BIS Archives - Page 2 of 3 - The Automatic Earth

The conundrum of stubbornly low inflation despite a pick-up in global growth and continued monetary stimulus is a “trillion dollar” question, the umbrella body for the world’s leading central banks said on Sunday. The Bank for International Settlements (BIS) said in its latest quarterly report that cheap borrowing rates and the rare simultaneous expansion of advanced and developing economies are driving financial markets higher, with signs of “exuberance” starting to re-emerge. U.S. corporate debt is much higher than before the financial crisis and a drop in the premiums investors demand for riskier lending has boosted sales of so-called covenant-lite bonds offering high yields. The BIS said this raises a question over the potential for another crisis if there is a significant rise in interest rates.

The body has called for a gradual return to higher rates, though central banks are being tentative because of persisting low inflation. “It feels like ‘Waiting for Godot’,” said Claudio Borio, the head of the monetary and economic department of the BIS, referring to a play in which the main characters wait for someone who never arrives. But the BIS says no one has yet worked out why inflation has remained so subdued while economies have approached or surpassed estimates of full employment and central banks have provided unprecedented stimulus. “This is the trillion-dollar question that will define the global economy’s path in the years ahead and determine, in all probability, the future of current policy frameworks,” Borio said. “Worryingly, no one really knows the answer.”

The BIS is surprised by lack of inflation, or does it pretend that? And it’s also surprised by swaps and forwards? Really?

• Global Debt Underreported By $14 Trillion – BIS (ZH)

In its latest annual summary published at the end of June, the IIF found that total nominal global debt had risen to a new all time high of $217 trillion, or 327% of global GDP…

… largely as a result of an unprecedented increase in emerging market leverage.

While the continued growth in debt in zero interest rate world is hardly surprising, what was notable is that debt within the developed world appeared to have peaked, if not declined modestly in the latest 5 year period. However, it now appears that contrary to previous speculation of potential deleveraging among EM nations, not only was this conclusion incorrect, but that developed nations had been stealthily piling on just as much debt, only largely hidden from the public eye, in the form of swaps and forwards.

According to a just released analysts by the Bank of International Settlements, “FX swaps and forwards: missing global debt?” non-banks institutions outside the United States owe large sums of dollars off-balance sheet through instruments such as FX swaps and forwards. The BIS then calculates what balance sheets would look like if borrowing through such derivative instruments was recorded on-balance sheet, as functionally equivalent repo debt, and calculates that the total “is of a size similar to, and probably exceeding, the $10.7 trillion of on-balance sheet dollar debt”, potentially as much as $13-14 trillion.

[..] “Every day, trillions of dollars are borrowed and lent in various currencies. Many deals take place in the cash market, through loans and securities. But foreign exchange (FX) derivatives, mainly FX swaps, currency swaps and the closely related forwards, also create debt-like obligations. For the US dollar alone, contracts worth tens of trillions of dollars stand open and trillions change hands daily. And yet one cannot find these amounts on balance sheets. This debt is, in effect, missing.”

Who says they’re ignoring it? They’re frantically looking to control it.

• World’s Central Banks Can’t Ignore the Bitcoin Boom – BIS (BBG)

The world’s central banks can’t sit back and ignore the growth in cryptocurrencies as it could pose a risk to the stability of the financial system, according to the Bank for International Settlements. It said central banks will need to figure out whether to issue a digital currency and what its attributes should be, though the decision is most pressing in countries like Sweden where cash use is dwindling. Institutions need to take into account of not only privacy issues and efficiency gains in payment systems, but also economic, financial and monetary policy repercussions, the BIS said in its Quarterly Review. The analysis comes at the end of a rough week for digital currencies, with JPMorgan CEO Jamie Dimon calling bitcoin a “fraud” and China moving to crack down on domestic trading of cryptocurrencies.

But with bitcoin and others gaining in popularity as payment systems go mobile and investors pour in money, central banks are beginning to delve into them and their underlying blockchain technology, which promises to speed up clearing and settlements. At the Bank of England, Mark Carney has cited cryptocurrencies as part of a potential “revolution” in finance. To better understand the system, the Dutch central bank has created its own cryptocurrency, albeit for internal use only. U.S. officials are exploring the matter too, though in March Federal Reserve Governor Jerome Powell said there were “significant policy issues” that needed further study, including vulnerability to cyber-attack, privacy and counterfeiting.

According to the BIS, one option for central banks might be a currency available to the public, with only the central bank able to issue units that would be directly convertible with cash and reserves. There might be a greater risk of bank runs, however, and commercial lenders might face a shortage of deposits. Another question to be resolved would be the question of privacy.

“It’s going to be like the dot-com bust, but on a much more epic scale.”

• Dogecoin Creator On Cryptocurrencies: “Very Bubble. Much Scam. So Avoid.” (NYT)

Jackson Palmer no longer thinks it’s funny to imitate Doge, the internet meme about a Shiba Inu dog whose awe-struck expressions and garbled syntax (e.g. “Wow. So pizza. Much delicious.”) made him a viral sensation several years ago. But if he did, he might channel Doge to offer a few cautionary words for investors who are falling for cryptocurrency start-ups, Silicon Valley’s latest moneymaking craze: Very bubble. Much scam. So avoid. Mr. Palmer, the creator of Dogecoin, was an early fan of cryptocurrency, a form of encrypted digital money that is traded from person to person. He saw investors talking about Bitcoin, the oldest and best-known cryptocurrency, and wanted to find a way to poke fun at the hype surrounding the emerging technology. So in 2013, he built his own cryptocurrency, a satirical mash-up that combined Bitcoin with the Doge meme he’d seen on social media.

Mr. Palmer hoped to use Dogecoin to show the absurdity of wagering huge sums of money on unstable ventures. But investors didn’t get the joke and bought Dogecoin anyway, bringing its market value as high as $400 million. Along the way, the currency became a magnet for greed and attracted a group of scammers and hackers who defrauded investors, hyped fake products, and left many of the currency’s original backers empty-handed. Today, Mr. Palmer, 30, is one of the loudest voices warning that a similar fate might soon befall the entire cryptocurrency industry. “What’s happening to crypto now is what happened to Dogecoin,” Mr. Palmer told me in a recent interview. “I’m worried that this time, it’s on a much grander scale.”

[..] Mr. Palmer, a laid-back Australian who works as a product manager in the Bay Area and describes himself as “socialist leaning,” was disturbed by the commercialization of his joke currency. He had never collected Dogecoin for himself, and had resisted efforts to cash in on the currency’s success, even turning down a $500,000 investment offer from an Australian venture capital firm. [..] Mr. Palmer worries that the coming reckoning in the cryptocurrency market — and it is coming, he says confidently — will deter people from using the technology for more legitimate projects. “The bigger this bubble goes, the bigger negative connotation it’s going to have,” he said. “It’s going to be like the dot-com bust, but on a much more epic scale.”

Peters is the CIO at One River Asset Management. “Once private markets perfect cryptocurrency technology, governments will commandeer it, killing today’s pioneers. Then with every cryptodollar, yen, euro and renminbi registered on their servers, they’ll have complete dominion over money, laundering, taxation.”

• The Future Of Cryptocurrency Is Not As It Seems (Eric Peters)

“Any other thoughts on the matter?” he asked. We’d spent quite some time discussing Bitcoin, Ethereum, and copycat cryptocurrencies popping up faster than North Korean nukes. I mostly listened, he knew far more about the subject; blockchain, distributed ledgers, mining, halving, hash rates. Unlike the S&P 500 realized volatility’s collapse to 8%, these new creations are realizing at 90%. Which makes them attractive to day-traders, adrenaline junkies, who launched 100 crypto hedge funds just last month. It’s the millennial’s wild west. Like all generations, they’ve discovered a new frontier, with few rules, seedy saloons, gunfights, corpses. As our earthly unknowns disappear, we find new ones in the ether. Which is where money belongs; it’s not real, it’s an abstraction, an age-old illusion.

As a golden myth captured mankind’s imagination, we built our societies upon a rare yellow metal. For 2,500 years we fought, killed, conquered. Until governments tired of the arbitrary spending constraints imposed upon them by a scarce element. So they invented today’s fiction, a printed promise, fiat currency. Seigniorage is the difference between that currency’s market value and its cost of production – that spread is a source of vast wealth and power. And in all human history, not a single government has willingly forfeited such a thing. Nor will one ever. Only after a hyperinflationary depression, confronted with revolution, do governments sometimes relinquish their power to print (Zimbabwe most recently).

Consequently, the future of cryptocurrency is not as it seems. Once private markets perfect cryptocurrency technology, governments will commandeer it, killing today’s pioneers. Then with every cryptodollar, yen, euro and renminbi registered on their servers, they’ll have complete dominion over money, laundering, taxation. They’ll track every transaction. Imposing negative interest rates in an instant. There will be no hiding, no mattresses. And in a deflationary panic, they’ll instantaneously add an extra zero to every account, their own especially.

“..we’re on a $40 trillion credit system on $2 trillion of equity on maybe $1 trillion of liquid reserves.”

• China’s $40 Trillion Banking System: “Largest Imbalances I’ve Ever Seen” (ZH)

KB: We’re in the such late stages of a game that is the largest global imbalance I’ve ever seen in my life. When you look at on balance sheet and off balance sheets, you look at on balance sheet in the banks, you look in the shadow banks. The number of total credit in the system, China is right at $40 trillion. Think about the number I just said. $40 trillion. And that’s using an exchange rate of call it 6.7 to the dollar, right? So it’s grown 1,000% in a decade. And we’re on a $40 trillion credit system on $2 trillion of equity on maybe $1 trillion of liquid reserves.

RP: Where do you get the equity and liquid reserves from?

KB: Well, it’s the amount of equity in the banks of China. It’s right at about $2 trillion. So that’s kind of a stated number. The reserves is my own calculation, right? The Chinese magically have leveled their reserves out around $3 trillion, which happens to be the minimum level of IMF reserve adequacy as defined by the IMF rule.

RP: So what have they been doing now? So, they were under pressure, and then everything kind of eased off, I guess, as the dollar started weakening a bit.

KB: Yeah. Actually, they’ve done three things. Well, so four things have caused this, quote, easing off that you refer to. Three have been driven by SAFE and the PBOC, one that’s been driven by our illustrious Trump. So the first three are, number one, they essentially halted all cross-border M&A. So if you look at the parabola of M&A coming out of China from 2012 to 2016, it reached dizzying heights in 2016. In 2017, it’s like 15% of the 2016 number and no new deals being announced. Now, they’ll always be some outbound M&A that’s driven by really policy at the Communist Party level, right?

They’ll always buy copper mines in Uganda. They’ll always invest in ports in Greece. They’ll always do things that are from a strategic perspective and a policy perspective. The things that the Communist Party needs to procure resources for its people over the long-term. But when you look at the rampant M&A of money leaving China, they just put a halt to it in November of 2016. And the second thing they did was they made it impossible for multinational corporations to get their profits and or working capital out of China. And that’s something that has been a problem for a lot of the multinationals that do business in China.”

Perma bear.

• Stockman: Trump’s Now ‘Blowing Kisses to Janet Yellen’

Stockman: Trump’s ‘Done Nothing in Nine Months’ and Is Now ‘Blowing Kisses to Janet Yellen’ (Fox Business, September 15, 2017)

EU, UN, US, nobody stands up for democracy. Revealing.

• Spain’s Prosecutor Warns Over Catalonia Referendum As Leaflets Seized (R.)

Spanish authorities on Sunday pursued efforts to block an independence vote in Catalonia, seizing campaign materials as the chief prosecutor said jailing the region’s top politician could not be ruled out. The government in the northeastern region is intent on holding a referendum on October 1 that will ask voters whether they support secession from Spain, a ballot Madrid has declared illegal. In a raid on a warehouse in the province of Barcelona on Sunday, police confiscated around 1.3 million leaflets and other campaign materials promoting the vote issued by the Catalan government. The haul was the largest in a series of similar raids, the Interior Ministry said in a statement.

Spanish prosecutors, who have ordered police to investigate any efforts to promote the plebiscite, said last week that officials engaged in any preparations for it could be charged with civil disobedience, abuse of office and misuse of public funds. More than 700 Catalan mayors gathered in Barcelona on Saturday to affirm their support for it. Asked if arresting regional government head Carles Puigdemont was an option if preparations continued, Spain’s chief public prosecutor said in an interview: ”We could consider it because the principal objective is to stop the referendum going ahead. “I won’t rule out completely the option of seeking jail terms… It could happen under certain circumstances,” Jose Manuel Maza was quoted as also telling Sunday’s edition of newspaper El Mundo.

Promising.

• After Single Payer Failed, Vermont Embarks On Big Health Care Experiment (WP)

Doug Greenwood lifted his shirt to let his doctor probe his belly, scarred from past surgeries, for tender spots. Searing abdominal pain had landed Greenwood in the emergency room a few weeks earlier, and he’d come for a follow-up visit to Cold Hollow Family Practice, a big red barnlike building perched on the edge of town. After the appointment was over and his blood was drawn, Greenwood stayed for an entirely different exam: of his life. Anne-Marie Lajoie, a nurse care coordinator, began to map out Greenwood’s financial resources, responsibilities, transportation options, food resources and social supports on a sheet of paper. A different picture began to emerge of the 58-year-old male patient recovering from diverticulitis: Greenwood had moved back home, without a car or steady work, to care for his mother, who suffered from dementia. He slept in a fishing shanty in the yard, with a baby monitor to keep tabs on his mother.

This more expansive checkup is part of a pioneering effort in this New England state to keep people healthy while simplifying the typical jumble of private and public insurers that pays for health care. The underlying premise is simple: Reward doctors and hospitals financially when patients are healthy, not just when they come in sick. It’s an idea that has been percolating through the health-care system in recent years, supported by the Affordable Care Act and changes to how Medicare pays for certain kinds of care, such as hip and knee replacements. But Vermont is setting an ambitious goal of taking its alternative payment model statewide and applying it to 70% of insured state residents by 2022 which — if it works — could eventually lead to fundamental changes in how Americans pay for health care.

“You make your margin off of keeping people healthier, instead of doing more operations. This drastically changes you, from wanting to do more of a certain kind of surgery to wanting to prevent them,” said Stephen Leffler, chief population health and quality officer of the University of Vermont Health Network. Making lump sum payments, instead of paying for each X-ray or checkup, changes the financial incentives for doctors. For example, spurring the state’s largest hospital system to invest in housing. Or creating more roles like Lajoie’s, focused on diagnosing problems with housing, transportation, food and other services that affect people’s well-being.

The Troika is in Athens to turn on the thumbscrews.

• Greek Government Told To Begin Online Auctions Or Face A Bank Bail-In (K.)

The possibility that banks will need for a fresh recapitalization grows with every day the delay in the implementation of online property transactions drags on. This might lead to a deposit haircut, along with generating a major crisis in relations between the government and the country’s creditors. Creditor representatives are accusing the government of delay tactics, for party political purposes, in starting electronic auctions. This puts the sustainability of the credit system at risk as it denies them a crucial tool in efforts to tackle the problem of nonperforming loans (NPLs).

The creditors have explicitly warned Athens about the prospect of a new recapitalization and the risk of a bail-in for banks and their depositors unless the auctions proceed quickly, as their representatives told notaries and banks in Greece during the presentations of the auctions’ online platform, according to the president of the Notaries’ Association, Giorgos Rouskas. The creditors reacted strongly when told that the first online auctions would not take place before early 2018 even though during the second bailout review Athens had committed to start the auctions on September 1. The government claimed the system is in place but the law provides for a period of two months between the submission of an auction request and its realization.

Seeing that the government is again trying to renege on its commitments, the creditors put fresh pressure on Athens, which backed down and said the system may open in the coming days for banks, so that the first online auctions can take place by end-November. In an interview with Kathimerini, Rouskas stressed that “the online platform is ready and all technical tests have been completed.” The onus is therefore on the banks now, which Rouskas explains have to register the repeat auctions or any new ones in the system, being the party initiating the auctions. They will then get a date based on the new system. “We have prepared the platform. It is now up to the lender, be that a bank or a private individual, to issue a request for an online auction scheduling, which notaries are forced to follow. This has not happened yet, but I believe we are very close to its implementation,” said Rouskas.

Why Greece will not recover. Money supply way down, money velocity way way down.

• In Greece, Full-Time Work Is Not The Norm It Once Was (K.)

Official data by the Hellenic Statistical Authority point to an increase in employment by about 250,000 jobs in the last three years (from the second quarter of 2014 to this year’s Q2), but that is only part of the truth. The figures also reveal a constant decline in average salaries, an ongoing increase in the percentage of employed workers who earn less than 500 euros a month – at least one in four gets less than that amount – soaring temporary work (either due to project-specific hirings, subsidies being paid for a restricted period, or time contracts), and a rise in the rate of part-time employment.

Senior and top officials are no longer offered such handsome pay packages, the primary sector is being abandoned and any new enterprises that are being set up are mostly in the field of restaurants, hotels and retail stores. Greeks can only find jobs such as waiters, cleaners, maids or sales assistants, which as a rule are of a seasonal character and fetch a low salary. The 40-hour working week concerns ever fewer workers nowadays, and without the subsidies handed out by the Manpower Organization (OAED) and the increase in tourism flows the unemployment rate probably wouldn’t have declined at all.

The season is far from over.

• Hurricane Maria Heading For Caribbean (AFP)

Maria became a hurricane Sunday as it headed toward the storm-staggered eastern Caribbean with 75 mile (120 kilometer) per hour winds, the US National Hurricane Center said. Storm warnings and watches went up in many of the Caribbean islands still reeling from the destructive passage of Hurricane Irma earlier this month. As of 2100 GMT, Maria was a Category One hurricane, the lowest on the five point Saffir-Simpson scale, located 140 miles (225 kilometers) northeast of Barbados, the NHC said, bearing west-northwest at 15 miles (24 kilometers) an hour. “On the forecast track, the center of Maria will move across the Leeward Islands Monday night and then over the extreme northeastern Caribbean Sea on Tuesday,” it said.

Hurricane warnings were triggered for St Kitts, Nevis and Montserrat, while lesser ‘watches’ were issued for the US and British Virgin Islands where at least nine people were killed during Irma. A warning is typically issued 36 hours before the first occurrence of tropical storm-force winds while watches are issued 48 hours in advance. Tropical storm warnings were, meanwhile, issued for Martinique, Antigua and Barbuda, Saba and St Eustatius and St Lucia. Barbuda was decimated by Hurricane Irma September 5-6 when it made its first landfall in the Caribbean as a top intensity Category Five storm. The NHC said Maria could produce a “dangerous storm surge accompanied by large and destructive waves” that will raise water levels by four to six feet (1.2 to 1.8 meters) when it passes through the Leeward Islands.

Debt Rattle June 26 2017

Jun 262017

June 26, 2017 Posted by Raúl Ilargi Meijer at 9:29 am Finance Tagged with: BIS, bonds, crash, deflation, Greece, hydropower, Italy, Japan, recession, unwind, USD 3 Responses »

Pablo Picasso Etude Pour Mercure 1924

• The Next Global Crash Could Arrive ‘With A Vengeance’ – BIS (CNBC)

• Push On With The ‘Great Unwinding’, BIS Tells Central Banks (R.)

• Japanese Banks at Risk as Borrowing in Dollars Doubles – BIS (BBG)

• Four Pronged Proposal to End Japanese Deflation (Mish)

• Japan’s Bond Market Grinds To A Halt (ZH)

• “It’ll Be An Avalanche”: Hedge Fund CIO Sets The Day Of The Next Crash (ZH)

• A Stock Market Crash Scenario (CH Smith)

• The Fed Is Going to Cause a Recession (James Rickards)

• US Dollar Will Strengthen on Fed Hikes – Credit Agricole (CNBC)

• The $1.5 Trillion US Business Tax Change Flying Under the Radar (WSJ)

• Two Failed Italian Banks Split Into Good And Bad Banks, Taxpayers Pay (G.)

• Investors Call For Greece To Accelerate Reforms (K.)

• Germans Fearing China’s World Order? Worry About The EU Instead (CNBC)

• China’s Hydropower Frenzy Drowns Sacred Mountains (AFP)

“..the end may come to resemble more closely a financial boom gone wrong..”

• The Next Global Crash Could Arrive ‘With A Vengeance’ – BIS (CNBC)

A new financial crisis is brewing in the emerging economies and it could hit “with a vengeance”, an influential group of central bankers has warned. Emerging markets such as China are showing the same signs that their economies are overheating as the US and the UK demonstrated before the financial crisis of 2007-08, according to the annual report of the Bank for International Settlements (BIS). Claudio Borio, the head of the BIS monetary and economic department, said a new recession could come “with a vengeance” and “the end may come to resemble more closely a financial boom gone wrong”. The BIS, which is sometimes known as the central bank for central banks and counts Bank of England Governor Mark Carney among its members, warned of trouble ahead for the world economy.

It predicted that central banks would be forced to raise interest rates after years of record lows in order to combat inflation which will “smother” growth. The group also warned about the threat poised by rising debt in countries like China and the rise in protectionism such as in the US under Donald Trump, City AM reported. Chinese corporate debt has almost doubled since 2007, now reaching 166% of GDP, while household debt rose to 44% of GDP last year. In May, Moody’s cut China’s credit rating for the first time since 1989 from A1 to Aa3 which could potentially raise the cost of borrowing for the Chinese government. The BIS’s credit-to-GDP gap indicator also showed debt, which is seen as an “early warning indicator” for a country’s banking system, is rising far faster than growth in other Asian economies such as Thailand and Hong Kong.

“The BIS identified four main risks to the global outlook in the medium-term. A sudden flare-up of inflation which forces up interest rates and hurts growth, financial stress linked to the contraction phase of financial cycles, a rise in protectionism and weaker consumption not offset by stronger investment.”

• Push On With The ‘Great Unwinding’, BIS Tells Central Banks (R.)

Major central banks should press ahead with interest rate increases, the Bank for International Settlements said on Sunday, while recognizing that some turbulence in financial markets will have to be negotiated along the way. The BIS, an umbrella body for leading central banks, said in one of its most upbeat annual reports for years that global growth could soon be back at long-term average levels after a sharp improvement in sentiment over the past year. Though pockets of risk remain because of high debt levels, low productivity growth and dwindling policy firepower, the BIS said policymakers should take advantage of the improving economic outlook and its surprisingly negligible effect on inflation to accelerate the “great unwinding” of quantitative easing programs and record low interest rates.

New technologies and working practices are likely to be playing a roll in suppressing inflation, it said, though normal impulses should kick in if unemployment continues to drop. “Since we are now emerging from a very long period of very accommodative monetary policy, whatever we do, we will have to do it in a very careful way,” BIS’s head of research, Hyun Song Shin, told Reuters. “If we leave it too late, it is going to be much more difficult to accomplish that unwinding. Even if there are some short-term bumps in the road it would be much more advisable to stay the course and begin that process of normalization.” Shin added that it will be “very difficult, if not impossible” to remove all those bumps. The BIS identified four main risks to the global outlook in the medium-term. A sudden flare-up of inflation which forces up interest rates and hurts growth, financial stress linked to the contraction phase of financial cycles, a rise in protectionism and weaker consumption not offset by stronger investment.

The death of the dollar has been greatly exaggerated.

• Japanese Banks at Risk as Borrowing in Dollars Doubles – BIS (BBG)

Japanese banks have more than doubled their borrowing and lending in dollars since 2007, leaving them vulnerable to funding shocks such as those that exacerbated the last financial crisis, the Bank for International Settlements warned in a report released Sunday. Assets denominated in dollars on the balance sheets of Japanese banks surged to about $3.5 trillion by the end of 2016, the coordinating body for the world’s central banks said in its annual report about the global economy. Those exceed liabilities in dollars by about $1 trillion, creating a massive so-called long position in the currency. The report also cited Canadian lenders for following a similar trend, almost doubling their dollar exposure since the crisis. Their net long positions reached almost $200 billion, the BIS said.

European firms, by contrast, have reduced exposure to dollars since the crisis, the report said. German banks, which had among the highest net dollar positions in 2007, now have matching assets and liabilities denominated in the currency after cutting dollar assets by about half. During the financial crisis, European banks’ net dollar exposures, which peaked at $2 trillion, ended up causing several firms to collapse when funding sources dried up and their efforts to dump U.S. mortgage-related assets led to huge losses. Even as post-crisis regulation has strengthened banks’ capital resources to cope with such losses and some funding has shifted to more stable sources, risks haven’t been completely eliminated, according to the Basel, Switzerland-based group.

[..] the biggest portion of dollar funding for non-U.S. banks – $4.1 trillion – now comes from deposits outside the U.S., according to BIS data. That shift toward offshore dollar deposits also presents risks because the Federal Reserve’s funding backstop during the 2008 crisis wouldn’t be present in non-U.S. jurisdictions if dollar funds became scant, the BIS said. The Fed provided $538 billion of emergency loans to European banks that lost dollar funding from U.S. sources during the 2008 crisis ..

Is Mish missing out on confidence as a factor? You can lead a horse to water, but…

• Four Pronged Proposal to End Japanese Deflation (Mish)

Negative Sales Taxes People hoard cash, especially the miserly wealthy. We need to unlock that cash and put it to work. To free up this money, I propose negative sales taxes. The more you spend, the more money you get back as a direct tax credit against income taxes. I leave specific details to economists Larry Summers and Paul Krugman. What can possibly go wrong?

One Percent Tax Per Month on Government Bonds Negative interest rates are in vogue. However, all negative interest rates have done is to get those with money to hoard bonds. Bond buyers effectively bet on capital gains of still more negative rates. Phooey! Just yesterday I noted Bank of Japan Corners 33% of Bond Market: All Japanese Bonds, 40 Years and Below, Yield 0.3% or Less. 33% cornering of the bond market is truly inadequate as this sentiment implies: Makoto Yamashita, a strategist for Japanese interest rates at Deutsche Bank’s securities unit in Tokyo said “There are investors who have no choice but to buy.” We need to end this “no choice” hoarding sentiment right here, right now. I have just the solution. Tax government bonds at the rate of 1% per month.

No one will want them. Hedge funds and pension plans will dump sovereign bonds en masse. This will allow governments to buy every bond in existence immediately, if not sooner. As soon as the government corners the bond market (at effectively zero cost), debt and interest on the debt will truly be owed to itself. Once the bond market is 100% cornered, I propose government debt be declared null and void annually. This would effectively wipe out the entirety of Japan’s debt. Japan’s debt-to-GDP ratio would immediately plunge from 250% to 0%.

National Tax Free Lottery Japan desperately needs to get people to spend, continually. Once again, I have a logical proposal. For every purchase one makes on a credit card, that person gets a free lottery ticket for a weekly drawing worth $10,000,000 tax free. Each week, a random day of the week is selected and separately a random taxpayer ID is selected. If the person drawn made a credit card purchase exceeding $10 on the day of the week drawn, they win $10,000,000 tax free. If there is no winner, the amount rolls over. This beautiful plan will cost no more than $520 million annually, peanuts these days.

Hav-a-Kid Demographics in Japan are a huge problem. Although various incentives have been tried, none of them have gone far enough. I propose a reduction in income taxes for everyone starting a family. The following scale applies. One new child: 50% reduction in income taxes for a period of ten years. Two new children: 100% reduction in income taxes for a period of twenty years. Three new children: Subsidized housing, free healthcare, free schooling, and no income taxes for thirty years. Those with one new child in the last five years get full credit if they add at least one more child in the next five years.

Well, Mish does have the answer to that above: One Percent Tax Per Month

• Japan’s Bond Market Grinds To A Halt (ZH)

The Bank of Japan may or may not be tapering, but that may soon be moot because by the time Kuroda decides whether he will buy less bonds, the bond market may no longer work. As the Nikkei reports, while the Japanese central bank ponders its next step, the Japanese rates market has been getting “Ice-9ed” and increasingly paralyzed, as yields on newly issued 10-year Japanese government bonds remained flat for seven straight sessions through Friday while the BOJ continued its efforts to keep long-term interest rates around zero. The 10-year JGB yield again closed at 0.055%, where it has been stuck since June 15m and according to data from Nikkei affiliate QUICK, this marks the longest period of stagnation since 1994, Because what comes after record low volatility? Simple: market paralysis.

And that’s what Japan appears to be experiencing right now as private bondholders no longer dare to even breathe without instructions from the central bank. Meanwhile, the implied volatility of JGBs tumbled to the lowest level since January 2008 for the same reason we recently speculated may be the primary driver behind the global collapse in volatility: nobody is trading. This means that trading in newly issued 10-year debt has become so infrequent that broker Japan Bond Trading has seen days when no bonds trade hands. It’s not just cash bonds that find themselves in trading limbo: trading in short-term interest rate futures has also thinned and on Tuesday of last week the Nikkei reports that there were no transactions in three-month Tibor futures – the first time that has happened since such trading began in 1989.

As more market participants throw in the towel on a rigged, centrally planned market, the result will – no could – be a further loss of market function, and a guaranteed crash once the BOJ and other central banks pull out (which is why they can’t). As the Nikkei politely concludes, “if the bond and money markets lose their ability to price credit based on future interest rate expectations and supply and demand, the risk of sudden rate volatility from external shocks like a global financial crisis will rise.” Translation: in a world where only central banks trade, everyone else is destined to forget forget what trading, and certainly selling, means.

“..when the global credit impulse reverses, it’ll be a cascade, an avalanche. And I pin the tail on that donkey to be Valentine’s Day 2018.”

• “It’ll Be An Avalanche”: Hedge Fund CIO Sets The Day Of The Next Crash (ZH)

While most asset managers have been growing increasingly skeptical and gloomy in recent weeks (despite a few ideological contrarian holdouts), joining the rising chorus of bank analysts including those of Citi, JPM, BofA and Goldman all urging clients to “go to cash”, none have dared to commit the cardinal sin of actually predicting when the next crash will take place. On Sunday a prominent hedge fund manager, One River Asset Management’s CIO Eric Peters broke with that tradition and dared to “pin a tail on the donkey” of when the next market crash – one which he agrees with us will be driven by a collapse in the global credit impulse – will take place. His prediction: Valentine’s Day 2018. Here is what Peters believes will happen over the next 8 months, a period which will begin with an increasingly tighter Fed and conclude with a market avalanche:

“The Fed hikes rates to lean against inflation,” said the CIO. “And they’ll reduce the balance sheet to dampen growing financial instability,” he continued. “They’ll signal less about rates and focus on balance sheet reduction in Sep.” Inflation is softening as the gap between the real economy and financial asset prices is widening. “If they break the economy with rate hikes, everyone will blame the Fed.” They can’t afford that political risk. “But no one understands the balance sheet, so if something breaks because they reduce it, they’ll get a free pass.”

“The Fed has convinced itself that forward guidance was far more powerful than QE,” continued the same CIO. “This allows them to argue that reversing QE without reversing forward guidance should be uneventful.” Like watching paint dry. “Balance sheet reduction will start slowly. And proceed for a few months without a noticeable impact,” he said. “The Fed will feel validated.” Like they’ve been right all along. “But when the global credit impulse reverses, it’ll be a cascade, an avalanche. And I pin the tail on that donkey to be Valentine’s Day 2018.”

One must remember there are no markets left. That makes talking about them dicey.

• A Stock Market Crash Scenario (CH Smith)

After 8+ years of phenomenal gains, it’s pretty obvious the global stock market rally is overdue for a credit-cycle downturn, and many research services of Wall Street heavyweights are sounding the alarm about the auto industry’s slump, the slowing of new credit and other fundamental indicators that a recession is becoming more likely. Next February is a good guess, as recessions and market downturns tend to lag the credit market by about 9 months. My own scenario is based not on cycles or technicals or fundamentals, but on the psychology of the topping process, which tends to follow this basic script:

When there are too many bearish reports of gloomy data, and too many calls to go long volatility or go to cash, the market perversely goes up, not down. Why? This negativity creates a classic Wall of Worry that markets can continue climbing. (Central banks buying $300 billion of assets a month helps power this gradual ascent most admirably.) The Bears betting on a decline based on deteriorating fundamentals are crushed by the steady advance. As Bears give up, the window for a Spot of Bother decline creaks open, however grudgingly, as central banks make noises about ending their extraordinary monetary policies by raising interest rates a bit (so they can lower them when the next recession grabs the global economy by the throat). As bearish short interest and bets on higher volatility fade, insiders go short.

A sudden air pocket takes the market down, triggered by some bit of “news.” (Nothing like a well-engineered bout of panic selling to set up a profitable Buy the Dip opportunity.) And since traders have been well-trained to Buy the Dips, the Spot of Bother is quickly retraced. Nonetheless, doubts remain and fundamental data is still weak; this overhang of negativity rebuilds the wall of Worry. Some Bears will reckon the weakened market will double-top, i.e. be unable to break out to new highs given the poor fundamentals, and as a result we can anticipate a nominal new high after the Wall of Worry has been rebuilt, just to destroy all those who reckoned a double-top would mark The Top. Mr. Market (and the central banks) won’t make it that easy to reap a fortune by going short.

I think the Fed has already done that. By manoeuvering themselves into a position they cannot escape from.

• The Fed Is Going to Cause a Recession (James Rickards)

Why did the Federal Reserve (Fed) hike rates last week, and what will its policy look like in the future? They’re trying to prepare for the next recession. They’re not predicting a recession, they never do, but they know a recession will come sooner rather than later. This expansion is 96 months old. It’s one of the longest expansions in U.S. history. It’s also the weakest expansion in U.S. history. A lot of people say, “What expansion? Feels like a depression to me.” I think it is a depression defined as depressed growth, but we’re not in a technical recession and haven’t been since June 2009. So it’s been an eight-year expansion at this point, but it won’t fare well, and the Fed knows that. When the U.S. economy goes into recession, you have to cut interest rates about 3% to get the United States out of that recession. Well, how do you cut interest rates by 3% when you’re only at 1%?

The answer is, you can’t. You’ve got to get them up to 3% to cut them back down, maybe to zero, to get out of the next recession. So that explains why the Fed is raising interest rates. That’s the fourth rate hike getting them up to 1%. They would like to keep going; they would like to get them up to 3, 3.5% by 2019. My estimate is that they’re not going to get there. The recession will come first. In fact, they will probably cause the recession that they’re preparing to cure. So let’s just say we get interest rates to 1% and now you go into recession. We can cut them back down to zero. Well, now what do you do? You do a new round of QE. The problem is that the Fed’s balance sheet is so bloated at $4.5 trillion. How much more can you do—$5 trillion, $5.5 trillion, $6 trillion—before you cause a loss of confidence in the dollar? There are a lot of smart people who think that there’s no limit on how much money you can print. “Just print money. What’s the problem?”

