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Negative Interest Rates and the War on Cash (2)

Sep 052016
 
 September 5, 2016  Posted by at 1:16 pm Finance Tagged with: , , , , , , , , , ,  13 Responses »


Berenice Abbott Broad St., NYC 1936

 

 

This is part 2 of a 4-part series by Nicole Foss entitled “Negative Interest Rates and the War on Cash”.

Part 1 is here: Negative Interest Rates and the War on Cash (1)

Parts 3 and 4 will follow in the next few days, and at the end we will publish the entire piece in one post.

Here, once again, is Nicole:

 

 

 

Closing the Escape Routes

 

Nicole Foss: History teaches us that central authorities dislike escape routes, at least for the majority, and are therefore prone to closing them, so that control of a limited money supply can remain in the hands of the very few. In the 1930s, gold was the escape route, so gold was confiscated. As Alan Greenspan wrote in 1966:

In the absence of the gold standard, there is no way to protect savings from confiscation through monetary inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods.

The existence of escape routes for capital preservation undermines the viability of the banking system, which is already over-extended, over-leveraged and extremely fragile. This time cash serves that role:

Ironically, though the paper money standard that replaced the gold standard was originally meant to empower governments, it now seems that paper money is perceived as an obstacle to unlimited government power….While paper money isn’t as big impediment to government power as the gold standard was, it is nevertheless an impediment compared to a society with only electronic money. Because of this, the more ardent statists favor the abolition of paper money and a monetary system with only electronic money and electronic payments.

We can therefore expect cash to be increasingly disparaged in order to justify its intended elimination:

Every day, a situation that requires the use of physical cash, feels more and more like an anachronism. It’s like having to listen to music on a CD. John Maynard Keynes famously referred to gold (well, the gold standard specifically) as a “barbarous relic.” Well the new barbarous relic is physical cash. Like gold, cash is physical money. Like gold, cash is still fetishized. And like gold, cash is a costly drain on the economy. A study done at Tufts in 2013 estimated that cash costs the economy $200 billion. Their study included the nugget that consumers spend, on average, 28 minutes per month just traveling to the point where they obtain cash (ATM, etc.). But this is just first-order problem with cash. The real problem, which economists are starting to recognize, is that paper cash is an impediment to effective monetary policy, and therefore economic growth.

Holding cash is not risk free, but cash is nevertheless king in a period of deflation:

Conventional wisdom is that interest rates earned on investments are never less than zero because investors could alternatively hold currency. Yet currency is not costless to hold: It is subject to theft and physical destruction, is expensive to safeguard in large amounts, is difficult to use for large and remote transactions, and, in large quantities, may be monitored by governments.

The acknowledged risks of holding cash are understood and can be managed personally, whereas the substantial risk associated with a systemic banking crisis are entirely outside the control of ordinary depositors. The bank bail-in (rescuing the bank with the depositors’ funds) in Cyprus in early 2013 was a warning sign, to those who were paying attention, that holding money in a bank is not necessarily safe. The capital controls put in place in other locations, for instance Greece, also underline that cash in a bank may not be accessible when needed.

The majority of the developed world either already has, or is introducing, legislation to require depositor bail-ins in the event of bank failures, rather than taxpayer bailouts, in preparation for many more Cyprus-type events, but on a very much larger scale. People are waking up to the fact that a bank balance is not considered their money, but is actually an unsecured loan to the bank, which the bank may or may not repay, depending on its own circumstances.:

Your checking account balance is denominated in dollars, but it does not consist of actual dollars. It represents a promise by a private company (your bank) to pay dollars upon demand. If you write a check, your bank may or may not be able to honor that promise. The poor souls who kept their euros in the form of large balances in Cyprus banks have just learned this lesson the hard way. If they had been holding their euros in the form of currency, they would have not lost their wealth.

 

 

Even in relatively untroubled countries, like the UK, it is becoming more difficult to access physical cash in a bank account or to use it for larger purchases. Notice of intent to withdraw may be required, and withdrawal limits may be imposed ‘for your own protection’. Reasons for the withdrawal may be required, ostensibly to combat money laundering and the black economy:

It’s one thing to be required by law to ask bank customers or parties in a cash transaction to explain where their money came from; it’s quite another to ask them how they intend to use the money they wish to withdraw from their own bank accounts. As one Mr Cotton, a HSBC customer, complained to the BBC’s Money Box programme: “I’ve been banking in that bank for 28 years. They all know me in there. You shouldn’t have to explain to your bank why you want that money. It’s not theirs, it’s yours.”

In France, in the aftermath of terrorist attacks there, several anti-cash measures were passed, restricting the use of cash once obtained:

French Finance Minister Michel Sapin brazenly stated that it was necessary to “fight against the use of cash and anonymity in the French economy.” He then announced extreme and despotic measures to further restrict the use of cash by French residents and to spy on and pry into their financial affairs.

These measures…..include prohibiting French residents from making cash payments of more than 1,000 euros, down from the current limit of 3,000 euros….The threshold below which a French resident is free to convert euros into other currencies without having to show an identity card will be slashed from the current level of 8,000 euros to 1,000 euros. In addition any cash deposit or withdrawal of more than 10,000 euros during a single month will be reported to the French anti-fraud and money laundering agency Tracfin.

Tourists in France may also be caught in the net:

France passed another new Draconian law; from the summer of 2015, it will now impose cash requirements dramatically trying to eliminate cash by force. French citizens and tourists will only be allowed a limited amount of physical money. They have financial police searching people on trains just passing through France to see if they are transporting cash, which they will now seize.

This is essentially the Shock Doctrine in action. Central authorities rarely pass up an opportunity to use a crisis to add to their repertoire of repressive laws and practices.

However, even without a specific crisis to draw on as a justification, many other countries have also restricted the use of cash for purchases:

One way they are waging the War on Cash is to lower the threshold at which reporting a cash transaction is mandatory or at which paying in cash is simply illegal. In just the last few years.

  • Italy made cash transactions over €1,000 illegal;
  • Switzerland has proposed banning cash payments in excess of 100,000 francs;
  • Russia banned cash transactions over $10,000;
  • Spain banned cash transactions over €2,500;
  • Mexico made cash payments of more than 200,000 pesos illegal;
  • Uruguay banned cash transactions over $5,000

Other restrictions on the use of cash can be more subtle, but can have far-reaching effects, especially if the ideas catch on and are widely applied:

The State of Louisiana banned “secondhand dealers” from making more than one cash transaction per week. The term has a broad definition and includes Goodwill stores, specialty stores that sell collectibles like baseball cards, flea markets, garage sales and so on. Anyone deemed a “secondhand dealer” is forbidden to accept cash as payment. They are allowed to take only electronic means of payment or a check, and they must collect the name and other information about each customer and send it to the local police department electronically every day.

The increasing application of de facto capital controls, when combined with the prevailing low interest rates, already convince many to hold cash. The possibility of negative rates would greatly increase the likelihood. We are already in an environment of rapidly declining trust, and limited access to what we still perceive as our own funds only accelerates the process in a self-reinforcing feedback loop. More withdrawals lead to more controls, which increase fear and decrease trust, which leads to more withdrawals. This obviously undermines the perceived power of monetary policy to stimulate the economy, hence the escape route is already quietly closing.

In a deflationary spiral, where the money supply is crashing, very little money is in circulation and prices are consequently falling almost across the board, possessing purchasing power provides for the freedom to pursue opportunities as they present themselves, and to avoid being backed into a corner. The purchasing power of cash increases during deflation, even as electronic purchasing power evaporates. Hence cash represents freedom of action at a time when that will be the rarest of ‘commodities’.

Governments greatly dislike cash, and increasingly treat its use, or the desire to hold it, especially in large denominations, with great suspicion:

Why would a central bank want to eliminate cash? For the same reason as you want to flatten interest rates to zero: to force people to spend or invest their money in the risky activities that revive growth, rather than hoarding it in the safest place. Calls for the eradication of cash have been bolstered by evidence that high-value notes play a major role in crime, terrorism and tax evasion. In a study for the Harvard Business School last week, former bank boss Peter Sands called for global elimination of the high-value note.

Britain’s “monkey” — the £50 — is low-value compared with its foreign-currency equivalents, and constitutes a small proportion of the cash in circulation. By contrast, Japan’s ¥10,000 note (worth roughly £60) makes up a startling 92% of all cash in circulation; the Swiss 1,000-franc note (worth around £700) likewise. Sands wants an end to these notes plus the $100 bill, and the €500 note – known in underworld circles as the “Bin Laden”.

 

 

Cash is largely anonymous, untraceable and uncontrollable, hence it makes central authorities, in a system increasingly requiring total buy-in in order to function, extremely uncomfortable. They regard there being no legitimate reason to own more than a small amount of it in physical form, as its ownership or use raises the spectre of tax evasion or other illegal activities:

The insidious nature of the war on cash derives not just from the hurdles governments place in the way of those who use cash, but also from the aura of suspicion that has begun to pervade private cash transactions. In a normal market economy, businesses would welcome taking cash. After all, what business would willingly turn down customers? But in the war on cash that has developed in the thirty years since money laundering was declared a federal crime, businesses have had to walk a fine line between serving customers and serving the government. And since only one of those two parties has the power to shut down a business and throw business owners and employees into prison, guess whose wishes the business owner is going to follow more often?

The assumption on the part of government today is that possession of large amounts of cash is indicative of involvement in illegal activity. If you’re traveling with thousands of dollars in cash and get pulled over by the police, don’t be surprised when your money gets seized as “suspicious.” And if you want your money back, prepare to get into a long, drawn-out court case requiring you to prove that you came by that money legitimately, just because the courts have decided that carrying or using large amounts of cash is reasonable suspicion that you are engaging in illegal activity….

….Centuries-old legal protections have been turned on their head in the war on cash. Guilt is assumed, while the victims of the government’s depredations have to prove their innocence….Those fortunate enough to keep their cash away from the prying hands of government officials find it increasingly difficult to use for both business and personal purposes, as wads of cash always arouse suspicion of drug dealing or other black market activity. And so cash continues to be marginalized and pushed to the fringes.

Despite the supposed connection between crime and the holding of physical cash, the places where people are most inclined (and able) to store cash do not conform to the stereotype at all:

Are Japan and Switzerland havens for terrorists and drug lords? High-denomination bills are in high demand in both places, a trend that some politicians claim is a sign of nefarious behavior. Yet the two countries boast some of the lowest crime rates in the world. The cash hoarders are ordinary citizens responding rationally to monetary policy. The Swiss National Bank introduced negative interest rates in December 2014. The aim was to drive money out of banks and into the economy, but that only works to the extent that savers find attractive places to spend or invest their money. With economic growth an anemic 1%, many Swiss withdrew cash from the bank and stashed it at home or in safe-deposit boxes. High-denomination notes are naturally preferred for this purpose, so circulation of 1,000-franc notes (worth about $1,010) rose 17% last year. They now account for 60% of all bills in circulation and are worth almost as much as Serbia’s GDP.

Japan, where banks pay infinitesimally low interest on deposits, is a similar story. Demand for the highest-denomination ¥10,000 notes rose 6.2% last year, the largest jump since 2002. But 10,000 Yen notes are worth only about $88, so hiding places fill up fast. That explains why Japanese went on a safe-buying spree last month after the Bank of Japan announced negative interest rates on some reserves. Stores reported that sales of safes rose as much as 250%, and shares of safe-maker Secom spiked 5.3% in one week.

In Germany too, negative interest rates are considered intolerable, banks are increasingly being seen as risky prospects, and physical cash under one’s own control is coming to be seen as an essential part of a forward-thinking financial strategy:

First it was the news that Raiffeisen Gmund am Tegernsee, a German cooperative savings bank in the Bavarian village of Gmund am Tegernsee, with a population 5,767, finally gave in to the ECB’s monetary repression, and announced it’ll start charging retail customers to hold their cash. Then, just last week, Deutsche Bank’s CEO came about as close to shouting fire in a crowded negative rate theater, when, in a Handelsblatt Op-Ed, he warned of “fatal consequences” for savers in Germany and Europe — to be sure, being the CEO of the world’s most systemically risky bank did not help his cause.

That was the last straw, and having been patient long enough, the German public has started to move. According to the WSJ, German savers are leaving the “security of savings banks” for what many now consider an even safer place to park their cash: home safes. We wondered how many “fatal” warnings from the CEO of DB it would take, before this shift would finally take place. As it turns out, one was enough….

….“It doesn’t pay to keep money in the bank, and on top of that you’re being taxed on it,” said Uwe Wiese, an 82-year-old pensioner who recently bought a home safe to stash roughly €53,000 ($59,344), including part of his company pension that he took as a payout. Burg-Waechter KG, Germany’s biggest safe manufacturer, posted a 25% jump in sales of home safes in the first half of this year compared with the year earlier, said sales chief Dietmar Schake, citing “significantly higher demand for safes by private individuals, mainly in Germany.”….

….Unlike their more “hip” Scandinavian peers, roughly 80% of German retail transactions are in cash, almost double the 46% rate of cash use in the U.S., according to a 2014 Bundesbank survey….Germany’s love of cash is driven largely by its anonymity. One legacy of the Nazis and East Germany’s Stasi secret police is a fear of government snooping, and many Germans are spooked by proposals of banning cash transactions that exceed €5,000. Many Germans think the ECB’s plan to phase out the €500 bill is only the beginning of getting rid of cash altogether. And they are absolutely right; we can only wish more Americans showed the same foresight as the ordinary German….

….Until that moment, however, as a final reminder, in a fractional reserve banking system, only the first ten or so percent of those who “run” to the bank to obtain possession of their physical cash and park it in the safe will succeed. Everyone else, our condolences.

The internal stresses are building rapidly, stretching economy after economy to breaking point and prompting aware individuals to protect themselves proactively:

People react to these uncertainties by trying to protect themselves with cash and guns, and governments respond by trying to limit citizens’ ability to do so.

If this play has a third act, it will involve the abolition of cash in some major countries, the rise of various kinds of black markets (silver coins, private-label cash, cryptocurrencies like bitcoin) that bypass traditional banking systems, and a surge in civil unrest, as all those guns are put to use. The speed with which cash, safes and guns are being accumulated — and the simultaneous intensification of the war on cash — imply that the stress is building rapidly, and that the third act may be coming soon.

Despite growing acceptance of electronic payment systems, getting rid of cash altogether is likely to be very challenging, particularly as the fear and state of financial crisis that drives people into cash hoarding is very close to reasserting itself. Cash has a very long history, and enjoys greater trust than other abstract means for denominating value. It is likely to prove tenacious, and unable to be eliminated peacefully. That is not to suggest central authorities will not try. At the heart of financial crisis lies the problem of excess claims to underlying real wealth. The bursting of the global bubble will eliminate the vast majority of these, as the value of credit instruments, hitherto considered to be as good as money, will plummet on the realisation that nowhere near all financial promises made can possibly be kept.

Cash would then represent the a very much larger percentage of the remaining claims to limited actual resources — perhaps still in excess of the available resources and therefore subject to haircuts. Not only the quantity of outstanding cash, but also its distribution, may not be to central authorities liking. There are analogous precedents for altering legal currency in order to dispossess ordinary people trying to protect their stores of value, depriving them of the benefit of their foresight. During the Russian financial crisis of 1998, cash was not eliminated in favour of an electronic alternative, but the currency was reissued, which had a similar effect. People were required to convert their life savings (often held ‘under the mattress’) from the old currency to the new. This was then made very difficult, if not impossible, for ordinary people, and many lost the entirety of their life savings as a result.

 

A Cashless Society?

 

The greater the public’s desire to hold cash to protect themselves, the greater will be the incentive for central banks and governments to restrict its availability, reduce its value or perhaps eliminate it altogether in favour of electronic-only payment systems. In addition to commercial banks already complicating the process of making withdrawals, central banks are actively considering, as a first step, mechanisms to impose negative interest rates on physical cash, so as to make the escape route appear less attractive:

Last September, the Bank of England’s chief economist, Andy Haldane, openly pondered ways of imposing negative interest rates on cash — ie shrinking its value automatically. You could invalidate random banknotes, using their serial numbers. There are £63bn worth of notes in circulation in the UK: if you wanted to lop 1% off that, you could simply cancel half of all fivers without warning. A second solution would be to establish an exchange rate between paper money and the digital money in our bank accounts. A fiver deposited at the bank might buy you a £4.95 credit in your account.

 

 

To put it mildly, invalidating random banknotes would be highly likely to result in significant social blowback, and to accelerate the evaporation of trust in governing authorities of all kinds. It would be far more likely for financial authorities to move toward making official electronic money the standard by which all else is measured. People are already used to using electronic money in the form of credit and debit cards and mobile phone money transfers:

I can remember the moment I realised the era of cash could soon be over. It was Australia Day on Bondi Beach in 2014. In a busy liquor store, a man wearing only swimming shorts, carrying only a mobile phone and a plastic card, was delaying other people’s transactions while he moved 50 Australian dollars into his current account on his phone so that he could buy beer. The 30-odd youngsters in the queue behind him barely murmured; they’d all been in the same predicament. I doubt there was a banknote or coin between them….The possibility of a cashless society has come at us with a rush: contactless payment is so new that the little ping the machine makes can still feel magical. But in some shops, especially those that cater for the young, a customer reaching for a banknote already produces an automatic frown. Among central bankers, that frown has become a scowl.

In some states almost anything, no matter how small, can be purchased electronically. Everything down to, and including, a cup of coffee from a roadside stall can be purchased in New Zealand with an EFTPOS (debit) card, hence relatively few people carry cash. In Scandinavian countries, there are typically more electronic payment options than cash options:

Sweden became the first country to enlist its own citizens as largely willing guinea pigs in a dystopian economic experiment: negative interest rates in a cashless society. As Credit Suisse reports, no matter where you go or what you want to purchase, you will find a small ubiquitous sign saying “Vi hanterar ej kontanter” (“We don’t accept cash”)….A similar situation is unfolding in Denmark, where nearly 40% of the paying demographic use MobilePay, a Danske Bank app that allows all payments to be completed via smartphone.

Even street vendors selling “Situation Stockholm”, the local version of the UK’s “Big Issue” are also able to take payments by debit or credit card.

 

 

Ironically, cashlessness is also becoming entrenched in some African countries. One might think that electronic payments would not be possible in poor and unstable subsistence societies, but mobile phones are actually very common in such places, and means for electronic payments are rapidly becoming the norm:

While Sweden and Denmark may be the two nations that are closest to banning cash outright, the most important testing ground for cashless economics is half a world away, in sub-Saharan Africa. In many African countries, going cashless is not merely a matter of basic convenience (as it is in Scandinavia); it is a matter of basic survival. Less than 30% of the population have bank accounts, and even fewer have credit cards. But almost everyone has a mobile phone. Now, thanks to the massive surge in uptake of mobile communications as well as the huge numbers of unbanked citizens, Africa has become the perfect place for the world’s biggest social experiment with cashless living.

Western NGOs and GOs (Government Organizations) are working hand-in-hand with banks, telecom companies and local authorities to replace cash with mobile money alternatives. The organizations involved include Citi Group, Mastercard, VISA, Vodafone, USAID, and the Bill and Melinda Gates Foundation.

In Kenya the funds transferred by the biggest mobile money operator, M-Pesa (a division of Vodafone), account for more than 25% of the country’s GDP. In Africa’s most populous nation, Nigeria, the government launched a Mastercard-branded biometric national ID card, which also doubles up as a payment card. The “service” provides Mastercard with direct access to over 170 million potential customers, not to mention all their personal and biometric data. The company also recently won a government contract to design the Huduma Card, which will be used for paying State services. For Mastercard these partnerships with government are essential for achieving its lofty vision of creating a “world beyond cash.”

Countries where electronic payment is already the norm would be expected to be among the first places to experiment with a fully cashless society as the transition would be relatively painless (at least initially). In Norway two major banks no longer issue cash from branch offices, and recently the largest bank, DNB, publicly called for the abolition of cash. In rich countries, the advent of a cashless society could be spun in the media in such a way as to appear progressive, innovative, convenient and advantageous to ordinary people. In poor countries, people would have no choice in any case.

Testing and developing the methods in societies with no alternatives and then tantalizing the inhabitants of richer countries with more of the convenience to which they have become addicted is the clear path towards extending the reach of electronic payment systems and the much greater financial control over individuals that they offer:

Bill and Melinda Gates Foundation, in its 2015 annual letter, adds a new twist. The technologies are all in place; it’s just a question of getting us to use them so we can all benefit from a crimeless, privacy-free world. What better place to conduct a massive social experiment than sub-Saharan Africa, where NGOs and GOs (Government Organizations) are working hand-in-hand with banks and telecom companies to replace cash with mobile money alternatives? So the annual letter explains: “(B)ecause there is strong demand for banking among the poor, and because the poor can in fact be a profitable customer base, entrepreneurs in developing countries are doing exciting work – some of which will “trickle up” to developed countries over time.”

What the Foundation doesn’t mention is that it is heavily invested in many of Africa’s mobile-money initiatives and in 2010 teamed up with the World Bank to “improve financial data collection” among Africa’s poor. One also wonders whether Microsoft might one day benefit from the Foundation’s front-line role in mobile money….As a result of technological advances and generational priorities, cash’s days may well be numbered. But there is a whole world of difference between a natural death and euthanasia. It is now clear that an extremely powerful, albeit loose, alliance of governments, banks, central banks, start-ups, large corporations, and NGOs are determined to pull the plug on cash — not for our benefit, but for theirs.

Whatever the superficially attractive media spin, joint initiatives like the Better Than Cash Alliance serve their founders, not the public. This should not come as a surprise, but it probably will as we sleepwalk into giving up very important freedoms:

As I warned in We Are Sleepwalking Towards a Cashless Society, we (or at least the vast majority of people in the vast majority of countries) are willing to entrust government and financial institutions — organizations that have already betrayed just about every possible notion of trust — with complete control over our every single daily transaction. And all for the sake of a few minor gains in convenience. The price we pay will be what remains of our individual freedom and privacy.

Negative Interest Rates and the War on Cash (1)

Sep 042016
 
 September 4, 2016  Posted by at 1:16 pm Finance Tagged with: , , , , , , , , , ,  7 Responses »


Irving Underhill City Bank-Farmers Trust Building, William & Beaver streets, NYC 1931

 

 

It’s been a while, but Nicole Foss is back at the Automatic Earth -which makes me very happy-, and for good measure, she starts out with a very long article. So long in fact that we have decided to turn it into a 4-part series, if only just to show you that we do care about your health and well-being, as well as your families and social lives. The other 3 parts will follow in the next few days, and at the end we will publish the entire piece in one post.

Here’s Nicole:

 

 

Nicole Foss: As momentum builds in the developing deflationary spiral, we are seeing increasingly desperate measures to keep the global credit ponzi scheme from its inevitable conclusion. Credit bubbles are dynamic — they must grow continually or implode — hence they require ever more money to be lent into existence. But that in turn requires a plethora of willing and able borrowers to maintain demand for new credit money, lenders who are not too risk-averse to make new loans, and (apparently effective) mechanisms for diluting risk to the point where it can (apparently safely) be ignored. As the peak of a credit bubble is reached, all these necessary factors first become problematic and then cease to be available at all. Past a certain point, there are hard limits to financial expansions, and the global economy is set to hit one imminently.

Borrowers are increasingly maxed out and afraid they will not be able to service existing loans, let alone new ones. Many families already have more than enough ‘stuff’ for their available storage capacity in any case, and are looking to downsize and simplify their cluttered lives. Many businesses are already struggling to sell goods and services, and so are unwilling to borrow in order to expand their activities. Without willingness to borrow, demand for new loans will fall substantially. As risk factors loom, lenders become far more risk-averse, often very quickly losing trust in the solvency of of their counterparties. As we saw in 2008, the transition from embracing risky prospects to avoiding them like the plague can be very rapid, changing the rules of the game very abruptly.

Mechanisms for spreading risk to the point of ‘dilution to nothingness’, such as securitization, seen as effective and reliable during monetary expansions, cease to be seen as such as expansion morphs into contraction. The securitized instruments previously created then cease to be perceived as holding value, leading to them being repriced at pennies on the dollar once price discovery occurs, and the destruction of that value is highly deflationary. The continued existence of risk becomes increasingly evident, and the realisation that that risk could be catastrophic begins to dawn.

Natural limits for both borrowing and lending threaten the capacity to prolong the credit boom any further, meaning that even if central authorities are prepared to pay almost any price to do so, it ceases to be possible to kick the can further down the road. Negative interest rates and the war on cash are symptoms of such a limit being reached. As confidence evaporates, so does liquidity. This is where we find ourselves at the moment — on the cusp of phase two of the credit crunch, sliding into the same unavoidable constellation of conditions we saw in 2008, but on a much larger scale.

 

From ZIRP to NIRP

 

Interest rates have remained at extremely low levels, hardly distinguishable from zero, for the several years. This zero interest rate policy (ZIRP) is a reflection of both the extreme complacency as to risk during the rise into the peak of a major bubble, and increasingly acute pressure to keep the credit mountain growing through constant stimulation of demand for borrowing. The resulting search for yield in a world of artificially stimulated over-borrowing has lead to an extraordinary array of malinvestment across many sectors of the real economy. Ever more excess capacity is being built in a world facing a severe retrenchment in aggregate demand. It is this that is termed ‘recovery’, but rather than a recovery, it is a form of double jeopardy — an intensification of previous failed strategies in the hope that a different outcome will result. This is, of course, one definition of insanity.

Now that financial crisis conditions are developing again, policies are being implemented which amount to an even greater intensification of the old strategy. In many locations, notably those perceived to be safe havens, the benchmark is moving from a zero interest rate policy to a negative interest rate policy (NIRP), initially for bank reserves, but potentially for business clients (for instance in Holland and the UK). Individual savers would be next in line. Punishing savers, while effectively encouraging banks to lend to weaker, and therefore riskier, borrowers, creates incentives for both borrowers and lenders to continue the very behaviour that set the stage for financial crisis in the first place, while punishing the kind of responsibility that might have prevented it.

Risk is relative. During expansionary times, when risk perception is low almost across the board (despite actual risk steadily increasing), the risk premium that interest rates represent shows relatively little variation between different lenders, and little volatility. For instance, the interest rates on sovereign bonds across Europe, prior to financial crisis, were low and broadly similar for many years. In other words, credit spreads were very narrow during that time. Greece was able to borrow almost as easily and cheaply as Germany, as lenders bet that Europe’s strong economies would back the debt of its weaker parties. However, as collective psychology shifts from unity to fragmentation, risk perception increases dramatically, and risk distinctions of all kinds emerge, with widening credit spreads. We saw this happen in 2008, and it can be expected to be far more pronounced in the coming years, with credit spreads widening to record levels. Interest rate divergences create self-fulfilling prophecies as to relative default risk, against a backdrop of fear-driven high volatility.

Many risk distinctions can be made — government versus private debt, long versus short term, economic centre versus emerging markets, inside the European single currency versus outside, the European centre versus the troubled periphery, high grade bonds versus junk bonds etc. As the risk distinctions increase, the interest rate risk premiums diverge. Higher risk borrowers will pay higher premiums, in recognition of the higher default risk, but the higher premium raises the actual risk of default, leading to still higher premiums in a spiral of positive feedback. Increased risk perception thus drives actual risk, and may do so until the weak borrower is driven over the edge into insolvency. Similarly, borrowers perceived to be relative safe havens benefit from lower risk premiums, which in turn makes their debt burden easier to bear and lowers (or delays) their actual risk of default. This reduced risk of default is then reflected in even lower premiums. The risky become riskier and the relatively safe become relatively safer (which is not necessarily to say safe in absolute terms). Perception shapes reality, which feeds back into perception in a positive feedback loop.

 

 

The process of diverging risk perception is already underway, and it is generally the states seen as relatively safe where negative interest rates are being proposed or implemented. Negative rates are already in place for bank reserves held with the ECB and in a number of European states from 2012 onwards, notably Scandinavia and Switzerland. The desire for capital preservation has led to a willingness among those with capital to accept paying for the privilege of keeping it in ‘safe havens’. Note that perception of safety and actual safety are not equivalent. States at the peak of a bubble may appear to be at low risk, but in fact the opposite is true. At the peak of a bubble, there is nowhere to go but down, as Iceland and Ireland discovered in phase one of the financial crisis, and many others will discover as we move into phase two. For now, however, the perception of low risk is sufficient for a flight to safety into negative interest rate environments.

This situation serves a number of short term purposes for the states involved. Negative rates help to control destabilizing financial inflows at times when fear is increasingly driving large amounts of money across borders. A primary objective has been to reduce upward pressure on currencies outside the eurozone. The Swiss, Danish and Swedish currencies have all been experiencing currency appreciation, hence a desire to use negative interest rates to protect their exchange rate, and therefore the price of their exports, by encouraging foreigners to keep their money elsewhere. The Danish central bank’s sole mandate is to control the value of the currency against the euro. For a time, Switzerland pegged their currency directly to the euro, but found the cost of doing so to be prohibitive. For them, negative rates are a less costly attempt to weaken the currency without the need to defend a formal peg. In a world of competitive, beggar-thy-neighbour currency devaluations, negative interest rates are seen as a means to achieve or maintain an export advantage, and evidence of the growing currency war.

Negative rates are also intended to discourage saving and encourage both spending and investment. If savers must pay a penalty, spending or investment should, in theory, become more attractive propositions. The intention is to lead to more money actively circulating in the economy. Increasing the velocity of money in circulation should, in turn, provide price support in an environment where prices are flat to falling. (Mainstream commentators would describe this as as an attempt to increase ‘inflation’, by which they mean price increases, to the common target of 2%, but here at The Automatic Earth, we define inflation and deflation as an increase or decrease, respectively, in the money supply, not as an increase or decrease in prices.) The goal would be to stave off a scenario of falling prices where buyers would have an incentive to defer spending as they wait for lower prices in the future, starving the economy of circulating currency in the meantime. Expectations of falling prices create further downward price pressure, leading into a vicious circle of deepening economic depression. Preventing such expectations from taking hold in the first place is a major priority for central authorities.

Negative rates in the historical record are symptomatic of times of crisis when conventional policies have failed, and as such are rare. Their use is a measure of desperation:

First, a policy rate likely would be set to a negative value only when economic conditions are so weak that the central bank has previously reduced its policy rate to zero. Identifying creditworthy borrowers during such periods is unusually challenging. How strongly should banks during such a period be encouraged to expand lending?

However strongly banks are ‘encouraged’ to lend, willing borrowers and lenders are set to become ‘endangered species’:

The goal of such rates is to force banks to lend their excess reserves. The assumption is that such lending will boost aggregate demand and help struggling economies recover. Using the same central bank logic as in 2008, the solution to a debt problem is to add on more debt. Yet, there is an old adage: you can bring a horse to water but you cannot make him drink! With the world economy sinking into recession, few banks have credit-worthy customers and many banks are having difficulties collecting on existing loans.
Italy’s non-performing loans have gone from about 5 percent in 2010 to over 15 percent today. The shale oil bust has left many US banks with over a trillion dollars of highly risky energy loans on their books. The very low interest rate environment in Japan and the EU has done little to spur demand in an environment full of malinvestments and growing government constraints.

Doing more of the same simply elevates the already enormous risk that a new financial crisis is right around the corner:

Banks rely on rates to make returns. As the former Bank of England rate-setter Charlie Bean has written in a recent paper for The Economic Journal, pension funds will struggle to make adequate returns, while fund managers will borrow a lot more to make profits. Mr Bean says: “All of this makes a leveraged ‘search for yield’ of the sort that marked the prelude to the crisis more likely.” This is not comforting but it is highly plausible: barely a decade on from the crash, we may be about to repeat it. This comes from tasking central bankers with keeping the world economy growing, even while governments have cut spending.

 

Experiences with Negative Interest Rates

 

The existing low interest rate environment has already caused asset price bubbles to inflate further, placing assets such as real estate ever more beyond the reach of ordinary people at the same time as hampering those same people attempting to build sufficient savings for a deposit. Negative interest rates provide an increased incentive for this to continue. In locations where the rates are already negative, the asset bubble effect has worsened. For instance, in Denmark negative interest rates have added considerable impetus to the housing bubble in Copenhagen, resulting in an ever larger pool over over-leveraged property owners exposed to the risks of a property price collapse and debt default:

Where do you invest your money when rates are below zero? The Danish experience says equities and the property market. The benchmark index of Denmark’s 20 most-traded stocks has soared more than 100 percent since the second quarter of 2012, which is just before the central bank resorted to negative rates. That’s more than twice the stock-price gains of the Stoxx Europe 600 and Dow Jones Industrial Average over the period. Danish house prices have jumped so much that Danske Bank A/S, Denmark’s biggest lender, says Copenhagen is fast becoming Scandinavia’s riskiest property market.

Considering that risky property markets are the norm in Scandinavia, Copenhagen represents an extreme situation:

“Property prices in Copenhagen have risen 40–60 percent since the middle of 2012, when the central bank first resorted to negative interest rates to defend the krone’s peg to the euro.”

This should come as no surprise: recall that there are documented cases where Danish borrowers are paid to take on debt and buy houses “In Denmark You Are Now Paid To Take Out A Mortgage”, so between rewarding debtors and punishing savers, this outcome is hardly shocking. Yet it is the negative rates that have made this unprecedented surge in home prices feel relatively benign on broader price levels, since the source of housing funds is not savings but cash, usually cash belonging to the bank.

 

 

The Swedish property market is similarly reaching for the sky. Like Japan at the peak of it’s bubble in the late 1980s, Sweden has intergenerational mortgages, with an average term of 140 years! Recent regulatory attempts to rein in the ballooning debt by reducing the maximum term to a ‘mere’ 105 years have been met with protest:

Swedish banks were quoted in the local press as opposing the move. “It isn’t good for the finances of households as it will make mortgages more expensive and the terms not as good. And it isn’t good for financial stability,” the head of Swedish Bankers’ Association was reported to say.

Apart from stimulating further leverage in an already over-leveraged market, negative interest rates do not appear to be stimulating actual economic activity:

If negative rates don’t spur growth — Danish inflation since 2012 has been negligible and GDP growth anemic — what are they good for?….Danish businesses have barely increased their investments, adding less than 6 percent in the 12 quarters since Denmark’s policy rate turned negative for the first time. At a growth rate of 5 percent over the period, private consumption has been similarly muted. Why is that? Simply put, a weak economy makes interest rates a less powerful tool than central bankers would like.

“If you’re very busy worrying about the economy and your job, you don’t care very much what the exact rate is on your car loan,” says Torsten Slok, Deutsche Bank’s chief international economist in New York.

Fuelling inequality and profligacy while punishing responsible behaviour is politically unpopular, and the consequences, when they eventually manifest, will be even more so. Unfortunately, at the peak of a bubble, it is only continued financial irresponsibility that can keep a credit expansion going and therefore keep the financial system from abruptly crashing. The only things keeping the system ‘running on fumes’ as it currently is, are financial sleight-of-hand, disingenuous bribery and outright fraud. The price to pay is that the systemic risks continue to grow, and with it the scale of the impacts that can be expected when the risk is eventually realised. Politicians desperately wish to avoid those consequences occurring in their term of office, hence they postpone the inevitable at any cost for as long as physically possible.

