Russell Lee Migrant family in trailer home near Edinburg, Texas Feb 1939
This could make a whole lot of people really nervous.
• At Least 11 Banks To Fail European Stress Tests (Reuters)
At least 11 banks from six European countries are set to fail a region-wide financial health check this weekend, Spanish news agency Efe reported, citing several unidentified financial sources. The results of the stress tests on 130 banks by the European Central Bank are due to be unveiled on Sunday. Four banks in Greece, three Italian lenders and two Austrian ones are among those that preliminary data showed had failed the tests, Efe said. It gave no details of how much capital the banks would have to raise and said this could yet change as numbers could be revised at the last minute.
The euro fell on the report. Efe also identified a Cypriot bank and possibly one from Belgium and one from Portugal. The exercise is designed to see how banks would cope under various economic scenarios, including adverse ones, and is likely to reveal capital shortfalls at some entities. The ECB is carrying out the checks of how the biggest euro zone banks have valued their assets, and whether they have enough capital to weather another economic crash, before taking over as their supervisor on Nov. 4.
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Anyone still realize how insane that is, or are our brains completely numb and dumbed down by now?
• All the Markets Need Is $200 Billion a Quarter From the Central Bankers (BW)
The central-bank put lives on. Policy makers deny its existence, yet investors still reckon that whenever stocks and other risk assets take a tumble, the authorities will be there with calming words or economic stimulus to ensure the losses are limited. A put option gives investors the right to sell their asset at a set price so the theory goes that central banks will ultimately provide a floor for falling asset markets to ensure they don’t take economies down with them. Last week as markets swooned again, it was St. Louis Federal Reserve President James Bullard and Bank of England Chief Economist Andrew Haldane who did the trick.
Bullard said the Fed should consider delaying the end of its bond-purchase program to halt a decline in inflation expectations, while Haldane said he’s less likely to vote for a U.K. rate increase than three months ago. “These comments left markets with the impression that the ‘central-bank put’ is still in place,” Morgan Stanley currency strategists led by Hans Redeker told clients in a report yesterday. Matt King, global head of credit strategy at Citigroup, and colleagues have put a price on how much liquidity central banks need to provide each quarter to stop markets from sliding. By estimating that zero stimulus would be consistent with a 10% quarterly drop in equities, they calculate it takes around $200 billion from central banks each quarter to keep markets from selling off.
With the Fed and counterparts peeling back their net liquidity injections from almost $1 trillion in 2012 toward that magic marker, King’s team said “a negative reaction in markets was long overdue.” “We think the markets’ weakness owes more to an almost belated reaction to a temporary lull in central bank stimulus than it does to any reduction in the effect of that stimulus in propping up asset prices,” they said in an Oct. 17 report to clients. Bank of America Merrill Lynch strategists said in a report today that another 10% decline in U.S. stocks might spark speculation of a fourth round of quantitative easing from the Fed. That would mimic how the Fed acted following equity declines of 11% in 2010 and 16% in 2011.
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It would seem that all it takes is for other central bankers failing to put in those $200 billion four times a year. But that still pre-supposes that the Fed’s first priority is to support the markets. Whereas I suggest it’s to support the big banks. And that’s not one and the same thing.
• What Would It Take To Trigger The ‘Fed Put’? (MarketWatch)
Janet Yellen runs the Federal Reserve now, but that doesn’t mean that notions about what used to be known as the “Bernanke put,” named after her predecessor, Ben Bernanke, have expired. So far, there’s been little talk of a “Yellen put,” but the U.S. Federal Reserve still remains ready to bail out the markets if things get hairy, Bank of America Merrill Lynch analysts say. Actual financial puts give the holder the right but not the obligation to sell the underlying security at a set price, known as the strike price. Puts named after central bankers are figurative. They’re shorthand for the idea the Fed will rush in to rescue tanking markets, a notion denied by Alan Greenspan and Bernanke, but reinforced by the Fed’s aggressive actions following big market declines, most recently, during the 2008 crisis. The BofA Merrill analysts, in a Tuesday note, say recent market volatility shows that investors are now losing faith in what traders had dubbed the “Draghi put,” named after European Central Bank President Mario Draghi.
