Aug 242018
 
 August 24, 2018  Posted by at 7:57 am Finance Tagged with: , , , , , , , , , , , ,  


Vincent van Gogh Café, le soir, Arles 1888

 

Thoughts On The ‘Longest Bull Market Ever’ (Black)
New Reality of China’s Failing Economy Is Coming Soon (Rickards)
UK Tells Drug Companies To Stockpile Medicine In Case Of No-Deal Brexit (Ind.)
Big Oil Asks Government To Protect It From Climate Change (AP)
Scott Morrison New Australian PM As Turnbull Denounces ‘Insurgency’ (G.)
Saudi Modernisation Drive Is Reflected In Aramco’s Faltering Sale (G.)
Libya Refuses To Take Migrants Rejected By Italy (AFP)
Italy Threatens To Stop EU Funding Unless Other States Accept Refugees (ZH)
Inflation Adjusted Gold Is At Historical Lows (von Greyerz)
Monsanto Faces A Surge In Lawsuits Following Cancer Ruling (BBC)
‘Monsanto’s History Is One Full of Vast Lies’ (Spiegel)
After 70 Years, Korean Father, Son Share A Drink For First, Last? Time (H.)

 

 

“..a full SIXTY PERCENT of corporate debt issued by companies in the Russell 2000 is rated as JUNK..”

Thoughts On The ‘Longest Bull Market Ever’ (Black)

Well, it happened. Yesterday the US stock market broke the all-time record for the longest bull market ever. This means that the US stock market has been generally rising for nearly a decade straight… or even more specifically, that the market has gone 3,453 days without a 20% correction. That’s a pretty big milestone. And there’s no end in sight. So it’s possible this market continues marching higher for the foreseeable future. But if you step back and really look at the big picture, there are a lot of things that might make a rational person scratch his/her head. For example– the Russell 2000 index (which is comprised of smaller companies whose shares are listed on various US stock exchanges) is currently right at its all-time high.

Yet simultaneously, according to the Wall Street Journal, a full SIXTY PERCENT of corporate debt issued by companies in the Russell 2000 is rated as JUNK. How is that even possible– a junk debt rating coupled with an all-time high? It’s as if investors are saying, “Well, there’s very little chance these companies will be able to pay their debts… but screw it, I’ll pay a record high price to buy the stock anyhow.” It just doesn’t make any sense. Looking at the larger companies in the Land of the Free (which make up the S&P 500 index), the current ‘CAPE ratio’ is now the second highest on record. ‘CAPE’ stands for ‘cyclically-adjusted price/earnings ratio’. Essentially it refers to how much investors are willing to pay for shares of a company, relative to the company’s long-term average earnings.

And right now investors are willing to pay 33x long-term average earnings for the typical company in the S&P 500. The median CAPE ratio based on data that goes back to the 1800s is about 15.6. So at 33, investors are literally paying more than TWICE as much for every dollar of a company’s long-term average earnings than they have throughout all of US market history. And it’s only been higher ONE other time– just before the 2000 stock market crash (when the dot-com bubble burst). 33 is higher than right before the 2008 crisis. It’s even higher than it was before the Great Depression.

Read more …

Building zombies for the future.

New Reality of China’s Failing Economy Is Coming Soon (Rickards)

There’s no denying China’s remarkable economic progress over the past thirty years. Hundreds of millions have escaped poverty and found useful employment in manufacturing or services in the major cities. Infrastructure gains have been historic, including some of the best trains in the world, state-of-the-art transportation hubs, cutting edge telecommunications systems, and a rapidly improving military. Yet, that’s only half the story. The other half is pure waste, fraud and theft. About 45% of Chinese GDP is in the category of “investment.” A developed economy GDP such as the U.S. is about 70% consumption and 20% investment. There’s nothing wrong with 45% investment in a fast-growing developing economy assuming the investment is highly productive and intelligently allocated.

That’s not the case in China. At least half of the investment there is pure waste. It takes the form of “ghost cities” that are fully-built with skyscrapers, apartments, hotels, clubs, and transportation networks – and are completely empty. This is not just western propaganda; I’ve seen the ghost cities first hand and walked around the empty offices and hotels. Chinese officials try to defend the ghost cities by claiming they are built for the future. That’s nonsense. Modern construction is impressive, but it’s also high maintenance. Those shiny new buildings require occupants, rents and continual maintenance to remain shiny and functional. The ghost cities will be obsolete long before they are ever occupied.

Other examples of investment waste include over-the-top white elephant public structures such as train stations with marble facades, 128 escalators (mostly empty), 100-foot ceilings, digital advertising and few passengers. The list can be extended to include airports, canals, highways, and ports, some of which are needed and many of which are pure waste. Communist party leaders endorse these wasteful projects because they have positive effects in terms of job creation, steel fabrication, glass installation, and construction. However, those effects are purely temporary until the project is completed. The costs are paid with borrowed money that can never be repaid. China might report 6.8% growth in GDP, but when the waste is stripped out the actual growth is closer to 4.5%. Meanwhile, China’s debts grow faster than the economy and its debt-to-GDP ratio is even worse than the U.S.

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It’s beginning to hit home that time has run out. Wait till the days shorten for real.

UK Tells Drug Companies To Stockpile Medicine In Case Of No-Deal Brexit (Ind.)

Health secretary Matt Hancock has told drug companies to ensure they have six weeks additional supplies of medicines on top of their normal stockpiles to avoid disruption caused by a possible no-deal Brexit. The remarks from Mr Hancock came as Dominic Raab, the Brexit secretary, released the first tranche of technical notes outlining the government’s preparations and warnings to businesses if Britain crashes out of the bloc without a deal. Among the 24 detailed papers it was also revealed that credit card users could be hit with a new “Brexit tax” amounting to £166m, UK citizens living in Europe face the prospect of losing access to pension income and new red tape could delay foreign sperm donations arriving in Britain.

In one of the most stark warnings, Mr Hancock told NHS staff and service providers that the move to increase pharmaceutical companies’ stockpiles was necessary “in case imports from the EU through certain routes” are affected if Theresa May fails to strike a deal with negotiators in Brussels. The request, according to the chief executive of the UK Bioindustry Association, Steve Bates, would be a “massive challenge” for the industry to deliver in less than 200 days. But Mr Hancock also warned that hospitals, GPs and community pharmacies should not hoard or stockpile additional drugs “beyond their business” as usual levels.

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Priceless.

Big Oil Asks Government To Protect It From Climate Change (AP)

As the nation plans new defenses against the more powerful storms and higher tides expected from climate change, one project stands out: an ambitious proposal to build a nearly 60-mile “spine” of concrete seawalls, earthen barriers, floating gates and steel levees on the Texas Gulf Coast. Like other oceanfront projects, this one would protect homes, delicate ecosystems and vital infrastructure, but it also has another priority — to shield some of the crown jewels of the petroleum industry, which is blamed for contributing to global warming and now wants the federal government to build safeguards against the consequences of it.

The plan is focused on a stretch of coastline that runs from the Louisiana border to industrial enclaves south of Houston that are home to one of the world’s largest concentrations of petrochemical facilities, including most of Texas’ 30 refineries, which represent 30 percent of the nation’s refining capacity. Texas is seeking at least $12 billion for the full coastal spine, with nearly all of it coming from public funds. Last month, the government fast-tracked an initial $3.9 billion for three separate, smaller storm barrier projects that would specifically protect oil facilities.

That followed Hurricane Harvey, which roared ashore last Aug. 25 and swamped Houston and parts of the coast, temporarily knocking out a quarter of the area’s oil refining capacity and causing average gasoline prices to jump 28 cents a gallon nationwide. Many Republicans argue that the Texas oil projects belong at the top of Washington’s spending list. “Our overall economy, not only in Texas but in the entire country, is so much at risk from a high storm surge,” said Matt Sebesta, a Republican who as Brazoria County judge oversees a swath of Gulf Coast. But the idea of taxpayers around the country paying to protect refineries worth billions, and in a state where top politicians still dispute climate change’s validity, doesn’t sit well with some.

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Another rightwing anti-immigrant yokel. That’s all they have down under.

Scott Morrison New Australian PM As Turnbull Denounces ‘Insurgency’ (G.)

Australia will have a new prime minister in Scott Morrison – the socially conservative architect of Australia’s hardline anti-asylum seeker policies – after he mounted a late challenge during a drawn-out struggle for power in the governing Liberal party. On Friday, incumbent Malcolm Turnbull failed in his attempt to stare down a challenge from hard right MP Peter Dutton, with insurgents in his party gathering enough signatures to call for a “spill” of the leadership. It led to a three-way challenge that included Morrison, Turnbull’s treasurer, and Julie Bishop, the foreign minister. Turnbull himself stood aside from the contest.

In a party room ballot, Bishop was eliminated in the first round, and Morrison won against former home affairs minister Dutton in a subsequent run-off, 45 votes to 40, suggesting the party is still deeply divided. There appears no end in sight to the civil war consuming the ruling Liberal-led coalition government. The country may be headed to an election, with Turnbull saying he will not stay in parliament. His resignation in between general elections would erase the government’s single-seat majority in the House of Representatives. Australia has now had five prime ministers in just over five years. Since 2010 four prime ministers have lost office not at the ballot box, but torn down by their own parties, earning Canberra the unhappy appellation “the coup capital of the Pacific”.

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Selling 5% of Aramco was supposed to finance ‘diversification’.

Saudi Modernisation Drive Is Reflected In Aramco’s Faltering Sale (G.)

For the Saudis, the implications of the Paris agreement were obvious: the drive to decarbonise the world economy would mean that a considerable part of their oil reserves would have to stay in the ground. This made a warning at the turn of the millennium by the former Saudi energy minister Sheikh Ahmed Zaki Yamani, seem suddenly urgent. “Thirty years from now, there will be a huge amount of oil – and no buyers”, Yamani said. “Oil will be left in the ground. The stone age came to an end, not because we had a lack of stones, and the oil age will come to an end not because we have a lack of oil.”

It was not long before Saudi’s rulers responded to this twin challenge. In the short term, they sought to persuade fellow oil producing nations to agree production curbs that would limit supply, drive up crude prices and so ease the pressures on the public finances. At the current oil price of around $70 a barrel, the Saudis can make their budget arithmetic stack up. In the longer term, there was a plan to diversify the economy away from oil. Saudi Vision 2030 was announced by Crown Prince Mohammed bin Salman in April 2016, shortly after the oil price reached its trough. The idea was to make Saudi Arabia a global investment giant, to turn the country into a hub linking the three continents of Europe, Asia and Africa and to be the heart of the Arab and Islamic worlds.

The proposed sale of part of the state-owned oil company – Saudi Aramco – was a key part of this attempt to transform and modernise the economy. Proceeds were earmarked for the country’s sovereign wealth fund so it could continue investing in companies such as the electric car company Tesla and the ride-hailing app Uber.

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Thank you Barack and Hillary.

Libya Refuses To Take Migrants Rejected By Italy (AFP)

Libya has refused to take in a group of 177 migrants stranded on an Italian coastguard boat off a Sicilian port after Rome insisted they would not be allowed to disembark. Italy’s Interior Minister Matteo Salvini threatened earlier this week to return the migrants to the North African country unless other European governments offered to take some of them in. But Mohamed Siala, foreign minister of the UN-backed Libyan unity government, said that “Libya does not accept this unjust and illegal measure because it already has more than 700,000 migrants” on its territory.

In a statement late Wednesday, he called on the international community “to put pressure on the countries of departure to repatriate their nationals”, adding that Libya had only served as a transit point. The Italian boat “Diciotti” arrived on Monday night off the Sicilian port of Catania. Plunged into chaos following the fall and killing of longtime dictator Moamer Kadhafi in a 2011 NATO-backed uprising, Libya has become a prime transit point for sub-Saharan African migrants making dangerous clandestine bids to reach Europe. The country takes in migrants whose boats are intercepted in its waters by the Libyan coastguard, but it has repeatedly rejected those rescued by foreign navies or by humanitarian organisations off its coast.

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Who’s going to blame them?

Italy Threatens To Stop EU Funding Unless Other States Accept Refugees (ZH)

On Thursday, out of the blue, Italy’s Deputy Prime Minister Luigi Di Maio threatened to stop financial contributions to the European Union next year unless other states agreed to take in migrants being held on a coastguard ship in Sicily. The Italian’s ultimatum comes less two months after Europe triumphantly announced a “vaguely worded” deal on how to resolve the continent’s migrant influx. “If tomorrow at the meeting of the European Commission nothing is decided on the redistribution of migrants and the Diciotti ship, I and the entire Five Star Movement are not willing to give 20 billion to the European Union,” Di Maio said in a video posted on his Facebook page.

He echoed statements by Interior Minister and Deputy Premier Matteo Salvini, who has refused to allow 177 migrants to leave the Italian coastguard ship Ubaldo Diciotti, which is docked in the Sicilian port of Catania. While Italian prosecutors opened an investigation into the detention of the migrants and 29 children were allowed to disembark, Salvini still won’t allow the rest of the people to come ashore and has attacked the EU for its “cowardly silence.” Salvini described those aboard as “illegal immigrants,” and said they won’t be allowed to step foot on Italian soil. Instead, he insisted fellow European Union nations take in some of the asylum-seekers. “Italy’s no longer Europe’s refugee camp,” he tweeted. “Upon my authorization, no one is disembarking from the Diciotti.”

Salvini, who is also interior minister, was defiant in the face of a criminal probe into possible kidnapping charges for forcing the migrants to remain on the vessel. The chief prosecutor from the Agrigento court, Luigi Patronaggio, on Wednesday boarded the Diciotti and said afterwards he had opened a probe against “unknown” persons for holding the migrants against their will. “There’s a court that is investigating whether those illegally on board the ship have been kidnapped,” Salvini said in a radio interview. “I’m not unknown. My name is Matteo Salvini… I’m the Interior Minister and I think it is my duty to defend the security of this country’s borders.”

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Just liked the graph, don’t want to tell anyone to buy anything.

Inflation Adjusted Gold Is At Historical Lows (von Greyerz)

Gold at $1,220, adjusted for real inflation, is almost as cheap as it was in 1999 at the $250 low. More importantly, inflation adjusted gold is now very near the 300 year low of 1999. So right now gold is again unloved and undervalued and therefore a bargain. On an inflation adjusted basis, the 1980 high of $850 would today be $16,650. Long before we get hyperinflationary gold prices, that $16,600 level should be easily reached. Owning physical gold for wealth protection purposes is the best preserved secret in the West. In this part of the world, virtually nobody holds gold. At the same time, the wise people in the East continue to buy all the gold that is produced annually. China, India, Iran, Turkey, Russia and many more Eastern nations understand history and economics. That is why they are accumulating major gold reserves at these levels.

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Bayer really didn’t see this coming.

Monsanto Faces A Surge In Lawsuits Following Cancer Ruling (BBC)

American agro-chemicals company Monsanto is facing a surge in lawsuits that may cost its new owners, Bayer, billions in damages. Monsanto manufactures glyphosate-based weedkillers which some believe are carcinogenic. Last month it lost a $289m (£225m) court case that alleged its products Roundup and RangerPro had led to a Californian man’s terminal cancer. Bayer said the number of outstanding cases had risen from 5,200 to 8,000. The German firm’s shares have lost 11% of their value since it lost the case in a California court to groundskeeper Dewayne Johnson, who claimed Monsanto herbicides containing glyphosate, had caused his non-Hodgkins lymphoma.

Bayer shares fell another 1.7% on Thursday. Chief executive Werner Baumann said that when it bought Monsanto, Bayer “could not foresee the scope of the current lawsuits.” The $63bn deal was completed earlier this month. “In the course of the acquisition, we carried out due diligence as is standard practice when taking over a listed company. In doing so, we of course also considered the legal risks,” he said in an interview with Germany’s Handelsblatt newspaper. In a conference call on Thursday, Mr Baumann added: “Our view is that the number is not indicative of the merits of the plaintiffs’ cases”.

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“..Another program is called “Freedom to Operate.” Its purpose is to eliminate everything that might disrupt sales of their products – laws, scientific articles, they go after everything.”

‘Monsanto’s History Is One Full of Vast Lies’ (Spiegel)

On Aug. 10, lawyer Brent Wisner, 34, scored a landmark verdict on behalf of his client, cancer patient Dewayne Johnson. A court in San Francisco ruled that Monsanto was guilty of concealing the potential health risks associated with its weed killer glyphosate, which is sold in the United States under the brand name Round Up. The jury ordered the company to pay $289 million in damages to the plaintiff, who had used Round Up at his job as a janitor for a school district. The court said Monsanto should have labeled the product’s possible dangers for consumers. Monsanto, which was recently acquired by German pharmaceuticals giant Bayer, has denied any link between the product and the disease. Wisner spoke to DER SPIEGEL about the case in an interview.

[..] DER SPIEGEL: How much does Monsanto have to do with the fact that a verdict was reached only now? Wisner: A lot! Monsanto has an internal program called “Let Nothing Go.” The aim of this program is to attack scientists who are critical of Monsanto products. They go after people directly and discredit them. They also pay others to do so. DER SPIEGEL: Are there other such PR strategies? Wisner: Another program is called “Freedom to Operate.” Its purpose is to eliminate everything that might disrupt sales of their products – laws, scientific articles, they go after everything. As part of that effort, they also engage lobbyists – scientists who Monsanto pays for their opportunism. Such programs reflect a corporate culture that shows no interest whatsoever in public health, only in profits.

DER SPIEGEL: Monsanto continues to dispute that it tried to influence scientific research. What was the critical factor for jurors in reaching the verdict? Wisner: I believe it was the scientific findings themselves. The 12 jurors were not lightweights after all. There was a molecular biologist, an environmental engineer, a lawyer. Some colleagues told me: “Be careful Brent, so much intelligence can be an impediment.” But I was certain that the arguments in the critical studies, parts of which were suppressed, were the strongest evidence we had.

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Sad and joyful. Why Korea’s really want peace.

After 70 Years, Korean Father, Son Share A Drink For First, Last? Time (H.)

As soon as 91-year-old Lee Gi-sun got up on the morning of Aug. 22, he pulled out one of the bottles of soju, a potent distilled liquor, that he’d stashed in the bottom of his suitcase. He’d brought this precious liquor to accompany a ceremony for which he’d waited his entire life – a daytime drink with his son! At 10 am on Aug. 22, the final day of the three-day reunion for families divided by the Korean War, family members met in the banquet hall on the second floor of the Mt. Kumgang Hotel to say their goodbyes. A few hours hence, they would return to their respective homes in South and North Korea, with no guarantee of seeing each other again. The father filled a cup with the soju he’d brought.

After taking a sip himself, he silently passed the cup to his son. Gi-sun’s North Korean son, Gang-son (69 years old himself), was also silent as he took the cup and brought it to his lips. This was the first drink shared by the white-haired father and son, and it very well might be their last. It was a heartrending moment when the father’s lifelong dream came true. “We were separated when he was two years old. Two years old,” the father said, letting the last phrase linger in the air. In Jan. 1951, he and his older brother had left their families behind in their home of Yonbaek County, Hwanghae Province, fleeing south with UN troops beaten back by the Chinese onslaught. Gi-sun had assumed he would soon be able to return.

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Feb 092017
 
 February 9, 2017  Posted by at 10:14 am Finance Tagged with: , , , , , , , , , , ,  


Russell Lee Migrant family in trailer home near Edinburg, Texas Feb 1939

China Approaches Maxi-Devaluation (DR)
German Exports Break Record as Trump Targets Trade Balance (BBG)
The Blood Bath Continues In The US Major Oil Industry (SRSrocco)
Record $1 Trillion in US Junk Debt to Mature in Next 5 Years (WSJ)
Trump EU Envoy Says Greece Is Now More Likely To Leave The Euro (G.)
Le Pen Aide Briefed French Central Banker on Plan to Print Money (BBG)
Global Banks In London To Relocate $1.9 Trillion Of Assets After Brexit (BBG)
Former Fed Staffer Says Central Bank Is Under the Thumb of Academics (WSJ)
Out of Pocket, Italians Fall Out of Love With The Euro (R.)
Italy’s “Bitter” Bank Rescue Tsar Bemoans Strategy Vacuum (R.)
Activists Plan Emergency Actions Across The Country To Protest DAPL (IC)
UK Government Backtracks On Pledge To Take Syrian Child Refugees (Ind.)
My Country Was Destroyed (Tima Kurdi)

 

 

Very much in line with what I’ve been saying. China’s dollar reserves are plunging but its dollar-denominated debt soars. A devaluation looks inevitable, and it has to be big because having to do a second one is the worst of all worlds.

China Approaches Maxi-Devaluation (DR)

The Institute of International Finance reports that capital outflows swelled to a record $725 billion last year. China’s desperate to keep that capital at home to support the economy. And it’s been burning holes in its dollar reserves to support the yuan. Selling its dollar holdings to buy yuan puts footings under the yuan. Makes it more attractive. Halts the capital flight. But the fire can only burn so long before it torches the remaining reserves… A $2.99 trillion war chest or a $3 trillion war chest sounds like plenty. But as Jim Rickards explained recently, it’s not nearly as much as it sounds: “Of the $3 trillion that China has left, only $1 trillion of that is a liquid. One trillion is invested in hedge funds, private equity funds, gold mines, et cetera. That money is not liquid. It cannot be used to support the currency, so remove a trillion.”

That leaves $2 trillion: “Another trillion has to be held on what’s called a precautionary reserve to bail out their banking system. The Chinese banks are completely insolvent. That system is going to need to be bailed out sooner rather than later.” Scratch another trillion: “That leaves only $1 trillion of the original $4 trillion in liquid form. The problem is that capital flight is continuing at a rate of $1 trillion per year, so China will be devoid of usable liquid assets by late 2017.” So now what? Jim has warned that Trump could soon label China a currency manipulator. That has vast implications, as you’ll see. But it’s not just Mr. Rickards. We learn today that a group of analysts at Deutsche Bank is piping an identical tune:

“Sometime in the next few weeks, President Trump or his Treasury secretary may declare China a currency manipulator and propose penalties including tariffs on some or all imports from China unless it ceases this and other alleged unfair trade policies.” And that would invite Chinese retaliation. Tariffs of their own on American goods. And then… China might reach for the nuclear option — a “maxi-devaluation.” Jim again: “We know what Donald Trump has said. China’s going to be labeled a currency manipulator. That’s like firing the first shot in a major currency war. We could see tariffs imposed in both directions, shots in retaliation, a financial war… China will retaliate with what I call their nuclear option, which is a maxi-devaluation of the Chinese yuan.”

If China’s going to be branded a currency manipulator and have its exports slapped with a steep tariff, why not go ahead and devalue? One, it would make Chinese exports more competitive. Two, China could stop depleting its dollar reserves. It would no longer have to burn through dollars to boost the yuan. And three, it could actually halt the capital outflows. How? Many Chinese fear the government will impose stricter capital controls as the situation worsens. So they move their capital out of the country in advance. That brings greater fear of capital controls. And more incentives for capital flight. It’s a vicious cycle. But if China devalues all at once, say, 25% or 30%, it sends this message: The worst is over. You may as well keep your capital in China. There will be no further devaluation.

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German trade surplus is bigger than the entire Greek economy. That is how the European Union ‘functions’.

German Exports Break Record as Trump Targets Trade Balance (BBG)

Germany posted a record trade surplus in 2016, which may further fuel accusations by the Trump administration that Europe’s largest economy is exploiting a “grossly undervalued” euro. Exports climbed 1.2% last year to 1.2 trillion euros ($1.3 trillion), the Federal Statistics Office in Wiesbaden reported on Thursday, while imports rose 0.6% to 954.6 billion euros. That left Germany’s trade surplus at 253 billion euros in 2016. The report feeds into a debate kicked off late last month by Peter Navarro, the head of the White House National Trade Council, who told the Financial Times that Germany is gaining an unfair advantage over the U.S. and other nations with a weak currency.

ECB President Mario Draghi, Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble all rejected the claim that came on the back of President Donald Trump’s promises of renegotiating or tearing up free-trade treaties. “The fact that the German economy is exporting much more than it imports is a source of concern and no reason to be proud” because weak imports are the result of a lack of investment, Marcel Fratzscher, head of the DIW economic institute in Berlin, said in an e-mailed statement. “The record surplus will continue to fuel conflict with the U.S. and within the EU.” Exports fell 3.3% in December from the previous month, the report said, while imports were unchanged. The country’s current-account surplus reached 266 billion euros in 2016.

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Zombies on life support.

The Blood Bath Continues In The US Major Oil Industry (SRSrocco)

The carnage continues in the U.S. major oil industry as they sink further and further in the RED. The top three U.S. oil companies, whose profits were once the envy of the energy sector, are now forced to borrow money to pay dividends or capital expenditures. The financial situation at ExxonMobil, Chevron and ConocoPhillips has become so dreadful, their total long-term debt surged 25% in just the past year. [..] While the Federal Government could step in and bail out BIG OIL with printed money, they cannot print barrels of oil. Watch closely as the Thermodynamic Oil Collapse will start to pick up speed over the next five years. According to the most recently released financial reports, the top three U.S. oil companies combined net income was the worst ever. The results can be seen in the chart below:

In 2011, ExxonMobil, Chevron and Conocophillips enjoyed a combined $80.4 billion in net income profits. ExxonMobil recorded the highest net income of the group by posting a $41.1 billion gain, followed by Chevron at $26.9 billion, while ConocoPhillips came in third at $12.4 billion. However, the rapidly falling oil price, since the latter part of 2014, totally gutted the profits at these top oil producers. In just five short years, ExxonMobil’s net income declined to $7.8 billion, Chevron reported its first $460 million loss while ConocoPhillips shaved another $3.6 billion off its bottom line in 2016. Thus, the combined net income of these three oil companies in 2016 totaled $3.7 billion versus $80.4 billion in 2011. Even though these three oil companies posted a combined net income profit of $3.7 billion last year, their financial situation is much worse when we dig a little deeper.

We must remember, net income does not include capital expenditures or dividend payouts. If we look at these oil companies Free Cash Flow, they have been losing money for the past two years. Their combined free cash flow fell from a healthy $46.3 billion in 2011 to a negative $8.7 billion in 2015 and a negative $7.3 billion in 2016. Now, their free cash flow would have been much worse in 2016 if theses companies didn’t reduce their CAPEX spending by nearly a whopping $20 billion.

[..] the free cash flow minus dividend payouts provides us evidence that these oil companies have been seriously in the RED since 2013, not just the past two years displayed in the Free Cash Flow chart. As we can see, the group’s free cash flow minus dividends was a negative $32.8 billion in 2015 and a negative $29 billion last year. Of course, these three companies may have sold some financial investments or assets to reduce these negative values, but a company can’t stay in business for long by selling assets that it would need to use to produce oil in the future. So, what has falling free cash flow and dividends done to ExxonMobil, Chevron and ConocoPhillips long-term debt? You guessed it… it skyrocketed:

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Does this sound like a good thing? : “..the environment remains highly favorable for junk-rated businesses..”

Record $1 Trillion in US Junk Debt to Mature in Next 5 Years (WSJ)

More than $1 trillion of junk-rated corporate debt is slated to mature over the next five years, creating a stiff challenge for heavily-indebted businesses if the market for riskier debt were to deteriorate, according to a new report from Moody’s Investors Service. The $1.063 trillion in maturing debt is the highest ever recorded by the ratings firm over a five-year period and also includes the highest single-year volume in 2021, when $402 billion of junk-rated corporate debt is scheduled to come due. Overall, a little more than $2 trillion of corporate debt is scheduled to mature by 2021 when factoring in $944 billion of investment-grade bonds. But it is the volume of junk-rated debt that could be of greater significance, given that investment-grade companies rarely have trouble extending debt maturities even in more difficult conditions.

As it stands, the environment remains highly favorable for junk-rated businesses, making it easy for most to access funds at their choosing. The average junk-bond yield was 5.72% Tuesday, the lowest level since September 2014. Buoyed by rising interest rates, junk-rated bank loans, which feature floating-rate coupons, have performed especially well of late, enabling U.S. companies to refinance $100 billion of loans in January, the largest monthly total in at least a decade, according to data from S&P Global Still, conditions can change quickly in the leveraged finance markets. A year ago, amid concerns that the U.S. was heading toward another recession, the average junk bond yield was nearly 10%, raising the risk that many borrowers would be unable to refinance bonds with looming maturities, hastening their descent into bankruptcy.

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“..you might have to ask the question if what comes next could possibly be worse than what’s happening now.”

Trump EU Envoy Says Greece Is Now More Likely To Leave The Euro (G.)

Donald Trump’s administration has put itself on a fresh collision course with the European Union after the president’s candidate to be ambassador in Brussels said Greece should leave the euro and predicted the single currency would not survive more than 18 months in its present form. Days after being accused of “outrageous malevolence” towards the EU for publicly declaring that it “needs a little taming”, Ted Malloch courted fresh controversy by saying Greece should have left the eurozone four years ago when it would have been “easier and simpler”. Malloch made his comments as financial markets began to take fright at the possibility of a fresh Greek debt crisis later this year. Shares fell and interest rates on Greek debt rose after it emerged that the EU was at loggerheads with the IMF over whether to give the country more generous debt relief.

“Whether the eurozone survives I think is very much a question that is on the agenda,” he told Greek Skai TV’s late-night chat show Istories. “We have had the exit of the UK, there are elections in other European countries, so I think it is something that will be determined over the course of the next year, year and a half. “Why is Greece again on the brink? It seems like a deja vu. Will it ever end? I think this time I would have to say that the odds are higher that Greece itself will break out of the euro,” Malloch said. The stridently Brexit-supporting businessman, who has yet to be confirmed as the US president’s EU ambassador and is seen by Brussels as a provocative nominee for the post, said he wholeheartedly agreed with Trump’s tweet from 2012 saying Greece should return to the drachma, its former currency.

“I personally think [Trump] was right. I would also say that this probably should have been instigated four years ago, and probably it would have been easier or simpler to do,” Malloch said in the interview with the show’s chief anchor, Alexis Papahelas. Seven years of arduous austerity – the price of the international bailout – had been so bad for the country that it was questionable whether what came next could possibly be worse, Malloch said. In the third bailout in as many years, Greece has lost more than 25% of its GDP due to austerity-fuelled recession, the biggest slump of any advanced western economy in modern times. Without further emergency funding from its €86bn rescue programme, Athens could face a default in July when debt repayments of about €7bn to the European Central Bank mature.

[..] The renewed focus came as the IMF revealed its board was split over how far spending cuts in the country should go, raising fresh doubts over the IMF’s participation in rescue plans for the struggling Greek economy. The IMF believes that the budgetary demands being imposed on Greece by Europe are unreasonable and that the country’s debts will hit 275% of national income by 2060 without fresh assistance. Malloch said: “I have travelled to Greece, met lots of Greek people, I have academic friends in Greece and they say that these austerity plans are really deeply hurting the Greek people, and that the situation is simply unsustainable. So you might have to ask the question if what comes next could possibly be worse than what’s happening now.” The biggest unknown was not a euro exit, but the chaos it would likely engender as Greece moved to a new currency, he said.

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French revolution. Ironic that the central bank governor makes Le Pen’s point while trying to ‘push back’: “The Bank of France belongs to all French and is at the service of a French asset – our currency.” That’s exactly Le Pen’s point, it’s just that she doesn’t see the euro as ‘our currency’. For her, that means the franc.

Le Pen Aide Briefed French Central Banker on Plan to Print Money (BBG)

Presidential candidate Marine Le Pen’s chief economic adviser Bernard Monot met with Bank of France Governor Francois Villeroy de Galhau in September and set out her party’s plans to take control of the central bank and use it to finance government spending. The meeting took place on the sidelines of Villeroy de Galhau’s public hearing in Brussels at the economic and monetary committee of the European Parliament, Monot, who also sits on the panel, said in a Feb. 4 interview. The central bank has become one of Le Pen’s key targets as she fleshes out her plans for taking control of the French economy and leaving the euro. She intends to revoke the Bank of France’s independence and use it to finance French welfare payments and service the government’s debts after abandoning the European monetary union.

While the National Front leader is ahead in polling for the first ballot on April 23, she’s still an outsider to become the next president because of the two-round system which requires broad-based support to win the run-off two weeks later. Villeroy de Galhau, who also sits on the governing council of the ECB, pushed back against her proposals in an interview on BFM television Thursday, though he didn’t mention her specifically. “It’s important that we have institutions and a currency that straddle daily turbulence,” the governor said. “The Bank of France belongs to all French and is at the service of a French asset – our currency.” The spread between French 10-year bonds and similarly dated German debt was the widest in more than four years earlier this week, as political uncertainty deterred investors. Villeroy de Galhau described the move as “temporary tension.”

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The British economy will be healthier when its dependence on banking goes down. Not richer, but healthier. For instance, home prices can finally fall, a much needed development. There’s nothing good about a one-trick pony.

Global Banks In London To Relocate $1.9 Trillion Of Assets After Brexit (BBG)

Global banks in London may have to relocate 1.8 trillion euros ($1.9 trillion) of assets to the continent after Britain withdraws from the European Union, putting as many as 30,000 U.K. jobs at risk, according to Brussels-based research group Bruegel. The assets potentially on the move represent 17% of the U.K. banking system, Bruegel said in a report published Wednesday. Based on discussions with market participants, the researchers estimate that 35% of wholesale banking activity in London can be attributed to dealings with customers inside the EU. Financial firms will have to move that business to countries inside the trading bloc after the U.K. leaves the EU in 2019, likely spelling the end of passporting, where firms seamlessly service the rest of the single market from their London hubs.

Banks, and their clients, are most concerned about a “cliff edge” Brexit, whereby all access is cut off after two years. To safeguard against that loss of access, banks are already in discussions with European regulators about setting up new bases inside the EU and have said they will start the process of moving people within weeks of the government triggering Brexit talks, expected in March. “At a minimum, it is expected that the new EU27-based entities will need to have autonomous boards, full senior management teams, senior account managers and traders, even though much of the back-office might stay in London or elsewhere in the world,” researchers led by Andre Sapir said in the report.

London-based firms will likely have to move about 10,000 employees into these new EU entities, Breugel estimates. An additional 18,000 to 20,000 people in associated professions, such as lawyers, consultants and accountants, may also have to relocate. Bruegel’s estimates are at the conservative end of the spectrum. TheCityUK industry lobby group forecasts as many as 35,000 banking jobs could be relocated, rising to 70,000 when including associated financial services. London Stock Exchange CEO Xavier Rolet has said Brexit would likely see 232,000 jobs leaving the U.K.

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Both Danielle DiMartino Booth and Ann Pettifor have new books coming out. We need girl power, badly.

Former Fed Staffer Says Central Bank Is Under the Thumb of Academics (WSJ)

The Federal Reserve is dominated by academics who don’t know how finance and the economy really work, according to a former Federal Reserve Bank of Dallas staffer in her new book. Danielle DiMartino Booth, an adviser to Richard Fisher when he was Dallas Fed president, says the economists who control most of the central bank’s seats of power filter their decision-making through theoretical models. That led the institution to miss the forces that created the financial crisis, and then adopt the wrong policies to put the economy back on track, she says. Ms. Booth makes her case in a book called “Fed Up: An Insider’s Take on Why the Federal Reserve Is Bad for America,” set to be published Tuesday. Her book comes as other Fed critics are pushing for more diversity at the central bank.

They often focus on the dearth of women and minorities among the top officials, but some have said a broader range of educational and professional backgrounds also would widen the central bank’s perspective. Of the 17 Fed governors and regional bank presidents, 16 are white, 13 are men, and 10 have a Ph.D. in economics. Ms. Booth’s arguments echo those of her former boss, who led the Dallas Fed from 2005 to 2015, and frequently voted against the central bank’s aggressive stimulus efforts during and after the financial crisis. “If you rely entirely on theory, you are not going to conduct the right policy, because policies have consequences” that in many cases people with real-world experience are particularly well-suited to spot, Mr. Fisher said in an interview late last year.

Mr. Fisher hired Ms. Booth, a former Wall Street trader turned financial journalist, to work at the Dallas Fed in 2006 on the strength of columns she had written warning about the state of the housing market and financial markets. She eventually rose to be his appointed eyes and ears on financial markets. In her book, Ms. Booth describes a tribe of slow-moving Fed economists who dismiss those without high-level academic credentials. She counts Fed Chairwoman Janet Yellen and former Fed leader Ben Bernanke among them. The Fed’s “modus operandi” is defined by “hubris and myopia,” Ms. Booth writes in an advance copy of the book. “Central bankers have invited politicians to abdicate leadership authority to an inbred society of PhD academics who are infected to their core with groupthink, or as I prefer to think of it: ‘groupstink.’”

“Global systemic risk has been exponentially amplified by the Fed’s actions,” Ms. Booth writes, referring to the central bank’s policies holding interest rates very low since late 2008. “Who will pay when this credit bubble bursts? The poor and middle class, not the elites.” Fed officials have defended their crisis-era stimulus policies, saying they lowered unemployment and helped the housing market recover. Opponents feared near-zero interest rates would cause excessive inflation and dangerous market bubbles, neither of which has happened. Ms. Booth also is among the Fed critics who see a worrisome revolving door between the central bank and the financial firms it regulates. She points to New York Fed President William Dudley, a former Goldman Sachs chief economist, as an illustration of a “codependent” relationship between the central bank and markets. He and three other regional Fed bank presidents have worked for or had associations with Goldman Sachs. With this in mind, she writes, “Goldman has positioned players on the Fed’s chessboard.”

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“Italy was the second most pro-euro nation after Luxembourg, with 79% expressing a positive opinion.” But now: “only 41% said the euro was “a good thing”..”

Out of Pocket, Italians Fall Out of Love With The Euro (R.)

When the Italian central bank’s deputy governor joined a radio phone-in show last week, many callers asked why Italy didn’t ditch the euro and return to its old lira currency. A few years ago such a scenario, that Salvatore Rossi said would lead to “catastrophe and disaster”, would not have been up for public discussion. Now, with the possibility of an election by June, politicians of all stripes are tapping into growing hostility towards the euro. Many Italians hold the single currency responsible for economic decline since its launch in 1999. “We lived much better before the euro,” says Luca Fioravanti, a 32-year-old real estate surveyor from Rome. “Prices have gone up but our salaries have stayed the same, we need to get out and go back to our own sovereign currency.”

The central bank is concerned about the rise in anti-euro sentiment, and a Bank of Italy source told Reuters Rossi’s appearance is part of a plan to reach out to ordinary Italians. Few Italians want to leave the European Union, as Britain chose to do in its referendum last year. Italy was a founding EU member in 1957 and Italians think it has helped maintain peace and stability in Europe. And the ruling Democratic Party (PD) is pro-euro and wants more European integration though it complains that the fiscal rules governing the euro are too rigid. But the three other largest parties are hostile, in various degrees, to Italy’s membership of the single currency in its current form. The PD is due to govern until early 2018, unless elections are called sooner. The PD’s prospects of victory have waned since its leader Matteo Renzi resigned as premier in December after losing a referendum on constitutional reform, and polls suggest that under the current electoral system no party or coalition is likely to win a majority.

Italians used to be among the euro’s biggest supporters but a Eurobarometer survey published in December by the European Commission showed only 41% said the euro was “a good thing”, while 47% called it “a bad thing.” In the Eurobarometer published in April 2002, a few months after the introduction of euro notes and coins, Italy was the second most pro-euro nation after Luxembourg, with 79% expressing a positive opinion. Italy is the only country in the euro zone where per capita output has actually fallen since it joined the euro, according to Eurostat data. Its economy is still 7% smaller than it was before the 2008 financial crisis, and youth unemployment stands at 40%.

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They literally don’t know what they’re doing: “badly devised and even more badly executed”

Italy’s “Bitter” Bank Rescue Tsar Bemoans Strategy Vacuum (R.)

The head of Italy’s bank-bailout fund said on Tuesday the country lacked a clear strategy for shifting 356 billion euros ($381 billion) in problem loans. In an extraordinary outburst from a man picked by Rome to help tackle the problem, Alessandro Penati, whose boutique asset management firm was chosen to raise private funds for struggling banks, said he felt “bitter and disillusioned”. His comments exposed tensions within the banking sector over Italy’s rescue efforts. “There is no clear vision of the problem and no strategy,” Penati said at a financial conference in Milan, suggesting that he was virtually working alone on rescues that had revealed “horror stories” within some banks. “There is simply a reaction to a problem and this has been the main difficulty for me over these past few months – I had nobody to relate to.”

The Atlante fund, created 10 months ago following pressure from the government, gathered 4.25 billion euros from around 70 mostly private investors, including Italy’s healthier lenders, to buy up bad loans and invest in weaker banks. But the fund’s investors are already making big writedowns on the value of their stakes in Atlante, which promised them annual returns of 6%. The fund faces ever greater demands for capital and no investors willing to stump up more money. In December, Penati’s plan to buy into Italy’s biggest-ever sale of bad debts – 28 billion euros worth of loans written by struggling bank Monte dei Paschi di Siena (BMPS.MI) — fell apart when the bank failed to find any other major investors.