 

The Zero Lower Bound and the Problem of Physical Cash

 

Central bankers attempting to stimulate the circulation of money in the economy through the use of negative interest rates have a number of problems. For starters, setting a low official rate does not necessarily mean that low rates will prevail in the economy, particularly in times of crisis:

The experience of the global financial crisis taught us that the type of shocks which can drive policy interest rates to the lower bound are also shocks which produce severe impairments to the monetary policy transmission mechanism. Suppose, for example, that the interbank market freezes and prevents a smooth transmission of the policy interest rate throughout the banking sector and financial markets at large. In this case, any cut in the policy rate may be almost completely ineffective in terms of influencing the macroeconomy and prices.

This is exactly what we saw in 2008, when interbank lending seized up due to the collapse of confidence in the banking sector. We have not seen this happen again yet, but it inevitably will as crisis conditions resume, and when it does it will illustrate vividly the limits of central bank power to control financial parameters. At that point, interest rates are very likely to spike in practice, with banks not trusting each other to repay even very short term loans, since they know what toxic debt is on their own books and rationally assume their potential counterparties are no better. Widening credit spreads would also lead to much higher rates on any debt perceived to be risky, which, increasingly, would be all debt with the exception of government bonds in the jurisdictions perceived to be safest. Low rates on high grade debt would not translate into low rates economy-wide. Given the extent of private debt, and the consequent vulnerability to higher interest rates across the developed world, an interest rate spike following the NIRP period would be financially devastating.

The major issue with negative rates in the shorter term is the ability to escape from the banking system into physical cash. Instead of causing people to spend, a penalty on holding savings in a banks creates an incentive for them to withdraw their funds and hold cash under their own control, thereby avoiding both the penalty and the increasing risk associated with the banking system:

Western banking systems are highly illiquid, meaning that they have very low cash equivalents as a percentage of customer deposits….Solvency in many Western banking systems is also highly questionable, with many loaded up on the debts of their bankrupt governments. Banks also play clever accounting games to hide the true nature of their capital inadequacy. We live in a world where questionably solvent, highly illiquid banks are backed by under capitalized insurance funds like the FDIC, which in turn are backed by insolvent governments and borderline insolvent central banks. This is hardly a risk-free proposition. Yet your reward for taking the risk of holding your money in a precarious banking system is a rate of return that is substantially lower than the official rate of inflation.

In other words, negative rates encourage an arbitrage situation favouring cash. In an environment of few good investment opportunities, increasing recognition of risk and a rising level of fear, a desire for large scale cash withdrawal is highly plausible:

From a portfolio choice perspective, cash is, under normal circumstances, a strictly dominated asset, because it is subject to the same inflation risk as bonds but, in contrast to bonds, it yields zero return. It has also long been known that this relationship would be reversed if the return on bonds were negative. In that case, an investor would be certain of earning a profit by borrowing at negative rates and investing the proceedings in cash. Ignoring storage and transportation costs, there is therefore a zero lower bound (ZLB) on nominal interest rates.

Zero is the lower bound for nominal interest rates if one would want to avoid creating such an incentive structure, but in a contractionary environment, zero is not low enough to make borrowing and lending attractive. This is because, while the nominal rate might be zero, the real rate (the nominal rate minus negative inflation) can remain high, or perhaps very high, depending on how contractionary the financial landscape becomes. As Keynes observed, attempting to stimulate demand for money by lowering interest rates amounts to ‘pushing on a piece of string‘. Central authorities find themselves caught in the liquidity trap, where monetary policy ceases to be effective:

Many big economies are now experiencing ‘deflation’, where prices are falling. In the euro zone, for instance, the main interest rate is at 0.05% but the “real” (or adjusted for inflation) interest rate is considerably higher, at 0.65%, because euro-area inflation has dropped into negative territory at -0.6%. If deflation gets worse then real interest rates will rise even more, choking off recovery rather than giving it a lift.

If nominal rates are sufficiently negative to compensate for the contractionary environment, real rates could, in theory, be low enough to stimulate the velocity of money, but the more negative the nominal rate, the greater the incentive to withdraw physical cash. Hoarded cash would reduce, instead of increase, the velocity of money. In practice, lowering rates can be moderately reflationary, provided there remains sufficient economic optimism for people to see the move in a positive light. However, sending rates into negative territory at a time pessimism is dominant can easily be interpreted as a sign of desperation, and therefore as confirmation of a negative outlook. Under such circumstances, the incentives to regard the banking system as risky, to withdraw physical cash and to hoard it for a rainy day increase substantially. Not only does the money supply fail to grow, as new loans are not made, but the velocity of money falls as money is hoarded, thereby aggravating a deflationary spiral:

A decline in the velocity of money increases deflationary pressure. Each dollar (or yen or euro) generates less and less economic activity, so policymakers must pump more money into the system to generate growth. As consumers watch prices decline, they defer purchases, reducing consumption and slowing growth. Deflation also lifts real interest rates, which drives currency values higher. In today’s mercantilist, beggar-thy-neighbour world of global trade, a strong currency is a headwind to exports. Obviously, this is not the desired outcome of policymakers. But as central banks grasp for new, stimulative tools, they end up pushing on an ever-lengthening piece of string.

 

 

Japan has been in the economic doldrums, with pessimism dominant, for over 25 years, and the population has become highly sceptical of stimulation measures intended to lead to recovery. The negative interest rates introduced there (described as ‘economic kamikaze’) have had a very different effect than in Scandinavia, which is still more or less at the peak of its bubble and therefore much more optimistic. Unfortunately, lowering interest rates in times of collective pessimism has a poor record of acting to increase spending and stimulate the economy, as Japan has discovered since their bubble burst in 1989:

For about a quarter of a century the Japanese have proved to be fanatical savers, and no matter how low the Bank of Japan cuts rates, they simply cannot be persuaded to spend their money, or even invest it in the stock market. They fear losing their jobs; they fear a further fall in shares or property values; they have no confidence in the investment opportunities in front of them. So pathological has this psychology grown that they would rather see the value of their savings fall than spend the cash. That draining of confidence after the collapse of the 1980s “bubble” economy has depressed Japanese growth for decades.

Fear is a very sharp driver of behaviour — easily capable of over-riding incentives designed to promote spending and investment:

When people are fearful they tend to save; and when they become especially fearful then they save even more, even if the returns on their savings are extremely low. Much the same goes for businesses, and there are increasing reports of them “hoarding” their profits rather than reinvesting them in their business, such is the great “uncertainty” around the world economy. Brexit obviously only added to the fears and misgivings about the future.

Deflation is so difficult to overcome precisely because of its strong psychological component. When the balance of collective psychology tips from optimism, hope and greed to pessimism and fear, everything is perceived differently. Measures intended to restore confidence end up being interpreted as desperation, and therefore get little or no traction. As such initiatives fail, their failure becomes conformation of a negative bias, which increases the power of that bias, causing more stimulus initiatives to fail. The resulting positive feedback loop creates and maintains a vicious circle, both economically and socially:

There is a strong argument that when rates go negative it squeezes the speed at which money circulates through the economy, commonly referred to by economists as the velocity of money. We are already seeing this happen in Japan where citizens are clamouring for ¥10,000 bills (and home safes to store them in). People are taking their money out of the banking system to stuff it under their metaphorical mattresses. This may sound extreme, but whether paper money is stashed in home safes or moved into transaction substitutes or other stores of value like gold, the point is it’s not circulating in the economy. The empirical data support this view — the velocity of money has declined precipitously as policymakers have moved aggressively to reduce rates.

Physical cash under one’s own control is increasingly seen as one of the primary escape routes for ordinary people fearing the resumption of the 2008 liquidity crunch, and its popularity as a store of value is increasing steadily, with demand for cash rising more rapidly than GDP in a wide range of countries:

While cash’s use is in continual decline, claims that it is set to disappear entirely may be premature, according to the Bank of England….The Bank estimates that 21pc to 27pc of everyday transactions last year were in cash, down from between 34pc and 45pc at the turn of the millennium. Yet simultaneously the demand for banknotes has risen faster than the total amount of spending in the economy, a trend that has only become more pronounced since the mid-1990s. The same phenomenon has been seen internationally, in the US, eurozone, Australia and Canada….

….The prevalence of hoarding has also firmed up the demand for physical money. Hoarders are those who “choose to save their money in a safety deposit box, or under the mattress, or even buried in the garden, rather than placing it in a bank account”, the Bank said. At a time when savings rates have not turned negative, and deposits are guaranteed by the government, this kind of activity seems to defy economic theory. “For such action to be considered as rational, those that are hoarding cash must be gaining a non-financial benefit,” the Bank said. And that benefit must exceed the returns and security offered by putting that hoarded cash in a bank deposit account. A Bank survey conducted last year found that 18pc of people said they hoarded cash largely “to provide comfort against potential emergencies”.

This would suggest that a minimum of £3bn is hoarded in the UK, or around £345 a person. A government survey conducted in 2012 suggested that the total number might be higher, at £5bn….

…..But Bank staff believe that its survey results understate the extent of hoarding, as “the sensitivity of the subject” most likely affects the truthfulness of hoarders. “Based on anecdotal evidence, a small number of people are thought to hoard large values of cash.” The Bank said: “As an illustrative example, if one in every thousand adults in the United Kingdom were to hoard as much as £100,000, this would account for around £5bn — nearly 10pc of notes in circulation.” While there may be newer and more convenient methods of payment available, this strong preference for cash as a safety net means that it is likely to endure, unless steps are taken to discourage its use.

Debt Rattle August 28 2016

Aug 282016
 
 August 28, 2016  Posted by at 9:31 am Finance Tagged with: , , , , , , , ,  8 Responses »


DPC On the beach, Coney Island 1907

• ‘If You’re Investing For The Long Term, You’re Crazy’ (MW)
• “The Next Time The World Comes To An End” – Jim Rogers (RV/ZH)
• The Housing Markets In The Hamptons, Aspen And Miami Are All Crashing (ZH)
• As Fed Nears Rate Hikes, Policymakers Plan For ‘Brave New World’ (R.)
• Coeure Says ECB May Need to Dive Deeper If Governments Don’t Act (BBG)
• BOJ’s Kuroda Says Ready to Ease as Jackson Hole Debates Options (BBG)
• The Sinister Side of Cash (Rogoff)
• The Thing About The EU That Drives So Many Up The Wall (Worstall)
• Greece PM Says EU Sleepwalking Toward Cliff, Wants Debt Relief By End 2016 (R.)
• Germany Expects ‘Up To 300,000’ Migrants This Year (BBC)

 

 

“We’re on the edge of a cliff right now. We have never been here before…”

• ‘If You’re Investing For The Long Term, You’re Crazy’ (MW)

Robert Kiyosaki, author of several best-selling books including “Rich Dad Poor Dad,” joined MarketWatch for a live interview on Facebook today. He offered up insights on making money, becoming an entrepreneur and even touched on politics. “The rich do not work for money. Most people do not understand that, because they’re taught to go to school and get a job for money. The rich don’t work for money. And one of the reasons for that is money is no longer money. One of the reasons for that is in 1971, President Nixon took the U.S. Dollar off the gold standard and basically screwed the world. It’s bad for the poor and middle class. As Bernie Sanders said, ‘wealth and income inequality is the greatest moral crisis facing America as well as the world today.’

The gap is growing between the rich and poor. The rich don’t work for money. If you went to school and got a job, and you’re saving money and investing in the stock market today, you’re going to lose.” “We’re on the edge of a cliff right now. We have never been here before. If you’re still saving money when interest rates are negative, you’ve got to be crazy. When you’re investing for the long-term in the stock market, where there is no connection between stock price and reality, you’re crazy.”

Read more …

Jim Rogers is always interesting, and this 50 min interview is no exception. Zero Hedge has a lot of quotes from it.

• “The Next Time The World Comes To An End” – Jim Rogers (RV/ZH)

China is going to have problems too. It’s just the way the world works. In 2008, when the world fell apart, China had a lot money saved for a rainy day, and they started spending it when it started raining. This time, China has a lot of debt themselves. It’s amazing how much debt has built up in China in just a few years. And so this time, while China’s in better shape, or less bad shape than most of us, China’s got a lot of debt, and they’re not going to be able to help us like they did before. Beijing has said we’re going to let people go bankrupt, which I hope they do. They don’t do that in the West. The red Chinese, the communist Chinese are going to let people go bankrupt, because they’re good capitalists.

Americans won’t let anybody – and the Europeans won’t let anybody go bankrupt so they can save the world. But China has said they will let people go bankrupt. It’ll be a shock for the people who go bankrupt. It’ll be a shock for the world. But it will certainly be good for China, and for the world, if they do let mistakes get cleaned up. But it will mean that they will not be able to save us as much as they did before. So the next time the world comes to an end, it’s going to be a bigger shock than we expect.

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Pretty big numbers.

• The Housing Markets In The Hamptons, Aspen And Miami Are All Crashing (ZH)

One month ago, we said that “it is not looking good for the US housing market”, when in the latest red flag for the US luxury real estate market, we reported that sales in the Hamptons plunged by half and home prices fell sharply in the second quarter in the ultra-wealthy enclave, New York’s favorite weekend haunt for the 1%-ers. Reuters blamed this on “stock market jitters earlier in the year” which damped the appetite to buy, however one can also blame the halt of offshore money laundering, a slowing global economy, the collapse of the petrodollar, and the drastic drop in Wall Street bonuses. In short: a sudden loss of confidence that a greater fool may emerge just around the corner, which in turn has frozen buyer interest.

We concluded this is just the beginning, and sure enough, several weeks later a similar collapse in the luxury housing segment was reported in a different part of the country. As the Denver Post reported recently, high-end sales that fuel Aspen’s $2 billion-a-year real estate market are evaporating, pushing Pitkin County’s sales volume down more than 42% to $546.45 million for the first half of the year from $939.91 million in the same period of 2015. [..] Ask a dozen market watchers why, and you’ll get a dozen answers. Uncertainty around the presidential election. Fear of Trump. Fear of Clinton. Growing trade imbalances with China. Brexit. Roller-coaster oil prices. Zika. Wobbling economies in South America. The list goes on. “People are worried about all kinds of stuff these days,” says longtime Aspen broker Bob Ritchie. “I’ve never seen anything like this before.”

[..] According to the latest report by the Miami Association of Realtors, the local luxury housing market is just as bad, if not worse, than the Hamptons and Aspen. The latest figures out of Miami this week showed residential sales are down almost 21% from the same time last year. But as bad as this double-digit decline may seem, it pales in comparison to what’s happening at the high end of the market. A closer look at transactions for properties of $1 million or more in July shows just 73 single-family home sales, representing an annual decline of 31.8%, according to a new report by the Miami Association of Realtors. In the case of condos in the same price range, the number of closed sales fell by an even wider margin: 44.4%, to 45 transactions.

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There’s nothing in sight that would stop this madness. Looks like it will have to run its natural course.

• As Fed Nears Rate Hikes, Policymakers Plan For ‘Brave New World’ (R.)

Federal Reserve policymakers are signaling they could raise U.S. interest rates soon but they are already weighing new tools they may need to fight the next recession. A solid U.S. labor market “has strengthened” the case for the first rate increase since last December, Fed Chair Janet Yellen told a central banking conference in Jackson Hole, Wyoming. Several of her colleagues said the increase could come as soon as next month if the economy does well. Further rate hikes are expected to be few and far between as the U.S. central bank tries to balance a desire to fuel growth against worries it could overheat the economy.

But Fed officials at three-day conference that ended Saturday also said they need to consider new policy tools for use down the road, such as raising the inflation target or even Fed purchases of non-government-backed assets like corporate debt. Such ideas would test the limits of political feasibility and some would need congressional approval. The view within the Fed is that it could take effort to win over a public already skeptical of the unconventional policies the Fed undertook during the last crisis. Policymakers think new tools might be needed in an era of slower economic growth and a potentially giant and long-lasting trove of assets held by the Fed. And they are convinced the time to vet them is now, while rates look to be heading up.

“Central banking is in a brave new world,” Atlanta Fed President Dennis Lockhart said in an interview on the sidelines of the conference. At the center of the Fed’s discussions is its $4.5 trillion balance sheet, built up by bond-buying sprees to combat the 2007-09 recession but which has been criticized by many lawmakers. While policymakers have maintained the Fed should eventually reduce its bond holdings, Lockhart said some officials were closer to accepting that they needed to learn to live with them. “I suspect there are colleagues who are contemplating at least maybe a statically large balance sheet is just going to be a fact of life and be central to the toolkit,” he said.

Read more …

The ECB should stop pretending it has a clue.

• Coeure Says ECB May Need to Dive Deeper If Governments Don’t Act (BBG)

European Central Bank Executive Board member Benoit Coeure said unconventional monetary policy may have to be used differently and more frequently if governments don’t act to boost the growth potential of euro-area economies. “We may see short-term rates being pushed to the effective lower bound more frequently in the event of macroeconomic shocks,” Coeure said Saturday in a speech at the U.S. Federal Reserve’s annual policy symposium in Jackson Hole, Wyoming. His remarks were posted on the ECB’s website. “We will fulfill the price stability mandate given to us,” Coeure said. “But if other actors do not take the necessary measures in their policy domains, we may need to dive deeper into our operational framework and strategy to do so.”

While slowing growth and inflation present difficulties for central banks around the industrialized world, the Frankfurt-based ECB has particular cause to urge pro-expansion measures by the 19 nations that use the euro. High unemployment, political spats and banking systems loaded with soured loans are hampering the region’s recovery from a debt crisis that started six years ago. “We face an exceptional situation where the real equilibrium rate is very low,” said Coeure. “All the monetary policy measures we have taken were a necessary response to this. They stabilized the euro-area economy and anchored medium-term price stability. But they were done on the assumption that low real rates would be temporary, because other policies would act in their fields of responsibility.”

Read more …

The word ‘ease’ takes on whole new meanings by now.

• BOJ’s Kuroda Says Ready to Ease as Jackson Hole Debates Options (BBG)

Bank of Japan Governor Haruhiko Kuroda said he won’t hesitate to boost monetary stimulus if needed, reiterating a pledge during an annual policy retreat in Jackson Hole, Wyoming, at which central bankers stressed their need for backup from fiscal policy. “There is no doubt that there is ample space for additional easing in each of the three dimensions,” Kuroda said Saturday, referring to the BOJ’s package of asset buying, monetary-base guidance, and negative interest rates. “The bank will carefully consider how to make the best use of the policy scheme in order to achieve the price stability target,” he told the Federal Reserve Bank of Kansas City’s symposium.

Central bankers, struggling to spur persistently disappointing growth, gathered in the Grand Teton National Park to debate how best to tackle low inflation despite having already cut interest rates to near zero or, in some cases, below zero. They heard Fed Chair Janet Yellen on Friday describe future potential options to jump-start the economy, while saying that the case for a U.S. rate hike had strengthened. Even though the Bank of Japan is currently engaged in a review of its monetary-policy settings, due for completion in September, Kuroda’s comments underline his stance that the exercise won’t mean any reduction in stimulus despite growing doubts about its effectiveness. “One of the key elements of our policy is to push up inflation expectations to our price stability target and anchor them there,” Kuroda said. “The Bank of Japan will continue to carefully examine risks to activity and prices at each monetary policy meeting, and take additional monetary policy measures without hesitation.”

Read more …

Wow. and I thought Rogoff was a reasonable smart man. Saying that cash causes crime is not smart. It’s nonsense.

• The Sinister Side of Cash (Rogoff)

When I tell people that I have been doing research on why the government should drastically scale back the circulation of cash—paper currency—the most common initial reaction is bewilderment. Why should anyone care about such a mundane topic? But paper currency lies at the heart of some of today’s most intractable public-finance and monetary problems. Getting rid of most of it—that is, moving to a society where cash is used less frequently and mainly for small transactions—could be a big help. There is little debate among law-enforcement agencies that paper currency, especially large notes such as the U.S. $100 bill, facilitates crime: racketeering, extortion, money laundering, drug and human trafficking, the corruption of public officials, not to mention terrorism.

There are substitutes for cash—cryptocurrencies, uncut diamonds, gold coins, prepaid cards—but for many kinds of criminal transactions, cash is still king. It delivers absolute anonymity, portability, liquidity and near-universal acceptance. It is no accident that whenever there is a big-time drug bust, the authorities typically find wads of cash. Cash is also deeply implicated in tax evasion, which costs the federal government some $500 billion a year in revenue. According to the Internal Revenue Service, a lot of the action is concentrated in small cash-intensive businesses, where it is difficult to verify sales and the self-reporting of income. By contrast, businesses that take payments mostly by check, bank card or electronic transfer know that it is much easier for tax authorities to catch them dissembling.

Though the data are much thinner for state and local governments, they too surely lose big-time from tax evasion, perhaps as much as $200 billion a year. Obviously, scaling back cash is not going to change human nature, and there are other ways to dodge taxes and run illegal businesses. But there can be no doubt that flooding the underground economy with paper currency encourages illicit behavior. Cash also lies at the core of the illegal immigration problem in the U.S. If American employers couldn’t so easily pay illegal workers off the books in cash, the lure of jobs would abate, and the flow of illegal immigrants would shrink drastically. Needless to say, phasing out most cash would be a far more humane and sensible way of discouraging illegal immigration than constructing a giant wall.

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“.. the idea that we average peeps just shouldn’t worry our pretty little heads about complicated things like Europe.”

• The Thing About The EU That Drives So Many Up The Wall (Worstall)

Gus O’Donnell, who used to be the head of the civil service, has floated the idea that Britain won’t in fact leave the European Union after all. After a couple of years of negotiating about it we’ll end up with something that’s very like we have now and politicians will just settle for that. This, at root, is exactly what the whole dang vote in favour of Brexit, in favour of leaving, was about anyway. For it is, again, the idea that we average peeps just shouldn’t worry our pretty little heads about complicated things like Europe. We should allow our betters, our betters being those who had the good grace to go into the bureaucracy, to take care of everything for us. And that is actually the driving aim of the EU itself.

The entire point over the decades has been to take power away from the various peoples, and from politicians directly accountable to them, and place said power in the hands of an unelected and unaccountable bureaucracy in Brussels. And that’s to a very large extent, what the upsurge which led to Brexit was about. No, thanks, very much, but we’ll rule ourselves. And O’Donnell’s not doing himself any favours by repeating the idea from a purely British perspective. Being told that “The Man in Whitehall knows best” enrages Brits just as much as the idea that someone in Brussels does. Largely on the basis that we’ve all too much evidence pointing the other way. Thus this is somewhere between simply wrong and evidence of having an entirely tin ear:

”A former top civil servant says a British exit from the European Union is not inevitable, although voters backed that course in a June referendum.[..] But Gus O’Donnell, who was U.K. cabinet secretary from 2005 to 2011 and today sits in the House of Lords, says Britain could remain within a reformed EU following talks that would take “a very long time.” He’s actually going a bit further than that: “Lord O’Donnell of Clapham, the former Cabinet Secretary, says Britain might not really leave the EU. Perhaps the EU will now change in a way that makes it more appealing to British people, he suggests. And anyway, even if we do actually go through with the whole Brexit thing, not much will change because, when we come to really think about it, we’ll realise that all those rules and regulations that originated with the EU are actually OK so they should remain in place.”

There are indeed times when civil servants can be left to get on with things. Whether the forms for unemployment pay use Times Roman or Comic Sans would be a useful level of that sort of thing. But when the populace at large has been asked a simple question like “In or Out of the EU?” then that’s not something that the civil servants should be either second guessing nor gainsaying. That’s the exact thing about the EU that drives a significant portion of the population up the wall.

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How much longer can Tsipras last? Or the EU for that matter?

• Greece PM Says EU Sleepwalking Toward Cliff, Wants Debt Relief By End 2016 (R.)

Greece said on Sunday the EU was “sleepwalking towards a cliff” by sticking to austerity rules that created huge inequalities among members, and it expected a debt relief deal for itself to be honored by end-2016 so that its economy could recover. Athens, facing a second bailout review entailing an unpopular loosening of labor laws in the autumn, is keen to show that painful tax rises and pension cuts as part of its 86-billion-euro bailout deal last year will bear fruit. “Greece has kept its part of the agreement and expects the same from its partners. We are not simply seeking, we are demanding and expecting specific measures that will render debt sustainable as part of the deal we are implementing,” Prime Minister Alexis Tsipras told the Sunday newspaper Realnews.

“This (debt relief) will be followed by reduced (budget) surpluses after 2018, which will open the way for the economy’s recovery,” he said. Greece has committed to attaining a primary budget surplus – excluding debt servicing costs – of 3.5% of economic output by 2018 as part of its third bailout package since 2010. The IMF, which has yet to decide whether it will fund the third bailout, has said that surplus targets of 3.5% beyond 2018 are not realistic for Greece and has pushed for softer fiscal goals to take part in the financing. Greece’s leftist-led government and the central bank also want lower primary surplus targets, arguing this will give Athens room to cut taxes and help the battered economy return to growth after a protracted recession.

The economy has shrunk by a quarter in six years and the jobless rate is 23.5%. Tsipras also told Realnews that the European Union was “sleepwalking towards a cliff” as the Stability Pact’s tough fiscal rules had engendered deep inequalities among member states. “Brexit will either awaken European leaderships or it will be the beginning of the end of the EU,” he said, referring to Britain’s June vote to leave the 28-nation bloc. He criticized Germany for acting as Europe’s “savings bank” with excessive surpluses, frozen wages and low inflation, at a time when the EU’s deficit-ridden southern members have broken all records for unemployment. “If Schaueble’s dogma for a multi-speed Europe and economic zones of low-cost labor is not abandoned, Europe will be brought to the brink of dissolution,” Tsipras was quoted by Realnews as saying.

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As Hungary and Austria are throwing up more barriers.

• Germany Expects ‘Up To 300,000’ Migrants This Year (BBC)

Germany expects up to 300,000 migrants to arrive in the country, according to the head of Germany’s Federal Office for Migration and Refugees. Frank-Juergen Weise told the Bild am Sonntag paper (in German) his office would struggle if more people came. But he said he was confident the number of new arrivals would remain within the estimate. More than one million migrants from the Middle East, Afghanistan and Africa arrived in Germany last year. The German interior ministry says more than 390,000 people applied for asylum in the first six months of this year. It is not clear how many of these may have arrived in the country in 2015. Mr Weise said Germany would try to get as many of them on the job market as possible. But he said the migrants’ integration in German society “would take a long time and cost a lot”.

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Debt Rattle August 22 2016

Aug 222016
 
 August 22, 2016  Posted by at 9:29 am Finance Tagged with: , , , , , , , , , , ,  4 Responses »


NPC Wilkins-Rogers Milling Co., Washington, DC 1926

• Oil Falls As August Price Rally Seen Overblown, China Fuel Exports Soar (R.)
• Less Than 5% Of Japan Inc. Think Abe’s Stimulus Will Boost The Economy (R.)
• Grim Outlook for the Economy, Stocks: Stephanie Pomboy (Barron’s)
• Citi Is About to Relive the 2008 Derivatives Nightmare (MM)
• The Brexit Question That Nobody Asked (BBG)
• China Is Grappling With Hidden Unemployment (BBG)
• Australia’s Unprecedented Collapse In Business Investment, In One Chart (BI)
• Australia Central Bank Loses Credibility As Housing Boom Continues (AFR)
• American Journalism Is Collapsing Before Our Eyes (Goodwin)
• The Clintons Really Do Think They Can Get Away With Anything (WSJ)
• Clinton Not In The Clear (Jack Kelly)
• The History of Money: Not What You Think (Minskys)
• German Government: Citizens Should Store Food, Water And Cash (DWN)
• ‘Nobody Believes In Anything Anymore’: Greek Crisis is Far From Over (CNBC)
• Rescuing Refugees: ‘You Never Get Used To It – And That’s A Good Thing’ (G.)
• Inuit Fear Being Overwhelmed As ‘Extinction Tourism’ Descends On Arctic (G.)

 

 

“China’s July exports of diesel and gasoline soared by 181.8% and 145.2% respectively..”

• Oil Falls As August Price Rally Seen Overblown, China Fuel Exports Soar (R.)

Oil prices fell on Monday as analysts doubted upcoming producer talks would rein in oversupply, saying that Brent would likely fall back below $50 a barrel as August’s more than 20% crude rally looks overblown. Soaring exports of refined products from China also pressured prices, as this was seen as the latest indicator of an ongoing global fuel glut, traders said. China’s July exports of diesel and gasoline soared by 181.8% and 145.2% respectively compared with the same month last year, to 1.53 million tonnes and 970,000 tonnes each, putting pressure on refined product margins. Brent crude futures were trading at $50.22 per barrel at 0224 GMT, down 66 cents, or 1.3%.

U.S. West Texas Intermediate (WTI) crude was down 51 cents, or 1.05%, at $48.01 a barrel. Analysts cast doubt on an August price rally, saying that much of it was a result of short-covering and anticipation of upcoming producer talks to discuss means to curb oversupply. “Positioning data seems to confirm our view that the latest oil bounce is more technical and positioning-oriented than fundamental. In fact, new buyers have been mostly absent the past few months,” Morgan Stanley said. Regarding the upcoming producer talks, the bank said a agreement was “highly unlikely” and that there were “too many headwinds and logistical challenges to a meaningful deal”.

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Less than 5% are wrong.

• Less Than 5% Of Japan Inc. Think Abe’s Stimulus Will Boost The Economy (R.)

Japanese companies overwhelmingly say the government’s latest stimulus will do little to boost the economy and the Bank of Japan should not ease further, a Reuters poll showed, a setback for policymakers’ efforts to overcome deflation and stagnation. Prime Minister Shinzo Abe this month unveiled a 13.5 trillion yen (£102.6 billion) fiscal package of public works projects and other measures, vowing a united front with the BOJ to revive the economy and raising speculation of a surge in government spending essentially financed by the central bank. But less than 5% of companies believe the steps will boost the economy near-term or raise its growth potential, according to the Reuters Corporate Survey, conducted August 1-16.

“It’s disappointing that the stimulus focuses on public works, and it lacks attention to promoting industry and technology that would lead to future growth,” said a manager at a precision-machinery maker. Abe took office 3 1/2 years ago, pledging to reboot the economy with aggressive monetary stimulus, fiscal spending and reform plans. After an early spurt of growth and surging corporate profits, helped by a sharp fall in the yen, the economy is again sputtering and prices are slipping, underscoring the challenge for Japan to beat nearly two decades of deflation and anaemic growth. “Unless drastic steps are taken to fix the root of Japan’s problems – the falling birthrate and working population – solid economic growth won’t return … only public debt would pile up without sustainable growth,” said an electrical machinery firm.

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You would still have to specify those who have nothing left to save; economists miss out on that.

• Grim Outlook for the Economy, Stocks: Stephanie Pomboy (Barron’s)

For some time, Stephanie Pomboy, an economist and the founder of MacroMavens, has pushed a provocative theory that a crisis-chastened U.S. consumer would retard global growth. That is why a U.S. recovery has taken so long to take off, and why Japan and Europe look set to embark on more rounds of quantitative easing. An avid reader of Shakespeare, Pomboy appreciates the comic and tragic dimensions of the markets—the giddy optimism for the second half of the year, and the potentially disastrous consequences of excessively low rates. As stocks teetered at new highs, we phoned Pomboy in Vail, Colo., where she lives when not in Manhattan, to hear her latest views. They aren’t rosy: Investors and policy makers are deluding themselves that we will soon return to a pre-financial crisis framework. Things have changed, she says, which means expectations for economic growth in the second half are far too optimistic. And today’s low rates could cause another financial crisis, bankrupting pension plans, putting retirees at risk, and hurting stocks.

Barron’s: You like to focus on the consumer—and plot U.S. consumer spending as a percentage of GDP versus world trade. Why? Pomboy: What ignited and supported the entire era of globalization was the spendthrift U.S. consumer; economies have been totally reliant on trade to U.S. consumers. This once-in-a-generation asset deflation will fundamentally change behavior, just as the Depression changed an entire generation’s attitude about spending and saving. Obviously, the burden of proof is on me, because for 20 years the consumer has reliably borrowed from China to buy their tube socks. Post-crisis, the consumer has clearly pulled back.

How many months did we have disappointing retail sales numbers that no one could explain? They’d say it’s too hot, too cold, there’s Brexit. But what’s really causing this slowdown in spending is that the post-crisis consumer is determined to save, and do it the old-fashioned way. Historically, when rates go down, people save less. In this cycle, things have completely reversed. Over the same stretch of time that the two-year note has gone from 4% to 1%, the savings rate has doubled. There are mountains of evidence to support my thesis. But every Wall Street analyst and the Fed is using the pre-crisis analytical framework to look at an economy that is fundamentally challenged.

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Note the numbers: “Credit Suisse prudently sold $380 billion of derivatives to Citi, thereby reducing its own leverage exposure by $5 billion.”

• Citi Is About to Relive the 2008 Derivatives Nightmare (MM)

Deutsche Bank – with its stock now trading at a 30-year low – was recently called the world’s riskiest financial institution by the IMF. Better late than never… In a last-ditch effort to save itself, DB is trying to dump a bucket load of credit derivatives – the murky, risky financial instruments that triggered the 2008 financial crisis. You would think no one would buy these weapons of financial mass destruction… but you’d be wrong. In a staggeringly stupid move, the American bank I’m telling you about today has gone on a derivatives shopping spree, eagerly taking credit default swaps off the hands of failing Eurozone banks like DB and Credit Suisse. That means, of course, another outsize short opportunity for you to take…

Citigroup already nearly destroyed itself with derivatives during the 2008 crisis, requiring the biggest taxpayer bailout in history in order to stay afloat. Strangely, it didn’t learn its lesson the first time its stock fell below $1. As rival banks see the writing on the wall and scramble to get rid of their derivatives, Citi is now cheerfully snapping up billions of dollars’ worth. Several weeks ago, Credit Suisse prudently sold $380 billion of derivatives to Citi, thereby reducing its own leverage exposure by $5 billion. Last year, Deutsche Bank palmed off $250 billion of credit default swaps on (guess who?) Citi, and is in talks to get rid of even more. The result is that Citi now holds the most derivatives of any of its U.S. rivals. That’s a staggering total exposure of nearly $56 trillion, according to the OCC’s latest report, shown here:

[..] our current $650 trillion derivatives market is a nightmare scenario waiting to happen. First problem: the size. It’s 36x the size of the U.S. GDP and over 8x larger than the world GDP – the entire global output of the entire world in a year. While credit default swaps shrank significantly in size since the financial crisis, they remain large enough to constitute a potential time bomb inside the financial system that could blow up any time. Second problem: the interconnectedness. Every derivative contract involves two parties that agree to make certain payments to each other. But if one party is unable or unwilling to live up to its agreement and make those payments, the other party is left holding the bag and nursing a big loss. In a crisis, this can leave a volume of broken contracts that will overwhelm these institutions and render them instantly insolvent.

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Where is the EU heading?

• The Brexit Question That Nobody Asked (BBG)

Mervyn King, former governor of the Bank of England, has written the best article I’ve read on Britain’s exit from the EU. In an essay for the New York Review of Books he makes many excellent points, but one is of surpassing importance. It’s an obvious point, or ought to be, that nonetheless has been almost entirely ignored by other respectable commentators: Whether Britain should stay in the EU depends on where the EU is heading. The EU is plainly in deep trouble with or without the U.K., and its condition as a political project is anything but stable. Judging whether Britain is better off as a member therefore requires a judgment not only about what Britain has gained or lost from membership up to now but also an assessment of the future character of the whole EU enterprise.

Britain’s Remain campaign, expressing the collective opinion of every expert on the subject, has had almost nothing to say about this. As King points out, the EU is structurally unsound. (Joseph Stiglitz in the FT makes the same point.) It has pressed political union both too far and not far enough. That is, it has created half a political union – with a single currency but without a collective fiscal policy or the political apparatus that would be necessary to legitimize it. King: Putting the cart before the horse – setting up a monetary union before a political union – has led the ECB to become more and more vocal about the need to “complete the architecture” of monetary union by proceeding quickly to create a Treasury and finance minister for the entire eurozone.

