commodities Archives - Page 2 of 5

China halted trading in stocks, futures and options after a selloff triggered circuit breakers designed to limit swings in one of the world’s most volatile equity markets. Trading was halted at about 1:34 p.m. local time on Monday after the CSI 300 Index dropped 7%, according to data compiled by Bloomberg. An earlier 15-minute halt at the 5% level failed to stop the retreat, with shares extending losses as soon as the market re-opened. The selloff, the worst-ever start to a year for Chinese shares, came on the first day the circuit breakers took effect. The $7.1 trillion stock market is starting the year on a down note after data showed manufacturing contracted for a fifth straight month and investors anticipated the end of a ban on share sales by major stakeholders.

Chinese policy makers, who went to unprecedented lengths to prop up stock prices during a summer rout, are trying to prevent financial-market volatility from weighing on economy set to grow at its weakest annual pace since 1990. “Stay short, or go home,” said Mikey Hsia at Sunrise Brokers. “That’s all you can do.” The halts took effect as anticipated, without any technical issues, Hsia said. About 595 billion yuan ($89.9 billion) of shares changed hands on mainland exchanges before the suspension, versus a full-day average of about 1 trillion yuan over the past year, according to data compiled by Bloomberg.

Under the circuit breaker rules finalized last month, a move of 5% in the CSI 300 triggers a 15-minute halt for stocks, options and index futures, while a move of 7% closes the market for the rest of the day. The CSI 300, comprised of large-capitalization companies listed in Shanghai and Shenzhen, fell as much as 7.02% before trading was suspended. Chinese shares listed in Hong Kong, where there is no circuit breaker, extended losses after the halt on mainland exchanges. The Hang Seng China Enterprises Index retreated 4.1% at 2:12 p.m. local time. “Investors are using Hong Kong to hedge their positions,” said Castor Pang at Core-Pacific Yamaichi. “The circuit breaker may increase selling pressure further.”

China needs a big clean-up.

• China Factories Struggle As Weak Exports Drag Industry In Asia (Reuters)

China’s factory activity shrank for a 10th straight month in December as surveys across Asia showed industry struggling with slack demand even as the policy cupboard is looking increasingly bare of fresh stimulus. Uncertainty over the economic outlook was exacerbated by a flare up in tensions between Saudi Arabia and Iran, that has sent investors scurrying from stocks to safe havens such as the Japanese yen. Japan’s Nikkei fell over 2% and Shanghai lost more than 3%. The Caixin/Markit China Manufacturing Purchasing Managers’ Index (PMI) slipped to 48.2 in December, below market forecasts of 49.0 and down from November’s 48.6. That was the lowest reading since September and well below the 50-point level which demarcates contraction from expansion.

It followed a fractional increase in the official PMI to 49.7. There was a faint stirring of hope as PMIs in South Korea and Taiwan both edged above the 50 mark, though more thanks to a pick up in domestic demand than any revival in exports. Weighed down by weak demand at home and abroad, factory overcapacity and cooling investment, China is expected to post its weakest economic growth in 25 years in 2015, with the rate of expansion slipping to around 7% from 7.3% in 2014. “Absent vibrant external demand, we think it’s a consensus view that China’s GDP growth is poised to slow further to ‘about’ 6.5% in 2016,” ING said in a research note. The drag from industry comes as China makes gradual progress in its transformation to a more service-driven economy.

Not so smart money: “More than $60 billion of fresh capital found its way into Chinese startup and take-private deals in 2015, compared with $13.9 billion during 2014..”

• China’s Tech Sector Likely Faces Tougher Sledding in 2016 (WSJ)

Investors who poured billions into China’s homegrown technology companies scored big during 2015. But increasingly it looks like the easy money has been made and this year could prove tougher as China’s tech companies face high expectations from investors. Many Chinese privately held startups rewarded investors, as valuations more than doubled during 2015 and a wave of management buyout offers buoyed investors in U.S.-listed Chinese tech companies. More than $60 billion of fresh capital found its way into Chinese startup and take-private deals in 2015, compared with $13.9 billion during 2014 according to data from CB Insights and Dealogic. Investors marked up their holdings in Chinese privately held startups during the year even as they put lower price tags on some of their Silicon Valley investments.

