Dec 142015
 
 December 14, 2015  Posted by at 3:43 pm Finance Tagged with: , , , , , , ,  


Dorothea Lange White Angel Breadline San Francisco 1933

Many people are cheering now that yesterday Marine Le Pen and her Front National (FN) party didn’t get to take over government in any regions in the France regional elections. They should think again. FN did get a lot more votes than the last time around, and, though she will be a little disappointed after last weekend’s results, it’s exactly as Le Pen herself said: “Nothing can stop us”.

And instead of bemoaning this, or even not believing it, it might be much better to try and understand why she’s right. And that has little to do with any comparisons to Donald Trump. Or perhaps it does, in that in the same way that Trump profits from -people’s perception of- the systemic failures of Washington, Le Pen is being helped into the saddle by Brussels.

The only -remaining- politicians in Europe who are critical of the EU are on the -extreme- right wing. The entire spectrum of politics other than them don’t even question Brussels anymore. Which is at least a little strange, because support for the EU on the street is not nearly as strong as among politicians, as referendum after referendum keeps on showing.

Some of which have rejected (more power to) the EU outright, like the one in Denmark last week, while others do it indirectly, by voting for anti-EU parties -see France this and last weekend-. There’s a long list of these votes going back through the years, with for instance both France and Holland saying No to the EU constitution in 2005, which led to many countries to postpone their own votes on the topic.

Brussels had an answer, though: by 2007, the Constitution proposal was converted into a Treaty (of Lisbon), which said basically the same but in a different order, and only through amendments to existing treaties. It was still rejected again in an Irish referendum, but in a second vote in 2009 accepted.

Importantly, the switch from Constitution to Treaty meant unanimity among EU nations was no longer needed; a majority was good enough. And so the whole thing was pushed through regardless of what people thought -and voted .

The overall picture is clear: Europeans in general are fine with the EU, but when it tries to grab more sovereign powers, they say NO, time and again. Only to be overruled by their own domestic politicians as well as Brussels. Their worries, frictions and arguments have only one way to go: the far right. All other political currents are united in unwavering support for the EU, basically no matter what.

But people see what’s happening in Greece, and with refugees, they see the way the Union treats the Russia and Ukraine issue, they see the new-fangled unholy plans with the EU border force, and they don’t want Brussels to tread on their respective nation’s sovereignty anymore than it already has.

They find no resonance for their worries at home, however, other than with people like Le Pen, Nigel Farage and similar ‘political outcasts’. And therefore that’s where they will turn. All Le Pen has to do is wait for the economy to get worse, and it will, and she can reap what the EU has sown.

As soon as Brussels threatens to turn into an authoritarian body, something it has already very evidently done, people will resist it.

The European Union could have been a very useful and appreciated organization, with many obvious advantages for the people of Europe. But as soon as it oversteps its boundaries, it is destined to self-implode. This process and outcome has become inevitable, because the Union has de facto appointed itself the arbiter of these boundaries.

The unelected high lords of Brussels have become too greedy, and too unaccountable, and they will end up achieving the exact opposite of what they claim the EU stands for: they will lead the continent into conflict, armed and otherwise.

The new border force concept is the perfect example for what is going wrong in Europe. A group of the largest, and therefore most powerful EU nations, have agreed on a rainy Monday afternoon that they’re going to set up some sort of military police force that will ‘protect’ the borders of member nations even if these nations don’t ask for such protection and/or outright resist it.

This is obviously directed mostly at Greece for now, and the EU thinks it can do with Greece as it pleases. But ask any German, French or British citizen if they want entrance to their countries controlled and decided by a para-military bunch of foreigners, and they’ll think you’ve lost it. But that’s the idea behind the border force: take away nations’ sovereignty. Start with the smaller and weaker and work your way up.

That this has some interesting legal implications, as I wrote recently in Greece Is A Nation Under Occupation, that few seem to even contemplate, will add to the entertainment.

There are 28 separate constitutions in the EU. Under which of these is it legal for a government to sign away control of its own borders? In how many of these countries will this be appealed at their own version of the Supreme Court? And how many of these courts will say: sure, sovereignty is way overrated anyway!?

The EU could have been a useful union. Not all those border checks, for one thing, not all those forms to fill out all the time. But with the advent of the euro, things got out of hand. You can have a functioning union between very different entities. But only as long as those differences are recognized and respected.

The euro is an idea that seeks to deny the differences between the people(s) of Europe, it seeks to claim that Germany IS Greece. To that end, it must then take away all nations’ sovereignty. The euro cannot exist without that. To function properly as a currency, it needs a banking union, a fiscal union. And then take it from there.

These are all things that nobody properly thought or talked about before it was introduced. Perhaps because everyone knew that these things would be unacceptable to the European people. And now the euro’s here, and all these things will have to be pushed through anyway. Brussels thinks it has plenty experience pushing things through despite the will of the people, so this one will work too.

But all it takes is for someone to point this out in clear language to people. Unfortunately, the only ones who do today connect this with resistance to refugees, to open societies, to all sorts of things that have nothing to do with why the euro is a failure.

Meanwhile, as I’ve written many times before, the EU is this body that self-selects for sociopaths in its hierarchy, being its undemocratic self. What few people recognize is that it also self-selects for the likes of Marine Le Pen.

And we haven’t seen anything yet. As I said before, all Le Pen has to do is for the economy to pine for the fjords. And looking at the current commodities slaughter, that might happen before anyone can look it up in the dictionary.

And Angela Merkel, after having pushed aside the Dublin accord on refugees and opened German doors, now wants to close them again. As if that works. The EU now wants to hand Greece tens of millions of euros just to keep refugees in the country.

But what happens when the recent projection of another 3 million arriving in Europe in 2016 comes to fruition? What happens when the refugees don’t listen to the Berlin/Brussels dictates? One can only imagine the chaos. The EU has offered Turkey €3+ billion to keep them there, but president Erdogan doesn’t look like the kind of guy you can make a deal with and expect him to live up to it.

Europe seriously risks being flooded with people, while its economy shrinks like a cotton jersey in an autumn rain storm. And who’s going to be looking at the wannabe dictators in Brussels for help then? Nations will end up deciding to decide for themselves. And because all politicians but the far right have unequivocally supported the Union for many years, guess who’ll be coming to dinner?

Today the victims are the Greeks and the refugees. And all those whose governments cut their benefits to ‘balance their budgets’. Tomorrow, those budgets must be balanced all over Europe, in this line of thinking.

As we witness the commodities plunge, and the stock market crash that must of necessity follow it, it becomes hard to see how countries like Italy, Spain, even France, could escape resembling Greece a whole lot more in 2016. And then Europe will be right back where it left off 70 years ago.

Dec 142015
 
 December 14, 2015  Posted by at 9:44 am Finance Tagged with: , , , , , , , ,  Comments Off on Debt Rattle December 14 2015


Harris&Ewing President Hoover lights Nation’s Capital community Xmas tree 1929

The New American Dream Is To Have A Job (FT)
The End Of The Bubble Finance Era (Stockman)
“It’s An Epic Bloodbath” : The 2015 Junk Bond Heatmap (ZH)
The Coincidences Are Just Too Eerie: The Last Time CCC Yields Were Here (ZH)
Yuan Declines to Four-Year Low as New Index Signals Weakness (BBG)
Oil Sinks to Lowest in Almost 7 Years as Iran Vows More Supply (BBG)
How Low Can Oil Prices Go? (Guardian)
World Markets In Fragile Mood As Yellen Prepares To Push The Button (Guardian)
Fed Officials Worry Interest Rates Will Go Up, Only to Come Back Down (WSJ)
The China Metal Exchange At Center Of Investment Scandal (Reuters)
China Local Officials Admit To Faking Economic Figures (CD)
Who’s Profiting From $1.2 Trillion of US Federal Student Loans? (BBG)
Ecuador Signs Deal With Sweden For Assange Questioning (Reuters)
Vulture Funds Price Greek Nonperforming Loans At Very Low Rates (Kath.)
Tsipras Expects Protest As Greece Agrees To Further Privatisations (Guardian)
Athens Wants To Turn Bailout Loans’ Floating Rates Into Fixed (Kath.)
Greece Seeks Help With Migrants As Tensions Rise (Kath.)
Angela Merkel Wants To ‘Drastically Reduce’ Refugee Arrivals In Germany (Reuters)
EU Border Force Plan Faces Resistance From Governments (Reuters)

“Fifth of US adults live in or near to poverty..”

The New American Dream Is To Have A Job (FT)

One in five US adults now lives in households either in poverty or on the cusp of poverty, with almost 5.7m having joined the country’s lowest income ranks since the global financial crisis. Many of the new poor, or near-poor, have become so even amid an economic recovery that is widely expected to lead the US Federal Reserve to raise interest rates next week for the first time in almost a decade. More than 45 per cent of them — almost 2.5m adults — have joined the lowest income ranks since 2011, long after the post-crisis recession was ostensibly over. The findings, contained in data prepared for a new study of the US middle class by the Pew Research Center and shared with the Financial Times, put a stark human face on the economic legacy left by the crisis and reveal how uneven the recovery has been.