The ability of such a new ministry to make transfers between member countries of the monetary union would reduce pressure on the ECB to find new ways of holding the monetary union together. But there is no democratic mandate for a new ministry to create such transfers or to have political union – voters do not want either. And voters aren’t the only ones who don’t want it. German officialdom (backed by popular opinion) is viscerally opposed to a “transfer union,” which is Germany’s name for fiscal policy as it operates in any normal country. Germany’s position is understandable, since Germans would give much more than they received in any such arrangement. But that doesn’t alter the conclusion: Not only is the EU structurally unsound, but there’s also little prospect that the structure either can be or will be repaired.

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Color me baffled.

• China Is Grappling With Hidden Unemployment (BBG)

Cracks are starting to show in China’s labor market as struggling industrial firms leave millions of workers in flux. While official jobless numbers haven’t budged, the underemployment rate has jumped to more than 5% from near zero in 2010, according to Bai Peiwei, an economics professor at Xiamen University. Bai estimates the rate may be 10% in industries with excess capacity, such as unprofitable steel mills and coal mines that have slashed pay, reduced shifts and required unpaid leave. Many state-owned firms battling overcapacity favor putting workers in a holding pattern to avoid mass layoffs that risk fueling social unrest. While that helps airbrush the appearance of duress, it also slows the shift of workers to services jobs, where labor demand remains more solid in China’s shifting economy.

“Underemployment in overcapacity industries is a drag on the potential improvement of productivity in China, which will lead to a softening wage trend,” said Grace Ng at JPMorgan in Hong Kong. “It would exert pressure on private consumption demand and in turn affect the overall rebalancing of the economy.” Other projections indicate the employment situation is even worse. An indicator of unemployment and underemployment produced by London-based research firm Fathom Consulting has more than tripled since 2012 to 13.2%. The official jobless rate isn’t much help for economists: it’s been virtually unchanged at about 4.1% since 2010 even as the economy slowed. The gauge only counts those who register for unemployment benefits in their home towns, which doesn’t take into account 277 million migrant workers. Total employment is 775 million, National Bureau of Statistics data show.

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Wow. What a chart that is.

• Australia’s Unprecedented Collapse In Business Investment, In One Chart (BI)

You’ve probably heard of the “capex cliff”, the term for the collapse in capital expenditure plans by Australian businesses that is an inevitable feature of the economy following the once-in-a-lifetime mining investment boom driven mainly by the surge in Chinese demand over the past two decades. But with Australia’s manufacturing industry having been hollowed out too over the past decade, the capital investment pipeline for both mining and manufacturing are gone. So the fall-off, when measured in terms of a percentage of GDP, is nothing short of spectacular in historical context, as shown in this chart from Macquarie. It’s not hard to see why economists have occasionally mentioned the word “recessionary” in reference to the investment outlook.

Part of what’s driving this is that Australia’s economy is increasingly being driven by much less capital-intensive sectors such as education and tourism, which don’t require huge pieces of machinery and infrastructure like trains, tunnelling machines and factory plant equipment. And on the other side of the ledger, the huge increases in capital investment during the mining boom have laid the foundations for the vast increase in Australia’s commodity export volumes, which have been supporting economic growth since the spending started to fall away. The Macquarie research team notes, however, that “non-mining business capex has yet to meaningfully react to lower interest rates, and that companies are “waiting for clear signs of sustained demand before investing.” Right now, those signs are nowhere to be seen.

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You can make charts just like this one for many countries.

• Australia Central Bank Loses Credibility As Housing Boom Continues (AFR)

Australia’s booming housing market has once again head-faked the central bank, which is losing credibility every time it cuts on claims the world’s dearest residential property prices are nothing to worry about. In rationalising its decision to reduce the cash rate to 1.5% in August, the Reserve Bank of Australia alleged that “the likelihood of lower interest rates exacerbating risks in the housing market has diminished”. Yet auction clearance rates in our two largest cities, Sydney and Melbourne, which account for 47% of the metro population, have subsequently risen back to boom-time levels. CoreLogic reports that 86.4% of Sydney auctions on the weekend resulted in a sale, which is 10 percentage points higher than the equivalent clearance rate 12 months ago and just shy of the 89.7% record set in May last year.

In Melbourne, 76.1% of auctions saw a sale, besting the 74.3% clearance rate in the same week last year. Median clearance rates in Sydney and Melbourne over the four weeks since July 31 have been 78% and 76% respectively, materially above the median levels observed in these cities since the current housing boom commenced in 2013 on the back of the RBA’s stimulus. While the RBA argues that much lower sales volumes in 2016 signal weakness, this is likely more a reflection of a four-year boom exhausting supply. And it does not stack up with unusually strong clearance rates or persistently exuberant capital gains across Sydney and Melbourne.

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I can only fully agree. And no, again, that’s not because I support Trump. Everything and everyone should be scrutinized.

• American Journalism Is Collapsing Before Our Eyes (Goodwin)

Donald Trump may or may not fix his campaign, and Hillary Clinton may or may not become the first female president. But something else happening before our eyes is almost as important: the complete collapse of American journalism as we know it. The frenzy to bury Trump is not limited to the Clinton campaign and the Obama White House. They are working hand-in-hand with what was considered the cream of the nation’s news organizations. The shameful display of naked partisanship by the elite media is unlike anything seen in modern America. The largest broadcast networks – CBS, NBC and ABC – and major newspapers like The New York Times and Washington Post have jettisoned all pretense of fair play. Their fierce determination to keep Trump out of the Oval Office has no precedent.

Indeed, no foreign enemy, no terror group, no native criminal gang, suffers the daily beating that Trump does. The mad mullahs of Iran, who call America the Great Satan and vow to wipe Israel off the map, are treated gently by comparison. By torching its remaining credibility in service of Clinton, the mainstream media’s reputations will likely never recover, nor will the standards. No future producer, editor, reporter or anchor can be expected to meet a test of fairness when that standard has been trashed in such willful and blatant fashion. Liberal bias in journalism is often baked into the cake. The traditional ethos of comforting the afflicted and afflicting the comfortable leads to demands that government solve every problem. Favoring big government, then, becomes routine among most journalists, especially young ones.

I know because I was one of them. I started at the Times while the Vietnam War and civil-rights movement raged, and was full of certainty about right and wrong. My editors were, too, though in a different way. Our boss of bosses, the legendary Abe Rosenthal, knew his reporters leaned left, so he leaned right to “keep the paper straight.” That meant the Times, except for the opinion pages, was scrubbed free of reporters’ political views, an edict that was enforced by giving the opinion and news operations separate editors. The church-and-state structure was one reason the Times was considered the flagship of journalism. Those days are gone. The Times now is so out of the closet as a Clinton shill that it is giving itself permission to violate any semblance of evenhandedness in its news pages as well as its opinion pages.

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But then you think: well, well, what got into the Wall Street Journal editors? Expect pressure on Clinton Foundation to increase.

• The Clintons Really Do Think They Can Get Away With Anything (WSJ)

After years of claiming that the Clinton Foundation poses no ethical conflicts for Bill and Hillary or the U.S. government, Bill Clinton now admits the truth—sort of. If his wife becomes President, he says the Super PAC masquerading as a charity won’t accept foreign or corporate contributions. Bill will also resign from the foundation board, and Chelsea will stop raising money for it. Now they tell us. If such fund-raising poses a problem when she’s President, why didn’t it when she was Secretary of State or while she is running for President? The answer is that it did and does, and they know it, but the foundation was too important to their political futures to give it up until the dynastic couple were headed back to the Oval Office.

Now that Hillary is running ahead of Donald Trump, Bill can graciously accept new restrictions on their pay-to-play politics. Bill must be having a good laugh over this one. The foundation served for years as a conduit for corporate and foreign cash to burnish the Clinton image, pay for their travel expenses for speeches and foreign trips, and employ their coterie in between campaigns or government gigs. Donors could give as much as they wanted because the foundation is a “charity.” President Obama may have banished Sidney Blumenthal from the State Department, but Bill could stash his conspiratorial pal at the foundation, keeping him on the family payroll while Sid flooded Hillary with foreign-policy advice. Her private email server was supposed to hide their email traffic—until that gambit was exposed last year.

But FBI Director James Comey let Hillary off the hook on the emails, and he declined to investigate the foundation, so it looks like they’re home free. By now the corporate and foreign cash has already been delivered, in anticipation that Hillary Clinton could become the next President. So now it’s the better part of political prudence to claim the ethical high ground. If you choose to believe or have a short memory. Readers may recall that the foundation promised the White House when Mrs. Clinton became Secretary of State that the foundation would restrict foreign donations and get approval from the State Department. It turned out the foundation violated that pledge, specifically when accepting $500,000 from Algeria.

The foundation also agreed to disclose donor names but failed to do so for more than 1,000 foreign donors until the failure was exposed by press reports. [..] Far from offering some new clean ethical slate, this latest foundation gambit ought to be a warning about a third Clinton term. Protected by Democrats and a press corps desperate to beat Donald Trump, the Clintons really do think they can get away with anything.

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“.. In 2013, for instance, the Clinton Foundation took in $140 million, but spent just $9 million (6.4%) on direct aid. A typical charity devotes about 75% of receipts to aid.”

• Clinton Not In The Clear (Jack Kelly)

Hillary Clinton has little to fear from Donald Trump. But she may be casting nervous glances over her shoulder at Preet Bharara. You may not have heard of Mr. Bharara. Sheldon Silver, former speaker of the New York State Assembly, a Democrat, and Dean Skelos, former majority leader of the New York Senate, a Republican, wish they hadn’t. In May, they were sentenced to 12 years and five years in prison, respectively, for corruption. Preet Bharara is the U.S. attorney for the Southern District of New York. Since his appointment in 2009, Mr. Bharara “has launched a one-man crusade against evil-doers, ranging from corrupt politicians to the Mafia,” wrote Alan Chartock, a political science professor who’s a longtime watcher of New York state government.

The Southern District of New York is the lead of three U.S. attorneys’ offices investigating the Clinton Foundation, a recently retired deputy director of the FBI told the Daily Caller. The Clinton Foundation is headquartered in New York. It was begun in Little Rock, Ark., to raise funds for the Clinton library. The office in Washington, D.C., may focus on when Hillary was secretary of state. The Clinton Foundation has received more than $2 billion in contributions. More than 1,000 donors are foreigners. The foundation won’t disclose their names or amounts donated. Few of the funds raised have been spent on charitable works. In 2013, for instance, the Clinton Foundation took in $140 million, but spent just $9 million (6.4%) on direct aid. A typical charity devotes about 75% of receipts to aid.

Much more is spent on pay and benefits for staff, office rent, conferences and travel. Some of the highest-paid staffers are political operatives, such as Huma Abedin, who for a time was on the payrolls of both the Clinton Foundation and the State Department, and Sid Blumenthal, who ran a private intelligence network for Hillary in Libya. The most ballyhooed project, relief for Haiti after a devastating earthquake in 2010, was an example of “Robin Hood in reverse”— robbing the poor for the benefit of the rich, said financial analyst Charles Ortel. The Clinton Foundation is a “charity fraud network,” Mr. Ortel wrote on his blog. “What possesses powerful, wealthy and educated persons to prey on the most desperately poor humans on earth as they posture as philanthropists?”

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Interesting view.

• The History of Money: Not What You Think (Minskys)

Most of us have an idea of how money came to be. It goes something like this: People wanted to exchange goods for other goods, but it was difficult to coordinate. So they started exchanging goods for money, and money for goods. This tells us that money is a medium of exchange. It’s a nice and simple story. The problem is that it may not be true. We may be understanding money entirely wrong. The above story assumes that first there was a market, and then people introduced money to make the market work better. But some people find this hard to believe. Those who subscribe to the Chartalist school of thought give a different history. Before money was used in markets, they say, it was used in primitive criminal justice systems.

Money started as—and still is—is a record of debt. It is a way to keep track of what one person owes another. There’s anthropological evidence to back up this view. Work by Innes, and Wray suggest that the origins of money are more like this: In a pre-market, feudal society, there was usually a system to maintain justice in the community. If someone committed a crime, the authority, let’s call him the king, would decide that the criminal owed a fine to the victim. The fine could be a cow, a sheep, three chickens, depending on the crime. Until that cow was brought forward, the criminal was indebted to the victim. The king would record the criminal’s outstanding debt. This system changed over time. Rather than paying fines to the victim, criminals were ordered to pay fines to the king.

This way, resources were being moved to the king, who could coordinate their use for the benefit of the community as a whole. This was useful for the King, and for the development of the society. But the amount of resources coming from a criminal here and there was not impressive. The system had to be expanded to draw more resources to the kingdom. To expand the system, the king created debt-records of his own. You can think of them as pieces of papers that say King-Owes-You. Next, he went to his citizens and demanded they give him the resources he wanted. If a citizen gave their cow to the king, the king would give the citizen some of his King-Owes-You papers. Now, a cow seems more useful than a piece of paper, so it seems silly that a citizen would agree to this.

But the king had thought of a solution. To make sure everyone would want his King-Owes-You papers, he created a use for them. He proclaimed that every so often, all citizens had to come forward to the kingdom. Each citizen would be in big trouble, unless they could provide little pieces of paper that showed the king still owed them. In that case, the king would let the citizen go, and not owe them any longer. The citizen would be free to go off and acquire more King-Owes-You papers, to make sure he would be safe the next time, too.

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Saw this on Reuters and other sites, but they all left out the need to store cash, for some reason, which is in the original directive. So I ran the article through Google Translate and corrected it a little.

A government advising people to store cash is not a minor point, I would think. Not in the days of plastic and a war on cash.

• German Government: Citizens Should Store Food, Water And Cash (DWN)

For the first time since the end of the Cold War, the federal government according to a report wants to encourage new stockpiling the population again, so that they, in the case of a disaster or an armed attack temporarily, can take care of themselves. “The population is ‘advised’ to hold a personal supply of food of ten days,” quoted the “Frankfurter Allgemeine Sonntagszeitung” from a concept for civil defense, which the government is requested to adopt on Wednesday. According to the report, the population should be able to protect themselves in an emergency before calling government action to ensure an adequate supply of food, water, energy and cash. Therefore, the population should also be ‘advised’, to hold, for a period of five days, two liters of drinking water per person per day, it is stated in the text drawn up by the Ministry of the Interior.

According to “FAS” is the first strategy for civil defense since the end of the Cold War in 1989. She had been given in 2012 by the Budget Committee of the Bundestag in order. In the 69-page concept it is stated “that an attack on the territory of Germany, which requires a conventional defense, play” was. Nevertheless, it was necessary, “nevertheless to such sufficiently prepared not fundamentally excluded for the future development of life-threatening”. Interestingly, the FAZ reported in this regard that the Federal Government also worry about their own safety. The newspaper writes that in the paper literally stand “. Precautions are the event the task of the service office to meet in order to relocate the performance of duties of a public authority to another, sheltered place (Emergency Seat) can”

It is not clear whether these preparations related to a possible war. The federal government has recently changed its military strategy and regarded Russia as an enemy. NATO considers Russia an attack on NATO territory possible. Therefore, NATO wants the US and the EU also defend outside their own territory. Reuters writes that in the concept of “the need for a reliable alarm system, a better structural protection of buildings and sufficient capacity discussed in the health system” would. Reuters: “The civilian support of the armed forces should be again a priority. These included modifications to the traffic steering when the Bundeswehr must relocate combat units. “

Read more …

Very far from over. Please help me support. Read: Meanwhile in Greece..

• ‘Nobody Believes In Anything Anymore’: Greek Crisis is Far From Over (CNBC)

With Europe facing pressing crises including the refugee crisis, economic slowdown and political disintegration following the Brexit vote, it’s easy to forget that Greece’s political and economic crisis dominated headlines last summer. One year on and a third bailout worth €86 billion later, arrived at after tortuous negotiations between Greece and its lenders, and the situation in Greece is a game of two halves with many Greeks suffering – and some trying to make something out of a bad situation. Greece’s government has been forced to make widespread spending cuts over the course of its three separate bailout programs, making life harder for most Greeks of ordinary means. The cuts have affected all ages with unemployment rising to the highest level in Europe.

A survey by independent analysis firm DiaNEOsis in June revealed that many Greeks were facing an increasing struggle to get by. Extreme poverty in the Greek population (of 11 million people) had risen from 2.2% in 2009, to 15% in 2015, the public opinion survey of 1,300 people showed, with 1.6 million people now living below in extreme poverty. One resident of the northern Greek city of Thessaloniki, Evangelos Kyrimlis, told CNBC that the Greece’s crisis had taken its toll on society, both at a local and national level. “Disillusionment is the first big thing that’s going on,” he noted. “Nobody believes in anything anymore.” “The second big thing is withdrawal. People have retreated to their families and fight only for the family survival. Society has been fragmented,” he said.

Kyrimlis works for his partner’s family firm, having returned to Greece after working for an engineering consultancy in London. Returning to Greece in the midst of the country’s financial breakdown, he said he now noted an increase in animosity between people, saying there was a “widespread hatred not directed to anyone in particular, it’s like all against all.”

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“When they reached the port in Sicily the Italian Red Cross were there, with coffins and flowers for every person who died [..] The tough MSF doctors who have been going from war to war cried because of the flowers..”

• Rescuing Refugees: ‘You Never Get Used To It – And That’s A Good Thing’ (G.)

It was the silence of the passengers that Hassiba Hadj-Sahraoui first noticed. Usually when the humanitarian rescue boat sees a tiny dinghy bobbing about in the Mediterranean there’s frantic waving and shouting. “When our team approached in smaller boats and everyone was so quiet we realised something was wrong,” she says. “We asked permission to go aboard and that’s when we realised the others had been waiting for rescue for hours with dead bodies in the boat.” Twenty-two bodies were recovered that day (21 of them women) and 209 people were saved by the crew of the Aquarius, a boat run by Medicins Sans Frontieres (MSF) that patrols the refugee route between Libya and Italy. MSF advocacy manager Hadj-Sahraoui got an idea of how they died from the testimonies of survivors once they were safely on the Aquarius.

A wooden board that had been placed along the bottom of the dinghy broke and water started to come in, mixing with leaking fuel cans. A panic ensued and the 22 people died either in a stampede or drowning in a mix of water and fuel. The people they rescued were in shock. “The priority – it’s sad to say – is with the living,” says Hadj-Sahraoui. “So there’s a very quick medical team, trying to assess needs.” Once the survivors were on the Aquarius they were each given a blanket, water and some food. The people who were soaked in fuel were sent for a shower, because the fuel and sea salt cause nasty burns. Then they registered them. Hadj-Sahraoui speaks Arabic, French and English, a great advantage in her line of work. She asks each person where they are from, how old they are, and if they are travelling alone.

“We don’t wear sunglasses, because we need to have eye contact. It’s about humanity. It’s big smiles saying: ‘You’re now safe. This is where you are. This is what’s going to happen next.’ What surprised me is how polite people are. How they take their time to say thank you.” Once all the survivors were safely on board, and being tended to, the crew of the Aquarius also felt it was right on this occasion to recover the bodies of the women and one man who died. “For several hours we tried to keep the living on one side of the boat. The bodies had spent hours in the water, so we were trying to protect the living from seeing that. The doctor took pictures for identification, because families will never know what happened to their loved ones.” When they reached the port in Sicily the Italian Red Cross were there, with coffins and flowers for every person who died.

“The tough MSF doctors who have been going from war to war cried because of the flowers,” says Hadj-Sahraoui. “I was one of the suckers who cried a lot.” She says that people who do humanitarian work need to learn to take care of themselves, because there’s a lot of emotional burnout. MSF staff have psychological debriefings before and after they go on missions, and after extreme experiences like this one.

Read more …

No-one’s going to stop this.

• Inuit Fear Being Overwhelmed As ‘Extinction Tourism’ Descends On Arctic (G.)

In a few days, one of the world’s largest cruise ships, the Crystal Serenity, will visit the tiny Inuit village of Ulukhaktok in northern Canada. Hundreds of passengers will be ferried to the little community, more than doubling its population of around 400. The Serenity will then raise anchor and head through the Northwest Passage to visit several more Inuit settlements before sailing to Greenland and finally New York. It will be a massive undertaking, representing an almost tenfold increase in passenger numbers taken through the Arctic on a single vessel – and it has triggered considerable controversy among Arctic experts. Inuit leaders fear that visits by giant cruise ships could overwhelm fragile communities, while others warn that the Arctic ecosystem, already suffering the effects of global warming, could be seriously damaged.

“This is extinction tourism,” said international law expert Professor Michael Byers, of the University of British Columbia. “Making this trip has only become possible because carbon emissions have so warmed the atmosphere that Arctic sea ice in summer is disappearing. The terrible irony is that this ship – which even has a helicopter for sightseeing and a huge staff-to-passenger ratio – has an enormous carbon footprint that is only going to make things even worse in the Arctic.” The Serenity is by far the biggest cruise vessel to traverse the fabled Northwest Passage, whose exploration has claimed the lives of hundreds of seamen. The ship has a crew of 655 and carries 1,070 passengers, who have paid between £19,000 and £120,000 for a voyage that Crystal Cruises says will take them on an “intrepid adventure” from Anchorage in Alaska to New York over 32 days.

For its part, Crystal insists its clients will have to follow a strict code of conduct during shore visits, while the ship’s air, water and rubbish discharges will be tightly controlled. Only low-sulphur fuel will be burned in the Serenity’s engines, said a spokesman. The Serenity will be accompanied by the UK icebreaker the RSS Ernest Shackleton, he added.

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Debt Rattle August 15 2016

Aug 152016
 
 August 15, 2016  Posted by at 8:45 am Finance Tagged with: , , , , , , , , , ,  2 Responses »


NPC R.P. Andrews fire, 628 D Street N.W, Washington, DC 1912

• Younger Generation In UK Face Overwhelming Pensions Bill (G.)
• British Millennials Are ‘Collateral Damage’ as Pension Gap Grows (BBG)
• A Simple Test to Dispel the Illusion Behind Stock Buybacks (NYT)
• The Bank of Japan’s Unstoppable Rise to Shareholder No. 1 (BBG)
• Japan’s Economy Stalls In April-June, Casts Doubts On Abe’s Policies (R.)
• China Is Hoarding Cash At The Fastest Pace Since Lehman (ZH)
• China Signals Growth, Not Political Disputes, Should Dominate G20 (R.)
• Cheap Money Fuels Boom In Germany, But Fails To Lift France And Italy (CNBC)
• Enough Austerity. More Fiscal Stimulus, Please (BBG Ed.)
• London Set To Bear Brunt Of Post-Brexit Downturn (G.)
• Give Us EU Visa Freedom In October Or Abandon Migrant Deal, Turkey Says (R.)
• Britain’s Vast National Gamble On Wind Power May Yet Pay Off (AEP)

 

 

“.. it leaves young people paying twice, saving for their own pensions while also paying for the pensions of older generations through taxation.”

“Since 2007, the real disposal income of pensioners has risen by almost 10%. Those over the age of 65 have harvested fully two-thirds of that £2.7tn increase in national wealth. By contrast, since 2007, working-age households with children have achieved income gains of only about 3%, while the incomes of those without children have fallen by 3%,” he said.

This can only go horribly wrong, there is no other possible outcome, but it’s a topic politicians either don’t understand or don’t want to touch. Which is why I wrote Basic Income in The Time of Crisis a month ago. There is not much time left.

• Younger Generation In UK Face Overwhelming Pensions Bill (G.)

Older people have saddled the younger generation with an excessive bill for state pensions while grabbing an ever-greater share of NHS spending, according to a report that calls for intergenerational rebalancing. The report from the Intergenerational Foundation (IF) said spending promises on state and public sector pensions are “overwhelming young people’s prospects”. The thinktank is calling on the prime minister, Theresa May, to abandon triple lock protection, which promises that the state pension will rise each year by whatever is highest out of inflation measured by the consumer price index, average earnings growth or 2.5%. The former pensions minister Ros Altmann has called for the triple lock to be scrapped. The Department for Work and Pensions has declined to rule out a review of the “totemic” policy in the coming months.

The report estimates that workers are paying £2,846 a year each to cover the cost of paying state pensions. Public sector pension liabilities, for schemes such as retired civil servants, have risen by 12% to nearly £44,000 per worker, with total liabilities at £1.4tn, it added. Angus Hanton, the co-founder of IF, said: “Public sector pensions represent one of the largest unfunded burdens for younger taxpayers, who will not retire at the same age, or on the same terms, while having to contribute more to their own pensions. “Increasing retirement ages and moving to career average pensions will not be enough to stall the pension burden avalanche that is bearing down on the young.

Auto-enrolment is an apparent success, except that it leaves young people paying twice, saving for their own pensions while also paying for the pensions of older generations through taxation.” But charity Age UK said the vast majority of pensioners have contributed throughout their life to the state pension, which remains lower than the amount paid in many other western countries. Caroline Abrahams, the charity director at Age UK, pointed out that 1.6 million older people live in poverty in the UK. “A strong pensions system that provides a decent quality of life in retirement is central to a civilised society and in the best interests of us all,” she said.

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“Postal-service operator Royal Mail said last week it may not be able to keep its program running beyond 2018. That’s because its annual contributions could more than double to over £900 million.”

• British Millennials Are ‘Collateral Damage’ as Pension Gap Grows (BBG)

Britain’s millennials, already suffering for the economic mistakes of the past, now face the prospect of having to pay for the country’s future. Pension-fund liabilities in the U.K. increased to a record £1 trillion ($1.3 trillion) after the Bank of England’s interest-rate cut this month, hurt by quantitative easing and razor-thin yields. It’s Britain’s version of what Duquesne Chairman Stanley Druckenmiller calls “Generational Theft” in the U.S. Plunging bond yields have caused pension liabilities to balloon and it could get even worse because the BOE will probably reduce interest rates further this year. Deficits for defined-benefit-pension funds already rose by more than 40% in the two months through July, following the vote to leave the EU and the central bank’s subsequent decision to increase quantitative easing, according to consulting firm Mercer.

“The Bank of England clearly believes that the effect on our pension system is acceptable long-term collateral damage” to prevent a short-term recession, said David Blake, professor of pension economics at London’s Cass Business School. Younger workers will “have to save more – which they appear reluctant to do – or be prepared to work much longer.” The increased bond-purchase program has had a relatively limited impact on pension deficits, according to the minutes of the BOE’s Monetary Policy Committee meeting on Aug. 3. While the fund managers have to move into riskier assets, that helps to support the economy, Governor Mark Carney said Aug. 4. “That makes it less likely that we will have a very long period of high unemployment, low output, and very low interest rates,” Carney said.

Money managers, however, appear to be unwilling to offload their higher-yielding gilts because they’re worried about generating enough returns to pay their members. The BOE last week failed to find enough investors who were prepared to sell their longer-maturity gilts, a slice of the credit market dominated by pensions and insurers. Companies that run defined-benefit pension funds are also starting to worry. Postal-service operator Royal Mail said last week it may not be able to keep its program running beyond 2018. That’s because its annual contributions could more than double to over £900 million.

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“..who really wants to own a company in the process of liquidating itself?”

• A Simple Test to Dispel the Illusion Behind Stock Buybacks (NYT)

Stock investors have had one sweet summer so far watching the markets edge higher. With the Standard & Poor’s 500-stock index at record highs and nearing 2,200, what’s not to like? Here’s something. As shares climb, so too do the prices companies are paying to repurchase their stock. And the companies doing so are legion. Through July of this year, United States corporations authorized $391 billion in repurchases, according to an analysis by Birinyi Associates. Although 29% below the dollar amount of such programs last year, that’s still a big number. The buyback beat goes on even as complaints about these deals intensify. Some critics say that top managers who preside over big stock repurchases are failing at one of their most basic tasks: allocating capital so their businesses grow.

Even worse, buybacks can be a way for executives to make a company’s earnings per share look better because the purchases reduce the amount of stock it has outstanding. And when per-share earnings are a sizable component of executive pay, the motivation to do buybacks only increases. Of course, companies that conduct major buybacks often contend that the purchases are an optimal use of corporate cash. But William Lazonick, professor of economics at the University of Massachusetts Lowell, and co-director of its Center for Industrial Competitiveness, disagrees. “Executives who get into that mode of thinking no longer have the ability to even think about how to invest in their companies for the long term,” Mr. Lazonick said in an interview. “Companies that grow to be big and productive can be more productive, but they have to be reinvesting.”

[..] The net profit test, said Gary Lutin, a former investment banker who heads the forum, “cuts through to the essential logic of comparing a process that grows a bigger pie – reinvestment – to a process that divides a shrunken pie among fewer people: share buybacks. “It’s pretty obvious,” he continued, “that even mediocre returns from reinvesting in the production of goods and services will beat what’s effectively a liquidation plan.” Investors may be dazzled by the earnings-per-share gains that buybacks can achieve, but who really wants to own a company in the process of liquidating itself? Maybe it’s time to ask harder questions of corporate executives about why their companies aren’t deploying their precious resources more effectively elsewhere.

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And if companies don’t buy stocks, central banks will. It’s the only way left to delay a giant crash.

• The Bank of Japan’s Unstoppable Rise to Shareholder No. 1 (BBG)

The Bank of Japan’s controversial march to the top of shareholder rankings in the world’s third-largest equity market is picking up pace. Already a top-five owner of 81 companies in Japan’s Nikkei 225 Stock Average, the BOJ is on course to become the No. 1 shareholder in 55 of those firms by the end of next year, according to estimates compiled by Bloomberg from the central bank’s exchange-traded fund holdings. BOJ Governor Haruhiko Kuroda almost doubled his annual ETF buying target last month, adding to an unprecedented campaign to revitalize Japan’s stagnant economy. While bulls have cheered the tailwind from BOJ purchases, opponents say the central bank is artificially inflating equity valuations and undercutting efforts to make public companies more efficient.

Traders worry that the monetary authority’s outsized presence will make some shares harder to buy and sell, a phenomenon that led to convulsions in Japan’s government bond market this year. “Only in Japan does the central bank show its face in the stock market this much,” said Masahiro Ichikawa at Sumitomo Mitsui Asset Management. “Investors are asking whether this is really right.” While the BOJ doesn’t acquire individual shares directly, it’s the ultimate buyer of stakes purchased through ETFs. Estimates of the central bank’s underlying holdings can be gleaned from the BOJ’s public records, regulatory filings by companies and ETF managers, and statistics from the Investment Trusts Association of Japan. Forecasts of the BOJ’s future shareholder rankings assume that other major investors keep their positions stable and that policy makers maintain the historical composition of their purchases.

[..] Japan’s government bond market offers a guide to the risks of further intervention in stocks, said Akihiro Murakami, the chief quantitative strategist for Japan at Nomura in Tokyo. JGB volatility soared to the highest level since 1999 in April, while trading volume has slumped as the central bank’s holdings swelled to about a third of the market. It’s still buying at an annual rate of 80 trillion yen. “If the BOJ does not sell stocks, then liquidity will disappear,” Murakami said. “As liquidity falls, the number of shares you can buy starts to decline – the same thing that’s happening in the JGB market.” The central bank owned about 60% of Japan’s domestic ETFs at the end of June, according to Investment Trusts Association figures, BOJ disclosures and data compiled by Bloomberg. Based on a report released on Friday by the Investment Trusts Association, that figure rose to about 62% in July.

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Abenomics is way beyond doubts.

• Japan’s Economy Stalls In April-June, Casts Doubts On Abe’s Policies (R.)

Japan’s economic growth ground to a halt in April-June after a stellar expansion in the previous quarter on weak exports and capital expenditure, putting even more pressure on premier Shinzo Abe to come up with policies that produce more sustainable growth. The world’s third-largest economy expanded by an annualized 0.2% in the second quarter, less than a median market forecast for a 0.7% increase and a marked slowdown from a revised 2.0% increase in January-March, Cabinet Office data showed on Monday. The weak reading underscores the challenges policymakers face in putting a sustained end to two decades of deflation with the initial boost from Abe’s stimulus programs, dubbed “Abenomics,” fading. “Overall it looks like the economy is stagnating. Consumer spending is weak, and the reason is low wage gains.

There is a lot of uncertainty about overseas economies, and this is holding back capital expenditure,” said Norio Miyagawa, senior economist at Mizuho Securities. “The government has already announced a big stimulus package, so the next question is how the Bank of Japan will respond after its comprehensive policy review, which is sure to lead to a delay in its price target.” On a quarter-on-quarter basis, GDP marked flat growth in April-June, weaker than a median market forecast for a 0.2% rise. Private consumption, which accounts for roughly 60% of GDP, rose 0.2% in April-June, matching a median market forecast but slowing from a 0.7% increase in the previous quarter. Capital expenditure declined 0.4% in April-June after a 0.7% drop in the first quarter, the data showed, suggesting that uncertainty over the global economic outlook and weak domestic markets are keeping firms from boosting spending.

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One word: FEAR.

• China Is Hoarding Cash At The Fastest Pace Since Lehman (ZH)

The last few months have seen trillions of dollars of fresh credit puked into existence in China to enable goal-seeked growth numbers to creep lower (as opposed to utterly collapse). The problem is… the Chinese are hoarding that cash at the fastest pace since Lehman as liquidity concerns flood through the nation. China’s M2, a broad gauge of money supply including savings deposits, rose at the slowest pace in 15 months and trailed the government’s full-year target of +11% in July. But, as Bloomberg details, by contrast, M1, the total of cash, checks and demand deposits, rose at the quickest pace in six years…

That shows companies “are holding all this cash, but investment returns are low and there are few options for projects,” said Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen.

In fact, no matter what has been done since the Chinese stock market crashed, the Chinese have been hoarding cash…

In fact, the hoarding of cash in China corresponded with the top in 1999/2000, and the top in 2007…

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“..If people don’t feel like they are beneficiaries of economic development, if they don’t think their lot in life is improving, that’s when they start getting all kinds of ideas.” We wouldn’t want that, would we?

• China Signals Growth, Not Political Disputes, Should Dominate G20 (R.)

China expects next month’s summit of the G20 which it is hosting will focus on boosting economic growth and other financial issues rather than disputes like the South China Sea, senior officials said on Monday. The summit of the world’s 20 biggest economies in the eastern city of Hangzhou will be the highlight of President Xi Jinping’s diplomatic agenda this year, and the government is keen to ensure it proceeds smoothly. The Sept 4-5 leaders’ meeting comes as clouds continue to hover over global growth prospects and worries about China’s own slowing economy. Last month’s meeting of G20 policymakers was dominated by the impact of Britain’s exit from Europe and fears of rising protectionism.

Yi Gang, a vice governor of the People’s Bank of China, said the summit will focus on how to stimulate sluggish global economic growth through open, inclusive trade and the development of robust financial markets. “We need to instil market confidence and ensure there are no competitive devaluations but rather let the market determine exchange rates,” Yi told a news briefing, adding this would be the first G20 to discuss foreign exchange markets in such detail. The G20 will also discuss how to better monitor and respond to risks presented by global capital flows, he said. Despite increasingly protectionist rhetoric around the world, the G20 is strongly opposed to anti-trade and anti-investment sentiment, Vice Finance Minister Zhu Guangyao said.

“We really do need to make sure that the people, the public, benefit from economic development and growth. If people don’t feel like they are beneficiaries of economic development, if they don’t think their lot in life is improving, that’s when they start getting all kinds of ideas.”

