Jan 092016
 
 January 9, 2016  Posted by at 9:42 am Finance Tagged with: , , , , , , , , ,  


DPC Longacre Square, soon to be Times Square 1904

Worst First Five Days of Year Ever For US Stocks Dim Outlook (WSJ)
The End of the Monetary Illusion Magnifies Shocks for Markets (BBG)
More Than 40% Of Young Americans Use Payday Loans Or Pawnshops (Ind.)
British People Donating Bodies To Science To Avoid Funeral Costs (Tel.)
Multiple Jobholders Responsible For 64% Of Net US Job Gains (ECRI)
First Profit Fall In 48 Years Looms Over US Energy Sector (MarketWatch)
Mining’s $1.4 Trillion Plunge Like Losing Apple, Google, Exxon Combined (BBG)
Inventor of Market Circuit Breakers Says China Got It Wrong (BBG)
China Market Tsar In Spotlight Amid Stock Market Turmoil (Reuters)
As Growth Slows, China’s Era of Easy Choices Is Over (WSJ)
Why China Shifted Its Strategy for the Yuan, and How It Backfired (WSJ)
China Finds $3 Trillion Just Doesn’t Pack the Punch It Used To (BBG)
Shock, Laughter Greet Plan for Saudi Arabia’s Record Oil IPO (BBG)
Saudi Aramco’s Fire Sale (BBG)
US Accuses Volkswagen Of Poor Co-Operation With Probe (FT)
Visible Light From Black Holes Detected For First Time (Guardian)
Refugees Struggle In Sub-Zero Temperatures In Balkans (BBC)
Greek Police, Frontex To ‘Check’ Volunteers On Islands Receiving Migrants (Kath.)

China went up on Friday, but Wall Street did not. Omen?

Worst First Five Days of Year Ever For US Stocks Dim Outlook (WSJ)

The Dow industrials tumbled more than 1,000 points this week, marking the worst first five days of any year, as volatility across the globe rattled investors. Traders said they are bracing for further big swings in the weeks to come. The Dow fell 1% Friday after starting the day in positive territory amid a strong U.S. jobs report and an uneventful session in China’s markets overnight. But shares slumped in afternoon trading as investors became unwilling to enter the weekend exposed to the risk of further losses. In all, U.S. stocks lost $1.36 trillion in value this past week.

The unusually severe drop highlighted the precarious position of markets caught between relatively high valuations—attributable in part to years of easy money from central banks—and a new round of uncertainty about the fundamental underpinnings of key parts of the global economy. “The conundrum is there are parts of the world that are doing fine…and we have pockets that aren’t doing so well,” said Lawrence Kemp, head of BlackRock’s Fundamental Large Cap Growth team. “Given what’s going on in China and the rest of the world, the U.S. economy could grow a little more slowly.” The Dow Jones Industrial Average lost 1,078.58 points in the first week of 2016, down 6.2%. The broader S&P 500 was down 6%, also its worst five-day start to a year, and the Nasdaq Composite Index was down 7.3%.

Traders said the glum tone is likely to carry over into the coming week, as U.S. companies start reporting earnings for the last quarter of 2015. Corporate-earnings reports are widely expected to be underwhelming. The strong dollar is weighing on the competitiveness of U.S. exporters and the dollar value of companies’ overseas sales. Oil prices, which fell below $33 a barrel Friday in New York before closing at $33.16, continue to weaken. And China’s growth remains slow. Fourth-quarter earnings by companies in the S&P 500 are expected to come in 4.7% lower than they were a year earlier, according to FactSet.

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Central banks

The End of the Monetary Illusion Magnifies Shocks for Markets (BBG)

Central bankers are no longer the circuit breakers for financial markets. Monetary-policy makers, market saviors the past decade through the promise of interest-rate reductions or asset purchases, now lack the space to cut further or buy more. Even those willing to intensify their efforts increasingly doubt the potency of such policies. That’s leaving investors having to cope alone with shocks such as this week’s rout in China or when economic data disappoint, magnifying the impact of such events. “The monetary illusion is drawing to a close,” said Didier Saint Georges at Carmignac Gestion, an asset-management company. “With central banks becoming increasingly restricted in their stimulus policies, 2016 is likely to be the year when the markets awaken to economic reality.” Even against the backdrop of this week’s market losses, Fed officials signaled their intention to keep raising interest rates this year.

Those at the ECB and BoJ ended last year playing down suggestions they will ultimately need to intensify economic-aid programs. They have only themselves to blame for becoming agents of volatility, according to Christopher Walen at Kroll Bond Rating. He told Bloomberg TV this week that officials’ willingness to keep interest rates near zero and repeatedly buy bonds and other assets meant they became “way too involved in the global economy” and should have left more of the lifting work to governments. The handover to looser fiscal policy now needs to happen if economic growth and inflation are to get the spur they need, said Martin Malone at London-based brokerage Mint Partners. “Major economies have exhausted monetary and foreign-exchange policies,” he said. “Government action must take over from central-bank policies, triggering more confident private-sector investment and spending.”

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Yeah, recovery.

More Than 40% Of Young Americans Use Payday Loans Or Pawnshops (Ind.)

Young people are turning to desperate means to make ends meet. New figures that show 42% of Millennials, the generation born between 1980 and the mid-1990s, have turned to alternative finance including payday lenders and pawnshops in the past five years. The numbers come from a survey of more than 5,000 Millennials in the US by PriceWaterhouseCoopers and the Global Financial Literacy Excellence Center at George Washington University. Reports show that Millennials are high users of payday loans in the UK too. A 2014 report by the Financial Ombudsman Service showed that customers complaining about payday lenders were far more likely to be drawn from the 25-34 age group than any other.

The PwC study showed that a third of Millennials are very unsatisfied with their current financial situation and 81% have at least one long term debt, like a student loan or mortgage. That’s before they are saddled with interest on a payday loan that can be as much as 2000%. “They have already maxed out everything else and so they’re going to behavior that’s deemed even riskier,” said Shannon Schuyler, PwC’s corporate responsibility leader. The report also found that almost 30% of Millennials are overdrawn on their current accounts and more than half carry a credit card. Millennials are not the only generation suffering from rising debts. Earlier this week the Bank of England published a report showing that household borrowing surged in the run up to Christmas. The monthly cash rise in consumer credit for November 2015 was the highest since February 2008.

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The shape of things to come. Who can afford a $5000-6000 funeral?

British People Donating Bodies To Science To Avoid Funeral Costs (Tel.)

People are choosing to donate their body to science to avoid the cost of paying for a funeral, MPs have been warned. A leading forensic anthropologist said giving remains to anatomy departments can be seen as a way of avoiding the burden of funeral costs. However, science departments are not always able to take a person’s body, because of disease or because there is simply no space. Professor Sue Black, Director of the Centre for Anatomy and Human Identification at the University of Dundee, told the bereavement benefits inquiry families can be shocked to realise their loved one’s remains cannot be donated. “It is important that bequeathal is not viewed as an option to address funeral poverty although for some individuals it is unquestionably used in this manner,” she said.

As Dundee has one of the highest levels of child and adult poverty in Scotland, Professor Black said it is “not unusual for our bequeathal secretary to receive calls that will relate to concerns over funeral costs.” The Work and Pensions Committee is investigating funeral poverty after a freedom of information request by the BBC found the cost to local councils of so-called “paupers’ funerals” has risen almost 30pc to £1.7m in the past four years. The number of public health funerals, carried out by local authorities for people who die alone or whose relatives cannot afford to pay, has also risen by 11pc. [..] Bodies donated to science are mainly used for medical training and research.

But some are turned down because they are not suitable for educational use, for example if there has been a post-mortem and the body has already been dissected, or because the person has had a particularly destructive form of cancer, or if they have had an organ transplant. Potential donors must also make their wishes clear in their lifetime. “It’s really important that if people think that they want to donate their body, there are things that they must do. It’s not enough to say if verbally, they have to either find the consent forms or make a legal statement in a will or testament,” Professor Black said. The average cost of a basic funeral is now £3,702 according to a recent report.

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Could be the major take-away from yesterday’s BLS report. Employment numbers do not reflect those of the employed.

Multiple Jobholders Responsible For 64% Of Net US Job Gains (ECRI)

The latest jobs report far exceeded consensus expectations as the economy added 292,000 nonfarm payroll jobs. But a closer look at the details reveals why concerns remain about the health of the labor market. In December, year-over-year (yoy) growth in multiple jobholders rose to an 11-month high, while yoy growth in single jobholders eased to a three-month low. Specifically, since May the number of multiple jobholders has increased by 752,000, while single jobholders have increased by 429,000. In other words, multiple jobholders have been responsible for 64% of the net job gains since last spring. The disproportionate importance of multiple jobholders – forced to cobble together a living – shows why the labor market is weaker than it seems. Notably, as long as these multiple jobholders log 35 hours of work per week – no matter how many part-time jobs that takes – they are considered full-time.

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1967. Remember?

