Sep 162018
 
 September 16, 2018  Posted by at 1:48 pm Finance Tagged with: , , , , , , , ,  


Salvador Dali Spain 1936-38

 

Yes, it is hard to believe, but still happening: 10 years after Lehman the very same people who either directly caused the financial crisis of 2008 or made things much much worse in its aftermath, are not only ALL walking around freely and enjoying even better paid jobs than 10 years ago, they are even asked by the media to share their wisdom, comment on what they did to prevent much much worse, and advise present day politicians and bankers on what THEY should do.

You know, what with all the wisdom, knowledge and experience they built up. because that’s the first thing you’ll hear them all spout: Oh YES!, they learned so many lessons after that terrible debacle, and now they’re much better prepared for the next crisis, if it ever might come, which it probably will, but not because of but despite what their wise ass class did back in the day.

Which never fails to bring back up the question about Ben Bernanke, who said right after Lehman that the Fed was entering ‘uncharted territory’ but ever after acted as if the territory had started looking mighty familiar to him, which is the only possible explanation for why he had no qualms about throwing trillion after trillion of someone else’s many at the banks he oversaw.

Somewhere along the line he must have figured it out, right, or he wouldn’t have done that?! He couldn’t still have been grasping in the pitch black dark the way he admitted doing when he made the ‘uncharted territory’ comment?! Thing is, he never returned to that comment, and was never asked about it, and neither were Draghi, Kuroda or Yellen. Did they figure out something they never told us about, or were and are they simple blind mice?

 

We have an idea, of course. Because we know central bankers serve banks and bankers, not countries or societies. Ergo, after Lehman crashed, whether that was warranted or not, Bernanke and the Fed focused on saving the banks that were responsible for the crisis, instead of the people in the country and society that were not.

They threw their out-of-thin-air trillions at making the asset markets look good, especially stock markets. Knowing that’s what people look at, and knowing foreclosures are of fleeting interest and can be blamed on borrowers, not lenders, anyway when necessary.

And obviously they knew and know they are and were simply blowing yet another bubble, just this time the biggest one ever, but the wealth transfer that has taken place under the guise of saving the economy has made the rich so much money they can’t and won’t complain for a while. They actually WILL eat cake.

Everyone else, sorry, we ran out of money, got to cut pensions and wages and everything else now. Healthcare? Nice idea, but sorry. Housing, foodstamps? Hey, what part of ‘the government is broke’ don’t you understand? You’re on your own, buddy. Remember the America Dream? Let that be your Yellow Brick Road.

The banking class is going to divest of their shares, while the individuals, money funds and pensions funds who are also in stocks because nothing else made money, will find their cupboards and cabinets replete with empty bags. Right after that the economy will start tanking, and for real this time. Want a loan to buy a home, a car, to start a business? Sorry, told you, there’s no money left.

 

But look, the banks are still standing! You don’t understand this, but that’s much more important. And oh well, those were all honest mistakes. And the ones that perhaps weren’t, shareholders paid big fines for those, didn’t they? See, we can’t have those banking experts in jail, because we need them to build the economy back up after the next crisis. The knowledge and experience, you just can’t replace that.

And it will be alright, you’ll see. Sure, it’ll be like Florence and all of her sisters blew themselves all over flyover country, but hey, that cleans up a lot of stuff too, right? And who needs all that stuff anyway? What is more important for the economy after all, Lower Manhattan or Appalachia?

And who are you going to blame for all this? We strongly suggest you blame Donald Trump, we sure as hell will at the Fed. So just fall in line, that’s better for everyone. Blame his tax cuts, or better even, blame his trade wars. Nobody likes those, and they sound credible enough to have caused the crash when it comes.

Anyway, while you’re stuck with the emergency menu at Waffle House, we hope your socks’ll dry soon, we really do, and we’re sorry about Aunt Mildred and the dogs and cats and chickens that have gone missing, but then that’s Mother Nature, don’t ya know?! Even we can’t help that. All we can really do is keep our own feet dry.

 

Central bankers haven’t merely NOT saved the economy, they have used the financial crisis to feed additional insane amounts of money to those whose interests they represent, and who already made similarly insane amounts, which caused the crisis to begin with. They have not let a good crisis go to waste.

But judging from the comments and ‘analyses’ on Lehman’s 10-year anniversary, the financial cabal still gets away with having people believe they’s actually trying to save the economy, and they just make mistakes every now and then, because they’re only human and uncharted territory, don’t you know?! Well, if you believe that, know that you’re being played for fools. Preferences and priorities are crystal clear here, and you’re not invited.

All the talk about how important it is that a central bank be independent is empty nonsense if that does not also, even first of all, include independence from financial institutions like commercial banks etc. Well, it doesn’t. Ben Bernanke’s Waffle House is nothing but a front for Grand Theft Auto.

 

 

Aug 132016
 
 August 13, 2016  Posted by at 8:26 am Finance Tagged with: , , , , , , , , , ,  Comments Off on Debt Rattle August 13 2016


Harris&Ewing Red Cross Motor Corps, Washington, DC 1917

The Central Bank Bubble And The Suspension Of Reality (CNBC)
US Farmland Bubble Bursts As Ag Credit Conditions Crumble (ZH)
China Property Oversupply Dampens Growth Outlook (R.)
IMF Says China’s Credit Growth Is Unsustainable (R.)
Negative Rates Reduce Japan Big Banks’ Profits By $2.96 Billion (R.)
Airing The IMF’s Dirty European Laundry (Eichengreen)
UK Treasury To Guarantee Post-Brexit Funding For EU-Backed Projects (G.)
The Scandalous Changes To Company Pension Schemes (G.)
Is Deutsche Bank Kaputt? (Dowd)
Polls Suggest Iceland’s Pirate Party May Form Next Government (G.)
An Incredibly Simple Idea To Help The Homeless (WaPo)

 

 

There are no markets and there are no investors.

The Central Bank Bubble And The Suspension Of Reality (CNBC)

In the middle of a prolonged period of negative real interest rates and loose monetary policy aimed at managing inflation and helping economies, fears are rising that asset bubbles are being created. “We’ve lost our way so we look to central banks, who give us massively loose monetary policy and that’s the little bubble we’re living in,” David Bloom, head of currency strategy at HSBC, told CNBC. New records are constantly being set in the markets, with Thursday’s close of the S&P, up 0.47 percent at 2,185.79, yet another new top. This is happening despite low productivity and growth in the U.S. economy. Analysts at UBS see “scope for the markets to run further still over the near-term” because of central banks’ policies in the developed world.

And it’s not just their own economies which are being helped by these actions. Emerging markets are benefitting too, as investors search for better returns on their money than in the low-growth developed economies and safe havens like U.K. bonds (gilts) and U.S. bonds (Treasurys). “All markets are running – that’s what happens when you have ultra-loose monetary policy and the central banks are handing over money,” Bloom said. “QE distorts markets completely.” Asset classes which are usually closely correlated have lost their usual connections. Examples include cash and equities, both at record highs despite one usually being strong while the other is weak, and oil and gold, which usually move together as they are both pegged to the U.S. dollar, but have diverged as investors pile in to gold.

Read more …

Falling land ‘value’ is one thing, falling income is another.

US Farmland Bubble Bursts As Ag Credit Conditions Crumble (ZH)

Aside from a brief pause during the “great recession” of 2009, Midwest farmland prices have been bubbling up for over a decade with annual price increases of 15%-30% in many years. Private Equity and low interest rates no doubt played a role in creating the farmland bubble as “excess cash on the sidelines” sought out investments in hard assets. No matter the cause, data continues to indicate that the farmland bubble is bursting. 2Q 2016 agricultural updates from the Federal Reserve Banks of Chicago, Kansas City and St. Louis indicate continued income, credit and farmland price deterioration for Midwest farmers. Lender surveys also suggest that as many as 30% of Midwest farmers are having problems paying loan balances.

Declining asset values and incomes have also caused banks to tighten lending standards which has only served to accelerate the decline. In Kansas’ 10th District (which includes MO, OK, KS, NE), values of non-irrigated and irrigated cropland declined 3% and 5%, respectively, in 2Q 2016. In fact, 2Q 2016 marks the 6th consecutive quarter of YoY declines for irrigated cropland values. Between 2002 to 2014, the value of both irrigated and non-irrigated cropland declined in only one other time in 3Q 2009. Farmland prices in Chicago’s 7th District (IL, IN, IA, MI, WI) paint a similar picture. Before price declines in 2014 and 2015, farmland prices in the 7th District had only declined YoY in 4 other years since 1965.

Respondents to the Tenth District Survey of Agricultural Credit Conditions indicated farm income in the quarter continued to tighten. Nearly 75% of surveyed bankers reported farm income was less than a year ago, although the% of bankers that reported weaker farm income declined slightly from the first quarter (Chart 1). Respondents also noted that agricultural producers continued to reduce capital and household spending as profit margins generally remained weak. Bankers also indicated they expect farm income to remain weak in the third quarter. Similar to last year, a significant number of bankers in each District state expect farm income in the third quarter to be less than a year earlier.

Read more …

Whack-a-mole Beijing-style.

China Property Oversupply Dampens Growth Outlook (R.)

Growth in China’s property investment slowed over January to July, even as the government scrambled to balance an increasingly stratified sector, clouding the outlook for China’s economic expansion in the second half of the year. Property investment in January-July rose 5.3% from a year earlier, data from the National Bureau of Statistics (NBS) showed on Friday, slowing from an increase of 6.1% in January-June, while property sales by floor area grew 26.4%, down from 27.9%. Some analysts believe an oversupply problem still remains largely unresolved, especially in China’s smaller cities. “Today’s data shows that a nation-wide oversupply problem still exists, which will continue putting downward pressure on future growth,” Wendy Chen, macroeconomist at Nomura told Reuters.

China’s property sector had a hot start to the year after slowing in 2015, as monetary easing and stimulus measures took effect. However, the upward trend in investment and sales is proving to be unsustainable, as more first and second tier cities adopt stiffer measures to dampen fast-rising prices, while smaller Chinese cities struggle to clear overhanging housing inventory. Home price gains also have started to slow, as cities start to tighten policies amid signs of overheating in the largest cities. With property investment growth losing momentum and private investment growth remaining stubbornly sluggish, China’s economic growth outlook for the second half looks increasingly gloomy. “China’s property sector is extremely unbalanced, which leads to more control in overheated first and second tier cities while less developed third and fourth tier cities are struggling to clear inventory,” said Liao Qun, chief economist at CITIC Bank International.

Read more …

“..non-financial state-owned enterprises accounted for half of bank credit but only a fifth of industrial output..”

IMF Says China’s Credit Growth Is Unsustainable (R.)

The IMF on Friday said China needed to slow its unsustainable credit growth and stop financing weak firms. China’s corporate debt is still manageable, but at approximately 145% of GDP, it is high by any measure,” said James Daniel, IMF Mission Chief for China, in the fund’s annual review of the country. The IMF has urged China to tackle the root causes of its credit growth risk by easing back on unsustainably high growth targets and lax budget constraints, particularly on local governments and state-owned enterprises. “This in turn requires a comprehensive strategy and decisive measures to address the corporate debt problem,” the IMF’s Daniel said.

China’s non-financial state-owned enterprises accounted for half of bank credit but only a fifth of industrial output, the report said, suggesting non-viable SOEs be liquidated and viable ones restructured. Defaults and downgrades have increased and around 14% of debt was held by firms with profit levels below their interest payments, the report said, with credit growth growing twice as fast as nominal GDP. The report reflected views provided by Chinese policymakers who agreed with the IMF that corporate debt had increased “excessively”. However, they argued China’s large pool of domestic savings, banking system buffers, and continued equity market development would ensure a smooth adjustment, the report said.

Read more …

Stuffed.

Negative Rates Reduce Japan Big Banks’ Profits By $2.96 Billion (R.)

Japan’s financial watchdog estimates that negative interest rates under the Bank of Japan’s monetary easing policy will reduce profits for the country’s three big banks by at least 300 billion yen ($2.96 billion) for the year through March 2017, the Nikkei business daily reported on Saturday. The Financial Services Agency (FSA) expressed concern to the BOJ regarding the situation as it sees reduced profits weakening the banks’ ability to extend loans, the Nikkei said. If the BOJ was to take interest rates deeper into negative terrain, the agency reckoned that the banks would suffer substantial further drops in profit as their interest rate income would suffer.

Read more …

Discussing IMF ‘mistakes’ without paying attention to the victims is dishonest.

Airing The IMF’s Dirty European Laundry (Eichengreen)

[..] the report goes on to criticise the IMF for acquiescing to European resistance to debt restructuring by Greece in 2010; and for setting ambitious targets for fiscal consolidation – necessary if debt restructuring was to be avoided – but underestimating austerity’s damaging economic effects. More interestingly, the report then asks how the IMF should coordinate its operations with regional bodies such as the European commission and the ECB, the other members of the so-called troika of Greece’s official creditors. The report rejects claims that the IMF was effectively a junior member of the troika, insisting that all decisions were made by consensus.

That is difficult to square with everything we know about the fateful decision not to restructure Greece’s debt. IMF staff favoured restructuring, but the European commission and the ECB, which put up two-thirds of the money, ultimately had their way. He who has the largest wallet speaks with the loudest voice. In other words, there are different roads to “consensus”. The Fund encountered the same problem in 2008, when it insisted on currency devaluation as part of an IMF-EU program for Latvia. In the end, it felt compelled to defer to the EU’s opposition to devaluation, because it contributed only 20% of the funds.

The implication is that the IMF should not participate in a programme to which it contributes only a minority share of the finance, but expecting it to provide majority funding implies the need to expand its financial resources. This is something that the IEO report evidently regarded as beyond its mandate – or too sensitive – to discuss. Was the ECB even on the right side of the table in the European debt discussions? When negotiating with a country, the IMF ordinarily demands conditions of its government and central bank. In its programmes for Greece, Ireland and Portugal, however, it and the central bank demanded conditions of the government. This struck more than a few people as bizarre.

Read more …

What you can do when you have your own currency.

UK Treasury To Guarantee Post-Brexit Funding For EU-Backed Projects (G.)

Philip Hammond is to guarantee billions of pounds of UK government investment after Brexit for projects currently funded by the EU, including science grants and agricultural subsidies. The chancellor’s funding commitment is designed to give a boost to the economy in what he expects to be a difficult period after the surprise result of the EU referendum in June. The Treasury is expected to continue its funding beyond the UK’s departure from the EU for all structural and investment fund projects, as long as they are agreed before the autumn statement. If a project obtains EU funding after that, an assessment process by the Treasury will determine whether funding should be guaranteed by the UK government post-Brexit.

Current levels of agriculture funding will also be guaranteed until 2020, when the Treasury says there will be a “transition to new domestic arrangements”. Universities and researchers will have funds guaranteed for research bids made directly to the European commission, including bids to the EU’s Horizon 2020 programme, an €80bn (£69bn) pot for science and innovation. The Treasury says it will underwrite the funding awards, even when projects continue post-Brexit. Hammond said the government recognised the need to assuage fears in industry and in the science and research sectors that funding would be dramatically reduced post-Brexit.

“We recognise that many organisations across the UK which are in receipt of EU funding, or expect to start receiving funding, want reassurance about the flow of funding they will receive,” he said. “The government will also match the current level of agricultural funding until 2020, providing certainty to our agricultural community, who play a vital role in our country.” The chancellor added: “We are determined to ensure that people have stability and certainty in the period leading up to our departure from the EU and that we use the opportunities that departure presents to determine our own priorities.”

Read more …

You cannot taper a Ponzi scheme.

The Scandalous Changes To Company Pension Schemes (G.)

A man in his 40s receives a pension projection that tells him his retirement income is going to collapse from the £38,000 he was expecting to £18,000. His company is having to find a sum equal to 45% of his salary to keep the pension scheme going, a crucifying amount for any employer, and the costs will keep on spiralling. It says it has no choice but to slash the scheme to ribbons. This is the sort of dilemma facing the workers, and bosses, of Royal Mail and the Post Office. Strike action is looming – and quite rightly too, because the cuts are equivalent to someone losing £200,000 or even £300,000 over the course of their retirement.

We are about to enter a new era of trench warfare over pensions. The early battles were easy victories for the employers. They decided to close their final-salary schemes to new entrants, but existing workers were protected and were able to carry on chalking up their entitlement to, let’s face it, rather generous retirement payouts. Nobody seemed to care too much about the millennials who were missing out on what their parents took for granted. Next came the more thorny shift from paying out pensions based on final salaries at age 60 or 65 to cheaper ones based on a “career average” salary. Again the employers won, but it was more bruising.

But now we’re moving into far more dangerous territory. The employers have begun to target existing workers, many in their 40s and 50s, who are in these career average schemes, saying: “You can keep what you’ve built up so far, but nothing beyond that.” In pensions terminology it’s called stopping “future accruals”; Royal Mail, the Post Office and Marks & Spencer are all considering it. To these companies it’s a foregone conclusion. They can’t possibly afford 45% of salary as a pension contribution, or in M&S’s case 34%. The snarky retort is that they’ll always find the money to pay silly sums into their chief executive’s pension, but not for the workers.

Read more …

This is just the last paragraph of another long and detailed piece by Kevin Dowd on Deutsche.