Penati, a former economist who set up Milan-based Quaestio Capital Management, said the sale had collapsed because it had been tied to a capital raising that had been “badly devised and even more badly executed”. Monte dei Paschi (MPS) is now to be rescued by the state. “It would no longer make sense for Atlante to play a role now. The point is that state intervention is considered a way to solve all problems, but it isn’t … MPS’s bad loan problem remains and how they are going to solve it – I don’t know.”

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Drilling has reportedly restarted. How bad can this get?

Activists Plan Emergency Actions Across The Country To Protest DAPL (IC)

On Tuesday the Army Corps of Engineers gave notice to Congress that within 24 hours it would grant an easement allowing Energy Transfer Partners to move forward with construction on the Dakota Access Pipeline, which North Dakota’s Standing Rock Sioux tribe and thousands of allies have attempted to halt out of concern for water contamination, dangers to the climate, and damage to sites of religious significance to the tribe. The federal government dismissed those concerns in its filing. “I have determined that there is no cause for completing any additional environmental analysis,” Douglas Lamont, the acting assistant secretary of the Army, wrote in a memorandum. “The COE has full responsibility to take the reasonable steps necessary to execute the requested easement.”

Two weeks earlier, after only four days in office, Trump signed two memoranda instructing federal officials to ram forward approvals for the Dakota Access and Keystone XL pipelines, both of which had been halted by the Obama administration after people mobilized across the U.S. to stop them. On Dakota Access, the Army Corps did just what the president demanded, waiving the standard 14-day waiting period before such a permit becomes official. The tribe has been left with just one day to rally a legal response. Lawyers for the tribe say they will argue in court that an environmental impact statement, mandated by the Army Corps under Obama, was wrongfully terminated. They will likely request a restraining order while the legal battle ensues. Pipeline company lawyers have said that it would take at minimum 83 days for oil to flow from the date that an easement is granted.

Although the tribal government once supported the string of anti-pipeline camps that began popping up last spring, leaders have since insisted that pipeline opponents go home and stay away from the reservation. “Please respect our people and do not come to Standing Rock and instead exercise your First Amendment rights and take this fight to your respective state capitols, to your members of Congress, and to Washington, D.C.,” tribal chairman Dave Archambault said in a statement. Still, the easement announcement is already activating pipeline opponents to return. A “couple thousand people” are headed back to the camps, including contingents of veterans, said former congressional candidate Chase Iron Eyes, a member of the tribe, in a video posted to Facebook.

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Boy, what a moral void.

UK Government Backtracks On Pledge To Take Syrian Child Refugees (Ind.)

Hours before the final vote on the triggering of Article 50 the government quietly announced it would allow just 350 unaccompanied Syrian children to come to the UK, thousands short of the figure suggested by government sources last year. The statement from Immigration Minister Robert Goodwill said local authorities indicated “have capacity for around 400 unaccompanied asylum-seeking children until the end of this financial year” and said the country should be “proud” of its contribution to finding homes for refugees. Liberal Democrat leader Tim Farron called the decision “a betrayal of British values”. “Last May, MPs from all parties condemned the Government’s inaction on child refugees in Europe, and voted overwhelmingly to offer help to the thousands of unaccompanied kids who were stranded without their families backed by huge public support,” Mr Farron said.

“Instead, the Government has done the bare minimum, helping only a tiny number of youngsters and appearing to end the programme while thousands still suffer. At the end of December last year the Government had failed to bring a single child refugee to the UK under the Dubs scheme from Greece or Italy where many of these children are trapped.” Ministers introduced the programme last year after coming under intense pressure to give sanctuary to lone children stranded on the continent. Calls for the measure were spearheaded by Lord Dubs, whose amendment to the Immigration Act requires the Government to “make arrangements to relocate to the UK and support a specified number of unaccompanied refugee children from other countries in Europe”.

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“This is not about supporting Bashar. This is about ending the war in Syria. We can’t continue like this, supporting regime change.”

My Country Was Destroyed (Tima Kurdi)

I am the aunt of Alan Kurdi, the Syrian boy who tragically drowned September 2, 2015. The devastating image of my 2-year old nephew’s lifeless body, lying face-down on the beach in Turkey, was all over the news across the world. Two weeks ago, I got home from work and my husband showed me a video of Tulsi Gabbard talking about her visit to my home country of Syria. The things she was saying about the United States policy of regime change and how the West and the Gulf countries are funding the rebel groups who wind up with the terrorists are true. I was shocked because it’s something no other U.S. politician has the courage to say. Regime change policy has destroyed my country and forced my people to flee. Tulsi’s message was exactly what I have been trying to say for years, but no one wants to listen.

I live in Canada now, but I was born and raised in Damascus, Syria. Growing up, our country was peaceful, beautiful and safe. Our neighbors were Christian, Muslim, Sunni, Shia; all kinds of religion and color. We all lived together and respected each other. Syria is a secular country. In 2011, the war started in Syria. Most of my family was still in Damascus. I was always in close contact with them and talked to them on the phone on a daily basis. For a year, I heard many tragic stories of people, friends, and neighbors who I grew up with having died in this war. Ultimately, my family had to flee to Turkey. I did what everyone would do for their own family to help, I sent them money and I listened to their struggles to survive as refugees in Turkey.

In 2014, I went to Turkey to visit my family and tried to help them. What I saw and experienced is not what we all saw in the news or we heard in the radio. It was worse than I could ever have imagined. I saw people in the streets without homes, without hope. Children were hungry, begging for a piece of bread. I heard many heartbreaking stories from other refugees who were suffering so much and many who had lost loved ones in the war. After I returned to Canada, I decided I wanted to bring my family here as refugees, but I couldn’t get them approved to come in. Eventually, my brother Abdullah and his wife Rehana, like thousands of Syrians, decided they had to take the risk and trust a smuggler they thought would bring them to freedom, safety, and hope. In September 2, 2015, I heard the tragic news that my sister-in-law Rehana and her two sons drowned crossing from Turkey to Greece.

The image of my two year old nephew Alan Kurdi lying face down on a Turkish beach was all over the media across the world. It was the wake up call to the world. Enough suffering. Enough killing. And most importantly, it was my wake up call. [..] Like me, many Syrians are encouraged that Tulsi met with President Bashar Assad in Syria. Tulsi recognizes that we need to talk to him because a political solution is the only way to restore peace in Syria. If the West keeps funding the rebels, we will see more people flee, more bloodshed, and more suffering. My people have suffered for at least six years. This is not about supporting Bashar. This is about ending the war in Syria. We can’t continue like this, supporting regime change. We have seen it before in Iraq, in Libya, and look what happened to them.

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Nov 302015
 
 November 30, 2015  Posted by at 10:26 am Finance Tagged with: , , , , , , , , , , , ,  


John Vachon Trucks loaded with mattresses at San Angelo, Texas Nov 1939

COP-21 Climate Deal In Paris Spells End Of The Fossil Era (AEP)
Oil’s Big Players Line Up for $30 Billion of Projects in Iran (Bloomberg)
India Opposes Deal To Phase Out Fossil Fuels By 2100 (Reuters)
Beijing Smog Levels So High They Move ‘Beyond Index’ (Bloomberg)
World’s Biggest Pension Fund Loses $64 Billion Amid Equity Rout (Bloomberg)
Iron Ore Falls Below $40 A Metric Ton For The First Time (Bloomberg)
Fed To Take Up ‘Too Big To Fail’ Emergency Lending Curb (Reuters)
Did the Yuan Really Pass the IMF Currency Test? You’ll Know Soon (Bloomberg)
IMF Move Would Pressure China on Management of Yuan (WSJ)
IMF’s Yuan Inclusion Signals Less Risk Taking In China (Reuters)
VW Top Execs Knew Fuel Usage In Some Cars Was Too High A Year Ago (Reuters)
BlackRock Spreads its Tentacles in Brussels (Don Quijones)
The Silk Road Affair: Power, Pop and a Bunch of Billionaires (Bloomberg)
The Strange Case Of Julian Assange (Crikey)
Saudi Arabia’s 2015 Beheadings The Most In 20 Years (Al Jazeera)
EU Split Over Refugee Deal As Germany Leads Breakaway Coalition (Guardian)
European Union Reaches Deal With Turkey on Migration (WSJ)
Tsipras Takes On Turkey’s Davutoglu On Twitter (AP)
As the World Turns Away, Refugees are Still Drowning in the Mediterranean (HRW)

Ambroses say the darndest things. This Ambrose looks through rosy glasses. Probably drinks from them too. “..both countries have come to the realisation that it is possible to decarbonise without hurting economic growth..” Oh, for Christ sake.

COP-21 Climate Deal In Paris Spells End Of The Fossil Era (AEP)

A far-reaching deal on climate change in Paris over coming days promises to unleash a $30 trillion blitz of investment on new technology and renewable energy by 2040, creating vast riches for those in the vanguard and potentially lifting the global economy out of its slow-growth trap. Economists at Barclays estimate that greenhouse gas pledges made by the US, the EU, China, India, and others for the COP-21 climate summit amount to an epic change in the allocation of capital and resources, with financial winners and losers to match. They said the fossil fuel industry of coal, gas, andoil could forfeit $34 trillion in revenues over the next quarter century – a quarter of their income – if the Paris accord is followed by a series of tougher reviews every five years to force down the trajectory of CO2 emissions, as proposed by the United Nations and French officials hosting the talks.

By then crude consumption would fall to 72m barrels a day – half OPEC projections – and demand would be in precipitous decline. Most fossil companies would face run-off unless they could reinvent themselves as 21st Century post-carbon leaders, as Shell, Total, and Statoil are already doing. The agreed UN goal is to cap the rise in global temperatures to 2 degrees centigrade above pre-industrial levels by 2100, deemed the safe limit if we are to pass on a world that is more or less recognisable. Climate negotiators say there will have to be drastic “decarbonisation” to bring this in sight, with negative net emissions by 2070 or soon after. This means that CO2 will have to be plucked from the air and buried, or absorbed by reforestation.

Such a scenario would imply the near extinction of the coal industry unless there is a big push for carbon capture and storage. It also implies a near total switch to electric cars, rendering the internal combustion engine obsolete. The Bank of England and the G20’s Financial Stability Board aim to bring about a “soft landing” that protects investors and gives the fossil industry time to adapt by forcing it to confront the issue head on. Barclays said ,$21.5 trillion of investment in energy efficiency will be needed by 2040 under the current pledges, which cover 155 countries and 94pc of the global economy. It expects a further $8.5 trillion of spending on solar, wind, hydro, energy storage, and nuclear power. Those best-placed to profit in Europe are: Denmark’s wind group Vestas; Schneider and ABB for motors and transmission; Legrand for low voltage equipment; Alstom and Siemens for rail efficiency; Philips, and Osram for LEDs and lighting.

But this is a minimalist scenario. While the Paris commitments suggest a watershed moment, they do not go far enough to meet the targets set by the Intergovernmental Panel on Climate Change (IPPC). The planet has already used up two-thirds of the allowable “carbon budget” of 2,900 gigatonnes (GT), and will have used up three quarters of the remaining 1,000 GT by 2030. Barclays advised clients to prepare for a more radical outcome, entailing almost $45 trillion of spending on different forms of decarbonisation. “The fact that COP-21 in itself is clearly not going to put the world on a 2 degree track does not mean that fossil-fuel companies can simply carry on with business-as-usual. We think they should be stress-testing their business models against a significant tightening of global climate policy over the next two decades,” it said.

[..] Mr Jacobs said a deal in Paris is highly likely. “You can never rule out a break-down. These meetings always go to the wire. But we have gone past the turning point in the US and China, and both countries have come to the realisation that it is possible to decarbonise without hurting economic growth,” he said. It will not be a legally-binding treaty, but it is expected to have the same effect as each country transposes the targets into its own law. In the US it will be enforced through the legal mechanism of the Clean Air Act, anchored on earlier accords, without need for Senate ratification. The sums of money are colossal. Macro-economists say this is just what is needed to soak up the global savings glut and rescue the world from its 1930s liquidity trap. There might even be a boom.

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End of the fossil era, Ambrose? Not everyone agrees.

Oil’s Big Players Line Up for $30 Billion of Projects in Iran (Bloomberg)

Total, Royal Dutch Shell and Lukoil are among international companies that have selected oil and natural gas deposits to develop in Iran as the holder of the world’s fourth-largest crude reserves presents $30 billion worth of projects to investors. Total is one of the companies that have been in the forefront of discussions and Eni is also looking to invest, Oil Minister Bijan Namdar Zanganeh said. Shell, Total and Lukoil all specified fields they would be interested in developing in Iran, Ali Kardor, deputy director of investment and financing at National Iranian Oil Co. said in an interview in Tehran. “Many companies are interested. Europeans are interested, Asian companies are interested,” Zanganeh told reporters at a conference in Tehran on Saturday. “Total is interested, Eni is interested.”

Iran is pitching 70 oil and natural gas projects valued at $30 billion to foreign investors at a two-day conference in Tehran as the Persian Gulf country prepares for the end of sanctions that have stifled its energy production. All banking and economic sanctions will be lifted by the first week of January,” Amir Hossein Zamaninia, deputy oil minister for international and commerce affairs, said at the event. “We are interested to come back to Iran when the sanctions are lifted and if the contracts are interesting,” Stephane Michel, Total’s head of exploration and production in the Middle East said at the conference. “We have worked in this country for a long time, so we know specific fields on which we’ve worked.”

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Eh, Ambrose? “The entire prosperity of the world has been built on cheap energy. And suddenly we are being forced into higher cost energy. That’s grossly unfair..”

India Opposes Deal To Phase Out Fossil Fuels By 2100 (Reuters)

India would reject a deal to combat climate change that includes a pledge for the world to wean itself off fossil fuels this century, a senior official said, underlying the difficulties countries face in agreeing how to slow global warming. Almost 200 nations will meet in the French capital on Nov. 30 to try and seal a deal to prevent the planet from warming more than the 2 degrees Celsius that scientists say is vital if the world is to avoid the most devastating effects of climate change. To keep warming in check, some countries want the Paris agreement to include a commitment to decarbonize – to reduce and ultimately phase out the burning of fossil fuels like coal, oil and gas that is blamed for climate change – this century.

India, the world’s third largest carbon emitter, is dependent on coal for most of its energy needs, and despite a pledge to expand solar and wind power has said its economy is too small and its people too poor to end use of the fossil fuel anytime soon. “It’s problematic for us to make that commitment at this point in time. It’s certainly a stumbling block (to a deal),” Ajay Mathur, a senior member of India’s negotiating team for Paris, told Reuters in an interview this week. “The entire prosperity of the world has been built on cheap energy. And suddenly we are being forced into higher cost energy. That’s grossly unfair,” he said. Mathur said India, whose position at climate talks is seen by some in the West as intransigent, was committed to the 2 degrees ceiling as a long-term goal and was confident a deal would be reached.

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If PM2.5 is the threat, what good is staying indoors? You’d have to live in a bunker.

Beijing Smog Levels So High They Move ‘Beyond Index’ (Bloomberg)

Smog levels spiked in Beijing on Monday, highlighting the environmental challenges facing China as President Xi Jinping arrives in Paris for global climate talks. The concentration of PM2.5, fine particulates that pose the greatest risk to human health, went “beyond index” in the afternoon, according to a U.S. Embassy monitor. The PM2.5 level was 678 micrograms per cubic meter near Tiananmen Square, the Beijing government said. The World Health Organization recommends average 24-hour exposure to PMI of 25 or below. Public outrage over air pollution has been a catalyst for China’s transformation into a driving force for a breakthrough deal in Paris. Leaders including U.S. President Barack Obama and Chinese President Xi Jinping are scheduled to being discussions in the French capital Monday.

Beijing on Sunday raised its air pollution alert to orange, the second-highest level in its four-tier system, for the first time in 13 months. The heavy pollution in Beijing won’t clear up until Dec. 2, according to the environment bureau. The city will ask some factories to suspend or limit production and construction sites to stop transporting materials and waste while the orange alert is active, it said. Under the orange alert, people are advised to cut down on outdoor activity, while the elderly and people with heart and lung ailments should stay inside. Severe pollution was also reported in at least 17 other cities around Beijing, Tianjin, Hebei and Shandong, according to the Ministry of Environmental Protection. Shanghai’s air was also heavily polluted, the second worst level on a six-grade scale, with the PM2.5 reading at 170.4 micrograms per cubic meter as of 12 p.m..

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I warned this would happen the moment Abe pushed pension funds to prop up stock markets: they lose big. Japanese who read this will save even more, further crippling Abenomics.

World’s Biggest Pension Fund Loses $64 Billion Amid Equity Rout (Bloomberg)

The world’s biggest pension fund posted its worst quarterly loss since at least 2008 after a global stock rout in August and September wiped $64 billion off the Japanese asset manager’s investments. The 135.1 trillion yen ($1.1 trillion) Government Pension Investment Fund lost 5.6% last quarter as the value of its holdings declined by 7.9 trillion yen, according to documents released Monday in Tokyo. That’s the biggest percentage drop in comparable data starting from April 2008. The fund lost 8 trillion yen on its domestic and foreign equities and 241 billion yen on overseas debt, while Japanese bonds handed GPIF a 302 billion yen gain.

The loss was GPIF’s first since doubling its allocation to stocks and reducing debt last October, and highlights the risk of sharp short-term losses that come with the fund’s more aggressive investment style. Fund executives have argued that holding more shares and foreign assets is a better approach as Prime Minister Shinzo Abe seeks to spur inflation that would erode the purchasing power of bonds. [..] GPIF had 39% of its assets in Japanese debt at Sept. 30, and 21% in the nation’s equities, according to the statement. That compares with 38% and 23% three months earlier, respectively. The fund had 22% of its investments in foreign stocks at the end of September, and 14% in overseas bonds.

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Overleveraged overcapacity will disappear no matter how powerful the interests.

Iron Ore Falls Below $40 A Metric Ton For The First Time (Bloomberg)

Most-active iron ore futures in Singapore sank below $40 a metric ton for the first time on concern that the economic slowdown in China will cut demand as supplies from the largest miners climb. [..] The raw material has been pummeled since the start of 2014 as surging supplies from low-cost producers including BHP Billiton Ltd. and Rio Tinto in Australia and Brazil’s Vale combine with faltering demand in China to spur a glut. Losses in Singapore and Dalian could presage a drop in the benchmark price for spot ore in Qingdao, which will be updated later in the day. The latest sign of new supply came from Australia, with a vessel waiting offshore on Monday to load the first cargo from Gina Rinehart’s Roy Hill mine.

“Supply continues to rise while port inventories are starting to climb, weighing on iron ore prices,” analysts at Maike Futures Co. said in a note on Monday. “The overseas producers are still profitable and are greatly reducing costs.” The top miners are betting that higher output will enable them to cut unit costs and defend market share while smaller rivals shut. Mills in China, contending with overcapacity and depressed margins, will cut steel production by almost 3% next year, according to the China Iron & Steel Association.

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The Fed can elect to ignore the law, and Congress?

Fed To Take Up ‘Too Big To Fail’ Emergency Lending Curb (Reuters)

The Federal Reserve Board will consider on Monday a proposal to curb its emergency lending powers, a change demanded by Congress after the central bank’s controversial decision to aid AIG, Citigroup and others in 2008. A proposed rule, to be considered by the Fed’s Washington-based board in an open meeting, would require that any future emergency lending be only “broad-based” to address larger financial market problems, and not tailored to specific firms. The 2010 Dodd-Frank financial reform law instructed the Fed to curtail emergency loans to individual banks and prohibited it from lending to companies considered insolvent.

While some at the Fed worry the new rules will hamper the central bank’s response in future crises, some politicians have said the proposed regulations are too imprecise, for example in defining insolvency, to prevent the types of deals done in 2008. As the financial crisis intensified in 2008, the Fed invoked its little-used emergency lending power to stave off the failure of AIG and Bear Stearns, and help other “too big to fail” companies including Citigroup and Bank of America. The Fed also enacted a series of more general emergency programs, in all providing $710 billion in loans and guarantees. Those programs were separate from the much larger Fed asset and bond purchases known as quantitative easing.

The loans have been repaid and the guarantees ended, ultimately earning the Fed a net profit of $30 billion, according to a September Congressional Research Service review. However the effort was criticized as overreach, arguably important in limiting the crisis but also not clearly in line with the intended use of the Fed’s emergency authority. The Fed routinely lends money to banks on a short-term basis to smooth the operations of the financial system. That is part of why it exists. But since the 1930s it has had the power to lend more broadly in a crisis.

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Can’t see Lagarde crushing the expectations she herself built up. Unless there’s a dirty game going on behind the curtain.

Did the Yuan Really Pass the IMF Currency Test? You’ll Know Soon (Bloomberg)

IMF Managing Director Christine Lagarde and some two dozen officials on the fund’s executive board will gather Monday at headquarters in Washington for one of the most-anticipated decisions outside of actually approving loans for nations in crisis. The question inside the 12th-floor, oval boardroom: whether to grant China’s yuan status as a reserve currency by adding it to the fund’s Special Drawing Rights basket. The SDR, created in 1969, gives IMF member countries who hold it the right to obtain any of the currencies in the basket – currently the dollar, euro, yen and pound – to meet balance-of-payments needs. While there’s little suspense in the main thrust of the expected approval – Lagarde already announced that fund staff had recommended the yuan be included and that she supported the finding – the IMF is likely to give more details on how it arrived at the decision.

The IMF’s highest decision-making body is its board of governors, a group of mostly finance ministers and central bankers from its 188 member countries. The board of governors has delegated most of its powers to the executive board, made up of 24 executive directors who represent the membership. The meeting Monday has been classified as “restricted,” meaning no support staff will be allowed to attend. The executive board, which meets more than 200 times a year, usually makes decisions based on consensus, rather than formal votes. Mark Sobel, the U.S. executive director who answers to the Obama administration, wields the most power, with a 17% voting stake. Together, the Group of Seven countries control 43% of the vote, making them a formidable bloc. China, which holds a 3.8% voting share, is represented by former People’s Bank of China official Jin Zhongxia.

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Beijing’s hands will be tied.

IMF Move Would Pressure China on Management of Yuan (WSJ)

The IMF is on the verge of labeling China’s yuan a reserve currency. Now Chinese officials will have to prove they can treat it like one. The IMF on Monday is widely expected to say that next year, it will add the yuan to the elite basket of currencies that comprise its lending reserves, a status enjoyed only by the U.S. dollar, the euro, the British pound and the Japanese yen. The inclusion would represent recognition that the yuan’s status is rising along with China’s place in global finance. Now comes the hard part. The inclusion puts new pressure on Beijing to change everything from how it manages the yuan, also known as renminbi, to how it communicates with investors and the world. China’s pledges to loosen its tight grip on the currency’s value and open its financial system will come under new scrutiny.

“We will have to build up confidence in renminbi assets from investors both at home and abroad and at the same time, prevent the financial risks associated with a more global currency,” said Sheng Songcheng, head of the survey and statistics department at the People’s Bank of China, the country’s central bank. “That calls for carrying out various financial reforms in a coordinated way.” Inclusion would also put pressure on the central bank to offer the same degree of clarity and transparency that the U.S. Federal Reserve, the European Central Bank and other vital institutions strive for. That could be difficult: In the past six months alone, the PBOC shocked markets with a surprise currency devaluation, stood mostly silent during a Chinese stock-market rout and confused investors by issuing a new proclamation that turned out to be months old.

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Is the SDR Xi’s Trojan Horse?

IMF’s Yuan Inclusion Signals Less Risk Taking In China (Reuters)

When the IMF agrees on Monday to add the Chinese yuan to its reserves basket in the biggest shake-up in more than three decades, the IMF can afford itself a congratulatory nod. By acknowledging the yuan as a major global currency alongside the dollar, euro, yen, and pound, as is widely expected, IMF members will endorse the efforts of China’s economic reformers and by doing so hope that will spur fresh change in China. But Chinese policy insiders and international policymakers say reforms may not continue at the breakneck pace of recent months. In addition, Chinese sources suggest adding the yuan to the IMF basket leaves economic conservatives better positioned to resist further significant reform in a reminder of the period following China’s entry to the World Trade Organization (WTO).

A slowing in the pace has implications for those who bet that making the yuan a global reserve currency will give it a boost. The yuan has fallen almost 3% against the dollar this year, on course for its biggest annual fall since its landmark 2005 revaluation. The IMF decision will remove a key incentive – bolstering national pride – that reformers used to push otherwise reluctant conservatives to support reforms. More importantly, however, are worries in Beijing that the rickety economy can’t handle more aggressive reform that allows a freer flow of currency across China’s borders. Beijing is already rapidly losing a taste for more experimentation with capital flows, say the sources – economists involved in policy discussions who declined to be identified because of the sensitivity of the subject.

After the stock market buckled more than 40% in the summer – which many blamed on nefarious foreign capital – regulators have made it harder for money to leave China to counter yuan selling pressure and have intervened heavily in onshore and offshore currency markets. Not just conservatives, but more liberal economists are calling for a pause. “Our ability to control financial risk has yet to be improved,” said a senior economist at the China Centre for International Economic Exchanges (CCIEE), an influential Beijing think-tank. “Any rush to open up the capital account completely could be unfavorable for controlling financial risks … we will definitely be very cautious.”

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Which is why former CEO Winterkorn left in a hurry as soon as the scandal first broke.

VW Top Execs Knew Fuel Usage In Some Cars Was Too High A Year Ago (Reuters)

Volkswagen’s top executives knew a year ago that some of the company’s cars were markedly less fuel efficient than had been officially stated, Sunday paper Bild am Sonntag reported, without specifying its sources. VW in early November revealed that it had understated the level of carbon dioxide emissions and fuel usage in around 800,000 cars sold mainly in Europe. The scandal, which will likely cost VW billions, initially centered on software on up to 11 million diesel vehicles worldwide that VW admitted was designed to artificially suppress nitrogen oxide emissions in a test setting. The Bild am Sonntag report contradicts VW’s assertion, however, that it only uncovered the false CO2 emissions labeling as part of efforts to clear up the diesel emissions scandal, which became public in September.

Months after becoming aware of excessive fuel consumption, former Chief Executive Martin Winterkorn decided this spring to pull one model off the market where the discrepancy was particularly pronounced, the Polo TDI BlueMotion, the paper cited sources close to Winterkorn as saying. The paper did not separately cite its sources for saying that top executives knew about the fuel usage problem a year ago, however. VW at the time cited low sales figures as the reason for the withdrawal. The paper said that VW did not inform Polo TDI BlueMotion owners of the high fuel consumption, which was 18% above the nameplate value.

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Goldman, BlackRock, they are the de facto executive rulers of the world. And it makes them filthy rich.

BlackRock Spreads its Tentacles in Brussels (Don Quijones)

Much like Goldman Sachs, Blackrock is spreading tentacles across Europe at a startling rate. In a sign of its growing influence, the firm met EU officials to discuss financial market matters more times than any other company in the seven months to July, Financial Times reported this week. During that period the firm met Jonathan Hill, European Commissioner for financial services (and former City of London lobbyist), and his team five times — one more time than HSBC and two more times than Deutsche Bank. In fact, the only institutions that met the Commissioner as many times were London Stock Exchange Group, the British Bankers’ Association and Insurance Europe.

BlackRock’s lobbying efforts have worried some investors amidst concerns that the fund house, which offers traditional active mutual funds, passive funds and alternative products such as hedge funds, could have too much influence on European policy. By pure happenstance, the growth in BlackRock’s influence coincided with a 10-fold increase in the company’s self-reported lobbying spending in Brussels: in 2012 the firm spent €150,000; by 2014 that number had catapulted to €1.5m. That kind of money gets you a heck of a lot of access and influence in Brussels, the world’s second most important lobbying hub, especially when you’re already the world’s biggest asset manager.

According to EU Integrity Watch, BlackRock held meetings with Brussels officials over issues as far-reaching as the regulatory agenda in financial services by the EU and the US – a vital issue given the looming TTIP and TiSA trade treaties – capital markets union, Mr. Hill’s plan to boost business funding and investment financing, and money market funds. BlackRock’s most audacious coup to date took place in August, 2014, when the ECB announced its decision to hire BlackRock Solutions to provide advice on the design and implementation of the central bank’s upcoming purchase of asset-backed securities. In other words, just before the ECB embarked on one of the biggest QE programs in world history, it sought the advice of the world’s largest asset manager – i.e. the company most invested in the assets it intended to buy.

To ensure that there were/are no conflicts of interest, BlackRock’s contract stipulates that there must be an effective separation between the project team working for the ECB and its staff involved in any other ABS-related activities, which, as you can imagine, is an immense relief. So too is the fact that “all external audits related to the management of conflicts of interest would be made available to the ECB,” an institution famed worldwide for its blinding institutional transparency and accountability. To put all lingering fears to bed, a spokesperson for BlackRock told FT, “BlackRock advocates for public policies that we believe are in our investors’ long-term best interests.”

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Juicy story. Let’s do a movie.

The Silk Road Affair: Power, Pop and a Bunch of Billionaires (Bloomberg)

Even in post-Soviet Uzbekistan, an ancient crossroads where torture and bribery allegations are endemic, Gulnara Karimova, the president’s Harvard-educated daughter, stood out for her ruthlessness. As the U.S. embassy noted in a secret dispatch from 2005 that was later published by Wikileaks, Karimova was viewed by most Uzbeks “as a greedy, power-hungry individual who uses her father to crush business people or anyone else who stands in her way.” These days the 43-year-old former globetrotting socialite who once publicly praised God for “my face” is confined to her homeland along the legendary Silk Road, watched over by the security services of her aging father, Islam Karimov, who has ruled for a quarter century.

Even in isolation, though, Googoosha, as she’s called herself in music videos, remains in the eye of a storm, the protagonist in a multibillion-dollar tale of alleged greed and graft unfolding across three continents. This story stretches back more than a decade, from the fringes of the czarist empire to the tidy streets of Oslo, via Gibraltar, Geneva and beyond. It touches companies owned by six of Europe’s richest men – five Russians and a native Norwegian – and thrusts the staid Scandinavian business world into a strange new light. It also offers a glimpse into a mercurial U.S. ally, a nation of 30 million that is ranked among the most repressive and corrupt in the world by Freedom House and Transparency International, even while providing occasional logistical support for American troops in neighboring Afghanistan.

[..] In Switzerland, where Karimova once lived in a Geneva mansion, prosecutors have widened their own probe into suspected money-laundering and fraud offenses related to her role in awarding telecommunications contracts in Uzbekistan. In August, they said they’d confiscated more than 800 million Swiss francs ($781 million) of assets linked to her, without elaborating, bringing the total amount seized to about $1.1 billion. Add the $900 million VimpelCom has set aside for potential liabilities and the amount tied up in the investigations is pushing $2 billion. And that’s not even counting the impact on the market values of VimpelCom, MTS and TeliaSonera or the future costs of litigation. VimpelCom’s market value has plunged 59% to $6.3 billion since March 12, 2014, when it disclosed the U.S. and Dutch probes…

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Good overview. No charges have ever been filed. No prosecutor wants to interview Assange.

The Strange Case Of Julian Assange (Crikey)

Julian Assange faces very serious allegations, politicians like to say. That was the description from UK Prime Minister David Cameron’s office three years ago, defending the UK s determination to extradite him to Sweden. And that was the description early this year from then-UK deputy PM Nick Clegg, too – he should go to Sweden to face very serious allegations and charges of rape, said Clegg, not long before leading his party to annihilation in this year’s general election. Clegg, of course, was peddling the oft-repeated lie that there are charges against Assange. But for very serious allegations -sexual molestation, unlawful coercion, sexual assault- the UK and Swedish governments have displayed zero interest in investigating them. In fact, the history of the case against Assange is a history of increasingly bizarre efforts by authorities to avoid questioning him.

When Swedish prosecutors first examined complaints about Assange by two women in 2010, the Chief Prosecutor of Stockholm dismissed all but one of the allegations, including the accusation of sexual assault, saying there is no suspicion of any crime whatsoever. After speaking to prosecutors, Assange remained in Sweden for another week to be interviewed about the one remaining allegation (of molestation). However, after an appeal by former Swedish politician Claes Borgstrom, another prosecutor, Marianne Ny, reopened the whole case. Assange remained in Sweden and offered to be interviewed again, but, in the first of what would turn out to be a long litany of excuses, was told Ny was ill and unable to speak to him. Ny’s office then told Assange’s lawyer he was free to leave Sweden, but once Assange did so, an arrest warrant was issued for him.

Assange then offered to return to Sweden to speak to Ny and gave her a full week of dates in which he would do so. These were all rejected. This was all despite Swedish police having access to the texts of one of the alleged victims of Assange saying she did not want to put any charges on JA but that the police were keen on getting a grip on him , that she was shocked when he was arrested given she only wanted him to take an STD test, and that it was the police who made up the charges . Ny’s unwillingnness to interview Assange would become the pattern for the next five years: Assange repeatedly offered to speak to Swedish authorities by phone, by videolink, or in person at the Australian embassy. The Swedes refused all opportunities to do so and demanded Assange return to Sweden, issuing a European arrest warrant for him.

Eventually the EAW would be upheld by British courts under UK laws, which since then have been amended. Under current British law, a similar case to Assange’s would now be successfully appealed and the EAW rejected. Once he had sought refuge in the Ecaudorean embassy in 2012, Assange continued to offer Swedish authorities the opportunity to speak with him, and they continued to reject them. But while they regularly rejected Assange s offer to be interviewed, other suspects were treated very differently: during the last five years, the Swedes have on 44 occasions asked to travel to the UK to interview, or asked British police to interview, other people in Britain in relation to allegations including violent crime, fraud and even murder. Assange, however, couldn’t be treated the same way – he had to go to Sweden.

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Nice company to keep: “Saudi Arabia, Iran, China, the United States, and Iraq are the top five countries with the most executions.”

Saudi Arabia’s 2015 Beheadings The Most In 20 Years (Al Jazeera)

Saudi Arabia has executed at least 151 people so far this year – the most put to death in a single year since 1995. The stark rise in the number of executions has seen, on average, one person killed every two days, according to the human rights group, Amnesty International. “The Saudi Arabian authorities appear intent on continuing a bloody execution spree,” Amnesty’s report released on Monday said, quoting James Lynch, deputy director at the Middle East and North Africa programme. It is the most people put to death in the kingdom in one year since 1995, when 192 executions were reportedly carried out. Most recent years have had between 79 and 90 people killed by beheadings annually for crimes including “nonlethal offences, such as drug-related ones,” according to the London-based rights group.

The large number of executions shed further light on what Amnesty referred to as unfair judicial proceedings, with a disproportionate imposition of capital punishment on foreign nationals. “Of the 63 people executed this year for drug-related charges, the vast majority, 45 people, were foreign nationals,” the report said. Khalid al-Dakhil, a Saudi political commentator based in Riyadh, challenged “the integrity” of Amnesty’s report, saying it failed to mention Iran’s execution record. “Iran executes far more people a year than Saudi Arabia, but it does not get the negative publicity Saudi Arabia has. This is something that must be addressed,” Dakhil told Al Jazeera. Saudi Arabia, Iran, China, the United States, and Iraq are the top five countries with the most executions. In total, 71 people executed so far in 2015 have been foreigners. The majority were migrant workers from poorer countries who are often sentenced to die without any knowledge of the court’s proceedings because they don’t speak Arabic and do not receive translations.

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These people are busy creating absolute mayhem in Europe.

EU Split Over Refugee Deal As Germany Leads Breakaway Coalition (Guardian)

Months of European efforts to come up with common policies on mass immigration unravelled when Germany led a “coalition of the willing” of nine EU countries taking in most refugees from the Middle East, splitting the EU on the issues of mandatory refugee-sharing and funding. An unprecedented full EU summit with Turkey agreed a fragile pact aimed at stemming the flow of migrants to Europe via Turkey. But the German chancellor, Angela Merkel, frustrated by the resistance in Europe to her policies, also convened a separate mini-summit with seven other leaders on Sunday to push a fast-track deal with the Turks and to press ahead with a new policy of taking in and sharing hundreds of thousands of refugees a year directly from Turkey.

The surprise mini-summit suggested that Merkel has given up trying to persuade her opponents, mostly in eastern Europe, to join a mandatory refugee-sharing scheme across the EU, although she is also expected to use the pro-quotas coalition to pressure the naysayers into joining later. Merkel’s ally on the new policy, Jean-Claude Juncker, president of the European commission, said of the mini-summit: “This is a meeting of those states which are prepared to take in large numbers of refugees from Turkey legally.” But the frictions triggered by the split were instantly apparent. Donald Tusk, the president of the European council who chaired the full summit with Turkey, contradicted the mainly west European emphasis on seeing Ankara as the best hope of slowing the mass migration to Europe.

“Let us not be naïve. Turkey is not the only key to solving the migration crisis. The most important one is our responsibility and duty to protect our external borders. We cannot outsource this obligation to any third country. I will repeat this again: without control on our external borders, Schengen will become history.” He was referring to the 26-country free-travel zone in Europe, which is also in danger of unravelling under the strains of the migratory pressures and jihadi terrorism. Merkel’s mini-summit brought together the leaders of Germany, Austria and Sweden – the countries taking the most refugees – Finland, Belgium, Luxembourg, the Netherlands, and Greece. President François Hollande of France did not attend the mini-summit because of scheduling problems, but it is understood that France is part of the pro-quotas vanguard.

The nine countries include the EU’s wealthiest. The EU-Turkey summit agreed to pay Turkey €3bn (£1.4bn) in return for a deal that would see Ankara patrolling the Aegean borders with Greece – the main point of entry to the EU for hundreds of thousands this year. Ankara is also to resume its long-stalled EU membership negotiations by the end of the year and, according to the schedule agreed, is to have visas waived by next year for Turks travelling to the EU. In response, the EU will be able to start deporting “illegal migrants” to Turkey by next summer under a fast-tracked “readmissions agreement”.

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No there there, just hot air. “..EU leaders made it clear there would be no shortcut in Turkey’s long-stalled bid to join the bloc. [..] And the Turks couldn’t say how effective the agreement would be in reducing the number of the migrants and refugees entering the EU..”

European Union Reaches Deal With Turkey on Migration (WSJ)

The EU on Sunday agreed with Turkey’s government for Ankara to take steps to cut the flow of migrants into Europe in exchange for EU cash and help with its bid to join the 28-nation bloc. EU leaders hailed the agreement as a key step toward substantially reducing the number of asylum seekers entering the bloc, while Turkey’s Prime Minister Ahmet Davutoglu said Sunday’s summit marked a historic new beginning in the often fraught relations between Brussels and Ankara. Yet the continued lack of trust on both sides remained evident, as EU leaders made it clear there would be no shortcut in Turkey’s long-stalled bid to join the bloc.

“The issue hasn’t changed,” French President François Hollande said after leaving the summit to return to Paris for global climate talks. “There is no reason either to accelerate or to slow it down.” And the Turks couldn’t say how effective the agreement would be in reducing the number of the migrants and refugees entering the EU via Turkey. EU officials have said cooperation with Turkey is the best way to reduce migrant flows, arguing that Ankara was very effective in previous years in preventing the outflow of refugees from the country. Alongside fresh efforts to tighten their external borders, EU officials hope the Turkey agreement can help turn the tide in the bloc’s migration crisis, the biggest since the aftermath of World War II.

[..] it appeared that substantial efforts would be required to turn Sunday’s agreement into reality. European Council President Donald Tusk said the EU will closely watch Turkey’s implementation of the deal and will review Ankara’s actions on a monthly basis. EU governments are also still at loggerheads over who would pay the €3 billion Turkey is to receive for its cooperation. Moreover, Turkey must complete dozens of EU requirements to win a recommendation for visa-free access to the bloc by autumn of 2016. Even then, a final decision will need backing of all 28 member states. Meanwhile, Mr. Davutoglu acknowledged he couldn’t promise the number of migrants heading into Europe via Turkey would fall. “Nobody can guarantee a drop,” he said of the refugees heading west from war-torn Syria.

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He’s simply right.

Tsipras Takes On Turkey’s Davutoglu On Twitter (AP)

A highly unusual online exchange took place on Twitter between the prime ministers of Greece and Turkey late Sunday before the former deleted his tweets – but only from the English version of his account. The official English-speaking account of Greek prime minister Alexis Tsipras (@Tsipras_eu) posted four tweets addressed to his Turkish counterpart Ahmet Davutoglu, needling him about Turkey’s downing of a Russian jet and Turkey’s violations of Greek airspace. “To Prime Minister Davutoglu: Fortunately our pilots are not mercurial as yours against the Russians #EuTurkey” Tsipras tweeted. Both prime ministers attended an EU-Turkey summit on refugees in Brussels Sunday. Tsipras did not explain whether his tweets reproduced a conversation between the two or were written especially for Twitter.

“What is happening in the Aegean is outrageous and unbelievable #EUTurkey” Tsipras continued. “We’re spending billions on weapons. You -to violate our airspace, we -to intercept you #EUTurkey” Tsipras said in a third tweet, referring to intrusions of Turkish planes into Greek airspace, which Turkey contests, and Greek and Turkish pilots frequently buzzing each other. Tsipras said the two countries should focus on saving refugees, not on weapons. “We have the most modern aerial weapons systems–and yet, on the ground, we can’t catch traffickers who drown innocent people #EUTurkey,” the Greek premier said in a fourth tweet. Davutoglu chose to respond to only the first tweet and not engage in a detailed dialogue.