First Profit Fall In 48 Years Looms Over US Energy Sector (MarketWatch)

The energy sector will depress U.S. fourth-quarter earnings and subdue growth for the entire S&P 500, making 2015 the weakest year for earnings since 2008, Goldman Sachs said Friday. The bank trimmed its S&P 500 earnings-per-share estimates for 2015, 2016 and 2017 in a note that highlighted three factors it expects to feature in earnings releases and on conference calls this year. The fourth-quarter and 2015 earnings season kicks off next week. The report from Aluminum producer Alcoa, scheduled for Monday after the market’s close, is seen as the unofficial start of several weeks of corporate news. The first factor Goldman highlighted is the energy sector, which the bank says is about to show a decline in operating earnings per share for 2015, its first negative reading since the bank started keeping records in 1967. “Energy EPS has collapsed along with crude oil prices,” analysts wrote in a note.

Energy EPS is highly sensitive to the price of oil, which Goldman is assuming will average $44 a barrel this year. Crude futures were trading below $33 a barrel early Friday, after hitting their lowest level since 2004 this week. Energy companies have been hammered by the slump in oil prices caused by oversupply, which has made some shale plays unprofitable and led companies to slash spending budgets, sell underperforming assets and cut staff and other costs. “The write-down in energy company assets has exacerbated the earnings hit from the 35% fall in Brent crude oil prices in 2015, following a 48% plunge in the commodity price in 2014,” said the note. In 2014, the energy sector accounted for $13, or 12%, of the overall S&P 500’s EPS reading of $113. In 2015, that contribution had tumbled to a loss of $2. That means energy contributed a $15 decline to S&P 500 earnings, which more than outweighed EPS gains in other sectors, said the note.

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Much more downside to come.

Mining’s $1.4 Trillion Plunge Like Losing Apple, Google, Exxon Combined (BBG)

The $1.4 trillion lost in global mining stocks since 2011 exceeds the total market value of Apple, Exxon Mobil and Google’s parent Alphabet. When you’ve spent a decade building new mines from the Andean mountains to the West African jungle, it’s bad news when a downturn in China, your biggest customer, shows no signs of stopping. Investors have been unforgiving and concerns that it will only get worse pushed the Bloomberg World Mining Index to an 11-year low. “It’s terrible, there are no two ways about it,” said Paul Gait at Sanford C. Bernstein in London. “A lot of people were hoping at the start of 2016 to see at least some stabilization in the commodity performance in these stocks. Essentially people were looking to close the consensus short that has characterized 2015. This has clearly not happened.”

BHP Billiton and Rio Tinto were once among the world’s largest companies. Shares of the biggest commodity producers trading in London are now at least twice as volatile as the U.K.’s benchmark stock index. Raw-material prices slipped to the lowest since 1999 on Thursday, with China’s stock market suffering its worst start to the year in two decades after the central bank cut the yuan’s reference rate by the most since August. A weaker currency encourages exports from the nation and makes it costlier for it to import commodities, hurting those that supply them. Anglo American, worth almost £50 billion ($73 billion) in 2008, is now valued at £3.1 billion. The 99-year-old company, which is the world’s biggest diamond and platinum producer and owns some of the best copper and coal mines, is now worth less than mid-tier Randgold and copper miner Antofagasta.

Apple, the world’s most valuable company, is worth about $549 billion. Alphabet is valued at $510 billion and Exxon $321 billion. The Bloomberg mining index of 80 stocks slumped as much as 4.1% on Thursday to the lowest since 2004. Anglo closed down 11% in London to the lowest since it started trading in 1999. BHP tumbled 5% and Rio retreated 3.4%. Glencore settled down 8.3%.

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They seem to get a lot wrong.

Inventor of Market Circuit Breakers Says China Got It Wrong (BBG)

The man responsible for stock circuit breakers says Chinese officials must revise their safety net to avoid creating panic, joining critics who argue the nation’s trading halts are triggered too easily for such a volatile market. “They’re just on the wrong track,” said Nicholas Brady, 85, the former U.S. Treasury secretary who ran a committee that recommended the curbs on equity trading after the 1987 crash. “They need a set of circuit breakers that appropriately reflects their market.” Brady spoke Thursday after Chinese regulators suspended their newly introduced program that ends stock trading for the entire day after a 7% plunge. The halt was set off twice in its first week of operation, bolstering speculation China set its threshold too low. “The right thing to do is to widen their band,” Brady said in an interview.

The U.S. confronted a similar problem in the 1990s. The curb that the Brady Commission helped implement shut the market for the first time on Oct. 27, 1997, when the Dow Jones Industry Average lost 554 points. That was only a 7.2% decline, almost identical to the Thursday plunge in China’s CSI 300 Index. The trouble was that a decade-long surge in U.S. stock prices had diminished the value of each point in the Dow. The 1987 crash’s 508-point slump had amounted to a 23% tumble, three times greater than the decline that froze trading 10 years later. Regulators and exchanges pushed through a revision: If the Dow fell 10%, there would be an hour pause. At 20%, trading would cease for two hours, and at 30%, the day would end early.

In recent years, the benchmark that triggers the halts switched to the Standard & Poor’s 500 Index and the levels changed. Now it takes 7% and 13% drops to prompt a brief pause, and a 20% decline to close markets early for the day. Whereas 7% losses are rare in the U.S. – they were only common during the 2008 financial crisis, October 1987, and the Great Depression – Chinese shares have dropped about that much seven times in the past year. “I don’t think this is an exact science,” said Sang Lee, an analyst at financial-markets researcher Aite Group. With circuit breakers, “If you set these too low, instead of easing volatility it may increase volatility. That echoes the view of Brady, who was chairman of Wall Street powerhouse Dillon Read & Co. when President Ronald Reagan asked him to figure out what happened during the 1987 crash and propose solutions.

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Lost in Beijing hubris.

China Market Tsar In Spotlight Amid Stock Market Turmoil (Reuters)

Xiao Gang, China’s stock market tsar, once remarked that the only thing he’d done right in life was marry his wife. No doubt the self-effacing Xiao, chairman of China Securities Regulatory Commission (CSRC), has done many other things right. Managing the stock market, though, might not be a high point of his career. Xiao faced internal criticism from the ruling Communist Party for his handling of the stock market crash last year, sources with ties to the leadership said at the time. In another blow, a “circuit breaker” mechanism to limit stock market losses that was introduced on Monday was deactivated by Thursday after it was blamed for exacerbating a sharp selloff. Online media had nicknamed Xiao “Mr Circuit Breaker”.

“There has to be responsibility. People are looking to the leader at the regulator. Xiao Gang is the public face,” said Fraser Howie, an independent China market analyst. “He was lucky to keep his job after the fiasco of July and August.” Xiao, 57, became chairman of the CSRC in the leadership churn when President Xi Jinping came into power, taking the helm of the regulator in March 2013. At the time, Chinese markets had been among the world’s worst-performing for six years – indeed they had not recovered from their collapse during the global financial crisis. Unfortunately for Xiao, they still haven’t. The challenge Xiao faced upon taking up the post was enormous: to attract fresh investment into equities from speculative bubbles in sectors like real estate, while defending against endemic insider trading.

To pull any of this off he needed to first convince China’s legions of small retail investors, who dominate transactions but are infamously fond of quick-hit speculative plays, that stocks are a safe place to park long-term capital. The urgency was heightened by the need to deal with China’s corporate debt overhang – Chinese firms had become almost entirely dependent on bank loans for financing, which naturally prejudiced economic development toward collateral-rich heavy industry and away from the innovative, nimble technology companies that tend to rely more on stock issuances to fund quick growth.

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Chinese politics clash with economics. By default. It’s not just pushing a button or pulling a lever.

As Growth Slows, China’s Era of Easy Choices Is Over (WSJ)

China has pulled hundreds of millions of people from poverty, supercharged its economy and burnished the pride of a nation that stood weak and isolated only decades ago. But swelling levels of debt, bloated state companies and an overall aversion to market forces are swamping the world’s second-largest economy, threatening to derail China’s ascent to the ranks of rich countries. As Beijing battles another bout of stock-market turmoil—and global markets shudder in response—the risks of doing nothing about these deep-seated problems are rising, economists said. Without a change in course, they said, China faces a period of low growth, crimped worker productivity and stagnating household wealth. It’s a condition known as “the middle-income trap.” “The era of easy growth is over,” said Victor Shih, professor at the University of California-San Diego.

“It’s increasingly about difficult choices.” Some economists don’t rule out an abrupt drop in growth, a hard landing that would see bad debts soar, consumer confidence tank, the Chinese yuan plunge, unemployment spiral and growth crater. More likely is that Beijing will continue to prop up growth, steering more capital to money-losing companies, unneeded infrastructure and debt servicing, depriving the economy of productive investment and leading to the sort of protracted malaise seen in Japan in recent decades. But China is less prosperous than Japan. An anemic China would weaken global growth at a time of low demand and prolong the downturn for big commodity producers like Brazil that have been dependent on the Asian economic giant. “They don’t want to take the pain,” said Alicia Garcia Herrero at investment bank Natixis. “But the longer they wait, the more difficult it becomes.”

