Jun 182016
 
 June 18, 2016  Posted by at 8:41 am Finance Tagged with: , , , , , , , , ,  Comments Off on Debt Rattle June 18 2016


Harris&Ewing F Street N.W., Washington, DC 1918

Stocks Slump Most In 4 Months As Global Financial Stress Nears 5-Year Highs (ZH)
The Fed And Other Central Banks Have Lost Their Magic Powers (Das)
ECB Closes Ranks With Bank Of England To Avert Brexit Crunch (AEP)
Canada’s Housing ‘Affordability Crisis’ Fueled By Overseas Money: Trudeau (G.)
Rio State Declares ‘Public Calamity’ Over Finances Weeks Before Olympics (BBC)
Japan: A Future of Stagnation (CH Smith)
EU Is Too Big and ‘Sinking’, UK Should Leave (CNBC)
Money and Banking, Keen and Krugman (Legge)
All You Need To Know About Blockchain, Explained Simply (WEF)
Digital Currency Ethereum Is Cratering Because Of A $50 Million Hack (BI)
German Minister Criticises ‘Warmongering’ NATO (BBC)
Greece Sidelines Officials Who Blocked Expulsion Of Refugees To Turkey (G.)
MSF Rejects EU Funds Over ‘Shameful’ Migrant Policy (AFP)

Oh what fun it is to play….

Stocks Slump Most In 4 Months As Global Financial Stress Nears 5-Year Highs (ZH)

Global Financial Stress Index spikes up most since Aug 2011…

 

As Brexit polls surge towards "Leave"…

 

As USDollar Scarcity (panic demand) rears its ugly head again…

 

And GDP-weighted European Sovereign risk surged to 2 year highs…

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They were always only illusionary.

The Fed And Other Central Banks Have Lost Their Magic Powers (Das)

During the financial crisis of 2008-09, politicians facing difficult and electorally unpopular decisions cleverly passed the responsibility for the economy to central bankers. These policymakers accepted the task to nurse the global economy to health. But there are increasing doubts about central banks’ powers and their ability to deliver a recovery. Policymakers have engineered an artificial stability. Budget deficits, low-, zero-, and now negative interest rates , and quantitative easing (QE) have not restored global growth or increased inflation to levels necessary to bring high-debt under control. Instead, low rates and the suppression of volatility have encouraged asset-price booms in many world markets.

Since prices of assets act as collateral for loans, central banks are being forced to support these inflated values because of the potential threat to financial institutions holding the debt. As the tried and tested policies lose efficacy, new unconventional initiatives have been viewed by markets with increasing suspicion and caution. Key to this debate is negative interest rate policy (NIRP), now in place in Europe and Japan, and most recently affecting German bonds. Markets do not believe that NIRP will create the borrowing-driven consumption and investment that generates economic activity. Existing high-debt levels, poor employment prospects, low rates of wage growth, and overcapacity have lowered potential growth rates, sometimes substantially.

NIRP is unlikely to create inflation for the same reasons, despite the stubborn belief among economic clergy that increasing money supply can and will ultimately always create large changes in price levels. There are toxic by-products to this policy. Low- and negative rates threaten the ability of insurance companies and pension funds to meet contracted retirement payments. Bank profitability also has been adversely affected. Potential erosion of deposits may reduce banks’ ability to lend and also reduce the stability of funding.

The capacity of NIRP to devalue currencies to secure export competitiveness is also questionable. The euro, yen and Swiss franc have not weakened significantly so far, despite additional monetary accommodation. One reason is that these countries have large current account surpluses: the eurozone (3.0% of GDP), Japan (2.9% of GDP), and Switzerland (12.5% of GDP). The increasing ineffectiveness of NIRP in managing currency values reflects the fact that the underlying problem of global imbalances remains unresolved.

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Crumbling.

ECB Closes Ranks With Bank Of England To Avert Brexit Crunch (AEP)

The European Central Bank has pledged to flood the financial system with euro liquidity if credit markets seize up after a Brexit vote. The move came as European bank stocks plummeted across the board for another day, the epicentre of stress as nerves fray over the potential fall-out from British referendum. The Euro Stoxx index of bank equities fell to a four-year low, and is nearing levels last seen in during the eurozone debt crisis in 2012. Europe’s banks have lost half their value in the last year. “We have taken the necessary precautionary measures to meet liquidity needs,” said Ewald Nowotny, Austria’s central bank governor and an ECB board member. “We have assured that there will be no liquidity bottlenecks, either among English banks or European banks, if it becomes necessary,” he said.

The soothing words put to rest any fear that the ECB might withhold full cooperation from the Bank of England in the poisonous political mood after a withdrawal vote. A spat might have sparked fears of a funding crunch for international banks in the City of London with short term debts in foreign currencies. The Bank of England cannot print euros or dollars. The world’s central banks tend to work closely together as an Olympian fraternity, knowing that their fates are bound together regardless of the political fighting around them. The US Federal Reserve and the central banks of Japan, Switzerland, Sweden, and Canada are all working as tightknit team with the Bank of England and the ECB, determined to avoid being caught off guard as they were when the payments system went into meltdown after the Lehman crisis.

[..] German banks are in surprisingly deep trouble, struggling with the corrosive effects of negative interest rates on their profit margins. But Italian lenders worry regulators most as tougher capital adequacy rules come into force, and the eurozone’s new ‘bail-in’ policy for creditors turns the sector into a lepers’ colony. The non-performing loans of Italian banks have reached 18pc of their balance sheets, the legacy of Italy’s economic Lost Decade. This is coming into focus as premier Matteo Renzi bleeds support and risks losing a make-or-break referendum in October.

Euro Intelligence reports that he faces an “insurrection” after ex-premier Massimo D’Alema – supposedly a Renzi ally – said he has switched his support to the radical Five Star movement of comedian Beppe Grillo. It is no longer implausible to imagine a Five Star government in charge of Italy within months, setting off a political earthquake. The picture is equally dramatic in Spain where the ultra-Left Podemos coalition has pulled well ahead of the establishment Socialist Party (PSOE) in the polls and has an outside chance of winning the elections on June 26, opening the way for an anti-austerity government in Madrid. The possibility of a ‘Syriza-style’ rebellion in Spain is viewed with horror in Brussels.

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No shit, Justin.

Canada’s Housing ‘Affordability Crisis’ Fueled By Overseas Money: Trudeau (G.)

An influx of capital from Asia is partly responsible for soaring housing prices in Vancouver and Toronto, Justin Trudeau has said, as a new study showed more than 90% of all detached homes in Vancouver are now worth more than C$1m($772,141). “We know that there is an awful lot of capital that left Asia in the past few years,” Canada’s prime minister told public broadcaster CBC on Friday. “Obviously overseas money coming in is playing a role” in Canada’s housing affordability crisis, he said. Trudeau provided no supporting data Friday to back up his remarks, although his government set aside funds to study the widespread perception that overseas investors and speculators are to blame for Canada’s housing bubble.

Concern over the overheated property market has focused on Vancouver, where the proportion of million-dollar homes in the city has climbed this year to 91%. The figure marks a leap from two years ago, when around 59% of houses were worth a million or more, according to the study by Andy Yan, acting director of Simon Fraser University’s City Program. “This shows how what used to be the earnest product of a lifetime of local work is perhaps quickly becoming a leveraged and luxurious global commodity,” Yan said. The median household income in Vancouver, meanwhile, rose just 8.6% between 2009 to 2013, according to the most recent data from Statistics Canada. Adjusted for inflation, it would be about C$77,000 a year in 2016.

That puts typical incomes well below the threshold needed to purchase million-dollar homes, said Yan, noting other factors must be driving the sharp increase in home values in Vancouver. “It’s global cash, meeting cheap money, meeting limited supply,” he said, adding that all three factors are working to “magnify each other” and drive further speculation.

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To quote myself: “You sure about those Olympics?”

Rio State Declares ‘Public Calamity’ Over Finances Weeks Before Olympics (BBC)

The Brazilian state of Rio de Janeiro has declared a financial emergency less than 50 days before the Olympics. Interim Governor Francisco Dornelles says the “serious economic crisis” threatens to stop the state from honouring commitments for the Games. Most public funding for the Olympics has come from Rio’s city government, but the state is responsible for areas such as transport and policing. Interim President Michel Temer has promised significant financial help. The governor has blamed the crisis on a tax shortfall, especially from the oil industry, while Brazil overall has faced a deep recession.

The measure could accelerate the release of federal emergency funds. Rio state employees and pensioners are owed wages in arrears. Hospitals and police stations have been severely affected. In a decree, Mr Dornelles said the state faced “public calamity” that could lead to a “total collapse” in public services, such as security, health and education. He authorised “exceptional measures” to be taken ahead of the Games that could impact “all essential public services”, but no details were given.

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Make that the entire western world.

Japan: A Future of Stagnation (CH Smith)

One of our longtime friends in Japan just sold the family business. The writing was on the wall, and had been for the past decade: fewer customers, with less money, and no end of competition for the shrinking pool of customers and spending. Our friend is planning to move to another more vibrant economy in Asia. She didn’t want to spend the rest of her life struggling to keep the business afloat. She wanted to have a family and a business with a future. It was the right decision, not only for her but for her family: get out while there’s still some value in the business to sell. [..] The Keynesian Fantasy is that encouraging people to borrow money to replace what they no longer earn is a policy designed to fail, and fail it has.

Borrowing money incurs interest payments, which even at low rates of interest eventually crimps disposable earnings. Banks must loan this money at a profit, so interest rates paid by borrowers can’t fall to zero. If they do, banks can’t earn enough to pay their operating costs, and they will close their doors. If banks reach for higher income, that requires loaning money to poor credit risks and placing risky bets in financial markets. Once you load them up with enough debt, even businesses and wage earners who were initially good credit risks become poor credit risks. Uncreditworthy borrowers default, costing the banks not just whatever was earned on the risky loans but the banks’ capital.

The banking system is designed to fail, and fail it does. Japan has played the pretend-and-extend game for decades by extending defaulting borrowers enough new debt to make minimal interest payments, so the non-performing loan can be listed in the “performing” category. Central banks play the game by lowering interest rates so debtors can borrow more. This works like monetary cocaine for a while, boosting spending and giving the economy a false glow of health, but then the interest payments start sapping earnings, and once the borrowed money has been spent/squandered, what’s left is the interest payments stretching into the future.

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“These opportunities come along once in a generation where people actually get to vote on what they want.”

EU Is Too Big and ‘Sinking’, UK Should Leave (CNBC)

The European Union is too big and is “sinking,” and the United Kingdom should take the chance to get out while it can, economist David Malpass said Friday. British citizens vote next Thursday on whether the U.K. should exit the union. “The EU is just too big. It’s too expensive. It doesn’t work,” the president of Encima Global said in an interview with CNBC’s “Power Lunch.” “They haven’t even made progress on their mission, which was fiscal responsibility, banking reforms, defending the external borders. They’re just not doing the job.” He believes the Brits should not squander the opportunity, noting that the last referendum the country held was in 1975. “These opportunities come along once in a generation where people actually get to vote on what they want.”

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More on an old feud.

Money and Banking, Keen and Krugman (Legge)

Keen carved out a major distinction between his approach and that of Krugman, but also of that of many of the economists who agree that money is not neutral. He argues that an increase in bank lending affects the macro economy by increasing demand. It follows that measured growth should be decomposed into workforce growth, productivity growth, and debt growth. Keen’s third term is deeply disturbing, because he goes on to argue that that a major part of the observed economic growth since 1980 has been driven by rising household debt levels.

Since all household debt involves interest, there must be a point at which households have all the debt that they can carry, and don’t take on any more. At this point, argues Keen, the affected economy will become a “debt zombie”, stuck in a low or even negative growth trajectory. Keen proposes a “debt jubilee” to write off excessive household debt and allow growth to resume. On its own, this would only postpose the debt/stagnation crisis; but perhaps after one debt jubilee they could become regular events.

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101. But nothing on security threats. Hmm.

All You Need To Know About Blockchain, Explained Simply (WEF)

Many people know it as the technology behind Bitcoin, but blockchain’s potential uses extend far beyond digital currencies. Its admirers include Bill Gates and Richard Branson, and banks and insurers are falling over one another to be the first to work out how to use it. So what exactly is blockchain, and why are Wall Street and Silicon Valley so excited about it? Currently, most people use a trusted middleman such as a bank to make a transaction. But blockchain allows consumers and suppliers to connect directly, removing the need for a third party. Using cryptography to keep exchanges secure, blockchain provides a decentralized database, or “digital ledger”, of transactions that everyone on the network can see. This network is essentially a chain of computers that must all approve an exchange before it can be verified and recorded.

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What’s that about the chain and its weakest link?

Digital Currency Ethereum Is Cratering Because Of A $50 Million Hack (BI)

The value of the digital currency Ethereum has dropped dramatically amid an apparent huge attack targeting an organisation with huge holdings of the currency. The price per unit dropped to $15 from record highs of $21.50 in hours, with millions of units of the digital currency worth as much as $50 million stolen at post-theft valuations. At a pre-theft valuation, it works out as a staggering $79.6 million. Ethereum developers have proposed a fix that they hope will neutralise the attacker and prevent the stolen funds from being spent. The core Ethereum codebase does not appear to be compromised. Ethereum is a decentralised currency like bitcoin, but it is built in such a way that it also allows for decentralised organisations to be built on top of its blockchain (the public ledger of transactions) and for smart contracts that can execute themselves automatically if certain conditions are met.

One of these organisations is the DAO, the Decentralised Autonomous Organisation, which controls tens of millions of dollars’ worth of the digital currency. ( The bitcoin news site CoinDesk has a good feature explaining more about how the DAO operates.) The DAO is sitting on 7.9 million units, known as ether, of the currency worth $132.7 million. Early Friday morning, it appears to have been hit with a devastating attack, with unidentified attackers appearing to exploit a software vulnerability and draining drain millions of ether – with a theoretical value in the tens of millions of dollars. One ether wallet identified by community members as a recipient of the apparently stolen funds holds more than 3.5 million ether. At an exchange rate of about $14 a unit, that works out at $47 million. At $21.50, the value of ether before the hack, it’s significantly more – $79.6 million.

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Germany wants to be able to talk to Russia.

German Minister Criticises ‘Warmongering’ NATO (BBC)

German Foreign Minister Frank-Walter Steinmeier has criticised Nato military exercises in Eastern Europe, accusing the organisation of “warmongering”. Mr Steinmeier said that extensive Nato manoeuvres launched this month were counterproductive to regional security and could enflame tensions with Russia. He urged the Nato military alliance to replace the exercises with more dialogue and co-operation with Russia. Nato launched a simulated Russian attack on Poland on 7 June. The two-week-long drill involves about 31,000 troops, including 14,000 from the US, 12,000 from Poland and 1,000 from the UK. It will also feature dozens of fighter jets and ships, along with 3,000 vehicles.

“What we shouldn’t do now is inflame the situation further through sabre-rattling and warmongering,” Mr Steinmeier said in an interview to be published in Germany’s Bild am Sontag newspaper. “Whoever believes that a symbolic tank parade on the alliance’s eastern border will bring security, is mistaken. “We are well-advised to not create pretexts to renew an old confrontation,” he said. The exercises are intended to test Nato’s ability to respond to threats, and take place every two years. But Russia has repeatedly said that Nato troops close to its borders are a threat to its security.

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This is serious. No sovereignty, no independent legal system, and hardly a constitution left. The political system trumps all. This is the EU. And Tsipras should never sign off on it, of course. Bus boy.

Greece Sidelines Officials Who Blocked Expulsion Of Refugees To Turkey (G.)

The Greek government has sidelined members of an independent authority that had blocked the deportation of Syrian refugees, following sustained pressure from other European countries. Greek MPs voted on Thursday to change the composition of the country’s asylum appeals board, in an attempt to sideline officials who had objected on legal grounds to the expulsion of Syrians listed for deportation to Turkey. The appeals board had jeopardised the EU-Turkey migration deal, the agreement enacted in March that is meant to see all asylum seekers landing on the Greek islands detained in Greece – and then deported. While Greek police had enacted the first part of the plan,

Greek appeals committees have largely held up the planned deportations – potentially giving Syrians greater incentive to reach Greece. The appeals committees argued that Turkey does not uphold refugee law, and is therefore not a safe country for refugees. Currently the three-person appeals committees consist of one government-appointed official, and two appointed independently by the UN refugee agency and Greece’s national committee for human rights. After pressure from European politicians who feared a new surge in arrivals to Greece, Greek MPs have voted to create new committees formed of two administrative judges and one person appointed by the UN, meaning that state officials will now outnumber independent ones on the committees.

An independent appeals committee member interviewed by the Guardian in the run-up to the law change said it was a political move designed to bend an independent judicial process to the will of the executive. Speaking on condition of anonymity, the official said the change was “a serious blow to the independence of the committee. We think like legal scientists. We have a specific view that is based on legal analysis. If we lose our [places on the committee] then the cases will be handled the way that politicians want.”

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This mirrors the long held view of our friend Kostas, who we actively support with TAE funds here in Athens: “We cannot accept funding from the EU or the Member States while at the same time treating the victims of their policies..

MSF Rejects EU Funds Over ‘Shameful’ Migrant Policy (AFP)

Aid group Doctors Without Borders said on Friday that it would no longer take funds from the EU in protest at its “shameful” policies on the migration crisis including a deal with Turkey. The charity, more widely known by its French acronym MSF, received €56 million from EU institutions and the 28 member states last year.”MSF announces today that we will no longer take funds from the EU and its Member States in protest at their shameful deterrence policies and their intensification of efforts to push people and their suffering back from European shores,” the group said in a statement. The group singled out for criticism the EU’s deal with Turkey in March to stem the biggest flow of migrants into the continent since World War II.

“For months MSF has spoken out about a shameful European response focused on deterrence rather than providing people with the assistance and protection they need,” Jerome Oberreit, international secretary general of MSF, told a press conference. “The EU-Turkey deal goes one step further and has placed the very concept of ‘refugee’ and the protection it offers in danger.” [..] Oberreit also criticised a proposal last week to make similar deals with African and Middle Eastern countries. He added: “We cannot accept funding from the EU or the Member States while at the same time treating the victims of their polices. It’s that simple.” MSF said it received €19 million from EU institutions and €37 million from member states in 2015, amounting to 8% of its funding. It added that its activities are 90% privately funded.

