Sep 022016
 
 September 2, 2016  Posted by at 8:55 am Finance Tagged with: , , , , , , , , , ,  3 Responses »
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John Collier Grandfather Romero, 99 years old. Trampas, New Mexico 1943


August US Auto Sales Fall 4.2%; Carmakers Say Industry Has Peaked (R.)
Bill Gross Says Negative Interest Rates Are Nothing But Liabilities (MW)
Goldman: The Fed Might Have a New, Big Idea (BBG)
BOJ Must ‘Do Something Meaningful,’ Former Official Says (BBG)
Is the ECB Buying Bonds From Itself? (WSJ)
Bond Buyers Leave Europe to the ECB, Head to US (WSJ)
The Fed Poses a Big Risk to the Emerging Market Inflow Party (BBG)
Hanjin Shipping Bankruptcy Causes Turmoil In Global Sea Freight (G.)
Don’t Criticize Europeans For Standing Up To Apple – Thank Them (Robert Reich)
Apple Boss Tim Cook Should Stop Whinging And Pay Up (Ind.)
US Imposes Sanctions On ‘Putin’s Bridge’ To Crimea (R.)
Putin Says DNC Hack Was a Public Service, Russia Didn’t Do It (BBG)
The Italian Referendum Could Result In The Death Of The Euro (Andrews/Capacci)
France Vows To Dismantle ‘Jungle’ Refugee Camp In Calais (G.)
Greece On Edge, As Turkish Coup Prompts Surge In New Arrivals (Omaira Gill)
The Death Of Aylan Kurdi: One Year On, Compassion Towards Refugees Fades (G.)

 

 

It’s funny to see how fast the subprime car loan schemes are falling apart.

August US Auto Sales Fall 4.2%; Carmakers Say Industry Has Peaked (R.)

U.S. auto sales fell 4.2% in August as some major automakers said a long-expected decline due to softer consumer demand had begun, possibly sparking a shift to juicer customer incentives and slower production. The top three sellers, General Motors, Ford and Toyota on Thursday reported declines of at least 5%. Of the seven top manufacturers by sales, only Fiat Chrysler reported a gain versus a year ago, when sales were restated to about 11,000 fewer than originally reported. Monthly spending on new cars and trucks is closely watched as the U.S. auto industry accounts for about one-fifth of U.S. retail sales. August sales, said Autodata, totaled 1.51 million vehicles, or 16.98 million vehicles at a seasonally adjusted annualized rate, versus a surprisingly strong 17.88 million vehicles in July.

Ford Chief Economist Bryan Bezold said sales had hit a plateau after steadily rising following the 2008-2009 recession. The auto industry outperformed the overall U.S. economy in those years largely due to pent-up demand that has now played out, he said. Wall Street has pressured automaker shares all year amid expectations of falling sales at some point. [..] Ford, whose sales tumbled 8.4%, said its U.S. inventory was at 81 days of supply versus 61 days a year earlier, suggesting Ford may have to cut production, increase profit-eroding incentives, or boost fleet sales.

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“This watch is ticking because of high global debt and out-of-date monetary/fiscal policies that hurt rather than heal real economies.”

Bill Gross Says Negative Interest Rates Are Nothing But Liabilities (MW)

Call bond-market veteran Bill Gross a “broken watch.” He doesn’t care. His gripe about negative interest rates and a flood of debt, which he considers a risk, not a fix, for a global economy that’s still limping out of the financial crisis, is challenged daily by resilient demand for the bonds he’s bearish on. But even if being “right” eventually is a hard sell right now, he’s not backing down, Gross said in his latest monthly commentary. “The problem with Cassandras, such as Gross and Jim Grant and Stanley Druckenmiller, among a host of others, is that we/they can be compared to a broken watch that is right twice a day but wrong for the other 1,438 minutes,” Gross wrote. “But believe me: This watch is ticking because of high global debt and out-of-date monetary/fiscal policies that hurt rather than heal real economies.”

Germany, Switzerland, France, Spain and Japan are among countries that have negative yields on government-issued debt. Their hope is that cheap, even free, borrowing raises inflation and revives asset prices that can filter through economies; they argue extreme policies have been needed. Gross and others have argued that rates, including those at the Federal Reserve, at near zero or below won’t create sustainable economic growth and actually undermine capitalism. The U.S. has not tipped rates quite as low as other central banks and the Federal Reserve weaned markets off its quantitative-easing program well ahead of its big-economy brethren. Still, Federal Reserve Chairwoman Janet Yellen said last week at the Fed’s Jackson Hole retreat that she wants her policy kit to include all tools, including further asset purchases if necessary.

Divergence with the rest of the world only complicates the debate over when and how aggressively the Fed should dial back accommodative policy. Was that enough to scare off most bond investors? Apparently not. Treasury yields logged their largest daily drop in nearly two months to kick off this week, taking back their Fed-spooked gain from hawkish comments at Jackson Hole. Yields, of course, fall when prices rise, and vice versa. At that mountain gathering, Fed second-in-command Stanley Fischer opened the door to more than one rate increase this year, depending on economic data. And Fischer himself said Fed Chairwoman Janet Yellen’s stance appears in line with that mind-set.

But Gross questions the long-term effects of the world’s unprecedented yield conditions and central banker reluctance to let them go. “Capitalism, almost commonsensically, cannot function well at the zero bound or with a minus sign as a yield,” wrote Gross, who manages the Janus Global Unconstrained Bond Fund, up just over 4% year to date. “$11 trillion of negative yielding bonds are not assets — they are liabilities. Factor that, Ms. Yellen, into your asset price objective.”

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Well, that makes us feel much better…

Goldman: The Fed Might Have a New, Big Idea (BBG)

The Death Star is a fictional space station popularized by the Star Wars franchise. The r-star (r*) is the natural rate of interest that sometimes crops up in economics texts. It also might be the Federal Reserve’s newest, biggest idea, according to strategists at Goldman Sachs. The notion that the natural or neutral rate of interest has been stuck at ultra-low levels might help the U.S. central bank square a dilemma between hiking interest rates and strengthening the U.S. dollar, they said.

“For the FOMC, this is a genuine conundrum, because it means that too hawkish a message could send the Dollar sky-rocketing, a deflationary shock that would also weigh on growth, thereby – in a way – undermining the very rationale for shifting hawkish in the first place,” write Goldman strategists led by Robin Brooks. “To deal with this conundrum, the framework that many at the Fed seem to be converging around is that ‘r-star’ is low, so that the degree of monetary policy accommodation is only moderate, despite policy rates being so low.” Such a stance could allow the central bank to justify keeping benchmark interest rates lower for longer. While the strategists don’t judge the notion on its merits, they do compare it to some previous big ideas that have been discussed at the central bank in recent years.

Among these is the concept that the effects of the U.S. housing crisis would not be material – a theme that dominated in the two years before the 2008 financial crisis (and shown in the pink line below). That idea soon gave rise to concerns that the bursting of the housing bubble would have a negative impact on the U.S. economy (shown in blue). Subsequently, policymakers’ collective imaginations were captured by the notion that quantitative easing would prove positive for economic growth (in red), while the notion that forward guidance (in yellow) is a useful policy tool soon gained in popularity.

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Yeah, dismantle itself.

BOJ Must ‘Do Something Meaningful,’ Former Official Says (BBG)

The Bank of Japan should abandon the monetary base target that’s driving its unsustainable bond purchases while pursuing a negative-rate loan program to help companies and consumers, said a former BOJ executive director. “The BOJ can’t get out of this struggle as long it has this cursed monetary base target,” Hideo Hayakawa, who retired from the central bank in 2013, said in an interview on Thursday. “Once they drop it, they can take a variety of other easing measures.” Hayakawa, 61, contends that there is no evidence that the monetary base target championed by Governor Haruhiko Kuroda is effective in spurring inflation. It should be dropped, and bond purchases scaled back and managed via a range rather than aiming for a specific number, he said.

“As long as they make it very clear that their goal is to keep a lid on bond yields, and the yields stay low, they can gradually lower the range of bond purchases,” said Hayakawa, who also served as the central bank’s chief economist. At the same time, he said Kuroda ought to avoid taking a deeper dive on the existing negative interest rate charged on some funds commercial banks park at the BOJ. It should simultaneously take rates on its lending facilities from zero into negative territory, which would effectively pay some borrowers who take out loans. People familiar with talks at the BOJ said in April that the central bank may consider minus rates on the Stimulating Bank Lending Facility.

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Can it still get crazier than this?

Is the ECB Buying Bonds From Itself? (WSJ)

The European Central Bank may be buying bonds from itself as it runs out of debt to sate its massive quantitative easing program. That’s according to economists at Jefferies. The ECB’s bond-buying program has been running for nearly 18 months, and investors and analysts have often asked whether the central bank is running out of debt to buy. Now, the ECB may be indirectly buying bonds from itself, according to Marchel Alexandrovich and David Owen at Jefferies, in a research note published Thursday. But here’s how Jefferies thinks it may work. The ECB’s QE program is implemented through several national central banks, like Germany’s Bundesbank and Spain’s Banco de Espana. National central banks buy bonds according to rules set by the ECB.

The problem is that these constraints narrow the stock of debt the banks can buy from. These rules prevent the purchase of too much debt from any one country and stop central banks from buying debt with steeply negative yields. Portuguese and Irish debt, for instance, is now becoming scarce. But the national central banks also sell sovereign bonds. They sometimes reduce their holdings as a part of their reserve management activities, which aim to ensure that banks, state institutions and other organizations “manage their euro-denominated reserve assets comprehensively, efficiently, and in a safe, confidential and reliable environment,” according to the ECB’s website. That means, for example, that while the German Bundesbank bought €209 billion in sovereign bonds between March and July, they also sold off €43 billion of such debt, according to Jefferies.

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Because why would they invest in liabilities?

Bond Buyers Leave Europe to the ECB, Head to US (WSJ)

The ECB recently started buying corporate bonds to boost the eurozone economy. One of the big beneficiaries so far: U.S. credit markets. Faced with dwindling returns in Europe, a growing number of investors are selling their corporate bonds to the ECB and heading across the Atlantic where yields are higher and they aren’t so vulnerable to changes in expectations around central bank buying habits. The extra yield investors demand to hold corporate bonds over safe government debt—or credit spread—has declined more rapidly in Europe than the U.S. since the ECB announced its buying plans in March. But that trend has reversed in recent weeks, with U.S. credit markets outperforming the eurozone in August, according to Bloomberg Barclays bond indexes.

That comes as investors have sold European corporate bonds and shifted funds into the U.S. as they fan out in search of returns. Net inflows into U.S. corporate bond funds have outpaced inflows to similar European funds by almost $2 billion since the start of the ECB’s program in early June, according to the latest available data from EPFR Global. As a result, borrowing costs for large U.S. companies have remained near record lows even as expectations have mounted that the Federal Reserve will soon resume raising interest rates. Mark Kiesel at PIMCO said he had been buying euro and sterling corporate bonds in anticipation of the ECB and, more recently, the Bank of England entering these markets. Now, he’s selling and moving more into U.S. credit markets.

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Modern colonialism.

The Fed Poses a Big Risk to the Emerging Market Inflow Party (BBG)

Battle-hardened emerging-market investors have seen this movie before: A U.S. Federal Reserve interest-rate hike triggers a jump in nominal local rates in emerging markets, especially those with fixed or semi-fixed exchange rate regimes. Hot money flows out of developing nations, across FX, equity and fixed-income markets. Local currencies weaken against the dollar. And the ensuing jump in the cost of dollar liquidity, and declining portfolio flows, spark fears over the debt-servicing capacity of emerging-market borrowers. In short, the boom-and-bust capital-flow cycles in emerging markets over the past three-decades have roughly followed this script.

Fast-forward to September 2016: markets are raising their bets that the Fed will hike rates this year – raising fears the post-Brexit-vote inflow party in emerging markets might ease, while international financial conditions, more generally, might tighten. Now, analysts say that the outlook for EM asset classes hinges on how the U.S. yield curve reprices in the coming months. In short, the shape of the Treasury yield curve and the level of long-term U.S. real rates, in particular – rather than the absolute level of U.S. short-end rates – will be crucial in driving capital flows into emerging markets, analysts say. Sebastian Raedler, equity strategist at Deutsche Bank, is one analyst who urges caution, citing EMs’ dependence on U.S. monetary policy.

EM portfolio flows tend to follow developments in the U.S. yield curve with a two-year lag, he says, suggesting financial conditions could tighten significantly in emerging markets if the Fed becomes notably more hawkish. “It’s very clearly the case that low U.S. rates are historically a push factor for foreign capital flows into emerging markets,” Raedler says. “The best scenario to support continued inflows into emerging markets is that financial conditions remain benign. But, thinking about the 30-year history, investors tend to love EM the most when the party in U.S. monetary policy — low rates — is in full swing.”

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I’m waiting for the next domino to fall. Only then will people recognize what’s going on.

Hanjin Shipping Bankruptcy Causes Turmoil In Global Sea Freight (G.)

[..] Hanjin’s banks decided to end financial support for the shipper this week and many of its vessels were denied entry to ports or left unable to dock as container lashing providers worried they would not be paid. This included the port of Busan, South Korea’s largest. The Korea International Trade Association said on Thursday that about 10 Hanjin vessels in China have been either seized or were expected to seized by charterers, port authorities or other parties. That adds to one other ship seized in Singapore by a creditor earlier in the week. The collapse comes at a time of high seasonal demand for the shipping industry ahead of the year-end holidays. In the US, at the ports of Los Angeles and Long Beach, the nation’s busiest port complex, three Hanjin container ships, ranging from about 700 feet to 1,100 feet long, were either sitting offshore or anchored away from terminals on Thursday.

A fourth vessel that was supposed to leave Long Beach on Thursday morning remained anchored inside the breakwater. The National Retail Federation, the world’s largest retail trade association, wrote to the US secretary of commerce, Penny Pritzker, and the Federal Maritime Commission chairman, Mario Cordero, on Thursday, urging them to work with the South Korean government, ports and others to prevent disruption. Hanjin represents nearly 8% of the trans-Pacific trade volume for the US market and the bankruptcy was having “a ripple effect throughout the global supply chain” that could cause significant harm to both consumers and the US economy, the association wrote.

[..] Other shipping lines were moving to take over some of the Hanjin traffic but at a price, with vessels already are operating at high capacity because of the season. The price of shipping a 40ft container from China to the US jumped by up to 50% in a single day, said Nerijus Poskus, director of pricing and procurement for Flexport, a licensed freight forwarder and customs broker based in San Francisco, who predicted the higher prices would last a month or two. The price from China to west coast ports rose from $1,100 per container to as much as $1,700 on Thursday, while the cost from China to the East Coast jumped from $1,700 to $2,400, he said.

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There is no one answer here. Applying tax laws retroactively is thin ice. But so is allowing companies to pay 0.005% in taxes

Don’t Criticize Europeans For Standing Up To Apple – Thank Them (Robert Reich)

For years, Washington lawmakers on both sides of the aisle have attacked big corporations for avoiding taxes by parking their profits overseas. Last week the European Union did something about it. The EU’s executive commission ordered Ireland to collect $14.5 billion in back taxes from Apple. But rather than congratulate Europe for standing up to Apple, official Washington is outraged. Republican House Speaker Paul Ryan calls it an “awful” decision. Democratic Senator Charles Schumer, who’s likely to become Senate majority leader next year, says it’s “a cheap money grab by the European Commission.” Republican Orrin Hatch, chairman of the Senate Finance Committee, accuses Europe of “targeting” American businesses. Democratic Senator Ron Wyden says it “undermines our tax treaties and paints a target on American firms in the eyes of foreign governments.”

P-l-e-a-s-e. These are taxes America should have required Apple to pay to the U.S. Treasury. But we didn’t – because Ryan, Schumer, Hatch, Wyden and other inhabitants of Capitol Hill haven’t been able to agree on how to close the loophole that has allowed Apple, and many other global American corporations, to avoid paying the corporate income taxes they owe. Let’s be clear. The products Apple sells abroad are designed and developed in the United States. So the foreign royalties Apple collects on them logically should be treated as corporate income to Apple here in America. But Apple and other Big Tech corporations like Google and Amazon – along with much of Big Pharma, and even Starbucks – have avoided paying hundreds of billions of dollars in taxes on their worldwide earnings because they don’t really sell things like cars or refrigerators or television sets that they make here and ship abroad.

[..] over the last decade alone Apple has amassed a stunning $231.5 billion cash pile abroad, subjected to little or no taxes. This hasn’t stopped Apple from richly rewarding its American shareholders with fat dividends and stock buybacks that raise share prices. But rather than use its overseas cash to fund these, Apple has taken on billions of dollars of additional debt. It’s a scam, at the expense of American taxpayers. Add in the worldwide sales of America’s Big Tech, Big Pharma and Big Franchise operations, and the scam is sizable. Over €2 trillion of U.S. corporate profits are now parked abroad – all of it escaping the U.S. corporate income tax. To make up the difference, you and I and millions of other Americans have to pay more in income taxes and payroll taxes to finance the U.S. government.

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Meanwhile, the opinions are fun to read.

Apple Boss Tim Cook Should Stop Whinging And Pay Up (Ind.)

Having been handed a €13bn bill for back taxes – it is not a fine as some would have you believe – Apple boss Tim Cook has gone on the offensive. The under fire tech giant’s chief executive chose Ireland’s state broadcaster RTE as the venue for a broadside against the European Commission in the wake of its ruling that the tax deal arranged between Apple and Ireland amounted to illegal state aid. What he said was, well, hard for me to read without inflicting damage on my, erm, Apple Mac. So read on at your own computer’s risk: “When you’re accused of doing something that is so foreign to your values, it brings out an outrage in you, and that’s how we feel. Apple has always been about doing the right thing.”

Oh Mr Cook. It’s not you who should be feeling outraged. It’s us. Even if you think that what the EC did was pushing it, this is is still a company that has cynically gamed the international tax system with the aim of depriving nation states from whose citizens Apple makes its living, the tax they are due. Taking advantage of loopholes, employing accountants to manipulate the rules; Apple’s defenders might call that pragmatic. But it’s hard to see how anyone not in the business of creating propaganda for Apple could describe its behaviour as “doing the right thing”. Mr Cook, it appears, has no shame. “Total political crap,” he ranted. “Maddening.”

What’s maddening is the way multinational companies like Apple utilise their resources to avoid paying their share at a time of austerity. What’s maddening is the way tax authorities bring the hammer down on individual citizens for making honest mistakes while shrugging their shoulders when it comes to policing wealthy corporations. As for “political crap”? This is a man who has hosted fundraisers for Hilary Clinton. If that’s not political crap, I’d really like to know what is.

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Victoria Nuland is still around. In fact, under a potential Hillary presidency, she’s set to acquire a whole lot more power (Secretary of State?). That’s very scary.

US Imposes Sanctions On ‘Putin’s Bridge’ To Crimea (R.)

Companies building a multi-billion dollar bridge to link the Russian mainland with annexed Crimea, a project close to the heart President Vladimir Putin, were targeted by the United States in an updated sanctions blacklist on Thursday. The U.S. Department of the Treasury added dozens of people and companies to the list, first introduced after Russia annexed the Crimean peninsula from Ukraine in 2014 and expanded over its support for separatist rebels in the east of the country. As well as multiple subsidiaries of Russian gas giant Gazprom and 11 Crimean officials, the Treasury named seven companies directly involved in the construction of the 19 km (11.8 miles) road-and-rail connection across the Kerch Strait, dubbed “Putin’s bridge” by some Russians.

Chief among those were SGM-Most, a subsidiary of lead contractor Stroygazmontazh which is already under U.S. sanctions, and sub-contractor Mostotrest, one of Russia’s biggest bridge builders. “Treasury stands with our partners in condemning Russia’s violation of international law, and we will continue to sanction those who threaten Ukraine’s peace, security and sovereignty,” said John Smith, acting director of the Treasury’s Office of Foreign Assets Control, which levies sanctions.

The Russian Foreign Ministry was not immediately available for comment, but Moscow has previously said sanctions levied over its actions in Ukraine undermine efforts to resolve the conflict. Set to be the longest dual-purpose span in Europe when completed, the Kremlin sees its 212-billion rouble ($3.2 billion) bridge as vital to integrating Crimea into Russia, both symbolically and as an economic lifeline for the region. Putin has called the undertaking an historic mission.

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Note: all of the Hillary campaign’s allegations about Russia hacking the DNC remain wholly unsubstantiated. That’s some flimsy ground to stand on, if that’s all you got. Innuendo can’t carry you all the way.

Putin Says DNC Hack Was a Public Service, Russia Didn’t Do It (BBG)

Vladimir Putin said the hacking of thousands of Democratic National Committee emails and documents was a service to the public, but denied U.S. accusations that Russia’s government had anything to do with it. “Listen, does it even matter who hacked this data?’’ Putin said in an interview at the Pacific port city of Vladivostok on Thursday. “The important thing is the content that was given to the public.’’ U.S. officials blame hackers working for the Russian government for the attacks on DNC servers earlier this year that resulted in WikiLeaks publishing about 20,000 private emails just before Hillary Clinton’s nominating convention in July.

The documents showed attempts by party officials to undermine her chief Democratic rival, Bernie Sanders, and led to the resignation of the head of the DNC, Representative Debbie Wasserman Schultz of Florida. Putin, in power since 2000 and facing re-election in 18 months, and Clinton have had an acrimonious relationship since her failed attempt to “reset” relations as secretary of state in 2009. Putin in 2011 blamed her personally for stoking the biggest protests of his rule by sending an activation “signal” to “some actors” inside Russia. Clinton has compared his annexation of Crimea in 2014 to actions taken by Adolf Hitler before World War II.

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No doubt about it. The euro makes no more sense for Italy than it does for Greece.

The Italian Referendum Could Result In The Death Of The Euro (Andrews/Capacci)

Prime ministers come and go in Italy—four since the financial crisis—but precious little seems to change. The latest incumbent, Matteo Renzi, has pursued structural reform more energetically than his predecessors. But for all the progress he has made, he might as well have been wading through molasses. Now, in a bid to secure a popular mandate for his restructuring program, Renzi has bet his premiership on a referendum over badly-needed constitutional reforms. It is a high stakes gamble. If Renzi wins the vote, which is due in either October or November, his proposed measures will streamline Italy’s legislative process, breaking the parliamentary gridlock which has crippled successive governments, and opening the way to far-reaching economic reforms.

If he loses, Renzi has promised to step down—a pledge that has turned the referendum into a popular vote of confidence in the unelected prime minister, his Europhile policies, and—by extension—Italy’s membership of the eurozone itself. As a result, a “no” vote in October will not just precipitate the fall of Renzi’s government; it could throw Italy’s long-term membership of the eurozone into doubt, plunging the single currency area once again into crisis. Italy’s fundamental problem is that it’s stuck in a policy no man’s land. Its old economic model, in place for much of the last three decades of the 20th century, relied on a combination of currency devaluation to maintain international competitiveness together with fiscal spending to support the poorer regions of the country’s south.

Signing up to the euro put an end to all that, preventing devaluations and prohibiting budget deficits at 10% of gross domestic product. However, the design of Italy’s bicameral parliamentary system, in which the upper and lower house—the Senate and the Chamber of Deputies—wield equal legislative power, made it almost impossible for any government to push through the structural reforms necessary for Italy to compete and prosper within the eurozone. The result has not just been depressed growth and relative impoverishment, but an outright decline in living standards as Italy’s real GDP per capita has slumped to a 20-year low.

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Problem is, the refugees don’t want to say in France.

France Vows To Dismantle ‘Jungle’ Refugee Camp In Calais (G.)

France is to gradually dismantle the “Jungle” refugee camp in Calais, the interior minister, Bernard Cazeneuve, has vowed. Cazeneuve told regional newspaper the Nord Littoral he would press ahead with the closure of the camp “with the greatest determination”, dismantling the site in stages, clearing the former wasteland where record numbers of refugees and migrants are sleeping rough in dire sanitary conditions as many hope to reach Britain. He said France would create accommodation for thousands elsewhere in the country “to unblock Calais”.

French authorities have made repeated efforts to shut down the camp, which the state was responsible for creating in April 2015 when authorities evicted migrants and refugees from squats and outdoor camps across the Calais area and concentrated them into one patch of wasteland without shelter. Less than six months ago, the authorities demolished a large area of the southern part of the camp, saying the aim was to radically reduce numbers. But this month the number of people in the camp reached an all-time high of almost 10,000 people, aid organisations estimate. The French authorities put the official number of people in the camp at almost 7,000. Authorities have said over the past year more than 5,000 asylum seekers have left the northern French town for 161 special centres set up around France.

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Beware the numbers. The relocation scheme has been one big EU failure, one among far too many.

Greece On Edge, As Turkish Coup Prompts Surge In New Arrivals (Omaira Gill)

After dropping for several months, the numbers of refugees pouring through Greece have started to increase again in recent weeks. When an EU-Turkey deal was hacked out in March 2016, it was hailed by EU governments as a success. The massive numbers that had transited through Greece in 2015 and early 2016 quickly whittled down to almost nothing. But people have not stopped coming, and the failed coup in Turkey on 15 July seems to have had consequences. The EU-Turkey deal came into effect on 20 March 2016. In February, UNHCR data showed 55,222 arrivals in Greece. This had fallen to 26,623 in March and 3,419 in April. The numbers for May and June were more or less steady at 1,465 and 1,489, respectively. But in July, the pattern began to change.

There were 1,855 arrivals recorded for the month of July. This could be written off as part of the settling down period for the deal, until the numbers are broken down and matched with events which took place that month. On 15 July, an attempted putsch took place in Turkey. The number of arrivals from 1 July to 14 July came to 560. But that number jumped to 1,295 for the period 15 July to 31 July – an increase of 131%. Taking a step further back, between 15 June and 14 July, 1,438 arrivals were registered in Greece. But from 15 July to 14 August, the number was 2,675, representing an 86% increase in arrivals. In the face of this data, it is hard to ignore Turkey’s current instability as a driving factor behind refugee flows. Between 1 and 28 August, the latest available date for arrivals by the UNHCR, 2,810 refugees and migrants arrived on Greek shores.

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We will be judged on this.

The Death Of Alan Kurdi: One Year On, Compassion Towards Refugees Fades (G.)

Sitting in a refugee camp in northern Greece, Mohammad Mohammad, a Syrian taxi driver, holds up a picture of three-year-old Alan Kurdi. It is nearly a year since the same photograph of the dead toddler sparked a wave of outrage across Europe, and heightened calls for the west to do more for refugees. Twelve months later, Mohammad uses it to highlight how little has changed. Alan may have died at sea, he says, “but really there is no difference between him and the thousands of children now dying [metaphorically] here in Greece”. Tens of thousands have been stranded in squalid conditions in Greece since March, when Balkan leaders shut their borders. “It is,” says Mohammad, “a human disaster.” A year ago, Alan’s tragic death seemed to have shifted the political discourse on refugees.

European leaders appeared to have been shocked into forming more compassionate policies, while previously hostile media outlets took a more conciliatory tone. Two days after Alan’s death, Germany agreed to admit thousands of refugees who had been stranded in Hungary. The move encouraged the leaders of central and eastern Europe to create a humanitarian corridor from northern Greece to southern Bavaria, while Canada promised to resettle 25,000 Syrians. In the UK David Cameron agreed to accept 4,000 refugees a year until 2020. It was less than the number landing each day on the Greek islands at that point, but far more than Cameron had previously dared to offer. He was cheered on by the Sun, whose opinion pages had previously described migrants as cockroaches, but now mounted a front-page campaign in Kurdi’s name: “For Aylan [sic]”.

