Nov 212015
 
 November 21, 2015  Posted by at 10:44 am Finance Tagged with: , , , , , , , , , ,  6 Responses »


Frances Benjamin Johnston Courtyard, 620-621 Gov. Nicholls Street, New Orleans 1937

Total US Household Debt Hits $12.1 Trillion As Subprime Auto Lending Jumps (WSJ)
US Oil Producer Bankruptcies Are Piling Up (WSJ)
Low Crude Prices Catch Up With the US Oil Patch (WSJ)
Speculators Test Saudi Currency As Oil Crisis Deepens (AEP)
Petrobras’s Dangerous Debt Math: $24 Billion Owed in 24 Months (Bloomberg)
Bank of Japan To Switch To Indicators That Show Rising Prices (Reuters)
Mario Draghi All But Announced an Expansion of ECB QE (Fortune)
The Power And The Impotence Of The ECB (Steve Keen)
Financially Engineered Stocks Drag Down S&P 500 (WolfStreet)
Volkswagen’s Emissions Scandal Is Getting Even Bigger, Again (AP)
EU Journalists Take European Parliament To Court Over Expense Accounts (EUO)
Australia Is A ‘Plaything’ Of World Economic Forces It Can’t Control (Guardian)
‘Terrible’ Public Finance Figures Heap Pressure On UK Chancellor (Ind.)
Is It Time To Close The Door To Foreign Buyers Of British Property? (Guardian)
A Nation Of Immigrants Wants To Close Its Doors (MarketWatch)
How Refugees Are Selected, Vetted, And Settled In The United States (Quartz)
EU-Turkey Refugee Talks Turn Sour As Erdogan Belittles Juncker
Merkel Slowly Changes Tune on Refugee Issue (Spiegel)
Over 900,000 Migrants Arrived In Germany This Year (Reuters)

Predators still rule. And that makes the economy look better for the moment.

Total US Household Debt Hits $12.1 Trillion As Subprime Auto Lending Jumps (WSJ)

Subprime auto lending is shifting into higher gear, raising some concerns in Washington where top financial regulators have sounded alarms about this category of loans. Over the six months through September, more than $110 billion of auto loans have been originated to borrowers with credit scores below 660, the bottom cutoff for having a credit score generally considered “good,” according to a report Thursday from the New York Fed. Of that sum, about $70 billion went to borrowers with credit scores below 620, scored that are considered “bad.” This rise in subprime auto lending comes against a backdrop of gradually improving credit across the economy. Overall household borrowing has climbed to $12.1 trillion, the highest level in more than 5 years, with rising balances for mortgages, auto loans, student loans and credit cards in the third quarter, according to the report.

But when it comes to auto loans, in particular, a rising volume of loans is going to borrowers with poor credit. The sum in that category has nearly reached the same level as in 2006, raising questions about the health of the nation’s auto-lending portfolio and drawing uncomfortable comparisons to the rise in subprime mortgages that helped fuel the housing collapse, financial crisis and recession. The comptroller of the currency, Thomas Curry, said in a speech last month that some of the activity in auto loans “reminds me of what happened in mortgage-backed securities in the run-up to the crisis.” And Richard Cordray, director of the Consumer Financial Protection Bureau, warned in September 2014 that subprime auto-loan borrowers “may be more vulnerable to predatory practices” and that “direct oversight of their lending practices is essential.”

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2016 will be a disaster year for US oil. And the lenders that allowed the restructuring delay.

US Oil Producer Bankruptcies Are Piling Up (WSJ)

It’s been a long year for oil and gas companies. After trading at an average price of $92.91 a barrel in 2014, the U.S. oil benchmark has averaged around $50 a barrel this year. It dipped below $40 a barrel briefly this morning. 36 North American oil and gas producers filed Chapter 11 bankruptcies this year through Nov. 8, according to law firm Haynes and Boone. The cases so far involve $13 billion in secured and unsecured debt, and “industry and economic indicators suggest more producer bankruptcy filings will occur before the year is out,” the law firm says. Sixteen of this year’s bankruptcies were filed in Texas, with another six in Canada, four each in Delaware and Colorado and the rest in Louisiana, Alaska, Massachusetts and New York. The biggest, with $4.3 billion of secured and unsecured debt, was KKR’s Samson Resources in September.

Earlier this week, a judge ruled that Samson’s resigning chief executive won’t be paid his bonus outright. Even so, some investors argue that not enough U.S. oil producers have gone under to help shrink the glut of crude that is weighing on oil prices. Oil producers have gotten more efficient, keeping production higher than some expected. U.S. production has fallen from 9.6 to about 9.2 million barrels a day, but recent weekly estimates from the Energy Information Administration show that the pace of declines has slowed. “There’s been more efficiency in the space than we all expected, and that’s helped current owners hold on a little longer,” said Rob Haworth at U.S. Bank Wealth Management. “We’re not seeing as much turnover in the oil patch as we’d expect, in terms of weak hands to strong hands. But things like that will need to happen at some point.”

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“Forty-dollar to fifty-dollar oil prices don’t work in this business..”

Low Crude Prices Catch Up With the US Oil Patch (WSJ)

The ingenuity and easy money that allowed American oil companies to keep pumping through a year-long price crash appear to be petering out as U.S. crude slides toward $40 a barrel. U.S. companies have stunned global rivals by continuing to produce oil—particularly from shale deposits—ever more cheaply as American crude prices plunged from over $100 a barrel in 2014. But the recent drop toward $40 a barrel and below puts even the most efficient operators in a bind. “Forty-dollar to fifty-dollar oil prices don’t work in this business,” Ryan Lance, chief executive of ConocoPhillips, the largest independent U.S. oil producer, said in an interview. The worst-case scenario most major producers have discussed in the past six weeks with investors involved a price of $50 a barrel. That is beginning to look optimistic as Saudi Arabia continues to produce near-record volumes and major exporters such as Iraq have increased output.

Many oil executives, including BP CEO Bob Dudley, expect prices to be “lower for longer.” The U.S. Energy Department is forecasting the price of oil will average around $50 a barrel next year. More than 250,000 people world-wide have lost their jobs in the industry over the past year, according to Graves & Co., a Houston consulting firm. Many companies that were hoping to weather low energy prices without new rounds of layoffs and salary cuts may be forced to slash those costs yet again, said Eric Lee, an energy analyst with Citigroup. “Who’s going to take the brunt of this? Shale has already cut back a lot,” Mr. Lee said, adding that new oil projects are being deferred around the world. In a way, he added, oil companies are responsible for the current situation. During brief price rallies, they raced back into fields to drill new wells—adding to the global glut of crude and cutting off the price rebounds.

Even as the number of rigs operating in the U.S. fell 60% so far this year, American oil production through August dipped just 3% from its April peak, federal data show. What happened was a combination of declining costs for oil-field services and equipment and impressive feats of engineering. Companies doubled the amount of sand they pumped into wells, figuring out how to better prop open rock layers to draw out more oil and natural gas. Operators moved rigs into areas where crude flowed the most freely, cut the number of days it took to drill by nearly half and extended the length of horizontal oil wells to reach nearly 2 miles. Costs for such big wells fell by as much as a third as oil explorers put extreme pressure on the suppliers that help them coax more fuel from the ground, including Halliburton. And producers became far more efficient. In the seven most prolific U.S. shale fields, they boosted oil production per rig by as much as 60% this year.

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“The Saudi strategy of flooding the world with oil in a bid to drive out rivals..” is a made-up idea. The Saudi’s simply looked at their forward contracts and thought: “Holy Sh*t!”

Speculators Test Saudi Currency As Oil Crisis Deepens (AEP)

Saudi Arabia’s currency regime is at risk of blowing up if oil prices fall further and the US dollar spikes higher, Bank of America has warned. The Saudi strategy of flooding the world with oil in a bid to drive out rivals may be hard to square with the country’s fixed dollar-peg, which is increasingly under scrutiny by currency traders as the US Federal Reserve prepares to raise interest rates. “The crucial point is what happens to the Saudi riyal. Saudi Arabia’s foreign exchange reserves still provide an ample buffer, but they have been falling fast,” said Francisco Blanch, the bank’s energy strategist. “Should Brent crude oil prices drop to $30, we estimate the foreign exchange reserve drain could accelerate to $18bn per month. Saudi Arabia may face a critical choice: cut oil supply, or de-peg,” he said.

The 12-month riyal forward contracts – watched by experts for signs that traders are betting on a collapse of the peg – has spiked violently to 535 from just 13 points in June. This is even higher than the peak after the 9/11 terrorist attacks in New York, and is approaching extremes seen in January 1999. Credit default swaps pricing bankruptcy risk has jumped to 153, the highest since the global financial crisis. Mr Blanch said a devaluation by China would leave the Saudis badly exposed and might ultimately force their hand. “A de-peg of the Saudi riyal is our number one ‘black-swan’ event for oil in 2016,” he said. The 30-year old dollar peg is the weak link in Saudi strategy. It matters more than dissent within OPEC as the cartel prepares for a stormy meeting in Vienna on December 4. To varying degrees, Algeria, Venezuela, Nigeria, Iraq, and Iran all want production cuts to stabilize the market.

Russia has been able to cushion the effects of the oil price crash by letting the rouble fall from 32 to 65 against the dollar since mid-2014. This protects oil revenues of the Russian state in local-currency terms. Saudi Arabia is taking the blow head-on, and is facing an extra tourniquet effect as Fed tightening pushes the global dollar index to a 12-year high. The central bank’s holdings of foreign securities fell $23bn in October. They are down $90bn since February. Foreign reserves are still $647bn but not all is usable. The Saudi government has had to cancel a raft of infrastructure projects and push through drastic spending cuts to rein in a budget deficit near 20pc of GDP. It denies reports that contractors are not being paid. Bank of America warned that a break-down of the Saudi dollar-peg would send the riyal tumbling, with major knock-on effects. “Oil could collapse to $25,” it said in a client note.

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2016: Annus Horribilis for Brazil.

Petrobras’s Dangerous Debt Math: $24 Billion Owed in 24 Months (Bloomberg)

The debt clock is ticking down at Brazil’s troubled oil giant, Petrobras. Next up: $24 billion of repayments over 24 months. That’s a towering hurdle for a company that hasn’t generated free cash flow for eight years and whose borrowing rates are soaring. Annual debt servicing costs have doubled to 20.3 billion reais ($5.4 billion) in the past three years. The delicate task of managing the massive $128 billion mound of debt accumulated by Petroleo Brasileiro – 84% of it in foreign currencies – falls to the two banking veterans parachuted atop the company earlier this year, CEO Aldemir Bendine, 51, and Chief Financial Officer Ivan Monteiro, 55. The pair came from the state-controlled Banco de Brasil to contain the damage from the biggest corruption scandal in the country’s history.

While prosecutors continue to grind away at years of suspicious dealings, Act II for the boys from the Bank of Brazil will further test their mettle. The challenge of Petrobras’s runaway debt, which has grown four-fold in five years, has been exacerbated by low oil prices, a weak currency and the Brazilian government’s own fiscal travails. “If you considered them to be totally independent and there were no chance of any kind of government support, I think the risk of default would certainly be there in a big way,” said Jason Trujillo at Invesco. Petrobras is not without options, but they tend to be either politically unpalatable or unattractive to the marketplace.

Bendine is actively trying to peddle off minority stakes in the Rio de Janeiro-based oil producer’s pipeline and gas station units, among others, but that plan is behind schedule and faces fierce opposition from the oil industry’s most powerful union. Other alternatives are also running up against resistance from one interest group or another. The only source of comfort for many bondholders is the belief the Brazilian government would stop at nothing to save the country’s biggest company – though, even at that, Trujillo said markets are “lessening the amount of implied government support.”

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Inventing new accounting methods, that’ll help!

Bank of Japan To Switch To Indicators That Show Rising Prices (Reuters)

The Bank of Japan will release a new set of price indicators this month that reconfigures the way price trends are measured as the central bank seeks to show the country’s below-target inflation rate is due to volatile items such as energy. Importantly, a new consumer price index (CPI) will exclude energy costs, which have been falling, but include the costs of items such as processed and imported foods, which have been rising. The BOJ currently uses the government’s core CPI, which excludes fresh food but includes energy costs, as its key price measurement in guiding monetary policy. With core CPI now slipping due largely to slumping oil prices, the central bank began internally calculating a new index that conveniently shows inflation exceeding 1% in the past few months.

That index strips away volatile fresh food and energy costs, but includes processed and imported food prices, which are rising. The BOJ said on Friday it will start publishing this month the new CPI, as well as other indicators such as one showing the ratio of goods seeing prices rise versus those that are falling, on a regular basis each month. “The performance of the government’s core CPI (in tracking broad price trends) seems to be deteriorating, although this is probably because of the temporary effect of large swings in crude oil prices,” the BOJ said in a research paper. The BOJ’s new indicators will be released on the day the government’s CPI figures are published. The upcoming release of the CPI and BOJ indicators is on Nov. 27. Government data showed core consumer prices fell 0.1% in the year to September, a second straight month of declines, keeping inflation distant from the BOJ’s 2% target.

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Beggar all of thy global neighbors.

Mario Draghi All But Announced an Expansion of ECB QE (Fortune)

The world’s two most important central banks are going separate ways. As the Federal Reserve drops increasingly heavy hints about raising interest rates for the first time in nearly a decade, ECB President Mario Draghi all but pre-announced a new round of stimulus for a Eurozone economy that is still flirting with deflation. In a closely-watched keynote speech at a banking conference in Frankfurt, Draghi dropped his clearest hint yet that the ECB will expand its program of asset purchases, which depresses interest rates by injecting money into the financial system, and may also push its official deposit rate even further into negative territory, from its current record low of -0.20%.

The latter move would be particularly radical, and has been bitterly resisted by banks who claim it effectively forces them to make losses. But the ECB’s chief economist Peter Praet said in an interview earlier this week that the evidence suggested it hadn’t had a negative impact so far. The ECB’s governing council is due to meet next on Dec. 3, two weeks before the Federal Open Market Committee Meeting where the Fed is expected to raise its official interest rates. Draghi said: “If we decide that the current trajectory of our policy is not sufficient to achieve our objective, we will do what we must to raise inflation as quickly as possible. If we decide that the current trajectory of our policy is not sufficient to achieve our objective, we will do what we must to raise inflation as quickly as possible.”

Speculation on further easing has been growing since Draghi’s last press conference in October, when he expressed concern about fresh risks to the economy from the slowdown in China and other emerging markets, and about the stubborn refusal of inflation to come back to its targeted level of just under 2%. Thanks to low oil prices, consumer prices in the Eurozone have barely changed all year, and were up only 0.1% in the year to October. Gross domestic product, meanwhile, grew only 0.3% in the third quarter, down from 0.4% in the summer. The euro has already lost nearly 6% against the dollar since Draghi’s October press conference, and is already trading close to the 12-year low it posted back in March.

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“The King spoke, the subjects listened, and The King left. There was nothing his subjects could do about it but cope with its consequences.”

The Power And The Impotence Of The ECB (Steve Keen)

I’ve attended two conferences in two days where both the power and the impotence of the European Central Bank (EBC) have been on vivid display. Its political power is considerable, both in form and in substance. At both seminars, the ECB speaker—ECB Board member Peter Praet at the first, and ECB President Mario Draghi at the second—spoke first, and then left. In form, the ECB has no need to defend its policies because it is unimpeachable in its execution of them. In substance, it does not even considering engaging with its subjects—I use the word deliberately—in open and robust discussion. It’s not unusual for a political leader to turn up at an event, speak and then immediately leave. But even political leaders have to tolerate sometimes being savaged by fearless CNBC moderators when they speak in public.

And I expected that economic leaders would want to hang around and get some feedback—positive or otherwise—from the economic elite that gathered to hear them. Might they not learn something about why their policies weren’t working as they had expected them to? Not a bit of that for the ECB. There was plenty that could be criticised, even within the context their speeches set. Speaking at the FAROS Institutional Investors Forum, Praet acknowledged, numerous times, that the ECB had failed to hit many of its policy targets—in particular, he noted how many times the ECB had to put off into the more distant future its objective to return to 2% inflation. But there was no chance to challenge him as to why they had failed, because after a couple of perfunctory exchanges with the moderator, he was out the door.

At the more prestigious Frankfurt European Banking Congress Draghi stated bluntly that the ECB would continue to do all it takes to support asset markets via QE—in the belief that this supported the real economy. This was a declaration of the intention to use unlimited power—since there is no effective limit to the ECB’s capacity to buy assets from the private sector. A politician would have to respond to sceptics about the use of such unlimited powers. But there was not even a single question, nor even a murmur, from the audience. There was however a jolt of recognition. Draghi was going to continue supporting asset markets, and that was that. The King spoke, the subjects listened, and The King left. There was nothing his subjects could do about it but cope with its consequences.

German Finance Minister Wolfgang Schäuble, who book-ended the EBC conference, had no such luxury of freedom from interlocution—nor did he need it. He engaged in a lively banter with his interviewer as he defended the far more limited power he has over expenditure in Germany. I doubt that Schäuble will suffer electoral defeat any time soon, but unlike Draghi he faces the prospect that it could happen. That doesn’t make him any less resolute in defending his policies; it just means that he has to defend them. This is what the originally principled concept of “Central Bank Independence” has transmuted into.

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One buybacks start failing to support stocks, there’s a big black hole looming beneath.

Financially Engineered Stocks Drag Down S&P 500 (WolfStreet)

Stocks have been on a tear to nowhere this year. Now investors are praying for a Santa rally to pull them out of the mire. They’re counting on desperate amounts of share buybacks that companies fund by loading up on debt. But the magic trick that had performed miracles over the past few years is backfiring. And there’s a reason. IBM has blown $125 billion on buybacks since 2005, more than the $111 billion it invested in capital expenditures and R&D. It’s staggering under its debt, while revenues have been declining for 14 quarters in a row. It cut its workforce by 55,000 people since 2012. And its stock is down 38% since March 2013.

Big-pharma icon Pfizer plowed $139 billion into buybacks and dividends in the past decade, compared to $82 billion in R&D and $18 billion in capital spending. 3M spent $48 billion on buybacks and dividends, and $30 billion on R&D and capital expenditures. They’re all doing it. “Activist investors” – hedge funds – have been clamoring for it. An investigative report by Reuters, titled The Cannibalized Company, lined some of them up:

In March, General Motors acceded to a $5 billion share buyback to satisfy investor Harry Wilson. He had threatened a proxy fight if the auto maker didn’t distribute some of the $25 billion cash hoard it had built up after emerging from bankruptcy just a few years earlier. DuPont early this year announced a $4 billion buyback program – on top of a $5 billion program announced a year earlier – to beat back activist investor Nelson Peltz’s Trian Fund Management, which was seeking four board seats to get its way.

In March, Qualcomm Inc., under pressure from hedge fund Jana Partners, agreed to boost its program to purchase $10 billion of its shares over the next 12 months; the company already had an existing $7.8 billion buyback program and a commitment to return three quarters of its free cash flow to shareholders.

And in July, Qualcomm announced 5,000 layoffs. It’s hard to innovate when you’re trying to please a hedge fund. CEOs with a long-term outlook and a focus on innovation and investment, rather than financial engineering, come under intense pressure. “None of it is optional; if you ignore them, you go away,” Russ Daniels, a tech executive with 15 years at Apple and 13 years at HP, told Reuters. “It’s all just resource allocation,” he said. “The situation right now is there are a lot of investors who believe that they can make a better decision about how to apply that resource than the management of the business can.”

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VW keeps flipping regulators the bird. “VW never told regulators about the software, in violation of U.S. law.”

Volkswagen’s Emissions Scandal Is Getting Even Bigger, Again (AP)

Volkswagen’s emissions cheating scandal widened Friday after the U.S. Environmental Protection Agency said the German automaker used software to cheat on pollution tests on more six-cylinder diesel vehicles than originally thought. Volkswagen told the EPA and the California Air Resources Board the software is on about 85,000 Volkswagen, Audi and Porsche vehicles with 3-liter engines going back to the 2009 model year. Earlier this month the regulators accused VW of installing the so-called “defeat device” software on about 10,000 cars from the 2014 through 2016 model years, in violation of the Clean Air Act. The regulators said in a statement they will investigate and take appropriate action on the software, which they claim allowed the six-cylinder diesels to emit fewer pollutants during tests than in real-world driving.

The latest allegation means that more Volkswagen, Audi and Porsche owners could face recalls of their cars to fix the software, and VW could face steeper fines and more intense scrutiny from U.S. regulators and lawmakers. Audi spokesman Brad Stertz on Friday conceded that VW never told regulators about the software, in violation of U.S. law. He said the company agreed with the agencies to reprogram it “so that the regulators see it, understand it and approve it and feel comfortable with the way it’s performing.” The software is on Audi Q7 and Volkswagen Touareg SUVs from the 2009 through 2016 model years, as well as the Porsche Cayenne from 2013 to 2016. Also covered are Audi A6, A7, A8, and Q5s from the 2014 to 2016 model years, according to the EPA.

Stertz said the software is legal in Europe and it’s not the same as a device that enabled four-cylinder VW diesel engines to deliberately cheat on emissions tests. VW has told dealers not to sell any of the models until the software is fixed. VW made the disclosure on a day it was meeting with the agencies about how it plans to fix 482,000 four-cylinder diesel cars equipped with emissions-cheating software. U.S. regulators continue to tell owners of all the affected cars they are safe to drive, even as they emit nitrogen oxide, a contributor to smog and respiratory problems, in amounts that exceed EPA standards — up to nine times above accepted levels in the six-cylinder engines and up to 40 times in the four-cylinders.

