borders Archives - Page 2 of 2 - The Automatic Earth

In the last two months, NYSE Short Interest has risen 4.5%, back over 18 billion shares near the historical record highs of July 2008 (and up 7 of the last 9 months).

There are two very different perspectives on could take when looking at this data… Either a central bank intervenes, or a massive forced buy-in event occurs, and unleashes the mother of all short squeezes, sending the S&P500 to new all time highs, or .. Just as the record short interest in July 2008 correctly predicted the biggest financial crisis in history and all those shorts covered at a huge profit, so another historic market collapse is just around the corner. The correct answer will be revealed in the coming weeks or months… but we know what happened last time…

Ask nicely. Prety pretty please. Look, China doesn’t want millions of unemployed workers. They’ll want to smear this out over years.

• EU Chamber Urges China To Cut Excess Production (WSJ)

The European Union Chamber of Commerce in China urged Beijing to do more to tackle excess industrial production, saying that failed attempts to do so have created a flood of excess goods that threatens to destabilize the global economy. The call comes as Chinese manufacturers, hit by an economic slowdown, are sending products–from tires and steel to solar panels and chemicals–overseas that they can’t sell at home. The EU Chamber, which represents more than 1,600 members across China, said Monday that excess production is plaguing industrial sectors, such as steel, cement and chemicals, but is also spilling over into the consumer economy, including consumer electronics, pharmaceuticals and even food and apparel.

The usage rate for China’s steel in 2014 dropped to 71% from 80% in 2008, the EU Chamber estimated, based on China’s official data. Production increased to 813 million metric tons from 513 million tons during that time, the industry group said. Representatives from Europe’s steel industry, reeling from competition from cheap Chinese steel, last week took to the streets in Brussels to protest alleged unfair trade practices that they claim will worsen if the EU grants market-economy status to China later this year. Such a move would make it more difficult for Europe to impose steep tariffs on Chinese goods. London-based Caparo initiated bankruptcy proceedings in October for 16 of its 20 steel businesses, which employed 1,700 people. Tata Steel of India blamed overproduction in China when it said in January that it would cut 1,050 jobs from its U.K. operations, adding to cuts announced in October.

In a briefing Monday, the EU Chamber, which released a study on China’s industrial overcapacity, said China must act immediately to restructure its economy and overhaul state-owned companies that are pumping out excess goods. It must reduce negative impacts in China, such as job losses and bad debt, and fend off a crisis that could reverberate globally, the chamber said. Chinese leaders have prioritized party reform and anticorruption, but it is time to shift that focus to the economy, said Jörg Wuttke, president of the European Chamber. “The time spent on economic reforms is way down on the priority list.” said Mr. Wuttke.” We believe they have to act now, not wait.”

Are they betting against their own clients yet?

• Biggest Banks’ Commodity Revenue Slid to Lowest in Over a Decade (BBG)

Revenue from commodities at the largest investment banks sank to the weakest in more than a decade last year, laid low by a rout in prices for everything from metals to gas. Income at Goldman Sachs, Morgan Stanley and the 10 other top banks slid by a combined 18% to $4.6 billion, according to analytics firm Coalition. That was the worst performance since the London-based company began tracking the data 11 years ago, and a slump of about two-thirds from the banks’ moneymaking peak in 2008. Revenues are unlikely to return to the heights of $14.1 billion seen at the top of the market, according to George Kuznetsov at Coalition. “The competitive landscape is very different,” Kuznetsov said by phone.

“Financial institutions are now much more regulated. We have significantly less involvement of the banks in the physical commodities market, and banks do not take as much risk as they used to in 2008-09.” The Bloomberg Commodity Index, a measure of investor returns from 22 raw materials, slumped the most in seven years in 2015, led by a plunge in energy and metals. Banks including JPMorgan, Deutsche Bank and Barclays have also been scaling back commodities activity in the past three years amid rising regulatory scrutiny. Even as oil revenues improved last year on increased activity by corporate clients, U.S. curbs on proprietary trading meant banks couldn’t fully take advantage of a 35% plunge in crude by making speculative bets, unlike trading houses and big oil companies.

Last year was one of the best years of all time for trading oil and gas, BP Chief Financial Officer Brian Gilvary said this month. Trafigura’s oil-trading earnings surged to a record last fiscal year. A gauge of industrial-metals prices fell by 24% last year, the most since 2008. Income from energy markets also returned to normal levels after gains in 2014, according to Coalition. “A normalization of the U.S. power and gas markets and weakness in metals and investor products drove the overall decline,” the company said in a report released on Monday. Declining commodities revenues helped bring down the performance for banks’ overall fixed-income divisions, according to Coalition. The analytics company tracks commodities activities including power and gas, oil, metals, coal and agriculture.

BHP Billiton looks to be in danger.

• The Metals Crunch Is Forcing Miners To Reconsider Diversification (Economist)

At the pinnacle of the mining industry sit two Anglo-Australian companies, BHP Billiton and Rio Tinto, which are to iron ore what Saudi Arabia is to oil: the ones who call the shots. Their mines in Pilbara, Western Australia, are vast cash cows; with all-in costs below $30 a tonne, they still generate substantial profits even though prices have slumped from $192 a tonne in 2011 to about $44. They have increased iron-ore production despite slowing demand from China, driving higher-cost producers to the wall—an echo of the Saudis’ strategy in the oil market. But whereas Rio Tinto has doubled down on iron ore, BHP also invested in oil and gas—in which it has nothing like the same heft—at the height of the shale boom. Their differing strategies are a good test of the merits of diversification.

The China-led commodities supercycle encouraged mission creep. Many companies looked for more ways to play the China boom, and rising prices of all raw materials gave them an excuse to cling on to even those projects that were high-cost and low-quality. Now the industry is plagued with debts and oversupply. On February 16th Anglo American, a South African firm that was once the dominant force in mining, said it would sell $3 billion of assets to help pay down debt, eventually exiting the coal and iron-ore businesses that it had spent a fortune developing. That would leave it with a core business of just copper, diamonds and platinum. The day before, Freeport-McMoRan, the world’s largest listed copper producer, was forced to sell a $1 billion stake in an Arizonan copper mine to Sumitomo of Japan, to help cut debts racked up when it expanded into oil and gas.

With Carl Icahn, an American activist investor, agitating for a shake-up, analysts say its energy assets could follow—if there are any buyers. When BHP reports half-yearly results on February 23rd its misadventure in American oil and gas will be of particular concern because it has put the world’s biggest mining firm in the shadow of Rio for the first time. Since BHP merged with Billiton in 2001, its share price has outperformed Rio’s; it made an unsuccessful bid to merge with its rival in 2007. Yet in the past year its shares have done worse. Analysts expect that next week it will cut its annual dividend for the first time since 2001, thereby breaking a promise to raise the dividend year by year. Though Rio ended a similar “progressive dividend” policy this month, it did not cut the 2015 payout.

And this is its last desperate call.

• The World’s Biggest Miner May Be About to Toast Its Oil Drillers (BBG)

BHP Billiton’s shares began tracking oil prices more closely last year as they headed into the worst energy market downturn in a generation. It may not seem like it, but that could be good news for the world’s biggest miner. Unlike its rivals, BHP has a substantial petroleum unit, valued at about $25 billion by UBS. So while iron ore and most base metal prices are forecast to languish over the remainder of the decade as growth in China slows, the Melbourne-based company’s stock stands to benefit from a projected rebound in crude oil. BHP needs an edge. Its Sydney-traded shares sunk last month to the lowest since 2005 and it’s forecast to report a 86% drop in first-half earnings on Tuesday. On top of that, the producer’s ultimate liability for the deadly Samarco dam burst in Brazil late last year remains uncertain and it’s been warned by Standard & Poor’s that it may face a second credit rating downgrade this year.

An oil rebound could deliver a reboot with Schroders saying this month prices may rally almost two-thirds to as high as $50 a barrel in a few months. BHP has flagged it’s on the lookout for petroleum assets, and is likely to study adding more conventional assets, particularly in the Gulf of Mexico, if distressed competitors are forced to sell, according to Aberdeen Asset Management. BHP “follows oil a lot more closely than iron ore these days,” Michelle Lopez, a Sydney-based investment manager at Aberdeen, which holds BHP shares among the $428 billion of assets it manages globally, said by phone. “When you look at the forward curve, iron ore still looks like it’s going to be at these levels if not a bit lower, whereas there are expectations of a correction in the oil price.”

Some people are still talking about a recovery. Get real.

• New Market Storm Could Catch Eurozone Unprepared (Reuters)

Distracted by an unresolved migration crisis and negotiations on keeping Britain in the EU, euro zone leaders could be caught unprepared by a new storm on financial markets. Global market turmoil since the start of the year has helped set warning lights flashing in euro zone sovereign bond markets. In early February, the premium that investors charge to hold Portuguese, Spanish and Italian government debt rather than German bonds hit some of the highest levels since the euro zone crisis that peaked in 2011-2012. European bank shares have been badly hit by concerns over their high stock of non-performing loans, new regulatory burdens and a squeeze on profits due to sub-zero official interest rates. New EU banking regulations that force shareholders and bondholders to take first losses if a bank needs rescuing are further spooking the market, notably in Italy.

All this comes at a time when public resistance to further austerity measures has surged all over southern Europe, producing unstable results at the ballot box. Furthermore, the storm clouds are gathering above a tenuous and slow euro zone economic recovery – growth is officially forecast to reach 1.9% this year versus around 1.6% in 2015. Southern periphery countries all face budget problems that are fuelling political tension with Brussels. Inflation is also refusing to perk up despite the ECB’s bond-buying programme and negative interest rates, making it harder for heavily indebted euro zone countries to pay down debt. Yet euro zone governments transfixed by differences over sharing out refugees, managing Europe’s porous borders and accommodating British demands for concessions on EU membership terms have a huge amount on their hands already. One French government adviser said the EU had never faced such an accumulation of crises in the last 50 years.

Yeah, sure: “We’re still looking for some confirmations for the economic growth outlook.”

• Traders Would Rather Get Nothing in Bonds Than Buy Europe Stocks (BBG)

The cash reward for owning European stocks is about seven times larger than for bonds. Investors are ditching the equities anyway. Even with the Euro Stoxx 50 Index posting its biggest weekly rally since October, managers pulled $4.2 billion from European stock funds in the period ended Feb. 17, the most in more than a year, according to a Bank of America note citing EPFR Global. The withdrawals are coming even as corporate dividends exceed yields on fixed-income assets by the most ever. Investors who leaped into stocks during a similar bond-stock valuation gap just four months ago aren’t eager to do it again: an autumn equity rally quickly evaporated come December.

A Bank of America fund-manager survey this month showed cash allocations rose to a 14-year high and expectations for global growth are the worst since 2011. If anything, the valuation discrepancy between stocks and bonds is likely to get wider, said Simon Wiersma of ING. “The gap between bond and dividend yields will continue expanding,” said Wiersma, an investment manager in Amsterdam. “Investors fear economic growth figures. We’re still looking for some confirmations for the economic growth outlook.” Dividend estimates for sectors like energy and utilities may still be too high for 2016, Wiersma says. Electricite de France and Centrica lowered their payouts last week, and Germany’s RWE suspended its for the first time in at least half a century.

Traders are betting on cuts at oil producer Repsol, which offers Spain’s highest dividend yield. With President Mario Draghi signaling in January that more ECB stimulus may be on its way, traders have been flocking to the debt market. The average yield for securities on the Bloomberg Eurozone Sovereign Bond Index fell to about 0.6%, and more than $2.2 trillion – or one-third of the bonds – offer negative yields. Shorter-maturity debt for nations including Germany, France, Spain and Belgium have touched record, sub-zero levels this month.

And Germany makes sure to transfer that blow to the rest of the eurozone.

• German Economy Takes a Blow From Weakening Global Demand (BBG)

The German economy took a hit this month from weak global demand, with a manufacturing gauge dropping to a 15-month low. Markit Economics said its factory Purchasing Managers Index fell to 50.2, barely above the key 50 level, from 52.3 in January. A services gauge improved slightly, but a composite measure declined to the lowest since July. “The German economy appears to be in the midst of a slowdown,” said Oliver Kolodseike, an economist at Markit. Manufacturing is “near stagnation,” he said. While Germany weathered global headwinds through 2015, maintaining its pace of expansion in the fourth quarter, business confidence has weakened recently.

China’s slowdown is weighing on exports while the equity selloff this year threatens a fragile recovery in the euro area, the country’s largest trading partner. The OECD cut its global growth forecast last week and said both Germany and the euro region will expand less this year than previously estimated. Markit said the slowdown in German output led to increased caution on hiring, with the rate of job creation at the weakest in almost a year. France’s composite Purchasing Managers Index slipped to 49.8 from 50.2 in January. In the 19-nation euro area, both the factory and services measures probably declined this month, according to surveys of economists. Markit will publish those numbers at 9 a.m. London time.

Germany’s surpluses keep on bleeding its neighbors dry. That is the problem.

• Germany Isn’t Investing the Way It Used to and That’s a Problem (BBG)

All the pieces appear to be in place for a surge in corporate investment in Germany – except one critical element. While low borrowing costs, robust domestic consumption and capacity strains mean companies should be itching to spend, the confidence to do so is lacking. Market turmoil, signs of a weaker global demand and Germany’s own aging population are giving bosses plenty of reason to hold back, leaving capital spending as a share of output clinging stubbornly to a five-year low. That matters both for Germany, where the IMF says more capital spending is needed to ensure future growth, and the 19-nation euro area. The strength of the region’s largest economy could be key to whether the currency bloc’s fragile recovery can be sustained.

“Every year since 2013, most pundits including ourselves have been predicting that this is going to be the year that investment really picks up in earnest,” said Timo Klein, an economist at IHS Global Insight in Frankfurt. “But every year something unfolds that clouds the picture, from Ukraine to China, and investment is postponed again. The long-term consequence of this is a reduction in growth potential.” A report on Tuesday will shed more light on the role of investment in Germany’s economic expansion in the fourth quarter. Preliminary data showed gross domestic product rose 0.3%, matching the pace of the previous three months, with government and consumer spending leading the way.

While that’s unspectacular, France and Italy fared worse. The euro zone’s second and third-largest economies cooled, with the latter barely growing, increasing the burden on Germany to be the region’s engine. Yet investment as a share of German GDP fell to less than 20% last year from about 23% at the turn of the century, a Bundesbank study in January showed. Private investment slid to 11.5% from 13.4%, according to Eurostat. In its February bulletin, the Bundesbank said investment should increase because of an “above-average level of capacity utilization.” However, it also said a “key prerequisite” is that external demand picks up.

One safe bet.

• China Yuan Bears Predict More Trouble Ahead (BBG)

Before China’s devaluation in August roiled global markets and spurred some of the hedge fund industry’s biggest names to bet against the yuan, a small cohort of researchers saw the whole thing coming. Now, some of those same forecasters are warning that there’s more turmoil in store – and it’s not just China they’re worried about. Asianomics’s Jim Walker, who predicted the yuan’s four-year advance would end a month before the currency peaked in January 2014, is forecasting a U.S. recession and says 10-year Treasury yields will plunge to all-time lows. Raoul Pal, publisher of the Global Macro Investor report and a yuan bear since 2012, says European bank shares will tumble by half. John Mauldin of Millennium Wave Advisors, who has argued since 2011 that the Chinese currency should weaken, sees the risk of heightened geopolitical instability in the Middle East as lower crude prices strain the budgets of oil-rich countries.

While all three forecasters see scope for further declines in the yuan, they’re also emphasizing risks outside the Chinese economy as the outlook for world growth dims and commodities trade near the lowest levels in more than 15 years. Their bearish stance has gained traction in global markets this year, with share prices from New York to Riyadh and Sydney sliding as investors shifted into gold and sovereign bonds. “There’s a storm of troubles coming,” Pal, a former hedge-fund manager at GLG Partners whose clients now include pension plans and sovereign wealth funds, said in a phone interview from the Cayman Islands. “The risk of a very bad outcome in 2016 and 2017 remains the highest probability.”

“What we are witnessing is the resetting of the largest macro imbalance the world has ever seen..”

• Kyle Bass, A Sharpshooting Short-Seller (FT)

I’ve been to Beijing twice, I don’t care to go back,” Kyle Bass says. “I’m OK with that.” The subprime-shorting, sniper rifle-shooting, spearfishing hedge fund manager from Dallas, Texas, does not fear the ire of the Chinese authorities. He has a decade-long record of putting his mouth where his money is, and if his latest apocalyptic call — that the Communist government does not have the resources to prevent a banking crisis and a vicious currency devaluation — puts him at the centre of the angriest debate in financial markets, well, that is just fine by him. “Anyone who is invested in China, whether you are a pension fund or sovereign wealth fund or a large US or European institution — you better be thinking about this, and not with the reverence that people give to China,” he says.

“Everyone has this embedded belief that China can pull off the ‘triple lindy’ every time they want to do it,” says the former springboard diver, “but our view is they are going to have to have a reset.” Mr Bass is hardly the only hedge fund manager betting on a renminbi devaluation; when Beijing wanted to send a shot across speculators bows last month, it was George Soros who was singled out on the front of the People’s Daily, a government mouthpiece. Yet, thanks to a 12-page dissection of China’s banks, shadow banks and central bank reserves sent to investors in his $1.7bn hedge fund Hayman Capital last week, it is Mr Bass who has given the most strident, forensic and colourful voice to those who suspect China will be forced to revalue the currency sharply lower. “What we are witnessing is the resetting of the largest macro imbalance the world has ever seen,” he wrote.

Banking system losses could be four times as big as those on subprime mortgages in the US during the financial crisis, and the central bank does not have the reserves to plug the hole and defend its currency. “China’s back is completely up against the wall today” and the country is “on the precipice of a large devaluation”. Economists and Beijing have challenged the alarming analysis; Zhou Xiaochuan, the People’s Bank of China governor, gave a rare interview to insist capital outflows were evidence of economic rebalancing rather than capital flight. This is all of a piece with previous declarations by Mr Bass. Since the Great Recession he has predicted sovereign debt crises in Ireland, Greece, Portugal, Spain, the UK, Switzerland and France.

He has compared the Japanese economy to a “Ponzi scheme”. Armageddon does not always come — he admits he was wrong on Switzerland and the UK; and Japan is notably still standing, though a devaluation of the yen meant his bet eventually made money overall there. Hayman’s returns since the financial crisis have been modest by the standards of the greatest hedge fund investors and 2015 was, by his own admission, one of his worst. But enough of Mr Bass’s predictions have come true to justify taking him seriously. One manager of a fund of hedge funds says investing with Mr Bass is like funding a “think-tank” on how to navigate the global economy.

Creative bankruptcies.

• As US Shale Sinks, Pipeline Fight Sends Woes Downstream (Reuters)

Within weeks, two low-profile legal disputes may determine whether an unprecedented wave of bankruptcies expected to hit U.S. oil and gas producers this year will imperil the $500 billion pipeline sector as well. In the two court fights, U.S. energy producers are trying to use Chapter 11 bankruptcy protection to shed long-term contracts with the pipeline operators that gather and process shale gas before it is delivered to consumer markets. The attempts to shed the contracts by Sabine Oil & Gas and Quicksilver Resources are viewed by executives and lawyers as a litmus test for deals worth billions of dollars annually for the so-called midstream sector. Pipeline operators have argued the contracts are secure, but restructuring experts say that if the two producers manage to tear up or renegotiate their deals, others will follow.

That could add a new element of risk for already hard-hit investors in midstream companies, which have plowed up to $30 billion a year into infrastructure to serve the U.S. fracking boom. “It’s a hellacious problem,” said Hugh Ray, a bankruptcy lawyer with McKool Smith in Houston. “It will end with even more bankruptcies.” A judge on New York’s influential bankruptcy court said on Feb. 2 she was inclined to allow Houston-based Sabine to end its pipeline contract, which guaranteed it would ship a minimum volume of gas through a system built by a Cheniere Energy subsidiary until 2024. Sabine’s lawyers argued they could save $35 million by ending the Cheniere contract, and then save millions more by building an entirely new system. Fort Worth, Texas-based Quicksilver’s request to shed a contract with another midstream operator, Crestwood Equity Partners, is set for Feb. 26.

[..] So far, relatively few oil and gas producers have entered bankruptcy, and most were smaller firms. But with oil prices down 70% since mid-2014 and natural gas prices in a prolonged slump, up to a third of them are at risk of bankruptcy this year, consultancy Deloitte said in a Feb. 16 report. Midstream operators have been considered relatively secure as investors and analysts focus on risks to the hundreds of billions of dollars in equity and debt of firms most directly exposed to commodity prices. That’s because firms such as Enterprise Products, Kinder Morgan and Plains All American relied upon multi-year contracts – the kind targeted in the two bankruptcies – that guarantee pipeline operators fixed fees to transport minimum volumes of oil or gas.

Now, with U.S. oil output shrinking and gas production stalling, many of the cash-strapped producers entering bankruptcy will be seeking to rid themselves of pricey agreements, particularly those with so-called minimum volume commitments that require paying for space even if it is not used. “They will be probably among the first things thrown out,” said Michael Grande, director for U.S. midstream energy and infrastructure at Moody’s.

Volatility writ large.

• Chinese Military Ambitions Fuel Asian Arms Race Amid Slowdown (WSJ)

The rapid rise in Chinese military spending and a greater assertiveness in its territorial claims is fueling an arms race in the Asia-Pacific region even though many of the countries involved have been hit by an economic slowdown, new research reports suggest. Of the 10 biggest importers of defense equipment in the past five years, six countries were in the Asia-Pacific region, the Stockholm International Peace Research Institute, or SIPRI, said in an annual report on arms transfers. India was the largest buyer of foreign equipment, with China in third position after Saudi Arabia, the think tank said. Although a country’s spending power is often tied to its economic strength, buyers in the Asia-Pacific region aren’t slashing military budgets even as their economies have come under strain from falling commodity prices and lower growth in China.

“The slight moderation in economic activity had little effect on regional military spending in 2015,” the International Institute for Strategic Studies, or IISS, said in a new report. China, Japan, South Korea, and Indonesia last year were among the countries to announce plans for higher military spending, the IISS said. Lower economic output has driven up Asian military spending as a percentage of GDP to 1.48%, the London-based research organization said, its highest level since at least 2010. China leads the way, accounting for 41% of the region’s military spending, well ahead of No. 2 India at 13.5% and Japan with 11.5%.

William K. Black: always a pleasure.

• Krugman and the Gang of 4 Need to Apologize (Bill Black)

If you depend for your news on the New York Times you have been subjected to a drumbeat of article attacking Bernie Sanders – and the conclusion of everyone “serious” that his economics are daft. In particular, you would “know” that four prior Chairs of the President’s Council of Economic Advisers (CEA) (the Gang of 4) have signed an open letter to Bernie that delivered a death blow to his proposals. Further, you would know that anyone who dared to disagree with these four illustrious economists was so deranged that he or she was acting like a Republican in denial of global climate change. The open letter set its sights on a far less famous economist, Gerald Friedman, of U. Mass at Amherst. It unleashed a personalized dismissal of his competence and integrity.

Four of the Nation’s top economists against one non-famous economists – at a school that studies heterodox economics. That sounds like a fight that the referee should stop in the first round before Friedman is pummeled to death. But why did Paul Krugman need to “tag in” to try to save the Gang of 4 from being routed? Krugman proclaimed that the Gang of 4 had crushed Friedman in a TKO. Tellingly, Krugman claimed that anyone who disagreed with the Gang of 4 must be beyond the pale (like Friedman and Bernie). Indeed, Krugman was so eager to fend off any analysis of the Group of 4’s attacks that he competed with himself rhetorically as to what inner circle of Hell any supporter of Friedman should be consigned. In the 10:44 a.m. variant, Krugman dismissed Bernie as “not ready for prime time” and decreed that it was illegitimate to critique the Gang of 4’s critique.

In Sanders’s case, I don’t think it’s ideology as much as being not ready for prime time — and also of not being willing to face up to the reality that the kind of drastic changes he’s proposing, no matter how desirable, would produce a lot of losers as well as winners. And if your response to these concerns is that they’re all corrupt, all looking for jobs with Hillary, you are very much part of the problem.

The implicit message is that four famous economists had to be correct, therefore anyone who disagreed with them must be a conspiracy theorist who is “very much part of the problem.” Paul doesn’t explain what “the problem” is, but he sure makes it sound awful. Logically, “the problem” has to be progressives supporting Bernie. Two hours later, Paul decided that his poisoned pen had not been toxic enough, he now denounced Sanders as a traitor to the progressives who was on his way “to making Donald Trump president.” To point out the problems in the Gang of 4’s attack on Friedman was to treat them “as right-wing enemies.”

Why was Krugman so fervid in its efforts to smear Friedman and prevent any critique of the Gang of 4’s smear that he revised his article within two hours and amped up his rhetoric to a shrill cry of pain? Well, the second piece admits that Gang of 4’s smear of Friedman “didn’t get into specifics” and that progressives were already rising in disgust at Paul’s arrogance and eagerness to sign onto a smear that claimed “rigor” but actually “didn’t get into specifics” while denouncing a scholar. Paul, falsely, portrayed Friedman as a Bernie supporter. Like Krugman, Friedman is actually a Hillary supporter.

Greece is a cash country. For one thing, there are still capital controls. People cannot get more than $420 a week or so out of their ATM. That is very limiting in many ways.