I disagree. I think there’s an invisible boundary. The Fed won’t talk about it. No one knows what it is. But you don’t want to find out the hard way. [..] You probably want to get from $4.5 trillion, down to $2.5 trillion. Well, you can’t sell any treasury bonds. You destroy the market. Rates would go up, putting us in recession, and the housing market would collapse. They’re not going to do that. What they’re going to do is just let them mature. When these securities mature, they won’t buy new ones. They won’t roll it over, and they actually will reduce the balance sheet and make money disappear. They’re going to do it in tiny increments, maybe $10 billion a month or $20 billion a month. They want to run this quantitative tightening in small increments and pretend nothing’s happening. But that’s nonsense. It’s just one more way of tightening money in a weak economy; it will probably cause a recession.

Views on the dollar are all over the place.

• US Dollar Will Strengthen on Fed Hikes – Credit Agricole (CNBC)

While investors seem to have come to a consensus view that the U.S. dollar rally is coming to an end, Credit Agricole has offered a contrarian take: There is room for the greenback to strengthen. David Forrester, the bank’s FX strategist told CNBC Monday that markets have been predominantly focused on U.S. inflation data and pricing in an overly cautious Federal Reserve. But, he thinks the Fed will be more hawkish than what is currently expected, which will support the U.S. dollar. “The Fed seems to have changed its policy response function. Yes it’s going to pay attention to the data, but less so. It now wants to get its rates normalized so that it actually has room to cut rates in the next downturn,” Forrester said.

“Let’s not forget here: The U.S. expansion, while being soft, is actually pretty mature so the Fed is getting lined up here in preparation for the next downturn. That’s why we think they’re going to hike rates and we will see a steepening of the U.S. Treasury curve and that will be supportive of the U.S. going forward.” Credit Agricole expects the Fed to hike rates once more this year, followed by three times in 2018. U.S. inflation — still below its 2% target despite a low unemployment rate — has been a key point in the argument on whether the Fed should continue normalizing rates. Forrester said the divergence between the unemployment rate and inflation is not unique to the U.S. Globally, economies face structural issues such as ageing populations and automation replacing jobs, which could increase the risks of a recession.

But, he said U.S. inflation should pick up on the back of further wage growth and a rebound in oil prices. “We expect the U.S. economy to continue to recover and strengthen, we will believe in the Philips curve in the U.S. We do expect wages growth to accelerate and inflation expectation(s) to pick back up. So all-in-all, we do expect that re-steepening,” he said. The Philips curve relates to a supposed inverse relationship between the level of unemployment and the inflation rate. Forrester’s views are in contrast to that of many analysts, who expect weakness in the U.S. dollar. Ken Peng, Asia investment strategist at Citi Private Bank, told CNBC’s “Squawk Box” that the greenback is headed for a “new cycle” after a six-year rally since 2011. He added that the dollar weakness will be “one of the greatest market trends” for global investors.

Desperately seeking something.

• The $1.5 Trillion US Business Tax Change Flying Under the Radar (WSJ)

Republicans looking to rewrite the U.S. tax code are taking aim at one of the foundations of modern finance—the deduction that companies get for interest they pay on debt. That deduction affects everyone from titans of Wall Street who load up on junk bonds to pay for multibillion-dollar corporate takeovers to wheat farmers in the Midwest looking to make ends meet before harvest. Yet a House Republican proposal to eliminate the deduction has gotten relatively little sustained public attention or lobbying pressure. Thanks in part to the deduction, the U.S. financial system is heavily oriented toward debt, which because of the tax code is often cheaper than equity financing—such as sales of stock. It also is widely accessible. In 2015, U.S. businesses paid in all $1.3 trillion in gross interest, according to Commerce Department data, equal in magnitude to the total economic output of Australia.

Getting rid of the deduction for net interest expense, as House Republicans propose, would alter finance. It also would generate about $1.5 trillion in revenue for the government over a decade, according to the Tax Foundation, a conservative-leaning think thank. The plan would raise money to help offset Republicans’ corporate tax cuts and reduce a “huge bias” toward debt financing, said Robert Pozen, a senior lecturer at MIT’s Sloan School of Management. That bias, he said, hurts companies built around innovation, which tend to not have the physical assets that banks usually require as collateral. [..] Midsize businesses may also get squeezed. “The people that utilize debt, they utilize it because they don’t have the cash and they don’t have the access to equity,” said Robert Moskovitz, CFO of Leaf Commercial Capital, which finances businesses’ purchases of items like copiers and telephone systems.

“A dry cleaner in Des Moines, Iowa? Where is he going to get equity? He can’t do an IPO.” The idea behind the Republican plan is to pair the elimination of this deduction with immediate deductions for investments in equipment and other long-lived assets. Party leaders expect the capital write-offs would encourage more investment and growth and greater worker productivity, but not the debt often associated with it.

Dijsselbloem et al made a big circus about how taxpayers would never again foot the bill. It was never worth a thing.

“German conservative MEP Markus Ferber (EPP): “With this decision, the European Commission accompanies the Banking Union to its deathbed. The promise that the tax payer will not stand in to rescue failing banks anymore is broken for good. I am very disappointed that the commission has approved this course of action. By doing so the Commission has massively undermined the credibility of the Banking Union. If the common set of rules governing banking resolution is so blatantly ignored, there is no point in negotiating any further on a common deposit insurance scheme. The precondition for a working Banking Union is a common understanding of its rules. If such a basic common understanding is lacking, there is no point in further deepening the Banking Union and mutualising risk.”

• Two Failed Italian Banks Split Into Good And Bad Banks, Taxpayers Pay (G.)

The Italian government is stepping in to wind up two failing lenders and prevent a bank run, at a total cost of up to €17bn. After an emergency cabinet meeting on Sunday, ministers agreed to a decree splitting Veneto Banca and Banca Popolare di Vicenza into ‘good’ and ‘bad’ banks, keeping branches open. The ‘good’ assets are being acquired by Italy’s biggest retail bank, Intesa Sanpaolo, with the Italian government handing about €5bn to Intesa as part of the deal. The lenders will then be liquidated, which leaves the state footing the bill for bad loans on both banks’ books, plus restructuring costs.

The Italian government would provide state guarantees worth up to €12bn to cover potential losses at the ‘bad’ bank, Pier Carlo Padoan, the finance minister, told reporters in Rome. That means the total cost could reach €17bn. Padoan added that both banks would operate normally on Monday. The deal is meant to ward off the threat of a bank run, by reassuring nervous savers and deterring them from withdrawing their funds when branches reopen. Paolo Gentiloni, Italy’s prime minister, insisted that the decree fully respected EU rules, even though taxpapers are no longer meant to stump the cost to rescue a failing bank. The funds will come from a €20bn fund created last year to help struggling lenders, so will not affect Italy’s public borrowing, according to the government.

Lower pensions solve everything.

• Investors Call For Greece To Accelerate Reforms (K.)

The return of investor confidence in Greece will require time and the acceleration of the government’s reform program, foreign fund managers told Greek officials during two investment conferences that took place in the last couple of weeks in New York and London with the participation of Greek listed firms. In their meetings with hundreds of funds from the US and Europe, the representatives of Greek companies said that while the recent Eurogroup decision may have banished uncertainty about Greece, the government will need to put in some serious effort and work in addressing the issues of speed and efficiency. This was after Greece had failed to secure any debt-easing measures, while the entry of Greek bonds to the ECB’s QE remains pending.

The main subject at the two investment events was the titanic effort being made by Greek banks to reduce the bad loans in their portfolios. As for the Athens stock market, Alpha Finance noted in its presentation at the 6th Greek Investment Forum in New York on June 21-22 that “there is a light at the end of the tunnel.” The Alpha Bank subsidiary noted that “the Greek market has recorded bigger returns than its European peers and prospects appear very encouraging as Greece has beaten its fiscal targets and restored investor confidence in the timetable of the Greek [bailout] program.”

“the U.S. will not be indifferent to the mistreatment of the long suffering Greece. That is America’s key strategic base in the Mediterranean, and a location of new military installations on the island of Crete to monitor the Middle East.”

• Germans Fearing China’s World Order? Worry About The EU Instead (CNBC)

Criticizing what he saw as Washington’s isolationist bent, German Finance Minister Wolfgang Schäuble voiced a concern in a speech earlier this month that the West could be threatened as China (and Russia) might fill the void. That, he feared, “would be the end of our liberal world order.” He also said that the U.S. was no longer willing to act as a “guardian of global order,” apparently because Washington withdrew from the agreement on climate change, and it allegedly showed no interest for cooperative migration and security policies. The U.S. Department of State has probably something to say about that, but I wish Schäuble were at least partly right. Arguably, the U.S. could cut back on some foreign engagements and pay more attention to pressing domestic problems.

That said, I wonder how the German minister fails to see that the U.S. is all over the map in active, proxy and hybrid warfare — Afghanistan, the Middle East and North Africa, Korean Peninsula, Central and Eastern Europe and the South China Sea. What else would he want? A nuclear war with China and Russia? Germany may wish to think about whether it is in its interest to fuel and broaden the points of friction with the United States. In my view, Berlin should leave the big power dealings alone. Washington and Beijing are engaged on a broad range of issues to build a historically unique relationship between an established superpower and a runner-up that needs space to develop and contribute to the world in peace and harmony. In trying to do that, the two countries are blazing totally new trails of modern statecraft.

Ubiquitous analogies of Sparta (an established power) and Athens (a rapidly developing strategic competitor), and their ensuing Peloponnesian War, are worthless in the case of countries with huge nuclear arsenals and ground, sea, air and airspace delivery vehicles. So, yes, Germany should leave that alone and get over its fury at Washington’s decision to stop the hemorrhage of foreign trade accounts that are killing jobs, incomes and whatever is left of American manufacturing industries. China got that message and is doing something about it. In the first four months of this year, American export sales to China soared 16.1%. By contrast, U.S. exports to the EU, which account for one-fifth of the total, barely eked out a 2.7% increase.

Germany has to make up its mind with regard to the European integration. Bullying the Visegrad Group (and Baltic States) — a task that Germany has subcontracted to France due to dark pages of its history — and pillorying Greece (a task Germany was eager to continue) won’t work. These countries will run to the U.S. for cover, as some of them are doing now by demanding large contingents of U.S. armed forces on their soil. Also, the U.S. will not be indifferent to the mistreatment of the long suffering Greece. That is America’s key strategic base in the Mediterranean, and a location of new military installations on the island of Crete to monitor the Middle East.

Proud supporters of the Paris Agreement.

• China’s Hydropower Frenzy Drowns Sacred Mountains (AFP)

Beijing is building hydropower at a breakneck pace in ethnically Tibetan regions as part of an ambitious undertaking to reduce the country’s dependence on coal and cut emissions that have made it the world’s top polluter. China had just two dams in 1949, but now boasts some 22,000 – nearly half the world total – in all but one of the country’s major waterways. Mountains and rivers are revered as sacred in Tibetan Buddhism, and the extensive construction, which began in 2014, has alarmed locals who believe they can only live peacefully if the nature around them is protected. “Last year, people said that a big forest fire happened because they blasted a road into the holy mountain, and it took revenge,” said villager Tashi Yungdrung, who tends a small herd of yaks in the pastures above her stone, square-windowed home.

Most would not dare remove so much as a single stone from the mountain Palshab Drakar, an important pilgrimage site, she said. Villagers are bracing for mass relocations, an experience that has previously caused havoc elsewhere in China. Beginning in the 1990s, more than a million were moved for the Three Gorges Dam, the world’s largest in terms of capacity, with thousands still mired in poverty. Plans posted at the Lianghekou construction site showed that 22 power plants will be built along the Yalong, a Yangtze tributary, collectively capable of generating 30 gigawatts of electricity – a fifth of China’s current total installed hydropower capacity. Li Zhaolong, a Tibetan from Zhaba village, said he received 300,000 yuan ($44,000) in government compensation to build a new home on higher ground, where he will move next year.

But the 28,000 yuan moving fee his family received per person will not last long once their crops are submerged and they have no other sources of income. “Before we were farmers, and now we have no land,” said Li. [..] Some 80% of China’s hydropower potential lies along the high-flow, glacier-fed rivers of the Tibetan plateau, but dams there bring minimal local benefits because most of the power goes to smog-choked cities in the east, according to the non-governmental organisation International Rivers. Construction worker Zeng Qingtao said the state-owned Power Construction Corporation had brought in some 10,000 employees, but none are locals. “We can’t hire Tibetans. They aren’t reasonable,” he said.

Debt Rattle December 12 2016

Dec 122016

December 12, 2016 Posted by Raúl Ilargi Meijer at 8:53 am Finance Tagged with: BIS, China, CIA, debt, Greece, happiness, India, leverage, lies, OPEC, Palmyra, Trump 5 Responses »

‘Daly’ Store, Manning, South Carolina July 1941

• CIA’s Blatant Lies Demolished By A Little Simple Logic (Craig Murray)

• Chinese Media Hit Out At Trump Over ‘One China’ Comments (CNBC)

• Dollar Debt Issuance Soars As Central Banks Take A Back Seat – BIS (CNBC)

• Market ‘Paradigm Shift’ May Be Under Way, More Volatility Likely – BIS (R.)

• China’s Highly Leveraged Real Estate Developers Face Tough 2017 (BBG)

• Top Tech Executives To Attend Trump Summit On Wednesday (R.)

• Italy’s Monte dei Paschi To Seek Private Sector-Led Rescue (AFP)

• Saudi’s Willing To Cut Oil Output Even More Than Agreed (BBG)

• India Workers Abandon Building Sites After Cash Crackdown (R.)

• Foxconn Puts 25% Of Its India Workers On Bench After Demonetization (ET)

• Venezuela Pulls Most Common Banknote From Circulation To ‘Beat Mafia’ (R.)

• Syria’s Palmyra Falls To ISIS Once More (DW)

• Vienna Will Veto EU Membership Talks With Turkey – Austrian FM (RT)

• Economic Migrants Put Extra Strain On Greek Asylum System (Kath.)

• Greece Is Rock Bottom In EU’s Social Justice Rankings (Kath.)

• Happiness Depends On Health And Friends, Not Money (G.)

A merciless put-down by Craig Murray, former British ambassador to Uzbekistan, and former Rector of the University of Dundee. Close associate of Assange.

• CIA’s Blatant Lies Demolished By A Little Simple Logic (Craig Murray)

I have watched incredulous as the CIA’s blatant lie has grown and grown as a media story – blatant because the CIA has made no attempt whatsoever to substantiate it. There is no Russian involvement in the leaks of emails showing Clinton’s corruption. Yes this rubbish has been the lead today in the Washington Post in the US and the Guardian here, and was the lead item on the BBC main news. I suspect it is leading the American broadcasts also. A little simple logic demolishes the CIA’s claims. The CIA claim they “know the individuals” involved. Yet under Obama the USA has been absolutely ruthless in its persecution of whistleblowers, and its pursuit of foreign hackers through extradition.

We are supposed to believe that in the most vital instance imaginable, an attempt by a foreign power to destabilise a US election, even though the CIA knows who the individuals are, nobody is going to be arrested or extradited, or (if in Russia) made subject to yet more banking and other restrictions against Russian individuals? Plainly it stinks. The anonymous source claims of “We know who it was, it was the Russians” are beneath contempt. As Julian Assange has made crystal clear, the leaks did not come from the Russians. As I have explained countless times, they are not hacks, they are insider leaks – there is a major difference between the two.

And it should be said again and again, that if Hillary Clinton had not connived with the DNC to fix the primary schedule to disadvantage Bernie, if she had not received advance notice of live debate questions to use against Bernie, if she had not accepted massive donations to the Clinton foundation and family members in return for foreign policy influence, if she had not failed to distance herself from some very weird and troubling people, then none of this would have happened. The continued ability of the mainstream media to claim the leaks lost Clinton the election because of “Russia”, while still never acknowledging the truths the leaks reveal, is Kafkaesque.

[..] both Julian Assange and I have stated definitively the leak does not come from Russia. Do we credibly have access? Yes, very obviously. Very, very few people can be said to definitely have access to the source of the leak. The people saying it is not Russia are those who do have access. After access, you consider truthfulness. Do Julian Assange and I have a reputation for truthfulness? Well in 10 years not one of the tens of thousands of documents WikiLeaks has released has had its authenticity successfully challenged. As for me, I have a reputation for inconvenient truth telling.

Contrast this to the “credible sources” Freedland relies on. What access do they have to the whistleblower? Zero. They have not the faintest idea who the whistleblower is. Otherwise they would have arrested them. What reputation do they have for truthfulness? It’s the Clinton gang and the US government, for goodness sake. In fact, the sources any serious journalist would view as “credible” give the opposite answer to the one Freedland wants. But in what passes for Freedland’s mind, “credible” is 100% synonymous with “establishment”. When he says “credible sources” he means “establishment sources”. That is the truth of the “fake news” meme. You are not to read anything unless it is officially approved by the elite and their disgusting, crawling whores of stenographers like Freedland.

The worst thing about all this is that it is aimed at promoting further conflict with Russia. This puts everyone in danger for the sake of more profits for the arms and security industries – including of course bigger budgets for the CIA. As thankfully the four year agony of Aleppo comes swiftly to a close today, the Saudi and US armed and trained ISIS forces counter by moving to retake Palmyra. This game kills people, on a massive scale, and goes on and on.

He’s not trying to trade the policy.

• Chinese Media Hit Out At Trump Over ‘One China’ Comments (CNBC)

Donald Trump attracted stinging criticism from China’s state media after the President-elect stated that the U.S. did not necessarily have to stick to the “One China” policy. Communist Party-owned paper, Global Times, published in an opinion piece with the headline: “Trump, please listen clearly, the One China policy cannot be traded” as it warned Trump that China cannot “cannot be easily bullied”. “If Trump abandons the one-China principle, why should China need to be U.S.’ partner in most international affairs?” said the paper, which is known for its extreme nationalistic views. Most would think Trump is “ignorant like a child” in handling diplomacy, the paper added.

Its English language editor was less strident, with the paper citing a foreign affairs analyst chalking up Trump comments to “inexperience” in a piece entitled “Prevent ‘immature’ Trump being manipulated by conservative forces: analyst”. “As a businessman, he thinks it’s quite normal to do business, but he hasn’t realized that the Taiwan question is not a business to China. The Taiwan question is not negotiable,” China Foreign Affairs University professor Li Haidong was quoted as saying. Li also said Trump didn’t have a plan to challenge the “One China” policy. China and Taiwan parted ways in 1949, when the Nationalist Party (KMT) was forced to retreat to Taiwan by the Chinese Communist Party and China views the territory as a renegade province that can be re-taken by force if necessary. Washington embraced the “One China” policy in 1979 under which Beijing views Taiwan, Hong Kong and Macau as part of China.

And at the end of the day central banks are going to buy up all the devalued paper again?

• Dollar Debt Issuance Soars As Central Banks Take A Back Seat – BIS (CNBC)

The amount of dollar-denominated debt issued by financial institutions stepped up to reach a record high during the third quarter as the influence of central banks receded, according to the latest quarterly review from the Bank of International Settlements (BIS), released on Sunday. “Developments during this quarter stand out for one reason: For once, central banks took a back seat,” Claudio Borio, head of the BIS’ monetary and economic department was quoted as saying in the review. “It is as if market participants, for once, had taken the lead in anticipating and charting the future, breaking free from their dependence on central banks’ every word and deed,” he continued. Total issuance of international debt securities during the third quarter slipped 10% to hit $1.4 trillion.

Within advanced economies, a below-average pace of repayments meant quarterly net issuance jumped 40% with the year-to-date net figure at its highest level since 2009. Turning to emerging markets, quarterly net issuance dropped 35% from its abnormally large amount the previous quarter but the year-to-date figure still showed a 73% jump over 2015’s equivalent number. The lower EM net issuance figure this quarter particularly reflected a sharp slowdown in sovereign borrowing by oil-producing governments. However, looking ahead, fourth-quarter figures should be bolstered once again by Saudi Arabia’s $17.5 billion bond issue placed in October and it is worth remembering the heady pace of issuance during the second quarter, driven by oil exporters such as Oman, Qatar and the United Arab Emirates.

Who needs central banks?

• Market ‘Paradigm Shift’ May Be Under Way, More Volatility Likely – BIS (R.)

Financial markets have been remarkably resilient to rising bond yields and sudden shift in outlook following last month’s shock U.S. election result, but the sheer scale of uncertainties ahead means the adjustment will be “bumpy”, the BIS said on Sunday. While the resilience to recent market swings following the U.S. election and Brexit vote have been welcome, investors should be braced for further bouts of extreme volatilty and “flash crash” episodes like the one that hit sterling in October, the Bank for International Settlements said. “We do not quite fully understand the cause of such unusual price moves … but as long as such moves remain self-contained and do not threaten market functioning or the soundness of financial institutions, they are not a source of much concern: we may need to get used to them,” said Claudio Borio, Head of the Monetary and Economic Department at the BIS.

“It is as if market participants, for once, had taken the lead in anticipating and charting the future, breaking free from their dependence on central banks’ every word and deed,” Borio said. This suggests investors may finally be learning to stand on their own two feet after years of relying on central bank stimulus, signaling a potential “paradigm shift” for markets, he said. “But the jury is still out, and caution is in order. And make no mistake: bond yields are still unusually low from a long-term perspective,” Borio said. [..] Bond yields have risen sharply since the middle of the year. The benchmark 10-year U.S. Treasury yield has jumped 100 basis points since July’s multi-decade low, with a growing number of investors saying the 35-year bull run in bonds is now over.

I say it almost every day: shadow banks.

• China’s Highly Leveraged Real Estate Developers Face Tough 2017 (BBG)

For China’s highly leveraged real estate developers, 2017 could be the year that the borrowing binge finally catches up with them. Regulators have choked off a key source of funding, with the Shanghai Stock Exchange raising the threshold for property firms to sell bonds on their platform in October. Since then, builders haven’t sold any notes in a market that played host to about 40% of their onshore debentures over the past two years, data compiled by Bloomberg show. The curbs couldn’t have come at a worse time, with a record $17.3 billion of developer bonds due next year, and another $27.9 billion in 2018. China’s government is treading a fine line with the curbs on debt issuance as it tries to gently deflate the real-estate bubble while avoiding wider fallout in an industry that accounts for as much as 20% of Asia’s largest economy.

The sector is also threatened by a broader increase in funding costs, with the yield premium on AAA-rated domestic corporate notes reaching the widest since July 2015, amid a global pullback in bonds and targeted central bank steps to stem leverage. Smaller developers will be the hardest hit, with bigger players still able to sell exchange-regulated bonds, according to NN Investment Partners. “Overall, funding conditions will become more challenging in 2017,” said Clement Chong, senior credit analyst in Singapore at NN Investment. “Only stronger developers can issue onshore bonds, subject to a number of conditions. But smaller builders will be forced to come to the offshore market to issue bonds, which will be subject to regulatory approval.”

Most of them were strong Hillary supporters.

• Top Tech Executives To Attend Trump Summit On Wednesday (R.)

Top executives from Alphabet Inc, Apple Inc and Facebook Inc are among a small group of tech leaders invited to a summit to be held on Wednesday by U.S. President-elect Donald Trump, Recode reported, citing sources. Executives from Microsoft Corp, Intel Corp and Oracle Corp will also be among “a very heady group of less than a dozen, comprising most of the key players in the sector” to attend the summit, Recode said. Billionaire entrepreneur and Tesla Motors Inc CEO Elon Musk will also be in attendance, the Wall Street Journal reported, citing people familiar with the matter.

“I plan to tell the president-elect that we are with him and are here to help in any way we can,” Oracle CEO Safra Catz told Reuters in an emailed statement. “If he can reform the tax code, reduce regulation, and negotiate better trade deals, the U.S. technology community will be stronger and more competitive than ever.” Amazon.com Inc CEO and founder Jeff Bezos was also invited and is likely to attend, Recode said citing sources with knowledge of the situation.

What’s in it for Qatar?

• Italy’s Monte dei Paschi To Seek Private Sector-Led Rescue (AFP)

Italy’s troubled Monte dei Paschi di Siena (BMPS) bank on Sunday announced it would go ahead with plans to seek a private sector-led rescue, narrowly avoiding the need to seek a government bailout. The world’s oldest bank’s woes have raised concerns over the eurozone’s third-largest economy, particularly in the aftermath of prime minister Matteo Renzi’s resignation after a crushing referendum defeat. The bank’s prospects appeared somewhat less alarming Sunday however, after Italian President Sergio Mattarella asked Renzi’s ally Paolo Gentiloni to form a new government. BMPS’s stock tumbled Friday over reports that the ECB had denied it more time to raise the cash it needed to avoid being wound down, triggering speculation it would be forced to seek a government bailout.

The bank – seen as the weak link in Italy’s economy – had asked to be given until January 20 to avoid collapse. The request was reportedly refused, with the ECB’s board believed to have ruled that two weeks of extra time would be of little use in turning around the historic bank. In a statement published late Sunday after a board meeting in Milan, BMPS said it had “decided to go ahead” with plans to seek a market-led rescue by December 31. The bank had initially announced its plan to seek a private sector-led rescue in July. The bank, whose stock has fallen more than 80% this year, plans the sale of €27.6 billion in non-performing loans. It also aims for a capital injection of up to €5 billion. Italian media reports say the Qatar Investment Authority – the Gulf nation’s state-owned holding company – may be willing to contribute €1 billion.

Everyone’s willing to cut outputs, but not if it costs money or market share. Not going to work.

• Saudi’s Willing To Cut Oil Output Even More Than Agreed (BBG)

Saudi Arabia signaled it’s ready to cut oil production more than expected, a surprise announcement made minutes after Russia and several non-other OPEC countries pledged to curb output next year. Taken together, OPEC’s first deal with its rivals since 2001 and the Saudi comments represent a forceful effort by producers to wrest back control of the global oil market, depressed by persistent oversupply and record inventories. “This is shock and awe by Saudi Arabia,” said Amrita Sen at Energy Aspects in London. “It shows the commitment of Riyadh to rebalance the market and should end concerns about OPEC delivering the deal.” Oil prices have surged more than 15% since OPEC announced Nov. 30 it will cut production for the first time in eight years, rising this week briefly above $55. The price rise has propelled the shares of energy groups from Exxon Mobil to shale firms such as Continental Resources.

Everyone needs a bank account, but the banks have no yime for that since they’re exchanging old for new money. Sounds like a plan.

• India Workers Abandon Building Sites After Cash Crackdown (R.)

Hundreds of thousands of construction workers have returned home since Prime Minister Narendra Modi abolished high-denomination banknotes, leaving some building sites across the country facing costly delays. A month after Modi’s shock move to take away 86% of cash in circulation to crush the shadow economy, the growing labour shortage threatens to slow a recovery in India’s construction industry, which accounts for 8% of gross GDP and employs 40 million people. Work at SARE Homes’ residential projects, spanning six cities, has slowed dramatically as migrant workers, who are out of cash and have no bank accounts to draw from, have little choice but to return to their villages. “Construction work at all projects has slowed down in a big way,” managing director Vineet Relia told Reuters.

Property enquiries, meanwhile, have slumped by 80% around the Indian capital since the cash crackdown, according to property portal 99acres. Getamber Anand, president of Indian builders’ association CREDAI, said projects nationwide had been hit, and estimated that roughly half of the migrant workforce, numbering in the low millions, had left for home. Road developers have also reported a slowdown as they struggle to find sufficient labour. The exodus shows little sign of reversing, risking damage to construction activity and the wider economy into 2017, despite Modi’s assurances that hardships from his radical “demonetisation” should be over by the end of the year. [..] for now, millions of workers who depend on daily wages for food and shelter are struggling. Many have never held a bank account, and even if they wanted one, some do not have the necessary documents to do so.

CREDAI’s Anand predicts activity on construction sites will not return to normal until April, and only once labourers are able to open accounts at banks still struggling to serve long queues of people desperate for cash. “Right now the banks say they don’t have time to open accounts. It’s the biggest challenge,” Anand said.

Modi said it would all be fine by the end of the year. Not going to happen.

• Foxconn Puts 25% Of Its India Workers On Bench After Demonetization (ET)

Foxconn, the world’s largest contract manufacturer and poster boy of the government’s Make in India project, has asked nearly a fourth of its 8,000 factory workers to go on paid leave for two weeks after last month’s demonetisation of high value notes sparked a severe cash crunch that saw sales slump almost 50%, forcing the company to slash production by half. The government’s move to ban Rs 500 and Rs 1,000 notes from November 9 has had a domino effect on the mobile phone industry, where a large majority of mobile phones are bought for less than Rs 5,000 and most of the transactions happen through cash.

Consumer purchase power has been reduced dramatically – mobile phone monthly sales halved to Rs 175-200 crore post demonetisation – and sales revival is not looking up, as was perceived earlier, industry insiders said. Leading local players including Intex, Lava and Karbonn are planning to lay off or bench 10-40% of their workforce, as they cut production to control inventory pile-ups in retail channels with consumers delaying cash purchases after Nov 8 demonetisation sucked out cash from the market. Lava is shutting down its plant – which employs around 5000 people -for a week starting December 12, while others could soon follow, industry insiders said.

Failure of Maduro or intervention from abroad? Venezuela still has a lot of oil.

• Venezuela Pulls Most Common Banknote From Circulation To ‘Beat Mafia’ (R.)

Venezuela, mired in an economic crisis and facing the world’s highest inflation, will pull its largest bill, worth two US cents on the black market, from circulation this week ahead of introducing new higher-value notes, President Nicolás Maduro said on Sunday. The surprise move, announced by Maduro during an hours-long speech, is likely to worsen a cash crunch in Venezuela. Maduro said the 100-bolivar bill will be taken out of circulation on Wednesday and Venezuelans will have 10 days after that to exchange those notes at the central bank. Critics slammed the move, which Maduro said was needed to combat contraband of the bills at the volatile Colombia-Venezuela border, as economically nonsensical, adding there would be no way to swap all the 100-bolivar bills in circulation in the time the president has allotted.

Central bank data showed that in November, there were more than six billion 100-bolivar bills in circulation, 48% of all bills and coins. Authorities on Thursday are due to start releasing six new notes and three new coins, the largest of which will be worth 20,000 bolivars, less than $5 on the streets. No official inflation data is available for 2016 though many economists see it in triple digits. Economic consultancy Ecoanalitica estimates annual inflation this year at more than 500%. The oil-producing nation’s bolivar currency has fallen 55% against the US dollar on the black market in the last month.

Putin won’t like this.

• Syria’s Palmyra Falls To ISIS Once More (DW)

On Sunday, the “Islamic State” (IS) retook the desert city of Palmyra in Syria after being driven out of the city hours earlier by heavy Russian aerial attacks, a group monitoring the country’s conflict reported. “Despite the ongoing air raids, IS retook all of Palmyra after the Syrian army withdrew south of the city,” said Rami Abdel Rahman, who heads the Britain-based Syrian Observatory of Human Rights. The Amaq news agency, which has links to the IS militants, also reported that the group had retaken “full control” of the city after first taking Palmyra’s citadel (above photo), which overlooks the historic site.

After launching an offensive in the region a few days before, IS pushed into the city on Saturday, only to be forced to withdraw by a fierce Russian bombing campaign that killed scores of its fighters. The Observatory reported that the militants regrouped on the outskirts of the city and made a successful attempt to retake control. IS has had possession of the city once before, in May last year, destroying many of its ancient treasures, and Palmyra’s recapture could put the remaining artifacts and monuments in extreme danger. The group considers certain artifacts and monuments to be “idolatrous,” and has severely damaged important historic sites and objects across areas of Syria and Iraq that it controls.

Nothing else makes sense.

• Vienna Will Veto EU Membership Talks With Turkey – Austrian FM (RT)

Any further negotiations with Ankara over its future European Union membership will be blocked by Vienna, the Austrian Foreign Minister said, slamming Ankara’s alleged human rights violations in the post-coup crackdown on any opposition. The European Parliament passed a non-binding resolution on November 24 to freeze Turkey’s EU accession process, citing Ankara’s crackdown after July’s failed coup. The final verdict on Turkey’s immediate EU future will be decided following the European Council meeting that is scheduled to take place on December 15-16. Granting visa liberalization to Turkish citizens will also be on the table during the discussions. Before the crucial meeting, the EU’s General Affairs Council of foreign ministers, which meets once a month, will convene to discuss the potential role of Ankara in the EU.

At the meeting, Austria intends to block the continuation of EU accession talks with Turkey, the country’s Foreign Minister, Sebastian Kurz, told Spiegel online. “The European Parliament has adopted a courageous and correct resolution demanding that the accession negotiations with Turkey be frozen. In the conclusions of the Foreign Ministers, there must also be a reaction to developments in Turkey. We must also propose that the accession talks be frozen,” Kurz said. The minister added that the Netherlands and Bulgaria seem to share Vienna’s position on Turkey. The 30-year-old politician said that his country believes that Turkey does not share EU values. He called for a clear response from the European Union to the events which followed the July 15 failed coup.

Over 300 arrivals a day. Numbers are rising again.

• Economic Migrants Put Extra Strain On Greek Asylum System (Kath.)

The numbers of migrants crossing from Turkey to the eastern Aegean islands are on the rise, but the%age of those who merit international protection is on the wane, say authorities, who are looking for ways to speed up asylum procedures. Speaking to Kathimerini on condition of anonymity, local officials told the newspaper that refugee families currently stranded on the islands are reluctant to share a roof with economic migrants, mostly young men from the Maghreb region (Morocco, Tunisia, Algeria) who allegedly often display delinquent behavior and are on the front lines of riots at reception centers. Migration Policy Minister Yiannis Mouzalas recently admitted that between 70 and 80% of arrivals were now migrants while before it was refugees escaping conflict and war.

Whereas the latter appear aware that the Balkan route to Western Europe is officially closed, the groups of young male economic migrants appear more willing to take the risks of reaching Europe. A total 324 undocumented migrants crossed from Turkey on Friday, most of them from Africa and Pakistan. Another 330 reached Greece on Saturday. Rising numbers are putting a big strain on Greece’s asylum system as virtually all newcomers make a claim for asylum despite knowing that they do not fulfill the necessary criteria for international protection. “Even so, we are still obliged to follow the formal procedure and fulfill the European directives,” Maria Stavropoulou, director of the Greek Asylum Service, told Kathimerini.

Firdt you put them down, then you write a report on it.

• Greece Is Rock Bottom In EU’s Social Justice Rankings (Kath.)

