Feb 192018
 
 February 19, 2018  Posted by at 10:56 am Finance Tagged with: , , , , , , , , , ,  


Frank Larson Broadway Billboard Seven Year Itch 1955

 

Global Dividends Hit Record Of $1.25 Trillion In 2017, More To Come (R.)
Jittery US Bond Market Braces For Supply Wave (R.)
How Did America Go Bankrupt? Slowly At First, Then All At Once (CH)
London’s Housing Boom Is Over, Rightmove Says (BBG)
Average Price Of Newly Marketed UK Home Rises Above £300,000 Again (G.)
Ex-CIA Director Thinks US Hypocrisy About Election Meddling Is Hilarious (CJ)
German Carmakers In A Spin Ahead Of Diesel Ban Ruling (R.)
Sweden Is Getting Worried About Its Cashless Society (BBG)
Europe Is A Collection Of Filter Bubbles (BBG)

 

 

As is the case with buybacks, this is all money that execs decide NOT to invest in a company (productivity, modernization, maintenance), but in its stock value.

Global Dividends Hit Record Of $1.25 Trillion In 2017, More To Come (R.)

Global dividends rose 7.7% to an all-time high of $1.25 trillion (1 trillion euros) last year boosted by a buoyant world economy and rising corporate confidence, Janus Henderson said on Monday, predicting another record year ahead. The surge – the strongest since 2014 – was driven by increases in every region and almost every industry with record showings in 11 countries including the United States, Japan, Switzerland, Hong Kong, Taiwan and the Netherlands, the investment manager added. For 2018 Janus Henderson expects dividends to keep the same 7.7% growth rate to reach around $1.35 trillion, as corporate and economic growth remains strong even in more volatile financial markets. “Companies are seeing rising profits and healthy cash flows, and that’s enabling them to fund generous dividends.

The record payout last year was almost three-quarters higher than in 2009, and there is more to come,” Ben Lofthouse, Director of Global Equity Income at Janus Henderson, said. “The next few months are set fair, and we expect global dividends to break new records in 2018.” Adjusting for movements in exchange rates, special one-off dividends and other factors, global dividends rose 6.8% last year and are expected to rise another 6.1% in 2018. Janus said 2017’s dividend growth showed less regional divergence than in previous years, reflecting the broadly based global economic recovery, though Europe lagged behind. European dividends rose just 1.9% to $227 billion, weighed down by cuts from a handful of large companies in France and Spain, lower special dividends and a weak euro during the second quarter, when most dividends are paid, it said.

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How can more debt not be good?

Jittery US Bond Market Braces For Supply Wave (R.)

Bond investors, who have been on edge over signs of growing inflation and a possibly more aggressive Federal Reserve, will have their work cut out for them as the U.S. government seeks to sell $258 billion worth of debt this coming week. The Treasury Department began ramping up its debt issuance earlier this month to fund the expected growth in borrowing tied to the biggest tax overhaul in 30 years and a two-year federal spending package. Last year’s tax reform is expected to add as much as $1.5 trillion to the federal debt load, while the budget agreement would increase government spending by almost $300 billion over the next two years. Analysts worry the combination of a rising budget deficit, faster inflation and more Fed rate increases have ratcheted up the risk of owning Treasuries. Those concerns pushed benchmark 10-year Treasury yields up to 2.944%, a four-year peak last week.

Treasury bill and two-year yields have reached their highest level in more than nine years. The five-year Treasury yield is hovering at its highest levels in nearly eight years, while seven-year yield climbed to levels not seen since April 2011. The increase in U.S. yields may entice investors seeking steady income in the wake of the rollercoaster sessions on Wall Street and other stock markets this month, analysts said. [..] The heavy Treasury supply will kick off on Tuesday with $151 billion worth of bills including record amounts of three-month and six-month T-bills. The rest of the debt sales will spread over a holiday-shortened week with $28 billion of two-year fixed rate notes on Tuesday; $35 billion in five-year debt on Wednesday and $29 billion in seven-year notes on Thursday. The Treasury Department also plans to add $15 billion to an older two-year floating-rate issue.

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Everything is debt. Imagine what would happen if it wasn’t there. Or soon won’t be.

How Did America Go Bankrupt? Slowly At First, Then All At Once (CH)

Clearly, debt has surged since 2000 and particularly since 2008 versus decelerating net full time jobs growth. The number of full time employees is economically critical as, generally speaking, only these jobs offer the means to be a home buyer or build savings and wealth in a consumer driven economy. Part time employment generally offers only subsistence level earnings. But if we look at the change over those periods highlighted, we get a clear picture. Full time jobs are being added at a rapidly declining rate while federal debt is surging in the absence of the growth of full time employees.

And if we look at the federal debt added per full time job added (chart below)…broken arrow…broken arrow!!! That is $1.92 million dollars in new federal debt per net new full time employee since 2008. Compare that to the $30 thousand per net new full time employee from ’70 to ’80…or $140 thousand from ’80 to ’90…and nearly quadruples the $460 thousand per from ’00 to ’08. Despite a far larger total population and after ten years of “recovery” since ’08, this is likely as good as it gets. We are likely at or very near the top of this economic cycle. This pattern is likely to carry forward over the next decade and economic cycle…likely with disastrous results.

[..] US population growth has been decelerating since 1790 and debt to GDP rising (chart below). Originally, the combination of a relatively small population, high immigration, and high birth rates meant annual population growth in excess of 3% and relatively low debt to GDP. Over time, as the population grew, immigration slowed, and birth rates collapsed; US population growth tumbled. Since 1950 total annual population growth (black line in chart below) has decelerated almost 75% (from 2% to 0.6%) but more critically the annual population growth among the under 65 year old population has essentially ceased (as the yellow line in the chart shows) and more debt has been the resounding “solution”. Massive interest rate cuts to incent debt creation have been substituted for the decelerating organic growth.

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About time.

London’s Housing Boom Is Over, Rightmove Says (BBG)

London’s property market has moved out of its boom phase and home sellers need to be more realistic about their price demands, according to Rightmove. The February report from the home-listing website shows that asking prices were down 1% from a year earlier, a sixth consecutive fall. They rose 4.4% on the month, reflecting the usual jump at the start of the spring season. While multiple reports point to a cooling in London housing, the damage is being limited by cautious sellers, who aren’t flooding the market in a panic to dump property. That means the long-running supply-demand imbalance in the city is providing some support to prices. “End-of-the-boom prices normally readjust more quickly if there is an over supply,” Miles Shipside, Rightmove director, said in the report. However, “some would-be sellers are holding back, preventing a glut of competition from forcing prices downward,” he said.

The capital’s housing market was the worst performing in the U.K. in 2017 and there’s little to suggest any upturn is in store. Brexit uncertainty has damped demand, while years of rampant inflation has pushed ownership out of reach for many. The mean asking price in London this month was almost 630,000 pounds ($885,000), more than 20 times average U.K. earnings. For those who need a fast sale, Shipside’s advice is to “sacrifice some of the substantial price gains of the last few years.” The average time to sell a property in London is now 83 days, up from 73 days a year ago. Nationally, asking prices increased 0.8% in February from January, though that was below the 10-year average for the time of year. The average price of 300,000 pounds is up 1.5% year-on-year. That compares with gains of about 6% seen less than two years ago.

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But wait, this quotes Rightmove as well…

Average Price Of Newly Marketed UK Home Rises Above £300,000 Again (G.)

The average price of a UK property coming on to the market has risen by more than £2,400 in a month to just over £300,000 amid evidence of “record” levels of house-hunting activity, according to Rightmove. The website, which tracks 90% of the UK property market, said the national average asking price for a home had increased by 0.8% during the past month, following the 0.7% rise it reported in mid-January. However, some sellers may be over-pricing their properties: the average time to sell has risen once again and is now 72 days, compared with 67 days a month ago and 55 during the summer of 2017. In London, the average has climbed to 83 days. Rightmove said that while it was the norm for new sellers’ asking prices to be buoyant at the start of a new year, “this first complete month in 2018 is seeing more pricing optimism than the comparable period in 2017”.

In general, however, sellers were not being over-ambitious or setting too high a price, it added. The website, which claims to display a stock of more than one million properties to buy or rent, said the average asking price now stood at £300,001, compared with £297,587 a month ago. It described January as its “busiest month ever”, with a record 141m website visits. In all the UK regions it tracks, the typical price of a newly-marketed property rose during the past month, with the exception of south-west England, where the figure slipped back slightly. Scotland saw the biggest monthly increase, at 5.1%, while the north-east and Wales managed 3.6% and 3.5%. However, on a national basis, the annual rate of price growth “remains subdued” at 1.5%, said the website.

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Isn’t it?

Ex-CIA Director Thinks US Hypocrisy About Election Meddling Is Hilarious (CJ)

Take off the terrorist’s mask, and it’s the CIA. Take off the revolutionary’s mask, and it’s the CIA. Take off the Hollywood producer’s mask, and it’s the CIA. Take off the billionaire tech plutocrat’s mask, and it’s the CIA. Take off the news man’s mask, and guess what? It’s the motherfucking CIA. CIA influence is everywhere. Anywhere anything is happening which could potentially interfere with the interests of America’s unelected power establishment, whether inside the US or outside, the depraved, lying, torturing, propagandizing, drug trafficking, coup-staging, warmongering CIA has its fingers in it. Which is why its former director made a cutesy wisecrack and burst out laughing when asked if the US is currently interfering in other democracies.

Fox’s Laura Ingraham unsurprisingly introduced former CIA Director James Woolsey as “an old friend” in a recent interview about Special Prosecutor Robert Mueller’s indictment of 13 alleged members of a Russian troll farm, in which Woolsey unsurprisingly talked about how dangerous Russian “disinformation” is and Ingraham unsurprisingly said that everyone should really be afraid of China. What was surprising, though, was what happened at the end of the interview. “Have we ever tried to meddle in other countries’ elections?” Ingraham asked in response to Woolsey’s Russia remarks. “Oh, probably,” Woolsey said with a grin. “But it was for the good of the system in order to avoid the communists from taking over. For example, in Europe, in ’47, ’48, ’49, the Greeks and the Italians we CIA-”

“We don’t do that anymore though?” Ingraham interrupted. “We don’t mess around in other people’s elections, Jim?” Woolsey smiled and said said “Well…”, followed by a joking incoherent mumble, adding, “Only for a very good cause.” And then they both laughed. They laughed about this. They thought it was funny and cute. They thought it was funny and cute that the very allegation being used to manufacture support for world-threatening new cold war escalations against a nuclear superpower was something they both knew the United States does constantly, usually through Woolsey’s own CIA. The US government’s own data shows that it has deliberately meddled in the elections of 81 foreign governments between 1946 and 2000, including Russia in the nineties. That isn’t even counting the coups and regime changes it facilitated, including right here in my home Australia in the seventies.