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Jan 072015
 
 January 7, 2015  Posted by at 1:10 pm Finance Tagged with: , , , , , , ,  3 Responses »


DPC Foundry, Detroit Shipbuilding Co., Wyandotte, Michigan 1915

Attack at Paris Satirical Magazine Office Kills 12 People (WSJ)
Is Attack Linked to Novel Depicting France Under Islamist President? (Bloomberg)
Bill Gross Calls It: 2015 Is Going to Be Terrible (Bloomberg)
Bill Gross Says the Good Times Are Over (Bloomberg)
Not Just Oil: Are Lower Commodity Prices Here To Stay? (CNBC)
Oil Price Slump Deepens As Drillers Seen Slashing Spending (Telegraph)
How the Bear Market in Crude Oil Has Polluted Non-Energy Stocks (Bloomberg)
As Oil Drops Below $50, Can There Be Too Much of a Good Thing? (BW)
ECB Considering Three Approaches To QE (Reuters)
Germany Prepares For Possible Greek Exit From Eurozone (Reuters)
Germany, France Take Calculated Risk With ‘Grexit’ Talk (Reuters)
Greece On the Cusp of a Historic Change (Alexis Tsipras, SYRIZA)
Eurozone Inflation Turns Negative For First Time Since October 2009 (Reuters)
Greek 10-Year Bond Yields Exceed 10% for First Time Since 2013 (Bloomberg)
Euro’s Drop is a Turning Point for Central Banks Reserves (Bloomberg)
Eurozone Prices Seen Falling as Risk of Deflation Spiral Mounts (Bloomberg)
Operation Helicopter: Could Free Money Help the Euro Zone? (Spiegel)
Russia’s ‘Perfect Storm’: Reserves Vanish, Derivatives’ Default Warnings (AEP)
Obama Threatens Keystone XL Veto (BBC)
Bank Of England Was Unaware Of Impending Financial Crisis (BBC)

Insanity. Marine Le Pen will become a lot more popular now in France.

Attack at Paris Satirical Magazine Office Kills 12 People (WSJ)

Armed men stormed the Paris offices of French satirical magazine Charlie Hebdo on Wednesday morning, killing 12 people and injuring more, French President François Hollande said. The men opened fire inside the magazine’s offices using automatic AK-47 rifles before fleeing, a police officer said. In November 2011, Charlie Hebdo’s headquarters were gutted by fire, hours before a special issue of the weekly featuring the Prophet Muhammad appeared on newsstands. The weekly has often tested France’s secular dogma, printing caricatures of the prophet on several occasions. Since the arson attack, the weekly has moved to a new location, which was guarded by police. Two of the victims in Wednesday’s shooting were police, an officer on the scene said.

The 2011 fire caused no injuries but spurred debate over press freedom and religious tolerance in France, which is home to Europe’s largest Muslim population. The special issue put a caricature of the prophet on its front page, quoting him as promising “100 lashes if you don’t die from laughter.” Several journalists received anonymous threats and its website was hacked, according to French officials. In 2012, France closed embassies and French schools in 20 countries after the weekly published a series of cartoons. In 2006, the paper reprinted images of Muhammad that had appeared in a Danish magazine a year before. The next year, it published a picture of Muhammad crying, with the tagline “It’s hard to be loved by idiots.” The Grand Mosque of Paris and the Union of Islamic Organizations of France filed slander charges, but a French court cleared the paper.

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Suggestive title. Answer: no. What happened is an editorial meeting was going on to prepare a special issue, named Sharia Hebdo, with the prophet Mohamed as guest editor.

Is Attack Linked to Novel Depicting France Under Islamist President? (Bloomberg)

“Submission,” a book by Michel Houellebecq released today, is sparking controversy with a fictional France of the future led by an Islamic party and a Muslim president who bans women from the workplace. In his sixth novel, the award-winning French author plays on fears that western societies are being inundated by the influence of Islam, a worry that this month drew thousands in anti-Islamist protests in Germany. In the novel, Houellebecq has the imaginary “Muslim Fraternity” party winning a presidential election in France against the nationalist, anti-immigration National Front. “A pathetic and provocative farce,” is how Liberation characterized the book in a Jan. 4 review that scathingly said the novelist is “showing signs of waning writing skills.”

Political analyst Franz-Olivier Giesbert in newspaper Le Parisien yesterday was kinder, calling it a “smart satire,” adding that “it’s a writers’ book, not a political one.” National Front’s leader Marine Le Pen, who appears in the 320-page novel, said on France Info radio on Jan. 5 that “it’s fiction that could become reality one day.” On the same day, President Francois Hollande said on France Inter radio he would read the book “because it’s sparking a debate,” while warning that France has always had “century after century, this inclination toward decay, decline and compulsive pessimism.” In an interview on France 2 TV last night, Houellebecq denied that he was being a scaremonger.

“I don’t think the Islam in my book is the kind people are afraid of,” he said. “I’m not going to avoid a subject because it’s controversial.” Hollande and German Chancellor Angela Merkel plan to discuss their respective countries’ struggle with Islamophobia, anti-immigration protests and the rise of Europe’s nationalist parties at an informal dinner in Strasbourg on January 11 organized by the European Parliament President Martin Schulz. Houellebecq’s book is set in France in 2022. It has the fictional Muslim Fraternity’s chief, Mohammed Ben Abbes, beating Le Pen, with Socialists, centrists, and Nicolas Sarkozy’s UMP party rallying behind him to block the National Front.

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Wow: “Gross is putting himself way out on a limb: Not one of Wall Street s professional forecasters predict the S&P 500 will drop in 2015.” Wow.

Bill Gross Calls It: 2015 Is Going to Be Terrible (Bloomberg)

Bill Gross, bond king, ousted executive, self-styled poet of the markets, has a bold, depressing prediction for 2015, and he’s not couching it in any of his usual metaphor: The good times are over, he wrote in his January investment outlook note. By the end of 2015, he goes on, there will be minus signs in front of returns for many asset classes. Gross is putting himself way out on a limb: Not one of Wall Street s professional forecasters predict the S&P 500 will drop in 2015. Their average estimate calls for an 8.1% rise. And while the global economy looks weak, the U.S. has been heating up, with GDP up 5% in the third quarter. These gloomy predictions come without Gross s usual colorful commentary. At Pimco, his monthly notes made reference to Flavor Flav and Paris Hilton. Since leaving for Janus Capital Group in September, he’s riffed on domestic violence in the NFL, the porosity of sand and the joys of dancing with his wife.

This month, Gross is almost all business. The trouble for the world s economy is that ultra low interest rates are holding back growth rather than stimulating it, he warns. After years of rising markets, investors are facing too much risk for the prospect of low returns. The time for risk taking has passed, he writes. Gross admits he’s taking his own risk with this call. Even if he’s completely right that the bear market is over, he could very well be a year or two early. And even if he’s right about economic growth, he could be wrong about how the market reacts to it. Gross advises buying Treasury and high-quality corporate bonds, but they could be hurt if U.S. interest rates rise this year.

He also puts a word in for stocks of companies with low debt, attractive dividends and diversified revenues both operationally and geographically. But as Causeway Capital Management s Sarah Ketterer warned, those high-quality dividend payers have already soared and could have trouble meeting expectations in the next few years. Gross has been wrong before, most famously in his predictions that bond yields would rise when the Federal Reserve ended quantitative easing. But maybe this time he sees something other market observers don’t. As Gross writes, deploying the commentary’s only off-color metaphor: There comes a time when common sense must recognize that the king has no clothes, or at least that he is down to his Fruit of the Loom briefs.

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Perhaps when he says it people actually will wake up.

Bill Gross Says the Good Times Are Over (Bloomberg)

Bill Gross, the former manager of the world’s largest bond fund, said prices for many assets will fall this year as record-low interest rates fail to restore sufficient economic growth. With global expansion still sputtering after years of interest rates near zero, investors will gradually seek alternatives to risky assets, Gross wrote today in an investment outlook for Janus Capital, where he runs the $1.2 billion Janus Global Unconstrained Bond Fund. “When the year is done, there will be minus signs in front of returns for many asset classes,” Gross, 70, wrote in the outlook. “The good times are over.” Six years after the end of the financial crisis, borrowing costs in the world’s richest nations are stuck near zero, a sign investors have little confidence that their economies will strengthen.

Gross, the former chief investment officer of Pacific Investment Management Co. who left that firm in September to join Janus, has argued the Federal Reserve won’t raise interest rates until late this year if at all as falling oil prices and a stronger U.S. dollar limit the central bank’s room to increase borrowing costs. The benchmark U.S. 10-year yield fell to 1.99% today, and bonds in the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index had an effective yield of 1.28% as of yesterday, the lowest based on data starting in 1996. The all-time 10-year Treasury low is 1.379% on July 25, 2012. Economists predict the yield will rise to 3.06% by end of 2015, according to a Bloomberg News survey with the most recent forecasts given the heaviest weightings.

Stocks plunged yesterday, with the Standard & Poor’s 500 Index dropping 1.8% to 2,020.58 and the Chicago Board Options Exchange Volatility Index increasing for the fifth time in six days. Declines spurred by tumbling oil and concerns Greece will exit the euro have sent American equities to the biggest decline to start a year since 2005, data compiled by Bloomberg show. While timing the end of a bull market is difficult, the next 12 months will probably see a turning point, Gross wrote. “Knowing when the ‘crowd’ has had enough is an often frustrating task, and it behooves an individual with a reputation at stake to stand clear,” he wrote. “As you know, however, moving out of the way has never been my style.”

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Yes.

Not Just Oil: Are Lower Commodity Prices Here To Stay? (CNBC)

Oil isn’t the only commodity that’s gotten cheaper. From nickel to soybean oil, plywood to sugar, global commodity prices have been on a steady decline as the world’s economy has lost momentum. That lower demand helps explain, in part, why nearly everything from crude oil to cotton has been getting cheaper. Sure, some commodity prices are rising. Local supply constraints have pushed prices higher in some parts of the world; transportation costs can also have a big impact on local prices. In the U.S., for example, a drought in California caused the price of vegetables and other food products to spike last year. Prices are also rising for some commodities, especially meats such as beef and chicken, thanks to growing demand from an expanding middle class in the developing world. But the global cost of most commodities has been on a long-term, downward trend since the Great Recession. The chart below is based on global prices, in dollars, assembled by the World Bank.

Now, as much of the world slogs through a faltering recovery, there are fears that falling prices in slow-moving economies such as Europe and Japan could spark and extended period of deflation, when the consumer prices of finished goods fall over an extended period. Deflation can be difficult to reverse if businesses and consumers start to cut back on spending and investment, waiting for prices to fall further, setting off an economic contraction that can deepen. European central bankers are scrambling to avoid that amid signs that prices in the euro zone have all but flattened. On Monday, the latest data showed that German inflation slowed to its lowest level in over five years in December; prices inched up at an annual rate of 0.1%, down from 0.5% in November. A widely watched inflation index of the entire euro zone is due out Wednesday. Some analysts think it could show a negative reading for the first time since October 2009.

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We’ve seen nothing yet.

Oil Price Slump Deepens As Drillers Seen Slashing Spending (Telegraph)

Brent crude has slumped to a new five-and-a-half-year low as leading ratings agency Moody’s warns that oil companies could be forced to slash spending by up to 40% this year. The benchmark crude contract fell to as low as $51.64 per barrel in early trading, while West Texas Intermediate oil traded in the US fell 2.2% to $48 per barrel. Earlier, Moody’s Investors Service issued a report warning of broad cuts in spending that could soon hit the entire oil and gas industry as companies move to protect their dwindling profit margins. The agency fears that, should prices remain below $60 per barrel for a significant period, companies in North America will slash capital spending by up to 40%.

“If oil prices remain at around $55 a barrel through 2015, most of the lost revenue will hit the E&P [exploration and production] companies’ bottom line, which will reduce cash flow available for re-investment,” said Steven Wood, managing director for corporate finance at Moody’s. “As spending in the E&P sector diminishes, oilfield services companies and midstream operators will begin to feel the stress.” However, Moody’s believes that oil majors such as ExxonMobil, Royal Dutch Shell, BP, Chevron and Total are in a stronger position to weather the financial storm caused by lower prices because they have already trimmed their capital expenditure for 2015.

Moody’s is the latest ratings agency to issue a major warning about the impact that falling oil prices will have on exploration and production companies. Standard & Poor’s said last month that the dramatic deterioration in the oil price outlook had prompted it to take a number of “rating actions” on European oil and gas majors including Shell, BP, and BG Group. Meanwhile, Saudi Arabia’s King Abdullah bin Abdul-Aziz al-Saud has said that a weak global economy was to blame for the current slide in prices, which will place his kingdom under severe economic stress. In a speech read out on state television by Crown Prince Salman, the king said that Saudi will deal with the current fall in oil prices “with a firm will”. The 91-year-old monarch of the world’s largest oil exporter was recently admitted into hospital, raising concerns over succession in the kingdom.

Saudi Arabia was instrumental in convincing the other members of OPEC not to cut output in November, a decision which triggered the current sharp falls in prices. The kingdom, which has the capacity to pump up to 12.5m barrels per day (bpd) of crude), this week discounted its oil heavily to European and US customers as it seeks to protect its market share. European buyers can now pay $4.65 per barrel less than for the Brent reference price for Saudi crude. “There is little reason at present to expect any end to the nose-diving oil prices,” said analysts at Commerzbank.

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Fifth Third Bancorp 2 years ago: “The oil and natural gas sector represents a tremendous growth opportunity.”

How the Bear Market in Crude Oil Has Polluted Non-Energy Stocks (Bloomberg)

Perusing the list of the biggest stock-market losers since the price of oil peaked in June yields some predictable results. You have your large-cap energy companies like Transocean, Denbury, Naborsm Noble and Halliburton, all down at least 45%. Yet mixed in with all the obvious ugliness are some names that bring to mind the question asked of Billy Joel by those drinkers at the piano bar, or perhaps even some of the wedding guests who watched him walk down the aisle with Christie Brinkley: Man, what are you doing here? The answer illustrates how much of an impact the energy industry has had on the bottom line of corporate America, whether it’s companies profiting from the boom in domestic production or those that made big investments based on the premise that fuel will always be expensive. As such it helps explain why the entire stock market, not just the energy companies, tends to freak out when oil heads lower rapidly.

The big bets on high energy prices made by companies like Ford (down 13% since oil peaked on June 20) or Tesla Motors (down 10%) or Boeing (down 3.9%) jump immediately to mind. Not so obvious, unless you follow the stock closely, is the investment made by Fifth Third Bancorp, one of the regional lenders that tried to chase the fracking boom. (It’s down 12% since June 20.) Here’s how the company’s management described the rationale for the launch of a new national energy banking team two years ago: “The energy sector is a rapidly growing industry,” said the announcement. The new team “demonstrates our commitment to providing dedicated banking services to this evolving sector. The oil and natural gas sector represents a tremendous growth opportunity.” The sector certainly is “evolving.” Fitch Ratings last month identified regional banks lifted by the shale boom that now face potential credit pressures in loans related to the industry. Oil prices below $50 a barrel, like now, would likely trigger a jump in credit losses, Fitch said.

Fitch’s list of banks with high concentrations of loans to the industry is topped by BOK Financial, which is down 13% since June 20.; Cullen/Frost, down 16%; Hancock, down 19%; Comerica, down 14%; and Amergy Bank of Texas, which is down 13%. Losses are even worse among the industrial companies that provide the services and sell the pipes, valves and assorted doodads used to pump oil and gas. Fluor Corp. an engineering, maintenance and project management firm that counted on the oil and gas industry for 42% of its revenue in 2013, is down 27% since June 20. Flowserve Corp., whose pumps and valves are used in refineries and pipelines, is off about the same amount. Caterpillar, Joy Global, Allegheny, Dover, Jacobs Engineering and Quanta Services are all down more than 20% since oil peaked at almost $108.

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Oh come on, let’s get real.

As Oil Drops Below $50, Can There Be Too Much of a Good Thing? (BW)

Oil falls below $50 a barrel on Jan. 5, and the Dow Jones Industrial Average plunges nearly 330 points. Seems like an open-and-shut case that the price plunge is getting to be a problem. People remember that in 1998, a sharp decline in the price of oil contributed to a Russian default that rocked the global financial system. Not quite. Cheaper oil is still creating more winners than losers. Far more people live in oil-importing countries than live in oil-exporting countries. The U.S., for one, remains a net importer. The well-publicized travails of U.S. shale oil producers are small compared with the gains by American consumers and businesses that are paying less for gasoline, diesel, jet fuel, petrochemicals, and the like. With fuel prices down, people are driving more miles and buying more cars and trucks.

Do the math: Close to 70% of the U.S. economy is consumer spending, which will gain from cheaper crude. Only about 10% is capital spending, of which 10% to 15% is the energy sector. That comes to roughly 1% of U.S. output, which might decline 20% this year, making it a relative drop in the bucket of U.S. gross domestic product, says Nariman Behravesh, chief economist for IHS Global Insight. Why, then, did stock prices fall when West Texas Intermediate for February delivery dropped nearly $3 a barrel on Jan. 5, to $49.89? Mostly because of market fears about global growth, which weighed down both stocks and oil prices, says Gus Faucher, a senior economist at PNC Financial Services. In other words, the latest drop in oil is a symptom, not a cause, of economic weakness, Faucher says. “Anyone who thinks that lower oil/gasoline prices is a net negative for the U.S. (and the global economy) is brain dead, economically speaking!” argues a Dec. 23 report by Faucher’s boss, PNC Chief Economist Stuart Hoffman.

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Try and trick the Germans?!

ECB Considering Three Approaches To QE (Reuters)

The European Central Bank is considering three possible options for buying government bonds ahead of its Jan. 22 policy meeting, Dutch newspaper Het Financieele Dagblad reported on Tuesday, citing unnamed sources. As fears grow that cheaper oil will tip the euro zone into deflation, speculation is rife that the ECB will unveil plans for mass purchases of euro zone government bonds with new money, a policy known as quantitative easing, as soon as this month. According to the paper, one option officials are considering is to pump liquidity into the financial system by having the ECB itself buy government bonds in a quantity proportionate to the given member state’s shareholding in the central bank.

