May 032016
 
 May 3, 2016  Posted by at 9:14 am Finance Tagged with: , , , , , , , , , , ,  


DPC French Market, New Orleans 1910

The EU Exists Only To Become A Superstate (Lawson)
US Dollar Falls To 1-Year Low (BBG)
Yen Under Pressure to Extend World-Beating Rally Against Dollar (BBG)
Kuroda Kollapse Kontinues As USDJPY Nears 105 Handle (ZH)
BOJ Chief Kuroda Warns Current Yen Strength Risks Harming Recovery (BBG)
China Factory Activity Contracts for 14th Straight Month In April (CNBC)
Fed’s Williams Sees Big Drop In Asset Prices As Systemic Risk (R.)
Apple’s Losing Streak Is Nearing Historic Levels (BBG)
No Alternative To Low Rates For Now, Draghi Says (R.)
ECB Report Says Investors May Be Profiting From Leaked US Data (FT)
Six Counterpoints About Australian Public Debt (Stanford)
‘Bank of Mum and Dad’ Behind 25% Of British Mortgages (G.)
Dominoes: Vanishing Arctic Ice Shifts Jet Stream, Which Melts Glaciers (WaPo)
Germany Wants To Extend Border Controls For Another 6 Months (AP)
Denmark Extends Controls On German Border (EN)
EU States Face Charge For Refusing Refugees (FT)
90,000 Unaccompanied Minors Sought Asylum In EU In 2015 (R.)

I don’t think I have much in common with Nigel Lawson -aka Lord Lawson of Blaby-, but it’s important that this ‘little fact’ be known and exposed. Even a superstate needs values if it is to survive. The EU ain’t got any left. Who wants to belong to that?

The EU Exists Only To Become A Superstate (Lawson)

For Britain, the issue in the coming European referendum is not Europe, with its great history, incomparable culture, and diverse peoples, but the European Union. To confuse the two is both geographically and historically obtuse. European civilisation existed long before the coming of the EU, and will continue long after this episode in Europe’s history is, hopefully, over. On the European mainland it has always been well understood that the whole purpose of European integration was political, and that economic integration was simply a means to a political end. In Britain, and perhaps also in the US, that has been much less well understood, particularly within the business community, who sometimes find it hard to grasp that politics can trump economics. The fact that the objective has always been political does not mean that it is in any way disreputable.

Indeed, the most compelling original objective was highly commendable. It was, bluntly, to eliminate the threat to Europe and the wider world from a recrudescence of German militarism, by placing the German tiger in a European cage. Whether or not membership of the EU has had much to do with it, that objective has been achieved: there is no longer a threat from German militarism. But in the background there has always been another political objective behind European economic integration, one which is now firmly in the foreground. That is the creation of a federal European superstate, a United States of Europe. Despite the resonance of the phrase, not one of the conditions that contributed to making a success of the United States of America exists in the case of the EU. But that is what the EU is all about. That is its sole raison d’être. And, unlike the first objective, it is profoundly misguided.

For the United Kingdom to remain in the EU would be particularly perverse, since not even our political elites wish to see this country absorbed into a United States of Europe. To be part of a political project whose objective we emphatically do not share cannot possibly make sense. It is true that our present Prime Minister argues that he has secured a British “opt-out” from the political union, but this is completely meaningless. “But,” comes the inevitable question, “what is your alternative to membership of the EU?” A more absurd question it would be hard to envisage. The alternative to being in the EU is not being in the EU. And it may come as a shock to the little Europeans that most of the world is not in the EU – and that most of these countries are doing better economically than most of the EU.

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Why don’t I see nobody accuse the US of currency manipulation?! That still the Shanghi Accord legacy?

US Dollar Falls To 1-Year Low (BBG)

The dollar fell to an 18-month low against the yen and touched its weakest since August versus the euro amid speculation that the U.S. won’t raise interest rates any time soon. The U.S. currency has lost ground versus most major peers over the past month as traders lowered expectations for a rate increase by the Federal Reserve in June to 12%. The Bloomberg Dollar Spot Index headed for the lowest close in almost a year, after a report showed manufacturing in the U.S. expanded less than forecast. Persistent weakness dragged the dollar down against the euro for a third straight month in April – its longest losing streak since 2013 – amid signs U.S. policy makers aren’t convinced the global and domestic economies can withstand higher borrowing costs.