The US meddles constantly in other democracies, not “for a good cause” as Woolsey claims, but to advance the agendas of the loosely allied plutocrats, intelligence and defense agencies which comprise America’s permanent government. It does this not to improve or protect the lives of ordinary Americans, but to make the rich richer and the powerful more powerful, usually at the expense of the money, resources, homes, governments, livelihoods and lives of people in other countries. It does this with impunity and without hesitation.

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Carmakers rule the country.

German Carmakers In A Spin Ahead Of Diesel Ban Ruling (R.)

A court will decide on Thursday whether German cities can ban heavily polluting cars, potentially wiping hundreds of millions of euros off the value of diesel cars on the country’s roads. Environmental group DUH has sued Stuttgart in Germany’s carmaking heartland, and Duesseldorf over levels of particulate matter exceeding EU limits after Volkswagen’s 2015 admission to cheating diesel exhaust tests. The scandal led politicians across the world to scrutinize diesel emissions, which contain the matter and nitrogen oxide (NOx) and are known to cause respiratory disease. There are around 15 million diesel vehicles on German streets and environmental groups say levels of particulates exceed the EU threshold in at least 90 German towns and cities.

Local courts ordered them to bar diesel cars which did not conform to the latest standards on days when pollution is heavy, startling German carmakers because an outright ban could trigger a fall in vehicle resale prices, and a rise in the cost of leasing contracts, which are priced on assumed residual values. The German states concerned, where the carmakers and their suppliers have a strong influence, appealed against the decisions, leaving Germany’s federal administrative court – the court of last resort for such matters – to rule on whether such bans can legally be imposed at local level.

“The key question is whether bans can already be considered to be legal instruments,” said Remo Klinger, a lawyer for DUH. “It’s a completely open question of law.” Paris, Madrid, Mexico City and Athens have said they plan to ban diesel vehicles from city centers by 2025, while the mayor of Copenhagen wants to ban new diesel cars from entering the city as soon as next year. France and Britain will ban new petrol and diesel cars by 2040 in a shift to electric vehicles.

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Big Brother is not worried.

Sweden Is Getting Worried About Its Cashless Society (BBG)

‘“No cash accepted” signs are becoming an increasingly common sight in shops and eateries across Sweden as payments go digital and mobile. But the pace at which cash is vanishing has authorities worried. A broad review of central bank legislation that’s underway is now taking a special look at the situation, with an interim report due as early as the summer. “If this development with cash disappearing happens too fast, it can be difficult to maintain the infrastructure” for handling cash, said Mats Dillen, the head of the parliamentary review. He declined to get into more details on what types of proposals could be included in the report. Sweden is widely regarded as the most cashless society on the planet. Most of the country’s bank branches have stopped handling cash; many shops, museums and restaurants now only accept plastic or mobile payments.

But there’s a downside, since many people, in particular the elderly, don’t have access to the digital society. “One may get into a negative spiral which can threaten the cash infrastructure,” Dillen said. “It’s those types of issues we are looking more closely at.” Last year, the amount of cash in circulation dropped to the lowest level since 1990 and is more than 40 percent below its 2007 peak. The declines in 2016 and 2017 were the biggest on record. An annual survey by Insight Intelligence released last month found only 25 percent of Swedes last year paid in cash at least once a week, down from 63 percent just four years ago. A full 36 percent never use cash, or just pay with it once or twice a year.

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There is no such thing as one Europe. And the more the EU promotes the narrative, the more that will become obvious.

Europe Is A Collection Of Filter Bubbles (BBG)

The EU can act in unison at times – for example, on Russia sanctions or, at least so far, on Brexit. But as French President Emmanuel Macron and German Chancellor Angela Merkel try for a closer union in the next few years, they will need to be mindful of the fact that there is no single narrative among the publics in different European countries on matters of economic importance. A recent paper for Bruegel, a Brussels-based think tank, vividly shows this by analyzing coverage of Europe’s recent financial crisis by four important centrist newspapers: Germany’s Sueddeutsche Zeitung, France’s Le Monde, Italy’s La Stampa and Spain’s El Pais. The total data set encompassed 51,714 news stories. The researchers fed them to a content analysis algorithm and then analyzed the results to construct generalized narratives. Their focus was on how blame for the crisis was attributed.

They found that only El Pais consistently attributed blame to Spain itself for its financial troubles during the euro crisis. “In Spain, the connection between the global financial crisis, the local housing bubble and the mismanagement of a previous period of impressive growth was more visible,” Porcaro explained to me. As one might expect, Sueddeutsche Zeitung blames the crisis on a departure from the traditional German social market economic model. Everyone except Germany seems to have contributed, according to the Munich paper — from greedy financial market players to financially imprudent Greeks to the ECB with its loose monetary policy. Le Monde, too, blamed the banks and speculators, but also German intransigence in handling the indebted southern Europeans.

And La Stampa focused on Italy’s role as a victim of circumstance, namely globalization and German-imposed austerity. Banks and financiers didn’t get much attention as culprits from the Italian newspaper, but the Italian political system and government did get some blame, as in Spain. Le Monde and La Stampa, according to the Bruegel paper, both “embrace a sense of desperation that goes far beyond purely economic considerations but calls into question the entire political system and social fabric.” It’s as if the euro area’s four biggest economies didn’t share a reality. The four quality dailies resemble the blind men in the Indian parable, feeling different parts of an elephant’s body, declaring the whole animal should look like a tree or a snake, then coming to blows when they can’t agree.

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Mar 202016
 
 March 20, 2016  Posted by at 9:50 am Finance Tagged with: , , , , , , , , ,  


NPC Kidwell’s Market on Pennsylvania Avenue, Washington DC 1920

World Is ‘Overloaded On Monetary Policy’, Says OECD (Tel.)
Central Banks Are Already Doing The Unthinkable – You Just Don’t Know It (Tel.)
Helicopter Drops By Stealth (Tel.)
Buyback Blackout Period Starts Monday (ZH)
Another False Oil Price Rally: Crossing A Boundary (Berman)
China’s Property Rally Has ‘Reached A Tipping Point’ (Forbes)
China’s Bottom Line to Avoid Systemic Risks, Vice Premier Says (BBG)
China Top Planner Promises Foreign Companies Access To Markets (WaPo)
Why Are There Doubts Over China’s Growth Rate? (Forbes)
Support For Impeaching Brazil’s President Rises To 68% (Reuters)
German Right Wing Demands Referendum on EU, Refugee Crisis (Express)
Greece Delays Sending Refugees Back To Turkey Under EU Deal (AFP)
EU-Turkey Deal: Officials Left In The Dark As Deadline Looms (Tel.)
Don’t Make Us Ashamed To Be European (3 Mayors)

One trick ponies.

World Is ‘Overloaded On Monetary Policy’, Says OECD (Tel.)

Central banks cannot haul economies out of stagnation on their own, the OECD has warned. Catherine Mann, chief economist at the Paris-based think-tank, said countries were now “overloaded on monetary policy” as she described the use of negative interest rates as “a reaction of central banks trying to meet the objective of raising inflation and fostering growth alone”. Ms Mann said banks faced being “squeezed” by the unintended consequences of sub-zero rates in an environment where demand remained subdued. The OECD has repeatedly warned that fiscal policy and structural reforms are needed to ensure recoveries are self-sustaining. “In the economies where negative interest rates are most deployed, the credit channel is particularly important, and this is impaired. Banks in Europe for example have not deleveraged and they as a result are not in a position to effectively lend credit,” said Ms Mann.

“They are also squeezed in the middle between negative interest rates on the one hand and very soft economic activity on the other. So negative interest rates are tough. It’s a tough policy to use.” Mark Carney, the Governor of the Bank of England, has warned that negative interest rates could do more harm than good by eating into banks and building societies’ profits and pushing up consumer charges. Earlier this month, the ECB stepped up efforts to reflate the eurozone. Policymakers slashed its deposit rate deeper into negative territory and beefed-up its quantitative easing programme. In a bid to spur credit growth, the ECB sweetened its incentive for banks to lend by revamping its targeted longer-term refinancing operations (TLTROs).

From this June, banks that lend more will be paid as much as 0.4pc to borrow from the ECB. Ms Mann said the ECB’s actions were welcome, but would not get Europe “back on track” on their own. “The ECB has done a lot, but the effective way to enhance economic activity in the euro area is a three-legged stool: fiscal, monetary and structural. What [Mario] Draghi [the president of the ECB] has done is make the monetary leg of the stool even longer, so we’re not there yet with the recipe we need in order to get Europe back on track.” Some experts argue that central banks will be forced to inject money directly into the economy through so-called “helicopter drops” in order to boost flagging nations.

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The road to helicopter money.

Central Banks Are Already Doing The Unthinkable – You Just Don’t Know It (Tel.)

The lords of finance are losing their touch. Institutions which dragged the world from its worst depression since the early 20th century are finally seeing their magic desert them, if conventional wisdom is to be believed. Eight years on the from the Great Recession, voices as authoritative as the IMF and the BIS – dubbed the ‘central bank of central banks’ – have called time on the era of extraordinary monetary policy. Having hoovered up $12.3 trillion in financial assets and carried out 637 interest rate cuts since 2008, central banks have been stunned back into action in the last six weeks. The Bank of Japan kicked off a new round of global easing with its decision to cross the rubicon into negative interest rate territory on January 29.

Eurozone policymakers followed suit earlier this month with a triple whammy of interest rate cuts, €20bn in additional asset purchases a month, and an unprecedented move to allow commercial banks to borrow money at negative rates. The Federal Reserve has also taken its foot off the pedal by slashing its expected interest rate hikes from four a year to just two. But the new wave of policy accommodation has ushered in fresh panic that monetary policy is suddenly subject to dwindling returns. Instead, talk has turned to governments finally pulling their weight to support the shaky global recovery. Fiscal policy has been largely dormant in the wake of the crisis as countries have concentrated on bringing down debt and deficits levels, binding themselves to stringent spending rules in the process.

Without tax breaks and greater state investment, the world is at risk of another “economic derailment”, the IMF has warned. The latest G20 communique has paid lip service to the idea that global governments will adopt policies to “strengthen growth, job creation and confidence”. In reality, there are little signs that politicians are ready to jettison their fixations on low debt and balanced budgets to support global growth.

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Part 2 of the long article above that takes a while getting to the point.

Helicopter Drops By Stealth (Tel.)

For some observers, the next phase in extraordinary central bank action has already arrived, and it is Japan which is leading the way. The Bank of Japan’s move to impose a three tiered deposit rate on banks this year can be seen as a covert attempt to transfer funds to the private sector, argues Eric Lonergan, economist and hedge fund manager. He notes that the BoJ’s decision to exempt some reserves from the negative rate represents a transfer of cash to commercial lenders at rate of 0.1pc. The system “separates out the interest rate on reserves from that which affects market rates”, says Lonergan. “It is taking the first step along the journey towards helicopter money and opens up a whole new avenue of stimulus”. In the same vein, the ECB has also signaled its intention to move away from endless interest rate cuts towards targeted attempts to boost private sector credit demand.