A second option is for the ECB to buy only triple-A rated government bonds, driving their yields down to zero or into negative territory. The hope is that this would push investors into buying riskier sovereign and corporate debt. The third option is similar to the first, but national central banks would do the buying, meaning that the risk would “in principle” remain with the country in question, the paper said.

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Hot air.

Germany Prepares For Possible Greek Exit From Eurozone (Reuters)

Germany is making contingency plans for the possible departure of Greece from the euro zone, including the impact of any run on a bank, tabloid newspaper Bild reported, citing unnamed government sources. The newspaper said the government was running scenarios for the Jan. 25 Greek election in case of a victory by the leftwing Syriza party, which wants to cancel austerity measures and a part of the Greek debt. In a report in the Wednesday issue of the paper, Bild said government experts were concerned about a possible bank collapse if customers storm Greek institutions to secure euro deposits in the event that Greece leaves the zone.

The European Union banking union would then have to intervene with a bailout worth billions, the paper said. Der Spiegel magazine reported on Saturday that Berlin considers a Greek exit almost unavoidable if Syriza wins, but believes the euro zone would be able to cope. Vice Chancellor Sigmar Gabriel said on Sunday that Germany wants Greece to stay and there are no contingency plans to the contrary, while noting the euro zone has become far more stable in recent years. As the euro zone’s paymaster, Germany is insisting that Greece stick to austerity and not backtrack on its bailout commitments, especially as it does not want to open the door for other struggling members to relax reform efforts.

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Right. And they have their pet hamsters doing the calculating.

Germany, France Take Calculated Risk With ‘Grexit’ Talk (Reuters)

Evoking a possible Greek exit from the euro zone, Germany and France are taking a coordinated and calculated risk in the hope of averting a leftist victory in Greece’s general election on Jan. 25. The intention, according to Michael Huether, head of Germany’s IW economic institute, is to make clear that other euro area countries “can get on well without Greece, but Greece cannot get on without Europe”, and to warn that the left-wing Syriza party would bring disaster on the country. Syriza leader Alexis Tsipras, whose party leads in opinion polls, insists he wants to keep Greece in the euro. However, he has promised to end austerity imposed by foreign creditors under the country’s bailout deal if he wins power, and wants part of the €240 billion lent by the EU and IMF written off.

The risk is that the European Union’s two main powers are seen by Greeks as interfering and threatening them, provoking a backlash after a six-year recession that shrunk their economy by 20% and put one in four workers out of a job. French President Francois Hollande said on Monday it was up to the Greek people to decide whether they wanted to stay in the single currency, while a German magazine reported that Berlin no longer feared a “Grexit” would endanger the entire euro area. Chancellor Angela Merkel’s spokesman did not explicitly deny the weekend “Der Spiegel” report but said: “The aim has been to stabilize the euro zone with all its members, including Greece. There has been no change in our stance.”

Merkel and Hollande conferred by telephone during the winter holidays and will meet in Strasbourg on Sunday with European Parliament President Martin Schulz for what a French diplomatic source insisted were not crisis talks on Greece. Should center-right Prime Minister Antonis Samaras lose power in the election, the real issue was how a Syriza-led government might seek to reschedule Greece’s debt, not its place in the euro, the French source said. Paris and Berlin have underlined that any new government in Athens would have to honor the country’s obligation to repay the bailout loans received since 2010. In an article in the Huffington Post, Tsipras accused German conservatives of spreading “old wives’ tales”, singling out Finance Minister Wolfgang Schaeuble. Syriza, a coalition of former communist and independent leftist groups, “is not an ogre, or a big threat to Europe, but the voice of reason,” he wrote.

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Tsipras himself sees it this way:

Greece On the Cusp of a Historic Change (Alexis Tsipras, SYRIZA)

Greece is on the cusp of a historic change. SYRIZA is no longer just a hope for Greece and the Greek people. It is also an expectation of a change of course for the whole of Europe. Because Europe will not come out of the crisis without a policy change, and the victory of SYRIZA in the 25th of January elections will strengthen the forces of change. Because the dead end in Greece is the dead end of today’s Europe. On January 25th, the Greek people are called to make history with their vote, to trail a space of change and hope of all people across Europe by condemning the failed memoranda of austerity, proving that when people want to, when they dare, and when they overcome fear, then things can change. The expectations alone of political change in Greece, has already begun to change things in Europe. 2015 is not 2012

SYRIZA is not an ogre, or a big threat to Europe, but the voice of reason. It’s the alarm clock which will lift Europe from its lethargy and sleepwalking. This is why SYRIZA is no longer treated as a major threat like it was in 2012, but as a challenge to change. By all? Not by all. A small minority, centered on the conservative leadership of the German government and a part of the populist press, insists on rehashing old wives’ tales and Grexit stories. Just like Mr. Samaras in Greece, they can no longer convince anyone. Now that the Greek people have experienced his government, they know how to tell the lies from the truth. Mr. Samaras offers no other program except continuing with the failed MOU of austerity.

It has committed itself and others to new wage and pension cuts, new tax increases, in the framework of accumulated income cuts and over- taxation of six whole years. He asks Greek citizens to vote for him so that he can implement the new memorandum. It is precisely because he has committed to austerity, that he interprets the rejection of this failed and destructive policy as a supposedly unilateral action. He is essentially hiding that Greece as a Eurozone member is committed to targets and not to the political means by which those targets are achieved. For this reason, and unlike the ruling party of Nea Dimokratia, SYRIZA has committed to the Greek people to apply from the first days of its’ administration a specific, cost-efficient and fiscally balanced program, “The Thessaloniki Program” regardless of our negotiation with our lenders.

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The editor told them not to call it deflation.

Eurozone Inflation Turns Negative For First Time Since October 2009 (Reuters)

Euro zone consumer prices fell by more than expected in December because of much cheaper energy, a first estimate by the European statistic office showed in data that is likely to trigger the European Central Bank’s government bond buying program. Eurostat said inflation in the 18 countries using the euro in December was -0.2% year-on-year, down from 0.3% year-on-year in November. The last time euro zone inflation was negative was in October 2009, when it was -0.1%. Economists polled by Reuters had expected a -0.1% year-on-year fall in prices. The ECB wants to keep inflation below but close to 2% over the medium term. Eurostat said that core inflation, which excludes the volatile energy and unprocessed food prices, was stable at 0.7% year-on-year in December – the same level as in November and October. But energy prices plunged 6.3% year-on-year last month and unprocessed food was 1.0% cheaper, pulling down the overall index despite a 1.2% rise in the cost of services.

The ECB is concerned that a prolonged period of very low inflation could change inflation expectations of consumers and make them hold back their purchases in the hope of even lower prices, triggering deflation. Because the ECB’s interest rates are already at rock bottom, the bank is preparing a program of printing money to buy government bonds on the secondary market to inject even more cash into the economy, boost demand and make prices rise faster. Economists expect the decision to launch such a bond buying program could be made as soon as the ECB’s next meeting on January 22. “We are in technical preparations to adjust the size, speed and compositions of our measures early 2015, should it become necessary to react to a too long period of low inflation. There is unanimity within the Governing Council on this,” ECB President Mario Draghi said on January 1. Inflation in the euro zone has below 1% – or what the ECB calls the danger zone – since October 2013.

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There we go again. Maybe the ECB is behind this.

Greek 10-Year Bond Yields Exceed 10% for First Time Since 2013 (Bloomberg)

For the first time in 15 months, Greek 10-year government bond yields are back above 10%. The rate on the securities climbed to 10.18% today as investors abandoned the bonds in the run-up to a Jan. 25 election that Prime Minister Antonis Samaras said will determine Greece’s euro membership. Greek stocks also fell, posting the biggest decline among 18 western-European markets. The double-digit yield is reminiscent of the euro region’s debt crisis. In 2012, Greece’s 10-year rates climbed as high as 44.21% before the nation held the biggest reorganization of sovereign debt in history.

Greek 10-year yields increased 44 basis points, or 0.44 %age point, to 10.18% at 11:02 a.m. London time. The 2% bond due in February 2024 fell 1.885, or 18.85 euros per 1,000-euro ($1,185) face amount, to 60.585. The nation’s three-year rate jumped 60 basis points to 14.65%. The ASE Index of stocks fell 2.7%, set for the lowest close since November 2012. With a 29% slump, the ASE posted the world’s worst performance among equity indexes after Russia last year.

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We said long ago that the dollar would rise.

Euro’s Drop is a Turning Point for Central Banks Reserves (Bloomberg)

Central banks and reserve managers are breaking from past practice by showing little appetite to add euros as the currency tumbles. The total amount of reserves held in euros fell 8.1% in the third quarter, more than the currency’s 7.8% decline in the period against the dollar, according to the most recent figures from the International Monetary Fund. The last two times the euro depreciated 7% or more in a quarter, 2011 and 2010, holdings declined much less. The data suggest reserve managers are passing up the chance to buy euros while they’re cheap, removing a key pillar of support. In August, European Central Bank President Mario Draghi cited the drop in central banks’ euro holdings as a factor that would help weaken the exchange rate and ultimately boost the region’s faltering economy.

“Central banks have found new reasons not to feel comfortable with the euro,” Stephen Jen, managing partner and co-founder of SLJ Macro, said. “Nobody wants to have a negative yield. You’re not keeping a currency to lose money.” The ECB has experimented with negative interest rates on deposits in an attempt to draw money out of safe government debt and into the broader economy. Yields on two-year notes in Germany, the Netherlands and France are all below zero on speculation the ECB is losing the battle against deflation. Policy makers are signaling they are ready to step up the fight by expanding the money supply through further stimulus, such as purchasing government debt, that typically weigh on a currency’s value.

Adding to the pressure is concern that Draghi won’t be able to hold the currency bloc together amid signs Greece may quit the euro area after its Jan. 25 election. The 19-nation euro fell in each of the past six months, dropping to $1.1843 today, its lowest level since February 2006. A spokesman for the Frankfurt-based ECB, who asked not to be identified, said yesterday by e-mail that the international role of the euro is primarily determined by market forces and the central bank neither hinders nor promotes it. The amount of euros held in allocated reserves – or those where the currency is specified – fell to $1.4 trillion in the third quarter, or 22.6% of the total, from $1.5 trillion, or 24.1%, at the end of June, according to figures published by the IMF on Dec. 31. The proportion is the lowest since 2002 and down from as much as 28% in 2009.

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“We expect the ECB to announce a broad-based asset-purchase program including government bonds.”

Eurozone Prices Seen Falling as Risk of Deflation Spiral Mounts (Bloomberg)

Consumer prices in the euro area probably fell for the first time in more than five years last month, pushing the European Central Bank closer to adding stimulus as it battles to revive inflation. Prices dropped an annual 0.1% in December, according to the median forecast of economists in a Bloomberg survey. That would be the first decline since October 2009. ECB officials are working on a plan to buy government bonds as they strive to prevent a deflationary spiral of falling prices and households postponing spending, a risk President Mario Draghi has said can’t be “entirely excluded.” They may use a gathering tomorrow to weigh options for a quantitative-easing program that may be announced at their Jan. 22 policy meeting.

“Inflation will most likely fall even further in January and remain extremely low all year long,” said Evelyn Herrmann, European economist at BNP Paribas SA in London. “We expect the ECB to announce a broad-based asset-purchase program including government bonds.” A sluggish economy and plunging oil prices are damping inflation across the euro region. Consumer prices are falling on an annual basis in Spain and Greece, while data yesterday showed inflation in Germany at 0.1%, its weakest since 2009. Crude oil prices have fallen about 50% in the past year amid a supply glut. Core euro-zone inflation, which strips out volatile items such as energy, food, tobacco and alcohol, is forecast to have increased 0.7% year-on-year in December.

Eurostat, the EU’s statistics office, will publish the data at 11 a.m. in Luxembourg, along with its unemployment report for November. ECB officials have taken different approaches in analyzing the impact of plunging oil prices on the economy. While Draghi has warned of a dis-anchoring of inflation expectations and signaled support for QE, Bundesbank President Jens Weidmann favors not acting at this time, arguing that the drop could prove to be a “mini-stimulus package.”

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“Daniel Stelter at think tank Beyond the Obvious has even called for giving €5,000 to €10,000 to each citizen. “It has to be massive if it is going to have any effect,” he says.”

Operation Helicopter: Could Free Money Help the Euro Zone? (Spiegel)

It sounds at first like a crazy thought experiment: One morning, every resident of the euro zone comes home to find a check in their mailbox worth over €500 euros ($597) and possibly as much as €3,000. A gift, just like that, sent by the ECB in Frankfurt. The scenario is less absurd than it may sound. Indeed, many serious academics and financial experts are demanding exactly that. They want ECB chief Mario Draghi to fire up the printing presses and hand out money directly to the people. The logic behind the idea is that recipients of the money will head to the shops, helping to turn around a paralyzed economy in the common currency area. In response, companies would have to increase production and hire more workers, leading to both economic growth and a needed increase in prices because of the surge in demand.

Currently, the inflation rate is barely above zero and fears of a horror deflation scenario of the kind seen during the Great Depression in the United States are haunting the euro zone. The ECB, whose main task is euro stability, has lost control. In this desperate situation, an increasing number of economists and finance professionals are promoting the concept of “helicopter money,” tantamount to dispersing cash across the country by way of helicopter. The idea, which even Nobel Prize-winning economist Milton Friedman once found attractive, has triggered ferocious debates between central bank officials in Europe and academics. For backers, there’s more to this than just a new instrument. They are questioning cast-iron doctrines of monetary policy. One thing, after all, is becoming increasingly clear: Draghi and his fellow central bank leaders have exhausted all traditional means for combatting deflation.

The failure of these efforts can be easily explained. Thus far, central banks have primarily provided funding to financial institutions. The ECB provided banks with loans at low interest rates or purchased risky securities from them in the hope that they would in turn issue more loans to companies and consumers. The problem is that many households and firms are so far in debt already that they are eschewing any new credit, meaning the money isn’t ultimately making its way to the real economy as hoped. Sylvain Broyer at French investment bank Natixis, says, “It would make much more sense to take the money the ECB wants to deploy in the fight against deflation and distribute it directly to the people.” Draghi has calculated expenditures of a trillion euros for his emergency program, funds that would be sufficient to provide each euro zone citizen with a gift of around €3,000.

Daniel Stelter at think tank Beyond the Obvious, has even called for giving €5,000 to €10,000 to each citizen. “It has to be massive if it is going to have any effect,” he says. Stelter freely admits that such figures are estimates. After all, not a single central bank has ever tried such a daring experiment. Many academics have based their calculations on experiences in the United States, where the government has in the past provided cash gifts to taxpayers in the form of rebates in order to shore up the economy. Oxford economist John Muellbauer, for one, looks back to 2001. After the Dot.com crash, the US gave all taxpayers a $300 rebate. On the basis of the experience at the time, Muellbauer calculates that €500 per capita would be sufficient to spur the euro zone. “It (the helicopter money) would even be much cheaper for the ECB than the current programs>],” the academic says.

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Ambrose doesn’t like Putin.

Russia’s ‘Perfect Storm’: Reserves Vanish, Derivatives’ Default Warnings (AEP)

Russia’s foreign reserves have dropped to the lowest level since the Lehman crisis and are vanishing at an unsustainable rate as the country struggles to defends the rouble against capital flight. Central bank data show that a blitz of currency intervention depleted reserves by $26bn in the two weeks to December 26, the fastest pace of erosion since the crisis in Ukraine erupted early last year. Credit defaults swaps (CDS) measuring bankruptcy risk for Russia spiked violently on Tuesday, surging by 100 basis points to 630, before falling back slightly. Markit says this implies a 32% expectation of a sovereign default over the next five years, the highest since Western sanctions and crumbling oil prices combined to cripple the Russian economy. Total reserves have fallen from $511bn to $388bn in a year. The Kremlin has already committed a third of what remains to bolster the domestic economy in 2015, greatly reducing the amount that can be used to defend the rouble.

The Institute for International Finance (IIF) says the danger line is $330bn, given the dollar liabilities of Russian companies and chronic capital flight. Currency intervention did stabilise the exchange rate in late December after a spectacular crash threatened to spin out of control, but relief is proving short-lived. The rouble weakened sharply to 64 against the dollar on Tuesday. It has slumped moe than 20% since Christmas, with increasing contagion to Belarus, Georgia and other closely-linked economies. There are signs that Russia’s crisis may undermine President Vladimir’s Putin’s Eurasian Economic Union before it has got off the ground. Belarus’s Alexander Lukashenko is already insisting that trade be carried out in US dollars, while Kazakhstan’s Nursultan Nazarbayev warned that the Russian crash poses a “major risk” to the new venture.

The rouble is trading in lockstep with Brent crude, which has continued its relentless slide this week, falling to a five-year low of $51.50 a barrel. “If oil drops to $45 or lower and stays there, Russia is going to face a big problem,” said Mikhail Liluashvili, from Oxford Economics. “The central bank will try to smooth volatility but they will have to let the rouble fall and this could push inflation to 20%.” Under the Russian central bank’s “emergency scenario”, GDP may contract by as much as 4.7% this year if oil settles at $60. The damage could be worse following the bank’s contentious decision to raise rates from 9.5% to 17% in December. BNP Paribas says that each 1% rise in rates cuts 0.8% off GDP a year later. BNP’s Tatiana Tchembarova said the situation is more serious than in 2008, when Russia had to spend $170bn to rescue its banks. This time it no longer has enough reserves to cover external debt, and it enters the crisis “twice as levered”.

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Why bother?

Obama Threatens Keystone XL Veto (BBC)

President Barack Obama will veto a bill approving the controversial Keystone XL pipeline if it passes Congress, the White House has said. It is the first major legislation to be introduced in the Republican-controlled Congress and a vote is expected in the House later this week. Spokesman Josh Earnest said the legislation would undermine a “well-established” review process. The $5.4bn (£3.6bn) project was first introduced in 2008. Mr Obama has been critical of the pipeline, saying at the end of last year it would primarily benefit Canadian oil firms and not contribute much to already dropping petrol prices. Environmentalists are also critical of the project, a proposed 1,179-mile (1,897km) pipe that would run from the oil sands in Alberta, Canada, to Steele City, Nebraska, where it could join an existing pipe.

