Mar 192016
 
 March 19, 2016  Posted by at 9:08 am Finance Tagged with: , , , , , , , ,  


Jack Delano Union Station, Chicago, Illinois 1943

Foreign Governments Dump US Debt At Record Rate (CNN)
If Caterpillar Data Is Right, The Industrial Depression Was Never Worse (ZH)
Shades of Plaza Accord Seen in Barrage of Stimulus After G-20 (BBG)
The Yellen Fed Risks Faustian Pact With Inflation (AEP)
The End of the Chinese Miracle (FT)
Traditional Economics Failed. Here’s a New Blueprint. (Evo.)
UK Minister Resigns From Cabinet Over Disability Cuts (Guardian)
Struggling US Oil And Gas Companies Eye Unusual Financing Deals (Reuters)
TTIP: Big Business And US To Have Major Say In EU Trade Deals (Ind.)
Refugees Will Be Sent Back Across Aegean In EU-Turkey Deal (Guardian)
Amnesty Hits Out At EU Over Turkey Deal (BBC)
Migration Is A Fact Of Life – Yet Our Deluded Leaders Try To Stop It (G.)
This EU-Turkey Refugee Deal Is Exactly What The People Traffickers Want (Ind.)

Desperation in motion. Sellers of US debt must need money badly. And at the same time: “..total foreign holdings of U.S. debt actually rose in January to $6.18 trillion.”

Foreign Governments Dump US Debt At Record Rate (CNN)

Foreign governments are dumping U.S. debt like never before. In a bid to raise cash, foreign central banks and government institutions sold $57.2 billion of U.S. Treasury debt and other notes in January, according to figures released on Tuesday. That is up from $48 billion in December and the highest monthly tally on record going back to 1978. It’s part of a broader trend that gathered steam last year when central banks sold a record $225 billion of U.S. debt. “Foreigners have no longer been our BFF when it comes to buying U.S. Treasuries,” Peter Boockvar at The Lindsey Group wrote. So what are foreign central bankers doing with these piles of cash? They’re mostly using the funds to stimulate their own economies as the global growth slowdown and crash in oil prices continue to take their toll.

For instance, China has been liquidating its holdings of foreign debt to pump money into its slowing economy, plummeting currency and extremely volatile stock market. China, the largest owner of U.S. debt, trimmed its Treasury holdings by $8.2 billion in January, the Treasury Department said. The actual decline was likely larger considering China reported selling $100 billion of foreign-exchange reserves in January. Countries exposed to the oil price crash are using the cash to fill giant holes in their budget. Norway, Mexico, Canada and Colombia all cut their Treasury holdings in January as oil plunged below $30 a barrel for the first time in a dozen years. Foreign sales of U.S. debt appear to be largely driven by economic necessity. “These foreign sales are not fundamentally driven. The U.S. economy seems to be on better footing,” said Sharon Stark at D.A. Davidson.

That’s why total foreign holdings of U.S. debt actually rose in January to $6.18 trillion. That’s because demand from global investors continues to be high. Besides, some foreign governments added to their piles of Treasury bonds, including Japan, Brazil and Belgium. Despite all these foreign government sales, demand for U.S. Treasuries remains high. In fact, the U.S. can borrow money at a lower rate now than at the beginning of the year. The benchmark 10-year Treasury yield is sitting at 1.99%. That’s down from nearly 3% two years ago. Demand is driven by the relative strength of the American economy, which continues to add jobs at a healthy pace despite the global headwinds. The diminished appetite from overseas is being offset by a number of factors. First, the turmoil in global financial markets has boosted appetite for safe-haven assets like U.S. government debt.

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Caterpillar has historically been the single share perceived as most reflecting the entire US economy.

If Caterpillar Data Is Right, The Industrial Depression Was Never Worse (ZH)

It has been over half a year since we first downgraded the industrial recession to an all-out global depression by using Caterpillar retail sales data, which have been so counterintuitive to what the company’s earnings have been reporting that last September we had to ask “What On Earth Is Going On With Caterpillar Sales?.” Today, we must admit that something simply does not compute. On one hand, CAT stock has soared by over 30% from its 2016 lows….

… despite warning just yesterday that the pain will continue after the company guided even lower to already depressed expectations. But what makes no sense at all is that according to the just released CAT retail sales data, the industrial recession since downgraded to a depression, just fell out of the bottom, when the heavy industrial equipment company reported that February world sales crashed by 21%, after falling “only” 15% in January, led by double digit drops in every single market:

  • US down 11% after sliding 7% in January
  • China and Asia/PAC down 26% after being down 22%
  • EAME down 23% after sliding 14% the month before
  • Latin Marica imploding by 45% after a 36% drop one month ago, and one of the worst monthly drops on record.

Visually, this is as follows:

And what is more confusing is that CAT has not only not had a positive monthly increase in retail sales in a record 39 months, or more than double the length of the Financial Crisis’ 19 months and the longest in history, but the February drop was the biggest one month decline in 5 years!


Of course, on its face, this data would explain why over the past month first the BOJ, then the PBOC, then the ECB and finally the Fed all surprised with not only more dovishness but much more outright easing as central banks panic to halt what at least according to this one indicator confirms the global economy has not been worse in nearly half a decade.

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As I wrote before.

Shades of Plaza Accord Seen in Barrage of Stimulus After G-20 (BBG)

Policy makers across the world are acting in ways that suggest there may have been more to last month’s Group of 20 meeting in Shanghai than mere platitudes about promoting global economic growth. In the past few weeks, officials from China, the euro area, Japan, the U.S. and the U.K. have taken a barrage of actions to keep the world economy afloat and currency markets calm. That’s led some analysts to conclude that there is indeed a secret Shanghai Accord, akin to those reached in an earlier era at the Plaza Hotel in New York and at the Louvre Museum in Paris. The Federal Reserve on Wednesday capped off the series of moves by global policy makers by forecasting a shallower-than-anticipated rise in interest rates this year, with Chair Janet Yellen stressing the risks from a weaker global outlook and market turbulence.

Behind the suspected agreement, according to Joachim Fels of Pimco and David Zervos of Jefferies is a belief that a further major dollar rise against the euro and the yen would be bad for the global economy. “There seems to be some kind of tacit Shanghai Accord in place,” said Fels, who is global economic adviser for Pimco. “The agreement is to roughly stabilize the dollar versus the major currencies through appropriate monetary policy action, not through intervention.” Many other analysts are skeptical. “I don’t think there is a coordinated agreement among central banks to follow the policies they have,” said Charles Collyns, chief economist for the Institute of International Finance in Washington and a former U.S. Treasury official. “But clearly central banks do talk with each other and are aware of each other’s strategies.”

At the Plaza Hotel in 1985, the U.S. and its four industrial-nation allies struck a deal to bring down the sky-high dollar through concerted selling on the currency market. They came together a year and half later in Paris with the aim of stabilizing the greenback after successfully engineering its decline.

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Do we need to explain we see the world differently from Ambrose?

The Yellen Fed Risks Faustian Pact With Inflation (AEP)

Interest rates in the United States have fallen to minus 2pc in real terms and are dropping into deeper negative territory with each passing month. This is a remarkable state of affairs. It is clear that the US Federal Reserve is now trapped. The FOMC dares not tighten despite core inflation reaching 2.3pc because it is so worried about tantrums in financial markets and about that other Sword of Damocles – some $11 trillion of offshore debt denominated in dollars, up from $2 trillion in 2000. The Fed has been forced by circumstances to act as the world’s central bank, nursing a fragile and treacherous financial system struggling with unprecedented leverage. Average debt ratios are 36 percentage points of GDP higher than they were at the top of the pre-Lehman bubble in 2008, and this time emerging markets have been drawn into the quagmire as well by the spill-over effects of quantitative easing.

Like it or not, the Fed is stuck with the task of cleaning up a global mess that is arguably of its own making. You can certainly make a case that the Fed was right to hold rates steady this week and – crucially – to signal just two more rises over the rest of the year. The risks are not symmetric. It would be fatal if the US economy failed to achieve “escape velocity” and then slid back into deflation, leaving no margin of safety before the next downturn. Yet however well-intentioned, the Fed’s policy is fast becoming untenable. The Cleveland Fed’s median index of underlying inflation is already up to 2.8pc. Healthcare costs, car insurance, rents, restaurant bills, hotels, and women’s clothing are all soaring. Marc Ostwald from ADM said the Fed’s governors have effectively told the world that “they will remain forcefully ‘behind the curve’, and ignore their own forecasts of a very tight labour market”.