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Letting politicians self-regulate their own spending?! Great idea!

EU Journalists Take European Parliament To Court Over Expense Accounts (EUO)

A group of 29 European journalists have filed complaints with the EU’s Court of Justice, demanding access to documents that will show how members of the European Parliament (MEPs) have been spending their allowances. The reporters filed freedom of information (FOI) requests with the European Parliament, asking for copies of documents that show details for the MEPs’ travel expenses, accommodation expenses, office expenses, and assistants expenses for the past four years. “We are not demanding access to records about how MEPs spend their salaries, which are intended for their personal and private use,” the group said in a statement. “We are demanding access to records that show details of how they spend all the extra payments they receive on top of their salaries, and only those extras which are paid to them solely for the exercise of their professional public mandates as elected representatives of European citizens,” they added.

In September, the parliament denied access to these documents, either because they contain personal data or, they argue, because no such records are held. A week ago, the reporters filed complaints with the Luxembourg-based Court of Justice of the European Union, with assistance from Natassa Pirc Musar, Slovenia’s former Information Commissioner. EP press spokesperson Marjory van den Broeke said the parliament has not yet received a formal notification from the court. “So formally, officially we cannot react to this, as we haven’t received it,” she told this website at a press conference Friday (20 November). However, she pointed out that when the EP does receive a FOI request, a balance must be struck between the EU’s rules on access to documents and its rules on personal data protection.

“Both these different aspects are taken into account when there is a proper investigation into the need to transfer personal data [to the FOI applicant],” said Van den Broeke, adding as an example of personal data that “some of these data could reveal political activities, which are the prerogative of an MEP to have, and which are their personal political convictions”. No clarification on the difference between personal political activities and public political activities was offered. According to the EP, around 27% of its almost €1.8 billion budget in 2014 was spent on MEP salaries and expenses, which include travel, office costs and assistants’ salaries. The journalists already know that there will be little information they can expect on the office costs, which are covered by the so-called general expenditure allowance (GEA), because little is recorded.

While MEPs are required to hand in receipts for their travel, accommodation and assistants expenses, they receive the GEA, which covers costs such as rent, phone bills, software, and furniture, as a monthly lump sum of €4,299 per MEP office. “The European Parliament spends €3.2 million each month solely on MEPs’ general expenditure allowance (almost €40 million per year). No one is monitoring this spending,” the journalists’ group noted.

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That’s still putting it mildly.

Australia Is A ‘Plaything’ Of World Economic Forces It Can’t Control (Guardian)

Australia is a “plaything” of forces it cannot control as the world economy heads into another phase of the global financial crisis, according to the former Greek finance minister Yanis Varoufakis. The “remarkable” flow of overseas money into the economy in recent years had created a “false sense of well-being”, he said, but the economy needed to change direction quickly to avert a crisis. Varoufakis, who quit as finance minister after a tumultuous six months in charge of the near-bankrupt Greek economy, taught economics at Sydney University for 12 years up to 2000 before he returned to Europe in dismay at Australia’s turn to the right under John Howard. The economist, who has dual Greek and Australian citizenship and whose daughter lives in Sydney, said Australia had become “complacent” about the health of its economy.

The Sydney and Melbourne housing boom, where price growth has been in double figures, was particularly alarming, said Varoufakis, who is in Australia for a short speaking tour. “Australia – especially Sydney and Melbourne – has always insulated itself from facts about the world. Aided and abetted by the remarkable flow of capital towards the property market in Sydney and Melbourne, it has created a false sense of wellbeing,” he told the Guardian. “People have always said to me that Australia is immune to the crisis because during the good times money has come as an investment. Then if things go wrong the rich Chinese will emigrate here and bring their dosh with them.” But Australia had become a “plaything of forces out of its control”, he said, and risked an economic shock as the credit bubble created by China in the wake of the global financial crisis began to deflate.

“The crisis of 2008 won’t go away. It is a unified, solid crisis, although it is metamorphisising and changing. Between the 80s and 2008 the world economy was fuelled by US debt, then financialisation [the huge increase in credit] which created a pyramid of money which collapsed in 2008. “The world economy lost its capacity to create demand for factories, but China reacted by creating a huge bubble. They were hoping the west would stabilise but it didn’t because America is ungovernable and Europe even more so.” After his bruising experience trying to face down the might of Germany, the ECB, the EU and the IMF, Varoufakis has become an outspoken critic of economic policy. He has described the settlement imposed on Greece in July as doomed to failure and will “go down in history as the greatest disaster of macroeconomic management ever”.

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And they’re thinking of making him PM?

‘Terrible’ Public Finance Figures Heap Pressure On UK Chancellor (Ind.)

The weakest set of October public finance figures for six years has given George Osborne a serious headache ahead of next week’s Autumn Statement. The borrowing figures for last month came in well above expectations, meaning the Chancellor is likely to fall short of his budget deficit reduction target set by the Office for Budget Responsibility only in July. Borrowing shot up to £8.2bn for the month – £1.1bn higher than the same month last year. Most City experts had pencilled in a £1.1bn fall to £6bn. The last time the Government borrowed more in an October was in 2009, when the deficit for the month was £9.6bn and the economy was still mired in recession. The figures are the latest in a run of disappointments in the monthly public finances. In the seven months of the financial year so far, cumulative borrowing is £54.3bn.

Although 10.9% below last year, it means the Chancellor needs a minor miracle to hit the Office for Budget Responsibility’s £69.5bn deficit target for the full year. Analysts said it was likely the OBR would revise up its full-year 2015-16 deficit forecast next month and that the deterioration would make the Chancellor’s job of mitigating his controversial tax credit cuts more difficult. “A critical question will be to what extent the OBR believes that this has implications for the fiscal targets further out,” said Howard Archer of IHS Global Insight. Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the deficit could hit £80bn this year, adding that the “terrible borrowing figures provide a grim backdrop to the Autumn Statement”. He said: “Barring revisions, borrowing would have to be an implausible 48% lower year-over-year in the second half of this fiscal year for the official forecast to be met.”

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The horse has long bolted. It’ll take many years to repair that door.

Is It Time To Close The Door To Foreign Buyers Of British Property? (Guardian)

A global super-rich elite, some of them criminal, are snapping up property in Britain, pushing up costs for all of us and throwing the poor to the edge of the cities. Rampant landlordism is dividing Britain into a nation of housing haves and have-nots. Tax breaks for buy-to-lets are still too generous. Tenants are in despair. Many young people will never be able to buy their own home. This, extraordinarily, is not the language of some lefty academic or pressure group, but comes from the heart of the Conservative party in a new report by the Bow Group, the oldest Tory thinktank in the UK, which styles itself as the “intellectual home to conservatives”. It is a dramatic repudiation of decades of thinking in the Conservative party.

These are the people who have, until now, equated rising house prices with wealth and prosperity, and who have profited enormously from buy-to-let and billions in foreign cash. But the Bow Group now recognises that Britain’s housing market is broken – and its prescription for reform may stagger traditional Tory supporters. It turns conventional thinking on its head by saying the solution to Britain’s housing crisis is not millions of new homes, as so many argue, but cutting demand. The report’s author, Daniel Valentine, traces the phenomenal increase in house price inflation to the mid-1990s when three factors came together: a sudden surge in population growth, the explosion in buy-to-let lending, and the entry of China and Russia into the global economy, producing a global elite seeking a safe home for their cash.

These factors have corrupted the market, creating an insatiable “investment demand” divorced from the underlying needs of the people of Britain. Foreign buyers now own close to 10% of the UK’s housing stock, he claims, and, unchecked, will gobble up much more, increasingly in Manchester, Edinburgh and other regional cities. With the global financial elite numbering at least 15 million, “increasing housing supply can never bring down prices, no matter how much public land and green belt is turned into flats, because the demand for investment returns is almost infinite.” The accepted wisdom is that Chinese billionaires buying in Belgravia have no impact on Bromley or Birmingham. Not so, says the report, citing academic studies that prove that top-end buyers pull up prices through the entire market.

The Bow Group’s solution? To follow the example of Denmark, Switzerland and Australia and make it much tougher for foreign buyers to snap up homes as investment vehicles. It is astonishing that we allow, for example, millionaires in Singapore to buy land and property in Britain, but Singapore bars British and other foreign nationals from buying in their country. Denmark prohibits non-EU nationals from buying a home unless they have lived in the country for five years – and, like Finland and Malta, is allowed by the EU to restrict EU citizens from buying second homes in the country.

Read more …

“Yes, it’s happened before. (See European Jews and World War II.) It was not our finest hour.”

A Nation Of Immigrants Wants To Close Its Doors (MarketWatch)

Close the borders! Deny refugees from war-torn Syria asylum in the U.S.! Pass a bill to provide a safe haven to Syrian Christians, not Syrian Muslims! Such knee-jerk reactions to the multipronged terrorist attacks in Paris last Friday only exacerbated the growing anti-immigrant sentiment in the U.S. Republican presidential candidate Donald Trump may be the loudest proponent of build-a-wall and ship-’em-back, but evidence of the expanding reach of Islamic State has won him many converts. So far 28 governors have said they will refuse to accept Syrian refugees in their states. (It’s not clear they have the legal authority to deny refugees entry to a particular state once they have been admitted to the U.S.) Another 20 are lobbying for increased screening. Congressional leaders have called for a suspension of President Barack Obama’s announced program to settle 10,000 Syrian refugees in fiscal 2016.

The 2,150 Syrian refugees that have been admitted to the U.S. so far have undergone extensive background checks, including biometric screening, a process that can take years, according to the Obama administration. To deny these victims of ISIS terror entry to the U.S. is, quite frankly, un-American. Yes, it’s happened before. (See European Jews and World War II.) It was not our finest hour. U.S. authorities do need to practice smarter security and improve screening procedures in light of the heightened risk. Have you ever wondered how many terrorists the Transportation Security Agency has nabbed asking travelers, “Did you pack your own bags?” As a nation of immigrants, the U.S. reaps considerable benefits from foreigners who come here to live and work.

Consider some statistics from the Kauffman Foundation, which focuses on entrepreneurship:
• More than 40% of the 2010 Fortune 500 companies were founded by immigrants or their children;
• Between 2006 and 2012, one quarter of all technology and engineering startups had at least one immigrant founder.
• Immigrants are twice as likely as native-born Americans to become entrepreneurs;
• Immigrant entrepreneurs accounted for 28.5% of all new entrepreneurs in the U.S. last year, up from 13.3% in 1997.

Small companies, especially startups, are responsible for most, if not all, of the job growth in the U.S. To the extent that immigrants are drawn to entrepreneurship, they are a big plus. You may have heard it said that immigrants steal jobs from American citizens. (You can substitute “machines” or “automation” for immigrants.) This is one of those silly ideas that persists despite evidence to the contrary. So prevalent is the notion that immigrants and innovation steal jobs that economists have a name for it: the lump of labor fallacy. It’s based on the false idea that there is a fixed amount of work in an economy, to be divided up among the pool of workers. This discredited notion inspired France to implement a 35-hour workweek in 2000, widely considered to be a failure. While the official 35-hour workweek still exists — most businesses apply for an exemption — it has failed to reduce unemployment in France.

Read more …

Very thoroughly. The rest is all just fearmongering.

How Refugees Are Selected, Vetted, And Settled In The United States (Quartz)

Who are the refugees coming to the US? Every year, the President, in consultation with Congress, determines how many refugees should come into the U.S. In FY16, the ceiling is 85,000, up from 70,000 last year. They come from diverse areas. The largest groups of refugees the U.S. received last year came from Iraq, Burma, Somalia and Bhutan. In the past five years, the U.S. has received less than 2,500 Syrian refugees, most of whom were women and children.

How does the vetting process work? The vetting process for each refugee is highly rigorous, and usually takes two to three years to complete. Refugees first have to prove that they are actually refugee by registering and being accepted by the United Nations’s refugee agency overseas. This means they have to have a well-founded fear of persecution based on five specific grounds: nationality, race, religion, political opinion or membership in a particular social group. A small number of those registered—the most vulnerable cases—are referred to the U.S to be considered for resettlement. Only those who cannot return home or locally integrate in the country of asylum are referred for resettlement.

The US State Department’s Resettlement Support Center then collects biographical information and personal data for security clearance. The Department of Homeland Security, the FBI, the Department of Defense and multiple intelligence agencies then work together to carry out multiple security screenings based on biometric and biographic data, photographs, and other background information over a period that lasts on average 18 to 24 months. Any refugee who is deemed to pose a threat to our national security is denied. Syrian refugees also undergo “enhanced reviews” in which specially trained officers examine each case biography for accuracy and authenticity. In addition to these security checks, every single refugee is interviewed face-to-face by a Department of Homeland Security official and must undergo a medical screening.

How are refugees resettled in the US? Once refugees are conditionally approved for resettlement, they go through cultural orientation and pay for their own plane tickets to come to the U.S. World Relief, which is one of nine refugee resettlement agencies in the U.S, partners with local communities to help refugees get on their feet upon their arrival. This includes, partnering with local businesses and churches to assist with living arrangements, providing English classes, aiding in their job search, and much more. Refugees have been welcomed all over the country where they have become integrated, and become tax-paying, contributing members of many communities.

This is not to say that we shouldn’t carefully vet refugees, but let’s get the facts first before making generalizations and shutting down a program that has literally saved thousands of lives. To turn our backs on refugees now would betray our nation’s core values to provide refuge for the persecuted and affirm the very message those who perpetrate terrorism are trying to send.

Read more …

Nothing funnier than the truth: “Mr Erdogan at one point referred to Mr Juncker as the former premier of Luxembourg, “a country the size of a Turkish city”.

EU-Turkey Refugee Talks Turn Sour As Erdogan Belittles Juncker

The potential deal between the EU and Turkey to stem the migrant flow to Europe is floundering as Ankara pushes Brussels to deliver on a multibillion-euro aid package and other elements of the bargain. The challenge of completing the deal, hammered out in a month of negotiations, was underlined at a difficult meeting on Monday between EU officials and Turkish president Recep Tayyip Erdogan. According to people familiar with the talks, Mr Erdogan balked as Jean-Claude Juncker and Donald Tusk, the respective presidents of the European Commission and Council, pressed him for a timetable for measures intended to discourage migrants in Turkey from continuing their journey to Europe. These include tighter border controls and awarding work rights to 2m Syrian refugees.

One official familiar with the discussion said the meeting turned “sour” as Mr Erdogan demanded that Europe move first on its pledges. Ankara is seeking €3bn in financial support, regular Turkey-EU summits, and a clear political path to open several chapters in stalled EU membership talks. There was also disagreement as to whether a planned EU assistance package covered one or two years. According to another European official briefed on the meeting, Mr Erdogan at one point referred to Mr Juncker as the former premier of Luxembourg, “a country the size of a Turkish city”. On Thursday, Mr Juncker described the meeting as “sportive and exhausting”. German and other EU officials are convinced Mr Erdogan has the ability to sharply cut the outflow from Turkey and want to see tangible results by the end of the year. But it remains unclear how much Turkey can actually do to make that happen, even if it reaches an agreement with the EU.

Frans Timmermans, the commission’s vice-president, went to Ankara on Thursday to try to rescue the plan with Feridun Sinirlioglu, Turkey’s foreign minister. It was supposed to have been fleshed out and formally signed off at an EU-Turkey summit on November 29. Mr Juncker said the discussions with Mr Timmermans showed the will of “both sides to get closer together”. Thursday’s talks helped to steady the situation but diplomats worry that difficulties with Mr Erdogan may jeopardise the final sign-off. “We don’t want a summit for the sake of a summit,” said one Turkish official. “We have to see they are serious.” One European diplomat said the “tough exchange of views” underlined how difficult it was to negotiate with Turkey — particularly at a time when some member states are desperate for assistance with the crisis and have a weak bargaining position. “They are trying to exploit this situation in a way that some countries find unacceptable,” he said.

Read more …

Angela better stop the ugly side of Germany from rising from its ashes.

Merkel Slowly Changes Tune on Refugee Issue (Spiegel)

In early September, German Chancellor Angela Merkel issued an order to bring thousands of refugees who were stranded in Hungary to Germany. Germany’s basic right to asylum has no upper limits, she said. It was a moment of unaccustomed conviction from a chancellor who had become notorious for her ability to avoid making decisions until the last possible moment. But she went even further. She equated the refugee issue with other significant turning points in the history of her party, the center-right Christian Democrats (CDU). Issues such as West Germany’s integration into Western alliances and Kohl’s commitment to keeping nuclear weapons stationed in West Germany in the 1980s. It was as though she were elevating her refugee policy into the pantheon of Christian Democratic basic principles.

And she didn’t even bother to inform the CDU’s Bavarian sister party, the Christian Social Union (CSU), before doing so. Now, though, Merkel is in the process of preparing a reversal of her refugee policy. At the G-20 summit in Antalya, Turkey at the beginning of the week, she spoke of quotas – fixed numbers of refugees that Europe is willing to accept. On the one hand, of course, introduction the idea of quotas is a concession to reality, because the chancellor knows that the ongoing arrival to Germany of up to 10,000 refugees every day is not sustainable. But the change is also a silent capitulation to her critics. Horst Seehofer, the head of the CSU, and Interior Minister Thomas de Maizière are now setting the tone in Germany’s refugee policy, and the Paris terrorist attacks have only given them more leverage.

Seehofer and de Maizière have been calling for an upper limit on immigration for months. “Quota” is simply a different word for the same thing. Merkel is in a tight spot. She made the right decision by accepting the desperate refugees who set out from Budapest for Germany on foot in early September. But in the period that followed, the dimensions of the inflow kept growing and Merkel never conveyed the message that Germany’s capacity is limited. Even the coming winter has not stopped the flow of refugees, and leading conservatives are now more openly questioning the efficacy and wisdom of Merkel’s plan to limit immigration by combating the underlying causes of migration. For many, the notion of Germany serving as an intermediary and arbiter of global crises borders on megalomania.

Even though she is still publicly sticking to her rhetoric, Merkel has been on the retreat for about two weeks. Leading CDU parliamentarians received the first signs of her change of heart in early November, when they met with her at the Chancellery. In the meeting, the chancellor clearly promised that she would support a reduction in refugee numbers, says one of the attendees. “I cannot guarantee that you will already see a change in the coming weeks,” the attendee said, quoting Merkel. But she also said that the current situation could not continue as it was.

Read more …

It’ll be well over 1 million by year’s end.

Over 900,000 Migrants Arrived In Germany This Year (Reuters)

More than 900,000 migrants have been registered in Germany since the beginning of the year, the Bavarian Interior Ministry said on Friday. “The number of 900,000 was surpassed in the nationwide registration system last night,” a spokesman for Bavarian Interior Minister Joachim Herrmann said. The federal government had forecast that some 800,000 refugees would arrive in Germany this year, but senior politicians have said there could be as many as 1 million new arrivals.

Read more …

Mar 102015
 
 March 10, 2015  Posted by at 11:18 am Finance Tagged with: , , , , , , , , , , ,  11 Responses »


William Henry Jackson Tunnel 3, Tamasopo Canyon, San Luis Potosi, Mexico 1890

The entire formerly rich world is addicted to debt, and it is not capable of shaking that addiction. Not until the whole facade that was built to hide this addiction must and will come crashing down along with the corpus itself.

Central banks are a huge part of keeping the disease going, instead of helping the patient quit and regain health, which arguably should be their function. In other words, central banks are not doctors, they’re crack dealers and faith healers. Why anyone would ever agree to that role for some of the world’s economically most powerful entities is a question that surely deserves and demands an answer. But no such answer is forthcoming.

Instead, we all pretend Yellen, Kuroda and Draghi are in fact curing us of our ailments. Presumably because that feels better. That our health deteriorates in the process is simply ignored and denied. But then, that’s what you get when you allow for a bunch of shaky goalseeked economic rules to be taken as some sort of gospel. People one thought leeches healed too, or bloodletting, exorcism, burning at the stake, you name it. Same difference, just a few hundred years later.

What’s happening today is that central bankers start to find that their goalseeked ideas are no longer working. What might work for one may backfire for another. That this might be the direct result of their own mindless policies will never even cross their minds. And so they will continue making things worse, until that facade they operate on cannot hold any longer.

The EU started its braindead QE program yesterday. If it gets to purchase the entire €1.14 trillion in bonds it aims for, that will be a bad thing. If it doesn’t, that will be an arguably worse thing. Draghi should have stayed away from this heresy, but it’s too late now: the die is cast.

Why banks and funds would sell their long maturity bonds, with a relatively high yield, to him, is not clear. On the other hand, that many funds will compete with the ECB for the few bonds that are available, is clear. Draghi simply attempts to turn the sovereign bond market into casino with zero price discovery. Whether he will succeed in that is not clear. To get it done, though, he will have to make some very peculiar moves. That again is clear. Durden:

Presenting The Buyers Of Over 100% Of New German And Japanese Bond Issuance

Back in December, when the total amount of annual ECB Q€ was still up in the air and and consensus expected a lowly €500 billion annual monetization number, we calculated that based on Germany’s capital key contribution of about 26%, the ECB would monetize some €130 billion of German gross issuance, or about 90% of the total scheduled issuance for 2015. Subsequently, the ECB announced that the actual amount across all ECB asset purchasing programs, will be some 44% higher, or €720 billion per year (€60 billion per month). So what does that mean for the revised bond supply and demand across two of the most important developed markets?

