Natl Photo Mailman with “The Flying Merkel” motorcycle 1915
I don’t want to make it a habit to talk about other people’s writing, I don’t find that terribly interesting, but after yesterday’s In The Lie Of The Beholder, please forgive me for doing one more.
This morning, two reports came out of Europe that look pretty bad. Germany’s June manufacturing data fell 3.2% month-on-month (4.1% on exports), and Italy fell back into a recession. So you would think that finance writers try to explain to their readers what is going on, and what the consequences, for them, for the world, could be. CNBC’s Katy Barnato, however, chooses an entirely different path:
Germany Stumbles But Not ‘Canary In The Coal Mine’
Weak manufacturing data for Germany has heightened concerns that the country is losing economic steam, hit by an aggressive Russia …
Not wasting any time to start bashing, and on unfounded grounds: as we’ll see, weak German manufacturing in June had very little, if anything, to do with Russia. But the tone is set.
… and a slow recovery in the euro zone. German manufacturing orders fell 3.2% month-on-month in June – the largest decline since September 2011 – while the annual rate slumped 2.4%. This was worse than expected, despite warnings from the country’s central bank, the Bundesbank, that the economy had stalled in the second quarter. Business confidence data and forward-looking indicators have also suggested a softening trend.
The economy stalled in Q2, April, May, June. That is, before MH17, and before the stronger sanctions. Confidence data and forward-looking indicators suggest a softening trend.
Manufacturing orders from abroad fell 4.1% in June, which the German Economy Ministry linked to sanctions against Russia amid the Ukrainian crisis. It cited “geopolitical developments and risks” as the dominant factor in the “clear reticence in orders”.
That makes little sense. The pre-MH17 sanctions wouldn’t have been strong enough to cut manufacturing orders by anything close to 4.1%. By now I’m thinking the author – and not just her – tries to skirt the real issues. Note that orders both from abroad and from inside Germany fell, the latter a bit less than the former.
“We have had the Malaysian airlines tragedy and the escalation of sanctions since then (June) – so it is reasonable to assume that the geopolitical impairment to business activity may well get worse still before it gets better,” said Derek Halpenny of Bank of Tokyo-Mitsubishi in a research note after the data was released.
The “geopolitical impairment to business activity” may get worse, or it may not, but we were talking about the June manufacturing data. The author tries to lead the reader away from her topic, and towards “something else”. And continues with that:
In July, the European Union and the U.S. announced new penalties against Russia, including barring its biggest state-run banks from raising finance in the West’s capital markets. Europe has also banned selling arms to Russia, along with certain types of oil exploration technologies. German companies including Adidas and Lufthansa have already complained about the impact of Russia sanctions on their business. Russia is also the principle source of energy for Germany, with 31% of its gas imports coming from the country.
We know about the gas imports, but they have absolutely nothing to do with June manufacturing data. The imports were never in danger, and they didn’t get more expensive.
Germany also has the highest exposure to eastern Europe among the larger euro area countries, exporting around 15% of its goods to the region, although exports to Russia account for only 3.3% out of this, according to Societe Generale. “In this sense, Germany is not the canary in the coal mine, unless the sanctions indirectly also hit on eastern Europe more broadly,” said Societe Generale’s Anatoli Annenkov in a note on Tuesday. “This also explains the German government’s decision to stop a defense contract worth €120 million ($160 million) this week, suggesting confidence that sanctions will not hurt the economy materially in the medium-term.”
Now we may be getting somewhere. Demand in eastern Europe may indeed have faltered (unrelated to Russia, sanctions or the plane crash). A $160 million contract is peanuts, and probably elected because of that: full publicity value (defense contract!), with little money involved.
NOTE: Placing Russia in eastern Europe in just plain strange: “exporting around 15% of its goods to the region, although exports to Russia account for only 3.3% out of this.”
Moreover, if the author herself contends that Russia accounts for just 3.3% out of the 15% of German exports that go to the eastern Europe “region”, then what part of the 4.1% OVERALL export manufacturing slump can possibly be blamed on Moscow?
Concerns are rising that Russia will retaliate against the sanctions, however – a prospect that Annenkov and some other economists warned was more problematic. A Russian business newspaper reported on Tuesday that the country was considering banning European airlines flying through Russian airspace, and Moscow has already begun to target iconic Western food brands, including McDonald’s. “In our view, the direct impact from the sanctions on Germany will be rather limited. It is rather the possible reaction from Russia, which could affect German growth in the second half of this year,” warned ING Economist Carsten Brzeski in a note on Wednesday.
Dear author, all this may or may not be, but this is forward looking, and you still haven’t done anything to explain why German June manufacturing data fell.