Most investors aren’t required to publicly disclose their valuations of startup holdings, which are often valued based on their most recent round of fundraising. But mutual fund Fidelity Blue Chip Growth Fund, which has marked down some of its Silicon Valley startup investments, instead increased the value ascribed to its January investment in the $15 billion Chinese shopping app Meituan.com by more than 20% through the end of November. Investors have seen their bet on Chinese ride-hailing company Didi Kuaidi Joint Co. nearly triple from a $6 billion valuation in February to $16 billion in September.

The higher valuations and cash-burning of many startups are giving some investors pause. In recent months, some have become more cautious about putting fresh cash into big startups, as China’s rocky domestic stock market put local initial public offerings on hold. “The huge swings in the public markets have spilled over into the later-stage venture investment market,” says Richard Ji, founder of All-Stars Investment, an investor in Chinese startups like $46 billion smartphone maker Xiaomi Corp. and ride-sharing company Didi Kuaidi Joint Co. “Valuations overall have softened and companies are offering better terms to investors.”

Smashing US exports, emerging and commodities currencies in the process.

• Obama Dollar Rally Is Forecast to Join Clinton, Reagan Upturns (BBG)

The dollar has an opportunity to make history. After three straight years of gains, strategists are forecasting the U.S. currency will be a world beater again in 2016, strengthening against seven of 10 developed-world peers by the end of the year, according to the median estimate in a Bloomberg survey. That outlook is backed by the Federal Reserve’s stated intent to continue raising interest rates while peers in the rest of the world keep them flat or lower. The rally that started during President Barack Obama’s second term is poised to join a category defined by only the biggest, most durable periods of dollar strength since the currency’s peg to gold ended in 1971.

Of the two other rallies that share that distinction, during the terms of Presidents Ronald Reagan and Bill Clinton, neither stopped at four years. “This is the third big dollar rally we’ve had,” said Marc Chandler, global head of currency strategy in New York at Brown Brothers Harriman & Co. “The Obama dollar rally, I think, is being fueled by the divergence in monetary policy.” The U.S. currency will end 2016 higher against its major counterparts except the Canadian dollar, British pound and the Norwegian krone, posting its biggest gains against the New Zealand and Australian dollars and the Swiss franc, according to forecasts compiled by Bloomberg.

“UK shares have steadily risen for more than 70 months..”

• Global Stock Markets Overvalued And Unprepared For Return Of Risk (Telegraph)

Investors face a rude awakening in 2016 as the return of risk brings an end to the era of unparalleled financial excess. Central bankers actions to save creditors by reducing borrowing costs to near zero created a Dorian Gray style economy that pursued returns without consequences. We are about to unveil the reality of those decisions after six years in a world devoid of financial responsibility.

[..] The realisation of losses is something that many in the cosseted world of investment will never have experienced. The collapse in high-yield bond prices is already causing paralysis. Third Avenue Management, a $800m high-yield mutual fund, was forced to halt redemptions in order to run down the fund in an orderly fashion as investors clamoured for the exit. The holders of certain bonds in Portuguese bank Novo Banco reacted with fury when they were informed they faced losses last week under a recapitalisation plan. The fact that an investor in the debt of a Portuguese bank is surprised that losses are even a possibility is laughable, if it wasn’t also deeply troubling. The return of risk will turn many of the investment decisions made during the past six years on their head.

Out will go unprofitable companies that relied on constant support from shareholders for stellar growth. In will come companies with solid profit track records that can generate enough cash to fund themselves. The lofty valuations in the technology sector are looking particularly exposed. When the world economy stumbled in 2008 it was only concerted action that pulled it back from the brink. The situation now is very different with the US pursuing monetary tightening, and China devaluing its currency to arrest the decline. Emerging markets have been crippled by a currency collapse and the drop in commodity prices has undermined the budgets of Canada, Norway, Australia, Venezuala and Saudi Arabia. The flow of funds out of developed Western equity markets is becoming alarming.

We enter 2016 as the bull run in the FTSE 100 is looking particularly long in the tooth. UK shares have steadily risen for more than 70 months. The goldilocks scenario of cheap debt and low wages is coming to and end and placing corporate profits under pressure. The Institute of Directors has already warned UK profits may be past their peak. This leaves investors in the FTSE 100 exposed with shares trading on 16 times forecast earnings, a premium to the long run average of 15. Even more worrying when you consider earnings have to increase by 14pc in 2016 to achieve that rating, if earnings remain flat in the year ahead the market is trading on more than 20 times earnings.

Scary graph of the day.

