Aug 022014
 August 2, 2014  Posted by at 2:58 pm Finance Tagged with: , , , , ,  

Harris & Ewing The Fall of Washington: Smokestacks on the Mall Sep 17 1935

And now for something completely different. Occasionally, I go through analytical stats for The Automatic Earth, to see who links to us. A few days ago, there were a bunch of links to my July 27 article US and EU Lose Major Energy Battle in Ukraine (I find it hard to believe nobody else has jumped on the ‘heart’ of that article: the Ukraine parliament voting down the sale of Naftogaz to western interests; if that’s not big enough for you, what is?).

The links were from a site that I think is Ukrainian, though I don’t know which ‘side’ in Ukraine, since I can’t read either the Cyrillic or the Roman contents. I do have an idea, though, of the ‘side’: in the same thread as the link to my article, someone posted an article from May 2, 1998, written by Thomas Friedman (or, as he calls him: Tomasa Fridmana) for the New York Times. The article is an interview with George Kennan, with Friedman comments.

I don’t want to waste words on Friedman, we all -should – know – of – his love of globalization and a few other hobby horses that would just lead me too far off track at this point. Suffice it to say, Tomasa thinks ‘The World is Flat’, and I totally believe his personal world indeed is. In my view, Glenn Greenwald’s description of Friedman a few years ago is pretty much all you need to know (see Wikipedia for sources):

“His status among American elites is the single most potent fact for understanding the nation’s imperial decline.”

George Kennan deserves a few more words. Once described by Foreign Policy as “the most influential diplomat of the 20th century”, Kennan was instrumental in defining US post WWII policy with regards to Russia. Born in 1904, he joined the US State Dept. in 1926(!), first began working in the US embassy in Moscow in 1933, and became America’s no 1. expert on Russia, though there were always, throughout his career, many voices who contested this, simple because they didn’t like what he said.

Kennan was instrumental in establishing the principle of “containment”, the Truman Doctrine and the Marshall Plan. In 1947, he anonymously, as “X”, wrote “The Sources of Soviet Conduct” in Foreign Affairs magazine, in which he said the Soviet regime was inherently expansionist and its influence had to be “contained”.

But while according to Kennan, this containment should be primarily political and economic, others ran away with his ideas and turned them into the military principles that started the Cold War. Kennan was now famous, but because he strongly opposed this ‘erosion’ of his ideas in the late 1940s, his career became a bumpy roller coaster. He ran in and out of favor with various administrations.

He did not at all like what he saw inside Russia between 1933 and the end of WWII, but he thought the subsequent arms race was preposterous, since Russia had lost up to 30 million people in the war and was flat on its back in 1945. Later, he said: “the general effect of Cold War extremism was to delay rather than hasten the great change that overtook the Soviet Union”.

He didn’t like the establishment of NATO (though he played a role in it), and later turned against Clinton and W. for the invasions of Kosovo and Iraq. And he was fiercely opposed to NATO expansion after 1990, which he labeled a “strategic blunder of potentially epic proportions”. He summed up his views this way:

Anyone who has ever studied the history of American diplomacy, especially military diplomacy, knows that you might start in a war with certain things on your mind as a purpose of what you are doing, but in the end, you found yourself fighting for entirely different things that you had never thought of before …

In other words, war has a momentum of its own and it carries you away from all thoughtful intentions when you get into it. Today, if we went into Iraq, like the president would like us to do, you know where you begin. You never know where you are going to end.

Kennan died in 2005, 101 years old. What a life. And what a man.

Here’s Friedman’s 1998 article on him. I’m sure you’ll see why I wanted to bring it up.

Foreign Affairs; Now a Word From X

His voice is a bit frail now, but the mind, even at age 94, is as sharp as ever. So when I reached George Kennan by phone to get his reaction to the Senate’s ratification of NATO expansion it was no surprise to find that the man who was the architect of America’s successful containment of the Soviet Union and one of the great American statesmen of the 20th century was ready with an answer.

”I think it is the beginning of a new cold war,” said Mr. Kennan from his Princeton home. ”I think the Russians will gradually react quite adversely and it will affect their policies. I think it is a tragic mistake. There was no reason for this whatsoever. No one was threatening anybody else.

This expansion would make the Founding Fathers of this country turn over in their graves. We have signed up to protect a whole series of countries, even though we have neither the resources nor the intention to do so in any serious way. [NATO expansion] was simply a light-hearted action by a Senate that has no real interest in foreign affairs.”

”What bothers me is how superficial and ill informed the whole Senate debate was,” added Mr. Kennan, who was present at the creation of NATO and whose anonymous 1947 article in the journal Foreign Affairs, signed ”X,” defined America’s cold-war containment policy for 40 years.

”I was particularly bothered by the references to Russia as a country dying to attack Western Europe. Don’t people understand?

Our differences in the cold war were with the Soviet Communist regime. And now we are turning our backs on the very people who mounted the greatest bloodless revolution in history to remove that Soviet regime.

”And Russia’s democracy is as far advanced, if not farther, as any of these countries we’ve just signed up to defend from Russia,” said Mr. Kennan, who joined the State Department in 1926 and was U.S. Ambassador to Moscow in 1952. ”It shows so little understanding of Russian history and Soviet history.

Of course there is going to be a bad reaction from Russia, and then [the NATO expanders] will say that we always told you that is how the Russians are – but this is just wrong.”

One only wonders what future historians will say. If we are lucky they will say that NATO expansion to Poland, Hungary and the Czech Republic simply didn’t matter, because the vacuum it was supposed to fill had already been filled, only the Clinton team couldn’t see it.

They will say that the forces of globalization integrating Europe, coupled with the new arms control agreements, proved to be so powerful that Russia, despite NATO expansion, moved ahead with democratization and Westernization, and was gradually drawn into a loosely unified Europe. If we are unlucky they will say, as Mr. Kennan predicts, that NATO expansion set up a situation in which NATO now has to either expand all the way to Russia’s border, triggering a new cold war, or stop expanding after these three new countries and create a new dividing line through Europe.

But there is one thing future historians will surely remark upon, and that is the utter poverty of imagination that characterized U.S. foreign policy in the late 1990’s. They will note that one of the seminal events of this century took place between 1989 and 1992 — the collapse of the Soviet Empire, which had the capability, imperial intentions and ideology to truly threaten the entire free world. Thanks to Western resolve and the courage of Russian democrats, that Soviet Empire collapsed without a shot, spawning a democratic Russia, setting free the former Soviet republics and leading to unprecedented arms control agreements with the U.S.

And what was America’s response? It was to expand the NATO cold-war alliance against Russia and bring it closer to Russia’s borders.

Yes, tell your children, and your children’s children, that you lived in the age of Bill Clinton and William Cohen, the age of Madeleine Albright and Sandy Berger, the age of Trent Lott and Joe Lieberman, and you too were present at the creation of the post-cold-war order, when these foreign policy Titans put their heads together and produced . . . a mouse.

We are in the age of midgets. The only good news is that we got here in one piece because there was another age – one of great statesmen who had both imagination and courage.

As he said goodbye to me on the phone, Mr. Kennan added just one more thing: ”This has been my life, and it pains me to see it so screwed up in the end.”

One last thing. I’m pretty sure I know what George Kennan would have thought of the role the US plays in Ukraine. But I’m not sure about Tom Friedman.

S&P 500 Suffers Largest Weekly Loss In 2 Years (MarketWatch)

U.S. stocks on Friday built on the week’s losses, leaving the S&P 500 with its biggest weekly drop in two years. Friday’s flurry of economic data only briefly lifted the stock market. Instead, Thursday’s selloff, sparked in part by signs of rising wages, continued as investors remained fearful that the Federal Reserve might raise interest rates sooner than expected. The S&P 500 fell 5.52 points, or 0.3% to end at 1,925.15, though it finished off its session low. The benchmark endured a weekly loss of 2.7%, its largest percentage drop since the week ended June 1, 2012. It’s now off 3.2% from its July 24 record close.