• Greek Attempt To Force Use Of Electronic Money Instead Of Cash Fails (ZH)

While the “developed world” is only now starting its aggressive push to slowly at first, then very fast ban the use of physical cash as the key gating factor to the global adoption of NIRP (by first eliminating high-denomination bills because they “aid terrorism and spread criminality”) one country has long been doing everything in its power to ween its population away from tax-evasive cash as a medium of payment, and into digital transactions: Greece. The problem, however, is that it has failed. According to Kathimerini, “Greek businesses are not ready for the expansion of plastic money through the compulsory use of credit and debit cards for everyday transactions.” Unlike in the rest of the world where “the stick” approach will likely to be used, in Greece the government has been more gentle by adopting a “carrot” strategy (for now) when it comes to migrating from cash to digital.

The government has told taxpayers that they will have to spend up to a certain amount of their incomes via bank and card transactions in order to qualify for an annual tax-free exemption. This appears to not be a sufficient incentive however, as a large proportion of stores still don’t have the card terminals, or PoS (Points of Sale), required for card payments, while plastic is accepted by very few doctors, plumbers, electricians, lawyers and others who tend to account for the lion’s share of tax evasion recorded in the country. Almost as if the local population realizes that what the government is trying to do is to limit at first, then ultimately ban all cash transactions in the twice recently defaulted nation as well. It also realizes that an annual tax-free exemption means still paying taxes; taxes which could be avoided if one only transacted with cash.

For the government this is bad news, as the lack of tracking of every transaction means that the local population will pay far less taxes: a recent study by the Foundation for Economic and Industrial Research (IOBE) showed that increasing the use of cards for everyday transactions could increase state revenues by anything between 700 million and 1.6 billion euros per year, and that the market’s poor preparation means that the tax burden has been passed on to lawful taxpayers. As a reminder, in Greece, the term “lawful taxpayers” is not quite the same as in most other countries. What is more surprising is that according to data seen by Kathimerini, PoS terminals in Greece amount to just 220,000, and that despite the fact these were effectively forced on enterprises with the imposition of the capital controls, an estimated half of all businesses do not have card terminals. Almost as if the Greeks would rather maintain capital controls than be forced into a digital currency by their Brussels overlords.

Some things are just plain weird. They invest $150 million in Espirito Santo in July -when everyone already knew something was fishy, but that’s not even the gist-, and then lose it all one month later?! That’s not fish I’m smelling, it’s a rat.

• New Zealand Super Fund’s $200 Million Loss (NZ Herald)

Almost $200 million of taxpayer money invested through the Kiwi Superannuation Fund has been lost after a Portuguese bank where the money was invested, supposedly as a “risk free” loan, collapsed. The Super Fund, set up with public money to cover partly the retirement costs of baby boomers, has revealed it had been caught up in last year’s collapse of Banco Espirito Santo (BES) and a US$150m (NZ$198m) investment made in July had been completely wiped out. The investment was a contribution to a Goldman Sachs-organised loan to the Portuguese bank, but only weeks after the money was injected it imploded, with president and founder Ricardo Salgado arrested as part of a criminal investigation into tax evasion.

After disclosing billions of Euros in losses, and facing a run on funds by depositors, the bank collapsed in a heap and was broken up in August. Goldman Sachs, described by Rolling Stone as “the great vampire squid” for their sharp business practices in the run-up to the global financial crisis, today said it would “pursue all appropriate legal remedies without delay” in an attempt to recover the loans to BES. The company also announced that, alongside the Super Fund, they were suing the Central Bank of Portugal over their loans being excluded from the bailout of BES. Despite this legal action, Super Fund chief executive Adrian Orr conceded today the entire investment had been written off as a “conservative” precaution. Finance Minister Bill English, the minister responsible for the Super Fund declined to comment on the spectacular loss, but Green Party MP Russel Norman said Mr English should be demanding answers.

“They have to give some sort of explanation as to why they gambled US$150m in this case, and why it’s come unstuck,” he said. The episode also illustrated what the NZSF should try to avoid, Mr Norman said. “For a fund operating on behalf of the NZ taxpayer, taking these high-risk investments is probably not appropriate,” he said. Mr Orr denied the investment was high-risk and said the NZSF had been covered in the event of BES defaulting. “It was risk-free with insurance,” he said. However, an unusual retrospective rule change in Portugal had resulted in the insurance being voided. Orr added the Super Fund had withdrawn lending to banks in Portugal until the result was overturned. The Fund said the loss amounted to only 0.7% of the firm’s total pool of $27b in assets.

“Christchurch, home to 366,000 people, who are still shaken daily by thousands of aftershocks..” (Nicole and I were there at the first anniversary)

• Long Way To Go: 5th Anniversary of the Christchurch Earthquake (G.)

It was as the clock struck 12.51pm that the last of the 185 names were read out. Then, the 1,000 people who had gathered in the city’s botanic gardens to mark the anniversary of the 2011 Christchurch earthquake fell silent for a minute to remember the moment, five years ago, that the 6.3-magnitude quake struck. Earlier, posies of flowers had been laid in road cones and taped to the safety fences that still litter the city centre half a decade after the disaster turned it largely to rubble.Once the memorial ceremony had finished, talk turned – as it usually does – to the rebuilding of this once-rich, agricultural hub – and what the new Christchurch will look like when it finally rises from the ashes. “There is still some way to go until Christchurch is truly reborn,” said the governor-general, Jerry Mateparae.

His is a sentiment widely shared in Christchurch, home to 366,000 people, who are still shaken daily by thousands of aftershocks – including a significant 5.9 rumble on Valentines day this year and a 5.0-magnitude quake that hit in nearby Blenheim on the anniversary itself. Despite years of clean-up and a recent boom in construction, Christchurch is still in a state of flux, with hundreds of people waiting for insurance payouts and widespread concern about the pace of the rebuild, especially in the heart of the city. The health of Christchurch residents has also fared poorly since the quake. Suicide and domestic violent rates have risen sharply – as has illegal drug use and the spread of sexually transmitted diseases.

Mental health problems are a persistent concern – particularly widespread are incidences of depression, anxiety and post traumatic stress disorder. Waiting lists for state-funded counselling in Christchurch are long, and last week it was reported the government would significantly cut funding to community mental health providers – from $1.6m in 2015 to $200,000 this year. Yet in tandem with the trauma of the quake’s aftermath has come a remarkable flourishing of the creative arts in the garden city. Rachael Welfare, operations director for Gap Filler, a charitable organisation filling the “gaps” of Christchurch with pop-up creative projects, said: “Before the quake, people thought of Christchurch as quite conservative, but now the opportunities have given people a blank canvas, if nothing else, and people are very open-minded about what the spaces could be.”

Who told them to do this and say damn the Geneva conventions?

• Macedonia, Serbia Close Borders To Afghan Refugees (AP)

Former Yugoslav Republic of Macedonia (FYROM) closed its border to Afghan migrants early Sunday, Greek police said, slowing the admission of refugees to a trickle and leaving a growing bottleneck of people stuck at their shared border. A FYROM police spokeswoman denied there was any new prohibition regarding Afghans, blaming the problem on Serbia, the next nation along the Balkans migration route into Western Europe. By early afternoon, about 1,000 migrants were waiting at the Greek border camp in Idomeni – and at a gas station only 17 kilometers (11 miles) away, 80 buses with 4,000 more migrants were waiting to take them to the border. Greek police said FYROM refused to let Afghans through because Serbia made the same decision and officials feared the migrants would get stuck in FYROM.

“The authorities of the Former Yugoslav Republic of Macedonia informed us that, beginning at dawn Sunday, they no longer accept Afghan refugees because the same problem exists at their border with Serbia,” Petros Tanos, spokesman for Greek police’s Central Macedonia division, told The Associated Press. Despite the reports, about 500 migrants of all nationalities made the trek on foot from the gas station to the border Sunday. “I can no longer wait,” said 17-year-old Ali Nowroz, one of the trekkers from the Afghan city of Jaghori Zeba. “We have spent three nights in the cold, we are hungry. They told me that the borders have been closed to us. However, when I started from Afghanistan I knew borders were open for us. I am going to the Idomeni border crossing to find out and ask why they have closed it.”

Every single day. Numbers are rising as borders are closing. Greece can’t be far away from becoming a failed state

• Shadowing The Hellenic Coast Guard’s Refugee Rescues (CCTV)

As Europe tries to deal with the biggest refugee crisis since World War II, improving weather means the pace of migrants and refugees reaching Greece from Turkey will pick up again. On Feb 15., over 4,500 people were rescued across the Aegean Sea in Greece. Since last year, the Hellenic Coast Guard has rescued almost 150,000. CCTV’s Filio Kontrafouri went on patrol with the Hellenic Coast Guard off the Greek island of Lesvos and witnessed what happens after those dinghies, usually loaded with women and children, enter the Greek waters. “For us, all these people are like they are condemned to death,” said Sub-lieutenant Kyriakos Papadopoulos of the Hellenic Coast Guard. “You’ll see when we get to that boat, about which some other colleagues in the area have informed us, even with everyone on board, there is panic. People could move from one side to the other, these boats are not suitable for travel at sea, their life jackets are not suitable and at any moment their life is in danger.”

Debt Rattle February 7 2016

Feb 072016

February 7, 2016 Posted by Raúl Ilargi Meijer at 9:34 am Finance Tagged with: borders, bulls, China, debt, default, FX, oil, refugees, reserves, Syria, WWIII 3 Responses »

DPC Chamber of Commerce, Boston MA 1904

• $100 Trillion Up in Smoke (Mauldin)

• As Big Oil Shrinks, Boards Plot Different Paths Out Of Crisis (Reuters)

• Exxon Ends Share Buybacks – It Must Be Acquisition Time (Forbes)

• Hess Oil: A “Folly For The Ages” (ZH)

• Debt, Defaults, And Devaluations: A Crash Like Nothing Before (Telegraph)

• Our Dysfunctional Monetary System (Steve Keen)

• Why The Bulls Will Get Slaughtered (Stockman)

• Obscure Chinese Firm Dives Into $22 Trillion US Market (BBG)

• China’s FX Reserves Decline to $3.23 Trillion (BBG)

• The Great Escape from China (Rogoff)

• Albert Edwards: China Has Only “Months Left” To Stop Collapse (VW)

• Why Doesn’t 4.9% Unemployment Feel Great? (CNN)

• Risk of WWIII as Saudi Arabia, Turkey –and Ukraine– Wade Into Syria (Trayner)

• EU Ministers Want To Buttress Borders To Stem Refugee Flow (AP)

• Austria Threatens To Extend Border Controls (Reuters)

• Austria Wants EU To Cover Costs Of Additional Migrants (Reuters)

That is a big number. Add losses in commodities, and you’re talking destruction, of money, credit, virtual wealth, it doesn’t matter anymore what you call it..

• $100 Trillion Up in Smoke (Mauldin)

If energy powers the world, then whoever owns that energy must have power over the world. That’s certainly been the case for the last century or two. Ownership of our primary energy source, crude oil, is what made billionaires of John D. Rockefeller, H.L. Hunt, and assorted Middle Eastern kings, emirs, and sheikhs. Oil in the ground is wealth only on paper – you may own that oil, but it earns you nothing until you recover and sell it. Yet paper wealth is still wealth. It goes on your balance sheet as an asset that you can sell. You can use it as collateral to borrow cash and buy other assets. The ongoing oil price collapse is having a severely negative impact on the wealth of those who own oil reserves. The numbers, as you will see below, are almost incomprehensibly big.

They are so big, in fact, that many analysts have simply tuned out. The attitude seems to be, “These numbers blow up my models, so I will ignore them.” Today we’ll stop dancing around the truth and call the oil collapse what it is: global wealth destruction of epic proportions. In mid-2014, crude oil prices were about $100, depending on which grade you wanted to buy. Now prices hover near $30 – roughly a 70% decline in 18 months. That’s well-known, but we usually discuss the price collapse in terms of particular countries or companies: we don’t look at the bigger picture. Last week someone showed me this from Twitter. I almost fell out of my chair.

Stop for a minute. Let that sink in. The total value of all the world’s oil reserves is over $100 trillion less than it was just a year and a half ago.

(By the way, I verified Mr. Levine’s reserve total by consulting the CIA’s World Fact Book. It says total world “proved” oil reserves were 1.656 trillion barrels as of January 1, 2015.) To put these figures in perspective, consider that Google’s parent company, Alphabet, briefly surpassed Apple last week as the planet’s largest publicly traded company. Both are worth around $500 billion, depending on the day. The lost value in crude oil is equivalent to a couple of hundred Googles and Apples going up in smoke. If stock values were crashing to that degree, we would call the losses earth-shattering. Yet otherwise intelligent people are saying the oil collapse is a minor issue.

They’re all fully unprepared. Deer and headlights.

• As Big Oil Shrinks, Boards Plot Different Paths Out Of Crisis (Reuters)

As oil and gas companies cut ever-deeper into the bone to weather their worst downturn in decades, boards have adopted contrasting strategies to lead them out of the crisis. Crude prices have tumbled around 70 percent over the past 18 months to around $35 a barrel, leading to five of the world’s top oil companies reporting sharp declines in profits in recent days. Executives at energy firms face a tough balancing act: they must cut spending to stay financially afloat while preserving the production infrastructure and capacity that will allow them to compete and grow when the market recovers. Companies have opted for differing approaches to secure future growth, often choosing to narrow focus to their areas of expertise and the geographic location of their main assets.

American firms Chevron, ConocoPhillips and Hess are withdrawing from more costly deepwater projects to focus on shale oil fields on their home turf, for example. Britain’s BP is betting on offshore gas in Egypt, while Royal Dutch Shell has opted for an alternative route as it seeks to safeguard its future: the $50 billion takeover of BG Group. In the five years before the downturn began in mid-2014, when crude prices held above $100 a barrel, big energy firms had raced to expand production capacity, including buying stakes in vast, costly fields sometimes located thousands of meters under the sea, and miles from land.

Over the past year however, companies have slashed their overall capital expenditure, scrapping plans for mega projects that cost billions to develop and take up to a decade to bring online. “Companies want to strike a balance between long and short-cycle investments while maintaining a robust balance sheet to fund their way through the down cycle,” said BMO Capital analyst Brendan Warn. Focusing on a specific set of expertise and geographies allowed them to offer investors a “unique value proposition”, he added.

Quick, before somone figures out what you’ve lost.

• Exxon Ends Share Buybacks – It Must Be Acquisition Time (Forbes)

If the company was happy buying its own stock in 2014, it should be all the more eager to buy now that shares are down 25%. Unless it sees a better bargain elsewhere. In its fourth-quarter financial release Tuesday, Exxon Mobil announced a halt to share buybacks. The company purchased $4 billion of its own shares in 2015, and has averaged about $20 billion a year in buybacks over the past decade, according to Reuters. The peak buyback year was 2008, when oil prices hit a record high and Exxon bought in $35 billion worth. At first glance, halting buybacks might seem reasonable. Perhaps amid this oil industry depression Exxon just wants to conserve cash — it also expects to reduce capital spending by $8 billion this year.

But think about it. The key to good investing is to buy low and sell high. If Exxon was happy buying back shares in 2014, when its stock price hit $103, it should be all the more eager to continue buying now that shares are down to $74.50. If Exxon didn’t think its own shares weren’t a great investment it wouldn’t have bought $200 billion of them over the past decade. Don’t take my word for it. As CEO Rex Tillerson said in a statement Tuesday, “The scale and diversity of our cash flows, along with our financial strength, provide us with the confidence to invest through the cycle to create long-term shareholder value.” It’s a hallmark of Exxon’s discipline that it continues to invest whether oil prices are low or high. In 2015 it brought on six big projects with 300,000 barrels per day of new production.

Exxon is not worried about running out of cash. Cash flows were on the order of $30 billion for the year. Even in the fourth quarter it generated net income of $2.8 billion (and $16 billion for the year). And don’t think for a second that Exxon intends to cut its dividend payouts, which totaled $12 billion last year. A more plausible reason Exxon is ending buybacks: it’s preparing to acquire another company whose shares are even more deeply discounted than Exxon’s. And with “just” $3.7 billion in cash on hand at the end of the fourth quarter, its likely that Exxon would use its shares as currency for a buyout. Who would they buy? The options abound for a company still sporting an equity market cap of $318 billion. Anadarko Petroleum has long been rumored to be a prime Exxon target; its shares are down about 65% to a market cap of $19 billion.

Occidental Petroleum float is $51 billion, ConocoPhillips $47 billion and Apache is at $15 billion. Deeper in the discount bin, Marathon Oil shares could be had for $6.5 billion, or Devon Energy for $11 billion. Of course Exxon would also need to assume any debt carried by an acquisition target. But that wouldn’t be a problem — compared with the averaged overleveraged oil company, Exxon has modest gearing with $38 billion in debt outstanding. Other than Royal Dutch Shell ’s $52 billion takeover of BG Group , we haven’t seen a landmark merger during this downturn. The last time things got this bad for the industry, back in 1998, BP bought Amoco for $48 billion and Exxon bought Mobil for $75 billion. Ending buybacks is just Exxon’s way of telling the market it’s ready to make a deal.

Hess oil is the case study. “..Hess just sold 25 million shares at a price of $39 after purchasing 63 million shares through 2015 at an average price that was more than double, or $83 a share..”

• Hess Oil: A “Folly For The Ages” (ZH)

[..] back in 2013, when it was trading at a discount to its peers, Hess became the target of an activist campaign led by Paul Singer’s Elliott Management who demanded a quick boost in the stock price, as a result of which the energy producer decided to exit its refining business (arguably the only line of business that would have benefited from the current depressed oil price) while not only raising its dividend but also authorizing a $4 billion share buyback. The company then boosted its buyback further with proceeds from the sale of its retail gas stations (for $2.9 billion) while growing its debt by $1 billion from 2013 to 2015, leading to the repurchase of a total of 62.7 million shares through the end of 2014 at an average price of $83. The stock price reacted as expected: it soared past $100 from below $60 before Elliott turned up. It then continued to spend more billions under additional buyback all the way through the third quarter of 2015, which however took place just as the worst oil downturn in history was taking place.

And then the stock crashed, as investors finally realized that plunging oil, sliding cash flow and surging debt meant the company found itself in a life and death fight for survival. Which brings us to yesterday, when in an attempt to shore up liquidity and avoid halting its dividend, Hess sold 25 million shares at a price of $39/share: a 10% discount to the prior closing price. As Reuters puts it, the “Hess folly is one for the ages.” The silver lining? Unlike before, when Hess’ weak management team was kicked around by a hedge fund, at least it is being proactive now and scrambling to preserve its business even it means huge pain and dilution for shareholders. The company ended 2015 with $2.7 billion in cash and a big revolving line of credit it hasn’t dipped into yet. Capital just raised will push net debt from 5.4x EBITDA to below four times, according to Cowen estimates.

That should allow Hess to keep investing in future production and pay dividends. If oil remains at $30, however, it has just bought itself a few quarters of time. Still, that does not absolve management of pandering to a vocal shareholder: if instead of spending billions on buybacks Hess had done the right thing and saved the cash, it would not only have avoided the wild swings in the stock price which rewarded just activist investors while punishing long-term holders, and have a far bigger war chest to defend itself from $30 oil. The bottom line: Hess just sold 25 million shares at a price of $39 after purchasing 63 million shares through 2015 at an average price that was more than double, or $83 share. As Reuters concludes, “this modern Hess era is a case study that should be required reading in boardrooms everywhere.”

The right wing is getting concerned.

• Debt, Defaults, And Devaluations: A Crash Like Nothing Before (Telegraph)

A global recession is on the way. This truism of economics holds at any point in which the world is not in the grips of a contraction. The real question is always when and how deep the upcoming downturn will be. “The crash will come, but it would be nice if it came two years from now”, Thomas Thygesen, head of economics at SEB told over 200 commodity investors and analysts in London last month. His audience was rapt with unusual attention. They could be forgiven for thinking the slump had not already arrived. Commodity prices have crashed by two thirds since their peaks in 2014. Oil has borne the brunt of the sell-off, suffering the worst price collapse in modern history. Brent crude has fallen from $115 a barrel in the summer of 2014, to just $27.70 in mid-January.

Plenty of investors sitting in the blue-lit, cavernous surrounds of Bloomberg’s London HQ would have had their fingers burnt by the price capitulation. “They tell you should start your presentations with a joke, but making jokes at a commodities seminar is hardly appropriate these days,” Thygesen told his nervous audience. Major oil price falls have a number of historical precedents. Today’s glutted oil market is often compared to the crash of 1986, the last major episode over global over-supply. Back in the late 90s, a barrel of Brent crude fell to as low as $10 in the wake of the Asian financial crisis. But is the current oil price collapse really like anything the world economy has ever experienced?

For many market watchers, a confluence of factors – led by oil, but encompassing China, the emerging world, and financial markets – are all brewing to create a perfect storm in a global economy that has barely come to terms with the Great Recession. “We are in a very unusual situation where market sentiment is of a different nature to anything we’ve seen before,” says Thygesen. Unlike previous pre-recessionary eras, the current sell-off has seen commodity prices, equities and credit conditions all move in dangerous lockstep. Although a 75pc oil price collapse should represent an unmitigated positive for the world’s fuel thirsty consumers, the sheer scale of the price rout is already imperiling the finances of producer nations from Nigeria to Azerbaijan, and is now threatening to unleash a wave of bankruptcies across corporate America.

It is the prospect of this vicious feedback loop – where low oil prices create financial tail risks that spill over into the real economy – which could now propel the world into a “full blown crisis” adds Thygesen. So will it materialise? The world economy is throwing up reasons to worry, as the globe’s largest emerging markets have shown signs of deterioration over the last six months, says Olivier Blanchard, the former long-serving chief economist of the IMF. “China’s growth is probably less than officially reported. Russia and Brazil are doing very badly. South Africa is flirting with recession. Even India may not be doing as well as was forecast,” says Blanchard, who left the Fund after seven years late last year. As it stands however, he says market ructions still represent a classic case of “herd” behaviour. “Investors worry that other investors know something bad, and so just sell, although they themselves have no new information.”

But a tipping point may well be approaching. According to Blanchard’s calculations, a 20pc decline in stock markets that persists for more than six months, will translate into a decline in consumption of between 0.5pc to 1.0pc. “This would be a serious shock. My biggest fear is precisely that the dramatic shift in mood becomes self-fulfilling”. For now, oil-induced financial stress is concentrated in the energy sector. With Brent set to languish around $30-35 barrel for the rest of the year, prices will persist below the $40-60 barrel break-even point that renders the bulk of US oil and gas companies profitable. Spreads on high yield US energy corporates have soared to unprecedented highs. “They make Lehman look like a walk in the park” says Thygesen. More than a third of the entire US high yield bond index is now vulnerable to crude prices remaining low or falling even further, according to calculations from Oxford Economics.

My friend Steve is losing his cool, and high time too. Is he really the only economist who undertands this, and can explain it? Y’all better listen closely, then.

“As someone who spent 2 years warning about this crisis before it happened, and another 8 years diagnosing it (and proposing remedies that would, I believe, be effective, if only banks and governments together would implement them), I find this dual idiocy incredibly frustrating. Rather than understanding the real cause of the crisis, we’ve seen the symptom—rising public debt—paraded as its cause. Rather than effective remedies, we’ve had inane policies like QE, which purport to solve the crisis by inflating asset prices when inflated asset prices were one of the symptoms of the bubble that caused the crisis.”

• Our Dysfunctional Monetary System (Steve Keen)

The great tragedy of the global economic malaise is that it is caused by a shortage of something that is essentially costless to produce: money. Both banks and governments can produce money at physically trivial costs. Banks create money by creating a loan, and the establishment costs of a loan are miniscule compared to the value of the money created by it—of the order of $3 for every $100 created. Governments create money by running a deficit—by spending more on the public than they get back from the public in taxes. As inefficient as government might be, that process too costs a tiny amount, compared to the amount of money generated by the deficit itself. But despite how easy the money creation process is, in the aftermath to the 2008 crisis, both banks and governments are doing a lousy job of producing the money the public needs, for two very different reasons.

Banks aren’t creating money now because they created too much of it in the past. The booms that preceded the crisis were fuelled by a wave of bank-debt-financed speculation on some useful products (the telecommunications infrastructure of the internet, the DotCom firms that survived the DotCom bubble) and much rubbish (the Liar Loans that are the focus of The Big Short). That lending drove private debt levels to an all-time high across the OECD: the average private debt level is now of the order of 150% of GDP, whereas it was around 60% of GDP in the “Golden Age of Capitalism” during the 1950s and 1960s—see Figure 1.

Figure 1: The private debt mountain that has submerged commerce

In the aftermath of the Subprime bubble, credit-money creation has come to a standstill across the OECD. In the period from 1955 till 1975, credit grew at 8.7% per year in the United States; from 1975 till 2008, it grew at 8% per year; since 2008, it has grown at an average of just 1.5% per year. The same pattern is repeated across the OECD—see Figure 2. Globally, China is the only major country with booming credit growth right now, but that will come crashing down (this probably has already started), and for the same reason as in the West: too much credit-based money has been created already in a speculative bubble.