And the project is the subject of a unresolved lawsuit in Nebraska over the route of the pipeline. “There is already a well-established process in place to consider whether or not infrastructure projects like this are in the best interest of the country,” Mr Earnest said on Tuesday. He added that the question of the Nebraska route was “impeding a final conclusion” from the US on the project. Despite the veto threat from the White House, the bill sponsors say they have enough Democratic votes to overcome a procedural hurdle to pass in the Senate.

“The Congress on a bipartisan basis is saying we are approving this project,” said Republican John Hoeven, one of the bill’s sponsors. But Mr Hoeven and Democratic Senator Joe Manchin said they would be open to additional amendments to the bill, a test of the changing political realities of the Senate. Democratic critics of the bill are said to be planning to add measures to prohibit exporting the oil abroad, use American materials in the pipeline construction and increased investment in clean energy. It is unclear if those amendments would gather the two-thirds of votes needed in both chambers to override Mr Obama’s veto.

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But took decisions costing trillions of pounds anyway.

Bank Of England Was Unaware Of Impending Financial Crisis (BBC)

A month before the start of the financial crisis, the Bank of England was apparently unaware of the impending danger, new documents reveal. In a unique insight of its workings, the Bank has published minutes of top-secret meetings of the so-called Court that took place between 2007 and 2009. The minutes show that the Bank did identify liquidity as a “central concern” in July 2007. However no action was taken as a result. The documents show that the Bank also used a series of code names for banks that were in trouble. Royal Bank of Scotland was known as “Phoenix”, and Lloyds as “Lark”. Following publication, Andrew Tyrie MP, the chairman of the Treasury Select Committee, was highly critical of some of the Court’s non-executive directors. He said they had failed to challenge senior executive members, like the then governor, Mervyn King, whom some accuse of failing to prioritise financial stability.

The minutes show that in July 2007, the Court – akin to a company board – spent time discussing staff pensions, open days and new members of the Monetary Policy Committee. Members heard that the Bank was working on a new model to detect risks to the financial system, but there was little suggestion of any impending trouble. Less than a month later, on 9 August, the French bank BNP Paribas came clean about its exposure to sub-prime mortgages, in what some believe was the start of the financial crisis. Six weeks later, despite some turmoil in financial markets, Court members were told to have confidence in the triple oversight of the Bank of England, the Treasury and the then Financial Services Authority (FSA). “The Executive believed that the events of the last month had proven the sense and strength of the tripartite framework,” the minutes asserted for the 12th September, 2007. The next day the banking crisis began in earnest.

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Nov 222014
 
 November 22, 2014  Posted by at 12:58 pm Finance Tagged with: , , , , , , , , , ,  1 Response »


NPC Newsstand with Out-of-Town Papers, Washington DC 1925

Cheap Oil May Be A Sign Of Bigger Problems (MarketWatch)
Drilling Slowdown on Sub-$80 Oil Creeps Into Biggest US Fields (Bloomberg)
Russia to Cooperate With Saudis on Oil, Avoiding Output Cuts (Bloomberg)
Sell, Sell, Sell .. The Central Bank Madmen Are Raging (David Stockman)
What Record Stock Buybacks Say About Economic Growth (Zero Hedge)
Is China Building a Mortgage Bomb? (Bloomberg)
‘China’s Economy Is Slowing Faster Than You Think’ (CNBC)
China Cut Pegs Growth Floor At 7%, Says Stephen Roach (CNBC)
Yen Weakens to Seven-Year Low as Japan Will Vote on Abenomics (Bloomberg)
‘We Are Living in an Aberrational World’ (Finanz und Wirtschaft)
European Central Bank Has Begun Buying Asset-Backed Securities (Reuters)
RBS Admits Overstating Financial Strength In Stress Test (Guardian)
Bank Of England Investigates Staff Over Possible Auction Rigging (Reuters)
The Impossible American Mall Business. ‘We Surrender’ (Bloomberg)
Dudley Defends New York Fed Supervision In Heated Senate Hearing (Bloomberg)
Illinois $111 Billion Pension Deficit Fix Struck Down (Bloomberg)
Click Here to See If You’re Under Surveillance (BW)

“If China does decelerate well below 7% in 2015, an oil price target in the $30 to $40 range is completely realistic.”

Cheap Oil May Be A Sign Of Bigger Problems (MarketWatch)

While there is no instant replay in the markets, if commodities raised more red flags over the summer, at this point they are doing the equivalent of the football coach screaming in the referee’s face as he has been completely ignoring the flags being thrown on the field. Looking at oil dispassionately, one has to admit that for all intents and purposes, WTI crude oil has been down for seven straight weeks. The glass-half-full crowd will note that consumers get more money to spend for the holidays, and this is true. The glass-half-empty crowd will say that oil price weakness indicates weak global demand and consumers cannot possibly make up for that. This does not necessarily have to be the case, although it is certainly a possibility with rising probabilities at the moment. Brent crude oil futures (the European benchmark) are much weaker from a trading perspective as they have taken out key support levels with rather persistent selling that indicates weak demand at a time when oil markets have ample supply.

European economic data signifies what is in effect an economic rarity — a triple-dip recession — as the eurozone never really recovered from its sovereign-debt crisis. Shrinking eurozone bank lending over the past two years already told us with a high degree of certainty that this was coming, but now that it is here, we are starting to see repercussions in key commodities. One thing that strikes me about this oil-price decline is how persistent and methodical it has been. Commodities trend much differently than stocks as strong trends sometimes seem almost linear in nature with very shallow countertrend moves. I have used the analogy that the zigs and zags of stocks are typically much better defined than those for key commodities in strong trends. The other asset class that tends to show such “zagless” strong trends at times is currencies. This can easily be seen in the yen’s USD/JPY cross rate upward move. The euro is also showing a weakening trend, where the EUR/USD downward move has been accelerating as deposit rates at the ECB have sunk further into negative territory.

Strong declines in commodity prices signify a supply-demand imbalance. You can’t quickly shut off supply, as there are many already-spent budgets and projects that need to be completed, so weakening demand can carry the oil price much further. I think this oil situation has little to do with the U.S. and much more to do with Europe and China, much the same way in which commodity-price weakness in 1997-1998 was due to the Asian Crisis and not U.S. demand. How low can the oil price go? [..] we know that the cash cost of shale oil is about $60 per barrel, varying among different producers, and that historically, commodity producers have been known to produce their respective commodities at a loss to keep personnel and equipment going, as well a service debts that have financed their recent expansion. In that regard, it would be interesting to note that energy junk bonds comprise 16% of the junk-bond market, and their issuance is up 148% to $211 billion according to Fitch. So, yes, I think the oil price can decline below $60.

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2015 will be a bloody year for the shale industry. Money looks certain to stop flowing in, and then reality fills the freed up space.

Drilling Slowdown on Sub-$80 Oil Creeps Into Biggest US Fields (Bloomberg)

The slowdown in the U.S. oil-drilling boom spread to two of the nation’s largest fields this week. The Permian Basin of Texas and New Mexico, the country’s biggest oil play, lost four rigs targeting crude, dropping to 558, Baker Hughes aid on its website today. Those in North Dakota’s Williston Basin, the third-largest and home to the Bakken shale formation, slid to the lowest level since August, according to the Houston-based field services company’s website. It was the first time in four weeks that oil rigs dropped in the Williston. Oil prices have tumbled 29% from this year’s peak, pausing a surge in drilling in U.S. shale plays that has propelled domestic crude production to the most in three decades and brought retail gasoline prices below $3 a gallon for the first time since 2010. Drillers from Apache to Hess have announced plans to cut their rig counts in some North American oil fields as crude futures trade under $80 a barrel.

U.S. benchmark West Texas Intermediate crude for January delivery gained 66 cents to settle at $76.51 a barrel on the New York Mercantile Exchange. “We’ll start to see really big drops early next year if oil prices stay the same,” James Williams, president of WTRG Economics in London, Arkansas, said by telephone. Nineteen shale regions in the U.S. are no longer profitable with oil at $75 a barrel, data compiled by Bloomberg New Energy Finance show. Those areas, including parts of the Eaglebine and Eagle Ford in Texas, pumped about 413,000 barrels a day, according to the latest data available from Drillinginfo and company presentations.

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“If OPEC wants to reduce output, it only makes sense if other oil producers outside of OPEC do the same .. ”

Russia to Cooperate With Saudis on Oil, Avoiding Output Cuts (Bloomberg)

Russia said it’s willing to cooperate with Saudi Arabia on the oil market, while avoiding a commitment to limit output to reverse plunging prices. The two countries also sought to overcome differences on Syria during the first ever talks in Moscow between their foreign ministers, marking a thawing of ties between the world’s two biggest oil exporters. Oil has collapsed into a bear market this year as the U.S. pumps crude at the fastest rate in more than three decades and demand shows signs of weakening. Russia, which depends on oil and gas for about half its revenue, is on the brink of recession amid U.S. and European sanctions targeting its energy and financial industries.

Saudi Arabia and Russia, which together produce 25% of global oil, agreed the market “must be free of attempts to influence it for political and geopolitical reasons,” Russian Foreign Minister Sergei Lavrov said after the talks today. Where supply and demand are “artificially distorted,” oil exporters “have a right to take measures to correct these non-objective factors.” Lavrov and Saudi Arabian Foreign Minister Prince Saud Al-Faisal said in a joint statement that they’ll coordinate on “issues” affecting the energy and oil markets, without giving more detail. [..] “If OPEC wants to reduce output, it only makes sense if other oil producers outside of OPEC do the same,” said Elena Suponina, a Middle East expert and adviser to the director of Moscow’s Institute for Strategic Studies. “Otherwise you just lose market share.”

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“Japan is going down for the count, China’s house of cards is truly collapsing, Europe is plunging into a triple dip and Wall Street’s spurious claim that 3% “escape velocity” has finally arrived in the US is soon to be discredited for the 5th year running.”

Sell, Sell, Sell .. The Central Bank Madmen Are Raging (David Stockman)

The global financial system has come unglued. Everywhere the real world evidence points to cooling growth, faltering investment, slowing trade, vast excess industrial capacity, peak private debt, public fiscal exhaustion, currency wars, intensified politico-military conflict and an unprecedented disconnect between debt-saturated real economies and irrationally exuberant financial markets. Yet overnight two central banks promised what amounts to more monetary heroin and, presto, the S&P 500 index jerked up to 2070. That is, the robo-traders inflated the PE multiple for S&P’s basket of US-based global companies to a nose bleed 20X their reported LTM earnings. And those earnings surely embody a high water mark in a world where Japan is going down for the count, China’s house of cards is truly collapsing, Europe is plunging into a triple dip and Wall Street’s spurious claim that 3% “escape velocity” has finally arrived in the US is soon to be discredited for the 5th year running.

So it goes without saying that if “price discovery” actually existed in the Wall Street casino, the capitalization rate on these blatantly engineered earnings (i.e. inflated EPS owing to massive buybacks) would be decidedly less exuberant. In truth, nothing has changed about the precarious state of the world since yesterday. Except .. except the Great Bloviator at the ECB made another fatuous and undeliverable promise – this time that he would do whatever he “must to raise inflation and inflation expectations as fast as possible”; and, at nearly the same hour, the desperate comrades in Beijing administered another sharp poke in the eye to China’s savers by lowering the deposit rate to by 25 bps to 2.75%.

Let’s see. Can it possibly be true that European growth is faltering because it does not have enough inflation? Or that China’s fantastic borrowing and building boom is cooling rapidly because the People Bank of China (PBOC) has been too stingy? The answer is not on your life, of course. So why would stocks soar based on two overnight announcements that can not possibly alleviate Europe’s slide into recession or the collapse of China’s out-of-control investment and construction bubble?

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There is no growth.

What Record Stock Buybacks Say About Economic Growth (Zero Hedge)

For all the obfuscation surrounding the topic of stock buybacks and corporations returning record amounts of cash to their shareholders, the bottom line is as simple as it gets. This is what you are taught in CFO 101 class:

if you see organic growth opportunities for your business, or if you want to maintain the asset quality generating your cash flows, you invest in (either maintenance or growth) capex.
if there are no such opportunities, you return cash to investors (or, maybe spend a little on M&A unless you are Valeant in which case you spend everything and then much more).

That’s it. Well, based on this shocking chart from the FT’s John Authers, does it seem that America’s corporations – who are returning over a record 90% of Net Income to shareholders – are seeing (m)any growth opportunities?

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The Chinese housing sector is in deep doodoo.

Is China Building a Mortgage Bomb? (Bloomberg)

The first Chinese interest-rate cut in more than two years is a stark recognition that the world’s second-biggest economy is in trouble. After years of piling ever more public debt onto the national balance sheet, it makes sense to have the People’s Bank of China take the lead in propping up gross domestic product. Yet while today’s benchmark rate cut should help stabilize growth, the move also adds to worries about looser credit that could pose risks to the global economy. Case in point: mortgages. Earlier this year, Chinese officials took several stealthy steps aimed at stabilizing the property sector and bolstering GDP growth. The China Banking Regulatory Commission loosened lending policies. Even before cutting the one-year lending rate to 5.6% and the one-year deposit rate to 2.75% today, the central bank had cut payment ratios and mortgage rates, while prodding loan officers to ease up on their reluctance to approve borrowers without local household registrations.

Pilot programs for mortgage-backed securities and real-estate investment trusts got more support. Incentives were rolled out to encourage high-end buyers to upgrade properties. There’s good news and bad in all this. The good: It marks progress for President Xi Jinping’s efforts to recalibrate China’s growth engines. In highly developed economies like the U.S., the quest for homeownership feeds myriad growth ecosystems and offers the masses ways to leverage their equity for other financial pursuits. And China’s debt problems are in the public sphere, not among consumers. The bad: If ramped-up mortgage borrowing isn’t accompanied by bold and steady progress in modernizing the economy, China will merely be creating another giant asset bubble. “Expanding the underdeveloped mortgage market is not bad news,” says Diana Choyleva of Lombard Street Research. “But if China relies on household credit to power the economy and pulls back from much-needed financial reforms, the omens are not good.”

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As I’ve said a hundred times.

‘China’s Economy Is Slowing Faster Than You Think’ (CNBC)

The Chinese economy is slowing even faster than indicated by the People’s Bank of China’s surprise interest rate cut on Friday, said Peter Baum, a former Asian sourcing executive. China has too much manufacturing capacity for current levels of global demand, which has not adequately recovered from the financial crisis, the COO and CFO of Essex Manufacturing told CNBC’s “Power Lunch” on Friday. “As an example, I was just back. We have plants that we run where they used to have 500, 1,000 workers. They’re down to 200,” Baum said.

Labor costs for factories are rising because working age Chinese have been educated and don’t want to toil in such positions, he said. At the same time, the managers must amortize the fixed costs of the facilities over lower productivity. On top of that, the Chinese renminbi has appreciated 25% since 2004, putting pressure on producers to raise prices, Baum said. Debt levels could be problematic because many Chinese factory owners plan to sell their property to developers if the business fails, but the real estate market is on the rocks, he said. “If real estate is tanking, if there’s no demand for manufacturing, somebody is carrying all the debt, whether it’s banks, whether it’s their shadow banking system,” Baum said.

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Roach is more of a religious man, or I can’t explain the 7% limit. It’s as if he’s saying China can set its own growth level.

China Cut Pegs Growth Floor At 7%, Says Stephen Roach (CNBC)

After unexpectedly cutting interest rates for the first time in two years, Chinese leaders have revealed their floor for economic growth is around 7%, said Stephen Roach, senior fellow at Yale’s Global Affairs Institute. The move also signals investors can expect further moves if China fears the growth rate will go appreciably below 7%, the former chairman of Morgan Stanley Asia said Friday on CNBC’s “Squawk Box.” In a surprise announcement Friday, the People’s Bank of China said it was cutting one-year benchmark lending rates by 40 basis points to 5.6%. It also lowered one-year benchmark deposit rates by 25 basis points. The changes take effect Saturday. The rate cut is seen as addressing slowing factory growth and a stalled property market, which have dragged down the broader economy.

China is addressing cyclical changes while also fixing big structural issues in its economy, something that no other economy is doing right now, Roach said. “There are headwinds associated with that when you try to shift the mix of economic growth from your hyper-growth sectors of investment—debt-intensive investments and exports—to services and internal private consumption,” he said. “There’s some slowing associated with that, and when that occurs in the context of much weaker external environment, which is obviously the case given what’s going on in the world, China’s got downside pressures to contend with,” Roach added. The hyperbole about China being an ever-ticking debt bomb stacked with excesses and nonperforming loans is based on emotion rather than empirical data, he said.

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And China needs to keep up with the yen devaluation too.

Yen Weakens to Seven-Year Low as Japan Will Vote on Abenomics (Bloomberg)

The yen slid to its lowest level in seven years versus the dollar after Japan’s Prime Minister Shinzo Abe called early elections seeking to renew his mandate for economic stimulus as the nation entered a recession. The 18-nation euro declined versus most of its 31 major peers as European Central Bank President Mario Draghi said officials “will do what we must” to raise inflation. The Swiss franc tested its cap versus the weakening shared currency as a central bank official vowed to defend it. The yen fell for a sixth week against the euro, the longest streak since December 2013, as the Bank of Japan warned inflation may slip below 1% before a consumer prices report Nov. 27.

“We have uncertainty on the political front and we have weaker domestic data combined with very aggressive policy coming from the central bank, all of which should be driving a weaker yen,” said Camilla Sutton, chief foreign-exchange strategist at Bank of Nova Scotia in Toronto. The yen tumbled 1.3% against the dollar this week in New York, touching 118.98 on Nov. 20, the weakest level since August 2007. The currency lost 0.2% versus the euro, which fell 1.2% to $1.2391 per dollar. The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major counterparts, rose a fifth week, adding 0.2% to close at the highest level since March 2009.

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“By the end of this year or by the start of next year, without QE, the market is going down”.