Greece came out worst among the bloc’s 28 member-states in the EU’s annual report on social justice for 2015, reflecting the impact of the financial crisis on society, social cohesion and the competitiveness of the Greek economy. The “Social Justice in the EU” report shows that not only is Greece the bloc’s laggard, but the situation in the country is deteriorating, with the gap between Greece and Romania – the second to last in the rankings – growing. Furthermore, the report indicates that the gap between the European North and South is also widening. The social and economic inequality that has emerged in Greece during the crisis is now taking on a permanent structural character, while the local economy appears to be losing its most important comparative advantage – human capital.

The report examines six social justice sectors: poverty prevention, equal rights in education, labor market access, social cohesion, and the absence of discrimination in healthcare and justice. It argues that those sectors have seen a downturn across the EU in the last seven years, reaching their lowest point in the period from 2012 to 2014. On the poverty and social exclusion front, the situation in Greece is particularly worrying, as 35.7% of the population faces the risk of poverty, with the figure for children even higher, at 37.8%, from 36.7% in 2014. The %age of children living in conditions of serious material deprivation has grown to 25.7% from 23.8% in 2014 and 10.4% in 2008. The situation is also disturbing in the labor market: In 2015 just 50.8% of Greeks of working age actually worked – the lowest rate in the EU.

What happened to the warm gun?

• Happiness Depends On Health And Friends, Not Money (G.)

Most human misery can be blamed on failed relationships and physical and mental illness rather than money problems and poverty, according to a landmark study by a team of researchers at the London School of Economics (LSE). Eliminating depression and anxiety would reduce misery by 20% compared to just 5% if policymakers focused on eliminating poverty, the report found. Lord Richard Layard, who led the report, said on average people have become no happier in the last 50 years, despite average incomes more than doubling. The economist and former adviser to Tony Blair and Gordon Brown said the study, called Origins of Happiness, showed that measuring people’s satisfaction with their lives should be a priority for every government. T

he researchers analysed data from four countries including the US and Germany. Extra spending on reducing mental illness would be self-financing, the researchers added, because it would be recovered by the government through higher employment and increased tax receipts together with a reduction in NHS costs from fewer GP visits and hospital A&E admissions. “Tackling depression and anxiety would be four times as effective as tackling poverty. It would also pay for itself,” he said. The report supports the arguments put forward by Layard over several decades that social and psychological factors are more important to the wellbeing of individuals than income levels. “Having a partner is as good for you as being made unemployed is bad for you,” he said.

The report claims that state-run organisations, including schools, must become more focused on tackling anxiety and mental health issues. “This evidence demands a new role for the state – not ‘wealth creation’ but ‘wellbeing creation’,” Layard said. “In the past, the state has successively taken on poverty, unemployment, education and physical health. But equally important now are domestic violence, alcoholism, depression and anxiety conditions, alienated youth, exam mania and much else. These should become centre stage.”

China Relies On Property Bubbles To Prop Up GDP

Sep 192016

September 19, 2016 Posted by Raúl Ilargi Meijer at 1:25 pm Finance Tagged with: basket, BIS, bubble, China, credit, GDP, housing, IMF, Minsky, yuan Comments Off

Carl Mydans Sharecropper’s family in Mississippi County, Missouri 1936

Lots of China again today. Most of it based on warnings, coming from the BIS, about the country’s financial shenanigans. I’m getting the feeling we have gotten so used to huge and often unprecedented numbers, viewed against the backdrop of an economy that still seems to remain standing, that many don’t know what to make of this anymore.

Ambrose Evans-Pritchard ties the BIS report to Hyman Minsky’s work, which is kind of funny, because our good friend and Minsky adept Steve Keen is the economist who most emphasizes the need to differentiate between public and private debt, in particular because public debt is not a big risk whereas private debt certainly is.

And that happens to be the main topic where people seem to get confused about China. To quote Ambrose: “..Outstanding loans have reached $28 trillion, as much as the commercial banking systems of the US and Japan combined. The scale is enough to threaten a worldwide shock if China ever loses control. Corporate debt alone has reached 171pc of GDP..”

The big Kahuna question then becomes: should Chinese outstanding loans and corporate debt be seen as public debt or private debt, given that the dividing line between state and corporations is as opaque and shifting as it is? Even the BIS looks confused. I’ll address that below. First, here’s Ambrose:

BIS Flashes Red Alert For a Banking Crisis in China

The Bank for International Settlements warned in its quarterly report that China’s “credit to GDP gap” has reached 30.1%, the highest to date and in a different league altogether from any other major country tracked by the institution. It is also significantly higher than the scores in East Asia’s speculative boom on 1997 or in the US subprime bubble before the Lehman crisis.

Studies of earlier banking crises around the world over the last sixty years suggest that any score above ten requires careful monitoring. The credit to GDP gap measures deviations from normal patterns within any one country and therefore strips out cultural differences. It is based on work the US economist Hyman Minsky and has proved to be the best single gauge of banking risk, although the final denouement can often take longer than assumed.

[..] Outstanding loans have reached $28 trillion, as much as the commercial banking systems of the US and Japan combined. The scale is enough to threaten a worldwide shock if China ever loses control. Corporate debt alone has reached 171pc of GDP, and it is this that is keeping global regulators awake at night. The BIS said there are ample reasons to worry about the health of world’s financial system. Zero interest rates and bond purchases by central banks have left markets acutely sensitive to the slightest shift in monetary policy, or even a hint of a shift.

Bloomberg commented on the same BIS report:

BIS Warning Indicator for China Banking Stress Climbs to Record

[..] the state’s control of the financial system and limited levels of overseas debt may mitigate against the risk of a banking crisis. In a financial stability report published in June, China’s central bank said lenders would be able to maintain relatively high capital levels even if hit by severe shocks.

While the BIS says that credit-to-GDP gaps exceeded 10% in the three years preceding the majority of financial crises, China has remained above that threshold for most of the period since mid-2009, with no crisis so far. In the first quarter, China’s gap exceeded the levels of 41 other nations and the euro area. In the U.S., readings exceeded 10% in the lead up to the global financial crisis.

Why am I getting the feeling that the BIS thinks perhaps just this one time ‘things will be different’? If the credit-to-GDP gap (difference with long-term trend) anywhere exceeded 10%, that was a harbinger of the majority of financial crisis. But in China to date, with a 30.1% print, ‘the state’s control of the financial system and limited levels of overseas debt may mitigate against the risk of a banking crisis’. That sounds like someone’s afraid to state the obvious out loud.

If you ask me there’s a loud and clear writing on the Great Wall. But regardless, I didn’t set out to comment on the BIS, I just used that to introduce something else. That is to say, early today, CNBC ran an article on the Chinese property market, seen through the eyes of Donna Kwok, senior China economist at UBS.

Donna sees some light in fast rising home prices (an ‘improvement’..) but also acknowledges they constitute a challenge. She mentions bubbles – she even sees ‘uneven bubbles’, a lovely term, and ‘selective pockets of bubbles’-, but she does seem to understand what’s going on, even if she doesn’t put it in the stark terminology that seems to fit the issue.

CNBC names the article “China Faces Policy Dilemma As Home Prices Jump In GDP Boost”, an ambiguous enough way of putting things. A second title that pops up but has apparently been rejected by the editor is: “Chinese Property Market Is Improving: UBS”. That would indeed have been a bit much. Because calling a bubble an improvement is like tempting the gods, or worse.

I adapted the title to better fit the contents:

China Relies on Housing Bubble to Keep GDP Numbers Elevated (CNBC)

Policymakers in China were facing the dilemma of driving growth while preventing the property market from overheating, an economist said Monday as prices in the world’s second largest economy jumped in August. Average new home prices in China’s 70 major cities rose 9.2% in August from a year earlier, accelerating from a 7.9% increase in July, an official survey from the National Bureau of Statistics showed Monday. Home prices rose 1.5% from July. But according to Donna Kwok, senior China economist at UBS, the importance of the property sector to China’s overall economic health, posed a challenge.

It contributes up to one-third of GDP as its effects filter through to related businesses such as heavy industries and raw materials. “On the one hand, they need to temper the signs of froth that we are seeing in the higher-tier cities. On the other hand, they are still having to rely on the (market’s) contribution to headline GDP growth that property investment as the whole—which is still reliant on the lower-tier city recovery—generates…so that 6.5 to 7% annual growth target is still met for this year,” Kwok told CNBC’s “Street Signs.”

The data showed prices in the first-tier cities of Shanghai and Beijing prices rose 31.2% and 23.5%, respectively. Home prices in the second tier cities of Xiamen and Hefei saw the larges price gains, rising 43.8% and 40.3% respectively, from a year ago. Earlier, the Chinese government introduced measures aimed at boosting home sales to reduce large inventories in an effort to limit an economic slowdown. While the moves have boosted prices in top-tier cities with some spillover in lower-tier cities, there were still concerns of uneven bubbles in the market.

“We are seeing potential signs of selective pockets of bubbles appearing again, especially in tier 1 and tier 2 cities,” Kwok said. The Chinese government in the meantime was rolling out selective cooling measures in these cities to try to even out growth. “If it’s navigated in a such a way that the (positive) spillover to the adjacent tier 3 cities continues to spread further, then maybe that’s where you may get a first or second best outcome resulting,” she added.

To summarize: China can only achieve its 6.5 to 7% annual GDP growth target if the housing bubble(s) persist, and that’s the one thing bubbles never do.

If housing makes up -directly and indirectly, after ‘filtering through’- one third of Chinese GDP, which is officially still growing at more than 6.5%, then the effects of a housing crash in the Middle Kingdom should become obvious. That is, if the property market merely comes to not even a crash but just a standstill, GDP growth will be close to 4%. And that is before we calculate how that in turn will also ‘filter through’, a process that would undoubtedly shave off another percentage point of GDP growth.

So then we’re at 3% growth, and that’s optimistic, that would require just a limited ‘filtering through’. If the Chinese housing sector shrinks or even collapses, and given that there is a huge property bubble -intentionally- being built on top of the latest -recent- bubble, shrinkage is the least that should be expected, then China GDP growth will fall below that 3%.

And arguably down the line even in a best case scenario both GDP growth and GDP -the economy itself-, will flatline if not fall outright. Since China’s entire economic model has been built to depend on growth, negative growth will hammer its economy so hard that the Communist Party will face protests from a billion different corners as its citizens will see their assets crumble in value.

What at some point will discourage Beijing from keeping on keeping blowing more bubbles to replace the ones that deflate, as it has done for years now, is that China desperately seeks for the renminbi/yuan to be a reserve currency, it’s aiming to be included in ‘the’ IMF basket as soon as October 1 this year.

That is not a realistic prospect if and when the currency continues to be used to prop up the economy, housing, unprofitable industries etc. Neither the IMF nor the other reserve currencies in the basket can allow for the addition of the yuan if its actual value is put at risk by trying to deflect the most basic dynamics of markets, not to that extent. And not at that price either.

The Celestial Empire will be forced to choose, but it’s not clear if it either acknowledges, or is willing to make, such a choice. Still, it won’t be able to absorb all private debt and make it public, and still play in the big leagues, even if other major countries and central banks play fast and loose with the system too.

Debt Rattle September 19 2016

Sep 192016

September 19, 2016 Posted by Raúl Ilargi Meijer at 9:23 am Finance Tagged with: Bakken, BIS, bubble, China, emissions, Le Pen, Merkel, OPEC, refugees, VW, WaPo Comments Off

Jack Delano Chicago & North Western Railroad locomotive shops 1942

• BIS Flashes Red Alert For a Banking Crisis in China (AEP)

• BIS Warning Indicator for China Banking Stress Climbs to Record (BBG)

• China Relies on Housing Bubble to Keep GDP Numbers Elevated (CNBC)

• Chinese Yuan Borrowing Rate Hits Second Highest Level On Record (R.)

• Oil Investors Flee as OPEC Freeze Hopes Face Supply Reality (BBG)

• The Death Of The Bakken Field Has Begun (SRSrocco)

• Canada To Impose Nationwide Carbon Price (R.)

• 1000s of VW Lawsuits To Be Filed By The End Of Monday, All in Print (BBG)

• Many Car Brands Emit More Pollution Than Volkswagen (G.)

• The Ongoing Collapse of Economics (Caswell)

• WaPo 1st Paper to Call for Prosecution of its Own Source -After Pulitzer- (GG)

• ‘People’s Candidate’ Le Pen Vows To Free France From EU Yoke (AFP)

• Merkel Suffers Drubbing In Berlin Vote Due To Migrant Angst (R.)

• Why Won’t The World Tackle The Refugee Crisis? (Observer)

“..China’s “credit to GDP gap” has reached 30.1, the highest to date and in a different league altogether from any other major country tracked by the institution”

• BIS Flashes Red Alert For a Banking Crisis in China (AEP)

China has failed to curb excesses in its credit system and faces mounting risks of a full-blown banking crisis, according to early warning indicators released by the world’s top financial watchdog. A key gauge of credit vulnerability is now three times over the danger threshold and has continued to deteriorate, despite pledges by Chinese premier Li Keqiang to wean the economy off debt-driven growth before it is too late. The Bank for International Settlements warned in its quarterly report that China’s “credit to GDP gap” has reached 30.1, the highest to date and in a different league altogether from any other major country tracked by the institution. It is also significantly higher than the scores in East Asia’s speculative boom on 1997 or in the US subprime bubble before the Lehman crisis.

Studies of earlier banking crises around the world over the last sixty years suggest that any score above ten requires careful monitoring. The credit to GDP gap measures deviations from normal patterns within any one country and therefore strips out cultural differences. It is based on work the US economist Hyman Minsky and has proved to be the best single gauge of banking risk, although the final denouement can often take longer than assumed. Indicators for what would happen to debt service costs if interest rates rose 250 basis points are also well over the safety line. China’s total credit reached 255pc of GDP at the end of last year, a jump of 107 percentage points over eight years. This is an extremely high level for a developing economy and is still rising fast.

Outstanding loans have reached $28 trillion, as much as the commercial banking systems of the US and Japan combined. The scale is enough to threaten a worldwide shock if China ever loses control. Corporate debt alone has reached 171pc of GDP, and it is this that is keeping global regulators awake at night. The BIS said there are ample reasons to worry about the health of world’s financial system. Zero interest rates and bond purchases by central banks have left markets acutely sensitive to the slightest shift in monetary policy, or even a hint of a shift. “There has been a distinctly mixed feel to the recent rally – more stick than carrot, more push than pull,” said Claudio Borio, the BIS’s chief economist. “This explains the nagging question of whether market prices fully reflect the risks ahead.”

really? “..the state’s control of the financial system and limited levels of overseas debt may mitigate against the risk of a banking crisis.”

• BIS Warning Indicator for China Banking Stress Climbs to Record (BBG)

A warning indicator for banking stress rose to a record in China in the first quarter, underscoring risks to the nation and the world from a rapid build-up of Chinese corporate debt. China’s credit-to-GDP “gap” stood at 30.1%, the highest for the nation in data stretching back to 1995, according to the Basel-based Bank for International Settlements. Readings above 10% signal elevated risks of banking strains, according to the BIS, which released the latest data on Sunday. The gap is the difference between the credit-to-GDP ratio and its long-term trend. A blow-out in the number can signal that credit growth is excessive and a financial bust may be looming. Some analysts argue that China will need to recapitalise its banks in coming years because of bad loans that may be higher than the official numbers.

At the same time, the state’s control of the financial system and limited levels of overseas debt may mitigate against the risk of a banking crisis. In a financial stability report published in June, China’s central bank said lenders would be able to maintain relatively high capital levels even if hit by severe shocks. While the BIS says that credit-to-GDP gaps exceeded 10% in the three years preceding the majority of financial crises, China has remained above that threshold for most of the period since mid-2009, with no crisis so far. In the first quarter, China’s gap exceeded the levels of 41 other nations and the euro area. In the U.S., readings exceeded 10% in the lead up to the global financial crisis.

“.. the importance of the property sector to China’s overall economic health, posed a challenge. It contributes up to one-third of GDP..”

• China Relies on Housing Bubble to Keep GDP Numbers Elevated (CNBC)

Policymakers in China were facing the dilemma of driving growth while preventing the property market from overheating, an economist said Monday as prices in the world’s second largest economy jumped in August. Average new home prices in China’s 70 major cities rose 9.2% in August from a year earlier, accelerating from a 7.9% increase in July, an official survey from the National Bureau of Statistics showed Monday. Home prices rose 1.5% from July. But according to Donna Kwok, senior China economist at UBS, the importance of the property sector to China’s overall economic health, posed a challenge. It contributes up to one-third of GDP as its effects filter through to related businesses such as heavy industries and raw materials.

“On the one hand, they need to temper the signs of froth that we are seeing in the higher-tier cities. On the other hand, they are still having to rely on the (market’s) contribution to headline GDP growth that property investment as the whole—which is still reliant on the lower-tier city recovery—generates…so that 6.5 to 7% annual growth target is still met for this year,” Kwok told CNBC’s “Street Signs.” The data showed prices in the first-tier cities of Shanghai and Beijing prices rose 31.2% and 23.5%, respectively. Home prices in the second tier cities of Xiamen and Hefei saw the larges price gains, rising 43.8 percent and 40.3 percent respectively, from a year ago.

Liquidity.

• Chinese Yuan Borrowing Rate Hits Second Highest Level On Record (R.)

Hong Kong’s overnight yuan borrowing rate was fixed at the highest level in eight months on Monday after the long holiday weekend. China’s financial markets were closed from Thursday for the Mid-Autumn Festival, and Hong Kong’s markets were shut on Friday. The CNH Hong Kong Interbank Offered Rate benchmark (CNH Hibor), set by the city’s Treasury Markets Association (TMA), was fixed at 23.683% for overnight contracts, the highest level since Jan. 12. Traders said the elevated offshore yuan borrowing rates in the past week were due to tight liquidity in the market and rumors that China took action to raise the cost of shorting its currency.

“Normal lenders of the yuan, like Chinese banks, have refrained from injecting liquidity into the market recently due to speculation that the yuan will depreciate toward certain levels like 6.68, 6.7 per dollar,” said a trader in a local bank in Hong Kong. “(The yuan’s) inclusion into the SDR basket nears, so the central bank would like to maintain the offshore yuan near the stronger side,” said the trader, adding that seasonal reasons including national holidays and caution near the quarter-end also drains yuan liquidity from the market. The U.S. dollar traded near a two-week high against a basket of major currencies on Monday after U.S. consumer prices rose more than expected in August, bolstering expectations the Federal Reserve will raise interest rates this year.

Really, it’s about demand.

• Oil Investors Flee as OPEC Freeze Hopes Face Supply Reality (BBG)

Oil speculators headed for the sidelines as OPEC members prepare to discuss freezing output in the face of signs the supply glut will linger. Money managers cut wagers on both falling and rising crude prices before talks between OPEC and other producers later this month. The meeting comes after the International Energy Agency said that the global oversupply will last longer than previously thought as demand growth slows and output proves resilient. “It’s a cliff trade right here,” said John Kilduff, partner at Again Capita, a New York hedge fund focused on energy. “There’s more uncertainty than usual in the market because of the upcoming meeting. People are waiting for the outcome and a number think this is a good time to stand on the sidelines.”

OPEC plans to hold an informal meeting with competitor Russia in Algiers Sept. 27, fanning speculation the producers may agree on an output cap to shore up prices. Oil climbed 7.5% in August after OPEC announced talks in the Algerian capital. [..] World oil stockpiles will continue to accumulate into late 2017, a fourth consecutive year of oversupply, according to the IEA. Just last month, the agency predicted the market would start returning to equilibrium this year. OPEC production rose last month as Middle East producers opened the taps, the IEA said. Saudi Arabia, Kuwait and the UAE pumped at or near record levels and Iraq pushed output higher, according to the agency. “OPEC is out of bullets,” said Stephen Schork, president of the Schork Group. “Even if they agree on a production freeze it will be at such a high level that it will be meaningless.”

“..the energy companies producing shale oil in the Bakken are in the hole for $32 billion. ”

• The Death Of The Bakken Field Has Begun (SRSrocco)

The Death of the Great Bakken Oil Field has begun and very few Americans understand the significance. Just a few years ago, the U.S. Energy Industry and Mainstream media were gloating that the United States was on its way to “Energy Independence.” Unfortunately for most Americans, they believed the hype and are now back to driving BIG SUV’s and trucks that get lousy fuel mileage. And why not? Americans now think the price of gasoline will continue to decline because the U.S. oil industry is able to produce its “supposed” massive shale oil reserves for a fraction of the cost, due to the new wonders of technological improvement. [..] they have no clue that the Great Bakken Oil Field is now down a stunning 25% from its peak just a little more than a year and half ago:

Some folks believe the reason for the decline in oil production at the Bakken was due to low oil prices. While this was part of the reason, the Bakken was going to peak and decline in 2016-2017 regardless of the price. This was forecasted by peak oil analyst Jean Laherrere. [..] I took Jean Laherrere’s chart and placed it next to the current actual Bakken oil field production:

As we can see in the chart above, the rise and fall of Bakken oil production is very close to what Jean Laherrere forecasted several years ago (shown by the red arrow). According to Laherrere’s chart, the Bakken will be producing a lot less oil by 2020 and very little by 2025. This would also be true for the Eagle Ford Field in Texas. According to the most recent EIA Drilling Productivity Report [8], the Eagle Ford Shale Oil Field in Texas will be producing an estimated 1,026,000 barrels of oil per day in September, down from a peak of 1,708,000 barrels per day in May 2015. Thus, Eagle Ford oil production is slated to be down a stunning 40% since its peak last year.

Do you folks see the writing on the wall here? The Bakken down 25% and the Eagle Ford down 40%. These are not subtle declines. This is much quicker than the U.S. Oil Industry or the Mainstream Media realize. And… it’s much worse than that. The U.S. Oil Industry Hasn’t Made a RED CENT Producing Shale. Rune Likvern of Fractional Flow has done a wonderful job providing data on the Bakken Shale Oil Field. Here is his excellent chart showing the cumulative FREE CASH FLOW from producing oil in the Bakken: [..] the BLACK BARS are estimates of the monthly Free Cash flow from producing oil in the Bakken since 2009, while the RED AREA is the cumulative negative free cash flow. [..] Furthermore, the red area shows that the approximate negative free cash flow (deducting CAPEX- capital expenditures) is $32 billion. So, with all the effort and high oil prices from 2011-2014 (first half of 2014), the energy companies producing shale oil in the Bakken are in the hole for $32 billion. Well done…. hat’s off to the new wonderful fracking technology.

Lofty.

• Canada To Impose Nationwide Carbon Price (R.)

Canada will impose a carbon price on provinces that do not adequately regulate emissions by themselves, Environment Minister Catherine McKenna said on Sunday without giving details on how the Liberal government will do so. Speaking on the CTV broadcaster’s “Question Period,” a national politics talk show, McKenna said the new emissions regime will be in place sometime in October, before a federal-provincial meeting on the matter. She only said the government will have a “backstop” for provinces that do not comply, but did not address questions on penalties for defiance. Canada’s 10 provinces, which enjoy significant jurisdiction over the environment, have been wary of Ottawa’s intentions and have said they should be allowed to cut carbon emissions their own way.

Prime Minister Justin Trudeau persuaded the provinces in March to accept a compromise deal that acknowledged the concept of putting a price on carbon emissions, but agreed the specific details, which would take into account provinces’ individual circumstances, could be worked out later. Canada’s four largest provinces, British Columbia, Alberta, Ontario and Quebec, currently have either a tax on carbon or a cap-and-trade emissions-limiting system. But Brad Wall, the right-leaning premier of the western energy-producing province of Saskatchewan, has long been resistant to federal emissions-limiting plans. McKenna said provinces such as Saskatchewan can design a system in which emissions revenues go back to companies through tax cuts, which would dampen the impact of the extra cost brought by the carbon price.

“Lower Saxony, home state to Volkswagen doesn’t offer electronic filing for civil litigation.”

• 1000s of VW Lawsuits To Be Filed By The End Of Monday, All in Print (BBG)

There was one thing Andreas Tilp and Klaus Nieding needed most for taking a wave of Volkswagen investor cases to court: a pickup truck. Nieding had a load of 5,000 suits sent Friday from his office in Frankfurt to Braunschweig, about 350 kilometers (218 miles) away. Tilp’s 1,000 or so complaints will arrive in a transport vehicle Monday, traveling more than 500 kilometers from his office in the southern German city of Kirchentellinsfurt. There was no other way to do it: Lower Saxony, home state to Volkswagen doesn’t offer electronic filing for civil litigation. The court in Braunschweig, the legal district that includes VW’s Wolfsburg headquarters, is expecting thousands of cases by the end of the day.

Investors are lining up to sue in Germany, where VW shares lost more than a third of their value in the first two trading days after the Sept. 18 disclosure of the emissions scandal by U.S. regulators. Monday is the first business day after the anniversary of the scandal and investors fear they have to sue within a year of the company’s admission that it had equipped about 11 million diesel vehicles with software to cheat pollution tests. The lawsuits disclosed so far are seeking 10.7 billion euros ($11.9 billion). The Braunschweig court has said it will release the total number this week. Volkswagen has consistently argued that it has followed all capital-markets rules and properly disclosed emissions issues in a timely fashion.

The super-sized filing is yet another example of the sheer scale of the scandal that’s haunted VW for a year. It forced the German carmaker into the biggest recall in its history to fix the cars or get them off the road entirely, the fines already levied are among the steepest against any manufacturer, and the carmaker has built up massive provisions to absorb the hit.

What are the odds VW sponsored the report?

• Many Car Brands Emit More Pollution Than Volkswagen (G.)

A year on from the “Dieselgate” scandal that engulfed Volkswagen, damning new research reveals that all major diesel car brands, including Fiat, Vauxhall and Suzuki, are selling models that emit far higher levels of pollution than the shamed German carmaker. The car industry has faced fierce scrutiny since the US government ordered Volkswagen to recall almost 500,000 cars in 2015 after discovering it had installed illegal software on its diesel vehicles to cheat emissions tests. But a new in-depth study by campaign group Transport & Environment (T&E) found not one brand complies with the latest “Euro 6” air pollution limits when driven on the road and that Volkswagen is far from being the worst offender.

“We’ve had this focus on Volkswagen as a ‘dirty carmaker’ but when you look at the emissions of other manufacturers you find there are no really clean carmakers,” says Greg Archer, clean vehicles director at T&E. “Volkswagen is not the carmaker producing the diesel cars with highest nitrogen oxides emissions and the failure to investigate other companies brings disgrace on the European regulatory system.” T&E analysed emissions test data from around 230 diesel car models to rank the worst performing car brands based on their emissions in real-world driving conditions. Fiat and Suzuki (which use Fiat engines) top the list with their newest diesels, designed to meet Euro 6 requirements, spewing out 15 times the NOx limit; while Renault-Nissan vehicle emissions were judged to be more than 14 times higher. General Motors’ brands Opel-Vauxhall also fared badly with emissions found to be 10 times higher than permitted levels.

Exposed. But too late.

• The Ongoing Collapse of Economics (Caswell)

If we accept the rapidly growing body of evidence and authority suggesting that many of the core concepts of conventional macroeconomics are bollox, and that economists don’t really know what they’re doing, then the important question becomes ‘What next?’ As conventional macroeconomic theory crumbles in the face of facts, what will replace it? One of the primary contenders is Modern Monetary Theory, which focuses on money itself (something which, believe it or not, conventional macroeconomic theory doesn’t do). Another possibility is that macroeconomics will learn from complexity and systems theory, and that its models (and, hopefully, their predictive ability) will become more like those used in meteorology and climate science.

Anti-economist Steve Keen is working in this direction, influenced by the Financial Instability Hypothesis (FIH) of Hyman Minsky, whatever that is. But wherever macroeconomics is going, it’s clear that the old order is collapsing. The theoretical orthodoxy that has guided the highest level of economic management for many decades is crumbling. Either economics is an objective science or it’s not. And if economics is not an objective science, then we quickly need an economics that is. Countless livelihoods and lives will be deeply affected by the revolution we are witnessing in theoretical macroeconomics. It may be dry, it may be boring, it may be theoretical, and it may seem incomprehensible. But it’s hard to think of any discussion that’s more important.

Not looking good.

• WaPo 1st Paper to Call for Prosecution of its Own Source -After Pulitzer- (GG)

Three of the four media outlets which received and published large numbers of secret NSA documents provided by Edward Snowden – The Guardian, The New York Times and The Intercept – have called for the U.S. Government to allow the NSA whistleblower to return to the U.S. with no charges. That’s the normal course for a newspaper, which owes its sources duties of protection, and which – by virtue of accepting the source’s materials and then publishing them – implicitly declares the source’s information to be in the public interest. But not The Washington Post.

In the face of a growing ACLU-and-Amnesty-led campaign to secure a pardon for Snowden, timed to this weekend’s release of the Oliver Stone biopic “Snowden,” the Post Editorial Page not only argued today in opposition to a pardon, but explicitly demanded that Snowden – their paper’s own source – stand trial on espionage charges or, as a “second-best solution,” “accept [] a measure of criminal responsibility for his excesses and the U.S. government offers a measure of leniency.” In doing so, The Washington Post has achieved an ignominious feat in U.S. media history: the first-ever paper to explicitly editorialize for the criminal prosecution of its own paper’s source – one on whose back the paper won and eagerly accepted a Pulitzer Prize for Public Service. But even more staggering than this act of journalistic treachery against their paper’s own source are the claims made to justify it.

The Post Editors concede that one – and only one – of the programs which Snowden enabled to be revealed was justifiably exposed – namely, the domestic metadata program, because it “was a stretch, if not an outright violation, of federal surveillance law, and posed risks to privacy.” Regarding the “corrective legislation” that followed its exposure, the Post acknowledges: “we owe these necessary reforms to Mr. Snowden.” But that metadata program wasn’t revealed by the Post, but rather by the Guardian.

Soon one of many.

• ‘People’s Candidate’ Le Pen Vows To Free France From EU Yoke (AFP)

French far-right National Front leader Marine Le Pen on Sunday vowed to give her country back control over its laws, currency and borders if elected president next year on an anti-EU, anti-immigration platform. Addressing around 3,000 party faithful in the town of Frejus on the Cote d’Azur, Le Pen aimed to set the tone for her campaign, declaring in her speech: “The time of the nation state has come again.” The FN leader, who has pledged to hold a referendum on France’s future in the EU if elected and bring back the French franc, said she was closely watching developments in Britain since it voted to leave the bloc. “We too are keen on winning back our freedom…. We want a free France that is the master of its own laws and currency and the guardian of its borders.”

Polls consistently show Le Pen among the top two candidates in the two-stage presidential elections to take place in April and May. But while the polls show her easily winning a place in the run-off they also show the French rallying around her as-yet-unknown conservative opponent in order to block her victory in the final duel. In Frejus, Le Pen sought to sanitise her image, continuing a process of “de-demonisation” that has paid off handsomely at the ballot box since she took over the FN leadership from her ex-paratrooper father Jean-Marie Le Pen in 2011. “I am the candidate of the people and I want to talk to you about France, because that is what unites us,” the 48-year-old politician said in a speech that avoided any reference to the FN which is seen as more taboo than its leader.

What would happen if she decides not to run next year?

• Merkel Suffers Drubbing In Berlin Vote Due To Migrant Angst (R.)

Chancellor Angela Merkel’s conservatives suffered their second electoral blow in two weeks on Sunday, with support for her Christian Democrats (CDU) plunging to a post-reunification low in a Berlin state vote due to unease with her migrant policy. The anti-immigrant Alternative for Germany (AfD) polled 11.5%, gaining from a popular backlash over Merkel’s decision a year ago to keep borders open for refugees, an exit poll by public broadcaster ARD showed. The result means the AfD will enter a 10th state assembly, out of 16 in total.

Merkel’s CDU polled 18%, down from 23.3% at the last election in 2011, with the centre-left Social Democrats (SPD) remaining the largest party on 23%. The SPD may now ditch the CDU from their coalition in the German capital. The blow to the CDU came two weeks after they suffered heavy losses in the eastern state of Mecklenburg-Vorpommern. The setbacks have raised questions about whether Merkel will stand for a fourth term next year, but her party has few good alternatives so she still looks like the most likely candidate.

Perhaps there’s a contradiction hiding in realizing that globalization is moving in reverse, but still expecting global responses to crises.

• Why Won’t The World Tackle The Refugee Crisis? (Observer)

It is now the greatest movement of the uprooted that the world has ever known. Some 65 million people have been displaced from their homes, 21.3 million of them refugees for whom flight is virtually compulsory – involuntary victims of politics, war or natural catastrophe. With just less than 1% of the world’s population homeless and seeking a better, safer life, a global crisis is under way, exacerbated by a lack of political cooperation – and several states, including the United Kingdom, are flouting international agreements designed to deal with the crisis. This week’s two major summits in New York, called by the United Nations general assembly and by President Barack Obama, are coming under intense criticism before the first world leaders have even taken their seats.

Amnesty, Human Rights Watch and refugee charities are among those accusing both summits of being “toothless” and saying that the declaration expected to be ratified by the UN on Monday imposes no obligations on the 193 general assembly nations to resettle refugees. The Obama-led summit, meanwhile, which follows on Tuesday, is designed to extract pledges of funding which critics say too often fail to materialise. Steve Symonds, refugee programme director at Amnesty, said: “Funding is great and very much needed, but it’s not going to tackle the central point of some sharing of responsibility. The scale of imbalance there is growing, and growing with disastrous consequences.”

He said nations were sabotaging agreements through self-interest. “It’s very, very difficult to feel any optimism about this summit or what it will do for people looking for a safe place for them and their families right at this moment, nor tackle the awful actions of countries who are now thinking, ‘If other countries won’t help take responsibility, then why should we?’ and are now driving back desperate people. “Compelling refugees to go back to countries where there is conflict and instability doesn’t help this awful merry-go-round going on and on.”

Debt Rattle March 7 2016

Mar 072016

March 7, 2016 Posted by Raúl Ilargi Meijer at 9:12 am Finance Tagged with: BIS, borders, bubble, China, concentration camp, FX, Greece, Grexit, refugees, Turkey, zombie 5 Responses »

DPC Launch of freighter Howard L. Shaw, Wyandotte, Michigan 1900

• Debtor Days Are Over As BIS Calls Time On World Credit Binge (Tel.)