Well, we already know that the Bank of Japan will monetize 100% or just over of all Japanese gross sovereign bond issuance (source). As for Germany, on a run-rate basis, and assuming allocation based on the abovementioned capital key, it means that for the next 12 month period, assuming no major funding changes in Germany, the ECB will swallow more than a whopping 140% of gross German [Bund] issuance! Or, said otherwise, the entities who will buy more than all gross German and Japanese issuance for the next 12 months, are the ECB and the Bank of Japan, respectively.

This also means that to fulfill its monthly purchase mandate, the ECB will have to push the price to truly unprecedented levels (such as the -0.20% yield across the curve discussed previously, or even lower) to find willing sellers. That said, please don’t tell your average Hinz and Kunz that more than all German bond issuance in 2015 will be monetized. It will bring back some very unpleasant memories.

Japan’s Abenomics are a huge failure, and so it looks like another double or nothing is in the offing. They’ll keep doing it until they can’t, because that’s their whole repertoire. Though it is a little weird to see Bill Pesek, and BoJ chief Kuroda, claim that Japan’s QE failed because it wasn’t big enough. Seen Japanese debt numbers lately, Bill? Not big enough yet?

Three Reasons Japan Will Get More Stimulus

With annualized growth of 1.5% between October and December after two straight quarters of contraction, Japan is hobbling out of recession far more slowly than hoped. A third dose of quantitative easing is almost certain. Here are three reasons why.

First, the initial rounds of QE weren’t potent enough. “In order to escape from deflationary equilibrium, tremendous velocity is needed, just like when a spacecraft moves away from Earth’s strong gravitation,” Kuroda recently explained. “It requires greater power than that of a satellite that moves in a stable orbit.”

Although the Bank of Japan managed to lower the value of the yen by more than 20% beginning in April 2013, that clearly hasn’t provided enough of a boost to the economy.

Maybe you can’t boost the 20-year coma the Japanese economy has been in by hammering the currency? Just a thought, Bill. And sure, Kuroda’s spacecraft metaphor is mighty cute, but what tells you economies are just like rocket ships? I like this piece from Deutsche Welle much better:

Central Bank Blues

On Monday the European Central Bank begins its long-anticipated program to buy sovereign bonds on secondary bond markets – i.e. previously issued government bonds held by institutional investors like banks or insurance funds. In central bankers’ jargon, this is called “quantitative easing,” or QE. The ECB’s plan is to pump €60 billion euros into the financial markets each month, by trading central bank reserve money (a form of electronic cash) for bonds. That’s set to continue until at least September 2016, which means at least €1.1 trillion will be put into the hands of investment managers – who will have to find some alternative investments to make with the money.

On Thursday last week, at the ECB’s governing board meeting in Nicosia on Cyprus, the central bank revised its projections for both GDP growth and inflation in the eurozone upward: The inflation rate is projected to go up to 0.7% for this year, and GDP growth from 1.0 to 1.5%. But are the new projections just a case of whistling in the dark? There are in fact serious doubts as to whether the ECB will actually be able to meet its targets, or if, instead, the bond-purchasing program will have effects that will make a structural recovery of the eurozone more difficult.

For a start, many observers doubt whether the ECB will even be able to find willing sellers for €60 billion a month of bonds. Sovereign bonds – especially those of the core eurozone member states, like Germany – may soon become rather scarce on secondary markets. Neither domestic banks and insurance funds, nor foreign central banks, will have much incentive to sell their government bond holdings to the ECB. The older bonds with long maturities and decent interest rates, in particular, will probably be held rather than sold. Moreover, experts question whether a flood of central bank reserve money, pumped into the hands of players in secondary financial markets, can generate a stimulus at all.

It probably won’t lead to any boost in their lending activities to real-economy businesses or households, for two reasons: First, banks have recently been obliged to increase their core capital reserves – the amount of shareholders’ money, including retained earnings, which is available to cover possible loan losses – and they’re still adjusting their balance sheets accordingly. That means they’re being cautious about lending.

That’s the basic question, isn’t it? “..whether a flood of central bank reserve money, pumped into the hands of players in secondary financial markets, can generate a stimulus at all.” But how do we answer it? Lots of people will want to point to the ‘success’ story of the US and the Fed, but there’s no way we can have any confidence in the numbers coming from the US. As for the EU and Japan, the failures are more obvious, but that may be because they’re less skilled in ‘massaging’ the data. All in all, the evidence, if it exists at all, is flimsy at best.

Oh, and then there’s China:

China’s ‘Money Garrote’ May Choke Us All

In this new era of all-powerful central banks, it is hard for investors to look past who will be next to take out the big gun of quantitative easing. This week, all eyes are on the ECB, which follows the Bank of Japan as the latest of the major monetary-policy makers to embark on its own aggressive bond-buying program. In contrast, China appears to be entering a “new normal” era, in which its central bank only has a pea-shooter [..] the benchmark money-supply growth target of 12% was the lowest in decades. Another part of China’s new normal is not just lower growth, but also an era where the central bank is no longer able to magically speed its money-printing presses.

Conventional wisdom holds that the People’s Bank of China (PBOC) has a gargantuan monetary arsenal, given that the country has the world’s largest stash of foreign reserves at $3.89 trillion [..] according to some analysts, this reserve accumulation is merely a byproduct of another form of quantitative easing. Rather than strength, its size indicates just how staggeringly large China’s domestic credit expansion has become in recent decades. According to strategist Albert Edwards at Société Générale, such foreign-reserve accumulation — which typically takes place in emerging markets — is equivalent to quantitative easing.

The PBOC’s historic mass-printing of money to buy foreign currency and depress the yuan’s value is little different from what the Federal Reserve and others have done, Edwards said. [..] the recent reversal in such reserve accumulation points to a significant turning point in monetary conditions. Indeed, Joe Zhang, author of “Inside China’s Shadow Banking System,” argues that China’s credit expansion has in fact been far more aggressive than the QE attempted in the U.S. or Europe.

Zhang, a former PBOC official, calculated that China’s money supply is already 372% of what it was at the beginning of 2006. And if you add up official data between 1986 and 2012, China’s benchmark M2 money supply has grown at a compound rate of 21.1%. While 7% economic growth is slow for China compared to the double-digit rates of the past, such data makes 12% money-supply growth looks positively measly. Another reason to believe that China is at the tail end of a huge monetary expansion is found in a recent study by McKinsey. They estimated that total credit in China’s economy has quadrupled since 2008, reaching 282% of GDP.

But now the conditions that enabled this debt habit have turned. Edwards argues that foreign-exchange accumulation by central banks is the key measure of global liquidity to pay attention to — and it is currently in free-fall. [..] while markets are focusing on the ECB’s easing announcement, they are missing this Chinese liquidity garrote that is strangling the global economy. Data from the IMF shows that central-bank foreign-reserve accumulation has been declining rapidly. China is at the center of this, with a $300 billion annualized decline over the last six months

The stress point for China is now its currency, which has fallen to a 28-month low against the dollar. The dilemma facing the PBOC is how to keep growth and liquidity sufficiently strong, while also maintaining its loose currency peg to a resurgent dollar. As China defends its currency regime, it must do the opposite of printing new money: using foreign reserves to buy yuan, contracting the money supply in the process.

The People’s Bank of China is a crack dealer with a client that no longer can afford its fix. Or perhaps it’s more accurate to say that all central banks are now crack dealers with such clients, and the PBOC is the first one that’s forced to admit it. And it now looks as if perhaps it can’t win back its market without spoiling it. And that is all about the dollar. A lot is about the dollar, and the looming shortage of them. And there’s nothing (central) banks can do. Not that they won’t try, mind you. Durden:

The Global Dollar Funding Shortage Is Back With A Vengeance

[..].. one can be certain that the current fx basis print around – 20 bps will most certainly accelerate to a level never before seen, a level which would also hint that something is very broken with the financial system and/or that transatlantic counterparty risk has never been greater. Unlike us, JPM hedges modestly in its forecast where the basis will end up:

.. different to previous episodes of dollar funding shortage such as the ones experienced during the Lehman crisis or during the euro debt crisis, the current one is not driven by banks. It is rather driven by the monetary policy divergence between the US and the rest of the world. This divergence appears to have created an imbalance in funding markets and a shortage in dollar funding. It is important to monitor how this dollar funding shortage and issuance patterns evolve over time even if the currency implications are uncertain.

And to think the Fed’s cheerleaders couldn’t hold their praise for the ECB’s NIRP (as first defined on these pages) policy. Because little did they know that behind the scenes the divergence in Fed and “rest of the world” policy action is leading to two things: i) the fastest emergence of a dollar shortage since Lehman and ii) a shortage which will be arb[itrage]ed to a level not seen since Lehman, and one which assures that over the coming next few months, many will be scratching their heads as to whether there is something far more broken with the financial system than merely an arbed way by US corporations to issue cheaper (hedged) debt in Europe thanks to Europe’s NIRP policies.

If and when the market finally does notice this gaping dollar shortage (as is usually the case with the mandatory 3-6 month delay), the Fed will once again scramble to flood the world with USD FX swap lines to prevent the global dollar margin call from crushing a matched synthetic dollar short which according to some estimates has risen as high as $10 trillion.

Until then, just keep an eye on the Fed’s weekly swap line usage, because if the above is correct, it is only a matter of time before they are put to full use once again. Finally what assures they will be put to use, is that this time the divergence is the direct result of the Fed’s actions…

And then, again with Tyler, we return to Albert Edwards:

“Ignore This Measure Of Global Liquidity At Your Own Peril”

With all eyes squarely on the ECB as Mario Draghi prepares to flood the EMU fixed income market with €1.1 trillion in new liquidity starting Monday, Soc Gen’s Albert Edwards reminds us that “another type of QE” is drying up thanks largely to the relative strength of the US dollar. The printing of currency to buy US dollar denominated assets in an effort to prop up “mercantilist export-led growth models [is] no different to the Fed’s QE,” Edwards says, explicitly equating EM FX intervention with the asset purchase programs employed by the world’s most influential central banks in the years since the crisis. Via Soc Gen:

Clearly when the dollar is declining sharply, global FX intervention accelerates as the Chinese central bank, for example, needs to debauch its own currency at the same rate. Conversely, when the dollar rallies strongly, as is the case now, FX intervention rapidly dries up and can even reverse, exerting a massive monetary tightening on emerging economies,

.. and ultimately the entire over-inflated global financial complex… The swing in global foreign exchange reserves is one key measure of the global liquidity tap being turned on and off, with the most direct and immediate effect being felt in emerging economies.

The bottom line is that in a world of over-inflated asset values, the strength of the dollar is resulting is a rapid tightening of global liquidity as emerging economies (and indeed the Swiss) stop printing money to buy the US dollar. This should be seen for what it is a clear tightening of global liquidity. Traditionally these periods of dollar strength are highly disruptive to emerging markets and often end in the weakest links blowing up the entire EM and commodity complex and sometimes much else besides! Investors ignore this at their peril.

So: the ECB has started doing its painfully expensive uselessness , the Fed refuses to do anymore and even threatens to derail the whole idea by hiking rates, both Japan and its central bank are so screwed after 20 years of having an elephant sitting on their lap for afternoon tea that nothing they do makes any difference anymore even short term, and China is faced with the riddle that what it thinks it should do to look better in the mirror mirror on the Great Wall, only makes it look old and bitter.

But as Edwards rightly suggests, the first bit of this battle will be fought in, and lost by, the emerging markets. And there will be nothing pretty about it. They’re all drowning in dollar denominated loans and ‘assets’, and it gets harder and more expensive all the time to buy dollars as all this stuff must be rolled over. And the game hasn’t even started yet.

Nov 282014
 
 November 28, 2014  Posted by at 8:58 pm Finance Tagged with: , , , , , , , , , , ,  7 Responses »


NPC Thanksgiving turkeys for the President Nov 26 1929

Thinking plummeting oil prices are good for the economy is a mistake. They instead, as I said only yesterday in The Price Of Oil Exposes The True State Of The Economy, point out how bad the global economy is doing. QE has been able to inflate stock prices way beyond anything remotely looking fundamental, but energy prices have now deflated instead of stocks. Something had to give at some point. Turns out, central banks weren’t able to inflate oil prices on top of everything else. Stocks and bonds are much easier to artificially inflate than commodities are.

The Fed and ECB and BOJ and PBoC may of course yet try to invest in oil, they’re easily crazy enough to try, but it will be too late even if they did. In that sense, one might argue that OPEC – or rather Saudi Arabia – has gifted us QE4, but the blessings of the ‘low oil price stimulus’ will of necessity be both mixed and short-lived. Because while the lower prices may free some money for consumers, not nearly all of the freed up ‘spending space’ will end up actually being spent. So in the end that’s a net loss as far as spending goes.

The ‘OPEC Q4′ may also keep some companies from going belly up for a while longer due to falling energy costs, but the flipside is many other companies will go bust because of the lower prices, first among them energy industry firms. Moreover, as we’re already seeing, those firms’ market values are certain to plummet. And, see yesterday’s essay linked above, many of eth really large investors, banks, equity funds et al are heavily invested in oil and gas and all that comes with it. And they are about to take some major hits as well. OPEC may have gifted us QE4, but it gave us another present at the same time: deflation in overdrive.

You can’t force people to spend, not if you’re a government, not if you’re a central bank. And if you try regardless, chances are you wind up scaring people into even less spending. That’s the perfect picture of Japan right there. There’s no such thing as central bank omnipotence, and this is where that shows maybe more than anywhere else. And if you can’t force people to spend, you can’t create growth either, so that myth is thrown out with the same bathwater in one fell swoop.

Some may say and think deflation is a good thing, but I say deflation kills economies and societies. Deflation is not about lower prices, it’s about lower spending. Which will down the line lead to lower prices, but then the damage has already been done, it’s just that nobody noticed, because everyone thinks inflation and deflation are about prices, and therefore looks exclusively at prices.

It’s like a parasite can live in your body for a long time before you show symptoms of being sick, but it’s very much there the whole time. A lower gas price may sound nice, but if you don’t understand why prices fall, you risk something like that monster from Alien popping up and out.

I had started writing this when I saw a few nicely fitting articles. First, at MarketWatch, they love the notion of the stimulus effects. They even think a ‘consumer-spending explosion’ is upon us. They’re not going to like what they see. That is, not when all the numbers have gone through their third revision in 6 months or so.

OPEC Has Ushered In QE4

Welcome to the new era of QE4. As if on cue, OPEC stepped in just as monetary policy (at least the Fed’s) has dried up. Central bankers have nothing on the oil cartel that did just what everyone expected, but has still managed to crush oil prices. Protest away about the 1% getting richer and how prior QE hasn’t trickled down to those who really need it, but an oil cartel is coming to the rescue of America and others in the world right now.

It’s hard to imagine a “more wide-reaching and effective stimulus measure than to lower the cost of gas at the pump for everyone globally,” says Alpari U.K.’s Joshua Mahoney. “For this reason, we are effectively entering the era of QE4, with motorists able to allocate more of their money towards luxury items, while firms are now able to lower costs of production thus impacting the bottom line and raising profits.”

The impact of that could be “bigger than anything that has come before,” says Mahoney, who expects that theory to be tested and proved, via sales on Black Friday and the holiday season overall. In short, a consumer-spending explosion as we race to the malls on a full tank of cheap gas. Tossing in his own two cents in the wake of that OPEC decision, legendary investor Jim Rogers says it’s a “fundamental positive for anybody who uses oil, who uses energy.” Just not great if you’re from Canada, Russia or Australia, he says. Or if you’re the ECB, fretting about price deflation. Or until it starts crushing shale producers.

Bloomberg, talking about Europe, has a less cheery tone.

Eurozone Inflation Slows as Draghi Tees Up QE Debate

Eurozone inflation slowed in November to match a five-year low, prodding the European Central Bank toward expanding its unprecedented stimulus program. Consumer prices rose 0.3% from a year earlier, the EU statistics office said today. Unemployment held at 11.5% in October [..] While the slowdown is partly related to a drop in oil prices, President Mario Draghi, who may unveil more pessimistic forecasts after a meeting of policy makers on Dec. 4, says he wants to raise inflation “as fast as possible.” [..]

“The only crumb of comfort for the ECB – and it is not much – is that November’s renewed drop in inflation was entirely due to an increased year-on-year drop in energy prices,” said Howard Archer at IHS. The data are “worrying news” for the central bank, he said. Data yesterday showed Spanish consumer prices dropped 0.5% this month from a year ago, matching the fastest rate of deflation since 2009. In Germany, Europe’s largest economy, inflation slowed to the weakest since February 2010. [..]

Bundesbank President Jens Weidmann, a long-running opponent to buying government bonds, today highlighted the positive consequence of low oil prices. “There’s a stimulant effect coming from the energy prices – it’s like a mini stimulus package,” he said in Berlin.

Sure, there’s a stimulant effect. But that’s not the only effect. While I’m happy to see Weidmann apparently willing to fight Draghi and his pixies over ECB QE programs, I would think he understands what the other effect is. And if he does, he should be far more worried than he lets on.

But then I stumbled upon a long special report by Gavin Jones for Reuters on Italy, and he does provide intelligent info on that other effect of plunging oil prices. Deflation. As I said, it eats societies alive. I cut two-thirds of the article, but there’s still plenty left to catch the heart of the topic. For anyone who doesn’t understand what deflation really is, or how it works, I think that is an excellent crash course.

Why Italy’s Stay-Home Shoppers Terrify The Eurozone

Italy is stuck in a rut of diminishing expectations. Numbed by years of wage freezes, and skeptical the government can improve their economic fortunes, Italians are hoarding what money they have and cutting back on basic purchases, from detergent to windows. Weak demand has led companies to lower prices in the hope of luring people back into shops. This summer, consumer prices in Italy fell on a year-on-year basis for the first time in a half-century ..

Falling prices eat into company profits and lead to pay cuts and job losses, further depressing demand. The result: Italy is being sucked into a deflationary spiral similar to the one that has afflicted Japan’s economy for much of the past two decades. That is the nightmare scenario that policymakers, led by European Central Bank chief Mario Draghi, are desperate to avoid.

The euro zone’s third-biggest economy is not alone. Deflation – or continuously falling consumer prices – is considered a risk for the whole currency bloc, and particularly countries on its southern rim. Prices have fallen for 20 months in Greece and five in Spain, for example. Both countries are suffering through deep cuts in salaries and state welfare. Yet Italy, a large economy with a huge public debt, is the country causing most worry. [..]

Like Japan, Italy has one of the world’s oldest and most rapidly aging populations – the kind of people who don’t spend. “It is young people who spend more and take risks,” says Sergio De Nardis, at thinktank Nomisma. In recent years, young people have been the hardest hit by layoffs, he says. Many have left the country to seek work elsewhere. People tend to spend more when they see a bright future. Italian confidence has steadily eroded over the past two decades … In Italy, as in Japan, the lack of economic growth has become chronic.

Underpinning economists’ worries is Italy’s biggest handicap: a huge national debt equal to 132% of national output and still growing. Rising prices make it easier for high-debt countries like Italy to pay the fixed interest rates on their bonds. And debt is usually measured as a proportion of national output, so when output grows, debt shrinks. Because output is measured in money, rising prices – inflation – boost output even if economic activity is stagnant, as in Italy. But if activity is stagnant and prices don’t rise, then the debt-to-output ratio will increase. [..]

Sebastiano Salzone, a diminutive 33-year-old from the poor southern region of Calabria, left with his wife five years ago to run the historic Cafe Fiume on Via Salaria, a traditionally busy shopping street near the center of Rome. Salzone was excited by the challenge. But after four years of grinding recession, his business is struggling to survive. “When I took over they warned me demand was weak and advised me not to raise prices. But now, I’m being forced to cut them,” he says. [..] Despite the lower prices, sales have dropped 40%, or 500 euros a day, in the last three years. [..]

For hard-pressed individuals, low and falling prices can seem a godsend; but low prices lead to business closures, lower wages and job cuts – a lethal spiral. Since Italy entered recession in 2008 it has lost 15% of its manufacturing capacity and more than 80,000 shops and businesses. Those that remain are slashing prices in a battle to survive.

Home fixtures maker Benedetto Iaquone says people are now only changing their windows when they fall apart. To hold onto his €500,000-a-year business, Iaquone says he is cutting prices. By doing so, he is helping fuel the chain of deflation from consumers to other companies.

In Italy’s largest supermarket chains, up to 40% of products are now sold below their recommended retail price, according to sector officials. “There is a constant erosion of our margins,” says Vege chief Santambrogio.

What Italy would look like after a decade of Japan-style deflation is grim to imagine. It is already among the world’s most sluggish economies, with youth unemployment at 43%. As a member of a currency bloc, Rome’s options are limited [..] Italy’s budget has to follow European Union rules.

Lasting deflation would force more companies out of business, reduce already stagnant wages and raise unemployment further [..] The inevitable rise in its public debt could eventually lead to a default and a forced exit from the euro.

Many in southern Europe say the EU should abandon its strict fiscal rules and invest heavily to create jobs. They also say Germany, the region’s strongest economy, should do more to push up its own wages and prices. Mediterranean countries need to price their products lower than Germany to make up for the fact that their goods – particularly engineered products such as cars – are less attractive. But with German inflation at a mere 0.5%, maintaining a decent price difference with Germany is forcing southern European countries into outright deflation.