Chinese leaders are aware of the risks. On Tuesday, Premier Li Keqiang called for a greater focus on innovation to spur new sources of economic growth and to revitalize traditional sectors, according to the Xinhua. A far-reaching economic blueprint laid out in 2013 after President Xi Jinping came to power vowed to let markets take a “decisive” role and build out a legal framework to restructure the economy and benefit consumers and small businesses, rather than industry. Progress to date, economists said, has been disappointing. Political objectives stand in the way. Mr. Xi has committed the government to meeting a goal of doubling income per person between 2010 and 2020, the eve of the 100th anniversary of the ruling Communist Party. That means, in Mr. Xi’s eyes, that growth must reach 6.5% annually. With global demand slipping and fewer Chinese entering the workforce, Beijing will need to resort to stimulus spending to get there, analysts said, delaying the reckoning with restructuring.

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“As of September, China’s outstanding foreign debt stood at $1.53 trillion. More than two-thirds of that amount is expected to come due within a year..”

Why China Shifted Its Strategy for the Yuan, and How It Backfired (WSJ)

The IMF’s decision on Nov. 30 to declare the yuan an official reserve currency removed an incentive for the central bank to keep propping up the currency. Rather, it aims to let it gradually depreciate with an eye toward sending it modestly higher in this year’s second half, according to advisers to the PBOC. That is when Beijing will host leaders from the Group of 20 major economies and will be eager to showcase China’s economic might. But that strategy is fraught with risks. Chief among them, analysts say, is the difficulty in reversing continued market expectations for a still-weaker yuan. In Hong Kong, where the yuan can be bought and sold freely, the Chinese currency now trades at a steep discount to its mainland cousin, whose trading is limited within a government-dictated band.

The gap has led some investors to try to profit from the different exchange rates, causing irregular flow of funds across China’s borders. By intervening in the Hong Kong market Thursday to try to cap the offshore yuan rate and at the same time allowing the onshore rate to weaken faster, the central bank appears to be attempting to find “a near-term market equilibrium level that can help the exchange rates converge,” analysts at HSBC wrote in a research note. The central bank also doesn’t want a too-weak yuan to exacerbate capital outflows and make it more difficult for Chinese companies to pay off their dollar-denominated debt. As of September, China’s outstanding foreign debt stood at $1.53 trillion. More than two-thirds of that amount is expected to come due within a year, according to government data.

Among the big foreign-debt holders are Chinese property companies, which have more than $60 billion of dollar debt outstanding, according to data provider Dealogic. Wary of continued weakening of the yuan, some Chinese companies are moving to pay off their debt early. State-run airliner China Eastern Airlines paid down $1 billion of dollar debts on Monday, citing the need to reduce its exposure to exchange-rate fluctuations. For many years, the prevailing investor sentiment had been the yuan had no way to go but up as China’s trade surplus surged. Investors have now shifted their mind-set to the other extreme.

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Will they have any FX reserves left a year from now? It’s not all that obvious.

China Finds $3 Trillion Just Doesn’t Pack the Punch It Used To (BBG)

China’s $3 trillion-plus in foreign currency reserves, the biggest such stockpile in the world, would seem to be a gold-plate insurance policy against the country’s current market chaos, a depreciating currency and torrent of capital leaving the country. Maybe not, say economists. First off, data point to an alarming burn rate of dollars at the People’s Bank of China. The nation’s stockpile of foreign exchange reserves plunged by $513 billion, or 13.4%, in 2015 to $3.33 trillion as the nation’s central bank coped with a weakening yuan and an estimated $843 billion in capital that left China between February and November, the most recent tally available according to data compiled by Bloomberg. “My greatest worry is the fast depletion of FX reserves,” said Yu Yongding, a member of China’s monetary policy committee when the currency was revalued in 2005.

True, trillions of dollars under the central bank’s care are thought to be invested in safe liquid securities, including Treasury bonds. The U.S. measure of China’s holdings of Treasuries, the benchmark liquid investment in dollars, stood at $1.25 trillion in October, according to the U.S. Treasury Department, which cautions that the figures may not reflect the true ownership of securities held in a custodial account in a third country. In China, like some other countries, the exact composition of China’s reserves is a state secret. But analysts worry the currency armory may not be as strong as it looks. That’s because some of the investments may not be liquid or easy to sell. Others may have suffered losses that haven’t been accounted for.

In addition, some Chinese reserves may have already been committed to fund pet government projects like the Silk Road fund to build roads, ports and railroad across Asia or tens of billions in government-backed loans to countries such as Venezuela, much of which is repaid through oil shipments. Then there are other liabilities that China needs to cover, such as the nation’s foreign currency debt to finance and manage imports denominated in overseas currencies. When those factors are taken into account, some $2.8 trillion in reserves may already be spoken for just to cover its liabilities, according to Hao Hong at Bocom International. “Considering China’s foreign debt, trade and exchange rate management, it needs around $3 trillion in foreign exchange reserves to be comfortable.” he said.

[..] “Where is the line in the sand, and what happens when we get there?,” said Charlene Chu, the former Fitch analyst known for her warnings over China’s debt risks. “China’s large hoard of foreign reserves gives the country considerable power and influence globally, and I would think they would want to protect that. If there is such a line in the sand, it is very possible we hit it in 2016.” To be sure, intervention isn’t the only thing dragging China’s reserves lower. There’s also a valuation impact from fluctuating currencies. Some of the fall may also reflect authorities accounting for its investments. Chu reckons much of the decline up to June 2015 was mostly due to investments in illiquid assets and valuation changes rather than capital outflows.

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“The company could be worth anything from $1 trillion to upwards of $10 trillion..”

Shock, Laughter Greet Plan for Saudi Arabia’s Record Oil IPO (BBG)

When one financial adviser heard about Saudi Arabia’s plans to list a company larger than the economies of most nations, he had to pull over his car because he was laughing so hard. Saudi Arabian Oil Co., or Aramco, the world’s largest oil producer, said Friday it’s considering an initial public offering. It confirmed an interview with Deputy Crown Prince Mohammad bin Salman published in the Economist Thursday. The news was greeted with incredulity in the financial industry, according to interviews with a half dozen bankers who do business in the Middle East. They asked not to be identified to protect their business interests. For one thing, Aramco’s inner workings are opaque, making its true value a mystery. Then there’s the timing. The price of crude oil is near its lowest level in more than a decade.

Discussions with Aramco about selling assets in the past had been about much smaller parts of the business, five of the people said. An initial public offering of the entire enterprise had only ever been discussed as a joke, one of the people said. The company could be worth anything from $1 trillion to upwards of $10 trillion, which would make it the most valuable company in the world, according to a note from Jason Tuvey at research firm Capital Economics. The last mega IPO from the oil industry was a decade ago, when Russia’s OAO Rosneft raised more than $10 billion. Even if Saudi Arabia sells a small stake, a listing could easily surpass that of Alibaba whose $25 billion IPO is the largest on record. Still, Aramco is unlikely to list on the biggest exchanges, according to Bloomberg oil strategist Julian Lee.

That would require the government to give investors more detailed information about Aramco’s reserves and production capacity, something oil-producing nations consider state secrets, he said. Aramco is considering selling an “appropriate%age” of its shares in the capital markets or listing a bundle of its subsidiaries, it said in the statement. Saudi Arabia typically sells stakes in state-owned companies to the public at below market value as part of its efforts to redistribute wealth. National Commercial Bank raised $6 billion in 2014 in the Middle East’s largest share sale. As the bankers do the sums, a big IPO won’t necessarily translate into big fees. Governments often pay low fees on their exits.

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“.. it’s hard not to see talk of floating Aramco as a defensive move forced on a kingdom that is under pressure on the financial, political and military fronts.”

Saudi Aramco’s Fire Sale (BBG)

That strange and rather unappetizing sound you just heard was the world’s energy bankers simultaneously salivating over the prospect of the oil deal of the century. In an interview published Thursday by The Economist, Saudi Arabia’s deputy crown prince Muhammad bin Salman said his country is considering privatizing Saudi Aramco. A quick back-of-the-envelope calculation for a company whose oil reserves dwarf those of Exxon Mobil yields a potential market capitalization of: gajillions. Apart from anything else, Aramco’s role in supplying roughly a tenth of the world’s oil would make its earnings guidance required reading not merely for sell-side analysts, but central bankers, government leaders and generals, too.There are many caveats here, beginning with the fact that the privatization is “something that is being reviewed.”

And if privatization were to proceed, it might well involve listing shares in some downstream part of Aramco such as petrochemicals, rather than the core upstream business or parent company. The bigger issue, though, is the idea appearing to have any traction at all and being spoken of publicly by no less a figure than the deputy crown prince. It adds a further twist to a narrative emanating from Saudi Arabia that suggests the global oil market is undergoing epochal change. The interview was wide-ranging, touching on relations with Iran and the U.S., women in the workforce, tax reform and possible privatization in many sectors, not just energy. And the deputy crown prince was in expansive mode, agreeing with his interviewer’s supposition that the autocratic kingdom is undergoing a “Thatcher revolution” and answering one question on attracting foreign investors with an almost Trumpian “I’m only giving out opportunities.”

The context for this sweeping vision, though, is the OPEC benchmark oil price having just slipped below $30 a barrel. The rational time to sell shares in Aramco would have been, let’s see, about 18 months ago, when oil was still trading in triple digits and the MSCI Emerging Markets Index was nudging 1100 rather than languishing below 750. Of course, other things play a part in deciding to privatize any state jewel of this scale – such as, in the words of the deputy crown prince, fostering transparency and strengthening the domestic stock market. Such factors were there, for example, in the privatization of China’s oil majors at the start of this century. Yet it’s hard not to see talk of floating Aramco as a defensive move forced on a kingdom that is under pressure on the financial, political and military fronts.