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Sep 012016
 
 September 1, 2016  Posted by at 9:31 am Finance Tagged with: , , , , , , , , , ,  1 Response »
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F.A. Loumis, Independence (Bastille?!) Day 1906


Collapse of Hanjin, World’s 7th-Biggest Shipping Line, Upsets Global Trade (R.)
Investors Miss Out On $500 Billion As Global Bond Yields Plunge (CNBC)
In Case Of Recession, The Fed Might ‘Need’ To Cut Rates To Minus 2% (CNBC)
Eurozone Core Inflation Fall Raises Prospect Of ECB Stimulus Measures (G.)
Bank of Japan Has an $84 Billion Yen Gap in Balance Sheet (BBG)
Admitting Ignorance Is Better Than Groupthink For Central Bankers (BBG)
An 809% Debt Ratio And Investors Are Serene? It Must Be China (BBG)
Austria Says Will Start ‘Conflict’ In EU About Canada Trade Deal (R.)
Apple Travesty Is A Reminder Why Britain Must Leave The Lawless EU (AEP)
UK Defined Benefit Pension Fund Deficit Grows By £100 Billion In A Month (G.)
London’s Elite ‘Pushed Out Of Exclusive Postcodes By Super Rich’ (G.)
A Third Of Africa’s Elephants Were Wiped Out In Just 7 Years (CNN)

 

 

Excellent. We’re far too independent on the idiocy of 10,000 mile shipping lines. They’re heavily polluting (in more ways than one) and entirely unnecessary.

Collapse of Hanjin, World’s 7th-Biggest Shipping Line, Upsets Global Trade (R.)

The collapse of South Korea’s Hanjin Shipping sent ripples though global trade on Thursday, as the country’s largest port turned away its ships and as some manufacturers scrambled for freight alternatives. Hanjin on Wednesday filed for court receivership after its banks decided to end financial support, and ports from China to Spain, the United States and Canada have refused entry to Hanjin vessels in what is traditionally the industry’s busiest season ahead of the year-end holidays. An official with Hanjin Shipping in Busan confirmed that its vessels were not entering the southern city’s port as container lashing providers deny service on concerns that they will not be paid. The company was also worried that the ships may be seized by creditors.

LG Electronics, the world’s No.2 maker of TVs, told Reuters it was cancelling orders with Hanjin and was seeking alternatives to ship its freight. An executive at the Korea International Freight Forwarders Association said on Wednesday he had been inundated with calls from cargo owners worried about the fate of their shipments in transit to the United States and Europe. While mobile phones and semiconductors are carried by air, other electronics like home appliances are shipped by sea. “This will have an impact on the entire industry,” the official said.

South Korea’s maritime ministry said on Wednesday that Hanjin’s woes would affect cargo exports for two or three months, with about 540,000 TEU of cargo already loaded on Hanjin vessels and facing delays. It would be difficult to find alternative ships given high seasonal demand from August to October. The ministry said it would ask local rival Hyundai Merchant Marine to supply vessels to cover some of Hanjin’s routes to the United States and Europe, while also seeking help from overseas carriers.

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How central bankers kill pensions.

Investors Miss Out On $500 Billion As Global Bond Yields Plunge (CNBC)

Investors have seen their interest income squeezed as global bond yields plunge. On the flipside, governments aren’t complaining. Relative to yields in 2011, global investors are foregoing more than $500 billion in annual income on roughly $38 trillion in sovereign debt that is outstanding, Fitch Ratings said in a report on Wednesday. “Cash flow benefits have effectively been transferred from global investors to sovereign issuers, as sovereign borrowing costs have dropped in response to central bank monetary stimulus,” Fitch said in the report. “This has posed new challenges for income-reliant investors, such as insurers and pension funds, while enabling governments to borrow at increasingly attractive rates.”

Borrowers would realize benefits only slowly, however, as bonds with higher coupon rates matured and newer bonds with lower interest rates were issued, the rating agency said. According to Fitch, investors who tended to buy assets and hold them onto maturity would have to invest new cash in bonds that paid lower interest rates, blunting the money they earned from coupon payments. Government bond yields, which move inversely to prices, have plummeted around the world as central banks in many developed economies scooped up bonds in order to provide stimulus to their economies. These purchases have sparked a scramble for government debt, enabling many countries to flog bonds while cutting the interest rates they have to pay to lure investors.

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In itself a reasonable argumant re the history of spreads, but that does not make the conclusion alright, or logical.

In Case Of Recession, The Fed Might ‘Need’ To Cut Rates To Minus 2% (CNBC)

The U.S. Federal Reserve might need to cut interest rates to as low as negative 2%, far lower than levels other global central banks have tested, a former Fed economist said. That’s what would likely be needed to engineer a recovery if the U.S. economy were to fall into a recession in the next couple of years, Marvin Goodfriend, who was an economist and policy advisor at the Federal Reserve’s Bank of Richmond from 1993-2005, told CNBC’s “Squawk Box” on Thursday. Goodfriend, who is currently a professor of economics at Carnegie Mellon University, pointed to data on the eight recessions in the U.S. since 1960.

“In eight of those recessions, the Fed had to push the short rate 2.5 percentage points below the long term rate. Today, the 10-year rate in the U.S. is 1.5%,” he noted, saying that would indicate that during the next recession, the Fed would need to cut rates as low as minus 1% at a minimum. “In five of those recessions, the Fed had to push the federal funds rate 3.5 percentage points below the 10-year bond rate,” he said. “So if that happens this time around, we would have to push the federal funds rate to minus 2%.” That’s well below where any other central banks have ventured so far. Sweden’s central bank, an early adopter of negative rates, has set its benchmark at negative 0.5%.

The Bank of Japan’s rate was set at minus 0.1% earlier this year, while the ECB, which first moved its rates into negative territory in 2014, currently has a deposit rate of negative 0.4%. The Fed funds rate has remained in positive territory, with the U.S. central bank last increasing interest rates in December of 2015, its first hike since 2006. That raised the Fed’s target rate to a range of 0.25 to 0.5%. To be sure, Goodfriend didn’t expect the Fed would be headed there anytime soon, noting that he believed the central bank should actually raise rates before the end of the year.

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More more more.

Eurozone Core Inflation Fall Raises Prospect Of ECB Stimulus Measures (G.)

Speculation is growing that the European Central Bank could take action to stimulate the eurozone economy after official figures showed an easing in underlying inflation last month. Pressure on the ECB increased when the European commission’s statistical agency, Eurostat, published figures that showed core inflation in July was lower than in same month last year, despite aggressive action by the Frankfurt-based bank over the past 18 months. With concerns that the eurozone recovery was losing momentum, Eurostat said the headline rate of inflation remained unchanged at 0.2% in August. Core, or underlying inflation, which excludes energy, goods, alcohol and tobacco, fell from 0.9% in July to 0.8%.

Separate Eurostat data showed that eurozone unemployment was unchanged at 10.1% in July, the latest month for which figures are available for all 19 countries that use the euro. The jobless rate in the eurozone has fallen from 10.8% over the past year, but financial markets had been expecting the reduction to continue to 10% last month. The ECB has been using negative interest rates and quantitative easing in an attempt to increase activity and push inflation back towards its target of just below 2%. Analysts said the inflation and unemployment figures would be discussed when the ECB meets to discuss policy options next week.

Stephen Brown of consultancy Capital Economics said: “The unchanged headline inflation rate in August highlights the fact that price pressures in the eurozone remain weak and boosts the case for more monetary easing from the ECB. “With [the] survey data also pointing to a marked slowdown in growth ahead, there is a strong case for the ECB to announce further policy easing. This could come as soon as the bank’s meeting next week.”

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Abe and Kuroda won’t even take it serious.

Bank of Japan Has an $84 Billion Yen Gap in Balance Sheet (BBG)

There’s an 8.7 trillion yen ($84 billion) gap between the value of government bond holdings on the Bank of Japan’s balance sheet and their face value. While not an immediate problem because the BOJ’s income can cover the losses, the widening gap raises questions about the sustainability of the central bank’s bond purchases, which Governor Haruhiko Kuroda has said could be expanded. The costs of the central bank’s record stimulus are mounting, while its chief goal – spurring inflation to 2% – appears as far away as it was when Kuroda took the helm in 2013. The BOJ is in the midst of reviewing its policy before a board meeting later this month, but the governor has said there will be no scaling back of his monetary program.

“These numbers show the distortions of the BOJ’s current policies,” said Sayuri Kawamura, a senior economist at the Japan Research Institute in Tokyo. “The annual amortization losses are going to increase and consume the BOJ’s profits, and the risk is increasing that the bank’s financial stability will be shaken.” The bonds the BOJ owns are worth almost 326.7 trillion yen when taken at face value, but were marked at almost 335.4 trillion yen on the balance sheet in August. That gap is 42% bigger than before the introduction of negative rates in January, according to an analysis of the balance sheet and list of the bonds the central bank owns. Tadaaki Kumagai, a spokesman for the central bank, said “the BOJ releases half-yearly and yearly accounts,” while declining to comment further.

The gap exists because, unlike the Federal Reserve, the BOJ counts its bond holdings at the purchase price, minus amortization costs. This number is diverging more from the face value because the central bank’s purchases and negative rate policy are pushing up prices. The face value is what the BOJ will receive when the bonds mature. At the end of the 2015 fiscal year on March 31, the gap between the two valuations was 6.4 trillion yen and the BOJ wrote down 874 billion yen, according to documents seen by Bloomberg. That was covered by the 1.29 trillion yen in coupon income the bank received that year, a situation that may not continue indefinitely.

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Groupthink is all they have.

Admitting Ignorance Is Better Than Groupthink For Central Bankers (BBG)

If the Fed’s objective last week was to put its September meeting back into play as the potential venue for a rate increase, it can claim a partial success. Prices in the futures market show traders now see about a 34% chance of a hike on Sept. 21, up from 22% two weeks ago. But you still have to go out to December before the likelihood rises above 50%. There’s a very good reason for that market skepticism. Raising rates at a time when inflation is dormant and miles away from the central bank’s 2% target seems somewhat perverse, especially when the forecast is for prices to remain subdued for many months to come:

The Jackson Hole Symposium (and let us note in passing what a great word symposium is, adding gravitas to what would otherwise be a mere conference) was an opportunity, as the event title said, to consider “Designing Resilient Monetary Policy Frameworks for the Future.” Instead, Fischer’s comment suggests it’s business as usual at the Federal Open Market Committee, with no room at present for such innovations as changing the inflation goal or targeting nominal GDP. That’s a shame. There’s a consensus that monetary policy is becoming impotent, and that governments need to step in with fiscal stimulus. But until central banks admit that their firepower is waning, politicians can continue to evade responsibility. “You can’t expect us to do the whole job,”

Christopher Sims, a Nobel Prize-winning economist from Princeton University, said at Jackson Hole last week. “Fiscal expansion can replace ineffective monetary policy at the zero lower bound. So long as the legislature has no clue of its role in these problems, nothing is going to get done. Of course, convincing them that they have a role and there is something they should be doing, especially in the U.S., may be a major task.” Finance – particularly in an era of fractional reserve banking – is essentially a confidence trick. Depositors have to be confident their money will be there when they try to withdraw it. Businesses have to be confident that the economy is on a sound footing otherwise they won’t invest and hire. Central bankers aren’t just economists and policy makers; they’re also salespeople, selling a story.

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China is a giant debt bubble.

An 809% Debt Ratio And Investors Are Serene? It Must Be China (BBG)

Prudence dictates that a compulsive shopper who runs up a hazardous amount of debt should think about cutting the credit card in half and staying home for a while. Try telling that to China’s acquisition-hungry companies.Two prime examples were on show this week when China Evergrande Group, one of the nation’s biggest developers, and Fosun International, an expanding Shanghai-based conglomerate, reported first-half earnings. The results show just how hard it is to kick the buying habit in an environment where compliant lenders stand ready to advance seemingly unlimited sums. Total borrowings at junk-rated Evergrande jumped by 28% from the end of December to 381 billion yuan ($57 billion).

That pushed the Guangzhou-based company’s ratio of net debt to shareholders’ equity to 142%, above the average 108% for China’s overleveraged property developers, according to data compiled by Bloomberg. Count Evergrande’s perpetual bonds as debt rather than equity and even that ratio starts to look benign. The total debt to common equity ratio rose to 809% at the end of June, from 582% six months earlier. The developer added about 40 billion yuan more perpetual notes during the period. So, time to rein things in somewhat?

Not a bit of it. Evergrande wants to acquire brokerage and trust companies as well as smaller rivals, Chief Executive Officer Xia Haijun told reporters in Hong Kong Tuesday. That would be on top of more than $5 billion of purchases so far this year, including building a stake in larger developer China Vanke and acquiring a chunk of Shenyang-based Shengjing Bank. First-half profit, meanwhile, fell 23% excluding property revaluations and foreign-exchange losses.The debt buildup wouldn’t be so striking if Evergrande were acquiring cash-generating assets that can help pay down borrowings. If anything, things seem to be moving in the opposite direction.

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Good. Kill that too.

Austria Says Will Start ‘Conflict’ In EU About Canada Trade Deal (R.)

Austria is ready to confront other European Union members states over its opposition to a free trade deal with Canada, Chancellor Christian Kern said, because it sees it containing many of the same problems as one being negotiated with the United States. “This will be difficult, this will be the next conflict in the EU that Austria will trigger… We must focus on making sure… we don’t shift the power balance in favor of global enterprises,” Kern told broadcaster ORF late on Wednesday. Austria opposes a proposed free trade deal with the United States, and Kern said the deal with Canada, called the Comprehensive Economic and Trade Agreement (CETA), bore many of the same problems.

Ministers from Germany and France have also called for a halt in negotitations on the EU-U.S. deal, the Transatlantic Trade and Investment Partnership (TTIP). “We will have to see where the weaknesses of (CETA) are. Many are the same as with TTIP,” Kern, a social-democrat, said, without elaborating. Kern is expected to address issues surrounding TTIP at a news conference on Friday. There are widespread concerns in Austria that the TTIP could compromise food safety standards. Kern also opposes the idea that the agreement could allow companies to challenge government policies if they feel regulations put them at a disadvantage.

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There are multiple truths in this case. In the end, though, this is about Brussels seeking to supersede member states’ sovereign law. For that, the constitutions of 27 nations should be held to the light. I would venture that what Brussels does here, and in many other fields, violates a fair number of these constitutions. And that is not legal no matter what their respective governments say or do. That’s an issue for their judicial systems. There’s a reason why the political and judicial systems have been made separate entities.

Apple Travesty Is A Reminder Why Britain Must Leave The Lawless EU (AEP)

Europe’s Competition Directorate commands the shock troops of the EU power structure. Ensconced in its fortress at Place Madou, it can dispatch swat teams on corporate dawn raids across Europe without a search warrant. It operates outside the normal judicial control that we take for granted in a developed democracy. The US Justice Department could never dream of acting in such a fashion. Known as ‘DG Comp’, it acts as judge, jury, and executioner, and can in effect impose fines large enough to constitute criminal sanctions, but without the due process protection of criminal law. It misused evidence so badly in pursuit of the US chipmaker Intel that the company alleged a violation of human rights. Apple is just the latest of the great US digital companies to face this Star Chamber.

It has vowed to appeal the monster €13bn fine handed down from Brussels this week for violation of EU state aid rules, but the only recourse is the European Court of Justice. This is usually a forlorn ritual. The ECJ is a political body, the enforcer of the EU’s teleological doctrines. It ratifies executive power. We can mostly agree that Apple, Google, Starbucks, and others have gamed the international system, finding legal loopholes to whittle down their tax liabilities and enrich shareholders at the expense of society. It is such moral conduct that has driven wealth inequality to alarming levels, and provoked a potent backlash against globalisation. But the ‘Double Irish’ or the ‘Dutch Sandwich’ and other such tax avoidance schemes are being phased out systematically by the G20 and by a series of tightening rules from the OECD.

The global machinery of “profit shifting” will face a new regime by 2018. We can agree too that Apple’s cosy EU arrangements should never have been permitted. It paid the standard 12.5pc corporate tax on its Irish earnings – and is the country biggest taxpayers – but the Commission alleges that its effective rate of tax on broader earnings in 2014 was 0.005pc, achieved by shuffling profits into a special ‘stateless company’ with its headquarters in Ireland. “The profits did not have any factual or economic justification. The “head office” had no employees, no premises and no real activities,” said Margrethe Vestager, the EU competition chief.

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Someone will find a way to blame this on Brexit.

UK Defined Benefit Pension Fund Deficit Grows By £100 Billion In A Month (G.)

The combined deficit of the UK’s 6,000 defined benefit pension funds has grown by £100bn in the last month, bringing the total deficit to £710bn, according to a new report. The research, by the accountants PricewaterhouseCooper, found that the pension schemes have total assets of £1,450bn but are liable to pay out about £2,160bn in contractual promises to existing and former workers. Pension deficits have worsened since the EU referendum because companies use the interest rate on gilts, otherwise known as the yield, as the main tool in estimating how much they will have to pay out in pensions in the future. The lower the gilt yield, the more that companies have to set aside to meet their future costs.

The scale of the problems facing companies offering final salary pension schemes was underlined on Wednesday by the Yorkshire-based manufacturer Carclo, which issued a statement to the stock exchange to say that the recent increase in its pension deficit meant that a dividend payout to shareholders announced in June and due to be paid in October could not now go ahead. Carclo, which is based near Leeds and employs about 1,300 people making plastics and LED products, said in its statement: “If the corporate bond yield remains at its current low level then this will result in a significant increase in the group’s pension deficit.” It said this would have the effect of “extinguishing the company’s available distributable reserves”. The announcement immediately wiped almost 15% off the company’s share price.

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How to kill a city, Chapter 826.

London’s Elite ‘Pushed Out Of Exclusive Postcodes By Super Rich’ (G.)

London’s traditional elite, such as lawyers, architects and academics, are being pushed out of their enclaves in Mayfair, Chelsea and Hampstead by an influx of global super rich investors, causing a chain reaction of gentrification across the capital, according to research by the London School of Economics. An influx of extremely wealthy overseas buyers is leading the old elite to sell up and move from London’s most exclusive postcodes and buy in areas they previously considered undesirable, said Dr Luna Glucksberg, of the LSE’s International Inequalities Institute. This displacement of old money and affluent middle class professionals is in turn pricing neighbourhoods in south and east London out of the reach of average Londoners and threatening to push those on low incomes to the margins of the city and beyond, she added.

“The changes happening at the top end of the market are real, and although they do not affect large numbers of people directly, the ripple effects they generate do resonate across London,” Glucksberg said. “In terms of the impact on London as a whole, this represents a very different kind of ‘trickle down’ effect from what politicians across the spectrum have long argued would be the benefit of the ‘super rich moving into our city’,” said Glucksberg. “Affordability for average Londoners in the rest of the city is likely to become an even more difficult issue to solve.” The trend was contributing to dramatic house price rises in areas ranging from Battersea and Clapham to Acton, as the old elite bought property there with the significant profits – usually in the millions – made from selling up to the global uber wealthy, the researcher found.

“The study shows that the wealthy individuals and families that live in London’s most exclusive areas no longer feel able to compete at the top end of the capital’s property market,” said the researcher. “Instead they feel like they are being pushed out of elite neighbourhoods. For the first time, this elite group are buying flats for their children in areas they never would have previously considered.”

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We need the death penalty for poachers and buyers, the entire chain, not just in Africa but everywhere, also in China and Japan. If they don’t comply, no more trade and full isolation.

A Third Of Africa’s Elephants Were Wiped Out In Just 7 Years (CNN)

Scanning Botswana’s remote Linyanti swamp from the low flying chopper, elephant ecologist Mike Chase can’t hide the anxiety and dread as he sees what he has seen too many times before. “I don’t think anybody in the world has seen the number of dead elephants that I’ve seen over the last two years,” he says. From above, we spot an elephant lying on its side in the cracked river mud. From a distance it could be mistaken for a resting animal. But the acrid stench of death hits us before we even land. Up close, it is a horror. He was a magnificent bull right in his prime, 45 to 50 years old. To get at his prized ivory tusks, poachers hacked off his face. Slaughtered for their ivory, the elephants are left to rot, their carcasses dotting the dry riverbed; in just two days, we counted the remains of more than 20 elephants in a small area.

Visitors and managers at the tourist camps here are frequently alarmed by the sound of gunshots nearby. And Chase worries that if Botswana can’t protect its elephants, there’s little hope for the species as a whole. Chase, the founder of Elephants Without Borders (EWB), is the lead scientist of the Great Elephant Census, (GEC) an ambitious project to count all of Africa’s savannah elephants – from the air. Before the GEC, total elephant numbers were largely guesswork. But over the past two years, 90 scientists and 286 crew have taken to the air above 18 African countries, flying the equivalent of the distance to the moon – and a quarter of the way back – in almost 10,000 hours.

Prior to European colonization, scientists believe that Africa may have held as many as 20 million elephants; by 1979 only 1.3 million remained – and the census reveals that things have gotten far worse. According to the GEC, released Thursday in the open-access journal PeerJ, Africa’s savannah elephant population has been devastated, with just 352,271 animals in the countries surveyed – far lower than previous estimates. Three countries with significant elephant populations were not included in the study. Namibia did not release figures to the GEC, and surveys in South Sudan and the Central African Republic were postponed due to armed conflict. In seven years between 2007 and 2014, numbers plummeted by at least 30%, or 144,000 elephants.

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Aug 282016
 
 August 28, 2016  Posted by at 9:31 am Finance Tagged with: , , , , , , , ,  8 Responses »
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DPC On the beach, Coney Island 1907


‘If You’re Investing For The Long Term, You’re Crazy’ (MW)
“The Next Time The World Comes To An End” – Jim Rogers (RV/ZH)
The Housing Markets In The Hamptons, Aspen And Miami Are All Crashing (ZH)
As Fed Nears Rate Hikes, Policymakers Plan For ‘Brave New World’ (R.)
Coeure Says ECB May Need to Dive Deeper If Governments Don’t Act (BBG)
BOJ’s Kuroda Says Ready to Ease as Jackson Hole Debates Options (BBG)
The Sinister Side of Cash (Rogoff)
The Thing About The EU That Drives So Many Up The Wall (Worstall)
Greece PM Says EU Sleepwalking Toward Cliff, Wants Debt Relief By End 2016 (R.)
Germany Expects ‘Up To 300,000’ Migrants This Year (BBC)

 

 

“We’re on the edge of a cliff right now. We have never been here before…”

‘If You’re Investing For The Long Term, You’re Crazy’ (MW)

Robert Kiyosaki, author of several best-selling books including “Rich Dad Poor Dad,” joined MarketWatch for a live interview on Facebook today. He offered up insights on making money, becoming an entrepreneur and even touched on politics. “The rich do not work for money. Most people do not understand that, because they’re taught to go to school and get a job for money. The rich don’t work for money. And one of the reasons for that is money is no longer money. One of the reasons for that is in 1971, President Nixon took the U.S. Dollar off the gold standard and basically screwed the world. It’s bad for the poor and middle class. As Bernie Sanders said, ‘wealth and income inequality is the greatest moral crisis facing America as well as the world today.’

The gap is growing between the rich and poor. The rich don’t work for money. If you went to school and got a job, and you’re saving money and investing in the stock market today, you’re going to lose.” “We’re on the edge of a cliff right now. We have never been here before. If you’re still saving money when interest rates are negative, you’ve got to be crazy. When you’re investing for the long-term in the stock market, where there is no connection between stock price and reality, you’re crazy.”

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Jim Rogers is always interesting, and this 50 min interview is no exception. Zero Hedge has a lot of quotes from it.

“The Next Time The World Comes To An End” – Jim Rogers (RV/ZH)

China is going to have problems too. It’s just the way the world works. In 2008, when the world fell apart, China had a lot money saved for a rainy day, and they started spending it when it started raining. This time, China has a lot of debt themselves. It’s amazing how much debt has built up in China in just a few years. And so this time, while China’s in better shape, or less bad shape than most of us, China’s got a lot of debt, and they’re not going to be able to help us like they did before. Beijing has said we’re going to let people go bankrupt, which I hope they do. They don’t do that in the West. The red Chinese, the communist Chinese are going to let people go bankrupt, because they’re good capitalists.

Americans won’t let anybody – and the Europeans won’t let anybody go bankrupt so they can save the world. But China has said they will let people go bankrupt. It’ll be a shock for the people who go bankrupt. It’ll be a shock for the world. But it will certainly be good for China, and for the world, if they do let mistakes get cleaned up. But it will mean that they will not be able to save us as much as they did before. So the next time the world comes to an end, it’s going to be a bigger shock than we expect.

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Pretty big numbers.

The Housing Markets In The Hamptons, Aspen And Miami Are All Crashing (ZH)

One month ago, we said that “it is not looking good for the US housing market”, when in the latest red flag for the US luxury real estate market, we reported that sales in the Hamptons plunged by half and home prices fell sharply in the second quarter in the ultra-wealthy enclave, New York’s favorite weekend haunt for the 1%-ers. Reuters blamed this on “stock market jitters earlier in the year” which damped the appetite to buy, however one can also blame the halt of offshore money laundering, a slowing global economy, the collapse of the petrodollar, and the drastic drop in Wall Street bonuses. In short: a sudden loss of confidence that a greater fool may emerge just around the corner, which in turn has frozen buyer interest.

We concluded this is just the beginning, and sure enough, several weeks later a similar collapse in the luxury housing segment was reported in a different part of the country. As the Denver Post reported recently, high-end sales that fuel Aspen’s $2 billion-a-year real estate market are evaporating, pushing Pitkin County’s sales volume down more than 42% to $546.45 million for the first half of the year from $939.91 million in the same period of 2015. [..] Ask a dozen market watchers why, and you’ll get a dozen answers. Uncertainty around the presidential election. Fear of Trump. Fear of Clinton. Growing trade imbalances with China. Brexit. Roller-coaster oil prices. Zika. Wobbling economies in South America. The list goes on. “People are worried about all kinds of stuff these days,” says longtime Aspen broker Bob Ritchie. “I’ve never seen anything like this before.”

[..] According to the latest report by the Miami Association of Realtors, the local luxury housing market is just as bad, if not worse, than the Hamptons and Aspen. The latest figures out of Miami this week showed residential sales are down almost 21% from the same time last year. But as bad as this double-digit decline may seem, it pales in comparison to what’s happening at the high end of the market. A closer look at transactions for properties of $1 million or more in July shows just 73 single-family home sales, representing an annual decline of 31.8%, according to a new report by the Miami Association of Realtors. In the case of condos in the same price range, the number of closed sales fell by an even wider margin: 44.4%, to 45 transactions.

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There’s nothing in sight that would stop this madness. Looks like it will have to run its natural course.

As Fed Nears Rate Hikes, Policymakers Plan For ‘Brave New World’ (R.)

Federal Reserve policymakers are signaling they could raise U.S. interest rates soon but they are already weighing new tools they may need to fight the next recession. A solid U.S. labor market “has strengthened” the case for the first rate increase since last December, Fed Chair Janet Yellen told a central banking conference in Jackson Hole, Wyoming. Several of her colleagues said the increase could come as soon as next month if the economy does well. Further rate hikes are expected to be few and far between as the U.S. central bank tries to balance a desire to fuel growth against worries it could overheat the economy.