It fell on Tuesday against Australia’s currency as Chinese equities climbed by the most in nearly three weeks. The U.S. has posted disappointing growth data as nascent signs of recovery emerge in Europe and China’s growth momentum accelerates. “The Fed is completely out of the picture now for the next few weeks – even with the June meeting, there’s got to be a lot of doubt about whether the Fed can raise rates,” said Shaun Osborne at Bank of Nova Scotia in Toronto. “The dollar has just not done particularly well over the past few weeks as the Fed has moved toward delaying rate hikes, and that’s a situation that definitely will continue, certainly for the near term.”

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Abe must be going nuts.

Yen Under Pressure to Extend World-Beating Rally Against Dollar (BBG)

The yen’s world-beating rally against the dollar looks to be gathering momentum, as central bank inaction on both sides of the Pacific Ocean leaves inflation expectations to drive the exchange rate. Japan’s currency extended its climb to an 18-month high Monday after Bank of Japan Governor Haruhiko Kuroda refrained from adding to stimulus on Thursday. That took its gain this year to 13%, the most among developed-market peers. The BOJ’s decision came just hours after Federal Reserve Chair Janet Yellen frustrated dollar bulls by reiterating she’s in no rush to cool the economy by raising interest rates. JPMorgan sees further yen gains after the U.S. put Japan on a new currency watch list.

With consumer price pressures building in the U.S. and dissipating in Japan, that narrows the gap in so-called real yields – the returns an investor can expect after accounting for inflation – supporting yen strength. If both central banks stay on the sidelines, Credit Suisse projects Japan’s currency could rapidly appreciate toward 90 per dollar. “So long as the Fed signals that they are being cautious in raising rates, real yields in the U.S. will decline, leading the dollar weaker,” said Hiromichi Shirakawa, the Swiss lender’s chief Japan economist and a former BOJ official. “The currency market is in a rather dangerous zone.” The BOJ’s benchmark for measuring progress toward its 2% target showed prices retreated at an annual 0.3% pace in March, the biggest decline since April 2013, the month that Kuroda initiated his stimulus program.

It had previously hovered near zero for more than a year. By contrast, the Fed’s preferred measure of inflation, based on the prices of goods and services consumers buy, rose 0.8% in the year through March. The so-called core measure, which strips out food and energy prices, climbed 1.6%. That’s seen a Treasury market gauge of inflation expectations over the coming decade – called the break-even rate – jump to 1.7% from as low as 1.2% in February. The equivalent measure in Japan is languishing at 0.3%. Benchmark 10-year Treasury Inflation Protected Securities yield around 0.1%, compared with about minus 0.5% for equivalent Japanese notes.

Japan met two of three criteria used to judge unfair practices in the U.S. report: a trade surplus with the U.S. above $20 billion, and a current-account surplus amounting to more than 3% of gross-domestic product. The third would be a repeated depreciation of the currency by buying foreign assets equivalent to 2% of gross domestic over a year. Meeting all three would trigger action by the U.S. president to enter discussions with the country and seek potential penalties. China, Germany, South Korea and Taiwan also made the watch list.

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“..Perhaps Jack Lew’s “currency manipulation” report was enough to stall the Japanese currency war for now?..”

Kuroda Kollapse Kontinues As USDJPY Nears 105 Handle (ZH)

Either The BoJ steps in soon and intervenes (even by just “checking levels”) or Kuroda-san is truly terrified of The G-20. USDJPY has now crashed 7 handles since last Thursday’s shock BoJ disappointment crashing to within 5 pips of a 105 handle tonight for the first time in 18 months…

 

 

Erasing the entire devaluation post-Fed, post QQE2…

 

Perhaps Jack Lew’s “currency manipulation” report was enough to stall the Japanese currency war for now? Or is China greatly rotating its Yuan devaluation pressure against another member of its basket…?

 

Charts: Bloomberg

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1) What recovery? 2) Abe and Kuroda are powerless prisoners to America’s dollar manipulation

BOJ Chief Kuroda Warns Current Yen Strength Risks Harming Recovery (BBG)

Bank of Japan Governor Haruhiko Kuroda warned that the yen’s biggest rally since Abenomics began risks harming the nation’s economic recovery. Speaking to reporters in Frankfurt Monday, Kuroda also reiterated that BOJ policy makers won’t hesitate to expand monetary stimulus in order to achieve their 2% inflation target. Japanese Prime Minister Shinzo Abe said the same day in Paris that rapid movements in exchange rates are undesirable, according to national broadcaster NHK. “There is a risk that the yen’s current appreciation brings an unwelcome impact on the economy,” Kuroda said on the sidelines of an annual gathering of finance chiefs from members of the Asian Development Bank, which he used to lead.