The Dow dropped 69.93 points, or 0.4%, to finish at 16,493.37 on Friday. The blue-chip gauge recorded a weekly tumble of 2.8%, its biggest decline since the week ended Jan. 24. Friday’s generally positive economic data keeps pressure on the Federal Reserve to reduce its stimulus measures that have helped stock prices, said Colin Cieszynski, chief market strategist at CMC Markets. “Good news for the economy is bad news for the market, because it means they’ll have to take way the liquidity that’s boosted stocks eventually,” Cieszynski told MarketWatch.

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Ambrose is on a prolific roll.

World Is At Inflexion Point As Fed Tightening Looms (AEP)

The Third Taper Tantrum has been postponed, perhaps. It has not been averted. The US Federal Reserve is preparing to tighten. Dallas Fed chief Richard Fisher said today that rates may rise early next year: “we are closer to lift-off than the market assumed we were, sometime late in 2015. I believe we moved that forward significantly,” he told CNBC. Nomura, Morgan Stanley and HSBC all think the dollar is poised for a long secular rally. This will expose which EMU crisis states have really recovered, and which emerging markets have genuinely progressed beyond boom-bust credit cycles. This is the most important development in global finance today. All else depends on it, including China’s post-bubble denouement, and Russia’s hopes of muddling through under sanctions. A powerful dollar rally threatens to turn the world upside down.

[..] When the Fed finally decides that it cannot create more jobs without stoking inflation – when the Phillips Curve trade-off turns malign – it will not show much mercy for markets. The Board is longing to prove that it is not a captive of Wall Street. It may well be especially tough to demonstrate central banking purity. Nor does the Fed pay as much attention as it should to the interlocking forces of world finance. It has a closed economy macro-model. The IMF is afraid that it may tighten stubbornly into an emerging market storm, precipitating a brutal dollar squeeze. Data from the Bank for International Settlements shows that 70% of global cross-border lending is still in dollars, whether or not the banks are American. Emerging markets have raised a further $2 trillion on the global bond markets in foreign currencies – mostly dollars – lately at a real rate of just 1%.

Dollar loans to Chinese companies through Hong Kong may have reached $1.2 trillion, a carry trade to match the subprime and Alt-A bubble in the US before Lehman blew up. It is this that will be tested. As the BIS has been warning, global debt ratios are at record levels both in emerging markets (175% of GDP) and in the rich countries (275%). They are therefore more sensitive than ever before to any rise in borrowing costs. Suddenly the world we have all know for the last five years is swivelling into reverse. The US will soon stop leaking emergency liquidity into the world economy, stoking asset bubbles everywhere.

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US car sales? What a cheatin’ mess. Subprime loans, uber-creative accounting, and then a crash.

Who Really Bought a Car in July? (Bloomberg)

July was another hot month for car sales, with today’s data releases showing the market remains on track to set a new post-recession high of almost 17 million units this year. Longer loan terms, lower lending standards and growing lease rates have the new car market racing toward its redline, and there’s talk of a bubble forming in car sales. That concern is well-founded. Like a well-tuned engine, the car market’s performance upgrade must be matched with better safeguards against overheating and misfiring. Unfortunately, the quality of car sales data in the U.S. has not been improved to meet the specifications of our hopped-up market. Even to those who regularly cover it, the U.S. auto-sales reporting system remains dauntingly, and unnecessarily, complex and opaque (note the major correction on this “insider’s guide to auto sales reporting”).

Here’s what U.S. car sales are not: registration numbers. In other mature auto markets such as Europe and Japan, every new car “sale” reported monthly is backed by a registration. Not so in the U.S., where a gap of almost 1 percent between the sales reported by dealers and the number of new vehicles registered is tolerated as normal. Last year, more than 140,000 new cars were officially sold to U.S. retail customers but never entered the fleet. This became an issue when Mercedes accused BMW of inflating its 2012 sales, running up a gap between sales and registration by including cars sold to dealers for loaner fleets. BMW’s defenses only highlighted the depth of the problem. In response to discussion of cash discounts dealers received in July 2012 to purchase vehicles for loaner fleets, the CEO of BMW North America argued, “everyone does it.” The subtext: These data discrepancies are in the short-term interest of every executive who occasionally finds himself a few hundred (or thousand) units short of a bonus at month’s end.

Only in the high-stakes, hyper-image-conscious luxury car game does self-policing of these volume-dumping tactics actually take place. Perhaps even more troublesome was a defense that BMW’s spokesman gave by e-mail in February 2013: “State-provided registration data, as reported by Polk, can lag 60 or even 90 days after an especially strong sales month. Throw in a holiday and the delay is inevitable. That’s what is playing out here.” [..] Short-term incentives for dealers and manufacturers to squeeze extra volume through various loopholes in the auto-sales reporting system are enormous, but the law of supply and demand can only be evaded for so long. With the size of the U.S. fleet failing to keep pace with gaudy sales numbers and the average vehicle age rising to more than 11 years, the market fundamentals don’t suggest endless growth beyond the approximately 800 car per 1,000 people level.

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And you thought Fannie Mae and Freddie Mac were dead. Or contained. Or civilized.

Mortgage-Bond Price Tumble Signals New Risks in Markets (Bloomberg)

Prices of a new type of U.S. mortgage bonds are plunging this month, teaching investors a lesson on the risks to markets wrought by the growing constraints on Wall Street banks. The $8.2 billion of risk-sharing securities sold in the last year by government-controlled Fannie Mae and Freddie Mac can shift their losses from homeowner defaults to bond buyers. One slice of a deal issued in May traded at 95.7 cents on the dollar yesterday, down from 99.7 cents at the end of last month, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

While JPMorgan Chase & Co. analysts say they fail to see “any fundamental reason” for the tumble, investors from CQS U.K. LLP to Calvert Investment Management Inc. are speculating that the drop is mainly about the growing amount of the debt running into limits created by new regulations on bond dealers’ ability to smooth trading by building up their inventories. “It could be symbolic of what could happen more broadly in a real ‘risk-off’ environment,” Bill Murray, a New York-based money manager at $14 billion hedge-fund firm CQS, said in an interview.

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Too big to fail.

Portugal May Be About To Bail Out Esperito Santo (CNBC)

After a devastating day in the stock markets for Portugal’s troubled lender Banco Espirito Santo (BES), analysts are weighing up whether the country’s central bank could step in and bail out the bank. Turmoil at the group which owns BES has embroiled the lender for months with top officials being suspended this week over suspected “harmful management.” BES shares lost around 40% on Thursday after Portugal’s largest listed lender by assets posted a first-half net loss of €3.58 billion ($4.8 billion). This effectively wiped out the €2.1 billion capital buffer it previously stated it had available. Then Friday came news from Reuters that Espirito Santo Financial Group, which owns BES, had announced that its Luxembourg-based division, ESFIL, had filed for creditor protection in Luxembourg.

Bill Blain, a senior fixed income strategist at Mint Partners believes that a state bailout of BES would convince him that “too-big-to-fail” lives on, adding that the whole issue of the unholy incestuous relationship between states and banking would reignite. “BES is not a one-off. There will be others equally mismanaged,” he said in a morning note. “If Portugal bites the bullet and leaves the bank unsupported, it at least demonstrates some credibility about restoring the bank/sovereign divide and separating the problem components.”

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If Elliott is found to have lied in court about its swaps holdings, this could take a nice turn. By the way, ISDA decides whether there’s a default or not. And who’s in ISDA? “The 15-member group includes representatives from Bank of America, Elliott, Morgan Stanley and JPMorgan”.