• ‘Gathering Storm’ For Global Economy As Markets Lose Faith (AFP)

• The Bank Of Japan Has Turned Economics On Its Head (BBG)

• China Growth Addiction Leaves Deleveraging, Reform in Back Seat (BBG)

• China Defends Veracity Of Foreign Exchange Reserves Data (FT)

• China’s Leaders Put the Economy on Bubble Watch (WSJ)

• China Plans Crackdown on Loans for Home Down-Payments (BBG)

• Hong Kong Homes Sales Tumble 70% (BBG)

• Grexit Back On The Agenda Again As Greek Economy Unravels (Guardian)

• Zombie Banks Are Stalking Europe (BBG)

• Threat Of A Synchronised Downturn (Pettifor)

• Why The House Price Bubble Still Hasn’t Burst (Steve Keen)

• Turkey Steps Up Crackdown on Erdogan Foes on Eve of EU Meetings (BBG)

• Turkey Disputes Greek Sovereignty Via NATO Patrols (Kath.)

• EU To Focus On Greek Aid, Closing Balkan Migrant Route At Summit (AP)

• Tsipras: “We Will Continue To Save Lives” (Reuters) (Reuters)

• Surge Of 100,000 Refugees Building In Greece (AFP/L)

• Refugee Boat Sinks Off Turkey’s Western Coast, 25 Dead, 15 Rescued (DS)

All we have left is debtors though.

• Debtor Days Are Over As BIS Calls Time On World Credit Binge (Tel.)

The world’s credit boom is beginning to show dangerous signs of unraveling, ushering in a period of fresh turmoil for the over-indebted global economy, the Bank of International Settlements has warned. The globe’s top financial watchdog called time on the world’s debt binge, noting that debt issuance and cross border flows in emerging economies slowed for the first time since the aftermath of the global credit crunch at the end of last year. With financial markets thrown into fresh paroxysms in 2016, oscillating between extremes of “hope and fear”, the over-leveraged world was finally approaching a day of reckoning, said Claudio Borio, the bank’s chief economist. “We may not be seeing isolated bolts from the blue, but the signs of a gathering storm that has been building for a long time”, he said.

The Swiss authority – known as the “central bank of central banks” – has long rang the alarm bell over the state of global indebtedness, warning that unprecedented monetary policy was storing up problems in a world which still lumbers under weak productivity, insipid growth, and has no appetite for major reforms. In its latest quarterly review, the BIS said some of its starkest warnings were now coming into fruition. It noted that international securities issuance turned negative at the end of last year to the tune of -$47bn – the sharpest contraction since the third quarter of 2012. The retrenchment was largely driven by the financial sector, said the BIS. Meanwhile emerging market debtors – who have embarked on a $3.3 trillion dollar denominated debt spree in the wake of the financial crisis – saw issuance ground to a halt in the second half of the year.

This provided a “telltale” sign that the financial conditions were reaching an inflection point, accompanied by large depreciations in emerging market currencies and slowing domestic growth. “It is as if two waves with different frequencies came together to form a bigger and more destructive one”, said Mr Borio. Global debt now stands at over 200pc of GDP, exceeding levels seen before the financial crash in 2007. Any turning in the credit cycle risks imperiling debtor companies and governments, raising the chances of default and corporate bankruptcies, said the BIS. “If they persist, tighter global liquidity conditions may raise stability risks in some countries, especially those where other indicators already point to a heightened risk of financial stress”, they said.

Ahead of the US Federal Reserve’s landmark decision to raise interest rates for the first time in eight years last December, the BIS had forewarned of an “uneasy market calm” that could quickly turn to debtor distress. This prophecy is seemingly playing out in the first three months of 2016. “The tension between the markets’ tranquility and the underlying economic vulnerabilities had to be resolved at some point,” said Mr Borio. “In the recent quarter, we may have been witnessing the beginning of its resolution.” Debt binges have also been exacerbated by a historic collapse in oil prices. Energy companies from Brazil to Russia are scrambling to service $3 trillion of dollar debt as prices languish at around $30 a barrel – a 70pc decline since late 2014.

More BIS.

• ‘Gathering Storm’ For Global Economy As Markets Lose Faith (AFP)

A fragile calm in global financial markets has given way to all-out turbulence, the Bank of International Settlements has said, warning of a “gathering storm” which has long been brewing. In its latest quarterly report, watched closely by investors, the BIS – which is known as the central bank of central banks – also warned that investors were concerned governments around the world were running out of policy options. BIS chief Claudio Borio said the “uneasy calm” of previous months had given way to turbulence and a “gathering storm”. “The tension between the markets’ tranquillity and the underlying economic vulnerabilities had to be resolved at some point. In the recent quarter, we may have been witnessing the beginning of its resolution,” he added.

“We may not be seeing isolated bolts from the blue, but the signs of a gathering storm that has been building for a long time,” he warned. Although Asian markets enjoyed another strong day on Monday and continued to claw back the losses of January, the report said said that investors were concerned about what central banks could do in the event of another crisis. “Underlying some of the turbulence was market participants’ growing concern over the dwindling options for policy support in the face of the weakening growth outlook,” the report said. “With fiscal space tight and structural policies largely dormant, central bank measures were seen to be approaching their limits.”

Borio surveyed the major disruptions over the last three months, from the first post-crisis interest rate hike by the US Federal Reserve in December, to accumulating signs of China’s slowdown. In what he termed the second phase of turbulence in the last quarter, Borio said markets were plagued by fears about the health of global banks and the Bank of Japan’s shock decision to impose negative policy rates.

Japan deserves a lot more scrutiny.

• The Bank Of Japan Has Turned Economics On Its Head (BBG)

Call me old fashioned, but I still think prices matter. I vividly recall the first time I studied those simple supply-and-demand graphs as a college freshman, and today, far too many years later, their basic logic remains undeniable. When prices are right, money flows to the most productive endeavors and economies work efficiently. When prices are wrong, crazy things eventually happen, with potentially dire consequences. That’s why we should be very worried about Japan, where things are getting crazy. On March 1, the Japanese government sold benchmark, 10-year bonds at a negative yield for the first time ever. Think about that for a minute. The investors who bought these bonds not only loaned the Japanese government their money. They’re paying for the privilege of doing so.

Why would any sane person do such a thing? A government with debt equivalent to more than 240% of national output – the largest load in the developed world – should surely have to pay investors a tidy sum to convince them to part with their money, not the other way around. But the bond market in Japan has become so distorted that investors believe it’s in their interests to lend money at a cost to themselves. The only explanation is that prices in Japan have gone horribly, horribly awry, and that has made the illogical logical. The culprit is the Bank of Japan. The entire purpose of its unorthodox stimulus programs – QE, negative interest rates – is, in effect, to get prices wrong: to press down interest rates below where they would normally go and force banks to lend money in ways they normally wouldn’t.

The BOJ, in other words, is trying to alter prices to change the incentive structure in the economy in order to engineer certain results – to increase inflation, encourage investment and spark growth. The problem is that the BOJ hasn’t achieved any of those objectives. Inflation in January, by one commonly used measure, was a pathetic zero. GDP has contracted in two of the past three quarters. Instead, the BOJ is creating new problems by undermining the price mechanism. The central bank is buying up so many government bonds that it has effectively stripped them of risk to the investor and cost to the borrower. Investors probably bought up the bonds with negative yields speculating that they could flip them to the BOJ. Meanwhile, since the government can now earn money while borrowing it, the BOJ is removing any urgency for Japan’s politicians to control debt and reduce budget deficits.

Worse, the central bank is undercutting the very goals it’s trying to achieve. By wiping out returns to investors on safe investments like government bonds – the yield curve on them is as flat as a pancake – the BOJ is straining the incomes of savers and dampening the consumption that might help the economy revive. If debt pressures finally do push the government to hike taxes again, spending will take another hit.

“Li signaled the prospect for more debt days after Moody’s Investors Service lowered its outlook on China’s credit rating to negative from stable because of a surge in borrowing.”

• China Growth Addiction Leaves Deleveraging, Reform in Back Seat (BBG)

Rule No.1 in China’s blueprint for the next five years: “give top priority to development.” That’s the word from Premier Li Keqiang’s work report delivered Saturday at the start of the annual National People’s Congress in Beijing. Li acknowledged there would be some difficult battles ahead as he outlined plans to clean up the environment, boost innovation, further urbanize and cut excess capacity in industries like coal and steel. Yet the firmest target remains on the one thing he has the least control over – the nation’s economic growth rate. For 2016, a 6.5% to 7% growth range was outlined, with 6.5% pegged as the baseline through 2020. That would be less than last year’s 6.9% rate, the slowest growth in a quarter century. To reach the new target, the government will permit a record high deficit and has raised its money supply expansion target.

The upshot: debt grows even as growth slows. “The risk is that if stimulus is accelerated but reform continues to lag, the government could end the year with growth on target but even bigger structural problems to deal with,” Bloomberg Intelligence economists Tom Orlik and Fielding Chen wrote in a note. The report “confirms that the focus is firmly on supporting short-term growth, with the deleveraging can kicked further down the road.” Li’s plan suggests debt may rise to 258% of GDP this year, from 247% at the end of 2015, they estimate. Li signaled the prospect for more debt days after Moody’s Investors Service lowered its outlook on China’s credit rating to negative from stable because of a surge in borrowing. “Development is of primary importance to China and is the key to solving every problem we face,” Li said in the work report. “Pursuing development is like sailing against the current: you either forge ahead or you drift downstream.”

Sorry, boys, confidence is in the gutter.

• China Defends Veracity Of Foreign Exchange Reserves Data (FT)

China’s official foreign exchange reserves only include highly liquid assets, a top central banker said on Sunday, seeking to reassure investors that authorities have enough ammunition to prevent a sharp fall in the renminbi. Investor sentiment towards China’s currency has turned sharply negative since a surprise devaluation in August, amid unprecedented capital outflows and concern about the health of the economy. Concern over China’s currency policy sparked a global market sell-off early this year. The People’s Bank of China has drawn on its foreign exchange reserves to curb renminbi weakness, but analysts believe the central bank may soon be forced to abandon this policy to prevent reserves dropping below dangerous levels.

Some bearish investors have also expressed skepticism about the reliability of China’s official foreign exchange reserves data, which showed reserves at $3.2tn at the end of January — still the world’s largest despite declining for 19 months. Skeptics say the headline total of reserves exaggerates the resources available to support the renminbi since they suspect it includes illiquid assets such as foreign real estate and private-equity investments that cannot be readily deployed in currency markets. Kyle Bass, the US hedge fund manager who has wagered billions that the renminbi and other Asian currencies will fall, believes China’s true reserves are more than $1tn below the government’s official total. Veteran investor George Soros has also suggested the renminbi may fall further.

Yi Gang, PBoC deputy governor who until January was also head of the foreign exchange regulator, said on Sunday that only highly liquid assets are included in the closely watched headline reserves figure. “I can clearly tell everyone here, those assets that don’t meet liquidity standards are entirely deducted from official foreign exchange reserves,” Mr Yi said. “For example, some illiquid equity investments, some capital injections and some other assets where liquidity isn’t good are entirely outside our foreign exchange reserves.” Beyond foreign real estate and private equity, analysts have questioned whether PBoC’s recent use of foreign currency to inject capital into state-owned policy banks, including at least $93bn injected into China Development Bank and the Export-Import Bank of China last year. There is also uncertainty about whether China’s capital contributions to two newly launched multilateral development banks, the Asia Infrastructure Investment Bank and the Brics bank, have been deducted.

While continuing to inflate history’s biggest bubble even further.

• China’s Leaders Put the Economy on Bubble Watch (WSJ)

China’s leaders made clear they are emphasizing growth over restructuring this year, but suggested they are trying to avoid inflating debt or asset bubbles as they send massive amounts of money coursing through the economy. The government’s announcement of a 6.5% to 7% growth target for 2016 at the start of the National People’s Congress over the weekend came with subtle acknowledgment that some of its efforts to jump-start a persistently decelerating economy have misfired, failing to steer stimulus to the most productive sectors. In his report to the annual legislative session, which opened Saturday, Premier Li Keqiang promised tax cuts that could leave companies with more money to invest.

And for the first time, the Chinese government specified total social financing—a broad measure of credit that includes both bank loans and nonbank lending—as a metric for helping determine monetary policy. In the past, leaders have just said total social financing should be kept at an appropriate level, while they have set clear targets for M2 money supply, which covers all cash in circulation and most bank deposits. Both measures have increased sharply in recent months. But the money-supply measure fails to capture how banks and financial institutions use the funds. For instance, M2 jumped 13.3% last year while total social financing grew 12.4%, according to official data. The discrepancy indicates not all deposits were used by banks to make loans to companies; instead, some of the funds were tapped for such purposes as margin loans for stock-market speculation.

This year, the two targets are paired, with both set to rise 13%. “The government seeks to more accurately show where the money is going, and whether credit is being used to support the real economy,” said Sheng Songcheng, head of the central bank’s survey and statistics department, in an interview. China’s past efforts to direct credit to entrepreneurs and other desired sectors of the economy have fallen short. And its loose monetary policy risks giving inefficient companies more room to avoid shutting down or retooling. Much of China’s breakneck growth over the past two decades has been fueled by state-led investment and debt. Concerns about a credit buildup have grown as the economy has slowed.

Prices in Shanghai and Shenzhen are totally crazy. And that’s the government’s doing.

• China Plans Crackdown on Loans for Home Down-Payments (BBG)

Chinese regulators plan to impose new rules to end the practice of homebuyers taking out loans to cover down-payments, as they step up scrutiny of financing risk in the property market, according to people familiar with the matter. The rules will bar lenders including developers, housing agencies, small-loan companies and peer-to-peer networks from offering loans for down-payments, said the people, who asked not to be named because the matter isn’t yet public. Regulators including the central bank and the China Banking Regulatory Commission will also ask commercial banks to scrutinize mortgage applications and reject those where down-payments come from loans offered by such institutions, the people said.

China is planning the crackdown amid concerns about rising risks in the loan markets and warnings from officials that home prices in some top-tier cities are rising too fast. Shanghai’s most-senior official said the city’s property market has “overheated” and should be more tightly controlled after a recent surge in residential housing prices. As part of the latest moves, regulators will also strengthen the stress tests of property loans, the people said, without offering details. Representatives at the People’s Bank of China and the CBRC didn’t immediately respond to faxed requests for comment. China in November 2014 started easing property curbs amid efforts to revive the world’s second-largest economy. The measures – intended to ease a glut of unsold homes in smaller cities – have instead lifted prices in the country’s biggest population centers.

Prices in Shenzhen jumped 4% in January from a month earlier and have gained 52% over the past year. Values in the financial center of Shanghai have increased 18% in the last 12 months, while those in Beijing advanced about 10%. Regulators last month allowed commercial banks to cut the minimum mortgage down-payment for first-home purchases to 20% from 25% and to 30% from 40% for second homes, except in five big cities with home-buying restrictions. Demand for real estate is also getting a boost from monetary stimulus after the PBOC cut benchmark lending rates six times since 2014, lowered banks’ reserve requirements and flooded the financial system with cash to keep borrowing costs low.

“Home prices in the city surged 370% from their 2003 trough through the September peak..”

• Hong Kong Homes Sales Tumble 70% (BBG)

Hong Kong residential home sales plunged 70% in February from a year earlier to a 25-year low, as falling prices and economic uncertainty deterred buyers. In February, 1,807 homes were sold in Hong Kong, compared with 6,027 a year earlier, according to government statistics. Home sales fell from 2,045 in January, the data show. “The newspapers keep on saying the market is going down and buyers think they can get a cheaper house half-a-year later or one year later so are waiting,” said Thomas Fok, a property agent at Centaline Property Agency in Hong Kong’s upscale Mid-levels West district where he hasn’t made one sale this year.

Property prices have declined 10% from their September highs amid uncertainty over the economy at home and in China, possible interest-rate increases and plans by the government to boost housing supply in the next five years. Senior Hong Kong government officials have ruled out relaxing property curbs, which include extra stamp duties and caps on mortgage levels. [..] Home prices in the city surged 370% from their 2003 trough through the September peak, spurred by low mortgage rates, tight supply of new units and buying from mainland Chinese. This year, BOCOM International Holdings Co. property analyst Alfred Lau has said prices could fall 30% amid a slowdown.

“I think the situation right now is more dangerous than it was last summer..”: former finance minister Gikas Hardouvelis.

• Grexit Back On The Agenda Again As Greek Economy Unravels (Guardian)

European finance ministers will once again deliberate over how to treat Greece’s ongoing debt crisis this week despite the country desperately grappling with refugees pouring across its borders. A meeting on Monday of finance ministers from the eurozone will determine whether creditors are to be given the green light to complete a long-delayed review of Greek economic recovery plans. The review has been held up by disagreement among lenders over how much more Athens needs to cut from public spending. It is seen as key to reviving Greece’s banking sector and restoring business and consumer confidence. “I think the situation right now is more dangerous than it was last summer,” the former finance minister Gikas Hardouvelis told the Guardian.

“Then it was a question of the political will of a few people,” he said, referring to the tumultuous negotiations that paved the way to Athens receiving a third bailout in August. “Now it’s a question of implementing reforms and working hard and if a government doesn’t believe in them and implements them begrudgingly, progress becomes very difficult.” Monday’s meeting comes at an especially sensitive time. Greek unemployment remains the highest in Europe at almost 25% – and just under 50% among the young. Many companies are relocating to Bulgaria, Albania, Romania and Cyprus as a result of over-taxation. Meanwhile, the once booming tourism trade has taken a hit as bookings to Aegean isles have collapsed because of refugee arrivals. Last week, it was announced by Greece’s official statistics agency, Elstat, that the debt-stricken nation had dipped back into recession.

After three emergency bailouts and the biggest debt restructuring in history, talk once again has turned to the country dropping out of the single currency. Businessmen and bankers in private concede that as the economy disintegrates the possibility of a parallel currency is now openly being discussed. “The probability of Grexit is still there,” added Hardouvelis. “It has not gone away. Just look at the yield investors are required to pay on Greek bonds.” Everyone agrees that time is of the essence. Further delays make potentially explosive reforms – starting with the overhaul of the pension system – harder to sell for a leftist-led government that in recent months has faced protest on the streets. “We have no time,” finance minister Euclid Tsakalotos told the European parliament’s economics committee last week. “We hope the IMF will become more reasonable.”

Europe’s a zombie financially and politically.

• Zombie Banks Are Stalking Europe (BBG)

Zombies are stalking Europe — zombie banks that are solvent in name only. The phenomenon is not new. Zombies weighed down Japan for almost 20 years after a real estate bust. They are usually born of financial panics, when loans go bad, capital flees and the value of assets tumbles. There are no good choices when zombie banks are on the march. Shutting them down can cause further panic. Restoring them to health can require hundreds of billions of dollars. But letting them fester can cripple an economy for years, because zombies don’t make the loans healthy businesses need to grow and consumers need to spend. No place has been cozier for zombies since the 2008 global financial crisis than Europe, and no economy has been slower to recover.

Europe has been slow and piecemeal in its approach to the region’s troubled banks. Lenders in Greece received their third cash infusion from the government in 2015. In Italy, the government developed a plan in early 2016 to relieve banks of their soured loans, though it’s expected to have only a limited impact because the program is voluntary. Investors are concerned that Europe’s banks are so weak that they still pose a risk to the economy and financial stability, after crippled banks in Ireland, Portugal, Greece and Spain threatened to pull down their indebted governments between 2010 and 2012. Even after multiple rescues and capital injections, almost a fifth of 130 banks failed a ECB stress test in October 2014, with a total capital shortfall of €25 billion. In an effort to coordinate the response, the ECB was given the job of the central banking regulator at the end of 2014. But even the ECB wasn’t bold enough to put a bullet to zombies’ heads, only requiring banks to be more aggressive on provisioning for bad loans.

One thing about old-fashioned bank runs — when they killed banks they stayed dead. The panics that followed, however, could bring down healthy banks as well, so tools for supporting banks grew up, most notably deposit insurance. Those developments brought with them a thorny question — when to pull the plug. The term “zombie banks” was coined by Edward J. Kane of Boston College in 1987 to refer to U.S. savings and loans institutions that had essentially been wiped out by commercial-mortgage losses but were allowed to stay in business, as regulators put off the pain of shutting them down in the hope that a market rebound would make them whole. By the time they gave up and cleaned up the mess, the losses of the zombies had tripled.

In Japan, zombie banks propped up zombie companies rather than write down their loans, while the banks themselves were kept alive through “regulatory forbearance” — a tacit agreement by the government to pretend that their bad loans were still worth something, an approach that kept the markets calm but contributed to a “lost decade” of economic stagnation. The prime example of a tough approach is Sweden, which in the 1990s responded to a financial crisis by nationalizing its ailing banks — and quickly rebounded.

After the 2008 crisis, the U.S. pumped $300 billion into its banks, but it also conducted stress tests that were more rigorous than Europe’s and forced low-scoring banks to raise private capital. In Europe, countries from Germany to Spain plugged holes in their banks and failed year after year to force losses and recapitalizations as the U.S. had. As a result, European lenders still sit on more than $1 trillion of dud loans, which don’t earn them any money and prevent them from making new loans that the region’s economy needs desperately to grow.

QE in a nutshell: “..the benefits from these wealth effects will accrue to those households holding most financial assets.”

• Threat Of A Synchronised Downturn (Pettifor)

“For the proposition that supply creates its own demand, I shall substitute the proposition that expenditure creates its own income” JM Keynes Collected Writings, Volume XXIX, p. 81

G20 Finance Ministers met in Huangzhou, China recently and refused appeals from both the IMF and the OECD for “urgent collective policy action” that focussed “fiscal policies on investment-led spending”. Instead the world’s finance ministers concluded that “it’s every country for themselves”. Keynes’s simple proposition is compelling: that expenditure will expand national (and international) income (including tax income) and thereby reduce the deficit. But it is a proposition that is anathema to OECD politicians, their friends in the finance sector and their advisers. Instead they adhere stubbornly to the antiquated classical economics embodied in Say’s Law.

Rather than relying on expenditure or investment, the British 2010-2015 Coalition government and then the 2015 Conservative government placed excessive reliance on monetary policy to revive aggregate demand for goods and services. The consequences were predictable. Loose monetary policy enriched those that owned assets – stocks and shares, bonds or property. The evidence of this grotesque enrichment is clearest in London. According to the FT (20 Feb 2016) the owners of South Kensington residential properties have seen “substantial capital appreciation – 45 % over the past five years and a remarkable 155% since 2006.” And as the Bank of England concluded back in 2012 in its paper on the Distributional Effects of Asset Purchases” (i.e. QE): “the benefits from these wealth effects will accrue to those households holding most financial assets.”

By contrast fiscal consolidation (austerity) has since 2010 hurt those that do not own assets – i.e. those who live by hand or by brain, or who are dependent on welfare, and do not benefit from the rent generated by the ownership of assets. Now, the British government is set to impose the largest fiscal consolidation of all OECD countries. Worryingly, it proposes to do so at a time of global economic and financial fragility. But the British government has not been alone in pursuing policies that enrich the already rich, while contracting wider economic activity. Over-reliance on central bankers and monetary policy, coupled with deflationary and contractionary fiscal policy is the cause both of ongoing weakness in OECD countries and of the slow but inexorable decline in world trade since 2011.

“The problem is that nothing — not even Donald Trump’s popularity — accelerates forever.”

• Why The House Price Bubble Still Hasn’t Burst (Steve Keen)

The standard retort to those who claim that Australia has a housing bubble is that it’s all just supply and demand. I can happily agree that it is indeed all just supply and demand and still prove that there is a bubble. Understanding my argument might force you to think more than you normally have to, in which case, tough: it’s about time Australians did some thinking. Fundamentally, the demand for housing comes from the flow of new mortgages. Only the super-rich or the well-heeled offshore buyer can afford to buy property without a mortgage, and the importance of mortgage debt has increased dramatically over time. In the 1970s, you couldn’t get a mortgage without a 30% deposit, so cash made up 30% of the purchase price; now it’s closer to 10%.

So, on the demand side of the supply and demand equation, we have the flow of new mortgage debt. On the supply side, we have two factors: the number of properties for sale and their prices. There is, therefore, a “dynamic tension” (to quote Rocky Horror) between the rate of change of mortgage debt, and the level of house prices: if the monetary value of the flow of new mortgage debt equals the monetary value of the flow of supply, then there’s no pressure forcing prices to change. It follows that there is a relationship between the acceleration of mortgage debt and the rate of change of house prices. So for house prices to rise, the flow of new mortgage debt needs to be not merely positive, but accelerating — growing faster over time.

Lest that sound like standard economic mumbo-jumbo — as Ross Gittins pointed out very well recently, most so-called economic modelling is no more than fantasy (“Tax modelling falls down at the household level”)—Figure 1 shows the empirical evidence for America, where not even Alan Greenspan disputes that there was a bubble. Similar relationships apply for all countries — and for the econometrically minded, the causal relation (as tested on US data) is from accelerating mortgage debt to house prices, not vice-versa.

Is Australia different? No. The same relationship applies here and now: though foreign buyers have certainly played a part, the key factor driving rising Australian house prices in the last three years has been accelerating mortgage debt.

So what’s the problem? The problem is that nothing — not even Donald Trump’s popularity — accelerates forever. At some point, the level of mortgage debt relative to income will stabilise; well before that happens, the acceleration of mortgage debt will decline, and prices will fall. This has already happened twice in recent history in Australia: in 2008 and in 2010. On both occasions, deliberate government policy stopped the fall in prices by encouraging Australians back into mortgage debt — firstly via the First Home Vendors Boost under Rudd and secondly via the RBA’s rate cuts from 2012 which were undertaken with the hope they would encourage more household borrowing. In both cases the acceleration of mortgage debt resumed, as did the bubble in prices.

Europe’ disgrace.

• Turkey Steps Up Crackdown on Erdogan Foes on Eve of EU Meetings (BBG)

Turkish authorities are escalating a crackdown on President Recep Tayyip Erdogan’s opponents, undeterred by possible risks to the nation’s renewed attempts to join the EU. In two days, authorities seized control of the company that owns a leading newspaper, and signaled the possibility of stripping prominent Kurdish lawmakers of their parliamentary immunity. The moves come on the eve of talks on Monday in Brussels between Turkish and EU officials to discuss ways to handle the influx of refugees from Syria. With the EU increasingly seeking Turkey’s help to contain Europe’s worst refugee crisis since World War II, and Ankara’s membership talks at an early stage, Erdogan’s allies are betting that the escalation won’t damage Turkey’s ties with the bloc.

The president expects EU leaders “to turn a blind eye” in return for his “cooperation in curbing Syrian refugee flows to the continent,” said Aykan Erdemir at the Foundation for Defense of Democracies, a policy institute. On Friday, Turkey seized control of the Zaman newspaper, the latest twist in a 2 1/2-year campaign against Fethullah Gulen, a former ally of Erdogan accused of running a “parallel state” to undermine the government. The move sparked clashes between police and anti-government protesters. EU governments revived the entry talks, dormant since November 2013, as part of a package of economic and political incentives to encourage Erdogan to host refugees in Turkey instead of pointing them to Europe.

German Finance Minister Wolfgang Schaeuble said in an interview recorded last week and broadcast on Sunday on BBC’s Andrew Marr show that “it will be a long time before we reach the end of negotiations with Turkey about accession to the EU.” “Actually, the German government has major doubts about whether Turkey should be a full member of the EU, but this is a question for the coming years,” said Schaeuble. “It is not a worry at the present time.” [..] Erdogan knows that the “EU can’t really stop him from eradicating followers of Gulen to putting Kurdish lawmakers on trial for ties to the PKK,” Nihat Ali Ozcan at the Economic Policy Research Foundation in Ankara said. “The EU’s criticism of Erdogan’s policies is not very meaningful at a time when the country’s membership bid is not high on the public’s agenda, and the reliance of the EU on Turkey to handle the refugee crisis and protect Europe against terrorism leaves more room for Erdogan to pursue his own agenda at home.”

Simmering tensions flare up. Better be careful.

• Turkey Disputes Greek Sovereignty Via NATO Patrols (Kath.)

Turkey is disputing Greece’s territorial sovereignty over a string of tiny islands and a part of its air space over the Aegean Sea, according to a confidential document, obtained by Kathimerini, that was submitted to NATO’s Military Committee last month. The 17-point document, which is expected to further strain relations between the neighboring countries, was submitted on February 15, during heated discussions between Greece and Turkey over the terms of deployment of a German-led NATO patrol in the Aegean to stem the flow of refugees. It was the first time that had Turkey disputed Greek sovereignty via an official NATO document.

Turkey’s demands from the Alliance included replacing the term “Aegean air space” with “NATO air space” and refraining from using the Greek names of several tiny islands “that may been seen as the promotion of national interest” – an apparent reference to 16 small islets whose Greek sovereignty has been repeatedly disputed by Ankara. Turkey also disputed Greece’s 10-mile national air space and demanded permission to enter the Athens Flight Information Region (FIR) without submitting flight plans. It further requested that NATO ships do not dock at ports of the Dodecanese islands in the southeast Aegean and claimed supervision of almost half the Aegean Sea for search and rescue operations.

The terms of the NATO patrol in the Aegean were agreed on February 25 after overcoming territorial sensitivities of the two neighbors. The agreement stipulated that the two countries would not operate in each other’s territorial waters and air space. According to several NATO diplomats, one of the stumbling blocks had been where Greek and Turkish ships should patrol and whether that would set a precedent for claims over disputed territorial waters. EU leaders will hold a special meeting Monday in a bid to hammer out a deal that would help contain the number of refugees entering Greece and the rest of the EU.

They’re really planning to do it: turn Greece into a concentration camp. This will not go well.

• EU To Focus On Greek Aid, Closing Balkan Migrant Route At Summit (AP)

European Union leaders will be looking to boost aid to Greece as the Balkan migrant route is effectively sealed, using Monday’s summit as an attempt to restore unity among the 28 member nations after months of increasing bickering and go-it-alone policies, according to a draft statement Sunday. The leaders will also try to persuade Turkey’s prime minister to slow the flow of migrants travelling to Europe and take back thousands who don’t qualify for asylum. In a draft summit statement produced Sunday and seen by The Associated Press, the EU leaders will conclude that “irregular flows of migrants along the Western Balkans route are coming to an end; this route is now closed.”

Because of this, the statement added that “the EU will stand by Greece in this difficult moment and will do its utmost to help manage the situation.” “This is a collective EU responsibility requiring fast and efficient mobilization,” it said in a clear commitment to end the bickering. It said that aid to Greece should centre on urgent humanitarian aid as well as managing its borders and making sure that migrants not in need of international protections are quickly returned to Turkey. The statement will be assessed by the 28 leaders after they have met with Turkish Prime Minister Ahmet Davutoglu. Late Sunday evening, German Chancellor Angela Merkel and Dutch Premier Mark Rutte met with Davutoglu to prepare for the summit.

[..] The EU summit, the second of three in Brussels in just over a month, comes just days after a Turkish court ordered the seizure of the opposition Zaman newspaper. The move has heightened fears over deteriorating media freedom in the country and led to calls for action from the international community, but they will most likely be brushed aside at the high-stakes talks. “In other words, we are accepting a deal to return migrants to a country which imprisons journalists, attacks civil liberties, and with a highly worrying human rights situation,” said Guy Verhofstadt, leader of the ALDE liberal group in the European Parliament on Sunday.

“We will continue to save lives … and defend the human face of Europe.”

• Tsipras: “We Will Continue To Save Lives” (Reuters)

Greece will press for solidarity with refugees and fair burden-sharing among European Union states at Monday’s emergency EU summit with Turkey, Prime Minister Alexis Tsipras said on Sunday, lashing out at border restrictions that led to logjams. Tsipras has accused Austria and Balkan countries of “ruining Europe” by slowing the flow of migrants and refugees heading north from Greece, where some 30,000 are now trapped, waiting for Macedonia to reopen its border so they can head to Germany. With more arriving in the mainland from Greek islands close to Turkish shores, the numbers could swell by 100,000 by the end of this month, EU Migration Commissioner Dimitris Avramopoulos projected on Saturday. “Europe is in a nervous crisis,” Tsipras told his leftist Syriza party’s central committee. “Will a Europe of fear and racism overtake a Europe of solidarity?”

He said central European countries with serious demographic problems and low unemployment could benefit in the long term by taking in millions of refugees, but austerity policies have fed a far-right “monster” opposing the inflows. “Europe today is crushed amidst austerity and closed borders. It keeps its border open to austerity but closed for people fleeing war,” Tsipras said. “Countries, with Austria in the front, want to impose the logic of fortress Europe.” Austrian Chancellor Werner Faymann has urged Germany to set a clear limit on the number of asylum seekers it will accept to help stem a mass influx of refugees that is severely testing European cohesion in the midst of the worst refugee crisis in generations. Tsipras told his party “unilateral” actions to close borders to refugees were condemned by all European institutions. “We are not pointing the finger to any other peoples or countries of Europe. We are against those who succumb to xenophobia and racism,” Tsipras said. “We will continue to save lives … and defend the human face of Europe.”

Merkel is losing her wits: “Greece should have created 50,000 accommodation places for refugees by the end of 2015..” Why Greece, Angela?

• Surge Of 100,000 Refugees Building In Greece (AFP/L)

As EU members continued to bicker, Dimitris Avramopoulos, in charge of migration at the powerful Brussels executive, pointed to upcoming measures, including an overhaul of asylum rules, to help ease tensions. “Hundreds are arriving on a daily basis and Greece is expected to receive another 100,000 by the end of the month,” Avramopoulos told a conference in Athens. Greece lies at the heart of Europe’s greatest migration crisis in six decades after a series of border restrictions on the migrant trail from Austria to Macedonia caused a bottleneck on its soil. Over 30,000 refugees and migrants are now trapped in the country, desperate to head northwards, especially to Germany and Scandinavia. “In a few weeks,” the EU will announce a revision of its asylum regulations to ensure a “fairer distribution of the burden and the responsibility,” Avramopoulous told the conference.

The huge influx of refugees and migrants has caused major divisions within the EU, although European President Donald Tusk on Friday struck an upbeat note about Monday’s summit in Brussels, which will include Turkey. European leaders are expected to use the summit to press Ankara to take back more economic migrants from Greece and reduce the flow of people across the Aegean Sea. Finger-pointing continued within the 28-nation EU bloc on Saturday. German Chancellor Angela Merkel – a key player in the drama – said Greece should have been quicker in preparing to host 50,000 people under an agreement with the European Union in October. “Greece should have created 50,000 accommodation places for refugees by the end of 2015,” Merkel told Bild newspaper in an interview to appear Sunday. “This delay must be addressed as soon as possible as the Greek government must provide decent lodgings to asylum claimants”, she said.