Italy’s policymakers are trying to stop the drop. Prime Minister Matteo Renzi cut income tax in May by up to €80 a month for the country’s low earners. But so far the emergency measures have had little effect – partly because Italians don’t really believe in them. A survey by the Euromedia agency showed that, despite the €80 cut, 63% of Italians actually think taxes will rise in the medium-term. Early evidence suggests most Italians are saving the extra money in their paychecks. If so, it will be reminiscent of similar attempts to boost demand in Japan in the late 1990s. The Japanese hoarded the windfalls offered by the government rather than spending them.

That same process plays out, as we speak, in a lot more countries, both in Europe and in many other parts of the world: South America, Southeast Asia etc.

Deflation erodes societies, and it guts entire economies like so much fish. Deflation is already a given in Japan, and in most of not all of southern Europe. Where countries might have saved themselves if only they weren’t part of the eurozone.

If Italy had the lira or some other currency, it could devalue it by 20% or so and have a fighting chance. As things stand now, the only option is to keep going down and hope that another country with the same currency Italy has, i.e. Germany, finds some way to boost its own growth. And even if Germany would, at some point in the far future, what part of that would trickle down to Italy? So what’s Renzi’s answer? An €80 a month tax cut for people who paid few taxes to begin with.

Deflation is not lower prices. Deflation is people not spending, then stores lowering their prices because nobody’s buying, then companies firing their employees, and then going broke. Rinse and repeat. Less spending leads to lower prices leads to more unemployment leads to less spending power. If that is not clear, don’t worry; you’ll see so much of it you own’t be able to miss it.

And don’t think the US is immune. Most of the Black Friday and Christmas sales will be plastic, i.e. more debt, and more debt means less future spending power. Unless you have a smoothly growing economy, but that’s not going to happen when Europe, Japan and soon China will be in deflation.

And yes, oil at $50-60-70 a barrel will accelerate the process. But it won’t be the main underlying cause. Deflation was baked into the cake from the moment that large scale debt deleveraging became inevitable, and you can take any moment between the Reagan administration, which first started raising debt levels, to 2008 for that. And all the combined central bank stimulus measures will mean a whole lot more debt deleveraging on top of what there already was.

We’ll get back to this topic. A lot.

Nov 252014
 
 November 25, 2014  Posted by at 10:47 am Finance Tagged with: , , , , , , , , ,  3 Responses »


Taylor Deluxe Kauneel auto trailer, Bay City, Michigan May 1936

“We Are Starting To Break Down”: Why So Many Americans Feel Traumatized (Salon)
Buy the All Time High (James Howard Kunstler)
The Dismal Economy: 148 Million Government Beneficiaries (Lance Roberts)
The Mystery Of America’s “Schrodinger” Middle Class (Zero Hedge)
Overvalued, Overbought, Overbullish, Extremely Vulnerable Markets (Hussman)
Canada Moving Toward American-Style Inequality (CTV)
Oil Seen Dropping Another $30 by ICAP on Commodity, Dollar Cycle (Bloomberg)
Market Manipulation Of Oil Prices Backfires On Those That Start It: Putin (RT)
Global Growth To Get $200 Billion Kick From Oil Price Crash (Telegraph)
How The Fed Has Boxed US Into An Easy-Money Corner (Satyajit Das)
The Week That Shook the Fed (Gretchen Morgenson)
Eurozone Yields Hit Record Lows: Is ECB Trumping Reality? (CNBC)
Bundesbank’s Weidmann Warns Of ‘Legal Limits’ On Further Moves By ECB (Reuters)
German Bond Yields To Trump Japan As ECB Battles Deflation (AEP)
Greece Bailout Talks Resume Amid Concerns Over Exit (Reuters)
Britain’s EU Retreat Means German Hegemony Warns Prodi (AEP)
BOJ Minutes Show Bazooka Is All About The Message (CNBC)
Kuroda Tells Japan Inc. to Stop Hoarding Cash as Costs to Rise (Bloomberg)
Hedge Funds Lose Money for Everyone, Not Just the Rich (Bloomberg)
Dudley Defense Leaves Senators Unimpressed as Fed Scrutiny Rises (Bloomberg)
Even Brazil’s President Is Involved In The Petrobras Scandal (CNBC)
Summit of Failure: How the EU Lost Russia over Ukraine (Spiegel)
In Wake Of China Rejections, GMO Seed Makers Limit US Launches (Reuters)

An absolute must read by Lynn Stuart Parramore.

“We Are Starting To Break Down”: Why So Many Americans Feel Traumatized (Salon)

Recently Don Hazen, the executive editor of AlterNet, asked me to think about trauma in the context of America’s political system. As I sifted through my thoughts on this topic, I began to sense an enormous weight in my body and a paralysis in my brain. What could I say? What could I possibly offer to my fellow citizens? Or to myself? After six years writing about the financial crisis and its gruesome aftermath, I feel weariness and fear. When I close my eyes, I see a great ogre with gold coins spilling from his pockets and pollution spewing from his maw lurching toward me with increasing speed. I don’t know how to stop him. Do you feel this way, too?

All along the watchtower, America’s alarms are sounding loudly. Voter turnout this last go-round was the worst in 72 years, as if we needed another sign that faith in democracy is waning. Is it really any wonder? When your choices range from the corrupt to the demented, how can you not feel that citizenship is a sham? Research by Martin Gilens and Benjamin I. Page clearly shows that our lawmakers create policy based on the desires of monied elites while “mass-based interest groups and average citizens have little or no independent influence.” Our voices are not heard.

When our government does pay attention to us, the focus seems to be more on intimidation and control than addressing our needs. We are surveilled through our phones and laptops. As the New York Times recently reported, a surge in undercover operations from a bewildering array of agencies has unleashed an army of unsupervised rogues poised to spy upon and victimize ordinary people rather than challenge the real predators who pillage at will. Aggressive and militarized police seem more likely to harm us than to protect us, even to mow us down if necessary. Our policies amplify the harm. The mentally ill are locked away in solitary confinement, and even left there to die. Pregnant women in need of medical treatment are arrested and criminalized. Young people simply trying to get an education are crippled with debt. The elderly are left to wander the country in RVs in search of temporary jobs. If you’ve seen yourself as part of the middle class, you may have noticed cries of agony ripping through your ranks in ways that once seemed to belong to worlds far away.

[..] A 2012 study of hospital patients in Atlanta’s inner-city communities showed that rates of post-traumatic stress are now on par with those of veterans returning from war zones. At least 1 out of 3 surveyed said they had experienced stress responses like flashbacks, persistent fear, a sense of alienation, and aggressive behavior. All across the country, in Detroit, New Orleans, and in what historian Louis Ferleger describes as economic “dead zones” — places where people have simply given up and sunk into “involuntary idleness” — the pain is written on slumped bodies and faces that have become masks of despair. We are starting to break down.

Read more …

Brilliant piece by buddy Jim: “All of these evil systems have to go and must be replaced by more straightforward and honest endeavors aimed at growing food, doing trade, healing people, traveling, building places worth living in, and learning useful things.”

Buy the All Time High (James Howard Kunstler)

Wall Street is only one of several financial roach motels in what has become a giant slum of a global economy. Notional “money” scuttles in for safety and nourishment, but may never get out alive. Tom Friedman of The New York Times really put one over on the soft-headed American public when he declared in a string of books that the global economy was a permanent installation in the human condition. What we’re seeing “out there” these days is the basic operating system of that economy trying to shake itself to pieces. The reason it has to try so hard is that the various players in the global economy game have constructed an armature of falsehood to hold it in place — for instance the pipeline of central bank “liquidity” creation that pretends to be capital propping up markets.

It would be most accurate to call it fake wealth. It is not liquid at all but rather gaseous, and that is why it tends to blow “bubbles” in the places to which it flows. When the bubbles pop, the gas will tend to escape quickly and dramatically, and the ground will be littered with the pathetic broken balloons of so many hopes and dreams. All of this mighty, tragic effort to prop up a matrix of lies might have gone into a set of activities aimed at preserving the project of remaining civilized. But that would have required the dismantling of rackets such as agri-business, big-box commerce, the medical-hostage game, the Happy Motoring channel-stuffing scam, the suburban sprawl “industry,” and the higher ed loan swindle.

All of these evil systems have to go and must be replaced by more straightforward and honest endeavors aimed at growing food, doing trade, healing people, traveling, building places worth living in, and learning useful things. All of those endeavors have to become smaller, less complex, more local, and reality-based — rather than based, as now, on overgrown and sinister intermediaries creaming off layers of value, leaving nothing behind but a thin entropic gruel of waste. All of this inescapable reform is being held up by the intransigence of a banking system that can’t admit that it has entered the stage of criticality. It sustains itself on its sheer faith in perpetual levitation. It is reasonable to believe that upsetting that faith might lead to war.

Read more …

The numbers are getting insane.

The Dismal Economy: 148 Million Government Beneficiaries (Lance Roberts)

.. the Federal Reserve has stopped their latest rounds of bond buying and are now starting to discuss the immediacy of increasing interest rates. This, of course, is based on the “hopes” that the economy has started to grow organically as headline unemployment rates have fallen to just 5.9%. If such activity were real then both inflation and wage pressures should be rising – they are not. According to the Congressional Budget Office study that was just released, approximately 60% of all U.S. households get more in transfer payments from the government than they pay in taxes.

Roughly 70% of all government spending now goes toward dependence-creating programs. From 2009 through 2013, the U.S. government spent an astounding 3.7 trillion dollars on welfare programs. In fact, today, the percentage of the U.S. population that gets money from the federal government grew by an astounding 62% between 1988 and 2011. Recent analysis of U.S. government numbers conducted by Terrence P. Jeffrey, shows that there are 86 million full-time private sector workers in the United States paying taxes to support the government, and nearly 148 million Americans that are receiving benefits from the government each month.

Yet Janet Yellen, and most other mainstream economists suggests that employment is booming in the U.S. Okay, if we assume that this is indeed the case then why, according to the Survey of Income and Program Participation conducted by the U.S. Census, are well over 100 million Americans are enrolled in at least one welfare program run by the federal government. Importantly, that figure does not even include Social Security or Medicare. (Here are the numbers for Social Security, Medicaid and Medicare: More than 64 million are receiving Social Security benefits, more than 54 million Americans are enrolled in Medicare and more than 70 million Americans are enrolled in Medicaid.) Furthermore, how do you explain the chart below? With roughly 45% of the working age population sitting outside the labor force, it should not be surprising that the ratio of social welfare as a percentage of real, inflation-adjusted, disposable personal income is at the highest level EVER on record.

Read more …

This is how you can pretend to have a recovery.

The Mystery Of America’s “Schrodinger” Middle Class (Zero Hedge)

On one hand, the US middle class has rarely if ever had it worse. At least, if one actually dares to venture into this thing called the real world, and/or believes the NYT’s report: “Falling Wages at Factories Squeeze the Middle Class.” Some excerpts:

For nearly 20 years, Darrell Eberhardt worked in an Ohio factory putting together wheelchairs, earning $18.50 an hour, enough to gain a toehold in the middle class and feel respected at work. He is still working with his hands, assembling seats for Chevrolet Cruze cars at the Camaco auto parts factory in Lorain, Ohio, but now he makes $10.50 an hour and is barely hanging on. “I’d like to earn more,” said Mr. Eberhardt, who is 49 and went back to school a few years ago to earn an associate’s degree. “But the chances of finding something like I used to have are slim to none.” Even as the White House and leaders on Capitol Hill and in Fortune 500 boardrooms all agree that expanding the country’s manufacturing base is a key to prosperity, evidence is growing that the pay of many blue-collar jobs is shrinking to the point where they can no longer support a middle-class life.

In short: America’s manufacturing sector is being obliterated: “A new study by the National Employment Law Project, to be released on Friday, reveals that many factory jobs nowadays pay far less than what workers in almost identical positions earned in the past.

Perhaps even more significant, while the typical production job in the manufacturing sector paid more than the private sector average in the 1980s, 1990s and early 2000s, that relationship flipped in 2007, and line work in factories now pays less than the typical private sector job. That gap has been widening — in 2013, production jobs paid an average of $19.29 an hour, compared with $20.13 for all private sector positions. Pressured by temporary hiring practices and a sharp decrease in salaries in the auto parts sector, real wages for manufacturing workers fell by 4.4% from 2003 to 2013, NELP researchers found, nearly three times the decline for workers as a whole.

How is this possible: aren’t post-bankruptcy GM, and Ford, now widely touted as a symbol of the New Normal American manufacturing renaissance? Well yes. But there is a problem: recall what we wrote in December 2010: ‘Charting America’s Transformation To A Part-Time Worker Society:”

.. one of the most important reasons for lower pay is the increased use of temporary workers. Some manufacturers have turned to staffing agencies for hiring rather than employing workers directly on their own payroll. For the first half of 2014, these agencies supplied one out of seven workers employed by auto parts manufacturers. The increased use of these lower-paid workers, particularly on the assembly line, not only eats into the number of industry jobs available, but also has a ripple effect on full-time, regular workers. Even veteran full-time auto parts workers who have managed to work their way up the assembly-line chain of command have eked out only modest gains.

Read more …

“QE only misallocates capital toward more speculation and low-quality debt .. ”

Overvalued, Overbought, Overbullish, Extremely Vulnerable Markets (Hussman)

.. iwhen concerns about default are rising, default-free, low-interest rate money is not considered to be an inferior asset, and as a result, its increased availability does not provoke risk-seeking behavior. If we observe narrowing credit spreads and stronger uniformity in market internals, we will be able to infer a shift toward risk-seeking (and in turn, a greater likelihood that monetary easing will provoke further speculation). That won’t make stocks any cheaper, and downside risk will still need to be managed, but our immediate concerns would be less dire. At present, current market conditions and the lessons of history encourage us to be aware that very untidy market outcomes could unfold in very short order. [..] QE only misallocates capital toward more speculation and low-quality debt (primarily junk and leveraged loan issuance), without much impact on real growth. [..]

The upshot is this. Quantitative easing only “works” to the extent that default-free, low interest liquidity is viewed as an inferior holding. When investor psychology shifts toward increasing risk aversion – which we can reasonably measure through the uniformity or dispersion of market internals, the variation of credit spreads between risky and safe debt, and investor sponsorship as reflected in price-volume behavior – default-free, low-interest liquidity is no longer considered inferior. It’s actually desirable, so creating more of the stuff is not supportive to stock prices. We observed exactly that during the 2000-2002 and 2007-2009 plunges, which took the S&P 500 down by half in each episode, even as the Fed was easing persistently and aggressively. A shift toward increasing internal dispersion and widening credit spreads leaves risky, overvalued, overbought, overbullish markets extremely vulnerable to air-pockets, free-falls, and crashes.

Read more …

It hurts to see Canada become so much like the US in so many ways.

Canada Moving Toward American-Style Inequality (CTV)

A prominent U.S. political economist says Canada is moving toward American-style inequality, and believes austerity economics and tax cuts for corporations are making the problem worse. Robert Reich, the secretary of labor during Bill Clinton’s presidency, now writes extensively on income equality and was in Canada this week speaking at an event for the Broadbent Institute. “The United States economy and the Canadian economy are going on parallel courses,” Reich said in an interview on CTV Question Period. With Japan moving into an official recession and much of Europe still mired in a slowdown, there’s still an idea that countries need to cut government spending during the recovery.

That kind of thinking, Reich says, has the effect of worsening the ratio of debt to the total economy. “Austerity economics does not work,” Reich said. “If you slow down the economy because government is cutting down so much that there’s not enough demand to keep the economy going, then you end up with a worse ratio of debt to GDP.” The U.S. and Canadian economies are growing too slowly, he says. And many wealthy people or corporations, he said, are putting their money in places where they can get the highest return – but that kind of investment isn’t what creates jobs. “Without customers, businesses are not going to create jobs,” he said.

Read more …

“The long-term cycle points to the dollar moving higher and the euro declining into 2016, while commodities move lower through 2016 and 2017.”

Oil Seen Dropping Another $30 by ICAP on Commodity, Dollar Cycle (Bloomberg)

New York-traded crude oil will probably drop another $30 in the next two years as long-term cycles in commodities and currencies converge, no matter what happens at this week’s OPEC meeting and Iran nuclear talks, according to brokerage United-ICAP. West Texas Intermediate crude, the U.S. benchmark, has collapsed five times since the contract’s introduction in 1983, said Walter Zimmerman, chief technical strategist for United-ICAP in Jersey City, New Jersey. The plunges in 1986, 1991, 1998, 2001 and 2008 coincided with an OPEC price war, recessions and financial crises, and were also tied to cycles in commodities or the dollar, said Zimmerman, who was calling for a drop in oil prices as early as April. “This time we have both.”

“Crude is heading lower, with the high $40s or low $50s being touched by 2017,” Zimmerman said. The long-term cycle points to the dollar moving higher and the euro declining into 2016, while commodities move lower through 2016 and 2017, he said. The average drop during the previous five major declines was about 62%, according to Zimmerman. Oil prices have dropped 32% from the year’s high in June amid slower economic growth and surging production in the U.S. and OPEC members. The Bloomberg dollar index is up 10% since the low in May and the euro is down 12%. The Bloomberg Commodity Index dropped 17% to a five-year low this month.

Read more …

“What is the profitability of this production like? It’s from $65 to $83 per barrel. Now when the price of a barrel of oil has fallen below $80, shale gas production becomes unprofitable.” said Putin.”

Market Manipulation Of Oil Prices Backfires On Those That Start It: Putin (RT)

The modern world is interdependent and there is no guarantee that sanctions, a sharp fall in oil prices, or the depreciation of the ruble won’t backfire on those who provoked them, says Russian President Vladimir Putin. “If undercharging for energy products occurs deliberately, it also hits those who introduce these limitations. Problems arise, they will continue to grow, worsening the situation, and not only for Russia but also for our partners, including oil and gas producing countries,” said Putin in an interview to TASS. The Russian leader suggested that the fall in oil prices is due to the sharp increase in the production of shale oil and gas by the United States, but questioned its commercial viability. “What is the profitability of this production like? It’s from $65 to $83 per barrel. Now when the price of a barrel of oil has fallen below $80, shale gas production becomes unprofitable.” said Putin.

The President said he sees objective reasons for the decline in oil prices. “The supply has increased from Libya, surprising as it may seem it produces more, Iraq as well, despite all the problems … ISIS sell oil illegally at $30 per barrel on the black market, Saudi Arabia increased its production and consumption decreased due to a period of stagnation or, say, a decrease compared with the forecasts of global economic growth,” he said. Talking about the Russian economy and the weakening ruble, Putin said the situation with oil prices doesn’t hit the budget as hard as expected. “…we are confident in solving social issues. Including the ones of the defense industry. Russia has its own base for import substitution,” he said. “Thank God, we’ve received a lot from previous generations, and that we’ve done much to modernize the industry over the past decade and a half. Does it damage us? Partly, but not fatally,” Putin concluded.

Read more …

SocGen is way off target here, any benefits will vanish along the way. The biggest problem all around today is deflation. Lower oil prices will exacerbate the problem, not solve it. People are simply not going to drive twice as much.

Global Growth To Get $200 Billion Kick From Oil Price Crash (Telegraph)

Global economies are set for a lift of more than $200bn (£127.4bn) within the next year, thanks to a “once in a generation downturn” in oil prices. Brent – an oil classification that serves as a global benchmark – has already plummeted by as much as 30pc from a peak of $115 a barrel in June. The decline of oil, and the effect that has on lower energy costs, will serve to boost growth and keep inflation contained, according to French bank Societe Generale. The lender’s economists have calculated that a $20 a barrel fall in oil prices could increase global output by an extra 0.26 percentage points after the first year of the shock, with producers in North America and Asia reaping much of the benefit.

This decline in oil has been “a major correction” said Michael Haigh, head of commodities research at the French bank. The downturn differs from previous falls because of its root cause – an oversupply of oil that “is not temporary in nature”, Mr Haigh argued. “We believe that we’re in the middle of a very fundamental change in the oil markets – the type of change that only happens every decade or two”, he added. Oil’s recent fall to around $80 a barrel has been driven “by both weak demand and increased supply”, said Michala Marcussen, Societe Generale’s global head of economics. A marked increase in Libyan oil production alongside a structural rise in US volumes, as a result of the shale boom in North America, have contributed to higher supply. With energy accounting for approximately 9pc of global inflation, a reduction in oil prices should also result in more subdued price growth.

If Brent Crude fell as low as $70 a barrel, this would reduce Societe Generale’s forecast for UK inflation by 0.3 percentage points for the whole of next year. But gains from weaker prices are unlikely to act as a panacea for nations suffering from lower growth. “Policy makers hoping that low oil prices will salvage growth should think twice,” Ms Marcussen cautioned. “In particular euro area leaders would do well to act resolutely on the European Central Bank’s calls for structural reforms at an accelerated pace.”

Read more …

” .. a 3% increase in government bond rates would result in a change in the value of outstanding government bonds ranging from a loss of around 8% of GDP for the U.S. to around 35% for Japan.”