Argentine Bonds Decline as Default Triggers $1 Billion of Swaps (Bloomberg)

Argentine bonds posted the biggest two-day loss since 2012 as a committee ruled that the failure to pay interest will trigger $1 billion of credit-default swaps. The International Swaps & Derivatives Association’s determinations committee made the ruling on the contracts in response to a question posed by Swiss bank UBS AG after the government missed a July 30 payment deadline on $539 million of notes. Argentina is the first nation to trigger the insurance since Greece restructured its debt in 2012. While Argentina says there was no default since it made the payment to the trustee for the bond, a U.S. judge’s ruling bars it from passing the money to holders without a resolution of the nation’s dispute with hedge funds led by Elliott Management Corp., which won an order for full repayment on defaulted debt from 2001.

“It’s a clear default, despite the rhetoric of the Argentine authorities,” Juan Carlos Rodado, the head of Latin America research at Natixis, said in an e-mail. Following the credit event ruling, the trades will be settled at an auction, ISDA said in a statement. The process sets a value for the defaulted bonds and then creators of the contracts pay buyers face value in exchange for the underlying securities or the cash equivalent determined at the auction administered by Markit Group Ltd. and Creditex Group. [..] Many bond buyers own credit swaps as protection against losses. The dual roles can skew incentives because creditors will sometimes stand to profit more from a swaps payout than an issuer actually meeting its debt obligations.

Argentina will investigate whether the holdouts’ failure to reach agreement on the debt case was part of a “maneuver” to profit from payouts on the credit-default swaps, the Economy Ministry said in an e-mailed statement on Aug. 1. Local regulators will ask the U.S. Securities and Exchange Commission to help the country establish if hedge funds, either by themselves or through third parties, benefited from the triggering of CDS, according to the statement. Elliott last year denied in a U.S. court that it owned default swaps for Argentina. [..] ISDA’s determinations committee was formed in 2009 and makes binding decisions for the market on whether contracts can be triggered. The 15-member group includes representatives from Bank of America, Elliott, Morgan Stanley and JPMorgan.

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The gist: India refuses to stop feeding its poor. The west won’t let them.

WTO’s Future In Doubt After India Blocks Trade Deal (Guardian)

The future of the World Trade Organisation has been thrown into doubt after eleventh-hour attempts to salvage a global trade deal collapsed. Talks broke down after India’s refusal to back a deal unless it included concessions allowing developing countries freedom to subsidise and stockpile food. An agreement on the deal, centred on loosening global customs rules, had been reached in Bali in December, with a deadline of midnight on Thursday to ratify it. But it was scuppered after the WTO’s 160 members failed to reach agreement over India’s demands. It would have been the first global trade deal reached by the Geneva-based institution since it was founded almost two decades ago. The last-minute failure to reach agreement prompted questions over the very existence of the WTO and how it will survive the deadlock.

Admitting defeat, Roberto Azevêdo, the director general, was candid about the challenges facing WTO. Despite intense negotiations, disagreement between members had not been resolved, he said. “We have not been able to find a solution that would allow us to bridge that gap. We tried everything we could. But it has not proved possible,” he said. “The fact we do not have a conclusion means that we are entering a new phase in our work – a phase which strikes me as being full of uncertainties.” Speaking about the future of the organisation, Azevêdo said: “What this means for the WTO will be in the hands of the members. I think we should take the time to reflect and come back in September.”

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‘Lies, hypocrisy and propaganda.’

Russia Says US Creating “Wall Of Information Noise” (RT)

Moscow has upped the ante in its growing confrontation with Washington after releasing an incendiary statement, accusing the US of spinning and distorting facts to allege that Russia is testing a new cruise missile, banned by a landmark Cold War treaty. “Once again the US is trying (and again rather clumsily) to act as a mentor, for some reason pretending to possess the truth in the last instance and have the right to judge others. Claims are made with little to no evidence and based on warped logic, in other words presented not with further experts’ analyses in mind,” opens the lengthy tirade by the Russian Foreign Ministry, in response to the allegations detailed in the State Department report released on Tuesday. “The purpose seems to be to create a wall of information noise to incite other countries, and to boil up a propagandist brew for the media. Or does the US administration still sincerely deceive itself that the world can take Washington’s word?”

The US report never specified how exactly Russia violated the treaty, instead offering a vague finding that: “The United States has determined that the Russian Federation is in violation of its obligations under the INF Treaty not to possess, produce, or flight-test a ground-launched cruise missile (GLCM) with a range capability of 500 km to 5,500 km, or to possess or produce launchers of such missiles.” This would be a direct violation of the Intermediate-Range Nuclear Forces Treaty (INF) signed by Ronald Reagan and Mikhail Gorbachev in 1987, which banned missiles that could carry nuclear warheads in the range of 500-5,500 km. The White House described the supposed transgression as a “very serious matter” of which it has been aware since 2008, again not naming the suspect. The media in the meantime were quick to allege the missile in question was the R-500 cruise missile with an officially stated range of 500km, which some believe can be easily modified for greater ranges.

Russia previously issued a brief response to the allegations that was dismissive, but called for further dialogue. The latest diatribe, however, makes no attempt to seek common ground, and takes pot shots at the entirety of the US approach to international treaties – repeatedly accusing Washington of duplicity and bad faith. “American officials cite classified intelligence, when questioned about their findings. The value of such intelligence has been amply proven by the ‘Iraqi weapons of mass destruction’ myth. Such undercover research becomes even less trustworthy, with regular leaks of obviously untrue and provocative pieces of information about the conflict in eastern Ukraine, while data coming from sources beyond US control gets ignored. Years pass, but the Americans have learned nothing.”

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How long till they revolt?

Russian Sanctions Crushing German Business (RT)

The West is tightening the financial screws on Moscow, but German companies are already feeling the kickback of a slowing Russian economy and weakening ruble. Russia is Europe’s third-largest trading partner, so a spluttering Russian economy, exacerbated by the Ukraine crisis, is seriously affecting German companies. In 2013, Germany exported €36 billion worth of goods to Russia. A higher value ruble and inflation risk consumer spending in the region, and are cutting German involvement in the market accordingly. German sports retailer Adidas lowered financial targets for the next two years, citing conditions in Russia as a major stumbling block. “The recent trend change in the Russian ruble as well as increasing risks to consumer sentiment and consumer spending from current tensions in the region point to higher risks to the short-term profitability contribution from Russia/CIS,” the company’s financial outlook said.

In response, Adidas says it will speed-up efforts to close stores in the Russian and CIS markets in 2014 and 2015, as well as reduce inventory in the marketplace. A shrinking car market in Russia is dragging down demand for Renault, Peugeot Citroen, GM, and Ford, which all produce cars locally. Europe’s largest carmaker, Volkswagen, reported an 8% decline in Russian sales in the first two quarters compared to last year, citing emerging market volatility. The company is facing tougher trading conditions in other developing markets such as Brazil, China, and India, where currency fluctuations sway buyers away from European manufacturers. Inflated currencies in emerging markets dissuade buyers from expensive European imports, and have the potential to strengthen demand for local products.

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Seems fine in summer, but that’s over in 2 months time.

Saving Up Gas For Winter: Ukraine Cuts Consumption by 30% (RT)

As natural gas supplies are tightly squeezed, from Friday, manufacturing and municipalities in Ukraine are officially getting 30% less gas. This reduction is expected to help the country live through the winter without imported Russian gas. The savings plan was announced by the deputy head of Naftogaz Alexander Todiichuk on Ukrainian TV in mid–July. “The saving regime is being forced in Ukraine and it’ll officially come into operation as of August 1,” he said. The ‘regime of gas saving’ includes cutting the use of gas by 30% in manufacturing and municipalities, while consumers that rely on government funding, such as schools and hospitals, would have to cut gas consumption by 10%. The measure are expected to save about 150 million cubic meters of gas per month, which will be pumped into underground storage, said Todiichuk, adding that the volume should increase starting from August.

Coming into the winter, Ukraine has 16-17 billion cubic meters of natural gas saved up in underground storage. The government in Kiev estimates Ukraine needs to import 7.23 billion cubic meters of gas in the next eight months through to March in order to keep economic activity stable, especially during the high-demand winter season. Supplies from Russia were cut (link) in June after Kiev failed to pay a$5.3 billion gas bill and as Ukrainian and Russia sides squabbled over a fair price. Ukraine’s Energy Minister Yuri Prodan said reverse gas flow supplies from Slovakia could begin in August, if not September. The US government has considered starting gas exports to Europe, but there is a lack of infrastructure.