They are searching for excuses not to tighten, either by discovering yet more “slack” in the shadows of the penumbras of the remotest corners of the jobs market, or by dismissing the inflation data as spikey, transient, and unreliable. Fed chief Janet Yellen was asked twice in her press conference whether the institution’s credibility was at stake if it continues to drag its feet, and this time the warnings are coming from people who know what they are talking about. She admitted that the US economy is “close to our maximum employment objective”, meaning that it is near the inflexion point of NAIRU (non-accelerating inflation rate of unemployment), where unemployment is so low that wage pressures start to gather steam. She admitted too that headline inflation will pick up briskly as the effects of the oil price crash fade from the data. Yet she shrank from her own insights.

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Cool video!

The End of the Chinese Miracle (FT)

China’s economic miracle is under threat from a slowing economy and a dwindling labour force. The FT investigates how the world’s most populous country has reached a critical new chapter in its history.

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Try it on.

Traditional Economics Failed. Here’s a New Blueprint. (Evo.)

In traditional economic theory, as in politics, we Americans are taught to believe that selfishness is next to godliness. We are taught that the market is at its most efficient when individuals act rationally to maximize their own self-interest without regard to the effects on anyone else. We are taught that democracy is at its most functional when individuals and factions pursue their own self-interest aggressively. In both instances, we are taught that an invisible hand converts this relentless clash and competition of self-seekers into a greater good. These teachings are half right: most people indeed are looking out for themselves. We have no illusions about that. But the teachings are half wrong in that they enshrine a particular, and particularly narrow, notion of what it means to look out for oneself.

Conventional wisdom conflates self-interest and selfishness. It makes sense to be self-interested in the long run. It does not make sense to be reflexively selfish in every transaction. And that, unfortunately, is what market fundamentalism and libertarian politics promote: a brand of selfishness that is profoundly against our actual interest. Let’s back up a step. When Thomas Jefferson wrote in the Declaration of Independence that certain truths were held to be “self-evident,” he was not recording a timeless fact; he was asserting one into being. Today we read his words through the filter of modernity. We assume that those truths had always been self-evident. But they weren’t. They most certainly were not a generation before Jefferson wrote.

In the quarter century between 1750 and 1775, in a confluence of dramatic changes in science, politics, religion, and economics, a group of enlightened British colonists in America grew gradually more open to the idea that all men are created equal and are endowed by their Creator with certain unalienable rights. It took Jefferson’s assertion, and the Revolution that followed, to make those truths self-evident. We point this out as a simple reminder. Every so often in history, new truths about human nature and the nature of human societies crystallize. Such paradigmatic shifts build gradually but cascade suddenly. This has certainly been the case with prevailing ideas about what constitutes self-interest. Self-interest, it turns out, is not a fixed entity that can be objectively defined and held constant. It is a malleable, culturally embodied notion.

Think about it. Before the Enlightenment, the average serf believed that his destiny was foreordained. He fatalistically understood the scope of life’s possibility to be circumscribed by his status at birth. His concept of self-interest extended only as far as that of his nobleman. His station was fixed, and reinforced by tradition and social ritual. His hopes for betterment were pinned on the afterlife. Post-Enlightenment, that all changed. The average European now believed he was master of his own destiny. Instead of worrying about his odds of a good afterlife, he worried about improving his lot here and now. He was motivated to advance beyond what had seemed fated. He was inclined to be skeptical about received notions of what was possible in life.

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Pro and con EU jockeying for position.

UK Minister Resigns From Cabinet Over Disability Cuts (Guardian)

Iain Duncan Smith has resigned as work and pensions secretary over cuts to disability benefits, in the most dramatic cabinet departure of David Cameron’s leadership. In a sign that divisions over Europe have heightened tensions in the Conservatives, the former party leader stormed out of his job, saying he thought the cuts to welfare for disabled people known as personal independence payments (PIP) were a “compromise too far”. Duncan Smith, who is campaigning to leave the EU in opposition to Downing Street, said he had too often felt under pressure to make huge welfare savings before a budget in a stinging critique of George Osborne’s entire approach to reducing the deficit.

In a direct attack on Osborne and a blow to the chancellor’s hopes of becoming the next Tory leader, Duncan Smith said the disability cuts were defensible in narrow terms of deficit reduction but not “in the way they were placed in a budget that benefits higher earning taxpayers”. He said he was stepping down because Osborne’s cuts were for self-imposed political reasons rather than in the national economic interest. “I am unable to watch passively while certain policies are enacted in order to meet the fiscal self-imposed restraints that I believe are more and more perceived as distinctly political rather than in the national economic interest,” Duncan Smith wrote in a resignation letter to Cameron.

“Too often my team and I will have been pressured in the immediate run-up to a budget or fiscal event to deliver yet more reductions to the working age benefit bill. There has been too much emphasis on money saving exercises and not enough awareness from the Treasury, in particular, that the government’s vision of a new welfare-to-work system could not repeatedly be salami-sliced.”

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Accountants are such creative souls, aren’t they?

Struggling US Oil And Gas Companies Eye Unusual Financing Deals (Reuters)

Some cash-strapped U.S. oil and gas companies are considering creating an unusual layer of debt as a way of surviving the rout in oil and gas prices, according to restructuring advisors. Chesapeake Energy for example is considering the strategy to swap some of its roughly $9 billion debt. Severely distressed companies may issue so-called 1.5 lien debt, sandwiched between the first and second liens, to raise new capital. Investors with a stomach for risk would get a better yield than for the top debt, and have a stronger claim than junior creditors if the company filed for bankruptcy. Companies could also create a new, middle layer of debt to swap with existing bondholders, offering them the option of giving up principal to jump the queue for repayment in the event of a bankruptcy.

But 1.5 liens, which often have longer maturities that help companies buy time to pay existing bondholders in full, are a sign of desperation that would anger junior creditors, restructuring experts said. Only six companies have done 1.5 lien deals over the past several years, according to Moody’s. The swap would make sense for Chesapeake because its bonds maturing in 2017 and 2018 are trading at depressed levels, analysts said. “This happens when the market kind of constricts,” said John Rogers, senior vice president at Moody’s. “(You) see it in deals where the company is overlevered and has a maturity coming up.” However, some credit rating agencies view the exchange of new 1.5 lien secured notes for existing senior unsecured and 2nd lien secured notes as a distressed exchange and a limited default depending on their definition of default.

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This is your world being sold up sh*t creek.

TTIP: Big Business And US To Have Major Say In EU Trade Deals (Ind.)

The European Commission will be obliged to consult with US authorities before adopting new legislative proposals following passage of a controversial series of trade negotiations being carried out mostly in secret. A leaked document obtained by campaign group the Independent and Corporate Europe Observatory (CEO) from the ongoing EU-US Transatlantic Trade and Investment Partnership (TTIP) negotiations reveals the unelected Commission will have authority to decide in which areas there should be cooperation with the US – leaving EU member states and the European Parliament further sidelined. The main objective of TTIP is to harmonise transatlantic rules in a range of areas – including food and consumer product safety, environmental protection, financial services and banking.

The leaked document concerns the “regulatory cooperation” chapter of the talks, which the European Union says will result in “cutting red tape for EU firms without cutting corners”. It shows a labyrinth of procedures that could tie up any EU proposals that go against US interests, according to analysis by CEO. The campaign group said the document also reveals the extent to which major corporations and industry groups will be able to influence the development of regulatory cooperation by making what is referred to as a “substantial proposal” to the working agenda of the Commission and US agencies. The plans revealed by the document will give the US regulatory authorities a “questionable role” in Brussels lawmaking and weaken the European Parliament, CEO argues.

Kenneth Haar, researcher for CEO, said: “EU and US determination to put big business at the heart of decision-making is a direct threat to democratic principles. This document shows how TTIP’s regulatory cooperation will facilitate big business influence – and US influence – on lawmaking before a proposal is even presented to parliaments.” Nick Dearden, director of the Global Justice Now campaign group, said: “The leak absolutely confirms our fears about TTIP. It’s all about giving big business more power over a very wide range of laws and regulations. In fact, business lobbies are on record as saying they want to co-write laws with governments – this gets them a step closer. This isn’t an ‘add on’ or a small part of TTIP – it’s absolutely central.”