From June, eurozone banks will be paid as much as 0.4pc to borrow from the ECB for four years – a scheme dubbed ‘Targeted Long-Term Refinancing Operations’ (TLTRO’s). Lenders who do the most to pass on cheap loans to customers will be rewarded with the most favourable rates. “I wish they’d done it an awful lot sooner”, says Lonergan, who notes that for all its institutional constraints, the ECB still boasts a number of tools to boost bank lending. With government borrowing costs at rock bottom across the eurozone, even more QE would be unnecessary at this stage, he says. TLTRO’s however, “open the possibility of two different rates where you can leave the policy rate unchanged but lend to banks at lower and lower rates contingent on them lending to the real economy” he adds. “It is much cleverer way of doing things because savers do not suffer.”

But central bank ingenuity – however welcome – raises separate concerns about the accountability of institutions whose independence is sacrosanct but where decision-making is often insulated from public view. Lord Adair Turner, a former chairman of the Financial Services Authority, and one of the earliest advocates of helicopter money, calls for more transparency in a bid to finally smash the taboos around injecting money straight into the hands of consumers or governments. “I think it is more dangerous for central banks to forever denying what they are doing,” says Lord Turner. He calls Japan’s move to issue government debt at a rate of 40 trillion yen, while the central bank expands its balance sheet at a rate of 80 trillion yen a year, “a de facto debt monetisation”. “You are effectively replacing government debt with central bank money,” says Lord Turner. “It would be better for authorities to publish a statement, laying out the rules and assuring the world it is not too much.”

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It’s been all buybacks, so this should scare you.

Buyback Blackout Period Starts Monday (ZH)

Last week, one day before the Fed unleashed a statement that stunned Wall Street by its dovishness and admission that the Fed had been far too optimistic on the state of the US (and global) economy, when it slashed its forecast on the number of rate hikes from 4 to 2, we said that “while everyone’s attention is on the Fed, the biggest danger to the S&P500 has little to do with what Janet Yellen may say tomorrow, and everything to do with the marginal buyer of stocks being put into a state of forced hibernation”, namely the start of the stock buyback blackout period during Q1 earnings session.

As a reminder, even Bloomberg recently acknowledged the unprecedented role corporate stock repurchases play in the current market when it penned “There’s Only One Buyer Keeping S&P 500’s Bull Market Alive.” Of course,  our readers have known the identity of the “mystery, indescriminate buyer” for two years.

Today, it is Deutsche Bank’s turn to warn about the imminent end of buybacks for the next 6 weeks. From Parag Thatte’s latest Asset Allocation and Flows report:

Buyback blackout period starts Monday. An increasing number of S&P 500 companies will enter into their blackout period starting next week, about a month before the earnings season kicks into high gear in the third week of April

Deutsche Bank tries to spin it as not necessarily a source of downside:

The blackout period means a slowing in the pace of buybacks which leaves equities vulnerable to negative catalysts. However it does not automatically imply downside and as we have emphasized before it is the total demand-supply gap that is key. So flows are critical and data surprises suggest the recent flow rotation into US equities can go further

There are two problems with this assessment. First. as DB’s own chart below shows, traditionally US equity flows have seen substantial and sharp declines during the buyback blackout period during the past three calendar years. It is unclear why this time will be any different.

Second, and more important, is that as Bank of America reported earlier this week, in the latest week “during which the S&P 500 climbed 1.1%, BofAML clients were net sellers of US stocks for the seventh consecutive week. Net sales of $3.7bn were the largest since September and led by institutional clients (where net sales by this group were the second-largest in our data history). Hedge funds and private clients were also net sellers, as was the case in each of the prior two weeks, but a different group has led the selling each week. Clients sold stocks across all three size segments, and net sales of mid-caps were notably the largest since June ’09.”

BofA’s summary: “clients don’t believe the rally, continue to sell US stocks” and they were selling specifically to corporations whose repurchasing activity is near all time highs: “buybacks by corporate clients accelerated for the third consecutive week to their highest level in six months, which is also above levels at this time last year.

Next week this “accelerating” buyback activity ends, and the question will be whether the S&P at a high enough level to give institutional investors comfort that without the buyback bid, in fact the only bid for the past seven weeks, they should now buy on their own, or will the selling, which took place as the market has soared from its recent lows in its biggest quarterly comeback ever…

 

… continue, only this time with a cheap debt-funded, price indiscriminate buyer on the other side to absorb all the selling. We will have the answer in just about one week’s time.

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Keep your eyes on the dollar.

Another False Oil Price Rally: Crossing A Boundary (Berman)

The oil-price rally that began in mid-February will almost certainly collapse. It is similar to the false March-June 2015 rally. In both cases, prices increased largely because of sentiment. As in the earlier rally, current storage volumes are too large and demand is too weak to sustain higher prices for long. WTI prices have increased 47%  over the past 20 days from $26.21 in mid-February to $38.50 last week (Figure 1).

Figure 1. NYMEX WTI futures prices & OVX oil-price volatility, 2015-2016. Source: EIA, CBOE, Bloomberg and Labyrinth Consulting Services, Inc. (click image to enlarge).

 

A year ago, WTI rose 41% in 35 days from $43 to almost $61 per barrel. Like today, analysts then believed that a bottom had been reached. Prices stayed around $60 for 37 days before falling to a new bottom of $38 per barrel in late August. Much lower bottoms would be found after that all the way down to almost $26 per barrel at the beginning of the present rally.

Higher prices were unsustainable a year ago partly because crude oil inventories were more than 100 mmb (million barrels) above the 5-year average (Figure 2). Current inventory levels are 50 mmb higher than during the false rally of 2015 and are they still increasing.

Figure 2. U.S. crude oil stocks. Source: EIA and Labyrinth Consulting Services, Inc. (click image to enlarge).

 

International stocks reflect a similar picture. OECD inventories are at 3.1 billion barrels of liquids, 431 mmb more than the 2010-2014 average and 359 mmb above the 2015 level. Approximately one-third of OECD stocks are U.S. (1.35 billion barrels of liquids).

For 2015, U.S. liquids consumption shows a negative correlation with crude oil storage volumes (Figure 3). During the 2015 false price rally, consumption began to increase in April and May following the lowest WTI oil prices since March 2009–response lags cause often by several months. First quarter 2015 prices averaged $47.54 compared to an average price of more than $99 per barrel from November 2010 through September 2014 (44 months).

Figure 3. U.S. liquids consumption, crude oil stocks and WTI price. Source: EIA, Bloomberg and Labyrinth Consulting Services, Inc. (click image to enlarge).

 

This coincided with the onset of declining U.S. crude oil production after April 2015 (Figure 4).

Figure 4. U.S. crude oil production and forecast. Source: EIA March 2016 STEO and Labyrinth Consulting Services, Inc. (click image to enlarge).

 

Net withdrawals from storage continued until consumption fell in July in response to higher oil prices that climbed to $60 per barrel in June. Production increased because of higher prices from July through November before resuming its decline after prices fell again, this time, far below previous lows. This complex sequence of market responses shows how sensitive the current market is to relatively small changes in price, production and consumption.

Most importantly, it suggests that a price variation of only $15 per barrel was enough to depress consumption a year ago. That has profound implications for the present price rally that is now $12 per barrel above its baseline and has already increased by a greater percentage than the 2015 rally.

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“For homebuyers, it is easier than ever to get mortgages.” But more important, the downpayment itself is today often being financed through peer-to-peer lending channels, [..] basically another form of high-interest “loan shark.”

China’s Property Rally Has ‘Reached A Tipping Point’ (Forbes)

The real estate market in China is once again burning hot. Home prices in Beijing, Shanghai and Shenzhen have surged by 20-30% since the Lunar New Year in February, according to state-controlled media. In Shenzhen, prices have increased by more than 70% over the past 12 months. “The makings of this rally started more than a year ago and have reached a tipping point,” says Steven McCord at JLL North China. “Policies are looser than at any time in history in the last ten years, including the major policy rollbacks of 2009.” This is not the first time China is facing a property bubble. But one thing makes this time around different – unregulated lending. Previous upswings were not driven by leverage, McCord explains. The norm was that people did not finance the maximum allowable level.

They financed, on average, half of the cost – even if 70% or 80% was allowed. Therefore, mortgages did not play a role in driving up demand or prices. “Now, we believe there are more buyers using the maximum available leverage,” he says. “For homebuyers, it is easier than ever to get mortgages.” But more important, McCord adds, the downpayment itself is today often being financed through peer-to-peer lending channels. “This is not the norm yet, but it’s appearing and it makes us uncomfortable,” he says. “This means some buyers are buying with zero down.” In his view, peer-to-peer lenders are basically another form of high-interest “loan shark.” Hong Kong Economic Journals recently reported that some 900 peer-to-peer lending platforms went belly up last year, three times the number in 2014.

While some bankruptcies were due to poor management, many companies folded after the owner or operator took the money and disappeared. “Unregulated lending adds fuel to the fire of any bubble, and this could be a real problem if it becomes common,” McCord said. Chen Zhenggao, Minister of Housing and Urban-Rural Development, said earlier this week that China’s real estate market would not collapse. “It is not appropriate to compare the real estate market in China with that of Japan in the 1990s, as the two countries are in different stages of economic development and urbanization. We also have different macro policies to control the situation,” Chen said at a news conference.

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Really?

China’s Bottom Line to Avoid Systemic Risks, Vice Premier Says (BBG)

China will do what it needs to tamp down risks to the stocks, bonds, foreign-exchange and property markets as economic growth slows, Vice Premier Zhang Gaoli said in a speech. The economy faces “relatively large” downward pressure, said Zhang, who is one of seven members of the ruling Communist Party’s top decision-making body, the Politburo Standing Committee. He said plans for a 3% fiscal deficit, outlined in Premier Li Keqiang’s March 5 report to the national legislature, are meant to ease the burden on business. “There will be no systemic risks – that’s our bottom line,” Zhang told the China Development Forum, an annual gathering of global business leaders and Chinese government officials. Zhang’s remarks echoed recent comments from top officials, including the chairman of the securities regulator, that the government would act swiftly to stop the sort of market turmoil that led to a $5 trillion stock-market wipeout last August.

Premier Li Keqiang told his annual news conference on March 16 that China needs to be on the lookout for financial-market risks with “golden-gaze fiery eyes.” Speaking earlier Sunday, IMF Managing Director Christine Lagarde said China is in the middle of a historic transition that’s “good for China and good for the world.” “We should expect that, like any major transition, it will at times be bumpy,” Lagarde said, according to her prepared remarks. “A delicate balance needs to be struck between shifting to a relatively slower but more sustainable pace of growth, and advancing much-needed structural reforms.” Zhang said the government plans to cut overcapacity, especially in the steel and coal sectors. China’s 13th Five-Year Plan, unveiled during the legislative session that ended March 16, said the government will reduce as much as 150 million tons of steel capacity.

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After they’ve collapsed.

