Apr 112016
 
 April 11, 2016  Posted by at 9:41 am Finance Tagged with: , , , , , , , , , ,  


Dorothea Lange Butter bean vines across the porch, Negro quarter, Memphis, Tennessee 1938

US Banks’ Dismal First Quarter Spells Trouble For 2016 (Reuters)
US Faces ‘Disastrous’ $3.4 Trillion Pension Funding Hole (FT)
Abenomics Rebuked As BlackRock Joins $46 Billion Japan Pullout (BBG)
Beijing Risks ‘Sterling-Style’ Currency Crisis As Deflation Persists (AEP)
Chinese Buyers Double Their Aussie Property Investments, Again (BBG)
In BP’s Final $20 Billion Gulf Settlement, US Taxpayers Pay $15.3 Billion (F.)
British Banks’ ‘Misconduct Bill’ Has Reached Nearly $75 Billion (Reuters)
The 1% Hide Their Money Offshore – Then Use It To Corrupt Our Democracy (G.)
Hit By Panama Row, Cameron Announces New Tax Evasion Law In 2016 (Reuters)
Italy Pushes For ‘Last Resort’ Bank Rescue Fund (FT)
Austria Regulator Imposes 54% Haircut, Long Wait On Heta Bank Creditors (R.)
As Ukraine Collapses, Europeans Tire of Us Interventions (Ron Paul)
State Of Emergency Over Suicide Epidemic In Canada’s First Nations (G.)
Mass Coral Bleaching Now Affects Half Of Great Barrier Reef (G.)
Fewer Than 0.1% Of Syrians In Turkey In Line For Work Permits (G.)
Hundreds Hurt As Refugees Confront FYROM Border Police Tear Gas (AP)

When TBTF starts failing, watch your wallet.

US Banks’ Dismal First Quarter Spells Trouble For 2016 (Reuters)

It is only April, but some on Wall Street are already predicting a rotten 2016 for U.S. banks. Analysts say it has been the worst start to the year since the financial crisis in 2007-2008 and expect poor first-quarter results when reporting begins this week. Concerns about economic growth in China, the impact of persistently low oil prices on the energy sector, and near-zero interest rates are weighing on capital markets activity as well as loan growth. Analysts forecast a 20% decline on average in earnings from the six biggest U.S. banks, according to Thomson Reuters I/B/E/S data. Some banks, including Goldman Sachs, are expected to report the worst results in over ten years.

This spells trouble for the financial sector more broadly, since banks typically generate at least a third of their annual revenue during the first three months of the year. “What’s concerning people is they’re saying, ‘Is this going to spill over into other quarters?'” Goldman’s Richard Ramsden said in an interview. “If you do have a significant decline in revenues, there is a limit to how much you can cut costs to keep things in equilibrium.” Investors will get some insight on Wednesday, when earnings season kicks off with JPMorgan, the country’s largest bank. That will be followed by Bank of America and Wells Fargo on Thursday, Citigroup on Friday, and Morgan Stanley and Goldman Sachs on Monday and Tuesday, respectively, in the following week.

Banks have been struggling to generate more revenue for years, while adapting to a panoply of new regulations that have raised the cost of doing business substantially. The biggest challenge has been fixed-income trading, where heavy capital requirements, new derivatives rules, and restrictions on proprietary trading have made it less profitable, leading most banks to simply shrink the business. Bank executives have already warned investors to expect major declines across other areas as well. Citigroup CFO John Gerspach said to expect trading revenue more broadly to drop 15% versus the first quarter of last year. JPMorgan’s Daniel Pinto said to expect a 25% decline in investment banking. Several bank executives have warned about declining quality of energy sector loans.

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“California, Illinois, New Jersey, Chicago and Austin, would need to put at least 20% of their revenues into their pension plans to prevent a rise in their deficits, while Nevada would have to contribute almost 40%.”

US Faces ‘Disastrous’ $3.4 Trillion Pension Funding Hole (FT)

The US public pension system has developed a $3.4tn funding hole that will pile pressure on cities and states to cut spending or raise taxes to avoid Detroit-style bankruptcies. According to academic research shared exclusively with FTfm, the collective funding shortfall of US public pension funds is three times larger than official figures showed, and is getting bigger. Devin Nunes, a US Republican congressman, said: “It has been clear for years that many cities and states are critically underfunding their pension programmes and hiding the fiscal holes with accounting tricks.” Mr Nunes, who put forward a bill to the House of Representatives last month to overhaul how public pension plans report their figures, added: “When these pension funds go insolvent, they will create problems so disastrous that the fund officials assume the federal government will have to bail them out.”

Large pension shortfalls have already played a role in driving several US cities, including Detroit in Michigan and San Bernardino in California, to file for bankruptcy. The fear is other cities will soon become insolvent due to the size of their pension deficits. Joshua Rauh, a senior fellow at the Hoover Institution, a think-tank, and professor of finance at the Stanford Graduate School of Business, who carried out the study, said: “The pension problems are threatening to consume state and local budgets in the absence of some major changes. “It is quite likely that over a five to 10-year horizon we are going to see more bankruptcies of cities where the unfunded pension liabilities will play a large role.” The Stanford study found that the states of Illinois, Arizona, Ohio and Nevada, and the cities of Chicago, Dallas, Houston and El Paso have the largest pension holes compared with their own revenues.

In order to deal with the large funding shortfall, many cities and states will have to increase their contributions to their pension funds, either by raising taxes or cutting spending on vital services. Olivia Mitchell, a professor at the Wharton School at the University of Pennsylvania, told FTfm last month that US public pension plans face “grave difficulties”. “I do believe that US cities and towns will continue to suffer, and there will be additional bankruptcies following the examples of Detroit,” she said. Currently, states and local governments contribute 7.3% of revenues to public pension plans, but this would need to increase to an average of 17.5% of revenues to stop any further rises in the funding gap, the research said. Several cities and states, including California, Illinois, New Jersey, Chicago and Austin, would need to put at least 20% of their revenues into their pension plans to prevent a rise in their deficits, while Nevada would have to contribute almost 40%.

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“A lot of people are starting to doubt Abenomics.” Very few have ever believed in it. But there was free money to be had.

Abenomics Rebuked As BlackRock Joins $46 Billion Japan Pullout (BBG)

For global equity investors and Shinzo Abe, it’s splitsville. Starting in the first days of 2016, foreign traders have been pulling out of Tokyo’s stock market for 13 straight weeks, the longest stretch since 1998. Overseas traders dumped $46 billion of shares as economic reports deteriorated, stimulus from the Bank of Japan backfired and the yen’s surge pressured exporters. The benchmark Topix index is down 17% in 2016, the world’s steepest declines behind Italy. Losing the faith of foreigners would be a blow to the Japanese prime minister – they’re the most active traders in a market Abe has held up as a litmus on his growth strategies. “Japan is back,” and “Buy my Abenomics!” he proclaimed during a visit to the New York Stock Exchange in September 2013, when shares were marching to an eight-year high.

Now about half of those gains are gone and BlackRock, the world’s largest money manager, is among firms ending bullish calls on Japan equities. “Japan has been disappointing,” said Nader Naeimi, Sydney-based head of dynamic markets at AMP Capital Investors, which oversees about $115 billion. He’s a long-time fan of Tokyo equities who says he’s now looking for opportunities to sell. “A lot of people are starting to doubt Abenomics.” While markets elsewhere are climbing back from a global selloff, investors in Japan see fewer reasons for optimism. Growing concern that Abenomics – the three-pronged strategy of fiscal and monetary stimulus and structural reform – is falling flat has spurred speculation the nation will slip into deflation, setting back efforts to end three decades of malaise.

Masahiro Ichikawa, a senior strategist at Sumitomo Mitsui, fears a downward spiral. Foreigners are needed to boost the stock market, and if equities don’t rise the public will lose confidence and curb spending, as he sees it. That could send Japan back into deflation. “If foreigners don’t come back, the future of Abenomics could be jeopardized,” he said.

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“Reserves will continue to fall until we devalue. Once we get towards $2 trillion the markets will start to panic. They won’t believe that the government can control it any longer..”

Beijing Risks ‘Sterling-Style’ Currency Crisis As Deflation Persists (AEP)

A top adviser to the Chinese government has warned that Beijing risks a currency blow-up akin to Britain’s traumatic ordeal in 1992, if it continues trying to defend its exchange rate peg amid a deepening deflation crisis. Yu Hongding, a director of the Chinese Academy of Social Sciences, said China is caught in two concurrent “deflationary spirals” that are feeding on the other. A major devaluation and a blast of well-targeted fiscal stimulus will be needed to break out of the trap. “They must stop intervening on the exchange market. China needs to devalue by 15pc. They are creating conditions for speculators,” he told the Daily Telegraph, speaking at the Ambrosetti forum of global policymakers on Lake Como.

Prof Yu, a former rate-setter for the PBOC and currently a member of the national planning committee, said the government is making a serious mistake in trying to defend the yuan by burning through foreign exchange reserves, already down to $3.2 trillion from $4 trillion in mid-2014. He warned that the slowdown in capital outlows in March may prove fleeting. “Reserves will continue to fall until we devalue. Once we get towards $2 trillion the markets will start to panic. They won’t believe that the government can control it any longer,” he said. Prof Yu said Beijing had been caught off guard by the relentless slowdown over the last five years. “In 2011 we thought the economy would stabilize, and we thought the same thing in 2012, and again in 2013, and it continued to slide,” he said.

It is far from clear whether the world could handle a 15pc devaluation given the vast scale of Chinese overcapacity, or that the US Treasury and Congress would tolerate such a move. Fears of uncontrollable capital flight and a yuan devaluation were key reasons for the plunge in global equity markets earlier this year, and are clearly what prompted the US Federal Reserve to delay rate rises. The fate of China’s currency has become the most neuralgic issue in global finance. One worry is that a sharp drop in the yuan would set off a second round of ‘currency wars’ across East Asia, transmitting a deflationary shock through the international system as cheap Asian exports flooded into Western markets.

Prof Yu’s life is a remarkable story of achievement in Maoist China. He worked for ten years in a machine factory, wrestling with Marx’s Das Kapital at night before discovering western economics. He devoured Paul Samuelson’s classic text, ‘Foundations of Economic Analysis’, first in a Chinese translation and then in the original after teaching himself English, no easy feat in the Cultural Revolution. He went onto to earn a doctorate at Oxford University, and was still in England when sterling was blown out of the European Exchange Rate Mechanism in September 1992. He still recalls the exact details of the debacle, including the two desperate rate rises by the Bank of England in a single day. “The British experience is very interesting for us,” he said.

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Keeps the bubble alive until it doesn’t.

Chinese Buyers Double Their Aussie Property Investments, Again (BBG)

Chinese appetite for property in Australia shows no sign of waning after buyers doubled investment in the nation’s homes and offices for a second straight year. Spending on Australian residential and commercial real estate rose to A$24.3 billion ($18.4 billion) in the 12 months through June 2015, up from A$12.4 billion a year earlier and A$5.9 billion in 2013, according to the Foreign Investment Review Board’s annual report. All Chinese investors in a survey conducted by KPMG and the University of Sydney want to allocate more money to Australia, a separate report showed on Monday. Real estate is fueling inflows from the world’s second largest economy, which last year overtook the U.S. as Australia’s largest foreign investor.

“Overall we are seeing a strong story of Chinese investment into Australia’s broader economy which is in line with premium products, services and lifestyle-oriented themes,” Doug Ferguson, head of KPMG Australia’s Asia and International Markets and co-author of the report, said in a statement. Purchases by foreigners, many with a connection to China, helped drive an almost 55% jump in home prices across Australia’s capital cities in the past seven years as mortgage rates dropped to five-decade lows. The rising demand has triggered community concern that locals are being priced out of the property market, prompting the government to tighten scrutiny of foreign investment.

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Like so many other things these days, perfectly legal.

In BP’s Final $20 Billion Gulf Settlement, US Taxpayers Pay $15.3 Billion (F.)

Now that a judge has approved BP’s $20 billion settlement over the 2010 gulf oil spill, it is appropriate to look at the overall societal costs, as well as the bottom line to BP. And at tax time, people understandably think about their own taxes, too. The government struck a $20 billion settlement with BP, which is a big number. Yet BP should be able to deduct the vast majority, a whopping $15.3 billion, on its U.S. tax return. That means American taxpayers are contributing quite a lot to this settlement, whether they know it or not. BP can write off the natural resource damages payments, restoration, and reimbursement of government costs. Only $5.5 billion is labeled as a non-tax-deductible Clean Water Act penalty. One big critic of the deal is U.S. Public Interest Research Group, which often rails against tax deductions by corporate wrongdoers.

U.S. Public Interest Research Group has asked the Justice Department to deny tax deductions for BP and other corporate defendants. U.S. PIRG’s has a research report on settling for a lack of accountability that details the tax deductions corporations can claim for legal settlement. However, a change to the tax code may be the only way to get there. The proposed Truth in Settlements Act (S. 1898) would require agencies to report after-tax settlement values. Another bill, S. 1654, would restrict tax deductibility and require agencies to spell out the tax status of settlements. The present tax code allows businesses to deduct damages, even punitive damages. Restitution and other remedial payments are also fully deductible. Only certain fines or penalties are nondeductible. Even then, the rules are murky, and companies routinely deduct payments unless it is completely clear that they cannot.

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No bankers have been indicted, and no shareholder has taken them to court.

British Banks’ ‘Misconduct Bill’ Has Reached Nearly $75 Billion (Reuters)

Lawsuits and misconduct fines have cost Britain’s largest retail banks and customer-owned lenders almost 53 billion pounds ($74.86 billion) over the past 15 years, a new study has found. The scale of the payouts has hampered banks’ efforts to rebuild capital, restricted the amount they are able to lend and reduced dividends for investors. Britain’s banks have been hit by scandals ranging from the manipulation of foreign exchange and benchmark interest rates to the mis-selling of loan insurance and complex interest-rate hedging products. While lenders have struggled to return money to shareholders because of the charges, they have continued to pay billions of pounds in bonuses to staff, the study by the independent think-tank New City Agenda said.

“The profitability of UK retail banks has been imperilled by persistent misconduct,” said John McFall, a director of New City Agenda and former Treasury Committee chairman. “This has made every citizen poorer through our pension funds and our ownership of the bailed out banks.” The report said the mis-selling of payment protection insurance alone cost banks at least 37.3 billion pounds in Britain’s costliest consumer scandal. Lloyds had to set aside 14 billion pounds to cover misconduct between 2010 and 2014, almost twice the amount of any other British lender, the report said.

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Yup, that’s how it works.

The 1% Hide Their Money Offshore – Then Use It To Corrupt Our Democracy (G.)

Over the past 72 hours, you have seen our political establishment operating at a level of panic rarely equalled in postwar history. Britain’s prime minister has had yanked out of him some of his most intimate financial details. Complete strangers now know how much he’s inherited so far from his mum and dad, and the offshore investments from which he’s profited. Yesterday he even took the unprecedented step of revealing the taxes he’d paid over the past six years. Leaders of other parties have responded by summarily publishing their own HMRC returns. In contemporary Britain, where one’s extramarital affairs are more readily discussed in public than one’s tax affairs, this is jaw-dropping stuff. And it will not stop here.

Whatever the lazy shorthand being used by some commentators, David Cameron has not released his tax returns, but merely a summary certified by an accountants’ firm. That halfway house will hardly be enough. If Jeremy Corbyn, other senior politicians and the press keep up this level of attack, then within days more details of the prime minister’s finances will emerge. Nor will the flacks of Downing Street be able to maintain their lockdown on disclosing how many cabinet members have offshore interests: the ministers themselves will break ranks. Indeed, a few are already beginning to do so. But the risk is that all this will descend into a morass of semi-titillating detail: a string of revelations about who gave what to whom, and whether he or she then declared it to the Revenue.

The story will become about “handling” and “narrative” and individual culpability. That will be entertaining for those who like to point fingers, perplexing for those too busy to engage in the detail – and miss the wider truth revealed by the leak which forced all this into public discussion. Because at root, the Panama Papers are not about tax. They’re not even about money. What the Panama Papers really depict is the corruption of our democracy. Following on from LuxLeaks, the Panama Papers confirm that the super-rich have effectively exited the economic system the rest of us have to live in. Thirty years of runaway incomes for those at the top, and the full armoury of expensive financial sophistication, mean they no longer play by the same rules the rest of us have to follow. Tax havens are simply one reflection of that reality.

Discussion of offshore centres can get bogged down in technicalities, but the best definition I’ve found comes from expert Nicholas Shaxson who sums them up as: “You take your money elsewhere, to another country, in order to escape the rules and laws of the society in which you operate.” In so doing, you rob your own society of cash for hospitals, schools, roads… But those who exited our societies are now also exercising their voice to set the rules by which the rest of us live. The 1% are buying political influence as never before. Think of the billionaire Koch brothers, whose fortunes will shape this year’s US presidential elections. In Britain, remember the hedge fund and private equity barons, who in 2010 contributed half of all the Conservative party’s election funds – and so effectively bought the Tories their first taste of government in 18 years.

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He will have to reveal a lot more of his own finances, no matter what laws he has lying on the shelf.

Hit By Panama Row, Cameron Announces New Tax Evasion Law In 2016 (Reuters)

British Prime Minister David Cameron will say on Monday that new legislation making companies criminally liable if employees aid tax evasion will be introduced this year, as he seeks to repair the damage from a week of questions about his personal finances. Cameron published tax records on Sunday to try and defuse criticism over his handling of the fallout from the Panama Papers, in which his late father was mentioned for setting up an offshore fund. After four carefully worded statements in four days, Cameron bowed to pressure and admitted that he had benefited from selling his share in his father’s fund in 2010. He recognized on Saturday that he had mishandled the disclosure. Cameron is leading efforts to persuade British voters to stay in the EU in a June 23 referendum that the polls suggest will be tight, and the tax row has raised concerns among the “in” camp that their cause may have been damaged.

The prime minister will attempt to regain the upper hand when he appears in the House of Commons later on Monday. “This government has done more than any other to take action against corruption in all its forms, but we will go further,” Cameron will say, according to advance excerpts of his statement circulated by his Downing Street office. “That is why we will legislate this year to hold companies who fail to stop their employees facilitating tax evasion criminally liable,” he will say. The plan had already been announced by finance minister George Osborne in March 2015, but previously the commitment was to introduce the legislation by 2020, Downing Street said. The decision to speed up that particular measure is unlikely to satisfy Cameron’s many critics in opposition parties and in some campaign groups that say Britain already has the tools it needs to crack down on tax evasion but lacks the will.

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Debt restructuring is still a four letter word in Europe.

Italy Pushes For ‘Last Resort’ Bank Rescue Fund (FT)

Italy is rushing to cobble together an industry-led rescue to address mounting concerns over the solidity of a banking sector whose woes pose a risk to the wider eurozone economy. Finance minister Pier Carlo Padoan has called a meeting in Rome on Monday with executives from Italy’s largest financial institutions to agree final details of a “last resort” bailout plan. Yet on the eve of that gathering, concerns remain as to whether the plan will be sufficient to ringfence the weakest of Italy’s large banks, Monte dei Paschi di Siena, from contagion, according to people involved in the talks. Italian bank shares have lost almost half their value so far this year amid investor worries over a €360bn pile of non-performing loans — equivalent to about a fifth of GDP. Lenders’ profitability has been hit by a crippling three-year recession.

The plan being worked on, which could be officially announced as soon as Monday evening, recalls the Sareb bad bank created in 2012 by the Spanish government to deal with financial crisis in its smaller cajas banks, say people involved. Although the details remain under discussion, it foresees the establishment of a private vehicle that will include upwards of €5bn in equity contributions – mostly from Italy’s banks, insurers and asset managers – and then a larger debt component. The fund will then mop up shares in distressed lenders. A second vehicle will seek to buy non-performing loans at market prices. “It is a backstop fund,” said one person involved in the talks. The Italian government can provide only limited financial backing because of EU state aid rules and because it is already struggling under a public debt load that amounts to 132.5% of GDP.

The bailout marks the latest and most wide-reaching attempt by Italy to shore up confidence having already sponsored the rescue of four small banks last year and passed a law intended to speed up the sale of bad loans. Both earlier measures failed to eradicate market concerns. [..] people involved in the talks question whether the plan would have the financial scope to provide a buffer of last resort for Monte dei Paschi di Siena. Italy’s third-largest bank was the worst performer in the 2014 European stress tests, with about €170bn in assets and about €50bn in bad loans. It is considered by many bankers to be the major risk to Italian financial stability and regarded as too big to fail. “Monte Paschi is the elephant in the room,” says one of Italy’s top bankers.

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Is this an attempt to let Carinthia go broke after all?

Austria Regulator Imposes 54% Haircut, Long Wait On Heta Bank Creditors (R.)

Austria’s financial markets regulator FMA on Sunday cut the nominal value of “bad bank” Heta Asset Resolution’s senior bonds by more than half, highlighting the long struggle creditors face for repayment if a settlement is not reached. The FMA, which is overseeing the wind-down of Heta, on Sunday announced measures including the bail-in, or haircut, of 54%, the extension of bonds’ maturities to 2023 and the cancellation of coupon payments as of March of last year.The announcement is the latest chapter in a standoff between the province of Carinthia and Heta’s creditors, many of which insist on repayment in full because their bonds were guaranteed by Carinthia, which could push the province into insolvency.

Carinthia guaranteed the bonds of local lender Hypo Alpe Adria before it collapsed and Heta was formed to wind it down. Carinthia says it cannot afford to fully honour the remaining guarantees, which the FMA put at €11.1 billion. Creditors are likely to sue Carinthia to recover the difference between what is paid out to them under Heta’s wind-down and their bonds’ full face value. The FMA put that difference at €6.4 billion, roughly three times the annual budget of Carinthia, a southern province of about 560,000 people that borders Italy and Slovenia and was long the stronghold of far-right politician Joerg Haider. The haircut’s size is based on the amount the FMA expects will be recovered from the sale of Heta’s assets by 2020.

It had said the estimate would be conservative to ensure that, if it is wide of the mark, there is extra revenue to be shared out. Only by the end of 2023 will it be possible to pay out all funds owed, the FMA said, partly in anticipation of many court cases, meaning creditors face a wait of seven years for their repayment of 46% of senior bonds’ face value. Carinthia offered to buy back the bonds it guaranteed, with loans from the Austrian government, for 75% of senior bonds’ face value, plus a last-minute sweetener by the Austrian government that brought the offer to around 82%. Too few creditors accepted the offer when it expired last month, and the question is now whether a compromise can be found or whether the dispute will be settled in court.

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Ron Paul doesn’t capture the entire picture, but from a US perspective he’s largely right.

As Ukraine Collapses, Europeans Tire of Us Interventions (Ron Paul)

On Sunday Ukrainian prime minister Yatsenyuk resigned, just four days after the Dutch voted against Ukraine joining the European Union. Taken together, these two events are clear signals that the US-backed coup in Ukraine has not given that country freedom and democracy. They also suggest a deeper dissatisfaction among Europeans over Washington’s addiction to interventionism. According to US and EU governments – and repeated without question by the mainstream media – the Ukrainian people stood up on their own in 2014 to throw off the chains of a corrupt government in the back pocket of Moscow and finally plant themselves in the pro-west camp. According to these people, US government personnel who handed out cookies and even took the stage in Kiev to urge the people to overthrow their government had nothing at all to do with the coup.

When Assistant Secretary of State Victoria Nuland was videotaped bragging about how the US government spent $5 billion to “promote democracy” in Ukraine, it had nothing to do with the overthrow of the Yanukovich government. When Nuland was recorded telling the US Ambassador in Kiev that Yatsenyuk is the US choice for prime minister, it was not US interference in the internal affairs of Ukraine. In fact, the neocons still consider it a “conspiracy theory” to suggest the US had anything to do with the overthrow. I have no doubt that the previous government was corrupt. Corruption is the stock-in-trade of governments. But according to Transparency International, corruption in the Ukrainian government is about the same after the US-backed coup as it was before.

So the intervention failed to improve anything, and now the US-installed government is falling apart. Is a Ukraine in chaos to be considered a Washington success story? This brings us back to the Dutch vote. The overwhelming rejection of the EU plan for Ukrainian membership demonstrates the deep level of frustration and anger in Europe over EU leadership following Washington’s interventionist foreign policy at the expense of European security and prosperity. The other EU member countries did not even dare hold popular referenda on the matter – their parliaments rubber-stamped the agreement.

Brussels backs US bombing in the Middle East and hundreds of thousands of refugees produced by the bombing overwhelm Europe. The people are told they must be taxed even more to pay for the victims of Washington’s foreign policy. Brussels backs US regime change plans for Ukraine and EU citizens are told they must bear the burden of bringing an economic basket case up to European standards. How much would it cost EU citizens to bring in Ukraine as a member? No one dares mention it. But Europeans are rightly angry with their leaders blindly following Washington and then leaving them holding the bag.

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This continues to make my half-Canadian heart bleed. It’s been going on for so long.

State Of Emergency Over Suicide Epidemic In Canada’s First Nations (G.)

A Canadian First Nation community of 2,000 people has declared a state of emergency after 11 of its members tried to take their own lives, national media reported. CTV News reported on Sunday that the remote northern community of the Attawapiskat First Nation in Ontario experienced an additional 28 suicide attempts last month. More than 100 people in the community have attempted suicide since last September, and one person died, according to CTV. The youngest was 11, the oldest 71. Charlie Angus, the local member of parliament, told the Canadian Press it was part of a “rolling nightmare” of more and more suicide attempts among young people throughout the winter. The Canadian Press said the regional First Nations government was sending a crisis response unit including social workers and mental health nurses to the community following the declaration.

The Health Canada federal agency said in a statement that it had sent two mental health counsellors as part of that unit. Attawapiskat resident Jackie Hookimaw told The Canadian Press that the epidemic started in the autumn when her 13-year-old niece Sheridan killed herself after being bullied at school. “There’s different layers of grief,” she said. “There’s normal grief, when somebody dies from illness or old age. And there’s complicated grief, where there’s severe trauma, like when somebody commits suicide.” Canadian prime minister Justin Trudeau said on Twitter: “The news from Attawapiskat is heartbreaking. We’ll continue to work to improve living conditions for all Indigenous peoples.” Another Canadian First Nation community in the western province of Manitoba appealed for federal aid last month, citing six suicides in two months and 140 suicide attempts in two weeks.

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“..three to four times worse than in 1998 or the second great bleaching in 2002.”

Mass Coral Bleaching Now Affects Half Of Great Barrier Reef (G.)

The mass coral bleaching event smashing the Great Barrier Reef has severely affected more than half its length and caused patches of bleaching in most areas, according to scientists conducting an extensive aerial survey of the damage. “The good news with my last flight is that I found 50 reefs that weren’t bleached, so that may be the southern boundary,” said Terry Hughes from James Cook University. Hughes is the head of the national coral bleaching task force, which has been conducting flights over the length of the reef, mapping bleached areas and recording the severity of the damage. Climate change and a strong El Niño have caused hundreds of kilometres of the reef to bleach, as the higher water temperatures stress the coral, and they expel their symbiotic algae.

If the bleaching is bad enough, or the temperatures remain high for long enough, the corals die, putting the future of reefs at risk. The mass bleaching on the Great Barrier Reef is part of what the US National Oceanographic and Atmospheric Administration has called the third global bleaching event – the first occurred in 1998. Initial reports suggested only the most northern and remote areas of the Great Barrier Reef were bleaching, but as aerial surveys have continued, scientists have struggled to find a southern boundary. The latest find of a stretch of unaffected reefs around Mackay was a small piece of good news, Hughes said. But he said its significane would be unclear until reefs further south were examined. “It may be a false southern boundary,” Hughes said.

The reefs around Mackay have unusually large tides, which might have pulled in cooler water and saved the coral there. [..] Two weeks ago, the Great Barrier Reef Marine Park Authority reported half the coral in the northern parts of the reef were dead. Hughes said that was consistent with reports from divers north of Port Douglas. Hughes said this was by far the worst bleaching event to have hit the Great Barrier Reef. He said it was three to four times worse than in 1998 or the second great bleaching in 2002. Last year, the Great Barrier Reef narrowly escaped being listed as “in danger” by Unesco, even though environmental groups said it clearly met the criteria. Hughes said the “outstanding universal value” of the reef was now “severely compromised”.

Ariane Wilkinson, a lawyer at Environmental Justice Australia, said the bleaching might cause Unesco to reconsider its decision. “[Unesco] weren’t scheduled to examine the reef this year but in light of the terrible bleaching it is entirely possible that they may decide to look at the reef,” she said. “If the World Heritage system is to have any value, it must address the most serious threats to the most iconic examples of world heritage,” she said. “If any site falls into this category, it is the … Great Barrier Reef.”

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Safe third country.

Fewer Than 0.1% Of Syrians In Turkey In Line For Work Permits (G.)

Fewer than 0.1% of Syrians in Turkey currently stand to gain the right to work under much-vaunted Turkish labour laws, undermining EU claims that the legislation excuses a recent decision to deport Syrian asylum-seekers back to Turkey. Turkish employers have allowed roughly 2,000 – or 0.074% – of Turkey’s 2.7 million Syrians to apply for work permits under new legislation enacted two months ago, according to government figures provided to aid workers at a meeting in late March. The number of permits granted has not yet been disclosed. More applications are expected in the coming months, but the statistic nevertheless highlights how the new law, enacted in January, does not offer blanket access to the labour market for all Syrians in Turkey.

Instead work permits can only be given to those who have the blessing of their employers, many of whom may still be unaware of the law, or unwilling to comply with it since it would require them to pay their employees the minimum wage. The figure was revealed in a speech to aid groups by the head of Turkey’s general directorate for migration management, who said he hoped the number would rise once more people became aware of the law. The news will complicate the new EU-Turkey deal to deport all asylum-seekers arriving to Greece back to Turkey, since the EU has justified the controversial agreement by claiming Turkey was a place that upheld internationally agreed obligations to refugees, including access to legal work. While Turkey is not a full signatory to the 1951 UN refugee convention, EU politicians have sometimes cited the January law as an example of how Turkey maintains the values of the convention by other means.

