Jun 282016
 
 June 28, 2016  Posted by at 9:20 am Finance Tagged with: , , , , , , , ,  


Walker Evans Saint Charles Street. Liberty Theatre, New Orleans 1935

Stocks Halt Brexit Selloff as Pound Rebounds With Commodities (BBG)
Asian Stocks Erase Losses as Japan Shares Gain on Stimulus Bets (BBG)
Jim Rogers On Brexit: Worse Than Any Bear Market You’ve Seen In Your Life (Y!)
Greenspan Warns A Crisis Is Imminent, Urges A Return To The Gold Standard (ZH)
European Banks Crash To Worst 2-Day Loss Ever As Default Risk Soars (ZH)
Brexit Is the Sum of China’s Fears (Balding)
Brexit To ‘Drive Tectonic Plate Shifts In European Bank Investing’ (R.)
Italy Eyes €40 Billion Bank Rescue As First Brexit Domino Falls (AEP)
Preparing For Brexit, Britain May See New PM By Early September (R.)
S&P Strips UK of Last Top-Notch Credit Rating After Brexit (R.)
UK Credit Default Swap Rates Spike After Wave Of Rating Downgrades (CNBC)
The Reaction to Brexit Is the Reason Brexit Happened (Matt Taibbi)
Some Bad And Some Worse News For Stock Buybacks (ZH)

And all of your problems are solved. It was only a dream….

Stocks Halt Brexit Selloff as Pound Rebounds With Commodities (BBG)

The pound, European stocks and commodities were all headed for their first gains since Britain’s shock vote to leave the European Union, while Asian shares erased losses amid signs policy makers are taking steps to limit any economic fallout. Sterling and the Stoxx Europe 600 Index both rebounded after tumbling 11% in the last two trading sessions. A gauge of the greenback’s strength snapped its steepest rally since 2011. The Bloomberg Commodity Index climbed from a three-week low as oil rose to about $47 a barrel and industrial metals rose. Sovereign bond yields plumbed new lows in Australia, Japan and South Korea as futures indicated that the next move in U.S. interest rates is now likely to be a cut.

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What? “Japan’s Prime Minister Shinzo Abe said he wants his finance minister and the central bank governor to watch markets more closely.” You mean they didn’t?

Asian Stocks Erase Losses as Japan Shares Gain on Stimulus Bets (BBG)

Asian stocks erased losses and most Tokyo shares rose amid speculation policy makers will move to shore up financial markets after Britain’s vote to leave the European Union. The MSCI Asia Pacific Index was little changed as of 4 p.m. in Tokyo after being down as much as 1.2% earlier. Most Japanese shares rose after a drop in the Nikkei 225 Stock Average below 15,000 spurred buying. South Korea’s Kospi index rose 0.5%, reversing a decline of 1%. Investors are watching closely for signs that central banks and governments will help to ease the post-Brexit market turmoil.

Japan’s Prime Minister Shinzo Abe said he wants his finance minister and the central bank governor to watch markets more closely. Toshihiro Nikai, chairman of the ruling party’s general council, proposed a 20 trillion yen ($196 billion) package to Abe, the Nikkei newspaper reported. South Korea said it’s planning a fiscal stimulus package of more than 20 trillion won ($17 billion). “We are probably going to have looser policy settings than before the vote,” said Tim Schroeders at Melbourne-based Pengana Capital. “You’d have to suspect that the bias is to the downside for global growth and as a result that stimulus remains in light of increased uncertainty.”

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“The bear case is the pound disappears…” “The EU as we know it will not exist,” he said. “The euro as we know it will not exist…”

Jim Rogers On Brexit: Worse Than Any Bear Market You’ve Seen In Your Life (Y!)

The UK’s decision to leave the European Union will lead to an economic crisis more severe than what the world faced in 2008, according to legendary investor Jim Rogers, chairman of Rogers Holdings. “This is going to be worse than any bear market you’ve seen in your lifetime,” he said. “2008 was bad because of debt. The debt all over the world is much, much higher now. Stocks in the US, for instance, have been going sideways for 18 months to 24 months. That’s called a distribution by many people. When you have distribution for a year and a half, it usually leads to bad things.” Rogers – who cofounded the Quantum Fund with George Soros in the 1970s – believes the “leave” movement’s victory last week may threaten the British union.

While any negotiated deal may help assuage the market’s Brexit fears, Rogers foresees a “bad case scenario” where Scotland and Northern Ireland leave the UK and London’s clout diminishes significantly as financial institutions move towards continental Europe. “The UK already has huge international debts and it has balance of trade problems and budget problems,” he said. “The bear case is the pound disappears. England becomes Spain or Poland or Italy or something.” While he doesn’t see an immediate collapse of England’s economy, Rogers anticipates a long-term decline in the country’s prospects.

“The deterioration will continue and make stocks go down a lot,” he warned. Brexit’s win will also embolden other countries to leave the EU and separatist movements to break up a few states, Rogers predicted. That could make the world to look significantly different in just a half a decade. “The EU as we know it will not exist,” he said. “The euro as we know it will not exist.

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But no mea culpa. he wants to die a revered oracle.

Greenspan Warns A Crisis Is Imminent, Urges A Return To The Gold Standard (ZH)

On Friday afternoon, after the shocking Brexit referendum, while being interviewed by CNBC Alan Greenspan stunned his hosts when he said that things are about as bad as he has ever seen. “This is the worst period, I recall since I’ve been in public service. There’s nothing like it, including the crisis — remember October 19th, 1987, when the Dow went down by a record amount 23%? That I thought was the bottom of all potential problems. This has a corrosive effect that will not go away. I’d love to find something positive to say.” Strangely enough, he was not refering to the British exodus but to America’s own economic troubles.

Today, Greenspan was on Bloomberg Surveillance where in an extensive, 30 minutes interview he was urged to give his take on the British referendum outcome. According to Greenspan, David Cameron miscalculated and made a “terrible mistake” in holding a referendum. That decision led to a “terrible outcome in all respects,” Greenspan said. “It didn’t have to happen.” Greenspan then noted that as a result of Brexit, “we are in very early days a crisis which has got a way to go”, and point to Scotland which he said will likely have another referendum on its own, predicting the vote would be successful, and Northern Ireland would “probably” go the same way.

His remarks then centered on the Eurozone which he defined as a truly “vulnerable institution,” primarily due to Greece’s inclusion in its structure. “Get Greece out. They’re a toxic liability sitting in the middle of a very important economic zone.” Ironically, the same Eurozone has spent countless hours doing everything in its power to show just how unbreakable the union is by preserving Greece, while it took the UK just one overnight session to break away. Luckily the UK was not part of the monetary union or else it would be game over. But speaking of crises, Greenspan warned that fundamentally it is not so much an issue of immigration, or even economics, but unsustainable welfare spending, or as Greenspan puts it, “entitlements.”

“The issue is essentially that entitlements are legal issues. They have nothing to do with economics. You reach a certain age or you are ill or something of that nature and you are entitled to certain expenditures out of the budget without any reference to how it’s going to be funded. Where the productivity levels are now, we are lucky to get something even close to two% annual growth rate. That annual growth rate of 2% is not adequate to finance the existing needs. I don’t know how it’s going to resolve, but there’s going to be a crisis. This is one of the great problems of democracy. It goes back to the founding fathers. How do you handle a situation like this? And it’s very troublesome, but eventually you get things like Margaret Thatcher showing up in Britain.”

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Enter Captain Fantastic.

European Banks Crash To Worst 2-Day Loss Ever As Default Risk Soars (ZH)

So much for George “Panic-Monger” Osborne’s calming statement this morning, European banks have collapsed this morning to close down between 20% and 30% since the Brexity vote. The last 2 days plunge in EU banks (down 23%) is the largest in history (double the size of Lehman) and pushes European bank equity market cap to its lowest (in USD terms) ever. Worst. Drop. Ever…

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Giving people a vote in their lives is not Xi’s idea of fun…

Brexit Is the Sum of China’s Fears (Balding)

In voting to leave the EU, the U.K. has confirmed many of the Chinese Communist Party’s worst fears about democracy. Now the question is whether Brexit will also impede its attempts at economic reform. At least one major target of “Leave” campaigners in the U.K. – an unaccountable bureaucracy in Brussels, enjoying the fruits of power – will certainly resonate with Chinese citizens. Despite a recent corruption crackdown, dissatisfaction with officials is simmering in many parts of China – over land grabs, unpaid wages, layoffs and more. For the Communist Party, a popular rejection of distant bureaucrats isn’t to be taken lightly. Brexit also confirms the party’s fears about the capriciousness of the people. As an editorial in the Global Times, a state-run tabloid, put it, Brexit is a “Pandora’s box,” a “lose-lose situation” and a “major setback.”

The Chinese people, it went on, “will continue to watch the consequence of Britain’s embracing of a `democratic’ referendum.” Such skepticism of the wisdom of crowds is widespread in Beijing’s halls of power – and it has real-world consequences for democracy advocates. A deeper worry for the party is instability. The political and business classes in China are extremely risk-averse. Banks lend to state-owned enterprises in the belief that the government stands behind them, students from the best schools aspire to the civil service, and changes to policy flow from on high. Party technocrats tend to see political and financial instability as intimately linked. And as Premier Li Keqiang stressed repeatedly yesterday at the World Economic Forum, Brexit has increased both.

The immediate economic consequences for China are likely to be minimal. As Bloomberg economists Tom Orlik and Fielding Chen have pointed out, only 2.6% of Chinese exports head to the U.K. But the indirect consequences could be substantial. After Britain voted out, the yuan suffered the biggest one-day drop since its devaluation last August. In the worst case, Brexit may act as a long-term drag on China’s exports, increase its spare capacity, spur capital flight, impede foreign direct investment and generally weaken the forces that have sustained its growth over the past few decades. Amid that kind of pressure, expect China’s leadership to double down on economic and financial policies intended to keep growth humming and minimize any disruption, no matter what the price.

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“The FTSE 100 ended 2.6% lower [..] ..wiping off nearly $132 billion since the referendum results early on Friday..”

Brexit To ‘Drive Tectonic Plate Shifts In European Bank Investing’ (R.)

Britain’s top share index extended the previous session’s steep losses on Monday as the country’s vote last week to leave the European Union hurled it into political and economic uncertainty, hitting banks, housebuilders and airlines hard. Some investors took refuge in firms producing gold, seen as a safe-haven asset, with Fresnillo closing up 7% after hitting a three-year high and Randgold Resources gaining 9%. The FTSE 100 ended 2.6% lower at 5,982.20 points, taking total losses to 5.6% in two sessions and wiping off nearly 100 billion pounds ($132 billion) since the referendum results early on Friday. Shares in easyJet recorded their biggest one-day percentage drop in 12 years.

The domestically-focused mid-cap index .FTMC lost nearly 7% after reaching its lowest since late 2014 following growing concerns about the country’s growth and earnings outlook after the poll outcome. “These uncertainties pose significant risks for the investment outlook,” said Larry Hatheway, chief economist and head of multi-asset portfolio solutions at GAM. “Against the backdrop of an already slowing UK economy, Brexit anxiety could precipitate a large enough reduction in consumer and business spending to tip the UK economy into recession.” British financial stocks declined the most, with the sector index ending 7.3% weaker after a seven-year low. RBS and Barclays dropped 15% and 17.3% respectively, also hit by broker downgrades and by JP Morgan’s cutting its rating on all domestic banks.

The mid-cap bank Shawbrook plummeted 30%. “The UK’s vote to leave the EU will drive tectonic plate shifts in European bank investing. We move to a slow growth/modestly recessionary scenario for UK banks,” analysts at Jefferies said in a note, downgrading RBS to “hold” and Barclays to “underperform”. Investors seemed to ignore finance minister George Osborne’s assertion on Monday that the British economy remained strong, his first public statement on the Brexit vote.

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“Italian officials are studying a direct state recapitalisation of the banks, to be funded by a special bond issue.” Remember Cyprus. Italy wants to change bail-in rules, but it can’t.

Italy Eyes €40 Billion Bank Rescue As First Brexit Domino Falls (AEP)

Italy is preparing a €40bn rescue of its financial system as bank shares collapse on the Milan bourse and the powerful after-shocks of Brexit shake European markets. An Italian government task force is watching events hour by hour, pledging all steps necessary to ensure the stability of the banks. “Italy will do everything necessary to reassure people,” said premier Matteo Renzi. “This is the moment of truth we have all been waiting for a long time. We just didn’t know it would be Brexit that set the elephant loose,” said a top Italian banker. The share price of banks crashed for a second trading day, with Intesa Sanpaolo off 12.5pc, and falls of 12pc for Banka MPS, 10.4pc for Mediobana, and 8pc for Unicredit. These lenders have lost a third of their value since Britain’s referendum.

“When Britain sneezes, Italy catches a cold. It is the weakest link in the European chain,” said Lorenzo Codogno, former director-general of the Italian treasury and now at LC Macro Advisors. The country is the first serious casualty of Brexit contagion and a reminder that the economic destinies of Britain and the rest of Europe are intimately entwined. Morgan Stanley warned in a new report that eurozone GDP would contract by almost as much as British GDP in a “high stress scenario”. Italian officials are studying a direct state recapitalisation of the banks, to be funded by a special bond issue. They also want a moratorium of so-called ‘bail-in’ rules and bondholder write-downs, but these steps are impossible under EU laws.

Mr Renzi raised the subject urgently at a meeting with Merkel and Hollande at a Brexit summit in Berlin on Monday. “There has to be a suspension of the bail-in rules and state aid rules at the highest political level in the EU, otherwise I don’t see how this can work,” said Mr Codogno. Unlike the eurozone debt crisis in 2011-2012, there is no serious trouble yet in the sovereign debt markets. The ECB is effectively capping yields under quantitative easing. The stress gauge in this episode is the health of the private banks. The Euro STOXX index of bank stocks has collapsed by half since last July, and is now probing depths seen in the white heat of the debt crisis. British bank shares have also plummeted since Brexit but this has no systemic implication so far.

It chiefly reflects recession fears, and potential loss of access to the EU market for business. Italy’s banks are the Achilles Heel of the eurozone financial system. Non-performing loans have ratcheted up to 18pc of total balance sheets as a result the country’s slide into depression after the Lehman crisis. The new bail-in reform this year has brought matters to a head, catching EU authorities off guard. It was intended to protect taxpayers by ensuring that creditors suffer major losses first if a bank gets into trouble, but was badly designed and has led to a flight from bank shares. The Bank of Italy has called for a complete overhaul of the bail-in rules. It is now almost impossible for Italian banks to raise capital.

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Lots of bitter infighting will ensue. Sort of a cross between Coronation Street and Absolutely Fabulous.

Preparing For Brexit, Britain May See New PM By Early September (R.)

Britain could have a new prime minister by early September, the ruling Conservative Party said on Monday, after David Cameron started laying the groundwork for his successor to trigger the country’s exit from the EU. The government is under pressure to fill a vacuum left when Cameron announced he would resign by October after Britain ignored his advice and voted to leave the 28-member bloc in last week’s referendum. Triggering a leadership battle that could draw in some of his closest advisers, Cameron urged ministers to work together in the meantime. But he also formed a separate unit, staffed by public servants, to help advise Britain on its departure and its options for a future outside the EU. “Although leaving the EU was not the path I recommended, I am the first to praise our incredible strengths as a country,” Cameron told parliament.

“As we proceed with implementing this decision and facing the challenges that it will undoubtedly bring, I believe we should hold fast to a vision of Britain that wants to be respected abroad, tolerant at home, engaged in the world.” Asked about the possibility of a second EU referendum, Cameron said the result of Thursday’s vote must be accepted. Graham Brady, chair of the “1922 Committee” of Conservative lawmakers, which sets the party’s ground rules in parliament, said the group had recommended that the leadership contest should begin next week and conclude no later than Sept. 2. That recommendation will almost certainly be passed. “Both the Conservatives and the country more generally really want certainty. We would like a resolution and we think it would be a good thing to conclude this process as soon as we practicably can,” Brady told Sky News.

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There are so few AAAs left that it doesn’t matter much anymore. And to label Britain AAA is of course silly to begin with.

