Sep 282015
 
 September 28, 2015  Posted by at 8:21 am Finance Tagged with: , , , , , , , , , ,  


John Vachon Koolmotor, Cleveland, Ohio May 1938

Cash Beats Stocks And Bonds For First Time In 25 Years (MarketWatch)
US Bonds Flash Warning Sign (WSJ)
Waiting for Collapse: USA Debt Bombs Bursting (Edstrom)
China August Industrial Profits Fall 8.8% From A Year Earlier (Reuters)
Chinese Mining Group Longmay To Cut 100,000 Coal Jobs (China Daily)
VW Proves That Global Business Has Become A Law Unto Itself (Guardian)
Seven Reasons Volkswagen Is Worse Than Enron (FT)
German Transport Authority Demands VW Car Clean-Up Plan By October 7 (Bloomberg)
VW Scandal to Hurt Its Financing Arm (WSJ)
VW Staff, Supplier Warned Of Emissions Test Cheating Years Ago (Reuters)
VW’s New CEO Is Moving Forward With a Strategy Shift (Bloomberg)
Catalan Separatists Claim Election Win As Yes Vote For Breakaway (Guardian)
Sweden’s Negative Interest Rates Have Turned Economics On Its Head (Telegraph)
Zero Inflation Looms Again for ECB as Oil Drop Counters Stimulus (Bloomberg)
Tory Welfare Cuts Will Destroy Benefit Of UK’s New Living Wage (Guardian)
Corbyn Recruits Top Global Economists to Boost Economic Credentials (Bloomberg)
Swiss Watchdog Says Opens Precious Metal Manipulation Probe (Reuters)
Rousseff Worried About Brazilian Companies With Dollar Debt (Bloomberg)
Shell Halts Alaska Oil Drilling After Disappointing Well Result (Bloomberg)
Banksy’s Dismaland To Be Taken Down And Sent To Calais To Build Shelters (PA)
500 Migrants Rescued In Mediterranean This Weekend: Italian Coastguard (AFP)

Brought to you by QE.

Cash Beats Stocks And Bonds For First Time In 25 Years (MarketWatch)

Cash is on track this year to outperform both stocks and bonds, something that hasn’t happened since 1990, according to Bank of America Merrill Lynch. And it might all be down to the notion that central bank-fueled liquidity has peaked. Year-to-date annualized returns are negative 6% for global stocks and negative 2.9% for global government bonds, according to analysts led by Michael Hartnett in a Friday note. The dollar is up 6% and commodities are down 17%, while cash is flat. Here’s what this has to do with the liquidity story:

[Quantitative easing] & zero rates reflated financial assets significantly. The only assets that QE did not reflate were cash, volatility, the US dollar and banks. Cash, volatility, the US dollar are all outperforming big-time in 2015, which tells you markets have been forced to discount peak of global liquidity/higher Fed funds. Frequent flash [crashes] (oil, UST, CHF, bunds, SPX) tell the same story. Peak in liquidity = peak of excess returns = trough in volatility.

The note speaks to what has become a very important theme for investors. While the Bank of Japan and the ECB continue to provide quantitative easing, the Fed has stopped its asset purchases and is moving toward lifting rates from near zero, as is the Bank of England. The notion that liquidity has peaked and that financial markets must now adjust to that new dynamic. Indeed, billionaire hedge-fund investor David Tepper earlier this month argued that as China and other emerging-market central banks shed foreign reserves, liquidity is no longer flowing one direction, making for more volatile conditions.

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“Clearly, the fact that spreads have been widening since the middle of 2014 is a very worrisome trend..” “We continue to scratch our heads as to the driver of that.”

US Bonds Flash Warning Sign (WSJ)

The U.S. corporate-bond market is starting to flash caution signals about the broader economy. The difference in yield, called the “spread,” between bonds from America’s strongest companies and ultrasafe U.S. Treasury securities has been steadily increasing, a trend that in the past has foreshadowed economic problems. Wider spreads mean that investors want more yield relative to Treasurys to own bonds from U.S. companies. It can signal that investors are less confident about companies’ business prospects and financial health, though other factors likely also are at play. Spreads in investment-grade corporate bonds—debt from companies rated triple-B-minus or higher—are on track to increase for the second year in a row, according to Barclays data.

That would be the first time since the financial crisis in 2007 and 2008 that spreads widened in two consecutive years. The previous times were in 1997 and 1998, as a financial crisis roiled Asian countries, and a few years before the dot-com bubble burst in the U.S. Investors and analysts say they are closely watching the action to determine whether trouble is brewing once again. Concerns are growing about companies’ ability to pay back the massive debt load taken on in recent years, as ultralow interest rates spurred corporate finance chiefs to sell record amounts of bonds. There is also anxiety that economic weakness overseas could ultimately spill over into the U.S., a worry highlighted on Thursday when Caterpillar said it could cut more than 10,000 jobs amid a slowdown in construction-equipment sales in China.

“We could see the economy accelerate; we could see this global weakness pass,” said Brian Rehling at Wells Fargo Investment Institute. “But you could also see things go the other way, where the global economy continues to weaken.” [..] As investors grow more skittish, companies looking to sell new debt are being forced to pay up. Altice NV on Friday reduced the size of a junk-bond deal backing its purchase of Cablevision from $6.3 billion to $4.8 billion and paid higher yields than initially expected, according to S&P Capital IQ LCD. The company also increased the size of a term loan to help finance the $10 billion acquisition. “Clearly, the fact that spreads have been widening since the middle of 2014 is a very worrisome trend,” said Krishna Memani at OppenheimerFunds, which oversees some $220 billion. “We continue to scratch our heads as to the driver of that.”

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A very extensive overview of what locations in the US are due to default first, and second. Pick your local flavor.

Waiting for Collapse: USA Debt Bombs Bursting (Edstrom)

) It’s been so easy the past 15 years for local governments in the USA, state governments, government authorities, corporations, banks, hedge funds and the US Federal government to simply say how many millions, billions or trillions of dollars they wanted, pay some high priced call accountants to fill out some paperwork with fine print and voila, millions, billions and trillions of dollars in borrowed money simply appeared. It has been that easy! Now, the government in the USA owes $46 trillion, US corporations owe $15 trillion, US individuals owe $13 trillion plus there are $315 trillion in outstanding Wall Street derivatives. (Few Americans know what a derivative is, but we as a nation are on the hook for up to $315 trillion in additional debt because of these derivatives.)

These debt figures continue to escalate with each passing month. Detroit and Puerto Rico have only just begun the debt bombs bursting in the USA, the USA’s slow motion economic collapse. Who’s next? I’m going to tell you about some US local and state governments that have too much debt and are ripe for debt collapse along with a few US government authorities and corporations that borrowed too much money and are also ripe for debt collapse. Mr. Dudley of the New York Federal Reserve Bank recently warned of a wave of US municipal debt collapses coming soon. The problem is bigger than solely US municipalities as Mr. Dudley no doubt is aware.

Chicago or LA, which one is more likely to collapse first? Chicago. Kanakee County IL or Perry County KY? Kanakee County is more likely to go belly up first. Atlantic City (AC) or Yonkers? AC is more likely to bite the dust first. 1 out of 25 states are ready to collapse within months, as are 1 out of 20 US cities, 1 out of 15 US government authorities and 1 out of 7 US corporations. Within a few years, many US cities, counties, authorities, states and corporations will have debt collapsed, before the USA as a nation debt collapses. A tsunami of debt collapses is hitting the USA. The causes are government officials and corporate executives who borrowed too much easy money plus Wall Street bankers and hedge fund vultures who lent too much easy money.

Besides city, county and state collapses, there will also be school debt collapses, hospital debt collapses, government authority debt collapses, individual bankruptcies, corporate debt collapses and finally the nationwide debt collapse of the USA. If change cannot be brought about fast – like increasing revenue (e.g. raising taxes on the rich) or cutting spending (e.g. ending endless war, cutting military/intel spending) or both – then, the best way forward may be to evacuate. Get away from the places about to collapse as quickly as you can. If you find your home is burning to the ground, as I discovered one Sunday evening in New York City in the Summer of 2011, what are you going to do? Evacuate.

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TEXT

China August Industrial Profits Fall 8.8% From A Year Earlier (Reuters)

Profits earned by Chinese industrial companies declined 8.8% in August from a year earlier due to rising costs and persistent falling prices, official data showed on Monday, adding to signs of weakness in the world’s second largest economy. Also hurting firms was the stock market slump, which pushed down their investment returns while yuan fluctuation increased companies’ financial costs in August, the National Bureau of Statistics (NBS) said. During August, profits of industrial companies suffered the biggest annual fall since the NBS began monitoring such data in 2011. For the first eight months of this year, profits were down 1.9% from the year-earlier period, according to the NBS. The bureau said firms were squeezed by rising costs and falling prices with profits falling more quickly in August than in July.

In total, August profits were down 156.6 billion yuan ($24.59 billion) from a year earlier. The NBS said investment returns for industrial companies from a year earlier increased by 4.12 billion yuan in August, compared with a 11.04 billion yuan gain in July. Financial payments of industrial firms’ increased by 23.9% in August from a year earlier, compared to a 3% year-on-year drop in July. A plunge in China’s stock market over the summer and a surprise devaluation in the yuan have roiled global markets, and raised doubts inside and outside China over Beijing’s ability to manage its economy. Among 41 industrial sectors, 31 sectors had year-on-year growth of profit in the first eight months of this year, while 10 recorded drops, the NBS said.

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Beijing will spin this as some clean air initiative.

Chinese Mining Group Longmay To Cut 100,000 Coal Jobs (China Daily)

The largest coal mining group in Northeast China is cutting 100,000 jobs within the next three months to reduce its losses – one of the biggest mass layoffs in recent years. Heilongjiang Longmay Mining Holding Group Co Ltd, which has a 240,000 workforce, said a special center would be created to help those losing their jobs to either relocate or start their own businesses. Chairman of the group Wang Zhikui said the job losses were a way of helping the company “stop bleeding”. It also plans to sell its non-coal related businesses to help pay off its debts, said Wang. The State-owned mining group has subsidiaries in Jixi, Hegang, Shuangyashan and Qitaihe in Heilongjiang province, which account for about half the region’s coal production.

China’s coal mining industry has been struggling with overcapacity and falling coal prices since 2012. Last year, Longmay launched a management restructuring and cut thousands of jobs to stay profitable, amid the overall industry decline. However, the company still reported around 5 billion yuan ($815 million) in losses. It has been a dramatic fall from grace for the company, which in 2011 reported 800 million yuan in profit with annual production exceeding 50 million metric tons.

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Entire political systems in their pockets.

VW Proves That Global Business Has Become A Law Unto Itself (Guardian)

A well-functioning capitalism has, and will always need, multiple and powerfully embedded checks and balances – not just on its conduct but on how it defines its purpose. Sometimes those checks are strong, uncompromised unions; sometimes tough regulation; sometimes rigorous external shareholders; sometimes independent non-executive directors and sometimes demanding, empowered consumers. Or a combination of all of the above. CEOs, company boards and their cheerleaders in a culture which so uncritically wants to be pro-business do not welcome any of this: checks and balances get in the way of “wealth generation”. They are dismissed as the work of liberal interferers and apostles of the nanny state. Germany’s economy has been a good example of how checks and balances work well.

But the existential crisis at Volkswagen following its systematic cheating of US regulators over dangerous diesel exhaust emissions shows that any society or company forgets the truth at its peril. Volkswagen abused the system of which it was part. It became an autocratic fiefdom in which environmental sustainability took second place to production – an approach apparently backed by the majority family shareholder, with no independent scrutiny by other shareholders, regulators, directors or consumers. Even its unions became co-opted to the cause. Worse, the insiders at the top paid themselves, ever more disproportionately, in bonuses linked to metrics that advanced the fiefdom’s interests. But they never had to answer tough questions about whether the fiefdom was on the right track.

The capacity to ignore views other than your own, no external sanction and the temptation for boundless self-enrichment can emerge in any capitalism – and when they do the result is toxic. VW, facing astounding fines and costs, may pay with its very existence. So why did a company with a great brand, passionate belief in engineering excellence and commitment to building great cars knowingly game the American regulatory system, to suppress measured emissions of nitrogen dioxide to a phenomenal degree? Plainly, there were commercial and production benefits. It could thus sell the diesel engines it manufactured for Europe in the much tougher regulatory environment – at least for diesel – of the US and challenge Toyota as the world’s largest car manufacturer. Directors, with their bonuses geared to growth, employment and profits, could become very rich indeed.

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Bailout?!

Seven Reasons Volkswagen Is Worse Than Enron (FT)

It has only been a week since the stunning revelation that the Volkswagen group equipped millions of diesel-powered cars with software designed to fool anybody testing their emissions, and just days since the company’s chief executive, Martin Winterkorn, resigned. And yet there are reasons to believe that the fallout from this scandal will be as big as Enron, or even bigger. Most corporate scandals stem from negligence or the failure to come clean about corporate wrongdoing. Far fewer involve deliberate fraud and criminal intent. Enron’s accounting manipulation is often held up as a prime example of the latter and cases featuring the US energy company’s massive financial fraud are therefore taught in business schools around the world. Here are seven reasons why the Volkswagen scandal is worse and could have far greater consequences.

First, whereas Enron’s fraud wiped out the life savings of thousands, Volkswagen’s has endangered the health of millions. The high levels of nitrogen oxides and fine particulates that the cars’ on-board software hid from regulators are hazardous and detrimental to health, particularly of children and those suffering from respiratory disease. Second, led by Volkswagen, Europe’s car manufacturers lobbied hard for governments to promote the adoption of diesel engines as a way to reduce carbon emissions. Whereas diesel engines power fewer than 5% of passenger cars in the US, where regulators uncovered the fraud, they constitute more than 50% of the market in Europe thanks in large part to generous government incentives.

