Jul 052016
 July 5, 2016  Posted by at 12:20 pm Finance Tagged with: , , , , , ,  2 Responses »

Dorothea Lange Miserable poverty. Elm Grove, Oklahoma County, OK 1936

We used to have this saying that if someone asks you to do a job good, fast and cheap, you’d say: pick two. You can have it good and cheap, but then it won’t be fast, etc. As our New Zealand correspondent Dr. Nelson Lebo III explains below, when it comes to our societies we face a similar issue with our climate, energy and the economy.

Not the exact same, but similar, just a bit more complicated. You can’t have your climate nice and ‘moderate’, your energy cheap and clean, and your economy humming along just fine all at the same time. You need to make choices. That’s easy to understand.

Where it gets harder is here: if you pick energy and economy as your focus, the climate suffers (for climate you can equally read ‘the planet’, or ‘the ecosystem’). Focus on climate and energy, and the economy plunges. So far so ‘good’.

But when you emphasize climate and economy, you get stuck. There is no way the two can be ‘saved’ with our present use of fossil fuels, and our highly complex economic systems cannot run on renewables (for one thing, the EROEI is not nearly good enough).

It therefore looks like focusing on climate and economy is a dead end. It’s either/or. Something will have to give, and moreover, many things already have. Better be ahead of the game if you don’t want to be surprised by these things. Be resilient.

But this is Nelson’s piece, not mine. The core of his argument is worth remembering:

Everything that is not resilient to high energy prices and extreme weather events will become economically unviable…

…and approach worthlessness. On the other hand,…

Investments of time, energy, and money in resilience will become more economically valuable…

Here’s Nelson:



Nelson Lebo: There appear to be increasing levels of anxiety among environmental activists around the world and in my own community in New Zealand. After all, temperature records are being set at a pace equal only to that of Stephen Curry and LeBron James in the NBA Finals. A recent Google news headline said it all: “May is the 8th consecutive month to break global temperature records.”

In other words, October of last year set a record for the highest recorded global monthly temperature, and then it was bettered by November, which was bettered by December, January, and on through May. The hot streak is like that of Lance Armstrong’s Tour De France dominance, but we all know how that turned out in the end.

Making history – like the Irish rugby side in South Africa recently – is usually a time to celebrate. Setting a world record would normally mean jubilation – not so when it comes to climate.

Responses to temperature records range from sorrow, despair, anger, and even fury. Anyone with children or grandchildren (and even the childless) who believes in peer review and an overwhelming scientific consensus has every right to feel these emotions. So why do I feel only resignation?

We are so far down the track at this point that we are damned if we do and damned if we don’t. Remember the warnings 30 years ago that we needed 30 years to make the transition to a low carbon economy or else there would be dire consequences? Well, in case you weren’t paying attention, it didn’t happen.

While these warnings were being issued by scientists much of the world doubled down – Trump-like – on Ford Rangers, Toyota Tacomas, and other sport utility vehicles. The same appears to be happening now, with the added element that we are experiencing the dire consequences as scientists issue even more warnings and drivers buy even more ‘light trucks’. Forget Paris, the writing was on the wall at Copenhagen.


The bottom line is that most people will (and currently do) experience climate change as a quality of life issue, and quality of life is related to a certain extent to disposable income. Acting or not acting proactively or reactively on climate change is expensive and gets more expensive every day.

If the international community ever takes collective action on climate change it will make individuals poorer because the cost of energy will rise significantly. If the international community fails to act, individuals will be made poorer because of the devastating effects of extreme weather events – like last year’s historic floods where I live as well as in northern England, etc – shown to be on the increase over the last 40 years in hundreds of peer-reviewed papers with verifiable data.

And here is the worst part: most economies around the world rely on some combination of moderate climate and cheap fossil fuels. For example, our local economy is heavily dependent on agriculture and tourism, making it exceptionally vulnerable to both acting AND not acting on climate change.

Drought hurts rural economies and extreme winds and rainfall can cost millions in crop damage as well as repairs to fencing, tracks and roads. As a result, both farmers and ratepayers have fewer dollars in their pockets to spend on new shoes, a night out, or a family trip. This is alongside living in a degraded environment post-disaster. The net result is a negative impact on quality of life: damned if we don’t.

On the other hand, tourism relies on inexpensive jet fuel and petrol to get the sightseers and thrill seekers to and around the world with enough dollars left over to slosh around local economies. Think about all of the service sector jobs that rely on tourism that in turn depend entirely on a continuous supply of cheap fuel. (This is not to mention peak oil and the lack of finance available to fund any long and expensive transition to an alternative energy world.) I’m told 70% of US jobs are in the service sector, most of which rely on inexpensive commuting and/or a highly mobile customer base.

Any significant approach to curbing carbon emissions in the short term will result in drastic increases to energy prices. The higher the cost of a trip from A to Z the less likely it is to be made. As a result, business owners and ratepayers at Z will have fewer dollars in their pockets to spend on new shoes, a night out, or a family vacation of their own. The net result is a negative impact on their quality of life: damned if we do.


I suppose it deserves repeating: most OECD economies and the quality of life they bring rely on both moderate climate and cheap fossil fuels, but these are mutually exclusive. Furthermore, regardless of emissions decisions made by the international community, we are already on track for decades of temperature records and extreme weather events that will cost billions if not trillions of dollars.

The response in many parts of the world has been to protest. That’s cool, but you can’t protest a drought – the drought does not care. You can’t protest a flood – the flood does not care. And even if the protests are successful at influencing government policies – which I hope long-term they are – we are still on track for decades of climatic volatility and the massive price tags for clean up and repair.

Go ahead and protest, people, but you better get your house in order at the same time, and that means build resilience in every way, shape and form.

Resilience is the name of the game, and I was impressed with Kyrie Irving’s post NBA game seven remarks that the Cleveland Cavaliers demonstrated great resilience as a team.

As I wrote here at TAE over a year ago, Resilience Is The New Black. If you don’t get it you’re not paying attention.

This article received a wide range of responses from those with incomplete understandings of the situation as well as those in denial – both positions dangerous for their owners as well as friends and neighbours.

The double bind we find ourselves in by failing to address the issue three decades ago is a challenge to put it mildly. Smart communities recognize challenges and respond accordingly. The best response is to develop resilience in the following areas: ecological, equity, energy and economic.

The first two of these I call the “Pope Index” because Francis has identified climate change and wealth inequality as the greatest challenges facing humanity. Applying the Pope Index to decision making is easy – simply ask yourself if decisions made in your community aggravate climate change and wealth inequality or alleviate them.

For the next two – energy and economics – I take more of a Last Hours of Ancient Sunlight (credit, Thom Hartmann) perspective that I think is embraced by many practicing permaculturists. Ancient sunlight (fossil fuels) is on its way out and if we do not use some to build resilient infrastructure on our properties and in our communities it will all be burned by NASCAR, which in my opinion would be a shame.

As time passes, everything that is not resilient to high energy prices and extreme weather events will become economically unviable and approach worthlessness.

On the other hand, investments of time, energy, and money in resilience will become more economically valuable as the years pass.

Additionally, the knowledge, skills and experience gained while developing resilience are the ultimate in ‘job security’ for an increasingly volatile future.

If you know it and can do it and can teach it you’ll be sweet. If not, get onto it before it’s too late.



Dr. Nelson Lebo is a serial permaculture property developer and consultant. He likes underdogs but not drug cheats. Congratulations Cleveland and Ireland.



Jun 282015
 June 28, 2015  Posted by at 11:42 am Finance Tagged with: , , , , , , , ,  6 Responses »

Harris&Ewing Goat team, Washington, DC 1917

A Perfect Storm Of Crises Blows Apart European Unity (Guardian)
The Losses For The EU Lenders Are Truly Eye-Watering (Muscatelli)
The Greek Butterfly Effect: Forcing The Issue of Math (Northman Trader)
Intervention in 27th June 2015 Eurogroup Meeting (Yanis Varoufakis)
Forget Greece, Portugal Is The Eurozone’s Next Crisis (MarketWatch)
Goldman’s Stunner: A Greek Default Is Precisely What The ECB Wants (Zero Hedge)
Tsipras Asking Grandma to Figure Out If Greek Debt Deal Is Fair (Bloomberg)
Here’s Why Any Greek Debt Deal Will Amount To Nothing (Satyajit Das)
Europe’s Moment of Truth (Paul Krugman)
Wikileaks: Plot Against Former Greek PM’s Life, ‘Silver Drachma’ Plan (GR)
Greece Referendum: Why Tsipras Made the Right Move (Fotaki)
IMF Heads Must Roll Over Shameful Greek Failings (Telegraph)
Austrians Launch Petition To Quit EU (RT)
The Government Must Run Deficits, Even In Good Times (Ari)
Pope Francis Recruits Naomi Klein In Climate Change Battle (Observer)

Because it has no morals.

A Perfect Storm Of Crises Blows Apart European Unity (Guardian)

The time was shortly after 3am when David Cameron descended from level 80 of the vast Justus Lipsius building in Brussels on Friday. The birds were singing as he was whisked away for a much-curtailed sleep at the British ambassador’s residence, five minutes up the road. The prime minister is no novice when it comes to long and tedious discussions at European summits. But what he had just witnessed over a seemingly never-ending dinner with the other 27 EU leaders was something different altogether. The immediate crisis under discussion was migration and what the EU should do to handle the many thousands who have crossed the Mediterranean from Africa and the Middle East and arrived via Italy and the western Balkans over recent months.

Increasingly, Europe is a magnet for those seeking a better life. But the EU does not know how to react and the problems are spreading. Last week a strike by French workers at Calais caused huge tailbacks on motorways leading to both the ferry port and Channel tunnel as hundreds of migrants – mainly from east Africa, the Middle East and Afghanistan – tried to take advantage of queueing traffic by breaking into lorries bound for the UK. Against this background, a supposedly cordial working dinner, held high in the Council of Ministers building, rapidly descended into personal insults and finger-jabbing – which an exhausted-looking Cameron later summed up as “lengthy and, at times, heated discussions”.

Matteo Renzi, the Italian prime minister, was incensed by the refusal of several countries, including Hungary, which has taken in 60,000 refugees since the beginning of the year, and the Czech Republic, to agree to take part in a compulsory refugee-sharing scheme to help ease Italy’s burden. Cameron kept fairly quiet. The UK has opted out of EU asylum policy and Renzi, who was in an emotional state, did not need to be reminded of its non-participation. But others took up the cudgels as the row intensified across the table. Dalia Grybauskaite, the Lithuanian president, told Renzi in no uncertain terms that her country would not take part either. Bulgaria, one of the EU’s poorest countries, took a similar line. Disputes flared. European commission president Jean-Claude Juncker, prime mover behind the idea of compulsory burden sharing, and council president Donald Tusk tore strips off each other over what should be done, as inter-institutional solidarity broke down.

Read more …

They don’t seem to realize that though.

The Losses For The EU Lenders Are Truly Eye-Watering (Muscatelli)

Greece is on the brink. Even if a last-minute deal is found it is clear that the solutions proposed are little more than a way to delay the crisis. A more comprehensive resolution of the Greek tragedy needs to address the medium-term (non-)sustainability of the Greek debt position. Economists know that negotiations usually break down when there is uncertainty in bargaining. When the two sides are uncertain as to what gains and losses the other side can make through any deal or by walking away. In this case, part of the uncertainty is political, because the Greek and other EU governments don’t fully know what might be acceptable to their electorates. But a good part of the uncertainty at this bargaining table is economic. Because we are in totally uncharted waters.

Monetary unions can be, and have been, dissolved before in history but, except in the aftermath of wars, not usually in anger. There are several sources of uncertainty for both sides in the dispute. First, if Greece leaves the Eurozone, at one level it will have greater freedom to walk away from at least some its debt, or to restructure it in a way which suits its short-term economic need. It could plan a moderate primary surplus. The problem for the Greek government is that it will inherit a broken banking system and there will be great uncertainty on whether a devaluing new Drachma could benefit its net trade position, with an impaired financial system, and shut out from world capital markets. Greece is not Iceland, and there is less social consensus on how to share the short-run burden of economic adjustment in a Grexit scenario.

Second, the losses for the EU lenders are truly eye-watering. The two bail-out packages for Greece amount to €215.8 billion. Of these €183.8 billion came from other EU countries and the rest from the IMF. The biggest shares of the support through the European Financial Stability Facility came from Germany and France. None of this includes the cost of support given to the Greek banking system via the ECB. The IMF would suffer considerable losses too (the UK’s main exposure is through this channel). The impact of Grexit and a partial or full debt repudiation on the rest of the EU would be considerable. Paradoxically by triggering a Grexit rather than an orderly debt restructure, the EU lenders may lose more of their current bail-out. So why are they not more accommodating? Because if it stays in, Greece will need a further bail-out, as no-one believes the current plan is sustainable. It’s that uncertainty again.

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Dead on. 1- 2 = -1.

The Greek Butterfly Effect: Forcing The Issue of Math (Northman Trader)

Many times nothing happens for a long time. Then all of a sudden everything happens at once. Like a dam break. It builds slowly and then it bursts. Example: Who would have ever thought the Confederate flag would be taken down across the South during the same week that a rainbow flag is symbolically hoisted across the entire country? Just because things seem unthinkable doesn’t mean they won’t happen. Take the global debt construct as another example. For decades the world has immersed itself in ever higher debt. The general attitude has been one of indifference. Oh well, it just goes higher. Doesn’t really impact me or so the complacent rationalize. When the financial crisis brought the world to the brink of financial collapse the solution was based on a single principle:

Make the math workable. In the US the 4 principle “solutions” to make the math workable were to:
1. End mark to market which had the basic effect of allowing institutions to work with fictitious balance sheets and claim financial viability.
2. Engage in unprecedented fiscal deficits to grow the economy. To this day the US, and the world for that matter, runs deficits. Every single year. The result: Global GDP has been, and continues to be overstated as a certain percentage of growth remains debt financed and not purely organically driven.
3. QE, to flush the system with artificial liquidity, the classic printing press to create demand out of thin air.
4. ZIRP. Generally ZIRP has been sold to the public as an incentive program to stimulate lending and thereby generate wage growth & inflation. While it could be argued it had some success in certain areas such as housing, the larger evidence suggests that ZIRP is not about growth at all.

ZIRP’s true purpose is actually much more sinister: To make global debt serviceable. To make the math work without a default. Here’s the reality: If we had “normalized” rates tomorrow the entire financial system would collapse under the weight of the math. In short: Default. Which brings us to Greece the butterfly, the truth and indeed the future: Greece for all its structural faults is the most prominent victim of fictitious numbers. From the original Goldman Sachs deal to get them into the EU based on fantasy numbers and to numerous bail-outs, the simple truth has always been the same: The math doesn’t work. It never has and it never will until there is a default on at least some of the debt. And in this context the Greek government’s move to call for a public referendum on July 5 may be a very clever strategic move as it forces the issue of math.

Read more …

“The very idea that a government would consult its people on a problematic proposal put to it by the institutions was treated with incomprehension and often with disdain bordering on contempt.”

Intervention in 27th June 2015 Eurogroup Meeting (Yanis Varoufakis)

Colleagues, In our last meeting (25th June) the institutions tabled their final offer to the Greek authorities, in response to our proposal for a Staff Level Agreement (SLA) as tabled on 22nd June (and signed by Prime Minister Tsipras). After long, careful examination, our government decided that, unfortunately, the institutions’ proposal could not be accepted. In view of how close we have come to the 30th June deadline, the date when the current loan agreement expires, this impasse of grave concern to us all and its causes must be thoroughly examined.

We rejected the institutions’ 25th June proposals because of a variety of powerful reasons. The first reason is the combination of austerity and social injustice they would impose upon a population devastated already by… austerity and social injustice. Even our own SLA proposal (22nd June) is austerian, in a bid to placate the institutions and thus come closer to an agreement. Only our SLA attempted to shift the burden of this renewed austerian onslaught to those more able to afford it – e.g. by concentrating on increasing employer contributions to pension funds rather than on reducing the lowest of pensions. Nonetheless, even our SLA contains many parts that Greek society rejects.

So, having pushed us hard to accept substantial new austerity, in the form of absurdly large primary surpluses (3.5% of GDP over the medium term, albeit somewhat lower than the unfathomable number agreed to by previous Greek governments – i.e. 4.5%), we ended up having to make recessionary trade-offs between, on the one hand, higher taxes/charges in an economy where those who pay their dues pay through the nose and, on the other, reductions in pensions/benefits in a society already devastated by massive cuts in basic income support for the multiplying needy.

Let me say colleagues what we had already conveyed to the institutions on 22nd June, as we were tabling our own proposals: Even this SLA, the one we were proposing, would be extremely onerous to pass through Parliament, given the level of recessionary measures and austerity it entailed. Unfortunately, the institutions’ response was to insist on even more recessionary (aka parametric) measures (e.g. increasing VAT on hotels from 6% to 23%!) and, worse still, on shifting the burden massively from business to the weakest members of society (e.g. to reduce the lowest of pensions, to remove support for farmers, to postpone ad infinitum legislation that offers some protection to badly exploited workers).

Read more …

There’s more than one candidate.

Forget Greece, Portugal Is The Eurozone’s Next Crisis (MarketWatch)

In the end, they kicked the can a little further down the road. After keeping the markets on a cliff-hanger for the last week, wondering whether the Greeks might end up getting kicked out of the eurozone, a deal of some sort looks likely. It won’t fix Greece, and it won’t fix the euro either. But it will patch the whole system up until Christmas — and that will buy everyone some time to concentrate on something else. And yet, in reality, the real crisis may not be in the east of the eurozone, but right over in the west. Portugal is the ticking time-bomb waiting to explode. Why? Because the country has run up unsustainable debts, most of the money is owed to foreigners, and with the economy still in deep trouble it may have to default as well.

The elections later this year may well trigger the second Portuguese crisis — and that will reveal how the problems in Europe involve far more than just Greece, even if that attracts most of the world’s attention. All the evidence suggests that, once the debt-to-GDP ratio climbs into the 130% bracket and above, it is basically unsustainable. Back in 2011 and 2012, when the euro crisis first flared up, three countries went bust. Of those, Greece is still in intensive care, and looks likely to remain so for the foreseeable future — the Greeks look willing to do just enough to stay in the eurozone, while the rest of Europe is willing to offer it just enough money to stay afloat while making it impossible to grow (it is a reverse Goldilocks — probably the worst of all possible solutions).

Ireland, which was always the strongest of the three bankrupt nations, is now growing again at a reasonable rate, helped along by the robust recovery in the U.K., which is still its main export market. And then there is Portugal — which is not in Greek-style permanent crisis, and yet does not seem capable of a sustainable recovery. On the surface, Portugal looks in much better shape than it did three years ago. It has exited the bailout scheme, leaving the program in May last year, after hitting European Central Bank and International Monetary Fund targets. The economy is starting to expand again. GDPt rose by 0.4% in the latest quarter, extending the run to a whole year of expansion, taking the annual growth rate up to 1.5%. It is forecast to expand by another 1.6% this year.

If Portugal can indeed recover, that would be a big win for the EU and IMF. Their catastrophic mix of internal devaluation and austerity looks to have been a complete failure in Greece, but if they can make it work in both Ireland and Portugal, the reputation of both institutions could be salvaged.

Read more …

Don’t think the ECB is smart enough to oversee the fall-out.

Goldman’s Stunner: A Greek Default Is Precisely What The ECB Wants (Zero Hedge)

[..] if this is correct, Goldman essentially says that it is in the ECB’s, and Europe’s, best interest to have a Greek default – and with limited contagion at that – one which finally does impact the EUR lower, and resumes the “benign” glideslope of the EURUSD exchange rate toward parity, a rate which recall reached as low as 1.05 several months ago before rebounding to its current level of 1.14. Needless to say, that is a “conspiracy theory” that could make even the biggest “tin foil” blogs blush. A different way of saying what Goldman just hinted at: “Greece must be destroyed, so it (and the Eurozone) can be saved (with even more QE).” Or, in the parlance of Rahm Emanuel’s times, “Let no Greek default crisis go to QE wastel.” Goldman continues:

Greece, like many emerging markets before it, is suffering a balance of payments crisis, whereby a “sudden stop” in foreign capital inflows caused GDP to fall sharply. In emerging markets, this comes with a large upfront currency devaluation – on average around 30% across nine key episodes (Exhibit 1) – that lasts for over four years. This devaluation boosts exports, so that – as unpleasant as this phase of the crisis is – activity rebounds quickly and GDP is significantly above pre-crisis levels five years on (Exhibit 2).

In Greece, although unit labor costs have fallen significantly, price competitiveness has improved much less, with the real effective exchange rate down only ten% (with much of that drop only coming recently). This shows that the process of “internal devaluation” is difficult and, unfortunately, a poor substitute for outright devaluation. The reason we emphasize this is because, even if a compromise is found that includes a debt write-down (as the Greek government is pushing for), this will do little to return Greece to growth. Only a managed devaluation can do that, one where the creditors continue to lend and help manage the transition.

Here, Goldman does something shocking – it tells the truth! “As such, the current stand-off is about something much deeper than the next disbursement. It signals that the concept of “internal devaluation” is deeply troubled.” Bingo – because what Goldman just said in a very polite way, is that a monetary union in which one of the nations is as far behind as Greece is, and recall just how far behind Greece is relative to IMF GDP estimates imposed during the prior two bailouts..

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It’s stunning to see that when confronted with basic democracy, the press has no idea what to say or do.

Tsipras Asking Grandma to Figure Out If Greek Debt Deal Is Fair (Bloomberg)

Economists with PhDs and hedge-fund traders can barely stay on top of the vagaries of Greece’s spiraling debt crisis. Now, try getting grandma to vote on it. That’s what Prime Minister Alexis Tsipras is doing by calling a snap referendum for July 5 on the latest bailout package from creditors. The 68-word ballot question namechecks four international institutions and asks voters for their opinion on two highly technical documents that weren’t made public before the referendum call and were only translated into Greek on Saturday.
Worse, they may no longer be on the table. International Monetary Fund chief Christine Lagarde told the BBC late on Saturday that “legally speaking, the referendum will relate to proposals and arrangements which are no longer valid.”

Tsipras’s decision means everyone from fishermen to taxi-drivers and factory workers will have to form an opinion on the package, with their country’s economic future hanging in the balance. A rejection of the bailout terms could lead to an exit from the euro area and economic calamity; accepting them would probably keep Greece in the euro, but with more austerity. “Usually in democracies, it’s the technocrats and the politicians who take care of the details, while voters are asked about broader issues and principles,” said Philip Shaw, the chief economist in London at asset manager Investec. “This is a transfer of responsibility from parliament to the voters.”

Read more …

The numbers stopped making sense long ago. Quit looking at the numbers.

Here’s Why Any Greek Debt Deal Will Amount To Nothing (Satyajit Das)

All the heated negotiations and analysis around a bailout for Greece seem oblivious to the key problems of any settlement. Since February’s “deal,” the parties have inched close to an agreement in a prolonged battle of alternative drafts (some incorrect; other misdirected). It remains highly uncertain whether agreement can be reached. The creditors insist this is their “last and best” offer. The Greeks bluster about democracy and blackmail. Now, the Greek government has called a snap referendum on the new proposals. In its current form, the terms will represent a few concessions by the creditors, but almost total capitulation by the Greek government. Consider:

First, the agreement is likely to cover five months, necessitating a more comprehensive further program, which will inevitably require creditors to provide new financing to Greece (in effect a third bailout) if default is to be avoided. Second, the focus originally has been on the release of €7.2 billion from the existing second bailout program. If the amounts that Greece has run down from reserves, pensions and also its account at the IMF are replaced, then there is little additional new funding to Greece. It seems the European have found a little more money, by shuffling funds, whereby the amount would be a more “generous” 17 or so billion euro. But it is far from clear what Greece needs in any case.

Third, the issue of debt repayments or relief is not addressed, other than in vague terms. Greece has commitments of around 5-10 billion euro each year plus the continuing need to roll over around €15 billion in short-term Treasury bills. Greece may not have the ability to meet these obligations on an ongoing basis. This does not take into account additional funding needs of the State that may arise from budget shortfalls or the need of Greek banks.

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Oh, c’mon, I feel so awkward agreeing with Krugman….

Europe’s Moment of Truth (Paul Krugman)

Until now, every warning about an imminent breakup of the euro has proved wrong. Governments, whatever they said during the election, give in to the demands of the troika; meanwhile, the ECB steps in to calm the markets. This process has held the currency together, but it has also perpetuated deeply destructive austerity — don’t let a few quarters of modest growth in some debtors obscure the immense cost of five years of mass unemployment. As a political matter, the big losers from this process have been the parties of the center-left, whose acquiescence in harsh austerity — and hence abandonment of whatever they supposedly stood for — does them far more damage than similar policies do to the center-right.

It seems to me that the troika — I think it’s time to stop the pretense that anything changed, and go back to the old name — expected, or at least hoped, that Greece would be a repeat of this story. Either Tsipras would do the usual thing, abandoning much of his coalition and probably being forced into alliance with the center-right, or the Syriza government would fall. And it might yet happen. But at least as of right now Tsipras seems unwilling to fall on his sword. Instead, faced with a troika ultimatum, he has scheduled a referendum on whether to accept. This is leading to much hand-wringing and declarations that he’s being irresponsible, but he is, in fact, doing the right thing, for two reasons.

First, if it wins the referendum, the Greek government will be empowered by democratic legitimacy, which still, I think, matters in Europe. (And if it doesn’t, we need to know that, too.) Second, until now Syriza has been in an awkward place politically, with voters both furious at ever-greater demands for austerity and unwilling to leave the euro. It has always been hard to see how these desires could be reconciled; it’s even harder now. The referendum will, in effect, ask voters to choose their priority, and give Tsipras a mandate to do what he must if the troika pushes it all the way. If you ask me, it has been an act of monstrous folly on the part of the creditor governments and institutions to push it to this point. But they have, and I can’t at all blame Tsipras for turning to the voters, instead of turning on them.