How The Fed Has Boxed US Into An Easy-Money Corner (Satyajit Das)

Despite the Federal Reserve ending its purchases of Treasury bonds, U.S. monetary policy remains accommodative — and will be for a long time to come. The downside is too great. Withdrawing fiscal stimulus would slow economic activity. Reduction in government services and higher taxes hits disposable incomes, especially when wage growth is stagnant. In turn, this leads to a sharp contraction in consumption. Slower growth, exacerbated by high fiscal multipliers, makes it difficult to correct budget deficits and control government debt levels. Accordingly, the Fed’s ability to reverse an expansionary fiscal policy is restricted, at best, corroborating economist Milton Friedman’s sarcastic observation: “There is nothing so permanent as a temporary government program.”

The Fed is basically stuck. Its ZIRP and QE policies are difficult to change. Normalization of interest rates, reducing purchases of government bonds, and the reduction of central bank holdings of securities, all risk risks higher rates and reduced available funding for economic expansion. Low rates, meanwhile, allow overextended companies and nations to maintain or increase borrowings. Central banks also cannot sell government bonds and other securities held on their balance sheet. The size of these holdings means that disposal would lead to higher rates, resulting in large losses to the central bank as well as commercial banks and investors. The reduction in liquidity would tighten the supply of credit, destabilizing a fragile financial system.

In 2013, the Federal Reserve’s tentative “taper,” in effect a slight reduction in bond purchases, triggered market volatility. Resulting higher mortgage rates slowed the rate of refinancing of existing mortgages and the recovery of the housing market. A 1% rise in rates would increase the debt-servicing costs of the U.S. government by around $170 billion. A rise of 1% in G-7 interest rates would increase the interest expense of the G-7 countries by around $1.4 trillion. Higher interest rates would also affect indebted consumers and corporations. In the U.S., for example, a 1% increase in interest rates, according to a McKinsey Global Institute Study, would increase household debt payments collectively to $876 billion from $822 billion, a rise of 7%. According to the Bank of International Settlements, a 3% increase in government bond rates would result in a change in the value of outstanding government bonds ranging from a loss of around 8% of GDP for the U.S. to around 35% for Japan.

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“But it was a good week for anyone interested in understanding how this secretive institution works. Or doesn’t.”

The Week That Shook the Fed (Gretchen Morgenson)

The Federal Reserve Board prefers to operate in a shroud of secrecy, and its officials really don’t like having to answer to anybody. So it was fascinating to learn last week that the Fed is embarking on a soul-searching campaign. Its inspector general will take up the astonishing questions of whether the Fed’s big-bank examiners have what they need to do their jobs and whether they receive the support of their superiors when they challenge bank practices. Or, as the Fed put it, whether “channels exist for decision-makers to be aware of divergent views” among the Fed’s bank examination teams. Asking such questions is an about-face for the Fed, whose officials have long maintained that it is the most sophisticated and enlightened of financial regulators. And given that the Fed received extensive new regulatory powers under the Dodd-Frank financial reform law, it is troubling indeed that it may not be certain that its bank examiners have what they need to do their jobs.

The Fed announcement looks an awful lot like damage control. It came late Thursday afternoon, directly after one Senate hearing that was critical of Fed practices and before another on Friday. It also came after a bill proposed by Senator Jack Reed, a Rhode Island Democrat, that would change the way the head of the most powerful of the 12 district banks — the Federal Reserve Bank of New York — is appointed. Currently, the president of the New York Fed is selected by its so-called public board members — those not affiliated with financial institutions. Senator Reed’s proposal would give the president of the United States, with Senate approval, responsibility for naming the president of the New York Fed. Clearly, last week was not a good one for the Fed. But it was a good week for anyone interested in understanding how this secretive institution works. Or doesn’t.

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The periphery is loaded with zombies.

Eurozone Yields Hit Record Lows: Is ECB Trumping Reality? (CNBC)

It’s hard to believe it’s just a few years since countries like Ireland and Spain had to go cap-in-hand to international lenders – at least if you look at their bond yields. Ireland’s 10-year bond yield, usually reflective of a country’s economic performance, hit a record low of 1.477% Monday, while Spanish 10-year bond yields fell below 2% for the first time ever. Ireland is expected to have one of the strongest economic rebounds in the euro zone, with 3.7% growth in GDP this year, according to Deutsche Bank forecasts. Yet it is also facing plenty of headwinds. There are increasing concerns that the current administration may not last for its maximum five-year term, as disputes over water charges and the recording of phone calls to police stations have destabilized the coalition.

Taoiseach Enda Kenny’s Fine Gael party would get just 22% of the vote now, down from 36% in the 2011 elections, according to a Red C/Sunday Business Post opinion poll published at the weekend. Polls suggest a large swing towards Sinn Fein, formerly better known as the political wing of the Irish Republican Army but now a growing voice of dissent from the main parties in Dublin. Independent candidates, often campaigning in direct opposition to a single government policy, have also been boosted by the waning popularity of the two traditionally dominant parties, Fine Gael and Fianna Fail. The troika of the International Monetary Fund, European Commission and ECB, who bailed-out Ireland and its banks during the credit crisis, warned on Friday that its current budget “makes less progress than desirable” towards reducing its budget deficit – and that its recovery is at risk if there is a further slowdown in the euro zone.

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“This would be a radical change in the structure of the global financial system.”

German Bond Yields To Trump Japan As ECB Battles Deflation (AEP)

German bond yields are to fall below Japanese levels and plumb depths never seen before in history as Europe becomes the epicentre of global deflationary forces, according to new forecast from the Royal Bank of Scotland. “We are seeing `Japanification’ setting in across Europe,” said Andrew Roberts, the bank’s credit strategist. “We expect 10-year Bund yields to cross the 10-year Japanese government bond and we are amply positioned for such an outcome.” Mr Roberts said it is a “weighty win-win” situation for investors. If the European Central Bank launches full-blown quantitative easing, it will almost certainly have to buy large amounts of German Bunds, and these are becoming scarce. “Net supply in Germany is zero since they are in budget surplus this year and next, and they have written a balanced-budget amendment into their constitution. There are simply fewer and fewer Bunds to buy, and everybody wants them,” he said.

It is assumed that if the ECB buys sovereign bonds, it will have to buy them evenly in accordance with its capital “key”. This implies that 28pc would have to be German debt. Yet if the ECB fails to deliver on hints that it will expand its balance sheet by €1 trillion, the damage would be so enormous that Europe would be sucked into a depressionary vortex, according to the bank. Bund yields would fall for different reasons, as debt markets began to reflect a Japanese-style deflation trap. The bank’s credit team is betting that the ECB will act more quickly and on a greater scale than widely assumed, launching purchases of corporate bonds as soon as early December and full sovereign QE in February once the European Court has ruled on a previous debt rescue plan (OMT). “We think Germany will be dragged to the table, kicking and screaming all the time,” said Mr Roberts.

Japanese yields are just 0.45pc, which is steeply negative in real terms now that ‘Abenomics’ is driving up Japan’s inflation rate. This is a deliberate strategy to whittle away a public debt that has reached 245pc of GDP. German yields are 0.78pc. RBS expects the two bonds to cross as Japanese yields rise while German yields fall. This would be a radical change in the structure of the global financial system.

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Some German court at some point will strike Draghi down.

Bundesbank’s Weidmann Warns Of ‘Legal Limits’ On Further Moves By ECB (Reuters)

The European Central Bank could encounter “legal limits” if it pursued additional steps to combat low inflation, the president of Germany’s Bundesbank said on Monday, calling for a focus on growth rather than any government bond buying. “Instead of focusing on the purchasing program, we should focus on how you find growth,” Jens Weidmann told an audience in Madrid, when asked about the possibility of the ECB buying government bonds, a step known as quantitative easing. He warned that it would be difficult to pursue such steps to tackle low inflation. “Of course there are other measures which are more difficult, because they are untested, because they are less clear … and of course they hit the legal limits of what you can do,” said Weidmann, who sits on the ECB’s Governing Council. “This is why discussions are so intense,” he added.

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There is nothing good left for Greece in the eurozone. It’s as simple as that.

Greece Bailout Talks Resume Amid Concerns Over Exit (Reuters)

Greece’s government will resume stalled talks with EU/IMF lenders in Paris on Tuesday, as Athens pushes to conclude a crucial review by inspectors so it can make an early exit to an unpopular bailout programme. Athens had set a 8 December deadline to complete the review. But talks floundered over a projected budget gap for next year and EU/IMF inspectors did not return as expected to Athens this month, leading to concerns that a delayed review would derail Greece’s plan to quit its bailout by the end of the year. The two sides will meet in Paris “to advance the review and examine the framework for the day after”, the bailout ends, the Greek Finance Ministry said in a statement. A ministry official declined to say if the talks would continue beyond Tuesday, but said the bailout would not be extended past the end of the year.

Greece’s government has staked its own survival on abandoning the €240bn (£190bn) bailout programme, which has entailed unpopular austerity measures, ahead of schedule. Prime minister Antonis Samaras needs to push through his candidate in a presidential vote in February to avoid being forced to call early elections; he is is hoping that leaving the bailout will help win him enough support to survive the vote. But the final bailout review, like most reviews before it, has struggled amid rows over reforms and austerity cuts. Athens and its foreign lenders have been at loggerheads over the projected deficit for next year, with the lenders arguing Greece will miss the target of 0.2% of gross domestic product because of a new payback plan for austerity-hit Greeks who owe money to the state. The Greek government, however, has so far resisted changes demanded by the inspectors, going so far as to submit its 2015 budget to parliament last week without the approval of lenders.

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You guys

Brexit or Grexit, if one leaves more will follow.

Britain’s EU Retreat Means German Hegemony Warns Prodi (AEP)

Britain is already a lame duck within the EU’s internal governing structure and is losing influence “by the day” in Brussels, even before David Cameron holds a referendum on withdrawal. This self-isolation has upset the European balance of power in profound ways, leading ineluctably to German hegemony and a unipolar system centred on Berlin. It is made worse by the near catatonic condition of France under Francois Hollande. Smaller states no longer form clusters of alliances around a three-legged diplomatic edifice made up of Germany, France, and Britain. They are instead scrambling to adapt to a new European order where only one state now counts. So too is the EU’s permanent civil service and the institutional machinery in Brussels and Luxembourg. Such is the verdict of Roman Prodi, the former Italian premier and ex-president of the European Commission.

I pass on his thoughts because the Brexit debate in the UK invariably dwells on what the consequences might or might not be for Britain, while taking it for granted that Europe itself would somehow sail on sedately as if nothing had changed. But everything would change, and we can already discern it. “France is ever more disoriented and Britain is losing power by the day in Brussels after its decision to hold a referendum on EU membership,” he said. “All the countries that previously maintained an equilibrium between Germany, France, and Britain (from Poland, to the Baltic States, passing through Sweden and Portugal) are regrouping under the German umbrella,” he told the Italian newspaper Il Messaggero. “Germany is exercising an almost solitary power. The new presidents of the Commission and the Council are men who rotate around Germany’s orbit, and above all there is a very strong (German) presence among the directors, heads of cabinet and their deputies. The bureaucracy is adapting to the new correlation of forces,” he said. [..]

The EU is either a treaty club of democracies and equals, or it is nothing.

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As Abe said at some point last year: all it takes for Abenomics to succeed is for people to believe in it. Well, they don’t. So now what, Shinzo?

BOJ Minutes Show Bazooka Is All About The Message (CNBC)

Latest minutes from the Bank of Japan (BOJ) released Tuesday reveal that the central bank’s surprise move in October to expand its already-massive stimulus program was about sending the message that it will do whatever it takes to “conquer deflation.” “The BOJ intended to send a strong message, beyond the financial markets, to jolt the wider economy,” said Shun Maruyama, Chief Japan Equity Strategist at BNP Paribas. “Consumer and business leaders remain unmoved by monetary policy.” Consumer inflation looks set to stall at around 1%, half of the BOJ’s stated target, he added, noting capital investments are picking up but not by enough to boost economic growth.

The BOJ’s commitment to pull the country out of two decades of deflation remains “unshakable”, according to the minutes from its policy meeting on October 31, when the central bank expanded its asset purchase program by 30 trillion yen to 80 trillion yen. “If no policy action was taken at this meeting, this could be understood as a breach of the commitment (to achieve its inflation target of 2%), thereby possibly impairing the Bank’s credibility significantly,” said one board member. The members that supported further monetary easing argued that the BOJ needed to “convey the bank’s unwavering resolve to conquer deflation.” In a tight ballot, five members backed the latest measures, and four voted against.

The BOJ kept its goal to boost the inflation rate to 2% by next year, but falling oil prices could put the target in question. When stripped of the effect of April’s consumption tax hike, Japan’s core inflation rate rose 1% in September from the year-ago period, its lowest pace in nearly a year. “The year-on-year rate of increase in the CPI (all items less fresh food) was likely to be at around 1% for some time, mainly due to the effects of the decline in crude oil prices,” board members said.

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The hoarding meme in economics is a red flag. Bernanke’s Asian ‘savings glut’ all over again.

Kuroda Tells Japan Inc. to Stop Hoarding Cash as Costs to Rise (Bloomberg)

Bank of Japan chief Haruhiko Kuroda urged business leaders to use profits more productively, saying hoarding cash will become costly as the central bank stamps out deflation. Companies could boost investment in facilities and jobs, taking advantage of a weaker yen, Kuroda said today in a speech in Nagoya. At the same time, the BOJ will continue to spur price gains, adjusting its unprecedented easing policy as needed to achieve its inflation goal, he said. Japanese companies are headed toward their highest profits ever as a weaker yen resulting from the BOJ’s stimulus boosts Toyota and other exporters. Japan Inc. holds near-record cash while capital spending in the second quarter was more than 50% lower than a peak in the first three months of 2007. “Kuroda is making it clear it’s companies’ turn to act,” said Mari Iwashita, an economist at SMBC Friend Securities.

“Capital spending, wages and price settings are all vital for the BOJ but are out of its hands. Kuroda must convince companies the economy will get better and deflation will end.” Kuroda last week secured a wider board majority for easing that the BOJ boosted on Oct. 31, and warned the central bank’s key gauge of inflation could fall below 1% after the world’s third-largest economy slid into recession. Falling prices over two decades of stagnation made holding cash a viable option for companies looking for safety and real returns on capital. The BOJ has been making steady progress in shaking a “deflationary mindset,” Kuroda said. Kuroda called on business leaders to take “action” that looks toward an economy that has overcome deflation. “As a corporate strategy, using their profits in a more productive manner is imperative,” Kuroda said. “I have great interest in developments in wages and price settings through spring of next year.”

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“Guess what the hedge fund firms are doing now? Hunting for new, less skeptical customers.”

Hedge Funds Lose Money for Everyone, Not Just the Rich (Bloomberg)

When Douglas Kobak was an adviser at a large brokerage firm, he suggested his wealthiest clients buy a hedge fund promising to be “a very conservative alternative to bonds.” Then the credit crisis hit in 2008, the fund imploded and investors got 45 cents on the dollar — as long as they promised not to sue. Since then, mediocrity is more common than blow-ups. Hedge funds have lagged behind stocks while still charging fees of up to 2% of assets and 20% of gains. For the rich and their advisers, “the sex appeal of hedge funds has worn off,” says Kobak, now head of Main Line Group Wealth Management. Guess what the hedge fund firms are doing now? Hunting for new, less skeptical customers.

While only those with at least $1 million are allowed to invest in hedge funds, anyone can buy a mutual fund with a hedge fund strategy. Unfortunately, these “alternative” funds come with the same disadvantages hedge funds have: high fees, inconsistent performance and strategies that take a PhD to decipher. By starting alternative funds, mutual fund companies get a chance to bring in revenue they’re losing to cheap index funds and exchange-traded funds. In a deal announced Nov. 18, Blackstone Alternative Asset Management is coming up with hedge-fund-like products for mutual fund company Columbia Management. They’ll join 11 other U.S. mutual funds and ETFs classified by Bloomberg as “alternative,” which together hold $68 billion in assets. One in five of those assets is held by the largest fund, the MainStay Marketfield Fund. Started in 2007, it’s one of the oldest alternative funds, and one of the most disappointing.

After a good start from 2007 to 2009, the fund mostly matched the stock market in 2010 and 2011, and then lagged behind it in 2012 and 2013. This year, it has dropped almost 11%, a mirror image of the S&P 500’s 11.6% gain. Unreliable and disappointing performance is getting to be as common among alternative funds as among hedge funds. The Bloomberg Global Aggregate Hedge Fund index is up 2% year-to-date. The average return of an alternative fund open to all investors is 1.1%, behind the inflation rate. High-quality corporate bonds have returned 70% more than the median alternative fund over the last three years. The stock market has brought in eight times as much as alternatives. And these blah results don’t come cheap. The MainStay Marketfield Fund has been losing money while charging an expense ratio of 2.6% per year. That’s pricier than 99% of all funds, though it’s not as extreme among alternative funds. They charge an average of 1.74% per year, 20 times as much as the cheapest index funds.

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“Goldman Sachs, the Wall Street bank where Dudley was chief U.S. economist for a decade.”

Dudley Defense Leaves Senators Unimpressed as Fed Scrutiny Rises (Bloomberg)

Federal Reserve Bank of New York President William C. Dudley’s defense of his record on financial supervision is unlikely to appease lawmakers seeking to tighten their oversight of the central bank. In a tense exchange with Senator Elizabeth Warren at a Nov. 21 hearing, Dudley rejected her assertion that there had been a “long list” of regulatory failures at the New York Fed. Warren, a Massachusetts Democrat, suggested that if Dudley doesn’t fix a “cultural problem” at the bank, “we need to get someone who will.” While the Senate doesn’t have the authority to appoint or remove Fed presidents, the exchange was a sign of growing frustration among Republicans and Democrats alike. Republicans, who have been critical of the Fed’s loose monetary policy, will take control of the Senate in January, adding to pressure on the Fed from Democrats who see the central bank as too close to the Wall Street banks it supervises.

“The Fed is as vulnerable as any time since the 1980s,” when then-Chairman Paul Volcker drew the ire of politicians for driving up interest rates to levels that threw the country into a recession, said Karen Shaw Petrou, managing partner of Federal Financial Analytics. The next Congress will be “really challenging for the Fed.” Last week’s hearing before a subcommittee of the Senate Banking Committee was prompted by allegations made by a former New York Fed bank examiner, Carmen Segarra, who said her colleagues were too deferential to Goldman Sachs, the Wall Street bank where Dudley was chief U.S. economist for a decade.

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She headed the board of directors as the money laundering and organized crime (those are the charges) were going on. And of course now says she had no idea. Which makes one wonder what she has no idea of now she leads the government. Ignorance doesn’t come high on a president’s list of job qualifications.

Even Brazil’s President Is Involved In The Petrobras Scandal (CNBC)

Energy giant Petrobras is engulfed in a corruption scandal that could prove to be Brazil’s biggest, threatening to engulf the country’s most senior politicians—including its president. Even the company is not downplaying the events. In a news release last week to explain why it had delayed its upcoming financial report, Petrobas said it was “undergoing a unique moment in its history, in light of the accusations and investigations of the “Lava Jato Operation” (Portuguese for “Operation car wash”) being conducted by the Brazilian Federal Police, which has led to charges of money laundering and organized crime.” CNBC takes a look at the facts behind the scandal and the implications for other oil companies and Brazil itself. [..]

Petrobras executives are alleged to have paid politicians for contracts, using money skimmed from company profits. The head of the country’s budget watchdog, Joao Augusto Nardes, has said the kickbacks may total as much as 4 billion Brazilian reais ($1.6 billion), according to the WSJ. The company has neither confirmed nor denied the allegations. It has hired independent auditors to investigate further, in addition to the official investigation by the Brazilian Federal Police. The country’s most senior politicians are implicated, including recently re-elected President Dilma Rousseff, who previously headed the Petrobras board of directors.

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Der Spiegel provides a lengthy history of how failure decided the future of Ukraine, and the German magazine doesn’t spare Merkel.

Summit of Failure: How the EU Lost Russia over Ukraine (Spiegel)

One year ago, negotations over a Ukraine association agreement with the European Union collapsed. The result has been a standoff with Russia and war in the Donbass. It was an historical failure, and one that German Chancellor Angela Merkel contributed to.

Only six meters separated German Chancellor Angela Merkel and Ukrainian President Viktor Yanukovych as they sat across from each other in the festively adorned knight’s hall of the former Palace of the Grand Dukes of Lithuania. In truth, though, they were worlds apart. Yanukovych had just spoken. In meandering sentences, he tried to explain why the European Union’s Eastern Partnership Summit in Vilnius was more useful than it might have appeared at that moment, why it made sense to continue negotiating and how he would remain engaged in efforts towards a common future, just as he had previously been. “We need several billion euros in aid very quickly,” Yanukovych said. Then the chancellor wanted to have her say. Merkel peered into the circle of the 28 leaders of EU member states who had gathered in Vilnius that evening. What followed was a sentence dripping with disapproval and cool sarcasm aimed directly at the Ukrainian president.

“I feel like I’m at a wedding where the groom has suddenly issued new, last minute stipulations.” The EU and Ukraine had spent years negotiating an association agreement. They had signed letters of intent, obtained agreement from cabinets and parliaments, completed countless diplomatic visits and exchanged objections. But in the end, on the evening of Nov. 28, 2014 in the old palace in Vilnius, it became clear that it had all been a wasted effort. It was an historical earthquake. Everyone came to realize that efforts to deepen Ukraine’s ties with the EU had failed. But no one at the time was fully aware of the consequences the failure would have: that it would lead to one of the world’s biggest crises since the end of the Cold War; that it would result in the redrawing of European borders; and that it would bring the Continent to the brink of war. It was the moment Europe lost Russia.