S&P Strips UK of Last Top-Notch Credit Rating After Brexit (R.)

Ratings agency Standard & Poor’s stripped Britain of its last remaining top-notch credit rating on Monday, slashing it by two notches from AAA and warning more downgrades could follow after Britons voted to leave the European Union last week. “In our opinion, this outcome is a seminal event, and will lead to a less predictable, stable, and effective policy framework in the UK,” S&P said in a statement, adding it saw a higher risk of Scotland breaking away from the United Kingdom. S&P had warned that Britain’s coveted top-notch credit rating was no longer tenable after last Thursday’s referendum result.

The loss of the last remaining “AAA” rating represents a fresh blow to Britain’s economic standing after the referendum, with sterling tanking to a 31-year low against the dollar and the country’s stock markets plunging. Rival ratings agencies Fitch and Moody’s stripped Britain of their AAA ratings long before the referendum campaign began. They too have warned of further cuts to their gradings of Britain’s creditworthiness. Protecting Britain’s credit rating was a top priority of Conservative finance minister George Osborne when he came to power in 2010.

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The kind of thing that can get very expensive very fast.

UK Credit Default Swap Rates Spike After Wave Of Rating Downgrades (CNBC)

In case you’re wondering how Brexit impacts the U.K.’s creditworthiness, the derivatives market may offer different clues than the bond market. The cost of buying protection against a default on British sovereign debt using credit default swaps rose to a three-year high on Tuesday, after rating agencies rushed to slash the U.K.’s debt rating following last week’s vote to leave the EU. It now costs $48,500 a year to protect $10 million of U.K. sovereign debt for five years, compared with levels near $32,000 before the June 23 referendum. This came despite a sharp fall in yields on U.K. government debt, or gilts. On its own, the absolute cost of insurance remains low, especially when compared with euro zone countries such as Italy and Spain.

The sharp pace of the increase, however, underscored how uncertainty over the U.K.’s position in Europe had undermined its credit-worthiness. Sterling has already plunged to more-than-30-year lows and stock markets have tumbled. On Monday Standard & Poor’s downgraded the U.K.’s debt rating by two notches, from AAA to AA, citing last week’s referendum that approved a British exit from the EU, depriving the U.K. of its last triple A rating. Fitch Ratings, meanwhile, moved its rating from AA+ to AA. “In our opinion, this outcome is a seminal event, and will lead to a less predictable, stable, and effective policy framework in the U.K. We have reassessed our view of the U.K.’s institutional assessment and now no longer consider it a strength in our assessment of the rating,” S&P said in a news release.

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“It’s become perilously fashionable all over the Western world to reach for non-democratic solutions whenever society drifts in a direction people don’t like…”

The Reaction to Brexit Is the Reason Brexit Happened (Matt Taibbi)

Were I British, I’d probably have voted to Remain. But it’s not hard to understand being pissed off at being subject to unaccountable bureaucrats in Brussels. Nor is it hard to imagine the post-Brexit backlash confirming every suspicion you might have about the people who run the EU. Imagine having pundits and professors suggest you should have your voting rights curtailed because you voted Leave. Now imagine these same people are calling voters like you “children,” and castigating you for being insufficiently appreciative of, say, the joys of submitting to a European Supreme Court that claims primacy over the Magna Carta and the Bill of Rights. The overall message in every case is the same: Let us handle things. But whatever, let’s assume that the Brexit voters, like Trump voters, are wrong, ignorant, dangerous and unjustified.

Even stipulating to that, the reaction to both Brexit and Trump reveals a problem potentially more serious than either Brexit or the Trump campaign. It’s become perilously fashionable all over the Western world to reach for non-democratic solutions whenever society drifts in a direction people don’t like. Here in America the problem is snowballing on both the right and the left. Whether it’s Andrew Sullivan calling for Republican insiders to rig the nomination process to derail Trump’s candidacy, or Democratic Party lifers like Peter Orszag arguing that Republican intransigence in Congress means we should turn more power over to “depoliticized commissions,” the instinct to act by diktat surfaces quite a lot these days. “Too much democracy” used to be an argument we reserved for foreign peoples who tried to do things like vote to demand control over their own oil supplies.

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A dead end street after all.

Some Bad And Some Worse News For Stock Buybacks (ZH)

For those 17-year-old hedge fund managers used to BTFD on hopes corporate buybacks will “have their back” and provide the bid on which momentum-chasing HFT algos will piggyback, we have some bad news and some worse news. The bad news is that we are entering yet another quiet period for buybacks. This means that for the next 45 days, the biggest – and supposedly only – buyer of stocks will be mostly out of the market, and bank buyback desks will not be able to provide much needed support during distressed (read: more sellers than buyers) times. The worse news is that even without the buyback blackout period, following months of surging stock repurchasing activity by corporate treasurers… buybacks have now ground to a virtual halt.

According to TrimTabs, stock buyback announcements by U.S. companies have fallen sharply, sending a longer-term negative signal for U.S. equities. “Corporate America announced $2.8 trillion in stock buybacks in the past five years, and these buybacks have provided a key source of fuel for the bull market,” said David Santschi, chief executive officer of TrimTabs. “Corporate actions this year suggest this support is going to diminish.” In a research note, TrimTabs reported that U.S. companies have announced a mere $11.8 billion in stock buybacks in June through Friday, June 24. This month’s pace is the lowest this year. Only four companies have announced plans to repurchase at least $1 billion this month.

“Even if some of the too-big-to-fails roll out buybacks after the release of the second part of the Fed’s stress test results, this month’s volume is likely to be among the lowest in the past three years,” noted Santschi. TrimTabs also explained that stock buyback announcements by U.S. companies have totaled $291.7 billion this year, which is 32% lower than the $432.0 billion in the same period last year. “The sharp decline in buyback announcements suggests corporate leaders are becoming more cautious, and it doesn’t bode well for the U.S. stock market,” said Santschi.

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


DPC New Orleans milk cart1903

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

It was terminal when it began.

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

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

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

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

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

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

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When you lose the currency war.

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

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

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

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

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

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

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

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

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Omen.

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

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

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

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

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

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

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

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

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

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

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

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Beijing wants monopoly on sentiment.

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

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

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

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

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

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

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

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

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

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

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

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

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

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Timber!

The Eurozone Crisis Is Back On The Boil (Guardian)

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

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

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

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

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

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

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

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The chain is as strong as…

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

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

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

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

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What to say?

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

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

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

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The next trigger for mass migrations.

Four Billion People Face Severe Water Scarcity (Guardian)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Oct 022015
 
 October 2, 2015  Posted by at 8:45 am Finance Tagged with: , , , , , , , , , ,  


Edwin Rosskam Service station, Connecticut Ave., Washington, DC 1940

‘Destruction Of Wealth’ Warning Looms Over Stocks (MarketWatch)
Key Global Equity Index Has Fallen Off The Precipice (Dana Lyons)
Is This The Mother Of All Warnings On Emerging Markets? (CNBC)
Global Investors Brace For China Crash (Guardian)
Over Half Of China Commodity Companies Can’t Pay The Interest On Their Debt (ZH)
Here’s How Ugly The Third Quarter Was For Stocks And Commodities (MarketWatch)
This Is The Endgame, According To Deutsche Bank (Jim Reid)
Goldman: Buyback Burst Could Be Enough to Save the S&P 500’s Year (Bloomberg)
There Are Five Times More Claims On Dollars As Dollars In Existence (Brodsky)
Few Understand Why Glencore Lost 1/3 Of Its Value. That’s Worrying (BBG)
Global Economy Loses Steam As Chinese, European Factories Falter (Reuters)
BOE Says Market May Be Underpricing Risks of Falling Liquidity (Bloomberg)
JPMorgan Said to Pay Most in $1.86 Billion CDS Rigging Settlement (Bloomberg)
IMF’s Botched Involvement In Greece Attacked By Former Watchdog Chief (Telegraph)
Volkswagen Too Big to Fail For Germany’s Political Classes (Bloomberg)
VW Says Emissions Probe Will Take Months as It Faces Fines (Bloomberg)
World’s Biggest Pension Fund Is Moving Into Junk and Emerging Bonds (Bloomberg)
How The Banks Ignored The Lessons Of The Crash (Joris Luyendijk)

The warnings come from all sides now.

‘Destruction Of Wealth’ Warning Looms Over Stocks (MarketWatch)

A new health indicator for the S&P 500 Index of the largest U.S. stocks shows a rising likelihood of a broad, long-term decline. The benchmark has fallen 6.8% this year, pulled down by an 11% correction from Aug. 17 through Aug. 25. Earlier this year, the S&P 500 SPX, +0.20% had been setting new highs. Investors are now bracing for more declines as there are plenty of indications of trouble ahead. For one thing, the S&P 500 trades for 16 times aggregate consensus 2015 earnings estimates, which is near a 10-year high. Another headwind is the coming rise in interest rates by the Federal Reserve. Fed Chairwoman Janet Yellen said last week that she anticipated an increase of short-term rates “later this year, followed by a gradual pace of tightening thereafter.”

The federal funds rate has been locked in a range of zero to 0.25% since late 2008. That, combined with the massive expansion of the central bank’s balance sheet, made stocks attractive to investors who might otherwise have been tempted by decent yields form other asset classes. Reality Shares, a San Diego-based firm founded in 2012, has a new market-health indicator called the Guardian Gauge, which uses volatility and price-momentum data to give a long-term outlook for the S&P 500. For the past 15 days, the Guardian Gauge has been in the red. Reality Shares CEO Eric Ervin explained it this way: “Guardian looks at the 10 sectors of the S&P 500. If three of the sectors go negative, it signals a very high probability of going into a bear market. Over the past 15 years, it would have predicted the tech wreck and the financial crisis.”

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“Each and every day, we are witnessing the ongoing global selloff inflict more and more damage to the post-2009 cyclical bull market.”

Key Global Equity Index Has Fallen Off The Precipice (Dana Lyons)

On September 8, we posted a chart showing how a key worldwide equity index – the Global Dow – was “hanging on the precipice”. To refresh, the Global Dow is an equally-weighted index of the world’s 150 largest stocks. Therefore, while it may not directly be the target of a lot of money changing hands, it most certainly represents the stocks that see the most money trading hands. Thus, The Global Dow is a fairly important barometer of the state of the global large cap equity market. The “precipice” that we referenced in the September 8 post was the UP trendline from the bull market bottom in 2009. Not surprisingly, the index did attempt to climb up off of the precipice in the weeks following the post. However, as we suggested, “another test of the precipice here at 2280 would not be surprising”. The Global Dow did return to test that area and is now officially off of the precipice – having fallen down off of it in the last few days, as the following charts illustrate.

Additionally, as the charts indicate, the post-2009 UP trendline also coincided with a cluster of important Fibonacci Retracement levels shown below. Therefore, this breakdown wasn’t just about the trendline but a myriad of significant levels, making it even more consequential. [..] this is one more in a rapidly growing list of examples of indexes around the globe that are breaking long-term UP trendlines and other significant levels of various magnitude. Each and every day, we are witnessing the ongoing global selloff inflict more and more damage to the post-2009 cyclical bull market. And while that bull may not be declared dead for some time, it is now being wounded enough daily to warrant very seriously considering that possibility.

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For 27 years, money has flown into emerging markets. That trend has now reversed.

Is This The Mother Of All Warnings On Emerging Markets? (CNBC)

The last time emerging markets had it nearly this bad, Ronald Reagan was the U.S. President, KKR purchased RJR Nabisco, and a future popstar named Rihanna was born. Net capital flows for global emerging markets will be negative in 2015, the first time that has happened since 1988, the Institute of International Finance (IIF) said in its latest report. Net outflows for the year are projected at $541 billion, driven by a sustained slowdown in EM growth and uncertainty about China, it added. In other words, investors will pull out more money out of emerging markets than they will pump in. The data come on the heels of a separate IIF report this week that showed portfolio capital outflows in EMs amounted to $40 billion during the third quarter, the worst performance since 2008.

Indeed, relief from the Federal Reserve’s decision to delay its first interest rate hike in a decade has proved to be short-lived for EMs amid fresh evidence of a slowing Chinese economy, precipitous currency declines, a sustained slide in commodity prices, and political uncertainty in countries such as Brazil and Turkey. Covering a group of 30 economies, the IIF report estimates net non-resident inflows at $548 billion for 2015 from $1,074 billion last year—levels not seen since the global financial crisis. “As a share of GDP, non-resident inflows have fallen to about 2% from a record high of almost 8% in 2007.” The situation is exacerbated by the fact that investors residing in emerging market countries are buying more foreign assets.

Known as resident outward investment flows, 2015’s reading is expected to hit a historical high of $1,089 billion, which is likely to further pressurize reserves, exchange rates and asset prices of EMs, the IIF said. “On a net basis, lower inflows and rising outflows imply that private capital is leaving EMs for the first time since the early 1980s.” So, which region is the weakest? No surprises here. “It is noteworthy that a large part of the decline in overall flows this year is attributable to flows out of China, which intensified after the People’s Bank of China announced a mini-devaluation of the renminbi and a shift to a more market-oriented exchange rate fixing regime in August.”

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“Global investors will suck capital out of emerging economies this year for the first time since 1988..”

Global Investors Brace For China Crash (Guardian)

Global investors will suck capital out of emerging economies this year for the first time since 1988, as they brace themselves for a Chinese crash, according to the Institute of International Finance. Capital flooded into promising emerging economies in the years that followed the global financial crisis of 2008-09, as investors bet that rapid expansion in countries such as Turkey and Brazil could help to offset stodgy growth in the debt-burdened US, Europe and Japan. But with domestic investors in these and other emerging markets squirrelling their money overseas, at the same time as international investors calculate the costs of a sharp downturn in Chinese growth, the IIF, which represents the world’s financial industry, said: “We now expect that net capital flows to emerging markets in 2015 will be negative for the first time since 1988.”

Unlike in 2008-09, when capital flows to emerging markets plunged abruptly as a result of the US sub-prime mortgage crisis, the IIF’s analysts say the current reversal is the latest wave of a homegrown downturn. “This year’s slowdown represents a marked intensification of trends that have been underway since 2012, making the current episode feel more like a lengthening drought rather than a crisis event,” it says, in its latest monthly report on capital flows. The IIF expects “only a moderate rebound” in 2016, as expectations for growth in emerging economies remain weak. Mohamed El-Erian, economic advisor to Allianz, responding to the data, described emerging markets as “completely unhinged”, and warned that US growth may not be enough to rescue the global economy. “It’s not that powerful to pull everybody out,” he told CNBC.

Capital flight from China, where the prospects for growth have deteriorated sharply in recent months, and the authorities’ botched handling of the stock market crash in August undermined confidence in economic management, has been the main driver of the turnaround. “The slump in private capital inflows is most dramatic for China,” the institute says. “Slowing growth due to excess industrial capacity, correction in the property sector and export weakness, together with monetary easing and the stock market bust have discouraged inflows.” At the same time, domestic Chinese firms have been cutting back on their borrowing overseas, fearing that they may find themselves exposed if the yuan continues to depreciate, making it harder to repay foreign currency loans.

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“What wasn’t known were the specifics of just how severe this bubble deterioration was for the most critical for China, in the current deflationary bust, commodity sector. We now know, and the answer is truly terrifying.”

Over Half Of China Commodity Companies Can’t Pay The Interest On Their Debt (ZH)

Earlier today, Macquarie released a must-read report titled “Further deterioration in China’s corporate debt coverage”, in which the Australian bank looks at the Chinese corporate debt bubble (a topic familiar to our readers since 2012) however not in terms of net leverage, or debt/free cash flow, but bottom-up, in terms of corporate interest coverage, or rather the inverse: the ratio of interest expense to operating profit. With good reason, Macquarie focuses on the number of companies with “uncovered debt”, or those which can’t even cover a full year of interest expense with profit. The report’s centerprice chart is impressive. It looks at the bond prospectuses of 780 companies and finds that there is about CNY5 trillion in total debt, mostly spread among Mining, Smelting & Material and Infrastructure companies, which belongs to companies that have a Interest/EBIT ratio >100%, or as western credit analysts would write it, have an EBIT/Interest <1.0x. As Macquarie notes, looking at the entire universe of CNY22 trillion in corporate debt, the "percentage of EBIT-uncovered debt went up from 19.9% in 2013 to 23.6% last year, and the percentage of EBITDA-uncovered debt up from 5.3% to 7%. Therefore, there has been a further deterioration in financial soundness among our sample." To be sure, both the size (the gargantuan CNY22 trillion) and the deteriorating quality (the surge in "uncovered debt" companies) of cash flows, was generally known. What wasn't known were the specifics of just how severe this bubble deterioration was for the most critical for China, in the current deflationary bust, commodity sector. We now know, and the answer is truly terrifying.