But in reality the law does not automatically offer most refugees a route out of the black market, several Syrians argued in interviews. Most problematically, the law requires an employer to give his employees a contract before they can apply for a permit. But this is an unattractive proposition for many employers, since they often employ Syrians precisely because they are easily exploited, said Hussam Orfahli, CEO of an Istanbul-based firm that helps Syrians apply for paperwork in Turkey. “If he wants you to have a work permit, then you can get it – but if he doesn’t, then you won’t,” said Orfahli, who has applied for permits on behalf of 60 wealthy clients, but has yet to hear whether any of them have been successful. “The minimum wage is 1,300 Turkish lira [£320] and most employers refuse to give contracts so that they can pay less, and don’t have to pay your health insurance.”

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Children injured by (8 hours of!) tear gas. Europe 2016.

Hundreds Hurt As Refugees Confront FYROM Border Police (AP)

Migrants waged running battles with Macedonian police Sunday after they were stopped from scaling the border fence with Greece near the border town of Idomeni, and aid agencies reported that hundreds of stranded travelers were injured. Macedonian police used tear gas, stun grenades, plastic bullets and a water cannon to repel the migrants, many of whom responded by throwing rocks over the fence at police. Greek police observed from their side of the frontier but did not intervene. More than 50,000 refugees and migrants have been stranded in Greece after Balkan countries closed their borders to the massive flow of refugees pouring into Europe. Around 11,000 remain camped out at the border with Macedonia, ignoring instructions from the government to move to organized shelters as they hold out hope to reach Western Europe.

Clashes continued in the afternoon as migrant groups twice tried to overwhelm Macedonian border security. The increasing use of tear gas reached families in their nearby tents in Idomeni’s makeshift camp. Many camp dwellers, chiefly women and children, fled into farm fields to escape the painful gas. Observers held out hope that evening rainfall, which began about seven hours into the clashes, would dampen hostilities. The aid agency Doctors Without Borders estimated that their medical volunteers on site treated about 300 people for various injuries. Achilleas Tzemos, deputy field coordinator of Doctors Without Borders, told the AP that the injured included about 200 experiencing breathing problems from the gas, 100 others with cuts, bruises and impact injuries from nonlethal plastic bullets.

He said six of the most seriously injured were hospitalized. The clashes began soon after an estimated 500 people gathered at the fence. Many said they were responding to Arabic language fliers distributed Saturday in the camp urging people to attempt to breach the fence Sunday morning and “go to Macedonia on foot.” A five-member migrant delegation approached Macedonian police to ask whether the border was about to open. When Macedonian police replied that this wasn’t happening, more than 100, including several children, tried to scale the fence. Greece criticized the Macedonian police response as excessive. Giorgos Kyritsis, a spokesman for the government’s special commission on refugees, said Macedonian forces had deployed an “indiscriminate use of chemicals, plastic bullets and stun grenades against vulnerable people.”

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Feb 022016
 
 February 2, 2016  Posted by at 9:41 am Finance Tagged with: , , , , , , , ,  


NPC Minker Motor Co, 14th Street NW, Washington, DC 1922

The Citi Market-Crash Clock Says It’s 5 Minutes To Midnight (BI)
Time Running Out For China On Capital Flight, Warns Bank Chief (AEP)
China Announces 400,000 Steelworker Job Cuts, 3 Million More Expected (WSWS)
Hong Kong Property Sales Slump To 25 Year Low (BBG)
Hong Kong Short Sellers Could Find The Weak Link In Real Estate (MW)
Oil-Price Poker: Why the Saudis Won’t Fold ‘Em (WSJ)
BP Reports 91% Decline In Fourth-Quarter Earnings (BBG)
BP Posts Biggest Loss In 20 Years, Axes 7000 Jobs, Shares Lose 5% (Guardian)
Flood Of Oil Asset Writedowns Across Asia (BBG)
Iceland Central Bank Preparing New Weapons To Fight Capital Rush (Reuters)
World Index Of Economic Freedom Tells Us That EU Should Be Broken Up (AEP)
Ground Control to Captain Zhou Xiaochuan (Jim Kunstler)
Progress On Migration Could ‘Facilitate’ Greece’s Bailout Review (Kath.)
Europe’s Refugee Story Has Hardly Begun (Paul Mason)
Where Are Our Principles? (Boukalas)

Nice concept.

The Citi Market-Crash Clock Says It’s 5 Minutes To Midnight (BI)

Citi published a scary update to its market clock chart at the end of last month. According to Citi’s analysis, the economy has moved into Phase 4 of the economic cycle, the point at which both credit and equities move into recessionary downward cycles. The US is further along in the clock rotation than the eurozone is. But both are heading into the dreaded Phase 4.

The last time Business Insider looked at the Citi clock, in August 2014, it was still in Phase 3. Here is how the clock works, according to Citi global strategy analyst Robert Buckland:

• Phase 1: This begins at the end of a recession, when interest rates have fallen, money is cheap, but stocks are still battered.

• Phase 2: A bull market sets in during phase 2, when stocks start to rise as easy credit lubricates the economy.

• Phase 3: This is the tricky part. Stocks are still flying high, but credits spreads are widening as investors become increasingly unwilling to finance further risk. Corporate CEOs have now experienced a lengthy period of gains and become risk-happy. (And we’d note that central banks are already talking about tightening credit by raising interest rates.) Bubbles can form in Phase 3, as the high-flying stock market ignores the early warning signs of the deteriorating credit market. Hello, tech startup IPOs!

• Phase 4: Stocks react to the lack of available credit by collapsing, and we see the kinds of things you get in a recession: “This is the classic bear market, when equity and credit prices fall together. It is usually associated with collapsing profits and worsening balance sheets,” Buckland said last year.

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“At the moment they won’t impose losses on anybody..”

Time Running Out For China On Capital Flight, Warns Bank Chief (AEP)

China is rapidly losing the confidence of global lenders and capital outflows risk turning virulent if the current policy paralysis continues, the world’s top banking body has warned. “There is a perception that the renminbi could weaken drastically,” said Charles Collyns, the managing-director of the Institute of International Finance in Washington. Mr Collyns said the authorities have so far failed to articulate a coherent strategy, and there are serious worries that outflows of capital could accelerate, broadening into a flood beyond Beijing’s control. “The Chinese have not been rigorous and they have not been very convincing,” he told The Telegraph. Mr Collyns said China has already allowed the renminbi (yuan) to weaken against the country’s new trade-weighted basket of currencies, stoking suspicions that the recent shift from a crawling dollar-peg to a more opaque foreign-exchange regime is really a cover for devaluation.

The IIF, the chief global body for the banking industry, calculates that capital outflows from China reached $676bn last year. The central bank has been burning through foreign exchange reserves to offset the bleeding and shore up the currency, culminating in intervention of $140bn in December, by some estimates. A big drop in the yuan would send a deflationary shockwave through a fragile world economy already on the cusp of a debt-deflation trap, and do so at a time when the eurozone and Japan are actively driving down their currencies. It would risk a pan-Asian currency storm along the lines of 1998, but on a much bigger scale. China is not just another country. Its fixed capital investment has been running at $5 trillion a year, matching the combined total of North America and Europe.

This has led to excess capacity across swathes of industry that casts a shadow over the entire global system. Chinese officials insist solemnly that the new basket rate is the “decided policy of China” and will be upheld come what may, but concerns are mounting that they may be overwhelmed by market forces. The crucial question is whether the exodus of money is chiefly a one-off move by Chinese companies and investors to pay off dollar debt – and to unwind “carry trade” positions in dollars – as the US Federal Reserve raises interest rates and drains liquidity. If so, the outflows are largely benign and should make the world’s financial system safer. Mark Tinker, head of equities for AXA Framlington in Asia, said the bulk of the outflows are to pay off liabilities. “Chinese corporates are issuing corporate bonds in record quantities and using the capital to restructure their balance sheets, both onshore and offshore. This is not capital flight, it is asset liability matching, both duration and currency. It is a good thing being presented as a bad thing,” he said.

The IIF’s Mr Collyns, a former assistant US Treasury Secretary, is less sanguine. He calculates that total dollar debt in China peaked at roughly $1.5 trillion in late 2014, if all forms of exposure are included. “We think they have paid off a third of this. Half of the outflows are to repay dollar debt,” he said. “What is worrying is that there could be a broadening of the outflows. There has been a surge in ‘errors and emissions’ and this is ominous. A lot of this is a capital outflow below board through inflated trade invoices and other forms of subterfuge, and some of it is ending up in the London property market,” he said.

Mr Collyns said there is no guarantee that the outflows will slow even if all the dollar debt is paid off since Chinese companies may start taking out “long” dollar positions (short renminbi) in the currency markets if they fear that Beijing is losing control. “The Chinese have to restore confidence by pushing through reforms. There must be greater transparency in fiscal and monetary policy, and they must tackle excess industrial capacity. At the moment they won’t impose losses on anybody,” he said.

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“..it is estimated that for every job lost in steel, another 3 jobs are lost in related and supporting industries.”

China Announces 400,000 Steelworker Job Cuts, 3 Million More Expected (WSWS)

An estimated 400,000 steelworkers in China will lose their jobs, in line with plans to slash crude steel production capacity by between 100 million and 150 million tons. The announcement was posted Sunday on government web sites, and reports a decision made by the State Council on January 22 to cut steel, coal and other basic industrial production in response to the global slump and declining growth in China. Li Xinchuang, head of the China Metallurgical Industry Planning and Research Institute, said that the cuts in production would translate into 400,000 steelworkers losing their jobs. “Large-scale redundancies in the steel sector could threaten social stability,” Li Xinchuang told the official Xinhua News Agency Monday.

The State Council did not say when the cuts would be made, but China, which produces half of the world’s steel, has already cut capacity by 90 million tons in response to the growing slowdown in the Chinese and world economy, and is under enormous pressure to do more. Along with the cuts already made, the new cuts will amount to about a 20% reduction in steelmaking capacity. The reductions will have an enormous impact on Chinese workers. In addition to those directly employed in steel making, it is estimated that for every job lost in steel, another 3 jobs are lost in related and supporting industries. Three million workers in the steel, coal, cement, aluminum and glass industries are expected to lose their jobs in the next few years as these industries seek to cut production by 30%.

Many of these employees are first-generation workers who migrated from impoverished rural villages with hopes of a better life. Often their families are dependent upon money these workers are able to send home. As in the United States and every other country, investors responded to the announced job cuts with joy. The stock price of China’s largest steelmaker, Hebei Iron & Steel, rose 4.3% on the news, and the second-biggest, Baoshan Iron & Steel, rose by 5.3%. The stock prices of China’s coal producers also rose on the news of the layoffs. According to the World Steel Association, China’s steel production in 2014 amounted to 822.7 million tons, or 49.4% of the world output of steel. Japan is the second largest steel producer, at 110.7 million tons, followed by the United States at 88.2 million tons and India at 86.5.

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Square peg in a round trap.

Hong Kong Property Sales Slump To 25 Year Low (BBG)

In a city that saw demand propel property prices to a record last year, the estimate that transactions reached a 25 year-low in Hong Kong shows how quickly sentiment has turned. Home prices have slumped almost 10% since September and monthly sales in January fell to the lowest since at least 1991, according to Centaline Property. Amid a spike in flexible mortgage rates this month and anemic demand for new developments, the low transactions volume for January is the latest evidence that prices have further to fall. “The danger is that when sentiment turns negative, it’s very hard to turn things around,” Michael Spencer, Deutsche Bank’s Hong Kong-based Asian chief economist, said in a telephone interview. “Developers realize they missed the best opportunity to sell.”

Hong Kong’s property market has been showing signs of weakening amid a rising supply of homes, higher short-term interest rates and slowing growth in China. Developers have been slow to make outright price cuts to move real estate while would-be buyers are delaying purchases in anticipation of further price declines, creating a standoff that could put more pressure on prices and drag down the city’s economy. Falling property prices may create a negative wealth effect on consumption by prompting buyers to cut back on their purchases, Deutsche Bank’s Spencer said. That could deal a huge blow to an already vulnerable economy where half the population owns homes and consumption accounts for nearly two-thirds of gross domestic product.

Based on housing and economic growth data going back to 2000, Spencer said that consumption growth declined on average by one percentage point for every 10% decline in housing prices. That suggests economic growth in Hong Kong could be halved to 1.1% this year assuming a 20% drop this year, he said. [..] Housing prices are down 9.5% since their September peak, according to the Centaline Property Centa-City Leading Index and may fall another 20% in 2016, according to some estimates. Centaline estimates that transactions reached 3,000 units last month. The previous low was 3,786 units in November 2008, according to a Jan. 31 release.

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How can Beijing stop this one?

Hong Kong Short Sellers Could Find The Weak Link In Real Estate (MW)

Hong Kong’s monetary chief warned Monday that speculators are wasting their time trying to short the Hong Kong dollar. But could Hong Kong’s property market be the government’s weak spot as more hedge funds line up to short China? The Hong Kong dollar has recently come into the spotlight amid reports that U.S. hedge funds are stepping up bets against the Chinese yuan. This comes after capital outflows have extended from China to Hong Kong in recent weeks as investors’ lack of confidence spreads. Since last week, Beijing’s job to hold the line on the yuan became even more difficult,thanks to the Bank of Japan’s surprise move to negative interest rates on a portion of bank reserves, which sent the yen on a renewed downward trend.

The move by the world’s third-largest economy to effectively target its exchange rate came only hours after Premier Li Keqiang pledged that China would not engage in a trade war by depreciating its currency. This is inconvenient as the market already views the yuan as overvalued as shown by accelerating foreign currency outflows. The latest move to weaken the yen just adds to the yuan’s perceived overvaluation. As well as unhelpful currency moves, confidence in the yuan is unlikely to be helped by renewed signs that China’s extended debt binge will be followed by a messy hangover.

New reports have emerged of multiple arrests after the discovery of a 50 billion yuan ponzi scheme, which may have seen 900,000 people lose money in a people-to-people lending scam. This comes on the heels of a 3.9 billion yuan loss at Agricultural Bank of China after staff reportedly devised a scam where bills of exchange were illegally funneled into the stock market before it crashed. The concern is that this is just the tip of the iceberg and that authorities will have a sizable cleanup bill as they deal with the aftermath of the stock market bubble and the loosely regulated shadow-banking sector. Still, for those with a bear view on China’s economy and currency, this is only likely to strengthen the conviction that the yuan will need to go lower.

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It’s not tactics, it’s sheer desperation.

Oil-Price Poker: Why the Saudis Won’t Fold ‘Em (WSJ)

The game being played in the global oil market today bears more than a passing resemblance to poker. Nobody wants to quit while they’re losing. That is important for investors to keep in mind as they ponder what have become almost daily spikes and drops in the price of crude. So, too, is the role of Saudi Arabia in the game. It remains within Saudi Arabia’s ability to foster at least a partial recovery in crude prices on its own. A sharp rally in prices last Thursday morning was based on comments from Russia’s energy minister that the Saudis might get the ball rolling on 5% output cuts. That was quickly refuted and oil gave up much of the gains. All major producers are suffering financially at today’s low prices—while oil has bounced from its sub-$30 nadir of January, it is still down nearly 7% in 2016 and nearly 70% from its 2014 peak.

And Saudi Arabia hasn’t forfeited only a couple of hundred billion dollars and counting in forgone revenue, but also market share. That has mainly been to a relative newcomer, U.S. shale producers. But going forward it may be to an old adversary: Iran. The Shiite powerhouse is ramping up production following the lifting of nuclear sanctions. And its export surge is occurring against the backdrop of ongoing proxy wars in Syria and Yemen. Those make it difficult for Sunni champion Saudi Arabia to take the lead with output cuts. Russia, meanwhile, is pumping the most crude ever, hitting a post-Soviet Union peak. But it may have difficulty maintaining today’s pace given a lack of investment in its aging Siberian fields. The chief executive of Russian oil giant Lukoil predicted that Russian output would drop in 2016 for the first time in several years.

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Nervous boardrooms.

BP Reports 91% Decline In Fourth-Quarter Earnings (BBG)

BP reported a 91% decline in fourth-quarter earnings after average crude oil prices dropped to the lowest in more than a decade. Profit adjusted for one-time items and inventory changes totaled $196 million, the London-based company said Tuesday in a statement. That missed the $814.7 million average estimate of 10 analysts surveyed by Bloomberg, and compares with year-earlier profit of $2.24 billion. Crude’s collapse has driven BP’s market value below $100 billion for the first time since the Gulf of Mexico oil spill in 2010. CEO Bob Dudley has cut billions of dollars of spending, removed thousands of jobs and deferred projects in an attempt to protect the balance sheet. Dudley was one of the first of his peers to start preparing for a prolonged slump and that puts BP in a better position, according to Barclays.

Profit has been lower year-on-year for six consecutive quarters as oil prices tumbled. The average price of benchmark Brent crude slumped 42% in the fourth quarter from a year earlier to $44.69 a barrel, the lowest since 2004. PetroChina said last week it expects 2015 profit to fall at least 60%. Chevron Corp. on Friday reported its first quarterly loss since 2002, while Royal Dutch Shell said last month that fourth-quarter profit is likely to drop at least 42%. The European oil major is scheduled to report full earnings on Thursday. BP started cutting costs and selling assets following the 2010 oil spill. In October, it lowered its 2015 capital-spending forecast to about $19 billion after investing about $23 billion in 2014. The company said then it expects to spend $17 billion to $19 billion a year through 2017.

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But: “We’re making good progress in managing and lowering our costs and capital spending, while maintaining safe and reliable operations..”

BP Posts Biggest Loss In 20 Years, Axes 7000 Jobs, Shares Lose 5% (Guardian)

BP is to cut another 3,000 jobs after reporting a loss of $6.5bn, its worst annual loss in at least 20 years. The latest job cuts are in addition to the 4,000 job cuts already announced. The group also said it has set aside a further $440m (£305m) over the last three months for liabilities associated with the Deepwater Horizon disaster, bringing the total bill so far to $55bn. The latest financial blow from the US Gulf accident nearly six years ago helped to drag BP into a fourth quarter loss of $2.2bn and an annual loss of $6.5bn.. Shares in the group fell by more than 5% as the results underlined the impact of falling oil prices. Despite this, Bob Dudley, BP’s chief executive, blamed low oil prices for the losses but gave an upbeat message saying the company was continuing to move rapidly to “adapt and rebalance” to cope with a changing environment.

“We’re making good progress in managing and lowering our costs and capital spending, while maintaining safe and reliable operations and continuing disciplined investment into the future of our portfolio.” The underlying profit for the last three months, not counting the Gulf and other factors, was down from $2.2bn last time to $196m, much worse than analysts had expected. A consensus among 17 analysts ahead of the results predicted that underlying profits would fall in the final three months to $730m down almost 70% on the same period a year earlier. The biggest problem for BP has come from low crude prices with Brent averaging $44 a barrel across the fourth quarter compared with $77 for the same period 12 months earlier. Brent is now down to just above $33, 42% less than a year ago.

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Deflation.

Flood Of Oil Asset Writedowns Across Asia (BBG)

Investors in Asian oil and gas companies should prepare for a wave of writedowns after a collapse in crude prices. CNOOC, Santos and Inpex are among explorers and producers that may report full-year net losses because of writedowns that may be equal to as much as 10% of book value, analysts at Sanford C. Bernstein in Hong Kong wrote in a report Tuesday. “The future value of oil and gas properties has been significantly reduced,” according to the Bernstein analysts, including Neil Beveridge. “The impairment loss will likely be larger than earnings for the year for some companies, pushing several E&P’s in the region into a loss.” Oil prices have tumbled almost 70% in the past two years, weighing on earnings and forcing explorers to cut spending.

Writedowns at Santos, the Adelaide-based energy company that built the $18.5 billion Gladstone liquefied natural gas project in Australia, may exceed A$3.4 billion ($2.4 billion), according to UBS. Companies including PTT Exploration & Production that have been active in mergers and acquisitions over the past five years also are expected to write down the value of assets, the analysts wrote. Writedowns at Chevron last week pushed the company to its first quarterly loss in 13 years. “Investors should look through impairment losses at the underlying earnings or cash flow for each company,” according to the Bernstein analysts, who expect a recovery in oil in the second half of the year. “Assuming an oil price of greater than $50 a barrel, we see value in the sector.”

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Iceland remains a unique and interesting story.

Iceland Central Bank Preparing New Weapons To Fight Capital Rush (Reuters)

Iceland is drawing up plans to tax foreigners who buy its bonds or to remove certain interest privileges to keep from being overwhelmed by a flood of money drawn by the highest interest rates in western Europe. The country is about to start the tricky process of removing the capital controls that have been in place since what the central bank governor, Mar Gudmundsson, calls “the third biggest bankruptcy in the history of mankind”. With its economy recovering and interest rates at 5.75% compared with virtually zero in the rest of Europe, concern is growing about a destabilizing rush of cash coming in. “The conditions are good for lifting capital controls – they have never been better,” Gudmundsson said in an interview with Reuters. “A current account surplus, high level of reserves, a fiscal surplus and, hopefully, inflation that is still not too high.”

He expects the first stage of that process to come in the next few months, which is to remove restrictions on foreigners’ ‘offshore crown’ funds, which are worth around 14% of Iceland’s annual economic output. Once that it is done, the bank has said, it will use some of its foreign exchange reserves to prevent any bad reaction, before taking the more uncertain step of lifting controls for the wider population. “Possibly in the Autumn or hopefully at least before the end of the year” controls on domestic residents can be lifted, Gudmundsson said. With interest rates higher in Iceland than in virtually every other developed economy in the world, Gudmundsson said, it was unlikely locals would be rushing to take their money out of their bank accounts. It was more likely foreign investors will put more in.

Foreign cash flowing into the country’s banks was one reason Iceland got into so much trouble in the first place. It has introduced a raft of measures to prevent those kind of problems. But now has a different one: so many people are buying its government bonds that interest rate increases are losing their effect. As a result, it is drawing up some counter measures. “We are working on designing certain tools that hopefully we do not need to use often but are there on the shelf if capital inflows into the bond market are making it very difficult for us to run our own monetary policy,” Gudmundsson said. “Theoretically we can do it through a tax, so instead of having an interest rate of say 6%, you are getting an interest rate of 3 or 4% in effective terms.

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“The message is that a country can keep most of its economic freedoms within the EU (provided it does not join the euro)..”

World Index Of Economic Freedom Tells Us That EU Should Be Broken Up (AEP)

Britain has overtaken the United States in the global index of economic freedom, jumping three points to 10th place. What is striking about the 2016 index released today by the Heritage Foundation is the shockingly “unfree” state of the European Union. “Greece has dropped to 138 because it has lost control over its economic levers and monetary policy” What you have is a northern free-zone clustered around the UK, Ireland (7), the Netherlands (16), and the Nordic-Baltic region of the old Hanseatic League, with Switzerland (4) as ever near the top, and safely beyond the clutches of Brussels and regulatory asphyxiation. Or put another way, it is the Protestant alliance that battled reactionary Habsburg absolutism in the late 16th and early 17th Centuries – with Germany split within, torn in both directions.

This Northern grouping is roughly that which would emerge as a closely linked area of prosperity if Britain left the EU. In my view most of these states would also pull out within 10 to 15 years – de facto, if not jure – once Britain had set the ball rolling. Germany would be left trying to manage two deeply troubled blocs with demographic crises: a poor sphere to the East where a fragile rule of law is breaking down in one country after another; and a heavily indebted bloc in the South that is trapped in deflation and labour hysteresis, and has yet to claw back its lost competitiveness within the structure of monetary union. The index shows that EU countries are on average less free than other countries with a comparable per capita income and level of development, an indictment that should give cause for thought. Several of them are disasters.

Greece is ranked “mostly unfree” and is deteriorating five years after it crashed into the arms of the Troika, which claimed to be pushing through reforms to make the country more efficient, transparent, modern and competitive – but was in reality collecting debts for northern creditors under false guise. Greece has dropped to 138 – sandwiched between Bangladesh and Mozambique – precisely because it has lost control over its economic levers and monetary policy. Capital controls have been relaxed somewhat since the banking crisis last summer, yet Greeks are still limited to ATM withdrawals of €420 a week. Italy is only “moderately free” at 86. Heritage says it is plagued by high taxes and rigid labour laws. It has yet to sell off the rump of state-owned industries. Court procedures are “extremely slow”. State contracts are tainted by “high-level corruption scandals” and the “involvement of local organized crime.”

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“..this sucker could go down so much further than they imagined, that whatever fortunes they gain from its descent will be foiled by the destruction of the very economic system needed for them to enjoy their gains.”

Ground Control to Captain Zhou Xiaochuan (Jim Kunstler)

Why would anybody suppose that the Peoples Bank of China might want to tell the truth about anything that was within their power to lie about? Especially the soundness of any loan portfolio vested unto the grasp of its tentacles? Of course, most of what China has done in speeding toward the wall of financial crack-up, it learned from watching US bankers slime their way into Too Big To Fail nirvana — most particularly the array of swindles, dodges, and frauds constructed in the half-light of shadow banking to hedge the sudden, catastrophic appearance of reality-based price discovery. When so many loans end up networked as collateral in some kind of bet against previous bets against other previous bets, you can be sure that cascading contagion will follow.

And so that is exactly what’s happening as China’s rocket ride into Modernity falls back to earth. Like most historical fiascos, it seemed like a good idea at the time: take a nation of about a billion people living in the equivalent of the Twelfth Century, introduce the magic of money printing, spend a gazillion of it on CAT and Kubota earth-moving machines, build the biggest cement industry the world has ever seen, purchase whole factory set-ups, and flood the rest of the world with stuff. Then the trouble starts when you try to defeat the business cycles associated with over-production and saturated markets. Poor China and poor us. Escape velocity has failed. Which raises the question: escape from what, exactly? Answer: the implacable limits of life on earth.

The metaphor for all this, of course, is the old journey-into-space idea, which still persists in the salesmanship of Elon Musk, the ragged remnants of NASA, and even the nightmares of Stephen Hawking. Get off this messed-up home planet and light out of the territories, say Mars. Of course, this is a vain and stupid idea, since we already have a planet engineered to perfection for all the life systems associated with the human project. We just can’t respect its limits. So now, that dynamic duo, Nature and Reality, the actual owners of the planet, have showed up to read the riot act to the renters throwing a wild party.

The fourth and perhaps ultimate financial crisis of the last twenty years begins to express itself in terms that only the raptors and vultures can see from on high. George Soros, Kyle Bass, and the other flocking shadow banking scavengers prepare to short the living shit out of the old Middle Kingdom. The immortal words of G.W. Bush ring in their ears: “This sucker is going down,” and they are sure to win big by betting on the obvious. Trouble is, this sucker could go down so much further than they imagined, that whatever fortunes they gain from its descent will be foiled by the destruction of the very economic system needed for them to enjoy their gains.

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Refugees are back on sale.

Progress On Migration Could ‘Facilitate’ Greece’s Bailout Review (Kath.)

Greek authorities are scrambling to set up screening centers for migrants and refugees as soon as possible as German officials have made it clear to Athens that more efficient management of the refugee crisis could help along creditors’ review of the country’s third bailout, Kathimerini understands. According to sources, German Chancellor Angela Merkel has indicated to Prime Minister Alexis Tsipras that success in tackling the migration crisis could boost the country’s prospects for progress with the review, which Athens hopes could ease the way for debt talks. Combined with a burgeoning debate about Greece’s future in the passport-free Schengen area, the message from Berlin is said to have encouraged action by Greek officials.

A source close to Tsipras who participated in a meeting of government officials on the refugee crisis over the weekend told Kathimerini that the prospect of a “European solution” to the migration crisis and Schengen issue was “becoming increasingly remote” as EU governments face a backlash from their own people about rising migrant arrivals. Tsipras is expected to meet Merkel on the sidelines of a Syria donors’ conference in London on Thursday where Greece’s response to the refugee crisis is likely to be the key topic of conversation. A broader meeting including Turkish Prime Minister Ahmet Davutoglu and key officials from other European countries, among them Austria and the Netherlands, is also probable, sources indicated.

On Monday Tsipras met in Athens with visiting European Home and Migration Commissioner Dimitris Avramopoulos and reassured him that the Defense Ministry, despite initial objections, would actively participate in finding a solution for accommodating thousands of migrants and refugees arriving in Greece. He insisted, however, that others must also share the burden, indicating other European states.

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Nice try, but Mason drops the ball somewhere.

Europe’s Refugee Story Has Hardly Begun (Paul Mason)

The refugee story has hardly begun. There will be, on conservative estimates, another million arriving via Turkey this year and maybe more. The distribution quotas proposed by Germany, and resisted by many states in eastern Europe, are already a fiction and will fade into insignificance as the next wave comes. Germany itself will face critical choices: if you’re suddenly running a budget deficit to meet the needs of asylum seekers, how do you justify not spending on the infrastructure that s supposed to serve German citizens, which has crumbled through underinvestment in the Angela Merkel era? But these problems are sideshows compared with the big, existential issues that a second summer of uncontrolled migration into Greece would bring.

[..] Greece is not going to push back or sink inflatables containing refugees. However many compromises Alexis Tsipras s government made over austerity, it is full of human rights lawyers, criminology professors and people who spent their lives fighting fascism. There is outrage at Europe s demands inside the Greek political establishment, ranging well beyond the radical-left party Syriza and its small nationalist coalition partner. Eastern Europe is, by and large, going to let the refugees go to hell. There is very little compassion in the media coverage of the refugees east of the former Iron Curtain. Poland, Hungary and Slovakia have swung towards populist nationalism. While there are tens of millions of liberal-minded, largely young people who are prepared to show compassion and adhere to international obligations, they do not control east Europe’s governments.

