what that will result in? There’s only one possible outcome.

The reason why all governments and central banks keep following the failed QE stimulus path regardless lies in the relative political powers that different parts of a society have. In today’s world, saving the banks, which equals saving the rich, is not only the priority, it’s the only deliberation.

And if you might be under the impression that what is true in Japan and Europe does not hold in the US, why not start with this graph from Doug Short, and take it from there.

If and when an economy is as deep in the doldrums as all major economies today are, you can’t rescue it by taking from the poor to save the rich. It’s fundamentally impossible. You need the bottom 90%’s spending in order to generate enough GDP to stay out of deflation. Money must move through an economy for it to stay sufficiently ‘lubricated’. And the only people who can keep that money moving are the bottom 90%. It’s Catch-22.

Any stimulus must be directed at the bottom, or it must of necessity fail. Nothing commie or socialist about it, but simply the way economies work. And it’s not just some difference of ideal or insight or something, it’s very simply that an economy cannot function without its poorer 90% of citizens spending.

Anything else is simply Grand Theft Auto. Both Japan and Europe are preparing for more of it.

Debt Rattle October 7 2014

Oct 072014

October 7, 2014 Posted by Raúl Ilargi Meijer at 12:29 pm Finance Tagged with: Banks, China, ebola, Europe, France, Germany 3 Responses »

Charlotte Brooks Marilyn Monroe and Navy Pilot 1952

• Global Banks Face 25% Loss-Absorbency Rule in FSB Plan (Bloomberg)

• ‘Nuanced’ Q4 Dollar Gains As Monetary Policy Diverges (CNBC)

• Why The Oil Price Decline Is Failing To Boost Europe (CNBC)

• German Industrial Output Drops Most Since 2009 (AN)

• France Cautions Germany Not To Push Europe Too Far On Austerity (AEP)

• France’s Stagnation Is Tragic To Watch (Telegraph)

• Europe Cash Pile Signals Savings Glut Sequel for Markets (Bloomberg)

• French PM To Bring In Sunday Shopping As Part Of Reform Program (Guardian)

• The Reserve Currency’s Exorbitant Burden (Pettis)

• Retirement Age To Rise By As Much As Six Months Per Year (Telegraph)

• China Private Sector Demand Continues To Decline (Zero Hedge)

• Chinese Investors Surged Into EU At Height Of Debt Crisis (FT)

• Beware a Chinese Slowdown (Rogoff)

• Zero Interest Loan Lets Low-income Borrowers Build Equity Fast (?!) (LA Times)

• Ukraine Insists Transit Of Russian Gas To Europe Should Be Revised (RT)

• $1,200 3-D Printer For Untraceable Guns Sells Out in 36 Hours (Wired)

• Nurse In Spain First Ebola Case Contracted Outside Africa (CNBC)

• CDC Clears US Ebola Victim’s Stepdaughter To Return To Work After 7 Days (DM)

• Senior Banker In UK Pleads Guilty In Libor Probe (Reuters)

• Must Be the Season of the Witch (Jim Kunstler)

Fool me once.

• Global Banks Face 25% Loss-Absorbency Rule in FSB Plan (Bloomberg)

The largest global banks will have to hold more capital and liabilities than previously reported that can automatically be written off in a crisis — as much as a quarter of risk-weighted assets — as regulators take on lenders deemed too big to fail. The Financial Stability Board is developing minimum standards that will limit the double-counting of capital banks use to meet existing international rules, according to an FSB working document sent for comment to Group of 20 governments and obtained by Bloomberg News. The restriction means that, while the basic requirement will be set at 16% to 20% of risk-weighted assets, the final number will be higher because the banks must separately meet “other regulatory capital buffers,” according to the document, dated Sept. 21. The FSB in Basel, Switzerland, declined to comment on the non-public document.

“These standards are an important step in developing a strategy which will limit taxpayers’ exposure to failing banks, but of course a lot of work still has to be done to determine how much flexibility national regulators will have or even need when applying the rules,” said Richard Reid, a research fellow for finance and regulation at the University of Dundee in Scotland. The FSB, which consists of regulators and central bankers from around the world, plans to present the draft rules to a G-20 summit in Brisbane, Australia, next month. The plans, which will be published for comment and completed next year, are part of a package of measures designed to make sure taxpayers are no longer on the hook when banks fail. The FSB maintains a list of globally systemic banks that it updates each November. The latest list included 29 banks and identified HSBC and JPMorgan as the banks whose failure would do the most damage to the global economy.