Investors are growing less certain the ECB will step in with a program of full-fledged quantitative easing of its own stave off deflationary pressures in the eurozone. “If this ECB option turns out to be worthless, the key question becomes how much protection does the Fed provide? In other words, approximately how big can an equity correction become before the Fed steps in again?” they write. They note that in 2010 and 2011, the Fed stepped in following equity corrections of 11% and 16%, respectively. Based on their assessment of last week’s market action, the analysts say it appears it would take a further 10% decline from the recent lows to trigger anticipation of what might be dubbed QE 4, or the fourth iteration of the U.S. central bank’s monetary stimulus measures.
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Everywhere but America.
• Currency Wars Evolve With Goal of Avoiding, Exporting Deflation (Bloomberg)
Currency wars are back, though this time the goal is to steal inflation, not growth. Brazil Finance Minister Guido Mantega popularized the term “currency war” in 2010 to describe policies employed at the time by major central banks to boost the competitiveness of their economies through weaker currencies. Now, many see lower exchange rates as a way to avoid crippling deflation. Weak price growth is stifling economies from the euro region to Israel and Japan. Eight of the 10 currencies with the biggest forecasted declines through 2015 are from nations that are either in deflation or pursuing policies that weaken their exchange rates, data compiled by Bloomberg show.
“This beggar-thy-neighbor policy is not about rebalancing, not about growth,” David Bloom, the global head of currency strategy at HSBC which does business in 74 countries and territories, said in an Oct. 17 interview. “This is about deflation, exporting your deflationary problems to someone else.” Bloom puts it in these terms because, when one jurisdiction weakens its exchange rate, another’s gets stronger, making imported goods cheaper. Deflation is a both a consequence of, and contributor to, the global economic slowdown that’s pushing the euro region closer to recession and reducing demand for exports from countries such as China and New Zealand.
[..] Disinflationary pressures in the euro area are starting to spread to its neighbors and biggest trading partners. The currencies of Switzerland, Hungary, Denmark, the Czech Republic and Sweden are forecast to fall from 4% to more than 6% by the end of next year, estimates compiled by Bloomberg show, partly due to policy makers’ actions to stoke prices. “Deflation is spilling over to central and eastern Europe,” Simon Quijano-Evans, head of emerging-markets at Commerzbank, said yesterday by phone. “Weaker exchange rates will help” them tackle the issue, he said. Hungary and Switzerland entered deflation in the past two months, while Swedish central-bank Deputy Governor Per Jansson last week blamed his country’s falling prices partly on rate cuts the ECB used to boost its own inflation. A policy response may be necessary, he warned.
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Interesting development. Forgot to ‘reform’ the core.
• Are Belgium, Finland And France The ‘New Periphery’ In Europe? (CNBC)
The improvement in competitiveness in southern euro zone nations has left some core countries such as Belgium and France lagging behind, posing the risk that they could become the “new periphery,” a new report warns. “A handful of core euro zone economies have registered pretty sharp increases in their unit labor costs (ULCs) over the past four years,” according to a report by Capital Economics published Monday. This was happening at the same time as those in many peripheral countries had been falling outright, it said. “While this process may help the peripheral economies regain relative competitiveness more rapidly, some core economies, including Belgium, now look at risk of falling behind, threatening to push the euro-zone’s periphery north,” Roger Bootle and Jonathan Loynes, managing director and chief European economist at Capital Economics respectively, said in their report. The report analysed changes in competitiveness in the euro zone by looking at unit labor costs (the average cost of labor to produce one unit of output) across the region.
On this metric it found that the southern peripheral economies comprised of Spain, Italy, Ireland and Portugal “have succeeded in cutting costs relative to the euro zone as a whole over the past few years.” However, in a handful of core economies, notably Belgium, Finland and France, ULCs have continued to rise, both in absolute terms and relative to the euro zone average. “In Belgium in particular, ULCs have risen sharply and are now the highest in the euro-zone. Belgium’s high costs already appear to be harming both investment and export growth, traditionally strong drivers of growth in the economy. And its current account has fallen into a sustained deficit for the first time in 30 years.” “All this suggests that Belgium’s recovery is unlikely to gather further pace [and] in contrast to governments in the south, we doubt that Belgian politicians will be prepared (or forced) to tackle these issues any time soon.” they added.