It was bad enough that Enron’s chief executive urged employees to buy the company’s stock. This, however, is the equivalent of the US government offering tax breaks at Enron’s behest to get half of US households to buy stock propped up by fraudulent accounting. Third, the fines and lawsuits facing Volkswagen are likely to surpass Enron in both scale and scope. Volkswagen’s potential liability to Environmental Protection Agency fines is $18bn. Add to this fines in most or all of the 50 US states and class action lawsuits by buyers and car dealers who have seen the value of their cars and franchises diminish overnight and you have a massive legal bill.

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Presumably, if you lower performance enough, it might be doable. But that makes it a toss-up between NOx and CO2.

German Transport Authority Demands VW Car Clean-Up Plan By October 7 (Bloomberg)

Germany’s car regulators have asked Volkswagen to provide a plan by Oct. 7 for if and when its vehicles will meet national emissions requirements, after the company admitted cheating on U.S. air-pollution tests. The Federal Motor Transport Authority sent a letter to VW requesting a “binding” program and schedule for a technical solution, Transport Minister Alexander Dobrindt said Sunday in an e-mailed statement. Volkswagen will present a plan in the coming days for how it will fix its affected vehicles and will notify customers and relevant authorities, Peter Thul, a company spokesman, said by phone. Bild reported earlier about the letter.

VW may have known for years about the implications of software at the center of the test-cheating scandal, newspapers reported. Robert Bosch GmbH warned VW in 2007 that its planned use of the software is illegal, according to Bild. A Volkswagen employee did the same in 2011, Frankfurter Allgemeine Zeitung reported. Volkswagen is investigating and will present its findings as soon as they’re available, Thul said, declining to elaborate.

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When it rains…

VW Scandal to Hurt Its Financing Arm (WSJ)

Volkswagen’s giant U.S. and European financing operations often act as lenders for car buyers and dealers for any of the brands in the company’s stable, from the namesake VW to Bentley, Lamborghini, Audi, Porsche and others. It bundles banking activities, including deposit taking and consumer lending to spur car sales, as well as leasing and insurance operations. The unit’s lending and leasing contracts are backed by cars. If the value of the car drops, the financial services unit may have to book a write-down. Volkswagen Financial Services AG, as it is formally known, is now evaluating whether it has to book charges on the collateral value of cars affected by a recall, a spokesman said. “We’re in talks with Volkswagen to evaluate the potential impact” and aim to produce results next week, he said.

With more than 11,000 employees and assets of around €114 billion, the Financial Services unit contributed €781 million or nearly 14% to the group’s overall net profit of €5.66 billion in the first half, according to an analyst presentation. The entire unit had 12.6 million contracts, 15% of which are in North America and 70% in Europe. The ECB late last week temporarily excluded asset- backed securities originated by Volkswagen AG from its bond buying program to review recent developments, according to a person familiar with the matter. The ECB hopes to complete its review soon, the person said. VW bonds fell last week.

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And nothing happened at all..

VW Staff, Supplier Warned Of Emissions Test Cheating Years Ago (Reuters)

Volkswagen’s own staff and one of its suppliers warned years ago about software designed to thwart emissions tests, two German newspapers reported on Sunday, as the automaker tries to uncover how long its executives knew about the cheating. The world’s biggest automaker is adding up the cost to its business and reputation of the biggest scandal in its 78-year history, having acknowledged installing software in diesel engines designed to hide their emissions of toxic gasses. Countries around the world have launched their own investigations after the company was caught cheating on tests in the United States. Volkswagen says the software affected engines in 11 million cars, most of which were sold in Europe. The company’s internal investigation is likely to focus on how far up the chain of command were executives who were responsible for the cheating, and how long were they aware of it.

The Frankfurter Allgemeine Sonntagszeitung, citing a source on VW’s supervisory board, said the board had received an internal report at its meeting on Friday showing VW technicians had warned about illegal emissions practices in 2011. No explanation was given as to why the matter was not addressed then. Separately, Bild am Sonntag newspaper said VW’s internal probe had turned up a letter from parts supplier Bosch written in 2007 that also warned against the possible illegal use of Bosch-supplied software technology. The paper did not cite a source for its report. Volkswagen declined to comment on the details of either newspaper report. “There are serious investigations underway and the focus is now also on technical solutions” for customers and dealers, a Volkswagen spokesman said. “As soon as we have reliable facts we will be able to give answers.”

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All the smoke and mirrors they can get their hands on.

VW’s New CEO Is Moving Forward With a Strategy Shift (Bloomberg)

Matthias Mueller pressed the Volkswagen board to move ahead with a reorganization he helped devise before the carmaker was caught up in an emissions-cheating scandal, as the new leader seeks to put his stamp on the company. The former Porsche boss wanted the new strategy to remain on the agenda of the Friday meeting in Wolfsburg, Germany, according to a person familiar with Mueller’s thinking, who asked not to be identified because the discussions were private. Volkswagen had intended to hold off on a reorganization aimed at streamlining decision-making to give the new boss a chance to settle in. But Mueller, who had assisted his predecessor Martin Winterkorn with devising the plan, didn’t want to wait to start making the changes.

Volkswagen said Friday that more authority will be given to individual brands and regions, a departure from the centralized structures that kept key decisions in Wolfsburg and the chief executive officer’s inner circle. The announcement capped a tumultuous week after the company admitted it rigged some diesel engines to cheat on emissions tests. Friday’s meeting, which took place in a newly constructed office building within Volkswagen’s main plant, started before noon and stretched into the evening amid wrangling over who knew what and when. Documents from four years ago that flagged the illegal software was evidently never sent up the chain of command, underscoring the need for external investigators, said another person familiar with the meeting.

When the 20-member panel finally dispersed and presented VW’s new CEO, Mueller was flanked by Volkswagen’s power players: Wolfgang Porsche, the head of the family that controls a majority of the company’s voting shares; Bernd Osterloh, the chief representative of Volkswagen’s 600,000 workers; the prime minister of Lower Saxony, Stephan Weil, whose state owns 20% of Volkswagen; and Interim Chairman Berthold Huber. Mueller vowed to do what it takes to fix the company and its tattered reputation. His mission statement was echoed by Osterloh, who said the company needs a new corporate culture that’s more inclusive and avoids a climate in which problems are hidden. Huber called the crisis a “political and moral catastrophe.”

Still, Mueller’s authority isn’t absolute. Winterkorn remains CEO of Porsche Automobil Holding SE, Volkswagen’s dominant shareholder. His continued role is a contentious issue especially for labor leaders, said a person familiar with the issue. The investment vehicle of the Porsche family moved on Saturday to tighten its control of the automaker by buying shares held by Suzuki Motor. The purchase takes the family’s holding in VW to 52.2% from 50.7%.

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A test of European democracy bigger than Greece. When the laws of the land you want to secede from won’t allow you to secede…

Catalan Separatists Claim Election Win As Yes Vote For Breakaway (Guardian)

Separatists took control of Catalonia’s regional government in an election result that could plunge Spain into one of its deepest political crises of recent years, by forcing Madrid to confront an openly secessionist government at the helm of one of its wealthiest regions. A record-breaking number of Catalans cast their vote in Sunday’s election, billed as a de facto referendum on independence. With more than 98% of the votes counted, the nationalist coalition Junts pel Sí (Together for Yes) were projected to win 62 seats, while far-left pro-independence Popular Unity Candidacy, known in Spain as CUP, were set to gain 10 seats, meaning an alliance of the two parties could give secessionists an absolute majority in the region’s 135-seat parliament. “We won,” said Catalan leaderArtur Mas i Gavarró, as a jubilant crowd waved estelada flags at a rally in Barcelona.

“Today was a double victory – the yes side won, as did democracy.” After attempts by Catalan leaders to hold a referendum on independence were blocked by the central government in Madrid, Mas sought to turn the elections into a de facto referendum, pledging to begin the process of breaking away from Spain if Junts pel Sí won a majority of seats. His party fell six seats short of a majority on Sunday. But Mas vowed to push forward with independence. “We ask that the world recognise the victory of Catalonia and the victory of the yes,” he said. “We have won and that gives us an enormous strength to push this project forward.” Junts pel Sí, representing parties from the left and right, as well as grassroots independence activists, captured 39.7% of the vote, while CUP received 8.2%.

The result leaves the separatists with 47.9% of the vote, shy of the 50%, plus one seat, that they would have needed if Sunday’s vote had been a real referendum. It’s a result that will leave the movement struggling to gain legitimacy on the world stage, said political analyst Josep Ramoneda, while setting Madrid and Barcelona on course for a collision. “The government in Catalonia will try to move forward with independence, but this result won’t allow them to take irreversible steps,” he said, pointing to a declaration of independence as an example. “I mean, nobody will recognise that.” Instead, Catalonia will be left to face Madrid alone, who will seek to stymie any attempts to move forward with independence. The Spanish prime minister, Mariano Rajoy, has vowed to use the full power of the country’s judiciary to block any move towards independence.

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The war on cash intensifies.

Sweden’s Negative Interest Rates Have Turned Economics On Its Head (Telegraph)

It has long been believed that when it comes to interest rates, zero is as low as you can go. Who would choose to keep their money in the bank if they had to pay for the privilege? But for the people who control the world’s money, this idea has recently been thrown out of the window. Many central banks have pushed their rates into negative territory and yet the financial system has still to come to an abrupt end. It is a discovery that flips on its head the conventional idea of how authorities could respond to future economic crises; and for central bankers, this has come as a relief. Central bank policymakers had believed they had run out of room to support their respective economies, with their interest rates held close to the floor. Traditionally, it was thought that if you wanted to boost the economy, the central bank would reduce its interest rates.

Normally, the rates offered on savings accounts would follow, and people would choose to spend more, and save less. But there’s a limit, what economists called the “zero lower bound”. Cut rates too deeply, and savers would end up facing negative returns. In that case, this could encourage people to take their savings out of the bank and hoard them in cash. This could slow, rather than boost, the economy. What is happening now should not – according to conventional thinking – be possible. As central bank rates have turned negative, the rates offered on bank deposits have followed. Yet rather than stuffing cash under mattresses, people have left their money in the bank or spent it. Nowhere is the experiment with negative rates more obvious than among Nordic central banks.

Sweden – the first to dabble with negative rates – is perhaps the prime candidate for such experimentation. The country already has high savings rates, the third highest in the developed world according to the OECD and, despite growing at healthy rates, there appears to be plenty of slack left in the economy to prevent an overheat. Unemployment is unusually high for an advanced economy at more than 7pc, still well above its pre-crisis levels of sub-6pc. Crucially, the Riksbank’s mandate suggests that such a radical experiment is necessary. Policymakers have battled with deflation since late 2012, and with inflation at minus 0.2pc in August, it remains well below the central bank’s 2pc target.

To a great extent, the Riksbank’s hand has been forced by the plight of the eurozone. A tepid recovery in the currency union has required the ECB to bring in ever-looser policy. As the ECB’s actions have weakened the euro against Sweden’s krona, the cost of importing goods into Sweden has fallen, and weighed down on inflation. The Riksbank has had to cut its own rates in response in an attempt to avoid deep deflation. Sweden’s flexible approach to monetary policy has won it the plaudits of leading credit ratings agency. Standard and Poor’s recently reaffirmed the country’s triple AAA sovereign rating, remarking on the benefits it derives from “ample monetary policy flexibility”. Noting that the Riksbank had introduced both negative interest rates and quantitative easing, S&P said that “should inflation rates stay low or the krona appreciate materially, the central bank could lower the repo rate further”.

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It’s bewildering to see people describe QE as a success. But they get away with it.

Zero Inflation Looms Again for ECB as Oil Drop Counters Stimulus (Bloomberg)

If the euro area is about to run out of inflation – again – it won’t shock Mario Draghi. The ECB said more than three weeks ago that the inflation rate could turn negative this year because of the renewed decline in oil prices. The 19-nation region is set to take a step in that direction on Wednesday, when data will show consumer prices stagnated in September for the first time in five months, according to a Bloomberg survey of economists. Stalled prices would mark a setback for policy makers who have been trying to steer inflation back toward 2% for the better part of two years, and may spark a new debate about deflation risks. Yet while officials have repeatedly stressed that they’re prepared to add stimulus if needed, they’ve also said they want more evidence before making a decision.

“The figures this month are unlikely to prompt any action from the ECB,” said Ben May, an economist at Oxford Economics Ltd. in London. “Quantitative easing has prevented the emergence of second-round effects from the new decline in oil prices and the pickup in core inflation in recent months is a cause for comfort. Some people may be concerned by this new fall in inflation, but the ECB has tried to distance itself from these concerns.” The EU’s statistics office will publish September inflation data on Wednesday. Estimates in the Bloomberg survey range from 0.3% to minus 0.2%. Eurostat will release unemployment data for August at the same time, and the European Commission will issue its latest report on economic confidence on Tuesday.

Oil prices have fallen more than 23% since the end of June, and a barrel of crude now costs about half what it did a year ago. The decline has boosted disposable income, underpinned consumer confidence that is already benefiting from slowly receding unemployment, and turned domestic demand into a key driver of the region’s economic recovery. At the same time, it has made the ECB’s job more complicated.

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Basic income is a much better approach than living wage. Huge boost to an economy.

Tory Welfare Cuts Will Destroy Benefit Of UK’s New Living Wage (Guardian)

A record 6.5 million people – almost a quarter of UK workers – will remain trapped on poverty pay next year, despite George Osborne’s 50p-an-hour increase in the national minimum wage, according to research by the Resolution Foundation thinktank. Adam Corlett, Resolution’s economic analyst, said: “While the chancellor’s new wage floor will give a welcome boost to millions of Britain’s lowest-paid staff, it cannot guarantee a basic standard of living or compensate for the £12bn of welfare cuts that were announced alongside it.” The chancellor announced the introduction of a “national living wage” in his July budget. It was an eyecatching bid for the votes of Britain’s workers and will see the statutory minimum pay rate for over-25s increase from £6.70 an hour to £7.20 next April – and to about £9 an hour by 2020.