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‘Nightmare Bacteria’ Spread In Southeastern US (USA Today)

Superbugs known as CRE — called “nightmare bacteria” by federal health officials because they are deadly and virtually untreatable — are skyrocketing in the Southeastern USA, new research shows. Experts fear a growing national problem, and some say the spread of such superbugs may portend a “post-antibiotic era.” Cases of the antibiotic-resistant CRE rose fivefold in community hospitals in the region from 2008 to 2012, researchers at Duke University Medical Center found, and they said those rates are likely underestimates. “We’re trying to sound the alarm. This is a problem for all of us in health care,” said Deverick J. Anderson, senior author of the study and an associate professor of medicine at Duke. “These (bacteria) are just about as bad as it gets.”

CRE, short for carbapenem-resistant Enterobacteriaceae, are a family of bacteria that have over time become resistant to last-resort antibiotics. They prey mostly on vulnerable, hospitalized patients and kill nearly half who get bloodstream infections. CRE are the worst of the worst in a growing sea of pernicious germs resistant to antibiotics that take hold in sick patients in health care settings. According to the U.S. Centers for Disease Control and Prevention, one in 25 hospitalized patients has at least one health care-associated infection on any given day. Two of the more common superbugs are C. difficile, which is rising steeply and is linked to about 14,000 American deaths each year, and MRSA, which has been a problem in hospitals for decades. Researchers point to a recent decrease in invasive MRSA infections but estimate there were still more than 80,000 in 2011. MRSA has spread beyond hospitals into communities.

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Nice studies, fast evolving. Lots of dinosaurs with feathers.

Birds: Incredible Shrinking Dinosaurs (CSM)

For decades, paleontologists have been uncovering the remarkable evolutionary relationships between fearsome, two-legged, meat-eating dinosaurs and birds. A new study suggests that the pace of the transition from one to the other was quick by dinosaur standards. In the 50 million years preceding the appearance of the first birds some 163 million years ago, the size and weight of theropods along the direct line of descent to birds shrank one group after another – slowly at first, but going into free fall during the final 10 to 15 million years once Maniraptors took the evolutionary baton from their direct ancestors, the Coelurosaurs. The skeletal changes taking place during the 50-million-year dinosaur-to-bird transition were occurring four times faster than for dinosaurs as a whole, according to the analysis, conducted by an international team of researchers led by Michael Lee, with the South Australia Museum in Adelaide.

Rapid rates of change in body size have appeared before in the fossil record. Following a mass extinction at the end of the Cretaceous period some 65 million years ago, an event that drove non-avian dinosaurs extinct, the size and diversity of mammals exploded over a 15-million-year period, researchers say. This came as mammals began to fill ecological niches vacated by the late, great dinosaurs. The interplay between evolution and ecological niches was likely at work for the ancestors to birds as well – in this case, the Great Escape. Some researchers surmise that the changes in body size and skeletal structures that led to the first birds, particularly during the phase of accelerated change, could have occurred as the now-smaller theropods moved into trees to escape becoming another animal’s meal or to take advantage of new sources of food.

The continuing reduction in size needed to succeed as tree dwellers would have triggered a cascade of evolutionary changes, suggests University of Bristol paleontologist Mike Benton. These changes would have improved vision, improved the aerodynamics of forelimbs to allow for increasingly ambitious leaps from tree to tree, or encouraged the evolution of feathers to insulate the new tree dwellers. “Being smaller and lighter in the land of giants, with rapidly evolving anatomical adaptations, provided these bird ancestors with new ecological opportunities,” Dr. Lee said in a prepared statement. Past studies of animal sizes in the run-up to birds had looked at individual branches of the avian ancestral tree or used trees that used physical traits to establish relationships, but no dates. Lee and colleagues were able to take advantage of the explosion of small feathered theropod fossils coming out of China since the mid-1990s, known collectively as Paraves. These animals were trying to exploit various ways of getting from tree to tree – jumping, gliding, or parachuting …

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Mar 252014
 March 25, 2014  Posted by at 4:15 pm Finance Tagged with: , , ,  

Charlotte Brooks Duke Ellington at bat near segregated motel in Florida April 1955

You can hurt a few handfuls of Putin’s people for a few days with sanctions like closing their Visa accounts. But if you threaten to buy less Rosneft oil and Gazprom gas, why should they really care? It’s not as if there’s a glut of either available. Any pain will be short lived. Moreover, it’s all but certain that such actions will drive Russia and China closer together, and is that such a dream scenario for America and Europe?

Of course there’s plenty of folk in the US Senate and in Brussels who relish the prospect of some sort of limited warfare with Russia, but they’re mostly fossilized entities, whether physically and/or mentally. There will be some such voices in Russia too, and there are many in Ukraine, where long festering hatred, by the looks of it, is still one of the main reasons people get out of bed in the morning.

Yulia Tymoshenko, former PM and prime candidate for prime minister again, was caught on tape uttering some real ugly threats against ethnic Russians, like nuking all 8 million of them. And that’s the kind of person the west is preparing to help back in the saddle by unleashing more sanctions and further isolating Putin? Really, we’d rather go there then seek common ground and peaceful solutions?

It would seem that many of the older Senators and EU career bureaucrats are under the impression that all that has changed since the cold war is that Russia was weakened. But if you take one look at what happened to western economies, debt levels and growth rates since then, it would be obvious to what extent the west, too, is considerably weaker.

It’s nice to draw up plans to be less independent on Russia for energy, but there would have to be alternative sources of supply for such plans to work. And they don’t seem to be available, or even if they are, at least 5-10 years away. How much more can bankrupt Europe afford to pay for its oil and gas delivery in the meantime, especially given the fact that it will also have to invest heavily in the infrastructure for the so far almost exclusively theoretical new energy streams?

Is all the chest thumping truly in the best interest of the average European or American? Or is this just the pursuit by a bunch of wrinkled demi-psychopath wannabees, of a faded dream of times gone by, still shot in black and white, that “we” have a god-given right to rule the entire planet and suck up all its resources for our own pleasure, swiping a few scraps off our tables for the rest of humanity? Do the not yet wrinkled rest of us still want to pursue that dream?

At the height of the cold war, if you recall, America still had a middle class, and the majority of the population looked forward and worked hard to achieve a better life for their children. Want to try poll Americans on that now? Want to try ask the Greeks and Italians how they see their children’s futures? The only reason the western elites care enough about reviving growth to risk going to – economic or actual – war over it, is to strengthen their own positions, not those of the increasingly downtrodden they purport to represent.

In China, the government and banking world worry, among an obvious slew of other issues, about the slowing pace of urbanization.

“The pace of migration of rural Chinese to cities, a dynamic hailed by Premier Li Keqiang as key to the nation’s development, is set to slow by a third in coming years …” [..] “In the past 30 years we turned farmers into factory workers, triggering massive gains in productivity and hence growth …”.

One would like to add: yeah, and pollution. What’s wrong with people living in the country side, with less pollution? It hurts economic growth numbers, that’s what’s wrong. But isn’t pollution one of the spear points in Chinese government policy too? Yes, it is, but like the west, China wants to have the growth first, and then clean up the mess afterwards. Whether that’s at all possible is much less of a concern. The leadership prefers a dirty world where it can maximize its hold on power to a cleaner one where it has less. It’s the same story wherever and whenever you look.

The financial world lives in hopeful expectation of more stimulus in China and Europe, stimulus that if it comes will originate only in lousy economic numbers. It’s not a mistake by central banks that lies at the origin of these stimulus measures, they simply serve the interests of the people who actually do benefit from the measures, not the ones who pay for them. That QE et al cannot lift an economy out of the doldrums is as clear to central bankers as it is to any single working neuron. But it is a great way to transfer wealth from the bottom to the top.