Is Deutsche Bank Kaputt? (Dowd)

So what’s next for the world’s most systemically dangerous bank? At the risk of having to eat my words, I can’t see Deutsche continuing to operate for much longer without some intervention: chronic has become acute. Besides its balance sheet problems, there is a cost of funding that exceeds its return on assets, its poor risk management, its antiquated IT legacy infrastructure, its inability to manage its own complexity and its collapsing profits — and thepeak pain is still to hit. Deutsche reminds me of nothing more than a boxer on the ropes: one more blow could knock him out. If am I correct, there are only three policy possibilities. #1 Deutsche will be allowed to fail, #2 it will be bailed-in and #3 it will be bailed-out.

We can rule out #1: the German/ECB authorities allowing Deutsche to go into bankruptcy. They would be worried that that would trigger a collapse of the European financial system and they can’t afford to take the risk. Deutsche is too-big-to-fail. Their preferred option would be #2, a bail-in, the only resolution procedure allowed under EU rules, but this won’t work. Authorities would be afraid to upset bail-in-able investors and there isn’t enough bail-in-able capital anyway. Which consideration leads to the policy option of last resort — a good-old bad-old taxpayer-financed bail-out. Never mind that EU rules don’t allow it and never mind that we were promised never again. Never mind, whatever it takes.

Read more …

“.. it also aims to boost the youth vote by persuading the company developing Pokémon Go in Iceland to turn polling stations into Pokéstops.”

Polls Suggest Iceland’s Pirate Party May Form Next Government (G.)

One of Europe’s most radical political parties is expected to gain its first taste of power after Iceland’s ruling coalition and opposition agreed to hold early elections caused by the Panama Papers scandal in October. The Pirate party, whose platform includes direct democracy, greater government transparency, a new national constitution and asylum for US whistleblower Edward Snowden, will field candidates in every constituency and has been at or near the top of every opinion poll for over a year. As befits a movement dedicated to reinventing democracy through new technology, it also aims to boost the youth vote by persuading the company developing Pokémon Go in Iceland to turn polling stations into Pokéstops.

“It’s gradually dawning on us, what’s happening,” Birgitta Jonsdottir, leader of the Pirates’ parliamentary group, told the Guardian. “It’s strange and very exciting. But we are well prepared now. This is about change driven not by fear but by courage and hope. We are popular, not populist.” The election, likely to be held on 29 October, follows the resignation of Iceland’s former prime minister, Sigmundur David Gunnlaugsson, who became the first major victim of the Panama Papers in April after the leaked legal documents revealed he had millions of pounds of family money offshore. In the face of some of the largest protests the small North Atlantic island had ever seen, the ruling Progressive and Independence parties replaced Gunnlaugsson with the agriculture and fisheries minister, Sigurdur Johansson, and promised elections before the end of the year.

Founded four years ago by a group of activists and hackers as part of an international anti-copyright movement, Iceland’s Pirates captured five per cent of the vote in 2013 elections, winning three seats in the country’s 63-member parliament, the Althingi. “Then, they were clearly a protest vote against the establishment,” said Eva Heida Önnudóttir, a political scientist at the University of Iceland who compares the party’s appeal to Icelandic voters to that of Spain’s Podemos, or Syriza in Greece. “Three years later, they’ve distinguished themselves more clearly; it’s not just about protest. Even if they don’t have clear policies in many areas, people are genuinely drawn to their principles of transforming democracy and improving transparency.”

Propelled by public outrage at what is widely perceived as endemic cronyism in Icelandic politics and the seeming impunity of the country’s wealthy few, support for the party – which hangs a skull-and-crossbones flag in its parliamentary office – has rocketed. A poll of polls for the online news outlet Kjarninn in late June had the Pirates comfortably the country’s largest party on 28.3%, four points clear of their closest rival, Gunnlaugsson’s conservative Independence party. That lead has since narrowed slightly but most analysts are confident the Pirates will return between 18 and 20 MPs to the Althingi in October, putting them in a strong position to form Iceland’s next government.

Read more …

“One man told him no one had said a kind word to him in 25 years.”

An Incredibly Simple Idea To Help The Homeless (WaPo)

Republican Mayor Richard Berry was driving around Albuquerque last year when he saw a man on a street corner holding a sign that read: “Want a Job. Anything Helps.” Throughout his administration, as part of a push to connect the homeless population to services, Berry had taken to driving through the city to talk to panhandlers about their lives. His city’s poorest residents told him they didn’t want to be on the streets begging for money, but they didn’t know where else to go. Seeing that sign gave Berry an idea. Instead of asking them, many of whom feel dispirited, to go out looking for work, the city could bring the work to them.

Next month will be the first anniversary of Albuquerque’s There’s a Better Way program, which hires panhandlers for day jobs beautifying the city. In partnership with a local nonprofit that serves the homeless population, a van is dispatched around the city to pick up panhandlers who are interested in working. The job pays $9 an hour, which is above minimum wage, and provides a lunch. At the end of the shift, the participants are offered overnight shelter as needed. In less than a year since its start, the program has given out 932 jobs clearing 69,601 pounds of litter and weeds from 196 city blocks. And more than 100 people have been connected to permanent employment. “You can just see the spiral they’ve been on to end up on the corner. Sometimes it takes a little catalyst in their lives to stop the downward spiral, to let them catch their breath, and it’s remarkable,” Berry said in an interview.

”They’ve had the dignity of work for a day; someone believed in them today.” Berry’s effort is a shift from the movement across the country to criminalize panhandling. A recent National Law Center on Homelessness & Poverty report found a noticeable increase, with 24% of cities banning it altogether and 76% banning it in particular areas. There is a persisting stigma that people begging for money are either drug addicts or too lazy to work and are looking for an easy handout. But that’s not necessarily the reality. Panhandling is not especially lucrative and it’s demoralizing, but for some people it can seem as if it’s the only option. When panhandlers have been approached in Albuquerque with the offer of work, most have been eager for the opportunity to earn money, Berry said. They just needed a lift. One man told him no one had said a kind word to him in 25 years.

Read more …

Mar 112016
 
 March 11, 2016  Posted by at 7:27 am Finance Tagged with: , , , , , ,  


Arthur Rackham “Why, Mary Ann, what are you doing out here?”1907

I’ll try and keep this gracefully short: Mario Draghi ‘unleashed’ a bazooka full of desperate tools on the financial markets yesterday and they blew up in his face faster than you could say blowback or backdraft (and that’s just the start of the alphabet). This must and will mean that Draghi’s stint as ECB head is for all intents and purposes done. But…

But there are two questions: 1) who has the power to fire him (not an easy one), and 2) who can replace him. Difficult issues because the only candidates that would even be considered for the job by the same people who hired -no, not elected- Mario -and who will still be in power after he’s gone-, under present conditions, are carbon copies of Draghi. They all went to the same schools, worked for the same banks etc.

So maybe they’ll let him sit a bit longer. Then again, the damage has been done, and Mario has done a lot of destruction, is what the markets said yesterday. But to replace him with someone who’s also already lost all credibility, because they supported Mario every step of the way, carries a very evident risk: that nobody will believe in the entire ECB itself anymore. If you ask me, it’s crazy that anyone still would, but that’s another chapter altogether.

Not that Janet Yellen and Japan’s Kuroda and China’s Zhou Xiaochuan should not also be put out by the curb. While they may -seem to- vary in approaches today, they all started from the same untested, purely theoretical and entirely clueless origins. Just saying. None of them have any idea what negative rates etc will lead to. They’re all in the same rabbit hole. And that’s not a joke, it’s deeply sad.

Ultra-low interest -even negative- rates and bond purchases to the tune of $1 trillion a year, Mario’s schtick, exist all across the formerly rich world. And they all do for the same purpose: to make the people think that they, and their economies, are still rich. Just so bankers can take from them whatever it is they still do have. Think pension funds, investment funds.

Why did this pandemonium of ZIPR and QE ever get started? Because central banks, and the economists that work within them, edged along by bankers who risked behemoth losses, said the most important thing to do was to ‘save’ the banking system, and they can always find some theory to confirm that preference.

But the banking system is where the losses are, and it’s where the risks are. Which are then both transferred to Joe and Jane Blow, who subsequently have less to spend, which defeats the alleged central bank purpose of ‘stimulating’ the economy.

Draghi’s argument for the new (water-)bazooka measures is that without them, Europe would face ‘awful’ deflation. But it’s his very measures that create and encourage deflation. So who still knows how to count beyond 101? Good question.

But anyway, I just wanted to say that Draghi’s gone in all but physical presence. And if they keep him on for a while longer, that means that what happened today will happen again, just faster. Big risk.

No Super Mario no more.

What happened with Draghi yesterday is eerily reminiscent of the ‘glorious’ Bernanke days, when ‘poor’ Ben would make one of his weighty announcements and the effects he was looking for would fizzle out within hours. In full accordance with the law of diminishing returns, Draghi’s new and far more desperate measures lost their very meaning even within the space of barely more than half an hour. This EURUSD graph says it all:

That is ugly. That has meaning. Much more than Mario -the former Goldman Sachs executive- himself and his paymasters will be willing to acknowledge. It means the financial world is now ready to bet against Draghi. Like they bet against China.

Europe’s best hope, somewhat ironically, is German resistance against Draghi, which yesterday reached a point of no return. Ambrose Evans-Pritchard gave a perfect example overnight of why that is:

Professor Richard Werner from Southampton University, the man who invented the term QE, said the ECB’s policies are likely to destroy half of Germany’s 1,500 savings and cooperative banks over the next five years. They cannot pass on the negative rates to savers so their own margins are suffering. “They are under enormous pressure from regulatory burdens already, and now they are reaching a tipping point,” he said.

These banks make up 70pc of German deposits and provide 90pc of loans to small and medium firms, the Mittelstand companies that form the backbone of German industry. Prof Werner said these lenders are being punished in favour of banks that make their money from asset bubbles and speculation.

“We have learned nothing from the financial crisis. The sooner there is a revolt in Germany, the better,” he said.

Draghi’s done. This hole is too deep for him to climb out of.

Feb 142016
 
 February 14, 2016  Posted by at 9:59 am Finance Tagged with: , , , , , , , ,  


Dorothea Lange Water supply in squatter camp near Calipatria CA 1937

China’s Central Bank Says No Basis for Continued Yuan Decline (BBG)
Why Kuroda’s ‘Bazooka’ May Be Out of Ammunition (WSJ)
BoJ Deputy Says Japan Needs Bolder Measures To Unlock Growth (FT)
Swedish Central Bank Move Creates a Global Shudder (NY Times)
Bond Investors Looking Out for Stimulus Hint in Draghi Testimony (BBG)
There Are Still a Few Tricks Seen Up Central Bankers’ Sleeves
Former Dallas Fed President Calls Out Central Banks (CNBC)
Nomura Drops to Pre-Abenomics Level as Japan’s Brokers Slump (BBG)
Deutsche Bank Buyback Sparks Backlash From Newest Investors (BBG)
This is How Financial Chaos Begins (WS)
Pension Funds See 20% Spike In Deficit (AP)

A Debt Rattle largely filled with central banks and various opinions and assumptions about them. Just happened that way.

China’s Central Bank Says No Basis for Continued Yuan Decline (BBG)

China’s central bank governor said there was no basis for continued depreciation of the yuan as the balance of payments is good, capital outflows are normal and the exchange rate is basically stable against a basket of currencies, according to an interview published Saturday in Caixin magazine. Zhou Xiaochuan dismissed speculation that China planned to tighten capital controls and said there was no need to worry about a short-term decline in foreign-exchange reserves, adding that the country had ample holdings for payments and to defend stability. The comments come as Chinese financial markets prepare to reopen Monday after the week-long Lunar New Year holiday.

The country’s foreign-exchange reserves shrank to the smallest since 2012 in January, signaling that the central bank sold dollars as the yuan fell to a five-year low. The weakening exchange rate and declining share markets in China have fueled global turmoil and helped send world stocks to their lowest level in more than two years. The bank will not let “speculative forces dominate market sentiment,” Zhou said, adding that a flexible exchange rate should help efforts to combat speculation by effectively using “our ammunition while minimizing costs.”Policy makers seeking to support the yuan amid slower growth and increasing outflows have been using up reserves. The draw-down has continued since the devaluation of the currency in August and holdings fell by $99.5 billion in January to $3.23 trillion, according to the central bank on Feb. 7.

The stockpile slumped by more than half a trillion dollars in 2015. China has no incentive to depreciate the currency to boost net exports and there’s no direct link between the nation’s GDP and its exchange rate, Zhou said. Capital outflows need not be capital flight and tighter controls would be hard to implement because of the size of global trade, the movement of people and the number of Chinese living abroad, he added. The country will not peg the yuan to a basket of currencies but rather seek to rely more on a basket for reference and try to manage daily volatility versus the dollar, Zhou said. The bank will also use a wider range of macro-economic data to determine the exchange rate, he said.

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By his own admission, no clue: “..what we have to do is to devise new tools, rather than give up the goal..”

Why Kuroda’s ‘Bazooka’ May Be Out of Ammunition (WSJ)

Bank of Japan Gov. Haruhiko Kuroda once awed the markets. Now he looks like just another central banker running out of options. Mr. Kuroda took the helm of the BOJ in March 2013, vowing to do whatever it takes to vault Japan out of more than a decade of deflation. He fired one “monetary bazooka” and then another, seeming to bend markets to his will both times. Japanese stocks rose, and the yen sank, key developments for “Abenomics,” Prime Minister Shinzo Abe’s growth program. But the introduction of negative interest rates two weeks ago failed to impress—except in the minds of some as confirmation that what the BOJ had been doing for three years wasn’t working. Japan’s economy is sputtering and Mr. Kuroda’s primary target—2% inflation—is as far away as ever, heightening skepticism about the limits of monetary policy and the fate of Abenomics.

It is an ominous development for Mr. Kuroda. He sees Japan’s long bout of deflation as a psychological disorder as much as an economic disease. His job as BOJ chief has been part central banker, part national psychologist. It has been all about creating confidence. From the start, many said he was attempting the impossible. Deflation is notoriously difficult to escape, and had taken deep root in Japan after years of policy missteps. Last summer he invoked a fairy tale to describe his task. “I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘The moment you doubt whether you can fly, you cease forever to be able to do it,’” Mr. Kuroda said in June last year. “Yes, what we need is a positive attitude and conviction.”

Answering questions in parliament Friday, Mr. Kuroda dismissed claims that the introduction of negative interest rates were to blame for the recent stock market selloff. He pointed to global market volatility, and said the negative rates have had their intended effects, driving down yields on short- and long-term government bonds. “I believe those effects will steadily spread through the economy and prices going forward,” he said. Mr. Kuroda has also repeatedly rejected the notion that the central bank is running out of ammunition, insisting that there is “no limit” to its policy options. “If we judge that existing measures in the tool kit are not enough to achieve the goal, what we have to do is to devise new tools, rather than give up the goal,” he said.

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Peter Pan rules.

BoJ Deputy Says Japan Needs Bolder Measures To Unlock Growth (FT)

The deputy governor of the Bank of Japan has called on the country’s government to pull its weight, as the central bank strains to haul the world’s third-largest economy decisively out of deflation. Last month the BoJ embarked on its latest round of easing, saying it would start charging for excess reserves deposited at the central bank. At the time, it said it wanted to provide a shot of stimulus at a critical moment, just ahead of the annual Spring round of wage negotiations between companies and workers’ groups. In a speech in New York on Friday, deputy governor Hiroshi Nakaso said that the government now needed to do more to boost Japan’s growth potential. He referred to a joint statement on overcoming deflation, signed by the BoJ and the government in January 2013, a few months before the bank embarked on its first round of easing under the current governor, Haruhiko Kuroda.

In it, the central bank pledged to stimulate demand through ultra-aggressive monetary policy while the government promised to pursue ‘all possible’ supply-side reforms. Now that the Bank of Japan has taken monetary easing one step further … I think that the original third arrow of Abenomics, the growth strategy, must also fly faster, he said. The unusually candid speech comes as the success of the mix of the policies pursued by prime minister, Shinzo Abe, remains in the balance. After three separate bursts of monetary stimulus from the BoJ, inflation has gained some momentum while corporate profits have been boosted by a sharp drop in the value of the yen. However, Japan’s potential growth rate remains so low — around or slightly below 0.5%, according to the BoJ’s estimate – that any setback has the potential to tip the country into recession.

Economists at Goldman Sachs expect that the first reading of GDP figures for the fourth quarter, due on Monday, will show an annualised contraction of 1.2% from the third quarter, hit by a slump in consumer spending due to a mild weather and smaller winter bonuses. The BoJ now fears that many cash-hoarding companies are set to resist calls for higher wages, as they assume that inflation will be kept in check by a combination of weak demand, a lower oil price and a stronger currency. The national trades union group, Rengo, has already signalled a less aggressive stance in this year’s negotiations, saying it is aiming at an across-the-board increase of “around 2%” — less than the 2015 demand for “at least” 2%. That could threaten progress toward the BoJ’s sole policy target: an inflation rate of 2%. In December Japan’s consumer price index stood at 0.1%, excluding fresh food, and 0.8% excluding energy.

“The sluggish increase in nominal wages is thought to reflect low productivity growth and the strong deflationary mindset,” said Mr Nakaso. “My answer to what kind of policies are needed, is that both monetary and fiscal policies and structural reforms are indispensable.” Mr Nakaso is likely to make similar remarks during a speech to business leaders next month in Okinawa, according to people familiar with his thinking, imploring the government to take bolder measures to unlock growth. Takuji Okubo, managing director at Japan Macro Advisors, a research boutique, said that the government’s ‘third arrow’ record has been poor, citing a lack of true reform of the labour market, the service sector or the public pension system. He added that the sharp sell-off in the Japanese stock market since the beginning of the year, coupled with a renewed appreciation of the yen, seems strong enough to put an end to the Abenomics boom. “The expiry date has now come to pass,” he said.