Saudi Arabia still sits on sizable foreign reserves. But the increases in (heavily subsidized) domestic fuel prices announced recently, as part of the country’s annual budget, indicate Riyadh’s desire to hunker down for a prolonged period of low oil prices. Indeed, it is possible that raising money from an Aramco IPO would be designed to show that the state is making its own sacrifices. [..] Change is clearly in the air. Riyadh is due later this month to unveil a medium-term “National Transformation Plan” aimed at, among other things, streamlining a public sector where wages swallow up nearly a fifth of GDP and diversifying the country’s tax base. This comes soon after a decision to open the country’s stock market to foreign investors. And, of course, it is happening amid an ongoing policy to maximize oil production in a suddenly much more competitive global oil market.

In one unnerving respect, this is bullish for oil: Ossified political structures are highly vulnerable precisely when they seek even partial reform. Any destabilization in Saudi Arabia could provide the supply shock that clears the glut in oil and raises oil prices. But don’t forget the warnings given by Saudi Arabia’s petroleum minister just over a year ago that global oil demand growth may face a “black swan” in the next few decades. Viewed through that lens, the policy of pumping more barrels out now looks like not merely a strategy to maintain market share but also to simply monetize reserves that might otherwise be left to mire underground. Take it one step further, and you might say the same of Riyadh suddenly deciding it’s time to cash in on Saudi Aramco now, oil price be damned.

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“VW cited German law as its reason for not co-operating.”

US Accuses Volkswagen Of Poor Co-Operation With Probe (FT)

Volkswagen is failing to co-operate sufficiently with a US investigation into the emissions scandal, according to New York attorney-general Eric Schneiderman, who warned that the authorities’ patience was “wearing thin”. Mr Schneiderman said on Friday that VW’s co-operation with a probe involving 47 state attorneys-general had been “spotty” and “slow”, adding to the German carmaker’s mounting troubles in the US. On Monday, the Department of Justice sued VW in a civil case, seeking at least $45bn in penalties. The US authorities’ clash with VW came as the company said that its annual sales had fallen last year for the first time in more than a decade.

A combination of the emissions scandal and turmoil in emerging markets has taken a toll on Europe’s biggest carmaker, pushing group-wide sales below 10m units in 2015. VW admitted in September that it had installed “defeat devices” in up to 11m cars, including 482,000 in the US, that served to understate the diesel-powered vehicles’ emissions of nitrogen oxides during official tests. The 47 state attorneys-general, plus prosecutors in Washington DC, are investigating whether VW violated environmental laws and misled consumers. The justice department is pursuing a similar probe now relating to almost 600,000 VW cars in the US.

“Volkswagen’s co-operation with the states’ investigation has been spotty — and frankly, more of the kind one expects from a company in denial than one seeking to leave behind a culture of admitted deception,” Mr Schneiderman said. He added that VW had been slow to produce documents from its US files, had sought to delay responses until it completed its own investigation, and had “failed to pursue every avenue to overcome the obstacles it says that German privacy law presents to turning over emails from its executives’ files in Germany”. “Our patience with Volkswagen is wearing thin,” Mr Schneiderman said. The New York Times first reported that VW was not handing over documents to the US authorities. VW cited German law as its reason for not co-operating.

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Not long ago the very idea was considered heresy.

Visible Light From Black Holes Detected For First Time (Guardian)

Astronomers have discovered that black holes can be observed through a simple optical telescope when material from surrounding space falls into them and releases violent bursts of light. The apparent contradiction emerges when a black hole’s gravity pulls in matter from nearby stars, producing light that can be viewed from a modest 20cm telescope. Japanese researchers detected light waves from V404 Cygni – an active black hole in the constellation of Cygnus, the Swan – when it awoke from a 26-year-long slumber in June 2015. Writing in the journal Nature, Mariko Kimura of Kyoto University and others report how telescopes spotted flashes of light coming from the black hole over the two weeks it remained active. The flashes of light lasted from several minutes to a few hours. Some of the telescopes were within reach of amateur astronomers, with lenses as small as 20cm.

“We now know that we can make observations based on optical rays – visible light, in other words – and that black holes can be observed without high-spec x-ray or gamma-ray telescopes,” Kimura said. The black hole, one of the closest to Earth, has a partner star somewhat smaller than the sun. The two objects circle each other every six-and-a-half days about 8,000 light years from Earth. Black holes with nearby stars can burst into life every few decades. In the case of V404 Cygni, the gravitational pull exerted on its partner star was so strong that it stripped matter from the surface. This ultimately spiralled down into the black hole, releasing a burst of radiation. Until now, similar outbursts had only been observed as intense flashes of x-rays and gamma-rays.

At 18.31 GMT on 15 June 2015, a gamma ray detector on Nasa’s Swift space telescope picked up the first signs of an outburst from V404 Cygni. In the wake of the event, Japanese scientists launched a worldwide effort to turn optical telescopes towards the black hole. The flickers of light are produced when x-rays released from matter falling into the black hole heat up the material left behind. Poshak Gandhi, an astronomer at Southampton University, said the black hole looked extremely bright when matter fell in, despite being veiled by interstellar gas and dust. “In the absence of this veil, V404 Cygni would have been one of the most distant objects in the Milky Way visible in dark skies to the unaided eye in June 2015,” he writes in the journal.

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Death stalks Europe.

Refugees Struggle In Sub-Zero Temperatures In Balkans (BBC)

Medics working at refugee aid camps in the Balkans say they are seeing a spike in the number of migrants falling ill as freezing temperatures arrive. It has fallen to as low as -11C (12F) in the region. The medical charities International Medical Corps and Medecins Sans Frontieres say most patients are suffering with respiratory problems such as bronchitis and flu. There are also concerns about people refusing or not seeking treatment. Migrants are offered medical assistance, warm clothes and food at the main refugee points at the Serbian border with Macedonia to the south, and Croatia to the north. International Medical Corps runs a makeshift clinic at the train station in the tiny town of Sid, in northern Serbia “Last week, when temperatures were a bit less, we were seeing around 50 to 60 people a day,” said Sanja Djurica, IMC team leader.

“This week, now that temperatures have fallen, it’s more like 100 or so a day.” “Almost all of them are suffering with respiratory illnesses brought on by the cold.” I met the Al-Maari family, who are making the journey as the snow falls thick and fast. They fled Syria three weeks ago, and have been on the road ever since. They are travelling with four children, the youngest is just two years old. His brother Mohammad, seven, is suffering with fever and a chest infection. “We are on a journey of death,” said Mohammad’s uncle, Iyad Al-Maari. “We can endure. But I am worried about the children – the cold, disease and hunger.” Mohammad is not thought to be seriously ill. Iyad said the family are determined to continue to Germany, where the children’s father is waiting for them.

“Some people are refusing further medical help after we’ve assessed them,” said Tuna Turkmen from MSF in Serbia. “Even if they are referred to hospital, most don’t go. They just want to keep moving… in case borders suddenly close and they are left stranded.” With tears in her eyes, Mohammad’s mother, Malak, said: “We didn’t want any of this… we just want the war to end in Syria.” The stress and anxiety can be seen clearly on Malak’s face. She is traumatised and desperate. Medics have also highlighted the enormous psychological impact on those making these journeys. International Medical Corps has psychologists on hand in Sid, and even though people only tend to stay there for a few hours, medics and aid workers do have some time to deliver “psychological first aid”. “It’s emotional comfort, empathetic listening and encouraging coping techniques,” said Sanja Djurica.

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Checking those who filled in when Europe was a no-show. What a joke.

Greek Police, Frontex To ‘Check’ Volunteers On Islands Receiving Migrants (Kath.)

The Greek Police and [EU border agency] Frontex are to carry out checks on non-governmental organizations and volunteers on islands of the northern Aegean which have been receiving large numbers of migrants, sources have told the Athens-Macedonia News Agency. “Our goal is not to offend the volunteers and employees of NGOs nor to disrupt their work but to simply highlight the presence of the police on the coastline and generally in areas where migrants and refugees are disembarking,” a police source told AMNA. There will also be an investigation into reports that certain individuals posed as refugees in order to steal the personal belongings of refugees or the smuggling boats on which they reach the islands. The broader checks will seek to determine that people declaring themselves as volunteers are working for an accredited organization. The aim is to restore a sense of security on the islands, police source said, not to prevent the work of the NGOs.

