Catalonia Archives - Page 3 of 6 - The Automatic Earth

For those lying awake at night worried about health care, the economy, and an overall feeling of divide between you and your neighbors, there’s at least one source of comfort: Your neighbors might very well be lying awake, too. Almost two-thirds of Americans, or 63%, report being stressed about the future of the nation, according to the American Psychological Association’s Eleventh Stress in America survey, conducted in August and released on Wednesday. This worry about the fate of the union tops longstanding stressors such as money (62%) and work (61%) and also cuts across political proclivities. However, a significantly larger proportion of Democrats (73%) reported feeling stress than independents (59%) and Republicans (56%).

The “current social divisiveness” in America was reported by 59% of those surveyed as a cause of their own malaise. When the APA surveyed Americans a year ago, 52% said they were stressed by the presidential campaign. Since then, anxieties have only grown. A majority of the more than 3,400 Americans polled, 59%, said “they consider this to to be the lowest point in our nation’s history that they can remember.” That sentiment spanned generations, including those that lived through World War II, the Vietnam War, and the terrorist attacks of Sept. 11. (Some 30% of people polled cited terrorism as a source of concern, a number that’s likely to rise given the alleged terrorist attack in New York City on Tuesday.)

“We have a picture that says people are concerned,” said Arthur Evans, APA’s chief executive officer. “Any one data point may not not be so important, but taken together, it starts to paint a picture.” The survey didn’t ask respondents specifically about the administration of President Donald Trump, Evans said. He points to the “acrimony in the public discourse” and “the general feeling that we are divided as a country” as being more important than any particular person or political party. [..] And keeping up with the latest developments is a source of worry all its own. Most Americans—56%—said they want to stay informed, but the news causes them stress. (Yet even more, 72%, said “the media blows things out of proportion.”)

Who brought in Baby George? Haven’t seen anyone dig into his contacts. His story doesn’t seem to add up. Been pushing Russia on Trump far too much. A Trojan Horse?

• Mueller Mugs America: The Case Of Baby George Papadopoulos (Stockman)

This is how the Deep State crushes disobedience by the unwashed American public. It indicts not only ham sandwiches but, apparently, political infants in diapers too, if that’s what it takes. Hence the sudden notoriety of Baby George Papadopoulos, who pled guilty to “lying” about an essentially immaterial date to the FBI. Oh, and by all signs and signals that plea came after this 30 year-old novice had been wearing a wire for several months. So here’s how this noxious act of bullying by Robert Mueller’s Federally-deputized thugs came down. It seems that during the early months of 2016, when Trump was winning primary after primary against all mainstream media expectations, the Donald’s establishment betters began attacking his foreign policy credentials with special malice aforethought.

That was mainly owing to his sensible suggestion that it would be better to seek rapprochement with Russia rather than pursue Hillary’s Cold War 2.0 and that 25 years after the disappearance of the Soviet Union from the pages of history that NATO was obsolete. Since this totally plausible (and correct) viewpoint was deeply offensive to the Imperial City’s group think and threatened the Warfare State’s existential need for a fearsome enemy, Trump’s ruminations about making a deal with Putin were belittled. They were, in fact, attributed not to a fresh look at the realities abroad or the possibility that homeland security does not require a global empire, but to the candidate’s lack of any pedigreed foreign policy advisors. Indeed, when it came to the Republican-oriented foreign policy establishment-nearly all of which had joined the Never Trump cause-the Donald added insult to injury.

That is, by suggesting he got his foreign policy views watching TV (like most of Washington) and that he could do a better job against terrorism than the Pentagon generals (not hard). At length, however, the “who are your foreign policy advisors” meme got so relentless that the Donald relented. On March 21, 2016 he announced a group of five advisors that exactly no one who was anyone in the Imperial City had ever heard of, and for good reason. Trump apparently rarely even met with the Five and no one running the campaign paid much attention to them. Still, Baby George’s carelessness about the exact dates and sequences of utterly irrelevant and inconsequential events is enough to get him time in one of Uncle Sam’s hospitality suites.

“..ECB QE is currently 7 times bigger than net issuance. So is it any wonder why yields have fallen, and what happens when the ECB tries to turn off the easy money tap?”

• Some Of The Scariest Charts In Finance To Celebrate Halloween (BV)

Investment markets have been remarkably resilient over the course of 2017. Sure, the geopolitical environment has thrown up a few frightening days which saw markets sell-off but on the whole volatility has been muted and most asset classes have generated solid total returns. That said, any horror movie fan will tell you that the scariest part of a horror film happens when things are relatively calm. With that in mind, here are a few charts that shine a light on a number of threats that are lurking just below the surface of the global economy.

ECB quantitative easing has propped up government bond markets

The strength of the European economy, and signs of labour market healing across the euro area, has been the surprise story of 2017. It is undeniable that the ECB, and its quantitative easing programme, has played a huge part in the economic success seen to date. Many point to the fall in yields on peripheral area debt as a sign that the euro sovereign debt crisis is well and truly over. The question is, do falling yields signify increasing confidence in the ability of euro area nations to repay their debt, or do they simply reflect the asset purchases that the ECB has conducted since the QE programme started? The above chart, published in the most recent IMF Global Financial Stability Report, shows that official purchases of euro area debt has eclipsed net issuance since May 2015. Indeed, ECB QE is currently 7 times bigger than net issuance. So is it any wonder why yields have fallen, and what happens when the ECB tries to turn off the easy money tap?

Debt is a beast that cannot be tamed

The EU forces food transports across the Union. Damn transport costs, including pollution. The result: “the system is very fragile”. Don’t depend for your essentials on people living 1000 miles away. It’s not that hard.

• Most Of UK Fruit And Veg Is From Other EU Nations, Brexit To Be Dramatic (G.)

The UK faces serious health implications if the government fails to agree a Brexit deal, finds a report that says of 35 portions of fruit and vegetables, a figure relating to the five-a-day recommendation for individuals, just one “portion” is grown in the UK and picked by British or non-EU workers. The report, to mark the launch of a new RSA commission examining the impact of Brexit on food and farming, found that the five-a-day health target – which adds up to the 35 portions of fruit and vegetables a week – was overwhelmingly met by food grown in the EU or harvested by EU workers in the UK. Sue Pritchard, director of the RSA Food, Farming and Countryside Commission, said Brexit offered a great opportunity to reshape farming and food, but warned that no deal over the exit from the union would have a dramatic and immediate effect.

“What would be available on the shelves would change dramatically. There will be delays at ports and all along the food supply system – the impact will be felt very, very quickly,” she said. The study found that of the average 28 portions consumed by Britons of the recommended weekly intake of 35 portions of fruit and vegetables, the equivalent of 11 portions came from the EU, seven from the rest of the world and nine arose from the UK and were harvested by workers from other EU countries. The equivalent of just one portion was grown in the UK and harvested by British or non-EU workers. Pritchard added: “If there is no deal the system is very fragile and the impact in the UK food supply is likely to be dramatic.” The majority of farmers backed Brexit, but the National Farmers’ Union has since suggested that crops will “rot in the fields” and that Britain will be unable to produce the food if the government cannot secure a deal that allows tens of thousands of EU workers to continue to work on UK farms.

Fitting. The entire country is back in Victorian times.

• Corbyn Has a Plan to Get May’s Tories to Give Up 58 Brexit Secrets (BBG)

The main U.K. opposition party wants to deploy a parliamentary tool hardly used since the 19th century to get Theresa May’s Conservatives to spill Brexit secrets. The political prize? The release of 58 studies on how leaving the European Union will affect industries that make up 88 percent of the economy. Brexit Secretary David Davis said he didn’t want to publish the studies because it would compromise the U.K.’s negotiating position. On Monday, he listed the sectors in a letter but stopped short of revealing more. Jeremy Corbyn’s Labour wants to use an obscure legislative device to force the hand of Tories, who have been coy about what the economic fallout might be when the country leaves the 28-nation bloc.

On Wednesday, Labour will argue that lawmakers should have the right to see the studies, and will ask Parliament to vote to make “an humble address” to Queen Elizabeth II, asking her to order her ministers to release the assessments to the House of Commons Brexit Committee. This means-to-an-end hasn’t been used much since Victorian times. “Ministers cannot keep withholding vital information from Parliament about the impact of Brexit on jobs and the economy,” Labour Brexit spokesman Keir Starmer said in an emailed statement.

Panic in Canberra.

• Australia’s Housing Boom Is ‘Officially Over’ – UBS (BBG)

The housing boom that has seen Australian home prices more than double since the turn of the century is “officially over,” after data showed prices now flatlining, UBS said. National house prices were unchanged in October from September, while annual growth has slowed to 7% from more than 10% as recently as July, CoreLogic data released Wednesday showed. “There is now a persistent and sharp slowdown unfolding,” UBS economists led by George Tharenou said in a report. “This suggests a tightening of financial conditions is unfolding, which we expect to weigh on consumption growth via a fading household-wealth effect.”

An end to Australia’s property boom will be welcome news for first-time buyers, who have struggled to break into the market after surging prices propelled Sydney past London and New York to be the second-most expensive housing market. Less impressed may be property investors, already squeezed by regulatory lending curbs that drove up mortgage rates. The cooling housing market may encourage the Reserve Bank to keep interest rates at a record low. A rate hike would be undesirable as it would put further downward pressure on dwelling prices, said Diana Mousina, senior economist at AMP Capital Investors.

Once they start locking up people, will Catalans still be non-violent?

• Government Raids On Catalonia Police Spark Fears Of Wider Crackdown (Ind.)

The acrimony and recriminations which followed Catalonia’s declaration of independence shows little sign of defusing following the fleeing of president Carles Puigdemont to Brussels. Spain’s civil guard raided the headquarters of the regional police, Mossos d’Esquadra, today drawing accusations of starting a crackdown. Computers and documents were taken away from the building in Sabadell as well as seven other offices. “We are carrying out inspections related to the Mossos d’Esquadra’s communications on the day of the illegal referendum,” said a civil guard spokesman. “This is something we are entitled to do.” The Mossos had been ordered by Madrid to stop the vote taking place, but they had refused, pointing out that this would have led to clashes with activists who had been protecting the polling stations. The national police, who were sent in, seized ballot boxes sparking violence.

The raids were viewed by some as the beginning of a punitive drive which will continue against separatists. As the news of the raids came in the afternoon, a group of activists approached police in Plaza de Colon in Barcelona city centre, the scene of huge demonstrations in recent weeks, offering sympathy and solidarity. The officers, whose chief Josep Lluis Trapero was sacked by Madrid at the weekend, were cautious in their response. “We are waiting to hear more details,” said one. “We don’t know any more than you do.” For Adreia Carbonell, a 23-year-old student and supporter of independence, the civil guard action was an ominous pointer for the future. “It is a form of counter-revolution,” she said. “The Spanish can now do what they like. There will be more raids, more arrests soon, you will see. They are intimidating our police who protect us and of course our government has gone.”

Double-sided. He’s gotten much weaker by leaving. But probably avoided a long jail term.

• Puigdemont Says Can’t Return To Catalonia, Spain Intent On ‘Vengeance’ (Ind.)

Hot, last-minute and chaotic, ousted Catalan leader Carles Puigdemont’s first press conference since fleeing Barcelona for Brussels was a fitting tribute to the political crisis that has gripped Spain. Amid speculation that he and members of his former cabinet would seek political asylum, fuelled by the comments of a Belgian minister, the disputed Catalan president instead recommitted himself to the independence cause. It is believed that Mr Puigdemont and his colleagues drove across the border into France before flying to Brussels on Monday, after Spain took over control of the Catalan region’s government and agencies. Mr Puigdemont said he could not return to Spain unless given clear assurances that he will be protected, accusing Madrid of being intent on “vengeance”.

He and his colleagues would stay in Belgium as long as their safety was not assured in Spain and would “continue our work despite the limits imposed on us.” Insisting he remained the rightful leader of Catalonia, Mr Puigdemont said his centre-right PDeCAT party would nonetheless accept the challenge of regional elections called for 21 December “with all our strength” and vowed that Catalan separatists would come out to vote. Spain wants Catalonia “to abandon our political project, and they won’t achieve it,” he said. As the news emerged on Monday that Mr Puigdemont’s contingent had fled the country, there was a distinct sense of deflation among those of his allies who remained in Barcelona to carry out a planned campaign of civil disobedience.

And as he entered the building in Brussels, he walked past protesters holding Spanish national flags and a sign that read “Estado de Derecho” – “Rule Of Law”. Other anti-independence demonstrators waving Catalan and Spanish flags chanted “viva Espana, viva Cataluña!” amid a heavy presence from Belgian police.

Horses and barns.

• New Jersey Sues OxyContin Maker, Links Marketing To Opioid Crisis (R.)

New Jersey on Tuesday sued Purdue Pharma LP, accusing the maker of the chronic pain medication OxyContin of fueling the state’s opioid crisis through deceptive marketing to doctors and patients, including the elderly and the “opioid-naive.” The state’s attorney general, Christopher Porrino, faulted what he called Purdue’s “almost inconceivable callousness and irresponsibility” in a decade-long campaign of downplaying the risks and exaggerating the benefits of opioids in the pursuit of profit. “We vigorously deny these allegations and look forward to the opportunity to present our defense,” Purdue said in a statement. “We are deeply troubled by the opioid crisis and we are dedicated to being part of the solution.” At least 11 U.S. states have sued Purdue over opioids, including a complaint filed by Alaska on Monday.

The grid’s a harsh mistress.

• Germany Forced To Pay Consumers To Use More Electricity

A stormy weekend led to free electricity in Germany, as Bloomberg reports wind generation reached a record, forcing power producers to pay customers the most since Christmas 2012 to use electricity. Power prices turned negative as wind output reached 39,409 megawatts on Saturday, equivalent to the output of about 40 nuclear reactors. To keep the grid supply and demand in balance, negative prices encourage producers to either shut power stations or else pay consumers to take the extra electricity off the network.

We get the intent, but what does this solve?

• Greece Plans An Unprecedented €30 Billion Debt Swap (BBG)

The Greek government is planning an unprecedented debt swap worth 29.7 billion euros ($34.5 billion) aimed at boosting the liquidity of its paper and easing the sale of new bonds in the future. Under a project that could be launched in mid November, the government plans to swap 20 bonds issued after a restructuring of Greek debt held by private investors in 2012 with as many as five new fixed-coupon bonds, according to two senior bankers with knowledge of the swap plan. The bank officials requested anonymity as the plan has yet to be made public. The maturities of the new bonds may be the same as for the existing notes, which range from 2023 to 2042. “The move aims to address the current illiquidity of the Greek bond market, ” according to analysts at Pantelakis Securities SA in Athens.

It will also “establish a decent yield curve, thus facilitating the country’s return to public debt markets.” The move comes as Greece prepares for life after the end of its current bailout program in August 2018. The debt swap is a step toward the country’s full return to markets required to avoid a new bailout program. The government plans to tap the bond market in 2018 to raise at least 6 billion euros to create an adequate buffer to honor debt obligations, according to a government official. The government has yet to decide on the exact timing of the swap, the Greek official said on condition of anonymity. One of the bank officials said that transaction could start on Nov. 13 and the settlement could happen a week later. The goal is to conclude the swap before the next mission of the country’s creditors, which is scheduled for the last week of November.

Maybe SYRIZA is the only force that can stop this.

• Greek PM Under Fire Over Migrants, Refugees (K.)

Prime Minister Alexis Tsipras and his migration minister came under a hail of fire Monday from a radical faction within SYRIZA over the plight of the thousands of refugees and migrants stranded in Greece. The criticism was launched during a meeting of the party’s political secretariat at which Tsipras had hoped to showcase his government’s success in steering the country toward a post-bailout era. But instead, the government and Migration Policy Minister Yiannis Mouzalas were slammed by members of the political secretariat that represent the Group of 53 faction – seen as a custodian of party purity – within SYRIZA, over the consistent violation of migrants and refugees’ human rights. More specifically, they blamed the leftist-led coalition government and Mouzalas for delays in providing migrants and refugees with appropriate accommodation as winter approaches.

Moreover, they slammed Tsipras for failing to absorb funds from the European Union and other international organizations intended to aid migrants and refugees. The government was also chided by the Group of 53 for giving its full support to last year’s agreement between the European Union and Turkey to stem the flow of migrants into Europe, while EU countries were not doing the same. “If you think I’m doing everything wrong, then I’ll resign,” Mouzalas told his critics at the meeting. However, members of the faction shot back, calling Mouzalas a hypocrite as they said he is planning to leave the ministry anyway as his name has been put forward for a seat on the Council of Europe.

Debt Rattle October 29 2017

Oct 292017

October 29, 2017 Posted by Raúl Ilargi Meijer at 9:10 am Finance Tagged with: Catalonia, FBI, Fed, informant, JFK, Luther, Puerto Rico, QT, swamp, Trump 4 Responses »

Springenberg Luther nails his theses to the church door

• Trump Frustrated By Secrecy With JFK Files (AP)

• Battle Hymns of the Republicans (G.)

• Markets Await Trump’s Decision on Fed Chair (Rickards)

• The Informant Cometh (Jim Kunstler)

• In 2019, Central Bank Liquidity Finally Turns Negative (ZH)

• All Hail British Banks: Self-absorbed, Short-termist And Spivvy (G.)

• Sacked Catalonia Leader Calls For Opposition To Madrid’s Rule (R.)

• Latin America and Caribbean No Longer US Backyard – Russia (TSur)

• HUD Explores Temporarily Housing Puerto Ricans on US Mainland (BBG)

• Barbuda PM Calls For Help From Britain To Rebuild Island (G.)

• We Need A 21st-Century Martin Luther To Challenge The Church Of Tech (G.)

And released it all anyway. Still not besties with US Intelligence.

• Trump Frustrated By Secrecy With JFK Files (AP)

Just before the release Thursday, Trump wrote in a memorandum that he had “no choice” but to agree to requests from the CIA and FBI to keep thousands of documents secret because of the possibility that releasing the information could still harm national security. Two aides said Trump was upset by what he perceived to be overly broad secrecy requests, adding that the agencies had been explicitly warned about his expectation that redactions be kept to a minimum. “The president and White House have been very clear with all agencies for weeks: They must be transparent and disclose all information possible,” White House Principal Deputy Press Secretary Raj Shah said Friday.

Late last week, Trump received his first official briefing on the release in an Oval Office meeting that included Chief of Staff John Kelly, White House Counsel Don McGahn and National Security Council legal adviser John Eisenberg. Trump made it clear he was unsatisfied with the pace of declassification. Trump’s tweets, an official said, were meant as a signal to the intelligence community to take seriously his threats to release the documents in their entirety. According to White House officials, Trump accepted that some of the records contained references to sensitive sources and methods used by the intelligence community and law enforcement and that declassification could harm American foreign policy interests. But after having the scope of the redactions presented to him, Trump told aides he did not believe them to be in the spirit of the law.

On Thursday, Trump’s top aides presented him with an alternative to simply acquiescing to the agency requests: He could temporarily allow the redactions while ordering the agencies to launch a new comprehensive examination of the records still withheld or redacted in part. Trump accepted the suggestion, ordering that agencies be “extremely circumspect” about keeping the remaining documents secret at the end of the 180-day assessment. “After strict consultation with General Kelly, the CIA and other agencies, I will be releasing ALL JFK files other than the names and addresses of any mentioned person who is still living,” Trump wrote in a Friday tweet. “I am doing this for reasons of full disclosure, transparency and in order to put any and all conspiracy theories to rest.”

Is the swamp being drained?

• Battle Hymns of the Republicans (G.)

The November election did not put an end to the Republican Party’s civil war – a chasm between the establishment in Washington and grassroots activists that deepened with the rise of the Tea Party movement of 2009. Trump has only amplified it. Flake, after all, was not alone in his scathing criticism of the president. All week, a feud between Trump and Bob Corker, the Republican chair of the Senate foreign relations committee, soared to new heights – or depths. It culminated in Corker issuing his own stunning rebuke of Trump. “When his term is over, the constant non-truth-telling, the name-calling, the debasement of our nation, will be what he will be remembered most for,” Corker told CNN. Corker announced his own retirement last month, joining the ranks of a small but growing number of Republicans who have come to see Trump’s presidency as a moment of reckoning.

On one side is Trump, the most unpopular president in modern US history, ushered in by a grassroots movement with Steve Bannon, the former White House chief strategist, at its helm. On the other is the old guard of Republican leaders, struggling to distance themselves from Trump’s toxicity and a party base that he increasingly drives with racially motivated nationalism. Critics like Flake, Corker and McCain subscribe to the views espoused by Republican presidents back to Ronald Reagan – a belief in limited government, moderate positions on immigration and trade – but Bannonites have waged war on “globalists” and used race and class to drive a wedge between the establishment and a rancorous base unmoored by the economic and cultural dislocation of the last 20 years.

The friction has prompted a battle for the soul of the Republican party. A strategist aligned with Bannon told the Guardian that Trump’s victory unleashed an insurgent movement that wants to overthrow the party establishment in Washington. “The strategy is to make everyone look over their shoulders,” the Bannon ally said, “so they understand that they are no longer in charge of the Republican party.” As reports of Flake’s retirement surfaced, another ally of Bannon swiftly celebrated the news by claiming “another scalp”. The departure of another moderate senator – at least, a moderate within the current Republican party – was the latest victory in Bannon’s mission to reshape the conservative movement.

White House leaks say Powell will be next Fed head. Rickards expects Kevin Warsh. But yeah, Trump will be in Asia after November 3. What effect does that have on the Mueller thingy?

• Markets Await Trump’s Decision on Fed Chair (Rickards)

President Trump is expected to nominate the next Federal Reserve chair within a matter of days. As I’ve explained before, Donald Trump has the opportunity to appoint a higher percentage of the Board of Governors of the Federal Reserve system at one time than any president since Woodrow Wilson. President Wilson signed the Federal Reserve Act during the creation of the Fed in 1913 when they had a vacant board. At that time, the law said the secretary of the Treasury and the comptroller of the currency were automatically on the Fed’s board of governors. But besides that, President Wilson selected all of the other participating members. Due to vacancies he inherited and key resignations, Trump now has the opportunity to fill more seats on the Fed’s Board of Governors than any president since then. That’s pretty amazing when you think about it.

To review, the Federal Reserve’s Board of Governors is made up of seven appointees. That means that they can make a majority decision with four votes. If you’re reading about the Fed, you might also see reference to “regional reserve bank presidents.” These are roles within the Federal Reserve System, but the real power is found on seven-member Board of Governors. Trump will own the Fed. Meaning, whatever the president wants monetary policy to be, he’ll get. In other words, Donald Trump will be able to shape the Fed’s majority. But the tricky part is figuring out how he plans to shape it… During the campaign season, Trump called China and other nations currency manipulators. That signaled he believed the dollar was too strong and wanted it to weaken. But then the North Korean nuclear crisis rose to the fore.

Trump backed off his threats against China because China has the most economic influence over North Korea, and Trump wanted China to use that leverage to convince the North to back off its nuclear program. But China didn’t deliver as Trump had hoped, and a trade war with China is now likely. That’s especially true now. Chinese president Xi Jinping has solidified his hold on power after the Chinese Politburo re-appointed him yesterday. Xi had avoided rocking the boat in recent months while his position was uncertain. But now that his lock on power is secure, Xi can afford to be much more confrontational with Trump. Trump’s trade policy has led many to believe that Trump will appoint a lot of “doves” to the Board. But don’t be surprised if Trump goes with a hard-money board. In fact, that’s what I expect. These will be hard-money, strong-dollar people, contrary to a lot of expectations.

The Fed’s credibility. And Mueller’s. And Comey’s.

• The Informant Cometh (Jim Kunstler)

Now, it also happens that the deal for Tenex to buy Uranium One had to be approved by nine federal agencies and signed off on by Secretary of State Hillary Clinton, which she did shortly after her husband Bill Clinton was paid $500,000 to give a speech in Moscow sponsored by a Russian bank. The Clinton Foundation also received millions of dollars in “charitable” donations from parties with an interest in the Tenex / Uranium One deal. It happened, too, that the CEO of Uranium One at the time of the Tenex sale, Frank Guistra, was one of eleven board members of the Clinton Foundation. The informant remained undercover for the FBI for five years. None of the Clinton involvement was included in the previously mentioned federal bribery and racketeering prosecutions.

Meanwhile, the informant had signed a nondisclosure agreement with the Obama Justice Department, only just lifted last week. As of this morning, the story is absent from The New York Times, formerly the nation’s newspaper of record. The FBI’s credibility is at stake in this case. Robert Mueller, who was Director of the agency during the Tenex/Uranium One deal, with all its Clintonian-Russian undertones, is in the peculiar position now as special prosecutor for the Russian election “meddling” alleged to involve President Trump. Whatever that investigation has turned up is not known publicly yet, but the massive leaking from government employees that turned the story into roughly 80% of mainstream legacy news coverage the past year, has ceased — either because Mueller has imposed Draconian restraints on his own staff, or because there is nothing there.

The FBI has a lot to answer for in overlooking the Clinton connection to the Uranium One deal. The informant, soon to be attached to a name and a face, is coming in from the cold, to the warm, wainscoted chambers of the house and senate committees. I wonder if Mr. Trump, or his lawyers, will find grounds to attempt to dismiss Special Prosecutor Mueller, given what looks like Mueller’s compromised position vis-à-vis Trump’s election opponent, HRC. It’s hard to not see this thing going a long way — at the same time that financial markets and geopolitical matters are heading south. Keep your hats on.

Once people start thinkng they’re actually going to do this, the effects will be felt way before 2019.

• In 2019, Central Bank Liquidity Finally Turns Negative (ZH)

[..] the great Central Bank liquidity tide, which generated over $2 trillion in central bank purchasing power in 2017 alone – and which as Bank of America said last month is the only reason why stocks are at record highs, is now on its way out. This was a point first made by Deutsche Bank’s Alan Ruskin two weeks ago, who looked at the collapse in global vol, and concluded that “as we look at what could shake the panoply of low vol forces, it is the thaw in Central Bank policy as they retreat from emergency measures that is potentially most intriguing/worrying.

We are likely to be nearing a low point for major market bond and equity vol, and if the catalyst is policy it will likely come from positive volatility QE ‘flow effect’ being more powerful than the vol depressant ‘stock effect’. To twist a phrase from another well know Chicago economist: Vol may not always and everywhere be a monetary phenomena – but this is the first place to look for economic catalysts over the coming year.” He showed this great receding tide of liquidity in the following chart projecting central bank “flows” over the next two years, and which showed that “by the end of next year, the combined expansion of all the major Central Bank balance sheets will have collapsed from a 12 month growth rate of $2 trillion per annum to zero.”

Shortly after, Fasanara Capital’s Francesco Filia used this core observation in his own bearish forecast, when he wrote that “the undoing of loose monetary policies (NIRP, ZIRP), and the transitioning from ‘Peak Quantitative Easing’ to Quantitative Tightening, will create a liquidity withdrawal of over $1 trillion in 2018 alone. The reaction of the passive community will determine the speed of the adjustment in the pricing for both safe and risk assets.”

Fast forward to today, when Bank of America’s Barnaby Martin is the latest analyst to pick up on this theme of great liquidity withdrawal. Looking at (and past) the ECB’s announcement, Martin writes that “as expected, Mario Draghi took a knife to the ECB’s quantitative easing programme yesterday. From January 2018, monthly asset purchases will decline from €60bn to €30bn, and continue for another 9m (and remain open ended). The ECB now joins an array of central banks across the globe that are either shrinking their balance sheets or heavily scaling back bond buying.” [..] However, as Ruskin and Filia warn, Martin underscores that it is the bigger point that is ignored by markets, namely that it is all about the “flow” of central bank purchases.