Mr Dearden said it was “scary” that the US could get the power to challenge and amend European regulations before elected European politicians have had the chance to debate them. Referring to the imminent EU referendum, he said: “We’re talking about sovereignty at the moment in this country – it’s difficult to imagine a more serious threat to our sovereignty than this trade deal.”

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“This is a dark day for the refugee convention, a dark day for Europe and a dark day for humanity..”

Refugees Will Be Sent Back Across Aegean In EU-Turkey Deal (Guardian)

Refugees and migrants arriving in Europe will be sent back across the Aegean sea under the terms of a deal between the EU and Turkey that has been criticised by aid agencies as inhumane. In an agreement that raises the prospect of a desperate last-minute rush to Greek shores by refugees and migrants hoping to beat the deadline of midnight on Saturday, the European council president, Donald Tusk, resolved sticking points with Turkey’s prime minister, Ahmet Davatoglu, before all of the EU’s 28 leaders approved the deal at talks in Brussels. Anyone arriving after Saturday midnight can expect to be returned to Turkey in the coming weeks. The UN’s refugee agency said big questions remained about how the deal would work in practice and called for urgent improvements to Greece’s system for assessing refugees.

But thousands of refugees who have already made it to Greece will be resettled in Europe, although they cannot choose where. The German chancellor, Angela Merkel, urged refugees at Idomeni to move to other accommodation being offered by the Greek authorities. Some 14,000 people are waiting at the border village in the hope of travelling north. “I want to take the opportunity to tell the refugees at Idomeni that they should trust the Greek government and move to other accommodation where the conditions will be significantly better,” Merkel said. She added that “from there, Greece will put asylum procedures in motion or redistribution to other European countries will take place”.

In exchange for taking in refugees, Turkey can expect “re-energised” talks on its EU membership, with the promise of negotiations on one policy area to be opened before July. Although this is a climbdown by Turkey, after Cyprus blocked a more ambitious restart of accession talks, Davatoglu said it was “a historic day” for EU-Turkey relations. But the head of the UN high commissioner for human rights in Europe raised concerns that safeguards intended to protect vulnerable asylum seekers would not be in place in time. Vincent Cochetel, director of the UNHCR for Europe, said the agreement was legal on paper, but questions remained on how it was implemented. “For us the proof is in the pudding. Clearly the deal on paper is consistent with international law and standards. The worry is that the safeguards will not be in place on 20 March.”

People claiming asylum needed access to interpreters and the right of appeal, he said, vital elements of a functioning asylum system that Greece has struggled to put in place until now. Implementation “is a big question mark, it is a big challenge”. Aid agencies accused the EU of failing to respect the spirit of EU and international laws. “This is a dark day for the refugee convention, a dark day for Europe and a dark day for humanity,” said Kate Allen of Amnesty International. Action Aid’s Mike Noyes claimed the deal would “effectively turn the Greek islands … into prison camps where terrified people are held against their will before being deported back to Turkey”.

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“Guarantees to scrupulously respect international law are incompatible with the touted return to Turkey of all irregular migrants arriving on the Greek islands as of Sunday.”

Amnesty Hits Out At EU Over Turkey Deal (BBC)

Amnesty International has accused European leaders of “double speak” over a deal which will see Europe-bound migrants returned to Turkey. The leading human rights charity said the deal failed to hide the EU’s “dogged determination to turn its back on a global refugee crisis”. Under the plan, migrants arriving in Greece will be sent back to Turkey if their asylum claim is rejected. In return, Turkey will receive aid and political concessions. John Dalhuisen, Amnesty International’s Director for Europe and Central Asia, said promises by the EU to respect international and European law “appear suspiciously like sugar-coating the cyanide pill that refugee protection in Europe has just been forced to swallow”. He added: “Guarantees to scrupulously respect international law are incompatible with the touted return to Turkey of all irregular migrants arriving on the Greek islands as of Sunday.”

Scepticism hangs heavy in the air about a host of legal issues, and about whether the agreement can actually work in practice. The idea at the heart of the deal – sending virtually all irregular migrants back to Turkey from the Greek islands – is the most controversial.
European leaders insist that everything will be in compliance with the law. “It excludes any kind of collective expulsions,” emphasised European Council President Donald Tusk. The UN refugee agency (UNHCR) will take part in the scheme, but it is clearly uncomfortable with what has been agreed. Turkey is “not a safe country for refugees and migrants”, Mr Dalhuisen said, adding that any deal to return migrants based on claims it was would be “flawed, illegal and immoral”. It is hoped the plan, agreed at a summit in Brussels, will deter people from taking the often dangerous sea crossing from Turkey to Greece.

As part of the arrangement, EU countries will resettle Syrian migrants already living in Turkey. EU leaders have welcomed the agreement, but German Chancellor Angela Merkel warned of legal challenges to come. Some of the initial concessions offered to Turkey have been watered down and some EU members expressed disquiet over Turkey’s human rights record. Turkish Prime Minister Ahmet Davutoglu hailed it as a “historic” day. European Council President Donald Tusk said there had been unanimous agreement between Turkey and the 28 EU members. The UN warned that Greece’s capacity to assess asylum claims needed to be strengthened for the deal. Implementation was “crucial”, the organisation said. An EU source told the BBC up to 72,000 Syrian migrants living in Turkey would be settled in the EU under the agreement. They added that the mechanism would be abandoned if the numbers returned to Turkey exceeded that figure.

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“Migration is a fact of history.”

Migration Is A Fact Of Life – Yet Our Deluded Leaders Try To Stop It (G.)

It is all for show. The EU plan to limit migrants flowing into Europe might cut numbers by a few thousand. Subsidising Turkey’s refugee camps might hold a few back. David Cameron’s “Australia” plan to seize and return migrant boats might cut a few more. News of horrors on the Macedonian border might deter some from making the desperate bid to escape present danger in hope of a safer future. But it won’t make much difference. One force greater than all the state power in the world is that of human beings fleeing for their lives. So what is the point of yet another “EU summit” on refugees? It is done to pretend to people back home that “something is being done”. It is to allay fear with an appearance of tough measures, that in turn might deter the marginal refugee, the economic migrant, the hanger-on.

But it is hard to see any meaningful change when it comes to separating Syrians and Iraqis from Afghans and Pakistanis on a Greek island, and manhandling them into a ferry back to Turkey or Libya. It is all for show. The reality is that once a refugee has established a foothold in a particular country, he or she is that country’s problem. It is both humanity and the law. We can build fences and fortresses to keep people out, but even the sophisticated regimes of western Europe can only watch as a tide of wretchedness ebbs back and forth. Sooner or later desperate people get through. Look at America’s Mexican population. Australia’s draconian policy of turning back boats and imprisoning migrants has slackened its flow, but these are not refugees, and neighbouring Indonesia is not Libya or Syria.

The current wave of newcomers to Europe’s shores is a tiny addition to the continent’s stagnant populations. That was one reason why Germany initially welcomed half a million well-qualified Syrians. As the Indian subcontinent, the Arabian Peninsula and even Africa grow and prosper, the outflow should ease. The west’s dreadful interventions in the Middle East – the prime cause of the present anarchy – must surely end. When order returns to Afghanistan, Syria and Iraq, these once-stable countries will be repopulated. But other conflicts will take their place.

While economists love to chart the impact of globalisation on trade flows, no one charts its impact on flow of people. Come what may, migration will be a theme of the 21st century. No one can underestimate the stress that inflows from Asia and Africa will place on European societies. America is still wrestling to absorb its one-time black and Hispanic migrations. But absorb we must. Migration is a fact of history. We should learn to handle it, not pretend to stop it.

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There’s always another route.

This EU-Turkey Refugee Deal Is Exactly What The People Traffickers Want (Ind.)

By any measure, the war waged by the EU against the people smugglers blamed for the refugee crisis has been an abject failure. If sabre-rattling, barbed wire, and naval flotillas and other barriers could disrupt the trade in transporting migrants, this is a war would have been won long ago. Yet the EU-Turkey deal offers more of the same. Rounding up people smuggled into Greece and trading them for refugees registered in Turkey is not just unethical, it’s also unworkable. Earlier this month, David Cameron declared that despatching the Royal Navy to the Aegean to intercept and return refugees would help “break the business model of the criminal smugglers.” That outcome is unlikely. The “business model” of people smugglers is built on an imbalance in supply and demand.