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“What central bankers are doing now feels like a Jedi trick..”

Swedish Central Bank Move Creates a Global Shudder (NY Times)

What if the bazooka is shooting blanks? Since the financial crisis, it has been gospel for many investors that some combination of actions by central banks — bond buying, bold promises or flirtations with negative interest rates — would be enough to keep the global economy out of recession. But investors’ distress over the latest volley by a major central bank, the surprise decision on Thursday by the Swedish central bank to lower its short-term rate to minus 0.50% from minus 0.35%, has heightened fears that brazen actions by central bankers are now making things worse, not better. Global stock markets sank, the price of oil plunged to a 13-year low and investors fled to safe haven instruments like gold and United States Treasury bills.

Markets generally embrace conviction and run away from indecision — which is what many see in the policy making of some of the large central banks these days. The Swedish central bank, the Riksbank, for example, has been criticized in the past for prematurely raising rates, and Thursday’s rate cut was opposed by two bank deputies. At the ECB Jens Weidmann, the head of the powerful German Bundesbank, remains at odds with the president, Mario Draghi, in terms of how loose the central bank’s policies should be. And in the United States, the Federal Reserve is seen by some market participants to be wavering in its commitment to higher rates in light of the market turmoil.

[..] “What central bankers are doing now feels like a Jedi trick,” said Albert Edwards, global strategist for Société Générale in London. “Everyone is in a currency war and inflation expectations are collapsing.” In other words, drastic steps by central bankers in Europe, Japan and China to keep their currencies weak and exports strong may not only be counterproductive in terms of stimulating global growth — someone has to buy all those Chinese and Japanese goods — but has other consequences as well. Negative interest rates, for example, are not only bad for bank profits and lending prospects, they can also make savers more fearful, hampering the central aim, which is to get people to spend, not hoard. All of which can lead to a global recession.

A perma-bear like Mr. Edwards is always in possession of a multitude of negative economic indicators to prove his thesis, which, in his case, is a fall of 75% in the S.&P. 500 from its peak last summer. Some are obvious and have been highlighted by most economists, like the increasing interest rates on corporate bonds in the United States — both investment grade and junk. But he also pointed to a recent release from the Fed that showed that loan officers at United States banks said that they had been tightening their loan standards for two consecutive quarters. “You tend to see that in a recession,” Mr. Edwards said. His prediction of a so-called deflationary ice age is still considered a fringe view of sorts, although he did say that a record 950 people (up from 700 the year before) attended his annual conference in London last month. Still, the notion that the global economy has not responded as it should to years of shock policies from central banks is more or less mainstream economic thinking right now.

[..] The well-known bond investor William H. Gross of Janus Capital took up this theme in his latest investment essay, arguing that there was no evidence to show that the financial wealth (and increased levels of debt) created by a long period of extra-low interest rates would spur growth in the real economy. As proof, he cited Japan’s persistent struggles to grow despite near-zero interest rates; subpar growth in the United States; and emerging market problems in China, Brazil and Venezuela. “There is a lot of risk in the global financial marketplace,” Mr. Gross said in an interview on Thursday. “It is incumbent on me to focus on safe assets now.”

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Debt is king, and Draghi its oracle.

Bond Investors Looking Out for Stimulus Hint in Draghi Testimony (BBG)

Investors will look next week for a whiff of confirmation from Mario Draghi that they weren’t wrong to push bond yields to record lows in anticipation of fresh stimulus from the ECB. The ECB president’s speech to European lawmakers in Brussels on Monday will come after a turbulent five days in which global markets exposed a schism in the euro region’s debt markets. German 10-year bund yields approached their record low from April while Portugal’s jumped by the most since May 2012, before Draghi made his famous “whatever it takes” speech in July that year. Investor demand for havens at these lower yields faces a challenge on Feb. 17 when Germany auctions €5 billion ($5.6 billion) of 10-year bonds.

That’s followed the next day by France selling up to €8.5 billion of conventional and inflation-linked bonds. The offerings come while the prospects of slowing growth and depressed inflation are prompting investors to pile into the region’s safer fixed-income assets, driving yields down toward levels that triggered a selloff last April and May. “Investors will keep a close eye for any hints for what type of policy easing will be forthcoming,” said Nick Stamenkovic at broker RIA Capital Markets. “People are plumping for safety, core government bonds and demanding a higher risk premium on peripherals in particular, and also some semi-core bonds. The upcoming auctions outside of Germany will be a good test of sentiment.”

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“Pessimism is unwarranted.” Darn, and I though it was time to panic. Finally. They can’t even agree on that.

There Are Still a Few Tricks Seen Up Central Bankers’ Sleeves

If one line of reasoning for the plunge in bank stocks is that monetary policy has lost its punch, investors would do well to recall a law of modern investing: “Don’t fight the Fed.” As the week draws to a close, some Wall Street economists and strategists say monetary authorities have plenty more tricks up their sleeve – even after more than 635 interest-rate cuts since the financial crisis by Bank of America’s reckoning and with central banks now sitting on more than $23 trillion of assets. “Time and time again policy makers have shown themselves to be bolder and more inventive than asset markets give them credit for,” Stephen Englander, Citigroup’s New York-based global head of Group-of-10 currency strategy, said in a report to clients late on Thursday. “Pessimism is unwarranted.”

His proposal is that officials focus their policy more on boosting demand rather than just increasing liquidity in the hope that consumers and companies will find a need for it. While he thinks targeted lending could help achieve that, he advocates what he calls “cold fusion” in which politicians would cut taxes and boost spending with central banks covering the resulting rise in borrowing by purchasing even more bonds. “The next generation of policy tools is likely to be designed to act more directly on final demand, using persistently below target inflation as a lever to justify policies that will be anathema otherwise,” Englander said. In a similar vein, Hans Redeker at Morgan Stanley in London, is declaring it’s time for central banks to begin using quantitative easing to buy private assets having previously focused on government debt.

“I would actually look into the next step of the monetary toolbox,” Redeker said in a Bloomberg Television interview. “We need to fight demand deficiency.” Critics say that’s the source of the problem. There’s little more bond-buying and rate cutting can do to stoke the real economy. And markets, they say, now recognize that. Part of this week’s pain in markets has stemmed from the concern that the negative interest rates increasingly embraced by the likes of the Bank of Japan and European Central Bank do more harm than good by hitting bank profits. That hasn’t stopped JPMorgan economists led by Bruce Kasman suggesting central banks could cut much deeper without any major side effects so long as they limit the reserves they are targeting. Citigroup said yesterday that Israel, the Czech Republic, Norway and perhaps Canada could also join the subzero club in the next couple of years.

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“Look, these are very smart people..”

Former Dallas Fed President Calls Out Central Banks (CNBC)

Are central banks’ aggressive monetary policies to blame for the today’s economic woes? Former Dallas Federal Reserve President Robert McTeer says yes. Speaking to CNBC’s “Fast Money” this week, McTeer explained that while the Fedis comprised of smart and carefully minded individuals, they dropped the ball when it comes to their current approach. “[The Fed] waited too long to begin the tightening process,” noted the former FOMC member and 36-year veteran of the Federal Reserve system. The central banker’s critique echoed that of other economists, whom have argued that the trillions of cheap dollars flooding the system have exacerbated the current downturn, and made the market addicted to the liquidity.

Known for his prolific writing and plain-speaking style while at the Fed, McTeer has been a critic of the Fed’s ultra-loose monetary policy, which he previously argued stayed too low for too long. However, McTeer admitted that bad luck and unfortunate timing has compounded the current undesirable circumstances. He told CNBC that “as soon as they took the first step [to tighten], international developments overwhelmed the situation.” At that time, China’s slowdown became more pronounced, upsetting markets. McTeer further believes that the Fed’s delay enabled other central banks—from Japan to the European Central Bank—to enact negative interest rates, a policy move with which he disagreed. Now, with international markets in crisis, McTeer says Fed chair Janet Yellen needs to take a more proactive approach in addressing global concerns.

The former central banker advised that “she should probably show more concern [related] to recent market turmoil” when speaking in the future. On Friday, international markets saw a sell-off in Asia where the Nikkei dropped 4.8% to 14,952, its lowest close since October, 2014. Additionally, the yen ended the week down 11%, unwinding some of the massive flight to safety buying that has recently boosted Japan’s currency. The Dow Jones Industrial Average, S&P 500 Index and Nasdaq all posted big gains, and snapped a five day losing streak. At the same time, the market’s latest mantra has become negative interest rates, which have been introduced in Japan and Europe. Earlier this week, Yellen refused to rule out the policy move for the world’s largest economy, but acknowledged the issue needed more study.

Negative rates, however, is an idea McTeer does not endorse. The central bank “is not going to do it, but furthermore they can’t do it,” he noted, speaking of the Fed’s next potential move. In McTeer’s interpretation, negative rates are not an options because the Fed has adopted a new mechanical procedure for establishing the Fed funds rate, which is the interest rate that banks use to calculate overnight loans to other institutions. The rate currently calls for a positivity on bank deposits. McTeer believes that if the Fed tries to go negative, it would take years to re-work the system.

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Buybacks then! Solves everything.

Nomura Drops to Pre-Abenomics Level as Japan’s Brokers Slump (BBG)

It’s as if Abenomics never happened for Japan’s biggest brokerages. Nomura and Daiwa Securities fell for an eighth straight day in Tokyo as the deepening stock-market rout continues to pummel investment banks around the world. Nomura is now trading below its price when Shinzo Abe became prime minister in December 2012, ushering in an economic-stimulus policy that sparked a stock-market rally and a profit rebound at Japan’s largest securities firm. The selloff may be overdone because brokerages remain stronger than they were before the Abe administration, according to SBI Securities analyst Nobuyuki Fujimoto. “Their fundamentals haven’t deteriorated that much,” Fujimoto said by phone. “The tide will turn as overseas investors in particular decide whether their profitability is really worse than it was before Abenomics.”

Shares of Tokyo-based Nomura closed 9.2% lower Friday, extending their decline to 33% since the company posted worse-than-estimated earnings on Feb. 2. At 446.6 yen, the price is the lowest since Dec. 21, 2012. Daiwa dropped 8.2% to 591.1 yen, the weakest since the month before Bank of Japan Governor Haruhiko Kuroda unveiled his first round of monetary easing in April 2013. An index of securities firms was the third-worst performer on the benchmark Topix, which slumped 5.4%. Investors continued dumping Nomura shares even after Chief Executive Officer Koji Nagai said this week that the company is considering buying back stock while it’s cheap. “The brokerage must also be advising Japanese firms to consider share buybacks, if the CEO’s remarks are any guide,” said Fujimoto. “I wouldn’t be surprised to see companies start announcing such plans soon, which will be beneficial to brokerages.”

Nomura has announced five share buybacks since May 2013, including two last year. The company is now trading at 0.57 times the book value of its assets, the cheapest since November 2012, according to data compiled by Bloomberg. Daiwa has a price-to-book ratio of 0.80 “We’re considering returning profit appropriately” to shareholders, Nagai said in an interview on Tuesday. “There’s no doubt that it’s better for us to do it when they’re cheap,” he said, declining to comment on the timing and size of any buyback.

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Oh wait, not everything…

Deutsche Bank Buyback Sparks Backlash From Newest Investors (BBG)

Investors who scooped up bonds sold by Deutsche Bank last month are pushing for better terms in the bank’s $5.4 billion debt buyback plan, saying they were misled because the German lender failed to disclose its true financial position before the sale, according to people with knowledge of the matter. Some of the bondholders who participated in the $1.75 billion, two-part offering say the bank, which announced a fourth-quarter earnings loss less than two weeks after the sale, should’ve made that disclosure before selling the bonds, the people said, asking not to be identified as the discussions are private. Some investors are so upset that they may raise the issue with regulators, the people said.

The money managers are planning to hold discussions next week to explore their options on how best to challenge the bank, the people said. In addition to raising concern about disclosure, the bondholders are pushing for greater priority and better terms in the bank’s buyback offer announced Friday. Deutsche Bank’s buyback comes as the lender attempts to reassure investors who dumped European bank bonds and shares this week amid concerns over declining earnings and slowing global growth. The lender’s debt in a Bloomberg investment-grade bond index have dropped 2.7% in the past month compared with a 0.4% decline for all bank debt. The $750 million of 4.1% notes sold in January slumped 5.7%.

The firms that bought the biggest piece of the January offering at 100 cents on the dollar are now getting an offer to sell them back to the bank at as much as 97.3 cents, according to calculations by Bloomberg Intelligence analyst Arnold Kakuda. The securities traded at 95.6 cents on Thursday. Deutsche Bank, which unveiled the sale of the bonds on Jan. 8, said on Jan. 21 that it would post a €2.1 billion loss for the fourth quarter after setting aside more money for legal matters and taking a restructuring charge. Moody’s Investors Service cut its long-term debt rating on the bank to Baa1 from A3, citing structural issues that contributed to “weak profitability,” and the expense of maintaining a global capital-market footprint, the ratings firm said in a Jan. 25 statement.

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Junk bonds will be back.

This is How Financial Chaos Begins (WS)

There are over $1.8 trillion of US junk bonds outstanding. It’s the lifeblood of over-indebted corporate America. When yields began to soar over a year ago, and liquidity began to dry up at the bottom of the scale, it was “contained.” Yet contagion has spread from energy, metals, and mining to other industries and up the scale. According to UBS, about $1 trillion of these junk bonds are now “stressed” or “distressed.” And the entire corporate bond market, which is far larger than the stock market, is getting antsy. The average yield of CCC or lower-rated junk bonds hit the 20% mark a week ago. The last time yields had jumped to that level was on September 20, 2008, in the panic after the Lehman bankruptcy. Today, that average yield is nearly 22%! Today even the average yield spread between those bonds and US Treasuries has breached the 20% mark. Last time this happened was on October 6, 2008, during the post-Lehman panic:

At this cost of capital, companies can no longer borrow. Since they’re cash-flow negative, they’ll run out of liquidity sooner or later. When that happens, defaults jump, which blows out spreads even further, which is what happened during the Financial Crisis. The market seizes. Financial chaos ensues. It didn’t help that Standard & Poor’s just went on a “down-grade binge,” as S&P Capital IQ LCD called it, hammering 25 energy companies deeper into junk, 11 of them into the “substantial-risk” category of CCC+ or below. Back in the summer of 2014, during the peak of the wild credit bubble beautifully conjured up by the Fed, companies in this category had no problems issuing new debt in order to service existing debt, fill cash-flow holes, blow it on special dividends to their private-equity owners, and what not. The average yield of CCC or lower rated bonds at the time was around 8%.

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Beware: “.. which would take their pension fund contribution rates from an average of about 18% of payroll to nearly 30%..”

Pension Funds See 20% Spike In Deficit (AP)

Oregon Treasurer and Portland mayoral candidate Ted Wheeler issued a statement last week noting that the state pension fund’s investment returns were 2.1% in 2015. That beat the Standard & Poor’s 500 index and topped the performance of 88% of comparable institutional investment funds. What Wheeler’s statement didn’t mention was that investment returns for the year still fell 5.6 percentage points below the system’s 7.75% assumed rate of return for 2015. That’s terrible news for public employers and taxpayers. It means the pension system’s unfunded liability just increased by another 20% — growing from $18 billion at the end of 2014 to between $21 and $22 billion a year later. That will put renewed upward pressure on payments the system’s 925 public-sector employers are required to make.

Public employers had already been warned to expect maximum increases over the next six years, which would take their pension fund contribution rates from an average of about 18% of payroll to nearly 30%, redirecting billions of dollars out of public coffers and into the retirement system. In reality, those “maximum” increases could be a lot bigger. Milliman Inc., the actuary for the Public Employees Retirement System, told board members at their regular meeting Feb. 5 that the pension fund now has 71 to 72 cents in assets for every $1 in liabilities. That’s an average number across the entire system. Some individual employers’ accounts, including the system’s school district rate pool, are flirting with the 70% threshold that triggers larger maximum rate increases.

Here’s how it works: To prevent rate spikes, PERS limits the biennial change in employers’ payments to 20% of their existing rate. For example, if an employer is required to make contributions equal to 20% of payroll, the rate increase is “collared” to 20% of that number, or a 4 percentage-point increase. That 20% increase is what employers have been warned to expect every other year for the next six years. But when an employer’s funded status falls below 70%, that collar begins to widen on a sliding scale — up to a maximum of 40%.

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Aug 252015
 
 August 25, 2015  Posted by at 9:29 am Finance Tagged with: , , , , , , , ,  


Dorothea Lange Play street for children. Sixth Street and Avenue C, NYC June 1936

China Stocks Plunge 7.63% As Selloff Picks Up Again (MarketWatch)
China Stocks Extend Biggest Plunge Since 1996 on Support Doubts (Bloomberg)
China Crash: You Can’t Keep Accelerating Forever (Steve Keen)
The Gravity of China’s Great Fall (Economist)
China’s Market Leninism Turns Dangerous For The World (AEP)
China Central Bank Injects $23.4 Billion as Yuan Intervention Drains Funds (BBG)
Imploding Chinese Stock Market Does Not Bode Well For World Economy (Forbes)
The Next Shoe To Drop In China? The Banks (MarketWatch)
China Stock Market Panic Shows What Happens When Stimulants Wear Off (Guardian)
China Launches Crackdown On ‘Underground Banks’ Amid Capital Flight Fears (SCMP)
How Greece Outflanked Germany And Won Generous Debt Relief (MarketWatch)
Varoufakis: Greek Deal Was A Coup d’État (EurActiv)
US Short Sellers Betting On Canadian Housing Crash (National Post)
Tropical Forests Totalling Size Of India At Risk Of Being Cleared (Guardian)

That’s a lot of POOF! by now. Makes one wonder what has EU exchanges feeling so happy today.