‘We Are Living in an Aberrational World’ (Finanz und Wirtschaft)

The editor of the influential investment newsletter ‘The High-Tech Strategist’ warns of trouble in semiconductor stocks and spots bright investment opportunities in gold miners. It’s unchartered territory: For the first time since more than half a decade the global financial markets are supposed to live without the constant liquidity infusions of the Federal Reserve. Fred Hickey, the outspoken editor of the widely-read investing newsletter ‘The High-Tech Strategist’, says this won’t work well for long. “By the end of this year or by the start of next year, without QE, the market is going down”, says the sharply thinking contrarian. In his view, especially the outlook for semiconductor makers like Intel is gloomy. As protection against the upcoming crash he recommends investments in gold and in gold mining stocks.

Mr. Hickey, after the short setback in October the hunt for new records at the stock market is on once again. What’s your take on the current situation?
We are living in an aberrational world. It’s all driven by an orgy of money printing. All the major central banks are engaged in this. From the Federal Reserve in the United States to the ECB, to the Bank of England and the National Bank of Switzerland to the Bank of Japan and the People’s Bank of China. It’s been tried ever since there was money, but in thousands of years of history it has never worked. When the Roman empire was unraveling the Caesars would shave the silver from the coins in order to be able to make a lot more of them. And in Weimar Germany, Reichsbank president Rudolf Havenstein ran the printing presses day and night, seven days a week. And here we are now, repeating the same mistake.

Yet, the markets love cheap money. The S&P 500 just climbed to another record high this Monday.
I lean towards the school of Austrian economists and they tell you that you can’t get out of those things. As a reminder, I keep the following quote from the great Austrian economist Ludwig von Mises pinned to the bulletin board in my office: “The final outcome of credit expansion is general impoverishment”. Von Mises also warned that the boom can only last as long as the credit expansion progresses at an ever-accelerating pace. That’s why the Federal Reserve is unable to get out of this. Shortly after QE1 the stock market sold off 13% and the economy tanked. Then they did QE2 and when that ended the market sunk 16% in just a few weeks. That led to Operation Twist and that led to QE3, the biggest money printing operation of them all. Even before QE3 ended the markets started to take a dive and the Fed had to come to the rescue again. James Bullard of the St. Louis Fed came out and said that maybe they shouldn’t stop QE. That led to what they call the «Bullard Bounce» or «Bullard’s Charge». So they gave the green light to speculate once again. But fact of the matter is that money printing does not work.

Nevertheless, Fed chief Janet Yellen stopped QE3 at the end of October.
That’s why I expect things to fall apart in the market. I don’t know what’s going to happen between now and the year end because this is a seasonally strong period for stocks. Money managers who have been underperforming all year are under pressure to get into the stock market. And we might see what I call a «Run for the Roses» and the market gets to even more extreme levels. I don’t know how much longer this global money printing experiment can continue. But it sure feels to me that we’re nearing the day that it spins out of control. By the end of this year or by the start of next year without QE the market is going down and we will end up in chaos.

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Another stillborn plan. In his latest speech, Draghi was poiting to the emphasis on confidence. His actions must make people feel confident. I guess that shows he doesn’t believe it himself.

European Central Bank Has Begun Buying Asset-Backed Securities (Reuters)

The European Central Bank has started buying asset-backed securities, it said on Friday, in a move to encourage banks to lend and revive the economy. “Following publication of legal act on the implementation of the ABS purchase programme, the Eurosystem has started the purchases on 21/11/2014,” the ECB said on its Twitter feed. The program is one plank in a strategy which ECB chief Mario Draghi hopes will increase its balance sheet by up to €1 trillion. It already buys covered bonds, a secure form of debt often backed by property.

The ABS and covered bond programs will last for at least two years. The ECB will give a weekly updated on its purchases on its website around 1430 GMT on Mondays, as it is already doing with the covered bond purchases. If it falls short of this overall €1 trillion mark and fails to boost the economy significantly, pressure to print money to buy government bonds, also known as quantitative easing, will reach fever pitch. However, expectations among market experts for the program are muted. To limit its risk, the ECB will buy only the most secure part of such loans in the hope that others pile in behind it to buy riskier credit.

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Excuse me, but what use is a stress test if banks can throw out false numbers and the test doesn’t detect them?

RBS Admits Overstating Financial Strength In Stress Test (Guardian)

Royal Bank of Scotland has admitted it made a mistake that led to it overstating its financial strength to banking regulators. Shares in RBS tumbled by almost 3% at one point on Friday as investors digested the bank’s announcement that it is less able to withstand an economic crisis than previously thought. The bank, which is 80% owned by the British taxpayer, has still passed the stress test exercise designed by European banking regulators, but among UK banks it has the least margin for error. An RBS spokesperson said the stress tests were a “theoretical” exercise that had no impact on its most recent capital position. One in five European banks failed the stress tests that were published last month by the European Banking Authority. The tests were intended to prevent a rerun of the economic crisis, with banks required to show they had enough capital to withstand a series of economic shocks such as a sudden rise in unemployment, a sharp fall in house prices and decline in economic growth.

The banks were asked to model how a slide into recession imposing £20bn of losses would affect their common equity tier 1 ratio – a key measure of financial strength based on its earnings. Under Friday’s revised results, RBS has found that its capital position in a crisis would be weaker than it previously thought: it would have a common equity tier 1 ratio of 5.7%, scraping above the EBA pass rate of 5.5%, but significantly less comfortable than the 6.7% it reported last month. The revised results mean that RBS beat the threshold by the narrowest margin among UK banks: Lloyds came in at 6.2%, followed by Barclays at 7.1% and HSBC at 9.3%. RBS said that if it was repeating the stress-test exercise based on its latest earnings figures, it would have a stronger financial cushion. The bank said it had improved its CET 1 ratio by 220 basis points to 10.8% by 30 September, compared to 8.6% at the end of last year.

The mistake was discovered by officials at the Bank of England, who spotted an anomaly in RBS’s figures after the pan-European results were published in late October. Officials at Threadneedle Street contacted RBS, which amended the figures and filed the results to the EBA on Friday. No errors were uncovered at any other UK bank, although Deutsche Bank amended one of its figures shortly after the stress test results were published.

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Investigating yourself. That always works fine.

Bank Of England Investigates Staff Over Possible Auction Rigging (Reuters)

The Bank of England is investigating whether staff knew or even aided possible manipulation of auctions it held at the onset of the financial crisis to pump liquidity into the banking system, the Financial Times has reported. The newspaper said the formal inquiry began during the summer and the central bank asked the British lawyer who looked into the Bank’s role in a foreign exchange scandal to head the new investigation. “If the bank were conducting an investigation or review of any of its activities, as it does from time to time, it would be wholly inappropriate to provide a running commentary via the press,” a spokesman said. “I can tell you that no actions have been taken or are currently being contemplated against any employee of the bank.“ The FT, quoting people familiar with the situation, said the investigation would look into whether Bank of England money market auctions in late 2007 and early 2008 were rigged, and whether officials were party to any manipulation.

About 10 Bank staff have been interviewed as part of the inquiry and have been provided with defence lawyers at the expense of the Bank, the FT said. The report comes little more than a week after an investigation, headed by lawyer Anthony Grabiner and commissioned by the Bank’s oversight committee, found no evidence that any of its official had been involved in improper behaviour in relation to a foreign exchange trading scandal. The FT said Grabiner had been asked to conduct the new investigation. The Bank dismissed its chief foreign exchange dealer last week, saying it found information about serious misconduct but it stressed the case was unrelated to the foreign exchange scandal.

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A dead model. Good riddance.

The Impossible American Mall Business. ‘We Surrender’ (Bloomberg)

On a crisp Friday evening in late October, Shannon Rich, 33, is standing in a dying American mall. Three customers wander the aisles in a Sears the size of two football fields. The RadioShack is empty. A woman selling smartphone cases watches “Homeland” on a laptop. “It’s the quietest mall I’ve ever been to,” says Rich, who works for an education consulting firm and has been coming to the Steeplegate Mall in Concord, New Hampshire, since she was a kid. “It bums me out.” Built 24 years ago by a former subsidiary of Sears Holdings Corp., Steeplegate is one of about 300 U.S. malls facing a choice between re-invention and oblivion. Most are middle-market shopping centers being squeezed between big-box chains catering to low-income Americans and luxury malls lavishing white-glove service on One%ers.

It’s a time of reckoning for an industry that once expanded pell-mell across the landscape armed with the certainty that if you build it, they will come. Those days are over. Malls like Steeplegate either rethink themselves or disappear. This summer Rouse Properties a real estate investment trust with a long track record of turning around troubled properties, decided Steeplegate wasn’t salvageable and walked away. The mall is now in receivership. As management buys time by renting space to temporary shops selling Christmas stuff, employees fret that if the holiday shopping season goes badly, more stores will close. Should the mall lose one of its anchors – Sears, J.C. Penney and Bon-Ton Stores – the odds of survival lengthen. “Rouse is basically saying ‘We surrender,’” said Rich Moore, an analyst at RBC Capital Markets who has covered mall operators for more than 15 years. “If Rouse couldn’t make it work and that’s their specialty, then that’s a pretty tough sale to keep it as is.”

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“Either you need to fix it, Mr. Dudley, or we need to get someone who will.”

Dudley Defends New York Fed Supervision In Heated Senate Hearing (Bloomberg)

William C. Dudley came under attack today by U.S. senators, who accused the Federal Reserve Bank of New York president of being too cozy with big Wall Street banks. “I wouldn’t accept the premise that there’s been a long list of failures by the New York Fed since my tenure,” Dudley said in response to an assertion by Elizabeth Warren, a Massachusetts Democrat. “Is there a cultural problem at the New York Fed? I think the evidence suggests that there is,” Warren said. “Either you need to fix it, Mr. Dudley, or we need to get someone who will.” The hearing was prompted by allegations by a former New York Fed bank examiner, Carmen Segarra, who said her colleagues were too deferential to Goldman Sachs Group Inc., the Wall Street bank where Dudley was chief economist for a decade.

Segarra attended today’s hearing and later released a statement via a spokesman expressing disappointment that she was not given a chance to address the panel. “She looks forward to publicly testifying if and when the Senate moves forward with additional hearings,” said her spokesman, Jamie Diaferia, in an e-mail. Senators questioned Dudley, 61, on issues ranging from whether some banks are too big to regulate to the Fed’s role in overseeing their commodities businesses. Some of the criticism was pointed. Warren, a frequent critic of financial regulators, asked Dudley if he was “holding a mirror to your own behavior.”

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Can this be solved without a default? Hard to see.

Illinois $111 Billion Pension Deficit Fix Struck Down (Bloomberg)

Illinois will have to find a new way to fix the worst pension shortfall in the U.S. after a judge struck down a 2013 law that included raising the retirement age. Yesterday’s ruling that the pension changes would have violated the state’s constitution undoes a signature achievement of outgoing Democratic Governor Pat Quinn and hands responsibility for tackling the state’s $111 billion pension deficit to Republican businessman Bruce Rauner, who defeated him in the Nov. 4 election. State constitutions have been invoked elsewhere to try to prevent cuts to public pensions. In Rhode Island, unions settled with the state over pension cuts before their constitutional challenge could be put to the test. In municipal bankruptcy cases in Detroit and California, judges ruled that federal law overrode state bans on cutting pensions.

Illinois Attorney General Lisa Madigan, a Democrat, said she’ll appeal the ruling by Judge John Belz in Springfield and ask the state Supreme Court to fast-track the review. “Today’s ruling is the first step in a process that should ultimately be decided by the Illinois Supreme Court,” Rauner said yesterday. “It is my hope that the court will take up the case and rule as soon as possible. I look forward to working with the legislature to craft and implement effective, bipartisan pension reform.” Belz concluded that a 1970 constitutional provision barring cuts to public employee retirement benefits trumps the state’s claim that it has the power to trim future cost-of-living adjustments and delay retirement eligibility for some workers. “The court finds there is no police power or reserved sovereign power to diminish pension benefits,” he said, voiding the legislation in its entirety and permanently barring the state from enforcing any part of it.

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Unfortunately, only for Windows computers.

Click Here to See If You’re Under Surveillance (BW)

For more than two years, researchers and rights activists have tracked the proliferation and abuse of computer spyware that can watch people in their homes and intercept their e-mails. Now they’ve built a tool that can help the targets protect themselves. The free, downloadable software, called Detekt, searches computers for the presence of malicious programs that have been built to evade detection. The spyware ranges from government-grade products used by intelligence and police agencies to hacker staples known as RATs—remote administration tools. Detekt, which was developed by security researcher Claudio Guarnieri, is being released in a partnership with advocacy groups Amnesty International, Digitale Gesellschaft, the Electronic Frontier Foundation, and Privacy International.

Guarnieri says his tool finds hidden spy programs by seeking unique patterns on computers that indicate a specific malware is running. He warns users not to expect his program (which is available only for Windows machines) to find all spyware, and notes that the release of Detekt could spur malware developers to further cloak their code. The use of the programs—which can remotely turn on webcams and track keystrokes—gained attention as researchers increasingly found the spyware being used to target political activists and journalists. In Syria, dissidents have been attacked by malware delivered through fake documents sent via Skype. In Washington and London, Bahraini democracy activists received e-mails laced with what was identified as the German-made FinSpy Trojan.

In Ethiopia, another hacking tool made multiple attempts against employees of an independent media company, according to a probe by Guarnieri and security researchers Morgan Marquis-Boire, Bill Marczak, and John Scott-Railton. The new safeguard comes amid fresh reminders of pervasive electronic snooping around the globe. Just this week, London-based Privacy International published a 96-page report detailing surveillance capabilities of Central Asian republics and the companies that supply them.

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Sep 252014
 
 September 25, 2014  Posted by at 5:51 pm Finance Tagged with: , , , , , ,  9 Responses »


Wyland Stanley Studebaker motor car in repair shop, San Francisco 1919

There are substantial and profound changes developing in the global economy, and in my view we should all pay attention, because everyone will be greatly affected. Some more than others, but still.

‘Metal markets’, be they gold, silver, copper or iron, exhibit distress and uncertainty, prices are falling, or at least seem to be. Partly, that is because of the apparently still ongoing investigation in the Chinese port of Qingdao, through which a $10 billion ‘currency fraud’ is reported today, ostensibly related to the double/triple borrowing that has been exposed, in which the same iron ore and copper shipments were used as collateral multiple times.

This could soon bring such shipments to the market and add to the oversupply already in place. Combined with ever more evidence of a slowdown in Chinese growth numbers, this doesn’t look good for iron, copper, aluminum.

But the Slow Boat To – or from – China is by no means the only reason metal prices are dropping. The main one is, plain and simple, the US dollar. Gold, for instance, hasn’t changed much at all when compared to a year ago, against the euro. Whereas it’s lost 8-9% against the dollar over the last 2-3 months, about the same percentage as that same euro. The movement is not – so much – in gold, it’s in the dollar.

To claim that this is the market at work makes no sense anymore. Today central banks, for all intents and purposes, are the market. As Tyler Durden makes clear once again for those who still hadn’t clued in:

Bank Of Japan Buys A Record Amount Of Equities In August

Having totally killed the Japanese government bond market, Shinzo Abe has – unlike the much less transparent Federal Reserve, who allegedly use their proxy Citadel – gone full tilt into buying Japanese stocks (via ETFs). In May, we noted the BoJ’s aggressive buying as the Nikkei dropped, and in June we pointed out the BoJ’s plan to buy Nikkei-400 ETFs and so, as Nikkei news reports, it is hardly surprising that the Bank of Japan bought a record JPY 123.6 billion worth of ETFs in August.

The market ‘knows’ that the BoJ tends to buy JPY 10-20 billion ETFs when stock prices fall in the morning. The BoJ now holds 1.5% of the entire Japanese equity market cap (or roughly JPY 480 trillion worth) and is set to surpass Nippon Life as the largest individual holder of Japanese stocks. And, since even record BoJ buying was not enough to do the job, Abe has now placed GPIF reform (i.e. legislating that Japan’s pension fund buys stocks in much greater size) as a primary goal for his administration. The farce is almost complete as the Japanese ponzi teeters on the brink.

Shinzo Abe wants the yen to fall, and he gets his (death)wish, because the Japanese economy and the financial situation of its government are in such bad shape, there’s nowhere else to go for the yen. That doesn’t spell nice things for the Japanese people, who will see prices for imported items (energy!) rise, but for all we know Abe sees that as a way to push up inflation. That’s not going to work, what we will push up instead is hardship. And that plan to force pension funds into stocks is just plain insane, an idea he got from US pension funds which are 50% in stocks – which is just as crazy.

Draghi talks down the euro, says a headline today, but I don’t see it; I wonder why that would be supposed to work now, and not in the preceding years, when it was just as obvious how poorly Europe was doing. Sure, there’s a new ‘threat’ in the AfD (Alternative for Germany), a right wing anti-euro party, but that’s not – for now – enough to cause the euro slide we’re seeing. The movement is not – so much – in the euro, it’s in the dollar.

Why the Fed moves the way it does, the moment it does, in its three pronged combo of fully tapering QE, hiking rates (or at least threatening to) and pushing up the greenback, is not immediately clear, but a few suggestions come to mind, some of which I mentioned earlier this month in The Fed Has A Big Surprise Waiting For You and in What Game Is Being Played With the US Dollar?.

My overall impression is that the Fed has given up on the US economy, in the sense that it realizes – and mind you, this may go back quite a while – that without constant and ongoing life-support, the economy is down for the count. And eternal life-support is not an option, even Keynesian economists understand that. Add to this that the -real – economy was never a Fed priority in the first place, but a side-issue, and it becomes easier to understand why Yellen et al choose to do what they do, and when.

When the full taper is finalized next month, and without rate rises and a higher dollar, the real US economy would start shining through, and what’s more important – for the Fed, Washington and Wall Street -, the big banks would start ‘suffering’ again. Just about all bets are on the same side of the trade today, and that’s bad news for Wall Street banks’ profits.

The higher dollar will bring some temporary relief for Americans, in lower prices at the pump, and for imported products in stores, for example. Higher rates, however, will put a ton and a half of pressure bearing down on everyone who’s in debt, and that’s most Americans. The idea is probably that by the time this becomes obvious and gets noticed, we’re far enough down the line that there’s no going back. Besides, we could be in full-scale war by then. One or two IS attacks in the west would do.