Simply stated, the number of asylum seekers and other migrants driven to Europe by fear, hope and aspiration greatly exceeds the number allowed in, creating a market for intermediation served by trafficking. If there is one pervasive theme linking the diverse stories of migrants, it is a generalised indifference to the risks associated with strengthened border defences, perilous sea journeys, and strictures from EU leaders warning them not to travel. Whatever its military prowess, the Royal Navy is powerless to suspend the laws of economics. Refugees will continue to head for Europe – and the people smugglers will be there to facilitate their transit.

The overwhelming focus on strengthening borders and maritime patrolling is ultimately self-defeating. As migration and people smuggling become more risky – and more criminalised – the profits to be made from trafficking will rise. Europol estimates that a market now generating a turnover of some $6.6bn annually could triple in size over the next few years. With the risks and rewards associated with smuggling increasing, more organised criminal groups will enter the market. The Turkish mafia, assorted jihadi groups in Libya, and networked crime networks linking Europe to the Sahel are already strengthening their grip on people smuggling routes, eroding the already porous borders between people-smuggling, drugs-trafficking, gun-running and money-laundering.

Apparently immune to evidence, Europe’s policy makers appear hell-bent on repeating the mistakes of the war on drugs. That war has created extraordinary profits for organised crime, hurt vulnerable people, and supported the rise of institutions like the great Mexican drug cartels. So how should European leaders respond to the migrant crisis? They should start by pulling out of the cattle-market in refugee trading underpinning the proposed deal with Turkey. The way to defeat people smuggling is to suck the oxygen out of the market through a large-scale global resettlement programme, safe transit and orderly processing of asylum claims.

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Sep 252015
 
 September 25, 2015  Posted by at 8:41 am Finance Tagged with: , , , , , , , , , , ,  


DPC Bromfield Street in Boston 1908

The “QE Infinity Paradox”, Or “The Emperor Is Naked, Long Live The Emperor” (ZH)
Yellen Expects Fed To Raise Interest Rates By End Of Year (Guardian)
Caterpillar, Crunched By Commodities Collapse, To Slash 10,000 Jobs (Forbes)
The Stock Markets Of The 10 Largest Global Economies Are All Crashing (Snyder)
Sweden’s Top Economist Puts China’s GDP Growth At 3% (Forbes)
China Becomes Asia’s Biggest Securitization Market (WSJ)
Japan’s Abe Airs Abenomics 2.0 Plan For $5 Trillion Economy (AP)
Refugees Keep Streaming In As Europe Seeks To Stem The Tide (Reuters)
EU Refugee Deal Barely Scratches Surface Of Crisis Still In Infancy (Guardian)
German Government Boosts Funding To States For Refugees (Reuters)
Germany Battles Past Ghosts as Merkel Urges Greater Global Role (Bloomberg)
ECB Faces Defiance on Bank Oversight as Germany Hoards Power (Bloomberg)
Volkswagen To Start Firings Over Emissions Scandal On Friday (Reuters)
VW Faces Deluge Of UK Legal Claims (Guardian)
Europe Claims It Will Embrace Real-World Emissions Testing (WSJ)
German Greens Claim Merkel Government Knew Emissions Tests Were Rigged (Ind.)
Canadian Dollar Hits 11-Year Low And Just Keeps Falling (FinPo)
Australia Pays the Price for Depending on China (Bloomberg)
Time To Dig Deep? Big Miners Face A Big Problem (Guardian)
US Energy Lending Caught in a Squeeze (WSJ)
Oil Companies in Europe Seek Creative Funding as Lenders Retreat (Bloomberg)

More and more people figure out what I wrote ten days ago: in the end it’s all about credibility, which the Fed is rapidly losing through its (non-)actions.

The “QE Infinity Paradox”, Or “The Emperor Is Naked, Long Live The Emperor” (ZH)

Perhaps the most important thing to understand about what was widely billed as the most important FOMC decision in recent history, is that by “removing the fourth wall” (to quote Deutsche Bank), the Fed effectively reinforced the reflexive relationship between its decisions, economic outcomes, and financial market conditions. In simpler terms, differentiating between cause and effect is now more difficult than ever as Fed policy affects markets which in turn affect Fed policy and so on. This sets the stage for any number of absurdly self-referential outcomes. For instance, the Fed needs to remain on hold to guard against the possibility that a soaring dollar triggers an EM meltdown that would then feed back into developed markets, forcing the FOMC to reverse itself.

But delaying liftoff sends a downbeat message about the state of the US economy which triggers the selling of domestic risk assets. Hiking would solve this as it would signal the Fed’s confidence in the outlook for the US economy, but that would be USD-positive which is bad news for EM. A similarly absurd circular dilemma presents itself if we take the view that the Fed missed its window to hike and is now creating more nervousness and uncertainty with each meeting that passes without liftoff. Here’s how former Treasury economist Bryan Carter put it to Bloomberg: “short-end rates move higher as the Fed gets closer to hiking, and that causes the dollar to strengthen, and that causes global funding stresses.

They are creating the conditions that are causing the external environment to be weak, and then they say they can’t hike because of those same conditions that they have created.” When you tie the reflexivity problem in with the fact that the excessive use of counter-cyclical policy is leading to the creation of ever larger asset bubbles by effectively short circuiting the market’s natural ability to purge speculative excess and correct the misallocation of capital, what you get is a never-ending loop whereby the consequences of unconventional monetary policy serve as the excuse for doubling and tripling down on those same policies.

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Keeping everyone hanging in suspension eventually will backfire.

Yellen Expects Fed To Raise Interest Rates By End Of Year (Guardian)

Federal Reserve chair Janet Yellen has made clear that she expects US interest rates to be raised from their current record low before the end of the year.In an extensive 40-page speech Yellen set out the case for raising rates – for the first since 2006 – as she expects inflation will gradually move up to the Fed’s target rate of 2% as the unusually low oil price rises and strong dollar weakens.“I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2% objective,” she said during a speech in Amherst, Massachusetts, on Thursday.

Her comments come just a week after Fed policymakers voted to keep interest rates at near-zero – where they have been since the 2008 financial crisis – and she warned that the US economy was not yet strong enough to withstand “recent global economic and financial developments” following a worldwide markets slump due to concerns about the health of the Chinese economy. On Thursday Yellen suggested that the current global economic weakness will not be “significant” enough to alter the Fed’s plans to raise its key short-term rate from zero by December. “Some slack remains in labor markets, and the effects of this slack and the influence of lower energy prices and past dollar appreciation have been significant factors keeping inflation below our goal,” Yellen said.

“But I expect that inflation will return to 2% over the next few years as the temporary factors weighing on inflation wane.” Yellen also warned that if rates were kept low it could lead to excessive risk taking. “Continuing to hold short-term interest rates near zero well after real activity has returned to normal and headwinds have faded could encourage excessive leverage and other forms of inappropriate risk-taking that might undermine financial stability,” she said. “The more prudent strategy is to begin tightening in a timely fashion and at a gradual pace, adjusting policy as needed in light of incoming data.”

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Look out below. America’s benchmark stock is cratering.

Caterpillar, Crunched By Commodities Collapse, To Slash 10,000 Jobs (Forbes)

That machinery and manufacturing giant Caterpillar has suffered its fair share of disappointing sales and earnings in recent years is no secret and yet an announcement it made Thursday morning still proved to be an unpleasant surprise for both its employees and its shareholders. Caterpillar said Thursday that its full-year sales and revenue for 2015 and 2016 have weakened, with 2016 revenue now projected to be 5% lower than 20152 s already-diminished levels. In an attempt to soften this blow to shareholders, the company also announced that it will undergo significant restructuring and cost savings initiatives, an effort that could see as many as 10,000 job cuts over the next three years.

Caterpillar said Thursday that it now expects 2015 revenue to come in around $48 billion, down from the prior forecast of $49 billion. For 2016, it said, sales and revenue are expected to be 5% lower than 2015 levels. The company admitted that this year’s decline in sales is its third consecutive down year for sales and revenues; if this trend continues, 2016 would mark the first time in the company s 90-year history that sales and revenues have decreased four years in a row. In an effort to compensate for these declines and save $1.5 billion annually, Caterpillar also said Thursday that it will undergo “significant restructuring and cost reduction actions” and these actions include a significant number of job cuts. Specifically, as many as 10,000 layoffs by the end of 2018.