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Why the euro is hammering the EU. And will be the end of it.

• Cheap Money Fuels Boom In Germany, But Fails To Lift France And Italy (CNBC)

Germany, for example, does not want zero interest rates and those trillions of euros created through ECB’s massive asset purchases. Germany is a fully-employed economy with balanced public finances and an exploding current account surplus of 9% of GDP. With a 1.8% annual growth in the first half of this year, the economy is running almost an entire percentage point above its potential and noninflationary growth. [..] Now, for a sharp contrast, take a look at Italy. On a quarterly basis, there has been virtually no growth in the first half of this year. In fact, the economy has been declining and stagnating over the last four years, and is currently experiencing a price deflation. Italy’s 3 million of unemployed in June (10.6% of the labor force) are only slightly below that level in the same month of last year. A shocking 36.5% of the country’s youth is out of work.

[..] Germany, close to one-third of the euro area’s products and services, does not need, and does not want, the ECB’s extraordinarily loose monetary policy. But the hard-pressed economies of France, Italy, Spain, Portugal and Greece – another 50% of the euro area output – need that oxygen to survive. Easy money is all they got. Their budget deficits of 2-5% of GDP, and their rising public debt of 120-185% of GDP, leave no room for fiscal policy to support demand, output and employment. The EU authorities, whoever they are, have relented from imposing penalties on Spain and Portugal – and have looked the other way in the case of France – for transgressing the euro area budget deficit commitments. But they continue to insist on labor market deregulations and on other socially and politically sensitive measures that act as short-term growth and employment killers.

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Bloomberg editorials blow wherever the wind does.

• Enough Austerity. More Fiscal Stimulus, Please (BBG Ed.)

Budget deficits may be coming out of retirement. With economies all over the world growing too slowly and little scope left for new monetary stimulus, governments are turning their attention back to fiscal policy. This shift in thinking is overdue. In many countries, though not all, fiscal expansion is not just possible but also necessary. A resumption of budget activism, if it happens, won’t be riskless, so caution will be needed. A stubborn commitment to fiscal austerity, though, would be riskier still. The immediate response to the 2008 crash included fiscal easing – sometimes deliberate and sometimes the automatic consequence (higher public spending, lower tax revenues) of slumping activity. In most cases, expansionary budgets lessened the impact of collapsing demand, but they also pushed up public debt.

Before long, governments started tightening their budgets to get debt back under control. With demand still lacking, the hope was that monetary expansion would be enough to support recovery. It wasn’t. Governments have found that monetary policy is losing its potency. Interest rates are close to zero in many countries, and in some even negative. Huge bond-buying programs – QE – have delivered an additional monetary punch, but again with diminishing effects, and with a growing risk of financial instability as well. So fiscal policy, despite the recent growth of public debt, is back on the agenda. Central banks have been leading the call. In June, Fed Chair Janet Yellen told the Senate Banking Committee that U.S. fiscal policy had “not played a supportive role.”

In July, the ECB’s chief economist, Peter Praet, said “monetary policy cannot be the only remedy to our current economic challenges.” Governments are responding. Following the U.K.’s decision to quit the EU, the new Chancellor of the Exchequer, Philip Hammond, has promised a break with his predecessor’s approach and says he will “reset” fiscal policy. Added investment in infrastructure is under consideration as part of a new industrial strategy.

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Blame it on the bubble, not the Brexit. That would be shooting the messenger.

• London Set To Bear Brunt Of Post-Brexit Downturn (G.)

London could bear the brunt of a post-Brexit vote downturn, according to economic indicators in the weeks since the EU referendum pointing to job cuts, falling house prices and a decline in business activity in the capital. London’s economy was relatively unaffected by the previous downturn, compared with other UK regions, but early signs from the latest bout of turmoil suggest that it might not get off so lightly again, economists have said. This could have consequences for the government’s tax receipts and overall growth, given the city’s contribution to the UK economy. One key concern about the impact on London of the vote to leave the EU stems from the capital’s dependence on financial services.

London could lose its status as Europe’s financial capital if the UK leaves the single market and City banks are stripped of their lucrative EU “passports” that allow them to sell services to the rest of the bloc. Samuel Tombs, the chief UK economist at consultancy Pantheon Macroeconomics, said: “London was unscathed by the last recession, but its dependence on finance now is its achilles heel.” He highlighted a potential change of fortunes for London in a note to clients after surveys showed that companies in the capital had taken a hit from the referendum result. London has been the UK’s growth star for the past two decades, outperforming the rest of the country, Tombs said. “Surveys since the referendum, however, indicate that the capital is at the sharp end of the post-referendum downturn.” added.

London was the worst performer out of 12 regions on one measure of business activity for the weeks following 23 June, the day of the referendum. Companies in the capital cut jobs and suffered the sharpest fall in output since early 2009, when the UK was mired in recession, according to the Lloyds Bank regional purchasing managers’ index. Clients appeared reluctant to commit to new contracts, London businesses said, leading to a slump in order books. “The capital was hit harder than any other UK region,” said Paul Evans, the regional director for London at Lloyds commercial banking.

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How deep a whole will Merkel dig this time around?

• Give Us EU Visa Freedom In October Or Abandon Migrant Deal, Turkey Says (R.)

The EU should grant Turks visa-free travel in October or the migrant deal that involves Turkey stemming the flow of illegal migrants to the bloc should put be put aside, Foreign Minister Mevlut Cavusoglu told a German newspaper. Asked whether hundreds of thousands of refugees in Turkey would head to Europe if the EU did not grant Turks visa freedom from October, he told Bild newspaper’s Monday edition: “I don’t want to talk about the worst case scenario – talks with the EU are continuing but it’s clear that we either apply all treaties at the same time or we put them all aside.” Visa-free access to the EU – the main reward for Ankara’s collaboration in choking off an influx of migrants into Europe – has been subject to delays due to a dispute over Turkish anti-terrorism legislation and Ankara’s crackdown after a failed coup.

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When Ambrose starts talking about energy -or anything other than finance, for that matter- I brace myself. He tends to go into cheerleading mode. In this piece, the only problem he sees is intermittency, and even that mostly as not a real issue. Advancements in technology, don’t you know…

• Britain’s Vast National Gamble On Wind Power May Yet Pay Off (AEP)

Wind power has few friends on the political Right. No other industry elicits such protest from the conservative press, Tory backbenchers, and free market economists. The vehemence is odd since wind generates home-made energy and could be considered a ‘patriotic choice’. It dates back to the 1990s and early 2000s when the national wind venture seemed a bottomless pit for taxpayer subsidies. Pre-modern turbines captured trivial amounts of energy. The electrical control systems and gearboxes broke down. Repair costs were prohibitive. Yet as so often with infant industries, early mishaps tell us little. Costs are coming down faster than almost anybody thought possible. As the technology comes of age – akin to gains in US shale fracking – the calculus is starting to vindicate Britain’s vast investment in wind power.

The UK is already world leader in offshore wind. The strategic choice now is whether to go for broke, tripling offshore capacity to 15 gigawatts (GW) by 2030. The decision is doubly-hard because there is no point dabbling in offshore wind. Scale is the crucial factor in slashing costs, so either we do it with conviction or we do not do it all. My own view is that the gamble is worth taking. Shallow British waters to offer optimal sites of 40m depth. The oil and gas industry knows how to operate offshore. Atkins has switched its North Sea skills seamlessly to building substations for wind. JDR in Hartlepool sells submarine cables across the world. Wind power is a natural fit.

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Debt Rattle March 17 2016

Mar 172016
 
 March 17, 2016  Posted by at 9:12 am Finance Tagged with: , , , , , , , , ,  9 Responses »


Christopher Helin Kissel military Highway Scout Kar at Multnomah Falls, Oregon 1918

• US Lost 30% Of Manufacturing Jobs Between 1998 And 2016 (WaPo)
• Rich Countries Have A $78 Trillion Pension Problem (CNBC)
• The Budget That Wasn’t (Halligan)
• Asia Cheers as Yellen Succumbs to Cry-Bullies (Barron’s)
• China’s Exporters Struggle as Yuan Swings Disrupt Business (BBG)
• China Banks Face Credit Risks From Ties To Wealth Management Products (CNBC)
• America’s No. 1 Coal Miner to Seek Bankruptcy Protection (WSJ)
• Energy Sector Defaults Could Start Falling Like Dominoes (MW)
• Oil Investors See $7.4 Billion Vanish as Dividends Are Targeted (BBG)
• Big-Oil Bailout Begins as Pemex’s Debt Spirals Down (WS)
• Munich Re Rebels Against ECB With Plan To Store Cash In Vaults (BBG)
• Netherlands Votes To Ban Weapons Exports To Saudi Arabia (Ind.)
• Austria’s Highest Court Proclaims Asylum Cap Illegal (NE)
• Huge Challenges Await EU’s Refugee Plan (FT)
• EU Prepares To Scale Back Resettlement Of Syrian Refugees (Guardian)
• Three Migrants Dead As 2,400 Rescued Off Libya (AFP)

Killing off your manufacturing base is the worst thing you can do.

• US Lost 30% Of Manufacturing Jobs Between 1998 And 2016 (WaPo)

Thomaston, Ga. — Not so long ago, this rural town an hour outside Atlanta was a hotbed of textile manufacturing. In the late 1990s, there were six major mills here. Their machines spun children’s clothing for Carter’s, made tire cords for B.F. Goodrich and produced bed sheets for J.C. Penney, Sears and Walmart. In all, they employed about 4,000 workers. By 2001, all of those jobs were gone. What has happened here in the 15 years since then tracks the slow comeback of manufacturing in the United States. Two textile companies have come in, investing millions in new technology and adding about 280 jobs in this town where one-third of the residents still live below the poverty line. It is becoming more affordable to produce textiles in the United States as machines become more efficient, companies say.

Major firms are more willing to pay higher prices for domestically sourced products, and rising wages in China mean there is less of an advantage to making products overseas. Last week, there was new cause for celebration when Marriott International announced that all towels in its 3,000 U.S. hotels would be manufactured by Standard Textile in plants here and in Union, S.C., a move expected to bring $23 million worth of business and 150 jobs back to the United States. The hotelier joins a number of other companies, including Walmart, Apple and General Electric, that have pushed for more U.S.-made products in recent years. But manufacturing employment here is a small fraction of what it was. Although a company such as Standard Textile once might have employed close to 1,000 people, today it has a couple of hundred workers who oversee machines that spin, scour and weave cotton.

“We’ve had to redefine who we were because we were a mill town for so long,” said Kyle Fletcher, executive director of the Thomaston-Upton Industrial Development Authority. “We lost a lot of the middle class.” The United States lost 30% of its manufacturing jobs between 1998 and 2016, according to Federal Reserve data. As of February, the country had 12.3 million workers in the sector, down from 17.6 million in April 2008. In February 2010, that figure was 11.5 million. There are hints that manufacturing is returning to the United States in small ways: The nation’s quarterly output has climbed steadily since the end of the recession, growing 35% and adding 650,000 jobs since mid-2009, according to the Fed. But the glory days are gone, Fletcher said. About one-third of Thomaston’s 9,000 residents live below the poverty line, compared with 23% in 1999. Average income has dropped more than 20% since 1999, to $14,243 from $18,193, according to U.S. Census data.

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Pon Zi.

• Rich Countries Have A $78 Trillion Pension Problem (CNBC)

Dreams of lengthy cruises and beach life may be just that, with 20 of the world’s biggest countries facing a pension shortfall worth $78 trillion, Citi said in a report sent on Wednesday. “Social security systems, national pension plans, private sector pensions, and individual retirement accounts are unfunded or underfunded across the globe,” pensions and insurance analysts at the bank said in the report. “Government services, corporate profits, or retirement benefits themselves will have to be reduced to make any part of the system work. This poses an enormous challenge to employers, employees, and policymakers all over the world.” The total value of unfunded or underfunded government pension liabilities for 20 countries belonging to the OECD – a group of largely wealthy countries — is $78 trillion, Citi said. (The countries studied include the U.K., France and Germany, plus several others in western and central Europe, the U.S., Japan, Canada, and Australia.)

The bank added that corporates also failed to consistently meet their pension obligations, with most U.S. and U.K. corporate pensions plans underfunded. Countries with large public pension systems in Europe appear to have the greatest problem. Citi noted that Germany, France, Italy, the U.K., Portugal and Spain had estimated public sector pension liabilities that topped 300% of GDP. Improvements in health care mean retirees need to string out their income for longer. Meanwhile, the increase in the retirement-age population versus the working population is straining government pension schemes. Several countries, including the U.K., France and Italy are gradually hiking retirement ages. Citi recommended that governments explicitly link the retirement age to expected longevity. It also advised that government-funded pensions should serve merely as a “safety net,” rather than the prime pension provider, and that corporate pensions should be “opt out” rather than “opt in” to encourage greater enrollment.

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Osborne’s not worried. He knew everyone would be talking about his sugar tax. Great diversion tactic.

• The Budget That Wasn’t (Halligan)

George Osborne’s latest Budget pretended to be many things it wasn’t. The Chancellor talked repeatedly about “borrowing falling”, yet in the next three years, borrowing on our behalf goes sharply up. He warned about “financial instability” and “storm clouds” on the economic horizon, yet he’s relying on growth assumptions that are surely too optimistic. While barely mentioning the EU referendum, the Chancellor’s determination to avoid Brexit pervaded almost every paragraph of his 63-minute Commons statement. Far from being “a Budget for the next generation” – a phrase wielded 18 times – his policies were aimed at attracting as many “Remain” voters as he could, while doing as little as possible to upset those still undecided. Rather than a “long-term Budget” (19 mentions), the package was designed for the next three months, ahead of the EU vote that will decide Osborne’s political future.

What we’ve just seen, then, was possibly the most short-term “long-term budget” in history. Bound to get the chattering classes chuntering (“G&T slimline, anyone?”), Osborne’s flab-fighting “sugar levy” was cynically tactical, broadening his appeal among non-Conservatives, while diverting attention from the statistical sleight of hand at the heart of this Budget. “Borrowing continues to fall,” the Chancellor told us. Really? It’s astonishing that, a full eight years after the financial crisis, and after a surge in growth and employment, the UK is still borrowing more than £72bn a year. Government debt stands at £1,591bn, 50pc up since Osborne took office, more than £50,000 per person in full or part-time employment. The Government is spending £46bn annually on interest payments alone – more than on defence – and that’s with interest rates at historic lows.

As the debt and rates spiral upwards, that interest bill can only rise, all at the expense of spending on services. Instead of cutting borrowing on Wednesday, the Budget fine print shows that, over the next three years, we’ll be adding another £116bn to our national debt – more than £36bn up on the borrowing projections in last November’s Autumn Statement. We’ll probably end up borrowing even more, of course, than these already gargantuan numbers, not least if growth is lower than forecast. Since last November, some £5 trillion has been wiped off global stock markets. Morgan Stanley now warns clients of a 30pc chance of global recession over the next year. Many financiers privately judge the chance of a financial collapse to be far higher. “As one of the most open economies in the world, the UK isn’t immune to global slowdowns and shocks,” Osborne told the Commons. Yet, over each of the next six years, the Budget borrowing projections rest on growth of 2pc or more. While I obviously hope that happens, it amounts to a mighty optimistic assumption.

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“Yellen has surrendered after achieving victory.”

• Asia Cheers as Yellen Succumbs to Cry-Bullies (Barron’s)

Well, here’s another nice mess you’ve gotten us into, Janet. U.S. Fed Chair Janet Yellen left rates unchanged this week, and confided after the Fed’s two-day policy meeting that, despite continuing improvement in the U.S. economy, weak global economic growth and turbulent markets had spooked the Fed into halving the number of times it expects to raise rates this year, to two from four. Yellen’s capitulation is already producing a predictable whoop of jubilation in Asian markets, as it confirms this column’s observation that the hot money crowd has succeeded in cry-bullying global central bankers into keeping the punchbowl of cheap cash full to overflowing. Stocks in Shanghai and Hong Kong rose by more than 1%, while Philippine stocks were up almost 2%.

While it’s often the case that Asian stocks move reflexively with those on Wall Street, today it’s all about the U.S. dollar, which fell 1% against the Japanese yen and about 0.7% against the Euro. Even though Tokyo stocks are up, the Fed’s move is bad news for Japan and Europe as well as their respective central bankers, Haruhiko Kuroda and Mario Draghi. As this column explained yesterday, both gentlemen are working furiously to use a negative interest-rate policy to weaken their currencies, boost inflation and revive economic growth. Hearing that Yellen won’t be riding to the rescue soon with another rate hike will come as bad news to them. But it’s excellent news for Asia’s smaller markets, since investors hunting for higher yields can no longer count on getting more bang for the buck out of Yellen.

Indonesia’s rupiah, which has risen 6% already this year, gained another 0.8% after the Fed’s announcement. Malaysia’s ringgit – what corruption scandal? – rose 1% and South Korea’s won soared by 2.5%. Don’t get too excited. While a more reluctant Fed extends the risk-on rally for Asian assets, it does not bode well for investors looking for fundamental value or an upturn in corporate profitability. For starters, the Fed is once again behind the market. Even as they’ve kicked and screamed after the Fed ended a 10-year, zero interest-rate policy by raising rates last December, sending Asian stocks down roughly 15% by mid-February, investors are starting to adjust to the reality that the U.S. economy is not sinking into recession. Jobs and inflation are improving and markets that early this year were predicting no rate hike until 2017 were yesterday betting on another hike as early as July. Yellen has surrendered after achieving victory.

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Will exporters force Beijing to devalue?

• China’s Exporters Struggle as Yuan Swings Disrupt Business (BBG)

The yuan’s swings are becoming a headache for the Chinese companies that should have been the biggest beneficiaries of last year’s devaluation. In rare overt comments, exporters including Midea and TCL are expressing apprehension about the nation’s exchange-rate policy. Two said the increased volatility has made it difficult to manage costs because customers are choosing to place only short-term orders, while a third said the yuan was allowed to strengthen far too much in the past few years. “Overseas clients are taking into account losses that can be caused by exchange-rate swings and are placing shorter-term orders with smaller volumes, which creates difficulty for our operations,” said Yuan Liqun, VP at Midea, China’s biggest maker of household appliances by market share.

“The fluctuations last year were relatively significant. Companies can accept a market-based yuan that moves within a reasonable range.” Exports slumped 25% in February from a year earlier and a gauge of overseas orders contracted for the 17th month in a row, while the currency’s volatility held near the highest levels since August’s shock devaluation. This illustrates the challenge facing Premier Li Keqiang as he balances the need to nudge the exchange rate lower to help an economy growing at the slowest pace in 25 years, while trying to avoid a run that would create financial instability. The currency, which has plunged 4.8% since last year’s devaluation, climbed in September and October, and dropped in the following three months before rebounding in February. It has strengthened 0.5% in March so far, almost wiping out this year’s losses. The wild swings contributed to an estimated $1 trillion in capital outflows last year.

The yuan, which Royal Bank of Canada says is currently overvalued, will face renewed selling pressure once the Federal Reserve decides to raise borrowing costs again. The median forecast in a Bloomberg survey of economists is for a drop of 4.1% by the end of the year. Its decline against the dollar in 2015 – the most in 21 years – masked a sixth straight annual gain against the exchange rates of China’s main trading partners, according to a BIS index. This shows that there is more room for depreciation, according to Fuyao Glass Industry, which makes automobile windows and whose clients include BMW and Volkswagen. “The yuan is strong, so Chinese companies can’t go abroad and most exporters are making losses,” Cho Tak Wong, chairman of Fuqing, Fujian-based Fuyao, said in an interview over the weekend. “China should allow the yuan to weaken. If the currency doesn’t depreciate, exports will be negatively influenced and export-focused firms will suffer.”

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“There were around 23.5 trillion yuan ($3.60 trillion) worth of WMPs outstanding at the end of 2015, up from around 15 trillion yuan a year earlier..”

• China Banks Face Credit Risks From Ties To Wealth Management Products (CNBC)

Chinese banks are starting to create a web of risk through their wealth management products (WMPs), raising concerns about the health of the financial system just as China’s economic growth has slowed to its weakest pace in 25 years. Retail investors are the majority of buyers of WMPs, which offer higher interest rates than a bank deposit. But it isn’t always clear what assets the funds are buying to finance those payouts. The industry publishes aggregated data on where WMPs tend to invest, but the disclosures of individual products can be vague. Overall, WMPs tend to invest in the industrial sector as well as industries related to local government and real estate, according to Fitch. All of these are segments of the economy suffering from overcapacity.

Most WMPs – as many as 74% – don’t carry the issuing bank’s guarantee that investors will be made whole at the end of the product’s term, which is usually less than six months, Fitch said. But even if the products fail to meet performance expectations, banks may choose to repay investors anyway to avoid the spectacle of mom and pop protesters in front of its branches – something that occurred outside a Hua Xia Bank branch near Shanghai in 2012, according to a Reuters report. When the WMP’s performance isn’t up to snuff, it can become a risk for more than just the issuing bank. “The fear is that investments are in industries that might not be generating cash so when they come due, the cash to repay investors might not be there.

There’s always pressure to roll them over,” Jack Yuan, associate director for financial institutions at Fitch, said last week. Additionally, some banks are investing in other banks’ WMPs – those investments are usually on banks’ balance sheets in a category called “investments classified as receivables,” Yuan noted. “There are a lot of interlinkages in the banking sector in terms of banks investing in other banks’ WMPs and calling on the interbank market for funding if they do go bad,” he said. “It’s going to be more and more difficult to resolve these if they do go bad.” There were around 23.5 trillion yuan ($3.60 trillion) worth of WMPs outstanding at the end of 2015, up from around 15 trillion yuan a year earlier, Fitch noted, with around 3,500 new ones offered each week.

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“Peabody’s share price has fallen to under $2.50 from more than $1,300 in 2008.”

• America’s No. 1 Coal Miner to Seek Bankruptcy Protection (WSJ)

Peabody Energy, the U.S.’s biggest coal miner, Wednesday posted a going-concern notice in a regulatory filing, warning of possible bankruptcy. A chapter 11 filing by Peabody, which operates 26 mines in the U.S. and Australia, would be the latest in a wave of bankruptcies to hit top American coal producers, including Arch Coal, Alpha Natural Resources, Patriot Coal and Walter Energy, as they wrestle with low energy prices, new regulations, and the conversion of coal-fired power plants to natural gas. Punctuating Peabody’s woes, the Energy Information Administration Wednesday said that 2016 “will be the first year that natural gas-fired generation exceeds coal generation.”

The EIA said Americans would get 33% of their electricity from gas in 2016, and 32% from coal. As recently as 2008, coal fed half of U.S. electricity consumption. The weakening demand is hurting markets. Coal prices have fallen 62% since 2011, and 18% in the past year, according to the EIA. That drop is crushing companies like Peabody. The company has now lost money in nine straight quarters, and in 2015 posted a $2 billion deficit. As of Dec. 31, it had $6.3 billion in debt and $261.3 million in cash. Peabody, whose biggest mining operations are in Wyoming, has also been weighed down by its ill-timed acquisition of Australia’s Macarthur Coal for $5.1 billion in 2011. Prices have been declining ever since. Company shares, which have already lost more than 95% of their value in the past 12 months, fell 44% in midday trading.

Peabody’s share price has fallen to under $2.50 from more than $1,300 in 2008. On Wednesday, Peabody pointed to uncertainty around global coal fundamentals, economic growth concerns of some major coal-importing nations and the potential for additional regulatory requirements on coal producers as reasons for its notice. Because of operating problems and other financial problems, “we may not have sufficient liquidity to sustain operations and to continue as a going concern,” the St. Louis-based miner said in a filing with the SEC. “We may need to voluntarily seek protection under chapter 11 of the U.S. bankruptcy code.” Peabody said it had delayed an interest-rate payment on two loans, triggering a 30-day grace period. If the payments aren’t made within 30 days, an event of default would be declared.

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Oh yeah!

• Energy Sector Defaults Could Start Falling Like Dominoes (MW)

Energy-sector bond defaults – and for some producers, bankruptcy risks – are piling up and coal liabilities aren’t the only culprit. Oil-and-gas producers, suffering with low crude prices after a shale revolution made the U.S. a viable energy producer, are smothered under their own junk bonds. Small- and medium-sized U.S.-based producers, especially those that expanded with the shale boom, are most vulnerable; any small blip in oil prices may not be high enough or fast enough to protect all producers. And just this week at least two more have warned about their near-term future. It’s a climate that’s driven some of this sector’s high-yield paper to trade at 30 cents on the dollar or less.

Peabody Energy said Wednesday it filed a “going concern” notice with regulators. Peabody has opted to exercise the 30-day grace period with respect to a $21.1 million interest payment due March 16 on its 6.50% notes due in September 2020, as well as a $50 million interest payment due March 16 on its 10% senior secured second lien notes due in March 2022. Costs and lost business to tougher coal regulation were cited. But Linn Energy – which on Tuesday filed its own “going concern” after missed interest payments now in a grace period — is primarily an oil-and-gas producer with shale interests in western U.S. states. If it files for bankruptcy protection, its $10 billion in debt would make it the largest U.S. oil company to do so since oil prices began their sharp decline in 2014.

In all, about 40 oil and gas producers have filed for bankruptcy protection globally since 2014, according to a February report from Deloitte. Crude traded to 12-year lows, below $30 a barrel, in February before a recent, mild rebound. Energy consulting firm Rystad Energy says smaller players typically need a minimum $50-a-barrel oil price to make a profit. Last week, Fitch said it’s raising its 2016 forecast for U.S. high-yield bond defaults to 6% from 4.5%, and said it expects energy and materials issuers to default on $70 billion of debt this year, including $40 billion for energy alone. The new rate of default is the highest that Fitch has ever forecast during a non-recessionary period, beating the 5.1% it forecast for 2000.

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Might as well sell then, right?

• Oil Investors See $7.4 Billion Vanish as Dividends Are Targeted (BBG)

The check is not in the mail. Bludgeoned by falling energy prices, at least a dozen oil and natural gas companies have opted to cut dividends this year to preserve cash, cannibalizing payouts considered sacrosanct by many investors. The cost to shareholders: more than $7.4 billion in lost income, compared to what they would have received this year if the payouts remained the same. It’s another painful measure – along with tens of thousands of layoffs and more than $100 billion in canceled investments – of the toll taken on the industry by the worst oil and gas price slump in decades. The quarterly payments, prized by conservative shareholders as a source of steady income, are unlikely to be restored any time soon. “It really reinforces the necessity of having a margin of safety if you are buying a stock primarily for its dividend,” said Josh Peters, editor of Morningstar’s DividendInvestor newsletter.

“What we have found for some of the energy companies is that the margin of safety was either slim or nonexistent.” Kinder Morgan’s 75% dividend cut was the biggest, amounting to a $3.44 billion loss for shareholders over the course of 2016. The announcement from North America’s largest pipeline operator “came as a shock to some people and obviously was deplored by some people,” founder and Executive Chairman Richard Kinder told analysts at a Jan. 27 meeting. The move was necessary to help the Houston-based company keep its investment-grade credit rating while ensuring it has enough money to pay debts and grow, Kinder said. Since the Dec. 8 announcement, shares have risen about 20%, compared with a 3% gain for the Alerian MLP stock index, which tracks energy infrastructure companies.

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It’s a miracle Pemex still exists.

• Big-Oil Bailout Begins as Pemex’s Debt Spirals Down (WS)

Pemex, Mexico’s state-owned oil giant, cannot seem to get a break these days. It notched up 13 straight quarters of rising losses. It now owes over $80 billion to international investors and banks. It needs to raise $23 billion this year to stay afloat. The cost of servicing that gargantuan debt mountain continues to rise. So it tries desperately to rein in its spending, without tackling — or even discussing — its endemic culture of corruption. In recent days, Pemex received a 15 billion peso ($840 million) lifeline from three of Mexico’s homegrown development banks, Banobras, Bancomext and Nafinsa, to help the firm pay back some of its smallest providers, consisting mainly of domestic SMEs. The loan was part of an arrangement cobbled together between the banks and the Mexican government.

By today’s standards the amount involved is pretty meager, but the operation was about more than just raising funds: it was meant to restore confidence among both investors and suppliers in the firm’s ability to repay its debts. “This sends a sign of stability and confidence to the sector, which has been very nervous” payments would not be made, explained Erik Legorreta, President of the Mexican Oil Industry Association, which represents around 3,000 service providers. “Members of the industry now have the confidence and certainty that the payments will be honored.” Not everyone agrees. Last week the U.S. credit rating agency Moody’s flagged concerns that the loan will significantly increase the three banks’ combined exposure to Pemex’s debt, calculated to grow from 44% to 62%.

“The three lenders now have high concentration risks with their 20 biggest creditors,” cautioned Moody’s, which already downgraded Pemex’s debt in November to Baa1, with a negative outlook. In its report last week, the agency piled on the pressure by warning that there’s “a high likelihood” that it will downgrade Pemex’s rating another notch in the coming weeks. What this all means is that rather than restoring investor confidence in Pemex, the loan operation has merely served to reinforce investors’ fears that lending to the debt-laden oil giant is fast becoming a very dangerous risk.

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We’ll see more of this.

• Munich Re Rebels Against ECB With Plan To Store Cash In Vaults (BBG)

Munich Re is resorting to the corporate equivalent of stuffing notes under the mattress as the world’s second-biggest reinsurer seeks to avoid paying banks to hold its cash. The German company will store at least €10 million in two currencies so it won’t have to pay for the right to access the money at short notice, Chief Executive Officer Nikolaus von Bomhardsaid at a press conference in Munich on Wednesday. “We will also observe what others are doing to avoid paying negative interest rates,” he said. Institutional investors including insurers, savings banks and pension funds are debating whether to store cash in vaults as overnight deposit rates fall deeper below zero and negative yields dent investment returns. The costs associated with insurance and logistics may outweigh the benefits of taking this step.

Munich Re’s move comes after the ECB last week cut the rate on the deposit facility, which banks use to park excess funds, to minus 0.4%. Munich Re’s strategy, if followed by others, could undermine the ECB’s policy of imposing a sub-zero deposit rate to push down market credit costs and spur lending. Cash hoarding threatens to disrupt the transmission of that policy to the real economy. Munich Re wants to test how practical it would be to store banknotes having already kept some of its gold in vaults, von Bomhard said. This comes at a time when consumers are increasingly using credit cards and electronic banking to pay for transactions. Deutsche Bank CEO John Cryan in January predicted the disappearance of physical cash within a decade. Munich Re also said on Wednesday that it expects its profit to decline this year as falling prices for its products and low interest rates weigh on investment earnings.

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UK rules!

• Netherlands Votes To Ban Weapons Exports To Saudi Arabia (Ind.)

The Dutch parliament has voted to ban arms exports to Saudi Arabia in protest against the kingdom’s humanitarian and rights violations. It sees the Netherlands become the first EU country to put in practice a motion by the European Parliament in February urging a bloc-wide Saudi arms embargo. The bill, voted through by Dutch MPs on Tuesday, quoted UN figures which suggest almost 6,000 people – half of them civilians – have been killed since Saudi-led troops entered the conflict in Yemen. It also cited the mass execution of 47 people, largely political dissidents, ordered by the Saudi judiciary on 2 January this year.

According to Reuters, the Dutch bill asks the government to implement a strict weapons embargo that includes dual-use exports which could potentially be used to violate human rights. The vote adds to the growing pressure on Britain, one of the main arms suppliers to Riyadh, to reconsider its stance. According to Campaign Against Arms Trade figures from the start of the year, the UK has sold more than £5.6 billion worth of weapons to the Saudi government under David Cameron. France is the other major European supplier of arms to the Saudi kingdom. Germany’s exports amounted to almost £140 million in the first six months of 2015, while figures for the Netherlands itself were not available.

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Has this changed their policy yet?

• Austria’s Highest Court Proclaims Asylum Cap Illegal (NE)

Austria’s asylum cap to 37,500 refugees has been declared unlawful by the country’s Constitutional Court on Tuesday, March 15. While Chancellor Werner Faymann is calling on Germany to introduce its own cap, the president of Austria’s Constitutional Court, Gerhart Holzinger, stated that Austria is obliged to grand asylum to everyone that meets the legal requirements. Vienna allows 80 asylum seekers per day and allows 3,200 to transit to Germany. Meanwhile, the Austrian Defense Minister, Peter Doskozil, suggested on Tuesday that the EU should help the Former Yugoslav Republic of Macedonia (FYROM) – an EU candidate state – to secure its borders with Greece, an EU member state. Doskozil praised the government in Skopje for the work it has done “for the whole of the EU.” Austria’s Vice-President, Reinhold Mitterlehner, reiterated that “the Balkan route must stay closed.”

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How the EU sees this: “We have a week to build a Greek state..” Insane, but true. It smells like the efficiency goal of German camps 70 years ago. If you don’t put people first, you’re going to get it wrong.

• Huge Challenges Await EU’s Refugee Plan (FT)

On paper the EU’s latest migration plan promises a straightforward solution to a crisis that has vexed European leaders for months. But in practice, it is anything but simple. By returning thousands of migrants to Turkey, Brussels and Berlin are hoping that others will become convinced the route is now impassable and join a formalised system instead. But its implementation poses an enormous administrative test, with little time to prepare. One of the EU’s weakest states, Greece, will be asked to play a central role. “We have a week to build a Greek state,” joked one senior EU official intimately involved with the planning. Frans Timmermans, the European Commission vice-president, acknowledged: “You don’t need to tell me that this is going to be very complicated in legal and logistical terms.” Here are five Herculean tasks ahead:

Preparing the ground — legally and literally Europe’s return plan violates Greek law. To address this, Greece must overhaul its asylum laws in a matter of days to enshrine Turkey as a “safe third country” to receive asylum seekers. The next step is harder: clearing the backlog. There are around 8,000 migrants on Greek islands, such as Lesbos and Chios. Officials say they ideally need to be moved before the so-called “X Day” -as early as Friday- when the returns policy officially begins. Yet Greek facilities are strained. Shelter is lacking on the mainland, where almost 40,000 migrants are already stranded. Mixing the groups — those who are trapped in Greece, awaiting relocation to Europe, and those who will be sent straight back to Turkey – could get ugly.

Creating a functioning asylum system in Greece “Unacceptable”, “degrading” and “unsanitary” were a few of the words used to describe Greece’s asylum system when the European Court of Human Rights banned other EU members from sending asylum seekers there in 2011. Yet the Greek system will now be the fulcrum of the EU’s deal with Turkey. Greece is the place where thousands of asylum seekers will land, be processed, housed and then returned to Turkey. This will require more manpower, particularly on the Aegean Islands. Everyone from judges -estimates range from 50 to 200- to a small army of Arabic or Pashto translators are required. “We’re far away from having the people, let alone trained people,” said one European official involved in preparations.

An asylum seeker’s claim is supposed to take a week to process, according to the EU plan. But the legal hoops are multiplying as Brussels attempts to guard against court challenges. This requires an assessment of each individual case and an interview. Applications must be dealt with fast – but not too fast. (In October, the European Commission criticised Budapest for rejecting applications in under an hour.) Most difficult is the appeals procedure, which must be heard by a judge. If Greece fails to jump through any of these legal hoops then judges in Greece, Luxembourg or Strasbourg could strike down the agreement. “That would bring the whole system to a halt,” said one senior EU official.