The higher dollar – certainly in combination with higher rates – will also mean a very precarious situation for the US government, which will have to pay a lot more in borrowing costs, but our leadership seems to think that at least in the short term, they can keep that under control. And then after that, the flood. Maybe the US can start borrowing in yuan, like the UK wants to do?

To reiterate: there is no accident or coincidence here, and neither is it the market reacting to anything. That’s not an option in this multiple choice, since there is no market left. It’s all central banks all the way (like the universe made up of turtles). It’s faith hope and charity, and the greatest of these is the Federal Reserve. Is they didn’t want a higher dollar, there would not be one. Ergo: they’re pushing it higher.

The Bank of England will follow in goose lockstep, while the ECB and Bank of Japan can’t. That’s earthquake and tsunami material. The biggest richest guys and galls will do fine wherever they live. The rest, not so much. Wherever they live . At the Automatic Earth, we’ve been telling you to get out of debt for years, and we reiterate that call today with more urgency. Other than that, it’s wait and see how many export-oriented US jobs will be lost to the surging buckaroo. And how a choice few nations in the northern hemisphere will make through the cold days of winter.

Whatever you do, don’t take this lightly. A major move is afoot.

Dollar Hits Four-Year High as Metals Drop on China Fraud (Bloomberg)

The dollar jumped to a four-year high and precious metals retreated on speculation the strengthening U.S. economy is pushing the Federal Reserve closer to raising interest rates. Industrial metals and the yuan declined after China said it uncovered $10 billion of trade fraud, while European stocks rose. The Bloomberg Dollar Spot Index climbed for a fifth day, rising 0.3% by 10:17 a.m. in London, as the euro tumbled to a 22-month low. New Zealand’s dollar led losses against the greenback after the central bank said its strength is unjustified, while silver slumped 0.8% and gold fell to an eight-month low. Copper dropped 0.4% and the yuan reference rate was set at a two-week low. Spain’s bonds rose with Italy’s as the Stoxx Europe 600 Index climbed 0.3%. Standard & Poor’s 500 Index (XU100) futures were little changed.

The U.S. reports durable-goods orders and initial jobless claims numbers today after new-home sales surged in August to the highest level in more than six years. The stronger data are leading traders to bring forward bets on higher U.S. interest rates, buoying the dollar, as monetary policy from the euro area to New Zealand weighs on other currencies. Some banks played roles in fake trade at the port of Qingdao, said Wu Ruilin, deputy head of China’s State Administration of Foreign Exchange. “The theme during the second half of this year is dollar strength,” Yannick Naud, a money manager at Sturgeon Capital Ltd. in London, said in an interview on Bloomberg Television’s “On The Move” with Jonathan Ferro. “The economy is growing very strongly, we have a very good set of results and the central bank will probably be the first, or the second after the Bank of England, to increase interest rates.”

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Iron Ore Falls Below $80 to Lowest Since 2009 on China Concerns (Bloomberg)

Iron ore slumped below $80 a metric ton for the first time in five years on speculation that China’s slowing economic growth will curb demand in the world’s biggest user, exacerbating a global surplus. Ore with 62% content delivered to Qingdao, China, fell 0.5% to $79.69 a dry ton, the lowest level since Sept. 16, 2009, according to data from Metal Bulletin Ltd. The drop followed seven weeks of declines as the steelmaking raw material had the longest run of losses since May. The commodity plunged 41% this year as BHP Billiton Ltd. (BHP) and Rio Tinto Group (RIO) expanded output in a bet that the increase in volumes would more than offset falling prices as higher-cost mines are forced to shut. China’s Finance Minister Lou Jiwei said this week growth in Asia’s largest economy faces downward pressure. China’s economy remained stuck in “low gear” this quarter, with retail and residential real-estate industries struggling, according to the China Beige Book.

“The ramp-up in global supply and downturn in Chinese property sector are driving prices lower,” Paul Bloxham, chief Australia economist at HSBC Holdings Plc, said by e-mail today. “We expect Chinese miners to cut back production, which should keep prices well above the costs of major Australian producers.” Iron ore’s decline came after raw materials dropped to the lowest level in five years yesterday. The Bloomberg Commodities Index (BCOM) retreated 5.1% this year, poised for a fourth year of losses. Global output of seaborne ore will exceed demand by 52 million tons this year and 163 million tons in 2015, according to Goldman Sachs Group Inc. The price will average $102 a ton this year and $80 in 2015, according to the bank. So far this year, it’s averaged about $105.25 in Qingdao. China accounts for about 67% of global seaborne demand.

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That’s all?

China Watchdog Finds $10 Billion in Fake Currency Trade (Bloomberg)

China uncovered almost $10 billion in fraudulent trade nationwide as part of an investigation begun in April last year, including many irregularities in the port of Qingdao, the country’s currency regulator said today. Companies “faked, forged and illegally re-used” documents for exports and imports, Wu Ruilin, a deputy head of the State Administration of Foreign Exchange’s inspection department, said at a briefing in Beijing. The trades have “increased pressure from hot money inflows and provided an illegal channel for criminals to move funds,” Wu said, adding that those involved in such fraud would be severely punished.

“Some companies used the trade channel to bring in hot money,” said Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd. SAFE’s investigation “will likely further cool down hot money inflows and commodity imports could slow as banks will likely conduct more careful checks on documentation.” Industrial metals fell and the yuan weakened after the announcement. Copper slid as much as 0.5% and all main metals on the London Metal Exchange declined. Chinese banks have about 20 billion yuan ($3.3 billion) of exposure to companies caught up in a loan fraud probe in Qingdao, two government officials told Bloomberg in July. SAFE identified the fake trade invoicing as part of a crackdown on the practice in 24 cities and provinces, Wu said. The news raised speculation that metals supplies may increase as stockpiles tied up in financing deals come back on the market.

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Bank Of Japan Buys A Record Amount Of Equities In August (Zero Hedge)

Having totally killed the Japanese government bond market, Shinzo Abe has – unlike the much less transparent Federal Reserve, who allegedly use their proxy Citadel – gone full tilt into buying Japanese stocks (via ETFs). In May, we noted the BoJ’s aggressive buying as the Nikkei dropped, and in June we pointed out the BoJ’s plan tobuy Nikkei-400 ETFs and so, as Nikkei news reports, it is hardly surprising that the Bank of Japan bought a record JPY 123.6 billion worth of ETFs in August. The market ‘knows’ that the BoJ tends to buy JPY10-20 billion ETFs when stock prices fall in the morning. The BoJ now holds 1.5% of the entire Japanese equity market cap (or roughly JPY 480 trillion worth) and is set to surpass Nippon Life as the largest individual holder of Japanese stocks. And, since even record BoJ buying was not enough to do the job, Abe has now placed GPIF reform (i.e. legislating that Japan’s pension fund buys stocks in much greater size) as a primary goal for his administration. The farce is almost complete as the Japanese ponzi teeters on the brink. Via Nikkei Asia:

The Bank of Japan is growing into its role as a key source of support for the country’s stock market, as it has stepped up purchases of exchange-traded funds to bring its equities portfolio to an estimated 7 trillion yen ($63.6 billion) or so. The central bank bought 123.6 billion yen worth of ETFs in August, the largest monthly tally so far this year. At one point, it snapped up ETFs in six straight sessions amid weak stock prices. The BOJ tends to make 10 billion yen to 20 billion yen worth of purchases when stock prices fall in the morning. The bank has not made any purchases so far in September because the market has been rallying. According to BOJ data, the market value of individual stocks and ETFs that it held as of March 31 came to 6.15 trillion yen. Given its purchases since then and the market rally, the value is estimated to have increased to a whopping 7 trillion yen or so by now.

That figure accounts for 1.5% of the entire market value of all Japanese shares, or roughly 480 trillion yen. It also means the BOJ may surpass Nippon Life Insurance, the largest private-sector stock holder with some 7 trillion yen in holdings, as early as this year and emerge as the second-biggest shareholder behind the Government Pension Investment Fund – the national pension fund with 21 trillion yen. The BOJ started outright purchases of shareholdings from banks back in 2002 with the aim of stabilizing the country’s financial system. To prevent stocks from tumbling steeply, it also began buying ETFs in 2010. The bank does not buy individual shares now, but it doubled its annual ETF purchases to 1 trillion yen when it introduced unprecedented levels of monetary easing in April 2013.

It is unusual for a central bank to buy stocks and ETFs, given that their sharp price swings pose the risk of undermining the health of the bank’s assets. High levels of purchases by the BOJ affect stock prices and may hurt asset allocation and development of the financial markets. The timing and technique of selling the BOJ’s shareholdings are also a tricky question. A freeze has been put on sales of individual shares until March 2016, and there is no selling schedule for ETFs. But given that the bank’s holdings are equal to roughly half the 15 trillion yen in net buying by foreigners last year, large-scale selling would be certain to shake the market.

We hope, by now, it is clear what a fraud the entire system has become. Simply put, the BoJ has the firepower (unlimited printing) but not the liquidity (the markets are just not deep enough as was clear in the JGB complex) to keep the dream alive if (and when) investors lose faith in Abenomics. Clearly that’s why Abe needs to get the GPIF on the case…

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What a surprise that is.

Lending to Minorities Declines to a 14-Year Low in US (Bloomberg)

The share of mortgage lending to minority borrowers fell to at least a 14-year low as U.S. regulators struggle to ease credit to blacks and Hispanics shut out of the housing recovery. These borrowers, whose share of the purchase mortgage market has been shrinking since the collapse of subprime lending, continued to lose ground to white borrowers through 2013, according to federal data released this week. Blacks and Hispanics were a smaller portion of borrowers last year than they were in 2000, before the housing bubble.

Minorities, who tend to have less savings and lower credit scores than whites, have been hit hardest by lenders who are giving mortgages only to the strongest borrowers. Fair-lending advocates and civil-rights groups are urging the government to create new loan products and change how creditworthiness is determined to give blacks and Hispanics greater access to one of the best vehicles for building wealth. “These numbers are a wake-up call that the housing market is a major driver of the economy and it can’t be a vibrant market when so many new households are excluded from it,” said Jim Carr, a former Fannie Mae executive who is now a scholar at the Opportunity Agenda, a New York-based organization that works on racial equity issues.

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And don’t you forget it.

The World’s Largest Subprime Debtor: The US Government (Mises.ca)

Do you have a friend who consistently borrows 30% of his income each year, is currently in debt about six times her annual income, and wanted to take advantage of short-term interest rates so that he needs to renegotiate with his banker about once every six years? Well, if Uncle Sam is your friend you do!

Lehman Brothers filed for Chapter 11 bankruptcy protection six years ago this month. The event has become famous as the spark that ignited the global financial crisis. Since that date, millions have lost their jobs and livelihoods, and countless others have seen their futures evaporate before their eyes, sometimes permanently. At the heart of the crisis of 2008 was a common cause acknowledged by almost all commentators. Borrowers now infamously known as “subprime” (or more politely, “non-prime”) were the main reason behind the meltdown. As financial institutions extended loans to those with less than stable means to repay their debts, the foundation of the financial world was destabilized. Six years on and these subprime debtors are largely a relic of the past. That fact notwithstanding, there is a new threat lurking in the global financial arena. This one borrower is far larger than all the previous subprime characters combined, and poses a far more dangerous hazard to the financial stability of nearly all (if not all) of the world’s citizens.

I am speaking, of course, of the United States government. Subprime borrowers are defined by FICO scores which are largely inapplicable to sovereign nations. We can instead look at the type of loans that these borrowers took on to understand how precarious the United States federal government’s finances are. To simplify matters greatly, consider three types of loans that made debt attractive to subprime borrowers. The first was the adjustable rate mortgage. After a short period at a low introductory teaser rate, the interest rate would reset higher. Second was the interest only loan. Borrowers could take out a sum of money and for a period not worry about paying down the principal. An extreme form of the interest only loan is the final type: the negative amortization loan. In this case, not only does the payment not reduce the principal of the loan, it doesn’t even cover all the accrued interest! The effect is that each month that goes by, the borrower slips further in debt as interest deferral is added to the principal to be repaid.

In the wake of the crisis, a lot of commentators focused on two measures of the government’s financial stability. The first was its debt to GDP level, which was added to on a yearly basis by its deficit (also expressed as a%age of GDP). At its nadir in 2010, the federal government ran a budget deficit of nearly 10% of GDP (the highest since World War II). As of today, the federal debt level (ignoring unfunded liabilities such as Social Security or Medicare) amounts to 102% of GDP. While these numbers are indeed high, they really understate the problem. After all, the denominator in both cases is the total income of the whole United States, not just that of the government.

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Two pieces on the same anti-euro bet at S&P.

Germany’s Ukip Threatens To Paralyse Eurozone Rescue Efforts (AEP)

The stunning rise of Germany’s anti-euro party threatens to paralyse efforts to hold the eurozone together and may undermine any quantitative easing by the European Central Bank, Standard & Poor’s has warned. Alternative für Deutschland (AfD) has swept through Germany like a tornado, winning 12.6pc of the vote in Brandenburg and 10.6pc in Thuringia a week ago. The party has broken into three regional assemblies, after gaining its first platform in Strasbourg with seven euro-MPs. The rating agency said AfD’s sudden surge has become a credit headache for the whole eurozone, forcing Chancellor Angela Merkel to take a tougher line in European politics and risking an entirely new phase of the crisis. “Until recently, no openly Eurosceptic party in Germany has been able to galvanise opponents of European ‘bail-outs’. But this comfortable position now appears to have come to an end,” it said. The report warned that AfD has upset the chemistry of German politics, implying even greater resistance to any loosening of EMU fiscal rules.

It raises the political bar yet further for serious QE, and therefore makes the tool less usable. There has long been anger in Germany over the direction of EMU politics, with a near universal feeling that German taxpayers are being milked to prop up southern Europe, but dissidents were until now scattered. “AfD appears to enjoy a disciplined leadership, and is a well-funded party appealing to conservatives more broadly, beyond its europhobe core,” it said. “This shift in the partisan landscape could have implications for euro area policies by diminishing the German government’s room for manoeuvre. We will monitor any signs of Germany hardening its stance.” Mrs Merkel has a threat akin to Ukip on her right flank, and can no longer pivot in the centre ground of German politics. AfD has almost destroyed the centre-Right Free Democrats (FDP), and is also eating into the far-Left of the Linke party. The new movement calls for an “orderly break-up” of monetary union, either by dividing the euro into smaller blocs or by returning to national currencies.

“Germany doesn’t need the euro, and the euro is hurting other countries. A return to the D-mark should not be a taboo,” it says. Club Med states should recover viability through debt restructuring, rather than rely on taxpayer bail-outs that draw out the agony. Unlike Ukip, the movement wants Germany to stay in a “strong EU”. Party leader Bernd Lucke is a professor of economics at Hamburg University. His right-hand man is Hans-Olaf Henkel, former head of Germany’s industry federation. Attempts to discredit the party as a Right-wing fringe group have failed. Prof Lucke had a taste of his new power in the European Parliament this week, questioning the ECB’s Mario Draghi directly on monetary policy. He attacked ECB asset purchases, insisting that there is already enough liquidity in the financial system to head off deflation. Such stimulus merely stokes asset bubbles and does little for the real economy, he argued, adding that the ECB is “saddling up the wrong horse” because it doesn’t have another one in the stable.

S&P said the rise of AfD would not matter for EMU affairs if the eurozone crisis were safely behind us. “This is unlikely to be the case. Eurozone output is still below 2007 levels and in 2014 the weak recovery has come to a near halt in much of the euro area. Public debt burdens continue to rise in all large euro area countries bar Germany,” it said. The report warned that any sign of hardening attitudes in German politics could “diminish the confidence of financial investors in the robustness of multilateral support” for EMU crisis states, leading to a rise in bond spreads. This in turn would shift the focus back on to Club Med debt dynamics, arguably worse than ever.

S&P said a forthcoming judgment by the European Court on the ECB’s backstop plan for Italy and Spain (OMT) might further constrain the EU rescue machinery. Germany’s top court has already ruled that the OMT “manifestly violates” EU treaties and is probably ultra vires, meaning that Bundesbank may not legally take part. The political climate in the eurozone’s two core states is now extraordinary. A D-Mark party is running at 10pc in the latest polls in Germany, while the Front National’s Marine Le Pen is in the lead in France on 26pc with calls for a return to the franc. One more shock would test EMU cohesion to its limits.

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Standard & Poor’s Warns Germany to Trigger the Next Debt Crisis (WolfStreet)

A true debacle happened. Just when we thought the euro was safe, that ECB President Mario Draghi had single-handedly duct-taped the Eurozone back together in the summer of 2012 with his magic words, “whatever it takes.” Markets assumed that they were backed by the ECB’s printing press, and they loved their assumption. Spanish, Italian, even highly dubious Greek debt, some of it with a fresh haircut, soared. And hedge funds and banks gorged on it and loved it. The debt crisis was over! Stocks soared even more. Money was being made. So bank bailouts continued, and the Eurozone recession proved to be a nasty long-term affair, but no problem, everything seemed to be guaranteed by the ECB. Debt-sinner countries, as Germans like to call them, could suddenly borrow for nearly free, and neither deficits nor debts mattered to financial markets.

But now comes ratings agency Standard & Poor’s and douses our illusions, because that’s all they were, with a bucket of ice water. The soaring popularity and electoral successes of Germany’s anti-euro party, Alternative for Germany (AfD), could push Chancellor Angela Merkel and her party, the conservative CDU, to take a harder line against bailouts, hopes of QE, and all manner of other ECB miracles that financial markets had been counting on. And it could spook them. And the nearly free money could suddenly dry up. So S&P warned:

None of this would matter much, if we were to assess that the euro crisis is safely behind us. However, this is unlikely to be the case. Eurozone output is still below 2007 levels, and in 2014 the weak recovery has come to a near halt in much of the euro area. Unemployment remains precariously high and disinflationary pressures have been mounting. Public debt burdens continue to rise in all large euro area countries bar Germany.

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Nice try but.