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“..September picked up many of the unresolved issues that we left behind in August..”

Here’s How Ugly The Third Quarter Was For Stocks And Commodities (MarketWatch)

Needless to say, September and the third quarter overall were tough for many investors. “The third quarter of 2015 proved to be the weakest quarter for risk assets for some years and most market participants are probably glad to see the back of it,” wrote Jim Reid, global strategist at Deutsche Bank, in a Thursday note. “Indeed Q3 saw the poorest quarterly performance for the S&P 500 and the Stoxx 600 since Q3 2011. It was also the worst quarter for the Nikkei since 2010 whereas in [emerging markets] the Shanghai Composite and Bovespa posted their worst quarterly scorecard since 2008. Reid breaks down the quarterly performance in a series of charts…

September on its own was pretty brutal, with 27 of Deutsche Bank’s 42 selected global asset classes ending the month with losses. “In many ways, September picked up many of the unresolved issues that we left behind in August,” Reid wrote. The selloff in commodities and emerging markets gained more momentum on deepening recession fears that, in turn, raised more questions about the sustainability of global growth, he said.

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More Jim Reid: “Although we don’t think QE and zero interest rates does much apart from prop up an inefficient financial system it’s all we’ve got until we have a huge policy sea change..“

This Is The Endgame, According To Deutsche Bank (Jim Reid)

From Jim Reid, Deutsche Bank’s chief credit strategist: “Our thesis over the last few years has basically been that the global financial system/economic fundamentals are so bad that its good for financial assets given it forces central banks into extraordinary stimulus and for them to continue to buy assets in never before seen volumes. The system failed in 2008/09 and rather than allow a proper creative destruction cleansing, policy makers have been aggressively propping it up ever since. This has surely led to a large level of inefficiency in the system which helps explain weak post crisis growth and thus forces them to do even more thus supporting asset prices if not the global economy. However since the summer this theory has been severely tested by China’s equity bubble bursting, China’s small ‘shock’ devaluation and the start of a rundown in reserves for the first time in over a decade.

We’ve also seen associated commodities and EM woes, endless unsettling speculation about the Fed’s next move and more recently the idiosyncratic corporate scandal around VW and funding concerns around Glencore. The hits keep on coming. Is it now so bad it’s actually bad again? The most recent leg of the sell-off begun after the Fed held rates steady two weeks ago as the narrative focused on either this reflecting worrying economic concerns or a Fed that is a slave to financial markets and losing credibility. So do we think we’re now entering a period where central banks are increasingly impotent? The answer is that they have been for a while on growth so not much has changed. However they can still buy more assets and continue to keep policy loose.

Although we don’t think QE and zero interest rates does much apart from prop up an inefficient financial system it’s all we’ve got until we have a huge policy sea change which probably only happens in the next recession (more later). So for now we think central banks are trapped into continuing on the same high liquidity path. The BoJ and the ECB are likely to do more QE in my opinion and the Fed is going to have a real struggle raising rates this year which has been our long-term view. Indeed we have sympathy with DB’s Dominic Konstam that they may also struggle in 2016. At the moment central banks are fortunate that they have the conditions to do more as virtually all are failing on their mandate to keep inflation close to or at 2%. The real problem would be if inflation was consistently looking like breaching 2%.

Then central banks would generally be going beyond their mandate by printing money and keeping rates close to zero. So in short the ‘plate spinning’ era continues for a number of quarters yet and certainly while inflation is so low. We think the end game is that when the next global recession hits, then QE/zero rate world will be re-appraised. Perhaps the G20 will get together and decide to try a different approach. In our 2013 long-term study we speculated how we thought the end game was ‘helicopter money’ – ie money printing to finance economic objectives (tax cuts, infrastructure etc). While it has obvious flaws and huge risks (eg political manipulation and inflation), one can argue it will always have more economic impact than QE in its current form. However that’s perhaps a couple of years away still.”

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The only thing left to prop up the US economy is companies buying their own stock. Let that sink in.

Goldman: Buyback Burst Could Be Enough to Save the S&P 500’s Year (Bloomberg)

Stock repurchases may accelerate enough toward the end of the year to salvage an annual gain for the Standard & Poor’s 500 Index, according to David Kostin, Goldman’s chief U.S. equity strategist. November is the busiest month of the year for buybacks among S&P 500 companies. 13% of annual spending occurs during the month, according to figures that Kostin presented in a report two days ago. The data is based on averages for 2007 and 2009-2014. The fourth quarter is the year’s busiest three-month period for S&P 500 repurchases, accounting for 30% of outlays, according to Kostin’s data. The total compares with 18% during the first quarter, 25% in the second and 26% in the third. These figures don’t add up to 100% because of rounding.

“Buybacks represent the single largest source of demand for U.S. equities,” he wrote, adding that he expects companies in the index to spend more than $600 billion this year on their own shares. “The typical year-end surge in buyback activity could help boost the market above our year-end target.” Kostin reduced his projection for the S&P 500 to 2,000 from 2,100. Assuming the latest estimate from the strategist is accurate, the index would post a loss of 2.9% for the year. A return to optimism among investors may also help the index exceed 2,000, according to Kostin. He cited a Goldman sentiment indicator, based on S&P 500 futures trading, that has been at the lowest possible reading for seven of the past eight weeks. That’s the longest stretch in the gauge’s eight-year history, the report said.

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TAE’s long lasting adage in action: “Multiple claims to underlying real wealth”.

There Are Five Times More Claims On Dollars As Dollars In Existence (Brodsky)

According to the Fed, there is about $60 trillion of US Dollar credit (claims for US dollars):

Also according to the Fed, there are about $12 trillion US dollars:

So, the data show plainly there are five times as many claims for US dollars as US dollars in existence. Does this matter to investors? Well, yes, it matters a lot. Not only is there not enough money to repay outstanding debt; the widening gap between credit and money is making it more difficult to service the debt and more difficult for nominal US GDP to grow through further credit extension and debt assumption. Remember, only a dollar can service and repay dollar-denominated debt. Principal and interest payments cannot be made with widgets or labor, only dollars. This means that future demand and output growth generated through more credit issuance and debt assumption is self-defeating. In fact, it adds to the problem.

Credit-generated growth is not growth in real (inflation-adjusted) terms because rising GDP, which engenders an increase in money, is also accompanied by a larger increase in claims on that money. Why larger? Because debt comes with interest. By definition then, debt compounds while real growth does not. In fact, economies naturally economize because innovation and competition tend to drive prices lower. This natural deflation works against debt service and repayment that needs perpetual inflation. As we know, for thirty years beginning in the early 1980s the Fed helped the US and global economies grow consistently more or less by reducing interest rates, which gave consumers of goods, services and assets incentive to take on more debt. Following the inevitable debt crisis in 2008, the Fed had to reduce the overnight interest rate it targets to 0%.

As we also know, to keep the economy growing from there, the Fed then had to begin creating money, which it did through quantitative easing (QE). It bought assets directly from the money center banks it deals with (primary dealers), and paid for them with the newly created money. At the same time, the Fed paid these banks – and continues to pay them – interest on the money they created for them (Interest on Excess Reserves). This provides a disincentive for banks to lend to the public, which is how the Fed is trying to control US growth and inflation today.

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Leverage.

Few Understand Why Glencore Lost 1/3 Of Its Value. That’s Worrying (BBG)

From London to New York to Hong Kong, the frantic question kept coming: could this be another Lehman? But nowhere did it cause more alarm than inside Glencore – the Swiss commodities giant that had suddenly found itself at the epicenter of a global panic on Monday. What began that morning in London, with a sudden plunge in Glencore’s share price, cascaded across oceans and time zones and left the company’s billionaire chief executive, Ivan Glasenberg, scrambling to calm anxious shareholders, creditors and trading partners. Days later, even as Glencore regained most of the $6 billion of shareholder wealth erased in a few hours, many investors wondered if Glasenberg can hold the markets at bay.

Few market players, including people close to Glencore, are able to pinpoint why a blue-chip member of the FTSE-100 Index – even one that had been under pressure from sliding commodities prices – lost almost a third of its value in a blink. And that, investors worry, suggests this could all happen again. “There’s more pain to be had,” said Serge Berger at Zurich-based Blue Oak Advisors. “I don’t think the story is over.”

Monday started out as just another workday in Baar, the tiny town where Glencore is based. The village could easily pass for a Swiss backwater, except for the billions of dollars worth of commodities that quietly course through Glencore’s headquarters on Baarermattstrasse, between the lake and the Alpine hills. Glasenberg, a former coal trader, has honed his skills over more than 30 years in the commodity-trading business since he joined a predecessor firm, Marc Rich & Co., in 1984. He was part of a $1.2 billion management buyout from Rich in 1994, when the company was renamed Glencore. A 2011 initial public offering – at the peak of a 10-year commodity boom – made him a billionaire on paper, with a stake worth about $9 billion. At the worst of Monday’s panic, that holding was worth $1.2 billion. What unfolded when the London markets opened at 8 a.m. stunned mining-industry veterans.

“Monday was certainly very scary,” said Benno Galliker, a trader at Luzerner Kantonalbank. “It had a similar feeling to that before Lehman collapsed.” There’d been no news of consequence over the weekend; the last major headline – a Bloomberg story about Glencore’s hiring of banks to sell a stake in its agriculture unit – had sent its shares up. In China, whose coal plants and steel mills are the largest consumers of Glencore’s products, there’d been some discouraging economic data. But this year’s drumbeat of negative news about the world’s second-largest economy was hardly a new phenomenon. Meanwhile, South African bank Investec had published a provocative note in which analyst Marc Elliott suggested the company could see its equity all but vanish if commodity prices stayed weak. While that was an alarming prediction, Elliott could hardly have expected his views to have much of an effect on an operation with almost $200 billion in annual turnover.

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“..the data highlight just how difficult it will be for policymakers to steer China’s economy out of the biggest slowdown in decades..”

Global Economy Loses Steam As Chinese, European Factories Falter (Reuters)

The world economy lost momentum in September, with China’s vast factory sector shrinking again and euro zone manufacturing growth weakening slightly, both casualties of waning global demand. The latest business surveys across Asia and Europe paint a darkening picture and are likely to prompt more calls for central banks around the world to loosen monetary policy even further. “The data probably increases the case for more stimulus in certain parts of the world, especially from the People’s Bank of China and the ECB,” said Philip Shaw, economist at Investec in London. “Those economies that are at less advanced paths of the recovery cycle – the key example is the euro zone, where we’re looking at more disinflation – may well find more stimulus is in order.”

Surveys of China’s factory and services sectors showed the world’s second largest economy may be cooling more rapidly than earlier thought, with deeper job cuts. Taken together with a stock market crash in Shanghai during the summer and a surprise devaluation of the Chinese yuan, the data highlight just how difficult it will be for policymakers to steer China’s economy out of the biggest slowdown in decades.

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“..a global bond rout in the second quarter erased more than a half a trillion dollars in the value of sovereign debt..”

BOE Says Market May Be Underpricing Risks of Falling Liquidity (Bloomberg)

Financial markets may not be alert to the potential damage caused by drops in liquidity, according to stability officials at the Bank of England. “Market prices might not yet sufficiently be factoring in the potential for a deterioration in liquidity conditions given changes in market functioning and elevated tail risks” related to emerging markets, the officials said, according to the record of the Financial Policy Committee meeting held on Sept. 23 in London. Concern about liquidity is intensifying since a global bond rout in the second quarter erased more than a half a trillion dollars in the value of sovereign debt. Exacerbating matters, the world’s biggest banks are scaling back their bond-trading activities to comply with higher capital requirements imposed in the wake of the financial crisis.

Stability officials at the BOE have already asked for more work to be done on the topic, including dealers’ ability to act as intermediaries in markets, contagion and investment funds. The record of the September meeting published Thursday also noted the increased importance of emerging markets and said “there was the potential for a material impact on U.K. financial stability.” Officials also discussed the appropriate settings for the countercyclical capital buffer, currently at zero, given that credit conditions were normalizing. When officials reconsider the setting in light of the 2015 stress-test results, they will assess the appropriate level for all stages of the credit cycle. There was a “possible benefit of moving the CCB in smaller increments, especially when credit growth was not unusually strong,” the record said.

In a wide-ranging record that follows last week’s statement, the FPC highlighted its need for new powers to intervene in the buy-to-let housing market. “The rapid growth of the market underscored the importance of FPC powers of direction for use in future,” the FPC said in its record. “Housing tools were important for the FPC,” given the potential for systemic risks.

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They’re all involved in scheming yet another system. But jail? Hell, no! Slap on the wrist fines to be paid not by the bankers, but by their corporations, that’s all.

JPMorgan Said to Pay Most in $1.86 Billion CDS Rigging Settlement (Bloomberg)

JPMorgan Chase is set to pay almost a third of a $1.86 billion settlement to resolve accusations that a dozen big banks conspired to limit competition in the credit-default swaps market, according to people briefed on terms of the deal. JPMorgan is paying $595 million, with the lender’s portion of the accord largely based on the plaintiffs’ measure of market share, said the people, who asked not to be identified because the firms haven’t disclosed how they’re splitting costs. The settlement also enacts reforms making it easier for electronic-trading platforms to enter the CDS market, according to a statement Thursday from attorneys for the plaintiffs, which include the Los Angeles County Employees Retirement Association. Morgan Stanley, Barclays and Goldman Sachs are paying about $230 million, $175 million and $164 million, respectively, the people said.

Plaintiffs’ lawyers disclosed the approximate size of the settlement in Manhattan federal court last month, saying they were still ironing out details. They updated the total Thursday. The accord averts a trial following years of litigation by hedge funds, pension funds, university endowments, small banks and other investors, who sued as a group. They alleged that global banks – along with Markit Group, a market-information provider in which the banks owned stakes – conspired to control the information about the multitrillion-dollar credit-default-swap market in violation of U.S. antitrust laws. Credit Suisse, Deutsche Bank and Bank of America will pay about $160 million, $120 million and $90 million, respectively, the people said. BNP Paribas, UBS, Citigroup, RBS and HSBC also would pay less than $100 million apiece, the people said.

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The IMF needs an independent chief. Or its credibility will continue to erode until it is irrelevant.

IMF’s Botched Involvement In Greece Attacked By Former Watchdog Chief (Telegraph)

The IMF has come under fire for failing in its duty of care towards Greece by pushing self-defeating austerity measures on the battered economy. The fund was told it should have eased up on the spending cuts and tax hikes, pushed for an earlier debt restructuring and paid more “attention” to the political costs of its punishing policies during its five-year involvement in Greece. The recommendations came from a former deputy director of IMF’s Independent Evaluation Office (IEO) David Goldsbrough.The IEO is an independent watchdog tasked with scrutinising the fund’s activities. Mr Goldsbrough worked at the body until 2006. His suggestions are set to embolden critics of the IMF’s handling of the Greek crisis. They follow previous admissions from the fund that it has over-stated the benefits of imposing excessive austerity on successive Greek governments.

The suggestions from the former watchdog chief come as reports suggest the IMF is still poised to pull out of Greece’s third international rescue in five years over the sensitive issue of debt relief. The fund is pushing for a restructuring of at least €100bn of Greece’s debt pile, according to a report in Germany’s Rheinische Post. Such bold measures to extend maturities and reduce interest payments are set to be rejected by its European partners, who are unwilling to impose massive lossess on their taxpayers. The head of Greece’s largest creditor – Klaus Regling of the European Stability Mechanism – told the Financial Times that such radical restructuring was “unnecessary”. This intransigence could now see the IMF withdraw its involvement when its programme ends in March 2016.