Managing unco-operative migrants So-called “hotspots” in Greece were first promised in September, yet these registration and sorting centres are only now taking shape. They can accommodate around 8,050 arrivals, according to the European Commission. Yet their role is about to change drastically. For a returns policy to work efficiently, hotspots must not simply register migrants but detain them. The centres will become containment facilities, according to EU plans, from which migrants who are about to be returned cannot escape. That requires more fences, more overnight shelter and more security guards. This is a horrible challenge. The UNHCR survey of Syrian refugees in February found almost half to be children. Some detainees will be desperate and angry at the prospect of return, having just risked their lives on a sea journey that possibly cost their life savings. The risk of disorder is high.

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Isn’t that a crazy headline, given that less than 1000 of 160,000 have actually been resettled?!

• EU Prepares To Scale Back Resettlement Of Syrian Refugees (Guardian)

The EU is preparing to scale back the number of Syrian refugees offered resettlement in Europe, as part of a controversial pact being drawn up with Turkey. The bloc’s 28 leaders will hold a summit in Brussels on Thursday, before a meeting the Turkish prime minister, Ahmet Davutoglu on Friday, to hammer out the final details of a plan aimed at stemming the flow of refugees and migrants coming to Europe. The EU has pledged to resettle Syrian refugees currently in Turkey, but figures that emerged on Wednesday suggested only 72,000 places would be available, with uncertainty about the bloc’s commitment beyond this number. As the UNHCR stepped up calls for a coordinated approach to manage the number of people, European diplomats were scrambling to finalise a deal with Turkey.

Under a proposed “one-for-one” scheme, for every Syrian refugee in Turkey who is resettled in Europe, a Syrian in Greece would be sent back across the Aegean. The vast majority of refugees and migrants in Greece can also expect to be sent back to Turkey. When these broad principles were agreed at an EU-Turkey summit 10 days ago, the numbers were vague but details are now emerging. Of the 72,000 places identified by the Commission for Syrian refugees, 18,000 places would be available under a voluntary resettlement scheme agreed last year. A further 54,000 places may be available “if needed” under a separate scheme designed to spread asylum seekers more evenly around the bloc, although this would require a change to EU law.

Frans Timmermans, vice-president of the European commission, said the EU would continue to help after these places were used up. It pointed to “a coalition of the willing”, made up of EU member states including Germany and Austria, who have pledged to resettle Syrians once irregular arrivals had stopped. “When we succeed in breaking the pattern of irregular arrivals one-for-one will not become none-for-none,” Timmermans said. But the various EU schemes to rehouse refugees are painfully slow. A plan to find homes for 160,000 refugees has led to only 937 being resettled, according to the latest data. Several countries are concerned that the Turkey deal could mean large-scale resettlement of Syrians in Europe.

A senior EU official said there “cannot be an open-ended commitment on the EU side”. The numbers discussed indicate that the EU wants to scale back help in Europe offered to refugees. Syrians in Greece will go to the back of the queue for resettlement in Europe once they are returned to Turkey. “Priority will be given to Syrians who have not previously entered the EU irregularly,” states an unpublished draft. The commission argues the plan will kill the business model of people smugglers, as potential migrants will have no incentive to come to Europe if they think they will be turned away. But the UN’s human rights chief has warned that the EU risks compromising its human rights values if it cuts corners on asylum standards.

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As the Balkan borders close, refugees will use new routes and old ones. At an even higher risk.

• Three Migrants Dead As 2,400 Rescued Off Libya (AFP)

More than 2,400 migrants and three corpses have been recovered from people smugglers’ boats off Libya since Tuesday, Italy’s coastguard said Wednesday. After several quiet weeks, the figures represent a pick-up in the flow of migrants attempting to reach Italy via Libya, a route through which around 330,000 people have made it to Europe since the start of 2014. Prior to the latest rescues, the UN refugee agency (UNHCR) had reported 9,500 people landing at Italian ports since the start of the year. This compares with more than 143,000 who have reached Greek islands by crossing the Aegean Sea since January 1.

With efforts underway to close the entry route through Greece, Italian authorities are wary of a surge in the number of migrants attempting to come through Libya. So far there has been no indication of that happening. Numbers arriving from Libya have always fluctuated in line with weather conditions in the Mediterranean and other factors. Arrivals were slightly down in 2015 compared with 2014 – a trend that may be related to the political chaos in Libya which might have deterred some migrants and has made it harder for those that do make the journey to find work there while awaiting boats to Italy.

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Merry St. Paddy’s

Debt Rattle March 6 2016

Mar 062016
 
 March 6, 2016  Posted by at 9:55 am Finance Tagged with: , , , , , , , , ,  1 Response »


Harris&Ewing War-bond rally on Penn. Avenue, Washington DC 1918

• China Picks Growth Over Reform At Annual Congress (AFR)
• Hard Landing Fallacy “No Way” In China: Regulator (Xinhua)
• China Says Cuts In Overcapacity Won’t Cause Massive Layoffs (Reuters)
• China PM Predicts ‘Battle’ For Growth (BBC)
• US Weekly Earnings Drop Most On Record (ZH)
• Sunshine, Lollipops and… (Bill Gross)
• Sweden Begins 5 Year Countdown Until It Eliminates Cash (ZH)
• Confused By The Economic Modelling? That’s The Whole Idea (SMH)
• Mutations, DNA Damage Seen In Fukushima Forests (AFP)
• Zaman Newspaper: Defiant Last Edition As Turkey Police Raid (BBC)
• “EU ’Must’ Hand Turkey €7 Billion Per Year To Keep Out Refugees” (Reuters)
• Merkel Pressures Greece to Step Up Refugee Aid (BBG)
• Open Letter To Vienna From Austrian Expatriates In Greece (Observer)
• EU Refugee Crisis Leaves 10,000 Children Missing, Europol Says (BBG)

But wasn’t reform supposed to be crucial to growth itself? Pretty sure it still is. They should be careful not to start contradicting themselves.

• China Picks Growth Over Reform At Annual Congress (AFR)

China will put development above structural reform over the next five years, as it outlined an ambitious economic growth target higher than economists and international agencies are forecasting. While announcing only modest tax cuts and a smaller than expected increase in fiscal spending, the government indicated it stands ready to roll out out other stimulus measures to meet targeted growth of 6.5% between 2016 and 2020. “We must remain committed to economic development as our central task … and respond effectively to challenges so as to ensure that China’s economy, like a gigantic ship, breaks the waves and goes the distance,” said Premier Li Keqiang during his opening address to the National People’s Congress on Saturday.

In outlining the three main priorities for its 13th Five Year Plan, Mr Li said development ranked ahead of structural reform and efforts to recalibrate China’s economy to be more reliant on consumption rather than investment. “Development is of primary importance to China and is the key to solving every problem we face,” he said. Mr Li’s determination for China to grow its way out of trouble will see a budgeted fiscal deficit of 3% of GDP in 2016, up from 2.3% last year. While this was lower than many had expected, it does not account for off-budget items, which are likely to see China post an actual fiscal deficit of 3.5% in 2015 and could see that figure top 4% this year. “The majority of the increase in the fiscal deficit will be used for a cut in taxes and charges in order to reduce the burden on enterprises,” Mr Li said.

This will result in 500 billion yuan ($103 billion) of tax cuts this year, as China replaces sales tax with a Value Added Tax. China set an economic growth target of between 6.5% and 7% for 2016. While this is well down on the double-digit growth rates of last decade, Mr Li put it in context by saying each 1 percentage point of growth today was the same as 2.5 percentage points 10 years ago, as the economy was now significantly larger. He also said each 1 percentage point of growth created 1.9 million new jobs. However, he conceded the country would face “more and tougher challenges” for economic development this year and must be prepared to “fight a battle” as international trade was weak and geopolitical risks were rising. But he said the economy was resilient and there was ample room for growth.

[..] On structural reform, Mr Li said the issue of so called “zombie enterprises” – companies that are effectively bankrupt but still operating – would be addressed “proactively yet prudently”. Beijing has outlined plans for 1.8 million steel and coal workers to lose their jobs over the next five years and has set up a 100 billion yuan ($20 billion) fund for compensating employees and restructuring companies. However, Mr Li outlined few details on how this would be achieved, suggesting it would be more gentle than the brutal restructure of State Owned Enterprises in the late 1990s, which saw an estimated 25 million workers lose their jobs.

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“China accounted for a quarter of the world’s economic growth in 2014, Xy said..” Tyler Durden wryly observes: “And accounted for 40% of all global new debt issuance since 2008..”

• Hard Landing Fallacy “No Way” In China: Regulator (Xinhua)

The hard landing fallacy on China’s economy will “no way” occur in China, a senior economic official said Sunday. The Chinese economy is so resilient with relatively strong abilities to resist risks, Xu Shaoshi, who heads the National Development and Reform Commission, said on the sidelines of the annual parliamentary session. “We are capable of keeping economic growth at rates within a reasonable range,” Xu said. “We are confident of achieving that end.” China set the growth target at a range of 6.5% to 7% this year, and an average annual growth of above 6.5% for the next five years.

It had seen, for a quarter of a century, the slowest expansion of 6.9% in 2015, amid its structural adjustment and a fragile global recovery. China’s economic growth remains relatively fast among world major economies. The 6.9% growth was hard won given the sluggish global recovery, Xu said. China accounted for a quarter of the world’s economic growth in 2014, Xu said, citing data from the World Bank and China’s National Bureau of Statistics.

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We respectfully disagree.

• China Says Cuts In Overcapacity Won’t Cause Massive Layoffs (Reuters)

China’s plans to reduce industrial overcapacity are unlikely to result in large-scale layoffs, the country’s top economic planner said on Sunday. Xu Shaoshi, head of the National Development and Reform Commission (NDRC), told reporters at a briefing that economic growth will create more jobs and help offset the impact of capacity cuts. China aims to keep its economy growing by at least 6.5% over the next five years while pushing hard to create more jobs and restructure inefficient industries, Premier Li Keqiang said on Saturday.

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“There was plenty of talk about “painful rebalancing”, the need to reform inefficient state owned enterprises and to cut overcapacity – but for many, this speech will look a lot like business as usual: a commitment to growth at all costs..”

• China PM Predicts ‘Battle’ For Growth (BBC)

China’s National People’s Congress has set the country’s growth target for 2016 at a lower range of 6.5%-7%. Premier Li Keqiang made the announcement in his opening speech, warning of a “difficult battle” ahead. The annual meeting in Beijing sets out to determine both the economic and political agenda for the country. It comes at a time when China struggles with slowing economic growth and a shift away from overreliance on manufacturing and heavy industry. The congress is also expected to approve a new five-year plan, a legacy of the communist command economy. “China will face more and tougher problems and challenges in its development this year, so we must be fully prepared to fight a difficult battle,” Mr Li told delegates on Saturday.

Last year, China’s goal was “about 7%”. The economy actually grew by 6.9% – the lowest expansion in 25 years. Mr Li also said that China was targeting consumer inflation at “around 3%” and unemployment “within 4.5%”. Meanwhile, the country’s defence spending will be raised by 7.6%, the state-run Xinhua news agency reports, citing a budget report. China’s congress is a highly choreographed, largely rubber stamp affair, but Premier Li’s opening address can at least be gleaned for clues about the overall direction of policy, the BBC’s John Sudworth in Beijing reports. There was plenty of talk about “painful rebalancing”, the need to reform inefficient state owned enterprises and to cut overcapacity – but for many, this speech will look a lot like business as usual: a commitment to growth at all costs, our correspondent adds.

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Ugly.

• US Weekly Earnings Drop Most On Record (ZH)

The headline jobs number was certainly good, beating expectations and well higher than last month’s disappointing (and upward revised) 182K print. However, a quick look below the headline reveals an amazing statistic: while we already noted that average hourly earnings posted only their first decline since December 2014, and just the 6th in the past decade, declining by -0.1%, what is the real surprise is that average weekly hours worked also dropped substantially by 0.2 from 34.6 to 34.4. This, naturally, is the denominator in the average hourly earnings calculation, and for it drop drop with the average also sliding, means that weekly earnings must have dropped.

And drop they did: as the chart below clearly shows, based on the data which showed a whopping tumble in average weekly earnings from 878.15 to just 872.04, at -0.7%, this was the biggest monthly drop in the entire series history!

The drop confirms that the jump in earnings observed in January, and which led many to prematurely conclude that wage growth has finally arrived, was nothing but a headfake driven by the increase in minimum wages across various states, which has now been fully digested, and as a result wage growth is once again what it was before: non-existent. Finally, it goes without saying that in the middle of a ‘recovery’ this is not really supposed to happen.

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Long article by Gross, worth a read.

• Sunshine, Lollipops and… (Bill Gross)

Our Sun – a rather tiny star in the galaxial scheme of things – seems inexhaustible. But 5 billion years from now, it will swallow, instead of nurture the Earth as it burns itself out – first contracting, then expanding like a flaming candle turned firecracker. Not to worry though. We won’t be around. It’s not that we are beyond worrying; it’s that our lives are much shorter and we needn’t think much about it. In the nearer term, there is global warming/climate change, and other such down to Earth problems as paying the bills and getting kids into the right colleges. Still – there are presumably inexhaustible things that deserve our attention in the here and now. One of them is finance-based capitalism and our assumption that the risk/ reward historically inherent in it will be sufficient to drive economic growth forward.

Unlike the Sun, whose fate and lifespan can be scientifically determined, there is little evidence that anything could ever change what has been until now a flawed, yet the best economic system conceivable. Capitalistic initiative married to an ever expanding supply of available credit has facilitated economic prosperity much like the Sun has been the supply center for energy/ food and life’s sustenance. But now with quantitative easing and negative interest rates, the concept of nurturing credit seems to have morphed into something destructive as opposed to growth enhancing. Our global, credit based economic system appears to be in the process of devolving from a production oriented model to one which recycles finance for the benefit of financiers. Making money on money seems to be the system’s flickering objective.

Our global financed-based economy is becoming increasingly dormant, not because people don’t want to work or technology isn’t producing better things, but because finance itself is burning out like our future Sun. What readers should know is that the global economy has been powered by credit – its expansion in the U.S. alone since the early 1970’s has been 58 fold – that is, we now have $58 trillion of official credit outstanding whereas in 1970 we only had $1 trillion. Staggering, is it not? But now, this expansion appears to be reaching an ending of sorts, at least in its current form. Private sector savers are growing leery of debt piled upon debt and government regulators have begun to build fences against further rampant creation.

In addition, the return offered on savings/investment whether it be on deposit at a bank, in Treasuries/Bunds, or at extremely low equity risk premiums, is inadequate relative to historical as well as mathematically defined durational risk. The negative interest rates dominating 40% of the Euroland bond market and now migrating to Japan like a Zika like contagion, are an enigma to almost all global investors. Why would someone lend money to a borrower with the certainty of getting less money back at a future date? Several years ago even the most Einsteinian-like economists would not have imagined such a state but now it seems an everyday occurrence, as central banks plumb deeper and deeper depths like drilling rigs expecting to strike oil, if only yields could be lowered another 10, 20, 50 basis points.

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Some kind of currency will appear. Maybe the Swedes will start using dollars.

• Sweden Begins 5 Year Countdown Until It Eliminates Cash (ZH)

How much louder can the “ban cash” calls get? Recall it was just last year when we catalogued the growing cacophony of crazies for whom banning physical currency is the only way to ensure that depositors can’t simply reassert their economic autonomy under a low or zero rate regime.. Put simply, if interest rates get too low, depositors will simply take their money out the bank and put it in the mattress or the safe where, to quote WSJ from last week, “interest rates are always low no matter what central bankers do. Most recently, Larry Summers called for the abolition of the $100 bill in the US and in Europe the €500 note is to go the way of the dinosaurs. Perhaps the most telling sign that citizens are starting to panic is that in Japan, they’re selling out of safes. Literally.

“It shows a vague sense of unease,” one Japanese lawmaker who brought up the soaring safe sales in parliament on Monday remarked. Now, the excuse given for banning big bills is that it combats crime. And maybe it does. But in the end the rationale is simple: if there are no more physical banknotes, people have no economic autonomy. Let’s say consumer spending is stagnating. No problem, take rates to -20%. We bet they’ll start spending then – either that or see their deposits haircut by 20%. In short, no cash means no effective lower bound and with no lower bound, the economy can be completely centrally planned – for all intents and purposes. Consumers not spending? No problem. Just tax their excess account balance. Economy overheating? Again, no problem. Raise the interest paid on account holdings to encourage people to stop spending.

So with Citi, Harvard, Denmark and Peter Bofinger, member of the German Council Of Economic Experts, all onboard, we’re surprised to hear that Sweden (already one of the leaders in the cashless society movement) is looking to phase out a series of new bank notes it just introduced last year and moved ever closer to the cashless utopia. “Last year Sweden introduced a series of new banknotes replacing its old kronor notes. But figures suggest these too could be gone from circulation in half a decade if the development towards a cashless society continues,” The Local reports,” continuing that “cash transactions today represent no more than 2% of the value of all payments made in Sweden, [and that estimate] will drop to below 0.5% within the next five years. Some welcome the trend – credit card providers, for instances – others have reservations.

“It is happening at a furious rate. And it’s important to many older people to be able to use cash. I mean, today it is legal tender and you have to be able to use it until parliament decides otherwise,” Christina Tallberg, chairwoman of Swedish pensioners’ organization PRO, told Swedish Radio on Friday. Well, until parliament or perhaps more appropriately, until The Riksbank and Stefan Ingves decides it. Because at -0.55, it’s a “how much lower can you go type scenario.” Well, if you go kronor-less, that question ceases to make sense. The “problem” simply goes away. “Sometimes you have to learn new things. It’s a little awkward for a transitional period, but I think it’s going to be so simple that you pretty soon realize that this is a lot easier and better than having cash,” said working environment ombudsman Krister Colde of the Commercial Employees’ Union (Handels). Famous last words Krister.

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Fun in Oz.

• Confused By The Economic Modelling? That’s The Whole Idea (SMH)

Politics is about trust. Prime Minister Malcolm Turnbull has been claiming for weeks that Labor’s plans for negative gearing would smash house prices. “The 70% of Australians who own houses will see the value of their single most important asset smashed to fulfil an ideological crusade,” he told parliament. His Attorney-General George Brandis has made it sound even worse. “There is one thing we know about the negative-gearing debate,” he told us. “If the Labor Party were to implement its policy, the value of most Australians’ homes would collapse”. His assistant treasurer Kelly O’Dwyer briefly said the opposite. Labor’s policy would “increase the cost of housing for all Australians; for those people who currently own a home and for those people who would like to get into the housing market”.

And then his treasurer Scott Morrison latched on to a “credible report” that said Labor’s policy would have “a significant impact on property values”. He latched on too quickly. The report, by BIS Shrapnel, said no such thing. Prices would continue to rise in all but two of the next 10 years under the scenario it modelled, just as they would if negative gearing was maintained. After a decade, they would have climbed 15%. That’s less than with full negative gearing, but its still an increase. The report explained that house prices are typically “sticky in a downwards direction,” unable to fall lower than the cost of construction plus a markup. When new attempts at negative gearing were temporarily suspended between 1985 and 1987 real estate prices continued to climb.

While new investors would be less keen to buy if Labor’s policy stopped them negatively gearing, existing investors would be also less keen to sell, because they could only continue to negative gear if they hung on to the properties they had. Prices wouldn’t be smashed. It’s all there in the report Morrison lauded as credible (because it said rents would rise), but appeared not to properly read. Certainly his eyes appeared to glaze over the howling error on page one. The report said Australia’s national income would average $190 billion over the next ten years when it meant $1.9 trillion. And they appeared not to be troubled by its suggestion that a measure that raised around $2 billion per year would shrink the economy by $19 billion per year.

That’s $9 of economic damage for every $1 collected, a sum so big as to be way out of the ballpark of anything his department has ever modelled. When Treasury modelled a range of taxes for its tax discussion paper, it found the worst of them, stamp duty, did 70 cents of economic damage for each dollar collected. Yet first thing Thursday morning on AM Morrison described as “credible” a report that found removing negative gearing would create multiples of the biggest damage his department could find The Grattan Institute’s John Daley says the finding doesn’t even pass the giggle test. Try it for yourself. Attempt to say: “a tax that raises $2 billion will shrink the economy by $19 billion” without laughing.

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5 years later.

• Mutations, DNA Damage Seen In Fukushima Forests (AFP)

Conservation group Greenpeace warned on Friday that the environmental impact of the Fukushima nuclear crisis five years ago on nearby forests is just beginning to be seen and will remain a source of contamination for years to come. The March 11, 2011 magnitude 9.0 undersea earthquake off Japan’s northeastern coast sparked a massive tsunami that swamped cooling systems and triggered reactor meltdowns at the Fukushima Daiichi nuclear plant. Radiation spread over a wide area and forced tens of thousands of people from their homes – many of whom will likely never return – in the worst nuclear accident since Chernobyl in 1986. As the fifth anniversary of the disaster approaches, Greenpeace said signs of mutations in trees and DNA-damaged worms were beginning to appear, while “vast stocks of radiation” mean that forests cannot be decontaminated.

In a report, Greenpeace cited “apparent increases in growth mutations of fir trees… heritable mutations in pale blue grass butterfly populations” as well as “DNA-damaged worms in highly contaminated areas”, it said. The report came as the government intends to lift many evacuation orders in villages around the Fukushima plant by March 2017, if its massive decontamination effort progresses as it hopes. For now, only residential areas are being cleaned in the short-term, and the worst-hit parts of the countryside are being omitted, a recommendation made by the International Atomic Energy Agency. But such selective efforts will confine returnees to a relatively small area of their old hometowns, while the strategy could lead to re-contamination as woodlands will act as a radiation reservoir, with pollutants washed out by rains, Greenpeace warned.

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Shame on Europe and the US.

• Zaman Newspaper: Defiant Last Edition As Turkey Police Raid (BBC)

Turkey’s biggest newspaper, Zaman, has condemned its takeover by the authorities in a defiant last edition published just before police raided it. Saturday’s edition said Turkey’s press had experienced “one of the darkest days in its history”.
Police raided Zaman’s Istanbul offices hours after a court ruling placed it under state control, but managers were still able to get the edition to print. Police later fired tear gas to disperse Zaman supporters. Water cannon was also used as about 500 people gathered in front of Zaman’s headquarters on Saturday. They chanted “Free press cannot be silenced!” A number of the journalists returned to work, but some of them tweeted that:
• they had lost access to internal servers and were not able to file articles
• they were not able to access their email accounts
• the newspaper’s editor-in-chief Abdulhamit Bilici and a leading columnist had been fired

One reporter, Abdullah Bozturk, said attempts were also under way to wipe the newspaper’s entire online archive. The European Union’s response has been to issue weak statements of concern, the BBC’s Mark Lowen says. It is accused of acting softly on Turkey as it needs the country’s support in managing the refugee crisis. The paper is closely linked to the Hizmet movement of influential US-based cleric Fethullah Gulen, which Turkey says is a “terrorist” group aiming to overthrow President Recep Tayyip Erdogan’s government. Mr Gulen was once an ally of Mr Erdogan but the two fell out. Many Hizmet supporters have been arrested.

The court ruled on Friday that Zaman, which has a circulation of some 650,000, should now be run by administrators. No explanation was given. Turkish Prime Minister Ahmet Davutoglu said the move was “legal, not political”. “It is out of the question for neither me nor any of my colleagues to interfere in this process,” he said in a television interview. The government in Ankara has come under increasing international criticism over its treatment of journalists. The EU’s diplomatic service said that Turkey “needs to respect and promote high democratic standards and practices, including freedom of the media”, while the US described the move as “troubling”.

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They should find other allies, this is nuts. Erdogan is (mass-)murdering Kurds and closing down the press. And we’re helping him do it?!

• “EU ’Must’ Hand Turkey €7 Billion Per Year To Keep Out Refugees” (Reuters)

The EU may need to more than double financial aid already pledged to Turkey to help it keep millions of Syrian refugees on its soil, Germany’s EU Commissioner Guenther Oettinger was quoted as saying on Saturday. The European Commission on Friday announced the first payouts from a €3 billion ($3.3 billion) fund to help Turkey pay for the needs of some 2.5 million refugees. “Europe should hold out the prospect of further financial support to Turkey also beyond 2017,” Oettinger told German magazine Der Spiegel. “Taking over full costs of the services that Turkey is providing by accommodating and caring for the refugees, the bill could easily add up to six or seven billion euros per year,” said Oettinger, a senior member of Chancellor Angela Merkel’s center-right party Christian Democratic Union (CDU).

Austrian Chancellor Werner Faymann proposed a new EU fund to finance the additional costs. “In the migrant crisis, we need joint European solutions,” Faymann told the magazine. “Therefore I suggest a fund in which each EU member state pays in, similar to the bank bailout. The money should be used to cover the costs of providing for the asylum seekers.” European Council President Donald Tusk, who on Friday held talks with Turkish President Tayyip Erdogan, will chair an emergency EU summit with Turkey on Monday aimed at strengthening cooperation to stem the flow of migrants to Europe.

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Emptier words were never spoken.

• Merkel Pressures Greece to Step Up Refugee Aid (BBG)

German Chancellor Angela Merkel boosted pressure on the Greek government to step up its capacity for sheltering refugees, pledging that the European Union will assist the country with the task. Greece fell short of its aim of setting up shelter for 50,000 asylum seekers fleeing Syria and the Middle East by the end of 2015, Merkel said in an interview with Bild am Sonntag. “The backlog needs to be made up posthaste,” Merkel told the German newspaper. “I know from my talks with Greek Prime Minister Alexis Tsipras that he wants that too, but that that he needs our help to do it.”

Thousands of refugees are stranded in Greece. Merkel in the Bild interview blamed the humanitarian crisis on other European states that tightened their borders against the influx, blocking passage north, where most asylum seekers have sought shelter in more accommodating countries such as Germany. The chancellor has said the blocked borders endanger Europe’s system of passport-free travel, known as Schengen. “Today we have a different situation, because Austria and the Balkan nations made unilateral decisions at their national borders that have unfortunately placed a burden on our partner and Schengen member Greece,” Merkel told Bild. The EU’s 28 leaders and the Turkish government will discuss the refugee crisis in Brussels on Monday.

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Well put.

• Open Letter To Vienna From Austrian Expatriates In Greece (Observer)

This is the full text of a letter written by prominent émigrés to ministers in protest over the country’s role in border closures against refugees

Open letter to the Austrian government Austrians living and working in Greece, who feel deeply connected with this country, appeal to the Austrian government to take a more responsible position in dealing with the refugee crisis. Instead of putting on blinkers, pretending that by closing the borders the problem will go away, the situation has to be tackled head-on at a European level. The Austrian government needs to understand that individual, national approaches fail to produce results, also because solitary advances contradict the basic tenets of the European programme, which is meant to serve as the foundation for a new generation. Despite the temporary ceasefire, the war in Syria continues unabated, forcing the frightened civilian population, trapped between the fighting fronts, to keep seeking refuge by fleeing their country.

While the neighbours of Syria bear the brunt of the pressure, the callous reaction of the Austrian government, one of the richest countries in the world (ranked 11), puts us to shame. Austrian politicians have claimed that our country has accepted more refugees than most others. But a glance at the facts from Europe’s south proves this statement to be fatally wrong, misrepresenting the data. Pushing solutions to the refugee crisis that rely on increasing the pressure on Greece is counterproductive, unrealistic and irresponsible. The Austrian Minister of the Interior maintains that “that will put an end to perilous journeys across the Mediterranean.” No, Mrs Minister, it won’t!

Dozens of boats continue to arrive on Greece’s shores on a daily basis, often carrying over three thousand desperate people a day. The unspeakable horror of the war, hopelessness in the adjacent countries and the desire to reunite with family members are a strong motivation for those who have nothing to lose to risk the journey towards European destinations. What could stop them? Coast guards? Warships? Walls? Barbed wire fences? None of these measures will have any effect, unless the acts of war are put to an end. Otherwise, traumatised, terrorised people will continue to do anything to escape their misery.

The Europeans, who cannot see eye to eye among each other and do not even seem to share the most basic values, are busying themselves reinforcing their ominous fortress. As much as they try, it is not going to prevent war refugees from attempting to save their lives. Many more will come, hoping to make it somehow, at all cost, as hope dies last. Europe has no choice but to face the catastrophic situation in the war-torn countries of the near and Middle East responsibly and make every effort to help these people rebuild their lives. This will require foresight, wisdom and the will to convince the doubters (and the constituencies). Otherwise, we will be faced with a generation growing up in war-torn nations in who cannot but feel deepest frustration and animosity towards Europe and its “values”.

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Nobody cares. All they care about is that refugees stop coming.

• EU Refugee Crisis Leaves 10,000 Children Missing, Europol Says (BBG)

More than 10,000 child refugees have disappeared after arriving in Europe, according to crime-fighting agency Europol, as the region faces its worst migrant crisis since World War II. “This is something European police services and governments should be worried about,” Europol Chief Rob Wainwright said in an interview Saturday with French newspaper Le Figaro. “Not all are exploited for criminal purposes – illegal labor or sexual slavery. Some have left shelters to reunite with their families, but we have no proof of that.” Of the 1.2 million refugees who arrived in the European Union last year, a quarter were minors, and 85,000 were unaccompanied by an adult, Wainwright said.

More than 135,000 asylum seekers have made their way to Europe this year, compared with about 376,000 in October and November, according to UNHCR, the United Nations refugee agency. European leaders are struggling to develop an alternative for the patchwork of unilateral border controls imposed by national governments to stem the flow of migrants fleeing war and poverty. The European Commission, the EU’s executive arm, proposed on Friday to lift internal border border checks and restore passport-free travel by the end of the year.

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Debt Rattle February 27 2016

Feb 272016
 
 February 27, 2016  Posted by at 9:09 am Finance Tagged with: , , , , , , , , , ,  5 Responses »


Ben Shahn “Scene in Jackson Square, New Orleans” 1935

• World Trade Falls 13.8% In Dollar Terms (FT)
• Scepticism Rife Over G20 Move To Calm FX (FT)
• G20 To Say World Needs To Look Beyond Ultra-Easy Policy For Growth (Reuters)
• As China’s Economic Picture Turns Uglier, Beijing Applies Airbrush (NY Times)
• Chinese Accounting Is ‘Highly Questionable’ (CNBC)
• China Commodities Industry Resists Cuts Despite Production Glut (BBG)
• Yuan Uncertainty Scares Funds Away From China Bond Market (BBG)
• Germany Lays the Foundations for a New Eurozone Debt/Banking Crisis (Fazi)
• Societe Generale Slashes Forecast For European Stocks (BBG)
• Japan Builds $124 Billion Cash Hoard Even as It Cuts Treasuries (BBG)
• “Peak Stupidity” – Where We Go From Here (Beversdorf)
• Bankers Have Not Learnt The Lessons Of The Great Crash (Tel.)
• Bank Of America Preparing Big Layoffs In Investment Banking And Trading (BI)
• UBS Accused of Money Laundering in Belgian Tax Case (BBG)
• With No Unified Refugee Strategy, Europeans Return to Old Alliances (NY Times)
• More Migrants Trapped In Greece As Balkan Countries Enforce Limits (Kath.)
• EU Med Countries Oppose Unilateral Actions On Refugee Crisis (AP)

Reality.

• World Trade Falls 13.8% In Dollar Terms (FT)

Weaker demand from emerging markets made 2015 the worst year for world trade since the aftermath of the global financial crisis, highlighting rising fears about the health of the global economy. The value of goods that crossed international borders last year fell 13.8% in dollar terms — the first contraction since 2009 — according to the Netherlands Bureau of Economic Policy Analysis’s World Trade Monitor. Much of the slump was due to a slowdown in China and other emerging economies. The new data released on Thursday represent the first snapshot of global trade for 2015. But the figures also come amid growing concerns that 2016 is already shaping up to be more fraught with dangers for the global economy than previously expected.

Those concerns are casting a shadow over a two-day meeting of G20 central bank governors and finance ministers due to start on Friday. Mark Carney, the Bank of England governor, was set to warn the gathering that the global economy risked “becoming trapped in a low growth, low inflation, low interest rate equilibrium”. His comments will echo the IMF, which this week warned it was poised to downgrade its forecast for global growth this year, saying the world’s leading economies needed to do more to boost growth. The Baltic Dry index, a measure of global trade in bulk commodities, has been touching historic lows. China, which in 2014 overtook the US as the world’s biggest trading nation, this month reported double-digit falls in both exports and imports in January.

In Brazil, which is now experiencing its worst recession in more than a century, imports from China have collapsed. Exports from China to Brazil of everything from cars to textiles shipped in containers fell 60% in January from a year earlier while the total volume of imports via containers into Latin America’s biggest economy halved, according to Maersk Line, the world’s largest shipping company. “What we are seeing right now from China is not only a phenomenon for Brazil; we are seeing the same all over Latin America, declining [Chinese export] volumes into all the markets,” said Antonio Dominguez, managing director for Maersk Line in Brazil, Paraguay, Uruguay and Argentina. “It has been going on for several quarters but is getting more evident as we move into the year [2016].”

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Currency war Mexican standoff.

• Scepticism Rife Over G20 Move To Calm FX (FT)

Scepticism is rife that the G20 gathering of finance ministers will agree to co-ordinate currency policy but there is some belief it could provide a short-term boost to risk appetite. Japan has led calls for the two-day meeting in Shanghai to bring calmness to an unstable market with a broad-based FX strategy, seen by some market commentators as a reprise of the 1985 Plaza Accord that succeeded in weakening a rampant dollar. But those hopes have been knocked back by China and the US, and market expectations have been subdued in the run-up to the G20 meeting that ends with a communique on Saturday. “A grand solution like the Plaza Accord feels far-fetched”, said Peter Rosenstrich at the online bank Swissquote.

“G20 members were ‘too unique’ to agree which currencies were mispriced, while to decide who wins and who loses would be ‘far too complex'” , he said. Some FX strategists are braced for a negative market reaction to the G20 meeting, basing their fears on the experience of previous gatherings. “Our fear is that…there may yet be a sense of despondency, an ‘is that it’ moment, should the G20 be seen to be papering over some rather large cracks in an all too familiar fashion“, said Neil Mellor at BNY Mellon. Market turmoil has driven a sharp rise in the value of the yen against the dollar, causing alarm at the Bank of Japan and jeopardising the government’s Abenomics growth strategy.

Japan’s negative interest rates policy, which came under attack as the G20 meeting began, has failed to reverse the yen’s rise, leading to heightened expectation of unilateral FX intervention by the BoJ. David Bloom, head of FX research at HSBC, said that possibility had been put on hold in the build-up to the G20 meeting, given the potential backlash from other G20 members. “But once that peer pressure passes after the meeting, FX intervention could be back on the table, he warned”. “Any push in USD-JPY towards 110 could be enough to trigger the green light on direct intervention”, said Mr Bloom. The best that can be hoped for from the meeting, said Steven Englander at Citigroup, was a communique that convinced investors that global policymakers are ‘sufficiently on the same page to add to global confidence’.

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A whole lot of nothing. They -make that we- are going to regret this. But the political climate is not there to act.

• G20 To Say World Needs To Look Beyond Ultra-Easy Policy For Growth (Reuters)

The world’s top economies are set to declare on Saturday that they need to look beyond ultra-low interest rates and printing money if the global economy is to shake off its torpor, while promising a new focus on structural reform to spark activity. A draft of the communique to be issued by the Group of 20 (G20) finance ministers and central bankers at the end of a two-day meeting in Shanghai reflected myriad concerns and policy frictions that have been exacerbated by economic uncertainty and market turbulence in recent months. “The global recovery continues, but it remains uneven and falls short of our ambition for strong, sustainable and balanced growth,” the leaders said in a draft seen by Reuters. “Monetary policies will continue to support economic activity and ensure price stability … but monetary policy alone cannot lead to balanced growth.”