As for Turkey, it has, to date, taken no visibly stronger measures to keep Syrian refugees inside its own borders and prevent the deadly traffic across the sea to Greece. For a state that can arrest its own newspaper editors at will and bomb its own cities, that demonstrates a clear set of priorities. So there are only two variables: what the EU does next and what the European peoples do. If Germany has given up trying to organise the orderly distribution of refugees inside the EU, then free movement itself is on borrowed time. Everybody understands this, except the political and media classes who have to maintain the fiction that everything is fine. Germany had, by December, registered just over half the 900,000 asylum claims it is facing. The hard-right AfD party has sprung from sixth to third in the polls. Angela Merkel seems frozen in the headlights of the oncoming train.

Which leaves the people. Quietly, and without rhetoric, one of the most spectacular, cross-border solidarity movements ever formed has emerged to help the refugees. Churches, NGOs, communities, police forces and social services – plus ordinary people with no big agenda – just got on and saved people, moved them along, gave them water, food and clothing, and are right now helping them to settle in.

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Solid.

Where Are Our Principles? (Boukalas)

When neo-Nazis are seen heading out in force on a new kind of safari, hunting down and assaulting refugees and migrants, preferably young Africans, in Sweden, a country regarded as a paradigm of prosperity and openness, Europe has a duty to have a good think about what it represents – all of Europe, together, honestly and methodically, not alone, hypocritically and intermittently. When in Germany, which has seen successive neo-Nazi attacks against refugee camps, the head of the anti-immigration Alternative for Germany party – polling at 13% – demands that refugees be stopped from entering the country by use of force if necessary, we should all be afraid. We should be afraid that not enough people in Europe would mind if Greece were to allow migrant boats to sink, as some of the harder cynics have suggested with a hint of blackmail, even though their problem would not be solved by 244 drowned in January alone.

When European states and regions are caught up in competing over who will further reduce the amount of money refugees are allowed to keep on them (from what wasn’t lost to the extortionate greed of people smugglers and thieves en route) and seize what’s left over so that the beleaguered Asians and African don’t get too comfortable, then “something is rotten in the state of Denmark.” Denmark here extends to various parts of Europe: to Denmark proper, where the maximum “fortune” a refugee is allowed has been set at €1,340, to Switzerland, where it’s €915, Bavaria, €750, and Baden-Wurttemberg, where it’s just €350. Many already regard this as too much. When in Italy noble merchants are selling “boy and girl refugee costumes” for the Carnival, then every European, not just the Italians, ought to wonder how much longer we will allow our masks to present us as sympathetic champions of a culture that is about solidarity and hospitality.

When countries of the European Union intervene in a non-member state (our neighbor the Former Yugoslav Republic of Macedonia) wielding a whip in one hand and a carrot of monetary reward and diplomatic support in the other in order to force it to control the flow of migrants and refugees to Northern Europe at the pace the north sees fit, then many of the principles touted as being inviolate in the EU are exposed as a myth: solidarity between partners and avoidance of unilateral decisions and intervention in third countries. What solidarity is there to talk about when instead of admitting that the refugee crisis is a huge added weight on the exhausted shoulders of Greece and, looking for ways to ease the burden, many Europeans are using it as another opportunity to blackmail the country? Even if Greece has delayed in setting up “hot spots,” who gave the tough guys of Europe the moral authority to threaten it with drowning?

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Oct 062015
 
 October 6, 2015  Posted by at 9:18 am Finance Tagged with: , , , , , , , , , ,  


NPC US Geological Survey fire, F Street NW, Washington DC 1913

In America, It’s Expensive To Be Poor (Economist)
Morgan Stanley Predicts Up To A 25% Collapse in Q3 FICC Revenue (Zero Hedge)
Bill Gross Sees Stocks Plunge Another 10%, Urges Flight to Cash (Bloomberg)
Treasury Auction Sees US Join 0% Club First Time Ever (FT)
Big US Firms Hold $2.1 Trillion Overseas To Avoid Taxes (Reuters)
Lower Interest Rates Hurt Consumers: Deutsche Bank (Bloomberg)
Bernanke Says ‘Not Obvious’ Economy Can Handle Interest Rates At 1% (MarketWatch)
UK Finance Chiefs Signal Sharp Fall In Risk Appetite (FT)
Commodity Collapse Has More to Go as Goldman to Citi See Losses (Bloomberg)
Emerging Market ETF Outflows Double as Losses Hit $12.4 Billion (Bloomberg)
China’s Slowing Demand Burns Gas Giants (WSJ)
BP’s Record Oil Spill Settlement Rises to More Than $20 Billion (Bloomberg)
Glencore Urges Rivals To Shut Lossmaking Mines (FT)
Norway Seen Tapping Its Wealth Fund to Ward Off Oil Slump Risks (Bloomberg)
South East Asia Economic Woes Test Built-Up Reserves, Defenses (Reuters)
Samsung Seen Tapping $55 Billion Cash Pile for Share Buyback (Bloomberg)
German Factory Orders Unexpectedly Fall in Sign of Economic Risk (Bloomberg)
Top EU Court Says US-EU Data Transfer Deal Is Invalid (Reuters)
US, Japan And 10 Countries Strike Pacific Trade Deal (FT)
TPP Trade Deal Text Won’t Be Made Public For Four Years (Ind.)
Air France Workers Rip Shirts From Executives After 2,900 Jobs Cut (Guardian)
Nearly A Third Of World’s Cacti Face Extinction (Guardian)

“In 2014 nearly half of American households said they could not cover an unexpected $400 expense without borrowing or selling something..”

In America, It’s Expensive To Be Poor (Economist)

When Ken Martin, a hat-seller, pays his monthly child-support bill, he uses a money order rather than writing a cheque. Money orders, he says, carry no risk of going overdrawn, which would incur a $40 bank fee. They cost $7 at the bank. At the post office they are only $1.25 but getting there is inconvenient. Despite this, while he was recently homeless, Mr Martin preferred to sleep on the streets with hundreds of dollars in cash—the result of missing closing time at the post office—rather than risk incurring the overdraft fee. The hefty charge, he says, “would kill me”. Life is expensive for America’s poor, with financial services the primary culprit, something that also afflicts migrants sending money home (see article). Mr Martin at least has a bank account.

Some 8% of American households—and nearly one in three whose income is less than $15,000 a year—do not (see chart). More than half of this group say banking is too expensive for them. Many cannot maintain the minimum balance necessary to avoid monthly fees; for others, the risk of being walloped with unexpected fees looms too large. Doing without banks makes life costlier, but in a routine way. Cashing a pay cheque at a credit union or similar outlet typically costs 2-5% of the cheque’s value. The unbanked often end up paying two sets of fees—one to turn their pay cheque into cash, another to turn their cash into a money order—says Joe Valenti of the Centre for American Progress, a left-leaning think-tank.

In 2008 the Brookings Institution, another think-tank, estimated that such fees can accumulate to $40,000 over the career of a full-time worker. Pre-paid debit cards are growing in popularity as an alternative to bank accounts. The Mercator Advisory Group, a consultancy, estimates that deposits on such cards rose by 5% to $570 billion in 2014. Though receiving wages or benefits on pre-paid cards is cheaper than cashing cheques, such cards typically charge plenty of other fees. Many states issue their own pre-paid cards to dispense welfare payments. As a result, those who do not live near the right bank lose out, either from ATM withdrawal charges or from a long trek to make a withdrawal. Other terms can rankle; in Indiana, welfare cards allow only one free ATM withdrawal a month. If claimants check their balance at a machine it costs 40 cents. (Kansas recently abandoned, at the last minute, a plan to limit cash withdrawals to $25 a day, which would have required many costly trips to the cashpoint.)

To access credit, the poor typically rely on high-cost payday lenders. In 2013 the median such loan was $350, lasted two weeks and carried a charge of $15 per $100 borrowed—an interest rate of 322% (a typical credit card charges 15%). Nearly half those who borrowed using payday loans did so more than ten times in 2013, with the median borrower paying $458 in fees. In 2014 nearly half of American households said they could not cover an unexpected $400 expense without borrowing or selling something; 2% said this would cause them to resort to payday lending.

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Fixed Income, Currency and Commodity.

Morgan Stanley Predicts Up To A 25% Collapse in Q3 FICC Revenue (Zero Hedge)

With the third quarter earnings season on deck, in which S&P500 EPS are now expected to post a 5.1% decline (versus a forecast -1.0% decline as of three months ago), it is common knowledge that the biggest culprit will be Energy companies, currently expected to suffer a 65% Y/Y collapse in EPS. What is less known is that the earnings weakness is far more widespread than just the Energy sector, touching on more than half of all sectors with Materials, Industrials, Staples, Utilities and even Info Tech all expected to see EPS declines: this despite what will likely be a record high in stock buyback activity. However, of all sectors the one which may pose the biggest surprise to investors is financials: it is here that Q3 (and Q4) earnings estimates have hardly budged, and as of September 30 are expected to rise by 10% compared to Q3 2014.

This may prove to be a stretch according to Morgan Stanley whose Huw van Steenis is seeing nothing short of a bloodbath in banking revenues, with the traditionally strongest performer, Fixed Income, Currency and Commodity set for a tumble as much as 25%, to wit: “we think FICC may be down 10- 25% YoY (FX up, Rates sluggish, Credit soft), Equities marginally up but IBD also down 10-20%. The reason for this: the double whammy of the ongoing commodity crunch as well as the collapse in fixed income trading, coupled with the lack of major moves across the FX space where the biggest beneficiary, now that bank manipulation cartels have been put out of business, are Virtu’s algos.

To be sure, if Jefferies – which as we previously reported suffered one of its worst FICC quarters in history, and actually posted negative revenues after massive writedown on energy holdings in its prop book – is any indication, Morgan Stanley’s Q3 forecast may be overly optimistic. For the full 2015, the picture hardly gets any better: “In 2015, we see industry revenues going sideways – slowing after a strong Q1. Overall we see FICC down ~3% on 2014, Equities up ~8% and IBD down ~6%. Overall we expect top line revenues to be flattish in 2015. In constant currency, it would be a little better for Europeans. But below this, there is a huge competitive battle afoot as all firms vie for share to drive profits on the cost base.”

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Why stop at 10%?

Bill Gross Sees Stocks Plunge Another 10%, Urges Flight to Cash (Bloomberg)

Bill Gross, who in January predicted that many asset classes would end the year lower, said U.S. equities have another 10% to fall and investors should sit out the current volatility in cash. The whipsaw market reaction to the lackluster U.S. jobs report last week shows that markets, especially stocks, high-yield bonds and some emerging market debt, are trading like a casino, Gross said in an interview on Friday. He was speaking from a cruise ship which had taken shelter near New York City amid stormy weather over the Atlantic. Gross, who earlier made prescient calls on German bunds and Chinese equities, said U.S. stocks will drop another 10% because economic conditions don’t support a rally like in 2013, when corporate profits were going up.

Today they are flat-lining and low commodity prices are hurting energy companies, said the manager of the $1.4 billion Janus Global Unconstrained Bond Fund. “More negative numbers lie ahead and if you define a bear market by a 20% correction, at some point – that’s 6 to 12 months – we’ll have a classic definition of a bear market, meaning another 10% downside,” he said. Just as New York City was the safe harbor for Hurricane Joaquin, Gross said, cash is the best bet until investors get a better view at what the Federal Reserve and the economy are going to do. “Cash doesn’t yield anything but it doesn’t lose anything,’’ so sitting it out and making 25 to 50 basis points in commercial paper compared to 4% to 5% in risk assets is not that much of a penalty, he said. “Investors need cold water splashed on their face and sit out the dance.”

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Bottom. Race.

Treasury Auction Sees US Join 0% Club First Time Ever (FT)

For the first time ever, investors on Monday parked cash for three months at the US Treasury in return for a yield of 0%. The $21bn sale of zero-yielding three-month Treasury bills brings the US closer into line with its rich-world peers. Finland, Germany, France, Switzerland and Japan have all auctioned five-year debt offering investors negative yields. As Alberto Gallo at RBS said in February, “negative yielding bonds are the fastest growing asset class in Europe”. Demand for the US issue was the highest since June, reflecting belief — stoked by Friday’s weak jobs report — that the Federal Reserve will keep interest rates at basement levels throughout 2015. David Bianco, strategist at Deutsche Bank, said the window for a “2015 lift-off” has been slammed shut. “We see a better chance of landing men on Mars before a full normalisation of nominal and real interest rates,” he wrote.

US Treasury debt is a haven asset, attracting hordes of investors whenever there is a flight to safety. Monday’s auction, however, occurred alongside the S&P 500 rallying 1.8%, a fifth straight gain. Also on Monday, the US auctioned six-month bills yielding 0.065%, the lowest in 11 months. The zero-yielding bond was anticipated in the secondary market, where investors trade outstanding bonds. The yield on bonds maturing on January 8 turned negative on September 21 and now yield -0.008%. In the swaps market, the chances that the Fed will lift rates at its October 28 meeting are just 10%. Just before the last meeting, the odds of a lift were placed at one-in-three. Before the financial crisis, three-month Treasury paper routinely paid investors more than 4%. But yields at the weekly auctions have been less than 0.2% at every auction since April 2009, reflecting the Fed’s suppression of interest rates. Until Monday the record low was 0.005%.

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All legal. “..would collectively owe an estimated $620 billion in U.S. taxes if they repatriated the funds..”

Big US Firms Hold $2.1 Trillion Overseas To Avoid Taxes (Reuters)

The 500 largest American companies hold more than $2.1 trillion in accumulated profits offshore to avoid U.S. taxes and would collectively owe an estimated $620 billion in U.S. taxes if they repatriated the funds, according to a study released on Tuesday. The study, by two left-leaning non-profit groups, found that nearly three-quarters of the firms on the Fortune 500 list of biggest American companies by gross revenue operate tax haven subsidiaries in countries like Bermuda, Ireland, Luxembourg and the Netherlands. The Center for Tax Justice and the U.S. Public Interest Research Group Education Fund used the companies’ own financial filings with the Securities and Exchange Commission to reach their conclusions.

Technology firm Apple was holding $181.1 billion offshore, more than any other U.S. company, and would owe an estimated $59.2 billion in U.S. taxes if it tried to bring the money back to the United States from its three overseas tax havens, the study said. The conglomerate General Electric has booked $119 billion offshore in 18 tax havens, software firm Microsoft is holding $108.3 billion in five tax haven subsidiaries and drug company Pfizer is holding $74 billion in 151 subsidiaries, the study said. “At least 358 companies, nearly 72% of the Fortune 500, operate subsidiaries in tax haven jurisdictions as of the end of 2014,” the study said. “All told these 358 companies maintain at least 7,622 tax haven subsidiaries.”

Fortune 500 companies hold more than $2.1 trillion in accumulated profits offshore to avoid taxes, with just 30 of the firms accounting for $1.4 trillion of that amount, or 65%, the study found. Fifty-seven of the companies disclosed that they would expect to pay a combined $184.4 billion in additional U.S. taxes if their profits were not held offshore. Their filings indicated they were paying about 6% in taxes overseas, compared to a 35% U.S. corporate tax rate, it said.

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You don’t say…

Lower Interest Rates Hurt Consumers: Deutsche Bank (Bloomberg)

Central banks the world over have reduced interest rates more than 500 times since the collapse of Lehman Brothers in 2008. But a crucial part of their thesis on how lower rates are supposed to help spur economic activity may be off the mark, according to strategists at Deutsche Bank. Cutting interest rates in response to a deteriorating outlook is thought to work through a variety of channels to help support the economy. Lower rates are supposed to encourage households to borrow and businesses to invest, while ceteris paribus, the softening in the domestic currency that accompanies a reduction in rates also makes the country’s goods and services more competitive on the global stage.

Most questions raised about the broken transmission mechanism from central bank accommodation to the real economy have centered on the efficacy of quantitative easing. But Deutsche’s team, led by chief global strategist Bankim “Binky” Chadha, contends that the commonly accepted link between traditional stimulus and household spending doesn’t have the net effect monetary policymakers think it does. This assertion comes about as a byproduct of the strategists’ investigation into what drives the U.S. household savings rate, which has largely been on the decline for a number of decades.

First, the strategists make the inference that the purpose of household savings is to accumulate wealth. If this holds, then it logically follows that in the event of a faster-than-expected increase in wealth, households will feel less of a need to save because they’ve made progress in collecting a sufficient amount of assets that allows them to enjoy their retirement, pass it down to their children, and so on. Chadha & Co. argue that wealth is therefore the driver of the U.S. savings rate. As this rises, the savings rate tends to fall: “The savings rate has been very strongly negatively correlated (-86%) with the value of gross assets scaled by the size of the economy, i.e., the ratio of household assets to nominal GDP which we use as our proxy for wealth, over the last 65 years,” wrote Chadha.

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So it’s on life-support.

Bernanke Says ‘Not Obvious’ Economy Can Handle Interest Rates At 1% (MarketWatch)

Former Fed Chairman Ben Bernanke said Monday that he was not sure the economy could handle four quarter-point rate hikes. Some economists and Fed officials argue that the U.S. central bank should hike rates now to anticipate inflation. That argument assumes the Fed can raise rates 100 basis points and it wouldn’t hurt anything, Bernanke said. ”That is not obvious, I don’t think everybody would agree to that,” he added in an interview with CNBC. Higher rates could “kill U.S. exports with a very strong dollar,” he said. Bernanke said the “mediocre” September employment report is a “negative” for the U.S. central bank’s plan to begin hiking rates in 2015, as a strengthening labor market was the key conditions for the Fed to be confident inflation was moving higher.

Bernanke said he would not second-guess Fed Chairwoman Janet Yellen, saying only that his successor faced “tough” calls. He said the two do not speak on the phone. Bernanke said interest rates at zero was not “radically easy” policy stance as some have suggested. He said he did not take seriously arguments that zero rates was creating an uncertain environment was holding down business investment Bernanke defended his policies, noting the steady decline in the unemployment rate in recent years. He said that the slower overall pace of GDP since the Great Recession was due to a downturn in productivity and other issues outside the purview of monetary policy. “I am not saying things are great, I don’t mean to say that at all,” he said.,.

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No kidding.

UK Finance Chiefs Signal Sharp Fall In Risk Appetite (FT)

The optimism and risk appetite of those in charge of the UK’s corporate finances has deteriorated sharply over the past three months. “Softening demand in emerging economies, greater financial market volatility and higher levels of risk aversion make for a more challenging backdrop for the UK’s largest businesses,” said David Sproul, chief executive of Deloitte. A Deloitte survey – of 122 chief financial officers of FTSE 350 and other large private UK companies – showed that perceptions of uncertainty were at a two-and-a-half year high, and had risen at the sharpest rate since the question was first put five years ago. Three-quarters of CFOs said the level of financial economic uncertainty was either “very high”, “high” or “above normal”, marking a return to the level last seen in the second quarter of 2013.

Ian Stewart, chief economist at Deloitte, said sentiment at large companies was heavily influenced by the global environment, especially by news flow and the performance of equity markets. “In both areas good news has been in short supply of late: UK equities down 16% from their April peaks; US institutional investor optimism at 2009 levels; financial market volatility up sharply and more downgrades to emerging market growth forecasts,” he said. But he added that CFOs were positive about the state of the UK economy. Instead, their biggest concerns were of imminent interest rate rises and of weakness in emerging market economies, particularly China. A year ago, corporate risk appetite was at a seven-year high. Now a minority of CFOs — 47% — felt that it was a good time to take risk on to their balance sheet, down from 59% in the second quarter of 2015.

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A lot more.

Commodity Collapse Has More to Go as Goldman to Citi See Losses (Bloomberg)

Even with commodities mired in the worst slump in a generation, Goldman Sachs, Morgan Stanley and Citigroup are warning bulls that prices may stay lower for years. Crude oil and copper are unlikely to rebound because of excess supplies, Goldman predicts, and Morgan Stanley forecasts that weaker currencies in producing countries will encourage robust output of raw materials sold for dollars, even during bear markets. Citigroup says the sluggish world economy makes it “hard to argue” that most prices have already bottomed. The Bloomberg Commodity Index on Sept. 30 capped its worst quarterly loss since the depths of the recession in 2008. The economy in China, the biggest consumer of grains, energy and metals, is expanding at the slowest pace in two decades just as producers struggle to ease surpluses.

Alcoa, once a symbol of American industrial might, plans to split itself in two, while Chesapeake Energy cut its workforce by 15%. Caterpillar may shed 10,000 jobs as demand slows for mining and energy equipment. “It would take a brave soul to wade in with both feet into commodities,” Brian Barish at Denver-based Cambiar Investors. “There is far more capacity coming on than there is demand physically. And the only way that you fix the problem is to basically shut capacity in, and you do that by starving commodity producers for capital.” Investors are already bailing. Open interest in raw materials, which measures holdings of futures and options, fell for a fourth month in September, the longest streak since 2008, government data show.

U.S. exchange-traded products tracking metals, energy and agriculture saw net withdrawals of $467.8 million for the month, according to data compiled by Bloomberg. The Bloomberg Commodity Index, a measure of returns for 22 components, is poised for a fifth straight annual loss, the longest slide since the data begins in 1991. It’s a reversal from the previous decade, when booming growth across Asia fueled a synchronized surge in prices, dubbed the commodity super cycle. Farmers, miners and oil drillers expanded supplies, encouraged by prices that were at record highs in 2008. Now, that output is coming to the market just as global growth is slowing.

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The dollar comes home.

Emerging Market ETF Outflows Double as Losses Hit $12.4 Billion (Bloomberg)

Outflows from U.S. exchange-traded funds that invest in emerging markets more than doubled last week, with redemptions exceeding $12 billion in the third quarter. Taiwan led the losses in the five days ended Oct. 2. Withdrawals from emerging-market ETFs that invest across developing nations as well as those that target specific countries totaled $566.1 million compared with outflows of $262.1 million in the previous week, according to data compiled by Bloomberg. Stock funds lost $483.5 million and bond funds declined by $82.5 million. The MSCI Emerging Markets Index advanced 1.9% in the week. The losses marked the 13th time in 14 weeks that investors withdrew money from emerging market ETFs and left the funds down $12.4 billion for the quarter, the most since the first quarter of 2014, when outflows reached $12.7 billion.

For September, emerging market ETFs suffered $1.9 billion of withdrawals. The biggest change last week was in Taiwan, where funds shrank by $93.3 million, compared with $19.9 million of redemptions the previous week. All the withdrawals came from stock funds, while bond funds remained unchanged. The Taiex advanced 2.1%. The Taiwan dollar strengthened 0.2% against the dollar and implied three-month volatility is 8.5%. Brazil had the next-biggest change, with ETF investors redeeming $68.7 million, compared with $12.8 million of inflows the previous week. Stock funds fell by $64.1 million and bond ETFs declined by $4.6 million. The Ibovespa Index gained 4.9%. The real appreciated 1.1% against the dollar and implied three-month volatility is 24%.

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They’ve all been overinvesting by a wide margin.

China’s Slowing Demand Burns Gas Giants (WSJ)

The energy industry overestimated just how much natural gas China needs, and global oil-and-gas companies risk paying a heavy price. When China’s economy hummed along a few years ago, energy companies from Australia to Canada bet its demand for natural gas would grow fast. They spent billions of dollars on promising fields, with plans to freeze the gas into liquid, called LNG, and load it on tankers to sell to energy-starved Asian buyers at a premium. China was “always seen as the kind of wonder market that was going to grow and need so much LNG,” said Howard Rogers of the Oxford Institute for Energy Studies and a former gas executive at BP. “People got somewhat carried away.”

Recent data paints a grimmer picture. Chinese LNG imports are down 3.5% this year, compared with a 10% rise in 2014. Total gas consumption grew about 2% in the first half, a turnabout from double-digit growth in recent years. Natural gas is an extreme example of how China’s slowing economy has contributed to a global commodities crash. Producers of raw materials from aluminum to iron ore made heady bets on Chinese demand. So far, many are being proven wrong. The downturn is sparking an industrywide recalibration. Energy consultancy Wood Mackenzie slashed its China gas-demand forecast by about 15% to 360 billion cubic meters by 2020.

Globally, the market faces 25 million tons of LNG oversupply by 2018, says Citi Research—more than China imported all of last year. If all the projects being constructed, planned and proposed today came to fruition, the market would face around one-third more capacity than it needs by 2025, Citi estimates. “We’re already seeing China cannot absorb all the gas that is thrown at it—that it’s choking on gas somewhat at the moment,” said Gavin Thompson, an analyst at Wood Mackenzie. Northeast Asia spot LNG prices have fallen to less than $8 per million metric British thermal units from over $14 last fall, according to pricing agency Platts. U.S. Henry Hub prices are under $3 per mmBtu versus around $4 a year ago.

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Just civil claims.

BP’s Record Oil Spill Settlement Rises to More Than $20 Billion (Bloomberg)

The value of BP’s settlement with the U.S. government and five Gulf states over the Deepwater Horizon oil spill rose to $20.8 billion in the latest tally of costs from the U.S. Department of Justice. The settlement is the largest in the department’s history and resolves the government’s civil claims under the Clean Water Act and Oil Pollution Act, as well as economic damage claims from regional authorities, according to a U.S. Justice Department statement Monday. The pact is designed “to not only compensate for the damages and provide for a way forward for the health and safety of the Gulf, but let other companies know they are going to be responsible for the harm that occurs should accidents like this happen in the future,” U.S. Attorney General Loretta Lynch told reporters at a briefing in Washington.

BP’s total settlement cost of $18.7 billion announced in July didn’t include some reimbursements, interest payments and committed expenditures for early restoration of damages to natural resources. The London-based company has set aside a total of $53.7 billion to pay for the disaster in 2010, when an explosion on the Deepwater Horizon drilling rig in the Gulf of Mexico resulted in the largest offshore oil spill in U.S. history. The announcement Monday includes $700 million for injuries and losses related to the spill that aren’t yet known, $232 million of which was announced earlier. It also adds $350 million for the reimbursement of assessment costs and $250 million related to the cost of responding to the spill, lost royalties and to resolve a False Claims Act investigation, according to a consent decree filed by the Justice Department at the U.S. District Court in New Orleans.

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“..prices did not reflect supply and demand because of “distortions” in the market.” True, but not in the way he means.

Glencore Urges Rivals To Shut Lossmaking Mines (FT)

Glencore chief executive Ivan Glasenberg stepped up his defence of the under-fire miner and trading house on Monday, calling on rivals to shut unprofitable mines and blaming hedge funds for pushing down commodity prices. Shares in the London-listed company, which have been the worst performer in the FTSE 100 this year falling by almost two-thirds, rallied as much as 21% in the wake of his comments and as analysts said that a recent sell-off and comparisons to Lehman Brothers were “overblown”. Glencore shares are now back above 100p and have recouped all of the losses sustained last week during a one-day sell-off that wiped out almost a third of the company’s equity.

However, the stock remains highly volatile – it has risen 68% in five trading sessions – and is significantly below its 2011 flotation price of 530p. The Switzerland-based company was forced to put out a statement early on Monday after its Hong Kong shares surged more than 70% following a speculative report that said it was open to takeover offers. Glencore’s statement said there was no reason for the share price surge. Insiders at the company said any publicly listed company was for sale at the right price, but dismissed talk of an approach or management buyout.

Speaking on the sidelines of the Financial Times Africa Summit in London, Mr Glasenberg refused to comment on the recent wild swings in Glencore’s share price, but said the company was focused on completing its $10 billion debt reduction plan, which could knock a third off its net debt pile by the end of next year. Mr Glasenberg focused on copper – Glencore’s most important mined commodity – arguing that prices did not reflect supply and demand because of “distortions” in the market. Glencore has been scrambling to reassure investors and creditors and silence its critics who claim that the company will struggle to manage its $30 billion of net debt if commodity prices do not recover quickly.

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Dutch disease.

Norway Seen Tapping Its Wealth Fund to Ward Off Oil Slump Risks (Bloomberg)

For Norway, the future may already be here. The nation could as soon as next year start making withdrawals from its massive $830 billion sovereign wealth fund, which it has built over the past two decades as a nest egg for “future generations.” The minority government will reveal its budget plans on Wednesday and has flagged new spending measures and tax cuts. Prime Minister Erna Solberg is trying to avoid a recession as a slump in the nation’s key commodity takes its toll on the $500 billion oil-reliant economy. Norway has already spent recent years using a growing chunk of its oil revenue to plug deficits while at the same time building the wealth fund. Now, with tax revenue from petroleum extraction down 42% on last year, budget spending in 2016 will probably outstrip income.

“We have reached a point where we will from now on see that the oil-corrected balance will be above the cash flow – that’s based on oil prices increasing slowly in the future,” said Kyrre Aamdal, senior economist at DNB ASA in Oslo. Tapping the fund’s returns marks a turning point that wasn’t expected to come for “several more years,” he said. The government said in May its non-oil budget deficit, or spending in real terms, would be a record 180.9 billion kroner ($21.6 billion). With its crude output waning and prices falling, the government saw petroleum income dropping to 251.6 billion kroner this year, almost 30% lower than its October projections. Those estimates assumed oil at about $69 a barrel. Brent crude has averaged $56 so far this year.

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Dollar-denominated debt.

South East Asia Economic Woes Test Built-Up Reserves, Defenses (Reuters)

Southeast Asia has spent the best past of two decades shoring defenses against a repeat of the Asian financial crisis, including building up record foreign exchange reserves, yet is now feeling vulnerable to speculative attacks again. Officials are growing increasingly concerned as souring sentiment has made currencies slide and investors reassess risk profiles in an environment where China is slowing and U.S. interest rates will rise at some point. And while economists have long dismissed comparisons with the 1997/98 currency crisis, pointing to freer exchange rates, current-account surpluses, lower external debt and stricter oversight by regulators, lately there has been a change.

Malaysia and Indonesia, which export oil and other commodities to fuel China’s factories, are looking vulnerable as the world’s second-largest economy heads for its slowest growth in 25 years and the prices of their commodity exports plunge. “We are worried about the contagion effect,” Indonesian Finance Minister Bambang Brodjonegoro said last week, using a word widely used in 1997/98. In 1997, “the thing happened first in Thailand through the baht, not the rupiah. But the contagion effect became widespread,” he added. Taimur Baig, Deutsche Bank’s chief Asia economist, said that unlike 1997, when pegged currencies were attacked as over-valued, today’s floating ones are “weakening willingly” in response to outflows. But there can still be contagion, as markets lump together economies reliant on China or on commodities.