They also help explain why any notion of a recovery still seems a long way off to many in the US and why the message of populist politicians such as Donald Trump that America is not working resonate on the eve of an election year. “There’s a new American dream,” says Torrey Easler, a Baptist preacher who helps feed a growing population of poor in the town of Eden, North Carolina. “The old American dream was to own a home and two cars. The new American dream is to have a job.” A large part of the shrinking of the US middle class, which for the first time in decades now forms less than a majority of the country’s adult population, has surprisingly been due to the country’s growing affluence, the Pew study found.

But the country’s lowest income group — defined by Pew for a three-person household as earning less than $31,402 a year — has also grown at more than five times the rate of the middle class in the past seven years. There are now 48.9m adults in this bracket in the US, up from 43.2m in 2008 and just 21.6m in 1971. Pew’s measure of the lowest income group is relatively broad, though it calculates that almost half of the adults in this category — 23m — fell below the $18,850 poverty line for a household of three set by the US Census Bureau. The group’s members earn half or less of Pew’s $62,804 median household income in the US last year and the $41,869 to $125,608 range Pew uses to define the American middle class. They also account for a population that, even as the struggles of the middle class draw an increasing focus, is often left out of policy discussions — as some policymakers admit.

Read more …

“..the world economy is actually going to shrink for the first time since the 1930s..”

The End Of The Bubble Finance Era (Stockman)

We are nearing a crucial inflection point in the worldwide bubble finance cycle that has been underway for more than two decades. To wit, the world’s central banks have finally run out of dry powder. They will be unable to stop the credit implosion which must inexorably follow the false boom. We will get to the Fed’s upcoming once in a lifetime shift to raising rates below, but first it is crucial to sketch the global macroeconomic context. In a word, we are now entering an epic deflation. Its leading edge is manifested in the renewed carnage in the commodity pits. This week the Bloomberg commodity index, which encompasses everything from crude oil to soybeans, copper, nickel, cotton and livestock, plunged below 80 for the first time since 1999. It is now down nearly 70% from its all-time high on the eve of the financial crisis, and 55% from its 2011 recovery high.

Wall Street bulls and Keynesian apologists for the Fed want you to believe that there isn’t much to see here. They claim it’s just a temporary oil glut and some CapEx over-exuberance in the metals and mining industry. But their assurances that in a year or so current excess supplies of copper, crude, iron ore and other commodities will be absorbed by an expanding global economy couldn’t be farther from the truth. In fact, this error is at the heart of my investment viewpoint. We believe the global economy is vastly bloated with debt-based spending that can’t be sustained. And that this distortion is compounded on the supply side by an incredible surplus of excess production capacity. As well as wasteful malinvestments that were enabled by dirt cheap central bank credit.

Consequently, the world economy is actually going to shrink for the first time since the 1930s.

That’s because the plunging price of commodities is only a prelude to what will amount to a worldwide CapEx depression — the kind of thing that has not happened since the 1930s. There has been so much over-investment in energy, mining, materials processing, manufacturing and warehousing that nothing new will be built for years to come. The boom of the last two decades essentially stole output from many years into the future. So there will be a severe curtailment in the production of mining and construction equipment, oilfield drilling rigs, heavy trucks and rail cars, bulk carriers and containerships, materials handling machinery and warehouse rigging, machine tools and chemical processing equipment and much, much more.

The crucial point, however, is that sharp curtailment of the capital goods industries has far more destructive implications for the macro-economy than a reduction in consumer appliance sales or restaurant and bar tabs. Service operations have virtually no working inventories and the supply chains for durable consumer goods such as dishwashers and cars typically have perhaps 50 to 100 days of stocks on hand. So when excessive inventory investments accumulate, the destocking and resulting supply chain curtailments are relatively short-lived. But when it comes to capital goods the relevant inventory measure is capacity in place. That’s where the bubble finance policies of the Fed and other central banks have done so much damage.

Read more …

See if you can spot the green.

“It’s An Epic Bloodbath” : The 2015 Junk Bond Heatmap (ZH)

Ten days ago, before the world had heard about the stunning liquidation and gating of the Third Avenue Focused Credit Fund, we asked one question: Did Something Blow Up in Junk, with our question driven by the relentless collapse in triple hook-rated (CCC or below) bond prices, or alternatively, their soaring yields. A few days later we learned that the answer to our question was a resounding yes, when first Third Avenue and then Stone Lion Capital (run by two ex-Bear Stearns distressed trading heads) gated investors following what may have been a dedicated attack on the worst and most illiquid junk bonds, but was really just a marketwide puke in junk starting at the bottom and spreading to the top. Since then things for the junk space have gone from bad to worse, and as of Friday, the effectively yield on the BofA-Merrill universe of bonds rated CCC and below has soared to 17.24%, taking out the 2011 wides and trading at levels not seen since the summer of 2009… only in the wrong direction.

And yet, in a world where everyone has become an algo and thinks of performance in heatmap terms, the chart above (which we will show shortly from a far more stunning angle) hardly does justice to the absolutely bloodbath in the junk bond space. So, without further ado, here is a visualization of the change in junk bond prices since January 1, 2015. For those confused, the redder the worse. It is, for lack of a better word, an epic bloodbath, and perhaps the only question after looking at this is how have many more credit funds not gated yet. And yes, if one looks hard enough, there are a few junk bonds which actually are green for the year. See if you can spot them.

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Nice find. CCC and below=junk.

The Coincidences Are Just Too Eerie: The Last Time CCC Yields Were Here (ZH)

Yesterday, we highlighted the all too eerie coincidence that the very first hedge fund (not mutual fund) to gate investors late on Friday, was operated by none other than the two former heads of distressed/high yield trading of the bank that started it all, Bear Stearns. Today, things get even eerier, because while we already have the Bear Stearns link, an even more curious coincidence emerged when according to the BofA-Merrill index of “CCC and below” bond yields, the index just hit 17.24%, soaring nearly 2% in just the past two weeks, and rising fast.

When was the last time the same index was at precisely 17.24% and rising? The answer: the weekend Lehman Brothers filed for bankruptcy (check for yourselves: on Sept 15, 2008, the closing effective yield was 17.27%).

 

What happened next? This.

 

And while no bank has blown up this time (to the best of our knowledge) the irony is that the catalyst driving the long, long overdue blow out in yields is the trifecta of plunging oil, the soaring dollar, and of course, fears about the tightening financial conditions as a result of the an “imminent” rate hike. In other words, the Fed. And while history rhymes, it usually does so in very ironic ways, and we can’t wait to find out if indeed Yellen’s first rate hike in 9 years this Wednesday unleashes a Lehman-like neutron bomb that leads to the full collapse of the junk bond market first, and then the shockwave spreads across all asset classes leading to the same financial devastation witnessed at the end of 2008, unleashing the longest period of “free capital markets” central planning the world has ever seen.

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At what point will the IMF chime in?

Yuan Declines to Four-Year Low as New Index Signals Weakness (BBG)

China’s yuan fell to a four-year low after the central bank said the currency shouldn’t be measured by its moves against the dollar alone, a statement that is being interpreted as a sign it will allow further declines. Exchange rates are a reflection of trade and investment with multiple countries and the market has to take into account the yuan’s fluctuations against a basket of currencies, the People’s Bank of China said on Friday. The China Foreign Exchange Trade System, which is run by the PBOC to facilitate interbank trading, published a new yuan index composed of 13 currencies, with the dollar accounting for 26.4%.

The yuan dropped 0.05% to 6.4585 a dollar as of 1:37 p.m. in Shanghai [..] The PBOC Monday cut its reference rate by 0.21% to a four-year low of 6.4495. “The latest move suggests the PBOC will allow weaker yuan fixings,” said Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd. “The yuan is also under pressure as the U.S. is likely to hike rates this week.” The central bank has lowered the reference rate, which limits the onshore currency’s moves to 2% on either side, on eight of the 10 trading days since winning reserve-currency status at the IMF on Nov. 30. This fueled speculation that the authority is trying to release pent-up depreciation pressure before the Federal Reserve meets Dec. 15-16.

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There’s nothing left that could lift demand. Well, other than warfare, that is.

Oil Sinks to Lowest in Almost 7 Years as Iran Vows More Supply (BBG)

Oil extended declines from the lowest price since February 2009 as Iran pledged to boost crude exports, bolstering speculation OPEC members will exacerbate the global oversupply. Futures dropped as much as 1% in New York after losing almost 11% last week, the most in a year. There’s “absolutely no chance” Iran will delay its plan to increase shipments even as prices decline, said Amir Hossein Zamaninia, the deputy oil minister for international and commerce affairs. Hedge funds and other large speculators raised bearish bets to an all-time high, U.S. Commodity Futures Trading Commission data showed.

Oil has slumped to levels last seen during the global financial crisis as OPEC effectively abandoned production limits to defend market share, fueling a record surplus. The glut will persist at least until late 2016 as demand growth slows and OPEC shows “renewed determination” to maximize output, according to the International Energy Agency. “The price war will likely drag on until the end of next year,” Hong Sung Ki at Samsung Futures in Seoul said by phone. “Saudi Arabia won’t be able to cut its production while Iran continues to increase output.”