And in this context, the BofA strategist warns that it will take just over a year before the global liquidity tide not only reaches zero, but turns negative… some time in early 2019. Chart 1 shows year-over-year changes in global asset purchases by central banks (we also include China FX reserves here). Given this year’s slowdown in ECB and BoJ QE (the latter, in particular, is striking in USD terms), we are well past the peak in global asset buying by central banks. But with the Fed now embarking on balance sheet shrinkage, the start of 2019 should mark the point where year-over-year asset purchases finally turn negative – a trend change that will come after four straight years of expansion.

Government and banks want one thing: keep housing prices high.

• All Hail British Banks: Self-absorbed, Short-termist And Spivvy (G.)

It’s not only the government that is obsessed with lending to prop up property owners and developers – the banking sector is keen, too. The report sets out the way UK banks mostly lend abroad, with loans to UK businesses accounting for just 5% of total UK bank assets, compared with 11% in France, 12% in Germany and 14% on average across the rest of the eurozone. Property loans to businesses and individuals in the UK account for more than 78% of all loans to individuals and non-financial businesses – which means those outside the Square Mile. After stripping out real estate, loans to UK businesses account for just 3% of all banking assets. As a transmission mechanism for diverting the nation’s savings into worthwhile, productive businesses, the banks fail miserably. And the rest of the financial sector is just as bad.

The IPPR report accused hedge funds, proprietary traders (which use investment bank cash) and high-frequency traders – a group that collectively makes up 72% of trades in on the London market – of paying themselves depending on performance against rivals and over short timescales, “not long-term value creation”. This spivvy trading arena has the knock-on effect of making short-term demands on the boards of listed companies. Such is the pressure to avoid being caught in traders’ headlights that in a survey of more than 400 executives, some 75% said they “would sacrifice positive economic outcomes” if it helped smooth their profit figures from one quarter to the next. The report argues that this self-absorbed world of stock market trading needs to support longer-term investment in a way that also benefits savers and business owners.

At least for now it’s peaceful. But Puidgemont seems to have weakened.

• Sacked Catalonia Leader Calls For Opposition To Madrid’s Rule (R.)

Sacked Catalonian president Carles Puigdemont on Saturday called for peaceful “democratic opposition” to the central government’s takeover of the region following its unilateral declaration of independence from Spain. Puigdemont, whose regional government was dismissed by Spanish Prime Minister Mariano Rajoy on Friday, accused Madrid of “premeditated aggression” against the will of the Catalans. Rajoy removed Puigdemont, took over the administration of the autonomous region and called a new election after Catalonia’s parliament declared itself an independent nation on Friday. The bold if to all appearances futile action marked a potentially dangerous escalation of Spain’s worst political crisis in the four decades since its return to democracy.

“It’s very clear that the best form of defending the gains made up until now is democratic opposition to Article 155,” Puigdemont said in a brief statement he read out in the Catalan city of Girona, referring to the legal trigger for the takeover. But he was vague on precisely what steps the secessionists would take as the national authorities are already moving into Barcelona and other parts of Catalonia to enforce control. Spanish government spokesman Inigo Mendez de Vigo said it would welcome Puigdemont’s participation in the regional elections it has called for Dec. 21. “I‘m quite sure that if Puigdemont takes part in these elections, he can exercise this democratic opposition,” Mendez de Vigo told Reuters TV in an interview.

[..] Puigdemont signed the statement as President of Catalonia, demonstrating he did not accept his ousting. “We continue persevering in the only attitude that can make us winners. Without violence, without insults… and also respecting the protests of the Catalans who do not agree with what the parliamentary majority has decided,” he said.

“All actors must respect international law instead of ignoring it and proclaiming themselves special states..”

• Latin America and Caribbean No Longer US Backyard – Russia (TSur)

A Russian official said the region no longer can be treated inappropriately by the United States. The Russian Foreign Ministry has warned the United States that Latin American and the Caribbean are no longer its “backyard.” Foreign Affairs spokesperson Maria Zajarova said the region has tired of the United State’s attempt to control its people by political, social or military force. “The countries of Latin America and the Caribbean have long ceased to be the U.S. backyard,” Zajarova said. In addition, she said the region has had many opportunities to “put Washington in its place on the inappropriateness of its conduct regarding Latin America,” urging the United States to respect international law and the sovereignty of nations, in order to “avoid conflicts.”

“Each state has its objectives, but we should start from common game rules and, at the same time, respect national interests,” she said. “All actors must respect international law instead of ignoring it and proclaiming themselves special states, this is the only way of preserving our own interests, and interacting and avoiding conflicts,” Zajarova added. The Russian official said development in the region in economics, politics, and science has shown “such potential that they can’t be treated as if an older brother were addressing other members of the lesser developed family.” Russia recently said it hopes countries around the world “refrain from the policy of pressure and sanctions” against countries in the region such as is being done in Venezuela, calling the attempts “counterproductive.”

No matter what they do, it must be massive.

• HUD Explores Temporarily Housing Puerto Ricans on US Mainland (BBG)

The Trump administration is exploring ways to relocate tens of thousands of Puerto Ricans to the U.S. mainland for an extended period as parts of the territory remain devastated more than a month after Hurricane Maria. Officials at the U.S. Department of Housing and Urban Development late last week started to develop a plan to provide housing to some of Puerto Rico’s displaced population, according to people familiar with the matter. And given the shortage of available options on the island, the possibility of evacuating large numbers to the mainland has emerged as an option. Two of the people who spoke to HUD officials said using large commercial cruise liners had been suggested to move residents en masse.

The most recent push for a solution began after a meeting on Friday that included officials from HUD, the Federal Emergency Management Agency, the White House and others, according to the people. But it’s unclear if the White House or any agencies outside of HUD are coordinating with the housing agency, or if the ideas are only being developed within the department for now. Agency officials in the past two days have contacted executives in the housing industry, investment managers with ties to Puerto Rico, and others in an attempt to brainstorm potential solutions, said the people [..] Thousands of Puerto Rico residents have already fled to Florida and elsewhere since Maria struck as a Category Four storm on Sept. 20.

Much of the territory, including the outer islands of Vieques and Culebra, remains without electricity. Potable drinking water is scarce in some areas, and thousands of miles of roads are still closed. The evacuation idea is in the earliest stages, and given immense logistical challenges it may never come to pass. An orchestrated mass movement and temporary resettlement would require coordination between various parts of the government and a willingness by local communities to house any evacuees, at a substantial cost.

Poorer nations offer help, the rich do not.

• Barbuda PM Calls For Help From Britain To Rebuild Island (G.)

Independent islands in the Caribbean are fearful that their infrastructure will be left in ruins as countries such as the UK focus relief and aid efforts on their own overseas territories. Gaston Browne, prime minster of Antigua and Barbuda, said his country was being overlooked in relief efforts because it was an independent island and had a higher per capita income than some Caribbean countries. “Technically, the Queen is still our head of state, which means there should be some empathy,” he said. “But I think because we are independent, and they’re looking at some artificial per capita income criteria, we are being overlooked.” The island of Barbuda was devastated by Hurricane Irma in September, with 95% of all properties on the island destroyed. When it was feared Barbuda would be struck again by Hurricane Jose a few days later, all 2,000 residents were evacuated to the larger sister island of Antigua.

The evacuees are living with friends and family on Antigua, or in large shelters run by the government in technical colleges, churches and a cricket stadium. People have begun to return to the island for a few days at a time to start the clear-up, often sleeping in tents on their lawns. Barbuda still has no water or electricity. Browne praised developing countries that had offered help, naming Cuba, Venezuela and the Dominican Republic, as well as Qatar, China and India. Even the small Caribbean island of Dominica pledged $250,000 before Dominica itself was hit and devastated by Hurricane Maria, Browne said. “We reciprocated afterwards by pledging $300,000,” he added “Even among countries that were devastated, there is a form of human cooperation to help each other.”

He’s actually written 95 theses.

• We Need A 21st-Century Martin Luther To Challenge The Church Of Tech (G.)

A new power is loose in the world. It is nowhere and yet it’s everywhere. It knows everything about us – our movements, our thoughts, our desires, our fears, our secrets, who our friends are, our financial status, even how well we sleep at night. We tell it things that we would not whisper to another human being. It shapes our politics, stokes our appetites, loosens our tongues, heightens our moral panics, keeps us entertained (and therefore passive). We engage with it 150 times or more every day, and with every moment of contact we add to the unfathomable wealth of its priesthood. And we worship it because we are, somehow, mesmerised by it. In other words, we are all members of the Church of Technopoly, and what we worship is digital technology.

Most of us are so happy in our obeisance to this new power that we spend an average of 50 minutes on our daily devotion to Facebook alone without a flicker of concern. It makes us feel modern, connected, empowered, sophisticated and informed. Suppose, though, you were one of a minority who was becoming assailed by doubt – stumbling towards the conclusion that what you once thought of as liberating might actually be malign and dangerous. But yet everywhere you look you see only happy-clappy believers. How would you go about convincing the world that it was in the grip of a power that was deeply hypocritical and corrupt? Especially when that power apparently offers salvation and self-realisation for those who worship at its sites?

It would be a tough assignment. But take heart: there once was a man who had similar doubts about the dominant power of his time. His name was Martin Luther and 500 years ago on Tuesday he pinned a long screed on to the church door in Wittenberg, which was then a small and relatively obscure town in Saxony. The screed contained a list of 95 “theses” challenging the theology (and therefore the authority) of the then all-powerful Catholic church. This rebellious stunt by an obscure monk must have seemed at the time like a flea bite on an elephant. But it was the event that triggered a revolution in religious belief, undermined the authority of the Roman church, unleashed ferocious wars in Europe and shaped the world in which most of us (at least in the west) grew up. Some flea bite.

[..] Why not, I thought, compose 95 theses about what has happened to our world, and post them not on a church door but on a website? Its URL is 95theses.co.uk and it will go live on 31 October, the morning of the anniversary. The format is simple: each thesis is a proposition about the tech world and the ecosystem it has spawned, followed by a brief discussion and recommendations for further reading. The website will be followed in due course by an ebook and – who knows? – perhaps eventually by a printed book. But at its heart is Luther’s great idea – that a thesis is the beginning, not the end, of an argument.

Debt Rattle October 28 2017

Oct 282017

October 28, 2017 Posted by Raúl Ilargi Meijer at 9:15 am Finance Tagged with: Catalonia, crypto, Finland, fixed costs, GDP, IRS, Mueller, New Zealand, sanctuary 11 Responses »

Stonehenge 1897

• Spanish PM Dissolves Catalan Parliament And Calls Fresh Elections (G.)

• Finland Prepares Parliamentary Vote To Recognize Catalonia (Exp.)

• Catalonia Looks To Estonia’s E-Residency, Considers Cryptocurrency (IBT)

• EU Economic Failures Are To Blame For Catalonia Mess – Steve Keen (Sp.)

• Robert Mueller’s First Charges (Atlantic)

• Large U.S. Cities Struggle With High Fixed Costs (BBG)

• What You See Is Not What You Get in GDP (WS)

• IRS Apologizes For Aggressive Scrutiny Of Conservative Groups (NPR)

• J is for Junk Economics – Michael Hudson (Ren.)

• New Zealand May Tighten Law That Allows Mega Wealthy To Buy Citizenship (G.)

• Hopes Dashed For Giant New Antarctic Marine Sanctuary (AFP)

Vote for independence, get the opposite. A feature not a flaw in the EU.

• Spanish PM Dissolves Catalan Parliament And Calls Fresh Elections (G.)

The Spanish government has taken control of Catalonia, dissolved its parliament and announced new elections after secessionist Catalan MPs voted to establish an independent republic, pushing the country’s worst political crisis in 40 years to new and dangerous heights. Speaking on Friday evening, the Spanish prime minister, Mariano Rajoy, said his cabinet had fired the regional president, Carles Puigdemont, and ordered regional elections to be held on 21 December. Rajoy said the Catalan government had been removed along with the head of the regional police force, the Mossos d’Esquadra. The Catalan government’s international “embassies” are also to be shut down. “I have decided to call free, clean and legal elections as soon as possible to restore democracy,” he told a press conference, adding that the aim of the measures was to “restore the self-government that has been eliminated by the decisions of the Catalan government.

“We never, ever wanted to get to this situation. Nor do we think that it would be good to prolong this exceptional [state of affairs]. But as we have always said, this is not about suspending autonomy but about restoring it.” The actions came hours after Spain’s national unity suffered a decisive blow when Catalan MPs in the 135-seat regional parliament voted for independence by a margin of 70 votes to 10. Dozens of opposition MPs boycotted the secret ballot, marching out of the chamber in Barcelona before it took place and leaving Spanish and Catalan flags on their empty seats in protest. Minutes later in Madrid, the Spanish senate granted Rajoy unprecedented powers to impose direct rule on Catalonia under article 155 of the constitution. The article, which has never been used, allows Rajoy to sack Puigdemont and assume control of Catalonia’s civil service, police, finances and public media.

Finland, Argentina, perhaps Scotland, who’s next?

• Finland Prepares Parliamentary Vote To Recognize Catalonia (Exp.)

Finland could be the first country to officially recognise Catalonia as a republic state, in a move that would put the Scandinavian country in direct opposition to the EU. The country’s MP for Lapland Mikko Karna has said that he intends to submit a motion to the Finnish parliament recognising the new fledgling country. Mr Karna, who is part of the ruling Centre Party, led by Prime Minister Juha Sipila, also sent his congratulations to Catalonia after the regional parliament voted earlier today on breaking away from the rest of Spain. Should Finland officially recognise the new state of Catalonia this will be yet another body blow to the the EU which has firmly backed the continuation of a unified Spain under the control of Madrid. European Commission President Jean-Claude Juncker warned today that “cracks” were appearing in the bloc due to the seismic events in Catalonia that were causing ruptures through the bloc.

Donald Tusk, the President of the European Council, said earlier today that for the EU nothing changes despite the Catalan parliament voting to breakaway from Spain. He said that the EU would continue to only speak with Spain. If Finland recognised Catalonia then this would make a mockery of the EU’s refusal to acknowledge the region’s new status. A statement from the European Union on October 2 read: “Under the Spanish Constitution, yesterday’s vote in Catalonia was not legal. [..] Argentina could also formally recognise the Republic of Catalonia and reject the intervention of the Spanish Prime Minister Mariano Rajoy who has moved to implement Article 155 which will permit Madrid to take over control of the semi-autonomous region. Socialist Left Argentine MP Juan Carlos Giordano, who represents Buenos Aires Province said that he would present a bill in parliament for the South American country to recognise Catalonia.

The Scottish Government has also sent a message of support, saying that Catalonia “must have” the ability to determine their own future. [..] “The European Union has a political and moral responsibility to support dialogue to identify how the situation can be resolved peacefully and democratically.”

“Eva Kaili MEP, an advocate of fintech innovation who was a politician in Greece at the time of the crisis, recounts that the plan was taken seriously. “We talked about leaving the eurozone, finding another currency,” said Kaili. “There was even a ‘Plan B’, which involved essentially hacking into everyone’s accounts and replacing all their money with Bitcoin.”

• Catalonia Looks To Estonia’s E-Residency, Considers Cryptocurrency (IBT)

As Spain is poised to seize control of the Catalan government and stop the region’s bid for independence, an initiative is underway to emulate Estonia’s innovative e-residency programme. Technology advocates in Catalonia, which is reputed to be ahead of the rest of Spain in areas like fintech, are also reportedly touting the possibility of a national cryptocurrency or digital token, something Estonia has also been considering. An article in Spain’s main daily newspaper El Pais reports that digital transformation experts working for the Government of Catalonia, the Generalitat de Catalunya, have visited Estonia several times to gather tips on how to implement an e-residency programme. Dani Marco, director of SmartCatalonia, who appears to be heading up the initiative, pointed out that the Estonians “started from scratch, with all the possibilities they were offered to build a model of economic development.”

The article goes on to namecheck Vitalik Buterin, inventor of the next generation public blockchain Ethereum, who was attending a technology conference in Barcelona. The takeaway was that Catalonia could follow Estonia’s proposal to issue some flavour of national blockchain tokens – a decentralised store of value in other words. Most of the time you hear about banks stating that cryptocurrencies like Bitcoin are only good for criminals, or that they are too slow, or volatile to be of any real use. However, issuing digital currency without the need for a central bank is undoubtedly a bona fide use case. Moreover, the mere mention of Estonia in this context is somewhat incendiary: the digitally advanced Baltic nation recently proposed issuing a national cryptocurrency – the so-called “Estcoin”.

This would make it the first nation to carry out an initial coin offering (ICO), a new way of funding technology projects by issuing tokens on a blockchain. A blogpost on the subject garnered so much interest and media attention that in the end ECB chief Mario Draghi publicly slapped down the proposal. “No member state can introduce its own currency; the currency of the eurozone is the euro,” he said. The other thing that Estonia has perfected across its 1.3 million e-residents is a secure and tamper-resistant e-voting system. [..] It was not widely reported, but during the years of punishing austerity that followed the banking bailouts, Greece considered a desperate measure called “Plan B”, which essentially involved switching from the euro to Bitcoin.

Eva Kaili MEP, an advocate of fintech innovation who was a politician in Greece at the time of the crisis, recounts that the plan was taken seriously. “We talked about leaving the eurozone, finding another currency,” said Kaili. “There was even a ‘Plan B’, which involved essentially hacking into everyone’s accounts and replacing all their money with Bitcoin. “Plan B was quite well drafted. Move all accounts into to Bitcoin, establish Bitcoin ATMs – it’s scary, and of course it goes against the ethos of Bitcoin and being in control of your own assets. But look what happened in Cyprus; sometimes you are not safe from your own government.”

“..the European Union is about unifying Europe — this is a great example of it actually causing Europe to fragment.”

• EU Economic Failures Are To Blame For Catalonia Mess – Steve Keen (Sp.)

Sputnik: Quite extraordinary scenes this afternoon in Catalonia. Are you surprised it’s come to this? Steve Keen: No, I am not. One thing that we tend to forget is that the last fascist dictator to die in his sleep was the last fascist ruler of Spain. So there’s a deep tendency for authoritarian reactions in that country. But in the meantime, the real story I think is the impact of the euro causing effectively depressions through southern Europe. And areas that were rich before the euro came are the ones that are leading revolts against it right now. Catalonia, of course, is the prime example!

Sputnik: People see this as a problem for Spain, but isn’t it a bit of a problem for the EU too? Steve Keen: Absolutely! The EU has completely sided with Spain, the only thing it did was acknowledge that the actual referendum was illegal. It didn’t make any mention of the heavy-handed treatment by the Spanish police and of the enforcing of that judgment. They should have been far more sensible simply ignoring it. The EU has aligned itself here with basically suppressing democratic tendencies inside its own member countries. Sputnik: Do you think that’s actually recognized by the European public? Or has it gone unnoticed?

Steve Keen: I think it’s gone unnoticed because the real reason to form the European Union was to bring about European unity. And that was, of course, a noble aim after the Second World War. But the mistake was the economic system into which it was imposed. And if you’re trying to bring about economic democracy of a continental level, when you don’t have a treasury at the same time and you don’t have a way of equalising the impact of trade imbalances, which is what removing the flexible exchange rates prior to the euro ended up causing, then you have a system which will end up causing crisis after crisis. Which is, of course, what happened with the global financial crisis leading to great-depression-levels of unemployment in Spain. And they’re still at 17% of the population. For everyone who thinks that the European Union is about unifying Europe — this is a great example of it actually causing Europe to fragment.

It’s getting ugly. And murky.

• Robert Mueller’s First Charges (Atlantic)

The special counsel overseeing the Russia investigation reportedly obtained a sealed indictment on Friday. It’s the end of the beginning for the Russia investigation. Special Counsel Robert Mueller’s team has reportedly filed the first criminal charges as part of the sprawling inquiry into Moscow’s interference in the 2016 presidential election, CNN reported Friday night. Citing “sources briefed on the matter,” the network said a federal grand jury in Washington, D.C., approved the charges, which have been sealed by a federal judge. CNN did not indicate who had been charged, how many people had been charged, or what charges had been filed by Mueller’s team. An arrest could come by Monday. Reuters subsequently confirmed CNN’s reporting.

John Q. Barrett, a St. John’s University law professor and former associate special counsel in the Iran-Contra affair, said that a sealed indictment itself is rare, as is its disclosure to the press. “It’s possible that this could come from sources in the Department of Justice or defense counsel, each of which would have been likely to know that charges were going to be sought and that a sealing order was going to be sought,” he explained. “It’s unusual and would be a serious violation,” Matthew Miller, a former Justice Department spokesman under the Obama administration, said Friday night. “No one outside of the Justice Department or the court—including grand jurors, court reporters and such—should know, with the possible exception of the defendant’s attorney, who might have been briefed to arrange surrender.”

No matter who is indicted, the move will send shockwaves throughout the Trump administration and the nation’s capital. Until now, the Russia investigation has followed President Trump’s first year in office like a shadow, darkening his political fortunes without substantially altering them. A federal indictment of anyone connected to the Trump campaign or the White House would turn that theoretical danger into hard reality.

The problems that crawl up on you in the dark of night.

• Large U.S. Cities Struggle With High Fixed Costs (BBG)

Cities across the U.S. often feel the same pinch—trying to manage the typical costs of running a city, such as picking up trash and filling potholes, on top of ballooning retirement obligations and outstanding debts. Several major cities are struggling to keep up. The culprit: As employees age and retire, cities are on the hook for funding more pensions and health-care benefits. In 2016, local governments faced a pension investment gap of $3.7 trillion, according to Moody’s Investors Service. Their predicament only worsens when cities fall behind in making those payments or their investments lag. When you measure those fixed costs against a city’s operating budget, no major city is as embattled as Jacksonville, Florida. In the city of 881,000 people, fixed costs are 31.4 percent of expenses, according to data compiled by Bloomberg.

That’s driven by pensions, which made up almost 18 percent of expenses in fiscal 2016. Twenty-six other U.S. cities with populations of more than 250,000 have fixed cost ratios above 23 percent. They include Los Angeles and Houston, which could also be on the hook to pay Hurricane Harvey recovery costs that federal funds don’t cover. Smaller cities aren’t necessarily immune. City leaders in Hartford, Connecticut, where fixed costs are 27 percent of expenses, warned last month that the city wouldn’t be able to meet its financial obligations without additional help from the state. State lawmakers passed a budget with additional aid to the capital city on Thursday. Relief may not be around the corner for other areas. City revenues are expected to stagnate in 2017, on average, while expenditures are forecast to rise 2.1 percent, according to a Sept. 12 survey of 261 U.S. city finance officers by the National League of Cities.

Awaiting revisions.

• What You See Is Not What You Get in GDP (WS)

The US economy, as measured by “real” GDP (adjusted for a version of inflation) grew 0.74% in the third quarter, compared to the prior quarter. That was a tad slower than the 0.76% growth in Q2, but up from the 0.31% growth in Q1. GDP was up 2.3% from a year ago. To confuse things further, in the US, we cling to the somewhat perplexing habit of expressing GDP as an “annualized” rate, which takes the quarterly growth rate (0.74%) and projects it over four quarters. This produced the annualized rate of 2.99%, or as we read this morning all over the media, “3.0%.” This was the “advance estimate” by the Bureau of Economic Analysis. The BEA emphasizes that the advance estimate is based on source data that are “incomplete or subject to further revision by the source agency.”

These revisions can be big, up or down, as we’ll see in a moment. The BEA will release the “second estimate” for Q3 on November 28 and the “third estimate” on December 21. More revisions are scheduled over the next few years. So 2.99% GDP growth annualized, or 0.74% GDP growth not annualized, or 2.3% growth from a year ago… is pretty good for our slow-growth, post-Financial-Crisis, experimental-monetary-policy era, but well within the range of that era, that goes from 5.2% annualized growth in Q3 2014 to a decline of 1.5% in Q1 2011. So nothing special here:

[..] In other words, we won’t really know how the economy did in the last quarter until we have a lot more hindsight. Point one: It’s devilishly hard to estimate what’s going on in the vast and complex US economy. The BEA comes up with an “advance estimate” to give economy watchers a feel, but it concedes that there will be many and substantial revisions as more data become available, and that initial “feel” may be wrong. Point two: Equally complex economies, such as China’s, are equally hard to estimate. Yet China’s National Bureau of Statistics comes up with one big-fat figure that is always very near the number the central government had mandated earlier. It publishes its GDP number less than three weeks after the end of the quarter, and a week or more before the BEA’s advance estimate.

For example, on October 18, the National Bureau of Statistics reported that GDP in Q3 grew 6.8% year-over-year. And this figure – however hastily concocted, inflated, or just plain fabricated – becomes etched in stone. No one believes it. At least in the US, after many revisions and years down the road, GDP becomes a credible number. In China, you’ll never get there. And point three: GDP is a terrible measure of the economy. It measures what money gets spent on and invested in. It’s a measurement of flow. Among other shortcomings, it doesn’t include the source of money – whether it’s earned money or borrowed money. This leads to the distortion that piling on debt is somehow good for the economy, when in reality it’s only good for GDP but will act as a drag on the economy down the road.

WTF?

• IRS Apologizes For Aggressive Scrutiny Of Conservative Groups (NPR)

In a legal settlement that still awaits a federal judge’s approval, the IRS “expresses its sincere apology” for mistreating a conservative organization called Linchpins of Liberty — along with 40 other conservative groups — in their applications for tax-exempt status. And in a second case, NorCal Tea Party Patriots and 427 other groups suing the IRS also reached a “substantial financial settlement” with the government. Attorney General Jeff Sessions announced the two settlements Thursday. The Justice Department quoted him as saying of the IRS activity: “There is no excuse for this conduct. Hundreds of organizations were affected by these actions, and they deserve an apology from the IRS. We hope that today’s settlement makes clear that this abuse of power will not be tolerated.”

It’s “a historic victory,” said Jay Sekulow of the American Center for Law and Justice, a conservative nonprofit legal group representing the Linchpins plaintiffs. Sekulow, who is also on President Trump’s personal legal-defense team, said the IRS agreed to stop “the abhorrent practices utilized against our clients.” The Linchpins case, in federal circuit court in Washington, D.C., has no monetary settlement. The two sides agreed to bear their own legal fees. The consent order says the IRS admits it wrongly used “heightened scrutiny and inordinate delays” and demanded unnecessary information as it reviewed applications for tax-exempt status. The order says, “For such treatment, the IRS expresses its sincere apology.” [..] The controversy began in 2013 when an IRS official admitted the agency had been aggressively scrutinizing groups with names such as “Tea Party” and “Patriots.”

It later emerged that liberal groups had been targeted, too, although in smaller numbers. The IRS stepped up its scrutiny around 2010, as applications for tax-exempt status surged. Tea Party groups were organizing, and court decisions had eased the rules for tax-exempt groups to participate in politics. Groups sought tax-exempt status as 501(c)(3) charities, where the organization and its donors get tax write-offs, and 501(c)(4) “social welfare” organizations, where donors’ contributions are not tax deductible. After the IRS confession in 2013, its top echelons were quickly cleaned out. Conservative groups sued. Congressional Republicans launched what became years of hearings, amid allegations the Obama White House had ordered the targeting.

Economics is designed to distort our view of the economy.

• J is for Junk Economics – Michael Hudson (Ren.)

The main goal of neoliberalism is to create an economic model for a parallel universe that seems plausible, says economist, Michael Hudson, Professor of economics at the University of Missouri in Kansas City and a researcher at the Levy Economics Institute at Bard College. “It seems that it would work very nicely, if the world where that day,” he tells host and co-founder, Ross Ashcroft. “But economics does not have a relationship to the real world. “The function of neoliberal economics is to distract attention away from how the economy really works: Why it’s polarising, why people are having to work harder despite the fact that productivity is increasing, and why the economy is polarising between the 1% and the rest of the economy.” It’s classic cognitive dissonance.