China Top Planner Promises Foreign Companies Access To Markets (WaPo)

China’s top planner tried to reassure foreign companies they are welcome in its slowing, state-dominated economy in a speech Sunday aimed at dispelling growing anxiety Beijing is squeezing them out of promising industries. Speaking to an audience that included executives of top global companies at a government-organized conference, Xu Shaoshi pledged to “promote two-way opening up and liberalization.” Xu promised foreign companies equal treatment with local enterprises as Beijing carries out a sweeping overhaul aimed at promoting self-sustaining growth based on domestic consumption and making state companies that dominate a range of industries more competitive and efficient. “We are ready to share these growth opportunities with you,” said Xu, chairman of the Cabinet’s National Reform and Development Commission.

The China Development Forum 2016 is being closely watched by global companies because it comes at the start of the ruling Communist Party’s latest five-year development plan that runs through 2020. Executives are eager to learn details of how the party might carry out pledges to make the economy more competitive, open more industries to private and possibly foreign competitors and to shrink bloated, money-losing industries including coal, steel and cement. The guest list for the weekend conference at a government guesthouse in the Chinese capital included executives of U.S., European and Asian banks, manufacturers, Internet and other companies.

The ruling party’s plan promises to give the private sector a bigger economic role, but business groups say regulators are trying to shield Chinese rivals from competition or compel foreign companies to hand over technology in exchange for market access. Business groups say Beijing has yet to carry out most of the reforms promised in a separate 2013 plan that called for giving market forces a “decisive role” in the economy. They point to limits on foreign ownership in an array of industries and say in some areas such as information security technology for banks regulators are reducing or blocking market access.

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“Examining a range of indicators from VAT rates to steel production volumes, and comparing the results to estimates of the government deficit, produces the startling suggestion that “the real economy in China probably isn’t growing at all.”

Why Are There Doubts Over China’s Growth Rate? (Forbes)

China’s growth rate has been in the spotlight ever since Li Keqiang – China’s Premier – signalled the arrival of a ‘new normal’ in May 2015. Before then, headline rates routinely in excess of 8%, even rising above 14% in 2007, meant the detail was not scrutinised so closely. Now, however, with growth forecast between 6.5% and 7% for the period to 2020, the decimal points are beginning to matter. For China, the growth rate indicates the continuing success of their economic development, and measures their progress towards prosperity. For the rest of the world, Chinese growth has become a crucial source of global demand, driving expansion – and revenue streams – everywhere. There is, therefore, no exaggerating the significance of the number, both in fact and in appearance.

But increasing doubts are being raised. A recent article in Foreign Affairs raised the possibility that, despite a headline growth figure of 6.9% for 2015, China’s economy may not be growing at all. Examining a range of indicators from VAT rates to steel production volumes, and comparing the results to estimates of the government deficit, produces the startling suggestion that “the real economy in China probably isn’t growing at all. It may even be shrinking.” Doubts about the official figures are not new of course, but the difference between 6.9% and 0.0% is pretty striking nonetheless. And what often goes unsaid is that the official estimates are always at the high end of expectations. As a follow up, Foreign Affairs published a more optimistic account just a few weeks later.

According to this version of events, the ‘Li Keqiang’ index is out of date, reflecting the sort of industrially focussed economy that China was 10 years ago. But even this measure has different methods of calculation, producing results which vary between 2.9% and 5% for 2015. This account, however, also implies the official figures are not very precise estimates. The main argument is that the Chinese economy has changed and now shows significant growth in the service sector, as opposed to the industrial and manufacturing sector.

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Zika, poisoned water, riots and impeachment: here come the Olympics.

Support For Impeaching Brazil’s President Rises To 68% (Reuters)

A growing majority of Brazilians favor impeachment of President Dilma Rousseff or her resignation, according to a survey released on Saturday by polling firm Datafolha. The poll showed 68% of respondents favor Rousseff’s impeachment by Congress, while 65% think the president should resign. The president’s approval ratings have been hammered by Brazil’s worst recession in decades and its biggest ever corruption probe. Rousseff’s popularity also fell, with 69% of respondents rating her government negatively. The current%age is close to the president’s lowest ratings on record, in August 2015, when 71% of respondents rated the government negatively.

The poll also showed that rejection levels for former President Luiz Inacio Lula da Silva, who was named as Rousseff’s chief of staff on Wednesday, rose to a record 57%. That is far higher than the previous high of 40% in September 1994, before his 2003-2010 presidency. A Supreme Court judge suspended Lula’s appointment on Friday, saying it might interfere with an investigation by prosecutors, who have charged him with money laundering and fraud, as part of the probe into political kick back scheme at state oil company Petrobras. Even if Brazilians support Rousseff’s ouster, voters are not enthusiastic about a government led by vice-president Michel Temer. Some 35% of respondents say his government would be “bad” or “terrible”. Datafolha surveyed 2,794 people on March 17 and 18.

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A Europe-wide idea.

German Right Wing Demands Referendum on EU, Refugee Crisis (Express)

Alternative fur Deutschland, formed in 2013, shocked the German establishment last week with huge gains in state elections. The results have placed it in prime position to challenge Mrs Merkel’s CDU/CSU coalition in next year’s general election. Speaking exclusively to the Sunday Express last night, party leaders shared their envy of Britain’s forthcoming EU referendum on June 23, and confirmed they would be pushing for a similar move in Germany. “I want every member state to decide what is better for them, and the only way we can really do that is to have a referendum, like the UK.” said deputy chairman Beatrix von Storch MEP. “Schengen has collapsed already. Under Schengen Europe’s borders are supposed to be protected. They’re not.

“A referendum is the only way German people can truly express if they want to stay in the EU, if they want to stay in the Euro, if they want to reform border controls to deal with the migrant crisis. They should be given a voice. They must be asked what they want.” Angela Merkel last week refused to back down on her policy not to cap the number of refugees given asylum in Germany. Over the last 12 months, more than 1.1 migrants have crossed Germany’s borders with 300,000 granted asylum. The policy will cost German taxpayers £36bn by 2017, according to a recent report. AfD won an extraordinary 61 seats in 3 regional parliaments last week, coming second with 24% of the votes in Saxony-Anhalt. “We’re still a very young party so it’s a huge success,” said Ms von Storch.

“What’s even more important is the result in Baden-Wuertemberg, where we overtook the SDP, a ruling coalition party, to gain 15% of the votes. “Our success shows that the people are no longer supporting the politics of our Chancellor and all the other parties who back her. “We are the only ones arguing that the only way for Germany to fight the refugee and migrant crisis is to close our borders.”

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The 2,300 ‘experts’ promised -and needed- for the deal are not available. It’ll take weeks for them to get to the islands. What happens to new arrivals in the meantime?

Greece Delays Sending Refugees Back To Turkey Under EU Deal (AFP)

Greece will not be able to start sending refugees back to Turkey from Sunday, the government said, as the country struggles to implement a key deal aimed at easing Europe’s migrant crisis. Under the agreement clinched between Brussels and Ankara last week, migrants who reach the Greek islands will be deported back to Turkey. For every Syrian returned, the EU will resettle one from a Turkish refugee camp. The deal aims to strangle the main route used by migrants travelling to the EU and discourage people smugglers, but it has faced criticism from rights groups and thousands took to the streets of Europe in protest. Greek premier Alexis Tsipras told his ministers on Saturday afternoon to be ready to begin deporting people the following day, as agreed, but officials said afterwards they needed more time to prepare.

“The agreement to send back new arrivals on the islands should, according to the text, enter into force on March 20,” the government coordinator for migration policy (migration coordination agency) spokesman Giorgos Kyritsis told AFP. “But a plan like this cannot be put in place in only 24 hours.” Around 1,500 people crossed the Aegean to Greece’s islands Friday before the deal was brought in, officials said – more than double the day before and compared with several hundred a day earlier this week. A four-month-old baby drowned when a migrant boat sank off the Turkish coast Saturday hours before the deal came into force, Turkey’s Anatolia agency reported. Hundreds of security and legal experts – 2,300 according to Tsipras – are set to arrive in Greece to help enforce the deal, described as “Herculean” by EC chief Jean-Claude Juncker.

Paris and Berlin have pledged to send 600 police and asylum experts to Greece, according to a joint letter seen by AFP. But Greek officials said they were still waiting for the extra personnel, and without them they would struggle to enforce the new accord. “We still don’t know how the deal will be implemented in practice,” a police source on the island of Lesbos told AFP. “Above all, we are waiting for the staff Europe promised to be able to quickly process asylum applications – translators, lawyers, police officers – because we cannot do it alone.” Realistically, migrants will likely not start being returned to Turkey until April 4, according to German Chancellor Angela Merkel, a key backer of the scheme. The numbers are daunting: officials said as of Saturday there were 47,500 migrants in Greece, including 8,200 on the islands and 10,500 massed at the Idomeni camp on the Macedonian border.

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“If they told me I had to go back, I would drown myself in the sea.”

EU-Turkey Deal: Officials Left In The Dark As Deadline Looms (Tel.)

Europe’s refugee resettlement programme with Turkey appeared to be descending into farce last night as officials on the Greek island of Lesbos reported they had received no instructions from the EU authorities on how to proceed. As the midnight deadline approached for the EU’s new deportation regime with Turkey, organisations and local authorities on Lesbos, where the majority of boats land, said not a single new staff member had arrived and no information had been received. “We don’t know anything,” said Marios Andriotis, advisor to the mayor of Lesbos. “We have received many officers from [the EU border agency] Frontex et cetera over the past year but no one new since Friday. And nobody told us to prepare anything or do anything differently.”

“We have taken note of the deal but we are not privy to details of the implementation,” said Boris Cheshirkov, a spokesman for the United Nations Refugee Agency (UNHCR). Jean-Claude Juncker, the president of the European Commission described the controversial plan as last week as a “Herculean task” that will present “the biggest challenge the EU has ever faced”, but there was no sign last night on Lesbos of even a symbolic show of intent. Under the terms of the deal agree last Friday, some 4,000 extra staff have been promised to process all new arriving refugees who will be deported back to Turkey after undergoing fast-track asylum processing. The first deportations are scheduled for April 4. The Greek authorities said yesterday there are now 47,500 migrants in the country, of which 8,200 were on the islands and some 10,500 massed at Idomeni, on the closed border with Macedonia.

NGO workers and volunteers in reception camps on Lesbos, which will serve as detention camps for migrants and refugees waiting to be returned to Turkey, shook their heads when asked about the implementation of the deal. “Like the husband of an unfaithful wife, we will always be the last to know anything about Europe’s deals,” said a UNHCR worker in Kara Tepe camp, where 1,500 Syrians and Iraqis are currently staying. “Really, we have no information.” Refugees in the camp called the idea of being returned “inhumane”, while Amnesty International has called the deal a “historic blow to human rights” raising the prospect of future legal challenges to the deal. The EU insists the deal is lawful.