But Fed officials at three-day conference that ended Saturday also said they need to consider new policy tools for use down the road, such as raising the inflation target or even Fed purchases of non-government-backed assets like corporate debt. Such ideas would test the limits of political feasibility and some would need congressional approval. The view within the Fed is that it could take effort to win over a public already skeptical of the unconventional policies the Fed undertook during the last crisis. Policymakers think new tools might be needed in an era of slower economic growth and a potentially giant and long-lasting trove of assets held by the Fed. And they are convinced the time to vet them is now, while rates look to be heading up.

“Central banking is in a brave new world,” Atlanta Fed President Dennis Lockhart said in an interview on the sidelines of the conference. At the center of the Fed’s discussions is its $4.5 trillion balance sheet, built up by bond-buying sprees to combat the 2007-09 recession but which has been criticized by many lawmakers. While policymakers have maintained the Fed should eventually reduce its bond holdings, Lockhart said some officials were closer to accepting that they needed to learn to live with them. “I suspect there are colleagues who are contemplating at least maybe a statically large balance sheet is just going to be a fact of life and be central to the toolkit,” he said.

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The ECB should stop pretending it has a clue.

Coeure Says ECB May Need to Dive Deeper If Governments Don’t Act (BBG)

European Central Bank Executive Board member Benoit Coeure said unconventional monetary policy may have to be used differently and more frequently if governments don’t act to boost the growth potential of euro-area economies. “We may see short-term rates being pushed to the effective lower bound more frequently in the event of macroeconomic shocks,” Coeure said Saturday in a speech at the U.S. Federal Reserve’s annual policy symposium in Jackson Hole, Wyoming. His remarks were posted on the ECB’s website. “We will fulfill the price stability mandate given to us,” Coeure said. “But if other actors do not take the necessary measures in their policy domains, we may need to dive deeper into our operational framework and strategy to do so.”

While slowing growth and inflation present difficulties for central banks around the industrialized world, the Frankfurt-based ECB has particular cause to urge pro-expansion measures by the 19 nations that use the euro. High unemployment, political spats and banking systems loaded with soured loans are hampering the region’s recovery from a debt crisis that started six years ago. “We face an exceptional situation where the real equilibrium rate is very low,” said Coeure. “All the monetary policy measures we have taken were a necessary response to this. They stabilized the euro-area economy and anchored medium-term price stability. But they were done on the assumption that low real rates would be temporary, because other policies would act in their fields of responsibility.”

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The word ‘ease’ takes on whole new meanings by now.

BOJ’s Kuroda Says Ready to Ease as Jackson Hole Debates Options (BBG)

Bank of Japan Governor Haruhiko Kuroda said he won’t hesitate to boost monetary stimulus if needed, reiterating a pledge during an annual policy retreat in Jackson Hole, Wyoming, at which central bankers stressed their need for backup from fiscal policy. “There is no doubt that there is ample space for additional easing in each of the three dimensions,” Kuroda said Saturday, referring to the BOJ’s package of asset buying, monetary-base guidance, and negative interest rates. “The bank will carefully consider how to make the best use of the policy scheme in order to achieve the price stability target,” he told the Federal Reserve Bank of Kansas City’s symposium.

Central bankers, struggling to spur persistently disappointing growth, gathered in the Grand Teton National Park to debate how best to tackle low inflation despite having already cut interest rates to near zero or, in some cases, below zero. They heard Fed Chair Janet Yellen on Friday describe future potential options to jump-start the economy, while saying that the case for a U.S. rate hike had strengthened. Even though the Bank of Japan is currently engaged in a review of its monetary-policy settings, due for completion in September, Kuroda’s comments underline his stance that the exercise won’t mean any reduction in stimulus despite growing doubts about its effectiveness. “One of the key elements of our policy is to push up inflation expectations to our price stability target and anchor them there,” Kuroda said. “The Bank of Japan will continue to carefully examine risks to activity and prices at each monetary policy meeting, and take additional monetary policy measures without hesitation.”

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Wow. and I thought Rogoff was a reasonable smart man. Saying that cash causes crime is not smart. It’s nonsense.

The Sinister Side of Cash (Rogoff)

When I tell people that I have been doing research on why the government should drastically scale back the circulation of cash—paper currency—the most common initial reaction is bewilderment. Why should anyone care about such a mundane topic? But paper currency lies at the heart of some of today’s most intractable public-finance and monetary problems. Getting rid of most of it—that is, moving to a society where cash is used less frequently and mainly for small transactions—could be a big help. There is little debate among law-enforcement agencies that paper currency, especially large notes such as the U.S. $100 bill, facilitates crime: racketeering, extortion, money laundering, drug and human trafficking, the corruption of public officials, not to mention terrorism.

There are substitutes for cash—cryptocurrencies, uncut diamonds, gold coins, prepaid cards—but for many kinds of criminal transactions, cash is still king. It delivers absolute anonymity, portability, liquidity and near-universal acceptance. It is no accident that whenever there is a big-time drug bust, the authorities typically find wads of cash. Cash is also deeply implicated in tax evasion, which costs the federal government some $500 billion a year in revenue. According to the Internal Revenue Service, a lot of the action is concentrated in small cash-intensive businesses, where it is difficult to verify sales and the self-reporting of income. By contrast, businesses that take payments mostly by check, bank card or electronic transfer know that it is much easier for tax authorities to catch them dissembling.

Though the data are much thinner for state and local governments, they too surely lose big-time from tax evasion, perhaps as much as $200 billion a year. Obviously, scaling back cash is not going to change human nature, and there are other ways to dodge taxes and run illegal businesses. But there can be no doubt that flooding the underground economy with paper currency encourages illicit behavior. Cash also lies at the core of the illegal immigration problem in the U.S. If American employers couldn’t so easily pay illegal workers off the books in cash, the lure of jobs would abate, and the flow of illegal immigrants would shrink drastically. Needless to say, phasing out most cash would be a far more humane and sensible way of discouraging illegal immigration than constructing a giant wall.

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“.. the idea that we average peeps just shouldn’t worry our pretty little heads about complicated things like Europe.”

The Thing About The EU That Drives So Many Up The Wall (Worstall)

Gus O’Donnell, who used to be the head of the civil service, has floated the idea that Britain won’t in fact leave the European Union after all. After a couple of years of negotiating about it we’ll end up with something that’s very like we have now and politicians will just settle for that. This, at root, is exactly what the whole dang vote in favour of Brexit, in favour of leaving, was about anyway. For it is, again, the idea that we average peeps just shouldn’t worry our pretty little heads about complicated things like Europe. We should allow our betters, our betters being those who had the good grace to go into the bureaucracy, to take care of everything for us. And that is actually the driving aim of the EU itself.

The entire point over the decades has been to take power away from the various peoples, and from politicians directly accountable to them, and place said power in the hands of an unelected and unaccountable bureaucracy in Brussels. And that’s to a very large extent, what the upsurge which led to Brexit was about. No, thanks, very much, but we’ll rule ourselves. And O’Donnell’s not doing himself any favours by repeating the idea from a purely British perspective. Being told that “The Man in Whitehall knows best” enrages Brits just as much as the idea that someone in Brussels does. Largely on the basis that we’ve all too much evidence pointing the other way. Thus this is somewhere between simply wrong and evidence of having an entirely tin ear:

”A former top civil servant says a British exit from the European Union is not inevitable, although voters backed that course in a June referendum.[..] But Gus O’Donnell, who was U.K. cabinet secretary from 2005 to 2011 and today sits in the House of Lords, says Britain could remain within a reformed EU following talks that would take “a very long time.” He’s actually going a bit further than that: “Lord O’Donnell of Clapham, the former Cabinet Secretary, says Britain might not really leave the EU. Perhaps the EU will now change in a way that makes it more appealing to British people, he suggests. And anyway, even if we do actually go through with the whole Brexit thing, not much will change because, when we come to really think about it, we’ll realise that all those rules and regulations that originated with the EU are actually OK so they should remain in place.”

There are indeed times when civil servants can be left to get on with things. Whether the forms for unemployment pay use Times Roman or Comic Sans would be a useful level of that sort of thing. But when the populace at large has been asked a simple question like “In or Out of the EU?” then that’s not something that the civil servants should be either second guessing nor gainsaying. That’s the exact thing about the EU that drives a significant portion of the population up the wall.

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How much longer can Tsipras last? Or the EU for that matter?

Greece PM Says EU Sleepwalking Toward Cliff, Wants Debt Relief By End 2016 (R.)

Greece said on Sunday the EU was “sleepwalking towards a cliff” by sticking to austerity rules that created huge inequalities among members, and it expected a debt relief deal for itself to be honored by end-2016 so that its economy could recover. Athens, facing a second bailout review entailing an unpopular loosening of labor laws in the autumn, is keen to show that painful tax rises and pension cuts as part of its 86-billion-euro bailout deal last year will bear fruit. “Greece has kept its part of the agreement and expects the same from its partners. We are not simply seeking, we are demanding and expecting specific measures that will render debt sustainable as part of the deal we are implementing,” Prime Minister Alexis Tsipras told the Sunday newspaper Realnews.

“This (debt relief) will be followed by reduced (budget) surpluses after 2018, which will open the way for the economy’s recovery,” he said. Greece has committed to attaining a primary budget surplus – excluding debt servicing costs – of 3.5% of economic output by 2018 as part of its third bailout package since 2010. The IMF, which has yet to decide whether it will fund the third bailout, has said that surplus targets of 3.5% beyond 2018 are not realistic for Greece and has pushed for softer fiscal goals to take part in the financing. Greece’s leftist-led government and the central bank also want lower primary surplus targets, arguing this will give Athens room to cut taxes and help the battered economy return to growth after a protracted recession.

The economy has shrunk by a quarter in six years and the jobless rate is 23.5%. Tsipras also told Realnews that the European Union was “sleepwalking towards a cliff” as the Stability Pact’s tough fiscal rules had engendered deep inequalities among member states. “Brexit will either awaken European leaderships or it will be the beginning of the end of the EU,” he said, referring to Britain’s June vote to leave the 28-nation bloc. He criticized Germany for acting as Europe’s “savings bank” with excessive surpluses, frozen wages and low inflation, at a time when the EU’s deficit-ridden southern members have broken all records for unemployment. “If Schaueble’s dogma for a multi-speed Europe and economic zones of low-cost labor is not abandoned, Europe will be brought to the brink of dissolution,” Tsipras was quoted by Realnews as saying.

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As Hungary and Austria are throwing up more barriers.

Germany Expects ‘Up To 300,000’ Migrants This Year (BBC)

Germany expects up to 300,000 migrants to arrive in the country, according to the head of Germany’s Federal Office for Migration and Refugees. Frank-Juergen Weise told the Bild am Sonntag paper (in German) his office would struggle if more people came. But he said he was confident the number of new arrivals would remain within the estimate. More than one million migrants from the Middle East, Afghanistan and Africa arrived in Germany last year. The German interior ministry says more than 390,000 people applied for asylum in the first six months of this year. It is not clear how many of these may have arrived in the country in 2015. Mr Weise said Germany would try to get as many of them on the job market as possible. But he said the migrants’ integration in German society “would take a long time and cost a lot”.

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Aug 262016
 
 August 26, 2016  Posted by at 9:17 am Finance Tagged with: , , , , , , , , ,  5 Responses »
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G. G. Bain On beach near Casino, Asbury Park 1911


Japan July Consumer Prices Post Biggest Annual Fall In 3 Years (R.)
Dollar Stores’ Admission: Half Of US Consumers Are In Dire Straits (ZH)
QE Infinity: Are We Heading Into The Unknown? (CNBC)
A Less Weird Time at Jackson Hole? (John Taylor)
There May Not Be Too Many Tricks Left For The ECB and Bank of England (BBG)
China’s Great Divide: A New Cultural Revolution? (CH Smith)
Backlash Against Chinese Investment Abroad Grows Ahead Of G-20 Summit (BBG)
China Has Returned To Reform Mode (BBG)
Australia’s Hunger Games (BBG)
Fannie, Freddie, Regulator Rolls Out Refinance Program For Homeowners (R.)
Eurozone Banks See Net Profit Fall 20% In First Quarter (R.)
Deposits at Bank of Ireland To Face Negative Interest Rates (O’Byrne)
It Was a Union for the Ages, Until Suddenly It Wasn’t. Is Europe Lost? (BBG)
The Broken Chessboard: Brzezinski Gives Up on Empire (Whitney)
2000 Finns to Get Basic Income in State Experiment Set to Start 2017 (BBG)
Greece Grapples With More ‘Fugitives’, Seeks To Avoid Tensions With Ankara (K.)

 

 

Might as well give up on Japan. 3 years of horrible policy failure, and Abe’s as popular as ever.

Japan July Consumer Prices Post Biggest Annual Fall In 3 Years (R.)

Japan’s consumer prices fell in July by the most in more than three years as more firms delayed price hikes due to weak consumption, keeping the central bank under pressure to expand an already massive stimulus program. The gloomy data reinforces a dominant market view that premier Shinzo Abe’s stimulus program have failed to dislodge the deflationary mindset prevailing among businesses and consumers. The nationwide core consumer price index, which excludes volatile fresh food prices but includes oil products, fell 0.5% in July from a year earlier, the fifth straight month of declines, data showed on Friday. It exceeded a median forecast for a 0.4% decline and June’s 0.4% drop.

While falling energy costs were mainly behind the slide in consumer prices, rises in imported food prices and hotel room rates moderated in a sign that weak consumption is discouraging firms from passing on rising costs. A strong yen also pushed down import costs, offering few justifications for retailers to raise prices of their goods. “While economic activity is on the mend, the slump in import prices suggests that underlying inflation will continue to fall in coming months,” said Marcel Thieliant, senior Japan economist at Capital Economics. “The Bank of Japan will find it increasingly difficult to blame falling energy prices for the decline in overall consumer prices.”

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Where the propaganda fails.

Dollar Stores’ Admission: Half Of US Consumers Are In Dire Straits (ZH)

Both Dollar General and Dollar Tree said pressures on their core lower-income shoppers contributed to the same-store sales misses that both retailers reported. On today’s conference call, Dollar General CEO Todd Vasos said that he was surprised to admit that while on the surface things are supposed to be getting better, the reality is vastly different for low-income US consumers: “I know that when we look at globally the overall U.S. population, it seems like things are getting better. But when you really start breaking it down and you look at that core consumer that we serve on the lower economic scale that’s out there, that demographic, things have not gotten any better for her, and arguably, they’re worse. And they’re worse, because rents are accelerating, healthcare is accelerating on her at a very, very rapid clip.”

Making matters worse, he added that the company’s core consumers base, 65% of which is comprised of lower-income shoppers, has been impacted by the recent reduction or elimination in foodstamps: “now couple that in upwards of 20 states where they have reduced or eliminated the SNAP benefit, and it has really put a toll on [the core consumer].” He elaborated that the reduction in foodstamps benefits promptly filtered through the entire business model, and culminated with Dollar General being forced to cut prices to remain competitive. This is what he said:

“That SNAP benefit reduction and/or elimination happened in April. That was the kickoff, and you could see it immediately in the numbers. So I believe that those are the things that are affecting her today. Again, our core customer, and by the way, we’ve seen this play out before. If you dial the clock back to October of 2013 and coming into November of 2013, when the last large SNAP benefit reduction happened, it happened almost exactly the same way on our comps and in how we saw traffic. Obviously, we’re up at a little higher level at that time, but rest assured, that our traffic slowed tremendously then, very similar to as it did now.

The difference here is we’re going to take aggressive price action to get that consumer back in the store. She needs a little motivation to get back in. We need to help her stretch her budget for a time period until she figures it out. Our core customer is very resilient. They’ll figure it out over time, but they need a little help as they tend to now try to figure out how to make ends meet with less money during the month.”

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No, we’ve been in the unknown for years. As soon as Bernanke said ‘Uncharted Territory’, we knew we were lost. Of course they’ve acted ever since as if they know what they’re doing, but that is bull.

QE Infinity: Are We Heading Into The Unknown? (CNBC)

Markets are currently riding on the wave of uncertainty and speculation over whether the world’s central banks will continue to pump in more and more cash into the economy though bond-buying programs known as quantitative easing (QE). But as we go deeper into the world of easy money from central banks, there are other areas of the economy that could see a knock-on effect. Alberto Gallo, manager of the Algebris Macro Credit Fund, describes this paradox as “QE infinity,” whereby low rates and seemingly endless rounds of bond-buying programs encourage cheap borrowing, and investment in financial markets – but not in the real economy. “The problem is rising debt and monetary easing comes with many collateral effects. One is the distortion of asset prices, leading to asset bubbles,” Gallo explained.

“Asset price distortion also has a ripple effect on wealth distribution, increasing inequality by benefitting the already-wealthy who are more likely to hold financial assets. Over time, low rates and QE can also encourage misallocation of resources to leverage-sensitive sectors, including real estate and construction.” Gallo further explained that for the global economy to exit this QE infinity trap, government action and reforms to improve productivity are needed. “But many governments are reluctant to accept the need for these measures, often instead implementing policies that win votes but compound the distortions of easy monetary policy e.g. housing affordability programmes, mortgage subsidies.” Without an adequate fiscal response from governments, growing imbalances make it harder to withdraw stimulus, warned Gallo.

“This is the paradox of current monetary policy: On one hand, it is the best possible response available to central bankers. On the other, it has long-term collateral effects which need to be confronted eventually.” Central banks have seen themselves come up with new ways of stimulating the economy ever since the world plunged into financial crisis in September 2008. Data from JPMorgan shows that the top 50 central banks around the world have cut rates 672 times between them since the collapse of Lehman Brothers, a figure that translates to an average of one interest rate cut every three trading days. This has also been combined with $24 trillion worth of asset purchases. This raises a big question: Will the global economy ever exit QE Infinity?

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Dream on. All they have left is weird.

A Less Weird Time at Jackson Hole? (John Taylor)

I’m on my way to join the world’s central bankers at Jackson Hole for the 35th annual monetary-policy conference in the Grand Teton Mountains. I attended the first monetary-policy conference there in 1982, and I may be the only person to attend both the 1st and the 35th. I know the Tetons will still be there, but virtually everything else will be different. As the Wall Street Journal front page headline screamed out on Monday, “Central Bank Stimulus Efforts Get Weirder”. I’m looking forward to it. Paul Volcker chaired the Fed in 1982. He went to Jackson Hole, but he was not on the program to give the opening address, and no one was speculating on what he might say. No other Fed governors were there, nor governors of any other central bank. In contrast, this year many central bankers will be there, including from emerging markets.

Only four reporters came in 1982 — William Eaton (LA Times), Jonathan Fuerbringer (New York Times), Ken Bacon (Wall Street Journal) and John Berry (Washington Post). This year there will be scores. And there were no television people to interview central bankers in 1982 (with the awesome Grand Teton as backdrop). It was clear to everyone in 1982 that Volcker had a policy strategy in place, so he didn’t need to use Jackson Hole to announce new interventions or tools. The strategy was to focus on price stability and thereby get inflation down, which would then restore economic growth and reduce unemployment. Some at the meeting, such as Nobel Laureate James Tobin, didn’t like Volcker’s strategy, but others did. I presented a paper at the 1982 conference which supported the strategy. The federal funds rate was over 10.1% in August 1982 down from 19.1% the previous summer.

Today the policy rate is .5% in the U.S. and negative in the Eurozone, Japan, Switzerland, Sweden and Denmark. There will be lot of discussion about the impact of these unusual central bank policy rates, as well the unusual large scale purchases of corporate bonds and stock, and of course the possibility of helicopter money and other new tools, some of which greatly expand the scope of central banks. I hope there is also a discussion of less weird policy, and in particular about the normalization of policy and the benefits of normalization. In fact, with so many central bankers from around the world at Jackson Hole, it will be an opportunity to discuss the global benefits of recent proposals to return to a rules-based international monetary system along the lines that Paul Volcker has argued for.

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Trapped.

There May Not Be Too Many Tricks Left For The ECB and Bank of England (BBG)

The European Central Bank and the Bank of England may soon find that their most powerful tool for overseeing lenders doesn’t pack the punch it once did. The European Union is overhauling the way supervisors set bank-specific capital levels for current and potential risks that aren’t covered by the minimum requirements in EU law. A proposal from the European Commission, the EU’s executive arm, would rein in supervisors and give banks the lead in determining their capital needs. The ECB has already followed directions from the commission in splitting its demands into binding requirements and non-binding guidance, reducing the capital burden on euro-area banks. This decision also made it less likely that banks will face restrictions on the payment of dividends, bonuses and additional Tier 1 bond coupons.

“What this boils down to is a complete disarming of the authorities,” said Christian Stiefmueller, a senior policy analyst at Finance Watch, a Brussels-based watchdog. “It makes it effectively impossible for the supervisor to set capital requirements for any risk except those that have already materialized.” Europe’s banks are starting to get some slack from policy makers after years of aggressive regulation. The Brussels-based commission has opened up the entire financial rule book for review, including contentious issues such as the cap on bankers’ bonuses. Faced with weak banks and an anemic economy, regulators have made clear that global standards will be adapted to suit Europe’s needs.

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Key: “The processes used to inflate the new bubble suffer from diminishing returns.”

China’s Great Divide: A New Cultural Revolution? (CH Smith)

The status quo solution (in China, the U.S., Japan, the E.U., etc.) to a weakening bubble-dependent economy is to inflate another even bigger bubble. If debt reached extremes that imploded, the solution is to expand debt far beyond the levels that triggered the implosion. If fudging the numbers triggered a loss of confidence, the solution is to fudge the numbers even more, so they no longer reflect reality at all. If the masses protest their powerlessness, the solution is to push them further from the centers of power. And so on. This blowing new bubbles to replace the ones that popped works for a while, but at the expense of systemic stability. Each new bubble requires pushing the system to new extremes that increase the risk of instability and collapse.

In other words, the stability of the new bubble is temporary and thus illusory. The processes used to inflate the new bubble suffer from diminishing returns. The nature of stimulus-response is that overuse of the stimulus leads to diminishing responses. This is a structural feature that cannot be massaged away. Goosing public confidence in the status quo with phony statistics and rigged markets works splendidly the first time, less so the second time, and barely at all the third time. Why is this so? The distance between reality and the bubble construct is now so great that the disconnection from reality is self-evident to anyone not marveling at the finery of the Emperor’s non-existent clothing. The system habituates to the higher stimulus. If the drug/debt has lost its effectiveness, a higher dose is needed.

This is the progression of serial bubbles. Then the system habituates to the higher dose/debt, and the next expansion of debt must be even greater. This dynamic can be visualized as The Rising Wedge Model of Breakdown, which builds on the well-known Ratchet Effect: the system is greased for easy expansion of debt, leverage, employees, etc., but it has no mechanism to allow contraction. Any contraction triggers systemic collapse. The only question left for China (and every other debt/bubble-dependent nation) is what socio-political consequences will manifest when the credit bubble finally bursts?

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More diminishing returns?!

Backlash Against Chinese Investment Abroad Grows Ahead Of G-20 Summit (BBG)

Forget about Yankee go home. Now it’s Chinese go home. From Australia blocking a bid for a power network to the U.K.’s review of a proposed Chinese-funded nuclear plant, opposition to China’s outward push is opening a thornier and potentially more treacherous front in the country’s economic tug-of-war with the rest of the world. And it’s coming as China prepares to host a Sept. 4-5 summit of Group of 20 leaders. Unlike festering frictions over trade, the new front is in an area – investment – where the global rules of engagement are more amorphous and where national security interests are more prominent. That raises the risk of a rapid escalation of tensions that can’t be so easily contained. “The implicit accusation when rejecting overseas direct investment is much stronger than trade,” said James Laurenceson, deputy director of the Australia-China Relations Institute in Sydney.

Using a national-security rationale to blocking outbound investment by China “is far more confronting. It suggests that China is untrustworthy and has potentially nefarious intentions. That’s what Beijing objects to.” But it’s not just security concerns that are driving the increased backlash against stepped-up Chinese investment abroad, especially by state-owned companies. It’s also the suspicion that the Communist-led government is trying to game the system by snapping up foreign firms in key areas of the economy while blocking others from doing the same in China. China “remains the most closed to foreign investment of the G-20 countries,” David Dollar, a senior fellow at the Brookings Institution and former U.S. Treasury attache to Beijing, said. “This creates an unfairness in which Chinese firms prosper behind protectionist walls and expand into more open markets such as the U.S.”

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China’s getting desperate to look like it’s in control of its own economy. It’s not.

China Has Returned To Reform Mode (BBG)

China has returned to reform mode. This week, plans have been unveiled to quicken the clean-up of excess capacity in state-backed companies, level the playing field for private and foreign investors with new access to previously off-limit sectors, and take the next step in a long-awaited fiscal shake up. Having stabilized the economy with a mix of fiscal support and easy monetary settings, China’s leaders appear to be reviving a stalled reform push that’s key to long-term growth prospects. The rush of announcements comes ahead of China’s hosting of leaders from the world’s 20 biggest economies in Hangzhou on Sept. 4 and 5, allowing it to show progress to officials from nations such as the U.S. and bodies like the IMF that have called for structural changes.

“The pace of reform had been slower than expected,” said Shen Jianguang at Securities in Hong Kong. “Now, policy makers want to speed it up again. With monetary easing proving less effective in propping up the economy, they have realized that there’s no way out if they don’t push forward on reform.” The People’s Bank of China has been upping its communication in recent weeks, signaling ongoing use of liquidity tools rather than big gun moves such as cuts to benchmark interest rates or the percentage of deposits banks must lock away as reserves. With businesses hoarding cash and reluctant to invest, further easing risks fueling financial risks without spurring a pick up in economic growth.

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More dividend priests liquidating themselves.

Australia’s Hunger Games (BBG)

If economies need animal spirits to thrive, what sort of beast is Australia in the aftermath of its mining boom? Something like a wounded bear that would rather hibernate than go hunting for food, if you listen to Treasurer Scott Morrison.Governments need to work at building an economy that “can coax private capital out of its cave,” he said at an event in Sydney Thursday. “Global capital is sitting dormant. How else do you interpret the absurdity of negative bond yields? “Though Australia’s 25 years without a recession represent a remarkable success story, it’s fair to say the country’s going through a rough patch. Interest rates are at a record-low 1.5%, and local businesses are showing more of a tendency to lick their wounds than search for new investment opportunities.

The huge splurge of capital expenditure that accompanied the mining boom helped cover for a while a fact that’s becoming embarrassingly clear as the resource spending recedes: Take out mining, and investment by Australian businesses has barely increased since the global financial crisis. So where’s the money going? Blame the baby boomers. Self-managed super funds – accounts that are controlled by their owners rather than professional fund managers – make up the biggest share of Australia’s pool of retirement savings.The funds, which have benefited from a range of overly generous tax breaks during the past decade, have an outsized influence on the Australian stock market, according to Hasan Tevfik, director of Australian equities research at Credit Suisse.

Retirees’ desire for a steady income from their investments helps explain why certain types of stocks tend to be overvalued in Australia relative to their performance elsewhere, and why local businesses so often fall over themselves to pay dividends above the levels found in other markets. [..] In the long term, companies that dedicate more of their free cash to shareholders rather than finding new ways of making money are robbing the future to pay the present. Countries where that becomes the predominant mode of corporate behavior are in even greater trouble.

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Everybody’s scared to death of falling home prices, which happen to be the only thing that can make the market somewhat healthier.

Fannie, Freddie, Regulator Rolls Out Refinance Program For Homeowners (R.)