“Comments on pilots by @atsipras seem hardly in tune with the spirit of the day. Alexis: let us focus on our positive agenda,” @Ahmet_Davutoglu responded. Then, the @Tsipras_EU account deleted the four tweets, which have remained posted, however, in Tsipras’ Greek language account, @atsipras. The deletion sparked further furious tweeting, with comments such as “who is handling your account?” being the most common. Then, the English account posted further tweets, but less controversial this time. “Important Summit today for the EU, Turkey and our broader region #EUTurkey” A last Tsipras tweet obliquely referred to the deleted ones: “We are in the same neighborhood and we have to talk honestly so we can reach solutions #EUTurkey.”

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But the disgrace goes on. And it’s ours, you, me, everyone. Want to protest something?

As the World Turns Away, Refugees are Still Drowning in the Mediterranean (HRW)

Her name was Sena. She was four years old. She was wearing blue trousers and a red shirt. She drowned in a shipwreck on November 18 in the Aegean Sea off Bodrum, Turkey. His name was Aylan. He was three years old. He drowned on September 2nd, along with his mother and his five-year-old brother. Like Sena, he was Syrian, dressed in blue and red, and travelling with his family on a desperate journey to reach safety and a future in Europe. The picture of his tiny lifeless body washed up on shore appeared to shake Europe’s—indeed, the world’s—conscience. Yet at least 100 more children, including Sena, have drowned in the Aegean in the weeks since. This year has seen an unprecedented number of asylum seekers and migrants—over 712,000 as of this week—crossing from Turkey to the Greek islands, most of them in overcrowded flimsy rubber dinghies.

One-quarter of those risking their lives are children. We have witnessed an unbearable death toll this year, with at least 585 people missing or lost in the Aegean, most of them since Aylan’s death. War, persecution, geopolitics, dangerous smuggler tactics, the weather – all of these factors contribute to the surge in arrivals as well as the number of lives lost. The UN refugee agency, UNHCR, estimates that 60% of those coming to Greece by sea are Syrians, while 24% are from Afghanistan. The response of the European Union has to be multifaceted. It should include measures to reduce the need for dangerous journeys and tackle the root causes of refugee and migration flows in a way that respects human rights.

But the immediate imperative has to be to save lives. Turkish and Greek coast guard boats are out there every day patrolling the waters. And various EU countries have sent boats, personnel and other equipment to participate in Operation Poseidon in the Aegean, a mission of the EU’s external border agency Frontex. Combined, these actions have saved tens of thousands of lives. I’ve seen a burly Portuguese coast guard officer gently take a baby from her mother’s arms after a rescue. I’ve observed the professionalism of Norwegian police officers on patrol for Frontex. A colleague of mine was impressed by the way Greek coast guard officers handled two difficult rescues. But more needs to be done.

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May 272015
 
 May 27, 2015  Posted by at 9:46 am Finance Tagged with: , , , , , , , , , , ,  


Walker Evans Shoeshine stand, Southeastern US 1936

China Blows Its Debt Bubble Bigger (Pesek)
Bernanke: No Risk Of Hard Landing In China (Reuters)
Greece May Delay IMF Payments Till The End Of June (Guardian)
Greece’s Creditors Must ‘Get Their Act Together’, Says Varoufakis (AFP)
Steve Keen: Varoufakis Battles ‘Divorce Lawyer’ Style Austerity Talks (CNBC)
Juncker Questions Varoufakis, Tsipras (Kathimerini)
Greek Default, European Bankruptcy (Jacques Sapir)
A Parallel Currency For Greece: Part I (VoxEU)
Half Of Greeks Cover Their Needs From Their Deposits (Kathimerini)
EU Funds At Risk Due To Project Payment Freeze By Athens (Kathimerini)
Target Of Greek Scorn Shapes Nation’s Fate As IMF’s Storm Chaser (Bloomberg)
Landlords Enjoy £14 Billion Tax Breaks In UK Buy-To-Let Expansion (Guardian)
Corruptionomics in Italy (Alessio Terzi)
Robert Mundell, Evil Genius Of The Euro (Greg Palast, 2012)
In EU, Reform Means Different Things To Member Countries (Guardian)
Big Oil Bosses’ Bonuses Linked To $1 Trillion Spending on Drilling (Guardian)
Why Finance Is Too Much Of A Good Thing (Martin Wolf)
Canada’s Economy Out Of The Woods? Think Again (CNBC)
FIFA Officials Arrested on Corruption Charges; Face Extradition to US (NY Times)
Can Organic Farming Counteract Carbon Emissions? (WSJ)

“Even among China’s many questionable credit vehicles, local-government financing vehicles are a standout.”

China Blows Its Debt Bubble Bigger (Pesek)

There are plenty of reasons one could argue China isn’t on the verge of a debt crisis: The country has $3.7 trillion in currency reserves, a closed financial system and ambitious leaders who claim to be on the case. And doesn’t the biggest rally in Chinese stocks since 2008 count for anything? But like Japan and other highly-indebted countries that have struggled to deleverage, China isn’t showing the requisite tolerance for pain. A case in point was the government’s May 15 decision to order banks to prop up the same local-government financing vehicles, or LGFVs, that it claimed to be reining in. Then the People’s Bank of China decided this week to guide the three-month Shanghai Interbank Offered Rate to its lowest level since 2008.

By manipulating “shibor” in this way, the People’s Bank of China is helping regional leaders accelerate their unsustainable borrowing. Neither of these steps will help China avoid a Japan-like crisis. Rather, they are likely to ensure a belated financial reckoning in the years ahead with the potential to shake the global economy. The encouragement of local government borrowing is especially alarming. Even among China’s many questionable credit vehicles, LGFVs are a standout. They allow provincial governments to use state-owned resources and assets, like land, to borrow from banks. LGFVs have become a potent symbol of the country’s post-2008 overindulgence in debt, with local government obligations now exceeding the entire German economy.

The Chinese government has also been urging banks to increase lending to borrowers with liquidity troubles, relaxing rules for companies to conduct off-balance-sheet borrowing and prodding the PBOC to do whatever it takes to cap local-government bond yields. Meanwhile, by allowing local government to shift their LGFV debt to fresh bonds, the Chinese government has eliminated any remaining semblance of transparency in those markets. Entrepreneurial government officials who want to raise some cash to fund dubious projects now have a license to do so without leaving a paper trail.

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Meet the expert.

Bernanke: No Risk Of Hard Landing In China (Reuters)

Former Federal Reserve Chairman Ben Bernanke said that China’s economic slowdown should not worry markets as there was no risk of a hard landing, and emphasized that a move to raise U.S. rates should be viewed as a positive sign for the world’s largest economy. Bernanke, who participated in an open interview at a private-sector forum in Seoul on Wednesday, said the expected U.S. rate hike would be “anticlimactic” when it happens and that there would only be minor negative impact on South Korea. “There may be some volatility. Countries like Korea are very well placed because it has very good policy, good institutions. It’s not weak or underdeveloped and doesn’t know how to handle capital flows.”

A Fed rate hike, expected by markets before the end of this year, would be something to cheer about, said Bernanke, who now works at the Brookings Institution, bond giant Pimco and hedge fund Citadel. “I don’t know when (the rate hike will come), but when that begins, that’s good news, not bad news because it means the U.S. economy is strong enough.” Bernanke also said the economic slowdown in China is necessary as it needs to change its growth model to be more sustainable in the long term. “China was growing 10% a year. And it was doing that through heavy capital investment, steel plants and so on. Very export oriented,” he said. “As the country gets more rich and sophisticated that kind of growth is no longer successful.”

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First move in a while? Promptly denied in Athens.

Greece May Delay IMF Payments Till The End Of June (Guardian)

Greece could secure vital weeks to negotiate a rescue deal with its creditors if Athens is able to delay repayments worth €1.6bn to the IMF, as critical deadlines approach. The proposal to combine four IMF repayments due in June and delay payment until the end of the month would win more time for vital debt talks that resumed on Tuesday. Greece must repay €300m on 5 June, the first of four instalments due next month. The IMF, its biggest creditor after the European Union, often waits a month before receiving funds from debtor countries. A senior eurozone official close to the talks with Athens told Reuters: “There is the possibility of putting together several payments that Greece would need to make to the IMF in the course of June and then just make one payment.”

The news agency said a second official close to the talks also acknowledged that a payment delay was a possibility. The first official said: “That’s basically a technical treasury exercise and they could tell the IMF that this is how they want to do it and the IMF would probably have to be OK with that.” Shut out of international markets, Athens has conceded that it will miss the 5 June payment without new loans from the EU, which is demanding reforms that will make the country’s debt sustainable. Last week, the interior minister, Nikos Voutsis, a longstanding ally of the prime minister, Alexis Tsipras, said the country needed to strike a deal with its European partners within the next couple of weeks or it would default on its IMF repayments. In remarks that heightened the possibility of a default, he said: “This money will not be given and is not there to be given.”

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“It’s about time the institutions, in particular the IMF, get their act together..”

Greece’s Creditors Must ‘Get Their Act Together’, Says Varoufakis (AFP)

Greece’s creditors must “get their act together” and help produce a new loan deal for the cash-strapped country, Finance Minister Yanis Varoufakis said Tuesday. “It’s about time the institutions, in particular the IMF, get their act together, and come to an agreement with us,” the outspoken Varoufakis told CNN. Greece’s radical left government in recent days has sent conflicting messages on its finances as the state is gradually running out of money. The cash crunch has been caused by the government’s inability to agree with its international creditors on reforms that would unlock some €7.2 billion in promised bailout cash.

Over the weekend, a cabinet minister said Greece had “no money” to make a series of repayments to the IMF from June 5. “The instalments for the IMF in June are (overall) €1.6 billion. This money will not be given. There isn’t any to be given. This is a known fact,” Interior Minister Nikos Voutsis said on Sunday. A day later, a government spokesman insisted the country would keep up with its payments for as long as it could. “To the extent that we are able to pay, we will keep on repaying these obligations,” government spokesman Gabriel Sakellaridis told reporters. Varoufakis on Tuesday denied that Greece is about to run out of money. “Our state, as a result of huge sacrifices by the Greek people, has managed to live within its means,” he said.

“We will make the payment because I have no doubt that we will have an agreement,” he added. Talks in Brussels over the Greek reform list are to resume on Tuesday. According to Athens, the two sides are still apart on tax issues, social insurance, labour rights and the size of Greece’s budget surplus. The government hopes to secure an agreement by early June at the latest.

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“Mainly his frustration, the fact that the one thing that he can’t discuss with the finance ministers of Europe is economics..”

Steve Keen: Varoufakis Battles ‘Divorce Lawyer’ Style Austerity Talks (CNBC)

Greece’s controversial finance minister, Yanis Varoufakis, has blamed the euro zone’s insistence on greater austerity measures as the real reason why talks with lenders are stalling, and not any lack of willingness on Greece’s part to implement reforms. In a blog post published Monday, Varoufakis said the Greek government’s negotiations with its creditors have been entirely misrepresented as “unwilling” by the world’s media when Athens is actually very keen to put economic reforms in place. “The problem is simple: Greece’s creditors insist on even greater austerity for this year and beyond – an approach that would impede recovery, obstruct growth, worsen the debt-deflationary cycle, and, in the end, erode Greeks’ willingness and ability to see through the reform agenda that the country so desperately needs,” Varoufakis said in a Project Syndicate blog post, published on Monday.

“Our government cannot – and will not – accept a cure that has proven itself over five long years to be worse than the disease,” he added. At the same time, former colleague, fellow economist and close friend of Varoufakis, Steve Keen said the finance minister was frustrated with the progress of Greece’s talks with the euro zone, adding Varoufakis had compared the talks to dealing with “divorce lawyers”. Keen, chief economist of the Institute of Dynamic Economic Analysis (IDEA) who is credited with forecasting the economic crisis from as early as 2005, said the finance ministers of Europe refused to discuss certain euro policies, according to Varoufakis.

Keen, who also heads up the school of economics, history and politics at Kingston University in London, first met Varoufakis when they both worked as lecturers at Sydney University in the late 1980s. When asked what they mainly discuss at the moment, Keen said, “Mainly his frustration, the fact that the one thing that he can’t discuss with the finance ministers of Europe is economics,” he told CNBC. “He goes inside, he is expected to be discussing what the economic impact of the policies of the euro are and how to get a better set of policies, living within the confines of the euro and the entire European Union system, and he said they simply won’t discuss it. He said it is like walking into a bunch of divorce lawyers, it is not anything like what you think finance ministers should be talking about,” Keen said, adding that he thought current austerity reforms being suggested by the euro zone were a “fantasy”.

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Way beyond his mandate. Still wondering how that became so accepted in Europe.

Juncker Questions Varoufakis, Tsipras (Kathimerini)

As Greece’s negotiations with its creditors enter the most critical phase, the country’s finance minister created fresh confusion on Tuesday with statements regarding possible tax reforms which were almost immediately revoked. Meanwhile, fuelling speculation about how much longer Varoufakis can stay in the crucial post of finance minister, European Commission President Jean-Claude Juncker declared that he was “not helping the process.” “Mr Varoufakis is the finance minister of a country that has to confront huge problems and he doesn’t give the feeling that he knows that,” Juncker told the MNI news agency. Asked by the MNI reporter whether he trusted Prime Minister Alexis Tsipras, Juncker took 14 seconds to answer “yes” but said Tsipras was becoming “increasingly responsible.”

In the interview Juncker also presented his opinions on what concessions should be made from each side in the tough negotiations while saying it was imperative to achieve a deal that includes the International Monetary Fund, which is awaiting a €300 million repayment from Greece next week. Referring to proposed changes to the Greek value-added tax system that are under discussion, Juncker said these reforms must yield €1.8 billion, or 1% of gross domestic product, in order to narrow a fiscal gap. He said pension reform was also crucial, pointing to the large proportion of early retirements in Greece in particular, while suggesting that labor reforms – another sticking point – could be postponed until the fall.

The Brussels Group negotiations resume on Wednesday with a Euro Working Group teleconference expected to take place on Thursday. In Athens, government sources said they expected a deal by the weekend so an emergency Eurogroup can be held next Tuesday. But confusion about the details such a deal would entail was deepened by Varoufakis. The minister told a press conference the government was considering introducing a “small” levy on ATM withdrawals. Two hours after the statement, his ministry said that the idea of taxing bank transactions had been proposed during negotiations but was withdrawn following “objections by the Finance Ministry.”

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“..one can see a preference emerging for an austerity which sweeps everything away wherever it passes.”

Greek Default, European Bankruptcy (Jacques Sapir)

The negotiations with Greece have been lead against any good sense or, more exactly, against any democratic good sense (which we are forced to agree is not quite the same thing). There have been attempts to discredit, to threaten, even to corrupt the Greek negotiators. These negotiations are actually being held in the greatest of obscurity. We do not have at disposal the minutes of the declarations of the participants, and one leaves it over to the press the produce “leaks“ the content of which is uncontrollable, precisely because of the lack of minutes. Yannis Varoufakis has expressed this quite well on his blog, admitting that he taped the negotiations so that one day we will know what to make out of the behavior of all parties involved.

“And maybe that we should question the European institutions, where decisions of fundamental importance are being taken, in the name of the European citizens, but minutes of which are neither taken down nor published. Secrecy and a credulous press are not good harbingers for European democracy.” Considering that Varoufakis is in reality a defender of the European project, one must understand, and measure the amplitude and the reach of his criticism. In effect, it is European democracy, not so much as a principle (already badly harmed since the 2005 refusal to take into account the referendums in France and in the Netherlands) but as a system of operational rules, with the purpose of ensuring the responsibility of actors for their acts, which is absent today. We know quite well that without responsibility there is democracy no longer.

What Varoufakis is saying, is that the European Union is no longer, in its day to day functioning, a democratic system. But the failure also concerns the aims of the European Union. In the case of Greece, one pretends officially wanting to keep the country in the Eurozone. But, in fact, and for various reasons, one can see a preference emerging for an austerity which sweeps everything away wherever it passes. Greece’s position has received the support of many economists and even the IMF has considered that on a number of points, the Greek government was right. But, nothing doing. It is all happening as if the German government, it must be said with the help of the French government which is behaving – alas – in this instance as the most eager of vassal, as the lowest of lackeys, were seeking to impose at any price upon ALL the countries of the Eurozone the death-bringing austerity which is its policy.

And one can understand that concessions to Greece would immediately entail demands emanating from Spain. In this latter country, Podemos, the party coming out of the movement of the indignés has carried away on this Sunday, May 24, a few beautiful victories which are rendering the position of the Spanish Prime Minister, Rajoy, ever more fragile. But this is true also of Portugal and Italy. Concessions to Greece would signal the beginning of a wholesale putting into question of austerity, something the German government doesn’t want to happen under any pretext. For ideological reasons, but also for some very material ones.

What is profiling itself on the horizon is not a Greek default, or more exactly, not only a Greek default. We are witnessing the bankruptcy of the Europeist ideology, and of the European Union as well. Through the Greek default, we will be witnessing a defaulting of the politics of the European Union, taken hostage by Germany. So that this default will be a European default, as it will signal the end of a certain idea of the European Union and will open a deep and durable crisis within Europe. European institutions will be affected in their legitimacy. This default will be the basis of the coming revolution.

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A useful overview that includes Cochrane, Parenteau and Varoufakis’ ideas.

A Parallel Currency For Greece: Part I (VoxEU)

Absent a deal with creditors, very soon, short of cash, the Greek government might default on its debt. To prevent this from happening, and to avoid taking new extra doses of useless and painful austerity, Athens could be bound to resort to the introduction of some kind of new domestic currency – in parallel to the euro – for the government to be able to make payments to public employees and pensioners while freeing up the euros needed to pay out its creditors. The ECB has not denied this possibility. Recently, ECB sources have unofficially discussed the issue with the media in some detail (albeit anonymously), and executive board member Yves Mersch has referred to a parallel currency for Greece as one of “the exceptional tools that any government can consider if it has no other options,” noting that all these tools bear high costs.

Is this really so? Is it really the case that a parallel currency would be worse than the current medicine Greece is taking (and is set to be taking for an indefinite future)? A parallel currency per se would neither prevent the risk of Greece’s disorderly default nor automatically help it out of depression. But not all parallel currencies are born equal, and there are various ways to design a parallel currency, each bearing significantly different implications. Below we compare the proposals currently on the table and discuss how a parallel (quasi) currency could be designed to promote Greece’s economic recovery. The issue is relevant for all countries suffering a weak economic activity, with no autonomous monetary policy, and limited fiscal space.

John Cochrane (2015) considers the possibility that the Greek government issues small cuts, zero-coupon bonds as promises to repay the bearer an equivalent amount of euros at some future date (IOUs). These IOUs could take the form of paper securities or electronic book entries in bank accounts, and the government could roll them over every year, just as for any type of debt obligation. The IOUs could be used to pay public salaries, pensions, and social transfers as well as to recapitalise or lend to banks. The IOUs would trade at a discount, but if the government accepted them at face value for tax payments, the discount might not be large. Mostly, the discount would reflect the risk that Greece either reneges on its commitment to accept its own debt for tax payments or suspends the roll over, thereby defaulting on the new debt. As Cochrane notices, introducing the IOUs would amount to creating a separate or dual currency that would allow Greece not to leave the Eurozone.

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The other half doesn’t have any…

Half Of Greeks Cover Their Needs From Their Deposits (Kathimerini)

Greek salaried workers cannot buy what they want but, rather, have to limit themselves to what they can afford on their reduced disposable income, a survey by the Labor Institute of the General Confederation of Greek Labor (GSEE) and the Association of Working Consumers of Greece (EEKE) showed on Tuesday. Crucially, 47% of consumers surveyed said they have relied on their savings to cover their needs in the past few months, while 16% were forced to borrow to spend, as the reduction of incomes continued in 2015 for more than half of Greece’s wage-earners (53%), the survey conducted in mid-February revealed – though this is markedly better than the 70% rate recorded last September.

In terms of expectations for the current quarter, consumers (who responded just three or four weeks after the change in government) said that things could not get much worse: Three in four (75%) said incomes would remain stable (from 57% in September), 16% expected a decline (from 40% five months earlier) and 9% even expected to see their incomes rise.

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To be filed under ‘irony’?!

EU Funds At Risk Due To Project Payment Freeze By Athens (Kathimerini)

Greece runs the immediate risk of missing out on €1 billion worth of EU subsidies this year from the previous support framework, which expires on December 31, as a payment freeze by the state has blocked the proper implementation of projects that will have to finish by the end of the year. Although the subsidy absorption rate had improved considerably in recent years, reaching a level of 85%, failure to stick to that rate this year – the last of the extended 2007-2013 program – would hamper Greece’s capacity to utilize the EU funds. At greater risk are not only the highway and environmental projects but also investment plans that are being implemented by the private sector. Economic uncertainty has suspended any resolve for investing, resulting in an extensive inability to absorb the funds Brussels has set aside for Greece.

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Hit man.

Target Of Greek Scorn Shapes Nation’s Fate As IMF’s Storm Chaser (Bloomberg)

When the IMF’s point man on Greece, Poul Thomsen, rebuffed the nation’s proposal in December to unlock more bailout funding, he wound up making his job even tougher. The Greek government’s failure then to secure an agreement with its creditors helped pave the way for its defeat in January by the anti-austerity Syriza party. Instead of negotiating with Greece’s establishment, Thomsen finds himself facing a novice group whose leaders have likened the lenders’ conditions to “fiscal waterboarding.” Now the 60-year-old Danish economist is holding his ground against Syriza economic plans that fail to meet IMF criteria for putting Greece’s debt on a sustainable path.

And this time, the nation’s membership in the euro and the IMF’s credibility hang in the balance as Greece runs low on cash and European leaders look to the fund’s blessing before disbursing more bailout money. The situation has Thomsen, whose thesis adviser was an architect of the euro, in the role of helping decide the currency’s fate. Thomsen has been closely involved with the Greek bailout since its inception in 2010, and often represents the fund at meetings of euro-area finance ministers, where officials from the European Commission and ECB also typically attend. Those two institutions and the IMF form the so-called troika of Greek creditors.

“That deal in December was a hugely missed opportunity,” said Martin Edwards, an international-relations professor at Seton Hall University in South Orange, New Jersey, who has researched IMF lending programs. “They moved from having a moderately cooperative government to one that wasn’t going to be in their corner. This is a problem of their own devising.”

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“A fraction of this amount would go a long way towards fixing our housing shortage, and giving millions of priced-out families and young people the chance of a stable home.”

Landlords Enjoy £14 Billion Tax Breaks In UK Buy-To-Let Expansion (Guardian)

Landlords enjoyed a record £14bn in tax breaks in 2013, according to figures revealing the expansion of the UK’s buy-to-let market in the aftermath of the financial crisis. Some £6.3bn was declared against the cost of mortgage interest alone in the 2012-13 financial year, according to information obtained by the Guardian from HMRC through a freedom of information request. The figures also reveal that the number of landlords has increased by more than one-third over the past six years. In the 2012-13 financial year, 2.1 million taxpayers declared income from property, up from 1.5 million in 2007-08.

The anti-homelessness charity Shelter has called for the government to conduct an urgent review of the tax treatment of landlords, who can also deduct the cost of insurance, maintenance and repairs, utility bills, legal fees and other expenses from their income. Owner-occupiers are not entitled to the same privileges. In response to the figures, Campbell Robb, Shelter’s chief executive, said: “In the context of looming welfare cuts and a dramatic shortage of homes, all those struggling to keep up with sky-high housing costs will be shocked to hear that a massive £14bn has been given in tax breaks for landlords in just a year.

“A fraction of this amount would go a long way towards fixing our housing shortage, and giving millions of priced-out families and young people the chance of a stable home. “In the Queen’s speech the new government must start to set out a comprehensive plan that will finally build the homes this country desperately needs, and an urgent review of these huge tax breaks must be part of this.”

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Masters of corruption.

Corruptionomics in Italy (Alessio Terzi)

In line with its National Reform Programme for the period 2015-16, Matteo Renzi’s government obtained parliament’s approval on a new anti-corruption law on May 21. We document the sheer size of corruption in Italy and argue that tackling it is not only a matter of fairness, but also crucial to boost the country’s potential output after three years of recession and almost two decades of stagnation. Experience from past success cases suggests that only forceful and comprehensive actions will succeed in bringing corruption under control.

The problem of corruption in Italy is real and large. Transparency International’s Corruption Perception Index, the most widely used indicator of corruption, shows how Italy occupies the last place in Europe and 69th in the world, on par with Romania, Bulgaria, and Greece. This picture is confirmed by other organisations. The World Bank’s indicator for Control of Corruption ranks Italy 95th out of 215 countries, again neck and neck with Greece, Romania, and Bulgaria. The WEF ranks Italy 102nd out of 144 countries on indicators related to ethics and corruption.

The economic consequences of corruption can be dissected in two classes: static and dynamic. Statically, corruption leads to the creation of deadweight losses, as it drives prices above their marginal cost of production. This implies a loss for both the public (e.g. in the form of investment projects being more expensive) and the private sector (e.g. in a bureaucratic procedure costing more to execute). The Italian Court of Auditors estimates these direct costs of corruption to be in the order of magnitude of €60bn per year, equivalent to roughly 4% of the country’s GDP.

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A timely reminder: “..when crises arise, economically disarmed nations have little to do but wipe away government regulations wholesale, privatize state industries en masse, slash taxes and send the European welfare state down the drain.”

Robert Mundell, Evil Genius Of The Euro (Greg Palast, 2012)

The idea that the euro has “failed” is dangerously naive. The euro is doing exactly what its progenitor – and the wealthy 1%-ers who adopted it – predicted and planned for it to do. That progenitor is former University of Chicago economist Robert Mundell. The architect of “supply-side economics” is now a professor at Columbia University, but I knew him through his connection to my Chicago professor, Milton Friedman, back before Mundell’s research on currencies and exchange rates had produced the blueprint for European monetary union and a common European currency. Mundell, then, was more concerned with his bathroom arrangements. Professor Mundell, who has both a Nobel Prize and an ancient villa in Tuscany, told me, incensed:

“They won’t even let me have a toilet. They’ve got rules that tell me I can’t have a toilet in this room! Can you imagine?” As it happens, I can’t. But I don’t have an Italian villa, so I can’t imagine the frustrations of bylaws governing commode placement. But Mundell, a can-do Canadian-American, intended to do something about it: come up with a weapon that would blow away government rules and labor regulations. (He really hated the union plumbers who charged a bundle to move his throne.) “It’s very hard to fire workers in Europe,” he complained. His answer: the euro. The euro would really do its work when crises hit, Mundell explained. Removing a government’s control over currency would prevent nasty little elected officials from using Keynesian monetary and fiscal juice to pull a nation out of recession.

“It puts monetary policy out of the reach of politicians,” he said. “[And] without fiscal policy, the only way nations can keep jobs is by the competitive reduction of rules on business.” He cited labor laws, environmental regulations and, of course, taxes. All would be flushed away by the euro. Democracy would not be allowed to interfere with the marketplace – or the plumbing. [..] The supply-side economics pioneered by Mundell became the theoretical template for Reaganomics – or as George Bush the Elder called it, “voodoo economics”: the magical belief in free-market nostrums that also inspired the policies of Mrs Thatcher. Mundell explained to me that, in fact, the euro is of a piece with Reaganomics: “Monetary discipline forces fiscal discipline on the politicians as well.” And when crises arise, economically disarmed nations have little to do but wipe away government regulations wholesale, privatize state industries en masse, slash taxes and send the European welfare state down the drain.

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Which is why the EU has no future.

In EU, Reform Means Different Things To Member Countries (Guardian)

The most over-used word in Brussels is “reform”. There is not a leader in the EU who does not urge reform of the union. The trouble is they all mean different things when they declaim the r-word. A German leader urges reform and means belt-tightening, structural change, balanced budgets in the push for global competitiveness. If you’re a French or Italian leader, reform means less austerity, more public spending, policies geared to growth not contraction, to jobs and not more unemployment. And David Cameron, who couches his referendum campaign in the need to reform the EU, of course, means a new deal for Britain.

Reform means concessions to UK exceptionalism in the EU, with 27 countries recognising and adjusting to Britain’s uniqueness in Europe. In the arguments about the looming renegotiation of Britain’s position in the EU, the emphasis until now has been on form rather than substance, the shape that a deal might take rather than what it might bring. This has focused on the calls for reopening the EU treaties, changing the terms of British EU membership, conferring a new legal order on that status. It is still not clear what might happen because Cameron has been deliberately vague about what he wants, exploring what the others – by the other 27 leaders, Cameron usually means Angela Merkel – might be prepared to give.

Cameron’s argument is that treaty change is necessary because of the impact of the euro crisis, that the eurozone needs a radical shift towards greater political and fiscal integration to shore up the single currency. Of course, Cameron speaks with a forked tongue because his argument is aimed at exploiting that renegotiation to rewrite the terms of British membership. Treaty change in any major way will not happen. It is too difficult. It will take too long. And eurozone leaders are also intensely irritated by the lecturing from Cameron and George Osborne, the chancellor, about how to put their house in order.

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Ain’t we smart?

Big Oil Bosses’ Bonuses Linked To $1 Trillion Spending on Drilling (Guardian)

Bosses at the world’s big five oil companies have been showered with bonus payouts linked to a $1tn crescendo of spending on fossil fuel exploration and extraction over nine years, according to Guardian analysis of company reports. The unprecedented push to bring untapped reserves into production, and to exploit new and undiscovered fields, involves some of the most complex feats of engineering ever attempted. It also reflects how confident Exxon Mobil, Shell, Chevron, Total and BP are that demand will remain high for decades to come.

The big oil groups are pressing ahead with investments despite the International Energy Agency (IEA) estimating that two-thirds of proven fossil fuel reserves will need to remain in the ground to prevent the earth from warming 2C above pre-industrial levels – a proposed temperature limit beyond which scientists warn of spiralling and irreversible climate change. Multi-billion-dollar capital projects amount to huge, long-term bets by the big five that exorbitant costs associated with unlocking hydrocarbon reserves in some of the most inaccessible locations on the planet can eventually be recouped and converted into profits. Bonuses for chief executives at all five firms are tied to the achievement of delivery milestones in the construction and deployment of such projects.

Shell’s Ben van Beurden, for example, last year received a pay deal worth $32.2m, including bonuses linked to delivering “a high proportion of flagship projects on time and on budget”. These are thought to include four platforms floating 1,000 metres or more above deepwater wells in the Gulf of Mexico, Gulf of Guinea and South China Sea. Similarly, BP’s Bob Dudley was awarded a pay deal worth $15.3m, with bonuses linked to seven “major projects”, thought to include Sunrise, a tar sands joint venture in Canada, as well as projects in Angola, Azerbaijan, the Gulf of Mexico and the North Sea.

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“The first is direct damage: an unsustainable credit-fuelled boom, say. Another is indirect damage that results from a breakdown in trust in a financial arrangements..”

Why Finance Is Too Much Of A Good Thing (Martin Wolf)

An organised society offers two ways of becoming rich. The normal way has been to exercise monopoly power. Historically, monopoly control over land, usually seized by force, has been the main route to wealth. A competitive market economy offers a socially more desirable alternative: invention and production of goods and services. Alas, it is also possible to extract rents in markets. The financial sector with its complexity and implicit subsidies is in an excellent position to do so. But such practices do not only shift money from a large number of poorer people to a smaller number of richer ones. It may also gravely damage the economy.

This is the argument of Luigi Zingales of Chicago Booth School, a strong believer in free markets, in his presidential address to the American Finance Association. The harm takes two forms. The first is direct damage: an unsustainable credit-fuelled boom, say. Another is indirect damage that results from a breakdown in trust in a financial arrangements, due to crises, pervasive “duping”, or both. Prof Zingales emphasises the indirect costs. He argues that a vicious circle may emerge between public outrage, rent extraction and back to yet more outrage. When outrage is high, it is difficult to maintain prompt and unbiased settlement of contracts. Without public support, financiers must seek political protection. But only those who enjoy large rents can afford the lobbying.

Thus, in the face of public resentment, only rent-extracting finance – above all, the mightiest banks – survive. Inevitably, this further fuels the outrage. None of this is to deny that finance is essential to any civilised and prosperous society. On the contrary, it is the very importance of finance that makes the abuses so dangerous. Indeed, there is substantial evidence that a rise in credit relative to gross domestic product initially raises economic growth. But this relationship appears to reverse once credit exceeds about 100% of GDP. Other researchers have shown that rapid credit growth is a significant predictor of a crisis.

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Beware housedold debt, hiding behind the housing bubble.

Canada’s Economy Out Of The Woods? Think Again (CNBC)

The state of Canada’s finances is back in focus this week with economists questioning whether the country has managed to combat a worrying rise in private debt. An independent policy think tank, called the Fraser Institute, made headlines last Wednesday when it described concerns as “overblown,” adding that there was little evidence that Canadian households were irresponsibly borrowing too much. However, that argument is now being challenged by David Madani, an economist focused on the north American nation at Capital Economics. He called the research “misleading” as it only showed the payments on debt interest, not the principal repayments which reduce the original loan amount.

“Principal repayments often represent a large portion of debt obligations, especially when it comes to housing mortgage debt,” he said in a note released on Monday. “Should market interest rates rise over the next several years, as we anticipate, household debt obligations will become much more onerous.” Canada’s economy has seen house prices and debt levels continue to climb despite the global financial crash of 2008. Former governor of the Bank of Canada, Mark Carney, warned of elevated household debt levels on several occasions during his tenure.

New statistics in March showed that Canadian households held roughly C$1.63 ($1.32) of credit market debt for every dollar of disposable income in the fourth quarter of 2014 – a record high, according to Statistics Canada who published the data. The country has also had to deal with a dramatic fall in the price of oil with its economy very much reliant on the commodity. The central bank delivered a rate cut in January and market participants are gearing up for another policy meeting this week. The current governor of the Bank of Canada, Stephen Poloz, said last week that this policy was “working” and that the cut would benefit households with a mortgage.

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Question: how did the NY times know where and when the arrests were going to take place?

FIFA Officials Arrested on Corruption Charges; Face Extradition to US (NY Times)

Swiss authorities conducted an extraordinary early-morning operation here Wednesday to arrest several top soccer officials and extradite them to the United States on federal corruption charges. As leaders of FIFA, soccer’s global governing body, gathered for their annual meeting, more than a dozen plain-clothed Swiss law enforcement officials arrived unannounced at the Baur au Lac hotel, an elegant five-star property with views of the Alps and Lake Zurich. They went to the front desk to get keys and proceeded upstairs to the rooms. The arrests were carried out peacefully, with at least two men being ushered out of the hotel without handcuffs. One FIFA official, Eduardo Li of Costa Rica, was led by the authorities from his room to a side-door exit of the hotel. He was allowed to bring his luggage, which was adorned with FIFA logos.

The charges allege widespread corruption in FIFA over the past two decades, involving bids for World Cups as well as marketing and broadcast deals, according to three law enforcement officials with direct knowledge of the case. The charges include wire fraud, racketeering and money laundering, and officials said they targeted members of FIFA’s powerful executive committee, which wields enormous power and does its business largely in secret. The arrests were a startling blow to FIFA, a multibillion-dollar organization that governs the world’s most popular sport but has been plagued by accusations of bribery for decades.

The inquiry is also a major threat to Sepp Blatter, FIFA’s longtime president who is generally recognized as the most powerful person in sports, though he was not charged. An election, seemingly pre-ordained to give him a fifth term as president, is scheduled for Friday. Prosecutors planned to unseal an indictment against more than 10 officials, not all of whom are in Zurich, law enforcement officials said. Among them are Jeffrey Webb of the Cayman Islands, a vice president of the executive committee; Eugenio Figueredo of Uruguay, who is also an executive committee vice president and until recently was the president of South America’s soccer association; and Jack Warner of Trinidad and Tobago, a former member of the executive committee who has been accused of numerous ethical violations.

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It can produce enough food for everyone, while at the same time cutting CO2 and toxicity in our food. It can not generate gigantic profits fro Big Ag and the chemical industry, though.

Can Organic Farming Counteract Carbon Emissions? (WSJ)

Organic practices could counteract the world’s yearly carbon dioxide output while producing the same amount of food as conventional farming, a new study suggests. The white paper by the Rodale Institute, a nonprofit that advocates for the use of organic practices, says that using “regenerative organic agriculture,” such as low or no-tillage, cover crops and crop rotation, will keep photosynthesized carbon dioxide in the soil instead of returning it to the atmosphere. Citing 75 studies from peer-reviewed journals, including its own 33-year Farm Systems Trial, Rodale Institute concluded that if all cropland were converted to the regenerative model it would sequester 40% of annual CO2 emissions; changing global pastures to that model would add another 71%, effectively overcompensating for the world’s yearly carbon dioxide emissions.

Michel Cavigelli, a research soil scientist at the USDA’s Agricultural Research Service, which has a slightly different 19-year side-by side study, says his research also shows that organic soil has higher carbon content than conventional but warns that the devil is in the details. For example, the USDA study tills the organic plot and that might cause the manure’s carbon to stay deeper in the soil. But the question organic farming always comes back to is whether farming without synthetic pesticides and genetically modified organisms is really a viable way to feed the planet. Rodale Institute believes it can do that and better. In the longest-running study of its kind, Rodale’s Farming Systems Trial compares organic farming with conventional farming, by farming neighboring plots just as organic farmers and traditional farmers would.

That means its organic farming plot utilizes techniques like crop rotation and cover crops while the conventional plot uses common synthetic pesticides and genetically modified organisms. Both organic and conventional fields were divided into tilled and no-till areas to reflect that farmers use both practices. The findings show that organic farming yields are lower than conventional in the first few years, while conventional crops do better in the first years than they do later on. Over time the production equals out and with organic outperforming conventional farming production in years of drought (organic corn yields 31% more than conventional corn during drought).

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Mar 242015
 
 March 24, 2015  Posted by at 7:27 am Finance Tagged with: , , , , , , ,  


DPC Surf Avenue, Coney Island, NY 1903

The World’s Next Credit Crunch Could Make 2008 Look Like A Hiccup (Telegraph)
No Risk Too Big as Bond Traders Plot Escape From Negative Yields (Bloomberg)
Fed’s Fischer Says Rate Rise Probably Warranted by End-2015 (Bloomberg)
Shadow Banking System Shows Signs of Stabilizing After Collapse (Bloomberg)
The Unbearable Exuberance of China’s Markets (Pesek)
Oil Majors Pile On Record Debt To Plug Cash Shortfalls (FT)
Pension Funds Shun Bonds Just as Southeast Asia Needs Them Most (Bloomberg)
Hedge Funds Are Boosting Tech Valuations to Dangerous Heights (Bloomberg)
IMF, World Bank Throw Weight Behind China-Led Bank (CNBC)
Tsipras Raises Nazi War Reparations Claim At Berlin Press Conference (Guardian)
Why Greek Default Looms (BBC)
Draghi Rejects Accusation That ECB Is Blackmailing Greece (Bloomberg)
Merkel Points Tsipras Toward Deal With Greece’s Creditors (Bloomberg)
Barroso: Greece Should Blame Itself (CNBC)
Andalusia Election Increases Pressure on Spain’s Rajoy (Bloomberg)
‘The Fourth Reich’: What Some Europeans See When They Look at Germany (Spiegel)
Beijing to Close All Major Coal Power Plants to Curb Pollution (Bloomberg)

Or 1937.

The World’s Next Credit Crunch Could Make 2008 Look Like A Hiccup (Telegraph)

In 1937 the US was, economically speaking, an island, entire of itself; today, thanks to globalisation, the power of the dollar and a long period of ultra-loose monetary policy, it is a part of the main. Christine Lagarde, the head of the IMF, recently raised concerns in India about the ripple effect of Fed tightening on countries that have borrowed heavily in dollars and whose still-recovering economies remain vulnerable to a rate rise. And in 1937 the equity markets were the financial be-all and end-all; today they are dwarfed by the debt markets, which are, in turn, dwarfed by the derivatives markets. The total value of all global equities was around $70 trillion in June last year, according to the World Federation of Exchanges; meanwhile, the notional value of all outstanding derivatives contracts was more than $690 trillion.

It is worth noting that the vast majority (around four-fifths) of all existing derivatives contracts are based on interest rates. The derivatives market is the not the vast roulette table of popular perception. These financial instruments are essentially insurance policies – they are designed to protect the holder from adverse price movements. If you are worried about (to pick some unlikely examples) a strong euro, or expensive oil, or rising interest rates, you can buy a contract that pays out if your fears are realised. Managed well, the gain from the derivative should offset the loss from the underlying price movement. Nevertheless, the arguments employed by the derivatives industry sometimes sound similar to those employed by the pro-gun lobby: derivatives aren’t dangerous, it’s the people using them that you need to worry about. That’s not hugely reassuring.

What could go wrong? Let’s say that US interest rates do rise sooner and faster than the market expects. That means bond prices, which always move in the opposite direction to yields, will plummet. US Treasury bonds are like a mountain guide to which most other global securities are roped – if they fall, they take everything else with them. Who will get hurt? Everyone. But it’ll likely be the world’s banks, where even little mistakes can create big problems, that suffer the most pain. The European Banking Authority estimates that the average large European lender still has 27 times more assets than it does equity. This means that if the stuff on their balance sheets (including bonds and other securities priced off Treasury yields) turns out to be worth just 3.7pc less than was assumed, it will be time to order in the pizzas for late night discussions about bail-outs.