“We will be closely monitoring the impact of financial markets on the real economy and prices.” A weaker currency has been a linchpin of Abe’s program to stoke growth and exit deflation. Japan’s economy is at risk of sliding into its second recession in two years after contracting in the final three months of 2015, while inflation remains far from the BOJ’s target. One gauge showed consumer prices retreated at an annual 0.3% pace in March, the biggest decline since April 2013, the month that Kuroda initiated his stimulus program. The yen has climbed 13% against the dollar this year, the best performance among its developed-market peers. That has chipped away at the 36% decline over the previous four years, which was triggered by Abe’s pledge of unlimited monetary easy to correct yen strength.

Kuroda and his board left policy settings unchanged at a meeting Thursday, spurring a nearly 5%, two-day surge in the yen against the dollar. It reached an 18-month high of 106.05 per greenback on Tuesday, before trading at 106.19 as of 9:54 a.m. in Singapore. Japanese markets are closed for holidays Tuesday, Wednesday and Thursday this week.

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Beyond salvation.

China Factory Activity Contracts for 14th Straight Month In April (CNBC)

Activity in China’s manufacturing sector unexpectedly declined further in April, a private survey showed Tuesday, reviving doubts over the health of the world’s second-largest economy. The Caixin Manufacturing Purchasing Managers’ Index (PMI) fell to 49.4 in April from 49.7 in March, according to Markit, which compiles the index. A reading above 50 indicates expansion; one below indicates contraction. The Caixin PMI, which focuses on smaller and medium-sized enterprises, was last in expansionary territory in February 2015. The official PMI, which targets larger companies, printed at 50.2 in April, the second successive month of expansion, figures released over the weekend showed. The survey findings follow recent economic data that appeared to suggest that China’s economy was slowly regaining its poise after a torrid 12 months.

China’s exports rose at their fastest clip in a year in March, while industrial profits also picked up in the first quarter. A flurry of rate cuts and easing of reserve requirement have helped bolster sentiment, while the capital outflows that had unnerved sentiment at the start of the year have slowed. The Caixin survey, however, cast a more somber picture. Respondents reported stagnant new orders, while new export work fell for a fifth month running. Companies shed staff as client demand was muted. “The fluctuations indicate the economy lacks a solid foundation for recovery and is still in the process of bottoming out. The government needs to keep a close watch on the risk of a further economic downturn,” said He Fan at Caixin Insight Group.

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What blows up must blow down.

Fed’s Williams Sees Big Drop In Asset Prices As Systemic Risk (R.)

San Francisco Fed President John Williams reiterated Monday his view that the U.S. economy is ready for higher interest rates, but flagged the risk of broad-based declines in asset prices as a result. “It makes sense for us to be moving interest rates gradually back to more a normal level over the next couple years,” Williams said. “I actually think that’s a sign of strength for the global economy.” Speaking at a panel on systemic risk at the Milken Institute Global Conference, Williams said the biggest systemic financial risk currently is the possibility that “broad sets of assets are going to see big movements downward” as interest rates rise. “That’s an area that I think is a potential risk.” Williams did not suggest he sees another crisis brewing, adding that U.S. regulators have made “amazing” progress in shoring up banks against potential future failure.

“What I worry a lot more about is when people forget about the financial crisis, when they forget about the terrible things that happened,” he said, suggesting that may not happen for another five or ten years. The Fed raised interest rates for the first time in nearly a decade last December, but has held off raising them any further amid global stock volatility and worries over a decline in global growth. Even after the Fed resumes raising rates, Williams said, it will not be able to lift them as high as it has in the past. Most Fed officials currently think that the rate at which the economy can sustain healthy employment and steady prices has probably fallen to about 3.25% in the long run, a full %age point lower than was the case before the crisis. But there are significant downside risks to that estimate, Williams said.

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No. 1 US stock for years.