In addition, Wednesday’s figures showed Germany suffered a 10.4% decline in orders from the euro area in June. “Today’s data shows that downside risks for the German economy do not only come from geopolitical tensions but also from longer-than-expected weak demand from euro zone peers,” said Brzeski.
Hold on, the author merely waited until the last paragraph, after an almost entire article full of innuendo, Russia bashing and confused and confusing dates and data, to reveal to her reader what is really happening. That reader by then already has such a head full of everything suggested – but not true – that the actually relevant information – mostly – escapes him/her. And it’s not as if a 10.4% decline in orders from the euro area in June is some small additional detail either, it’s the only piece of data that explains the falling manufacturing data.
This risk was highlighted on Wednesday by disappointing gross domestic product (GDP) data for Italy. The euro area’s third-biggest economy contracted by 0.2% quarter-on-quarter between April and June. “Italy’s provisional GDP data provide a timely reminder that the euro zone economy is still deep in the mire,” said ADM ISI Chief Economist Stephen Lewis in a note.
And there we go: the author knew all long what is relevant, and what isn’t. She just chose to hide the real data behind a wall of nonsense. The Eurozone is “deep in the mire”, Italy’s in a recession, the demise of Espírito Santo may cost Portugal, as we saw yesterday, 7.6% or so of its GDP, France – the EU’s 2nd economy – is doing very poorly, Greek bank stocks fell off a cliff today, etc. etc.
But apparently one can focus on other issues, especially if one doesn’t know, or chooses not to know nor mention, that any June data were subject to the first, weak, batch of sanctions only. Author, author!
That things can be done differently is shown by, of all places, the Daily Telegraph today. Same topic, same data, same look on life, but a completely different article.
Second Fall In German Factory Orders As Eurozone Flags – But Don’t Blame Russia
After what was dismissed as an irregular drop last month, Germany’s factory orders have seen another surprise fall in June. But the downturn has not been solely down to German exposure to ongoing tensions in Russia and Ukraine. Much of the poor performance is explained by crumbling demand from eurozone peers. Evelyn Herrmann, European economist at BNP Paribas, said that “the weakness was mainly driven by orders from within the eurozone” which fell by 10.4% in June.
Non-eurozone orders were stagnant in that month. Ms Herrmann said that overall the data “was very soft” and raises concerns about “the loss of steam in the German manufacturing sector”. The monthly data series is historically volatile, but Ms Herrmann said that “the bulk of today’s downward surprise is likely to be more than noise”. The powerhouse of the euro area, Germany saw total factory orders plunge by 3.2% in June, their worst performance since September 2011. That follows a 1.6% fall in May, according to data released by the Bundesbank this morning.
In both months, analysts had been expected to see growth in factory orders. Ms Herrmann said that “market consensus and us had expected a dull, but at least positive 1% rebound” in June after May’s weakness. Berenberg’s chief economist Holger Schmieding said that even before recent escalations over Ukraine that eurozone companies “were probably applying some extra-caution in their investment decisions”.
Mr Schmieding said that this “Putin factor”, and the introduction of even soft sanctions “probably raised alarm bells in many boardrooms” as firms prepare for the possibility of escalating tit-for-tat sanctions. Up to May, much of the weakness in second quarter data could be attributed to a particularly mild winter, which saw a downward bias introduced to the second quarter’s seasonally adjusted data. “This effect really should have faded in June,” said Ms Herrmann. Germany’s domestic orders were also weak in June, off by 1.9% after a 2.4% decline in May.
How simple do you want it? Or should I say: how hard was that, Ms Barnato? I know, I know, the Telegraph can’t help itself from bringing up the “Putin factor” either, but at least they start off with the relevant info, instead of hiding it on page 16, next to the obituaries. And only then do they veer off into insinuations and conjecture.
• German Factory Orders Fall On Weak Eurozone Demand, Not Russia (Telegraph)
After what was dismissed as an irregular drop last month, Germany’s factory orders have seen another surprise fall in June. But the downturn has not been solely down to German exposure to ongoing tensions in Russia and Ukraine. Much of the poor performance is explained by crumbling demand from eurozone peers. Evelyn Herrmann, European economist at BNP Paribas, said that “the weakness was mainly driven by orders from within the eurozone” which fell by 10.4pc in June. Non-eurozone orders were stagnant in that month. Ms Herrmann said that overall the data “was very soft” and raises concerns about “the loss of steam in the German manufacturing sector”. The monthly data series is historically volatile, but Ms Herrmann said that “the bulk of today’s downward surprise is likely to be more than noise”. The powerhouse of the euro area, Germany saw total factory orders plunge by 3.2pc in June, their worst performance since September 2011. That follows a 1.6pc fall in May, according to data released by the Bundesbank this morning.