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Casino.

No Risk Too Big as Bond Traders Plot Escape From Negative Yields (Bloomberg)

In the negative-yield vortex that is the European bond market, investors are discovering just what lengths they’re willing to go to generate returns. Norway’s $870 billion sovereign wealth fund said this month that it added Nigeria and lifted its share of lower-rated company debt to the highest since at least 2006. Allianz SE, Europe’s biggest insurer, is shifting from German bunds to bulk up on mortgages. JPMorganis buying speculative-grade corporate debt to boost returns. With the ECB’s fight against deflation pushing yields on almost a third of the euro area’s $6.26 trillion of government bonds below zero, even the most risk-averse investors are taking chances on assets and regions that few would have considered just months ago.

That’s exposing more clients to the inevitable trade-off that comes with the lure of higher returns: the likelihood of deeper losses. “We are wandering into uncharted territory that’s subject to uncertainty and mistakes,” said Erik Weisman at MFS Investment Management. He’s buying debt with longer maturities and increasing his allocation of top-quality government holdings to Australia and New Zealand, which have some of the highest yields in the developed world. The shift is a consequence of how topsy-turvy the bond market has become as falling consumer prices and stubbornly high unemployment prompted the ECB to step up its quantitative easing with government debt purchases.

About €1.44 trillion sovereign debt, valued at about $1.9 trillion as of their issue dates, from Germany to Finland and even Slovakia, carry negative yields. That means the bonds guarantee losses for buyers who hold them to maturity. In effect, investors are betting the securities will appreciate in price before then, allowing them to sell at a profit before they come due. [..] The bond market worldwide is more vulnerable to losses than at any time on record, based a metric known as duration, index data compiled by Bank of America show. The risk has ballooned as issuers worldwide took advantage of the decline in borrowing costs to sell more and more longer-term bonds. This probably means we end up seeing all these reverse in a very unpleasant fashion,” Weisman said.

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The multi-voiced good cop bad cop narrative continues.

Fed’s Fischer Says Rate Rise Probably Warranted by End-2015 (Bloomberg)

Federal Reserve Vice Chairman Stanley Fischer said raising interest rates from near zero “likely will be warranted before the end of the year” and subsequent increases probably won’t be uniform or predictable. “A smooth path upward in the federal funds rate will almost certainly not be realized” as the economy encounters shocks such as the surprise plunge in oil prices, Fischer, said on Monday in remarks to the Economic Club of New York. Officials last week opened the door to a rate increase as soon as June, while also indicating in their forecasts they will go slow once they get started. Fischer’s comments are the first from Fed leadership since Chair Janet Yellen’s press conference after the Federal Open Market Committee meeting on Wednesday.

The Fed wants to be “reasonably confident” inflation is rising toward its 2% goal before moving. A stronger dollar could interfere by holding down import prices. Fisher, however, was unfazed by the strength of the dollar, which has advanced almost 5% this year on the Bloomberg Dollar Spot index. He argued that its rise reflected the performance of the U.S. economy and central bank bond buying in Europe and Japan, which will also benefit U.S. growth. “What is not acceptable is manipulating exchange rates – purely exchange rates – trying to use that as the sole means of generating growth,” Fischer told the audience. “That has not happened as far as we can tell in our partner countries.”

The dollar dropped against all its 16 major peers except the pound on Fischer’s comments on rate-increase timing, which he left vague and stressed would be data-dependent. “Whether it’s going to be June or September, or some later date, or some date in between, will depend on the data,” said Fischer, although he said labor market readings would be an important guide. The March payrolls report is due on April 3. “We’ve got two very positive numbers for the first quarter of 2015 and we’re waiting for another one,” said Fischer, 71, the former Bank of Israel governor who joined the Fed in May. U.S. employers added 534,000 new jobs in the first two months of 2015 and the jobless rate fell to 5.5% in February.

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Make it sound like a good thing, why don’t you?

Shadow Banking System Shows Signs of Stabilizing After Collapse (Bloomberg)

The financing markets that help ease most U.S. debt trading are showing signs of stabilizing after shrinking by almost 50% since the financial crisis. The amount, known as shadow banking, was $4.124 trillion in February and averaged $4.139 trillion over the past three months, according to data compiled by the Center for Financial Stability, a nonpartisan research group. The measure, which includes money-market funds, repurchase agreements and commercial paper, all adjusted for inflation, peaked at $7.61 trillion in March 2008. “The flicker of good news is that we are starting to see a bottom form and hopefully we will start to see a recovery,” Lawrence Goodman at the Center for Financial Stability.

“The damage is done and we still have a long ways to go for there to be re-engagement of market finance in the economy. The economy has been growing substantially below potential, in part because market finance has failed to provide the fuel to the economy.”
Federal Reserve officials last week cut their economic growth estimate for the fourth quarter from a year earlier to 2.3% to 2.7%, down from as much as 3% in December. Inflation will range from 0.6% to 0.8% at the end of this year, policy makers forecast, down from a range of 1% to 1.6% projected in December.

Global regulators have focused on reducing the footprint of shadow banking, which was viewed as a catalyst for the collapse of Lehman Brothers Holdings Inc. in 2008 that shook markets worldwide. In the process, market finance contracted to a degree that starved financial markets of liquidity and was detrimental to growth, according to the CFS. Repo agreements are a source of short-term finance for banks, allowing them to use securities as collateral for short-term loans from investors such as other banks or money-market mutual funds. The amount of securities financed through a part of the market known as tri-party repo averaged $1.62 trillion as of Feb. 10, compared with $1.58 trillion in January and down from $1.96 trillion in December 2012, according to data compiled by the Fed.

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The term ‘bubble’ doesn’t begin to describe it.

The Unbearable Exuberance of China’s Markets (Pesek)

Chinese investors are acting as giddy as Americans were on Dec. 5, 1996, the day Alan Greenspan made his infamous “irrational exuberance” dig at markets. Don’t take my word for it. Here’s what the country’s securities regulator said Friday, the day the Shanghai Composite Index rallied to its highest close since May 2008: “Investors should be cautious about market risks,” the China Securities Regulatory Commission said on its microblog. “We shouldn’t be thinking if we don’t buy now, we will miss it.” Not much ambiguity there, and yet Shanghai stocks rallied Monday, heading to their longest streak of gains since 2007. What gives? Beijing is making the same mistake Washington did 18-plus years ago by not clamping down on a stock-market boom that’s based more on leverage than reality.

Then-Federal Reserve Chairman’s Greenspan’s swipe at Wall Street froth was a halfhearted one – so cryptic, in fact, that many seasoned Fed reporters missed it. It came in the middle of a mind-numbingly boring speech about Japan’s 1980s bubble. For a couple of days, markets quaked at the prospect that the Fed might cut short the ongoing rally, which had assigned astronomical valuations to the dodgiest startups. But then Greenspan blew the endgame. Lawmakers were apoplectic over the Fed targeting stocks. Rather than stand his ground, Greenspan shut up and moved on. If the Fed had clamped down more assertively in the late 1990s – say, with stringent margin requirements – a Nasdaq crash might’ve been averted. Chastened investors might’ve been less inclined to overleverage in the decade that followed.

In Beijing, central bank governor Zhou Xiaochuan can’t afford to make the same mistake. Economic fundamentals aren’t driving this rally – political expedience is. Chinese growth is slowing – an early indicator of factory activity hit an 11-month low in March – Beijing is clamping down on credit and a property market that once seemed unstoppable is reeling. That leaves one place for Chinese to satisfy their urge to get rich quick: equities. And recent policy tweaks are helping them. In September, China reduced fees by more than half for individuals and institutions to open share accounts. At the same time, the futures exchange cut margin requirements for equity-index contracts. Last month, it trimmed the amount of cash banks must hold back from lending by 50 basis points to 19.5%.

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Everyone piles on debt. There’s nothing else left.

Oil Majors Pile On Record Debt To Plug Cash Shortfalls (FT)

The world’s biggest energy groups have sold record amounts of debt this year, taking advantage of historically low interest rates to plug cash shortfalls with borrowing, after a 50% plunge in oil prices. The total debt raised in the first two months of 2015 by large US and European oil and gas companies has jumped by more than 60% from the final three months of 2014. It outstrips the previous quarterly record set six years ago after the last price collapse, Morgan Stanley research shows. Sales by half a dozen of these companies, which include multibillion dollar bond offerings from ExxonMobil, Chevron, Total and BP, reached $31bn in January and February, accounting for almost half the $63bn raised by oil and gas groups globally.

The dominance of the majors also reflects the increasing difficulties faced by the smaller oil explorers, whose borrowing costs are rising. Gulf Keystone recently put itself up for sale and EnQuest had to renegotiate its banking covenants. Martijn Rats, analyst at the US bank, says some of the so-called oil “majors” could be preparing the ground for acquisitions, borrowing now to be able to act quickly should smaller, weakened groups become vulnerable to take over. Mr Rats said that mergers and acquisitions could pick up as early as the second half of this year: “As a result, it would seem reasonable for integrated oil companies to lock in extremely competitive rates of financing,” he said. Another reason for the high levels of issuance is that debt remains a relatively cheap way to cover spending on big projects and fund dividends as cash flow dwindles due to lower prices.

Apart from Italy’s Eni, which has said it will cut its dividend this year, most of the big groups have vowed to protect payouts to investors. They are also pressing suppliers to cut costs, delaying projects and selling assets. “If you see a protracted period of lower oil prices ahead, you will probably think that it takes a while for cost deflation to come through and restore cash flow, so the first thing you can do is use the balance sheet to borrow money to plug that gap,” said Mr Rats. The majors have made up a much larger share of overall oil and gas debt issuance, accounting for 48% of such fundraising this year, up from 30% in the last three months of 2014. By contrast, the share of state-owned oil companies has fallen to just 22% from 35% in the first quarter of last year.

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No more road building.

Pension Funds Shun Bonds Just as Southeast Asia Needs Them Most (Bloomberg)

The biggest state pension funds in Thailand and the Philippines are shifting money from bonds to stocks, which could push up the cost of government stimulus programs. The Social Security Office and Government Service Insurance System said they’re increasing holdings of shares, while the head of Indonesia’s BPJS Ketenagakerjaan said he sees the nation’s stock index rising 14% by year-end. Rupiah, baht and peso notes have lost money since the end of January, after handing investors respective returns of 13%, 9.9% and 6.6% last year, Bloomberg indexes show. “There has been frustration among domestic institutional investors about the falling returns on bonds,” Win Phromphaet, who manages 1.2 trillion baht ($37 billion) as Social Security Office’s head of investment in Bangkok, said.

“Large investors including SSO must quickly expand our investments in other riskier assets.” Appetite for sovereign debt is cooling just as Southeast Asian governments speed up construction plans in response to slowing growth in China and stuttering recoveries in Europe and Japan. Indonesian President Joko Widodo has added 100 trillion rupiah ($7.7 billion) of spending on projects including ports and power plants in his 2015 budget, Thailand’s military rulers are accelerating outlays on rail and roads and Philippine President Benigno Aquino is relying on new infrastructure to increase growth to 8% in his last two years in office.

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“Some of the valuations are mind-boggling..”

Hedge Funds Are Boosting Tech Valuations to Dangerous Heights (Bloomberg)

A flood of money from unconventional sources has sent valuations of late-stage technology startups, including Uber Technologies Inc. and Snapchat Inc., to levels that haven’t been seen since before the dot-com crash. Hedge funds and mutual funds that once shunned venture-style deals are flocking to the market’s hottest corner, paying 15 to 18 times projected sales for the year ahead in recent private-funding rounds, according to three people with knowledge of the matter. That compares with 10 to 12 times five years ago for the priciest companies, one said. While some of the startups may become profitable, others are consuming cash and could fail.

The torrid action is spurring talk that 15 years after the collapse of the Internet bubble, the market may be setting itself up for another bruising fall. “Some of the valuations are mind-boggling,” said Sven Weber, investment manager of the Menlo Park, California-based SharesPost 100 Fund, which backs late-stage tech startups. Companies now valued at 16 times future revenue could easily lose a third of their value in a market pullback that Weber and others say may occur in the next three years. The other people asked not to be named because they didn’t want to be seen criticizing competitors’ deals. Such worries have done little to cool the market. Investors’ appetites have been stoked by jackpots won in initial public offerings.

Among the biggest: an almost fourfold $3.2 billion paper profit earned by Silver Lake in Chinese e-commerce giant Alibaba’s record-breaking, $21.8 billion September IPO. It was a quick kill for Silver Lake, coming three years after the private-equity firm’s investment in the company. Private values also are soaring. Online scrapbooking startup Pinterest Inc. raised $367 million this month, valuing the company at $11 billion. Snapchat, the mobile application for sending disappearing photos, is valued at $15 billion, based on a planned investment by Alibaba, according to people with knowledge of the deal. Uber’s valuation climbed more than 10-fold since the middle of 2013, reaching $40 billion in December.

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“The frustration with the U.S. is palpable.”

IMF, World Bank Throw Weight Behind China-Led Bank (CNBC)

Global institutions, including the IMF and the World Bank, have endorsed a China-led international bank, despite opposition from the U.S. “We are comfortable with the idea of a bank that puts together finance for infrastructure, because our view is that there is a huge need for infrastructure in emerging markets countries,” David Lipton, the first deputy managing director of the IMF, told CNBC early on Monday. The $50-billion Asian Infrastructure Investment Bank (AIIB) is being established to meet the need for greater infrastructure investment in lower- and middle-income Asian countries. It comes amid complaints by China and other major emerging economies that they lack influence in institutions such as the IMF, the Asian Development Bank and the World Bank.

Support for the AIIB has gathered speed in Europe this month, with the U.K. the first country to sign up, followed by Germany, France and Italy and then Luxembourg and Switzerland. However, Washington has expressed misgivings, officially because of concerns about standards of governance and environmental and societal safeguards. Unofficially, the country’s is thought to be worried about sacrificing its clout in Asia to China, as well as piqued by criticism of slow reforms in the IMF and World Bank. “While this is seen as a diplomatic setback for the Obama administration, the underlying (blame) may lie with Congress,” said strategists led by Marc Chandler at Brown Brothers Harriman in a research note on Monday.

“It has blocked IMF funding which is the precondition for reforming the voting (quotas), which would give China and other developing countries a greater voice. In contrast, the Obama Administration seems to recognize that if China (and others) do not get a larger voice in the existing institutions, it will create parallel institutions.” He added: “The frustration with the U.S. is palpable.” “China is now the leader of the world,” Sri Mulyani Indrawati, managing director of the World Bank, told CNBC on Sunday in Beijing. “They (Chinese leaders) try to show that they have sound principles in not only presenting a development solution, but also in establishing this new institution and that is why many of the countries now are becoming members of this institution.”

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Timing is everything.

Tsipras Raises Nazi War Reparations Claim At Berlin Press Conference (Guardian)

Greece’s leftwing prime minister Alexis Tsipras stood beside German leader Angela Merkel and demanded war reparations over Nazi atrocities in Greece on Monday night, even as the two leaders sought to bury the hatchet following weeks of worsening friction and mud-slinging. “It’s not a material matter, it’s a moral issue,” said Tsipras, unusually insisting on raising the “shadows of the past” at the heart of German power in the gleaming new chancellery in Berlin. It was believed to be the first time a foreign leader had gone to the capital of the reunified Germany to make such a demand. Merkel was uncompromising, while appearing uncomfortable and irritated. “In the view of the German government, the issue of reparations is politically and legally closed,” she said.

While the two leaders clashed over the second world war, there was no sign of any meeting of minds on the substance of their dispute over Greece’s bailout and what Tsipras has to deliver to secure fresh funding and avoid state insolvency within weeks. Two months after winning the election by promising to abolish “Merkelism” – the harsh austerity ordained by the eurozone and other creditors in return for €240bn in bailout loans over the past five years – Tsipras held to the view that Greece’s crisis was not of his making. He delivered a lengthy diagnosis of what had gone wrong in the last five years, but had next to nothing to say about his own policies except vague references to fighting corruption.

And when he raised the corruption issue, he singled out a German company, Siemens, because of its alleged activities in Greece. A stony-faced Merkel reiterated what she had said in Brussels on Friday after a late-night session with Tsipras – that a 20 February agreement with the eurozone extending Greece’s bailout until the end of June remained the yardstick. That agreement obliges Tsipras to deliver a persuasive menu of detailed fiscal and structural reforms which need to be vetted by the eurozone before any further bailout funding can be released. Asked if she had reached any agreements with Tsipras, Merkel avoided the question and stressed she was only one of 19 eurozone national leaders.

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“.. the punishment of Greek people for the feckless borrowing of their government and the feckless lending of German banks has surely gone well beyond what is necessary to instruct Greece in the merits of fiscal rectitude..”

Why Greek Default Looms (BBC)

I have used the metaphor before of Greece and Germany being a feuding married couple, not really wanting a divorce but so unable ever to understand the other’s point of view that terminal rupture remains a significant probability. So for the Greek prime minister, Alexis Tsipras, it must have been personally humiliating to send his “please-send-cash-soon” letter to Angela Merkel, the German chancellor (the letter has been obtained by the FT). He complains that there is no sign, in the conduct of eurozone officials working on the new financial rescue plan, of wanting to make the promised new start in the fraught relationship. Mr Tsipras accuses them of trying to hold the country to a reform and reconstruction programme that his Syriza government has rejected, and which he thought had been dropped, too, by eurozone leaders.

Which broadly points to the biggest flaw in the entente reached in February between Greece and eurozone – namely that the agreement they approved disguised a continuing and profound emotional and ideological gulf. Both sides in essence want the other to admit they were wrong in the past and have turned over a new leaf: neither shows the inclination to do that. The clearest manifestation of mutual misunderstanding being a long way off was last week’s blog by the finance minister, Yanis Varoufakis. He makes a point that is both true and incendiary (in the present circumstances): namely that the eurozone’s and IMF’s original €240bn bailout was, in practice, a bailout of the feckless banks and investors who had lent to Greece, rather than of Greece itself. [..]

There is a high probability, most economists would say, of history vindicating Mr Varoufakis’s critique: the punishment of Greek people for the feckless borrowing of their government and the feckless lending of German banks has surely gone well beyond what is necessary to instruct Greece in the merits of fiscal rectitude. But whether it is altogether wise and diplomatic to tell the Germans they were selfish and wrong, at this juncture, is moot. There is no sign of the two sides forgiving each other and moving on.

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I did not have financial realationships with that country.

Draghi Rejects Accusation That ECB Is Blackmailing Greece (Bloomberg)

Mario Draghi pushed back against an accusation that the European Central Bank is blackmailing Greece and compounding the pressure on the country. “Let me disagree with you about everything you said,” Draghi told Portuguese lawmaker Marisa Matias during his regular hearing at the European Parliament in Brussels. He was responding to a question about the withdrawal of a waiver that allowed the ECB to accept the country’s junk-rated debt as collateral. “It’s bit rich when you look at our exposure to Greece” which totals €104 billion, Draghi says. “What sort of blackmail is this? We haven’t created any rule for Greece, rules were in place and they’ve been applied. The exchange came amid signs that Greece could run out of money by early next month.

Prime Minister Alexis Tsipras is meeting today with German Chancellor Angela Merkel to discuss reform commitments that could unlock stalled aid money. Draghi said the ECB will reintroduce the waiver at some point, ‘‘but several conditions have to be satisfied.’’ Shut out from ECB funding, Greek banks currently rely on emergency liquidity from their national central bank. The ECB reviews the allowance on a weekly basis to make sure it doesn’t run against a ban on state financing. Draghi said Greek lenders are solvent ‘‘at present,’’ even though ‘‘the liquidity situation has been deteriorating.’’ In his opening statement to the parliament in Brussels, Draghi pushed aside concerns that the ECB’s quantitative-easing plan will be hampered by a shortage of bonds available to buy.

‘‘We see no signs that there will not be enough bonds for us to purchase,’’ he said. ‘‘Feedback from market participants so far suggests that implementation has been very smooth and that market liquidity remains ample.’’ The central bank started buying government debt this month to revive inflation. While the region’s recovery is being helped by cheap oil and a weak euro, Draghi is faced with a resumption of the crisis in Greece, with the country on the verge of a default that would shake the foundations of the single currency. The ECB plans to buy €60 billion a month of public-sector debt under its latest stimulus program, which is slated to last until September 2016, or until inflation is back on track toward the central bank’s goal of just under 2%. In the first two weeks of the program, €26.3 billion of public sector purchases were settled.

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Concerted effort to make Merkel look good.

Merkel Points Tsipras Toward Deal With Greece’s Creditors (Bloomberg)

German Chancellor Angela Merkel encouraged Prime Minister Alexis Tsipras to follow the path set out by Greece’s creditors, saying his country belongs in Europe and she wants its economy to succeed. Merkel gave Tsipras a red-carpet reception at the Chancellery in Berlin on Monday without giving any signal that the emergency aid the Greek government is urgently seeking would be unlocked. Instead, she talked at their joint briefing of how she wanted to build trust with her Greek counterpart. “We want Greece to be economically strong, we want Greece to have growth,” Merkel said. “And I think we share the view that this requires structural reforms, solid finances and a functioning administration.”

Meeting the chancellor for the second time in five days in an effort to build bridges between their governments after weeks of sniping, Tsipras echoed her tone, while resisting the embrace of the policy prescriptions that she has shaped for the past five years. “The Greek bailout program was an unprecedented adjustment effort but in our view it wasn’t a success story,” he said. “We’re trying to find common ground to reach an agreement soon on the reforms that the Greek economy needs and for the disbursement of the funds that it also needs.” The two countries have often been at loggerheads since Tsipras’s January election victory as the Greek leader tries to shape an alternative to the austerity program set out in the country’s bailout agreement. Merkel insists Greece must stick to the broad terms of that deal, though holding out the prospect of some flexibility.

With Greece’s financial predicament becoming ever more parlous, Tsipras was greeted by a group of supporters demonstrating outside the Chancellery who could be heard chanting during the ceremonial reception. His government needs to persuade its creditors to sign off on a package of economic measures to free up long-withheld aid payments that will keep the country afloat. Finance ministry officials may submit their latest plans as soon as this week, a Greek official said earlier. Hinting at the prickly relationship between their respective finance ministers, Tsipras said that he wants to avoid widening splits in the euro area and urged Germans and Greeks to avoid stereotyping each other, saying Germany isn’t to blame for all of Greece’s problems. “We have to understand each other better,” he said.

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Who’s he again?

Barroso: Greece Should Blame Itself (CNBC)

Greece’s problems can be laid at its own door and the country needs to provide a clear commitment to reform to reach an agreement with its creditors, Jose Manuel Barroso, the former president of the European Commission, told investors in Hong Kong. “The Greek people went through extremely difficult moments, hardship. But these difficulties of Greece were not provoked by Europe,” Barroso said in an address at the Credit Suisse Asian Investment Conference in Hong Kong. “It was provoked by the irresponsible behavior of the Greek government.” “The situation of Greece is the result of unsustainable debt that was created by the Greek government, mismanagement of their public finances, huge problems with tax evasion and tax fraud [and] problems of the administration,” he said, noting that the country had also misled the European Union by filing false figures on its economy. [..]

Barroso was generally unsympathetic to the Greek stance. “There is nothing that condemns Greece to be in a difficult situation. There are reforms they can make and they are as able as any other country to do,” he said. “There is an ideological difficulty that exists in the Greek government to understand that the way for Greece to recover the confidence of the markets is in fact for to go on with structural reforms that Greece has committed to.”

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Podemos did not do well.

Andalusia Election Increases Pressure on Spain’s Rajoy (Bloomberg)

Spanish Prime Minister Mariano Rajoy’s People’s Party scored its worst election result in 25 years in Spain’s most populous region, adding to pressure on the party leadership before general elections. Rajoy’s PP got 26.8% in Andalusia, compared with 40.7% in the last regional vote in 2012, according to the regional government data. That’s the lowest level of support since 1990, when the PP got 22.2%. Andalusia’s ballot marks the start of a Spanish electoral marathon to choose another 14 regional presidents, more than 8,000 mayors, and a new national government in the next 10 months. Rajoy struggled to mobilize his voters even as the fourth largest economy in the euro region is growing at the fastest pace since 2007. No date has been set for the national election which must be held by January 2016.

“Alternative leadership to Rajoy should be an urgent first point of discussion for the party based on public opinion criteria,” said Lluis Orriols, a political scientist at Carlos III University in Madrid. “Still, sometimes internal party power dynamics and public opinion follow different patterns.” Rajoy is scheduled to chair a meeting of his party’s executive committee in Madrid on Monday. The Spanish leader attended five political events in Andalusia during the two-week electoral campaign in the southern region, compared with two visited by his Socialist counterpart, Pedro Sanchez. Andalusia’s President Susana Diaz won the regional vote, paving the way for the Spanish Socialist Party, PSOE, to run the country’s most-populous area for the 10th term in a row.

Andalusia, located in southern Spain, is the nation’s largest and most populous region. It struggles with unemployment of about 35%, compared with 26% in Greece, the European Union state with the highest jobless rate. Farming and tourism comprise two of the largest sources of revenue and the region’s 16,843 euro ($18,330) gross domestic product per capita is the second lowest in the country after Extremadura. Sunday’s election also tested the advance of Podemos, allied to Greece’s Syriza party that won power in January in Athens after promising to raise public spending in defiance of its bailout agreement. The anti-austerity Podemos won 15 seats.

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“German capital dominates Europe and it profits from the misery in Greece,” Glezos says. “But we don’t need your money.”

‘The Fourth Reich’: What Some Europeans See When They Look at Germany (Spiegel)

May 30, 1941 was the day when Manolis Glezos made a fool of Adolf Hitler. He and a friend snuck up to a flag pole on the Acropolis in Athens on which a gigantic swastika flag was flying. The Germans had raised the banner four weeks earlier when they occupied the country, but Glezos took down the hated flag and ripped it up. The deed turned both him and his friend into heroes. Back then, Glezos was a resistance fighter. Today, the soon-to-be 93-year-old is a member of the European Parliament for the Greek governing party Syriza. Sitting in his Brussels office on the third floor of the Willy Brandt Building, he is telling the story of his fight against the Nazis of old and about his current fight against the Germans of today.

Glezos’ white hair is wild and unkempt, making him look like an aging Che Guevara; his wrinkled face carries the traces of a European century. Initially, he fought against the Italian fascists, later he took up arms against the German Wehrmacht, as the country’s Nazi-era military was known. He then did battle against the Greek military dictatorship. He was sent to prison frequently, spending a total of almost 12 years behind bars, time he spent writing poetry. When he was let out, he would rejoin the fight. “That era is still very alive in me,” he says. Glezos knows what it can mean when Germans strive for predominance in Europe and says that’s what is happening again now. This time, though, it isn’t soldiers who have a chokehold on Greece, he says, but business leaders and politicians.

“German capital dominates Europe and it profits from the misery in Greece,” Glezos says. “But we don’t need your money.” In his eyes, the German present is directly connected to its horrible past, though he emphasizes that he doesn’t mean the German people but the country’s ruling classes. Germany for him is once again an aggressor today: “Its relationship with Greece is comparable to that between a tyrant and his slaves.” Glezos says that he is reminded of a text written by Joseph Goebbels in which the Nazi propaganda minister reflects about a future Europe under German leadership. It’s called “The Year 2000.” “Goebbels was only wrong by 10 years,” Glezos says, adding that in 2010, in the financial crisis, German dominance began.

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Let’s see them try.

Beijing to Close All Major Coal Power Plants to Curb Pollution (Bloomberg)

Beijing, where pollution averaged more than twice China’s national standard last year, will close the last of its four major coal-fired power plants next year. China’s capital city will close China Huaneng’s 845 megawatt power plant next year, after last week closing plants owned by Guohua Electric and Beijing Energy Investment, according to a statement Monday on the website of the city’s economic planning agency. A fourth major power plant, owned by China Datang, was shut last year. The plants will be replaced by four gas-fired stations with capacity to supply 2.6 times more electricity than the coal plants. Once complete, the city’s power and its central heating will be entirely generated by clean energy, according to the Municipal Commission of Development and Reform.

Air pollution has attracted more public attention in the past few years as heavy smog envelops swathes of the nation including Beijing and Shanghai. About 90% of the 161 cities whose air quality was monitored in 2014 failed to meet official standards, according to a report by China’s National Bureau of Statistics earlier this month. The level of PM2.5, the small particles that pose the greatest risk to human health, averaged 85.9 micrograms per cubic meter last year in the capital, compared with the national standard of 35. Beijing plans to cut annual coal consumption by 13 million metric tons by 2017 from the 2012 level in a bid to slash the concentration of pollutants. The city also aims to take other measures such as closing polluted companies and cutting cement production capacity to clear the air this year, according to the Municipal Environmental Protection Bureau.

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Oct 272014
 
 October 27, 2014  Posted by at 11:38 am Finance Tagged with: , , , , , , , ,  


Unknown California State Automobile Association signage 1925

Stock Markets Threatened By Collapse In Chinese Consumer Demand (Questor)
Scariest Day For Market Looms, And It’s Not Halloween (CNBC)
What Next After China’s Foreign Reserves Fall? (MarketWatch)
15 Big Oil Sell Signals That Warn Of A 50% Stock Crash (Paul B. Farrell)
Oil Speculators Bet Wrong as Rebound Proves Fleeting (Bloomberg)
Goldman Cuts Oil Forecasts as US Market Clout Increases (Bloomberg)
A Scary Story for Emerging Markets (Worth Wray)
Fed-Driven ‘Locomotive USA’ (Ivanovitch)
U.S. Gains From ‘Good’ Deflation as Europe Faces the Bad and Ugly (Bloomberg)
Spain’s Export-Led Recovery Comes At Price Of EU-Wide Deflationary Vortex (AEP)
Europe’s Bank Test Celebrations Mask Mounting Challenges (Reuters)
Europe Must Act Now To Avoid ‘Lost Decade (FT)
Italy Under Pressure As Nine Banks Fail Stress Tests (FT)
Italy’s Stress Test Fail: Attack Of The ‘Drones’ (CNBC)
Italy Market Watchdog Bans Short Selling On Monte Paschi Bank Shares (Reuters)
Europe’s Banks Are Still a Threat (Bloomberg)
Draghi Sets Stimulus Pace as ECB Reveals Covered-Bond Purchases (Bloomberg)
German Business Confidence Drops For 6th Straight Month (AP)
Hundreds Give Up US Passports After New Tax Rules Start (Bloomberg)
Arctic Ice Melt Seen Doubling Risk of Harsh Winters in Europe, Asia (Bloomberg)
Nurse’s Lawyers Promise Legal Challenge to Ebola Quarantine (NBC)

I can repeat this every single day: China is in much worse shape than we know from official numbers.

Stock Markets Threatened By Collapse In Chinese Consumer Demand (Questor)

The capitulation of the Chinese consumer threatens to drag stock markets around the world into a death spiral as one of the pillars of global growth is undermined. Figures from the world’s largest consumer goods groups last week laid bare the shocking weakness of consumer demand in China, which threatens to pull down global stock markets that have been priced to perfection by more than five years of extraordinary monetary policy and asset price inflation. For China to avoid a hard landing it was essential for consumer spending to pick up from where centrally planned infrastructure spending left off, but there are signs this simply isn’t happening. Unilever, the world’s third largest consumer goods company, said they were surprised by the “unusually rapid” slowdown in Chinese consumer demand. The company said that sales growth had slumped to about 2pc during the nine months ended September, down from about 8pc growth last year. The slowdown in Chinese sales growth to about 2pc is also an average – there are pockets where trading is far worse.

The company added that sales to the big hypermarkets in the country are less than 2pc or even negative in some cases. Nestle, the worlds largest food company, recently reported falling sales for the first nine months of the year and also warned of “challenging” Chinese trading conditions. The fear of China going backwards is now becoming a reality, as the Chinese consumer is not picking up from where capital investment left off. Immediately after the 2008 banking crisis China launched the largest stimulus package and infrastructure investment program the world has ever seen. China has used 6.6 gigatons of cement in the last three years compared to 4.5 gigatons the USA has used in 100 years. The stimulus package increased fixed capital investment to 50pc of GDP, while domestic consumption withered to only 35pc. The lopsided economy led Hu Jintao, the President of China until 2012, to call the period of growth “unstable, unbalanced, uncoordinated and unsustainable.” The hope was it would eventually kick start consumer spending.

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What Next After China’s Foreign Reserves Fall? (MarketWatch)

Should we be worried that China’s prodigious foreign-exchange accumulation has gone into reverse? Last week, China’s forex regulator reassured markets that there was no need to worry about a $100 billion fall in reserves in the third quarter — the largest such drop since 1996. China’s foreign reserve pile fell to $3.89 trillion from $3.99 trillion at the end of June. Guan Tao, head of China’s State Administration of Foreign Exchange’s balance-of-payments department, cited the end of the Federal Reserve’s quantitative easing policy as a main factor contributing to the decline, adding there were no risks or problems. But some analysts are less sanguine, especially when this rare dwindling of China’s cash pile coincides with the economy growing at its slowest pace in five years, according to third-quarter data.

Société Générale strategist Albert Edwards writes that a reserve decline of this magnitude reflects deteriorating Chinese competitiveness from its excessively strong real foreign-exchange rate. Daiwa Research, meanwhile, highlights the significance of these outflows in undermining the ability of the People’s Bank of China (PBOC) to expand its balance sheet. In recent decades, China’s reserve accumulation has been the fuel for its massive money-supply growth. Thanks to twin capital and trade surpluses, the PBOC was able to behave like a massive money-printing machine. Now, as reserve accumulation goes into reverse, so too does the money supply. M2 – which includes currency, checking deposits and some time deposits — grew at just at 12.9% year-on-year for September, versus 14.7% year-on-year for June. SocGen’s Edwards warns that China faces a looming credit crunch and is already on a deflationary precipice. China’s consumer inflation rate slowed to 1.6% in September, down from 2% previously.

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Fed meeting to announce end of QE on Wednesday.

Scariest Day For Market Looms, And It’s Not Halloween (CNBC)

The Federal Reserve in the coming week is expected to end its quantitative easing program – the much-anticipated action that’s been at the very heart of the market’s fears. After a two-day meeting, the Fed Wednesday is expected to announce the completion of its bond purchases, based on improvements in the economy. Markets will now look forward to the time – expected at some point next year—when the Fed believes the economy is strong enough for it to raise short-term interest rates from zero. The economic calendar also heats up in the week ahead, with durable goods Tuesday; third-quarter GDP Thursday, and income and spending and employment costs data Friday. All of the data becomes even more important as the markets attempt to interpret the Fed’s process of normalizing rates.

The Fed “tries to reinvigorate corporate risk taking, and finally we get to the point where corporate risk taking picks up again, and they’re supposed to remove the accommodation. That was just a bridge,” said Tobias Levkovich, chief equity strategist at Citigroup. While recent market volatility has been blamed on everything from Ebola to a global growth scare, one common thread going through all markets is the underlying concern that the Fed’s removal of its easing program will be the financial equivalent of taking off the training wheels. Markets already have stumbled, and analysts expect more volatility ahead as they continue to move closer to a world with more normal interest rate levels.

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“Graham says the next bear will hit around election time 2016. The third $10 trillion stock crash early in this new 21st century.”

15 Big Oil Sell Signals That Warn Of A 50% Stock Crash (Paul B. Farrell)

Big Oil investors beware: “The day of the huge international oil company is drawing to a close,” warned the Economist last year. Since then, Big Oil sell signals have gotten louder, more frequent, confirming fears of a crash in Big Oil, in the entire energy industry, rippling through Wall Street stocks, the global economy. When? Before the new president is elected, in 2016. Scenario like 2008, when McCain lost. Yes, the overhyped shale boom was supposed to make America energy independent, investors happy. Wrong. Risks are rocketing, volatility increasing. Why? Big Oil is vulnerable, they’re running scared, making bigger, costlier, deadlier and dumber bets that threaten the global economy. Worse, Big Oil is in denial about their high-risk, self-destructive gambles.

Main Street’s also in denial. Yes, we’re in a rare historical event now. Two bulls back-to-back, with no bear market in between. Makes investors feel it’ll go forever, like 1999. True, stocks have been roaring since March 2009 when the bottom hit at 6,547 on the Dow after a 54% drop from the October 2007 high of 14,164. Since, a steady climb to a recent DJIA record at 17,279, with gains over 250%. But now our Double Bull has stopped roaring. But market giants are warning, bye-bye bull. Jeremy Grantham, founder of the $117 billion GMO money-management firm, predicts another megatrillion dollar crash, repeating the bears of 2000 and again in 2008. Wall Street lost roughly $10 trillion each time. Graham says the next bear will hit around election time 2016. The third $10 trillion stock crash early in this new 21st century.

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“People came in and tried to pick the bottom, and they picked wrong.”

Oil Speculators Bet Wrong as Rebound Proves Fleeting (Bloomberg)

Hedge funds rushed back into oil too quickly, boosting bullish bets amid a rebound last week, only to then watch surging U.S. crude supplies push prices right back down to a two-year low. The net-long positions in West Texas Intermediate futures rose 5.7% in the seven days ended Oct. 21, U.S. Commodity Futures Trading Commission data show. Short bets shrank 20%, the most in three months, while longs dropped 2.8%. After rising as analysts speculated prices had reached a floor, WTI sank again after stockpiles climbed nationally and at Cushing, Oklahoma, the delivery point for New York Mercantile Exchange futures. It fell to $80.52 on Oct. 22, the lowest settlement since June 2012, and ended the week down 24% from the year’s high.

The U.S. benchmark, which slipped into a bear market Oct. 9, may dip to $75 by the end of year, Bank of America Corp. said Oct. 23. The “swiftness of the selloff” attracted bargain hunters, John Kilduff, a partner at Again Capital, a New York-based hedge fund that focuses on energy, said by phone Oct. 24. “People came in and tried to pick the bottom, and they picked wrong.” U.S. oil inventories increased 7.11 million barrels in the seven days ended Oct. 17 to 377.7 million, the Energy Information Administration said Oct. 22. Supply has grown by about 21 million in three weeks.

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A good call for once?

Goldman Cuts Oil Forecasts as US Market Clout Increases (Bloomberg)

Goldman Sachs cut its forecasts for Brent and WTI crude prices next year on rising global supplies, predicting OPEC will lose influence over the oil market amid the U.S. shale boom. The bank is becoming more confident in the scale and sustainability of U.S. shale oil production and said U.S. benchmark prices need to decline to $75 a barrel for a slowdown in output growth. Brent will average $85 a barrel in the first quarter, down from a previous forecast of $100, and West Texas Intermediate will sell for $75 a barrel in the period, from an earlier estimate of $90, analysts including Jeffrey Currie wrote in a report. The biggest members of the Organization of Petroleum Exporting Countries are discounting supplies to defend market share rather than cutting production to boost prices that have collapsed into a bear market.

The highest U.S. output in almost 30 years is helping increase stockpiles as exporters including Saudi Arabia reduce prices to stimulate demand. “We believe that OPEC will no longer act as the first-mover swing producer and that U.S. shale oil output will be called upon to fill this role,” Goldman said in the report. “Our forecast also reflects the realization of a loss of pricing power by core-OPEC.” Any near-term OPEC production cut will be modest until there is sufficient evidence of a slowdown in U.S. shale oil production growth, according to the report. Global producers may need to cut almost 800,000 barrels a day of output next year to limit a build in inventories and ultimately balance the global oil market in 2016, Goldman said.

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“the global debt drama would end with an epic US dollar rally, a dramatic reversal in capital flows, and an absolute bloodbath for emerging markets … ”

A Scary Story for Emerging Markets (Worth Wray)

In the autumn of 2009, Kyle Bass told me a scary story that I did not understand until the first “taper tantrum” in May 2013. He said that – in additon to a likely string of sovereign defaults in Europe and an outright currency collapse in Japan – the global debt drama would end with an epic US dollar rally, a dramatic reversal in capital flows, and an absolute bloodbath for emerging markets. Extending that outlook, my friends Mark Hart and Raoul Pal warned that China – seen then by many as the world’s rising power and the most resilient economy in the wake of the global crisis – would face an outright economic collapse, an epic currency crisis, or both. All that seemed almost counterintuitive five years ago when the United States appeared to be the biggest basket case among the major economies and emerging markets seemed far more resilient than their “submerging” advanced-economy peers.

But Kyle Bass, Mark Hart, and Raoul Pal are not your typical “macro tourists” who pile into common-knowledge trades and react with the herd. They are exceptionally talented macroeconomic thinkers with an eye for developing trends and the second- and third-order consequences of major policy shifts. On top of their wildly successful bets against the US subprime debacle and the European sovereign debt crisis, it’s now clear that they saw an even bigger macro trend that the whole world (and most of the macro community) missed until very recently: policy divergence. Their shared macro vision looks not only likely, not only probable, but IMMINENT today as the widening gap in economic activity among the United States, Europe, and Japan is beginning to force a dangerous divergence in monetary policy.