Safe passage is very possible. But we prefer to let them drown.

• Refugee Boat Sinks Off Turkey’s Western Coast, 25 Dead, 15 Rescued (DS)

25 refugees drowned off Turkey’s Aegean coast on Sunday after their boat sank off the western province of Aydin’s district of Didim, Anadolu Agency reported. The Turkish Coast Guard has rescued 15 of the refugees and launched a search and rescue operation to find the other missing refugees with three boats and one helicopter. The total number of refugees is not yet known. The refugees’ nationalities were not immediately released, but they are likely to be Syrians, who comprise the majority of refugees attempting to sneak to the Greek islands from Turkey. Media outlets said three children were among the casualties. It is not known what caused the boat to sink, although a mix of strong winds and boats carrying passengers over their capacities are often the causes of similar tragedies. The local Ihlas News Agency reported that passenger overload was the cause of the disaster.

Debt Rattle December 7 2015

Dec 072015

December 7, 2015 Posted by Raúl Ilargi Meijer at 9:48 am Finance Tagged with: BIS, bonds, cattle, debt, deflation, EM, EU, iron ore, oil, war 8 Responses »

DPC Cuyahoga River, Lift Bridge and Superior Avenue viaduct, Cleveland, Ohio 1912

• Emerging Market Debt Sales Are Down 98% (BBG)

• BIS Warns “Uneasy Calm” In Global Markets May Be Shattered By Fed Hike (ZH)

• BIS Argues For Tighter Monetary Policy In Spite Of ‘Uneasy Calm’ (FT)

• Corporate Bond Market Hit By Rates Fears (FT)

• Junk Bonds Set For First Annual Loss Since Credit Crisis (WSJ)

• Japan’s Current Recession To Prove An Illusion (FT)

• Last Gasps of a Dying Bull Market – And Economy (Hickey)

• As Oil Keeps Falling, Nobody Is Blinking (WSJ)

• Gradual Erosion Of The EU Will Leave A Glorified Free-Trade Zone (Münchau)

• China’s Iron Ore, Steel Demand To Fall Further In 2016 (AFR)

• China’s Biggest Broker CITIC Can’t Locate Two Of Its Top Execs (Reuters)

• Falling Cattle Prices Put The Hurt On Kansas Ranchers, Feedlots (WE)

• Prison Labor In USA Borders On Slavery (AHT)

• German States Slam New Refugee Boss For ‘Slow Work’ (DPA)

• US Alliance-Supported Groups In Syria Turn Guns On Each Other (Reuters)

• Iraq Could Ask Russia for Help After ‘Invasion’ by Turkish Forces (Sputnik)

Maxed out.

• Emerging Market Debt Sales Are Down 98% (BBG)

The commodity-price slump and the slowdown in China’s economy are crippling developing nations’ ability to borrow abroad, even as international debt sales from advanced nations remain at a five-year high. Issuance by emerging-market borrowers slumped to a net $1.5 billion in the third quarter, a drop of 98% from the second quarter, according to the Bank for International Settlements. That was the biggest downtrend since the 2008 financial crisis and helped to reduce global sales of securities by almost 80%, a BIS report said. Emerging-market assets tumbled in the third quarter, led by the biggest plunge in commodity prices since 2008 and China’s surprise devaluation of the yuan.

The average yield on developing-nation corporate bonds posted the biggest increase in four years, stocks lost a combined $4.2 trillion and a gauge of currencies slid 8.3% against the dollar. Sanctions on Russian entities and political turmoil in Brazil and Turkey also affected sales by companies in those countries. “Weak debt-securities issuance in the third quarter can only be partially explained by seasonality,” the latest quarterly review from the BIS said. “Growing concerns over emerging-market fundamentals, falling commodity prices and rising debt burdens probably played a role. Additionally, an increasing focus on local markets may also have been a factor.”

One side effect of the decline in international-debt sales was the emergence of the euro as a borrowing currency. The net issuance of securities in the shared currency by non-financial companies was $23 billion in the three months through Sept. 30, while dollar-denominated debt accounted for $22 billion. The main reason for that was a jump in euro-bond offerings from emerging markets, where the share of the currency went up to 62% from 18% in the second quarter. Borrowers from advanced economies issued a net $22 billion in debt, $100 billion less than in the preceding three months. Still, cumulative figures remained the highest since 2010 because of the increases in the first half of the year.

$3.3 trillion in non-bank EM debt. Hike into that.

• BIS Warns “Uneasy Calm” In Global Markets May Be Shattered By Fed Hike (ZH)

[..] the nightmare situation is that you accumulate an enormous amount of foreign currency liabilities only to see your currency crash just as market demand for EM assets dries up. Drilling down further, the bank notes that of the $9.8 trillion in non-bank, USD dollar debt outstanding, more than a third ($3.3 trillion) is concentrated in EM. “Since high overall dollar debt can leave borrowers vulnerable to rising dollar yields and dollar appreciation, dollar debt aggregates bear watching,” Robert Neil McCauley, Patrick McGuire and Vladyslav Sushko warn. The right pane here gives you an idea of how quickly borrowers’ ability to service that debt is deteriorating.

“Any further appreciation of the dollar would additionally test the debt servicing capacity of EME corporates, many of which have borrowed heavily in US dollars in recent years,” Borio reiterates, ahead of the December Fed meeting at which the FOMC is set to hike just to prove it’s actually still possible. All in all, central banks have managed to preserve an “uneasy calm,” Borio concludes, but “very much in evidence, once more, has been the perennial contrast between the hectic rhythm of markets and the slow motion of the deeper economic forces that really matter.” In other words: the market is increasingly disconnected from fundamentals and the rather violent reaction to a not-as-dovish-as-expected Mario Draghi proves that everyone still “hangs on the words and deeds” of central banks.

In the end, Borio is telling the same story he’s been telling for over a year now. Namely that the myth of central banker omnipotence is just that, a myth, and given the abysmal economic backdrop, the market risks a severe snapback if and when that myth is exposed. One of the pressure points is EM, where sovereigns may have avoided “original sin” (borrowing heavily in FX), but corporates have not. With $3.3 trillion in outstanding USD debt, a rate hike tantrum could spell disaster especially given the fact that the long-term, the fundamental outlook for EM continues to darken. Borio’s summary: “At some point, [this] will [all] have to be resolved. Markets can remain calm for much longer than we think. Until they no longer can.”

“Markets can remain calm for much longer than we think. Until they no longer can.”

• BIS Argues For Tighter Monetary Policy In Spite Of ‘Uneasy Calm’ (FT)

Central banks must not let market volatility halt their plans to retreat from crisis-fighting monetary policies, the Bank for International Settlements has warned ahead of the expected first rate rise by the US Federal Reserve in nine years. While the current “uneasy calm” in financial markets threatened to blow up into bouts of financial turmoil, with clear tensions between markets’ behaviour and underlying economic conditions, such a threat should not dissuade monetary policymakers from taking the first steps towards tighter monetary policy, the BIS argued in its latest quarterly review. “At some point, [the tension] will have to be resolved,” said Claudio Borio, head of the BIS’s monetary and economic department. “Markets can remain calm for much longer than we think. Until they no longer can.”

The Federal Open Market Committee, the Fed’s rate-setting board, is set to vote on December 16. Recent strong jobs figures have raised the likelihood of an increase to the federal funds rate. An earlier shift towards the exit by the US central bank sparked a “taper tantrum” in financial markets — a reference to the Fed’s decision to announce that it was tapering, or slowing, the pace of its asset purchases made under its quantitative easing package. The Fed resisted raising rates this year in part because of market turmoil over the summer. Going into this month’s meeting, conditions have been milder — although the BIS noted this calm had been uneasy. “Very much in evidence, once more, has been the perennial contrast between the hectic rhythm of markets and the slow motion of the deeper economic forces that really matter,” Mr Borio said. The BIS has long believed that what it describes as “unthinkably” low interest rates are fuelling instability in global financial markets.

“People are going to be carried out on stretchers..”

• Corporate Bond Market Hit By Rates Fears (FT)

Investor alarm at the riskier end of the US corporate bond market is mounting, with borrowing costs for the lowest-rated companies climbing to their highest level since the financial crisis as the Federal Reserve prepares to raise interest rates for the first time in nearly a decade. While the US stock market has recovered after a bumpy autumn and is relaxed about the prospect of tighter monetary policy, the corporate bond market has become increasingly jittery. Typically, when bond and stock markets point in different directions, a drop in the former augurs a correction in the latter — as happened this summer.

Concerns over the possible impact of a US interest rate increase on more vulnerable borrowers has been exacerbated by rising indebtedness and shrinking revenues among companies. This has fuelled concerns that the profitable “credit cycle” that has reigned since the financial crisis receded is coming to an end. “People are going to be carried out on stretchers,” said Laird Landmann, a senior bond fund manager at TCW, a Californian asset manager. “When earnings are coming down, leverage is high and interest rates are going up. It’s not good.” Safer corporate bonds judged “investment grade” by Standard & Poor’s, Moody’s or Fitch have been reasonably steady, with average yields dipping slightly again after a faltering start to November.

But debt rated below that threshold has had a bad autumn, particularly debt issued by companies in the struggling energy industry. UBS estimated in a note last week that as much as $1tn of US corporate bonds and loans rated below investment grade could be in the danger zone as borrowing conditions become tougher just as many face repayments. Much of the pain is in the energy sector but the Swiss bank argues the problems are wider than this. “It is our humble belief that the consensus at the Fed does not fully understand the magnitude of the problems in corporate credit markets and the unintended consequences of their policy actions,” wrote Matthew Mish, a UBS strategist.

Debt debt debt wherever you look.

• Junk Bonds Set For First Annual Loss Since Credit Crisis (WSJ)

Junk bonds are headed for their first annual loss since the credit crisis, reflecting concerns among investors that a six-year U.S. economic expansion and accompanying stock-market boom are on borrowed time. U.S. corporate high-yield bonds are down 2% this year, including interest payments, according to Barclays data. Junk bonds have posted only four annual losses on a total-return basis since 1995. The declines are worrying Wall Street because junk-market declines have a reputation for foreshadowing economic downturns. Junk bonds are lagging behind U.S. stocks following a debt selloff in the past month. The S&P 500 has returned 3.6% on the year, including dividends.

Adding to the worries are signs that the selling has spread beyond firms hit by the energy bust to encompass much of the lowest-rated debt across the market, potentially snarling some takeovers and making it difficult for all kinds of companies to borrow new funds. In the fourth quarter of the year, there has been a “meaningful disconnect between equities and high yield,” said George Bory, head of credit strategy at Wells Fargo Securities. “It’s a warning sign about the potential challenges in the economy.” High-yield bonds pay high interest rates, typically above 7%, because the heavily indebted companies that issue them are more likely to default.

Investors flock to the debt in boom times when other securities pay minimal interest and often dump it just as quickly when they get nervous, making junk bonds a bellwether for risk appetite. Defaults are rising after several years near historically low levels, as new bond sales stall and companies with below-investment-grade credit ratings struggle to refinance their debts. The junk-bond default rate rose to 2.6% from 2.1% this year and will likely jump to 4.6% in 2016, breaching the 30-year average of 3.8% for the first time since 2009, said New York University Finance Professor Edward Altman, inventor of the most commonly used default-prediction formula.

Wow. Abe turns into Catweazle. All about magic.

• Japan’s Current Recession To Prove An Illusion (FT)

Japan’s “recession” will soon be exposed as an illusion according to the country’s economy minister, Akira Amari, who on Sunday predicted data revisions this week will turn contraction into growth. Initial figures just three weeks ago showed the economy shrank at an annualised 0.8% in the third quarter, meeting the technical definition of a recession, and prompting gloom about the outlook. But Mr Amari said he expected a revision from 0.8% to zero this week. That would confirm Japan’s economy is not in a downward spiral, despite sluggish consumption and exports, but it would raise fresh questions about the unreliable early growth data. “I expect growth to turn positive from here,” said Mr Amari, an influential figure in the government of prime minister Shinzo Abe. “I think we’re on a path of steady recovery.”

Expectations for an upward revision have grown since the publication of finance ministry data last week showing a third-quarter rise in corporate investment. That was the opposite of the initial gross domestic product data, which showed investment falling. Analysts at Citi in Tokyo expect an upward revision to show growth was flat while Goldman Sachs expects a revision to plus 0.2% for the quarter. Mr Abe wants companies to invest more at home and is planning to encourage them by cutting corporation tax from 32.11% to 29.77% next year. He is also pushing them to raise wages. Mr Abe’s goal is to turn the surge in corporate profits caused by the weak yen into greater demand, in order to sustain economic growth and drive inflation towards the Bank of Japan’s goal of 2%.

One problem is the large number of Japanese companies that make accounting losses and therefore pay no corporation tax anyway. On Sunday, Mr Amari hinted at new measures to push them towards investment. “You have to pay fixed asset taxes regardless of losses,” he said. “I’d like to bring in fixed asset tax relief for companies making new investments, which is something we’ve never done before.”

“..in the U.S., the economy appears relatively healthier only because the rest of the world is so awful.”

• Last Gasps of a Dying Bull Market – And Economy (Hickey)

Deteriorating market breadth and herding into an ever-narrower number of stocks is classic market top behavior. Currently, there are many other warning signs that are also being ignored. The merger mania (prior tops occurred in 2000 and 2007), the stock buyback frenzy (after the record amount of buybacks in 2007 buybacks were less than one-sixth of that level at the bottom in 2009), the year-over-year declines in corporate sales (-4% in Q3 and down every quarter this year) and falling earnings for the entire S&P 500 index, the plunges this year in the high-yield (junk bond) and leveraged loan markets, the topping and rolling over (the unwind) of the massive (record) level of stock margin debt… and I could go on.

It was very lonely as a bear at the tops in 2000 and 2007. I was just a teenager in 1972 so I was not an active investor, but just a few days prior to the early 1973 January top, Barron ‘s featured a story titled: “Not a Bear Among Them.” By “them” Barron ‘s meant institutional investors. I do vividly remember my Dad listening to the stock market wrap-ups on the kitchen radio nearly every night in 1973-74. It seemed to me back then that the stock market only went in one direction — and that was DOWN. The global economy is in disarray. It’s the legacy of the central planners at the central banks. China’s economy has been rapidly slowing despite all sorts of attempts by the government to prop it up (including extreme actions to hold up stocks). China’s economic slowdown has cratered commodity prices to multi-year lows and helped drive oil down to around $40 a barrel.

All the “commodity country” economies (and others) that relied on exports to China are suffering. Brazil is now in a deep recession. Last month Taiwan officially entered recession driven by double-digit declines (for five consecutive months) in exports. Also last month Japan officially reentered recession. Canada and South Korea’s governments recently cut forecasts for economic growth. Despite the lift from an extremely weak euro, Germany’s Federal Statistical Office reported last month that the economy slowed in Q3 due to weak exports and slack corporate investment. The German slowdown led a slide in the overall eurozone economy in Q3 per data from the European Union’s statistics agency. The recent immigration and terrorist problems make matters worse. Tourism will suffer.

Here in the U.S., the economy appears relatively healthier only because the rest of the world is so awful. That has driven the U.S. dollar skyward (DXY index over 100), hurting tourism and multinational companies exporting goods and services overseas. Last month the U.S. Agriculture Department forecast that U.S. farm incomes will plummet 38% this year to $56 billion – the lowest level since 2002.

But someone will have to take the losses… And they will be spectacular.

• As Oil Keeps Falling, Nobody Is Blinking (WSJ)

The standoff between major global energy producers that has created an oil glut is set to continue next year in full force, as much because of the U.S. as of OPEC. American shale drillers have only trimmed their pumping a little, and rising oil flows from the Gulf of Mexico are propping up U.S. production. The overall output of U.S. crude fell just 0.2% in September, the most recent monthly federal data available, and is down less than 3%, to 9.3 million barrels a day, from the peak in April. Some analysts see the potential for U.S. oil output to rise next year, even after Saudi Arabia and OPEC on Friday again declined to reduce their near-record production of crude. With no end in sight for the glut, U.S. oil closed on Friday below $40 a barrel for the second time this month.

The situation has surprised even seasoned oil traders. “It was anticipated that U.S. shale producers, the source of the explosive growth in supply in recent years, would be the first to fold,” Andrew Hall, CEO of commodities hedge fund Astenbeck Capital wrote in a Dec. 1 letter to investors reviewed by The Wall Street Journal. “But this hasn’t happened, at least not at the rate initially expected.” For the past year, U.S. oil companies have been kept afloat by hedges—financial contracts that locked in higher prices for their crude—as well as an infusion of capital from Wall Street in the first half of the year that helped them keep pumping even as oil prices continued to fall. The companies also slashed costs and developed better techniques to produce more crude and natural gas per well.

The opportunity for further productivity gains is waning, experts say, capital markets are closing and hedging contracts for most producers expire this year. These factors have led some analysts to predict that 2016 production could decline as much as 10%. But others predict rising oil output, in part because crude production is growing in the Gulf, where companies spent billions of dollars developing megaprojects that are now starting to produce oil. Just five years after the worst offshore spill in U.S. history shut down drilling there, companies are on track to pump about 10% more crude than they did in 2014. In September, they produced almost 1.7 million barrels a day, according to the latest federal data.

What it always should have been, at the most.

• Gradual Erosion Of The EU Will Leave A Glorified Free-Trade Zone (Münchau)

The main characteristic of today’s EU is an accumulation of crises. This is no accident. It happens because policies are not working. Political leaders such as David Cameron and Viktor Orban, the prime ministers of the UK and Hungary, are even questioning some of the fundamental values on which the EU is built – such as the freedom of movement of people. The EU is in an unstable equilibrium: small disturbances can produce large changes. We have reached this point because the various projects of the union now have a negative economic effect on large parts of the European population. I would no longer hesitate to say, for example, that your average Italian is worse off because of the euro.

The country has had no real growth since it joined the euro, while it had grown at fairly average rates before and I have heard no rational explanation that does not attribute this to the flaws in European monetary arrangements. This is not just a problem for the eurozone. As Simon Tilford of the Centre for European Reform has argued, the worst-paid Britons have been made worse off, too. Their real incomes have fallen, and an inadequate supply of housing has pushed up accommodation costs. Both trends have been exacerbated by a net inflow of workers from abroad, even though net immigration into the UK has not been extreme by European standards.

No individual is in a position to make an objective assessment of the effect of immigration on their own income and wealth, but it is clearly not irrational to suspect that an influx of net immigration and one’s own falling real wages to be somehow related. The Danes, who last week voted against ending the country’s opt-out from EU home and justice affairs, also acted rationally. Why opt into a common justice system that still cannot produce adequate levels of co-ordination between police forces in the fight against terrorism? Home and justice affairs are public goods. Why should a rational voter prefer a dysfunctional public goods provider? The same holds for Finland. The country has been locked in a four-year long recession.

There is now a parliamentary motion in the works that may end up in a referendum on whether to quit the eurozone. I do not think that Finland will take that step, for political reasons. But, at the same time, I have not the slightest doubt that Finnish growth and employment would recover if it did. A currency devaluation would be a much more powerful tool than the policy that the Finnish government is trying to implement right now: improving competitiveness through wage cuts.

Overextended miners and producers face a lot of hurt.

• China’s Iron Ore, Steel Demand To Fall Further In 2016 (AFR)

China’s steel production will not recover next year, according to its official government forecaster, which believes demand for iron ore will decline by 4.2%. The report released on Monday by the China Metallurgical Industry Planning and Research Institute predicts steel production will fall 3.1% to 781 million tonnes in 2016, as economic growth continues to moderate. The forecast provides another round of bad news for Australian iron ore miners, which are already battling record low prices of around $US40 a tonne. China’s steel industry reached a long predicted turning point in 2015, as the economy slowed and over-supply in the property sector crimped demand for everything from machinery, to home appliances and cars.

This will see China’s steel consumption post its first annual decline since 1995, falling 4.8% this year, according to the government forecaster. The declines are set to continue next year with consumption falling by 3% to 648 million tonnes. “With a slowdown in steel for construction, machinery and vehicles we saw consumption decline for the first time in 20 years,” said the institute in its annual outlook report. The declines this year have been faster than the institute predicted. Monday’s downgrade to 2015 production was the third this year. It believes iron ore demand, which fell 0.4% in 2015, will decline by 4.2% in 2016 to around 1.07 billion tonnes.

Everyday occurence.

• China’s Biggest Broker CITIC Can’t Locate Two Of Its Top Execs (Reuters)

CITIC Securities is not able to contact two of its top executives, China’s biggest brokerage said on Sunday, following media reports that they had been asked by authorities to assist in an investigation. CITIC said in a Hong Kong exchange filing it could not reach two of its most senior investment bankers, Jun Chen and Jianlin Yan. Chinese business publication Caixin said on Friday the pair had been detained, although it was not clear whether they were subjects of an investigation or merely being asked to assist with it. CITIC Securities is among Chinese brokerages facing investigation by the country’s securities regulator for suspected rule breaches. Some employees of CITIC Securities have returned to work after assisting with unspecified government investigations, the company said in the filing.

Chen is head of CITIC’s investment banking division, according to the company website, while Yan runs investment banking at the company’s overseas unit CITIC Securities International. Several high-profile brokerage executives have been investigated in mainland China as authorities looked for answers to explain a slump of more than 40% in stocks between June and August that they blamed in part on “malicious short-selling”. Executives at CITIC Securities have been investigated for insider trading and leaking information. Last month, CITIC said it was choosing a new chairman and incumbent Wang Dongming could not take part because of his age. However, the Financial Times reported that Wang had been forced out because of the scandal, citing people familiar with the matter.

Yet another way to spell debt deflation.

• Falling Cattle Prices Put The Hurt On Kansas Ranchers, Feedlots (WE)

Tumbling cattle prices have left the mood of the state’s ranchers a lot more somber this year. The Kansas Livestock Association held its annual meeting at the Hyatt Regency Wichita this week and, on Friday, heard from Randy Blach, president of market analyst CattleFax. Blach’s message is that he knows 2015 has been a rough ride for ranchers as prices have plunged from their record highs a year ago. The reasons have been long in coming. Ranchers and feeders enjoyed a terrific year in 2013 and 2014 as beef and cattle prices skyrocketed. Herds had shrunk because of the drought, and prices hit record highs. High prices and the return of the rains caused ranchers to hold back large numbers of heifers to rebuild herds. Well, now the herds are largely rebuilt. And more steers are being sent to slaughter.

The effect has been dramatic in the second half of the year, Blach said, citing the slaughter price for cattle. “Last year at this time it was $174 a hundred (pounds),” he said. “Now, it’s $125. That’s a $50-a-hundred loss in a very short period of time.” In addition, the export market for beef has dropped significantly as the global economy, particularly in China, has slowed, and the dollar has risen 15 to 20% against foreign currencies. This year has already punished some of the middlemen in the chain. Kansas feedlots have seen steep losses in the second half. For the consumer, high prices will start to fall in grocery stores by mid-2016, Blach said. Shoppers will start seeing more quantity, variety and price specials. “It will start being pretty visible,” he said. And prices will remain down through the end of the decade, he said, rebuilding demand for beef.

“..a prison where modern day Black men labor in the sun while guards patrol from horseback just as they did a century and a half ago.”

• Prison Labor In USA Borders On Slavery (AHT)

When slavery was abolished in the United States in 1865, the focus on free labor shifted from human ownership, to forced prison labor. This practice has been exploited for a very long time and the companies that prosper from it, the list of which includes American corporate giants like Wal Mart, McDonald’s, Victoria’s Secret and a long list of others, are generating huge revenues by people who are reportedly paid 2 cents to $1.15 per hour. According to the USUncut.com article, “These 7 Household Names Make a Killing Off of the Prison-Industrial Complex”, the list of companies benefiting from this questionable type of workforce is a real eye opener. The article reveals how prisoners work an average of 8 hours a day, yet they are paid roughly six times less than the federal minimum wage. Prison labor is an even cheaper alternative to outsourcing.

“Instead of sending labor over to China or Bangladesh, manufacturers have chosen to forcibly employ up to 2.4 million incarcerated people in the United States. Chances are high that if a product you’re holding says it is ‘American Made,’ it was made in an American prison.” It is also noteworthy that items that say “Made in China” are sometimes manufactured in Chinese prisons. According to the NPR article, “Made In China – But Was It Made In A Prison?”, there are few limits to the use of prison labor in Communist China, “Prisoners in China’s re-education-through-labor camps make everything from electronics to shoes, which find their way into U.S. homes.” This is an issue that potentially affects every American family, but squarely impacts the African-American community, where on any given day, more Black males are serving prison time than attending college.

The practice hearkens back to the brutal days of slavery in America’s deep South, in countless ways. An article published by The Atlantic this year, “American Slavery, Reinvented,” examines the Louisiana State Penitentiary called Angola, which was converted from a southern plantation into a prison, where modern day Black men labor in the sun while guards patrol from horseback just as they did a century and a half ago. The article explains that the prisoners who do not perform the labor as expected, will be severely punished, “…once cleared by the prison doctor, (the prisoners) can be forced to work under threat of punishment as severe as solitary confinement. Legally, this labor may be totally uncompensated; more typically inmates are paid meagerly—as little as two cents per hour—for their full-time work in the fields, manufacturing warehouses, or kitchens. How is this legal? Didn’t the Thirteenth Amendment abolish all forms of slavery and involuntary servitude in this country?”

“..964,574 refugees had arrived in Germany by the end of November..”

• German States Slam New Refugee Boss For ‘Slow Work’ (DPA)

Ministers rushed to defend the new head of the national refugee authority from attacks by leaders of Germany’s federal states, saying he had only been in position a few weeks and needed time to make a difference. Rhineland-Palatinate minister-president Malu Dreyer said on the weekend that the Federal Office for Migration and Refugees (BAMF) was working too slowly and shouldn’t be taking weekends off during the crisis. On Monday, the Passauer Neue Presse (PNP) reported that 964,574 refugees had arrived in Germany by the end of November, based on figures the Interior Ministry gave in response to a parliamentary question. That’s more than four times as many as arrived in 2014, when the total for the whole year was 238,676. The BAMF still faces a backlog of 355,914 cases, the PNP reported.

But Chancellor Angela Merkel’s chief of staff Peter Altmaier – who has overall responsibility for refugees – leapt to the defence of BAMF boss Frank-Jürgen Weise on Sunday. Altmaier told broadcaster ARD on Sunday evening that Weise “has only been in office for a few weeks, and an unbelievable amount has been done in this time”. Altmaier said that in spite of massively increased numbers of asylum applications, the BAMF had managed to cut down the time it takes to make decisions. “That’s why I don’t think it’s productive when whoever it is thinks they can make political declarations off the backs of the workers” at the BAMF, he said. Labour Minister Andrea Nahles told broadcaster ZDF that things would really pick up at the BAMF after the new year, when 4,000 new officials would join the office. “Then there will be a big step forward,” she said.

“Allies” fighting one another.

• US Alliance-Supported Groups In Syria Turn Guns On Each Other (Reuters)

Groups that have received support from the United States or its allies have turned their guns on each other in a northern corner of Syria, highlighting the difficulties of mobilizing forces on the ground against Islamic State. As they fought among themselves before reaching a tenuous ceasefire on Thursday, Islamic State meanwhile edged closer to the town of Azaz that was the focal point of the clashes near the border with Turkey. Combatants on one side are part of a new U.S.-backed alliance that includes a powerful Kurdish militia, and to which Washington recently sent military aid to fight Islamic State. Their opponents in the flare-up include rebels who are widely seen as backed by Turkey and who have also received support in a U.S.-backed aid program.

Despite the ceasefire, reached after at least a week of fighting in which neither side appeared to have made big gains, trust remains low: each side blamed the other for the start of fighting and said it expected to be attacked again. A monitoring group reported there had still been some firing. The fighting is likely to increase concern in Turkey about growing Kurdish sway near its border. It also poses a new challenge for the U.S.-led coalition which, after more than a year of bombing Islamic State in Syria, is trying to draw on Syrian groups to fight on the ground but finding many have little more in common than a mutual enemy. Azaz controls access to the city of Aleppo from the nearby border with Turkey. It also lies in an area coveted by Islamic State, which advanced to within 10 km of the town on Tuesday and took another nearby village later in the week.

The fighting pitched factions of the Free Syrian Army, supported by Turkey and known collectively as the Levant Front, against the YPG and Jaysh al-Thuwwar – both part of the Democratic Forces of Syria alliance backed by Washington. The Syrian Observatory for Human Rights, a Britain-based group that monitors the conflict in Syria, said Levant Front was supported in the fighting by the Ahrar al-Sham Islamist group and the al Qaeda-linked Nusra Front. Observatory director Rami Abdulrahman said the rebels had received “new support, which is coming in continuously” from Turkey, a U.S. ally in the fight against Islamic State. “Turkish groups against U.S. groups – it’s odd,” he said.

Russia will act in careful ways. They’re not going to send troops into battle with Turkey.

• Iraq Could Ask Russia for Help After ‘Invasion’ by Turkish Forces (Sputnik)

The head of Iraq’s parliamentary committee on security and defense, Hakim al-Zamili, in an interview with Al-Araby Al-Jadeed, said that Baghdad could turn to Moscow for help after Turkey had allegedly breached Iraq’s sovereignty. Numerous reports suggest that on Friday Turkey sent approximately 130 soldiers to norther Iraq. Turkish forces, deployed near the city of Mosul, are allegedly tasked with training Peshmerga, which has been involved in the fight against Daesh, also known as ISIL. On Saturday, Baghdad described the move as “a serious violation of Iraqi sovereignty,” since it had not been authorized by Iraqi authorities.

“We may soon ask Russia for direct military intervention in Iraq in response to the Turkish invasion and the violation of Iraqi sovereignty,” Iraqi lawmaker al-Zamili said. Earlier, Hakim al-Zamili threatened Turkey with a military operation if the Turkish soldiers do not leave Iraq immediately The parliamentarian reiterated that Turkey sent troops into Iraqi territory without notifying the government. Iraqi Prime Minister Haider Abadi urged Ankara to immediately pull out its forces, including tanks and artillery, from the Nineveh province. Iraqi President Fuad Masum referred to the incident as a violation of international law and urged Ankara to refrain from similar activities in the future, al-Sumaria TV Channel reported.

Debt Rattle September 14 2015

Sep 142015

September 14, 2015 Posted by Raúl Ilargi Meijer at 9:21 am Finance Tagged with: BIS, border control, China, EM, Fed, Germany, Greece, Highwayman, rate hike, stocks 1 Response »

DPC Wall Street and Trinity Church, New York 1903

• China Stocks Decline Most in Three Weeks (Bloomberg)

• China’s Not The Only One Selling FX Reserves (CNBC)

• BIS Fears Emerging Market Maelstrom As Fed Tightens (AEP)

• BIS Sees Central Banks Following Fed’s Lead (WSJ)

• Fischer’s 2014 Why-Wait Wisdom Points to Fed Liftoff This Week (Bloomberg)

• Why Asia Shouldn’t Fear the Fed (Pesek)

• Eurogroup President: Greece Can Choose to be Either North or South Korea (GR)

• Germany Reinstates Controls At Austrian Border (Guardian)

• Germany Border Crackdown Deals Blow To Schengen System (Guardian)

• German Border Controls Cause Traffic Jams (AP)

• Hungary Empties Migrant Camp as Military Arrives (Bloomberg)

• On German Moral Leadership (Yanis Varoufakis)

• Equity Markets And Credit Contraction (Macleod)

• Write-Downs Abound for Oil Producers (WSJ)

• Nothing Appears To Be Breaking (Golem XIV)

• No Pay Rise? Blame The Baby Boomers’ Gilded Pension Pots (Guardian)

• The Highwayman (Jeff Thomas)

Shenzhen down 6.7%.

• China Stocks Decline Most in Three Weeks (Bloomberg)

China’s stocks slumped the most in three weeks as data over the weekend added to concern the economic slowdown is deepening and traders gauged the level of state support for equities. The Shanghai Composite Index slid 2.7% to 3,114.80 at the close, paring earlier declines of 4.7%. About 12 stocks fell for each that rose on the gauge, led by technology and consumer companies. The Hang Seng China Enterprises Index trimmed a 1.4% gain to 0.1% at 3:03 p.m. in Hong Kong. Industrial output missed economists’ forecasts, while investment in the first eight months increased at the slowest pace since 2000. The Shanghai Composite has tumbled 40% from its June high to erase almost $5 trillion in value on mainland bourses as leveraged investors fled amid concerns valuations weren’t justified given dimming growth outlook.

China’s government spent 1.5 trillion yuan ($246 billion) trying to shore up its stock market since the rout began three months ago through August, according to Goldman Sachs. “Investors continue to be nervous and are trying to avoid being caught in another correction,” said Gerry Alfonso at Shenwan Hongyuan in Shanghai. Government funds appear to be “staying out” of equities to try to discourage investors from relying on interventions, he said. Industrial output rose 6.1% in August from a year earlier, missing the 6.5% estimate. Fixed asset investment excluding rural households climbed 10.9% in the first eight months versus the 11.2% median projection of economists surveyed by Bloomberg. Five interest-rate cuts since November and plans to boost government spending have yet to revive an economy mired in a property slump, overcapacity and factory deflation.

We never presumed as much.

• China’s Not The Only One Selling FX Reserves (CNBC)

Look out world—China’s not the only central bank in town selling its currency reserves to cope with a tumultuous global economy. With crude prices having shed more than half their value over the past year, oil producing economies are feeling the sting of cheaper oil. More importantly, Saudi Arabia—OPEC’s largest member and the world’s top oil producer—bears watching as oil stays below $50 and a global glut depresses oil prices, analysts say. Even before China surprised markets by announcing a record drawdown of its foreign currency denominated assets, Saudi Arabia had already begun selling its reserves to plug a hole in its budget and support its flagging currency, the riyal. In February and March, the world’s largest oil exporter saw net foreign assets drop by more than $30 billion, the biggest two- month drop on record.

These asset sales are important because Saudi holds one of the world’s largest reserve caches—and such sales put downward pressure on the U.S. dollar and upward pressure on Treasury bond rates. “The drop in oil prices, more so than volatility per se, have contributed to a decline in oil exporters’ reserves globally,” said Rachel Ziemba at Roubini Global Economics, including members of the Gulf Cooperation Council (GCC) and other Middle East economies. “Across the 11 oil exporters I track, reserves fell by over $200 billion over the last year,” she added, even adjusting for changes in other FX holdings such as euros. According to Ziemba, Libya, Algeria and Iraq are also likely to eventually sell some FX assets, as are Bahrain and Oman. Wealthier Gulf nations have sizable FX assets, thus allowing them more time.