Figure 2: Credit growth is anaemic now, and will remains so as it has in Japan for 25 years

Japan, of course, got mired in this private debt trap long before the rest of the world succumbed. As Figure 1 shows, its private debt bubble peaked in 1995, and since then it’s had either weak or negative credit growth, so that its private debt to GDP level is now in the middle of the global pack. Economic growth there has come to a standstill since: Japan’s economy grew at an average of 5.4% a year in real terms from 1965 till 1990, when its crisis began; since then, it has grown at a mere 0.4% a year. That gives us a simple way to perform a “what if?”. What if the rest of the OECD is as ineffective at escaping from the private debt trap as Japan has been? Then the best case scenario for global credit growth is that it will match what has happened since Japan “hit the credit wall” in 1990

Seasonally adjusted slaughter, that is.

• Why The Bulls Will Get Slaughtered (Stockman)

Needless to say, none of that stink was detected by Steve Liesman and his band of Jobs Friday half-wits who bloviate on bubblevision after each release. This time the BLS report actually showed the US economy lost 2.989 million jobs between December and January. Yet Moody’s Keynesian pitchman, Mark Zandi described it as “perfect” Yes, the BLS always uses a big seasonal adjustment (SA) in January——so that’s how they got the positive headline number. But the point is that the seasonal adjustment factor for the month is so huge that the resulting month-over-month delta is inherently just plain noise. To wit, the seasonal adjustment factor for the month was 2.165 million. That means the headline jobs gain of 151k reported on Friday amounted to only 7% of the adjustment amount!

Any economist with a modicum of common sense would recognize that even a tiny change in the seasonal adjustment factor would mean a giant variance in the headline figure. So the January SA jobs number cannot possibly reveal any kind of trend whatsoever – good, bad or indifferent. But that didn’t stop Beth Ann Bovino, US chief economist at Standard & Poor’s Rating Services, from dispatching the usual all is swell hopium: “Today’s numbers are about momentum, so while 151,000 new jobs in January is below expectations and off pace from prior months, the data shows America’s recovery is continuing. Amid all the global economic turmoil and domestic market gyrations, positive job growth, the drop in the unemployment rate to 4.9%, and the uptick in wages show the U.S. is heading in the right direction.” Actually, it proves none of those things.

For one thing, the January NSA (non-seasonally adjusted) job loss this year of just under 3 million was 173,000 bigger than last January – suggesting that things are getting worse, not better. In fact, this was the largest January job decline since the 3.69 million job loss in January 2009 during the very bottom months of the Great Recession. So are we really “heading in the right direction” as claimed by Bovino, Zandi and the rest of the Cool-Aid crowd? Well, just consider two alternative seasonal adjustment factors for January that have been used by the BLS in the last five years. Had they used the January 2013 adjustment factor this time, the headline gain would have been 171,000 jobs; and had they used the 2010 adjustment factor there would have been a headline loss of 183,000 jobs. We could say in a variant of the Fox News motto – we report, you decide. But believe me, you can look at years of seasonal adjustment factors for January (or any other month) and not find any consistent, objective formula. They make it up, as needed.

“..to help bring Chinese companies to U.S. markets..” Which is not that easy on most exchanges.

• Obscure Chinese Firm Dives Into $22 Trillion US Market (BBG)

When Cromwell Coulson heard that an obscure Chinese real estate firm had agreed to buy the Chicago Stock Exchange, he was shocked. “My first reaction was, ‘Wow, that’s who they’re selling to?”’ said Coulson, CEO of OTC Markets in New York. “These new buyers have no connection to Chicago’s existing business. They’re completely disconnected from the current business of supporting the Chicago trading community. So wow, that’s out of left field.” While the world has gotten used to seeing Chinese companies snap up overseas businesses, the purchase of a 134-year-old U.S. stock market by Chongqing Casin Enterprise – a little-known property and investment firm from southwestern China – raises a whole host of questions. For starters, why does a provincial Chinese business with no apparent ties to the securities industry have any interest in buying one of America’s smallest equity exchanges? And will U.S. regulators sign off?

So far, Casin Group’s intentions are unclear, with calls to the company’s Chongqing headquarters going unanswered on Friday. If the deal does pass muster with American regulators, it would mark the first-ever Chinese purchase of a U.S. equity exchange, giving Casin Group a foothold in a $22 trillion market where even the smallest bourses have room to grow if they can provide the best price for a stock at any given moment. The Chicago Stock Exchange – a subsidiary of CHX Holdings – is minority-owned by a group including E*Trade, Bank of America, Goldman Sachs and JPMorgan, according to the company. The minority shareholders are also selling their stake, Chicago Stock Exchange CEO John Kerin said. The deal values the exchange at less than $100 million, according to a person familiar with the matter.

Casin Group’s offer, announced on Friday in a statement from the Chicago exchange, comes amid an unprecedented overseas shopping spree by Chinese companies. Businesses from Asia’s largest economy have announced $70 billion of cross-border acquisitions and investments this year, on track to break last year’s record of $123 billion, according to data compiled by Bloomberg. While many of those deals had obvious business rationales, the reasons for Casin Group’s bid are less clear. The company, founded in the 1990s through a privatization of state-owned assets, initially focused on developing real estate projects in Chongqing, before expanding into the environmental and financial industries. While the firm owns stakes in banks and insurers, it has no previous experience owning an exchange. Lu Shengju, the majority owner and chairman of Casin Group, wants to help bring Chinese companies to U.S. markets, according to the statement from Chicago’s bourse.

Another $100 billion spent. That leaves about 2 months at this pace till alarm bells will start going off.

• China’s FX Reserves Decline to $3.23 Trillion (BBG)

China’s foreign-exchange reserves shrank to the smallest since 2012, indicating that the central bank sold dollars as the yuan’s retreat to a five-year low exacerbated depreciation pressure. The world’s largest currency hoard declined by $99.5 billion in January to $3.23 trillion, according to a People’s Bank of China statement released on Sunday. The stockpile fell by more than half a trillion dollars in 2015, the first-ever annual decline. Policy makers fighting to hold up the weakening yuan amid slower economic growth, plunging stocks and increasing outflows have been burning through the reserves. The draw-down has continued since the central bank’s surprise devaluation of the currency in August, when the stockpile tumbled $94 billion, a monthly record at the time.

“While the remaining reserves represent a substantial war chest, the rapid pace of depletion in recent months is simply unsustainable,” said Rajiv Biswas at IHS Global Insight in Singapore. “Domestic private investors and global currency traders see a one-way bet against the currency. This has resulted in large-scale private capital outflows since early 2015 as expectations mount that the PBOC will eventually be forced to capitulate once its reserves are sufficiently depleted.” Capital outflows increased to $158.7 billion in December, the most since September and were $1 trillion last year, according to estimates from Bloomberg Intelligence. That’s more than seven times the amount of cash that left in 2014. The PBOC has stepped up efforts to stem the exodus, warning speculators that they will be punished.

It intervened in the Hong Kong market last month after the yuan’s offshore exchange rate sank to a record 2.9% discount to the onshore rate. Apart from selling dollars, the monetary authority also gave guidance to some Chinese lenders in the city to suspend yuan lending to curb short selling, a move that contributed to the overnight interbank lending rate surging to an all-time high of 66.8% on Jan. 12.

“Now that Chinese firms have bought up so many US and European companies, money laundering can even be done in-house. ”

• The Great Escape from China (Rogoff)

Since 2016 began, the prospect of a major devaluation of China’s renminbi has been hanging over global markets like the Sword of Damocles. No other source of policy uncertainty has been as destabilizing. Few observers doubt that China will have to let the renminbi exchange rate float freely sometime over the next decade. The question is how much drama will take place in the interim, as political and economic imperatives collide. It might seem odd that a country running a $600 billion trade surplus in 2015 should be worried about currency weakness. But a combination of factors, including slowing economic growth and a gradual relaxation of restrictions on investing abroad, has unleashed a torrent of capital outflows. Private citizens are now allowed to take up to $50,000 per year out of the country.

If just one of every 20 Chinese citizens exercised this option, China’s foreign-exchange reserves would be wiped out. At the same time, China’s cash-rich companies have been employing all sorts of devices to get money out. A perfectly legal approach is to lend in renminbi and be repaid in foreign currency. A not-so-legal approach is to issue false or inflated trade invoices – essentially a form of money laundering. For example, a Chinese exporter might report a lower sale price to an American importer than it actually receives, with the difference secretly deposited in dollars into a US bank account (which might in turn be used to purchase a Picasso). Now that Chinese firms have bought up so many US and European companies, money laundering can even be done in-house.

The Chinese hardly invented this idea. After World War II, when a ruined Europe was smothered in foreign-exchange controls, illegal capital flows out of the continent often averaged 10% of the value of trade or more. As one of the world’s largest trading countries, it is virtually impossible for China to keep a tight lid on capital outflows when the incentives to leave become large enough. Indeed, despite the giant trade surplus, the People’s Bank of China has been forced to intervene heavily to prop up the exchange rate – so much so that foreign-currency reserves actually fell by $500 billion in 2015. With such leaky capital controls, China’s war chest of $3 trillion won’t be enough to hold down the fort indefinitely. In fact, the more people worry that the exchange rate is going down, the more they want to get their money out of the country immediately.

That fear, in turn, has been an important factor driving down the Chinese stock market. There is a lot of market speculation that the Chinese will undertake a sizable one-time devaluation, say 10%, to weaken the renminbi enough to ease downward pressure on the exchange rate. But, aside from providing fodder for the likes of Donald Trump, who believes that China is an unfair trader, this would be a very dangerous choice of strategy for a government that financial markets do not really trust. The main risk is that a big devaluation would be interpreted as indicating that China’s economic slowdown is far more severe than people think, in which case money would continue to flee.

But they can’t afford to wait that long.

• Albert Edwards: China Has Only “Months Left” To Stop Collapse (VW)

In this week’s issue of Société Générale’s Global Strategy research note, Edwards writes that “China has burned through almost $800bn of its FX reserves mountain since it peaked at almost $4 trillion in mid-2014. January’s FX data to be released this weekend is set to register another sharp drop of $120bn (consensus estimate).” He goes on: “But at $3.2bn the market remains content that massive firepower remains to support the renminbi. It does not. Our economists estimate that when FX reserves reach $2.8 trillion – which should only take a few more months at this rate – FX reserves will fall below the IMF’s recommended lower bound. If that occurs in the next few months, expect to see a tidal wave of speculative selling, forcing the PBoC to throw in the towel and let the market decide the level of the renminbi exchange rate.”

Edwards’ view is based on the predictions of Société Générale’s China economist Wei Yao. Wei Yao has written that in her view, the PBoC might, “move to a free-float within six months, after burning through a significant amount of FX reserves.” Both Yao and Edwards’ doom-mongering is based on the level of China’s FX reserves. China has been depleting its FX reserves in an effort to slow the pace of currency depreciation. However, if the country continues to spend its reserves at the current rate, FX reserves will fall through the $2.8 trillion level that the IMF believes is the lowest acceptable level. The IMF’s ‘lowest acceptable’ reserves level is based on four specific elements that reflect potential drains on the balance of payments: (1) exports, (2) broad money, (3) short-term external debt, and (4) other liabilities (long-term external debt and portfolio liabilities).

Société Générale’s analysts believe that (assuming the level of short-term external debt at remaining maturity was unchanged from year-end 2014) China’s reserves are at 118% of the recommended level (estimated to be $2.8 trillion). If China’s reserves fall below the key $2.8 trillion level, the market could lose confidence in the PBoC’s ability to resist currency depreciation and manage future balance of payments shocks. Only two major emerging market countries (Malaysia and South Africa) have reserves that are below the IMF’s recommended range and many EM countries now have a more robust reserve balance than China in terms of the percentage above the IMF’s recommended minimum.

Because it’s just a narrative. More right wing worry signs.

• Why Doesn’t 4.9% Unemployment Feel Great? (CNN)

The U.S. unemployment rate just fell below 5% for the first time since 2008. Normally, this would merit a celebration. But these aren’t normal times. The economy is better than it was in the Great Recession, but not even President Obama is ready to declare it’s booming. In a special speech Friday touting the job gains during his presidency, Obama admitted there’s more “to tackle.” “We should be proud of the progress we’ve made…we’ve recovered from the worst economic crisis since the 1930s,” Obama said. He doesn’t believe he gets enough credit for creating over 14 million jobs. People as diverse as Democrat Bernie Sanders and Republican Donald Trump don’t put it gently. They claim the “real” unemployment rate is much higher. Sanders calls the economy “rigged,” and Trump says the U.S. never wins anymore. There are three key reasons why everyone from Main Street to Wall Street isn’t cheering 4.9% unemployment.

1. Fewer adults are working Only 62.7% of adult Americans are working. The so-called Labor Force Participation rate hasn’t been this low since the late 1970s. The rate measures how many people over age 16 are working or actively seeking work. Back in the ’70s, it was low because fewer women worked outside the home. That’s not the story today. Now, three factors are driving the decrease in workers. The first is that a huge part of the adult population, Baby Boomers, are retiring. That’s expected and healthy. It explains about half of the decline in the workforce. The second is more young people are going to college and graduate school. They are studying more, which should be a positive for the nation. But the third one is alarming: some people have just given up on finding work. It’s hard to quantify how many people fall into this dropout category, but it’s large enough to matter. Politicians like Trump talk about it in stump speeches.The WSJ estimates that about 2.6 million of the roughly 92 million American adults who don’t work want a job but aren’t looking for one.

2. Long-term unemployment is still high Another reason why the jobs picture still looks gloomy is that an unusually high number of people can’t find jobs even though they have been looking for a long time. About 2.1 million Americans have been unable to get a job for over half a year. The government calls these people the “long-term unemployed.” During the worst of the Great Recession, 6.8 million people were long-term unemployed. So there’s been improvement, but there are still roughly double the number of long-term unemployed than in normal times.

3. Wage growth is anemic The last big issue is that wages aren’t going up for many Americans. The typical take home pay (often called “median income” by the Census Bureau) is about the same today as it was 20 years ago, once you adjust for inflation. In other words, middle class families aren’t really getting ahead. They’re just getting by. To be fair, this was a problem even before the Great Recession came along, but experts keep predicting wages will go up and it’s not happening. On Friday, Obama tried to celebrate the small gains that have been made in recent months. “This progress is finally starting to translate into bigger paychecks,” he said. But the reality is wage growth is only 2.5% a year. As Sharon Stark of D.A. Davidson notes, normally when unemployment is this low, wage growth should be humming along at about 4% a year.

So many crazies. Trying to provoke Russia by sending Ukraine’s fascist troops into Syria.

• Risk of WWIII as Saudi Arabia, Turkey –and Ukraine– Wade Into Syria (Trayner)

A terrifying array of rival superpowers are wading into the chaotic conflict on opposing sides. Analysts now fear the bloodbath – already longer than World War One – is mutating into a full-scale regional war. Saudi Arabia has threatened to send in ground troops and intelligence reports suggest Turkey is preparing to invade. Ukraine is also weighing up sending in soldiers. If their forces clashed with Russians or Iranians already on the ground, NATO – including Britain – could be dragged into an apocalyptic World War 3. Most military experts see the conflict as a proxy war between Sunni Muslim Saudi Arabia – supported by the US – on one side and Shia Muslim Iran – backed by Russia – on the other. The civil war in Yemen is also a victim of the new power struggle for control of the Middle East – which dates back to the death of Muhammed in 632 AD.

But the new Cold War – which some claim involved Saudi Arabia arming ISIS and Iran backing militants such as the Houthi rebels in Yemen – would turn searing hot if Saudi troops met the Iranian Army on the battlefield. The US fears Saudi Arabia may have obtained – or tried to obtain – nuclear weapons for an final battle with its centuries-old enemy. Tom Wilson, a research fellow for think tank the Henry Jackson Society, said: “The proxy war between Saudi Arabia and Iran is now in a rapid state of escalation. “Saudi talk of sending troops to Syria may be a bluff to try and force the West to take more decisive action in that country instead. “But if the Saudis do put troops on the ground in Syria then this would represent the opening of a major new front in what is increasingly a full scale regional conflict.”

Russia claims aerial photographs reveal Turkey is preparing to invade Syria, its neighbour. Turkish Islamic extremists are already fighting in Syria – some on the side of ISIS – with well-attended funerals for “martyrs” held back home in Turkey. Ultra-nationalist “Grey Wolves” – who want to protect Turkmen living in northern Syria and restore the Ottoman Empire – are also battling the Syrian army and Russian forces. Enmity between Black Sea rivals Russia and Turkey dates back so long a Jewish “oracle” prophesied an apocalyptic war between Russia and Turkey would usher in the End of Days 200 years ago. Turkey is now a member of NATO and if the old enemies came to blows again – as almost happened when Turkey shot down a Russian jet last year – the US and UK would be compelled to back Turkey. Britain has already been dragged into war with Russia by Turkey once: the Crimean War.

Everything they can do wrong, they do.

• EU Ministers Want To Buttress Borders To Stem Refugee Flow (AP)

European Union nations anxious to stem the flow of asylum-seekers coming through the Balkans are increasingly considering sending more help to non-member Former Yugoslav Republic of Macedonia (FYROM) as a better way to protect European borders instead of relying on EU member Greece. With Athens unable to halt the tens of thousands of people making the sea crossing from Turkey, EU nations fear that Europe’s Schengen border-free travel zone could collapse, taking with it one of the cornerstones on which the 28-nation bloc is built. “If Greece is not ready or able to protect the Schengen zone and doesn’t accept any assistance from the EU, then we need another defense line, which is obviously Macedonia and Bulgaria,” Hungarian Foreign Affairs Minister Peter Szijjarto said at Saturday’s meeting of EU foreign ministers in Amsterdam.

An estimated 850,000 migrants arrived in Greece in 2015, overwhelming its coast guard and reception facilities. Aid groups say cash-strapped Greece has shelter for only about 10,000 people, just over 1% of those who have entered. Most of the asylum-seekers then travel on across the Balkans and into the EUs heartland of Germany and beyond. Szijjarto said EU nations are “defenseless from the south. There are thousands of irregular migrants entering the territory of the EU on a daily basis.” Austrian Foreign Minister Sebastian Kurz said the cash-strapped government in Athens still underestimates the crisis. “I still don’t have the feeling that it has dawned on Greece how serious the situation is” for receiving nations like Austria, he said.

The situation has pushed some EU nations to send bilateral aid to FYROM, a non-EU nation, to control its border with EU member Greece. There has been even talk of sending military troops to FYROM to beef up the Greek border. FYROM Foreign Minister Nikola Poposki said after the meeting it did not matter what the aid was technically called. “The essential thing is that we have people and equipment to control the border and do registration where legal crossing should happen,” he said. He said FYROM has already put its own military on the job. “They’re making sure that we have decreased the illegal crossings through our border and were going to continue to make these efforts,” he said.

There certainly is no such thing as an EU policy.

• Austria Threatens To Extend Border Controls (Reuters)

Austria will extend its border controls if Turkey does not take back refugees picked up at sea on their way to Greece, Chancellor Werner Faymann said in an interview with the daily Oesterreich, being published on Sunday. He had earlier said that migrants picked up at the Greek external EU border should be sent back directly to Turkey because this was the only measure that would make a radical enough impact. Austria is set to introduce a new border management system at Spielfeld, a key crossing point on its south-eastern border with Slovenia, which aims at speeding up applications and making the country less attractive to asylum seekers. More such border management facilities on other routes may be needed if Turkey does not respond to his proposal, the chancellor was quoted as saying.

Faymann said Turkey must make a decision by Feb. 18, when EU leaders meet for a summit. It would not be a solution if Turkish border controls led to 10,000 refugees arriving at EU borders instead of 20,000, Faymann was quoted as saying in the interview. “Then we must secure our borders even more,” Faymann said. “To protect internal borders is a makeshift solution. But we have to be prepared.” Ankara and Brussels agreed to slow down the flow of migrants in a Nov. 29 deal, but refugees continue to stream into Greece. Austria, which has a population of 8.4 million and last year received 90,000 applications for asylum, has said that the number of refugees it will accept this year will be limited to 37,500.

And let me guess, Greece should pay its share?!

• Austria Wants EU To Cover Costs Of Additional Migrants (Reuters)

Austria’s Finance Minister Hans-Joerg Schelling has asked the European Commission to provide €600 million to cover the costs of taking in additional refugees, a ministry spokesman said on Saturday. Austria budgeted for 35,000 asylum seekers annually at a cost of €11,000 per person but took in some 90,000 people in 2015, the spokesman quoted the minister as saying in a letter to the head of the EU executive, Jean-Claude Juncker. “Concerning the migration crisis it is high time the Commission returned to its normal function as an independent institution representing the general Community interest and start acting as such,” Schelling said in the letter, part of which was published by the daily Kurier.

Austria and neighboring Germany threw open their borders last year to hundreds of thousands of people pouring into Europe, many of them fleeing conflicts in Syria and elsewhere. Despite an initial outpouring of sympathy for the migrants, public concern about the influx has fueled a rise in support for the far right in Austria. Last week Vienna said it would step up deportations of migrants to countries it deems safe.

Debt Rattle January 19 2016

Jan 192016

January 19, 2016 Posted by Raúl Ilargi Meijer at 9:33 am Finance Tagged with: bonds, borders, China, derivatives, EU, GDP, oil, refugees, steel, stocks 4 Responses »

Ann Rosener Reconditioning spark plugs, Melrose Park Buick plant, Chicago 1942

• China GDP at 25-Year Low, Long Slog Increases the Pain (WSJ)

• China Stocks Surge As GDP Triggers Expectations Of Beijing Stimulus (MW)

• The Case for Chaos in Trying to Pick Bottom of US Equity Rout (BBG)

• Big US Banks Brace For Oil Loans To Implode (CNN)

• The Fed Responds To Zero Hedge: Here Are Some Follow Up Questions (ZH)

• The North Dakota Crude Oil That’s Worth Less Than Nothing (BBG)

• China’s Hot Bond Market Seen at Risk of Default Chain Reaction (BBG)

• Chinese Shipyards See New Orders Fall by Almost Half in 2015 (BBG)

• World’s Biggest Steel Industry Shrinks for First Time Since 1991 (BBG)

• Strong China Property Data Masks Big Problem of Unsold Homes (Reuters)

• Japan Makes Plans for Pension Fund to Invest in Stocks (WSJ)

• Italy Banks Lose $82 Billion of Cheap Financing From Savers (BBG)

• Italy PM Renzi Sharpens His Rhetorical Barbs At EU (FT)

• Hollande Says France In State Of Economic, Social Emergency (BBC)

• Russia Considers Suspending Loans to Other Countries (Moscow Times)

• Worse Than 1860 (Jim Kunstler)

• End Of Europe? Berlin, Brussels’ Shock Tactic On Migrants (Reuters)

• UN Seeks Mass Resettlement Of Syrians (AP)

• Davos Boss Warns Refugee Crisis Could Become Something Much Bigger (BBG)

• German Minister Urges Merkel To Prepare To Close Borders (Reuters)

Kudo’s to the WSJ for a bit of reflection. Just about all other outlets I’ve seen, parade analysts opining in hollow phrases.

• China GDP at 25-Year Low, Long Slog Increases the Pain (WSJ)

Whether or not one believes China’s GDP data, the news is depressing. There was little in the fourth quarter to indicate that gobs of monetary and fiscal easing are doing anything but cushioning the economy through an increasingly painful slog. China’s headline GDP grew 6.8% in the fourth quarter. But in nominal terms, it grew just under 6%, the slowest since last century. With debt in the economy still growing at twice that rate, this implies that a huge amount of new lending is going nowhere but to pay off old loans, not to stimulate the economy. It’s a vicious cycle that will be hard for China to escape. The reason nominal GDP was lower than headline GDP—it’s usually the other way around—was a negative price deflator, indicating overall deflation.

It was the third time in four quarters that China’s deflator has been negative, giving the headline number a boost. Some suspect that China is monkeying with the deflator; the larger it is, the more it improves the headline figure. Nor is the deflator the only figure that private economists suspect is distorting the GDP series. Oxford Economics points to industrial-output numbers that it calls overly optimistic. Adjusting for that, it said China’s GDP grew 6.1% in the fourth quarter. Capital Economics, using various proxy indicators, puts growth at 4.5%. Other indicators support the dour outlook. Industrial-production growth slowed to 5.9% in December from 6.2% in November. Services sustained the party, up 8.2% from a year earlier in the fourth quarter.

But even that is a slowdown from the previous two quarters, a sign of how much the stock-market crash and volatility in the financial-services industry are undermining the idea that China can seamlessly shift the economy from industrial output to services. The poor end to the year is especially depressing in light of the stimulus pumped into the economy over the past six months. How much worse would its performance have been without a sharp ramp-up in government spending, low interbank rates and multiple cuts in interest rates and reserve requirements? For investors who are spooked whenever China’s currency and stock markets plunge, the data are hardly reassuring. And the increasing outflows of yuan from the economy suggest locals are nervous, too.

When bad news gets so awful it must lead to something good. Something like that.

• China Stocks Surge As GDP Triggers Expectations Of Beijing Stimulus (MW)

China shares turned higher Tuesday, as investors weighed the likelihood of further stimulus from Beijing following data that the economy grew at its slowest pace in a quarter of a century. The Shanghai Composite Index traded up 2.8%, after flitting near the flat line and Australia’s S&P/ASX climbed 0.9%. Japan’s Nikkei closed up by 0.6% and South Korea’s Kospi rose 0.6%. The region’s markets were reacting to the latest batch of data from the world’s second largest economy. Growth slowed to 6.9% in 2015, compared to 7.3% in 2014. China also expanded by an annualized 6.8% during the fourth quarter alone, shy of 6.9% expected by economists surveyed by The Wall Street Journal. “It does suggest that more stimulus [from authorities] may be needed to push forth the pace of expansion,” said Niv Dagan at Peak Asset Management.