Apple’s Losing Streak Is Nearing Historic Levels (BBG)

So far in 2016, Apple is the dog of the Dow. After an underwhelming earnings report led to the shares’ worst week since January 2013, Apple stock extended its losses to kick off May, closing down 0.18% on Monday. The benchmark index’s laggard has declined by nearly 11% so far this year heading into today’s session: Bespoke Investment Group notes that Monday’s negative close marks eight straight sessions in the red for Apple—something that last happened in July 1998, and has now happened only four times in the company’s history. More than $79 billion in Apple’s market capitalization has been erased over the past eight sessions.

The company’s heavy weighting in major sector and benchmark indexes, coupled with the stock’s terrible two-week stretch, has made $4 billion in assets of exchange-traded funds evaporate over this stretch. “Smart beta” ETFs are poised to trounce their more popular peers, Bloomberg’s Eric Balchunas observes, in the event that this span of underperformance continues. There’s a possible silver lining for Apple bulls, and investors who own those market-cap-weighted ETFs: The stock tends to bounce back in earnest following these rare stretches of rotten performance. “Two of the three eight-day streaks saw the stock fall on day nine as well, but the stock has never experienced a losing streak longer than nine trading days,” Bespoke writes. “While the next day and next week returns following eight-day losing streaks lean negative, the stock has been higher over the next month all three times for a median gain of 8.01%.”

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Well, there is, but Draghi’s masters don’t want it.

No Alternative To Low Rates For Now, Draghi Says (R.)

Low interest rates are not harmless but they are only the symptom, not the cause of an underlying problem across major economies, ECB President Mario Draghi said on Monday, arguing that there was no alternative for now. “Thus the second part of the answer to raising rates of return is clear: continued expansionary policies until excess slack in the economy has been reduced and inflation dynamics are sustainably consistent again with price stability,” Draghi told a conference. “There is simply no alternative to this today.” “The only potential margin for maneuver is in the composition of the policy mix, that is, the balance of monetary and fiscal policy,” he added.

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Corruption is not a deficiency, it’s the MO.

ECB Report Says Investors May Be Profiting From Leaked US Data (FT)

US investors may be profiting from leaked economic data releases that allow them to front-run market-moving news, according to a research paper published by the ECB. Macroeconomic news announcements can move markets, as traders watch for indications about how the economy is performing. The data are released to everyone at the same time to ensure fairness but ECB researchers said they had found evidence of “informed trading” ahead of US data releases. Of the 21 market-moving announcements analysed, seven “show evidence of substantial informed trading before the official release time”, according to the paper, including two releases from the US government. The pre-release “price drift” accounts for about half of the overall price impact from the announcement.

The researchers looked at the impact on futures tracking the S&P 500 stock index and the 10-year Treasury bond for the 30 minutes preceding the announcement. The researchers also note that the price impact has become worse since 2008, and estimate that since 2008 profits in the S&P “e-mini” futures market alone amount to about $20m per year. “These results imply that some traders have private information about macroeconomic fundamentals,” said the report. “The evidence suggests that the pre-announcement drift likely comes from a combination of information leakage and superior forecasting based on proprietary data collection and reprocessing of public information.”

The paper raises questions about the safeguards used to ensure data are protected up until scheduled release time. Important economic indicators in the US are subject to the “Principle Federal Economic Indicator” guidelines, but the report notes that many distributors of the data are not subject to the same rules. “To ensure fairness, no market participant should have access to this information until the official release time,” the report added. “Yet, in this paper we find strong evidence of informed trading before several key macroeconomic news announcements.”

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Household debt is a much bigger factor is some countries than others. In Australia, it’s far bigger than government debt. But the latter is what all political talk is about. “Pumping up fear of government debt is always an essential step in preparing the public to accept cutbacks in essential public services.”

Six Counterpoints About Australian Public Debt (Stanford)

In the lead-up to today’s pre-election Commonwealth budget, much has been written about the need to quickly eliminate the government’s deficit, and reduce its accumulated debt. The standard shibboleths are invoked liberally: government must face hard truths and learn to live within its means; government must balance its budget (just like households do); debt-raters will punish us for our profligacy; and more. Pumping up fear of government debt is always an essential step in preparing the public to accept cutbacks in essential public services. And with Australians heading to the polls, the tough-love imagery serves another function: instilling fear that a change in government, at such a fragile time, would threaten the “stability” of Australia’s economy.