“If you see a sell-off in Brazil, that can easily spread to Indonesia, which can spread to Malaysia, and so on,” he said. Foreign funds have sold a net $9.7 billion of stocks in Malaysia, Thailand and Indonesia this year, with the bourses in those three countries seeing Asia’s largest net outflows, Nomura said on Oct. 2. Baig said that as in 1997/98, falling currencies will naturally pose balance-sheet problems for companies with dollar debts and local-currency earnings. This year, Malaysia’s ringgit MYR= has fallen nearly 20% against the dollar and its reserves dropped by about the same%age, to below $100 billion. “It’s almost like a perfect storm for Malaysia,” the country’s economic planning minister, Abdul Wahid Omar, said.

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Because their new phones don’t sell.

Samsung Seen Tapping $55 Billion Cash Pile for Share Buyback (Bloomberg)

Investors in Samsung Electronics are watching their holdings plunge as new Galaxy smartphones get a lukewarm public response. With $55 billion in cash, the company may be poised to offer consolation. Analysts expect the world’s biggest smartphone maker to buy back shares as early as this month in an effort to return some value to stockholders. Removing more than $1 billion of stock from the market could prompt shares to rally by as much as 20%, according to the top-ranked analyst covering Samsung, potentially erasing their declines this year. Samsung has lost about $22 billion in market value – roughly equivalent to a Nintendo – this year as sales of the S6 and Note 5 devices sputter against new models from Apple and Chinese makers.

A buyback would be just the second in eight years and may take the sting out of sliding market share and sales projected to hit their lowest since 2011. “A share buyback should happen anytime now because the earnings haven’t been performing well,” said Dongbu Securities Co.’s Yoo Eui Hyung, who tops Bloomberg Absolute Return rankings for his calls on Samsung Electronics. Suwon-based Samsung is scheduled to release third-quarter operating profit and sales estimates Wednesday. That three-month period was marked by price cuts for the S6 and curved-screen S6 Edge phones just months after their debuts. Analysts expect profit of 6.7 trillion won in the period ended September.

While that is up from 4.1 trillion won a year earlier, it’s 34% below a record 10.2 trillion won two years ago. Net income and details of division earnings will be released later this month. Shares of Samsung rose 3.2% to 1,151,000 won in Seoul, paring this year’s decline to 13%. A stock repurchase also would help the founding Lees tighten their grip on the crown jewel of South Korea’s biggest conglomerate since the family typically doesn’t sell stock in a buyback, Yoo said. Vice Chairman Lee Jae Yong, the heir apparent, and his relatives control Samsung Group through a web of cross shareholdings with less than 10% of total shares.

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Before VW.

German Factory Orders Unexpectedly Fall in Sign of Economic Risk (Bloomberg)

German factory orders unexpectedly fell in August in a sign that Europe’s largest economy is vulnerable to weaker growth in China and other emerging markets. Orders, adjusted for seasonal swings and inflation, dropped 1.8% after decreasing a revised 2.2% in July, data from the Economy Ministry in Berlin showed on Tuesday. The typically volatile number compares with a median estimate of a 0.5% increase in a Bloomberg survey. Orders rose 1.9% from a year earlier. A China-led slowdown in emerging markets that threatens Germany’s export-oriented economy is exacerbated by an emissions scandal at Volkswagen AG that could affect as many as 11 million cars globally. Still, business confidence unexpectedly increased in September as the economy benefited from strengthening domestic demand on the back of record employment, rising wages and low inflation.

Excluding big-ticket items, orders dropped 2.1% in August, the Economy Ministry said in a statement. Domestic factory orders declined 2.6% as demand for investment goods slumped. The drop in orders was exaggerated by school holidays, it said. A bright spot was the rest of the euro area, where demand for capital goods jumped. Waning Chinese industrial demand has prompted Henkel AG to announce the removal of 1,200 jobs at its adhesives unit as it adapts capacity. While the brunt of the layoffs will be borne in Asia, 250 jobs will be cut in Europe and 100 in Germany. August factory orders don’t yet reflect the impact of VW’s cheating on U.S. emissions tests revealed last month. Chairman-designate Hans Dieter Poetsch warned that the scandal could pose “an existence-threatening crisis” for Europe’s largest carmaker.

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“..EU laws that prohibit data-sharing with countries deemed to have lower privacy standards, of which the United States is one…”

Top EU Court Says US-EU Data Transfer Deal Is Invalid (Reuters)

A system enabling data transfers from the European Union to the United States by thousands of companies is invalid, the highest European Union court said on Tuesday in a landmark ruling that will leave firms scrambling to find alternative measures. “The Court of Justice declares that the Commission’s U.S. Safe Harbor Decision is invalid,” it said in a statement. The decision could sound the death knell for the Safe Harbor framework set up fifteen years ago to help companies on both sides of the Atlantic conduct everyday business but which has come under heavy fire following 2013 revelations of mass U.S. snooping. Without Safe Harbor, personal data transfers are forbidden, or only allowed via costlier and more time-consuming means, under EU laws that prohibit data-sharing with countries deemed to have lower privacy standards, of which the United States is one.

The Court of Justice of the European Union (ECJ) said that U.S. companies are “bound to disregard, without limitation,” the privacy safeguards provided in Safe Harbor where they come into conflict with the national security, public interest and law enforcement requirements of the United States. Revelations by former National Security Agency contractor Edward Snowden of the so-called Prism program allowing U.S. authorities to harvest private information directly from big tech companies such as Apple, Facebook (FB.O) and Google prompted Austrian law student Max Schrems to try to halt data transfers to the United States. Schrems challenged Facebook’s transfers of European users’ data to its U.S. servers because of the risk of U.S. snooping.

As Facebook has its European headquarters in Ireland, he filed his complaint to the Irish Data Protection Commissioner. The case eventually wound its way up to the Luxembourg-based ECJ, which was asked to rule on whether national data privacy watchdogs could unilaterally suspend the Safe Harbor framework if they had concerns about U.S. privacy safeguards. In declaring the data transfer deal invalid, the Court said the Irish data protection authority had to the power to investigate Schrems’ complaint and subsequently decide whether to suspend Facebook’s data transfers to the United States. “This is extremely bad news for EU-U.S. trade,” said Richard Cumbley, Global Head of technology, media and telecommunications at law firm Linklaters. “Without Safe Harbor, (businesses) will be scrambling to put replacement measures in place.”

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Democracy it ain’t.

US, Japan And 10 Countries Strike Pacific Trade Deal (FT)

The US, Japan and 10 other Pacific Rim nations have struck the largest trade pact in two decades, in a huge strategic and political victory for US President Barack Obama and Japanese Prime Minister Shinzo Abe. The Trans-Pacific Partnership covers 40% of the global economy and will create a Pacific economic bloc with reduced trade barriers to the flow of everything from beef and dairy products to textiles and data, and with new standards and rules for investment, the environment and labour. The deal represents the economic backbone of the Obama administration’s “pivot” to Asia, which is designed to counter the rise of China in the Pacific and beyond. It is also a key component of the “third arrow” of economic reforms that Mr Abe has been trying to push in Japan since taking office in 2012.

But the TPP must still be signed formally by the leaders of each country and ratified by their legislatures, where support for the deal is not universal. In the US, Mr Obama will face a tough fight to push it through Congress next year, especially as presidential candidates such as the Republican frontrunner Donald Trump have argued against it. It is also likely to face parliamentary opposition in countries such as Australia and Canada, where the TPP has been one of the main points of economic debate ahead of an election on October 19. Critics around the world see it as a deal negotiated in secret and biased towards corporations. Those criticisms will be amplified when national legislatures seek to ratify the TPP.

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“When Australian and New Zealand trade representatives asked to view the texts, they were asked to sign an agreement promising to keep it secret for at least four years “to facilitate candid and productive negotiations..”

TPP Trade Deal Text Won’t Be Made Public For Four Years (Ind.)

The text of the Trans-Pacific Partnership that was agreed by trade ministers from US, Japan and ten other countries will not be made public for four years – whether or not it goes on to be passed by Congress and other member nations. If ratified by US Congress and other member nations, TPP will bulldoze through trade barriers and standardise international rules on labour and the environment for the 12 nations, which make up 40% of the world’s economic output. But the details of how it will do this are enshrined in secrecy. Politicians and ordinary people have been largely excluded from TPP negotiations, leaving it in the hands of multinational corporations.

Julian Assange, the founder of Wikileaks, said that the contents of the deal have been kept secret to avoid potential opposition. Wikileaks has leaked three of the 29 chapters of the TPP agreement. One section on intellectual property rights was published in November 2013, another on the environment was published in January 2014 and one on investment was published in March 2015. John Hilary, the executive director the political organisation War On Want, said the result is that nobody knows what’s being negotiated. “You have these far reaching deals that are going to change the face of our economies and societies know nothing about it,” Hilary said in an interview posted on the Wikileaks channel in August.

The US trade representative’s office keeps trade documents secret because they are considered matters of national security, according to Margot E. Kaminski, an assistant professor of law at the Ohio State University and an affiliated fellow of the Yale Information Society. The representatives claim that negotiating documents are “foreign government information” even though some may have been drafted by US officials. When Australian and New Zealand trade representatives asked to view the texts, they were asked to sign an agreement promising to keep it secret for at least four years “to facilitate candid and productive negotiations”, according to a document leaked by the Guardian.

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” It’s the nature of the social dialogue in our country.”

Air France Workers Rip Shirts From Executives After 2,900 Jobs Cut (Guardian)

Striking staff at Air France have taken demonstrating their anger with direct action to a shocking new level. Approximately 100 workers forced their way into a meeting of the airline’s senior management and ripped the shirts from the backs of the executives. The airline filed a criminal complaint after the employees stormed its headquarters, near Charles de Gaulle airport in Paris, in what was condemned as a “scandalous” outbreak of violence. Photographs showed one ashen-faced director being led through a baying crowd, his clothes torn to shreds. In another picture, the deputy head of human resources, bare-chested after workers ripped off his shirt and jacket, is seen being pushed to safety over a fence.

Tensions between management and workers at France’s loss-making flagship carrier had been building over the weekend in the runup to a meeting to finalise a controversial “restructuring plan” involving 2,900 redundancies between now and 2017. The proposed job losses involve 1,700 ground staff, 900 cabin crew and 300 pilots. After the violence erupted at about 9.30am on Monday morning, there was widespread condemnation from French union leaders who sought to blame each other’s members for the assaults. Laurent Berger, secretary general of the CFDT, said the attacks were “undignified and unacceptable”, while Claude Mailly, of Force Ouvrière (Workers Force) said he understood Air France workers’ exasperation, but added: “One can fight management without being violent.”

Manuel Valls, France’s prime minister, said he was “scandalised” by the behaviour of the workers and offered the airline chiefs his “full support”. Air France said it had lodged an official police complaint for “aggravated violence”. [..] Olivier Labarre, director of BTI, a human resources consultancy, told Libération newspaper in 2009: “This happens elsewhere, but to my knowledge, taking the boss hostage is typically French. It’s the nature of the social dialogue in our country.”

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It’s not just rhino’s. We kill across the board.

Nearly A Third Of World’s Cacti Face Extinction (Guardian)

Nearly a third of the world’s cacti are facing the threat of extinction, according to a shocking global assessment of the effects that illegal trade and other human activities are having on the species. Cacti are a critical provider of food and water to desert wildlife ranging from coyotes and deer to lizards, tortoises, bats and hummingbirds, and these fauna spread the plants’ seeds in return. But the International Union for the Conservation of Nature (IUCN)‘s first worldwide health check of the plants, published today in the journal Nature Plants, says that they are coming under unprecedented pressure from human activities such as land use conversions, commercial and residential developments and shrimp farming.

But the paper said the main driver of cacti species extinction was the: “unscrupulous collection of live plants and seeds for horticultural trade and private ornamental collections, smallholder livestock ranching and smallholder annual agriculture.” The findings were described as “disturbing” by Inger Andersen, the IUCN’s director-general. “They confirm that the scale of the illegal wildlife trade – including the trade in plants – is much greater than we had previously thought, and that wildlife trafficking concerns many more species than the charismatic rhinos and elephants which tend to receive global attention.”

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Apr 202015
 
 April 20, 2015  Posted by at 9:12 am Finance Tagged with: , , , , , , , , ,  


DPC Broad Street lunch carts, New York 1906

World Braces for Taper Tantrum II Even as Yellen Soothes Nerves (Bloomberg)
Caveat Creditor As IMF Chiefs Mull Unpayable Debts (AEP)
Fed Crisis-Liquidity Function Reviewed for Potential Use by IMF (Bloomberg)
Draghi Tells Euro Shorts To “Make His Day”, Again (Zero Hedge)
Greece’s Varoufakis Warns Of Grexit Contagion (Reuters)
Can Beijing Tame China’s Bull Market? (MarketWatch)
China Cuts Bank Reserves Again To Fight Slowdown (Reuters)
Why China’s RRR Cut Reeks Of Desperation (CNBC)
China to Investors: Don’t Forget That Stocks Can Lose Money Too (Bloomberg)
China Cracks Down On Golf, The ‘Sport For Millionaires’ (NY Times)
China’s President Xi Jinping To Unveil $46 Billion Deal In Pakistan (BBC)
You Do Need A Weatherman (Steve Keen)
Auckland Property: Cashed-Up And Heading Off (NZ Herald)
Secret Files Reveal the Structure of Islamic State (Spiegel)
Russia Has Bigger Concerns Than Oil, Ruble: Deputy PM (CNBC)
5 Years After BP Spill, Drillers Push Into Riskier Depths (AP)
US Army Commander Urges NATO To Confront Russia (RT)

We should get rid of the lot.

World Braces for Taper Tantrum II Even as Yellen Soothes Nerves (Bloomberg)

The world economy is about to discover if to be forewarned by the Federal Reserve is to be forearmed. Two years since the Fed triggered a selloff of their assets in the so-called “taper tantrum,” the finance chiefs of emerging markets left Washington meetings of the IMF praising Chair Janet Yellen for the way she is signaling plans to raise U.S. interest rates. The test now is whether developing nations have done enough to insulate their economies from the threats of a higher U.S. dollar and capital flight once the Fed boosts borrowing costs for the first time since 2006. How successful they are will help determine the strength of global growth that’s already taking a hit from weaker expansions in China and Brazil.

“The Fed is trying its best to be as transparent as possible, to explain its considerations,” Tharman Shanmugaratnam, Singapore’s finance minister, said in an interview. “But it doesn’t mean that ensures us of an orderly exit. One way or another there’s going to be some disturbance.” Yellen is seeking to avoid the May 2013 episode of her predecessor Ben S. Bernanke, when his suggestion that the Fed might soon wind down its bond-buying program prompted investors to flee the risk in emerging markets. India’s rupee and the Turkish lira both tumbled to record lows. While Yellen didn’t speak publicly during the IMF’s spring gathering, officials said her message behind closed doors was reassuring.

Russian Finance Minister Anton Siluanov told reporters that Yellen informed fellow Group of 20 officials that any U.S. rate increases would be “transparent and understandable.” The latest Bloomberg survey shows 71% of participating economists expect the Fed to raise rates from near zero in September after a slowing of U.S. activity diluted speculation it would act as soon as June. “The Fed has been very clear about saying it would be a very steady process rather than an abrupt process, and I think that should calm people down,” Reserve Bank of India Governor Raghuram Rajan said in Washington. Malaysian central bank Governor Zeti Akhtar Aziz said in an interview that markets may be calmer following the Fed’s move than before. “I believe that when this interest-rate adjustment occurs, conditions will actually stabilize,” she said.

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“We must not let our rulers load us with perpetual debt.”

Caveat Creditor As IMF Chiefs Mull Unpayable Debts (AEP)

The IMF has sounded the alarm on the exorbitant levels of debt across the world, this time literally. The theme trailer to its fiscal forum on the ‘political economy of high debt’ plays on our fears with the haunting tension of a Hitchcock thriller. A quote from Thomas Jefferson flashes across the screen in blood-red colours: “We must not let our rulers load us with perpetual debt.” We learn that public debt in the rich economies fell from 124pc of GDP at the end of Second World War to 29pc in 1973, a dream era that we have left behind. The debt burden has since climbed at a compound rate of 2pc a year, accelerating into an upward spiral to 105pc of GDP after the Lehman crash. It is as if we had fought another world war. A baby boom and surging work-force enabled us to grow out of debt in the 1950s and 1960s without noticing it.

No such outcome looks plausible today. The IMF’s World Economic Outlook describes a prostrate planet caught in a low-growth trap as the population ages across the Northern Hemisphere, and productivity splutters. Nor is this malaise confined to the West. The fertility rate has collapsed across the Far East. China’s work-force is shrinking by three million a year. The report warned of a “persistent reduction” in the global growth rate since the Great Recession of 2008-2009, with no sign yet of a return to normal. “Lower potential growth will make it more difficult to reduce high public and private debt ratios,” it said.

Christine Lagarde, the Fund’s managing-director, calls it the “New Mediocre”. The height of elegance as always, and seemingly inexhaustible as she holds court at IMF Headquarters, Mrs Lagarde has learned the hard way that something is badly out of kilter in the world. The painful ritual of her IMF tenure has been to admit at each meeting that the previous forecasts were too hopeful. First it was Europe’s debt crisis. Now it is because China, Brazil, Russia, and a host of mini-BRICS have hit the limits of easy catch-up growth. This year the curse was finally broken. There will be no downgrade. The IMF is crossing its fingers that world growth will still be 3.5pc for 2015.

Yet the Fund’s underlying message is that sky-high debt ratios and old-age populations are a dangerous mix, leaving the world prone to the “Japanese” diseases of deflation and atrophy. The monetary and fiscal buffers are largely exhausted. Authorities have little left in their policy arsenal to fight the next downturn, whenever it comes. There is of course a time-honoured way to clear unpayable debts and wipe the slate clean. It is called default. Some wicked wit at the IMF ended the Hitchcock trailer with a killer quote, this one from the Canadian poet and novelist Margaret Atwood, strangely constructed but pithy in its way: “And then the REVENGE that comes when they are not paid back.

This touches a raw nerve, for that is more or less what may happen within weeks if an angry Greece – aggrieved at the way it was sacrificed to save Europe’s banks in 2010 – becomes the first developed country to miss a payment to the IMF, and perhaps the first of a long string of debtor-nations to turn the tables on their foreign creditors. Athens is where it all begins. George Osborne said talk of a Grecian debacle was on everybody’s lips at this year’s Spring Meeting. “The mood is notably more gloomy, and it is now clear to me that a misstep or a miscalculation by either side could easily return European economies to the kind of perilous situation we saw three or four years ago. The crunch appears to be coming in May,” he said.

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Yeah, more power to the IMF, that’s a great idea.

Fed Crisis-Liquidity Function Reviewed for Potential Use by IMF (Bloomberg)

IMF member nations are discussing how to expand the lender’s mandate to include keeping markets liquid during a financial crisis, a role played by a group of major central banks led by the Federal Reserve in 2008. The IMF’s main committee of central bank governors and finance ministers is working on ways for the fund to provide a better financial “safety net” during a crisis, said Singapore Finance Minister Tharman Shanmugaratnam, who last month finished a four-year term as chairman of the panel. Singapore remains a member of the International Monetary and Financial Committee.

“In the last crisis, the Fed and some other central banks had a system of swaps that was applied to only certain financial centers, but you can’t leave it to an individual central bank to make those decisions,” he said in an interview Friday in Washington, as officials from around the world gathered for the IMF’s spring meetings. “It has to be a global player, and the IMF is the only credible institution to perform that role.” The Washington-based IMF needs to evolve into more of a “system-wide policeman” that enforces global financial stability, rather than solely a lender to individual countries that run into trouble, said Shanmugaratnam, 58, who also serves as Singapore’s deputy prime minister.\ IMF Managing Director Christine Lagarde said this month that the world could be in for a “bumpy ride” when the Fed starts raising interest rates, with commodity-exporting emerging economies likely to take a major hit.

The Fed set up foreign-exchange swap lines during the crisis with major central banks, including the ECB, Bank of Japan and Bank of Canada, as well as some smaller and emerging-market nations such as Singapore, South Korea, Mexico and New Zealand. Under the program, foreign central banks exchanged their countries’ currencies for U.S. dollars, which they loaned to local financial institutions to shore up their liquidity. Outstanding swaps peaked at almost $600 billion in late 2008. Some emerging-market economies were rebuffed for swap agreements with the Fed, including Indonesia, India, Peru and the Dominican Republic, according to the book “The Dollar Trap” by Eswar Prasad, a former IMF official.

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I’d be more worried about periphery bonds perhaps. But the euro too has a ways to fall.

Draghi Tells Euro Shorts To “Make His Day”, Again (Zero Hedge)

With a “defiant” Syriza determined to hold onto any shred of dignity and legitimacy that may remain in the wake of months of painful negotiations with its creditors and with a €5 billion advance from Russia (a large chunk of which will promptly be paid to the IMF which use it to bailout Ukraine which will hand it right back to Russia) shaping up to be the last lifeline for Greece before Athens is reduced to issuing IOUs to pay pensions and salaries, the focus is beginning to shift away from Grexit and towards contagion risk. The worry is that once Greece goes, both the credit market and periphery depositors will suddenly realize that the EMU is not “indissoluble,” but is in fact nothing more than a confederation of fixed exchange rates.

This realization could (and to a certain extent already has) cause credit investors to begin pricing redenomination risk back into sovereign spreads and, far more importantly (because as UBS recently noted, bonds don’t cause breakups, bank runs do), may lead depositors to question the wisdom of holding their euros in bank accounts where they’re earning next to no interest and where, should some “accident” occur, they are subject to conversion into a national currency that would swiftly collapse against the euro once introduced.

And so, with every sell side European credit strategist trying to figure out what happens when €60 billion in monthly asset purchases by a central bank collide head on with an unprecedented sovereign default and with speculators’ net short position on the EUR now at levels last seen in 2012, it’s time to bring out the big guns with Mario Draghi staging a sequel to his now famous “whatever it takes” speech which came in the summer of 2012, when spreads were blowing out across the periphery and when euro net shorts looked a lot like they do today. While conceding that a Greek exit from the euro would put everyone in “uncharted waters,” Draghi says he has the tools to combat contagion and as for shorting the euro, well, perhaps the best way to sum up Draghi’s position is to quote Clint Eastwood: “go ahead, make my day.”

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“”Once the idea enters peoples’ minds that monetary union is not forever, speculation begins..”

Greece’s Varoufakis Warns Of Grexit Contagion (Reuters)

Greece’s Finance Minister Yanis Varoufakis said in an interview broadcast on Sunday that if Greece were to leave the euro zone, there would be an inevitable contagion effect. “Anyone who toys with the idea of cutting off bits of the euro zone hoping the rest will survive is playing with fire,” he told La Sexta, a Spanish TV channel, in an interview recorded 10 days ago. “Some claim that the rest of Europe has been ring-fenced from Greece and that the ECB has tools at its disposal to amputate Greece, if need be, cauterize the wound and allow the rest of euro zone to carry on.”

“I very much doubt that that is the case. Not just because of Greece but for any part of the union,” he said, speaking in English. “Once the idea enters peoples’ minds that monetary union is not forever, speculation begins … who’s next? That question is the solvent of any monetary union. Sooner or later it’s going to start raising interest rates, political tensions, capital flight.” His comments were recorded before those of Mario Draghi, the European Central Bank’s president, who this weekend said the euro zone was better equipped than it had been in the past to deal with a new Greek crisis but warned of uncharted waters if the situation deteriorates.

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“This bull run is taking place as the Chinese economy slumps under a sea of debt..”

Can Beijing Tame China’s Bull Market? (MarketWatch)

Authorities in China face the delicate task of taming an equity bull market of their own making, which could now be spiraling out of control. Last week, the announcement of new measures to allow fund managers to short stocks not only hit Chinese shares, but also spooked the global markets. This was followed up by warnings from China’s securities regulator to small investors not to borrow money or sell property to buy stocks. A warning for equity bulls to cool off certainly looks overdue. Stock turnover reached a record 1.53 trillion yuan ($247 billion) on Friday, with stock-trading accounts reportedly being opened at a rate of 1 million every two days. Margin account balances reached a record 1.16 trillion yuan. But should global markets worry if day traders in Shenzhen or Shanghai are about to lose their shirts?

China’s casino-like equity markets are largely sealed off from the outside world, after all. Foreign ownership of domestic Chinese shares is still a fraction of 1%, even with new initiatives such as the recent opening of the Shanghai-Hong Kong Stock Connect. The concern for global markets, however, is not equity-market contagion but the potential hole a stock-market bust could blow in the world’s second-largest economy. This bull run is taking place as the Chinese economy slumps under a sea of debt, with exports now also going south along with the property market. This hardly sounds like conditions ripe for rallying shares — but this is no normal rally. The real wild card to consider is the fact that this bull market has the fingerprints of the ruling Communist Party all over it.

They initiated it, meaning an official policy shift could also see it reverse — although that looks unlikely for now. Official state media have been cheerleading this rally by extolling the benefits of share ownership in a series of articles since last year. But what has really unleashed “animal spirits” of day traders has been the re-opening of the domestic initial public offering (IPO) market. Thanks to systematic underpricing orchestrated by the state regulator, investors have been all but guaranteed spectacular gains. According to a first-quarter report from accountants Ernst & Young, there were 70 domestic Chinese IPOs, all of which rose by the maximum 44% allowed on the first day of trading. Average gains for IPOs have been around 200% this year.

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What’s the reserve requirement over here these days? 0.05%?

China Cuts Bank Reserves Again To Fight Slowdown (Reuters)

China’s central bank on Sunday cut the amount of cash that banks must hold as reserves, the second industry-wide cut in two months, adding more liquidity to the world’s second-biggest economy to help spur bank lending and combat slowing growth. The People’s Bank of China (PBOC) lowered the reserve requirement ratio for all banks by 100 basis points to 18.5%. The reduction is effective from April 20, the central bank said in a statement on its website www.pbc.gov.cn. The latest cut in the reserve requirement shows how the central bank is stepping up efforts to ward off a sharp slowdown in the economy.

Weighed down by a property downturn, factory overcapacity and local debt, growth is expected to slow to a quarter-century low of around 7% this year from 7.4% in 2014, even with expected additional stimulus measures. The PBOC last cut the reserve requirement ratio for all commercial banks by 50 basis points on February 4, the first industry-wide cut since May 2012. The central bank has also cut interest rates twice since November in a bid to lower borrowing costs and spur demand.

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Too late: “..they don’t want to see bubble territory..”

Why China’s RRR Cut Reeks Of Desperation (CNBC)

The People’s Bank of China (PBoC) is “desperate” to control Shanghai’s red-hot equity rally, analysts said, after the central bank slashed the reserve requirement ratio (RRR) on Sunday. The 100 basis-point RRR cut to 18.5% is the biggest since 2008 and comes in response to a sharp selloff in stock futures on Friday after the China Securities Regulatory Commission (CSRC) tightened margin trading rules. The CSRC aims to cool Shanghai’s stock market, which is up over 30% year to date at seven-year highs. Futures plunged during late trading on Friday, with the China A50 futures contract down 6% in New York.

“After the announcement on Friday, stock futures were looking horrible so something needed doing to put a floor under that from a short-term point of view. But everybody’s going to take a look at this and say ‘hold on, why are they [PBoC] overreacting so strongly?’ People are going to start sensing desperation here,” Paul Gambles, co-founder of MBMG Group, told CNBC on Monday. Indeed, policy watchers were scratching their heads over the series of conflicting announcements. The PBoC is scrambling to ensure stability in China’s notoriously volatile share market, said Mark Andersen, global co-head of Asset Allocation at UBS CIO Wealth Management. “They want to see markets go up to some extent, but not out of control. With some of this margin financing, they want to see a relatively stable capital market with property prices falling so they don’t mind equity prices moving up a bit to support the broader economy, but they don’t want to see bubble territory,” Anderson said.

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Also too late. People think Beijing has it all under control, and when the markets crash, they will be very angry.

China to Investors: Don’t Forget That Stocks Can Lose Money Too (Bloomberg)

After the longest-ever rally in Chinese equities, investors are getting a reminder that the $7.3 trillion market isn’t just a one-way bet. China’s securities regulator jolted traders after the close of local bourses Friday when it banned a source of financing for margin trades and made it easier for short sellers to wager that stocks will fall. Offshore futures and exchange-traded funds linked to the world’s second-largest stock market sank, with the iShares China Large-Cap ETF tumbling 4.2% in the U.S. While China bulls will draw some comfort from the central bank’s biggest cut to lenders’ reserve requirements since 2008 on Sunday, last week’s sell-off in offshore markets shows how vulnerable the Shanghai Composite Index is to a pullback after going 452 days without a 10% drop from a recent high.

The benchmark gauge posted an average peak-to-trough retreat of 28% after six previous rounds of policy intervention to curtail stock speculation since 1996, according to Bank of America. “Institutional investors as well as authorities have had some concerns over the sharp rise in prices and trading,” Michael Kass at Baron Capital, whose $1.53 billion emerging-markets fund has outperformed 95% of peers tracked by Bloomberg over the past three years, said by e-mail on Friday. “This will likely cool some of the recent enthusiasm.” The Shanghai Composite’s 115% surge from last year’s low on Jan. 20 is challenging authorities as they seek to weigh the benefits of rising share prices against the risk that individual investors will get burned by excessive speculation.