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Jan 082016
 
 January 8, 2016  Posted by at 9:50 am Finance Tagged with: , , , , , , , , ,  


Unknown Charleston, SC, after bombardment. Ruins of Cathedral of St John and St Finbar 1865

Slowing Productivity Fast Becoming A Global Problem (Lebowitz)
Dow, S&P Off To Worst Four-Day Jan Start Ever As China Fears Grow (Reuters)
US Stock Markets Continue Plunge (Guardian)
China Has Not One Insolvable Problem, But Many Of Them (Mish)
Capital Flight Pushes China To The Brink Of Devaluation (AEP)
China Stocks Rebound as State Funds Said to Buy Equities (BBG)
China’s Yuan Fixing Calms Markets as Asian Stocks Rally With Oil (BBG)
The Decline Of The Yuan Destroys Belief In Central Banking (Napier)
One Big Market Casualty: China Regulators’ Reputation (CNBC)
China Orders Banks To Limit Dollar Buying This Month To Stem Outflows (CNBC)
Yuan Depreciation Risks Competitive Devaluation Cycle (Reuters)
China’s Forex Reserves Post Biggest Monthly Drop On Record (Xinhua)
China’s Stock Market Is Hardly Free With Circuit Breakers Gone (BBG)
Iran Severs All Commercial Ties With Saudi Arabia (Reuters)
Saudi Arabia Considers IPO For World’s Biggest Energy Company Aramco (Guardian)
VW Weighs Buyback of Tens of Thousands of Cars in Talks With US (BBG)
Human Impact Has Pushed Earth Into The Anthropocene (Guardian)
Europe’s Economy Faces Confidence Test as Borderless Ideal Fades (BBG)
Turkey Does Nothing To Halt Refugee Flows, Says Greece (Kath.)

We’ve reached the end of a line. Not even the narrative works from here.

Slowing Productivity Fast Becoming A Global Problem (Lebowitz)

In “The Fed And Its Self-Defeating Monetary Policy” we focused our discussion on U.S. productivity, but weak and slowing productivity growth is not just an American problem. All of the world’s leading economies are, to varying degrees, exhibiting the same worrisome pattern. And slowing productivity is something investors across asset classes should pay attention to in 2016. The graph below compares annualized productivity trends from three time periods – the 7 years immediately preceding the financial crisis, the 5 years immediately following the crisis, and the 2 most recently reported years (2013 and 2014). The black dots display the change in trend from pre to post crisis.

In all cases the black dots are below zero representing slowing productivity growth. More troublesome, the world’s largest economies are most recently reporting either negligible productivity growth or a decline in productivity. Assuming that demographics are already “baked” and debt has been over-used to produce non-productive growth since well before the crisis, good old-fashioned productivity gains are what the global economy requires to produce durable organic growth in the developed world. Central bankers, politicians and investors are well advised to understand this dynamic.

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Jobs numbers today will be big.

Dow, S&P Off To Worst Four-Day Jan Start Ever As China Fears Grow (Reuters)

U.S. stocks sold off further on Thursday, giving the Dow and S&P 500 their worst four-day starts to a year ever, dragged down by another drop in Chinese equities and oil prices at 12-year lows. China allowed the biggest fall in its yuan currency in five months, adding to investor fears about the health of its economy, while Shanghai stocks were halted for the second time this week after another steep selloff. Oil prices fell to 12-year lows and copper prices touched their lowest since 2009, weighing on energy and materials shares. Shares of Freeport McMoran dropped 9.1% to $5.61. All 10 S&P 500 sectors ended in the red, though, and the Nasdaq Biotech index fell 4.1%. “People see the weakness in China and in the overall equity market and think there’s going to be an impact on corporations here in the United States,” said Robert Pavlik at Boston Private Wealth in New York.

“When you have a market that begins a year with weakness, people are sort of suspect anyway. The economy isn’t moving all that well, the outlook is modest at best, and they don’t want to wait for the long term. China creates more uncertainty.” The Dow Jones industrial average closed down 392.41 points, or 2.32%, to 16,514.1, the S&P 500 had lost 47.17 points, or 2.37%, to 1,943.09 and the Nasdaq Composite had dropped 146.34 points, or 3.03%, to 4,689.43. The Dow has lost 5.2% since the end of 2015 in the worst first four trading days since the 30-stock index was created in 1928. The S&P 500 is down 4.9% since Dec. 31, its worst four-day opening in its history, according to S&P Dow Jones Indices, while the Nasdaq is down 6.4%.

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Serious losses and serious jitters.

US Stock Markets Continue Plunge (Guardian)

US stocks continued to fall on Thursday as fears of an economic slowdown in China spooked investors around the world. The Dow Jones industrial average fell 392.41 points, or 2.32%, capping its worst four-day start to a year in more than a century. The S&P 500 posted its largest daily drop since September, losing 47.17 points, or 2.37%, to 1,943.09 and the Nasdaq Composite dropped 146.34 points, or 3%, to 4,689.43. The falls followed another day of turmoil on the world’s stock markets amid more signs that the Chinese economy is slowing. China moved early to try to head off more panic, scrapping a new mechanism that Beijing had initially hoped would prevent sharp selloffs.

Beijing suspended the use of “circuit breakers” introduced to halt trading after dramatic selloffs. The circuit breakers appear to have exacerbated the selloffs, as would-be sellers waited for the markets to open again in order to sell. The decision came after the breaker was tripped for the second time in a week as the market fell 7% within half an hour of opening. Signs of problems in the world’s second largest economy triggered selling in Europe. The German DAX was the worst performer, falling 2.29%, as manufacturing firms were hit by fears about China’s impact on the global economy. In London the FTSE 100 staged a late rally but still ended the day down 119 points, or 1.96%, at 5,954. That’s a three-week low, which wipes around £30bn ($43.86bn) off the index.

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Well put.

China Has Not One Insolvable Problem, But Many Of Them (Mish)

Yuan and Capital Flight
• China needs to prop up the yuan to slow capital flight.
• China needs to let the yuan drop to support exports.
• China needs to float the yuan and remove capital controls to prove it really deserves to be taken seriously as a reserve currency.
• If the yuan sinks, capital flight will increase and China risks the ire of US congress and those play into protectionist sentiment, notably Donald Trump.
• Artificial stabilization of the yuan will do nothing but create an oversized move down the road as we saw in Switzerland.

SOEs and Malinvestments
• China needs to write off malinvestments in state owned enterprises (SOEs).
• If China does write off malinvestments in SOEs it will harm those investing in them, generally individual investors who believed in ridiculous return guarantees.
• If China doesn’t write off malinvestments it will have to prop up the owners of those enterprises, mainly the ruling class, at the expense of everyone else, delaying much needed rebalancing.

Property Bubble
• China needs to fill tens of millions of vacant properties, but no one can afford them.
• If China makes the properties affordable it will have to cover the losses, or builders will suffer massive losses.
• If China subsidizes losses for the builders, there are still no real jobs in in the vacant cities.
• If China does not subsidize the losses, the builders and current investors will both suffer massive damage.

Jobs
• China is losing exports to places like Vietnam that have lower wage points.
• Property bubbles, the overvalued yuan, SOEs, and capital flight all pose conflicting problems for a government desperate for job growth.

Stock Market
• China’s stock market is insanely overvalued (as are global equity markets in general). Many investors are trapped. A sinking stock market and loss of paper profits will make overvalued properties even more unaffordable.
• Propping up the market, as China has attempted (not very effectively at that), encourages more speculation.

Pollution
• Curtailing pollution will cost tens of millions of jobs.
• Not curtailing pollution will cost tens of millions of lives.

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“Our new base case is that the Chinese government will simply let the debt party go on until it eventually collapses under its own weight..”

Capital Flight Pushes China To The Brink Of Devaluation (AEP)

China is perilously close to a devaluation crisis as the yuan threatens to break through the floor of its currency basket, despite massive intervention by the central bank to defend the exchange rate. The country burned through at least $120bn of foreign reserves in December, twice the previous record, the clearest evidence to date that capital outflows have reached systemic proportions. “There is certainly a sense that the situation is spiraling out of control,” said Mark Williams, from Capital Economics. Mr Williams said the authorities botched a switch in early December from a dollar currency peg to a trade-weighted exchange basket, accidentally setting off an exodus of money. Skittish markets suspected – probably wrongly – that it was camouflage for devaluation. The central bank is now struggling to pick up the pieces.

Global markets are acutely sensitive to any sign that China might be forced to abandon its defence of the yuan, with conspiracy theories rampant that it is gearing up for currency war in a beggar-thy-neighbour push for export share. Any such move would send a powerful deflationary impulse though a world economy already on its knees, and risk setting off a chain-reaction through Asia, replicating the 1998 crisis on a larger and more dangerous scale. The confused signals coming from Beijing sent Brent crude crashing to an 11-year low of $32.20. They have also set off a parallel drama on China’s equity markets. The authorities shut the main exchange after the Shanghai Composite index plunged 7.3pc in less than half an hour, triggering automatic circuit-breakers. The crash wiped out $635bn of market capitalisation in minutes.

It was triggered by a witches’ brew of worries: a fall in China’s PMI composite index for manufacturing and services below the boom-bust line of 50, combined with angst over an avalanche of selling by company insiders as the deadline neared for an end to the share-sales ban imposed last year. Faced with mayhem, regulators have retreated yet again. They have extended the ban, this time prohibiting shareholders from selling more than 1pc of the total float over a three-month period. The China Securities Regulatory Commission said the move was to “defuse panic emotions”. The freeze on sales is an admission that the government is now trapped, forced to keep equities on life-support to stop the market crumbling. The commission said its “national team” would keep buying stocks if necessary, doubling down on its frantic buying spree to rescue the market last year.