But the new national minimum will still fall short of an actual “living wage”, calculated on the basis of the cost of basic essentials, including housing, food and transport, that has been the centrepiece of a long-running public campaign. Supermarket giant Lidl recently became the latest high-profile company to promise its staff this higher rate, which stands at £7.85 outside London and £9.15 in the capital. In its annual Low Pay Britain report, to be published next week, the Resolution Foundation will suggest that the living wage will have to be higher – £8.25 an hour outside the capital in 2016 – in part to compensate for the reductions in tax credits and benefits also announced in the budget. Households that receive less in welfare payments will need higher wages to make ends meet.

Resolution forecasts that, despite Osborne’s announcement, the number of people struggling to survive on less than the living wage will continue to rise, hitting 6.5 million people, or 24.4% of employees, in 2016 – up from 5 million, or less than 20% of workers, in 2012. Frances O’Grady, general secretary of the TUC, said: “This analysis provides a sobering reality check. While any increase in the minimum wage is to be welcomed, the new supplement will not cure in-work poverty on its own.” She urged ministers to continue encouraging firms to adopt the living wage – a cause backed in the past by many senior Conservatives, including David Cameron and Boris Johnson.

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Quite a panel. Steve Keen’s missing though.

Corbyn Recruits Top Global Economists to Boost Economic Credentials (Bloomberg)

U.K. Labour leader Jeremy Corbyn recruited Nobel Prize-winning economist Joseph Stiglitz and wealth and inequality expert Thomas Piketty to advise his party as he seeks to regain credibility for policies attacked by many academics as potentially disastrous. His finance spokesman, John McDonnell, will outline the opposition’s “new economics” in a speech Monday that will cover his deficit-reduction plans and a goal to “change the economic discourse.” McDonnell’s office would say only that his plans involve a “radical review” of the Bank of England. Appointing Stiglitz – a well-known opponent of western governments’ austerity policies – and Piketty, whose book, “Capital in the 21st Century,” became a best-seller in 2013, mark Corbyn’s effort to restore trust among the business and academic community.

They will serve on a panel that will also include David Blanchflower, a former member of the BOE’s Monetary Policy Committee and labor-market economist who’s been vocal in his criticism of British central-bank policy and the U.K.’s Conservative government. “There is now a brilliant opportunity for the Labour Party to construct a fresh and new political economy which will expose austerity for the failure it has been in the U.K. and Europe,” Piketty said in an e-mailed statement. They’ll be joined on Labour’s Economic Advisory Committee by Mariana Mazzucato of Sussex University and Anastasia Nesvetailova and Ann Pettifor of City University in London, the main opposition party said in an e-mailed statement Sunday as it began its annual conference in Brighton, on England’s south coast.

“Corbynomics” has been the subject of much debate since the anti-austerity lawmaker become frontrunner in the party’s leadership race over the summer. His campaign leaflet “The Economy in 2020,” citing analysis by tax expert Richard Murphy, said the government is missing out on £120 billion ($180 billion) in uncollected revenue a year – enough to give every person in Britain £2,000. Corbyn also suggested creating a National Investment Bank, with the power to issue bonds that would then be acquired by the Bank of England. Corbyn’s form of quantitative easing would be used specifically to kick-start infrastructure projects – for instance building schools and hospitals. Murphy estimated this could generate £50 billion a year.

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The Swiss will need US, UK cooperation.

Swiss Watchdog Says Opens Precious Metal Manipulation Probe (Reuters)

The Swiss competition regulator said on Monday it had opened an investigation into possible manipulation of the precious metals market by several major banks. Switzerland’s WEKO watchdog said its investigation, the result of a preliminary probe, was looking at possible collusion of bid/ask spreads in the market by UBS, Julius Baer, Deutsche Bank, HSBC, Barclays, Morgan Stanley and Mitsui. A WEKO spokesman said the investigation would likely conclude in either 2016 or 2017.

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She’s still there? Right to be worried, though. Not worried enough, I’d say.

Rousseff Worried About Brazilian Companies With Dollar Debt (Bloomberg)

Brazil is “extremely concerned” about companies that have debt in dollars, President Dilma Rousseff told reporters in New York, after volatility in the country’s foreign exchange market last week reached the highest level in almost four years. “Brazil today has sufficient reserves to avoid any problems in relation to disruptions because of the real,” Rousseff said. “The government will take a very clear and firm position, as did the central bank at the end of last week.” Brazil’s currency fell to a historic low last week amid concern about the president’s ability to push budget cuts and tax hikes through Congress. Rousseff has said Brazil is better prepared to recover from this year’s recession, compared to past crises, because it has $370 billion in international reserves.

Rousseff arrived Friday in New York for the United Nations General Assembly after a week of negotiations with political allies over cabinet changes intended to consolidate her fragile ruling coalition and reduce government expenses. Political uncertainty has aggravated what is expected to be Brazil’s longest recession since the 1930s, and was cited by Standard & Poor’s as part of their decision to downgrade Latin America’s largest economy to junk status. Speaking after a meeting with heads of state from Germany, Japan and India, Rousseff repeated Brazil’s demands for reform of the UN Security Council to make it more representative of all member states. She said global challenges such as conflict in the Middle East and Europe’s refugee crisis could be better solved by more collective action.

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$3 billion spent on no oil at all.

Shell Halts Alaska Oil Drilling After Disappointing Well Result (Bloomberg)

Royal Dutch Shell will stop further oil and gas exploration offshore Alaska, citing high costs and “challenging” regulation for drilling in the region. Shell forecast it will take related financial charges, according to a company statement on Monday. The balance sheet carrying value of its Alaska position is about $3 billion, with additional future contractual commitments of about $1.1 billion, The Hague, Netherlands-based energy explorer said. The company will abandon the Burger J well in Alaska’s Chukchi Sea, saying indications of oil and gas weren’t sufficient to warrant further exploration. The company holds a 100% working interest in 275 Outer Continental Shelf blocks in the sea, according to the statement. “Shell will now cease further exploration activity in offshore Alaska for the foreseeable future,” the company said. “This decision reflects both the Burger J well result, the high costs associated with the project, and the challenging and unpredictable federal regulatory environment in offshore Alaska.”

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“The exhibition sold out every day of its five-week run, attracting about 4,000 people a day – a total of 150,000 visitors. ”

Banksy’s Dismaland To Be Taken Down And Sent To Calais To Build Shelters (PA)

Britain’s most disappointing tourist attraction is to be dismantled and sent to Calais to be shelter for migrants, creator Banksy has revealed. Work to take down Dismaland begins on Monday and the elusive street artist said all the timber and fixtures from the ‘bemusement park’ would be sent to the Jungle camp. An estimated 5,000 people displaced from countries including Syria, Libya and Eritrea are believed to be camped in and around the French port. On the Dismaland website, Banksy posted a picture of the migrant camp in Calais and had superimposed onto it his fire-ravaged fairytale Cinderella Castle. In a message accompanying the picture, he wrote: “Coming soon … Dismaland Calais.

“All the timber and fixtures from Dismaland are being sent to the Jungle refugee camp near Calais to build shelters. No online tickets will be available.” The theme park opened at a derelict seaside lido at Weston-super-Mare in Somerset and even though Banksy said it was ‘crap’, thousands of people visited. The controversial attraction featured migrant boats, Jimmy Savile and an anarchist training camp, and there were long queues as visitors waited to get inside when it first opened on 22 August. The exhibition sold out every day of its five-week run, attracting about 4,000 people a day – a total of 150,000 visitors.

North Somerset council, which has described the site as the centre of the contemporary art universe, said it would bring £7m to the local economy, while local business leaders have estimated that the economic benefit to the seaside town could top £20m. Banksy described the park as a festival of art, amusements and entry-level anarchism, adding: “This is an art show for the 99% who’d rather be at Alton Towers.” The Bristol-based artist later told the Sunday Times: “This is not a street art show. It’s modelled on those failed Christmas parks that pop up every December – where they stick some antlers on an Alsatian dog and spray fake snow on a skip. “It’s ambitious, but it’s also crap. I think there’s something very poetic and British about all that.”

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Will this ever stop? How many children must drown?

500 Migrants Rescued In Mediterranean This Weekend: Italian Coastguard (AFP)

Some 500 migrants were rescued in seven operations launched over the weekend in the Mediterranean, the Italian coastguard said. A spokesman told AFP on Sunday that four of the rescue operations had already wound up but the others were ongoing. “Saturday was quiet on the whole but now there is further movement,” he said. “We have had several interventions – one by a ship belonging to (medical charity) MSF, two coastguard units as well as an Italian naval ship and a ship belonging to EU Navfor Med,” he said. The EU Navfor Med is a military operation launched at the end of June to identify, capture and dispose of vessels and rescue migrants undertaking risky journeys in a desperate bid to try and get to Europe from war-ravaged Syria and other trouble spots.

The mission is equipped with four ships, including an Italian aircraft carrier, and four planes. It is manned by 1,318 troops from 22 European countries. A German frigate named Werra and an MSF (Doctors Without Borders) ship rescued 140 people from a giant dinghy on Saturday afternoon, according to an AFP photographer. The migrants mainly came from the west African countries of Nigeria, Ghana, Senegal and Sierra Leone and left Libya three days earlier. They were rescued about 80 kilometres off the Libyan coast. EU leaders have agreed to boost aid for Syria’s neighbours, including one billion dollars through UN agencies, in a bid to mitigate the refugee influx into Europe.

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Nov 102014
 
 November 10, 2014  Posted by at 10:30 am Finance Tagged with: , , , , , , , , , , ,  Comments Off on Debt Rattle November 10 2014


DPC Wanted: 500 men to eat frankfurters, Bowery, Rockaway, NY 1905

US Economic Growth Is All An Illusion (John Crudele)
The System Is Terminally Broken (Investment Research Dynamics)
Buybacks Biggest “Source Of Equity Demand In Recent Years” (Zero Hedge)
Myopic Domestic Delusion or Planned Monetary Demolition? (De Landevoisin)
What Stocks Say About The State Of The Global Economy (Zero Hedge)
China Factory-Gate Prices Decline for Record 32nd Month (Bloomberg)
Xi Dangles $1.25 Trillion as China Counters U.S. Refocus (Bloomberg)
China’s Stock Markets Change Forever Next Week (MarketWatch)
China’s $9 Trillion Untapped Market Spurs U.S. ETF Frenzy (Bloomberg)
Russia, China Add to $400 Billion Gas Deal With Accord (Bloomberg)
Russian Ruble Firms On Putin’s Backing (Reuters)
Banks Face 25% Loss Buffer as FSB Fights Too-Big-to-Fail (BW)
Jean-Claude Juncker Needs to Go (Bloomberg Ed.)
Draghi Summons Banking Know-How for Top Posts as ECB Role Shifts (Bloomberg)
Over 80% of Catalans Vote Yes at Independence Poll (RIA)
Letter Reveals 2010 ECB Funding ‘Threat’ To Ireland (BreakingNews.ie)
GM Ordered New Ignition Switches Long Before Recall (WSJ)
A 700-Kilometre Surveillance Fence Along The Canada-US Border (NPost)
Australia ‘Giving Up’ On Renewables (BBC)
Australia Renewables Investment Drops 70% From Last Year (Tim Flannery)
Why It’s Not Enough to Just Eradicate Ebola (NBC)

Haven’t seen anything by Crudele in a long time. My bad. Then again, he hides out at the NY Post of all places.

US Economic Growth Is All An Illusion (John Crudele)

As voters were coming out of the polls on Tuesday, pesky reporters were asking why they voted the way they did — and what was going through their heads The most popular response — from 45% of the voters — was the economy. Only 28% said their families were doing better financially. The economy is always the major issue in an election during times like these. So no one should have been shocked that voters took their anger out on the party that controls the White House, even though Republicans are just as much to blame for our economy’s failures. John Harwood, a political reporter for CNBC, asked a very good question before the votes were counted: Why? As in, “Why did people appear so angry and unhappy when the stock market was at record levels, the unemployment rate is down sharply, inflation is subdued and the number of jobs is increasing?”

Harwood’s explanation was that the benefits of this economic growth weren’t being evenly distributed and were being felt only by the blessed in the American economy — the upper 1%, if you will. Harwood is only a little right. Yes, the economy is blessing the few and leaving the rest of us in limbo. What Harwood and the rest of the folks who rely solely on Washington’s mainstream thinkers and Wall Street boosters for their information don’t realize is this: The economy isn’t really doing what the statistics say it is doing. Our nation’s economic statistics are nipped and tucked, massaged, managed, fabricated and dolled up. In short, our statistics are wrong and Main Street folks know it. Here’s what a Wall Street hedge fund mogul, Paul Singer, head of Elliott Management Corp., told his clients the other day: “Nobody can predict how long governments can get away with fake growth, fake money, fake jobs, fake financial stability, fake inflation numbers and fake income growth,” Singer wrote.

“When confidence is lost, that loss can be severe, sudden and simultaneous across a number of markets and sectors.” I’m glad someone is reading my column. But it’s not like Singer — whom I don’t know — was willing to say that out loud so that everyone could understand. He wrote that in his newsletter to his clients. So, shhhhh! It’s a secret. Don’t tell Americans that the economy isn’t doing so well. (Oh, that’s right, they’ve already caught on.) I won’t get into the year-long investigation I have been conducting into the Census Bureau’s faulty economic data. Now that the Republicans control both houses of Congress, I’m sure what is going on at Census will be looked at very carefully. But fabrication of data isn’t the only problem. Put enough academics and statisticians in a room and they can turn any statistic into something it isn’t.

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Word: “What would happen if the Fed decided to “experiment” by removing this massive dead-pool of money from the banks? The money isn’t really “dead,” it’s keeping the banks from collapsing.”