In both months, analysts had been expected to see growth in factory orders. Ms Herrmann said that “market consensus and us had expected a dull, but at least positive 1pc rebound” in June after May’s weakness. Berenberg’s chief economist Holger Schmieding said that even before recent escalations over Ukraine that eurozone companies “were probably applying some extra-caution in their investment decisions”. Mr Schmieding said that this “Putin factor”, and the introduction of even soft sanctions “probably raised alarm bells in many boardrooms” as firms prepare for the possibility of escalating tit-for-tat sanctions. Up to May, much of the weakness in second quarter data could be attributed to a particularly mild winter, which saw a downward bias introduced to the second quarter’s seasonally adjusted data. “This effect really should have faded in June,” said Ms Herrmann. Germany’s domestic orders were also weak in June, off by 1.9pc after a 2.4pc decline in May.
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Not good. Bring on Beppe.
• Italy Q2 GDP Growth Negative, Economy Slides Into Recession (Bloomberg)
Italian gross domestic product unexpectedly dropped in the second quarter, showing the economy is in recession. Gross domestic product fell 0.2% from the previous three months, when it declined 0.1%, the national statistics institute Istat said in a preliminary report in Rome today. That compares with the median forecast of a 0.1% expansion in a Bloomberg survey of 22 economists. From a year earlier, output shrank 0.3%. With Italian youth unemployment above 40% and sovereign debt of about 2 trillion euros ($2.7 trillion), Prime Minister Matteo Renzi is under pressure to quickly turn around the euro region’s third-biggest economy.
Lower-than-expected growth may undermine his plans to bring the country’s deficit-to-GDP ratio to 2.6% this year and start reducing Europe’s second-biggest debt. Renzi has acknowledged that annual GDP growth will probably fall well below the Treasury’s 0.8% forecast, while the government’s debt reduction plans also seem to be yielding disappointing results, Wolfango Piccoli, managing director at Teneo Intelligence in London, wrote in a research note this week. “Under present conditions, and assuming a more realistic growth rate of 0.3%, the cabinet will need to find at least €15 billion to €16 billion to keep its 2014 deficit reduction plans on course,” he said.
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Two linked articles: A Brookings study of aging US business, and Tyler Durden’s conclusions, using the study, about the BLS Birth/Death model:
• 4 Million Fewer Jobs: How The BLS Overestimates US Job Creation (Zero Hedge)
Indeed, and sadly, just as the Fed’s artificial capital misallocation has forced companies to invest hundreds of billions into stock buybacks and other non-growth friendly (but very shareholder friendly) activities, so ZIRP has also shifted the balance of power so far to the side of older, less dynamic, less robut companies that the very premise of statistical inference of “entrepreneurship” via the Birth/Death adjustment is worthless. Or will be once the BLS realizes what the Brookings authors have concluded.
In the meantime, here is the bottom line: since Lehman, or starting in 2009, the Birth/Death adjustment alone has added over 3.5 million jobs. Or rather “jobs”, because these are not actual jobs – these are BLS estimates for how many jobs newly-formed businesses have created based purely on statistical estimations and hypotheses that the US economy in 2014 is as it was in 1960. Which means that the traditional dynamics used behind the Birth and Death adjustment are now merely Dead, and US employment is overestimated by as much as three and a half million jobs!
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• The Other Aging of America: Increasing Dominance of Older Firms (Brookings)
“It is no secret that the population in the United States is aging; the product of a baby boom and increased life expectancy. The numbers validate the obvious: the Census Bureau projects that the share of America’s population accounted for by people aged 65 or over will explode from 13% in 2010 to more than 20% by 2025. The strains this aging of the population will place on the economy and our society are well known. Here we provide evidence of another type of aging that hasn’t received enough attention yet— the aging of American businesses, or the firm structure of the U.S. economy.
Previously, we documented the decline in entrepreneurship and in overall “business dynamism” in the American economy, finding that this has been occurring across a broad range of sectors, firm sizes, states, and metropolitan areas. Business dynamism is the inherently disruptive, yet productivity-enhancing process of firm and worker churn that reallocates capital and labor to more productive uses. Older firms are less dynamic than younger ones, and their increasing share in the American economy coincides with a three-decade decline in business dynamism. In this essay we highlight the flip side of an economy that has become less entrepreneurial: the shift of economic activity into mature firms. While this may not come as a surprise to some, we think the sheer magnitude will. Though more research is needed, we think that an American economy that has become less entrepreneurial and more concentrated in mature firms could support the “slow growth” future that many economists have projected.”
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Well, that makes perfect sense!