The regulator of Fannie Mae and Freddie Mac unveiled on Thursday a program aimed at homeowners who are paying their mortgages on time but whose loan-to-value (LTV) ratios are too high to qualify for traditional refinance programs. To be eligible for this program, which Fannie and Freddie will implement, borrowers must have not missed any mortgage payments in the prior six months; must not have skipped more than one payment in the previous 12 months; must have a source of income and must receive a benefit from the refinance such as a reduction in their monthly loan payment, the Federal Housing Finance Agency said.

“This new offering will give borrowers the opportunity to refinance when rates are low, making their mortgages more affordable and thus reducing credit risk exposure for Fannie Mae and Freddie Mac,” said FHFA Director Melvin Watt in a statement. Because this program for high LTV borrowers will not be available until October 2017, the agency said it will extend the Home Affordable Refinance Program (HARP) until Sept. 30, 2017 as a bridge to the new high LTV program. HARP was introduced in 2009 to help underwater borrowers following the housing bust. More than 3.4 million homeowners have refinanced their mortgage through the program. More than 300,000 homeowners could still refinance through HARP, FHFA said.

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Portuguese and Italian banks cannot afford this. Many others can’t either. Question is where the next bailout (bail-in) will happen.

Eurozone Banks See Net Profit Fall 20% In First Quarter (R.)

Euro area banks saw their profits fall by a fifth in the first three months of this year as they made less money from trading and most other business areas, European Central Bank data showed on Wednesday. The ECB survey painted a gloomy picture, with all the main sources of profit for banks – lending, trading and fees – down from the year before. Net profit fell by 20% year on year to €18 billion ($20.25 billion). The net result from trading and foreign exchange was one of the main culprits for that drop as it fell by 41% to €10.8 billion. Other income streams – such as net interest on loans, dividends, and fees and commissions – also declined, albeit more modestly.

Banks have blamed the ECB’s policy of ultra-low rates, which includes charging banks for the excess cash they park at the central bank, for eating into their profits. In cash-rich Germany, several banks have responded by charging fees on bank accounts or charging corporate clients a percentage charge on large deposits. The ECB has maintained its policy has done more good than harm but it has acknowledged it comes with side effects.

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This can not end well.

Deposits at Bank of Ireland To Face Negative Interest Rates (O’Byrne)

Deposits at Bank of Ireland are soon to face charges in the form of negative interest rates after it emerged on Friday that the bank is set to become the first Irish bank to charge customers for placing their cash on deposit with the bank. This radical move was expected as the ECB began charging large corporates and financial institutions 0.4% in March for depositing cash with them overnight. Bank of Ireland is set to charge large companies for their deposits from October. The bank said it is to charge companies for company deposits worth over €10 million. The bank was not clear regarding what the new negative interest rate will be but it is believed that a negative interest rate of 0.1% will initially be charged to such deposits by Ireland’s biggest bank.

BOI was identified as one of the most vulnerable banks in Europe in the recent EU stress tests – along with Banca Monte dei Paschi di Siena (MPS), AIB and Ulster Bank’s parent RBS. All the banks clients, retail, SME and corporates are unsecured creditors of the bank and exposed to the new bail-in regime. Only larger customers will be affected by the charge for now. The bank claims that it has no plans to levy a negative interest rate on either personal or SME customers but negative interest rates seem likely as long as the ECB continues with zero% and negative interest rates. Indeed, they are already being seen in Germany where retail clients are being charged 0.4% to hold their cash in certain banks such as Raiffeisenbank Gmund am Tegernsee.

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Europe is not lost, but the EU sure is.

It Was a Union for the Ages, Until Suddenly It Wasn’t. Is Europe Lost? (BBG)

The U.K.’s vote to quit the EU is the enterprise’s worst setback since it was conceived in the 1950s. Until now, the EU has always grown in scale and ambition. For the first time, Brexit shows that Europe’s manifest destiny—ever closer union—may not be destiny after all. Merely knowing that European integration can be reversed is a threat: It makes the unthinkable thinkable. But this isn’t the only danger. The union is increasingly unpopular not only in the U.K. but also in other European countries. Its political capital is depleted. Working through the mechanics of Brexit may deepen divisions, severely testing the union’s ability to adapt. Brexit could conceivably spur support for the union. But this will demand consensus, flexibility, and farsighted calculation, none of which can be taken for granted.

If governments can’t rise to this challenge, Brexit may be the beginning of the end of the European dream. In one way, today’s discontent is nothing new. There has often been a gap between the grandest designs of Europe’s leaders and the readiness of the continent’s citizens to go along. The EU’s remarkable achievements in securing peace and prosperity in the postwar era required brave, visionary leadership, and voters were rarely up to speed. For years, that was fine. The model was top-down institution-building, followed by good results, then popular backing—in that order. It all worked beautifully. Europe’s postwar political and economic reconstruction was a modern miracle. But now the model is failing. The Brits aren’t the proof. They’ve always been uncomfortable in the EU, late to the party and a nuisance throughout; their vote to quit was a shock, but probably shouldn’t have been.

Lately, though, the disenchantment has spread far more widely. According to one recent poll, the EU is less popular in France—France!—than in the U.K. So what went wrong? [..] Even at the design stage, many economists said the euro’s political underpinnings were too weak. Monetary union, they argued, demanded a commitment to a form of fiscal union. (If currency devaluation with respect to other EU currencies was going to be ruled out, fiscal transfers would be needed to help cushion economies from downturns.) This would require a widely shared sense of common purpose—in effect, a more fully developed European identity. Without it, member states would balk at collective fiscal action. And balk they did: Fiscal union, with the need for fiscal transfers across the union’s internal borders, wasn’t part of the plan.

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Worried about his legacy?

The Broken Chessboard: Brzezinski Gives Up on Empire (Whitney)

The main architect of Washington’s plan to rule the world has abandoned the scheme and called for the forging of ties with Russia and China. While Zbigniew Brzezinski’s article in The American Interest titled “Towards a Global Realignment” has largely been ignored by the media, it shows that powerful members of the policymaking establishment no longer believe that Washington will prevail in its quest to extent US hegemony across the Middle East and Asia. Brzezinski, who was the main proponent of this idea and who drew up the blueprint for imperial expansion in his 1997 book The Grand Chessboard: American Primacy and Its Geostrategic Imperatives, has done an about-face and called for a dramatic revising of the strategy. Here’s an excerpt from the article in the AI:

“As its era of global dominance ends, the United States needs to take the lead in realigning the global power architecture. Five basic verities regarding the emerging redistribution of global political power and the violent political awakening in the Middle East are signaling the coming of a new global realignment. The first of these verities is that the United States is still the world’s politically, economically, and militarily most powerful entity but, given complex geopolitical shifts in regional balances, it is no longer the globally imperial power.” (Toward a Global Realignment, Zbigniew Brzezinski, The American Interest)

Repeat: The US is “no longer the globally imperial power.” Compare this assessment to a statement Brzezinski made years earlier in Chessboard when he claimed the US was ” the world’s paramount power.” ““…The last decade of the twentieth century has witnessed a tectonic shift in world affairs. For the first time ever, a non-Eurasian power has emerged not only as a key arbiter of Eurasian power relations but also as the world’s paramount power. The defeat and collapse of the Soviet Union was the final step in the rapid ascendance of a Western Hemisphere power, the United States, as the sole and, indeed, the first truly global power.” (“The Grand Chessboard: American Primacy And Its Geostrategic Imperatives,” Zbigniew Brzezinski, Basic Books, 1997, p. xiii)

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A basic income for just 2000 people seems to miss the whole idea.

2000 Finns to Get Basic Income in State Experiment Set to Start 2017 (BBG)

Finland is pushing ahead with a plan to test the effects of paying a basic income as it seeks to protect state finances and move more people into the labor market. The Social Insurance Institution of Finland, known as Kela, will be responsible for carrying out the experiment that would start in 2017 and include 2,000 randomly selected welfare recipients, according to a statement released Thursday. The level of basic income would be €560 per month, tax free, and mandatory for those picked. “The objective of the legislative proposal is to carry out a basic income experiment in order to assess whether basic income can be used to reform social security, specifically to reduce incentive traps relating to working,” the Social Affairs and Health Ministry said.

To asses the effect of a basic income, the participants will be held up against a control group, the ministry said. The target group won’t include people receiving old-age pension benefits or students. The level of the lowest basic income to be tested will correspond with the level of labor market subsidy and basic daily allowance. The idea of a basic income, or paying everyone a stipend, has gained traction in recent years. It was rejected in a referendum in Switzerland as recently as June, where the suggested amount was 2,500 francs ($2,587) for an adult and a quarter of that sum for a child. It has also drawn interest in Canada and the Netherlands. Finnish authorities were clear on one thing as they embark on their study: “An experiment means that, at this point, basic income will not be paid to the whole population.”

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Whatever the US do, Greece will follow. Unless Berlin decides against it.

Greece Grapples With More ‘Fugitives’, Seeks To Avoid Tensions With Ankara (K.)

As Greece struggles to strike a balance between international law and Turkey’s demand for the extradition of eight Turkish officers, it was confronted with a fresh challenge this week after seven civilians from the neighboring country arrived in Alexandroupoli and Rhodes late Wednesday and are expected to request asylum. The new arrivals have been charged with illegally entering Greece. According to officials, they include a couple, both university professors, and their two children, who arrived in Alexandroupoli, reportedly via the northeastern border, possibly crossing the Evros River by boat. All four were said to be holding Turkish passports, though only the man’s is valid.

The other three individuals – of whom only one has a valid passport – said they are businessmen, but it was not clear how they made it to the southeastern Aegean island. One of the passports has been listed as stolen by Interpol. Initial reports suggested they are possibly supporters of the self-exiled cleric Fethullah Gulen, whom Turkey claims orchestrated the failed coup attempt in July. Their case is set to put yet more strain on already tense relations between the traditional rivals after eight Turkish officers fled to Greece in the aftermath of the attempted coup. Ankara has demanded their immediate extradition to stand trial as “traitors” and coup plotters. Greece has said the decision will lie with its independent court.

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Mar 232016
 
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Jack Delano Atchison, Topeka and Santa Fe, Sibley, Missouri 1943


Bank Earnings Get Mauled by “Leveraged Loan” Time Bomb (WS)
Former Stock Darlings Japan, Europe Rebuked as Stimulus Gets Costly (BBG)
Technical Analysts Warn This Stock Rally Is Not Going to Last (BBG)
London House Prices Rose Almost £500 A Day In January (Guardian)
Property Bubble Ghost Haunts Central Bankers Trying to Boost Prices (BBG)
US Mining Losses Last Year Wipe Out Profits From Past Eight Years (WSJ)
Mounting Debts Derail China Plans To Cut Steel, Coal Glut (Reuters)
China May Adopt Tobin Tax on Short-Term Capital Flows (BBG)
Trade Deficits Come Due Someday (BBG)
Michael Hudson On Killing The Host (NC)
What Happens When The US Dollar Is No Longer A Hedge Fund Hotel? (BBG)
French Central Banker Wants Eurozone Finance Minister With Sweeping Powers (FT)
It’s Not Going To End Well BUT Central Banks Have Plenty Of Ammo Left (Faber)
Plant-Growing Season In UK Now A Month Longer Than In 1990 (Guardian)
A Violent Coming-of-Age For Europe (Papachelas)
NGOs Withdraw As Greece Refugee Camps Turn Into Detention Centers (Kath.)
UN Slams Refugee ‘Detention Facilities’ In Greece (AFP)

From junk bonds to junk loans.

Bank Earnings Get Mauled by “Leveraged Loan” Time Bomb (WS)

Banks have a few, let’s say, issues, among them: a source of big-fat investment banking fees is collapsing before their very eyes. S&P Capital IQ reported today that there was an improvement in the “distress ratio” of junk bonds, after nearly a year of brutal deterioration that had pushed it beyond where it had been right after Lehman’s bankruptcy. The recent surge in oil prices seems to have lifted all boats for a brief period. But not “leveraged loans.” Their distress ratio spiked to the highest levels since the Financial Crisis! Leveraged loans are the loan-equivalent to junk bonds. They’re issued by junk-rated companies to fund M&A, special dividends to the private equity firms that own the companies, or other “general corporate purposes.” They form an $800-billion market and trade like securities.

But the SEC, which regulates securities, considers them “loans” and doesn’t regulate them. No one regulates them. This gives banks a lot of leeway. But they’re too risky for banks to keep on their balance sheet. Instead, they sell them to loan mutual funds or ETFs, or they slice and dice them and repackage them into Collateralized Loan Obligations (CLO) to sell them to institutional investors, such as mutual-fund companies. Regulators have been exhorting banks to back off. Banks can get stuck with them when markets get woozy just when the loans blow up, as they did during the Financial Crisis – or as they’re doing right now…. The S&P/LSTA Leveraged Loan Index Distress Ratio for February spiked to 12.96 from 11.13 in January, from 9.07 in December, from 7.77 in November… from 1.06 just last June!

It was the highest level since February 2010, when distress was on the way down from the Financial Crisis. It’s where it had been in June 2008, when distress was blowing out as the Financial Crisis was cracking the slick veneer of the banks. Lehman went bankrupt in September 2008. By December, the distress ratio had reached a catastrophic 79.8. This chart, based on data from S&P Capital IQ, shows that before the Financial Crisis, as the bubble was reaching its final stages, the distress ratio was near zero! This happened again in 2014. Even in 2015, leveraged loans held up well, as junk bonds were already falling apart. The happy times lasted till July, when the distress ratio began to spike relentlessly:

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Extend and pretend.

Former Stock Darlings Japan, Europe Rebuked as Stimulus Gets Costly (BBG)

Japan and Europe, former darlings of stock investors, are now bottom of the heap. The Topix index lost 13% from the start of the year through last week and foreign investors have yanked $10.7 billion out of Japanese equities. The world’s worst-performing developed markets are found in Tokyo and across Europe, where a regional benchmark gauge lost 6.8% and strategists expect shares to tread water for the rest of 2016. For Tatsushi Maeno at Pinebridge Investments Japan, it’s no coincidence that those are the two regions where central banks have established negative interest rates. “The feeling is that we can’t ride our hopes on the monetary easing policies of the European Central Bank and the Bank of Japan any more,” Maeno said.

“They want to continue with negative interest rates, but there’s push back. They want additional easing, but we’re beginning to see the limits to that too.” As company profits decline and the yen and euro strengthen, investors are questioning the effectiveness of the stimulus that’s underpinned Japanese and European equities since 2012. In contrast, the easing is working elsewhere around the world, including emerging markets where equities are staging a 20% rally and as shares in the U.S. have erased losses for the year. The moves so far this year are a stark reversal of 2015’s investment trends, which saw shares in Japan and Europe rise 9.9% and 6.8%, respectively, while global equities fell 4.3% and emerging markets tumbled 17%. Bank of America’s monthly survey of fund managers consistently showed Europe and Japan as one of the most preferred markets throughout last year.

The latest example of diverging reactions to stimulus was on display this month, when the ECB’s decision to cut all three key rates and boost bond buying did little to spur a strong rebound. In Japan, Bank of Japan Governor Haruhiko Kuroda’s suggestion on Wednesday that he could cut interest rates to as low as 0.5% sent the nation’s banks and insurers tumbling, which weighed on the overall market. “Equities cannot really rally on monetary stimulus anymore,” Stephen Jen of SLJ Macro Partners and a former IMF economist, wrote in an e-mail. “As long as the earnings outlook continue to deteriorate, the basis for additional multiples expansion is not compelling.”

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“..the S&P 500 has reached its most overbought position since 2009..”

Technical Analysts Warn This Stock Rally Is Not Going to Last (BBG)

U.S. stocks are up a stunning 12% from their February depths, yet plenty of doubts persist about the strength of the recent rally. Some have attributed the recent increase to a need by investors to buy equities to cover so-called short positions. Others have warned that corporate buybacks have pushed the market to unsustainable price levels. Meanwhile, technical analysts who look at charts to divine the direction of stocks have joined the doubters; some are urging clients to proceed with caution when it comes to U.S. equities. Analysts at Bespoke Investment Group noted that while the latest rally has pushed more than 93% of stocks in the S&P 500-stock index above their 50-day moving averages—which smooths out price moves over the past 50 days—there may yet be cause for concern.

The strongest moving average reading since the start of the bull market in 2009 is not necessarily a bullish sign for markets, they warned, as it could indicate that stocks have surged past fair value. “In the coming weeks we expect this breadth measure to cool off a bit as the market works off extreme overbought measures. If you’ve been waiting to buy and haven’t yet, it’s best to wait for a pullback at this point,” Bespoke analysts wrote in a note. Still, Bespoke is far from bearish. The research firm points out that greater breadth is positive for the market’s strength over a longer-term time frame. “Strong breadth is a sign that all stocks are participating instead of just a few,” the team said. “This action is the complete opposite of the weak breadth we saw in the early part of last year when the S&P 500 was making new highs but fewer stocks were doing the same. Eventually, we saw a significant correction later in the year.”

Technical Analysts at UBS AG seem far less optimistic. “With the rally of the last few weeks and looking at our daily trend work, the S&P 500 has reached its most overbought position since 2009!!” wrote analysts Michael Riesner and Marc Muller, with added grammatical emphasis. “We see the market vulnerable for a significant reversal this week, which we would see as the beginning of a tactical top building process and subsequent correction into deeper [second quarter]. We reiterate … [that we] would not chase the market on current elevated levels.” They recommend that investors sell now, rather than await further price increases.

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Be afraid.

London House Prices Rose Almost £500 A Day In January (Guardian)

London house prices increased by almost £500 a day in January, according to government figures that provide fresh evidence of a “two-speed” property market. The latest data from the Office for National Statistics (ONS) reveals that while London and the south-east are powering ahead with double-digit annual growth rates, the property markets in Wales, Scotland and Northern Ireland appear to have stuttered to a halt. Overall, the average price of a UK home had just under £4,000 added to its value during January, lifting the typical figure to £291,504. This is almost £40,000 higher than the figure of £251,935 recorded two years earlier, in January 2014. The average London house price hit a record £551,000, said the ONS. This was £15,000 up on December’s figure of £536,000 and translates into an increase of £484 a day.

Annual house price growth in the south-east, London and the east of England is running at 11.7%, 10.8% and 9.8% respectively. By contrast, prices fell in Wales over the same period – by 0.3% – and notched up rises of just 0.1% in Scotland, 0.8% in Northern Ireland and 0.9% in north-east England. The strong price growth in the south-east may reflect the fact that growing numbers of homeowners in the capital are cashing in on London’s turbo-charged performance and buying properties in commuter belt towns and cities. Jonathan Hopper, the managing director of Garrington Property Finders, said that “seldom has the gulf between Britain’s two-speed property market been so stark”. However, he added that it was likely that the numbers were given a boost by a last-minute “stamp duty stampede”, as buy-to-let investors rushed to complete purchases before April’s 3% hike in stamp duty.

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You can’t taper a Ponzi.

Property Bubble Ghost Haunts Central Bankers Trying to Boost Prices (BBG)

The property market is an animal almost every central banker is worried about and hardly anyone can control. As the Federal Reserve downshifts into go-slow mode while the ECB and other monetary authorities ease, expect to hear a lot of concern about property prices. Here’s the dilemma: How do you cut rates to goose too-low inflation and support growth without lighting a fuse under real estate? The U.S. is still feeling the consequences of a housing-market collapse that is widely blamed for triggering the Great Recession. The world’s largest economy stopped contracting in the second quarter of 2009, but house prices continued to fall over the next three years.

While property costs since then have risen at a faster annual pace than an aggregate of 23 countries tracked by the Dallas Fed, prices are still 3.8% below their peak. Since the global property market bottomed out at the start of 2012, house prices have risen most in New Zealand, Australia and South Africa. Increases of more than 30% in the three countries compare with an average gain of 11% in the sample. Prices are still declining in some of Europe’s largest economies. One exception is Germany, where property costs have surged more than 17% after prices slid for a decade and a half starting in the mid 1990s.

Central bankers want to see their low rates transmit into economic activity. Prices and transactions in real-estate markets can serve as indicators for buyers’ confidence in the economy, the strength of the labor market and spending prospects.
Too much froth in property markets can also be an obstacle to cutting rates further.

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“..a collective $227 billion after-tax loss last year..”

US Mining Losses Last Year Wipe Out Profits From Past Eight Years (WSJ)

The U.S. mining industry—a sector that includes oil drillers—lost more money last year than it made in the previous eight. Mining corporations with assets of $50 million or more recorded a collective $227 billion after-tax loss last year, according to Commerce Department data released Monday. That loss essentially wipes out all the profits the industry had made since 2007. A crash in oil prices last year caused significant losses for what had been an upstart domestic energy industry propelled by petroleum reserves accessed via fracking. Crude oil prices fell from above $100 a barrel in the middle of 2014 to less than $40 by the end of last year.

That meant many of those new wells were suddenly operating at a loss. What’s more, other types of mining operations were stung by falling commodity prices tied to weak demand from China and other parts of the globe. Mining revenues also fell sharply, down 38% in the fourth quarter from a year earlier. A faltering global economy also stung the manufacturing sector, though the industry remained profitable. The sector recorded a $510 billion annual profit, down from $609 billion in 2014. But manufacturing revenue declined 7.8% in the fourth quarter from a year earlier. Falling revenues suggest weaker global demand for U.S.-made goods. That’s likely a symptom of a stronger dollar making American products relatively more expensive overseas.

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Not good. Too much debt to lay off workers. Or dispose of bad loans.

Mounting Debts Derail China Plans To Cut Steel, Coal Glut (Reuters)

China’s campaign to slim down its bloated industries could be derailed by more than $1.5 trillion of debt in its steel, coal, cement and non-ferrous metal sectors, which threatens to overwhelm local banks. Tackling industrial overcapacity has become a priority for Beijing to make its slowing economy more efficient and address a supply glut that has hammered coal and steel prices. China is providing more than 100 billion yuan ($15 billion) in the next two years to handle layoffs from coal and steel, but that will only be made available once debts have been settled. Critics say there is no clear mechanism for tackling the debt burden, which will put huge strain on the weakest sections of the banking sector. The debt figures, revealed in papers submitted to China’s parliament this month, highlight the dilemma facing state firms grappling with surplus capacity and how difficult it will be to pull off this central plank of Beijing’s economic reform plans.

Costs for the estimated 1.3 million coal-sector layoffs alone are as much as 195 billion yuan, and coal industry delegates attending parliament urged government to provide more support to deal with the mounting debts of hundreds of stricken “zombie” firms. The four sectors targeted in the battle against overcapacity owe around 10.2 trillion yuan ($1.56 trillion), according to documents submitted to parliament by Wang Mingsheng, head of coal firm Huaibei Mining. China’s statistics bureau puts coal and steel debts alone at 8 trillion yuan, of which about a third is bank debt. If 20% of that were to go bad in 2016, which industry analysts say is not unrealistic, it would raise Chinese banks’ non-performing loans by nearly half. Bankers say city and regional banks set up by party or provincial government officials are most exposed, and that official NPLs, which already doubled last year, underestimate the scale of their problem lending.

“China needs to set up a new organization, a special bank just to take over these debts in order to avoid the local banks going bankrupt,” said steel industry consultant Xu Zhongbo. China’s banking regulator didn’t return a request for comment, though earlier in March sent notices to joint-stock banks and city commercial lenders to boost risk assessment and collateral valuations to control exposure to industries suffering overcapacity. A lawyer who handles steel industry non-performing loans for mid-sized Chinese banks said: “Banks’ fear is not without reason. The steel sector’s continued slump increases the difficulty of disposing of outstanding non-performing loans.”

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It doesn’t matter what Beijing tries anymore, money will find a way to flow out.

China May Adopt Tobin Tax on Short-Term Capital Flows (BBG)

China may impose a tax on currency trading to manage short-term cross-border capital flows as the U.S. Federal Reserve raises interest rates, the country’s foreign-exchange regulator said Tuesday. Interest rate hikes by the Fed will spur capital outflows and add pressure on yuan management, Wang Yungui, a director with the State Administration of Foreign Exchange’s General Affairs Department, told a news briefing in Beijing. A levy on trading is one of several tools under consideration to cope with the situation, Wang said. China’s central bank has drafted rules for a tax on foreign-exchange transactions that would help curb currency speculation, people with knowledge of the matter have said.

UBS has said a so-called Tobin tax would be a step back for China’s credibility on currency management, while Citi Private Bank said the proposal was “short-sighted” and would drive away foreign investors. Imposing a levy on foreign-exchange trading would be one of the most extreme steps yet by policy makers to prevent speculative bets against the Chinese currency, after state-run banks intervened repeatedly to prop up the yuan and the government intensified a crackdown on capital outflows. People’s Bank of China Deputy Governor Yi Gang said Saturday the tax is currently an academic subject. While SAFE last week said capital outflows have eased significantly, China is still grappling with economic data pointing to a deepening slowdown. Exports slumped 25% in February from a year earlier and the trade surplus almost halved from January’s level, making a case against yuan gains.

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Ain’t that the truth: “..at some point, someone is going to decide to use the dollar-valued asset to get something of real, usable value. And where do you spend dollars? In the U.S.”

Trade Deficits Come Due Someday (BBG)

In a recent interview on the EconTalk podcast, Massachusetts Institute of Technology economist David Autor said that a trade deficit represents a loan that has to be paid back. This is an important issue, since the U.S. has run a large trade deficit for several decades now. I was happy to hear someone talk about this fact, which is rarely acknowledged. But not everyone was pleased. When I repeated Autor’s statement, Dan Ikenson, director of the Herbert A. Steifel Center for Trade Policy Studies at the Cato Institute, said that I don’t understand how trade works, and that a trade deficit isn’t a loan. Ikenson is wrong, and this provides an important opportunity to explain how trade deficits work.

Suppose there are two countries, Germany and the U.S. And suppose that one fine day, Germany gives the U.S. a car. But Germany isn’t running a charity; it doesn’t just go around handing out cars – the U.S. has to give something in return. If the U.S. gets the car from Germany for free, it’s called aid, not trade. So what does the U.S. give Germany in exchange? It could send over a real, usable good or service – some bushels of corn, perhaps, or some copies of Windows 10. If the U.S. gives corn and software equal to the value of the car, that’s called balanced trade. Alternatively, if the U.S. doesn’t feel like growing any corn or writing any software today, it could write Germany an IOU. The U.S. could pay for the car not with corn or software, but with dollar bills.

The Germans might then use the dollar bills to buy some long-term American financial asset, such as a U.S. Treasury bond or some shares of Apple stock. In this case, we say that the U.S. ran a trade deficit with Germany, because it got something of real value from Germany (a car), while all Germany got in return was a slip of paper. But at some point, Germany is going to want to exchange its slip of paper for something of real value – something some German person can use and enjoy. Whoever in Germany is holding onto the American financial asset can’t use it within his or her own country – Germany uses euros, not dollars! He or she could sell the dollar-valued asset to another German for a euro-valued asset, but that just delays the issue – at some point, someone is going to decide to use the dollar-valued asset to get something of real, usable value. And where do you spend dollars? In the U.S.

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“..finance and property ownership claims are not “factors of production.” They are external to the production process. But they extract income from the “real” economy.”

Michael Hudson On Killing The Host (NC)

The financial sector today is decoupled from industrialization. Its main interface with industry is to provide credit to corporate raiders. Their objective isasset stripping, They use earnings to repay financial backers (usually junk-bond holders), not to increase production. The effect is to suck income from the company and from the economy to pay financial elites. These elites play the role today that landlords played under feudalism. They levy interest and financial fees that are like a tax, to support what the classical economists called “unproductive activity.” That is what I mean by “parasitic.” If loans are not used to finance production and increase the economic surplus, then interest has to be paid out of other income. It is what economists call a zero-sum activity.