The System Is Terminally Broken (Investment Research Dynamics)

The Fed has formally “ended” QE, but it hasn’t really. The Fed will continue reinvesting interest on its portfolio in more bonds and it will rollover maturities. We saw what happens to the stock market a few weeks ago when Fed official James Bullard asserted that the Fed needs to start raising rates: the S&P 500 quickly dropped 8%. Right at the bottom of the drop, the very same Bullard issued a statement suggesting that QE should be extended. This triggered an insanely abrupt “V” move back up to a new record high for the S&P 500. Bullard either did this intentionally or is a complete idiot. The stock market can’t function without Federal Reserve intervention. The stock market lost 8% quickly on just the thought that the Fed might start raising rates. Imagine what would happen if the Fed decided to “experiment” by shutting down its market intervention operations – both verbal and physical – for a month…

As for QE, if the Fed has achieved its objective of stimulating the economy, why doesn’t it start removing the $2.6 trillion of liquidity that it has injected into its member banks? This was money that was supposed to be directed at the economy. How come it’s sitting on bank balance sheets earning .25% interest? That’s $6.5 billion in free interest the Fed continues to inject into the Too Big To Fail banks. But why? What would happen if the Fed decided to “experiment” by removing this massive dead-pool of money from the banks? The money isn’t really “dead,” it’s keeping the banks from collapsing. I’m interested to watch the Government Treasury bond auctions now that the Fed is not there to soak up anywhere from 50-100% of each issue. I wonder if the banks will be moving their $2.6 trillion in Excess Reserves into new Treasury issuance. Obama is going around broadcasting the lie that the Government’s spending deficit in FY 2014 was something like $600 billion.

Yet, the amount of new Treasury bonds issued increased by $1 trillion over the same period. Either Obama is lying or the accountants at the Treasury committed a big typo. Either the Fed has found a way to continue opaquely monetizing new Government debt issuance, or the market is soon going to force U.S. interest rates up much higher.

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Time to raise rates, or companies will own all their own stock. Sort of like BOJ buying up all Japanese sovereign bonds. Snake eats tail.

Buybacks Biggest “Source Of Equity Demand In Recent Years” (Zero Hedge)

Spoiler alert: it’s not the Fed, even though the portfolio rebalancing channel courtesy of a $4.5 trillion Fed balance sheet certainly assured that the artificially inflated bubble in stocks, as a result of the Fed’s own purchases of bonds, is unlike anything seen before (and to all those debating whether the bubble is in bonds or stocks, here is the answer: it is in both). The answer, according to Goldman’s David Kostin is the following: “From a strategic perspective, buybacks have been the largest source of overall US equity demand in recent years.”

In other words, not only has the Fed made a mockery of fundamentals, the resulting ZIRP tsunami means that corporations can issue nearly-unlimited debt to yield chasing “advisors” managing other people’s money, and use it to buyback vast amounts of stock, which brings us to the latest aberation of the New Abnormal: the “Pull the S&P up by the Bootstaps” market, in which the only relevant question is which company can buyback the most of its own stock. Some further observations on the only thing that matters for equity demand in a world in which the Fed is, for the time being, sidelined:

Since the start of 4Q, a sector-neutral basket of 50 stocks with the highest buyback yields has outpaced the S&P 500.

And sure enough, with the market once again rewarding stock buybacks… companies will focus exclusively on stock repurchases in lieu of actual growth-promoting capital allocation such as CapEx (as predicted in April 2012):

We forecast S&P 500 cash spent on repurchases will rise by 18% in 2015 following a 26% jump in 2014.

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Very much worth a read. People leap into assumptions about Fed and IMF goals far too easily, if you ask me.

Myopic Domestic Delusion or Planned Monetary Demolition? (De Landevoisin)

So where is the impasse I point to? Well, as stated above, I am not quite so sanguine as Mr. Stockman is regarding the reasons behind our apparent self induced economic undoing. It is my contention that there exists ample motive behind the apparent policy insanity we are indeed witnessing and actually navigating through. What is being done is quite simply too plainly preposterous to be so innocently and readily dismissed. One has to consider what else may be driving the continuous and relentless stoking of a glaring, oncoming, head on collision train wreck dead ahead. No locomotive engineer can simply be assumed to be this brain dead, so completely out to lunch, it just doesn’t add up. Something else is at the heart of this mainlined monetary mayhem.

Call me a jaded cynic or even worse, a crackpot conspiracist, but when I see a country as majestic and powerful as the United States which has always stood for liberty and the pursuit of free enterprise, knowingly, willfully and conspicuously being undermined, as if being herded over a cliff like baffled buffaloe on the great plains, I smell a dubious dirty rat. Let us bear in mind, that the IMF Multinational Central Bankers are waiting in the wings to pick up the pieces of the train wreckage, with their deliberate SDR regime preparations. They are qualifying themselves to take on the existing immense capital account imbalances between the debtor and creditor nations. That will be a critical aspect of the developing picture.

As a new global monetary order begins to emerge and impose itself, the SDR composite will be expanded so as to address these utterly unsustainable trade imbalance. The envisaged multilateral SDR monetary instrument will be positioned to buy out the existing unserviceable sovereign debt loads, whereby the massively indebted nations of the developed world will cede a measure of influence to the creditor nations of the emerging world.

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Ouch!

What Stocks Say About The State Of The Global Economy (Zero Hedge)

The following two charts cut right through the headline propaganda and show all there is to know about the state of the global economy. The first is a chart of Global Cyclical stocks (Goldman ticker GSSBGCYC). The second shows Global Defensives (Goldman ticker GSSBGDEF). The resulting picture is worth 1000 Op-Eds welcoming you to yet another “global recovery.”

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And that economy is still supposed to grow at 7%?

China Factory-Gate Prices Decline for Record 32nd Month (Bloomberg)

China’s factory-gate prices fell for a record 32nd month in October and consumer prices remained subdued, raising pressure on policymakers to bolster the world’s second-largest economy as disinflation spreads. The producer-price index dropped 2.2% from a year earlier, the National Bureau of Statistics said in Beijing today, compared with the median projection of a 2% decline in a survey of analysts by Bloomberg News. Consumer prices rose 1.6% and the rate was unchanged from the prior month and matched economists’ estimates. China’s economy, burdened by overcapacity and weak domestic demand, is headed for the slowest full-year growth in more than two decades. Lower oil and metals prices are cutting costs at the factory gate, allowing China’s exporters to reduce prices and adding to deflationary pressures globally.

“China’s domestic demand remained soft and dis-inflationary risks are on the rise on the back of falling global commodity prices,” said Chang Jian, chief China economist at Barclays. “Subdued inflation offers room for more PBOC easing, but broad-based monetary easing will more likely to be triggered by disappointing growth numbers, which we will likely see in the coming months.” Chang said she expects the PPI drop will continue to 2015. Purchasing prices of fuels fell 3.8% in October from a year earlier, while ferrous metals costs dropped 6.9%, the NBS data showed. Prices of all nine components dropped. Oil prices have slumped into a bear market amid speculation of a global glut, slowing drilling at U.S. shale formations. Producers in OPEC countries are responding by cutting prices, resisting calls to reduce supply as they compete with the highest U.S. output in three decades.

“The extended drop in the PPI is affected by the prolonged decline of global oil prices and overcapacity in some domestic industries,” Yu Qiumei, a senior statistician at the NBS, said in a statement today. Eighteen of China’s 31 provinces and municipalities reported a nominal growth rate lower than the price-adjusted level for the first nine months of this year, signaling deflation. China’s imports moderated to a 4.6% increase in October from September’s 7% gain, according to data released by General Administration of Customs over the weekend.

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Ahem: “China’s development will generate huge opportunities and benefits and hold lasting and infinite promise.”

Xi Dangles $1.25 Trillion as China Counters U.S. Refocus (Bloomberg)

President Xi Jinping sought to counter U.S. efforts aimed at boosting influence in Asia by flexing China’s economic muscle days before a Beijing summit with his counterpart Barack Obama. Speaking to executives at a CEO gathering in Beijing, Xi outlined how much the world stands to gain from a rising China. He said outbound investment will total $1.25 trillion over the next 10 years, 500 million Chinese tourists will go abroad, and the government will spend $40 billion to revive the ancient Silk Road trade route between Asia and Europe. “China’s development will generate huge opportunities and benefits and hold lasting and infinite promise,” Xi said. “As China’s overall national strength grows, China will be both capable and willing to provide more public goods for the Asia Pacific and the world.”

China has used the Asia-Pacific Economic Cooperation forum summit under way in Beijing to put forward its own trade and economic proposals to strengthen its sway in Asia. Those incentives complement a greater assertiveness in territorial disputes and moves to upgrade its military after decades of U.S. dominance in the region. China is rolling out counteroffers for each promise made by President Barack Obama, whom he’ll meet this week in Beijing as part of the summit. Xi is pushing the Free Trade Area of the Asia-Pacific in response to the U.S.-backed Trans-Pacific Partnership, which excludes China. An Asia Infrastructure Investment Bank mostly financed with money from Beijing is seen as an answer to the Asian Development Bank and other multinational lenders where the U.S. and Japan have the most influence.

“Any time they have the chance to shape international economic rules or norms they are going to do that,” said Andrew Polk, resident economist at the Conference Board China Center for Economics and Business in Beijing. “It’s a bifurcated kind of response – there’s a reactive response to the developed world but trying to take a leadership role among other emerging economies.” While spelling out his message, Xi also made clear China is ready to accept a lower rate of growth, assuring executives that the economy is more resilient than ever and his government can safely guide the country through any slowdown. China’s economy is targeted to grow at about 7.5% this year, the slowest since 1990, and Xi said a growth rate around 7% would still make the country a top performer.

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Big deal, but with China doing far worse than they let on, what possible outcomes are there?

China’s Stock Markets Change Forever Next Week (MarketWatch)

When MarketWatch covers Chinese stocks, we usually focus on those listed in Hong Kong. The reason for this is that few outside of China – mainly just institutional investors with approved quotas – are able to buy what’s sold in Shanghai, Shenzhen and the other mainland Chinese bourses, while any investor in the world can buy Hong Kong-listed names. But this is all about to change in a big way next Monday, when China launches its game-changing “Shanghai-Hong Kong Stock Connect” program. For the first time ever, retail investors around the world will be able to invest in mainland Chinese equities.

In some high-profile cases, the same companies have stock listing in both Shanghai (known as “A-shares” when denominated in yuan) and Hong Kong (“H-shares”), though here too, opportunities exist in the form of arbitrage, as a given company’s A-shares and H-shares rarely trade at the same level. “Many international investors are completely excited,” Charles Li, the chief executive of bourse operator Hong Kong Exchanges & Clearing (HKEx) told MarketWatch at a recent media availability. “This is probably the last frontier market that has yet to open,” Li said, “and they [global investors] probably have never seen a rebalancing possibility like this scale anytime in past history.”

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I smell a huge rat. This has the potential to hide away the reality of global financial markets for a while. However, it also brings western scrutiny closer to China’s numbers.

China’s $9 Trillion Untapped Market Spurs U.S. ETF Frenzy (Bloomberg)

The race is on to give U.S. exchange-traded fund investors access to $9 trillion of stocks and bonds in mainland China. Money managers including BlackRock and CSOP have now registered almost 40 ETFs tracking the country’s domestic shares and debt with U.S. regulators, six times the number of existing funds. The products allow anyone with a U.S. brokerage account to gain exposure to Chinese securities that were previously off limits to all but a few qualified institutions. Equities in the biggest emerging market are heading for the best annual gain since 2009, outpacing shares of mainland companies listed overseas amid speculation government plans to ease capital controls will narrow the valuation discount on domestic securities. As programs including a planned bourse link between Hong Kong and Shanghai help open up China’s markets, fund providers are rushing to stake claims to the fees they hope will come from new investors.

“There is so much potential, you just can’t ignore China,” Patricia Oey, a senior analyst at investment data provider Morningstar Inc. in Chicago, said in a telephone interview. Fund companies “want to have a foot into a very big market. China is opening up and they want to be there.” BlackRock, the world’s largest money manager, is seeking to introduce its first U.S. exchange-traded fund that would invest directly in equities traded in Shanghai and Shenzhen, according to a Sept. 15 regulatory filing. CSOP, which runs a $6 billion ETF of China’s yuan-denominated A shares out of Hong Kong, filed to create a U.S. version three days later. While only a fraction of Chinese companies are listed or sell debt offshore, U.S. investors have piled almost $10 billion into ETFs that exclusively buy securities trading abroad, until recently one of the only ways for individuals to gain exposure to businesses from the world’s second-largest economy.

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“Together we have carefully taken care of the tree of Russian-Chinese relations. Now fall has set in, it’s harvest time, it’s time to gather fruit.”

Russia, China Add to $400 Billion Gas Deal With Accord (Bloomberg)

China has secured almost a fifth of the natural gas supplies it will need by the end of the decade after striking a second major deal with Russia. Russian President Vladimir Putin and Chinese President Xi Jinping signed the gas-supply agreement in Beijing the day before U.S. President Barack Obama arrived in the Chinese capital for the Asia-Pacific Economic Cooperation summit. The deal is slightly smaller than the $400 billion accord reached earlier this year, shortly after Russia’s annexation of Crimea. Russia’s Gazprom is negotiating the supply of as much as 30 billion cubic meters of gas annually from West Siberia to China over 30 years, it said yesterday. Another Russian company is discussing the sale of a 10% stake in a Siberian unit to state-owned China National Petroleum Corp.

Russia has turned to China to diversify its market and spur its economy as relations soured with the U.S. and Europe over the Ukraine crisis. The initial accord “will make Russia rely more on China both economically and politically,” Lin Boqiang, director of the Energy Economics Research Center at Xiamen University, said by phone. “China is probably the only country in the world that has both the financial ability and the market capacity to consume Russia’s huge energy exports on a sustainable basis over a long period of time,” said Lin. It gives Putin an opportunity to show Europe and the U.S. that his country won’t be isolated over Ukraine, he said. The two deals could account for almost 17% of China’s gas consumption by 2020, Gordon Kwan at Nomura wrote.

Russia may start selling gas to China within four to six years as part of the agreement with CNPC, Gazprom Chief Executive Officer Alexey Miller told reporters in Beijing. When the new supply deal begins, China will surpass Germany to become Russia’s biggest natural gas customer, according to CNPC’s website. “Together we have carefully taken care of the tree of Russian-Chinese relations,” Chinese President Xi Jinping said yesterday at a meeting with Putin at the economic forum. “Now fall has set in, it’s harvest time, it’s time to gather fruit.”