• UK Productivity ‘Abysmal’ – But Economy Growing Well (CNBC)
U.K. workers are still far less productive than before the financial crisis of six years ago even though the country’s economic recovery is “entrenched”, a leading think tank said on Tuesday. In a quarterly report, the National Institute of Economic and Social Research (NIESR) said labor productivity—a measure of the amount of goods and services produced by one hour of labor—was still around 4.5% below the pre-crisis peak of 2007. “Productivity performance, therefore, remains abysmal,” said NIESR in the report, which was published on Tuesday. The Institute forecast that pre-crisis productivity levels would be regained, but not before the latter half of 2017. “Given the continuing puzzle about the causes of poor productivity performance, large uncertainties remain,” it said. Labor productivity growth in the U.K. has been particularly weak since the start of the global financial crisis. Reasons remain unclear, and economists, including those at the Bank of England, refer to the “productivity puzzle”.
Despite the “puzzle”, U.K. economic growth has been 0.5% or more per quarter for the last six consecutive quarters—nearly twice the rate seen between 2010 and 2012. The labor market continues to improve, with total employment now more than 4% higher than it was at the start of 2008. “The fall in labor productivity during the recent recession has been larger than in any other post-war recession and the recovery has been more protracted than previous experiences,” said the Bank of England its second quarter bulletin. “Although measurement issues may explain some part of the shortfall in productivity relative to a continuation of its pre-crisis trend, a large part still remains unexplained.” The Bank hypothesized that trend growth in productivity had started falling before the crisis, perhaps due to slowing North Sea extraction output, which the U.K. relies on for much of its oil and gas.
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He’s right. The UK has much more to fear from Boris himself.
• London Mayor Says UK Has Nothing to Fear From EU Exit (Bloomberg)
London Mayor Boris Johnson said the U.K. could thrive outside the European Union and should be prepared to leave the bloc if Prime Minister David Cameron fails to win sufficient changes to the way it functions. The best option for Britain, where Cameron has pledged a referendum on membership by the end of 2017, would be to stay within a “reformed” EU, Johnson said today, according to extracts of a speech e-mailed by his office, and the U.K. should be able to achieve that. “But if we can’t, then we have nothing to be afraid of in going for an alternative future,” Johnson said at Bloomberg’s European headquarters in London. “It is crucial to understand that if we can’t get that reform, then the second option is also attractive.”
London’s economy is set to grow by an average 2.75% a year in a reformed EU or by 2.5% in a managed exit with the U.K. remaining open to the bloc and the rest of the world, according to a report by Johnson’s economic adviser, Gerard Lyons, published today entitled “The Europe Report: a Win-Win Situation.” That compared with 1.9% under the status quo or 1.4% growth if Britain follows inward-looking policies after leaving the EU. Johnson, who is among the favorites to succeed Cameron as leader of the Conservative Party, is setting out his position on an issue that has dominated and divided the party for 30 years. The party needs to balance the views of voters — who have shifted support to the anti-EU U.K. Independence Party, which campaigns to leave the bloc — with those of business leaders, who want Britain to remain inside the 28-nation EU.
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Will Beijing let them default?
• China Default Storm Seen as $1 Billion of Private Bonds Mature (Bloomberg)
The small companies that dominate China’s private market for high-yield bonds face rising default risks as their debt obligations soar to a record and economic growth slows to the lowest in more than two decades. Privately issued notes totaling 6.2 billion yuan ($1 billion) come due next quarter, the most since authorities first allowed such offerings from small- to medium-sized borrowers in 2012, according to China Merchants Securities Co. The guarantor of debentures sold by Xuzhou Zhongsen Tonghao New Board Co. stepped in to help after the building-materials producer based in the eastern province of Jiangsu missed a coupon payment in March. Three other issuers have also faced “payment crises” this year, China Merchants said.
Premier Li Keqiang has sought to expand financing for small companies, which account for 70% of China’s economy, as expansion is set to cool to the slowest since 1990 at 7.4% this year, according to a Bloomberg survey. The nation’s bond clearing house last month suspended valuation of privately placed securities sold by an auto-parts exporter after it failed to clarify media reports regarding a possible default. A polyester maker with similar notes had a bankruptcy application accepted in March. “The current risks exposed in the private-bond market are probably a prelude to a storm,” said Sun Binbin, a Shanghai-based bond analyst at China Merchants. “There’s been improvement in only some sectors of the economy, not in all.”
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Internal boom and bust.
• China’s Offshore “Dim Sum” Debt Market Not Yet A Global Play (Reuters)
China’s offshore bond market looks to be booming with record issuance and strong demand, but rather than the global market that was hoped for it has been a speculative play on the yuan dominated by Chinese issuers and investors. The “dim sum” bond market has been largely shunned by big U.S. and European institutional investors, and worries about the lack of information on issuers, debt structures and rights in case of a default mean that is unlikely to change soon. Despite record half-yearly issuance of 359 billion yuan ($58 billion) in the first six months of 2014, the perception that it is an insider’s market has hampered its global development and intended role in helping internationalize the yuan.