Read more …

Getting ugly.

Wikileaks: Plot Against Former Greek PM’s Life, ‘Silver Drachma’ Plan (GR)

Evidence pointing to international espionage, a plot to murder former Greek Prime Minister Costas Karamanlis and a 2012 plan for Greece’s exit from the euro code-named the “Silver Drachma” are just some of the sensational findings unveiled in a report by Greek Anti-Corruption Investigator Dimitris Foukas, released on Friday and sent to the Justices’ Council for consideration. The report outlines the findings of three converging judicial investigations spanning several years, initiated after the notorious phone-tapping scandal in 2005 and revelations that the mobile phones of then Prime Minister Karamanlis and dozens of other prominent Greeks were under surveillance.

This investigation later merged with that of the “Pythias Plan’” – for the neutralization and even murder of Karamanlis – and allegations that Greek National Intelligence Service officers and former Minister Michalis Karchimakis had leaked classified state secrets and documents. Foukas cited evidence – including Wikileaks reports – supporting the existence of the Pythias Plan, which he said was designed to exert pressure on the Greek government to change its policy in crucial sectors, such as energy, arms procurements and public sector procurements. According to the report, the rapprochement between Greece and Russia provoked action by the United States to avert agreements for Russian pipelines, leading to the gradual abandonment of the plans by Athens and its commitment to the Trans-Adriatic Pipeline (TAP), as well as the cancellation of plans to acquire Russian military equipment.

Read more …

Word: “With hundreds of thousands of people depending on soup kitchens, and thousands of suicides in the years 2010-2015, the moral case for debt forgiveness seems just as strong as the technical one based on economics.”

Greece Referendum: Why Tsipras Made the Right Move (Fotaki)

Greece will hold a referendum on July 5 on whether the country should accept the bailout offer of international creditors. The government’s decision to reject what was on offer and call the referendum is ultimately an attempt to take charge of its domestic policy and reaffirm its credibility with voters. Although Greece is hard strapped for cash this is clearly a political decision with profound consequences for the future of the European Union. It is also the right one. This is not merely useful as a negotiating tactic for obtaining a better deal with its creditors, as many commentators might suggest. The coalition of the left, Syriza, had no choice but to oppose further measures that would lock its economy into a deflationary spiral, the trappings of which are destroying Greek society.

Elected with the mandate to end the savage austerity policies already imposed, Syriza could hardly accept the further cuts demanded. These include cuts in income support for pensioners below the poverty line and a VAT hike of up to 23% on food staples. Even more onerous was the demand that Greece should deliver a sustained primary budget surplus of 1% for 2016, gradually increasing to 3.5% in the following years when its economy has already been contracting for six years. By most counts the austerity policies imposed by Greece’s creditors in 2010 in exchange for the bailout money have been an abject economic and moral failure. The IMF itself has acknowledged “a notable failure” in managing the terms of the first Greek bailout, in setting overly optimistic expectations for the country’s economy and underestimating the effects of the austerity measures it imposed.

The former IMF negotiator, Reza Moghadam, has acknowledged the fund’s erroneous projections about Greek growth, inflation, fiscal effort and social cohesion. The debt is now almost 180% of Greece’s GDP, up from 120% when the bailout program began. And this is mainly due to the fact that GDP has contracted by 25%, rather than the significantly lower projections by the IMF. The shrinking of the economy and rising unemployment levels have exceeded those that hit the US in the financial crisis of the 1930s. The human and social costs have been even more staggering in Greece. Incomes have fallen by an average of 40%, and the unemployment rate reached 26% in 2014 (and higher than 50% for youth). With hundreds of thousands of people depending on soup kitchens, and thousands of suicides in the years 2010-2015, the moral case for debt forgiveness seems just as strong as the technical one based on economics.

Yet in the terms presented to Greece by their creditors there is no commitment to reducing Greece’s crippling debt (which all commentators acknowledge is unrepayable). Nor is there any tangible proposal for rebuilding the Greek economy. Germany, France, and the EU, aided by the IMF and ECB, continue to insist on implementing policies that have so manifestly failed Greece. They do so to avoid having to justify the massive bailouts of their own financial systems – shifting the burden from banks to taxpayers – if Greece fails to make the repayments. The leading EU partners must not be seen to act leniently towards Greece as this might encourage anti-austerity parties Spain and elsewhere.

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No, the IMF should be dismantled.

IMF Heads Must Roll Over Shameful Greek Failings (Telegraph)

Whatever the eventual outcome of the Greek debt talks, there are a number of judgments can already be made; one is that a large part of the blame for this ever deepening debacle lies at the doors of the International Monetary Fund, which from the very beginning has had both its priorities and its analysis of the situation hopelessly wrong. The IMF is meant to fix these things; instead, it has conspired to turn what should have been a containable crisis into a total disaster. With its reputation in tatters and its credibility shot to bits, it is small wonder that China and others are seeking alternative, rival models of governance for the global financial system. If this were any normal organisation, the IMF’s managing director, Christine Lagarde, would be forced to resign and someone with less of a vested interest in propping up the folie de grandeur of EMU installed in her place.

Tharman Shanmugaratnam, deputy prime minister of Singapore – measured, clever, internationally respected and impressively free- market orientated in his approach to global affairs – would make an excellent choice, though even he, as a long-standing chairman of the IMF’s policy committee, is somewhat tainted. It may require a complete outsider. Crisis management is of course what the IMF is there for; and if in the thick of a crisis, you are almost bound to get flak. Has there ever been a crisis in the IMF’s 70-year history that was not said to have done irreparable damage to the organisation’s reputation? It’s hard to think of one. Whatever it does, the IMF always gets it in the neck. Take the Russian financial crisis of 1998. The $5bn the IMF lent to help the country over its difficulties was immediately stolen and spirited away into Swiss bank accounts.

Or the pre-millennial Asian crises, where the IMF was accused of imposing a degree of austerity on afflicted nations it would never dare advocate for any G7 economy. I could go on, but it would fill the rest of the newspaper. In any case, criticism comes with the territory, which is possibly why the IMF has always been so impervious to it, and also why it repeatedly fails to learn from its mistakes. By any standards, however, the IMF’s entanglement with the eurozone crisis is a whopper of a screw-up. Nor is it something in which the IMF should have got involved in the first place. Europe, one of the richest regions in the world, should have been left to sort out its own affairs. This is more particularly the case as the Greek debt crisis is almost entirely one of the eurozone’s own making.

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Shut off the light on your way out.

Austrians Launch Petition To Quit EU (RT)

Austrians have launched a petition to quit the EU, arguing that the nation will be better off economically if it leaves the union. To force the national parliament to consider the initiative activists need to have gathered 100,000 signatures by July 1. The petition was started by a retired 66-year-old translator, Inge Rauscher, who has collected enough signatures to launch an official campaign. The plea seeks to request that the national parliament debate the idea of a referendum on quitting the EU. However, to get that issue even discussed, the petition must gather 100,000 signatures. “We want to go back to a neutral and peace-loving Austria,” Rauscher said at the start of the campaign this week. Austrians have until July 1 to sign the petition which they can do in municipal or district offices.

Rauscher and her non-partisan Heimat & Umwelt committee (Homeland and Environment) argue that Austria will benefit from leaving the EU both economically and environmentally. She also criticized Austria’s forceful endorsement of EU sanctions against Russia, generally blaming Brussels for the economic downturn. “We are not any longer a sovereign state in the European Union. Over 80% of all essential legislation is being imposed by Brussels, not by elected commissioners. In our view, Europe is not a democracy. The European Parliament does not even have legislative powers,” Rauscher told Sputnik Radio.

An independent Austria, the committee believes, would gain an extra €9,800 per household per year, because the country will be freed from the burdens of EU bureaucracy. Recent polls show that only about one third of Austrians would be in favor of leaving the EU, according to the Local. The idea is championed by both the right-wing Freedom Party and the Euro-skeptic Team Stronach party. “This initiative is open for all political parties and we expect a broad support,” Rauscher said. “This is proved by our numerous conversations with the citizens over the past months.”

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Ari, interesting, but you kill your own argument by defining inflation as rising prices.

The Government Must Run Deficits, Even In Good Times (Ari)

It is my view that it is very important to keep things simple and this is what I will aim to do here. I will get down to the simplest identity and build from there using empirical data. I will draw conclusions which logically follow from the data and base assumptions. But despite the elementary nature of the idea, I still think that what it will show is very informative and the conclusion it leads to is one that the current government in the UK would be appalled to consider. Although the conclusion will be surprising to some people, I believe that every step of the logic shown here is undeniably true. I would be very interested if someone can show me a faulty link in the chain. The starting point is the basic identity here:

If GDP in one year is given by £A, then the total amount of money spent on domestic goods and services is £A.
If nominal GDP the next year grows by proportion n, then GDP in year two is given by £A*(1+n) and the total amount of money spent in year two is also £A*(1+n).
What it means is that, if, for example, growth is 2% and inflation is 2%, then a total of 4% more money MUST be spent in year two than was spent in year one.

The question I will mainly be answering in the rest of this post is ‘where does this money come from?’. I will not just try to answer this question in the abstract but to quantify the effect of different sources of money. When money is spent in an economy then it contributes to nominal GDP. Nominal GDP growth is the increase in A above. The economy can be simplified to how much money was spent and how much of that leads to real growth and how much to inflation. I will try to show, using empirical data, the source of funding for our economic growth and how this leads to the conclusion that we have a big problem now. I am trying to keep things simple so I will avoid using any long equations, but to see this idea broken down into greater detail, it can be seen in the model I develop here and give an example of here (where I explain that the next crash we will have could well be a painful one).

I am not too concerned with the supply side during this discussion; it is a different issue. For example, better infrastructure and training will increase future real growth by improving productivity. There are two sides to an economy and both are important. However all of this is irrelevant for this analysis because it is just looking at the importance of demand. Deficiencies in supply will be shown in inflation figures. The supply side can expand supply to fill a certain amount of the demand as demand grows. This is dependent upon the spare capacity in the economy. If many people are out of work, then it would be easier to fulfill an increase in demand than if there is full employment. This will show in the numbers. The higher the level of GDP, the higher proportion of the extra spending that will lead to inflation.

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Not sure about this…

Pope Francis Recruits Naomi Klein In Climate Change Battle (Observer)

She is one of the world’s most high-profile social activists and a ferocious critic of 21st-century capitalism. He is one of the pope’s most senior aides and a professor of climate change economics. But this week the secular radical will join forces with the Catholic cardinal in the latest move by Pope Francis to shift the debate on global warming. Naomi Klein and Cardinal Peter Turkson are to lead a high-level conference on the environment, bringing together churchmen, scientists and activists to debate climate change action. Klein, who campaigns for an overhaul of the global financial system to tackle climate change, told the Observer she was surprised but delighted to receive the invitation from Turkson’s office.

“The fact that they invited me indicates they’re not backing down from the fight. A lot of people have patted the pope on the head, but said he’s wrong on the economics. I think he’s right on the economics,” she said, referring to Pope Francis’s recent publication of an encyclical on the environment. Release of the document earlier this month thrust the pontiff to the centre of the global debate on climate change, as he berated politicians for creating a system that serves wealthy countries at the expense of the poorest. Activists and religious leaders will gather in Rome on Sunday, marching through the Eternal City before the Vatican welcomes campaigners to the conference, which will focus on the UN’s impending climate change summit.

Protesters have chosen the French embassy as their starting point – a Renaissance palace famed for its beautiful frescoes, but more significantly a symbol of the United Nations climate change conference, which will be hosted by Paris this December. Nearly 500 years since Galileo was found guilty of heresy, the Holy See is leading the rallying cry for the world to wake up and listen to scientists on climate change. Multi-faith leaders will walk alongside scientists and campaigners, hailing from organisations including Greenpeace and Oxfam Italy, marching to the Vatican to celebrate the pope’s tough stance on environmental issues. The imminent arrival of Klein within the Vatican walls has raised some eyebrows, but the involvement of lay people in church discussions is not without precedent.

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Nov 202014
 November 20, 2014  Posted by at 12:26 pm Finance Tagged with: , , , , , , , , , , ,  13 Responses »

Jack Delano Truck service station on US 1, NY Avenue, Washington DC Jun 1940

Growth Isn’t God in Indonesia (Bloomberg)
Federal Reserve In Easy Decision To End Stimulus (BBC)
Fed Debate Shifts to Tightening Pace After First Rate Increase (Bloomberg)
The Only Thing More Bullish Than Inflation Is …. Deflation (Zero Hedge)
Cheap-Oil Era Tilts Geopolitical Power to US (Bloomberg)
Oil Industry Risks Trillions Of ‘Stranded Assets’ On US-China Climate Deal (AEP)
Iron Ore’s Massive Expansion Era Is Finished: BHP Billiton (Bloomberg)
China’s Factory Activity Stalls In November (CNBC)
Distressed Debt in China? You Ain’t Seen Nothing Yet (Bloomberg)
The Yen Looks Like It’s Ready To Get Crushed (CNBC)
BOJ Warns Abe Over “Fiscal Responsibility” While Monetizing All Debt (ZH)
Why UK Needs ‘Radical’ Change As Exports Fall (CNBC)
Michael Pettis: Spain Needs to Debate Leaving the Euro (Mish)
Eurozone PMI Falls To 16-Month Low In November (MarketWatch)
French Manufacturing Slump Deepens as Economic Weakness Persists (Bloomberg)
Pressure Mounts for EU Crackdown on Tax Havens (Spiegel)
Senator Slaps Plan For Low-Down-Payment Loans At Fannie, Freddie (MarketWatch)
Junk-Bond Banking Boom Peaks as Firms Drop off Deal List (Bloomberg)
Goldman Fires Staff For Alleged NY Fed Breach (FT)
Banking Industry Culture Promotes Dishonesty, Research Finds (Guardian)
New International Gang Of Thieves Make Somali Pirates Look Like Amateurs (Black)

Is there still hope and sanity in the world?

Growth Isn’t God in Indonesia (Bloomberg)

Joko Widodo’s rise from nowhere to Jakarta governor and then the presidential palace showed the wonders of Indonesia’s democracy. Now, he wants to democratize the economy as well, focusing as much on the quality of growth as the quantity. Sixteen years ago, Indonesia was cascading toward failed statehood. In 1998, as riots forced dictator Suharto from office, many wrote off the world’s fourth-most populous nation. Today, Indonesia is a stable economy growing modestly at 5%, with quite realistic hopes of more. There’s plenty for Widodo, known by his nickname “Jokowi,” to worry about, of course. Indonesia still ranks behind Egypt in corruption and near Ethiopia in ease-of-doing-business surveys. More than 40% of the nation’s 250 million people lives on less than $2 a day.

A dearth of decent roads makes it more cost-effective to ship goods to China than across the archipelago. Retrograde attitudes abound: to this day, female police recruits are subjected to humiliating virginity tests. But this week, Jokowi reminded us why Indonesia is a good-news story — one from which Asian peers could learn. His move to cut fuel subsidies, saving a cash-strapped nation more than $11 billion in its 2015 budget, showed gumption and cheered investors. Even more encouraging is a bold agenda focusing not just on faster growth, but better growth that’s felt among more than Jakarta elites. This might seem like an obvious focus in a region that’s home to a critical mass of the world’s extreme poor (those living on $1 or $2 a day).

But grand rhetoric about “inclusive growth” hasn’t even come close to meeting the reality on the ground. In India, for example, newish Prime Minister Narendra Modi boasts that he will return gross domestic product to the glory days of double-digit growth rates, as if the metric mattered more than what his government plans to do with the windfall. The “Cult of GDP,” the dated idea that booming growth lifts all boats, has long been decried by development economists like William Easterly. The closer growth gets to 10%, the more likely governments are to declare victory and grow complacent. In many cases rapid GDP growth masks serious economic cracks. In her recent book, “GDP: A Brief but Affectionate History,” Diane Coyle called the figure a “familiar piece of jargon that doesn’t actually mean much to most people.”

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Janet Yellen lives in virtual reality.

Federal Reserve In Easy Decision To End Stimulus (BBC)

Although the US Federal Reserve was worried about turmoil in emerging markets, the central bank reached an easy consensus to end its stimulus programme, its latest minutes reveal. Minutes from the central bank’s October meeting show officials were concerned about stock market fluctuations and weakness abroad. However, they worried that saying so could send the wrong message. Overall, officials were confident the US economy was on a strong footing. That is why they decided to end their stimulus programme – known as quantitative easing (QE) – in which the Fed bought bonds in order to keep long-term interest rates low and thus boost spending. “In their discussion of the asset purchase programme, members generally agreed … there was sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment,” read the minutes, referring to the decision to end QE. US markets reacted in a muted way to the news, with the Dow Jones briefly rising before falling once more into the red for the day.

However, to reassure markets that the Fed would not deviate from its set course, the central bank decided to keep its “considerable time” language in reference to when the Fed would raise its short term interest rate. That interest rate – known as the federal funds rate – has been at 0% since late 2008, when the Fed slashed rates in the wake of the financial crisis. Most observers expect that the bank will begin raising that rate in the middle of 2015, mostly in an effort to keep inflation in check as the US recovery gathers steam. However, US Fed chair Janet Yellen has sought to reassure market participants that the bank will not act in haste and remains willing to change its timeline should economic conditions deteriorate in the US. The minutes also show that the Fed is still concerned about possibly lower-than-expected inflation, particularly as oil prices continue to decline and wage growth remains sluggish.

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They’re going to do it. Screw the real economy, it’s dead anyway.

Fed Debate Shifts to Tightening Pace After First Rate Increase (Bloomberg)

U.S. central bankers are weighing whether they should communicate more of their views about the probable pace of interest-rate increases after they lift off zero next year. “A number of participants thought that it could soon be helpful to clarify the committee’s likely approach” to the pace of increases, according to minutes of the Oct. 28-29 Federal Open Market Committee meeting released today in Washington. The discussion last month underscored how much officials will rely on forward guidance on the pace of tightening in the future. After bond purchases ended last month, guidance may be the most practical option left to assure investors that policy won’t become overly restrictive if officials decide to take a stand against inflation seen as too low. The pace of rate increases is “going to be slow until they are really convinced that inflation’s sustainably at target and the labor market’s in really, really good shape,” said Guy Berger, a U.S. economist at RBS Securities. “They are going to take their sweet time.”

The minutes showed that many FOMC participants last month felt the committee should stay on the lookout for signs that inflation expectations were declining. Declining expectations could herald an actual fall in prices. Such deflation does economic damage by encouraging consumers to delay spending in anticipation of lower prices in the future. The potency of the first rate increase could be diminished or increased, depending on what the FOMC says about how it views its subsequent moves, said Laura Rosner, U.S. economist at BNP Paribas SA in New York. “It isn’t just the timing of liftoff the Fed cares about, but the whole path of federal funds rate,” said Rosner, a former New York Fed staff member. “I think they do probably want to limit the extent of tightening that people expect, at least at the beginning.” While telegraphing the future rate path may be attractive to some officials, it may also be unpopular with those, such as Chair Janet Yellen, who recall the Fed’s experience in 2004 with language saying the pace of increases would be “measured.”

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“Positioning for a deflationary boom is a binary event.”

The Only Thing More Bullish Than Inflation Is …. Deflation (Zero Hedge)

Deflation. And not just deflation, but a deflationary bust! At least, such is the goalseeked logic of Cornerstone Marco, which has released a bullish (no really) note titled the Coming Deflationary Boom in the U.S. In it the authors throw in the towel on the most conventional concept in modern economics, namely that for growth one needs stable inflation which in turn causes earnings growth and is low enough not to pressure multiples too high. Well, according to the BLS’ hedonic adjustments and courtesy of Japan’s epic exporting of deflation, inflation is nowhere to be seen (except if one eats pork or beef, or drinks milks), so it is time to give ye olde paragidm shift a try. The paradigm that the only thing more bullish for stocks than inflation, is deflation. To wit:

The concept of a deflationary boom is a controversial one in economics. Truth be told it will not work in every economy. Indeed, a prerequisite for this to unfold is an economy driven by consumers. In that sense, it does not get more consumer-centric than the US. The second, and necessary, condition calls for a major decline in commodity prices ideally compounded by a strong currency to provide the fuel for growth. In essence, a decline in commodity and import prices creates disposable income the same way the Fed Funds rate cuts used to a decade ago.

Positioning for a deflationary boom is a binary event. After all, “deflationary” implies that stocks levered to lower inflation will have a powerful tailwind, these are what we like to call early cyclicals such as consumer, transports and other similar segments. Meanwhile, the “boom” part of the story implies that segments levered to growth, US growth in this case, also find a tailwinds. This should help the beleaguered financials to a better year in 2015 and also provides support for sectors like technology and some of the industrials. As we see it, “deflation” is going to become the operative word on the street … that and PE expansion since they typically go hand in hand. As always, we shall see.

Indeed we shall. Then again the only thing we will see is how every time there is deflation somewhere in the world, one after another central bank somewhere will admit its only mandate is to keep stocks at record highs and inject a few trillion in risk-purchasing power into what was once called a market.

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Wait till shale implodes, then we can talk again.

Cheap-Oil Era Tilts Geopolitical Power to US (Bloomberg)

A new age of abundant and cheap energy supplies is redrawing the world’s geopolitical landscape, weakening and potentially threatening the legitimacy of some governments while enhancing the power of others. Some changes already are evident. Surging U.S. oil production enabled America and its allies to impose tough sanctions on Iran without having to worry much about the loss of imports from the Middle Eastern nation. Russia, meanwhile, faces what President Vladimir Putin called a possibly “catastrophic” slump in prices for its oil as its economy is battered by U.S. and European sanctions over its role in Ukraine. “A new era of lower prices is being ushered in” by the U.S. shale oil and gas revolution, Ed Morse, global head of commodities research for Citigroup, said in an e-mail.

“Undoubtedly some of the geopolitical changes will be momentous.” They certainly were a quarter of a century ago. Plunging oil prices in the latter half of the 1980s helped pave the way for the breakup of the Soviet Union by robbing it of revenue it needed to survive. The depressed market also may have influenced Iraqi leader Saddam Hussein’s decision to invade fellow producer Kuwait in 1990, triggering the first Gulf War. Russia again looks likely to suffer from the fallout in oil markets, along with Iran and Venezuela, while the U.S. and China come out ahead. Oil is “the most geopolitically important commodity,” said Reva Bhalla, vice president of global analysis at Stratfor.

“It drives economies around the world” and is located in some “usually very volatile places.” Benchmark oil prices in New York have dropped more than 30% during the last five months to around $75 a barrel as U.S. crude production reached the highest in more than three decades, driven by shale fields in North Dakota and Texas. Output was 9.06 million barrels a day in the first week of November, the most since at least January 1983, when the weekly data series from the Energy Information Administration began.

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Petrobras was aiming to be the world’s first trillion-dollar company. Now it’s the most indebted company in the world.

Oil Industry Risks Trillions Of ‘Stranded Assets’ On US-China Climate Deal (AEP)

Brazil’s Petrobras is the most indebted company in the world, a perfect barometer of the crisis enveloping the global oil and fossil nexus on multiple fronts at once. PwC has refused to sign off on the books of this state-controlled behemoth, now under sweeping police probes for alleged graft, and rapidly crashing from hero to zero in the Brazilian press. The state oil company says funding from the capital markets has dried up, at least until auditors send a “comfort letter”. The stock price has dropped 87pc from the peak. Hopes of becoming the world’s first trillion dollar company have deflated brutally. What it still has is the debt. Moody’s has cut its credit rating to Baa1. This is still above junk but not by much. Debt has jumped by $25bn in less than a year to $170bn, reaching 5.3 times earnings (EBITDA). Roughly $52bn of this has been raised on the global bond markets over the last five years from the likes of Fidelity, Pimco, and BlackRock.

Part of the debt is a gamble on ultra-deepwater projects so far out into the Atlantic that helicopters supplying the rigs must be refuelled in flight. The wells drill seven thousand feet through layers of salt, blind to seismic imaging. The Carbon Tracker Initiative says the break-even price for these fields is likely to be $120 a barrel. It is much the same story – for different reasons – in the Arctic ‘High North’, off-shore West Africa, and the Alberta tar sands. The major oil companies are committing $1.1 trillion to projects that require prices of at least $95 to make a profit. The International Energy Agency (IEA) says fossil fuel companies have spent $7.6 trillion on exploration and production since 2005, yet output from conventional oil fields has nevertheless fallen. No big project has come on stream over the last three years with a break-even cost below $80 a barrel.

“The oil majors could not even generate free cash flow when oil prices were averaging $100 ,” said Mark Lewis from Kepler Cheuvreux. They have picked the low-hanging fruit. New fields are ever less hospitable. Upstream costs have tripled since 2000. “They have been able to disguise this by drawing down legacy barrels, but they won’t be able to get away with this over the next five years. We think the break-even price for the whole industry is now over $100,” he said. A study by the US Energy Department found that the world’s leading oil and gas companies were sinking into a debt-trap even before the latest crash in oil prices. They increased net debt by $106bn in the year to March – and sold off a net $73bn of assets – to cover surging production costs. The annual shortfall between cash earnings and spending has widened from $18bn to $110bn over the last three years. Yet these companies are still paying normal dividends, raiding the family silver to save face.

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They’ve all invested for continuing huge growth numbers. And now growth is gone.