“Investors are happy to take a backward step and increase their cash weighting until things stabilize.” Investors have been reluctant to buy up the region’s shares, remaining nervous about how Chinese authorities will guide their markets and lower oil prices. Doubts linger about the ability of China’s central bank to curb yuan speculation, which was the initial trigger for selling in markets worldwide earlier this year. China’s Shanghai Composite Index, which has fallen nearly 17% this year, has dragged markets in Japan and Australia near bear market territory, defined as a 20% fall or more from a recent high. Efforts by authorities to talk up the underlying health of the Chinese economy this weekend may have helped calm some fears among investors and encouraged them to return to markets, said Angus Nicholson at IG. “Chinese markets have already suffered such a dramatic correction this year that I think some of these official assurances have helped bring a few buyers back to the table,” he said.

It has legs.

• The Case for Chaos in Trying to Pick Bottom of U.S. Equity Rout (BBG)

In a market bouncing up and down 2% a day, investor psychology is taking a beating in U.S. stocks. But nerves may need to fray further before the volatility abates. For all of last week’s twists, measures of investor anxiety sit well below levels from the last selloff, when shares plunged 11% in August. Twice last week the Chicago Board Options Exchange Volatility Index jumped more than 10% in a day, yet it ended 34% below its summer high. To those who monitor sentiment for clues to the market’s direction, these aren’t things that add up to capitulation, when bulls give up and prices fall to levels where calm is restored. While last week’s losses capped an 8% tumble that equaled the worst start to a year on record, they see enough optimism left to keep gyrations coming. “Wholesale panic” is what’s needed before the market turns, according to Scott Minerd at Guggenheim Partners.

“You start to see a huge surge in volatility because everybody is just trying to get through the exits, and they’re pushing prices down just to get out of the positions.” Ten days into 2016 and more than $2 trillion has been wiped from American stocks, with the Standard & Poor’s 500 Index careening to the lowest close since August. Alternating swings in the Dow Jones Industrial Average over the last three days were the wildest since S&P stripped the U.S. of its AAA credit rating in 2011. The Chicago Board Options Exchange Volatility Index, a gauge of trader trepidation tied to options on the S&P 500, ended the week at 27.02, more than 60% above its average level in 2015. At the same time, it sits 12% below its mean reading during the six-day rout that started Aug. 18 – and 34% below its highest close in that stretch.

In comes the Dallas Fed.

• Big US Banks Brace For Oil Loans To Implode (CNN)

Firms on Wall Street helped bankroll America’s energy boom, financing very expensive drilling projects that ended up flooding the world with oil. Now that the oil glut has caused prices to crash below $30 a barrel, turmoil is rippling through the energy industry and souring many of those loans. Dozens of oil companies have gone bankrupt and the ones that haven’t are feeling enough financial stress to slash spending and cut tens of thousands of jobs. Three of America’s biggest banks warned last week that oil prices will continue to create headaches on Wall Street – especially if doomsday scenarios of $20 or even $10 oil play out. For instance, Wells Fargo is sitting on more than $17 billion in loans to the oil and gas sector. The bank is setting aside $1.2 billion in reserves to cover losses because of the “continued deterioration within the energy sector.”

JPMorgan is setting aside an extra $124 million to cover potential losses in its oil and gas loans. It warned that figure could rise to $750 million if oil prices unexpectedly stay at their current $30 level for the next 18 months. “The biggest area of stress” is the oil and gas space, Marianne Lake, JPMorgan’s chief financial officer, told analysts during a call on Thursday. “As the outlook for oil has weakened, we would expect to see some additional reserve build in 2016.” Citigroup built up loan loss reserves in the energy space by $300 million. The bank said the move reflects its view that “oil prices are likely to remain low for a longer period of time.” If oil stays around $30 a barrel, Citi is bracing for about $600 million of energy credit losses in the first half of 2016. Citi said that figure could double to $1.2 billion if oil dropped to $25 a barrel and stayed there.

Interesting to see where this goes now that Kaplan has opened the door.

• The Fed Responds To Zero Hedge: Here Are Some Follow Up Questions (ZH)

Over the weekend, we gave the Dallas Fed a chance to respond to a Zero Hedge story corroborated by at least two independent sources, in which we reported that Federal Reserve members had met with bank lenders with distressed loan exposure to the US oil and gas sector and, after parsing through the complete bank books, had advised banks to i) not urge creditor counterparties into default, ii) urge asset sales instead, and iii) ultimately suspend mark to market in various instances. Moments ago the Dallas Fed, whose president since September 2015 is Robert Steven Kaplan, a former Goldman Sachs career banker who after 22 years at the bank rose to the rank of vice chairman of its investment bank group – an odd background for a regional Fed president – took the time away from its holiday schedule to respond to Zero Hedge. This is what it said.

We thank the Dallas Fad for their prompt attention to this important matter. After all, as one of our sources commented, “If revolvers are not being marked anymore, then it’s basically early days of subprime when mbs payback schedules started to fall behind.” Surely there is nothing that can grab the public’s attention more than a rerun of the mortgage crisis, especially if confirmed by the highest institution. As such we understand the Dallas Fed’s desire to avoid a public reaction and preserve semantic neutrality by refuting “such guidance.” That said, we fully stand by our story, and now that we have engaged the Dallas Fed we would like to ask several very important follow up questions, to probe deeper into a matter that is of significant public interest as well as to clear up any potential confusion as to just what “guidance” the Fed is referring to.

The world beyond spot prices. Still, a tad sensationalist.

• The North Dakota Crude Oil That’s Worth Less Than Nothing (BBG)

Oil is so plentiful and cheap in the U.S. that at least one buyer says it would need to be paid to take a certain type of low-quality crude. Flint Hills Resources, the refining arm of billionaire brothers Charles and David Koch’s industrial empire, said it would pay -$0.50 a barrel Friday for North Dakota Sour, a high-sulfur grade of crude, according to a list price posted on its website. That’s down from $13.50 a barrel a year ago and $47.60 in January 2014. While the negative price is due to the lack of pipeline capacity for a particular variety of ultra low quality crude, it underscores how dire things are in the U.S. oil patch. U.S. benchmark oil prices have collapsed more than 70% in the past 18 months and West Texas Intermediate for February delivery fell as low as $28.36 a barrel on the New York Mercantile Exchange on Monday, the least in intraday trade since October 2003.

“Telling producers that they have to pay you to take away their oil certainly gives the producers a whole bunch of incentive to shut in their wells,” said Andy Lipow, president of Lipow Oil in Houston. Flint Hills spokesman Jake Reint didn’t respond to a phone call and e-mail outside of work hours on Sunday to comment on the bulletin. The prices posted by Flint Hills Resources and rivals such as Plains All American Pipeline are used as benchmarks, setting reference prices for dozens of different crudes produced in the U.S. Plains All American quoted two other varieties of American low quality crude at very low prices: South Texas Sour at $13.25 a barrel and Oklahoma Sour at $13.50 a barrel. High-sulfur crude in North Dakota is a small portion of the state’s production, with less than 15,000 barrels a day coming out of the ground, said John Auers at Turner Mason in Dallas. The output has been dwarfed by low-sulfur crude from the Bakken shale formation in the western part of the state, which has grown to 1.1 million barrels a day in the past 10 years.

China 2016: Stock losses prompt money to flee into bonds and real estate. But for all the wrong reasons.

• China’s Hot Bond Market Seen at Risk of Default Chain Reaction (BBG)

China’s bond investors are raking it in as an equity rout scatters cash into fixed-income securities. But concerns are rising that spreading defaults and a sliding yuan will spark a selloff. Credit derivatives that are seen as a gauge of risk in the market have spiked 22 basis points since Dec. 31, the worst start to a year in data going back to 2008. The number of listed firms with debt double equity has jumped to 339 amid a weakening economy, from 185 in 2007. Traders surveyed by Bloomberg in December said note failures will spread. “2016 is a year when we will see systemic risks emerge in China’s credit market,” said Ji Weijie, credit analyst in Beijing at China Securities Co., the top arranger of bond offerings from state-owned and listed firms.

“There may be a chain reaction as more companies are likely to fail in a slowing economy and related firms could go down too.” The 18% tumble in China’s benchmark stock gauge this year has so far buoyed bonds, cutting yield premiums on local securities to record lows and on dollar debentures from the nation to the least in eight years. A reversal may be coming as the yuan’s slide spurs capital outflows that have forced the central bank to inject liquidity to hold down borrowing costs, a task it can’t manage indefinitely, according to First State Cinda. The weakest economic growth in a quarter century prompted onshore defaults to jump to at least seven in 2015 even as Premier Li Keqiang vowed to limit failures. Hua Chuang Securities said investors should avoid buying notes for now as surging supply also adds to risks that the hot onshore market will cool.

Such concerns have yet to be reflected in prices. The extra yield on top-rated local corporate debentures due in five years over similar-maturity government notes dropped 3.4 basis points since the start of the year to 57.3 basis points, near a record low. The premium on dollar securities from China is at 274 basis points, near the least since 2007, a Bank of America Merrill Lynch index shows. “The Chinese government wants to maintain a low domestic borrowing rate to support growth by injecting liquidity into the system,” said Ben Sy, the head of fixed income, currencies and commodities at the private banking arm of JPMorgan Chase & Co. in Hong Kong. “CDS, on the other hand, is a proxy for global investors’ sentiment toward China and it can be speculative in nature.”

Steel can fall by half along with shipyards.

• Chinese Shipyards See New Orders Fall by Almost Half in 2015 (BBG)

New orders received by Chinese shipbuilders fell by nearly half last year from 2014, suggesting more consolidation is in order as the country’s appetite for raw materials wanes and shipping rates languish at multiyear lows. Shipbuilders in China received new orders amounting to 31.3 million deadweight tons last year, a world-leading 34% share of the global market, the Ministry of Industry and Information Technology said Monday. Backlog orders fell 12% to 123 million deadweight tons, or 36% of global market share. Chinese shipbuilders have sought government support as excess vessel capacity depresses shipping rates, leading to contracts being canceled.

South Korean and Singaporean shipyards are also feeling the pain, compounded by a bribery scandal in Brazil that has further affected orders. China Rongsheng Heavy Industries, once the country’s largest private shipyard, exited the sector last year amid heavy losses and changed its name to China Huarong Energy to reflect its new business focus. In early January, Zhoushan Wuzhou Ship Repairing & Building became China’s first state-owned shipbuilder to go bankrupt in a decade. In a sign of ongoing restructuring in the sector, the 10 leading shipbuilders on the mainland accounted for 53% of total orders completed and 71% of new orders received in 2015, the ministry said.

A big story for this year. The global steel glut is beyond proportions. Time for tariffs and protectionism.

• World’s Biggest Steel Industry (China) Shrinks for First Time Since 1991 (BBG)

Steel output in the world’s largest producer posted the first annual contraction in a quarter century. Mills in China, which make half of global supply, churned out less last year for the first time since at least 1991 as local demand dropped, prices sank and producers struggled with overcapacity. Crude steel production shrank 2.3% to 803.83 million metric tons, the statistics bureau said Tuesday. December output fell 5.2% to 64.37 million tons from a year earlier. Demand is weakening as policy makers seek to steer the economy away from investment toward consumption-led growth. The economy expanded 6.9% last year, the slowest full-year pace since 1990, data showed. Steel output will probably drop 2.6% this year, weakening the outlook for iron ore as global miners increase shipments, Citigroup has estimated.

“This marks the start of declining steel output in China as the economy slows,” Xu Huimin, an analyst at Huatai Great Wall Futures in Shanghai, said. “We’re likely to see more output cuts this year, though the magnitude of declines will be quite similar to 2015. Supply cuts in a glut are a long-drawn process as mills seek to maintain market share.” Crude-steel output in China surged more than 12-fold between 1990 and 2014, and the increase is emblematic of the country’s emergence as the world’s second-largest economy. Demand soared as policy makers built out infrastructure, shifted millions of people into cities and promoted consumption of autos and appliances.

“Shanghai, up a healthy 15.5%..” Pray tell what’s healthy about that.

• Strong China Property Data Masks Big Problem of Unsold Homes (Reuters)

For an economy facing its slowest economic growth in a quarter century, a 7.7% year-on-year rise in new home prices in December would seem to offer China some light at the end of the tunnel. But the headline number, published by the National Bureau of Statistics on Monday, masks China’s massive property problem – a vast amount of unsold apartments mainly in its smaller cities. Property prices were rising fast in mega cities like southern Shenzhen, where prices rocketed by nearly 47%, Shanghai, up a healthy 15.5%, and Beijing, which posted a respectable 8% gain over a year ago. But the recovery that began in October, after 13 months of straight decline, has only spread to just over half the 70 cities captured by official data, leaving others languishing far behind.

Wang Jianlin, China’s richest man and chairman of property and entertainment conglomerate Dalian Wanda Group, said on Monday that it could take four to five years for the market to digest the inventory in tier three and four cities. China has some 13 million homes vacant – enough to house the families of several small countries – and whittling down the excess is among Chinese policymakers top priorities for 2016. Dalian Wanda expects a significant decline in real estate income as it diversifies its business away from property. But, planning an initial public offering, Wang reckoned the market would manage so long as authorities took a gradual approach to the inventory issue. “Sales are highly concentrated in first- and second-tier cities, where 36 top cities account for three-quarters of the total sales value. So the portion from third- and fourth-tier cities is very low. As long as they destock slowly, there is no problem,” he told the Asia Financial Forum in Hong Kong.

Meantime, Wang said property investment in China’s first tier cities was the most risky due to high land costs, and his firm’s real estate focus is largely on the commercial sector in the lower-tier cities. Still, analysts reckon it will take a lot longer before the price recovery translates into growth in property investment that can help the overall economy regain momentum. “Property investment is expected to see a single-digit decline this year despite recovering home prices, so it will continue to weigh on GDP,” said Liao Qun, China chief economist at Citic Bank International in Hong Kong. That will hardly dull the pain for investors worried by a depreciation in the yuan currency and crumbling stock markets since the start of the year.

Imagine that were your pension money. Invested in a market that is grossly overvalued. Abe is a madman.

• Japan Makes Plans for Pension Fund to Invest in Stocks (WSJ)

Japan’s government is preparing legislation that would allow its $1.1 trillion public pension reserve fund to directly buy and sell stocks, a plan that is sparking divisions over the state fund’s role in private markets. The Government Pension Investment Fund currently entrusts its stock-investment money to outside managers. The welfare ministry plans to present a plan for direct investment to parliament this spring, though legislation might take until later in the year to pass, say politicians and government officials. The change would mark another step in the GPIF’s transformation from a conservative investor into one that resembles other global pension and sovereign-wealth funds. Prime Minister Shinzo Abe has encouraged the shift to reinvigorate Japan’s financial markets and improve corporate governance.

“GPIF could contribute more to Japan’s economy by constructively interacting not only with money managers, but also with corporations,” said GPIF chief investment officer Hiromichi Mizuno. “As Japan’s biggest asset owner, we can jump start a positive chain reaction of better governance between businesses and investors.” The plan has raised concerns among some business leaders and politicians who say the giant fund could distort markets with its stock picks or act as a tool for politicians to exert influence over companies. “I am most worried about political intervention,” said Keio Business School associate professor Seki Obata, who previously served on the GPIF’s investment advisory committee.

“In theory, I’m in support of in-house stock investing, but Japan is still the most immature country and society in terms of asset-management issues.” The Abe administration has already been criticized for using the GPIF to influence financial markets. In 2014, the fund said it was nearly doubling its allocation to equities, which some investors criticized as a “price-keeping operation”—an attempt to pump up the stock market. Criticism started again after the fund posted an ¥8 trillion loss in the third quarter of 2015, and further losses are likely in the current quarter if Japanese stocks continue their current slide. The Nikkei Stock Average has fallen more than 10% since the beginning of the year and fell 1.1% Monday.

Turning to junk. Shorting Banco Dei Paschi has already been banned.

• Italy Banks Lose $82 Billion of Cheap Financing From Savers (BBG)

Italian savers ditched €75 billion of bank bonds in the year ended September, further depriving lenders of a cheap source of funding. Retail holdings of the notes tumbled 27% in the period to €200 billion, extending declines since 2012, based on Bank of Italy data released on Monday. There was a €5 billion drop in the three months ended September, marking a slowdown from previous quarters. Savers are shunning bank bonds as losses at four small lenders in November have made more people aware that the investments are risky. The cash drain has contributed to a slump in prices for junior bonds, as lenders turn to more expensive wholesale financing and contend with tighter European Union rules on state aid.

“A lot of these banks have survived better thanks to retail funding,” Alberto Gallo at RBS, said before the data was released. “If you take out the retail-funding channel some banks may find it more expensive to fund.” A new EU bail-in regime, which forces lenders to impose losses on creditors before they can accept state aid, has driven declines in Italian bank bonds this year, Gallo said. Banca Popolare di Vicenza’s €200 million of 9.5% subordinated notes due September 2025 have dropped to 74 cents on the euro from 96 cents on Dec. 31, according to data compiled by Bloomberg. Banca Monte dei Paschi di Siena SpA’s€ 379 million of 5.6% September 2020 bonds have fallen to 72 cents from 95 cents.

Numbered days.

• Italy PM Renzi Sharpens His Rhetorical Barbs At EU (FT)

When Matteo Renzi visited Berlin last July he delivered a subtle warning to the assembled crowd at Humboldt university that a new deal was needed to save European integration. “A world that is changing so quickly needs a place that it can call home in terms of values, ideals, and passion – and that place is Europe,” the Italian prime minister said, weaving in references to Sophie Scholl, a symbol of German resistance to the Nazis, and Willy Brandt, the former chancellor. “We risk wasting it if we hand it over to bureaucrats and technocrats”. But the 41-year-old former mayor of Florence has now turned to much more pointed complaints, perhaps feeling that his delicate and vague admonitions of last summer were conveniently ignored.

Mr Renzi has sharply escalated his confrontational rhetoric towards the European Commission and the German government, triggering surprise and irritation in Brussels and Berlin. Italy’s increasingly bitter recriminations span a wide range of issues — from migration to energy, banking and budget policy — Mr Renzi feels that the EU is either applying its rules too rigidly, or is adopting double standards that often benefit Germany, to the detriment of Italy. “Europe has to serve all 28 countries, not just one,” he told the FT in an interview last month. Mr Renzi’s attacks on the EU — which have also made him an unlikely David Cameron sympathiser, if not an ally, ahead of Britain’s EU referendum — are undoubtedly a reflection of shifting public opinion in Italy over the past decade.

Whereas Italians used to be among the biggest supporters of European integration, years of economic stagnation and recession have brought a wave of disillusion with its outcomes, particularly when it comes to the euro. Mr Renzi, who took office nearly two years ago, saw his poll numbers drop substantially over the course of 2015, with the populist anti-euro Five Star Movement and Northern League consolidating their positions as Italy’s second and third largest political parties respectively. And Mr Renzi faces two key electoral tests this year: municipal elections in some of the largest Italian cities, including Rome and Milan, and a referendum on constitutional reforms to strip power from the Italian Senate that the prime minister has staked his political future on, threatening to resign should he lose.

Funny thing is, he’s the first one other than Le Pen to say it out loud. Still, €2 billion won’t get him anywhere.

• Hollande Says France In State Of Economic, Social Emergency (BBC)

President Francois Hollande has set out a €2bn job creation plan in an attempt to lift France out of what he called a state of “economic emergency”. Under a two-year scheme, firms with fewer than 250 staff will get subsidies if they take on a young or unemployed person for six months or more. In addition, about 500,000 vocational training schemes will be created. France’s unemployment rate is 10.6%, against a EU average of 9.8% and 4.2% in Germany. Mr Hollande said money for the plan would come from savings in other areas of public spending. “These €2bn will be financed without any new taxes of any kind,” said President Hollande, who announced the details during an annual speech to business leaders.

“Our country has been faced with structural unemployment for two to three decades and this requires that creating jobs becomes our one and only fight.” France was facing an “uncertain economic climate and persistent unemployment” and there was an “economic and social emergency”, he said. The president said recently that the country’s social emergency, caused by unemployment, was as serious as the emergency caused by terrorism. He called on his audience to help “build the economic and social model for tomorrow”. The president also addressed the issue of labour market flexibility. “Regarding the rules for hiring and laying off, we need to guarantee stability and predictability to both employers and employees. There is room for simplification,” he said.

“The goal is also more security for the company to hire, to adapt its workforce when economic circumstances require, but also more security for the employee in the face of change and mobility”. However, the BBC’s Paris correspondent Hugh Schofield said there was widespread scepticism that the plan would have any lasting impact. “Despite regular announcements of plans, pacts and promises, the number of those out of work continues to rise in France. “With a little over a year until the presidential election in which he hopes to stand for a second term, President Hollande desperately needs good news on the jobs front. But given the huge gap so far between his words and his achievements, there is little expectation that this new plan will bear fruit in time”, our correspondent said.

Russia can’t borrow in world markets. The upside of that is it has very little debt.

• Russia Considers Suspending Loans to Other Countries (Moscow Times)

Russia could suspend loans to foreign countries as the country’s budget continues to be strained by economic recession, the Interfax news agency reported Monday, citing Deputy Finance Minister Sergei Storchak. “The budget is strained, more than strained. I think we are in a situation where we are forced to take a break from issuing new loans,” Storchak was quoted by the news agency as saying. Given the current state of the national budget, the undertaking of new obligations involves increased risk, he added, according to Interfax.

Russia’s federal budget for this year, based on oil prices of $50 per barrel, will likely face problems as the oil price continues to drop dramatically. As of Monday morning, the price of Brent crude fell to $28 dollars per barrel following the lifting of sanctions against Iran, Interfax reported. Storchak also said that negotiations on Russia’s $5 billion loan to Iran were continuing and that no final decision had been taken yet. Last year, Iran requested a $5 billion loan from Russia for the implementation of joint projects, including the construction of power plants and development of railways.

As much as I want to stay out of US politics, Jim’s observations here warrant a thorough read.

• Worse Than 1860 (Jim Kunstler)

The Republican Party may be closer to outright blowup since the rank and file will never accept Donald Trump as their legitimate candidate, and Trump has nothing but contempt for the rank and file. If Trump manages to win enough primaries and collect a big mass of delegate votes, the July convention in Cleveland will be the site of a mass political suicide. The party brass, including governors, congressmen, senators and their donor cronies will find some device to deprive Trump of his prize, and the Trump groundlings will revolt against that move, and the whole nomination process will be turned over to the courts, and the result will be a broken organization. The Federal Election Commission may then have to appeal to Capital Hill to postpone the general election. The obvious further result will be a constitutional crisis.

Political legitimacy is shattered. Enter, some Pentagon general on a white horse. Parallel events could rock the Democratic side. I expect Hillary to exit the race one way or another before April. She comes off the shelf like a defective product that never should have made it through quality control. Nobody really likes her. Nobody trusts her. Nobody besides Debbie Wasserman Schultz and Huma Abedin believe that it’s her turn to run the country. Factions at the FBI who have had a good look at her old State Department emails want to see her indicted for using the office to gin up global grift for the Clinton Foundation. These FBI personnel may be setting up another constitutional crisis by forcing Attorney General Loretta Lynch either to begin proceedings against Clinton or resign.

Rumors about her health (complications from a concussion suffered in a fall ) won’t go away. And finally, of course, Senator Bernie Sanders is embarrassing her badly at the polls. The Democrats could feasibly end up having to nominate Bernie on a TKO, but in doing so would instantly render themselves a rump party peddling the “socialist” brand — about the worst product-placement imaginable, given our history and national mythos. In theory, the country might benefit from a partial dose of socialism such as single-payer Medicare-for-all — just to bust up the odious matrix of rackets that medicine has become — but mega-bureaucracy on the grand scale is past its sell-by date for an emergent post-centralized world that needs its regions to get more local and autonomous.

The last time the major political parties disintegrated, back in the 1850s, the nation had to go through a bloody convulsion to reconstitute itself. The festering issue of slavery so dominated politics that nothing else is remembered about the dynamics of the period. Today, the festering issue is corruption and racketeering, but none of the candidates uses those precise terms to describe what has happened to us, though Sanders inveighs against the banker class to some effect. Trump gets at it only obliquely by raging against the “incompetence” of the current leadership, but he expresses himself so poorly in half-finished sentences and quasi-thoughts that he seems to embody that same mental incapacity as the people he rails against.

“You can only imagine what happens when the weather improves,” he said.”

• End Of Europe? Berlin, Brussels’ Shock Tactic On Migrants (Reuters)

Is this how “Europe” ends? The Germans, founders and funders of the postwar union, shut their borders to refugees in a bid for political survival by the chancellor who let in a million migrants. And then — why not? — they decide to revive the Deutschmark while they’re at it. That is not the fantasy of diehard Eurosceptics but a real fear articulated at the highest levels in Berlin and Brussels. Chancellor Angela Merkel, her ratings hit by crimes blamed on asylum seekers at New Year parties in Cologne, and EU chief executive Jean-Claude Juncker both said as much last week. Juncker echoed Merkel in warning that the central economic achievements of the common market and the euro are at risk from incoherent, nationalistic reactions to migration and other crises.