Traders in Shanghai have borrowed a record 1.2 trillion yuan ($194 billion) to buy equities via margin trades, while new investors have opened an unprecedented number of stock accounts this year. The Shanghai Composite trades at 16.5 times estimated earnings for the next 12 months, the highest valuation in five years, even after data last week showed economic growth slowed to the weakest pace since 2009 in the first quarter. On Friday, the China Securities Regulatory Commission prohibited the margin-trading businesses of brokerages from using so-called umbrella trusts, which allow investors to take on more leverage. Authorities also allowed fund managers to lend shares for short sales, a move that will make it easier to execute bearish bets, and expanded the number of stocks available for this kind of trading.

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“..drugs, gambling, prostitution, ill-gotten wealth overflowing banquet tables and golf.” That’s the life we’re all supposed to long for, isn’t it?

China Cracks Down On Golf, The ‘Sport For Millionaires’ (NY Times)

President Xi Jinping’s crackdown on vice and corruption in China has gone after drugs, gambling, prostitution, ill-gotten wealth and overflowing banquet tables. Now it has turned to a less obvious target: golf. In a flurry of recent reports, state-run news outlets have depicted the sport as yet another temptation that has led Communist Party officials astray. A top official at the Commerce Ministry is under investigation on suspicion of allowing an unidentified company to pay his golf expenses. The government has shut down dozens of courses across the country built in violation of a ban intended to protect China’s limited supplies of water and arable land.

And in the southern province of Guangdong, home to the world’s largest golf facility, the 12-course Mission Hills Golf Club, party officials have been forbidden to golf during work hours “to prevent unclean behavior and disciplinary or illegal conduct.” The provincial anticorruption agency has set up a hotline for reporting civil servants who violate nine specific regulations, including prohibitions on betting on golf, playing with people connected to one’s job, traveling on golf-related junkets or holding positions on the boards of golf clubs. “Like fine liquor and tobacco, fancy cars and mansions, golf is a public relations tool that businessmen use to hook officials,” the newspaper of the party’s antigraft agency declared on April 9. “The golf course is gradually changing into a muddy field where they trade money for power.”

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Fresh from the Monopoly press.

China’s President Xi Jinping To Unveil $46 Billion Deal In Pakistan (BBC)

China’s President Xi Jinping is due in Pakistan, where he is expected to announce $46bn of investment. The focus of the spending is on building a China-Pakistan Economic Corridor (CPEC), running from Gwadar in Pakistan’s Balochistan province to China’s western Xinjiang region. Pakistan hopes the investment will boost its struggling economy and help end chronic power shortages. Leaders are also expected to discuss co-operation on security. Mr Xi will spend two days holding talks with his counterpart Mamnoon Hussain, Prime Minister Nawaz Sharif and other ministers. He will address parliament on Tuesday. Deals worth some $28bn are ready to be signed during the visit, with the rest to follow. The sum significantly outweighs American investment in Pakistan.

Under the CPEC plan, China’s government and banks will lend to Chinese companies, so they can invest in projects as commercial ventures. A network of roads, railways and energy developments will eventually stretch some 3,000km (1,865 miles). Some $15.5bn worth of coal, wind, solar and hydro energy projects will come online by 2017 and add 10,400 megawatts of energy to Pakistan’s national grid, according to officials. A $44m optical fibre cable between the two countries is also due to be built. The projects will give China direct access to the Indian Ocean and beyond, marking a major advance in its plans to boost its economic influence in central and south Asia. Pakistan, meanwhile, hopes the investment will enable it to transform itself into a regional economic hub.

Ahsan Iqbal, the Pakistani minister overseeing the plan, told the AFP news agency that these were “very substantial and tangible projects which will have a significant transformative effect on Pakistan’s economy”. Mr Xi is also expected to discuss security issues with Mr Sharif, including China’s concerns that Muslim separatists from Xinjiang are linking up with Pakistani militants. “China and Pakistan need to align security concerns more closely to strengthen security co-operation,” he said in a statement to Pakistani media on Sunday. “Our cooperation in the security and economic fields reinforce each other, and they must be advanced simultaneously.”

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Steve on non-linear economics.

You Do Need A Weatherman (Steve Keen)

I’ve just come back from the annual Institute for New Economic Thinking conference in Paris, where the President of INET Rob Johnson is infamous for opening every session he chairs with an apt set of lyrics from the 1960s. I’ve aped Rob here by misquoting one of Bob Dylan’s great lines “You don’t need a weatherman to know which way the wind blows”. In fact, you do. Why? Because Weathermen know a lot more about which way the wind blows now that they did back in the 1960s, thanks to the work of a lesser-known icon of the 1960s, Edward Lorenz. A mathematician and a meteorologist, Lorenz was dissatisfied with the methods then used to predict the weather—which were a combination of looking for patterns in historical data, and using what mathematicians call linear models.

He demonstrated the importance of nonlinear effects in the weather in a seminal paper in 1963 (two years before Dylan released Subterranean Homesick Blues), and meteorologists rapidly moved from linear to nonlinear thinking. Why is nonlinear thinking better than linear? Ironically, given how defensive the Old Guard in economics is of its generally linear approach, one of the best explanations of what linear thinking is, and why it is misleading, was recently given by the chief economist at the IMF, Olivier Blanchard. Looking back at the failure of mainstream economic models to forewarn of the 2008 economic crisis, Blanchard noted that these models only made sense if “small shocks had small effects and a shock twice as big as another had twice the effect on economic activity”:

These techniques however made sense only under a vision in which economic fluctuations were regular enough so that, by looking at the past, people and firms (and the econometricians who apply statistics to economics) could understand their nature and form expectations of the future, and simple enough so that small shocks had small effects and a shock twice as big as another had twice the effect on economic activity.

The reason for this assumption, called linearity, was technical: models with nonlinearities—those in which a small shock, such as a decrease in housing prices, can sometimes have large effects, or in which the effect of a shock depends on the rest of the economic environment—were difficult, if not impossible, to solve under rational expectations. (Blanchard, “Where Danger Lurks”, September 2014)

Then along came the economic crisis, and suddenly in the real world—unlike in their models—“the effect of a shock depended on the rest of the economic environment”, and what appeared to economists to be a small shock (the Subprime mortgage crisis) had a very large impact on the global economy. Lorenz’s criticism of linear weather models was essentially the same: linear models grossly underestimated the interconnectedness of the weather. Meteorologists took this message to heart, and developed highly nonlinear models in which “‘cause and effect’ relationships between the basic variables can become ferociously complex”. This required some very difficult work in mathematics and computing—but it was worth it, given the devastating real-world impact of an unanticipated hurricane on the real world. The world has benefited enormously from this work by meteorologists over the last half century.

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They’re not all stupid.

Auckland Property: Cashed-Up And Heading Off (NZ Herald)

As house prices in the country’s biggest city spiral out of control, Auckland homeowners are cashing in their chips and buying mansions in the regions.Thousands of property owners are now sitting on million-dollar goldmines thanks to rampant capital gain. The lure of a traffic-free, laid-back lifestyle with outdoor space for the children is proving tempting for many, and one-in-10 Hawkes Bay sales are now to ex-pat Aucklanders. The Bay of Islands and Marlborough are also drawing “Jafa” homeowners keen to escape the rat race. They have newly acquired equity thanks to soaring Auckland house prices which hit a median of $720,000 last month – a 13% jump in the past year alone.

In Marlborough, with its climate, vineyards and scenery, the median selling price last month was $316,500. Bayleys Marlborough director Andy Poswillo said the median price of a home in Auckland would buy a dated two-to-four-bedroom house or unit, with single car garaging set on a “pocket-handkerchief of lawn”.In Marlborough, the same money could buy a modern three-to-five-bedroom house, some with great views, a swimming pool, hobby orchard and up to 4000sq m of land.”It is easy to see why the temptation is there to cash up, do away with the mortgage and move down the line.”Mr Poswillo said at least eight Auckland families had bought local properties in the past three months.

Many buyers had negotiated “work from home” or satellite office arrangements to maintain their city careers. “They all share the same sentiment; they are tired of chipping away at their colossal mortgages for homes that are failing to serve their needs.”Put simply they want a better lifestyle for their kids and to dump the financial stress of living in the big smoke.”On Saturday the Weekend Herald revealed the average Auckland home had earned nearly $230 a day in the past year – nearly twice what the average worker earned from their job.

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Good article.

Secret Files Reveal the Structure of Islamic State (Spiegel)

Aloof. Polite. Cajoling. Extremely attentive. Restrained. Dishonest. Inscrutable. Malicious. The rebels from northern Syria, remembering encounters with him months later, recall completely different facets of the man. But they agree on one thing: “We never knew exactly who we were sitting across from.” In fact, not even those who shot and killed him after a brief firefight in the town of Tal Rifaat on a January morning in 2014 knew the true identity of the tall man in his late fifties. They were unaware that they had killed the strategic head of the group calling itself “Islamic State” (IS). The fact that this could have happened at all was the result of a rare but fatal miscalculation by the brilliant planner. The local rebels placed the body into a refrigerator, in which they intended to bury him.

Only later, when they realized how important the man was, did they lift his body out again. Samir Abd Muhammad al-Khlifawi was the real name of the Iraqi, whose bony features were softened by a white beard. But no one knew him by that name. Even his best-known pseudonym, Haji Bakr, wasn’t widely known. But that was precisely part of the plan. The former colonel in the intelligence service of Saddam Hussein’s air defense force had been secretly pulling the strings at IS for years. Former members of the group had repeatedly mentioned him as one of its leading figures. Still, it was never clear what exactly his role was.

But when the architect of the Islamic State died, he left something behind that he had intended to keep strictly confidential: the blueprint for this state. It is a folder full of handwritten organizational charts, lists and schedules, which describe how a country can be gradually subjugated. SPIEGEL has gained exclusive access to the 31 pages, some consisting of several pages pasted together. They reveal a multilayered composition and directives for action, some already tested and others newly devised for the anarchical situation in Syria’s rebel-held territories. In a sense, the documents are the source code of the most successful terrorist army in recent history.

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Investment finance.

Russia Has Bigger Concerns Than Oil, Ruble: Deputy PM (CNBC)

Faced with the triple whammy of plunging oil prices, currency volatility and Western sanctions, there’s no dearth of challenges for Russia’s ailing economy, but Deputy Prime Minister Arkady Dvorkovich said what hurts most is the scarcity of financing for new investments. “The shortness of financing for new investments is where the Russian economy is being hit in the most important way,” Dvorkovich told CNBC on the sidelines of World Economic Forum on East Asia in Jakarta. “How do we deal with this? We are working with new partners. This is why we are in China, in other countries, looking for new partners who can bring new investments into the country,” he added.

Russia’s economy, which grew by just 0.6% in 2014, is expected to enter a deep recession this year under the weight of lower oil prices and sanctions, which have compounded the country’s underlying structural weaknesses and undermined business and consumer confidence. Earlier this month, the IMF slashed its growth outlook for the country, forecasting a contraction of 3.8% in 2015 and 1.1% in 2016. Its earlier estimate was for a contraction of 3% this year and 1% next. Nevertheless, Dvorkovich says the country has built up enough reserves to weather the rout in the commodities market.

“We were not counting on higher oil prices in our economic policies. We were saving some money for the times like what we face now, so we have reserves that allow us to smooth this stage and to help poor families and increase unemployment benefits,” he said. As for the precipitous fall in the ruble over the past year, Dvorkovich said the implications are not all negative as it gives Russian manufacturing and agricultural exports a pricing edge in global markets. Responding to criticism over the Kremlin’s decision to lift a self-imposed ban on supplying a sophisticated missile air defense system to Iran, Dvorkovich said: “We are not breaking any sanctions.” “We will fulfill our commitments and responsibilities in full compliance with international legislations. Our partners shouldn’t doubt that we would work in that manner,” he said.

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The price of oil better stay down, or they’ll do it too.

5 Years After BP Spill, Drillers Push Into Riskier Depths (AP)

Five years after the nation’s worst offshore oil spill, the industry is working on drilling even further into the risky depths beneath the Gulf of Mexico to tap massive deposits once thought unreachable. Opening this new frontier, miles below the bottom of the Gulf, requires engineering feats far beyond those used at BP’s much shallower Macondo well. But critics say energy companies haven’t developed the corresponding safety measures to prevent another disaster or contain one if it happens — a sign, environmentalists say, that the lessons of BP’s spill were short-lived.

These new depths and larger reservoirs could exacerbate a blowout like what happened at the Macondo well. Hundreds of thousands of barrels of oil could spill each day, and the response would be slowed as the equipment to deal with it — skimmers, boom, submarines, containment stacks — is shipped 100 miles or more from shore. Since the Macondo disaster, which sent at least 134 million gallons spewing into the Gulf five years ago Monday, federal agencies have approved about two dozen next-generation, ultra-deep wells. The number of deepwater drilling rigs has increased, too, from 35 at the time of the Macondo blowout to 48 last month, according to data from IHS Energy, a Houston company that collects industry statistics.

Department of Interior officials overseeing offshore drilling did not provide data on these wells and accompanying exploration and drilling plans, information that The Associated Press requested last month. But a review of offshore well data by the AP shows the average ocean depth of all wells started since 2010 has increased to 1,757 feet, 40% deeper than the average well drilled in the five years before that. And that’s just the depth of the water. Drillers are exploring a “golden zone” of oil and natural gas that lies roughly 20,000 feet beneath the sea floor, through a 10,000-foot thick layer of prehistoric salt — far deeper than BP’s Macondo well, which was considered so tricky at the time that a rig worker killed in the blowout once described it to his wife as “the well from hell.”

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Crazed.

US Army Commander Urges NATO To Confront Russia (RT)

US army commander in Europe says Russia is a “real threat” urging NATO to stay united. The alliance is not interested in a “fair fight with anyone” and wants to have “overmatch in all systems,” Lieutenant-General Frederick “Ben” Hodges believes. “There is a Russian threat,” Hodges told the Telegraph, maintaining that Russia is involved in ongoing conflict in eastern Ukraine. A key objective for NATO is not to let Russia outreach it in terms of capabilities, the general said. “We’re not interested in a fair fight with anyone,” General Hodges stated. “We want to have overmatch in all systems. I don’t think that we’ve fallen behind but Russia has closed the gap in certain capabilities. We don’t want them to close that gap,” he revealed.

“The best insurance we have against a showdown is that NATO stands together,” he said, pointing to recent moves by traditionally neutral Sweden and Finland to cooperate more closely on defense with NATO. Moscow has expressed “special concern” over Finnish and Swedish moves towards the alliance viewing it as a threat aimed against Russia. “Contrary to past years, Northern European military cooperation is now positioning itself against Russia. This can undermine positive constructive cooperation,” Russia’s Foreign Ministry said in a statement. Hodges also said US expects its allies to contribute financially to the security umbrella provided by the NATO alliance, as its member states have been failing to allocate 2% of every member nation’s GDP to NATO budget.

“I think the question for each country to ask is: are they security consumers or security providers?” the general demanded. “Do they bring capabilities the alliance needs?” However, the general does not believe that the world is on the brink of another Cold War, saying that “the only thing that is similar now is that Russia and NATO have different views about what the security environment in Europe should be.” “I don’t think it’s the same as the Cold War,” he said, recalling “gigantic forces” and “large numbers of nuclear weapons” implemented in Europe a quarter of a century ago. “That [Cold War] was a different situation.”

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Mar 152015
 
 March 15, 2015  Posted by at 9:01 am Finance Tagged with: , , , , , , , , ,  


NPC Fred Haas, Rhode Island Avenue NE, Washington, DC 1924

Welcome To A Fed Without Patience (MarketWatch)
US Debt To Hit Legal Limit Again On Monday (MarketWatch)
BP CEO On Oil: ‘It’s Going To Be Very Painful’ (CNBC)
Oil Futures Suffer Nearly 10% Weekly Plunge (MarketWatch)
‘Most Significant Break Between Germany And US Since WWII’ (RT)
Poroshenko: 11 EU States Struck Deal With Ukraine To Deliver Weapons (RT)
Ukraine Says Creditors Face Principal Losses on Dollar Bonds (Bloomberg)
The #ALBA Dawn Of A New Europe (Beppe Grillo)
Presenting An Agenda For Europe, Ambrosetti, Lake Como, 14-3-2015 (Varoufakis)
Greece Has Plenty Of Options. It’s Just That None Are Good (Satyajit Das)
Juncker, Tsipras Agree On Creating Greek Task Force For Reforms (Kathimerini)
Athens Ready To Delay Some Election Pledges, Says Varoufakis (Reuters)
Greece’s Varoufakis Says QE To Fuel Unsustainable Equity Rally (Reuters)
The Greek Election: Why I Went Home To Vote For The First Time (Alex Andreou)
The Power of Le Pen (BBC)
UK Support For China-Backed Asia Bank Prompts US Concern (BBC)
Russia In A Spin As Its Putin Goes Missing (FT)
Is EU Army Intended To Reduce US Influence In Europe? (RT)
Steven Pinker Is Wrong About Violence And War (John Gray)

“We’re in the ninth inning of a zero-rate environment.”

Welcome To A Fed Without Patience (MarketWatch)

Get ready for a central bank without patience. The Federal Reserve on Wednesday is widely expected to remove its pledge to be “patient” in raising short-term interest rates, giving them the flexibility to move as soon as June. This may be the most anticipated Fed meeting in some time as it fundamentally changes policy to a meeting-by-meeting calculation. The Fed has not hiked rates since 2006, and it has kept rates at zero since December 2008 . The Fed will release its policy statement on Wednesday at 2 p.m. Eastern along with its latest economic forecast and the projected interest rate path of the 17 officials. A press conference with Fed Chairwoman Janet Yellen will follow at 2:30 p.m.

Fed watchers said Yellen telegraphed the Fed policy committee’s intentions in her Congressional testimony last month. Read Yellen removes another obstacle to an eventual rate hike. “I would be shocked if ‘patient’ is not removed,” said John Ryding, chief economist at RDQ Economics. “Patient” meant the Fed would not raise rates for two meetings. With formal policy deliberations scheduled for late April and June, the pledge needed to go if a June move was to be on the table. “Enough Fed officials have said they want to have the debate about hiking rates at the June meeting, so it has to come out,” Ryding said. Avery Shenfeld, chief economist at CIBC World Markets, agreed patient would be dropped and said Yellen would use her press conference to stress that the central bank has not made up its mind about a June move.

The Fed chairwoman will stress the Fed is data dependent and a decision will come on a meeting-by-meeting basis. She will highlight some of the mixed messages the economy has been sending, such as the strength in employment but the relatively soft pace of GDP growth. The goal is to keep markets from overreacting and tightening financial conditions, he said. Q1 GDP seems likely to decelerate to a 1.5% annual rate from a 2.2% rate in the final three months of 2014, he said. But growth should rebound “north of 4% “in the second quarter, which should boost worker paychecks and give the Fed a green light to hike rates, Shenfeld said. Ryding agreed: “We’re in the ninth inning of a zero-rate environment.”

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“The creditworthiness of the United States is not a bargaining chip..”

US Debt To Hit Legal Limit Again On Monday (MarketWatch)

The U.S. government is about to run into the legal limit on how much it can borrow, but don’t expect a whole lot of fireworks again in Congress over what’s become a frequently quarrelsome issue. The U.S. debt limit goes into effect on Monday after a one-year suspension, with a ceiling of around $18 trillion. Treasury Secretary Jack Lew on Friday urged John Boehner, the Republican speaker of the House, to raise the debt limit as quickly as possible and not to allow the issue to become a political football. “The creditworthiness of the United States is not a bargaining chip, and I again urge Congress to address this matter without controversy or brinksmanship,” Lew wrote in a second letter to Boehner in two weeks.

Americans and foreign investors need not worry, though. The U.S. Treasury has the means to keep funding the government until October through the use of so-called extraordinary measures, the Congressional Budget Office estimates. And the Bipartisan Policy Center in a new report suggests a breach in the debt limit could be put off potentially until the end of the December. What’s more, the leader of the U.S. Senate, Republican Mitch McConnell of Kentucky, insists he won’t let the government default or shut down amid negotiations with the White House on raising the debt limit.

That’s good news for the nation’s bondholders or anyone dependent on the feds for support, such as retirees receiving Social Security or other benefits, because it means the government will continue to pay its bills on time. The modern-day debt limit, which has been in place since World War II, caps how much money the government can borrow. The limit has been raised about a hundred times since the 1950s, but it’s become the source of increasingly hostile political tug-of-wars since the mid-1990s.

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“We’re back into the normal world of volatility for oil and gas prices..”

BP CEO On Oil: ‘It’s Going To Be Very Painful’ (CNBC)

The dramatic drop in oil prices and the transfer of wealth to consumers is going to be very painful for the oil and gas industry, Bob Dudley, CEO of BP, told CNBC Saturday. Speaking at Egypt’s Economic Development Conference in the resort town of Sharm el-Sheikh, Dudley said that oil prices – which have fallen around 60% since last June – had been a “huge shock” for companies like his. “We’re back into the normal world of volatility for oil and gas prices,” he said on a CNBC-hosted panel. “Anything that happens that fast can have unintended consequences. BP was the first European major to sound the alarm on tumbling oil prices – on December 10, it warned that it was implementing a cost-cutting program as a result.

In December, oil majors in Europe also received a stark warning from credit ratings agency S&P, which placed BP, Total and Shell on a negative watch. It means the three firms are more likely to have their debt rating downgraded over the next three months. Speaking at the investment event in Egypt, Dudley added that BP had operated continuously in the country for the last 25 years. His comments come after the oil giant signed an deal to develop gas resources in Egypt, with investment of around $12 billion from BP and its partners. The company said the project underlined its commitment to the Egyptian market and was a vote of confidence in the country’s investment climate and economic potential.

Three days later, BP also announced a gas discovery in the East Nile Delta which it said was expected to be the deepest well ever drilled in Egypt. “I think the time is absolutely right,” Dudley said about investing in the Middle Eastern nation. “(Egypt) really is the lynchpin…it’s the largest market in the Middle East.” On Saturday, Dudley said the investments would increase in gas production in the country by 25 to 30%.

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Anything over zero is a godsend by now.

Oil Futures Suffer Nearly 10% Weekly Plunge (MarketWatch)

Oil futures fell sharply on Friday, to tally a weekly decline of nearly 10%, as a monthly report from the International Energy Agency raised concerns that the glut of crude supplies and tightening storage capacity in the U.S. may cause prices to weaken further. Crude-oil for delivery in April fell $2.21, or 4.7%, to settle at $44.84 a barrel on the New York Mercantile Exchange. Prices ended the week with a loss of 9.6%. April Brent crude on London’s ICE Futures exchange shed $2.41, or 4.2%, to settle at $54.67 a barrel, with the front-month contract down 8.5% for the week. After trading on Nymex ended Friday, the U.S. Energy Department said it plans to buy up to 5 million barrels of crude for the Strategic Petroleum Reserve. Prices in electronic trading edged backed above $45.

In its report early Friday, the IEA said any appearance of stability in oil is tenuous. “Behind the facade of stability, the rebalancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly,” the report said. Ballooning inventories combined with the nation’s shrinking oil storage could drag prices lower, it said. The comments from IEA come as oil has been trading in a relatively narrow band over the course of the past few weeks, on the heels of steep declines in weekly U.S. rig counts. Baker Hughes on Friday reported that the number of U.S. rigs actively drilling for oil as of March 13 fell 56 rigs from last week to 866.

“Oil rig counts fell for a historic 14th week in a row,” said Phil Flynn, senior market analyst at Price Futures Group. “While at this point the rig count drop has not impacted output, at this rate it soon will.” Flynn also pointed out that the IEA report wasn’t all that bearish as it raised its demand estimate. The IEA forecast average global oil demand of 93.5 million barrels a day for 2015.

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Sounds good.

‘Most Significant Break Between Germany And US Since WWII’ (RT)

People in the US, like ex-CIA chief Michael Hayden, are trying to put Berlin back in place dissatisfied that the Germans are acting like adults but not like subservient servants from of the “five eyes” alliance, says Ray McGovern, a former CIA officer. Speaking at a Washington-based think tank, the New America Foundation, on Tuesday former NSA and CIA director, General Michael Hayden, said that terror attacks such as the Charlie Hebdo shooting are inevitable and similar to Ebola. He confessed that the NSA would never agree to stop spying on Germany whatever the political fallout.

RT: Do you really believe that nothing can be done to avoid terror attacks like Charlie Hebdo, given the West’s massive intelligence networks?
Ray McGovern: It does make everything that General Hayden implemented at the NSA worthless. The famous pile, from which you are supposed the extract a little nugget on terrorism, it hasn’t worked. Hayden has his nose out of joint. He is neocon who is very dissatisfied these days and particularly with the performance of German Chancellor Angela Merkel because she is not acting obediently anymore. She actually sees Germany interests first, and has prevented a worsening of the situation in Ukraine. General Hayden doesn’t like that. He doesn’t like Angela Merkel being an upstart and saying that she’s displeased at having her handy, her little cell phone monitored. Well, “she should know her place.” So Hayden here is not the most diplomatic person in the world. He is trying to tell Merkel and everyone else who is outside the [Five Eyes intelligence alliance] – the UK, the US, Canada, Australia, and New Zealand – that they are secondary citizens and they will remain so as long as they don’t spring to obedience the way the other four do.

RT: The former NSA director suggested that relations between Germany and the US might not be as rosy as generally believed. Is that true? How do you see relations between Berlin and Washington evolving from here?
RM: The most significant break since WWII has just happened. Angela Merkel came to Washington and she said“selling offensive arms and giving them to the Ukrainians is a bad idea, we oppose it.” And the President [Barack Obama] said: “Oh, we’re still trying to make our decision about that.” She went to Russia and worked out a deal with Putin and Poroshenko saying: “Look, we need a ceasefire,” and so far the good news is that ceasefire is holding.

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But then we still have the war types and lying basterds.

Poroshenko: 11 EU States Struck Deal With Ukraine To Deliver Weapons (RT)

Ukraine has concluded deals with eleven countries of the EU on delivery of weapons, including lethal, President Petro Poroshenko told the country’s TV. He, however, didn’t mention which countries will provide ‘defensive aid’ to Kiev. “The Head of State has informed that Ukraine had contracts with a series of the EU countries on the supply of armament, inter alia, lethal one. He has reminded that official embargo of the EU on the supply of weapons to Ukraine had been abolished,” said a statement on Poroshenko’s official website, citing his interview to the TV channel “1+1”.

According to Poroshenko’s statement, he is confident that EU and USA will support Ukraine with weapons if needed. “If there is a new round of aggression against Ukraine, I can surely say that we will immediately receive both lethal weaponry and new wave of sanctions against the aggressor. We will act firmly and in a coordinated manner.” Ukraine won’t reduce its defense capacity, said Poroshenko, adding that now “intensive combat training is being held” in the country. “We are mining the most dangerous tank directions and building engineering structures under the new plan and projects.”

The statement said that the decision of the US President Barack Obama “who decided to supply Kiev with defensive weaponry” is crucial. “This armament will increase preciseness and efficiency of the Ukrainian weapons. In addition, thermal imagers and radars that detect motion help counteract reconnaissance and subversive groups of the opponent.” The Ukrainian leader said the situation in Donetsk and Lugansk Regions is being gradually deescalated, adding that the Ukrainian army hasn’t suffered casualties for several days.

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Good model for Greece?!

Ukraine Says Creditors Face Principal Losses on Dollar Bonds (Bloomberg)

Ukraine’s bond restructuring may include a reduction in principal, as well as an extension of maturities and lower coupons, Finance Minister Natalie Jaresko said in her first talks with creditors about easing the country’s debt load. The nation of more than 40 million, which is struggling to contain a separatist war that has killed more than 6,000 people in its easternmost regions, will try to reorganize debt from both the government and publicly run entities by June, Jaresko said in a conference call on Friday. She called on Russia, which has lent Ukraine $3 billion in a bond maturing this year, to join the talks. The price of Ukraine’s dollar debt fell. The operation “will probably involve the combination of a maturity extension, a coupon reduction and a principal reduction,” Jaresko said. “The proportion of each of these elements will be discussed with creditors.”

Ukraine won approval this week for $17.5 billion of IMF aid, bolstering reserves that have fallen to a more-than-decade low. The loan is part of a $40 billion package to rescue the nation’s economy as it buckles under a plunging hryvnia currency and the war, which has devastated its industrial heartland. The best investors can try is to limit the principal reduction, said Richard Segal, the head of emerging-market credit strategy at Jefferies in London. Avoiding losses on the face value of the debt “seems to be mathematically impossible,” Michael Ganske, who helps oversee $7 billion in emerging-market assets as a money manager at Rogge Global Partners in London, said by e-mail.

Ukraine’s dollar bonds extended losses after Jaresko’s comments. The dollar notes due in July 2017 dropped 1.5 cents to 44.3 on the dollar at 8 p.m. in Kiev, increasing the yield to 53.48%. The securities fell as low as 41.35 cents last month, before rallying in the run-up to the IMF’s approval of its second Ukraine loan in 11 months this week. “Unfortunately, they have to insist on debt reduction,” Ronald Schneider, who helps manage about €800 million at Raiffeisen in Vienna, including Ukrainian bonds, said by e-mail on Friday. “Negotiations with creditors would be easier without a haircut” reducing the face value of the securities, he said.

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Beppe: “Something that can ensure no one is left behind.”

The #ALBA Dawn Of A New Europe (Beppe Grillo)

“They are telling us that the European economy is in recovery because the reforms are working. And the government has been celebrating the 0.1% growth in GDP in the first quarter of 2015 as a trophy. The reality is, however, that:
– since 2010, our GDP has lost 10 points;
– since the beginning of the crisis about 100 thousand companies have gone bust with the loss of more than a million jobs, and out of every hundred young people, fifty are without a job.

And (as we hope others will do), we can examine the state of our country in terms of the index called “Benessere Equo e Sostenibile” {Equitable and Sustainable Well-being} instead of using the Gross Domestic Product, and we become aware of a drama that is ever more ferocious. In this tragic recessionary vortex, the countries that have suffered the greatest setback are those in Southern Europe: as well as Italy, there’s Greece, Spain and Portugal. The economists all over the world and a few German hacks have called us “PIGS“. After depriving us of our future, they have insulted us in the media. Today we are at a crossroads.. The first round lost by Alexis Tsipras against the Troika, demonstrates that for Berlin, Brussels and Frankfurt there is no alternative to “austerity Europe”. This is confirmed by Renzi’s “Jobs Act” and the growing amount of trickery he’s coming up with.