Iron Ore’s Massive Expansion Era Is Finished: BHP Billiton (Bloomberg)

Iron ore’s golden spending era is history. That’s the verdict of BHP Billiton, the world’s biggest mining company. BHP and rivals Rio Tinto and Vale are flooding the global iron ore market after a $120 billion spending spree to boost the capacity of their mines from Australia to Brazil. Now prices have slumped to the lowest in more than five years as surging supply coincides with a slowdown in China, the world’s biggest consumer. “Our company has been very clear that the time for massive expansions of iron ore are over,” BHP CEO Andrew Mackenzie told reporters today after a shareholder meeting in Adelaide, South Australia. While BHP is still increasing production, the company last approved spending on an iron ore expansion in 2011.

It’s shifting investment into copper and petroleum, he said Global seaborne output will exceed demand by 100 million metric tons this year from 16 million tons in 2013, HSBC said last month. Prices, which are trading around $70 a ton in China, may drop to below $60 a ton next year, according to Citigroup forecasts. “At these prices, we still have a very decent business,” Mackenzie said. “We’ve been fairly clear that prices at about these levels were what we were expecting for the longer term.” Investments in copper may help BHP seize on rising demand for energy in emerging economies. Demand from China, the biggest metals consumer, will be supported by electricity grid expansion and greater adoption of renewable energy sources, all of which require more copper wiring, according to Citigroup.

The prospects for an expansion of BHP’s Olympic Dam copper, gold and uranium mine in Australia are looking more promising after testing of new processing technology shows early signs of success, Mackenzie said. Olympic Dam in South Australia is the world’s largest uranium deposit and fourth-biggest copper deposit. BHP is pilot testing a heap leaching extraction process used in its copper mines in Chile. If the tests “are successful, and they are showing considerable promise, we will use this technology and phased expansions of the underground mine to further increase Olympic Dam’s output,” Mackeznie told the meeting. In 2012, BHP halted a proposed expansion of Olympic Dam, estimated by Deutsche Bank AG to cost $33 billion. Mackenzie was addressing the first annual meeting held in the state since the decision.

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Flash PMI at zero growth.

China’s Factory Activity Stalls In November (CNBC)

China’s factory activity stalled in November as output shrank for the first time in six months, a private survey showed on Thursday. The HSBC flash Purchasing Managers’ Index (PMI) for November clocked in at the breakeven level of 50.0 that separates expansion from contraction, compared with a Reuters estimate for 50.3 and following the 50.4 final reading in October. Overall, new orders picked up slightly but new export orders slowed markedly, dragging on activity. The factory output sub-index fell to 49.5, the first contraction since May.

The Australian dollar eased against the greenback on the news, trading at $0.8607. But shares in China and Hong Kong appear unaffected by the data. The reading is the latest evidence that the world’s second biggest economy continues to lose traction. Recent data on housing prices and foreign direct investments also missed forecasts. “China is slowing and we think it will continue to slow. A lot of it is structural, and in our view, growth will slow to about 4.5% over the next 10 years. We see some sectors that are very challenged; clearly real estate is one,” Robin Bew, MD of Economist Intelligence Unit, told CNBC.

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“They keep reporting such a low number for so many years, there’s only one way it can go – up …”

Distressed Debt in China? You Ain’t Seen Nothing Yet (Bloomberg)

Bad debts in China are well underestimated because authorities persist in propping up weak companies and bailing out local investors, according to DAC Management. The Chicago-based asset management and advisory firm, which focuses on distressed credit and special situations in China, says the worst is yet to come, and that means lots of opportunities for the world’s biggest distressed debt traders. Nonperforming loans at Chinese banks jumped by the most since 2005 in the third quarter to 766.9 billion yuan ($125.3 billion), official statistics released earlier this month showed. The People’s Bank of China has injected 769.5 billion yuan into its banking system over the past two months to support an economy growing at the slowest pace in more than a decade.

“They keep reporting such a low number for so many years, there’s only one way it can go – up,” DAC co-founder Philip Groves said in an interview. “We’ve yet to see it because if you look at corporate defaults, they keep getting covered by the government. At some point, they can’t cover every single one.” DAC manages about $400 million of its own and clients’ money onshore in China. It first bought Chinese bad loans in December 2001 from China Orient Asset Management, one of four asset management companies created by the government to buy, repackage and onsell soured debt, Groves said.

While China’s bad loan ratio is relatively small versus other countries in Asia – soured loans are equivalent to 1.16% of total advances compared with 3.88% in Vietnam and 0.86% in South Korea – their total is still in an order of magnitude greater than the funds raised by distressed investors, Groves said. There hasn’t been enough capital to soak up the nonperforming debt and much ends up being reabsorbed by the government, he said. That’s why distressed activity in China has been “sporadic” over the past 10 years and why some large investors aren’t participating. “It never became a market where you could put a billion dollars to work in a year,” Groves said. “But if the wave of bad debt comes, and there are things to buy, the money will follow.”

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I’ve said it before, Japan is not going to be a nice place to be.

The Yen Looks Like It’s Ready To Get Crushed (CNBC)

Japan has slipped back into recession, with the economy shrinking 1.6% in the third quarter, surprising economists who forecast it would grow 2%. The takeaway? Double down on the dollar versus the yen. How weak can the yen get? Forecasters are lowering their already bearish targets after the new disappointing economic data. “I’d expect another 20% drop next year, which would take us north of 140,” said Peter Boockvar of the Lindsey Group about the dollar-yen rate. The team at Capital Economics raised their forecast for dollar-yen to finish next year at 140 as well, up from 120 previously.

Those are bold calls, because it’s unusual for any currency to move more than 5% to 10% per year. Also, the yen has already tumbled 14% in the past 12 months and 19% the previous year, making it the worst-performing major currency against the dollar both years. But when it comes to the yen right now, it seems, no forecast is too bearish. “When I started in the business, dollar-yen was 230,” recalled David Rosenberg, chief economist and strategist at Gluskin Sheff. “For those that think this move is over, this is probably going to be a round trip, meaning that the dollar’s run-up against the yen has a lot further to go.”

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Japan is a state of panic.

BOJ Warns Abe Over “Fiscal Responsibility” While Monetizing All Debt (ZH)

If one were to look up the definition of hypocrisy, the image of BoJ head Kuroda should be front-and-center. Having tripled-down on his money-printing and ETF-buying largesse just last week, he came out swinging last night at the government’s fiscal irresponsibility blasting Abe’s policies by saying Japan’s fiscal health “is the responsibility of parliament and the government, not an issue for the central bank to be held responsible for.” Aside from the fact that he is directly monetizing all JGB issuance – thus enabling Abe’s arrogant fiscal stimulus plan (by issuing 30Y and 40Y debt), Bloomberg notes that “Kuroda is making it crystal clear the government has to tackle the debt problem and if fiscal trust is lost that’s not going to be on the BOJ.” The world has truly gone mad. Seemingly paying the same lip-service as Bernanke and Yellen in the US and Draghi in Europe, BoJ’s Haruhiko Kuroda is carefully positioning the blame for lack of growth and economic chaos on the government’s lack of growth-oriented policies… and not the central bank’s enabling experiments… (via Bloomberg):

Bank of Japan chief Haruhiko Kuroda emphasized the onus is on the government to strengthen its finances after PM Shinzo Abe postponed a sales-tax hike and outlined plans to boost fiscal stimulus. “It’s the responsibility of parliament and the government, not an issue for the central bank,” Kuroda said when asked about risks to Japan’s fiscal health. The BOJ’s job is to achieve its inflation target, he said at a press conference in Tokyo. Kuroda’s repeated comments at a press conference today on the importance of fiscal discipline indicate the governor is unhappy and may signal a change in strategy, said Credit Suisse economist Hiromichi Shirakawa. “Kuroda is making it crystal clear the government has to tackle the debt problem and if fiscal trust is lost that’s not going to be on the BOJ,” said Shirakawa, a former BOJ official. “This is true, but he used to highlight that the BOJ and the government were working together. Abe might have created an enemy by postponing the sales-tax hike.”

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This is how you expose the madness in all those nonsensical plans and targets.

Why UK Needs ‘Radical’ Change As Exports Fall (CNBC)

The U.K. government needs to make radical changes to halt the slide in export growth, the head of British Chambers of Commerce told CNBC. “Exports are tailing off, the rate of growth is tailing off — it’s the one part of the economy we are failing on,” BCC’s Director- General John Longworth told CNBC Europe’s “Squawk Box” on Thursday. “They always say that the definition of madness is carrying on doing the same thing as before and expecting a different result. We need to do something radically different as a country.” His comments come as the BCC published its third-quarter Trade Confidence Index on Thursday. The survey, carried out with delivery company DHL Express, measures U.K. exporting activity and business confidence of more than 2,300 exporting firms.

It found that in the latest quarter, fewer exporters reported increased sales: 29% of exporters stated that sales had increased in the third quarter of 2014, a sharp drop from 47% in the second quarter. Of those exporters no longer seeing an increase in export sales, most said that sales have remained consistent. “There has a slowdown in the U.K.’s export potential because of the slowdown global economic circumstances,” Longworth said, or government export targets would be missed. The U.K. Prime Minister David Cameron said in his 2012 budget that he wanted the U.K. to double exports to £1 trillion ($1.5 trillion) by 2020. In order to achieve that, however, Longworth said the U.K. would have to see export growth of nearly 11% year-on-year growth every year. “So far since the beginning of the recovery in 2010, the total growth in those years has been 14%. So we’ve got a real issue and unless we do something different we’re not going to hit those targets.”

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And so must Italy, Greece, and many others. Let the people debate it, and give them alll the information, not just choice bits.

Michael Pettis: Spain Needs to Debate Leaving the Euro (Mish)

Michael Pettis has a very interesting article on the Spanish news site ABC regarding a possible default of Spain and the eventual breakup of the eurozone. [..] What follows is my heavily modified translation of key portions of Pettis’ article after reading both of the above translations.

In the Panic of 1837, two-thirds of the US, including several of the richest states, suspended payment of external debt. The United States survived. If the European Union is to survive, it will have to find a solution to the European debt. The more hope instead of action, the more likely there’s a permanent breakdown of the euro and the European Union. In a gesture more of faith than economic or historical data, Madrid assures us that with the right reforms, it will eventually be able to get out of debt. Other countries in debt crises have made the same promise, but the promise is rarely fulfilled. Excessive debt itself impedes growth. Even without the straitjacket of the euro, Spain probably cannot afford its debt. Even those who are against debt cancellation recognize that the only thing that shielded Germany from a Spanish default was the European Central Bank.

Despite their obnoxious policies, far-right parties across Europe flourish more than ever because the ECB protects the euro and European banks at enormous costs for the working and middle classes. These extremists exploit the refusal of European leaders to acknowledge their errors. The longer the economic crisis, greater their chances of winning, and then comes an end to Europe. The only thing that prevented a suspension of payments by Spain and other countries was the promise of the European Central Bank in 2012 to do “whatever it takes” to protect the euro. But debt continues to grow faster than GDP in Europe, and the ECB load increases inexorably month after month. There will come a time when rising debt and a weakening of the German economy will jeopardize the credibility of the guarantee of the ECB (which will be useless), little by little at first, and then suddenly later. In a matter of months Spain will suspend payments.

For now, with debt settlement postponed, German banks strengthen capital to protect themselves from bankruptcy that many predict. Berlin is playing the same game as Washington during the crisis in Latin America in the 1980s. Then US banks actively strengthened their capital, mainly at the covert expense of ordinary Americans, while insisting that Latin American countries needed further reforms and no debt forgiveness. However, multiple reforms led to extremely high rates of unemployment and enormous social upheaval throughout Latin America. From 1987 to 1988, when US banks finally had enough capital, Washington officially recognized that full payment of the debt in 1990 was impossible and forgave the debt of Mexico. In the years following, US banks forgave almost the entire debt of other Latin American countries.

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It’s getting painful. Stop the experiment, it’s failed beyond repair.

Eurozone PMI Falls To 16-Month Low In November (MarketWatch)

Activity in the eurozone’s private sector slowed in November, according to surveys of purchasing managers, an indication the currency area’s economy will continue to grow weakly, if at all, in the final quarter of the year. The surveys also found that businesses again cut their prices in the face of weak demand, a development that will concern the European Central Bank, which is struggling to raise the currency area’s inflation rate from the very low level it has settled at for more than a year. Data firm Markit on Thursday said its composite purchasing managers index – a measure of activity in the manufacturing and services sectors in the currency bloc – fell to 51.4 from 52.1 in October, reaching a 16-month low. A reading below 50.0 indicates activity is declining, while a reading above that level indicates it is increasing.

Preliminary results from Markit’s survey of 5,000 manufacturers and service providers also showed that a significant pickup in activity is unlikely in the coming months, with new orders falling for the first time since July 2013, while employment was unchanged. The surveys also found that businesses continued to cut their prices, although at a slightly less aggressive pace. “The deteriorating trend in the surveys will add to pressure for the ECB to do more to boost the economy without waiting to gauge the effectiveness of previously announced initiatives,” said Chris Williamson, chief economist at Markit.

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France toast.

French Manufacturing Slump Deepens as Economic Weakness Persists (Bloomberg)

French manufacturing shrank more than analysts forecast in November and demand fell, signaling that an economic rebound seen in the third quarter might be short lived. A Purchasing Managers Index fell to 47.6, the lowest in three months, from 48.5 in October, London-based Markit Economics said today. That’s below the 50-point mark that divides expansion from contraction and compares with the median forecast of 48.8 in a Bloomberg News survey. A separate index showed services also contracted, while new business across both industries fell the most in 17 months. The euro area’s second-largest economy has barely grown in three years and recent data suggests that 2014 will be little different. With unemployment near a record and the budget deficit widening, President Francois Hollande is under pressure to deliver on his promises of business-friendly reforms.

“The continued softness in private-sector activity signaled by the PMIs suggests an ongoing drag on growth during the fourth quarter,” said Jack Kennedy, senior economist at Markit. “Another round of job shedding by companies during November meanwhile provides little hope of bringing down the high unemployment rate.” An index of services activity rose to 48.8 this month from 48.3 in October, while a composite gauge for the whole economy increased to 48.4 from 48.2, according to today’s report. Employment across both manufacturing and services fell for 13th month, though the rate of decline slowed compared with the previous month. The French economy grew 0.3% in the three months through September as a jump in public spending offset a fourth quarterly decline in investment. The unemployment rate stood at 10.5% in September, more than double than Germany’s 5%, according to Eurostat. Hollande, whose popularity is among the lowest ever registered for a French president, has said he won’t run for a second term if he is unable to bring down joblessness.

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Please, let’s have some violent infighting in Brussels.

Pressure Mounts for EU Crackdown on Tax Havens (Spiegel)

In Luxembourg, corporate income taxes are as low as 1% for some companies. An average worker in Germany with a salary of €40,000 ($50,000) who doesn’t joint file with a spouse has to pay about €8,940 in taxes each year. At the Luxembourg rate, the worker would only have to pay €400. But some companies have even managed to finagle a tax rate of 0.1%, which would amount to a paltry €40 for the average German worker. As delightful as those figures may sound, normal workers will never have access to those kinds of tax discounts. That’s why it came across as obscene to many when Juncker defended Luxembourg’s tax arrangements on Wednesday as “legal”. They may be legal, but they are anything but fair. It also strengthens an impression that gained currency during the financial crisis – that capitalism favors banks and companies, not normal people, and that these institutions profit even more than previously known from tax loopholes.

But the Juncker case also sheds light on the two faces of European politics. Top Brussels politicians are recruited from the individual EU member states and, as such, have long representated their countries’ national interests. Then they move to Brussels, where they are expected to advocate for the European Union. At times like this, though, when dealings in Brussels are becoming increasingly politicized, the idea that these politicians are promoting the EU’s interests as a bloc loses credibility. And Juncker, the very man who had a hand in stripping Luxembourg’s neighbors of tax money, is supposed to be the main face representing the EU. It’s also very problematic that he, as the man who led a country that was one of the worst perpetrators of these tax practices, is now supposed to see to it that these schemes are investigated and curbed in the future.

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Kudos Crapo. Let’s cut the crap, not reintroduce it.

Senator Slaps Plan For Low-Down-Payment Loans At Fannie, Freddie (MarketWatch)

A controversial housing-finance proposal quickly came under fire during a Wednesday Capitol Hill hearing, with a top committee Republican questioning whether it’s a good idea to allow federally controlled mortgage-finance giants Fannie Mae and Freddie Mac to back mortgages with very low down payments. “I’m troubled,” said Idaho Sen. Mike Crapo, the leading Republican member of the Senate Banking, Housing and Urban Affairs Committee, by a plan from the Federal Housing Finance Agency to enable Fannie and Freddie to buy mortgages with down payments as low as 3%. “After the problems we’ve seen” it could be risky for Fannie and Freddie to buy loans when borrowers have little equity, Crapo said.

In response, Mel Watt, who became FHFA’s director in January and was the sole witness at the agency-oversight hearing, told senators that mortgages with low down payments will require insurance, and that borrowers will be required to have relatively strong credit profiles otherwise. He added that FHFA will provide more details in December about the types of borrowers who would be eligible for such mortgages. “We are not making credit available to people that we cannot reasonably predict, with a high degree of certainty,” will make their mortgage payments, Watt said. Decisions over who can qualify for loans bought by Fannie and Freddie can have a large impact on the housing market. Together Fannie and Freddie back about half of new U.S. mortgages. The FHFA must carefully craft rules that support the housing market’s somewhat erratic recovery without creating too much risk.

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This could make plenty waves, it’s a high stakes game.

Junk-Bond Banking Boom Peaks as Firms Drop off Deal List (Bloomberg)

The explosion of brokers plowing into the lucrative junk-bond underwriting business may be fading. The number of firms managing U.S. high-yield bond sales isn’t growing for the first year since 2008, according to data compiled by Bloomberg. The ranks will likely thin in upcoming years as yields rise, making it more expensive for speculative-grade companies to borrow, according to Charles Peabody, a banking analyst at research firm Portales Partnersin New York. “You’re going to see fewer and fewer deals,” he said in a telephone interview. “Underwriting volumes are probably going to decline from here and you’re going to see more of a consolidation or exodus.” So far, the decline has been small, with 87 firms managing high-yield bond sales this year, down from the record 92 in the same period in 2013, Bloomberg data show.

The number of underwriters is still about twice as many as in 2009, when a slew of bankers founded their own firms to grab business from Wall Street firms that were shrinking as the credit crisis caused trillions of dollars of losses and writedowns. The new firms sought to win assignments managing smaller deals that bigger banks didn’t have the appetite for anymore. Five years later, the scene is changing. The least-creditworthy companies have borrowed record amounts of debt, spurred by central-bank stimulus that pushed borrowing costs to all-time lows. Now, the Federal Reserve is preparing to raise rates and junk-bond buyers are getting jittery.

The notes have declined 1.7% since the end of August as oil prices plunged, eroding the value of debt sold by speculative-grade energy companies, Bank of America Merrill Lynch index data show. While junk-bond sales are still on track for a new record this year, issuance has been choppy, with deals being canceled one week and then a flood of sales going through the next. For the past few years, high-yield underwriting has been a bright spot for banks, especially compared with flagging trading revenues. Speculative-grade companies have sold $1.2 trillion of dollar-denominated debt since the end of 2010 to lock in historically low borrowing costs. That’s also meant there have been a swelling number of firms elbowing each other out of the way for a chance to manage those deals, vying for fees that have been almost three times as much as those on higher-rated deals.

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Pot and kettle.

Goldman Fires Staff For Alleged NY Fed Breach (FT)

Goldman Sachs has fired an investment banker who allegedly accessed confidential information from the Federal Reserve Bank of New York, his former employer. Goldman said it had fired Rohit Bansal, a junior employee, in September and then fired his supervisor Joe Jiampietro, a better-known senior banker in the financial institutions group, which advises other banks. Mr Jiampietro was himself a former government official – a top adviser to Sheila Bair when she was chairman of the Federal Deposit Insurance Corporation. The New York Fed said: “As soon as we learned that Goldman Sachs suspected one of its employees may have inappropriately obtained confidential supervisory information, we alerted law enforcement authorities.”

The news, first reported by the New York Times, comes ahead of a congressional hearing on Friday that is examining whether there is too “cosy” a relationship between regulators and banks. Goldman has been nicknamed “Government Sachs” as the epitome of the “revolving door” between government and banking. Several of its employees formerly worked at government agencies, including the Fed and US Treasury. Hank Paulson, Goldman’s former chief executive, left the bank to become US Treasury secretary under President George W. Bush. On Friday, the Senate banking committee is due to examine allegations from a former New York Fed examiner, who says that she was fired because her bosses wanted her to water down criticism of Goldman. Bill Dudley, president of the New York Fed and himself a former Goldman employee, is due to testify.

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A little skimpy perhaps, but who would doubt the premise?

Banking Industry Culture Promotes Dishonesty, Research Finds (Guardian)

How do you tell if a group of bankers is dishonest? Simply by getting them all to toss a coin. That may not seem like in-depth research, but it is the basis of an academic paper published in Nature magazine this week, which investigates whether the financial sector’s culture encourages dishonesty – and concludes that it does. The academics from the University of Zurich used a sample of 128 employees of a large bank, and split them into two groups. The first set of bankers were primed to start thinking about their job, with questions such as “what is your function at this bank?”. They were then asked to toss a coin 10 times, in private, knowing which outcome would earn them $20 a flip. They then had to report their results online to claim any winnings. Unsurprisingly perhaps, there was cheating – with the percentage of winning tosses coming in at an incredibly fortunate 58.2% (although the research omitted to say how many bankers also trousered the coin).

Meanwhile, the second group completed a survey about their wellbeing and everyday life, that did not include questions relating to their professional life. They then performed the coin-flipping task, which threw up a quite astonishing finding: these bankers proved honest. Identical exercises in other industries did not produce the same skewing in results when participants were primed to start thinking about their work. The research does not reveal which institution took part in the survey, presumably to avoid it suing the authors for unearthing some decent behaviour among the cheating. “The effect induced by the treatment could be attributable to several causes,” the authors muse, “including the competitiveness expected from bank employees, the exposure to competitive bonus schemes, the beliefs about what other employees would do in the same situation or the salience of money in the questionnaire.”

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Anti-tax rant. Simon Black knows quite a bit about moving abroad.

New International Gang Of Thieves Make Somali Pirates Look Like Amateurs (Black)

This past month, a real-life guild of thieves was formed. With 51 governments pledging their support to each other for the protection of their ignoble craft of theft. And another 30 pledging to join by 2018. From day one, governments have been pilfering their citizens’ assets through taxation, claiming a monopoly on thievery. From the largest institution to the pettiest pickpocket, anyone else who tries to engage in theft is severely punished, as governments work to protect their exclusive right to steal. Frighteningly, they do this all out in the open, believing that they actually have a moral right to commit theft. You can see this delusion in the US government’s claims that last year they “lost out” on $337 billion from people avoiding taxes. As if they have some moral claim to the money they’d failed to pilfer. Nonetheless, they use this claim to justify actively hunting down and penalizing anyone who takes action to avoid being stolen from.

The ones that are doing this are the bankrupt countries, and the deeper they slide into debt, the more desperate they become. Which is why these broke governments are now joining forces, pledging to to collect and share information amongst themselves about citizens’ bank accounts, taxes, assets and income outside local tax jurisdictions. Basically – I’ll help you steal from your citizens if you help me steal from mine. Both the punishment and the likelihood of getting caught for tax evasion are growing. Don’t even bother trying. However that doesn’t mean that you have no choice but to sit there and let your self be stolen from. While there are still ways of legally reducing your tax burden from within a country, your best option is to move and diversify. Diversification is key, because if you have all your eggs in one bankrupt basket, you are really taking on extraordinary risk. Moving some assets abroad can legitimately reduce some of this risk. And an even greater strategy is considering moving yourself.

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Sep 262014
 September 26, 2014  Posted by at 9:17 pm Finance Tagged with: , , , ,  21 Responses »

Harris & Ewing Staircase in the Capitol, Albany, New York 1905

So PIMCO was going to fire Bill Gross over the weekend, and he chose to leave on his own accord and work for Janus. So what? Gross is 70 years old and still joins another firm geared towards making money, and nothing else at all. As if making money, and nothing else, is a valid goal in a human life.

As if someone who’s done nothing else his entire life, and who’s richer than Croesus, should have nothing else to do with the times that remains him, and is somehow right and justified about not being able to find anything more worthwhile.

As if that singular focus does not make his life a useless one, or the man an empty shell. And yeah, I’m sure he gives away some cash from time to time to make himself feel even better. Though I doubt he ever feels truly fine. Perhaps the disappointment of being a billionaire and still feel like he’s wasted his life is what drives him on. Or maybe his wife beats him. And he enjoys it.

And it’s not just Bill Gross, it’s just as much the way the mainstream press covers the ‘event’ of Gross’ departure, the fact that they bother to cover it in the first place, and the details they focus on, that shine a chillingly clear cold and revealing light on what we have become, as individuals and as societies.

The hollow single-minded worshipping of money, which Gross can be said to embody, is the single biggest scourge on each and every one of us, on all the bonds we form between each other, on the communities and nations we live in, and the planet they’re located on. The bible is full of allusions to this, and the world is full of people who call themselves Christians, but the twain are like ships passing in the night.

if you would want to prevent a war, or you want to stop the destruction of rivers and seas through pollution, or for the earth’s climate from entering a cycle that neither we nor the climate itself can control, would you think first of people like Bill Gross when you’re looking for support? If you do, that would not be wise. Nevertheless, at every single climate conference it’s people just like him, such as Bill Clinton and Bill Gates, who made sure they’re in the spotlight.

People who’ve never done anything in their lives that was not directed at self-gratification. People who cause, not prevent, the mayhem. Even the big demonstrations last week were shrouded in a veil of corporatism, not unlike the one Greenpeace has been enveloped in for many years.

And of course you can argue that it serves a purpose, because it’s the only way to get people pout on to the street. But still, if millions of dollars have to be spent to make a few hundred thousand people in New York leave their homes, what exactly are we doing?