And though there have been many economists who have accurately explained the world, the economist says very little empirical research has been factored into classical economic modelling. “Everyone from Adam Smith, through even Malthus and Ricardo – had the basic concepts of value and price theory correct, for instance” said Professor Hudson. “John Stuart Mill gets even better marks, though he was a little optimistic about where capitalism was going. Then Thorstein Veblen caps-it-off. These are people Americans haven’t heard very much of: The institutionalist, Simon Patton for instance, was the first Professor of Economics at America’s first business school – the Wharton School – who became the intellectual mentor of economics turning into sociology early in the 20th century.

“There is an enormous amount of analysis, all of it based on history, on empirical analysis, on statistical analysis – and all of that is excluded from the curriculum – so there’s no way to fit economic reality into the academic curriculum of neoclassical economics.” [..] “What happens is that people who criticise financialisation – for instance, modern monetary theorists – find that they can’t get published in the major refereed journals. And without that, they can’t get promoted within academia. Universities are systematically detouring students away from economic reality.” [..] When Professor Hudson was teaching at the New School 50 years ago, he said his graduate students were dropping out of economics because they couldn’t fit reality into the curriculum.

The economist, famed for sacking Alan Greenspan back before the days he was appointed to the Chair of the US Federal Reserve, criticised him for claiming he was “shocked” by the self-interest lending of institutions to protect shareholders equity. “He knew who paid him,” said Hudson. “When I was on Wall Street in the 1960s, banks were afraid to hire him because he was known for saying whatever the client wanted to be said. He’s a public relations person. “The fact is universities are teaching the economics of public relations for the corporate sector. That’s why, underlying this theory, is a theory of how an economy would work without government, or any governmental regulation, where taxation is seen as a burden.”

It’ll be hard to keep the rich away.

• New Zealand May Tighten Law That Allows Mega Wealthy To Buy Citizenship (G.)

New Zealand’s new Labour government will reconsider legislation that allows wealthy foreigners to effectively buy citizenship, the housing minister has said. In an interview with the Guardian about the housing shortage in New Zealand, Phil Twyford said the law that allowed Trump donor and Paypal co-founder Peter Thiel to become a citizen and buy a bolt hole in the South Island would come under scrutiny. Since coming into power last week, Labour has said it will ban foreigners from buying existing homes, along with a slew of policies aimed at addressing the housing crisis, which has seen homelessness grow to more than 40,000 people. However, the ban will not apply to foreigners who gain citizenship in New Zealand – a loophole that billionaire Thiel used, after spending a total of 12 days in the country.

Thiel’s fast-tracked citizenship allowed him to buy multiple properties in New Zealand, even though he told the government he had no intention of living in the country, but would be an “ambassador” for New Zealand overseas instead, and provide contacts for New Zealand entrepreneurs to Silicon Valley. “That was a discretionary decision that was made at the time [Thiel’s citizenship], and we were very critical. Our policy, banning people would apply to everybody, regardless of how much money they have or what country they come from,” Twyford said. “We haven’t announced policy on that [tightening the investment immigration criteria] but I think it is probably something that we are likely to look at.” Twyford said New Zealand’s ban on foreign buyers was modelled on similar legislation in Australia, and was designed to ensure New Zealanders can once again achieve the Kiwi dream of owning their own home.

We are the tragedy.

• Hopes Dashed For Giant New Antarctic Marine Sanctuary (AFP)

Hopes for a vast new marine sanctuary in pristine East Antarctica were dashed Saturday after a key conservation summit failed to reach agreement, with advocates urging “greater vision and ambition”. Expectations were high ahead of the annual meeting of the Commission for the Conservation of Antarctic Marine Living Resources (CCAMLR) – a treaty tasked with overseeing protection and sustainable exploitation of the Southern Ocean. Last year’s summit in Hobart saw the establishment of a massive US and New Zealand-backed marine protected area (MPA) around the Ross Sea covering an area roughly the size of Britain, Germany and France combined. But an Australia and France-led push this year to create a second protected area in East Antarctica spanning another one million square kilometre zone failed.

Officials told AFP that Russia and China were key stumbling blocks, worried about compliance issues and fishing rights. Consensus is needed from all 24 CCAMLR member countries and the European Union. Greenpeace called for “greater vision and ambition” in the coming year while WWF’s Antarctic program chief Chris Johnson said it was another missed opportunity. “We let differences get in the way of responding to the needs of fragile wildlife,” he said. Australia’s chief delegate Gillian Slocum described the failure as “sad”. She also bemoaned little progress on addressing the impacts of climate change which was having a “tangible effect” on the frozen continent. “While CCAMLR was not able to adopt a Climate Change Response Work Program this year, members will continue to work together ahead of the next meeting to better incorporate climate change impacts into the commission’s decision-making process,” she said.

Debt Rattle October 27 2017

Oct 272017

October 27, 2017 Posted by Raúl Ilargi Meijer at 9:33 am Finance Tagged with: Ardern, Catalonia, CIA, Draghi, Gilded Age, JFK, kindness, Minsky, retail, unwind 2 Responses »

Salvator Rosa Lucrezia as poetry 1640-41

• The World’s Witnessing A New Gilded Age (G.)

• ECB Sees Option for Ending QE With Short Taper in 2018 (BBG)

• The Fed Balance Sheet Unwind Myth (Roberts)

• Alarm Sounds Over State Of UK High Street As Sales Crash (G.)

• 75% of UK MPs Don’t Know Where Money Comes From (CityAM)

• China’s Minsky Moment (Muir)

• Catalonia’s Leader Rules Out Snap Election, Crisis Deepens (R.)

• Catalan Companies Face Boycott Over Independence Push (AFP)

• New JFK Files Reveal FBI Warning On Oswald And Soviets’ Missile Fears (G.)

• Australian Court Rules Deputy PM Ineligible For Parliament (R.)

• ‘I Want The Government … To Bring Kindness Back’ (RNZ)

A hundred years ago.

• The World’s Witnessing A New Gilded Age (G.)

The world’s super-rich hold the greatest concentration of wealth since the US Gilded Age at the turn of the 20th century, when families like the Carnegies, Rockefellers and Vanderbilts controlled vast fortunes. Billionaires increased their combined global wealth by almost a fifth last year to a record $6tn – more than twice the GDP of the UK. There are now 1,542 dollar billionaires across the world, after 145 multi-millionaires saw their wealth tick over into nine-zero fortunes last year, according to the UBS/PwC Billionaires report. Josef Stadler, the lead author of the report and UBS’s head of global ultra high net worth, said his billionaire clients were concerned that growing inequality between rich and poor could lead to a “strike back”. “We’re at an inflection point,” Stadler said. “Wealth concentration is as high as in 1905, this is something billionaires are concerned about.

The problem is the power of interest on interest – that makes big money bigger and, the question is to what extent is that sustainable and at what point will society intervene and strike back?” Stadler added: “We are now two years into the peak of the second Gilded Age.” He said the “$1bn question” was how society would react to the concentration of so much money in the hands of so few. Anger at so-called robber barron families who built up vast fortunes from monopolies in US rail, oil, steel and banking in the late 19th century, an era of rapid industrialisation and growing inequality in America that became known as the Gilded Age, led to President Roosevelt breaking up companies and trusts and increasing taxes on the wealthy in the early 1900s. “Will there be similarities in the way society reacts to this gilded age?,” Stadler asked. “Will the second age end or will it proceed?”

We’re doing so well we need to keep throwing money at bankers.

• ECB Sees Option for Ending QE With Short Taper in 2018 (BBG)

European Central Bank policy makers implicitly assume their newly-extended bond-buying program will be tapered to a halt by the end of next year so long as the inflation outlook improves, according to officials with knowledge of the discussions. The Governing Council, which met on Thursday, focused on the first nine months of next year for its quantitative-easing program and didn’t formally debate options for what to do after that, said the people, asking not to be named because the talks are private. While tapering would be possible, extending the program without changing the pace of purchases is also a credible option if inflation doesn’t show sufficient progress, one of them said. Whether to set a firm end-date on the bond-buying program has been a key sticking point for some officials.

The council agreed to cut monthly purchases in half, to €30 billion ($35 billion), and President Mario Draghi said that a “large majority” backed the decision to include a pledge to extend again if needed. He added that “it’s never been our view that things should stop suddenly.” The meeting came after governors were presented with several scenarios at a seminar on Wednesday, according to the people. Those included a reduction to 40 billion euros a month through June, and a 12-month tapering through December, similar to the Federal Reserve’s exit from its own program. The latter scenario wasn’t considered a realistic policy option, one of the people said. Governors also looked at a three-month scenario that would see buying after September tapered in monthly steps to 20 billion euros, 10 billion euros and 5 billion euros, another official said.

“..In fact, just last week the Fed increased their balance sheet by over $13.5 billion dollars. No wonder the stock market shot higher.”

• The Fed Balance Sheet Unwind Myth (Roberts)

Since the beginning of the year, the Federal Reserve has been heavily discussing, warning rather, they were going to begin to “unwind” their gargantuan balance sheet. As Michael Lebowitz recently penned in his subscription-only article “Draining The Punchbowl:” “Since QE was first introduced, the S&P 500 has gained 1,546 points. All but 355 points were achieved during periods of QE. Of those remaining 355 points, over 80% occurred after Trump’s victory.” That is a pretty amazing set of stats. I have previously noted the high correlation of the financial markets relative to the ongoing liquidity operations of the Federal Reserve. I have updated that analysis to show the reduction in the balance according to the Fed’s proposed schedule.

While the market stumbled following the end of QE in the United States, global QE, as shown in the charts of the major global Central Banks picked up the slack.

But now, the ECB has already begun discussing their plans to begin cutting the amount of their QE program by half in the coming year. The hope, of course, by Central Bank officials is that global economies are now humming along at a pace strong enough to withstand the reduction of “emergency measures.” Of course, the real question is whether the Central Bank’s “measures” of economic strength are accurate. While there are certainly indicators such as GDP growth, production, and employment measures which suggests that global economies are indeed on a cyclical upswing, there are also numerous measures which suggest the opposite.

With the Fed trying to raise interest rates, and reduce the balance sheet simultaneously, the “tightening of monetary policy” is a drag on economic growth and ultimately the stock market. But as I stated above, while the Fed is currently “discussing” the reduction of their balance sheet beginning in October, they actually haven’t. In fact, just last week the Fed increased their balance sheet by over $13.5 billion dollars. No wonder the stock market shot higher.

It’s the weather. Too warm to shop.

• Alarm Sounds Over State Of UK High Street As Sales Crash (G.)

The fastest monthly fall in high street sales since the height of the recession in 2009 has raised fears for the retail sector ahead of the crucial Christmas trading period. A survey by the the CBI found that 50% of retailers suffered declining sales in October while only 15% benefited from an increase, leaving a rounded balance of -36%, the lowest since March 2009. The business lobby group said the survey showed retailers were “feeling the pinch” from rising inflation, which has eaten into consumer incomes and squeezed profit margins. Uncertainty surrounding the outcome of the UK’s Brexit negotiations has also preyed on consumer confidence, which has declined sharply over the past 18 months and depressed spending. Figures estimating GDP growth in the third quarter showed the services sector holding up despite recent declines in wages adjusted for inflation.

However, the construction sector fell into recession. Rain Newton-Smith, the CBI chief economist, said: “While retail sales can be volatile from month to month, the steep drop in sales in October echoes other recent data pointing to a marked softening in consumer demand.” The gloomy CBI survey came as Debenhams warned of an “uncertain” environment on the high street in the run up to Christmas after suffering a 44% dive in profits. [..] Warm autumn weather and low consumer confidence in the wake of the Brexit vote have also combined to deliver a “grim” October, according to the John Lewis boss, Paula Nickolds, who revealed last week that shoppers are continuing to put off expensive household purchases. That comes after the UK retail sector recorded its lowest growth rate in four years for the three months to the end of September, according to official data.

Maube the Bank of England should send them their reports?

• 75% of UK MPs Don’t Know Where Money Comes From (CityAM)

Only 15% of MPs surveyed answered correctly when asked a true/false question on whether banks create money when they make loans. Almost two-thirds of the 50 MPs surveyed by Dods for campaign group Positive Money wrongly thought banks can’t create money, while a quarter admitted they didn’t know. In a far from stellar field Conservative MPs outperformed slightly “in this regard”, with 19% answering correctly, compared to only one in 20 Labour MPs. More than three-quarters of the MPs surveyed incorrectly believed that only the government has the ability to create new money. Some 23% knew this to be false, with Labour performing better than the Conservatives. The Bank of England has previously intervened to point out that most money in the UK begins as a bank loan.

In a 2014 article the Bank pointed out that “whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.” The perception of money creation has been complicated further by the unorthodox use of quantitative easing, in which the government creates money electronically, which is then used to buy financial assets. Fran Boait, executive director of Positive Money, said: “Despite their confidence in telling the public that there is ‘no magic money tree’ to pay for vital services, politicians themselves are shockingly ignorant of where money actually comes from. “There is in fact a ‘magic money tree’, but it’s in the hands of commercial banks, such as Barclays, HSBC and RBS, who create money whenever they make loans.”

The difference between short and long term.

• China’s Minsky Moment (Muir)

Sometimes you have to love the naivety of the markets. At this week’s Communist Party Congress meeting in Beijing, the governor of the PBoC (People’s Bank of China) said the following; “If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a ‘Minsky moment’. That’s what we should particularly defend against.” Yet instead of focusing on this dire warning, markets are busy trying to discount the chance of a Powell Fed or a Republican tax cut. Although both of these developments would be important, China is the tail that wags the dog. Full stop. Figure out China, and all the other financial market forecasts become that much easier. Some might argue this “Minsky moment” warning is nothing more than a Central Bank whistling in the wind.

Didn’t Greenspan caution about a similar concern with his “irrational exuberance” speech? And didn’t that end up being a complete non-event? Yet I would argue that China is not the same as other countries. Although there are market elements to their economy, to a large degree, China is still a command economy. If Chinese leadership wants a particular outcome, they can just demand it, and it will happen. So when the head of the PBoC warns about a “Minsky moment”, it’s probably not a good idea to load up on financial assets. For the longest time, China exported goods and imported developed nation debt and other financial assets. They had already started down the road of re-balancing their economy away from this export driven model, but this recent development confirms that the old playbook should be thrown out the window.

The global financial system is changing, and China is leading the way. Their moves will reverberate for years in the future. The Chinese authorities have just put up the warning flag, and you would be foolish to not believe it. This long term warning coincides with my belief that over the short term, the risks are all to the downside. I have been banging the drum on the fact that the Chinese government have done everything in their power to keep markets stabilized through their Communist Party Congress. They haven’t even hidden this fact. From the big sign above the Shenzhen Securities Exchange building that read “Use every effort to protect the stability of stock market for 20 days,” to the recent release that the Chinese government has asked firms to delay bad result during Congress, the message is clear.

Too many last minute turnarounds. But still explosive.

• Catalonia’s Leader Rules Out Snap Election, Crisis Deepens (R.)

Catalonia’s leader Carles Puigdemont on Thursday said he would not hold a new regional election to break the deadlock between Madrid and separatists wanting to split from Spain, sharpening a political crisis that could turn into direct confrontation. Puigdemont had been expected to announce an election to head off moves by Madrid to take direct control of the autonomous region in the next few days. But, speaking in the courtyard of the regional government headquarters in Barcelona, Puigdemont said the central government had not provided sufficient guarantees that holding an election would prevent the imposition of direct rule. “I was ready to call an election if guarantees were given. There is no guarantee that justifies calling an election today,” Puigdemont said.

He said it was now up to the Catalan parliament to move forward with a mandate to break from Spain following an independence referendum that took place on Oct. 1 – a vote which Madrid had declared illegal and tried to stop. Some independence supporters are pushing him to unilaterally declare independence. Late on Thursday, the regional government’s business head resigned over his opposition to a unilateral declaration, a sign of growing division in the separatist movement. Puigdemont’s stand sets the stage for the Spanish Senate on Friday to approve the take-over of Catalonia’s institutions and police, and give the government in Madrid the power to remove the Catalan president.

But this could spark confrontation on the streets as some independence supporters have promised to mount a campaign of civil disobedience. Spanish Deputy Prime Minister Soraya Saenz de Santamaria, speaking in a Senate committee, said: “The independence leaders have shown their true face – they have promised a dream but are performing tricks.” The aim of Article 155 – the constitutional trigger for direct rule – was to permit any election to take place in a normal and neutral situation, she said. The Spanish government has said it would call such a vote within six months of taking over Catalonia.

Sad.

• Catalan Companies Face Boycott Over Independence Push (AFP)

Calls for a boycott of Catalan food, cars and other goods, to punish the region for its separatist push, are worrying businesses who fear the economy will suffer. “You have to hit them where it hurts the most: the wallet,” a Twitter user wrote under the hashtag #boycottcatalanproducts. “We Spaniards who do not want Spain to be broken up… we can take action by adopting dissuasive steps of an economic nature,” reads a Facebook page calling for consumers to snub Catalan products. Appeals for a boycott have become more urgent since Catalonia’s separatist regional government held a banned independence referendum on October 1 in defiance of Spain’s central government and courts. The campaign targets Catalonia’s key agriculture and food sectors, with consumers urged to shun cava, a sparkling wine, Estrella Damm beer, as well as Vichy Catalan and Font Vella bottled water.

Medicines are also on the list to hurt Catalonia’s important pharmaceutical sector, as well as cars made by Seat, German carmaker Volkswagen’s Spanish unit in the region. Products made by foreign multinationals in Catalonia, including Nestle and Unilever, have also been swept up in the campaign. Mobile phone applications help consumers identify which products come from the rebel region. The impact of the boycott campaign is hard to measure to date. “We have had some clients who have bought less,” especially in Madrid, Rosa Rebula, a manager at cava producer Rosell i Formosa, told AFP. But she said the company will only be able to confirm the trend in November — a peak period for sales of cava ahead of the Christmas holiday season.

CIA/FBI got to Trump? They’ve had 50 years to redact docs, but need 6 months more? Best comment I read: A whole generation knows where they were when Kennedy was shot, except George HW Bush. Turns out he was in Dallas.

• New JFK Files Reveal FBI Warning On Oswald And Soviets’ Missile Fears (G.)

The US government released 2,800 documents on Thursday, but President Donald Trump delayed the release of others, saying he had “no choice” but to consider “national security, law enforcement and foreign affairs concerns” raised mostly by the FBI and CIA. One of the first interesting documents to be unearthed, as journalists, scholars and the public pored over them, was a memo written by director J Edgar Hoover that said the FBI had warning of a potential death threat to Oswald, who was then in police custody. “There is nothing further on the Oswald case except that he is dead,” Hoover wrote on 24 November 1963. “Last night we received a call in our Dallas office from a man talking in a calm voice and saying he was a member of a committee organized to kill Oswald.

[..] The files comprise almost the final 1% of records held by the federal government and their publication follows a release in July when the record-keepers, the National Archives, posted 3,801 documents online, mostly formerly released documents with previously redacted portions. An administration official told reporters on Thursday that the files that remain secret have information that “remains sensitive depending on its context”. Trump ordered the agencies to review those redactions over the course of six months, the official said, to ensure more documents reach the public. The next deadline for documents is 26 April 2018. According to the National Archives, 88% of records related to Kennedy’s murder were already fully open and another 11% released but partially redacted. In total, that makes for about 5m pages.

The newly released documents also reveal that Soviet Union leaders considered Oswald a “neurotic maniac who was disloyal to his own country and everything else”, according to an FBI memo documenting reactions in the USSR to the assassination. The Soviet officials feared a conspiracy was behind the death of Kennedy, perhaps organised by a rightwing coup or JFK’s successor Lyndon Johnson. They also feared a war in the aftermath of Kennedy’s death, according to the memo: “Our source further stated that Soviet officials were fearful that without leadership, some irresponsible general in the United States might launch a missile at the Soviet Union.”

How many more?

• Australian Court Rules Deputy PM Ineligible For Parliament (R.)

Australia’s High Court ruled on Friday that Deputy Prime Minister Barnaby Joyce is ineligible to remain in parliament, a stunning decision that cost the government its one-seat parliamentary majority and forced a by-election. The Australian dollar fell a quarter of a U.S. cent after the unexpected decision. Australian Prime Minister Malcolm Turnbull said he accepted the court’s ruling, even though it was “clearly not the outcome we were hoping for”. Turnbull did not name a new deputy leader during a short news conference in Canberra soon after the court’s ruling. The Australian leader had been scheduled to travel to Israel on Saturday for a week-long visit but a spokesman for Turnbull told Reuters his departure has now been delayed. The spokesman said the new travel arrangements are still be finalised.

Turnbull’s center-right coalition is now in a precarious position. His Liberal Party is the senior party in a coalition with the smaller National Party, which Joyce led. He must now win the support of one of three independent lawmakers to keep his minority government afloat, with two sitting weeks of parliament left until it recesses for the year. At least two independent lawmakers have promised their support. Independent MP Bob Katter told Reuters he would support the government, but he may reconsider that if the coalition tried to block renewed efforts for a sweeping investigation into the scandal-ridden financial system. “I think we have the numbers for a commission into the banks and, if the government tries to block that, then I think we will get into murky waters,” Katter said. The opposition Labor Party immediately went on the attack and threatened to launch a legal challenge to every decision made by Joyce since last year’s election.

Great intentions. But she has to talk to Trump, Xi et al.

• ‘I Want The Government … To Bring Kindness Back’ (RNZ)

Shortly before she was sworn in as the new Prime Minister, Jacinda Ardern spoke to Checkpoint with John Campbell as she was on her way to Government House in a Crown car. She said she wants the new government to “feel different”, to be empathetic and kind. There was a significant part of her that was focused on the work that needed to be done, she said. “Once you’re there, get on with it.” She said she wanted the government to feel different. “I want it to feel like we are a government that’s truly focused on everybody. Perhaps I’m more acutely aware of that sense having now led a set of negotiations in our government that brings together a range of parties.

“I know I need to transcend politics in the way that I govern for this next term of Parliament but I also want this government to feel different, I want people to feel that it’s open, that it’s listening and that it’s going to bring kindness back. “I know that will sound curious but to me if people see they have an empathetic government I think they’ll truly understand that when we’re making hard calls that we’re doing it with the right focus in mind.” She said there were tough times during the coalition negotiations. “It’s not about just preserving people’s political careers. It’s not about power. It’s about being in a position to make a difference to people who need it most. “This will be a government that works with others. “There is a lot to do.” Asked if there was a central tenet to her approach to the new role, she said it was empathy.

Debt Rattle October 26 2017

Oct 262017

October 26, 2017 Posted by Raúl Ilargi Meijer at 9:08 am Finance Tagged with: bull market, Catalonia, China, Draghi, New Zealand, sand, Schaeuble, slowdown, Sydney 6 Responses »

Salvador Dalí Living still life 1956

• The Current Bond Bull Market Is The Longest In More Than 500 Years (BI)

• Get Ready For A ‘Substantial’ Slowdown In The US Economy – Natixis (CNBC)

• America is in Worse Financial Shape than Russia or China – Kotlikoff (SMN)

• Xi Has Built Chinese Economy On ‘Foundation Of Sand’ – Kyle Bass (BBG)

• China US Buying Spree Prompts Move to Toughen Deal Reviews (BBG)

• S&P: Britain’s £200 Billion Consumer Debt Boom Is ‘Unsustainable’ (BI)

• Mario Draghi Is Preparing For His Final Act As ECB President (BBG)

• Sydney Apartment Market Has Cracked (Aus.)

• New Zealand To Ban Foreign Buyers Snapping Up Existing Homes (G.)

• Almost 1,400 Companies Have Left Catalonia Since October 2 (ZH)

• ‘Schauble Has Reduced Europe To Rubble’ – German Foreign Minister (Tel)

Enough to make you nervous?!

• The Current Bond Bull Market Is The Longest In More Than 500 Years (BI)

We’re currently living through the second longest bond bull market in recorded history, and the longest since the 16th century, according to a new research paper from the Bank of England. Written by Paul Schmelzing, a Harvard PhD candidate currently working with the bank, the paper, titled “Eight centuries of the risk-free rate: bond market reversals from the Venetians to the ‘VaR shock’” — explores hundreds of years of data around real rates and bonds. “This paper presents a new dataset for the annual risk-free rate in both nominal and real terms going back to the 13th century. On this basis, we establish for the first time a long-term comparative investigation of ‘bond bull markets’,” Schmelzing writes.

The paper — which started out as an entry on the Bank of England’s staff blog, Bank Underground — argues that the current bull market in bonds is only surpassed by one longer period of growth in recorded history. “The average length of bond bull markets stands at 25.8 years, and the range falls between 61 years (1451-1511) and 12 years (1718-1729). Our present real rate bond bull market, at 34 years, is already the second longest ever recorded,” Schmelzing writes. Here’s the chart (note that blue shaded areas represent periods of bull markets):

“If US growth slows down markedly … equity valuation and share prices will start falling.”

• Get Ready For A ‘Substantial’ Slowdown In The US Economy – Natixis (CNBC)

One investment bank is urging investors to prepare for the U.S. economy to roll over as early as 2018. “The US economy will in all likelihood slow down substantially: there is a limit to the rise in the participation rate and the employment rate; real wages are slowing down,” wrote Patrick Artus, chief economist at Natixis, on Tuesday. “Investors should therefore prepare for the consequences.” Consequences of this slowdown, notes Artus, include a brief rise in interest rates, a market sell-off and a depreciating dollar. Natixis is a French corporate and investment bank headquartered in Paris. Natixis Global Asset Management oversees roughly $950 billion, according to its website. The analyst also called the current level of corporate investment “abnormally high” and suggested a downward correction.

To be sure, the more mainstream investment banks on Wall Street are not nearly as pessimistic. Wall Street foresees a positive 2.5% change in GDP in the third quarter year over year, according to the consensus estimate collected by Thomson Reuters. The Bureau of Economic Analysis will release GDP number on Friday before the bell. And none of the major banks see a recession on the horizon. The American people are even more bullish. According to CNBC’s All-American Economic Survey, optimism about the economy hit an all-time high earlier this month. Forty-three% of the public believes the economy is in excellent or good condition while the four-quarter average for every major economic metric in the poll is at a record 10-year high.

Goldman Sachs is probably the most bearish on the U.S. economy among major firms, predicting 3.9% annual global growth through 2020, but that U.S. growth will decelerate to just 1.5% annually over that time. [..] Natixis has a warning for clients in the note, “If US growth slows down markedly … equity valuation and share prices will start falling.”

Time to get things out into the open.

• America is in Worse Financial Shape than Russia or China – Kotlikoff (SMN)

America’s 2017 fiscal gap will come in near $6 trillion, nine times higher than the $666 billion deficit announced by the US Department of the Treasury last week, says Laurence Kotlikoff, an economics professor at Boston University. “Our country is broke,” says Kotlikoff, who estimates total US government debts at more than $200 trillion, when unfunded liabilities are included. “We are in worse shape than Russia, China or any developed nation.” Worse, says Kotlikoff, who has testified before Congress, government officials are well-aware that many of America’s debts and accruing liabilities are being written off the books. However, for the most part, they are keeping their mouths shut.

The upshot is a de facto “two-tier” financial reporting system, in which politicians and insiders have access to key data buried in footnotes about unfunded liabilities, which indicate that there are huge problems in the economy. The public, on the other hand, in slews of Presidential and Congressional Speeches and publications, is led to believe that while things are tough, overall everything is OK. According to Kotlikoff, a long-time activist for fiscal rectitude, the problem stems in large part from the fact that the US government has been spending almost all of Americans’ approximately $795 billion in social security payroll taxes to pay current bills, rather than investing them to fund retirees’ benefits. The upshot is that on a net basis, the US government has no money to pay all the benefits that have been promised. Politicians know that defaults will occur, they just haven’t figured out how to finesse this.