“You’ve got to be a fairly specialist investor to be interested in these bonds if you are in Europe because a lot of issuers are below investment grade, an area we wouldn’t seek to invest in,” said Andrew Main, a managing director at London-based Stratton Street with assets of $1.55 billion at end May. A slowdown in the economy and volatility in the yuan has tempered enthusiasm for Chinese debt among foreigners. And with Beijing starting to allow companies to default on debts instead of bailing them out, as part of its push to introduce more market discipline, investors have to better assess their risks.
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” … under the assumption that they stood to get annual returns in excess of 10%”.
• Banco Espirito Santo Loan Mystery Confronts Derivatives Buyers (Bloomberg)
Some investors are waking up from a stimulus-induced malaise and realizing they don’t exactly know what risk they’ve assumed. There’s a prime example in buyers of credit-linked notes created by Banco Espirito Santo SA last year. Investors who bought the securities agreed to protect against losses on a €2 billion ($2.68 billion) pool of commercial loans made by the Portuguese bank, according to marketing documents reviewed by Bloomberg News. That was under the assumption that they stood to get annual returns in excess of 10%. Now that Banco Espirito Santo’s finances are unraveling, investors in the Lusitano Synthetic II Ltd. deal are understandably getting nervous about the specific loans they’re guaranteeing. They asked for details last month, which the issuer is declining to give them, according to a July 23 notice on the Cayman Islands Stock Exchange.
The Lisbon-based lender’s sudden fall is a rude awakening for bondholders who’ve generally been rewarded for delving into the riskiest, most-illiquid securities for the past five years. The easy-money policies of central banks across the globe have propped up debt prices, suppressing borrowing costs so much that investors have piled on more and more risk to meet their return targets. Credit-linked notes work like traditional bonds with interest payments, except the principal gets wiped out when losses on the underlying debt accumulate enough. Such deals, which use credit-default swaps, have been used as way for banks to raise cash while offloading some of the risk tied to the loans they’ve made. In Banco Espirito Santo’s case, investors who bought the €184 million of synthetic securities agreed to absorb losses on thousands of loans, according to the marketing documents. The notes were sold with expected returns of more than 10%….
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• Hedge Funds Betting Against Banco Espírito Santo in Line for Big Gains (WSJ)
A handful of hedge funds may have made tens of millions of dollars on the collapse of troubled Portuguese lender Banco Espírito Santo. One of the biggest funds to bet the bank’s shares would fall was Marshall Wace LLP, which initially made the wager on May 15, according to a filing with the Portuguese regulator. The shares were then trading at around 99 euro cents. The London-based hedge fund would have made a profit of around €27 million ($36 million) from the position if it closed the position at 12 cents, the price when the shares were suspended. The firm, which manages $18 billion in assets and is headed by founders Paul Marshall and Ian Wace, increased its position from 0.51% of the bank’s share capital to 0.85% by mid-June, before slowly reducing it to 0.51% as of July 30. Trading in Espírito Santo’s shares was finally halted from trading last Friday at 12 euro cents.
The fund’s gains are based on the opening share prices on the days when it traded the shares and don’t allow for borrowing or brokerage costs. It couldn’t be determined at precisely what price Marshall Wace opened the position, nor whether it actually closed it. In a short sale, an investor borrows a stock and sells it in the hopes the price will fall. If the bet works out, the investor can buy the shares at a lower price, repay the loan and pocket the difference. On Sunday the Portuguese central bank unveiled plans to break up the troubled bank into a bad bank, which will be wound down, and a good bank, and to pump in billions of euros of state money. Another hedge fund that may have benefited is TT International, which put on a short position as far back as July last year and increased it in June this year, according to filings.
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Let’s see how bad we can make it.
• How Student Loans Are Shaping US Mortgage Approvals (WSJ)
The loan-application data show clear signs of growing student-debt burdens. Through the first half of this year, applicants with student debt carried more than $35,000 in student loans. But there is very little difference in total debt burdens between the funded and not-funded pools. A key metric that mortgage underwriters use to evaluate a borrowers’ ability to repay a loan is their total debt-to-income ratio, and it’s this metric that can make student loans a big negative in the loan approval process. New rules that took effect this year give lenders greater legal liability if they don’t properly verify a borrower’s ability to repay a mortgage. Those rules give a greater legal shield to lenders if they verify a borrower’s total debt-to-income ratio is no greater than 43%, which means borrowers with total debt that exceeds 43% of their income could put them at greater risk of being denied.