Where does that money come from? Does anyone want to deny that in general the richer people in the world are the ones responsible for the destruction? That we ourselves cause more damage than the average Bangla Deshi or Senegalese, and that the richest and most powerful people in our own societies do more harm than the poorset?

If you don’t want to deny that, why do you walk in a heavily sponsored protest march? Or does anyone think those marches are spontaneous eruptions of people’s true feelings anymore? Why then do they feel scripted, in a way the anti-globalization ones (Seattle) absolutely did not?

There is no doubt that there are well-meaning people involved, and a lot of grass-roots identity, but isn’t there something wrong the very moment money becomes a factor, if and when we can agree that the pursuit of money is the 8 million ton culprit in the room in the first place? Do we really feel like we can’t achieve anything without money anymore? And moreover, shouldn’t we, as soon as we feel that way, start doing something about it?

There’s a nice interview in Slate with Naomi Klein, who says capitalism is the bogey man. I find that a little easy; in the end man him/herself is the bogey man. Klein sits on the board of Bill McKibben’s 350.org, which I have no doubt is full of people full of best intentions, but which also sees money as way to achieve things:

Naomi Klein Says We Must Slay Capitalism to Fight Climate Change

Everybody that’s trying to get anything progressive done in this country knows that the biggest barrier is getting money out of politics. Climate can be a shot of adrenaline in the pre-existing movement to get money out of politics. So, it’s not a brand-new movement. [..] All these new reports say that the transition to that next economy will be cheap. So why isn’t it happening? Elites like to think of everything as a win-win, but it’s not true.* It’s the wealthiest corporations on the planet that will win; everyone else will lose. No number of reports is going to change that. You actually need a counter-power.

[..] we need to finance this transition somehow. I think it needs to be a polluter-pays principle. It’s not that we’re broke, it’s just that the money is in the wrong place. The divestment movement is a start at challenging the excesses of capitalism. It’s working to delegitimize fossil fuels, and showing that they’re just as unethical as profits from the tobacco industry. Even the heirs to the Rockefeller fortune are now recognizing this. The next step is, how do we harness these profits and use them to help us get off fossil fuels?

Exxon needs to pay—it’s the most profitable company on the planet. It’s also the descendent of Standard Oil. In the book, I talk a lot about Richard Branson’s pledge to donate all the profits from his airline to fight climate change. When he made that announcement, it was extraordinary. The problem is, no one held him accountable—well, besides me and my underpaid researcher. But at least Branson’s heart was in the right place. These profits are not legitimate in an era of climate change. We can’t leave this problem to benevolent billionaires.

‘Getting money out of politics’, but ‘we need to finance this transition somehow’. There’s a grand contradiction in there somewhere. Now, I’m a big admirer of Naomi, her Shock Doctrine is one of the greatest books in the past 25 years or so. But I have my questions here.

I don’t think you can argue that capitalism itself is the issue. This is about the erosion of checks and balances, laws and regulations, the erosion of a society’s ability to hold people responsible for what they do, whether they operate in the political field or in private business.

And those same issues are just as relevant in any communist or socialist society. Unless you’re very careful day after 24/7 day, all political systems tend towards ceding control to ever more psychopatic individuals. In the exact same way that bad money drives out good. In short, it’s not about ‘them’, it’s about us. It’s the psychos who want that power and that money more than anyone else, but it’s us who let them have it. While we’re watching some screen or another.

It’s about how we can keep the most money- and power hungry individuals amongst us from ruling over us. An obviously daunting task if you look at most countries, corporations and organizations today. I mentioned the three Bills already, Bill Gross, Bill Clinton and Bill Gates, and they epitomize as fittingly as any threesome where and how we go wrong, and how hard it is to keep ourselves from doing that.

If you want a better world, A) stop listening to the crazy clowns, and B) stop telling yourself you care and then just keep doing what you always did. Get real. Pursue truth, not money.

Bonds Worldwide Pull Out of Tailspin This Week on Growth Concern (Bloomberg)

Bonds worldwide pulled out of a tailspin this week as a surging dollar sparked warnings from Federal Reserve officials that the stronger currency may hamper the U.S. recovery. The Bloomberg Global Developed Sovereign Bond Index (BGSV) headed for its first weekly gain this month, buoyed by speculation weak economic growth in Europe and Japan will spur policy makers there to maintain stimulative monetary policy. The gauge advanced 0.2%, trimming September’s decline to 2.7%. Yields attracted investors after climbing last week when Fed policy makers increased their estimate for how far they’ll raise borrowing costs next year.

“The speed in the rise of interest rates in response to the Federal Reserve, and also gains in the U.S. dollar, have had an impact on demand for Treasuries,” said Tony Morriss, an interest-rate strategist at Bank of America Merrill Lynch in Sydney. While the stronger dollar may damp U.S. growth, unprecedented easing in Japan and Europe have also “served to reverse some of the sharp rise in yields that we saw earlier.” The company’s Merrill Lynch unit is one of the 22 primary dealers that trade directly with the Fed. The U.S. 10-year yield was little changed at 2.50% at 6:56 a.m. in London, according to Bloomberg Bond Trader data. The price of the 2.375% note due August 2024 was 98 29/32. The yield rose to 2.65% on Sept. 19, the highest since July 7. It has dropped eight basis points this week. The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 of its major counterparts, rose to a four-year high yesterday.

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Oh, you real man.

Bank of England’s Carney: Rate Rise ‘Getting Close’ (Reuters)

The Bank of England is getting nearer to raising interest rates, but the exact date will depend on economic data, Governor Mark Carney said in a speech on Thursday. Carney stuck close to previous remarks on monetary policy in his address to actuaries, much of which focused on the BoE’s plans for further regulating insurers. Britain’s economic outlook was much improved, and a rate rise was only a matter of time, Carney said. “The point at which interest rates … begin to normalise is getting closer,” he said. “In recent months the judgement about precisely when to raise Bank Rate has become more balanced. While there is always uncertainty about the future, you can expect interest rates to begin to increase.”Most economists expect the Bank of England to raise rates early next year, though a minority see a chance of an increase in November. Two members of the BoE’s Monetary Policy Committee voted for a rate rise this month.

Britain’s economy looks set to grow by more than 3% this year – faster than any other big, advanced economy – and unemployment has fallen to its lowest level since 2008. But inflation of 1.5% is well below the BoE’s 2% target, and wages are growing even more slowly – something the BoE has cited as a reason to keep rates on hold. Carney said that when rate rises did come, he expected them to be gradual, and for rates to peak below pre-crisis levels. “Headwinds facing the economy are likely to take some time to die down,” he said. “Demand in our major export markets remains muted. Public balance sheet repair is ongoing. And a highly indebted private sector is likely to be particularly sensitive to changes in interest rates.”

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This is the reality of Europe (and the US, Japan): you can’t force people to borrow. Therefore, you will have deflation. If people don’t spend, it’s inevitable.

Draghi’s Trillion-Euro Pump Finds Blockage in Spain (Bloomberg)

Mario Draghi’s plan to channel as much as €1 trillion ($1.3 trillion) into the euro region’s economy is running into a blockage: some companies in the countries hardest hit by the debt crisis don’t want the money. “We’re getting calls from lenders every day,” said Miquel Fabre, 34, whose family-run beauty products firm Fama Fabre employs 43 people in Barcelona. “They can see that they’ll benefit from a loan because we’re doing good business and will return the money. Whether it’s in our interest as well is a different question.” Many small and medium-sized businesses are wary of the offers from banks as European Central Bank President Draghi prepares to pump more cash into the financial system to boost prices and spur growth. The reticence in Spain suggests demand for credit may be as much of a problem as the supply. The monthly flow of new loans of as much as €1 million for as much as a year – a type of credit typically used by small and medium-sized companies – is still down by two-thirds in Spain from a 2007 peak, according to Bank of Spain data.

The total stock of loans is almost 470 billion euros below the 2008 record of €1.87 trillion, the figures show. Spanish bonds rose for a third day yesterday, with 10-year yields dropping to 2.11%, after further evidence that Draghi may have to resort to buying government debt to get cash into the economy. The ECB’s latest attempt to funnel money through the financial system with a targeted-loans offer, known as TLTRO, was shunned by banks on Sept. 18. That’s not to say banks aren’t making an effort to attract borrowers. Banco Popular Espanol SA (POP), a Spanish lender that borrowed €2.85 billion from the TLTRO, started an advertising campaign this month using Spanish NBA basketball star Pau Gasol to target smaller companies. In the first six months, Popular boosted lending to that group by 6% and is aiming for a 10% increase for all of 2014. Across the economy, small business loans at 12.9 billion euros in July were the highest in more than two years, while still just a third of the peak volume.

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Make that ‘will’.

Draghi May Discover Weaker Euro Doesn’t Buy Enough Recovery (Bloomberg)

Mario Draghi may find a falling currency can’t buy much of an economic recovery. The euro has dropped toward a two-year low against the dollar since the European Central Bank president boosted stimulus earlier this month. Economics textbooks say that should lift Europe’s struggling growth rate by boosting exports and speed inflation by raising import prices. Such effects will be more welcome if falling commodities deal a disinflationary blow. It’s time for those textbooks to be revised, according to economists at Societe Generale SA led by Michala Marcussen, who reckon a devaluation of the euro will not be as stimulatory as it once was and perhaps as much as the ECB is hoping. For one thing, the single currency may not be that weak yet. While it has fallen 7.5% against the dollar this year, it has slipped just 4% on a trade-weighted basis.

A deep decline may be hard to achieve. While the euro should keep falling against the dollar and sterling as the Federal Reserve and Bank of England shift toward higher interest rates, those currencies account for only about a third of the trade-weighted index. The monetary policies of Japan and China are almost just as important, with the yen and yuan accounting for a quarter of the euro’s value, according to Marcussen. With their central banks also dovish, the euro may have less far to fall against those currencies, meaning a 10% decline on a trade-weighted basis would require the single currency to drop below $1.15 and 70 pence. It was at $1.28 and 0.78 pence today. Another brake on any descent is that the euro’s long-term rate may actually have risen since the global financial crisis to $1.35 from $1.31, Societe Generale calculates. That’s because in aggregate the euro area is running a current-account surplus and its budget deficit and debt are lower than in other major economies.

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But won’t.

Debt Forgiveness Could Ease Eurozone Woes (Guardian)

The eurozone debt crisis never went away. It merely acquired a misleading veneer of resolution, thanks to grand promises, political chest-thumping and frazzled financial markets that were desperate to believe in happily ever after. Today, there is an accentuated sense of deja vu (all over again, as Yogi Berra would concur). Europe faces the spectre of deflation. Some members, such as Italy, have toppled over the edge for the first time in more than half a century; Germany threatens recession; France is a basket case. Wages are in decline across club Med: real hourly wages in Greece, Spain and Ireland recently fell for the fourth year in succession. Meanwhile, bank lending is an aspiration and Banco Espirito Santo is an ugly reminder of the iceberg of bad debts lurking. Good Europeans are in decline while populism, nationalism and jingoism are les belles du jour.

Enter quantitative easing (QE) as the white knight, as envisaged by the European central bank. This is fast becoming a modern-day rain dance. QE is not a cure. It is a shot of morphine that sedates an ailing patient while doctors figure out what to do in the long term. Like most opiates, the patient is elated and euphoric. Leaving aside “niggles” like the Germans and the moral hazard of whose sovereign bonds to buy, there is no reason why financial markets should not rally if QE proceeds. Our limited sample over the past few years proves this. But asset-price inflation and falling bond yields are poor substitutes for long-run economic growth and, arguably, even antithetical, thanks to the punishing bubbles they risk creating.

Europe has a singular problem – it has far too much debt. And in a globalised world, much of this debt is bound in a complex web, particularly among the weaker economies – namely Portugal, Ireland, Italy, Greece and Spain – and their main creditors: France, Germany, the UK and the US. For example, more than half of Portugal’s foreign debt claims are held by Spain, while Italy owes French banks about $373bn – almost a seventh of France’s GDP. And, lest we forget, Italy also has the third-largest sovereign bond market in the world. This is a game of dominoes. Any solution that does not involve large-scale debt forgiveness is doomed to failure. In the 1920s, an ambitious scheme of credit easing – the Dawes plan – to tackle the intractable debts left by the first world war fuelled an enormous bubble that ended in the great depression, as the underlying reality of sovereign insolvency became clear. It also created a fertile political climate for the nationalism that ended so disastrously more than a decade later. Money is divisive when things turn sour.

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“The Fed Gig Is Up” (Scotiabank)

In a switch from what are typically only one-sidedly dovish comments, NY Fed President Dudley was balanced this week, even citing reasons for why the Fed would want to hike rates. Dudley stated that “being at the zero-lower-bound is not a very comfortable place to be”, because it “limits” flexibility and has “consequences for the economy”. He said it “hurts savers”, and while acknowledging “what is happening” to financial markets, he avoided directly citing risks to financial stability. Anxiety-riddled conversations about financial instability are probably implicitly restricted to a ‘behind-closed-doors-only’ rule. FOMC members are slowly and carefully trying to change the conversation. Yellen completely diluted away any meaning behind “considerable period” to make it all but meaningless. Bullard said to that he still “sees the first tightening at the end of the first quarter”.

A March 18th hike seems reasonable to me, since US economic improvement appears to remain on track (at least for the moment) and since the FOMC seems more anxious to begin the normalization process. Actually though, by waiting even until March, it is possible that the FOMC risks missing its window of opportunity in terms of using US economic momentum as its cover (what irony). Financial markets are becoming agitated and disturbed by shifting government and central bank policies, mounting geo-political tensions, and rising nationalist fervor. QE has not yet ended and the Fed is likely still months away from hiking for the first time, but markets are using these factors to adjust portfolio exposures. These are hints that a larger market reaction is likely to unfold as the Fed’s policy transition approaches.

Macro signs are currently evident with steep commodity price declines, rising FX volatility, rallying global bond markets (long end), and sagging prices for low quality credits. Some investors are clearly getting out of the Fed-generated “herd” trades of recent years and saying that they are doing so because “the Fed’s balance sheet is set to stop expanding next month”. The strengthening dollar is one consequence and it has already had an impact on commodities and Emerging Markets. In turn, weakening currencies in EM countries are starting to trigger capital outflows. It may lead toward domestic central bank hikes (again) which weaken those economies and cause second-order effects.

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5 US Banks Each Have More Than $40 Trillion Exposure To Derivatives (Snyder)

When is the U.S. banking system going to crash? I can sum it up in three words. Watch the derivatives. It used to be only four, but now there are five “too big to fail” banks in the United States that each have more than $40 trillion in exposure to derivatives. Today, the U.S. national debt is sitting at a grand total of about $17.7 trillion, so when we are talking about $40 trillion we are talking about an amount of money that is almost unimaginable. And unlike stocks and bonds, these derivatives do not represent “investments” in anything. They can be incredibly complex, but essentially they are just paper wagers about what will happen in the future. The truth is that derivatives trading is not too different from betting on baseball or football games.

Trading in derivatives is basically just a form of legalized gambling, and the “too big to fail” banks have transformed Wall Street into the largest casino in the history of the planet. When this derivatives bubble bursts (and as surely as I am writing this it will), the pain that it will cause the global economy will be greater than words can describe. If derivatives trading is so risky, then why do our big banks do it? The answer to that question comes down to just one thing. Greed. The “too big to fail” banks run up enormous profits from their derivatives trading. According to the New York Times, U.S. banks “have nearly $280 trillion of derivatives on their books” even though the financial crisis of 2008 demonstrated how dangerous they could be…

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Problem, not solution.

Federal Reserve Policies Cause Booms and Busts (Mises.org)

Since the economic crisis of 2008-2009, the Federal Reserve — America’s central bank — has expanded the money supply in the banking system by over $4 trillion, and has manipulated key interest rates to keep them so artificially low that when adjusted for price inflation, several of them have been actually negative. We should not be surprised if this is setting the stage for another serious economic crisis down the road. Back on December 16, 2009, the Federal Reserve Open Market Committee announced that it was planning to maintain the Federal Funds rate — the rate of interest at which banks lend to each other for short periods of time — between zero and a quarter of a%age point.

The Committee said that it would keep interest rates “exceptionally low” for an “extended period of time,” which has continued up to the present. Beginning in late 2012, the then-Fed Chairman, Ben Bernanke, announced that the Federal Reserve would continue buying US government securities and mortgage-backed securities, but at the rate of an enlarged $85 billion per month, a policy that continued until early 2014. Since then, under the new Federal Reserve chair, Janet Yellen, the Federal Reserve has been “tapering” off its securities purchases until in July of 2014, it was reduced to a “mere” $35 billion a month.

In her recent statements, Yellen has insisted that she and the other members of the Federal Reserve Board of Governors, who serve as America’s monetary central planners, are watching carefully macro-economic indicators to know how to manage the money supply and interest rates to keep the slowing general economic recovery continuing without fear of price inflation. Some of the significant economic gyrations on the stock markets over the past couple of months have reflected concerns and uncertainties about whether the Fed’s flood of paper money and near zero or negative real interest rates might be coming to an end. In other words, borrowing money to undertake investment projects or to fund stock purchases might actually cost something, rather than seeming to be free.

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Pimco ETF Probe Spotlights $270 Billion Market Vexing Regulators (Bloomberg)

The U.S. regulatory probe into Bill Gross’s Pimco Total Return ETF is highlighting an industry that supervisors say may pose an increasing risk to the stability of the bond market. The assets held by bond exchange-traded funds have ballooned to more than $270 billion from about $57 billion at the end of 2008 as hedge funds to retirees sought quick and easy access to debt markets, according to data compiled by the Investment Company Institute. While the amount is still a pittance compared to the $38 trillion U.S. bond market, trading in ETFs is fueling price swings that may become more severe in a downturn — particularly for the most illiquid markets, like speculative-grade debt. Regulators are examining the danger it will be more difficult than investors expect to get out of the funds in a falling market.

“The ETF market will be the tail that wags the dog,” said Mark Pibl, head of research and fixed-income strategy at Canaccord Genuity in New York. As assets managed by ETFs of all types more than tripled since 2008 to $1.8 trillion, the fastest-growing product in the money-management industry is drawing scrutiny from regulators. While ETFs have shares that trade like stocks on exchanges, bonds often trade in transactions that are negotiated by telephone and through e-mails.

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How is this a question?

Is Big Business Too Influential? (CNBC)

People from emerging economies are much more comfortable in strong corporations having influence over government than in developed nations, a CNBC/Bursen-Marsteller poll survey has found. Most emerging markets’ respondents –whether from the public or executives – surveyed in the CNBC/Bursen-Marsteller poll on the Global Corporate Compass viewed strong and influential corporations as engines for innovation and economic growth. However, in the developed world, opinion was split. Indeed, in seven out of the 13 developed nations included in the survey, the public believe that strong and influential corporations “rig the system so that they do not have to act responsibly,” the survey reported. These include economic powerhouses such as the U.S., U.K., Germany and Hong Kong. Surprisingly, people in France and Italy sided with emerging markets in their belief that strong and influential businesses can boost the economy.

For Tamsin Cave, director of Spinwatch and author of “A quiet Word: Lobbying, Crony Capitalism and Broken Politics in Britain”, there’s now a “growing disquiet among the public (in the developed world) about this relationship between government and big business”. The public in the U.K., she added, feels that there is a disconnect between politicians and the public. “The public voice isn’t heard because of the enormity of what is a corporate lobbying industry – worth something like £2 billion ($3.2 billion) in the country,” she said. Even executives across the developed world were of two minds with C-suite respondents in Germany, Italy, Singapore and Australia describing strong and influential corporations as bad. “I have a saying”, said Gary Greenberg, head of emerging markets at Hermes. “The way you can tell the difference between emerging markets and developed markets is that in emerging markets the government controls the banks whereas in developed markets it is the opposite!”

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Chiecken and the egg.

Australia Kills Civil Liberties with Draconian New Anti-Terror Law (Krieger)

Understanding how the power structure thinks, and how it intentionally manipulates the emotions of the masses, is key to overcoming and rolling back totalitarian ambitions. I have spent the last few posts talking about how instilling fear throughout the general populace is one of their primary tactics. Indeed, to borrow a term from Glenn Greenwald, “fear-manufacturing” has been in overdrive across the Five Eyes nations over the past several weeks. In the UK, we saw it used to convince elderly Scots to overwhelming vote against independence, thus swaying the result decisively to the NO side. In the USA, we have seen it used to drum up support for another pointless war in the Middle East, which will benefit nobody except for the military/intelligence-industrial complex. While these examples are bad enough, nowhere is fear being used in a more clownish and absurd manner to strip the local citizenry of its civil liberties than in Australia. This should come as no surprise, considering that nation’s Prime Minister is a certified raging lunatic.

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“National home prices rose an annualized 16.8% in the three months to August”. Not a bubble, right? That doubles ± every 4.5 years.

Is Australian Housing Facing A Repeat Of 2003? (CNBC)

Australia’s property market is approaching the bubble extremes seen a decade ago, an analyst told CNBC, after the Reserve Bank of Australia (RBA) warned this week that the market looks ‘unbalanced’. “There was an intense bubble in the property market a decade ago. There were property ‘spruikers’ out there encouraging people to buy five properties at a time – everyone was buying property magazines and all the top rated shows on TV were property related,” Shane Oliver, head of investment strategy and chief economist at AMP Capital, told CNBC. “We haven’t quite returned to the extremes we had back then but we’re getting close and that’s why the RBA is getting concerned,” he said. “Danger signs are emerging.”

A low interest rate environment and strong price competition among lenders have led to a surge in investment property, raising the risk of a repricing, the RBA said in its Financial Stability Review on Wednesday. National home prices rose an annualized 16.8% in the three months to August after a cooler period in the first half of the year. Meanwhile, prices in Sydney and Melbourne rose 16 and 11%, respectively, over the past 12 months according to RP data. As a result, the RBA said it is considering measures to cool property investment that could include macro-prudential controls or credit restrictions designed to reinforce sound lending practices.

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Ukraine Pushes for NATO Membership as Gas Talks Commence (Bloomberg)

Ukraine kick-started the process to strengthen its ties with NATO and will strive to join the alliance in the “short term,” its government said, a day after its president declared the worst of its separatist war was over. The country of more than 40 million people is scheduled to hold talks today in Berlin to resolve a dispute over natural gas supply before the onset of winter. Russia stopped selling the fuel to Ukraine in June without pre-payment after raising the price 81%, which has prompted officials in Kiev to urge companies and households to cut consumption. Russian gas exporter OAO Gazprom (GAZP) says Ukraine owes it $5.3 billion.

Ukraine’s push to end its neutral status and join the North Atlantic Treaty Organization will probably exacerbate the worst standoff between Russia and its former Cold War foes since the fall of the Iron Curtain. Sporadic fighting between pro-Russian rebels and government troops in the eastern Donetsk region of the former Soviet Republic is threatening a shaky cease-fire reached three weeks ago. “The cabinet has submitted a draft law to parliament that envisages the cancellation of our non-aligned status and ensuring a European integration course to create grounds for Ukraine’s integration into the Euro-Atlantic security space,” the administration in Kiev said in an e-mailed statement today. “Ukraine’s government underlines that Ukraine’s aim is to receive special partner status with NATO now and membership in the short term.”

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Because it would force him to drive Kiev, which can’t survive without Moscow, into the ground, by cutting trade even more..

Putin Demands Reopening Of EU Trade Pact With Ukraine (FT)

)Vladimir Putin has demanded a reopening of the EU’s recently-ratified trade pact with Ukraine and has threatened “immediate and appropriate retaliatory measures” if Kiev moves to implement any parts of the deal. The demand, made in a letter to European Commission President José Manuel Barroso, reflects Russia’s determination to put a brake on Ukraine’s integration into Europe and other Euro-Atlantic organisations such as Nato, even after annexing Crimea and creating a pro-Russian separatist entity in the east of the country. It also comes amid a fresh crackdown on Russia’s oligarchs, exemplified by the recent house arrest of billionaire businessman Vladimir Yevtushenkov, which was extended by a court on Thursday.

The integration treaty was the spark that set off the 10-month Ukraine crisis after the country’s then-president, Viktor Yanukovich, backed out of the deal. Petro Poroshenko, the new Ukrainian president, has made integration with the EU a key objective of his presidency. But this is strongly opposed by Moscow, which is determined to keep Ukraine within its own economic sphere of influence. Mr Putin’s letter argues that a 15-month delay in implementing part of the deal – which Kiev and the EU agreed to earlier this month – should be used to “establish negotiating teams” to make wholesale changes to the deal.

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Russia Mulls Draft Law To Allow Seizure Of Foreign Assets (Reuters)

Russian courts could get the green light to seize foreign assets on Russian territory under a draft law intended as a response to Western sanctions over the Ukraine crisis. The draft, which was submitted to parliament on Wednesday by a pro-Kremlin deputy, would also allow state compensation for an individual whose property is seized in foreign jurisdictions. Italian authorities this week seized property worth about 30 million euros ($40 million) belonging to companies controlled by Arkady Rotenberg, an ally of President Vladimir Putin targeted by the U.S. and European Union sanctions. The draft law, published on a parliamentary database, would allow for compensation for Russian citizens who suffer because of an “unlawful court act” in a foreign jurisdiction and clear the way to foreign state assets in Russia being seized, even if they are subject to international immunity.

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Don’t think he’s far off.