China Stocks Plunge 7.63% As Selloff Picks Up Again (MarketWatch)

Chinese stocks tumbled Tuesday, bringing two-day losses to more than 15%, while other markets in Asia started to turn negative again after a bounce in earlier trading. Shares in Shanghai finished down 7.63% and fell as much as 8.2% in the afternoon. China’s main index breached the 3,000 level for the first time since December 2014. That follows a drop of 8.5% drop on Monday, the worst single-day loss in more than eight years. Shares in Hong Kong were down 0.7%, and the Nikkei closed 4% lower. Both benchmarks had risen as high as 2.9% and 1.6%, respectively, earlier in the day. The lack of support from Beijing for the market continued to spook investors.

“The market feels like it’s self-imploding because it’s used to a lot of hand holding,” said Steve Wang brokerage Reorient Group. Instead, regulators “are taking a wait and see approach… they intervened a lot in the past” and it didn’t work. In its latest effort to counter intensifying capital outflows from a weakening economy and a tumbling stock market, China’s central bank on Tuesday injected more cash into the financial system. The People’s Bank of China offered 150 billion yuan ($23.40 billion) of seven-day reverse repurchase agreements, a form of short-term loan to commercial lenders, as part of a routine money market operation. The bank injected a net 150 billion yuan into the financial system last week, marking its biggest pump priming exercise since the early February.

But the move fell short of expectations for larger measures, such as a cut to bank’s reserve requirements which could free up hundreds of billions of yuan for loans. Some analysts have said that even a cut in reserve ratio requirements of banks won’t be enough to rescue the market. “The intensity of the global stock rout demands something more substantial from both the monetary and fiscal side,” said Bernard Aw at Singapore based brokerage IG. “There are doubts whether China can cope with the persistent capital outflows, and domestic equity meltdown, given that it has already put in some heavy-hitting measures, and funded over $400 billion to a state agency to buy stocks,” said he added.

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It was fun to see how Bloomberg et al were forced to change their upbeat headlines throughout the Asia trading day.

China Stocks Extend Biggest Plunge Since 1996 on Support Doubts (Bloomberg)

Chinese shares slumped, extending the steepest four-day rout since 1996, on concern the government is paring back market support. The Shanghai Composite Index tumbled 4.3% to 3,071.06 at the midday break, taking its decline since Aug. 19 to 19%. About 14 stocks fell for each that rose on Tuesday. Stocks slumped even as equities rallied around Asia. Speculation around the government’s intentions has escalated since Aug. 14, after China’s securities regulator signaled authorities will pare back the campaign to prop up share prices as volatility falls. The China Securities Regulatory Commission made no attempt to reassure investors after Monday’s plunge, unlike a month ago when officials issued two statements shortly after an 8.5% drop.

“It’s panic selling and an issue of confidence,” said Wei Wei at Huaxi Securities in Shanghai. “The government won’t step in to rescue the market again as it’s a global sell-off and it’s spreading everywhere now. It’s not going to work this time.” The CSI 300 Index dropped 3.9%, led by technology, industrial and material companies. The Hang Seng Index advanced 1.6% after a gauge of price momentum dropped to the lowest since the October 1987 stock-market crash. The Hang Seng China Enterprises Index rose 0.5% from its lowest level since March 2014. Unprecedented government intervention has failed to stop a more than $4.5 trillion rout since June 12 amid concern the slowdown in the world’s second-largest economy is deepening. Officials have armed a state agency with more than $400 billion to purchase stocks, banned selling by major shareholders and told state-owned companies to buy equities.

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“This was the fastest growth in credit in any country, EVER. It dwarfs both Japan’s Bubble Economy and the USA’s combination of the DotCom and Subprime Bubbles.”

China Crash: You Can’t Keep Accelerating Forever (Steve Keen)

As I noted in last week’s post “Is This The Great Crash Of China?”, the previous crash of China’s stock market in 2007 lacked the two essential pre-requisites for a genuine crisis: private debt was only about 100% of GDP, and it had been relatively constant for the previous decade. This bust however is the real deal, because unlike the 2007-08 crash, the essential ingredients of excessive private debt and excessive growth in that debt are well and truly in place. China’s resilience against credit crises came to an end in 2009, when in a response to government directives, Chinese banks began lending to anyone with a pulse.

The growth in private debt rocketed from 17% per year at the beginning of 2009 (versus nominal GDP growth of 8% at the same time) to 37% per year by the beginning of 2010 (nominal GDP growth peaked six months later at 20% per year). By the beginning of this year, private debt had hit 180% of GDP and had grown by over 80% of GDP in the previous seven years. This was the fastest growth in credit in any country, EVER. It dwarfs both Japan’s Bubble Economy and the USA’s combination of the DotCom and Subprime Bubbles. China’s bubble drove private debt up by as much in 5 years as Japan managed in over 17 years, and more than the USA’s debt rose in the entire Clinton-Bush debt bubble from 1993 until 2010 (see Figure 1).

Figure 1: China’s credit bubble grew as much in 5 years as Japan’s did in 18

Since last week’s post, the crash in the Shanghai stock market has gone into overdrive. Shares fell 8.5% today, bringing the fall in the index to 20% in the last 5 days and 37% since the market peaked on June 12th. This is the downside of the credit bubble that China used to sidestep the Global Financial Crisis in 2008. It kept the wheels of the Chinese economy spinning when they had threatened to seize up in 2008, but it set China up for the fall it is now experiencing—and this fall is not going to be limited to the Shanghai Index.

Much of the 80%+ of GDP borrowed since 2009 went into property speculation by developers, which in turn fuelled much of the apparent growth of the Chinese economy. One key peculiarity about China’s economy—and there are many—is that much of its growth has come from the expansion of industries established by local governments (“State Owned Enterprises” or SOEs). Those factories have been funded partly by local governments selling property to developers (who then on-sold it to property speculators for a profit while house prices were rising), and partly by SOE borrowing. The income from those factories in turn underwrote the capacity of those speculators to finance their “investments”, and it contributed to China’s recent illusory 7% real growth rate.

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China’s a vortex.

The Gravity of China’s Great Fall (Economist)

Asian markets are once again driving traders batty. A mammoth plunge in China’s stockmarkets on Monday, August 24th, touched off a wild day on global markets: in which Japanese and European stocks plummeted (as did American shares, before staging a remarkable turnaround) prompting commentators to liken the situation to previous crises from the Wall Street crash of 1929 to the Asian financial crisis of 1997. Asian share prices have had a brutal summer. China deserves much of the blame. Its own market has crashed (falling by almost 40% from its peak, and losing all the ground gained in 2015) amid worries about the pace of China’s economic slowdown. Slackening Chinese demand for goods and commodities would represent a big blow to its Asian neighbours.

The region has also been squeezed by a reversal of capital flows back toward the rich world, which has been accelerating as America’s Federal Reserve moves closer to interest rate increases. The currencies of Asia’s large economies have been falling as a result: Malaysia’s ringgit is down by 19% since May 1st, for example, while the Indonesian rupiah has dropped 8%. Despite those declines, which boost export competitiveness in those economies, export growth has slowed dramatically. There will probably be more market wobbles ahead.

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Ambrose called this one spectacularly wrong mere days ago. Whole other tone now.

China’s Market Leninism Turns Dangerous For The World (AEP)

The world financial system is at a dangerous juncture. Markets no longer believe that China’s Communist leaders are in full control of the country’s $27 trillion debt bubble, or know how to manage fast-moving events beyond their ken. This sudden loss of confidence in the anchor economy of East Asia has struck before the West is fully back on its feet after its own debacle seven years ago. Interest rates are still near zero in the US, the eurozone, Britain and Japan. Fiscal deficits are at unsafe levels. Debt is 30 percentage points of GDP higher than it was at the onset of the Lehman crisis. The safety buffers are largely exhausted. “This could be the early stage of a very serious situation,” said Larry Summers, the former US Treasury Secretary.

He compared it to the two spasms of the Asian crisis in the summer of 1997 and again in August 1998. Ominously, he also compared it to the “heart attack” of August 2007, when credit markets seized up on both sides of the Atlantic and three-month US Treasury yields plummeted to zero. That proved to be a false alarm, but it was an early warning of the accumulating stress that would bring down Western finance a year later. Full-blown contagion is now ripping through the international system. The main equity indexes in Europe and the US have all sliced through key levels of technical support. Once the S&P 500 index on Wall Street broke below its 200-day and 50-week moving averages last week, it was extremely vulnerable to any bad news. This came last Friday with yet more grim manufacturing data from China.

JP Morgan says the Caixin PMI indicator that so alarmed markets is skewed to the weakest segment of the Chinese economy and overstates the trouble, but such subtleties are lost in a panic. It turned into a global rout after the Shanghai composite index crashed 8.5pc on China’s “Black Monday”, pulverizing its July lows after the central bank (PBOC) – oddly passive – refused to come to the rescue as expected with a cut in the reserve requirement ratio for banks. Beijing’s botched efforts to prop up the country’s stock markets have collapsed. An estimated $300bn of state-orchestrated buying achieved nothing, overwhelmed by an avalanche of selling by investors forced to cover margin debt.

Professor Christopher Balding from Peking University wrote on FT Alphaville that China is lurching from one incoherent policy to another, shedding credibility and its aura of omnipotence at every stage. “There is a very real risk that Beijing is losing control of the story,” he said. The speed with which this episode has now engulfed US markets – trading at 50pc above their historic average on the long-term Shiller price/earnings ratio, and primed for trouble – suggests that events could all too easily metastasize into a self-perpetuating crisis of confidence. The Dow may have rebounded after a record 1,090-point drop at the opening bell, but such tremors cannot be ignored. “Circuit-breakers are needed, given how quickly markets have moved. Crises are highly non-linear events and ruling them out isn’t wise,” said Manoj Pradhan from Morgan Stanley.

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Whatever they do won’t be enough.

China Central Bank Injects $23.4 Billion as Yuan Intervention Drains Funds (BBG)

China’s central bank added the most funds to the financial system in open-market operations in six months as currency-market intervention to prop up the yuan strained the supply of cash. The People’s Bank of China auctioned 150 billion yuan ($23.4 billion) of seven-day reverse-repurchase agreements, according to a statement on its website. That compares with 120 billion yuan maturing Tuesday, leaving a net injection of 30 billion yuan. The PBOC also sold 60 billion yuan of three-month treasury deposits on behalf of the Ministry of Finance at 3%, according to a trader who bid at the auction. “Banks have become more reluctant to lend and we expect the PBOC to offer liquidity support,” said Liu Dongliang at China Merchants Bank.

“The amount was smaller than expected.” Major banks have been seen selling dollars toward the close of onshore trading in Shanghai on most days since a surprise yuan devaluation on Aug. 11. The intervention removes funds from the financial system and risks driving borrowing costs higher unless the monetary authority releases additional cash. China’s foreign-exchange reserves will drop by some $40 billion a month for the rest of this year, according to the median of 28 estimates in a Bloomberg survey. The monetary authority injected a net 150 billion yuan last week using reverse-repurchase agreements. It also added 110 billion yuan via its Medium-term Lending Facility.

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No lack of people who’d deny this.

Imploding Chinese Stock Market Does Not Bode Well For World Economy (Forbes)

The China hard landing aficionados (all five of them) may have something to celebrate with the implosion of Chinese equities, but the world economy does not. On Monday, investors woke up to yet another rout in both Chinese markets. The Deutsche X-Trackers A-Shares (ASHR) exchange traded fund was down 16% in the first half hour of trading on the NYSE and the iShares FTSE China (FXI) was down by 9%. This is capitulation at its best. Everyone is seeing who can scream “fire” the loudest. “When investors look at their trading dashboard this morning, they do not have just one factor which making them anxious about riskier assets…it is a combination of factors which reminds them that the sell-off in the markets is becoming very serious and similar to that of 2008, especially with regards to China,” says Naeem Aslam at AvaTrade International in Edinburgh.

Besides the massive stock market correction underway in China, the fundamentals of the economy are not what they used to be. While many businessmen on the ground in China say no one is in panic mode yet, momentum is clearly not in the their favor. This impacts the world, whether we like it or not. China is the world’s No. 2 economy and one of the world’s biggest consumers of raw materials, as in oil and soybeans. And when they consume less, prices decline, and when prices decline, it means less money for Iowa farmers, lower profits for big agribusiness like Bunge and — though many won’t cry over this — a weaker ruble and worsening recession in Russia.

In fact, on Monday morning the Russian ruble cracked 71 to 1, its weakest free-float level ever against the dollar. The weakening of emerging market currencies against the dollar is spreading suggesting that worries about emerging markets are deepening as investors think China demand is suddenly falling off a cliff. All BRIC currencies, including South Africa, have weakened substantially today. The trend is likely to continue, Barclays Capital analyst Guillermo Felices says.

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It’s about their links to shadow banks, to a large extent.

The Next Shoe To Drop In China? The Banks (MarketWatch)

To many investors, the problem with China is a suspicion that things could be much worse than is officially being let on. My own experience with a Bank of China ATM at the Hong Kong-Shenzhen border last Friday certainly got me thinking — just how bad is China’s liquidity crunch? The problem was the ATM menu options had been limited to funds balance, transfer and deposit but none for withdrawal. And it did not appear personal, as all three cash machines were the same, refusing locals and foreigners alike. This might be dismissed as merely anecdotal but it comes in the same week that global markets have zeroed in on Chinese capital flight risks and authorities have been scrambling to inject liquidity into the banking system.

In the past week the central bank made three interventions to boost liquidity, totaling some 350 billion yuan. Despite this interbank rates have remain elevated and reports suggest the People’s Bank of China’s next move will be to cut bank-reserve ratios to free up potentially another 678 billion yuan for lending. Turning off the cash withdrawal functions of ATMs at the border is certainly one way to stem capital leakage, albeit a rather draconian and clumsy one. While it is also unlikely, it is not unreasonable to be wary of unexpected policy moves coming out of Beijing. After all, few would have predicted measures, such as mass share suspensions and the banning of large shareholders from selling equities, that have been announced in recent weeks to support domestic stock prices.

Any signs that the fault line in China’s highly leveraged economy is spreading to its financial system, brings with it another layer of potential systematic risk. This always looked a possibility when authorities used the banking system and public funds to support equity markets. [..] Analysts warn that it is futile for the government to try to support both currency and assets markets. According to Stuart Allsopp at BMI Research, Beijing will increasingly have to choose between propping up the equity market and defending the currency from further downside pressure. As the veil of government support for both markets has been pierced and gives way to market forces, he says lower equity prices and continued weakness in the yuan look inevitable.

The PBOC now has to balance drawing down its foreign-exchange reserves to prevent aggressive weakness in the yuan, and the extent to which it can reduce liquidity from the domestic financial system. BMI expects the rate of growth of domestic money supply will have to slow sharply in order to firm up the value of the yuan, in the process weighing heavily on domestic asset prices.

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Cold turkey.

China Stock Market Panic Shows What Happens When Stimulants Wear Off (Guardian)

Financial markets have gone cold turkey. For the past seven years, they have been given regular doses of strong and dangerous narcotics. The threat that the drugs will no longer be available has resulted in severe withdrawal symptoms. Unlike in 2007, the crash could be seen coming. Wall Street and the City were taken completely by surprise by the subprime crisis, but have had plenty of warning that something nasty might be brewing in China. Anybody caught unawares really hasn’t been paying attention. But this is about more than China. Financial markets in the west have been booming for the past six years at a time when the real economy has been struggling. Recovery from the last recession has been patchy and weak by historical standards, but that has not prevented a bull market in equities.

The reason for this is simple: the markets have been pumped full of stimulants in the form of quantitative easing, the money creation programmes adopted by central banks as a response to the last crisis. On the day that QE was launched in the UK, 9 March 2009, the FTSE 100 stood at 3542 points. Its recent peak on 27 April this year was 7103 points, a gain of 100.5%. There is a similar correlation between the three rounds of QE in the US and the performance of the S&P 500, which was up more than 200% during the same period. But there were always doubts about what might happen when central banks decided it was time to remove some of the stimulus they have been providing for the past seven years. Now we know.

The Federal Reserve and the Bank of England halted their QE programmes and started to muse publicly about the timing of the first increase in interest rates. At that point, financial markets merely needed a trigger for a big selloff. China has provided that, because the world’s second biggest economy has shown distinct signs of slowing. What was inevitably dubbed “Black Monday” began in east Asia where there was disappointment that Beijing did not provide fresh support for shares in Shanghai overnight. Having been accused of acting like quacks dispensing dodgy remedies on previous stock market rescue missions, China’s leaders decided they would tough it out. Big mistake. The stimulus junkies needed a fix and when they didn’t get one they had a bad dose of the shakes.

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Finding the bad guys.