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It’s one sunny message after the other at the APEC summit.

Russian Ruble Firms On Putin’s Backing (Reuters)

The ruble firmed broadly on Monday after President Vladimir Putin said there were no reasons for the slide in the Russian currency. After a dramatic fall in previous week and volatile swings of 6% in its rate on Friday, the rouble traded 1.9% higher at 45.77 to the dollar at 0735 GMT. The Russian currency was 1.7% stronger at 57.07 against the euro. The Russian central bank said on Monday that it expects zero economic growth in 2015 and only 0.1% growth in 2016, in a three-year monetary policy strategy that anticipates Western sanctions against Russia will remain until the end of 2017. The central bank said that it was also calculating its base forecasts on the Urals oil price recovering to an average of $95 in 2015 but falling to $90 by the end of 2017, a long-term downward trend which it said would constrain economic growth.

Putin, wooing Asian investors on Monday at the Asia-Pacific Economic Cooperation summit in Beijing, said he was hopeful that speculation against the rouble would stop soon and that there was no fundamental economic reason for the currency’s slide. The rouble has slumped nearly 30% against the dollar this year as plunging oil prices and Western sanctions over the Ukraine crisis shrivelled Russia’s exports and investment inflows. Russia’s central bank, which limited its support for the rouble last week by cutting the size of its interventions to $350 million a day, said on Friday it would still intervene to support the rouble it sees threats to financial stability. Putin also said Russia and China intend to increase the amount of trade that is settled in yuan, as he ruled out capital controls for Russia.

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Long overdue and even now just a plan.

Banks Face 25% Loss Buffer as FSB Fights Too-Big-to-Fail (BW)

The world’s largest banks will have to build up their loss-absorbing liability buffers to see them through a crisis, as regulators tackle too-big-to-fail lenders six years after the collapse of Lehman Brothers Holdings Inc. The Financial Stability Board, led by Bank of England Governor Mark Carney, said today that the biggest banks may be required to have total loss absorbing capacity equivalent to as much as a quarter of their assets weighted for risk, with national regulators able to impose still tougher standards. The FSB is seeking comment on the rule, known as TLAC, which would apply at the earliest in 2019. Carney said the plans are a “watershed” in regulators’ mission to end the threat posed by banks whose size and systemic importance mean their failure would be catastrophic for the global economy.

“Once implemented, these agreements will play important roles in enabling globally systemic banks to be resolved without recourse to public subsidy and without disruption to the wider financial system,” he said. The rules are the latest step by the FSB in a five-year quest to boost banks’ resilience in the face of financial shocks. Agreement has already been reached on measures including tougher capital requirements and enhanced scrutiny by supervisors. The TLAC rules would apply to the FSB’s register of global systemically important banks. The latest list, published last week, contains 30 banks, with HSBC and JPMorgan identified as the most significant. The draft requirements announced by the FSB would measure banks’ ability to absorb losses in a crisis, shielding taxpayers from bailouts.

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For once, I agree with the Bloomberg editors.

Jean-Claude Juncker Needs to Go (Bloomberg Ed.)

Jean-Claude Juncker, the new president of the European Commission, was always a bad choice for the job, foisted on the bloc’s 28 national governments by a European Parliament eager to expand its powers. It’s becoming clear now just how poor a decision that appointment was. Juncker was the prime minister of Luxembourg, a tiny nation with a population 1/17th the size of London’s, for almost two decades. In that time, he oversaw the growth of a financial industry that became a tax center for at least 340 major global companies, not to mention investment funds with almost €3 trillion ($3.7 trillion) in net assets – second only to the U.S. Partly as a result of the Swiss-style bank secrecy rules and government-blessed tax avoidance schemes that helped draw so much capital, the people of Luxembourg have become the world’s richest after Qatar.

The tax arrangements, described in leaked documents provided by the International Consortium of Investigative Journalists, allegedly enabled multinationals, from Apple to Deutsche Bank, to reduce their tax liabilities on profits earned in other countries: The effective Luxembourg tax rates that resulted were as little as 0.25%. The countries where the money was made received nothing. It’s telling that these arrangements have long been shrouded in secrecy. (Only last month did Luxembourg’s government drop its opposition to new EU rules on banking transparency.) Juncker, you could say, made his country rich by picking the pockets of other countries, including those of the European Union he is now mandated to serve.

The commission was already conducting an investigation of Luxembourg’s tax arrangements. Juncker says he won’t interfere – but he won’t recuse himself, either. Indeed, his spokesman says he is “serene” in the face of the revelations. He shouldn’t be. At this point, he could best serve the European project by resigning. Juncker’s position as the head of the body investigating the tax practices he oversaw as prime minister is a clear conflict of interest. It’s possible the commission will find nothing improper about Luxembourg’s tax-avoidance paradise: The EU allows member governments wide latitude in taxing companies, so long as they don’t favor some over others. But with Juncker in charge of the commission, any such exoneration will fail to command public confidence.

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“Oh, jeez: “This macroprudential policy was born out of the gradual recognition that the financial system isn’t always rational.”

Draghi Summons Banking Know-How for Top Posts as ECB Role Shifts (Bloomberg)

Mario Draghi is seeking economists who understand banks, and he’s not afraid to look outside Frankfurt to find them. As the European Central Bank assumes the mantle of euro-area financial supervisor, its president has just staffed two key monetary-policy posts with non-ECB experts on how lenders function in the economy. The appointments mark a trend of turning to outsiders as the 16-year-old institution struggles to meet its changing responsibilities with existing staff. “People like Draghi have much more interest in how markets and supervision affect monetary policy than the old school,” said Anatoli Annenkov, senior European economist at Societe Generale SA in London. “It’s a reflection of the problems that the ECB is facing.” Sergio Nicoletti Altimari, a Bank of Italy financial-markets official who worked closely with Draghi during the latter’s time as governor there, will become director general for macroprudential policy and financial stability from Jan. 1.

Luc Laeven, a Belgian economist at the International Monetary Fund with a track record of analyzing financial crises, will become director general for research by March. Draghi is seeking people who can handle the new powers the ECB gained when it became the euro-area banking supervisor on Nov. 4. About 900 new staff have been hired so far who will be dedicated to oversight, and the role also brings the authority to promote financial stability throughout the economy with measures such as higher capital buffers or increased risk-weightings on lenders’ assets. This macroprudential policy was born out of the gradual recognition that the financial system isn’t always rational, and so someone needs to be watching for the emergence of risks that could escalate and broaden.

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Add this to the recent revelations of the corruption agonizingly close to Rajoy and his government, and Catalunya must feel stronger every day.

Over 80% of Catalans Vote Yes at Independence Poll (RIA)

An overwhelming majority of Catalans has supported the region’s independence, vice president of the autonomy’s government Joana Ortega said early Monday. There have been two question in the ballots: “Would you like Catalonia to become a state?” and “If yes, would you like Catalonia to become an independent state?” With 88.44% of the ballots counted, 80.72% of voters answered yes to both questions in the ballot, and 10.11% answered yes only to the first questions, according to Ortega. As few as 4% of the voters said no to both questions.

More than 2.25 million people out of 5.4 million eligible voters in the wealthy breakaway region of Catalonia in northeastern Spain voted on Sunday in the unofficial independence poll. Results of the vote are expected to come on Monday morning. Spanish government sees the voting as illegal and tried to block it by filing complaints to the Constitutional Court. However Catalan President Artur Mas has stated that Catalonia would carry out the consultation despite the central government’s protests. Earlier on Sunday the central government dismissed the vote as “useless” and unconstitutional.

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The ECB is no more beyond blackmail than the rest of Brussels is.

Letter Reveals 2010 ECB Funding ‘Threat’ To Ireland (BreakingNews.ie)

A top-level threat to cut emergency European funding to Ireland days before the humiliating international bailout will shock people, Public Expenditure Minister Brendan Howlin has said. Letters released today by the European Central Bank (ECB) confirm the Government was warned crisis funds propping up collapsed banks in 2010 would be withdrawn unless they asked for an €85bn rescue package. The missive from then-ECB president Jean Claude Trichet to the late former Finance Minister Brian Lenihan also demanded a written commitment to punishing austerity measures, spending cutbacks and an overhaul of the financial industry. Irish high-street banks were surviving on emergency funding – known as emergency liquidity assistance (ELA) – at the time and if stopped, it could have effectively shut down the property crash-ravaged lenders.

Mr Trichet urged a speedy response to his proposals, which have been interpreted by some as the Frankfurt central bank pushing Ireland into a bailout. “It is the position of the (ECB) Governing Council that it is only if we receive in writing a commitment from the Irish government vis-a-vis the Eurosystem on the four following points that we can authorise further provisions of ELA (Emergency Liquidity Assistance) to Irish financial institutions,” Mr Trichet wrote. The four points included Ireland seeking a bailout, agreeing to austerity, reforming banks and guaranteeing to repay emergency funds. Two days after the letter was sent on November 19 Ireland officially requested a rescue package from the ECB, the International Monetary Fund and the European Commission. Minister Howlin said the letters – published after a years-long campaign for their release – would “come as a shock to many people”.

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OK, now we know this, go get ’em! Take ’em to court already!

GM Ordered New Ignition Switches Long Before Recall (WSJ)

General Motors ordered a half-million replacement ignition switches to fix Chevrolet Cobalts and other small cars almost two months before it alerted federal safety regulators to the problem, according to emails viewed by The Wall Street Journal. The parts order, not publicly disclosed by GM, and its timing are sure to give fodder to lawyers suing GM and looking to poke holes in a timetable the auto maker gave for its recall of 2.5 million vehicles. The recall concerns a switch issue that is now linked to 30 deaths and has led to heavy criticism of the auto giant’s culture and the launch of a Justice Department investigation.

The email exchanges took place in mid-December 2013 between a GM contract worker and the auto maker’s ignition-switch supplier, Delphi Automotive. The emails indicate GM placed a Dec. 18 “urgent” order for 500,000 replacement switches one day after a meeting of senior executives. GM and an outside report it commissioned have said the executives discussed the Cobalt at the Dec. 17 meeting but didn’t decide on a recall. The emails show Delphi was asked to draw up an aggressive plan of action to produce and ship the parts at the time. In the months that followed, the size of the recall announced Feb. 7 would balloon and spark an auto-safety crisis, casting a shadow over the industry and leading to widespread calls for faster action by auto makers addressing safety concerns.

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” … the Border Integrity Technology Enhancement Project.” Alternatively, they could just burn the $92 million. Or give it to people who need it.

A 700-Kilometre Surveillance Fence Along The Canada-US Border (NPost)

A massive intelligence-gathering network of RCMP video cameras, radar, ground sensors, thermal radiation detectors and more will be erected along the U.S.-Canada border in Ontario and Quebec by 2018, the Mounties said Tuesday. The $92-million surveillance web, formally known as the Border Integrity Technology Enhancement Project, will be concentrated in more than 100 “high-risk” cross-border crime zones spanning 700 kilometres of eastern Canada, said Assistant Commissioner Joe Oliver, the RCMP’s head of technical operations. Airport search not racial profiling when based on customs officers’ on-the-job experience: court Customs officers are not guilty of racial profiling when they use on-the-job experience to decide who to stop and search at Canada’s airports, the Federal Court of Appeal has ruled.

“Officers on the front line, such as the officer herein, cannot be expected to leave their experience — acquired usually after many years of observing people from different countries entering Canada — at home,” Justice Marc Nadon said, writing on behalf of a three-person appeal panel. Justice Nadon made the comment in overturning a tribunal decision that quashed an $800 fine imposed against an Ottawa woman, Ting Ting Tam, who failed to declare some pork rolls in her luggage. “The concept involves employing unattended ground sensors, cameras, radar, licence plate readers, both covert and overt, to detect suspicious activity in high-risk areas along the border,” Assistant Commissioner Oliver told security industry executives attending the SecureTech conference and trade show at Ottawa’s Shaw Centre. “What we’re hoping to achieve is a reduction in cross-border criminality and enhancement of our national security.”

The network of electronic eyes is to run along the Quebec-Maine border to Morrisburg, Ont., then along the St. Lawrence Seaway, across Lake Ontario, and ending just west of Toronto in Oakville. The project was announced under the 2014 federal budget, but framed solely as a measure to improve the RCMP’s ability to combat contraband cigarette smuggling. The network will be linked to a state-of-the-art “geospatial intelligence and automated dispatch centre” that will, among other things, integrate the surveillance data, issue alerts for high-probability targets, issue “instant imagery” to officers on patrol and produce predictive analysis reports.

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The OZ government doesn’t seem to be in sync with its people.

Australia ‘Giving Up’ On Renewables (BBC)

Investment into renewable energy projects in Australia has dropped by 70% in the last year, according to a new report by a climate change body. The Climate Council says foreign investors are going to other countries because Australia’s government has no clear renewable energy policy. Australia has gone from “leader to laggard” in energy projects, it added. Another new report says Australia will need to raise its carbon emission reduction target to 40% by 2025. The damning report on the state of renewable energy, entitled Lagging Behind: Australia and the Global Response to Climate Change, said the country was losing out on valuable business. Investment that could be coming to Australia was going overseas “to countries that are moving to a renewables energy future”, said Tim Flannery, one of the report’s authors. He said most countries around the world had accelerated action on climate change in the last five years because the consequences had become more and more clear.

The report found China had retired 77 gigawatts of coal power stations between 2006 and 2010 and aimed to retire a further 20GW by next year. It also said the US was “rapidly exploiting the global shift to renewable energy” by introducing a range of incentives and initiatives to investors. The future of Australia’s renewable energy industry remains highly uncertain, the report concluded, because of a lack of clear federal government renewable energy policy. “Consequently investment in renewable energy in 2014 has dropped by 70% compared with the previous year,” it said. The second new report, by the Climate Institute, calls on Australia’s government to announce an “independent, transparent” process for setting the post 2020 carbon emission reduction targets. Erwin Jackson, deputy chief executive of the climate body, said too much of the political debate had “ignored growing scientific, investment and international realities”.