[..] Jonathan Anderson, from Emerging Advisors Group in Shanghai, said the latest burst of stimulus – led by an 18pc rise in credit – is clear evidence that Beijing is unwilling to take its medicine and deflate the country’s $27 trillion loan bubble. “The debt ratio is rocketing upwards. China is still adding new leverage at a massive, frenetic pace,” he said. “The authorities have clearly shown that they have no intention of addressing leverage problems. Our new base case is that the Chinese government will simply let the debt party go on until it eventually collapses under its own weight,” he said.

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Light. Tunnel. Oncoming freight train.

China Stocks Rebound as State Funds Said to Buy Equities (BBG)

Chinese stocks gained in volatile trading after the government suspended a controversial circuit breaker system, the central bank set a higher yuan fix and state-controlled funds were said to buy equities. The Shanghai Composite Index rose 3% at 1:34 p.m. local time, after falling as much as 2.2% earlier. Regulators removed the circuit breakers after plunges this week closed trading early on Monday and Thursday. The central bank set the currency’s reference rate little changed Friday after an eight-day stretch of weaker fixings that roiled global markets. State-controlled funds purchased Chinese stocks on Friday, focusing on financial shares and others with large weightings in benchmark indexes, according to people familiar with the matter.

“The scrapping of the circuit breaker system will help to stabilize the market, but a sense of panic will remain, particularly among retail investors,” said Li Jingyuan, general manager at Shanghai Bingsheng Asset Management. “The ‘national team’ will probably continue to buy stocks significantly to stabilize the market.” While China’s high concentration of individual investors makes its stock-market notoriously volatile, the extreme swings this year have revived concern over the Communist Party’s ability to manage an economy set to grow at the weakest pace since 1990. The selloff has spread around the world this week, sending U.S. equities to their worst-ever start to a year and pushing copper to the lowest levels since 2009.

[..] The flip-flop in the circuit breaker rule adds to the sentiment among global investors that authorities are improvising – and improvising poorly – as they try to stabilize markets and shore up the economy. “They are changing the rules all the time now,” said Maarten-Jan Bakkum, a senior emerging-markets strategist at NN Investment Partners in The Hague with about $206 billion under management. “The risks seem to have increased.” Investors should expect more volatility in Chinese markets as the government attempts to shift away from a planned economy to one driven by market forces, Mark Mobius, chairman of the emerging markets group at Franklin Templeton Investments, wrote in a blog post on Thursday. Policy makers face a “conundrum” as they seek to maintain financial stability while at the same time loosening their grip on markets, he said.

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“Global shares have lost more than $4 trillion this year..”

China’s Yuan Fixing Calms Markets as Asian Stocks Rally With Oil (BBG)

China’s efforts to stabilize its markets showed early signs of success as the yuan strengthened and regional equities rallied for the first time in five days. Treasuries and the yen fell as demand for havens eased. The Shanghai Composite Index gained 2.4% at the midday break after the securities regulator suspended a controversial circuit-breaker system. Asia’s benchmark share index pared its biggest weekly drop since 2011. The yuan rose 0.1% in onshore trading after the People’s Bank of China ended an eight-day stretch of setting weaker reference rates. Crude oil rallied, while Treasuries and the yen headed for their first declines this week. Global shares have lost more than $4 trillion this year as renewed volatility in Chinese markets revived doubts over the ruling Communist Party’s ability to manage the world’s second-largest economy.

The tumult has heightened worries over competitive devaluations and disinflation as emerging-market currencies tumbled with commodities. Investors will shift their attention to America’s economy on Friday as the government reports monthly payroll figures, a key variable for U.S. interest rates. “The PBOC may have been surprised at how badly China and global stock markets reacted to yuan depreciation,” said Dennis Tan at Barclays in Singapore. “They may want to keep the yuan stable for a while to help calm the stock market.” The PBOC set the yuan’s daily fixing, which restricts onshore moves to a maximum 2% on either side, at 6.5636 per dollar. That’s 0.5% higher than Thursday’s onshore effective closing price in the spot market and ends an eight-day reduction of 1.42%.

China’s markets regulator abandoned the circuit breaker just days after it was introduced, as analysts blamed the new mechanism for exacerbating this week’s selloff. Mainland exchanges shut early on Thursday and Monday after plunges of 7% in the CSI 300 triggered automatic halts. Chinese shares rallied after a volatile start to the day that sent the Shanghai Composite down as much as 2.2%. Producers of energy and raw-materials led the advance as investors gravitated to some of last year’s most beaten-down stocks and state funds were said to intervene to by purchasing shares with large index weightings.

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China will be exporting a crushing deflation.

The Decline Of The Yuan Destroys Belief In Central Banking (Napier)

The key failure of control is in China because that failure will overwhelm other seeming successes. In 2012 this analyst labelled one chart “the most important chart in the world”. It was a chart of China’s foreign exchange reserves. It showed how they were declining and The Solid Ground postulated that this would produce a decline in real economic activity in China and higher real interest rates in the developed world. The result of these two forces would be deflation, despite the amount of wind puffed below the wings of the global economy in the form of QE. Of course, no sooner had this report been issued than China’s grand falconer got to work by borrowing hundreds of billions of USD through its so-called commercial banking system!

The alchemical process through which this mandated capital inflow supported the exchange rate while permitting money creation in China stabilized the global economy- for a while. However, by 2014 it was ever more difficult to borrow more money than the people of China were desperate to export and the market began to win. Since then foreign reserves have been falling and the grand falconer has tried to support the exchange rate while simultaneously easing monetary policy to boost economic growth. I’m no falconer but isn’t this akin to trying to get a bird to fly while tying back its wings? Some investors, well paid to believe six impossible things before breakfast, did not question the ability of the grand Chinese falconer to fly a falcon with tethered wings.

They changed their minds briefly as the bird plummeted earthwards in August 2015 but still the belief in the ability to reflate the economy and simultaneously support an overvalued exchange rate continued. In January 2016 this particular falcon, let’s call it the people’s falcon, was more ‘falling with attitude’ than flying. This bird does not fly and if this bird does not fly the centre does not hold. A major devaluation of the RMB is just beginning and the faith in all the falconers will wane as deflation comes to the world almost seven years after the falconers first fanned the winds of QE supposed to levitate everything.

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Whack-a-mole.

One Big Market Casualty: China Regulators’ Reputation (CNBC)

The wobbles in China that rocked financial markets this week have not only cast doubts over the economy, they’ve also shaken confidence in policymakers’ ability to stem the volatility. For two decades, China’s frenetic growth has been the source of the world’s envy, with investors placing faith in the ability of policymakers to help transform China from a manufacturing-led powerhouse to a consumer-driven economy . As the economy stutters and regulators scramble to contain wild moves in the yuan and stocks, analysts are calling out what appears to be a ham-fisted approach to managing market volatility.

“Market volatility this week suggests that nobody really knows what the policy is right now. Or if the government itself knows or is capable of implementing the policy even if there is one,” DBS said in a currency note Friday. “The market’s message was loud and clear that more clarity and less flip-flopping is needed going forward.” China-listed stocks plunged this week, with trade suspended completely in two sessions after the CSI 300 index dropped more than 7 percent, triggering a circuit breaker meant to limit market volatility. The China Securities Regulatory Commission (CSRC) suspended the circuit-breaker system, implemented for the first time on Monday, before the start of trade Friday. The quick regulatory flip-flops spurred a lot of derision among social media commentators.

“The CSRC all treated us as experiments to make history. When it failed, it concluded with ‘lacking experience,’ and that’s it,” Weibo user Li Hua posted. “I strongly call for resignation of related personnel who designed this policy! There’s no cost of failure so that decision makers can do whatever they want.” Another factor weighing on faith in China’s regulators: Policy makers at the central bank, the People’s Bank of China (PBOC), have tinkered again with its currency without providing much indication to the market about its endgame. On Thursday the PBOC allowed the yuan to fall by the most in five months, to the lowest level since the fixing mechanism was established in 2011.

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Money will continue to flow out no matter what they do.

China Orders Banks To Limit Dollar Buying This Month To Stem Outflows (CNBC)

China’s foreign exchange regulator has ordered banks in some trading hubs to limit dollar purchases this month, three people with direct knowledge said on Friday, in the latest attempt to stem capital outflows. The spread between the onshore and offshore markets for the yuan, or renminbi, has been growing since the devaluation last year, spurring Beijing to adopt a range of measures to curb outflows of capital. All banks in certain trading hubs, including Shenzhen, have been affected, the people added. China suspended forex business for some foreign banks, including Deutsche, DBS and Standard Chartered at the end of last year.

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Beggar all of thy neighbors.

Yuan Depreciation Risks Competitive Devaluation Cycle (Reuters)

The depreciation of the Chinese yuan risks triggering a cycle of competitive devaluation and is causing enormous worry in the world’s financial markets, Mexican Finance Minister Luis Videgaray said on Thursday. China allowed the biggest fall in the yuan in five months on Thursday, sending global markets down on concerns that China might be aiming for a devaluation to help its struggling exporters and that other countries could follow suit. “This is one of the worst starts of the year for all the world’s markets,” Videgaray said at an event in Mexico City. “There is a real worry that in the face of the slowing Chinese economy that the public policy response is to start a round of competitive devaluation,” he said.