China Launches Crackdown On ‘Underground Banks’ Amid Capital Flight Fears (SCMP)

Police in China have launched a two-month crackdown against “underground banks” amid concerns about cash flowing in and out of the country illegally and fuelling speculation in the country’s volatile stock markets. The campaign will focus on illegal financing in shares markets, plus funding for terrorism and banking connected to corrupt officials, state media reported.It will last until late November. Meng Qingfeng, a vice minister of public security who oversees the country’s manhunt for economic fugitives overseas and headed last month’s crackdown on “malicious short-selling” in China’s stock markets, said underground banking had undermined the country’s economic security and the order of the financial market, the state-run news agency Xinhua reported.

The ministry will also despatch special taskforces to areas where underground banking activity is particularly severe. Meng said that since April the police, the central bank and the State Administration of Foreign Exchange have cracked down on a number of illegal fund transfers through underground banks and offshore companies. Some 66 underground banks handling assets of about 430 billion yuan (HK$520 billion) have been discovered. More than 160 suspects have been arrested. Some of the crackdowns took place in Guangdong, Liaoning and Zhejiang provinces, Xinhua said, plus in Shanghai and the Xinjiang region.

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Nice contrarian view.

How Greece Outflanked Germany And Won Generous Debt Relief (MarketWatch)

Alexis Tsipras, who is likely to continue as Greek prime minister after precipitating a general election for next month, arrived in power in January attempting to resolve an “impossible trinity”: relaxing the economic squeeze, rescheduling Greece’s unpayable debts, and keeping the country in the euro. Satisfactorily achieving all three aims appeared unachievable — and it was. Yet Tsipras appears to have achieved greater success than Angela Merkel, his main European sparring partner. The German chancellor, too, promised her electorate three unrealizable goals. However, frightened of being made a scapegoat worldwide for ejecting Greece from the euro, she seems to have caved in to international pressure even more than Tsipras.

The debt rescheduling under way for Greece, partly prompted by the IMF’s accurate labelling of Greek debts as unsustainable, appears reminiscent of the relief that West Germany gained from a “troika” of international lenders (France, the U.K. and the U.S.) at the 1953 London debt conference. At a time when global economic storm clouds are darkening, Greek voters may well thank Tsipras for shifting much of the country’s borrowings on to concessionary terms. The big question is whether, once the full generosity of Greek debt relief becomes widely known, other large-scale debtors around the world — ranging from indebted Chinese local authorities to borrowers from Italy, Portugal and Spain — will demand similar concessions from creditors.

The new €86 billion low-cost Greek bailout will probably not be fully redeemed until 2075 — a similar extension of loan repayments that was granted to West Germany in 1953, with some long-standing borrowings not repaid until 57 years later, in 2010. Further effective Greek debt reductions will occur in the autumn as part of a deal to keep the IMF as a direct underwriter of Greek debt. Germany’s insistence on bringing in the IMF is politically expedient yet economically contradictory. Greece’s biggest creditor believes the only way to make its lending domestically palatable is to keep on board another lender (the IMF), which will do so only if Germany asks its taxpayers to shoulder fresh burdens through stretching out loan repayments and lowering interest costs.

Merkel’s promises to German voters have had a Tsipras-like quality: maintain the unity of euro members, avoid full-scale Greek debt restructuring, and keep euro economic policies in line with German-style orthodoxy. Both Merkel and Tspiras have resolved their individual “trilemmas” by attempting to keep their respective electorates in the dark about the extent to which they have diluted their principles.

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Sorry, Yanis, can’t have a political union, can’t have a banking union.

Varoufakis: Greek Deal Was A Coup d’État (EurActiv)

Ignoring the will of the people by pursuing unpopular austerity policies plays into the hands of Europe’s extreme right, say Yanis Varoufakis and Arnaud Montebourg. “Fakis, Fakis,” the militant socialists chanted in Frangy-en-Bresse, in France, on Sunday (23 August). The annual “Fête de la Rose”, a gathering regularly attended by France’s former finance minister Arnaud Montebourg, has taken place since 1972. Once the scourge of the Eurogroup, the rock star economist Yanis Varoufakis was visibly delighted to be in the village of Frangy (dubbed Frangis in his honour), despite the rain, and to launch a fresh attack on European leaders and the current Greek government.

“What happened on 12 July was a real coup d’état and a defeat for all Europeans,” the former finance minister said, referring to Greece’s acceptance of the harsh conditions attached to the latest aid package. A package that also cost him his job as the country’s minister of finance. Similarly, Arnaud Montebourg lost his job as French Minister of the Economy exactly one year ago, after openly criticising the French government’s austerity policies at the 2014 Fête de la Rose. “I do not believe the September elections can lead to an alliance that will create the conditions for an economic policy that works for Greece,” Yanis Varoufakis warned. He said he was “torn” by the splitting of the Syriza party, although he was not officially a party member.

25 Syriza MPs announced on Friday that they would form a new party, following the resignation of the Prime Minister, Alexis Tsipras, who hopes the elections will give him a larger majority and a stronger mandate to enact his plans. The two ex-ministers strived to highlight the dangers of continued austerity in Greece. “Without political union, the Economic and Monetary Union (EMU) is a big mistake. Now that we have it, we must repair it. What we need today is a real common investment policy, and a real banking union,” the Greek economist said. Yanis Varoufakis told EurActiv that the emergence of an allied European left, in opposition to the current system, was a possibility.

“I believe that an alliance of Europeans from across the political spectrum, who share one radical idea, the idea of democracy, is possible,” he joked. “For 20 years, the principle of democracy has been trampled on in Europe. But it remains a common idea. If we want to make the transition to a democratic Europe, we need to empower the citizens, rather than the current cartel of lobbies.” This view was shared by his host. Arnaud Montebourg said, “Power is held by an oligarchy in Europe.”

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And every other property market that’s bubbling.

US Short Sellers Betting On Canadian Housing Crash (National Post)

Large Wall Street investors who made billions when the U.S. housing market collapsed in 2008 are now betting real estate values in Vancouver and other Canadian cities will crash, financial insiders say. The hedge fund investors, known as short sellers, are betting against what they believe is a housing bubble in Vancouver, Toronto, Calgary and other Canadian cities. They believe Canadians hold too much mortgage debt, and that Canadian banks, mortgage insurers and “subprime” private lenders will lose money on unpaid loans when property prices fall. “The cross currents are beyond crazy in Vancouver — it’s a mix of money laundering, speculation, low interest rates,” said Marc Cohodes, once called Wall Street’s highest-profile short-seller by The New York Times.

“A house is something you live in, but in Vancouver you guys are trading them like the penny stocks on Howe Street.” He says Vancouver real estate has reached peak insanity, and any number of factors could trigger a collapse. Local real estate professionals predicted the U.S. investors are likely to lose their shirts betting against Vancouver property, which they described as a special market thriving on international demand. But one Canadian housing analyst who advises U.S. clients, including Cohodes, said major investors are currently “building positions” against Canadian housing targets. They are forecasting a raise in historically low U.S. interest rates this fall will spill financial stress into Canada. “All of the big global macro funds that were involved in betting against the U.S. in 2007 and 2008 and 2009, they’ve all studied Canadian housing for a few years,” said the Canadian analyst.

“I know a number of them are shorting Canadian housing. It looks like an accident waiting to happen.” This is although housing markets in Vancouver and Toronto have continued to rocket higher since international short-sellers started circling in 2013. Short sellers use complex financial arrangements to make rapid profits when publicly traded stocks fall in value. In this case, they are betting against businesses connected to property and household debt. They are also betting against the Canadian dollar, because they believe it will decline significantly in a housing bust. Most of these traders are employed by secretive New York investment funds that shy away from publicity, partly because they want to disguise how they lay their bets.

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We won’t stop until it’s all gone.

Tropical Forests Totalling Size Of India At Risk Of Being Cleared (Guardian)

Tropical forests covering an area nearly the size of India are set to be destroyed in the next 35 years, a faster rate of deforestation than previously thought, a study warned on Monday. The Washington-based Center for Global Development, using satellite imagery and data from 100 countries, predicted 289m hectares (714m acres) of tropical forests would be felled by 2050, with dangerous implications for accelerating climate change, the study said. If current trends continued tropical deforestation would add 169bn tonnes of carbon dioxide into the atmosphere by 2050, the equivalent of running 44,000 coal-fired power plants for a year, the study’s lead author told the Thomson Reuters Foundation.

“Reducing tropical deforestation is a cheap way to fight climate change,” said environmental economist Jonah Busch. He recommended taxing carbon emissions to push countries to protect their forests. UN climate change experts have estimated the world can burn no more than 1tn tonnes of carbon in order to keep global temperature rises below two degrees – the maximum possible increase to avert catastrophic climate change. If trends continued the amount of carbon burned as a result of clearing tropical forests was equal to roughly one-sixth of the entire global carbon dioxide allotment, Busch said. “The biggest driver of tropical deforestation by far is industrial agriculture to produce globally traded commodities including soy and palm oil.” The study predicted the rate of deforestation would climb through 2020 and 2030 and accelerate around the year 2040 if changes were not made.

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Aug 132015
 
 August 13, 2015  Posted by at 9:28 pm Finance Tagged with: , , , , , , ,  


Gustave Doré The Ninth Circle of Hell (Treachery) 1857

Eventful days in the middle of summer. Just as the Greek Pandora’s box appears to be closing for the holidays (but we know what happens once it’s open), and Europe’s ultra-slim remnants of democracy erode into the sunset, China moves in with a one-off but then super-cubed renminbi devaluation. And 100,000 divergent opinions get published, by experts, pundits and just about everyone else under the illusion they still know what is going on.

We’ve been watching from the sidelines for a few days, letting the first storm subside. But here’s what we think is happening. It helps to understand, and repeat, a few things:

• There have been no functioning financial markets in the richer parts of the world for 7 years (at the very least). Various stimulus measures, in particular QE, have made sure of that.

A market cannot be said to function if and when central banks buy up stocks and bonds with impunity. One main reason is that this makes price discovery impossible, and without price discovery there is, per definition, no market. There may be something that looks like it, but that’s not the same. If you want to go full-frontal philosophical, you may even ponder whether a country like the US still has a functioning economy, for that matter.

• There are therefore no investors anymore either (they would need functioning markets). There are people who insist on calling themselves investors, but that’s not the same either. Definitions matter, lest we confuse them.

Today’s so-called ‘investors’ put to shame both the definition and the profession; I’ve called them grifters before, and we could go with gamblers, but that’s not really it: they’re sucking central bank’s udders. WHatever we would settle on, investors they’re not.

• The stimulus measures, QE, were never designed to induce economic recovery. They were meant to transfer private losses to public purses. In that, they have been wildly successful.

• China is the end of the line. It was the only economy left that until recently could boast actual growth on a scale that mattered to the global economy. Growth stopped when China, too, introduced stimulus measures. To the tune of some $25 trillion or more, no less.

The perhaps most pivotal importance of China is that it was the world’s latest financial hope. The yuan devaluation shatters that hope once and for all. The global economy looks a lot more bleak for it, even if many people already didn’t believe official growth numbers anymore.

Because we’ve reached the end of the line, the game changes. Of course there will be additional attempts at stimulus, but China’s central bank has de facto conceded that its measures have failed. The yuan devaluations, three days in a row now, mean the central People’s Bank of China has, openly though reluctantly, acknowledged its QE has failed, and quite dramatically at that. They just hope you won’t notice, and try to bring it on with a positive spin.

Central banks are not “beginning” to lose control, they lost control a long time ago. The age of central bank omnipotence has “left and gone away” like Joltin’ Joe. Omnipotence has been replaced by impotence.

This admission will reverberate across the globe. China is simply that big. It may take a while longer for other central bankers to admit to their own failures (though ‘failures’, in view of the wealth transfer, is a relative term here), but it won’t really matter much. One is enough.

What will happen from here on in will be decided by how, where and in what amounts deleveraging will take place. This will of necessity be a chaotic process.

Debt deleveraging leads to, or can even be seen as equal to, debt deflation. This is a process that has already started in various places and parts of economies (real estate), but was kept at bay by QE programs. It will now accelerate to wash over our societies like a biblical plague.

The Automatic Earth started warning about this upcoming deflation wave many years ago. I am wondering if I should rerun some of the articles we posted over the past 8 years or so. I might just do that soon.

It is fine for people to say that since it hasn’t happened yet, we were wrong about this, but for us it was never, and is not now, about timing. If you think like an investor -or at least you think you do- timing may seem to be the most important thing in the world. But that’s just another narrow point of view.

When deflation takes its inevitable place center stage, it will wipe away so much wealth, be it real or virtual or plain zombie, that the timing issue will be irrelevant even retroactively. Whether the total sum of global QE measures is $22 trillion or $42 trillion, its deflation-driven demise will wipe out individuals, companies and nations alike at such a pace, people will wonder why they ever bothered with trying to get the timing right.

This may be hard to understand in today’s world where so many eyes are still focused on central banks and asset- and equity markets, on commodities and precious metals, on housing markets. In that regard, again, it is important to note that there have been no functioning markets for many years. Those eyes are focused on something that merely poses as a market.

For us this was clear years ago. It was never about the timing, it was always about the inevitability. Back in the day there were still lots of voices clamoring for – near-term or imminent – hyperinflation. Not so much now. We always left open the hyperinflation option, but far into the future, only after deflation was done wreaking its havoc. A havoc that will be so devastating you’ll feel silly for ever even thinking about hyperinflation.

Deflation will obliterate our economies as we know them. Imagine an economy for instance where next to no-one sells cars, or houses, or college educations, simply because next to no-one can afford any of it.

Where everything that today is bought on credit will no longer be bought, because the credit will be gone. Where homes are not worth more than the cardboard they’re made of, and still don’t sell.

Where ships won’t sail because letters of credit won’t be issued, where stores won’t open in the morning because they can’t afford their inventory even if it arrives in a nearby port.

As for today’s reality, the Chinese leadership has been eclipsed by its own ignorance about economic systems, the limits of their control over them, and the overall hubris they live in on a daily basis. These people were educated in the 1960s and 70s China of Mao and Deng Xiaoping. In the same air of omnipotence that today betrays all central bankers. Why try to understand the world if you’re the one who shapes it?!

It was obvious this moment would arrive in Beijing as soon as the one millionth empty apartment was counted. There are some 60 million ’empties’ now, a number equal to half the total US housing contingent.

Beijing then heavily promoted the stock market for its citizens, as a way to hide the real estate slump. All the while, it kept the dollar peg going. And now all this is gone. And all that’s left is devaluation. As Bill Pesek put it: “China Adds a Chainsaw to Its Juggling Act”.

Ostensibly to improve the country’s trade position, for lack of a better word. Whether that will work is a huge question. For one thing, the potential increase in capital flight may turn out to be a bigger problem than the devaluation is a solution.

Moreover, one of the main reasons to devalue one’s currency is the idea that then people will start buying your stuff again. But in today’s deflationary predicament, one of the main failures of mainstream economics pops up its ugly head: the refusal to see that many people have little or nothing left to spend.

This as opposed to economists’ theories that people must be sitting on huge savings whenever they don’t spend “what they should”. Ignoring the importance of personal debt levels plays a major part in this. Any which way you define it, the result is a drag on the velocity of money in either a particular economy, or, as we are increasingly witnessing, a major spending slowdown in the entire global economy.

Seen in that light, what good could a 1.9% devaluation (or even a, what is it, super-cubed 5% one, now?!) possibly do when China producer prices fell for the 40th straight month, exports were down 8.3% in July, and cars sell at 30% discounts? Those numbers indicate a fast and furious reduction in spending.

Which in turn lowers the velocity of money in an economy. If money doesn’t move, an economy can’t keep going. If money velocity slows down considerably, so does the entire economy, its GDP, job creation, everything.

This of course is the moment to, once again, point out that we at the Automatic Earth define deflation differently from most. Inflation/deflation is not rising/falling prices, but money and credit supply relative to available good and services, and that, multiplied by the velocity of money.

When this whole debate took off, even before Lehman, there were only a few people I can remember who emphasized the role of deflation the way we did: Steve Keen, Mike Mish Shedlock and Bob Prechter.

And Mish doesn’t even seem think the velocity of money is a big factor, if only because it is hard to quantify. We do though. Steve is a good friend, he’s the very future of economics, and a much smarter man than I am, but still, last time I looked, stumbling over the inflation equals rising prices issue (note to self: bring that up next time we meet). Prechter gets it, but believes in abiotic oil, as Nicole just pointed out from across the other room.

So yeah, we’re sticking out our necks on this one, but after 8+ years of thinking about it, we’re more sure than ever that we must insist. Rising prices are not the same as inflation, and falling prices are but a lagging effect of deflation.

Spending stops when people are maxed out and dead broke. And then prices drop, because no-one can afford anything anymore.

We’ve had a great deal of inflation in the past decade or two, like in US housing. We still have some, for instance in global stock markets and Canada and Australia housing. But these things are nothing but small pockets, where spending persists for a while longer.

Problem is, those pockets pale in comparison to diving -consumer- spending in the US, China, Europe, Japan. Spending that wouldn’t even exist anymore if not for QE, ZIRP and cheap credit.

The yuan devaluation tells us the era of cheap credit is now over. The first major central bank in the world has conceded defeat and acknowledged the limits to its alleged omnipotence.

It always only took one. And then nothing would stand in the way of the biblical plague. It was never a question. Only the timing was. And the timing was always irrelevant.