In a CNBC interview earlier this week from his Barefoot Economic Summit (“Fed Tapers to Zero Next Week”), Kyle Bass explained that this divergence is set to accelerate in the next couple of weeks, as the Fed will likely taper its QE3 purchases to zero. Two days later, Kyle notes, the odds are high that the Bank of Japan will make a Halloween Day announcement that it is expanding its own asset purchases. Such moves only increase the pressure on Mario Draghi and the ECB to pursue “overt QE” of their own.
Such a tectonic shift, if it continues, is capable of fueling a 1990s-style US dollar rally with very scary results for emerging markets and dangerous implications for our highly levered, highly integrated global financial system.

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“No other country buys more than it sells to the rest of the world”. The curse of the reserve currency.

Fed-Driven ‘Locomotive USA’ (Ivanovitch)

No other country buys more than it sells to the rest of the world: America’s net contribution to the growth of the world economy in the first eight months of this year amounted to $480.8 billion, or about 3% of its GDP. And here is a striking contrast: Germany, the world’s fourth-largest economy, is currently getting a net contribution from the rest of the world to the tune of $280 billion – nearly 7% of its GDP. Not even China is sucking so much demand out of the world economy. In the year to the second quarter, China’s trade surplus is estimated at about 2% of its GDP. Those taking potshots at the U.S. government’s foreign policy have a point here that could strongly resonate with the American public, because exports directly or indirectly support more than 11 million American jobs, or close to one-tenth of the country’s latest employment numbers.

It might, therefore, be a good idea to help the Fed’s efforts to steady the economy by getting Germany, China and other large surplus countries to generate more growth from their domestic demand. We may then be able to sell them something instead of being their dumping ground: In the first eight months of this year, our trade deficits with Germany and China were up 14% and 4%, respectively, from the year earlier. But don’t hold your breath for such actions by Washington, or by multilateral agencies whose job it is to ensure balanced trade relationships in the world economy. Nothing of the sort will happen. As in the past, large trade surplus countries won’t budge. They know that during the forthcoming elections – starting with the mid-term Congressional elections next month and culminating with the U.S. presidential contest in 2016 – the Fed will do everything possible to keep economy and employment in a reasonably good shape.

That, of course, means that the locomotive USA will be an increasingly steady pillar of global output, and an expanding market for export-led economies. Germany’s sinking economy, for example, will continue to force local companies to seek salvation on external markets. An apparently rising political hostility with Russia seems to be turning German businesses toward an open, properly regulated and welcoming American market. Problems with China will also cause Germany to lower its formidable export boom on the U.S. That is a conclusion one may draw from the analysis of Sebastian Heilemann, a prominent German sinologist and a director of the Mercator Institute for China Studies (MERICS) in Berlin. Ominously, he is talking about the “dark clouds” in Chinese-German relations, saying that German companies are suffering from Chinese (get the euphemism) “reverse engineering,” and from increasing administrative difficulties of doing business in the Middle Kingdom.

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There’s no such thing as good deflation.

U.S. Gains From ‘Good’ Deflation as Europe Faces the Bad and Ugly (Bloomberg)

When it comes to deflation there’s the good – and there’s the bad and ugly. Europe faces the risk of the latter as it teeters on the edge of a recession that could trigger a debilitating dive in prices and wages. The U.S., meanwhile, may end up with the more benign version as surging oil and gas supplies push energy costs down and the economy ahead. “Bad deflation weakens growth,” Nancy Lazar, co-founder and a partner at Cornerstone Macro LP in New York, wrote in a report to clients this month. “Good deflation lifts growth.” Lazar also co-founded International Strategy & Investment Group LLC more than 20 years ago. That’s welcome news for U.S. investors. Billionaire Paul Tudor Jones, one of the most successful hedge-fund managers, said on Oct. 20 that U.S. stocks will outperform other equity markets for the rest of the year, according to two people who heard him speak at the closed-door Robin Hood Investors conference in New York.

Hedge fund manager David Tepper, who runs the $20 billion Appaloosa Management LP, told the same conference the following day that investors should bet against the euro, two people familiar with his remarks said. The Standard & Poor’s 500 Index has risen 6.3% so far this year, while the Stoxx Europe 600 Index has fallen 0.3%. The euro is down 7.8% against the dollar since the start of 2014. Treasuries have returned 5.3% this year, compared with 7.6% for German bunds and 15% for Greek debt, according to Bloomberg World Bond Indexes. The U.S. has the “best hand” among nations, while Europe is “the sick one,” Jamie Dimon, chief executive officer of JPMorgan Chase & Co. in New York, said at an Oct. 21 event held by the Urban Land Institute in New York.

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Pushing wages down with unemployment at 27.5% is the easy part. In a currency union, you’re going to export those low wages too, though. And that will implode the EU.

Spain’s Export-Led Recovery Comes At Price Of EU-Wide Deflationary Vortex (AEP)

[..] A deal reached with Renault after much soul-searching in 2012 cuts entry pay for new workers by 27.5pc, to roughly €17,000 a year (£13,400). Older workers keep their jobs at frozen pay, but with fewer holidays and tougher conditions. Joaquin Arias from the trade union federation CCOO said the terms amounted to blackmail. “The alternative was slow death. We would never have accepted such a plan if the crisis hadn’t been so bad.” Wage costs are now 40pc below levels in comparable French plants in France, the chief reason why Renault and Peugeot have cut their output of vehicles in their home country by half over the last decade. French unions may rage against “social dumping”, but they now face the asphyxiation of their industry unless they too knuckle under. “The French factories are going through exactly what we faced five years ago. It is very hard for everybody, but they too are having to follow the Spanish model,” said Mr Estevez. [..]

Fernando de Acuña, head of Spain’s top property consultancy RR de Acuña, warns that the country is going through an illusionary mini-bubble, with people betting on a fresh cycle in the housing market when the crippling effects of the last boom-bust cycle have yet to be cleared. “We think prices will fall by another 20pc over the next three years. There is still an overhang of 1.7m unsold homes in an annual market of around 230,000. The developers have 467,000 units on their books, and half of these are indirectly controlled by the banks. It is extend and pretend. There are another 150,000 in foreclosure proceedings that are backed up because the courts are saturated,” he said. “People don’t want to hear any of this. We were called criminals and terrorists when we warned in 2007 the country was going to Hell, but we were right, because we base our analysis on the facts and not on wishful thinking,” he said.

It has always been debatable whether Spain can hope to pull itself out of a low-growth trap by relying on exports alone, given that it still has a relatively closed economy with a trade gearing of just 34pc of GDP, far lower than Ireland at 108pc. The current account is already slipping back into deficit in any case as imports surge, suggesting that Spain is still nowhere near a competitive equilibrium within the eurozone. It is already “overheating” in a sense even with 5.6m people unemployed. The International Monetary Fund says Spain’s exchange rate is up to 15pc overvalued. Ominously, the export boom has been fading despite the success of the car industry. Total shipments rose just 1pc in the year to August compared with the same period in 2013, with falls of 11pc to Latin America, and of 13pc to the Middle East. Exports actually contracted by 5pc in August from a year earlier.

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“One-fifth of European banks are at risk of insolvency … ”

Europe’s Bank Test Celebrations Mask Mounting Challenges (Reuters)

Investors were spared immediate pain on Sunday after the European Central Bank’s landmark banking health check did not force massive capital hikes amongst the euro zone’s top lenders. But the sector’s long-term attractiveness has been damaged by revelations of extra non-performing loans and hidden losses that will dent future profits. The ECB said on Sunday the region’s 130 most important lenders were just €25 billion ($31.69 billion) short of capital at the end of last year, based on an assessment of how accurately they had valued their assets and whether they could withstand another three years of crisis. The amount of new money needed falls to less than €7 billion after factoring in developments in 2014, well shy of the €50 billion of extra cash investors surveyed by Goldman Sachs in August were expecting.

That means existing investors will only be asked for a fraction of the demand they expected in order to maintain their shareholdings. But, those who read the details of the ECB’s proclamation on the health of the euro zone banking sector would have seen more ominous signs too, as the ECB pointed to the amount of work that remains to be done to restore the region’s lenders. The review said an extra €136 billion of loans should be classed as non-performing – increasing the tally of non-performing loans by 18% – and that an extra €47.5 billion of losses should be taken to reflect assets’ true value. “Banks face a significant challenge as the sector remains chronically unprofitable and must address their €879 billion exposure to non-performing loans as this will tie-up significant amounts of capital,” accountancy firm KPMG noted.

Others took a bleaker view. “One-fifth of European banks are at risk of insolvency,” said Jan Dehn, head of research at Ashmore, referencing the fact that one-fifth of banks fell shy of the ECB’s pass mark at the end of last year. He added that the ECB’s efforts to boost the euro zone’s sluggish growth through pumping money into the economy would not work if banks were too poorly capitalised to lend. After the ECB adjusted banks’ capital ratios to reflect supervisors’ assessments of banks’ asset values, 31 had core capital below the 10% mark viewed by investors as a safety threshold, while a further 28 had ratios just 1 percentage point above.

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That headline could just as well be 5 years old. Nothing changed. Just new shades of porcine lipstick.

Europe Must Act Now To Avoid ‘Lost Decade (FT)

The bottom line is that none of the tools currently on the table will get the job done. There are not enough assets to purchase or finance and the timetable to get anything done is too long. Policy makers do not have the luxury of a year or two to figure this out. The ECB balance sheet shrinks virtually daily and as it shrinks, the monetary base of Europe is contracting and putting downward pressure on prices. Europe is clearly in danger of falling into the liquidity trap, if it is not already there. The likelihood of a “lost decade” like that experienced in Japan is rapidly increasing. The ECB must act and act quickly. How is this affecting the markets? The recent rally in US fixed income is materially different than when rates last approached 2%. Previously, the Federal Reserve was actively managing the yield curve to reduce long-term borrowing costs in order to stimulate the economy. The current rally is caused by a massive deflationary wave unleashed upon the US by beggar-thy-neighbour policies in Europe and Asia.

The precipitous decline in energy and commodity prices and competitive pressures on prices for traded goods will probably push inflation, as measured by the Fed’s favoured personal consumption expenditures index, back down toward 1%. This raises the likelihood that any increase in the policy rate by the Fed will be pushed into 2016 or later. With inflationary expectations falling and the relative attractiveness of US Treasury yields over German Bunds and Japanese government bonds, US long-term rates are likely to continue to be well supported with limited room to rise and a dynamic that could push them lower from here. In the real economy, the decline in energy prices should offset the effect of reduced exports, which is supportive of US growth in the near term. This will help equities recover from the recent storm of volatility as we move deeper into the fourth quarter, which is a time of seasonal strength for the stock market. However, this may prove to be the rally to sell. Results from currency translations for large, multinational companies will weigh heavily on S&P 500 earnings in the first half of 2015.

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Leave the euro, and restructure all bank debt. It’s the only thing that makes any sense at all. But it’s not even considered.

Italy Under Pressure As Nine Banks Fail Stress Tests (FT)

Italy’s central bank was thrown on the defensive on Sunday as its banking sector emerged as the standout loser in health checks aimed at restoring confidence in the euro area’s financial sector. Officials at the Bank of Italy criticised parameters in regulatory stress tests as unrealistically harsh on Italian banks and disputed the exact number of failures, after nine Italian lenders fell short in a comprehensive review unveiled by the European Central Bank. Across the euro area, some 25 banks emerged with capital shortfalls following an unprecedented regulatory effort aimed at dispelling the cloud of uncertainty surrounding the European banking sector’s health.

The announcement represents the culmination of more than a year of intensive work costing hundreds of millions of euros and involving thousands of officials and accountants – all aimed at restoring investor faith in European banks ahead of the launch of a unified banking supervisor in Frankfurt. The biggest failure was Banca Monte dei Paschi di Siena, which has already hired bankers at Citigroup and UBS to advise on its options after it received takeover approaches. German banks emerged largely unscathed, with only one technical failure, while Spain clawed its way through with no shortfalls.

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Italy’s “public debt-to-GDP ratio was 134% in the second quarter of 2014, compared to 94% for the euro zone as a whole”.

Italy’s Stress Test Fail: Attack Of The ‘Drones’ (CNBC)

Italy’s report card was by far the worst from this weekend’s European bank stress tests, with nine of its 15 banks tested failing to reach the levels of capital required. The country’s relationship with European authorities could get increasingly fractious, with the European Commission yet to approve its 2015 budget. And tensions are set to continue as its banks look to raise more capital than any other country to reach ECB requirements at a time when the Italian economy is back in recession. There was a “surgical targeting of Italian banks with asset quality review (AQR) drones (by the ECB),” according to Carlo Alberto Carnevale-Maffe, professor of strategy at Italy’s Bocconi University. “The ECB targeted the banks with the lowest level of transparency and governance, and the highest links with the political system,” he told CNBC.

Unicredit and Intesa Sanpaolo, the country’s two biggest lenders, both passed the tests, but some of their smaller counterparts are struggling as the economy stagnates, and the level of sovereign debt on their balance sheets starts to look more worrying. While household debt levels in Italy are relatively low, its public debt-to-GDP ratio was 134% in the second quarter of 2014, compared to 94% for the euro zone as a whole. Federico Ghizzoni, chief executive of UniCredit, told CNBC he was “very satisfied” with his bank’s result and added: “For the system in general, the results including what has been done in 2014 is OK.” Ghizzoni predicted there will be an increase in mergers and acquisitions in the Italian banking sector as a result of the tests.

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World’s oldest bank turns into merger target.

Italy Market Watchdog Bans Short Selling On Monte Paschi Bank Shares (Reuters)

Italy’s Consob has banned short selling on Monte dei Paschi’s shares on Monday and Tuesday, the Italian market regulator said in a statement. Shares in Italy’s third biggest bank lost more than 17% on Monday after results from a pan-European health check of lenders showed on Sunday that Monte dei Paschi faced a capital shortfall of €2.1 billion – the biggest gap among the 130 lenders under scrutiny.

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“In one way, the ECB had good reason to be strict.” Question is then, why didn’t it?

Europe’s Banks Are Still a Threat (Bloomberg)

The European Central Bank has just published the results of new “stress tests” on European Union banks, hoping to convince financial markets that the banking system is now strong enough to weather another crisis. This latest exercise is a big improvement over previous efforts, which were widely derided as too soft – but it’s still not good enough. The test had two parts. The first was a detailed examination of loans, to see whether they were worth what the banks said. This found that most of 130 banks under review had overvalued their assets – by a total of €47.5 billion ($60 billion) at the end of last year. The second part asked, with assets correctly valued, whether the banks had enough capital to safely endure another recession and financial-market shock. It found that 25 did not, and 13 of those need to raise €9.5 billion in capital, over and above what they’ve added so far this year.

This closer scrutiny has helped. Deutsche Bank AG raised €8.5 billion in equity this year to boost its chances of passing. Weak institutions, such as Portugal’s Banco Espirito Santo and Austria’s Volksbanken network, are restructuring or shutting down. By strengthening the system and increasing confidence in it, the ECB’s tests might reverse a two-year slump in private-sector lending. That’s the hope, anyway. Trouble is, even the new tests were pretty soft. Economists at Switzerland’s Center for Risk Management at Lausanne, for example, have put the capital shortfall for just 37 banks at almost €500 billion – as opposed to the roughly €10 billion reported by the ECB for its sample of 130. This more stringent test used a method that mimics how the market value of equity actually behaves under stress.

In one way, the ECB had good reason to be strict. It had to contend with doubts aroused by the previous unpersuasive tests. Also, it takes over as the euro area’s supranational bank supervisor on Nov. 4, so any lingering issues will be its responsibility. But it knew that if it were too tough, the blow to confidence could have plunged the EU back into crisis. The euro area already has a stalled recovery and stands on the brink of deflation; an alarming report on the banks might have done more harm than good. So the design of the exercise was compromised. It used a measure of capital that relies on banks to weight assets by risk — an opportunity to fudge the numbers. It ignored the credit freezes, forced asset sales and contagion that can cause huge losses in bad times. The worst-case scenario projected a fall in euro-area output of just 1.4%in 2015 (in 2009, it dropped 4.5%). And no governments default.

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It’s already crystal clear that there’s not enough to purchase: “In reality, it is what follows that will be important, or maybe more importantly, what doesn’t follow.”

Draghi Sets Stimulus Pace as ECB Reveals Covered-Bond Purchases (Bloomberg)

Investors will be handed a clue today in to just how aggressive Mario Draghi is willing to be. At 3:30 p.m. in Frankfurt, the European Central Bank will reveal how much it spent on covered bonds last week after returning to that market for a third time as part of a renewed bid to stave off deflation. The central bank bought at least €800 million ($1 billion) of assets from Portugal to Germany in the three days since the program began on Oct. 20, traders said last week. Formal details will help them divine how quickly the ECB president can reach his target of expanding the institution’s balance sheet by as much as €1 trillion. “In terms of the ECB’s aspiration to expand its balance sheet, the market wants it all now,” said Richard Barwell, senior European economist at Royal Bank of Scotland Group Plc in London.

“There’s scope for immediate disappointment to the scale of the purchases we see today.” With the economy stuttering and inflation forecast to have stayed below 1% for a 13th month in October, Draghi is under pressure to do more. While central banks from the U.S. to Japan used large-scale asset purchases to bolster their balance sheets and kick-start lending, the ECB has so far refrained from such a step. German opposition to sovereign-bond purchases means officials have chosen covered bonds and asset-backed securities as the latest tools to help expand the balance sheet. While policy makers say their plans will spark new issuance, economists at firms including Morgan Stanley and Commerzbank say the central bank will probably need to buy other assets to reach the target.

Of the region’s €2.6 trillion covered-bond market, the ECB will only buy assets eligible under its collateral framework for refinancing loans, denominated in euros and issued by credit institutions in the euro area. Purchases will be announced weekly, starting today, and the pool of bonds eligible is about €600 billion, ECB Vice President Vitor Constancio said this month. ABS buying is scheduled to begin later this quarter and there are about €400 billion of such assets eligible to buy, according to Constancio. “Covered bond and ABS purchases appear to be the line of least resistance for the ECB,” said Jon Mawby, a London-based fund manager at GLG Partners LP, which manages $32 billion. “In reality, it is what follows that will be important, or maybe more importantly, what doesn’t follow.”

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Lowest in 22 months.

German Business Confidence Drops For 6th Straight Month (AP)

Business confidence in Germany, Europe’s largest economy, has dropped for a sixth consecutive month as concerns over the turmoil in Ukraine and elsewhere continue to take their toll. The Ifo institute said Monday that its confidence index dropped to 103.2 points in October from 104.7 in September, as business leaders’ assessments of their current situation and their expectations for the next six months both fell. The government and independent economists have cut their growth forecasts for Germany after a string of disappointing industrial data for August. Economists warn if international crises escalate or Africa’s Ebola outbreak spreads the impact could become greater. Ifo’s survey is based on responses from about 7,000 companies in various sectors.

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All your bucks are belong to us.

Hundreds Give Up US Passports After New Tax Rules Start (Bloomberg)

The number of Americans renouncing U.S. citizenship increased 39% in the three months through September after rules that make it harder to hide assets from tax authorities came into force. People giving up their nationality at U.S. embassies increased to 776 in the third quarter, from 560 in the year-earlier period, according to Federal Register data published yesterday. Tougher asset-disclosure rules that started July 1 under the Foreign Account Tax Compliance Act, or Fatca, prompted more of the estimated 6 million Americans living overseas to give up their passports. The appeal of U.S. citizenship for expatriates faded further as more than 100 Swiss banks began to turn over data on American clients to avoid prosecution for helping tax evaders.

The U.S., the only Organization for Economic Cooperation and Development nation that taxes citizens wherever they reside, stepped up the search for tax dodgers after UBS paid a $780 million penalty in 2009 and handed over data on about 4,700 accounts. Shunned by Swiss and German banks and with Fatca starting, more than 9,000 Americans living overseas gave up their passports over the past five years. Fatca requires U.S. financial institutions to impose a 30% withholding tax on payments made to foreign banks that don’t agree to identify and provide information on U.S. account holders. It allows the U.S. to scoop up data from more than 77,000 institutions and 80 governments about its citizens’ overseas financial activities..

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Winter time.

Arctic Ice Melt Seen Doubling Risk of Harsh Winters in Europe, Asia (Bloomberg)

The decline in Arctic sea ice has doubled the chance of severe winters in Europe and Asia in the past decade, according to researchers in Japan. Sea-ice melt in the Arctic, Barents and Kara seas since 2004 has made more than twice as likely atmospheric circulations that suck cold Arctic air to Europe and Asia, a group of Japanese researchers led by the University of Tokyo’s Masato Mori said in a study published yesterday in Nature Geoscience. “This counterintuitive effect of the global warming that led to the sea ice decline in the first place makes some people think that global warming has stopped. It has not,” Colin Summerhayes, emeritus associate of the Scott Polar Research Institute, said in a statement provided by the journal Nature Geoscience, where the study is published.

The findings back up the view of United Nations climate scientists that a warmer average temperature for the world will make storms more severe in some places and change the character of seasons in many others. It also helps debunk the suggestion that slower pace of global warming in the past decade may suggest the issue is less of a problem. “Although average surface warming has been slower since 2000, the Arctic has gone on warming rapidly throughout this time,” he said.

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The mess the US makes of its ebola response reaches staggering proportions. How is it possible that it has been so hugely unprepared?

Breaking: 5-year old boy monitired for ebola in NY.

Nurse’s Lawyers Promise Legal Challenge to Ebola Quarantine (NBC)

Lawyers for a nurse quarantined in a New Jersey hospital say they’ll sue to have her released in a constitutional challenge to state restrictions for health care workers returning to New Jersey after treating Ebola patients in West Africa. Civil liberties attorney Norman Siegel said Kaci Hickox, who was quarantined after arriving Friday at the Newark airport, shows no symptoms of being infected and should be released immediately. He and attorney Steven Hyman said the state attorney general’s office had cooperated in getting them access to Hickox. Late Sunday, a spokesman for New Jersey Gov. Chris Christie issued a statement saying that people who had come into contact with someone with Ebola overseas would be subject to a mandatory quarantine at home. It did not explain why Hickox was being held at the hospital, though it did say, “Non-residents would be transported to their homes if feasible and, if not, quarantined in New Jersey.”

Hyman told NBC News he wasn’t sure what the statement meant for Hickox’s release. “I think we’re getting closer to it,” he said. He and Siegel, speaking earlier outside Newark University Hospital, where she is quarantined, said they spent 75 minutes with her on Sunday. They said she was being kept in a tented area on the hospital’s first floor with a bed, folding table and little else — they said she was able to get a laptop computer with wi-fi access only Sunday. But they said she is not being treated. “She is fine. She is not sick,” Hyman said. Photos they released showed her in hospital garb peering through a plastic window of the tented-off area.

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Oct 222014
 
 October 22, 2014  Posted by at 10:47 am Finance Tagged with: , , , , , , , , , , ,  


Russell Lee Migrant family in trailer home near Edinburg, Texas Feb 1939

At Least 11 Banks To Fail European Stress Tests (Reuters)
All the Markets Need Is $200 Billion a Quarter From the Central Bankers (BW)
What Would It Take To Trigger The ‘Fed Put’? (MarketWatch)
Currency Wars Evolve With Goal of Avoiding, Exporting Deflation (Bloomberg)
Are Belgium, Finland And France The ‘New Periphery’ In Europe? (CNBC)
EU To Warn France And Italy On Budget Plans (FT)
US Shale Producers Cramming Wells in Risky Push to Extend Boom (Bloomberg)
Oil at $80 a Barrel Muffles Forecasts for US Shale Boom (Bloomberg)
How Wall Street Is Killing Big Oil (Oilprice.com)
Investors Pile Into Oil Funds at Fastest Pace in 2 Years (Bloomberg)
Markets Need To Accept Low Growth As ‘New Normal’ In China (Saxo)
China to Let World in on Gauge Showing State of Economy (Bloomberg)
UK Deficit Up 10% From Last Year, National Debt Rises £100 Billion (Guardian)
The Moral Economy Of Debt (Robert Skidelsky)
Fears Over Gas Supply As Russia-Ukraine Talks Fail (Reuters)
New York Fed Caught Sight of London Whale and Let Him Go (Bloomberg)
World’s Top-Ranked Pension Funds Probed for Hedge Fund Use (Bloomberg)
How To Start A War And Lose An Empire (Dmitry Orlov)
“Omenland” (James Howard Kunstler)
WHO: Ebola Serum In Weeks And Vaccine Tests In Africa By January (Guardian)

This could make a whole lot of people really nervous.

At Least 11 Banks To Fail European Stress Tests (Reuters)

At least 11 banks from six European countries are set to fail a region-wide financial health check this weekend, Spanish news agency Efe reported, citing several unidentified financial sources. The results of the stress tests on 130 banks by the European Central Bank are due to be unveiled on Sunday. Four banks in Greece, three Italian lenders and two Austrian ones are among those that preliminary data showed had failed the tests, Efe said. It gave no details of how much capital the banks would have to raise and said this could yet change as numbers could be revised at the last minute.

The euro fell on the report. Efe also identified a Cypriot bank and possibly one from Belgium and one from Portugal. The exercise is designed to see how banks would cope under various economic scenarios, including adverse ones, and is likely to reveal capital shortfalls at some entities. The ECB is carrying out the checks of how the biggest euro zone banks have valued their assets, and whether they have enough capital to weather another economic crash, before taking over as their supervisor on Nov. 4.

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Anyone still realize how insane that is, or are our brains completely numb and dumbed down by now?

All the Markets Need Is $200 Billion a Quarter From the Central Bankers (BW)

The central-bank put lives on. Policy makers deny its existence, yet investors still reckon that whenever stocks and other risk assets take a tumble, the authorities will be there with calming words or economic stimulus to ensure the losses are limited. A put option gives investors the right to sell their asset at a set price so the theory goes that central banks will ultimately provide a floor for falling asset markets to ensure they don’t take economies down with them. Last week as markets swooned again, it was St. Louis Federal Reserve President James Bullard and Bank of England Chief Economist Andrew Haldane who did the trick.

Bullard said the Fed should consider delaying the end of its bond-purchase program to halt a decline in inflation expectations, while Haldane said he’s less likely to vote for a U.K. rate increase than three months ago. “These comments left markets with the impression that the ‘central-bank put’ is still in place,” Morgan Stanley currency strategists led by Hans Redeker told clients in a report yesterday. Matt King, global head of credit strategy at Citigroup, and colleagues have put a price on how much liquidity central banks need to provide each quarter to stop markets from sliding. By estimating that zero stimulus would be consistent with a 10% quarterly drop in equities, they calculate it takes around $200 billion from central banks each quarter to keep markets from selling off.

With the Fed and counterparts peeling back their net liquidity injections from almost $1 trillion in 2012 toward that magic marker, King’s team said “a negative reaction in markets was long overdue.” “We think the markets’ weakness owes more to an almost belated reaction to a temporary lull in central bank stimulus than it does to any reduction in the effect of that stimulus in propping up asset prices,” they said in an Oct. 17 report to clients. Bank of America Merrill Lynch strategists said in a report today that another 10% decline in U.S. stocks might spark speculation of a fourth round of quantitative easing from the Fed. That would mimic how the Fed acted following equity declines of 11% in 2010 and 16% in 2011.

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It would seem that all it takes is for other central bankers failing to put in those $200 billion four times a year. But that still pre-supposes that the Fed’s first priority is to support the markets. Whereas I suggest it’s to support the big banks. And that’s not one and the same thing.

What Would It Take To Trigger The ‘Fed Put’? (MarketWatch)

Janet Yellen runs the Federal Reserve now, but that doesn’t mean that notions about what used to be known as the “Bernanke put,” named after her predecessor, Ben Bernanke, have expired. So far, there’s been little talk of a “Yellen put,” but the U.S. Federal Reserve still remains ready to bail out the markets if things get hairy, Bank of America Merrill Lynch analysts say. Actual financial puts give the holder the right but not the obligation to sell the underlying security at a set price, known as the strike price. Puts named after central bankers are figurative. They’re shorthand for the idea the Fed will rush in to rescue tanking markets, a notion denied by Alan Greenspan and Bernanke, but reinforced by the Fed’s aggressive actions following big market declines, most recently, during the 2008 crisis. The BofA Merrill analysts, in a Tuesday note, say recent market volatility shows that investors are now losing faith in what traders had dubbed the “Draghi put,” named after European Central Bank President Mario Draghi.

Investors are growing less certain the ECB will step in with a program of full-fledged quantitative easing of its own stave off deflationary pressures in the eurozone. “If this ECB option turns out to be worthless, the key question becomes how much protection does the Fed provide? In other words, approximately how big can an equity correction become before the Fed steps in again?” they write. They note that in 2010 and 2011, the Fed stepped in following equity corrections of 11% and 16%, respectively. Based on their assessment of last week’s market action, the analysts say it appears it would take a further 10% decline from the recent lows to trigger anticipation of what might be dubbed QE 4, or the fourth iteration of the U.S. central bank’s monetary stimulus measures.

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Everywhere but America.

Currency Wars Evolve With Goal of Avoiding, Exporting Deflation (Bloomberg)

Currency wars are back, though this time the goal is to steal inflation, not growth. Brazil Finance Minister Guido Mantega popularized the term “currency war” in 2010 to describe policies employed at the time by major central banks to boost the competitiveness of their economies through weaker currencies. Now, many see lower exchange rates as a way to avoid crippling deflation. Weak price growth is stifling economies from the euro region to Israel and Japan. Eight of the 10 currencies with the biggest forecasted declines through 2015 are from nations that are either in deflation or pursuing policies that weaken their exchange rates, data compiled by Bloomberg show.

“This beggar-thy-neighbor policy is not about rebalancing, not about growth,” David Bloom, the global head of currency strategy at HSBC which does business in 74 countries and territories, said in an Oct. 17 interview. “This is about deflation, exporting your deflationary problems to someone else.” Bloom puts it in these terms because, when one jurisdiction weakens its exchange rate, another’s gets stronger, making imported goods cheaper. Deflation is a both a consequence of, and contributor to, the global economic slowdown that’s pushing the euro region closer to recession and reducing demand for exports from countries such as China and New Zealand.

[..] Disinflationary pressures in the euro area are starting to spread to its neighbors and biggest trading partners. The currencies of Switzerland, Hungary, Denmark, the Czech Republic and Sweden are forecast to fall from 4% to more than 6% by the end of next year, estimates compiled by Bloomberg show, partly due to policy makers’ actions to stoke prices. “Deflation is spilling over to central and eastern Europe,” Simon Quijano-Evans, head of emerging-markets at Commerzbank, said yesterday by phone. “Weaker exchange rates will help” them tackle the issue, he said. Hungary and Switzerland entered deflation in the past two months, while Swedish central-bank Deputy Governor Per Jansson last week blamed his country’s falling prices partly on rate cuts the ECB used to boost its own inflation. A policy response may be necessary, he warned.

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Interesting development. Forgot to ‘reform’ the core.

Are Belgium, Finland And France The ‘New Periphery’ In Europe? (CNBC)

The improvement in competitiveness in southern euro zone nations has left some core countries such as Belgium and France lagging behind, posing the risk that they could become the “new periphery,” a new report warns. “A handful of core euro zone economies have registered pretty sharp increases in their unit labor costs (ULCs) over the past four years,” according to a report by Capital Economics published Monday. This was happening at the same time as those in many peripheral countries had been falling outright, it said. “While this process may help the peripheral economies regain relative competitiveness more rapidly, some core economies, including Belgium, now look at risk of falling behind, threatening to push the euro-zone’s periphery north,” Roger Bootle and Jonathan Loynes, managing director and chief European economist at Capital Economics respectively, said in their report. The report analysed changes in competitiveness in the euro zone by looking at unit labor costs (the average cost of labor to produce one unit of output) across the region.

On this metric it found that the southern peripheral economies comprised of Spain, Italy, Ireland and Portugal “have succeeded in cutting costs relative to the euro zone as a whole over the past few years.” However, in a handful of core economies, notably Belgium, Finland and France, ULCs have continued to rise, both in absolute terms and relative to the euro zone average. “In Belgium in particular, ULCs have risen sharply and are now the highest in the euro-zone. Belgium’s high costs already appear to be harming both investment and export growth, traditionally strong drivers of growth in the economy. And its current account has fallen into a sustained deficit for the first time in 30 years.” “All this suggests that Belgium’s recovery is unlikely to gather further pace [and] in contrast to governments in the south, we doubt that Belgian politicians will be prepared (or forced) to tackle these issues any time soon.” they added.

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Rome and Paris will stare them down.

EU To Warn France And Italy On Budget Plans (FT)

The European Commission will on Wednesday tell five euro zone countries, including France and Italy, that their budget plans risk breaching EU rules, say three officials briefed on the decision. The move comes a week after all euro zone countries submitted their budgets to Brussels for review as part of the EU’s new fiscal rules. Officially a request for more information, the commission’s move is the first step in a politically charged process of rejecting a euro zone nation’s budget and sending it back to national capitals for revision. A decision on rejection must be made by the end of the month. In addition to France and Italy, EU officials said similar requests will be sent to Austria, Slovenia and Malta. Simon O’Connor, a spokesman for Jyrki Katainen, the EU’s economic commissioner who is in charge of the evaluations, would not confirm the move. But he said it would not mean that Brussels had definitively decided to reject a country’s budget plan.

“Technical consultations with member states on the draft budget plans do not prejudge the outcome of our assessment,” O’Connor said. A formal request for revisions to the French and Italian budgets could prove politically explosive. Both governments are fending off rising anti-EU sentiment. Under the EU’s new budget rules, adopted at the height of the euro zone crisis, the commission is required to send a budget back to its government within two weeks of submission if it finds “particularly serious non-compliance” with EU budget rules. If the commission is contemplating such a move, the rules require it to notify the government in question within one week. Wednesday is the deadline for the one-week notification. EU officials said France and Italy may contravene different parts of the budget rules. France is required to get its deficit back under the EU ceiling of 3% of economic output by next year but its plan ignored that commitment, projecting a deficit of 4.3% of gross domestic product.

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Right. We all know that by sticking two straws in a glass of soda, you get out twice as much as with one. And sure, a shale play is not exactly like a glass of water, but still close enough. I think this is not about getting out more, but about getting the same amount out faster. Doesn’t sound like a terrible solid business model, but it’s not at all surprising either, given how the shale industry operates.

US Shale Producers Cramming Wells in Risky Push to Extend Boom (Bloomberg)

U.S. shale producers are cramming more wells into the juiciest spots of their oilfields in a move that may help keep the drilling boom going as prices plunge. The technique known as downspacing aims to pull more oil at less cost from each field, allowing companies to boost profit, attract more investment and arrange needed loans to continue drilling. Energy companies see closely-packed wells as their best chance to add billions more barrels of oil to U.S. production that’s already the highest in a quarter century. “We would be dealing with more than a decade of inventory,” said Manuj Nikhanj, co-head of energy research for ITG Investment Research in Calgary. “If you can go twice as tight, the multiplication effect is massive.”

To make downspacing work, the industry must first solve a problem that for decades has required producers to carefully distance their wells. Crowded wells may steal crude from each other without raising total production enough to make the extra drilling worthwhile. Too much of that cannibalization could propel the U.S. production revolution into a faster downturn. In the past, most wells were drilled vertically into conventional reservoirs, which act more like pools of oil or gas. Companies learned quickly that packing wells too closely together just drains the reservoirs faster without appreciably increasing production, like two straws in the same milkshake. Shale rock is different, acting more like an oil-soaked sponge.

Drilling sideways through the layers of shale taps more of the resource, while fracking is needed to crack the rock to allow oil and gas to flow more freely into the well. So far, early results from downspacing experiments by a handful of companies have been mixed. It’s “the billion-dollar question,” said Wood Mackenzie’s Jonathan Garrett, “Is downspacing allowing access to new resources, or is it drawing down the existing resources faster?” An analysis of a group of wells on the same lease in La Salle County, in the heart of Texas’s booming Eagle Ford formation, showed that closer spacing reduced the rate of return for drilling to 23% from a high of 62% for wells spaced further apart, according to a paper published in April by Society of Petroleum Engineers.

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A sordid tale indeed.

Oil at $80 a Barrel Muffles Forecasts for US Shale Boom (Bloomberg)

The bear market in oil has analysts reassessing the U.S. shale boom after five years of historic growth. The U.S. benchmark price dropped to $79.78 a barrel on Oct. 16, the lowest since June 2012. At that level, one-third of U.S. shale oil production would be uneconomic, analysts for New York-based Sanford Bernstein said in a report yesterday. Drillers would add fewer barrels to domestic output than the previous year for the first time since 2010, according to Macquarie, ITG Investment and PKVerleger. Horizontal drilling through shale accounts for as much as 55% of U.S. production and just about all the growth, according to Bloomberg Intelligence. The nternational Energy Agency predicted in November that the U.S. would pass Russia and Saudi Arabia to become the biggest producer in the world by 2015. Though some forecasts show oil rebounding or stabilizing, any slower increase in U.S. output would shake perceptions for the global market, said Vikas Dwivedi, an oil and gas economist in Houston for Sydney-based Macquarie.

“It would reshape the way everybody would think about oil,” Dwivedi said. Daily domestic production added a record 944,000 barrels last year and reached a 29-year high of 8.95 million barrels this month, according to the Energy Information Administration, the U.S. Department of Energy’s statistical arm. Output, much less growth, is difficult to maintain because shale wells deplete faster than conventional production. Oil production from shale drilling, which bores horizontally through hard rock, declines more than 80% in four years, more than three times faster than conventional, vertical wells, according to the IEA. New wells have to generate about 1.8 million barrels a day each year to keep production steady, Dwivedi said. At $80 a barrel, output would grow by 5%, down from a previous forecast of 12%, according to New York-based ITG. At $75 a barrel, growth would fall 56% to about 500,000 barrels a day, Dwivedi said. Closer to $70 a barrel, the growth rate would drop to zero, he said.

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why

This has been going on for a number of years. Exxon will go the way of IBM. Or maybe Rosneft can do a hostile take-over. That would be so funny.

How Wall Street Is Killing Big Oil (Oilprice.com)

Lee Raymond, the famously pugnacious oilman who led ExxonMobil between 1999 and 2005, liked to tell Wall Street analysts that covering the company would be boring. “You’ll just have to live with outstanding, consistent financial and operating performance,” he once boasted. For generations, Exxon and its Big Oil brethren, including Chevron, ConocoPhilipps, BP, Royal Dutch Shell and Total, dominated the global energy landscape, raking in enormous profits and delivering fat dividends to shareholders. Big Oil has long been an investor darling. Those days are over. Once reliable market beaters, Big Oil shares are lagging: Over the last five years, when the S&P 500 rose more than 80%, shares of Exxon and Shell rose just over 30%. The underperformance reflects oil majors’ inability to maintain steady cash flows and increase production in a world where much of the easy oil has already been found and project costs are rapidly escalating.

Last year, Exxon, Chevron and Shell failed to increase oil and gas production despite having spent US$500 billion over the previous five years, $120 billion in 2013 alone. Under pressure from investors, the world’s largest oil companies are now forced to cut capital expenditure and sell assets to boost cash flows. Big Oil is, in short, heading towards liquidation. And this process has set in motion a tectonic shift in the global energy balance of power away from western international oil companies, or IOCs, and towards state-owned national oil companies, NOCs, in emerging markets. Not only do the NOCs – companies like Saudi Aramco; Russia’s Gazprom and Rosneft; China’s CNOOC, CNPC and Sinopec; India’s ONGC; Venezuela’s PDVSA; and Brazil’s Petrobras – control approximately 90% of the world’s known petroleum reserves, they are also immune to the market pressures constraining Big Oil.

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Betting that the Saudi’s will blink. Hey, it’s a casino out there.

Investors Pile Into Oil Funds at Fastest Pace in 2 Years (Bloomberg)

Investors are putting money into funds that track oil prices at the fastest rate in two years, betting that crude will rebound from a bear market. The four biggest oil exchange-traded products listed in the U.S. have received a combined $334 million so far this month, the most since October 2012, according to data compiled by Bloomberg. Shares outstanding of the funds, including the United States Oil Fund (DBO) and ProShares Ultra Bloomberg Crude Oil, rose to 55 million yesterday, a nine-month high. “There are investors who love to catch a falling knife,” said Dave Nadig, chief investment officer of San Francisco-based ETF.com. “It’s pretty easy to look at what’s been going on in oil and say ‘well, it has to bottom out somewhere.’ There are plenty of investors out there who still believe that the long-term trend of oil has to be $100.” Money has flowed into the funds as West Texas Intermediate and Brent crudes, the benchmarks for U.S. and global oil trading, each plunged more than 20% from their June highs, meeting a common definition of a bear market.

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Wonder what the real number is at this point in time for China, the actual growth. Even 4% feels high.

Markets Need To Accept Low Growth As ‘New Normal’ In China (Saxo)

Pauline Loong, Managing Director of Asia-analytica, gives us her assessment of the latest Chinese GDP figures: “The worst quarterly GDP performance in almost six years has raised hopes of a bolder policy response from Beijing. But more aggressive measures in the coming months might still not provide the hoped-for catalyst on stock prices or deliver the boost needed for a return to market-moving growth rates.” Pauline says we need to “be realistic” about China’s GDP and get used to lower numbers. For example 6.9% could be the “new normal” next year. China’s official GDP target for 2014 remains 7.5%, a number which looks increasingly out of reach. In response, Beijing has been “micro managing” stimulus, in Pauline’s view, going from sector to sector and even telling banks what size of business to lend to. Pauline Loong warns that China’s gear change from export driven economy to consumer driven market will take longer than most may imagine, it’s worth bearing in mind that Chinese GDP per capita is only just above Iraq in global rankings.