The FSB plan would force the world’s most systemically important banks to issue junior debt and other securities that could be written down in a straightforward manner and cover costs associated with winding down or restructuring. The rule would fully apply in 2019 at the earliest. Bank of England Governor Mark Carney, the FSB’s chairman, has said that the measure is needed to prevent taxpayer-funded bailouts of banks. “It is essential that systemically important institutions can be resolved in the event of failure without the need for taxpayer support, while at the same time avoiding disruption to the wider financial system,” Carney wrote in a letter to the G-20 last month.

Beware the analysts and experts.

• ‘Nuanced’ Q4 Dollar Gains As Monetary Policy Diverges (CNBC)

The divergence in global monetary policy – as the Federal Reserve prepares for its first rate hike in mid-2015 while counterparts in Japan and Europe consider adding stimulus – will drive the U.S. dollar higher this quarter, a CNBC survey of currency strategists and traders shows. The rise of the dollar index – a gauge of the greenback’s value against a basket of six major currencies – has been virtually unassailable, racking up gains for a record 12 straight weeks – its longest winning streak since its 1971 free float under President Nixon. “We expect a strategically strong dollar over an extended period measured in months and years,” said David Kotok, chief investment officer at U.S. money manager Cumberland Advisors with $2.3 billion in assets under management. “Our central bank is at neutral and unlikely to revert to QE (quantitative easing) again. The rest of the world has not reached that stage.”

Kotok is not alone. Eighty one% of respondents expect the greenback to set new highs, while just under a fifth believes the rally will fade. In a research report on September 30, Deutsche Bank flagged the dollar’s ascent as a major headwind for the commodities complex and predicted that the move has further to go. “A new long-term uptrend in the U.S. dollar is now firmly entrenched and will continue to pose risks to large parts of the commodities complex,” Deutsche Bank strategists said in their Commodities Quarterly. “On our reckoning we are only half way through the current U.S. dollar cycle in duration and magnitude terms.” Fed policymakers last month indicated that they expect faster rate hikes next year and the year after. The central bank in its mid-September meeting pushed up its expected path of interest rate increases – the so-called Fed ‘dots’ forecast. That’s likely to set the tone for further dollar gains, though yields on U.S. treasuries – on short and medium-dated notes – suggest the bond market remains unconvinced.

Obvious.

• Why The Oil Price Decline Is Failing To Boost Europe (CNBC)

Forget quantitative easing by the European Central Bank. Surely the precipitous oil price decline in the last couple of weeks will finally be the catalyst to give the down-trodden European economy the big boost it needs. I mean, after three years of prices north of $100 a barrel surely a big cut in the European energy bill will provide the stimulus effect that ECB President Mario Draghi could only dream of? Well, I’m afraid it appears there will be no energy-induced bonanza as, like many other peculiar aspects of the European economy, consumers will hardly see the benefits of market falls in commodities. To recap, the likes of OPEC are only getting circa $90 per barrel for their oil nowadays compared with around $107 per barrel as recently as June this year. So you could be forgiven for thinking that if the producers are getting less bang per barrel then the consuming nations of Europe would be a major beneficiary. Well that’s not quite the case it seems.

Yes, the big red top headlines talk of the ‘a couple of pence per liter’ off pump prices but the major benefits will never come our way in Europe. Why? Simple. Europe is overwhelmed by taxation, subsidy, over-capacity and green incentivization plans that have conspired make hydrocarbons a dirty and expensive source of energy. Europe’s biggest economy, Germany, is at the heart of the issue in its noble pursuit to reduce greenhouse gases. Great ambition but stunningly expensive. By 2050 the Germans want to have 60% of their energy coming from renewables. This will be an impressive feat but may well seriously dent European competitiveness further.

Daniel Lacalle, Senior Portfolio Manager at Ecofin is worried. “Since the beginning of the crisis in 2008, average European power prices are up 38% whereas wholesale prices have actually fallen. The problem is that we don’t see any of the benefits in Europe of the lower oil prices as we subsidize too many energy industries, we have oversupply and subsidies. In addition, there are so many green taxes that gasoline prices have been going up instead of down.”

Factory orders down 5.7%, capital goods down 8.8%. Europe lost its engine. Get ready for the freefall.

• German Industrial Output Drops Most Since 2009 (AN)

German industrial production declined at the fastest pace since January 2009 underlining that the largest euro area economy is moving further down after contracting in the second quarter. Industrial production fell 4% month-on-month in August following the revised 1.6% rise in July. This was the biggest annual decline since January 2009 and was much larger than the expected fall of 1.5%. Last month, Bundesbank had warned against a decline in August industrial production after the timing of school holidays boosted July output. The drop is too strong to explain it by one-offs, Carsten Brzeski, an economist at ING Bank NV, said. This means that increased uncertainty but also real slowing of the Eurozone economy, Eastern European economies and emerging markets are all currently taking their toll on the German economy, he said. Looking beyond the third quarter, the German industry is looking into a more difficult future, Brzeski said.