Iran’s Rouhani Blames Intelligence Agencies For Rise In Extremism (RT)

The rise of violent extremism around the world is the fault of “certain states” and “intelligence agencies” that have helped to create it and are failing to withstand it, Iranian President Hassan Rouhani said in an address to the UN General Assembly. Speaking at the 69th session of the UN General Assembly on Thursday, Rouhani stressed that extremism is not a regional but a global issue, and called on states worldwide to unite against the extremists. “Certain states have helped to create it, and are now failing to withstand it. Currently our peoples are paying the price,” he said. “Certain intelligence agencies have put blades in the hand of the madmen, who now spare no one.” Rouhani also said the current anti-Western sentiment in certain parts of the world was “the offspring of yesterday’s colonialism. Today’s anti-Westernism is a reaction to yesterday’s racism.”

The Iranian president urged “all those who have played a role in founding and supporting these terror groups” to acknowledge their mistake. Rouhani also blamed “strategic blunders of the West in the Middle East, Central Asia and the Caucasus” for inciting violence in these regions and creating a “haven for terrorists and extremists.” “Military aggression against Afghanistan and Iraq and improper interference in the developments in Syria are clear examples of this erroneous strategic approach in the Middle East.” Warning that “if the right approach is not undertaken in dealing with the issue at hand” the Middle East risks turning into “a turbulent and tumultuous region with repercussions for the whole world.” “The right solution to this quandary comes from within the region and regionally provided solution with international support and not from the outside the region,” he said.

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Chasing money.

How Australia Became The Dirtiest Polluter In The Developed World (Slate)

Australians like to think of themselves as green. Their island country boasts some 3 million square miles of breathtaking landscape. They were an early global leader in solar power. They’ve had environmental regulations on the books since colonial times. And in 2007 they elected a party and a prime minister running on a “pro-climate” platform, with promises to sign the Kyoto Protocol and pass sweeping environmental reforms. All of which makes sense for a country that is already suffering the early effects of global warming. And yet, seven years later, Australia has thrown its environmentalism out the window—and into the landfill. The climate-conscious Labor Party is out, felled by infighting and a bloodthirsty, Rupert Murdoch–dominated press that sows conspiracy theories about climate science.

In its place, Australians elected the conservative Liberal Party, led by a prime minister who once declared that “the climate argument is absolute crap.” In the year since they took office, Prime Minister Tony Abbott and his Liberal-led coalition have already dismantled the country’s key environmental policies. Now they’ve begun systematically ransacking its natural resources. In the process, they’ve transformed Australia from an international innovator on environmental issues into quite possibly the dirtiest country in the developed world. And in a masterful whirl of the spin machine, they’ve managed to upend public debate by painting climate science as superstition and superstition as climate science. (We should note here that one of us grew up in Australia.)

The country’s landmark carbon tax has been repealed. The position of science minister has been eliminated. A man who warns of “global cooling” is now the country’s top business adviser. In November, Australia will host the G-20 economic summit; it plans to use its power as host to keep climate change off the official agenda. If the environment has become Australia’s enemy, fossil fuels are its best friend once again. Two months after it struck down the carbon tax, the government forged a deal with a fringe party led by a mining tycoon to repeal a tax on mining profits. It appointed a noted climate-change skeptic—yes, another one—to review its renewable energy targets.

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I wrote many years ago that is the only way. Not that communism or socialism is any better. Any system aimed at growth will do it.

Naomi Klein Says We Must Slay Capitalism to Fight Climate Change (Slate)

Q: On Sunday, more than 300,000 people were in the streets in New York. In stark contrast, Tuesday’s U.N. Climate Summit didn’t accomplish much. How do you feel about “progress” toward a climate treaty through official U.N. channels?

A: It’s been quite an amazing week. [Sunday’s march] was, I think, a real turning point. A lot of debates have sharpened up a bit. I’m excited. After the march, it was kind of jarring to go to the U.N. I definitely did not get the feeling that they were even managing to convince themselves. Some shit-disturber decided it would be a good idea to invite me into the private-sector portion of the U.N. summit Tuesday, which had unprecedented participation from CEOs. It was definitely the highest net-worth room I’ve ever been in. They were conducting what amounted to a telethon for the Earth. It was pretty unimpressive.

Q: I think U.N. countries officially pledged a little more than $1 billion to the fund designed to help low-income nations adapt.

A: Yes, and I think almost all of it was from France. At one point in that room, there was a debate over whether France’s pledge was in euros or dollars. Yeah. It was in dollars.

Q: So what’s the next step in terms of climate action? How do we get from 300,000 in the streets to 30 million?

A: Everybody that’s trying to get anything progressive done in this country knows that the biggest barrier is getting money out of politics. Climate can be a shot of adrenaline in the pre-existing movement to get money out of politics. So, it’s not a brand-new movement. What excited me about Sunday is the huge participation from labor. People in that movement clearly see that a climate-justice agenda would be a serious benefit to their members. The post-carbon economy we can build will have to be better designed.

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Jun 252014
 June 25, 2014  Posted by at 3:42 pm Finance Tagged with: , , ,  25 Responses »

Harris & Ewing Kids, police motorcycles with sidecars, and streetcar, WashingtonDC 1922

I’m going to step into uncharted territory, a for lack of a better word philosophical theme that I’ve long had on my mind but can’t quite figure out completely yet, and I would like you to tell me how much of it you recognize, or that maybe I’m a total fool for looking at things the way I do. You see, I often have this notion that we are living in our own past; not even our present, and certainly not our future.

It’s a feeling that creeps up on me a lot when I do my daily perusing of the financial press. It makes me think: wait a minute, that whole financial world is dead, because if you would subtract all the debt from all the assets, there would be nothing left, or at the very minimum not nearly enough to keep it going at anything like the size it had until recently, and which it needs to continue functioning (you can’t just chop off a third or half or more off a system and expect it to keep working).

Sure, it’s being kept ‘alive’ – though there’s a lot of virtual world in there – by adding more debt to the existing debt and by hiding much of that existing debt from prying eyes, but that doesn’t solve any of the fundamental problems, that’s all just lipstick on the zombie pig. And it can only lead to problems growing worse, certainly for the weaker segments of our societies.

And if the world of finance is broke, so must the economy at large be, and hence the entire model of society we live in. Which I think about on a regular basis when I see all these people live in their increasingly identical homes and get in their increasingly identical cars on their way to do increasingly identical jobs in increasingly identical offices or retail buildings. Sometimes I think perhaps the lack of variety itself is a sign of death, or dying. In any case, I wonder why all these people keep doing what they do. Don’t they have the same notion that I have that it’s really over, this model, maze, matrix, they live in, that perhaps they should take a step back and look at themselves?

I think they don’t. But I also still don’t think that makes me the crazy one. I see it as evidence that the manipulation and propaganda or whatever you call it, is doing its job, and the job is easy, because people don’t want to reflect on the fact that everything they’ve ever known, and that they’ve built their entire existence around, is not just crumbling but effectively already gone. People don’t like change, and certainly not the kind that threatens to make things ‘worse’. Whatever ‘worse’ may actually mean in this context, it could be an unfounded fear and it would make little difference to their attitude.

And it’s by no means just the financial world that looks like a bankrupt remnant of our past. Our energy resources, too, are dwindling. Over a somewhat longer timeframe, but what difference does that make? There’s very little doubt left that we hit peak conventional oil in the last decade, and it’s all downhill and harder and in the end less from there.

Shale is a pipedream, wind and solar can’t keep the grid running; these things, like the debt situation, look so obviously threatening to our way of life you’d think we’d be looking hard at seriously adapting that way of life. But we don’t, we just want to substitute one energy source with another, even though they’re hugely different and to a large extent incompatible.

We’re so addicted to the comfortable feeling of having all rooms in our homes heated or cooled, and to taking our own little transport units the same half hour drive to work and back every single day that we’d rather not think about why we do it than change our ways. Even as it’s glaringly obvious that our ways must and will stop at some point. We’re not going to find some new magical mystery energy source, and besides, both our own legacy of profligate energy use and the 2nd law of thermodynamics tell us it wouldn’t be all that magical anyway.

The consumption of energy is a potentially very destructive force, as physics clearly states. Which should really teach us that we need to be very careful about using it, burning it, and building our societies in ways that necessitate for us to use more of it all the time. Even if burning more of it makes us feel more comfortable in the short run.

Which leads to the third issue to give me the feeling that we live in our past: the damage we’ve done by using the planet’s energy resources to abandon over the past 150 years or so (an arbitrary number), to our living environment. There are many kinds of energy consumption related pollution that various sizes of ecosystems won’t be able to clean up in hundreds of years or more. Pesticides, insecticides, plastic oceans, nuclear waste we have no storage solutions for, the list is so absolutely endless it’s no use trying to name all individual items.

And then there’s the impact of methane, CO2 and other substances, which scores of people, for all sorts of reasons, seek to deny. While the principle is dead simple, even if the earth’s ecosystem is far more complex than we are smart enough to comprehend: increase the amount of these substances in the atmosphere – and soil, and oceans -, and temperatures will rise. Again, basic physics.

A world of violent storms and heatwaves, of crop losses and flooded nations, a world which at the same time will have far less energy available to deal with these issues, and no money/credit to speak of to buy that energy with. That looks like a pretty accurate picture of the world that we – or is that our children? – will live in.

The bright side is there’ll be far less of them, and per capita energy consumption will come down something big. The dark side is they will be fully unprepared, because we will have chosen to live in our past until our future caught up with it. For anyone wanting to emphasize how clever we are as a species, please explain what is so smart about this hitting the wall at 100 miles an hour thing. Or, alternatively, your instinctive denial of it.

For the rest of you, please tell me if you ever have the same feeling I do when you look around where you live, that you’re really looking at a society that has already died. See, I think that perhaps the longer we insist on pretending this is our future, not our past, and that everything is fine and/or easily solvable, the further and the more violently we’ll be thrown back into that past.

And they still have the audacity to say they expect 3.5% growth in Q2. I think 2-2.5% will initially be announced in a few weeks, and then go down in subsequent prints.

U.S. Economy Shrank -2.9% in First Quarter, Most in Five Years (Bloomberg)

The U.S. economy contracted in the first quarter by the most since the depths of the last recession as consumer spending cooled. Gross domestic product fell at a 2.9% annualized rate, more than forecast and the worst reading since the same three months in 2009, after a previously reported 1% drop, the Commerce Department said today in Washington. It marked the biggest downward revision from the agency’s second GDP estimate since records began in 1976. The revision reflected a slowdown in health care spending.

Consumers returned to stores and car dealerships, companies placed more orders for equipment and manufacturing picked up as temperatures warmed, indicating the early-year setback was temporary. Combined with more job gains, such data underscore the view of Federal Reserve policy makers that the economy is improving and in less need of monetary stimulus. The first-quarter slump is “not really reflective of fundamentals,” said Sam Coffin, an economist at UBS Securities LLC in New York and the best forecaster of GDP in the last two years, according to data compiled by Bloomberg. “For the second quarter, we’ll see some weather rebound and a return to more normal activity after that long winter.”

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This is how sad America has become.

For Most American Families, Wealth Has Vanished (Yahoo!)

If you’re a typical family, you’re considerably poorer than you used to be. No wonder the “recovery” feels like a recession. A new study published by the Russell Sage foundation helps explain why many families feel like they’re falling behind: They actually are. The study, which measures the average wealth of U.S. households by income level, reveals a startling decline in wealth nationwide. The median household in 2013 had a net worth of just $56,335 — 43% lower than the median wealth level right before the recession began in 2007, and 36% lower than a decade ago. “There are very few signs of significant recovery from the losses in wealth suffered by American families during the Great Recession,” the study concludes. Not surprisingly, lower-income households have lost a larger portion of their wealth than those with higher incomes, as the following chart from the study shows:

Wealth generally comes from two types of assets: financial holdings and real estate. Financial assets have more than recovered ground lost during the recession, thanks largely to a stock-market rally now in its sixth year. The S&P 500 index, for instance, has hit several new record highs this year and is up more than 25% from the peak it reached in 2007. Home values, however, are still about 18% below the peak reached in 2006, according to the S&P/Case-Shiller index.

Since wealthier households tend to hold more financial assets, they’ve benefited the most form the stock-market recovery, which itself has been assisted by the Federal Reserve’s super-easy monetary policy. Fed policy has been intended to help typical homeowners and buyers too, by pushing long-term interest rates unusually low and, in theory, goosing demand for housing. But a housing recovery is taking much longer to play out than the reflation of financial assets. That’s part of the reason the top 10% of households have held onto more of their wealth than the other 90% during the past 10 years. Here’s how different income groups have fared since 2003:

The Russell Sage data is based on surveys, and differs in a few important ways from data gathered by the Federal Reserve, which paints a rosier picture. The Fed’s numbers, derived from banking data, show that total net worth plunged during the recession but hit new highs in 2012, and is now nearly 20% higher than the prerecession peak. Since the Fed’s numbers aren’t broken down by income level, they don’t show whether more wealth has been concentrated among a smaller number of rich households. The Sage numbers fill in that blank and do show that the top 10% of households control a larger portion of the nation’s total wealth than they used to. They also show, however, that every income group is still behind where it used to be, on average.

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” … the full economic losses on the vastly over-priced junk bonds are never realized by investors and issuers due to the Fed’s post-crash reflation maneuvers”

The Junk Bomb Ticking Beneath The S&P 500 (Stockman)

Lance Roberts’ weekend review provides a solid reminder that the Fed’s happy talk and the market’s giddy heights are dangerous illusions. But this particular chart in his presentation drives the message home loud and clear.

The Fed has become a serial bubble machine over the last two decades, and cheap debt is the driving force. Note that before each cyclical peak of the S&P 500 that junk bond yields plunge into new cyclical lows as measured by the dotted boxes. And during each of the three bubble cycles shown here the boxes dip lower in absolute terms, meaning that junk bonds and risk have been increasingly mis-priced owing to central bank financial repression. Thus, with the Merrill high yield index nearing an all-time low yield of 5%, the implication is astonishing. Namely, that with the CPI having just clocked in at 2.1% y/y, the real yield on junk bonds is barely 3%! Yet history proves losses can reach double digits when the bubbles crashes.

During the 2008-2009 meltdown, for example, yields rose from 7% to 23%, implying devastating losses for speculators on leverage and bond funds managers subject to redemption. Needless to say, those categories encompassed most of the bond holders at the time. And that’s the evil of the Fed’s financial repression at work. It creates a frenzied scramble for yield that results in a double deformation. First, debt gets way too cheap, causing companies to borrow wildly in order to fund financial engineering maneuvers such as massive stock buybacks, LBO’s and cash M&A deals. That massive inflow of debt-based share buying, in turn, drives the stock market into its final blow-off phase as is evident in the chart.

But secondly, the full economic losses on the vastly over-priced junk bonds are never realized by investors and issuers due to the Fed’s post-crash reflation maneuvers. Rather than avoid bubbles or pricking them once they begin inflating uncontrollably, the Fed’s policy every since Greenspan has been to keep its head in the sand until the bubble crashes on its own weight. It then flood the financial markets with liquidity to prevent the resulting wring-out of debt and speculative excess from running its course. Nothing could be more perverse than this morning after monetary flood syndrome. It allows speculators to front-run the central bank’s now predictable monetary expansion. Instead of incurring losses, they scoop up busted securities for cents on the dollar and ride out the bubble reflation as the Fed cranks up the printing presses.

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Many people around the world would like such a deal.

$4,750 Plus Three Years Is Price of Debt-Free Life (Bloomberg)

On a balmy June evening in Dublin, with pubs overflowing, Brodrick O’Neill is inside the Ashling Hotel learning how to declare personal bankruptcy. “It’s a no-brainer,” said O’Neill, 52, a former taxi driver who still owes his bank about €80,000 ($109,064) after selling his house. “What else can I do? I’m broke.” Bankruptcy is increasingly becoming the route of choice for some Irish individuals trying to cope with the legacy of the worst real-estate crash in Western Europe. Under new laws that made the process easier, borrowers can exit bankruptcy after three years with a clean financial bill of health instead of 12 years previously. After the deepest recession since at least the 1940s, with unemployment still near 12%, many people are still crushed under the weight of debt.

Household borrowing in 2012 was 198% of income, compared with 123% in Spain, 132% in the U.K. and 98% in the euro region, according to Eurostat, the European Union’s statistics office. Along with central bank pressure, the prospect of a flurry of bankruptcies and insolvency is forcing banks to negotiate just as borrowing costs fall to record lows for the government. The yield on benchmark 10-year bonds was 2.38% today compared with a peak of 14.2% in July 2011. “Bankruptcy is a game-changer,” said Ross Maguire, 45, a Dublin-born lawyer who helped set up New Beginning, which shepherds people through the process. He had spoken to about 150 people, including O’Connor. “Banks are forced to do deals.”

About 66,000 mortgages on family homes were permanently restructured by the end of April through agreements such as extensions to the term of the loans, the Finance Ministry said on June 12, citing figures from six of the country’s biggest banks. That’s an increase of 21,000 from the end of September. About 13,000 mortgages on rental properties were restructured, up by a third from September. In all, about 142,000 borrowers, or a quarter of the total, are behind with their payments, the Finance Ministry said. Dublin courts have declared 132 bankruptcies so far this year, compared with eight in all of 2008. [..] New Beginning charges debtors €3,500 to take them through bankruptcy, with €1,000 going to the organization and the rest earmarked for legal and government fees. U.S. President Abraham Lincoln was bankrupt twice, Maguire tells his attentive audience. Walt Disney and Henry Ford were also bankrupts, he says. “That’s how the world works,” he said. “If a fella falls down, you are allowed to start again.”

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It works until it doesn’t.

Flipping For The Fed (Stockman)

It still may be recalled that 2012-2013 was the time of the Fed’s housing liquidity flood – when hedge funds and LBO shops swooped in to buy busted mortgages with cheap money from the Fed/Wall Street. And once the party got started and prices in some formerly devasted markets like Phoenix, Los Vegas and much of California and Florida started soaring by 20-40% after March 2012, it appears that local flippers did not waste much time climbing aboard the fast train. Redfin has some stunning figures out on profits during 2013 from house flipping in about 30 major markets. The short answer is that it beats working and makes a mockery of saving! In the combined markets, the average 2013 flip netted a gain of $90,000 or just shy of 2X the median household income.

But San Francisco turned out to be in a league of its own. There the average house flipper gained just under $200,000—which is to say, a better payday than the total annual earnings of 95% of households in America. And in these blessed precincts it seem that a Fed triple whammy was at work. On top of the 2% Wall Street money and 3.3% home mortgage funding that drove real estate cap rates to rock bottom in September 2012, and therefore elevated valuation ratios to the nosebleed section of history, San Francisco benefited two more ways. First, from windfalls out of the screaming market for social media, biotech and cloud stocks; and then because the vast flow of winnings from that eruption unleashed a follow-on tsunami of venture capital pursing the next Facebook, Twitter or WhatsApp.

In effect, the massive eruption of housing purchasing power evident in San Francisco is in large part fueled by an inflow of capital from Wall Street, not the sustainable earnings of its employed population. Stated differently, tens of thousands in silicon valley are getting paid in options gains and venture capital “burn rate” money, which is being channeled back into a roar housing casino. There are exceedingly few cases were housing asset prices have ever been so utterly divorced from the recurring incomes of the resident population. Nevertheless, San Francisco is just the outlier that illustrates the massive deformations caused by the Fed’s financial repression and wealth effects policies. One year flip gains of $150k, $125k and $100k in Boston, Los Angelo’s and Washington DC, respectively, are powerful evidence of the Fed’s folly.

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What a mess. What a man.

Abe Declares End of Deflation (Bloomberg)

Prime Minister Shinzo Abe said the deflation that wiped out much of Japan’s growth the past 15 years and so stunted the economy that it slipped to No. 3 behind China, has ended and will be thwarted by new government policies designed to encourage business expansion. “Through bold monetary policy, flexible fiscal policy and the growth strategy we have reached a stage where there is no deflation,” Abe, 59, said in an interview yesterday at the prime minister’s official residence in Tokyo. With the first sales tax rise since 1997 that took effect in April, “this was an extremely difficult time for management of the economy, but I believe we were somehow able to overcome it.”

Abe was speaking before his cabinet endorsed the most specific measures yet to deliver on his growth strategy – the third part of a campaign to end declines in consumer prices and stoke investment. The government plans corporate-tax cuts, trade liberalization, reduced barriers for agricultural land consolidation, special zones of lighter regulation and the study of casinos as a way of spurring record numbers of tourists.

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Abe Misses With ‘Third Arrow’, Again (CNBC)

Japan Prime Minister Shinzo Abe’s revamped economic growth strategy unveiled on Tuesday fell short of its hype, failing to provide critical details on how the proposed reforms would be employed. “We were provided with the reform path but we’re still light on an implementation timeline, so it’ll be a case of wait-and-see for the detailed implementation and how that might unfold,” Matthew Hegarty, equities analyst at Perennial International told CNBC on Wednesday. Structural reforms, the “third arrow” in Abe’s radical strategy to revive the economy or Abenomics, are seen as critical for putting Asia’s second largest economy on a sustainable growth path. However, unlike the first two “arrows” of monetary stimulus and fiscal spending, the third arrow has yet to be deployed in earnest.

Abe’s latest plan, which builds upon a growth strategy he first unveiled last June, called for corporate tax rate cuts, a bigger role for women and foreign workers and easing long-standing regulations in areas such as agriculture and health care. But there was nothing new to the measures, analysts say, many of which were featured in the plan’s final draft presented earlier in the month. “This is the second attempt for Abenomics – and maybe this one looks a little more promising at the onset,” said Lars Peter Hanson, a professor at the University of Chicago. “(But) it’s one thing to announce these principals. Until we fully understand how they are going to be executed and carried out with specificity, it’s hard to have full confidence in it.”

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Blow it all on candy!

3 Japan Public Pension Funds Buying Stocks Ahead Of Asset Review (Reuters)

Three Japanese “semi-public” pension funds aggressively bought Tokyo stocks in recent weeks, market sources said, acting before a review of their asset allocation policies is complete. The funds’ buying helped Japanese shares to rally more than 10% in just over a month – though one source said the buying may come to a halt before month-end, posing the threat of a near-term correction to the market.All three funds declined to comment on whether they bought shares in the last two months. The three pension funds – the Pension Fund Association for Local Government Officials, the Federation of National Public Service Personnel Mutual Aid Association and the Private School Mutual Aid System – manage a combined 29 trillion yen ($284 billion) of assets.

The funds will be merged into the 129 trillion yen ($1.26 trillion) Government Pension Investment Fund (GPIF), the biggest pension fund in the world, in October next year. A market source, who was briefed on the matter, said the three semi-public pension funds transferred money to portfolio managers in May, requesting them to finish buying up shares before end-June. Data from the Tokyo Stock Exchange also pointed to heavy buying by public accounts since May. Buying by trust banks, which manage a large proportion of public pension funds, soared to 687.3 billion yen in May, the most since March 2009, when there was a whisper of buying by public accounts to prop up the market as share prices hit 25-year lows.

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You can’t very well tell them not to lie, it’s what central bankers do. If they didn’t, they’d be out of a job.

Forward Guidance: Making It Up As You Go Along (Choudhry)

The banking industry likes superfluous language. There’s “quantitative finance” for example, which (given that finance is already a quantitative subject) is a bit like saying “aerial flight” or “wet swimming”. And then there’s “forward guidance”. What, as opposed to backward guidance? I mean, what other type of guidance is there? Last summer the Bank of England decided it wanted to import the U.S. Federal Reserve’s forward guidance policy. In short this went along the lines of “we’ll link future moves in the base rate to other external market indicators, so that as these other indicators move then so will base rates. Thus by keeping an eye on these indicators you will know when to expect interest rates to rise”. Simple, eh? The BoE decided to link its base rate expectation to the level of unemployment. At the time, for me it was like watching England play football. You know, the bit in the game when the manager makes some inexplicable substitution and everyone in the stands cries, “what on earth is he doing?!”.

That’s what I thought of the BoE’s forward guidance policy, which stated that when unemployment reached 7%, the Bank might think about raising rates. As the Bank’s econometric model predicted that this level would not be reached until 2016, one could safely conclude that rates were staying put until then. There were the usual caveats. What on earth? The level of unemployment is a function of so many varied and diverse causal factors that to suggest that one could safely predict its future level reflects the mind of a charlatan. Many factors drive the employment rate, and some of them (seasonal, sentiment, external like euro zone health, etc etc) have nothing to do with monetary policy and are outside one’s control. Why would one link the base rate movement to that? It’s completely nonsensical.

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Don’t worry, there’s plenty of hidden debt left there.

China Local Debt Growth Slows as Economic Expansion Cools (Bloomberg)

China’s chief auditor said growth in local government debt slowed, a sign that tighter scrutiny on borrowing and an economic slowdown have curbed credit. Outstanding debt for nine provinces and nine cities grew 3.79% from the end of June last year through March, 7%age points slower than the pace in the first half of 2013, according to a report delivered by Liu Jiayi, head of the National Audit Office, at a National People’s Congress meeting yesterday. The report was posted on the office’s website. A slower pace of debt growth would help ease financial risks in local borrowings that surged 67% to 17.9 trillion yuan ($2.9 trillion) as of June 2013 from the end of 2010. The government is trying to protect its 7.5% target for gains in gross domestic product this year without reviving a credit boom that’s evoked comparisons to the runup to Japan’s lost decade.

“Local government debt is still high as measured by its share of GDP,” said Liu Li-Gang, chief Greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. Regional authorities would need to sell stakes in state-owned companies to reduce debt levels, said Liu, who previously worked at the Hong Kong Monetary Authority and World Bank. The local-debt accumulation poses risks to central government finances, Moody’s Investors Service said in a January report. The nine audited provinces had 821 million yuan in overdue liabilities as of March 31, after borrowing 57.9 billion yuan during the nine preceding months to repay maturing debt, according to Liu’s report. Four cities raised a combined 15.7 billion yuan by using government guarantees or collateral that wasn’t allowed, Liu said.