Such interest is a “transfer payment,” because it that does not play a directly productive function. Credit may be a precondition for production to take place, but it is not a factor of production as such. The situation is most notorious in the international sphere, especially in loans to governments that already are running trade and balance-of-payments deficits. Power tends to pass into the hands of lenders, so they lose control – and become less democratic. To return to my use of the word parasite, any exploitation or “free lunch” implies a host. In this respect finance is a form of war, domestically as well as internationally. At least in nature, “smart” parasites may perform helpful functions, such as helping their host find food. But as the host weakens, the parasite lays eggs, which hatch and devour thehost, killing it.

That is what predatory finance is doing to today’s economies. It’s stripping assets, not permitting growth or even letting the economy replenish itself. The most important aspect of parasitism that I emphasize is the need of parasites to control the host’s brain. In nature, a parasite first dulls the host’s awareness that it is being attacked. Then, the free luncher produces enzymes that control the host’s brain and make it think that it should protect the parasite – that the outsider is part of its own body, even like a baby to be specially protected. The financial sector does something similar by pretending to be part of the industrial production-and-consumption economy.

The National Income and Product Accounts treat the interest, profits and other revenue that Wall Street extracts – along with that of the rentier sectors it backs (real estate landlordship, natural resource extraction and monopolies) – as if these activities add to GDP. The reality is that they are a subtrahend, a transfer payment from the “real” economy to the Finance, Insurance and Real Estate Sector. I therefore focus on this FIRE sector as the main form of economic overhead that financialized economies have to carry. What this means in the most general economic terms is that finance and property ownership claims are not “factors of production.” They are external to the production process. But they extract income from the “real” economy.

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Any USD downturn is temporary.

What Happens When The US Dollar Is No Longer A Hedge Fund Hotel? (BBG)

In the wake of last week’s dovish decision from the Federal Reserve, investors have been throwing in the towel on the U.S. dollar. But Bank of America Merrill Lynch’s proprietary positioning data suggests there’s still another major shoe to drop for the greenback. In a note to clients, FX Strategists Myria Kyriacou and Athanasios Vamvakidis illustrate that hedge funds’ long position in the U.S. dollar remains substantial relative to the past 12 months and to other investors. “Real money is now short USD for the year, but hedge funds remain long, pointing to risks for a further squeeze USD lower,” they conclude. Real money, in this case, refers to pension funds, real estate investment trusts, smaller asset managers, and the like.

The strategists note that these parties often use foreign exchange positions to carry out trades in equities or debt, and therefore they may not be expressing a view on the currency itself. However, the positioning of this ‘real money’ does imply something about the appetite for assets denominated in U.S. dollars, an important factor for the currency. During an interview on Bloomberg TV, Vamvakidis said that any advances in the U.S. dollar going forward, both against other developed market currencies and their emerging market peers, would not be broad based. “We’re not going to see an overall strengthening trend of the dollar across the board,” he said. “We do expect the dollar to be stronger against the euro, not against the yen.”

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Centralization is the biggest threat to the EU and the eurozone.

French Central Banker Wants Eurozone Finance Minister With Sweeping Powers (FT)

France’s central bank governor has attacked the country’s government over its botched attempt to overhaul its labour markets, saying President François Hollande’s backtracking on vital measures has threatened growth. François Villeroy de Galhau, who succeeded Christian Noyer at the Banque de France last November, said officials across the eurozone needed to build trust by passing much-needed economic reforms. More trust between Germany and other member states would pave the way for the economic integration that he said was essential to improve the region’s longer-term economic prospects. Mr Villeroy de Galhau said the nascent recovery in the French economy, the second largest in the eurozone, was partly down to previous pro-business measures, such as €40bn in tax credits, introduced by Mr Hollande two years ago.

But a retreat by the French president, triggered by union opposition and student protests, had undermined businesses’ faith. “Confidence is a key issue for entrepreneurs,” Mr Villeroy de Galhau said in the palatial surroundings of the Banque de France’s headquarters in central Paris. “This question is very often raised: how can we better translate the favourable economic conditions created by the ECB’s monetary policy and low oil prices into a sustainable recovery? The key for that is investment, especially corporate investment, and the key for corporate investment is confidence. The method used for this labour market law didn’t help confidence.” Describing France’s labour market, he said: “The status quo is not an option.”

The reproach directed at Mr Hollande, who picked Mr Villeroy de Galhau for the Banque de France’s top job, comes as the president is battling unions and his own majority over a bill that hands companies more power to negotiate longer working hours with employees and facilitate lay-offs. Mr Villeroy de Galhau, a former banker at BNP Paribas, is more in line with Mr Hollande when it comes to eurozone integration. He is pushing for the creation of a eurozone finance ministry with sweeping powers to exert control on fiscal spending and “sanction” countries that refuse structural reforms.

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Helicopter money will not be accepted in quite a few economies.

It’s Not Going To End Well BUT Central Banks Have Plenty Of Ammo Left (Faber)

The magicians at central banks, they always come out with a new trick and these negative interest rates that we have today, this is for the first time in recorded human history from the times of Babylon up to today that we have negative interest rates, and it’s not going to end well. That, I can tell you. But the sequence of how it will not end well, I’m not so sure. But they still have a lot of ammunition. What they can do is helicopter money. In other words, they can send you and Mr. Bloomberg and me and everybody, say a check for $10,000, and that is like throwing gasoline into a fire…. will it help the economy? That is the question. It won’t help in the long run. You cannot grow an economy by just throwing money at people.

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That’s crazy.

Plant-Growing Season In UK Now A Month Longer Than In 1990 (Guardian)

The growing season for plants has become a month longer than it was a few decades ago, Met Office figures show. In the last 10 years, the growing season, measured according to the central England temperature daily record, which stretches back hundreds of years, has been on average 29 days longer than in the period 1961-1990, the data show. And while more of the year is warm enough for plants to grow, there has also been a decline in the number of frosty days in recent decades, the Met Office said. Between 2006 and 2015, the plant growing season, which begins and ends with periods of consecutive days where daily temperatures average more than 5C (41F) and is without any five-day spells of temperatures below 5C, averaged 280 days.

Figures also reveal that six of the 10 longest growing seasons have occurred in the last 30 years, with 2014 topping the list at 336 days, or about 11 months of the year, while 2015 was 10th, with 303 days – about 10 months. Only three of the 10 shortest growing seasons have taken place in the last century – in 1979, 1941 and 1922 – while the years with the shortest season were in 1782 and 1859, at just 181 days. Mark McCarthy, manager of the Met Office’s national climate information centre, said: “Between 1861 and 1890, the average growing season by this measure was 244 days, and measuring the same period a century later, the average growing season had extended by just over a week. For the most recent 10 years, between 2006 and 2015, the average growing season has been 29 days longer at 280 days, when compared with the period between 1961 and 1990.”

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Nice try, but I think Europe has a lot more, and deeper problems. The deepest of all is that it has no heart and no soul.

A Violent Coming-of-Age For Europe (Papachelas)

The most serious problem right now is that the West appears helpless in the face of major threats and challenges. Not that it is about to come tumbling down like a paper tower. The continent has been through too much for a hasty futurologist to discard it. But Europe does face two crucial issues: the flows of refugees and migrants and Islamic extremism. Large movements of populations are a recurring phenomenon throughout history. It’s hard to stop them. Europe is currently trying to do this through NATO and the closing of borders. NATO, however, is operating more along the lines of a think tank, as opposed to a military alliance. The alliance’s frigates may be state-of-the-art and look very threatening, but in reality they do not have the authority to halt a boat carrying refugees or migrants.

This is becoming evident to the rest of the world and paints a picture of weakness. The same is true of terrorism. Every time a terrorist attack occurs, the streets of Brussels are flooded by military vehicles and armed commandos. So what? They might offer a sense of security to passers-by or tourists visiting the city, but they are clearly not capable of deterring terrorists attacks. Watching footage of soldiers walking the streets, while we know that they merely give the impression of safety, is like watching a tragicomedy. Europe became very spoilt over the last decades. The Cold War brought the continent under the safety umbrella of the US. European governments, with very few exceptions, did not have to deal with security concerns.

They felt they could go on living the good life, which they became accustomed to after WWII, without spending energy, time and money on security issues. They are now realizing that the American umbrella no longer provides the continent with a shield and that, at the same time, the world has suddenly become far more dangerous and unpredictable. Europe has been coming of age in a violent way in the last few years. There’s another thing. Europe cannot handle both the refugee crisis and terrorism as it gradually enters a period of cold war conflict with Russia. This is a recipe for disaster for both Russian and European interests. Europe and Russia are natural allies in the war against terrorism and should work together to rebuild the broken puzzle in the Middle East.

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You lock ’em up? Tsipras should have said no to this.

NGOs Withdraw As Greece Refugee Camps Turn Into Detention Centers (Kath.)

Staff from non-governmental organizations were being withdrawn from the Idomeni refugee camp in northern Greece on Tuesday as the UN Refugee Agency (UNHCR) also said it would be taking a less active role in providing assistance on the Greek islands in the wake of the European Union’s agreement with Turkey. NGOs began withdrawing their personnel from Idomeni due to rising tension at the camp, where refugees had been protesting since the morning about not being able to continue their journey north. The aid organizations deemed that they would not be able to continue their work in the current circumstances. Their withdrawal came as the UNHCR also distanced itself from the deal to return refugees to Turkey, which has led to the agency scaling down its operations in places such as Lesvos. “Under the new provisions, these so-called hot spots have now become detention centers,” said UNHCR spokewoman Melissa Fleming.

“Accordingly, and in line with UNHCR policy of opposing mandatory detention, we have suspended some of our activities at all closed centers on the island.” Until Sunday, refugees arriving on Lesvos had been free to leave the Moria hot spot and continue their journeys but under the terms of the agreement with Turkey, Greek authorities now have to hold them there or at one of four other centers set up on the Aegean islands of Samos, Chios, Leros and Kos, pending the outcome of their asylum applications. The returns are due to begin on April 4. Part of the process involves Greece and Turkey exchanging police officials who will monitor the process. Six Turkish policemen have already arrived on Lesvos, while two Greek officers traveled to Cesme yesterday. Another four will follow. Also yesterday, Greece’s public broadcaster ERT began news bulletins in Arabic aimed at keeping refugees informed about developments.

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Europe is busy creating an ever bigger mess.

UN Slams Refugee ‘Detention Facilities’ In Greece (AFP)

The UN refugee agency on Tuesday harshly criticised an EU-Turkey deal on curbing the influx of migrants to Greece, saying reception centres had become “detention facilities”, and suspended some activities in the country. “Under the new provisions, these sites have now become detention facilities”, the UNHCR said in a statement. “Accordingly, and in line with our policy on opposing mandatory detention, we have suspended some of our activities at all closed centres on the islands,” it added. The EU and Ankara struck a deal on Friday aiming to cut off the sea crossing from Turkey to the Greek islands that enabled 850,000 people to pour into Europe last year, many of them fleeing the brutal war in Syria. The agreement, under which all migrants landing on the Greek islands face being sent back to Turkey, went into effect early on Sunday.

“UNHCR is not a party to the EU-Turkey deal, nor will we be involved in returns or detention,” the agency said Tuesday, adding though that it would “continue to assist the Greek authorities to develop an adequate reception capacity.” It pointed out that Greece currently “does not have sufficient capacity on the islands for assessing asylum claims, nor the proper conditions to accommodate people decently and safely pending an examination of their cases.” The UN agency said 934 refugees and migrants had landed on Lesbos alone since the accord took effect. “They are being held at a closed registration and temporary accommodation site in Moria on the east of the island,” it said, adding that the 880 others who arrived before Sunday were being hosted separately at the Kara Tepe centre, which is run by the local municipality and “remains an open facility”.

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Mar 142016
 
 March 14, 2016  Posted by at 9:45 am Finance Tagged with: , , , , , , , , ,  2 Responses »
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John M. Fox WCBS studios, 49 East 52nd Street, NYC 1948


Marc Faber: Central Banks Will End Up Buying All Financial Assets (CNBC)
There’s Only One Buyer Keeping the S&P 500’s Bull Market Alive (BBG)
The Central Bankers Are Crazy & Public is Out Of Its Mind (Armstrong)
The Effects of a Month of Negative Rates in Japan (BBG)
Bank Of Japan Scrambles To Find Positives In Negative Rates (Reuters)
There Is A Limit To Draghi’s Negative Interest Rate Madness (Mish)
The European Central Bank Has Lost The Plot On Inflation (FT)
A Thought Experiment On Budget Surpluses (Steve Keen)
Central Banks Beat Bitcoin At Own Game With Rival Supercurrency (AEP)
China Debt Swap Could Leave Banks In Capital Hole (Reuters)
China’s Next Bubble? Iron Ore Surges As Speculators Weigh In (AFP)
China’s Growth Target Is the Next Test for Its Central Bank (BBG)
Goldman: 4 Reasons Why Yuan Will Weaken vs Dollar (CNBC)
Subprime Flashback: Early Defaults Are a Warning Sign for Auto Sales (WSJ)
Key Formula for Oil Executives’ Pay: Drill Baby Drill (WSJ)
Dairy Industry In Race To Ruin (NZH)
Why Monsanto’s GMO Business Isn’t Growing in India (WSJ)
February Breaks Global Temperature Records By ‘Shocking’ Amount (Guardian)
Anti-Refugee And Pro-Refugee Parties Both Win In German Elections (Guardian)
Bulgaria Pushes To Be Part Of EU-Turkey Refugee Deal (AFP)

Don’t know that you would call this socialism, but with the limits to negative rates, it sounds plausible.

Marc Faber: Central Banks Will End Up Buying All Financial Assets (CNBC)

Central banks around the globe are pursuing strategies that will put all financial assets into government hands, perma-bear Marc Faber, told CNBC’s Squawk Box. He also took the opportunity to endorse Donald Trump’s bid for the U.S. presidency. Faber said central bank policies are essentially monetizing debt, particularly in Japan, where he claims the Bank of Japan is buying all the government bonds the treasury is issuing. He expects that asset buying by global central banks will only increase, even though he believes those policies aren’t working to stimulate the economy. “The central banks aren’t interested in what works, they’re interested in their own prestige. And they are so deep into it already and it didn’t work. They will increase the medicine,” said Faber, the publisher of The Gloom, Boom & Doom Report.

“Eventually, they’ll buy all the government bonds; they’ll buy all the corporate bonds, all the shares outstanding. Afterwards the housing market goes down, they’ll buy all the homes and then the government will own everything.” That’s the road to socialism, he said. “I could see a situation where at the end the government owns all the corporations and all the government bonds and then we are back into socialism, into a planning economy,” said Faber. To be sure, the Bank of Japan does not buy Japan government bonds (JGBs) directly from the treasury; it only purchases them in the open market. Since some entities, such as banks and insurers, are required to hold JGBs in their reserves, the BOJ is unlikely to acquire all of the bonds outstanding. The BOJ does, however, use its quantitative easing program to purchase select exchange traded funds (ETFs) in the open market.

The U.S. Federal Reserve began tapering its quantitative easing program in 2013 and officially ended it in late 2014. But last week, the ECB announced further easing measures, including expanding the size of its bond-buying program to 80 billion euros ($89.23 billion) worth of assets a month, to include corporate bonds. Faber expects these programs will only expand. “The governments in my view, with their agents the Federal Reserve and other central banks and with the treasury department, they will do anything not to let asset prices go down,” said Faber. “If the stock markets go down, I’m convinced all the central banks will buy stocks. All of them,” he said, noting that this is not without precedent, citing Hong Kong’s purchase of stocks during the Asian Financial Crisis in the late 1990s.

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Beware.

There’s Only One Buyer Keeping the S&P 500’s Bull Market Alive (BBG)

Demand for U.S. shares among companies and individuals is diverging at a rate that may be without precedent, another sign of how crucial buybacks are in propping up the bull market as it enters its eighth year. Standard & Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever. While past deviations haven’t spelled doom for equities, the impact has rarely been as stark as in the last two months, when American shares lurched to the worst start to a year on record as companies stepped away from the market while reporting earnings.

Those results raise another question about the sustainability of repurchases, as profits declined for a third straight quarter, the longest streak in six years. “Anytime when you’re relying solely on one thing to happen to keep the market going is a dangerous situation,” said Andrew Hopkins at Wilmington Trust.. “Over time, you come to the realization, ‘Look, these companies can’t grow. Borrowing money to buy back stocks is going to come to an end.”’

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“I asked John if he slept with Karen and got his admittal!” “I told him, Oh that’s cool, I think it’s probably about time you stopped drinking.”

The Central Bankers Are Crazy & Public is Out Of Its Mind (Armstrong)

The central bankers are simply crazy, not evil. They are trying to steer the economy by utilizing this simpleton theory that if you make something cheaper, someone will buy it. Japanese and German cars managed to get a major foothold in the U.S. because the quality of U.S. manufacturers collapsed, thanks to unions. The socialist battle against corporations forgot something important – the ultimate decision maker is the consumer. The last American car I bought in the 1970s simply caught on fire while parked in my driveway. Another friend bought a brand-new American car and there was a terrible rattle. When they took the door panel off, there was an empty bottle of Coke inside. Cheaper does not always cut it. Gee, shall we cheer if the stock market goes down by 90%? It would be a lot cheaper. Why does the same theory not apply?

Then we have the trading public. If the central bankers have gone crazy with this whole negative interest rate theory, then the public is simply out of their minds. The euro rallied because Draghi cut rates further, extended the stimulus another year, increased the amount by another 33%, and then declared rates would stay there for years to come. And these insane traders cheer. Unbelievable! They are celebrating the public admission of Draghi that all his efforts to date have failed, so let’s do even more of the same. And they love this nonsense? Negative interest rates have become simply a tax on saving money and the stupid traders and media writers love it. The Fed tries to raise rates and they say – NO! This is a stunning combination of admission and stupidity that one would expect from a pretty but clueless girl and her drunk college boyfriend who can’t say no to any girl: “I asked John if he slept with Karen and got his admittal!” “I told him, Oh that’s cool, I think it’s probably about time you stopped drinking.”

All they see is that lower interest rates “should” stimulate but ignore the fact that they never do. They are too stupid to grasp the fact that raising taxes cannot be offset by lower interest rates. People judge everything by the bottom-line and not some crazy theory that’s just stupid. A simple correlation study by a high school student in math class would prove this theory does not correlate to the expected outcome. And we cheer this insanity confirming our own overall stupidity and one is left wondering who is crazier? I suppose it is just that central bankers are crazy and the public, as well as the media, are just out of their minds.

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Bank hits.

The Effects of a Month of Negative Rates in Japan (BBG)

The Bank of Japan shocked markets in January with negative rates. The policy had immediate effects on financial markets, even before it actually started on February 16. Although most analysts don’t expect a change on Tuesday, they are expecting the central bank eventually to cut the rate further. Here’s a look at some effects of negative rates:

About 70% of government bonds have a yield of zero or below, meaning investors are paying to hold the debt. Pushing the yield curve down to make borrowing less costly and to encourage lending is the aim of the new policy, according to Governor Haruhiko Kuroda. However, those actions are hurting the bond market, with 69% of traders in February saying market function has declined compared with three months ago, according to a BOJ survey.

A 10-year, fixed-rate home loan carried a 0.8% rate last week, down from 1.05% before the introduction of the negative rate, according to a speech by Kuroda. Japan’s three biggest banks cut their deposit rate to a record low of 0.001%, meaning you receive 10 yen (9 cents) in income on a deposit of 1 million yen. All 11 companies running money-market funds stopped accepting new investments, citing the BOJ stimulus. They plan to return money to investors, the Nikkei newspaper reported, and money from the funds is moving to deposits, according to analysts at Deutsche Bank. Deposit returns are still positive, if negligible.

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“Bank shares fell sharply.”

Bank Of Japan Scrambles To Find Positives In Negative Rates (Reuters)

Bank of Japan officials have been scurrying to commercial banks to explain and apologize for its surprise adoption of negative interest rates in January, while Prime Minister Shinzo Abe has distanced himself from a decision that is proving unpopular with the public. Some officials close to the premier say it could cause a rift in his once close relationship with BOJ Governor Haruhiko Kuroda, whose radical stimulus measures have so far failed to lift Japan clear of two decades of deflation and stagnation. A government press relations official said there was nothing to add beyond remarks made publicly by Chief Cabinet Secretary Yoshihide Suga that no such rift exists. With the economy shrinking again and prices flat, Abe has already announced he will set up a panel to consider fresh budget spending to provide the stimulus that monetary policy has struggled to achieve.

The controversy over the negative rates move, which unlike his previous eye-catching policy steps was not welcomed by Japan’s stock market, comes even as Kuroda is on the verge of gaining greater control of the bank’s nine-member board. Two skeptics of his stimulus program are stepping down in the coming months. The diminishing returns from his preferred modus operandi of market-shocking measures will leave him little option but to revert to the drip-feed easing he derided in his predecessor Masaaki Shirakawa if inflation fails to pick up, some analysts say. “Given the confusion caused by the January move, I don’t think the BOJ will be able to cut rates again for the time being,” said Hideo Kumano, a former BOJ official who is now chief economist at Dai-ichi Life Research Institute.

“The BOJ may instead expand asset purchases in small installments. That would be returning to the incremental approach of easing Kuroda dismissed in the past as ineffective.” Mandated by Abe to transform the risk-shy BOJ, Kuroda delighted markets and silenced skeptics within the bank by deploying a massive money-printing program, dubbed “quantitative and qualitative easing” (QQE), in April 2013. The Tokyo stock market soared and the yen tumbled, giving exporters a boost, and Japanese growth and inflation registered a pulse. He struck again in October 2014 with a big expansion of QQE, though the market boost was smaller, price rises were already moderating and the economy was taking a step back for every step forward. But the late-January rates decision failed to reverse a rise in risk-aversion that was hitting stocks and forcing up the yen, traditionally a safe haven in times of market stress. Bank shares fell sharply.

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Very clear and simple explanation of what the limits are.

There Is A Limit To Draghi’s Negative Interest Rate Madness (Mish)

On Thursday, ECB president Mario Draghi lowered the deposit rate on money parked at the ECB to -0.4% from -0.3%. Draghi also cut the main refinancing rate by 5 basis points to 0%. How low can he go? Is there a limit? There is indeed a practical limit to negative interest rate madness, and it’s likely we have already hit that limit. Let’s investigate why. All hell would break loose if rates fell lower than -1.0%, and perhaps well before that. This has to do with Euribor. Euribor is the rate offered to prime banks on euro-denominated interbank term loans. It is based on the average interest rates of about 50 European banks that lend and borrow from each other. [..]

How does Euribor place a Limit? Millions of mortgages in Europe are based on Euribor. The vast majority of mortgage rates in Spain and Portugal are based on Euribor. A huge number in Italy are based on Euribor. The typical mortgage loan in many Eurozone countries is Euribor plus 1%age point. For those on 1-month Euribor, the interest banks collect is no longer 1%. Instead, banks collect 0.70%. Servicing fees eat into that profit. If Euribor fell below -1.0% banks would have to pay customers interest on their mortgages rather than collect interest! This has already happened in some instances, primarily related to the Swiss Franc where rates are even lower.

Low rates eat into bank profits. Such concerns place a floor on negative rates. This is why Draghi announced he is finished cutting rates. The practical limit on negative interest rates in Europe may very well be -0.4%, right where we are now. Perhaps Draghi has a buffer of another -0.20% or so, but he is reluctant to use it. If 12-month Euribor rates go any lower, it will affect bank profits on every Euribor-based mortgage loan. Loans based on 1-month and 6-month Euribor are already impacted. Draghi is unable or unwilling to go further down the interest rabbit hole, but there are still lots of rabbit hole possibilities regarding various QE measures. Corporate bonds still offer Draghi wide possibilities for more economic madness.

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“The only reason you would want to make a long-term investment at these rates is that you do not believe in the target.”

The European Central Bank Has Lost The Plot On Inflation (FT)

Better than expected. How often have we heard these three words after a policy decision by the European Central Bank? My advice is to stop reading immediately whenever you see them. After all, what the markets expect to happen is entirely in the control of the ECB. The only thing that matters is the policy decision itself: the extent to which it can help achieve a target in this case an inflation rate of just under 2%. It may have been better than expected. But was it sufficient? The components of the decision an≠nounced on Thursday by Mario Draghi, ECB president, were: cuts in the three official interest rates; an increase in the volume of asset purchases; and more generous terms on targeted longer-term refinancing operations, a liquidity facility for banks pegged to the quantity of loans on their balance sheet.

The deposit rate, at which banks park their reserves at the central bank, is down from -0.3 to -0.4%. Mr Draghi hinted that we should not expect further cuts in that rate. And that line was the really big news of the day. He did not so much cut the rates as end the rate cuts. This is why the euro first fell then rose when investors realised this rate cut was not what it seemed. There is nothing fundamentally wrong with any of the decisions except that the ECB missed a trick. It could have widened the spread between short-term and long-term interest rates or, in financial parlance, it could have steepened the yield curve. One method would have been to make a bigger cut in the deposit rate and a smaller increase in the size of asset purchases. Since asset purchases reduce long-term rates, a small increase in purchases would have reduced them by less.

There are big problems with a flat yield curve. It is a nightmare for the banks because their business consists of turning short-term savings into long-term loans. When long rates are similar to short rates, banks find it hard to make money. They have to find other ways to generate income. Think also about the deeper meaning of a flat yield curve with all interest rates near 0%. Assume you trust Mr Draghi’s commitment to the inflation target. Would you, as a private investor, buy a 10-year corporate bond that yields 0.5%? If inflation really were to reach 2% within two or three years, you would surely make a loss. The only reason you would want to make a long-term investment at these rates is that you do not believe in the target. Long-term rates are low because people believe the ECB has lost the plot on inflation. I, too, believe this.

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Government surpluses kill economies.

A Thought Experiment On Budget Surpluses (Steve Keen)

While conservative parties—like the USA’s Republicans, the UK’s Tories, and Australia’s Liberals,—are more emphatic on this point than their political rivals, there’s little doubt that all major political parties share the belief that the government should aim to have low government debt, to at least balance its budget, and at best to run a surplus. As the UK’s Prime Minister put it in 2013:

“Would you want a government that is not targeting a surplus in the next Parliament, that just said no, we’re going to run overdrafts all the way through the next parliament,” he told BBC political editor Nick Robinson. “I don’t think that would be responsible. So the other parties are going to have to answer this question, ‘Do you think it’s right to have a surplus?’ I do.” (David Cameron: It’s responsible to target budget surplus”, BBC October 1 2013)

So is it “right to run a surplus”? Let’s consider this via a little thought experiment. The numbers are far-fetched, but they’re chosen just to highlight the issue: Imagine an economy with an GDP of $100 per year, where the money supply is just $1—so that $100 of output each year is generated by that $1 changing hands 100 times in a year. And imagine that this country’s government has accumulated debt of $100—giving it a debt to GDP ratio of 100%—and it decides to reduce it by running a surplus that year of 1% of GDP. And imagine that it succeeds in its target. What will this country’s GDP the following year, and what will happen to the government’s debt to GDP ratio? The GDP will be zero, and the government’s debt to GDP ratio will be infinite.