Jonathan Loynes, an economist at Capital Economics said the big drop in industrial production underlined the need for both the ECB and the German government to give the economy much more policy support. The European Central Bank kept its key rates unchanged at a record low early this month as economic momentum in the euro area remains subdued. ECB President Mario Draghi unveiled details of its Asset Backed Securities and covered bond buying programs. The Organization for Economic Cooperation and Development, in its interim economic assessment published on September 15, recommended more monetary support to boost demand as slow growth in the euro area was the most worrying feature of the projections. The think-tank projected that the German economy would grow by 1.5% in both 2014 and 2015. Data today showed that production of capital goods declined the most, by 8.8%. Production of intermediate goods and consumer goods slid 1.9% and 0.4%, respectively.

Construction output decreased 2%, while energy production rose 0.3% in August. Industrial production, excluding energy and construction, fell 4.8%. Year-on-year, industrial production fell 2.8% in August in contrast to a 2.7% rise in July. The ministry said the sector is going through a period of weakness. The third quarter is likely to see soft production. Data released on Monday showed that factory orders declined the most since 2009 in August. Orders fell 5.7% after rising 4.9% in July.

Full panic mode soon to come.

• France Cautions Germany Not To Push Europe Too Far On Austerity (AEP)

France has denounced the eurozone’s austerity regime as deeply misguided and issued a blunt warning to Germany and the EU institutions that demands for further belt-tightening may set off a political backlash, endangering European stability. “Be careful how you talk to the countries in the South, and be careful how you to talk to France,” said the French premier, Manuel Valls. “The adjustment has been brutal and it has turned millions of people against Europe. It is putting the European project itself at risk.” Mr Valls said Europe’s fiscal rules have been overtaken by deflationary forces and a protracted slump. “You cannot enforce the Treaty rigidly in these circumstances. The austerity policies are becoming absurd, and we have to examine the situation,” he told journalists in London.

The reformist French premier said the eurozone’s failure to recover risked leaving the region on the margins of the world economy, stuck in a Japanese-style trap. France had pushed through €30bn of fiscal cuts from 2010 to 2012, and another €30bn since then in an effort to comply with EU deficit rules, only to see the gains overwhelmed by the economic downturn. The deficit will remain stuck at 4.3pc of GDP in 2015. A further €50bn of cuts are coming over the next three years. “If they make us reach a 3pc deficit, the country will be totally on its knees. It’s not possible,” he said. The warnings came amid reports the European Commission may strike down France’s draft budget for 2015, refusing to give Paris two extra years until 2017 to meet the 3pc limit. Brussels is also threatening “infringement proceedings”, a process that could ultimately lead to fines. This would put the new Juncker Commission on a dangerous collision course with both France and Italy, two of the eurozone’s big three, now closely aligned in a joint push for EMU-wide reflation and New Deal policies.

[..] “When we came to power, we made a strategic error. We didn’t tell the French people what the condition of the country really was: the level of the deficit, the debt and the trade balance,” he said. “The welfare state and everything the Left stands for has been blown up by the shock of globalisation, which was much greater than people realised. When we were beaten, we fell back on our Old Left ideology. We spent 10 years failing to prepare, and now we have to push through our ideological revolution while in government, which is much more difficult,” he said Mr Valls plays down any suggestion that he is pursuing an Anglo-Saxon market agenda. “We will not get rid of the 35-hour working week. We are not a Thatcherite government,” he said. Yet his aim is to slash the size of the French state from 56pc of GDP to average European levels, a drastic overhaul of the French model..

• France’s Stagnation Is Tragic To Watch (Telegraph)

Most countries would welcome with open arms the prospect of hosting a major theme park attracting millions of tourists every year. Not so France – or at least, not in 1992. When Disneyland Paris opened 22 years ago, the fruit of a major foreign direct investment from Walt Disney, it was slammed as a “cultural Chernobyl” by one commentator and faced the wrath of its left-leaning, anti-American establishment. There were endless rows about dress codes, language and just about everything else, even though the American owners employed thousands of staff and millions of ordinary French families readily embraced the experience. I remember the row well as I grew up in France. These days, it is companies like Amazon that are discriminated against in statist France; the people may love US goods and services but the establishment all too often still sees trade as a form of imperialism, for all of prime minister Manuel Valls’ assurances to the contrary on Monday.

But it is not France’s protectionism – at least not directly – that caused Disneyland Paris’s latest woes and the need for a £783m injection of cash from its shareholders. The problem this time is simply the downturn: visitor numbers are declining on the back of economic growth expected by the OECD to come in at just 0.4pc this year. The unfortunate reality is that Disney would have been far better off building its European resort elsewhere – Germany has hardly boomed either in recent years but it would probably have made for a better base. The French economy is stagnating, with a horrifying 3.4m people out of work and millions more in unviable, state-subsidised jobs.