He renewed warnings that Europe is on its “last chance”, even if he still hoped it was not “at the beginning of the end”. Merkel, facing trouble among her conservative supporters as much as from opponents, called Europe “vulnerable” and the fate of the euro “directly linked” to resolving the migration crisis – highlighting the risk of at the very least serious economic turbulence if not a formal dismantling of EU institutions. Some see that as mere scare tactics aimed at fellow Europeans by leaders with too much to lose from an EU collapse – Greeks and Italians have been seen to be dragging their feet over controlling the bloc’s Mediterranean frontier and eastern Europeans who benefit from German subsidies and manufacturing supply chain jobs have led hostility to demands that they help take in refugees.

Germans are also getting little help from EU co-founder France, whose leaders fear a rising anti-immigrant National Front, or the bloc’s third power, Britain, consumed with its own debate on whether to just quit the European club altogether. So, empty threat or no, with efforts to engage Turkey’s help showing little sign yet of preventing migrants reaching Greek beaches, German and EU officials are warning that without a sharp drop in arrivals or a change of heart in other EU states to relieve Berlin of the lonely task of housing refugees, Germany could shut its doors, sparking wider crisis this spring. With Merkel’s conservative allies in the southern frontier state of Bavaria demanding she halt the mainly Muslim asylum seekers ahead of tricky regional elections in March, her veteran finance minister delivered one of his trademark veiled threats to EU counterparts of what that could mean for them.

“Many think this is a German problem,” Wolfgang Schaeuble said in meetings with fellow EU finance ministers in Brussels. “But if Germany does what everyone expects, then we’ll see that it’s not a German problem – but a European one.” Senior Merkel allies are working hard to stifle the kind of parliamentary party rebellion that threatened to derail bailouts which kept Greece in the euro zone last year. But pressure is mounting for national measures, such as border fences, which as a child of East Germany Merkel has said she cannot countenance. “If you build a fence, it’s the end of Europe as we know it,” one senior conservative said. “We need to be patient.”

Call the assembly together then.

• UN Seeks Mass Resettlement Of Syrians (AP)

The new chief of the U.N. refugee agency said Monday the world should find a fairer formula for sharing the burden of Syria’s crisis, including taking in tens of thousands of refugees from overwhelmed regional host nations. Filippo Grandi, who assumed his post earlier this month, heads an agency grappling with mounting challenges as Syria’s five-year-old civil war drags on. Humanitarian aid lags more and more behind growing global needs, including those caused by the Syrian conflict. More than 4 million Syrians have fled their homeland, the bulk living in increasingly difficult conditions in neighboring countries such as Jordan and Lebanon, while hundreds of thousands have flooded into Europe. Grandi came to Jordan after a stop in Turkey. Later this week, he is due in Lebanon. He visited the Zaatari refugee camp in Jordan after meeting with King Abdullah II in the capital, Amman.

His agency, UNHCR, hopes to raise money for refugees at a London pledging conference in February, followed by an international gathering in March in Geneva where countries would commit to taking in more refugees. “I think we need to be much more ambitious” about resettling refugees, Grandi said. “We are talking about large numbers … in the tens of thousands.” “What is needed is a better sharing of responsibilities, internationally, for a crisis that cannot only concern the countries neighboring Syria,” he said. Hundreds of thousands of refugees entered Europe in 2015, often with the help of smugglers who ferried them across the Mediterranean in dangerous voyages. Grandi said it was time to create legal ways for some refugees to leave overburdened host countries.

Either stop bombing or face mass migration on a much larger scale than what we’ve already seen. At least it’s not complicated.

• Davos Boss Warns Refugee Crisis Could Become Something Much Bigger (BBG)

As the crash in commodities prices spreads economic woe across the developing world, Europe could face a wave of migration that will eclipse today’s refugee crisis, says Klaus Schwab, executive chairman of the World Economic Forum. “Look how many countries in Africa, for example, depend on the income from oil exports,” Schwab said in an interview ahead of the WEF’s 46th annual meeting, in the Swiss resort of Davos. “Now imagine 1 billion inhabitants, imagine they all move north.” Whereas much of the discussion about commodities has focused on the economic and market impact, Schwab said he’s concerned that it will also spur “a substantial social breakdown. That fits into what Schwab, the founder of the WEF, calls the time of “unexpected consequences” we now live in.

In the modern era, it’s harder for policy makers to know the impact of their actions, which has led to “erosion of trust in decision makers.” “First, we have to look at the root causes of this,” Schwab said. “The normal citizen today is overwhelmed by the complexity and rapidity of what’s happening, not only in the political world but also the technological field.” That sense of dislocation has fueled the rise of radical political leaders who tap into a rich vein of anger and xenophobia. For reason to prevail, Schwab said, “we have to re-establish a sense that we all are in the same boat.” The theme for this year’s meeting is the Fourth Industrial Revolution, which the WEF defines as a “fusion of technologies that is blurring the lines between the physical, digital, and biological spheres.”

While that presents huge opportunities, Schwab warns that technological innovation may result in the loss of 20 million jobs in the coming years. Those job cuts risk “hollowing out the middle class,” Schwab said, “a pillar of our democracies.” At the same time, Schwab argues, trends like the sharing economy and the changes wrought by technology mean economists must adapt the tools they use to assess well-being. “Many of our traditional measurements do not work anymore,” he said. After decades watching the ebbs and flows of the global economy, Schwab said the current anxiety is “not new” for him. But he said that as the world gets ever more interconnected, the consequences of such turmoil could become more grave. This week’s WEF meeting, he said, will offer policy makers “the first opportunity after the markets have come down to look at the situation and coordinate.”

It’s been so long since I wrote there should an emergency UN meeting on refugees, I don’t even remember when. Let me renew that call. The EU must be afraid it wouldn’t like the outcome.

• German Minister Urges Merkel To Prepare To Close Borders (Reuters)

Chancellor Angela Merkel’s transport minister has urged her to prepare to close Germany’s borders to stem an influx of asylum seekers, arguing that Berlin must act alone if it cannot reach a Europe-wide deal on refugees. Alexander Dobrindt said Germany could no longer show the world a “friendly face” – a phrase used by Merkel as refugees began pouring into Germany last summer – and that if the number of new arrivals did not drop soon, Germany should act alone. “I urgently advise: We must prepare ourselves for not being able to avoid border closures,” Dobrindt, a member of the Bavarian Christian Social Union (CSU), told the Muenchner Merkur newspaper.

The CSU, the Bavarian sister party to Merkel’s conservative Christian Democrats (CDU), has ramped up pressure on the chancellor over her open-door refugee policy that saw 1.1 million migrants arrive in Germany last year alone. CSU leader Horst Seehofer told Der Spiegel magazine in a weekend interview that he would send the federal government a written request within the next two weeks to restore “orderly conditions” at the nation’s borders. Bavaria is the main entry point to Germany for refugees. “I would advise us all to prepare a Plan B,” Dobrindt said in an advanced release of an interview to run in the Muenchner Merkur’s Tuesday edition. Merkel has vowed to “measurably reduce” arrivals this year, but has refused to introduce a cap, saying it would be impossible to enforce without closing German borders.

Instead, she has tried to convince other European countries to take in quotas of refugees, pushed for reception centers to be built on Europe’s external borders, and led an EU campaign to convince Turkey to keep refugees from entering the bloc. But progress has been slow. Dobrindt rejected Merkel’s argument that closing borders would jeopardize the European project. “The sentence, the closure of the border would see Europe fail, is true in reverse. Not closing the border, just going on, would bring Europe to its knees,” he said.

Greece Is A Nation Under Occupation

Dec 052015

December 5, 2015 Posted by Raúl Ilargi Meijer at 7:15 pm Finance Tagged with: borders, constitution, EU, Frontex, Greece, occupation, Tsipras 3 Responses »

Yannis Bahrakis Witnessing the refugee crisis 2015

Perhaps the best way to show what a mess Europe is in is the €3 billion deal they made with Turkey head Erdogan, only to see him being unmasked by EU archenemy Vlad Putin as a major supporter, financial and who knows how else, of the very group everyone’s so eager to bomb the heebees out after Paris. It could hardly have been more fitting. That’s not egg on your face, that’s face on your egg.

But Brussels thinks it’s found a whipping boy for all its failures. Greece. It’s fast increasing its accusations against Athens’ handling of the 100s of 1000s of refugees flooding the country. Everything that goes wrong is the fault of Greece, not Brussels. The EU has so far given Greece €30 million in ‘assistance’ for the refugee crisis, while the country has spent over €1.5 billion in money it desperately needs for its own people. But somehow it’s still not done enough.

The justification given for this insane shortfall is that Greece doesn’t blindly follow all orders emanating from Europe’s ‘leaders’. Orders such as setting up a joint patrol of the Aegean seas with … yes, Erdogan’s Turkey. Where Greece gets next to nothing as the children keep drowning, Turkey gets €3 billion and a half-baked promise to join the Union sometime in the future.

Which was never going to happen, the EU would blow up before Turkey joins and certainly if it does, and most certainly now that Russia’s busy detailing the link between the Erdogan cabal and Europe’s supposed new archenemies -move over Putin?!, which, incidentally, are reason for France to ponder a kind of permanent state of emergency; ostensibly, this is Hollande’s way of exuding confidence. ‘We must protect our way of life’.

Given Schengen -while it lasts-, which effectively erases all frontiers, this de facto means permanent emergency across the entire EU. And that, to a degree, though the two may seem unrelated, plays into the EU’s insistence to station foreign border guards (military police) at Greek borders. A, we can’t put it in different words, completely insane demand to which Alexis Tsipras’ government has apparently even acceded.

Insane because once you have foreigners deciding who can enter or leave your country, you’re effectively a country under occupation. It really is that simple. This latest attempt at power grabbing on the part of Brussels could have some ‘unexpected side effects’, though. And that may be a good thing.

We are not specialists in the Greek constitution -terribly hard to read-, but we very much question whether an elected government can decide to give up its nation’s sovereignty this way. Two -related- issues here are: 1) does the EU have the legal capacity to force this (EU border guards agency Frontex) on a member state, and 2) does Tsipras have the legal capacity to sign over the sovereignty of his country to foreigners?

Brussels may claim that Athens voluntarily ‘invited’ in German and Polish ‘officers’, but that’s far short of even half the story. EU countries have been complaining about the way Greece has dealt with the refugee crisis, stating that it is not capable of protecting its borders, which it ‘should’ under Schengen.

Nonsense of course. Athens is very capable of protecting its borders, but it has stated -quite correctly, it would seem- that it protects its borders from enemies, and the refugees are not enemies. The reason the refugees keep arriving -and/or drowning-, mind you, has a lot more to do with Angela Merkel’s ‘invitation’ for them to come, and with Turkey’s eagerness to let them leave, than it does with anything Greece has done. Or not done.

But that’s not what Brussels talks about. Far from it. The EU claims it has the power to take over, even if Greece would resist. Reuters quotes a EU official as saying: “One option could be not to seek the member-state’s approval for deploying Frontex but activating it by a majority vote among all 28 members..”

In other words, if 15 countries vote to occupy Greece, it’s a done deal. Once more, we’re quite shaky on Greek constitution at the moment, but we’re thinking someone somewhere (preferably but not necessarily Greece) should take this to a constitutional court. Again, preferably in Athens, but that’s not where the buck stops.

Because if the EU can do this to Greece, it can ostensibly do it to any member state. All 28 countries in the EU could be subject to their borders being taken over. And no matter how shaky we are on any of the 28 constitutions, we are darn sure that at the very least some of them will not allow for this kind of tomfoolery. A nation is either sovereign or it’s not.

Can anyone imagine Frontex taking control of British borders, or German or French? The very notion is too silly to even bring up in serious conversation. But that is exactly what Tsipras has just accepted. It would seem wise to let that sink in.

And we, in all the innocence and ignorance we have, and we have plenty, fail to see how Alexis Tsipras can retain his position as prime minister in the face of this. No prime minister gets elected to sign over his country’s sovereignty to some group of bureaucrats the country happens to be aligned with on one way or the other.

There must be terms written into the Greek constitution, too, that prevent this from happening. Or else the nation was handed over to the dogs long ago, just waiting to be conquered once again. We don’t think Greeks are stupid, and most certainly not that stupid.

The refugee crisis is not Greece’s fault. In much the same way that the EU/ECB decision to bail out French/Dutch/German banks from their losses on Greek casino loans was not Greece’s fault. The EU is turning rapidly into a theater where the largest and most powerful countries get to play the weaker for whatever they desire. And that won’t last. Not with sovereign nations and their constitutions.

The internal problem in Greece, and we have to hand it to Tsipras that he understands this, is that when he leaves, the old guard will take over again. And that will be even worse for Greeks. Whose economy is being systematically dismantled by Brussels as we speak. Greece has zero chance of recovering from its crisis under the terms the EU has forced upon it.

But that doesn’t mean that an elected prime minister has the legal power to sign over the entire nation to a bunch of international bankers and power-thirsty politicians. There are still laws in this world. Written into constitutions.

Europe’s own Real Donald (there’s one on each side of the Atlantic), the one called Tusk, who owes his job exclusively to badmouthing Putin, on top of all sorts of suggestions to halt Schengen for 2 years or so, talked about detaining all refugees for 18 months, pending background checks and the like.

And we’re thinking, in our innocence, pray tell where, Don? In Poland, where you guys have such great experience with detention camps? But we’re drifting, straying… We’ve written too many times to count over the past while that the EU is bound to collapse because its structure selects for sociopaths. Who dream of power, night and day.

Look, Greece should leave while it can. Britain’s going to sign some convoluted deal to keep up appearances, though the ECB is not at all pleased with the idea of a multi-currency union, but deep down David Cameron is a second-hand car salesman who can’t even spell principles or morals, so it’ll get done.

The Danes voted down more EU in their country this week, in an outcome eerily familiar when it comes to actual votes on the Union. It seems every time such a vote takes place, Brussels loses.

But neither Britain nor Denmark not any other EU nation would vote to give up their sovereignty, their borders, their control over who enters and who leaves. And very rightly so. Greece shouldn’t either, it’s gone way too far already trying to please the bully.

Alexis Tsipras has made exactly that decision, however. And that makes his position untenable, even though neither he nor -allegedly- anyone else realizes it yet. He’ll be lucky not to face trial for treason. We’re not kidding.

Europe’s On A Road To A Very Bleak Nowhere

Oct 272015

October 27, 2015 Posted by Raúl Ilargi Meijer at 9:24 am Finance Tagged with: borders, camps, EU, humanity, Juncker, Merkel, military, police, private security, Slovenia 9 Responses »

LIFE How to kiss 1942

On the day after a bunch of European countries headed into yet another -emergency- meeting, and as the refugee situation in Greece and the Balkans was more out of hand than ever before, not in the least because the numbers of refugees arriving from -in particular- Turkey are larger than ever, let’s reiterate what should always be the guiding principle driving the response to issues like this.

That is, the only way to approach a crisis such as this one is to put the people first. To say that whatever happens, we will do what we can, first and foremost, to not allow for people to drown, or go hungry or cold, or contract diseases. Because that contradicts our basic morals. The loss of lives and prevention of misery should be the most important thing for everyone involved, all the time, from politicians to citizens.

If we cannot approach both the issue and the people with decency and humanity, we are as lost as they are. If only because we have no claim to being treated better than we ourselves treat others. After all, if someone else’s life is neither sacred nor valuable, why should yours be?

Looking through the response across Europe to the growing numbers and the growing crisis, what’s remarkable is the difference between individual citizens and the governments that are supposed to represent them. Apart from outliers like Hungary PM Victor Urban and the ubiquitous fascist groups from Greece through Germany, citizens win hands-down and across the board when it comes to humanity.

The arguably worst record is set by the European Union, ironically the one body that claims to represent everyone in the 500 million strong continent. Individual politicians in leading nations like Germany, France and the UK are close behind. European ‘leaders’ are not looking for a European solution, they’re all only trying to deal with their own part of the problem. As long as the refugees don’t burden their nations, they’re satisfied.

After a year of increasing refugee arrivals it’s safe to say that the pan-European approach, to the extent that it can even be said to exist, is a dismal and deadly failure.

Yesterday’s ‘Balkan+’ mini-summit was no exception. The AP headline says it all: “EU Agrees To Tighten Border Controls And Slow Migrant Arrival”. Europe’s priority is not to fight or minimize the suffering, it’s to make the problems go away by making the people go away. The new deal that came out of the summit cannot possibly work because it is based on unrealistic predictions of stopping the flow of refugees.

Greece has agreed to ‘host’ 50,000 refugees, but with 10,000 arriving daily that is a meaningless number. Apart from that, this is supposed to take place in ‘holding camps’, and the term all by itself should make one shiver. The ‘hotspots’, another EU initiative, are already making the refugee situation even worse than they have been for months.

Moreover, these people don’t want to stay in Greece, because in Greece economic prospects are so bleak as to be non-existent for the simple reason that the EU itself has demolished the Greek economy. Those responsible for that demolition now seek to force Greece to keep refugees from traveling north in holding camps and severely undermanned fingerprint facilities.

Disgrace comes in spades. It was therefore good to see that Greece had the pretty perfect answer:

Greece Says Refugees Are Not Enemies, Refuses to Protect Borders From Them

Greece’s migration minister has rejected accusations by Germany and other European countries that Greece is failing to defend its borders against mass migration, insisting that the refugees and other migrants trekking to Europe constitute a humanitarian crisis, not a defense threat. “Greece can guard its borders perfectly and has been doing so for thousands of years, but against its enemies. The refugees are not our enemies,” Yiannis Mouzalas said in an interview.

Greece is under pressure from other European governments to use its coast guard and navy to control the huge influx of migrants who are making their way, via the Aegean Sea and Greece’s territory, from the Middle East to Northern Europe, especially Germany. [..] leaders from Greece and other countries on the latest migration route through the Balkans are facing allegations from Germany, Hungary and others that they are passively allowing migrants to pass through.

“In practice what lies behind the accusation is the desire to repel the migrants,” said Mr. Mouzalas. “Our job when they are in our territorial sea is to rescue them, not [let them] drown or repel them.”

Last week alone, Greece received about 48,000 migrants and refugees on its shores, the highest number of weekly arrivals this year, the International Organization for Migration said Friday.

Athens opposes an idea floated by European Commission President Jean-Claude Juncker to set up joint Turkish-Greek border patrols. Greece and Turkey have long-standing disputes over their territorial waters, which have led to military tension over the years.

“This was an unfortunate statement by Mr. Juncker,” Mr. Mouzalas said. “The joint patrols have never been on the table. They have no point anyway, as they wouldn’t help ease the situation.”

Mr. Mouzalas said Turkey should have been invited to Sunday’s summit. “Turkey is the door and Greece is the corridor; Europe should not treat Greece as the door..”

But count on Brussels and Berlin to issue Athens with more threats. It worked over the summer, so… Still, Europe as a whole, the 28 nations that make up the EU, can and will not agree on the entire issue and all its aspects. And that is why Yanis Varoufakis is wrong in his approach, and his call to Britain (which he shares with Xi Jinping of all people) and the rest of Europe:

Yanis Varoufakis Says Britons Should Vote To Stay In Union

Yanis Varoufakis, the former Greek finance minister, has called on Britons to vote to remain in the European Union in the upcoming referendum. The bête noire of the European political elite was speaking at a Guardian Live event at Central Hall in Westminster, central London, on Friday night. He said: “You have a referendum coming up. My message is simple yet rich: those of us who disdain the democratic deficit in Brussels, those of us who detest the authoritarianism of a technocracy which is incompetent and contemptuous of democracy, those of us who are most critical of Europe have a moral duty to stay in Europe, fight for it, and democratise it.”

Yanis is wrong because the EU is not a democratic institution, and can therefore not be “democratized”. It’s a pipedream gone horribly awry. It should be exorcised. And even if “democratization” were possible in theory, before you can reform the EU, you’re 10-20 years or more down the road. And there’s no such time available. The problems exist in the presence, not just in the future.

The EU is a loose collection of separate sovereign nations that came together in times of plenty. These nations will always, when pressured, seek their own advantages, never that of the collective if it means a disadvantage for themselves. The whole idea behind the union has been, from the start, that of a tide that lifts all boats. And that promise has already been smashed into a corner, bruised and broken beyond repair.

After Greece there can be no doubt of that. And the other separate EU-member economies are not exactly doing well either. Mario Draghi pumps €60 billion a month into the eurozone engine, but it keeps leaking just as hard and the best it can do is sputter.

In institutions such as the EU, organized like the EU, power will inevitably flow towards the center. And at some point in that process, democracy will vanish into thin air. Draghi’s €60 billion will just as inevitably benefit the power center most, and leave the periphery ever poorer. This is not an unfortunate coincidence, it’s built into the union’s structure. Which is therefore not merely undemocratic, it’s inherently anti-democratic.

Nobody in Europe ever voted for Jean-Paul Juncker -or had the chance to- to represent them, at least not in any direct democratic fashion. And nobody outside of Germany ever voted for Angela Merkel -or had the chance to- . Yet, these are arguably the most powerful people in the EU. That in a nutshell is what’s wrong with and in Europe.

Financial and political power reside with the rich and powerful nations, and they acquire more of each as they go along. This is unavoidable in the present situation. It can only be corrected by decentralization of power, but since that would run counter to what Brussels and Berlin envision (more power for themselves), it’s not going to happen. Europe will not be ‘democratized’.

Or put it this way: the only way EU nations can regain democratic values is by leaving the union. That is also the only real vote Europeans have left; a vote within the EU structure goes wasted. Ask the Greeks.

Europeans need to acknowledge that the EU has failed, and inexorably so. Schengen is already dead, walls and fences are popping up everywhere. All the rest is just make-believe. There will never be a consensus on the ‘distribution’ of the numbers of refugees. Views and national interests are too far apart.

And the vested interests in the centers of power are too strong. Merkel may be Europe’s unelected leader, but she will always put German interests before those of the 27 other nations. This may be accepted in 7 years of plenty, but it won’t be in the 7 lean years.

Meanwhile, it’s the hundreds of thousands of refugees who pay the price for the fundamental faultlines in what was supposed to bring and hold Europe together. And an interesting additional issue, which so far flies largely under the radar, arises.

First, refugee numbers keep rising, as Reuters reports:

Immigration flows to Greece surged to 48,000 in the five days to October 21, the highest weekly total so far this year, bringing the number of Mediterranean migrant arrivals in Europe to 681,000 the International Organization for Migration said today. Amin Awad, the Middle East director for the UN refugee agency UNHCR, said Russian airstrikes and increased fighting around the Syrian city of Aleppo had contributed to the “dynamic of displacement”, with about 50,000 displaced, but had not contributed much to the refugee exodus. But he said the number of internally displaced people within Syria had fallen from 7.6 million people to 6.3 million, a decline that could be attributed to the refugee flows to Europe, as well as people being missed from the latest count.

48,000 in 5 days in Greece from October 17-21, 12,000 in one day in Slovenia. Over 5,000 in 5 hours on Lesvos Friday. 52 refugees died off Greece in 10 days. That’s five lives lost every day. While Brussels stand by and watches, as does Merkel, paralyzed by fears of losing votes and power at home. And when they do act, it’s most of all to try and quell the refugee flood, not to minimize the suffering.

Turkey gets offered billions to built camps on its territory, Greece is threatened into doing the same. Makes you wonder where Juncker and Merkel think the people they want to lock up in these camps will eventually wind up.

Slovenia is the latest bottleneck, after many miles of walls and and fences and razorwire have been installed elsewhere.

Last Tuesday, Slovenia was first reported to be asking for “additional police forces”.

Slovenia Asks For EU Police Help As Thousands Enter Country

Around 19,500 have entered Slovenia since Friday after Hungary sealed its southern border with Croatia. Speaking after a meeting with European Council President Donald Tusk and EU chief executive Jean-Claude Juncker, President Borut Pahor said:

We need fast assistance of the European Union. Slovenia will formally ask for additional police forces to guard the border between Slovenia and Croatia and for financial help.

The country has deployed 140 soldiers to the border to assist police and hasn’t ruled out building a fence as part of its efforts to control the influx of migrants.

And I thought: police? What police? There is no EU police force. At least not a ‘boots on the ground’ one. There’s Europol, Europe’s own Interpol, but they do intelligence. There’s the European Gendarmerie Force, but that’s a (para-)military police force. And we’re dealing with sovereign nations here, so any police force, let alone a military one, would face huge legal issues; at least if people pay attention.

Then a few days later, Reuters had this:

Worried Slovenia Might Built Fence To Cope With Migrant Crisis

Slovenia said it will consider all options, including fencing off its border with Croatia, if European leaders fail to agree a common approach to the migrant crisis as thousands stream into the ex-Yugoslav republic. Migrants began crossing into Slovenia last Saturday after Hungary closed its border with Croatia. The Slovenian Interior Ministry said that a total of 47,000 had entered the country since Saturday, including some 10,000 in the past 24 hours. Slovenian officials said the country is too small and does not have enough resources to handle such large numbers of people. [..]

According to Slovenia’s interior ministry, the cost of fencing off the 670-km long border with Croatia would be about €80 million. Slovenia has asked for the EU for assistance and officials said Austria, Germany, Italy, France, Hungary, the Czech Republic, Slovakia and Poland offered to send police reinforcements.

That’s 8 different countries offering to send policemen. But what status would these people have? Would they be allowed to bear arms? In a foreign sovereign nation? I’d love to see the legal documents that justify such a move. Would these foreign police officials also enjoy immunity, as Europol officers do? Under whose command would they operate?