In addition to his findings on Greece, Mr Goldsbrough urged the IMF to question its involvement in many bail-out countries for the sake of the institution’s credibility. “Few reports probe more fundamental questions – either about alternative policy strategies or the broader rationale for IMF engagement,” said the report. Accounts from 2010 show the IMF was railroaded into a Greek rescue programme on the insistence of European authorities, vetoing the objections of its own board members from the developing world. The IMF is prevented from lending to bankrupt nations by its own rules. But it deployed an “exceptional circumstances” justification to provide part of a €110bn loan package to Athens five years ago. Greece has since become the first ever developed nation to default on the IMF in its 70-year history.

Despite privately urging haircuts for private sector creditors in 2010, the IMF was ignored for fear of triggering a “Lehman” moment in Europe, by then ECB chief Jean-Claude Trichet. Greece later underwent the biggest debt restructuring in history in 2012. The findings of the fund’s research division have largely discredited the notion that harsh austerity will bring debtor nations back to health. However, this stance has been at odds with its negotiators during Greece’s new bail-out talks where officials have continued to demand deep pension reforms and spending cuts for Greece. Diplomatic cables between Greece’s ambassador to Washington have since revealed the White House pressed the fund to make vocals calls for mass debt relief to keep Greece in the eurozone during fraught negotiations in the summer. However, the issue of debt relief is not due to be discussed when eurozone finance ministers gather to meet for talks on Monday, said EU officials.

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“Cars accounted for almost 20% of Germany’s near $1.5 trillion in exports last year, or to put it in blunt political terms: one in seven jobs.”

Volkswagen Too Big to Fail For Germany’s Political Classes (Bloomberg)

At Volkswagen AG, political connections come already fitted. In part, it’s due to Volkswagen’s iconic role as a symbol of West Germany’s economic revival after Nazi rule and the destruction of World War II. Angela Merkel, who grew up under communism in East Germany, has said her first car after the fall of the Berlin Wall in 1989 was a VW Golf compact. Mostly it’s about jobs: around a third of Volkswagen’s almost 600,000 positions are in Germany, and that’s not to mention the company’s supply chain. For Volkswagen, however, proximity to political power is enshrined in statute. When Germany privatized the automaker in 1960, its home state of Lower Saxony kept a blocking minority and a supervisory board seat for the region’s premier. Future presidents, chancellors and cabinet ministers have cut their political teeth in the state with VW at their side.

That nexus of political affinity and economic awareness ensures the scandal engulfing VW is too big a threat to national prosperity for the government to be a neutral observer. “It’ll be important for the German government to look at scenarios for the worst possible outcome,” Stefan Bratzel at the University of Applied Sciences in Bergisch Gladbach said. Merkel’s options could include helping the state of Lower Saxony increase its stake in VW or tax incentives to promote electric cars, he said. Merkel is thus far trying to keep VW’s scandal over cheating on diesel-car emissions at arm’s length, simply demanding that the automaker come clean quickly. Her restraint signals a reluctance by chancellery officials to exercise direct influence on private companies, according to a person familiar with government policy making. In any case, the full scope of the scandal is still not clear, the person said.

“Of course German governments take business interests into account,” Marcel Fratzscher, head of the Berlin-based DIW economic institute, said by phone. Still, “if you look at France, the ties between business and politics are much closer there than in Germany,” he said. With almost 35% wiped off VW’s share value since the affair came to light, that’s a luxury that might not be granted for long if the company’s position deteriorates further. [..] Merkel has experience of intervening when it comes to autos. In 2013, she watered down European pollution-control legislation aimed at reducing CO2 emissions from cars, an action for which she was lauded by German auto-industry lobby VDA. Justifying her decision to defend jobs, Merkel said at the time there was a need “to take care that, notwithstanding the need to make progress on environmental protection, we don’t weaken our own industrial base.” Cars accounted for almost 20% of Germany’s near $1.5 trillion in exports last year, or to put it in blunt political terms: one in seven jobs.

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Stalling as a last defense.

VW Says Emissions Probe Will Take Months as It Faces Fines (Bloomberg)

Volkswagen said its investigation into rigged diesel engines will probably take months to complete, highlighting the complexity of the scandal that upended the carmaker two weeks ago. The company set up a five-person committee led by Berthold Huber, interim chairman of the supervisory board. The group will work closely with U.S. law firm Jones Day to unravel how software to cheat diesel-emissions tests was developed and installed for years in millions of vehicles, the company said Thursday. Volkswagen stuck to a pre-crisis plan that CFO Hans Dieter Poetsch will become the permanent chairman. Frank Witter, 56, head of the financial-services division, will succeed Poetsch as CFO.

The automaker is facing a significant financial impact, including at least €6.5 billion it already set aside for repairs and recalls and a U.S. fine that may reach $7.4 billion, according to analysts from Sanford C. Bernstein. A sales stop in September already put a dent in its U.S. deliveries. The board’s leadership panel met for seven hours on Wednesday night with CEO Matthias Mueller, who was appointed after his predecessor Martin Winterkorn stepped down under pressure last week. “We’re at the beginning of a long process,” said Olaf Lies, who is economy minister of the German state of Lower Saxony, which owns one-fifth of Volkswagen’s voting shares, and a member of Volkswagen’s investigation committee. “In the end, a series of people will be held accountable, and that doesn’t mean the software developers but those responsible at the senior level.”

Volkswagen postponed an extraordinary shareholders’ meeting that had been planned for Nov. 9, saying “it would not be realistic to provide well-founded answers which would fulfill the shareholders’ justified expectations” by that time. Some investors have criticized the appointment of Poetsch. Though Volkswagen hasn’t assigned blame for the diesel scandal to the CFO or to ousted CEO Winterkorn, the two were close associates. “Making Poetsch the chairman at this point while the investigation into the diesel scandal is ongoing isn’t the right way to go about rebuilding trust in the company,” said Ingo Speich, a fund manager at Volkswagen shareholder Union Investment. “Volkswagen needs a strong chairman right now, and he’ll be in a weak position.”

The company is facing an “enormous recall” in the U.S., though it’s still not clear what hardware and software corrections it will use to fix the problem, U.S. Energy Secretary Ernest Moniz said Thursday in an interview in Istanbul. “Obviously there’s a discussion of fines, of very, very major fines” from the Environmental Protection Agency, Moniz said. The amount of the penalties VW faces is “going to depend upon what corrective actions” the company takes, he said. Volkswagen’s 600,000-person workforce is starting to feel the impact of the scandal as the carmaker cuts spending in anticipation of fines, recalls and a drop in U.S. sales.

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Taking your pensions into the casino is an obvious last desperate step.

World’s Biggest Pension Fund Is Moving Into Junk and Emerging Bonds (Bloomberg)

Japan’s $1.2 trillion Government Pension Investment Fund, the world’s largest, unveiled sweeping changes to its foreign bond investments, hiring more than a dozen new asset managers and creating mandates for junk and emerging-market securities. The fund picked managers for eight categories of active investments in overseas debt, it said Thursday. GPIF chose Nomura Asset Management to oversee U.S high-yield bonds and UBS Global Asset Management for European speculative-grade debt. Janus Capital Management will handle part of the pension giant’s U.S. bond investments as a subcontractor for Diam Co., according to GPIF’s statement, which didn’t specify whether the money would go to Bill Gross’s fund.

Ashmore Japan, a specialist in developing-country investment, won the only local-currency emerging-market contract. GPIF faces mounting pressure to boost returns and diversify assets as pension payouts for the world’s oldest population swell. The fund has pared domestic bonds in the past year in favor of equities, inflation-linked debt and alternative assets. Its foray into high-yield bonds comes as the securities hand investors the biggest losses in four years. “I’m worried,” said Naoki Fujiwara, chief fund manager at Shinkin Asset Management in Tokyo. “The timing isn’t good. We’re talking about the Fed raising rates, and the assets that are likely to be affected the most by this are junk bonds. Investing in emerging-market currencies is worrying, too.”

A gauge of global speculative-grade debt compiled by Bank of America Merrill Lynch dropped for a fourth month in September, the longest stretch since the data began in 1998. This year is shaping up as one to forget for investors in risky assets, with stocks, commodities and currency funds all in the red amid concern about the outlook for the global economy and as the Federal Reserve prepares to raise interest rates. Investors pulled $40 billion out of emerging markets in the third quarter, fleeing at the fastest pace since the height of the global financial crisis.

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Joris should get into today’s events, things move too fast to linger on the past.

How The Banks Ignored The Lessons Of The Crash (Joris Luyendijk)

I spent two years, from 2011 to 2013, interviewing about 200 bankers and financial workers as part of an investigation into banking culture in the City of London after the crash. Not everyone I spoke to had been so terrified in the days and weeks after Lehman collapsed. But the ones who had phoned their families in panic explained to me that what they were afraid of was the domino effect. The collapse of a global megabank such as Lehman could cause the financial system to come to a halt, seize up and then implode. Not only would this mean that we could no longer withdraw our money from banks, it would also mean that lines of credit would stop.

As the fund manager George Cooper put it in his book The Origin of Financial Crises: “This financial crisis came perilously close to causing a systemic failure of the global financial system. Had this occurred, global trade would have ceased to function within a very short period of time.” Remember that this is the age of just-in-time inventory management, Cooper added – meaning supermarkets have very small stocks. With impeccable understatement, he said: “It is sobering to contemplate the consequences of interrupting food supplies to the world’s major cities for even a few days.” These were the dominos threatening to fall in 2008. The next tile would be hundreds of millions of people worldwide all learning at the same time that they had lost access to their bank accounts and that supplies to their supermarkets, pharmacies and petrol stations had frozen.

The TV images that have come to define this whole episode – defeated-looking Lehman employees carrying boxes of their belongings through Wall Street – have become objects of satire. As if it were only a matter of a few hundred overpaid people losing their jobs: Look at the Masters of the Universe now, brought down to our level! In reality, those cardboard box-carrying bankers were the beginning of what could very well have been a genuine breakdown of society. Although we did not quite fall off the edge after the crash in the way some bankers were anticipating, the painful effects are still being felt in almost every sector. At this distance, however, seven years on, it’s hard to see what has changed. And if nothing has changed, it could all happen again.

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Nov 182014
 
 November 18, 2014  Posted by at 1:09 pm Finance Tagged with: , , , , , , , , , , ,  


Dorothea Lange Saturday afternoon, Pittsboro, North Carolina Jul 1939

Japan PM Abe Calls Snap Election, Delays Sales Tax Hike (CNBC)
Japan Prepares Stimulus to Strengthen 2015 Growth After Recession Hit (Bloomberg)
Japan’s ‘Abenomics’ Can Survive Quadruple-Dip Recession (AEP)
‘Godfather’ Of Abenomics Admits It’s A Ponzi Game, Taxpayers May Revolt (ZH)
ECB’s Draghi: Buying Sovereign Bonds Is An Option (CNBC)
Draghi Says ECB Measures May Entail Buying Government Bonds (Bloomberg)
Draghi Seen Bypassing QE Qualms to Hit Balance-Sheet Goal (Bloomberg)
Industrial Output in U.S. Unexpectedly Fell in October (Bloomberg)
Deutsche Bank Scales Back Trading in Credit Derivatives (Bloomberg)
Flash Boys Invade $12.4 Trillion Treasury Market in New Era of Volatility (Bloomberg)
Wall Street to Reap $316 Million From Day of Mega Deals (Bloomberg)
Australia’s Record-Low Rates To Head Further South (CNBC)
US Pension Insurer Ran Record $62 Billion Deficit (AP)
All Aboard The Instability Express (James Howard Kunstler)
The Secret History Of Corruption In America (Stoller)
UK Grocery Sales In Decline For First Time In 20 Years (Guardian)
1 in 5 UK Supermarkets Must Close To Restore Profit Growth (Guardian)
Putin Warns He Won’t Let Ukraine Annihilate Eastern Rebels (Bloomberg)
Shale Drillers Plan Output Increases Despite Oil Price Decline (Bloomberg)
3 Billion Gallons Of Fracking Wastewater Pumped Into Clean CA Aquifers (ZH)
Modern Slavery Affects More Than 35 Million People (Guardian)
Ebola Doctors: The Last Working Consciences In The Western World (Guardian)

It’ll give him the power to totally sink the nation. All that’s missing is a few nuke plants and a major quake.

Japan PM Abe Calls Snap Election, Delays Sales Tax Hike (CNBC)

Japanese Prime Minister Shinzo Abe called a snap election and announced a delay in the second sales tax hike by 18 months after the country fell into recession. The move announced on Tuesday comes after growth numbers on Monday showed the world’s third-largest economy shrunk by an annualized 1.6% in the third quarter after a 7.3% contraction in the second quarter, shocking the markets. “I have decided not to raise the consumption tax to 10% next October and I have decided to delay a consumption tax hike for 18 months,” Abe said at a press conference. Japan has suffered since the first consumption tax hike from 5 to 8% in April.

Abe said the rise in the sales tax “acted as a heavy weight and offset a rise in consumption”. A second consumption tax hike was set for October 2015 which would have seen a 2% increase to 10%. Abe also said the lower house of parliament would be dissolved on November 21 and an election would be called in a move to strengthen his mandate for “Abenomics” – his set of economic policies. The Japanese Prime Minister admitted that it will be a “difficult election” but said he wanted the public to back his package of reforms. “There are differing opinions on the structural reforms we have proposed and I have decided that I need to hear the voice of the Japanese public on whether or not we should go forward with these reforms,” Abe said.

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There are still ‘analysts’ around who actually believe this stuff: “Household sentiment should be relaxed thanks to the delay in another VAT hike, helping improve spending attitude and facilitate consumption recovery”. Spending in Japan has been down for years, nothing to do with sales taxes.

Japan Prepares Stimulus to Strengthen 2015 Growth After Recession Hit (Bloomberg)

With Japan’s slump into its fourth recession since 2008 threatening the failure of the Abenomics reflation program, Prime Minister Shinzo Abe’s administration is taking steps to shore up growth for the coming year. Economy Minister Akira Amari told reporters yesterday in Tokyo there’s a high chance of a stimulus package. Etsuro Honda, an adviser to Abe, said a 3 trillion yen ($26 billion) program was appropriate and should go toward measures that directly help households, such as child care support. Abe, who holds a news conference later today, is also considering a postponement of an October sales-tax increase until 2017 – a move that would add 0.3 percentage point to growth in the coming fiscal year, according to the median estimate of economists surveyed by Bloomberg.

At stake for the prime minister is assuring re-election in a likely snap vote next month that may serve as a referendum on his policies. “Household sentiment should be relaxed thanks to the delay in another VAT hike, helping improve spending attitude and facilitate consumption recovery,” Kazuhiko Ogata, chief Japan economist at Credit Agricole SA in Tokyo, wrote in a note to clients yesterday, referring to the sales, or value-added, tax. “If Abe’s Liberal Democratic Party wins in the election, ‘Abenomics’ would be set” to be sustained until as long as until 2018, when he would run up against term limits as LDP head, according to Ogata.

Less than two years into Abenomics – a three-pronged strategy to pull Japan out of two decades of stagnation through monetary stimulus, fiscal flexibility and structural deregulation – the program has yet to spark sustained growth. An April sales-tax rise saw the economy sink into two straight quarters of contraction, a government report showed yesterday. Abe, 60, has yet to implement growth-strategy items from labor-market liberalization to the securing of a free-trade deal within the U.S.-led Trans-Pacific Partnership talks. Corporate-tax cut discussions have yet to see legislation enacted. In other areas, Abenomics has stirred Japan, achieving the end of 15 years of sustained deflation and spurring focus in the stock market on corporate returns on equity. The Topix index of shares has jumped 79% in the past two years.

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Once again, Ambrose is out of his league. And not as sure as the title suggests, since he also says: “This is a formidable task and may ultimately fail.” The rest is not arguments, but exclusively wishful thinking. And harking back to what Japan did in 1932 is cute, but also entirely hollow.