Maybe a look at debt levels would shine some much-needed light on this claim.

• Europe Cash Pile Signals Savings Glut Sequel for Markets (Bloomberg)

Europe is becoming China without the economic growth. What that means is that the euro area is building history’s biggest current-account surplus. The result: mountains of money likely to buoy the world’s stock and bond markets. Deutsche Bank AG’s George Saravelos has coined a phrase for a pile he estimates has reached $400 billion: the euroglut. “It is Europe’s huge savings glut – what we call euroglut – that will drive global trends for the foreseeable future,” the London-based strategist wrote in a report yesterday. “Via large demand for foreign assets, it will play a dominant role in driving global asset-price trends for the remainder of this decade.” The cash is piling up because the world is buying European goods and services – especially Germany’s – and the euro area’s depressed consumers aren’t buying much of anything from home or abroad. The region’s current-account surplus is now 2.2% of gross domestic product having been in a deficit of almost 2% as recently as 2008.

In dollar terms, Deutsche Bank reckons it’s just above China’s peak last decade. As China learned, there’s a political angle too. The surplus provides a stick for international finance chiefs to beat sclerotic Europe with during the International Monetary Fund’s annual meetings in Washington this week. The pressure will fall mainly on Germany to ramp up domestic demand given its own current-account surplus is 7% of GDP. Since accounting rules dictate a current-account surplus is matched by a capital-account deficit, the implications are for investors around the world. For Deutsche Bank, these include the euro falling to 95 cents against the dollar by the end of 2017 and a cap on U.S. 10-year Treasury yields even if the Federal Reserve raises interest rates. Emerging-market assets are also likely to benefit. Think of it as a new version of what then-Fed Chairman Ben S. Bernanke called a “global savings glut” in 2005 when China’s surplus supported global asset prices.

And people will spend like crazy?

• French PM To Bring In Sunday Shopping As Part Of Reform Program (Guardian)

The French prime minister, Manuel Valls, has told a City audience in London that his drastic reform programme will extend to the introduction of Sunday shopping in Paris, and the major towns of France. Valls is fighting on all fronts to lift the French economy out of the doldrums, and may face a confrontation with the new European commission to tolerate a deficit that breaches EU limits. Valls was in London to meet David Cameron and persuade fellow EU leaders that he is trying to take the French economy on the path to structural reform, including an end to the 35-hour working week. Describing it as “bad news to give you here in London”, Valls said shops would open on Sundays in Paris and promised museums will be open seven days week.

He said socialists were pro-business and he would use his time in power to transform the country. He said he had accepted the apology from the John Lewis managing director who described France as sclerotic, hopeless and downbeat. Valls pointed out that the French economy was the fifth largest in the world and second largest in Europe. Insisting his new government was pro-business, he said the top 75% tax rate would be gone by January. Cameron was told by Valls that he wanted Britain to remain a central figure in the EU but he also said the City of London would lose much if it turned its back on Europe. Cameron, who has mocked the socialist policies of the French president, François Hollande, will probably be delighted by Valls’ overall tone and list him as a potentially ally in any future negotiations on the EU.

• The Reserve Currency’s Exorbitant Burden (Pettis)

This may be excessively optimistic on my part, but there seems to be a slow change in the way the world thinks about reserve currencies. For a long time it was widely accepted that reserve currency status granted the provider of the currency substantial economic benefits. For much of my career I pretty much accepted the consensus, but as I started to think more seriously about the components of the balance of payments, I realized that when Keynes at Bretton Woods argued for a hybrid currency (which he called “bancor”) to serve as the global reserve currency, and not the US dollar, he wasn’t only expressing his dismay about the transfer of international status from Britain to the US. Keynes recognized that once the reserve currency was no longer constrained by gold convertibility, the world needed an alternative way to prevent destabilizing imbalances from developing.

This should have become obvious to me much earlier except that, like most people, I never really worked through the fairly basic arithmetic that shows why these imbalances must develop. For most of my career I worked on Wall Street – at different times running fixed income trading, capital markets and liability management teams at various investment banks, usually focusing on Latin America – and taught classes at Columbia’s business school on debt trading and arbitrage, emerging markets finance and financial history. Both my banking work and my academic work converged nicely on the related topics of global capital flows, financial crises and the structure of balance sheets.

“The number of over-65s in England is expected to increase by 51% over the next 20 years.”