In China, the people’s view of economics is much less obfuscated than it is in the west. When real estate prices and trust investments start falling, the Chinese will take to the streets demanding the government give them what they feel they deserve after having moved to smog filled cities to do mind numbing jobs. But while China’s development model is as much of a bubble as ours, after the smoke has cleared, the country will rise up again under different leadership to take on a much bigger role in the world than it’s ever had in modern times.

Are we still going to be chest thumping by then? Or will we have learned to recognize the traits that make the leaders handpicked for us to vote for, unfit to represent out interests? I think that the poorer we get, and that process will forcibly continue, the more likely we are to pick the less competent ones. As long as they use the right words to promise us better days, and they look like they could work in TV, they got the job.

And they can get into another cold war with China and Russia and whoever else challenges our broken black and white dreams by then.

But granted, that’s the future. Here’s a great graph depicting where we are today, courtesy of IceCap:

Guess maybe our bubbles are not big enough yet?

Great piece with great graph. Should perhaps be everybody’s screensaver.

Connecting The Bubbles The Fed Blows (IceCap)

Reading down IceCap’s memory lane, you’ll recall our November 2012 “Salma Hayek” publication which described how world leaders had two choices in the way to manage the global economy. The first option was based upon economic theory by Friedrich Hayek who claimed that the economy couldn’t be and shouldn’t be managed on an acute basis. Mr. Hayek believed that governments should simply ensure there was enough money available. That was about it. If only our leaders had listened.

Instead, the financial world we enjoy today chose the second option which was built entirely on the mislead belief of John Maynard Keynes, that man could in fact control or better still eliminate the business cycle by changing interest rates, changing tax rates, and spending more money than you own. In theory, this approach works beautifully. Then it meets reality. From our perspective, reality arrives when there are no more interest rates to cut, no more taxes to cut, and no more money to spend.

Chart 1 shows the success enjoyed by the US central bank’s interest rate policy over the years. In 1997, the Asian crisis followed by the Russian crisis followed by the collapse of a gigantic hedge fund, allowed the American central bank to plant the seeds for the next crisis which turned out to be the tech bubble.

At the time, both financial pundits and the big banks with their balanced funds proclaimed that the world had indeed entered a different financial and economic era – yes, this time it was different. Of course 4,000 Dow Jones Industrial and NASDAQ points later, the sheep started to lazily admit that perhaps this new post-Y2K economy wasn’t all that it was cracked up to be.

Not to worry, once again the American central bank mounted their ponies and rode the global economy straight into several years of ultra-low interest rates. The hope (there’s that word again) was that really cheap money would encourage people, companies and governments to borrow and spend again. And borrow and spend they did – right smack into the biggest housing bubble in economic history. Day traders became passé, and the newest game in town was flippin’ houses.

Rich people flipped mansions, plumbers and teachers flipped suburban homes and even Vegas strippers got in on the act and flipped condos among other things. By the time it was over, the entire world was flipped upside down – courtesy of the US Federal Reserve and their interest rate machine. And this brings us to the next global crisis, which we assure you is on its way. After all, Chart 1 proves it is crystal clear that every time the US Federal Reserve acts to “save us” from one crisis, it directly sows the seeds for an even bigger crisis in the future.

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China’s Urbanization Loses Momentum as Growth Slows (Bloomberg)

The pace of migration of rural Chinese to cities, a dynamic hailed by Premier Li Keqiang as key to the nation’s development, is set to slow by a third in coming years, deepening economic-growth concerns. A government report released this month projected a 6.3 percentage-point rise in the share of people living in cities from 2013 to 2020 – down from a 9.4-point gain the previous seven years. Nomura Holdings Inc. estimates that slower urbanization will slice as much as half a percentage point from annual gross domestic product growth over the next half decade.

“In the past 30 years we turned farmers into factory workers, triggering massive gains in productivity and hence growth,” said Ken Peng, Asia Pacific investment strategist at Citigroup Inc.’s private-bank business in Hong Kong. “Now those gains are diminishing.”

Li, who asked an arm of China’s cabinet to work with the World Bank on an urban-planning strategy released today, is under increasing pressure to take steps to address weakening economic expansion. A private report yesterday indicated a fifth straight slowdown in manufacturing in the world’s second-largest economy. The premier, who has advocated an urbanization-growth strategy for two decades, is up against a shrinking pool of rural workers, rising local-government debt and unhealthy air pollution in almost all big cities. Diminishing returns from urbanization make it tougher to achieve economic goals including this year’s 7.5% expansion target.

Today’s report from the World Bank and the State Council’s Development Research Center, which helped inform the government’s plan, recommends changes including on land use to spur more-efficient and denser cities. That can save China $1.4 trillion from a projected $5.3 trillion in infrastructure spending over the next 15 years, World Bank Chief Operating Officer Sri Mulyani Indrawati said in a speech today. “You cannot go on with the same urbanization model,” Sri Mulyani said in a separate interview.

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Big Risk for Big Oil. But they’re in such bad shape they’re going for the jugular: get rid of Putin and take it all.

Kremlin Partnership Places BP at Risk in Russia Crisis (Bloomberg)

No business has as much at stake as BP, as the crisis in the West’s relations with Russia escalates. The British oil company, whose shares are down 6.2% since Putin deployed troops in Crimea, holds the single biggest foreign investment in Russia – a 20% stake in OAO Rosneft (ROSN) it acquired last year. U.S. sanctions last week against oil-trading billionaire Gennady Timchenko showed willingness to target Russia’s most important industry and Vladimir Putin’s closest associates.

That’s a concern for BP because Rosneft links it directly to Putin’s regime: the state owns 70% of Russia’s largest oil producer and it’s run by Igor Sechin, a confidant of Putin for two decades. While current sanctions won’t harm BP’s ability to do business in Russia, analysts said they worry about the long-term prospects for the Rosneft investment against a background of worsening relations between the West and Moscow. “Tight sanctions would impact BP more than peers given Russia is their second-largest contributor to earnings and production after the U.S.,” said Brian Youngberg, an analyst at Edward Jones in St. Louis. “BP’s placed a big bet on Russia and something like this shows the risk in doing so.”

Since the start of the month, BP’s shares have dropped more than any of the 30 members of the Dow Jones Oil & Gas Titans index apart from Russian gas exporter OAO Gazprom. On a March 4 conference call, one day after the value of London-based BP’s deal tumbled $850 million as investors sold Russian stocks in response to the Ukrainian crisis, Chief Executive Officer Bob Dudley summed up the importance of Rosneft for a company still trying to recover from 2010’s Gulf of Mexico disaster.

“And then there is our unique investment in Russia’s growing energy industry,” he said. “Russia is, of course, one of the world’s largest oil and gas producers and a country where BP has a long and successful track record. Through our investment in Rosneft, we have created a unique position.” While the company is monitoring the situation, it remains fully committed to its investment in Russia, said Toby Odone, a BP spokesman. Rosneft declined to comment.

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True colors shining through.

Former Ukraine PM Tymoshenko: Time To Grab Guns And Kill Damn Russians (RT)

Ukrainians must take up arms against Russians so that not even scorched earth will be left where Russia stands; an example of former Ukrainian PM Yulia Tymoshenko’s vitriol in phone call leaked online. Tymoshenko confirmed the authenticity of the conversation on Twitter, while claiming that a section where she is heard to call for the nuclear slaughter of the eight million Russians who remain on Ukrainian territory was edited. She tweeted “The conversation took place, but the ‘8 million Russians in Ukraine’ piece is an edit. In fact, I said Russians in Ukraine – are Ukrainians. Hello FSB 🙂 Sorry for the obscene language.”

The former Ukrainian PM has not clarified who exactly she wants to nuke. The phone conversation with Nestor Shufrych, former deputy secretary of the National Security and Defense Council of Ukraine, was uploaded on YouTube on Monday by user Sergiy Vechirko. Shufrych’s press service flatly contradicted Tymoshenko, slamming the tape as fake. The press release reads “The conversation didn’t take place,” as quoted by The leaked phone call took placed on March 18, hours after the Crimea & Sevastopol accession treaty was signed in the Kremlin.