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200 million migrant workers are missing from the official stats. That’s considerably more than the entire active US workforce. Remember, from the article above, that “Chinese GDP per capita is only just above Iraq in global rankings.”

China to Let World in on Gauge Showing State of Economy (Bloomberg)

Chinese Premier Li Keqiang has an insider’s knowledge on the strength of the world’s second-largest economy that helps him determine when stimulus is needed. He’s about to share part of the secret. Li has said several times this year that slower growth is tolerable as long as enough jobs are created, often referring to a survey-based unemployment indicator that’s different from the registered urban jobless rate released every quarter. The published gauge excludes migrant workers who aren’t registered with local authorities, estimated at more than 200 million. The more comprehensive jobless rate will be released “very soon,” Sheng Laiyun, spokesman for the National Bureau of Statistics, said in Beijing yesterday. “The quality of the indicator, for now, looks very good. So, we are using it internally for policy decision-making references.”

China’s leaders have eschewed across-the-board stimulus and interest-rate cuts even as growth cooled to the weakest pace in more than five years last quarter, sticking to limited steps such as easing home-purchase controls. Having access to better barometers like the new unemployment measure would help economists estimate how deep a slowdown in gross domestic product the government will tolerate. “The lack of good unemployment data is the main reason why China still focuses so much on GDP,” said Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong. “In fact, the government is more concerned about employment and inflation, and that’s why they refrained from big stimulus.” Releasing the methodology, breakdown and samples for the new jobless rate in addition to the headline number, as the U.S. does, would also greatly help researchers, Zhu said.

He called China’s current registered unemployment rate “untrustworthy and unusable.” Sporadic revelations made by the government about the broader unemployment gauge, which surveys 31 cities, show about a 1 percentage-point divergence from the official rate this year. The surveyed rate fell for four straight months to 5.05% in June, the National Development and Reform Commission said on its website in July. In contrast, the official registered rate was 4.08% in the second quarter, unchanged from the previous three months. The new surveyed rate adopts a methodology following the guidance of the International Labour Organization, according to Cai Fang, vice director of the government-backed Chinese Academy of Social Sciences. “All eyes will be on it,” said Ding Shuang, senior China economist at Citigroup Inc. in Hong Kong. “It’s going to be really important, like that of the U.S.”

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The UK government is a joke.

UK Deficit Up 10% From Last Year, National Debt Rises £100 Billion (Guardian)

The chancellor’s plan to cut the deficit this year looks increasingly unrealistic after another jump in government borrowing in September pushed the deficit 10% higher in the first half of the year, lessening the chances of a pre-election giveaway at December’s autumn statement. Borrowing last month was £11.8bn, £1.6bn higher than in September 2013 and more than £1bn higher than City economists had forecast, official figures showed, as the tax take failed to keep pace with government spending despite the recovery in the economy. Tax receipts have disappointed over recent months partly due to unexpectedly weak pay growth and the increase in the personal allowance to £10,000. In the first six months of the tax year, between April and September, borrowing was £58bn, up £5.4bn on the first half of last year, according to the Office for National Statistics. Economists said it was looking increasingly likely George Osborne would miss his target of reducing the deficit by more than £12bn in 2014-15.

Alan Clarke, economist at Scotiabank, said that if the current trend continued, borrowing would come in about £10bn above the target. Howard Archer, chief UK economist at IHS Global Insight, said: “The chancellor is looking ever more unlikely to meet his fiscal targets for 2014/15. This means that Mr Osborne faces an awkward fiscal backdrop as he announces his autumn statement in December as the May 2015 general election draws ever nearer. This gives him little scope to announce any major sweeteners.” The Office for Budget Responsibility, the Treasury’s official forecaster, cautioned that although there was uncertainty over government borrowing in the second half of the fiscal year, tax receipts for the full year were likely to come in below forecast. “Factors such as weaker-than-expected wage growth, lower-than-expected residential property transactions and lower oil and gas revenues mean it is looking less likely that the full year receipts growth forecast will be met,” it said.

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How is this not a criminal practice: “The US student loan provider, Sallie Mae, sells repackaged debt for as little as 15 cents on the dollar.”

The Moral Economy Of Debt (Robert Skidelsky)

Every economic collapse brings a demand for debt forgiveness. The incomes needed to repay loans have evaporated, and assets posted as collateral have lost value. Creditors demand their pound of flesh; debtors clamour for relief. Consider Strike Debt, an offshoot of the Occupy movement, which calls itself “a nationwide movement of debt resisters fighting for economic justice and democratic freedom”. Its website argues that “with stagnant wages, systemic unemployment, and public service cuts” people are being forced into debt in order to obtain the most basic necessities of life, leading them to “surrender [their] futures to the banks”. One of Strike Debt’s initiatives, rolling jubilee, crowdsources funds to buy and extinguish debt, a process it calls collective refusal. The group’s progress has been impressive, raising more than $700,000 and extinguishing debt worth almost $18.6m. It is the existence of a secondary debt market that enables rolling jubilee to buy debt so cheaply.

Financial institutions that have come to doubt their borrowers’ ability to repay, sell the debt to third parties at knockdown prices, often for as little as five cents on the dollar. Buyers then attempt to profit by recouping some or all of the debt from the borrowers. The US student loan provider, Sallie Mae, sells repackaged debt for as little as 15 cents on the dollar. To draw attention to the often-nefarious practices of debt collectors, rolling jubilee recently cancelled student debt for 2,761 people enrolled at Everest College, a for-profit school whose parent company, Corinthian Colleges, is being sued by the US government for predatory lending. Everest’s loan portfolio was valued at almost $3.9m. Rolling jubilee bought it for $106,709.48, or about three cents on the dollar. But that is a drop in the ocean. In the US alone, students owe more than $1tn, or about 6% of GDP. And the student population is just one of many social groups that lives on debt.

Indeed, throughout the world, the economic downturn of 2008-09 increased the burden of private and public debt – to the point that the public-private distinction became blurred.In a recent speech in Chicago, Irish president Michael D Higgins explained how private debt became sovereign debt. He said: “As a consequence of the need to borrow so as to finance current expenditure and, above all, as a result of the blanket guarantee extended to the main Irish banks’ assets and liabilities, Ireland’s general government debt increased from 25% of GDP in 2007 to 124% in 2013.” The Irish government’s aim, of course, was to save the banking system. But the unintended consequence of the bailout was to shatter confidence in the government’s solvency.

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One day a deal is announced, the next it’s denied.

Fears Over Gas Supply As Russia-Ukraine Talks Fail (Reuters)

Russia and Ukraine failed to reach an accord on gas supplies for the coming winter in EU-brokered talks on Tuesday but agreed to meet again in Brussels in a week in the hope of ironing out problems over Kiev’s ability to pay. After a day of talks widely expected to be the final word, European Energy Commissioner Guenther Oettinger told a news conference the three parties agreed the price Ukraine would pay Russia’s Gazprom – $385 per thousand cubic metres – as long as it paid in advance for the deliveries. But Russian Energy Minister Alexander Novak said Moscow was still seeking assurances on how Kiev, which earlier in the day asked the EU for a further €2 billion ($2.55 billion) in credit, would find the money to pay Moscow for its energy.

Dependent on Western aid, Ukraine is in a weak position in relation to its former Soviet master in Moscow, though Russia’s reasons were unclear for wanting further assurances on finances, beyond an agreement to supply gas only for cash up front. Citing unpaid bills worth more than $5 billion, Russia cut off gas flows to Kiev in mid-June. The move added to East-West tensions sparked by Russia’s annexation of Ukraine’s Crimea and conflict in Russian-speaking eastern Ukraine. The two countries are fighting in an international court over the debt, but Oettinger noted that Ukraine had agreed to pay off $3.1 billion in two tranches this year to help unblock its access to gas over the winter. European Union states, many also dependent on Russian gas and locked in a trade war with Moscow over Ukraine, fear their own supplies could be disrupted if the issue is not resolved.

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Boy oh boy, what a surprise.

New York Fed Caught Sight of London Whale and Let Him Go (Bloomberg)

It seems pretty clear to me that JPMorgan’s London Whale episode, in which the bank’s Chief Investment Office lost $6.2 billion on poorly managed credit derivatives trades, was a huge win for U.S. banking regulators. Like, here is a rough model of banking regulation:

  1. Banks tend to be better at banking than banking regulators are, so they are unlikely to want to defer to the regulators’ judgment in most circumstances.
  2. You need the banks to buy into the regulation, and defer to the regulators, for the regulation to produce real broad-based risk reduction rather than mere check-the-box compliance efforts.
  3. One way to get the banks to buy into regulation is for them to fail catastrophically and realize that they’re not as good at their jobs as they thought they were.
  4. But catastrophic failure is precisely what, as a regulator, you want to prevent.
  5. Because it’s bad.
  6. But also because, if you allow a catastrophic failure, then you’re not a very good regulator either, so the failure provides no additional reason for a bank to listen to you.

So 2008 ushered in a new regulatory environment but at, you know, a certain cost, both to the world and to the regulators’ credibility.

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At east the Danes have not yet fully been taken over.

World’s Top-Ranked Pension Funds Probed for Hedge Fund Use (Bloomberg)

Denmark, home to the world’s top-ranked pension system, will toughen oversight of the $500 billion industry after regulators observed a surge in risk-taking linked in part to more widespread use of hedge funds. The Financial Supervisory Authority in Copenhagen will require pension funds to submit quarterly reports on their alternative investments to track their use of hedge funds, exposure to private equity and infrastructure projects. The decision follows funds’ failures to account adequately for risks in their investment strategies, according to an FSA report. The regulatory clampdown comes as Denmark deals with risks it says are inherent to a system due to be introduced across the European Union in 2016.

The new rules will allow pension funds to invest according to a so-called prudent person model, rather than setting outright limits. In Denmark, the approach has proven problematic for the only EU country to have adopted the model, said Jan Parner, the FSA’s deputy director general for pensions. “The funds are setting up for their release from the quantitative requirements, but the problem is, it’s not clear what a prudent investment is,” Parner said in an interview. “The challenge for European supervisors is to explain to the industry what prudent investments are before the opposite ends up on the balance sheets.” Denmark, which has almost two years of experience with the approach after its early adoption in 2012, says a lack of clear guidelines invites misinterpretation as firms try to inflate returns.

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Great Orlov piece on Unkraine, US, Russia, NATO.

How To Start A War And Lose An Empire (Dmitry Orlov)

A year and a half I wrote an essay on how the US chooses to view Russia, titled The Image of the Enemy. I was living in Russia at the time, and, after observing the American anti-Russian rhetoric and the Russian reaction to it, I made some observations that seemed important at the time. It turns out that I managed to spot an important trend, but given the quick pace of developments since then, these observations are now woefully out of date, and so here is an update. [..] … what a difference a year and a half has made! Ukraine, which was at that time collapsing at about the same steady pace as it had been ever since its independence two decades ago, is now truly a defunct state, with its economy in free-fall, one region gone and two more in open rebellion, much of the country terrorized by oligarch-funded death squads, and some American-anointed puppets nominally in charge but quaking in their boots about what’s coming next.

Syria and Iraq, which were then at a low simmer, have since erupted into full-blown war, with large parts of both now under the control of the Islamic Caliphate, which was formed with help from the US, was armed with US-made weapons via the Iraqis. Post-Qaddafi Libya seems to be working on establishing an Islamic Caliphate of its own. Against this backdrop of profound foreign US foreign policy failure, the US recently saw it fit to accuse Russia of having troops “on NATO’s doorstep,” as if this had nothing to do with the fact that NATO has expanded east, all the way to Russia’s borders. Unsurprisingly, US–Russia relations have now reached a point where the Russians saw it fit to issue a stern warning: further Western attempts at blackmailing them may result in a nuclear confrontation. The American behavior throughout this succession of defeats has been remarkably consistent, with the constant element being their flat refusal to deal with reality in any way, shape or form.

Just as before, in Syria the Americans are ever looking for moderate, pro-Western Islamists, who want to do what the Americans want (topple the government of Bashar al Assad) but will stop short of going on to destroy all the infidel invaders they can get their hands on. The fact that such moderate, pro-Western Islamists do not seem to exist does not affect American strategy in the region in any way. Similarly, in Ukraine, the fact that the heavy American investment in “freedom and democracy,” or “open society,” or what have you, has produced a government dominated by fascists and a civil war is, according to the Americans, just some Russian propaganda. Parading under the banner of Hitler’s Ukrainian SS division and anointing Nazi collaborators as national heroes is just not convincing enough for them. What do these Nazis have to do to prove that they are Nazis, build some ovens and roast some Jews? Just massacring people by setting fire to a building, as they did in Odessa, or shooting unarmed civilians in the back and tossing them into mass graves, as they did in Donetsk, doesn’t seem to work.

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And my main man Jim was in Sweden.

“Omenland” (James Howard Kunstler)

[..] too soon, I landed back in Newark Airport, Lord have mercy. I grabbed a taxi to the Newark train station to get to the Hudson River line out of New York City back upstate. Along the way on Route 21, I passed a graffiti on an overpass. It said “Omenland.” The anonymous genius who sprayed that there sure caught the US zeitgeist. Newark compares to Stockholm as an Ebola victim in the gutter compares to a supermodel at poolside. The scene in the Newark train station was like the barroom from Star Wars, a creature-feature extravaganza, intergalactic Mutt Central, wookies in hoodies with burning coals for eyes, ladies with pierced cheeks, crack-heads, winos, missing body part people, lopsided head people, and the scrofulous physical condition of the station is proof positive that Chris Christie is unqualified to be president. This is a gateway to New York, America’s greatest city, you understand, and it looks like the veritable checkpoint to the rectum of the universe. You know what occurred to me: maybe it is?

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Guess it’s better than nothing.

WHO: Ebola Serum In Weeks And Vaccine Tests In Africa By January (Guardian)

The World Health Organisation has announced it hopes to begin testing two experimental Ebola vaccines in west Africa by January and may have a blood serum treatment available for use in Liberia within two weeks. The UN’s health agency said it aimed to begin testing the two vaccines in the new year on more than 20,000 frontline health care workers and others in west Africa – a bigger rollout than previously envisioned. Dr Marie Paule Kieny, an assistant director general at the WHO, acknowledged there were many “ifs” remaining and “still a possibility that it [a vaccine] will fail”. But she sketched out a much broader experiment than was imagined only six months ago, saying the WHO hoped to dispense tens of thousands of doses in the first months of the new year. “These are quite large trials,” she said.

Kieny said in remarks reported by the BBC that a serum was also being developed for use in Liberia based on antibodies extracted from the blood of Ebola survivors. “There are partnerships which are starting to be put in place to have capacity in the three countries to safely extract plasma and make preparation that can be used for the treatment of infective patients. “The partnership which is moving the quickest will be in Liberia where we hope that in the coming weeks there will be facilities set up to collect the blood, treat the blood and be able to process it for use.” A WHO spokeswoman, Fadela Chaib, said the agency expected 20,000 vaccinations in January and similar numbers in the months afterwards using the trial products. An effective vaccine would still not in itself be enough to stop the outbreak but could protect the medical workers who are central to the effort. More than 200 of them have died of Ebola.

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Aug 202014
 
 August 20, 2014  Posted by at 9:42 pm Finance Tagged with: , , , , , ,  


Dorothea Lange Salvation Army, Minna Street, San Francisco, California. Apr 1939

When I think about what an American president should do, and should be, the first thing that pops into my mind is (s)he should be a peacemaker. It would seem to be the no. 1 requirement for someone who’s the leader of the most powerful nation on the planet, and therefore the leader of the free world.

If that person is not a peacemaker, if (s)he is not focused on diffusing trouble and violence when and where they rear their ugly heads, how could the entire world possibly not be in a state of perpetual warfare? But here we are, there’s no such American leader in sight, and the prospects of one appearing anytime soon are zero.

Despite what anyone might say or claim, and many will do just that, today America makes war, not peace. A lot of people tell a lot of stories of how and why the American Empire is winding down, but they’re usually talking about the US dollar or energy resources or the rise of China.

For me, it’s the failure of the strongest power in the hood to maintain peace and calm, that tells the story in the clearest terms. If the leader doesn’t just not keep the peace, but actively ignites battles, all the rest are doomed to fight amongst each other until either the end of time, or the end of the leader’s prominence, whichever comes first.

Today, as we look at what goes on in Ukraine, Iraq, Syria, the Gaza Strip, there’s no way we can say the US hasn’t had a stoke-the-fire role in each of these conflicts, and in most cases has even been the main instigator. If you’re the biggest bully on the block, and you keep on bullying people, your days are numbered. It’s the law of the jungle.

Once you’re on top, expectations and responsibilities change. You just went from conquering the fort to holding the fort. And that change is very hard to make. Then again, it’s not as if no-one in 20th century American history ever had an idea of how it works. Robert Kennedy. Ron Paul.

But today American policy is made in the headquarters of Big Oil, the military-industrial complex and Wall Street. All of whom stand to profit hugely from chaos and bloodshed in foreign countries, and won’t shy away, never have, from putting American boots on the ground if they feel that will boost their profits. Boots worn by kids who know the army is their only chance at ever getting a real education, but never make it back home.

This was inevitable from the moment money was allowed to enter US politics, and it inevitably got stronger over time, until it culminated in the recent Supreme Court decision that there should be no effective limits to how much influence the rich can purchase themselves in Washington.

And if you’ve got the cash to buy yourselves the best writers and spin doctors in the world, you can maintain the illusion of democracy, of one man one vote, for a very long time. We all witness that principle on a daily basis. It can be done. People can be made to believe they live in a democracy, that they live in a nation and a political system where their voice counts and has real meaning, for long after they stopped having any voice at all.

It takes those same spin doctors, it takes control over all relevant media (and you decide what’s relevant), and it takes the best speech writers, but since money is no object, why worry, you can always buy better spinners and media and writers than anyone else.

You can’t lose. You have complete control. You can buy the government, the media, and what’s more, through the advertizing industry, you can buy the picture people have of them, and of you.

No matter what harm bankers and oil drillers and gunmakers engage in, they can make sure the public sees them in a favorable light. It may not seem that way at first blush, but remember, the banking/oil/military complex doesn’t need you to love them, only to not hate them, to not demand their downfall. And they’re very successful in that.

Who calls for Exxon to be swept from the face of the earth, or JPMorgan, or Boeing? Nobody. That’s all these firms need, given what’s left of the democracy we once aspired to be. As long as they have that, they can continue to manipulate prices for oil and gold and American homes and jobs as much as they want, for their own benefit and at the cost of everyone else.

America’s role as instigator in theaters like Ukraine – which can be blamed on Putin -, in Iraq – plenty of potential bad guys there – remains hidden thanks to the usual suspects, NY Times, WSJ, Bloomberg etc, let alone CNN and Fox, all of which claim independence, and all were long since purchased hook, line, sinker and fishing pond.

Even inside America, how are things different exactly? The first black president prefers Martha’s Vineyard to a visit to the first serious racial riots since he got the job. Not exactly hands on, to say the least. Or a peacemaker. More like just another neighborhood bully, or a ‘representative’ of that bully. Even worse.

Obama should have been in Ferguson at least a week ago. The fact that he didn’t go has me worried about all those places just like Ferguson, where jobs and conditions and prospects have gotten much worse for so many young black – and white – people, and where “authorities” seem only too eager to show of their power and their new federal government issued toys, which scream ‘overkill’ from all angles, and were purchased with borrowed money.

I wish I could say this is not going anywhere. It is going somewhere though. Just not anywhere you or I should want to go. But we have been pre-empted, what we think or feel no longer matters. The system decides, fully independent from what we as participants in this democracy are legally entitled to, and are supposed to do: guide our nations’ policies towards what we want, not what a handful of corporate interests want.

We lost that. We no longer have any influence on what Obama decides, or Congress, or the next president. It’s gone.

Uh-oh: Stock Buybacks Are On The Decline (MarketWatch)

Everyone knows the stock market has skyrocketed in the past few years, but far too few understand why. No, it hasn’t been magic. It hasn’t been levitation. It hasn’t been the natural state of affairs. It’s been supply and demand. U.S. corporations have been spending hundreds of billions of dollars a year buying in their own stock, simultaneously increasing the demand for the stock and reducing the supply. And this matters right now because…er…they just stopped. The amount spent on share buybacks plunged by more than 20% last quarter, strategists at SG Securities calculate. Even though stock prices in the Standard & Poor’s 500 were on average 25% higher than they were a year ago, the amount spent on share buybacks actually fell. As SG notes, “US corporates (have) been the major net buyer of US equity in recent years, purchasing over $500 billion of stock last year alone.” But, notes the bank, this happy trend may be drawing to a close.

There are two reasons. The first is that the federal deficit is falling. Without getting too technical, economists note that there is an historical and mathematical connection between federal deficits and corporate profits. The booming deficits around the financial crisis were followed by booming corporate profits. And corporations used a lot of that money to buy up stock. As deficits decline as a share of the economy, so, it is likely, will corporate profits. The second reason has to do with the winding down of the Federal Reserve’s “quantitative easing” policy. From 2009 through 2013, the Fed effectively printed money and used it to buy up long-term government bonds. Bonds work like seesaws: When the price rises, the yield falls. The Fed’s actions drove up the price of Treasury bonds, and drove down the yield — or interest rate. As the interest rate on Treasury bonds fell, the interest rate that investors demanded on long-term corporate bonds also fell. It became cheaper and cheaper for corporations to borrow money.

The average yield on Moody’s-rated BAA corporate bonds — meaning those at the bottom rung of investment grade — is now below 5%, levels not seen for any length of time since before the Vietnam War. Drop hamburger on the kitchen floor and your golden retriever will eat it. Drop free money on the bond market and corporations will behave about the same. And so they have.

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How sad would you like it? How much can you bear?

A True Picture of What’s Dragging on the American Economy (WolfStreet)

The Bureau of Labor Statistics released a study to confirm what has become the biggest economic problem in the US: those at the lower-income levels, those who’ve gotten ripped off by inflation and wages, have become terrible consumers in an economy dependent on consumer spending. The report found that the average income of households in the top 20% grew by $8,358 per year from 2008 through 2012. But the lowest 20% saw their already minimal incomes get whittled down by $275 per year. The earnings of the second and third quintiles increased only $143 and $69 per year. So for the bottom 60% combined, there really wasn’t any improvement. And their spending patterns? The lowest quintile cut their spending by $150 per year in total. They cut where they could: in seven categories, totaling $490 per year, mostly on apparel, entertainment, housing, and personal care.

And they increased spending where they had to: in seven other categories totaling $340, topped by “cash contributions” such as alimony, “miscellaneous,” and healthcare. This principle of cutting back where they can and spending more where they have to, in order to make their shrinking ends meet, has been dissected by Gallup, which found that consumers are “straining against rising prices on daily essentials” and are cutting back on things they want to buy. But not everyone has this problem. The top two quintiles raised their expenditures by $1,348 and $2,365 respectively. And that’s where the entire increase in consumer spending since 2008 has come from. But over the long run – and that’s now – the math just doesn’t work out. This is the picture of that distortion, the one that is dragging down the American economy:

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Twouble in the house!

BOE Split On Interest Rates Reopens Prospect Of A Rise In 2014 (Guardian)

The first increase in interest rates from the Bank of England since 2007 has moved a decisive step closer after two members of Threadneedle Street’s key policy committee broke ranks and voted for dearer borrowing. Minutes of the meeting of the Bank’s monetary policy committee meeting show that two of the nine members – Martin Weale and Ian McCafferty – called for rates to be pushed up by a quarter point to 0.75%. Although the other seven members of the MPC said weak earnings growth, below-target inflation, and the fragile finances of some households warranted keeping rates unchanged, the August meeting was the first time since 2011 that the MPC has not voted unanimously on rates.

The City had been expecting another 9-0 vote in favour of keeping borrowing costs at 0.5% and the pound rose by half a cent against the dollar shortly after the minutes were published, as dealers anticipated more MPC members joining Weale and McCafferty over the coming months. According to the minutes, the two dissenting MPC members said the state of the economy justified an immediate rise in the bank rate. “These members noted that the continuing rapid fall in unemployment alongside survey evidence of tightening in the labour market created a prospect that wage growth would pick up. They noted that it was possible that wages were lagging developments in the labour market to some extent. If that were true, wages might not start to rise until spare capacity in the labour market were fully used up. Since monetary policy, too, could be expected to operate only with a lag, it was desirable to anticipate labour market pressures by raising Bank Rate in advance of them.”

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Simple, to the point.

How Your Pension Fund Became a Casino (Yves Smith/Bloomberg)

In September 1974, Congress passed a law aimed at ensuring that U.S. companies could fulfill the vast pension promises they had made to millions of employees. Forty years later, that law is greatly in need of reinterpretation. Known as the Employee Retirement Income Security Act, the law has been widely hailed as a success. It created standards for managing private pension funds that professionalized their operations — and that public pension funds, which invest on behalf of government employees, have also chosen to adopt. In 1978, though, the Labor Department made an adjustment that has had vast consequences. Responding to political pressure and influenced by new academic thinking on portfolio theory, it reinterpreted the so-called prudent-man rule of fiduciary duty. Fund managers would be judged not on the risk of their individual investments, but on the risk profile of their investment portfolio as a whole.

The result was that the pension funds, which had long been limited to safe assets such as corporate bonds and Treasury securities, could put some money into riskier investments such as stocks and venture capital — on the assumption that diversification, both by asset class and within each asset class, would reduce risk in the broader portfolio. Unfortunately, over-reliance on the power of diversification has led fund managers to be less attentive to the hazards of particular investments. Consider two examples: private-label mortgage securities, which are issued without government guarantees, and private-equity partnerships, which acquire public companies with the aim of restructuring them and selling at a profit. Seduced by AAA ratings, fund managers often ignored the extraordinary complexity of mortgage securitizations, which typically involve hundreds of pages of documents defining the circumstances under which different investors get paid or suffer losses. As a result, they failed to notice some significant pitfalls.

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Fannie Mae Sledgehammers Housing Forecasts To Smithereens (WolfStreet)

The National Association of Home Builders just released its Housing Market Index [..] Home builders have become an optimistic bunch in 2012. As housing starts were ticking up a smidgen, builder optimism as measured by the HMI began to surge, and except for a couple of dives, including during the harsh winter this year, has continued to surge. The HMI has soared even as the puny growth in housings starts petered out in 2013. And they remain mired down at about one-third of the level where they’d been during the bouts of peak optimism. But the NAHB’s electronic ink wasn’t even dry, so to speak, when the ever optimistic Fannie Mae, the bailed-out government mortgage giant, came out with its August 2014 forecast, in which it took a sledgehammer to its prior forecasts. Home sales have been plunging for months, after post-crisis optimism peaked mid last year. And Fannie Mae is adjusting to an ugly reality.

It slashed its 2014 forecast for construction starts for single-family homes to 642,000 units, down 8% from its July forecast of 696,000. But it has been slashing its forecasts all along: in January, it had still seen 768,000 single-family housing starts in 2014. And in August last year, it had forecast 876,000 starts. It has now chopped 27% off that forecast. Same thing with home sales. Fannie Mae cut its forecast for new single-family home sales to 431,000 units, down 11% from last month, down 21% from its forecast in January. August last year, it still believed that 588,000 new single-family homes could be sold in 2014. Now it has axed that by a brutal 36%. The current forecast is about flat with the 429,000 units actually sold last year. But this is only August. There are four more months to go, and at the current rate of slashing forecasts to bring them in line with reality, it doesn’t look good for the year.

Fannie Mae then took its sledgehammer to its forecast of existing home sales. Only 4.91 million units will change hands this year, it said, down from 4.97 million in July, down from 5.18 million in January, and down from 5.26 million in August last year. The current forecast is already 3.5% below actual sales last year. And total home sales? Fannie cut its forecast for 2014 to 5.34 million units, from 5.45 million last month, from 5.70 million in January. The forecast is now down 9% from the 5.85 million it forecast in August 2013, and it’s 3.4% below last year’s actual sales.

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Germany never had a housing boom. Now they do.

Germany Sees Dizzying Rise In Housing Prices (CNBC)

As soon as someone mutters the words London property, the word “bubble” is never far away. London house prices displayed a jaw-dropping 20% growth year-on-year in July– even though last week’s RICS indicator showed that the housing market is pausing for breath. Bank of England (BoE) Governor Mark Carney has sounded a warning on tougher mortgage rates and the expectation of higher rates. But London isn’t the only place which is seeing a dizzying increase in property prices. Look no further than across the channel – to the euro zone’s economic powerhouse – Germany. Major cities like Frankfurt, the financial capital, Munich with its famous beer gardens and proximity to the Alps and Stuttgart, the home of Mercedes and Porsche, are becoming increasingly attractive as a place to live and work. Germans from rural settings and immigrants are flocking to the cities.

But like in London, an equally potent driver of the property market in Germany is the good old “search for yield”. “Near zero interest rates in the euro zone make sense for the region but not for Germany. The economy has been relatively strong and the interest rate policy is disjointed from economic reality,” Patrick Armstrong from Plurimi Global Macro Fund told CNBC. “With 10-year Bund yields at 1%, free money will have to flow towards property at some point. Rental yields of 4-5% are attractive with current interest rates, and German property is the least expensive per square meter in Western Europe.” Rolf Buch, CEO of Deutsche Annington, Germany’s largest private-sector residential real estate company, echoed these comments when he told CNBC the German housing market is in a “sweet spot” because of stable incomes and the benefit from low interest rates.

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Dodges US court order. Pariah?

Argentina To Bring Defaulted Debt Under National Law (Reuters)

President Cristina Fernandez said on Tuesday her government will move to service its defaulted debt in Argentina or allow bondholders to swap their bonds for new bonds governed by national law in order to get around a U.S. court order. Argentina slid into default last month after a New York court blocked an interest payment owed to holders of debt that was restructured after the country’s record 2002 default. The judge said Argentina could not pay that debt until it had also settled with a group of funds that had rejected the restructuring deal and were demanding full payment.

Fernandez’s announcement killed hopes that Argentina might soon reach a deal with holdouts, enabling it to exit default. In a televised speech, Fernandez said her government would send a bill to Congress to remove Bank of New York Mellon as the exchange bondholders’ trustee and replace it with Argentina’s Banco Nacion. Banco Nacion would open up an account at the country’s central bank to enable Argentina to service its exchange debt there. Under the proposal, holders of bonds resulting from the 2005 and 2010 debt restructurings could also choose to swap their bonds for notes with “identical terms and financial conditions, and with equal nominal value” under Argentine law.

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Ha!

Bank of China Doubles Money for Bad Loans as Growth Slows (Bloomberg)

Bank of China Ltd. more than doubled its money set aside for bad loans as profit growth cooled to the slowest pace in five quarters on weakness in the economy. Provisions for potential soured debt climbed to 12.7 billion yuan ($2.1 billion) in the second quarter, up 116% from a year earlier, based on half-year figures released by the Beijing-based company yesterday. Net income rose 8.5% to 44.4 billion yuan, the earnings statement showed. The nonperforming loans of China’s fourth-largest bank surged to 85.9 billion yuan, the highest in more than five years, as companies struggled with repayments in an economy at risk of the weakest full-year growth since 1990.

The nation’s lenders are already trading at the cheapest price-to-earnings valuations of global banks. “The biggest concern for Bank of China is their asset quality,” Chen Xingyu, a Shanghai-based analyst at Phillip Securities Research, said by phone. “The trend is very obvious. We expect nonperforming loans to continue rising in the next two quarters.” The bank’s net income compared with the 44.9 billion-yuan median of 10 estimates in a Bloomberg News survey. Its net interest margin, a measure of lending profitability.

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Sanity.

Latvia Evokes 1914, Urges End To ‘War Of Sanctions’ Before Economies Ruined (RT)

The “right steps” politicians in the West and Russia are now taking against each other are very similar to what was happening before World War I, Latvian MEP Andrejs Mamikinsh warned EC President Jose Manuel Barroso in a letter Tuesday. It’s crucial to stop reciprocal sanctions before they throw people into poverty and ruin the economies altogether, the European Parliament member wrote. “In 2014 exactly 100 years have passed since the beginning of World War I that killed millions of people and left Europe in ruins. On the eve of that war similar processes occurred when countries took “the right” steps against each other and eventually were not able to stop. It is doubtful that in the end of that war anyone remembered for what good intentions it had started,” Mamikinsh wrote in his letter.

These would be ordinary people, not politicians, who’ll be hit first and hardest by a so called “risky poker” played by politicians in the West and Russia, the Latvian MEP, added. Latvia is expected to suffer the most from the tit for tat sanctions imposed by the West and Russia, Mamikinsh said. Further escalation of a “sanctions war” would erode about 10% of Latvian GDP, which means thousands of people could be left out of work with shrinking living standards.

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Everyone seems to want Ukraine to fail. It’s a power game.

Ukrainian Steel, Coal Producers Facing Shutdown as Result of Conflict (MM)

We have viewed the unfolding violence in eastern Ukraine on our TV screens as a humanitarian disaster in the making. An estimated three quarters of a million Ukrainians have fled across the border into Russia, many living in tents in 95 temporary refugee camps. A further 175,000 are said to be displaced westward into Ukraine. Economically, the damage to Ukraine will take much longer to evaluate. For the steel and coal industries, the situation is deteriorating as the conflict intensifies. This week Reuters reported that after months of fighting, extensive damage has been sustained to the infrastructure of Ukraine’s industrial heartland and considerable disruption to supply networks, leading to a 12% year-on-year fall in industrial output in July.

Last week, it emerged that around half of the 115 coalmines in Ukraine, Europe’s second-largest coal producer, had halted production entirely. Shelling of power stations and transmission lines has halted production at Avdiivka coke plant, which produces 40% of Ukraine’s coke. The same loss of power has led to the full shut down of production at Yenakiieve Steel, a leading producer of steel billet. Enakievskiy Koksohimprom and Khartsyzsk Pipe is one of Europe’s largest large-diameter pipe mills according to the owners Metinvest. Metinvest controls about 50% of Ukraine’s steel market and steel makes up about 15% of the Ukrainian economy, which last year was the fifth-largest exporter in the world, according to a separate Reuters report. Tensions in eastern Ukraine have led to outright production disruptions as the year has gone on resulting in a 7% fall in output in the first half of 2014.

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How many black people on the jury?

Ferguson Police Shooting Grand Jury Probe Starts Today (Bloomberg)

A grand jury will begin hearing evidence tomorrow in the police shooting death of Ferguson, Missouri, teenager Michael Brown, as violent clashes continued in the St. Louis suburb. Witnesses are scheduled to appear before the grand jury, Ed Magee, a spokesman for St. Louis County Prosecuting Attorney Bob McCulloch, said in a telephone interview today. The shooting sparked more than a week of violent protests in Ferguson. The state grand-jury probe comes as federal officials are starting a civil-rights’ investigation into the death of the unarmed black teenager. President Barack Obama has ordered U.S. Attorney General Eric Holder to go to Ferguson and meet with FBI agents and Justice Department lawyers handling the probe into the circumstances of Brown’s death. Police fired tear gas at protesters and 31 people were arrested in Ferguson last night after demonstrators refused to leave a section of the city that has been the epicenter of protests.

Brown, 18, was killed Aug. 9 by Darren Wilson, a white Ferguson police officer, after being stopped on a city street, Police Chief Thomas Jackson said earlier. Wilson has the right to testify before the grand jury, Magee said. It’s not clear how long the proceedings will take or how many witnesses will be called, he said. Greg Kloeppel, Wilson’s lawyer, declined in a telephone interview to comment on the grand jury. Kloeppel is chief legal counsel for a local chapter of the Missouri Fraternal Order of Police. Evidence is still being collected and the probe is “far from being finished,” so there’s no timeline for the case, Magee said yesterday. The grand jury must decide whether Wilson violated the law by shooting the teenager and whether he should face charges ranging from manslaughter to murder, said Gordon Ankney, a former assistant county prosecutor who now does criminal defense work in St. Louis.

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That’s what I said yesterday.

Go to Ferguson, Mr. President (Bloomberg Ed.)

Once upon a time, there was a man who gave moving and important speeches about race. He was careful to respect history, to call out injustice, to acknowledge competing anxieties — and, crucially, to elucidate a path forward. His speeches touched Americans of every color and background and gave them hope that it is possible to make progress in their great national project of creating a more just and equal society. That man was Barack Obama. As a little-known Senate candidate a decade ago, he offered a grand vision of a united America; four years later, as the Democrats’ leading presidential candidate, he offered a more personal reflection. Obama’s unique ability to both articulate and embody the equal-opportunity ideal of America helped him become the country’s first biracial president. Since he has taken office, however, this Obama has mostly gone missing. It has never been more manifest, or painful, than these past weeks in Ferguson, Missouri.

As local and state authorities bumble their way through the crisis that erupted over the police shooting of 18-year-old Michael Brown, Obama has said little of note. Yesterday he held a news conference in which he checked all the necessary boxes: He condemned violence and looting, endorsed the rights of protesters, acknowledged racial grievances with the criminal justice system, and suggested that Americans “use this moment to seek out our shared humanity.” Then he hopped on Air Force One to resume his vacation. Obama was right to recognize the magnitude of this moment. But he seems not to realize that he himself has to be the one to seize it. It is his job as president, of course, and it also happens to be a task that almost perfectly matches his talents and demeanor. Attorney General Eric Holder will be in Ferguson [today]. But the president should go, too – if not tomorrow then in the days or weeks ahead.

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Yikes!

Under What Conditions Can The US Army Engage Citizens (Zero Hedge)

With events in Ferguson deteriorating from day to day, despite the arrival of the Missouri National Guard, some have asked what further escalation steps are possible.

As a reminder, the reason Missouri governor Jay Nixon resorted to the aid of the National Guard is due to the limitations imposed by the Posse Comitatus Act which, broadly, seeks to limit the powers of Federal government in using federal military personnel, i.e., the Armed Forces of the United States, to enforce state laws. The Act does not apply to the National Guard, nor to the US Coast Guard, although the former will likely not see much practical use in Missouri.

However, as usually happens, there are loopholes and the best place to uncover these is in a 132-page primer conveniently released by none other than the US Army back on April 21, known simply as ATP 3-39.33 “Civil Disturbances.” The primer begins with the umbrella statement:

Civil unrest may range from simple, nonviolent protests that address specific issues, to events that turn into full-scale riots. Gathering in protest may be a recognized right of any person or group, regardless of where U.S. forces may be operating. In the United States, this fundamental right is protected under the Constitution of the United States…

“Protected” it may be, but as usual, the interpretation of the Constitution is in the eye of the beholder, or more appropriately, gun holder. Because shortly thereafter we further read the following:

The Constitution of the United States, laws, regulations, policies, and other legal issues limit the use of federal military personnel in domestic support operations. Any Army involvement in civil disturbance operations involves many legal issues requiring comprehensive legal reviews. However, federal forces are authorized for use in civil disturbance operations under certain circumstances.

What circumstances? For the answer we turn to section, 2-8, whose provisions may soon become applicable to Ferguson and/or other municipal regions, should the rioting in the St. Louis suburb escalate further.

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US Spends Millions To Blow Up Its Own War Machines (Reuters)

Last week was a weird one for American military hardware. In the United States, Mine-Resistant Ambush Protected vehicles (MRAPs), AR-15s and camouflage body armor all made an appearance on the streets of a suburb in the heartland, helping to give a tense situation the push needed to turn into a week of riots. American citizens in Ferguson, Missouri, feeling they were being occupied by a foreign army, rather than their friendly neighborhood cop on the beat. Riot police stand guard as demonstrators protest the shooting death of teenager Michael Brown in Ferguson, Missouri.

MRAPs didn’t get a better rap overseas, either. In what’s still being called Iraq — at least for the sake of convenience — the U.S. Air Force has resumed bombing missions in the northern part of the “country.” The aim of the missions is stated as being the defense of a minority group known as the Yazidis, who practice a religion unique to themselves and are under threat by the Islamic State, a jihadi group that controls a large chunk of territory in Syria and Iraq. The extremist cadre Islamic State — which has declared itself to be the new caliphate, representing God’s will on earth — has had an incredible string of military successes over the last few months. They’ve taken a lot of territory. They’ve slaughtered a lot of people, including civilians. They’ve imposed what they say is Islamic law — though many Islamic scholars would beg to disagree. And Islamic State’s captured an enormous amount of U.S. weaponry, originally intended for the rebuilt Iraqi Army.

You know — the one that collapsed in terror in front of the Islamic State, back when they were just ISIL? The ones who dropped their uniforms, and rifles and ran away? They left behind the bigger equipment, too, including M1 Abrams tanks (about $6 million each), 52 M198 Howitzer cannons ($527,337), and MRAPs (about $1 million) similar to the ones in use in Ferguson. Now, U.S. warplanes are flying sorties, at a cost somewhere between $22,000 to 30,000 per hour for the F-16s, to drop bombs that cost at least $20,000 each, to destroy this captured equipment. That means if an F-16 were to take off from Incirclik Air Force Base in Turkey and fly two hours to Erbil, Iraq, and successfully drop both of its bombs on one target each, it costs the United States somewhere between $84,000 to $104,000 for the sortie and destroys a minimum of $1 million and a maximum of $12 million in U.S.-made equipment.