“France has suffered the worst deterioration of any major country in the developed world, with total non-financial debt levels spiralling upwards by 75 percentage points to 291pc, overtaking Britain at 269pc for the first time in decades. ”

• BIS Fears Emerging Market Maelstrom As Fed Tightens (AEP)

Debt ratios have reached extreme levels across all major regions of the global economy, leaving the financial system acutely vulnerable to monetary tightening by the US Federal Reserve, the world’s top financial watchdog has warned. The Bank for International Settlements said the wild market ructions of recent weeks and capital outflows from China are warning signs that the massive build-up in credit is coming back to haunt, compounded by worries that policymakers may be struggling to control events. “We are not seeing isolated tremors, but the release of pressure that has gradually accumulated over the years along major fault lines,” said Claudio Borio, the bank’s chief economist. The Swiss-based BIS said total debt ratios are now significantly higher than they were at the peak of the last credit cycle in 2007, just before the onset of global financial crisis.

Combined public and private debt has jumped by 36 percentage points since then to 265pc of GDP in the the developed economies. This time emerging markets have been drawn into the credit spree as well. Total debt has spiked 50 points to 167pc, and even higher to 235pc in China, a pace of credit growth that has almost always preceded major financial crises in the past. Adding to the toxic mix, off-shore borrowing in US dollars has reached a record $9.6 trillion, chiefly due to leakage effects of zero interest rates and quantitative easing (QE) in the US. This has set the stage for a worldwide dollar squeeze as the Fed reverses course and starts to drain dollar liquidity from global markets. Dollar loans to emerging markets (EM) have doubled since the Lehman crisis to $3 trillion, and much of it has been borrowed at abnormally low real interest rates of 1pc. Roughly 80pc of the dollar debt in China is on short-term maturities.

These countries are now being forced to repay money, though they do not yet face the sort of ‘sudden stop’ in funding that typically leads to a violent crisis. The BIS said cross-border loans fell by $52bn in the first quarter, chiefly due to deleveraging by Chinese companies. It estimated that capital outflows from China reached $109bn in the first quarter, a foretaste of what may have happened in August after the dollar-peg was broken. China and the emerging economies were able to crank up credit after the Lehman crisis and act as a shock absorber, but there is no region left in the world with much scope for stimulus if anything goes wrong now. The venerable BIS – the so-called ‘bank of central bankers’ – was the only global body to warn repeatedly and loudly before the Lehman crisis that the system was becoming dangerously unstable.

It has acquired a magisterial authority, frequently clashing with the IMF and the big central banks over the wisdom of super-easy money. Mr Borio said investors have come to count on central banks to keep the game going but engenders moral hazard and is ultimately wishful thinking. “Financial markets have worryingly come to depend on central banks’ every word and deed,” he said. A disturbing feature of the latest scare over China is a “shift in perceptions in the power of policy”, a polite way of saying that investors have suddenly begun to question whether the emperor is wearing any clothes after all following the botched intervention in the Shanghai stock market and the severing of the dollar exchange peg in August.

The BIS ‘house-view’ is that the global authorities may have put off the day of reckoning by holding interest rates below their ‘natural’ or Wicksellian rate with each successive cycle but this merely stores up greater imbalances, drawing down prosperity from the future and stretching the elastic further until it snaps back. At some point, you have to take your bitter medicine.

Will they have any choice?

• BIS Sees Central Banks Following Fed’s Lead (WSJ)

When officials at the U.S. Federal Reserve decide to raise interest rates, they will likely be setting in train a sequence of events that will lead to higher borrowing costs around the world, according to research published Sunday by the Bank for International Settlements. Economists at the consortium of central banks looked at the relationship between the short-term interest rates set by the Fed and policy rates in 22 developing economies, as well as eight smaller developed countries since 2000. The economies studied by the BIS economists were chosen partly because they are “well integrated in the global financial system,” and therefore would be more likely to be affected by Fed policy than a broader sample. They found a very close correlation between changes in policy rates, up to 63%.

Using statistical techniques, they then established that much of that had nothing to do with the fact that central banks were facing similar circumstances, that is to say, either a strengthening or weakening of the global economy. “We find that interest rates in the U.S. affect interest rates elsewhere beyond what similarities in business cycles or global risk factors would justify,” they wrote. They speculated that central banks in the countries surveyed change their policies to adjust to Fed moves for two possible reasons. In the years following the financial crisis, the BIS economists hypothesize that other central banks may have eased policy even when their domestic economies didn’t need additional stimulus to avoid an appreciation of the national currency, which could have damaged exporters.

Alternatively, they may have cut their own interest rates to avoid large inflows of short-term capital searching for higher returns than those available in the U.S., which could have threatened financial stability. “In both cases, monetary authorities would aim to avoid large interest rate differentials against the rates prevailing in the U.S.,” the economists wrote. While the Fed was easing policy during much of the period covered by the study, the BIS economists concluded there is evidence of similar “spillovers” when the Fed tightens policy, although it cautioned the scale of the response could be smaller or larger when the Fed does start to raise its short-term interest rate. “It might well be that spillovers are not fully symmetrical: for instance, policy makers might tolerate exchange rate depreciations or short-term capital outflows better than appreciations and inflows,” they wrote. “Or they might be even more sensitive about them.”

“If you wait that long, you will be waiting too long.”

• Fischer’s 2014 Why-Wait Wisdom Points to Fed Liftoff This Week (Bloomberg)

Stanley Fischer offered a word to the wise in 2014 that resonates today as he and other Federal Reserve officials face their toughest decision in years – the benefits of waiting can be overrated. Slowing economic growth abroad and volatile stock prices at home are prompting some U.S. central bankers to rethink whether now is the best time for the first interest-rate increase since 2006. One option, says former Fed Vice Chairman Donald Kohn, would be to put off a move at this week’s meeting to get a clearer view of the outlook. Investors seem to agree, putting a 70% chance of no move on Sept. 17. Yet Fischer cautioned in a speech just three months before taking over as the Fed’s No. 2 official in June 2014 that waiting carries its own difficulties.

In his view, the situation is always unclear and monetary policy takes time to affect the economy. “Don’t overestimate the benefits of waiting for the situation to clarify,” he said. Harking back to his time as head of Israel’s central bank from 2005 to 2013, Fischer recalled telling his advisers he had put off a “very difficult” decision on rates until the following month when the situation would be less uncertain. His then deputy, Meir Sokoler, commented, “It is never clear next time; it is just unclear in a different way.” Fischer, whom Fed Chair Janet Yellen has said she relies on in mapping out policy, made a similar point much more recently. “There is always uncertainty and we just have to recognize it,” he told CNBC television on Aug. 28. Asked if the Fed should delay an increase until it had an “unimpeachable case” that a move was warranted, Fischer replied, “If you wait that long, you will be waiting too long.”.

One of many silly theories out there. One thing’s clear: nobody knows. But they’re afraid to say it out loud.

• Why Asia Shouldn’t Fear the Fed (Pesek)

In 2008, Asian economies had good reason to race to decouple from the struggling West. The collapse of Lehman Brothers and subsequent contagion sent export-dependent countries in search of a more reliable customer. Not surprisingly, they latched onto China. That switch now looks like a bad bet. China’s economy is sputtering, its stocks are nose-diving and officials in Beijing appear ill-equipped to maintain the world’s second-biggest economy as a stable, dependable trading partner. There’s an obvious contradiction in developing nations relying so overwhelmingly on another emerging economy, and a highly unbalanced one at that. No doubt many in the region are now wishing they could decouple from China, too.

Asia may be able to do just that soon, argues Bloomberg Industries economist Tamara Henderson, thanks to the approach of the Federal Reserve’s first tightening cycle in a decade. “Just as Asia decoupled from the U.S. in the wake of the global financial crisis, benefiting from China’s extraordinary stimulus at the time, Fed hikes may allow Asia to decouple from China,” she writes in a recent report. However contrarian, the idea that the dreaded taper may be good for Asia has merit. It’s hard to remember a moment since 2008 when markets were more panicked and central bankers so on edge. The conventional wisdom is that a Fed rate hike will send shockwaves around the world, sucking money back to the U.S. and driving fragile nations to the IMF for help. Such fears, however, lack perspective.

For all the risks, Asia’s fundamentals are comparatively sound. Financial systems are stronger, transparency greater and currency reserve hoards big enough to avoid another 1997-like meltdown. At the same time, higher U.S. rates are an indication that the world’s biggest economy – and customer – is humming again. “The start of a rate hike cycle sends an important signal: it is time to be confident about the world’s largest economy,” Henderson argues. “The Fed appreciates this and global investors will eventually, too.”

The blind arrogance of unelected power threatening entire countries.

• Eurogroup President: Greece Can Choose to be Either North or South Korea (GR)

On Friday, during an interview with a Dutch TV network ,Eurogroup President Jeroen Dijsselbloem presented the choice he believes Greece must make. “Ultimately, it is up to Greece whether it will become North or South Korea: absolute poverty or one of the richest countries in the world,” he said. The Eurogroup president spoke on the corrupt and inefficient Greek governments that have ruled for decades and noted that it will take a different and honest government for Greece to recover. Dijsselbloem also recognized that the implementation of the third bailout’s agreed reforms will be very tough.

Dijsselbloem also issued a warning to all the sides involved in the Greek bailout. Prior to Saturday’s unofficial Eurogroup meeting on Greece, he noted that the work of the third Greek bailout must continue. Greek politics are currently captivated by the September 20 elections. The Eurogroup President noted that both the international creditors and Greece must move forward with the necessary actions, despite the elections. Creditors should prepare the evaluation of the bailout, which according to reports will take place in October, while Greece must continue to prepare for the implementation of the program.

Bye bye Mama Merkel. The troubles start now.

• Germany Reinstates Controls At Austrian Border (Guardian)

Germany introduced border controls on Sunday, and dramatically halted all train traffic with Austria, after the country’s regions said they could no longer cope with the overwhelming number of refugees entering the country. Interior minister, Thomas de Maizière, announced the measures after German officials said record numbers of refugees, most of them from Syria, had stretched the system to breaking point. “This step has become necessary,” he told a press conference in Berlin, adding it would cause disruption. Asylum seekers must understand “they cannot chose the states where they are seeking protection,” he told reporters.

All trains between Austria and Bavaria, the principal conduit through which 450,000 refugees have arrived in Germany this year, ceased at 5pm Berlin time. Only EU citizens and others with valid documents would be allowed to pass through Germany’s borders, de Maizière said. The decision means that Germany has effectively exited temporarily from the Schengen system. It is likely to lead to chaotic scenes on the Austrian-German border, as tens of thousands of refugees try to enter Germany by any means possible and set up camp next to it. German police began patrolling road crossing points with Austria at 5.30pm on Sunday. These checks may be rolled out to the borders with Poland and the Czech Republic.

Chancellor Angela Merkel agreed the details in a conference call on Saturday with her Social Democrat coalition partners. The Czech Republic said separately that it would boost controls on its border with Austria. The emergency measures are designed to give respite to Germany’s federal states who are responsible for looking after refugees. There is also discussion inside the government about sending troops to the road and rail borders with Austria to reinforce security, Der Spiegel reported.

It will not recover in its present shape.

• Germany Border Crackdown Deals Blow To Schengen System (Guardian)

Germany’s decision to re-establish national border controls on its southern frontier with Austria deals a telling blow to two decades of open travel in the 26-nation bloc known as the Schengen area. The abrupt move to suspend Schengen arrangements along the 500-mile border with Austria will shock the rest of the EU and may spur it towards a more coherent strategy to deal with its migration crisis. Yet there will be little sympathy for Berlin from Hungary, Italy or Greece, which are bearing the brunt of the mass arrivals of people from Syria, Iraq, Eritrea and Afghanistan. The German decision came as EU interior ministers prepared to meet for a crucial session on the issue. There are deep splits over Brussels’ campaign, backed by Berlin, to establish a new compulsory quota system to distribute asylum seekers across the EU on a more equitable basis.

Thomas de Maizière, the German interior minister, announced that while Austria was the focus of the new border controls, all of Germany’s borders would be affected. As the EU’s biggest country straddling the union’s geographical centre, Germany is the lynchpin of the Schengen system. It borders nine countries. Without Germany’s participation, Schengen faces collapse. It was the second unilateral decision by the German government in a fortnight. Previously, without telling Brussels, Budapest or Vienna in advance, Berlin announced that given the concentration of refugees in Hungary it was waiving European rules known as the Dublin regulations, which stipulate that people must be registered and lodge their asylum applications in the first EU country they enter.

The decision prompted a sudden surge into German of Syrians looking for safe haven. It elicited huge praise for Germany’s humane approach, but ultimately it has proven unmanageable. Sunday’s decision to suspend the open borders reverses that move. It will create a backlog of people in Austria and Hungary, with the latter also introducing a stiff new closed-borders regime, effectively criminalising most new arrivals as illegal migrants. Reports from a camp on the Hungarian-Serbian border at the weekend described a military operation, with helicopters constantly buzzing overhead and police and dogs patrolling a razor-wire border fence. A lack of running water and lavatories in the camp made for wretched conditions.

It’ll get worst, first, in Hungary. But let’s hope the media will be on all of it. Don’t allow the cops and soldiers and politicians to hide.

• German Border Controls Cause Traffic Jams (AP)

Controls on Germany’s border with Austria have led to traffic jams at crossings. Authorities in Bavaria said there was a roughly 3-kilometer (2-mile) tailback Monday on the A8 highway at Bad Reichenhall, near the Austrian city of Salzburg, news agency dpa reported. Regional broadcaster Bayerischer Rundfunk reported a 6-kilometer (nearly 4-mile) queue on the A3 highway near Passau. Germany introduced temporary border controls on Sunday evening to slow the influx of immigrants arriving from Hungary via Austria. Train services from Austria to Germany resumed Monday morning after being halted Sunday. The section between Salzburg and the German border town of Freilassing initially remained closed because of reports of people on the track, but police said they found no one.

European Union interior ministers meet for emergency migration talks on Monday a day Germany reintroduced controls at its border with Austria to stem the continuing flow of refugees. The ministers will try to narrow a yawning divide over how to share responsibility for thousands of migrants arriving daily and ease the burden on frontline states Italy, Greece and Hungary. Their talks in Brussels will focus on distributing 160,000 refugees over the next two years. The arrival of around 500,000 migrants so far this year has taken the EU by surprise and it has responded slowly. The ministers will confirm the distribution of an initial 40,000 refugees, but this scheme was conceived in May and some nations still do not plan to do their full share before year’s end.

“The country has also made illegal border entry a crime punishable by prison terms.”

• Hungary Empties Migrant Camp as Military Arrives (Bloomberg)

Hungarian police cleared a major migrant camp by the Serb border, transporting families to an unknown location on buses and making way for soldiers who arrived at the site, Index news website reported, citing its correspondent on the scene. Hungary’s government is deploying soldiers by the Serbian border starting this week to reinforce a razor-wire fence meant to keep out the tens of thousands of undocumented migrants who stream into the EU each week. The country has also made illegal border entry a crime punishable by prison terms.

Idle hopes.

• On German Moral Leadership (Yanis Varoufakis)

Kant’s practical Reason demands that we should undertake those actions which, when generalised, yield coherent outcomes. For example, lying cannot be a rational choice because, if universalised, if everyone were to lie all the time, trust in what others say would disappear and language would lose its coherence. True enough, many people refrain from lying because of the fear that they will be found out. But Kant does not consider such instrumental reasons for not lying as fully rational. In his mindset, the rational and the moral merge when we develop a capacity to act on the so-called categorical imperative: of acting in a universalisable manner independently of the consequences. For the hell of it, in plainer language.

Taking refugees in is such a universalisable act. You do not take them in because of what you expect to gain. The fact that you may end up with great gains is irrelevant. The warm inner glow of having done the ‘right’ thing, the boost to aggregate demand, the effect on productivity – all these are great repercussions of one’s Kantian rationality. They are not, however, the motivation. One’s rational acts, according to Kant, are not to be determined by expected gain, that instrumental ‘utility’ that depends on what others do and on a number of contingencies. There is no strategy here. Just the application of the deontological reasoning which requires that we should act upon ‘universalisable’ rules.

There is, of course, no way that one can prove empirically that German solidarity to the refugees was of the Kantian type, and not some instrumental attempt to feel better about themselves, to show up other Europeans, to improve the country’s demographics. Be that as it may, I do not buy these cynical, instrumental accounts. Having observed so many Germans perform countless acts of kindness toward refugees shunned by other Europeans, I am convinced that something akin to Kantian reasoning is at work. I say “something akin to Kantian reasoning” because full Kantian behaviour is neither observed in Germany nor necessarily desirable. There are times when good people need to lie (for instance when skinheads interrogate you on the whereabouts of a black person they are chasing) and there are several realms where German attitudes are far from consistent with Kantian thinking.

Indeed, this summer there was a second occasion when Europe harmed its integrity and damaged its soul: It happened on 12th and 13th July when the leader of a small European country, Greece, was threatened with expulsion from the Eurozone unless he accepted an economic reform program that no one truly believes (not even Chancellor Merkel) can alleviate my country’s long standing economic collapse, and the hopelessness that goes along with it. On that occasion no universalisable principle was in play, the result being that a proud nation was forced to surrender to an illogical economic program for which everyone in Europe, including Germany, will pay a price.

This is not the place to recount the vagaries of Greece’s never-ending crisis. And nor is there a need since its underlying cause has nothing to do with Greece: the real reason Greece has been imploding, while Berlin and the troika are insisting on a ‘reform’ program that pushes the country deeper into a black hole and keeps it hopelessly unreformed, is that the German government has not yet decided what it wants to do with the Eurozone.

“The bald fact that equity markets have now lost upside momentum and appear to be at risk of a self-feeding collapse will be viewed by central bankers with increasing alarm.”

• Equity Markets And Credit Contraction (Macleod)

There is one class of money that is constantly being created and destroyed, and that is bank credit. Bank credit is created when a bank lends money to a customer; it becomes money because the customer draws down this credit to deposit in other bank accounts and to pay creditors. It is not money that is created by a central bank; it is money that is created out of thin air by commercial banks to lend. Its contraction comes about when it is repaid, or if a customer defaults. The recent sharp fall in equity markets is leading to two levels of contraction of bank credit. Brokers’ loans to speculating investors are being unwound from record levels, notably in China and also in the US where in July they hit an all-time record of $487bn.

Then there is the secondary effect, likely to kick in if there are further falls in equity prices, when equities held as loan collateral are liquidated. This is when falling stock prices can be so destructive of bank credit, and as the US economist Irving Fisher warned in 1933, a wider cycle of collateral liquidation can ensue leading to economic depression. Fear of an escalating debt liquidation cycle is always a major concern for central bankers, so ensuring the secondary effect described above does not occur is their ultimate priority. Macroeconomic policy is centred on ensuring that bank credit grows continually, so since the Lehman crisis any tendency for bank credit to contract has been offset by central banks creating money.

The bald fact that equity markets have now lost upside momentum and appear to be at risk of a self-feeding collapse will be viewed by central bankers with increasing alarm. For this reason many investors believe that a bear market will never be permitted, and the combined weight of central banks, exchange stabilisation funds and sovereign wealth funds will be investing to support the markets. There is some evidence that this is the direction of travel for state intervention anyway, so state-sponsored buying into equity markets is a logical next step.

The risk to this line of reasoning is if the authorities are not yet prepared to intervene in this way. When the S&P 500 Index halved in the aftermath of the last financial crisis, the subsequent recovery appeared to occur without significant US government buying of equities. Instead the US government might continue to rely on more conventional monetary remedies: more quantitative easing, reversing current attempts to raise interest rates, and perhaps attempting to enforce negative interest rates as well. If, in the future, state jawboning accompanying these measures does not stop the bear market from running its course, the next round of quantitative easing will have to be far larger than anything seen so far.

Kept barely ailve only by the grace of an accounting time-lag.

• Write-Downs Abound for Oil Producers (WSJ)

U.S. oil-and-gas producers have written down the value of their drilling fields by more in 2015 than any full year in history, as the rout in commodity prices makes properties across the country not worth drilling. A group of 66 oil and gas producers have taken impairment charges totaling $59.8 billion through June, according to a tally by energy consultancy IHS Herold Inc. That tops the previous full-year record of $48.5 billion set in 2008, IHS says. In 2008, oil prices plummeted from above $140 a barrel at midyear to below $37 by year-end as the financial system’s near collapse sent the global economy into recession. The drop was steep but relatively short-lived as growing demand from China and other emerging economies was expected to suck up global supplies.

Now, with China’s economy sputtering and U.S. production at its highest level in decades, prices aren’t expected to return to the $100 level of recent years any time soon. Write-downs, or impairments, are taken by companies when the value of assets falls below the value on its books. For energy fields, that can mean that the price of leasing land, drilling and installing pipelines exceed the worth of whatever oil and gas is unearthed. Anadarko, Chesapeake. and Devon Energy are among the large energy companies that have taken multibillion-dollar impairments this year, while dozens of smaller companies have made proportionally large write-downs.

Writing down assets can shrink the pool of oil-and-gas reserves that are used as collateral for loans. Because many oil-and-gas producers spend more than they make selling commodities, abundant credit is crucial to them being able to keep going. These companies’ shares are often valued on forecast production growth more than current profitability. This year’s impairment tally is certain to grow, even if oil prices buck forecasts and move higher. U.S. securities regulators require exploration-and-production companies to value drilling properties and reserves according to energy prices over the previous 12 months.

That means the formulas used to calculate their value at the end of June still included prices from the second half of last year, before oil prices had made much of their descent to their current price around $45 a barrel. “There’s a disconnect between the 12-month average and reality,” said IHS analyst Paul O’Donnell. “There will be pricing impairments for the next two quarters, at least.” Prices used to determine asset values at the end of June were $71.50 a barrel for oil and $3.40 a million British thermal units for natural gas, IHS says. That compares with U.S. crude prices of $59.47 a barrel and $2.83 for natural gas on June 30. The consultancy expects the prices used at year-end to determine asset value will be around $50.50 and $2.80, respectively.

Tick tock.

• Nothing Appears To Be Breaking (Golem XIV)

Some time in the recent past we crawled inside our machine, closed the last hatch to the outside behind us, and then forget there was an outside. Our leaders are the worst of us. They are the lords of the machine and they are sure outside there is only chaos. We must all save the machine. Their power and wealth demands it. And yet they do not know how.

“Something Happened” but “Nothing appears to be breaking”. So said JPM’s chief economist Bruce Kasman. He was refering to the recent extreme ‘turbulence’ on the stock markets and the continuing drop in global market values. All I can say is that only a person who lives resolutely in a linear world, despite it being over a 100 years since we discovered that our world in not linear but non-linear, could say such a thing. In a linear world effects tend to follow their causes quickly and clearly. When things are non-linear, however, effects can surface long after and far away from their cause. Mr Kasman, I suspect, held his breath, waited for everything to fall down and after a couple of days, when they didn’t he concluded nothing had broken after all.

He looked at the on-going trend in events and saw they were much as before the inexplicable ‘turbulence’ and concluded that all was as before and the ‘turbulence’ was just ‘one of those things’. He could be right. But I doubt it. Ours is a non-linear world and we should remember that. Think back to August 9th 2007. That was the day when PNB Paribas suddenly closed three large sub-Prime mortgage finds. The world at large had not even heard of sub-prime. To little fanfare the ECB pumped €95 billion in to the markets to steady nerves. It was not enough. The next day, August 10th The ECB pumped in another €156 billion, the FED injected $43 Billion and the BoJ a trillion Yen.

Five days later Countrywide Financial haemorrhaged 13% of it value. 16 days later Ameriquest the largest specialist sub-prime lender in the US collapsed and on September 14th there was a bank run on Norther Rock. It was a turbulent time. And then do you know what happened? Nothing. Something had happened but nothing appeared to be broken. The linear pundits went about their crooked business. Six whole months later Bear Stearns collapsed. Its a non-linear world. And I think we are going to be reminded … again.

Generational warfare just around the corner.

• No Pay Rise? Blame The Baby Boomers’ Gilded Pension Pots (Guardian)

Workers expecting Britain’s economic recovery to fill out their pay packets are in for a nasty surprise. While the UK’s collective national income is expected to grow by more than 2% a year until at least 2020, the share distributed in wages is going to be less than many hope. As much as onepercentage point could continue to be knocked off annual pay rises because firms need to plug holes in the pension pots of retired staff, according to a report. The blame lies with the retired baby boomer and their employers who failed to ensure enough funds went into their final salary schemes during their working lives. The deficit-ridden schemes must now be filled from company cashflows, denying today’s workers a proportion of the forecast wage rises.

The day that average wages regain their pre-crash peak is now expected in the middle of 2017, but the Resolution Foundation points out that the pensions effect will continue to be felt in pay packets for years to come. Economists have failed to make the connection between private pension scheme deficits and workers’ current wages, according Jon Van Reenan – an economics professor at the London School of Economics and a leading expert on the labour market. Brian Bell, an associate professor at Oxford University consulted by the report’s author, said the huge sums involved would deepen the already growing inequality between generations. Maybe this should not come as a surprise after more than a decade watching those who own assets – mostly the over 55s – ringfence their booty from anyone planning to tax it or allow the market to diminish its value.

It is well known that a major prong of the rescue operation following the banking crash – the Bank of England’s £375bn quantitative easing scheme – was designed to generate bank lending, pumping fresh money into the economy. In practice it did more to support the stock market and help stop property values tumbling. Baby boomers had successfully lobbied in the early noughties to protect their final salary pension payouts, even when it was obvious they were becoming unaffordable. It was never fair that one generation could secure its own pensions knowing everyone else would be left with a pittance in old age – as companies rushed to ditch their final salary-linked schemes – but we did not know it would also mean people sacrificing wage rises.

Land of the crazies.

• The Highwayman (Jeff Thomas)

The Highwayman has a romantic image as a bold, 18th-century scallywag who would ride up to a coachload of aristocrats on his horse, shouting, “Stand and deliver!” Having relieved the aristocrats of their purses, he would gallop off. Today, the Highwayman is being revived in a big way in the US. But, far from being a scofflaw, he is, in fact, the law. He wears a badge and the law protects him in his roadside robberies. The revival is the result, in part, of both the defunding of police departments (creating a demand for law enforcement departments to seek money from other sources) and the encouragement of the federal government for an overall expansion of the police state. The legal justification for such highway robbery is the police practice of civil forfeiture, which has been on the books for decades.

Civil forfeiture allows law enforcement to seize property (including cash, cars, and even homes) without having to prove the owners are guilty of a crime. In many cases, drivers are not charged with any crime at all, not even a traffic citation. In fact, one Florida sheriff has noted that the best targets are those who are obeying the speed law. He knows whereof he speaks, having seized over $6.5 million on the highways of Florida. (Quite an advance on the size of the purses seized by the 18th-century highwayman.) Typically, police stop a car and make the usual request to see license and registration. If the driver asks why he was stopped, a vague explanation may be offered by the officer, or he may simply ignore the question, then demand a search of the car or the driver’s person.

The officer then seizes cash and other valuables as potential “evidence” of a crime (suspected drug dealing is a common accusation). In some cases, police threaten drivers that, if they are not cooperative, their children may be taken by Child Protective Services. The burden of proof is on the driver. In order to regain his possessions, he must prove his innocence in a court. However, in most cases, no charges are made, so there is no court case to try. Whether charges are made or not, law enforcement agencies are entitled to keep 100% of the forfeiture proceeds. Although they are required to keep records on forfeiture, in many cases, police departments avoid or even refuse to provide such information when requested.

Debt Rattle April 13 2015

Apr 132015

April 13, 2015 Posted by Raúl Ilargi Meijer at 10:16 am Finance Tagged with: Australia, BIS, China, collapse, copper, exports, Greece, housing bubble, London, New Zealand, oil 3 Responses »

George N. Barnard Nashville, Tennessee. Rail yard and depot. 1864

• China’s March Exports Shrink 15% Year-on-Year In Shock Fall (Reuters)

• China’s March Exports Come In Far Worse Than Expected (WSJ)

• China’s Trade Collapse Raises Fears Of Growth Slowdown (Telegraph)

• World Bank Warns Of Hit To Australia As Chinese Growth Falters (AAP)

• China’s Stock Surge May Very Well End In Tears (MarketWatch)

• The $9 Trillion Short That’s Seen Sending the Dollar Even Higher (Bloomberg)

• Saudi Arabia’s Plan to Extend the Age of Oil (Bloomberg)

• Greece May Have Blown Best Hope Of Debt Deal (Reuters)

• Greece Defends Bailout Tactics As Latest Deadline Looms (Guardian)

• UK Economy Poised To Welcome ‘Deflation’ For First Time Since 1960 (Guardian)

• Sales Of London Luxury Homes Drop 80% In One Year (FT)

• Quarter Of World’s Copper Mines Operating At A Loss (Reuters)

• Bundesbank Tells German Heta Creditors To Expect 50% Loss (Bloomberg)

• Sweden Confirms Mystery ‘Russian Sub’…Was In Fact A Workboat (RT)

• Default In Ukraine ‘Virtual Certainty’: S&P Cuts Rating To ‘CC’ (RT)

• Protests Across Brazil Seek Ouster Of President (AP)

• Auckland Housing Bubble ‘Floats Off Into Its Own Orbit’ (Hickey)

• 40% Of Houses In Auckland Are Bought By Investors (Interest.co.nz)

• New Zealand PM Denies There Is A Housing Bubble (NZ Herald)

• The Shadowy History of the Secret Bank that Runs the World (LeBor)

15% is a devastating number. But they’re just going to announce 7% GDP growth no matter what.

• China’s March Exports Shrink 15% Year-on-Year In Shock Fall (Reuters)

China’s export sales contracted 15% in March while import shipments fell at their sharpest rate since the 2009 global financial crisis, a shock outcome that deepens concern about sputtering Chinese economic growth. The tumble in exports – the worst in about a year – compared with expectations for a 12% rise and could heighten worries about how a rising yuan CNY=CFXS has hurt demand for Chinese goods and services abroad, analysts said. In a sign that domestic demand was also tepid, imports into the world’s second-biggest economy shrunk 12.7% last month from a year ago, the General Administration of Customs said on Monday. That was the biggest slump in imports since May 2009, and compared with a Reuters poll forecast for a 11.7% drop.

“It’s a very bad number that was much worse than expectations,” Louis Kuijs, an economist at RBS in Hong Kong, said in reference to the export data. “It leads to warning flags both on global demand and China’s competitiveness.” Buffeted by lukewarm foreign and domestic demand, China’s trade sector has wobbled in the past year on the back of the country’s cooling economy, unsettling policymakers. Chinese Vice Premier Wang Yang was quoted by Xinhua state news agency as saying earlier this month that authorities must act to arrest China’s export slowdown lest it further dampens economic growth.

“The fall defied the expectations of economists who said exports usually rebound after the Lunar New Year..”

• China’s March Exports Come In Far Worse Than Expected (WSJ)

China’s exports fell sharply in March while imports slumped once again, suggesting to economists that the world’s second largest economy is being hit with sluggish demand at home and abroad. The nation’s exports slid 15% from a year earlier in March while imports dropped 12.7%, according to data released Monday by the General Administration of Customs. “Domestic demand is still sluggish,” said Kevin Lai, economist at Daiwa Capital. “Other than the U.S., the export situation isn’t looking very strong.” The fall defied the expectations of economists who said exports usually rebound after the Lunar New Year, which fell in February this year. In February, customs data showed exports up 48.3% from a year earlier while imports were down 20.5%.

Exports are no longer the big engine for the Chinese economy that they once were but the absence of growth in that once-critical area is a further drag on already weak growth. China’s economy posted growth of 7.4% last year, its slowest pace in 24 years, and the government has set an even lower target of about 7% growth for this year. Beijing has used a host of targeted measures to boost the economy, ranging from increased infrastructure spending and reductions in electricity tariffs to two cuts in interest rates to lower the cost of borrowing for domestic companies.

Data for the first quarter are due to be released Wednesday, and many economists project growth at less than 7% from a year earlier. Economists expected an increase of about 10% for exports in March and a drop of 12% for imports, according to a poll of analysts by The Wall Street Journal. China posted a trade surplus of 18.16 billion yuan in March, or about $2.93 billion, well below the $60.6 billion surplus in February.

“..concerns about the state of the global recovery..” No kidding.

• China’s Trade Collapse Raises Fears Of Growth Slowdown (Telegraph)

China’s exports fell by a spectacular 15pc in March reviving fears of a slowdown in the world’s second largest economy. Trade data showed imports also fell by 12pc year-on-year, resulting in a sharp drop in the country’s trade surplus and leading to concerns economic growth will register a significant slowdown when figures are released on Wednesday. China’s economy has been in the throes of a managed slowdown in the last few years. Beijing has set a target of 7pc GDP growth in 2015 as the country seeks to move towards a more sustainble rate of growth. GDP expanded by 7.4pc in 2014, its slowest rate of output growth in nearly a quarter of a century.

The Australian dollar, which is closely linked to the trade fortunes of the Chinese economy, fell to a six-year low on the back of the news. A significant brake on Chinese growth could now “ripple out across the globe,” said Michael Hewson of CMC Markets. “These data misses raise concerns that not only is the Chinese economy failing to rebalance with demand remaining low, but also the global economy’s demand for Chinese exports is also falling back raising concerns about the state of the global recovery as well,” said Mr Hewson. The sluggish numbers come despite stimulative action from China’s central bank to cut interest rates, and ease bank reserve targets.

Australia already knows.

• World Bank Warns Of Hit To Australia As Chinese Growth Falters (AAP)

A Chinese economic slowdown will hit Australia as iron ore prices tumble, the World Bank has said. The bank said Australia’s growth pace had deteriorated sharply since the first quarter of 2014 as declining prices for export commodities depressed mining investment and weakened the Australian dollar. The warning came as poor Chinese trade figures underlined the continued slowdown in the world’s second-largest economy. Exports were down 14.6% in March from a year ago while imports fell 12.3% on the same measure. The Australian dollar fell more than half a US cent to hover around the US76c mark. The World Bank predicted that a further slowdown in China, Australia’s biggest trading partner, would affect Australia and its neighbours.

The bank’s east Asia and Pacific economic update said: “The significant negative impact on Australia and New Zealand, among the world’s largest commodity suppliers, would lead to indirect spillovers on the Pacific Island countries, given their tight links through trade, investment and aid.”. China’s growth pace in 2014 was the weakest since 1990 but the World Bank said things were set to get worse – just a month after the Chinese government cut its growth target to 7%. Chinese growth would ease from 7.4% in 2014, to 7.1% in 2015, 7% in 2016 and 6.9% in 2017.