The bulk of the cuts will come in the short-term, though: the company said it expects to permanently reduce its salaried and management workforce by 4,000 to 5,000 positions by the end of 2016, with most of those cuts occurring this year. The additional 5,000 to 6,000 cuts could occur as Caterpillar gradually closes and consolidates certain manufacturing facilities over the next three years. “We are facing a convergence of challenging marketplace conditions in key regions and industry sectors. namely in mining and energy”, Doug Oberhelman, Caterpillar chairman and CEO, said in a statement. “While we’ve already made substantial adjustments as these market conditions have emerged, we are taking even more decisive actions now. We don’t make these decisions lightly, but I’m confident these additional steps will better position Caterpillar to deliver solid results when demand improves.”

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That’s a lot of dough going Poof!

The Stock Markets Of The 10 Largest Global Economies Are All Crashing (Snyder)

You would think that the simultaneous crashing of all of the largest stock markets around the world would be very big news. But so far the mainstream media in the United States is treating it like it isn’t really a big deal. Over the last sixty days, we have witnessed the most significant global stock market decline since the fall of 2008, and yet most people still seem to think that this is just a temporary “bump in the road” and that the bull market will soon resume. Hopefully they are right. When the Dow Jones Industrial Average plummeted 777 points on September 29th, 2008 everyone freaked out and rightly so. But a stock market crash doesn’t have to be limited to a single day.

Since the peak of the market earlier this year, the Dow is down almost three times as much as that 777 point crash back in 2008. Over the last sixty days, we have seen the 8th largest single day stock market crash in U.S. history on a point basis and the 10th largest single day stock market crash in U.S. history on a point basis. You would think that this would be enough to wake people up, but most Americans still don’t seem very alarmed. And of course what has happened to U.S. stocks so far is quite mild compared to what has been going on in the rest of the world. Right now, stock market wealth is being wiped out all over the planet, and none of the largest global economies have been exempt from this. The following is a summary of what we have seen in recent days…

#1 The United States – The Dow Jones Industrial Average is down more than 2000 points since the peak of the market.
#2 China – The Shanghai Composite Index has plummeted nearly 40% since hitting a peak earlier this year.
#3 Japan – The Nikkei has experienced extremely violent moves recently, and it is now down more than 3000 points from the 2015 peak.
#4 Germany – Almost one-fourth of the value of German stocks has already been wiped out, and this crash threatens to get much worse.
#5 The United Kingdom – British stocks are down about 16% from the peak of the market, and the UK economy is definitely on shaky ground.
#6 France – French stocks have declined nearly 18%.
#7 Brazil – Brazil is the epicenter of the South American financial crisis of 2015.
#8 Italy – Watch Italy. Italian stocks are already down 15%, and look for the Italian economy to make very big headlines in the months ahead.
#9 India – Stocks in India have now dropped close to 4000 points, a nd analysts are deeply concerned as global trade continues to contract.
#10 Russia – Even though the price of oil has crashed, Russia is actually doing better than almost everyone else on this list.

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“If you really want to know what is going on in China’s markets, there is no better research method than walking down the street ..”

Sweden’s Top Economist Puts China’s GDP Growth At 3% (Forbes)

China’s economy is officially growing at 7%, but few economists actually believe that number to be accurate. Mauro Gozzo, chief economist at Business Sweden – an organization jointly owned by the government and the business community – estimates that the real growth of China’s gross domestic product is just 3%.“China is wrestling with serious economic difficulties and our estimates place the actual growth at a much lower rate than the official data,” he said in a new report. “We have often pointed out that the official statistics should be taken with a grain of salt.”According to Gozzo, the slowdown is the result of failed economic policies, which has brought to light the impossibility of combining a market economy with central planning.

For example, the country has seen the real appreciation of the currency during the last two years, which is part of the government’s rebalancing of the economy from exports and investments to private consumption. But it has also weakened the industry.“The rebalancing may have been necessary,” he said. “But dealing with the imbalances between the various sectors of the economy has become a big headache for the Chinese administration.”He added that the devaluation of the yuan in August was not sufficient, and should rather be seen as a signal that China is no longer intent on following the upward movement of the dollar.At the same time, consumption is being held back by factors like a housing bubble, the system of resident permits, and the absence of social support systems.

Although the plunge in the stock market, which has more than wiped out all of the gains of this year, has had limited repercussions on many households, the negative effects on the financial system are hardly negligible, he said. Gozzo also said that China’s official growth of industrial production of around 6% is “strongly exaggerated.” A number of other indicators, like the consumption of electricity, domestic cargo volumes and manufacturing activity, indicate much lower production.“The industry is wrestling with difficulties, but services are doing better and one good reason why the economy as a whole is still growing.”“It is now clear that China is struggling with a number of economic deficiencies and we believe that the actual growth rate is more likely 3%, not 7%,” Gozzo concluded.

Also Oxford Economics, which has used a model based on alternative indicators, estimating the actual growth this year to around 3-4%. New York-based Evercore ISI, which is using its own GDP equivalent index, goes even further and puts the annual growth at -1.1%, or rather a contraction. The high level of uncertainty actually makes many economists say it’s more or less pointless to look at China’s economy data. Matthew Crabbe, author of the book “Myth-busting China’s number”, points out that the country has a century-long history of secrecy and number-fudging and that the top-line GDP figure is “increasingly meaningless” for China. “If you really want to know what is going on in China’s markets, there is no better research method than walking down the street and watching what really goes on”, he said.

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Rocking the Ponzi.

China Becomes Asia’s Biggest Securitization Market (WSJ)

China’s fledging securitization market is soaring, as Beijing looks for new ways to ease lending to firms amid the country’s slowest period of economic growth in more than two decades. In the past few months, Chinese officials have laid out new rules to expand and quicken the process for car makers and other lenders to issue debt by bundling together pools of underlying loans. Issuance of asset-backed securities in the world’s second largest economy rose by a quarter in the first eight months of 2015—to $26.3 billion from $20.8 billion in the same period last year, according to data publisher Dealogic. Though the Chinese securitization market took flight just last year, it has already become Asia’s biggest, outpacing other, more developed markets like South Korea and Japan.

Asset securitization helps free up capital from banks or financing firms to support smaller businesses and projects that typically have less credit available to them. Leading the drive are state-owned and medium-size lenders seeking to unload loans from their books by packaging them into products known as collateralized loan obligations. Such firms account for the bulk of the market—CLO issuance totaled $20.9 billion between January and August, a third more than $15.9 billion over the same period last year. While securities backed by auto loans comprise a smaller piece of the market, issuances from the financing units of car makers including Ford and Volkswagen have increased fivefold to $4 billion from January through August, compared with $1.8 billion over the same period last year.

The State Council, China’s cabinet—which sets the country’s total issuance of asset-backed securities—said in May it would allow companies to issue up to 500 billion yuan ($80 billion) of such securities. That compares with $49 billion in all of 2014. The central bank and the banking regulator also will speed up the process by allowing select borrowers to issue securities after registering with regulators. Previously, each issuance had to be approved on a deal-by-deal basis.

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Lost it. A three-year gross failure leads to: “Tomorrow will definitely be better than today!”

Japan’s Abe Airs Abenomics 2.0 Plan For $5 Trillion Economy (AP)

Japan’s prime minister Shinzo Abe, fresh from a bruising battle over unpopular military legislation, announced Thursday an updated plan for reviving the world’s third-largest economy, setting a GDP target of 600 trillion yen ($5 trillion). Abe took office in late 2012 promising to end deflation and rev up growth through strong public spending, lavish monetary easing and sweeping reforms to help make the economy more productive and competitive. So far, those “three arrows” of his “Abenomics” plan have fallen short of their targets though share prices and corporate profits have soared. “Tomorrow will definitely be better than today!” Abe declared in a news conference on national television.

“From today Abenomics is entering a new stage. Japan will become a society in which all can participate actively.” Abe recently was re-elected unopposed as head of the ruling Liberal Democratic Party. He has promised to refocus on the economy after enacting security legislation enabling Japan’s military to participate in combat even when the country is not under direct attack. Thousands of Japanese gathered for noisy street protests last weekend over the “collective self-defense” law, and Abe’s popularity ratings took a hit. “He has to deliver the message that he is so committed to achieving the economic agenda, that is, to make people’s lives better,” said analyst Masamichi Adachi of JPMorgan in Tokyo.