Those that are now on Lesbos will not be sent back, though with Macedonia’s border still closed, they face an uncertain road ahead. “There is nothing for us in Turkey. No life, no work. I worked bad jobs for 700 lira (£170) a month, I could not put a roof over my family’s head,” said Samir, a teacher from Damascus who had been in the camp for five days. “If they told me I had to go back, I would drown myself in the sea.” In nearby Moria camp hundreds of mainly Pakistani migrants are housed in tents pitched on a muddy field outside the sealed-off EU “hotspot”, the official reception camp. Camp volunteers debated how to break the news of the returns to tomorrow’s arrivals. “They’ll just try again,” said Emma Kriss, an American volunteer. “I don’t think people will give up.”

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Article by Ada Colau, Mayor of Barcelona, Giuseppina Nicoli, Mayor of Lampedusa, and Spyros Galinos, Mayor of Athens

Don’t Make Us Ashamed To Be European (3 Mayors)

Two and a half thousand years ago, the islands of the Western Mediterranean were the cradle of the sciences, the arts and democracy. Today, they’re where the survival of Europe is at stake. We find ourselves facing a dilemma: either we assume our responsibility and strengthen the founding principles of the European project or we allow it to sink irreversibly. There is hope. Over recent months we’ve seen thousands of citizens, volunteers and aid workers working to save lives by helping those fleeing from war. We’ve seen local governments with hardly any legal powers carry out herculean tasks to receive refugees, investing the resources that state governments have refused.

Nevertheless, we’ve also observed, with sadness, not just the inability of European states to offer a dignified solution to the humanitarian crisis, but also transit routes being choked off; increasing border controls and repression, and the aberration of a deal with Turkey that contravenes all international law regarding asylum and fundamental rights. Local initiatives stand in stark contrast to the lack of sensitivity demonstrated by European states. While state governments haggle quotas, we cities make contingency and awareness-raising strategies that, with adequate resources, we have a greater capacity to take in refugees than has been recognized. While state governments agree to repressive measures, we municipalities are working in networks to reach deals, like the agreement between Lesbos, Lampedusa and Barcelona that will allow the exchange of knowledge, resources and solidarity between the three cities.

With state governments are incapable of thinking beyond their national context, Barcelona and Athens city halls are working together to put pressure on them to meet their ethical and legal obligations. We, the cities of the Mediterranean, urgently call for other European cities to put an end to the inhumane policies of state governments and to force them to change course in response to the greatest humanitarian crisis since the end of the Second World War. The families that have lost their homes will not rest in pursuit of a place to live in peace, however many obstacles are put in their way. Each new impediment will simply increase the risks to human life and be another incentive for those wishing to profit from people-trafficking. We call for the rejection of the deal with Turkey, which flouts international law and fundamental rights.

Human lives cannot be traded for economic and commercial agreements. The right to asylum is a basic human right that cannot be subject to discounts and bartering. We also call for an end to the criminalization of refugees, and of the aid workers and volunteers collaborating in their reception. Their work should be a source of pride, and be supported and incentivised by public institutions. Events in recent days at the border of the Former Yugoslav Republic of Macedonia, the xenophobic rallies seen in various European countries, and their subsequent electoral exploitation, are a display of indecency that should embarrass us as European citizens and as human beings.

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Mar 142016
 
 March 14, 2016  Posted by at 9:45 am Finance Tagged with: , , , , , , , , ,  


John M. Fox WCBS studios, 49 East 52nd Street, NYC 1948

Marc Faber: Central Banks Will End Up Buying All Financial Assets (CNBC)
There’s Only One Buyer Keeping the S&P 500’s Bull Market Alive (BBG)
The Central Bankers Are Crazy & Public is Out Of Its Mind (Armstrong)
The Effects of a Month of Negative Rates in Japan (BBG)
Bank Of Japan Scrambles To Find Positives In Negative Rates (Reuters)
There Is A Limit To Draghi’s Negative Interest Rate Madness (Mish)
The European Central Bank Has Lost The Plot On Inflation (FT)
A Thought Experiment On Budget Surpluses (Steve Keen)
Central Banks Beat Bitcoin At Own Game With Rival Supercurrency (AEP)
China Debt Swap Could Leave Banks In Capital Hole (Reuters)
China’s Next Bubble? Iron Ore Surges As Speculators Weigh In (AFP)
China’s Growth Target Is the Next Test for Its Central Bank (BBG)
Goldman: 4 Reasons Why Yuan Will Weaken vs Dollar (CNBC)
Subprime Flashback: Early Defaults Are a Warning Sign for Auto Sales (WSJ)
Key Formula for Oil Executives’ Pay: Drill Baby Drill (WSJ)
Dairy Industry In Race To Ruin (NZH)
Why Monsanto’s GMO Business Isn’t Growing in India (WSJ)
February Breaks Global Temperature Records By ‘Shocking’ Amount (Guardian)
Anti-Refugee And Pro-Refugee Parties Both Win In German Elections (Guardian)
Bulgaria Pushes To Be Part Of EU-Turkey Refugee Deal (AFP)

Don’t know that you would call this socialism, but with the limits to negative rates, it sounds plausible.

Marc Faber: Central Banks Will End Up Buying All Financial Assets (CNBC)

Central banks around the globe are pursuing strategies that will put all financial assets into government hands, perma-bear Marc Faber, told CNBC’s Squawk Box. He also took the opportunity to endorse Donald Trump’s bid for the U.S. presidency. Faber said central bank policies are essentially monetizing debt, particularly in Japan, where he claims the Bank of Japan is buying all the government bonds the treasury is issuing. He expects that asset buying by global central banks will only increase, even though he believes those policies aren’t working to stimulate the economy. “The central banks aren’t interested in what works, they’re interested in their own prestige. And they are so deep into it already and it didn’t work. They will increase the medicine,” said Faber, the publisher of The Gloom, Boom & Doom Report.

“Eventually, they’ll buy all the government bonds; they’ll buy all the corporate bonds, all the shares outstanding. Afterwards the housing market goes down, they’ll buy all the homes and then the government will own everything.” That’s the road to socialism, he said. “I could see a situation where at the end the government owns all the corporations and all the government bonds and then we are back into socialism, into a planning economy,” said Faber. To be sure, the Bank of Japan does not buy Japan government bonds (JGBs) directly from the treasury; it only purchases them in the open market. Since some entities, such as banks and insurers, are required to hold JGBs in their reserves, the BOJ is unlikely to acquire all of the bonds outstanding. The BOJ does, however, use its quantitative easing program to purchase select exchange traded funds (ETFs) in the open market.

The U.S. Federal Reserve began tapering its quantitative easing program in 2013 and officially ended it in late 2014. But last week, the ECB announced further easing measures, including expanding the size of its bond-buying program to 80 billion euros ($89.23 billion) worth of assets a month, to include corporate bonds. Faber expects these programs will only expand. “The governments in my view, with their agents the Federal Reserve and other central banks and with the treasury department, they will do anything not to let asset prices go down,” said Faber. “If the stock markets go down, I’m convinced all the central banks will buy stocks. All of them,” he said, noting that this is not without precedent, citing Hong Kong’s purchase of stocks during the Asian Financial Crisis in the late 1990s.

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Beware.

There’s Only One Buyer Keeping the S&P 500’s Bull Market Alive (BBG)

Demand for U.S. shares among companies and individuals is diverging at a rate that may be without precedent, another sign of how crucial buybacks are in propping up the bull market as it enters its eighth year. Standard & Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever. While past deviations haven’t spelled doom for equities, the impact has rarely been as stark as in the last two months, when American shares lurched to the worst start to a year on record as companies stepped away from the market while reporting earnings.

Those results raise another question about the sustainability of repurchases, as profits declined for a third straight quarter, the longest streak in six years. “Anytime when you’re relying solely on one thing to happen to keep the market going is a dangerous situation,” said Andrew Hopkins at Wilmington Trust.. “Over time, you come to the realization, ‘Look, these companies can’t grow. Borrowing money to buy back stocks is going to come to an end.”’

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“I asked John if he slept with Karen and got his admittal!” “I told him, Oh that’s cool, I think it’s probably about time you stopped drinking.”

The Central Bankers Are Crazy & Public is Out Of Its Mind (Armstrong)

The central bankers are simply crazy, not evil. They are trying to steer the economy by utilizing this simpleton theory that if you make something cheaper, someone will buy it. Japanese and German cars managed to get a major foothold in the U.S. because the quality of U.S. manufacturers collapsed, thanks to unions. The socialist battle against corporations forgot something important – the ultimate decision maker is the consumer. The last American car I bought in the 1970s simply caught on fire while parked in my driveway. Another friend bought a brand-new American car and there was a terrible rattle. When they took the door panel off, there was an empty bottle of Coke inside. Cheaper does not always cut it. Gee, shall we cheer if the stock market goes down by 90%? It would be a lot cheaper. Why does the same theory not apply?

Then we have the trading public. If the central bankers have gone crazy with this whole negative interest rate theory, then the public is simply out of their minds. The euro rallied because Draghi cut rates further, extended the stimulus another year, increased the amount by another 33%, and then declared rates would stay there for years to come. And these insane traders cheer. Unbelievable! They are celebrating the public admission of Draghi that all his efforts to date have failed, so let’s do even more of the same. And they love this nonsense? Negative interest rates have become simply a tax on saving money and the stupid traders and media writers love it. The Fed tries to raise rates and they say – NO! This is a stunning combination of admission and stupidity that one would expect from a pretty but clueless girl and her drunk college boyfriend who can’t say no to any girl: “I asked John if he slept with Karen and got his admittal!” “I told him, Oh that’s cool, I think it’s probably about time you stopped drinking.”

All they see is that lower interest rates “should” stimulate but ignore the fact that they never do. They are too stupid to grasp the fact that raising taxes cannot be offset by lower interest rates. People judge everything by the bottom-line and not some crazy theory that’s just stupid. A simple correlation study by a high school student in math class would prove this theory does not correlate to the expected outcome. And we cheer this insanity confirming our own overall stupidity and one is left wondering who is crazier? I suppose it is just that central bankers are crazy and the public, as well as the media, are just out of their minds.

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Bank hits.

The Effects of a Month of Negative Rates in Japan (BBG)

The Bank of Japan shocked markets in January with negative rates. The policy had immediate effects on financial markets, even before it actually started on February 16. Although most analysts don’t expect a change on Tuesday, they are expecting the central bank eventually to cut the rate further. Here’s a look at some effects of negative rates:

About 70% of government bonds have a yield of zero or below, meaning investors are paying to hold the debt. Pushing the yield curve down to make borrowing less costly and to encourage lending is the aim of the new policy, according to Governor Haruhiko Kuroda. However, those actions are hurting the bond market, with 69% of traders in February saying market function has declined compared with three months ago, according to a BOJ survey.

A 10-year, fixed-rate home loan carried a 0.8% rate last week, down from 1.05% before the introduction of the negative rate, according to a speech by Kuroda. Japan’s three biggest banks cut their deposit rate to a record low of 0.001%, meaning you receive 10 yen (9 cents) in income on a deposit of 1 million yen. All 11 companies running money-market funds stopped accepting new investments, citing the BOJ stimulus. They plan to return money to investors, the Nikkei newspaper reported, and money from the funds is moving to deposits, according to analysts at Deutsche Bank. Deposit returns are still positive, if negligible.