Kotlikoff, unlike most, has a solution. He believes that the US government should adopt what he calls “fiscal gap accounting”, which involves putting all future receipts and expenditures on its books. The idea is that if Americans knew about all the money that their politicians were borrowing and spending, they would be able to make better decisions as to the usefulness of those policies. If the US government produced a financial statement that listed the $200 trillion in unfunded liabilities that Kotlikoff says it owes, workers might make different decisions about how much they will save for retirement. Sadly, current de facto US government practice – inspired by Keynesian thinkers such as Paul Krugman – is for governments to spend, tax, borrow and print as much money as possible, in an effort to keep the economy perpetually running at full steam. The idea is to leave future generations to deal with the problems.

“Today Xi is celebrated in media reports, but when future historians look back, he will be blamed for recklessly building the Chinese economy on a foundation of sand..”

• Xi Has Built Chinese Economy On ‘Foundation Of Sand’ – Kyle Bass (BBG)

Hedge fund manager Kyle Bass, who has been betting against the yuan and warning of a collapse in China’s banking system, said the nation will one day come to regret handing Xi Jinping more power than any leader in decades. “Today Xi is celebrated in media reports, but when future historians look back, he will be blamed for recklessly building the Chinese economy on a foundation of sand,” Bass, founder of Hayman Capital Management, said in an email Wednesday. “Xi desperately seeks credibility, but true developed economies do not impose severe capital controls or move short-term rates hundreds of basis points overnight in attempts to manipulate their own currency.”

At a twice-a-decade congress in Beijing, China’s ruling Communist Party enshrined President Xi’s policies alongside those of former leaders Mao Zedong and Deng Xiaoping. Xi, who has sought to turn China into a global economic power and was the architect of the Belt-and-Road infrastructure drive, had his theories on “socialism with Chinese characteristics for a new era” included in China’s guiding charter. Yet, some foreign investors have been less than impressed as China’s currency has remained sheltered behind exchange restrictions and curbs on foreign investment. They’ve also pointed to China’s ever-growing pile of debt, with borrowing swelling to 260% of GDP at the end of 2016, Bloomberg Intelligence data show. Moody’s and S&P both downgraded the nation this year on risks from soaring debt.

Bass, who has called for a 30% drop in the Chinese currency, said in an interview earlier this month that he expects the government to relax its grasp on the exchange rate after the National Party Congress. He said he believed once Xi consolidates power, he’ll allow natural economic forces to play out within the banking system. “China remains an emerging backwater when it comes to global currency settlements,” he said Wednesday.

Tech.

• China US Buying Spree Prompts Move to Toughen Deal Reviews (BBG)

Lawmakers in Washington, spurred by Chinese acquisitions of American firms, are moving to broaden the government’s authority to scrutinize overseas investment in the U.S. with bi-partisan legislation set to be proposed in the coming days, according to people familiar with the matter. The bill would expand the power of a national security panel to review investments by foreigners to include joint ventures and minority stakes in companies, according to documents detailing the legislation obtained by Bloomberg. Lawmakers say the current framework for reviews conducted by the Committee on Foreign Investment in the U.S., or CFIUS, misses deals that pose national security risks because the panel focuses primarily on full acquisitions of American companies even though foreigners conduct a range of deal types in the U.S.

“Many Chinese investments are coordinated state-driven efforts to target critical American infrastructure and disrupt our defense supply-chain requirements,” said Republican Congressman Robert Pittenger of North Carolina, one of the sponsors of the legislation. “Our bi-partisan bill strengthens and modernizes CFIUS to give the government the necessary tools to better track and evaluate Chinese investments.” The Defense Department has raised concerns about Chinese investors financing American start-ups that are developing leading-edge technology in sectors with military applications like artificial intelligence, augmented reality and robotics. Those types of investments generally avoid CFIUS scrutiny because they’re not full acquisitions.

The proposal follows a drumbeat of concerns from lawmakers about recent Chinese deals in U.S. technology, agriculture and financial services. Chinese acquisitions and minority investments in the U.S. peaked in 2016 at $45.9 billion, up from $17.7 billion in 2015, according to Bloomberg data. Chinese deals in 2017 so far are behind 2016’s pace at $23.6 billion. Several Chinese deals have fallen apart this year after encountering objections from CFIUS, an interagency panel that reviews foreign acquisitions of U.S. companies for national security risks. The panel is led by the Treasury Department and includes officials from the Defense, State and Justice departments among others. While CFIUS can impose changes to deals, only the president can block them.

Wonder where Britain will be in 5 years, 10.

• S&P: Britain’s £200 Billion Consumer Debt Boom Is ‘Unsustainable’ (BI)

Double-digit growth in UK consumer debt this year should alarm British lenders, according to credit rating agency Standard and Poor’s. S&P said in a report on Tuesday that consumer credit — which constitutes borrowing like car finance and credit cards — has climbed over £200 billion this year in a low-interest rate market, and warned that losses from lenders could lead to ratings agencies downgrading UK lenders. The agency added that while near-term credit risk remains low, “the recent double-digit annual growth rate in U.K. consumer credit would be unsustainable if it continued at the same pace.” The report also highlighted the Bank of England’s concern over consumer credit levels, which have grown by 10% this year while household income growth has grown by only 2%.

“The Bank of England’s recent assessment of stressed losses on consumer credit lending, brought forward as part of its annual stress test results, also indicates that the regulator is concerned that the resilience of these portfolios may be reducing,” it said. S&P Global Ratings credit analyst Joseph Godsmark said lenders had not been seriously tested on their ability to pull back lending since the 2008 financial crisis. “Although we consider that near-term credit risk remains low, past experience shows that lenders find it hard to avoid inherent cyclicality in consumer credit, and the impact can be severe,” he said.

End of an era.

• Mario Draghi Is Preparing For His Final Act As ECB President (BBG)

Mario Draghi is preparing for the final act in his dramatic tenure as ECB president. The ECB’s meeting on Thursday to discuss how and when it should bring large-scale bond purchases to an end is one of the most keenly anticipated by investors and economists since early 2015 when the program was unveiled. The decision will be announced at 1:45 p.m. in Frankfurt and Draghi will speak 45 minutes later. It’s something of a crossroads for the ECB chief, who faced down the sovereign-debt crisis and near-deflation in the euro area but may end his term in October 2019 without reaching the central bank’s inflation goal or raising interest rates. The Governing Council looks likely to cut monthly asset purchases from 60 billion euros ($71 billion) and stretch them out for as long as capacity allows while it waits for consumer-price growth to pick up.

The president won’t want to repeat the mistake of his predecessor Jean-Claude Trichet who raised interest rates twice in his final months in charge in 2011, only for Draghi to reverse the hikes shortly after taking office. Economists in a Bloomberg survey foresee a nine-month extension of quantitative easing at around 30 billion euros a month, starting in January. There are a range of potential outcomes though – with some officials pushing for QE to end sooner, Bloomberg economists expect a six-month extension at €40 billion. Most commentators expect the ECB to keep its pledge to extend the program further if needed. The central bank is also considering highlighting a related measure: the reinvestment of the proceeds of bond holdings as they mature. That additional spending, which will average about €15 billion a month in 2018 and could run for years, could work as a shock absorber amid any market concerns about the pullback in stimulus.

Economists don’t expect any change to the forward guidance that interest rates will remain unchanged until “well past” the end of net asset purchases. They foresee a rate hike, which would be the first under Draghi’s presidency, only in the first half of 2019 at the earliest. A critical factor for the ECB is the amount of debt still available under its own rules. Some officials see room for little more than €200 billion of purchases in 2018, which would bring total holdings to around €2.5 trillion.

It’s happening. It’ll be painful.

• Sydney Apartment Market Has Cracked (Aus.)

As readers know I have been warning the nation that our banking industry is undertaking a property credit squeeze on a scale not seen for decades. For the most part the regulators and the bankers are inexperienced and are operating in silos so have not understood the combined power of the weapons they are using. Many will be shocked at the results of their actions and by what is to come. In putting numbers to the extent of the fall readers need to understand that the cracking process has been sudden and parts of the Sydney apartment market and other Sydney residential property markets have yet to receive the impact. Many will not fall as much as the big Sydney apartment estate markets, which also led the rise. If you want a headline figure, apartments sold as used apartments in the big Sydney apartment estates have fallen by at least 20%.

The fall rate for individual sales can rise to 25%. These are huge declines by any measure although in Melbourne 18 months after the 1987 share crash falls of 50% were common. However the price fall in new apartments bought either off the plan or as the developer sells a completed apartment are down in the vicinity of 12%. As I will describe later there are good reasons for the difference. And so a hypothetical apartment bought by an investor or a residential buyer for, say, $1 million in the boom (most two bedroom apartments were selling for between $1.2 million and $1.4 million) is now selling for $800,000 — a 20% decline. If I want to buy that hypothetical $1 million apartment off the plan or as a completed unit it would cost about $880,000 — a 12% decline.

She has to amend TPP to get it done.

• New Zealand To Ban Foreign Buyers Snapping Up Existing Homes (G.)

New Zealand is planning to ban foreign buyers from purchasing existing homes in an attempt to tackle a housing crisis by halting a trend among the world’s wealthy to snap up property in the country. The restrictions announced by the prime minister-designate, Jacinda Ardern, are likely to be closely watched by other countries around the world also facing housing shortages and price rises driven by foreign investors. At 37, Ardern has become New Zealand’s youngest leader for 150 years. New Zealand has become a destination for Chinese, Australian and Asian buyers and has gained a reputation as a bolthole for the world’s wealthy – who view it as a safe haven from a potential nuclear conflict, the rise of terrorism and civil unrest, or simply as a place to get away from it all.

The country has become a hotspot for wealthy Americans seeking an escape from political upheaval elsewhere, who view it as a stable nation with robust laws and far from potential conflict zones. Peter Thiel, the co-founder of PayPal and a Facebook board member and donor to Donald Trump’s campaign, is among those to have purchased property in New Zealand. Global financiers have been increasingly snapping up properties in the country. Speaking at the annual gathering of the world’s elite in Davos, Robert Johnson, the president of the Institute for New Economic Thinking, said: “I know hedge-fund managers all over the world who are buying airstrips and farms in places like New Zealand because they think they need a getaway.”

Reports by Bloomberg and the New Yorker have suggested dozens of Silicon Valley futurists are secretly preparing for doomsday, acquiring boltholes in the country. Jack Ma, the man behind Alibaba, China’s answer to Amazon and its richest man, is also reported to have shown interest in buying a home there. Land sales to foreign buyers are booming in New Zealand, with 465,863 hectares (1.16m acres) bought in 2016, an almost sixfold increase on the year before. That is the equivalent to 3.2% of farmland in a country of 4.7 million people.

The price of freedom. Pray for peace.

• Almost 1,400 Companies Have Left Catalonia Since October 2 (ZH)

A total of 1,394 companies moved their headquarters from Catalonia to other regions of Spain between 2 and 23 October, according to data from the Association of Commercial Registrars of Spain. On Monday, a total of 92 companies emerged, after recording highs at the end of last week. As El Economista reports, the vast majority (1,255) of the companies that left Catalonia had their headquarters in the province of Barcelona, while 25 left Gerona, 57 moved from Lleida and 57 did so from Tarragona. In the period between 2 and 9 October, the number of companies leaving Catalonia was 219 entities, while this figure rose to 551 companies until day 11, to 700 companies until October 16, to 805 until day 17, 917 until Wednesday 18, 1,185 until Thursday 19 and 1,302 until Friday 20. With the departures of Monday 23, there are already 1,394 companies.

The days with the greatest number of transfers of headquarters of Catalonia were 19 of October, with 268; on October 9, with 212 outgoing entities, and on October 10, with 177 companies. After the rebound experienced from day 16 (68 transfers), when the trend was that each day increased the number of exits, to the maximum of 19 (268 transfers), on Friday decreased the number of companies that changed their registered office outside of the community (117), a decline that continued this week (92 on Monday). Without taking into account weekends or holidays, every 15 minutes and a half leaves a company from Catalonia. For its part, a total of 55 companies from outside Catalonia moved their headquarters to the region between 2 and 23 October, 48 of them to the province of Barcelona. We wonder how that ratio will change after today…

They’ve been in the same government for years. Gabriel should have spoken out sooner.

• ‘Schaeuble Has Reduced Europe To Rubble’ – German Foreign Minister (Tel)

Germany’s foreign minister launched an extraordinary attack on the country’s outgoing finance minister on Tuesday, exposing deep divisions within Angela Merkel’s government of the last four years. On the day Wolfgang Schäuble was elected speaker of the German parliament, Sigmar Gabriel accused him of “reducing Europe to a pile of rubble which has to put back together by others”. In an interview with several German newspapers, Mr Gabriel said the former finance minister had “succeeded in turning almost all EU member states against Germany” with his hardline stance against Eurozone bailouts. What made the outburst more remarkable was that Mr Gabriel served alongside Mr Schäuble as economy minister and vice-chancellor for much of the period he was describing.

Mr Schäuble has long been a divisive figure in European politics. As Mrs Merkel’s long-serving finance minister, he is feted in Germany for presiding over a period of economic strength. But he is hated in countries like Greece for his deep-seated aversion to bailing out the poorer performing economies of southern Europe. The foreign minister’s outburst is the first sign that Mr Schäuble’s policies were disliked much closer to home — within Mrs Merkel’s government. Mr Gabriel led his Social Democrats (SPD) into coalition with Mrs Merkel’s Christian Democrats (CDU) in 2013 — only for his party to suffer its worst ever defeat in last month’s election. Although the SPD has announced it is going into opposition, Mr Gabriel and other ministers are staying on in a caretaker government while Mrs Merkel holds talks on putting together a new coalition with the pro-business Free Democrats (FDP) and the Greens.

The 75-year-old Mr Schäuble agreed to become speaker to free up the finance ministry, which the FDP is widely expected to demand as the price for its support. He was elected unopposed in Tuesday’s first sitting of the newly elected parliament. But in a sign that Mr Gabriel had spoken for many in his party, his nomination was not applauded from the SPD benches, against tradition.

Debt Rattle October 21 2017

Oct 212017

October 21, 2017 Posted by Raúl Ilargi Meijer at 9:07 am Finance Tagged with: apocalypse, Armageddon, bonds, CAPE, Catalonia, ecosystem, Fed, insects, Italy, Trump, VIX 4 Responses »

Robert Doisneau Vitrine, Galerie Romi, Paris 1948

• Will Trump Oversee The Financial Apocalypse? (Cohan)

• Calm Before The Storm (Peter Schiff)

• The Big Story: Edge Of The Cliff (RV/ZH)

• A $4 Trillion Hole in Bond Market May Start Filling in 2018 (BBG)

• US Fiscal Year Deficit Widens To $666 Billion (R.)

• Fed’s Yellen Defends Past Policies As Trump Mulls Top Fed Pick (R.)

• ‘Dr. Doom’, Marc Faber, Removed From More Boards After Comments On Race (R.)

• China Still Needs Loans From World Bank (Caixin)

• Betrayed by Banks, 40,000 Italian Businesses Are in Limbo (BBG)

• Catalan Rebels Say Spain Will Live to Regret Hostile Power Grab (BBG)

• A Giant Insect Ecosystem Is Collapsing Due To Humans. It’s A Catastrophe (G.)

“The bond market determines how much you pay to borrow money to buy a home, a car, or when you use your credit cards.”

• Will Trump Oversee The Financial Apocalypse? (Cohan)

Let’s face it: people’s eyes tend to glaze over when someone starts talking about bonds and interest rates. Which is why much of the audience inside the Wallis Annenberg Center for the Performing Arts, and those watching the livestream, probably missed the import of Gundlach’s answer. But the bond market is hugely important. The stock markets get most of the attention from the media, but the bond market, four times the size of the stock market, helps set the price of money. The bond market determines how much you pay to borrow money to buy a home, a car, or when you use your credit cards. The Bond King said the returns on bonds have been anemic at best for the past seven years or so.

While the Dow Jones Industrial Average has nearly quadrupled since March 2009, returns on bonds have averaged something like 2.5% for treasuries and something like 8.5% for riskier “junk” bonds. Gundlach urged investors to be “light” on bonds. Of course, that makes the irony especially rich for the Bond King. “I’m stuck in it,” he said of his massive bond portfolio. He said interest rates have bottomed out and been rising gradually for the past six years. (Rising interest rates hurt the value of the bonds you own, as bonds trade in inverse proportion to their yield. Snore . . .) Gundlach said his job now, on behalf of his clients, “is to get them to the other side of the valley.” When the bigger, seemingly inevitable hikes in interest rates come, “I’ll feel like I’ve done a service by getting people through,” he said. “That’s why I’m still at the game. I want to see how the movie ends.”

But it can’t end well. To illustrate his point about the risk in owning bonds these days, Gundlach shared a chart that showed how investors in European “junk” bonds are willing to accept the same no-default return as they are for U.S. Treasury bonds. In other words, the yield on European “junk” bonds is about the same—between 2% and 3%—as the yield on U.S. Treasuries, even though the risk profile of the two could not be more different. He correctly pointed out that this phenomenon has been caused by “manipulated behavior”—his code for the European Central Bank’s version of the so-called “quantitative easing” program that Ben Bernanke, the former chairman of the Federal Reserve, initiated in 2008 and that Mario Draghi, the head of the E.C.B., has taken to heart.

Bernanke’s idea was to have the Federal Reserve buy up trillions of dollars of bonds, increasing their price and lowering their yields. He figured lower interest rates would help jump-start an economy in recession. Whereas Janet Yellen, Bernanke’s successor, ended the Fed’s Q.E. program in 2014, Draghi’s version of it is still going, which has led to the “manipulation” that so concerns Gundlach. European interest rates “should be much higher than they are today,” he said, “. . . [and] once Draghi realizes this, the order of the financial system will be turned upside down and it won’t be a good thing. It will mean the liquidity that has been pumping up the markets will be drying up in 2018 . . . Things go down. We’ve been in an artificially inflated market for stocks and bonds largely around the world.”

Excellent from Schiff. The VIX/CAPE ratio looks to be a valuable tool.

• Calm Before The Storm (Peter Schiff)

Before the crisis, there was still a strong belief that stock investing entailed real risk. The period of stock stagnation of the 1970s and 1980s was still well remembered, as were the crashes of 1987, 2000, and 2008. But the existence of the Greenspan/Bernanke/Yellen “Put” (the idea that the Fed would back stop market losses), came to ease many of the anxieties on Wall Street. Over the past few years, the Fed has consistently demonstrated that it is willing to use its new tool kit in extraordinary ways. While many economists had expected the Fed to roll back its QE purchases as soon as the immediate economic crisis had passed, the program steamed at full speed through 2015, long past the point where the economy had apparently recovered. Time and again, the Fed cited fragile financial conditions as the reason it persisted, even while unemployment dropped and the stock market soared.

The Fed further showcased its maternal instinct in early 2016 when a surprise 8% drop in stocks in the first two weeks of January (the worst ever start of a calendar year on Wall Street) led it to abandon its carefully laid groundwork for multiple rate hikes in 2016. As investors seem to have interpreted this as the Fed leaving the safety net firmly in place, the VIX has dropped steadily from that time. In September of this year, the VIX fell below 10. Untethered optimism can be seen most clearly by looking at the relationship between the VIX and the CAPE ratio. Over the past 27 years, this figure has averaged 1.43. But just this month, the ratio approached 3 for the first time on record, increasing 100% in just a year and a half. This means that the gap between how expensive stocks have become and how little this increase concerns investors has never been wider. But history has shown that bad things can happen after periods in which fear takes a back seat.

Investors may be trying to convince themselves that the outcome will be different this time around. But the only thing that is likely to be different is the Fed’s ability to limit the damage. In 2000-2002, the Fed was able to cut interest rates 500 basis points (from 6% to 1%) in order to counter the effects of the imploding tech stock bubble. Seven years later, it cut rates 500 basis points (from 5% to 0) in response to the deflating housing bubble. Stocks still fell anyway, but they probably would have fallen further if the Fed hadn’t been able to deliver these massive stimuli. In hindsight, investors would have been wise to move some funds out of U.S. stocks when the CAPE/VIX ratio moved into record territory. While stocks fell following those peaks, gold rose nicely.

Past performance is not indicative of future results. Created by Euro Pacific Capital from data culled from Bloomberg.

But interest rates are now at just 1.25%. If the stock market were again to drop in such a manner, the Fed has far less fire power to bring to bear. It could cut rates to zero and then re-launch another round of QE bond buying to flood the financial sector with liquidity. But that may not be nearly as effective as it was in 2008. Given that the big problem at that point was bad mortgage debt, the QE program’s purchase of mortgage bonds was a fairly effective solution (although we believe a misguided one). But propping up overvalued stocks, many of which have nothing to do with the financial sector, is a far more difficult challenge. The Fed may have to buy stocks on the open market, a tactic that has been used by the Bank of Japan.

A whole family of bears.

• The Big Story: Edge Of The Cliff (RV/ZH)

Real Vision released a video early today containing interviews with some of the biggest names in the hedge fund universe. Though the interview was shot a few weeks ago, remarks from Hayman Capital’s Kyle Bass resonated with market’s mood. Bass discussed what he sees as the many short- and long-term risks to the US equity market, including the rise of algorithmic trading and passive investment, which have enabled investors to take risks without understanding what they’re doing, leaving the market vulnerable to an “air pocket.” And with so many traders short vol, Bass said investors will know the correction has begun when a 4% or 5% drop in equities snowballs into a 10% to 15% decline at the drop of a hat.

“The shift from active to passive means that risk is in the hands of people who don’t know how to take risk. Therefore we’re likely to have a 1987 air pocket. This is like portfolio insurance on steroids, the way algorithmic trading is now running the market place. Investors are moving from active to passive, meaning they’re taking the wheel themselves all at a time when CTAs are running their own algo strategies where they’re one and a half times long and half short and they all believe they can come out at the same time.” “If you see the equity market crack 4 or 5 points, buckle up, because I think we’re going to see a pretty interesting air-pocket, and I don’t think investors are ready for that,” Bass said.

“Our trade relationship with China is worsening our relationship with north korea whatever it is continually worsens. We’ve got three people at the head of these countries that are trying ot maike their countries great again, I think that’s a real risk geopolitically.” “But when you think about it financially, which is actually easier to calculate, the financial reason is the G-4 central banks going from a period of accommodation to a period of tightening, and that’s net of bond issuance.

Yeah, that’s right. We’re not issuing enough debt yet. What will central banks purchase?

• A $4 Trillion Hole in Bond Market May Start Filling in 2018 (BBG)

A key dynamic that’s been holding down bond yields since the global financial crisis is poised to ease next year – presenting a test to riskier parts of the market, according to analysis by Oxford Economics. In the aftermath of the crisis, banks and shadow financial institutions in developed economies sharply cut back their issuance of bonds, to the tune of about $4 trillion, according to the research group’s tally. That happened thanks to banks shrinking their balance sheets amid a regulatory crackdown, and due to a contraction in supply of mortgages that were regularly securitized into asset-backed bonds. “Against stable demand for fixed-income securities, the large negative supply shock created an increasingly acute shortage of these assets,” said Guillermo Tolosa, an economic adviser to Oxford Economics in London who has worked at the IMF.

The impact of that shock was an “almost decade-long yield squeeze,” he wrote. That compression “may start to ease in 2018,” Tolosa wrote in a report distributed Tuesday. Using slightly different metrics, the chart below shows how the market for financial company debt securities in the Group of Seven nations shrank after the 2009 global recession, and now appears to have flat-lined. Continued demand among mutual funds, pensions and insurance companies for fixed income then created the opportunity for nonfinancial companies to ramp up issuance, Tolosa wrote – a dynamic also seen in the chart. It’s one of a number of supply factors that have been identified explaining why bond yields globally remain historically low. Perhaps the most well documented one is the QE programs by the Fed, ECB and Bank of Japan that gobbled up about $14 trillion of assets.

Tolosa’s analysis suggests that Fed QE has had less of an impact than generally accepted, as the initiative was “more than offset” by increased public-sector borrowing. The large portfolio rebalancing in fixed income was instead “essentially a switch within private sector securities,” he said. There was a “massive shift” from financial securities into Treasuries, along with nonfinancial corporate and overseas debt, Tolosa concluded. “This explains a considerable part of the post-crisis surge in demand for other spread products and the issuance boom for global nonfinancial corporates and emerging-market borrowers,” Tolosa wrote. Over the decade through 2007, 10-year U.S. Treasury yields averaged 4.85%. But since the start of 2009 they’ve averaged just 2.46% – giving investors incentives to find higher rates elsewhere.

What’s in a number?

• US Fiscal Year Deficit Widens To $666 Billion (R.)

The U.S. budget deficit widened to $666 billion for the fiscal year 2017 as record spending more than offset record receipts, the Treasury Department said on Friday. The 2017 deficit increased to 3.5% of gross domestic product. The previous fiscal year deficit was $586 billion, with a deficit-to-GDP ratio of 3.2%. The latest fiscal year, which ended Sept. 30, straddled the presidencies of Barack Obama, a Democrat, and Donald Trump, a Republican. Accounting for calendar adjustments, the 2017 fiscal year deficit was $644 billion compared with $546 billion the prior year. Fiscal 2017 revenues increased 1% to $3.315 trillion, while spending rose 3% to $3.981 trillion. Since taking office in January, the Trump administration has sought to overhaul the U.S. tax code with precise details currently being worked on in Congress.

The Republican tax plan currently calls for as much as $6 trillion in tax cuts, which would sharply reduce government revenues. It has prompted criticism that it favors tax breaks for business and the wealthy and could add trillions of dollars to the deficit. The administration contends tax cuts will pay for themselves by boosting economic growth. In addition to the annual deficit, the national debt – the accumulation of past deficits and interest due to lenders to the Treasury – now exceeds $20 trillion. The non-partisan Congressional Budget Office has said the ever-rising debt levels are unsustainable as the government pays for the medical and retirement costs of the aging Baby Boomer generation.

We know they don’t know a thing.

• Fed’s Yellen Defends Past Policies As Trump Mulls Top Fed Pick (R.)

Federal Reserve Chair Janet Yellen said on Friday that asset purchases and other unconventional policy tools must remain part of the Fed’s arsenal as long as the economy remains stuck in a low interest-rate economy. Yellen’s remarks offered a contrast between her legacy as Fed chair with the policy views of others who President Donald Trump is considering for her position when her term expires in February. Yellen told the National Economists Club, “We must keep our unconventional policy tools ready to be deployed again.” Reaching the near-zero lower bound would force the Fed to turn to other means to stimulate the economy. Following the 2007 to 2009 financial crisis, the Fed used both a spoken commitment to lower rates and $3.5 trillion in asset purchases to pull rates lower than they would have been otherwise, boosting consumption and growth.

Those asset holdings are now on the decline, the Fed’s policy rate is being increased, and the economy in general is doing well, Yellen said. But she cautioned that the world may not return to its old normal, and “future policymakers” may need to use emergency steps similar to those used in the past decade. Persistent low inflation has caught the Fed by surprise and is “of great concern,” Yellen said. She and other Fed officials are also convinced that the “neutral” rate, which neither stimulates nor discourages economic activity, is much lower than in the past, likely limiting how far the Fed can go during this rate increase cycle. As President Donald Trump mulls a switch at the Fed, Trump is considering several possible replacements for Yellen.