It’ll be difficult to get out of this trap, but it is possible if we manage to build an alliance among the Mediterranean countries that can break the logic of German mercantilism. Italy, Greece, Spain, Portugal and France – together – represent the third biggest economy in the world. We could create a “cartel” and get greater contractual power with Berlin. Someone has already done it before us: the countries of ALBA, formed in 2001 as an alternative to The Free Trade Area of the Americas (FTAA) that was what the United States wanted. The political principles and the concept of social cooperation that the countries of Venezuela, Bolivia, Nicaragua, Ecuador and Cuba have signed up to, can be our source of inspiration to fight the domineering and neo-liberal process at the basis of the endless crisis in the West. They’ve had the FTAA, and soon, we’ll have TTIP.

Today there are movements and parties not delegitimized by years of power and of compromising with the corporate-financial lobbies that can, or must, start to think of a new supportive Community that can reject the diktats of the Troika. The dawn of a new Europe is close at hand: a great Euro-Mediterranean alliance of sovereign States that can give back freedom, civilisation, sovereignty and democracy to our own people. Something that can ensure no one is left behind.

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Yanis’ first blog since Jan 25 is this long speech at the Ambrosetti forum March 14.

Presenting An Agenda For Europe, Ambrosetti, Lake Como, 14-3-2015 (Varoufakis)

Dear All, Ministerial duties have impeded my blogging of late. I am now breaking the silence since I have just given a talk that combines my previous work with my current endeavours. Here is the text of the talk I gave this morning at the Ambrosetti Conference on the theme of ‘An Agenda for Europe’. Long time readers will recognise the main theme – evidence of a certain continuity… Back in March 1971, as Europe was preparing itself for the Nixon Shock and beginning to plan for a European monetary union closer to the Gold Standard than to the Bretton Woods system that was unravelling, Cambridge economist Nicholas Kaldor wrote the following lines in an article published in The New Statesman:

“… [I]t is a dangerous error to believe that monetary and economic union can precede a political union or that it will act (in the words of the Werner report) “as a leaven for the evolvement of a political union which in the long run it will in any case be unable to do without”. For if the creation of a monetary union and Community control over national budgets generates pressures which lead to a breakdown of the whole system it will prevent the development of a political union, not promote it.”

Unfortunately, Kaldor’s prescient warning was ignored and replaced by a touching optimism that monetary union will forge stronger links between Europe’s nations and, following some large financial sector crisis (like that of 200), European leaders will be forced by circumstances to deliver the political union that was always necessary. And so, at a time when America was recycling other peoples’ surpluses at a global scale, a Gold Standard of sorts was created in the midst of Europe, causing a wall of capital to flow into Wall Street fuelling financialisation and large-scale private money minting worldwide – with French and German rushing in to participate enthusiastically.

Within the Eurozone the illusion of riskless risk was reinforced by the fantasy that (in a union built on the Principle of Perfectly Separable Public Debts and Separate Banking Systems,) lending to a Greek entity was more or less equally risky as lending to a Bavarian one. As a result, net trade surpluses gave rise to net capital flows into the deficit nations, causing unsustainable bubbles in both the private and the public sectors. Our Eurozone growth model, ladies and gentlemen, relied heavily on private, bank-driven, vendor-financing for the net exports of the surplus nations. It was as if, in constructing the Eurozone, we removed all shock absorbers while ensuring that the shock, when it came, would be massive.

And when that massive shock came, in the form of the Great Eurozone Crisis in 2010, following the global Crash of 2008, with my country, Greece, proving the canary in the mine, Europe decided to remain in denial of the nature of the crisis, insisting on dealing with the insolvencies caused by the bursting of bubbles (first in the banking sector and then in the realm of public debt) as if they were mere liquidity problems, lending to the deeply indebted nations through SPVs (special purpose vehicles) that resembled stacked CDOs (collateralized debt obligations). The end result was a transfer of potential losses from the banks’ books onto Europe’s taxpayers in a manner that placed most of the burden of adjustment on the crisis countries that could least bear it.

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But that doesn’t mean they‘re all equally bad.

Greece Has Plenty Of Options. It’s Just That None Are Good (Satyajit Das)

The choices for Greece now are clear. In the first option, the European Union makes allowances: maturities for loans, especially short-term ones, are extended; there are concessions on interest rates; debt may be replaced with securities without maturity and a coupon linked to growth – Keynes-style “Bisque bonds”; the European Central Bank continues to support the liquidity needs of the Greek banks; and the hated Troika is renamed, to remove the odious association with the past. Despite the reduction in the value of the debt outstanding, the EU and lenders avoid a politically difficult explicit debt writedown. Syriza claims to have fulfilled its mandate to stand up to the EU and Germany, and reclaim Hellenic sovereignty and pride. In reality, little changes. Under this scenario, Greece and the EU are back at the negotiating table within six to 12 months, confronting the same issues.

In the second option, Greece defaults on its debt but stays in the euro. (It is not clear how a nation in default can remain within the euro other than through the fortuitous absence of an ejection mechanism.) Greek banks collapse if the ECB decides to withdraw funding. Capital flight accelerates, requiring capital controls. The Greek Government is left with no obvious source of funding, other than a parallel currency or IOUs, as used during some government shutdowns in the US. Greece’s competitive position is unchanged as it purports to use the euro. The EU and lenders incur substantial losses on their loans.

In the third option, Greece defaults and leaves the euro, bringing in new drachmas. There is short-term chaos. Activity in Greece collapses. The EU and lenders face the same problem as in the second option. In addition, the euro is destabilised. The third option allows Greece to regain control of its currency and interest rates. Sharp devaluation of the new drachma improves competitiveness, for example in tourism. The ability of the central bank to create and control money supply helps restore liquidity to its banks and provides a mechanism for financing the Government.

A cheap new drachma, if appropriately managed, may reverse capital flight, as the threat of a loss of purchasing power is reduced. A devalued currency may also help attract inflows of funds looking for bargains. In time, Greece regains access to capital markets as Russia did after its 1998 default. Greece regains economic sovereignty but at the cost of reduced living standards as import prices sky-rocket and international purchasing power is diminished. But after the initial dislocation, a strong recovery may ensue.

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“Juncker, however, insisted that there was no scope for Greece and its eurozone partners failing to find a way to progress.”

Juncker, Tsipras Agree On Creating Greek Task Force For Reforms (Kathimerini)

Greece was warned on Friday that it has to make swifter progress in agreeing reforms with its lenders, as European Commission President Jean-Claude Juncker and Prime Minister Alexis Tsipras agreed in Brussels on the creation of a Greek task force to work with EU experts on structural improvements. “I don’t think we have made sufficient progress,” Juncker told reporters as he welcomed Tsipras to the Commission on Friday, echoing Eurogroup chief Jeroen Dijsselbloem’s comments that the two weeks following the February 20 agreement on a four-month bailout extensions between Greece and its creditors had been “wasted.” Juncker, however, insisted that there was no scope for Greece and its eurozone partners failing to find a way to progress.

“I’m totally excluding a failure… This is not a time for division. This is the time for coming together,” he said. His comments came in the wake of German Finance Minister Wolfgang Schaeuble refusing to rule out the possibility that Greece would slip out of the single currency. “As the responsibility, the possibility to decide what happens lies only with Greece and because we don’t exactly know what those in charge in Greece are doing, we can’t rule it out,” he told an Austrian broadcaster. In an interview with Germany’s Der Spiegel magazine due to be published on Saturday, European Economic and Monetary Affairs Commissioner Pierre Moscovici strikes a similar tone to Juncker, insisting that the option of a Greek exit should not be considered. “All of us in Europe probably agree that a Grexit would be a catastrophe – for the Greek economy, but also for the eurozone as a whole,” he said.

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Mind you: Delay. Not give up.

Athens Ready To Delay Some Election Pledges, Says Varoufakis (Reuters)

Greek Finance Minister Yanis Varoufakis said on Friday he was confident Athens could reach a deal by April 20 with its international creditors on the reforms it must implement to unblock further aid. Speaking to reporters on the sidelines of a business conference in northern Italy, Varoufakis also said Greece’s new leftist government was prepared to delay some of its promised anti-austerity measures in an effort to win EU backing. “We can complete the review of the 20th of February agreement… We have a commitment, all of us, to reach an agreement by the 20th of April,” Varoufakis said. The government was elected in January on a pledge to roll back austerity and renegotiate the terms of a €240 billion international bailout, but it has faced fierce resistance from EU partners who are unwilling to offer Athens major compromises.

Although the partners agreed on Feb. 20 to a four-month extension to the bailout programme, the accord did not give Greece access to funds pledged to it from the euro zone and the International Monetary Fund. To obtain that cash, Athens needs to agree on a revised package of measures. After long delays, the discussions only kicked off in earnest this week in Brussels. Varoufakis indicated on Friday a willingness to compromise. “If this means that, for the next few months that we have negotiations, we suspend or we delay the implementation of our (election) promises, we should do precisely that in the context to build trust with our partners…,” he said.

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That’s not its worst consequence.

Greece’s Varoufakis Says QE To Fuel Unsustainable Equity Rally (Reuters)

The ECB’s bond purchases will create an unsustainable stock market rally and are unlikely to boost euro zone investments, Greek Finance Minister Yanis Varoufakis warned on Saturday. The ECB began a programme of buying sovereign bonds, or quantitative easing, on Monday with a view to supporting growth and lifting eurozone inflation from below zero up towards its target of just under 2%. Bond yields in the currency bloc have collapsed, but record low interest rates so far have not spurred investments that would support growth in recession-hit countries like Italy or Spain.

“QE is all around us and optimism is in the air,” Varoufakis told a business audience in Italy. “At the risk to sound the party pooper … I find it hard to understand how the broadening of the monetary base in our fragmented and fragmenting monetary union will transform itself into a substantial increase in productive investments. “The result of this is going to be an equity run boost that will prove unsustainable,” he said.

Varoufakis reiterated that the new Greek government was ready to time its promised anti-austerity measures in a way that helped negotiations with European Union partners over the disbursement of financial aid. “We never said we’re going to renege on any promises, we said that our promises concern a four-year parliamentary term,” he told reporters on the sidelines of the conference. “They will be spaced out in an optimal way, in a way that is in tune with our bargaining stance in Europe and also with the fiscal position of the Greek state,” he said.

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“Most understand that, whatever one thinks of the outcomes, there would not have been any negotiation at all but for Syriza.”

The Greek Election: Why I Went Home To Vote For The First Time (Alex Andreou)

It has become clear that most of the commentariat no longer possesses even the basic language to engage with politics that is not free market-based. It looks at a government with clear social intentions, but flexible methods, and it cannot make sense of it. Politicians who, after an election, appear to want to achieve precisely what they promised before it, just don’t compute. Even in its first months, Syriza must be discredited, it seems, at any cost. Recent polls, and the following interviews, reveal Greek voters to be infinitely more sophisticated. Most understand that this is merely the start of a necessary conversation about austerity and, more generally, capitalism. Many hope that Spain, Italy and even the UK will join it in time.

Most understand that, whatever one thinks of the outcomes, there would not have been any negotiation at all but for Syriza. After four decades of being ruled by corruption and nepotism, expectations are low. Everything is a bonus. It feels utterly refreshing to have someone fighting your corner. After almost two months of dominating international news, Greece will no doubt disappear again into relative obscurity. This is as it should be. A country whose economy accounts for less than 0.3% of the world’s GDP should not be the focus of such intense attention.

That it has been consistently presented as the fuse that, once lit, will set the globe on the path to inevitable decline is revealing. It says that the systemic interconnectedness that resulted in the global financial crisis is still very much present. It reveals a fear of anyone who does things differently. It speaks volumes about this being a political, as well as an economic, crisis. Most of all, such scrutiny makes it impossible for an inexperienced government to get on with the practical business of running a country. The absence of this obsessive examination will be welcome. Wouldn’t it be something if our collective folly, this experiment at fair and honest government, actually made a difference?

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“She talks about this as “regaining our economic freedom” and the “exercise of economic patriotism.”

The Power of Le Pen (BBC)

Marine le Pen. Arguably, she is the most important opposition politician in Europe, who has the potential to affect the way of life of all of us. How so? Well her party is France’s most popular. It topped the polls in last years European elections and is expected to do so again in the first round of local elections on March 22. Also France’s business and political establishment, with whom I have spent a good deal of time nattering in recent weeks, takes it for granted that she will go through to the second round of the French presidential elections in 2017 – and is not remotely confident that a centre-ground candidate of left or right will be able to rally sufficient moderate support to beat her. So she matters, which is why I interviewed her twice for my film, once before and once after the Charlie Hebdo atrocity.

One important question is whether her repudiation of her party’s racist and anti-Semitic past is more than cosmetic (she insists it is – but many argue the party’s criticism of Islam is insidious). Outside France probably what may matter most about her is that she explicitly blames the EU and eurozone for all France’s economic woes. She is in favour of French withdrawal from both, so that she can restrict immigration, impose customs duties on imports, nationalise big businesses when useful, and re-instate the French Franc. She talks about this as “regaining our economic freedom” and the “exercise of economic patriotism”. When I put it to her that her protectionist policies were chillingly similar to those that reinforced the Great Depression of the 1930s, she said she totally disagreed and that the relevant crisis was the “eurozone that has been the black hole of world growth for 12 years”.

Whether or not you think reinstating economic borders is the road to penury, it is very difficult to see how the eurozone could survive a French exit – and the economic shock of even rising fears of French withdrawal would seriously set back a European recovery (the cost of finance would rise sharply, because of the fear that converting strong euros into weak francs would generate huge losses on French assets). None of which is to say there is a need to panic about this now. But it does show that unless and until Europe’s establishment succeeds in demonstrating that the EU and the eurozone is serving the interests of most people, which they are conspicuously failing to do at the moment, Europe’s way of life will be under sustained and serious threat.

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“..the US sees the Chinese effort as a ploy to dilute US control of the banking system..”

UK Support For China-Backed Asia Bank Prompts US Concern (BBC)

The US has expressed concern over the UK’s bid to become a founding member of a Chinese-backed development bank. The UK is the first big Western economy to apply for membership of the Asian Infrastructure Investment Bank (AIIB). The US has raised questions over the bank’s commitment to international standards on governance. “There will be times when we take a different approach,” a spokesperson for Prime Minister David Cameron said about the rare rebuke from the US. The AIIB, which was created in October by 21 countries, led by China, will fund Asian energy, transport and infrastructure projects.

The UK insisted it would demand the bank adhere to strict banking and oversight procedures. “We think that it’s in the UK’s national interest,” said Mr Cameron’s spokesperson. Pippa Malmgren, a former economic advisor to US President George W Bush, told the BBC that the public chastisement from the US indicates the move might have come as a surprise. “It’s not normal for the United States to be publically scolding the British,” she said, adding that the US’s focus on domestic affairs at the moment could have led to the oversight. However, Mr Cameron’s spokesperon said UK Chancellor George Osborne did discuss the measure with his US counterpart before announcing the move.

In a statement announcing the UK’s intention to join the bank, Mr Osborne said that joining the AIIB at the founding stage would create “an unrivalled opportunity for the UK and Asia to invest and grow together”. The hope is that investment in the bank will give British companies an opportunity to invest in the world’s fastest growing markets. But the US sees the Chinese effort as a ploy to dilute US control of the banking system, and has persuaded regional allies such as Australia, South Korea and Japan to stay out of the bank.

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He’s already ‘back’. Who starts this sort of thing?

Russia In A Spin As Its Putin Goes Missing (FT)

He is the most talked-about person in Russia – even when he’s nowhere to be seen. Moscow is buzzing with talk about the whereabouts of Vladimir Putin who took a week-long hiatus from public appearances from March 5, fuelling wild rumours about the president’s health, political future and love life. On Twitter, critics of the president have been tweeting morbid jokes and memes under the hashtag “Putin is dead”, while Russian bloggers and pundits pore over the official Kremlin website looking for discrepancies in Mr Putin’s alleged work schedule.

Andrei Illarionov, a former adviser to Mr Putin now based in Washington, claimed in a blog post that Mr Putin had fallen victim to a palace coup and fled abroad, while Konstantin Remchukov, an influential Moscow editor, alleged that the state-owned oil company Rosneft’s chairman Igor Sechin was about to get the boot, indicating that a big government shake-up was looming. In Switzerland, the news outlet Blitz.ch ran a report claiming that Alina Kabaeva, a former gymnast and Duma deputy who has been linked romantically with Mr Putin, had given birth to a child this week in Switzerland’s Italian-speaking region of Ticino, suggesting that the Russian president had taken time off for a “baby mission”.

The Kremlin’s press service has brushed off the various allegations, with Mr Putin’s spokesman repeatedly insisting that the president’s health is “fine”. On Friday, the Kremlin announced that he would be meeting the president of Kyrgyzstan – publicly – in St Petersburg on Monday. Later, Russian state television channels co-ordinated to show Mr Putin at a Kremlin meeting with the head of Russia’s supreme court. However, at least one blogger claimed that the footage was dated, noting that the president’s desk had a clock on it that was supposed to have been given away as a gift a few days earlier.

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Great read.

Is EU Army Intended To Reduce US Influence In Europe? (RT)

Germany itself is the ultimate prize for the US in the conflict in Ukraine, because Berlin has huge sway in the direction that the EU turns. The US will continue to stoke the flames in Ukraine to destabilize Europe and Eurasia. It will do what it can to prevent the EU and Russia from coming together and forming a “Common Economic Space” from Lisbon to Vladivostok, which is dismissed as some type of alternative universe in the Washington Beltway. The Fiscal Times put it best about the different announcements by US officials to send arms to Ukraine. “Given the choreographed rollout, Washington analysts say, in all likelihood this is a public-opinion exercise intended to assure support for a weapons program that is already well into the planning stages,” the news outlet wrote on February 9.

After the Munich Security Conference it was actually revealed that clandestine arms shipments were already being made to Kiev. Russian President Vladimir Putin would let this be publicly known at a joint press conference with Hungarian Prime Minister Viktor Orban in Budapest when he said that weapons were already secretly being sent to the Kiev authorities. In the same month a report, named ‘Preserving Ukraine’s Independence, Resisting Russian Aggression’, was released arguing for the need to send arms to Ukraine — ranging from spare parts and missiles to heavy personnel — as a means of ultimately fighting Russia. This report was authored by a triumvirate of leading US think-tanks, the Brookings Institute, the Atlantic Council, and the Chicago Council on Global Affairs — the two former being from the detached ivory tower “think-tankistan” that is the Washington Beltway.

This is the same clique that has advocated for the invasions of Iraq, Libya, Syria, and Iran. It is in the context of divisions between the EU and Washington that the calls for an EU military force are being made by both the European Commission and Germany. The EU and Germans realize there is not much they can do to hamper Washington as long as it has a say in EU and European security. Both Berlin and a cross-section of the EU have been resentful of how Washington is using NATO to advance its interests and to influence the events inside Europe. If not a form of pressure in behind the door negotiations with Washington, the calls for an EU military are designed to reduce Washington’s influence in Europe and possibly make NATO defunct.

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Can’t let John Gray go unnoticed.

Steven Pinker Is Wrong About Violence And War (John Gray)

If great powers have avoided direct armed conflict, they have fought one another in many proxy wars. Neocolonial warfare in south-east Asia, the Korean war and the Chinese invasion of Tibet, British counter-insurgency warfare in Malaya and Kenya, the abortive Franco-British invasion of Suez, the Angolan civil war, the Soviet invasions of Hungary, Czechoslovakia and Afghanistan, the Vietnam war, the Iran-Iraq war, the first Gulf war, covert intervention in the Balkans and the Caucasus, the invasion of Iraq, the use of airpower in Libya, military aid to insurgents in Syria, Russian cyber-attacks in the Baltic states and the proxy war between the US and Russia that is being waged in Ukraine – these are only some of the contexts in which great powers have been involved in continuous warfare.

While it is true that war has changed, it has not become less destructive. Rather than a contest between well-organised states that can at some point negotiate peace, it is now more often a many-sided conflict in fractured or collapsed states that no one has the power to end. The protagonists are armed irregulars, some of them killing and being killed for the sake of an idea or faith, others from fear or a desire for revenge and yet others from the world’s swelling armies of mercenaries, who fight for profit. For all of them, attacks on civilian populations have become normal. The ferocious conflict in Syria, in which methodical starvation and the systematic destruction of urban environments are deployed as strategies, is an example of this type of warfare.

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Feb 032015
 
 February 3, 2015  Posted by at 11:56 am Finance Tagged with: , , , , , , , , ,  


DPC City Hall subway station, New York 1904

US Consumer Spending Declined in December by Most in Five Years (Bloomberg)
US Household Spending Tumbles Most Since 2009 (Zero Hedge)
Q1 Energy Earnings Shocker: Then And Now (Zero Hedge)
Exxon Revenue, Earnings Down 21% From YoY, Sales Miss By $5 Billion (Zero Hedge)
BP Hit By $3.6 Billion Charge, Cuts Capex On Oil Prices (CNBC)
Greece Finance Minister Varoufakis Unveils Plan To End Debt Stand-Off (FT)
Germany Will Have To Yield In Dangerous Game Of Chicken With Greece (AEP)
The Truth About Greek Debt Is Far More Nuanced Than You Think (Telegraph)
Greece Standoff Sparks Ire From US, UK Over Economic Risks (Bloomberg)
Varoufakis Is Brilliant. So Why Does He Make Everyone So Nervous? (Bloomberg)
Greece’s Damage Control Fails to Budge Euro Officials (Bloomberg)
What is Plan B for Greece? (Kenneth Rogoff)
Why The Bank Of England Must Watch Its Words (CNBC)
More Than 25% Of Euro Bond Yields Are Negative, But … (MarketWatch)
Draghi’s Negative-Yield Vortex Draws in Corporate Bonds (Bloomberg)
China Debt Party Nears The End Of The Road (MarketWatch)
Global Deflation Risk Deepens As China Economy Slows (Guardian)
Canada Mauled by Oil Bust, Job Losses Pile Up (WolfStreet)
Aussie Gets Crushed – How Much More Pain Lies Ahead? (CNBC)

But don’t worry: nothing Bloomberg can’t spin: “Consumers are in a good mood coming into 2015, and we think that’s likely to continue..”

US Consumer Spending Declined in December by Most in Five Years (Bloomberg)

Consumer spending fell in December as households took a breather following a surge in buying over the previous two months. Household purchases declined 0.3%, the biggest decline since September 2009, after a 0.5% November gain, Commerce Department figures showed Monday in Washington. The median forecast of 68 economists in a Bloomberg survey called for a 0.2% drop. Incomes and the saving rate rose. Consumers responded to early promotions by doing most of their holiday shopping in October and November, leading to the biggest jump in consumer spending last quarter in almost nine years. For 2015, a pick-up in wage growth will be needed to ensure households remain a mainstay of the expansion as the economy tries to ward off succumbing to a global slowdown.

“Consumers are in a good mood coming into 2015, and we think that’s likely to continue,” said Russell Price, a senior economist at Ameriprise, who correctly forecast the drop in outlays. “The prospects for 2015 look very encouraging.” Stock-index futures held earlier gains after the report. Projections for spending ranged from a decline of 0.6% to a 0.2% gain. The previously month’s reading was initially reported as an increase of 0.6%. For all of 2014, consumer spending adjusted for inflation climbed 2.5%, the most since 2006. Incomes climbed 0.3% in December for a second month, the Commerce Department’s report showed. The Bloomberg survey median called for a 0.2% increase. November’s income reading was revised down from a 0.4% gain previously reported. While growth in the world’s largest economy slowed in the fourth quarter, consumption surged, with household spending rising at the fastest pace since early 2006, a report from the Commerce Department last week showed.

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Recovery.

US Household Spending Tumbles Most Since 2009 (Zero Hedge)

After last month’s epic Personal Income and Spending data manipulation revision by the BEA, when, as we explained in detail, the household saving rate (i.e., income less spending ) was revised lower not once but twice, in the process eliminating $140 billion, or some 20% in household savings… there was only one possible thing for household spending to do in December: tumble. And tumble it did, when as moments ago we learned that Personal Spending dropped in the month of December by a whopping 0.3%, the biggest miss of expectations since January 2014 and the biggest monthly drop since September 2009!

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“By December 31, the estimated growth rate fell to -28.9%. Today, it stands at -53.8%.” Just a little off.”

Q1 Energy Earnings Shocker: Then And Now (Zero Hedge)

Here is what Factset has to say about forecast Q1 energy earnings: “On September 30, the estimated earnings growth rate for the Energy sector for Q1 2015 was 3.3%. By December 31, the estimated growth rate fell to -28.9%. Today, it stands at -53.8%.” Just a little off. This is what a difference 4 months makes.

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“XOM did the best with margins and accounting gimmickry it could under the circumstances..”

Exxon Revenue, Earnings Down 21% From YoY, Sales Miss By $5 Billion (Zero Hedge)

Moments ago, following our chart showing the devastation in Q1 earning forecasts, Exxon Mobil came out with its Q4 earnings, and – as tends to happen when analysts take a butcher knife to estimates – beat EPS handily, when it reported $1.56 in EPS, above the $1.34 expected, if still 18% below the $1.91 Q4 EPS print from a year earlier. A primary contributing factor to this beat was surely the $3 billion in Q4 stock buybacks, with another $2.9 billion distributed to shareholders mostly in the form of dividends. Overall, XOM distributed $23.6 billion to shareholders in 2014 through dividends and share purchases to reduce shares outstanding.

This number masks the 29% plunge in upstream non-US earnings which were smashed by the perfect storm double whammy of not only plunging oil prices but also by the strong dollar. Curiously, all this happened even as XOM actually saw its Q4 worldwide CapEx rise from $9.9 billion a year ago to $10.5 billion, even though capital and exploration expenditures were $38.5 billion in the full year, down 9% from 2013. However, while XOM did the best with margins and accounting gimmickry it could under the circumstances, there was little it could do to halt the collapse in revenues, which printed at $87.3 billion, well below the $92.7 billion expected, and down a whopping 21% from a year ago. And this is just in Q4 – the Q1 slaughter has yet to be unveiled!

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Set to get much worse.

BP Hit By $3.6 Billion Charge, Cuts Capex On Oil Prices (CNBC)

BP revealed plans to cut capital expenditure (capex) on Tuesday, after it was hit by tumbling oil prices and an impairment charge of $3.6 billion. “We have now entered a new and challenging phase of low oil prices through the near- and medium-term,” said CEO Bob Dudley in a news release. “Our focus must now be on resetting BP: managing and rebalancing our capital program and cost base for the new reality of lower prices while always maintaining safe, reliable and efficient operations.” BP reported a replacement-cost loss of $969 million for the fourth quarter of 2014, after taking a $3.6-billion post-tax net charge relating to impairments of upstream assets given the fall in oil prices. On an underlying basis, replacement cost profit came in at $2.2 billion, above analyst expectations of $1.5 billion.

In the news release, BP said it was “taking action to respond to the likelihood of oil prices remaining low into the medium-term, and to rebalance its sources and uses of cash accordingly.” The company said that organic capex was set to be around $20 billion in 2015, significantly lower than previous guidance of $24-26 billion. Capex for 2014 came in at $22.9 billion, lower than initial guidance of $24-25 billion. “In 2015, BP plans to reduce exploration expenditure and postpone marginal projects in the Upstream, and not advance selected projects in the Downstream and other areas,” said the company.

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“Attempting to sound an emollient note, Mr Varoufakis told the Financial Times the government would no longer call for a headline write-off of Greece’s €315bn foreign debt. Rather it would request a “menu of debt swaps..”

Greece Finance Minister Varoufakis Unveils Plan To End Debt Stand-Off (FT)

Greece’s radical new government unveiled proposals on Monday for ending the confrontation with its creditors by swapping outstanding debt for new growth-linked bonds, running a permanent budget surplus and targeting wealthy tax-evaders. Yanis Varoufakis, the new finance minister, outlined the plan in the wake of a dramatic week in which the government’s first moves rattled its eurozone partners and rekindled fears about the country’s chances of staying in the currency union. After meeting Mr Varoufakis in London, George Osborne, the UK chancellor of the exchequer, described the stand-off between Greece and the eurozone as the “greatest risk to the global economy”.

Attempting to sound an emollient note, Mr Varoufakis told the Financial Times the government would no longer call for a headline write-off of Greece’s €315bn foreign debt. Rather it would request a “menu of debt swaps” to ease the burden, including two types of new bonds. The first type, indexed to nominal economic growth, would replace European rescue loans, and the second, which he termed “perpetual bonds”, would replace European Central Bank-owned Greek bonds. He said his proposal for a debt swap would be a form of “smart debt engineering” that would avoid the need to use a term such as a debt “haircut”, politically unacceptable in Germany and other creditor countries because it sounds to taxpayers like an outright loss. But there is still deep scepticism in many European capitals, in particular Berlin, about the new government’s brinkmanship and its calls for an end to austerity policies.

“What I’ll say to our partners is that we are putting together a combination of a primary budget surplus and a reform agenda,” Mr Varoufakis, a leftwing academic economist and prolific blogger, said. “I’ll say, ‘Help us to reform our country and give us some fiscal space to do this, otherwise we shall continue to suffocate and become a deformed rather than a reformed Greece’.” [..] Mr Varoufakis said the government would maintain a primary budget surplus — after interest payments — of 1 to 1.5% of gross domestic product, even if this meant Syriza, the leftwing party that dominates the ruling coalition, would not fulfil all the public spending promises on which it was elected. Mr Varoufakis also said the government would target wealthy Greeks who had not paid their fair share of taxes during the nation’s six-year economic slump. “We want to prioritise going for the head of the fish, then go down to the tail,” he said.