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Not a very interesting question, since nobody knows.

How Low Can Oil Prices Go? (Guardian)

Not only did US prices fall under $40 this week but so did the global benchmark Brent crude oil prices, for the first time since February 2009. The global supply glut of about 1.5m barrels per day is the driving factor behind the lower oil prices, with much of that overproduction because of Opec’s opening the spigots. [Jay Hatfield atr Infrastructure Capital Advisors] said there’s another factor behind the new drop in oil prices: warm weather. “The fact that you can almost go swimming in New York City right now is horrible. Absolutely horrible [for heating oil demand]. To me, that’s the straw that is breaking the camel’s back. We’re ground zero for fuel oil demand,” he said.

The El Niño weather phenomenon can bring milder winter weather to the northern part of the US, and that’s been seen in places like New York and Chicago, where December temperatures are above normal, reducing heating demand. If Opec’s disorganization continues and temperatures stay mild, that could add further pressure to prices, he said. “I thought prices would have stabilized in the $40 to $50 area, but … now it could be $35 to $40,” he said. A few factors could influence oil, such as next week’s Federal Reserve’s monetary policy meeting, where the Fed may raise interest rates for the first time in seven years. That could give the dollar another boost, and Kessens said the greenback’s strength has hit oil since it is dollar denominated.

Next week is the last full trading week of 2015, so there could be some book squaring as investment managers close up accounts before the holidays when trade volume dwindles. Daniel Pavilonis, senior commodity broker with RJO Futures, said the next target for prices is likely the 2008 low. “I see prices going lower. I wouldn’t be surprised if we saw an uptick from here next week, maybe to the $40s, but then see a sharp decline, a sell-off below $35. There’s so much supply out there. I think [prices are] going to be lower than people will perceive,” he said.

Taking out a level that’s held for so long could be jarring and may have a snowball effect, he said. On the other hand, there is likely to be some opportunistic buying simply because prices are so low. Pavilonis didn’t rule out a dip under $30 a barrel, but just how far prices may go is hard to determine. “It’s hard to call a bottom. It’s like catching a falling knife. Just let the knife fall to the side and pick it up later so you don’t get hurt,” he said.

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All that focus on the Fed is not healthy.

World Markets In Fragile Mood As Yellen Prepares To Push The Button (Guardian)

Stock market investors are braced for panic selling in New York and London ahead of what is expected to be the first rate rise by the US Federal Reserve since 2006. The US central bank will decide on Wednesday whether to raise interest rates as a mark of the US economy’s strong recovery since the 2008 banking crash. But Fed boss Janet Yellen is expected to announce the increase in borrowing costs despite a slowdown in global trade and a slump in oil and commodity prices that has pushed inflation down to near zero in most developed countries. Shares plunged on Friday and oil prices tumbled as the date neared for the Fed decision and investors became increasingly nervous of the impact on highly indebted emerging market economies.

The level of borrowing by businesses and governments in China, Thailand, Indonesia, Brazil has soared in the last decade. Borrowing by emerging market economies has quadrupled from $4tn in 2004 to over $18tn in 2014, much of it in dollars, making them vulnerable to higher US interest rates. Phil Shaw, chief UK economist at fund manager Investec, said it was almost certain the Fed would raise rates, but the question for markets was whether Yellen would signal further rate rises over the coming months. More than £73bn was wiped off the value of UK shares last week after fresh falls in the price of copper and other metals was matched by a precipitous fall in the price of oil to below $38. London’s FTSE 100 closed 135.27 points down at 5,952.78 – its lowest level since late September.

The index of Britain’s top 100 companies is now about 6.5% below its level at the start of the year, unlike the German Dax 30 and the Paris Cac 40, which are well above. A forecast from the IEA that a glut of crude will persist for another year triggered panic selling among investors, already concerned that an interest rate rise will potentially destabilise the global economy.

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Hilsenrath perparing the narrative for a way out?

Fed Officials Worry Interest Rates Will Go Up, Only to Come Back Down (WSJ)

Federal Reserve officials are likely to raise their benchmark short-term interest rate from near zero Wednesday, expecting to slowly ratchet it higher to above 3% in three years. But that’s if all goes as planned. Their big worry is they’ll end up right back at zero. Any number of factors could force the Fed to reverse course and cut rates all over again: a shock to the U.S. economy from abroad, persistently low inflation, some new financial bubble bursting and slamming the economy, or lost momentum in a business cycle which, at 78 months, is already longer than 29 of the 33 expansions the U.S. economy has experienced since 1854.

Among 65 economists surveyed by The Wall Street Journal this month, not all of whom responded, more than half said it was somewhat or very likely the Fed’s benchmark federal-funds rate would be back near zero within the next five years. Ten said the Fed might even push rates into negative territory, as the European Central Bank and others in Europe have done—meaning financial institutions have to pay to park their money with the central banks. Traders in futures markets see lower interest rates in coming years than the Fed projects in part because they attach some probability to a return to zero. In December 2016, for example, the Fed projects a 1.375% fed-funds rate. Futures markets put it at 0.76%.

Among the worries of private economists is that no other central bank in the advanced world that has raised rates since the 2007-09 crisis has been able to sustain them at a higher level. That includes central banks in the eurozone, Sweden, Israel, Canada, South Korea and Australia. “They effectively have had to undo what they have done,” said Susan Sterne, president of Economic Analysis Associates, an advisory firm specializing in tracking consumer behavior. The Fed has never started raising rates so late in a business cycle. It has held the fed-funds rate near zero for seven years and hasn’t raised it in nearly a decade.

Its decision to keep rates so low for so long was likely a factor that helped the economy grow enough to bring the jobless rate down to 5% last month from a recent peak of 10% in 2009. At the same time, waiting so long might mean the Fed is starting to lift rates at a point when the expansion itself is nearer to an end. Ms. Sterne said the U.S. expansion is now at an advanced stage and consumers have satisfied pent-up demand for cars and other durable goods. She’s worried it doesn’t have engines for sustained growth. “I call it late-cycle,” she said.

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The volumes are staggering.

The China Metal Exchange At Center Of Investment Scandal (Reuters)

The Fanya Metals Exchange was launched shortly after China, the world’s dominant producer of rare earths, imposed quotas on production and exports in a bid to support prices and attract downstream consumers to China. Fanya was keen to provide a supporting role, saying it wanted to raise the value of the whole minor metals industrial chain. It stockpiled and traded 14 metals, rapidly becoming the biggest minor metals market in the world. These metals are minor because they are a byproduct of extracting other major metals, such as zinc or copper. “Fanya prices already lead global prices, and have made China’s voice on the minor metals’ stage growing increasingly strong,” it boasted on its website in 2014. Prices for the metals traded on the exchange rose sharply and became increasingly out of sync with world prices.

Its most traded metal – indium – more than doubled between 2012 and 2015 to $1,200 per kg. Prices kept rising from the end of 2014 even as global prices headed into a rapid decline. The price difference kept traders outside of China wary of using the exchange. Now they are worried about what will happen to the accumulated stock of metals on the exchange. “It’s not clear how all this winds down, or what the local government or Beijing will do,” said David Abraham, director of the Technology, Rare and Electronic Materials Center. “There are lots of wild cards here.” As early as last year, state regulators called on local authorities to “clean up and rectify” privately run exchanges throughout China. A provincial regulator in Yunnan singled out Fanya for rule-breaking behavior, although it did not provide details.

“The risks are huge,” it said. Those risks became clear in April when investors placed a wave of sell orders, which the exchange later admitted caused liquidity problems. Looking to make good on the promise of instant redemption, investors wanted to switch their money into a stock market rally. Seeing a rush to sell, many investors were reassured their money was safe when the Yunnan government issued a statement saying Fanya remained a legal entity engaged in legal operations. Some continued to put money into the plan.

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Scapegoats.

China Local Officials Admit To Faking Economic Figures (CD)

Several local officials in China’s Northeast region sought to explain dramatic economic drops in their areas by admitting they had faked economic data in the past few years to show high growth when the real numbers were much lower, Xinhua News Agency reported on Friday. “If the past data had not been inflated, the current growth figures would not show such a precipitous fall,” one official was quoted as saying. The report cited several officials in the region who acknowledged they had significantly overstated data ranging from fiscal revenue and household income to GDP.

Three years ago Liaoning province’s GDP growth was reported at 9.5%, but its current figure -over the first three quarters of this year- is just 2.7%. Jilin’s growth was reported at 12% three years ago, but its current rate is 6.3% in the same period. The revelation about the inflated figures came as the GDP growth of the three Northeast provinces ranked the lowest nationwide. Guan Yingmin, an official in Heilongjiang province, said local investment figures were inflated by at least 20%, which translates to nearly 100 billion yuan ($15.7 billion). If the local financial reports were true, some single counties’ GDP would have surpassed Hong Kong. An earlier audit by the National Audit Office found one county in Liaoning that reported annual fiscal revenues 127% higher than the actual number.