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“Bank shares fell sharply.”

Bank Of Japan Scrambles To Find Positives In Negative Rates (Reuters)

Bank of Japan officials have been scurrying to commercial banks to explain and apologize for its surprise adoption of negative interest rates in January, while Prime Minister Shinzo Abe has distanced himself from a decision that is proving unpopular with the public. Some officials close to the premier say it could cause a rift in his once close relationship with BOJ Governor Haruhiko Kuroda, whose radical stimulus measures have so far failed to lift Japan clear of two decades of deflation and stagnation. A government press relations official said there was nothing to add beyond remarks made publicly by Chief Cabinet Secretary Yoshihide Suga that no such rift exists. With the economy shrinking again and prices flat, Abe has already announced he will set up a panel to consider fresh budget spending to provide the stimulus that monetary policy has struggled to achieve.

The controversy over the negative rates move, which unlike his previous eye-catching policy steps was not welcomed by Japan’s stock market, comes even as Kuroda is on the verge of gaining greater control of the bank’s nine-member board. Two skeptics of his stimulus program are stepping down in the coming months. The diminishing returns from his preferred modus operandi of market-shocking measures will leave him little option but to revert to the drip-feed easing he derided in his predecessor Masaaki Shirakawa if inflation fails to pick up, some analysts say. “Given the confusion caused by the January move, I don’t think the BOJ will be able to cut rates again for the time being,” said Hideo Kumano, a former BOJ official who is now chief economist at Dai-ichi Life Research Institute.

“The BOJ may instead expand asset purchases in small installments. That would be returning to the incremental approach of easing Kuroda dismissed in the past as ineffective.” Mandated by Abe to transform the risk-shy BOJ, Kuroda delighted markets and silenced skeptics within the bank by deploying a massive money-printing program, dubbed “quantitative and qualitative easing” (QQE), in April 2013. The Tokyo stock market soared and the yen tumbled, giving exporters a boost, and Japanese growth and inflation registered a pulse. He struck again in October 2014 with a big expansion of QQE, though the market boost was smaller, price rises were already moderating and the economy was taking a step back for every step forward. But the late-January rates decision failed to reverse a rise in risk-aversion that was hitting stocks and forcing up the yen, traditionally a safe haven in times of market stress. Bank shares fell sharply.

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Very clear and simple explanation of what the limits are.

There Is A Limit To Draghi’s Negative Interest Rate Madness (Mish)

On Thursday, ECB president Mario Draghi lowered the deposit rate on money parked at the ECB to -0.4% from -0.3%. Draghi also cut the main refinancing rate by 5 basis points to 0%. How low can he go? Is there a limit? There is indeed a practical limit to negative interest rate madness, and it’s likely we have already hit that limit. Let’s investigate why. All hell would break loose if rates fell lower than -1.0%, and perhaps well before that. This has to do with Euribor. Euribor is the rate offered to prime banks on euro-denominated interbank term loans. It is based on the average interest rates of about 50 European banks that lend and borrow from each other. [..]

How does Euribor place a Limit? Millions of mortgages in Europe are based on Euribor. The vast majority of mortgage rates in Spain and Portugal are based on Euribor. A huge number in Italy are based on Euribor. The typical mortgage loan in many Eurozone countries is Euribor plus 1%age point. For those on 1-month Euribor, the interest banks collect is no longer 1%. Instead, banks collect 0.70%. Servicing fees eat into that profit. If Euribor fell below -1.0% banks would have to pay customers interest on their mortgages rather than collect interest! This has already happened in some instances, primarily related to the Swiss Franc where rates are even lower.

Low rates eat into bank profits. Such concerns place a floor on negative rates. This is why Draghi announced he is finished cutting rates. The practical limit on negative interest rates in Europe may very well be -0.4%, right where we are now. Perhaps Draghi has a buffer of another -0.20% or so, but he is reluctant to use it. If 12-month Euribor rates go any lower, it will affect bank profits on every Euribor-based mortgage loan. Loans based on 1-month and 6-month Euribor are already impacted. Draghi is unable or unwilling to go further down the interest rabbit hole, but there are still lots of rabbit hole possibilities regarding various QE measures. Corporate bonds still offer Draghi wide possibilities for more economic madness.

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“The only reason you would want to make a long-term investment at these rates is that you do not believe in the target.”

The European Central Bank Has Lost The Plot On Inflation (FT)

Better than expected. How often have we heard these three words after a policy decision by the European Central Bank? My advice is to stop reading immediately whenever you see them. After all, what the markets expect to happen is entirely in the control of the ECB. The only thing that matters is the policy decision itself: the extent to which it can help achieve a target in this case an inflation rate of just under 2%. It may have been better than expected. But was it sufficient? The components of the decision an≠nounced on Thursday by Mario Draghi, ECB president, were: cuts in the three official interest rates; an increase in the volume of asset purchases; and more generous terms on targeted longer-term refinancing operations, a liquidity facility for banks pegged to the quantity of loans on their balance sheet.

The deposit rate, at which banks park their reserves at the central bank, is down from -0.3 to -0.4%. Mr Draghi hinted that we should not expect further cuts in that rate. And that line was the really big news of the day. He did not so much cut the rates as end the rate cuts. This is why the euro first fell then rose when investors realised this rate cut was not what it seemed. There is nothing fundamentally wrong with any of the decisions except that the ECB missed a trick. It could have widened the spread between short-term and long-term interest rates or, in financial parlance, it could have steepened the yield curve. One method would have been to make a bigger cut in the deposit rate and a smaller increase in the size of asset purchases. Since asset purchases reduce long-term rates, a small increase in purchases would have reduced them by less.

There are big problems with a flat yield curve. It is a nightmare for the banks because their business consists of turning short-term savings into long-term loans. When long rates are similar to short rates, banks find it hard to make money. They have to find other ways to generate income. Think also about the deeper meaning of a flat yield curve with all interest rates near 0%. Assume you trust Mr Draghi’s commitment to the inflation target. Would you, as a private investor, buy a 10-year corporate bond that yields 0.5%? If inflation really were to reach 2% within two or three years, you would surely make a loss. The only reason you would want to make a long-term investment at these rates is that you do not believe in the target. Long-term rates are low because people believe the ECB has lost the plot on inflation. I, too, believe this.

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Government surpluses kill economies.

A Thought Experiment On Budget Surpluses (Steve Keen)

While conservative parties—like the USA’s Republicans, the UK’s Tories, and Australia’s Liberals,—are more emphatic on this point than their political rivals, there’s little doubt that all major political parties share the belief that the government should aim to have low government debt, to at least balance its budget, and at best to run a surplus. As the UK’s Prime Minister put it in 2013:

“Would you want a government that is not targeting a surplus in the next Parliament, that just said no, we’re going to run overdrafts all the way through the next parliament,” he told BBC political editor Nick Robinson. “I don’t think that would be responsible. So the other parties are going to have to answer this question, ‘Do you think it’s right to have a surplus?’ I do.” (David Cameron: It’s responsible to target budget surplus”, BBC October 1 2013)

So is it “right to run a surplus”? Let’s consider this via a little thought experiment. The numbers are far-fetched, but they’re chosen just to highlight the issue: Imagine an economy with an GDP of $100 per year, where the money supply is just $1—so that $100 of output each year is generated by that $1 changing hands 100 times in a year. And imagine that this country’s government has accumulated debt of $100—giving it a debt to GDP ratio of 100%—and it decides to reduce it by running a surplus that year of 1% of GDP. And imagine that it succeeds in its target. What will this country’s GDP the following year, and what will happen to the government’s debt to GDP ratio? The GDP will be zero, and the government’s debt to GDP ratio will be infinite.

Huh? The outcomes of this policy are the opposite of its intentions: a policy aimed at reducing the government’s debt to GDP ratio increased it dramatically; and what is perceived as “good economic management” actually destroys the economy. What went wrong? The target of running a surplus of 1% of GDP means that the government collects $1 more in taxes than it spends. This $1 surplus of taxation over spending takes all of the money in the economy out of circulation, leaving the population with no money at all. The physical economy is still there, but without money, no-one can buy anything, and the economy collapses. The government can pay its debt down by $1 as planned, but the GDP of the economy is now zero, so the government debt to GDP ratio has gone from $100/$100 or 100%, to $99/$0 or infinity.

As I noted, the numbers are far-fetched, but the principle is correct: a government surplus effectively destroys money. A government surplus, though it might be undertaken with the noble aim of reducing government debt, and the noble intention of helping the economy to grow, will, without countervailing forces from elsewhere in the economy, increase the government’s debt to GDP ratio, and make the economy smaller (if the rate of turnover of money—it’s so-called “velocity of circulation”—is greater than one). This little thought experiment illustrates the logical flaw in the conventional belief that running a government surplus is “good economic management”: it ignores the relationship between government spending and the money supply. Unless the public finds some other way to compensate for the effect of a government surplus on the money supply, the surplus will reduce GDP by more than it reduces government debt.

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Provocative. Let’s see how this unfolds.

Central Banks Beat Bitcoin At Own Game With Rival Supercurrency (AEP)

Computer scientists have devised a digital crypto-currency in league with the Bank of England that could pose a devastating threat to large tranches of the financial industry, and profoundly change the management of monetary policy. The proto-currency known as RSCoin has vastly greater scope than Bitcoin, used for peer-to-peer transactions by libertarians across the world, and beyond the control of any political authority. The purpose would be turned upside down. RSCoin would be a tool of state control, allowing the central bank to keep a tight grip on the money supply and respond to crises. It would erode the exorbitant privilege of commercial banks of creating money out of thin air under a fractional reserve financial system.

“Whoever reacts too slowly to these developments is going to take it on the chin. They will lose their businesses,” said Dr George Danezis, who is working on the design at University College London. “My advice is that companies should play very close attention to what is happening, because this will not go away,” he said. Layers of middlemen in payments systems face a creeping threat across the nexus of commerce, stockbroking, currency trading or derivatives. Many risk extinction over time. “Deep in the markets there are dark pools buying and selling shares, and entities that facilitate that foreign exchange. There are Visa, Master, and PayPal. These are the sorts of guys that we are going to disrupt,” he said. University College drafted the plan after being encouraged by the Bank of England last year to come up with a radical design for a secure digital currency.

The Bank itself has an elite four-man unit grappling with the implications of crypto-currencies and blockchain technology. Central banks at first saw Bitcoin as a rogue currency and a threat to monetary order, but they are starting to glimpse ways of turning the new technology to their advantage. The findings of the University College team were delivered to the Network and Distributed System Security Symposium (NDSS) in San Diego, revealing for the first time what may be in store. Dr Danezis said a national pilot project could be up and running within eighteen months if a decision were made to launch such a scheme. The RSCoin is deemed more likely to gain to mass acceptance than Bitcoin since the ledger would remain exclusively in the hands of the central bank, with the ‘trust’ factor of state authority. It would have the incumbency benefits of an established currency behind it.