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Rome and Paris will stare them down.
• EU To Warn France And Italy On Budget Plans (FT)
The European Commission will on Wednesday tell five euro zone countries, including France and Italy, that their budget plans risk breaching EU rules, say three officials briefed on the decision. The move comes a week after all euro zone countries submitted their budgets to Brussels for review as part of the EU’s new fiscal rules. Officially a request for more information, the commission’s move is the first step in a politically charged process of rejecting a euro zone nation’s budget and sending it back to national capitals for revision. A decision on rejection must be made by the end of the month. In addition to France and Italy, EU officials said similar requests will be sent to Austria, Slovenia and Malta. Simon O’Connor, a spokesman for Jyrki Katainen, the EU’s economic commissioner who is in charge of the evaluations, would not confirm the move. But he said it would not mean that Brussels had definitively decided to reject a country’s budget plan.
“Technical consultations with member states on the draft budget plans do not prejudge the outcome of our assessment,” O’Connor said. A formal request for revisions to the French and Italian budgets could prove politically explosive. Both governments are fending off rising anti-EU sentiment. Under the EU’s new budget rules, adopted at the height of the euro zone crisis, the commission is required to send a budget back to its government within two weeks of submission if it finds “particularly serious non-compliance” with EU budget rules. If the commission is contemplating such a move, the rules require it to notify the government in question within one week. Wednesday is the deadline for the one-week notification. EU officials said France and Italy may contravene different parts of the budget rules. France is required to get its deficit back under the EU ceiling of 3% of economic output by next year but its plan ignored that commitment, projecting a deficit of 4.3% of gross domestic product.
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Right. We all know that by sticking two straws in a glass of soda, you get out twice as much as with one. And sure, a shale play is not exactly like a glass of water, but still close enough. I think this is not about getting out more, but about getting the same amount out faster. Doesn’t sound like a terrible solid business model, but it’s not at all surprising either, given how the shale industry operates.
• US Shale Producers Cramming Wells in Risky Push to Extend Boom (Bloomberg)
U.S. shale producers are cramming more wells into the juiciest spots of their oilfields in a move that may help keep the drilling boom going as prices plunge. The technique known as downspacing aims to pull more oil at less cost from each field, allowing companies to boost profit, attract more investment and arrange needed loans to continue drilling. Energy companies see closely-packed wells as their best chance to add billions more barrels of oil to U.S. production that’s already the highest in a quarter century. “We would be dealing with more than a decade of inventory,” said Manuj Nikhanj, co-head of energy research for ITG Investment Research in Calgary. “If you can go twice as tight, the multiplication effect is massive.”
To make downspacing work, the industry must first solve a problem that for decades has required producers to carefully distance their wells. Crowded wells may steal crude from each other without raising total production enough to make the extra drilling worthwhile. Too much of that cannibalization could propel the U.S. production revolution into a faster downturn. In the past, most wells were drilled vertically into conventional reservoirs, which act more like pools of oil or gas. Companies learned quickly that packing wells too closely together just drains the reservoirs faster without appreciably increasing production, like two straws in the same milkshake. Shale rock is different, acting more like an oil-soaked sponge.
Drilling sideways through the layers of shale taps more of the resource, while fracking is needed to crack the rock to allow oil and gas to flow more freely into the well. So far, early results from downspacing experiments by a handful of companies have been mixed. It’s “the billion-dollar question,” said Wood Mackenzie’s Jonathan Garrett, “Is downspacing allowing access to new resources, or is it drawing down the existing resources faster?” An analysis of a group of wells on the same lease in La Salle County, in the heart of Texas’s booming Eagle Ford formation, showed that closer spacing reduced the rate of return for drilling to 23% from a high of 62% for wells spaced further apart, according to a paper published in April by Society of Petroleum Engineers.
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A sordid tale indeed.