A staff member in the Jilin provincial finance department, who asked not to be identified, told China Daily that in past years, local officials competed each other to lure external investment projects. They reported the promised investment value, whether it had been achieved or not, as the investment figure. The legacy of the command economy in the area means that there is a lack of entrepreneurship and forward thinking, said Xu Mengbo, an economics professor at Jilin University. “In terms of management ideas, there is at least 10-year gap,” he said.

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At what point does this become a criminal operation?

Who’s Profiting From $1.2 Trillion of US Federal Student Loans? (BBG)

Jody Sofia borrowed $92,500 to get a degree from Florida Coastal School of Law. Now she’s in default, her outstanding balance having ballooned to almost $144,000, and she spends her days fielding calls from government-contracted debt collectors. The companies making those calls are just one part of an ecosystem feeding on federal student loans. There are also debt servicers, refinance lenders, firms that help former students stay out of default and for-profit schools that make money as borrowers try to repay more than $1.2 trillion in government-backed education debt. Sofia is one of 7 million former students in default on a record $115 billion of federal loans, an amount that has grown almost 25% in two years, according to U.S. government data. The mountain of debt, for which taxpayers are on the hook, has provided a stream of revenue to companies at every stage of the process.

“This is not some small cottage industry,” said Rohit Chopra, the former student-loan ombudsman for the U.S. Consumer Financial Protection Bureau, which oversees loan servicers, debt collectors and private student lenders. “There is a large student-loan industrial complex. Rising costs of college and flat family incomes have created enormous business opportunity for every step of the loan process.” Sofia, who didn’t take the bar exam and never got a legal job after graduating from Florida Coastal in 2004, says the system is dysfunctional. Derailed by illness and having to care for ailing parents, most of her income has come from working as an independent insurance adjuster, the same thing she was doing before going to law school. While she has made some payments, interest on the loans keeps accruing. “There’s something really wrong with this system,” said Sofia, 45. “The government is spending all this money for these people to constantly call you. How effective is that?”

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Sweden has nothing. That’s what’ll come out of the questioning. But will they go public that way?

Ecuador Signs Deal With Sweden For Assange Questioning (Reuters)

Ecuador and Sweden have signed a pact that would allow WikiLeaks founder Julian Assange to be questioned at Ecuador’s embassy in London where he has been for more than three years, the Quito government said. The legal agreement was signed in the Ecuadorean capital after half a year of negotiations. “It is, without doubt, an instrument that strengthens bilateral relations and will facilitate, for example, the fulfillment of judicial matters such as the questioning of Mr. Assange,” the foreign ministry said in a weekend statement.

Assange, 44, took refuge in the embassy building in June 2012 to avoid extradition to Sweden, where he is wanted for questioning over allegations of sexual assault and rape against two women in 2010. The Australian denies the accusations. Assange says he fears Sweden will extradite him to the United States where he could be put on trial over WikiLeaks’ publication of classified military and diplomatic documents five years ago, one of the largest information leaks in U.S. history. Britain has accused Ecuador of preventing the course of justice by allowing Assange to remain in its embassy in the upmarket central London area of Knightsbridge.

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Forcing Greece into the hands of vulture funds is the lowest things the Troika has done so far.

Vulture Funds Price Greek Nonperforming Loans At Very Low Rates (Kath.)

Investment funds preparing to profit from Greek nonperforming loans are offering rates of between 5 and 15 cents per euro for the purchase of bad corporate loans, in anticipation of a legal framework that would allow them to enter the local market. The repayment of those loans is considered impossible, as the majority of the enterprises that have received them are at the bankruptcy stage and their assets comprise nothing more industrial real estate or equipment. By contrast, the rate for NPLs taken out by sustainable corporations with high borrowing come to 40-50 cents per euro, which factors in the writing off of half of the debt when the funds take control of their management, which would ensure that costs would be cut and the company would undergo a general tidying up ahead of their sale.

Bank officials say the rates currently being quoted in the local market have declined significantly compared to a year ago, when the prices of bad corporate loans came to 30 cents per euro, as economic conditions have deteriorated considerably in the meantime. The high country risk factor is increasing the potential cost for the distressed debt funds that are eyeing the local market with interest due to the high accumulation of bad loans in bank portfolios.

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There has better be protests.

Tsipras Expects Protest As Greece Agrees To Further Privatisations (Guardian)

The Greek prime minister, Alexis Tsipras, has warned that his government faces a new storm of protest after jumping another reform-for-aid hurdle with international creditors. After a week of rigorous negotiations with foreign lenders, Tsipras’s leftist-led government finalised a deal foreseeing further privatisations, reforming the energy sector and opening up the market to non-performing loans. The agreement is slated to unlock another €1bn (£720m) in loans for the debt-stricken country next week. Addressing Syriza’s central committee at the weekend, Tsipras warned of the perils that lay ahead. “There are forces that want to see Greece’s government fail,” he said.

Under the accord, publicised early on Saturday, Greece will retain a 51% stake in the national grid operator, Admie, and forge ahead with a host of state sell-offs through the creation of a privatisation scheme. New rules for non-performing loans, which amount to an extraordinary 60% of GDP, will also be enacted. Those belonging to big businesses as well as unpaid mortgage repayments will henceforth be sold to foreign funds. Viewed as a compromise by many in Tsipras’s once far-left Syriza party, the deal is expected to be passed in the name of national expediency. Failure to endorse the legislation would derail the country’s bailout programme and put Greece, which only narrowly survived a euro exit before clinching a third €86bn rescue package in August, at risk of national bankruptcy again.

But Tsipras is unlikely to be let off as lightly in the new year, when his fragile two-party coalition will be obliged to overhaul a dysfunctional pension system that is not only on the verge of collapse but is seen as the most expensive in Europe. Creditors are demanding the overhaul produces the equivalent of 1% of GDP, or €1.8bn, in savings next year. With Greek pensioners already having suffered 12 cuts since the outbreak of the debt crisis in late 2009, MPs are likely to balk at further austerity being meted out. The prospect of turmoil has been heightened by the government’s parliamentary majority being whittled down to a mere three seats in the 300-member house, after two deputies defected in a vote on an earlier set of milestones last month.

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Greece has no voice anymore.

Athens Wants To Turn Bailout Loans’ Floating Rates Into Fixed (Kath.)

The answers to the burning questions of whether a new arrangement for the Greek debt is necessary and what kind of measures will be required are coming through the numbers: Next year the amount Greece will have to repay for the capital of the bailout loans it has received will be almost as much as the interest on them. In total, the amount due in 2016 for servicing the debt will come to just 7.5% of gross domestic product, similar to the following years’ amounts. That is why the eurozone has been insisting on every occasion that the Greek debt does not require a haircut and that any intervention would be necessary only from 2022 onward – i.e. the year when the current grace period ends: That year Greece will need to pay €22 billion for interest alone.

Until then the state’s obligations are under control: Market observers say that the intervening years will be very much like 2016. Next year Greece will have to pay €12.5 billion, of which €6.5 billion concerns capital repayment and 6 billion the payment of interest. At this point the interest trap is hiding. Nowadays the country pays interest of some 6 billion while the loans of the European Stability Mechanism have interest that is very low, around 1%. However, in the following years the interest rates will begin to grow, given that they are floating rates, placing a significant burden on future state budgets.

For that reason Athens is requesting the conversion of the floating rates into fixed rates, which would be advantageous compared to to the current levels (some 0.5%) but still be fairly low for a long period (of at least 15-20 years) during which they would increase by at least 2-3% under normal circumstances. All this would mean that the state budget would become lighter in the future as far as the expenditure on interest was concerned, compared to what the country faces without an arrangement.

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“Concern has been mounting that thousands of migrants arriving in Greece by boat from neighboring Turkey will become trapped in the country..”

Greece Seeks Help With Migrants As Tensions Rise (Kath.)

As tensions peaked at temporary reception facilities for migrants, Citizens’ Protection Minister Nikos Toskas said over the weekend that Greece was doing all it can to tackle a relentless migration crisis which he described as “a massive problem, stretching the limits of our country and of Europe.” Toskas visited the Tae Kwon Do Stadium in Palaio Faliro, southern Athens, on Saturday following scuffles between groups of migrants from different countries. Greece cannot keep hosting thousands of migrants streaming into the country, he said. “Our country can’t handle it, our economy can’t handle it.”

Asked by reporters about a joint letter he and Migration Minister Yiannis Mouzalas sent to European Migration and Home Affairs Commissioner Dimitris Avramopoulos, Toskas said the two ministers underlined that the return of migrants from EU countries must be carried out in line with EU regulations and agreements “to keep the number of people that we can support at manageable levels.” Toskas’s comments came ahead of a European Union leaders’ summit planned for Thursday and Friday where the issue of migration is to be discussed along with plans for the creation of a new EU border force which, unlike Frontex, will not require the approval of member-states to be deployed. In an interview with Kathimerini on Sunday, Frontex’s Executive Director Fabrice Leggeri said the border agency had guards ready to dispatch to Greece as early as October but Greek authorities delayed the deployment as they had not appointed Greek officials to head the teams.