• Retirement Age To Rise By As Much As Six Months Per Year (Telegraph)

Older people will be encouraged to work longer under a Government plan to increase the average retirement age by six months every year. Ministers believe that the retirement age needs to increase dramatically to reflect Britain’s ageing population and to avoid a health care crisis. The average age of retirement is 64.7 for men and 63.1 for women. The Department for Work and Pensions said in its business plan that it would like the average to rise by as much as six months every year. The number of over-65s in England is expected to increase by 51% over the next 20 years, and the numbers of those aged 85 and above will double by 2030. Ministers accept that the trend will hugely increase the costs to the NHS, elderly care and state pensions systems.

Steve Webb, the Liberal Democrat pensions minister, admitted that the target was “ambitious” but said the retirement age had already been rising for women. He said: “If someone works an extra year they can add 10 per cent to their pension for life. What we are doing is catching up with decades of longer living. “We are living longer but the labour market and people’s retirement age has not been keeping up. I have fought against a vague target of trying to get people to work longer to have something more specific.” The target is contained in a document released by the Department for Work and Pensions which makes clear that an increase of six months would be a “meaningful change”. “An increase in the average age of withdrawal of more than around 0.5 years would demonstrate an improvement,” the document states.

Mr Webb has said that the growing numbers of people living into their eighties and nineties would leave taxpayers with a rising bill and meant “the sums” would never add up if people continued to retire in their fifties. George Osborne announced earlier this year that increases in life expectancy will automatically trigger a rise in the state pension age, which is likely to rise to 70 within 50 years. The state pension age is currently 65 for men, and is rising from 60 for women to come into line with men at 66 by 2020. It will continue to rise so people in their late twenties are likely to have to work until their 70th birthdays, according to official projections. The Office for Budget Responsibility said that Coalition policies such as raising the state pension age and further cuts will reduce Britain’s debt as a proportion of national income by two thirds.

Nobody invests?!

• China Private Sector Demand Continues To Decline (Zero Hedge)

China is slowing, mostly due to a gradual, steady decline in private sector activity. One example: the decline in fixed asset investment (e.g., business capital spending) at private sector firms relative to firms that are state-controlled. Premier Li Keqiang’s reforms are aimed at making it easier for entrepreneurs to start private sector firms, but in the current climate, private sector investment growth continues to fall.

The Chinese central bank injected some liquidity into the domestic banking system recently, but it was only for 3 months and not meant to address the more structural issue of declining private sector demand. While export growth and job creation still look pretty good, the overall picture is one of an economy growing at 7%, and that’s with the contribution from government spending. Government spending is set to slow in the second half of the year; the authorities continue to reduce the size of the shadow banking system which extends credit; and the overheated housing market is still in decline as well when looking at national home sales and a 70-city home price average. We expect continued weakness in Chinese data for the rest of 2014 and into next year as well.

Source: JPMorgan

€27 billion is still not exactly a huge number.

• Chinese Investors Surged Into EU At Height Of Debt Crisis (FT)

As investors fled Europe in the worst days of its sovereign debt crisis, China-based companies moved in the other direction and surged in, with cash flowing from China into some of the hardest-hit countries of the eurozone periphery. In 2010, the total stock of Chinese direct investment in the EU was just over €6.1 billion – less than what was held by India, Iceland or Nigeria. By the end of 2012, Chinese investment stock had quadrupled, to nearly €27 billion, according to figures compiled by Deutsche Bank. The buying spree, analysts say, was nothing short of a transformation of the model of Chinese outbound investment. It is expected to increase steadily over the next decade. “We saw a massive spike in Chinese investment in Europe, particularly [mergers and acquisitions] during the height of the debt crisis,” says Thilo Hanemann, an expert in Chinese outbound investment and research director at Rhodium Group, a research consultancy.

“This was partly opportunistic buying because assets were cheap and partly it was a structural secular shift in Chinese outbound investment, from securing natural resources in developing countries to acquiring brands and technology in developed countries.” The Financial Times this week investigates the modern trail of Chinese investment, migration and ambition in Europe. A series of reports from Beijing to Milan to Madrid to Lisbon to Athens reveal the scale of China’s expansion in Europe, the flow of investment and the strategies of Chinese investors and migrants caught up in a national effort – a “going out” policy in place since 1999 – to find new markets and enhance China’s economic strength. The incursion has not been all plain sailing.

When a Chinese state-owned consortium won the bid to build a road from Warsaw to the German border, the government in Beijing presented the deal as a model for Chinese contractors in Europe. But after cost over-runs and repeated breaches of local labour law, the Polish government cancelled the contract with Covec, the Chinese consortium, in 2011 – less than two years into the project. What befuddled the Chinese company most were Polish environmental laws requiring tunnels for wildlife to be built beneath the road and a two-week work stoppage while seven rare species of frogs, toads and newts were moved out of the way.