• Oil at $80 a Barrel Muffles Forecasts for US Shale Boom (Bloomberg)
The bear market in oil has analysts reassessing the U.S. shale boom after five years of historic growth. The U.S. benchmark price dropped to $79.78 a barrel on Oct. 16, the lowest since June 2012. At that level, one-third of U.S. shale oil production would be uneconomic, analysts for New York-based Sanford Bernstein said in a report yesterday. Drillers would add fewer barrels to domestic output than the previous year for the first time since 2010, according to Macquarie, ITG Investment and PKVerleger. Horizontal drilling through shale accounts for as much as 55% of U.S. production and just about all the growth, according to Bloomberg Intelligence. The nternational Energy Agency predicted in November that the U.S. would pass Russia and Saudi Arabia to become the biggest producer in the world by 2015. Though some forecasts show oil rebounding or stabilizing, any slower increase in U.S. output would shake perceptions for the global market, said Vikas Dwivedi, an oil and gas economist in Houston for Sydney-based Macquarie.
“It would reshape the way everybody would think about oil,” Dwivedi said. Daily domestic production added a record 944,000 barrels last year and reached a 29-year high of 8.95 million barrels this month, according to the Energy Information Administration, the U.S. Department of Energy’s statistical arm. Output, much less growth, is difficult to maintain because shale wells deplete faster than conventional production. Oil production from shale drilling, which bores horizontally through hard rock, declines more than 80% in four years, more than three times faster than conventional, vertical wells, according to the IEA. New wells have to generate about 1.8 million barrels a day each year to keep production steady, Dwivedi said. At $80 a barrel, output would grow by 5%, down from a previous forecast of 12%, according to New York-based ITG. At $75 a barrel, growth would fall 56% to about 500,000 barrels a day, Dwivedi said. Closer to $70 a barrel, the growth rate would drop to zero, he said.
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why
This has been going on for a number of years. Exxon will go the way of IBM. Or maybe Rosneft can do a hostile take-over. That would be so funny.
• How Wall Street Is Killing Big Oil (Oilprice.com)
Lee Raymond, the famously pugnacious oilman who led ExxonMobil between 1999 and 2005, liked to tell Wall Street analysts that covering the company would be boring. “You’ll just have to live with outstanding, consistent financial and operating performance,” he once boasted. For generations, Exxon and its Big Oil brethren, including Chevron, ConocoPhilipps, BP, Royal Dutch Shell and Total, dominated the global energy landscape, raking in enormous profits and delivering fat dividends to shareholders. Big Oil has long been an investor darling. Those days are over. Once reliable market beaters, Big Oil shares are lagging: Over the last five years, when the S&P 500 rose more than 80%, shares of Exxon and Shell rose just over 30%. The underperformance reflects oil majors’ inability to maintain steady cash flows and increase production in a world where much of the easy oil has already been found and project costs are rapidly escalating.
Last year, Exxon, Chevron and Shell failed to increase oil and gas production despite having spent US$500 billion over the previous five years, $120 billion in 2013 alone. Under pressure from investors, the world’s largest oil companies are now forced to cut capital expenditure and sell assets to boost cash flows. Big Oil is, in short, heading towards liquidation. And this process has set in motion a tectonic shift in the global energy balance of power away from western international oil companies, or IOCs, and towards state-owned national oil companies, NOCs, in emerging markets. Not only do the NOCs – companies like Saudi Aramco; Russia’s Gazprom and Rosneft; China’s CNOOC, CNPC and Sinopec; India’s ONGC; Venezuela’s PDVSA; and Brazil’s Petrobras – control approximately 90% of the world’s known petroleum reserves, they are also immune to the market pressures constraining Big Oil.
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Betting that the Saudi’s will blink. Hey, it’s a casino out there.
• Investors Pile Into Oil Funds at Fastest Pace in 2 Years (Bloomberg)
Investors are putting money into funds that track oil prices at the fastest rate in two years, betting that crude will rebound from a bear market. The four biggest oil exchange-traded products listed in the U.S. have received a combined $334 million so far this month, the most since October 2012, according to data compiled by Bloomberg. Shares outstanding of the funds, including the United States Oil Fund (DBO) and ProShares Ultra Bloomberg Crude Oil, rose to 55 million yesterday, a nine-month high. “There are investors who love to catch a falling knife,” said Dave Nadig, chief investment officer of San Francisco-based ETF.com. “It’s pretty easy to look at what’s been going on in oil and say ‘well, it has to bottom out somewhere.’ There are plenty of investors out there who still believe that the long-term trend of oil has to be $100.” Money has flowed into the funds as West Texas Intermediate and Brent crudes, the benchmarks for U.S. and global oil trading, each plunged more than 20% from their June highs, meeting a common definition of a bear market.