Abe said he was determined to ensure that 50 years from now the Japanese population, which is 126 million and falling, has stabilized at 100 million. He said his new “three arrows” would be a strong economy, support for child rearing and improved social security, to lighten the burden of child and elder care for struggling families. But with Japan also committed to reducing its massive public debt, it is unclear how he intends to achieve those goals. “There’s nothing wrong with him saying he wants to achieve a better life for everybody. But how to achieve it is a different matter,” Adachi said.

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Europe is setting itself up for something truly epic.

Refugees Keep Streaming In As Europe Seeks To Stem The Tide (Reuters)

A tide of refugees from the Middle East and Asia showed no sign of abating on Thursday, after European Union leaders began the task of trying to prevent tens of thousands of people fleeing war or poverty from streaming unchecked through the continent. After weeks of recrimination and buck-passing, a summit on Wednesday produced a glimmer of political unity on measures to help the refugees closer to home, or at least register their asylum requests as soon as they enter the EU. However, all attempts in recent weeks to stem the flow have only prompted more desperate people to make a dash for Europe before the doors are shut or winter makes the trip too perilous.

On Thursday, about 1,200 crossed from Turkey to the Greek island of Lesvos on 24 boats in under an hour, following the 2,500 who had made the dangerous crossing the previous day. Weeks ago, most would have found the quickest route into the EU and their preferred destination of Germany was from Serbia into Hungary. But since Hungary took unilateral action by sealing its border with razor-wire, an overwhelmed Serbia has passed the problem to the EU’s newest member, Croatia, which says it also cannot keep pace with the influx. Demanding that Serbia send at least some of the refugees and migrants to Hungary or Romania, Croatia barred all Serbian-registered vehicles from entering. Serbia compared those restrictions to racial laws enforced by a Nazi puppet state in Croatia in WWII.

It blocked Croatian goods and cargo vehicles in the escalating dispute, which has dragged relations between the former Yugoslav republics to their lowest ebb since the overthrow of Serbian strongman Slobodan Milosevic in 2000. Money for middle east. In an attempt to forestall such rows, EU leaders on Wednesday night pledged at least €1 billion for Syrian refugees in the Middle East and closer cooperation to stem the flow of people. The summit also decided that EU-staffed “hotspots” would be set up in Greece and Italy by November to register and fingerprint new arrivals and start the process of relocating Syrians and others likely to win refugee status to other EU states, while deporting those classed as economic migrants.

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All cowards lack vision.

EU Refugee Deal Barely Scratches Surface Of Crisis Still In Infancy (Guardian)

Following a bruising fight this week to agree a new quotas regime sharing 120,000 refugees across Europe, EU policymakers say that by Christmas member states will be embroiled in much bigger battles over how to distribute up to a million newcomers. The signals emerging from two days of summitry in Brussels on Tuesday and Wednesday and days of non-stop negotiations behind the scenes suggest that the EU’s biggest refugee crisis is but in its infancy, and that Europe’s agony has barely begun. The meetings of leaders and interior ministers produced breakthrough decisions in EU policy terms, but at the same time they hardly scratched the surface of an emergency whose scale is predicted to balloon by the end of the year.

A Brussels summit that ended early on Thursday began to heal the divisions and cool the tempers that have flared for months over what to do about immigration, fragmenting the union between east and west, north and south, big and small. The leaders did not decide very much but managed to communicate more civilly with one another, unlike in June when they engaged in an unseemly bout of recrimination until 3.30am. The breakthrough came on Tuesday when EU interior ministers employed the blunt instrument of a majority vote to impose refugee quotas against the will of four central European countries and despite the strong reservations of many others and widespread doubts over whether compulsory sharing will work. “We don’t believe it will ever be implemented,” said a senior diplomat in Brussels.

It was a damaging and divisive exercise in which Berlin, Brussels, and Paris prevailed. The European commission, the initiator of the quotas idea, thinks it has set a precedent for future action. But the experience was traumatic for some and the question is will it ever be repeated, especially when the numbers are likely to be much higher the next time. Donald Tusk, the conservative Polish politician and European Council president who chaired the summit, did not convene the emergency session until he had visited the camps holding four million Syrians in Jordan, Lebanon, and Turkey. He seems to have been shocked by what he found. Following the summit he said the “tide” of refugees coming to Europe would get much bigger. He seems certain that almost all of those in the camps are determined to head for the EU and that the refugees have convinced themselves they are welcome.

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Here’s wondering what to think of the entire EU throwing €1 billion at the issue this week, but Germany spending much more than that at home.

German Government Boosts Funding To States For Refugees (Reuters)

The German government agreed on Thursday to give its 16 regional states around €4 billion next year to help them cope with a record influx of refugees that is straining their budgets and resources. Chancellor Angela Merkel made the announcement after meeting state premiers to discuss ways of helping the states, which are struggling to look after 800,000 asylum seekers expected this year alone. Merkel said the government would pay the states €670 each month for every asylum seeker they took in. Sources from her SPD coalition partner indicated that the package could be worth around €4 billion once extra payments for providing social housing and looking after unaccompanied young refugees were taken into account.

The government had previously pledged to offer the states €3 billion for next year to help cover the additional costs of housing and caring for the refugees and asylum seekers. German public opinion has been divided on the rising numbers of new arrivals, with some warmly welcoming people fleeing conflict in the Middle East and Africa but others concerned about how easily they can be integrated. Merkel told the German parliament earlier on Thursday that the European Union needed the support of the United States, Russia and countries in the Middle East to help tackle the underlying causes of the refugee crisis. Merkel has been criticized by some eastern EU neighbors for what they see as actions that have fueled the influx of people trying to reach Germany.

As well as feeding and housing the newcomers, Germany is also weighing their impact on Europe’s largest economy. Finance Minister Wolfgang Schaeuble said he still aimed to maintain a balanced budget next year. Some lawmakers have questioned whether that will be possible given the rising costs associated with the migrant crisis.

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How much worse could timing get? Has Merkel shifted to “attack is the best defense”?

Germany Battles Past Ghosts as Merkel Urges Greater Global Role (Bloomberg)

Europe’s dominant country is stepping out from its own shadow. Seventy years after Germany’s defeat at the end of World War II, Chancellor Angela Merkel’s government is signaling a willingness to assume a bigger role in tackling the world’s crises without fear of offending allies like the U.S. Spurred into more international action by the refugee crisis, Merkel on Wednesday prodded Europe to adopt a “more active foreign policy” with greater efforts to end the civil war in Syria, the source of millions fleeing to safety. As well as enlisting the help of Russia, Turkey and Iran, Merkel said that will mean dialogue with Bashar al-Assad, making her the first major western leader to urge talks with the Syrian president.

Germany’s position as Europe’s biggest economy allowed Merkel and her finance minister, Wolfgang Schaeuble, to assume a leading role during the euro-area debt crisis centered on Greece, but the change in focus to beyond Europe’s borders is very much political. After decades of relying on industrial prowess – now under international scrutiny as a result of the Volkswagen scandal – globalization and the necessity to keep Europe relevant are opening up options for Merkel to make Germany a less reluctant hegemon. Syria has spurred “a rethink in German foreign policy,” Magdalena Kirchner at the German Council on Foreign Relations in Berlin, said. “As the refugee crisis developed, the view took hold that this conflict can no longer be fenced off or ignored. With her stance on the crisis, Merkel may be prodding other European leaders toward a bigger international engagement.”

Merkel will address the United Nations General Assembly in New York on Friday as she and key members of her cabinet begin to leverage Germany’s economic might and turn it into a force for global policy-making. Having been at the forefront of Ukraine peace talks, Merkel can also point to Germany’s part in forging a nuclear deal with Iran and efforts to spur the U.S. and others into action against climate change. “There is a rising awareness in the political class and even to some extent in the public that Germany has to assume more responsibility, especially in and around Europe,” said Kai-Olaf Lang, a senior fellow at the German Institute for International and Security Affairs in Berlin.

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How to put the Union in danger. Greece should adopt similar measures.

ECB Faces Defiance on Bank Oversight as Germany Hoards Power (Bloomberg)

vThe ECB faces increasing defiance from euro-area governments reluctant to cede control over their lenders, highlighted by a German bill that chips away at the ECB’s supervisory powers.vThe Bundestag, the lower house of parliament, votes Thursday on an amendment to Germany’s banking act that would allow the Finance Ministry in Berlin to issue rules on banks’ recovery plans, risk management and internal decisions under a bill implementing European Union rules for winding down failing banks.vThe Frankfurt-based ECB, which assumed supervisory powers over euro-area banks last November, is considering complaining at the European Commission, asking the EU’s executive arm to take Germany to court over the legislation.