Concern has been mounting that thousands of migrants arriving in Greece by boat from neighboring Turkey will become trapped in the country as the Former Yugoslav Republic of Macedonia has tightened controls at Greece’s northern border. Thousands of migrants who had been in a makeshift camp near the FYROM border were bused to Athens last week. Most of them were moved to the Tae Kwon Do Stadium, where scuffles broke out late on Friday and on Saturday morning, prompting riot police to intervene. According to sources, the clashes were between groups of migrants from Morocco and other countries and followed allegations that some migrants had stolen cell phones and cash from others.

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Where would they go then, Angela? Remember 3 million more expected in 2016?

Angela Merkel Wants To ‘Drastically Reduce’ Refugee Arrivals In Germany (Reuters)

Chancellor Angela Merkel wants to “drastically decrease” the number of refugees coming to Germany, signalling a compromise to critics of her open-door policy from within her conservatives on the eve of a party congress. Merkel has resisted pressure from allies within her Christian Democratic Union (CDU) to put a cap on the number of refugees entering Germany, which is expected to be more than 340,000 this year. “At the same time we took on board the concerns of the people, who are worried about the future, and this means we want to reduce, we want to drastically decrease the number of people coming to us,” Merkel told broadcaster ARD on Sunday. Merkel, whose popularity has fallen over her handling of the refugee crisis, said the word “limit” did not feature in the CDU’s main resolution which will be debated at the two-day party congress starting on Monday in the southern city of Karlsruhe.

The chancellor added there was broad support in the CDU for her strategy to reduce the numbers. This included working with Turkey to fight traffickers, improving the situation at Syrian refugee camps in Turkey, Lebanon and Jordan, and strengthening control of the European Union’s outer borders. Merkel’s conservative critics want her to get the number of arrivals down before three state elections in March and say her hopes of running for a fourth term in 2017 would be in danger. Her strategy also includes finding a solution to the migration crisis on the EU level, where she is meeting resistance from member states opposed to a quota system to distribute refugees. Her critics say her decision in late August to allow Syrian asylum seekers to remain in Germany regardless which EU country they had first entered had accelerated the influx of migrants.

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The end of the EU will come through Brussels seeking to take away nations’ sovereignty.

EU Border Force Plan Faces Resistance From Governments (Reuters)

A proposal to give the EU’s executive the power to send forces unbidden into member states to defend the common European frontier will face resistance from some countries when it is published this week. The European Commission wants to be able to deploy personnel from a new European Border and Coastguard Agency without, as currently required, the consent of the state concerned, EU officials told Reuters in early December, reflecting frustration with Greek reluctance to seek help with migrants. European Union officials call it a largely theoretical “nuclear option” and stress that any infringement of national sovereignty would be balanced by the power of a majority of member states to block Commission intervention – similar to checks agreed during the euro debt crisis.

The Commission will set out the plan on Tuesday to reinforce its Frontex agency with up to six times more staff, EU officials said, following a commitment to an EU border guard in September by President Jean-Claude Juncker. “We think the current situation justifies a certain ambition,” the Commission’s chief spokesman said on Friday, expressing confidence about backing from member states. Failure to strengthen the external borders, senior officials argue, will see more states reimpose frontier controls inside the bloc, wrecking its cherished free movement area, and foster the rise of anti-EU nationalists like France’s National Front.

But while big powers France and Germany support such EU power, other EU leaders may voice concerns at a summit on Thursday. Italy has pushed for a “Europeanisation” of external frontiers to relieve the costs on itself and Greece of policing the Mediterranean. But the plan may go too far for many leaders. “This idea will face opposition from most member states,” one EU diplomat said. “We believe such a solution would interfere too deeply in member states’ internal competences.” “The Commission is testing our limits,” said another. He compared it to the Commission’s push to oblige states to take in mandatory quotas of asylum seekers, which set furious east Europeans against German Chancellor Angela Merkel.

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 December 11, 2015  Posted by at 9:40 am Finance Tagged with: , , , , , , ,  


John Vachon Billie Holiday at the Newport Jazz Festival Jul 1954

Warning: Half Of Oil Junk Bonds Could Default (CNN)
Junk Fund’s Demise Fuels Concern Over Bond Rout (WSJ)
Kinder Morgan – Poster Boy For Bubble Finance (Stockman)
Oil Producers Offset Fall In Prices By Raising Output (Reuters)
Zombies Appear In US Oilfields As Crude Plumbs New Lows (Reuters)
What Went Wrong in Oil-Price Forecasts? (WSJ)
China Has Officially Joined the Currency Wars (ET)
China Yuan Falls To Lowest Since August 2011 Versus Dollar (CNBC)
Let’s Just Hope Shipping Isn’t Telling the Real Story of China (BBG)
How to Break the Wall Street to Washington Merry-Go-Round (DaCosta)
Give Me Only Good News! (Grantham)
First Government Plane Carrying Refugees Arrives in Canada (AP)
Greece Struggles With Creditors To Keep Bad Loans From ‘Vultures’ (Reuters)
EU To Sue Greece, Italy, Croatia Over Migrants (AP)
Stranded Migrants Relocated in Athens Arena, Many Disperse (GR)
Behind Angela Merkel’s Open Door for Migrants (WSJ)
Four More Bodies Found In Aegean After Boat Sinks (AP)
EU Plans Border Force To Police External Frontiers (FT)

“It’s so bad that a key Bloomberg index of commodity prices is now sitting at its lowest level since 1999.”

Warning: Half Of Oil Junk Bonds Could Default (CNN)

Energy companies that loaded up on debt during the oil boom are likely to have trouble paying back those loans. Oil prices have collapsed over 65% since the middle of last year to below $37 a barrel this week and there’s no recovery in sight. It’s fueling financial turmoil on Wall Street with Standard & Poor’s Ratings Service recently warning that a stunning 50% of energy junk bonds are “distressed,” meaning they are at risk of default. Overall, about $180 billion of debt is distressed. It’s the highest level since the end of the Great Recession and much of it is in energy companies. “The wave of energy defaults looming in the wings could make for some very bumpy roads ahead in 2016,” Bespoke Investment Group wrote in a recent report.

The firm described the junk bond market environment as “pretty terrible” lately. That’s a dramatic change from recent go-go years, when the shale oil boom along with cheap borrowing costs allowed energy companies to take on loads of debt to fund expensive drilling operations. U.S. oil production skyrocketed, creating a gigantic supply glut that is currently pushing prices lower and hurting the ability of many energy companies to repay their debt. “The tide may be turning. Excess leverage during the good years has dented credit profiles,” analysts at research firm Markit wrote in a report published on Wednesday. Of course, it’s not just oil companies under financial duress. S&P said a whopping 72% of the bonds in the metals, mining and steel industry are now distressed.

That makes sense given the fact that prices for raw materials like copper, iron ore, aluminum and platinum have recently plummeted to crisis levels. It’s so bad that a key Bloomberg index of commodity prices is now sitting at its lowest level since 1999. No matter the sector, these financially stressed companies will be forced to cut costs by selling off assets and laying off workers. Corporate defaults are already on the rise. S&P said defaults recently topped 100 on the year, the first time that’s happened since 2009. Almost one-third of 2015’s defaults have come from oil, gas or energy companies. S&P warns the high level of distressed bonds is an indicator that more defaults are coming. The firm said being classified as “distressed” reflects an “increased need for capital and is typically a precursor to more defaults.”

At a time when oil and natural gas prices are super low, there’s more bad financial news for these companies – a change in the interest rate environment. The U.S. Federal Reserve is expected to raise interest rates next week for the first time in nearly a decade, a move that will likely hurt demand for risky assets.

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““Currently, though, the ability to sell a large position is especially poor…”

Junk Fund’s Demise Fuels Concern Over Bond Rout (WSJ)

A firm founded by legendary vulture investor Martin Whitman is barring investor withdrawals while it liquidates its high-yield bond fund, an unusual move that highlights the severity of the monthslong junk-bond plunge that has swept Wall Street. The decision by Third Avenue Management means investors in the $789 million Third Avenue Focused Credit Fund may not receive all their money back for months, if not more. Third Avenue said poor bond-market trading conditions made it almost impossible to raise sufficient cash to meet redemption demands from investors without resorting to fire sales of assets.

Securities attorneys said Third Avenue’s decision to wind down the mutual fund without giving investors all their cash back could have significant repercussions for both the company and the mutual-fund industry, which for decades has thrived by promising to allow investors to take a long-term view of the markets while retaining the right to cash out shares at any time. While hedge-funds have occasionally prevented investors from taking out their money, such a move is uncommon for a mutual fund. The move is also a sign of how much the market for corporate debt is deteriorating following a long boom. Since the financial crisis, investors have sought higher-returning assets, and companies raised funds for business investment as well as for mergers, acquisitions and share buybacks.