I can imagine perhaps these new policemen, or border guards, could be Frontex, but Slovenia is not on Europe’s border. And Frontex already lacks the personnel to execute its intended policies (halt the refugees) in places where Europe does have borders.

This looks like a deep and dark legal quagmire. So perhaps it’s not surprising that Slovenia digs a little deeper still, as the Guardian noted yesterday:

Slovenia To Hire Private Security Firms To Manage Migrant Flows

Slovenia is planning to employ private security firms to help manage the flow of thousands of migrants and refugees travelling through the country toward northern Europe, a senior official has said. Bostjan Sefic, state secretary at the interior ministry, said 50-60 private security guards would assist the police where necessary. More than 76,000 people have arrived in Slovenia from Croatia in the past 10 days. More than 9,000 were in Slovenia on Monday, hoping to reach Austria by the end of the day, while many more were on their way to Slovenia from Croatia and Serbia. The emergency measure was announced by the prime minister, who described the migrant crisis as the biggest challenge yet to the EU.

If a joint solution is not found, [EU] will start breaking up, Miro Cerar warned. About 2,000 migrants waited in a field in Rigonce on the Croatian border on Monday for buses to take them to a nearby camp to be registered before they are allowed to proceed north. [..] Slovenia, the smallest country on the Balkan migration route, has brought in the army to help police. Other EU states have pledged to send a total of 400 police officers this week to help manage the flow of people. Over the past 24 hours, 8,000 people arrived in Serbia en route to northern Europe, the UN refugee agency, UNHCR, said.

Now I know it all perhaps depends on what tasks the various ‘additional’ crew are supposed to handle. Frontex could be doing registration and finger printing. Europol could do some stuff behind the scenes, like sniffing out alleged terrorists. But actual policemen and soldiers and even private security operating inside a sovereign European nation?

The overarching question is how this is different, how far removed is it, from German soldiers and policemen patrolling in for instance Greece? And what would be the reaction from the Greek people to such a development? Or we can turn it around: how would Germans react to Greek soldiers operating on German soil? Once you provide a legal justification for one situation, this should cover all 28 nations, and equally.

Another question is Slovenia once hires private security, how far away are we from employing some subsidiary of Blackwater to patrol the Aegean and/or other parts of the Mediterranean? Or land-based border crossings for that matter?

It will become clearer, fast, what an awful mess Brussels and Berlin have created here, because with winter approaching more refugees will fall victim to the conditions under which they’re forced to live once they’ve entered Europe. Which, in their own eyes, will still be preferable to the conditions in their homelands. And then what will we do, when dozens start dying from cold and diseases? Send in more police and military?

This is a road to a very bleak nowhere. We can only possibly return to what I started out with: “the only way to approach a crisis such as this one is to put the people first.” That is, pay for and send in aid agencies, not officers bearing arms.

And perhaps Europe should begin to ponder the possibility that this is not something it can stop at will. That the 500 million citizens of the EU may have to share their bounty with a few million newcomers. Who, on the whole, look a lot fitter, more determined and more motivated than scores of Europeans do, by the way.

Debt Rattle October 26 2015

Oct 262015

October 26, 2015 Posted by Raúl Ilargi Meijer at 10:02 am Finance Tagged with: Africa, borders, China, deflation, EM, EU, Greece, Japan, recession, refugees, Syria 7 Responses »

Wyland Stanley Chalmers touring car 1922

• US Economic Data Has Never Been This Weak For This Long (Zero Hedge)

• US Companies Warn of Pending Recession (WSJ)

• EU Agrees To Tighten Border Controls And Slow Migrant Arrival (AP)

• Tensions Rise Between European Nations Over Refugee Crisis (Bloomberg)

• Greece Says Refugees Are Not Enemies, Refuses to Protect Borders From Them (WSJ)

• European Trust: The Perfect Storm (Mungiu-Pippidi)

• China Containerized Freight Index Collapses to Worst Level Ever (WolfStreet)

• A China Twist: Why Are Malls Closing If Consumption Is Rising? (Reuters)

• China’s Leaders Shift From Short-Term Stimulus to Five-Year Plan (Bloomberg)

• China Banks Turn To Investors For More Capital As Bad Loans Pile Up (Reuters)

• ‘Deflationary Boom’ In Prospect As China Slows (FT)

• Why China’s Interest Rate Cut May Be Bad News For The World Economy (Guardian)

• Emerging Currencies’ Fate Looms Large In Rich World Rates Policy (Reuters)

• Africa Is In Grave Danger From The Global Economic Slowdown (Telegraph)

• Japan’s Struggling Economy Finds ‘Abenomics’ Is Not an Easy Fix (NY Times)

• Reality Keeps Catching Up With BOJ’s Inflation Forecasts (Bloomberg)

• When Greeks Fled To Syria (Kath.)

“..this period of economic weakness and disappointment is not just the longest on record, but it is entirely unprecedented…”

• US Economic Data Has Never Been This Weak For This Long (Zero Hedge)

Despite the ongoing propaganda reinforcing America’s “cleanest sheets in a brothel” economic growth, the fact is, there is a reason why The Fed folded, why Draghi doubled-down, why China cut, and why Kuroda will likely unleash moar QQE this week. It appears the ‘trap’ that central planners have set for themselves – by enabling massive financial asset inflation in the face of what is now the longest streak of economic weakness and data disappointment on record – now looks set to prove their impotence and/or Enisteinian insanity. As Ice Farm Capital notes: “.. a year ago were looking at 5yr inflation breakevens around 1.5%. They have since deteriorated to 1.15% (by way of 1%) and this week we are expecting a Q3 GDP print more like 1.5% – a deceleration of a full 240bps.”

“Corporate profit margins have taken a sharp hit and corporate profits for the S&P are now down 3% yoy despite continued share buybacks. Through this entire period, markets have continually expected happy days to be just around the corner.”

As a result, we have seen economic surprises for the US negative for the longest stretch in the history of the data series:

To make it a little clearer, this period of economic weakness and disappointment is not just the longest on record, but it is entirely unprecedented…

“The industrial environment’s in a recession. I don’t care what anybody says..”

• US Companies Warn of Pending Recession (WSJ)

Quarterly profits and revenue at big American companies are poised to decline for the first time since the recession, as some industrial firms warn of a pullback in spending. From railroads to manufacturers to energy producers, businesses say they are facing a protracted slowdown in production, sales and employment that will spill into next year. Some of them say they are already experiencing a downturn. “The industrial environment’s in a recession. I don’t care what anybody says,” Daniel Florness, chief financial officer of Fastenal Co., told investors and analysts earlier this month. A third of the top 100 customers for Fastenal’s nuts, bolts and other factory and construction supplies have cut their spending by more than 10% and nearly a fifth by more than 25%, Mr. Florness said.

Caterpillar last week reduced its profit forecast, citing weak demand for its heavy equipment, and 3M, whose products range from kitchen sponges to adhesives used in automobiles, said it would lay off 1,500 employees, or 1.7% of its total, as sales growth sagged for a wide range of wares. The weakness is overshadowing pockets of growth in sectors such as aerospace and technology. Industrial companies are being buffeted on multiple fronts. The slump in energy prices has gutted demand for drilling equipment and supplies. Economic expansion is slowing in China and major emerging markets such as Brazil, which U.S. companies have relied on for sales growth. And the dollar’s strength also has eroded overseas profits.

The drag on earnings and sluggish growth projections for next year come as the Federal Reserve considers raising interest rates for the first time in nine years, and could add momentum to those in favor of postponing any rate increase until next year. Profit and revenue are falling in tandem for the first time in six years, with a third of S&P 500 companies reporting so far. Analysts expect the index’s companies to book a 2.8% decline in per-share earnings from last year’s third quarter, according to Thomson Reuters. Sales are on pace to fall 4%—the third straight quarterly decline. The last time sales and profits fell in the same quarter was in the third period of 2009.

Priorities couldn’t be more skewed.

• EU Agrees To Tighten Border Controls And Slow Migrant Arrival (AP)

European and Balkan leaders agreed on measures early Monday to slow the movement of tens of thousands whose flight from war and poverty has overwhelmed border guards and reception centers and heightened tension among nations along the route to the European Union’s heartland. In a statement to paper over deep divisions about how to handle the crisis, the leaders committed to bolster the borders of Greece as it struggles to cope with the wave of refugees from Syria and beyond that cross over through Turkey. The leaders decided that reception capacities should be boosted in Greece and along the Balkans migration route to shelter 100,000 more people as winter looms. They also agreed to expand border operations and make full use of biometric data like fingerprints as they register and screen migrants, before deciding whether to grant them asylum or send them home.

“The immediate imperative is to provide shelter,” European Commission President Jean-Claude Juncker said after chairing the mini-summit of 11 regional leaders in Brussels. “It cannot be that in the Europe of 2015 people are left to fend for themselves, sleeping in fields.” Nearly 250,000 people have passed through the Balkans since mid-September. Croatia said 11,500 people entered its territory on Saturday, the highest tally in a single day since Hungary put up a fence and refugees started moving sideways into Croatia a month ago. Many are headed northwest to Austria, Germany and Scandinavia where they hope to find a home. “This is one of the greatest litmus tests that Europe has ever faced,” German Chancellor Angela Merkel told reporters after the summit. “Europe has to demonstrate that it is a continent of values and of solidarity.”

“We will need to take further steps in order to get through this,” she said. Slovenian Prime Minister Miro Cerar said his small Alpine nation was being overwhelmed by the refugees – with 60,000 arriving in the last 10 days – and was not receiving enough help from its EU partners. He put the challenge in simple terms: if no fresh approach is forthcoming “in the next few days and weeks, I do believe that the European Union and Europe as a whole will start to fall apart.” The leaders agreed to rapidly dispatch 400 border guards to Slovenia as a short-term measure. As they arrived at the hastily organized meeting, some leaders traded blame for the influx with their neighbors, with Greece targeted for the mismanagement of its porous island border.

“We should go down south and defend the borders of Greece if they are not able to do that,” said Hungarian Prime Minister Viktor Orban, who claimed he was only attending the meeting as an “observer” because Hungary is no longer on the migrant route since it tightened borders. But the country that many say is another key source of the flow – Turkey – was not invited, and some leaders said that little could be done without its involvement. “It has to be tackled in Turkey and Greece, and this is just a nice Sunday afternoon talk,” Croatian Prime Minister Zoran Milanovic said, after complaining about having to leave an election campaign to take part in the mini-summit of nations in Europe’s eastern “migrant corridor.”

“If we do not deliver some immediate and concrete actions on the ground in the next few days and weeks, I do believe that the European Union and Europe as a whole will start falling apart..”

• Tensions Rise Between European Nations Over Refugee Crisis (Bloomberg)

European leaders clashed over how to manage the influx of hundreds of thousands of refugees forging through the region’s eastern flank as they warned that Europe is buckling under the strain of the crisis. While 11 leaders including German Chancellor Angela Merkel managed to come up with short-term fixes at a summit on Sunday, including the provision of emergency shelter for 100,000 refugees and a stepped-up system for their registration, the meeting laid bare tensions between nations that risk fraying the fragile fabric of cooperation in addressing the growing problem. “This is one of the greatest litmus tests that Europe has ever faced.” Merkel said after the gathering in Brussels. “We will need to take further steps to get through this litmus test.”

With winter approaching and more than a million migrants set to reach the European Union this year, national authorities have shut their borders and waved asylum seekers through to neighboring countries as they struggle to get a grip on Europe’s largest influx of refugees in seven decades. “We have made clear to everyone this evening that waving them through has to stop,” European Commission President Jean-Claude Juncker said. While it’s important to implement measures agreed on Sunday, “there will be no miracle cure.” The situation in the Western Balkans – the focus of the summit in Brussels – has worsened over the past few months, aggravating deep-seated distrust between nations that emerged from the violent breakup of the former Yugoslavia.

The main flow of migrants fleeing conflict-stricken nations changed from a route through southern Europe to one leading from Turkey to Greece and through countries including Croatia, Serbia and Slovenia. “If we do not deliver some immediate and concrete actions on the ground in the next few days and weeks, I do believe that the European Union and Europe as a whole will start falling apart,” Slovenian Prime Minister Miro Cerar told reporters before the meeting. Greece, which is at the front line for refugees arriving in Europe, agreed to provide temporary shelter for 30,000 refugees by the end of the year, with the UN High Commissioner for Refugees supporting a further 20,000 places in the country.

An additional 50,000 places will be established by the countries along the Western Balkan route, according to a statement issued after the gathering. Countries also agreed to work together and with Frontex, the EU border-management agency, to bolster frontier controls and cooperation, including between Turkey and Bulgaria and between Greece and Macedonia. Greece fended off “absurd proposals” at the meeting, including allowing countries to block migrants entering from neighboring countries and giving Frontex a new undertaking on the Greek frontier with Macedonia, Prime Minister Alexis Tsipras said. Tsipras signaled disappointment that Turkey wasn’t invited to the summit because it plays “the basic role, the key role” in the crisis.

Sanity. It still does exist.

• Greece Says Refugees Are Not Enemies, Refuses to Protect Borders From Them (WSJ)

Greece’s migration minister has rejected accusations by Germany and other European countries that Greece is failing to defend its borders against mass migration, insisting that the refugees and other migrants trekking to Europe constitute a humanitarian crisis, not a defense threat. “Greece can guard its borders perfectly and has been doing so for thousands of years, but against its enemies. The refugees are not our enemies,” Yiannis Mouzalas said in an interview. Greece is under pressure from other European governments to use its coast guard and navy to control the huge influx of migrants who are making their way, via the Aegean Sea and Greece’s territory, from the Middle East to Northern Europe, especially Germany.

At a European summit in Brussels on Sunday, leaders from Greece and other countries on the latest migration route through the Balkans are facing allegations from Germany, Hungary and others that they are passively allowing migrants to pass through. “In practice what lies behind the accusation is the desire to repel the migrants,” said Mr. Mouzalas. “Our job when they are in our territorial sea is to rescue them, not [let them] drown or repel them.” Countries in Southern and Central Europe have been struggling to cope with the arrival of more than half a million people this year, with the largest number reaching Europe via Turkey and Greece. Many are from war-torn Syria and are treated as refugees from mortal danger, while others come from as far as Pakistan and are seen as having weaker claims to asylum in Europe.

Last week alone, Greece received about 48,000 migrants and refugees on its shores, the highest number of weekly arrivals this year, the International Organization for Migration said Friday. European Union authorities want countries along the transit route to agree on a plan to stop allowing people through, to fingerprint everyone who enters their territory, to beef up border surveillance in Greece, and to deploy 400 border guards to Slovenia, the latest hot spot. Athens opposes an idea floated by European Commission President Jean-Claude Juncker to set up joint Turkish-Greek border patrols. Greece and Turkey have long-standing disputes over their territorial waters, which have led to military tension over the years.

“This was an unfortunate statement by Mr. Juncker,” Mr. Mouzalas said. “The joint patrols have never been on the table. They have no point anyway, as they wouldn’t help ease the situation.” He said an alternative could be to set up a European body to patrol Turkish waters, closer to where many migrants begin their trip, to stem the flow of people attempting the perilous journey to the Greek islands. Mr. Mouzalas said Turkey should have been invited to Sunday’s summit. “Turkey is the door and Greece is the corridor; Europe should not treat Greece as the door,” Mr. Mouzalas said.

Nobody trusts anybody anymore.

• European Trust: The Perfect Storm (Mungiu-Pippidi)

The EU is not a popular democracy – such was not, after all, the intention of its founding fathers. Jean Monnet recounts in his memoirs that the founding idea originated in the First World War and that the goal was to pool resources to enable the repulse of an enemy under a unified command – because coordination was failing to deliver under such conditions. It still fails. Ghita Ionescu, the founder of the London School of Economics journal Government and opposition wrote more than twenty years ago that the democratic deficit predated the EU, caused by the specialization of knowledge and increase in the power of experts on one hand, and on the other by the transnationalization of what had previously been national matters. Consequently, it became impossible for governments to act alone even after the “fullest consultation of their peoples”.

In 2004, the number of Europeans who believed that their voice counted in the EU was 39%. Ten years later, after the powers of the European Parliament have greatly increased, that figure has dropped to 29% (those who feel disempowered have increased from 52 to 66, an even greater difference). In other words, a majority always knew that the EU was not a popular democracy from the outset. Even in 2004, for every European who believed he had a voice in the EU two believed that they had none (Eurobarometer 2013a). Apart from Denmark, where an absolute majority believe that their voice counts in the EU (57% vs. 41%), in 26 countries people believe they have no influence in the EU in proportions that vary from 50% in Sweden and 51% in Belgium, up to 86% in both Cyprus and Greece – for obvious reasons.

But there is nothing new here, except, of course, the terrible constraints that the euro crisis has imposed on Greece, Cyprus and other countries, a tragedy caused by the complexity of an interdependent world which makes people less and less able to decide their own fate. In such complex situations, it is only the populists who offer simple solutions for how to empower voters. We do know what has caused the loss of trust: over two generations a significant question mark has arisen over whether the EU is the best vehicle to maximize social welfare for its various peoples. On one hand, there is the EU’s economic performance since the advent of the economic and growth crisis. On the other, there is loss of trust in European elites, perceived as demanding austerity from the people only to live a life of privilege themselves where taxes are concerned.

“These rates are a function of oversupply of shipping capacity and of lackluster demand for shipping containers to distant corners of the world. They’ve been in trouble since February. “Trouble” is a euphemism. They relentlessly plunged.”

• China Containerized Freight Index Collapses to Worst Level Ever (WolfStreet)

A week ago, we pointed out how China’s dropping exports and plunging imports – the “inevitable fallout from China’s unsustainable and poorly executed credit splurge,” according to Thomson Reuters – had collided with long-term bets by the shipping industry that has been counting on majestic endless growth. The industry has been adding capacity in quantum leaps, where “the scramble to order so-called ultra-large container vessels had turned into a stampede,” as the Journal of Commerce put it. So we said, “Pummeled by Lousy Global Demand and Rampant Overcapacity, China Containerized Freight Index Collapses to Worst Level Ever”. And now, the China Containerized Freight Index (CCFI) has dropped to an even worse level.

Unlike a lot of official data emerging from China, the index, which is operated by the Shanghai Shipping Exchange and sponsored by the Chinese Ministry of Communications, is raw, unvarnished, not seasonally adjusted, or otherwise beautified. It’s volatile and a reflection of reality, as measured by how much it costs, based on contractual and spot market rates, to ship containers from China to 14 major destinations around the world. These rates are a function of oversupply of shipping capacity and of lackluster demand for shipping containers to distant corners of the world. They’ve been in trouble since February. “Trouble” is a euphemism. They relentlessly plunged.

By early July, the index dropped below 800 for the first time in its history, which started in 1998 when the index was set at 1,000. It soon recovered to about 850. And just when bouts of hope were rising that the worst was over, it plunged again and hit even lower levels. The latest weekly reading dropped another 1.7% from the prior week to 752.21, the worst level ever. The CCFI is now 30% below where it had been in February this year and 25% below where it had been 17 years ago at its inception.

The Shanghai Containerized Freight Index (SCFI), also operated by the Shanghai Shipping Exchange, tracks spot rates (not contractual rates) of shipping containers from Shanghai to 15 major destinations around the world. It’s even more volatile than the CCFI. But being based on spot rates, it’s a good indicator where the CCFI is headed. For last week, the SCFI plunged 5.4% to a new record low of 537.73, down 46% from where it had been at its inception in 2009 when it was set at 1,000 – and down 52% from February:

Spending is cratering in China too.

• A China Twist: Why Are Malls Closing If Consumption Is Rising? (Reuters)

Major listed mall operators are also feeling the pain. Dalian Wanda, a big property developer, said in January it would close or restructure 30 of its retail venues and in August said more adjustments were underway. Malaysia-based Parkson, which operates more than 70 department stores in China, closed several of its stores in northern China last year following a 58% drop in China net profit in 2013. “As growth in retail sales slows because of the country’s lower GDP growth, and in cities where mall space is abundant, vacancy rates have risen substantially,” said Moody’s analyst Marie Lam in a research note. In its latest efforts to re-energize the economy, China’s central bank on Friday cut interest rates for the sixth time in less than a year.

Tim Condon, an economist at ING in Singapore warned that investors should not read China’s official retail figures as exclusively reflective of rising household consumption, noting that the data also capture some government purchases. [..] … the risk is that the frenetic pace of mall construction cascades into a bad-debt problem for banks if shoppers fail to match the zeal of property developers. China is currently the site of more than half the world’s shopping mall construction, according to CBRE, a real estate firm, even though it appears that many of these malls will not produce good returns for their investors.

A joint report by the China Chain Store Association and Deloitte showed that by the end of this year, the total number of China’s new malls is projected to reach 4,000, a jump of over 40% from 2011. Real estate analysts note that much of the surge in retail space construction came at the behest of local governments, who were rushing to push real estate development as part of attempts to stimulate the economy. The result has been malls built in haste and managed poorly. Not surprisingly, shoppers are voting with their feet. “If you build it and they’re not coming, that’s a non-performing loan,” said Condon of ING. “That’s the banks’ problem.”

A process familiar to the west: “The evidence of recent years shows that China is getting less and less real GDP growth for every yuan of credit create..”

• China’s Leaders Shift From Short-Term Stimulus to Five-Year Plan (Bloomberg)

China’s leaders gathering in Beijing this week to formulate the 13th five-year plan confront an era of sub-7% economic growth for the first time since Deng Xiaoping opened the nation to the outside world in the late 1970s. Old drivers such as manufacturing and residential construction are spluttering, and new areas like consumption, services and innovation aren’t picking up the slack quickly enough. While President Xi Jinping’s blueprint for 2016-2020 will seek to map out the structural change needed to propel the next leg in China’s march toward high-income status, a more immediate fix has been delivered with the sixth interest-rate cut in a year. “Defensive economic stimulus is needed to ensure that structural reforms maintain their momentum,” said Stephen Jen at hedge fund SLJ Macro Partners.

“If growth slows too much, the pace of structural reforms in China will also need to be curtailed. The government wants to conduct reforms before the macro conditions get worse.” Late Friday, China announced it would cut benchmark interest rates, stepping up the battle against deflationary pressures and easing the financing burden on indebted local governments and companies. It also lowered the amount of deposits banks must hold as reserves, adding liquidity that has been drained by intensifying capital outflows since August’s yuan devaluation. Underscoring the juggling act between reform and stimulus, Friday’s rate-cut announcement was accompanied by the scrapping of a ceiling on deposit rates.

[..] some critics argue administering more stimulus now is the wrong medicine and what’s needed are faster and deeper market-driven reforms. China’s sliding growth is mainly caused by too much easy credit channeled into over-investment, says Patrick Chovanec at Silvercrest Asset Management n New York. “The evidence of recent years shows that China is getting less and less real GDP growth for every yuan of credit created,” said Chovanec. “In other words, more easing won’t help, and could even hurt.” The cut to interest rates may only serve to give yet another lifeline to inefficient state companies, the entities most likely to borrow at the benchmark rate, said Andrew Polk at the Conference Board in Beijing. The risk is that these state companies add more industrial capacity with the funds, worsening deflation and tightening real monetary conditions for the rest of corporate China, he said.

The relentless and unstoppable rise of bad loans.

• China Banks Turn To Investors For More Capital As Bad Loans Pile Up (Reuters)

Mounting bad loans are running down Chinese banks’ capital buffers, forcing them to turn to investors for fresh funds despite raising a record amount last year. Commercial banks are issuing expensive preference shares as well as convertible and perpetual bonds to shore up their capital bases, even after 2014’s bumper issuance when lenders raced to meet new regulatory requirements. But with bad loans up 30% in the first half of 2015 according to China’s banking regulator, doubts are growing about the ability of some banks to withstand the economic slowdown. “China is facing a systemic credit crisis,” said Jim Antos, banking analyst at Mizuho Securities in Hong Kong. “Chinese banks, until mid 2014, were able to cope with deterioration of loans. It seems that has changed.”

Banks’ operating profit margins also are expected to worsen, following the central bank’s decision on Friday to cut interest rates for the sixth time in less than a year. China’s listed commercial lenders raised $57.6 billion (£37.6 billion) last year to bolster their core capital according to Thomson Reuters data. But they may need to raise an additional 553 billion yuan (£54.7 billion) if a slowdown in the economy pushes the ratio of non-performing loans (NPLs) from 1.5 to 4%, according to calculations by Barclays’ banking analyst Victor Wang. Huaxia Bank is the latest lender to get approval from the Chinese Banking Regulatory Commission (CBRC) to issue 20 billion yuan in preference shares.The economic downturn and structural adjustment have caused “overdue loans to increase quickly, increasing pressure on credit risk management of the entire system,” the official said.

Lombard Street Research with a weird plea for a global consumer revival: “..now they can see that oil prices are staying low, consumers are starting to spend the windfall.” BS.

• ‘Deflationary Boom’ In Prospect As China Slows (FT)

The slowdown in Chinese growth, confirmed by last week’s third-quarter GDP report, is feeding fears that the world economy faces a prolonged period of stagnation, perhaps even a new crisis. In fact, China’s weakness is one of the reasons to be optimistic about global growth. Of course, there are many reasons to be pessimistic too. Many emerging markets are in deep trouble. Many asset prices are unsustainably high. Seven years after the financial crisis erupted, major central banks are still forced to keep monetary policy at emergency settings. And the world is short of genuine consumer demand. It is on this last score that China gives cautious grounds for confidence. Chinese growth of about 3-5% as the economy weans itself off wasteful investment is exactly what the world needs.