All you need to know: “… annual growth in electricity demand has fallen sharply to below 4% for the first eight months of 2014, a level recorded previously only in the depths of the global financial crisis”

• Beware a Chinese Slowdown (Rogoff)

While virtually every country in the world is trying to boost growth, China is trying to slow it down to a sustainable level. As the country shifts to a more domestic-demand driven, services-oriented economy, a transition to slower-trend growth is inevitable and desirable. But the challenges are immense, and no one should take a soft landing for granted. As China’s economy grows relative to those of its trading partners, the efficacy of its export-led growth model must inevitably fade. As a corollary, the returns on massive infrastructure investment, much of which is directed toward supporting export growth, must also fade. Consumption and quality of life need to rise, even as China’s air pollution and water shortages become more acute in many areas. But, in an economy where debt has exploded to more than 200% of GDP, it is not easy to rein in growth gradually without triggering widespread failure of ambitious investment projects.

Even in China, where the government has deep pockets to cushion the fall, one Lehman Brothers-size bankruptcy could trigger a major panic. Think of how hard it is to engineer a soft landing in market-based economies. Many a recession has been catalysed or amplified by monetary-tightening cycles; Alan Greenspan, the former US Federal Reserve chairman, was known as the “maestro” in the 1990s because he managed to slow inflation and maintain strong growth simultaneously. The idea that controlled tightening is easier in a more centrally planned economy, where policymakers must rely on noisier market signals, is questionable. If one were to judge by official and market growth forecasts, one would think the risks were modest. China’s official target growth rate is 7.5%. Anyone forecasting 7% is considered a “China bear”, and predicting a downshift to 6.5% makes one a downright fanatic. For most countries, such small differences would be splitting hairs. In the US, quarterly GDP growth has fluctuated between -2.1% and 4.6% in the first half of 2014.

Of course, Chinese growth almost surely fluctuates far more than the official numbers reveal, in part because local officials have incentives to smooth the data that they report to the central authorities. So where is China’s economy now? Most evidence suggests it has slowed significantly. One striking fact is that annual growth in electricity demand has fallen sharply to below 4% for the first eight months of 2014, a level recorded previously only in the depths of the global financial crisis that erupted in 2008. For most of China’s modernisation drive, electricity consumption has grown faster than output, not slower. Weakening electricity demand has tipped China’s coal industry into severe distress, with many mines, in effect, bankrupt. Falling house prices are another classic indicator of a vulnerable economy, though the exact pace of decline is difficult to assess. The main house price indices measure only asking prices and not actual sales prices. Data in many other countries, such as Spain, suffer from the same deficiency.

The LA Times is part of the scam team? Wow.

• Zero Interest Loan Lets Low-income Borrowers Build Equity Fast (?!) LA Times

Two major banks have agreed to originate a new 15-year mortgage under pilot programs aimed at low- and moderate-income borrowers. In addition, the creators of the so-called Wealth Building Home Loan, which allows home buyers to build equity at a much faster clip than they would with a standard 30-year loan, are planning to bring their ideas to 10 other institutions over the next few weeks. Still, Edward Pinto thinks it might take months or even years for the product to become universal, if it becomes a regular offering at all. But Pinto and his co-conspirator, Bruce Marks, generated major buzz when they introduced the Wealth Building Home Loan at a mortgage conference in North Carolina in early September. The loan won the endorsement of several high-profile industry executives, including Lewis Ranieri, generally considered the father of the mortgage-backed security, and Joseph Smith, the former North Carolina bank regulator who was appointed to oversee the National Mortgage Settlement that created new mortgage servicing standards and provided some relief for distressed owners.

So what is everybody so excited about? The Wealth Building Home Loan is a 15-year mortgage with a fixed interest rate that can be bought down to zero. In addition, little or no down payment is required, there are no additional fees, and underwriters will pay far more attention to your residual income than to your credit score. Typically, the monthly payment on a 15-year loan is higher than that on a 30-year loan. But the loan amortizes much more quickly, meaning you build wealth — or equity — faster. To make the payments more affordable, the offering rate will be about three-quarters of a%age point below the 30-year FHA rate. And the rate can be bought down even further. For every 1% of the loan amount the borrower puts up as a down payment, the interest rate will be lowered by half a%age point, which is twice as much as usual. Consequently, a $6,000 down payment on a $100,000 mortgage at 3% would bring the rate down to zero, meaning that every penny spent on the monthly payment would go to principal.

Shut up.