While Shufrych was “just shocked,” Tymoshenko was enraged by the results of the Crimean referendum . “This is really beyond all boundaries. It’s about time we grab our guns and kill go kill those damn Russians together with their leader,” Tymoshenko said. The ex-PM declared if she was in charge “there would be no f***ing way that they would get Crimea then.”

Shufrych made the valid point that Ukraine “didn’t have any force potential” to keep Crimea. But Tymoshenko, who plans to run in Ukraine’s presidential election, expressed confidence that she would have found “a way to kill those a*****es.” “I hope I will be able to get all my connections involved. And I will use all of my means to make the entire world raise up, so that there wouldn’t be even a scorched field left in Russia,” she promised. Despite being incapacitated by spinal disc hernia the ex-PM stressed she’s ready to “grab a machine gun and shoot that m*********er in the head.”

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These moves have been under consideration for a long time. All the plans are drawn up.

Russian Oil Seen Heading East Not West in Crimea Spat (Bloomberg)

The Crimean crisis is poised to reshape the politics of oil by accelerating Russia’s drive to send more barrels to China, leaving Europe with pricier imports and boosting U.S. dependence on fuel from the Middle East. China already has agreed to buy more than $350 billion of Russian crude in coming years from the government of President Vladimir Putin. The ties are likely to deepen as the U.S. and Europe levy sanctions against Russia as punishment for the invasion of Ukraine.

Such shifts will be hard to overcome. Europe, which gets about 30% of its natural gas from Russia, has few viable immediate alternatives. The U.S., even after the shale boom, must import 40% of its crude oil, 10.6 million barrels a day that leaves the country vulnerable to global markets. The alternatives to Russia also carry significant financial, environmental and geological challenges. Canada’s oil sands pollute more than most traditional alternatives, while Poland’s promising shale fields have yet to be unlocked. The biggest oil finds of the past decade are trapped under the miles-deep waters offshore Brazil and West Africa.

“You’re going to see the Russians go out and try to sell and you’re going to see the Asian buyers drive hard bargains with Russia,” said Philip Verleger, an energy economist at PKVerleger LLC in Carbondale, Colorado, suggesting European countries will feel the most pain in the form of higher gas prices as they struggle to reduce their dependence on Russia. As world leaders gathered in The Hague to discuss nuclear security issues, U.S. President Barack Obama sought to encourage Chinese criticism of Russia on Ukraine. Chinese President Xi Jinping in turn pressed Obama about a reported U.S. breach of the servers of China’s largest phone-equipment maker.

China has always held a “just and objective attitude” toward the Ukraine crisis, Xi said in the meeting with Obama, according to a report yesterday from China’s official Xinhua news agency. The world’s biggest energy user, China abstained from the United Nations Security Council resolution that declared the Crimean succession referendum illegal. Russia vetoed it.

China imported a record amount of Russian crude last month, 2.72 million metric tons, about a supertanker full every three days. The total more than tripled in a decade, and Russia now represents 12% of China’s crude imports, customs data show, among the highest levels in the past seven years.

“It’s always been assumed Russia reorienting its shipments toward China would be a long-term objective; originally it was considered something of a leverage point for Russia,” said Robert Kahn, a senior fellow at the Council on Foreign Relations in Washington. “Now people may see it as a reaction to the possible loss of a European market.”

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Hilarious. Nothing US infighting can’t make worse.

Senate Republicans Seek to Void IMF Money in Ukraine Aid (Bloomberg)

A partisan dispute over the International Monetary Fund will be at the center of the U.S. Senate debate this week on legislation providing aid to Ukraine and imposing sanctions on Russia. After a Senate vote yesterday, 78-17, to advance the bill, Republicans say they’ll try to strike language boosting the U.S. share, or quota, at the IMF and implementing a 2010 international agreement giving rising economies more voice. “If the IMF reform is in there, you’re not going to have that strong show of unity from the Congress,” said Senator Ron Johnson, a Wisconsin Republican, who said he would offer an amendment to eliminate the language. “Hopefully we can strip that out so that we have as singular a voice coming from Congress as possible.”

The IMF provision has slowed Senate consideration of legislation that otherwise has drawn broad bipartisan support. The Senate measure, which Majority Leader Harry Reid said yesterday he wants to complete this week, would provide about $1 billion in loan guarantees and authorize $150 million in direct assistance to Ukraine. Senators could begin considering amendments as soon as today. In addition to removing the IMF provision, Republicans will seek to boost U.S. natural gas exports to countries that are members of the North Atlantic Treaty Organization.

Senator Ted Cruz, a Texas Republican, told reporters yesterday that the IMF changes Democrats are seeking “would decrease America’s influence at the IMF and perversely would increase Russia’s influence in the IMF.” “These provisions have no business in a Ukraine aid package,” Cruz said, adding that taking out the IMF language would be the “easiest way” to quickly pass the legislation. Significantly, Cruz said he wouldn’t try to block a final vote on the underlying bill as long as Republicans are given a vote on their amendment to remove the IMF provision.

Delay “sends a very weak message” to Moscow, said Reid, who blamed Republicans for slowing action, noting that Russia moved to annex Crimea while Congress was on a week-long break that ended yesterday. “It’s impossible to know whether events would have unfolded differently if the United States had responded to this Russian aggression with a strong, unified voice, which we did not do,” Reid said.

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Why The EU Won’t Annex Ukraine (RT)

Hysterical 24/7 Western spin conveys the impression Ukraine will be annexed by a (mostly bankrupt) EU tomorrow. No so fast! The final deal will be just an association agreement; afterwards there would be a long and winding road towards EU admission (which, by the way, the absolute majority of EU member-nations don’t want.) Article 7.2. of the association agreement states that Ukraine will have to comply with the common foreign and security policy (CFSP) and the European security and defense policy (ESDP).

The obscure – even for most Europeans – ESDP happens to be the key European pillar of NATO. Translation: it details how the EU is subordinated to the US (which controls NATO). For instance, the EU may only act in a determined case if NATO first declines to. Additionally, the March 2003 Berlin-plus agreement allows the EU to use NATO’s hardware and software for military operations if NATO declines to. What this essentially means is that Ukraine is on the road to become legally bound to NATO’s overall project. Along with other independent analysts, I’ve argued from the start that this whole geopolitical drama is first and foremost about NATO annexing Ukraine.

The NATO-Ukraine twisted love affair started in the early 2000s. After some soul-searching, it was decided NATO or no NATO should be the subject of a national referendum in the future. In the 2008 Bucharest summit NATO opened its arms, stating that Ukraine could join as soon as it met the criteria. In 2010 Yanukovich announced Ukraine was not interested anymore. Still, Ukraine remains quite a muscular member of NATO’s innocent-sounding Partnership for Peace (PfP).

No wonder NATO is now in overdrive selling the notion that Ukraine is “under threat” – and should join as soon as possible. NATO’s secretary-general – the astonishingly mediocre American poodle, Anders Fogh Rasmussen – said we’re living the most serious threat to Europe’s security since the end of the Cold War: “This is a wake-up call. For the Euro-Atlantic community. For NATO. And for all those committed to a Europe whole, free and at peace.’’ He forgot to add: a Europe under free and peaceful submission to the Pentagon.

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Weidmann is Bundesbank. Bundesbank is enemy no. 1 of EU QE.

ECB’s Weidmann Says QE Not Out Of The Question (Reuters)

Bundesbank President Jens Weidmann said it was not ‘out of the question’ for the European Central Bank to buy bank assets to fight deflation, in a softening of the German central bank’s strict stance on the issue. Quantitative easing (QE) is when a central bank buys loans or other assets from banks and would represent a radical departure for the ECB, which has so far, not least under pressure from Germany, refused to make such a move.