As the price of oil, copper and other commodities falls in response to China’s structural adjustment, demand deflates in countries that export energy and natural resources. Brazil and Russia, already deep in recession, will be among those watching anxiously for any economic policy announcements at this month’s plenary meeting of the ruling Chinese Communist party. At the same time, however, global rebalancing transfers income from commodity producers to western consumers. Households have largely chosen so far to set aside money saved on cheaper petrol and lower home heating bills. Economic growth in Europe and the US is below par. But now they can see that oil prices are staying low, consumers are starting to spend the windfall.

We capture these two divergent trends in our forecast of a “deflationary boom” in the world economy — with deflation referring to the step-down in demand in China, emerging markets and commodity-producing countries, and boom describing the step-up in household spending in the US, the eurozone and Britain. If China does manage to make the transition to consumer-driven growth, lower investment would mean less crowding-out of opportunities for profitable capital expenditure in advanced economies. Investment growth would follow the consumer revival. For this rosy scenario to materialise, however, either an unprecedented degree of international co-ordination is required or quite a few pieces of the global economic puzzle have to fall into place independently. The latter is what has been happening over the past year. Can it continue? Here are some signposts investors should keep an eye on.

Self-defeating policies, in China as much as in the west.

• Why China’s Interest Rate Cut May Be Bad News For The World Economy (Guardian)

So what’s the problem? China, Japan and the eurozone are all easing policy. The US is going to delay tightening policy. More stimulus equals stronger growth and fends off the threat of deflation. That’s got to be good, hasn’t it? Well, only up to a point. Problem number one is that by deliberately weakening their exchange rates, countries are stealing growth from each other. Central banks insist that this does not represent a return to the competitive devaluations and protectionism of the 1930s, but it is starting to look awfully like it. Problem number two is that the monetary stimulus is becoming less and less effective over time. There are two main channels through which QE operates. One is through the exchange rate, but the policy doesn’t work if all countries want a cheaper currency at once.

Then, as the weakness of global trade testifies, it is simply robbing Peter to pay Paul. The other channel is through long-term interest rates, which are linked to the price of bonds. When central banks buy bonds, they reduce the available supply and drive up the price. Interest rates (the yield) on bonds move in the opposite direction to the price, so a higher price means borrowing is cheaper for businesses, households and governments. But when bond yields are already at historic lows, it is hard to drive them much lower even with large dollops of QE. In Keynes’s immortal words, central banks are pushing on a piece of string. Nor is that the end of it. Charlie Bean, until recently deputy governor of the Bank of England, is the co-author of a new report that looks at the impact of persistently low interest rates.

It concludes there is a danger that periods when interest rates are stuck at zero are likely to become more frequent, resulting in a greater reliance on unconventional measures such as QE that are subject to diminishing returns. “Second, and possibly more importantly, a world of persistently low interest rates may be more prone to generating a leveraged ‘reach for yield’ by investors and speculative asset-price boom-busts.” The current vogue is for macro-prudential policies – attempts to prevent bubbles from developing in specific asset markets, such as housing. But the paper makes the reasonable point that the macro-prudential approach – yet to be tried in crisis conditions – might not work. There is, therefore, a risk that tighter monetary policy in the form of higher interest rates will have to deployed in order to deal with the problems that monetary policy has created in the first place.

Pushing on an orchestra of strings.

• Emerging Currencies’ Fate Looms Large In Rich World Rates Policy (Reuters)

The fate of emerging market currencies is looming ever larger in the outlook for interest rates in the advanced world, promising that their central banks will keep policies super loose for some time to come. Ever since China sprang a surprise depreciation of the yuan in August, the resulting decline of a whole host of emerging market (EM) currencies has produced a disinflationary pulse that the world is ill prepared to withstand. The danger was clearly much on the mind of ECB President Mario Draghi on Thursday when he all but guaranteed a further easing as soon as December.

“The risks to the euro area growth outlook remain on the downside, reflecting in particular the heightened uncertainties regarding developments in emerging market economies,” warned Draghi, as he sent the euro reeling to two-month lows. They were also cited as a reason the U.S. Federal Reserve skipped a chance to hike interest rates in September. In a recent much-discussed speech, Fed board member Lael Brainard put the deflationary pressures emanating from emerging markets at the center of a forceful case against a “premature” tightening in policy. Fuelling these worries has been a downdraft in emerging market currencies caused in part by worries that higher U.S. rates would suck much needed capital from countries already struggling with large foreign currency debts.

The scale of the shift can be seen in the Fed’s trade weighted U.S. dollar index for other important trading partners, which includes China, Brazil, Mexico and the like. The dollar index began to take off in mid-July and by the end of September had surged over 6% to an all-time high. The impact was clear in U.S. bond markets, where yields on 10-year Treasury notes fell from 2.43% in mid-July to just 2.06% by early October. Investors expectations for U.S. inflation in five years time, a benchmark closely watched by the Fed, sank from a peak of 2.47% in early July to hit an historic trough of 1.99% three months later. That in turn saw investors drastically scale back expectations on when and how fast the Fed might hike. In mid-July, Fed fund futures for December implied a rate of 37 basis points.

By early October it implied only 18 basis points. All of which threatens to become a self-fulfilling cycle where the fear of a Fed hike spurs a steep fall in emerging currencies which in turn stirs concerns about disinflation and prevents the Fed from moving at all. “It’s a negative feedback loop,” says Robert Rennie, global head of market strategy at Westpac in Sydney. “China first flipped the switch with its depreciation of the yuan and the risk of capital flight from EM has kept the pressure on,” he added. “It’s now certain the ECB will ease in December and the Fed will find it tough to hike in December.”

Bootle’s a bit of an idiot, but Africa’s fall does deserve more attention.

• Africa Is In Grave Danger From The Global Economic Slowdown (Telegraph)

Nowhere in the world is more at risk from the combination of Chinese economic slowdown, low commodity prices and imminent rises in US interest rates, than Africa. There is now a serious question over whether many African economies can achieve rapid growth in the years ahead or whether they are due to sink back into mediocre performance, thereby condemning their people to a continued low standard of living. The fact that this question now needs to be asked may come as a shock. Not long ago Africa was growing very strongly. Indeed, many good judges saw it as due to repeat the sort of economic take-off accomplished by several countries in east Asia a few decades previously. Yet, whereas five years ago the sub-Saharan African (SSA) growth rate was almost 7pc, last year it was down to less than 5pc.

Moreover, it looks as though this year’s performance will be even weaker, with growth dropping to 3pc. Nor is there any real prospect of a return to previous rapid growth rates. There is a suspicion in the minds of many investors that Africa’s recent growth surge was really just the outcome of the commodity boom. Accordingly, if we are in for a long period of commodity prices at about this level, then African growth prospects are pretty poor. Admittedly, there is considerable variation across countries. The worst hit are Nigeria, Zambia and Angola. The major economy that is doing best is Kenya. Meanwhile, SSA’s most developed economy, and the destination for much overseas investment, namely South Africa – where I was last week – seems to be mired in a phase of decidedly slow growth. This year it might manage 1.5pc.

But its medium-term prospects are pretty poor; its potential growth rate might only be 2pc. When you adjust for population growth, its potential growth of per capita GDP may only be 1.2pc per annum, which is pretty paltry compared to China – even after the recent slowdown. China’s importance to Africa is great – especially for South Africa, Angola, Congo and Zambia. But it can be exaggerated. Exports to China represent about 10pc of South Africa’s GDP. That is substantially lower than the UK’s exposure to the EU. In fact, China is Africa’s second largest export market. The largest is the EU, and by a considerable margin. Africa exports about 50pc more to the EU than it does to China. Accordingly, perhaps the most important factor bearing upon Africa’s economic future is what is going to happen to the euro-zone.

Abenomics was always just a crazy desperate move with zero chance of succeeding. And it’s going to get a lot worse still.

• Japan’s Struggling Economy Finds ‘Abenomics’ Is Not an Easy Fix (NY Times)

Japan’s economy has contracted so many times in the last few years that the meaning of recession has started to blur. If an economy is shrinking almost as often as it is growing, what does any single downturn say about its health? Now Japan appears to be faltering again. After a decline in the second quarter, there are signs that output may have slipped again in the third, driven down in part by a slowing Chinese economy. Economists expect any recession to be short and shallow, but the deeper lesson looks more troubling: Nearly three years after Prime Minister Shinzo Abe gained office on a pledge to end economic stagnation, a decisive break with the past still appears far off. “The potential growth rate is close to zero, so any small shock can put the economy into recession,” said Masamichi Adachi at JPMorgan Chase. “Growth expectations are anemic.”

As a result, some economists are betting that the Bank of Japan, which has been pumping vast amounts of money into the economy by buying up government debt, will pull the trigger on more stimulus at its next board meeting on Friday. The central bank’s aggressive intervention has been central to Mr. Abe’s policies, widely known as Abenomics. But events have conspired to blunt its impact. Last year, it was an ill-timed sales tax increase, which rattled Japanese consumers and dissuaded them from spending. Lately it has been the deceleration in China, whose factories have been important buyers of Japanese-made machinery. But the more fundamental problem, many specialists say, is that Japan’s economy simply doesn’t grow much in the first place.

Baseline growth is essentially zero. GDP is the same size it was in the mid-1990s, in part because the work force is shrinking. So where a faster-moving economy might simply lose momentum in response to headwinds, Japan’s goes into reverse. So far, Mr. Abe’s policies have done little to change the dynamic. “Overseas investors appear increasingly disillusioned with Abenomics,” Naohiko Baba at Goldman Sachs said last week. [..] Mr. Abe has continued to make ambitious promises. Last month, he set a goal of increasing Japan’s nominal economic output to 600 trillion yen by 2020 or soon after – an increase of about 20% from the current level. He gave little indication of how an economy that has not grown in two decades could expand by a fifth in just a few years.

Audacious pronouncements have been a hallmark of Abenomics from the start — part of what Mr. Kuroda has described as an effort to dispel Japan’s “deflationary mind-set.” But after three mostly lackluster years, its architects’ credibility is being questioned by many, including their natural supporters in the business elite. “I believe ¥600 trillion is an outrageous figure,” Yoshimitsu Kobayashi, chairman of the Japan Association of Corporate Executives, said after Mr. Abe announced his goal. “I see it as merely a political message.”

Jaoan, US, Europe, all these forecasts are completely useless.

• Reality Keeps Catching Up With BOJ’s Inflation Forecasts (Bloomberg)

The Bank of Japan will release updated inflation forecasts this Friday. These are an indicator of when, or if, the bank’s board members see Japan reaching the inflation target of 2%. If history is a guide, the forecasts will probably be cut again, with some people with knowledge of the board’s discussions seeing the possibility of a reduction in the estimates for this and next fiscal years. The bank has had to lower estimates for all four years from 2014, as the chart below shows. Japan’s central bank was the second worst inflation forecaster, according to a Bloomberg survey which compared it to the Bank of Canada, the Fed, the ECB, and the Bank of England. The BOJ’s GDP estimates were the least accurate. While Governor Haruhiko Kuroda says he sees the nation hitting that target sometime around the six months from April, the bank isn’t forecasting inflation that high for any full year through the fiscal year that ends in March 2018.

Forgotten history. Europe’s full of it.

• When Greeks Fled To Syria (Kath.)

Giorgos Taktikos was just 5 years old when he and his family began their long journey to the Sinai Desert by boarding a small boat in the middle of the night and leaving behind their native Chios. Today, at the age of 78, Taktikos is following history being written the other way round. As a former refugee, he is pained to observe the boatloads of people fleeing the Middle East and reaching Greek shores, while his mind races back to his own long and difficult journey into the unknown. A native of the Chiot village of Kourounia, Taktikos was one of over 30,000 Greeks who left several eastern Aegean islands during the German wartime occupation, some seeking refuge in Syria, others reaching South Africa, in an effort to escape hunger and war.

Boats crossing over, people drowning at sea, overflowing train wagons, refugee camps and deprivation – some things haven’t changed as far as the refugee journey goes. What has changed, however, is the destination: While people were striving to reach Syria back then, today it’s the other way round. “It’s hard to beat hunger and fear; refugee pain is tremendous,” said Taktikos. In the fall of 1942, hunger spread across occupied Greece: While there were severe food shortages in urban centers, the situation was even worse on the islands, given the British Royal Navy’s blockade of the Aegean and the Mediterranean region in general. Getting away was the only way out and for residents of the eastern Aegean, including Samos, Icaria, Chios, Lesvos and Limnos, this was made slightly easier given the islands’ proximity to Turkish shores.

“I was 5. There was plenty of poverty and hunger on the island. In November 1942, a time when it seemed the situation was about to get even worse, my father decided it was time for us to flee in order to survive. Along with two young men, we stole a boat which the Germans had requisitioned, and one night my my father, mother and younger sister, together with another two families, crossed over to Cesme. We were collected by Father Xenakis, an Orthodox priest who met refugees as they arrived and took them to an area where humanitarian organizations could look after them. The first thing he did when we arrived was to make sure the wooden boat was broken into little pieces, so as not to be detected by the Turkish coast guard, who would have forced us to get back on it and return to Greece.”

Debt Rattle September 15 2015

Sep 152015

September 15, 2015 Posted by Raúl Ilargi Meijer at 9:43 am Finance Tagged with: Banks, borders, Brazil, China, EU, FX, hunger, internment, layoffs, refugees, stocks, Syria 6 Responses »

John Vachon Rain. Pittsburgh, Pennsylvania Jun 1941

• China Stocks Sink Again: Shanghai Down 3.52% (Bloomberg)

• China Sells Record FX In August, Shows Pressure After Devaluation (Reuters)

• China Spending Surge Means Debts Will Only Get Larger (WSJ)

• China Grabs Unused Funds To Spend On New Projects As Growth Slows (Reuters)

• Brazil Downgrade Leaves Firms With $270 Billion Debt Hangover (Bloomberg)

• Pimco, Fidelity Stung by Collapse of Petrobras’s 100-Year Bond (Bloomberg)

• Deutsche Bank To Cut 23,000 Jobs, A Quarter Of Its Workforce (Reuters)

• UniCredit, Italy’s Biggest Bank, Plans To Cut Around 10,000 Jobs (Reuters)

• ‘Syria Is Emptying’ (WaPo)

• Refugees Confounded By Merkel’s Decision To Close German Borders (Guardian)

• Thousands Of Refugees To Lose Right Of Asylum Under EU Plans (Guardian)

• EU Plan To Share 120,000 Refugees Has Fallen Apart (FT)

• Border-Free Europe Unravels As Migrant Crisis Hits Record Day (Reuters)

• Europe Fortifies Borders as Germany Predicts 1 Million Refugees (Bloomberg)

• EU Governments Set To Back New Internment Measures (Guardian)

• Hungary Transports Refugees To Austria Before Border Clampdown (Guardian)

• Cameron Invents The Humanitarian Offside Rule (Frankie Boyle)

• US Officials Cover Up Housing Bubble’s Scummy Residue (David Dayen)

• Defining Neoliberalism (Jeremy Smith)

• One In Six Americans Go Hungry. We Can’t Succeed On An Empty Stomach (Guardian)

It just keeps going. Nobody in China trusts stocks anymore, because Beijing has failed to restore that trust.

• China Stocks Sink Again: Shanghai Down 3.52% (Bloomberg)

China’s stocks slumped for a second day in thin turnover amid concern government measures to support the world’s second-largest equity market and economy are failing. The Shanghai Composite Index dropped 3.5% to 3,005.17 at the close, led by commodity producers and technology companies. About 14 stocks declined for each one that rose on the gauge, while volumes were 36% below the 30-day average. The index completed its biggest two-day loss in three weeks with a decline of 6.1%.

Mainland Chinese equity funds lost 44% of their value at the end of last month compared with July, data showed Monday, as unprecedented state measures to stop a $5 trillion selloff failed to avert redemption. Data this month showed five interest-rate cuts since November and plans to boost state spending have yet to revive an economy weighed down by overcapacity and producer-price deflation. Yuan positions at the central bank and financial institutions fell by the most on record in August, a sign that policy makers stepped up intervention to support the currency.

Intervening in all asset markets at the same time…

• China Sells Record FX In August, Shows Pressure After Devaluation (Reuters)

China’s central bank and commercial banks sold a net 723.8 billion yuan ($113.69 billion) of foreign exchange in August, by far the largest on record, highlighting how capital outflows intensified in the wake of the yuan’s devaluation last month. The previous largest outflow, in July, totaled 249.1 billion yuan ($39.13 billion). The figures are based on Reuters calculations using central bank data, the latest of which was released on Monday. The figures show the price China is paying to keep its currency from falling further in the face of concerns about the health of the economy and as financial markets anticipate a rise in U.S. interest rates. Shen Jianguang, an economist at Mizuho Securities in Hong Kong, said the figures suggest selling pressure on the yuan remains strong.

“It also shows that the central bank will continue to intervene in the FX market in the coming months as depreciation expectation is still there,” Shen said. Still, traders said the net outflow was within market forecasts. Some had expected a net outflow of $130 billion, said a senior trader at a Chinese commercial bank in Shanghai. This person declined to be identified. “Purchases are likely to fall from September on but uncertainties remain, including the yuan’s own volatility and the dollar’s performance in global markets in line with the Fed’s policy moves,” the trader said. China’s central bank, the People’s Bank of China, surprised global markets on Aug 11 by devaluing the yuan by nearly 3%.

Since the devaluation, China has scrambled to keep the yuan steady, running down its foreign exchange reserves by a record amount in August to stabilize the onshore rate. The central bank has instituted a raft of new policies aimed at discouraging speculation on further yuan depreciation and traders suspect it also intervened in offshore yuan markets. Authorities have also frantically tried to prevent a precipitous slide in equities markets from turning into a market crash with a flurry of policies to prop up prices and restore confidence.

It starts to smell of desperation. But then, Xi and Li have nothing to lose but their heads.

• China Spending Surge Means Debts Will Only Get Larger (WSJ)

China is falling back on infrastructure spending to stimulate its sputtering economy. The move may support growth, but it is also a setback to getting the country’s debt load under control. Government agencies have publicly confirmed a new willingness to spend on infrastructure in recent weeks. Already in August, infrastructure investment rose 21% from a year earlier, up from 15.8% growth in July, according to calculations by SocGen. That far outpaced total fixed-asset-investment growth, which clocked in at just 9.2%. What is less clear is where the money is coming from. In recent years, much of the infrastructure development has been funded chiefly by off-balance sheet local government financing platforms, which helped get around limits on public borrowing.

This avenue seemed to be cut off by a new budget law in late 2014, which ostensibly banned new borrowing by such financing vehicles. But it quickly became clear that this amounted to a kind of fiscal cliff for the economy. Beijing quietly backtracked, and is now allowing the platforms to keep borrowing for approved projects. Still, China will be eager to keep a lid on borrowing by provinces and towns. An official audit of total local government debt, released earlier this month, found it reached 24 trillion yuan ($3.8 trillion) at the end of 2014, up 34% over 18 months. Beijing doesn’t want to see that pace of growth continue. It is already working hard to clean up the last infrastructure spending boom with its 3.2 trillion yuan program to allow local government-linked high-cost loans to be swapped into lower interest bonds with longer durations.

But this merely reduces financing costs on previous projects. The amount that it frees up for new spending is minimal. So if the central government wants more infrastructure spending, it has to find another way. The plan appears to be to rely on government-controlled policy banks, including China Development Bank and the Agricultural Development Bank. These lenders can access loans directly from the central bank. For fresh funding, they have also issued over 1.8 trillion yuan ($280 billion) of bonds this year, up more than 70% from all of last year, according to Nomura.

Something tells me those funds were already in use, for instance as collateral for the shadow banks.

• China Grabs Unused Funds To Spend On New Projects As Growth Slows (Reuters)

Chinese authorities have seized up to 1 trillion yuan ($157 billion) from local governments who failed to use their budget allocations, sources said, as Beijing looks for ways to spend its way out of an economic slowdown. The exclusive Reuters report came after China’s stocks fell following data suggesting economic growth was running below the 2015 target level of about 7%, heightening concerns about the health of the world’s second largest economy. “China’s economy faces relatively big downward pressure, so investor sentiment remains weak,” said Gu Yongtao, strategist at Cinda Securities. Two sources close to the government said budget funds repossessed from local governments would be used to pay for other investments.

The huge underspend, linked to officials’ reluctance to splash out on big-ticket projects while authorities crack down on corruption, supports the argument of some economists that Chinese state investment has grown too slowly this year. “In the past, local governments had asked for the money. Money was given, but no one acted,” said one of the two sources. On Monday, China’s powerful economic planner, the National Development and Reform Commission (NDRC), said it had approved feasibility studies for two road projects worth a total of 6.2 billion yuan ($973.65 million). Last week, the NDRC gave the green light for railway, highway and bridge projects worth a combined $23 billion, in a sign authorities are focusing on infrastructure spending rather than deeper reforms to shore up growth in the short term.

Brazil is in for a very deep fall.

• Brazil Downgrade Leaves Firms With $270 Billion Debt Hangover (Bloomberg)

Brazilian companies that piled on $270 billion in international debt during the boom years are seeing their funding costs rise after the nation’s credit rating was cut to junk. The spread for five-year credit-default swaps to protect against a government default, one benchmark for setting what Brazilian companies must pay for external funding, has jumped 7.5% to 400 basis points since the downgrade, the highest since 2009. Adding to the pain, the dollar surged to a 13-year high, making principal and interest on international borrowing more costly for local firms. “Even very small, unknown companies issued international bonds when Brazil was considered one of the most promising economies after the 2008 financial crisis,” Salvatore Milanese at Pantalica Partners said in Sao Paulo. “Now many of them are facing the consequences.”

Standard & Poor’s last week lowered Brazil’s sovereign credit rating one level to BB+ and said it might cut it further in response to the administration’s inability to shore up fiscal accounts as the economy falters. President Dilma Rousseff has failed to win support for her initiatives amid an investigation into corruption at the state-controlled oil company, some of which allegedly occurred while she was its chairwoman, sending her popularity to a record low and generating calls for her impeachment. Federal, state and municipal governments oversaw only modest increases in external debt during the seven years Brazil had an investment-grade credit rating, increasing it 4.5% from December 2007 to March 2015, to $69 billion, according to central bank data. For banks and non-financial companies, the story is different: They more than doubled their dollar-denominated debt to $154 billion and $114.7 billion, respectively.

Because 100-year bonds never looked stupid?

• Pimco, Fidelity Stung by Collapse of Petrobras’s 100-Year Bond (Bloomberg)

When Petroleo Brasileiro SA sold 100-year bonds in June, the move was largely seen as a sign the corruption-tainted oil producer had put the worst of its problems behind it. For investors like Pimco, Fidelity and Capital Group – the three biggest holders of the securities – that turned out to be a costly miscalculation. Since the $2.5 billion offering, the bonds have tumbled 15%. That’s four times the average loss for emerging-market company debt. The plunge deepened last week, when the securities sank to a record-low 69.5 cents on the dollar after Petrobras, as the Brazilian company is known, had its credit rating cut to junk by Standard & Poor’s. The world’s most-indebted major oil producer was stripped of its investment grade by Moody’s Investors Service seven months earlier as a widening probe into alleged bribes paid to former executives at the state-controlled oil company caused it to delay reporting earnings.

“Everything was priced for perfection, and sadly, except for soccer players, Brazil seldom achieves perfection,” Russ Dallen, the head trader at Caracas Capital Markets, said from Miami. Pimco didn’t respond to e-mailed requests for comment. Fidelity and Capital Group declined to comment. Petrobras didn’t respond to an e-mail seeking comment on the performance of its bonds. The company has already borrowed enough to finance its projects for the medium term, it said in a statement Sept. 10. Yields on Petrobras’s 6.85% bonds, which mature in 2115, have soared 1.5 percentage points to a record 9.86% since they were issued on June 2, according to data compiled by Bloomberg.

Of things to come.

• Deutsche Bank To Cut 23,000 Jobs, A Quarter Of Its Workforce (Reuters)

Deutsche Bank aims to cut roughly 23,000 jobs, or about one quarter of total staff, through layoffs mainly in technology activities and by spinning off its PostBank division, financial sources said on Monday. That would bring the group’s workforce down to around 75,000 full-time positions under a reorganization being finalised by new Chief Executive John Cryan, who took control of Germany’s biggest bank in July with the promise to cut costs. Cryan presented preliminary details of the plan to members of the supervisory board at the weekend. Deutsche’s share price has suffered badly under stalled reforms and rising costs on top of fines and settlements that have pushed the bank down to the bottom of the valuation rankings of global investment banks. It has a price-book ratio of around 0.5, according to ThomsonReuters data.

The bank unveiled a broad restructuring plan in April but co-chief executives Anshu Jain and Juergen Fitschen quit shortly afterwards, handing over its execution to Cryan. “This is the first time ever that you had the feeling that somebody is talking straight,” said one of the sources. “But the problem is he has to deliver soon.” Deutsche is mainly reviewing cuts to the parts of its technology and back office operations that process transactions and work orders for staff who deal with clients. A significant number of the roughly 20,000 positions in that area will be reviewed for possible cuts, a financial source said. Back-office jobs in the group’s large investment banking division will be concentrated in London, New York and Frankfurt, the source said.

No coincidence.