• Ukraine Insists Transit Of Russian Gas To Europe Should Be Revised (RT)

Agreements stipulating deliveries of Russian gas to Europe via Ukraine should be revisited, as they don’t comply with EU standards, insists Ukraine’s Energy Minister Yuri Prodan. “The process of revising the transit contract will be conducted surely, as the current contract does not comply with the European standards,” Prodan said in Brussels on Friday. “We are ready to discuss and reach a compromise agreement even tomorrow. But, once again we require compliance in accordance with European legislation. And we are ready to make any decision in this regard if that will be demanded by the European Commission,” the Minister of Energy added. According to him, there are two ways to resolve the gas problem between Kiev and Moscow: whether the decision will be achieved through the courts or an interim solution, “that we can achieve in the next week.” Initially it was reported that a meeting will take place before the end of this week, but the Russian Ministry of Energy and the European Commission announced that it is delayed to next week.

Prodan said that dates are still not confirmed. On September 26, Russia, Ukraine and the the EU conducted three-way gas negotiations in Berlin where they discussed a so-called “winter plan.” According to it Ukraine will pay Gazprom $2 billion as part of its gas debt by the end of October and an additional $1.1 billion in advance payment by year’s end for 5 billion cubic meters of gas, the EU Energy Commissioner Gunther Oettinger said. However, no final documents have been sealed, as price and payment schedule remain the stumbling blocks in the negotiations. Kiev is offering its own repayment schedule for $3.1 billion debt and does not agree with the proposed $100 per thousand cubic meters discount due to customs duty. Russian Minister of Energy Aleksandr Novak rejected Kiev’s conditions saying it calculated the $3.1 billion cost at its own virtual price at $268.5 per thousand cubic meters of gas.

The land of the free.

• $1,200 3-D Printer For Untraceable Guns Sells Out in 36 Hours (Wired)

Americans want guns without serial numbers. And apparently, they want to make them at home. On Wednesday, Cody Wilson’s libertarian non-profit Defense Distributed revealed the Ghost Gunner, a $1,200 computer-controlled (CNC) milling machine designed to let anyone make the aluminum body of an AR-15 rifle at home, with no expertise, no regulation, and no serial numbers. Since then, he’s sold more than 200 of the foot-cubed CNC mills—175 in the first 24 hours. That’s well beyond his expectations; Wilson had planned to sell only 110 of the machines total before cutting off orders. To keep up, Wilson says he’s now raising the price for the next round of Ghost Gunners by $100. He has even hired another employee to add to Defense Distributed’s tiny operation. That makes four staffers on the group’s CNC milling project, an offshoot of its larger mission to foil gun control with digital DIY tools.

“People want this machine,” Wilson tells WIRED. “People want the battle rifle and the comfort of replicability, and the privacy component. They want it, and they’re buying it.” While the Ghost Gunner is a general-purpose CNC mill, capable of automatically carving polymer, wood, and metal in three dimensions, Defense Distributed has marketed its machine specifically as a tool for milling the so-called lower receiver of an AR-15, which is the regulated body of that semi-automatic rifle. The gun community has already made that task far easier by selling so-called “80-percent lowers,” blocks of aluminum that need only a few holes and cavities milled out to become working lower receivers. Wilson says he’s now in talks with San Diego-based Ares Armor, one of the top sellers of those 80-percent lowers, to enter into some sort of sales partnership.

Scary.

• Nurse In Spain First Ebola Case Contracted Outside Africa (CNBC)

A nurse in Spain has become the first person to contract the potentially deadly Ebola virus outside of West Africa in the latest epidemic, the worst on record, authorities said Monday. The nurse had gone into a room in a Madrid hospital that had been used to quarantine an elderly priest, Manuel Garcia Viejo, who contracted Ebola doing missionary work with victims of the same disease in Sierra Leone. The priest died Sept. 25. About 30 other people who had cared for the missionary are also being monitored, officials said. Also, Monday, President Barack Obama said his administration was developing added protocols for screening airline passengers for Ebola. Obama also said he was ordered increased efforts to educated medical providers on how to handed such cases, and that he would also push other large national to provide financial aid to the West African countries were the epidemic is occurring.

Obama spoke to reporters after briefed on the Ebola situation by health advisers. The White House earlier said Monday it is not considering a ban on travel from the West African countries dealing with the Ebola epidemic, which has killed more than 3,400 people since March. “We feel good about the measures that are already in place,” White House spokesman Josh Earnest said. Meanwhile, the father of a freelance NBC News cameraman being treated in Nebraska said his son suspects he may have contracted the Ebola virus from helping clean a car in Liberia after someone else died from the disease in the vehicle. That journalist, Ashoka Mukpo, is “not certain” how he got Ebola, but “he was around the clinic … and he does remember one instance where he was helping spray-wash one vehicle with chlorine,” said Mukpo’s father, Dr. Mitchell Levy.

What will it take to make Americans wake up? How many bodies?