Just How Big Is Britain’s Debt Mountain? (Telegraph)

The Office for National Statistics (ONS) has changed the way it measures our public finances, throwing fresh light on the precise state of the nation’s coffers. The latest revisions help bring the UK in line with European accounting standards, but they don’t make great reading for the Chancellor. According to the figures, Britain’s debt mountain is £127 billion bigger that we first thought. To provide some context, that’s more than the government’s annual budget for education and housing put together.

In total, the government owes its creditors £1.4 trillion as of this year. Public sector borrowing – the difference between what the government earns in revenues and what it spends and invests – has also jumped. The ONS now thinks borrowing is around £99 billion, £5 billion higher than previously calculated. So what’s changed? The ONS has adopted a different methodology for calculating the public finances. Debt and borrowing are now higher as the new figures include the cost of the bank bailouts carried out in the wake of the credit crunch, as well as the Bank of England’s quantitative easing programme. The new accounting rules also mean that Network Rail has been reclassified as part of central government rather than the private sector. The liabilities associated with Network Rail add £33 billion to the nation’s debt pile. That’s approximately the entire GDP of Uruguay.

Meanwhile the inclusion of the Asset Purchase Facility, the part of the Bank of England that has been purchasing government bonds, adds on a further £42.4 billion to the debt burden. This is more than Britain’s entire defence budget for 2014/15, or roughly six times the market capitalisation of Marks & Spencer’s. In other areas, the ONS no longer treats the government’s auctioning of 4G phone spectrum licences as a one-off windfall. Should we worry? On the question of the accounting changes, the government’s fiscal watchdog, the Office for Budget Responsibility says: “it is important to stress that these are changes to the way public sector finances are measured, not to the underlying activities being measured.”

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But they’ll raise rates, Carney said again today.

Bank of England ‘Won’t Risk Recovery’: Deputy Governor Minouche Shafik (YP)

Businesses must increase productivity, investment and exports to ensure a lasting economic recovery, according to the new deputy governor of the Bank of England. In her first interview since taking on the role, Minouche Shafik discussed the risks to the rebounding UK economy, the need for more growth-orientated policies in Europe and when to start unwinding the Bank’s £375bn quantitative easing scheme. She said the economy has been growing faster than many had expected at 3.2%. Ms Shafik told The Yorkshire Post: “The recovery is encouraging. The real question is how can we make this recovery sustainable. “We don’t want to take risks with this recovery. It’s been a long recession and I think that’s going to be the biggest challenge going forward.”

On the question of when to increase interest rates, she said she would be closely watching the relationship between wage growth and productivity. She said there are mixed signals about the strength of that growth. “If wage increases are expected but productivity is performing well we can wait for longer; if those wage increases are not accompanied by productivity increases then I think we will have to move more quickly on rates because inflationary pressures will build up. “I think that’s the key choice that we face,” said Ms Shafik, who has so far attended two meetings of the Monetary Policy Committee.

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Buy stocks in a shrinking economy. Great idea.

Brace For China Markets’ Biggest Opening In Years (NY Times)

O’Connor, the $5.6 billion hedge fund owned by UBS, has been expanding its presence in Asia. It has hired traders from UBS’s proprietary trading desk to work in its Hong Kong and Singapore offices. In August, it hired John Yu, a former analyst at SAC Capital Advisors. It is not alone. Bankers, brokerage firms and hedge funds have all been quietly expanding their Asian operations to take advantage of one event: the biggest opening into China in years. China plans to connect the Shanghai stock exchange to its counterpart in Hong Kong over the next month as part of an initiative announced by Premier Li Keqiang this year to open China’s markets to foreign investors who have been largely shut out. The move will allow foreign investors to trade the shares of companies listed on the Shanghai stock exchange directly for the first time, and Chinese investors to buy shares in companies listed in Hong Kong.

The potential rewards of an open market between the mainland and Hong Kong are enormous for investors. Currently, the only way for foreign investors to trade Chinese stocks is indirectly through a limited quota program that allows a trickle of foreign money into the country. “This is the single most important development in China’s intention to internationalize this market,” one senior Western banker in Asia said of the planned reform, speaking on the condition he not be named because he was not authorized to speak publicly on the matter. The program, called the Shanghai-Hong Kong Connect, will create the second-largest equity market in the world in terms of the market value of the combined listed companies, said Dawn Fitzpatrick, the chief investment officer of O’Connor. “It is also going to create a much more efficient way for the global marketplace to value many Chinese companies, and this attribute alone makes the market more attractive,” she added.

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Infighting?

Speculation Resurfaces on China Central Bank Governor (Bloomberg)

Speculation about the retirement of China central bank Governor Zhou Xiaochuan, a champion of shifting the world’s second-largest economy to greater reliance on markets, is resurfacing, focusing attention on potential successors. With Zhou, 66, past the typical retirement age for senior officials and a Communist Party leadership meeting looming next month, social media chatter on his possible exit escalated. The Wall Street Journal said yesterday party boss Xi Jinping is considering replacing Zhou, citing unidentified officials. The China Times this month published an opinion piece on prospects for ex-securities regulator Guo Shuqing taking the job. Six of 13 economists in a Bloomberg News survey this month cited Guo, 58, as the most likely successor when Zhou does leave. Five predicted it would be People’s Bank of China Deputy Governor Yi Gang, 56. The government, which controls the PBOC, hasn’t publicly signaled its intention and rounds of speculation in 2007 and 2012 that Zhou would be replaced failed to pan out.

“There will eventually be a rumor that’s right – Zhou will retire at some point,” David Loevinger, former U.S. Treasury Department senior coordinator for China affairs and now a Los Angeles-based analyst at TCW Group Inc., said in an e-mail. “I’ve met Guo several times. He’s an accomplished economist, banker and regulator with a good understanding of the international financial system.” The PBOC, along with the rest of the nation’s policy making community, is grappling with a slowdown in growth and efforts to follow through on a pledge to give markets a “decisive” role in the economy. Zhou, at 11 years the longest-serving PBOC chief on record, has advocated freeing up controls on interest rates and reducing intervention in the exchange rate. “If Guo were to replace him, I wouldn’t expect much change in Chinese policy,” said Nicholas Lardy, author of the book “Markets Over Mao” and a senior fellow at the Peterson Institute for International Economics in Washington. “Guo Shuqing has very similar strong reformist credentials as Governor Zhou.”

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Altogether now.

Is Shorting The Euro The New One-Way Bet? (CNBC)

The euro’s drop to its lowest against the U.S. dollar in over a year may be just the beginning, with some analysts expecting the common currency to fall to levels not seen since 2003. “The euro is vulnerable to a serious hit,” analysts at Barclays said in a note Wednesday. “We now expect a large, multi-year downtrend in the euro, following a substantial deterioration in the euro area’s economic outlook and the ECB’s (European Central Bank) aggressive response to that deterioration.” The euro slipped as low as $1.2764 in early Asian trade Thursday, touching its lowest level since July 2013, after ECB President Mario Draghi said monetary policy will remain loose for as long as it takes to bring the euro zone’s inflation rate up to the central bank’s 2% target.

On Monday, Draghi told the European parliament the central bank may use unconventional tools to spur inflation and growth, which could include quantitative easing, or buying credit and sovereign bonds. Draghi reiterated those views in an interview published Thursday by Lithuanian business daily Verslo Zinios, and noted he expects modest economic growth in the second half of this year after it stalled in the second quarter Also weighing on the common currency, fresh data from the region’s economic powerhouse Germany showed business sentiment fell in September to its lowest level since April of last year.

Barclays cut its 12-month forecast for the euro to $1.10 from $1.25, with much of the depreciation expected within six months. Others are equally bearish. “The main drivers of euro trends point to significant weakness,” Societe Generale said in a note earlier this week. “Draghi will succeed in weakening the euro now because in the coming months the contrast between euro area and U.S. economic performance will translate into monetary policy divergence as the ECB remains accommodative but the Federal Reserve first stops buying assets and then raises rates from mid-2015 onwards.”

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Well, that sounds realistic …

Rapid Growth At Top Of Agenda For Emerging Market Businesses (CNBC)

Emerging economies look to corporations to keep their economies expanding at their rapid rates, according to a survey. One in three (34%) of the public and 30% of business leaders in emerging economies said helping to strengthen the economy was the most important responsibility for a company, according to the CNBC/Burson-Marsteller Corporate Perception Index. Job creation was the second most important responsibility for corporations. In developed markets however, the trend was flipped with job creation seen as the number one role of corporations, followed by helping the economy more generally. Emerging market countries are known for their rapid economic growth, which has appealed to investors over recent years. China is obsessed with its growth rate and the government continues to push for a 7.5% target. This focus on rapid growth is behind the results of the survey, according to economists.

“Growth is key and it is all about growth,” Benoit Anne, head of global emerging market strategy at Societe Generale, told CNBC by phone. “In emerging markets unemployment seems to be less of a concern because the informal economy is large and premium is attached to growth considerations.” 37% of the general public in developed countries, which includes Spain, France and the U.K., said creating jobs was the most important role for an organization, while 31% of business executives thought this was the case. The euro zone economy has been struggling since the 2008 crisis and even Germany, the bloc’s largest economy contracted in the second quarter. Unemployment in the 18 country zone stands at 11.5%, and in Spain at 24.5%. This, combined with increasing perception of income inequality, has driven the results of the survey, analysts said.

Read more …

Power.

What Does The US Gain From Paying For Europe’s Security? (RT)

Despite the fact that Europe is a very rich continent – the EU’s total GDP is higher than the US – Americans are bankrolling its security. The only way to explain the background to this conundrum is in fairytale style. When detailed in analytical text it’s even more baffling, and I don’t want to confuse everyone. Once upon a time in a land far away there were two families, the Europas and the Amerigos, who were closely related. The Europa’s fought bloody wars for millennia, mainly due to disputes between kings and queens they declared fealty to, and a few centuries ago, the Amerigos moved out of the home region. After that, the Europas continued to – constantly – argue and the Amerigos became extremely rich in their new homeland. Then, about 70 years ago, the Europas had the mother, father and cousin of all internal rows and much of the family was annihilated in a mass fratricide, but the Amerigos and their other cousins, the Sovetskys, came to save them.

While the Europas became largely poor as a result of the conflict, the Amerigos and the Sovetskys were bolstered and decided they both wanted to be top dog. They then ‘fought’ a cold war for 45 years. The Amerigos worshipped free markets, but the Sovetskys believed in socialism. The Europas were divided by the ‘isms’ – capital and social. Most of the family members on the west side of town supported the Amerigos but the east end of things fancied the Sovetskys ideas. Eventually, the Sovetskys system of communism proved inadequate and their power dissipated so the Europas began to unite again. But something had changed. A half century of peace and stability meant that the western Europas were now as wealthy as the Amerigos but the eastern branch were not; in fact, many on the east side of town were sickeningly poor after their system had collapsed.

The western Europas had become used to the Amerigos looking after security needs, but most of them were no longer afraid of the Sovetskys, who had now embraced the free market ideology and were called the Rus. They’d changed their names after half the family had splintered into smaller groups. However, many of the eastern Europas were still extremely afraid of the Rus and they pressured the Amerigos into also paying for their security. The Amerigos had promised the Rus after the Sovetsky split that they wouldn’t interfere with former family members – but this promise was broken. Now the eastern Europas too had their safety bankrolled by the Amerigos. However, they didn’t run off and join their cousins, instead they re-united with the western branch of the Europa family.

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Blame Putin.

Ukraine Is Broke – And Winter Is Coming… (RT)

How broke is Ukraine? On a scale of one to 10, I’d venture 10 and a half. What the well-meaning idiots from abroad haven’t talked about is how dependent Kiev’s economy is on Russia. In 2013, more than 60% of their exports went to post-Soviet countries. Meanwhile, export levels have, officially, fallen by a gigantic 19% already this year (and the real figure is probably much worse). Also, what little high-end manufacturing Ukraine had was almost entirely beholden to the Russian military-industrial complex. An example is Antonov, the famed aircraft maker, which recently had to write off $150 million when it couldn’t deliver an order to the Russian Air Force. Antonov’s planes can’t compete in western markets, so without the Russian market the company is finished. Good news for Komsomolsk-on-Amur (the home of Sukhoi) in Russia’s Far East, but a tragedy for the 12,000 employees of Antonov, near Kiev.

I’m not sure how Roshen Chocolates is doing, but with a $1.3 billion fortune, its owner, oligarch Willy Wonka, or President Petro Poroshenko as he’s better known, won’t be going hungry. He’s one of the lucky ones. Industrial production has fallen off a cliff in Ukraine, down over 20% already this year and retail sales aren’t far off, at about 19%. Foreign currency reserves have collapsed by around 25%, even with emergency IMF funding. Yet, that’s not even close to the largest concern. This would be the currency, the hryvna, which crumbled by 11% against the dollar last Friday alone. A year ago, the rate was around 8.1, it’s now a startling 13.5. Great news for those paid in greenbacks, but 99% of locals are remunerated in hryvnas. Inflation is north of 14% and is set to increase dramatically in the short-term as the currency is geared in only one direction. Winter is coming, and anyone who has been in Kiev in January can tell you how shivery that gets. It’s a special variety of biting cold and it takes more than North Face – for the few can afford it – to survive the onslaught.

Ukraine imports 80% of its natural gas – and most of that comes from Russia. A real problem here is that Kiev currently owes Gazprom, Russia’s state gas giant, $4.5 billion. In fact, Ukraine’s single most profitable export service (worth $3 billion annually) is transit fees for Gazprom’s access to other European markets. This is what is known as a “double bind.” I didn’t mention the IMF loans yet. They are not “aid” – and they must be repaid. The latest guarantee was around $20 million and there have been suggestions that a sizeable portion has been looted by kleptocrat insiders already. The IMF’s Articles of Agreement forbid it to make loans to countries that clearly cannot pay. Unless the agency is willing to tear up its rule book – thus making Greeks the happiest people alive – it’s clear that emergency funding from that source is also about to grind to a halt.

Read more …

Good Parry piece.

The High Cost of Bad Journalism on Ukraine (Robert Parry)

To blame this crisis on Putin simply ignores the facts and defies logic. To presume that Putin instigated the ouster of Yanukovych in some convoluted scheme to seize territory requires you to believe that Putin got the EU to make its reckless association offer, organized the mass protests at the Maidan, convinced neo-Nazis from western Ukraine to throw firebombs at police, and manipulated Gershman, Nuland and McCain to coordinate with the coup-makers – all while appearing to support Yanukovych’s idea for new elections within Ukraine’s constitutional structure. Though such a crazy conspiracy theory would make people in tinfoil hats blush, this certainty is at the heart of what every “smart” person in Official Washington believes. If you dared to suggest that Putin was actually distracted by the Sochi Olympics last February, was caught off guard by the events in Ukraine, and reacted to a Western-inspired crisis on his border (including his acceptance of Crimea’s request to be readmitted to Russia), you would be immediately dismissed as “a stooge of Moscow.”

Such is how mindless “group think” works in Washington. All the people who matter jump on the bandwagon and smirk at anyone who questions how wise it is to be rolling downhill in some disastrous direction. But the pols and pundits who appear on U.S. television spouting the conventional wisdom are always the winners in this scenario. They get to look tough, standing up to villains like Yanukovych and Putin and siding with the saintly Maidan protesters. The neo-Nazi brown shirts are whited out of the picture and any Ukrainian who objected to the U.S.-backed coup regime finds a black hat firmly glued on his or her head. For the neocons, there are both financial and ideological benefits. By shattering the fragile alliance that had evolved between Putin and Obama over Syria and Iran, the neocons seized greater control over U.S. policies in the Middle East and revived the prospects for violent “regime change.”

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But not going to happen.

Russia Calls For International Probe Into Ukraine Mass Burial Sites (RT)

Russia is calling for an international investigation into the discovery of burial sites with signs of execution at locations where the Ukraine National Guard forces were stationed two days earlier. The head of Russia’s presidential human rights council, Mikhail Fedotov, has called on the authorities to do everything to “ensure an independent international probe” and “let international human rights activists and journalists” gain access to the site in Eastern Ukraine’s embattled Donetsk region. The crime, Fedotov noted, shouldn’t “remain without consequences.” He didn’t exclude the discovery of other burial sites, reminding that mass killings are “the reality of the modern-day war” and that such crimes were committed in the wars in the former Yugoslavia. The burial sites near the Kommunar mine, 60 kilometers from Donetsk, were first discovered on Tuesday by self-defense forces. Four bodies have been exhumed, including those of three women. Their hands were tied, at least one of the bodies was decapitated, self-defense fighters said.

Two bodies were found Monday, and two others Tuesday. Self-defense forces believe there might be other burials in the area. “They are from Kommunar, which has just been freed [by DNR/DPR forces]. The people told me that the women had been missing and here we found four bodies. And I don’t know how many more people we might find,” a self-defense fighter, nicknamed Angel, told RT. “The peaceful Ukrainian army came here and “liberated” them but I can’t understand what the Army freed them from. These women died horribly,” his comrade, Alabai, added. Self-defense forces said that near the mine – which was abandoned by the Ukrainian forces a few days ago – there are other burial sites which will also be examined.

OSCE monitors have already visited and inspected the burial site. According to the OSCE report published Wednesday, some of the victims buried not far from Donetsk were killed a month ago. Near an entrance to the village the organization’s staff saw “a hill of earth, resembling a grave” and a sign with the initials of five people and a date of death – August 27, 2014. This was one of the three unidentified burial sites discovered by OSCE monitors. Prosecutors in the Donetsk People’s Republic have started an investigation. Russian Foreign Ministry’s envoy for human rights, Konstantin Dolgov, said on Twitter that the Ukrainian army was to blame for the killings. “The finding of mass burial sites in Donetsk area is yet another trace of the Ukrainian forces’ and radical nationalists’ humanitarian crime,” Dolgov said. “This beastly crime targeting civilians attracts our attention even more to the necessity of investigating humanitarian crimes in Ukraine under international control,” he added.

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Not just the US, I’d venture.