High-yield bond assets at U.S. mutual funds hit $305 billion in June 2014, according to Morningstar data, triple their level in 2009. But investors have pulled money lately. Outflows in November were $3.3 billion, the most since June, according to Morningstar data. The yield spread between junk-rated debt and U.S. Treasurys narrowed to a multiyear low in mid-2014, reflecting investors’ confidence in companies’ business prospects. But spreads have since risen, reflecting lower prices, as the energy bust intensified questions about junk-rated companies’ ability to repay debts. All 30 of the largest high-yield bond funds tracked by Morningstar have lost money this year, reflecting price declines as investors shied away from risk.

“Investors have been dazzled that yields on bonds have climbed so high, even while default rates remained low,” said Martin Fridson, founder of Lehmann Livian Fridson Advisors and a longtime junk-bond analyst. “Currently, though, the ability to sell a large position is especially poor…. When that tension gets especially high, you can see something snap.”

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“In fact, it was just a momo stock on a borrowing spree.”

Kinder Morgan – Poster Boy For Bubble Finance (Stockman)

The graph below belongs in the “what were they thinking category”. After Tuesday’s dividend massacre, it’s plain as day that Kinder Morgan (KMI) wasn’t the greatest thing since sliced bread after all. That is, a “growth” business paying rich dividends out of rock solid profit margins and flourishing cash flow. In fact, it was just a momo stock on a borrowing spree. During the 27 quarters since the beginning of 2009, the consolidated entities which comprise KMI generated $20.8 billion of operating cash flow, but spent $24.3 billion on CapEx and acquisitions. So the “growth” side of the house ended-up in the red by $3.5 billion. Presumably that’s because it was “investing” for long haul value gains.

But wait. It also had to finance those juicy dividends, and there was a reassuring answer for that, too. The payout was held to be ultra safe owing to KMI’s business model as strictly a toll gate operator in the oil and gas midstream, harvesting risk-free fees from gathering systems, transportation pipelines and gas processing plants. Accordingly, even when its stock price was riding high north of $40 per share, the yield was 5%. So over the last 27 quarters KMI paid out $17.3 billion in dividends from cash it didn’t have. It borrowed the difference, of course, swelling its net debt load from $14 billion at the end of 2009 to $44 billion at present. And that’s exactly the modus operandi of our entire present regime of Bubble Finance. Kinder Morgan is the poster boy.

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No other options.

Oil Producers Offset Fall In Prices By Raising Output (Reuters)

The first response of commodity producers to a drop in prices is normally to increase production – ensuring price falls become deeper and more prolonged. Producers attempt to make up in volume what they have lost in prices. But what might be rational for one is disastrous collectively. Cuba’s top trade negotiator warned a conference as long ago as 1946: “We know from experience that sometimes a reduction in prices not only does not bring a reduction in production, but as a matter of fact stimulates production, because farmers try to make up by a larger volume in production the decrease in income resulting from the fall in prices.” He was speaking about sugar, but the same response has been true for other commodities, including petroleum.

In 2015, most oil producers have responded to the slump in prices by raising output, ensuring the market remains flooded and postponing the anticipated rebalancing of supply and demand. Russia, Saudi Arabia and Iraq have all increased production in 2015. Iran hopes to follow in 2016 once sanctions are lifted. Combined output from nine of the world’s largest oil and gas companies rose by 8% in the first nine months of 2015. Output from U.S. waters in the Gulf of Mexico was almost 19% higher in September 2015 than the same month a year earlier, according to the U.S. Energy Information Administration. Oil companies have said the Gulf of Mexico remains an attractive prospect even at low prices and they intend to continue increasing production there.

Even in the major shale-producing areas of the United States, production is not falling as fast as had been predicted. Companies have sought to maintain production volumes even as they slash costs. North Dakota’s oil output is down only 5% from the peak and has been surprisingly stable in recent months. Bakken producers even accelerated output and sales in October ahead of an OPEC meeting they feared would result in even lower prices, the state’s chief regulator told reporters on Dec. 9. In Texas, output from the Permian Basin, one of the oldest oil-producing areas in the country with particularly attractive geology, is still increasing.

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Walking dead pay interest from cannibalizing own assets.

Zombies Appear In US Oilfields As Crude Plumbs New Lows (Reuters)

Drained by a 17-month crude rout, some U.S. shale oil companies are merely hanging on for life as oil prices lurch further away from levels that allow them to profitably drill new wells and bring in enough cash to keep them in business. The slump has created dozens of oil and gas “zombies,” a term lawyers and restructuring advisers use to describe companies that have just enough money to pay interest on mountains of debt, but not enough to drill enough new wells to replace older ones that are drying out. Though there is no single definition of a zombie, most investors and analysts consulted by Reuters say they tend to have exceptionally high debt loads and face the prospect of shrinking oil reserves.

About two dozen oil and gas companies whose debt Moody’s rates toward the bottom of its junk bond scale broadly fit that description. Investors and analysts mentioned SandRidge Energy, Comstock Resources, and Goodrich Petroleum as some of that group’s more prominent members. To stay alive, zombie companies have curbed costly drilling and are using revenue from existing production to pay interest and other expenses in a process some describe as “slow-motion liquidation.” Bankruptcies and defaults loom because the cutbacks in new drilling have been so deep that many companies risk getting caught in a vicious circle of shrinking oil reserves, falling revenue and declining access to credit, experts say.

As long as oil prices stay below the estimated break-even level of $50 a barrel, the zombie group is set to grow. In fact, so many oil companies are struggling that “zombies” are the topic of a keynote address at a big energy conference in Houston on Thursday. Thomas Califano, vice chair of the restructuring practice at the law firm DLA Piper, said banks that have loosened loan terms to avoid defaults might be just allowing companies to postpone “their day of reckoning.” “They can just be zombies. They can pay their interest, there’s no growth and they are cannibalizing their assets,” he said.

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What went wrong is who was trusted to do the forecasting.

What Went Wrong in Oil-Price Forecasts? (WSJ)

This was supposed to be the year oil prices turned around. Ten banks surveyed by The Wall Street Journal in March predicted that U.S. crude would average $50 a barrel or better in the fourth quarter. December 2015 futures contracts were selling for $63.82 a year ago. Instead, oil is on one of its longest price routs in history, and it shows no sign of ending. Oil hasn’t settled above $50 in the U.S. since July. And in a reminder that energy busts often start out looking bad and then get even worse, analysts are rapidly ratcheting down their forecasts for 2016, and oil companies and investors are bracing for another year of pain. How did market watchers get this so wrong? Analysts say they forgot the lesson that supply-driven downturns can last a long time.

“We haven’t seen a lot of the supply-driven oil-price declines in recent history,” said Miranda Davis at Quintium Advisors. “I don’t think the world was prepared for that.” Unlike the demand-driven price drop in 2009, which markets partly rebounded from within months, this downturn could last for years, she added. OPEC surprised markets by increasing its output this year instead of cutting it. In fact, the group said Thursday that it pumped more oil in November than in any month in the past three years. Meanwhile, producers in the U.S. and Russia proved much more resilient than expected. U.S. production started falling in April but remains near multidecade highs. Canada, Russia, China and Norway all are expected to post annual production gains this year, according to the U.S. government’s EIA.

Oil prices fell again Thursday, with futures in the U.S. falling 40 cents to $36.76, and global benchmark Brent futures falling 38 cents to $39.73. Both contracts have lost nearly one-third of their value this year. The energy industry now is facing the possibility that oil prices in 2016 could be even lower, on average, than in 2015—a suggestion unthinkable even six months ago.

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The IMF was the enabler.

China Has Officially Joined the Currency Wars (ET)

The only thing China had to wait for was the official inclusion into the IMF’s reserve currency basket. Now it can devalue its currency as it pleases—and it may not even have a choice. “A devaluation could be as much as 20% against the U.S. dollar because in real effective exchange rate terms the yuan is about 15% overvalued at the moment,” says Diana Choyleva, chief economist at Lombard Street Research. The Chinese currency has gained 15% against other major currencies since the middle of last year, according to an analysis by Westpac Strategy Group. On cue, China set the yuan at 6.414 to the U.S. dollar on Wednesday, Dec. 9, its weakest level since August 2011 and down 3.4% since the mini-devaluation in August.

Choyleva thinks the IMF inclusion may have even prevented a sharper one-off devaluation. “They would not be so keen to be a responsible citizen,” she says and expects further gradual devaluation. Macquarie analysts also believe Beijing now likely won’t “risk their credibility by devaluing the yuan sharply after that.” But while there is clarity as to how (gradual) and how much (15–20%) China will devalue, there is still confusion as to why they have to do it. Market observers usually cite exports as the major reason for a cheaper currency. In theory, prices for Chinese goods would become cheaper on international markets so volumes would pick up. In practice, this rarely works, as imports become more expensive, as China is a big importer too.

In addition, trade just doesn’t contribute that much to the Chinese economy anymore. “They were at the peak which was just a few years ago. Their net exports were 8% of GDP. Now it’s just a couple of% of GDP,” says Richard Vague, author of “The Next Economic Disaster.” Exports make up even less of GDP growth. Consumption and investment make up most of Chinese GDP growth. [..] It’s the combination of low growth and easy money that puts pressure on the currency. Because the regime created a debt bubble of epic proportions and investors now realize they won’t get the promised returns, capital is flowing out of the country at a record pace. Until the imbalances are fixed and China takes its losses, and stops the easy money policies, outflows will continue and the regime will face continued pressure to devalue.