“It will take a long time for euro-area member states to reach full acceptance that banking-sector policy is no longer in their hands,” said Nicolas Veron, a senior fellow at the Brussels-based Bruegel think tank. “National regulations, as in this German case, are essentially rearguard actions. But this kind of skirmish diverts” the ECB’s “attention from its important tasks of ensuring European banks are safe and sound.” Two weeks ago, German Finance Minister Wolfgang Schaeuble chided other countries in the bloc for putting the “cart before the horse” by pushing for a European deposit-guarantee system before they had fully implemented measures already on the books. At the same time, less than a year into the new era of centralized bank supervision in the euro area, Schaeuble’s ministry is chipping away at the authority of the ECB.

The central bank is trying to unify an array of national banking systems with strong historical roots, such as the savings and mutual banks in Germany and Austria. And Germany’s not alone in pushing back against the ECB. Fabio Panetta, Italy’s member of the ECB’s Supervisory Board, has warned that the central bank risks criticism for “unwarranted” and “arbitrary” decisions over higher capital requirements for euro-area lenders that could harm the fragile economy. One point of contention is “early intervention” rules enshrined in the EU’s Bank Recovery and Resolution Directive. The law gives supervisors the power to order capital increases, call shareholder meetings or oust managers in certain cases Yet triggers for early intervention vary widely in national laws implementing BRRD. The German rules are cast so narrowly that it’s practically impossible to use them unless a bank is already on the brink of collapse, negating the purpose of the law.

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Better do it well. Fire the right people, not scapegoats.

Volkswagen To Start Firings Over Emissions Scandal On Friday (Reuters)

Volkswagen will start firing people responsible for rigging U.S. emissions tests and shake up management on Friday, two sources familiar with the plans said, as the German carmaker tries to get to grips with the biggest scandal in its 78-year history. The supervisory board of Europe’s biggest automaker is meeting on Friday to decide a successor to chief executive Martin Winterkorn, who resigned on Wednesday. The sources said it would give initial findings from an internal investigation into who was responsible for programming some diesel cars to detect when they were being tested and alter the running of the engines to conceal their true emissions. Top managers could also be replaced, even if they did not know about the deception, with U.S. chief Michael Horn and group sales chief Christian Klingler seen as potentially vulnerable.

Volkswagen shares have plunged around 20% since U.S. regulators said on Friday the company could face up to $18 billion in penalties for falsifying emissions tests. The company said on Tuesday 11 million of its cars globally were fitted with engines that had shown a “noticeable deviation” in emission levels between testing and road use. Regulators in Europe and Asia have said they will also investigate, while Volkswagen faces criminal inquiries and lawsuits from cheated customers. When he resigned, Winterkorn denied he knew of any wrongdoing but said the company needed a fresh start. “There will be further personnel consequences in the next days and we are calling for those consequences,” Volkswagen board member Olaf Lies told the Bavarian broadcasting network, without elaborating.

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This will go global.

VW Faces Deluge Of UK Legal Claims (Guardian)

Volkswagen could face a barrage of legal claims from British car owners over the emissions tests scandal, according to top law firms. Lawyers say they have been indundated with enquiries from VW drivers whose cars may have been far more polluting than claimed, after the German carmaker admitted installing defeat devices to cheat tests. The CEO of Volkswagen, Martin Winterkorn, quit on Wednesday, with the group facing criminal investigation in the US and other countries, plus potential legal claims worldwide, with 11m vehicles directly affected. Leigh Day, a London law firm specialising in personal injury and product liability claims, says it has been “inundated” by inquiries; the number of potential claimants they were talking to would number “in the thousands – it’s constant enquirers at the moment.”

Another law firm, Slater & Gordon, said it was fielding calls from concerned drivers. The firm’s head of group litigation, Jacqueline Young, said both owners and car dealerships would have viable legal claims for breach of contract, with the value of vehicles falsely boosted by VW’s misrepresentations. Shareholders might also have a case, Young said, after the 30% fall in its share price since the scandal erupted. Young said a huge class-action lawsuit was possible: “If the Volkswagen scandal applies to cars in the UK then this has the potential to be one of the largest group action lawsuits this country has seen.” The German transport minister, Alexander Dobrindt, has now confirmed that Volkswagen vehicles containing software to fix emissions standards were also sold across Europe.

VW has put aside an initial €6.5bn to deal with the costs of the crisis, although that sum could be dwarfed by fines from US regulators. The carmaker has enlisted Kirkland & Ellis – the US law firm employed by BP in the Deepwater Horizon oil disaster – to deal with its mounting legal claims. Concerns over true pollution levels have also spread to fuel consumption, with consumer group Which? having long reported discrepancies between official miles per gallon test figures and their own results, with the VW Golf the second-worst offender in their research. Richard Lloyd, the Which? executive director, said: “Our research has consistently showed that the official test used by carmakers is seriously in need of updating as it contains a number of loopholes that lead to unrealistic performance claims.”

Pressure has grown on the UK government to follow up its call for a European commission inquiry, after it was revealed that the Department for Transport had been lobbying in private for less rigorous tests. Environmental law organisation ClientEarth has written to the DfT demanding it take action to establish whether VW’s use of defeat devices was part of wider industry practice, and to release all information held on the real-world emissions performance of cars licensed for sale on UK roads.

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The stats in the graph are devastating. Does anyone believe Germany or France will volunteer to break their car industries?

Europe Claims It Will Embrace Real-World Emissions Testing (WSJ)

For years, EU researchers have warned that diesel cars emit more nitrogen oxides, or NOx, than the regulations allow. A 2011 report said road tests of 12 diesel vehicles showed NOx levels exceeded European limits by as much as a factor of 14. A 2013 follow-up report by the same researchers said many modern cars used “defeat devices,” sensors or software that detects the start of an emissions test in a laboratory. The report suggested testing cars on the road, rather than in laboratories, was the best way of thwarting the use of such deviceswhich falsify results. Politicians are now calling for a review of testing protocols, while car makers attempt to calm the public by claiming their cars are as clean as advertised.

The EC, the EU’s executive arm, on Thursday asked governments to examine how many cars now on the road have software or sensors that can mask true emissions. “It is fundamental that the French authorities can guarantee…that the vehicles on the road in France respect the rules,” said Ségolène Royal, the French environment minister, Thursday after meeting with auto executives. French officials said they would form an independent commission to test around 100 cars and deliver results in a matter of weeks. The U.K. also said it would conduct random emissions tests on cars. The regulators will compare emissions from tests done in laboratories with those done in real-world situations, using relatively new portable testing equipment.

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Potentially explosive: “..it asked the German Transport Ministry in July about the devices used to deceive regulators and received a written response as follows, the FT reports: “The federal government is aware of [defeat devices], which have the goal of [test] cycle detection.“

German Greens Claim Merkel Government Knew Emissions Tests Were Rigged (Ind.)

The German Green party has claimed that the German Government, led by Chancellor Angela Merkel, knew about the software car manufacturers used to rig emissions tests in the US. The Green party has said it asked the German Transport Ministry in July about the devices used to deceive regulators and received a written response as follows, the FT reports: “The federal government is aware of [defeat devices], which have the goal of [test] cycle detection.” The Transport Ministry denied knowing that the software was being used in new vehicles, however. The timing of the questions has raised concerns over whether the German government knew about the activities at Volkswagen stretching back to 2009.

“The federal government admitted in July, to an inquiry from the Greens, that the [emissions] measurement practice had shortcomings. Nothing happened,” said Oliver Krischer, a German Green party lawmaker. Alexander Dobrindt, the German transport minister, has denied the government knew about emissions rigging. “I have made it very clear … that the allegations of the Greens party are false and inappropriate. We are trying to clear up this case. Volkswagen has to win back confidence,” he said. Governments and manufacturers are both aware that diesel vehicles emit up to five times the amount of poisonous nitrogen dioxide that they are limited to under law, but this is the first time a manufacturer has admitted to deceiving the authorities.

Note: in the graph, every other brand does worse than VW.

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Commodity economies.

Canadian Dollar Hits 11-Year Low And Just Keeps Falling (FinPo)

The Canadian dollar touched its weakest level in more than 11 years against the greenback on Wednesday and kept falling today, following July domestic retail sales figures that fell short of expectations and another plunge in volatile oil prices. New car and clothing sales helped push Canadian retail sales higher for the third month in a row in July, up 0.5% and in line with economists polled by Reuters, but sales were flat and below expectations when automotive figures were excluded. Volumes were also weaker than the headline, while figures from the previous month were revised lower.