However, this well-worn line of rhetoric will fit uncomfortably for the Coalition government, given its indecisive and contradictory approach to fiscal policy while in office. The deficit has gotten bigger, not smaller, on their watch, despite the destructive and unnecessary cutbacks in public services imposed in their first budget. Their response to Australia’s fiscal and economic problems has consisted mostly of floating one half-formed trial balloon after another (from raising the GST to transferring income tax powers to the states to cutting corporate taxes), with no systematic analysis or framework. And their ideological desire to invoke a phony debt “crisis” as an excuse for ratcheting down spending will conflict with another, more immediate priority: throwing around new money (or at least announcements of new money), especially in marginal electorates, in hopes of buying their way back into office.

In short, the politics of debt and deficits will be both intense and complicated in the coming weeks. To help innoculate Australians against this hysteria, here are six important facts about public debt, what it is – and what it isn’t.

1. Australia’s public debt is relatively small

3. Other sectors of society borrow much more than government

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Somone should explain to these people what’s going on. Mum and Dad will lose their shirts AND their skirts. Ironically, some insist more homes must be build. Ironoc, because that would mean even steeper losses for those buying into today’s craze.

‘Bank of Mum and Dad’ Behind 25% Of British Mortgages (G.)

The “Bank of Mum and Dad” will help finance 25% of UK mortgage transactions this year, according to research. Parents are set to lend their children £5bn to help them on to the property ladder. If the lending power was of all these parents was combined, it would be a top 10 mortgage provider. Nigel Wilson, chief executive of Legal & General, which carried out the research, said the data showed a number of issues, including house prices being “out of sync with wages”. The research estimated that the Bank of Mum and Dad will provide deposits for more than 300,000 mortgages. The homes purchased will be worth £77bn and the average contribution is £17,500 or 7% of the average purchase price.

But relying on parental support might soon be unsustainable as parents could be giving away more than they can afford. Wilson said that in London the funding method was reaching “tipping point” already as parental contributions made up more than 50% of the wealth (excluding property) of the average household in the capital. He said: “The Bank of Mum and Dad plays a vital role in helping young people to take their early steps on to the housing ladder.” Not all young people have parents who can afford to help them and some who do still do not have enough to buy a place of their own, he said. He added: “We need to fix the housing market by revolutionising the supply side – if we build more houses, demand can be met at a sensible level and prices will stabilise relative to wages.”

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Positive feedback.

Dominoes: Vanishing Arctic Ice Shifts Jet Stream, Which Melts Glaciers (WaPo)

Investigating the factors affecting ice melt in Greenland — one of the most rapidly changing places on Earth — is a major priority for climate scientists. And new research is revealing that there are a more complex set of variables affecting the ice sheet than experts had imagined. A recent set of scientific papers have proposed a critical connection between sharp declines in Arctic sea ice and changes in the atmosphere, which they say are not only affecting ice melt in Greenland, but also weather patterns all over the North Atlantic. The new studies center on an atmospheric phenomenon known as “blocking” — this is when high pressure systems remain stationary in one place for long periods of time (days or even weeks), causing weather conditions to stay relatively stable for as long as the block remains in place.

They can occur when there’s a change or disturbance in the jet stream, causing the flow of air in the atmosphere to form a kind of eddy, said Jennifer Francis, a research professor and climate expert at Rutgers University. Blocking events over Greenland are particularly interesting to climate scientists because of their potential to drive temperatures up and increase melting on the ice sheet. “When they do happen, and they kind of set up in just the right spot, they bring a lot of warm, moist air from the North Atlantic up over Greenland, and that helps contribute to increased cloudiness and warming of the surface,” Francis said. “When that happens, especially in the summer, we tend to see these melt events occur.” Now, two new studies have suggested that there’s been a recent increase in the frequency of melt-triggering blocking events over Greenland — and that it’s likely been fueled by climate change-driven losses of Arctic sea ice.

A paper set to be published Monday in the International Journal of Climatology reveals an uptick in the frequency of these blocking events over Greenland since the 1980s. A team of researchers led by the University of Sheffield’s Edward Hanna used a global meteorological dataset relying on historical records to measure the frequency and strength of high pressure systems over Greenland all the way back to the year 1851. Previous analyses had only extended the record back to 1948, so the new study is able to place recent blocking events in a much larger historical context. When the researchers analyzed the data, they found that the increase in blocking frequency over the past 30 years is particularly pronounced in the summer, the time of year when blocking events are likely to have the biggest impact on ice melt.

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Clueless, rudderless, valueless.