One of the possible nominees Trump has interviewed, former Fed Governor Kevin Warsh, was critical of Fed asset purchases at the time, and argued that Fed has stayed too deeply involved in asset markets. Another, Stanford Economist John Taylor, advocates use of an interest rate rule that would have recommended higher rates through the downturn and recovery. Once rates reach the lower bound, moreover, Taylor’s rule-based approach would likely have to give way to judgment about what steps to take.

What curious ideas.

• ‘Dr. Doom’, Marc Faber, Removed From More Boards After Comments On Race (R.)

Marc Faber, the markets prognosticator known as “Dr. Doom,” has been dismissed from three more company boards after comments in his latest newsletter this week suggested the United States had only prospered because it was settled by white people. U.S-based Sunshine Silver Mining, Vietnam Growth Fund managed by Dragon Capital, and Indochina Capital Corporation, had all dismissed him, Faber told Reuters on Friday, Faber has now been fired from six boards with Canadian fund manager Sprott, NovaGold Resources and Ivanhoe Mines letting him go on Tuesday after his remarks went viral on social media platform Twitter. In the October edition of his newsletter, “The Gloom, Boom & Doom Report,” in a section discussing capitalism versus socialism, Faber criticized the move to tear down monuments commemorating the U.S. Civil War military leaders of the Confederacy.

“Thank God white people populated America, not the blacks,” Faber wrote in his newsletter. “Otherwise, the U.S. would look like Zimbabwe, which it might look like one day anyway, but at least America enjoyed 200 years in the economic and political sun under a white majority.” “I am not a racist,” Faber continued, “but the reality – no matter how politically incorrect – needs to be spelled out as well.” Faber, a Swiss investor based in Thailand, who oversees $300 million in assets, said he has not lost any client money, and still stands by his comments and will keep publishing his newsletter. ”My clients all know me for more than 30 years. They know that to call me a racist is inappropriate,” he said. Faber said he has not seen a significant amount of subscribers cancel their subscriptions to his newsletter as a result of the controversy. “No, I think most people actually agree with me and certainly defend freedom of expression even if it does not coincide with their views.”

Strange indeed.

• China Still Needs Loans From World Bank (Caixin)

The World Bank’s former country director for China has defended the organization’s lending to Chinese governments. Yukon Huang, who now serves as a senior fellow at the Carnegie Asia Program, made the remarks after reports said the U.S. has rejected a capital increase plan for the multilateral lender because of dissatisfaction with its loans to wealthier countries, including China. The provincial-level and local governments need the World Bank loans because structural impediments prevent domestic banks from providing sufficient credit to finance public projects, Huang said. Chinese governments that borrow from the World Bank benefit from the support, Huang told Caixin. For example, he said, loans help agencies finance public services without having to rely so much on land sale revenues.

World Bank loans also help those governments improve their debt management. World Bank funds made available in January through its Development Policy Financing program are now helping governments within Hunan province and the municipality of Chongqing “achieve fiscal sustainability through a comprehensive and transparent public finance framework that integrates budget, public investment and debt management,” according to a statement on the World Bank’s website. For two years, the World Bank Group had been working to get member countries to agree on a capital increase plan for its International Bank for Reconstruction and Development (IBRD) lending arm before the 2017 World Bank and IMF annual meetings, which began last week, according to Reuters.

The IBRD, the world’s largest development bank, is dedicated to helping countries reduce poverty and extending the benefits of sustainable growth by providing them with financial products and policy advice, its official website says. The U.S. is currently the largest IBRD shareholder out of its 189 member nations, with the greatest voting power of 16.28%. China is the third-largest shareholder, after Japan, with 4.53% voting power. The Trump administration was reluctant to endorse the capital increase, with U.S. Treasury Secretary Steven Mnuchin saying in an Oct. 13 statement that “more capital is not the solution when existing capital is not allocated effectively.” “We want to see a significant shift in allocation of funding to support countries most in need of development finance,” Mnuchin said.

Yes, Italy’s troubles run deep.

• Betrayed by Banks, 40,000 Italian Businesses Are in Limbo (BBG)

The Most Serene Republic, as the area around Venice was known for a millennium, is now the troubled epicenter of a banking meltdown that’s threatening to derail one of globalization’s great success stories. The base of brands like Benetton, De’Longhi, Geox and Luxottica, Veneto has also become home to as many as 40,000 small businesses suddenly stranded without access to financing since a pair of regional banks collapsed in June. The implosions of Popolare di Vicenza and Veneto Banca, which also wiped out the life savings of many of their 200,000 shareholders, set off economic and political tremors felt from Rome to Frankfurt. Anger over what many view as lax oversight by national authorities is animating a movement for more autonomy that’s already emboldened by Catalonia’s efforts to split from Spain.

“The pain for Veneto’s banks may be over, but the pain for Veneto’s businesses is just beginning,” said Andrea Arman, a lawyer advising some of the companies and individuals who’ve been hit the hardest. “We’re just starting to see the consequences of the collapse and what we’re seeing is alarming.” Nestled between the Alps and the Adriatic, Veneto is home to about 5 million people. Like Catalonia, it has a seafaring heritage, its own language and incomes far above the national average. Veneto President Luca Zaia, who’s called Italy and its 64 governments in 71 years a “bankrupt state,” plans to use the results of a nonbinding referendum on Oct. 22 to press Rome for more autonomy. Three out of four Veneti want more local power and 15% would support complete independence, according to a Demos poll published by La Repubblica this week.

While Intesa Sanpaolo SpA, Italy’s second-largest bank, paid a symbolic sum to acquire the healthiest parts of the two Veneto lenders, the state entity that’s absorbing the 18 billion euros ($21.3 billion) of troubled debt the banks amassed, called SGA, isn’t fully operational yet. That has left small and midsized companies in the lurch—in many cases unable to do business. “Many of these borrowers are profitable companies, but they’re stuck in limbo,” said Mauro Rocchesso, head of Fidi Impresa e Turismo Veneto, a financial firm that provides collateral to companies seeking lines of credit. “They don’t have a counterparty anymore and can’t find fresh capital from a new lender because of their exposure to the two Veneto banks.”

More violence and Rajoy is out.

• Catalan Rebels Say Spain Will Live to Regret Hostile Power Grab (BBG)

Catalan separatists say Spanish Prime Minister Mariano Rajoy doesn’t know what he’s getting himself into as he moves to quash their campaign for independence. As the government in Madrid prepares to deploy its most powerful legal weapons, three leading members of the movement in Barcelona said Rajoy isn’t equipped to achieve his goals and risks a damaging entanglement in hostile terrain. They reckon they have enough support among the Catalan civil service and police to thwart Spain’s plan. Rajoy’s cabinet meets in Madrid on Saturday to consider specific measures to reassert control over the rebel region, a process set out in the Spanish Constitution that’s never yet been tested. Among the top priorities is bringing to heel the Catalan police force and deciding what to do with President Carles Puigdemont.

The plan still needs approval by the Senate, so it could be another two weeks before Spain can take any action. “This is a minefield for Rajoy,” said Antonio Barroso, an analyst in London at Teneo Intelligence, a company advising on political risk. “The implementation on the ground is a risk for him when the government may face some regional civil servants who don’t cooperate.” The three Catalan officials – one from the parliament, one from the regional executive and one from the grass-roots campaign organization – spoke on condition of anonymity due to the legal threats against the movement. It all comes down to Article 155 of the constitution, a short passage that gives the legal green light for Spain to revoke the semi-autonomy of Catalonia. Foreign Minister Alfonso Dastis said at a press conference in Madrid on Friday that it would be applied in a “prudent, proportionate and gradual manner.”

The problem for Rajoy is that the separatists already proved with their makeshift referendum on Oct. 1 that they can ignore edicts from Madrid with a degree of success. That means he will need to back up his ruling with people on the ground, and it didn’t work as planned the last time around. The Catalan police force, the Mossos d’Esquadra, ignored orders to shut down polling stations before the illegal vote on Oct. 1. After Rajoy sent in the Civil Guard, images of Spanish police beating would-be voters were broadcast around the world. Mossos Police Chief Josep Lluis Trapero is a local hero, his face worn on T-shirts at separatist demonstrations. When he returned this week from an interrogation in Madrid, where he’s facing possible sedition charges, staff greeted him with hugs and applause.

And we worry about a financial apocalypse. If you value money over life, you will lose both.

• A Giant Insect Ecosystem Is Collapsing Due To Humans. It’s A Catastrophe (G.)

They are multitudinous almost beyond our imagining. They thrive in soil, water, and air; they have triumphed for hundreds of millions of years in every continent bar Antarctica, in every habitat but the ocean. And it is their success – staggering, unparalleled and seemingly endless – which makes all the more alarming the great truth now dawning upon us: insects as a group are in terrible trouble and the remorselessly expanding human enterprise has become too much, even for them. The astonishing report highlighted in the Guardian, that the biomass of flying insects in Germany has dropped by three quarters since 1989, threatening an “ecological Armageddon”, is the starkest warning yet; but it is only the latest in a series of studies which in the last five years have finally brought to public attention the real scale of the problem.

Does it matter? Even if bugs make you shudder? Oh yes. Insects are vital plant-pollinators and although most of our grain crops are pollinated by the wind, most of our fruit crops are insect-pollinated, as are the vast majority of our wild plants, from daisies to our most splendid wild flower, the rare and beautiful lady’s slipper orchid. Furthermore, insects form the base of thousands upon thousands of food chains, and their disappearance is a principal reason why Britain’s farmland birds have more than halved in number since 1970. Some declines have been catastrophic: the grey partridge, whose chicks fed on the insects once abundant in cornfields, and the charming spotted flycatcher, a specialist predator of aerial insects, have both declined by more than 95%, while the red-backed shrike, which feeds on big beetles, became extinct in Britain in the 1990s. Ecologically, catastrophe is the word for it.

[..] It seems indisputable: it is us. It is human activity – more specifically, three generations of industrialised farming with a vast tide of poisons pouring over the land year after year after year, since the end of the second world war. This is the true price of pesticide-based agriculture, which society has for so long blithely accepted. So what is the future for 21st-century insects? It will be worse still, as we struggle to feed the nine billion people expected to be inhabiting the world by 2050, and the possible 12 billion by 2100, and agriculture intensifies even further to let us do so. You think there will be fewer insecticides sprayed on farmlands around the globe in the years to come? Think again. It is the most uncomfortable of truths, but one which stares us in the face: that even the most successful organisms that have ever existed on earth are now being overwhelmed by the titanic scale of the human enterprise, as indeed, is the whole natural world.

Debt Rattle October 20 2017

Oct 202017

October 20, 2017 Posted by Raúl Ilargi Meijer at 7:54 am Finance Tagged with: backlash, Brexit, Catalonia, Corbyn, ICO, inflation, Merkel, Nissan, pollution, refugees 1 Response »

René Magritte Youth 1924

• Fed Flunks Econ 101: Understanding Inflation (MW)

• Meet The Bears Predicting Stock Market Doom (CNN)

• Catalan Groups Call For Mass Withdrawal Of Money From Bank ATMs (CN)

• The World’s Largest ICO Is Imploding After Just 3 Months (ZH)

• Scandal-Hit Nissan Suspends All Production For Japan Market (AFP)

• End Of Australia Auto-Making Sector As Holden Closes Doors (AFP)

• Top Startup Investors See Mounting ‘Backlash’ Against Tech (R.)

• Native American Tribe Holding Patents Sues Amazon And Microsoft (R.)

• Putin Slams West for Lack of Respect and Broken Trust (BBG)

• Ditch Neoliberalism To Win Again, Jeremy Corbyn Tells EU’s Center-Left (Ind.)

• Merkel Comes to May’s Aid on Brexit (BBG)

• Italian Regions To Vote In Europe’s Latest Referendums On Autonomy (G.)

• Greece Plans Billion Euro Handout For The Poor (R.)

• Tensions Rise On Aegean Islands As Migrants Continue To Arrive (K.)

• Global Pollution Kills Millions, Threatens ‘Survival Of Human Societies’ (G.)

As I’ve said 1000 times.

• Fed Flunks Econ 101: Understanding Inflation (MW)

The Federal Reserve’s illusive quest to achieve 2% inflation over the medium term is becoming a long-term problem. The institutional anxiety over the chronic inflation undershoot is evident in daily news stories, Fed speeches and the increased focus in internal discussions, as reflected in the minutes of the Sept. 19-20 meeting of the Federal Open Market Committee (FOMC). One doesn’t have to read between the lines to appreciate the degree to which policy makers fear the onset of the next recession without adequate “room” to lower interest rates. Hence, normalizing interest rates is “on track,” as the headline above noted, even though the relationship — between unemployment and inflation — is decidedly off track.

So what gives? The persistence of sub-2% inflation in the face of nine years of near-zero interest rates and an economy at what is perceived to be full employment has led to an array of silly explanations, embarrassing excuses and a host of pseudo-theories. Just maybe the Fed’s internal guidance system is flawed. The inverse correlation between unemployment and wages in the U.K. from 1861 to 1957 initially observed by New Zealand economist A.W. Phillips has morphed into a model of causation for Fed chief Janet Yellen and the current crop of U.S. policy makers. It’s not clear why. Just eyeballing the graph of the Fed’s preferred inflation measure and the civilian unemployment rate, one might conclude that the relationship broke down in the 1970s and has yet to reassert itself. Is a half-century malfunction enough to declare a theory null and void?

One would think so. Yet the notion of cost-push inflation as (supposedly) expressed by Phillips Curve lives, although faith in it has started to wane, even among ardent devotees like labor-economist Yellen. Instead, we are confronted with headlines such as, “Nobody seems to know why there is no inflation.” Really? Have they all forgotten Milton Friedman’s axiom that inflation is always and everywhere a monetary phenomenon? When the central bank creates more money than the public wants to hold, people spend it. The increased demand for goods and services eventually exceeds the economy’s ability to produce or provide them. The result is higher economy-wide prices, or inflation.

That isn’t happening, not just in the U.S. but across the globe. For all the sturm und drang about the Fed debasing the dollar and sowing the seeds of the next great inflation, the public’s demand for money has increased. The increased desire to hold cash and checkable deposits has risen to meet the increased supply. Velocity, or the rate at which money turns over, has plummeted.

“.. it’s central banks that typically end the party. And central banks are telling you it’s last call.”

• Meet The Bears Predicting Stock Market Doom (CNN)

The red-hot stock market may continue its rapid ascent, especially if Trump delivers his promise for “massive” corporate tax cuts. And even if not, healthy economic fundamentals and corporate profits should continue to support stocks. Nonetheless, some bears are fighting the herd mentality on Wall Street by warning of serious trouble brewing just beneath the surface of the stock market. These market skeptics are reassured by the fact that betting against stocks wasn’t popular in 2007, either. “The best time to be a bear is the loneliest time,” Jesse Felder, a money manager and founder of The Felder Report, told CNNMoney. Here are some of the red flags these bears are warning about, including similarities between now and 30 years ago:

In 2007 and 2008, Chris Cole presciently bet that market volatility would skyrocket to levels no one had seen before. He took those crisis-era winnings and started Artemis Capital, a hedge fund that has amassed $210 million. Today, the stock market is unusually quiet. The VIX, a popular barometer of market fear, recently hit a record low. Cole thinks it’s a mirage, partly because popular trading strategies allow investors to bet on the low volatility itself. All those bets lead to even lower volatility – until something unexpected happens, like suddenly higher interest rates. “Any shock to the system could cause this to unravel in the opposite direction, where higher volatility drives higher volatility,” Cole told CNNMoney. “This is a massive risk to the system. The only thing we’re missing is a fire.” [..] “This is a disaster waiting to happen,” said Cole. “In the event there is a fire, this can cause a massive explosion.”

Kyle Bass, founder of Hayman Capital Management, is also having a flashback to 30 years ago. “If you look at the all of the different constituencies of the market today, it resembles the portfolio insurance debacle of 1987 on steroids,” Bass told Real Vision TV in an interview released on Wednesday. Bass fears that, once stock prices decline 4% to 5%, that will quickly morph into a 10% to 15% plunge. He isn’t sure about timing, but pointed to geopolitical trouble and central banks as potential triggers. “Buckle up, because I think you’re going to see a pretty interesting air pocket. And I don’t think investors are ready for that,” he said.

Peter Boockvar, chief market analyst at The Lindsey Group, predicts the “overvalued” stock market will run into serious trouble as central banks hit the brakes on the stimulus measures they used to prop up economies after the crisis. He pointed to the Federal Reserve shrinking its balance sheet and the European Central Bank slowing its bond purchases. “Historically speaking, central banks put us into recessions and bear markets. The same will happen this time,” Boockvar said. He estimates that central banks will be pumping $1 trillion less money into markets. “The liquidity spigot is going to be dripping instead of flowing. That’s a really big deal,” said Boockvar. He conceded that stocks could run higher before eventually reversing. “When it happens, I’m not sure,” Boockvar said. “But it’s central banks that typically end the party. And central banks are telling you it’s last call.”

Chaos.

• Catalan Groups Call For Mass Withdrawal Of Money From Bank ATMs (CN)

Civil society organizations in Catalonia call for a mass withdrawal of money from bank ATMs on Friday at 8am in order to pressure the Spanish government. Organizers don’t especify how much money should be taken out nor what to do with it. The action targets the five main banks in Catalonia: Caixa Bank, Sabadell, Bankia, BBVA and Santander. Organizers call on clients of Caixa Bank and Sabadell to show their disagreement with the banks’ recent decision to move their headquarters out of Catalonia due to the escalating political crisis between governments in Barcelona and Madrid.

This is the first “direct and peaceful” action organized by Crida per la Democràcia (Call for Democracy). This is an umbrella group which includes among others the two main pro-independence organizations in Catalonia: the Catalan National Assembly (ANC) and Òmnium Cultural. The mass withdrawal is also aimed at condemning the imprisonment of ANC and Òmnium presidents, Jordi Sánchez and Jordi Cuixart, held in custody on sedition charges since Monday.

All’s not well in crypto land.

• The World’s Largest ICO Is Imploding After Just 3 Months (ZH)

Earlier this summer, Tezos smashed existing sales records in the white-hot IPO market after the company’s pitch to build a better blockchain for cryptocurrencies made it one of the buzziest ICOs in the world. As we noted at the time, the company capitalized on that buzz by courting VC firms and other institutional investors with a $50 million token pre-sale. After the company opened up selling to the broader public, demand soared as investors greedily bought up tokens in spite of glitches that threatened to derail the sale early on. By the end of its weeks-long token sale in July, Tezos had sold more than $230 million. Now, Tezos is proving that authorities in the US and China were on to something when they decided to crack down on the ICO market, which has become a cesspool of fraud and abuse.

To wit, the company’s management revealed this week that progress on its vaunted product has stalled as it has struggled to recruit engineering talent, and an acrimonious dispute between several of the company’s leading figures has spilled out into the open. As WSJ’s Paul Vigna reports, “a battle between the founders of the company and the head of the Swiss foundation they installed to give it more independence has put most trading of Tezos coins on ice, possibly until early next year.” The shakeup started after Tezos founders Arthur and Kathleen Breitman reported the delays in a blog post published Wednesday. But even more alarming, the pair accused Johann Gevers, the head of a Swiss foundation which oversees their funds, of attempting to overpay himself using the massive pot of investor capital – despite the fact that the company will likely blow through its promised deadline of allocating tokens to buyers by December (the tokens have yet to be created).

In early September we became aware that the president of the Tezos Foundation, Johann Gevers, engaged in an attempt at self-dealing, misrepresenting to the council the value of a bonus he attempted to grant himself. We have been working with the Tezos foundation to resolve the matter and have advocated for his removal from the foundation council. We are confident in the council’s ability to handle this sensitive matter with care and diligence. In the meantime, Johann’s operational role in the foundation has been suspended, pending an investigation by the council’s auditor. The news sent Tezos futures contracts trading on BitMex, an exchange known for its cryptocurrency futures products, tumbling more than 50% as traders unwound bets the project would be launched before the end of the year, as Bloomberg pointed out.

The final nail in the Made in Japan coffin.

• Scandal-Hit Nissan Suspends All Production For Japan Market (AFP)

Nissan said Thursday it was suspending all production destined for the local market, as Japan’s number-two automaker grapples with a mounting inspection scandal that has already seen it recall some 1.2 million vehicles. “Nissan decided today to suspend vehicle production for the Japan market at all Nissan and Nissan Shatai plants in Japan,” it said in a statement, referring to an affiliate. The announcement comes weeks after the company announced the major recall as it admitted that staff without proper authorisation had conducted final inspections on some vehicles intended for the domestic market before they were shipped to dealers. On Thursday, it said a third-party investigator found the misconduct had continued at three of its six Japanese plants even after it took steps to end the crisis.

“Nissan regards the recurrence of this issue at domestic plants – despite the corrective measures taken – as critical,” it said. “The investigation team will continue to thoroughly investigate the issue and determine measures to prevent a recurrence.” Nissan president Hiroto Saikawa offered a blunt assessment, saying that “old habits” were to blame. “You might say it would be easy to stop people who are not supposed to inspect from inspecting,” he told reporters Thursday. “But we are having to take (new measures) in order to stop old habits that had been part of our routine operations at the factories.”

Lost skills.

• End Of Australia Auto-Making Sector As Holden Closes Doors (AFP)

The last car rolled off the production line of Australian automaker Holden on Friday, marking the demise of a national industry unable to stand up to global competition. The closure of the Elizabeth plant in South Australia is the end of an era for Holden, which first started in the state as a saddlery business in 1856 and made the nation’s first mass-produced car in 1948. The brand has long been an Australian household name, with 1970s commercials singing that “football, meat pies, kangaroos and Holden cars” were part of the nation’s identity. “I feel very sad, as we all do, for it’s the end of an era, and you can’t get away from the emotional response to the closure,” Prime Minister Malcolm Turnbull told Melbourne radio station 3AW on Friday.

Holden was marketed as “Australia’s Own Car” and became a symbol of post-war prosperity Down Under despite being a subsidiary of US giant General Motors. At its peak in 1964, Holden employed almost 24,000 staff. But just 950 were able to watch the final car leave the factory floor Friday. “There are a number of people who have been here since the seventies and today will be a very emotional day for some people and a very sad day,” Australian Manufacturing Workers Union state secretary John Camillo told reporters. The union blamed the federal government for causing the closure by withdrawing support to the auto sector. The death of the industry was always on the cards after subsidies were cut off in 2014. Some Aus$30 billion (US$24 billion) in assistance was handed out between 1997 and 2012, according to the government’s Productivity Commission.

The rich get scared. It’s about power as much as money.

• Top Startup Investors See Mounting ‘Backlash’ Against Tech (R.)

Two of the technology industry’s top startup investors took to the stage at a conference on Wednesday to decry the power that companies such as Facebook had amassed and call for a redistribution of wealth. Bill Maris, who founded Alphabet’s venture capital arm and now runs venture fund Section 32, and Sam Altman, president of startup accelerator Y Combinator, said widespread discontent over income inequality helped elect U.S. President Donald Trump and had put wealthy technology companies in the crosshairs. “I do know that the tech backlash is going to be strong,” said Altman. “We have more and more concentrated power and wealth.” The market capitalization of the so-called Big Five technology companies – Alphabet, Apple, Amazon, Microsoft and Facebook – has doubled in the last three years to more than $3 trillion.

Silicon Valley broadly has amassed significant wealth during the latest tech boom. Altman and Maris spoke on the final day of The Wall Street Journal DLive technology conference in Southern California. Facebook’s role in facilitating what U.S. intelligence agencies have identified as Russian interference in last year’s U.S. presidential election is an example of the immense power the social media company has amassed, the investors said. “The companies that used to be fun and disruptive and interesting and benevolent are now disrupting our elections,” Maris said.

Altman said people “are understandably uncomfortable with that.” Altman, who unequivocally rebuffed rumors that he would run for governor of California next year, said he expects more demands from both the public and policy makers on data privacy, limiting what personal information Facebook and others can collect. Maris said regulators would have good cause to break up the big technology companies. “These companies are more powerful than AT&T ever was,” he said. [..] Altman and Maris offered few details of how to accomplish a redistribution of wealth. Maris proposed shorter term limits for elected officials and simplifying the tax code. Altman has advocated basic income, a poverty-fighting proposal in which all residents would receive a regular, unconditional sum of money from the government.

Curious legal battle.

• Native American Tribe Holding Patents Sues Amazon And Microsoft (R.)

A Native American tribe sued Amazon.com and Microsoft in federal court in Virginia on Wednesday for infringing supercomputer patents it is holding for a technology firm. The Saint Regis Mohawk Tribe was assigned the patents by SRC Labs LLC in August, in a deal intended to use the tribe’s sovereign status to shield them from administrative review. SRC is also a plaintiff in the case. The tribe, which would receive a share of any award, made a similar deal in September to hold patents for Allergan on its dry eye medicine Restasis. SRC and Allergan made the deals to shield their patents from review by the Patent Trial and Appeal Board, an administrative court run by the U.S. patent office that frequently revokes patents.

The tribe would get revenue to address environmental damage and rising healthcare costs. Companies sued for patent infringement in federal court often respond by asking the patent board to invalidate the asserted patents. Both Microsoft and Amazon have used this strategy to prevail in previous disputes. A federal court in Texas separately invalidated Allergan’s Restasis patents on Monday. The company responded that it would appeal that ruling.Allergan’s deal with the tribe has drawn criticism from a bipartisan group of U.S. lawmakers, some of whom have called it a “sham.” Missouri Senator Claire McCaskill on Oct. 5 introduced a bill to ban attempts to take advantage of tribal sovereignty.

“The biggest mistake our country made was that we put too much trust in you; and your mistake was that you saw this trust as a lack of power and you abused it..”

• Putin Slams West for Lack of Respect and Broken Trust (BBG)

President Vladimir Putin has yet to declare his candidacy for re-election next year, but on Thursday the outlines of his campaign were clear, beginning from his strongest suit as the man who restored power and respect to Russia. Putin spent much of his address to an annual gathering of foreign-policy specialists from Russia and abroad recounting his country’s perceived humiliation following the collapse of the Soviet Union, singling out the West and the U.S. for special criticism. “The biggest mistake our country made was that we put too much trust in you; and your mistake was that you saw this trust as a lack of power and you abused it,’’ he said during a question-and-answer session that was carried on national television. What was needed, he said, was “respect.’’

In its portrayal of the U.S., “it was the most negative speech Putin has given’’ at the annual Valdai Club meeting, said Toby Gati, a former U.S. National Security Council and State Department official who is a regular at the event. At the same time, the Russian leader appeared to leave a door open to a rapprochement with U.S. President Donald Trump, saying that he, too, deserved respect as the elected choice of the American people. [..] Even during the Cold War, the U.S. and the Soviet Union had always treated each other with respect, said Putin, lamenting how the Russian flag was recently torn from the country’s consulate in California. “Respect has been the underbelly of the whole conference,’’ said Wendell Wallach, chairman of technology and ethics studies at Yale University.

The only leftist in Europe left standing. Oh irony.

• Ditch Neoliberalism To Win Again, Jeremy Corbyn Tells EU’s Center-Left (Ind.)

Jeremy Corbyn has warned centre-left parties across Europe that they must follow his lead and abandon the neoliberal economics of the imagined “centre ground” if they want to start winning elections again. The Labour leader was given a hero’s welcome at the Europe Together conference of centre-left parties in Brussels, where he was introduced as “the new Prime Minister of Britain” and received two standing ovations from a packed auditorium. Continental centre-left leaders are looking to Mr Corbyn’s Labour as a model to reinvigorate their movement. Across Europe from France to Germany, Austria to Netherlands, and Spain to Greece, once powerful social-democratic parties have been reduced to a shadow of their former selves – with Labour a notable exception.