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Wonder what the real number is at this point in time for China, the actual growth. Even 4% feels high.
• Markets Need To Accept Low Growth As ‘New Normal’ In China (Saxo)
Pauline Loong, Managing Director of Asia-analytica, gives us her assessment of the latest Chinese GDP figures: “The worst quarterly GDP performance in almost six years has raised hopes of a bolder policy response from Beijing. But more aggressive measures in the coming months might still not provide the hoped-for catalyst on stock prices or deliver the boost needed for a return to market-moving growth rates.” Pauline says we need to “be realistic” about China’s GDP and get used to lower numbers. For example 6.9% could be the “new normal” next year. China’s official GDP target for 2014 remains 7.5%, a number which looks increasingly out of reach. In response, Beijing has been “micro managing” stimulus, in Pauline’s view, going from sector to sector and even telling banks what size of business to lend to. Pauline Loong warns that China’s gear change from export driven economy to consumer driven market will take longer than most may imagine, it’s worth bearing in mind that Chinese GDP per capita is only just above Iraq in global rankings.
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200 million migrant workers are missing from the official stats. That’s considerably more than the entire active US workforce. Remember, from the article above, that “Chinese GDP per capita is only just above Iraq in global rankings.”
• China to Let World in on Gauge Showing State of Economy (Bloomberg)
Chinese Premier Li Keqiang has an insider’s knowledge on the strength of the world’s second-largest economy that helps him determine when stimulus is needed. He’s about to share part of the secret. Li has said several times this year that slower growth is tolerable as long as enough jobs are created, often referring to a survey-based unemployment indicator that’s different from the registered urban jobless rate released every quarter. The published gauge excludes migrant workers who aren’t registered with local authorities, estimated at more than 200 million. The more comprehensive jobless rate will be released “very soon,” Sheng Laiyun, spokesman for the National Bureau of Statistics, said in Beijing yesterday. “The quality of the indicator, for now, looks very good. So, we are using it internally for policy decision-making references.”
China’s leaders have eschewed across-the-board stimulus and interest-rate cuts even as growth cooled to the weakest pace in more than five years last quarter, sticking to limited steps such as easing home-purchase controls. Having access to better barometers like the new unemployment measure would help economists estimate how deep a slowdown in gross domestic product the government will tolerate. “The lack of good unemployment data is the main reason why China still focuses so much on GDP,” said Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong. “In fact, the government is more concerned about employment and inflation, and that’s why they refrained from big stimulus.” Releasing the methodology, breakdown and samples for the new jobless rate in addition to the headline number, as the U.S. does, would also greatly help researchers, Zhu said.
He called China’s current registered unemployment rate “untrustworthy and unusable.” Sporadic revelations made by the government about the broader unemployment gauge, which surveys 31 cities, show about a 1 percentage-point divergence from the official rate this year. The surveyed rate fell for four straight months to 5.05% in June, the National Development and Reform Commission said on its website in July. In contrast, the official registered rate was 4.08% in the second quarter, unchanged from the previous three months. The new surveyed rate adopts a methodology following the guidance of the International Labour Organization, according to Cai Fang, vice director of the government-backed Chinese Academy of Social Sciences. “All eyes will be on it,” said Ding Shuang, senior China economist at Citigroup Inc. in Hong Kong. “It’s going to be really important, like that of the U.S.”
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The UK government is a joke.
• UK Deficit Up 10% From Last Year, National Debt Rises £100 Billion (Guardian)
The chancellor’s plan to cut the deficit this year looks increasingly unrealistic after another jump in government borrowing in September pushed the deficit 10% higher in the first half of the year, lessening the chances of a pre-election giveaway at December’s autumn statement. Borrowing last month was £11.8bn, £1.6bn higher than in September 2013 and more than £1bn higher than City economists had forecast, official figures showed, as the tax take failed to keep pace with government spending despite the recovery in the economy. Tax receipts have disappointed over recent months partly due to unexpectedly weak pay growth and the increase in the personal allowance to £10,000. In the first six months of the tax year, between April and September, borrowing was £58bn, up £5.4bn on the first half of last year, according to the Office for National Statistics. Economists said it was looking increasingly likely George Osborne would miss his target of reducing the deficit by more than £12bn in 2014-15.