The office didn’t identify the provinces or cities it audited. A media officer for the agency declined to elaborate when reached by phone today. “The slowdown in the pace of debt accumulation is a major success of policy makers,” Dariusz Kowalczyk, a senior economist at Credit Agricole SA in Hong Kong, said in an e-mail. “On the other side of the coin, it explains strong downward pressure on growth, given that local government debt finances much of infrastructure investment.”

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The walls of Jericho.

China Ting Says Borrowers Defaulting on Entrusted Loans (Bloomberg)

China Ting Group, a garment maker, said two borrowers defaulted on entrusted loans it made through Ningbo Bank Corp. and Bank of Communications Ltd. The stock fell. Zhongdou Group Holdings Ltd. and Hangzhou Zhongdou Shopping Centre Co. failed to make interest payments on schedule on loans worth 160 million yuan ($26 million), China Ting said in a Hong Kong exchange filing yesterday. Entrusted loans, advances between companies arranged through banks, are part of China’s shadow banking system that regulators are seeking to rein in. Some of the entrusted funds, which totaled 8.2 trillion yuan as of the end of 2013, were being directed to industries that face lending curbs from the government, according to the People’s Bank of China. “Ningbo Bank Corp. confirms that they have commenced legal proceedings in respect of their loan arrangements with Zhongdou Group,” and Bank of Communications is prepared to take action, China Ting said. [..]

China’s 10 largest lenders reported overdue loans reached 588 billion yuan at the end of 2013, a 21% increase from a year earlier to the highest level since at least 2009. The rise in late payments portends more losses on soured loans for banks in coming months as China’s slowing economy crimps companies’ earnings. The number of entrusted loans made by publicly traded companies rose 43% from 2012 to 397 cases in 2013, the central bank said in its 2014 financial stability report. China’s aggregate financing, the broadest measure of new credit that includes bank lending and less-regulated products like entrusted loans, fell to 1.4 trillion yuan in May from 1.55 trillion yuan in April, according to the central bank.

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Why Is Dubai’s Stock Market Crashing?

The Dubai Financial Market has been taking a beating for weeks, and news of firings at Arabtec, the United Arab Emirates’ largest listed builder, caused a new round of panic yesterday. Shares in the stock exchange fell 6.7%, to 4,009.01, leaving them down 25% from their May peak. It was the end of a long bull market: Since June 2012, shares in the emirate had climbed 250%. Dubai has been looking like a property bubble for a little while now. The emirate has led consulting firm Knight Frank’s Global House Price Index for 12 months, and while growth has slowed in the past quarter, it still was up 27.7% for the year ended in March. Reuters reported that real estate deals in Dubai “jumped 38% in the first quarter to some 61 billion dirhams ($16.6 billion).”

If the symbol of the last boom, which ended brutally in 2008, was a network of islands built out of dredged sand in the shape of a world map – still unoccupied – the symbol of this one is a plan, announced in 2012, to build a complex that includes the world’s largest mall, along with 100 hotels (especially since a different mall in Dubai already holds the title of world’s biggest).

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Draghi’s starting to look a whole lot like Abe.

Draghi’s Monetary Blitz Has Failed To Lift Euro Zone (MarketWatch)

The build-up was intense. The hype was overwhelming. The anticipation was growing. But the actual performance? So far, very disappointing. I am not talking about England’s, or indeed Spain’s, progress in the World Cup, although I easily could be. I am referring to Mario Draghi’s monetary blitz that was meant to lift the euro-zone economy off the rocks of recession and deflation. So far, it does not appear to be working. True, it is still too early for many of the measures the European Central Bank unveiled after its council meeting earlier this month to have any impact on the real economy.

But two of the key objectives were to bring down an overvalued euro and to lift confidence. There has been precious little sign of either. In fact, the exchange rate has hardly moved, confidence is still falling, and prices are still heading closer to full-blown deflation. The result? Negative interest rates and targeted loans are not going to get the euro zone out of trouble. The ECB only has one weapon left to counter that — full-blown quantitative easing, along similar lines to the programs already launched in the U.S., Japan and the U.K. Plan A hasn’t worked, so it will have to switch to Plan B. Expect it to pull the trigger before the end of the year.

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Let’s recall all cars.

Nissan, Honda And Mazda In Mass Recall Over Faulty Airbags (Independent)

Japanese carmakers Nissan, Honda and Mazda have recalled close to three million vehicles citing faulty airbags that could potentially explode and send pieces flying inside the car. Honda is set to recall two million vehicles, affecting at least 13 models, Nissan is recalling 755,000 cars worldwide, while Mazda Motor Corp added it would call back 159,807 vehicles. The automakers blamed a defect affecting both driver and passenger seat airbags that, if inflated and applied excessive pressure, could explode and send small metal pieces flying inside the car.

The airbags were made by Tokyio-based Takata Corp, the world’s largest supplier. Reacting to the recall, chief executive Shigehisa Takada said the company is working with safety regulators and car makers to strengthen its “quality control system”. The latest recall brings the total number of vehicles affected by faulty airbags to nearly 10 million in roughly five years, making it one of the biggest car recalls in history.

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They were forced to, they’re the only source of real money left.

Why Government Pension Funds Became Addicted to Risk (NY Times)

A public pension fund works like this: The government promises to make payments to its employees after they retire; it invests money now and uses those investments, and the returns on them, to make those promised payments later. Back when interest rates were high, this was fairly simple to do. Pension funds could buy bonds — ideally bonds that would mature around the time they would need the money to pay pensioners — and use the interest on those bonds to fund the payouts. In 1972, more than 70% of pension fund investment portfolios consisted of bonds and cash, according to a new analysis from the Pew Center on the States and the Laura and John Arnold Foundation.

But as interest rates began their long fall, pension funds faced a dilemma. Staying heavily invested in bonds would force governments either to set aside more cash upfront or to cut pension promises. So instead, pension funds radically changed their investment strategies, embracing investments that produce higher returns but also involve more risk. This shift has replaced an explicit cost with a hidden one: that lawmakers will have to divert more tax dollars into pension funds, cut back on benefits or both when stock market crashes cause pension fund asset values to decline. The shift began with pension funds’ adoption of portfolios consisting mostly of stocks, with only about a quarter of their investments in bonds.

Then, in the last few years, they rapidly expanded their use of “alternative” asset classes like hedge funds, private equity, commodities and real estate. As of 2012, the typical pension fund investment portfolio was about half stocks, a quarter bonds and cash, and a quarter alternative investments. The shift has allowed public pension funds to adjust to a sharp drop in bond interest rates. Between 1992 and 2012, the yield on 30-year Treasury bonds fell 4.75 percentage points; on average, large government pension funds cut their investment return targets by just 0.7 of a percentage point over that period.

And the shift has been, in one sense, a success: Pension funds continue to hit their target returns, on average. After the stock market crash of 2008-9, pension funds’ typical goals of annual returns around 8 percent were often criticized as unrealistic, but the National Association of State Retirement Administrators notes that public pension funds have earned annual returns of 9% on average over the last 25 years, despite falling interest rates and gyrating stock prices.

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What a great idea for a net energy importer.

U.S. Ruling Loosens Four-Decade Ban On Oil Exports (WSJ)

The Obama administration cleared the way for the first exports of unrefined American oil in nearly four decades, allowing energy companies to start chipping away at the longtime ban on selling U.S. oil abroad. In separate rulings that haven’t been announced, the Commerce Department gave Pioneer Natural Resources and Enterprise Products Partners permission to ship a type of ultralight oil known as condensate to foreign buyers. The buyers could turn the oil into gasoline, jet fuel and diesel. The shipments could begin as soon as August and are likely to be small, people familiar with the matter said. It isn’t clear how much oil the two companies are allowed to export under the rulings, which were issued since the start of this year. The Commerce Department’s Bureau of Industry and Security approved the moves using a process known as a private ruling.

For now, the rulings apply narrowly to the two companies, which said they sought permission to export processed condensate from south Texas’ Eagle Ford Shale formation. The government’s approval is likely to encourage similar requests from other companies, and the Commerce Department is working on industrywide guidelines that could make it even easier for companies to sell U.S. oil abroad. In a statement Tuesday night, the Commerce Department said there has been “no change in policy on crude oil exports.” Under rules imposed after the Arab oil embargo of the 1970s, U.S. companies can export refined fuel such as gasoline and diesel but not oil itself except in limited circumstances that require a special license. The embargo essentially excludes Canada, where U.S. oil can flow with a special permit.

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The sanctions are a propaganda tool.

Putin Pals Dealing With U.S. Firms Make Sanctions Useless (Bloomberg)

To see why U.S. economic sanctions against Russia are likely to have limited impact, follow the spending of a small Delaware-incorporated, Nasdaq-traded television company named CTC Media Inc. While CTC Media has a market capitalization of just $1.7 billion, it’s a good example of the way Russia’s economy has become so closely intertwined with U.S. business that it’s difficult to separate them. And once you unwind any of the string, one end is likely to lead, with twists and turns, to Russian President Vladimir Putin’s inner circle. The U.S. has issued five rounds of sanctions in response to Russia’s seizure of Crimea and its alleged backing of militants who have taken over part of Ukraine. The U.S. would be ready to issue further restrictions if Russia escalates tensions in Ukraine, Treasury Secretary Jack Lew said June 19 in Berlin.

The sanctions were designed to minimize harm to U.S. companies, which also leaves them open to some wide loopholes. Funds from U.S. firms flow legally through these gaps to companies linked to blacklisted entities or people. In CTC’s case, it is paying tens of millions of dollars to Video International, a Russian advertising firm part-owned by OAO Bank Rossiya. In March, the U.S. sanctioned the St. Petersburg bank and its largest shareholder, financier and media magnate Yury Kovalchuk, calling him Putin’s “personal banker.” “When somebody is on the sanctions list, American companies shouldn’t do business with them, period,” said David Kramer, a former U.S. assistant secretary of state and now president of Freedom House, a Washington-based non-profit that advocates for democracy and civil liberties. “This may not be a technical violation of the law, but it certainly is a violation of the spirit.”

Four days after Kovalchuk and his bank were sanctioned, CTC formed a compliance committee to ensure that its procedures comply with the U.S. restrictions, CTC spokesman Igor Ivanov said. The impact of sanctions is lessened because the U.S. has mostly targeted individuals rather than companies. For example, although Igor Sechin, chief executive officer of Russian oil giant OAO Rosneft, was sanctioned in April, his company is not. That approach enables Exxon Mobil to keep working with Rosneft. The U.S. oil company reached an agreement in May with Rosneft, extending a pact to build a plant to liquefy natural gas for export in eastern Russia. Sechin himself signed the agreement because the U.S. rules allow him to continue to act as signatory for the company. Exxon Mobil, through a 2011 deal with the state-run crude producer, owns drilling rights across 11.4 million acres of Russian land. The partnership gives Rosneft the ability to buy stakes in Exxon’s North American projects.

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How scary does it have to get?

A Heat More Deadly Than the US Has Ever Seen Is Forecast (Bloomberg)

It’s not the heat. It’s the humidity. And the U.S. is on a path to regularly experience a deadly combination of the two the likes of which have only been recorded once on planet Earth. That’s one of the findings in a report published today called “Risky Business,” commissioned by some of America’s top business leaders to put price tags on climate threats. For example, by the end of the century, between $238 billion and $507 billion of existing coastal property in the U.S. will likely be subsumed by rising seas, and crop yields in some breadbasket states may decline as much 70%.

But perhaps the biggest way Americans will physically experience global warming is, well, the warming. By 2050, the average American is likely to see between two and more than three times as many 95 degree days as we’re used to. By the end of this century, Americans will experience, on average, as many as 96 days of such extreme heat each year. The report breaks down “extremely hot” days by region to show what a child born in the past 20 years can expect to see over a lifetime.

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Nice book, nice excerpt.

All The Presidents’ Bankers: The Mid-1910s: Bankers Go To War (Nomi Prins)

On June 28, 1914, a Slavic nationalist in Sarajevo murdered Archduke Franz Ferdinand, heir to the Austrian throne. The battle lines were drawn. Austria positioned itself against Serbia. Russia announced support of Serbia against Austria, Germany backed Austria, and France backed Russia. Military mobilization orders traversed Europe. The national and private finances that had helped build up shipping and weapons arsenals in the last years of the nineteenth century and the early years of the twentieth would spill into deadly battle. Wilson knew exactly whose help he needed. He invited Jack Morgan to a luncheon at the White House. The media erupted with rumors about the encounter. Was this a sign of tighter ties to the money trust titans? Was Wilson closer to the bankers than he had appeared?

With whispers of such queries hanging in the hot summer air, at 12:30 in the afternoon of July 2, 1914, Morgan emerged from the meeting to face a flock of buzzing reporters. Genetically predisposed to shun attention, he merely explained that the meeting was “cordial” and suggested that further questions be directed to the president. At the follow-up press conference, Wilson was equally coy. “I have known Mr. Morgan for a good many years; and his visit was lengthened out chiefly by my provocation, I imagine. Just a general talk about things that were transpiring.” Though Wilson explained this did not signify the start of a series of talks with “men high in the world of finance,” rumors of a closer alliance between the president and Wall Street financiers persisted.

Wilson’s needs and Morgan’s intentions would soon become clear. For on July 28, Austria formally declared war against Serbia. The Central Powers (Germany, the Austro-Hungarian Empire, the Ottoman Empire, and Bulgaria) were at war with the Triple Entente (France, Britain, and Russia). While Wilson tried to juggle conveying America’s position of neutrality with the tragic death of his wife, domestic and foreign exchange markets were gripped by fear and paralysis. Another panic seemed a distinct possibility so soon after the Federal Reserve was established to prevent such outcomes in the midst of Wilson’s first term. The president had to assuage the markets and prepare the country’s finances for any outcome of the European battles.

Not wanting to leave war financing to chance, Wilson and Morgan kicked their power alliance into gear. At the request of high-ranking State Department officials, Morgan immediately immersed himself in war financing issues. On August 10, 1914, Secretary of State William Jennings Bryan wrote Wilson that Morgan had asked whether there would be any objection if his bank made loans to the French government and the Rothschilds’ Bank (also intended for the French government). Bryan was concerned that approving such an extension of capital might detract from the neutrality position that Wilson had adopted and, worse, invite other requests for loans from nations less allied with the United States than France, such as Germany or Austria. The Morgan Bank was only interested in assisting the Allies.

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Jun 212014
 June 21, 2014  Posted by at 1:59 pm Finance Tagged with: , , ,  4 Responses »

Tesla Studios Engineering class, Wanganui Technical College, New Zealand Sep 26 1916

Today, we give you another little gem from Nelson Lebo, our dear friend in Wanganui, New Zealand, who equates the inertia in debt (economy) with that of heat (climate), a smart idea that makes a lot of – explanatory – sense. But first, here’s a picture of Nicole and I back in April 2012 (that’s a kitten named Billy T I’m holding in my arms) at the Lebo home that Nelson restored from basically a bare skeleton and which he talks about in this article, in Castle Cliff, one on New Zealand’s poorest neighborhoods. The house is right by a beach with black volcanic sand and – I kid you not – a local seal slash resident beachmaster who was keeping watch lying on top of these huge pieces of eucalyptus driftwood.

Here’s Nelson:

Nelson Lebo: Today is the winter solstice in the southern hemisphere – “the shortest day of the year.” This weekend marks the time of year when hours of daylight are shortest and hours of darkness are longest. For a home like ours that is powered mostly by sunlight energy, this is not good news. But every cloud has a silver lining. Here’s what I mean.

Although the end of June marks the time when hours of daylight are shortest, it is not necessarily the coldest time of year – that comes later. In other words, as June turns to July and temperatures drop on average, the days actually get longer. This may sound counterintuitive: more sun but colder. What’s up with that?

It all has to do with lag time, or what may also be called thermal momentum or seasonal inertia. Put simply, there is a delay in the system between energy input (amount of sunlight) and how we experience that energy (air temperature).

Most of the seasonal delay is influenced by large bodies of water: oceans, seas, very big lakes. These large bodies of water are the thermal mass of the planet – they absorb heat slowly and release it slowly. Sunlight energy is loaded into the world’s waters only for it to be released at a later date.

On a very large scale, most climate scientists say that much of the excess heat energy that the Earth is currently absorbing is going into the world’s oceans. They refer to oceans as “heat sinks.” The major concern with this situation is that the ‘sinks’ will become ‘sources’ in the future. In other words, the chickens (massive amounts of heat energy) will come home to roost (wreak havoc on us with extreme weather events).

While this energy is being stored in the oceans everything appears to us to be OK. It is a lot like running up a large debt. I suspect there were few complaints in Wanganui, New Zealand, while council was running up our current debt while holding rates artificially low. Only now do we hear complaints.

This is the same strategy that U.S. President Bush (the second) used with the Iraq War. He did not tax Americans to pay for the war, but put it on the national credit card. There were few complaints at the time, but now after a trillion dollars we hear complaints about the “unsustainable levels of federal debt” in America.

Similarly, climate scientists continue to warn of “unsustainable levels of carbon debt,” but I suspect more and more people will echo them in the future, especially because another and perhaps more ominous delay is also built into the climate system.

Once fossil fuels are burned the carbon dioxide remains in the atmosphere for decades causing more and more warming. Many scientists say that even if we stopped burning all coal, oil and gas today that we would continue to experience the effects for the better part of most Wanganui Chronicle readers’ lifetimes.

In the same way, even if WDC balanced the city’s budget next year we will all still be paying for debts racked up in the past and the accrued interest for years to come.

OK, now for the silver lining … for our house anyway. Heading into July and through August, as temperatures remain low, the increasing minutes of sunlight every day make our solar home that much warmer. Additionally, we use a ‘delay system’ inside our home to capture the daytime warmth and release it at night.

This delay is, of course, thermal mass and it acts just like the Tasman Sea outside our front door: absorbing heat slowly when it is in abundance and releasing it slowly when it is in deficit.

Understanding complex systems and their associated delays, oscillations, changes and feedback loops helps us to ‘see’ into the future and plan accordingly. This way of seeing the world is called “systems thinking,” and is at the heart of eco-design. It has helped us design and renovate an inefficient old villa into a low-energy eco-home, and it has the potential for humanity to come to grips with global climate change and unsustainable debt.

Human beings are notoriously bad at looking toward the future and planning ahead. Systems thinking is a tool to help us all look toward an increasingly volatile and indebted future, ask if it is the future we want for our children, and then decide whether we have the courage to do anything about it today.

Update: Nelson sent me a picture of Billy T. and her little sister:

Global Drag Threatens Worst US Export Performance In 60 Years (Wiley)

Ever since an über-strong U.S. dollar crushed the export sector in the mid-1980s, the U.S. economy hasn’t looked quite the same. Exports picked up towards the end of the decade, helped along by the G-7’s historic 1985 powwow at New York’s Plaza Hotel, which led to a coordinated effort to slam back the dollar. Nonetheless, some export industries never fully recovered. Fast forward to the present, and export performance may soon be as noteworthy as it was 30 years ago. Risks to the global economy (and exports) include turmoil in oil-producing nations, credit markets that are teetering in China and comatose in Europe, and the backside of Japan’s April sales tax hike. Worse still, export growth already lags behind every one of the past ten expansions, even the 1980s, thanks to a drop in the first quarter:


The chart shows that exports are no longer distinct from other parts of the economy (nearly all of them) that haven’t measured up to a “normal,” credit-infused, post-World War 2 business cycle. Together with emerging global risks, it begs the question of whether sagging exports can drag the U.S. into recession. We think it’s too early to make that call [..] Nonetheless, export performance bears watching, and especially as the first quarter’s result mirrored a big drop in corporate profits. Falling export volumes surely contributed to the weak profits result. Moreover, profits are an excellent leading indicator, as shown below:


Should exports and profits weaken further, that would cause us to reevaluate risks in both financial markets and the economy. Extra chart (free) Some readers may prefer this version of the export chart, with each cycle labeled:


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“The sooner and more predictably the Fed exits its extraordinary monetary accommodation, the sooner businesses can get back to business and labor can get back to work.”

The Asset-Rich, Income-Poor Economy (WSJ)

“Balance-sheet wealth is sustainable only when it comes from earned success, not government fiat,” is the ugly truth that former Fed governor Kevin Warsh (amazing what truths come out after their terms are up) and hedge fund billionaire Stan Druckenmiller.

Economist Richard Koo diagnosed Japan’s crash in the early 1990s and subsequent two decades of economic malaise as a “balance-sheet recession.” That conclusion wasn’t lost on the Federal Reserve during the financial crisis of 2008-09. The Fed engineered an emergency response to craft what can best be described as a balance-sheet recovery. At its policy meeting earlier this week, the Fed made clear that it’s scarred, if no longer scared, by the crisis. Extraordinarily loose monetary policy will continue in force. While the Fed’s monthly asset purchases will decline, short-term interest rates will remain pinned near zero. And long-term rates need not move higher—the Fed assures us—even with improving inflation dynamics, credit markets priced-for-perfection, and stock prices at record levels. The aggregate wealth of U.S. households, including stocks and real-estate holdings, just hit a new high of $81.8 trillion.

That’s more than $26 trillion in wealth added since 2009. No wonder most on Wall Street applaud the Fed’s unrelenting balance-sheet recovery strategy. It’s great news for those households and businesses with large asset holdings, high risk tolerances and easy access to credit. Yet it provides little solace for families and small businesses that must rely on their income statements to pay the bills. About half of American households do not own any stocks and more than one-third don’t own a residence. Never mind the retirees who are straining to make the most of their golden years on bond returns. The Fed’s extraordinary tools are far more potent in goosing balance-sheet wealth than spurring real income growth. The most recent employment report reveals the troubling story for Main Street. While 217,000 jobs were created in May, incomes for most Americans remain under stress, with only modest improvements in hours worked and average hourly earnings.

It’s taken a full 76 months for the number of people working to get back to its previous peak, a discomfiting postwar record. Unfortunately, during the same period the U.S. working-age population increased by more than 15 million people. That’s why the share of the working-age population out of work is now at a 36-year high. There are now more Americans on disability insurance than are working in construction and education, combined. Meanwhile, corporate chieftains rationally choose financial engineering—debt-financed share buybacks, for example—over capital investment in property, plants and equipment. Financial markets reward shareholder activism. Institutional investors extend their risk parameters to beat their benchmarks. And retail investors belatedly participate in the rising asset-price environment. All of this lifts balance-sheet wealth, at least for a while. But real economic growth—averaging just a bit above 2% for the fifth year in a row—remains sorely lacking. [..]

Balance-sheet wealth is sustainable only when it comes from earned success, not government fiat. Wealth creation comes from strong, sustainable growth that turns a proper mix of labor, capital and know-how into productivity, productivity into labor income, income into savings, savings into capital, capital into investment, and investment into asset appreciation. The country needs an exit from the 2% growth trap. There are no short-cuts through Fed-engineered balance-sheet wealth creation. The sooner and more predictably the Fed exits its extraordinary monetary accommodation, the sooner businesses can get back to business and labor can get back to work.

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“Each of the last five great merger waves on record” – going back more than 125 years – “ended with a precipitous decline in equity prices”

Stocks Are ‘Dangerously Overvalued,’ M&A Deals Suggest (MarketWatch)

Here’s one sign a significant stock market decline might occur sooner rather than later: the rapid acceleration of recent merger and acquisition activity. This past week saw news of another big deal, led by medical-device maker Medtronic’s announcement of its $43 billion bid to acquire rival Covidien. At the current pace, M&A deals could reach $3.51 trillion this year, the most since 2007, according to data provider Dealogic. It wasn’t a fluke that a surge in M&A activity coincided with that year’s market top, according to Matthew Rhodes-Kropf, a professor at Harvard Business School and an expert in the field. “Each of the last five great merger waves on record” – going back more than 125 years – “ended with a precipitous decline in equity prices”, he says.

Some experts have found that merger activity surges when stocks are richly priced, at least in part because companies can use their inflated shares to pursue acquisitions. “The marked increase in recent M&A activity is one more piece of evidence that the market is dangerously overvalued,” says Dennis Mueller, an emeritus economics professor at the University of Vienna in Austria who has studied M&A cycles in the U.S. as well as overseas. Of course, shareholders of the company being acquired rarely complain, since the acquisition price usually represents a huge premium. Covidien’s stock this past week surged as much as 29%, compared with where it closed the prior week, for example.

Does the recent M&A boom mean you should immediately get out of stocks? Not necessarily, since the volume of M&A activity isn’t an exact market-timing tool. Mueller says it’s possible that the market is at the beginning of a long M&A boom that could last a few more years. Rhodes-Kropf agrees that the recent M&A surge doesn’t necessarily mean a bear market is imminent. “Everyone tends to call the bubble too soon,” he says, adding that his hunch is that this merger trend could very well last a while longer.

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It’s Never Different This Time – 1987 or 2014 (Zero Hedge)

While the price analogs of the last few year’s exuberance in US equity markets are enough to worry all but the most systemically bullish “believer”; we suspect the following article from the LA Times In the Spring of 1987 will raise a few hairs on the back of the neck of perpetually optimistic extrapolator…

It’s never different this time..

“One of the largest bullish factors is burgeoning worldwide liquidity, thanks to expansive monetary policies by central banks. That has helped fuel a surge of foreign investing that could propel US stocks higher, regardless of what happens to the American economy, some analysts say… Low interest rates also help stocks by making Treasury securities, certificates of deposit and other interest-paying investments less attractive. The sluggish economy, meanwhile, keeps the Federal Reserve from driving up interest rates and prevents inflation from overheating… Also, the sluggish economy–by keeping manufacturing rates low–discourages money from flowing out of financial assets into such investments as factories and machinery.”
– LA Times, March 8, 1987; a few months before the October 1987 crash

Read that again!!

Never different.

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I’ve said this often about people just like Yellen, especially Bernanke. And I’ve always been hesitant to declare them incompetent; they have access to far more data than we do, and they have tons of smart people working for them.