Weidmann, who is a member of the European Central Bank Governing Council told MNI in an interview published on Tuesday that the scope of the ECB’s conventional tools, such as changes to the interest rates, was limited. “The unconventional measures under consideration are largely uncharted territory. This means that we need a discussion about their effectiveness and also about their costs and side-effects,” Weidmann said in the interview, conducted on Friday. “This does not mean that a QE program is generally out of the question,” Weidmann said. “But we have to ensure that the prohibition of monetary financing is respected.”

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Yay! More vampires. Guess that means China’s ready to play in the big leagues.

China Banks Drained by Internet Funds Called Vampires (Bloomberg)

It has been labeled a “blood-sucking vampire” by a prominent commentator on state-run television. Executives at China’s largest banks have called for regulators to curb its rapid expansion.

The focus of this ire is Internet financing, specifically Yu’E Bao, the fund pioneered nine months ago by Alibaba Group Holding Ltd.’s online-payment affiliate Alipay. Its ease of use, involving a few taps on a smartphone, has drawn deposits from 81 million customers, more than the population of Germany, as they chase returns higher than China’s banks can offer. The total exceeded 500 billion yuan ($80 billion) as of Feb. 28, according to the official Xinhua news agency, double the amount reported by Alipay in mid-January.

At least six other technology firms, including Baidu Inc. and Tencent Holding Ltd., have embraced Internet financing with similar products offering returns as high as 10% and threatening to drain more cash from China’s banking system. Bank executives, unable to stop the outflow of their cheapest source of funding because interest rates on comparable deposits are fixed by the government at 0.35%, are calling for more regulation, saying that lack of oversight and risks related to account security, yield volatility and liquidity management threaten China’s financial stability.

“Now it’s time to step up regulation for the industry’s own good,” Yang Kaisheng, a former president of Industrial & Commercial Bank of China Ltd. and now an adviser to the China Banking Regulatory Commission, said in an interview this month at the National People’s Congress in Beijing. “The emergence of Internet financing is inevitable in China because it serves the grassroots better, but whoever is engaging in financial services, no matter online or off-line, must comply with regulations. If someone stays out of oversight for too long, the chances of it disrupting financial stability will increase significantly.” [..]

“Why is all the money going into Yu’E Bao? Because banks fail to pay what savers deserve. You can’t fool them,” Ma Weihua, a former president of China Merchants Bank Co., said during a group discussion at the National People’s Congress. “Yu’E Bao is forcing banks to face up to the challenges of interest-rate deregulation.” The drain from the banks prompted Niu Wenxin, a managing editor and chief commentator at China Central Television, to attack Yu’E Bao in his blog on Feb. 21, drawing 11.5 million views and sparking nationwide debate.

“Yu’E Bao is a vampire sucking blood out of the banks and a typical financial parasite,” Niu wrote. “It didn’t create value. Instead it makes a profit by pushing up the whole society’s borrowing costs. By passing some teeny-weeny benefit to the public, it makes massive profit for itself and lets the entire society foot the bill.”

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Credit Problems To Rattle China Economy: New Zealand FinMin (CNBC)

The Chinese economy will continue to face more volatility as the country wrestles with credit problems, says New Zealand’s Finance Minister Bill English. “There’s clearly a will [in China] to allow some defaults to try and work through the credit build up,” English told CNBC Asia’s “Squawk Box” on Tuesday. “As an economy selling into China, we’re expecting more volatility in the economy in general, but still reasonably solid consumer demand,” he added.

The stability of China’s financial sector has been in focus in recent months after a near high-profile failure of a trust product, which was marketed by local lender ICBC, in January. Earlier this month, China experienced its first domestic bond default when Shanghai Chaori Solar Science & Technology Co was unable to make an 89 million yuan ($14.5 million) interest payment. In addition, recent economic data has pointed to slowing growth momentum. This has raised speculation that authorities may provide monetary or fiscal stimulus to support growth. “I think we’ve had an artificially smooth growth profile out of China because of the extent of their intervention. They can’t keep doing that,” said English.

China is New Zealand’s biggest export destination, with dairy products accounting for roughly half of the $10 billion worth of goods the country dispatched to the mainland in 2013. Last week, China and New Zealand signed a currency deal to allow the direct conversion of the New Zealand dollar with the Chinese renminbi or yuan. The deal aims to reduce costs for exporters and importers by removing the necessity for transactions to be settled in two foreign exchange trades via a third currency – typically the U.S. dollar.

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True enough, Moody’s, but only the worst handful have to go down to create mayhem.

China’s Local Government Debt Burden Varies Widely: Moody’s (CNBC)

Concerns over high levels of debt among local governments in China have mounted in recent months, but the quality and quantity of that burden varies widely by province, Moody’s said. “The provinces all show varying degrees of credit risk as their indebtedness levels differ significantly, from moderate to high,” credit rating service Moody’s Investor Service said in a report on Tuesday. China’s state auditor said in a report in December that local governments owe almost $3 trillion in outstanding debt as of the end of June last year, up 67% from the last audit in 2011.

The debt pile is viewed as one of the biggest threats facing the country’s economy and there are worries that much of it cannot be repaid as it was used to fund non-profitable projects. Among the top 31 upper-tier local governments reporting government-related debt on their websites, indebtedness ranged from 69% to 156% of revenues, with the median at 108%, Moody’s said. The median debt for all the provinces was 31% of their gross domestic products (GDP), but the levels ranged from 79% of GDP for Guinzhou province to 13% for Shandong.

“While higher levels of debt are typically credit negative, the credit quality implications also depend on economic strength, budget flexibility, access to financing, and ability to repay,” Moody’s said. “In addition to the debt figures, we need to understand an entity’s ability to mobilize resources to repay its debt and the extent to which government-related entities have projects that generate streams of revenue sufficient to repay debt.”

Moody’s said it was concerned about a lack of information on which financing vehicles and other entities are generating enough revenue to repay their debt without tapping the local government. It cited Beijing Infrastructure, which operates the capital’s subway system, as an example of a company unable to operate without heavy subsidies.

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China Demands End To US Spying Activities After New Snowden Leak (RT)

China has demanded that the US stop the snooping activities of its National Security Agency against Chinese officials and companies. Beijing has also asked Washington to explain the reports on the illegal spying. Chinese foreign ministry spokesman, Hong Lei, said on Monday that China is “extremely concerned” about allegations that the US National Security Agency (NSA) infiltrated the servers of Chinese telecom giant, Huawei, targeting the Chinese Trade Ministry, national banks, leading telecommunications companies and the country’s top officials.

“China has already lodged many complaints with the United States about this. We demand that the United States makes a clear explanation and stop such acts,” the spokesman stressed. Hong cited media reports on “eavesdropping, surveillance and stealing of secrets by the United States of other countries, including China,” which were based on the revelations of the former NSA contractor, Edward Snowden.

The Snowden leaks published by The New York Times and Der Spiegel on Sunday exposed the details of the NSA’s activities in China, which allegedly involved spying on the former Chinese President Hu Jintao. China’s reaction comes amid the European trip of Chinese President Xi Jinping, who met US President Barack Obama in The Hague on Monday.

The US first lady, Michelle Obama, on Saturday addressed college students in Beijing, saying that open access to online information is a “universal right.” However, the two countries’ governments clearly had a different understanding of “open access” to the global net. “We consistently believe internet communication technologies should be used to develop a country’s economy in a normal way, and not be used in stealing secret information, phone-tapping and monitoring,” Hong said.

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Oh, it’s coming, alright.

Dying Memphis Neighborhood Foretells Next U.S. Crisis (Bloomberg)

When Rebecca Black bought the three-bedroom house at 698 Hazelwood Road in southwest Memphis in May 2005 and moved in with her two teenage sons, it was a quiet community. Children played in the street and neighbors tended their yards. She could afford the $57,000 mortgage if she skipped oil changes for the car and served the boys store-brand groceries. Then trouble came.