Alan Clarke, economist at Scotiabank, said that if the current trend continued, borrowing would come in about £10bn above the target. Howard Archer, chief UK economist at IHS Global Insight, said: “The chancellor is looking ever more unlikely to meet his fiscal targets for 2014/15. This means that Mr Osborne faces an awkward fiscal backdrop as he announces his autumn statement in December as the May 2015 general election draws ever nearer. This gives him little scope to announce any major sweeteners.” The Office for Budget Responsibility, the Treasury’s official forecaster, cautioned that although there was uncertainty over government borrowing in the second half of the fiscal year, tax receipts for the full year were likely to come in below forecast. “Factors such as weaker-than-expected wage growth, lower-than-expected residential property transactions and lower oil and gas revenues mean it is looking less likely that the full year receipts growth forecast will be met,” it said.
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How is this not a criminal practice: “The US student loan provider, Sallie Mae, sells repackaged debt for as little as 15 cents on the dollar.”
• The Moral Economy Of Debt (Robert Skidelsky)
Every economic collapse brings a demand for debt forgiveness. The incomes needed to repay loans have evaporated, and assets posted as collateral have lost value. Creditors demand their pound of flesh; debtors clamour for relief. Consider Strike Debt, an offshoot of the Occupy movement, which calls itself “a nationwide movement of debt resisters fighting for economic justice and democratic freedom”. Its website argues that “with stagnant wages, systemic unemployment, and public service cuts” people are being forced into debt in order to obtain the most basic necessities of life, leading them to “surrender [their] futures to the banks”. One of Strike Debt’s initiatives, rolling jubilee, crowdsources funds to buy and extinguish debt, a process it calls collective refusal. The group’s progress has been impressive, raising more than $700,000 and extinguishing debt worth almost $18.6m. It is the existence of a secondary debt market that enables rolling jubilee to buy debt so cheaply.
Financial institutions that have come to doubt their borrowers’ ability to repay, sell the debt to third parties at knockdown prices, often for as little as five cents on the dollar. Buyers then attempt to profit by recouping some or all of the debt from the borrowers. The US student loan provider, Sallie Mae, sells repackaged debt for as little as 15 cents on the dollar. To draw attention to the often-nefarious practices of debt collectors, rolling jubilee recently cancelled student debt for 2,761 people enrolled at Everest College, a for-profit school whose parent company, Corinthian Colleges, is being sued by the US government for predatory lending. Everest’s loan portfolio was valued at almost $3.9m. Rolling jubilee bought it for $106,709.48, or about three cents on the dollar. But that is a drop in the ocean. In the US alone, students owe more than $1tn, or about 6% of GDP. And the student population is just one of many social groups that lives on debt.
Indeed, throughout the world, the economic downturn of 2008-09 increased the burden of private and public debt – to the point that the public-private distinction became blurred.In a recent speech in Chicago, Irish president Michael D Higgins explained how private debt became sovereign debt. He said: “As a consequence of the need to borrow so as to finance current expenditure and, above all, as a result of the blanket guarantee extended to the main Irish banks’ assets and liabilities, Ireland’s general government debt increased from 25% of GDP in 2007 to 124% in 2013.” The Irish government’s aim, of course, was to save the banking system. But the unintended consequence of the bailout was to shatter confidence in the government’s solvency.
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One day a deal is announced, the next it’s denied.
• Fears Over Gas Supply As Russia-Ukraine Talks Fail (Reuters)
Russia and Ukraine failed to reach an accord on gas supplies for the coming winter in EU-brokered talks on Tuesday but agreed to meet again in Brussels in a week in the hope of ironing out problems over Kiev’s ability to pay. After a day of talks widely expected to be the final word, European Energy Commissioner Guenther Oettinger told a news conference the three parties agreed the price Ukraine would pay Russia’s Gazprom – $385 per thousand cubic metres – as long as it paid in advance for the deliveries. But Russian Energy Minister Alexander Novak said Moscow was still seeking assurances on how Kiev, which earlier in the day asked the EU for a further €2 billion ($2.55 billion) in credit, would find the money to pay Moscow for its energy.