Janet Yellen: Either Lying or Incompetent (Phoenix)

Janet Yellen just cemented her status as the third member of the unholy triumvirate of Fed Presidents: Greenspan, Bernanke, and now Yellen. Greenspan was so afraid of deflation that he hired Bernanke (an alleged deflation expert) in the early 2000s. Between the two of them, they created bubbles in virtually every asset class on the planet. Deflation did hit for a total 12-14 months (late 2007-early 2009). It was enough to terrify Bernanke to the point that he spent well over $3 trillion (an amount larger than all but a handful of countries’ GDPs), cut interest rates to zero (punishing savers) and generally destroyed the US economy… all in the quest of propping up a few crony capitalist banks that were sitting on several hundred trillion dollars’ worth of derivatives trades. Yellen took over the Fed in early 2014 and has since proven herself to be just as misguided or dishonest as Bernanke was. Among other things…

• She claims there are no signs of stocks being overvalued, despite the fact that by virtually every metric in existence the market is SEVERELY overvalued.

• She first claimed inflation was too low, and now claims that rising prices are just “noise” while meat prices hit record highs, gas prices hit their highest levels since 2008, home prices are as unaffordable as they were in 2005-2006, healthcare costs are up double digits and energy prices are rising.

It’s an astounding series of comments, coming from the woman in charge of US monetary policy. What’s even more astounding is that it appears Yellen actually believes this stuff, which indicates that she either A) doesn’t read the news or look at price charts for items or B) has no idea how to interpret data or C) is a liar. This is the same story we had with Bernanke and Greenspan, both of whom oversaw epic meltdowns in the financial system. Yellen will be no different.

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” … the more they print, the more inequality there is, the weaker the economy will become”

Marc Faber: Fed Policies Have Been A ‘Catastrophe’ (CNBC)

The Federal Reserve [announced] another $10 billion worth of tapering on Wednesday, reducing the size of its monthly asset purchase program to $35 billion, from $85 billion at the height of the program. And though the hyper inflation many warned would be a consequence of its stimulative policies has not yet reared its head, Fed skeptics like Marc Faber still have strong words for the central bank. “It’s a catastrophe,” Faber said Tuesday on CNBC’s “Futures Now.” “What the Fed has done is to lift asset prices, and the cost of living. In the meantime, as the cost of living increases, are higher than the wage increases, the typical American household income is going down in real terms.”

Faber, editor of the “Gloom, Boom & Doom Report,” consequently believes that rising American inequality is a result of the Fed’s actions. “So the Fed is boosting asset prices. It leads to less affordability, people can’t buy their homes anymore in the lower income group. Except, of course, the well-to-do people, they can buy homes because their asset prices have gone up and they own the assets,” Faber said. “And so the more they print, the more inequality there is, the weaker the economy will become.”

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The Shortest Economics Textbook Ever (Zero Hedge)

1. 95% of economics is common sense You don’t need a degree to understand it. We’ve got this profession wrong; a lot of professional economists think what they do is too difficult for ordinary people. You’d be surprised how often these people are stupid enough to say things, at least in private, like ‘you wouldn’t understand what I do even if I explained it to you’. If you cannot explain it to other people, you have the problem.

2. Economics is not a science Despite what the experts want you to believe, there is more than one way of ‘doing’ economics People have been led to believe that, like physics or chemistry, economics is a ‘science’, in which there is only one correct answer to everything; thus non-experts should simply accept the ‘professional consensus’ and stop thinking about it.

3. Economics is politics Economic arguments are often justification for what politicians want to do anyway Economics is a political argument. It is not – and can never be – a science. Behind every economic policy and corporate action that affect our lives – the minimum wage, outsourcing, social security, food safety, pensions and whatnot – lies some economic theory that either has inspired those actions or, more frequently, is providing justification of what those in power want to do anyway.

4. Never trust an economist It is one thing not to foresee the financial crisis; it’s another not to have changed anything since. Most economists were caught completely by surprise by the 2008 global financial crisis. Not only that, they have not been able to come up with decent solutions to the ongoing aftermaths of that crisis. Given all this, economics seems to suffer from a serious case of megalomania. The financial crisis has been a brutal reminder that we cannot leave our economy to professional economists and other ‘technocrats’. We should all get involved in its management – as active economic citizens.

5. We have to reclaim economics for the people It’s too important to be left to the experts alone. You should be willing to challenge professional economists (and, yes, that includes me). They do not have a monopoly over the truth, even when it comes to economic matters. Like many other things in life – learning to ride a bicycle, learning a new language, or learning to use your new tablet computer – being an active economic citizen gets easier over time, once you overcome the initial difficulties and keep practicing it. Unless you are willing and able to challenge the professionals, challenge the experts, what’s the point of having a democracy?

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13 Facts They Don’t Tell You About Economics (Zero Hedge)

Yesterday, Ha-Joon Chang exposed the shortest economics textbook ever. Today the Cambridge University Economics professor uncovers everything you didn’t know about economics (in 13 simple points)…

1. Economics Was Originally Called ‘Political Economy’ – Economics is politics and it can never be a science. Yet the dominant neoclassical school of economics succeeded in changing the name of the discipline from the traditional ‘political economy’ to ‘economics’ at the turn of the 20th Century. The Neoclassical school wanted economics to become a pure science, shorn of political (and thus ethical) dimensions that involve subjective value judgments. This change was a political move in and of itself.

2. The Nobel Prize In Economics Is Not A Real Nobel Prize – Unlike the original Nobel Prizes (Physics, Chemistry, Physiology, Medicine, Literature and Peace), established by the Swedish industrialist Alfred Nobel at the end of the nineteenth century, the economics prize was established by the Swedish central bank (Sveriges Riksbank) in 1968 and is thus officially called the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Members of the Nobel family are known to have criticized the Swedish central bank for giving prizes to free-market economists of whom their ancestor would have disapproved.

7. Capitalism Did Best Between The 1950s And The 1970s, An Era Of High Regulation And High Taxes – Despite what we hear these days about the detrimental economic effects of high taxes and strong government regulation, the advanced capitalist economies grew the fastest between the 1950s and the 1970s, when there were a lot of regulations and high taxes.Between 1950 and 1973, per capita income in Western Europe grew at an astonishing rate of 4.1% per year. Japan grew even faster at 8.1%, starting off the chain of ‘economic miracles’ in East Asia in the next half a century. Even the US, the slowest-growing economy in the rich world at the time, grew at an unprecedented rate of 2.5%. Per capita income for these economies collectively have since then managed to grow at only 1.8% per year between 1980 and 2010, when they cut taxes for the rich and deregulated their economies.

13. Most Poor People Don’t Live In Poor Countries – Currently, around 1.4billion people – or about one in five people in the world – live with less than $1.25 per day, which is the international poverty line (below which survival itself becomes a challenge). But most poor people do not live in poor countries. Over 70% of people in absolute poverty actually live in middle-income countries. As of the mid-2000’s, over 170 million people in China (around 13% of its population) and 450 million people in India (around 42% of its population) lived with incomes below the international poverty line. These show the enormity of challenges that the two most populous countries face.

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Spot The Oxymoron: “Growth Down, Optimism Up” (Simon Black)

With a nod to the absurd, Federal Reserve Chair Janet Yellen freely admitted earlier this week that the Fed really has no idea what’s going to happen to the economy. Bear in mind this is the person who controls interest rates in the United States, effectively setting the ‘price of money’ for the most widely used currency in the world. This is key– because the price of money (interest rates) influence the prices of so many other things. Real estate. Business investment. Automobile sales. Agricultural commodity prices. Oil prices. Etc. Of course, there’s a knock-on effect. Consider, for example, how many products and services are influenced by the price of oil… fertilizers, plastics, shipping, etc. And then how many products and services are influenced by the price of shipping… like everything in the world that’s imported/exported. So in setting the price of money, Ms. Yellen is influencing the price of just about everything.

Yet she and her fellow members of the Federal Open Market Committee (FOMC) admittedly don’t have a clue where the economy’s going. This stands in stark contrast to what investors are used to. Back in the 90s, Fortune put former Fed Chair Alan Greenspan on the cover with a headline– “It’s HIS economy, stupid”. That’s how clear it was back then. Greenspan was the benevolent wizard… the ‘maestro’ in masterful command pulling the strings of the largest economy in the world. And investors had all the [misplaced] confidence in the world in this arrangement. So you’d think that with such a demonstration of ignorance that investors would be heading for the hills, right? Not so. The big banks and institutional investors (who appointed most of the FOMC members to begin with) rewarded the Fed’s stunning admission and lack of foresight with… record high stock prices.

If I could quote our long-lost Billy Mays– BUT WAIT, THERE’S MORE! The Fed also reduced its GDP growth forecasts for the US economy from 2.9% to 2.2%. In case you’re not too fast on the ‘calc’ icon, that’s a 24% proportional reduction in GDP growth. Not exactly a drop in the bucket. AND, of course, there’s the recent data that inflation has ticked up, even according to their own official numbers. Of course Ms. Yellen proceeded to downplay the inflation, writing it off as ‘noise’. So this morning I received yet another analysis from a large private bank I deal with; the report’s headline– FED: Growth down, optimism up. Hmmm. Spot the oxymoron here (OK fine, paradox). Growth is down. Inflation is up. The grand wizards don’t have a clue. Yet people are excited about this?

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Yay! Bank run!

Bank Run Prompts Bulgarian Central Bank To Seize Control (Reuters)

A run on Corporate Commercial Bank (Corpbank) prompted Bulgaria’s central bank to take control of the country’s fourth-largest lender on Friday and its governor appealed to depositors to stay calm. The Bulgarian National Bank (BNB) said it would handle Corpbank’s operations for three months and removed its management and supervisory board after the run, which was sparked by media reports of shady deals involving the bank. The BNB said it acted after Corpbank said on Friday morning it had stopped all payments and bank operations due to a liquidity drain. The central bank said Corpbank was not bankrupt and other lenders in the country were safe from the effects. “As you know, there has been a lot of talk about the bank and one of its shareholders, which triggered bank runs,” central bank governor Ivan Iskrov said at a news conference. “It is very important to be very careful when we talk about banks. Let’s not tear down our house alone unnecessarily.”

“Let me make this very clear. Corporate Commercial Bank is not a bankrupt bank. We are acting swiftly to avoid a bankruptcy,” said Iskrov. He declined to give further details of the bank’s problems and said supervisors would carry out a full audit of its books. The central bank action did not stop dozens of people from queuing outside the main office of the bank in the capital Sofia on Friday, and credit default swaps on the country’s debt hit a six-month high on fears of contagion. Sofia’s blue-chip shares index closed at its lowest level since February. The central bank blocked depositors from withdrawing cash after it took control. “We are worried, because my husband and I have deposits there in euros and in U.S. dollars,” said Lilia Polova, editor at a lifestyle magazine. “These are our family savings. He was reading newspapers and was asking me to take our money out of there … but I waited.”

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May 222014
 May 22, 2014  Posted by at 10:49 am Earth Tagged with: , , ,  14 Responses »

Dorothea Lange Sons of Negro tenant farmer, Granville County, North Carolina July 1939

This is the second installment of Nicole’s series on food security.

Nicole Foss: In part one of this series, we looked at finance as a major causal factor in the development of food insecurity. The boom and bust cycles that result from over-financialization are, however, only one aspect of a food crisis already present for many, and looming for many more in the years to come. Finance can, and does, generate artificial scarcity, initially through the manipulation of land and commodities for profit and, and latterly by over-reaching itself and crashing the human operating system, with tremendous negative impact on the supply of all goods and services. Food is one of the vital factors that will be substantially affected in a financial crash where connecting producers and consumers will be extremely difficult due to lack of money in circulation.

The inherent instability of our human operating systems is only one of a large number of limiting factors for food production and distribution. The very real scarcity coming as a result of limiting factors grounded in the physical world is far more serious in the longer term. While we can make changes capable of addressing both human and physical limits, we are highly unlikely to do so in a timeframe, or on a scale, that would prevent us from experiencing the consequences of of over-shooting our natural carrying capacity. Nevertheless, whatever we can achieve in the time available will be an improvement.

This series is not meant to be a comprehensive assessment of each limiting factor in relation to food supply, but an overview of vulnerability in its many forms, clarifying the imperative for re-engineering our food systems. Given the extent of the over-stretch of the current model, the possibility of rapid collapse in response to very predictable system shocks is uncomfortably high. We are at risk of cascading system failure. We cannot expect facilitation of this transition to come from the top down, however – far from it. The larger scale centralized human construct, highly over-stretched and inflexible, can only be expected to look after itself and defend the status quo at the expense of decentralization initiatives. Meaningful change will have to come from the bottom up, one local initiative at a time.

There is a considerable urgency to making this transition to a human-scale food system. While many are generally aware that our current means of producing and distributing food is unsustainable, few seem to realize that what cannot continue will not continue, that the limits are already being reached, and that the effects will most certainly be felt in our lifetimes, even in what are now wealthy countries. This is not an issue where we can continue business as usual and expect the impact to be felt only by distant populations or by subsequent generations. It will be one where we must take personal responsibility for change, both for our own benefit and that of society in general.

We are facing non-negotiable physical limits in terms of water and climate, which are the subject of this instalment, but also energy, soil fertility and carrying capacity, the subjects for the next part of the series. Our human systems for trade and agricultural regulation are frequently exacerbating the scope of the problems we face and will be covered subsequently. Ultimately we are going to have to face the root of the problem, which lies in the inherently expansionist nature of agriculture itself, as practiced not just in the industrial age, but from the dawn of the neolithic period. We will need to develop polycultural food production systems along permaculture lines if we are to avoid the worst consequences of over-reach. We will need to learn to live within limits.

Farming and Water

Fresh, clean water is the ultimate precious resource – the lifeblood of the planet – yet it is increasingly scarce in many places already and set be become far scarcer in the foreseeable future. Only a tiny percentage of the Earth’s fresh water is sufficiently accessible to be available for human use, and of that, agriculture consumes the lion’s share. It takes 1000 tons of water to grow a ton of wheat for instance.

Irrigated land is far more productive in the short term, allowing us to use the cheap energy we have had access to to expand the areas under cultivation and increase yields in order to feed our expanding population. However, in the longer term, irrigation leads to soil water-logging and salinization, as evaporation of mineralized water leaves salts behind in the soil. Land can be badly damaged and eventually abandoned, while new land is then subjected to the same treatment:

Although only 17% of all cropland is currently irrigated, it provides 40% of the world’s food….But much existing irrigated land is threatened by salinization — a build-up of salts in the soil. This lowers yields and can damage the land beyond economic repair. Salinization is reducing the world’s irrigated area by 1-2% every year, hitting hardest in the arid and semi-arid regions. “No one is really certain of the figures, but it seems that at least 8% of the world’s irrigated land is affected,” says FAO water expert Julián Martínez Beltrán. “In the arid and semi-arid regions, it’s somewhere around 25%.”

In this way, land is being consumed as a non-renewable resource. Needless to say, there is a finite supply of land available, and with irrigation damage occurring most quickly in the most water-stressed regions, the risk of food insecurity is compounded.

Some 60% of irrigation draws on surface water sources, but chronic over-use has led to major rivers no longer reaching the sea, destroying the health and productivity of formerly fertile delta lands which had previously been substantial food sources for local populations:

For six million years, the Colorado River ran its course from its soaring origins in the Rockies to a once-teeming two-million-acre delta, finally emptying 14 million acre-feet of fresh water into the Sea of Cortez. But now, a multitude of straws are drinking from the river….Indeed, the Colorado River has not reached the sea since 1998 but ends rather in a cracked and desolate expanse of barren mud flats and abandoned boats — a “dry river cemetery.”….

….Referred to as the Nile of North America, the Colorado River is the arid West’s lifeline. It provides water to more than 30 million Americans, including people in cities like Phoenix, Denver and Los Angeles. Over 100 dams and thousands of miles of canals divert the river to nearly every farm, industry and city within a 250-mile radius of its banks. It is one of the most diverted and dammed rivers in the world.

Dry Rivers are increasingly common worldwide.

Where irrigation depends on aquifers, draw-down often exceeds the natural recharge rate. We are depending on fossil water that is also effectively a non-renewable resource, and when the limit of feasible extraction is reached, whole regions are at risk of becoming unable to support either the human population or what remains of the existing ecosystem. Water tables are falling by several feet per year in many parts of the developing world dependent on groundwater sources, notably beneath rapidly growing urban centres with an insatiable demand for water, but also beneath agricultural regions:

Shijiazhuang, China — Hundreds of feet below ground, the primary water source for this provincial capital of more than two million people is steadily running dry. The underground water table is sinking about four feet a year. Municipal wells have already drained two-thirds of the local groundwater. Above ground, this city in the North China Plain is having a party. Economic growth topped 11% last year. Population is rising. A new upscale housing development is advertising waterfront property on lakes filled with pumped groundwater. Another half-built complex, the Arc de Royal, is rising above one of the lowest points in the city’s water table. “People who are buying apartments aren’t thinking about whether there will be water in the future,” said Zhang Zhongmin, who has tried for 20 years to raise public awareness about the city’s dire water situation….

….The North China Plain undoubtedly needs any water it can get. An economic powerhouse with more than 200 million people, it has limited rainfall and depends on groundwater for 60% of its supply….But scientists say [the aquifers] below the North China Plain may be drained within 30 years.

The same phenomenon is occurring under the major breadbaskets of the world, for instance the Punjab in India and the Ogallala Aquifer underlying the great plains of the US:

The Ogallala Aquifer, the vast underground reservoir that gives life to these fields, is disappearing. In some places, the groundwater is already gone. This is the breadbasket of America—the region that supplies at least one fifth of the total annual U.S. agricultural harvest. If the aquifer goes dry, more than $20 billion worth of food and fiber will vanish from the world’s markets. And scientists say it will take natural processes 6,000 years to refill the reservoir….

….With a liquid treasure below their feet and a global market eager for their products, farmers here and across the region have made a Faustian bargain—giving up long-term conservation for short-term gain. To capitalize on economic opportunities, landowners are knowingly “mining” a finite resource.

As with so many aspects of our human systems, short term gains trumps long term ability to provide that which sustains existence. Unfortunately, as the shared resource diminishes, competition over what remains intensifies, and the potential for conflict increases enormously. Resources previously used in common often become privatized and used for the exclusive benefit of a dominant group. The land grabs we discussed in relation to financial aspects of food insecurity are also reflections of this competition over water resources, and in fact are often water grabs in disguise:

Water grabbing refers to situations where powerful actors are able to take control of or divert valuable water resources and watersheds for their own benefit, depriving local communities whose livelihoods often depend on these resources and ecosystems. The ability to take control of such resources is linked to processes of privatisation, commodification and take-over of commonly-owned resources. They transform water from a resource openly available to all into a private good whose access must be negotiated and is often based on the ability to pay. Water grabbing thus appears in many different forms, ranging from the extraction of water for large scale food and fuel crop monocultures, to the damming of rivers for hydroelectricity, to the corporate takeover of public water resources….

….The causes of water grabbing are similar to those of ‘land grabbing’: the phenomenon whereby investors acquire or lease vast tracts of land, with negative socio-economic and environmental effects. An investor’s control of land usually comes with a corresponding control of water resources. Indeed, access to water could be the most valuable part of the deal. This is especially so given that host governments seek to entice investors by offering them concessions with regards to water use….

….Acquiring land in order to access and control water is especially relevant to countries facing water scarcity. Renewable water resources in the Gulf states for example are set to run out in the next three decades. The implications of this water scarcity are profound. Saudi Arabia, once a net exporter of wheat, intends to phase out domestic production of wheat by 2016 due to the depletion of fresh water reserves in the country. It seeks to compensate for this loss in domestic food production by acquiring farmland abroad, thereby transferring much of the pressure on water resources caused by agricultural production to other countries. This is a strategy likely to be pursued by other water deficit countries as they seek to ‘lock in’ access to water reserves and resolve their own water constraints by acquiring land abroad.

The problem is compounded by the use to which acquired land is put, as this use, generally by absentee land owners, does not reflect a condition of resource scarcity. Water resources, which may already be under stress as local populations rise, are all too often being rapidly squandered in the pursuit of short term profit, with the result that ecosystems are damaged or destroyed and local populations forced to migrate:

All of the land deals in Africa involve large-scale, industrial agriculture operations that will consume massive amounts of water. Nearly all of them are located in major river basins with access to irrigation. They occupy fertile and fragile wetlands, or are located in more arid areas that can draw water from major rivers. In some cases the farms directly access ground water by pumping it up. These water resources are lifelines for local farmers, pastoralists and other rural communities. Many already lack sufficient access to water for their livelihoods. If there is anything to be learnt from the past, it is that such mega-irrigation schemes can not only put the livelihoods of millions of rural communities at risk, they can threaten the freshwater sources of entire regions.

The concept of virtual water trade refers to the quantity of water effectively exported when countries export agricultural products, which consume local water resources. Importing countries can save water at the expense of exporting ones:

When a country imports one tonne of wheat instead of producing it domestically, it is saving about 1,300 cubic meters of real indigenous water. If this country is water-scarce, the water that is ‘saved’ can be used towards other ends. If the exporting country is water-scarce, however, it has exported 1,300 cubic meters of virtual water since the real water used to grow the wheat will no longer be available for other purposes.

In 2007, the global water trade was estimated to be some 567 billion litres, double that in 1986 as the water trade has become increasingly globalized.

Exporting virtual water becomes problematic where exporting nations are water scarce. The decision to export virtual water anyway is generally a matter of short term economic gain, either for wealthy foreign purchasers of land, as we have seen in Africa, or for large domestic land owners. For instance, Australia is the driest inhabited continent, but also, according to UNESCO, the largest net exporter of virtual water in the world, with agricultural exports feeding 60 million people worldwide. This is currently possible due to the availability of the necessary energy to supply the water when and where needed, but it is obviously unsustainable. Australia has only just established an independent agency tasked with monitoring and setting sustainable limits on water use.

Similarly, drought-stricken California uses artificially cheap water provided with temporarily affordable energy to export thirsty hay and rice crops to Japan:

In the Imperial Valley of California, a region drier than part of the Sahara Desert, farmers have found a lucrative market abroad for a crop they grow with Colorado River water: They export bales of hay to land-poor Japan….Container ships from Japan unload electronics and other goods in the Port of Long Beach, and the farmers fill up the containers with hay for the trip back across the Pacific. Since the containers would otherwise return empty, it ends up costing less to ship hay from Long Beach to Japan than to California’s Central Valley.

“Everything is done for economics,” said Ronnie Leimgruber, an Imperial Valley hay grower who is expanding into the export market. “Japan cannot get hay cheaper. The freight is cheaper from Long Beach than from anywhere else in the world.” Water is cheap for valley farmers, too: urban rates there are four times as high. It costs only $100 to irrigate an acre of hay in the desert for a year. But what makes economic sense to farmers may not be rational behavior for California in the third year of a severe drought, say some conservationists. At the very least, they contend, the growing state debate over water allocation should take into account the exports of crops such as hay and rice — two of the most water-intensive crops in the West — because they take a toll on local rivers and reservoirs.

“This is water that is literally being shipped away,” said Patrick Woodall, research director at Food and Water Watch, an international consumer advocacy group with headquarters in Washington, D.C. “There’s a kind of insanity about this. Exporting water in the form of crops is giving water away from thirsty communities and infringing on their ability to deal with water scarcity.”

Increasingly, limits are going to be reached and hard choices are going to have to be made. The current pursuit of individual or corporate economic benefit at the expense of rational resource use cannot continue where the resources in question are increasingly limited and therefore subject to competing interests. Those competing interests will increasingly make themselves know in a highly socially disruptive manner destined to force change.

Competition over water access is already inflaming regional tensions in areas of water scarcity, with unequal provision reflecting relative power. The powerless may be prevented, by lack of sufficient water, from growing food at all, cementing a state of dependency where the powerful hold hostage the ability to provide basic essentials:

Published Monday by the Ramallah-based human rights organization Al-Haq, “Water for One People Only: Discriminatory Access and ‘Water-Apartheid’ in the Occupied Palestinian Territory”, reports that Israel has claimed up to 89% of an underground aquifer that is largely located in the West Bank, giving Palestinians only access to the remaining 11%. The water grab has fueled increased discrepancy in water usage in the region with the 500,000 Jewish settlers consuming approximately six times the amount of water used by the 2.6 million Palestinians living in the West Bank—with the discrepancy growing even greater when agricultural water use is accounted for.
“There is a grave injustice in the division of water, and the results have been catastrophic,” Tawfiq Salah, mayor of West Bank village al-Khader, told Al-Monitor….

….Writing about the report, Al-Monitor’s Jihan Abdalla quotes Musa, a Palestinian father of six, who had attempted to build a rainwater cistern in his field before the Israeli authorities quickly issued it with a demolition order. Abdalla continues: Musa says if they had access to sufficient, affordable water, his family would be able to live off their ancestral field, selling their grapes, olives and fruit in nearby markets. That, he says, is the reason why Israeli authorities prevent them from building a cistern, and why they do not have any running water. “They don’t want us to plant or grow anything, they just want us to have barely enough water for drinking and that’s it,” Musa says looking at the unfinished, empty hole in the ground.

It is not only in situations of long term ethnic conflict where actions such as collecting rainwater for self-sufficiency are seen as competing with established interests. In drought prone regions of the US southwest, precious water rights are considered to be threatened by domestic rainwater capture, even though the water captured would otherwise have been more likely to have evaporated than to have made its way to the fully allocated river:

The Rocky Mountain state uses a convoluted mix of first-come, first-serve water rights, some of which date back to the 1850s, and riparian rights that belong to the owners of land lying adjacent to water. A single person catching rain wouldn’t make a difference to water rights holders, according to Brian Werner of the Northern Colorado Water Conservancy District. But if everyone in Denver captured rain, he says, that would upset the state’s 150-year-old water-allocation system. The Colorado Department of Natural Resources estimates that 86% of water deliveries go to agriculture, which is already stressed by dwindling supplies. And because 19 states and Mexico draw water from rivers that originate in the Colorado Rockies, backyard water harvesting can have widespread implications….