The LoanDepot data shows little difference in average debt-to-income ratios or credit scores for loans that were and weren’t funded. But it does show that, so far this year, loan applications that weren’t funded had almost $500 in monthly student loan payments, compared to around $300 in monthly payments on applications that were approved. “Between the approved universe and the denied universe, the [borrower’s] credit is the same. The fundamental difference is a few hundred dollars in student loan debt that pushed the debt-to-income above the approved threshold,” said Anthony Hsieh, the chief executive of LoanDepot.com. These numbers mirror the concerns of some housing analysts, who say that young adults often don’t realize how signing up for thousands of dollars of student debt could hurt their ability to borrow later.
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• US Fails To Report $619 Billion In Spending On Transparency Site (WaPo)
The White House budget office launched USASpending.gov in 2007 to track federal spending after scores of lawmakers, including then-Sen. Barack Obama, successfully pushed through a bipartisan bill to ensure greater transparency with the funding. At last check, less than 8% of the site’s spending information was accurate, and federal agencies had failed to report nearly $620 billion in grants, loans and other forms of assistance awards, according to a recent report from Congress’s nonpartisan Government Accountability Office. The Federal Funding Accountability and Transparency Act of 2006, sponsored by Sen. Tom Coburn (R-Okla.) and signed into law by President George W. Bush, required the Office of Management and Budget to set up a Web site with data on federal awards and develop guidance on reporting requirements. President Obama later set a goal of 100% accuracy by the end of 2011.
But the legislation is not working as well as lawmakers and the administration had hoped. The GAO said a review of the 2012 data found “significant underreporting of awards and few that contained information that was fully consistent with the information in agency records.” The findings drew criticism from members of the Senate Homeland Security and Government Affairs Committee, including Coburn, the panel’s ranking Republican. Coburn said the reporting problems hinder Congress’s ability to determine the pros and cons of spending decisions.”It is disappointing that the federal bureaucracy is so vast and unaccountable that the administration cannot enact the president’s signature accomplishment as a senator requiring the government to disclose how and where it spends money,” he said in a statement on Monday.
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Too big to fail lives!
• U.S. Tells Big Banks to Rewrite ‘Living Will’ Bankruptcy Plans (WSJ)
In a sweeping rebuke to Wall Street, U.S. regulators said 11 of the nation’s biggest banks haven’t demonstrated they can collapse without causing damaging economic repercussions and ordered them to try again. The Federal Reserve and the Federal Deposit Insurance Corp. said bankruptcy plans submitted by big banks make “unrealistic or inadequately supported” assumptions and “fail to make, or even to identify, the kinds of changes in firm structure and practices that would be necessary to enhance the prospects for” an orderly failure. The regulators raised the specter of slapping banks with tougher rules on capital and leverage or restrictions on growth—and even eventually forcibly breaking them up—should they fail to make significant progress to address the shortcomings by July 2015.
The findings applied to 11 banks with assets greater than $250 billion, including Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley, State Street, and the U.S. units of Barclays, Credit Suisse, Deutsche Bank, and UBS. The firms all received letters detailing shortcomings in their so-called “living wills.” “Despite the thousands of pages of material these firms submitted, the plans provide no credible or clear path through bankruptcy that doesn’t require unrealistic assumptions and direct or indirect public support,” said Thomas Hoenig, the No. 2 official at the FDIC, in a statement. Representatives of banks declined to comment or had no immediate comment Tuesday.
The Financial Services Forum, a big bank trade group, said banks are safer now than before the crisis and “the industry remains strongly committed to ensuring the financial system is less complex, safe, transparent, accountable and capable of fulfilling its role of promoting economic growth and weathering substantial stress scenarios without taxpayer dollars being at risk.” The rebuke is almost certain to fuel the debate over whether some firms remain “too big to fail” – or so big their collapse would make government support necessary to avert broad economic damage. It will likely feed the appetite of some lawmakers to push for more aggressive action to force structural changes at the biggest banks.
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• Standard Chartered Faces New US Legal Issues as Profit Plunges (CNBC)
Standard Chartered is facing another substantial fine from U.S. regulators as it announced its first-half profits fell by 20% from the same period in 2013, to $3.27 billion. Standard Chartered confirmed “certain issues have been identified with respect to the group’s post-transaction surveillance system” in a statement. The issues are likely to result in a nine-figure fine from the New York State Department of Financial Services, led by Benjamin M.Lawsky, who previously tackled the bank over sanctions violations, according to reports. Standard Chartered said that its focus on the conduct of its employees had intensified. These particular issues are with its money-laundering control process, which is separate from its sanctions screening.
Part of the penalty for the problem is likely to include an extension of the term of the monitor appointed to oversee the bank in the light of its earlier fine. Standard Chartered flagged its profits fall in June, after falling revenues in its business, which is around three quarters emerging markets-focused. The bank paid $340 million to the regulator in 2012, over transactions linked to Iran. Chief executive Peter Sands, the longest-serving British bank chief executive, has faced question marks over his future following the bank’s recent troubles. Its board said just a couple of weeks ago that “it is united in its support” for him and chairman John Peace.