China is a major buyer of Australian iron ore, which is used to make steel. The World Bank said: “In China, as it shifts to a consumption-led, rather than an investment-led, growth model, the main challenge is to implement reforms that will ensure sustainable growth in the long run.” Sudhir Shetty, the World Bank’s chief economist for east Asia and the Pacific region, said many risks remained for east Asia Pacific region “both in the short and long run”. The gloomy prediction comes as the treasurer, Joe Hockey, forecast the iron ore price dropping to $35 a tonne, which could see commonwealth revenue fall $25bn over four years.

Again: they’re just going to say 7% growth no matter what.

• China Growth Last Quarter Seen Worst Since Global Recession

While the central bank has cut interest rates twice in the last six months to cushion a slowdown, rising bad debts and a crackdown on shadow lending are making banks reluctant to lend to smaller firms. “It’s a structural problem that can’t be quickly addressed,” said Zhao Yang, the Hong Kong-based chief China economist at Nomura. “China’s financial system is not friendly to private businesses, and for the central bank, it has few short-term options but to cut required reserve ratios or benchmark interest rates further.” The benchmark one-year lending rate in China is now 5.35%, versus near-zero levels in the U.S., euro zone and Japan. The Wenzhou Private Finance Index, a measure of non-bank lending rates among private companies, is around 20%. State-owned enterprises, traditionally with easier access to credit, have seen output weighed by a restructuring drive and crackdown on corruption and pollution.

That leaves People’s Bank of China Governor Zhou Xiaochuan juggling financial reforms to try to steer toward a more market-driven economy with the need to ensure growth doesn’t slow too fast. GDP data scheduled for Wednesday will probably show the economy expanded 7% in the first quarter from a year earlier, according to the median estimate of 38 economists in a Bloomberg survey as of April 10. That would be the slowest pace since the first quarter of 2009, when China was hit by the global financial crisis, prompting then Premier Wen Jiabao to unleash a massive stimulus package that featured a record credit boom. To achieve this year’s growth target of about 7%, current Premier Li Keqiang may need to add policy support, something he flagged last month he stood ready to do. The consumer-prices index held steady at a 1.4% increase in March from a year earlier, giving room to act.

Fighting in the streets more likely.

• China’s Stock Surge May Very Well End In Tears (MarketWatch)

Once dismissed as a “ghost train,” the trading scheme — known variously as the “new China through train” or Shanghai-Hong Kong Stock Connect — roared to life last week, helping send the Hang Seng Index HSI, +2.22% to a seven-year high. But this awakening brings not just welcome stock gains, but also fear of a rerun of the euphoric boom and bust of 2007, when a previous through-train plan was announced, only to be later shelved. This time, a possible bust may also challenge the Hong Kong dollar’s currency peg. Unlike the failed 2007 scheme, the new Stock Connect was designed to limit exuberant cross-border money flows, as it operates under a closed loop.

That may be easier said than done. Hong Kong holds a unique position as the first and only stop for mainland Chinese who want to buy foreign equities. This will not be lost on global funds which may want to hitch a ride on this through train, even if it is a roller coaster. All signs suggest the trading scheme will be extended. Hong Kong’s political leader, Chief Executive C.Y. Leung, has been quick to laud the “win-win” of deepening cooperation with Shanghai. Already, it is expected daily trading limits — 10.5 billion yuan ($1.69 billion) going south, and 13 billion yuan going north — will be expanded. Many were caught unaware by the by speed of the post-Easter-holiday surge in southbound investment. As these quotas were filled for the first time, the benchmark Hang Seng Index finished the week up 7.9%.

One explanation for the rush south was a new insurance-investment policy, which allows Chinese mutual funds to participate in the Stock Connect. Another is an inevitable catch-up, with the A-share (Shanghai) rally spilling into H-shares (Hong Kong) as mainland investors come south to pick up bargains. (See previous column on the divergence between the two markets.) Yet turnover figures suggest the Hang Seng Index’s surge past the 27,000 mark cannot be a result of the Stock Connect alone. On Thursday, for instance, volume reached a record 293.9 billion Hong Kong dollars ($37.9 billion), three times normal levels. Analysts are offering different explanations for the surge. Bank of America writes that we are witnessing a “Keynes beauty contest,” in which the jump in money flows is likely driven by some investors anticipating other investors’ reaction to government policy.

“Sovereign and corporate borrowers outside America owe a record $9 trillion in the U.S. currency, much of which will need repaying in coming years..”

• The $9 Trillion Short That’s Seen Sending the Dollar Even Higher (Bloomberg)

Investors speculating the dollar rally is fizzling out may be overlooking trillions of reasons why it will keep on going. There’s pent-up demand for the U.S. currency that will underpin years of appreciation because the world is “structurally short” the dollar, according to investor and former International Monetary Fund economist Stephen Jen. Sovereign and corporate borrowers outside America owe a record $9 trillion in the U.S. currency, much of which will need repaying in coming years, data from the Bank for International Settlements show. In addition, central banks that had reduced their holdings of the greenback are starting to reverse course, creating more demand. The dollar’s share of global foreign reserves shrank to a record 60% in 2011 from 73% a decade earlier, though it has since climbed back to 63%.

So, the short-term ebbs and flows caused by changes in Federal Reserve policy or economic data releases may be overwhelmed by these larger forces combining to fuel more appreciation, according to Jen, the London-based co-founder of SLJ Macro Partners LLP and the former head of currency research at Morgan Stanley. “Short-covering will continue to power the dollar higher,” said Jen, who predicts a 10% advance in the next three months to 96 cents per euro. “The dollar’s strength is not just about cyclical factors such as growth. The recent consolidation will likely prove to be temporary.” The U.S. currency was at $1.0593 per euro at 12:09 p.m. in Tokyo. The last time it traded at 96 cents was June 2002.

Most strategists and investors agree on the reasons for the dollar’s advance versus each of its major counterparts during the past year: the prospect of higher U.S. interest rates while other nations are loosening policy. Bloomberg’s Dollar Spot Index, which tracks the U.S. currency against 10 major peers including the euro and yen, has surged 20% since the middle of 2014. The gains stalled recently, sending the index down more than 3% in the three weeks through April 3, as Fed officials tempered investors’ expectations about the pace of rate increases.

“Demand will peak way ahead of supply..”

• Saudi Arabia’s Plan to Extend the Age of Oil (Bloomberg)

Last fall, as oil prices crashed, Ali al-Naimi, Saudi Arabia’s petroleum minister and the world’s de facto energy czar, went mum. He still popped up, as is his habit, at industry conferences on three continents. Yet from mid-September to the middle of November, while benchmark crude prices plunged 21% to a four-year low, Naimi didn’t utter a word in public. For 20 years, Bloomberg Markets reports in its May 2015 issue, the world’s $2 trillion oil market has parsed Naimi’s every syllable for signs of where supply and prices are heading. Twice during previous routs—amid the Asian financial crisis in 1998 and again when the global economy melted down 10 years later—Naimi reversed oil’s free fall by orchestrating production cutbacks among members of OPEC. This time, he went to ground.

At the cartel’s semiannual meeting on Nov. 27 in Vienna, Naimi shot down proposed output reductions supported by a majority of the 12 members in favor of a more daring strategy: keep pumping and wait for lower prices to force high-cost suppliers out of the market. Oil prices fell a further 10% by the end of the next day and kept going. Having averaged $110 a barrel from 2011 through the middle of 2014, Brent crude, the global benchmark, dipped below $50 in January. “What they did was historic,” Daniel Yergin, the pre-eminent historian of the oil industry, told Bloomberg in February. “They said: ‘We resign. We quit. We’re no longer going to be the manager of the market. Let the market manage the market.’ That’s when you got this sort of shocked reaction that took prices down to those levels we saw.”

Naimi, 79, dominated the debate at the November meeting, according to officials briefed on the closed-door proceedings. He told his OPEC counterparts they should maintain output to protect market share from rising supplies of U.S. shale oil, which costs more to get out of the ground and thus becomes less viable as prices fall. In December, he said much the same thing in a press interview, arguing that it was “crooked logic” for low-cost producers such as Saudi Arabia to pump less to balance the market. Supply was only half the calculus, though. While the new Saudi stance was being trumpeted as a war on shale, Naimi’s not-so-invisible hand pushing prices lower also addressed an even deeper Saudi fear: flagging long-term demand.

Naimi and other Saudi leaders have worried for years that climate change and high crude prices will boost energy efficiency, encourage renewables, and accelerate a switch to alternative fuels such as natural gas, especially in the emerging markets that they count on for growth. They see how demand for the commodity that’s created the kingdom’s enormous wealth—and is still abundant beneath the desert sands—may be nearing its peak. This isn’t something the petroleum minister discusses in depth in public, given global concern about carbon emissions and efforts to reduce reliance on fossil fuels. But Naimi acknowledges the trend. “Demand will peak way ahead of supply,” he told reporters in Qatar three years ago. If growth in oil consumption flattens out too soon, the transition could be wrenching for Saudi Arabia, which gets almost half its gross domestic product from oil exports.

“There’s just no appetite in the euro zone for a grand bargain to take over Greece’s debt to the IMF and the ECB.”

• Greece May Have Blown Best Hope Of Debt Deal (Reuters)

Even if it survives the next three months teetering on the brink of bankruptcy, Greece may have blown its best chance of a long-term debt deal by alienating its euro zone partners when it most needed their support. Prime Minister Alexis Tsipras’ leftist-led government has so thoroughly shattered creditors’ trust that solutions which might have been on offer a few weeks ago now seem out of reach. With a public debt equivalent to 175% of economic output and an economy struggling to pull out of a six-year depression, Athens needs all the goodwill it can summon to ease the burden. It owes 80% of that debt to official lenders after private bondholders took a hefty writedown in 2012.

Since outright debt forgiveness is politically impossible, the next best solution would be for Greece to pay off its expensive IMF loans early, redeem bonds held by the ECB and extend the maturity of loans from euro zone governments to secure lower interest rates for years to come. “This step would save Greece’s budget billions of euros, while reforming the Troika arrangement, eliminating the IMF’s and the ECB’s financial exposure to Greece,” said Jacob Funk Kirkegaard, senior fellow at the Peterson Institute for International Economics, who advocates such an arrangement. It would lower the effective interest rate on Greek debt to less than 2%, far less than Athens was paying before the euro zone debt crisis began in 2009, and radically reduce the principal amount to be repaid over the next decade, giving Greece fiscal breathing space to revive its economy.

And unlike ideas floated by Greek Finance Minister Yanis Varoufakis to swap euro zone loans for GDP-linked bonds and ECB holdings with perpetual bonds, paying out the IMF and the ECB early would be legal and supported by precedent. But if the economics make sense for Greece, the politics no longer add up for its partners. A euro zone official said there had been exploratory talks with the previous conservative-led Greek government about such a plan last year, before then Prime Minister Antonis Samaras chose to bring forward an election he lost rather than complete a bitterly unpopular bailout program. “Now it’s a political non-starter,” said a euro zone official. “There’s just no appetite in the euro zone for a grand bargain to take over Greece’s debt to the IMF and the ECB.”

“..the newspaper will have difficulty justifying its headline and the content of its article.”

• Greece Defends Bailout Tactics As Latest Deadline Looms (Guardian)

Greece has denied being intransigent in its dealings with eurozone officials, ahead of another crucial week for the cash-strapped country. Greece’s finance ministry dismissed on Sunday a report by a German newspaper which reported that eurozone officials were “disappointed” by Greece’s failure to come up with plans for economic reforms at last week’s talks in Brussels. The mood between Greece’s leftist government and its eurozone partners has remained tense during negotiations to determine whether or not the country qualifies for further financial aid from international lenders. Frankfurter Allgemeine Sonntagszeitung (FAS) cited officials at last week’s meeting as saying they were shocked by the lack of progress, and that the new Greek representative just asked where the money was – “like a taxi driver” – and insisted his country would soon be bankrupt.

Eurozone officials disagreed with this assessment, saying Athens was still able to meet its international obligations, and regarded its ability to pay public sector wages and pensions as a domestic problem, according to the report. They deplored Greece’s unwillingness to discuss cuts to public sector pensions. The finance ministry in Athens hit back on Sunday, saying: “When the readers of FAS read the minutes … the newspaper will have difficulty justifying its headline and the content of its article. Such reports undermine the negotiation and Europe.” Greece made a €450m loan repayment to the International Monetary Fund last week. A further €747m payment is due on 12 May. There are fears that Athens could run out of cash in coming weeks. It needs to pay out more than €1.5bn of social security payments for April this week.

IMF managing director Christine Lagarde said last week that talks between Greece and its creditors had been “difficult on almost a daily basis”. She added: “What really matters now is for Greece and the three institutions to get on with the work so we can identify together the measures that will take Greece out of the very bad economic situation it could be in if those measures are not taken.” A meeting of deputy finance ministers – called the Euro Working Group – last Thursday gave Athens six working days to come up with a convincing economic reform plan before eurozone finance ministers meet on 24 April to decide whether to unlock €7.2bn of bailout funds. Greece has been on the verge of bankruptcy since 2009 and has depended on rescue loans totalling €240bn from the EU and IMF to stay afloat.

“..describing the falling oil price as “unambiguously good” for the economy…”

• UK Economy Poised To Welcome ‘Deflation’ For First Time Since 1960 (Guardian)

Britain could fall into deflation this week for the first time in more than half a century, the result of an escalating supermarket price war and falling energy prices. Inflation, as measured by the consumer prices index, fell to zero in February for the first time since comparable records began in 1989. Estimates from the Office for National Statistics suggested that it was the lowest reading since 1960. The statistics office will release the latest inflation figures, for March, on Tuesday morning. City economists say it is going to be a close call between a zero reading and a 0.1% dip. Petrol prices rose 3.6% last month, reflecting a rebound in global oil prices, which is expected to push up the inflation rate by 0.1 %age points.

This will be offset, however, by the 5% cut in gas prices by British Gas, Britain’s largest energy supplier, and low food price inflation. Fierce competition from discount chains has forced the major supermarket groups to slash prices on basic items such as bread, with the discounter Aldi overtaking Waitrose to become the UK’s sixth-largest grocer recently. Alan Clarke, an economist at Scotiabank, said: “While food price deflation of close to 4% year on year may sound extreme, this represents something of a relief after years of rapid price increases. More specifically, over the seven years between 2007 and 2013, the average annual pace of increase in food price inflation was 5% per year. Enjoy the cheap food and fuel while it lasts!”

Even if the UK avoids deflation in March, it will probably enter a period of falling prices at some point soon – following in the footsteps of other countries. Eurozone inflation has been negative since December, and the US rate turned negative in January before recovering to zero in February. There is no reason to panic, according to the Bank of England and City analysts. They claim any period of UK deflation is likely to prove temporary, unlike the deflationary spiral in Japan, where people have lived with falling prices for two decades. Bank of England governor Mark Carne, has sought to allay fears that Britain faces a 1930s-style deflationary spiral, describing the falling oil price as “unambiguously good” for the economy. An oil glut pushed the price of Brent crude, the international benchmark, down by more than 50% from last summer to a six-year low earlier this year.

“It is like the 1970s again, when waves of wealthy people left Britain and it was a disaster..”

• Sales Of London Luxury Homes Drop 80% In One Year (FT)

Wealthy foreigners are shunning London’s luxury housing market following Labour’s announcement that it will end their “non-dom” status if it wins the UK’s general election, according to estate agents. Property deals have begun to fall through in the days since Ed Miliband laid out his plans, they revealed, with some foreign residents also putting their homes up for sale and fleeing the UK. The announcement, combined with Labour’s plan to introduce a mansion tax on high-value homes, has led many foreigners to conclude that the UK is no longer an attractive and reliable home for the rich, agents said. During the past two years Conservative chancellor George Osborne has also made tax changes that have increased the burden on the affluent.

The introduction of capital gains tax on the proceeds of property sales came into force on April 6 and is believed by agents to have contributed to owners’ jitters. Ed Mead, a director of Douglas & Gordon estate agents, said his company had carried out 37 valuations in the past month for owners of high-end homes who were thinking of selling up, when the normal level is about six. “It is like the 1970s again, when waves of wealthy people left Britain and it was a disaster,” Mr Mead said. Sales of homes worth more than £2m have dropped by 80% in the past year, according to Douglas & Gordon.

Commodities are a disaster across the board.

• Quarter Of World’s Copper Mines Operating At A Loss (Reuters)

Nearly a quarter of the world’s major copper mines are running in the red, even after producers including Codelco and BHP Billiton engage in their deepest cost-cutting in years, according to a Reuters analysis. A 17% slump since last July has pushed copper futures on the London Metals Exchange to under $6,000 a ton, the lowest since 2009, is the first major test of producers’ margins since the global economic crisis, forcing a new reckoning after five years of relatively consistent profitability. Codelco, the Chilean state miner that produces about 8% of the world’s copper, will review the cost reduction plan at its Salvador mine as it prepares to restart operations there after torrential rains shuttered the complex in March, said a source close to the state-run miner.

The company has an ambitious target to slash total costs by as much as $1 billion this year. Salvador produced copper at a cost of some $11,439 per tonne in the fourth quarter last year, the highest out of 91 mines analyzed by Thomson Reuters unit GFMS as part of its Copper Mine Economics database. The mines account for more than two-thirds of global output, and almost a quarter of them had production costs late last year above current prices. The GFMS analysis, which is based on quarterly and semi-annual filings by 26 mining companies, gives the deepest insight yet into the voracious pace of cost-cutting by miners late last year as the sell-off in copper quickened, a hot topic at CRU Copper’s conference in Santiago this week.

Austria’s pulling off quite a feat. In almost total silence.

• Bundesbank Tells German Heta Creditors To Expect 50% Loss (Bloomberg)

German banks should expect to lose at least half of their investments in bonds of Austrian bad bank Heta Asset Resolution and make the appropriate provisions, the Bundesbank director responsible for bank supervision said. “I think this situation has to be taken seriously by the German banks,” Andreas Dombret, also a member of the board of the ECB’s Single Supervisory Mechanism, said in an interview in Johannesburg on Friday. “It’s advisable and recommendable to take provisions on this, and if I were to put a number on this I would say it should be a minimum of a 50% provision for potential losses.” German lenders and insurers have emerged as the biggest creditors of the bad bank set up after the collapse of Hypo Alpe-Adria-Bank, with about €7.1 billion at risk.

Heta was taken over last month by Austrian regulators, who ordered a debt moratorium and said they will impose losses on creditors to fund the bank’s wind-down. Bayerische Landesbank, a former owner of Hypo Alpe, has the biggest exposure among German banks, as around €2.4 billion of loans to the former subsidiary weren’t repaid. Commerzbank, Deutsche Pfandbriefbank, NordLB, and a German unit of Dexia all own Heta debt. While BayernLB has said it will set aside provisions equal to about half of what Heta owes it, Dombret’s recommendation goes further than some of the disclosed provisions other banks have made. Deutsche Pfandbriefbank said it wrote down its €395 million investment by €120 million, or 30%. Austria’s Hypo NOE Gruppe Bank said it provisioned its €225 million holding by “about a quarter.”

“The massive hunt was used by the Swedish Defense Ministry to justify a six billion kronor ($696 million) hike in defense spending..”

• Sweden Confirms Mystery ‘Russian Sub’…Was In Fact A Workboat (RT)

The unknown foreign vessel the Swedish Navy searched for near Stockholm last autumn was actually a “workboat,” a senior navy official says. Local media had alleged a hunt was on to try and find a Russian submarine, which was believed to be in the area. Swedish Rear Admiral Anders Grenstad told the Swedish TT news agency on Saturday that what was thought to be a vessel or a foreign submarine was actually just a “workboat.” The Swedish Navy changed the wording from “probable submarine” to “non-submarine” when referring to the reconnaissance mission connected to the unidentified vessel spotted in the Stockholm archipelago. The massive hunt was used by the Swedish Defense Ministry to justify a six billion kronor ($696 million) hike in defense spending between 2016 and 2020.

The drama started after an amateur photograph of an alleged underwater vessel of unidentified origin was sent to the ministry. The man who took the photo raised the alarm because he thought he saw the object surface and disappear again. Sweden undertook an intense one-week search in late October, looking for possible “foreign underwater activity” near Stockholm. During the operation, the Swedish Navy reportedly used over 200 troops, helicopters, stealth ships and minesweepers to search the waters of the Baltic Sea. During the search, the Swedish media exaggerated the story, claiming country’s navy was looking for a submarine in the Baltic Sea, which allegedly belonged to Russia.

Meanwhile, naval officials from Sweden and Russia maintained there was no substance to the reports, which was confirmed by Grenstad. “From the information we have, we cannot draw the same conclusion as the media that there is a damaged U-boat. We have no information about an emergency signal or the use of an emergency channel,” the navy official said. A full report of the search operations will be published later this spring, the Swedish newspaper Svenska Dagbladet reported.

“Ukraine’s total debt is estimated at $50 billion, and it has to service about $10 billion of that debt this year..”

• Default In Ukraine ‘Virtual Certainty’: S&P Cuts Rating To ‘CC’ (RT)

Standard & Poor’s has downgraded Ukraine’s long-term foreign currency sovereign credit rating to CC, a notch lower than the previous CCC- level. A default on Ukraine’s foreign-currency debt is a “a virtual certainty,” according to the agency. The ratings agency has said that the outlook remains negative. Ukraine’s foreign currency rating is the world’s second worst, behind Argentina which has a rating of ‘SD’. It is still ahead of Venezuela, which S&P has assigned a ‘CCC’ rating. “The negative outlook reflects the deteriorating macroeconomic environment and growing pressure on the financial sector, as well as our view that default on Ukraine’s foreign currency debt is virtually inevitable,” the ratings agency said in a statement.

Ukraine’s total debt is estimated at $50 billion, and it has to service about $10 billion of that debt this year, including corporate and sovereign loans and bonds. It will receive about $40 billion in IMF loans in the next four years, as well as separate loan guarantees from the US, Europe, and other allies. Public sector debt rose to 71% of Ukraine’s gross domestic product, and is due to rise to 94% of GDP in 2015, according to the National Bank of Ukraine.

Paying back debt is becoming more difficult for Ukraine as the national currency, the hryvnia, continues to plummet in value. It was the worst performing currency in 2014, and lost more than 34% on February 5, when the Central bank said it could no longer support the beleaguered currency. On February 5 the currency hit a historic low of 24.5 per 1 USD, and at the time of publication has only recovered slightly, to 23.4 versus the US dollar. Officially, foreign currency reserves stood at $5.6 billion at the end of March, compared to the $36 billion level in 2011.

Rousseff had better wisen up and leave. But that would open her up to prosecution.

• Protests Across Brazil Seek Ouster Of President (AP)

Nationwide demonstrations calling for the impeachment of President Dilma Rousseff swept Brazil for the second day in less than a month, though turnout at Sunday’s protests appeared down, prompting questions about the future of the movement. A poll published over the weekend suggested the majority of Brazilians support opening impeachment proceedings against Rousseff, whose second term in office has been buffeted by a corruption scandal at Brazil’s largest company, oil giant Petrobras, as well as a stalled economy, a sliding currency and political infighting. Only 13% of survey respondents evaluated Rousseff’s administration positively.

Sunday’s protests, which took place in cities from Belem, in the northern Amazonian rainforest region, to Curitiba in the south, were organized mostly via social media by an assortment of groups. Most were calling for Rousseff’s impeachment, but others’ demands ranged for urging looser gun control laws to a military coup. While last month’s protests drew substantial crowds in several large cities, Sunday’s turnout was lackluster. In Rio, several thousand people marched along the golden sands of Copacabana beach, many dressed in the yellow and green of the Brazilian flag. The March 15 protest, by contrast, drew tens of thousands. In the opposition stronghold of Sao Paulo, about 100,000 people marched on the city’s main thoroughfare, according to an estimate by the respected Datafolha polling agency.

The crowd was less than half the size of last month’s demonstration here, when more than 200,000 people turned out, making it the biggest demonstration in Sao Paulo since 1984 rallies demanding the end of the military dictatorship. “I was on the avenue on March 15 and without a doubt, today’s demonstration was much smaller,” said Antonio Guglielmi, a 61-year-old sales representative for construction materials company, vowing, “I will keep coming back to demonstrations like this one — big or small — because it is the best way for us to make our voices heard and demand an end to the Dilma government and the PT and end to corruption. The country cannot go on like this.”

New Zealand’s set to land very hard.

• Auckland Housing Bubble ‘Floats Off Into Its Own Orbit’ (Hickey)

If you are reading this and you don’t own Auckland property, then it would be a good idea not to read any further because it will probably ruin your Sunday. Figures released this week by Barfoot & Thompson, Auckland’s biggest real estate agency group, confirmed everyone’s worst fears (or biggest hopes if they owned property in the city). Auckland’s housing market has officially floated off its New Zealand moorings into its own orbit. The Reserve Bank can now have no doubts or caveats around the seasonality or size of the trend — the housing market in New Zealand’s biggest city is booming. The average three bedroom house price on the isthmus of Auckland that used to be the old Auckland Council rose over NZ$1 million for the first time in March.

The average house price in West Auckland rose 20.5% over the last year to NZ$632,032. Barfoot sold 420 homes worth more than NZ$1 million each in the 31 days of March, while selling just 300 homes for less than NZ$500,000. Barfoot’s agents would have collected almost NZ$1 million of commissions each day in March as they sold over NZ$1.2 billion worth of houses over the month. Auckland house prices are now rising at double digit rates on an annual basis, while the rest of the country is growing at less than 5%, or not at all. Even in Christchurch, house price inflation is subdued as a wall of new houses hits the market to soak up demand and replace quake-damaged buildings. Prices are still falling in some regional cities where populations and work are drying up.

Unfortunately for the Reserve Bank, taxpayers outside of Auckland and Auckland’s renters, there is no relief in sight. Net migration is rollicking along at record highs and at least half of new migrants end up in Auckland, or just as importantly, aren’t leaving Auckland. Longer term fixed mortgage rates are low and falling. Employment growth is strong and rental property investors are stocked up with plenty of fresh equity to gear up with much bigger and often interest-only mortgages. New mortgage lending is growing at over 20% per year.

Bubbles have their own dynamics. Politicians won’t touch them.

• 40% Of Houses In Auckland Are Bought By Investors (Interest.co.nz)

All we are hearing is about supply and what’s being done there, through such strategies as the Auckland Housing Accord. In his Radio NZ interview the PM banged on and on about what the Government is doing to help supply. There’s two issues here: One, it will take years not months to ramp up the supply of Auckland housing. Two, the Government and other politicians can happily talk and talk and talk about supply because it’s essentially a positive thing to talk about. We’ll build houses, and we’ll create jobs and people will have places to live. Marvellous. But, dear politicians, there’s another side to this and it’s the side you don’t want a bar of because if you are seen to be doing anything about this, well, then it would be negative. Yes, I’m talking about demand.

Reserve Bank Governor Graeme Wheeler recently suggested that about 40% of houses in Auckland were being bought by investors. Now, whatever you want to say about Auckland’s perceived housing supply shortage, if 40% of the available houses are being bought as investments then clearly there’s a hell of a demand issue as well. But what’s the Government doing about that? They could immediately do something about about the high levels of immigration that have seen a net 55,000 people arrive in New Zealand – about 25,000 of them in Auckland – in the past 12 months. They could do something to limit the numbers of offshore-based investors buying properties by introducing a rule that any overseas buyer of a house has to come and actually live in the house, or alternatively that offshore investors must build new houses.

They could introduce capital gains tax on investment properties. They won’t. Why not? Because these things would be unpopular. It’s much easier to talk about building new houses than any measures that might discourage investors from pumping more and more money into the inflated Auckland market. So, we’ll keep talking and talking and talking about supply. And who knows, if enough people believe the mantra then maybe there really will be a whole lot more houses built in Auckland eventually – possibly just in time to coincide with a global event that sees our 40% of investor-buyers take fright of the housing market and disappear overnight.

But of course. With exports plunging, the housing bubble is what keeps up appearances.

• New Zealand PM Denies There Is A Housing Bubble (NZ Herald)

Prime Minister John Key has again denied there is a housing crisis or bubble developing in Auckland, despite figures from Barfoot and Thompson last week showing average prices hitting record highs of over NZ$1 million in the old Auckland Council area of the isthmus and the Government itself seeing a supply shortage in Auckland of more than 20,000 dwellings. Key told Morning Report the current double-digit price rises were not sustainable, but the Government had already taken action to free up land supply in Auckland and that restricting migration would frustrate employers looking for skilled staff. “In the end, it’s not sustainable for house prices to rise 10-12-13% per year. The only answer to that is to do what what we’re doing, which is allocate new land and build more houses,” he said, adding continued inflation “forever” at that level would lead to a “bubble”, although he denied it was currently a bubble.

He said the Government’s moves to introduce Special Housing Areas to circumvent the Metropolitan Urban Limit would add new housing supply to the market and slow that double-digit house price inflation, although this would take time while the necessary infrastructure and housing was built. He would not give a time-frame for the supply-driven slowdown in Auckland house price inflation, but “sooner as opposed to later is my guess.” Key referred to the recent supply-driven slowdown in Christchurch house price inflation and downplayed suggestions of tightening migration rules, saying the Government would have to reduce the numbers coming in for skilled occupations and for construction if it was to use the migration lever.

Must read.

• The Shadowy History of the Secret Bank that Runs the World (LeBor)

The world’s most exclusive club has eighteen members. They gather every other month on a Sunday evening at 7 p.m. in conference room E in a circular tower block whose tinted windows overlook the central Basel railway station. Their discussion lasts for one hour, perhaps an hour and a half. Some of those present bring a colleague with them, but the aides rarely speak during this most confidential of conclaves. The meeting closes, the aides leave, and those remaining retire for dinner in the dining room on the eighteenth floor, rightly confident that the food and the wine will be superb. The meal, which continues until 11 p.m. or midnight, is where the real work is done. The protocol and hospitality, honed for more than eight decades, are faultless. Anything said at the dining table, it is understood, is not to be repeated elsewhere.

Few, if any, of those enjoying their haute cuisine and grand cru wines— some of the best Switzerland can offer—would be recognized by passers-by, but they include a good number of the most powerful people in the world. These men—they are almost all men—are central bankers. They have come to Basel to attend the Economic Consultative Committee (ECC) of the Bank for International Settlements (BIS), which is the bank for central banks. Its current members [ZH: as of 2013] include Ben Bernanke, the chairman of the US Federal Reserve; Sir Mervyn King, the governor of the Bank of England; Mario Draghi, of the ECB; Zhou Xiaochuan of the Bank of China; and the central bank governors of Germany, France, Italy, Sweden, Canada, India, and Brazil. Jaime Caruana, a former governor of the Bank of Spain, the BIS’s general manager, joins them.

In early 2013, when this book went to press, King, who is due to step down as governor of the Bank of England in June 2013, chaired the ECC. The ECC, which used to be known as the G-10 governors’ meeting, is the most influential of the BIS’s numerous gatherings, open only to a small, select group of central bankers from advanced economies. The ECC makes recommendations on the membership and organization of the three BIS committees that deal with the global financial system, payments systems, and international markets. The committee also prepares proposals for the Global Economy Meeting and guides its agenda.

Debt Rattle December 8 2014

Dec 082014

December 8, 2014 Posted by Raúl Ilargi Meijer at 11:36 am Finance Tagged with: asset sales, BIS, China, debt, deflation, fragility, Japan, leveraged loans, LNG, oil, power 3 Responses »

Russell Lee Front of livery stable, East Side, New York City Jan 1938

• Japan’s Economy Is Worse Than Feared (WSJ)

• Japan’s Recession Deepens as Election Looms for Abe (Bloomberg)

• China Trade Data Miss Forecasts By A Wide Margin (MarketWatch)

• China Trade Data Paints Dreary Picture Of Economy (CNBC)

• The Two Main Threats That Are Shaking Global Firms: China And Deflation (CNBC)

• Oil, Gas Bloodbath Spreads to Junk Bonds, Leveraged Loans. Defaults Next (Wolf)

• Canada’s LNG Export Dream Is Dead (Oilprice.com)

• Dollar Surge Endangers Global Debt Edifice, Warns BIS (AEP)

• Sudden Swings Expose Fragility Of Financial Markets: BIS (Reuters)

• International Lending To China Soars In 2014: BIS (Reuters)

• Why The Dollar Is Still King: BIS (CNBC)

• Why The World Is Like A Real-Life Game Of Global Domination (Guardian)

• Citigroup Panicked Over Fraud at Chinese Ports (Bloomberg)

• The Long Slow Inexorable Demise Of America’s Working-White-Male (Zero Hedge)

• ECB’s Loans Offer Clues In QE Guessing Game (Reuters)

• Bank of England: Half A Million Housebuyers Face Mortgage Arrears (Guardian)

• Bank of England: UK Banking To Double In Size, Reach 950% of GDP (Guardian)

• Keep An Eye On The Fed’s Accelerating Asset Sales (CNBC)

• Bill Gross: You Can’t Cure Debt With More Debt (CNBC)

• The Most Essential Lesson of History That No One Wants To Admit (Beversdorf)

• Uncork the Central Bank Bubbly (StealthFlation)

• Taming Corporate Power: The Key Political Issue Of Our Age (Monbiot)

“The key economic figures come just six days before general elections ..”

• Japan’s Economy Is Worse Than Feared (WSJ)

Japan’s economy contracted for the second straight quarter in the July-to-September period, revised data released Monday showed, serving as a bitter reminder to Prime Minister Shinzo Abe that the nation’s economy remains in the woods two years after he came into office. Gross domestic product shrank an annualized 1.9% in the third quarter from the previous three-month period. The government last month estimated that the economy shrank 1.6% in the third quarter after a 6.7% plunge in the second quarter, indicating that the economy had entered a recession.

The key economic figures come just six days before general elections, which Mr. Abe is framing as a referendum on his economic policy program known as Abenomics. Recession or not, Japan’s economy is in a funk. Private consumption, the most important pillar of the economy, has shown little sign of life after a one-two punch of a sales tax increase in April and inflation caused by the yen’s 30% fall against the dollar. The consumption slump had led businesses to slash production and capital investment, further undermining economic growth.

How crazy will he get after being re-elected?