“People had been thinking that we’d get a decent contribution to the next quarter’s GDP growth and show some positive data,” said Don Mikolich at CIBC World Markets, adding that the soft data also underscored the interest rate differential between Canada and the United States. “In a quiet week of data, that one sticks out as having a bit of a negative sentiment around the economy here. (Oil’s) the other big driver.” The loonie has plunged some 25% since last summer, along side the price of crude, a key Canadian export, but had been mostly rangebound over the last month after hitting a previous 11-year low at 75.18 U.S. cents. The price of crude, a key Canadian export, reversed course during the session to give up an earlier rally after large gasoline builds raised concerns about high autumn fuel supplies.

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More of the same.

Australia Pays the Price for Depending on China (Bloomberg)

Throughout Australia’s industrial heartland, factories are closing. About an eight-minute car ride from the center of Melbourne, a General Motors plant that in 1948 produced the first automobile wholly made in the country is scheduled to shut for good in 2017, victim of a rising Australian dollar that caused labor costs to nearly double from 2001 to 2011. Toyota and Ford factories are set to close within two years, leaving Australia without any domestic auto production. Down the road from the GM plant is a facility operated by Boeing. In 2010 it sold the plant’s equipment for making metal aircraft parts to Mahindra & Mahindra, an Indian company that’s shipping the machinery to Bengaluru. Last year, Alcoa closed a nearby aluminum smelter.

Until recently the sad decline of heavy industry had little impact on the country’s highflying economy. Australia’s factories were closing, but its mines were booming. Chinese demand for Australian iron ore and other resources kept the economy humming. The country hadn’t suffered through a recession since the early 1990s. The boom is over as the Chinese economy slows, and the woes of the manufacturing sector are complicating the job of new Prime Minister Malcolm Turnbull. Lawmakers from the right-of-center Liberal Party on Sept. 14 chose the former Goldman Sachs banker to be their new leader, ousting Prime Minister Tony Abbott amid concerns that Australia’s long run of economic growth was in danger. Gross domestic product in the second quarter expanded just 0.2% over the first quarter, worse than the 0.4% expected by economists.

The unemployment rate is at 6.2%, holding near a 13-year high. Turnbull, who was communications minister under Abbott, is promising action. “My government has a major focus on tax reform,” he told reporters on Sept. 20. That will mean less reliance on income taxes and more on consumer levies. An early investor in technology startups before entering politics, Turnbull in March co-authored an article in the Australian newspaper with Vivek Kundra, executive vice president of Salesforce.com and former chief information officer for President Obama. The pair lauded companies like Uber and Airbnb. “The most successful businesses in the 21st century will be those that embrace digital disruption as an opportunity, and not something to guard against,” they wrote.

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Behold: deflation at work.

Time To Dig Deep? Big Miners Face A Big Problem (Guardian)

How severe is the crisis in the world of over-borrowed big miners? Here’s an illustration. Anglo-American, a company founded in 1917, employing 148,000 people around the world and generating sales last year of almost £20bn, now has a stock market value of £8.7bn. By contrast, Next, the clothing chain with a £4bn turnover, is worth £11bn. Even Whitbread, pumping out Costa Coffees rather than digging for diamonds, coal and iron ore, is within a whisker of Anglo’s market value. Or try this one. Glencore, Ivan Glasenberg’s trading-cum-mining house, has seen its share price fall 20% since it raised £1.6bn last week to make its balance sheet “bullet proof”. Thursday’s closing price was 98.6p, versus a flotation price of 530p in 2011. Glencore is now worth just £14bn, even after consuming Xstrata in 2013 in a merger worth £55bn at the time.

Beleaguered mining executives speak despairingly of the deterioration in “market sentiment”, especially in the past fortnight. By that, they mean investors are terrified by every piece of weak economic data that emerges from China – the latest was a slowdown in manufacturing for the seventh consecutive month. The US Federal Reserve also spooked everybody by failing to raise interest rates last week; by fretting about “global economic and financial developments,” the Fed, in effect, invited others to do the same. If you are even slightly optimistic on China, you can find a parade of analysts arguing that mining shares are now cheap. The trouble is, many of the same voices were singing the same tune when Glencore and Anglo were at twice their current share prices earlier this year.

Predicting commodity prices – and thus miners’ cash-flows – is a mug’s game when nobody can really know the true state of affairs in China, the biggest customer. The only rough certainty is that most industrial commodities are over-supplied. But judging whether demand for copper, say, comes into balance in 2017, 2018 or 2019 is pure guesswork.

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Must. Restructure.

US Energy Lending Caught in a Squeeze (WSJ)

Banks are clashing with regulators over loan reviews that could crimp the flow of new credit to the oil patch. The dispute is focused on the relatively narrow issue of loans secured by oil and gas companies’ reserves, but it highlights the much broader point of how postcrisis regulation of the financial industry is affecting sectors far from Wall Street. On one side are the bankers who have been grappling with the plunge in oil prices and the need to shore up billions of dollars in credit extended to the energy industry. On the other are regulators eager to prevent another financial crisis while not knowing what it might be. Caught in the middle are the small- and medium-size exploration and production companies that rely on credit lines that use their energy reserves as collateral.

Banks are now beginning their fall reviews of the quality of that collateral and worry regulators could ding them for making loans the banks think are prudent. “We’re concerned about it,” said Matt McCaroll, CEO of Fieldwood Energy. “These are challenging times for our business…and to have additional pressure on the relationship between borrower and lender is going to be very problematic.” The oil and gas exploration company has about $1.75 billion of reserve-based loans with 23 banks. Mr. McCaroll said he has voiced his concerns with congressmen.

The issue came to a head this month when a dozen regulators from the Office of the Comptroller of the Currency, Federal Reserve and Federal Deposit Insurance Corp. flew to Houston to meet with about 40 energy bankers from J.P. Morgan, Wells Fargo, Bank of America, Citigroup and Royal Bank of Canada. In the spring and fall, regulators conduct a review of large corporate loans shared by multiple banks. Several industry officials said the meeting, held at Wells Fargo’s offices in downtown Houston, was the first of its kind. The bankers and regulators sat around tables in a large room with a screen displaying the OCC’s agenda that largely focused on examining and rating the loans.

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Desperation: “Dolphin approached hedge funds and private-equity investors last month for a $50 million loan that would return about 15% annually..”

Oil Companies in Europe Seek Creative Funding as Lenders Retreat (Bloomberg)

Oil services companies in Europe are finding alternative ways to raise cash and repay debt after falling crude prices made it difficult for them to get funding from traditional sources. Dolphin Group AS has sought to persuade private-equity and hedge funds to finance projects exploring and mapping seabeds in return for interest tied to sales, according to people familiar with the matter. At least two Norwegian drillers are planning to sell and lease back ships to raise cash and fund operations as they struggle to access loan and bond markets, said the people, who asked not to be identified because the matters are private. Energy companies are being shut out of bond markets and lenders are reducing credit lines after prices dropped about 60% from last year’s peak.

Services companies in Europe are starting to run out of cash as producers from Shell to Petrobras cut their own investments and delay projects. “Bond markets are closed for these companies, especially small ones, and banks may not be lending to them at this stage,” said Nigel Thomas, partner at law firm Watson Farley & Williams in London. “Services companies need to buy time to survive during the downturn and alternative investors are able to give them that, albeit at a very expensive cost.” Bonds issued by oil-services businesses globally dropped to $6.7 billion this year, on pace for the least in a decade, according to data compiled by Bloomberg. French oilfield surveyor CGG said it had to cancel a loan in July because banks had offered unfavorable terms.

Energy-services companies are searching for new investors and funding strategies as even lenders of last resort pull back. Hedge funds and private-equity firms that previously sought to lend at high rates are becoming reluctant to step in after getting stuck with losing positions. Dolphin approached hedge funds and private-equity investors last month for a $50 million loan that would return about 15% annually, people familiar with the matter said. The Bergen-based company is working with a potential lender for a deal that will pay interest linked to data sales, Chief Executive Officer Atle Jacobsen said this month. “We have never seen this type of funding in the industry before,” said Hakon Johansen at Fondsfinans in Oslo. “The market remains very weak, but Dolphin’s management wants to expand operations, hoping that someone in the end will buy their data.”

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