Japan’s ‘Abenomics’ Can Survive Quadruple-Dip Recession (AEP)

Abenomics is alive and well. Japan’s crash into its fourth recession since 2008 is a nasty surprise for premier Shinzo Abe but it tells us almost nothing about the central thrust of his reflation blitz The mini-slump is chiefly due to a one-off fiscal shock in April. Mr Abe defied warnings from Keynesian critics and unwisely stuck to plans drawn up by a previous (DPJ) government to raise the consumption tax from 5pc to 8pc. The essence of Abenomics is monetary reflation a l’outrance to lift the country out of deflation after two Lost Decades. The unstated purpose of this “First Arrow” is to lower real interest rates and raise the growth of nominal GDP to 5pc, deemed the minimum necessary to stop Japan’s debt trajectory from spiralling out of control. This is a formidable task and may ultimately fail. Public debt is already 245pc of GDP. Debt payments are 43pc of fiscal revenues. The population is expected to fall to from 127m to 87m by 2060. Given the grim mathematics of this, the inertia of the pre-Abe era was inexcusable.

Takuji Aida from Societe Generale said the tax rise was an “unnecessary diversion from Mr Abe’s reflationary goals” but will not have a lasting effect. The contraction of Japanese GDP by 0.4pc in the third quarter – following a 1.8pc crash in the second quarter – is certainly a public relations embarrassment, but less dreadful than meets the eye. The economy expanded by 0.2pc when adjusted for inventory effects. Machinery orders rose for a fourth month in September to 2.9pc. Retail sales jumped by 2.3pc. Danske Bank’s Fleming Nielsen says Japan’s economy will be growing at a 3pc rate again this winter. Mr Abe has shrugged off the tax debacle without much political damage. He is likely to call a snap election for December, win heartily, and suspend plans for a further rise in the sales tax to 10pc next October, ditching a policy he never liked anyway.

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Besides, Ambrose, the guy who thought it all up has this: ” .. there are always new taxpayers, so this is a feasible Ponzi game”. How bad can you get it when, as Ambrose himself said, ” .. the population is expected to fall to from 127m to 87m by 2060″? It’s a hopeless game.

‘Godfather’ Of Abenomics Admits It’s A Ponzi Game, Taxpayers May Revolt (ZH)

Koichi Hamada is a special adviser to prime minister Shinzo Abe and one of his closest confidants. That makes his comments, as The Telegraph reports, even more stunningly concerning. Focusing his attention on the fact that Japan must delay the 2nd stage of its planned consumption tax hike – for fear of derailing the ‘recovery’ – Hamada unwittingly, it seems, explains the terrible reality behind the so-called “godfather” of Abenomics’ perspective on the extreme monetary policy he has unleashed… Select stunning quotes that everyone should ignore and just BTFPonziD in Japan…

“The consumption tax hike is a great big turbulence to the Japanese economy. It may have erased almost two thirds of the benefits of Abenomics,” he told the Telegraph. “At the very least, a third of this great experiment is gone.” [..] “I used to say that we should wait until the third quarter figures are out. However, by various economic indicators, the GDP figures cannot be very optimistic,” he added. [..] “We should increase the consumption tax in the intermediate future,” he said. “This first shock starting in April has been countered by a monetary counter-move. But can we risk another shock in this way?” He also said that while he fully supported the Bank of Japan’s bond buying spree, he said there would be diminishing returns from quantitative easing the longer it went on. “I completely agree with Kuroda’s direction of policy, as well as his strategy of keeping quiet and surprising the market. Of course, if you repeat the same kind of action then the impact will be weaker,” he said.

[..] Marc Faber, the famous Swiss investor, has accused Japan of “engaging in a Ponzi scheme” because the BoJ is hoovering up most of the debt that has been issued by the government. While Mr Hamada agreed that Japan had created a “mild ponzi game”, he also said it was a “feasible” one because of Japan’s huge foreign reserves. “In a Ponzi game you exhaust the lenders eventually, and of course Japanese taxpayers may revolt. But otherwise there are always new taxpayers, so this is a feasible Ponzi game, though I’m not saying it’s good.” Mr Hamada said it was important that Japanese policymakers sent a clear signal that the government was willing to do whatever it takes to smash deflation and pave the way for wage increases for millions of workers. “I’m optimistic about wages, but the uncertainty is how long it takes,” he said. Business is still in doubt about whether Abenomics will continue. If they know it will continue and the profits of export firms are really soaring, they will start to share that with their employees.”

So to sum up… as long as the BoJ keeps buying stocks and bonds in ever-greater amounts (and Japan has more taxpayers to foot the bill) then the ponzi scheme can survive in its fiscally unsustainable way… what a total farce.

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Tell ‘im ee’s dreamin’.

ECB’s Draghi: Buying Sovereign Bonds Is An Option (CNBC)

The euro zone’s growth has weakened over the summer months, European Central Bank (ECB) President Mario Draghi told European lawmakers Monday, but stressed that he was willing to do more to stimulate the economy—including the purchase of government bonds. Speaking at the European Union’s Parliament, Draghi reiterated that the bank’s governing council remained “unanimous in its commitment to using additional unconventional instruments if needed.” He added: “The other unconventional measures might entail the purchase of a variety of assets, one of which is sovereign bonds.” The comments helped the pan-European FTSEurofirst 300 close 0.5% higher on the day.

The central bank has already launched a slew of stimulus in an effort to boost the economy by easing credit conditions. These include cutting interest rates to record lows and announcing plans to purchase covered bonds and asset-backed securities (ABS) – and there are calls for the ECB to do more by launching a U.S. Federal Reserve-style sovereign bond-buying program. Further measures, “could include changes to the size and composition to the Eurosystem balance sheet, if warranted, to achieve price stability over the medium term,” Draghi added.

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“Data released today showed that officials accelerated covered-bond buying last week, with the total settled rising by more than €3 billion – up from €2.629 billion the week before.” Ahem: the goal is $1 trillion. At this rate, that’ll take 6 years.

Draghi Says ECB Measures May Entail Buying Government Bonds (Bloomberg)

ECB President Mario Draghi explicitly cited government-bond buying as a policy tool officials could use to stimulate the economy if the outlook worsens. “Other unconventional measures might entail the purchase of a variety of assets, one of which is sovereign bonds,” Draghi said in Brussels today during quarterly testimony to lawmakers at the European Parliament. In opening remarks both today and after the ECB’s monthly policy decision, Draghi stopped short of mentioning government bonds when he said that officials had been tasked with the preparation of further stimulus measures. His comments today come weeks before the institution’s critical December meeting, when it will publish new forecasts that are likely to incorporate a lower outlook for the economy and inflation. Draghi will succeed in boosting the ECB’s balance sheet back toward €3 trillion ($3.74 trillion), though he’ll have to override some policy makers’ qualms on quantitative easing to do so, according to a majority of economists in Bloomberg’s monthly survey published today.

Until now, the ECB has restricted purchases of assets to covered bonds, though asset-backed securities are now on its shopping list too. Data released today showed that officials accelerated covered-bond buying last week, with the total settled rising by more than €3 billion – up from €2.629 billion the week before. As Draghi spoke, Italian and Spanish bonds rose. The ECB president began his comments in the parliament by presenting European lawmakers with a list of policy resolutions for them to pursue in 2015 as he insisted his institution alone can’t fix the economy. “2015 needs to be the year when all actors in the euro area, governments and European institutions alike, will deploy a consistent common strategy to bring our economies back on track,” Draghi said today. “Monetary policy alone will not be able to achieve this.” “Monetary policy has done a lot,” Draghi said. “It can do more if structural reforms are implemented. It can’t do everything.”

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Not sure the Bundesbank and Nowotny will look favorable on being called ‘qualms’. 60% of Bloomberg ‘experts’ think Draghi will win, and they’re hardly ever right about anything.

Draghi Seen Bypassing QE Qualms to Hit Balance-Sheet Goal (Bloomberg)

Mario Draghi will succeed in boosting the European Central Bank’s balance sheet back toward 3 trillion euros ($3.75 trillion), though he’ll have to override some policy makers’ qualms on quantitative easing to do so. That’s the majority view of economists in Bloomberg’s monthly survey, who have become more optimistic that the ECB president will meet his goal. Most predicted he’ll have to buy more than covered bonds and asset-backed securities though, and 72% said any stimulus expansion will be against the wishes of some national central-bank governors. Draghi, who has faced opposition to his most recent measures, told European lawmakers today that an expanded purchase program could include government bonds, as he insisted the ECB alone can’t fix the region’s economy. He also reiterated his pledge to be ready with further steps should the outlook worsen, and 95% of respondents in the survey said he’ll act on that promise either this year or in 2015.

“If private-sector asset purchases are insufficient, then sovereign bonds will then likely be included,” said Alan McQuaid, chief economist at Merrion Capital in Dublin. “This will be a hard sell internally.” Resistance to Draghi’s recent loosening of policy has come primarily from Germany. Bundesbank President Jens Weidmann has repeatedly warned of the risks of large-scale asset purchases, known as quantitative easing, and Executive Board member Sabine Lautenschlaeger has said the balance between cost and benefit for some non-standard tools is currently negative. Austria’s Ewald Nowotny joined Weidmann in opposing the ABS plan. That didn’t stop a fresh reference by Draghi on Nov. 6 to driving the balance sheet back toward its March 2012 level via asset purchases and targeted loans to banks. 60% of the economists surveyed said he’ll succeed, which implies that close to €1 euros of assets will be added. In last month’s survey just 39% said he’ll achieve his aim.

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Yup, that’s that strong revovered economy for you.

Industrial Output in U.S. Unexpectedly Fell in October (Bloomberg)

Industrial production in the U.S. unexpectedly dropped in October, weighed down by declines at utilities, mines and automakers that signal manufacturing started the fourth quarter on soft footing. Output fell 0.1% after a 0.8% increase in September that was smaller than previously estimated, figures from the Federal Reserve in Washington showed today. The median forecast in a Bloomberg survey of 83 economists projected a 0.2% gain. Factory production rose 0.2%, matching the prior month’s advance that was also revised down. A pickup in manufacturing is needed to help bolster the expansion, now is its sixth year, as global growth from Europe and Japan to emerging markets cools. Rising consumer confidence and the drop in gasoline prices are brightening the outlook for holiday sales, indicating factories will get a lift in the next few months.

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When CDS dries up, there will be major problems in the markets. It’s in the size: ” .. the market that shrank to less than $11 trillion from $32 trillion before the financial crisis”. So much money is evaporating it’s scary: “requiring large swaths of credit swaps to be backed by clearinghouses, which are capitalized by banks and require traders to set aside collateral, or margin, to cover losses”.

Deutsche Bank Scales Back Trading in Credit Derivatives (Bloomberg)

Deutsche Bank will stop trading most credit-default swaps tied to individual companies, exiting a business that new banking regulations have made costlier, according to a spokeswoman. The lender will instead focus on transactions in corporate bonds, while maintaining trading in the more active market for credit swaps tied to benchmark indexes, Michele Allison, a spokeswoman for the bank said today. The firm also will continue trading swaps tied to emerging-market borrowers and distressed companies, she said. The derivatives are used by hedge funds, banks and other institutional investors to protect against losses or to speculate on the ability of companies to repay their obligations. Deutsche Bank is exiting a part of the market that shrank to less than $11 trillion from $32 trillion before the financial crisis, data from the Bank for International Settlements show.

Dealing in credit swaps, which have been blamed for exacerbating the 2008 financial crisis, has become more expensive for lenders like Deutsche Bank as regulators across the U.S. and Europe require banks to hold more capital to back trades, reducing the returns for shareholders. “When liquidity providers leave the market, it becomes really questionable if the market is functioning efficiently,” Jochen Felsenheimer, founder of XAIA Investment said in a telephone interview. “Regulators continue to dry out the CDS market by putting more and more constraints.” Among measures that regulators have enacted since the crisis is requiring large swaths of credit swaps to be backed by clearinghouses, which are capitalized by banks and require traders to set aside collateral, or margin, to cover losses if they can’t make good on the transactions. Much of the market, where the privately negotiated trades have typically been done over phone calls and e-mails, is also being shifted to electronic systems.

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What could go wrong?

Flash Boys Invade $12.4 Trillion Treasury Market in New Era of Volatility (Bloomberg)

In a flash, the bond market went wild. What began on Oct. 15 as another day in the U.S. Treasury market suddenly turned into the biggest yield fluctuations in a quarter century, leaving investors worrying there will be turbulence ahead. The episode exposed a collision of forces – the rise of high-frequency trading and the decline of Wall Street dealers – that are reshaping the world’s biggest and most important bond market. Money managers say the $12.4 trillion Treasury market is becoming less liquid, meaning securities can no longer be traded as quickly and easily as they used to be, thanks in part to the Federal Reserve’s bond-buying program.

“The way the market is set up right now, we’ll see instances like we did on that day,” said Michael Lorizio, senior trader Manulife Asset Management, which oversees $281 billion. “There’s going to be a learning curve as to how to handle that.” The development reflects unintended consequences of new financial regulation, as well as steps the Fed has taken to breath life into the U.S. economy. The implications, however, extend far beyond Wall Street, because the Treasury market determines borrowing costs for governments, companies and consumers around the world. When the day began on Oct. 15, an unprecedented number of investors were betting that interest rates would rise and U.S. government debt would lose value. The news that morning seemed ominous. Ebola was spreading. So was war in the Middle East.

At 8:30 a.m. in Washington, the Commerce Department announced a decline in retail sales. The shift came all at once. The sentiment that the Fed would raise rates reversed. Traders who’d bet against, or shorted, Treasury bonds had to buy as many as they could as quickly as they could to limit their losses. By 9:38 a.m., 10-year Treasury yields plunged 0.34 percentage point, the most in five years. Analysts such as Jim Bianco, president of Bianco Research LLC in Chicago, blame the herd mentality of electronic traders. “A lot of these guys are focused on speed,” Bianco said. “They’re all uncreative and write the same program. When the stimulus comes in a certain way, every one of them comes to the same conclusion at exactly the same moment.”

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And we’ll see this as a positive, shall we?

Wall Street to Reap $316 Million From Day of Mega Deals (Bloomberg)

The five Wall Street banks that advised on $100 billion of takeovers announced yesterday by Halliburton and Actavis could reap as much as $316 million in fees for their work. Goldman Sachs and Bank of America will take home the lion’s share of that, with roles on both the $34.6 billion purchase of Baker Hughes Inc. by Halliburton, and the $66 billion acquisition of Allergan by Actavis. Goldman Sachs was the sole adviser to Baker Hughes, while Bank of America and Credit Suisse advised Halliburton. The three banks are set to receive as much as $143 million in total, Freeman & Co. said. Halliburton, the second-biggest oilfield services provider, agreed to buy No. 3 Baker Hughes, taking advantage of plunging crude prices to set up the biggest takeover of a U.S. energy company in three years. Actavis’s deal to acquire Allergan, meanwhile, will help the target rebuff a hostile approach from Valeant Pharmaceuticals International Inc.

Goldman Sachs and Bank of America were also advisers to Allergan, for which they may share as much as $92 million, according to Freeman. JPMorgan, meanwhile, may receive as much as $81 million as adviser to Actavis. Yesterday’s deals firmed up Goldman Sachs’s status as the No. 1 adviser on M&A, with almost $814 billion of total value to its credit. Morgan Stanley which didn’t have a role on either of the two large deals, ranks second with $653 billion of deals to its credit. Citigroup, which also didn’t have a role on either deal, slipped a spot in the rankings to No. 4, while Bank of America rose to third from fifth. The ranking lists, called league-tables, are used by banks when they pitch their services to clients. A strong track record can help them convince companies to hire them as advisers. “We are extremely proud of the performance and momentum of our M&A franchise and the strategic advice and solutions that we have delivered to our clients in 2014,” Citigroup spokesman Robert Julavits wrote.

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Fingers in your ears, a big bang is coming.

Australia’s Record-Low Rates To Head Further South (CNBC)

Australia’s economy faces myriad headwinds that could trigger interest rate cuts from the central bank, taking borrowing rates further south from current historic lows. “Leading indicators suggest that a case can be made for further cuts: Confidence is low and consistent with weak growth, inflation expectations are falling and the unemployment rate is rising,” Credit Suisse wrote in a note Friday, arguing that rates could fall to 1.5%. Consumer confidence slumped over 12% on year in November, according to a joint survey from the Melbourne Institute and Westpac, marking the ninth straight month of pessimists outnumbering optimists – the longest slump since the global financial crisis.