Geopolitics figured prominently, with the draft noting risks and vulnerabilities had risen against a backdrop that includes the shock of a potential British exit from the European Union, which will be decided in a June 23 referendum, rising numbers of refugees and migrants, and downgraded global growth prospects. But there was no sign of coordinated stimulus spending to spark activity, as some investors had been hoping after the market turmoil that began 2016. Divisions have emerged among major economies over the reliance on debt to drive growth and the use of negative interest rates by some central banks, such as in Japan. Germany had made it clear it was not keen on new stimulus, with Finance Minister Wolfgang Schaeuble saying on Friday the debt-financed growth model had reached its limits.

“It is even causing new problems, raising debt, causing bubbles and excessive risk taking, zombifying the economy,” he said. The G20, which spans major industrialized economies such as the United States and Japan to the emerging giants of China and Brazil and smaller economies such as Indonesia and Turkey, reiterated in the communique a commitment to refrain from targeting exchange rates for competitive purposes, including through devaluations. While G20 host China has ruled out another devaluation of the yuan after surprising markets by lowering its exchange rate last August, there still appeared to be concerns that some members may seek a quick fix to domestic woes through a weaker currency.

Japanese finance minister Taro Aso said late on Friday he had urged China to carry out currency reform and map out a mid-term structural reform plan with a timeframe. U.S. Treasury Secretary Jack Lew also encouraged China on Friday to shift to a more market-oriented exchange rate in “an orderly way” and “refrain from policies that would be destabilizing and create an unfair advantage”.

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“Data disappears when it becomes negative..”

• As China’s Economic Picture Turns Uglier, Beijing Applies Airbrush (NY Times)

This month, Chinese banking officials omitted currency data from closely watched economic reports. Weeks earlier, Chinese regulators fined a journalist $23,000 for reposting a message that said a big securities firm had told elite clients to sell stock. Before that, officials pressed two companies to stop releasing early results from a survey of Chinese factories that often moved markets. Chinese leaders are taking increasingly bold steps to stop rising pessimism about turbulent markets and the slowing of the country’s growth. As financial and economic troubles threaten to undermine confidence in the Communist Party, Beijing is tightening the flow of economic information and even criminalizing commentary that officials believe could hurt stocks or the currency.

The effort to control the economic narrative plays into a wide-reaching strategy by President Xi Jinping to solidify support at a time when doubts are swirling about his ability to manage the tumult. The persistence of that tumult was underscored on Thursday by a 6.4% drop in Chinese stocks, which are now down more than a fifth since the beginning of this year alone. The government moved to bolster confidence on Saturday by ousting its top securities regulator, who had been widely accused of contributing to the stock market turmoil. Mr. Xi is also putting pressure on the Chinese media to focus on positive news that reflects well on the party. But the tightly scripted story makes it ever more difficult to get information needed to gauge the extent of the country’s slowdown, analysts say. “Data disappears when it becomes negative,” said Anne Stevenson-Yang, co-founder of J Capital Research, which analyzes the Chinese economy.

The party’s attitude has raised further questions among executives and economists over whether Chinese policy makers know how to manage a quasi-market economy, the second-largest economy in the world, after that of the United States. Economists have long cast some doubt on Chinese official figures, which show a huge economy that somehow manages to avoid the peaks and valleys that other countries regularly report. In recent years, China made efforts to improve that data by releasing more information more frequently, among other measures. It also gave its financial media greater freedom, even as censors kept a tight leash on political discourse. But the party now sees reports of economic turbulence as a potential threat. The same goes for data. “Many economic indicators are on a downward trend in China, and economic data has become quite sensitive nowadays,” said Yuan Gangming, a researcher at the Center for China in the World Economy at Tsinghua University.

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Analysts are not ging to leave this alone anymore.

• Chinese Accounting Is ‘Highly Questionable’ (CNBC)

Financial reporting in China was back in the spotlight again Friday, with one strategist claiming Chinese businesses were using “accounting trickery” to mask underlying credit problems. China looks like it’s heading towards a credit bust, Chris Watling, CEO and chief market strategist at Longview Economics told CNBC on Friday, explaining that cash borrowed by mainland firms is primarily being used to service debts. “We’ve been looking a lot at Chinese accounting recently and it is highly questionable,” he said. The corporate sector is increasing borrowing to pay interest, while instances of fraud and default are on the rise, he added in a note published Thursday. He said there were many examples where operating profit has been high, while cash flow has been negative — a “classic sign” that firms aren’t generating a profit, he added.

Watling highlighted that the balance sheets of commercial banks were particularly worrying. “In an economy which has undergone a credit boom, all of the lending is not necessarily readily apparent from the top level data,” he said. “Accounting trickery is often at work,” Watling claimed. Chinese corporates would reject the accusations, but this isn’t the first time there has been speculation over the accuracy of Chinese figures. Back in September, the state’s statistics bureau announced it would officially change the way it calculated gross domestic product amid skepticism over the credibility of the numbers as the government sought to sooth reaction to China’s economic slowdown. Watling now claims lenders are using tricks like labelling loan collateral as revenue in their balance sheets, rather than as a creditor.

And it may be helping inflate banks’ balance sheets, which in aggregate have increased tenfold in 10 years to over three times gross domestic product at $30 trillion, he said. However, whether this will help lead to a devastating credit bust isn’t clear, Watling explained, saying that while the cracks are starting to show, the economy is managed so differently that normal market rules don’t necessarily apply. A current slowdown in Chinese growth comes at a time when the country’s leadership is stepping up regulation, curbing an overheated credit market and switching an export-focused economy into a consumer-driven one. After double-digit growth for the last decade, investors and officials in China are coming to terms with growth that has fallen below 7%, hitting a 25- year low.

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“China produces more than double the steel of Japan, India, the U.S., and Russia—the four next-largest producers—combined..”

• China Commodities Industry Resists Cuts Despite Production Glut (BBG)

China has had an overcapacity problem in its aluminum, chemical, cement, and steel industries for years. Now it’s reaching crisis levels. “The situation has gone so dramatically bad that action has to happen very soon,” said Jörg Wuttke, president of the European Union Chamber of Commerce in China, at a press conference in Beijing on Feb. 22, where a chamber report on excess capacity was released. That report’s conclusion: “The Chinese government’s current role in the economy is part of the problem,” while overcapacity has become “an impediment to the party’s reform agenda.” Many of the unneeded mills, smelters, and plants were built or expanded after China’s policymakers unleashed cheap credit during the global financial crisis in 2009. The situation in steel is especially dire.

China produces more than double the steel of Japan, India, the U.S., and Russia—the four next-largest producers—combined, according to the EU Chamber of Commerce. That’s causing trade frictions as China cuts prices. On Feb. 12 the EU announced it would charge antidumping duties of as much as 26.2% on imports of Chinese non-stainless steel. Steel mills are running at about 70% capacity, well below the 80% needed to make the operations profitable. Roughly half of China’s 500 or so steel producers lost money last year as prices fell about 30%, according to Fitch Ratings. Even so, capacity reached 1.17 billion tons, up from 1.15 billion tons the year before. With about one-quarter of China’s steel production coming from Beijing’s neighboring province of Hebei, excess production is a major contributor to the capital’s smoggy skies.

And with average steel prices likely to fall an additional 10% in 2016, fears of spiraling bad debts are growing. A survey released in January by the China Banking Association and consulting firm PwC China found that more than four-fifths of Chinese banks see a heightened risk that loans to industries with overcapacity may sour. [..] China will “actively and steadily push forward industry and resolve excess capacity and inventory,” the People’s Bank of China said on Feb. 16 after a meeting with the National Development and Reform Commission, the banking regulatory commission, and other agencies.

The government may find it hard to achieve that goal. The steel industry will lose as many as 400,000 jobs as excess production is shuttered, Li Xinchuang, head of the China Metallurgical Industry Planning and Research Institute, predicted in January. Hebei and the industrial northeastern provinces of Heilongjiang, Jilin, and Liaoning, home to much of China’s steel production, don’t have lots of job-creating companies to absorb unemployed steelworkers. “They are concerned about the possibility of social unrest with workers’ layoffs,” says Peter Markey at consultants Ernst & Young. “As you can see around the world, steelworkers are pretty feisty people when it comes to protests.”

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The big kahuna that should dominate the G20.

• Yuan Uncertainty Scares Funds Away From China Bond Market (BBG)

Yield versus yuan. That’s the crux of the investment decision now facing the global funds given more access to China’s bond market. While it offers the highest yields among the world’s major economies, PIMCO and Schroder Investment say exchange-rate risk is damping global demand for Chinese assets. Barclays said this week there’s a growing chance China will announce a sharp, one-time devaluation to change sentiment toward the currency and suggested such a move would need to be in the region of 25% to be effective. “Uncertainty around currency policy remains one of the larger hurdles for foreign investors,” said Rajeev De Mello at Schroder Investment in Singapore. “This should be resolved as the year progresses and would then be a signal to increase investments in Chinese government bonds.”

The People’s Bank of China said Wednesday that most types of overseas financial institutions will no longer require approvals or quotas to invest in the 35 trillion yuan ($5.4 trillion) interbank bond market, which had foreign ownership of less than 2% at the end of January. The nation’s 10-year sovereign yield of 2.87% compares with 1.74% in the U.S., which offers the highest rate among Group of 10 countries, and sub-zero in Japan and Switzerland. The yuan has weakened 5% versus the dollar since a surprise devaluation in August, even as the central bank burnt through more than $400 billion of the nation’s foreign-exchange reserves over the last six months trying to support the exchange rate amid record capital outflows.

China is opening its capital markets to foreign investors to try and draw money as the slowest economic growth in a quarter century drives funds abroad, pressuring the yuan. Freer access will help the nation’s bonds gain entry to global benchmarks, bolstering appetite for the securities as a restructuring of local-government debt spurs record issuance. Uncertainty on the currency is preventing investors from buying onshore assets now, according to Luke Spajic, an emerging markets money manager at Pimco, whose developing-nation currency fund has outperformed 82% of peers during the past five years. “If you buy these bonds, collect coupons, make some profits, how can you take the money out, are there any issues.” Spajic said in an interview in Shanghai on Thursday. “What we want to clarify is how this process works now, given the capital control environment.”

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“.. in the case of a country like Italy, where the banks own around €400 billion of government debt and are already severely undercapitalised, the effects on the banking system would be catastrophic.”

• Germany Lays the Foundations for a New Eurozone Debt/Banking Crisis (Fazi)

In recent weeks, Germany has put forward two proposals for the future viability of the EMU that, if approved, would radically alter the nature of the currency union. For the worse. The first proposal, already at the centre of high-level intergovernmental discussions, comes from the German Council of Economic Experts, the country s most influential economic advisory group (sometimes referred to as the ‘five wise men’). It has the backing of the Bundesbank, of the German finance minister Wolfgang Sch‰uble and, it would appear, even of Mario Draghi.

Ostensibly aimed at severing the link between banks and government (just like the banking union) and ensuring long-term debt sustainability , it calls for: (i) removing the exemption from risk-weighting for sovereign exposures, which( essentially means that government bonds would longer be considered a risk-free asset for banks (as they are now under Basel rules), but would be ‘weighted’ according to the ‘sovereign default risk’ of the country in question (as determined by the fraud-prone rating agencies depicted in The Big Short); (ii) putting a cap on the overall risk-weighted sovereign exposure of banks; and (iii) introducing an automatic sovereign insolvency mechanism that would essentially extend to sovereigns the bail-in rule introduced for banks by the banking union, meaning that if a country requires financial assistance from the European Stability Mechanism (ESM), for whichever reason, it will have to lengthen sovereign bond maturities (reducing the market value of those bonds and causing severe losses for all bondholders) and, if necessary, impose a nominal ‘haircut’ on private creditors.

The second proposal, initially put forward by Schaeuble and fellow high-ranking member of the CDU party Karl Lamers and revived in recent weeks by the governors of the German and French central banks, Jens Weidmann (Bundesbank) and François Villeroy de Galhau (Banque de France), calls for the creation of a eurozone finance ministry , in connection with an independent fiscal council . At first, both proposals might appear reasonable – even progressive! Isn’t an EU- or EMU-level sovereign debt restructuring mechanism and fiscal authority precisely what many progressives have been advocating for years? As always, the devil is in the detail.

As for the proposed ‘sovereign bail-in’ scheme, it s not hard to see why it would result in the exact opposite of its stated aims. The first effect of it coming into force would be to open up huge holes in the balance sheets of the banks of the riskier countries (at the time of writing, all periphery countries except Ireland have an S&P rating of BBB+ or less), since banks tend to hold a large percentage of their country’s public debt; in the case of a country like Italy, where the banks own around €400 billion of government debt and are already severely undercapitalised, the effects on the banking system would be catastrophic.

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“..in light of the downgraded U.S. economic outlook,..”

• Societe Generale Slashes Forecast For European Stocks (BBG)

The biggest bull on European stocks just buckled. Societe Generale, among the few firms that hadn’t cut 2016 estimates in response to global-growth concerns, now has the most bearish forecast. The bank sees the Euro Stoxx 50 Index ending 2016 at 3,000, up just 4.3% from Thursday’s close. It’s a far cry from only two weeks ago. Europe’s equities were at a 2 1/2-year low, yet the bank’s call for an year-end level of 4,000 translated to an almost 50% advance. Societe Generale also cut its estimate for the Stoxx Europe 600 Index to 340, indicating a 4.1% rise from the last close. “We trim our equity market forecasts in light of the downgraded U.S. economic outlook,” strategists led by Roland Kaloyan wrote in a report.

“We nevertheless maintain a positive stance on equities, as the recent correction already prices in this scenario to a certain extent. Equity indices should recover in the second quarter from oversold levels, followed by low single-digit quarterly declines in the second half of the year.” Societe Generale favors French and Italian stocks, citing “improving economic momentum,” while saying weakness in China will likely pressure the DAX Index. Along with the Swiss Market Index, the German benchmark is among the bank’s least-preferred markets in Europe. European equity funds had a third straight week of outflows, according to a Bank of America note on Friday citing EPFR Global data. Societe Generale analysts also expect the U.K. equity market to benefit from “rising Brexit fever.” It now expects the FTSE 100 Index to end the year at 6,400, up 6.4% from yesterday’s closing level.

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The power of the dollar.

• Japan Builds $124 Billion Cash Hoard Even as It Cuts Treasuries (BBG)

Japan has stockpiled a record amount of cash at central banks as part of its currency reserves, after selling Treasuries, as policy makers around the world adjust to rising U.S. interest rates and falling bond-market liquidity. Foreign-exchange deposits in the vaults of overseas institutions ballooned to $124.1 billion as of Jan. 31, from $14 billion at the end of 2014, according to data from Japan’s Ministry of Finance. That’s the most based on figures going back to 2000, and accounts for about 10% of the nation’s total reserves. While the figure isn’t broken down, it coincides with a surge in greenbacks held by global central banks at the Fed. Any shift away from Treasuries would protect Japan’s reserves from potential losses as the Fed extends monetary policy tightening and concerns rise over bond-market liquidity.

Dollar holdings kept in cash stand to benefit from higher U.S. interest rates and a stronger currency, even as monetary authorities in Japan and across Europe start charging banks for some deposits. “Everybody’s devaluing their currencies, everywhere across the planet, except the U.S. dollar,” said John Gorman at Nomura, the nation’s biggest brokerage. “People are more comfortable putting their reserves in a currency that’s appreciating rather than a currency that’s depreciating. An official in the office of foreign exchange reserve management in the Ministry of Finance declined to comment on the matter, saying it can affect markets. The increase in Japan’s cash at foreign institutions is a change in the composition of the country’s foreign-exchange reserves. The overall stockpile, the world’s largest after China’s, has fallen almost 3% to $1.19 trillion since it reached a record at the start of 2012.

Japan, America’s largest overseas creditor after China, is cutting its Treasuries position. The stake among both government and private investors dropped 8.8% in 2015, the first sales since 2007, based on the most recent Treasury Department data. The reduction dovetails with a decline in foreign securities in Japan’s foreign exchange reserves. Since November 2014, bond holdings fell $126.4 billion, while deposits rose $116.9 billion. The strategy of selling Treasuries and holding dollars would allow investors to get out of older U.S. government securities that can be difficult to trade and may get even tougher to transact if the Fed raises rates further. Declining liquidity in the Treasury market is driving demand for the newest, easiest-to-sell securities. When policy makers increased benchmark borrowing costs in December, they indicated they will act four more times in 2016. Even so, the Bloomberg U.S. Treasury Bond Index has advanced 3.4% so far in 2016 in a flight from riskier assets.

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Something tells me we can always get stupider.

• “Peak Stupidity” – Where We Go From Here (Beversdorf)

A reminder of what the market actually represents is a good place to start.  The stock market is simply an asset with some intrinsic value based on an expectation of future free cash flows to equity holders.  Those cash flows are generated from revenues less costs of the underlying companies that make up the market.  Let’s use the Wilshire 5000 Full Price Cap Index as the proxy market for this discussion as it is the broadest measure of total market cap for US corporations.  It’s level actually represents market capital in billions.

Screen Shot 2016-02-25 at 8.29.51 PM

So the market has put a valuation on those expected future cash flows to equity holders (as of today) at around $19.7T (a 55% increase from Jan of 2012) down from around $22.5T (a 77% increase from Jan of 2012) at the market peak last summer.  So let’s take a look at the growth in cash flows of US corporations over that same period.  We should expect to find a growth pattern in free cash flows similar to the above growth pattern in the overall market valuation (the Wilshire is a statistically large enough sample to be representative of total US corporations).  Let’s have a look…
Screen Shot 2016-02-26 at 11.53.09 AM

The above chart depicts corporate free cash flows (blue line) indexed to 100 in Jan 2012.  It is obtained by taking the BEA’s Net Cash Flow with IVA and CCAdj adding back depreciation and net dividends and subtracting net capex.  (The actual definitions of these can be found here.) What we find is that while the current valuation of expected future free cash flows to equity holders (i.e. market cap of Wilshire) has increased by some 55% since the end of 2011, the actual free cash flows of US corporations have only increased by 4%.

This becomes a very difficult fact to reconcile inside the classroom.  Why would market participants be baking in so much growth when the actual data simply doesn’t support it?

Well there are plenty of potential explanations.  For instance, rarely are investors rational.  While buy low and sell high is rational investing behaviour, often market euphoria comes at the market top right before a major sell off, leading to a buy high and sell low strategy.  Another reason is that the Fed has been providing a free put to all investors for the past 7 years essentially significantly reducing naturally occurring risk factors.  But whatever the reason this dislocation between expected and realized growth begs the question, how long can it last?  So let’s explore this issue.

Below is a longer term growth chart of the Wilshire vs US corporate free cash flows to equity holders both indexed to 1995 (i.e. 1995 = 100).

Screen Shot 2016-02-25 at 7.31.21 PM

And so over the past 20 years we’ve seen this same type of dislocation three times.  That is, we see expectations of growth far exceeding actual growth of free cash flows to equity holders.  In the previous two dislocations we reached a peak dislocation (peak stupidity) followed by a reversion to reality (epiphany) where expected growth moves back in line with actual growth.

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“Whereas US banking sector assets were worth only 80% of its GDP, Britain’s were worth 500%..”

• Bankers Have Not Learnt The Lessons Of The Great Crash (Tel.)

Barack Obama used to talk about the audacity of hope. Mervyn King was Governor of the Bank of England during ‘the biggest financial crisis this country has faced since 1914’. Its lesson, he says, is that we now need ‘the audacity of pessimism’. Only when we fully understand how badly things went wrong – and why they are still wrong today – can we start to put them right. His new book suggests how. I meet Lord King in his modest office at the London School of Economics. Typically, he is just off to the West Midlands for a dinner for famous sons of Wolverhampton. He is a proud provincial boy, not a City slicker. I ask him to recall the moment he first understood the depth of the problem facing the world. Back in September 2007, when he ‘it was already clear that Northern Rock would need support’, King recalls, he was in Basel for a conference.

There was alarm in the United States because ‘sub-prime’ mortgages were collapsing. The central bank supervisors at the conference insisted that sub-prime failure could not bring down the system. But King talked to his friend Stan Fischer, then Governor of the Bank of Israel. They shared their fears: ‘If the only thing that goes wrong is sub-prime, ok. But what else could go wrong? What if the unimaginable happens?’ It did. Over the next two months, says King, he became obsessed with the need for more equity capital in the banking system. The banks resisted at first and ‘The politicians [Gordon Brown’s government] were susceptible to pressure from the banks’. But ‘we limped along till the bankruptcy of Lehman Brothers’ in September 2008. Then ‘the banking of the entire industrial world was at risk of collapse’.

Britain – without a proper ‘bank resolution regime’ which, says King, ‘could have solved the problem of Northern Rock in a weekend, without fuss’ – was enormously vulnerable. Whereas US banking sector assets were worth only 80% of its GDP, Britain’s were worth 500%, a terrifying ratio. New Labour, having turned its back on nationalisation, had to revert to it: ‘It must have been galling for them.’ In Mervyn King’s mind, the credit crunch was brought about by something profoundly wrong. Bankers had been encouraged to take enormous risks with the customers’ money, enrich themselves and then dump the losses on the taxpayer. Huge pay increases for senior executives had produced a ‘very unattractive culture when clever people started to say to themselves: “I’m smart, I can make money out of people who don’t understand this”.’

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One by one they fall: “..the firm’s investment-banking revenues are forecast to be down 25% in the first quarter. Markets revenues are down 20% year-on-year..”

• Bank Of America Preparing Big Layoffs In Investment Banking And Trading (BI)

Bank of America is preparing for significant job cuts across its global banking and markets business, according to people with knowledge of the matter. Senior executives in the division were tasked with identifying potential job cuts a few weeks ago, and this week were asked to increase their size, according to people familiar with the situation. The cuts are likely to be over 5% of staff, the people said. Some business lines will face deeper cuts than others, and the details haven’t been finalized. Employees could be told of the cuts as soon as March 8, one of the people said, which is weeks sooner than managers were initially expecting. The people didn’t know the reasons the cuts had been pushed forward.

BofA is joining firms across Wall Street in paring back staff amid one of the worst quarters for investment-banking and trading revenues. Business Insider reported on Monday that Deutsche Bank was cutting 75 staff in fixed income, while Morgan Stanley and Barclays have also recently cut staff. Daniel Pinto, CEO of JPMorgan’s corporate and investment bank, said on Tuesday that the firm’s investment-banking revenues are forecast to be down 25% in the first quarter. Markets revenues are down 20% year-on-year, Pinto said, speaking at JPMorgan’s Investor Day conference.

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Their shareholders will pay the fine.

• UBS Accused of Money Laundering in Belgian Tax Case (BBG)

Belgian authorities accused UBS of money laundering and fiscal fraud over allegations it helped clients evade taxes, citing help from France where the Swiss bank is fighting similar accusations. The investigating judge also accused UBS of illegally approaching Belgian clients directly rather than through its Belgian unit, according to an e-mailed statement Friday from the Brussels prosecutor’s office. UBS said it will continue to defend itself against any unfounded allegations. The probe is continuing and the investigating judge will present his findings to prosecutors at a later date. The accusations are based on strong evidence of guilt uncovered by the investigative magistrate, said Jennifer Vanderputten, a spokeswoman at the prosecutor’s office. UBS will be given the right to access evidence supporting the allegations, she said.

The Belgian prosecutor cited “excellent collaboration” with authorities in France, where UBS is awaiting a decision on whether it will face trial for allegedly helping clients evade taxes. UBS is also accused in France of laundering proceeds from tax evasion. Investigating judges in France wrapped up their formal investigation earlier this month, turning the case over to the national financial prosecutor who will make a recommendation on whether it goes to trial. The bank, which has called the French allegations “unfounded,” was forced to post a bail of 1.1 billion euros ($1.2 billion). Friday’s decision came after the head of UBS’s Belgium unit was similarly accused in 2014 of money laundering and fiscal fraud as part of the probe. Marcel Bruehwiler was questioned for several hours before being released in June 2014.

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Yeah, like Middle Ages.

• With No Unified Refugee Strategy, Europeans Return to Old Alliances (NY Times)

Roughly five weeks ago, Donald Tusk, one of the EU’s most powerful political figures, issued a blunt warning to its 28 countries: Come up with a coherent plan to tackle the refugee crisis within two months, or risk chaos. Surprisingly, given the plodding pace of European Union policy making, three weeks before Mr. Tusk’s deadline, many of Europe’s national leaders are now moving swiftly, announcing tough new border policies and guidelines on asylum — even with three weeks remaining on the deadline set by Mr. Tusk, president of the European Council. The problem is that the leaders are not always adhering to European rules, possibly not sticking to international law and not acting with the unity envisioned by Mr. Tusk. In some cases, they instead seem to be reverting to historical alliances rather than maintaining the EU’s mantra of solidarity.

This week, Austria joined with many of the Balkan countries to approve a tough border policy in what some are wryly calling the return of the Hapsburg Empire. Four former Soviet satellites, led by Poland and Hungary, have become another opposition power bloc. All the while, a call for unity by Chancellor Angela Merkel of Germany is increasingly being ignored, even as she struggles to tamp down on a political revolt at home while searching for a formula to reduce the number of refugees still trying to reach Germany. “We are now entering a situation in which everybody is trying to stop the refugees before they reach their borders,” said Ivan Krastev, chairman of the Center for Liberal Strategies, a research institute in Sofia, Bulgaria. Mr. Krastev added, “The basic question is, which country turns into a parking lot for refugees?”

For many months, European Union officials, joined by Ms. Merkel, have tried to share the burden by distributing quotas of the refugees already in Greece and Italy to different member states. Many states have balked, and the program is largely paralyzed. European Union leaders also agreed to pay 3 billion euros, roughly $3.3 billion, to aid organizations in Turkey to help stanch the flow of migrants departing the Turkish coast for the Greek islands. But record numbers of migrants keep coming.

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What will this lead to?

• More Migrants Trapped In Greece As Balkan Countries Enforce Limits (Kath.)

The European Commission said Friday that it is putting together a humanitarian aid plan for Greece as Balkan countries placed further restrictions on the numbers of refugees and migrants that could cross their territories. As of last night, authorities in the Former Yugoslav Republic of Macedonia (FYROM) had not allowed any refugees to pass from Greece. Earlier, Slovenia, Croatia and Serbia said they would each restrict the number of migrants allowed to enter their territories to 580 per day. The clampdown comes in the wake of Austria last week introducing a daily cap of 80 asylum seekers and saying it would only let 3,200 migrants pass through each day. As border restrictions north of Greece have been stepped up, the number of migrants and refugees stuck in the country has increased.

The government is attempting to stem the flow of migrants to mainland Greece by asking ferry companies to delay crossings from the Aegean islands, but between 2,000 and 3,000 people are arriving in Greece each day. It is estimated that there are currently 20,000 to 25,000 in the country. Some of them are out in the open, having chosen not to remain in transit centers or other temporary shelters provided by Greek authorities. Several thousand have reached the village of Idomeni at the border with FYROM, where conditions were said to be deteriorating last night as a result of bad weather.

The government launched a hotline for people or companies who want to donate items that are in need at the moment, such as non-perishable food, sneakers, towels and plastic cutlery. European Commission spokeswoman Natasha Bertaud admitted Friday that due to the changing situation in Greece, Brussels is putting together an “emergency plan” to avert a humanitarian crisis in Greece. Speaking at an economic forum in Delphi yesterday, Migration Commissioner Dimitris Avramopoulos warned that the upcoming summit between EU members and Turkey on March 7 would be crucial to addressing the growing crisis. “If there is no convergence and agreement on March 7, we will be led to disaster,” the former Greek minister said.

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Is this the bombshell?!: UN’s Peter Sutherland says: “Any country that unilaterally rejects an EU law duly enacted on migration or otherwise cannot remain a member of the Union”

• EU Med Countries Oppose Unilateral Actions On Refugee Crisis (AP)

The rift over how to handle Europe’s immigration crisis ripped wide open Friday. As nations along the Balkans migrant route took more unilateral actions to shut down their borders, diplomats from EU nations bordering the Mediterranean rallied around Greece, the epicenter of the crisis. Cypriot Foreign Minister Ioannis Kasoulides — speaking on behalf of colleagues from France, Spain, Italy, Portugal, Malta and Greece — said decisions on how to deal with the migrant influx that have already been made by the 28-nation bloc cannot be implemented selectively by some countries. “This issue is testing our unity and ability to handle it,” Kasoulides told a news conference after an EU Mediterranean Group meeting. “The EU Med Group are the front-line states and we all share the view that unilateral actions cannot be a solution to this crisis.”

Kasoulides urged EU countries to enact all EU decisions on immigration so there “will be no unfairness to anybody.” Greek Foreign Minister Nikos Kotzias blasted some European nations for imposing border restrictions on arriving migrants, saying that police chiefs are not allowed to decide to overturn EU decisions. He said Mediterranean colleagues were “unanimous” in their support for Greece’s position on the refugee crisis and that there was “clear criticism to all those who are seeking individual solutions at the expense of other member states.” The Greek government is blaming Austria — a fellow member of Europe’s Schengen Area — for the flare-up in the crisis. Austria imposed strict border restrictions last week, creating a domino effect as those controls were also implemented by Balkan countries further south along the Balkans migration route.

Greece recalled its ambassador to Austria on Thursday and rejected a request to visit Athens by Austrian Interior Minister Johanna Mikl-Leitner. The United Nations secretary-general expressed “great concern” Friday at the growing number of border restrictions along the migrant trail through Europe. Ban Ki-moon’s spokesman said the U.N. chief is calling on all countries to keep their borders open and says he is “fully aware of the pressures felt by many European countries.” The statement noted in particular the new restrictions in Austria, Slovenia, Croatia, Serbia and Macedonia. Thousands of migrants are pouring into Greece every day and officials fear the country could turn into “a giant refugee camp” if they are unable to move north due to borders closures.

In Munich, German Chancellor Angela Merkel echoed the Mediterranean EU ministers in calling for a unified European approach to tackle the migrant crisis. Merkel, who has said that those fleeing violence deserve protection, said she was encouraged by the recent deployment of NATO ships to the Aegean Sea alongside vessels from the European Union border agency Frontex. “NATO has started to work in collaboration with the Turkish coast guard and Frontex. It is too early to see the effects of this measure. All 28 (EU) member states want to stop illegal immigration,” she said. But NATO Secretary-General Jens Stoltenberg said the ships would only be providing a support role. “NATO ships will not do the job of national coastguards in the Aegean. Their mission is not to stop or turn back those trying to cross into Europe,” he wrote.

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Debt Rattle February 19 2016

Feb 192016
 
 February 19, 2016  Posted by at 8:36 am Finance Tagged with: , , , , , , , , ,  3 Responses »


Richardson Hope for a New Life: Man passes baby through fence, Serbia/Hungary border 2015

• Negative Interest Rates Set The Stage For The Next Crisis (Stephen Roach)
• Why Negative Interest Rates Spell Doom For Capitalism (Romano)
• Central Banking Is In Crisis. Can The World Economy Be Far Behind? (Economist)
• Bank of Japan Baffled by Negative Reaction to Negative-Rate Policy (WSJ)
• Nomura Sees Yen Falling More Than 10% on BOJ Negative Rates (BBG)
• Abenomics? How About Kurodanomics? (BBG)
• OECD Calls for Urgent Increase in Government Spending (WSJ)
• China Bears Say the Capital Outflow Is Just Beginning (BBG)
• Red Ink In China (Economist)
• Overproduction Swamps Smaller Chinese Cities, Revealing Depth of Crisis (WSJ)
• You Cannot Print Your Way to Prosperity (Ron Paul)
• The Real Economy Is Talking, but Treasuries Aren’t Listening (BBG)
• Number Of UK Homes Worth More Than £1 Million Set To ‘Triple By 2030’ (G.)
• 400,000 Americans In Jeopardy As Giant Pension Fund Plans 50% Benefit Cuts (ZH)
• The Political War on Cash (WSJ)
• Swiss MPs Want New 5,000-Franc Banknotes To ‘Save Privacy And Freedom’ (L.)
• The Stressed-Out Oil Industry Faces an Existential Crisis (BBG)
• Oil Gives Up Gains as Inventories Build (WSJ)
• Anglo American Cut to Junk for Third Time This Week (BBG)
• Wary On Turkey, EU Prepares For Refugee Crisis In Greece (Reuters)

As QE and ZIRP did before them. This started years ago.

• Negative Interest Rates Set The Stage For The Next Crisis (Stephen Roach)

In what could well be a final act of desperation, central banks are abdicating effective control of the economies they have been entrusted to manage. First came zero interest rates, then quantitative easing, and now negative interest rates — one futile attempt begetting another. Just as the first two gambits failed to gain meaningful economic traction in chronically weak recoveries, the shift to negative rates will only compound the risks of financial instability and set the stage for the next crisis. The adoption of negative interest rates — initially launched in Europe in 2014 and now embraced in Japan — represents a major turning point for central banking. Previously, emphasis had been placed on boosting aggregate demand — primarily by lowering the cost of borrowing, but also by spurring wealth effects from appreciating financial assets.

But now, by imposing penalties on excess reserves left on deposit with central banks, negative interest rates drive stimulus through the supply side of the credit equation — in effect, urging banks to make new loans regardless of the demand for such funds. This misses the essence of what is ailing a post-crisis world. As Nomura economist Richard Koo has argued about Japan, the focus should be on the demand side of crisis-battered economies, where growth is impaired by a debt-rejection syndrome that invariably takes hold in the aftermath of a “balance sheet recession.” Such impairment is global in scope. It’s not just Japan, where the purportedly powerful impetus of Abenomics has failed to dislodge a struggling economy from 24 years of 0.8% inflation-adjusted growth in GDP.

It’s also the U.S., where consumer demand — the epicenter of America’s Great Recession — remains stuck in an eight-year quagmire of just 1.5% average real growth. Even worse is the eurozone, where real GDP growth has averaged just 0.1% over the 2008-2015 period. All of this speaks to the impotence of central banks to jump-start aggregate demand in balance-sheet-constrained economies that have fallen into 1930s-style “liquidity traps.” As Paul Krugman noted nearly 20 years ago, Japan exemplifies the modern-day incarnation of this dilemma. When its equity and property bubbles burst in the early 1990s, the keiretsu system — “main banks” and their tightly connected nonbank corporates — imploded under the deadweight of excess leverage.

But the same was true for over-extended, saving-short American consumers — to say nothing of a eurozone that was basically a levered play on overly inflated growth expectations in its peripheral economies — Portugal, Italy, Ireland, Greece, and Spain. In all of these cases, balance-sheet repair pre-empted a resurgence of aggregate demand, and monetary stimulus was largely ineffective in sparking classic cyclical rebounds. This could be the greatest failure of modern central banking. Yet denial runs deep. then-Federal Reserve Chair Alan Greenspan’s “mission accomplished” speech in early 2004 is an important case in point. Greenspan took credit for using super-easy monetary policy to clean up the mess after the dot-com bubble burst in 2000, while insisting that the Fed should feel vindicated for not leaning against the speculative madness of the late 1990s.

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“When, not if, central banks go completely negative, they will wind up paying banks to borrow money from them. That’s quantitative easing by another name.”