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Even Reuters cheerleading can’t prevent this.

In Wake Of China Rejections, GMO Seed Makers Limit US Launches (Reuters)

China’s barriers to imports of some U.S. genetically modified crops are disrupting seed companies’ plans for new product launches and keeping at least one variety out of the U.S. market altogether. Two of the world’s biggest seed makers, Syngenta and Dow AgroSciences, are responding with tightly controlled U.S. launches of new GMO seeds, telling farmers where they can plant new corn and soybean varieties and how can the use them. Bayer CropScience told Reuters it has decided to keep a new soybean variety on hold until it receives Chinese import approval. Beijing is taking longer than in the past to approve new GMO crops, and Chinese ports in November 2013 began rejecting U.S. imports saying they were tainted with a GMO Syngenta corn variety, called Agrisure Viptera, approved in the United States, but not in China.

The developments constrain launches of new GMO seeds by raising concerns that harvests of unapproved varieties could be accidentally shipped to the world’s fastest-growing corn market and denied entry there. It also casts doubt over the future of companies’ heavy investments in research of crop technology. The stakes are high. Grain traders Cargill and Archer Daniels Midland, along with dozens of farmers, sued Syngenta for damages after Beijing rejected Viptera shipments, saying the seed maker misrepresented how long it would take to win Chinese approval. In the weeks since Cargill first sued on Sept. 12, Syngenta’s stock has touched a three-year low. ADM in its lawsuit last week alleged the company did not follow through on plans for a controlled launch of Viptera corn. Syngenta says the complaints are unfounded.

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Nov 012014
 
 November 1, 2014  Posted by at 12:56 pm Finance Tagged with: , , , , , , , , , ,  1 Response »


Jack Delano Window display for Christmas sale, Providence, Rhode Island Dec 1940

Japan Stimulus Likened To Bear Stearns (CNBC)
The BOJ Jumps The Monetary Shark (Stockman)
Japan Risks Asian Currency War With Fresh QE Blitz (AEP)
Markets Are Still Addicted To Money Printing (CNBC)
Central Banks Answer the Markets’ Prayers – For Now (Bloomberg)
Japan’s Shock and Awe (Bloomberg Ed.)
China’s October Factory Growth Unexpectedly Hits 5-Month Low (Reuters)
Gold Sinks To Levels Not Seen Since 2010 (MarketWatch)
Consumer Spending In US Unexpectedly Drops As Incomes Cool (Bloomberg)
Why that Glorious Economy of Ours Feels so Crummy (WolfStreet)
Top US Oil Companies See More Pressure To Clamp Down On Spending (Reuters)
The Failure of Green Energy Policies (Euan Mearns)
Riots, Clashes In France After Activist Dies In Police Grenade Blast (RT)

“First thing that’s going to happen is we’re going to get deflation over here in the U.S.”

Japan Stimulus Likened To Bear Stearns (CNBC)

Stocks closed at all-time highs after the Bank of Japan announced additional monetary stimulus Friday, but Brian Kelly of Brian Kelly Capital said the move gave him serious misgivings. “What they did is outrageous. It is a terrible idea,” he said. “It is going to have massive, massive ramifications. The U.S. stock market hasn’t woken up to it yet, but they absolutely will. “First thing that’s going to happen is we’re going to get deflation over here in the U.S.” Additionally, the country’s Government Pension Investment Fund also said it would put half its assets—roughly $1.14 trillion—in U.S. and Japanese stocks. The Dow Jones Industrial Average closed at 17,390.52, up 1.13%, while the S&P 500 ended at 2,018.15, up 1.17%. On CNBC’s “Fast Money,” Kelly said investors would do well to buy U.S. Treasury bonds. Japan’s additional foreign investment could total about $200 billion going into the U.S. stock and bond markets, he added.

“Once again, everything is going to be manipulated, and eventually when the levee breaks, it’s going to completely fall apart,” he said. Kelly also said he had made a winning bet by being short Japanese yen coming into the trading day, adding the massive Japanese stimulus program gave him pause. “However, I felt this way before—and it was during Bear Stearns. Everybody cheered that Bear Stearns got a bailout from the Fed. And within three days, they were out of business,” he said. “So, this is Japan bailing themselves out, they had no choice. They have to raise taxes. They are now monetizing their debt—100% monetizing their debt, and buying stocks. They’re buying REITs. They’re buying ETFs. It’s insane.” Kelly clarified he wasn’t calling for a massive selloff in the near future. “I’m not saying the market’s going to fall apart on Monday morning,” he said. “I’m just saying it’s the same type of feeling where people are cheering a bailout they shouldn’t cheer.”

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” … the Japanese bond market soared on this dumping announcement because the JCBs are intended to tumble right into the maws of the BOJ’s endless bid. Charles Ponzi would have been truly envious!”

The BOJ Jumps The Monetary Shark (Stockman)

This is just plain sick. Hardly a day after the greatest central bank fraudster of all time, Maestro Greenspan, confessed that QE has not helped the main street economy and jobs, the lunatics at the BOJ flat-out jumped the monetary shark. Even then, the madman Kuroda pulled off his incendiary maneuver by a bare 5-4 vote. Apparently the dissenters – Messrs. Morimoto, Ishida, Sato and Kiuchi – are only semi-mad. Never mind that the BOJ will now escalate its bond purchase rate to $750 billion per year – a figure so astonishingly large that it would amount to nearly $3 trillion per year if applied to a US scale GDP. And that comes on top of a central bank balance sheet which had previously exploded to nearly 50% of Japan’s national income or more than double the already mind-boggling US ratio of 25%.

In fact, this was just the beginning of a Ponzi scheme so vast that in a matter of seconds its ignited the Japanese stock averages by 5%. And here’s the reason: Japan Inc. is fixing to inject a massive bid into the stock market based on a monumental emission of central bank credit created out of thin air. So doing, it has generated the greatest front-running frenzy ever recorded. The scheme is so insane that the surge of markets around the world in response to the BOJ’s announcement is proof positive that the mother of all central bank bubbles now envelopes the entire globe. Specifically, in order to go on a stock buying spree, Japan’s state pension fund (the GPIF) intends to dump massive amounts of Japanese government bonds (JCB’s). This will enable it to reduce its government bond holding – built up over decades – from about 60% to only 35% of its portfolio.

Needless to say, in an even quasi-honest capital market, the GPIF’s announced plan would unleash a relentless wave of selling and price decline. Yet, instead, the Japanese bond market soared on this dumping announcement because the JCBs are intended to tumble right into the maws of the BOJ’s endless bid. Charles Ponzi would have been truly envious! Accordingly, the 10-year JGB is now trading at a microscopic 43 bps and the 5-year at a hardly recordable 11 bps. So, say again. The purpose of all this massive money printing is to drive the inflation rate to 2%. Nevertheless, Japanese government debt is heading deeper into the land of negative real returns because there are no rational buyers left in the market – just the BOJ and some robots trading for a few bps of spread on the carry.

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You won’t have to wait long to find out just how destructive this is.

Japan Risks Asian Currency War With Fresh QE Blitz (AEP)

The Bank of Japan has stunned the world with fresh blitz of stimulus, pushing quantitative easing to unprecedented levels in a bid to drive down the yen and avert a relapse into deflation. The move set off a euphoric rally on global equity markets but the economic consequences may be less benign. Critics say it threatens a trade shock across Asia in what amounts to currency warfare, risking serious tensions with China and Korea, and tightening the deflationary noose on Europe. The Bank of Japan (BoJ) voted by 5:4 in a hotly-contested decision to boost its asset purchases by a quarter to roughly $700bn a year, covering the fiscal deficit and the lion’s share of Japan’s annual budget. “They are monetizing the national debt even if they don’t want to admit it,” said Marc Ostwald, from Monument Securities. In a telling move, the bank will concentrate fresh firepower on Japanese government bonds (JGBs), pushing the average maturity out to seven to 10 years.

It also pledged to triple the amount that will be injected directly into the Tokyo stock market through exchange-traded funds, triggering a 4.3pc surge in the Topix index. Governor Haruhiko Kuroda said the fresh stimulus was intended to “pre-empt” mounting deflation risks in the world, and vowed to do what ever it takes to lift inflation to 2pc and see through Japan’s “Abenomics” revolution. “We are at a critical moment in our efforts to break free from the deflationary mindset,” he said. The unstated purpose of Mr Kuroda’s reflation drive is to lift nominal GDP growth to 5pc a year. The finance ministry deems this the minimum level needed to stop a public debt of 245pc of GDP from spinning out of control. The intention is to erode the debt burden through a mix of higher growth and negative real interest rates, a de facto tax on savings. Mr Kuroda’s own credibility is at stake since he said in July that there was “no chance” of core inflation falling below 1pc. It now threatens to do exactly that as the economy struggles to overcome a sharp rise in the sales tax from 5pc to 8pc in April.

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100%.

Markets Are Still Addicted To Money Printing (CNBC)

Friday’s stock surge provides yet another reminder that when it comes to moving the market, there’s nothing like a little old-fashioned money printing. What waits on the other side—asset bubbles, inflation, the prospects for still greater wealth disparity—remains, of course, an issue for another day. The important thing is that the market wants what the market wants, and the Bank of Japan appears only too happy to comply, announcing a fairly aggressive stimulus package Friday that traders cheered by pushing the major averages back near record territory. The announcement came just two days after the Federal Reserve—the BOJ’s U.S. counterpart—said it was ending a quantitative easing program that saw its balance sheet swell by nearly $4 trillion since its inception. “So much for the end of QE! The Bank of Japan’s announcement today that it is stepping up its asset purchases is a timely reminder that not everyone has to follow the Fed,” Julian Jessop, chief global economist at Capital Economics, said.

“Further QE in Japan should help to support equity prices worldwide and especially in the euro zone if expectations build that the (European Central Bank) will follow with full-blown QE of its own.” Indeed, Wall Street is rubbing its hands together contemplating that at a time when global growth appears to be slowing, the willingness of central banks to crank up their virtual printing presses hasn’t abated a bit, the Fed notwithstanding. Of course there are words of caution: Jessop warned investors not to go “overboard” in their enthusiasm over the BOJ’s move. At current exchange rates, the action amounts to just more than a quarter of the $85 billion a month the Fed was adding when it it began the third leg of its QE program. Even Europe may not deliver the goods to the extent the market hopes.

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Clueless.

Central Banks Answer the Markets’ Prayers – For Now (Bloomberg)

It’s the party that just keeps going: the first batch of guests leave, the next ones arrive. Just as the U.S. Federal Reserve winds down its asset purchases, the Bank of Japan expands its own program. World stock markets, rejoice! For a while anyway. So far, quantitative easing, the policy of national bond purchases has arguably succeeded in perking up the economy, almost certainly succeeded in helping along the stock market and (this is key) certainly not led to the out-of-control inflation that critics predicted. Bloomberg Businessweek’s Peter Coy answers some of the folks who were sure bond buying would lead to economic catastrophe and still won’t admit they’re wrong.

That said, don’t get too comfortable. Central bank asset purchases dramatically lower bond returns and effectively push money into the stock market. When they end, the flow of money reverses. The idea is to do it slowly and gradually and not cause a panic. So far the Fed is succeeding. However, over the long run pulling out of the stimulus without scaring the markets is a tough difficult maneuver to pull off (and stock market returns aren’t necessarily the central bank’s concern. The Bank of Japan pulled out of its last stimulus program, in 2006, fairly smoothly. But as the chart below shows, it was the prelude to three years of market declines.

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Here’s how clueless the Bloomberg editorial staff is: “Abe has shown no great zeal for exposing farmers to foreign competition or freeing up the labor market. Japan’s agricultural protections are a double burden, because it’s holding up agreement on the Trans-Pacific Partnership free-trade pact. A breakthrough on farm trade is just the tonic Japan needs.”

Japan’s Shock and Awe (Bloomberg Ed.)

Bank of Japan Governor Haruhiko Kuroda stunned investors today by announcing a big expansion of the central bank’s bond-buying program. The move won’t fix Japan’s ailing economy by itself, but it might help, and Kuroda is right to try. The U.S. Federal Reserve likes to signal its intentions and avoid taking financial markets by surprise. Kuroda prefers shock and awe. Investors were wrong-footed by the scale of the BOJ’s quantitative easing when it was first announced last year. Now Kuroda has ambushed them again. Few expected the scale of purchases to be ramped up so soon – to 80 trillion yen a year ($724 billion), from 60 trillion to 70 trillion. Just three of 32 economists surveyed by Bloomberg News predicted it. Kuroda’s board was surprised as well, and was divided on the announcement. If Kuroda wanted investors to sit up and pay attention, it worked.

Fed doctrine notwithstanding, the element of surprise serves a purpose. QE works partly because it sends a message to investors that the central bank is determined to be forceful. At the moment, Japan’s economy needs all the forceful support it can get. The main worry is that inflation is falling again. After rising to 1.5% earlier this year, as the BOJ intended, the rate has since fallen back to 1%. The central bank’s target of 2% looked to be moving out of reach. Kuroda is saying he isn’t about to let that happen. The problem is that the BOJ can’t repair Japan’s economy by itself. At the moment, macroeconomic policy is pulling in two directions: bold stimulus from the central bank combined with a recent hefty sales-tax increase to cut public debt, with another tax increase planned for next year. The tax rise appears to have had a more dampening effect on the economy than expected. Yet it’s hard to deny that it was needed: After years of high borrowing and stagnant growth, Japan’s public debt is enormous.

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How long before we get some real bad numbers out of China from some unexpected source?

China’s October Factory Growth Unexpectedly Hits 5-Month Low (Reuters)

China’s factory activity unexpectedly fell to a five-month low in October as firms fought slowing orders and rising costs in the cooling economy, reinforcing views that the country’s growth outlook is hazy at best. The official Purchasing Managers’ Index (PMI) eased to 50.8 in October from September’s 51.1, the National Bureau of Statistics said on Saturday, but above the 50-point level that separates growth from contraction on a monthly basis. Analysts polled by Reuters had forecast a reading of 51.2.

Underscoring the challenges facing the world’s second-largest economy, the PMI showed foreign and domestic demand slipped to five- and six-month lows, respectively, with overseas orders shrinking slightly on a monthly basis. “There remains downward pressure on the economy, and monetary policy will remain easy,” economists at China International Capital Corp said in a note to clients after the data. Noting that inventory levels of unsold goods rose last month even as factories cut output levels and drew down on stocks of raw materials, the investment bank argued that the economy still faced tepid demand.

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We’re sure to have some fun conversations on gold going forward.

Gold Sinks To Levels Not Seen Since 2010 (MarketWatch)

Gold took a hard fall on Friday, at one point trading at levels not seen since 2010, as the dollar surged in the wake of a surprise stimulus move from the BOJ\. Gold for December delivery slumped $27, or 2.3%, to settle at $1,171.60 an ounce, closing out the week 5.3% lower. The precious metal shed 3.7% in October and is down 3.3% for the year to date. December silver gave up 31 cents to $16.11 an ounce. A more hawkish-than expected Fed statement has already been weighing on gold this week. The Fed’s ending of its bond-buying stimulus program on Wednesday smacked prices hard as gold shed 2.2% amid signs of a healing economy. The U.S. economy expanded 3.5% in the third quarter, data showed Thursday. “The surprisingly robust US GDP figures yesterday confirmed the Fed’s more optimistic economic outlook of the day before and thus indirectly dampened demand for gold as a safe haven,” said analysts at Commerzbank, in a note.

Gold was further pummeled after the Bank of Japan shocked markets with a move to expand the pace of quantitative easing, triggering a 5% surge in the Nikkei 225 index. The dollar touched its highest level against the yen since January 2008. The BOJ expanded the size of its Japanese Government Bond purchases to the equivalent of “about 80 trillion yen” ($727 billion) a year, a rise of ¥30 trillion on the previous amount. It also said it would buy longer-dated JGBs, and triple its purchase of exchange-traded funds and real-estate investment trusts. Gold losses speeded up as a pageant of economic numbers rolled out, including one that showed a slowdown in consumer spending. Commzerbank said gold has taken out its psychologically important $1,200 per troy ounce mark, but also its four-year low of around $1,180. Jim Wyckoff, a Kitco analyst, is more pessimistic on gold than he has been in a while, and noted that prices could be in trouble if they don’t hold the $1,183 level. “If [gold] prices fall below that, you’ll probably see a stiff leg down in prices, and a challenge of $1,000 could not be ruled out,” he warned.

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Big number. No snow, no excuses, just a bad print. With no other reason than people simply don’t have the spending power.

Consumer Spending In US Unexpectedly Drops As Incomes Cool (Bloomberg)

The drop in fuel prices couldn’t have come at a better time for the U.S. economy. Consumer spending unexpectedly dropped 0.2% in September, weaker than any economist projected in a Bloomberg survey, after rising 0.5% in August, according to Commerce Department data issued today in Washington. The report also showed incomes rose at a slower pace last month. “This is a little blip, a bit of payback, but all the numbers are pointing to solid growth between now and the end of the year,” said Nariman Behravesh, chief economist of IHS, who is among the top-ranked forecasters of consumer spending over the past two years, according to data compiled by Bloomberg. “There are a variety of factors that are playing into it. Better finances for consumers, very good jobs growth and you’ve got more money in consumers’ pockets because of lower gasoline prices.” The lowest costs at the gas pump in four years and the biggest payroll gains in more than a decade are projected to lift buying power and household purchases heading into the holiday-shopping season.

Other reports today showed consumer confidence jumped this month to a seven-year high and manufacturing in the Chicago area picked up, bolstering prospects for a rebound. The U.S. consumer spending data showed that after adjusting for inflation, which generates the figures used to calculate gross domestic product, purchases also dropped 0.2% last month after a 0.5% gain in August. The data provided a monthly breakdown of the third-quarter figures issued yesterday. That report showed consumer spending, which accounts for almost 70% of the economy, climbed at a 1.8% pace after growing at a 2.5% rate in the previous three months. The weak reading at the end of the quarter gives consumption little momentum heading into the last three months of the year. In a research note, economists at JPMorgan Chase & Co. in New York said it will probably be difficult to reach their 2.9% spending forecast for the fourth quarter, though they maintained the projection until more data are available.

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More slices cut from the same pie.

Why that Glorious Economy of Ours Feels so Crummy (WolfStreet)

That the economy grew at a “faster than expected” annual rate of 3.5% in the third quarter has been touted as a sign that now – finally, after years of false promises – it is reaching that ever elusive “escape velocity.” But instantly, people with keen eyes began to quibble with it. One big factor was military spending, which spiked 16%, the fasted since Q2 2009. This rate is based on the increase from the second quarter that is then annualized, assuming that spending wound continue at this rate for a year. This type of quarter-to-quarter annualized rate is volatile. For example, it plunged 20% in Q4 2012, jumped 17% in Q2 2009, and 18% in Q3 2008. Spikes and plunges often run in sequence (chart). In reality…. According to data from the US Treasury, the Department of Defense spent $149 billion in Q3, which was actually down a smidgen from the $150 billion it spent in Q3 2013.

This lets out a lot of hot air. That spike was likely a fluke, much like other spikes and plunges before it, and much of it may well be undone in Q4. The other two big factors in that “faster than expected” growth of GDP were inventories, which ballooned and will eventually have to be whittled back down, and exports. The surges in these three categories caused JPMorgan to cut its Q4 GDP growth forecast to 2.5% from 3.0%. “All three of these categories tend to be associated with payback the following quarter,” explained chief US economist Michael Feroli. And the crux of the economy, the consumer? “Still plodding along in a steady, but unspectacular, manner….” Whether or not that annualized quarterly rate of 3.5% was a mirage – year over year, the economy grew by just 2.3%.

A growth rate barely above 2% is exactly where the US economy has been for the last five years! Nothing has changed. For a recovery by US standards, it’s a very crummy growth rate, and far from the escape velocity that Wall Street hype artists have predicted for years in their justification for the ceaselessly skyrocketing stock market. But it gets worse. The population in the US has been growing too. And the economic pie has to be divvied up among more people. So the pie has to grow faster than the population or else, on an individual basis, that growing overall economy, gets cut into smaller slices of the pie.

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But without spending they lose even more reserves and production …

Top US Oil Companies See More Pressure To Clamp Down On Spending (Reuters)

Top U.S. oil producers, which already were reining in spending before crude prices started to slip in June, are now looking to trim more fat from their budgets while reminding investors they must spend to grow. Exxon Mobil said on Friday it would keep its current spending plan intact, though it is about 15% less than 2013. ConocoPhillips said it will spend less money next year, and Chevron said it is looking for budget “flexibility.” Crude oil prices have slumped 25% since June as global supplies grow and demand weakens. Exxon, which sets budgets using a long-term horizon, still expects to spend a little bit less than $37 billion a year from 2015 to 2017, an executive told investors on Friday on a conference call. “We always are mindful of what’s happening in the near future but I keep on pulling back that we are a long-term investor,” said Jeff Woodbury, Exxon’s head of investor relations.

Exxon tests projects “across the full range of economic parameters including price” to ensure favorable returns, he said. The Irving, Texas company saw capital spending peak at $42.5 billion last year when it was advancing projects to deliver future production growth. Exxon has spent $28 billion so far this year, down 14% versus the first nine months of 2013. ConocoPhillips, the largest independent oil and gas company, said on Thursday it plans to spend less than $16 billion next year, below the $16.7 billion it expects to spend in 2014. “(Capital spending) is going to be lower because of the commodity price environment,” Jeff Sheets, ConocoPhillip’s chief financial officer said in an interview with Reuters. “We have the flexibility in our capital program to reduce it without giving up any opportunities.”