Meanwhile, Australia’s official jobless rate rose to a 12-year high of 6.2%in October. Lower inflation also paves the way for rate cuts, Credit Suisse said. Headline consumer price inflation cooled to an annual 2.3% during the third-quarter, the lower end of the central bank’s 2-3% target band. Most importantly, markets have started to price in cuts, it said. The dominant view among major banks is still for the Reserve Bank of Australia to hike interest rates in 2015, but Credit Suisse says the behavior of the spread between 10-year bond yields and the cash rate is “abnormal” and doesn’t reflect that view.

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One of multiple problems in US pensions.

US Pension Insurer Ran Record $62 Billion Deficit (AP)

The federal agency that insures pensions for about 41 million Americans saw its deficit nearly double in the latest fiscal year. The agency said the worsening finances of some multi-employer pension plans mainly caused the increased deficit. At about $62 billion for the budget year ending Sept. 30, it was the widest deficit in the 40-year history of the Pension Benefit Guaranty, which reported the data Monday. That compares with a $36 billion shortfall the previous year. Multi-employer plans are pension agreements between labor unions and a group of companies, usually in the same industry. The agency said the deficit in its multi-employer insurance program jumped to $42.4 billion from $8.3 billion in 2013. By contrast, the deficit in the single-employer program shrank to $19.3 billion from $27.4 billion.

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“The global economy has caught the equivalent of financial Ebola: deflation ..”

All Aboard The Instability Express (James Howard Kunstler)

The mentally-challenged kibitzers “out there” — in the hills and hollows of the commentary universe, cable news, the blogosphere, and the pathetic vestige of newspaperdom — are all jumping up and down in a rapture over cheap gasoline prices. Overlay on this picture the fairy tale of coming US energy independence, stir in the approach of winter in the North Dakota shale oil fields, put an early November polar vortex cherry on top, and you have quite a recipe for smashed expectations. Plummeting oil prices are a symptom of terrible mounting instabilities in the world. After years of stagnation, complacency, and official pretense, the linked matrix of systems we depend on for running our techno-industrial society is shaking itself to pieces.

American officials either don’t understand what they’re seeing, or don’t want you to know what they see. The tensions between energy, money, and economy have entered a new phase of destructive unwind. The global economy has caught the equivalent of financial Ebola: deflation, which is the recognition that debts can’t be repaid, obligations can’t be met, and contracts won’t be honored. Credit evaporates and actual business declines steeply as a result of all those things. Who wants to send a cargo ship of aluminum ore to Guangzhou if nobody shows up at the dock with a certified check to pay for it? Financial Ebola means that the connective tissues of trade start to dissolve, and pretty soon blood starts dribbling out of national economies.

One way this expresses itself is the violent rise and fall of comparative currency values. The Japanese yen and the euro go down, the dollar goes up. It happens in a few months, which is quickly in the world of money. Foolish US cheerleaders suppose that the rising dollar is like the rising score of an NFL football team on any given Sunday. “We’re numbah one!” It’s just not like that. The global economy is not some stupid football contest. When currencies change value quickly, as has happened since the past summer, big banks get into big trouble. Their revenue streams are pegged to so-called “carry trades” in which big blobs of money are borrowed in one currency and used to place bets in other currencies. When currency values change radically, carry trades blow up.

So do so-called “derivatives” such as bets on interest rate differentials. When the sums of money involved are grotesquely large, the parties involved discover that they never had any ability to pay off their losing bet. It was all pretense. In fact, the chance that the bet might go bad never figured into their calculations. The net result of all that foolish irresponsibility is that banks find themselves in a position of being unable to trust each other on virtually any transaction. When that happens, the flow of credit, a.k.a. “liquidity,” dries up and you have a bona fide financial crisis. Nobody can pay anybody else. Nobody trusts anybody. Fortunes are lost. Elephants stomp around in distress, then keel over and die, and a lot of “little people” get crushed in the dusty ground.

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Looks like a good book to get.

The Secret History Of Corruption In America (Stoller)

If there s one way to summarize Zephyr Teachout’s extraordinary book Corruption in America: From Benjamin Franklin’s Snuff Box to Citizens United, it is that today we are living in Benjamin Franklin’s dystopia. Her basic contention, which is not unfamiliar to most of us in sentiment if not in detail, is that the modern Supreme Court has engaged in a revolutionary reinterpretation of corruption and therefore in American political life. This outlook, written by Supreme Court Justice Anthony Kennedy in the famous Citizens United case, understands and celebrates America as a brutal and Hobbesian competitive struggle among self-interested actors attempting to use money to gain personal benefits in the public sphere.

What makes the book so remarkable is its scope and ability to link current debates to our rich and forgotten history. Perhaps this has been done before, but if it has, I have never seen it. Liberals tend to think that questions about electoral and political corruption started in the 1970s, in the Watergate era. What Teachout shows is that these questions were foundational in the American Revolution itself, and every epoch since. They are in fact questions fundamental to the design of democracy.

Teachout starts her book by telling the story of a set of debates that took place even before the Constitution was ratified – whether American officials could take gifts from foreign kings. The French King, as a matter of diplomatic process, routinely gave diamond-encrusted snuff boxes to foreign ambassadors. Americans, adopting a radical Dutch provision banning such gifts, wrestled with the question of temptation to individual public servants versus international diplomatic norms. The gifts ban, she argues, was evidence of a particular demanding notion of corruption at the heart of American legal history. These rules, bright-line rules versus corrupt-intent rules, govern temptation and structure. They cover innocent and illicit activity, as opposed to bribery rules which are organized solely around quid pro quo corruption.

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However you slice and dice it, that’s not a number from a recovering economy.

UK Grocery Sales In Decline For First Time In 20 Years (Guardian)

UK grocery sales have gone into decline for the first time in at least 20 years as a raging price war and the falling cost of food commodities hit Britain’s supermarkets. In good news for shoppers, the average price of a basket of everyday essentials such as milk, bread and vegetables now costs 0.4% less than it did a year ago, according to the latest figures from market research firm Kantar Worldpanel. But the figures highlight a painful few months for the UK’s biggest retailers with all of the “big four” supermarkets seeing sales fall back in the 12 weeks to 9 November. Tesco continues to be the worst performer with sales dropping by 3.7%, but Morrisons’ performance deteriorated at the fastest rate, with the slump in sales accelerating to 3.3%, from 1.3% a month ago.

Sainsbury’s trading figures also worsened, with sales down 2.5%. Asda’s sales also went into decline, for the first time in some months, although the Walmart-owned group was the only one of the big four to hold market share. Fraser McKevitt, head of retail and consumer insight at Kantar Worldpanel said: “The declining grocery market will be of concern to retailers as they gear up for the key Christmas trading season.” In a pattern that has continued throughout this year, the German discounters Aldi and Lidl continued to grow strongly, as did the up-market grocer Waitrose. But only Waitrose picked up the pace of growth, to 5.6%, shoring up its spot at the UK’s sixth largest supermarket. Aldi’s growth slowed to 25.5% from 29.1% last month, and more than 30% earlier this year, while Lidl’s growth slowed to 16.8% from 17.7% last month.

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Complaceny and hubris pay off.

1 in 5 UK Supermarkets Must Close To Restore Profit Growth (Guardian)

Supermarket chiefs need to take drastic action by shutting one in five of their stores if the financial health of the mainstream grocery chains is to recover from the damage being wreaked by altered shopping habits and the onslaught of the discounters, according to analysts at Goldman Sachs. A large closure programme is the only viable solution to bring about a return to profitable growth for the UK supermarket industry, the analysts said in a report. With 56% of Tesco’s stores bigger than 40,000 sq ft, the report concludes the market leader has the biggest problem on its hands. Profits at the three listed chains, Tesco, Sainsbury’s and Morrisons, have gone into reverse as weak food sales are exacerbated by the runaway growth of Aldi and Lidl. Further pressure is coming from structural changes in the market such as the growth of online and convenience store retailing.

Last week Sainsbury’s reported a first half loss of £290m as it counted the cost of pulling the plug on 40 new supermarket projects and wrote down the value of its underperforming stores. Goldman Sachs analyst Rob Joyce was gloomy about the ability of the major players to bounce back if the fight was based on price cuts alone. “We believe that any major price investments by Morrisons, Sainsbury’s or Tesco can be exceeded by the discounters,” he wrote. The unhealthy industry dynamic prompted him to predict large stores would suffer like-for-like sales declines of 3% a year until 2020, unless the big chains embrace the need for major surgery. Too much focus on profitability allowed the “discounters to get too strong”, with incumbents, until recently, reliant on pushing up prices to combat falling sales?, according to the report. But even Asda, which was the first of the big four to take on the discounters with a £1bn price cuts campaign, has started to show signs of strain.

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It’s a simple story.

Putin Warns He Won’t Let Ukraine Annihilate Eastern Rebels (Bloomberg)

Russian President Vladimir Putin warned he won’t allow rebels in eastern Ukraine to be defeated by government forces as European Union ministers met to consider imposing more sanctions on the separatists. “You want the Ukrainian central authorities to annihilate everyone there, all of their political foes and opponents,” Putin said in an interview yesterday with Germany’s ARD television. “Is that what you want? We certainly don’t. And we won’t let it happen.” German Chancellor Angela Merkel said yesterday the EU will keep its economic sanctions on Russia “for as long as they are needed.”

EU foreign ministers convened today in Brussels to discuss adding to sanctions that have limited access to capital markets for some Russian banks and companies and blacklisted officials involved in the conflict. New measures will likely target pro-Russian separatist leaders, the EU said. “Sanctions in themselves are not an objective, they can be an instrument if they come together with other measures,” European Union foreign policy chief Federica Mogherini told reporters before the meeting. She said the EU’s three-track strategy consists of sanctions, encouragement of reforms in Ukraine and dialogue with Russia. “We are very concerned about any possible ethnic cleansings and Ukraine ending up as a neo-Nazi state,” Putin said according to an English translation of his remarks published by the Kremlin.

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They’re afraid if they cut production, investors may pull out. So they keep on the treadmill until they blow up the entire thing.

Shale Drillers Plan Output Increases Despite Oil Price Decline (Bloomberg)

Shale drillers are planning on production growth with fewer rigs despite a worldwide glut that has sent crude prices to a four-year low. Companies including Devon Energy, Continental Resources and EOG Resources said they expect to pump more from their prime properties while cutting back in their least productive prospects. That puts the onus on OPEC nations, led by Saudi Arabia, to cut output if they want to stem the slide in global oil prices. “There’s a lot more production coming online this year and in the first half of 2015,” said Jason Wangler, an analyst at Wunderlich Securities. “This isn’t a machine that you can turn on and off with a switch. It’s going to take months, if not quarters, to turn it around.”

Domestic output topped 9 million barrels a day for the first time since at least 1983, the U.S. Energy Information Administration said Nov. 13. West Texas Intermediate crude, the U.S. benchmark oil contract, sank 18 cents yesterday to settle at $75.64 a barrel. Prices fell to $74.21 on Nov. 13, the lowest since 2010. “Certainly if prices fall even further than they are now, it’ll have some impact, and it may slow the growth rate of U.S. production,” said Jason Bordoff, founding director of Columbia University’s Center on Global Energy Policy in New York. “I still think, unless they fall significantly further, U.S. production is going to see dramatic increases in growth.”

Lower prices aren’t stopping U.S. shale drillers. Devon Energy, which pumped 136,000 barrels a day of crude in the third quarter, will boost output by as much as 25% next year, said John Richels, the company’s CEO, in a Nov. 5 earnings call. That rivals this year’s expansion, even though Devon will idle four of its six rigs in Oklahoma’s Mississippi Lime prospect. Continental Resources, which produced 128,000 barrels a day in the third quarter, trimmed $600 million from its 2015 drilling budget by shelving plans to add new rigs. Nonetheless, the Oklahoma City-based company said in its Nov. 6 earnings call it will increase output as much as 29%. Pioneer Natural Resources in Irving, Texas, the most active driller in West Texas’s Permian Basin, said in its Nov. 5 third-quarter call that it plans to add as much as 21%.

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Anything for a buck.

3 Billion Gallons Of Fracking Wastewater Pumped Into Clean CA Aquifers (ZH)

Dear California readers: if you drank tapwater this morning (or at any point in the past few weeks/months), you may be in luck as you no longer need to buy oil to lubricate your engine: just use your blood, and think of the cost-savings. That’s the good news. Also, the bad news, because as the California’s Department of Conservation’s Chief Deputy Director, Jason Marshall, told NBC Bay Area, California state officials allowed oil and gas companies to pump up to 3 billion gallons (call it 70 million barrels) of oil fracking-contaminated waste water into formerly clean aquifiers, aquifiers which at least on paper are supposed to be off-limits to that kind of activity, and are protected by the government’s EPA – an agency which, it appears, was richly compensated by the same oil and gas companies to look elsewhere.

And the scariest words of admission one can ever hear from a government apparatchik: “In multiple different places of the permitting process an error could have been made.” Because nothing short of a full-blown disaster prompts the use of the dreaded passive voice. And what was unsaid is that the “biggest error that was made” is that someone caught California regulators screwing over the taxpayers just so a few oil majors could save their shareholders a few billion dollars in overhead fees. And now that one government agency has been caught flaunting the rules, the other government agencies, and certainly private citizens and businesses, start screaming: after all some faith in the well-greased, pardon the pun, government apparatus has to remain:

“It’s inexcusable,” said Hollin Kretzmann, at the Center for Biological Diversity in San Francisco. “At (a) time when California is experiencing one of the worst droughts in history, we’re allowing oil companies to contaminate what could otherwise be very useful ground water resources for irrigation and for drinking. It’s possible these aquifers are now contaminated irreparably.”

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Our own countries are replete with mental slaves.

Modern Slavery Affects More Than 35 Million People (Guardian)

More than 35 million people around the world are trapped in a modern form of slavery, according to a report highlighting the prevalence of forced labour, human trafficking, forced marriages, debt bondage and commerical sexual exploitation. The Walk Free Foundation (WFF), an Australia-based NGO that publishes the annual global slavery index, said that as a result of better data and improved methodology it had increased its estimate 23% in the past year. Five countries accounted for 61% of slavery, although it was found in all 167 countries covered by the report, including the UK. India was top of the list with about 14.29 million enslaved people, followed by China with 3.24 million, Pakistan 2.06 million, Uzbekistan 1.2 million, and Russia 1.05 million.

Mauritania had the highest proportion of its population in modern slavery, at 4%, followed by Uzbekistan with 3.97%, Haiti 2.3%, Qatar 1.36% and India 1.14%. Andrew Forrest, the chairman and founder of WFF – which is campaigning for the end of slavery within a generation – said: “There is an assumption that slavery is an issue from a bygone era. Or that it only exists in countries ravaged by war and poverty. “These findings show that modern slavery exists in every country. We are all responsible for the most appalling situations where modern slavery exists and the desperate misery it brings upon our fellow human beings.

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That’s an excellent way to look at them.

Ebola Doctors: The Last Working Consciences In The Western World (Guardian)

Patients arrive at the Médecins Sans Frontières treatment centre in Sierra Leone 10 to an ambulance. The overcrowding means that by the time they get there, even those whose original symptoms may not have been Ebola will have been sufficiently exposed to catch it on the way in. Such is life in West Africa in the midst of the worst outbreak of the disease since it was first identified 38 years ago. Ebola Frontline – Panorama (BBC1) followed MSF doctor Javid Abdelmoneim – who, along with his colleagues, you can’t help but feel must be the owners of the last working consciences in the western world – on his month-long volunteer posting to the centre, treating some of the tens of thousands of people who have contracted Ebola since the epidemic began nine months ago.

Furnished with a specially adapted camera fitted to his goggles, one that can survive the chlorine sprayings and sluicings as part of the good doctor’s 20 minute decontamination procedure every time he leaves the tent full of his suffering and dying charges, we watch along with him as the disease plots its course through bodies, through families and through entire communities. People die quietly, for the most part. The loudest noise we hear is the wailing in grief of a woman who loses her sister. Their parents died before the cameras got there. Eleven-month-old Alfa is an Ebola orphan too, one of the estimated 10.3 million children directly or indirectly affected by the crisis. She dies alone, relieved of physical pain, Abdelmoneim hopes, by the morphine he gives her as her little body starts to fail, but “she looked frightened at the end”.