Mexico has been committed to a freely floating currency since a devastating financial crisis in the mid-1990s and authorities refrain from some of the more direct forms of intervention seen in other emerging markets. Mexico’s peso slumped to a record low on Thursday, triggering two auctions of $200 million each by Mexico’s central bank to support the currency. The country’s program of dollar auctions, under which the central bank can sell up to $400 million a day, is set to expire on Jan. 29. Videgaray said policymakers would announce if the plan would be maintained or modified before that deadline. He noted the program’s goal is not to defend a certain peso level but to ensure sufficient order and liquidity in the market. “We have managed to achieve this objective in a satisfactory manner,” he said. “Up until now, there has been no decision to modify the mechanism.”

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Can’t be a good sign no matter what they say.

China’s Forex Reserves Post Biggest Monthly Drop On Record (Xinhua)

China’s foreign exchange reserves posted the sharpest monthly fall on record in December, official data showed Thursday. Foreign exchange reserves fell to $3.33 trillion at the end of last month, the lowest level in more than three years and down by 108billion dollars from November, according to the People’s Bank of China. The fall in December extended a month-on-month decline of $87.2 billion registered in November. The yuan has been heading south since the central bank revamped the foreign exchange mechanism in August to make the rate more market-based. The yuan has been losing ground as the Chinese economy is expected to register its slowest pace of growth in a quarter of a century in 2015.

Meanwhile, the United States raised interest rates in December and more rises are expected in 2016. The onshore yuan (CNY), traded in the Chinese mainland, declined 4.05% against the greenback in 2015. Li Huiyong, analyst with Shenwan Hongyuan Securities, said the faster decline indicated greater pressure for capital outflow as the yuan depreciated. On Thursday, the central parity rate of the yuan weakened by 332 basis points to 6.5646 against the U.S. dollar, its weakest level in nearly five years, according to the China Foreign Exchange Trading System. “An appropriate size for China’s forex reserves should be around 1.5 trillion U.S. dollars. There is still large room for necessary operations to sustain a stable yuan,” Li said.

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They need to let it go. But won’t.

China’s Stock Market Is Hardly Free With Circuit Breakers Gone (BBG)

China’s removal of market-wide circuit breakers after just four days still leaves investors facing plenty of restrictions in how they trade. A 10% daily limit on single stock moves and a rule preventing investors from buying and selling the same shares in a day remain in force. Volume in what was once the world’s most active index futures market is minimal after authorities curtailed trading amid a summer rout, making it more difficult to implement hedging strategies. Officials unveiled curbs Thursday on share sales by major stockholders just a day before an existing ban was due to expire. And the activity of foreign investors is limited by quotas, given either to asset managers or to users of the Hong Kong-Shanghai exchange link.

“Although there’s more ability now for offshore participation, it’s largely a market that’s restricted the domestic users,” said Ric Spooner at CMC Markets Asia Pacific. “That means it doesn’t get the arbitrage benefits that international investors bring. It’s a work in progress.” There’s also the prospect that regulators and executives will dust off last year’s playbook as they seek to stem losses. At the height of the summer rout, about half of China’s listed companies were halted, while officials investigated trading strategies, made it harder for investors to borrow money to buy equities and vowed to “purify” the market. Chinese equities seesawed in volatile trading on Friday, with the CSI Index rising 1.3% as of 10:02 a.m. local time after climbing 3.1% and sinking 1.7%.

The gauge slid 12% in the first four days of the week, two of which were curtailed as the circuit breakers triggered market-wide halts for the rest of the day. The flip-flop on using the mechanism, which was meant to help stabilize the market, is adding to investor concern that authorities are improvising. Policy makers weakened the yuan for eight days straight through Thursday, and authorities were said to intervene on Tuesday to prop up equities. Policy makers used purchases by government-linked funds to bolster shares as the CSI 300 plunged as much as 43% over the summer. State funds probably spent $236 billion on equities in the three months through August, according to Goldman Sachs.

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Saudi rocket attack on embassy in Yemen.

Iran Severs All Commercial Ties With Saudi Arabia (Reuters)

Relations between Iran and Saudi Arabia deteriorated even further on Thursday as Tehran severed all commercial ties with Riyadh and accused Saudi jets of attacking its embassy in Yemen’s capital. A row has been raging for days between Shi’ite Muslim power Iran and the conservative Sunni kingdom since Saudi Arabia executed cleric Nimr al-Nimr, an opponent of the ruling dynasty who demanded greater rights for the Shi’ite minority. Saudi Arabia, Bahrain, Sudan, Djibouti and Somalia have all broken off diplomatic ties with Iran this week, the United Arab Emirates downgraded its relations and Kuwait, Qatar and Comoros recalled their envoys after the Saudi embassy in Tehran was stormed by protesters following the execution of Nimr and 46 other men.

In a cabinet meeting chaired by Iran’s President Hassan Rouhani on Thursday, Tehran banned all imports from Saudi Arabia. Saudi Arabia had announced on Monday that Riyadh was halting trade links and air traffic with the Islamic Republic. Iran also said on Thursday that Saudi warplanes had attacked its embassy in Yemen’s capital, Sanaa, an accusation that Riyadh said it would investigate. “Saudi Arabia is responsible for the damage to the embassy building and the injury to some of its staff,” Foreign Ministry Spokesman Hossein Jaber Ansari was quoted as saying by the state news agency, IRNA. Residents and witnesses in Sanaa said there was no damage to the embassy building in Hadda district.

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Aramco is so big, it may be impossible to value.

Saudi Arabia Considers IPO For World’s Biggest Energy Company Aramco (Guardian)

Saudi Arabia is considering a stock market listing for its national oil group – the world’s biggest energy company and probably the most valuable company on the planet. Saudi Aramco is a highly secretive organisation but is likely to be valued at well over $1tn (£685bn). Any public share listing would be viewed as a potent symbol of the financial pain being wreaked by low prices on the world’s biggest crude exporting country. Prince Muhammad bin Salman, the country’s highly influential deputy crown prince, confirmed in an interview on Monday with the Economist magazine that a decision would be taken within months whether to raise cash in this way, even as oil company shares are depressed at this time.

“Personally I am enthusiastic about this step,” he said. “I believe it is in the interest of the Saudi market, and it is in the interest of Aramco, and it is for the interest of more transparency, and to counter corruption, if any, that may be circling around.” The sale via an initial public offering (IPO) of any part of Saudi Aramco would be a major change in direction for a country, which has jealously guarded its enormous – and cheaply produced – oil reserves. Aramco’s reserves are 10 times greater than those of Exxon, which is the largest publicly listed oil company. The prince, considered the power behind the throne of his father King Salman, is keen to modernise the largely oil-based Saudi economy by privatisation or other means but it also needs to find money.

The country is under pressure, with oil prices plunging to their lowest levels in 11 years and more than 70% below where they were in June 2014. This has put huge strain on Saudi public spending plans, which were drawn up when prices were much higher and pushed the public accounts into deficit.

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A long way from salvation.

VW Weighs Buyback of Tens of Thousands of Cars in Talks With US (BBG)

Volkswagen may buy back tens of thousands of cars with diesel engines that can’t be easily fixed to comply with U.S. emissions standards as part of its efforts to satisfy the demands of regulators, according to two people familiar with the matter. Negotiations between the German automaker and the U.S. Environmental Protection Agency are continuing and no decisions have been reached. Still, a buyback would be an extraordinary step that demonstrates the challenge of modifying vehicles that were rigged to pass emission tests. VW has concluded it would be cheaper to repurchase some of the more than 500,000 vehicles than fix them, said the people, who declined to be cited by name.

One person said the number of cars that might be bought back from their owners totals about 50,000, a figure that could change as talks continue. “We’ve been having a large amount of technical discussion back and forth with Volkswagen,” EPA Administrator Gina McCarthy said Thursday, when asked about the possibility of VW having to buy back some vehicles. “We haven’t made any decisions on that.” McCarthy told reporters after an event in Washington Thursday that VW’s proposals to bring its cars into compliance with emissions standards have so far been inadequate. “We haven’t identified a satisfactory way forward,” McCarthy said. The EPA is “anxious to find a way forward so that the company can get into compliance,” she said.

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“..the presence of isotopes from nuclear weapons testing..”

Human Impact Has Pushed Earth Into The Anthropocene (Guardian)

There is now compelling evidence to show that humanity’s impact on the Earth’s atmosphere, oceans and wildlife has pushed the world into a new geological epoch, according to a group of scientists. The question of whether humans’ combined environmental impact has tipped the planet into an “anthropocene” – ending the current holocene which began around 12,000 years ago – will be put to the geological body that formally approves such time divisions later this year. The new study provides one of the strongest cases yet that from the amount of concrete mankind uses in building to the amount of plastic rubbish dumped in the oceans, Earth has entered a new geological epoch.

“We could be looking here at a stepchange from one world to another that justifies being called an epoch,” said Dr Colin Waters, principal geologist at the British Geological Survey and an author on the study published in Science on Thursday. “What this paper does is to say the changes are as big as those that happened at the end of the last ice age . This is a big deal.” He said that the scale and rate of change on measures such as CO2 and methane concentrations in the atmosphere were much larger and faster than the changes that defined the start of the holocene. Humans have introduced entirely novel changes, geologically speaking, such as the roughly 300m metric tonnes of plastic produced annually. Concrete has become so prevalent in construction that more than half of all the concrete ever used was produced in the past 20 years.