Dependent on Western aid, Ukraine is in a weak position in relation to its former Soviet master in Moscow, though Russia’s reasons were unclear for wanting further assurances on finances, beyond an agreement to supply gas only for cash up front. Citing unpaid bills worth more than $5 billion, Russia cut off gas flows to Kiev in mid-June. The move added to East-West tensions sparked by Russia’s annexation of Ukraine’s Crimea and conflict in Russian-speaking eastern Ukraine. The two countries are fighting in an international court over the debt, but Oettinger noted that Ukraine had agreed to pay off $3.1 billion in two tranches this year to help unblock its access to gas over the winter. European Union states, many also dependent on Russian gas and locked in a trade war with Moscow over Ukraine, fear their own supplies could be disrupted if the issue is not resolved.
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Boy oh boy, what a surprise.
• New York Fed Caught Sight of London Whale and Let Him Go (Bloomberg)
It seems pretty clear to me that JPMorgan’s London Whale episode, in which the bank’s Chief Investment Office lost $6.2 billion on poorly managed credit derivatives trades, was a huge win for U.S. banking regulators. Like, here is a rough model of banking regulation:
- Banks tend to be better at banking than banking regulators are, so they are unlikely to want to defer to the regulators’ judgment in most circumstances.
- You need the banks to buy into the regulation, and defer to the regulators, for the regulation to produce real broad-based risk reduction rather than mere check-the-box compliance efforts.
- One way to get the banks to buy into regulation is for them to fail catastrophically and realize that they’re not as good at their jobs as they thought they were.
- But catastrophic failure is precisely what, as a regulator, you want to prevent.
- Because it’s bad.
- But also because, if you allow a catastrophic failure, then you’re not a very good regulator either, so the failure provides no additional reason for a bank to listen to you.
So 2008 ushered in a new regulatory environment but at, you know, a certain cost, both to the world and to the regulators’ credibility.
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At east the Danes have not yet fully been taken over.
• World’s Top-Ranked Pension Funds Probed for Hedge Fund Use (Bloomberg)
Denmark, home to the world’s top-ranked pension system, will toughen oversight of the $500 billion industry after regulators observed a surge in risk-taking linked in part to more widespread use of hedge funds. The Financial Supervisory Authority in Copenhagen will require pension funds to submit quarterly reports on their alternative investments to track their use of hedge funds, exposure to private equity and infrastructure projects. The decision follows funds’ failures to account adequately for risks in their investment strategies, according to an FSA report. The regulatory clampdown comes as Denmark deals with risks it says are inherent to a system due to be introduced across the European Union in 2016.
The new rules will allow pension funds to invest according to a so-called prudent person model, rather than setting outright limits. In Denmark, the approach has proven problematic for the only EU country to have adopted the model, said Jan Parner, the FSA’s deputy director general for pensions. “The funds are setting up for their release from the quantitative requirements, but the problem is, it’s not clear what a prudent investment is,” Parner said in an interview. “The challenge for European supervisors is to explain to the industry what prudent investments are before the opposite ends up on the balance sheets.” Denmark, which has almost two years of experience with the approach after its early adoption in 2012, says a lack of clear guidelines invites misinterpretation as firms try to inflate returns.
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Great Orlov piece on Unkraine, US, Russia, NATO.
• How To Start A War And Lose An Empire (Dmitry Orlov)
A year and a half I wrote an essay on how the US chooses to view Russia, titled The Image of the Enemy. I was living in Russia at the time, and, after observing the American anti-Russian rhetoric and the Russian reaction to it, I made some observations that seemed important at the time. It turns out that I managed to spot an important trend, but given the quick pace of developments since then, these observations are now woefully out of date, and so here is an update. [..] … what a difference a year and a half has made! Ukraine, which was at that time collapsing at about the same steady pace as it had been ever since its independence two decades ago, is now truly a defunct state, with its economy in free-fall, one region gone and two more in open rebellion, much of the country terrorized by oligarch-funded death squads, and some American-anointed puppets nominally in charge but quaking in their boots about what’s coming next.