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With the amounts being thrown around, it looks risky to pull out.

Australia Renewables Investment Drops 70% From Last Year (Tim Flannery)

Australia’s most important trading partners and allies, such as China, the US and the European Union are strengthening their responses to climate change. Australia will be left in the wake of these big economies (and big emitters), according to the latest Climate Council report Lagging Behind: Australia and the Global Response to Climate Change. Australia’s retreat from being a global leader at tackling climate change is as impressive as our recent performances at the cricket. Looking on the bright side, even countries not known for their sunshine like Germany are going solar in a big way. Global momentum is building as more and more countries invest in renewable energy and put a price on carbon. 39 countries are putting a price on carbon. The EU and China (now with seven pilot schemes up and running) are home to the two largest carbon markets in the world, together covering over 3,000m tonnes (MtCO2) of carbon dioxide emissions.

There’s also plenty of action in the US: 10 states with a combined population of 79 million are now using carbon pricing to drive down emissions, including California, the world’s ninth largest economy. Yet, here in Australia, we now hold the dubious distinction of being the first country to repeal an operating and effective carbon price. Like carbon pricing, support for renewables is also advancing worldwide. In the last year, more renewable energy capacity was added than fossil fuels. Globally renewables attracted greater investment with US$192bn spent on new renewable power compared to US$102bn in fossil fuel plants. China is leading the charge on expanding renewable capacity. At the end of last year, China had installed a whopping 378GW of renewable energy capacity – about a quarter of renewables capacity installed worldwide, and over seven times Australia’s entire grid-connected power capacity.

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Don’t let the GOP find out Obama spends $6 billion on African health care systems.

Why It’s Not Enough to Just Eradicate Ebola (NBC)

The new U.S. plan to spend $6 billion fighting Ebola has a hidden agenda that aid workers approve of: not only stamping out the epidemic in West Africa, but starting to build a health infrastructure that can prevent this kind of thing from happening again. President Barack Obama’s $6.18 billion request is an enormous amount of money – six times what the U.S. has already committed and far more even than what the World Health Organization says is needed. Most is going for full frontal assault on Ebola – one that hasn’t really gotten off the ground yet, months into an epidemic that has been out of control despite an outcry from international groups and governments alike. But billions are also being quietly allocated to building a health care system in the countries suffering the most – a less sexy approach that could prevent another epidemic in the future. Most aid groups are focused on eradicating the virus, which has infected at least 13,000 people, probably more, and killed at least 5,000 of them.

That’s where the public support is; donors and taxpayers alike prefer to focus on a specific goal, and an emergency always gets attention. “Had we had those things in place, we would have detected this a lot earlier.” “We are not really a developmental organization,” said Dr. Armand Sprecher of Médecins Sans Frontières (Doctors Without Borders), one of the main groups fighting Ebola in West Africa. MSF focuses on providing targeted medical care. And while that has to be the first priority, it’s important to keep an eye on the long game, says Dr. Raj Panjabi, a founder and CEO of Last Mile Health, an aid group focused on helping people in the most remote corners of the world. “The goal has to be to not just contain Ebola,” Panjabi told NBC News. Ebola spread silently in villages and remote communities where there were no health care workers to diagnose Ebola and no way for them to report it even if they did catch it. “Had we had those things in place, we would have detected this a lot earlier,” said Panjabi.

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Nov 042014
 
 November 4, 2014  Posted by at 12:22 pm Finance Tagged with: , , , , , , , , , , ,  


DPC Looking south on Fifth Avenue at East 56th Street, NYC 1905

Dollar Smashes Through Resistance As Mega-Rally Gathers Pace (AEP)
WTI Falls to 3-Year Low on Saudi Price Cut as US Supply Climbs (Bloomberg)
Saudis Cut Crude Prices to US in December Amid Shale Boom (Bloomberg)
Gross Says Deflation a ‘Growing Possibility’ Threatening Wealth (Bloomberg)
Deep Divisions Emerge over ECB Quantitative Easing Plans (Spiegel)
Why The ECB May Not Want To Join The QE Dance (CNBC)
Japan Creates World’s Biggest Bond Bubble (Bloomberg)
Marc Faber: Japan Is Engaged in a Ponzi Scheme (Bloomberg)
BOJ Easing Seen Boosting Chances Abe Will Raise Sales Tax (Bloomberg)
Japan Pension Fund Strategy Shift Adds $187 Billion To Stocks (Bloomberg)
EU Leaders Weigh Plan For Greek Exit From Bailout (FT)
Greek Far-Left PM-in-Waiting Smells Power, Moves To Center (Reuters)
Euro Woes Pressuring Eastern EU States Into More Easing (Bloomberg)
Spain Bondholders Told Catalans Offer Best Chance of Repayment (Bloomberg)
JPMorgan Faces US Criminal Probe Into FX Trading (Bloomberg)
Venezuela, With World’s Largest Reserves, Imports Oil (USA Today)
Lingering Slump In Real UK House Prices Outside London Belies Bubble Fears (AEP)
Scandalously Low Pay Should Not Be The New Normal (Guardian)
Australia Trade Deficit More Than Doubles On Commodity Prices (BBC)
Rich Guys Running for Office Struggle With Voters in Land of Frozen Wages (Bloomberg)

The only safe haven left, as we’ve been saying for a very long time. The inevitable outcome, because: “Corporate debt in dollars across Asia has jumped from $300bn to $2.5 trillion since 2005. More than two-thirds of the total $11 trillion of cross-border bank loans worldwide are denominated in dollars.”

Dollar Smashes Through Resistance As Mega-Rally Gathers Pace (AEP)

The US dollar has surged to a four-year high against a basket of currencies and has punched through key technical resistance, marking a crucial turning point for the global financial system. The so-called dollar index, watched closely by traders, has finally broken above its 30-year downtrend line as the US economy powers ahead and the Federal Reserve prepares to tighten monetary policy. The index – a mix of six major currencies – hit 87.4 on Monday, rising above the key level of 87. This reflects the plunge in the Japanese yen since the Bank of Japan launched a fresh round of quantitative easing last week. Data from the Chicago Mercantile Exchange show that speculative dollar bets on the derivatives markets have reached a record high, with the biggest positions against sterling, the New Zealand dollar, the Canadian dollar, the yen and the Swiss franc, in that order.

David Bloom, currency chief at HSBC, said a “seismic change” is under way and may lead to a 20pc surge in the dollar over a 12-month span. The mega-rally of 1980 to 1985 as the Volcker Fed tightened the screws saw a 90pc rise before the leading powers intervened at the Plaza Accord to cap the rise. “We are only at the early stages of a dollar bull run. The current rally is unlike any we have seen before. The greatest danger for markets and forecasters is that they fail to adjust their behaviour to fully reflect a very different world,” he said. Mr Bloom said the stronger dollar buys time for other countries engaged in currency warfare to “steal inflation”, now a precious rarity that economies are fighting over. The great unknown is how long the US economy itself can withstand the deflationary impact of a stronger dollar. The rule of thumb is that each 10pc rise in the dollar cuts the inflation rate of 0.5pc a year later.

Hans Redeker, from Morgan Stanley, said the dollar rally is almost unstoppable at this stage given the roaring US recovery, and the stark contrast between a hawkish Fed and the prospect of monetary stimulus for years to come in Europe. “We think this will be a 4 to 5-year bull-market in the dollar. The whole exchange system is seeking a new equilibrium,” he said. “We think the euro will reach $1.12 to the dollar by next year and will be even weaker than the yen in the race to the bottom.” Mr Redeker said US pension funds and asset managers have invested huge sums in emerging markets without considering the currency risks. “They may be forced to start hedging their exposure, and that could catapult the dollar even higher in a self-fulfilling effect.” The dollar revival could prove painful for companies in Asia that have borrowed heavily in the US currency during the Fed’s QE phase, betting it would continue to fall.

Data from the Bank for International Settlements show that the dollar “carry-trade” from Hong Kong into China may have reached $1.2 trillion. Corporate debt in dollars across Asia has jumped from $300bn to $2.5 trillion since 2005. More than two-thirds of the total $11 trillion of cross-border bank loans worldwide are denominated in dollars. A chunk is unhedged in currency terms and is therefore vulnerable to a dollar “short squeeze”. The International Monetary Fund said $650bn of capital has flowed into emerging markets as a result of QE that would not otherwise have gone there.

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Major reset on the way.

WTI Falls to 3-Year Low on Saudi Price Cut as US Supply Climbs (Bloomberg)

West Texas Intermediate dropped to the lowest intraday level in three years as Saudi Arabia cut prices for crude exports to U.S. customers amid speculation that stockpiles increased. Brent extended losses in London. Futures fell as much as 3.7% to $75.84 a barrel, the weakest since Oct. 4, 2011. Saudi Arabian Oil Co. reduced December differentials for all grades it ships to the U.S., while supplies to Asia and Europe were priced higher, according to an e-mailed statement yesterday. U.S. crude inventories climbed by 1.9 million barrels last week to a four-month high, a Bloomberg News survey shows before government data tomorrow. Oil slid in October by the most since May 2012 as leading members of the Organization of Petroleum Exporting Countries resisted calls to cut output.

Global supplies are rising, with the U.S. pumping at the fastest pace in more than three decades. “Saudi Arabia isn’t inspiring the sentiment that they are trying to force customers to take less,” Olivier Jakob, managing director at Petromatrix GmbH in Zug, Switzerland, said by e-mail. “The only solution seen by the market to reduce the oversupplied outlook is an OPEC cut led by Saudi Arabia.”

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Killing the competition.

Saudis Cut Crude Prices to US in December Amid Shale Boom (Bloomberg)

Saudi Arabian Oil Co. lowered the cost of its crude to the U.S., where production is the highest in three decades, deepening a selloff that sent prices to the lowest in more two years. The state-owned producer, known as Saudi Aramco, lowered the premium for Arab Light relative to U.S. Gulf Coast benchmarks by 45 cents a barrel to the smallest since December. medium and heavy grades were also down 45 cents and extra light oil 50 cents. Aramco increased the cost to Asia and Europe. Swelling supplies from producers outside OPEC drove oil prices into a bear market last month as global demand growth slowed. Middle Eastern producers are increasingly competing with cargoes from Latin America, North Africa and Russia for buyers, as well as with U.S. production that has jumped 54% in the past three years.

“The Saudi move speaks to them wanting to preserve market share in the U.S., where it has slipped recently,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said yesterday by phone. “It looks like the Saudis are comfortable with prices and demand.” West Texas Intermediate, the U.S. benchmark, fell 55 cents to $78.23 a barrel in electronic trading on the New York Mercantile Exchange at 7:02 a.m. London time. The contract slid $1.76 to $78.78 yesterday, the lowest settlement since June 28, 2012. Brent, the global benchmark, lost 79 cents to $83.99 a barrel on the ICE Futures Europe exchange. “The market is reacting as though Saudi Arabia is going to flood the Gulf and is going to compete with shale production,” Michael Hiley, head of energy OTC at LPS Partners Inc. in New York, said yesterday by phone.

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” … governments worldwide are struggling to create inflation and stimulate growth.” They can’t and they won’t. There’s too much debt. And adding more will cause the opposite of what they see they want.

Gross Says Deflation a ‘Growing Possibility’ Threatening Wealth (Bloomberg)

Bill Gross, in his second investment outlook since joining Janus Capital Group, said deflation is a “growing possibility” as governments worldwide are struggling to create inflation and stimulate growth. Central banks around the world have made “a damn fine attempt” at fueling inflation, yet their efforts have pushed up financial assets, rather than prices in the real economy, Gross wrote in his outlook titled “The Trouble with Porosity and Prosperity.” “The real economy needs money printing, yes, but money spending more so, and that must come from the fiscal side – from the dreaded government side – where deficits are anathema and balanced budgets are increasingly in vogue,” he wrote. Until then, the possibility of deflation is a challenge to wealth creation, according to Gross. The 70-year-old Gross, who last month started managing Janus Global Unconstrained Bond Fund, has forecast subdued market returns in what he calls the ‘new normal,’ a view he and Pimco first expressed in 2009 coming out of the financial crisis.

At Pimco, Gross ran the $201.6 billion Total Return fund, the world’s biggest bond mutual fund, which had trailed peers since the beginning of 2013 as he misjudged the timing and impact of the Federal Reserve’s tapering of its stimulus. Gross left the firm he co-founded in 1971 after his deputies threatened to quit and management debated his ouster, according to people familiar with the matter. Gross, whose investment commentaries are known for their colorful anecdotes and comparisons, in today’s outlook called himself a “philosophical nomad” with a foundation formed from sand. The 21st century economy is built on the sand of finance instead of the firmer foundation of investment and innovation, he wrote. “Stopping the printing press sounds like a great solution to the depreciation of our purchasing power but today’s printing is simply something that the global finance based economy cannot live without,” he wrote.

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Nothing’s changed in a long time when it comes to points of view.

Deep Divisions Emerge over ECB Quantitative Easing Plans (Spiegel)

To prevent dangerous deflation, the ECB is discussing a massive program to purchase government bonds. Monetary watchdogs are divided over the measure, with some alleging that central bankers are being held hostage by politicians. [..] At first glance, there’s little evidence of the sensitive deals being hammered out in the Market Operations department of Germany’s central bank, the Bundesbank. The open-plan office on the fifth floor of its headquarters building, where about a dozen employees are staring at their computer screens, is reminiscent of the simple set for the TV series “The Office”. There are white file cabinets and desks with wooden edges, there is a poster on the wall of football team Bayern Munich, and some prankster has attached a pink rubber pig to the ceiling by its feet. The only hint that these employees are sometimes moving billions of euros with the click of a mouse is the security door that restricts access to the room.