Mr Corbyn said low taxes, deregulation, and privatisation had not brought prosperity for Europe’s populations and that if social democratic parties continued to endorse them they would continue to lose elections. He berated the longstanding leadership of the centre-left, telling delegates from across the EU: “For too long the most prominent voices in our movement have looked out of touch, too willing to defend the status quo and the established order. “In a desperate attempt to protect what is seen as the centre-ground of politics: only to find the centre ground has shifted or was never where the elites thought it was in the first place.” Citing the rise of the far-right in countries like Austria and France, Mr Corbyn said the abdication of the radical end of politics by the left had created space for reactionary parties.

“Our broken system has provided fertile ground for the growth of nationalist and xenophobic politics,” he said. “We all know their politics of hate, blame and division and not the answer, but unless we offer a clear and radical alternative of credible solutions for the problem we face, unless we offer a chance to change the broken system, and hope for a more prosper future we are clearing the path for the extreme right to make even more far-reaching inroads into our communities. Their message of fear and division would become the political mainstream of our discourse. But we can offer a radical alternative, we have the ideas to make progressive politics the dominant force of this century. But if we don’t get our message right, don’t stand up for our core beliefs, and if we don’t stand for change we will founder and stagnate.”

Does Angela not like what Corbyn has to say?

• Merkel Comes to May’s Aid on Brexit (BBG)

German Chancellor Angela Merkel offered Theresa May the political cover she’s been asking for to take further steps in Brexit talks, calling on both sides to move so that a deal can be reached by year-end. The U.K. prime minister signaled she’s willing to offer more on the divorce bill, according to a U.K. official. May urged leaders at a European summit to help her find a deal she could sell to skeptics at home, and her counterparts responded with words of encouragement – though no concrete concessions. Merkel said there’s “zero indication” that Brexit talks won’t succeed and she “truly” wants an agreement rather than an “unpredictable resolution.” She welcomed the concessions May made in a landmark speech in Florence last month and said she’s “very motivated” to get talks moved on from the divorce settlement to trade by December.

“Now both sides need to move,” she told reporters after hearing May speak at dinner, in a shift of rhetoric for the EU side, which has previously insisted that it’s up to the U.K. alone to make the next move. [..] he chancellor’s upbeat tone on Brexit was in marked contrast to Germany’s portrayal in the U.K. media as the principle obstacle to Britain’s attempts to shift negotiations onto trade and a transition period. In reality, Merkel has rarely commented on Brexit in the past two months or more as she fought for re-election to a fourth term. Even when she has weighed in, the chancellor tended to adopt a matter-of-fact approach that stuck to the facts. “So what I heard today was a confirmation of the fact that, in contrast to what you hear in the British press, the process is moving forward step by step,” Merkel said. “You get the impression that after a few weeks you already have to announce the final product, and I found that – to be very clear – absurd.”

it’s not about borders, but about decentralizing power. Unstoppable.

• Italian Regions To Vote In Europe’s Latest Referendums On Autonomy (G.)

Two of Italy’s richest regions are holding referendums on greater autonomy on Sunday, in the latest push by European regions to wrest more power from the centre. Lombardy and Veneto, between them home to a quarter of Italy’s population, are seeking semi-autonomy, giving them more control over their finances and administration. Although legally non-binding, the exercise is the latest ripple in a wave of votes on greater autonomy across Europe in recent years, from Scotland in 2014 to Brexit last year and Catalonia in September. Although both regions have in the past campaigned for complete independence from Rome, their leaders have made it clear the ballots are about autonomy and not secession.

Some insight into the dynamics can be gleaned from the example of Sappada, a mountainous town in Veneto that straddles the regional border with Friuli-Venezia Giulia. A skiing and hiking paradise, the town is on the verge of becoming the first in Italy to switch regions to become part of Friuli-Venezia Giulia, one of Italy’s five semi-autonomous regions. The plan was approved by the Italian government in September after a lengthy bureaucratic process. “The reasons for people wanting to be part of Friuli are varied: we have our own dialect, which originates from German, and culturally we feel closer to Friuli,” Manuel Piller Hoffer, the mayor of Sappada, told the Guardian. “But the main one is economic: living next door to a semi-autonomous region, people see advantages that they don’t have. They see finances being controlled better, a better health service and sustainable investments being made – they see a better standard of living.”

Do you need to call it a ‘handout’, Reuters?

• Greece Plans Billion Euro Handout For The Poor (R.)

Greece plans to offer handouts worth 1 billion euros to poor Greeks who have suffered during the seven-year debt crisis after beating its budget targets this year, the government said on Thursday. Greece expects to return to nearly 2% growth this year and achieve a primary surplus – which excludes debt servicing costs – of 2.2% of GDP, outperforming the 1.75% bailout target. “The surplus outperformance which will be distributed to social groups that have suffered the biggest pressure during the financial crisis, will be close to 1 billion euros,” government spokesman Dimitris Tzanakopoulos told reporters. It is not yet clear who would be eligible for what the leftist-led government calls a “social dividend.” Hundreds of thousands of Greeks have lost their jobs during a six-year recession that cut more than a quarter of the country’s GDP.

With unemployment 21.3% and youth unemployment at 42.8% many households rely on the income of grandparents – although they have lost more than a third of the value of their pensions since 2010, when Athens signed up to its first international bailout. The government will make final decisions in late November, once it gets full-year budget data, Tzanakopoulos said. Greece’s fiscal performance this year and its 2018 budget is expected to be discussed with representatives from its European Union lenders and the International Monetary Fund next week when a crucial review of its bailout progress starts. Tzanakopoulos reiterated that Athens aims to wrap up the review as soon as possible, ruling out new austerity measures.

We’re really going to see this play out all over again?

• Tensions Rise On Aegean Islands As Migrants Continue To Arrive (K.)

As dozens of migrants continue to land daily on the shores of eastern Aegean islands, and tensions rise in reception centers, local communities are becoming increasingly divided over growing migrant populations. A total of 438 people arrived on the islands aboard smuggling boats from Turkey in the first three days of the week, with another 175 people arriving on the islet of Oinousses yesterday morning. The latter were transferred to a center on nearby Chios which is very cramped with 1,600 people living in facilities designed to host 850. The situation is worse on Samos, where a reception center designed to host 700 people is accommodating 2,850.

The Migration Ministry said around 1,000 migrants will be relocated to the mainland next week. But island authorities said that this will not adequately ease conditions at the overcrowded facilities. Samos Mayor Michalis Angelopoulos on Thursday appealed for European Union support during a meeting of regional authority officials in Strasbourg. He said the Aegean islands “cannot bear the burden of the refugee problem which is threatening to divide Europe.” There are divisions on the islands too. On Sunday rival groups are planning demonstrations on Samos – far-right extremists to protest the growing migrant population and leftists to protest the EU’s “anti-migrant” policy.

When you think money is more valuable than life.

• Global Pollution Kills Millions, Threatens ‘Survival Of Human Societies’ (G.)

Pollution kills at least nine million people and costs trillions of dollars every year, according to the most comprehensive global analysis to date, which warns the crisis “threatens the continuing survival of human societies”. Toxic air, water, soils and workplaces are responsible for the diseases that kill one in every six people around the world, the landmark report found, and the true total could be millions higher because the impact of many pollutants are poorly understood. The deaths attributed to pollution are triple those from Aids, malaria and tuberculosis combined. The vast majority of the pollution deaths occur in poorer nations and in some, such as India, Chad and Madagascar, pollution causes a quarter of all deaths. The international researchers said this burden is a hugely expensive drag on developing economies.

Rich nations still have work to do to tackle pollution: the US and Japan are in the top 10 for deaths from “modern” forms of pollution, ie fossil fuel-related air pollution and chemical pollution. But the scientists said that the big improvements that have been made in developed nations in recent decades show that beating pollution is a winnable battle if there is the political will. “Pollution is one of the great existential challenges of the [human-dominated] Anthropocene era,” concluded the authors of the Commission on Pollution and Health, published in the Lancet on Friday. “Pollution endangers the stability of the Earth’s support systems and threatens the continuing survival of human societies.”

Prof Philip Landrigan, at the Icahn School of Medicine at Mount Sinai, US, who co-led the commission, said: “We fear that with nine million deaths a year, we are pushing the envelope on the amount of pollution the Earth can carry.” For example, he said, air pollution deaths in south-east Asia are on track to double by 2050. Landrigan said the scale of deaths from pollution had surprised the researchers and that two other “real shockers” stood out. First was how quickly modern pollution deaths were rising, while “traditional” pollution deaths – from contaminated water and wood cooking fires – were falling as development work bears fruit. “Secondly, we hadn’t really got our minds around how much pollution is not counted in the present tally,” he said. “The current figure of nine million is almost certainly an underestimate, probably by several million.”

Debt Rattle October 19 2017

Oct 192017

October 19, 2017 Posted by Raúl Ilargi Meijer at 8:55 am Finance Tagged with: buybacks, capitalism, Catalonia, dollar funding, insects, liquidity, Minsky, obsolete, Xi 9 Responses »

Joan Miro The sun embracing the lover 1952

• Don’t Rely on US Consumers to Power Global Growth (DDMB)

• Who Has the World’s No. 1 Economy? Not the US (BBG)

• Capitalism Is Ending Because It Has Made Itself Obsolete – Varoufakis (Ind.)

• Something Wicked This Way Comes: McDonald’s Stock Buybacks (Lebowitz)

• $1 Trillion In Liquidity Is Leaving: Market’s First Crash-Test In 10 Years (ZH)

• Dollar Funding Shortage Never Went Away And Starts To Get Worse Again (ZH)

• China’s Central Bank Warns Of Sudden Collapse In Asset Prices (R.)

• Xi Jinping Gets His Own School of Thought (G.)

• Spain-Catalonia Standoff Set To Intensify As Leaders Take Hard Lines (R.)

• Let Catalonia Go (Exp.)

• Australia’s First Home Super Scheme Passes The Lower House (D.)

• Warning Of ‘Ecological Armageddon’ After 75% Plunge In Insect Numbers (G.)

“The “something-had-to-give” moment appears to be arriving.”

• Don’t Rely on US Consumers to Power Global Growth (DDMB)

U.S. consumers account for 18% of global GDP, and it’s tempting to rely on them to continue carrying the aging recovery to support world growth. The data and growing lender anxiety, though, suggest investors should prepare for what is increasingly looking like an inevitable slowdown in economic growth next year. Although American households managed to maintain their spending levels in the face of dwindling prospects for future economic expansion, they have done so by taking on incremental debts, which could soon prove unsustainable. Headed into the 1960s, consumer credit as apercentage of disposable income was 14%. As baby boomers came of age and started settling down in suburbia to build families under their own roofs, this figure rose to 18% where it largely remained until the early 1990s.

The go-go run of the 1990s, though, was the first major break from history; consumer credit as apercentage of household discretionary spending rose to 24% by the turn of the century and remained there until the recession of 2007-2008. And while there was a movement toward deleveraging, it was short-lived. Today the ratio sits at a high of 26%. The upshot is that when consumer credit is combined with government transfer payments the total amounts to about 43% of all consumer spending. Put differently, almost a third of U.S. growth relies on increasing debt in one form or another.

Economists have long emphasized the historically low debt-service costs households must shoulder as proof that the rebuild in debt levels was not problematic. It was telling that fresh data revealed Americans ploughed more of their income to paying debts last year, the first increase in seven years. Moody’s warned the troubling finding would lead to further increases in default rates. JPMorgan Chase and Citigroup validated the data in their most recent earnings reports in which they boosted their reserves for losses on consumer loans by the most in more than four years. Credit card debt, which clocked a brisk 7% growth rate in August, was specifically cited. Citigroup added that the increase was coming faster than anticipated. The stresses, though, have been growing for almost two years when increases in credit card borrowing began to outpace that of incomes. The “something-had-to-give” moment appears to be arriving.

“..a more accurate picture of how much a country really produces..” It’s almost too easy.

• Who Has the World’s No. 1 Economy? Not the US (BBG)

What’s the most powerful country in the world? There’s a good case to be made that it’s China. There are many kinds of power – diplomatic, cultural, military and economic. So an easier question to ask is: What’s the world’s largest economy? That’s almost certainly China. Many might protest when hearing this. After all, the U.S. still produces the most when measured at market exchange rates:

But this comparison is misleading, because things cost different amounts in different countries. GDP is supposed to measure the amount of real stuff — cars, phones, financial services, back massages, etc. – that a country produces. If the same phone costs $400 in the U.S. but only $200 in China, China’s GDP is getting undercounted by 50% when we measure at market exchange rates. In general, less developed countries have lower prices, which means their GDP gets systematically undercounted.Economists try to correct for this with an adjustment called purchasing power parity (PPP), which controls for relative prices. It’s not perfect, since it has to account for things like product quality, which can be hard to measure. But it probably gives a more accurate picture of how much a country really produces. And here, China has already surpassed the U.S.:

If you don’t trust the murky PPP adjustments, a simple alternative is just to look at the price of a Big Mac. The same burger costs 1.8 times more in the U.S. than in China. Adjusting the market-exchange-rate GDP numbers by that ratio would put China even farther ahead. In some dimensions, China’s lead is even larger. The country’s manufacturing output overtook that of the U.S. almost a decade ago. Its exports are more than a third larger as well.

“..capital is being socially produced, and the returns are being privatised..” The serpent and the tail.

• Capitalism Is Ending Because It Has Made Itself Obsolete – Varoufakis (Ind.)

Former Greek finance minister Yanis Varoufakis has claimed capitalism is coming to an end because it is making itself obsolete. The former economics professor told an audience at University College London that the rise of giant technology corporations and artificial intelligence will cause the current economic system to undermine itself. Mr Varoufakis, who took on EU institutions over Greek debt repayments in 2015, said companies such as Google and Facebook, for the first time ever, are having their capital bought and produced by consumers. “Firstly the technologies were funded by some government grant; secondly every time you search for something on Google, you contribute to Google’s capital,” he said. “And who gets the returns from capital? Google, not you. “So now there is no doubt capital is being socially produced, and the returns are being privatised. This with artificial intelligence is going to be the end of capitalism.”

Warning Karl Marx “will have his revenge”, the 56-year-old said for the first time since capitalism started, new technology “is going to destroy a lot more jobs than it creates”. He added: “Capitalism is going to undermine capitalism, because they are producing all these technologies that will make corporations and the private means of production obsolete. “And then what happens? I have no idea.” Describing the present economic situation as “unsustainable” and fearing the rise of “toxic nationalism”, Mr Varoufakis said governments needed to prepare for post-capitalism by introducing redistributive wealth policies. He suggested one effective policy would be for 10% of all future issue of shares to be put into a “common welfare fund” owned by the people. Out of this a “universal basic dividend” could be paid to every citizen.

The serpent and the tail. Exhibit no. 1: corporate America in the 21st century.

• Something Wicked This Way Comes: McDonald’s Stock Buybacks (Lebowitz)

We have written six articles on stock buybacks to date. While each discussed different themes including valuations, executive motivations, and corporate governance, they all arrived at the same conclusion; buybacks may boost the stock price in the short run but in the majority of cases they harm shareholder value in the long run. Data on MCD provides support for our conclusion. Since 2012, MCD’s revenue has declined by nearly 12% while its earnings per share (EPS) rose 17%. This discrepancy might lead one to conclude that MCD’s management has greatly improved operating efficiency and introduced massive cost-cutting measures. Not so. Similar to revenue, GAAP net income has declined almost 8% over the same period, which rules out the possibilities mentioned above.

To understand how earnings-per-share (EPS) can increase at a double-digit rate, while revenue and net income similarly decline and profit margins remain relatively flat, one must consider the effect of share buybacks. Currently, MCD has about 20% fewer shares outstanding than they did five years ago. The reduction in shares accounts for the warped EPS. As noted earlier, EPS is up 17% since 2012. When adjusted for the decline in shares, EPS declined 7%. Given the 12% decline in revenue and 8% drop in net income, this adjusted 7% decline in EPS makes more sense. MCD currently trades at a trailing twelve-month price to earnings ratio (P/E) of 25. If we use the adjusted EPS figure instead of the stated EPS, the P/E rises to 30, which is simply breathtaking for a company that is shrinking. It must also be noted that, since 2012, shareholder equity, or the difference between assets and liabilities, has gone from positive $15.2 billion to negative $2 billion. A summary of key financial data is shown later in this article.

In addition to adjusting MCD’s earnings for buybacks, investors should also consider that to accomplish this financial wizardry, MCD relied on a 112% increase in their debt. Since 2012, MCD spent an estimated $23 billion on share buybacks. During the same period, debt increased by approximately $16 billion. Instead of repurchasing shares, MCD could have used debt and cash flow to expand into new markets, increase productivity and efficiency of its restaurants or purchase higher growth competitors. MCD executives instead manipulated EPS and ultimately the stock price. To their good fortune (quite literally), the Board of Directors and shareholders appear well-deceived by the costume of a healthy and profitable company. The following table compares MCD’s fundamental data and buyback adjusted data from 2012 to their last reported earnings statement.

The graph below compares the sharp increase in the price of MCD to the decline in revenue over the last five years.

.. but I ain’t got wings .. coming down .. is the hardest thing ..

• $1 Trillion In Liquidity Is Leaving: Market’s First Crash-Test In 10 Years (ZH)

In his latest presentation, Francesco Filia of Fasanara Capital discusses how years of monumental liquidity injections by major Central Banks ($15 trillion since 2009) successfully avoided a circuit break after the Global Financial Crisis, but failed to deliver on the core promise of economic growth through the ‘wealth effect’, which instead became an ‘inequality effect’, exacerbating populism and representing a constant threat to the status quo. Fasanara discusses how elusive, over-fitting economic narratives are used ex-post to legitimize the “fake markets” – as defined previously by the hedge fund – induced by artificial flows.

Meanwhile, as an unintended consequence, such money flows produced a dangerous market structure, dominated by both passive-aggressive investment vehicles and a high-beta long-only momentum community ($8 trn and rising rapidly), oftentimes under the commercial disguise of brands such as behavioral Alternative Risk Premia, factor investing, risk parity funds, low vol / short vol vehicles, trend-chasing algos, machine learning. However as Filia, and many others before him, writes, only when the tide goes out, will we discover who has been swimming naked, and how big of a momentum/crowding trap was built up in the process.

The undoing of loose monetary policies (NIRP, ZIRP), and the transitioning from ‘Peak Quantitative Easing’ to Quantitative Tightening, will create a liquidity withdrawal of over $1 trillion in 2018 alone. The reaction of the passive community will determine the speed of the adjustment in the pricing for both safe and risk assets. And, echoing what Deutsche Bank said last week, when it warned that central bank liquiidty injections will collapse from $2 trillion now to 0 in 12 months, a “most worrying” turn of events, Fasanara doubles down that “such liquidity withdrawal will represent the first real crash-test for markets in 10 years.”

A global problem.

• Dollar Funding Shortage Never Went Away And Starts To Get Worse Again (ZH)

Since last month, the Treasury has rebuilt the balance in its account at the Fed from $38bn on 6 September 2017 to $170bn on 11 October 2017, for a net increase of $132bn…not insignificant. Obviously, if and when the Treasury rebuilds its account at the Fed to the previous level, dollar liquidity could become extremely tight again, especially if the Fed is tapering its balance sheet at the same time. We have been wondering whether the Fed governors fully understand this, although some of the boys at 33 Liberty no doubt do. Credit guys also understand it “there’s another reason the strain is set to grow. The Fed is set to boost the pace of its balance-sheet roll-off each quarter, potentially putting upward pressure on U.S. rates relative to Europe and making it tougher for global investors to get dollar funding,” according to Mark Cabana, head of U.S. short rates strategy at Bank of America Corp.”

Clearly the issue is attracting the attention of investors as BoA analyst, Cabana writes in a recent report, and explains that “we have received a number of client questions recently about the outlook for banking reserves both in the near and medium term due to the Fed’s balance sheet unwind and potential swings in Treasury’s cash balance.” In summary, Cabana expects a large reserve drain in Q2 2018 with banking reserves dropping by more than $1 trillion by the end of 2019, which “highlights the potential for funding strains to emerge around Q2 next year and uncertainties around the Fed’s longer-run policy framework… This reserve drain and the Fed’s portfolio unwind should pressure funding conditions tighter through wider FRA-OIS and more negative XCCY (cross currency basis swaps) levels.”

Minsky.

• China’s Central Bank Warns Of Sudden Collapse In Asset Prices (R.)

China will fend off risks from excessive optimism that could lead to a “Minsky Moment,” central bank governor Zhou Xiaochuan said on Thursday, adding that corporate debt levels are relatively high and household debt is rising too quickly. A Minsky Moment is a sudden collapse of asset prices after a long period of growth, sparked by debt or currency pressures. The theory is named after economist Hyman Minsky. China will control risks from sudden adjustments to asset bubbles and will seriously deal with disguised debt of local government financing vehicles, Zhou said. The People’s Bank of China governor was speaking on the sidelines of China’s 19th Communist Party congress.

Cult, anyone?

• Xi Jinping Gets His Own School of Thought (G.)

China’s communist leader Xi Jinping looks to have further strengthened his rule over the world’s second largest economy with the confirmation that a new body of political theory bearing his name will be written into the party’s constitution. On day two of a week-long political summit in Beijing marking the end of Xi’s first term, state-media announced the creation of what it called Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era. “The Thought is … a historic contribution to the Party’s development,” Zhang Dejiang, one of the seven members of China’s top ruling council, the politburo standing committee, told delegates at the 19th party congress according to Beijing’s official news agency, Xinhua. Liu Yunshan, another standing committee member, said the elevation of Xi’s Thought into the party’s list of “guiding principles” was of “great political, theoretical and practical significance”.

“All members of the Party should study hard Xi’s ‘new era’ thought,” he was quoted as saying. Experts say the decision to grant Xi his own eponymous school of thought, while arcane-sounding, represents a momentous and highly symbolic occasion in the politics and history of the world’s most populous nation. Only two previous leaders – Chairman Mao and Deng Xiaoping – have been honoured in such a way with theories called Mao Zedong Thought and Deng Xiaoping Theory. The names of Xi’s immediate predecessors – Hu Jintao and Jiang Zemin – were not attached to the political philosophies they bequeathed to the party. The official inception of Xi Jinping Thought – which now seems certain to be formally added to the party’s charter next week – also reinforces suspicions that Xi will seek to stay in power beyond the end of his second-term, in 2022.

“It is a huge deal,” said Orville Schell, a veteran China expert who has been studying Chinese politics since the late 1950s. “It is sort of like party sky writing. If you get your big think in the constitution it becomes immortal and Xi is seeking a certain kind of immortality.” However, Schell, the head of the Asia Society’s Center on US-China Relations, said the decision to honour Xi was not only noteworthy “because it makes Xi Jinping look like a thought leader comparable to Chairman Mao.” “It also suggests that [China’s political system] Socialism with Chinese Characteristics is a viable counter-model to the presumption of western liberal democracy and capitalism. In a sense, what Xi is setting up here is not only a clash of civilisation and values, but one of political and economic systems,” he said.

The deadline has passed. Madrid prepares to take over Catalonia on Saturday. This leaves the Catalan parliament time to vote on independence.

• Spain-Catalonia Standoff Set To Intensify As Leaders Take Hard Lines (R.)

Spain’s political showdown with Catalonia is set to reach a new level on Thursday when political leaders in Madrid and Barcelona are expected to make good on pledges made to their supporters to stick to their tough positions over the region’s future. In an unprecedented move since Spain returned to democracy in the late 1970s, Prime Minister Mariano Rajoy will impose direct rule in Catalonia unless the region’s leader Carles Puigdemont retracts by 10 a.m. (0800 GMT) an ambiguous declaration of independence he made last week. Puigdemont told members of his Catalan Democratic Party on Wednesday night that not only he would not back down but that he would press ahead with a more formal declaration of independence if Rajoy suspends Catalonia’s political autonomy.

It is not yet clear how and when this declaration would take place and whether it would be endorsed by the regional assembly, though many pro-independence lawmakers have openly said they wanted to hold a vote in the Catalan parliament to make it more solemn. If Rajoy invokes Article 155 of the 1978 constitution, which allows him to take control of a region if it breaks the law, it would not be fully effective until at least early next week as it needs previous parliamentary approval, offering some last minute leeway for secessionists to split unilaterally. This prospect has raised fears of social unrest, led the euro zone’s fourth-largest economy to cut its growth forecasts and rattled the euro.

Medieval is the right word.

• Let Catalonia Go (Exp.)

Now one businessman has warned enough is enough – as he insisted the Spanish government just “let Catalonia go” or risk being dragged down and destroyed by the enveloping crisis. Xavier Adam, a London-born financial investor who was brought up in Catalonia and considers himself to be a Spaniard, told Express.co.uk he was disgusted by the actions of the Spanish government and its police and military. The Managing Director of AMC network finance firm, Mr Adam says he has decided to cut a planned $450 million investment in Spanish real estate projects in protest at what he sees as Madrid’s “medieval” response to the crisis. He explained he feels his investment would be unsafe until the crisis is solved, as he believes Spain has undone 40 years of democratic progress with the actions of the police – and he warned the instability could send the already fragile country under.

Speaking exclusively to Express.co.uk today, he said: “It never had to be this way, going to beat up people in the streets just trying to vote, its been pandemonium. But Spain can’t come to terms with losing Catalonia, and losing the GDP it provides. “Madrid is being worse hit than Catalonia, it is really struggling. Madrid and Spain is facing a crisis. “Every day they’re threatening more violence and its just grubby, people think its just grubby. “It’s so hard to work with these people in government, they have got their ideas and they are fixed on them. “And Catalonia’s independence doesn’t feature in that, so they’re trying to teach them a lesson. “But there will be more and more of these demos and more and more protests and something is going to happen.

“Spain is going down and this government has to go. It is too volatile – you don’t know when it is going to blow.” Mr Adam, 40, says he was so enraged by the response to the referendum, he even wrote to Carlos Bastarreche, Spain’s ambassador to the UK, saying: “As an international investor of some repute and an expert on the Spanish economy, I write to say how appalled I am by the way your country has behaved in Catalonia. “It appears to me, a failure to listen to the will of the Catalan people, state sponsored violence against civilians and a manipulation of the Spanish public and media are ways Spain wants to move through the 21st Century.

From site of Domain, huge real estate firm. They’re not ready yet to let the bubble pop.

• Australia’s First Home Super Scheme Passes The Lower House (D.)

The federal government insists its plan to allow first-home buyers to save for a deposit through their superannuation won’t undermine Australia’s retirement savings system. The coalition used its numbers in parliament’s lower house to pass the measure – announced in the May budget – on Wednesday. The legislation also allows older Australians to contribute the proceeds of the sale of their family home to their super. Labor and the Greens are against the proposal, with the opposition claiming it will do nothing to address housing affordability. Shadow treasurer Chris Bowen argues it will instead work to undermine the country’s superannuation system, labelling it a “sham”. Assistant minister to the treasurer, Michael Sukkar, accused Labor of deliberately peddling misconceptions about the scheme.

He told MPs it was not an attack on superannuation but simply provides people with an opportunity to save more money that wouldn’t otherwise be used for super. “It’s quite shocking and surprising to see any political party take a view that a tax cut for first home buyers is something that they cannot support,” Mr Sukkar said. Labor, however, said it won’t stand in the way of two other housing affordability bills, both of which were announced in the 2017 budget. They include limiting deductions investors can claim in relation to residential properties and imposing an annual fee on foreign owners if their property is vacant for at least six months during a one-year period. Mr Bowen said there was nothing to oppose because the measures were ineffective. “What we see here is some minor tinkering which won’t do anything for housing affordability,” he told parliament.

This should really make us think. We don’t survive if insects don’t.