• Reserve Bank of Australia Index of Commodity Prices (RBA)

Preliminary estimates for December indicate that the index declined by 4.9% (on a monthly average basis) in SDR terms, after declining by 3.1% in November (revised). The decline was led by the prices of iron ore and oil. The base metals subindex declined slightly in the month while the rural subindex was little changed. In Australian dollar terms, the index declined by 6.0% in December. Over the past year, the index has fallen by 23.3% in SDR terms, led by declines in the prices of bulk commodities. The index has fallen by 17.1% in Australian dollar terms over the past year. Consistent with previous releases, preliminary estimates for iron ore, coking coal and thermal coal export prices are being used for the most recent months, based on market information. Using spot prices for these commodities, the index declined by 5.3% in December in SDR terms, to be 25.6% lower over the past year.

John provides a slew of examples I have no space for here.

• As Hedge Funds Go, So Goes The World (John Rubino)

How do you make money in a world where history is meaningless? The answer, for a growing number of big fund managers, is that you don’t. Hedge funds, generally the most aggressive species of money manager, do a lot of “black box” trading in which bets are placed on previously-identified patterns and relationships on the assumption that those patterns will repeat in the future. But with governments randomly buying stocks and bonds and bailing out/subsidizing everything in sight, old relationships are distorted and strategies that worked in the past begin to fail, as do the money managers who rely on them.

[..] Why should regular people care about the travails of the leveraged speculating community? Because these guys are generally considered to be the finance world’s best and brightest, and if they can’t figure out what’s going on, no one can. And if no one can, then risky assets are no longer worth the attendant stress. In response, a system that had previously embraced leverage and “alternative” asset classes will go risk-off in a heartbeat, and all those richly-priced growth stocks and trophy buildings and corporate bonds will find air pockets under their prices. And since pretty much everything else now depends on high asset prices, things will get ugly in the real world.

A case can be made that such a contagion is already underway but is being hidden from Americans by the recent strength of the dollar. According to Deutsche Bank, when measured in dollars the rest off the world is now deeply in recession and falling fast. In other words, Main Street is vulnerable to leveraged trading algorithms and Brazilian bonds because it’s not just exotica that is overleveraged. Virtually all governments have to refinance trillions of short-term debt each year. Corporations have borrowed record amounts of money in this expansion (and wasted much of it on share buy-backs). Pension funds (the last remaining leg of the middle-class stool for millions of Americans) are grossly underfunded and will have to slash benefits if their portfolios decline from here.

Risk-off, in short, is no longer just a temporary swing of the pendulum, guaranteed to reverse in a year or two. As amazing as this sounds, we’ve borrowed so much money that as hedge funds go, so goes the world.

Desperation writ large.

• Japan Central Bank Turns Activist Investor To Revive Economy (Reuters)

Japan’s central bank, which dominates the domestic bond market, has begun to call the shots in the equity market as well – to the point where asset managers are looking to design investment funds with the Bank of Japan in mind. The bank has blazed a trail in global central banking by becoming something of an activist investor in pursuit of economic revival, using its influence as a mainly indirect owner of shares to support firms that spend more cash at home. The bank, which owns about $54 billion in exchange-traded funds (ETFs), is ramping up its purchases but has yet to give any detailed investment criteria, beyond a preference for firms with growing capital expenditure and investment in its staff.

“We’re willing and considering to add such a product,” said Kohei Sasaki at Mitsubishi UFJ Kokusai Asset Management. “We’ve already contacted index vendors on this matter.” Bank of Japan Governor Haruhiko Kuroda and Prime Minister Shinzo Abe have been calling on companies to raise capital expenditure and wages to spur the economy, after repeated monetary and fiscal stimulus over the past three years failed to lift it out of a funk of weak consumption and deflation. So far, their pleas have failed to prod companies into action, despite many of them making record profits on the back of the central bank’s zero interest rates and a weak yen.

Losing patience, Kuroda said last month the bank would buy 300 billion yen ($2.5 billion) a year of ETFs, in addition to 3 trillion yen it already assigns each year to ETFs. It said the extra purchases would target funds whose underlying firms were “proactively making investment in physical and human capital”. Though he did not go into detail, the comment was an invitation for asset managers and index compilers to come up with some “Abenomics” ETFs which would be full of listed firms doing their bit to revive consumption and the broader economy. “We’ve already started trying to develop some kind of solution to the demand,” said Seiichiro Uchi, managing director for index compiler MSCI in Tokyo.