….With water systems across the country already highly or fully appropriated, and with drought aggressively depleting supplies, Aiken predicts that legal battles over who owns the rain won’t go away anytime soon. Old water-allocation systems remain in direct conflict with a growing movement for DIY water conservation, including rainwater collection.

Bulk water transfers are being contemplated in a number of locations, but these are highly controversial as they would have significant environmental impacts. They are so highly capital and energy intensive that limits on those parameters may prevent this kind of development, although it would depend on which critical resource first became limiting in a given location. Both farms and cities, increasingly competing for water in arid regions, could prioritize water over money and energy if the latter remain available.

An illustration of the emerging tension between critical resources can be seen in relation to the water requirements of fracking for unconventional fossil fuels:

The move to tap petroleum-rich shale reserves in some of the country’s driest regions, including Colorado, may be setting up a battle between oil and water. The water is needed for hydraulic fracturing, a process that pumps millions of gallons of sand and water into a well to crack the hard shale and release oil and gas. Nearly half of the 39,294 reported “fracked” wells drilled in the U.S. since 2011 are in regions with high or extreme water stress, according to a report by Ceres, an investor and environmental-advocacy group….

….In Colorado, 86% of the state’s water is used by agriculture. Municipalities and industry use 7.4%. While oil and gas companies have created a small market for water, it hasn’t had a major impact on farms, said Bill Midcap, a spokesman for the Rocky Mountain Farmers Union. “There are cases where companies have bid up water to more than farmers can afford, but it is in a few cases,” Midcap said.

Over-use of water sources and inappropriate or uncontrolled land use has had a substantial impact on water quality in many regions, damaging both surface water sources and also the oceans into which those surface waters emerge. Both urban pollution and agricultural runoff have major impacts. Fertilizers and animals wastes from agricultural land wash into water courses, causing eutrophication – the nutrient enrichment of the water to an extent that allows algal blooms to form. As these decay, the available oxygen is consumed, suffocating the inhabitants of the river and creating dead zones at river mouths. For instance, the one at the mouth of the Mississippi is the size of New Jersey.

Of China’s 23,000 miles of large rivers, 80% are no longer able to support fish and aquatic ecosystems are on the brink of collapse. This will have a profound effect on food security is the world’s most populous country. Of course, food security is hardly the only issue with regard to rampant mis-use of water resources. Water-borne diseases are also going to prove to be strongly limiting factors in many places where more and more people have no access to safe drinking water.

Given the critical nature of water availability for drinking, for food security and for ecosystem health, a global water crisis represents a systemic threat.

Farming and Climate:

Climate change is already proving to be a factor in food insecurity, and is likely to have an increasing impact over time. The effects are complex, interacting with, and exacerbating, other factors, most notably the availability of water. Water will be affected by climate disruption through melting glaciers reducing surface water, increased evaporation, shifting rainfall patterns, droughts, an increasing number of extreme weather events and instances of coastal flooding. Where changes happen relatively quickly, they are much more difficult to adapt to, particularly in places where the local food system is already operating near a number of limits. This could easily lead to conflict:

“Battles over water and food will erupt within the next five to 10 years as a result of climate change,” said World Bank President Jim Yong Kim of the IPCC report. “The water issue is critically related to climate change. People say that carbon is the currency of climate change, water is the teeth. Fights over water and food are going to be the most significant direct impacts of climate change.”

Droughts have have had an increasing impact in recent years, with the shifting of of atmospheric jet stream patterns being a contributing factor. These upper level rivers of air guide low pressure systems and determine the storm track, with its attendant rainfall patterns. Where there are jet stream disturbances, weather patterns can be substantially altered:

Scientists expect the amount of land affected by drought to grow by mid-century—and water resources in affected areas to decline as much as 30%. These changes occur partly because of an expanding atmospheric circulation pattern known as the Hadley Cell—in which warm air in the tropics rises, loses moisture to tropical thunderstorms, and descends in the subtropics as dry air. As jet streams continue to shift to higher latitudes, and storm patterns shift along with them, semi-arid and desert areas are expected to expand.

For instance, the historic drought in California this past winter is a reflection of exactly this dynamic in action:

From November 2013 – January 2014, a remarkably extreme jet stream pattern set up over North America, bringing the infamous “Polar Vortex” of cold air to the Midwest and Eastern U.S., and a “Ridiculously Resilient Ridge” of high pressure over California, which brought the worst winter drought conditions ever recorded to that state. A new study published this week in Geophysical Research Letters, led by Utah State scientist S.-Y. Simon Wang, found that this jet stream pattern was the most extreme on record, and likely could not have grown so extreme without the influence of human-caused global warming. The study concluded, “there is a traceable anthropogenic warming footprint in the enormous intensity of the anomalous ridge during winter 2013-14, the associated drought and its intensity.”

California is a major food producing region, and the lack of water is already reducing production, with on-going effect.

Farmers in the state probably will leave as much as 500,000 acres unplanted, or about 12% of last year’s principal crops, because they won’t have enough water to produce a harvest, which will mean fewer choices and higher prices for consumers, said Mike Wade, executive director of the California Farm Water Coalition, a Sacramento-based group of farmers, water district managers and farm-related businesses. “Any job that’s associated with agriculture is hurting,” Wade said. While some farmers were able to conserve water in years past, they won’t get “any preferential treatment” over uses by municipalities, he said.

Extreme weather around the world is wreaking havoc with farmers and threatening global food production. Dry weather in China turned the world’s second-biggest corn grower into a net importer of the grain in 2010, and ranchers in Texas have yet to recover from a record dry spell three years ago. One in eight people in the world go hungry, some of which can be blamed on drought, according to the United Nations.

Although California is a relatively wealthy place, food security is affecting an increasing number of people as the financial bubble leaves more and more people behind, unable to keep up with a treadmill that keeps running faster and faster. As a result, the drought is impacting food security for the poorest residents:

The effects of California’s drought could soon hit the state’s food banks, which serve 2 million of its poorest residents. Fresh produce accounts for more than half the handouts at Bay Area food banks, but with an estimated minimum of 500,000 acres to be fallowed in California, growers will have fewer fruits and vegetables to donate.

With less local supply, food prices will spike, increasing as much as 34% for a head of lettuce and 18% for tomatoes, according to an Arizona State University study released last week. With fewer fields planted, there could be as many as 20,000 unemployed agricultural workers who will need more food handouts, especially in the Central Valley. And if urban food banks like those in Oakland and San Francisco can’t get produce from the valley, which grows a third of the nation’s fruits and vegetables, their transportation costs to haul in out-of-state produce will soar.

Jet stream fluctuations are now driving the development of dangerous heat conditions further inland, exacerbating persistent drought conditions reminiscent of the 1930s. In fact the US Department of Agriculture has recently issued what is effectively a dust bowl warning:

Meanwhile, US Department of Agriculture officials issued a warning Tuesday that conditions in the US Heartland were rapidly deteriorating along lines last seen during the infamous 1930s Dust Bowl as expectations for the US domestic winter wheat crop again fell after the USDA’s most recent agricultural tour.

Even prior to the extreme early May heatwave emerging over the Central US Sunday, Monday and Tuesday, the% of the US wheat crop in either good or excellent condition had fallen another 2% to 31% late last week. Meanwhile, crops listed as ‘very poor’ rocketed from an already abysmal 34% to 39% over the same period. The net result is that the US wheat crop is in its worst condition since at least 1996, according to findings by Commerzbank analysts.

For Oklahoma, at the epicenter of current agricultural harm and flash heatwaves, only 6% of the state’s entire wheat crop was listed as in either good or excellent condition. Department of Agriculture crop scouts described the Oklahoma situation in, perhaps, the starkest possible terms during their most recent report stating: “Producers in the Panhandle continued to experience high winds … and low moisture conditions similar to the Dust Bowl in the 1930s.” Overall, analysts now expect a US wheat crop of just 762 million bushels, the third lowest in 15 years despite record areas planted.

In other parts of the world, climate-driven changes in rainfall patterns over longer periods could have catastrophic effects where rain is highly seasonal and the food security of very large numbers of people depends on its regularity. For instance, the Indian summer monsoon is critical for farming in a country of over a billion people, but is predicted to be significantly affected in a future of rising temperatures:

Global warming could cause frequent and severe failures of the Indian summer monsoon in the next two centuries, new research suggests. The effects of these unprecedented changes would be extremely detrimental to India’s economy which relies heavily on the monsoon season to bring fresh water to the farmlands. The findings have been published November 6, in IOP Publishing’s journal Environmental Research Letters, by researchers at the Potsdam Institute for Climate Impact Research and Potsdam University….

….The Walker circulation usually brings areas of high pressure to the western Indian Ocean but, in years when El Niño occurs, this pattern gets shifted eastward, bringing high pressure over India and suppressing the monsoon, especially in spring when the monsoon begins to develop. The researchers’ simulations showed that as temperatures increase in the future, the Walker circulation, on average, brings more high pressure over India, even though the occurrence of El Niño doesn’t increase.

Unfortunately, surface water resources in both India and China will also be badly affected by the on-going melting of the Himalayan glaciers, with additive effect:

The world is now facing a climate-driven shrinkage of river-based irrigation water supplies. Mountain glaciers in the Himalayas and on the Tibet-Qinghai Plateau are melting and could soon deprive the major rivers of India and China of the ice melt needed to sustain them during the dry season. In the Ganges, the Yellow, and the Yangtze river basins, where irrigated agriculture depends heavily on rivers, this loss of dry-season flow will shrink harvests.

The world has never faced such a predictably massive threat to food production as that posed by the melting mountain glaciers of Asia. China and India are the world’s leading producers of both wheat and rice — humanity’s food staples. China’s wheat harvest is nearly double that of the United States, which ranks third after India. With rice, these two countries are far and away the leading producers, together accounting for over half of the world harvest.

The Intergovernmental Panel on Climate Change reports that Himalayan glaciers are receding rapidly and that many could melt entirely by 2035. If the giant Gangotri Glacier that supplies 70% of the Ganges flow during the dry season disappears, the Ganges could become a seasonal river, flowing during the rainy season but not during the summer dry season when irrigation water needs are greatest.

The combination of shifting seasonal rainfall, disappearing glacial meltwater, and the falling water tables already discussed adds up to a major predicament for Asian food security going forward:

Asia is home to some of the world’s biggest natural-disaster hot spots, and no other continent is more prone to the cumulative impact of droughts, flooding and large storms. This fragility is compounded by the region’s unmatched population size and density, and its concentration of people living in deltas and other low-lying regions.

The specter of a hotter, drier future for Asia can be seen in the degradation of watersheds, watercourses and other ecosystems, as well as in the shrinking forests and swamps and over-dammed rivers. Such developments undermine the region’s hydrological and climatic stability, fostering a cycle of chronic droughts and flooding. To make matters worse, Asia is likely to bear the brunt — as the report by the U.N. Intergovernmental Panel on Climate Change warns — of the global effects of extreme weather, rising seas and shortages of drinking water. Water wars may only be a matter of time.

Asia’s droughts are becoming longer and more severe, and the availability of water per capita is declining at a rate of 1.6% a year. This is a troubling trend for a region where agriculture alone guzzles 82% of the annual water supply. The rapid spread of irrigation since the 1960s has helped turn a continent once plagued by food shortages and famines into a food exporter. But it has also exacted a heavy toll on the environment and resources.

Higher temperature in many locations are also set to lead to substantially higher rates of evaporation, compounding the problem:

Sure, scientists expect the changing climate to bring on more drought. There’s going to be less rainfall in already arid regions, that’s fairly certain. And that alone would be bad news for denizens of the planet’s dry zones—in some places in North Africa, the American Southwest, India, and the Middle East, water shortages could well become an existential threat to civilization. But new research shows that evaporation may be more of a problem than previously thought: Climate change could dry out up to a third of the planet.

The study, published in the journal Climate Dynamics last month, estimates that climate change will cause reduced rainfall alone to dessicate 12% of the Earth’s land by 2100. But if evaporation is factored in, the study’s authors say that it will “increase the percentage of global land area projected to experience at least moderate drying by the end of the 21st century from 12 to 30%.”

“We know from basic physics that warmer temperatures will help to dry things out,” the study’s lead author, Benjamin Cook, a climate scientist with Columbia University and NASA’s Goddard Institute for Space Studies, said in a statement. “Even if precipitation changes in the future are uncertain, there are good reasons to be concerned about water resources.”

Writing in a 2011 literature review in the science journal Nature, the physicist Joe Romm elaborates on how increased heat and evaporation can lead to a vicious cycle: “Precipitation patterns are expected to shift, expanding the dry subtropics. What precipitation there is will probably come in extreme deluges, resulting in runoff rather than drought alleviation. Warming causes greater evaporation and, once the ground is dry, the Sun’s energy goes into baking the soil, leading to a further increase in air temperature.”

Disappearing soil moisture is likely to be a greater problem than previously thought, and the occasional downpour won’t sate year-round crops. As Columbia University notes, “An increase in evaporative drying means that even regions expected to get more rain, including important wheat, corn, and rice belts in the western United States and southeastern China, will be at risk of drought.”

Australia, already the driest continent, is set to become drier as a result of reduced rainfall and higher evaporation. While the continent  current produces a huge excess of food for export, it’s ability to continue doing so is likely to be substantially compromised in an increasingly arid future:

Australia emerged from a decade-long drought in 2009, which was said to be the worst in the country’s history. The report states the drought was estimated to have caused an 80% reduction in grain production and a 40% reduction in livestock production, and climate models predict that rainfall in southern and eastern Australia will continue to decrease as the century progresses.

Increasing aridity can lead to additional risks, notably the threat of wildfires. California is facing a potentially catastrophic fire season this year following on from its recent drought:

Even before this year’s drought, forest officials were reporting a longer fire season, and more catastrophic mega-fires, in California and other western states. Half of the worst fires in recorded Californian history have occurred since 2002. Climate change and land-use patterns are adding fuel to those fires. Higher temperatures, with recurring and intensifying droughts are drying out landscapes. Pest invasions, such as the pine bark beetle, have killed off stands of trees.

California’s state fire chief, Ken Pimlott, said: “We can’t recall when we have seen this level of fire activity early in this year. “This is usually the time of year when much of the state is greening up. We haven’t even got into the months that historically are the worst in California – late August, September and October – so that’s a big red flag right there.”

Similarly, Australia is facing increased risk of major conflagrations as climatic shifts cause further drying. There have been an increasing number of hot, dry and windy days over the last 30 years, amounting to greatly increased fire risk. The country only recently emerged from the worst drought in its history, which was accompanied by huge fires. Fire has always been a feature of the arid landscape, reflected in the fire tolerance of many trees, but not on the scale seen in recent years. These intense fires are a far bigger threat. They incinerate all before them and remove all the oxygen from the air as they pass by:

The 2009 Black Saturday bushfires in Victoria were also preceded by extreme fire danger conditions: a decade-long drought and a number of record hot years, all compounded by a heatwave in the week prior. The ferocity of these fires was unprecedented, and so severe were they that they broke the record for the Forest Fire Danger Index, and a new category – ”catastrophic” or ”code red” – was added. Worryingly, since 2009, we have experienced more days of ”catastrophic” fire danger, and this number will very likely increase in the future. Fire frequency and intensity is also predicted to increase in already fire-prone areas – areas in which a large proportion of the Australian population lives. We are now also seeing the season of bushfire weather lengthening from October to March, and this will continue to extend in future….

….So, while bushfires are part of the Australian story, more intense and frequent bushfires are part of the Australian climate change story. The current environment in which we experience bushfires is changing. The lengthened bushfire season, and increased frequency and intensity of heatwaves, mean that the overall risk of bushfires in Australia has amplified.

Bushfires are capable of wiping out areas of food production. This is of particular concern for tree crops which take many years to re-establish. Intense fires can also cause soil damage.

Apart from the problem of too little water, climate change can also lead to too much. Flooding can inflict enormous damage on food production, often in areas where food insecurity is already prevalent:

The impact of extreme weather events on food production and consumption are well documented. For example, extreme floods in Pakistan in 2010 destroyed an estimated two million hectares of crops, killed 40% of the livestock in affected areas, and delayed the planting of winter crops, causing the price of basic foods such as rice and wheat to rocket. As a consequence, an estimated eight million people reported eating less food and less nutritious food over an extended period of time.

Increasingly intense storms can bring deluges, but also damaging winds and storm surges high enough to cause serious coastal flooding. For instance, Typhoon Haiyan, which hit the Philippines in late 2013 was the most powerful to make landfall since records began, with winds reaching 310km/h. While one cannot say definitively that any one event is caused by climate change, warmer air and oceans, leading to greater evaporation and therefore more moisture in unstable air masses, would be expected to raise the probability of increasingly intensity of storm events. Storms draw their energy from warm water, and their impact is enhanced by rising sea levels, the disappearance of protective coastal wetlands and coastal over-development.

Storms threaten not only land crops, but also the biologically diverse and highly productive coastal food production relied upon by so many people. Some 95% of marine food production originates from coastal ecosystems, but damage to mangrove forests and coastal wetlands destroys spawning and feeding grounds for fisheries.

Increasing temperature, even in the absence of acute threats such as drought, wildfires and severe storms, are capable of lowering crops yields, particularly for grains:

Warmer temperatures may make many crops grow more quickly, but warmer temperatures could also reduce yields. Crops tend to grow faster in warmer conditions. However, for some crops (such as grains), faster growth reduces the amount of time that seeds have to grow and mature. This can reduce yields (i.e., the amount of crop produced from a given amount of land).

Yield declines are expected to be significant as heat and aridity increase:

“Almost everywhere you see the warming effects have a negative affect on wheat and there is a similar story for corn as well. These are not yet enormous effects but they show clearly that the trends are big enough to be important,” Lobell said. Wheat is the first big staple crop to be affected by climate change, because it is sensitive to heat and is grown around the world, from Pakistan to Russia to Canada. Projections suggest that wheat yields could drop 2% a decade….

….Declines in crop yields will register first in drier and warmer parts of the world but as temperatures rise two, three or four degrees, they will affect everyone. In the more extreme scenarios, heat and water stress could reduce yields by 25% between 2030 and 2049.

In addition, seasonal boundaries, and therefore vegetation zones, are shifting, which is making it far more difficult to produce food in the ways people have traditionally done in a given area:

Paul Roberts has been producing wine in Friendsville in Garrett County for 17 years. Last year, for the first time, his growing season began in March — six weeks earlier than the historical timeline. It was “unprecedented,” he said. For farmers and gardeners, climate change is making the art of coaxing a flower to blossom or fruit to grow precarious and unpredictable….

….A midwinter thaw or an early frost can kill many plants and ruin crops. With increasingly extreme and unpredictable weather due to climate change, plants’ health is at the whim of the weather. An early warm spell triggers fresh growth that is vulnerable to frost, Roberts said. When the growing season starts early, it means more nights for him to worry about the temperature dropping below freezing and damaging his crops….

…The mismatch of pollinators’ and plants’ schedules also threatens plants’ ability to reproduce and produce food. Plants and insects respond to changes in hours of sunlight and temperature. But if a pollinator emerges during an early temperature spike, the plants it pollinates may not be in blossom. Crops rely heavily on insects such as bees, whose populations have struggled in recent years.

Very rapid change can destabilize ecosystems in this way, as climate sensitivities for different species can vary. As prime growing temperatures shift to higher latitudes, they may no longer coincide with suitable soils and nutrients. In addition insect and plant pests may thrive without cold winters to control their populations. Novel pests may also invade with shifting temperature and humidity. Over time, land use patterns are expected to change as ecosystems shift:

Vegetation around the world is on the move, and climate change is the culprit, according to a new analysis of global vegetation shifts led by a University of California, Berkeley, ecologist in collaboration with researchers from the U.S. Department of Agriculture Forest Service….“This is the first global view of observed biome shifts due to climate change,” said the study’s lead author Patrick Gonzalez, a visiting scholar at the Center for Forestry at UC Berkeley’s College of Natural Resources. “It’s not just a case of one or two plant species moving to another area. To change the biome of an ecosystem, a whole suite of plants must change.”…

….Some examples of biome shifts that occurred include woodlands giving way to grasslands in the African Sahel, and shrublands encroaching onto tundra in the Arctic. “The dieback of trees and shrubs in the Sahel leaves less wood for houses and cooking, while the contraction of Arctic tundra reduces habitat for caribou and other wildlife,” said Gonzalez, who has served as a lead author on reports of the Intergovernmental Panel on Climate Change (IPCC). “Globally, vegetation shifts are disrupting ecosystems, reducing habitat for endangered species, and altering the forests that supply water and other services to many people.”

Important shifts with major implication for food security are happening not just on land, but also in the oceans. Climate change is compounding the impact of fish stocks collapsing due to over-fishing. Oceans are warming. This translates into rising sea levels due to thermal expansion, combined with the effect of melting glaciers and ice sheets. Ocean currents are being altered as temperature changes in the atmosphere drive changes in wind patterns and therefore surface currents, and ice melting changes the ocean density profile. As thermohaline circulation in the oceans provides nutrients through upwelling, changes have the potential to cause much damage to marine ecosystems by starving the base of the food chain.

Changes in ocean heat flow have the potential to alter the climate on land as well. For instance, a weaker Gulf Stream would be expected to cause substantial cooling in northern Europe. Cold periods in Europe’s past have been associated with a weaker Gulf Stream, and climate change is predicted to pose a risk this may happen to a greater extent:

“The strength of the Gulf Stream was about 10% weaker during the Little Ice Age,” David Lund, of the Massachusetts Institute of Technology/Woods Hole Oceanographic Institution, told Reuters. He and two colleagues studied sediment cores off Florida and the Bahamas, and found evidence of a weaker flow that may have contributed to the Little Ice Age from about 1200-1850, when Alpine glaciers grew and London’s Thames River froze. “The possibility of abrupt changes in Gulf Stream heat transport is one of the key uncertainties in predictions of climate change for the coming centuries,” the scientists wrote in the journal Nature.

In addition, ocean acidification, as the oceans absorb CO2 from the atmosphere, is also impacting at the base of the food chain, affecting the millions of small organisms increasingly unable to form their carbonate shells:

Ocean acidification is sometimes called “climate change’s equally evil twin,” and for good reason: it’s a significant and harmful consequence of excess carbon dioxide in the atmosphere that we don’t see or feel because its effects are happening underwater. At least one-quarter of the carbon dioxide (CO2) released by burning coal, oil and gas doesn’t stay in the air, but instead dissolves into the ocean. Since the beginning of the industrial era, the ocean has absorbed some 525 billion tons of CO2 from the atmosphere, presently around 22 million tons per day….

….When carbon dioxide dissolves in seawater, the water becomes more acidic and the ocean’s pH (a measure of how acidic or basic the ocean is) drops. Even though the ocean is immense, enough carbon dioxide can have a major impact. In the past 200 years alone, ocean water has become 30% more acidic—faster than any known change in ocean chemistry in the last 50 million years. Scientists formerly didn’t worry about this process because they always assumed that rivers carried enough dissolved chemicals from rocks to the ocean to keep the ocean’s pH stable. (Scientists call this stabilizing effect “buffering.”) But so much carbon dioxide is dissolving into the ocean so quickly that this natural buffering hasn’t been able to keep up, resulting in relatively rapidly dropping pH in surface waters. As those surface layers gradually mix into deep water, the entire ocean is affected….

….Reef-building corals craft their own homes from calcium carbonate, forming complex reefs that house the coral animals themselves and provide habitat for many other organisms. Acidification may limit coral growth by corroding pre-existing coral skeletons while simultaneously slowing the growth of new ones, and the weaker reefs that result will be more vulnerable to erosion. This erosion will come not only from storm waves, but also from animals that drill into or eat coral. By the middle of the century, it’s possible that even otherwise healthy coral reefs will be eroding more quickly than they can rebuild.

Coral bleaching, as a result of environmental stressors such as rising temperature and increasing acidification, is an indicator that highly productive marine ecosystems are under threat. Marine food webs can collapse, with reefs dying and top predators over-fished, leaving the simple organisms such as sea urchins and jellyfish to proliferate unchecked. This is a tragedy in its own right, but will inevitably have knock-on consequences for human food security as well, as so many people either make, or supplement, their living from the sea.

While specific climate impacts are only probabilistically predictable over the longer term, there is every reasons to think that these impacts are going to exacerbate the the problem of food security.

The Bottom Line

Water will be in increasingly short supply as more and more people attempt to provide for themselves in regions where the supply is diminishing and resources are being used at far greater than replacement rate. Climate change is expected to accentuate water shortages in many ways, as well as having destabilizing effects on ecosystems forced to shift latitude or altitude rapidly. The potential for conflict is already increasing, as we saw in part one of this series in relation to food prices. Water and climate change are going to add to the pressure, and this is likely to precipitate some very unfortunate situations.

Our relentless human expansion is running up against hard, non-negotiable limits to food security, which is already threatened in so many places. Our current extractive methods amount to a draw down of natural capital, allowing us to feed (most of) ourselves today, but in highly wasteful ways which are already compromising our ability to feed ourselves and our descendants tomorrow. Those in a position to do so chase short term economic gain at the expense of burning through non-renewable resources in ways which clearly make no sense with respect to any logic other than short term economic benefit. Those at the other end of the financial food chain also prioritize what could, in a sense, be called short term gain, but for them is in fact a matter of short term survival.

The next part of this series will address the equally pressing issues of energy, soil fertility and carrying capacity.