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• Fear And Loathing On The Marketing Trail (Ben Hunt)
For all of us that rely directly or indirectly on healthy, growing public markets for our livelihood, it’s high time to recognize that these markets are neither healthy nor growing. They are hollow and declining. A 50-year bull market in the market itself ended with policy responses to the Great Recession, and we are now in the 5th year of a bear market in the market itself, a bear market that shows no sign of abating but rather of accelerating. I’m calling this an existential risk, because it is, but it’s also a phenomenal opportunity for any investment firm that can make an emotional, animal-spirited connection with public market investors. The capacity for faith is there. Investors will absolutely come back to public markets if they’re given a rationale that works not only for the head but also for the gut, if they’re given a philosophy that is not only smart but also something they can believe in.
What is that investment philosophy that can inspire as well as inform? I don’t know where it ends, but I know where it starts. It starts with what Tennyson called honest doubt. It starts with what Confucius described as his first principles – faithfulness and sincerity. There’s absolutely nothing sincere about the public sphere today, in its politics or its economics, and as a result we have lost faith in our public institutions, including public markets. It’s not the first time in the history of the Western world this has happened … the last time was in the 1930’s … and over time, perhaps a very long period of time, a modicum of faith will return. This, too, shall pass. But in the meantime, investment firms immersed in the public markets had better start adapting to these new political realities.
How? By embracing honest doubt and rejecting the didactic, crystal ball-driven approach to asset allocation and broad portfolio construction that is so rampant in our industry. By embracing sincerity and rejecting the hard sell of “alpha”, as if market-beating returns in this politically-driven investment environment were just a matter of listening to this analyst’s opinion rather than that analyst’s opinion. Adaptation to difficult times is never easy, and the implications of embracing honest doubt and sincerity within an investment philosophy will start to seem rather uncomfortable and weird to most investment firms pretty quickly. But as Hunter S. Thompson said in his most famous line, when the going gets weird, the weird turn pro.
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• Moscow May Force European Airlines To Fly Around Russia (Reuters)
Russian Prime Minister Dmitry Medvedev threatened on Tuesday to retaliate for the grounding of a subsidiary of national airline Aeroflot because of EU sanctions, with one newspaper reporting that European flights to Asia over Siberia could be banned. Low-cost carrier Dobrolyot, operated by Aeroflot, suspended all flights last week after its airline leasing agreement was cancelled under European Union sanctions because it flies to Crimea, a region Russia annexed from Ukraine in March. “We should discuss possible retaliation,” Medvedev said at a meeting with the Russian transport minister and a deputy chief executive of Aeroflot. The business daily Vedomosti reported that Russia may restrict or ban European airlines from flying over Siberia on Asian routes, a move that would impose costs on European carriers by making flights take longer and require more fuel.
Vedomosti quoted unnamed sources as saying the foreign and transport ministries were discussing the action, which would put European carriers at a disadvantage to Asian rivals but would also cost Russia money it collects in overflight fees. Shares in Aeroflot – which according to Vedomosti gets around $300 million a year in fees paid by foreign airlines flying over Siberia – tumbled after the report, closing down 5.9% compared with a 1.4% drop on the broad index. At the height of the Cold War, most Western airlines were barred from flying through Russian airspace to Asian cities, and instead had to operate via the Gulf or the U.S. airport of Anchorage, Alaska on the polar route. European carriers now fly over Siberia on their rapidly growing routes to countries such as China, Japan and South Korea, paying the fees which have been subject to a long dispute between Brussels and Moscow.
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And that’s just in one county ….
• Dozens Of Suburban Police And Fire Pension Funds Drying Up (SunTimes)
There are 217 police and fire pension funds in suburban Cook County. The taxpayer-supported systems, with collective assets of nearly $5 billion, are intended to provide public safety workers and their families with stable retirement incomes. But a Better Government Association analysis found that dozens of local police and fire pension funds are in financial peril, putting retirement incomes at risk – as well as the fiscal health of numerous municipalities. Rescuing the troubled funds may require tax hikes, service cuts or both, say experts. Already, some public safety agencies are looking to privatize or merge with neighboring departments in an effort to cut personnel and ease future pension payouts. Whatever the method, taxpayers can expect to bear a heavier cost burden because of the severe local pension shortfall. In all, unfunded liabilities for police and fire pension funds throughout suburban Cook County total $3.3 billion, according to a BGA analysis of the most recent municipal pension fund data.