They trade in foreign currencies and bonds, an activity they used to perform primarily for the German government or public pension funds. Now they also often do it for the ECB and its so-called “unconventional measures. Those measures seem to be coming on an almost monthly basis these days. First, there were the ultra low-interest rates, followed by new four-year loans for banks and the ECB’s buying program for bonds and asset backed securities – measures that are intended to make it easier for banks to lend money. As one Bundesbank trader puts it, they now have “a lot more to do.” Ironically, his boss, Bundesbank President Jens Weidmann, is opposed to most of these costly programs. They’re the reason he and ECB President Mario Draghi are now completely at odds.

Even with the latest approved measures not even implemented in full yet, experts at the ECB headquarters a few kilometers away are already devising the next monetary policy experiment: a large-scale bond buying program known among central bankers as quantitative easing. The aim of the program is to push up the rate of inflation, which, at 0.4%, is currently well below the target rate of close to 2%. Central bankers will discuss the problem again this week. It is a fundamental dispute that is becoming increasingly heated. Some view bond purchases as unavoidable, as the euro zone could otherwise slide into dangerous deflation, in which prices steadily decline and both households and businesses cut back their spending. Others warn against a violation of the ECB principle, which prohibits funding government debt by printing money. Is it important that the ECB adhere to tried-and-true principles in the crisis, as Weidmann argues? Or can it resort to unusual measures in an emergency situation, as Draghi is demanding?

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Germany.

Why The ECB May Not Want To Join The QE Dance (CNBC)

As one major central bank – the U.S. Federal Reserve – closes the quantitative easing door, markets are hoping another – the European Central Bank – will throw it wide open again. Many economists now expect that ECB President Mario Draghi will usher in a quantitative easing (QE) policy, involving buying up countries’ sovereign debt, early in the New Year. Something definitely needs to be done in the euro zone. Unemployment remains stubbornly high at 11.5% and inflation, at 0.4%, doesn’t look that far away from the deflation danger zone. Two of its biggest economies, France and Italy, are going to need extra wriggle room to meet their budgetary targets – and even Germany, the stalwart of recent years, looks less confident than for some time. Yet is QE that something? The most obvious problem with a bond-buying program, particularly when it involves buying up sovereign debt, is the potential political fallout.

How can you make sure that you’re not giving some countries in the single currency bloc an unfair advantage, particularly if they have already been helped out by tens of billions of euros in bailout aid during the financial crisis? No wonder Germany’s anti-European Union party, Alternative für Deutschland, is causing Angela Merkel almost as much trouble as the U.K. Independence Party is for David Cameron. And can QE really be that effective? In the U.K. and U.S., effectively printing money has helped to reduce credit spreads and, therefore, the cost of borrowing. Yet the euro zone already has low credit spreads and borrowing rates, after a series of actions by the ECB. The gap between the cost of short and long-term borrowing for Germany, for example, is already much smaller than it was in the U.S. before QE was introduced there. If funding does not seem to be filtering through to the real economy already, how could the ECB ensure that, by pumping more money into the system, it reached the right places?

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Bubble, Ponzi, it’s all of the above. It’s setting the world ablaze as we speak.

Japan Creates World’s Biggest Bond Bubble (Bloomberg)

Ten years from now, will Bank of Japan Governor Haruhiko Kuroda be regarded as a genius or a madman? Kuroda’s shock-and-awe stimulus move on Oct. 31 delighted markets and won him plaudits as a monetary virtuoso. Japan, the conventional wisdom tells us, has finally gotten serious about ending deflation, and isn’t it wonderful. But what happens when a central bank buys up an entire bond market? We’re about to find out as Kuroda, like some feverish hedge fund manager, corners Japan’s. Neglected in all the celebrating: To reach a 2% inflation goal that’s both arbitrary and meaningless, the BOJ is destroying Japan’s standing as a market economy. In announcing that it will boost purchases of government bonds to a record annual pace of $709 billion, the central bank has just added further fuel to the most obvious bond bubble in modern history — and helped create a fresh one on stocks. Once the laws of finance, and gravity, reassert themselves, Japan’s debt market could crash in ways that make the 2008 collapse of Lehman Brothers look like a warm-up.

Worse, because Japan’s interest-rate environment is so warped, investors won’t have the usual warning signs of market distress. Even before Friday’s bond-buying move, Japan had lost its last honest tool of price discovery. When a nation that needs 16 digits in yen terms to express its national debt (it reached 1,000,000,000,000,000 yen in August 2013) sees benchmark yields falling, you’ve entered the financial Twilight Zone. Good luck fairly pricing corporate, asset-backed or mortgage-backed securities. Considered in relation to gross domestic product, Kuroda’s purchases make the U.S. Federal Reserve’s quantitative-easing program look quaint. The Fed, of course, is already ending its QE experiment, while Japan is doubling down on one that dates back to 2001. Kuroda’s latest move means Japan’s QE scheme could last forever. The BOJ has willingly become the Ministry of Finance’s ATM; reversing the arrangement will be no small task.

All this liquidity has made for surreal events in Tokyo. Take the news that Japan’s $1.2 trillion Government Pension Investment Fund will dramatically rebalance its portfolio away from bonds. Japan has enormous public debt and a fast-aging population, and now the world’s biggest pension pool is shifting to stocks. Yet somehow, 10-year yields are just 0.43%. The explanation, of course, is that the parts of the market the BOJ doesn’t already own are sedated by its overwhelming liquidity. The BOJ is now on a financial treadmill that’s bound to accelerate, demanding ever more multi-trillion-dollar infusions to keep the market in line.

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Stating the obvious. But Faber doesn’t know what deflation is: “In some sectors of the economy you can have inflation, and in some sectors, deflation.” No, you cannot.

Marc Faber: Japan Is Engaged in a Ponzi Scheme (Bloomberg)

What do you think about what Bill Gross is saying? Do you think deflation is a real possibility for the United States?

I think the concept of inflation and deflation is frequently misunderstood. In some sectors of the economy you can have inflation, and in some sectors, deflation. But if the investment implication of Bill Gross is that – and he is a friend of mine, i have high regards for him. If the implication is that one should be long US Treasury’s, to some extent i agree. The return on 10-year note’s will be miserable , 2.35% for the next 10 years if you hold them to maturity. However, if you compare that to french government bonds yielding today 1.21% , i think that’s quite a good deal. For japanese bonds, a country that is engaged in a ponzi scheme, bankrupt, they have government bond yields yielding 0.43%. go ahead. I think they are engaged in a Ponzi scheme in the sense that all the government bonds that the treasury issues are being bought by the bank of japan. I think the good news is for Japan, most countries are engaged in a ponzi scheme and it will not end well, but as Carlo Ponzi proved, it can take a long time until the whole system collapses.

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Yeah, why not finish it off even faster?

BOJ Easing Seen Boosting Chances Abe Will Raise Sales Tax (Bloomberg)

The Bank of Japan’s extra stimulus increases the chances of Prime Minister Shinzo Abe going ahead with a plan to raise the nation’s sales tax, a survey by Bloomberg News shows. Nine of 10 economists responding after the central bank’s surprise move on Oct. 31 expect Abe to increase the levy, which is currently 8% after a 3%age-point bump in April. A decision on whether to lift the tax to 10% in October next year is expected by the end of this year after the government takes account of economic data including gross domestic product figures for the third quarter. The BOJ’s easing may give Abe a firmer footing to pursue measures for longer-term fiscal deficit reduction, including an increase in the sales levy, Moody’s Investors Service said in an e-mailed report.

“Progress on those two policy fronts will ultimately determine the success or failure of Abenomics and its monetary policy strategy,” Moody’s said. The BOJ’s expansion of stimulus puts the spotlight back on Abe’s policies. He’s under pressure to accelerate efforts to strengthen corporate governance, deregulate agriculture, increase female participation in the workforce and secure trade agreements to fuel long-term growth. While deciding on whether Japan can handle another sales-tax hike to help rein in the world’s heaviest debt burden, he is also considering how much to lower company taxes.

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The casino’s open for business.

Japan Pension Fund Strategy Shift Adds $187 Billion To Stocks (Bloomberg)

Japan’s public retirement savings manager is set to pump $187 billion into stock markets across the globe as the world’s biggest pension fund implements a new investment strategy aimed at enhancing returns. The Government Pension Investment Fund will have to buy 9.8 trillion yen ($86 billion) of Japanese shares and 11.5 trillion yen of foreign equities to meet the asset-allocation targets it set last week, based on holdings in June. GPIF needs to cut 23.4 trillion yen of domestic debt, the data show. The Topix index soared 4.3% Oct. 31 in anticipation of the allocations and on the Bank of Japan’s unexpected stimulus boost, which included tripling purchases of exchange-traded funds. The measure jumped 2.6% today. The domestic bonds GPIF needs to pare could be bought by the BOJ in as little as two months. The fund will end up owning more than 6% of Japan’s equity market once it completes the strategy shift, with that investment enough to buy everything listed in New Zealand, Greece and Morocco combined.

“If you consider the amount of money that’s involved, this will probably have more impact on stocks than the BOJ’s buying of ETFs,” said Takashi Aoki, a Tokyo-based fund manager at Mizuho. “We can expect material support for the market.” Brokerages led gains among the Topix’s 33 industry groups today, soaring 9.4%. The broader gauge posted the highest close in six years, while the Nikkei 225 traded above 17,000 for the first time since 2007 before paring gains. GPIF will put half its assets in equities, equally split between Japanese and foreign markets, according to targets published Oct. 31 after markets closed. That’s up from 12% each under the fund’s previous strategy. The announcement came just hours after the BOJ expanded easing, saying it will buy 8 trillion yen to 12 trillion yen of sovereign debt per month. The pension manager allocated 35% of its holdings to domestic bonds, down from 60%, and boosted foreign debt to 15% from 11%. The new figures don’t include a target for short-term assets, while the previous ones did.

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With the weaknesses ahead, the dumbest plan yet. Greek yields are already under heavy fire. And now they want to make us believe Greece can stand on its own, and still remain in the eurozone?

EU Leaders Weigh Plan For Greek Exit From Bailout (FT)

Euro zone leaders are weighing a plan to allow Greece to exit its four-year-old bailout at the end of the year by converting nearly €11 billion of unused rescue funds into a backstop for Athens for when it raises cash from the markets on its own. The plan, which will be discussed at a meeting of euro zone finance ministers in Brussels on Thursday,would allow Antonis Samaras, Greek prime minister, to declare an end to the quarterly reviews by the hated “troika” of bailout monitors ahead of parliamentary elections, which could come as early as March. At the same time, backers of the plan believe it would give financial markets the security of knowing Athens could draw on the credit line in an emergency.

The credit line would come from the euro zone’s €500 billion rescue fund, meaning it would still require monitoring from Brussels, albeit less onerous than at present. By tapping €11 billion originally earmarked for shoring up by Greek banks, euro zone officials hope to avoid political resistance from Germany. “In political terms, the money has already been made available to the Greek authorities,” said an EU official involved in the negotiations. Mr Samaras’s hopes of a “clean exit” from Greece’s €172 billion second bailout –which would mean no line of credit or additional outside monitoring – were dashed last month when Greek bonds were sold off in a mini-panic after he announced his intention to finish the bailout at the end of the year without any follow-on program. “A completely clean exit is highly unlikely,” said the EU official. [..]

The biggest remaining stumbling block remains the role of the International Monetary Fund in the plan. Unlike the EU, whose Greek bailout runs out of cash this year, the IMF program is due to run into 2016. The IMF has become a lightning rod for political anger in Greece – Poul Thomsen, the blunt Dane who heads the IMF’s Greek team, has to travel in Athens with a significant security detail – and Greek political leaders are eager to eject the Fund from the program. “It’s not helpful to have them camping in Athens,” said one Greek official, referring to prolonged negotiations over the last bailout review which took nine months to complete. But a group of euro zone countries led by Germany have insisted the IMF remain part of the program, arguing the Fund’s independence and credibility is essential to gaining support for a credit line in the Bundestag.

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Disappointing development for all Greeks.

Greek Far-Left PM-in-Waiting Smells Power, Moves To Center (Reuters)

Alexis Tsipras, leader of Greece’s far-left Syriza party, recently traveled to Frankfurt and Rome to meet European leaders. He is softening his confrontational tone with Greece’s international lenders. He has a drafted an agenda for the first 100 days of a future government. The 40-year-old former student Communist is acting like a prime minister in waiting. Syriza, once a fringe far-left movement, is now the most popular party in Greece, representing the many voters who feel punished by the country’s EU/IMF bailout. In May, the party easily won European elections and gained the governor’s seat for Greece’s most populous region. Today, it polls higher than any other party, leading by a margin of between 4 and 11 points over Prime Minister Antonis Samaras’s conservatives. One poll shows Tsipras as the most popular political leader in the country. “The big change has begun. The old is on its way out. The new is coming,” Tsipras thundered in a recent speech to parliament. “No one can stop it.”

Key to Syriza’s ascent, party officials say privately, is a calculated effort to moderate the radical leftist rhetoric that prompted German magazine Der Spiegel to name Tsipras among the most dangerous men in Europe in 2012. The party still rails against austerity measures and a bailout-driven “humanitarian crisis”. It wants to reverse minimum wage cuts, freeze state layoffs and halt state asset sales. But Syriza no longer threatens to tear up the bailout agreement or default on debt. Instead, officials say it supports the euro and wants to renegotiate the bailout by using the same pro-growth arguments of partners France and Italy. Syriza’s transformation mirrors the political progression of other anti-establishment fringe parties, such as the Northern League in Italy, that changed tactics after gaining parliamentary power and became more mainstream political forces.

It also reflects how Greece has turned a page on the dark days of the euro zone crisis four years ago, when Athens’ profligate spending risked bringing down the entire euro project. Then, a Tsipras victory at the polls was widely seen as a trigger for a bank run and Greece’s exit from the euro. Recently, however, Tsipras has held talks with European Central Bank chief Mario Draghi in Frankfurt and Austrian President Heinz Fischer. Syriza’s threadbare headquarters, where a portrait of Che Guevara once hung on the wall, is undergoing a makeover to include new desks and an expanded press room. “This is not the Alexis Tsipras of 2010,” said Blanka Kolenikova, European analyst for IHS Global Insight. “Since the last election Syriza’s rhetoric has calmed down. Tsipras is preparing for the fact that he might be leading a government so he needs to prove that he is approachable and flexible.”