• Warning Of ‘Ecological Armageddon’ After 75% Plunge In Insect Numbers (G.)

The abundance of flying insects has plunged by three-quarters over the past 25 years, according to a new study that has shocked scientists. Insects are an integral part of life on Earth as both pollinators and prey for other wildlife and it was known that some species such as butterflies were declining. But the newly revealed scale of the losses to all insects has prompted warnings that the world is “on course for ecological Armageddon”, with profound impacts on human society. The new data was gathered in nature reserves across Germany but has implications for all landscapes dominated by agriculture, the researchers said. The cause of the huge decline is as yet unclear, although the destruction of wild areas and widespread use of pesticides are the most likely factors and climate change may play a role.

The scientists were able to rule out weather and changes to landscape in the reserves as causes, but data on pesticide levels has not been collected. “The fact that the number of flying insects is decreasing at such a high rate in such a large area is an alarming discovery,” said Hans de Kroon, at Radboud University in the Netherlands and who led the new research. “Insects make up about two-thirds of all life on Earth [but] there has been some kind of horrific decline,” said Prof Dave Goulson of Sussex University, UK, and part of the team behind the new study. “We appear to be making vast tracts of land inhospitable to most forms of life, and are currently on course for ecological Armageddon. If we lose the insects then everything is going to collapse.”

The research, published in the journal Plos One, is based on the work of dozens of amateur entomologists across Germany who began using strictly standardised ways of collecting insects in 1989. Special tents called malaise traps were used to capture more than 1,500 samples of all flying insects at 63 different nature reserves. When the total weight of the insects in each sample was measured a startling decline was revealed. The annual average fell by 76% over the 27 year period, but the fall was even higher – 82% – in summer, when insect numbers reach their peak. Previous reports of insect declines have been limited to particular insects, such European grassland butterflies, which have fallen by 50% in recent decades. But the new research captured all flying insects, including wasps and flies which are rarely studied, making it a much stronger indicator of decline.

Debt Rattle October 16 2017

Oct 162017

October 16, 2017 Posted by Raúl Ilargi Meijer at 8:55 am Finance Tagged with: bitcoin, Brexit, Catalonia, China, interest only, Puerto Rico, valuation, wage growth, WeiWei 9 Responses »

Marc Riboud Street seen from inside antique dealer’s shop, Beijing 1965

• US Equities “At Most Offensive Level Of Overvaluation In History” (BI)

• Yellen Doubles Down: “Valuations Are At High Levels Historically” (ZH)

• Goldman Sachs: 88% Chance We’re Heading Into A Bear Market (BI)

• The Mystery Of Weak Wage Growth (BI)

• China Factory Prices Jump As Government Reduces Capacity (BBG)

• China’s Mortgage Debt Bubble Raises Spectre Of 2007 US Crisis (SCMP)

• Interest-only Loans Are A Huge Problem For The Australian Economy (Holden)

• Revised Figures Reveal UK Is £490 Billion Poorer Than Previously Thought (FL)

• How To Weather Brexit: Focus Less On Trade, More On Investment (Pettifor)

• UK Financial Regulator Warns Of Growing Debt Among Young People (BBC)

• How to Wipe Out Puerto Rico’s Debt Without Hurting Bondholders (Ellen Brown)

• Catalan Leader Fails To Spell Out Independence Stance, Calls For Talks (R.)

• Electricity Required For Single Bitcoin Trade Could Power Home For A Month (BI)

• New Quantum Atomic Clock May Finally Reveal Nature of Dark Matter (USci)

• Ai Weiwei On Art, Exile And Refugee Film ‘Human Flow’ (AFP)

John Hussman correcting Buffett.

• US Equities “At Most Offensive Level Of Overvaluation In History” (BI)

Billionaire investor Warren Buffett made a lot of people feel better about historically stretched stock prices earlier this month. Speaking in an interview with CNBC on October 3, the chairman and CEO of Berkshire Hathaway said, “Valuations make sense with interest rates where they are.” The investment community breathed a sigh of relief. After all, Buffett is arguably the most successful stock investor in world history. An all-clear from him surely gives a green light for adding more equity exposure, right? Wrong, says John Hussman, the president of the Hussman Investment Trust and a former economics professor. In his mind, Buffett only gets half of the equation right. While Hussman acknowledges that low lending rates do, by nature, improve future cash flows, he argues that they must also be accompanied by strong growth — something that he notes the US is not currently enjoying.

To Hussman, the simple idea that “lower interest rates justify higher valuations” is one that gives people false confidence. “It’s an incomplete sentence ,” Hussman wrote in a recent blog post. “Unfortunately, the convenience of investing-by-slogan, rather than carefully thinking about finance and examining evidence, is currently leading investors into what is likely to be one of the worst disasters in the history of the U.S. stock market.” Hussman calculates that stock valuations are stretched 175% above their historic norms, and predicts the S&P 500 will see negative total returns over the next 10 to 12 years. Along the way, the benchmark index will experience an interim loss of more than 60%, he estimates. As touched on above, at the core of Hussman’s bearish argument is a lack of economic growth. He specifically points to slowing expansion in the US labor force, as shown by this chart:

“Put simply, if interest rates are low because growth rates are also low, no valuation premium is ‘justified,'” Hussman wrote. “The long-term rate of return on the security will be low anyway without any valuation premium at all. This observation has enormous implications for current U.S. stock market prospects.” So where does that leave the market at this very moment? In the very near term, Hussman’s neutral, citing the continued speculative impulses of investors. Still, he stresses that traders should be hedging and using other safety nets to protect against potential downside, which he says could materialize quickly. To say he’s less than warm and fuzzy about the stock market is an understatement. And when discussing price levels, he doesn’t exactly pull any punches, saying US equities are now “at the most offensive level of overvaluation in history” — even worse than in 1929 and 2000.

People like Yellen focus on one activity: explain away the consequences of their blindly taken actions. They grope in the dark.

• Yellen Doubles Down: “Valuations Are At High Levels Historically” (ZH)

On the heels of San Franciso Fed Governor John Williams’ warning that The Fed “doesn’t want there to be excesses in financial markets… ” Janet Yellen has reiterated her concerns that markets are a bit toppy… Market valuations “are at high level in historical terms” when assessed on metrics akin to price-earnings ratios, warned Fed Chair Janet Yellen in response to a question on an IMF panel in Washington, but was careful to add that “overall financial stability risks in the U.S. remain moderate.” “Prospects for U.S. fiscal stimulus have buoyed sentiment but not yet had much impact on spending or investment,” she said. “Broader financial stability risks depend on more than just asset prices and it may also be important just why asset valuations are high. So one factor that clearly comes into play is an environment of low interest rates and central bankers like many market participants have been adjusting our notions of what” interest rates are likely to be in the longer term.

So – to sum up – The Fed doesn’t want excesses… Yellen thinks stock valuations are stretched… but don’t worry coz rates are low (although we are dedicated to raising them) and financial stability (despite record high corporate leverage and record low spreads) is not a problem. Well… The market has almost never been this expensive… As Peter Boockvar warns: “Almost there. S&P 500 price to sales ratio is just 4% from March 2000 peak.”

Additionally, Draghi and Kuroda were also said they saw little evidence of frothiness in markets. Others in Washington were less sanguine… The market “feels as benign in 2017 as it felt in 2006,” said Jes Staley, the chief executive of Barclays Plc, referencing the eve of the crisis. Yellen also added in a subtle jab at Trump that while prospects for U.S. fiscal stimulus have buoyed sentiment but not yet had much impact on spending or investment… “It is a source of uncertainty,” Yellen says of fiscal policy changes, “we’ve taken,” as many households have, “a kind of wait-and-see attitude.” Of course, The Fed head being worried about stock valuations is a nothing-burger for the mainstream. Since Janet Yellen’s first warning in July 2014: “Equity market valuations appear stretched”

So there.

• Goldman Sachs: 88% Chance We’re Heading Into A Bear Market (BI)

Goldman Sachs has circulated a fascinating but scary research note to clients suggesting that the probability of stocks entering a bear market in the next 24 months currently stands at about 88%, based on the history of previous bear markets. The note is titled “Bear Necessities. Should we worry now?” It is an exhaustive, 87-page dive through macroeconomic data and stock market activity going all the way back to the early 20th Century. It was written in September by London-based Chief Global Equity Strategist Peter Oppenheimer, and European strategists Sharon Bell and Lilia Iehle Peytavin. Most of their data focus on the US S&P 500 index of stocks – the largest and most-followed of the share indices globally. The S&P is currently the second largest and longest bull run in history.

The index is also relatively expensive, the Goldman trio says. The aggregate valuation of the S&P 500 is now in its 88th percentile, as measured since 1976, according to Goldman’s calculations. The median stock is in the 99th percentile. The trio calculated a risk index based on the Shiller price-earnings ratio (the price of S&P 500 stocks divided by the average of 10 years of earnings, adjusted for inflation), the US ISM manufacturing index, unemployment (very low), the bond yield curve, and core inflation. The resultant “GS Bear Market Indicator” is currently flashing at 67%. The indicator typically hits highs right before a bear market in US stocks appears:

Historically, when the indicator is at 67%, there is an 88% chance of stocks falling into a bear market in two years’ time, the Goldman analysts say:

However, the chance of a bear growling into view in the near-term remains low — just 35%. Bear markets are triggered in three different ways, Oppenheimer et al argue: “Cyclical” bear markets are trigged by rising interest rates and recessions; “Event-driven” bears come from negative economic shocks like war or emerging market crises; “Structural” bears come from financial bubbles. Depending on your point of view, all three of those triggers are hovering on the horizon: The Fed and the Bank of England are both signalling interest rates will rise; US President Trump is threatening military action in North Korea; and plenty of people think the low-interest rate environment of the last 10 years has inflated asset bubbles in stocks, real estate and property in Europe, and private equity tech startup valuations.

Those for whom this is a mystery are not fit for their jobs. If you export millions of jobs to Asia, take workers’ negotiating powers away and push them into crappy jobs with no benefits, only one outcome is possible.

• The Mystery Of Weak Wage Growth (BI)

Many economists say they can’t figure out why US wage growth remains so meager nine years into the economic expansion, especially given a decline in the unemployment rate to a historically low 4.4%. A new study from the IMF might help them out. It finds that shifts in the labor market toward less stable, temporary or contract jobs, including odd hours and often no health insurance, likely play a substantial role in preventing wages from rising. That’s because job uncertainty makes it harder for workers to bargain for higher wages, giving employers a strong upper hand in any salary negotiation. The trend is happening not just in the United States but also in other rich economies, the Fund says. “Labor market developments in advanced economies point to a possible disconnect between unemployment and wages,” IMF staffers write in their latest World Economic Outlook report.

“Subdued nominal wage growth has occurred in a context of a higher rate of involuntary part-time employment, an increased share of temporary employment contracts, and a reduction in hours per worker,” the report adds. That’s not the only factor. The Great Recession of 2007 to 2009, which was a global phenomenon, set labor markets back years, and suppressed wages sharply as unemployment surged, peaking at 10% in the United States. The IMF suggests the policy reaction to that global downturn was underwhelming, particularly when it came to fiscal policies, which were restrictive both in the United States and Europe.

“Whereas in many economies headline unemployment is approaching ratios seen before the Great Recession, or has even dipped below those levels, nominal wage growth rates continue to grow at a distinctly slower pace,” the Fund said. “For some economies, this may reflect policy measures to slow wage growth and improve competitiveness in the aftermath of the global financial crisis and euro area sovereign debt crisis.” [..] “To the extent that declining unemployment rates partly reflect workers forced into part-time jobs, increases in such types of employment may overstate the tightening of the labor market,” the IMF said.

It’s all for the Party Congress: close industries so air is cleaner, and let scarcity push producer prices higher. But wait till consumers feel those higher prices. It’s just, that is AFTER the Congress.

• China Factory Prices Jump As Government Reduces Capacity (BBG)

China’s factory prices jumped more than estimated, as domestic demand remained resilient and the government continued to reduce excess industrial capacity. Consumer price gains matched projections. • The producer price index rose 6.9% in September from a year earlier. • The manufacturing PPI sub-index climbed 7.3%, the most in nine years • The consumer price index climbed 1.6%, versus a prior reading of 1.8%, the statistics bureau said Monday. Aggressive cuts to capacity in industries like steel and cement, coupled with resilient demand, have contributed to factory inflation that’s lasted longer than economists expected. The drive to cut pollution and boost firms’ efficiency will probably continue as the Communist Party begins its 19th Congress this week.

“The economy has pretty strong momentum now, monetary policy remained loose ahead of the 19th Party Congress, and the environmental cleanup has cut the supply of commodities,” said Shen Jianguang, chief Asia economist at Mizuho in Hong Kong and the lone forecaster in Bloomberg’s survey to correctly predict the PPI reading. “But this is not sustainable. Deleveraging will be moving up on the agenda after the congress.” “Strong PPI shows that economic momentum is pretty robust in the second half,” said Liu Xuezhi, an analyst at Bank of Communications in Shanghai. “It was widely expected that factory-gate inflation could slow in the second half, but apparently it’s still quite resilient, which may lead to a more positive outlook.”

“China’s manufacturing industry, upstream in particular, continues to see decent demand,” said Raymond Yeung, chief Greater China economist at Australia & New Zealand Banking in Hong Kong. “This PPI figure foretells a decent growth number to be out later this week. We see GDP of 6.8% at the moment but should be prepared for an upside risk.”

I don’t normally post 3-week-old articles, but this one (h/t Tyler) is just too good. The Chinese never borrowed much, but now they borrow more than anyone. Scary: “..a person without a flat has no future in Shenzhen.” It’ll keep the economy going until it doesn’t.

• China’s Mortgage Debt Bubble Raises Spectre Of 2007 US Crisis (SCMP)

Young Chinese like Eli Mai, a sales manager in Guangzhou, and Wendy Wang, an executive in Shenzhen, are borrowing as much money as possible to buy boomtown flats even though they cannot afford the repayments. Behind the dream of property ownership they share with many like-minded friends lies an uninterrupted housing price rally in major Chinese cities that dates back to former premier Zhu Rongji’s privatisation of urban housing in the late 1990s. Rapid urbanisation, combined with unprecedented monetary easing in the past decade, has resulted in runaway property inflation in cities like Shenzhen, where home prices in many projects have doubled or even tripled in the past two years. City residents in their 20s and 30s view property as a one-way bet because they’ve never known prices to drop.

At the same time, property inflation has seen the real purchasing power of their money rapidly diminish. “Almost all my friends born since the 1980s and 1990s are racing to buy homes, while those who already have one are planning to buy a second,” Mai, 33, said. “Very few can be at ease when seeing rents and home prices rise so strongly, and they will continue to rise in a scary way.” The rush of millions young middle-class Chinese like Mai into the property market has created a hysteria that eerily resembles the housing crisis that struck the United States a decade ago. Thanks to the easy credit that has spurred the housing boom, many young Chinese have abandoned the frugal traditions of earlier generations and now lead a lifestyle beyond their financial means.

The build-up of household and other debt in China has also sparked widespread concern about the health of the world’s second largest economy. The Chinese leadership headed by President Xi Jinping has taken a note of the problem and launched an unprecedented campaign in the second half of last year to curb home price rises in major cities by raising down payment requirements, disqualifying some buyers and squeezing the bank credit available for home buyers. The campaign is still deepening, with five more cities introducing rules last weekend that will freeze some property deals.

[..] Government policies are also protecting the interests of homeowners. City governments have squeezed land supply to keep land prices high and made secondary market trading less attractive, with new home buyers left to compete for a few new developments. Meanwhile, there is no property tax, which encourages homeowners to hold on to appreciating property assets. The result has been skyrocketing housing prices in Shenzhen, Beijing and Shanghai, where property prices can match those in Hong Kong or London. The lesson was that “if you don’t buy a flat today, you will never be able to afford it”, Wang, 29, said. [..] “The debts are huge to me,” Wang said. “But a person without a flat has no future in Shenzhen.”

Half of one banker’s loan books are interest-only. Most are 40%. That is an insane amount of principal that is not being paid off.

• Interest-only Loans Are A Huge Problem For The Australian Economy (Holden)

I’m not normally a fan of parliament hauling private sector executives before them and asking thorny questions. But when the Australian House of Representatives did so this week with the big banks it was both useful and instructive. And, to be perfectly frank, terrifying. Let’s start with Westpac CEO Brian Hartzer. First, he confirmed the little-known but startling fact that half of his A$400 billion home loan book consists of interest-only mortgages. Yep, half. Of A$400 billion. At one bank. Oh, and ANZ, CBA and NAB are all nearly at 40% interest-only. Hartzer went on to make the banal statement: “we don’t lend to people who can’t pay it back. It doesn’t make sense for us to do so.” So did it make sense for all those American mortgage lenders to lend to people on adjustable rates, teaser rates, low-doc loans, no-doc loans etc. before the global financial crisis?

Of course not. The point is that banks are not some benevolent, unitary actor taking care of their own money. There are top managers like Harzter acting on behalf of shareholders. Those top managers delegate authority to lower-level managers, who are given incentives to write lots of mortgages. And, as we know, the incentives of those who make the loans are not necessarily aligned with those of the shareholders. Those folks may well want to make loans to people who can’t pay them back as long as they get a big payday in the short term. ANZ CEO Shayne Elliot repeated Hartzer’s mantra, saying: “It’s not in our interest to lend money to people who can’t afford to repay.” Recall, this is the man who on ABC’s Four Corners said that home loans weren’t risky because they were all uncorrelated risks (the chances that one loan defaults does not affect the chances of others defaulting).

That is a comment that is either staggeringly stupid or completely disingenuous. Messers Harzter and Elliot must take us all for suckers. They have made a huge amount of interest-only loans, at historically low interest rates, to buyers in a frothy housing market, who spend a large chunk of their income on interest payments. This certainly looks troubling. It may not be US sub-prime, but it could be ugly. Very ugly. To put it in context, there appears to be in the neighbourhood of A$1 trillion of interest-only loans on the books of Australian banks. I say “appears to be” because reporting requirements are so lax it’s hard to know for sure, except when CEOs cough up the ball, like this week. The big lesson of the US mortgage meltdown is that the risks on these mortgages are all correlated. If a few people aren’t paying back an interest-only loan, that is a fair predictor that others won’t pay back their loans either.

From a “gated” Ambrose Evans-Pritchard article. Troubles grow fast.

• Revised Figures Reveal UK Is £490 Billion Poorer Than Previously Thought (FL)

“Global banks and international bond strategists have been left stunned by revised ONS figures showing that Britain is £490bn poorer than had been assumed and no longer has any reserve of net foreign assets, depriving the country of its safety margin as Brexit talks reach a crucial juncture. A massive write-down in the UK balance of payments data shows that Britain’s stock of wealth – the net international investment position – has collapsed from a surplus of £469bn to a net deficit of £22bn. This transforms the outlook for sterling and the gilts markets. “Half a trillion pounds has gone missing. This is equivalent to 25pc of GDP,” said Mark Capleton, UK rates strategist at Bank of America. Making matters worse, foreign direct investment (FDI) by companies is plummeting. It fell from a £120bn surplus in the first half 2016 to a £25bn deficit over the same period of this year.”

The news comes on top of the OBR confessing to a miscalculation of their own last week in UK productivity potential. Not good news for the UK or pound so let’s see if it plays out as the session progresses.

Too late? Won’t happen under Tories.

• How To Weather Brexit: Focus Less On Trade, More On Investment (Pettifor)

“Strong and stable” seems of a world so far, far away. Yesterday’s Daily Mail headline “PM slaps treacherous Chancellor down” portrays a government in political chaos. Thanks to open, unresolved intra-Brexiteer warfare, ministers are unable to agree the basics of how to exit the European Union. This state of uncertainty intensifies just as the risks to British jobs and living standards are becoming starker and more potent. Ironically, just as we teeter towards the cliff, ONS data reveals that exports of goods to the EU grew over the last three months, while those to the rest of world fell back, a fact not devoid of dark humour. Yet while ministers appear obsessed by trade, net trade comprises only a small part of UK GDP. Surely, through the coming period of Brexit chaos, government priority must be to “take back control” and maintain and support the domestic economy.

This means a commitment to support not only investment technically defined as “capital” but also public investment in the health, education, and training of the British people. In that way, Britain will have some chance of weathering the storm. George Magnus highlighted the OBR’s acceptance that UK productivity growth is likely to stay much lower than previously assumed. This leads to the inevitable conclusion that—on present course—the ever-weaker economy will lead this government to continue to slash public revenues. Yet even this gloomy OBR data underestimates the dangers. For the OBR has not yet factored in the far greater damage that will flow from a chaotic, unplanned Brexit in less than 18 months.

[..] Investment in the UK has since 2007 been in the 14 – 18% range as a share of GDP. In 2016, the figure was 17%. France, by contrast, has annual investment of between 22 – 24% of GDP, and Germany around 19 – 21%. The UK in 2016 slumped to 116th place out of 141 countries in terms of capital investment as a percentage of GDP. In the EU, only Greece, Portugal, Lithuania and Cyprus were below us. Low levels of investment by the “timid mouse” that is the private sector is directly a function of low levels of aggregate demand. Firms can’t see future customers coming through the door, and are made timid by volatile financial conditions and political uncertainty. Weak demand and financial instability are exacerbated by low levels of public investment.

More UK misery: “We should not think this is reckless borrowing, this is directed at essential living costs.”

• UK Financial Regulator Warns Of Growing Debt Among Young People (BBC)

The chief executive of the Financial Conduct Authority has warned of a “pronounced” build up of debt among young people. In an interview with the BBC, Andrew Bailey said the young were having to borrow for basic living costs. The regulator also said he “did not like” some high cost lending schemes. He said consumers, and institutions that lend to them, should be aware that interest rates may rise in the future and that credit should be “affordable”. Action was being taken to curb long term credit card debt and high cost pay-day loans, Mr Bailey said. The regulator is also looking and charges in the rent-to-own sector which can leave people paying high levels of interest for buying white goods such as washing machines, he added.

“There is a pronounced build up of indebtedness amongst the younger age group,” Mr Bailey said. “We should not think this is reckless borrowing, this is directed at essential living costs. It is not credit in the classic sense, it is [about] the affordability of basic living in many cases.” [..] “There are particular concentrations [of debt] in society, and those concentrations are particularly exposed to some of the forms and practices of high cost debt which we are currently looking at very closely because there are things in there that we don’t like,” Mr Bailey said. “There has been a clear shift in the generational pattern of wealth and income, and that translates into a greater indebtedness at a younger age. “That reflects lower levels of real income, lower levels of asset ownership. There are quite different generational experiences,” he said.

Haven’t seen anything from Ellen in a while. This makes a ton of sense. But Puerto Rico’s not the only place that needs it.

• How to Wipe Out Puerto Rico’s Debt Without Hurting Bondholders (Ellen Brown)

DWiping out Puerto Rico’s debt, they warned, could undermine confidence in the municipal bond market, causing bond interest rates to rise, imposing an additional burden on already-struggling states and municipalities across the country. True, but the president was just pointing out the obvious. As economist Michael Hudson says, “Debts that can’t be paid won’t be paid.” Puerto Rico is bankrupt, its economy destroyed. In fact it is currently in bankruptcy proceedings with its creditors. Which suggests its time for some more out-of-the-box thinking . . . . In July 2016, a solution to this conundrum was suggested by the notorious Goldman Sachs itself, when mom and pop investors holding the bonds of bankrupt Italian banks were in jeopardy. Imposing losses on retail bondholders had proven to be politically toxic, after one man committed suicide.

Some other solution had to be found. Italy’s non-performing loans (NPLs) then stood at 210bn, at a time when the ECB was buying 120bn per year of outstanding Italian government bonds as part of its QE program. The July 2016 Financial Times quoted Goldman’s Francesco Garzarelli, who said, “by the time QE is over – not sooner than end 2017, on our baseline scenario – around a fifth of Italy’s public debt will be sitting on the Bank of Italy’s balance sheet.” His solution: rather than buying Italian government bonds in its quantitative easing program, the ECB could simply buy the insolvent banks’ NPLs. Bringing the entire net stock of bad loans onto the government’s balance sheet, he said, would be equivalent to just nine months’ worth of Italian government bond purchases by the ECB.

Puerto Rico’s debt is only $73 billion, one third the Italian debt. The Fed has stopped its quantitative easing program, but in its last round (called “QE3”), it was buying $85 billion per month in securities. At that rate, it would have to fire up the digital printing presses for only one additional month to rescue the suffering Puerto Ricans without hurting bondholders at all. It could then just leave the bonds on its books, declaring a moratorium at least until Puerto Rico got back on its feet, and better yet, indefinitely. Shifting the debt burden of bankrupt institutions onto the books of the central bank is not a new or radical idea. UK Prof. Richard Werner, who invented the term “quantitative easing” when he was advising the Japanese in the 1990s, says there is ample precedent for it. In 2012, he proposed a similar solution to the European banking crisis, citing three successful historical examples.

One was in Britain in 1914, when the British banking sector collapsed after the government declared war on Germany. This was not a good time for a banking crisis, so the Bank of England simply bought the banks’ NPLs. “There was no credit crunch,” wrote Werner, “and no recession. The problem was solved at zero cost to the tax payer.” For a second example, he cited the Japanese banking crisis of 1945. The banks had totally collapsed, with NPLs that amounted to virtually 100% of their assets: But in 1945 the Bank of Japan had no interest in creating a banking crisis and a credit crunch recession. Instead it wanted to ensure that bank credit would flow again, delivering economic growth. So the Bank of Japan bought the non-performing assets from the banks – not at market value (close to zero), but significantly above market value.

Set for confrontation. Combine with Brexit and Austria’s push to the right, and you get an EU with crumbling foundations.

• Catalan Leader Fails To Spell Out Independence Stance, Calls For Talks (R.)

Catalan leader Carles Puigdemont failed to clarify on Monday whether he had declared Catalonia’s independence from Spain last week, paving the way for the central government to take control of the region and rule it directly. The wealthy region’s threatened to break away following a referendum in Oct. 1 that Spain’s Constitutional Court said was illegal. That plunged the country into its worst political crisis since an attempted military coup in 1981. Puigdemont made a symbolic declaration of independence on Tuesday, but suspended it seconds later and called for negotiations with Madrid on the region’s future. Spain’s Prime Minister Mariano Rajoy gave him until Monday 10:00 a.m. (0800 GMT) to clarify his position, and until Thursday to change his mind if he insisted on a split – and said Madrid would suspend Catalonia’s autonomy if he chose independence.

Rajoy had said Puigdemont should answer the formal requirement with a simple “Yes” or “No” and that any ambiguous response would be considered a confirmation that a declaration of independence had been made. Puigdemont did not directly answer the question in his letter to Rajoy, made public by local Catalan media. The Catalan leader said instead that the two should meet as soon as possible to open a dialogue over the next two months. “Our offer for dialogue is sincere and honest. During the next two months, our main objective is to have this dialogue and that all international, Spanish and Catalan institutions and personalities that have expressed the willingness to open a way for dialogue can explore it,” Puigdemont said in the letter.

And this will go up as the blockchain grows.

• Electricity Required For Single Bitcoin Trade Could Power Home For A Month (BI)

Bitcoin transactions use so much energy that the electricity used for a single trade could power a home for almost a whole month, according to a paper from Dutch bank ING. Bitcoin trades use a lot of electricity as a means to make verifying trades expensive, therefore making fraudulent transactions costly and deterring those who would seek to misuse the currency. “By making sure that verifying transactions is a costly business, the integrity of the network can be preserved as long as benevolent nodes control a majority of computing power,” wrote ING senior economist Teunis Brosens. “Together, they will dominate the verification (mining) process. To make the verification (mining) costly, the verification algorithm requires a lot of processing power and thus electricity.”