Jun 032015
 
 June 3, 2015  Posted by at 2:02 pm Finance Tagged with: , , , , , , ,  


Jack Delano Mike Evans, welder, Proviso Yard, Chicago & North Western RR 1940

We’ve been entertaining ourselves to no end the past couple days with a ‘vast array’ of articles that purport to provide us with ‘expert’ opinion on the question of whether we are witnessing a bubble or not. Got the views of Goldman’s David Kostin, Robert Shiller, Jeremy Grantham, Jeremy Siegel, Howard Marks.

But although these things can be quite amusing because while they’re at it, of course, the ‘experts’ say the darndest things (check Bloomberg ‘Intelligence’s Carl Riccadonna: “You had equity markets benefit from QE, but eventually QE also jump-started the broader recovery.. Ultimately everyone’s benefiting.”), we can’t get rid of this one other nagging question: who needs an expert to tell them that today’s markets are riddled with bubbles, given that they are the size of obese gigantosauruses about to pump out quadruplets?

Moreover, when inviting the opinions of these ‘authorities’, you inevitably also invite denial and contradiction (re: Siegel). And before you know what hit you, it turns into something like the climate change ‘debate’: just because a handful of ‘experts’ deny what’s right in front of their faces as tens of thousands of scientists do not, doesn’t mean there’s a valid discussion there. It’s just noise with an agenda.

And though the global climate system is infinitely more complex than the very vast majority of people acknowledge, fact remains that a plethora of machine-driven and assisted human activities emit greenhouse gases, greenhouse gases trap heat and higher concentrations of greenhouse gases trap more heat. In very similar ways, central banks’ stimuli (love that word) play havoc, and blow bubbles, with and within the economic system. Ain’t no denying the obvious child.

But even more than the climate ‘debate’, the bubble expert articles made us think of a Jerry Seinfeld episode called The Opera, which ends with Jerry doing a stand-up shtick that goes like this:

I had some friends drag me to an opera recently, you know how they’ve got those little opera glasses, you know, do you really need binoculars, I mean how big do these people have to get before you can spot ’em?

These opera kids they’re going two-fifty, two-eighty, three-twenty-five, they’re wearing big white woolly vests, the women have like the breastplates, the bullet hats with the horn coming out.

If you can’t pick these people out, forget opera, think about optometry, maybe that’s more you’re thing.

As far as we can figure out, all you need to know today about bubbles is displayed right there in front of you if you’re able to simply imagine what asset prices would be like without the $40 trillion or so in global stimulus measures the central banks have gifted upon the banks and forced upon the rest of us.

Does anyone honestly think that prices for stocks and bonds and houses and commodities would be anywhere near where they are now without all that zombie money?

How can you even pretend that anything at all has a fair valuation these days? Central banks buy bonds up the wazoo, and there’s no way that does not drive up prices like they’re being chased by the caucasian Baltimore police force department.

Home prices have stabilized for one reason only: the beneficiaries of QE money have done one of two things: either buy up homes wholesale themselves, or sign some poor greater sucker into a loan to procure a leaking and peeling American dream at inflated ‘value’.

As for stocks, they’re supposed to reflect the state of the economy, and their record setting highs obviously do nothing of the kind, because economic performance is just as obviously many lightyears away from any record high.

In fact, the only thing that’s ‘positive’ about the economy is home and share prices. And that is because corporations engage in M&A and in buybacks the size of which people just 10 years ago would have not deemed possible, or even legal, and because that drives up share prices to levels where the many millions of greater fools get tempted to participate. Just watch China.

The flipside of this, as they will find out soon enough, is that QE and ZIRP and that entire alphabet soup completely destroy price discovery. And that means that nobody knows what anything is really worth, everyone’s just guessing, there is no correlation left to the work that has gone into producing anything, let alone to the practical value of what’s being produced.

These companies that buy their own shares can do so with credit borrowed at very low rates, so low their actual activities don’t even have to generate anywhere near an economically viable profit. They can simply borrow it.

Where and when then will these grossly bloated monstrosities burst? The clue would seem to be closely related to what Martin Armstrong had to say:

Velocity of Money Below Great Depression Levels

Ever since the repeal of Glass-Steagall by Bill Clinton in 1999, this “new” way of making money by transforming banking from Relationship to Transactional Banking has destroyed the economy in ways we are soon to discover. The VELOCITY of money has fallen to BELOW Great Depression levels. This is the destruction of Capitalism, and I fear the response against the banks on the next downturn will lead to authoritarianism.

Taking interest rates NEGATIVE will not reverse this trend – it will accelerate the trend. This is all part of Big Bang. We seriously need to understand the nature of the problem or we will lose all rights and freedom because of what the bankers have set in motion. Transactional Banking only benefits the banks and fails to create a foundation for economic growth. This is not about Fractional Banking, this is all about the destruction of Relationship Banking which creates small businesses and employment.

The collapse in the VELOCITY of money illustrates the collapse in liquidity in the markets, which will erupt in higher volatility we have not seen before. The VELOCITY of money declines as HOARDING rises. This is how empires, nations, and city-states decline and fall.

Armstrong uses the following graph to make his point, which is a series that depicts (not seasonally adjusted) GDP/St. Louis Adjusted Monetary Base.

I’ll add the MZM graph (Money Zero Maturity = all money in M2 less the time deposits, plus all money market funds). It’s not as dramatic, but more commonly used (do note that the timescale is different):

It’s obvious that what ails the US economy, and all western economies, is that people are not spending. That’s what brings velocity of money down. And that’s also what causes deflation, and by that we don’t mean falling prices only.

Ergo: when Armstrong states that “The VELOCITY of money declines as HOARDING rises”, he’s half right, but only half. I’ve explained before that this is also where Bernanke’s preposterous claims about an Asian savings glut a few years ago failed in dramatic fashion.

In that same sense, I wrote recently that the ‘savings rate’ in the US is calculated to include debt payments. If you pay off your mortgage or your payday loan, that is jotted down as you saving, even hoarding your money. Just one in a long range of mind-numbing accountancy tricks the US utilizes to hide the real state of its economy. Makes one wonder what the double seasonally adjusted savings rate might be.

This issue shirks uncomfortably close to the contribution of each dollar of added debt to a country’s GDP, which in the west by now must shirk just as uncomfortably close to zero. And once it is zero, the game’s up.

That puts into perspective Jon Hilsenrath’s quasi-funny letter yesterday in the Wall Street Journal, which Tyler Durden presented with: “..to our best knowledge, this is not the WSJ transforming into the Onion.”

Dear American Consumer,

This is The Wall Street Journal. We’re writing to ask if something is bothering you. The sun shined in April and you didn’t spend much money. The Commerce Department here in Washington says your spending didn’t increase at all adjusted for inflation last month compared to March. You appear to have mostly stayed home and watched television in December, January and February as well. We thought you would be out of your winter doldrums by now, but we don’t see much evidence that this is the case. You have been saving more too. You socked away 5.6% of your income in April after taxes, even more than in March. This saving is not like you. What’s up?

The most glaring problem with this letter is -though granted, there’s quite a few- that Americans are not actually saving. Of course some of them are, but that’s not what drives the savings rate. Americans are paying off debt. They have no choice. They’re maxed out. They don’t want to lose their homes, or not feed their kids. The only jobs created have been low-paid ones. While home prices have been QE’d into a suspended state of Wile E. style false stability.

This is how you gut a society. It’s 101. Central banks’ largesse has indulged the rich with more than they can spend, while the rest get less than they need to spend to survive. Home prices are so high they keep people from spending, says Bloomberg.

That’s where the rubber hits the road. That’s where the asset bubbles hit the real economy. And they haven’t even started to burst yet, for real. When they do, the brunt of that will be borne by the real economy as well.

What will bring down our western economies is that people simply no longer have money to spend. While consumer spending in the US is still close to 70% of GDP. That won’t be solved by handing money to banks, or by keeping asset prices from reverting to their market values. Quite the contrary.

Mar 312015
 
 March 31, 2015  Posted by at 8:30 pm Finance Tagged with: , , , ,  


Gottscho-Schleisner Plaza buildings from Central Park, NY 1933

Who knew that the revolution would start with those radical Icelanders? It does, though. One Frosti Sigurjonsson, a lawmaker from the ruling Progress Party, issued a report today that suggests taking the power to create money away from commercial banks, and hand it to the central bank and, ultimately, Parliament.

Can’t see commercial banks in the western world be too happy with this. They must be contemplating wiping the island nation off the map. If accepted in the Iceland parliament , the plan would change the game in a very radical way. It would be successful too, because there is no bigger scourge on our economies than commercial banks creating money and then securitizing and selling off the loans they just created the money (credit) with.

Everyone, with the possible exception of Paul Krugman, understands why this is a very sound idea. Agence France Presse reports:

Iceland Looks At Ending Boom And Bust With Radical Money Plan

Iceland’s government is considering a revolutionary monetary proposal – removing the power of commercial banks to create money and handing it to the central bank. The proposal, which would be a turnaround in the history of modern finance, was part of a report written by a lawmaker from the ruling centrist Progress Party, Frosti Sigurjonsson, entitled “A better monetary system for Iceland”.

“The findings will be an important contribution to the upcoming discussion, here and elsewhere, on money creation and monetary policy,” Prime Minister Sigmundur David Gunnlaugsson said. The report, commissioned by the premier, is aimed at putting an end to a monetary system in place through a slew of financial crises, including the latest one in 2008.

According to a study by four central bankers, the country has had “over 20 instances of financial crises of different types” since 1875, with “six serious multiple financial crisis episodes occurring every 15 years on average”. Mr Sigurjonsson said the problem each time arose from ballooning credit during a strong economic cycle.

He argued the central bank was unable to contain the credit boom, allowing inflation to rise and sparking exaggerated risk-taking and speculation, the threat of bank collapse and costly state interventions. In Iceland, as in other modern market economies, the central bank controls the creation of banknotes and coins but not the creation of all money, which occurs as soon as a commercial bank offers a line of credit. The central bank can only try to influence the money supply with its monetary policy tools.

Under the so-called Sovereign Money proposal, the country’s central bank would become the only creator of money. “Crucially, the power to create money is kept separate from the power to decide how that new money is used,” Mr Sigurjonsson wrote in the proposal. “As with the state budget, the parliament will debate the government’s proposal for allocation of new money,” he wrote.

Banks would continue to manage accounts and payments, and would serve as intermediaries between savers and lenders. Mr Sigurjonsson, a businessman and economist, was one of the masterminds behind Iceland’s household debt relief programme launched in May 2014 and aimed at helping the many Icelanders whose finances were strangled by inflation-indexed mortgages signed before the 2008 financial crisis.

Feb 262015
 
 February 26, 2015  Posted by at 8:12 am Finance Tagged with: , , , , , , , ,  


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

Oh well, some are more equal than others. One day after Eurogroup head Dijsselbloem says France won’t get any more lenience …

France Must Respect EU Budget Rules

France must meet EU budget targets or risk damaging the bloc’s entire framework for policing countries’ spending plans, the head of the Eurogroup said on Tuesday. “I don’t think small or larger countries should be treated differently … It is crucial for the credibility of the whole fiscal framework that also France commits to it, both in fiscal terms and in reform terms,” Jeroen Dijsselbloem, who chair meetings of eurozone finance ministers, told the European Parliament. “I think that the Commission has allowed itself and France more time to scrutinise the figures but also to take more measures and prepare more proposals. The Commission will assess them first and then report to us at the beginning of March.”

… the EC overrules him. Just like he overruled them a few days ago on the proposal for Greece that EC head Juncker had prepared for Varoufakis, but which Dijsselbloem swept off the table. A tit for tat battle of the peacocks? Talking with one voice it ain’t.

France Gets More Time to Meet EU Budget Rules

European Union officials on Wednesday gave France until 2017 to bring its government finances in line with the bloc’s budget rules, despite the country’s continued failure to adhere to them. The European Commission said it was recommending that France be given what amounted to a two-year extension to cut its deficit, which is expected to come in at around 4.1% of GDP this year and next, well above the 3% ceiling for the bloc. The commission, the executive arm of the European Union, is charged with signing off on member states’ budgets to ensure they comply with Union rules.

The commission also said it would not recommend that Italy, Finland and Belgium be punished, despite their failure to meet deficit goals, owing to “account key relevant factors,” including the weak economic picture. In November, the commission gave France, Belgium and Italy a three-month extension on their budget deadlines. The decision “fully reflects the current economic situation,” Pierre Moscovici, the commissioner for economic and financial affairs, said in a statement, adding: “The commission is demonstrating both the importance of structural reforms and the respect of our fiscal rules.”

In another 180º within 24 hours, Ukraine central bank head Valeria Gontareva withdrew a measure that banned purchases of foreign currencies by banks for clients, for 48 hours. Apparently, PM Yatsenyuk didn’t agree with the measure, and never got the memo about central bank independence. He must have a bunch of wealthy friends, no wait, that weasel has no friends, make that puppeteers, who told him to yank the measure or else. Which means more cash will flee and the hryvnia can keep plunging, after having lost 40-50% (depending on the blackness of the market you would trade in) over the past 10 days.

Earlier, President Willy Poroshenko, who didn’t get that memo either, had ordered(!) the central bank to stabilize the currency at 21 to the dollar as it was trading at 32 officially and 44 on the street. Look, Wonka, no politician can order a central banker to do anything, not in an alleged democracy. Well, perhaps (s)he could be ordered to step down, but not change policy. You might as well run monetary policy yourself from your candy empire.

Besides, it’s a stupid order: central banks don’t fix rates, certainly not of countries waging wars against their own people. No matter what Poroshenko says, or Yatsenyuk, who apparently called Gontareva ‘negligent’ and claimed she should have come to talk to him first. No, that’s exactly what she should not have done. Your currency’s exchange rate is not a political instrument. Because if you open that Gontareva’s box, you lose all credibility. Just ask Ben Bernanke.

Mish Shedlock has a great series on Ukraine going, and I fully agree with his advice for Valeria Gontareva: Get the hell out of Ukraine immediately!” Because once these people see their economy crash, they’re going to try and blame you for it.

Developments in Ukraine have accelerated enormously the past two weeks or so, even if that is not always obvious. The Ukraine army is losing big time, Russia may cut its access to gas because it doesn’t pay its bills, and now the economy is in the last throngs of its debt death rattle. Even the IMF today started to backpeddle on the billions more that it promised Kiev only a few days ago. It’s prone to be a battlefield in more ways than one.

Compared to that, Yanis Varoufakis is having a tea party in Athens. Though there was the indefinite ban the government slapped on professional soccer (football) because of fan violence, and that is more important to many Greeks than their own limbs, bot other than that, compared to Ukraine, it’s smooth sailing.

One detail Varoufakis came up with yesterday had me crack a smile. He told Bloomberg TV that the ECB was sitting on about €2 billion that the bank itself admits belongs to Greece (it stems from earlier purchases of Greek sovereign bonds). Therefore, Yanis suggested, if the ECB would use that money for the upcoming payment Greece owes the IMF, that would show ‘good faith and sportsmanship’ (I’m paraphrasing here). Bloomberg records a somewhat lame response by ECB head Draghi, but, let’s say, the die is cast:

Varoufakis Counts On ECB to Avoid Greek Default in March

ECB President Mario Draghi told the European Parliament earlier on Wednesday it was a popular misconception that it was up to the central bank to return any profit from buying bonds through the Securities and Markets Program. “The profits are ready to be distributed if Greece obliges with the program,” Draghi said. “It’s a commitment by the member states, not by the ECB.”

There is a principal agreement for a 4-month loan extension to carry Greece over, though there are still plenty loose ends. There is also the fact that Europe has reacted positively to the long list of proposals Greece prepared over the weekend. So Varoufakis is not only right in saying …

“I find it very hard to imagine that Europe and the IMF will allow us to trip over what is a relatively small cash problem.”

… it’s also a great moment to bring up that $2 billion. He could have done it two weeks ago, but that wouldn’t have had the same effect. At this point in time, the ‘institutions’ are going to look vindictive, and not acting in good faith, if they decide not to throw Athens that lifeline. It’s all about perception. The money’s there, and it’s theirs.

That doesn’t mean the fight is won or over, but it does mean Greece won the day. And that’s all it has, and all it can hope for: one step at a time.

That’s kind of true for Ukraine as well, only for them, every single one of their steps marks a further descent into hell.

And I still don’t like ‘our’ role in that one bit. We’re all far too silent.

Aug 262014
 
 August 26, 2014  Posted by at 9:32 pm Finance Tagged with: , ,  


DPC Post and Montgomery, corner of Market, San Francisco post quake Apr 1906

Courtesy of Tyler Durden comes a 22,000+ word ‘essay’ from Mark Blyth and Eric Lonergan at the Council on Foreign Relations (yes, those fine folks) on how and why swaths of dough should be handed to the man in the street. But that’s not what the CFR stands for, so this calls for deconstruction, if not demolition.

It might be a really good idea if money were handed out to the real economy instead of a bunch of banks. It might be better if central banks would just leave the economy be. But that’s not what the CFRs of the planet want: they want governments and central bankers in every aspect of our lives.

They want full control. And they pretty much already have it. If they offer us free money on top, we’ll sing their praises in temples. But we’ll come to regret the whole thing more than we have any idea of. We can do just fine if they just stay out. Still, once you’ve granted people power over others, especially large numbers of them, they’ll be very reluctant to let it go.

And they’ll end up squeezing the living daylights out of you and yours. It’s how nature works. These tendencies and instincts don’t stop of their own accord, they need to be stopped from some place outside of themselves.