Huh? The outcomes of this policy are the opposite of its intentions: a policy aimed at reducing the government’s debt to GDP ratio increased it dramatically; and what is perceived as “good economic management” actually destroys the economy. What went wrong? The target of running a surplus of 1% of GDP means that the government collects $1 more in taxes than it spends. This $1 surplus of taxation over spending takes all of the money in the economy out of circulation, leaving the population with no money at all. The physical economy is still there, but without money, no-one can buy anything, and the economy collapses. The government can pay its debt down by $1 as planned, but the GDP of the economy is now zero, so the government debt to GDP ratio has gone from $100/$100 or 100%, to $99/$0 or infinity.

As I noted, the numbers are far-fetched, but the principle is correct: a government surplus effectively destroys money. A government surplus, though it might be undertaken with the noble aim of reducing government debt, and the noble intention of helping the economy to grow, will, without countervailing forces from elsewhere in the economy, increase the government’s debt to GDP ratio, and make the economy smaller (if the rate of turnover of money—it’s so-called “velocity of circulation”—is greater than one). This little thought experiment illustrates the logical flaw in the conventional belief that running a government surplus is “good economic management”: it ignores the relationship between government spending and the money supply. Unless the public finds some other way to compensate for the effect of a government surplus on the money supply, the surplus will reduce GDP by more than it reduces government debt.

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Provocative. Let’s see how this unfolds.

Central Banks Beat Bitcoin At Own Game With Rival Supercurrency (AEP)

Computer scientists have devised a digital crypto-currency in league with the Bank of England that could pose a devastating threat to large tranches of the financial industry, and profoundly change the management of monetary policy. The proto-currency known as RSCoin has vastly greater scope than Bitcoin, used for peer-to-peer transactions by libertarians across the world, and beyond the control of any political authority. The purpose would be turned upside down. RSCoin would be a tool of state control, allowing the central bank to keep a tight grip on the money supply and respond to crises. It would erode the exorbitant privilege of commercial banks of creating money out of thin air under a fractional reserve financial system.

“Whoever reacts too slowly to these developments is going to take it on the chin. They will lose their businesses,” said Dr George Danezis, who is working on the design at University College London. “My advice is that companies should play very close attention to what is happening, because this will not go away,” he said. Layers of middlemen in payments systems face a creeping threat across the nexus of commerce, stockbroking, currency trading or derivatives. Many risk extinction over time. “Deep in the markets there are dark pools buying and selling shares, and entities that facilitate that foreign exchange. There are Visa, Master, and PayPal. These are the sorts of guys that we are going to disrupt,” he said. University College drafted the plan after being encouraged by the Bank of England last year to come up with a radical design for a secure digital currency.

The Bank itself has an elite four-man unit grappling with the implications of crypto-currencies and blockchain technology. Central banks at first saw Bitcoin as a rogue currency and a threat to monetary order, but they are starting to glimpse ways of turning the new technology to their advantage. The findings of the University College team were delivered to the Network and Distributed System Security Symposium (NDSS) in San Diego, revealing for the first time what may be in store. Dr Danezis said a national pilot project could be up and running within eighteen months if a decision were made to launch such a scheme. The RSCoin is deemed more likely to gain to mass acceptance than Bitcoin since the ledger would remain exclusively in the hands of the central bank, with the ‘trust’ factor of state authority. It would have the incumbency benefits of an established currency behind it.

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“..any bank that swaps a corporate loan for equity of the equivalent value will need at least four times as much capital for that exposure.”

China Debt Swap Could Leave Banks In Capital Hole (Reuters)

China’s mooted debt-for-equity swap could leave the country’s banks in a capital hole. New rules are being proposed that would allow lenders to exchange bad loans for shares. That could ease pressure on ailing companies. But it would also put pressure on bank capital ratios. In developed economies, it’s not unusual for creditors of troubled companies to accept shares in exchange for loans. In China, however, banks are restricted from investing in non-financial companies, limiting their scope for restructuring ailing borrowers. The regulations being prepared would remove that constraint, Reuters reported on March 10, potentially clearing the way for a wave of debt conversions. Some exchanges are already happening: Huarong Energy, a troubled shipbuilder, announced on March 8 it would give creditors a 60% stake in the company in return for forgiving debt worth $2.2 billion.

Yet while such swaps help overindebted Chinese companies, they are less positive for banks. True, the industry’s reported ratio of non-performing loans – which rose to 1.7% of total lending at the end of 2015 – will fall. But capital requirements will also rise as banks recognize more losses. Under China’s interpretation of international Basel rules, corporate loans typically attract a risk weighting of 100% for capital purposes. But the risk weighting for equity investments is at least 400%, and can be as high as 1250%, according to a 2013 assessment of Chinese regulations by the Bank for International Settlements. In other words, any bank that swaps a corporate loan for equity of the equivalent value will need at least four times as much capital for that exposure.

This calculation also assumes that banks have already written down troubled loans to their correct value. In reality, that’s unlikely to be the case. So-called “special mention” loans, which are wobbly but not yet officially classed as bad, accounted for a further 3.8% of overall lending at the end of last year. The true level of non-performing debt is probably much higher. The result is that any large-scale swap of debt-for-equity in the country will leave lenders short of capital. As the largest shareholder of Chinese banks, the government would have to step in. Though that might be one way to start solving China’s debt problem, other investors in the banks would feel the pain.

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Casino.

China’s Next Bubble? Iron Ore Surges As Speculators Weigh In (AFP)

With a huge global steel glut and slowing demand in China, an enormous recent spike in the price of iron ore has left analysts scratching their heads, with some even claiming a flower show might be to blame. But observers say the extraordinary movements for one of the world’s basic bulk commodities have been fuelled by something far more prosaic than daisies and daffodils – simple speculation. The spot price for iron ore – the key material for steel – jumped 20% on the Dalian Commodity Exchange on Monday. It closed at $57.35 per tonne on Friday, up nearly 33% so far this year. But the vast majority of trades on the exchange do not reflect real-world transactions: the iron ore futures volume on Wednesday alone represented an underlying 978 million tonnes of the commodity – more than China’s entire imports last year.

“Steel prices are in a crazy phase now. Everyone’s emotions are high and pushing up prices is the norm,” Chen Bingkun at Minmetals and Jingyi Futures told AFP. “The price rise is also caused by speculation.” Only part of the real global iron ore trade passes through exchanges such as Dalian or Singapore, the other main hub for derivatives based on the commodity. Instead, the business is dominated by a small group of producers, including Anglo-Australian giants Rio Tinto and BHP Billiton, Brazil’s Vale and Fortescue Metals of Australia. They all compete to sell to steelmakers in China and elsewhere on longer-term contracts, often priced according to indices calculated by specialist trade publications, leaving limited liquidity for the spot market and heightening its volatility.

Chinese analysts and industry officials have cited a mix of factors driving the speculation that fuelled the price surge, including hopes for higher government spending on steel-hungry infrastructure after the economy grew at its slowest pace in a quarter of a century last year. The beginning of warmer weather and the end of the Lunar New Year holiday have restarted construction projects and steel production. Even an upcoming flower show in the Chinese steel hub of Tangshan has been named as a factor, with local steel companies expected to suspend output to ensure blue skies for the event – which could prompt them to step up production before the halt. China produces more steel than the rest of the world combined, and in the long term, cuts of up to 150 million tonnes in its capacity over five years could ultimately support steel prices, although their impact on iron ore costs is less clear.

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“If market participants have been worried about China since June-July 2015, they have not seen the real thing yet.”

China’s Growth Target Is the Next Test for Its Central Bank (BBG)

China’s central bank chief oozed calm in an annual press briefing in Beijing Saturday, supported by weeks of composure in markets as investor anxiety over the nation’s currency policy eased. How long the lull lasts will depend on how policy makers manage a balancing act made tougher by a weaker-than-anticipated start to the year for the world’s No. 2 economy. After People’s Bank of China Governor Zhou Xiaochuan spoke at the country’s annual gathering of the legislature, data showed an “alarming” failure of growth to respond to recent stimulus, Bloomberg Intelligence analysts Tom Orlik and Fielding Chen concluded. The weakening momentum seen in industrial output and retail sales highlight skepticism about the Communist Party’s goal of achieving average growth of at least 6.5% in its five-year plan to 2020.

Gavekal Dragonomics calls the target “incredible.” JPMorgan says a sustainable pace is “much lower” than what officials are targeting for this year. The danger is that to meet the leadership’s objective, which for 2016 is an expansion of 6.5% to 7%, Zhou will need to loosen monetary policy faster and further. That could intensify depreciation pressures on the yuan, which has benefited in recent weeks from a drop in the dollar. Looser monetary policy, along with the expanded fiscal deficit pledged by Premier Li Keqiang’s cabinet, would quicken a buildup of debt that already amounts to almost 2.5 times GDP. “This is a risky target for the next five years as it means the continuation of super-loose monetary and fiscal policy,” said Chen Zhiwu, a finance professor at Yale University, and a former adviser to China’s State Council.

“If market participants have been worried about China since June-July 2015, they have not seen the real thing yet.” The data released Saturday showed industrial production rose 5.4% in the first two months of the year from a year before, the weakest reading since the 2009 global recession. That’s even before policy makers have much to show for a campaign to shut down excess capacity in the unproductive state-owned sector. Retail sales also slowed, while the value of homes soared versus a year ago with property sales in some mid-sized cities doubling. Fixed-asset investment exceeded economists’ estimates. Speaking hours before the data releases, Zhou, 68, warned banks about increased credit risk and rising real estate prices in the biggest cities. He sought to ease concerns over volatility in the stock and currency markets while saying meeting the five-year growth target would not require a big stretch.

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China is going to get called on its illusions.

Goldman: 4 Reasons Why Yuan Will Weaken vs Dollar (CNBC)

The Chinese yuan, the source of much anguish in financial markets from Sao Paulo to Singapore since last summer, is enjoying some respite. The currency, also known as renminbi, is currently trading near its best levels against the dollar this year at 6.5241, having slumped to 6.5800 earlier in 2016. Efforts by Chinese policymakers to shore up confidence in the economy have helped somewhat. Capital outflows, a big factor behind the weakness in the currency and the subsequent depletion of China’s foreign exchange reserves as the People’s Bank of China intervened to prevent the yuan from falling more, also appear to have eased. But Goldman Sachs still expects the currency to weaken to 7 against the greenback by the end of the year and has listed four reasons behind its call. Here they are:

Debt overhang The sharp surge in credit in recent years has led to an accumulation of debt in the economy that will likely imply interest rates will stay lower for longer, Goldman Sachs estimates. The softer monetary policy should add to depreciation pressures on the currency.

Economic slowdown China’s once-runaway export growth has slowed (shipments fell at their fastest pace since 2009 in February) as the currency has appreciated on a trade-weighted basis over many years. Overall economic growth was 6.9% in 2015, sturdy by global standards but the slowest pace in China in 25 years. Policymakers may now have to tweak the currency to counter the slowdown in the economy, Goldman reckons.

Preference for weaker currency According to Goldman Sachs, the managed depreciation of the yuan in December and the early weeks of 2016 suggests “a degree of bias” on the part of the authorities for a weaker currency. Goldman cites a recent interview given by PBOC Governor Zhou Xiaochuan to Caixin magazine, in which Zhou suggested that the current yuan level against the dollar did not represent a “reasonable and balanced” level for the currency.

Policy divergence Goldman’s U.S. team expects the U.S. Federal Reserve to raise interest rates three times this year, while forecasting economic growth to be above the trend level. An increase in U.S. interest rates coupled with a downward trend in Chinese monetary policy will imply outflow pressures and lead to yuan weakness, Goldman says. The trend for further softness in the yuan has raised speculation on policy options for the PBOC, including a one-off devaluation in the yuan or a more steady weakness. Goldman believes the second option is more likely as a chunky one-off devaluation would raise doubts over the credibility of Chinese policymakers and draw political attention at a sensitive time.

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This is going to go so wrong.

Subprime Flashback: Early Defaults Are a Warning Sign for Auto Sales (WSJ)

To understand how far the U.S. auto business has been reaching for new customers, consider the early performance of a bond issue called Skopos Auto Receivables Trust 2015-2. The bonds were built out of subprime auto loans and sold in November. Through February, about 12% of the underlying loans were at least 30 days past due, a third of which were more than 60 days delinquent. In another 2.6% of loans, borrowers had filed for bankruptcy or the vehicles had been repossessed. Those borrowers are at the outer fringe of the auto market. Still, the high level of missed payments for loans made so recently is a warning sign for an industry that needs every customer it can get to keep sales increasing at a record pace.

The early delinquency rates seen in the debt issue from Skopos Financial, a Dallas-based lender that specializes in loans to people with weak or no credit histories, are in line with those for several similar bond deals from other lenders around the same time. About 12% of the loans backing bonds sold in November by Exeter Finance, another Dallas-based subprime lender, were more than 30 days delinquent through February, according to the company. A spokeswoman said delinquency rates came down from the previous month. Loan payments have been slipping as well for the broader group of subprime borrowers who make up a big slice of the auto market. The 60-plus day delinquency rate among subprime car loans that have been packaged into bonds over the past five years climbed to 5.16% in February, according to Fitch Ratings, the highest level in nearly two decades.

The rate of missed payments is higher for loans made in more recent years, a reflection of more liberal credit standards and the larger number of deals from lenders serving less creditworthy customers, according to Standard & Poor’s Ratings Services. Investors are becoming concerned. Flagship Credit Acceptance, another small lender, recently had to offer higher yields than expected to sell bonds backed by subprime auto loans. Flagship declined to comment. “What’s driving record auto sales is not the economy, but record auto lending,” said Ben Weinger, who runs hedge fund 3-Sigma Value LP in New York and who has bearish bets on some auto lenders. He said demand for auto debt has led lenders to systematically loosen underwriting standards, which he predicts will result in higher loan delinquencies.

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Paid to harm your own company. Perfect.

Key Formula for Oil Executives’ Pay: Drill Baby Drill (WSJ)

Markets have been waiting for U.S. energy producers to slash output during a period of depressed crude prices. But these companies have been paying their top executives to keep the oil flowing. Production and reserve growth are big components of the formulas that determine annual bonuses at many U.S. exploration and production companies. That meant energy executives took home tens of millions of dollars in bonuses for drilling in 2014, even though prices had begun to fall sharply in what would be the biggest oil bust in decades. The practice stems from Wall Street’s treatment of such companies’ shares as growth stocks, favoring future prospects over profitability. It has helped drive U.S. energy producers to spend more unearthing oil and gas than they make selling it, energy executives and analysts say.

It has also helped fuel the drilling boom that lifted U.S. oil and natural-gas production 76% and 31%, respectively, from 2009 through 2015, pushing down prices for both commodities. “You want to know why most of the industry outspent cash flow last year trying to grow production?” William Thomas, CEO of EOG Resources, said recently at a Houston conference. “That’s the way they’re paid.” Lately, though, some shareholders are asking companies to reduce connections between pay and production, saying such incentives don’t make sense since abundant supplies have caused commodity prices to crash. Signs that oil production may finally be easing helped push up crude prices Friday to their highest levels of the year. The International Energy Agency said in a monthly report that output in some regions was falling faster than expected and that prices may have “bottomed out.”

A separate report said the number of rigs drilling for oil and natural gas in the U.S. fell to a record low. Still, CEO pay and production are likely to remain a flash point for investors because few wells are profitable even at these higher crude prices. The persistence of U.S. production in the face of such economics has been one of the biggest puzzles in the energy market. Members of the Organization of the Petroleum Exporting Countries have increased production, betting that U.S. energy producers would curtail drilling or be forced out of business. But even as oil prices began their plunge in the second half of 2014, many companies kept drilling.

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New Zealand is so toast. Land prices are doomed, and home prices will follow a swell as corporate defaults.

Dairy Industry In Race To Ruin (NZH)

Imagine being approached with an investment proposal that went something like this: how about you borrow almost $30 billion to invest in something that produces a commodity that swings in price by more than 50% over a two-year cycle? How about you invest in producing that commodity on the idea that demand has moved structurally higher, but pretty much ignores what other suppliers of that commodity might do? You would probably be more than a little sceptical. Yet that was the proposition New Zealand Inc essentially agreed to invest in over the past decade. This is the story of the dairy boom that has now bust, leaving dairy farmers holding debts of more than $40b and producing a commodity that is losing them $1.6b a year. Those debts are worth more than three times the income produced by that land and up from just $11.3b as recently as 2003.

The Reserve Bank has forecast that if this week’s payout cut to $3.90/kg is extended into next season, and then recovers only slowly, then 44% of those loans would be non-performing. That doesn’t necessarily mean the banks would kick 44% of farmers off their land – but it does mean the banks face profit drops. No other business leader in any other industry would borrow three times the income to build a business that produced something they couldn’t control the price of. Robert Muldoon was ridiculed and condemned for borrowing and betting big on a continued high price for oil when he invested in petro-chemical plants at Motonui, Waitara and Kapuni, and indirectly on the Clyde Dam and Tiwai Point expansion. This sort of investment decision makes no sense. Unless, of course, you weren’t actually borrowing the money purely to produce cashflow from the sale of that commodity.

It makes perfect sense if you are borrowing money to push up the value of land, the gains from which are tax-free. Most farmers would vehemently deny they are farming for tax-free capital gains, and most hold their land for multiple decades and often for multiple generations. But it is simply not credible to say that land value is irrelevant in their decision-making. It’s certainly relevant in the decision-making of the banks. Finance Minister Bill English put it best this week when he said it was time for farmers to be more like proper business investors. “This is an industry where they’ve had a focus on growing equity and growing land values for quite a long time now. It’s going to be a significant adjustment to getting back to the core business of effective farming for cash flow. “They are going to see land values drop. That is pretty much certain.”

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“Despite dozens of biotech-food-crop trials in India, the country has approved none for commercial cultivation.”

Why Monsanto’s GMO Business Isn’t Growing in India (WSJ)

Genetically modified organisms, or GMOs, grow in an estimated 97% of India’s cotton fields and have helped India by some measures become the fiber’s top global producer. But after a decade of Monsanto’s efforts with Mahyco to win Indian-government approval for biotech food crops, seeds for plants like Mr. Char’s remain in limbo, stymied by environmentalist opposition, farmer skepticism and bureaucratic inertia. Despite dozens of biotech-food-crop trials in India, the country has approved none for commercial cultivation. “What greater case study in terms of food security than a country that will soon have more people than any other country in the world?” said Robert Fraley, Monsanto’s chief technology officer. “To see a country that has the potential and intellectual ability to be a leader in these biotech advances, to be stymied politically, I think it’s a tragedy.”

India’s Agriculture Minister, Radha Mohan Singh, said the government was waiting for India’s Supreme Court to rule in a case opposing genetically modified food crops before deciding on their commercial cultivation. Meanwhile, Monsanto’s established cotton business in India faces new threats, including new government price controls around seed genetics and an antitrust probe into pricing practices, prompting Monsanto on March 4 to warn that it could withdraw its biotech crop genes from the country. Monsanto’s experience is part of a broader backlash against genetically engineered crops from a mix of environmentalists, consumer groups and nationalism thwarting the technology’s expansion after years of growth. Biotech-crop opponents say they can damage the environment, burden poor farmers with high-price seeds and potentially harm health.

GMO proponents reject such assertions, and the U.S. Food and Drug Administration, World Health Organization and European Commission have concluded GMOs are safe to eat. Yet pushback has swept the world. More than half of European Union countries have moved to bar GMO cultivation. Russia hasn’t approved any biotech crops. China, which allows cultivation of some, isn’t expected to approve new ones soon. In the U.S., where GMO crops are widespread, some food brands are stripping GMOs from their products. The backlash has slowed global-sales growth of genetically modified seeds. Sales grew 4.7% to $21 billion in 2014, compared with 8.7% growth in 2013 and average annual growth of 21% from 2007 through 2012, according to research firm PhillipsMcDougall.

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Looks insane.

February Breaks Global Temperature Records By ‘Shocking’ Amount (Guardian)

Global temperatures in February smashed previous monthly records by an unprecedented amount, according to Nasa data, sparking warnings of a climate emergency. The result was “a true shocker, and yet another reminder of the incessant long-term rise in global temperature resulting from human-produced greenhouse gases”, wrote Jeff Masters and Bob Henson in a blog on the Weather Underground, which analysed the data released on Saturday. It confirms preliminary analysis from earlier in March, indicating the record-breaking temperatures. The global surface temperatures across land and ocean in February were 1.35C warmer than the average temperature for the month, from the baseline period of 1951-1980.

The global record was set just one month earlier, with January already beating the average for that month by 1.15C above the average for the baseline period. Although the temperatures have been spurred on by a very large El Niño in the Pacific Ocean, the temperature smashed records set during the last large El Niño from 1998, which was at least as strong as the current one. The month did not break the record for hottest month, since that is only likely to happen during a northern hemisphere summer, when most of the world’s land mass heats up. “We are in a kind of climate emergency now,” Stefan Rahmstorf, from Germany’s Potsdam Institute of Climate Impact Research and a visiting professorial fellow at the University of New South Wales, told Fairfax Media. “This is really quite stunning … it’s completely unprecedented,” he said.

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Polarization

Anti-Refugee And Pro-Refugee Parties Both Win In German Elections (Guardian)

The anti-refugee party, Alternative für Deutschland (AfD), has shaken up Germany’s political landscape with dramatic gains at regional elections, entering state parliament for the first time in three regions off the back of rising anger with Angela Merkel’s asylum policy. But, in a sign of the increasingly polarised nature of Germany’s political debate, pro-refugee candidates also achieved two resounding victories in the elections – the first to take place in Germany since the chancellor embarked on her flagship open-doors approach to the migration crisis. Merkel’s Christian Democrat party suffered painful defeats to more left-leaning parties in two out of three states, one of them Baden-Württemberg, a region dominated by the CDU since the end of the second world war. News weekly Der Spiegel described the result as a “black Sunday” for the conservatives.

The CDU also failed to oust the incumbent Social Democrats in Rhineland-Palatinate. But it was the breakthrough of the AfD – a party that did not exist a little more than three years ago and last year was on the verge of collapse – that was arguably most striking. In Saxony-Anhalt in the former east Germany, the party with links to the far-right Pegida movement had gained 24.4%, according to initial exit polls, thus becoming the second-biggest party behind the CDU. In both Rhineland-Palatinate and Baden-Württemberg, it appeared to have gained 12% and 15%. Germany’s rightwing upstarts appeared to have benefited from an increased voter turnout across the country. In all three states, the AfD gained most of its votes from people who had not voted before, rather than disillusioned CDU voters. In Saxony-Anhalt, as many as 40% of AfD voters were previously non-voters, while 56% of AfD voters in the state said they had opted for the party because of the refugee crisis, according to one poll.

[..]If the AfD’s strong showing reflected deep hostility to Merkel’s plan, however, other results last night told a different story. [..] The politician who won in Baden-Württemberg’s, Green state premier Winfried Kretschmann, had passionately defended the German chancellor’s open-borders stance, stating in one day that he was “praying every day” for her wellbeing. With a centrist, pro-business party programme that defied orthodox ideas of what an environmental party should stand for, the Green party in Germany’s southwest managed to come top with 30.5% in a state. Remarkably, 30% of voters who had switched from Christian Democrat to Green in the state said they had done so because of the refugee debate. “In Baden-Württemberg we have written history”, Kretschmann told reporters after the first exit polls.

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More closed borders.

Bulgaria Pushes To Be Part Of EU-Turkey Refugee Deal (AFP)

Bulgarian Prime Minister Boyko Borisov pressed on March 12 to have his country’s borders protected as part of a proposed EU-Turkey deal aimed to stop the flow of migrants to Europe. Bulgaria has so far remained on the sidelines of the EU’s worst migration crisis since WWII after it built a 30-kilometre razor wire fence in 2014 and sent 2,000 border police to guard its 260-kilometre (160-mile) border with Turkey. But the EU member fears that it could become a major transit hub after countries along the main western Balkan migrant trail shut their borders this week. All countries on the frontline should be able to rely on support from the EU for protection of the EU’s external borders,” Borisov told visiting Austrian Interior Minister Johanna Mikl-Leitner and Austrian Defense Minister Hans Peter Doskozil in Sofia.

Borisov said he had sent a letter to that effect to EU President Donald Tusk on March 11. “Bulgaria insists that the talks between the EU and Turkey for solving the migration problem should also include Bulgaria’s land borders with Turkey and Greece as well as the Black Sea border between the EU and Turkey,” the letter read. [..] Bulgarian media reported on Saturday that Borisov was ready to block the deal if Turkey only agreed to stop the flow of migrants to the Greek islands in the Aegean Sea. Mikl-Leitner and Doskozil, who were due to visit the Bulgarian-Turkish border later on Saturday, expressed their “full support” for Borisov’s demands. “What applies to Greece also has to apply to Bulgaria,” Doskozil said. Mikl-Leitner meanwhile pledged to host a police conference on border security and human traffickers with the countries along the western Balkan migrant trail, including Germany and Greece.

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Feb 242016
 
 February 24, 2016  Posted by at 9:58 am Finance Tagged with: , , , , , , , ,  7 Responses »
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Gordon Parks Harlem, New York 1943


Fantasy and Magic: A New Central Bank Approach (WSJ)
Draghi Has Two Weeks To Pull Another Rabbit Out Of The Bag (BBG)
Investors Fear Central Bank Policy Errors (FT)
China Adds To The World’s Most Dangerous Debt Pile (BBG)
How Long Before The Cracks Show In China’s Great Currency Wall? (Reuters)
Capital Controls In China A Possibility (CNBC)
World Bank’s Kim Sees Little Chance of G-20 Action (BBG)
Europe’s Banking Model Is Still Broken (BBG)
US Banks To Cut Credit Lines For Energy Firms (Reuters)
Banks Have More to Fear Than Boris (BBG)
The Australian Housing Bubble Is Out Of Control (SMH)
Portugal Adopts Anti-Austerity Budget Despite Concerns (AFP-PTI)
Czech Republic ‘Will Follow Britain Out Of EU’ (Telegraph)
NATO’s New Migrant Mission In The Aegean Is A Victory For Turkey (EI)
Refugee Flows To Europe Already Top 110,000 So Far In 2016 (Reuters)
Italy’s Navy Rescues 700 Refugees From Six Boats, 4 Found Dead (Reuters)
Refugee Pressure Piles Up On Greece (Kath.)
Greek Migration Crisis Enters Worst-Case Scenario (EUO)

Well, new…

Fantasy and Magic: A New Central Bank Approach (WSJ)

“You may call it ‘nonsense’ if you like, but I’ve heard nonsense, compared with which that would be as sensible as a dictionary,” says the Red Queen in “Through The Looking-Glass.” Central banks have gone down the rabbit hole. Starting with record low interest rates, then purchases of government bonds and mortgage bonds, ultra-accommodative policy progressed in Japan to buying real-estate investment trusts and equity funds. With negative rates, central bankers have now managed what was believed all but impossible: breaching the “zero lower bound.” In the looking-glass world of modern central banking, almost nothing is taboo, with even the abolition of cash discussed seriously by top monetary wonks.

One idea not yet considered: the Bank of Japan should print money to buy oil. It sounds beyond nonsense. But with central bankers believing six impossible things before breakfast, it no longer seems inconceivable, which is informative in itself. Consider the BOJ’s problem. The central bank is creating ¥80 trillion ($700 billion) a year to buy mainly government bonds, one of the biggest programs of money printing in history. It already owns almost a third of the bond market, nearly 2% of equities and about half of exchange-traded funds by value. Nonetheless, Japanese inflation remains quiescent. The yen has been strengthening despite the negative rates introduced last month, making it even harder to push prices up toward the BOJ’s 2% target.