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Why do we do it?

Earth Overshoot Day: We Already Used Up A Whole Year’s Resources (Guardian)

Humans have used up the natural resources the world can supply in a year in less than eight months, campaigners have warned. The world has now reached “Earth overshoot day”, the point in the year when humans have exhausted supplies such as land, trees and fish and outstripped the planet’s annual capacity to absorb waste products including carbon dioxide. The problem is worsening, with the planet sliding into “ecological debt” earlier and earlier, so that the day on which the world has used up all the natural resources available for the year has shifted from early October in 2000 to August 19 in 2014.

In 1961, humans used only around three-quarters of the capacity Earth has for generating food, timber, fish and absorbing greenhouse gases, with most countries having more resources than they consumed. But now 86% of the world’s population lives in countries where the demands made on nature – the nation’s “ecological footprint” – outstrip what that country’s resources can cope with. The Global Footprint Network, which calculates earth overshoot day, said it would currently take 1.5 Earths to produce the renewable natural resources needed to support human requirements. The network warned that governments that ignore resource limits in decision-making are putting long-term economic security at risk.

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repaet of what I’ve said often.

The Powerful ‘Group Think’ on Ukraine (Robert Parry)

When even smart people like economist Paul Krugman buy into the false narrative about the Ukraine crisis, it’s hard to decide whether to despair over the impossibility of America ever understanding the world’s problems or to marvel at the power of the U.S. political/media propaganda machine to manufacture its own reality. On Monday, Krugman’s New York Times column accepts the storyline that Russia’s President Vladimir Putin instigated the Ukraine crisis and extrapolates from that “fact” the conclusion that perhaps the nefarious Putin did so to engineer a cheap land grab or to distract Russians from their economic problems.

“Delusions of easy winnings still happen,” Krugman wrote. “It’s only a guess, but it seems likely that Vladimir Putin thought that he could overthrow Ukraine’s government, or at least seize a large chunk of its territory, on the cheap — a bit of deniable aid to the rebels, and it would fall into his lap. … “Recently Justin Fox of the Harvard Business Review suggested that the roots of the Ukraine crisis may lie in the faltering performance of the Russian economy. As he noted, Mr. Putin’s hold on power partly reflects a long run of rapid economic growth. But Russian growth has been sputtering — and you could argue that the Putin regime needed a distraction.”

Or you could look at the actual facts of how the Ukraine crisis began and realize that it was the West, not Russia, that instigated this crisis. Putin’s response has been reactive to what he perceives as threats posed by the violent overthrow of elected President Viktor Yanukovych and the imposition of a new Western-oriented regime hostile to Moscow and Ukraine’s ethnic Russians. Last year, it was the European Union that was pushing an economic association agreement with Ukraine, which included the International Monetary Fund’s demands for imposing harsh austerity on Ukraine’s already suffering population. Political and propaganda support for the EU plan was financed, in part, by the U.S. government through such agencies as the National Endowment for Democracy. When Yanukovych recoiled at the IMF’s terms and opted for a more generous $15 billion aid package from Putin, the U.S. government ratcheted up its support for mass demonstrations aimed at overthrowing Yanukovych and replacing him with a new regime that would sign the EU agreement and accept the IMF’s demands.

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Sad.

A Time To Cull? The Battle Over Australia’s Wild Horses (Guardian)

The last mare in Dead Horse Gap lies dying on a pure-white bed of snow. Her ears twitch as we approach, but she’s too weak to lift her head. Her rib bones are a scaffold now for her chocolate brown coat. About her, her fellow mob lie in various stages of decay, food for fat, shiny foxes. Crows line the pretty snow gums above. This mare, like her mates, has starved here in Australia’s alpine winter landscape for the unhappy chance of being in the wrong place at the wrong time. She was caught in a mountain pass when the late snow arrived, and nothing can save her now. And by her eye, she knows it. This scene is, as the poet Tennyson put it, “nature, red in tooth and claw”. In another life, a mare like her could have been petted and cosseted and dressed in a pink rug by a teenage girl who would have whispered love-torn secrets into that twitching ear. In this story, the foxes will have it.

It’s a bad year for Australia’s wild horses caught in the upper reaches of the Australian Alps. This mountain pass between New South Wales and Victoria is not called Dead Horse Gap for nothing. But it could get worse for the wild horses as national parks in Victoria and NSW decide how to manage brumby numbers, which they describe as out of control. Both states are considering “wild horse management plans” for the next five years. Both will address how to cull brumbies with all methods on the table, in an effort to protect Australian habitats and species. They may be dying up top, but down the mountain, on the open plains of the now-deserted gold mining village of Kiandra, a mob of 24 fat and shiny brumbies tramps through the appropriately named Racecourse creek. The creek forms part of the Eucumbene catchment, delivering water to 2.1 million people downstream.

These animals are magnificent as they run through the snow against a pink evening sky. When we follow their tracks, they run along a watercourse, leaving deep prints in a spongy, unstable wetland, before escaping from us to higher ground. As we follow, the scene resembles a Lord of the Rings landscape of soft grassland studded by pools fringed with the “super moss”, sphagnum. Problem is, this swampy stuff is heritage-listed. Sphagnum is highly prized for holding a lot of water and carbon. It is the breeding ground for the endangered corroboree frog, a black and fluoro smudge that would fit on the end of a teaspoon. The surrounding environment is habitat for other endangered species such as the pygmy possum, the broad-toothed rat, the mountain she-oak skink and the guthega skink.

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Sad.

Lions Hunted to Preserve Rhinos in South African Circle of Life (Bloomberg)

When U.S. television host Melissa Bachman posted a photo on Facebook of herself smiling and holding a rifle above the head of a lion she had shot, the response was instant. Users of the social network vilified Bachman, 30, who also killed a Nyala antelope last year on a trip to South Africa, as “evil,” a “low-life” and a “disgusting excuse for a human being.” The hunting trip was part of South Africa’s 12 billion rand ($1.1 billion) per year game ranching industry, which is growing at 10% annually, according to Barclays Africa Group. The industry also responsible for boosting the country’s large mammal population, a measure that excludes animals such as rodents, to 24 million, the most since the 19th century, and up from 575,000 in the early 1960s, Wouter van Hoven, an emeritus professor at the University of Pretoria, said in an interview last month. By contrast animal numbers in Kenya, which bans hunting, have plunged.

“We’re made out to be the bad guys,” said Peter Oberem, 60, a veterinarian turned game rancher, as he pointed to three adolescent rhinos being raised on his farm in northern South Africa, funded by hunting. “We put everything we earn back into conservation. Hunters pay us to save the rhino and repopulate Africa with native species.” Game ranching, the private-ownership of wildlife for hunting, tourism and meat production that’s been allowed by law since 1991, has split conservation groups. Some, such as London-based Save the Rhino, say the money raised from hunting is vital in the fight against poaching. The Massachusetts-based International Fund for Animal Welfare, says it’s hypocritical to conserve animals by killing them, and that turning wildlife into a commodity is bad for natural ecosystems.

Kenya, which focuses on eco-tourism, has lost 80% of its wildlife since it banned hunting almost 30 years ago, said Mike Norton-Griffiths, an academic writing for London’s Institute of Economic Affairs, a social policy research group. The country’s elephant population has dropped 76% since the 1970s while rhinos are down 95%, said Stephen Manegene, Director Wildlife Conservation in Kenya’s Department of Environment and Natural Resources. Foreign hunters, about 60% of whom came from the U.S., spent $118.1 million on licenses to hunt in South Africa in 2012, figures from the Pretoria-based Professional Hunters’ Association of South Africa, known as PHASA, show. Hunters target animals ranging from the Big Five — rhino, lion, leopard, elephant and buffalo — to plains game, a term for antelopes. The hunting of endangered animal species, such as the black rhino, is subject to quotas.

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Jul 272014
 
 July 27, 2014  Posted by at 1:35 pm Finance Tagged with: , , , , ,  


Lewis Hine 10-year-old oyster shucker, does 5 pots a day; been working 3 years Feb 1912

As the propaganda war over 298 innocent dead people plunges into ever deeper absurdity, I think we may have found the answer to a question that intrigued me over the past few days: why did Ukraine PM Yatsenyuk and his government resign all of a sudden last week? A banker, installed by the west, who produced some of the most over the top language against Russia and his own Russian speaking fellow citizens, who leaves mere days after the battle he’s involved in gained a whole new dimension with MH17. Puzzling.

But there are now clues as to why he may have done it (note: I don’t rule out his possible personal involvement in the MH17 crash either). The clues don’t come from western media, but that’s probably not surprising. I therefore have to turn to Russian media, and though many will say they may be part of the propaganda war as well, I don’t think these particular things are made up, simply because it makes no sense to invent a TV talk show and a parliamentary vote out of thin air; these things are easy to trace.

First, Ria Novosti reports on a Yatsenyuk talk show appearance after his resignation:

“My decision to resign has one motive: I want the whole country to see that the parliament refuses to support the Ukrainian Armed Forces, the parliament refuses to fight for the east and impose taxes on those who need to pay taxes,” Yatsenyuk said in a Shuster LIVE Ukrainian talk show. Yatsenyuk said the country’s parliament needs a “reset” and also called to carry out reforms even if this demands taking unpopular steps among the Ukrainian population. He urged the parliament to allocate additional 9 billion hryvnia ($0.7 billion) to support the troops and also approve the bills on levying taxes on the most profitable sectors and attracting European and US companies to the management of the country’s gas transmission network.

In my view, that last bit is the clincher. RT expands on the story.

Ukraine Votes To Keep Western Companies Out Of Gas Industry

Ukraine’s parliament has rejected allowing EU and US companies to buy up to 49% of oil and gas company Naftogaz, and also said they were against liquidating the national energy monopoly . Kiev rejected splitting the company in two, a measure encouraged by the West in order for Naftogaz to comply with Europe’s third energy package, which doesn’t allow one single company to both produce and transport oil and gas. The bill proposed creating two new joint stock companies in order to conform to the package, “Ukraine’s Main Gas Transmission” and “Ukraine’s Underground Storages.” The proposal sought to meet the requirements of EU legislation and strengthen Ukraine’s energy independence.

Earlier in July, the Ukrainian parliament passed a first reading of the bill that would have allowed Western companies up to a 49% of Ukraine’s Gas Transportation System (GTS). There had been rumors the state would sell off at least 15% of Naftogaz in a public offering, however, the conditions in Ukraine’s capital and equity market aren’t strong enough to get a high enough price. The changes was rejected because of the large monopoly and influence Naftogaz has over the Ukrainian market, the country’s political scientist Alexander Ohrimenko, told Russian business daily RBC.

Ukraine’s Rada needed a minimum of 226 votes to support the reform, but only 94 deputies were “for” the change. In the first reading, it received 229 of the 226 votes required to restructure the company. Voting bloc dynamics changed on Thursday after the ruling coalition dissolved itself triggering an early parliamentary election after the government resigned. Following the rejection of privatizing Naftogaz, Prime Minister Yatsenyuk announced his resignation as head of the government. The vote took place among other proposed budget reforms, defense spending, as well as a discussion on how to tackle Ukraine’s gas debt. Naftogaz’s debt to Russia now exceeds $5 billion.

While I don’t rule out that URDA, Kiev mayor Klitschko’s party, may have left the coalition in part as a protest against the army’s continued and intensified assault on east Ukraine, I’d put my money on Yatsenyuk’s failure to deliver control over Ukraine’s energy industry to western interests as the reason he left. And I’m equally sure there is a plan B in place to use the ensuing political – and military – chaos to let the west take over large parts of Naftogaz anyway.

That’s why we’re there. It’s an energy war. IMF loans, IMF-style reforms – in an EU sauce -, the whole package is in place. And Yats failed to make it happen. It’s very possible that “we” have found an alternative option to get what we want in President Poroshenko, who can rule like an emperor until the end of this year.

Meanwhile, Poroshenko’s army launched another major offensive against east Ukraine, which makes it impossible for international forensic experts to work on the crash scene. This has basically been going on since the plane came down, and all the blame has been put with the rebels.

Who, when asked why they removed – some of – the bodies from the scene, said no-one turned up for three days to claim them, and the sweltering heat made it seem respectless to leave them out in the sun any longer. And, despite what the Kiev government and western media said to the contrary, this was done in a dignified way. A fact that was corroborated by the experts who took possession of the remains.

The overall western storyline remains Putin’s desire for empire building, but from where I’m sitting it looks a whole lot more like it’s not Putin but Washington and Brussels who dream of empires. And that, as I said earlier, is directly linked to to the demise of the age of fossil fuels. That age is not over yet, and shale provides some – futile – hope for more oil, but empires need to look forward lest they crumble and fall.

While many may not yet be fully aware of how valid it already is, the energy=power principle will become much more pronounced as less energy becomes available – we’ve entered that phase – . If energy equals power, less energy equals less power, and if you don’t want to lose your power, you will have to take someone else’s resources, and that will in almost all cases involve some act of war, be it economic, physical or otherwise (e.g. propaganda).

Putin, and Russia, were fine with Ukraine the way it functioned before the Maidan protests, and especially before the western involvement in these protests. They had a good oil and gas deal going, they had steady customers and steady income. There was one weak link in that chain: the pipelines that delivered the gas destined for Europe ran largely under Ukraine soil (dating back to Ukraine being part of the Soviet Union). This is the weak link US and EU are now seeking to explore. That’s why they seek to take over Naftogaz.

And now it’s sanctions time. Time for Brussels to self-righteously squeeze Moscow, or something like that. I got to tell you, I can only see this go horribly wrong. I have a picture in my head of a boomerang hitting the various EU politburos straight back in the jaw. But they certainly don’t see it coming, they’re far too smug about what they think is their new found power:

“The shooting down of the airliner was a tipping point that’s changed the EU constellation,” Joerg Forbrig, senior program officer for central and eastern Europe at the Berlin bureau of the German Marshall Fund of the U.S., said in a phone interview. “Putin has crossed a line and misread the mood in European capitals to close ranks on new sanctions.”

Europe rides the train of public anger that their own spin doctors have created. And that is a hazardous thing to do. The EU can agree amongst itself to define – new – sanctions on Russia, or perhaps it can’t even do that, we’ll have to wait and see. And the US can unilaterally announce all sorts of additional sanctions of its own. And some of these sanctions may hurt Russia quite a bit, simply because it’s part of the global financial system.

Still, if either US or EU wants a UN resolution to be accepted (they’ll need it at some point), they will, despite all the applied propaganda, have to produce hard evidence. Something both have so far categorically refused to do. They’ve managed to change the mood in many places without even one piece of evidence. Maybe we should congratulate them on that.

To illustrate: RT has another video on its YouTube channel of a conversation between State Dept. spokesperson Marie Harf and AP journalist Matt Lee (see below), and it’s as painful to watch as the first one a few days ago. Perhaps it’s simply the arrogance of the aggressor, edged on by countless polls being done among the public that show huge support for unsubstantiated claims. Still, one would think having Ms Harf do the talking doesn’t help, but that’s what we all once thought about W. too.

And it’s not just the UN either. The Telegraph reports on a whole new potential threat to the propaganda induced storyline:

Putin To Face Multi-Million Class-Action Suit Over MH17 Crash

Vladimir Putin is facing a multi-million-pound legal action for his alleged role in the shooting down of a Malaysia Airlines passenger jet over eastern Ukraine, The Sunday Telegraph can disclose. British lawyers are preparing a class action against the Russian president through the American courts. Senior Russian military commanders and politicians close to Mr Putin are also likely to become embroiled in the legal claim.

The case would further damage relations between Mr Putin and the West, but politicians would be powerless to prevent it. Last week, lawyers from McCue & Partners, the London law firm, flew to Ukraine for discussions about how to bring the case and where it should be filed. Victims’ families will be invited to join the action. The case will inevitably highlight the role allegedly played by Russia in stoking conflict in eastern Ukraine.

Though the neutrality of US courts can be questioned, and justifiably at times, one would still have to assume that mere propaganda wouldn’t cut it, if only because no court wants to make itself a laughing spectacle in the eyes of the entire world. Will the US, the EU and the British government persist in their refusal to provide evidence for their version of the truth even when a US court asks them for it? If they do, how can any case be brought forward? And if they do provide the evidence, the question will be why they didn’t do that sooner, like today.

As for the sanctions themselves, the EU attempts to maximize the pain for Russia (or maybe I should say they try to make the impression that they’re doing that), while minimizing the pain for its member nations. To achieve that double goal, however, it must bend itself into a convoluted pretzel shape. Because Italy wants exemptions to sanctions, and Britain too, but different ones, and there are 28 separate nations in the EU. Who in the end will all have to sign off on everything.

What we see now is compromises, like the sanctions on shared technology are supposed to impact oil but not gas, and military but not civil applications. As if these things are so easy to tear apart. The reason is obvious: many EU nations are very vulnerable to disruptions in Russian gas deliveries – and other business interests. Reuters has a reasonable take:

EU Edges To Economic Sanctions On Russia But Narrows Scope

The European Union reached outline agreement on Friday to impose the first economic sanctions on Russia over its behaviour in Ukraine but scaled back their scope to exclude technology for the crucial gas sector. The sanctions on access to capital markets, arms and hi-tech goods are also likely to apply only to future contracts ..

Brussels seeks a short cut, to profit from the still fresh public anger, and before people start asking questions about evidence.

Van Rompuy said the proposed sanctions package “strikes the right balance” in terms of costs and benefits to the EU and in its flexibility to ramp up sanctions or reverse them over time. “It should have a strong impact on Russia’s economy while keeping a moderate effect on EU economies,” he wrote in the letter, seen by Reuters. But the narrowing of the proposed measures highlighted the difficulty of agreeing to tough sanctions among countries which have widely different economic interests and rely to varying degrees on Russian gas.

European Commission President Jose Manuel Barroso said the Commission had adopted a draft legal text for the Russia sanctions package. “The final decision now lies with the EU’s member states, but I believe that this is an effective, well-targeted and balanced package … I call on Russia to take decisive steps to stop the violence and genuinely engage in peace plan discussions,” he said.

Russia has been calling for peace plan discussions for half a year. What have Europe and America done? They bring demands to such a discussion that they know will fail: for Russia to withdraw altogether, and let its people in Ukraine perish. That is not an honest discussion. It’s Europe that has never been willing to “genuinely engage in peace plan discussions”.

Key measures include closing EU capital markets to state-owned Russian banks, an embargo on arms sales to Moscow and restrictions on the supply of dual-use and energy technologies. They would not affect current supplies of oil, gas and other commodities from Russia. Van Rompuy said there was an “emerging consensus” among EU governments that “the measures in the field of sensitive technologies will only affect the oil sector in view of the need to preserve EU energy security.”

If the sanctions had applied to gas technology, they could have affected Gazprom’s huge South Stream pipeline project to Europe and Novatek’s Arctic Yamal LNG facility. That in turn would have hit large EU energy suppliers and manufacturers with an interest in the project, including in Germany, Austria and Italy.

See, when I read these things, my first reaction is Russia has the longer scope: it still has time left to further develop non-conventional resources. Europe – and Big Oil – need energy now, and immediate supplies are under threat for both. Killing off the South Stream line will hurt the EU at least as much as Russia. And when van Rompuy talks about measures that will “only affect the oil sector in view of the need to preserve EU energy security”, he puts his foot so far up his mouth Putin can only be slapping his thighs. Cherry picking sanctions is a game as silly as it is dangerous. Not that van Rompuy would know.

Separately, the EU was due to publish on Saturday the names of 15 individuals and 18 entities, including companies, subject to asset freezes for their role in supporting Russia’s annexation of Crimea and destabilisation of eastern Ukraine. That will bring the number of people under EU sanctions to 87 and the number of companies and other organisations to 20.

Yes, rich Russians that have their assets spread around the world can be hurt.

Spreading the burden evenly among EU member states is a delicate balancing act. Britain is strong in financial services, Germany in technology and machinery, France in arms sales, while Italy is heavily dependent on Russia for energy. “To a degree everyone is reverting to trying to protect their own national interests from harm,” a senior European diplomat said. As things stood, Britain would probably face more pain than any other state from the proposed measures because of London’s key position as a financial centre.

Finally, to put it all into perspective, especially my contention that the underlying “logic” beneath the propaganda, the sanctions and all the dead bodies are dwindling global energy supplies, look at how the once mighty oil giants are falling:

Are We On The Cusp Of The Oil Mega Mergers?

[..] … some senior City sources think falling fortunes could force the giants into each other’s arms in the next year or two. Their central argument for a fresh flurry of deal-making is a problem affecting the whole industry: a slump in profits. In January, Shell issued a shock quarterly profit warning and weeks later posted a 23% fall in annual earnings from $25.3bn the year before to £19.5bn in 2013. In April, BP followed suit, reporting a similar drop in profits for 2013 and the first quarter of 2014.

Their US rivals are similarly struggling. In May, Exxon Mobil, the titan of the world’s oil majors, reported falling profits for the fourth quarter in a row. ConocoPhilips also posted a dip. The industry is being hit by a perfect storm of headwinds: lower oil and gas prices which mean falling margins in their downstream businesses, which make petrol, diesel, and other finished products; as well as higher exploration expenses and dwindling reserves. Oil executives say their profits are pinched because, as many fields around the world age and produce less oil, they are forced to drill in deeper oceans and more remote places such as the Arctic to keep up with production.

The days of easy discoveries seem to be over and widening the search costs more money. There is certainly plenty of rationale for a further round of mega deals such as that led by Browne in the late Nineties. And there may be appetite from investors too. Some of Shell’s big shareholders are said to be frustrated by the company’s continued spending on expensive far-flung projects that fail to yield healthy returns.

Big Oil is done, toast. But its political clout will make that a very hard thing to absolve. So much so that it’s not at all hard to imagine Shell and BP and Exxon playing a role in the battle over Ukraine, which is part of a larger battle against Russia, and against its control over what today must look to the oil majors like very abundant resources, compared to what they themselves have left. I have no doubt they were among the major bidders for Naftogaz.

One thing’s for sure: we have entered a whole new chapter in global energy and power policy, and we’ve entered it for good.

UPDATE 10 am EDT: The Ukraine army, as per Dutch press just now, is fighting to ‘conquer’ the plane crash scene. What a great way to get rid of evidence. Needless to say, forensic experts still can’t do their work.

As promised, here’s State Dept.’s Marie Harf in another embarrassing conversation with AP’s Matt Lee:

I give you: The Recovery!

Median US Household Net Worth Down 36% Since 2003 (NY Times)

Economic inequality in the United States has been receiving a lot of attention. But it’s not merely an issue of the rich getting richer. The typical American household has been getting poorer, too. The inflation-adjusted net worth for the typical household was $87,992 in 2003. Ten years later, it was only $56,335, or a 36% decline, according to a study financed by the Russell Sage Foundation. Those are the figures for a household at the median point in the wealth distribution — the level at which there are an equal number of households whose worth is higher and lower. But during the same period, the net worth of wealthy households increased substantially. The Russell Sage study also examined net worth at the 95th percentile. (For households at that level, 94% of the population had less wealth and 4% had more.)

It found that for this well-do-do slice of the population, household net worth increased 14% over the same 10 years. Other research, by economists like Edward Wolff at New York University, has shown even greater gains in wealth for the richest 1% of households. For households at the median level of net worth, much of the damage has occurred since the start of the last recession in 2007. Until then, net worth had been rising for the typical household, although at a slower pace than for households in higher wealth brackets. But much of the gain for many typical households came from the rising value of their homes. Exclude that housing wealth and the picture is worse: Median net worth began to decline even earlier. “The housing bubble basically hid a trend of declining financial wealth at the median that began in 2001,” said Fabian T. Pfeffer, the University of Michigan professor who is lead author of the Russell Sage Foundation study.

Read more …

Ukraine Votes To Keep Western Companies Out Of Gas Industry (RT)

Ukraine’s parliament has rejected allowing EU and US companies to buy up to 49% of oil and gas company Naftogaz, and also said they were against liquidating the national energy monopoly. Kiev rejected splitting the company in two, a measure encouraged by the West in order for Naftogaz to comply with Europe’s third energy package, which doesn’t allow one single company to both produce and transport oil and gas. The bill proposed creating two new joint stock companies in order to conform to the package, “Ukraine’s Main Gas Transmission” and “Ukraine’s Underground Storages.” The proposal sought to meet the requirements of EU legislation and strengthen Ukraine’s energy independence.

Earlier in July, the Ukrainian parliament passed a first reading of the bill that would have allowed Western companies up to a 49% of Ukraine’s Gas Transportation System (GTS). There had been rumors the state would sell off at least 15% of Naftogaz in a public offering, however, the conditions in Ukraine’s capital and equity market aren’t strong enough to get a high enough price. The changes was rejected because of the large monopoly and influence Naftogaz has over the Ukrainian market, the country’s political scientist Alexander Ohrimenko, told Russian business daily RBC. Ukraine’s Rada needed a minimum of 226 votes to support the reform, but only 94 deputies were “for” the change. In the first reading, it received 229 of the 226 votes required to restructure the company. Voting bloc dynamics changed on Thursday after the ruling coalition dissolved itself triggering an early parliamentary election after the government resigned.

Following the rejection of privatizing Naftogaz, Prime Minister Yatsenyuk announced his resignation as head of the government. The vote took place among other proposed budget reforms, defense spending, as well as a discussion on how to tackle Ukraine’s gas debt. Naftogaz’s debt to Russia now exceeds $5 billion. Crippled finances prevent the company from paying for Russian gas supplies, much of which have already been delivered. Gazprom halted supplies to Naftogaz in June following Kiev’s unwillingness to start paying off the amassed debt. Ukraine has recently increased its effort to find alternative sources of gas to substitute Russian supplies. One of its main goals is to soon start reverse gas flows from neighboring Slovakia, an undertaking that may not be legal.

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Boeing To Banking: How Russian Sanctions Will Hit Western Business (Guardian)

The downing of flight MH17 could become a turning point in the west’s economic relations with Russia. Since the Ukraine crisis flared up last year, sanctions have mostly been targeted at individuals and companies associated with Russia’s annexation of Crimea or those stirring up unrest in eastern Ukraine. The European Union extended these sanctions on Friday, adding 15 names and 18 organisations (mostly companies) to the list. As it stands, the list includes Kremlin officials, separatists and state companies. But the game could change this week, when the EU is expected to unveil more sweeping “tier three” economic sanctions aimed at entire sections of the economy.

This weekend, diplomats have been examining proposals to restrict Russian state-owned companies from accessing capital markets, impose an arms embargo, and issue an export ban on specialist energy technology and “dual use” equipment, such as computers and machinery, that can be put to both civilian and military uses. The draft proposal notes pointedly that European leaders should decide whether the arms embargo should be retrospective, thus annulling France’s €1.2bn contract to deliver Mistral assault ships to Russia. Tightening the economic screws will hurt Russia’s economy, but the consequences will also be felt by western companies – and not just the usual suspects of energy and arms companies that have made high-profile deals with the Kremlin. Germany, for example, has 6,000 companies doing business in Russia, mostly small and medium-sized enterprises. But large conglomerates will be the bellwethers, showing how serious the consequences will be.

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Russia Criticizes EU Sanctions, Raps US Over Ukraine Role (Reuters)

Russia reacted angrily on Saturday to additional sanctions imposed by the European Union over Moscow’s role in the Ukraine crisis, saying they would hamper cooperation on security issues and undermine the fight against terrorism and organized crime. Russia’s Foreign Ministry also accused the United States, which has already imposed its own sanctions against Moscow, of contributing to the conflict in Ukraine through its support for the pro-Western government in Kiev. The 28-nation EU reached an outline agreement on Friday to impose the first economic sanctions on Russia over its behavior in Ukraine but scaled back their scope to exclude technology for the crucial gas sector.

The EU also imposed travel bans and asset freezes on the chiefs of Russia’s FSB security service and foreign intelligence service and a number of other top Russian officials, saying they had helped shape Russian government policy that threatened Ukraine’s sovereignty and national integrity. “The additional sanction list is direct evidence that the EU countries have set a course for fully scaling down cooperation with Russia over the issues of international and regional security,” Russia’s Foreign Ministry said in a statement. “(This) includes the fight against the proliferation of weapon of mass destruction, terrorism, organized crime and other new challenges and dangers.” The EU had already imposed asset freezes and travel bans on dozens of senior Russian officials over Russia’s annexation in March of Ukraine’s Black Sea peninsula of Crimea and its support for separatists battling Kiev’s forces in eastern Ukraine.

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Mergers, acquisitions and bankruptcies.

Are We On The Cusp Of The Oil Mega Mergers? (Telegraph)

Ten years ago, Lord Browne, the then chief executive of BP, flew to Williamsburg, Virginia, for a board meeting, where he planned to outline detailed proposals for a mega-merger with Royal Dutch Shell. The radical tie-up had been discussed in secret weeks earlier with Jeroen van Der Veer, his counterpart at Shell, during a stroll around Lake Como in Italy. With an estimated $9bn (£5.3bn) of synergies from the deal and Browne’s conviction that he had the backing of his own executive team, including his eventual successor Tony Hayward, the BP chief was ready to deliver the grand plan. But on the flight out of the UK, he suddenly got cold feet. “I knew the answer even before the meeting started. The sentiment was ‘why rock the boat?’ The Shell merger was not discussed. It was not going to be done and that was that… In the end we did not rock the boat; we missed it,” he recounted in his memoirs four years ago.

Browne, who stepped down in 2007, was among a generation of buccaneering oil major executives who had overseen a wave of mega-mergers at the end of the nineties that totally reshaped the industry. BP moved first, merging with Amoco and kicking off a flurry of tie-ups including Exxon and Mobil, Texaco and Chevron, and TotalFina and Elf, that created the so-called supermajors. More than a decade and a half on from those unions, could we be on the cusp of another round of mega-mergers? Not immediately, but some senior City sources think falling fortunes could force the giants into each other’s arms in the next year or two. Their central argument for a fresh flurry of deal-making is a problem affecting the whole industry: a slump in profits. In January, Shell issued a shock quarterly profit warning and weeks later posted a 23pc fall in annual earnings from $25.3bn the year before to £19.5bn in 2013. In April, BP followed suit, reporting a similar drop in profits for 2013 and the first quarter of 2014.

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Why only half? Pussies!

Half Of Britain To Be Opened Up To Fracking (Telegraph)

Ministers are this week expected to offer up vast swathes of Britain for fracking in an attempt to lure energy companies to explore shale oil and gas reserves. The Department for Energy and Climate Change is expected to launch the so-called “14th onshore licensing round”, which will invite companies to bid for the rights to explore in as-yet untouched parts of the country. The move is expected to be hugely controversial because it could potentially result in fracking taking place across more than half of Britain. Industry sources said the plans could be announced at a press conference tomorrow.

The Government is a big proponent of fracking and last year revealed that it would “step up the search” for shale gas and oil. Ministers said they would offer energy companies the chance for rights to drill across more than 37,000 square miles, stretching from central Scotland to the south coast. Michael Fallon, the former energy minister, has previously described shale as “an exciting prospect, which could bring growth, jobs and energy security”.

Read more …

Putin To Face Multi-Million Class-Action Suit Over MH17 Crash (Telegraph)

Vladimir Putin is facing a multi-million-pound legal action for his alleged role in the shooting down of a Malaysia Airlines passenger jet over eastern Ukraine, The Sunday Telegraph can disclose.
British lawyers are preparing a class action against the Russian president through the American courts. Senior Russian military commanders and politicians close to Mr Putin are also likely to become embroiled in the legal claim. The case would further damage relations between Mr Putin and the West, but politicians would be powerless to prevent it.

Last week, lawyers from McCue & Partners, the London law firm, flew to Ukraine for discussions about how to bring the case and where it should be filed. Victims’ families will be invited to join the action. The case will inevitably highlight the role allegedly played by Russia in stoking conflict in eastern Ukraine. [..]

A legal source close to the planned class action said the burden of proof in a civil case was lower than in a criminal investigation, meaning that senior Kremlin politicians, including Mr Putin, could be held to account through the civil courts, even if they escape criticism in the official inquiry. The case against Mr Putin could be worth hundreds of millions of pounds, possibly more, in potential damages. The action is likely to be brought through the US courts and could – if held liable – eventually see assets of Mr Putin and those closest to him frozen if any resulting compensation is not paid.

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There are reports Ukraine is using white phosphorus bombs. Israel too.

Ukraine Army Advances as EU Plans Tougher Putin Sanctions (Bloomberg)

Ukraine’s army advanced on a last main separatist stronghold as the U.S. said Russian President Vladimir Putin is poised to give the rebels heavy weapons and European Union leaders considered their toughest sanctions yet on Russia. Ukrainian troops are battling insurgents in the town of Horlivka, about 20 kilometers (12 miles) northeast of the regional capital Donetsk, a city of 1 million people where rebels retreated after abandoning other positions earlier this month. Taking Horlivka would open the way to attack one of their last redoubts, Ukrainian Defense Ministry spokesman Andriy Lysenko said yesterday in Kiev.

“Fighting to take over Horlivka is going on,” he told journalists. “Donetsk will be next.” CNN reported that long lines of cars jammed roads leading south from the city yesterday as residents tried to flee. The military gains come as German Chancellor Angela Merkel is pushing EU leaders to sign off on new sanctions aimed at Russia after the shooting down of Malaysian Airlines Flight MH17. The jet’s downing over eastern Ukraine on July 17 is isolating Putin in the international community. While he denies arming pro-Russian rebels, the U.S. says its intelligence shows that the missile that destroyed the plane and killed all 298 passengers and crew was supplied by Russia.

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Why isn’t anyone is the west asking about the aIr traffic control conversation logs? Don’t we want to find out what happened?

MH17 Black Box Reveals “Massive Explosive Decompression” (Zero Hedge)

While it was already reported that the black boxes of flight MH 17 were supposedly not tempered with, despite early propaganda attempts via planted YouTube clips to claim otherwise (clips which have since disappeared replaced by other propaganda), the question of what the data recovery team operating in London would find was unanswered, until earlier today when CBS reported that “unreleased data” from a black box retrieved from the wreckage of Malaysia Airlines Flight 17 in Ukraine show findings consistent with the plane’s fuselage being hit multiple times by shrapnel from a missile explosion.

“It did what it was designed to do,” a European air safety official told CBS News, “bring down airplanes.” [..] The official described the finding as “massive explosive decompression.”

Of course none of this is surprising, and has been widely known from the beginning: it was also widely known that the black box would provide no additional information on the $64K question: whose missile was it, and was it a missile launched from the ground or an air-to-air missile fired by a fighter jet. Perhaps a better question is who is leaking the “unreleased data” and what propaganda is it meant to achieve in what is, as we said a week ago, nothing but a propaganda war on both sides. As for the real questions the “released” black box data should reveal, they remain as follows:

• why was the plane diverted from its traditional flight path; and

• what was said between the pilots and air traffic control in the minutes before the crash.

Recall that the Ukraine secret service confiscated the ATC conversation logs a week ago, and the fate of said conversations has been unknown ever since, something that Malaysian Airlines revealed to the public promptly after its other, just as infamous plane anomaly, flight MH 370 disappeared forever from radar.

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Yeah, imagine having to agree with Pat Buchanan.

In Praise of Pat Buchanan’s Take On America’s Ukraine Fiasco (Stockman)

In just 800 words Pat Buchanan exposes the sheer juvenile delinquency embodied in Washington’s current Ukrainian fiasco. He accomplishes this by reminding us of the sober restraint that governed the actions of American Presidents from FDR to Eisenhower, Reagan and Bush I with respect to Eastern Europe during far more perilous times. In a word, as much as they abhorred the brutal Soviet repression of the Hungarian uprising in 1956, the Prague Spring in 1968 and the solidarity movement in Poland in the early 1980s, among many other such incidents, they did not threaten war for one simple reason: These unfortunate episodes did not further endanger America’s national security. Instead, in different ways each of these Presidents searched for avenues of engagement with the often disagreeable and belligerent leaders of the Soviet Empire because they “felt that America could not remain isolated from the rulers of the world’s largest nation”.

Accordingly, during the entire span from 1933, when FDR recognized the Soviet Union, until 1991, when it ended, the US never once claimed Ukraine’s independence was part of its foreign policy agenda or a vital national security interest. Why in the world, therefore, should we be meddling in the backyard of a far less threatening Russia today? More importantly, if Ike could invite Khrushchev to tour America and pow-wow with him at Camp David after the suppression of the Hungarian freedom fighters and his bluster over Berlin, what in the world is Obama doing attempting to demonize Putin and make him an international pariah?

The fact is, Crimea had been part of Russia for 200 years, and the Donbas had been its Russian-speaking coal, steel and industrial heartland since the time of Stalin. Putin’s disagreements with the Ukrainian nationalists who took over Kiev during the Washington inspired overthrow of its constitutionally-elected government in February are his legitimate geo-political business, but have nothing to do with our national security. And whatever his considerable faults, Putin is no totalitarian menace even remotely in the same league as his Soviet predecessors. In that regard, Hillary Clinton’s sophomoric comparison of him to Hitler is downright preposterous.

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Ebola gets scarier. Someday soon someone will label it out of control.

U.S. Doctor in Africa Tests Positive for Ebola (WSJ)

An American doctor working with Ebola patients in Liberia has tested positive for the deadly virus, an aid organization said Saturday. North Carolina-based Samaritan’s Purse issued a news release saying that Dr. Kent Brantly tested positive for the disease and was being treated at a hospital in Monrovia, Liberia. Dr. Brantly is the medical director for the aid organization’s case management center in the city. Dr. Brantly, 33, has been working with Samaritan’s Purse in Liberia since October 2013 as part of the charity’s post-residency program for doctors, said the group’s spokeswoman Melissa Strickland. The organization’s website says he had worked as a family practice physician in Fort Worth, Texas.

The highly contagious virus is one of the most deadly diseases in the world. Photos of Dr. Brantly working in Liberia show him in white coveralls made of a synthetic material that he wore for hours a day while treating Ebola patients. Dr. Brantly was quoted in a posting on the organization’s website earlier this year about efforts to maintain an isolation ward for patients. “The hospital is taking great effort to be prepared,” Dr. Brantly said. “In past Ebola outbreaks, many of the casualties have been health-care workers who contracted the disease through their work caring for infected individuals.” Ms. Strickland says that Dr. Brantly’s wife and children had been living with him in Africa, but they are currently in the U.S.

Read more …

Get out of the desert.

Pumping Groundwater in a Drought Is Great, Until You Run Out (Bloomberg)

Water is becoming so precious in the drought-stricken U.S. West that – why not – states are even taking steps to figure out how much of it they have. California governor Jerry Brown in January challenged towns and state agencies to cut their water use by 20%. Now they’re trying to measure what 20% means. It’s hard. Cities and the state in some cases are coming up with estimates that differ by up to 10 times. “Despite our longstanding water problems, we don’t accurately report and measure water in any sector — urban or agricultural,” Peter Gleick, president of the Pacific Institute, a water think tank in Oakland, told James Nash of Bloomberg News. “That makes it difficult to implement programs to conserve water and deal with this crisis.”

All of California is in severe drought, according the U.S. Drought Monitor. Nearly 82% is in extreme drought and more than 36% is in exceptional drought, which is marked by crop and pasture loss and water shortage that fall within the top two%iles of drought indicators. In the Southwest, the Colorado River Basin remains “the most over-allocated river system in the world,” according to a study that will be published in Geophysical Research Letters. The basin lost 64.8 cubic kilometers (15.5 cubic miles) of freshwater — two-thirds of that disappearing from underground reservoirs — over the time period in the study. That’s an amount of water almost twice the size of Lake Mead, the biggest U.S. reservoir, gone from the basin.

Read more …

Jul 102014
 
 July 10, 2014  Posted by at 2:48 pm Finance Tagged with: , , ,  


Gottscho-Schleisner Rockefeller Center NYC, RCA Building Sep 1 1933

As fear begins to scare the vanguard of the herd into what may develop into a rampage, the eurocrisis is back with a vengeance. Portuguese bank Esperito Santo leads the way down through missed payments, bringing the Lisbon exchange to its knees with a -4.5% plunge as I write this, with northern EU exchanges showing -1.5% losses and southern ones -2.5%. Markets start to realize than all PIIGS now have much higher state debts than before the crisis started, and that they still are very much big risks, no matter what Draghi and his never fired bazooka say. The same Draghi who, by the way, reiterated once again that Brussels should be given more – and more centralized – power. As if the May election never happened. Of course EU finances were always a mess; it’s just that now we can see it.