• Japan’s Recession Deepens as Election Looms for Abe (Bloomberg)

Japan’s recession was deeper than initially estimated as company investment unexpectedly shrank, a blow to Prime Minister Shinzo Abe as he campaigns for re-election on his economic credentials. The economy contracted an annualized 1.9% in the July to September period from the previous quarter, weaker than the 1.6% drop reported in preliminary data. The result was also below every forecast in a Bloomberg News survey that showed a median 0.5% decrease. The surprise decline in business investment sapped the strength of the world’s third-biggest economy, compounding damage from a slump in consumer spending after a sales-tax rise in April. With the main opposition party caught unprepared, Abe is on-track to win the Dec. 14 election, even as a decline in the yen cuts into people’s spending power. “Today’s report shows a pretty bleak picture of Japan’s economy,” said Taro Saito, director of economic research at NLI Research Institute in Tokyo. “We are going to see a recovery but only a gradual one. The weakening yen should provide a boost to manufacturers and those benefits will penetrate through a wide range of industries.”

Not much use, these analysts.

• China Trade Data Miss Forecasts By A Wide Margin (MarketWatch)

China’s exports rose a disappointing 4.7% in November while imports unexpectedly fell, as the world’s second-largest economy grapples with sluggish global activity and weak demand at home. Analysts said the data the government released on Monday show that the country’s crucial export sector – the one segment of the economy that had been showing signs of strength – was struggling during the month. “This was worse than expected,” said Ma Xiaoping, economist at HSBC. “We can see there is considerable downward pressure on the economy.” China’s economy has been showing slower growth after years of double-digit expansion. Growth slipped to 7.3% year-over-year in the third quarter, its slowest pace in more than five years. Full-year growth could fail to reach the government target of about 7.5% for the year.

November exports were below market expectations of an 8% gain compared with a year earlier and much less robust than the 11.6% increase in October. Meanwhile, imports sank 6.7% against expectations for a 3% rise, after a 4.6% year-over-year rise in October. Analysts said a rebound in the yuan’s value against other currencies could have been a factor. CIMB economist Fan Zhang said the weak export growth also reflects a strong month in the year-earlier period, while the drop in imports includes the impact of a sharp decline in global commodities prices, particularly oil. “In 2015, I still expect exports to improve over 2014 because of U.S. economic growth,” Mr. Zhang said. China’s central bank in late November cut benchmark interest rates for the first time in more than two years in a bid to give the economy a boost and cut borrowing costs for struggling companies. It has also injected liquidity into the banking system and encouraged banks to lend to struggling small businesses and the agricultural sector.

Time for Xi and Li to set a new, much power, growth target?!

• China Trade Data Paints Dreary Picture Of Economy (CNBC)

China’s annual import and export figures slowed sharply in November, data showed on Monday, reinforcing signs of fragility in the world’s second-largest economy. Exports rose 4.7% in November from a year earlier, much slower than an 11.6% rise in October and below expectations for an 8.2% increase in a Reuters poll. Imports fell an annual 6.7% in November, well below October’s 4.6% rise, and below expectations for a 3.9% increase. That left the country with a trade surplus of $54.5 billion for the month, above expectations of $43.5 billion. The Australian dollar weakened against the U.S. dollar after the data was released, recently trading at $0.8297.

“It’s clear domestic demand is pretty weak, most of the decline seems to be commodity related – which partly reflects lower prices, but is also because of the slowdown in the housing sector and overcapacity in industrial sectors,” Alaistair Chan, economist at Moody’s Analytics told CNBC. The slowdown in exports, meanwhile, was likely driven by a clamp down on over-invoicing seen earlier in the year and could suggest a cooling in global demand, said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole.

“The Asian powerhouse, which has been the world’s biggest consumer of raw materials, is now on course to post its slowest growth in nearly a quarter of a century.”

• The Two Main Threats That Are Shaking Global Firms: China And Deflation (CNBC)

With an uneasiness looming over the global economy as the year draws to a close, chief financial officers (CFOs) have told CNBC that softer growth in China and the threat of deflation in the euro zone are the two biggest issues their firms are facing. Fifty-one CFOs from Europe and Asia – who make up the CNBC CFO Global Council – were asked what the major risks that their firms are currently up against. Coming ahead of the pack by a clear margin was the threat of falling growth in China. It came top of the list for Asian CFOs and was the third biggest risk for their European counterparts. When asked which of the year’s geopolitical or economic risks had the greatest impact on their businesses, 57% pointed at the warning signs coming from the world’s second largest economy.

The results underline how important China is for global confidence as the country shifts from its traditional role as the world’s factory floor to becoming a consumer-led economy. The Asian powerhouse, which has been the world’s biggest consumer of raw materials, is now on course to post its slowest growth in nearly a quarter of a century. It grew 7.3% year-on-year during the July-September period, its slowest pace in more than five years, jeopardizing Beijing’s 7.5% target for 2014. The slowdown comes after years of double-digit growth and at a time when the country’s new leadership is stepping up regulation and trying to curb an overheated credit market. As well as the tougher stance by Beijing, there has been a more gentle touch from the People’s Bank of China.

The central bank looks increasingly ready to backstop the economy and manage the fall in growth after announcing a surprise rate cut last month. Diana Choyleva, the head of macroeconomic research at Lombard Street Research, believes that growth and monetary conditions in China are actually much weaker than the official numbers suggest. She regularly concentrates her research on the country and said in a note last week that Beijing is battling an ongoing correction in investment and capital flight from its shores. “China’s banks are one of the victims of Beijing’s past excesses and will have to pay the price as the needed cleanup and financial market reforms unfold,” she said.

“.. what the Fed has been worrying about is already happening in the energy sector: leveraged loans are getting mauled. And it’s just the beginning.”

• Oil, Gas Bloodbath Spreads to Junk Bonds, Leveraged Loans. Defaults Next (Wolf)

The price of oil has plunged nearly 40% since June to $65.63, and junk bonds in the US energy sector are getting hammered, after a phenomenal boom that peaked this year. Energy companies sold $50 billion in junk bonds through October, 14% of all junk bonds issued! But junk-rated energy companies trying to raise new money to service old debt or to fund costly fracking or off-shore drilling operations are suddenly hitting resistance.

And the erstwhile booming leveraged loans, the ugly sisters of junk bonds, are causing the Fed to have conniptions. Even Fed Chair Yellen singled them out because they involve banks and represent risks to the financial system. Regulators are investigating them and are trying to curtail them through “macroprudential” means, such as cracking down on banks, rather than through monetary means, such as raising rates. And what the Fed has been worrying about is already happening in the energy sector: leveraged loans are getting mauled. And it’s just the beginning.

This monthly chart by S&P Capital IQ’s LeveragedLoan.com shows the leveraged loan index for the oil and gas sector. Earlier this year, when optimism about the US shale revolution was still defying gravity, these loans were trading at over 100 cents on the dollar. In July, when oil began to swoon, these loans fell below 100 cents on the dollar. The trend accelerated during the fall. And in November, these loans dropped to around 92 cents on the dollar.

How bad is it? The number of leveraged loans in the oil and gas sector trading between 80 and 90 cents on the dollar (blue line in the chart below) has soared parabolically from 0% in September to 40% now. These loans are now between 10% and 20% in the hole! And some leveraged loans are now trading below 80 cents on the dollar:

And so is Australia’s.

• Canada’s LNG Export Dream Is Dead (Oilprice.com)

Lower oil prices have killed off major plans for liquefied natural gas exports from Canada’s west coast. On December 2 the state-owned oil company of Malaysia, Petronas, decided to shelve plans to build an enormous LNG export terminal in British Columbia, citing the falling price of oil. It is common for LNG contracts to be priced using a formula linked to the price of crude oil, so declining oil prices pushes down prices for LNG. Petronas’ Pacific NorthWest LNG, as it was known, was a proposed $32 billion export terminal that would send LNG to Asia. The decision highlights how competitive global LNG trade has become, despite growing demand. Greenfield projects, such as Pacific Northwest LNG, face steep startup costs that become prohibitive when oil prices fall. Although low oil prices may have been the icing on the cake, Canadian LNG projects were facing serious obstacles before oil prices plummeted.

There is stiff competition from a slew of LNG projects already under construction in the U.S. and Australia, which will come online much earlier than anything from British Columbia. Several LNG export facilities in the U.S. are not starting from scratch, for example. The Sabine Pass terminal on the Gulf Coast and the Cove Point facility on the Chesapeake Bay were both originally constructed to import LNG rather than export. The original facilities were put on ice when the U.S. no longer needed LNG imports. Now, companies are retrofitting them to handle exports – a much cheaper process than building a new facility. The indefinite cancellation of Pacific NorthWest LNG is a major setback for Canada’s plans to export natural gas. The move comes after BG Group abandoned plans to build a separate LNG export terminal on Canada’s west coast. Chevron is also in limbo with its Kitimat LNG project after its partner Apache pulled out.

“BIS officials are worried that tightening by the US Federal Reserve will transmit a credit shock through East Asia and the emerging world, both by raising the cost of borrowing and by pushing up the dollar.”

• Dollar Surge Endangers Global Debt Edifice, Warns BIS (AEP)

Off-shore lending in US dollars has soared to $9 trillion and poses a growing risk to both emerging markets and the world’s financial stability, the Bank for International Settlements has warned. The Swiss-based global watchdog said dollar loans to Chinese banks and companies are rising at annual rate of 47%. They have jumped to $1.1 trillion from almost nothing five years ago. Cross-border dollar credit has ballooned to $456bn in Brazil, and $381bn in Mexico. External debt has reached $715bn in Russia, mostly in dollars. A chunk of China’s borrowing is disguised as intra-firm financing. This replicates practices by German industrial companies in the 1920s, which hid their real level of exposure as the 1929 debt trauma was building up. “To the extent that these flows are driven by financial operations rather than real activities, they could give rise to financial stability concerns,” said the BIS in its quarterly report. “More than a quantum of fragility underlies the current elevated mood in financial markets,” it warned.

Officials are disturbed by the “risk-on, risk-off, flip-flopping” by investors. Some of the violent moves lately go beyond stress seen in earlier crises, a sign that markets may be dangerously stretched and that many fund managers do not really believe their own Goldilocks narrative. “Mid-October’s extreme intraday price movements underscore how sensitive markets have become to even small surprises. On 15 October, the yield on 10-year US Treasury bonds fell almost 37 basis points, more than the drop on 15 September 2008 when Lehman Brothers filed for bankruptcy.” “These fluctuations were large relative to actual economic and policy surprises, as the only notable negative piece of news that day was the release of somewhat weaker than expected retail sales data for the US one hour before the event,” it said.

The BIS said 55% of collateralised debt obligations (CDOs) now being issued are based on leveraged loans, an “unprecedented level”. This raises eyebrows because CDOs were pivotal in the 2008 crash. “Activity in the leveraged loan markets even surpassed the levels recorded before the crisis: average quarterly announcements during the year to end-September 2014 were $250bn,” it said. BIS officials are worried that tightening by the US Federal Reserve will transmit a credit shock through East Asia and the emerging world, both by raising the cost of borrowing and by pushing up the dollar. “The appreciation of the dollar against the backdrop of divergent monetary policies may, if persistent, have a profound impact on the global economy. A continued depreciation of the domestic currency against the dollar could reduce the creditworthiness of many firms, potentially inducing a tightening of financial conditions,” it said.

They do know.

• Sudden Swings Expose Fragility Of Financial Markets: BIS (Reuters)

Sudden swings in financial markets recently suggest they are becoming increasingly sensitive to unexpected events, the global organization of central banks said on Sunday, warning “more than a quantum of fragility” underlies the current bullish mood. MSCI’s all-country world stock index is hovering around multi-year highs after rebounding from sell-offs in August and October. The downturns were triggered by uncertainty over the global economic outlook and monetary policy, as well as geopolitical tensions, and the Bank for International Settlements (BIS) said the sharp and sudden dips pointed to frailty in the markets. “These abrupt market movements (in October) were even more pronounced than similar developments in August, when a sudden correction in global financial markets was quickly succeeded by renewed buoyant market conditions,” the BIS said in its quarterly review.

“This suggests that more than a quantum of fragility underlies the current elevated mood in financial markets,” it said, adding that recent developments suggest markets are becoming “increasingly fragile” “Global equity markets plummeted in early August and mid-October. Mid-October’s extreme intra-day price movements underscore how sensitive markets have become to even small surprises,” it said in the report. The comments followed the organization’s warning in September that financial asset prices were at “elevated” levels and market volatility remained “exceptionally subdued” thanks to ultra-loose monetary policies being implemented by central banks around the world.

Since then, the U.S. Federal Reserve has brought its monthly bond-purchase program to an expected end. However, Japan’s central bank has spurred global markets by expanding its massive stimulus spending while China unexpectedly cut interest rates, adding to stimulus measures from the European Central Bank. The BIS said these divergent monetary policies, coupled with the recent appreciation of the dollar, could have a “profound impact” on the global economy, particularly in emerging markets where many companies have large dollar-denominated liabilities. Separately, the BIS report said that international banking activity expanded for the second quarter running between end-March and end-June. Cross-border claims of BIS reporting banks rose by $401 billion. The annual growth rate of cross-border claims rose to 1.2% in the year to end-June, the first move into positive territory since late 2011.

“China’s share of BIS reporting banks’ foreign claims on all emerging markets stood at 28% in mid-2014, up from just 6% at the end of 2008.”

• International Lending To China Soars In 2014: BIS (Reuters)

China has become the largest emerging market destination for international bank lending, accounting for more than a quarter of cross-border claims on all emerging market economies, a central banking report shows. Cross-border claims on China increased by $65 billion in the second quarter of 2014 to $1.1 trillion, and were up nearly 50% in the year to the end of June, according to a quarterly report from the Bank for International Settlements on Sunday. “China has become by far the largest (emerging market) borrower for BIS reporting banks. Outstanding cross-border claims on residents of China totaled $1.1 trillion at end-June 2014, compared with $311 billion on Brazil and slightly more than $200 billion each on India and Korea,” the report says.

It said China’s share of BIS reporting banks’ foreign claims on all emerging markets stood at 28% in mid-2014, up from just 6% at the end of 2008. The BIS, often referred to as the central bankers’ central bank, says China’s status as the principal emerging market destination for international bank lending reflects a “remarkable evolution” since the financial crisis of 2008-9. However, concerns are mounting among international investors of a credit bubble developing in China, with the country’s property market seen as the biggest risk to the economy.

In late November, after saying for months that China did not need any big economic stimulus, the People’s Bank of China surprised financial markets with its first interest rate cut in more than two years to shore up growth and help firms pay off mountains of debt. Outside China, cross-border claims on emerging market economies rose 2.7%, or $33 billion, in the three months to the end of June, the BIS said, with the increase coming mainly from Asia. However, cross-border lending to Russia declined 10%. Russia has seen its finances come under strain from western sanctions over Moscow’s role in the Ukraine crisis and the falling price of oil, its main export.

“We argue that the dollar’s role may reflect instead the share of global output produced in countries with relatively stable dollar exchange rates – the ‘dollar zone’ ..”

• Why The Dollar Is Still King: BIS (CNBC)

A question that has frustrated even the most experienced economists in the last few decades is how the dollar has remained the most prominent reserve currency in the world despite the global share of U.S. output eroding away. The Bank for International Settlements (BIS), a Basel-based institution that is known as the central bank of central banks, thinks it has found the answer. “We argue that the dollar’s role may reflect instead the share of global output produced in countries with relatively stable dollar exchange rates – the ‘dollar zone’,” it said in its new quarterly report released on Sunday. In 1978, economists Robert Heller and Malcolm Knight were credited as first to draw attention to the fact that countries held an average of 66% of their foreign-exchange reserves in dollars. Even today that number hasn’t budged much with the latest statistics from the International Monetary Fund showing that just over 60% of allocated funds are held in the greenback.

The higher the correlation in price between a given currency and the dollar, the higher the economy’s dollar share of that country’s official reserves, according to Robert McCauley and Tracy Chan, the two authors of the BIS report. The report adds that the dollar’s robustness comes despite an 18% decline against major currencies since 1978 and the U.S. economy’s share of global GDP (gross domestic product) shrinking 6% in those 36 years. “The ‘dollar zone’ still accounts for more than half of the global economy. In countries whose currencies are more stable against the dollar than against the euro, reserve composition that favors the dollar produces more stable returns in terms of the domestic currency,” they said.

It’s a shame this guy feels he needs to resort to Putin bashing.

• Why The World Is Like A Real-Life Game Of Global Domination (Guardian)

Putin gives a speech and the rouble falls. Europe’s central bank boss gives a speech and the stock markets fall. Opec meets in Vienna and the oil price plummets. Japan’s prime minister calls a snap election and the yen’s slide against the dollar accelerates. All these things in the last six weeks of an already fractious year. There are suddenly multiple conflicts being played out in the global markets, conflicts the global game’s usual rules are not built to handle. The first concerns a clear game of beggar thy neighbour between China and Japan. Since 2012 Japan has printed money hand over fist, with the aim of kickstarting economic growth. With growth stalling for a third time in the final quarter of 2014 its premier Shinzo Abe printed more. China perceives this as unfair competition, and with its own growth slowing, it responded in late November with a surprise interest-rate cut.

Many see this as the outbreak of a classic currency war, along 1930s lines, where rival economic giants engage in a pointless game of devaluing their own currency – boosting exports but hitting the spending power of their people – to their mutual detriment. By hitting each other’s capacity to export, they edge the region towards deglobalisation. The second new dynamic is the game of chicken being played over the oil price between America, Russia and Opec. Oil demand is falling because growth in the emerging markets – China, Brasil and the like – is slowing down. Yet supply has risen – by 11m barrels to 92m barrels per day since the global financial crisis began. America has become the world’s biggest oil producer thanks to the rapid rollout of shale and deep sea oilfields.

Since June 2014 the price of a barrel of Brent crude has fallen from $115 to $68 – and after Opec met in late November and rejected calls to cut production some analysts predicted the price could collapse to $40. Saudi Arabia and the other gulf monarchies were the key players in the decision to keep production high and prices falling – and few doubt there is politics behind the move. It hurts Russia, Venezuela and Iran. For Saudi Arabia there are scores to settle with both Russia and Iran over their role in crushing the Syrian revolution, and with Venezuela for being Russia’s perpetual Bolivarian cheerleader.

As a result, Vladimir Putin has had to admit to his people that a combination of western sanctions and Saudi oil strategy will push Russia into recession next year. At times like this economists resort to game theory, warning sparring countries that, in a game where everybody is trying to shrink something – whether it be prices or currencies – everybody loses out. So let’s game it out – not in the austere language of theory but of the empire-building “god games” popular on games consoles.

The whole shebang is still under lockdown after all this time.

• Citigroup Panicked Over Fraud at Chinese Ports (Bloomberg)

Citigroup was in a “state of panic” when alleged fraud was uncovered in two Chinese ports, Mercuria Energy’s lawyer said as a London trial over disputed metal finance deals got under way. “The discovery of the fraud was a massive problem for Citi as it was their metal and it was at their risk,” Mercuria lawyer Graham Dunning told a London judge. “There was a state of panic.” The disputed copper and aluminum is under lockdown in the ports of Qingdao and Penglai, where Chinese authorities are investigating an alleged fraud. Neither side can get access and they don’t know how much of the metal is there, Dunning said at a pre-trial hearing in August. Citigroup argues that it effectively delivered the metal to Mercuria under the terms of a sale-and-repurchase agreement by handing over warehouse receipts. The bank says it is owed about $270 million. Mercuria, a Cyprus-based firm with major trading operations in Geneva, argues the products were never properly delivered.

“It appears that substantial quantities may be missing from the warehouses or may be the subject of multiple pledges,” Dunning said today. The probe at Qingdao, China’s third-largest port, is examining companies owned by a Chinese-Singaporean metals trader, Chen Jihong, who is alleged to have pledged the same metal inventories multiple times for collateral on loans. Chinese authorities have uncovered almost $10 billion in fraudulent trade, including irregularities at Qingdao, according to the country’s currency regulator. Standard Chartered, Standard Bank and ABN Amro have also made loans affected by the alleged fraud. “Mercuria’s apparent goal is for it to be Citi, not Mercuria, which is left out of pocket,” Citigroup said in documents from the trial. Mercuria was responsible for safeguarding and insuring the metal, the bank said.

What do they do all day?

• The Long Slow Inexorable Demise Of America’s Working-White-Male (Zero Hedge)

Not “off the lows”…

Germany holds the levers here.

• ECB’s Loans Offer Clues In QE Guessing Game (Reuters)

The guessing game over the timing of euro zone money printing will intensify as the European Central Bank unveils a closely watched gauge of policy in the coming week, the highlight of a calendar dominated by Europe’s malaise. On the other side of the Atlantic, investors will continue placing their bets on a different but equally crucial event: when the U.S. Federal Reserve might raise interest rates. U.S. data and several Fed central bankers will give a sense of the speed of the recovery and when a rate rise might be merited, while oil prices and Chinese data will provide plenty more for markets to digest. “The key story is going to be in the euro zone,” said James Knightley, ING’s senior economist, referring to the results of the ECB’s targeted long-term refinancing operations (TLTROs) on Thursday. The cheap loans for banks are one of the ECB’s main ways to flush money into the stagnating euro zone economy. “If the take-up is poor, that could increase market talk that the ECB is going to step in and use other tools,” Knightley said.

That means a sovereign bond-buying program like those used in the United States, Britain and Japan, but which Germany fears would encourage reckless state borrowing and fuel inflation. Such a program may come early next year. “The take-up of TLTROs could swing the ECB’s Governing Council between January and March, depending on how the number looks,” said Citigroup economist Guillaume Menuet. The first TLTRO was taken up only to the tune of €83 billion. Hopes are higher for this time but forecasts hover around the €150 billion mark, leaving the ECB short of the €400 billion it was prepared to offer banks in total. On Monday in Brussels, ECB President Mario Draghi will tell euro zone finance ministers no amount of stimulus can replace reforms to tax, labor and pension systems to bring down near-record unemployment.

Rate rises will be murder.

• Bank of England: Half A Million Housebuyers Face Mortgage Arrears (Guardian)

The Bank of England has warned half a million families would be at risk of falling into mortgage arrears once it started to raise interest rates from their emergency level of 0.5%. Threadneedle Street said the number of households running into difficulties would increase by a third to 480,000 in the event of a two-percentage-point increase in the cost of borrowing. The Bank stressed the proportion of borrowers having trouble paying their home loans should remain well below the levels of the early 1990s – when Britain suffered its worst postwar property crash – provided incomes rose alongside interest rates. “Higher interest rates will increase financial pressure on households with high levels of debt,” the Bank said in its Quarterly Bulletin. “The%age of households with high debt-servicing ratios, who would be most at risk of financial distress, is not expected to exceed previous peaks given the likely paths of interest rates and income.

“But developments in incomes for the households who are potentially most vulnerable will be an important determinant of the extent to which financial distress does increase.” The findings were based on a survey for the Bank conducted by NMG consulting. It found that the average outstanding mortgage debt was £83,000 per household, with average household income of £33,000 a year (£43,000 for those with a mortgage) and unsecured debt £8,000. Interest rates have been pegged at 0.5% – the lowest in the Bank’s 320-year history – since March 2009 and cheap borrowing costs have made it easier for households with large home loans to keep up payments on their mortgages. The Bank has used its forward guidance policy to stress that interest rate rises, when they come, will be gradual and limited in size. Financial markets do not anticipate the first rise to come before the second half of 2015 but the Bank is exploring the impact of tighter policy on households where more than 40% of income is spent on mortgage repayments, since these housebuyers are most likely to fall into arrears.“

Oh, great! 950% of GDP. What could go wrong?

• Bank of England: UK Banking To Double In Size, Reach 950% of GDP (Guardian)

Britain’s exposure to its banks, already the largest in the G20 group of leading nations, is set to double in the next 35 years. “The size of the UK banking system might roughly double from its current size to over 950% of GDP by 2050, far outstripping the projected increase in other G20 banking systems,” the Bank of England said. The UK’s banking system is currently 450% of GDP, Threadneedle Street said. In money terms, it would amount to a rise from over £5tn to £60tn. “Some have suggested that the current size of the UK banking system represents a material risk to economic stability and that action should be taken to reduce its size,” the central bank said in its latest quarterly bulletin. However, in an article asking “Why is the banking system so big and is that a problem?” the Bank of England said it had not found evidence of a link between the size of the economy and the risk of a crisis.

It said more work was needed and that it had not looked at the interconnectedness of the banking system and its opacity as it increases in size. “The empirical analysis in this article does not find a strong link between banking system size and the probability or output cost of a crisis, at least once the resilience of the system is taken into account,” the bank said in the article. “Establishing empirically whether banking system size is a leading indicator of banking crises is not straightforward,” it said. The banking system has undergone a dramatic shift in past 40 years, with assets rising from about 100% of GDP in 1975, the Bank of England said. It said the UK’s banking system was the largest out of Japan, the US and the 10 biggest EU economies. Nearly a fifth of global banking activity is booked in the UK, where there are 150 deposit-taking foreign branches of banks and almost 100 foreign subsidiaries from more than 50 countries.

“Since peaking at $4.07 trillion last August, the Fed’s monetary base has been reduced by $259.2 billion as of the latest reserve reporting date on November 26, 2014.”

• Keep An Eye On The Fed’s Accelerating Asset Sales (CNBC)

The U.S. monetary authorities (Fed) are stepping up the contraction of their balance sheet at a surprisingly fast pace. Since peaking at $4.07 trillion last August, the Fed’s monetary base has been reduced by $259.2 billion as of the latest reserve reporting date on November 26, 2014. More than half of these Fed asset sales occurred between the end of October and the end of November. But the balance sheet remains an impressive $3.8 trillion – a huge difference with the pre-crisis monetary base of $820-$830 billion. It is interesting to note that even at these comparatively modest amounts of high-powered money, the pre-crisis U.S. monetary policy was very expansionary: the federal funds rate was fluctuating around 3% while the inflation rate was accelerating above 4%.

Obviously, these are different times now: the U.S. financial system and the economy have changed in a rapidly evolving global context. Still, the comparison is useful because it shows how much the Fed’s balance sheet will have to adjust in the months ahead. One key aspect of that adjustment process is the Fed’s statement that interest rates will remain low well after the beginning of large liquidity withdrawals to “normalize” the policy stance. The question is: how is that possible? If the quantity of money is being reduced in as large amounts as is currently the case, would it not be normal to expect that its price (i.e., interest rate) would also have to rise? Certainly it would.

But what makes the Fed’s statement credible is the fact that huge excess reserves (money banks can use to make loans) of the U.S. banking system – $2.4 trillion at the last count – will continue to keep an extraordinarily liquid interbank market for some time. Last Friday, for example, the effective federal funds rate (overnight money banks lend to each other) closed trading at 0.11% – more than half way below the Fed’s target of 0.25%. These excess reserves are now being drained by the Fed’s bond sales; they have been cut by $286.1 billion from their peak of last August. There is still plenty of cutting to do, though. Just think that during the pre-crisis period from January 2007 to June 2008 banks’ average excess reserves were fluctuating around monthly levels of $1.9 billion (sic). That is a far cry from the $2.4 trillion we have now.

Not exactly a new point, but ..

• Bill Gross: You Can’t Cure Debt With More Debt (CNBC)

Central banks are trying to solve a debt crisis by piling on more debt, creating a “point of low return” for investors, bond guru Bill Gross said in a letter to clients. The Janus Capital portfolio manager and Pimco founder takes the Federal Reserve, Bank of Japan and European Central Bank to task for using monetary policy to make it easier for governments to run up debt, all in the hopes of stimulating anemic global growth. “How could they?” Gross asks, using nursery rhymes including the characters Punch and Judy to bemoan the possibility of “inflationary horror” that characterized the 1970s. It’s probably better to read the Gross letter in its entirety – get it here – to see how he connects the dots, but his conclusion is stark:

Ah, policymakers. Perhaps the last five years have been one giant nursery rhyme. But each of these central bankers is trying to achieve the same basic objective: Solve a debt crisis by creating more debt. Can it be done? A few years ago, I wrote that this uncommonsensical feat could be accomplished, but with a number of caveats: 1) Initial conditions must not be onerous; 2) Both monetary and fiscal policies must be coordinated and lead to acceptable structural growth rates; and 3) Private investors must continue to participate in the capital market charade that such policies produced.

Several pitfalls have occurred within each caveat, not the least of which is stagnant growth and companies using the easy money of the past six years not to propel the economy but to jack up their own stock prices and reward themselves and shareholders. At the same time, the much-awaited handoff from monetary to fiscal policy has not happened, in large part because the Fed and others have been willing to provide trillions in accommodation:

In the U.S., as elsewhere, there has been little focus on public investment and infrastructure spending. It’s been all monetary policy, all of the time, with most of the positives flowing over to markets as opposed to the real economy. The debt currently being created is not promoting real growth and solving a debt crisis – it is being used by corporations to repurchase shares and accentuate the growing inequality between the very rich and the middle class.

” .. as Dr. Paul so clearly points out, the sole purpose of H. Res. 758 is simply a pouring of the legal foundation for something much more substantive. You see, this is how wars begin.”

• The Most Essential Lesson of History That No One Wants To Admit (Beversdorf)

Ron Paul wrote an eye opening article recently about some legislation that was just signed in Congress, namely H. Res. 758. In the article Dr. Paul explains the purpose of the resolution. It’s not a new law but provides a basis of facts that will be relied on for future action. So essentially the resolution purports that Russia behaved badly in various ways and by way of signing H. Res. 758 each congressman was indicating their agreement that the propositions contained therein are factual. Now just because a group of obnoxiously arrogant A-holes stand around in a tax-revenue financed chamber and say “yeah” to several assertions does not make those assertions factual, but here in the United Orwellian States of America it kinda does. Because those assertions that were voted to be fact (similar to the First Council of Nicaea) will now be written as factual history and taught to our children as having happened that way. The very same way we all attained our ideas of American superiority.

The dishonesty and ignorance it creates is reason enough not to do such things, however, the real stinker of it is, as Dr. Paul so clearly points out, the sole purpose of H. Res. 758 is simply a pouring of the legal foundation for something much more substantive. You see this is how wars begin. And the wheels for this particular war have been in motion for many years now. We’ve been told our actions heretofore are simply a necessary response to the Ukraine situation. However, those who can objectively look at the Ukraine situation will realize the US sponsored coup in Ukraine was simply a spark to light the fuse of a much larger detonation.

Now I understand many at this point are thinking “yep another conspiracy theory, why can’t it ever just be the US government thinks what they are doing is best for Americans”? And it can, it just never is anymore and perhaps ever was. Lies are told and public opinion is manipulated. For war must be every bit good theatre in the press, as good strategy on the ground. It is the theatre that makes war so ugly. Fighting a war for what one believes in is unfortunate and brutal but fighting for lies and deceit to an end that benefits only those telling the lies is a type of ugliness most of us cannot comprehend. It is only in the world ruled by sociopaths where such things can happen.

“No worries, Father Allen, Brother Ben and Sister Janet figured out how to turn the universe’s economic waters into wine.”

• Uncork the Central Bank Bubbly (StealthFlation)

What a glorious global economic gala! Apparently, contracting world GDP growth, monumental sovereign debt loads, ballooning central bank balance sheets, crashing commodity prices, competitive currency devaluations and synthetically suppressed interest rates, as far as the eye can see, are all great tidings to be joyously celebrated throughout this holiday season. Well, at least that’s the takeaway from the whooping wonderful world of capital markets. Have no fear, all is perfectly in order. Jamie Dimon, Jim Cramer, Larry Fink and Company have our back. The rest of us mere mortals are simply supposed to stand aside and take their professional word for it, silently sipping the financial establishment’s spiked eggnog until we attain a sheepish state of stupid stupor. After all, the money experts at the Fed are on the case, what could possibly go wrong?

Joy to the world! es, it’s true, your Nation too can enjoy the very same blissful state of economic euphoria, all you need is the will to turn your monetary policy completely on its head, a la festive freeloading Fed. No need to maintain the integrity of your means of exchange, that’s so old school. That’s right, you too are absolutely invited to enter the ZIRP zero bound party zone, just buy out all your own newly issued treasury obligations and be sure to lap up any illiquid debt that may be languishing. Set it and forget it, that’s it, nothing to it. In the end, it will all take care of itself according to the all knowing fabulous Fed heads and the crazed Keynesian collegiate kooks that orchestrated and obliged this opulent banker blowout. No worries, Father Allen, Brother Ben and Sister Janet figured out how to turn the universe’s economic waters into wine.

Oh, there is one important caveat which needs to be pointed out, along with the monetary ecstasy ease regime, your Nation is also required to unequivocally serve the United States’ geopolitical ambitions and global economic interests, otherwise, no monetary marmalade for you! Just ask Vlad on that score. His toast is badly burnt, his olive oil spread is spoiled, and his Ruble is now rubble. No money honey for comrade Putin until he bows down to the high and mighty masters of the badass bully banking USD monetary system hegemony.

Wealth inequality is a symptom. Power inequality is the disease.

• Taming Corporate Power: The Key Political Issue Of Our Age (Monbiot)

Does this sometimes feel like a country under enemy occupation? Do you wonder why the demands of so much of the electorate seldom translate into policy? Why parties of the left seem incapable of offering effective opposition to market fundamentalism, let alone proposing coherent alternatives? Do you wonder why those who want a kind and decent and just world, in which both human beings and other living creatures are protected, so often appear to be opposed by the entire political establishment? If so, you have encountered corporate power – the corrupting influence that prevents parties from connecting with the public, distorts spending and tax decisions, and limits the scope of democracy.

It helps explain the otherwise inexplicable: the creeping privatisation of health and education, hated by the vast majority of voters; the private finance initiative, which has left public services with unpayable debts; the replacement of the civil service with companies distinguished only by incompetence; the failure to re-regulate the banks and collect tax; the war on the natural world; the scrapping of the safeguards that protect us from exploitation; above all, the severe limitation of political choice in a nation crying out for alternatives. There are many ways in which it operates, but perhaps the most obvious is through our unreformed political funding system, which permits big business and multimillionaires in effect to buy political parties. Once a party is obliged to them, it needs little reminder of where its interests lie. Fear and favour rule.

And if they fail? Well, there are other means. Before the last election, a radical firebrand said this about the lobbying industry: “It is the next big scandal waiting to happen … an issue that exposes the far-too-cosy relationship between politics, government, business and money … secret corporate lobbying, like the expenses scandal, goes to the heart of why people are so fed up with politics.” That, of course, was David Cameron, and he’s since ensured that the scandal continues. His Lobbying Act restricts the activities of charities and trade unions but imposes no meaningful restraint on corporations.

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