There have been hints that the BOJ will do more next month, although Gov. Haruhiko Kuroda on Tuesday cast doubt on whether printing money alone would achieve the goal. The obvious alternative is to take rates much more negative, possibly in conjunction with more asset purchases and higher government spending. Yet, negative rates have unpleasant side-effects, hurting banks, while bond supply may be limited. Nomura estimates that over the next three years only ¥236 trillion of bonds could be available to buy because banks and insurance companies are reluctant to sell many of their holdings—making it hard to ramp up purchases further. HSBC says that in a worst-case scenario the BOJ would have trouble filling its monthly purchases later on this year.

These estimates may be overly pessimistic. If not, the obvious alternative of buying foreign assets is challenging. Direct currency manipulation is a diplomatic no-no nowadays for such a big country as Japan, so buying U.S. Treasurys—similar to Swiss purchases of European bonds—is not realistic. There are more extreme options, such as direct financing of government spending, or abolishing bank notes so interest rates can go deeply negative. None is politically palatable. Compared with these, creating money to buy oil has several big advantages.

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More magic.

Draghi Has Two Weeks To Pull Another Rabbit Out Of The Bag (BBG)

Mario Draghi has two weeks left to decide how to ramp up stimulus in a way that doesn’t upset either his colleagues or investors. When ECB policy makers meet in Frankfurt from March 9-10, they’ll consider whether negative interest rates and 60 billion euros ($67 billion) a month of debt purchases is enough to revive consumer prices. With another rate cut priced in by markets, the biggest question mark hangs over how to customize quantitative easing. The ECB president has said there are no limits to how far policy makers will go within their mandate, yet sub-zero rates carry risks and expanding QE is easier said than done.

He’ll walk a fine line between convincing investors he can overcome the hurdles and avoiding the market disappointment that greeted the last adjustment in December. “It’ll be very challenging” to increase QE, said James Nixon at Oxford Economics, who doesn’t expect such a move just yet. “You’d have to sort of throw the rule book out. It might be quite interesting to see whether Draghi, as he tends to do when he’s confronted by these situations, pulls another rabbit out of the bag.”

[..] To ease the reliance on German debt, the ECB could eliminate the capital key that links buying to economic size. That would allow other countries with more outstanding debt, such as Italy, to buy a greater share. That strategy might make it look like the ECB is supporting nations that pursued riskier fiscal policies. Worse, it could draw accusations of monetary financing, which is banned under European Union law. “They chose the capital key for a reason,” said Peter Schaffrik at Royal Bank of Canada in London. “Do I think it would make sense to change that from a macroeconomic point of view? Absolutely. Do I think that’s the preferred measure and most easily adoptable within the council? I’m not so convinced.”

Allowing central banks to buy other nations’ public debt would also be a hard sell. It’s unlikely a country such as Germany would find it acceptable to buy riskier bonds from elsewhere. “You’ve really got to sort of put that in print, write it down, to realize how completely unworkable politically that would be,” Nixon said. “It’s just a complete non-starter.”

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“..China cannot simultaneously control its currency and its money supply growth and allow free flow of capital…”

Investors Fear Central Bank Policy Errors (FT)

Do investors think central banks can restore calm or is negative rate policy an error? Bear markets thrive on fear and uncertainty. Until a few weeks ago, the list included a hard landing for China, plunging oil prices, problems for European banks and fears that even the US economy was rolling over. Now we worry that central bankers are not just behind the curve, to use that trite phrase, but have lost the plot. What is the current policy framework, let alone its efficacy? The first concern is China’s exchange rate policy; is it simply moving from a fixed dollar peg to a trade weighted basket? Is modest volatility required to justify the renminbi’s membership of the IMF’s SDR, the reserve asset, or a dramatic depreciation to prop up a rapidly slowing economy? The ‘unholy trinity’ remains very clear — that China cannot simultaneously control its currency and its money supply growth and allow free flow of capital.

A second policy error possibly took place when the Bank of Japan unexpectedly adopted negative interest rates, following in the footsteps of several European central banks. Just as with QE, there are several channels through which this new policy tool could affect the real economy. The standard argument is that in a world of low headline inflation the zero bound on nominal yields needs to give way to engineer negative real yields, encourage portfolio rebalancing and discourage savings. There are other rationales, though; the Swiss and Swedish central banks adopted negative rates to dissuade currency inflows which could destabilise their inflation targets. It is vital to recognise what works domestically need not work externally. Each central bank in turn argues that their currency is too high in relation to domestic conditions, and therefore action needs to be taken to make their exchange rate more competitive.

This argument might work in an environment of strong global GDP and trade growth but those days are long past. We are all familiar with the litany of headwinds which have brought global nominal GDP growth to its lowest since 2009. A zero sum game is threatening with no winners from ever more desperate efforts to bring currencies down. Negative rates are an especially large threat to commercial banks because they compress net interest margins and thus remove a key driver of profits. That may matter less in Sweden where banks can benefit from a range of other income sources. Rightly or wrongly, investors have assumed that Japan’s decision is more dangerous. Sure, the BoJ was aware of the risk and crafted a complicated three-tier mechanism, but negative rates were associated with a parallel shift down, rather than a steepening, in the yield curve. Over 70% of the JGB market now has negative yields — about 15% of Japanese bank assets are in bonds and bills. How can this help profits growth?

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This is scary: “..45% of new debt is being used to pay interest on old debt..”

China Adds To The World’s Most Dangerous Debt Pile (BBG)

China has two very good reasons to slow the gusher of cheap money that continues to flood its economy. The first, obviously, is to prevent the kind of financial implosion that’s struck down similarly debt-burdened countries. The second is just as important: to clear out the deadwood in the world’s second-largest economy. For Chinese leaders, the need to prop up faltering GDP growth outweighs fears about a rapid buildup in debt. In January alone, banks made a record $385 billion worth of new loans, more than 70% higher than the year before. Debt now tops 230% of GDP and could reach as high as 300% of GDP if current trends continue. Billionaire investor Bill Gross has joined the chorus of voices calling this trajectory “unsustainable.” Even the Bank for International Settlements, a body not known for hyperbole, has warned that Chinese debt is reaching levels that typically trigger financial crises.

The recent surge in credit is merely an extension of policies put into place after the global financial crisis. To fend off a downturn, China launched a massive 2009 fiscal stimulus package focused on infrastructure and investment spending. Simultaneously, policymakers ordered banks to open the credit spigot. Since January 2009, total loans in China have grown 202%, for an annualized growth rate of 34%. Local governments and businesses alike have been only too happy to partake in the largesse. The problem is that most of this money has gone into the least efficient, most saturated parts of the economy. Nomura estimates that 40% of bank loans to companies go to state-owned enterprises, although they account for barely 10% of China’s output. The money is being used to prop up companies that probably shouldn’t survive: One Chinese securities firm suggests 45% of new debt is being used to pay interest on old debt, like using a new credit card to pay off an old one.

Cheap money is also continuing to expand capacity in sectors that already have too much. There are currently about four-and-a-half years’ worth of residential real estate sales under construction. Coal plants, which are currently running at only 67% of capacity, are investing in an additional $9.4 billion worth of capacity in 2015, with a similar number expected in 2016. The government has pledged to slash capacity in the bloated steel sector by as much as 13% by 2020. But given that the industry is already losing about $25 for every ton of steel produced, those small cuts, even excluding capacity additions, are hardly going to solve the problem. The government isn’t blind to the dangers. Its 2016 economic plan lists “deleveraging” and capacity reduction as two major priorities for the year.

The central bank has imposed limits on certain banks that had been a bit too liberal in their recent lending. But the fact remains that the state-owned giants drawing the bulk of new lending are also the most politically well-connected. Rather than shutting them down and throwing potentially millions of Chinese out of work, the government hopes to keep them afloat while they’re merged and overhauled. There’s little reason to think this plan can succeed. No country with a similarly rapid rise in debt levels has escaped either a financial crisis, or like Japan, a prolonged slowdown. Continuing to lend at this pace will only increase the ranks of zombie companies, alive because of government life support. Slowing lending will inevitably mean lower GDP growth, more corporate bankruptcies and higher unemployment. But it will also reduce the buildup of risks that are otherwise certain to come due.

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Horse, cart. If you can’t see the cracks already, get better glasses.

How Long Before The Cracks Show In China’s Great Currency Wall? (Reuters)

China still owns the world’s largest currency reserves, but it has been burning through them at such a pace that some think Beijing might soon have to allow a sharp fall in the yuan or back-pedal on liberalization and tighten its capital controls. Foreign exchange reserves in China declined $99.5 billion in January to $3.23 trillion, following a record fall the previous month, and have shrunk by $762 billion since mid-2014, more than the gross domestic product of Switzerland. That still leaves a mighty arsenal, and the People’s Bank of China says it is more than adequate, though it has not said what the minimum might be and did not return a request for comment. PBOC governor Zhou Xiaochuan told Caixin magazine a week ago that much of the outflow had been Chinese companies repaying dollar debt as the greenback rose, which would bottom out, or outbound investment, which was to be welcomed.

Most economists agree China has a way to go before running out of road, but some believe it will have to hit the brakes in months, not years. The pace of decline has accelerated as the PBOC fought to keep the yuan steady in the face of speculative selling offshore and capital flight at home, a task made harder by China’s slowest economic growth in 25 years and the bank’s own decision to guide the currency down in August and again in early January. Though it has huge reserves, an economy the size of China’s needs them to cover imports and foreign debts, and the less liquid assets in reserves can’t readily serve those purposes. Though the composition of China’s reserves is a state secret, officials also say the falling dollar value of other currencies it holds accounts for some of the fall.

Economists and foreign exchange professionals around the world are nevertheless asking how low can they go before Beijing is forced to choose between fresh capital controls or giving up selling dollars to defend the yuan. French bank Societe Generale says IMF guidelines put $2.8 trillion as the minimum prudent level for China, which is not far away if reserves keep falling at the current pace. “If that occurs in the next few months,” says SocGen, “expect to see a tidal wave of speculative selling, forcing the PBOC to throw in the towel and let the market decide the level of the renminbi exchange rate.” A G20 deputy central banker was considerably more sanguine. “Whatever number I would come up with, it would be a lot less than $2.8 trillion,” he said, adding that reserves could fall another trillion by year-end in conjunction with stability in the exchange rate.

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But that doesn’t rhyme with their new IMF status.

Capital Controls In China A Possibility (CNBC)

While markets are flirting with the idea that a big devaluation of the yuan could take China’s economic slowdown to a new and more dangerous place, economists and some money managers say it’s not at all likely. Over the past eight months, China’s central bank has spent billions of dollars to fend off speculators who think the yuan will fall as China looks to pump up exports. The currency fell to a five-year low of 6.51 against the dollar on Jan. 6 as weak economic data spooked investors. That’s one reason uber-bear fund manager Kyle Bass, founder of Hayman Capital Management, could shake markets with a prediction that China’s currency could lose 40% of its value in the next 18 months, thanks to the heavy debt load of state-backed Chinese enterprises.

Bass’ idea is that China’s banks are facing huge yet-undisclosed credit losses, largely on loans to manufacturers that, like the banks, are controlled by the government, and that the currency will fall as the government prints yuan to recapitalize the banks. Bass’ opinion remains, for now at least, a minority view. Other fund managers and economists argue that devaluation would do little to promote sales of Chinese exports that are already competitive, especially in the U.S., and that a sharp devaluation would backfire if countries like Australia, Malaysia and Indonesia were prodded to devalue their currencies in a bid to make sure they remain competitive with China.

Most of all, they said, a market-jolting move lower for the yuan would be at odds with a record of incrementalism that Beijing’s government has nurtured for years, and it would rock investors who have already pushed the Shanghai Composite Index down 43% to 2,927 since its peak last June. “They want a stable but gradually declining exchange rate if they can engineer it,” said Barry Eichengreen, an economist at the University of California-Berkeley and former senior policy advisor for the International Monetary Fund. “Stability is good for their image in the markets, and a gradual decline is good for their effort to maintain a growth rate of 6%.”

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Missed opportunities?! A deal for a yuan devaluation at the summit means Beijing wouldn’t pick up the blame alone.

World Bank’s Kim Sees Little Chance of G-20 Action (BBG)

The sluggish global economy has entered “unprecedented territory” as countries grapple with divergent difficulties, leaving little room for a coordinated policy response from the Group of 20 finance chiefs meeting this week, World Bank President Jim Yong Kim said in an interview. “There is a lot of uncertainty; there is a lot of instability and fluctuations in global markets,” he said. “But I don’t think we’re at a point where you are going to see some sort of concerted, focused action in one sector or another.” Global growth continues to lag even as advanced economies embrace “unorthodox” policies, Kim said. “We are now seeing negative interest rates in Japan, negative interest rates in Europe and even in the US, although they are not negative, the notion that that might be possible has been put on the table, so this is completely unprecedented territory.”

The Washington-based development bank lowered its global forecast for 2016 growth to 2.9%, from a 3.3% projection in June, according to a report it released last month. The world economy advanced 2.4% last year, lower than the 2.8% growth forecast. China’s hosting of the G-20 forum this year in Shanghai culminates in a leaders’ summit in September, and officials are pushing a detailed and diverse platform that covers everything from bolstering investment in infrastructure to climate-friendly financing. The weakening outlook for global growth and how policy makers should respond will dominate the agenda when the G-20 central bank governors and finance ministers gather. China faces calls to make its currency and macroeconomic policies clearer at the meeting.

The economic woes afflicting individual countries are so varied that it’s unlikely a consensus on a policy response will be reached, Kim said. The G-20 provides “an environment in which we can put difficult issues on the table and talk them through,” he said. “But it’s difficult to imagine that everyone would take a particular action around fiscal, monetary or other kinds of policies because you have oil producers and oil importers, you have commodity exporters and commodity importers — there’s such a difference in economic models.”

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Looks pretty dark.

Europe’s Banking Model Is Still Broken (BBG)

Call it the new normal for European bank earnings. Standard Chartered shares plunged by the most in more than three years on Tuesday after the bank posted a “surprise” 2015 pretax loss of $1.5 billion, somewhat different from the $1.37 billion average profit estimate from 20 analysts. On Monday, HSBC delivered a “surprise” fourth-quarter pretax loss of $858 million, rather than the expected profit of $1.95 billion. On Jan. 28, Deutsche Bank “surprised” bond investors with a fourth-quarter net loss of $2.3 billion, less than two weeks after tapping them for $1.75 billion of funds. As the saying goes, fool me once, shame on you; fool me twice, shame on me. But fool me three times and maybe I should just resign myself to being a fool, at least where European banks are concerned.

The unpalatable truth is that the banking model is broken. The days of generating gobs of cash from “socially useless” financial engineering, as Adair Turner put it in 2009 when he chaired the U.K. Financial Services Authority, are over. Because banks have to hold more capital for a rainy day, they have less money to play with in financial markets. And they’re still shrinking their trading desks, further curbing their ability to make money from markets. Important aspects of Europe’s regulatory backdrop remain foggy at best; the European Union’s Markets in Financial Instruments Directive, new rules covering a multitude of markets from derivatives to bonds, has been delayed by a year to 2018. But it’s clear that the EU is seeking to keep financial institutions from so-called casino banking as much as possible.

Provisions for European bank loans to oil and gas companies are likely to climb – HSBC took a $400 million hit on those loans this week – further crimping profit. And there seems to be no end to the fines being paid for rigging markets, with settlements for faking prices for gold, silver, platinum, palladium and derivative-market benchmarks still looming. As another saying goes, a billion here and a billion there and pretty soon you’re talking about real money. So it’s little wonder that Europe’s banks have lost about 30% of their value in the past year [..] Central bank interest rates at near or below zero deliver cheap money. But longer-term rates also at record lows and in many cases below zero (five-year German government bonds yield -0.33%) mean banks can’t borrow cheaply and profit from lending to their customers at inflated rates.

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You mean they haven’t done that yet?

US Banks To Cut Credit Lines For Energy Firms (Reuters)

Cash-strapped energy firms are coming under increasing pressure from U.S. bank lenders and, on average, could see a 15% to 20% cut in their credit lines, the head of JP Morgan’s commercial bank told investors on Tuesday. Until now, banks could be more lenient with their energy clients despite a prolonged slump in the price of oil, but Doug Petno, the head of JP Morgan’s commercial bank, said that is changing. Moves, disclosed in securities filings, by oil and gas companies such as Linn Energy and SandRidge Energy to max out revolving credit lines – designed to cover short-term funding gaps – have prompted banks to take action. Petno said JP Morgan was not waiting for April, when banks traditionally reassess the value of oil reserves underpinning energy loans – a process known as redetermination – to reassess its exposure.

“We are not waiting for the spring redetermination to discuss this with our clients,” he said during a presentation at JP Morgan’s annual investor day in New York. Petno said JP Morgan had been working closely with its energy customers through the current price rout. The biggest U.S. bank by assets plans to increase provisions for expected losses on bad energy loans by more than 60% in the first quarter. Petno said he expected credit lines, on average, would shrink by 15% to 20% across the industry, but there would be wide variations depending on the health of the borrower. “Some borrowing bases may by go up. Some may go down by 50%,” he said. A lurch in the price of oil below $30 a barrel last month has forced companies to offload assets and cut staff to survive.

Dozens of companies have already hit the wall and a third of oil producers and service firms, or 175 companies, are at high risk of slipping into bankruptcy this year, according to a study by Deloitte. “Most of these clients are working with their banks way in advance of redeterminations, so it is compelling M&A, it is compelling asset sales, it is compelling discussions with private equity. But there is a lot of leverage,” said Petno. “The most distressed clients know when they are going to be pinched… and are taking the steps to deal with it,” he added. “There will be a meaningful number of these players who have no options. I think we have only begun to see the range of bankruptcies in oil and gas.”

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You can’t be the EU’s financial center if you’re not in the EU.

Banks Have More to Fear Than Boris (BBG)

Boris Johnson’s backing of Brexit has heightened anxiety in the City of London. But Europe’s dominant financial center faces bigger threats to its future than whether or not the Brits listen to their capital’s mayor and quit the EU. A vote to leave in June’s referendum certainly wouldn’t help London’s financiers. Take this from Deutsche Bank analysts led by Barbara Boettcher:”An EU exit would mean uncertainty for the ability to use the U.K. as a hub to provide banking services into Europe. This has implications not just for the EU operations of U.K. financial institutions (which have actually reduced significantly post-crisis), but also for the U.K. and European operations of banks globally. “Some banks might move their headquarters to continental Europe or shift jobs, Deutsche Bank said, something senior executives have warned about in private over the past year.

HSBC chief Stuart Gulliver broke cover on Monday and said his bank could shift about 1,000 U.K. jobs to Paris in the event of an exit.But despite the veiled (and not so veiled) threats, the City of London is already under pressure on jobs and to defend its pre-eminence in Europe – even before a decision on the EU. For starters, many roles that were traditionally strong in London have been in the firing line since the financial crisis. In particular, big banks are shrinking fixed income and commodities trading desks in response to regulations that make these businesses more capital intensive and less profitable. At the top global investment banks, fixed income revenues and staffing levels fell about a third between 2010 and 2015, according to Coalition research. More broadly, weak revenue growth across banking puts more emphasis on costs as the best way to lift profit.

Investment-banking revenue has dipped 15% since 2010 but costs have remained stubbornly high despite layoffs. That suggests more cuts will come.Meanwhile, the soaring cost of employing staff in London makes it harder to keep large swathes of workers there when other locations will do. London has by far the most expensive office space in Europe – annual leasing costs run to $122 per square foot on average, compared to just $56.75 in Paris or $53.25 in Frankfurt. Surging accommodation costs are pushing up the cost of living too. The median house price in London climbed about 13% in December from a year earlier to $615,931. Already, many global investment banks have shifted jobs to smaller U.K. cities such as Bournemouth, Birmingham and Manchester and to offshore sites, and more plans are afoot.

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Oh boy…

The Australian Housing Bubble Is Out Of Control (SMH)

Jonathan Tepper, a UK based economist and founder of research house Variant Perception, is convinced Australia is in the midst of “one of the biggest housing bubbles in history”. The Australian Financial Review reports about how he and local hedge fund manager John Hempton scoped out the apparent epicenter of this bubble, Sydney’s western suburbs, and walked away thinking it was even worse than they’d originally thought. It’s a fascinating story. In a subsequent report to clients, obtained by Fairfax Media, Tepper uses the following charts to support his thesis.

‘Australia is simply in a league of its own when it comes to mortgage lending.’

And a rising share of these mortgages are ‘interest only’ loans

“The Australian housing bubble could not have become as ridiculous as it is without the help of easy financing,” he writes. “Over the past few years, over 40% of all new mortgages originated have been interest-only mortgages. “This is truly Ponzi financing, where home buyers only make money if their houses keep rising in value,” he writes, later describing interest only loans as a “disaster waiting to happen.”

The negative gearing effect…

It is one of the most contentious issues in the national political discourse at the moment. Tepper likens negative gearing – the ability to claim losses on leveraged investment properties as a tax deduction – to startups during the dot com bubble burning through their cash. “Only in a bubble could losing money on housing be viewed as positive,” he writes.

Housing prices are totally out of whack with…everything

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Schäuble will come and get them.

Portugal Adopts Anti-Austerity Budget Despite Concerns (AFP-PTI)

Portugal’s Socialist-led lawmakers have approved a 2016 budget that pledges to reverse unpopular austerity measures but is seen as high-risk by critics and investors, with Lisbon under EU pressure to stay on a disciplined path. “This budget proves it is possible to live a better life in Portugal,” socialist Prime Minister Antonio Costa said yesterday. The vote came a few weeks after the European Commission approved Portugal’s draft, but warned that more efforts would be needed by the government to avoid a breach of EU rules on spending. In response, Portugal cut its budget deficit target for 2016 to 2.2% of GDP from a previously announced target of 2.6%. Last year, Portugal’s budget deficit came in at 4.3%, well above the EU’s 3.0% limit.

The conservative opposition lashed out at the new budget yesterday, branding it “unrealistic and populist”. “It is a poisoned gift for the Portuguese,” said former prime minister Pedro Passos Coelho. Portugal received a massive international debt bailout in 2011 that saved it from defaulting, but in return the country had to introduce a string of austerity measures. In four years, over 78,000 public sector jobs were cut – more than 10% of the total – alongside other steps the creditors said were needed to return the public finances to balance and put the economy back on track.

Portugal’s public debt is forecast to hit 130% of GDP. True to the socialists’ campaign promises that brought them to power in November, Costa’s budget restores civil servants’ salaries, eases a surtax tax on employees’ incomes, and breathes new life into the welfare system. However, in a bid to appease Brussels’ demands, the government also announced a hike in taxes on fuel, vehicles and tobacco. Analysts were sceptical however that the plan would actually work. “The budget seeks an impossible balance. It is doomed. It will neither put an end to austerity, nor will it meet the deficit objectives,” said Joao Cesar das Neves, an economics professor.

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Czexit.

Czech Republic ‘Will Follow Britain Out Of EU’ (Telegraph)

The Czech Republic may choose to follow Britain out of the EU, the country’s prime minister said, amid growing fears in Brussels of a “contagion”. Bohuslav Sobotka said that a “Czexit” may take place. The Czech Republic only joined the EU in 2004 and has been the beneficiary of billions in development funds, but has some of the most hostile public opinion. A Brussels decision to force the country to take in a quota of migrants caused fury. Three-fifths of Czechs said they were unhappy with EU membership and 62% said they would vote against it in a referendum, according to an October 2015 poll by the STEM agency. “If Britain leaves the EU, we can expect debates about leaving the EU in a few years too,” said Mr Sobotka, who led eastern European states in opposition to David Cameron’s plans to curb benefits.

“The impact may be really huge,” he said, adding that a “Czexit” could trigger an economic and security downturn and a return to the Russian sphere of influence. Such a move “would be an absolute negation of the developments after 1989”, he said, referring to the revolution of Czechoslovakia that threw off Soviet rule. There are fears in Brussels that the multiple crises of Brexit, migration and the euro mean that 2016 will prove to be the high-water mark of the European project, in which it becomes plain that the vision of a fully federalised EU state will never be reached. And leaders fear that Mr Cameron will trigger a string of copy-cat referendums from ambitious leaders who want to extract special concessions from Brussels, pulling the bloc to pieces.

Meanwhile, Aleksander Vucic, the Serbian Prime Minister said that EU membership is no longer the “big dream it was in the past” for Balkan states.. “The EU that all of us are aspiring to, it has lost its magic power,” Mr Vucic told a conference at the European Bank for Reconstruction and Development (EBRD) in London. “Yes we all want to join, but it is no longer the big dream it was in the past.” “When you see that in Britain at least 50% of the people say they want to leave that has an effect on the public,” he said. Seven states are in the queue to join the EU under a new wave of enlargement, that will not take place before 2019: Serbia, Montenegro, Kosovo, Bosnia-Herzegovina, Albania, Turkey and Macedonia. Membership could take years for some, as they are gripped by corruption, cronyism and sky-high unemployment, according to the EU’s own assessment reports.

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Not to take lightly: Turkey links the refugee crisis to its land-grabbing Kurds-killing ambitions in Syria.

NATO’s New Migrant Mission In The Aegean Is A Victory For Turkey (EI)

The recent Nato agreement to create a mission to tackle the migration crisis in the Aegean has been presented as a major new development. But its impact on migrant flows will in reality be limited. Its shape and scope for action is a reflection of Turkey’s priorities in the region rather than European needs. The creation of the Nato mission showcases the EU’s strategic irrelevance and highlights Turkey’s desire to entangle Europeans in its adventurist endeavours in Syria. The Nato mission will conduct monitoring, surveillance and reconnaissance in the Aegean in order to deter and contain the activities of human traffickers. Nato forces will not push back boats, except when rescuing migrants from drowning who will be returned to Turkey. The task of deterring smugglers will be performed by the Greek and Turkish coastguards.

But assistance from Nato will not make much of a difference if the key actor in the crisis, Turkey, does not act decisively. The stemming of migration flows still hinges on Turkish will to patrol its coasts. In previous months, Turkey had been under pressure to patrol its coasts more effectively. But it refrained from acting because the cost of accepting back or keeping in Turkish territory large numbers of migrants was considered much higher than whatever rewards the EU had promised. Caving in to external pressure would also be infuriating for domestic public opinion. A Nato mission allows Turkey to give in to some EU demands while circumventing these problems. As the mission covers Turkish as well as Greek territory, Turkey can deflect part of the European pressure for control of migrant flows back on its neighbour.

Turkey has also ensured that its actions will be scrutinised by an organisation in which it has a strong say. The migration issue forms only one aspect of a complex geopolitical game that Turkey is involved in now in Syria. Turkey’s relationship with Russia has deteriorated rapidly. Moscow’s clients in Syria have made significant inroads against Turkey’s allies, threatening it with both a collapse of its support and the arrival of new waves of refugees to its borders. Turkey’s position is further complicated by the assertiveness of Syria’s Kurds, whom Turkey’s Western allies consider a valuable ally against Islamic State. Turkey is now pushing for stronger support from Nato for its activities in Syria. A first step was taken in the same meeting that authorised the migrant mission in the Aegean. There,

Nato also decided to step up its participation in the fight against Islamic State, initially by deploying AWACS planes in the region. Involving Nato in the management of the migration crisis is part of a broader strategy by Turkey to align Europeans with its goals in the region. Any signs of Turkey becoming more cooperative on migration in the following weeks must be seen through the prism of its interests in Syria and its expectation that Europe will support it there in return.

