Jul 272014
 
 July 27, 2014  Posted by at 1:35 pm Finance Tagged with: , , , , ,  17 Responses »


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.

Read more …

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.

Read more …

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.

Read more …

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.

Read more …

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.

Read more …

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.

Read more …

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.

Read more …

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.

Read more …

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.

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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.

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Jul 102014
 
 July 10, 2014  Posted by at 2:48 pm Finance Tagged with: , , ,  17 Responses »


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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