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“..any bank that swaps a corporate loan for equity of the equivalent value will need at least four times as much capital for that exposure.”

China Debt Swap Could Leave Banks In Capital Hole (Reuters)

China’s mooted debt-for-equity swap could leave the country’s banks in a capital hole. New rules are being proposed that would allow lenders to exchange bad loans for shares. That could ease pressure on ailing companies. But it would also put pressure on bank capital ratios. In developed economies, it’s not unusual for creditors of troubled companies to accept shares in exchange for loans. In China, however, banks are restricted from investing in non-financial companies, limiting their scope for restructuring ailing borrowers. The regulations being prepared would remove that constraint, Reuters reported on March 10, potentially clearing the way for a wave of debt conversions. Some exchanges are already happening: Huarong Energy, a troubled shipbuilder, announced on March 8 it would give creditors a 60% stake in the company in return for forgiving debt worth $2.2 billion.

Yet while such swaps help overindebted Chinese companies, they are less positive for banks. True, the industry’s reported ratio of non-performing loans – which rose to 1.7% of total lending at the end of 2015 – will fall. But capital requirements will also rise as banks recognize more losses. Under China’s interpretation of international Basel rules, corporate loans typically attract a risk weighting of 100% for capital purposes. But the risk weighting for equity investments is at least 400%, and can be as high as 1250%, according to a 2013 assessment of Chinese regulations by the Bank for International Settlements. In other words, any bank that swaps a corporate loan for equity of the equivalent value will need at least four times as much capital for that exposure.

This calculation also assumes that banks have already written down troubled loans to their correct value. In reality, that’s unlikely to be the case. So-called “special mention” loans, which are wobbly but not yet officially classed as bad, accounted for a further 3.8% of overall lending at the end of last year. The true level of non-performing debt is probably much higher. The result is that any large-scale swap of debt-for-equity in the country will leave lenders short of capital. As the largest shareholder of Chinese banks, the government would have to step in. Though that might be one way to start solving China’s debt problem, other investors in the banks would feel the pain.

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Casino.

China’s Next Bubble? Iron Ore Surges As Speculators Weigh In (AFP)

With a huge global steel glut and slowing demand in China, an enormous recent spike in the price of iron ore has left analysts scratching their heads, with some even claiming a flower show might be to blame. But observers say the extraordinary movements for one of the world’s basic bulk commodities have been fuelled by something far more prosaic than daisies and daffodils – simple speculation. The spot price for iron ore – the key material for steel – jumped 20% on the Dalian Commodity Exchange on Monday. It closed at $57.35 per tonne on Friday, up nearly 33% so far this year. But the vast majority of trades on the exchange do not reflect real-world transactions: the iron ore futures volume on Wednesday alone represented an underlying 978 million tonnes of the commodity – more than China’s entire imports last year.

“Steel prices are in a crazy phase now. Everyone’s emotions are high and pushing up prices is the norm,” Chen Bingkun at Minmetals and Jingyi Futures told AFP. “The price rise is also caused by speculation.” Only part of the real global iron ore trade passes through exchanges such as Dalian or Singapore, the other main hub for derivatives based on the commodity. Instead, the business is dominated by a small group of producers, including Anglo-Australian giants Rio Tinto and BHP Billiton, Brazil’s Vale and Fortescue Metals of Australia. They all compete to sell to steelmakers in China and elsewhere on longer-term contracts, often priced according to indices calculated by specialist trade publications, leaving limited liquidity for the spot market and heightening its volatility.

Chinese analysts and industry officials have cited a mix of factors driving the speculation that fuelled the price surge, including hopes for higher government spending on steel-hungry infrastructure after the economy grew at its slowest pace in a quarter of a century last year. The beginning of warmer weather and the end of the Lunar New Year holiday have restarted construction projects and steel production. Even an upcoming flower show in the Chinese steel hub of Tangshan has been named as a factor, with local steel companies expected to suspend output to ensure blue skies for the event – which could prompt them to step up production before the halt. China produces more steel than the rest of the world combined, and in the long term, cuts of up to 150 million tonnes in its capacity over five years could ultimately support steel prices, although their impact on iron ore costs is less clear.

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“If market participants have been worried about China since June-July 2015, they have not seen the real thing yet.”

China’s Growth Target Is the Next Test for Its Central Bank (BBG)

China’s central bank chief oozed calm in an annual press briefing in Beijing Saturday, supported by weeks of composure in markets as investor anxiety over the nation’s currency policy eased. How long the lull lasts will depend on how policy makers manage a balancing act made tougher by a weaker-than-anticipated start to the year for the world’s No. 2 economy. After People’s Bank of China Governor Zhou Xiaochuan spoke at the country’s annual gathering of the legislature, data showed an “alarming” failure of growth to respond to recent stimulus, Bloomberg Intelligence analysts Tom Orlik and Fielding Chen concluded. The weakening momentum seen in industrial output and retail sales highlight skepticism about the Communist Party’s goal of achieving average growth of at least 6.5% in its five-year plan to 2020.

Gavekal Dragonomics calls the target “incredible.” JPMorgan says a sustainable pace is “much lower” than what officials are targeting for this year. The danger is that to meet the leadership’s objective, which for 2016 is an expansion of 6.5% to 7%, Zhou will need to loosen monetary policy faster and further. That could intensify depreciation pressures on the yuan, which has benefited in recent weeks from a drop in the dollar. Looser monetary policy, along with the expanded fiscal deficit pledged by Premier Li Keqiang’s cabinet, would quicken a buildup of debt that already amounts to almost 2.5 times GDP. “This is a risky target for the next five years as it means the continuation of super-loose monetary and fiscal policy,” said Chen Zhiwu, a finance professor at Yale University, and a former adviser to China’s State Council.

“If market participants have been worried about China since June-July 2015, they have not seen the real thing yet.” The data released Saturday showed industrial production rose 5.4% in the first two months of the year from a year before, the weakest reading since the 2009 global recession. That’s even before policy makers have much to show for a campaign to shut down excess capacity in the unproductive state-owned sector. Retail sales also slowed, while the value of homes soared versus a year ago with property sales in some mid-sized cities doubling. Fixed-asset investment exceeded economists’ estimates. Speaking hours before the data releases, Zhou, 68, warned banks about increased credit risk and rising real estate prices in the biggest cities. He sought to ease concerns over volatility in the stock and currency markets while saying meeting the five-year growth target would not require a big stretch.

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China is going to get called on its illusions.

Goldman: 4 Reasons Why Yuan Will Weaken vs Dollar (CNBC)

The Chinese yuan, the source of much anguish in financial markets from Sao Paulo to Singapore since last summer, is enjoying some respite. The currency, also known as renminbi, is currently trading near its best levels against the dollar this year at 6.5241, having slumped to 6.5800 earlier in 2016. Efforts by Chinese policymakers to shore up confidence in the economy have helped somewhat. Capital outflows, a big factor behind the weakness in the currency and the subsequent depletion of China’s foreign exchange reserves as the People’s Bank of China intervened to prevent the yuan from falling more, also appear to have eased. But Goldman Sachs still expects the currency to weaken to 7 against the greenback by the end of the year and has listed four reasons behind its call. Here they are:

Debt overhang The sharp surge in credit in recent years has led to an accumulation of debt in the economy that will likely imply interest rates will stay lower for longer, Goldman Sachs estimates. The softer monetary policy should add to depreciation pressures on the currency.

Economic slowdown China’s once-runaway export growth has slowed (shipments fell at their fastest pace since 2009 in February) as the currency has appreciated on a trade-weighted basis over many years. Overall economic growth was 6.9% in 2015, sturdy by global standards but the slowest pace in China in 25 years. Policymakers may now have to tweak the currency to counter the slowdown in the economy, Goldman reckons.

Preference for weaker currency According to Goldman Sachs, the managed depreciation of the yuan in December and the early weeks of 2016 suggests “a degree of bias” on the part of the authorities for a weaker currency. Goldman cites a recent interview given by PBOC Governor Zhou Xiaochuan to Caixin magazine, in which Zhou suggested that the current yuan level against the dollar did not represent a “reasonable and balanced” level for the currency.

Policy divergence Goldman’s U.S. team expects the U.S. Federal Reserve to raise interest rates three times this year, while forecasting economic growth to be above the trend level. An increase in U.S. interest rates coupled with a downward trend in Chinese monetary policy will imply outflow pressures and lead to yuan weakness, Goldman says. The trend for further softness in the yuan has raised speculation on policy options for the PBOC, including a one-off devaluation in the yuan or a more steady weakness. Goldman believes the second option is more likely as a chunky one-off devaluation would raise doubts over the credibility of Chinese policymakers and draw political attention at a sensitive time.

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This is going to go so wrong.

Subprime Flashback: Early Defaults Are a Warning Sign for Auto Sales (WSJ)

To understand how far the U.S. auto business has been reaching for new customers, consider the early performance of a bond issue called Skopos Auto Receivables Trust 2015-2. The bonds were built out of subprime auto loans and sold in November. Through February, about 12% of the underlying loans were at least 30 days past due, a third of which were more than 60 days delinquent. In another 2.6% of loans, borrowers had filed for bankruptcy or the vehicles had been repossessed. Those borrowers are at the outer fringe of the auto market. Still, the high level of missed payments for loans made so recently is a warning sign for an industry that needs every customer it can get to keep sales increasing at a record pace.

The early delinquency rates seen in the debt issue from Skopos Financial, a Dallas-based lender that specializes in loans to people with weak or no credit histories, are in line with those for several similar bond deals from other lenders around the same time. About 12% of the loans backing bonds sold in November by Exeter Finance, another Dallas-based subprime lender, were more than 30 days delinquent through February, according to the company. A spokeswoman said delinquency rates came down from the previous month. Loan payments have been slipping as well for the broader group of subprime borrowers who make up a big slice of the auto market. The 60-plus day delinquency rate among subprime car loans that have been packaged into bonds over the past five years climbed to 5.16% in February, according to Fitch Ratings, the highest level in nearly two decades.

The rate of missed payments is higher for loans made in more recent years, a reflection of more liberal credit standards and the larger number of deals from lenders serving less creditworthy customers, according to Standard & Poor’s Ratings Services. Investors are becoming concerned. Flagship Credit Acceptance, another small lender, recently had to offer higher yields than expected to sell bonds backed by subprime auto loans. Flagship declined to comment. “What’s driving record auto sales is not the economy, but record auto lending,” said Ben Weinger, who runs hedge fund 3-Sigma Value LP in New York and who has bearish bets on some auto lenders. He said demand for auto debt has led lenders to systematically loosen underwriting standards, which he predicts will result in higher loan delinquencies.

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Paid to harm your own company. Perfect.

Key Formula for Oil Executives’ Pay: Drill Baby Drill (WSJ)

Markets have been waiting for U.S. energy producers to slash output during a period of depressed crude prices. But these companies have been paying their top executives to keep the oil flowing. Production and reserve growth are big components of the formulas that determine annual bonuses at many U.S. exploration and production companies. That meant energy executives took home tens of millions of dollars in bonuses for drilling in 2014, even though prices had begun to fall sharply in what would be the biggest oil bust in decades. The practice stems from Wall Street’s treatment of such companies’ shares as growth stocks, favoring future prospects over profitability. It has helped drive U.S. energy producers to spend more unearthing oil and gas than they make selling it, energy executives and analysts say.