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Not sure I’m happy with how Euan places nuclear so close to renewables.

The Failure of Green Energy Policies (Euan Mearns)

Whilst enjoying the good natured exchanges on this blog concerning the pros and cons of new renewable energy sources I decided to dig deeper into the success of Green energy policies to date. Roger Andrews produced this chart the other day and the low carbon energy trends caught my eye. It is important to recall that well over $1,700,000,000,000 ($1.7 trillion) has been spent on installing wind and solar devices in recent years with the sole objective of reducing global CO2 emissions. It transpires that since 1995 low carbon energy sources (nuclear, hydro and other renewables) share of global energy consumption has not changed at all (Figure 1). New renewables have not even replaced lost nuclear generating capacity since 1999 (Figure 2). ZERO CO2 has been abated and the world has done zilch to prepare itself for the expected declines (escalating costs) of fossil fuels in the decades ahead. If this is not total policy failure, what is?

Figure 1 Nuclear, Hydro and Other Renewables (mainly wind and solar) expressed as % of total global energy consumption. The combined low carbon share reached 13.1% in 1995. In 2013 it was 13.3%. From this chart it is easy to see that Other Renewables have simply compensated for the decline in nuclear power a point made more clear in Figure 2.

One of the main problems with Green thinking is that many Greens are against both fossil fuel (FF) based energy and nuclear power. There are some notable exceptions, James Lovelock and George Monbiot, and I recognise that a number of the “pro-renewable” commenters on this blog are at least not anti-nuclear. It would also be unfair to blame the relative decline of nuclear power since 2001 exclusively on Greens but they do have to shoulder a significant slice of that responsibility.

Figure 2 shows that the recent growth in Other Renewables does not compensate for the relative decline in nuclear power. What is more, stable base load is being replaced with intermittent supply that is seldom correlated with demand. FF generation is wrestling in the background, unloved and unappreciated, maintaining order in our society.

Figure 2 Nuclear and Other Renewables as a%age of total global energy consumption. Nuclear’s contribution peaked in 2001 and the decline in nuclear since then has not been fully compensated by the rapid expansion of renewables.

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All about a dam.

Riots, Clashes In France After Activist Dies In Police Grenade Blast (RT)

Another anti-police brutality protest turned violent in the French city of Rennes, with masked youths and police engaging in running street battles. The unrest follows the death of a young environmental activist earlier this week. Overnight Thursday, protesters in the northwestern city lobbed flairs at police and flipped over cars, some of which they set ablaze. Police responded by firing tear gas. The number of arrests or injures, if any, remains unclear. A similar protest in Paris on Wednesday also descended into violence. Around 250 people gathered outside City Hall in Paris, with some throwing rocks at police and writing “Remi is dead, the state kills” on walls, The Local’s French edition reports. At least 33 people were taken into police custody following the unrest. The protests are in response to the death of 21-year-old activist Remi Fraisse. He was killed early on Sunday by an explosion, which occurred during violent clashes with police at the site of a contested-dam project in southwestern France.

His death, the first in a mainland protest in France since 1986, has been blamed on a concussion grenade fired by police. France’s Interior Minister Bernard Cazeneuve, who came under serious pressure to resign following the incident, announced an immediate suspension of such grenades, which are intended to stun rather than kill. On Monday, outrage at Fraisse’s death sparked protests in several French cities. Violence erupted in Albi, the town close to the dam, as well as in Nantes and Rennes. Fraisse was one of 2,000 activists present in the southwestern Tarn region to protest the €8.4m ($10.7) million Sivens dam project. Activists said the project would harm the environment, but officials say it is needed to irrigate farm land and boost the local economy. On Friday, however, local authorities suspended work on the project, saying it would be impossible to continue in light of current events. The executive council, however, which is tasked with overseeing the project, has not ruled to abandon it all together.

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Oct 152014
 
 October 15, 2014  Posted by at 11:29 am Finance Tagged with: , , , , , , , ,  10 Responses »


John Vachon Rear of grocery store in Baltimore Jul 1938

BIS Warns On ‘Violent’ Reversal Of Global Markets (AEP)
No Happy Ending for Investors in Central Bank Fairy Tale (Bloomberg)
Saudi Prince Alwaleed Says Falling Oil Prices ‘Catastrophic’ (Telegraph)
Crumbling US Fix Seen With Global Trillions of Dollars (Bloomberg)
Americans Face Post-Foreclosure Hell As Wages, Assets Seized (Reuters)
The $11 Trillion Advantage That Shields U.S. From Turmoil (Bloomberg)
No Stock Salvation Seen in Bank Results as VIX Surges (Bloomberg)
Triple-Dip Eurozone Recession Fears As Germany Cuts Growth Forecast (Guardian)
Merkel Vows Austerity Even as Growth Projection Cut (Bloomberg)
‘Bank of Japan Should Quit While It’s Ahead’ (Bloomberg)
UK Economy Sinks at the Checkout Line (Bloomberg)
On The Precipice Of A Breakdown In Confidence (Ben Hunt)
Average UK Worker £5,000 A Year Worse Off (Guardian)
Youth Unemployment In Rich Middle East A ‘Liability’ (CNBC)
Russia-US Relations Reset ‘Impossible’: PM Medvedev (CNBC)
New US Price Tag for War Against ISIS: $40 Billion a Year (Fiscal Times)
Real Life is Not Spin Art (Jim Kunstler)
‘Star Trek’ Time Capsule 2047 Launches As Earth Burns (Paul B. Farrell)
UK Waterways Face ‘Invasional Meltdown’ From European Organisms (BBC)
Ebola Outbreak Boosts Odds of Mutation Helping It Spread (Bloomberg)
Second Health Care Worker Tests Positive For Ebola In Texas (CNBC)
WHO Sees 10,000 Ebola Cases a Week in West Africa by Dec. 1 (Bloomberg)

“The biggest worry is a precipitous sell-off in the bond markets once the US Federal Reserve and the other major central banks begin to tighten in earnest. Mr Debelle cited the US bond crash in 1994, but warned that it could be even more violent this time with a “fair chance that volatility will feed on itself”.”

BIS Warns On ‘Violent’ Reversal Of Global Markets (AEP)

The global financial markets are dangerously stretched and may unwind with shock force as liquidity dries up, the Bank of International Settlements has warned. Guy Debelle, head of the BIS’s market committee, said investors have become far too complacent, wrongly believing that central banks can protect them, many staking bets that are bound to “blow up” as the first sign of stress. In a speech in Sydney, Mr Debelle said: “The sell-off, particularly in fixed income, could be relatively violent when it comes. There are a number of investors buying assets on the presumption of a level of liquidity which is not there. This is not evident when positions are being put on, but will become readily apparent when investors attempt to exit their positions. “The exits tend to get jammed unexpectedly and rapidly.” Mr Debelle, who is also chief of financial markets at Australia’s Reserve Bank, said any sell-off could be amplified because nominal interest rates are already zero across most of the industrial world.

“That is a point we haven’t started from before. There are undoubtedly positions out there which are dependent on (close to) zero funding costs. When funding costs are no longer close to zero, these positions will blow up,” he said. The BIS warned earlier this summer that the world economy is in many respects more vulnerable to a financial crisis than it was in 2007. Debt ratios are now far higher, and emerging markets have also been drawn into the fire over the last five years. The world as whole has never been more leveraged. Debt ratios in the developed economies have risen by 20 percentage points to 275pc of GDP since the Lehman Brothers crash. The new twist is that emerging markets have also been on a debt spree, partly as a spill-over from quantitative easing in the West. This has caused a flood of dollar liquidity into these countries that they have struggled to control. It has pushed up their debt ratios by 20 percentage points to 175pc, and much of the borrowing has been at an average real rate of 1pc that is unlikely to last.

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It was never in the cards. Unless perhaps you’re free to come and go as you please. Most institutional investors are not. So they must get burned.

No Happy Ending for Investors in Central Bank Fairy Tale (Bloomberg)

You know it’s a special moment in the financial markets when analysts ditch the jargon and reach for artistic references. Ed Yardeni cited “The Wizard of Oz.” IMF Managing Director Christine Lagarde went with both “Alice in Wonderland” and Harry Potter. Stephen King – the HSBC chief economist, not the author – trolled the fantasy aisle. Their message for investors: Even after the MSCI World Index’s lurch to its lowest since February, sentiment risks souring for a while longer. The reason is that just as global growth is weakening again, central bankers who sustained much of the expansion are running out of ammunition. “Investors around the world are shocked, shocked that the monetary wizards may have run out of magic tricks to revive global economic growth,” said Yardeni. “Even the wizards are admitting that their powers to do so are limited.” To King, markets spent most of this year caught up in a fairy tale that policy makers were on top of things.

In the rosy scenario, the Federal Reserve would next year cool U.S. growth with tighter monetary policy and the European Central Bank would revive expansion with quantitative easing. Everyone would win. “Like most fairy tales it can’t be true in reality,” King told a conference in Washington last week. “There’s something wrong with it.” A case in point is the reliance of the ECB on the weaker euro to deliver an economic boost. That’s not likely to work because what matters is its trade-weighted value. On that basis, he calculates sterling and the yen both fell 20% when their authorities pursued easier monetary policy in recent years.

The problem for the ECB is that countries are now more resistant to their own exchange rates strengthening. Switzerland and the Czech Republic are capping their currencies against the euro; Sweden is unhappy with gains in the krona. The Bank of Japan would likely push back against any gain in the yen. Australia and New Zealand also have signaled disquiet with strength in their dollars. To compensate for all that, the euro would have to fall to parity against the greenback. “That’s way bigger than anything that anyone is currently forecasting,” says King, whose colleagues forecast the euro to fall to $1.19 by the end of 2015 from $1.27 today, which would amount to a 3% decline on a trade-weighted basis. The upshot? Either the ECB’s stimulus efforts fall short or the dollar goes through the roof, preventing the Fed from raising interest rates and hitting dollar-reliant economies in Latin America and China.

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Throwing in a bit – or two bits – of confusion. Just like the Fed.

Saudi Prince Alwaleed Says Falling Oil Prices ‘Catastrophic’ (Telegraph)

Saudi Arabia’s most high-profile billionaire and foreign investor, Prince Alwaleed bin Talal, has launched an extraordinary attack on the country’s oil minister for allowing prices to fall. In a letter in Arabic addressed to ministers and posted on his website, Prince Alwaleed described the idea of the kingdom tolerating lower prices below $100 per barrel as potentially “catastrophic” for the economy of the desert kingdom. The letter, first reported online by the FT, is a significant attack on Saudi’s highly respected 79-year-old oil minister Ali bin Ibrahim Al-Naimi who has the most powerful voice within the Organisation of Petroleum Exporting Countries (Opec). Prince Alwaleed – who is a member of the ruling house of Saud – is also a major international investor, who holds significant stakes in companies from News Corp through to Citigroup.

The publication of the letter comes as Brent oil prices crashed under $87 after the International Energy Agency slashed its forecast for oil demand this year amid signs of weaker global economic growth and a glut of crude. Saudi Arabia is the world’s largest exporter and has the capacity to pump 12.5m barrels per day (bpd) if needed, giving it tremendous power both within Opec but also the international market. Reuters had earlier reported that Iran had rowed back on its earlier concerns over falling prices and was more willing to leave production unchanged at the next meeting of Opec in Vienna in November. Prince Alwaleed had taken particular issue with a remark attributed to Saudi Arabia’s oil minister, in which he said that falling prices were “no cause for alarm”.

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America can no longer afford to maintain its own infrastructure. All the new debt goes towards keeping banks look presentable.

Crumbling US Fix Seen With Global Trillions of Dollars (Bloomberg)

The concrete piers of two new bridges are rising out of the Ohio River between Louisville, Kentucky, and southern Indiana, as crews blast limestone and move earth to build the roads and tunnels that will soon connect the twin spans to nearby interstate highways. For more than two decades, the project languished. Business and political leaders on both sides of the river couldn’t agree on how to relieve snarled traffic, improve safety and spur development that was bypassing the region for Indianapolis and Nashville. The Ohio River Bridges project is an American anomaly that has the potential to become a model while lack of money and political will are allowing many of the nation’s roads and bridges to crumble. Along the shores of the Ohio, Democrat-led Kentucky and Republican-run Indiana have forged a partnership to rebuild U.S. infrastructure at a time of partisan gridlock and untapped trillions in private dollars.

“It’s an enduring irony that the U.S., allegedly the home of innovation, is absolutely block-headed and backwards in this one respect,” former Indiana Governor Mitch Daniels, now the president of Purdue University in West Lafayette, Indiana, said in an interview. “America needs the upgrade and modernization of our infrastructure, and I don’t think you’ll get there if you keep excluding, or at least discouraging, private capital.” President Barack Obama’s administration, which had resisted private financing of public works, is starting a new center to serve as a one-stop shop for bringing capital into government projects. During a Sept. 9 infrastructure conference with investors, U.S. Treasury Secretary Jacob J. Lew said while direct federal spending is indispensable in such cases, tight budgets demand creative ways for unlocking private money.

His cabinet colleague, Transportation Secretary Anthony Foxx, put it more bluntly when he announced the Build America Investment Initiative in July. “There will always be a substantial role for public investment,” Foxx said. “But the reality is we have trillions of dollars internationally on the sidelines that are not being put to work.” Fixing those roads and bridges also boosts employment. Every $1 billion in new infrastructure investment creates about 18,000 jobs, according to a 2009 report by economists at the University of Massachusetts’ Political Economy Research Institute.

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Brace yourself for the debt collectors.

Americans Face Post-Foreclosure Hell As Wages, Assets Seized (Reuters)

Many thousands of Americans who lost their homes in the housing bust, but have since begun to rebuild their finances, are suddenly facing a new foreclosure nightmare: debt collectors are chasing them down for the money they still owe by freezing their bank accounts, garnishing their wages and seizing their assets. By now, banks have usually sold the houses. But the proceeds of those sales were often not enough to cover the amount of the loan, plus penalties, legal bills and fees. The two big government-controlled housing finance companies, Fannie Mae and Freddie Mac, as well as other mortgage players, are increasingly pressing borrowers to pay whatever they still owe on mortgages they defaulted on years ago. Using a legal tool known as a “deficiency judgment,” lenders can ensure that borrowers are haunted by these zombie-like debts for years, and sometimes decades, to come. Before the housing bubble, banks often refrained from seeking deficiency judgments, which were seen as costly and an invitation for bad publicity.

Some of the biggest banks still feel that way. But the housing crisis saddled lenders with more than $1 trillion of foreclosed loans, leading to unprecedented losses. Now, at least some large lenders want their money back, and they figure it’s the perfect time to pursue borrowers: many of those who went through foreclosure have gotten new jobs, paid off old debts and even, in some cases, bought new homes. “Just because they don’t have the money to pay the entire mortgage, doesn’t mean they don’t have enough for a deficiency judgment,” said Florida foreclosure defense attorney Michael Wayslik. Advocates for the banks say that the former homeowners ought to pay what they owe. Consumer advocates counter that deficiency judgments blast those who have just recovered from financial collapse back into debt — and that the banks bear culpability because they made the unsustainable loans in the first place.

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The stupidest thing I’ve seen in a while. The US consumer will save the economy … Yeah. The US consumer is broke and in debt, guys.

The $11 Trillion Advantage That Shields U.S. From Turmoil (Bloomberg)

Call it America’s $11 trillion advantage: Consumer spending is likely to steer the U.S. economy safely through the shoals of deteriorating global growth and turbulent financial markets. The combination of more jobs, falling gasoline prices and low borrowing costs will help lift household purchases. Such tailwinds probably matter more than Europe’s struggles or the slackening in emerging markets that caused the Dow Jones Industrial Average last week to erase its gains for the year. “We’ve got a lot of things working in favor of the consumer right now,” said Nariman Behravesh, chief economist in Lexington, Massachusetts, at IHS Inc. “To have that kind of strength is the biggest asset for the U.S. It’s a pretty rock solid footing.” Household purchases make up almost 70% of the $16.8 trillion U.S. economy and have climbed an average 2% in the recovery that’s now in its sixth year. Spending growth will accelerate to 2.7% next year after 2.3% in 2014, according to the latest Bloomberg survey of economists.

The poll, taken from Oct. 3 to Oct. 8 in the midst of the meltdown in equities, showed little change in the median projections from the prior month. The economy is forecast to expand 3% in 2015 after 2.2% growth this year, according to the survey. “We’ve got the proverbial 800-pound gorilla – the consumer,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. “Households are more fixated on the good news here, and a big part of that is the labor market. The U.S. is going to be pretty immune to the rest of the world.” Economic weakness in Europe, slowing growth in China and tensions in the Middle East sparked a $3.5 trillion loss in value for global equities through last week since a record in September. Brent crude oil yesterday sank to an almost four-year low and the dollar has climbed almost 5% since June.

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See my article yesterday: The Fed Must Feed The Beast.

No Stock Salvation Seen in Bank Results as VIX Surges (Bloomberg)

Options traders are skeptical this week’s bank earnings will deliver calming news to a stock market enduring its worst losses in two years. U.S. stocks have fallen for the past three days on concerns about global growth, the future of interest rates and the spread of Ebola. With companies from JPMorgan to Goldman Sachs and Bank of America scheduled to report this week, demand for bearish options on the largest U.S. financial firms has increased to the highest since May 2013. Even though banks have escaped the worst losses in the recent selloff, the companies will struggle to boost profits if the Federal Reserve keeps interest rates near zero. Analyst projections tracked by Bloomberg show financial companies in the S&P 500 increased earnings 3.1% in the third quarter and 1.6% in the fourth. “There’s an anticipation that a significant percentage of earnings are going to lower forward guidance relatively significantly, including some of the big banks,” Jeff Sica at Sica Wealth Management said.

“That’s going to have a very negative impact on the stock market.” JPMorgan, Citigroup and Wells Fargo are scheduled to provide quarterly results this morning. Bank of America, Goldman Sachs and Morgan Stanley report later in the week. Low interest rates have crimped lending profits for banks, which benefit from higher loan yields. Net interest margins, the difference between what a firm pays in deposits and charges for loans, were a record-low 3.1% in the second quarter, according to St. Louis Fed data on U.S. banks with average assets greater than $1 billion. Fed Vice Chairman Stanley Fischer said during the weekend that U.S. rate increases could be delayed by slowing growth elsewhere. The central bank should be “exceptionally patient” in adjusting monetary policy, Chicago Fed President Charles Evans said yesterday. Federal fund futures show the likelihood of a September 2015 rate increase fell to 46%, from 56% on Oct. 10, and 67% two months ago, according to data compiled by Bloomberg.

“If you get rates rising, you can price that into loans,” Peter Sorrentino, who manages shares of Wells Fargo and JPMorgan for Huntington Asset Advisors, said. “We haven’t seen much shift in the yield curve, even though people thought this would be the year for it because of the Fed easing on QE. There’s a disappointment that we haven’t seen better margin growth this year.”

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The eurozone is a straightjacket that will crush everything inside.

Triple-Dip Eurozone Recession Fears As Germany Cuts Growth Forecast (Guardian)

Germany has slashed its growth forecasts for this year and 2015, sparking calls for a public spending boost to prevent the eurozone falling into a triple-dip recession. Berlin now expects growth of just 1.2% this year and the same in 2015, it said on Tuesday, down from 1.8% and 2%, in the face of slowing export growth. It came as official Eurostat figures showed that industrial production across the eurozone slumped in August by an alarming 1.8% month-on-month, meaning it was 1.9% lower than a year ago. With reports mounting of slowing industrial output in Germany and declining business confidence, the eurozone’s largest economy is now expected to expand at less than half the pace of the UK and US over the next year.

The economy minister, Sigmar Gabriel, blamed geopolitical tensions and global economic problems overseas. He said: “The German economy is steering through rough foreign waters. Geopolitical crises have also increased uncertainty in Germany and moderate growth is weighing on the German economy.” An October survey showed a big fall in investor sentiment in Germany, mirroring reports through the summer months of stumbling business confidence following the erosion of previously buoyant demand for German goods. Across the eurozone business optimism in the last three months fell from net 35% to just 5%, according to Grant Thornton’s International Business Report, dragged down by a dramatic fall in German optimism, which plummeted from a net 79% to 36% over the period.

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Haven’t the read the great Keynes?

Merkel Vows Austerity Even as Growth Projection Cut (Bloomberg)

Chancellor Angela Merkel told lawmakers that Germany won’t raise public spending to stimulate the economy even after her government slashed growth forecasts for this year and next, a party official said. Europe’s biggest economy will probably grow by 1.2% this year and by 1.3% in 2015, marking respective drops from 1.8% and 2.0% forecast in April, the Economy Ministry said today. Merkel, addressing a closed-door meeting of members of her Christian Democratic Union-led bloc in Berlin today, vowed that her government will pursue its balanced budget goal regardless of the outlook, according to the CDU official, who asked not to be named because the session was private.