Print Less but Transfer More: Why Central Banks Should Give Money Directly to the People

Today, most economists agree that like Japan in the late 1990s, the global economy is suffering from insufficient spending, a problem that stems from a larger failure of governance.

Questions right off the bat: Isn’t ‘insufficient spending, whatever it may mean, a problem that stems from people not having enough to spend? What exactly does it have to do with governance? Isn’t it just as likely that governance is the cause of not having enough to spend?

And how would one define ‘insufficient spending’ to begin with? Is this where people can’t buy enough food for their children, or is it where GDP growth fails to meet economists’ models? And don’t tell me those are the same thing.

Central banks, including the U.S. Federal Reserve, have taken aggressive action, consistently lowering interest rates such that today they hover near zero. They have also pumped trillions of dollars’ worth of new money into the financial system. Yet such policies have only fed a damaging cycle of booms and busts, warping incentives and distorting asset prices, and now economic growth is stagnating while inequality gets worse.

It’s well past time, then, for U.S. policymakers – as well as their counterparts in other developed countries – to consider a version of Friedman’s helicopter drops. In the short term, such cash transfers could jump-start the economy. Over the long term, they could reduce dependence on the banking system for growth and reverse the trend of rising inequality.

First of all: why should policymakers do anything at all? Why shouldn’t they just retract from the markets other than in a regulatory sense, meant to protect the weak from the rich, and prey from predators? What role do central banks or governments have in that?

Is all we can take from this that what they’ve done is simply the wrong policy, and now they should switch to another, thought up by economists? Why do we need any such policy? Why isn’t that the first and central question? Am I missing something?

Next, note, in the following, how the authors entirely avoid the question whether governments and/or central banks SHOULD try to boost spending; for them, that’s a done deal.

In theory, governments can boost spending in two ways: through fiscal policies (such as lowering taxes or increasing government spending) or through monetary policies (such as reducing interest rates or increasing the money supply). But over the past few decades, policymakers in many countries have come to rely almost exclusively on the latter.

Presidents and prime ministers need approval from their legislatures to pass a budget; that takes time [..] Many central banks, by contrast, are politically independent and can cut interest rates with a single conference call. Moreover, there is simply no real consensus about how to use taxes or spending to efficiently stimulate the economy.

Yeah, but why would we want central banks to cut interest rates with a phone call? What good does that do anyone other than those who already make money like water?

Low interest rates reduce the cost of borrowing and drive up the prices of stocks, bonds, and homes. But stimulating the economy in this way is expensive and inefficient, and can create dangerous bubbles – in real estate, for example – and encourage companies and households to take on dangerous levels of debt.

Well, yes, low rates suck in people into borrowing for homes they can’t afford, making those same homes even less affordable. Not rocket science. And they kill those same people’s pension plans.

And that’s what the Oracle describes here:

That is precisely what happened during Alan Greenspan’s tenure as Fed chair, from 1997 to 2006 [..] Greenspan was completely honest about what he was doing. In testimony to Congress in 2002, he explained how Fed policy was affecting ordinary Americans:

“Particularly important in buoying spending [are] the very low levels of mortgage interest rates, which [encourage] households to purchase homes, refinance debt and lower debt service burdens, and extract equity from homes to finance expenditures. Fixed mortgage rates remain at historically low levels and thus should continue to fuel reasonably strong housing demand and, through equity extraction, to support consumer spending as well.”

Translation: How to suck in all the greater fools you can find, since there’s money to be squeezed out of them and at the same time they’ll believe the economy is doing fine, for a while longer.

Greenspan’s model crashed and burned when the housing market imploded in 2008. Yet nothing has really changed since then. The United States merely patched its financial sector back together and resumed the same policies that created 30 years of financial bubbles. Consider what Bernanke did with his policy of “quantitative easing.” Bernanke aimed to boost stock and bond prices in the same way that Greenspan had lifted home values. Their ends were ultimately the same: to increase consumer spending.

Really? That’s what Bernanke was shooting for? Increase consumer spending? And Greenspan too? You sure they weren’t just trying to boost bank profits? And no, they’re not even remotely alike.

Higher asset prices have encouraged a modest recovery in spending, but at great risk to the financial system and at a huge cost to taxpayers. Yet other governments have still followed Bernanke’s lead. Japan’s central bank, for example, has tried to use its own policy of quantitative easing to lift its stock market. So far, however, Tokyo’s efforts have failed to counteract the country’s chronic underconsumption. In the eurozone, the European Central Bank has attempted to increase incentives for spending by making its interest rates negative, charging commercial banks 0.1% to deposit cash. But there is little evidence that this policy has increased spending.

I don’t think Japan followed Bernanke, it’s the other way around. That neither increased spending is obvious. That neither aimed to achieve that is less so, but it does fit the evidence (just not the PR).

Know what would be scary? if these policies HAVE increased spending, and we’re still where we are today. That would mean we’re in far deeper doo than we ever considered.

China is already struggling to cope with the consequences of similar policies, which it adopted in the wake of the 2008 financial crisis. To keep the country’s economy afloat, Beijing aggressively cut interest rates and gave banks the green light to hand out an unprecedented number of loans.

What will be the result in China? All out civil war, or just very many very bloody local battles? The jury’s still out, but things ain’t looking good.

The broader global economy, meanwhile, may have already entered a bond bubble and could soon witness a stock bubble. Housing markets around the world, from Tel Aviv to Toronto, have overheated. Many in the private sector don’t want to take out any more loans; they believe their debt levels are already too high. That’s especially bad news for central bankers: when households and businesses refuse to rapidly increase their borrowing, monetary policy can’t do much to increase their spending.

They don’t just believe it; their debts are too high. What happened to make debt a matter of faith?

Over the past 15 years, the world’s major central banks have expanded their balance sheets by around $6 trillion, primarily through quantitative easing and other so-called liquidity operations. Yet in much of the developed world, inflation has barely budged. To some extent, low inflation reflects intense competition in an increasingly globalized economy. But it also occurs when people and businesses are too hesitant to spend their money, which keeps unemployment high and wage growth low. In the eurozone, inflation has recently dropped perilously close to zero.

Why do we want inflation (or, what these people really mean, rising prices)? What use is it? If prices rise, we have less debt? So we can create more of it? What an infantile model that looks to be, and yet everyone wants a share.

As for “low inflation occurs when people and businesses are too hesitant to spend their money”, that’s dead on (but gets lost among all the other jibber jabber): the inflation rate is directly – we’re talking umbilical cord – connected to spending, which is connected to what people actually possess, not what ‘authorities’ or banks allow them to borrow, that’s just a passing phase.

This so-called “rising prices ‘inflation'” is low because the velocity of money is at about historical lows. And it is because people have gotten a lot poorer over the past decade. Getting them deeper into debt won’t fix that. How is that still not clear?

Governments must do better. Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly. In practice, this policy could take the form of giving central banks the ability to hand their countries’ tax-paying households a certain amount of money.

“Handing consumers cash directly” hardly seems a job for a central bank, but it’s sure better than handing it to banks directly.

The government could distribute cash equally to all households or, even better, aim for the bottom 80% of households in terms of income. Targeting those who earn the least would have two primary benefits. For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality.

Now we’re talking. Though I fail to see how you could maintain a healthy economy by just handing out money. Other than a basic income for every citizen, but that’s a whole other concept altogether.

Such an approach would represent the first significant innovation in monetary policy since the inception of central banking, yet it would not be a radical departure from the status quo. Most citizens already trust their central banks to manipulate interest rates. And rate changes are just as redistributive as cash transfers. When interest rates go down, for example, those borrowing at adjustable rates end up benefiting, whereas those who save – and thus depend more on interest income – lose out.

No they’re not; “rate changes are just as redistributive as cash transfers” only for those who borrow.

[..] … critics warn that such helicopter drops could cause inflation. The transfers, however, would be a flexible tool. Central bankers could ramp them up whenever they saw fit and raise interest rates to offset any inflationary effects, although they probably wouldn’t have to do the latter: in recent years, low inflation rates have proved remarkably resilient, even following round after round of quantitative easing.

Wait, the idea evolves into something where a veiled wizard yanks a crank whenever (s)he see fit, and controls everybody’s lives that way. How scary does it get?

… the recurring financial panics of the past few decades have encouraged many lower-income economies to increase savings – in the form of currency reserves – as a form of insurance. That means they have been spending far less than they could, starving their economies of investments in [..]

When people save, they spend less than they could. This is distorted, if not perverse. We should push everyone to spend all they have, and then get them to borrow so they spend more than they have? So no-one will have any savings left, but instead be indebted? That’s an economic model?

… throughout the developed world, increased life expectancies have led some private citizens to focus on saving for the longer term (think Japan). As a result, middle-aged adults and the elderly have started spending less on goods and services. These structural roots of today’s low inflation will only strengthen in the coming years, as global competition intensifies, fears of financial crises persist, and populations in Europe and the United States continue to age. If anything, policymakers should be more worried about deflation, which is already troubling the eurozone.

There is no need, then, for central banks to abandon their traditional focus on keeping demand high and inflation on target. Cash transfers stand a better chance of achieving those goals than do interest-rate shifts and quantitative easing, and at a much lower cost. Because they are more efficient, helicopter drops would require the banks to print much less money. By depositing the funds directly into millions of individual accounts – spurring spending immediately – central bankers wouldn’t need to print quantities of money equivalent to 20% of GDP.

Ha! We’re finally getting to the core of the issue!

The transfers’ overall impact would depend on their so-called fiscal multiplier, which measures how much GDP would rise for every $100 transferred. In the United States, the tax rebates provided by the Economic Stimulus Act of 2008, which amounted to roughly 1% of GDP, can serve as a useful guide: they are estimated to have had a multiplier of around 1.3. That means that an infusion of cash equivalent to 2% of GDP would likely grow the economy by about 2.6%. Transfers on that scale – less than 5% of GDP – would probably suffice to generate economic growth.

Win-win. Right?

[..] … instead of trying to drag down the top, governments could boost the bottom. Central banks could issue debt and use the proceeds to invest in a global equity index, a bundle of diverse investments with a value that rises and falls with the market, which they could hold in sovereign wealth funds. The Bank of England, the European Central Bank, and the Federal Reserve already own assets in excess of 20% of their countries’ GDPs, so there is no reason why they could not invest those assets in global equities on behalf of their citizens.

After around 15 years, the funds could distribute their equity holdings to the lowest-earning 80% of taxpayers. The payments could be made to tax-exempt individual savings accounts, and governments could place simple constraints on how the capital could be used.

Wait! 15 years? Where did that come from? I thought you were going to give people money to spend tomorrow morning?! Moreover, how does this prevent the funds from being annihilated through falling markets? And who will manage the money? Goldman Sachs anyone?

For example, beneficiaries could be required to retain the funds as savings or to use them to finance their education, pay off debts, start a business, or invest in a home. Such restrictions would encourage the recipients to think of the transfers as investments in the future rather than as lottery winnings.

A 15 year wait would not immediately boost spending, I would venture. By the time the funds would be available, the economy could well be all but gone. Let alone the funds, you geniuses.

Best of all, the system would be self-financing. Most governments can now issue debt at a real interest rate of close to zero. If they raised capital that way or liquidated the assets they currently possess, they could enjoy a 5% real rate of return – a conservative estimate, given historical returns and current valuations. Thanks to the effect of compound interest, the profits from these funds could amount to around a 100% capital gain after just 15 years.

Say a government issued debt equivalent to 20% of GDP at a real interest rate of zero and then invested the capital in an index of global equities. After 15 years, it could repay the debt generated and also transfer the excess capital to households. This is not alchemy. It’s a policy that would make the so-called equity risk premium – the excess return that investors receive in exchange for putting their capital at risk – work for everyone.

This all, obviously, depends on the potential returns of the equities the funds are invested in. Alchemy or not. What happens when the return is negative?

As things currently stand, the prevailing monetary policies have gone almost completely unchallenged, with the exception of proposals by Keynesian economists such as Lawrence Summers and Paul Krugman, who have called for government-financed spending on infrastructure and research. Such investments, the reasoning goes, would create jobs while making the United States more competitive. And now seems like the perfect time to raise the funds to pay for such work: governments can borrow for ten years at real interest rates of close to zero. The problem with these proposals is that infrastructure spending takes too long to revive an ailing economy.

But a fund that takes 15 years to pay out does not take ‘too long to revive an ailing economy’?

[..] large, long-term investments are needed. But they shouldn’t be rushed. [..] Governments should thus continue to invest in infrastructure and research, but when facing insufficient demand, they should tackle the spending problem quickly and directly. [..]

Those who don’t like the idea of cash giveaways, however, should imagine that poor households received an unanticipated inheritance or tax rebate. An inheritance is a wealth transfer that has not been earned by the recipient, and its timing and amount lie outside the beneficiary’s control. Although the gift may come from a family member, in financial terms, it’s the same as a direct money transfer from the government. Poor people, of course, rarely have rich relatives and so rarely get inheritances – but under the plan being proposed here, they would, every time it looked as though their country was at risk of entering a recession.

So, your government hands you a gift, and then yanks it right out your hands again, with the promise to take care of it better than you ever could. How’s that different from what we already have?

Unless one subscribes to the view that recessions are either therapeutic or deserved, there is no reason governments should not try to end them if they can, and cash transfers are a uniquely effective way of doing so. [..] in contrast to interest-rate cuts, cash transfers would affect demand directly, without the side effects of distorting financial markets and asset prices.

But your guys idea is not to transfer anything to the people. You want people to spend more than they would have because there’s a pot of gold waiting for them beneath a 15 year rainbow.

They would also would help address inequality – without skinning the rich.

What, we don’t want to skin the rich?

By the way, how much money would you CFR guys want to hand out? Did you mean 20% of GDP for one year, or would you prefer 20 years? Just asking.

Read the whole thing. Hussman’s bright.

Fed Policy and the Growing Gap Between Wall Street and Main Street (Hussman)

When the majority of Americans examine the world around them, they see a stock market at record highs and modest apparent improvement in the economy, but they also have the sense that something remains terribly wrong, and they can’t quite put their finger on it. According to a recent survey by the Federal Reserve, 40% of American families report that they are “just getting by,” and 60% of families do not have sufficient savings to cover even 3 months of expenses. Even Fed Chair Janet Yellen seemed puzzled last week by the contrast between a gradually improving unemployment rate and persistently sluggish real wage growth. We would suggest that much of this perplexity reflects the application of incorrect models of the world. Before the 15th century, people gazed at the sky, and believed that other planets would move around the Earth, stop, move backwards for a bit, and then move forward again. Their model of the world – that the Earth was the center of the universe – was the source of this confusion.

Similarly, one of the reasons that the economy seems so confusing at present is that our policy makers are dogmatically following models that have very mixed evidence in reality. Several factors contribute to the broad sense that something in the economy is not right despite exuberant financial markets and a lower rate of unemployment. In our view, the primary factor is two decades of Fed-encouraged misallocation of capital to speculative uses, coupled with the crash of two bubbles (and we suspect a third on the way). This repeated misallocation of investment resources has contributed to a thinning of our capital base that would not have occurred otherwise. The Fed has repeatedly followed a policy course that sacrifices long-term growth by encouraging speculative malinvestment out of impatience for short-term gain. Sustainable repair will only emerge from undistorted, less immediate, but more efficient capital allocation.

In recent years, the U.S. has experienced a collapse in labor participation and weak growth in labor compensation, coupled with an increasingly lopsided distribution of whatever benefits the recent economic recovery has generated. This is not well-explained by Phillips Curves or simplistic appeals to “insufficient demand,” and it is unlikely to be improved by endless monetary “stimulus” (the targets that clearly occupy the Fed’s thinking). While our economic challenges can be largely traced to more than a decade of persistent Fed-enabled misallocation of capital, most of the costs of this misallocation have fallen on labor because of a) shifting composition of labor demand that has resulted from an increasing share of international trade with countries with heavy populations of relatively unskilled labor; and b) economic features that increasingly create a “winner-take-all” distribution of economic gains.

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Because it is.

Why “S&P 2000” Is A Fed Manufactured Mirage (Stockman)

That 4% market correction was quick and virtually painless. Not missing a beat after the market briefly tested 1900, the dip buyers came roaring back—- gunning for the 2000 marker on the S&P 500, confident that longs were not selling and that shorts had long ago been obliterated. Needless to say, bubblevision had its banners ready to crawl triumphantly across the screen. When the algos finally did print the magic 2000 number, it represented a 200% gain from the March 2009 lows. And to complete the symmetry, the S&P 500 thereby clocked in at exactly 20X LTM reported earnings based on consistent historical pension accounting. The bulls said not to worry because the market is still “cheap” – like it always is, until it isn’t. Yet now more than ever is the time to keep the champagne corked. The stock charts show an outsized skunk in the woodpile, while the economic data completely belie the sizzling gains in risk asset prices that have been racked up during the last 65 months.

Even more crucially, the Wall Street casino’s puppeteers at the Fed more or less admitted at Jackson Hole that they are utterly lost in Keynesian voodoo. To put it generously, Yellen’s speech amounted to a vaporous word cloud wrapped in incoherent double-talk. In this context, Lance Roberts recently published a stock chart that shows why “S&P 2000? is yet another signal that a giant financial train wreck is waiting to happen. For a fleeting moment six years ago, the thundering 50% plunge of the stock indices caused a crisis of confidence in the Wall Street casino that had been fostered over two decades by Greenspan and Bernanke. During that short season of trauma and disbelief, the idea briefly resonated that prosperity cannot be built on towering mountains of debt and egregious stimulation and manipulation of financial markets by the central bank.