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It ain’t done yet.

China Yuan Falls To Lowest Since August 2011 Versus Dollar (CNBC)

China’s yuan dropped to its lowest level against the dollar in over four years Friday, as the central bank steadily guides the currency lower amid an economic slowdown and hefty capital outflows. The yuan, or renminbi as it’s also known, fell to 6.4550 against the dollar, its lowest level since August 2011. Earlier Friday, the People’s Bank of China (PBOC) had set the mid-point for the yuan at a new four and a half year low of 6.4358, down 0.2% from Thursday’s fixing. China’s central bank lets the yuan spot rate rise or fall a maximum of 2% against the dollar relative to the official fixing rate. Nomura’s Craig Chan said the moves are in line with policymakers’ repeatedly stated ultimate goal of a more market-determined exchange rate.

“There really isn’t much perceived intervention in the markets,” he said at a press conference Friday. Chan believes that the reason the yuan is being allowed to decline now, when the market mechanism shift was officially made in August was due to concerns over whether some debtors would struggle with external debt if the currency declined. In the intervening months, PBOC data has indicated substantial hedging activity and concern over external debt has subsided somewhat, he said. Even with the declines, “our view is the currency is still over valued. They want to move closer to fair value, which we perceive to be around 6.80,” for the dollar-yuan pair, Chan said. Nomura expects the currency pair will hit that level by the end of 2016.

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Add China’s raw material exports and the graph gets real ugly.

Let’s Just Hope Shipping Isn’t Telling the Real Story of China (BBG)

Investors betting that China’s near-insatiable appetite for industrial raw materials will drive global economic growth may want to skip the shipping news. For the first time in at least a decade, combined seaborne imports of iron ore and coal – commodities that helped fuel a manufacturing boom in the world’s second-largest economy – are down from a year earlier. While demand next year may be a little better, slower-than-anticipated growth in 2015 has led to almost perpetual disappointment for shippers, after analysts’ predictions at the end of 2014 for a rebound proved wrong. The world has surpluses of everything from corn to crude oil, and commodity prices are heading for their biggest annual loss since the financial crisis.

With China’s economy expanding at the slowest pace since 1990 demand has ebbed from one of the biggest importers. The Baltic Dry Index of shipping rates for bulk materials fell to an all-time low last month, turning those who watch the industry increasingly bearish. “For dry bulk, China has gone completely belly up,” said Erik Nikolai Stavseth at Arctic Securities in Oslo, talking about ships that haul everything from coal to iron ore to grain. “Present Chinese demand is insufficient to service dry-bulk production, which is driving down rates and subsequently asset values as they follow each other.” China produces about half the world’s steel. The metal is made from iron ore in furnaces fueled by coal, which also is used to run power plants.

While domestic mines supply both raw materials, it isn’t enough, so the country must buy from overseas. As the economy surged over the past decade, imports of iron ore tripled, and coal purchases rose almost four-fold since 2008, government data show. The country accounts for two in every three iron-ore cargoes in the world, and is the largest importer of soybeans and rice. But this year, demand has slowed. Combined seaborne imports of iron ore and coal will drop 4.8% to 1.097 billion metric tons, the first decline since at least 2003, according to data from Clarkson Plc, the biggest shipbroker. A year ago, Clarkson was anticipating a 5.5% increase for 2015. The broker expects growth to increase just 0.04% next year.

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Take away the political power.

How to Break the Wall Street to Washington Merry-Go-Round (DaCosta)

The revolving door that allows regulators to slide quickly into the same sector they oversee and vice versa is a common pattern across industries. It seems to spin with particular vigor, however, when it comes to Wall Street and financial overseers in Washington. The revolving door has not merely led to the impression of conflict, eroding public trust in an already troubled and meltdown-prone financial system and the institutions in charge of regulating it; it has also coincided with ethical scandals and even alleged crimes that have affected the credibility of many of the world’s leading central banks, including the Federal Reserve. It’s also a door that keeps on spinning. But it doesn’t have to: Simple reforms could prevent its most pernicious incarnations.

Lack of public trust in the Fed’s aggressive monetary easing may already have curtailed additional action to support the economy and arguably lessened the benefits of low rates and asset purchases for the economic outlook. That’s because consumers and investors were left thinking the central bank would pull back stimulus as soon as it possibly could. Indeed, many observers have erroneously come to equate the Fed’s monetary policies, which are aimed at the economy as a whole, with bank bailouts, which are direct cash injections to specific institutions.

The latest tour de porte came on Dec. 7, when the bond fund giant Pimco announced not one but three salient appointments of former leading government figures — former Federal Reserve Chairman Ben Bernanke, ex-European Central Bank President Jean-Claude Trichet, and Gordon Brown, former U.K. prime minister and, earlier in his career, its finance minister for a decade. Before that, on Nov. 10, the Federal Reserve Bank of Minneapolis appointed Neel Kashkari, a former Goldman Sachs banker, to be its new president. It was the third consecutive top Federal Reserve appointment to come from Goldman Sachs.

Kashkari’s story is, in many ways, typical. He has already taken a couple of spins through the revolving door. He first came into the public eye in late 2008, at the age of 35. Then-Goldman Sachs CEO Hank Paulson had been tapped by George W. Bush to become treasury secretary as the financial crisis deepened, and Paulson brought Kashkari, then a young confidant at Goldman, to work with him. Kashkari was appointed to manage the $700 billion taxpayer bailout of the nation’s largest banks. Given that role, he certainly possesses some experience in economic policy management. But the ease with which he has flowed back and forth between public and private jobs is disheartening.

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Finance and limits to growth. Never discussed. Long article, great graphs.

Give Me Only Good News! (Grantham)

It takes little experience in the investment business to realize that investors prefer good news. As a bear in the bull market of 1999 I was banned from an institution’s building as being “dangerously persuasive and totally wrong!” The investment industry also has a great incentive to encourage this optimistic bias, for little money would be made if the market ticked slowly upwards. Five steps forward and two back are far more profitable. Similarly, we environmentalists were shocked to realize how profoundly the general public preferred to believe good news on our climate, even if it meant disregarding the National Academies of the world. The fossil fuel industry, not surprisingly, encouraged this positive attitude. They had billions of dollars to protect.

If the realistic information were to be widely believed, most of their assets would be stranded. When dealing with realistic limits to growth it is also obvious how reluctant everyone is to accept the natural mathematical limits: There simply cannot be compound growth in a finite world. A modest 1% growth compounded for the 3,000 years of Ancient Egypt’s population would have multiplied its economic output by nine trillion times! Yet, the improbability of feeding ten billion or so global inhabitants in 50 years is shrugged off with ease. And the entire economic and political system appears eager to encourage optimism on resources for it is completely wedded to the virtues of quantitative growth forever.

Hard realities in these three fields are inconvenient for vested interests and because the day of reckoning can always be seen as “later,” politicians can always find a way to postpone necessary actions, as can we all: “Because markets are efficient, these high prices must be reflecting the remarkable potential of the internet”; “the U.S. housing market largely reflects a strong U.S. economy”; “the climate has always changed”; “how could mere mortals change something as immense as the weather”; “we have nearly infinite resources, it is only a question of price”; “the infinite capacity of the human brain will always solve our problems.”

Having realized the seriousness of this bias over the last few decades, I have noticed how hard it is to effectively pass on a warning for the same reason: No one wants to hear this bad news. So a while ago I came up with a list of propositions that are widely accepted by an educated business audience. They are widely accepted but totally wrong. It is my attempt to bring home how extreme is our preference for good news over accurate news. When you have run through this list you may be a little more aware of how dangerous our wishful thinking can be in investing and in the much more important fields of resource (especially food) limitations and the potentially life-threatening risks of climate damage. Wishful thinking and denial of unpleasant facts are simply not survival characteristics.

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Canada turned on a dime when Justin was elected.

First Government Plane Carrying Refugees Arrives in Canada (AP)

The first Canadian government plane carrying Syrian refugees arrived in Toronto late Thursday where they were greeted by Prime Minister Justin Trudeau, who is pushing forward with his pledge to resettle 25,000 Syrian refugees by the end of February. The arrival of the military flight carrying 163 refugees stands in stark contrast to the U.S., which plans to take in 10,000 Syrian refugees over the next year and where Republican presidential candidate Donald Trump caused a worldwide uproar with a proposal to temporarily block Muslims from entering the U.S. The flight arrived just before midnight carrying the first of two large groups of Syrian refugees to arrive in the country by government aircraft.

Trudeau greeted the first two families to come through processing. The first family was a man, woman and 16-month-old girl. The second family was a man, woman, and three daughters, two of whom are twins. Trudeau and Ontario’s premier welcomed them to Canada and gave them winter coats. Both families said they were happy to be here. “This is a wonderful night, where we get to show not just a planeload of new Canadians what Canada is all about, we get to show the world how to open our hearts and welcome in people who are fleeing extraordinarily difficult situations,” Trudeau said earlier to staff and volunteers who were waiting to process the refugees.