“We’re agreed in the German federal government that we must stay the course even in difficult times,” Finance Minister Wolfgang Schaeuble told reporters in Luxembourg today after a meeting of European Union finance ministers. A separate party official who attended the Berlin meeting told reporters later that Merkel said it’s more important than ever for the EU to hold to its rules and that Germany’s stance is crucial. If Germany deviates from its fiscal position, it would give other countries a reason to do likewise, she said. “This, in a word, is silly: Germany should borrow money and invest in infrastructure to boost growth,” Fredrik Erixon, director of the European Centre for International Political Economy in Brussels, said by phone. “Merkel and others have invented a story about how Germany always had an austere budget. Yet in postwar history, Germany has repeatedly shown far more fiscal policy flexibility to lift growth.”

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But it won’t, it’ll keep going until the end.

‘Bank of Japan Should Quit While It’s Ahead’ (Bloomberg)

The Bank of Japan should quit while it’s ahead. That’s the advice of the central bank’s former chief economist, Hideo Hayakawa. The BOJ should start paring its unprecedented easing soon or risk hurting people, Hayakawa said in an interview. Pushing inflation to a 2% target in a short period will raise living costs without boosting employment or growth, he said. “It’s important to quit while you’re ahead,” said Hayakawa, who was an executive director at the BOJ until March 2013. “Basically, drop the two-year reference, keep the 2% target and taper slowly.” The remarks underscore the risks Governor Haruhiko Kuroda is taking to reflate the world’s third-biggest economy with a stimulus program he began in April last year. While the BOJ is still winning its “gamble” with its stimulus, it shouldn’t push its luck, Hayakawa said. “The secret to success is declare victory while you’re winning,” he said.

With prices rising by about 1% and a labor shortage intensifying, the central bank will eventually achieve the inflation goal and shouldn’t rush, according to Hayakawa. Masayoshi Amamiya, BOJ’s executive director in charge of monetary affairs, said today in a parliamentary committee that the central bank’s easing helps invigorate the economy. With the BOJ buying assets at a record pace, it could face huge losses should interest rates start to rise, according to Hayakawa. The central bank buys about 7 trillion yen of Japanese government bonds a month. Growing public criticism of the yen’s recent weakness means the BOJ can’t stick to its current plan to reach 2% inflation, he said. “The short cut to achieving the 2% target is through a weak yen but that goes against public sentiment,” Hayakawa said. “It’s not good to go too far and get wounded later.”

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US and UK are supposedly doing well. But in reality, just like in the US, there are no consumers in Britain left either.

UK Economy Sinks at the Checkout Line (Bloomberg)

The U.K. supermarket scene is a microcosm of the British economy and holds up a mirror to the global backdrop in developed economies. Low wages and so-called flexible working contracts make it hard for workers to feel they’re sharing in the economic recovery, undermining consumer confidence; the grocery companies themselves, meantime, have no pricing power and are in a beggar-thy-neighbor race to the bottom, sacrificing margins to maintain sales. It’s a combination that should loom large in the Bank of England’s monetary policy deliberations, curtailing its instincts to raise interest rates. Similar considerations should be high on the Federal Reserve’s checklist of things to watch out for when it begins normalizing policy. And in Europe, this should be lighting a fire under the European Central Bank’s efforts to rejuvenate growth.

The price war among U.K. supermarkets has erased more than half of the value of Tesco in a year, making Britain’s biggest retailer the highest-profile victim of the battle. Tesco’s local difficulties notwithstanding — ditching the chief executive for his disastrous attempt to emulate Jeff Bezos’s strategy, followed by accounting irregularities that may turn out to be fraudulent and have led to eight employees being suspended – the discounting by two German retailers, Aldi and Lidl, have depressed food prices for the entire U.K. industry: Aldi increased its market share to 4.8% from 3.7% in the 12 weeks to Sept. 14, according to market researcher Kantar, while Lidl expanded to 3.5% from 3.0%. In response, Wm Morrison Supermarkets said this month it’s introducing a new loyalty card. Customers will be automatically reimbursed for the difference between what they pay in a Morrison store and any cheaper price available at Aldi, Lidl, Tesco, Sainsbury or Asda. Despite their protestations, all of the U.K. supermarkets are now discount stores.

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“The words are not lies. But they’re only not-lies because if they were found to be lies that would be counterproductive to the social policy goals, not because there’s any fundamental objection to lying.”

On The Precipice Of A Breakdown In Confidence (Ben Hunt)

Here is the most fundamental idea behind game theory, the one concept you MUST understand to be an effective game player. Ready? You are not a super genius, and we are not idiots. The people you are playing with and against are just as smart as you are. Not smarter. But just as smart. If you think that you are seeing more deeply into a repeated-play strategic interaction (a game!) than we are, you are wrong. And ultimately it will cost you dearly. But if there is a mutually acceptable decision point – one that both you and we can agree upon, full in the knowledge that you know that we know that you know what’s going on – that’s an equilibrium. And that’s a decision or outcome or policy that’s built to last. Fair warning, this is an “Angry Ben” email, brought on by the US government’s “communication policy” on Ebola, which is a mirror image of the US government’s “communication policy” on markets and monetary policy, which is a mirror image of the US government’s “communication policy” on ISIS and foreign policy.

We are being told what to think about Ebola and QE and ISIS. Not by some heavy-handed pronouncement as you might find in North Korea or some Soviet-era Ministry, but in the kinder gentler modern way, by a Wise Man or Woman of Science who delivers words carefully chosen for their effect in constructing social expectations and behaviors. The words are not lies. But they’re only not-lies because if they were found to be lies that would be counterproductive to the social policy goals, not because there’s any fundamental objection to lying. The words are chosen for their truthiness, to use Stephen Colbert’s wonderful term, not their truthfulness. The words are chosen in order to influence us as manipulable objects, not to inform us as autonomous subjects. It’s always for the best of intentions. It’s always to prevent a panic or to maintain confidence or to maintain social stability. All good and noble ends. But it’s never a stable equilibrium. It’s never a lasting legislative or regulatory peace.

The policy always crumbles in Emperor’s New Clothes fashion because we-the-people or we-the-market have not been brought along to make a self-interested, committed decision. Instead the Powers That Be – whether that’s the Fed or the CDC or the White House – take the quick and easy path of selling us a strategy as if they were selling us a bar of soap. This is what very smart people do when they are, as the Brits would say, too clever by half. This is why very smart people are, as often as not, poor game players. It’s why there aren’t many academics on the pro poker tour. It’s why there haven’t been many law professors in the Oval Office. This isn’t a Democrat vs. Republican thing. This isn’t a US vs. Europe thing. It’s a mass society + technology thing. It’s a class thing.

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Yeah, they’re doing absolutely fab.

Average UK Worker £5,000 A Year Worse Off (Guardian)

The protracted squeeze on pay packets since the financial crisis means the average worker in Britain is £5,000 a year worse off, a leading labour market expert warns on Wednesday. In advance of official figures expected to show that pay growth has again lagged far behind inflation over the summer months, Prof Paul Gregg of Bath University says that because wages have fallen in real terms since 2008, today they are nearly 20% below where they would be had wage growth continued. His calculations are likely to be seized on by Labour as it seeks to keep the “cost-of-living crisis” centre-stage before the election.

Labour market data on Wednesday is expected to underscore the pressure on household finances, with wage growth forecast at just 0.7% on the year over the three months to August, less than half the pace of inflation in August. That would mark just a small pick-up in pay growth from 0.6% in the three months to July. Gregg’s report for the university’s Institute for Policy Research (IPR) casts doubt on predictions from other economists that wage growth will start to pick up significantly in coming months. He warns that the government cannot rely on falling unemployment alone to restart sustained wage growth. Instead, Britain must turn around its relatively poor performance on productivity. “Continued falls in unemployment will lead to modest wage recovery, but this alone will not go far enough,” says Gregg.

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I’d use a much stronger term than that.

Youth Unemployment In Rich Middle East A ‘Liability’ (CNBC)

Youth unemployment across the wealthy Middle East is one of the region’s greatest challenges and liabilities, according to a report by the World Economic Forum (WEF). The Middle East and North Africa (MENA) might have abundant wealth as a result of natural resources such as oil and gas but the region has the highest regional youth unemployment rate in the world with 27.2% of under-25s unemployed in the Middle East. More than 29% are out of work in North Africa — more than double the global average, according to WEF’s report. With more than half of its population under 25 years old the MENA region now “stands at a critical juncture,” according to the report. It warns the youthful populace could turn into a “liability” rather than a “youth dividend” if an environment in which youth aspirations can be fulfilled is not created soon. “The demographic ‘youth bulge’ represents one of the greatest opportunities, as well as one of the greatest challenges, faced by the Arab World, ” the report, released in October, warns.

“Solutions to date show little progress in confronting the challenge of youth unemployment in a structural manner, in spite of existing financial means, ” the report which was compiled from a range of consultations with business, government and civil society leaders and academics in the region said. Countries belonging to the Gulf Cooperation Council (GCC), including Kuwait, Qatar, Saudi Arabia and the United Arab Emirates have persistently high youth unemployment rates, with the highest found in oil-rich Saudi Arabia where the rate hovers around 30%, data from the G20 organization showed this year. Despite the economic support of a spectacular rise in oil prices (the WEF estimates that today oil revenues account for at least 80% of total government revenues in all GCC countries), the fast economic expansion of the GCC during the past decades has not translated into jobs for the under-25s “suggesting that economic expansion is not enough to solve the youth unemployment challenge in the region,” WEF said.

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On Obama’s UN speech: “It’s sad, it’s like some kind of mental aberration.”

Russia-US Relations Reset ‘Impossible’: PM Medvedev (CNBC)

Russia’s Prime Minister has said a “reset” of relations with the United States is “impossible” and that ties between the two powers had been damaged by “destructive” and “stupid” sanctions imposed on the country in response for its role in the conflict in neighboring Ukraine. In an exclusive interview with CNBC, Dmitry Medvedev said any suggestion of a “reset”, as mooted by Russia’s foreign minister, Sergei Lavrov, in September, was out of the question.”No, of course not. It’s absolutely impossible. Let’s be clear: we did not come up with these sanctions. Our international partners did,” Medvedev said. Western countries have imposed wide-ranging sanctions on Russia since its annexation of the Crimean peninsula in March, targeting banks, oil producers and defense companies. In response, Russia has imposed retaliatory measures such as banning imports of European and U.S. fruit and vegetables.

Medvedev said the country would overcome the sanctions and believed they would be lifted in the near future. But they had “no doubt” damaged relations. He said he understood former Soviet countries’ concerns over Ukraine. But he felt that the “foundations international relations” were being undermined by the punishing sanctions. The position was “destructive” and “stupid”, he said. Medvedev expressed dismay at U.S. President Barack Obama’s speech before the UN General Assembly in which he labeled Russia a key threat, second only to the deadly Ebola virus and ahead of the terrorist threat posed by Islamic State. “I don’t want to dignify it with a response. It’s sad, it’s like some kind of mental aberration. We need to come back to a normal position, and only after that we can elaborate on how we are going to elaborate our positions in the future,” he said. He said the country hadn’t closed its doors to anyone however.

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Make that a month.

New US Price Tag for War Against ISIS: $40 Billion a Year (Fiscal Times)

With the war against ISIS off to a rocky start, there are signs that the Obama administration is getting ready to up the ante substantially on weaponry, manpower and aid to allies – at a cost of an additional $30 billion to $40 billion a year. Earlier, Gordon Adams, a military analyst at American University, told The Fiscal Times that the mission to stop ISIS will cost $15 billion to $20 billion annually, based on his “back of the envelope” calculations. Other analysts have made similar forecasts. But based on soundings of the defense establishment, Adams said Thursday that the Defense Department would almost certainly request funding of twice that level later this year.

The estimated $30 billion to $40 billion of new spending would come on top of the Pentagon’s $496 billion fiscal 2015 operating budget for personnel and contractors and the roughly $58.6 billion in an “Overseas Contingency Operation” fund that is used to finance U.S. war operations in the Middle East. The OCO, as it is known, has paid for the protracted U.S. military engagement in the Middle East with borrowing that adds to the long-term U.S. debt. If Adams’ projections are correct, then the OCO would total as much as $80 billion to $90 billion in the coming year.

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“Welcome to the diminishing returns of the global economy. They’ve been there all along, but none previously were sufficiently vivid or horrifying as ebola.”

Real Life is Not Spin Art (Jim Kunstler)

The authorities keep emphasizing that the nurse who caught ebola from Thomas Eric Duncan was sealed in her haz-mat suit the whole time she cared for the poor fellow and blah blah nobody knows how she could possibly catch the darn thing…. But the newspapers and cable news networks are not asking: What about all the people, ordinary civilians, that this nurse was consorting with off-work, after she took off her haz-mat suit and, let’s say, at some point stopped by the Kroger Store’s fabulous steam table display of take-out goodies behind the helpful and reassuring sneeze-guard on her way back home? It sounds like a new Netflix drama – The Fatal Mac and Cheese.

If one more person in that chain of circumstance falls ill, Rick Perry will have to ring-fence Dallas faster than you can say Guadalupe Hidalgo and then we’ll be off to the quarantine races in America. It will be interesting to see who’s shorting the airline stocks a few hours from now. I’ve got to pass through Dulles airport tomorrow myself, and then two more foreign hubs after that, and return to freakin’ Newark International at the end of the week when a fullblown ebola panic may be underway. For the moment, I’m in Washington for a conference on population and immigration. Believe it or not there are some people who want to have an honest national conversation about these issues amid all the disingenuous chatter about “dreamers” emanating from the Oval Office in this miserable era of politics-as-spin-art. And along comes the galvanizing event of a really serious disease to finally force the issue. Nothing concentrates a nation’s attention like the specter of the people next door bleeding out through their ears and noses.

Welcome to the diminishing returns of the global economy. They’ve been there all along, but none previously were sufficiently vivid or horrifying as ebola. The Chinese FoxConn workers throwing themselves out the factory windows in despair just seemed like some kind of fraternity prank in comparison. Now something has got loose from the Heart of Darkness like the hissing beastie that burst out of John Hurt’s ribcage in Alien and water-skied out of the sick bay into the bowels of the cargo ship Nostromo. Sometimes a metaphor is just a figure of speech and sometimes it’s liable to set your hair on fire.

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Farrell’s still on his climate and population quest.

‘Star Trek’ Time Capsule 2047 Launches As Earth Burns (Paul B. Farrell)

One very special “Star Trek: The Next Generation” episode haunts me. From stardate 45944.1: “The Inner Light” gives us a brief glance at the star-crossed future of two civilizations. One boldly exploring new worlds. The other leaving behind a brief snapshot of its mysterious death. A bold metaphor for our own planet, in the near future, perhaps 2047? The facts: The U.S.S. Enterprise is on a research mission, completing a magnetic survey of the Parvenium system when it encounters a probe floating in space. Suddenly a telepathic energy bolt drops Capt. Jean-Luc Picard on the deck, unconscious. He wakes up on a strange planet. Dazed, recovering from a fever as “Kamin.” He cannot recognize his wife. Friends think he’s delusional, mumbling about being a starship captain. Time passes. He gradually adapts to this new reality on this far-off world. Memories of his prior life slowly fade. He falls in love with his wife again, raises a family, his children give him grandchildren. He lives the quiet, peaceful life he never imagined in his space travels.

The planet’s natural resources gradually disappear as temperatures rise. Water gets scarce. Desert lands replace forests and rich farmlands. Food supplies depleted. The planet is dying. Near the end, he stands alone, a wide brimmed hat shielding his eyes from the blinding sun, watching the launch of a rocket, soaring into the clouds, contrails disappearing into the heavens, carrying the final record of a great civilization on a once-rich planet. Suddenly the probe powers off. Picard wakes up on the floor of the Enterprise bridge. Only a few minutes had passed. Back in command. Engines power up. They accelerate to warp, continuing on their mission, boldly going where no one has gone before. Picard is left with long memories of a simpler life on a planet that vanished thousands of years earlier. Alone in his quarters, Picard begins playing the flute retrieved from within the drifting space probe. A haunting melody fills his ship … time and space fade to black.

A metaphor for Earth? Perhaps, but which one? We live with 7.3 billion people today. By 2047 the United Nations estimates the population will rocket to 10 billion, with everyone competing with America’s 400 million capitalists for ever-scarcer resources. Yes, huge odds against us, with the rest of the world outnumbering us 22 to 1. Every nation, every society, everyone fighting for their own version of the American Dream, in an unsustainable lifestyle war that will require the resources of not one but six planets. An impossible quandary in a world where population demographics – the bubble of all bubbles – becomes the force driving all other bubbles, economic, political, cultural. The ultimate force driving us in an accelerating trajectory into an unsustainable reality on a planet that can never feed 10 billion people.

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No native species left soon.

UK Waterways Face ‘Invasional Meltdown’ From European Organisms (BBC)

Scientists are warning that an army of species from Turkey and Ukraine is poised to invade Britain’s waterways. One organism, the quagga mussel, was discovered in a river near London just weeks ago. At least 10 others are established in the Netherlands and there is a “critical risk” of them coming here. Researchers are also concerned that invaders, including the killer shrimp, will rapidly spread and devastate native species. The research has been published in the Journal of Applied Ecology. In the study, the team from the University of Cambridge looked at 23 invasive species that originate from the waters of the Black, Azov and Caspian seas. They believe these creatures have spread across Europe in recent years because of canal construction that has helped them move outside their native range.

At least 14 of the species are now well established in the Rhine estuary and in Dutch ports. Four, including the bloody red shrimp, have recently crossed the Channel and established themselves here. Others are likely to follow. According to the authors, Britain faces an “invasional meltdown”. “I think we are at a tipping point,” said Dr David Aldridge, the report’s co-author. “We’ve been watching species heading our way from the Ponto-Caspian region for the past 20 years or so. They are all building up in the Rhine system just over the ocean. “We think that particularly now that the quagga mussel has just arrived, we are about to have a big meltdown.”

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Well, obviously. The more hosts a virus has to replicate in, the more mutations.

Ebola Outbreak Boosts Odds of Mutation Helping It Spread (Bloomberg)

The Ebola virus circulating in West Africa is already different from previous strains. While scientists don’t fully understand what the changes mean, some are concerned that alterations in the virus that occur as that pathogen continues to evolve could pose new dangers. Researchers have identified more than 300 new viral mutations in the latest strain of Ebola, according to research published in the journal Science last month. They are rushing to investigate if this strain of the disease produces higher virus levels — which could increase its infectiousness. So far, there is no scientific data to indicate that. The risk, though, is that the longer the epidemic continues, the greater the chance that the virus could change in a way that makes it more transmissible between humans, making it harder to stop, said Charles Chiu, an infectious disease physician who studies Ebola at the University of California at San Francisco.

“If the outbreak continues for a prolonged period of time or it becomes endemic, it may mutate into a form that is more virulent,” said Chiu. “It is really hard to predict.” Viruses such as Ebola, whose genomes are made from ribonucleic acid, are constantly mutating. Some mutations are good for the virus and some are bad for the virus, said Ian Mackay, a virologist at the University of Queensland. It’s the ones that are good for the virus that tend to stick around. “Viruses don’t think. They make mutations that are good for them,” he said. “If it helps the virus spread or replicate faster it will be around more.” “It is a numbers game, the more cases you have the more likely there are going to be mutations that could change the virus” in a significant way, said David Sanders, a professor of biological sciences at Purdue University who studies Ebola. “The more it persists, the more likely we are going to be thrown a curve.”

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Scared yet? What’s with the protocol?

Second Health Care Worker Tests Positive For Ebola In Texas (CNBC)

A second health care worker has tested positive for Ebola in the U.S., the Texas Department of Health said on Wednesday. The person, who was employed at Texas Health Presbyterian Hospital, was among those who took care of Thomas Eric Duncan after he was diagnosed with Ebola. “Health officials have interviewed the latest patient to quickly identify any contacts or potential exposures, and those people will be monitored,” the Texas Department of Health said in a statement. “The type of monitoring depends on the nature of their interactions and the potential they were exposed to the virus.”

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And counting.

WHO Sees 10,000 Ebola Cases a Week in West Africa by Dec. 1 (Bloomberg)

The number of new Ebola cases in three West African nations may jump to between 5,000 and 10,000 a week by Dec. 1 as the deadly viral infection spreads, the World Health Organization said. The outbreak is still expanding geographically in Guinea, Sierra Leone and Liberia and accelerating in capital cities, Bruce Aylward, the WHO’s assistant director-general in charge of the Ebola response, said in a briefing with reporters in Geneva. There have been about 1,000 new cases a week for the past three to four weeks and the virus is killing at least 70% of those it infects, he said. “Any sense that the great effort that’s been kicked off over the last couple of months is already starting to see an impact, that would be really, really premature,” Aylward said. “The virus is still moving geographically and still escalating in capitals, and that’s what concerns me.”

The WHO’s forecast shows the magnitude of the task facing governments and aid groups as they try to bring the worst-ever Ebola outbreak under control. More than 8,900 people have been infected with Ebola in the three countries, with more than 4,400 deaths, the WHO said. The effects of the epidemic have rippled outward in recent weeks, adding to concern that Ebola may spread in the U.S. and Europe. The first two cases of Ebola being contracted outside Africa occurred, with health workers in Madrid and Dallas falling ill after caring for infected patients. The U.S. and the U.K. began screening some airline passengers on arrival in the past few days. [..] To bring the outbreak under control, there needs to be a common operational plan among all aid groups and governments, Aylward said. That means having people in every county or district responsible for burials, finding infected people and tracing who they’ve been in contact with, and isolating those who are ill and managing their care, he said. “Those pieces are not systematically in place,” he said.

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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.

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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.

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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.

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