Wildlife, meanwhile, is being pushed into an ever smaller area of the Earth, with just 25% of ice-free land considered wild now compared to 50% three centuries ago. As a result, rates of extinction of species are far above long-term averages. But the study says perhaps the clearest fingerprint humans have left, in geological terms, is the presence of isotopes from nuclear weapons testing that took place in the 1950s and 60s. “Potentially the most widespread and globally synchronous anthropogenic signal is the fallout from nuclear weapons testing,” the paper says. “It’s probably a good candidate [for a single line of evidence to justify a new epoch] … we can recognise it in glacial ice, so if an ice core was taken from Greenland, we could say that’s where it [the start of the anthropocene] was defined,” Waters said.

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It’s all become a joke.

Europe’s Economy Faces Confidence Test as Borderless Ideal Fades (BBG)

Here’s the latest in a long line of threats to Europe’s economy: the border guard. Danish officers checking travel documents on the boundary with Germany this week aren’t out to stymie trade or hinder tourism – they’re under orders from politicians anxious to stem the flow of refugees. Even so, analysts are beginning to worry about what could happen to the already-embattled region when the free movement of people is called into question. Like the euro, the single currency used by 19 of the European Union’s 28 nations, the Schengen Agreement has long been touted by politicians as an irrevocable pillar of a multi-national union, allowing unimpeded travel between states for business or pleasure. So with an already fragile recovery, monetary policy stretched trying to fend off deflation and companies deferring investment, the mere threat that Schengen could unravel may be hard to shrug off.

“If in the migrant crisis Schengen were to disintegrate, this would send a disastrous signal to markets: the European project would be seen as in fact reversible,” said Wolfango Piccoli, managing director of Teneo Intelligence in London. “Nobody could blame investors if against that backdrop, they would suddenly start to re-evaluate the reliability of promises made by European institutions in the euro-zone crisis.” The EU says Europeans make over 1.25 billion journeys within the Schengen zone every year, which comprises 26 countries from the Barents Sea to the eastern Mediterranean. It also includes countries such as Iceland and Norway that aren’t part of the EU. Signed in 1985, Schengen took effect 10 years later. In normal times, it means travelers within the bloc aren’t subjected to border checks, and external citizens holding a visa for one country may usually travel without restriction to all.

These aren’t normal times and now the edifice of carefree travel across the continent is cracking. During 2015, the arrival of people fleeing wars and persecution in Asia, Africa and the Middle East exceeded 1 million, sparking political tension and public debate over how, and where, to settle the newcomers. Denmark’s decision to establish temporary controls seems, according to the EU, to be covered by Schengen rules that allow such curbs in emergencies. But it’s not the first; that move came hours after Sweden started systematic ID checks at its borders, while Germany was forced to take similar action in September along its frontier with Austria. Hungary erected a fence at its borders with Serbia and Croatia last year.

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€3 billion, Angela.

Turkey Does Nothing To Halt Refugee Flows, Says Greece (Kath.)

Turkey has not taken any action to clamp down on human traffickers and between 3,000 and 4,000 migrants and refugees are reaching Greece every day, Immigration Policy Minister Yiannis Mouzalas said Thursday. Mouzalas suggested in an interview on Skai TV that Ankara has not lived up to its pledges to stem the flow of people traveling across the Aegean to Greece. “It has not done anything to stop human trafficking, as is evident from the migratory flows.” The minister said that the high level of arrivals has continued because the news that some migrants are not being allowed through European borders has yet to filter through but, at the same time, refugees waiting to cross from Turkey are concerned that if they do not do so soon they will be prevented from reaching Central and Northern Europe.

“The high rate has to do with refugees’ fear that the borders will close for everyone,” he said, adding that he thought this possibility is “very likely.” “When the message reaches Morocco that Moroccans are not being allowed to cross into Europe but are being held and repatriated, the flows will drop.” Mouzalas said that around half of the people arriving in Greece over the last two months have been undocumented migrants.

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Jan 042016
 
 January 4, 2016  Posted by at 4:27 pm Finance Tagged with: , , , , , , ,  


Marion Post Wolcott Natchez, Mississippi, grocery window 1940

The Chinese stock markets broke through 2 circuit breakers today, breakers that were introduced only a few months ago in response to the market selloff, triggered by a surprise yuan devaluation, in August. The first breaker, at -5%, forced a 15-minute trading halt. The second one, at -7%, halted trading for the rest of the day.

For many people, today’s bust can’t have been a huge surprise, because it’s been known for some time that a ban on stock sales by parties holding a 5% or larger stake in a company, is set to expire on Friday. Beijing may panic again before that date, but it can’t force stakeholders to hold on to large portfolios forever either.

Xi and his crew should have stayed out of the markets from the start, but that’s not how they see the world. They still think like apparatchicks, and don’t understand that markets are opposed, at a 180º angle, to top down control. You can either have a market, or you can have central control.

They pumped up the housing market for all they could, and when that bubble blew they tricked their people into buying stocks. And now that one’s fixing to die too, and that didn’t take nearly as long as the housing bubble. The central control team is frantically looking for the next carnival attraction, but it won’t be easy.

They should have stayed out of all markets. Just like western central banks. All interference by governments and central banks can only make things worse, a fact at best temporarily hidden by the distortions they force upon markets.

And we shouldn’t forget that expectations for China as the world’s economic savior determined western central bank ‘thinking’ to a large extent over the past decade. Like so many others, central bankers too are incapable of spotting a Ponzi when it’s staring them in the face.

Now the Chinese bubble is bursting, and set to spill over into and over the global economy with dire consequences, we are all exposed to that much more than was ever necessary. All the PBoC, Yellen, Kuroda and Draghi managed to accomplish was a dran-out illusion, a slow-motion sleight of hand.

Here’s something I was writing over the weekend, prior to today’s market action:

China underlies all problems the world faces economically today. Since at least 2008, the global economy has been a one-dimensional one-way street, in which all hope was focused on China. Western companies and stock traders were so confident that China would lift the entire planet out of its recessionary doldrums, they leveraged themselves up the wazoo to bet on a China-based recovery. It was the only game in town, and it was merrily facilitated by central banks.

The People’s Bank of China threw some $25 trillion at the illusion, the Fed, ECB and BoJ combined for probably as much again. One way of looking at it is that if you weren’t sure on how bad the recession really was, now you know the numbers.

But today China is close to entering its own recession, whether Beijing will admit it or not. The official GDP growth goal of 6.5% looks downright silly when you see this graph that Charlene Chu sent to BI:


CEIC and the National Bureau of Statistics; Charlene Chu, Autonomous Research

From the article:

Secondary industry comprises about 40-45% of GDP. [..] In China, GDP is classified into three industries, primary (agriculture), secondary (manufacturing and construction), and tertiary (services). [..]

This slowdown in the secondary industry is part of China’s intentional shift toward an economy focused on services and consumer consumption rather than manufacturing.

The first line there is educative, the second is nonsense. Manufacturing in China is plunging because ‘we’ don’t buy their overcapacity and overproduction any longer. And neither do the Chinese themselves. Primary industry, agriculture, may grow a little bit, but certainly not much.

Tertiary industry, services, may also grow a bit, but Beijing can’t just flip a switch and get people to buy services on a scale that can make up for the decline in manufacturing. Neither can it retrain tens of millions of workers for jobs in that illusive services sector, let alone on short notice.

This decline will take years for the Chinese economy to absorb, since so much of it is based on overleveraged overcapacity and overproduction. The spectre of massive job losses hangs over the entire ‘adjustment’ process, both in China itself and in countries that -used to- supply it with commodities. Mass unemployment in China in turn raises the spectre of severe social unrest.

As I said in 2016 Is An Easy Year To Predict, China has got to be the biggest story going forward (rather than oil, for instance), and it would have been already, to a much larger extent than it has, if there were less denial involved. And less debt.

Like the west, China will have to deleverage its enormous debt burden before it can even start thinking of rebuilding its economy. Which is precisely what they all seek to deny, loudly and boisterously, not only as if a recovery were feasible without dealing with the debt, but even as if more debt could mean more recovery.

This debt deleveraging will involve such stupendous amounts of -largely virtual- money that the situation, the bottom, from which rebuilding will need to take place will be one at which today’s societies will be hardly recognizable anymore.

Debt deleveraging comes with deflation. Spending will plummet, unemployment will shoot up, production will grind to a halt. Power will shift from established political and economic parties to others.

Obviously, this will not be a smooth transition. The clarions of war sound in the distance already. What is crucial to realize is that none of it can be prevented, other than perhaps the warfare; the economic parts of the play must must be staged. All we can do is to make it as bearable as possible.

The people on the streets, as always, will bear the brunt of the downfall. We only need to look at Greece today to get a pretty good idea of how these things play out.

It won’t be all straight down from here, but the trend will be crystal clear. It didn’t start all of a sudden today, but China’s double circuit breaker is a useful sign, if not an outright red flag. One thing’s for sure: we’ll make the history books.