She is buried in a cemetery purpose-built for bodies that remain biohazards after death, one of hundreds of people marked only by patient ID numbers scrawled on paper labels attached to sticks driven into the ground. While the volunteer doctors, nurses and staff try to hold the line at the treatment centre – whose name they change to “case management centre” in recognition that all they can give is supportive, not curative care – the voiceover keeps us abreast of the rising death toll in Africa and the ponderous reactions and non-reactions of other nations to the crisis, and the delivery and non-delivery of promises and aid to the stricken regions. Last month the UN called for a twentyfold increase in help. Half of that has so far been donated. A plague on all our houses.

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Jun 242014
 
 June 24, 2014  Posted by at 3:17 pm Finance Tagged with: , ,  


John Vachon Soft drinks and war bonds truck, Montgomery AL March 1943

The age of financial innnovations found such an exalted high priest in Alan Greenspan that in his days as Fed governor he couldn’t stop talking about the dangers of regulating them, even though that was in his job description, and even though he had far too little detailed knowledge of them. His sidekicks over at the Treasury, Bob Rubin and Larry Summers, made sure their friends at Citi and JPMorgan had nothing to fear from the US government in this regard either, just as Glass-Steagall was repealed.

That’s how we got see the spread of a zillion kinds of securities and derivatives, and that’s why the vast majority of them were lauded as being highly beneficial for the economy, and therefore for all of us. Many of these instruments were and are being touted as insurance policies for the finance industry, in the same way farmers had been able to buy crop insurance since the days of old.

But that’s at best only part of the story. For instance, whether the hugely popular credit default swap may or may not initially have been ‘invented’ to serve as an insurance tool in the financial markets, is hardly interesting or relevant. What’s more important is that it very rapidly became, while it got cheaper as its popularity soared, a way for corporations and financial institutions to hide, and get rid of, their debts and liabilities.

In somewhat simplified terms, once you can claim that you have insurance against potential losses on your assets, you no longer have to carry reserves against the risk of these losses. At the height of the crisis this made many a balance sheet look a whole lot better than it really was .

And that situation continues to this day. Even if conditions have changed, and been adapted. A lot of the riskiest paper has been bought up by central banks since 2008. That buying spree, too, continues. This has lowered the risks – of credit defaults – substantially, at least for now and at least in the eyes of the industry.

And since the central banks have not only taken on a lot of the worst risk, but also made sure stock markets have been propped up and interest rates kept low, and moreover are today even increasingly purchasing stocks and bonds themselves, asset prices are skyhigh and risk assessments are ultra low. Stocks, bonds, securities have all been bought up with central banks’ thin air money in such quantities that central banks have become the markets instead of regulating them.

The reality of central bank stimulus measures, such as QE 1,2,3,x, is as different from perception as that of credit default swaps. And their aim and function are very similar: to hide from sight the risks that exist inside the financial system. Both for CDS and for QE this so far works like a charm. The dark side is, however, that if no-one knows the real value of any assets anymore, they have no way of gauging the risks involved either.

Central banks’ policies today are geared towards one goal, and one only: that no-one will find out what anything at all is really worth. The very fact that the Chinese, Japanese, European and American central banks engage in this behavior in the first place should raise flaring red flag suspicions about actual values.

Both QE and CDS – along with many other “securities” – are weapons of mass deception. We live in a global economic system that has been intentionally deprived of the means to find out what assets are worth, and that’s not a coincidence. The system couldn’t survive in its present state if there were price discovery; real values and losses may have been hidden, but they haven’t gone away.

Values may have been artificially inflated, and losses artificially limited, but nothing of the underlying reality has changed. Quite the contrary: decisions are being made on a daily basis by governments, companies and individuals, based on the false assumptions about values, risks and losses that result from financial innovations specifically designed to produce an artificial portrait of where we stand.

The consequence is that no-one truly knows where they stand anymore, but almost everyone thinks they do, thinks that we’re in a rough patch, but otherwise doing fine, that we’re growing, just at a temporarily slow pace. While in reality, we haven’t grown in years, and have very little chance of doing so in the next decade, at least.

We don’t like the idea that everything we see that looks and feels good in this regard needs to be borrowed from somebody’s future. So we ignore it. We’re a sad lot, really, we can’t face our own truth. We’d rather sell our souls for a lie that makes us feel better for a fleeting moment. We all like to think our homes, our pensions, our investments are worth more than they are.

QE, CDS et al are “innovations” designed to take advantage of that.

“There’s something going on in derivatives land … ”

The Market Has Never Been More Fearful Of An Extreme Event (Zero Hedge)

“There’s something going on in derivatives land,” is the warning from ADM’s Andy Ash and as Paul Mylchreest notes the relationship between VIX and SKEW suggests the options market is pricing in the possibility of a major market event. The process enables professionals to maintain the illusion of calmness in VIX while hedging their positions (as they attempt to unwind as we have shown). Whether this ‘event’ is a crash or melt-up is historically unclear but given the taper and the trend of the last few years, we suspect the former more likely that the latter.

Via ADM Investor Services’ Paul Mylchreest: “A rather thought-provoking chart which we’ve been looking at is the ratio of the SKEW (the chance of an extreme or outlier event, i.e. OTM versus ATM options) versus the VIX (the expectations for more ‘normal’ day-to-day volatility – the price of hedging implied by ATM options)… and is an indicator of how the market is pricing the possibility of a potential black swan event. You can see how extended we are right now… (actually at record highs)

We can’t help wondering when Bill Gross tells the world that he is selling volatility, whether he is, in fact, selling ATM vol and buying OTM vol ??? While (curiously) 2000 didn’t register, the two previous highs in the SKEW/VIX ratio were 1994 and 2007 which turned out to be pivotal dates in terms of changes in market direction. One up and one down… Which does it look like this time?

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Abenomics is a disaster.

Bank of Japan At Risk Of QE Failure (CNBC)

The unprecedented quantitative easing (QE) program the Bank of Japan launched last year to revive the country’s stalled economy could be at risk of failure, Oxford Economics says. “Economic activity has indeed picked up since the QE program began early last year, but there are now serious warning signs that this progress may not be maintained,” Adam Slater, senior economist at Oxford Economics wrote in a report. The central bank’s large-scale asset purchases were designed to boost money supply growth, asset prices and inflation expectations while holding down interest rates. However, broad money growth slowed markedly in recent months and is now negative in real terms, a clear danger sign. “Higher inflation expectations have done little to boost credit demand so far, as continued aversion to debt among firms and households may be blunting the effectiveness of this channel,” he said.

In May, the broadest money supply measure grew just 2.7% on year, according to Oxford Economics. With headline inflation running at 3.2% in May, real broad money growth is negative. “This risks generating a significant economic slowdown – a slowdown in real broad money growth was a lead indicator of the downturns in 1998, 2005, 2009 and 2012,” Slater said. Meanwhile, the impact of monetary stimulus on asset prices is waning. QE aims to boost economic activity through shifting asset prices; for Japan, the two key prices are the stock market and the exchange rate. “Both of these asset prices have moved the ‘right way’ as a result of the QE program – stocks are up, and the exchange rate is down. But the big moves were a year ago or more, so the impact is starting to wane,” Slater said. Japan’s benchmark Nikkei 225 has declined over 6% so far this year, after rising nearly 60% last year. The yen, meantime, has appreciated over 3% against the U.S. dollar, following 21% depreciation last year. [..]

“The Bank of Japan should have ensured that monetary stimulus was sufficiently strong to offset the drag from the consumption tax rises. Recent developments in broad money and credit suggest they have failed to do so, and recent communications do not suggest any urgency on the part of the BOJ to act,” he said. “The case for delaying the second planned consumption tax rise (scheduled for 2015) is growing increasingly strong,” he added. Ultimately, the BOJ’s inaction risks turning the QE program from a qualified success into a failure. “We have long expected the BOJ to add to its QE program but had generally assumed this would be a measured decision aimed at heading off lingering downside risks to growth and inflation. Now, the danger is increasing that this will instead be a tardy response to a significant deterioration in economic conditions,” he said.

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And then came the ….

Dollar Volatility at Record Low on Bets Fed to Keep Zero Rates (Bloomberg)

Expectations for price swings in the dollar-yen currency pair fell to a record as signs of an uneven U.S. economic recovery fueled bets the Federal Reserve will keep borrowing costs at unprecedented lows. The dollar was poised for declines this quarter against most of its 16 major counterparts before U.S. reports this week that economists said will show new home sales slowed and gross domestic product contracted more than earlier estimated. The pound was about 0.2% from the strongest level since 2008 before Bank of England Governor Mark Carney testifies today to U.K. lawmakers.

Taiwan’s dollar gained as quarterly equity inflows climb toward the most since 2009. “You would need to see some prospect of change in the trajectory of U.S. monetary policy” before you see any pickup in volatility, said Emma Lawson, a senior currency strategist at National Australia Bank Ltd. in Sydney. “We don’t expect the dollar to deteriorate, but equally, it’s not expected to really take off until we get some indication of a change.”

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Only expensive homes sell, because only the rich got richer.

Guess Who Is Propping Up The US Housing Market (Zero Hedge)

Moments ago the NAR released its May data, which on first blush was widely lauded as bullish: the topline print came at a 4.9% increase, rising from 4.65MM to 4.89MM, above the 4.74MM expected. Great news… if only on the surface. So what happens when one drills down into the detail? As usual, we focused on the last slide of the NAR breakdown, located at the very end of the supplementary pdf for good reason, because what it shows is hardly as bullish. So how does this “housing recovery” in which the NAR has proclaimed the “sales decline is over” look on a granular basis. The answer is below, and it is even worse than the April data. It also explains why first time buyers have dropped to even further cycle lows of just 27%, down from 29% both a month and year ago.

This is bad because while in April there was a modest increase sales in house buckets from $250 all the way up to $1MM +, in May the only bucket that had an increase in sales from a year ago was that exclusively reserve for the ultra-richest, i.e., those who benefit the most from the Fed’s non-trickle downing wealth effect policies. In fact, on a price bucket basis, the May data was unformly worse than April!

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It shouldn’t be used for Abe’s political purposes.

‘Japan Pension Fund Should Hold Cash After Dumping Bonds’ (Bloomberg)

The world’s biggest pension fund should consider sitting on cash after selling Japanese sovereign bonds, said the government’s top adviser on the overhaul, after the Topix (TPX) index of stocks rebounded 10% amid anticipation of retirement-plan buying. While the Government Pension Investment Fund must take the opportunity to sell debt amid central-bank stimulus that is holding down yields, there’s less pressure to invest the proceeds, said Takatoshi Ito, who led a panel that advised the government on overhauling the 128.6 trillion yen ($1.3 trillion) fund. GPIF should avoid buying into markets that have rallied on bets its purchases will boost prices, he said. “It’s OK if there’s a gap in timing between selling JGBs and buying Japanese stocks and overseas assets,” Ito, a professor at the National Graduate Institute for Policy Studies in Tokyo, said in a June 19 interview.

“If they hold cash and short-term bills, they also have the option of buying back some bonds after yields finish rising.” The Topix surged 10% from a May 21 low through yesterday, outpacing a global stock rally, as investors speculated that inflows from the world’s biggest pension fund would accelerate. GPIF may change its strategy as soon as August, and putting 20% of its assets into local stocks wouldn’t be too much, Yasuhiro Yonezawa, who heads its investment committee, told the Nikkei newspaper this month. GPIF should cut its target holdings of domestic bonds to 40% from 60%, while boosting local shares to 20% from 12%, Ito said. After completing his role advising on pensions, Ito currently heads a Ministry of Finance panel working on reviving Japan’s capital markets.

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The whole economy will have huge problems with rising rates.

Bond Market Has $900 Billion Mom-and-Pop Problem When Rates Rise (Bloomberg)

It’s never been easier for individuals to enter some of the most esoteric debt markets. Wall Street’s biggest firms are worried that it’ll be just as simple for them to leave. Investors have piled more than $900 billion into taxable bond funds since the 2008 financial crisis, buying stock-like shares of mutual and exchange-traded funds to gain access to infrequently-traded markets. This flood of cash has helped cause prices to surge and yields to plunge. Now, as the Federal Reserve discusses ending its easy-money policies, concern is mounting that the withdrawal of stimulus will lead to an exodus that’ll cause credit markets to freeze up. While new regulations have forced banks to reduce their balance-sheet risk, analysts at JPMorgan Chase & Co. (JPM) are focusing on the problems that individual investors could cause by yanking money from funds.

There’s a bigger risk “that when the the Fed starts hiking in earnest, outflows from high-yielding and less-liquid debt will lead to a free fall in prices,” JPMorgan strategists led by Jan Loeys wrote in a June 20 report. “In extremis, this could force a closing of the primary market and have serious economic impact.” Last week, Fed Chair Janet Yellen said she didn’t see more than a moderate level of risk to financial stability from leverage or the ballooning volumes of debt. Even though it may be concerning that Bank of America Merrill Lynch index data shows yields on junk bonds have plunged to 5.6%, the lowest ever and 3.4%age points below the decade-long average, the outlook for defaults does look pretty good.

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” … it will be 10 to 20 years before the potential growth rate rises”. Japan doesn’t have 10 to 20 years.

Japan’s Abe Unveils ‘Third Arrow’ Of Reforms, Disappoints (Reuters)

Prime Minister Shinzo Abe unveiled a package of measures on Tuesday aimed to boost Japan’s long-term economic growth, from phased-in corporate tax cuts to a bigger role for women and foreign workers, but applause from investors is likely to be muted after Tokyo backpedaled on bolder reforms. Abe took office 18 months ago pledging to end deflation and generate sustainable growth with a three-pronged strategy of monetary easing, fiscal spending and reform. Experts say the latest installment of his so-called “Third Arrow” of long-term economic policies, most of which had been trailed in advance, is a step in the right direction, but want to see how they are fleshed out and implemented. Private economists surveyed by Reuters forecast that the plan could boost Japan’s potential growth rate by 0.2-1.5 percentage points from its current level of around 0.5%. But they noted that it would take time.

“Even after the government growth strategy is announced, various legislation must be enacted and it will take time for companies to begin to act. Therefore, it will be 10 to 20 years before the potential growth rate rises,” said Kenji Yumoto, vice chairman of the Japan Research Institute. Yumoto said it was possible, but very difficult, for Japan to hit the 2% growth level the government says is needed to reduce its mammoth public debt. Among the steps outlined so far is a future cut in Japan’s effective corporate tax rate – among the highest in the world – to below 30% over the next several years, and a promise to reform the $1.26 trillion Government Pension Investment Fund in ways likely to reallocate more money to the stock market.

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At least it would be in tune with the entire casino theme.

Better A Lucky Central Banker Than A Correct One? (CNBC)

Better a lucky governor than one who’s always right. At least, that’s what Mark Carney will be hoping for as he faces politicians on Tuesday – almost a year to the day since he took over as Bank of England Governor. After all, the Treasury Select Committee could find plenty of things to quiz Carney about. A starter for 10 would be his scattergun communication record on interest rates. His volte face on rates this month caused short-term borrowing costs to spike in the biggest one-day jump since 2009, back when the U.K. was in the midst of a financial crisis.

The Monetary Policy Committee minutes may say the Bank was surprised a rate rise hadn’t been factored in earlier – but most participants would argue they had simply trusted the governor. But it’s not just Carney’s credibility in the bond market that’s at question. The governor got it wrong on his unemployment target, on the pace of recovery in the U.K., and his fuzzy guidance has been, well, fuzzy, testing the patience of politicians and borrowers alike. Certainly, even Carney can’t pretend to have got it right in his forecasts about the pace of Britain’s recovery. Until recently, the “guidance” seemed to be that Carney was in no big hurry to raise rates – believing the economy was still fragile.

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Just give everyone $1000 a month for life, that would be much cheaper.