So, that taken care of, let’s turn to another mess: energy. Ambrose Evans-Pritchard has a nice piece out in which he labels the oil, gas and coal industry “the subprime of this cycle”. And as always, he has a lot of interesting data, and undermines them with his own analysis. It’s what he does. Still, if we simply ignore his personal views, there is plenty to “enjoy”. It’s not as if The Automatic Earth hasn’t but the energy market, especially shale, down to size sufficiently, but it’s always nice to have some new numbers, certainly when they’re absurdly large:

Fossil Industry Is The Subprime Danger Of This Cycle

The epicentre of irrational behaviour across global markets has moved to the fossil fuel complex of oil, gas and coal. This is where investors have been throwing the most good money after bad. [..] Data from Bank of America show that oil and gas investment in the US has soared to $200 billion a year. It has reached 20% of total US private fixed investment, the same share as home building.

This has never happened before in US history, even during the Second World War when oil production was a strategic imperative. The International Energy Agency (IEA) says global investment in fossil fuel supply doubled in real terms to $900 billion from 2000 to 2008 as the boom gathered pace. It has since stabilised at a very high plateau, near $950 billion last year.

All that investment looks for production that more and more vanishes beyond a receding horizon. That’s why there is so much of it: it gets more expensive, fast, to find new reserves that can actually be produced. Whether they can, if they are found at all, be produced at an economically viable level is quite another question, and one to which answers are mostly kept conveniently opaque. Big Oil is in a big bind, but oil and gas is what they do, whether it’s available or not. These companies are fighting a bitter fight just to stay alive, and given their economic and political power, that fight is sure to get very ugly.

The cumulative blitz on exploration and production over the past six years has been $5.4 trillion, yet little has come of it. Output from conventional fields peaked in 2005. Not a single large project has come on stream at a break-even cost below $80 a barrel for almost three years.

“What is shocking is that upstream costs in the oil industry have risen threefold since 2000 but output is up just 14%,” said Mark Lewis, from Kepler Cheuvreux. The damage has been masked so far as big oil companies draw down on their cheap legacy reserves. “They are having to look for oil in the deepwater fields off Africa and Brazil, or in the Arctic, where it is much more difficult. The marginal cost for many shale plays is now $85 to $90 a barrel.”

Upstream costs are up 200%, output rose just 14%. That’s just plain nasty. A few days ago we saw a report that said a joint Shell and Aramco gas project in Saudi Arabia, which cost tens of billions of dollars, came up utterly empty handed, despite the fact that the IEA claims there are trillions of cubic feet in reserves “available” there. That’s the kind of issue Big Oil runs into. And then they invest more. I think it was the Marcellus play that saw its estimates cut by 95% or so recently. Much of the industry runs on insanely optimistic estimates these days, lest nobody wants to fund their exploits any longer. You better look good than feel good.

A report by Carbon Tracker says companies are committing $1.1 trillion over the next decade to projects that require prices above $95 to break even. The Canadian tar sands mostly break even at $80-$100. Some of the Arctic and deepwater projects need $120. Several need $150. Petrobras, Statoil, Total, BP, BG, Exxon, Shell, Chevron and Repsol are together gambling $340 billion in these hostile seas.

Martijn Rats, from Morgan Stanley, says the biggest European oil groups (BP, Shell, Total, Statoil and Eni) spent $161 billion on operations and dividends last year, but generated $121 billion in cash flow. They face a $40 billion deficit even though Brent crude prices were buoyant near $100, due to disruptions in Libya, Iraq and parts of Africa. “Oil development is so expensive that many projects do not make sense,” he said.

The word “gambling” is well chosen. Thousands of billions are laid out on the crap table. Big Oil wants nothing more than rising gas prices. But western economies – plus China, Japan – would implode if prices went even “just” to $150 a barrel. The price itself would increase their profits, but the economic collapse it would cause would take those profits away again.

… the sheer scale of “stranded assets” and potential write-offs in the fossil industry raises eyebrows. IHS Global Insight said the average return on oil and gas exploration in North America has fallen to 8.6%, lower than in 2001 when oil was trading at $27 a barrel.

A large chunk of US investment is going into shale gas ventures that are either underwater or barely breaking even, victims of their own success in creating a supply glut. One chief executive acidly told the TPH Global Shale conference that the only time his shale company ever had cash-flow above zero was the day he sold it – to a gullible foreigner.

The Oxford Institute for Energy Studies says the Eagle Ford Dry Gas field, the Marcellus WC T2 and “C” Counties, Powder River, Cotton Valley, among others, are all losing money at the current Henry Hub spot price of $4.50. “The benevolence of the US capital markets cannot last forever,” it said.

In 2001, when prices were a quarter of what they are, profit margins were higher. That’s how much production costs have gone up in just 13 years. Many if not most shale plays are already losing money, kept alive by financial speculation, not energy returns. But it may take a while before people understand how that works: shale is still lauded as the big savior. Even Ambrose begs to differ:

This does not mean shale has been a failure. Optimists still hope it will reach a “positive inflexion point” in five years or so, the typical pattern for a fledgling industry. … the low-hanging fruit has been picked and the costs are ratcheting up. Three Forks McKenzie in Montana has a break-even price of $91.

Nor does it mean that America has made a mistake. Shale has been a timely shot in the arm, helping the US economy achieve “escape velocity” from the Great Recession, unlike Europe, which lurched back into a double-dip recession. It has whittled down the US current account deficit, now just 2% of GDP. Cheap gas costs – a third of EU prices and a quarter of Asian prices – has brought US industry back from near death, perhaps for long enough to give America another two decades of superpower ascendancy. But making money out of shale is another matter.

Ambrose needs to read up on depletion rates for shale wells. Shale is a financial play, not an energy source. At least, not for more than a few years. “Another two decades of superpower ascendancy” is just silly. And he himself quoted the Oxford Institute for Energy Studies, which states very clearly why that is: “The benevolence of the US capital markets cannot last forever.” Nor the benevolence of other capital markets, for that matter.

Then he turns to another issue that faces Big Oil:

Even if the fossil companies navigate the next global downturn more or less intact, they are in the untenable position of booking vast assets that can never be burned without violating global accords on climate change. The IEA says that two-thirds of their reserves become fictional if there is a binding deal limit to CO2 levels to 450 particles per million (ppm), the maximum deemed necessary to stop the planet rising more than two degrees centigrade above pre-industrial levels. It crossed the 400 ppm threshold this spring, the highest in more than 800,000 years.

“Under a global climate deal consistent with a two degrees centigrade world, we estimate that the fossil fuel industry would stand to lose $28 trillion of gross revenues over the next two decades, compared with business as usual,” said Mr Lewis. The oil industry alone would face stranded assets of $19 trillion, concentrated on deepwater fields, tar sands and shale.

Now those are numbers! Now we’re getting somewhere. Can anyone imagine Shell and ExxonMobil giving up on $1.4 trillion in revenue, year after year, for 20 years? I sure can’t. Look, Germany is supposed to be this green economy, but they’ve increased their – brown – coal use substantially recently, to make up for lost nuclear power. It’s nice to talk about ideals, Obama is increasingly chiming in, but legislating Big Oil out of existence is a whole other thing. And so is collapsing your own economy through $15 a gallon prices at the pump.

By their actions, the oil companies implicitly dismiss the solemn climate pledges of world leaders as posturing, though shareholders are starting to ask why management is sinking so much their money into projects with such political risk. This insouciance is courting fate. President Barack Obama’s new Climate Action Plan aims to cut US emissions by 30% below 2005 levels by 2030. His Clean Air Act is a drastic assault on coal-fired power plants, “industrial sabotage by regulatory means” in the words of the industry lobby.

China too is trying to break free of coal after anti-smog protests across the cities of the Eastern Seaboard. It is shutting down its coal-fired plants in Beijing this year. There is a ban on new coal plants in key regions. The Communist Party’s Five-Year Plan aims to cap demand at 3.9 billion tonnes a year up to 2015. Since the country consumes half the world’s coal supply, this has left Australia’s coal industry high and dry, Exhibit number one of assets stranded by a sudden policy change. Peak coal demand is in sight.

Sounds nice, and – almost – believable, but what are we, and our leaders, going to do when these measures raise energy prices beyond affordability? What will be our priority? Cleaner and poor, and richer and dirty? At best, we won’t know the answer to that until we’re forced to provide it; answering it today, from a position of affluence, doesn’t count. As for coal: the harder it gets to find more oil, the more attractive it will seem to switch to the most abundant fossil to keep our feet and our children warm.

In any case, staggering gains in solar power – and soon battery storage as well – threatens to undercut the oil industry with lightning speed, perhaps in a race with cheap nuclear power from a coming generation of molten salt reactors. The US National Renewable Energy Laboratory has already captured 31.1% of the sun’s energy with a solar chip, but records keep being broken. Brokers Sanford Bernstein say we are entering an era of “global energy deflation” where gains in solar technology must relentlessly erode the viability of the fossil nexus, since it goes only in one direction.

Deep sea drilling will become pointless. We can leave the Arctic alone. Once the crossover point is reached – and photovoltaic energy already competes with oil, diesel and liquefied natural gas in much of Asia without subsidies – it must surely turn into a stampede. My guess is that the world energy landscape will already look radically different in the early 2020s.

Sure, renewables are developing, but there are so many issues left to conquer that evoking an 10 year timeline for a “radically different energy landscape” looks wild. Our economies, which are very far from healthy, would need to cough up tens of trillions of dollars to build both equipment and infrastructure, and we don’t and won’t have that kind of money available; we’d need to borrow it, and add to our Andes-high pile of existing debt. The switch, if it ever happens, will take much longer, so long that it’s highly doubtful it will ever happen.

And besides, as mentioned above, who among us is going to tell Big Oil, and all of its major shareholders and highly-placed supporters in Congress and other parliaments, that they’re going to have to leave $28 trillion on the table and walk away? And what do we think their answer will be? They’re zombies, but they have a direct line into the blood of both you and the people you vote for.

it’s nice and all to think up cute little scenarios of how we’re all going to have solar panels and windmills and live in a blessed clean world, but in the real world we live in today, there are deeply entrenched economic and political power divisions and equally deeply vested interests that are not simply going to walk peacefully into the sunset and leave the world’s biggest fortune behind, just so we can do what we want. Reality is always dirtier, and in more than one way, than we like to think.

More importantly, we simply don’t have the wealth left that would allow us to make “the switch” from fossils to renewables. The plunging US markets I see now that I’m finishing this piece are just one more confirmation of that.

If Ever The Stock Market Flashed A ‘Sell’ Signal, It’s Now (MarketWatch)

I know what you’re thinking. You’re thinking: Is this market going to go up another 10%? I have no idea. But this being a powerful market that can blow your account clean off if you’re wrong, you’ve gotta ask yourself: “Do I feel lucky?” Most investors seem to feel pretty confident that this market will never go down. But if you’ve studied bear markets, you know how this story will end. Don’t forget: Human nature never changes.At the point of maximum giddiness (or pain if you’re short-selling), the market always teaches investors a costly lesson. Right now, investors are chasing yield, but all it takes is one bad day to wipe out a year’s worth of gains. Sentiment indicators such as Investors Intelligence are at historic highs (that is bearish), and the RSI Wilder indicator is telling us the market is seriously overbought.

Yes, the market can still go higher, but it’s on borrowed time. Don’t believe me? When you are standing 17,000 points in the air at the top of Dow Mountain, and the market is priced for perfection, there is nowhere to go but down. Although the market still has room to rise, so do interest rates. In fact, the odds are very good that interest rates will creep higher, and this will affect bonds and stocks. There is also an 800-pound gorilla in the room, and that is inflation. Shoppers already know that inflation is spreading. For example, cereal boxes are getting smaller while prices are rising. The price of orange juice and other commodities are skyrocketing. I could give a dozen more examples.

The Fed seems to want inflation, as if it’s desirable. Here’s what I say to the Fed: Be careful what you wish for. Here’s how the market odds look to me: At the most, the upside is 5% or 10%, while the downside is potentially 25% or 30%. I’m not saying the market is going to fall that much, but in previous bear markets that’s exactly what happened (or worse) over several months or years. Like the game of three-card monte, while most investors are celebrating the all-time highs, prudent investors are looking underneath the hood. For example, the number of stocks making new highs is shrinking every week. And the stocks that are making new highs are not leading stocks, but many unknowns. That’s a red flag.

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What else is there?

Art Cashin: ‘Ultra High’ Level Of Leverage In Stock Market (CNBC)

Big moves in a handful of stocks provided traders with a worrying signal—an “ultra-high” level of leverage in the stock market, veteran trader Art Cashin told CNBC on Wednesday. The trend could mean more volatility going forward, he added. Cashin said he saw a dozen stocks make 7% to 8% moves on Tuesday without any specific headlines to justify those swings. That left traders curious, and Cashin said they settled on high levels of leverage as a culprit behind the moves. “People must be three or four times normal leverage,” Cashin said. “We’ve seen margin accounts go up. We knew the hedge funds were playing. But to see extreme moves like that on nonspecific news tells me there’s a lot of leverage out there. … If we start to get a protracted move, it could get very volatile.”

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Over.

Buyback Plunge Another Sign Bull Market Is Nearing Its End (MarketWatch)

Here’s another sign the bull market in stocks may be nearing an end: Companies have dramatically reduced share repurchases. New stock buybacks fell to $23.2 billion in June, the lowest level in a year and a half, according to fund tracker TrimTabs Investment Research. In May, the total was just $24.8 billion, and the monthly average in 2013 was $56 billion. That’s worrisome, according to TrimTabs CEO David Santschi, because “buyback volume has a high positive correlation with stock prices.” How high? Consider the correlation coefficient, a statistic that reflects the degree to which two series tend to zig and zag in lockstep. It ranges from plus 1 (which means the two series are perfectly correlated) to minus 1 (the two move inversely to each other). A zero correlation coefficient would mean there is no detectable relationship between the two series.

According to Santschi, the correlation coefficient between monthly buyback volume and the stock market’s level, for the period from 2006 until this spring, was 0.61. That’s highly statistically significant. A high correlation also makes theoretical sense. That’s because, when a company announces a share-repurchase program, it sends a strong signal that its management really thinks its stock is undervalued — so much so that it’s willing to put its money where its mouth is. So it’s bullish for the overall market when lots of companies are simultaneously announcing such programs. To be sure, the monthly buyback data are quite volatile, so two months of anemic numbers don’t automatically doom the market. Santschi, for one, says that, if the slow pace continues through July, “we will become very concerned.”

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If borrowed money is debt, what is borrowed time called?

‘Rotten Rotation’ Signals Bull Market Living On Borrowed Time (The Tell)

Market bulls, beware.The stock market’s push to another round of record highs has hidden a “rotten rotation” that belies investor fears that the economic-growth story isn’t all it’s cracked up to be, argues Mike Ingram, market strategist at London-based BGC Brokers, in a note. Ingram highlights how bulls are now arguing that there is more equity volatility than indexes suggest. It might seem odd that bulls are actively talking up the kind of volatility that investors — often wrongly, according to Ingram — equate with increased risk. But their conclusion is always “unambiguously upbeat,” he says, with bulls arguing that markets aren’t complacent and that investors are very much engaged and placing active bets on future growth. Needless to say, Ingram isn’t convinced:

It is notable that some of the best-performing sectors in equity markets this year are highly defensive — utilities and health care — while more economically sensitive sectors such as industrials and banks have struggled. In this regard at least, markets have yet to reflect the recovery that economists have been forecasting. Indeed the consensus view that investors position themselves in more cyclically exposed names did little better than pace the market in Q1 2014 and actually underperformed in the last quarter, even in the U.S. where growth seems reasonably entrenched.

He also notes that value stocks are still struggling to outperform growth stocks, which is worrying “because one would normally expect ‘value’ to re-rate as economic growth broadens out and the premium that investors are willing to pay for growth stocks falls.” “This hasn’t really happened,” Ingram says. He observes that even after the occasional “growth scare” over the past few months, notably on the tech-heavy, and therefore growth-heavy, Nasdaq Composite, the index is still poised to challenge its 14-year-old, dot-com-era high. It’s not just equities that are flashing cautious signals, he says. Long-term bonds have defied predictions for a rout to instead rally this year.

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Fed Moves Closer to Choosing Main Stimulus-Exit Tool (Bloomberg)

Federal Reserve officials moved closer to deciding on the main tool they will use to tighten monetary policy when the time comes, most likely next year. Most participants at the Federal Open Market Committee’s June meeting agreed that the interest rate on excess reserves banks keep on deposit at the Fed “should play a central role” in the exit from extraordinary monetary stimulus, according to minutes released today in Washington. Another tool, known as the overnight reverse repurchase facility, “could play a useful supporting role,” according to the minutes. The tool could be used to set the lowest rate at which holders of cash would be willing to lend.

The Fed now pays 0.25% interest on bank reserves deposited overnight at the central bank. By contrast, it pays 0.05% on cash it borrows through its reverse repo facility, which is used by institutions such as money-market funds, which can’t deposit money at the Fed. Many members of the FOMC judged at the June meeting that “a relatively wide spread — perhaps near or above the current level of 20 basis points — would support trading in the federal funds market and provide adequate control over interest rates,” according to the minutes. A narrower spread between the two rates would give the reverse repo facility a bigger role by increasing incentives for depositors to pull cash out of banks and put it in money-market funds in search of higher interest.

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Well, now you know. Want to keep your dough in shares?

Fed Plans To End Bond Purchases In October (MarketWatch)

Federal Reserve revealed in the minutes of its June meeting released Wednesday that it has decided to end its asset-purchase program in October if the economy stays on track. According to the new plan, the Fed will make a $15 billion final reduction at its October meeting, after trimming it by $10 billion at each meeting up to that point. Fed officials said that members of the public had asked them if the Fed would end the program in October or with a final $5 billion reduction in December. Most Fed officials said that the exact end of the tapering issue will have no bearing on the timing of the first rate hike.

The Fed has said that rates would remain near zero for a “considerable time” after the Fed halts its program of bond purchases. An end of the asset purchases will “set the clock on eventual tightening — which we think could start as soon as March 2015,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics. Stocks dipped immediately after the Fed minutes were released but quickly moved higher. Bond yields also had a brief move higher after the report. The minutes also reveal that Fed officials had a lengthy discussion of its exit strategy. The central bankers generally agreed to keep reinvesting the proceeds of securities that mature on its balance sheet until after it had hiked interest rates.

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Controlled demolition.

Rate Rise Chatter Grows As Bond Yields Climb (FT)

The radar screens of investors have long been clear of the one blip guaranteed to sound the alarm for risk taking and financial complacency: interest rate rises by central banks. In the UK and US, economists and bond traders are monitoring when the long period of near zero official rates set by the Federal Reserve and the Bank of England will finally end, a moment that may matter greatly for roaring equity and credit bull markets. Since the financial crisis peaked in early 2009, investors, homeowners and companies have greatly benefited from aggressive monetary policy actions in the US and UK that have lowered the cost of borrowing and muted market volatility.

Asset prices have boomed with risk taking in stocks and credit approaching levels last seen at the height of the prior boom in 2007, as bullish sentiment has been nurtured by the easy money policies of key central banks. Such investor complacency has not escaped the attention of policy makers, with this week’s Fed meeting minutes from June raising the topic. That comes after Mark Carney, governor of the BoE, caused a stir by saying the first rate hike “could happen sooner than markets currently expect”. While central bankers, including Mr Carney, stress they are in no rush to tighten policy in the absence of real wage growth, chatter about the timing of rate increases stands to grow a lot louder should economic activity continue to pick up over the summer.

Stronger employment figures in the UK and US have already driven policy-sensitive short-dated bond yields noticeably higher in recent weeks. The two-year UK Gilt yield has led the charge, touching its highest level since the summer of 2011, while on Wednesday the US equivalent briefly eclipsed last September’s peak of 0.53%, the high water mark of last year’s interest rate rout. “There is scope for markets to be surprised should the BoE and Fed change course, that’s the nature of monetary policy,” says Paul Ashworth of Capital Economics. But unlike past rate hike periods, he says the eventual peak will be lower. “Both BoE and Fed officials have stressed that they will raise rates gradually and the neutral rate will be lower.

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Yes. They are.

Are Bond Managers Getting Antsy? (CNBC)

Markets have frustrated widespread expectations for bond yields to rise this year, but some bond managers are still antsy and are looking to protect their portfolios’ liquidity against sudden market moves. “A sudden rise in U.S. short rates could easily entice fast outflows from higher yielding bond funds,” Jan Loeys, head of global asset allocation at JPMorgan, said in a note last month. In the post-financial crisis era, tougher regulations mean banks can’t step in to take advantage of fire sales and parts of the credit market could potentially freeze up in a worst-case scenario, he said. The possibility is one that other credit managers considered. “That risk is always there,” said Harsh Agarwal, head of Asia credit research at Deutsche Bank. “With the heavy amount of supply we’ve seen so far this year, there might not be takers on the way down when things turn,” Agarwal said.

But he noted that analysts now expect interest rates won’t rise until 2015, pushing the risks further out. That hasn’t stopped some fund managers from starting to prepare the decks. JPMorgan is trimming the long exposure to bonds in its model portfolio in favor of more liquid assets, such as equities, Loeys said. It isn’t alone in worrying about the risks to bond market liquidity once interest rates begin rising. “We definitely recognize the situation,” said Jonathan Liang, senior portfolio manager for fixed income at AllianceBernstein. “We got a small taste of that last year between May and June with when people panicked.” Since then, AllianceBernstein has bolstered the liquidity management measures in its open-ended mutual funds, he said.

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Abe should be sent to Elba.

Japan Machinery Orders Fall 19.5% On Month In May (Reuters)

Japan’s core machinery orders unexpectedly fell 19.5% in May from the previous month, government data showed on Thursday, casting doubt over the outlook for a pickup in capital spending. The month-on-month decrease in core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, compared with economists’ median estimate of a 0.7% gain in a Reuters poll of economists. That followed a 9.1% fall in April, data compiled by the Cabinet Office showed. Compared with a year earlier, core orders, which exclude ships and electric power utilities, declined 14.3% in May, versus a 9.5% gain expected. The Cabinet Office cut its assessment on machinery orders, saying the increasing trend was seen stalling.

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Why trust any number coming out of Beijing?

China Trade Picture Improves, But Data Underwhelm (CNBC)

China released improved trade data that missed expectations on Thursday, figures that suggest external demand remains weak and domestic recovery fragile, analysts say. The country’s exports rose 7.2% from the year ago period, lower than the 10.6% rise predicted by a Reuters poll and after gaining 7% in May. Imports climbed an annual 5.5%, versus Reuters’ forecast for a 5.8% rise but reversing a 1.6% contraction in May. That brings trade balance to a surplus of $31.6 billion, compared with $35.92 billion logged in May. “June export growth was somewhat disappointing given that most had expected a weak base for comparison to push it into double digit territory.

That said, it remains stronger than import growth, which continues to be affected by the slowdown in the property sector,” Julian Evans-Pritchard, China economist with Capital Economics, said it a note. The Australia dollar eased following the news, while most Asian stocks gave up earlier gains while Japan’s Nikkei extended losses. China’s exports gained traction in recent months, helped by an improving U.S. economy and as the government took measures to aid exporters, including providing more tax breaks, credit insurance and currency hedging options. But imports have remained weak on sluggish demand. “We think the downside surprise in June export growth suggests a softer-than-expected pickup in China’s external demand, while the uptick in import growth points to a modest recovery in domestic demand,” said Jian Chang, analyst with Barclays.

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Did we mention China’s as corrupt as can be?

China Said to Probe Alleged Bank of China Money Laundering (Bloomberg)

China’s central bank and currency regulator are investigating a state media report that alleged Bank of China Ltd. broke rules on transferring money overseas, two government officials familiar with the matter said. The probe focuses on whether Bank of China violated regulations in its operations or aided money laundering, the people said, asking not to be named as they aren’t authorized to speak publicly on the matter. Starting an investigation doesn’t mean the Beijing-based bank has done anything wrong, they said. Bank of China, the nation’s largest foreign-exchange lender, yesterday denied a report by China Central Television claiming that it circumvented the rules by helping customers transfer unlimited amounts of yuan overseas and convert it into other currencies through a product called “Youhuitong.”

The bank said it introduced a cross-border yuan transfer service in 2011 with the knowledge of authorities. Chinese foreign-exchange rules cap the maximum amount of yuan that individuals are allowed to convert into other currencies at $50,000 each year and ban them from transferring yuan abroad directly. Policy makers have taken steps in recent years including allowing freer movements of capital in and out of China as they seek to boost the global stature of the yuan. Media reports referring to “an ‘underground bank’ and ‘money laundering’ are inconsistent with the facts,” Bank of China said in a statement on its website yesterday. The cross-border yuan transfer service only allows money to be moved for emigration and overseas property investment, it said. Youhuitong targets customers who wish to invest in or migrate to North America, Australia and some European countries, CCTV reported, referring to documents shown by unidentified Bank of China employees.

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Yay! 1000% more debt!

China Debt Seen Jumping Tenfold as Stocks Overtake Japan by 2030 (Bloomberg)

China’s corporate bond issuance will surge 10-fold by 2030 and the nation’s stock market will overtake the U.K. and Japan to become the world’s second largest, according to Credit Suisse. Bond sales in the biggest developing country will increase to $32 trillion, while the market value of stocks will jump to $54 trillion, lagging only the U.S., the Swiss bank’s research institute said in a report yesterday. Emerging markets’ share of global equity market capitalization will increase to 39% by 2030 from 22% now, the bank said. With the benchmark Shanghai Composite Index down 66% from its peak in 2007, the government has been opening up its capital markets by doubling the daily trading band of the yuan and allowing foreign investors to buy the nation’s shares through Hong Kong’s stock exchange.

China’s $9 trillion economy is already the world’s second largest behind the U.S. “The disparity between developed and emerging nations in the global capital market universe will close by 2030,” Stefano Natella, the global head of equity research at Credit Suisse in New York, said in a statement. “This should be driven by a disproportionately large contribution from emerging market equity and corporate bond supply and demand.” China’s equity market is the world’s fifth largest with a market capitalization of $3.4 trillion, according to data compiled by Bloomberg. The U.S. is the biggest at $23.5 trillion.

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Catch fire with fire.

US Uses New Tactic To Crack Laundering Cases (Reuters)

U.S. prosecutors are using a new tactic to crack down on banks that fail to fight money laundering: systematically asking suspects in a wide range of criminal cases to help them follow the money back to their bankers. The efforts are paying off in probes of banks and other financial institutions now filling the prosecution pipeline, according to Jonathan Lopez, who last month left his post as deputy chief of the Justice Department’s Money Laundering and Bank Integrity Unit (MLBIU). “Asking criminals the simple question ‘Who is moving your money?’ can lead the Department of Justice to a financial institution’s doorstep,” said Lopez, who declined to identify specific targets. The department confirmed the stepped up reliance on criminal informants in anti-money laundering investigations, but also declined to discuss probes underway.

The four-year-old MLBIU, which includes a dozen prosecutors, is responsible for insuring that financial institutions adhere to U.S. laws including the main U.S. anti-money laundering law, the Bank Secrecy Act (BSA). It has filled in an enforcement gap among federal financial regulators who lack the capacity or expertise to aggressively pursue money-laundering cases. The Justice Department has begun seeking banking information not only from perpetrators of fraud and drug traffickers, but also from suspects linked to the full range of criminal activity, said Lopez, who is now an attorney at Orrick, Herrington & Sutcliffe LLP in Washington. Many criminals seeking reduced punishment have pointed fingers at banks, casinos, money transfer businesses, check cashers, broker-dealers and other financial institutions, he said.

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Kick the loonie!

The Market Could Be Shocked By The Bank Of Canada (CNBC)

The Bank of Canada has a problem: Bank Governor Stephen Poloz was counting on a weak currency to boost exports and drive the economic recovery but things haven’t gone entirely his way. The USD/CAD started the year around 1.06, rose to about 1.12 in March and has since fallen back to around 1.06. In Q1 the CAD was the world’s worst performing major currency, with a total return of -3.5% vs USD; in Q2 it was the best performing G-10 currency, with a total return of +3.8%. The reason for the currency’s good performance is that investors became more confident about Canada’s outlook as the U.S. economy accelerated and energy prices turned up. According to the Commodity Futures Trading Commission (CFTC) Commitment of Traders report, speculators had been considerably short CAD since early 2013, but in the most recent reporting week they flipped to being a tiny bit long (about 2,700 contracts). It’s not much, but the fact that they’re no longer short is significant.

However, this could be the case of a self-destroying prophecy. Everyone knows a self-fulfilling prophecy: when all investors think something is likely to happen, for example that gold is going to go up, then they buy gold and of course it go up! A self-defeating prophecy would be the opposite: one that might go right, but since everyone acts on it, it goes wrong. That’s what I believe is going to happen here. The Canadian economy is indeed improving, but a good part of that improvement is due to exports. The latest Business Outlook Survey showed that the Canadian economy’s biggest hope remains overseas demand, particularly from the U.S. Exporters seemed notably more optimistic about the future than companies supplying the domestic market. So the Bank of Canada has to keep the currency from appreciating in order to keep the recovery going. Governor Poloz, who was previously the head of Canada’s export-promotion agency Export Development Canada, naturally understands this.

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Draghi’s a fool. Get out of the EU!

Draghi Says Brussels Needs Higher Powers as Leaders Quarrel (Bloomberg)

European Central Bank President Mario Draghi said the region needs more-centralized powers to push governments to overhaul their economies. “There is a case for some form of common governance over structural reforms,” Draghi said in a speech in London yesterday. “This is because the outcome of structural reforms, a continuously high level of productivity and competitiveness, is not merely in a country’s own interest. It is in the interest of the union as a whole.” Draghi has repeatedly said the ECB’s ultra-loose monetary policy isn’t sufficient to sustain the euro area’s fragile recovery if governments backslide.

European Union finance ministers meeting in Brussels this week signaled a willingness to give politicians extra leeway so long as they take measures to fix their economies. They then clashed as Italian Prime Minister Matteo Renzi pushed back against austerity measures. “Historical experience, for example of the International Monetary Fund, makes a convincing case that the discipline imposed by supranational bodies can make it easier to frame the debate on reforms at the national level,” Draghi said. “I would see merits in initiating, as a one-off, a new convergence process within the euro area – one which ensures that all countries are truly in a position to benefit from membership.”

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Bail in your banker’s bonus.

Germany to Force Creditors to Prop Up Struggling Banks in 2015 (WSJ)

Germany plans to force creditors into propping up struggling banks beginning in 2015, one year earlier than required under European-wide plans that set rules for failing financial institutions, according to a senior German finance ministry official.From next year, struggling bank creditors, in addition to shareholders, will have to help financial institutions, covering up to 8% of liabilities, before the banks can tap Germany’s financial markets stabilization fund SoFFin, said the official, who declined to be identified. Germany also plans to operate the SoFFin rescue fund until the end of 2015 to bridge the time until a European-wide restructuring fund is in place. The stabilization fund was scheduled to be dissolved this year. The plan comes as Europe’ banking supervisor, the European Banking Authority, conducts a new round of stress tests aimed at making the European Union’s financial sector more resilient. The results, expected for the end of October, might reveal a need for fresh capital.

Banks failing the tests have then up to six months to raise fresh capital from private investors. Bankers say that keeping SoFFin alive longer is a sign that the government wants to make sure that the country’s regional public-sector lenders, or Landesbanken, would have a last resort should the stress test unveil a capital shortfall. The move also underscores that the separate institution winding down the bad assets from former German lender Hypo Real Estate needs to continue its work. Germany’s government earlier this year halted the planned sale of Hypo Real Estate’s Dublin-based Depfa Bank unit, choosing instead to wind down the unit. Germany’s new bail-in rules are part of a package of German legislation on the European banking union, an ambitious project to centralize bank supervision in the euro zone and, when banks fail, to organize their rescue or winding-up at a European level.

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You betcha.

Mortgage Deals Leave Thousands Vulnerable If House Prices Fall (Telegraph)

A “glut” of mortgage deals aimed at buyers with small deposits pushed the number of homeowners vulnerable to a slump in property prices to a post-crisis high in June, according to the UK’s biggest chartered surveyor. The number of households that took out mortgages with deposits of 15pc or less of a property’s value rose to 10,898 in June, up from 9,750 in May and 7,166 a year ago, according to e.surv. This means that high loan-to-value (LTV) lending now accounts for one in five of all new mortgages, the highest level since April 2008. This compares with just one in nine mortgages a year ago.

The e.surv data also revealed a prominent north-south divide in high LTV lending in June. More than a quarter of borrowers in the North West and Yorkshire took out high LTV loans, compared with just 7pc in London. It said lower wages in these regions meant an increasing number of borrowers were struggling to save for a deposit. While the current levels are below those seen pre-crisis, when the number of high LTV loans reached 41,745 in February 2007 – or one in three loans – it means a growing number of households are at risk of falling into negative equity should prices fall sharply. Negative equity occurs when the size of a mortgage exceeds the price of the property it is secured against. Many homeowners were plunged into negative equity after the financial crisis because they took out high LTV mortgages only for property prices to fall in the downturn.

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Lots of economies hide unemployment rates inside “self-employment”.

Fall In UK Wages 20% Steeper Than Thought (Guardian)

Average wages in Britain have fallen further than official figures show after a huge shift into low-paid self-employment since the financial crash, according to a report by a leading thinktank. The fall in wages could be 20% greater than currently estimated across the whole workforce once Britain’s 4.5 million self-employed people are included in pay figures, said the Resolution Foundation. A real-terms fall of 10% in average wages since 2008 would increase to more than 12% if a 27% fall in self-employed incomes is taken into account. Before the Bank of England’s decision on interest rates at its monthly meeting, the thinktank said the exclusion of pay figures for the self-employed gave a skewed picture of the health of the UK’s labour market.

Officials on the Bank’s monetary policy committee, which sets interest rates, are understood to be concerned that the exclusion of self-employed incomes from official figures hampers their efforts to gauge when to increase the cost of credit. Laura Gardiner, a senior analyst at the Resolution Foundation and the author of the paper, said official figures used by the Bank and other policymakers gave “a picture that’s incomplete at best and sometimes misleading”. She said: “What we know about earnings is central to our understanding of the recovery and the timing of interest rate rises so it’s crucial that we equip ourselves with the best possible wage measure.” More than 700,000 people have declared themselves self-employed since 2008, bringing the total number of people who work for themselves to 4.5 million or one in seven of the total. Over the same period only 260,000 workers have been added to the ranks of the employed on a net basis, said the report.

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Price Of UK Electricity To Double Over Next 20 Years (Guardian)

The price of electricity could double over the next two decades, according to forecasts published on Thursday by the National Grid, the company responsible for keeping Britain’s lights on. The current price of wholesale electricity is below £50 per megawatt hour but could soar to over £100 by 2035 under a “high case” example used in the Grid’s UK Future Energy Scenarios report. The group, which is the main pipes and pylons operator in England and Wales, predicts the wholesale gas price could rise from 70p per therm to around 100p per therm under another high case scenario. The cost of electricity has already risen 20% since 2009 and the company blames future increases on the number of coal-fired power stations being closed plus the cost of subsidising wind farms.

“Electricity prices for the high case and base case scenarios are assumed to increase over the next few years due to decreasing margins as coal-fired plants retire due to the Large Combustion Plants Directive [European anti-pollution] legislation and some gas-fired plants are mothballed,” says the document. “All prices increase post-2020 as the costs of low carbon generation increasingly factor into the power price,” it adds. The Grid admits the estimates are based on the lowest “baseload” cost at which the electricity is available rather than any “peak” costs during periods of high demand. The latest forecasts – although combined with more modest price rises under different scenarios – will worry householders and energy-intensive businesses already struggling with the impact of higher bills.

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Fossil Industry Is The Subprime Danger Of This Cycle (AEP)

The epicentre of irrational behaviour across global markets has moved to the fossil fuel complex of oil, gas and coal. This is where investors have been throwing the most good money after bad. They are likely to be left holding a clutch of worthless projects as renewable technology sweeps in below radar, and the Washington-Beijing axis embraces a greener agenda. Data from Bank of America show that oil and gas investment in the US has soared to $200bn a year. It has reached 20pc of total US private fixed investment, the same share as home building. This has never happened before in US history, even during the Second World War when oil production was a strategic imperative. The International Energy Agency (IEA) says global investment in fossil fuel supply doubled in real terms to $900bn from 2000 to 2008 as the boom gathered pace. It has since stabilised at a very high plateau, near $950bn last year.

The cumulative blitz on exploration and production over the past six years has been $5.4 trillion, yet little has come of it. Output from conventional fields peaked in 2005. Not a single large project has come on stream at a break-even cost below $80 a barrel for almost three years. “What is shocking is that upstream costs in the oil industry have risen threefold since 2000 but output is up just 14pc,” said Mark Lewis, from Kepler Cheuvreux. The damage has been masked so far as big oil companies draw down on their cheap legacy reserves. “They are having to look for oil in the deepwater fields off Africa and Brazil, or in the Arctic, where it is much more difficult. The marginal cost for many shale plays is now $85 to $90 a barrel.”

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Flint is Michael Moore territory. Been a desert for ages.

After Detroit, Another City Ponders Bankruptcy (AP)

As Detroit works to emerge from bankruptcy following a court-supervised overhaul, another Michigan city with strong auto industry bonds could be on the brink of beginning the same process, the latest sign that the spate of municipal defaults may not have ended. Flint, which was the birthplace of General Motors and once had 200,000 residents, also has suffered a spectacular drop in population and factory jobs and a corresponding rise in property abandonment, much like its insolvent big brother an hour’s drive south. If a judge rules against Flint’s effort to cut its retiree health care benefits, the city is expected to join about a dozen cities or counties to seek court relief since the beginning of the recession. “If we don’t get any relief in the courts … we are headed over the same cliff as Detroit,” said Darnell Earley, the emergency manager appointed by Gov. Rick Snyder to manage Flint’s finances. “We can’t even sustain the budget we have if we have to put more money into health care” for city workers.

Before Detroit, the largest local government bankruptcy filing was in Jefferson County, Alabama in November 2011. The county emerged last year after reorganization of its $4 billion in debt. Court proceedings continue for the California cities of Stockton, San Bernardino, and Mammoth Lakes, all of which filed in 2012. The greatest threat of new cases may be in Michigan, where about a dozen cities, many of them small, and four school districts are under state control. The state unemployment rate still is 7.3%, and some entities remain saddled with underfunded pension plans. That Flint might follow Detroit, which filed in July 2013, isn’t surprising given their shared circumstances. Both once were boomtowns brimming with auto jobs for collars white and blue. General Motors employed about 80,000 in the area in the early 1970s. Fewer than 8,000 GM jobs remain. The city’s population has fallen to just below 100,000.

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Anyone surprised?

Second Silent Spring? Bird Declines Linked to Popular Pesticides (NatGeo)

Pesticides don’t just kill pests. New research out of the Netherlands provides compelling evidence linking a widely used class of insecticides to population declines across 14 species of birds. Those insecticides, called neonicotinoids, have been in the news lately due to the way they hurt bees and other pollinators. This new paper, published online Wednesday in Nature, gets at another angle of the story—the way these chemicals can indirectly affect other creatures in the ecosystem. Scientists from Radboud University in Nijmegen and the Dutch Centre for Field Ornithology and Birdlife Netherlands (SOVON) compared long-term data sets for both farmland bird populations and chemical concentrations in surface water. They found that in areas where water contained high concentrations of imidacloprid—a common neonicotinoid pesticide—bird populations tended to decline by an average of 3.5% annually.

“I think we are the first to show that this insecticide may have wide-scale, significant effects on our environment,” said Hans de Kroon, an expert on population dynamics at Radboud University and one of the authors of the paper. Pesticides and birds: If this story sounds familiar, it’s probably because Rachel Carson wrote about it back in 1962. Carson’s seminal Silent Spring was the first popular attempt to warn the world that pesticides were contributing to the “sudden silencing of the song of birds.” “I think there is a parallel, of course,” said Ruud Foppen, an ornithologist at SOVON and co-author of the Nature paper. Foppen says that while Carson battled against a totally different kind of chemicals—organophosphates like DDT—the effects he’s seeing in the field are very much the same. Plainly stated, neonicotinoids are harming biodiversity. “In this way, we can compare it to what happened decades ago,” he said. “And if you look at it from that side, we didn’t learn our lessons.”

In the past 20 years, neonicotinoids (pronounced nee-oh-NIK-uh-tin-oyds) have become the fastest growing class of pesticides. They’re extremely popular among farmers because they’re effective at killing pests and easy to apply. Instead of loading gallons and gallons of insecticide into a crop duster and spraying it over hundreds of acres, farmers can buy seeds that come preloaded with neonicotinoid coatings. Scientists refer to neonicotinoids as “systemic” pesticides because they affect the whole plant rather than a single part. As the pretreated seed grows, it incorporates the insecticide into every bud and branch, effectively turning the plant itself into a pest-killing machine.

This lock, stock, and barrel approach to crop protection means that no matter where a locust or rootworm likes to nibble—the root, the stem, the flower—the invader winds up with a bellyful of neurotoxins. “The plants become poison not only for the insects that farmers are targeting, but also for beneficial insects like bees,” said Jennifer Sass, a senior scientist with the Natural Resources Defense Council (NRDC) who’s been building a case against the widespread use of neonicotinoids. The pesticide’s top-to-bottom coverage means the plants’ flowers, pollen, and nectar are all poisonous too. Worse still, Sass says, neonicotinoids can persist in the soil for years. This gives other growing things a chance to come into contact with and absorb the chemicals.

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