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That’s a very benign way of putting it.

Slowing Home Sales Show U.S. Market Lacks Momentum (Bloomberg)

The pace of new-home sales fell to the slowest in four months in July, signaling U.S. real estate lacks the vigor to propel faster growth in the economy. Purchases unexpectedly declined 2.4% to a 412,000 annualized pace, weaker than the lowest estimate of economists surveyed by Bloomberg, Commerce Department data showed today in Washington. June purchases were revised up to a 422,000 rate after a May gain that was also bigger than previously estimated. Housing has advanced in fits and starts this year as tight credit and slow wage growth kept some prospective buyers from taking advantage of historically low borrowing costs. Bigger job and income gains, along with a further slowdown in price appreciation, would help make properties more affordable. “It’s a little bit disappointing,” said Thomas Simons, an economist at Jefferies LLC and the top forecaster of new-home purchases over the past two years, according to data compiled by Bloomberg. “The new-home sales data have no traction whatsoever and don’t seem to be gaining at all.”

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You mean, like Detroit?

US Bank Liquidity Rule Said to Exclude Municipal Bonds (Bloomberg)

Municipal bonds will be excluded from the group of easily sellable assets that banks can use to show they’re able to survive a credit crunch, according to a person familiar with the rule. Regulators including the Federal Reserve are set to approve a final liquidity rule on Sept. 3. The most recent draft bars debt issued by states and municipalities from being listed as high-quality assets that could help sustain a bank through a 30-day squeeze, said the person, speaking on condition of anonymity because the process isn’t public. Hoping to head off the kind of vulnerability seen during the 2008 credit crisis, the Fed, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. based their rule on an accord reached by the 27-nation Basel Committee on Banking Supervision. An initial version proposed last year, which called for a 2017 implementation, was toughest on banks with more than $250 billion in assets or major global reach.

The regulations could weigh on prices in the $3.7 trillion municipal bond market by giving banks less incentive to buy bonds that finance schools, roads and public works. Fitch Ratings in January said that an exclusion could lead banks to begin cutting their holdings in the market. “Over time there would be less demand for municipal securities,” said Michael Decker, a managing director who tracks municipal securities regulations for the Securities Industry and Financial Markets Association. “The result would be higher borrowing costs for state and local governments.” Wells Fargo held the most municipal bonds among the four largest U.S. banks, with $47.3 billion on June 30, according to regulatory filings. The bank didn’t say how much was included in its liquidity tally. Wells Fargo said in May that it was compliant with the international rule and was awaiting the U.S. version.

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Where is that new cabinet?

Economic Malaise Sparks Political Crisis in France (BW)

A heavy rain fell on François Hollande as he spoke in Brittany on the 70th anniversary of the liberation of Paris on Monday, leaving the French president with a drenched raincoat and fogged-up glasses. The weather is predicted to clear, but the forecast for Hollande’s presidency is looking more and more ominous. Facing an open rebellion within their ruling Socialist Party, Hollande and Prime Minister Manuel Valls dissolved the cabinet today and said they’ll name a new government within 24 hours. They acted after Economy Minister Arnaud Montebourg accused the government over the weekend of bowing to the pro-austerity “obsessions” of German Chancellor Angela Merkel. Montebourg and others on the Socialists’ left wing are speaking out against Hollande’s plan to pare government spending and cut taxes on business—an approach that they say will further undermine France’s stagnant economy.

Montebourg didn’t give Hollande and Valls time to fire him; he announced today that he had resigned, in a speech blasting the government for “absurd” policies. Culture Minister Aurélie Filippetti said she’d also step aside, and some other ministers who’ve sided with Montebourg are likely to be replaced as well. Yet the shake-up actually could make things worse. “The reshuffle will probably worsen the internal divisions” within the ruling party, says Antonio Barroso of Teneo Intelligence in London. Although the Socialists still have a majority in Parliament, “rogue deputies could start voting against some of the upcoming economic measures.” Montebourg, meanwhile, will continue to speak out as he positions himself to run for president in 2017, Barroso predicts.

Divisions within the Socialists, along with Hollande’s record-low 17% popularity rating in an Ipsos poll conducted last week, could make it increasingly difficult for him to govern. “One wonders what majority he will have to pass laws, notably the budget,” scheduled to be voted on in the fall, Ipsos’s Brice Teinturier told the FranceTV public television network. “The unhappiness is real and powerful.” Ironically, the debate over austerity in France is exploding just as European Central Bank President Mario Draghi is softening his position on budget-cutting. Speaking in Jackson Hole, Wyo., last week, Draghi expressed concern over slow growth in the euro zone, saying it was time to move to a “more growth-friendly composition of fiscal policies.”

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Hollande Replaces Cabinet as EU Austerity Rebellion Stirs (Bloomberg)

French President Francois Hollande’s firing of malcontent minister Arnaud Montebourg risks unleashing the ruling Socialist Party’s chief critic of budget cuts, adding to an austerity backlash stirring across Europe. Montebourg, 51, industry minister for the past two years, will not be part of the new team Hollande names today after he publicly criticized the president for “slavish” and “dogmatic” deficit reduction that he said stokes unemployment. The dismissal of a top minister underlines the political crisis confronting Hollande as he seeks to balance European Union pressure to reduce the deficit with domestic demands to revive a stalled economy. It also exposes a wider rift in Europe as Italy uses its six-month presidency of the 28-nation EU to make a stand against a German-led drive to clamp down on spending.

“The backlash against austerity has taken some time to arrive, but this is it,” Antonio Barroso, an analyst at Teneo Intelligence in London, said by phone. “Of course Montebourg has done this for his personal ambition, but his timing is good: The mood on this is shifting at the European level.” With an approval rating of just 17 percent and faced with record-high French unemployment levels, Hollande’s room for maneuver is shrinking as he slips into the second half of his five-year mandate. His purge of Montebourg from the cabinet merely moves the chief austerity critic from his side into the open, according to Arthur Goldhammer, co-chairman of the French Study Group at Harvard University’s Center for European Studies. “The breach in the Socialist Party is now an open bleeding wound,” Goldhammer said in a blog posting. “Hollande can push out Montebourg but not the problem he represents.”

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Notice how this is presented as beneficial.

Europe Bank Cleanup Driving $1.72 Trillion of Asset Sales (Bloomberg)

Europe’s largest banks are finally putting hundreds of billions of dollars of unwanted assets up for sale amid mounting competition among buyers and regulatory pressure. A wave of deals could be a boon to the region’s economy if the banks free up capital to increase lending. Banks led by London-based Barclays and including UniCredit in Milan and Credit Suisse in Zurich, have shunted more businesses, bad loans and spoiled investments into units to be sold or wound down. Such assets jumped by 65% since the end of 2013, to more than $1.72 trillion, according to data compiled by Bloomberg. “The list of deals coming in across the asset classes and markets at this point is higher than it’s ever been,” said Jody Gunderson, a senior managing director at CarVal Investors LLC in Minneapolis. Banks are “driven by regulatory considerations to sell, but also market pressures for them to get back to the business of trying to produce good profits.”

Tougher capital rules have made some once-lucrative bond businesses less attractive, while regulatory scrutiny has pushed lenders to admit that soured loans won’t be repaid. Selling bad debts and underperforming operations frees up funds firms can use to increase lending. That’s important for European economies stuck in the doldrums six years after a credit squeeze and a raft of bank bailouts spilled over into a sovereign-debt crisis. “Stronger banks will be good for credit in Europe,” Paul Tucker, a former deputy governor of the Bank of England, said in an interview in Salzburg, Austria. “Weak banks don’t lend.” [..]

Europe’s efforts to clean up and recapitalize its biggest banks lagged behind those in the U.S., where the Treasury Department set up the $700 billion Troubled Asset Relief Program in October 2008 after the housing-market meltdown and collapse of Lehman. “The U.S. forced its banks to take money, while we in Europe thought we could sit it out, and we still are in many places,” said Hans-Peter Burghof, a professor of banking and finance at the University of Hohenheim in Stuttgart, Germany. “U.S. banks had an easier time disposing of assets, which is why they’re in a better situation today.” The $1.72 trillion of loans, shareholdings and securitized products up for sale or slated to be wound down at the 23 European banks with the largest such holdings rose from about $1.04 trillion at the end of 2013, when 21 firms disclosed such information. The assets amount to about 7.9% of their combined $21.7 trillion balance sheet. Those figures are in addition to $817.6 billion of holdings at entities backed by taxpayers in Spain, Ireland, Belgium, France, Germany, Austria and the Netherlands, which are winding down banks that have failed since the 2008 credit crunch.

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China’s Falling Real-Estate Prices Trigger Protests, Clashes (MarketWatch)

The sharp drop in China’s housing prices has led to an outburst of anger among property owners, leading to violent clashes in some cases, according to local media reports Tuesday. In one case, scores of property owners surrounded a Shanghai sales office of Greentown China to protest the developer’s 25% cut to prices within a five-day period, according to a report on the NetEase news portal site. Protesters held banners with slogans such as “You cheated us!” and “300,000 yuan [$48,750] worth of assets evaporate within five days — years of work in vain!” according to photographs of the demonstration posted on the site.

The report quoted a sales manager from Greentown as saying that the price-cut was aimed to boost sales and “cope with competition” from rival China Vanke, the nation’s largest residential property developer. In other Chinese cities, such confrontations between buyers and developers have turned violent. In the eastern city of Jinan, banner-carrying owners blocked a street to protest another 25% price cut for a local housing development, this one conducted over the space of two weeks, according to the local-government-run Life Daily newspaper. The protesters clashed with a group of counter-protestors suspected to have been hired by local developers, injuring some of the demonstrators and forcing the police to break up the fight, 163.com said in a separate report.

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‘Sponsored By West IS Will Become A Nightmare For The Entire World’ (RT)

ISIS is worse than Al-Qaeda, it is not going to stay just in Syria and Iraq, they are going to come everywhere where they can create violence, havoc, and they would do anything, Imam Syed Soharwardy of Calgary told RT.

RT: The Islamic State is conducting a massive PR campaign in the Western world. How effective is it, in your opinion?

Syed Soharwardy: The ISIS campaign of recruitment in the Western world has been very successful. They have very successfully recruited hundreds and thousands of young Canadians, Europeans, and Americans. From my own city, Calgary, three young Muslim men have died in Iraq and Syria within the last two months. So it is quite disturbing and alarming, they have been very successful.

RT: The number of Westerners joining the Islamic State is growing month by month. How much danger is the UK and Europe in now that many of these jihadists have returned home?

SS: I think ISIS is a big danger to the entire world. I do not think there are only 50 British people fighting; I think more people from Britain have been fighting there. More than 100 Canadians are fighting for ISIS in Syria and Iraq, I am not sure how many Americans are there. The number is in the hundreds of thousands of people from the Western world who are fighting there, and they are not going to stay in Syria and Iraq. Al-Qaeda was created in Afghanistan and we can see now what kind of destruction and atrocities they carried out around the world. Similarly, ISIS is worse than Al-Qaeda and they are not going to stay just in Syria and Iraq, they are going to come everywhere where they can create violence, havoc, and they would do anything. My biggest concern is that they have been very successful in recruiting people from the Western world and they will be the one who will be fighting for them.

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Turkey Struggles As ‘Lone Gatekeeper’ Against IS Recruitment (Reuters)

As Islamic State insurgents threaten the Turkish border from Syria, Turkey is struggling to staunch the flow of foreign jihadists to the militant group, having not so long ago allowed free access to those who would join its neighbor’s civil war. Thousands of foreign fighters from countries including Turkey, Britain, parts of Europe and the United States are believed to have joined the Islamist militants in their self-proclaimed caliphate, carved out of eastern Syria and western Iraq, according to diplomats and Turkish officials. The militants, who seized an air base in northeast Syria on Sunday as they surge northwards, are trying to secure control of the area bordering Turkey above the city of Raqqa, their major stronghold, in a bid to further ease the passage of foreign fighters and supplies, sources close to Islamic State said.

Some of the foreign fighters in their midst reached Syria via Turkey, entering the region on flights to Istanbul or Turkey’s Mediterranean resorts, their Western passports giving them cover among the millions of tourists arriving each month in one of the world’s most visited countries. From Turkey, crossing the 900 km (560-mile) frontier into northern Syria was long relatively straightforward, as the Turkish authorities maintained an open border policy in the early stages of the Syrian uprising to allow refugees out and support to the moderate Syrian opposition in. That policy now appears to have been a miscalculation and has drawn accusations, strongly denied by the Turkish government, that it has supported militant Islamists, inadvertently or otherwise, in its enthusiasm to help Syrian rebels topple President Bashar al-Assad. [..] “Thousands of Europeans have entered Turkey en route to Syria, and a large number of them we believe have joined extremist groups,” said one European diplomat in Ankara, describing Turkey as a “top security priority” for the EU.

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Islamic State Now Resembles the Taliban With Oil Fields (Bloomberg)

With its reign of terror over a large population and ability to self-finance on a staggering scale, the extremist group that beheaded American journalist James Foley resembles the Taliban with oil wells. The Islamic State, which now controls an area of Iraq and Syria larger than the U.K., may be raising more than $2 million a day in revenue from oil sales, extortion, taxes and smuggling, according to U.S. intelligence officials and anti-terrorism finance experts. Unlike other extremist groups’ reliance on foreign donations that can be squeezed by sanctions, diplomacy and law enforcement, the Islamic State’s predominantly local revenue stream poses a unique challenge to governments seeking to halt its advance and undermine its ability to launch terrorist attacks that in time might be aimed at the U.S. and Europe.

“The Islamic State is probably the wealthiest terrorist group we’ve ever known,” said Matthew Levitt, a former U.S. Treasury terrorism and financial intelligence official who now is director of the counterterrorism and intelligence program at the Washington Institute for Near East Policy. “They’re not as integrated with the international financial system, and therefore not as vulnerable” to sanctions, anti-money laundering laws and banking regulations.

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What else can they say?

Saudi Arabia And Iran Sound Petrol Price Warning For Motorists (Telegraph)

Oil superpowers Saudi Arabia and Iran have warned that recent declines in crude prices will be short lived. It is an ominous sign for motorists in the UK who were hoping that recent declines in the cost of a gallon of petrol would be sustained. Iran’s Petroleum Minister Bijan Namdar Zanganeh said on Tuesday that the current weakness in oil prices, which have resulted in Brent crude falling by almost 13pc to a low around $100 per barrel, will soon be reversed. “The downward crude oil price will not live long due to seasonal fluctuations,” Zanganeh was quoted as saying by an Iranian state news agency. Petrol prices in the UK have come down sharply in recent weeks in line with falling crude prices and a supermarket price war at the pumps.

The AA said last week that the average price of petrol across the UK was 129.71p a litre and diesel 133.74p, the lowest since February 2011. Although UK petrol and diesel are heavily taxed, prices on the forecourts do fluctuate in line with international oil prices. Zanganeh’s remarks followed comments made by al-Falih, chief executive of Saudi Aramco, the world’s largest state-owned oil company, which suggested that prices would have to remain around current levels to sustain enough investment to meet future demand. “To tap these increasingly expensive oil resources, oil prices will need to be healthy enough to attract needed investments,” al-Falih was quoted as saying at an industry conference by Reuters. “Long-term prices will be underpinned by more expensive marginal barrels.”

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People dying, California quadrupled.

Guatemala Declares State Of Emergency Amid Central America Drought (IBT)

Guatemala’s government declared a state of emergency in the majority of its provinces, which have been affected by one of the country’s worst droughts. The dry spell has mainly affected local staples like corn and beans, and could cost the country millions of dollars in agricultural losses. President Otto Perez Molina declared a state of emergency on Monday in 16 of its 22 provinces, which are home to nearly 236,000 families, most of whom are dependent on agriculture, according to Associated Press. Molina’s announcement will have to be approved by the country’s legislature before the government can authorize emergency assistance and humanitarian aid for people in the affected regions.

“At a cabinet meeting this Monday, we signed a governmental decree that declares a State of Calamity in 17 departments as a result of the effects on agriculture of the prolonged drought,” Molina said in a tweet, according to Xinhua. In a later tweet, Molina modified the number of affected provinces to 16. Guatemala would need nearly $60 million to tackle the food shortage that the country is facing, Xinhua reported, citing the country’s agriculture minister Elmer Lopez, and added that the emergency plan is expected to be put in place by October. Although the rainy season in the Central American country typically lasts from May through October, rains have been absent since the beginning of June, Xinhua reported.

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Not nearly enough; WHO is losing control.

WHO Seeks $430 Million For Coordinated Fight Against Ebola (Bloomberg)

More than $430 million will be needed to bring the worst Ebola outbreak on record under control, according to a draft document laying out the World Health Organization’s battle strategy. The plan sets a goal of reversing the trend in new cases within two months, and stopping all transmission in six to nine months. It requires funding by governments, development banks, the private sector and in-kind contributions, according to the document obtained by Bloomberg News.

The current outbreak, which has killed 1,427 people in Liberia, Guinea, Sierra Leone and Nigeria, may soon exceed all previous Ebola outbreaks combined. The sum now being sought is six times more than the $71 million the WHO suggested was needed in a plan published less than a month ago. There is reason to be concerned “about whether the proposed resources would be adequate,” said Barry Bloom, a public health professor at Harvard University who also questioned whether the funds would be made available fast enough, and whether the organization’s latest plan “would ensure the expertise from WHO that is needed.”

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