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“The creation of the euro was a terrible mistake but breaking it up would be an even bigger mistake. We would be in a world where anything could happen:”

Germany Will Have To Yield In Dangerous Game Of Chicken With Greece (AEP)

Finland’s governor, Erkki Liikanen, was categorical. “Some kind of solution must be found, otherwise we can’t continue lending.” So was the ECB’s vice-president Vitor Constancio. Greece currently enjoys a “waiver”, allowing its banks to swap Greek government bonds or guaranteed debt for ECB liquidity even though these are junk grade and would not normally qualify. This covers at least €30bn of Greek collateral at the ECB window. “If we find out that a country is below that rating – and there’s no longer a (Troika) programme – that waiver disappears,” he said. These esteemed gentlemen are sailing close to the wind. The waiver rules are not a legal requirement. They are decided by the ECB’s governing council on a discretionary basis. Frankfurt can ignore the rating agencies if it wishes. It has changed the rules before whenever it suited them.

The ECB may or may not have good reasons to cut off Greece – depending on your point of view – but let us all be clear that such a move would be political. A central bank that is supposed to be the lender of last resort and guardian of financial stability would be taking a deliberate and calculated decision to destroy the Greek banking system. Even if this were to be contained to Greece – and how could it be given the links to Cyprus, Bulgaria, and Romania? – this would be a remarkable act of financial high-handedness. But it may not be contained quite so easily in any case, as Mr Osborne clearly fears. I reported over the weekend that there is no precedent for such action by a modern central bank. “I have never heard of such outlandish threats before,” said Ashoka Mody, a former top IMF official in Europe and bail-out expert. “The EU authorities have no idea what the consequences of Grexit might be, or what unknown tremors might hit the global payments system. They are playing with fire.

The creation of the euro was a terrible mistake but breaking it up would be an even bigger mistake. We would be in a world where anything could happen. “What they ignore at their peril is the huge political contagion. It would be slower-moving than a financial crisis but the effects on Europe would be devastating. I doubt whether the EU would be able to act in a meaningful way as a union after that.” In reality, the ECB cannot easily act on this threat. They do not have the political authority or unanimous support to do so, and historians would tar and feather them if they did. The ground is shifting in Paris, Rome and indeed Brussels already. Jean-Claude Juncker, the European Commission’s president, yielded on Sunday, accepting (perhaps with secret delight) that the Troika is dead. French finance minister Michel Sapin bent over backwards to be accommodating at a meeting with Mr Varoufakis. There is no unified front against Greece. It is variable geometry, as they say in EU parlance.

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“if Greece were to measure its debt using corporate accounting standards, which take account of interest rates and maturities, its debt burden could be lower than 70pc of GDP.”

The Truth About Greek Debt Is Far More Nuanced Than You Think (Telegraph)

“Greek debts are unsustainable” Greece’s debts are, as a proportion of GDP, higher than most countries in the eurozone. But, by the same measure, the interest rates it pays on those debts are among the lowest in the currency bloc; the maturities on its loans are the longest. Eurozone countries calculate their debt according to the Maastricht definition, which means that a liability is valued in the same way whether it is due to repaid tomorrow or in 50 years’ time. Greece’s debts are 175pc of GDP under this definition. Some people have calculated that if Greece were to measure its debt using corporate accounting standards, which take account of interest rates and maturities, its debt burden could be lower than 70pc of GDP.

Greece’s debts might actually be a distraction from bigger issues. One is the requirement that, under the bailout conditions, Greece must run a primary surplus of 4.5pc of GDP. Another is the so-called fiscal compact, which requires EU governments with debts of more than 60pc of GDP to reduce the excess by one-twentieth a year. Are Greece’s debts unsustainable? Maybe and maybe not. Are these targets unattainable? Probably.

“The eurozone can withstand ‘Grexit’ now” This rather depends on what you mean by “withstand”. It is certainly true that the eurozone is in a better financial position to deal with Greece quitting or being ejected from the euro than when the last crisis flared up in 2012. It now has a rescue fund and has embarked on a quantitative easing programme. Even as yields on Greek sovereign debt have shot up in recent weeks, those in Spain, Portugal and Italy have stayed at or near record lows, suggesting the markets believe the potential fallout from Greece won’t spread to other southern European countries.

It is less clear that the eurozone could handle the existential threat posed by a Grexit. Membership of the currency bloc would no longer by irrevocable. The markets would scent blood. And the political and diplomatic repercussions are almost impossible to predict: Would it subdue or embolden the various anti-austerity and anti-euro factions that are gaining ground elsewhere in the region? Would it help foster an Orthodox alliance between Greece and Russia? Does Brussels really want to find out?

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“Calling the meeting with Osborne a “breath of fresh air,” Varoufakis said: “we are highly tuned into finding common ground and we already have found it.”

Greece Standoff Sparks Ire From US, UK Over Economic Risks (Bloomberg)

U.S. and British leaders are expressing frustration at Europe’s failure to stamp out financial distress in Greece and the risk it poses to the global economy. U.K. Chancellor of the Exchequer George Osborne, whose government faces voters in three months, became the latest critics, following comments by Britain’s central banker, Mark Carney, and U.S. President Barack Obama. “It’s clear that the standoff between Greece and the euro zone is fast becoming the biggest risk to the global economy,” Osborne said after meeting Greek Finance Minister Yanis Varoufakis in London. “It’s a rising threat to our economy at home. Varoufakis travels to Rome Tuesday, along with Prime Minister Alexis Tsipras, in a political offensive geared to building support for an end to German-led austerity demands, a lightening of their debt load and freedom to increase domestic spending even as they rely on bailout loans.

Tsipras, who went to Cyprus on Monday, also heads to Brussels and Paris. Calling the meeting with Osborne a “breath of fresh air,” Varoufakis said, “we are highly tuned into finding common ground and we already have found it.” Osborne’s comment came a day after Obama questioned further austerity. “You cannot keep on squeezing countries that are in the midst of depression,” he said on CNN. “When you have an economy that is in freefall there has to be a growth strategy and not simply an effort to squeeze more and more out of a population that is hurting worse and worse.” Greece’s economy has shrunk by about a quarter since its first bailout package in 2010. Tsipras was elected Jan. 25 promising the end the restrictions that have accompanied the aid that has kept it afloat.

The premier issued a conciliatory statement on Jan. 31, promising to abide by financial obligations after Varoufakis said the country won’t take more aid under its current bailout and wanted a new deal by the end of May. Before his appointment as finance minister, he advocated defaulting on the country’s debt while remaining in the euro. The Greek finance minister told bankers in London he wants the country’s “European Union-related” loans to be restructured, leaving debt to the IMF and the private sector intact. “A priority for them is to address the high level of debt,” said Sarah Hewin, head of research at Standard Chartered, who was at the meeting. “They’re looking to restructure EU bilateral loans and ECB loans and leave IMF and private-sector debt alone. At the moment, they’re working at a broad case without being specific on how this restructuring will take place.”

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“Varoufakis knows as much about this subject “as anyone on the planet,” Galbraith says. “He will be thinking more than a few steps ahead” in any interactions with the troika.”

Varoufakis Is Brilliant. So Why Does He Make Everyone So Nervous? (Bloomberg)

Yanis Varoufakis, Greece’s new finance minister, is a brilliant economist. His first steps onto the political stage, though, didn’t seem to go very smoothly. Before joining the Syriza-led government, Varoufakis taught at the University of Texas and attracted a global following for his blistering critiques of the austerity imposed on Greece by its international creditors. Among his memorable zingers: Describing the Greek bailout deal as “fiscal waterboarding” and comparing the euro currency to the Hotel California, as in, “You can check out any time you like, but you can never leave.” His social-media followers seem to love the fiery rhetoric—but investors and European Union leaders are clearly less enthusiastic. Greek stock and bond markets tanked on Jan. 30 after Varoufakis said the new government would no longer cooperate with representatives of the troika of international lenders who’ve been enforcing the bailout deal.

At an awkward Jan. 30 meeting with Jeroen Dijsselbloem, head of the Eurogroup of EU finance ministers, Varoufakis appeared to make things worse by calling for a conference on European debt. “This conference already exists, and it’s called the Eurogroup,” an obviously irritated Dijsselbloem told reporters afterwards. The reaction from Berlin was even frostier, with Finance Minister Wolfgang Schaeuble saying Germany “cannot be blackmailed” by Greece. Prime Minister Alexis Tsipras appeared to be scrambling to contain the damage. “Despite the fact that there are differences in perspective, I am absolutely confident that we will soon manage to reach a mutually beneficial agreement, both for Greece and for Europe as a whole,” he said on Jan. 31. But Varoufakis stayed on the offensive, with blog posts accusing news media organizations of inaccurate reporting and a BBC interview in which he blasted an anchorwoman for “rudely” interrupting him. “He may need some tips on how to handle himself on TV,” Steen Jakobsen, chief investment officer at Denmark’s Saxo Bank, wrote.

Is this really the guy Greece is counting on to negotiate a better deal with its creditors? Yes—and Varoufakis’s admirers say he shouldn’t be underestimated. “Yanis is the most intense and deep intellectual figure I’ve met in my generation,” says James K. Galbraith, an economist at the University of Texas who has worked closely with him. “Yanis knows far more about the current situation than some of the people he will be negotiating with,” adds Stuart Holland, an economist and former British Labour Party politician who has co-authored a series of papers with Varoufakis on the euro zone debt crisis. What’s more, Varoufakis’s academic specialty is game theory, the study of strategic decision-making in situations where people with differing interests try to maximize their gains and minimize their losses. Varoufakis knows as much about this subject “as anyone on the planet,” Galbraith says. “He will be thinking more than a few steps ahead” in any interactions with the troika.

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“It’s clear that the stand-off between Greece and the euro zone is fast becoming the biggest risk to the global economy..”

Greece’s Damage Control Fails to Budge Euro Officials (Bloomberg)

Greek Prime Minister Alexis Tsipras’s damage-control efforts calmed investors while failing to budge European policy makers on his week-old government’s key demands. Officials in Berlin, Paris and Madrid rejected the possibility of a debt writedown raised by Greece’s anti-bailout coalition, as they held out the prospect of easier repayment terms, an offer that has been on the table since November 2012. Greek stocks and bonds rebounded following a conciliatory statement issued by the premier Saturday. He promised to abide by financial obligations, a prelude to a tour of European capitals, after Finance Minister Yanis Varoufakis had prompted concern of a looming cash crunch by saying the country won’t take more aid under its current bailout and wanted a new deal by the end of May.

“The weekend statements sound less absurd than the noises from Athens last week,” Holger Schmieding, chief economist at Berenberg Bank in London, wrote in a note today. “However, the ideas of the new Greek government remain far removed from reality.” The Athens Stock Exchange index jumped 4.6%, led by Eurobank Ergasias. The yield on 10-year notes fell 22 basis points to 10.9% at 5:30 p.m. in Athens. Varoufakis was in London today, meeting Chancellor of the Exchequer George Osborne and then investors in sessions organized by Bank of America and Deutsche Bank.

“It’s clear that the stand-off between Greece and the euro zone is fast becoming the biggest risk to the global economy,” Osborne said in a statement after their talks. “It’s a rising threat to our economy at home.” Tsipras was in Cyprus before trips to Rome, Paris and Brussels, with Berlin not yet on the agenda. German Chancellor Angela Merkel wants to duck a direct confrontation and isolate him, a German government official said. In Nicosia, Tsipras repeated his finance chief’s call for an end to the committee that oversees the Greek economy. Dismantling the troika, which includes representatives of the European Commission, ECB and IMF, is “timely and necessary,” Tsipras said.

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“They might be right; then again, back in 2008, US policy makers thought that the collapse of one investment house, Bear Stearns, had prepared markets for the bankruptcy of another, Lehman Brothers. We know how that turned out.”

What is Plan B for Greece? (Kenneth Rogoff)

Financial markets have greeted the election of Greece’s new far-left government in predictable fashion. But, though the Syriza party’s victory sent Greek equities and bonds plummeting, there is little sign of contagion to other distressed countries on the eurozone periphery. Spanish 10-year bonds for example, are still trading at interest rates below those of U.S. Treasuries. The question is how long this relative calm will prevail. Greece’s fire-breathing new government, it is generally assumed, will have little choice but to stick to its predecessor’s program of structural reform, perhaps in return for a modest relaxation of fiscal austerity.

Nonetheless, the political, social, and economic dimensions of Syriza’s victory are too significant to be ignored. Indeed, it is impossible to rule out completely a hard Greek exit from the euro (“Grexit”), much less capital controls that effectively make a euro inside Greece worth less elsewhere. Some eurozone policy makers seem to be confident that a Greek exit from the euro, hard or soft, will no longer pose a threat to the other periphery countries. They might be right; then again, back in 2008, US policy makers thought that the collapse of one investment house, Bear Stearns, had prepared markets for the bankruptcy of another, Lehman Brothers. We know how that turned out.

True, there have been some important policy and institutional advances since early 2010, when the Greek crisis first began to unfold. The new banking union, however imperfect, and the European Central Bank’s vow to save the euro by doing “whatever it takes,” are essential to sustaining the monetary union. Another crucial innovation has been the development of the European Stability Mechanism, which, like the International Monetary Fund, has the capacity to execute vast financial bailouts, subject to conditionality. And yet, even with these new institutional backstops, the global financial risks of Greece’s instability remain profound. It is not hard to imagine Greece’s brash new leaders underestimating Germany’s intransigence on debt relief or renegotiation of structural-reform packages. It is also not hard to imagine eurocrats miscalculating political dynamics in Greece.

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“‘The question’ said Humpty Dumpty, ‘is which is to be master? The words or the girl?”

Why The Bank Of England Must Watch Its Words (CNBC)

Once upon a time, it was only Alice who vanished down a rabbit hole into Wonderland. Nowadays, we’re all falling in head-first – thanks to a bunch of central bankers. But as we’re down here, in this inverted quantitative easing (QE) world, Mark Carney, governor of Britain’s central bank, should probably heed the words of Humpty Dumpty who warned Alice that she’d only gain control of reality if she became “master of words.” In Alice’s looking-glass reality, and maybe ours too, sense has become nonsense and nonsense sense – and not just because of asset bubbles. “‘The question’ said Humpty Dumpty, ‘is which is to be master?'” The words or the girl?

All central bankers worry about being imprisoned by their own words. But it will be preoccupying Carney’s thoughts more than ever as the Bank of England prepares its historic move to publish the minutes alongside the rate setting committee’s decision, due to begin in August. The frenzied over-analysis of the U.S. Federal Reserve’s choice of words could not have escaped his attention, with its decision to drop the phrase “considerable time” dominating newspaper columns and analysts notes. One economist complained privately that his job had morphed from monetary policy to structural linguistics.

Back in March 2011, Jean-Claude Trichet, the then president of the ECB got hemmed in by his own verbal signaling. Ironically, it was one of his favourite catch phrases: “strong vigilance”. It eventually forced his hand into making an ill-advised rate hike from 1% to 1.25% despite a deteriorating economic climate, duly sending the euro zone into recession. Of course, the ECB’s current boss, Mario Draghi, understands Humpty Dumpty’s lesson about making words perform the exact meaning one wants, though €1.1 trillion of QE and a crisis in Greece might now fully test “whatever it takes”.

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“Government bond yields typically fall near the beginning of central-bank led programs intended to boost shaky economies, like the ECB’s bond-buying program, due to a shortage of bonds available to meet the central bank’s demand.”

More Than 25% Of Euro Bond Yields Are Negative, But … (MarketWatch)

More than a quarter of eurozone bonds have negative yields — meaning investors are essentially paying for the privilege of lending money to a European sovereign government — but several analysts are betting that those yields will soon return to normal. The exact number of negative yielding sovereign bonds is 27%, according to Tradeweb data based on Monday’s closing rates. “We’re hoping that this is roughly the peak,” said David Keeble, head of fixed-income strategy at Crédit Agricole. “There’s certainly no reason to keep them in negative territory after five year [bonds].” So why are sovereign bond yields negative? Government bond yields typically fall near the beginning of central-bank led programs intended to boost shaky economies, like the ECB’s bond-buying program, due to a shortage of bonds available to meet the central bank’s demand.

But after two or three weeks, the effects of this stimulus programs should begin to take hold, Keeble said, resulting in stronger economic data. This in turn should whet the market’s appetite for risky assets like equities while safe investments like bonds fall out of favor. Keeble added that his prediction is contingent on the European Central Bank keeping monetary policy steady. “We’re not going to get any more rate cuts from ECB and i don’t think we’re going to see anymore QE,” Keeble added. In its latest forecast on eurozone bond yields, published Monday, Bank of America Merrill Lynch said they expect the yield on five-year eurozone bonds to fall from negative 0.05% to negative 0.10% in the second quarter, before rising in the third and fourth quarters.

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Price discovery urgently needed.

Draghi’s Negative-Yield Vortex Draws in Corporate Bonds (Bloomberg)

Credit markets are being so distorted by the European Central Bank’s record stimulus that investors are poised to pay for the privilege of parking their cash with Nestle. The Swiss chocolate maker’s securities, which have the third-highest credit ranking at Aa2, may be among the first corporate bonds to trade with a negative yield, according to Bank of America strategist Barnaby Martin. Covered bonds, which are bank securities backed by loans, started trading with yields below zero at the end of September. With the growing threat of falling prices menacing the euro-area’s fragile economy, some investors are calculating it’s worth owning Nestle bonds, even with little or no return. That’s because yields on more than $2 trillion of the developed world’s sovereign debt, including German bunds, have turned negative and the ECB charges 0.2% interest for cash deposits.

“In the same way that bunds went negative, there’s nothing, in theory, to stop short-dated corporate bond yields going slightly negative as well,” Martin said. “If investors want to park some cash, the problem with putting it in a bank or money market fund is potential negative returns, because of the negative deposit rate policy of the ECB.” Vevey-based Nestle SA’s 0.75% notes due October 2016 were quoted to yield 0.05% today, according to data compiled by Bloomberg. It isn’t the only company with short-dated bond yields verging on turning negative. Roche, the world’s largest seller of cancer drugs, issued €2.75 billion of bonds with a coupon of 5.625% in 2009. The notes, which mature in March 2016, pay 0.09%, Bloomberg data show. “The current yield is market-driven,” Nicolas Dunant, head of media relations at Basel, Switzerland-based Roche, said in an e-mail. “The bond has traded up because it has become increasingly attractive for investors in the current low-rate environment.”

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The end of omnipotence.

China Debt Party Nears The End Of The Road (MarketWatch)

Despite an interest-rate cut late last year, China’s economy has got off to a slow start, with weak factory and service-sector readings. The typical response to such data is to expect more monetary stimulus. But have we reached the point where rate cuts are no longer able to lift China’s debt-heavy economy? As China enters its third year of slowing growth, there is growing concern the debt reckoning cannot be kicked down the road any longer. Credit has been growing faster than the economy for six years, and there has always been a recognition this cannot continue indefinitely. Experience elsewhere would suggest countries coming off a multi-year, debt-fueled expansion could expect an inevitable hangover.

This would include everything from bad debts, bankruptcies and asset write-downs, together with currency weakness and perhaps a dose of austerity to restore order to finances. For China, however, we are led to expect a different economy — one where, even in a down cycle, you don’t get recessions but growth that only changes gear from double-digit to “just” 7%. While naysayers warn China’s debt binge is an accident waiting to happen, it never quite does: The bond market and shadow-banking sector have not experienced any meaningful defaults, nor has the banking system seen anything more than a limited increase in non-performing loans. China’s property market might look a lot like bubbles in the U.S., Spain or Japan at different times in history, yet here the ending is again benign, with a gentle plateauing of prices.

But elsewhere, it is possible to find evidence that an abrupt China slowdown is underway. In various global hard-commodity markets – where Chinese demand was widely acknowledged to have lifted prices in everything from iron ore to copper in the boom years — a major reversal is underway. A collection of industrial commodities has now reached multi-year lows. This suggests a lot of folk in China are already facing a hard landing. Signs are accumulating that the financial economy is now getting to a moment of reckoning. At home, slower growth puts added pressure on servicing corporate debt as profitability weakens. Overseas, tighter credit as the Federal Reserve retreats from quantitative easing means hot-money flows are no longer providing a boost to liquidity and are instead reversing.

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“The slide in global oil prices and inflation has turned out to be even bigger than anticipated..”

Global Deflation Risk Deepens As China Economy Slows (Guardian)

The risk of global deflation looms large for 2015 as surveys of China’s mammoth manufacturing sector showed excess supply and insufficient demand in January drove down prices and production. While the pulse of activity was livelier in Japan, India and South Korea, they shared a common condition of slowing inflation. “The slide in global oil prices and inflation has turned out to be even bigger than anticipated,” said David Hensley, an economist at JP Morgan, and central banks from Europe to Canada to India have responded by easing policy. “What is now in the pipeline will help extend the near-term impulse from energy to economic growth into the second half of the year.” A fillip was clearly necessary in China where two surveys showed manufacturing struggling at the start of the year.

The HSBC/Markit Purchasing Managers’ Index (PMI) inched a up a fraction to 49.7 in January, but stayed under the 50.0 level that separates growth from contraction. More worryingly, the official PMI – which is biased towards large Chinese factories – unexpectedly showed that activity fell for the first time in nearly 30 months. The reading of 49.8 in January was down from 50.1 in December and missed forecasts of 50.2. The report showed input costs sliding at their fastest rate since March 2009, with lower prices for oil and steel playing major roles. Ordinarily, cheaper energy prices would be good for China, one of the world’s most intensive energy consumers, but most economists believe the phenomenon is a net negative for Chinese firms because of its impact on ultimate demand.

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Canada joins the currency war: “The Bank of Canada surprised the dickens out of everyone by cutting the overnight interest rate by 25 basis points.”

Canada Mauled by Oil Bust, Job Losses Pile Up (WolfStreet)

Ratings agency Fitch had already warned about Canada’s magnificent housing bubble that is even more magnificent than the housing bubble in the US that blew up so spectacularly. “High household debt relative to disposable income” – at the time hovering near a record 164% – “has made the market more susceptible to market stresses like unemployment or interest rate increases,” it wrote back in July. On September 30, the Bank of Canada warned about the housing bubble and what an implosion would do to the banks: It’s so enormous and encumbered with so much debt that a “sharp correction in house prices” would pose a risk to the “stability of the financial system”.

Then in early January, oil-and-gas data provider CanOils found that “less than 20%” of the leading 50 Canadian oil and gas companies would be able to sustain their operations long-term with oil at US$50 per barrel. “A significant number of companies with high-debt ratios were particularly vulnerable right now,” it said. “The inevitable write-downs of assets that will accompany the falling oil price could harm companies’ ability to borrow,” and “low share prices” may prevent them from raising more money by issuing equity. In other words, these companies, if the price of oil stays low for a while, are going to lose a lot of money, and the capital markets are going to turn off the spigot just when these companies need that new money the most. Fewer than 20% of them would make it through the bust.

To hang on a little longer without running out of money, these companies are going on an all-out campaign to slash operating costs and capital expenditures. The Canadian Association of Petroleum Producers estimated that oil companies in Western Canada would cut capital expenditures by C$23 billion in 2015, with C$8 billion getting cut from oil-sands projects and C$15 billion from conventional oil and gas projects. However, despite these cuts, CAPP expected oil production to rise, thus prolonging the very glut that has weighed so heavily on prices (a somewhat ironic, but ultimately logical phenomenon also taking place in the US). Then on January 21 – plot twist. The Bank of Canada surprised the dickens out of everyone by cutting the overnight interest rate by 25 basis points. So what did it see that freaked it out?

A crashing oil-and-gas sector, deteriorating employment, and weakness in housing. A triple shock rippling through the economy – and creating the very risks that it had fretted about in September. “After four years of scolding Canadians about taking on too much debt, the Bank has pretty much said, ‘Oh, never mind, we’ve got your back’, despite the fact that the debt/income ratio is at an all-time high of 163 per cent,” wrote Bank of Montreal Chief Economist Doug Porter in a research note after the rate-cut announcement. Clearly the Bank of Canada, which is helplessly observing the oil bust and the job losses, wants to re-fuel the housing bubble and encourage consumers to drive their debt-to-income ratio to new heights by spending money they don’t have.

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As predicted, Australia joins the currency race to the bottom.

Aussie Gets Crushed – How Much More Pain Lies Ahead? (CNBC)

With the Reserve Bank of Australia (RBA) leaving the door open to further rate cuts, the only way forward for the Australian dollar is down, say strategists. The Aussie plunged 1.9% against the U.S. dollar to $0.7655 on Tuesday after the central bank cut its benchmark cash rate by 25 basis points to a fresh record low of 2.25%. It was the currency’s biggest once-day loss since mid-2013, according to Reuters. “75 cents seems the natural progression point from here – I would expect that over the next two weeks if not sooner,” Jonathan Cavenagh, a currency strategist at Westpac told CNBC. “Beyond that, we’ll see how things unfold. If we see another rate cut, the Aussie could definitely be trading in the low-70 cent range,” he said.

The central bank struck a dovish tone in its policy statement highlighting below-trend growth and weak domestic demand in the economy, giving rise to expectations of additional easing. It also said the Aussie remained above fundamental value and that a lower exchange rate is needed to achieve balanced growth. In December, RBA Governor Glenn Stevens told local media that he would prefer to see the currency at $0.75 – levels not seen since early 2009. The Austrian dollar has already suffered a 26% decline against the U.S. dollar over the past two years, weighed by weak commodity prices and a stronger greenback. Paul Bloxham, chief economist for Australia and New Zealand at HSBC also expects the currency to come under further selling pressure. He forecasts the currency will head towards $0.70 going into 2016.

Read more …

Jul 292014
 
 July 29, 2014  Posted by at 3:49 pm Finance Tagged with: , , , , ,  


Arthur Rothstein Elm Street, Theater Row, Dallas Jan 1942

I don’t think it’s ever a good sign, no matter how funny it may look, when the US state Department makes one think of Monty Python. But it does. With a Silly Claims instead of Silly Walks department. Would these people really sit around a big table in the evening and brainstorm about what anti-Russia statement to feed to the press the next morning? What else could possibly be going on here? I mean, just look at this bit from the New York Times:

US Says Russia Tested Cruise Missile, Violating Treaty

The United States has concluded that Russia violated a landmark arms control treaty by testing a prohibited ground-launched cruise missile, according to senior American officials, a finding that was conveyed by President Obama to President Vladimir V. Putin of Russia in a letter on Monday. It is the most serious allegation of an arms control treaty violation that the Obama administration has leveled against Russia [..]

At the heart of the issue is the 1987 treaty that bans American and Russian ground-launched ballistic or cruise missiles capable of flying 300 to 3,400 miles. That accord, which was signed by President Ronald Reagan and Mikhail S. Gorbachev, the Soviet leader, helped seal the end of the Cold War and has been regarded as a cornerstone of American-Russian arms control efforts.

Russia first began testing the cruise missiles as early as 2008, according to American officials, and the Obama administration concluded by the end of 2011 that they were a compliance concern. In May 2013, Rose Gottemoeller, the State Department’s senior arms control official, first raised the possibility of a violation with Russian officials. The New York Times reported in January that American officials had informed the NATO allies that Russia had tested a ground-launched cruise missile [..]

If we are to believe the NYT, Russia started testing the system 6 years ago, it then took the US at least 3 years to ‘conclude’ it was ‘a compliance concern’, another 18 months or so to ‘raise the possibility of a violation with Russian officials’, 8 more months after that to inform NATO – and have the NYT write it up – and another half year on top of that for Obama to write a letter to ‘President Vladimir V. Putin of Russia’ (excellent choice of title, love the extra V.) and feed the press.

Whereas we can all agree that timing is everything, how many of you recognize that any and every single day over the past 6 years and change would have been better to go public with this than today? In all the papers, we can read that ‘Senior American officials’ stress that this is ‘a serious violation’.

Look, we know you’re trying to make Russia look bad. We get it. But we also know that if this would have been such a serious violation, you would have spoken out a long time ago. We therefore have no other choice but to file this under ‘whatever’. And wait with glee for what you come up with tomorrow.

By the way, while reading up on this, I happenstanced upon something else in the field of nuclear treaties. And since you guys insisted on putting us in Python mood, here goes. This is from the Santa Barbara Independent:

Feds Looks to Quash Nuclear Treaty Lawsuit

Federal attorneys have made their first big move to dismiss a lawsuit that alleges the United States, along with eight other countries, has violated a 46-year-old treaty to dismantle its nuclear arsenal. The lawsuit was filed in April — in U.S. Federal Court as well as in the International Court of Justice in The Hague – by the tiny Pacific nation of the Marshall Islands, which the U.S. bombarded with nuclear weapons tested between 1946 and 1958. Marshall Islands officials maintain that radioactive fallout from the tests sickened citizens and rendered some territories unlivable.

“Our people have suffered the catastrophic and irreparable damage of these weapons,” said Marshall Islands Foreign Minister Tony de Brum in May, “and we vow to fight so that no one else on Earth will ever again experience these atrocities.” The Treaty on the Non-Proliferation of Nuclear Weapons (NPT) was signed in 1968 and mandates that the United States, Russia, United Kingdom, France, China, Israel, India, Pakistan, and North Korea “pursue negotiations in good faith” to end the nuclear arms race “at an early date and to work toward worldwide nuclear disarmament.”

Attorneys for the Marshall Islands argue that the countries have instead increased and modernized their nukes over the decades. [..] In the fed’s Motion to Dismiss, the government claims the lawsuit should be thrown out because of procedural and jurisdictional issues. “The U.S.… does not argue that the U.S. is in compliance with its NPT disarmament obligations,” the NAPF explained in a prepared statement. “Instead, it argues in a variety of ways that its non-compliance with these obligations is, essentially, justifiable, and not subject to the court’s jurisdiction.”