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The end of the EU is near.

Refugee Flows To Europe Already Top 110,000 So Far In 2016 (Reuters)

More than 110,000 migrants and refugees have arrived in Greece and Italy already this year, a sharp increase on 2015, the International Organization for Migration (IOM) said on Tuesday. They include around at least 102,500 landing on Greek islands including Samos, Kos and Lesbos, and 7,500 in Italy, the IOM said. “Over 410 migrants and refugees have also lost their lives during the same period, with the eastern Mediterranean route between Turkey and Greece continuing to be the deadliest, accounting for 321 deaths,” the IOM said. Last year, the figure of 100,000 refugees and migrants was not reached until the end of June, according to IOM figures. Spokesman Itayi Viriri noted that the figure of 100,000 had already been exceeded this year despite rough sea conditions in recent days on the route from Libya to Italy. Migrants arriving in Italy are often in “very bad condition, having been subjected to violence by smugglers in Libya”, the IOM said, adding that women were subjected to human trafficking.

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Mankind’s new normal: “More than 400 migrants have died in the Mediterranean this year..”

Italy’s Navy Rescues 700 Refugees From Six Boats, 4 Found Dead (Reuters)

More than 700 migrants were rescued from six leaky boats in the sea between Tunisia and Sicily on Tuesday and four were found dead, the Italian navy said. More than 400 migrants have died in the Mediterranean this year, as people continue to try to cross into Europe despite bad winter weather in the second year of Europe’s biggest migration crisis since World War II. More than 110,000 people, many fleeing poverty and war in Africa and the Middle East, have arrived in Greece and Italy this year, a sharp increase on 2015, according to the International Organization for Migration (IOM). The navy said one of its ships went to help three boats, recovering 403 survivors and the four bodies. Another ship rescued 219 people from two vessels and a third coordinated the rescue of 105 migrants from their sinking boat.

The navy did not say what nationality the migrants were nor did it give any other information about their identities. Bad weather cut the number of people arriving last month in Greece, the main gateway to Europe for migrants, but the number was still nearly 40 times higher than in the previous January, European Union border agency Frontex says. Most of those were from Syria, Iraq and Afghanistan, while most of those who entered Europe via Italy were Nigerian, according to Frontex. Italy called on Monday for shared funding, including through issuing EU bonds, for a common policy to manage external borders and cope with the migration crisis.

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This can get fully out of hand in mere weeks.

Refugee Pressure Piles Up On Greece (Kath.)

More than 12,000 refugees and migrants found themselves trapped in Greece on Tuesday as Athens took diplomatic action to counter the border restrictions to its north that are causing the buildup. The Greek government issued a demarche to Austria over its decision to limit the number of asylum seekers it will accept, as well as the number of migrants that can pass through its territory in transit. Vienna is also hosting a conference on Wednesday to discuss the refugee crisis. A number of Western Balkan countries will attend but Greece had not been invited, prompting Athens to accuse the Central European country of making a “unilateral” move. “The exclusion of our country at this meeting is seen as a non-friendly act since it gives the impression that some, in our absence, are expediting decisions which directly concern us,” said Foreign Minister Nikos Kotzias.

Prime Minister Alexis Tsipras also called his Dutch counterpart Mark Rutte to discuss Athens’s grievances as the Netherlands currently holds the six-month rotating EU presidency. Athens feels that there was an agreement at last week’s leaders’ summit in Brussels that none of the Union’s members should take any unilateral actions concerning refugees until the planned meeting with Turkey takes place on March 6. The limitations put in place by Austria have had a knock-on effect along the rest of the so-called Balkan Route for migrants, particularly on Greece’s border with the Former Yugoslav Republic of Macedonia (FYROM), where only a few dozen people were allowed to cross on Tuesday.

FYROM border guards refused to allow Afghans to cross, leading to the Greek government hiring 21 coaches to transport the migrants back to Athens, where some were taken to the former Olympic Games site at Elliniko and others to the transit center at Schisto. Last night there was a total of around 2,500 people at the two sites. The rise in the number of arrivals also means there is a greater number of refugees and migrants on the Greek islands. Almost 1,400 people were rescued by the coast guard on Lesvos, some 1,200 people were at the hot spot on Chios and more than 1,300 had arrived on passengers ferries at Piraeus.

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The Balkanization of Europe.

Greek Migration Crisis Enters Worst-Case Scenario (EUO)

The European Commission and the Dutch EU presidency warned on Tuesday (23 February) of a humanitarian crisis in the Western Balkans and “especially in Greece,” adding that preparation for “contingency plans” was under way. The warning comes after border controls along the Western Balkan migration route were tightened in recent days in Austria and Macedonia. It is the realisation of a worst-case scenario becoming reality for EU authorities, in which Greece would be in effect cut off from the Schengen area and left to cope with hundreds of thousands of stranded refugees, while still being itself in the middle of an economic and social crisis. On Monday, Macedonia decided to deny entry to Afghan migrants and restricted access to Syrians and Iraqis.

The move followed last week’s decision by Austria to cap to 80 the number of daily asylum applications and to 3,200 the number of entries, also under the condition that the people go to another country to apply for asylum. The situation illustrates the growing rift between the actions of some EU and Balkan states and the common policies the European Commission and Germany have tried to put in place since the start of the migrant crisis last summer. The result is growing and potentially dramatic pressure on Greece, where 2,000 to 4,000 migrants arrive on the islands each day. On Tuesday alone, 1,130 refugees arrived at Athens Piraeus port, where they will have to be taken care of. “We are concerned about the developments along the Balkan route and the humanitarian crisis that might unfold in certain countries especially in Greece,” EU migration commissioner Dimitri Avramopoulos and Dutch minister for migration Klaas Dijkhoff said in a joint statement.

They called on “all countries and actors along the route to prepare the necessary contingency planning to be able to address humanitarian needs, including reception capacities”. “In parallel,” they said, “the commission is coordinating a contingency planning effort, to offer support in case of a humanitarian crisis both outside and within the EU, as well as to further coordinate border management.” Commission experts are already in Greece to assess the needs and what could be done in cooperation with the UN. Faced with the new developments, the commission seems to be more helpless than ever. “There is a clear risk of a fragmentation of the [Balkan] route,” an EU official said, with countries deviating from previously agreed plans. “We are concerned by the fact that member states are acting outside of the agreed framework,” commission spokeswoman Natasha Bertaud told journalists on Tuesday.

[..] This is the scenario that is now unfolding with the Austrian-Balkan initiative, one that the commission, together with Germany and some other EU countries, had wished to avoid. “We cannot let Greece become an open air detention camp,” a senior EU diplomat said, adding that “preserving the integrity of Schengen” was crucial for the EU. Financial and geopolitical concerns also come under consideration as Greece is engaged in an €85 billion bailout programme. “We do not want 500,000 migrants to destabilise the Greek government and Greece itself,” a source from another influential country said. “We would not see our money back and the whole EU would dismantle.”

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Feb 122016
 
 February 12, 2016  Posted by at 7:07 pm Finance Tagged with: , , , , , , , ,  28 Responses »
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Crowd outside Wall Street Stock Exchange on BlackThursday Oct 24 1929

What we see happening today is why we called our news overview the “Debt Rattle” 8 years ago. The last gasps of a broken system ravished by the very much cancer-like progress of debt. Yes, it took longer than it should have, and than we thought. But that’s pretty much irrelevant, unless you were trying to get rich off of the downfall of your own world. Always a noble goal.

There’s one reason for the delay only: central bank hubris. And now the entire shebang is falling to bits. That this would proceed in chaotic ways was always a given. People don’t know where to look first or last, neither central bankers nor investors nor anyone else.

It’s starting to feel like we have functioning markets again. Starting. Central bankers still seek to meddle where and when they can, but their role is largely done. It’s hard to pinpoint what exactly started it, but certainly after Kuroda’s negative rate ‘surprise’ fell as flat on its face as it did, and then fell straight through the floor and subsequently shot up through the midnight skies, a whole lot more ‘omnipotence credibility’ has disappeared.

Kuroda achieved the very opposite of what he wanted, the yen soared up instead of down -big!-, and that will reflect on Yellen, Draghi et al, because they all use the same playbook. And the latter so far still got a little bit of what they were shooting for, not the opposite. Still, one could also make a good case that it was Yellen’s rate hike that was the culprit. Or even Draghi’s ‘whatever it takes’. It doesn’t matter much anymore.

Though what should remain clear is that it was in their interference in markets to begin with, as extremely expensive as it has been extremely useless and dumb, that the real guilt resides. Or we could take it even a step further back and point to the credit bubbles blown in the west before 2008. Central banks could have let that one go, and allow it to run its natural course. Instead, they decided they should inflate their own balance sheets. What could go wrong?

Then again, these inane policies concocted by a bunch of bankers and bookworm academics who don’t even understand how their own field works, as Steve Keen once again explained recently, would have blown up in their faces long before if not for China’s decision to join in and then some. Some $35 trillion, that is.

Money, debt, spent on ghost cities and on what now turn out to be ghost factories. Ghost jobs, ghost prosperity,a ghost future. Makes us wonder all the time what people thought when they saw China used as much cement in 2011-2013 as the US did in the entire 20th century. Did anyone think that would continue for decades, even grow perhaps? Have we lost all sense of perspective?

How much cement or steel can one country need, even if it’s that large? How much coal and oil can it burn, let alone store? Blinded as we were, apart from the financial shenanigans, much of what the ‘developed nations’ engaged in since 2008 was overleveraged overinvestment, facilitated by ultra-low rates, in industries that would feed China’s hunger for ever more forever. Blind? Blinded?

And now we’re done. If Elon Musk doesn’t come back soon with a zillion little green Martians to pick up China’s slack, we’re all going to be forced to face just how distorted our media-fed visions of our economic futures have become, and how much pain it will take to un-distort them.

Which is what we’re watching crash down to mother earth now. And the central bankers’ loss of ‘omnipotence credibility’ is not something to be underestimated. It encourages people like Kyle Bass to dare the PBoC to show what it’s got left, even if, as Bass said, he’s got maybe a billion to go up against the multi-trillion Chinese state windmills of Beijing. It shouldn’t matter, but it does. Because the windmills are crumbling.

Bass won’t be alone in challenging global central banks. And that’s probably good. Without people like him, we would never see proper checks and balances on what the formerly omnipotent are up to. Kuroda has next to nothing left -or even less that that. Draghi and Yellen only have negative territory left to plow into, and at the very least that means putting positive spins on any economic numbers becomes exceedingly hard to do -and be believed.

Granted, they can still all go for helicopter money -and some will. But that will be the definite last step, and they know it. Dropping free money into a festering cesspool of debt is as useless and deadly as all previous QEs put together.

As we watch the world crash down to earth in epic fashion -and it ain’t even the 1st inning- people are already looking for a bottom to all of this (a waste of time). But if there’s one law in economics, it’s that when a bubble pops it always ends up below where it started. So look at where levels were before the bubble was blown, and then look out below.

Want to argue that this is not a bubble? Good luck. This is the mother of ’em all.

The Lunar New Year, and the breather it brings for Beijing -though we’re sure there’s not a lot of family time off for PBoC personnel- seems like a good moment to take stock of the multiple crises that simultaneously and in concert accelerated head first into the new year. And boy, the rest of the world decided not to wait for China, did it now? For those who’ve seen this coming and/or have no skin in the game, it’s an amusing game of whack-a-mole. For others perhaps not so much.

To take a few steps back, if you ever believed there was a recovery after 2008, or even that it was theoretically possible for that matter, you’re going to have a much harder time understanding what is happening now. If you’ve long since grasped that all that happened over the past 8 years of QE infinity-and-beyond, was nothing but “debt passed off as growth”, it’ll be much easier.

It’s stunning to see for everyone at first blush that the “book value” of global proven oil reserves is down by $120 trillion or so since summer 2014. And it certainly is a big number; the S&P has lost ‘only’ $2 trillion in 2016. But what counts is the speed with which that number sinks in, and that speed depends on one’s reference frame. In the same vein, what’s perhaps most important about all the seemingly separate crises developing before your eyes is how they feed on each other.

Or, rather, how they all turn out to be the same crisis, kind of like in the perfect whack-a-mole game, where there’s only one mole and you still can’t catch it. So try and whack these. Or better still, try and imagine central bankers doing it, or finance ministers, spin doctors. They’re all so out of their leagues it would be funny if they didn’t have the power to make you pay for their incompetence.

Jan 182016
 
 January 18, 2016  Posted by at 10:39 pm Finance Tagged with: , , , , , , , , ,  8 Responses »
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Berenice Abbott Columbus Circle, Manhattan 1936

We’ve only really been in two weeks of trading in the new year, things are looking pretty bad to say the least, so predictably the press are asking -and often answering- questions about when the slump will be over. Rebound, recovery, the usual terminology. When will we get back to growth?

For me personally, but that’s just me, that last question sounds a bit more stupid every single time I hear and read it. Just a bit, but there’s been a lot of those bits, more than I care to remember. Luckily, the answer is easy. The slump will not be over for a very long time, there will be no rebound or recovery, and please stop talking about a return to growth unless you can explain what you want to grow into.

I’m sorry, I know that’s not what you want to hear, but life’s a bitch and so’s the economy. You’ve lived on pink fumes for a long time, most of you for their whole lives, but reality dictates that real ‘growth’ stopped decades ago, and you never figured that out because, and I quote here (see below), you and the world you’re part of became “addicted to borrowing money, spending it, and passing this off as ‘growth'”.

That you believed this was actual growth, however, is on you. You fell for a scam and you’re going to have to pay the price. If there’s one single thing people are good at, it’s lying. It’s as old as human history, and it happens every day, so you’re no exception to any rule. You’re perhaps just not particularly clever.

How do we know a ‘recovery’ is so far off it’s really no use to even talk about it? As I said, it’s easy. Let me lead this in with a graph I saw just today, which deals with a topic the Automatic Earth has covered a lot: marginal debt, or more precisely, the productivity/growth gained from each additional dollar of debt.

Please note, this particular graph deals with private non-financial debt only, we’ll get to other kinds of added debt, but that restriction is actually quite illuminating.

Now of course, you have to wonder about the parameters the St. Louis Fed uses for its data and graphs, and whether ‘growth’ was all that solid in the run up to 2008. There’s plenty of very valid arguments that would say growth in the 1960’s was a whole lot more solid than that in the naughties, after the Glass-Steagall repeal, and after the dot.com blubber.

However, that’s not what I want to take away from this, I use this to show what has happened since 2008, more than before, when it comes to “passing debt off as ‘growth'”.

But it’s another thing that has happened since 2008, or rather not happened, that points out to us why this slump will have legs. That is, in 2008 a behemoth bubble started bursting, and it was by no means just US housing market. That bubble should have been allowed to fully deflate, because that is the only way to allow an economy to do a viable restart.

Instead, all that has been done since 2008, QE, ZIRP, the works, has been aimed at keeping a facade ‘alive’, and aimed at protecting the interests of the bankers and other rich parties. That facade, expressed most of all in rising stock markets, has allowed for societies to be gutted while people were busy watching the S&P rise to 2,100 and the Kardashians bare 2,100 body parts.

It was all paid for, apart from western QE, with $28 trillion and change of newfangled Chinese debt. The problem with this is that if you find yourself in a bubble and you don’t go through the inevitable deleveraging process that follows said bubble in a proper fashion, you’re not only going to kill economies, you’ll destroy entire societies.

And that is not just morally repugnant, it also works as much against the rich as it does against the poor. It’s just that that is a step too far for most people to understand. That even the rich need a functioning society, and that inequality as we see it today is a real threat to everyone.

Recognizing this simple fact, and the consequences that follow from it, is nothing new. It’s why in days of old, there were debt jubilees. It’s also why we still quote the following from Marriner Eccles, chairman of the Federal Reserve under FDR and Truman from 1934-1948, in his testimony to the Senate Committee on the Investigation of Economic Problems in 1933, which prompted FDR to make him chairman in the first place.

It is utterly impossible, as this country has demonstrated again and again, for the rich to save as much as they have been trying to save, and save anything that is worth saving. They can save idle factories and useless railroad coaches; they can save empty office buildings and closed banks; they can save paper evidences of foreign loans; but as a class they cannot save anything that is worth saving, above and beyond the amount that is made profitable by the increase of consumer buying.

It is for the interests of the well to do – to protect them from the results of their own folly – that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit. This is not “soaking the rich”; it is saving the rich. Incidentally, it is the only way to assure them the serenity and security which they do not have at the present moment.

Everything would all be so much simpler if only more people understood this, that you need a – fleeting, ever-changing equilibrium- to prosper.

Instead, we’re falling into that same trap again. Or, more precisely, we already have. We have been fighting debt with more debt and built the facade put up by the Fed, the BoJ and the ECB, central banks that all face the same problems and all take the same approach: save the rich at the cost of the poor. Something Eccles said way back when could not possibly work.

Anyway, so here are the graphs that prove to us why the slump has legs. There’s been no deleveraging, the no. 1 requirement after a bubble bursts. There’s only been more leveraging, more debt has been issued, and while households have perhaps deleveraged a little bit, though that is likely strongly influenced by losses on homes etc. plus the fact that people were simply maxed out.

First, global debt and the opposite of deleveraging:

And global debt from a longer, 65 year, more historical perspective:

It’s a global debt graph, but it’s perhaps striking to note that big ‘growth’ spurts happened in the days when Reagan, Clinton and Obama were the respective US presidents. Not so much in the Bush era.

Next, China. What we’re looking at is what allowed the post 2008 global economic facade to have -fake- credibility, an insane rise in debt, largely spent on non-productive overinvestment, overcapacity highways to nowhere and many millions of empty apartments, in what could have been a cool story had not Beijing gone all-out on performance enhancing financial narcotics.

Today, the China Ponzi is on its last legs, and so is the global one, because China was the last ‘not-yet-conquered’ market large enough to provide the facade with -fleeting- credibility. Unless Elon Musk gets us to Mars very soon, there are no more such markets.

So US debt will have to come down too, belatedly, with China, and it will have to do that now. because there are no continents to conquer and hide the debt behind. We’re all going to regret engaging in the debt game, and not letting the bubble deflate in an orderly fashion when we still could, but all those thoughts are too late now.

What the facade has wrought is not just the idea that deleveraging was not needed (though it always is, after every single bubble), but that net US household worth rose by 55% in the 6-7 years since the bottom of the crisis, an artificial bottom fabricated with…more debt, with QE, and ZIRP.

Meanwhile, in today’s world, as stock markets go down at a rapid clip, China, having lost control of a market system it never had the control over that Politburos are ever willing to acknowledge they don’t have, plays a game of Ponzi whack-a-mole, with erratic ‘policies’ such as circuit breakers and CIA-style renditions of fund managers and the like.

And all the west can do is watch them fumble the ball, and another one, and another. And this whole thing is nowhere near the end.

China bad loans have now become a theme, but the theme doesn’t mean a thing without including the shadow banking system, which in China has been given the opportunity to grow like a tumor, on which Beijing’s grip is limited, and which has huge claims on local party officials forced by the Politburo to show overblown growth numbers. If you want to address bad loans, that’s where they are.

Chinese credit/debt graphs paint only a part of the picture if and when they don’t include shadow banks, but keeping their role hidden is one of Xi’s main goals, lest the people find out how bad things really are and start revolting. But they will anyway. That makes China a very unpredictable entity. And unpredictable means volatile, and that means even more money flowing out of, and being lost in, markets.

The ‘least worst’ place to be for what money will be left is US dollars, US treasuries and perhaps metals. But there’ll be a whole lot less left than just about anyone thinks. That’s the price of deleveraging.

The price of not deleveraging, on the other hand, is what we see in the markets today. And there is no cure. It must be done. The price for keeping up the facade rises sharply with each passing day, and the effort will in the end be futile. All bubbles have limited lifespans.

I’ll close this with a few recent words from Tim Morgan, who puts it so well I don’t feel the need to try and do it better.

The Ponzi Economy, Part 1

In order to set the Ponzi economy into some context, let’s put some figures on it. In the United States, total “real economy” debt (which excludes inter-bank borrowing) increased by $19.4 trillion – in real, inflation-adjusted terms – between 2000 and 2014, whilst real GDP expanded by only $3.7 trillion. Britain, meanwhile, added £1.9 trillion of new debt for less than £400bn on “growth” over the same period. I spent part of the holiday period unearthing quite how much debt countries added for each dollar of “growth” over a period starting at the end of 2000 and ending in mid-2015.

Unsurprisingly, the league is topped by Portugal ($5.65 for each $1 of growth), Ireland ($5.42) and Greece ($5.39). Britain’s ratio ($3.46) is somewhat flattering, in that the UK has used asset sales as well as borrowing to sustain its consumption. The average for the Eurozone ($3.54) covers ratios as diverse as Germany (just $1.87) and France ($4.22).

China’s $2.56 looks unexceptional until you note that the more recent (post-2007) number is much worse. Economies which seem to have been growing without too much borrowing (such as Brazil and Russia) are now experiencing dramatic worsening in their ratios, generally in the wake of tumbling commodity prices.

In the proverbial nutshell, then, the world has become addicted to borrowing money, spending it, and passing this off as “growth”. This is a copybook example of a pyramid scheme, which in turn means that the world’s most influential economic mentor is neither Keynes nor Hayek, but Charles Ponzi.

[..] How, in the absence of growth, can inflated capital values be sustained? The answer, of course, is that they can’t. Like all Ponzi schemes, this ends with a bang, not a whimper. This is why I find forecasts of a ‘big fall’ or ‘sharp correction’ in markets hard to swallow. Ponzi schemes don’t end gradually, any more than someone can fall off a cliff gradually, or be “slightly pregnant”.

The Ponzi economy simply continues for as long as irrationality prevails, and then implodes. Capital markets, though, are the symptom, not the cause. The fundamental problem is an inability to escape from an addictive practice of manufacturing supposed “growth” on the basis of borrowed money.

There may be shallow lulls in the asset markets, nothing ever only falls down in a straight line in the real world, but that debt I’ve described here will and must come down and be deleveraged.

The process will in all likelihood lead to warfare, and to refugee movements the likes of which the world has never seen just because of the sheer numbers of people added in the past 50 years.

When your children reach your age, they will not live in a world that you ever thought was possible. But they will still have to live in it, and deal with it. They will no longer have the facade you’ve been staring at for so long now, to lull them into a complacent sleep. And the Kardashians will no longer be looking so attractive either.

Jan 072016
 
 January 7, 2016  Posted by at 2:05 pm Finance Tagged with: , , , , , , , ,  5 Responses »
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Berenice Abbott William Goldberg, 771 Broadway, Manhattan 1937

If there’s one thing to take away from this year’s developments in markets and economies so far, it’s that they are all linked, they’re all part of the same thing. If you can’t see that, you’re not going to understand what’s happening.

Looking at falling oil prices as a separate thread is not much use, and neither is doing the same with Chinese stocks, or the yuan, or the millions of Americans who are one paycheck away from poverty, for that matter. It’s all one story.

And the take-away from that, in turn, is that focusing too much on ‘narrow’ conditions in your particular part of the globe has only limited value. We’re very much all in this together. In the UK today, it matters very little what George Osborne says or does, or Mark Carney, because they don’t shape the future of the economy.

The same goes for all finance ministers and central bank governors across the planet, Yellen, Draghi, Koruda, the lot: the influence they exert on their own economies, which was always limited from the start, is running into the boundaries imposed by global developments.

Even if central bankers could ever have ‘lifted’ anything at all (a big question mark), their power to do so is rapidly diminishing. The constraints global developments place on their powers will now be exposed -even more. And of course they’ll try to deny and ignore that, as naked emperors are wont to do.

And with the exposure of the limits to their abilities to make markets and economies do what they want, come the limitations of the mainstream financial press to make their long-promoted recovery narratives appear valid. Before we know it, we might have functioning markets back.

Oil -both Brent and WTI- have breached the $32 handle, and are very openly flirting with the $20s. China’s stock market trading was halted for a second time this year, just 14 minutes after the opening. This came about after the PBoC announced another ‘official’ devaluation of the yuan by 0.5% (stealth devaluation has been a daily occurrence for a while).

$2.5 trillion was lost in global equities in three days this year even before the Thursday China trading stop and ongoing oil price decline. Must be easily over $3 trillion by now. And counting: European markets look awful, and so do futures.

For the first time in years, markets begin to seem to reflect actual economic activity. That is to say, industrial production, factory orders, exports, imports and services sectors are falling both in China and the US. Many of these have been falling for a prolonged period of time.

In fact, Reuters quotes a Sydney trader as saying: The Chinese economy actually contracted in December. Given what I’ve written in the past year and change about China, that can hardly be a surprise anymore.

What we are looking at is debt deflation, in which virtual ‘wealth’ is being wiped out at a fast pace, and it’s taken some real wealth with it for good measure. It’s not going to be one straight line down, for instance because there are a lot of parties out there who need to cover bets they carry from last year, but it’s getting very hard to see what can stop the plunge this time. Volatility will be a popular term again.

The Fed could lose its last remaining shred of credibility through QE4,5,6 and a 180º turn on the rate hike, but it would lose that last shred for sure. Draghi’s ECB could start buying ever more paper, but they would have a hard time finding sufficient amounts of anything to buy that’s worth anywhere near the written value.

The PBoC can’t really do QE after the $25 trillion post-2008 credit pump, and the yuan devaluation today achieved the opposite of what it was intended for. The BoJ is being severely hampered by the rising yen. We’ll see crazy stuff from the global Oracles, for sure, but in reality they never had anything but expensive band-aids to offer, and they have nothing better now.

Ultimately, if China is a Ponzi (and $25 trillion in credit spent on overcapacity strongly suggests so), then the entire world economy is one. I would very much argue so, and have for years. And we all know what inevitably happens with Ponzi’s.

Economists like to think in cycles, in which things will simply bounce back at some point, but a lot of this stuff will not come back, not for a very long time. I’ve said it before: Kondratieff is also a cycle.

We’re watching the initial stages (though a lot has already vanished behind all sorts of curtains) of a massive ‘wealth’ destruction, a very loud POOF!, ‘wealth’ which can so easily be destroyed because most of it was never real, just inflated soap. It’s time to move to cash if you haven’t already, and if you have enough, perhaps a bit of gold, silver or bitcoin, but do remember those are not risk-free.

It’s tempting to see this as a China problem, but first of all there is no China problem that will not of necessity also gravely affect the west , and second of all when you read, just to name an example, that America’s new jobs pay 23% less than the jobs they replaced, it’s just plain silly to believe that the economy is doing well, let alone recovering.

Which is why a majority of Americans are living paycheck to paycheck, and don’t have enough savings even for a $500 car repair bill. All Ponzi’s burst, they can’t be tapered, and this one we have now is going down in epic fashion because there are no major economies left that are not overburdened by debt.

It’s also tempting, certainly for economists, to see money that’s lost in one ‘investment’ to automatically shift to another, but that’s not what’s happening. Much of it simply evaporates. That’s why investment funds where already in a huge high-yield bind last year, and why you should really worry about your pension fund.

Do prepare for rising taxes and services cuts: governments suffer along with everyone, and because they’re slow and lagging, probably even more so. And governments think they deserve to have their hands in your pockets. Prepare for mass lay-offs too. The consumption model is being broken and dismantled as we speak.