• UniCredit, Italy’s Biggest Bank, Plans To Cut Around 10,000 Jobs (Reuters)

Italy’s biggest bank by assets, is planning to cut around 10,000 jobs, or 7% of its workforce, as it seeks to slash costs and boost profits, a source at the bank told Reuters on Monday. The planned cuts will be concentrated in Italy, Germany and Austria, several sources said, adding that they include 2,700 layoffs in Italy that have already been announced. A UniCredit spokesman declined comment beyond noting that the bank’s CEO Federico Ghizzoni had on Sept. 3 said there were no concrete numbers on potential lay-offs, after a report said it was considering eliminating 10,000 positions in coming years.

Ghizzoni is reworking a five-year strategic plan, unveiled only last year, that will aim to boost revenue and cut costs. The revised plan is expected to be announced in November. “The plans are for 10,000 job cuts,” the bank’s insider said, speaking on condition of anonymity. “They will be mainly in Italy, Austria and Germany.” UniCredit, which has 146,600 employees across 17 countries, is under pressure to boost its profits as low interest rates are expected to keep hurting its earnings in coming years.

Why Putin wants to talk to Obama.

• ‘Syria Is Emptying’ (WaPo)

A new exodus of Syrians is fueling the extraordinary flow of migrants and refugees to Europe as Syria’s four-year-old war becomes the driving force behind the greatest migration of people to the continent since World War II. Syrians account for half of the 381,000 refugees and migrants who have sought asylum in Europe so far this year, which is in turn almost a doubling of the number in 2014 — making Syrians the main component of the influx. The continued surge through Europe prompted Hungary, Austria and Slovakia to tighten border controls Monday, a day after Germany projected that in excess of a million people could arrive by year’s end and began to impose restrictions on those entering the country.

How many more Syrians could be on the way is impossible to know, but as the flow continues, their number is rising. In July, the latest month for which figures are available, 78% of those who washed up on inflatable dinghies on the beaches of Greece were Syrian, according to the U.N. High Commissioner for Refugees. Some were already among the 4 million refugees who have sought sanctuary in neighboring countries, but many also are coming directly from Syria, constituting what Melissa Fleming of the UNHCR called a “new exodus” from the ravaged country. They are bypassing the refugee camps and heading straight for Europe, as the fallout from what President Barack Obama once called “someone else’s civil war” spills far beyond Syria’s borders.

More are on the way. Syrians are piled up on the streets of the Turkish port city of Izmir waiting for a place on one of the flimsy boats that will ferry them across the sea to Greece, and they say they have friends and family following behind. “Everyone I know is leaving,” said Mohammed, 30, who climbed three mountains to make his way across the Turkish border from the city of Aleppo with his pregnant wife, under fire from Turkish border guards. “It is as though all of Syria is emptying.” Analysts say it was inevitable it would come to this, that Syrians would eventually tire of waiting for a war of such exceptional brutality to end. At least 250,000 have been killed in four ferocious years of fighting, by chemical weapons, ballistic missiles and barrel bombings by government warplanes that are the biggest single killer of civilians, according to human rights groups.

Men on both sides die in the endless battles between the government and rebels for towns, villages and military bases that produce no clear victory. The Islamic State kills people in the areas it controls with beheadings and other brutal punishments. The United States is leading a bombing campaign against the Islamic State but has shown scant interest in solving the wider Syrian war, which seems destined only to escalate further with the deepening involvement of Russian troops. “It should surprise no one. Hopelessness abounds,” said Fred Hof, a former State Department official who is now with the Atlantic Council. “Why would any Syrian with an option to leave and the physical ability to do so elect to stay?”

“Everybody is coming,” said Iyad, a Syrian student. “They are coming, coming, coming.”

• Refugees Confounded By Merkel’s Decision To Close German Borders (Guardian)

Angela Merkel, Germany’s chancellor, has cut a chequered figure this summer: scorned for taking Greece to the wall, and praised for welcoming large numbers of Syrians to Germany. But nowhere and at no time has she been more of an enigma than she was in Vienna’s central station on Monday where crowds of refugees struggled to reconcile how the same “Mama Merkel” had opened Germany’s borders one week, and closed them again barely eight days later – leaving those at the station stranded. “She said she will bring big boats from Turkey to rescue Syrians!” said Maria, a Syrian who fled the bombs of Damascus six weeks ago. “And now why has she closed the border?” asked Maria’s daughter.

For a week, refugees had been able to freely board trains to Germany from Vienna – but Sunday’s developments returned the status quo to how it was in late August. Station staff said on Monday that the rail border had reopened at 7am, less than a day after Germany had stopped all inbound rail services. But the ticket machines would not let people book journeys to German destinations. And while some had managed to get fares from the ticket office, it was unclear to many people whether the border had reopened or not. Pacing around the concourse with her two children, Galbari al-Hussein saw the constant changes in border policy as a cruel game played at the expense of vulnerable refugees.

“We’ve travelled so far, thousands of kilometres, and now they’re closing the borders,” said Hussein, who reached Vienna barely a week after escaping Islamic State territory, hidden in an unfamiliar niqab. “Is it open, is it closed? It’s very unfair.” Among Syrians, there lingered the suspicion that their chances had been spoilt by people hoping to piggyback on the generosity shown by Germany to the victims of the Syrian civil war. “Not everyone here is Syrian,” said Josef, from Damascus, who disclosed his exact address in an attempt to prove his nationality. “People say they are Syrians, but they are from somewhere else. And that’s why this is happening..” [..] As rumours swirled, even non-Syrian refugees couldn’t help but wonder whether they were the real targets of the German border shenanigans. Hany, an Iraqi engineering student, smiled wistfully. “Germany is very good to Syrians,” he said. “It wants all the Syrians to come, but maybe not the Iraqis.”

There was one thing on which everyone could agree. Whatever Germany does or doesn’t do with its border, refugees will still keep fleeing to Europe. “Everybody is coming,” said Iyad, a Syrian student. “They are coming, coming, coming. My brother will leave Syria in two days.” Iyad’s friend Amal nodded in agreement. “The only people who will stay are those who don’t have any money,” said Amal. “People are selling their cars and homes to come here.”

How to use a crisis.

• Thousands Of Refugees To Lose Right Of Asylum Under EU Plans (Guardian)

European governments are aiming to deny the right of asylum to innumerable refugees by funding and building camps for them in Africa and elsewhere outside the European Union. Under plans endorsed in Brussels on Monday evening, EU interior ministers agreed that once the proposed system of refugee camps outside the union was up and running, asylum claims from people in the camps would be inadmissible in Europe. The emergency meeting of interior ministers was called to grapple with Europe’s worst modern refugee crisis. It broke up in acrimony amid failure to agree on a new system of binding quotas for refugees being shared across the EU and other decisions being deferred until next month.

The lacklustre response to a refugee emergency that is turning into a full-blown European crisis focussed on “Fortress Europe” policies aimed at excluding refugees and shifting the burden of responsibility on to third countries, either of transit or of origin. The ministers called for the establishment of refugee camps in Italy and Greece and for the detention of “irregular migrants” denied asylum and facing deportation but for whom “voluntary return” was not currently “practicable”. The most bruising battle was over whether Europe should adopt a new system of mandatory quotas for sharing refugees. The scheme, proposed by the European commission last week, is strongly supported by Germany which sought to impose the idea on the rejectionists mainly in eastern Europe.

Hungary’s hardline anti-immigration government said it would have no part of the scheme, from which it would benefit, while Thomas de Maizière, the German interior minister, complained that the agenda for the meeting was inadequate. The ministers agreed “in principle” to share 160,000 refugees across at least 22 countries, taking them from Greece, Hungary, and Italy, but delayed a formal decision until next month, made plain the scheme should be voluntary rather than binding and demanded ‘flexibility’. De Maizière, by contrast, called for precise definitions of how refugees would be shared. Luxembourg, chairing the meeting, signalled that there was a sufficient majority to impose the quotas, but that the meeting had balked at forcing a vote.

They’ll pull aid funds from whoever won’t comply.

• EU Plan To Share 120,000 Refugees Has Fallen Apart (FT)

EU efforts to agree a binding plan to share out 120,000 refugees fell apart after a minority of countries led by Czech Republic and Hungary objected to a heavily watered down proposal. After six hours of argument, member states failed to reach unanimous agreement on the plan, although a majority — including France and Germany — supported the scheme. Countries in favour of the plan will now try to force through a deal with a qualified majority at another meeting in October, setting the stage for a bitter diplomatic fight in the intervening period. Although qualified majority votes are acceptable under EU law, they are rarely used to force through decisions on politically sensitive topics against vocal opposition.

Hungary was supposed to be one of the beneficiaries of the scheme but has opposed it, arguing that it is not a front-line country and that it has only suffered a huge influx of migrants because Greece has failed to manage its borders. Officials also say that it would risk turning the country into a holding pen for migrants who do not want to stay there. French interior minister Bernard Cazeneuve criticised those countries opposed to the measures. “Europe is not Europe a la carte. If Europe wants to surmount this humanitarian challenge, it is necessary that all countries live up to their responsibilities.” The Czech Republic also refused to sign up to the proposals, saying that it would oppose efforts to introduce an automatic relocation scheme. Romania and Slovakia were also against the scheme.

7,437 migrants recorded entering Hungary from Serbia yesterday. Times 365 equals 2.7 million.

• Border-Free Europe Unravels As Migrant Crisis Hits Record Day (Reuters)

Two decades of frontier-free travel across Europe unraveled on Monday as countries re-established border controls in the face of an unprecedented influx of migrants, which broke the record for the most arrivals by land in a single day. Germany’s surprise decision to restore border controls on Sunday had a swift domino effect, prompting neighbors to impose checks at their own frontiers as thousands of refugees pressed north and west across the continent while Hungary sealed the main informal border crossing point into the European Union. A majority of EU interior ministers, meeting in Brussels, agreed in principle to share out 120,000 asylum seekers on top of some 40,000 distributed on a voluntary basis so far, EU president Juncker said.

But details of the deal, to be formalized on Oct. 8, were vague with several ex-Communist central European states still rejecting mandatory quotas. Austria said it would dispatch its military to help police carry out checks at the border with Hungary after thousands of migrants crossed on foot overnight, filling up emergency accommodation nearby, including tents at the frontier. Thousands more raced across the Balkans to enter Hungary before new rules take effect on Tuesday, which Budapest’s right-wing government says will bring a halt to the illegal flow of migrants across its territory. By 1400 GMT on Monday, police said 7,437 migrants had been recorded entering Hungary from Serbia, beating the previous day’s record of 5,809.

Then helmeted Hungarian police, some on horseback, closed off the main informal crossing point, backed by soldiers as a helicopter circled overhead. A goods wagon covered with razor wire was moved into place to block a railway track used by migrants to enter the EU’s Schengen zone of border-free travel. Hungary later declared the low-level airspace over its border fence closed but allowed a trickle of refugees to enter the country at an official crossing point. As the shockwaves rippled across Europe, Slovakia said it would impose controls on its borders with Hungary and Austria. The Netherlands announced it would make spot checks at its borders. Other EU states from Sweden to Poland said they were monitoring the situation to decide whether controls were needed.

“If Germany carries out border controls, Austria must put strengthened border controls in place,” Vice Chancellor Reinhold Mitterlehner told a joint news conference with Chancellor Werner Faymann. “We are doing that now.” The army would be deployed in a supporting role.

How the end begins.

• Europe Fortifies Borders as Germany Predicts 1 Million Refugees (Bloomberg)

One day after Germany curbed the freedom of movement in the region by temporarily reinstating border controls, the country’s vice chancellor estimated that as many as 1 million refugees may arrive by the end of the year as other nations moved to fortify their frontiers. The prediction from Sigmar Gabriel, who leads the Social Democrats, underscored how quickly the numbers fleeing to Germany are spiraling upward. The official government estimate, released just a few weeks ago, is for roughly 800,000 in 2015, nearly four times the 2014 figure.

European Union interior and justice ministers will try to bridge a divide over the region’s worst refugee crisis since World War II when they meet Monday in Brussels to hammer out an agreement over binding quotas redistributing 160,000 migrants who have flooded into Hungary, Greece and Italy. Eastern European countries including Poland and the Czech Republic have opposed such measures. Germany, which supports the EU proposal, on Sunday introduced the temporary controls on the southern border with Austria, where thousands of migrants have been crossing into the country. Austria responded Monday by sending 2,200 troops to its frontier with Hungary, while Slovakia reinstated checks along its border with both countries.

“Of course, the idea is not to prolong this, but it’s a short-term measure that should be in place for as short a time as possible,” Felix Braz, the justice minister of Luxembourg, which currently holds the rotating EU presidency — said in an interview. “A lot will depend on what comes out of Brussels this afternoon.” Germany’s move risks creating widespread disruption as governments weigh a further tightening of frontier controls across Europe.

EU leaders are a much bigger threat to the union than refugees.

• EU Governments Set To Back New Internment Measures (Guardian)

EU governments are expected to back radical new plans for the internment of “irregular migrants”, the creation of large new refugee camps in Italy and Greece and longer-term aims for the funding and building of refugee camps outside the EU to try to stop people coming to Europe. A crunch meeting of EU interior ministers in Brussels, called to grapple with Europe’s largest refugee crisis since the second world war, was also expected to water down demands from the European commission, strongly supported by Germany, for the obligatory sharing of refugees across at least 22 countries. A four-page draft statement, prepared on Monday morning by EU ambassadors before the ministers met, focused on “Fortress Europe” policies amid increasing confusion as a number of countries set up border controls in the Schengen free-travel area that embraces 26 countries.

The draft statement, obtained by the Guardian, said “reception facilities will be organised so as to temporarily accommodate people” in Greece and Italy while they are identified, registered, and finger-printed. Their asylum claims are to be processed quickly and those who fail are to be deported promptly, the ministers say in the draft statement. “It is crucial that robust mechanisms become operational immediately in Italy and Greece to ensure identification, registration and fingerprinting of migrants; to identify persons in need of international protection and support their relocation; and to identify irregular migrants to be returned.” The Europeans are to set up “rapid border intervention teams” to be deployed at “sensitive external borders”. Failed asylum seekers who are expected to try to move to another EU country from Greece or Italy can be interned, the statement says.

“When voluntary return is not practicable and other measures on return are inadequate to prevent secondary movements, detention measures … should be applied.” The European commission demanded last week that at least 22 EU countries accept a new system of quotas for refugees, with 160,000 redistributed from Greece, Italy and Hungary under a binding new system. Germany is insisting on the binding nature of the proposed scheme and its unilateral decision on Sunday to re-establish national border controls within the Schengen area was widely seen as an attempt to force those resisting mandatory quotas to yield. The resistance is strongest in eastern and central Europe.

TEXT

• Hungary Transports Refugees To Austria Before Border Clampdown (Guardian)

Hungary is transporting thousands of refugees by train and dumping them on the border with Austria, the UN refugee agency has said, as EU states scrambled to follow Germany’s lead and introduce new controls on their borders. Special trains were taking refugees on a four-hour journey from camps in southern Hungary directly to Austria, the UNHCR said. There are signs that Hungary’s prime minister, Viktor Orban, wants to empty refugee camps before a law comes into force on Tuesday criminalising the act of crossing or damaging a newly built border fence. At least three trains carrying 2,000 people left on Sunday from the Hungarian town of Röszke, the UNHCR’s regional representative Erno Simon said. He added: “During the night our colleagues saw police waking people up at the [Hungarian] border collection point.”

Austria said it was sending troops to its border to help with security. The numbers entering from Hungary had reached overwhelming levels, police said, with 14,000 arriving on Sunday and another 7,000 by mid-Monday, and more expected. Austria’s vice-chancellor, Reinhold Mittelehner, said: “If Germany carries out border controls, Austria must put strengthened border controls in place. We are doing that now.” Slovakia said it was introducing checks on its borders with Hungary and Austria and would deploy 220 extra officers. Polandd’s prime minister, Ewa Kopacz, said Warsaw would restore border controls in response to “outside threats”.

On Sunday Berlin announced new controls on its border with Austria and halted train traffic between Austria and Germany. Germany’s interior minister, Thomas de Maizière, said the measures were necessary because record numbers of refugees, many of them from Syria, had stretched the system to breaking point. The measures are likely to remain in place for weeks if not months, German officials have indicated. Police patrols have been set up on road crossings between Austria and Bavaria, leading to four-mile tailbacks on Monday. Similar measures will be rolled out in the federal state of Saxony, on the border with the Czech Republic.

“I certainly don’t want to see Islamic State in a war with our troops because – let’s be honest – they are just impressionable young men who have been manipulated into a life of murder by those who teach hate, and Isis isn’t much better.“

• Cameron Invents The Humanitarian Offside Rule (Frankie Boyle)

David Cameron visited a refugee camp in Lebanon on Monday. Our prime minister, a man who can normally muster all the moral authority of Roman Polanski’s penis, has discovered his soul. Amazing what a three-week break away from parliament can do. It only took David Cameron six years to finally come out and take a moral stand, and all it took was the death of one toddler. You may call the Tories’ glacial crawl towards respecting human life a political and personal train crash. I call it compassion. In Europe we have the stereotype that Africans view life cheaply, but we’ve spent much of the summer watching van loads of Syrians being washed in by the tide and all we worried about was whether this meant the beach might be closed during the October holidays.

There were Greek kids incorporating human remains into their sandcastles and yet the big story here was that the drinks trolley didn’t make it down the Eurostar. One dog locked in a car on a sunny day – Britain goes apeshit. Seventy-one dead migrants roasted in a truck – oh that reminds me, Bake Off’s on tonight. It seems we are naive about the workings of this modern culture, where people Skype each other masturbating before a first date, and forget that the general populace now don’t believe children are dying unless you show them a closeup picture of a dead child. The Kurdi family were trying to get from Turkey to Kos, so many people said, “Why would they want to leave Turkey? Turkey is nice!”

Turkey is nice if you’re a sunburnt Brit with a taste for overpriced kebabs, cheap jeans and waterslides. It’s not so nice for a member of their oppressed minority who speak a language that’s been banned by law. What we haven’t heard is that children get washed up on the shore at Bodrum every single day. What are Turkish journalists doing? Generally about two to four years’ hard labour. Of course there are many people who say we shouldn’t be helping refugees when there are homeless people here that we can do nothing to help first. Indeed Britain may have entirely forgotten how to be welcoming. We’ll probably welcome refugees by putting the word Syrian in the sidebar of xHamster. We are only taking people from camps – we don’t want refugees already in Europe as they cheated and didn’t wait to shout “What’s the Time Mr Wolf?” We don’t want any refugees who are already close to us, like there’s some kind of humanitarian offside rule.

Fraudulent Foreclosure Documents

• US Officials Cover Up Housing Bubble’s Scummy Residue (David Dayen)

Every day in America, mortgage companies attempt to foreclose on homeowners using false documents. It’s a byproduct of the mortgage securitization craze during the housing bubble, when loans were sliced and diced so haphazardly that the actual ownership was confused. When the bubble burst, lenders foreclosing on properties needed paperwork to prove their standing, but didn’t have it — leading mortgage industry employees to forge, fabricate and backdate millions of mortgage documents. This foreclosure fraud scandal was exposed in 2010, and acquired a name: “robo-signing.” But while some of the offenders paid fines over the past few years, nobody cleaned up the documents. This rot still exists inside the property records system all over the country, and those in a position of authority appear determined to pretend it doesn’t exist.

In two separate cases, activists have charged that officials and courts are hiding evidence of mortgage document irregularities that, if verified, could stop thousands of foreclosures in their tracks. Officials have delayed disclosure of this evidence, the activists believe, because it would be too messy, and it’s easier to bottle up the evidence than deal with the repercussions. “All they’re doing is making a mockery of our judicial system,” said Bill Paatalo, a private investigator and one of the activists. Like many other anti-foreclosure activists, Paatalo got involved with the issue through a case involving his own property — in Absarokee, Montana. Like many homeowner loans purchased during the housing bubble, Paatalo’s was packaged into a mortgage-backed security.

The process worked like this: The loans were eventually sold into a tax-exempt REMIC (Real Estate Mortgage Investment Conduit) trust; the REMIC trust received monthly mortgage payments from homeowners; and the payments were passed along to investors in the mortgage-backed securities. The trust where Paatalo’s mortgage ended up is known as “WaMu Mortgage Pass-Through Certificates Services 2007-OA3 Trust.” When he faced foreclosure, the trust, as the nominal owner of the mortgage, was the plaintiff. In doing research for his own trial, Paatalo discovered that all “foreign business trusts” established outside of Montana have to register with the Secretary of State in order to transact business, under Title 35-5-201 of the Montana code. Trustees must file an application, along with legal affidavits affirming its trust agreement and identifying all trustees, and pay a $70 filing fee. WaMu Mortgage Pass-Through Certificates Services 2007-OA3 Trust – based in Delaware — didn’t.

“Neoliberalism’s ultimate purpose, and its finality, is that of transformation to a single global economy and society governed and disciplined by finance capital.”

• Defining Neoliberalism (Jeremy Smith)

In a twitter exchange today, involving Duncan Weldon, Tony Yates, George Magnus, Jo Michell and PRIME’s Ann Pettifor, the question arose (not for the first time!) over the definition of “neoliberalism.” It is often argued that the term has no distinct or discernible meaning, and certainly Wikipedia’s entry for Neoliberalism only adds to confusion. Ann tweeted this: “puzzle over definition of “neoliberalism. Definition elastic? Insult? Help Twitter..” Well I’m not going to try and make my offer via twitter, because I can’t manage a decent definition in the allotted 140 characters. But I am convinced that neoliberalism does have a clear meaning – and offer the following as my contribution to the discussion:

Neoliberalism: The utopian politico-economic system and ideology, under constant and conscious construction by its “priesthood”, under which the interests of society are to be subordinated to the interests of actors in financial markets and the dominance of finance capital, minimally regulated and flowing unfettered across frontiers. Under this system, the role and remit of the state and public sphere, beyond protection and furtherance of those interests and that dominance, are to be reduced to their practical minimum. Neoliberalism’s ultimate purpose, and its finality, is that of transformation to a single global economy and society governed and disciplined by finance capital.

My definition owes much to Karl Polanyi’s approach. In “The Great Transformation” Polanyi wrote:

This paradox [of the need for a strong central executive under laissez-faire] was topped by another. While laissez-faire economy was the product of deliberate state action, subsequent restrictions on laissez-faire started in a spontaneous way. Laissez-faire was planned; planning was not. If ever there was conscious use of the executive in the service of a deliberate government-controlled policy, it was on the part of the Benthamites in the heroic period of laissez-faire. (p.141)

Polanyi also draws attention to the disastrous contribution of “economic liberalism at its height” in the 1920s. He argues (p.142):

The repayment of foreign loans and the return to stable currencies were recognized as the touchstones of rationality in politics; and no private suffering, no infringement of sovereignty was considered too great a sacrifice for the recovery of monetary integrity. The privations of the unemployed made jobless by deflation; the destitution of public servants dismissed without a pittance; even the relinquishment of national rights and the loss of constitutional liberties were judged a fair price to pay for the fulfilment of the requirements of sound budgets and sound currencies, these a priori of economic liberalism.

This nicely captures the consciousness of the creation of globalising “economic liberalism”, as well as – once programmed correctly – the way it rolled out the consequences automatically, via a kind of austerity algorithm. This coincides with what we see today in the way neoliberalism works. And that is why I call it both an ideology (or philosophy if you feel kinder) and a system.

We just don’t care.

• One In Six Americans Go Hungry. We Can’t Succeed On An Empty Stomach (Guardian)

As millions of kids head back to school this month, some of them are missing summer, but many are excited to once again receive regular meals. Many low-income children are able to get the food they need through the federal nutrition programs such as free school lunches. But, only half of these kids also get a nutritious school breakfast. And 75% of them struggle over the summer to get enough to eat. One child out of every five in the United States is fighting to learn, grow and prosper while combating the gnawing stress of hunger. In fact, kids make up nearly half of all people living in households struggling with hunger. That’s why lawmakers on Capitol Hill are currently working to reauthorize the laws that govern, among other things, whether or not more kids have access to summer meal programs.

Last month, a bipartisan group of six senators introduced the “Hunger Free Summer for Kids Act.” If the policies in this bill make it into law this year, it could mean as many as 6.5 million can get the nutrition they need during the summer holidays. These nutrition laws expire on September 30th, so Congress needs to act quickly. And we need to be doing more. Hunger impacts every American. According to the latest “food insecurity” numbers by the United States Department of Agriculture, 14% of all households struggle to have enough to eat. That’s 48 million of our friends, neighbors and fellow Americans. And that is one in six Americans — not just in the inner city, but in the suburbs, rural areas and every primary and battleground state across the country. These numbers show how many American households struggle to consistently provide all of its family members enough food for an active, healthy lifestyle. It could mean some days the cupboards are completely bare.

It could mean a mother is skipping meals to ensure food for her son at night. It could mean a family is choosing between food and medicine, or food and rent. It does mean there is never enough. Hunger has a devastating effect on the food insecure, but, it is not just those with empty bellies who suffer. Hunger impacts education, health and the economy at large. Children struggling with hunger struggle with schoolwork and tend to have lower test scores and are less likely to graduate. People are not getting the nutrition they need, and are at higher risk for expensive, avoidable health conditions, like diabetes, heart disease and asthma. As a nation, we spend billions on the fall-out from hunger, including avoidable health care costs and the rising cost of poor education outcomes, all while losing productivity in the workplace.

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