All 10 of Canada’s provincial premiers support taking in the refugees and members of the opposition, including the Conservative party, attended the welcoming late Thursday. Trudeau was also joined by the ministers of immigration, health and defense, as well as Ontario Premier Kathleen Wynne and Toronto Mayor John Tory.[..] “They step off the plane as refugees, but they walk out of this terminal as permanent residents of Canada with social insurance numbers, with health cards and with an opportunity to become full Canadians,” Trudeau said. “This is something that we are able to do in this country because we define a Canadian not by a skin color or a language or a religion or a background, but by a shared set of values, aspirations, hopes and dreams that not just Canadians but people around the world share.”

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They seek to force them into the hands of vulture funds? Wow!

Greece Struggles With Creditors To Keep Bad Loans From ‘Vultures’ (Reuters)

Greece is aiming for a deal with international lenders on Friday on the next set of reforms to unlock additional aid, but differences remain over how to handle banks’ bad loans. Athens is struggling to keep non-performing loans to small business and consumers out of the clutches of so-called vulture funds that buy loan books of distressed debt at a discount and try to recover the money. Prime Minister Alexis Tsipras’ government started a new round of talks with euro zone institutions and the IMF this week on the bad loans, as well as splitting off the country’s power grid operator from dominant electricity utility PPC and making state sector wages dependent on performance.

After successfully completing the recapitalization of its four systemic banks and qualifying for €2 billion in bailout loans last month, Athens must enact this second set of reforms to qualify for €1 billion by the end of the month. Athens aims to pass the law by Dec. 18, parliament officials said. “Our effort is to conclude talks on Friday,” said a government official who participated in the talks with the heads of the EU/IMF mission at a central Athens hotel. “The main hurdle is non-performing loans. Our side is trying to exempt mortgages and small business and consumer loans from being transferred to private funds.” Talks were expected to drag on until late on Thursday and also cover the structure of a new privatization fund which Germany and other creditors insisted on to pay down debt.

Another government official said there was convergence on public sector wages and an energy ministry official said Athens was also likely to reach agreement on the power grid operator. Separately, the government submitted to the creditors an initial draft of a tough pension reform seen as the biggest political hurdle in the coming months for Tsipras’s leftist-led coalition, with just a three-seat parliamentary majority. The reform must be adopted in January prior to the first bailout review. After five years of austerity including 12 pension cuts, the government plans to increase social security contributions instead of slashing main pensions again. But the lenders have signaled reluctance, saying it could further damage employment. Greece has pledged to cut spending on pensions by 1% of GDP or €1.8 billion next year. It says it can cover most of this amount from a recent retirement age increase but still needs to find €600 million.

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Sorry, but it was Merkel who suspended the Dublin Regulation in August. She can’t very well hope to switch it on and off as she pleases. This is just harassment.

EU To Sue Greece, Italy, Croatia Over Migrants (AP)

The European Union has started legal action against Greece, Italy and Croatia for failing to correctly register migrants. Tens of thousands of migrants have arrived in those countries over the last few months but less than half of them have been registered by national authorities. Greece has only fingerprinted around 121,000 of the almost half a million people who arrived there between July 20 and Nov. 30 this year, according to the European Commission. The Commission warned the three countries about the shortfalls two months ago, but said Thursday that these “concerns have not been effectively addressed.” The EUs executive arm said it sent formal letters of notice to the three, the first formal step in infringement proceedings.

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Moving to no man’s land.

Stranded Migrants Relocated in Athens Arena, Many Disperse (GR)

Greek authorities finished transferring about 2,300 migrants from the Greece-FYROM border to a former Olympic sports arena early Thursday morning. Greek police used 45 buses to transfer a total of 2,300 migrants, mostly from Morocco, Iran and Soudan, from the Greece-Former Yugoslav Republic of Macedonia border. The migrants do not qualify for refugee status and they were denied entry to FYROM, as a transit point to western Europe. Thirty-four buses transferred most of the migrants to the former taekwondo Olympic arena, while 11 buses took a number of them to the former ice hockey Olympic arena. However, many of them dispersed and disappeared from the hospitality premises as soon as they arrived. Non government organizations and the Red Cross were there to accommodate the migrants as the living conditions are not ideal.

Deputy Migration Minister Yiannis Mouzalas spoke to reporters and said that on December 17 the migrants will be transferred elsewhere but it hasn’t been decided where yet. Regarding the conditions inside the arena, the deputy said that until yesterday these people were hungry and sleeping on the ground. Now they have an enclosed place to stay with meals and bathroom facilities provided. Mouzalas said that the migrants have 30 days to petition for asylum or return to their homelands. Otherwise, they will be deported. The taekwondo arena is guarded by the police and there is no access to reporters. The migrants, in general, do not want to stay in Athens or Greece. Now that the FYROM border is closed, some of them told reporters that they will try to cross to western Europe through Albania and then Croatia. They said there are traffickers who can accommodate those who want to reach the destination of their choice.

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“The Germans think they’re the Americans of Europe.”

Behind Angela Merkel’s Open Door for Migrants (WSJ)

Angela Merkel had just returned to her apartment here after meeting critics of her policy of welcoming Middle East refugees, when aides phoned her with news of terrorist attacks in Paris. The German chancellor’s open door for people fleeing war in Syria, Iraq and elsewhere had already weakened her once-unassailable popularity. She knew, says a person familiar with her thinking, that immigration opponents in Germany and Europe would want to link the Islamist terrorist threat with refugees trekking to Europe and would demand a clampdown on the mainly Muslim migrants. Ms. Merkel’s response: to double down on her migrant policy. She emphatically reiterated her refugee-friendly stance, amping up the moral rhetoric that is infuriating many supporters and politicians of her conservative party. “We live based on shared humanity, on charity,” she told Germans the next morning.

“We believe in…every individual’s right to pursue happiness,” she said, “and in tolerance.” Catching the terrorists is Europe’s duty “also to the innocent refugees who are fleeing from war and terror,” she said at a world leaders’ summit in Turkey that weekend. Ms. Merkel’s insistence that Europe can absorb potentially millions of new residents is vexing her country and continent. Germans are questioning her judgment and her grip on power. Some other European countries bridle at Germany’s leadership, raising fears the crisis could cripple the European Union. Germany seeks to impose “moral imperialism,” says a senior official from Hungary, one of the EU countries critical of Ms. Merkel’s course. “The Germans think they’re the Americans of Europe.” The backlash against Ms. Merkel’s pro-refugee policy has become the biggest-yet test of her political skills and of Germany’s leadership in Europe.

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Many more today. A father lost his wife and 7 children. Saw another Tweet talking about 35 people from one boat.

Four More Bodies Found In Aegean After Boat Sinks (AP)

Greek authorities have located four more bodies off the eastern Aegean Sea islet of Farmakonissi, a day after a boat carrying migrants sank there, drowning 12 people and leaving 12 more missing. The coast guard says the bodies of two men, a woman and a baby were located Thursday in the sea off Farmakonissi. It was not yet clear whether they were among those missing from Wednesday’s accident, in which a wooden boat carrying about 50 people sank. A further 26 people who had been on the boat were rescued.

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The madness intensifies. This is not what people want in Europe. But they get it anyway. Hence Marine Le Pen.

EU Plans Border Force To Police External Frontiers (FT)

Brussels is to propose the creation of a standing European border force that could take control of the bloc s external frontiers – even if a government objected. The move would arguably represent the biggest transfer of sovereignty since the creation of the single currency. Against the backdrop of a crisis that has seen 1.2m migrants reach Europe this year, the European Commission will unveil plans next week to replace the Frontex border agency with a permanent border force and coastguard – deployed with the final say of the commission, according to EU officials and documents seen by the Financial Times. The blueprint represents a last-ditch attempt to save the Schengen passport-free travel zone, by introducing the kind of common border policing repeatedly demanded by Paris and Berlin.

Britain and Ireland have opt-outs from EU migration policy, and would not be obliged to take part in the scheme. European leaders have discussed a common border force for more than 15 years, but always struggled to overcome deep-seated objections to yielding national powers to monitor or enforce borders one of the core functions of a sovereign state. Greece, for instance, only recently agreed to accept EU offers to send border teams, after months of wrangling over their remit. Systemic weaknesses in the Schengen Area agreement were laid bare by this year s massive influx of migrants, many of them unregistered, into the EU through Greece and Italy. Concerns came to a head after last month s terrorist attacks in Paris, when it transpired that at least some of the assailants came to Europe from Syria via Greece.

One of the most contentious elements of the regulation would hand the commission the power to authorise a deployment to a frontier, on the recommendation of the management board of the newly formed European Border and Coast Guard. This would also apply to non-EU members of Schengen, such as Norway. Although member states would be consulted, they would not have the power to veto a deployment unilaterally. Dimitris Avramopoulos, who is responsible for EU migration policy, said: The refugee crisis has shown the limitations of the current EU border agency, Frontex, to effectively address and remedy the situation created by the pressure on Europe’s external borders.

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