That doesn’t exactly make that claim against Russia look better, does it? Anything else? Alright then, moving on. The Financial Times has a particularly spicy rendering of the Yukos lawsuit story in which Russia was ordered to pay $50 billion in damages:

‘Yukos Is Insignificant, There Is A War Coming In Europe’

Beleaguered shareholders of Yukos could scarcely have imagined when they launched arbitration in 2005 they would one day be awarded $50bn in damages – nor that the ruling would be released into the febrile atmosphere that exists between Russia and the west today.

Just six months ago, say legal experts, Russia still seemed interested in being part of international “clubs” like the Organisation for Economic Co-operation and Development, the group of mainly rich countries. As the Ukraine crisis worsens, protecting its international reputation no longer seems a priority. “If one were to be quite cynical, I think the reputational consequences for Russia [of not paying] will be very limited indeed, because they have already been through a lot of things,” said Loukas Mistelis, director of the School of International Arbitration at Queen Mary University of London. “I think they would be prepared to take quite a bit of risk.” [..]

… if Russian state businesses find themselves hit both by western sanctions and attempts to seize assets by Yukos shareholders, relations between the Kremlin and the west could sour further. One person close to Mr Putin said the Yukos ruling was insignificant in light of the bigger geopolitical stand-off over Ukraine.

“There is a war coming in Europe,” he said. “Do you really think this matters?”

I don’t know. I catch myself thinking at times that there’s already a war going on in Europe. It could certainly expand and accelerate a lot further, but the sanctions the US and EU intend to slam on Russia sure look like economic warfare to me. As do the innuendo, the lack of evidence, the constant stream of smear stories leaked through fuzzy channels, it all fits the picture.

The Yukos case is already causing people to wake up from various stages of slumber. BP reported ‘great’ profits today, largely from their interest in Russian oil giant Rosneft (got to love the irony), but it also said the sanctions that are being prepared could hurt its shares, because it has a 19% stake in Rosneft.

What it didn’t say out loud, but what is certainly an added threat, is that the parties who won the case can now go sue BP to get their $50 billion. Because of the same 19% stake. And given that many of the stakeholders of the other 81% will be hard to go after, BP could face a bit of a problem.

But something tells me that’s still not Beyond Petroleum’s biggest worry: the deals with Rosneft gave it the prospect of actual recognized fossil fuel reserves, something BP, like all western oil behemoths, has far too little of. Exxon, too, has Rosneft deals, as does Norway’s Statoil, both for Arctic drilling projects. Shell, though Sakhalin developement(s), may well be the largest foreign investor in Russia.

At some point Big Oil will need to write down reserves; at some point their shares will fall for real. That sanctions originating in western anti-Putin sentiments may accelerate the process is something that, I’m not even sorry to say it, amuses me.

To get some perspective on the whole story, here are a few principle ideas it is based on. The west – US and EU – tries to squeeze Russia, and Rosneft. The west also – so far – seems to think this would surprise Putin and hurt his plans. Many people for instance claim that he will lose popularity at home if his economy takes a southbound turn.

Me, I’m not so sure. I think Putin must have seen all of this coming from a long time and a long distance away. The US keeps trying to pull him into proxy wars, but he’s not biting (which is why they turn to unsubstantiated claims).

Russian speaking Ukrainians are getting killed by the dozen with western support, and he must detest that. But sending in his troops would be just what the west wants, and it would lead to far more bloodshed. As long as he and his people officially stay on sovereign Russian soil, he’s OK.

As for economic sanctions, Russia is not that vulnerable. While the US tries to break the bond between Russia and Europe, Russia can try the same for the bond between US and EU. What’s more, Putin knows the ‘leadership’ in Brussels is not overly competent, and dreams away in grand visions of power, of an equal partnership with their American friends. Vladimir V. knows the US has no intention of granting Brussels any such power.

The sanctions will eventually lead to either a break between US and EU -because European business interests get hurt too much -, or – more likely for now – it will lead to $200 a barrel oil, huge increases in EU heating costs and a sharp dip in the euro that will make that $200 a lot more still.

Putin’s fine either way. Sell 50% less to Europe at 100% higher prices, why not? Let’s see EU member Slovakia send Russian gas back to Ukraine – or however that reverse flow is supposed to work -. Putin can simply cut overall gas delivery to Europe by 25%, and 50% if they try it again. There’s no love lost between Putin and Europe in the aftermath of the crash and the things that have been said about him.

And I think Vladimir must know how the US feels about this. Washington sees the advantages of making Europe their bitch, pardon my French. With half of the old world in the cold come winter, the US can greatly enhance its influence there. The Americans think that with their domestic shale wealth – they’re wrong, but they think it -, $200 a barrel oil in international markets would suit them just fine for a while.

As I said last week, we have entered the next phase in the energy equals power battle, and we entered it for good. This should be evident from looking at the sanctions and the Yukos case, and the fall-out this will have on western oil companies. You can be a big wig in Brussels and feel nice about yourself negotiating punishments for Vladimir V. Putin, but that doesn’t mean you’re ready to play with the big boys. And from here on in, it’s a big boys game only.

Note: Holland announced today that 195 of the 298 people who died in the MH17 crash had the Dutch nationality; some had dual citizenship. The one person they added to the list was a 2-year old girl. Isn’t that just the saddest thing on the planet? And then the US and EU have the audacity to play a propaganda war over that, blaming people for killing that little girl without any proof? Also, finally, 12 days after the crash, the Dutch government is calling on Ukraine to stop the fighting on the crash site and let forensic experts do their job. President Poroshenko has promised for while that they would. But nothing changed. There are still dozens of bodies and body parts decomposing in the fields. Best remember who your friends are. Same question again: who’s commanding that army?

But hey, stock markets are up … What more can we ask for?

‘Yukos Is Insignificant, There Is A War Coming In Europe’ (FT)

Beleaguered shareholders of Yukos could scarcely have imagined when they launched arbitration in 2005 they would one day be awarded $50bn in damages – nor that the ruling would be released into the febrile atmosphere that exists between Russia and the west today. The award is a landmark not just for its size – 20 times the previous record for an arbitration ruling. The tribunal also found definitively that Russia’s pursuit of Yukos and its independently-minded main shareholder, Mikhail Khodorkovsky, a decade ago was politically motivated. Through inflated tax claims, the ruling said, senior officials set out to destroy Russia’s then biggest oil company, transfer its assets to a state-controlled competitor – Rosneft – and put Mr Khodorkovsky in jail. “The tribunal confirmed what the [Yukos shareholders] have been saying all along,” said Tim Osborne, director of GML, the Yukos holding company. [..]

Just six months ago, say legal experts, Russia still seemed interested in being part of international “clubs” like the Organisation for Economic Co-operation and Development, the group of mainly rich countries. As the Ukraine crisis worsens, protecting its international reputation no longer seems a priority. “If one were to be quite cynical, I think the reputational consequences for Russia [of not paying] will be very limited indeed, because they have already been through a lot of things,” said Loukas Mistelis, director of the School of International Arbitration at Queen Mary University of London. “I think they would be prepared to take quite a bit of risk.” [..]

Emmanuel Gaillard of Shearman & Sterling, which represented the Yukos claimants, said he was confident of eventually “piercing the veil” around assets of Russian state companies such as Rosneft, the oil company, and the natural gas monopoly, Gazprom. He added that the principle that state-controlled businesses could be a kind of proxy for the state was already inherent in sanctions over Ukraine against companies such as Rosneft – which has been targeted by the US. But if Russian state businesses find themselves hit both by western sanctions and attempts to seize assets by Yukos shareholders, relations between the Kremlin and the west could sour further. One person close to Mr Putin said the Yukos ruling was insignificant in light of the bigger geopolitical stand-off over Ukraine. “There is a war coming in Europe,” he said. “Do you really think this matters?”

Read more …

BP: Russia Still Key As Production Set To Dip (CNBC)

BP, the U.K. oil giant, announced a 34% rise in profits Tuesday – but its results highlighted concerns over its important Russian joint venture. The company’s 19.75% stake in Rosneft is regularly cited as one of the most lucrative deals which could be threatened if sanctions imposed against Russia in the light of the Ukrainian crisis escalate. The company confirmed these concerns in the statement accompanying its second-quarter results: “If further international sanctions are imposed on Rosneft or new sanctions are imposed on Russia or other Russian individuals or entities, this could have a material adverse impact on our relationship with and investment in Rosneft, our business and strategic objectives in Russia and our financial position and results of operations.”

BP also warned that third-quarter production would be lower than the second quarter, blaming seasonal slowing. Output from the Gulf of Mexico helped push overall underlying production of oil and gas, excluding Russia, up by over 3% compared to a year earlier. The company also hiked its provision for litigation related to the Gulf of Mexico oil by $260 million, bringing the total potential bill for the accident to $43 billion.

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BP Warns On Russia Sanctions Despite Rosneft Profits (Guardian)

BP has earned bumper profits from its stake in the Kremlin-controlled oil company Rosneft since the start of the year, but warned investors that it could be hurt by western sanctions against Russia. The FTSE 100 company, which owns one fifth of Russia’s largest oil company, made $1.6bn (£950m) from Rosneft in the first six months of 2014, an 80% increase on last year. On top of this BP was paid a $700m dividend from Rosneft in July. But with the European Union poised to announce tougher sanctions against Russia, BP acknowledged that its reputation was at stake over its ties with the Russian state oil giant. “Further economic sanctions could adversely impact our business and strategic objectives in Russia, the level of our income, production and reserves, our investment in Rosneft and our reputation,” the company said. Earlier this month the United States added Rosneft to its sanctions list and EU is expected to approve a ban on the export of advanced technology that could be used to drill for oil in Russia.

Igor Sechin, the chairman of Rosneft and a close friend of President Vladimir Putin, has been on the US sanctions list since April. As EU leaders have struggled to keep a united front amid the conflict in eastern Ukraine, BP has stuck to a business-as-usual policy with Russia. In May BP and Rosneft struck a deal to exploit shale reserves in the Urals at a ceremony attended by Putin at the St Petersburg Economic Forum, a Russian Davos that was shunned by many other western business leaders. BP’s exposure to Russia was highlighted on Monday when a tribunal in the Hague ruled that Rosneft had been the prime beneficiary from a “devious and calculated expropriation” by the Russian government against Yukos, once Russia’s largest private oil company, broken up by the Russian government after its boss fell foul of Putin. Rosneft went on to acquire Yukos’s prime assets at rock-bottom prices. Shareholders have vowed to pursue Rosneft for a $50bn damages claim and indicated they may also pursue BP.

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Ambrose gets a lot wrong here.

BP’s Faustian Pact With Russia Goes Horribly Wrong With Yukos Verdict (AEP)

The Permanent Court of Arbitration in The Hague has thrown the book at the Russian state, or more specifically at Vladimir Putin and his Soliviki circle from the security services. The $51.5bn ruling against the Kremlin unveiled this morning has no precedent in international law. The damages are 20 times larger than any previous verdict. Lawyers for the Yukos-MGL-Khodorkovsky team tell me that they cannot pursue the foreign bond holdings of the Russian central bank if the Kremlin refuses to pay up when the deadline expires on January 15, as seems likely. Moscow has already dismissed the case as “politically motivated”. Nor can they go after embassies and other sovereign assets that enjoy diplomatic immunity, though they are eyeing a list of Russian state targets that slipped through the net. What they can certainly do – and have every intention of doing – is attacking the assets of state-owned companies that act as instruments of the Russian government.

Above all, they intend to pursue Rosneft, the venture built from the expropriated assets of Yukos. That means they also intend to pursue BP (indirectly), since BP owns a fifth of Rosneft shares as a legacy from the TNK-BP debacle. Rosneft is the world’s biggest traded oil company with production of 4m barrels a day. It is run by Mr Putin’s close friend Igor Sechin, a former KGB operative in Africa, a loyalist in Mr Putin’s political machine in St Petersburg, and the architect of Russia’s energy strategy for the last decade. The Court’s ruling made it clear that Rosneft is not a commercial company with a (passive) state shareholder. It said the Rosneft was “the vehicle” used to expropriate Yukos and has acted as an instrument of the state. Mr Putin himself said at the time that the purpose was to reverse the giveaway privatisation of Russia’s natural resources and sovereign heirlooms in the bandit era of the 1990s. “The State, resorting to absolutely legal market mechanisms, is looking after its own interest,” he said.

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US Says Russia Tested Cruise Missile, Violating Treaty (NY Times)

The United States has concluded that Russia violated a landmark arms control treaty by testing a prohibited ground-launched cruise missile, according to senior American officials, a finding that was conveyed by President Obama to President Vladimir V. Putin of Russia in a letter on Monday. It is the most serious allegation of an arms control treaty violation that the Obama administration has leveled against Russia and adds another dispute to a relationship already burdened by tensions over the Kremlin’s support for separatists in Ukraine and its decision to grant asylum to Edward J. Snowden, the former National Security Agency contractor. At the heart of the issue is the 1987 treaty that bans American and Russian ground-launched ballistic or cruise missiles capable of flying 300 to 3,400 miles. That accord, which was signed by President Ronald Reagan and Mikhail S. Gorbachev, the Soviet leader, helped seal the end of the Cold War and has been regarded as a cornerstone of American-Russian arms control efforts.

Russia first began testing the cruise missiles as early as 2008, according to American officials, and the Obama administration concluded by the end of 2011 that they were a compliance concern. In May 2013, Rose Gottemoeller, the State Department’s senior arms control official, first raised the possibility of a violation with Russian officials. The New York Times reported in January that American officials had informed the NATO allies that Russia had tested a ground-launched cruise missile, raising serious concerns about Russia’s compliance with the Intermediate-range Nuclear Forces Treaty, or I.N.F. Treaty as it is commonly called. The State Department said at the time that the issue was under review and that the Obama administration was not yet ready to formally declare it to be a treaty violation.

In recent months, however, the issue has been taken up by top-level officials, including a meeting early this month of the Principals’ Committee, a cabinet-level body that includes Mr. Obama’s national security adviser, the defense secretary, the chairman of the Joint Chiefs of Staff, the secretary of state and the director of the Central Intelligence Agency. Senior officials said the president’s most senior advisers unanimously agreed that the test was a serious violation, and the allegation will be made public soon in the State Department’s annual report on international compliance with arms control agreements. “The United States has determined that the Russian Federation is in violation of its obligations under the I.N.F. treaty not to possess, produce or flight test a ground-launched cruise missile (GLCM) with a range capability of 500 kilometers to 5,500 kilometers or to possess or produce launchers of such missiles,” that report will say.

Read more …

US Looks to Quash Nuclear Treaty Lawsuit (Santa Barbara Independent)

Federal attorneys have made their first big move to dismiss a lawsuit that alleges the United States, along with eight other countries, has violated a 46-year-old treaty to dismantle its nuclear arsenal. The lawsuit was filed in April — in U.S. Federal Court as well as in the International Court of Justice in The Hague, Netherlands — by the the tiny Pacific nation of the Marshall Islands, which the U.S. bombarded with nuclear weapons tested between 1946 and 1958. Marshall Islands officials maintain that radioactive fallout from the tests sickened citizens and rendered some territories unlivable.

“Our people have suffered the catastrophic and irreparable damage of these weapons,” said Marshall Islands Foreign Minister Tony de Brum in May, “and we vow to fight so that no one else on Earth will ever again experience these atrocities.” The Treaty on the Non-Proliferation of Nuclear Weapons (NPT) was signed in 1968 and mandates that the United States, Russia, United Kingdom, France, China, Israel, India, Pakistan, and North Korea “pursue negotiations in good faith” to end the nuclear arms race “at an early date and to work toward worldwide nuclear disarmament.”

Attorneys for the Marshall Islands – and with the law firm Keller Rohrback LLP, which has an office in Santa Barbara and specializes in constitutional and treaty law – argue that the countries have instead increased and modernized their nukes over the decades. Santa Barbara’s Nuclear Age Peace Foundation (NAPF) is a consultant to the Marshall Islands on the legal and moral issues involved in the case, which has received attention all over the globe and the support of Nobel Prize winners. In the fed’s Motion to Dismiss, the government claims the lawsuit should be thrown out because of procedural and jurisdictional issues. “The U.S.… does not argue that the U.S. is in compliance with its NPT disarmament obligations,” the NAPF explained in a prepared statement. “Instead, it argues in a variety of ways that its non-compliance with these obligations is, essentially, justifiable, and not subject to the court’s jurisdiction.”

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Very good point.

Fed Creates Asset Bubbles To Paper Over Decline In Quality Of Life (Phoenix)

Many commentators have previously argued that the Fed is too dumb or too inept to identify of categorize asset bubbles. By focusing on the Fed’s mental acuity, these commentators are overlooking a key factor: the Fed WANTS asset bubbles. The reason for this? Asset bubbles, at least according to the Fed’s models, will paper over the steady decline in quality of life that began in the US roughly 50 years ago. This fact is staring everyone in the face, though few people make it explicit. Back in the 1950s, the average American family had one working parent and was able to get by just fine. Today, most families have two working parents, sometimes working more than two jobs and they’re still not able to live a stable life. Indeed, a 2012 study by NYU Professor Edward Wolff found that the median net worth of American households was at a 43-YEAR LOW. The average American in the 21st century was in worse shape than his 1970s counterpart. This process began to accelerate in the late ‘90s. Indeed, looking at real media household income, one can see clearly that things have generally been downhill for nearly 20 years now.

It is not coincidence that the Fed began blowing serial bubbles starting in the late ‘90s. The Fed is aware on some level that quality of life in the US has fallen. The Fed’s answer, rather than focus on items that it doesn’t understand (job growth, income growth, etc.) was to blow bubbles to paper over this decline. This is why we’ve had bubble after bubble after bubble in the last 15 years. The Fed doesn’t have a clue how to create jobs or boost incomes. Why would it? Most of the Fed’s Presidents are academics with no real world business experience. Instead, the Fed believes in the “wealth effect” or the theory that when housing prices or stock prices soar, people feel wealthier and so go out and spend more money. This theory is baloney. People spend based on their incomes, NOT the value of their homes or portfolios.

After all, both assets only convert into actual cash once the owner sells the asset. Anyone who goes out and spends more money because their home went up in value will only end up with credit card debt, which combined with their mortgage, puts an even greater strain on their financial resources. The Fed wants asset bubbles because they hide the rot within the US economy. If the Fed didn’t raise stock or housing prices, people might actually start to wonder… “hey, why is my life getting more and more difficult despite the fact that I’m working all the time?” The Fed wants bubbles. So we’re doomed to keep experiencing them and the subsequent crashes.

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Agree.

Housing Bubble May Pop Entire U.K. Economy (Bloomberg)

You may not want to bring this up at any London dinner parties, but there are tentative signs that the bubble in U.K. housing prices that’s helped boost the economic recovery by underpinning consumer confidence may be running out of puff. Given the British obsession with home ownership, any evidence of real-estate deflation will complicate the Bank of England’s efforts to nudge borrowing costs higher. July marked the first month of no growth in London house prices since December 2012, according to figures last week from research company Hometrack Ltd. A different gauge showed the slowest pace of London gains in 15 months in June, according to the Royal Institution of Chartered Surveyors. And today, Lloyds Banking Group’s mortgage-lending unit reported that only five% of people say the coming year is a good time to buy a home, a 29-point drop in just three months.

With earnings still in the dumps – wages grew just 0.3% in May, while annual inflation was 1.5% – houses are becoming less and less affordable, hence the U.K. central bank’s imposition of new rules on mortgage lending in recent months. Some 71% of U.K. couples with at least one child own their own homes, rising to 80% for childless couples; U.S. home ownership is 65%, while in the euro region the rate is about 67%. Prices in the futures market suggest investors are currently less concerned about the Bank of England’s appetite for interest-rate increases than they were five weeks ago, when Mark Carney first raised the prospect of a shot across the bows of the monetary-policy landscape.

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How much longer till Nippon sinks into the ocean?

Japan’s Retail Sales Drop in Challenge to Abe Reflation (Bloomberg)

Japan’s retail sales fell more than forecast in June, capping a weak quarter that challenges Prime Minister Shinzo Abe’s bid to reflate the economy while heaping a heavier tax burden on consumers. Sales dropped 0.6% from a year earlier, the trade ministry said in Tokyo today, steeper than a median forecast for a 0.5% decline in a Bloomberg News survey. In the second quarter, sales slumped 7% from the previous three months. Prime Minister Shinzo Abe is counting on consumers to bear a higher sales levy even as the Bank of Japan drives the cost of living upward with record monetary easing. The risk is that spending fails to regain vigor, sapping strength from an economy lacking support from exports.

“The government and the BOJ say the economy is recovering from the slowdown after the sales-tax increase, but it’s too early to tell,” said Koya Miyamae, senior economist at SMBC Nikko Securities Inc. in Tokyo. “There’s a chance consumption will remain below year-earlier levels in the July-September quarter.” Abe’s effort to stoke a sustained recovery in domestic demand is running up against a failure of companies to pass along record cash holdings in the form of higher wages that could help households cope with rising prices and the heavier tax burden.

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China Trade Numbers Still Don’t Add Up Post-Fake Exports (Bloomberg)

China’s trade numbers still don’t add up. A discrepancy between Hong Kong and Chinese figures for bilateral trade remains even after a crackdown last year on Chinese companies’ use of fake export-invoicing to evade limits on importing foreign currency. China recorded $1.31 of exports to Hong Kong in June for every $1 in imports Hong Kong tallied from China, for a $6.4 billion difference, based on government data compiled by Bloomberg News. Analysts offered at least three possible explanations for the gap, including differences in how China and Hong Kong record trade in goods that pass through the city, as well as a persistence in fraud at a lower level. Any discrepancies make it tougher to gauge the impact of global demand on a Chinese economy that’s projected for the slowest growth in 24 years. “Sporadic fake exports certainly still exist,” said Hu Yifan, chief economist at Haitong International Securities Co. in Hong Kong.

The longer the data gap remains at this level, the more likely it’s a permanent fixture: “If the ratio stays at 1.3 throughout the year, I think that’s consistent,” Hu said. Distortions in China’s trade data have abated since the State Administration of Foreign Exchange started a campaign in May 2013 to curb money flows disguised as trade payments. The initial crackdown may have failed to eliminate deception. SAFE said in December that it would boost scrutiny of trade financing and that banks should prevent companies from getting financing based on fabricated trade. The State Administration of Taxation said earlier this month that it found instances of fraudulent exports used to obtain tax rebates by some companies. “You can’t exclude the possibility that capital flows are being disguised as exports” in the China-Hong Kong figures, said Yao Wei, China economist at Societe Generale SA in Paris. “As the capital account becomes more open, the flows will show up in the places they should.”

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Mind you: ‘Unexpectedly’.

Pending Sales of U.S. Existing Homes Unexpectedly Decrease (Bloomberg)

Fewer Americans than forecast signed contracts to buy previously owned homes in June, a sign residential real estate is struggling to strengthen. The index of pending home sales declined 1.1% from the month before after rising 6% in May, figures from the National Association of Realtors showed today in Washington. The median forecast of 39 economists surveyed by Bloomberg projected sales would rise 0.5%. Limited availability of credit and sluggish wage growth are making it harder for prospective buyers to take the plunge, threatening to throttle the pace of the housing recovery.

Continued gains in employment and a bigger supply of available homes will be needed to help accelerate the industry’s progress, which Federal Reserve Chair Janet Yellen has said is lackluster. “Unfortunately, I don’t see much of an acceleration in housing demand going forward until we get a significant improvement in the labor market and the income part of it in particular,” said Yelena Shulyatyeva, a U.S. economist at BNP Paribas in New York, who forecast a 1% decrease in pending sales. “An uneven recovery in the housing market is really one of the biggest concerns of the Fed.”

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Short on moral values. Not uncommon among the rich.

Qatar World Cup Migrant Workers Not Paid For A Year (Guardian)

Migrant workers who built luxury offices used by Qatar’s 2022 football World Cup organisers have told the Guardian they have not been paid for more than a year and are now working illegally from cockroach-infested lodgings. Officials in Qatar’s Supreme Committee for Delivery and Legacy have been using offices on the 38th and 39th floors of Doha’s landmark al-Bidda skyscraper – known as the Tower of Football – which were fitted out by men from Nepal, Sri Lanka and India who say they have not been paid for up to 13 months’ work. The project, a Guardian investigation shows, was directly commissioned by the Qatar government and the workers’ plight is set to raise fresh doubts over the autocratic emirate’s commitment to labour rights as construction starts this year on five new stadiums for the World Cup.

The offices, which cost £2.5m to fit, feature expensive etched glass, handmade Italian furniture, and even a heated executive toilet, project sources said. Yet some of the workers have not been paid, despite complaining to the Qatari authorities months ago and being owed wages as modest as £6 a day. By the end of this year, several hundred thousand extra migrant workers from some of the world’s poorest countries are scheduled to have travelled to Qatar to build World Cup facilities and infrastructure. The acceleration in the building programme comes amid international concern over a rising death toll among migrant workers and the use of forced labour.

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The Agricultural Holocaust Explained: GMOs (Natural News)

Here are the top 10 ways GMOs threaten us all:

#1) Every grain of GM corn contains poison
#2) GMOs have never been safety tested for human consumption
#3) GMOs transform farming freedom into farming servitude
#4) GMOs run the very real risk of runaway self-replicating genetic pollution and ecocide
#5) GMO agriculture is breeding a new generation of chemical-resistant superweeds
#6) GMOs may have long-term unintended consequences on the environment
#7) GMOs collapse biodiversity
#8) GMOs put control over the food supply into the hands of profit-driven corporations
#9) GMOs may be harming pollinators
#10) The kind of scientists who collaborate with biotech companies are the most dishonest, corrupt and unethical scientists in our world

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I’m shocked!

UK Bee Research Funded By Pesticide Manufacturers (Guardian)

Criticial future research on the plight of bees risks being tainted by corporate funding, according to a report from MPs published on Monday. Pollinators play a vital role in fertilising three-quarters of all food crops but have declined due to loss of habitat, disease and pesticide use. New scientific research forms a key part of the government’s plan to boost pollinators but will be funded by pesticide manufacturers. UK environment ministers failed in their attempt in 2013 to block an EU-wide ban on some insecticides linked to serious harm in bees and the environmental audit select committee (EAC) report urges ministers to end their opposition, arguing there is now even more evidence of damage. Millions of member of the public have supported the ban.

“When it comes to research on pesticides, the Department of Environment, Food and Rural Affairs (Defra) is content to let the manufacturers fund the work,” said EAC chair Joan Walley. “This testifies to a loss of environmental protection capacity in the department responsible for it. If the research is to command public confidence, independent controls need to be maintained at every step. Unlike other research funded by pesticide companies, these studies also need to be peer-reviewed and published in full”. The EAC report found: “New studies have added weight to those that indicated a harmful link between pesticide use and pollinator populations.” Walley said: ”Defra should make clear that it now accepts the ban and will not seek to overturn it when the European commission conducts a review next year.” She added that ministers should make it clear that attempts to gain “emergency” exemptions, as pesticide-maker Syngenta did recently, will be turned down.

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No more hobbits.

New Zealand Dramatic Ice Loss Causes Severe Decline Of Glaciers (Guardian)

New Zealand’s vast Southern Alps mountain range has lost a third of its permanent snow and ice over the past four decades, diminishing some of the country’s most spectacular glaciers, new research has found. A study of aerial surveys conducted by the National Institute of Water and Atmospheric Research (Niwa) discovered that the Southern Alps’ ice volume has shrunk by 34% since 1977. Researchers from the University of Auckland and University of Otago said this “dramatic” decrease has accelerated in the past 15 years and could lead to the severe decline of some of New Zealand’s mightiest glaciers. Glaciers, made up of ice that collects above the permanent snowline, have their size and shape altered by various conditions, such as temperature, wind and rainfall.

The Niwa data shows that New Zealand’s glaciers experienced three growth spurts during the 1970s and 1980s due to a change in the Pacific climate system that generated more wind. But since that wind circulation has returned to its previous state, rising global temperatures have caused the glaciers to retreat dramatically. About 40% of the recorded ice loss has been in the dozen largest New Zealand glaciers, including the Tasman, Murchison and Maud glaciers. These huge slabs of ice and snow, supported by rock, take many years to respond to changing temperatures but are now collapsing, according to researchers. “We are losing the bottom half of these large glaciers as they sink into lakes,” Trevor Chinn, a glaciologist at Niwa, told Guardian Australia. “We are also losing access to the upper glaciers. We used to be able to walk up them but it’s much harder now because the ridges are turning into gravel cliffs and they collapse.

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“With global carbon emissions already too high because of fossil-fuel use, he says, “why do we have to look for more?”

For New Zealand Town, Oil Brings Debate Over Economy, Environment (WSJ)

A government push to lure oil companies to New Zealand offers the promise of diversifying the country’s economy, long dependent on wool and, more recently, Hobbit-inspired tourism. But in the university town of Dunedin, the oil push has also locked residents in a debate over how to balance economic gains with environmental consequences. Local business leaders welcome the boats that have been prospecting offshore over the past few years. “It would be a real boon to have an industry that would be able to employ a lot of people,” says Peter Brown, the head of Dunedin’s port. Business from exploration vessels is “massive for us,” says Nicky Gibbs, who runs a business supplying boats from a quay-side warehouse here. “Our income will at least double in any month that you have them here.”

But ecotourism entrepreneurs and environmental activists say looking for oil undermines New Zealand’s work to conserve land and reduce carbon emissions, especially because the country itself has scant demand for new oil and gas sources. “You’d have to have rocks in your head” to believe petroleum prospecting is good for Dunedin ecotourism, says Lisa King. For three generations, her family has brought tourists to see endangered yellow-eyed penguins that nest on their 1,500-sheep farm. Driving a 1980s-vintage bus atop a bluff where penguins nest in the scrub below, Ms. King’s brother Brian McGrouther says watching helicopters fly to exploration ships “right out there on the horizon” this year unsettled him. An oil spill off the coast could hurt the birds or the already-waning fish populations they depend on for food. “Our community has concerns around risk,” says Dunedin Mayor Dave Cull. With global carbon emissions already too high because of fossil-fuel use, he says, “why do we have to look for more?”

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