• CDC Clears US Ebola Victim’s Stepdaughter To Return To Work, She Refuses (DM)

The stepdaughter of Texas Ebola victim, Thomas Duncan, who called 911 and rode in the ambulance with the man she calls ‘Daddy’ has been told she can return to work, MailOnline can reveal. Nursing assistant Youngor Jallah, 35, has been in ‘quarantine’ in her small Dallas apartment along with her husband, Aaron Yah, 43, and their four children ages 2 to 11 since Thomas Duncan’s devastating diagnosis last Monday. MailOnline has reported that Mr Yah, also a nursing assistant, had been told he could return to work at the end of last week. Ms Jallah whose contact with Mr Duncan – who remains in a critical condition – was far more intimate and prolonged than that of her husband, told MailOnline on Monday: ‘The CDC came yesterday. They said I can go back to work but I do not know what I will do. I will not go back yet.’

Doctors say that no-one is at risk of catching the virus unless they come into contact with a sufferer who is exhibiting symptoms. But it is unlikely that Youngor will return to work until the family have gone through the 21 days considered the latest time between exposure and manifestation of Ebola. She does not intend to allow her eldest child to return to school before the October 17. She has no child-care provisions either – as her mother, Louise Troh, 54, the woman who Mr Duncan traveled to the States to marry, provided childcare and remains in quarantine in a secret location along with her 13-year-old son, nephew and a friend.

Reminder: “Libor, a key benchmark against which around $450 trillion of financial contracts are pegged from consumer loans to derivatives”

• Senior Banker In UK Pleads Guilty In Libor Probe (Reuters)

A senior banker at a leading British bank has pleaded guilty to conspiracy to defraud in connection with the manipulation of Libor benchmark interest rates, becoming the first person in the UK to plead guilty to such an offence. The banker submitted the plea on Friday and an English High Court judge on Tuesday lifted court reporting restrictions on the case. Two men have already pleaded guilty in the United States to fraud offences linked to the rigging of Libor, a key benchmark against which around $450 trillion of financial contracts are pegged from consumer loans to derivatives, amid a global investigation.

Paul Robson, a British citizen and former senior trader at Dutch Rabobank and his former colleague, Takayuki Yagami, have pleaded guilty to participating in a scheme to rig the London interbank offered rate. Seven banks and brokerages have so far settled U.S. and UK regulatory allegations of interest rate rigging as a result of a global investigation and 17 men have been charged with fraud-related offences.

“There has never been a crazier moment in history. The weeks before the outbreak of the First World War seem like a garden party compared to the morbid antics of these darkening days. America, you’ve been wishing fervently for the Zombie Apocalypse. What happens when you discover you can’t just change the channel?”

• Must Be the Season of the Witch (Jim Kunstler)

As the Governor goblins at the Federal Reserve whistle past the graveyard of dead Quantitative Easing, and the US dollar magically expands like a prickly puffer fish, and Mario Drahgi does what it takes with Euro duct tape to patch all black holes of unpayable debt from Athens to Dublin, and Japan watches its once-wondrous economy congeal in a puddle of Abenomic sludge (with a radioactive cherry on top), and China chokes on its dollar-peg, and Russia waits patiently with its old friend, Winter, covering its back — and notwithstanding the violent chaos, beheadings, and psychopathic struggles across the old Levant, not to mention the doubling of Ebola cases every 20 days, which the World Health Organization did not have the nerve to project beyond 1.2 million in January (does the doubling just stop there?) — there is enough instability around the globe for the gentlemen of Wall Street to make one last fabulous fortune arbitraging the future before the boomerang of consequence circles this suffering planet and finally accomplishes what the Department of Justice under Eric Holder failed to do for six long years.

It’s the season of witch and you should be nervous. Especially if you live in apart of the world where money is used. Pretty soon nobody will know what any currency is really worth — at least for a while — or what anything else is worth, for that matter. Perhaps the fishermen of India will start using their worthless gold for sinkers. Jay-Z and Diddy will gaze down on their bling in despair, thinking, perhaps, they should have invested in Betamax players instead. In the time of anything-goes-and-nothing-matters, it’s dangerous to expect anything.

Here’s what I expect: the surge of the dollar is the crest of an historic Great Wave. A Great Wave is an awesome event, and its crest is a majestic sight, but soon the foam spits and hisses and the wave breaks and crashes down on the beach — say, out at the Hamptons — where hedge funders stroll to catch the last dwindling rays of a beautiful season, and all of a sudden they are being swept out to sea in the rip-tide that retracts all that lovely green liquidity, and no one is even left on the beach to weep for them. Indeed their Robert A. M. Stern shingled manor houses up behind the dunes are swept away, too, and the tennis courts, and the potted hydrangeas, and the Teslas, and all the temporal bric-a-brac of their uber-specialness.

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