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Still want to join?

Euro Woes Pressuring Eastern EU States Into More Easing (Bloomberg)

Low inflation, flagging growth, and the European Central Bank’s stimulus bias will probably force eastern members of the European Union to cut interest rates to record lows this week. Reduced borrowing costs will be cemented in three monetary policy decisions on consecutive days before the outcome of the ECB’s deliberations on Nov. 6, economists predict. They forecast Romania and Poland will reduce rates today and tomorrow, while Czech officials will maintain their own benchmark close to zero a day later as they ponder their stance on stemming gains in the koruna. Prone to contagion from economic woes in the euro region, their main export market and source of funding, eastern European countries keep a close eye on policy moves in the single currency area.

Now they’re facing border-jumping deflation and ECB loosening that are making the zloty, the leu and their peers stronger and endangering slowing growth. “You have the disinflation trend passing through, you have the ECB policy driving the currency side,” Simon Quijano-Evans, the London-based head of emerging-market research at Commerzbank AG, said by phone yesterday. “If central banks were not to react correspondingly, you’d have downside pressure on growth appearing as well. We don’t really see any major inflation pressure, so there is no real need to keep rates on hold at these sorts of levels.”

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Referendum in 5 days. Let’s hope it will be a peaceful one.

Spain Bondholders Told Catalans Offer Best Chance of Repayment (Bloomberg)

Spanish bondholders would be well advised to engage with Catalan officials since they may hold the key to getting repaid, according to Oriol Junqueras, leader of the separatist group Esquerra Republicana. Bond investors should recognize that Spain will struggle to contain its public debt when interest rates rise, and that the alternative to dealing with Catalonian separatists may be the anti-establishment Podemos party, said Junqueras. Podemos, which topped a national opinion poll this week, plans to audit Spanish government debt to assess how much is legitimate. “We all suspect interest rates won’t stay low forever,” Junqueras, who heads the most popular group in Catalonia, said in an interview yesterday. “One good way to prepare for that would be to talk to Catalan politicians.”

Junqueras has identified Spain’s public debt of more than €1 trillion ($1.3 trillion) as a weakness for the central government, as his alliance of separatists tries to force Prime Minister Mariano Rajoy to negotiate over Catalan independence. A flashpoint looms on Nov. 9, when Catalans including Junqueras propose holding an informal ballot on secession. They scaled back their plans last month after Rajoy rallied the Constitutional Court to block a non-binding referendum. Even the goal of an informal consultation this weekend may be frustrated. Spain’s highest court is due to meet tomorrow to consider a second challenge to the Catalan plans by the central government. Catalonian President Artur Mas said last week he plans to push ahead with the ballot whatever the court says.

In the event of a split, Catalans might draw on the precedent of the Dayton Accords relating to the former Yugoslavia and offer to take on 9% of Spain’s public debt, or about 90 billion euros, said Junqueras. That equates to Catalonia’s share of Spanish public spending over the past 25 years, he said. “That’s a legitimate criteria,” said Junqueras. “We could propose that.” Alternatively, the liabilities of the Spanish sovereign could be divided up based on Catalonia’s 21% contribution to the state’s tax revenue, he said. That would see the Catalans take on about €210 billion. “It would be good for the markets to talk to Catalan society about this as soon as possible,” he said. “That would be better for everyone.”

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A few more billions in taxpayer money will be paid in fines.

JPMorgan Faces US Criminal Probe Into FX Trading (Bloomberg)

JPMorgan Chase said it faces a U.S. criminal probe into foreign-exchange dealings and boosted its maximum estimate for “reasonably possible” losses on legal cases to the highest in more than a year. The firm is cooperating with the criminal investigation by the Department of Justice as well as inquiries by regulators in the U.K. and elsewhere, it said yesterday in a quarterly report. The largest U.S. bank said it might need as much as $5.9 billion to cover losses beyond reserves for legal matters, up $1.3 billion from the end of June, and the most since since mid-2013. “In recent months, U.S. government officials have emphasized their willingness to bring criminal actions against financial institutions,” the bank wrote of the general legal environment. “Such actions can have significant collateral consequences for a subject financial institution, including loss of customers and business.”

Chief Executive Officer Jamie Dimon, 58, who led the New York-based firm through $23 billion in settlements last year, is contending with an international probe into whether traders at the biggest banks sought to profit by rigging currency rates. Citigroup and Zurich-based UBS disclosed last week they also face criminal inquiries by the Justice Department into their foreign-exchange dealings. Citigroup cut third-quarter results to include a $600 million legal charge. “These investigations are focused on the firm’s spot FX trading activities as well as controls applicable to those activities,” JPMorgan said its report. While the company is in talks to resolve the cases, “there is no assurance that such discussions will result in settlements,” it said. Banks are facing foreign-exchange probes by authorities on three continents, people with knowledge of the situation have said. Richard Usher, JPMorgan’s chief currency dealer in London, left the company amid efforts to settle a U.K. probe into allegations of foreign-exchange rigging. He hasn’t been accused of any wrongdoing.

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Makes one wonder what would have happened if ‘we’ had supported Venezuela, instead of hindering it every possible step of the way

Venezuela, With World’s Largest Reserves, Imports Oil (USA Today)

For the first time in its 100-year history of oil production, Venezuela is importing crude – a new embarrassment for the country with the world’s largest oil reserves. The nation’s late president Hugo Chávez often boasted the South American country regained control of its oil industry after he seized joint ventures controlled by such companies as ExxonMobil and Conoco. But 19 months after Chávez’s death, the country can’t pump enough commercially viable oil out of the ground to meet domestic needs — a result of the former leader’s policies. The dilemma — which comes as prices at U.S. pumps fall below $3 per gallon — is the latest facing the government, which has been forced to explain away shortages of basic goods such as toilet paper, food and medicine in the past year.

“The government has destroyed the rest of the economy, so why not the oil industry as well?” says Orlando Rivero, 50, a salesman in Caracas. “How much longer do we have to hear that the government’s economic policies are a success when all we see is one industry after another being affected?” While Venezuela has more than 256 billion barrels of extra-heavy crude, the downside is that grade contains a lot of minerals and sulfur, along with the viscosity of molasses. To make it transportable and ready for traditional refining, the extra-heavy crude needs to have the minerals taken out in so-called upgraders, or have it diluted with lighter blends of oil. The latter tactic is what state oil company Petroleos de Venezuela SA (PDVSA) is using since it doesn’t have the money to build upgraders, which perform a preliminary refining process, and its partners have been unwilling to pony up cash because of the risk of doing business in the country.

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Ambrose tries to deny the obvious.

Lingering Slump In Real UK House Prices Outside London Belies Bubble Fears (AEP)

British house prices have fallen 35pc in real terms since the peak in 2007 and remain stuck at levels last seen at the start of the century once London is excluded, according to hard data from the Land Registry. “We are not in a bubble or anywhere near it. We’re still climbing out of a trough. The number of mortgages as a share of all homes is the lowest in almost thirty years,” said Michael Saunders from Citigroup. A study by consultants London Central Portfolio said average prices for the country as a whole were £133,538 in September, if London is stripped out. They are down from a peak in £158,494 in 2007. This is a 16pc fall in nominal terms but the full scale of the correction has been disguised by accumulated inflation over these years, deliberately engineered by the Bank of England to avoid a debt-deflation trap. Prices in absolute terms are back to 2004 levels. The drop in real house prices from the peak has been closer to 35pc. This is comparable to the sort of house price shock seen in large parts of the eurozone but the social and economic effects are entirely different.

House prices in central London have decoupled from the British economy and reflect vast concentrations of wealth in the hands of rich foreigners looking for a safe-haven. There are indications that some of the money coming from Asia is leveraged tenfold and falsely designated as cash, but this is chiefly a problem for banks in Hong Kong or China rather than for British regulators. “I do not think it is a policy issue for the Bank of England if foreigners want to overpay for property in London,” said Mr Saunders. Real house prices in Britain are still hovering at levels reached in 2002 during the dotcom bust and the 9/11 attacks in the US, when much of the developed world was in recession. “Fears of a national house price bubble have been wildly premature,” said Naomi Heaton, head of London Central Portfolio. Mrs Heaton said the worry is that the Bank of England will be bounced into interest rate rises too early by a chorus of warnings about eye-watering prices in London, which have distorted perceptions of the broader picture.

While eight million people live in the property zone classified as London, some 56m people live elsewhere. “The furore about a house price bubble over recent months has been totally unhelpful. It is simply not justified outside London,” she said. The parallel between the property cycle in Britain and the Netherlands is illuminating. Both had similar house price and credit surges before the Lehman crisis, and both have seen steep falls in real terms since then. The difference is that Holland has not been able to take countervailing measures to stop a deep slide in nominal prices due to the constraints of EMU membership. The result is that a third of all mortgages are now underwater and household debt ratios are rising. Negative equity in Britain is just 8pc. The picture is far worse in Spain where house prices have dropped 44pc in nominal terms, and where over half of all mortgages are in negative equity by some estimates.

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The Living Wage debate in the UK. Too late?

Scandalously Low Pay Should Not Be The New Normal (Guardian)

There’s the man who comes into the west London food bank, ashamed he can’t feed his children this week, though he works full-time at the Charing Cross hospital. There’s the trainee childcare worker I met there last Friday, who certainly can’t feed and heat herself on her pay. They leave with basic dry food in carrier bags, but no answer to an economy that ordains lifetimes of pay no family can live on. They are members of a growing army of 5.28 million – the 22% – paid less than a living wage to keep body and soul together. “Predistribution” was Ed Miliband’s much mocked word, by which he meant fair pay from employers, not benefit top-ups from government. Making employers pay the living wage once looked set to become Labour’s signature theme. The simple message that a week’s pay should be enough to keep a family out of poverty resonated with the public. Polls strongly support it. Fair pay, not benefits or subsidies to miserly employers, brought Labour into being – so why is the party in danger of letting this strong emblematic policy slip away?

The voluntary living wage rate has now risen 20p to £7.85 an hour (£9.15 in London) for companies that have signed up. But that improvement contrasts with a crisis of shrinking pay that is draining the Treasury of tax receipts and leaving taxpayers to pick up the benefit top-up bill for mean employers. Not for 140 years has pay fallen so far and for so long. Worse, this looks increasingly like the new normal. The pay gap between women and men is growing again too: women form the bulk of the lowest paid. Another 250,000 fell below the living wage in the last year, but the true state of pay is hidden by official figures, which ignore the 1.7 million self-employed, most not entrepreneurs but minicab drivers. The number of people on the minimum wage has doubled since 1999: it is becoming the norm not the floor.

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The rising USD makes many victims.

Australia Trade Deficit More Than Doubles On Commodity Prices (BBC)

Australia’s trade deficit more than doubled to A$2.26bn (£1.2b; $1.96bn) in September, data showed. Exports rose just 1% in the month, while imports were up 6% as Australia brought in more fuel. The deficit, a balance of goods and services, widened a lot more than market expectations of A$1.95bn and compared to a revised deficit of A$1.013bn in July. Falling prices of key commodities like iron ore is being blamed for the jump. “The trade deficit for September came in worse than expected with falling commodity prices clearly weighing on export values,” said AMP Capital chief economist Shane Oliver. Export earnings in Australia, home to some of the world’s biggest miners like BHP Billiton and Rio Tinto, have been impacted by the slump in prices.

The price of iron ore is down 40% this year, while thermal coal prices are hovering near five-year lows of A$63 a ton on oversupply in the market and slower demand from China. The two commodities are Australia’s top two exports. Added to the ballooning trade deficit on Tuesday was revised employment data, which showed a weaker labour market. New figures showed that 9,000 jobs were lost in August, compared to previous estimated rise of 32,100. But, the number of jobs lost in September was revised to 23,700, less than an initial estimate of 29,700. The unemployment rate, however, was up to 6.2% in September from a previous estimate of 6.1%. Mr Oliver of AMP said the economic data showed a mixed picture of the economy, which resulted in the Reserve Bank of Australia (RBA) leaving interest rates at a record low of 2.5% in its policy meeting today. “Revised jobs data up to September now shows a slightly weaker jobs market over the last two months than previously reported with unemployment now drifting up,” he said.

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Y’all sing along now: ‘This is America, can’t you see, little pink houses for you and me.’

Rich Guys Running for Office Struggle With Voters in Land of Frozen Wages (Bloomberg)

Two millionaires vying for governor in Florida are bickering over who’s had the more cushy life. “You grew up with plenty of money, Charlie,” Florida Republican Governor Rick Scott said to Charlie Crist, the Democrat, a line he would repeat five times during a recent hour-long debate. But it’s Scott who flies around in a private jet and is “worth about $100 or $200 million,” countered Crist, arguing that such wealth has made Scott “out of touch” with Florida. Five years into an economic recovery that has sent stocks and corporate profits soaring while weekly wages stagnate, millionaire candidates are fending off attacks on their bank accounts and business records in races from Connecticut to Georgia to Kentucky. “We shouldn’t be too surprised that politicians are coming under fire for their wealth,” said Nicholas Carnes, a public policy professor at Duke University in Durham, North Carolina, who studies the occupations and earnings of elected officials.

“We’re still recovering from the effects of the recession. There are still a lot of people facing hard economic times.” Wealth hasn’t been much of an impediment to U.S. electoral success in the past. Former Presidents Franklin Roosevelt, John F. Kennedy, George W. Bush and his father, George H.W. Bush are among the millionaire office-holders from both parties. In recent years, a strain of economic populism that also has a long history in U.S. politics has seen a revival in the wake of the 18-month recession that ended in June 2009. In part that’s because it accelerated a trend of rising income inequality in the country: Average income for the top 5% of households grew 38% from 1989 to 2013, compared with an increase of less than 10% for all others, according to the Federal Reserve. The median usual pay for Americans employed full-time was $790 per week in the third quarter, about a dollar less per week than just before the start of the recession, Labor Department figures show.

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