Germany Wants To Extend Border Controls For Another 6 Months (AP)

Germany and some other EU countries are planning to ask the European Commission for an extension of border controls within the Schengen passport-free travel zone for another six months because they fear a new wave of migrants. Interior Minister Thomas de Maizere’s spokesman says a letter is being sent Monday asking for an extension of the controls on the German-Austrian border, which were implemented last year when thousands of migrants crossed into Germany daily. De Maizere has expressed concern before that an increasing number of migrants will try to reach Europe this summer by crossing the Mediterranean Sea from lawless Libya to Italy, then travel north to Austria and Germany. Germany registered nearly 1.1 million new arrivals last year and is keen to bring the numbers down in 2016.

Germany’s defense minister, meanwhile, said it was up to Italy to protect its borders but other European countries must be ready to help if needed. Ursula von der Leyen’s comments Monday touched on the potential problems Italy could have with increased arrival of migrants looking for an alternative route into the EU now that the West Balkans route is closed and Turkey has committed to taking back those arriving illegally to Greece. She said a solution must be found “together with Italy.” Austria plans to impose border controls at its main border crossing with Italy to prevent potential attempts by migrants to enter, and with Austria bordering Germany, von der Leyen’s comments indicate her country’s concern that it also may have to deal with new waves of migrants seeking entry.

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“..We have to protect ourselves against the Islamic State group..”

Denmark Extends Controls On German Border (EN)

Denmark has extended temporary controls on its border with Germany, first imposed in January to help regulate an influx of migrants. The measures have been prolonged by another month until the beginning of June. The European Commission, struggling to prevent the collapse of the Schengen agreement, has confirmed it will soon authorise more such extensions. The Danish government says it has joined several countries in writing to the Commission asking for a two-year extension. “Together with the Germans, the French, the Austrians and the Swedes I have today sent a letter to the EU commission asking for the possibility to extend the border control for the next two years,” said Inger Støjberg, Danish minister of immigration and integration.

“I have done so because we need to look out for Denmark. We have to protect ourselves against the Islamic State group, who are trying to take advantage of the situation where there are holes in borders. But also as protection against the influx of refugees coming through Europe.” The Commission could give the green light as early as Wednesday to countries within the passport-free Schengen zone wishing to extend exceptional border controls. The five countries have taken the measures because of the influx of migrants and refugees heading north via the so-called Balkans route after entering Europe via the Greek shores. Although the crisis has eased, the governments say many migrants are still camped along the route and in Greece.

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The cattle trade continues unabated. Europeans are as immoral as their leadership.

EU States Face Charge For Refusing Refugees (FT)

European countries that refuse to share the burden of high immigration will face a financial charge of about €250,000 per refugee, according to Brussels’ plans to overhaul the bloc’s asylum rules. The punitive financial pay-off clause is one of the most contentious parts of the European Commission’s proposed revision of the so-called Dublin asylum regulation, due to be revealed on Wednesday. It represents the EU’s most concerted attempt to salvage an asylum system that collapsed under the weight of a million-strong migration to Europe last year, endangering the principle of passport-free travel in the Schengen area. In recent weeks migrant flows to Greece have fallen due to tighter controls through the western Balkans and a deal with Turkey to send-back asylum seekers arriving on Greek islands.

However, the EU remains as politically divided as ever over strengthening the bloc’s asylum rules. While acknowledging these political constraints, the commission’s reforms aim to gradually shift more responsibility away from the overwhelmed frontline states, such as Greece, in future crises, primarily through an automatic system to share refugees across Europe if a country faces a sudden influx. Crucially, this is backed by a clause that allows immigration-wary countries to pay a fee — set at a deliberately high level — if they want to avoid taking relocated asylum seekers for a temporary period. According to four people familiar with the proposal, this contribution was set at €250,000 per asylum seeker in Monday’s commission draft. But those involved in the talks say it may well be adjusted in deliberations over coming days.

“The size of the contribution may change but the idea is to make it appear like a sanction,” said one official who has seen the proposal. Another diplomat said in any event the price of refusing to host a refugee would be “hundreds of thousands of euros”. Eastern European states such as Poland and Hungary would welcome alternatives to mandatory asylum quotas but will balk at the high penalties suggested. At the commission’s recommended rate, Poland would need to pay around €1.5bn to avoid its existing 6,200 quota to relocate refugees from Italy and Greece. These financial contributions are in part designed to fix incentives around migrant quotas, which have badly failed and proved almost impossible to implement even once agreed in law. The commission proposal builds on the EU’s flagship emergency scheme to relocate 160,000 refugees, which has barely redistributed 1% of its target since it was agreed last year.