This is a policy thing, not some freak accident.

• UK Set For Worst Wage Growth Since 1920s, 3rd Worst Since 1860s (Guardian)

The 10 years between 2010 and 2020 are set to be the worst decade for pay growth in almost a century, and the third worst since the 1860s, according to new research. Research from the House of Commons Library shows that real-terms wage growth is forecast by the Office for Budget Responsibility to average at just 6.2% in this decade, compared with 12.7% between 2000 and 2010. The figures show that real-terms wage growth was lower only in the decades between 1920 and 1930 and between 1900 and 1910. Wage growth averaged at 1.5% in the 1920s and at 1.8% in the 1900s. Owen Smith, shadow work and pensions secretary, who commissioned the research, said that a “Tory decade of low pay” would see “workers’ pay packets squeezed to breaking point”.

“Even with this year’s increase in the minimum wage, the Tories will have overseen the slowest pay growth in a century and the third slowest since the 1860s,” he said. George Osborne has justified cuts to in-work benefits by arguing that the government is transitioning the UK from being “a low-wage, high-welfare economy to a high-wage, low-welfare economy”, a claim that Smith said was contradicted by wage-growth figures. In the autumn statement, the chancellor abandoned plans to cut £4bn from working tax credits, under pressure from the opposition and many backbench Tory MPs. However, Labour has pointed out there will be cuts to in-work benefit payments for new claimants put on the new universal credit system – championed by the work and pensions secretary, Iain Duncan Smith – which rolls at least six different benefits into one.

Reasons given: weather and terrorism. Couldn’t be lack of spending money, could it?

• UK High Street Retailers Feel The Pinch As Shoppers Stay At Home (Guardian)

Record-breaking discounts on offer in the post-Christmas sales have so far failed to attract a rush of bargain hunters to the high street, raising fears that Marks and Spencer, John Lewis and Next will be forced to report disappointing trading figures for the festive period. The number of high street shoppers from Monday 28 December to Friday 1 January was down 3% compared with the same period in 2014, according to research firm Springboard. A year ago, retailers had been celebrating a jump of 6.2%. Retail experts had predicted a stampede to the shops on Boxing day after retailers offered discounts topping last year’s average of more than 50%. They are desperate to clear cold-weather clothing that has remained on the shelves during record mild weather.

While Boxing Day had offered some hope of a pick-up in trade, the following week – which included a bank holiday – was poor. Shopper behaviour differed markedly in different parts of the country, with footfall down by almost 7% in Wales and by 5.8% in the West Midlands, but up in Scotland and the east of England by 11.3% and 4.5% respectively. In London and the south-east, the affluent engine of consumer spending, numbers were also in decline, dropping 4.5% and 3.3% respectively. But Springboard figures showed that some of this trade appeared to have migrated to shopping centres, where numbers were up 3.3% in Greater London and ahead by 8.8% in the south-east. As well as unexpectedly mild weather leaving little demand for winter clothing stock, shoppers are also thought to have been put off venturing out by heavy rainstorms and concerns about potential terrorist attacks.

Will M&A’s be 2016 story?

• Big Oil Faces Longest Period Of Investment Cuts In Decades (Reuters)

With crude prices at 11-year lows, the world’s biggest oil and gas producers are facing their longest period of investment cuts in decades, but are expected to borrow more to preserve the dividends demanded by investors. At around $37 a barrel, crude prices are well below the $60 firms such as Total, Statoil and BP need to balance their books, a level that has already been sharply reduced over the past 18 months. International oil companies are once again being forced to cut spending, sell assets, shed jobs and delay projects as the oil slump shows no sign of recovery. U.S. producers Chevron and ConocoPhillips have published plans to slash their 2016 budgets by a quarter. Shell has also announced a further $5 billion in spending cuts if its planned takeover of BG Group goes ahead.

Global oil and gas investments are expected to fall to their lowest in six years in 2016 to $522 billion, following a 22% fall to $595 billion in 2015, according to the Oslo-based consultancy Rystad Energy. “This will be the first time since the 1986 oil price downturn that we see two consecutive years of a decline in investments,” Bjoernar Tonhaugen, vice president of oil and gas markets at Rystad Energy, told Reuters. The activities that survive will be those that offer the best returns. But with the sector’s debt to equity ratio at a relatively low level of around 20% or below, industry sources say companies will take on even more borrowing to cover the shortfall in revenue in order to protect the level of dividend payouts.