• Why Negative Interest Rates Spell Doom For Capitalism (Romano)

Interest rates in Switzerland, Denmark, Sweden, the European Central Bank and now the Bank Japan have now plunged into negative territory, starting a new phase in the era of central banking that is very much uncharted. Time will tell if it leaves the global economy lost at sea. So far, banks are primarily being charged for keeping excess reserves on account at these central banks, a policy designed to jumpstart lending by making it more expensive for banks to sit on reserves. In some cases, like Sweden, the deposit rates have gone negative, too. Whether it will all work out or not remains to be seen — initiating inflation and economic growth. Maybe it will, but so far it’s not really looking good. So what if it doesn’t work? The longer term implication is that central banks will then feel compelled to move their discount rates and other rates negative, too.

Once that Pandora’s Box is open, it will mean that when financial institutions borrow money from the central bank, they will earn interest instead of owing it. You read that right. When, not if, central banks go completely negative, they will wind up paying banks to borrow money from them. That’s quantitative easing by another name. Say, the interest rate is -1%. For every $1 trillion that is lent, the central bank in theory would owe an additional $10 billion in interest to the borrowing banks. Fast forward 10 or 20 years into the future. Can you imagine a world where commercial banks pay their customers to borrow money? Sure, scoff now. But mark my words. Central banks are so desperate to kick start the economy and credit creation, they will do almost anything. So, if they have to bribe you to borrow money to start acquiring more things, then that’s exactly what they’ll do.

A few problems immediately emerge. If it ends up costing money for banks to lend money, how will they make any profits? The answer might be that the profits will be the difference between the interest earned from that bank borrowing the money from the central bank less the interest owed to the borrowing customer. So, say the bank borrowed from the central bank at -5% and then issued a loan with that money at -1%. The customer still earns 1%age point of negative interest, and the bank still gets to pocket the remaining 4%age points of negative interest from the central bank. But what about savers? Would they be charged just to put money into the bank? If so, why would they keep it there? Since banks depend on deposits to make up their capital requirements, they would have a powerful disincentive against charging customers to keep deposits, lest it provoke a run on the banks. But why invest in bonds? This is where the real rub comes.

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Chicken and the egg. Central bankers incompetence will drag us all down.

• Central Banking Is In Crisis. Can The World Economy Be Far Behind? (Economist)

A world of helicopter drops is anathema to many: monetary financing is prohibited by the treaties underpinning the euro, for example. Incomes policies are even more problematic, as they reduce flexibility and are hard to reverse. But if the rich world ends up stuck in deflation, the time will come to contemplate extreme action, particularly in the most benighted economies, such as Japan’s. Elsewhere, governments can make use of a less risky tool: fiscal policy. Too many countries with room to borrow more, notably Germany, have held back. Such Swabian frugality is deeply harmful. Borrowing has never been cheaper. Yields on more than $7 trillion of government bonds worldwide are now negative.

Bond markets and ratings agencies will look more kindly on the increase in public debt if there are fresh and productive assets on the other side of the balance-sheet. Above all, such assets should involve infrastructure. The case for locking in long-term funding to finance a multi-year programme to rebuild and improve tatty public roads and buildings has never been more powerful. A fiscal boost would pack more of a punch if it was coupled with structural reforms that work with the grain of the stimulus. European banks’ balance-sheets still need strengthening and, so long as questions swirl about their health, the banks will not lend freely. Write-downs of bad debts are one option, but it might be better to overhaul the rules so that governments can insist that banks either raise capital or have equity forced on them by regulators.

Deregulation is another priority—and no less potent for being familiar. The Council of Economic Advisors says that the share of America’s workforce covered by state-licensing laws has risen to 25%, from 5% in the 1950s. Much of this red tape is unnecessary. Zoning laws are a barrier to new infrastructure. Tax codes remain Byzantine and stuffed with carve-outs that shelter the income of the better-off, who tend to save more. The problem, then, is not that the world has run out of policy options. Politicians have known all along that they can make a difference, but they are weak and too quarrelsome to act. America’s political establishment is riven; Japan’s politicians are too timid to confront lobbies; and the euro area seems institutionally incapable of uniting around new policies.

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Makes sense, since they have no idea what they’re doing. Then again, since this is a double negative…

• Bank of Japan Baffled by Negative Reaction to Negative-Rate Policy (WSJ)

A clash Thursday between Japan’s central-bank chief and lawmakers highlighted the downside of negative interest rates: They are making the Japanese public feel negative. Bank of Japan Gov. Haruhiko Kuroda, who announced the nation’s first move into minus rates three weeks ago, found himself dodging a concerted attack in Parliament from lawmakers who charged the policy was victimizing consumers and sending a message of despair. Even a ruling-party member, Masahiro Ishida, called the policy hard to grasp. “It could have the opposite effect of confusing the market,” he said. The criticism has come as a surprise to central-bank officials who thought their efforts to spark lending and faster economic growth would gain more public support.

“Those who understand this policy are criticizing us, and those who do not are also criticizing us,” said one official this week. It is a symptom of a global problem. The more central banks move into unconventional policies, the harder it becomes to get their message across. That is a particular problem when the policies are supposed to work in part by inspiring confidence. It also highlights an open question about negative rates: Commercial banks, for the most part, haven’t started charging depositors to hold their cash, despite increasing pressure on margins. But what happens if they do? Under new rules that took effect Tuesday, the Bank of Japan started imposing an interest rate of minus -0.1% on some deposits it holds for commercial banks, meaning the banks have to pay to store their money.

The goal was to bring down interest rates generally, including long-term rates charged for home loans. The move followed years of attempts to defeat deflation and stimulate moribund spending, including by pumping ¥80 trillion ($701 billion) of cash annually into the economy with purchases of government bonds. The immediate impact was muted as global markets swooned and the yen, seen as a haven in times of trouble, rose against the dollar, threatening the profits of Japanese exporters. This week, markets have stabilized, but the central bank is struggling with a different and equally hard-to-control force: public opinion.

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But if that’s true for all negative rates, who would the yen fall against?

• Nomura Sees Yen Falling More Than 10% on BOJ Negative Rates (BBG)

Nomura is sticking to its forecast for the yen to weaken to 130 per dollar by year-end on the view Japan’s negative interest-rate policy will prompt investors to buy more overseas assets and U.S. borrowing costs will rise. Japan’s biggest brokerage has maintained the projection since December 2014, when the yen completed a six-month slide to 119.78 after the central bank boosted its debt purchases to a record. The yen has rallied 5.5% this year against the dollar, about 14% stronger than Nomura’s target, as a flight to haven assets from tumbling global stocks burnished the currency’s allure. “There is nothing convincing yet to alter the outlook,” said Yunosuke Ikeda at Nomura Securities in Tokyo. “The most important check points for now are a set of U.S. data in early March. If we can confirm recession risks are low, the 130-yen forecast can be maintained.”

The yen’s recent strength was partly driven by the dollar’s weakness as concerns over a slowdown in China and the health of banks in Europe caused traders to pare bets that the Federal Reserve will raise rates again this year after moving in December. There’s a 41% probability the Fed will boost rates by the end of December, according to futures data compiled by Bloomberg. The odds were more than 90% at the end of last year. The yen’s advance is being driven by “low conviction” risk aversion, according to Nomura’s Ikeda, a trend that may lose momentum should the U.S. show signs of strength when economic figures are released next month. “The worst case scenario is the low-conviction risk off will become high-conviction should the U.S. economy become decisively bad,” he said. “ For this, ISM manufacturing and non-manufacturing as well as jobs data due in early March are very significant.”

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I’ve suggested seppuku before.

• Abenomics? How About Kurodanomics? (BBG)

Despite all Prime Minister Shinzo Abe has done, Japan’s economy contracted an annualized 1.4% in the final three months of 2015, the government announced on Feb. 15. Consumer prices rose just 0.2% year to year, perilously close to deflation. Japanese consumers, hurt by tepid growth in wages and bonuses and a 3%age point rise in the consumption tax in 2014, are holding on to their wallets, with private consumption dropping 0.8% in the quarter. The yen has gained 5.6% against the dollar since the start of the year, eroding profits for exporters such as Toyota Motor and Panasonic. These companies have benefited from the yen’s weakness since the prime minister came to office in late 2012 and began the policy changes known as Abenomics.

“There’s no clear driver to support Japan’s economy,” says Yuichi Kodama at Meiji Yasuda Life Insurance in Tokyo. Yet on the same day the government announced the economy’s contraction, the benchmark Nikkei stock index rose more than 7%. Investors hope that the weak data could spur Bank of Japan Governor Haruhiko Kuroda, who pushed through a negative interest rate last month, to move even deeper into negative territory, or purchase even more bonds. They also hope Abe will postpone another hike in the consumption tax. Handpicked by Abe in 2013, Kuroda has aggressively implemented the monetary policy envisioned by Abenomics. He has championed a quantitative easing program of bond and other asset purchases by the central bank that has left the BOJ with a balance sheet about three-quarters the size of Japan’s $4.6 trillion economy.

Kuroda’s bold and unconventional moves helped drive down the yen, contributing to an increase in corporate earnings and stock prices. In January, the Bank of Japan started charging 0.1% on part of the cash deposited at the central bank by big financial institutions. The idea is to encourage banks to lend instead of watching their cash lose value. “Kuroda is doing everything he can,” says Marcel Thieliant, Japan economist for Capital Economics. Abe’s program has what he calls three “arrows”: an easy-money policy, fiscal stimulus, and structural reforms. Although the BOJ has done its part in terms of interest rates and bond purchases, Abenomics has been a disappointment in the other two areas. The government has moved slowly on reforms of labor laws and other regulations.

As for fiscal stimulus, Abe has increased spending, but also raised the consumption tax to 8%. He wants to raise it to 10%. “Abe and the government have no choice but to depend on Bank of Japan policy,” says Kazuhiko Ogata at Crédit Agricole. But with the BOJ rate negative, Kuroda has little room to maneuver. GDP growth for the fiscal year ending in March will be just 0.8%, according to Bloomberg Intelligence, lower than the central bank’s target of 1.1%. Confidence in Abenomics is falling. In a Yomiuri poll published on Feb. 16, approval of Abe’s economic policies fell to a record low of 39%.

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Can we talk about timing here, OECD?

• OECD Calls for Urgent Increase in Government Spending (WSJ)

Governments in the U.S., Europe and elsewhere should take “urgent” and “collective” steps to raise their investment spending and deliver a fresh boost to flagging economic growth, the Organization for Economic Growth and Development said on Thursday. In its most forceful call to action since the financial crisis, the OECD said the global economy is suffering from a weakness of demand that can’t be remedied through stimulus from central banks alone. Releasing its first economic forecasts of 2016, it urged governments that can borrow at very low interest rates to boost their spending on infrastructure. The OECD said that if governments work together, fresh borrowing could have such a positive impact on growth that it would reduce rather than increase their debts relative to economic output.

Speaking to The Wall Street Journal, OECD Chief Economist Catherine Mann said that without such action, governments will be unable to honor their pledges to deliver a “better life” for young people, adequate pensions and health care for old people, and the returns anticipated by investors. “The economic performance generated by today’s set of policies is insufficient to make good on these commitments,” said Ms. Mann, who has worked at the U.S. Federal Reserve and the Council of Economic Advisers. “Those commitments will not be met unless there is a change in policy stance.” The Paris-based think tank lowered its forecasts for global growth this year and next. It now expects the U.S. economy to grow by 2.0% in 2016 and 2.2% in 2017, having in November projected expansions of 2.5% and 2.4%, respectively.

The OECD lowered its eurozone growth forecasts to 1.4% and 1.7% from 1.8% and 1.9%, and nudged down its Japanese growth forecast for this year to 0.8% from 1.0%. It left its growth forecasts for China unchanged. Overall, it expects the global economy to grow by 3% this year, the same rate of expansion as in 2015 but slower than the 3.3% it anticipated in November. “The downgrade in forecasts is broadly based, reflecting a wide range of disappointing incoming data for the fourth quarter of 2015 and the recent weakness and volatility in global financial markets,” the OECD said. “These trends have been apparent in both advanced and emerging economies.” Last month, the IMF cut its global growth forecast for this year, but still expected a pickup from 2015.

Ms. Mann said the sharp and varying falls in prices of assets and commodities since the start of the year largely reflect a delayed response to weaker growth prospects around the world, and not just in China. “We should have had a decline starting a year ago,” she said. “We can see in those different rates of decline both investor views of prospects, but some over shooting.” The OECD said that budget policy in a number of major economies -including Japan, the U.K. and the U.S.- is “contractionary,” while some developing economies had also made recent budget decisions that will slow growth. It urged governments to reverse course.

“Governments in many countries are currently able to borrow for long periods at very low interest rates, increasing fiscal space,” the OECD said. “Many countries have room for fiscal expansion to strengthen demand. This should focus on policies with strong short-run benefits and that also contribute to long-term growth. A commitment to raising public investment collectively would boost demand while remaining on a fiscally sustainable path.”

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Seems obvious.

• China Bears Say the Capital Outflow Is Just Beginning (BBG)

Yuan bears say this month’s rally shouldn’t be taken as a sign China’s great reversal in capital flows has finished. Goldman Sachs warns that any further shock depreciation will only accelerate the exit. Daiwa Capital Markets, which predicted the outflow risks back in 2014, says less than half of the $3 trillion of dollar debt that ended up in China has been repaid. Commerzbank said record new yuan loans in January showed companies are raising money to repay more debt abroad. Corporate bond sales onshore have more than doubled this year, as offshore issuance in the greenback dropped about 30%. Goldman Sachs says there have been $550 billion of outflows in the second half of 2015, and that every 1% yuan weakening risks $100 billion more.

The yuan’s appreciation in the four years through 2013 prompted companies to borrow dollars offshore and use the money to profit from a strong currency and higher interest rates in China. The one-way bets began to fade in 2014 as the exchange rate to the dollar plunged the most since 1994. This month’s 0.9% rally hasn’t dissuaded analysts from forecasting a further 3.4% drop by year-end. “We’re less than halfway done” in terms of carry trade unwinding, said Kevin Lai at Daiwa. “My main focus is not about unwinding, but the reverse carry trade. People are taking fresh positions to sell the yuan. We’re talking about a massive deflationary scenario now, which is very bad for the market, economy, for everything.” Daiwa’s estimate for the carry trade is on the high side because it includes borrowing by companies outside China, such as Hong Kong and Taiwan.

Oversea-Chinese Banking economist Tommy Xie estimates the positions at around $1 trillion, based on data from the Bank of International Settlements and the Hong Kong Monetary Authority. Chinese companies’ total foreign-currency debt dropped by about $140 billion in the second half of 2015 to $1.69 trillion, including corporate borrowing from onshore banks, Goldman estimates. That was dwarfed by the $370 billion outflows by Chinese residents buying foreign currencies, it said. “A risk is that any further shocks to renminbi confidence and the perception of policy uncertainty could sharply compound the outflow pressure and render any subsequent stabilization attempts much less effective,” Goldman wrote in a note released to media on Jan. 26.

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Much worse now: “As of 2014, according to an estimate by the McKinsey Global Institute, total debt in China stood at 282% of GDP.”

• Red Ink In China (Economist)

This week began with the release of a staggering number. In January, new debt issued in China rose to just over $500 billion, an all-time high. Not all of the “new” debt was actually new; some represented a move out of foreign-currency loans and into local-currency borrowing (in order to reduce foreign-currency risk). But the flow of red ink is not a mirage. China’s government opened the credit taps early in 2016 in order to reduce the odds of a sharp economic slowdown. Private borrowing in China has grown rapidly and steadily since 2008, even as nominal output growth has slowed. As of 2014, according to an estimate by the McKinsey Global Institute, total debt in China stood at 282% of GDP. China is rapidly becoming one of the most indebted countries in the world.

So what? There is a cottage industry of analysts out there gaming out the ways in which a crisis of some sort might unfold within China. But with debts of this magnitude accumulating, you don’t need to posit a looming crisis to draw some reasonably strong, and reasonably gloomy conclusions about the near-term future of the Chinese economy—and the world as a whole. At some point, Chinese corporates will need to deleverage. It is hard to say precisely when or why, but a deleveraging at some point is inevitable. The result of that deleveraging, when it occurs, will be a big drag on demand growth within China. That, in turn, will translate into much slower GDP growth, unless some other source of demand can be found. China could try to boost demand by encouraging more spending and investment by non-corporates.

This probably wouldn’t work especially well, if the history of other economies in such circumstances is any guide. Households have also been adding debt at a good clip. To get them to borrow at an even faster pace, especially at a time when (presumably, given the corporate deleveraging) animal spirits are not at their most spirited, the Chinese government would basically have to force new loans down households’ throats. Certainly, we could expect China to hit the zero lower bound on interest rates and to begin QE. Zero rates and QE would place significant downward pressure on the value of the yuan. That’s just as well, since another thing history tells us is that demand-deficient, deleveraging economies depreciate their currencies and rely on exernal demand to support growth.

Of course, most countries in the situation we’re imagining here aren’t already running big trade surpluses. It is possible, given the importance to China of supply-chain trade, that even a big depreciation wouldn’t boost demand in the economy very much, since it would make imported components more expensive even as it made exports cheaper. If those arguments are right, they suggest that a Chinese adjustment would require either a really big depreciation, or would be slower and more painful, or a bit of both. Conventional wisdom has it, however, that China does not want to depreciate the currency. Depreciation might not boost net exports by much, but it would make dollar-denominated loans more expensive (increasing the pressure on some of those deleveraging corporates), it would squeeze Chinese consumers, and it would represent a big loss of face for the government.

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Delusional: “The government aims to urbanize 100 million lower-income people within five years to expand a middle class that can afford movies and medicine, and sustain China’s upward trajectory.”

• Overproduction Swamps Smaller Chinese Cities, Revealing Depth of Crisis (WSJ)

Even in China’s remotest places, relentless overproduction—here it is mushrooms and cement trucks—is clouding the country’s path to prosperity and jolting the global economy. When 48-year-old farmer Yang Qun began trading at Suizhou’s bustling morning mushroom market a half decade ago, the fungus industry was expanding, even attracting a rural lending arm of British financial giant HSBC. Ms. Yang saved enough to buy a minivan. When wet snow fell last month, she was settling for closeout prices to unload six bags of dried mushrooms that took a half year to cultivate. For Xu Song, a clanging sound was once a welcome reminder that his 200 colleagues were busy pounding steel into the giant barrels used on cement trucks.

On a recent day, he sat alone watching videos in an unheated office, the only worker left on an abandoned factory floor where dozens of rusting barrels were stacked like multi-ton footballs. “The decline was steep,” says Mr. Xu, standing inside the all-but-defunct Hubei Aoma Special Automobile Co. factory, where he was hired to do quality control. “I don’t know what had really happened to us.” Beyond the glut of steel and apartments that weighed down growth in recent years, China’s economy is also saturated with surplus goods from farms and factories. Numerous small and midsize cities such as Suizhou, which boomed on easy credit and government support for agribusiness and construction, were supposed to provide the second wave in China’s growth story. Instead they are now sputtering, wearing down prices, profits and job opportunities.

The struggles in Suizhou show how China’s slowdown is broad and deep and hard to fix. It has fueled volatile market trading around the world and has contributed to anxiety about potentially stalled U.S. growth. Domestic overproduction means China is now spending less overseas, while businesses that sell to China are bracing for possible protectionist moves aimed at propping up local companies. And with Chinese demand at risk, its industrial giants with idle capacity are looking to capture market share abroad, including construction and railway equipment makers. The government has made a priority of eliminating “zombie companies,” kept alive with loans to produce unneeded goods, to clear the path for more vibrant parts of the economy. The squeeze won’t be easy because in small, remote places such as Suizhou, overbuilt industries are often the economic backbone.

[..] China’s future is dependent on spreading opportunity more widely. While Shanghai and other gleaming metropolises on the coast powered the first decades of market liberalization, Beijing is now counting on smaller cities for the next phase. The government aims to urbanize 100 million lower-income people within five years to expand a middle class that can afford movies and medicine, and sustain China’s upward trajectory.

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How many times have we said this?!

• You Cannot Print Your Way to Prosperity (Ron Paul)

Last week US stock markets tumbled yet again, leaving the Dow Jones index down almost 1500 points for the year. In fact, most major world markets are in negative territory this year. There are many Wall Street cheerleaders who are trying to say that this is just a technical correction, that the bottom is near, and that everything will be getting better soon. They are ignoring the real message the markets are trying to send: you cannot print your way to prosperity. People throughout history have always sought to acquire wealth. Most of them understand that it takes hard work, sacrifice, savings, and investment. But many are always looking for that “get rich quick” scheme. Monetary cranks throughout history have thought that just printing more money would result in greater wealth and prosperity. Every time this was tried it resulted in failure.

Huge economic booms would be followed by even larger busts. But no matter how many times the cranks were debunked both in theory and practice, the same failed ideas kept coming back. The intellectual descendants of those monetary cranks are now leading the world’s central banks, which is why the last decade has seen an explosion of money creation. And what do the central bankers have to show for it? Lackluster employment numbers that have not kept up with population growth, increasing economic inequality, a rising cost of living, and constant fear and uncertainty about what the future holds. The past decade has been a lot like the 1920s, when prices wanted to drop but the Federal Reserve kept the price level steady through injections of easy money into the economy. The result in the 1920s was the Great Depression.

But in the 1920s prices were dropping because of increased production. More goods being produced meant lower prices, which the Fed then tried to prop up by printing money. Unlike the “Roaring 20s” however, the economy isn’t quite as strong today. It’s more of a gasp than a roar. Production today is barely above 2007 levels, while heavily-indebted households already hurt during the financial crisis don’t want to keep spending. The bad debts and mal-investments from the last Federal Reserve-induced boom were never liquidated, they were merely papered over with more easy money. The underlying economic fundamentals remain weak but the monetary cranks who run the Fed keep trying to pump more and more money into the system. They fail to realize that easy money is the cause, not the cure, of recessions and depressions. [..] The more money the Federal Reserve creates, the more ordinary Americans will end up suffering.

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What happens when you make it all up.

• The Real Economy Is Talking, but Treasuries Aren’t Listening (BBG)

There’s a massive divergence between recent economic data and U.S. Treasury yields. Amid widespread risk aversion, the yield on 10-year debt fell below 1.60% this month before recovering to back over 1.75% on Thursday. According to Deutsche Bank Chief International Economist Torsten Sløk, that’s still far too low. The Atlanta Fed’s GDPNow indicator provides an estimate for quarterly economic growth based on recently released economic data, which currently stands at 2.6% for the first quarter: “Using the historical relationship between the Atlanta Fed GDP Now estimate and 10y rates shows that 10y rates today should not be 1.82% but instead 2.3%,” he wrote. “Put differently, markets are currently pricing a deep recession, but that is simply not what the data is showing.”

Some caveats apply: The sample size depicted here is quite small, so there’s no guarantee the Atlanta Fed’s GDPNow will prove accurate, and the composition of growth, not merely the headline rate, is important in assessing economic health. Additionally, while it makes intuitive sense for there to be a relationship between yields on sovereign debt, it’s worth remembering what goes into a bond yield: expectations regarding short-term interest rates, market-based measures of inflation compensation, and the term premium (what investors demand for taking on more duration). At present, market-implied expectations for the federal funds rate and inflation are quite low. Term premiums are also suppressed, due in part to strong demand for U.S. assets that are perceived as a safe haven, particularly in times of market turmoil. Those assets also provide a yield that’s more attractive than most other advanced economies.

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How the Anglo model of ownership obsession ritually murders itself.

• Number Of UK Homes Worth More Than £1 Million Set To ‘Triple By 2030’ (G.)

The number of properties in Britain worth £1m or more is set to more than triple by 2030, widening the gap between the housing haves and have-nots, according to a report. Less than half a million homes in the UK are currently valued at £1m-plus, but a study by high street lender Santander claims this number will rise to more than 1.6m in the next 15 years. The report also warns that affordability will worsen considerably by the end of the next decade as house price rises far outstrip growth in household incomes. The average property price amounts to 7.9 times the average income at present, but by 2030 this is expected to hit a multiple of 9.7. Santander said: “By 2030 the UK will be even more starkly divided into the housing wealthy and the housing poor than it is now.”

There is a stark geographical divide among the projected members of the £1m club, according to Santander. One in four homes in London will cost £1m-plus by 2030, rising to 70% in two boroughs in the capital – Kensington and Chelsea and the City of Westminster. More than half of homes in three more London boroughs – Camden, the City of London and Hammersmith and Fulham – will also be worth more than £1m. Across the south-east, 7% of homes are expected to be valued at that level. However, many areas of the UK – the north-east, north-west, Yorkshire and Humber, Scotland and the East Midlands – are expected to host a negligible number of such expensive houses (less than 1%). One area, Torfaen in Wales, home to more than 90,000 people, will have none.

The report, carried out in partnership with Paul Cheshire, professor of economic geography at the London School of Economics, predicts that prices in London, which are currently 11.5 times average incomes, will soar to a multiple of 16.5 by 2030. Cheshire said: “By 2030, the divide between housing haves at the top and the have-nots at the bottom will be even wider than it is now. More owners will enjoy millionaire status, as homes that many would consider modest fetch seven figure prices in sought-after areas. “It will make entering the market more difficult still for new buyers, further highlighting the importance of the right timing, advice, support and financial planning; and not just having a mum and dad who bought a house, but a grandparent, too.”

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Make that the entire western world; pensions are Ponzi’s: “What’s happening to us is a microcosm of what’s going to happen to the rest of the pensions in the United States..”

• 400,000 Americans In Jeopardy As Giant Pension Fund Plans 50% Benefit Cuts (ZH)

Dale Dorsey isn’t happy. After working 33 years, he’s facing a 55% cut to his pension benefits, a blow which he says will “cripple” his family and imperil the livelihood of his two children, one of whom is in the fourth grade and one of whom is just entering high school. Dorsey attended a town hall meeting in Kansas City on Tuesday where retirees turned out for a discussion on “massive” pension cuts proposed by the Central States Pension Fund, which covers 400,000 participants, and which will almost certainly go broke within the next decade. “A controversial 2014 law allowed the pension to propose [deep] cuts, many of them by half or more, as a way to perhaps save the fund,” The Kansas City Star wrote earlier this week adding that “two much smaller pensions also have sought similar relief under the law, and still more pensions are significantly underfunded.”

“What’s happening to us is a microcosm of what’s going to happen to the rest of the pensions in the United States,” said Jay Perry, a longtime Teamsters member. Jay is probably correct. Public sector pension funds are grossly underfunded in places like Chicago and Houston, while private sector funds are struggling to deal with rock bottom interest rates, which put pressure on expected returns and thus drive the present value of funds’ liabilities higher. Illinois’ pension burden has brought the state to its knees financially speaking and in November, Springfield was forced to miss a $560 million payment to its retirement fund. In the private sector, GM said on Thursday that it will sell 20- and 30-year bonds in order to meet its pension obligations.

“At the end of last year GM’s U.S. hourly pension plan was underfunded by $10.4 billion,” The New York Times writes. “About $61 billion of the obligations were funded for the plan’s roughly 360,000 pensioners.” Maybe it’s time for tax payers to bail themselves out. Speaking of GM, Kenneth Feinberg – the man who oversaw the distribution of cash compensation to victims who were involved in accidents tied to faulty ignition switches – is now tasked with deciding whether the Central States Pension Fund’s proposal to cut benefits passes legal muster. “Central States’ proposal would allow the retirees to work and still collect their reduced benefits. But some are no longer able to work, and the idea didn’t seem plausible to others,” the Star goes on to note.

“You know anybody hiring a 73-year-old mechanic?” Rod Heelan asked Feinberg. “I’m available.” “I’ll have to go find a job. I don’t know. I’m 68,” Gary Meyer of Concordia, Mo said. “It would probably be a minimum-wage job.” To be sure, retirees’ frustrations are justified. That said, the fund is simply running out of money. “We simply can’t stay afloat if we continue to pay out $3.46 in pension benefits for every $1 paid in from contributing employers,” a letter to retirees reads. The fund is projected to go broke by 2026. Without the proposed cuts, no benefits at all will be paid from that point forward.

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Not even the WSJ is fooled.

• The Political War on Cash (WSJ)

These are strange monetary times, with negative interest rates and central bankers deemed to be masters of the universe. So maybe we shouldn’t be surprised that politicians and central bankers are now waging a war on cash. That’s right, policy makers in Europe and the U.S. want to make it harder for the hoi polloi to hold actual currency. Mario Draghi fired the latest salvo on Monday when he said the ECB would like to ban €500 notes. A day later Harvard economist and Democratic Party favorite Larry Summers declared that it’s time to kill the $100 bill, which would mean goodbye to Ben Franklin. Alexander Hamilton may soon—and shamefully—be replaced on the $10 bill, but at least the 10-spots would exist for a while longer. Ol’ Ben would be banished from the currency the way dead white males like him are banned from the history books.

Limits on cash transactions have been spreading in Europe since the 2008 financial panic, ostensibly to crack down on crime and tax avoidance. Italy has made it illegal to pay cash for anything worth more than €1,000, while France cut its limit to €1,000 from €3,000 last year. British merchants accepting more than €15,000 in cash per transaction must first register with the tax authorities. Fines for violators can run into the thousands of euros. Germany’s Deputy Finance Minister Michael Meister recently proposed a €5,000 cap on cash transactions. Deutsche Bank CEO John Cryan predicted last month that cash won’t survive another decade. The enemies of cash claim that only crooks and cranks need large-denomination bills. They want large transactions to be made electronically so government can follow them.

Yet these are some of the same European politicians who blew a gasket when they learned that U.S. counterterrorist officials were monitoring money through the Swift global system. Criminals will find a way, large bills or not. The real reason the war on cash is gearing up now is political: Politicians and central bankers fear that holders of currency could undermine their brave new monetary world of negative interest rates. Japan and Europe are already deep into negative territory, and U.S. Federal Reserve Chair Janet Yellen said last week the U.S. should be prepared for the possibility. Translation: That’s where the Fed is going in the next recession. Negative rates are a tax on deposits with banks, with the goal of prodding depositors to remove their cash and spend it to increase economic demand. But that goal will be undermined if citizens hoard cash. And hoarding cash is easier if you can take your deposits out in large-denomination bills you can stick in a safe. It’s harder to keep cash if you can only hold small bills.

So, presto, ban cash.

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First Austria, now Switzerland. 5000 francs is well over $5000.

• Swiss MPs Want New 5,000-Franc Banknotes To ‘Save Privacy And Freedom’ (L.)

Two MPs from the canton of Zug’s parliament are calling on the Swiss federal government to create 5,000-franc banknotes to “save the privacy and freedom” of citizens. Philip Brunner and Manuel Brandberg, members of the right-wing Swiss People’s Party, have proposed a motion that they hope Zug will support for a cantonal initiative seeking changes to the federal currency law. They argue that the creation of 5,000-franc notes will ensure that the Swiss franc maintains its status as a safe haven currency. The move goes in the opposite direction of in the European Union, where finance ministers have talked about withdrawing 500-euro bills from circulation to deter their use for financing terrorism, money laundering and other illegal activities.

But Brunner and Brandberg maintain that the tendency in the EU and in OECD member countries is to “weaken individual liberties” and to exercise greater control over citizens. In this context “cash is comparable to the service firearm kept by Swiss citizen soldiers,” the pair argued in their motion, saying they both “guarantee freedom”. “In France and Italy already cash payments of only up to 1,000 euros are allowed and the question of the abolition of cash is being seriously discussed and considered in Europe, “ Brunner said on his Facebook page. The move toward electronic payments allows governments “total surveillance” over individuals, the pair claim. Switzerland already has a 1,000-franc note (worth around $1,008), which is the most valuable banknote in Europe and second in the world only to the Singapore $10,000 note among currencies in general circulation.

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“You can’t have these conversations when oil is $125 because then you can’t get it out of the ground quickly enough. And you can’t have it at $27 because you’re just trying to survive.”

Hmmm. Looks to me like it’s at $27 that you can’t get it out of the ground quickly enough.

• The Stressed-Out Oil Industry Faces an Existential Crisis (BBG)

The Saudis may go public, OPEC’s in disarray, the U.S. is suddenly a global exporter, and shale drillers are seeking lifelines from investors as banks abandon them. Welcome to oil’s new world order, full of stresses, strains and fractures. For leaders gathering in Houston next week at the IHS CERAWeek conference – often dubbed the Davos of the energy industry – a key question is: what will break first? Will it be the balance sheets of big U.S. shale companies? The treasuries of Venezuela and Nigeria? The resolve of Saudi Arabia, whose recent deal with Russia to freeze output levels offered the first hint of a rethink? After watching prices crash through floor after floor in the worst slump for a generation, the industry is eager for answers.

Insiders say it’s not too hard to visualize what markets might look like after the storm – say five years down the line, when today’s cost-cutting creates a supply vacuum that will push up prices. But it’s what happens in the meantime that’s got them scratching their heads. “This is a weird thing for a market analyst to say because it’s usually the opposite case, but I have more conviction in my five-year outlook than my one-year outlook,” said Mike Wittner at Societe Generale. “Maybe I’m letting my head get turned upside down by the last couple months.” Seeking clarity at closed-door sessions, cocktail hours and water-coolers in Houston will be some of the industry’s biggest players, from Saudi Petroleum Minister Ali al-Naimi to Shell CEO Ben Van Beurden.

In a less volatile year, the long-term viability of fossil fuels might have been high on their agenda after December’s breakthrough climate deal in Paris. But within the industry, that debate has “fallen into the abyss of $27 oil,” said Deborah Gordon, director of the Carnegie Endowment for International Peace’s energy and climate program. “It seems like it’s never a good time,” she said. “You can’t have these conversations when oil is $125 because then you can’t get it out of the ground quickly enough. And you can’t have it at $27 because you’re just trying to survive.”

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Keep watching below.

• Oil Gives Up Gains as Inventories Build (WSJ)

U.S. oil prices eked out a gain Thursday as the U.S. government’s weekly oil-inventory report showed another increase in stockpiles of crude oil. U.S. crude inventories rose by 2.1 million barrels last week to 504.1 million barrels, a new weekly record high, the Energy Information Administration said. In monthly data, which don’t line up exactly with weekly data, inventories last exceeded 500 million barrels in 1930. Light, sweet crude for March delivery settled 0.4%, at $30.77 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, slipped 0.6% to $34.28 a barrel on ICE Futures Europe. Both benchmarks had been up about 3% ahead of the government data, which was delayed one day due to the Presidents Day holiday. Oil prices are down more than 70% since a peak in June 2014, driven lower by a mismatch between ample supplies and tepid demand for crude around the globe.

“U.S. and global inventories are nearing maximums, and global production is showing little sign of slowing,” said Rob Haworth at U.S. Bank Wealth Management in a note. Price moves have been especially volatile in recent weeks amid uncertainty about the pace of global demand growth. The U.S. oil benchmark settled up or down by 1% or more for 23 straight sessions until Thursday, the longest such streak since 2009. U.S. crude stockpiles have climbed since the start of the year as production continued to outpace demand. Inventories fell in the week ended Feb. 5 as imports declined, but imports rose again last week, the EIA data show. ”It’s back to business as usual,” said Bob Yawger at Mizuho. He predicted that prices “will eventually cave under the weight of these storage numbers.”

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Better come clean before you’re forced to?!