Syria and Iraq, which were then at a low simmer, have since erupted into full-blown war, with large parts of both now under the control of the Islamic Caliphate, which was formed with help from the US, was armed with US-made weapons via the Iraqis. Post-Qaddafi Libya seems to be working on establishing an Islamic Caliphate of its own. Against this backdrop of profound foreign US foreign policy failure, the US recently saw it fit to accuse Russia of having troops “on NATO’s doorstep,” as if this had nothing to do with the fact that NATO has expanded east, all the way to Russia’s borders. Unsurprisingly, US–Russia relations have now reached a point where the Russians saw it fit to issue a stern warning: further Western attempts at blackmailing them may result in a nuclear confrontation. The American behavior throughout this succession of defeats has been remarkably consistent, with the constant element being their flat refusal to deal with reality in any way, shape or form.
Just as before, in Syria the Americans are ever looking for moderate, pro-Western Islamists, who want to do what the Americans want (topple the government of Bashar al Assad) but will stop short of going on to destroy all the infidel invaders they can get their hands on. The fact that such moderate, pro-Western Islamists do not seem to exist does not affect American strategy in the region in any way. Similarly, in Ukraine, the fact that the heavy American investment in “freedom and democracy,” or “open society,” or what have you, has produced a government dominated by fascists and a civil war is, according to the Americans, just some Russian propaganda. Parading under the banner of Hitler’s Ukrainian SS division and anointing Nazi collaborators as national heroes is just not convincing enough for them. What do these Nazis have to do to prove that they are Nazis, build some ovens and roast some Jews? Just massacring people by setting fire to a building, as they did in Odessa, or shooting unarmed civilians in the back and tossing them into mass graves, as they did in Donetsk, doesn’t seem to work.
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And my main man Jim was in Sweden.
• “Omenland” (James Howard Kunstler)
[..] too soon, I landed back in Newark Airport, Lord have mercy. I grabbed a taxi to the Newark train station to get to the Hudson River line out of New York City back upstate. Along the way on Route 21, I passed a graffiti on an overpass. It said “Omenland.” The anonymous genius who sprayed that there sure caught the US zeitgeist. Newark compares to Stockholm as an Ebola victim in the gutter compares to a supermodel at poolside. The scene in the Newark train station was like the barroom from Star Wars, a creature-feature extravaganza, intergalactic Mutt Central, wookies in hoodies with burning coals for eyes, ladies with pierced cheeks, crack-heads, winos, missing body part people, lopsided head people, and the scrofulous physical condition of the station is proof positive that Chris Christie is unqualified to be president. This is a gateway to New York, America’s greatest city, you understand, and it looks like the veritable checkpoint to the rectum of the universe. You know what occurred to me: maybe it is?
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Guess it’s better than nothing.
• WHO: Ebola Serum In Weeks And Vaccine Tests In Africa By January (Guardian)
The World Health Organisation has announced it hopes to begin testing two experimental Ebola vaccines in west Africa by January and may have a blood serum treatment available for use in Liberia within two weeks. The UN’s health agency said it aimed to begin testing the two vaccines in the new year on more than 20,000 frontline health care workers and others in west Africa – a bigger rollout than previously envisioned. Dr Marie Paule Kieny, an assistant director general at the WHO, acknowledged there were many “ifs” remaining and “still a possibility that it [a vaccine] will fail”. But she sketched out a much broader experiment than was imagined only six months ago, saying the WHO hoped to dispense tens of thousands of doses in the first months of the new year. “These are quite large trials,” she said.
Kieny said in remarks reported by the BBC that a serum was also being developed for use in Liberia based on antibodies extracted from the blood of Ebola survivors. “There are partnerships which are starting to be put in place to have capacity in the three countries to safely extract plasma and make preparation that can be used for the treatment of infective patients. “The partnership which is moving the quickest will be in Liberia where we hope that in the coming weeks there will be facilities set up to collect the blood, treat the blood and be able to process it for use.” A WHO spokeswoman, Fadela Chaib, said the agency expected 20,000 vaccinations in January and similar numbers in the months afterwards using the trial products. An effective vaccine would still not in itself be enough to stop the outbreak but could protect the medical workers who are central to the effort. More than 200 of them have died of Ebola.
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