Fifty-eight or roughly a quarter of the systems were less than half-funded, meaning there was fewer than 50 cents for every dollar owed in long-term benefits, according to the analysis. Generally, a minimum 80% funding is considered healthy. A state law approved in 2010 requires such pension plans to be 90% funded – by 2040. At the current low funding levels the systems aren’t cushioned against investment losses, and may have to liquidate assets to pay benefits, raising the risk that some systems could run dry. In such a scenario, taxpayers could be responsible for any shortfall. If and how municipalities and pension funds can declare bankruptcy and get out from under financial obligations is unchartered terrain. “The gravity of the situation goes from grave concern to outright terror,” says Roger Huebner, deputy executive director of the Illinois Municipal League. “Some of the funds are in such bad shape I don’t know how they recover.”
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Brown coal, lignite, we’ll be burning lots of the stuff. The real irony is that Germany needs it to offset the dangers to the grid caused by wind and solar.
• Dirtiest Fuel Threatens 700-Year-Old Villages in Europe (Bloomberg)
Europe’s energy dilemma — burning the dirtiest coal while meeting pollution targets – is crystallizing in opposition to a plan that would uproot 700-year-old villages and dig two pits the size of Manhattan. PGE SA and Vattenfall AB, the Warsaw- and Stockholm-based utilities, want to tap Europe’s richest lignite deposit, along the German-Polish border. They’re opposed by communities already suffering sporadic sand storms and crumbling roads, in an area where the 12 kilometer (7.5 miles) long Jaenschwalde mine has dominated the landscape for three decades. Locals will form an 8-kilometer cross-border human chain on Aug. 23 in protest.
The battle reflects the divide across Europe. Polish Prime Minister Donald Tusk sees coal, used to generate 90% of his nation’s power, as a way for Europe to depend less on Russian natural gas. German Chancellor Angela Merkel’s government calls lignite “the black gold” that will help smooth out fluctuations from wind and solar generation. The European Union, to which both belong, wants tighter pollution rules that make coal pricier to burn. “We feel like Asterix and Obelix fighting the Roman Empire,” said Andreas Stahlberg, an engineer analyzing the impact of the expansion for the German municipality of Schenkendoebern, referring to the French comic strip characters resisting powerful invaders. “Since Poles are dealing with the same problem and the mines will be so close, we think this is an international issue,” he said in an interview in Gubin, Poland.
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They have reason to be scared.
• Greek Bank Shares Drop Sharply On ECB Stress Test Fears (RT)
Greek bank shares fell sharply on Wednesday, leading the broader Greek equities market lower, with traders citing jitters over the European Central Bank’s region-wide stress test and weakness in other European markets. The Athens bourse’s banking index was down 8.2% at 134.82 points at 0851 GMT with shares in Alpha Bank shedding 10% and National Bank losing 5.7%.
“There are worries banks may need additional capital after the ECB’s stress test in November and there is also nervousness because of resurging geopolitical tension and weak European bourses,” said Theodore Krintas, head of wealth management at Attica Bank. Greece’s top four banks, which have already been through two rounds of recapitalisation, will be part of the ECB’s stress region-wide health check later this year. “The steep drop is hitting stop losses in relatively thin trading volume but I think the selling pressure is overdone,” said fund manager Costantine Morianos, head of AssetWise asset management.
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• Bodies Dumped In Streets As West Africa Struggles To Curb Ebola (Reuters)
Relatives of Ebola victims in Liberia defied government orders and dumped infected bodies in the streets as West African governments struggled to enforce tough measures to curb an outbreak of the virus that has killed 887 people. In Nigeria, which recorded its first death from Ebola in late July, authorities in Lagos said eight people who came in contact with the deceased U.S. citizen Patrick Sawyer were showing signs of the deadly disease. The outbreak was detected in March in the remote forest regions of Guinea, where the death toll is rising. In neighboring Sierra Leone and Liberia, where the outbreak is now spreading fastest, authorities deployed troops to quarantine the border areas where 70% of cases have been detected. Those three countries announced a raft of tough measures last week to contain the disease, shutting schools and imposing quarantines on victim’s homes, amid fears the incurable virus would overrun healthcare systems in one of the world’s poorest regions.
In Liberia’s ramshackle ocean-front capital Monrovia, still scarred by a 1989-2003 civil war, relatives of Ebola victims were dragging bodies onto the dirt streets rather than face quarantine, officials said. Information Minister Lewis Brown said some people may be alarmed by regulations imposing the decontamination of victims’ homes and the tracking of their friends and relatives. With less than half of those infected surviving the disease, many Africans regard Ebola isolation wards as death traps. “They are therefore removing the bodies from their homes and are putting them out in the street. They’re exposing themselves to the risk of being contaminated,” Brown told Reuters. “We’re asking people to please leave the bodies in their homes and we’ll pick them up.”
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