Her next-door neighbor died, and his family lost the house. Across the street, there were two foreclosures. One morning, the abandoned house three doors down had gang graffiti spray-painted on the side. A girl in the neighborhood pulled a gun on Black’s son. In 2010, it was Black’s turn to go. She’d gotten one of those 2–28 mortgages that slowly strangled so many borrowers – two years of a low, fixed interest rate followed by 28 years of rising payments – and she’d reached her limit. “I was crazy about that house, and so proud of it,” said Black, a U.S. Army veteran. “I just didn’t have enough money.”

She got a letter from her mortgage company saying it was starting the foreclosure process, and rather than hear a knock on the door one morning from a sheriff’s deputy ordering her to get out, Black packed whatever she could fit into her Chevy Astro and left the home she loved so well. By 2011, the property two doors down had sold for $3,000, and Black was in bankruptcy.

If homes are living things, sustaining their inhabitants and contributing to the vitality of their communities, then Hazelwood Road is dying. On nine of the fifteen parcels on Black’s side of the street, houses sit empty, have been bulldozed flat, or the lots have reverted to a tangle of sumac and poison ivy.

In the hottest part of 2012, four years after bad mortgages triggered a meltdown in the world’s most resilient economy, the biggest banks were reporting record profits and government agencies were trumpeting statistics showing that a robust recovery from the worst hard times since Dorothea Lange’s Great Depression photo “Migrant Mother” was just around the corner.

Though Hazelwood Road was never a paradise – a place where Black could buy a three-bedroom house for $57,000 couldn’t be described as anybody’s ideal of “location, location, location” – conditions there indicated that something essential about America had shifted in the aftermath of the 2008 financial crisis. Hope for advancement was that much tougher for most people to sustain after 2008. And just as the crisis was no accident but rather a tragic convergence of stupidity and poor oversight, so too were its consequences a result of calculation.

Just about all the behavior by the biggest banks and their Washington regulators described in this book occurred after the 2008 financial crisis. The book is divided into seven chapters, each corresponding to one of Catholicism’s seven deadly sins. Wall Street’s seven sins – size, secrecy, regulatory capture (when government supervisors identify more with the industry they police than with the people they’re supposed to protect), excessive pride, complexity, impunity, and a predatory greed – risk the second avoidable economic cataclysm of the baby boom era.

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Long-Term Unemployed on the Margins of the Labor Market (Brookings)

In “Are the Long-Term Unemployed on the Margins of the Labor Market?” Alan B. Krueger, Judd Cramer, and David Cho of Princeton University find that even after finding another job, reemployment does not fully reset the clock for the long-term unemployed, who are frequently jobless again soon after they gain reemployment: only 11% of those who were long-term unemployed in a given month returned to steady, full-time employment a year later.

Long-term unemployment has remained a persistent problem post-Great Recession – a somewhat new issue for the U.S., as compared to Europe. Despite declining over the last 4 years, the share of the unemployed who have been out of work for more than 6 months still exceeds its previous peak reached in 1981-82, and is well above its average in the last recovery, the authors note. Yet, measures of short-term unemployment are close to their average rates in the last recovery. As a result, overall unemployment remains elevated because of the large number of people who have been unemployed long term.

The long-term unemployed are spread throughout all corners of the economy, with a majority previously employed in sales and service jobs (36%) and blue collar jobs (28%), they find. In addition, the authors find that when long-term unemployed workers do return to work, there is a tendency to return to jobs in the same set of industries and occupations from which the workers were displaced.

The authors present a calibrated model that shows that the collapse in job vacancies, coupled with a decline in labor force withdrawal rates, accounts for the sharp rise in the number of long-term unemployed workers in 2009-13 and the overall rise in the unemployment rate. Furthermore, the authors show that the historically slower rate of reemployment for long-term unemployed workers can account for the apparent shift in the relationship between the unemployment rate and job vacancies. Their model predicts that the unemployment-vacancy relationship will return to its original position as the long-term unemployed continue to exit the labor force.

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Fracking Won’t Crack UK Dependence On Russian Gas Imports (Guardian)

As tensions with Russia intensify, government ministers and conservative commentators have increasingly sought to capitalise on the crisis to sell fracking to the electorate. Over the weekend, Conservative energy minister Michael Fallon argued that the UK should reduce its reliance on gas imports by fracking for shale gas in the UK. The foreign minister, William Hague, wrote in the Telegraph that we need to “develop indigenous European energy supplies … such as shale gas”, while commentators including Matt Ridley argued that if it wasn’t for “the greens in suits, rather than kaftans” we could have a fully fledged fracking industry up and running already.

The chutzpah of these attempts to build support for an increasingly unpopular fracking industry is astonishing. These are the same people who were arguing the case for the construction of up to 40 gas power stations. This would have left us even more dependent on imported gas. The Crimean crisis should be a catalyst for a rethink about whether the government’s “dash for gas” is the wisest energy policy for a country with dwindling North Sea resources. But rather than admit that we should be reducing our dependence on gas, its proponents prefer to blame the green groups that have for decades been arguing for a reduced reliance on finite energy sources.

Claims that fracking offers a panacea to dependence on Russian gas don’t even stack up. A study for the oil and gas industry by consultants Pöyry, found that European supplies wouldn’t even come on stream at scale for at least a decade. The study also shows that while the EU’s dependency on gas imports could be reduced by up to 18% depending on the success of EU shale gas extraction, it is actually supplies of liquefied natural gas from Qatar that would be displaced by shale gas. Supplies that are deemed “secure” by Fallon. Even a shale gas boom will have no impact on Russian imports until well into the next decade, by which point demand for gas should be falling sharply in the EU as efforts to limit climate change bear fruit.

It is, in fact, our efforts to tackle climate change that will reduce the UK’s and Europe’s exposure to energy imports. The EU has set a target of 80%-95% emissions reductions by 2050. In the UK, the government’s independent climate advisers have suggested that we will need to largely remove gas from the power sector in the coming decades. Yet the government, including the energy minister, is opposing measures that could make this ambition a reality by blocking nationally binding EU targets for both renewables and energy efficiency. The European commission’s assessment of the impacts of these targets found that they could cut net energy imports by more than half by 2050.

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What did I call it again? The gift that keeps on taking.

TEPCO Fails To Restart Fukushima Water Decontamination Process (RT)

The water decontamination process at the crippled Fukushima nuclear power plant has once again been halted, only about six hours after the plant’s operator TEPCO announced it was resuming the purification process following a previous failure. Six days ago, Tokyo Electric Power Co. (TEPCO) detected a failure in what is known as the Advanced Liquid Processing System (ALPS). The company said that up to 900 tons of water, which had not been sufficiently cleaned in the ALPS equipment, flowed into a network of 21 tanks that were holding 15,000 tons of treated water. Not only have the 21 tanks been rendered unusable, but all 15,000 tons of previously cleaned water has to be retreated.

TEPCO said it restarted two of three lines used to clean toxic water at around 04:00 GMT on Monday. A third line remained offline while crews examined a filter defect, AFP reported. Yet shortly before 10:00 GMT, TEPCO suspended the ALPS of the two units after finding about a half liter of leaked water at a tank designed to measure levels of radioactive materials in the processed water, according to Jiji Press. TEPCO said in a press release that there were no new leaks outside the system, though. The difficulties only mark the latest challenges TEPCO has faced since March 2011, when a 9.0 megathrust earthquake triggered a subsequent tsunami that resulted in a badly-damaged Fukushima Daiichi nuclear power plant.

The ALPS system was developed to dramatically curb the radiation level of highly contaminated water that is accumulating at the plant. The ALPS consists of 14 steel cylinders through which the contaminated water is filtered. After the filtering, waste materials like the absorbent and remaining sludge are transferred to high-integrity containers (HICs) that are transported to a temporary storage facility.

The ALPS can remove 62 different types of radionuclides, including strontium and cobalt, from contaminated water. While the system cannot remove tritium – a radioactive isotope of hydrogen – the purification of water through the system is expected to reduce damage levels if water leaks from storage tanks.

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