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And how many did you say are unaccounted for, Europe?

90,000 Unaccompanied Minors Sought Asylum In EU In 2015 (R.)

Some 88,300 unaccompanied minors sought asylum in the EU in 2015, 13% of them children younger than 14, crossing continents without their parents to seek a place of safety, EU data showed on Monday. More than a million people fleeing war and poverty in the Middle East and Africa reached Europe last year. While that was roughly double the 2014 figure, the number of unaccompanied minors quadrupled, statistics agency Eurostat said. Minors made up about a third of the 1.26 million first-time asylum applications filed in the EU last year. EU states disagree on how to handle Europe’s worst migration crisis since World War II and anti-immigrant sentiment has grown, even in countries that traditionally have a generous approach to helping people seeking refuge.

Four in 10 unaccompanied minors applied for asylum in Sweden, where some have called for greater checks, suspicious that adults are passing themselves off as children in order to secure protection they might otherwise be denied. Eurostat’s figures refer specifically to asylum applicants “considered to be unaccompanied minors,” meaning EU states accepted the youngsters’ declared age or established it themselves through age assessment procedures. More than 90% of the minors traveling without a parent or guardian were boys and more than half of them were between 16 and 17 years old. Half were Afghans and the second largest group were Syrians, at 16% of the total. After Sweden, Germany, Hungary and Austria followed as the main destinations for unaccompanied underage asylum seekers.

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Sep 142015
 
 September 14, 2015  Posted by at 9:21 am Finance Tagged with: , , , , , , , , ,  


DPC Wall Street and Trinity Church, New York 1903

China Stocks Decline Most in Three Weeks (Bloomberg)
China’s Not The Only One Selling FX Reserves (CNBC)
BIS Fears Emerging Market Maelstrom As Fed Tightens (AEP)
BIS Sees Central Banks Following Fed’s Lead (WSJ)
Fischer’s 2014 Why-Wait Wisdom Points to Fed Liftoff This Week (Bloomberg)
Why Asia Shouldn’t Fear the Fed (Pesek)
Eurogroup President: Greece Can Choose to be Either North or South Korea (GR)
Germany Reinstates Controls At Austrian Border (Guardian)
Germany Border Crackdown Deals Blow To Schengen System (Guardian)
German Border Controls Cause Traffic Jams (AP)
Hungary Empties Migrant Camp as Military Arrives (Bloomberg)
On German Moral Leadership (Yanis Varoufakis)
Equity Markets And Credit Contraction (Macleod)
Write-Downs Abound for Oil Producers (WSJ)
Nothing Appears To Be Breaking (Golem XIV)
No Pay Rise? Blame The Baby Boomers’ Gilded Pension Pots (Guardian)
The Highwayman (Jeff Thomas)

Shenzhen down 6.7%.

China Stocks Decline Most in Three Weeks (Bloomberg)

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

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

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We never presumed as much.

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

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

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

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

BIS Fears Emerging Market Maelstrom As Fed Tightens (AEP)

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

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

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

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

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

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Will they have any choice?

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

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

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

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

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

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

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

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

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

Why Asia Shouldn’t Fear the Fed (Pesek)

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

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

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

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The blind arrogance of unelected power threatening entire countries.

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

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

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

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Bye bye Mama Merkel. The troubles start now.

Germany Reinstates Controls At Austrian Border (Guardian)

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

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

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

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It will not recover in its present shape.

Germany Border Crackdown Deals Blow To Schengen System (Guardian)

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

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

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

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

German Border Controls Cause Traffic Jams (AP)

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

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

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

Hungary Empties Migrant Camp as Military Arrives (Bloomberg)

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

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Idle hopes.

On German Moral Leadership (Yanis Varoufakis)

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

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

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

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

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

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

Equity Markets And Credit Contraction (Macleod)

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

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

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

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

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

Write-Downs Abound for Oil Producers (WSJ)

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

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

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

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

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Tick tock.

Nothing Appears To Be Breaking (Golem XIV)

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

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

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

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

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Generational warfare just around the corner.

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

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

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

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

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Land of the crazies.

The Highwayman (Jeff Thomas)

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

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

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

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