Comparing the amount of energy used for a bitcoin transaction to running his home in the Netherlands, Brosens says: “This number needs some context. 200kWh is enough to run over 200 washing cycles. In fact, it’s enough to run my entire home over four weeks, which consumes about 45 kWh per week costing €39 of electricity (at current Dutch consumer prices).” Not only does Bitcoin use a vast amount of electricity to complete transactions, it uses an almost exponentially larger amount than more traditional forms of electronic payment. “Bitcoin’s energy costs stand in stark contrast to payment systems that have the luxury of working with trusted counterparties. E.g. Visa takes about 0.01kWh (10Wh) per transaction which is 20000 times less energy,” Brosens notes, pointing to the chart below:

3-dimensional quantum clocks. Much of our electronic infrastructure already relies on atomic clocks.

• New Quantum Atomic Clock May Finally Reveal Nature of Dark Matter (USci)

Physicists have created a quantum atomic clock that uses a new design to achieve unprecedented levels of accuracy and stability. Its broad range of potential applications could even stretch to research into dark matter. Scientists at the University of Colorado Boulder’s JILA (formerly the Joint Institute for Laboratory Astrophysics) have developed an incredibly precise quantum atomic clock based on a new three-dimensional design. The project has set a new record for quality factor, a metric used to gauge the precision of measurements. The clock packs atoms of strontium into a cube, achieving 1,000 times the density of prior one-dimensional clocks. The design marks the first time that scientists have been able to successfully utilize a so-called “quantum gas” for this purpose.

Previously, each atom in an atomic clock was treated as a separate particle, and so interactions between atoms could cause inaccuracies in the measurements taken. The “quantum many-body system” used in this project instead organizes atoms in a pattern, which forces them to avoid one another, no matter how many are introduced to the apparatus. A state of matter known as a degenerate Fermi gas — which refers to a gas comprised of Fermi particles — allows for all of the atoms to be quantized. [..] It’s been suggested that monitoring minor inconsistencies in the ticking of an atomic clock might offer insight into the presence of pockets of dark matter. Previous research has shown that a network of atomic clocks, or even a single highly-sensitive system, might register a change in the frequency of vibrating atoms or laser light in the clock if it passed through a dark matter field.

Ai himself grew up in miserable conditions due to Mao.

• Ai Weiwei On Art, Exile And Refugee Film ‘Human Flow’ (AFP)

In the most tender moments of “Human Flow,” Ai Weiwei’s epic documentary on the worldwide migrant crisis, he is seen hugging, cooking with and cutting the hair of refugees. An ordinary filmmaker might be accused of getting too close to his subject but, as far as the Chinese dissident and internationally renowned artist is concerned, he is the subject. “When I look at people being pushed away from their home because of war, because of all kinds of problems, because of environmental problems, famine, I don’t just have sympathy for them,” he tells AFP. “I do feel that they are part of me and I am part of them, even with very different social status.”

[..] “Human Flow,” his powerful expression of solidarity with refugees around the world, demonstrates the staggering scale of the refugee crisis and its profoundly personal human impact. Captured over a year in 23 countries, it follows a chain of human stories that stretches from Bangladesh and Afghanistan to Europe, Kenya and the US-Mexico border. Ai travels from teeming refugee camps to barbed-wire borders, witnessing refugees’ desperation and disillusionment as well as hope and courage. “I’m so far away from their culture, their religion or whatever the background. But with a human being, you look at him, you know what kind of person he is,” says Ai.

“I have this natural understanding about human beings. So I try to grab them with this kind of approach, a very intimate approach. They can touch me, cut my hair. I can cut their hair. I can cook in their camp.” “Human Flow” is far from Ai’s first work on the refugee crisis. Just last week he scattered over 300 outdoor works across New York as part of a new illustration of his empathy for refugees worldwide. Ai dismisses a common criticism that his work has little artistic merit and that he is more of a campaigner, telling AFP “a good artist should be an activist and a good activist should have the quality of an artist.”

Debt Rattle October 15 2017

Oct 152017

October 15, 2017 Posted by Raúl Ilargi Meijer at 9:21 am Finance Tagged with: Austria, Brexit, Catalonia, China, coal, deleveraging, ECB, Flanders, IMF, racket, Tesla 5 Responses »

Piet Mondriaan Composition in color A 1917

• Tesla Shareholders: Are You Drunk On Elon Musk’s Kool-Aid? (Lewitt)

• ECB Suffers from “Corporate Capture at its Most Extreme” (DQ)

• ECB Still Believes In Eventual Inflation, Wage Rise: Draghi (R.)

• China Credit Growth Exceeds Estimates Despite Debt Curb Vow (BBG)

• PBOC Governor Zhou Says China’s 6.9% Growth ‘May Continue’ (BBG)

• In China, The War On Coal Just Got Serious (SMH)

• IMF Steering Committee Warns Global Growth Is At Risk Of Faltering (BBG)

• Corbyn Has A Washington Ally On Taxing The Rich. But No, It’s Not Trump (G.)

• Brexit Has Made The UK The Sick Man Of Europe Once More (NS)

• UK MPs Move To Block May From Signing ‘No Deal’ Brexit (G.)

• Forget Catalonia, Flanders Is The Real Test Case Of EU Separatism! (OR)

• Europe’s Migration Crisis Casts Long Shadow As Austria Votes (R.)

Funny but very serious. Recommend the whole article.

• Tesla Shareholders: Are You Drunk On Elon Musk’s Kool-Aid? (Lewitt)

Tesla shareholders (and bullish Wall Street analysts) are either geniuses or delusional and I am betting on the latter. Typical of the lack of gray matter being applied to this investment is a recent post on Seeking Alpha, often a place where amateurs go to pump stocks they own. Someone calling himself “Silicon Valley Insights” issued an ungrammatical “Strong Buy” recommendation on October 11 based on the following syllogism: (1) “Tesla CEO Elon Musk has stated very firmly that they can and will reach his goal of producing 5,000 cars per week by the end of this year.” (2) “Musk has a history of setting aggressive targets (more for his staff than investors) [Editors’s Note: That is a lie.] and then missing them on initial timing but reaching them later. [Editor’s Notes: That is another lie–Musk has NEVER reached a production target.]

(3) “Reaching anything [sic] significant portion of that 5K target (say 1-2K) by the end of December could drive TSLA shares significantly higher.” This genius then suggests that investors stay focused on the Model 3 ramp as the key price driver over the coming weeks and months and argues that the announcement that only 260 Model 3s were produced in the third quarter leaves “much of the risk…now in the stock price.” He is correct – there is a great deal of risk embedded in a stock trading at infinity-times earnings with no prospect of profitability , a track record of breaking promises, a reluctance to sell equity to fund itself even at price levels above the targets of most analysts, and a market cap larger than rivals that are pouring tens of billions of dollars into putting it out of business.

Undeterred, he offers two investment strategies. The first he terms a “reasonable and conservative” one that waits to invest in TSLA shares until the early November third quarter earnings call. In my world, a reasonable and conservative strategy would be to run for the hills or short the stock (as I am doing). A “more aggressive and risky strategy” (compared to skydiving or bungee jumping) would be “to buy shares before that third quarter report and call on the bet that the Model 3 production update will be taken positively.” No doubt investors like Mr. Silicon Valley Insights will put a positive spin on whatever fairy tales Elon Musk spins on that call, but that is a big bet indeed.

Bankers involved in LIbor and other scandals regulate themselves. This is the exact opposite of an independent central bank. It’s a criminal racket.

• ECB Suffers from “Corporate Capture at its Most Extreme” (DQ)

No single institution has more influence over the lives of European citizens than the European Central Bank. It sets the interest rates for the 19 Member States of the Eurozone, with a combined population of 341 million people. Every month it issues billions of euros of virtually interest-free loans to hard-up financial institutions while splashing €60 billion each month on sovereign and corporate bonds as part of its QE program, thanks to which it now boasts the biggest balance sheet of any central bank on Planet Earth. Through its regulatory arm, the Single Supervisory Mechanism, it decides which struggling banks in the Eurozone get to live or die and which lucky competitor gets to pick up the pieces afterwards, without taking on the otherwise unknown risks. In short, the ECB wields a bewildering amount of power and influence over Europe’s financial system.

But how does it reach the decisions it makes? Who has the ECB’s institutional ear? The ECB has 22 advisory boards with 517 seats in total that provide ECB decision-makers with recommendations on all aspects of EU monetary policy. A new report by the non-profit research and campaign group Corporate Europe Observatory (CEO) reveals that 508 of the 517 available seats are assigned to representatives of private financial institutions. In other words, 98% of the ECB’s external advisors have some sort of skin in the game. Of the nine seats not taken by the financial sector, seven have gone to non-financial companies such as German industrial giant Siemens and just two to consumer groups, according to the CEO report. In response to questions by CEO, the ECB said that its advisory groups help it to gather information, effectively “discharge its mandate”, and “explain its policy decisions to citizens.”

[..] Many of the above institutions were implicated in two of the biggest financial crimes of this century, the Forex and Libor scandals. In fact, according to CEO, banks involved in a separate forex manipulation scandal that emerged in 2013 have been heavily represented on the ECB’s Foreign Exchange Contact Group. In other words, these banks are supposed to be under direct ECB supervision, and yet they have been repeatedly caught committing serious financial crimes. And now it turns out that they enjoy more influence over ECB decision making than anyone else..

Spot the nonsense: ”..already bought over 2 trillion euros worth of bonds to cut borrowing costs and induce household and corporate spending..”

They buy bonds and magically households will start spending. They don’t belive that themselves either.

• ECB Still Believes In Eventual Inflation, Wage Rise: Draghi (R.)

Wages and inflation in the 19-country euro zone will eventually rise but more slowly than earlier thought, requiring continued patience from policymakers, European Central Bank President Mario Draghi said on Saturday. Wage growth has failed to respond to stimulus for a list of reasons but the ECB remains convinced that labor markets and not a structural change in the nature of inflation is the chief culprit behind low prices, Draghi told a news conference on the sidelines of the International Monetary Fund annual meeting. Having fought low inflation for years, the ECB is due to decide at its Oct. 26 meeting whether to prolong stimulus, having to reconcile rapid economic expansion with weak wage and price growth.

Sources close to the discussion earlier told Reuters that the ECB will likely extend asset purchases but at lower volumes, signaling both confidence in the outlook but also indicating that policy support will continue for a long time. “The bottom line in terms of policy is that we are confident that as the conditions will continue to improve, the inflation rate will gradually converge in a self-sustained manner,” Draghi said. “But together with our confidence, we should also be patient because it’s going to take time.” Even as the euro zone has enjoyed 17 straight quarters of economic growth, wage growth has underperformed expectations, due in part to hidden slack in the labor market and low wage demands from unions.

Some policymakers also argue that globalization and technological changes have made value chains more international, making low inflation a global phenomenon and limiting central banks’ ability to control prices in their own jurisdiction. Draghi acknowledged the debate but said the ECB was convinced the main problem was the labor market and even if there was a broader issue, it would not lead to policy change. The ECB has kept interest rates in negative territory for years and already bought over 2 trillion euros worth of bonds to cut borrowing costs and induce household and corporate spending.

They say one thing and do another.

• China Credit Growth Exceeds Estimates Despite Debt Curb Vow (BBG)

China’s broadest gauge of new credit exceeded projections, signaling that the funding taps remain open even as the government pushes to curb excessive borrowing. Aggregate financing stood at 1.82 trillion yuan ($276 billion) in September, the People’s Bank of China said Saturday, compared with an estimated 1.57 trillion yuan in a Bloomberg survey and 1.48 trillion yuan the prior month. New yuan loans stood at 1.27 trillion yuan, versus a projected 1.2 trillion yuan. The broad M2 money supply increased 9.2%, exceeding estimates and picking up from the prior record low. Policy makers have been clamping down on shadow banking while also working to keep corporate borrowing intact to avoid impeding growth.

The central bank said Sept. 30 it will reduce the amount of cash some banks must hold as reserves from next year, with the size of the cut linked to lending to parts of the economy where credit is scarce. “Momentum continues to be very strong,” said Kenneth Courtis, chairman of Starfort Investment Holdings and a former Asia vice chairman for Goldman Sachs. “Loan demand of the private sector has finally turned up in recent months.” “This means that there is little hope of further policy easing in the fourth quarter as the monetary policy is very accommodative,” said Zhou Hao, an economist at Commerzbank in Singapore. “There could be even a tightening bias.”

“Household short-term loans have increased too rapidly, with some funds being invested in stock and property markets,” said Wen Bin, a researcher at China Minsheng Banking Corp. in Beijing. “Regulators have started to pay attention to the sector and required banks to strengthen credit review. I think the momentum will show signs of slowing in the fourth quarter.” “Deleveraging is not happening if we look at any measure of credit growth,” according to Christopher Balding, an associate professor at the HSBC School of Business at Peking University in Shenzhen. “Lending in 2017 has actually accelerated significantly from 2016.”

Yeah. Financed by debt.

• PBOC Governor Zhou Says China’s 6.9% Growth ‘May Continue’ (BBG)

Economic indicators show “stabilized and stronger growth” and the momentum of a 6.9% expansion in the first six months of 2017 “may continue in the second half,” People’s Bank of China Governor Zhou Xiaochuan said. Imports and exports increased rapidly, fiscal income grew, and prices have been steady, Zhou said, according to a statement the central bank released Saturday after he attended meetings of global finance chiefs this week in Washington. The effects of a campaign to rein in leverage are showing, and China will monitor and prevent shadow banking and real estate risk, he said. China’s broadest gauge of new credit, released Saturday, exceeded projections, signaling that the funding taps remain open even as the government pushes to curb excessive borrowing. “Positive progress has been achieved in economic transformation,” the statement said.

“China will continue to pursue a proactive fiscal policy and a prudent monetary policy, with a comprehensive set of policies to strengthen areas of weakness.” Zhou’s comments, delivered before a gathering of Group of 20 finance ministers and central bankers, come before the release of third-quarter GDP, scheduled for Oct. 19. Economists project a moderation to 6.8% growth from the 6.9% pace in the second quarter amid government efforts to reduce overcapacity and ease debt risk. Steady growth in the world’s second-largest economy gives policy makers additional room to push ahead with reforms. Zhou recently made a fresh call to further open up the financial sector, warning that such an overhaul will become more difficult if the window of opportunity is missed. Some analysts say they expect reforms will pick up should President Xi Jinping further consolidate power after the 19th Party Congress starting next week.

The IMF this week increased its global growth forecast amid brightening prospects in the world’s biggest economies. It also raised its China growth estimate to 6.8 percent this year and 6.5 percent in 2018, up 0.1 percentage point in each year versus July. “We expect that the authorities can and will maintain a sufficiently expansionary macro policy mix to meet their policy target of doubling 2010 GDP by 2020,” Changyong Rhee, the fund’s Asia and Pacific director, said at a briefing Friday in Washington. “However, as this expansionary policy comes at the cost of a further large increase in debt, it also implies that there’s more downside risk in the medium-term due to this rapid credit expansion.”

Beijing seems to be getting scared of people’s reactions. Still, when you think about it, closing down 50% of steel production says something about the country’s needs for steel.

• In China, The War On Coal Just Got Serious (SMH)

Beijing: In Australia, politicians continue to debate the existence of climate change. Donald Trump’s Environment Protection Agency declared this week that the “war on coal is over”. In China, the outlook could not be more different. The war on coal reached fever pitch here this month. As a deadline looms to achieve clean air targets by the end of 2017, October has seen unprecedented measures come into force to curb air pollution and reduce emissions. Steel production has been halved in major steel cities, coal banned in China’s coal capital, factories closed down for failing pollution inspections, and hundreds of officials sacked for failing to meet environmental targets. The complete shutdowns, or 50% production cuts, will stay in place for an unprecedented five months.

The winter heating season in China is approaching, when coal use has traditionally spiked, worsening northern China’s notorious air pollution. But cities are under pressure to meet important domestic targets for clean air, set five years ago by the State Council in response to a public outcry over pollution. China can’t allow a repeat of last winter, when, after several years of improvement, air quality suddenly worsened in some cities. For a few days in January 2016, the sky darkened and it looked possible that the “airpocalypse” of 2013 – which first drew global attention to Beijing’s severe air pollution – was back. Social media went into overdrive. Fighting air pollution is a matter of social stability, Environment Protection Minister Li Ganjie said a fortnight ago. So now the Chinese government has brought out the “iron fist”.

That was the phrase used by the environment protection bureau in China’s most polluted province, Hebei, as 69 government officials were sacked and 154 handed over to police for investigation last month for failing to implement pollution control measures. Meeting emissions targets has become a key performance indicator for local Communist Party bosses and mayors alike. Local governments that don’t enforce the pollution controls will have environmental assessments for new property developments suspended by the Ministry for Environment Protection, effectively blocking deals. A battle plan has been drawn up by the ministry to cover 28 northern cities, including Beijing and Tianjin, where 7000 pollution inspectors will be deployed to expose violations and look for data fraud. The curbs on industry, particularly steel making, are hitting world resources prices, including Australia’s biggest exports, as demand for iron ore and coal fall.

Let me guess. They want more reforms.

• IMF Steering Committee Warns Global Growth Is At Risk Of Faltering (BBG)

The IMF’s steering committee warned that global growth is at risk of faltering in coming years given uncomfortably low inflation and rising geopolitical risks, injecting a cautious note into an otherwise improving economic outlook. “The recovery is not yet complete, with inflation below target in most advanced economies, and potential growth remains weak in many countries,” the International Monetary and Financial Committee said in a communique released Saturday in Washington. “Near-term risks are broadly balanced, but there is no room for complacency because medium-term economic risks are tilted to the downside and geopolitical tensions are rising.” The panel didn’t specify which geopolitical risks it was most concerned about.

In the past few weeks the U.S. and North Korea have engaged in shrill rhetoric about Pyongyang’s nuclear weapons. And on Friday, U.S. President Donald Trump took steps to confront Iran and renegotiate a 2015 multinational accord to curb Tehran’s nuclear program. At the same time, the U.K. is in the middle of negotiations on the terms of its exit from the EU. The panel nonetheless described the global outlook as strengthening, with rising investment, industrial output and confidence – conditions that make it ripe for nations to “tackle key policy challenges” and enact policies that boost the speed limit of their economies. “It’s when the sun is shining that you need to fix the roof,” IMF Managing Director Christine Lagarde said at a press briefing to discuss the statement.

The best part of the iMF is not the front office, it’s the anonymous workers.

• Corbyn Has A Washington Ally On Taxing The Rich. But No, It’s Not Trump (G.)

The IMF has been on quite a journey from the days when it was seen as the provisional wing of the Washington consensus. These days the IMF is less likely to harp on about the joys of liberalised capital flows than it is to warn of the dangers of ever-greater inequality. The fund’s latest foray into the realms of progressive economics came last week when it used its half-yearly fiscal monitor – normally a dry-as-dust publication – to make the case for higher taxes on the super-rich. Make no mistake, this is a significant moment. For almost 40 years, since the arrival of Margaret Thatcher in Downing Street and Ronald Reagan in the White House, the economic orthodoxy on taxation has been that higher taxes for the 1% are self-defeating.

Soaking the rich, it was said, would punish initiative and lead to lower levels of innovation, investment, growth and, therefore, reduced revenue for the state. As the Conservative party conference showed, this line of argument is still popular. Minister after minister took to the stage to warn that Jeremy Corbyn’s tax plans would lead to a 1970s-style brain drain. The IMF agrees that a return to the income tax levels seen in Britain during the 1970s would have an impact on growth. But that was when the top rate was 83%, and Corbyn’s plans are far more modest. Indeed, it is a sign of how difficult it has become to have a grown-up debate about tax that Labour’s call for a 50% tax band on those earning more than £123,000 and 45% for those earning more than £80,000 should be seen as confiscatory.

The IMF’s analysis does something to redress the balance, making two important points. First, it says that tax systems should have become more progressive in recent years in order to help offset growing inequality, but have actually become less so. Second, it finds no evidence for the argument that attempts to make the rich pay more tax would lead to lower growth. There is nothing especially surprising about either of the IMF’s conclusions: in fact, the real surprise is that it has taken so long for the penny to drop. Growth rates have not picked up as taxes have been cut for the top 1%. On the contrary, they are much weaker than they were in the immediate postwar decades, when the rich could expect to pay at least half their incomes – and often substantially more than half – to the taxman.

If trickle-down theory worked, there would be a strong correlation between growth and countries with low marginal tax rates for the rich. There is no such correlation and, as the IMF rightly concludes, “there would appear to be scope for increasing the progressivity of income taxation without significantly hurting growth for countries wishing to enhance income redistribution”. With a nod to the work of the French economist Thomas Piketty, the fiscal monitor also says that countries should consider wealth taxes for the rich, to be levied on land and property.

Why am I thinking it’s the Brit(on)s themselves who’ve done that?

• Brexit Has Made The UK The Sick Man Of Europe Once More (NS)

Though it didn’t feel like it at the time, the years preceding 2017 now resemble an economic golden age for the UK. After the damage imposed by the financial crisis and excessive austerity, Britain recovered to become the fastest growing G7 country. Real earnings finally rose as wages increased and inflation fell (income per person grew by 3.5% in 2015). And then the Brexit vote happened. Though the immediate recession that the Treasury and others forecast did not materialise, the UK has already paid a significant price. Having previously been the fastest growing G7 country, Britain is now the slowest. Real earnings are again in decline owing to the inflationary spike caused by the pound’s depreciation (the UK has the lowest growth and the highest inflation – stagflation – of any major EU economy).

Firms have delayed investment for fear of future chaos and consumer confidence has plummeted. EU negotiator Michel Barner’s warning of a “very disturbing” deadlock in the Brexit talks reflects and reinforces all of these maladies. While Leavers plead with Philip Hammond to set money aside for “a no-deal scenario”, the referendum result is daily harming the public finances. The Office for Budget Responsibility has forecast a £15bn budgetary hit (the equivalent of nearly £300m a week). To the UK’s existing defects – low productivity, low investment and low pay – new ones have been added: political uncertainty and economic instability. The Conservatives, to annex former Chancellor George Osborne’s phrase of choice, failed to fix the roof when the sun was shining.

Rather than taking advantage of record-low borrowing rates to invest in infrastructure (and improve the UK’s dismal productivity), the government squandered money on expensive tax cuts. The Sisyphean pursuit of a budget surplus (now not expected until at least 2027) reduced the scope for valuable investment. Productivity in quarter two of this year was just 0.9% higher than a decade ago – the worst performance for 200 years. Having softened austerity, without abandoning it, the Conservatives are now stuck in a political no man’s land.

Cross-party action against May. It’s quite something. But it’ll just be more fighting.

• UK MPs Move To Block May From Signing ‘No Deal’ Brexit (G.)

A powerful cross-party group of MPs is drawing up plans that would make it impossible for Theresa May to allow Britain to crash out of the EU without a deal in 2019. The move comes amid new warnings that a “cliff-edge” Brexit would be catastrophic for the economy. One critical aim of the group – which includes the former Tory chancellor Kenneth Clarke and several Conservative ex-ministers, together with prominent Labour, SNP, Liberal Democrat and Green MPs – is to give parliament the ability to veto, or prevent by other legal means, a “bad deal” or “no deal” outcome. Concern over Brexit policy reached new heights this weekend after the prime minister told the House of Commons that her government was spending £250m on preparations for a possible “no deal” result because negotiations with Brussels had stalled.

Several hundred amendments to the EU withdrawal bill include one tabled by the former cabinet minister Dominic Grieve and signed by nine other Tory MPs, together with members of all the other main parties, saying any final deal must be approved by an entirely separate act of parliament. If passed, this would give the majority of MPs who favour a soft Brexit the binding vote on the final outcome they have been seeking and therefore the ability to reject any “cliff-edge” option. A separate amendment tabled by Clarke and the former Labour minister Chris Leslie says Theresa May’s plan for a two-year transition period after Brexit – which she outlined in her recent Florence speech – should be written into the withdrawal bill, with an acceptance EU rules and law would continue to apply during that period. If such a transition was not agreed, the amendment says, exit from the EU should not be allowed to happen.

Some nice history, but a weird anti-Islam stance. And a somewhat dubious conclusion.

• Forget Catalonia, Flanders Is The Real Test Case Of EU Separatism! (OR)

To concisely summarize, there’s a very distinct possibility that the EU’s liberal-globalist elite have been planning to divide and rule the continent along identity-based lines in order to further their ultimate goal of creating a “federation of regions”. Catalonia is the spark that could set off this entire process, but it could also just be a flash in the pan that might end up being contained no matter what its final result may be. Flanders, however, is much different because of the heightened symbolism that Belgium holds in terms of EU identity, and the dissolution of this somewhat artificially created state would be the clearest sign yet that the EU’s ruling elite intend to take the bloc down the direction of manufactured fragmentation. Bearing this in mind, the spread of the “Catalan Chain Reaction” to Belgium and the inspiration that this could give to Flanders to break off from the rest of the country should be seen as the true barometer over whether or not the EU’s “nation-states” will disintegrate into a constellation of “Balkanized” ones.

{..] It’s important to mention that the territory of what would eventually become Belgium had regularly been a battleground between the competing European powers of the Netherlands, the pre-unification German states, France, the UK, and even Spain and Austria during their control of this region, and this new country’s creation was widely considered by some to be nothing more than a buffer state. The 1830 London Conference between the UK, France, Prussia, Austria, and Russia saw the Great Power of the time recognize the fledgling entity as an independent actor, with Paris even militarily intervening to protecting it during Amsterdam’s failed “Ten Day’s Campaign” to reclaim its lost southern province in summer 1831.

[..] Flanders contributes four times as much to Belgium’s national economy as Catalonia does to Spain’s, being responsible for a whopping 80% of the country’s GDP as estimated by the European Commission, and it also accounts for roughly two-thirds of Belgium’s total population unlike Catalonia’s one-sixth or so. This means that Flemish independence would be absolutely disastrous for the people living in the remaining 55% of the “Belgian” rump state, which would for all intents and purposes constitute a de-facto, though unwillingly, independent Wallonia.

Austria is as much of a threat to the EU as Flanders is. The Visograd anti-migrants idea is moving west. This worries Germany, which shares quite a long border with Austria.

• Europe’s Migration Crisis Casts Long Shadow As Austria Votes (R.)

Austria holds a parliamentary election on Sunday in which a young conservative star hopes to beat the far right at its own game with a hard line on refugees and pledging to prevent a repeat of Europe’s migration crisis. Foreign Minister Sebastian Kurz, who is just 31, propelled his conservative People’s Party (OVP) to the top of opinion polls when he became its leader in May, dislodging the far-right Freedom Party from the spot it had held for more than a year. He is now the clear favorite to become Austria’s next leader. Kurz has pledged to shut down migrants’ main routes into Europe, through the Balkans and across the Mediterranean. Many voters now feel the country was overrun when it threw open its borders in 2015 to a wave of hundreds of thousands of people fleeing war and poverty in the Middle East and elsewhere.

Chancellor Christian Kern’s Social Democrats (SPO) are currently in coalition with Kurz’s OVP, but Kurz called an end to the alliance when he took over the helm of his party, forcing Sunday’s snap election. Opinion polls have consistently shown the OVP in the lead with around a third of the vote, and second place being a tight race between the Social Democrats and the Freedom Party (FPO), whose candidate came close to winning last year’s presidential election. “We must stop illegal immigration to Austria because otherwise there will be no more order and security,” Kurz told tabloid daily Oesterreich on Friday night. Campaigning has been dominated by the immigration issue. Kurz plans to cap benefit payments for refugees at well below the general level and bar other foreigners from receiving such payments until they have lived in the country for five years.

Now or never

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