UK Living Wage Commission: End “National Scandal” Of Poverty (Telegraph)

Measures should be taken to cut the number of low-paid workers by a million to end the “national scandal” of poverty, according to a new report. A year-long study by the Living Wage Commission recommended a series of “low-cost” moves to tackle low pay, by building on the UK’s economic recovery. The commission, chaired by Archbishop of York John Sentamu, said increasing the pay of half a million public sector workers to the Living Wage could be more than met by higher tax revenues and reduced in-work benefits from a similar number of employees in private firms. Professional service firms such as accountancy, banks and construction companies could boost the pay of 375,000 workers if they agreed to pay the Living Wage, currently set at £8.80 an hour in London and £7.65 elsewhere, compared to the national minimum wage of £6.31, said the report.

The commission, made up of business, union and voluntary sector leaders, said extending the Living Wage depended on the Government adopting a goal to increase the voluntary take up of the companies payinh higher rate to at least a million more workers by 2020, otherwise families will continue to rely on food banks and “unsustainable debt”. Dr Sentamu said: “Working and still living in poverty is a national scandal. For the first time, the majority of people in poverty in the UK are now in working households. “The campaign for a Living Wage has been a beacon of hope for the millions of workers on low wages struggling to make ends meet. If the Government now commits to making this hope a reality, we can take a major step towards ending the strain on all of our consciences. Low wages equals living in poverty.”

Dr Adam Marshall, director of policy and external affairs at the British Chambers of Commerce, said: “The return to economic growth means that many employers are now looking again at increasing levels of pay for their employees after a tough period for business. “Many thousands of companies already pay their employees a Living Wage, and many more have an aspiration to do so. As the recovery gathers pace, they should be supported and encouraged to make this happen without facing compulsion or regulation, which could lead to job losses and difficulties – particularly for younger people entering the labour market.

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I think it’s Brussels that’s dragging down Europe.

France And Germany ‘Dragging Down’ Eurozone Recovery (Telegraph)

They are meant to be the powerhouses of Europe, but the latest figures show that the “core” economies of France and Germany are faltering while growth in the rest of the eurozone is at its strongest since pre-recession levels. France’s economy was hit by a steep downturn, and in Germany the pace of expansion was at its weakest in eight months, according to a flash reading of most recent Purchasing Managers’ Index (PMI) report by Markit. Across “peripheral” Europe – including the countries that were hit the hardest by the global financial crisis – output accelerated and growth is at the strongest since August 2007. Chris Williamson, chief economist at Markit, said that these divergent trends between the “core” and “peripheral” countries of Europe were a “big concern”.

He said: “Although the survey suggests the eurozone as a whole should grow by at least 0.4pc in the second quarter, France appears to be entering a renewed downturn after GDP stagnated in the first quarter. “Germany meanwhile looks set to grow by 0.7pc or more in the second quarter, albeit with signs that the upturn is starting to lose momentum again. “It is the rest of the region, outside of France and Germany, which – as a whole – is seeing the strongest growth momentum at the moment, highlighting how the ‘periphery’ is recovering.” The PMI report showed that in France, business contracted for the second month running ad suffered the steepest downturn with headcounts cut at the fastest rate since February. Despite the slow increases that were recorded in both the manufacturing and service sectors in Germany, the latter remained optimistic about prospects for output growth in the year ahead, with positivity hitting a three year high.

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Trojan horse story.

Berlin Is Playing With Fire Over The EU’s Top Job (Open Europe)

The fight over the appointment of the next European Commission President has reached fever pitch and left David Cameron facing the prospect of being the first EU leader ever to be outright outvoted on the matter. It would set a range of unfortunate precedents for the UK – as a new Open Europe briefing explains here. However, it would also set a very worrying precedent – and be a big gamble – for Berlin. Many representatives of Germany’s chattering classes have chosen to throw their weight behind the idea of “Spitzenkandidaten” – the notion that the European Parliament, rather than EU leaders, appoints the Commission President. Somehow, Jean-Claude Juncker has been depicted as the “people’s choice” and David Cameron the chief enemy of democracy.

There are a range of complicated reasons behind this odd series of events, including Merkel’s own coalition partner, the SPD, successfully cornering her over her decidedly lukewarm support for a candidate she herself had endorsed. Now, it’s Europe’s worst kept secret that Italy’s Matteo Renzi and France’s Francois Hollande are looking for a horse-trade: their votes for Juncker are conditional on greater flexibility in the eurozone’s rules on budget deficits, the very opposite of what Merkel and most Germans want. This has led mega-tabloid Bild – that backed Juncker a few weeks ago – to blast the “shabby haggling” over Juncker’s candidacy. It argued: “Juncker should be warned and be made aware that he must not be a chief at the mercy of Southern Europe.”

The irony of a process intended to boost transparency now being concluded via various backroom deals should not be lost on anyone. However, for Germany it also poses two huge risks going forward. First, this may set a troublesome anti-Ordnungspolitik precedent. A candidate to head the European Commission with an alleged “public mandate” who promised the Mediterranean block goodies in return for support under Qualified Majority Voting (meaning that Germany, like the UK, has no veto) surely must be Berlin’s worst nightmare. What if the next Commission President chosen by the Eurobond friendly European Parliament campaigns on a platform of debt pooling and laxer fiscal rules (on the latter, the Commission does have a key role). Berlin is just about to give away even more control over one of its key post-World War pillars.

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These guys already cooperate much more than they compete; they have the same goals. My bet is some sort of merger comes out of this and then a name change, in the same fashion that Blackwater became Academi, a brilliant name for an ordinary bunch of mercenaries. Wonder what they paid the guy who came up with it.

Monsanto Said to Have Weighed $40 Billion Syngenta Deal (Bloomberg)

The desire to avoid U.S. corporate taxes has now spread to agricultural giants – as a dead deal shows. Monsanto, the world’s largest seed company worth $64 billion, recently explored a takeover of $34 billion Swiss rival Syngenta in a transaction that would have allowed the U.S. firm to move its tax location to Switzerland. The deal, which is now defunct according to people familiar with the matter, is another sign of how U.S. firms in many sectors are trying to avoid corporate taxes by moving their headquarters overseas. U.S. drugmaker Pfizer Inc. pursued U.K.- based AstraZeneca Plc, offering as much as $117 billion before abandoning the deal, while North Chicago, Illinois-based AbbVie. is chasing Dublin-based Shire for $46.5 billion.

Monsanto and Syngenta held preliminary talks with advisers in the past few months about a combination before Syngenta’s management decided against negotiations, said the people, who asked not to be identified because the talks were private. Company officials also spoke informally with each other about a potential deal, two of the people said. There were concerns about the strategic fit, antitrust issues and relocating the company to Switzerland for tax reasons, they said. The talks, which valued Syngenta at more than $40 billion, fizzled out in late May, one of the people said. An additional concern was that U.S. politicians would close the inversion loophole, thereby removing that benefit, another person said.

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How to communicate collapse.

Answers to Tough Questions (Dmitry Orlov)

1. How can we communicate the reality of collapse to family and friends in ways that are constructive rather than destructive and find helpful ways to reflect our “endarkenment” in our everyday behavior?

“In many cases I don’t think it’s possible to communicate the reality of collapse to family and friends, because some people are simply unable to shake themselves loose from the dominant paradigm of endless growth, and will go to their graves believing that a return to growth is just around the corner, regardless of all evidence to the contrary. There are many intelligent, educated people—chairmen of central banks and professors of economics—who believe in infinite growth, even though it is mathematically impossible, and they are educated in math. Given this level of denial, how can I even start to communicate collapse to my wife if she believes in infinite growth, while neither of us are professors of economics?” “If friends and family have a vested interest in the status quo, they will stay with it. It doesn’t matter if it’s crumbling or increasingly insecure. It’s a bit like the scenario depicted in E.M. Forster’s old story ‘The Machine Stops.’

Inertia and reluctance to make abrupt changes is a major factor—not only for others but for oneself. And exactly what alternative is on offer? Jettison one’s attachment to the current status quo—for what exactly? What is one to do if one has a job and needs it to put food on the table? The consequence is that as the ship goes down, the passengers remain willfully oblivious, and even the few who do know what’s going on are confused about what is to be done.” “If you can’t fix this problem then you are on your own—and lost. It took each of us a lifetime to build our closest family relationships and we are not going to be able to walk out on them and start afresh. It also took us a long time to get to our individual understandings of where we are in terms of collapse, and there is no shortcut—so the answer is patience, mutual tolerance, and facilitating the learning process in one’s nearest circle.”

“I’ve warned everyone I know about imminent collapse. Now I no longer have any friends. But seriously, I approach it from a different angle altogether, where preparing for collapse becomes logical from the standpoint of offering a less threatening reality. For example, start by discussing medicinal plants as a way of resolving health issues. Then extend that discussion to freedom from expensive doctors and costly pharmaceuticals. Then project it further to the joys of developing the personal security and independence from large bureaucratic systems, Before you know it, you can talk about collapse without ever dropping the ‘C’ word.”

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In cases like this, it’s safe to take the worst case scenario, because things always get even worse than that.

Britain’s Nuclear Clean-Up Bill May Soar To $370 Billion (Telegraph)

The bill for cleaning up Britain’s nuclear waste has topped £110bn, after a £6.6bn increase in the cost estimate for work required over the next 120 years The Nuclear Decommissioning Authority said that the biggest increase derived from a fresh assessment of the work required at Sellafield, the country’s biggest and most toxic nuclear site. Sellafield, in Cumbria, is now estimated to cost £79.1bn to clean up, but the NDA warned that the total would “increase significantly next year” once it had fully assessed a new “performance plan” for the site.

The NDA controversially renewed a contract with Nuclear Management Partners to manage Sellafield despite fierce criticism from MPs on the Public Accounts Committee and the National Audit Office of the company’s performance. The NDA’s annual report and accounts make clear the huge scale of uncertainty that exists over the ultimate bill for Britain’s civil and military nuclear waste. It says it has “reviewed a number of scenarios with a range of possible outcomes” and found that “the estimated cost could have a potential range from £88bn to £218bn”. The figure of £110bn is on an “undiscounted” basis. Once discounted, the total is £65bn.

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World Posted Warmest May on Record as Oceans Heat Up (Bloomberg)

The world had its warmest May in more than a century as the planet’s oceans also set a record for heat, the National Oceanic and Atmospheric Administration said. The globe’s combined land and sea temperature for May was 59.93 degrees Fahrenheit (15.5 Celsius), or 1.33 degrees warmer than the 20th century average, breaking the mark of 1.3 degrees set in 2010, NOAA said in a monthly climate report today. “The globally averaged temperature over land and ocean surfaces for May 2014 was the highest for May since record keeping began in 1880,” the agency said. “The last below-average global temperature for May occurred in 1976 and the last below-average temperature for any month occurred in February 1985.”

The oceans contributed the most to the overall temperature, with a record of 62.4 degrees, while the period from January to May was the fifth-warmest start to any year, NOAA said. In the Arctic, ice covered 4.9 million square miles, 4.6% below the 1981-2010 average, or the third-smallest extent for May since record-keeping began in 1979, NOAA’s National Snow and Ice Data Center said. Antarctic sea ice covered 4.6 million miles, the most for May on record.

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Welcome to the New Warm Normal: Global Temps Break Another Record (Bloomberg)

The average temperature of Earth’s surface last month exceeded all other Mays before it, since recordkeeping began in 1880, according to new data from the National Oceanic and Atmospheric Association. The monthly temperature was 1.33 degrees Fahrenheit higher than the average May. That may not seem like much, but on a planetary scale, it’s huge. It ties the highest departure from average for any single month, in weather records that predate electric lights in Manhattan. But the truly disturbing part isn’t that we’ve hit a new record. It’s that we live in a season of new records. This may be the the new warm normal.

To find previous hottest Mays, you don’t have to search far; four of the five hottest Mays on record have occurred since 2010. More difficult is finding a cool May. The last time the month fell below its 20th-century average was 39 years ago. The planetary hot streak is driven by rapidly rising levels of greenhouse gases in the atmosphere since the industrial revolution. Global warming is already being felt around the world, resulting in bigger heat waves, rising seas and changing patterns of precipitation. No one under age 30 has been alive for a single month when the planet’s average surface temperature was below average.

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The more it’s clear that and why we should leave ban chemicals from our soils and food, the more power the old chemical giants like Monsanto and Bayer get.

Insecticides Put World Food Supplies At Risk (Guardian)

The world’s most widely used insecticides have contaminated the environment across the planet so pervasively that global food production is at risk, according to a comprehensive scientific assessment of the chemicals’ impacts. The researchers compare their impact with that reported in Silent Spring, the landmark 1962 book by Rachel Carson that revealed the decimation of birds and insects by the blanket use of DDT and other pesticides and led to the modern environmental movement. Billions of dollars’ worth of the potent and long-lasting neurotoxins are sold every year but regulations have failed to prevent the poisoning of almost all habitats, the international team of scientists concluded in the most detailed study yet. As a result, they say, creatures essential to global food production – from bees to earthworms – are likely to be suffering grave harm and the chemicals must be phased out.

The new assessment analysed the risks associated with neonicotinoids, a class of insecticides on which farmers spend $2.6bn (£1.53bn) a year. Neonicotinoids are applied routinely rather than in response to pest attacks but the scientists highlight the “striking” lack of evidence that this leads to increased crop yields. “The evidence is very clear. We are witnessing a threat to the productivity of our natural and farmed environment equivalent to that posed by organophosphates or DDT,” said Jean-Marc Bonmatin, of the National Centre for Scientific Research (CNRS) in France, one of the 29 international researchers who conducted the four-year assessment.

“Far from protecting food production, the use of neonicotinoid insecticides is threatening the very infrastructure which enables it.” He said the chemicals imperilled food supplies by harming bees and other pollinators, which fertilise about three-quarters of the world’s crops, and the organisms that create the healthy soils which the world’s food requires in order to grow. Professor Dave Goulson, at the University of Sussex, another member of the team, said: “It is astonishing we have learned so little. After Silent Spring revealed the unfortunate side-effects of those chemicals, there was a big backlash. But we seem to have gone back to exactly what we were doing in the 1950s. It is just history repeating itself. The pervasive nature of these chemicals mean they are found everywhere now. “If all our soils are toxic, that should really worry us, as soil is crucial to food production.”

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We ditched the precautionary principle in favor of profits long ago. There’s a price to pay for that.

Autism, Developmental Delays Linked To Pesticide Exposure During Pregnancy (RT)

Exposure to several common agricultural pesticides during pregnancy increases the risk of developmental delays and autism in children by two-thirds, a new study found. While researchers did not say pesticides cause autism, a direct link is plausible. Researchers at the University of California, Davis’ MIND Institute tracked associations with specific classes of pesticides (including organophosphates, pyrethroids and carbamates) and later diagnoses of autism and developmental delay in children. They used maps from the California Pesticide Use Report (1997-2008) and the addresses of expectant mothers to track women’s exposure to agricultural pesticide spraying during their pregnancies. Developmental delay, in which children take extra time to reach communication, social or motor skills milestones, affects about four% of US. kids, the authors wrote.

The Centers for Disease Control and Prevention estimates that one in 68 children has an autism spectrum disorder (ASD), also marked by deficits in social interaction and language. Of the 970 children covered by the study, 486 had an ASD, 168 had developmental delays and 316 had typical development. “We mapped where our study participants’ lived during pregnancy and around the time of birth. In California, pesticide applicators must report what they’re applying, where they’re applying it, dates when the applications were made and how much was applied,” principal investigator Irva Hertz-Picciotto, a MIND Institute researcher and professor and vice chair of the Department of Public Health Sciences at UC Davis, said in a statement. “What we saw were several classes of pesticides more commonly applied near residences of mothers whose children developed autism or had delayed cognitive or other skills.”

The Northern California-based Childhood Risk of Autism from Genetics and the Environment (CHARGE) Study was published online in Environmental Health Perspectives. It found that approximately one-third of the study participants lived in “close proximity” (just under one mile) of commercial pesticide application sites. “This study of ASD strengthens the evidence linking neurodevelopmental disorders with gestational pesticide exposures, and particularly, organophosphates and provides novel results of ASD and DD associations with, respectively, pyrethroids and carbamates,” the researchers said in the study. Proximity to organophosphates at some point during gestation was associated with a 60% increased risk for ASD, researchers said.

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