• Anglo American Cut to Junk for Third Time This Week (BBG)

Anglo American’s credit rating was cut to junk by Standard & Poor’s, following similar downgrades by Moody’s Investors Service and Fitch Ratings this week, amid questions about the miner’s ability to sell assets. The company’s rating was reduced to BB from BBB- with a stable outlook, S&P said in a statement Thursday. Moody’s cut Anglo to Ba3, and Fitch lowered the rating to BB+ earlier in the week. The shares slid 4.6% as of 2:25 p.m. in London. Anglo, which became the first major London-based miner to be rated junk, has said it’s looking to speed up sales of coal and iron ore assets after losses bled into a fourth year. It’s trying to engineer a turnaround by focusing on its best mines that produce diamonds, platinum and copper. The company wants to raise $4 billion from mine sales and cut net debt to less than $10 billion this year.

Anglo said on Thursday it will start a tender for a maximum of $1.3 billion of bonds to reduce debt and interest costs. It may purchase $1 billion of notes maturing in 2016, 2017 and 2018 in euros and pounds as well as a maximum of $300 million in dollar-denominated securities, according to company statements.= On Tuesday, Anglo added mines including coal in Australia and nickel in Brazil to an already long list of assets for sale as it seeks to scale back its $12.9 billion debt. CEO Mark Cutifani expects to sell 10 assets by the first half of 2016 and because there are so many up for sale, Anglo wouldn’t be forced to accept any offer, he said.

“Although the program should enable Anglo to lower its debt levels, the depressed market means that we view the proceeds and timeline as very uncertain,” S&P said in the statement. “Because other companies are also seeking to divest assets at this time, we remain very cautious about the timing of any sales and the level of proceeds they will generate.” Goldman Sachs said Tuesday that the miner’s plan to sell off assets was “ambitious” in such a tough environment. Bank of America questioned whether the market trusted the management team to execute sales, while Citigroup said the process was coming too late.

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Translation: Dump ’em all in Greece. And then dump Greece itself.

• Wary On Turkey, EU Prepares For Refugee Crisis In Greece (Reuters)

The European Union hopes Turkey will prevent as many migrants reaching Greece as last year but is readying “contingency” plans to shelter large numbers who may arrive but can no longer trek north toward Germany. Migration Commissioner Dimitris Avramopoulos told Reuters on Thursday that it was unclear how far Turkey could reduce numbers once the weather improves and, with efforts under way to prevent a repeat of last summer’s chaotic treks through the Balkans, the EU was working with Athens to shelter refugees in Greece. “As long as our cooperation agreement we made with Turkey doesn’t start giving results, the situation will not be easy at all. The flows will continue,” said Avramopoulos. “That is why we have already started working on contingency planning.”

“If this happens, we are going to be confronted with a huge humanitarian crisis and this has to be avoided.” When more than 800,000 people, many Syrian refugees, arrived in Greece last year, most moved north through the Balkans to Germany. Berlin does not want a repeat, leaving states to the south along the route tightening borders and raising a prospect that a large proportion of new arrivals may be halted in Greece. Assessing how far Turkey will help reduce the flow in return for cash and closer ties with the EU is difficult. Avramopoulos noted that arrivals had dropped sharply in the past week or so, despite good sailing weather, but spiked again on Wednesday.

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Debt Rattle February 13 2016

Feb 132016
 
 February 13, 2016  Posted by at 10:09 am Finance Tagged with: , , , , , , , , ,  6 Responses »


DPC New Orleans milk cart1903

• Abenomics Is In Poor Health After Nikkei Slide, And It May Be Terminal (G.)
• Yen’s Best Two-Week Run Since 1998 Just the Start (BBG)
• The World’s Hottest Trade Has Suddenly Turned Ice-Cold (CNBC)
• Credit Default Swaps Are Back As Investors Look For Panic Button (BBG)
• ‘Austrians Need Constitutional Right to Pay in Cash’ (BBG)
• The Shipping Industry Is Suffering From China’s Trade Slowdown (BBG)
• China Central Bank: Speculators Should Not Dominate Sentiment (Reuters)
• America’s Big Banks Are Fleeing The Mortgage Market (MW)
• Large Increase in Debts Held by Americans Over Age 50 (WSJ)
• The Eurozone Crisis Is Back On The Boil (Guardian)
• Schäuble Says Portugal Debt Woes Trump ‘Strong’ Deutsche Bank (BBG)
• European Banks Are In The Eye Of A New Financial Storm (Economist)
• 150,000 Penguins Die After Giant Iceberg Renders Colony Landlocked (Guardian)
• Four Billion People Face Severe Water Scarcity (Guardian)
• Merkel Turns to ‘Coalition of Willing’ to Tackle Refugee Crisis (BBG)
• EU Is Poised To Restrict Passport-Free Travel (AP)
• 80,000 Refugees Arrive In Europe In First Six Weeks Of 2016 (UNHCR)

It was terminal when it began.

• Abenomics Is In Poor Health After Nikkei Slide, And It May Be Terminal (G.)

Not long ago, Shinzo Abe was being heralded for the early success of his grand design to bring Japan out of a deflationary spiral that had haunted the world’s third-biggest economy for two decades. Soon after Abe became prime minister in December 2012, the first two of the three tenets of his ‘Abenomics’ programme – monetary easing and fiscal stimulus – were having the desired effect. In the first year of the programme, the Nikkei index jumped nearly 60%, and the strong yen, the scourge of the country’s exporters, finally ceded ground to the US dollar. And in April 2013 came the appointment of Haruhiko Kuroda, a Bank of Japan governor who shared Abe’s zeal for deflation busting through ever looser monetary policy.

But by Friday, at the end of a dismal week for the Nikkei share index, market volatility caused by renewed fears over the health of the global economy has left Abe’s prescription for economic recovery in jeopardy. While, as some suggest, it is too early to read the last rites for Abenomics, few would disagree that its symptoms are in danger of becoming terminal. There is damning evidence for that claim; enough, in fact, for Abe to reportedly summon key economic advisers on Friday to discuss a way out of the impasse. Japanese shares registered their biggest weekly drop for more than seven years after shedding 4.8% for the Nikkei s lowest close since October 2014. That took the index below the 15,000 level investors regard as a psychological watershed, and erased all the gains made since the Bank of Japan made the shock decision in October 2014 to inject 80tn yen into the economy.

To compound the problem, another pillar of Abenomics – a weak yen – is also crumbling, with the Japanese currency rising to its strongest level for more than a year on Friday. The intention was for a weak yen to push up corporate earnings and help generate inflation by raising import prices; instead, companies are now cutting earnings forecasts as speculation mounts that Japan will again intervene to rein in the yen’s surge. In recent weeks, slumping oil costs and soft consumer spending – the driving force behind 60% of Japan’s economic activity – have brought inflation to a halt. Official data released last month showed that Japan’s inflation rate came in at 0.5% in 2015, way below the Bank of Japan’s 2% target, as the government struggled to convince cautious firms to usher in big wage rises to stir spending and drive up prices.

In response, the Bank of Japan extended the deadline for achieving its 2% inflation target to the first half of the fiscal year 2017, from its previous estimate of the second half of fiscal 2016. In fairness, Abe is partly the victim of factors beyond his control, namely China’s slowdown, weak overseas demand and plunging oil prices. The problem for Abe and Kuroda is that they are quickly running out of options: witness how the market boost from last week’s surprise decision to adopt negative interest rates ended after a couple of days with barely a whimper. By the time Japan hosts G7 leaders this summer, Abe could be forced to concede defeat in his principal aim of dragging Japan out of deflation and boosting growth.

But higher share prices and a weaker yen were only part of the scheme. He has barely started to address the structural reforms comprising the “third arrow” of Abenomics: a shrinking and ageing workforce and the urgent need to boost the role of women in the economy. Next year, he is expected to introduce a highly controversial increase in the consumption tax – a move that will help Japan tackle its public debt and pay for rising health and social security costs, but which could also dampen consumer spending, the driving force behind 60% of the economy. He may be inclined to disagree after a month of upheaval that also saw the resignation of his economics minister, but Abe’s troubles may be only just beginning.

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When you lose the currency war.

• Yen’s Best Two-Week Run Since 1998 Just the Start (BBG)

When the going gets tough, foreign-exchange traders turn to the yen. Japan’s currency may extend its biggest two-week rally since 1998 as investors continue to seek out refuge assets amid market turmoil, according Citigroup Inc. State Street Global Advisors Inc., which oversees about $2.4 trillion, says it’s buying yen and selling dollars as the tumult gripping financial markets bolsters the Japanese currency’s appeal. “We’re not counting on the market mood shifting any time soon,” said Steven Englander at Citigroup. Citigroup, world’s biggest foreign-exchange trader according to Euromoney magazine, expects haven currencies including the yen, euro and Swiss franc to appreciate in the near term, even though it said investors are being overly pessimistic about the prospects for economic growth in the U.S. and monetary stimulus elsewhere.

The yen has defied predictions to weaken this year while its biggest counterpart, the dollar, has upended forecasts for gains. Currency traders are questioning the idea that the U.S. economy is strong enough for the Federal Reserve to raise interest rates while central bankers in Tokyo and Frankfurt consider adding to stimulus. Japan’s currency rose 3.2% this week to 113.25 per dollar, adding to last week’s 3.7% gain. Its strength contrasts with a median forecast for the currency to drop to 123 against the dollar by the end of the year. Global equities fell into a bear market this week, and commodities declined, amid growing signs that central-bank policy tools were losing their stimulative effects. Fed Chair Janet Yellen signaled financial-market volatility may delay rate increases as the central bank assesses the impact of recent turmoil on domestic growth.

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“In 2009, the ETF enjoyed average daily volume of just 10,000 to 20,000 shares. By 2012, about 200,000 shares were being traded each day. The DXJ rallied tremendously in the next half a year, and by mid-2013 was seeing about 7 million to 8 million shares trade daily..”

• The World’s Hottest Trade Has Suddenly Turned Ice-Cold (CNBC)

An international trade that once looked like a no-brainer has turned into a major headache. The WisdomTree Japan Hedged Equity Fund (DXJ), which combines a long position on Japanese stocks with a short position on the Japanese yen, sounds like a niche product. But as that trade played out beautifully over the past few years, with Japanese stocks soaring as the yen tanked, the ETF has become downright mainstream. In 2009, the ETF enjoyed average daily volume of just 10,000 to 20,000 shares. By 2012, about 200,000 shares were being traded each day. The DXJ rallied tremendously in the next half a year, and by mid-2013 was seeing about 7 million to 8 million shares trade daily, a pace it has maintained up to the present.

The product plays into a popular macro thesis: Expansive policies from the Bank of Japan should help Japanese stocks and hurt the yen. This trend indeed played out powerfully for a time, leading the DXJ to nearly double from November 2012 to June 2015. But the good times didn’t last. In the eight months after hitting that June peak, the ETF lost nearly all of its gain, falling back to its lowest level in more than three years. This as both legs of the trade failed, with Japanese stocks sliding and the yen strengthening amid a global sell-off in risk assets. What may make this especially frustrating is that Japanese monetary authorities haven’t exactly given up on their plan to send the yen lower in order to foster long-dormant inflation and to boost exports.

To the contrary, the BOJ has introduced a negative interest rate policy — which utterly failed in halting the yen’s rise. In fact, the currency is enjoying its best week in years.

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Omen.

• Credit Default Swaps Are Back As Investors Look For Panic Button (BBG)

As markets plunge globally, investors are seeking refuge in an all-but-forgotten place. Trading volumes in the credit-default swaps market — where banks and fund managers go to hedge against losses on corporate and government debt — have surged. Transactions tied to individual entities doubled in the four weeks ended Feb. 5 to a daily average of $12 billion, according to a JPMorgan analysis of trade repository data. The volume of contracts on benchmark indexes in the market increased two-fold during that period to an average of $87 billion a day. The growth could represent a shift. The credit derivatives market has contracted for almost a decade, after loose monetary policies triggered a big rally in assets including corporate bonds, which made investors less eager to protect against the worst.

Regulators have also urged banks to curb their risk taking, reducing the appetite for at least some dealers to trade the instruments. Now, stock markets are selling off and junk bond prices are plunging, increasing investor demand for protection. “The surge we’ve seen in trading is likely to stay with us for the foreseeable future,” said Geraud Charpin at BlueBay Asset Management, which has traded more credit-default swaps on individual credits in the past three months. “The credit cycle has turned, so there’s more appetite to go short and buy protection.” Risk measures fell on Friday after soaring this week to the highest levels since at least 2012 in the U.S., and 2013 in Europe. The cost of insuring Deutsche Bank’s subordinated debt dropped from a record after the German lender said it planned to buy back about $5.4 billion of bonds to allay investor concerns about its finances. The bank’s shares have lost about a third of their value this year.

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The EU just gets crazier by the day. But currency in circulation is way up.

• ‘Austrians Need Constitutional Right to Pay in Cash’ (BBG)

Austrians should have the constitutional right to use cash to protect their privacy, Deputy Economy Minister Harald Mahrer said, as the EU considers curbing the use of banknotes and coins. “We don’t want someone to be able to track digitally what we buy, eat and drink, what books we read and what movies we watch,” Mahrer said on Austrian public radio station Oe1. “We will fight everywhere against rules” including caps on cash purchases, he said. EU finance ministers vowed at a meeting in Brussels on Friday to crack down on “illicit cash movements.” They urged the European Commission to “explore the need for appropriate restrictions on cash payments exceeding certain thresholds and to engage with the ECB to consider appropriate measures regarding high denomination notes, in particular the €500 note.” Ministers told the commission to report on its findings by May 1.

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“..orders for new vessels dropped 40% in 2015 [..] The demolition rate for unwanted vessels jumped 15%.”

• The Shipping Industry Is Suffering From China’s Trade Slowdown (BBG)

When business slows and owners of ships and offshore oil rigs need a place to store their unneeded vessels, Saravanan Krishna suddenly becomes one of the industry’s most popular executives. Krishna is the operation director of International Shipcare, a Malaysian company that mothballs ships and rigs, and these days he’s busy taking calls from beleaguered operators with excess capacity. There are 102 vessels laid up at the company’s berths off the Malaysian island of Labuan, more than double the number a year ago. More are on the way. “There’s a huge demand,” he says. “People are calling us not to lay up one ship but 15 or 20.” Shipbuilders, container lines, and port operators feasted on China’s rise and the global resources boom.

Now they’re among the biggest victims of the country’s slowdown and the worldwide decline in demand for oil rigs and other gear amid the oil price plunge. China’s exports fell 1.8% in 2015, while its imports tumbled 13.2%. The Baltic Dry Index, which measures the cost of shipping coal, iron ore, grain, and other non-oil commodities, has fallen 76% since August and is now at a record low. Shipping rates for Asia-originated routes have dropped, too, and traffic at some of the region’s major ports is falling. In Singapore, the world’s second-largest port, container traffic fell 8.7% in 2015, the first decline in six years. Volumes at the port of Hong Kong, the fourth-busiest, slid 9.5% last year. Beyond Asia, the giant port of Rotterdam in the Netherlands recorded a dip in containerized traffic for the year. Globally, orders for new vessels dropped 40% in 2015, to $69 billion, according to Clarksons Research. The demolition rate for unwanted vessels jumped 15%.

Just a few years ago, as the global economy improved and oil prices rose, many companies ordered more fuel-efficient ships. There were more than 1,200 orders for bulk carriers that transport iron ore, coal, and grain in 2013, compared with just 250 last year, according to Clarksons. Many of the ships ordered are now in operation, says Tim Huxley, chief executive officer of Wah Kwong Maritime Transport Holdings, a Hong Kong-based owner of bulk carriers and tankers. “You have a massive oversupply,” he says. The damage is especially severe in China, the world’s leading producer of ships. New orders for Chinese shipbuilders fell by nearly half last year, according to the Ministry of Industry and Information Technology. In December, Zhoushan Wuzhou Ship Repairing & Building became the first state-owned shipbuilder to go bankrupt in a decade.

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Beijing wants monopoly on sentiment.

• China Central Bank: Speculators Should Not Dominate Sentiment (Reuters)

Speculators should not be allowed to dominate market sentiment regarding China’s foreign exchange reserves and it was quite normal for reserves to fall as well as rise, central bank governor Zhou Xiaochuan was quoted as saying on Saturday. China’s foreign reserves fell for a third straight month in January, as the central bank dumped dollars to defend the yuan and prevent an increase in capital outflows. In an interview carried in the Chinese financial magazine Caixin, Zhou said yuan exchange reform would help the market be more flexible in dealing with speculative forces. There was a need to distinguish capital outflows from capital flight, and tight capital controls would not be effective for China, he said. China has not fully liberalized its capital account.

Zhou added that there was no basis for the yuan to keep depreciating, and China would keep the yuan basically stable versus a basket of currencies while allowing greater volatility against the U.S. dollar. The government also needed to prevent systemic risks in the economy, and prevent “cross infection” between the stock, debt and currency markets, he said. The comments come after China reported economic growth of 6.9% for 2015, its weakest in 25 years, while depreciation pressure on the yuan adds to the case for the central bank to take more economic stimulus measures over the near-term. A slew of economic indicators has sent mixed signals to markets at the start of 2016 over the health of China’s economy. Activity in the services sector expanded at its fastest pace in six months in January, a private survey showed on Feb. 3, while manufacturing activity fell to the lowest since August 2012.

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“..the four largest commercial banks will “downsize or exit entirely from the business of originating and servicing residential mortgages.”

• America’s Big Banks Are Fleeing The Mortgage Market (MW)

When it comes to residential mortgages, big banks are waving the white flag. Banks originated 74% of all mortgages in 2007, but their share fell to 52% in 2014, the most recent data available from the Mortgage Bankers Association. And it could go even lower. But even at these levels, the big bank backtrack is reshaping a lending landscape that’s already undergone seismic shifts since the housing bubble burst. While there’s widespread agreement that banks should have been reined in — and perhaps punished — after playing a major role in the housing bubble that helped tank the economy, the past few years have been tough for banks’ mortgage businesses. They now face a regulatory environment so strict that many are afraid to lend, even to customers with the most pristine credit.

They’re still paying up for misdeeds done during the bubble. There’s essentially no private bond market to whom to sell mortgages. And fighting those battles on behalf of their least-profitable divisions means residential lending just isn’t worth it for many banks. “We can’t make money in the business,” BankUnited CEO John Kanas said when he announced a mortgage retreat on a January earnings call. “We realized that this was the lowest-margin, most volatile business we had and we decided that we should exit.” Of the top 10 originators in 2015, banks lent 28.6% of all mortgages, according to data from Inside Mortgage Finance. That’s about half their share in 2012, when banks among the top 10 originators accounted for 54.4% of all mortgages.

For many analysts, that step is only natural. “The fact is that the cost of capital and compliance has convinced many bankers that making home loans to American families is not worth the risk,” said Chris Whalen, a long-time bank analyst now with Kroll Bond Rating Agency, in a speech early in February. Whalen expects the four largest commercial banks will “downsize or exit entirely from the business of originating and servicing residential mortgages.”

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Boomers. They’re supposed to be the richest Americans. “..the aggregate debt of the average Baby Boomer has soared 169% since 2003..”

• Large Increase in Debts Held by Americans Over Age 50 (WSJ)

Americans in their 50s, 60s and 70s are carrying unprecedented amounts of debt, a shift that reflects both the aging of the baby boomer generation and their greater likelihood of retaining mortgage, auto and student debt at much later ages than previous generations. The average 65-year-old borrower has 47% more mortgage debt and 29% more auto debt than 65-year-olds had in 2003, according to data from the Federal Reserve Bank of New York released Friday. The result: U.S. household debt is vastly different than it was before the financial crisis, when many younger households had taken on large debts they could no longer afford when the bottom fell out of the economy.

The shift represents a “reallocation of debt from young [people], with historically weak repayment, to retirement- aged consumers, with historically strong repayment,” according to New York Fed economist Meta Brown in a presentation of the findings. Older borrowers have historically been less likely to default on loans and have typically been successful at shrinking their debt balances. But greater borrowing among this age group could become alarming if evidence mounted that large numbers of people were entering retirement with debts they couldn’t manage. So far, that doesn’t appear to be the case. Most of the households with debt also have higher credit scores and more assets than in the past.

“Retirement-aged consumers’ repayment has shown little sign of developing weakness as their balances have grown,” according to Ms. Brown. The data were released in conjunction with the New York Fed’s quarterly report on household debt, that aggregates millions of credit reports from the credit-rating agency Equifax. The report was launched in 2010 to track the changing debt behaviors of U.S. households after the financial crisis. For the last two years, household debts have been slowly rising, although they remain well below where they were in 2008. That trend continued in the final quarter of 2015, with overall household indebtedness rising by $51 billion to $ 12.1 trillion.

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Timber!

• The Eurozone Crisis Is Back On The Boil (Guardian)

Greece is back in recession. Italy is barely growing. Portugal expanded but only at half the expected rate. The message could hardly be clearer: the next phase of the eurozone crisis is about to begin. On the face of it, the performance of the eurozone economy in the final three months of 2015 looks solid if unspectacular, with growth as measured by GDP up by 0.3%. But scratch beneath the surface and the picture looks far less rosy. The beneficial impacts of the European Central Bank’s quantitative easing programme have started to wear off, as has the effect of the big drop in oil prices in the second half of 2014. The eurozone peaked in the second quarter of 2015 and the trend was starting to weaken even before the recent turbulence on the financial markets.

Three individual countries bear closer examination. The first is Germany, for which growth of 0.3% in the fourth quarter of 2015 and 1.4% for the year as a whole is as good as it gets. Exports – the mainstay of the German economy – are going to face a much more challenging international climate in 2016, particularly with the euro strengthening on the foreign exchanges. Finland is noteworthy, not just because it is officially back in recession after two successive quarters of negative growth and still has a smaller economy than it did when the financial crisis erupted in 2008, but because its performance is worse than that of Denmark and Sweden, two Scandinavian EU members not in the single currency.

But by far the most worrying country is Greece, where a crumbling economy and the attempts to impose even more draconian austerity is leading, unsurprisingly, to violent protests on the streets. A contraction in growth makes it even harder for Greece to achieve the already ridiculously ambitious deficit and debt reduction targets set for it by its creditors, and on past form that will lead sooner or later (sooner in this case) to a fresh financial crisis and the imposition of further austerity measures. After six months out of the headlines, Greece is coming back to the boil. The danger is that other weak countries on the eurozone’s periphery – most notably Italy and Portugal – suffer from contagion effects.

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He’s trying so hard to boost Deutsche confidence it’ll backfire. People are going to say: ‘let’s see what you got’.

• Schäuble Says Portugal Debt Woes Trump ‘Strong’ Deutsche Bank (BBG)

The volatile Portuguese bond market is more alarming than plunging confidence in Deutsche Bank AG, Europe’s largest lender, according to German Finance Minister Wolfgang Schaeuble. Even as a global rout in stocks has driven down European bank shares by 27% this year, Schaeuble warned on Friday after a meeting of EU finance ministers in Brussels that Portugal doesn’t have enough “resilience.” “Portugal must do everything to counter uncertainty in financial markets,” he said. The German finance minister’s comments come after the yield on Portugal’s 10-year bond fluctuated in a range of 143 basis points this week, the largest five-day swing since July 2013. Prime Minister Antonio Costa, who was sworn in at the end of November, has rolled back reform measures introduced during the nation’s bailout program that ended in 2014.

Deutsche Bank, which issued a statement Friday reassuring investors it has enough reserves to service debt obligations, “has sufficient capital and is well positioned,” Schaeuble said. In an effort to allay anxieties, the Frankfurt-based lender announced plans to buy back about $5.4 billion of bonds in euros and dollars Friday. The move comes after the cost of insuring its senior debt via credit-default swaps rose to the highest since 2011. Deutsche Bank isn’t alone as confidence in banks’ abilities to return profits in a low interest rate environment is waning. Global banks including Citigroup, Bank of America, Credit Suisse and Deutsche Bank have all plunged more than 32%. European finance ministers, when asked about the negative sentiment around European banks, remained upbeat, citing confidence in the safeguards put in place after Lehman Brothers went under in 2008. “We have taken precautions to make banks more resilient after the lessons from the financial and banking crisis,” Schaeuble said.

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The chain is as strong as…

• European Banks Are In The Eye Of A New Financial Storm (Economist)

If the start of the year has been desperate for the world’s stockmarkets, it has been downright disastrous for shares in banks. Financial stocks are down by 19% in America. The declines have been even steeper elsewhere. Japanese banks’ shares have plunged by 36% since January 1st; Italian banks’ by 31% and Greek banks’ by a horrifying 60%. The fall in the overall European banking index of 24% has brought it close to the lows it plumbed in the summer of 2012, when the euro zone seemed on the verge of disintegration until Mario Draghi, the president of the ECB, promised to do “whatever it takes” to save it. The distress in Europe encompasses big banks as well as smaller ones. It has affected behemoths within the euro area such as Société Générale and Deutsche Bank – both of which saw their shares fall by 10% in hours this week – as well as giants outside it such as Barclays (based in Britain) and Credit Suisse (Switzerland).

The apparent frailty of European banks is especially disappointing given the efforts made in recent years to make them more robust, both through capital-raising and tougher regulation. Euro-zone banks issued over €250 billion ($280 billion) of new equity between 2007, when the global financial crisis began, and 2014, when the ECB took charge of supervising them. Before taking on the job, it combed through the books of 130 of the euro zone’s most important banks and found only modest shortfalls in capital. Some of the recent weakness in European banking shares arises from wider worries about the world economy that have also driven down financial stocks elsewhere. A slowdown in global growth is one threat. Another is that the negative interest rates being pursued by central banks to try to prod more life into economies will further sap banks’ profits.

A retreat in Japanese bank shares turned into a rout following such a decision in late January. Investors in European banks fret not just about lacklustre growth but also a possible move deeper into negative territory by the ECB in March. On February 11th Sweden’s central bank cut its benchmark rate from -0.35% to -0.5%, prompting shares in Swedish banks to tumble. But the malaise of European banking stocks has deeper roots. The fundamental problem is both that there are too many banks in Europe and that many are not profitable enough because they have clung to flawed business models. European investment banks lack the deep domestic capital markets that give their American competitors an edge. Deutsche, for instance, has only just resolved to hack back its investment bank in the face of a less hospitable regulatory environment following the financial crisis.

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What to say?

• 150,000 Penguins Die After Giant Iceberg Renders Colony Landlocked (Guardian)

An estimated 150,000 Adelie penguins living in Antarctica have died after an iceberg the size of Rome became grounded near their colony, forcing them to trek 60km to the sea for food. The penguins of Cape Denison in Commonwealth Bay used to live close to a large body of open water. However, in 2010 a colossal iceberg measuring 2900sq km became trapped in the bay, rendering the colony effectively landlocked.Penguins seeking food must now waddle 60km to the coast to fish. Over the years, the arduous journey has had a devastating effect on the size of the colony. Since 2011 the colony of 160,000 penguins has shrunk to just 10,000, according to research carried out by the Climate Change Research Centre at Australia’s University of New South Wales. Scientists predict the colony will be gone in 20 years unless the sea ice breaks up or the giant iceberg, dubbed B09B, is dislodged.

Penguins have been recorded in the area for more than 100 years. But the outlook for the penguins remaining at Cape Denison is dire. “The arrival of iceberg B09B in Commonwealth Bay, East Antarctica, and subsequent fast ice expansion has dramatically increased the distance Adélie penguins breeding at Cape Denison must travel in search of food,” said the researchers in an article in Antarctic Science. “The Cape Denison population could be extirpated within 20 years unless B09B relocates or the now perennial fast ice within the bay breaks out” “This has provided a natural experiment to investigate the impact of iceberg stranding events and sea ice expansion along the East Antarctic coast.” In contrast, a colony located just 8km from the coast of Commonwealth Bay is thriving, the researchers said. The iceberg had apparently been floating close to the coast for 20 years before crashing into a glacier and becoming stuck.

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The next trigger for mass migrations.

• Four Billion People Face Severe Water Scarcity (Guardian)

At least two-thirds of the global population, over 4 billion people, live with severe water scarcity for at least one month every year, according to a major new analysis. The revelation shows water shortages, one of the most dangerous challenges the world faces, is far worse previously than thought. The new research also reveals that 500m people live in places where water consumption is double the amount replenished by rain for the entire year, leaving them extremely vulnerable as underground aquifers run down. Many of those living with fragile water resources are in India and China, but other regions highlighted are the central and western US, Australia and even the city of London. These water problems are set to worsen, according to the researchers, as population growth and increasing water use – particularly through eating meat – continues to rise.

In January, water crises were rated as one of three greatest risks of harm to people and economies in the next decade by the World Economic Forum, alongside climate change and mass migration. In places, such as Syria, the three risks come together: a recent study found that climate change made the severe 2007-2010 drought much more likely and the drought led to mass migration of farming families into cities. “If you look at environmental problems, [water scarcity] is certainly the top problem,” said Prof Arjen Hoekstra, at the University of Twente in the Netherlands and who led the new research. “One place where it is very, very acute is in Yemen.” Yemen could run out of water within a few years, but many other places are living on borrowed time as aquifers are continuously depleted, including Pakistan, Iran, Mexico, and Saudi Arabia. Hoekstra also highlights the Murray-Darling basin in Australia and the midwest of the US. “There you have the huge Ogallala acquifer, which is being depleted.”

He said even rich cities like London in the UK were living unsustainably: “You don’t have the water in the surrounding area to sustain the water flows” to London in the long term. The new study, published in the journal Science Advances on Friday, is the first to examine global water scarcity on a monthly basis and at a resolution of 31 miles or less. It analysed data from 1996-2005 and found severe water scarcity – defined as water use being more than twice the amount being replenished – affected 4 billion people for at least one month a year. “The results imply the global water situation is much worse than suggested by previous studies, which estimated such scarcity impacts between 1.7 billion and 3.1 billion people,” the researchers concluded. The new work also showed 1.8 billion people suffer severe water scarcity for at least half of every year.

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Making deals with Turkey while blaming Greece is just plain wrong on many different levels.

• Merkel Turns to ‘Coalition of Willing’ to Tackle Refugee Crisis (BBG)

German Chancellor Angela Merkel is turning to a subgroup of European Union members to tackle the region’s refugee crisis as the bloc as a whole bickers over how to handle the biggest influx of migrants into Europe since World War II. Merkel plans to meet again with a “coalition of the willing” in Brussels ahead of an EU summit in the city next week. Turkish Prime Minister Ahmet Davutoglu will attend the talks, which have taken place at previous EU gatherings. Turkey is the main country from which migrants enter the EU. “This doesn’t have to do with a permanent distribution mechanism but rather a group of countries that are willing to consider” taking refugees once the illegal trafficking has been stopped, Merkel said Friday at a Berlin press conference with her Polish counterpart Beata Szydlo.

“We will then report quite transparently to all 28 member states where things stand.” Merkel traveled earlier this week to Turkey to discuss the crisis with Davutoglu. Merkel said on Monday the only way to end the flood of illegal migration across the Aegean Sea from Turkey into Greece was to replace it with a legal avenue. That would involve the EU resettling allotments of mostly Syrian refugees directly from Turkey in return for Turkey halting the flow of migrants, she said. The chancellor has thus far failed to secure a wider EU deal to share in housing and caring for those who have already reached the bloc.

Germany, which took in more than 1 million refugees last year, has pushed to implement a quota system to distribute migrants among EU members – something that a number of the bloc’s states, in particular in the east, argue should only be done on a voluntary basis. “For Poland, a permanent mechanism of relocating migrants is currently not acceptable,” Szydlo said at the press conference with Merkel. “I think we will continue talking about this. But I want to stress that Poland wants to actively participate in solving the migrant crisis because it’s very important for the EU as a whole.”

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They’re too thick to see that this means the end of the union.

• EU Is Poised To Restrict Passport-Free Travel (AP)

EU countries are poised to restrict passport-free travel by invoking an emergency rule to keep some border controls for two more years because of the migration crisis and Greece’s troubles in controlling its border, according to EU documents seen by AP. The switch would reverse a decades-old trend of expanding passport-free travel in Europe. Since 1995, people have been able to cross borders among Schengen Area member countries without document checks. Each of the current 26 countries in the Schengen Area is allowed to unilaterally put up border controls for a maximum of six months, but that time limit can be extended for up to two years if a member is found to be failing to protect its borders.

The documents show that EU policy makers are preparing to make unprecedented use of an emergency provision by declaring that Greece is failing to sufficiently protect it border. Some 2,000 people are still arriving daily on Greek islands in smugglers’ boats from Turkey, most of them keen to move deeper into Europe to wealthier countries like Germany and Sweden. A European official showed the documents to the AP on condition of anonymity because the documents are confidential. Greek government officials declined to comment on the content of documents not made public. In Brussels on Friday, EU nations acknowledged that the overall functioning of Schengen “is at serious risk” and said Greece must make further efforts to address “serious deficiencies” within the next three months.

European inspectors visited Greek border sites in November and gave Athens until early May to upgrade the border management on its islands. Two draft assessments forwarded to the Greek government in early January indicated Athens was making progress, although they noted “important shortcomings” in handling migrant flows. But with asylum-seekers still coming at a pace ten times that of January 2015, European countries are reluctant to dismantle their emergency border controls. And if they keep them in place without authorization, EU officials fear the entire concept of the open-travel zone could be brought down. A summary written by an official in the EU’s Dutch presidency for a meeting of EU justice and home affairs ministers last month showed they decided that declaring Greece to have failed in its upgrade was “the only way” for Europe to extend the time for border checks.

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“..more than in the first four months of 2015..”

• 80,000 Refugees Arrive In Europe In First Six Weeks Of 2016 (UNHCR)

Despite rough seas and harsh winter weather, more than 80,000 refugees and migrants arrived in Europe by boat during the first six weeks of 2016, more than in the first four months of 2015, the UN Refugee Agency, UNHCR, announced today. In addition it said more than 400 people had lost their lives trying to cross the Mediterranean. However, despite the dangers over 2,000 people a day continue to risk their lives and the lives of their children attempting to reach Europe. Comparable figures for 2015 show such numbers only began arriving in July. “The majority of those arriving in January 2016, nearly 58%, were women and children; one in three people arriving to Greece were children as compared to just 1 in 10 in September 2015,” UNHCR’s Chief spokesperson Melissa Fleming told a press briefing in Geneva.

Fleming added that over 91% of those arriving in Greece come from the world’s top ten refugee producing countries, including Syria, Afghanistan and Iraq. “Winter weather and rough seas have not deterred those desperate enough to make the journey, resulting in near daily shipwrecks,” she added. When surveyed upon arrival, most of them cite they had to leave their homeland due to conflict. More than 56% of January arrivals to Greece were from Syria. However, UNHCR stressed that solutions to Europe’s situation were not only eminently possible, but had already been agreed by States and now urgently needed to be implemented. Stabilization is essential and something for which there is also strong public demand.

“Within the context of the necessary reduction of dangerous sea arrivals, safe access to seek asylum, including through resettlement and humanitarian admission, is a fundamental human right that must be protected and respected,” Fleming added. She said that regular pathways to Europe and elsewhere were important for allowing refugees to reach safety without putting their lives in the hands of smugglers and making dangerous sea crossings. “Avenues, such as enhanced resettlement and humanitarian admission, family reunification, private sponsorship, and humanitarian and refugee student/work visas, should be established to ensure that movements are manageable, controlled and coordinated for countries receiving these refugees,” Fleming added.

Vincent Cochetel, UNHCR’s Director Bureau for Europe, added that faced with this situation, UNHCR hoped that EU Member States would implement at a faster pace all EU-wide measures agreed upon in 2015, including the implementation of hotspots and the relocation process for 160,000 people already in Greece and Italy and the EU-Turkey Joint-Action Plan. “If Europe wants to avoid the mess of 2015, it must take action. There is no plan B,” he also told the briefing.

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