Shell has not cut its dividend since 1945, a tradition its present management is not keen to break. The rest of the sector is also averse to reducing payouts to shareholders, which include the world’s biggest investment and pension funds, for fear investors might take flight. Exxon Mobil and Chevron benefit from the lowest debt ratios among the oil majors while Statoil and Repsol have the highest debt burden, according to Jefferies analyst Jason Gammel.

Amounts look utterly useless.

• New EU Authority Budgets For 10 Bank Failures In Four Years (FT)

The new EU authority that took over the job of winding up failing banks on January 1 has budgeted enough money to wind up 10 banks over the next four years, a tender sent to financial services firms shows. The tender, seen by the Financial Times, says the Single Resolution Board (SRB) is seeking €40m in “accounting advice, economic and financial valuation services and legal advice” to be used in the resolution of struggling eurozone banks from 2016-2020. Industry sources said such advice would cost between €4m and €5m per large case, so the SRB will be able to resolve eight to 10 banks. A spokeswoman for the SRB confirmed the tender’s details, but said the budget should not be interpreted as firm prediction of the number of banks the authority expects to resolve over the coming years.

“The SRB has made a reasonable estimation of the amount,” she said. “This estimation can be negotiated and adjusted.” In the aftermath of the 2008 financial crisis, which saw a series of chaotic and inconsistent collapses, eurozone leaders hammered out a complex protocol for handling bank failures. The goal is to be able to wind up even one of the region’s biggest banks over a single weekend under the guiding arm of the Brussels-based SRB and national resolution authorities. The authority is chaired by Elke König, a former president of the German regulator BaFin.

Many industry insiders and policy watchers are sceptical about whether an orderly wind-down in such a tight timeframe is really possible, especially in cases as complicated as the implosion of the Greek and Cypriot banking systems. As such, the first case the SRB handles will be closely watched. The SRB wants to have the best advice money can buy. The tender, which has not yet been awarded, is only open to large international firms; those offering accountancy or valuation advice must have annual sales of at least €5m the last three years, those offering legal advice must have at least €10m.

Yeah. What are the odds? Which markets? China’s?

• Fed’s Fischer Supports Higher Rates If Markets Overheat (BBG)

Federal Reserve Vice Chairman Stanley Fischer said it might be necessary for the central bank to increase interest rates if financial markets were overheating, though the first line of defense should be using regulatory tools to prevent bubbles from developing. “If asset prices across the economy – that is, taking all financial markets into account – are thought to be excessively high, raising the interest rate may be the appropriate step,” Fischer said in a speech at the annual American Economic Association meeting in San Francisco on Sunday. He suggested that might be particularly true in the U.S., where many of the so-called macro-prudential regulatory tools to tackle financial market excesses are either lacking or untested. Such tools would include, for example, adjusting lending rules to try to rein in borrowing.

Fischer did make clear that he thought “macro-prudential tools, rather than adjustments in short-term interest rates, should be the first line of defense” in tackling asset bubbles, while spelling out that “the real issue of whether adjustments in interest rates should be used to deal with problems of potential financial instability is macroeconomic.” Fischer didn’t address the current state of financial markets, although other policy makers, including Fed Chair Janet Yellen, have indicated that they do not see them, on the whole, as being overheated. Fischer was among three Fed policy makers who made public remarks at the AEA meeting on Sunday. San Francisco Fed President John Williams discussed estimates of long-run neutral rates, while Cleveland’s Loretta Mester delivered her outlook for the U.S. economy and explained why the Fed would not react to short-term swings in economic data.

Baltic Drier.

• Cash Burning Up For Shipowners As Finance Runs Dry (FT)

During stumbles in the market for shipping dry bulk commodities since the financial crisis, DryShips — the listed vehicle of George Economou, one of the industry’s best-known figures — has proved adept at dodging trouble. Diversification into owning oil-drilling rigs — through Ocean Rig, in which DryShips now holds only a minority stake — proved robustly profitable when oil prices were high. The company also diversified into oil tankers. However, slumps in earnings for dry bulk carriers and in oil prices have left the company scrabbling to stay afloat. On December 7, it announced an $820m loss for the third quarter after it was forced to take a $797m write-off for the value of its entire remaining fleet of dry bulk vessels, many of which it has been selling off. In October, the company announced that it was borrowing $60m from an entity controlled by Mr Economou.