How the US Screwed Up in the Fight Against Ebola (BW)

It was a small victory in a grim, relentless, and runaway catastrophe. In July, Kent Brantly and Nancy Writebol, both American medical workers in Liberia, became stricken with Ebola hemorrhagic fever after treating dozens suffering from the disease, which has a mortality rate of between 50% and 90%. They were rushed doses of an experimental cocktail of Ebola antibodies called ZMapp, flown home via a Gulfstream III on separate flights on Aug. 2 and 5, and isolated inside a special tent called an “aeromedical biological containment system.” The U.S. State Department and the Centers for Disease Control and Prevention (CDC) coordinated the flights, operated by Phoenix Air, a private transport company based in Georgia. Cared for in a special ward at Emory University in Atlanta, they recovered within the month and later met with President Obama. It appeared a win for the White House.

Mapp Biopharmaceutical, the San Diego company that developed ZMapp, is also in a way a White House project. It’s supported exclusively through federal grants and contracts that go back to 2005. The antibody mixture hadn’t yet passed its first phase of human clinical trials, but after the two Americans were infected with Ebola, the Food and Drug Administration granted emergency access to ZMapp. It’s impossible to say whether ZMapp was vital to the Americans’ survival. There were a limited number of doses available. Mapp ran out after having given doses to the two Americans, a Spanish priest, and doctors in two West African countries, although it declined to say how many. And that raised a fair question: Why hadn’t the promising treatment gone through human clinical trials sooner, and why were there so few doses on hand?

Since appearing in Guinea in December, Ebola has spread to five West African countries and infected 5,864 people, of which 2,811 have died, according to the World Health Organization’s Sept. 22 report. This number is widely considered an underestimate. The CDC’s worst-case model assumes that cases are “significantly under-reported” by a factor of 2.5. With that correction, the CDC predicts 21,000 total cases in Liberia and Sierra Leone alone by Sept. 30. A confluence of factors has made it the biggest Ebola outbreak yet. For starters, West Africa has never seen Ebola before; previous outbreaks have mainly surfaced in the Democratic Republic of the Congo in Central Africa. The initial symptoms of Ebola—fever, vomiting, muscle aches—are also similar to, and were mistaken for, other diseases endemic to the region, such as malaria.

Then, when officials and international workers swept into villages covered head to toe and took away patients for isolation, some family members became convinced that their relatives were dying because of what happened to them in the hospitals. They avoided medical care and lied to doctors about their travel histories. Medical staff at local hospitals became scared and quit their jobs. Aid workers trying to set up isolation units or trace infected people’s contacts were attacked by angry villagers. With these countries short on resources, staff, medical equipment, and basic understanding of the disease, Ebola took hold and spread.

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Ambrose is the epitomy of techno-happy. And he proves once more than actual knowledge has nothing to do with it.

Technology Revolution In Nuclear Power Could Slash Costs Below Coal (AEP)

The cost of conventional nuclear power has spiralled to levels that can no longer be justified. All the reactors being built across the world are variants of mid-20th century technology, inherently dirty and dangerous, requiring exorbitant safety controls. This is a failure of wit and will. Scientists in Britain, France, Canada, the US, China and Japan have already designed better reactors based on molten salt technology that promise to slash costs by half or more, and may even undercut coal. They are much safer, and consume nuclear waste rather than creating more. What stands in the way is a fortress of vested interests. The World Nuclear Industry Status Report for 2014 found that 49 of the 66 reactors under construction – mostly in Asia – are plagued with delays, and are blowing through their budgets.

Average costs have risen from $1,000 per kilowatt hour to around $8,000/kW over the past decade for new nuclear, which is why Britain could not persuade anybody to build its two reactors at Hinkley Point without fat subsidies and a “strike price” for electricity that is double current levels. All five new reactors in the US are behind schedule. Finland’s giant EPR reactor at Olkiluoto has been delayed again. It will not be up and running until 2018, nine years late. It was supposed to cost €3.2bn. Analysts now think it will be €8.5bn. It is the same story with France’s Flamanville reactor. We have reached the end of the road for pressurised water reactors of any kind, whatever new features they boast. The business is not viable – even leaving aside the clean-up costs – and it makes little sense to persist in building them. A report by UBS said the latest reactors will be obsolete by within 10 to 20 years, yet Britain is locking in prices until 2060.

The Alvin Weinberg Foundation in London is tracking seven proposals across the world for molten salt reactors (MSRs) rather than relying on solid uranium fuel. Unlike conventional reactors, these operate at atmospheric pressure. They do not need vast reinforced domes. There is no risk of blowing off the top. The reactors are more efficient. They burn up 30 times as much of the nuclear fuel and can run off spent fuel. The molten salt is inert so that even if there is a leak, it cools and solidifies. The fission process stops automatically in an accident. There can be no chain-reaction, and therefore no possible disaster along the lines of Chernobyl or Fukushima. That at least is the claim.

Read more …

Mar 192014
 
 March 19, 2014  Posted by at 3:38 pm Finance Tagged with: , , ,  20 Responses »


Marion Post Wolcott Man washing car at Sarasota, Florida, trailer park January 1941

There will be many people who don’t care, there will be many more who don’t understand, and there will be boatloads who refuse to believe it’s true, but it still is. The Bank of England, in one single document, discredited, just at first count, 1) the majority of economics textbooks, 2) vast swaths of the entire field of economics, run as it is by economists educated by those same textbooks, 3) most governments’ economic policies, designed by these economists, 4) much of its own work, also designed by the same economists, 5) Paul Krugman and 6) the “committee” that hands Krugman and his ilk their Not-So-Nobel Prizes.

Indeed, the message the Bank’s people send is so devastating to economics as it is taught today that their document will most likely simply be ignored, even though that probably shouldn’t really be possible with an official central bank report. As my friend Steve Keen, whose take on this I touched on yesterday, put it:

Now if I believed in the tooth fairy, I would hope this emphatic denunciation of the textbook model would cause macroeconomics lecturers to drastically revise their lectures for next week. But I’m too long in the tooth to have such a delusion. They’ll ignore it instead.

Their dominant “tactic” — if I can call it that — will be ignorance itself: most economics lecturers won’t even know that the bank’s paper exists, and they will continue to teach from whatever textbook bible they’ve chosen to inflict upon their students. A secondary one will be to know of it, but ignore it, as they’ve ignored countless critiques of mainstream economics before. The third arrow in the quill, if they are challenged by students about it (hint hint!), will be to argue that the textbook story is a “useful parable” for beginning students, and a more realistic vision is introduced in more advanced courses.

Still, to see the Bank of England admit that the entire model most governments, including that of England, use to conduct policies, including austerity, should really be thrown out the window, is noteworthy.

Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate published in the Quarterly Bulletin 2014 Q1 a document entitled Money Creation in the Modern Economy, and introductory document, Money in the Modern Economy: An Introduction, and two videos that unfortunately seem shot with the express intent of losing the viewer’s interest within 10 seconds, but are still worth watching.

The authors’ opening statements are:

• This article explains how the majority of money in the modern economy is created by commercial banks making loans.

• Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.

• The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’.

Where they say “banks do not act simply as intermediaries”, they do away in one fell swoop with Paul Krugman, who in his discussions with Steve Keen has always maintained just that: banks are mere intermediaries. Instead, Steve’s argument that banks create money, an argument ridiculed by Krugman, is now confirmed by the BoE. We await Krugman’s reaction.

Since I have two very good interpretations of the BoE document that I think you should read, and they’re long enough as they are, I’m not going to try and add a third one myself. I suggest you first try and stomach and process Steve Keen, plus David Graeber’s take as the Guardian published it. One thing: this confirms what most people already know, though most have never defined it as such. That makes it all the more peculiar that economists are not educated that way, and that economic policies are based on their recommendations.

Here’s Dave Graeber:

The Truth Is Out: Money Is Just An IOU, And The Banks Are Rolling In It

The Bank of England’s dose of honesty throws the theoretical basis for austerity out the window

Back in the 1930s, Henry Ford is supposed to have remarked that it was a good thing that most Americans didn’t know how banking really works, because if they did, “there’d be a revolution before tomorrow morning”.

Last week, something remarkable happened. The Bank of England let the cat out of the bag. In a paper called “Money Creation in the Modern Economy”, co-authored by three economists from the Bank’s Monetary Analysis Directorate, they stated outright that most common assumptions of how banking works are simply wrong, and that the kind of populist, heterodox positions more ordinarily associated with groups such as Occupy Wall Street are correct. In doing so, they have effectively thrown the entire theoretical basis for austerity out of the window.

To get a sense of how radical the Bank’s new position is, consider the conventional view, which continues to be the basis of all respectable debate on public policy. People put their money in banks. Banks then lend that money out at interest – either to consumers, or to entrepreneurs willing to invest it in some profitable enterprise. True, the fractional reserve system does allow banks to lend out considerably more than they hold in reserve, and true, if savings don’t suffice, private banks can seek to borrow more from the central bank.

The central bank can print as much money as it wishes. But it is also careful not to print too much. In fact, we are often told this is why independent central banks exist in the first place. If governments could print money themselves, they would surely put out too much of it, and the resulting inflation would throw the economy into chaos. Institutions such as the Bank of England or US Federal Reserve were created to carefully regulate the money supply to prevent inflation. This is why they are forbidden to directly fund the government, say, by buying treasury bonds, but instead fund private economic activity that the government merely taxes.

It’s this understanding that allows us to continue to talk about money as if it were a limited resource like bauxite or petroleum, to say “there’s just not enough money” to fund social programmes, to speak of the immorality of government debt or of public spending “crowding out” the private sector. What the Bank of England admitted this week is that none of this is really true.

To quote from its own initial summary: “Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits” … “In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.”

In other words, everything we know is not just wrong – it’s backwards. When banks make loans, they create money. This is because money is really just an IOU. The role of the central bank is to preside over a legal order that effectively grants banks the exclusive right to create IOUs of a certain kind, ones that the government will recognise as legal tender by its willingness to accept them in payment of taxes. There’s really no limit on how much banks could create, provided they can find someone willing to borrow it.

They will never get caught short, for the simple reason that borrowers do not, generally speaking, take the cash and put it under their mattresses; ultimately, any money a bank loans out will just end up back in some bank again. So for the banking system as a whole, every loan just becomes another deposit. What’s more, insofar as banks do need to acquire funds from the central bank, they can borrow as much as they like; all the latter really does is set the rate of interest, the cost of money, not its quantity. Since the beginning of the recession, the US and British central banks have reduced that cost to almost nothing. In fact, with “quantitative easing” they’ve been effectively pumping as much money as they can into the banks, without producing any inflationary effects.

What this means is that the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow. Government spending is the main driver in all this (and the paper does admit, if you read it carefully, that the central bank does fund the government after all). So there’s no question of public spending “crowding out” private investment. It’s exactly the opposite.

Why did the Bank of England suddenly admit all this? Well, one reason is because it’s obviously true. The Bank’s job is to actually run the system, and of late, the system has not been running especially well. It’s possible that it decided that maintaining the fantasy-land version of economics that has proved so convenient to the rich is simply a luxury it can no longer afford.

But politically, this is taking an enormous risk. Just consider what might happen if mortgage holders realised the money the bank lent them is not, really, the life savings of some thrifty pensioner, but something the bank just whisked into existence through its possession of a magic wand which we, the public, handed over to it.

Historically, the Bank of England has tended to be a bellwether, staking out seeming radical positions that ultimately become new orthodoxies. If that’s what’s happening here, we might soon be in a position to learn if Henry Ford was right.

And Steve Keen:

The BoE’s Sharp Shock To Monetary Illusions

A couple of weeks ago I took a swipe at Bank of England over a speech by its Governor Mark Carney that was unrealistic about the dangers of a bloated financial sector (Godzilla is good for you? March 3). Today I’m doing the opposite: I’m doffing my cap to the researchers at Threadneedle Street for a new paper “Money creation in the modern economy,” which gives a truly realistic explanation of how money is created, why this really matters, and why virtually everything that economic textbooks say about money is wrong.

The bank is going gangbusters to get its message across, with an introductory paper on what money is, and two short videos on what money is and money creation, both shot in its gold vault. It clearly wants economic textbooks to throw out the neat, plausible but wrong rubbish they currently teach about money, and connect with the real world instead.

Economic textbooks teach students that money creation is a two-stage process. At the start, banks can’t lend because of a rule called the “Required Reserve Ratio” that specifies a ratio between their deposits and their reserves. If they’re required to hold 10 cents in reserves to back every dollar in deposits, then if deposits are $10 trillion and reserves are $1 trillion, the banking sector can’t lend any money to anyone.

Stage one in the textbook money creation model is that the Fed (or the Bank of England) gives the banks additional reserves — say $100 billion worth. Then in stage two, the banks lend this to their customers, who then deposit it right back into banks, who hang on to 10% of it ($10 billion) and lend the remaining $90 billion out again. This process iterates until an additional $1 trillion of deposits are created, so that the reserve ratio is restored ($1.1 trillion in reserves, $11 trillion in deposits).

That model goes by the name of “Fractional Reserve Banking” (aka the “Money Multiplier”), and depending on your political persuasion it’s either outright fraud (If you’re of an Austrian persuasion like my mate Mish Shedlock) or just the way things are if you’re a mainstream economist like Paul Krugman. In the latter case, it lets conventional economists build models of the economy that completely ignore the existence of banks, and private debt, and in which the money supply is completely controlled by the Fed.

In this new paper, the Bank of England states emphatically that “Fractional Reserve Banking” is neither fraud, nor the way things are, but a myth — and it rightly blames economic textbooks for perpetuating it. The paper doesn’t beat about the bush when it comes to the divergence between reality and what economic textbooks spout. In fact, as the paper explains it:

• Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits. (p. 1)

• In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits… (p. 1)

  • Rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks… (p. 2)
  • While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality… (p. 2)
  • As with the relationship between deposits and loans, the relationship between reserves and loans typically operates in the reverse way to that described in some economics textbooks. (p. 2)

Now if I believed in the tooth fairy, I would hope this emphatic denunciation of the textbook model would cause macroeconomics lecturers to drastically revise their lectures for next week. But I’m too long in the tooth to have such a delusion. They’ll ignore it instead.

Their dominant “tactic” — if I can call it that — will be ignorance itself: most economics lecturers won’t even know that the bank’s paper exists, and they will continue to teach from whatever textbook bible they’ve chosen to inflict upon their students. A secondary one will be to know of it, but ignore it, as they’ve ignored countless critiques of mainstream economics before. The third arrow in the quill, if they are challenged by students about it (hint hint!), will be to argue that the textbook story is a “useful parable” for beginning students, and a more realistic vision is introduced in more advanced courses.

Here the Bank of England has unfortunately given them a useful “out”, by politely pretending that the money multiplier model “can be a useful way of introducing money and banking”. But of course this feint will be pure malarkey. Firstly, the model is utterly misleading — it’s about as useful an introduction to the nature of money and banking as the Book of Genesis is an introduction to the theory of evolution. Once people believe the money multiplier model, they can rarely get their heads around the reality that bank lending creates money, and that this has drastic effects on the level of economic activity.

Secondly, the undergraduate lecturer’s “it gets better higher up” line is a ruse. Masters and PhD level courses continue to ignore banks, and though mainstream modellers are introducing all sorts of “financial frictions” into their DSGE models (as Noah Smith pointed out recently), none of them — with the sterling exception of Michael Kumhof of the IMF — are actually incorporating banks and their capacity to both create and destroy money into their models.

Why? Because if you admit the reality that banks create money by lending, and that money is destroyed by debt repayment (a point I have to admit that I took some time to appreciate), all the simple equilibrium parables of conventional economics fly out the window. In particular, the level of economic activity now depends on the lending decisions of banks (and the repayment decisions of borrowers). If banks lend more rapidly, or if borrowers repay more slowly, there will be a boom; if the reverse, there will be a slump. As the Bank of England puts it, if new loans simply make up for old ones being repaid, then there is no effect, but if new loans exceed repayment then aggregate demand will increase.

“There are two main possibilities for what could happen to newly created deposits,” the bank says. “First, as suggested by Tobin, the money may quickly be destroyed if the households or companies receiving the money after the loan is spent wish to use it to repay their own outstanding bank loans…

“The second possible outcome is that the extra money creation by banks can lead to more spending in the economy (p. 7).”

So from a realistic, hands-on perspective, the Bank of England declares that money matters in macroeconomics because it affects the level of economic activity. This really shouldn’t be a big deal — it’s what most people actually believe anyway — but incredibly, mainstream economics pretends that money only affects prices, that it has no impact (or only temporary one) on real activity, and that monetary disturbances are all the fault of the government (read central bank) anyway, because a quintessential market institution like a bank couldn’t do anything wrong, could it?

Leading economists can’t just ignore this paper, or blithely dismiss it as the foot-soldiers of the profession will do. But I seriously doubt that they will let it challenge their current position.

I will in particular be curious to see whether Paul Krugman notes this paper, and how he reacts to it. Krugman has been the most visible and aggressive defender of the proposition that banks don’t matter, with this including throwing a haymaker at me for making the case that the Bank of England is now making.

“In particular, he [Keen] asserts that putting banks in the story is essential,” Krugman wrote in 2012. “Now, I'm all for including the banking sector in stories where it's relevant; but why is it so crucial to a story about debt and leverage?

“Keen says that it's because once you include banks, lending increases the money supply. OK, but why does that matter? He seems to assume that aggregate demand can't increase unless the money supply rises, but that's only true if the velocity of money is fixed; so have we suddenly become strict monetarists while I wasn't looking? In the kind of model Gauti and I use, lending very much can and does increase aggregate demand, so what is the problem?”

Since then Krugman has continued to press the belief that banks are “mere intermediaries” in lending, that they can be ignored in macroeconomics.

“Yes, commercial banks, unlike other financial intermediaries, can make a loan simply by crediting the borrower with new deposits, but there’s no guarantee that the funds stay there,” he said in the article Commercial Banks As Creators of “Money”.

And in the same piece he wrote: “Banks are just another kind of financial intermediary, and the size of the banking sector — and hence the quantity of outside money — is determined by the same kinds of considerations that determine the size of, say, the mutual fund industry.”

Now that he has been directly contradicted on these points, not by some Antipodean heterodox economist, but by Threadneedle Street itself, I expect Krugman’s riposte will be the KISS principle: that while the “loans create deposits” argument is technically true, it doesn’t make any real difference to macroeconomics.

After all, Krugman certainly can’t just dismiss the Bank of England as being staffed by “Banking Mystics”, as he has brushed off the contrary views of others.