It has also helped fuel the drilling boom that lifted U.S. oil and natural-gas production 76% and 31%, respectively, from 2009 through 2015, pushing down prices for both commodities. “You want to know why most of the industry outspent cash flow last year trying to grow production?” William Thomas, CEO of EOG Resources, said recently at a Houston conference. “That’s the way they’re paid.” Lately, though, some shareholders are asking companies to reduce connections between pay and production, saying such incentives don’t make sense since abundant supplies have caused commodity prices to crash. Signs that oil production may finally be easing helped push up crude prices Friday to their highest levels of the year. The International Energy Agency said in a monthly report that output in some regions was falling faster than expected and that prices may have “bottomed out.”

A separate report said the number of rigs drilling for oil and natural gas in the U.S. fell to a record low. Still, CEO pay and production are likely to remain a flash point for investors because few wells are profitable even at these higher crude prices. The persistence of U.S. production in the face of such economics has been one of the biggest puzzles in the energy market. Members of the Organization of the Petroleum Exporting Countries have increased production, betting that U.S. energy producers would curtail drilling or be forced out of business. But even as oil prices began their plunge in the second half of 2014, many companies kept drilling.

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New Zealand is so toast. Land prices are doomed, and home prices will follow a swell as corporate defaults.

Dairy Industry In Race To Ruin (NZH)

Imagine being approached with an investment proposal that went something like this: how about you borrow almost $30 billion to invest in something that produces a commodity that swings in price by more than 50% over a two-year cycle? How about you invest in producing that commodity on the idea that demand has moved structurally higher, but pretty much ignores what other suppliers of that commodity might do? You would probably be more than a little sceptical. Yet that was the proposition New Zealand Inc essentially agreed to invest in over the past decade. This is the story of the dairy boom that has now bust, leaving dairy farmers holding debts of more than $40b and producing a commodity that is losing them $1.6b a year. Those debts are worth more than three times the income produced by that land and up from just $11.3b as recently as 2003.

The Reserve Bank has forecast that if this week’s payout cut to $3.90/kg is extended into next season, and then recovers only slowly, then 44% of those loans would be non-performing. That doesn’t necessarily mean the banks would kick 44% of farmers off their land – but it does mean the banks face profit drops. No other business leader in any other industry would borrow three times the income to build a business that produced something they couldn’t control the price of. Robert Muldoon was ridiculed and condemned for borrowing and betting big on a continued high price for oil when he invested in petro-chemical plants at Motonui, Waitara and Kapuni, and indirectly on the Clyde Dam and Tiwai Point expansion. This sort of investment decision makes no sense. Unless, of course, you weren’t actually borrowing the money purely to produce cashflow from the sale of that commodity.

It makes perfect sense if you are borrowing money to push up the value of land, the gains from which are tax-free. Most farmers would vehemently deny they are farming for tax-free capital gains, and most hold their land for multiple decades and often for multiple generations. But it is simply not credible to say that land value is irrelevant in their decision-making. It’s certainly relevant in the decision-making of the banks. Finance Minister Bill English put it best this week when he said it was time for farmers to be more like proper business investors. “This is an industry where they’ve had a focus on growing equity and growing land values for quite a long time now. It’s going to be a significant adjustment to getting back to the core business of effective farming for cash flow. “They are going to see land values drop. That is pretty much certain.”

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“Despite dozens of biotech-food-crop trials in India, the country has approved none for commercial cultivation.”

Why Monsanto’s GMO Business Isn’t Growing in India (WSJ)

Genetically modified organisms, or GMOs, grow in an estimated 97% of India’s cotton fields and have helped India by some measures become the fiber’s top global producer. But after a decade of Monsanto’s efforts with Mahyco to win Indian-government approval for biotech food crops, seeds for plants like Mr. Char’s remain in limbo, stymied by environmentalist opposition, farmer skepticism and bureaucratic inertia. Despite dozens of biotech-food-crop trials in India, the country has approved none for commercial cultivation. “What greater case study in terms of food security than a country that will soon have more people than any other country in the world?” said Robert Fraley, Monsanto’s chief technology officer. “To see a country that has the potential and intellectual ability to be a leader in these biotech advances, to be stymied politically, I think it’s a tragedy.”

India’s Agriculture Minister, Radha Mohan Singh, said the government was waiting for India’s Supreme Court to rule in a case opposing genetically modified food crops before deciding on their commercial cultivation. Meanwhile, Monsanto’s established cotton business in India faces new threats, including new government price controls around seed genetics and an antitrust probe into pricing practices, prompting Monsanto on March 4 to warn that it could withdraw its biotech crop genes from the country. Monsanto’s experience is part of a broader backlash against genetically engineered crops from a mix of environmentalists, consumer groups and nationalism thwarting the technology’s expansion after years of growth. Biotech-crop opponents say they can damage the environment, burden poor farmers with high-price seeds and potentially harm health.

GMO proponents reject such assertions, and the U.S. Food and Drug Administration, World Health Organization and European Commission have concluded GMOs are safe to eat. Yet pushback has swept the world. More than half of European Union countries have moved to bar GMO cultivation. Russia hasn’t approved any biotech crops. China, which allows cultivation of some, isn’t expected to approve new ones soon. In the U.S., where GMO crops are widespread, some food brands are stripping GMOs from their products. The backlash has slowed global-sales growth of genetically modified seeds. Sales grew 4.7% to $21 billion in 2014, compared with 8.7% growth in 2013 and average annual growth of 21% from 2007 through 2012, according to research firm PhillipsMcDougall.

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Looks insane.

February Breaks Global Temperature Records By ‘Shocking’ Amount (Guardian)

Global temperatures in February smashed previous monthly records by an unprecedented amount, according to Nasa data, sparking warnings of a climate emergency. The result was “a true shocker, and yet another reminder of the incessant long-term rise in global temperature resulting from human-produced greenhouse gases”, wrote Jeff Masters and Bob Henson in a blog on the Weather Underground, which analysed the data released on Saturday. It confirms preliminary analysis from earlier in March, indicating the record-breaking temperatures. The global surface temperatures across land and ocean in February were 1.35C warmer than the average temperature for the month, from the baseline period of 1951-1980.

The global record was set just one month earlier, with January already beating the average for that month by 1.15C above the average for the baseline period. Although the temperatures have been spurred on by a very large El Niño in the Pacific Ocean, the temperature smashed records set during the last large El Niño from 1998, which was at least as strong as the current one. The month did not break the record for hottest month, since that is only likely to happen during a northern hemisphere summer, when most of the world’s land mass heats up. “We are in a kind of climate emergency now,” Stefan Rahmstorf, from Germany’s Potsdam Institute of Climate Impact Research and a visiting professorial fellow at the University of New South Wales, told Fairfax Media. “This is really quite stunning … it’s completely unprecedented,” he said.

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Polarization

Anti-Refugee And Pro-Refugee Parties Both Win In German Elections (Guardian)

The anti-refugee party, Alternative für Deutschland (AfD), has shaken up Germany’s political landscape with dramatic gains at regional elections, entering state parliament for the first time in three regions off the back of rising anger with Angela Merkel’s asylum policy. But, in a sign of the increasingly polarised nature of Germany’s political debate, pro-refugee candidates also achieved two resounding victories in the elections – the first to take place in Germany since the chancellor embarked on her flagship open-doors approach to the migration crisis. Merkel’s Christian Democrat party suffered painful defeats to more left-leaning parties in two out of three states, one of them Baden-Württemberg, a region dominated by the CDU since the end of the second world war. News weekly Der Spiegel described the result as a “black Sunday” for the conservatives.

The CDU also failed to oust the incumbent Social Democrats in Rhineland-Palatinate. But it was the breakthrough of the AfD – a party that did not exist a little more than three years ago and last year was on the verge of collapse – that was arguably most striking. In Saxony-Anhalt in the former east Germany, the party with links to the far-right Pegida movement had gained 24.4%, according to initial exit polls, thus becoming the second-biggest party behind the CDU. In both Rhineland-Palatinate and Baden-Württemberg, it appeared to have gained 12% and 15%. Germany’s rightwing upstarts appeared to have benefited from an increased voter turnout across the country. In all three states, the AfD gained most of its votes from people who had not voted before, rather than disillusioned CDU voters. In Saxony-Anhalt, as many as 40% of AfD voters were previously non-voters, while 56% of AfD voters in the state said they had opted for the party because of the refugee crisis, according to one poll.

[..]If the AfD’s strong showing reflected deep hostility to Merkel’s plan, however, other results last night told a different story. [..] The politician who won in Baden-Württemberg’s, Green state premier Winfried Kretschmann, had passionately defended the German chancellor’s open-borders stance, stating in one day that he was “praying every day” for her wellbeing. With a centrist, pro-business party programme that defied orthodox ideas of what an environmental party should stand for, the Green party in Germany’s southwest managed to come top with 30.5% in a state. Remarkably, 30% of voters who had switched from Christian Democrat to Green in the state said they had done so because of the refugee debate. “In Baden-Württemberg we have written history”, Kretschmann told reporters after the first exit polls.

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More closed borders.

Bulgaria Pushes To Be Part Of EU-Turkey Refugee Deal (AFP)

Bulgarian Prime Minister Boyko Borisov pressed on March 12 to have his country’s borders protected as part of a proposed EU-Turkey deal aimed to stop the flow of migrants to Europe. Bulgaria has so far remained on the sidelines of the EU’s worst migration crisis since WWII after it built a 30-kilometre razor wire fence in 2014 and sent 2,000 border police to guard its 260-kilometre (160-mile) border with Turkey. But the EU member fears that it could become a major transit hub after countries along the main western Balkan migrant trail shut their borders this week. All countries on the frontline should be able to rely on support from the EU for protection of the EU’s external borders,” Borisov told visiting Austrian Interior Minister Johanna Mikl-Leitner and Austrian Defense Minister Hans Peter Doskozil in Sofia.

Borisov said he had sent a letter to that effect to EU President Donald Tusk on March 11. “Bulgaria insists that the talks between the EU and Turkey for solving the migration problem should also include Bulgaria’s land borders with Turkey and Greece as well as the Black Sea border between the EU and Turkey,” the letter read. [..] Bulgarian media reported on Saturday that Borisov was ready to block the deal if Turkey only agreed to stop the flow of migrants to the Greek islands in the Aegean Sea. Mikl-Leitner and Doskozil, who were due to visit the Bulgarian-Turkish border later on Saturday, expressed their “full support” for Borisov’s demands. “What applies to Greece also has to apply to Bulgaria,” Doskozil said. Mikl-Leitner meanwhile pledged to host a police conference on border security and human traffickers with the countries along the western Balkan migrant trail, including Germany and Greece.

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