The challenges facing DryShips are among the most acute of those facing nearly all dry bulk shipping companies after a slump in earnings drove most owners’ revenues well below their operating costs. Owners are haemorrhaging cash. Owners of Capesize ships — the largest kind — currently bring in around $3,000 a day less than the $8,000 they cost to operate. The losses for the many owners who have to service debts secured against vessels are far higher. Basil Karatzas, a New York-based corporate finance adviser, points out that in an industry that has already been making steady losses for 18 months, such substantial losses quickly mount up. “If you have 10 ships and you’re losing $3,000 to $4,000 per day per ship, that’s, let’s say, $40,000 per day, times 30 in a month, times 12 in a year,” he says. “You are losing some very serious money.” The question is how long dry bulk owners — and the private equity firms which have invested heavily in the companies — can survive the miserable market conditions.

Odd take, but amusing.

• The 20% World: The Odds Of The Unthinkable Are Going Up (BBG)

If you want to pick a number for 2016, how about 20%? Look around the politics of the Western world, and you’ll see that a lot of once-unthinkable ideas and fringe candidates suddenly have a genuine chance of succeeding. The odds are usually somewhere around one in five – not probable, but possible. This “20% world” is going to set the tone in democracies on both sides of the Atlantic – not least because, as anybody who bets on horse racing will tell you, eventually one of these longshots is going to canter home. Start with President Donald Trump. Gamblers, who have been much better at predicting political results than pollsters, currently put the odds of the hard-to-pin-down-but-generally-right-wing billionaire reaching the White House at around 6-1, or 17%.

Interestingly, those are roughly the same odds as the ones offered on Jeremy Corbyn, the most left-wing leader of the Labour Party for a generation, becoming the next British prime minister. In France, gamblers put the likelihood of Marine Le Pen winning France’s presidency in 2017 at closer to 25%, partly because the right-wing populist stands an extremely good chance of reaching the runoff. Geert Wilders, another right-wing populist previously described as “fringe,” perhaps stands a similar chance of becoming the next Dutch prime minister. Other once-unthinkable possibilities could rapidly become realities. America’s version of Corbyn, Bernie Sanders, whom Trump recently described as a “wacko,” is currently trading around 5%, no worse than Jeb Bush.

Plus, Sanders has assembled the sort of Corbynite coalition of students, pensioners and public-sector workers that tends to outperform in primaries. If Hillary Clinton stumbles into another scandal, the Democrats could yet find themselves with a socialist contending for the national ticket. And it’s not just “wacko” candidates; some unthinkable events are also distinctly possible. This year, perhaps as early as June, Britain may vote to leave the European Union. Bookmakers still expect the country to go for the status quo, though most pundits are less certain about this than they were about the Scottish referendum in 2014, which turned out to be an uncomfortably close race for the British establishment.

Investors are used to the political world serving up surprises. These surprises, however, have usually involved one mainstream party doing much better or worse than expected – and things continuing as normal. Not this time. With Trump in charge, America would have a wall along the Rio Grande and could well be stuck in a trade war with China. Le Pen wants to take France out of the euro and renegotiate France’s membership in the EU. It’s hard to tell what would do more damage to the City of London: a Brexit that could lead to thousands of banking jobs moving to the continent; or a Corbyn premiership, which could include a maximum wage and the renationalization of Britain’s banks, railways and energy companies.

Moreover, in the 20% world, some nasty possibilities make others more likely. If Britain leaves the European Union, Scotland (which, unlike England, would probably have voted to stay in) might in turn try to leave Britain. If Le Pen manages to pull France out of the euro, the union’s chances of dissolution increase. And you can only guess what a President Trump would do to U.S. relations with Latin America and the Muslim world.

How much longer for Tsipras?

• Greece Warns Creditors On ‘Unreasonable Demands’ Over Pensions (FT)

Greek Prime Minister Alexis Tsipras has said his government “will not succumb to unreasonable demands” as it prepares to send the country’s creditors proposals on crucial reforms to the pension system this week. “The creditors have to know that we are going to respect the agreement,” Mr Tsipras said in an interview with Real News newspaper on Sunday, referring to reforms demanded in exchange for Greece’s €86bn bailout agreement last year. However, he pledged that Greece “won’t succumb to unreasonable and unfair demands” for more pension cuts. Mr Tsipras said that Greece will reform its pension system through measures targeting additional proceeds of about €600m in 2016, adding that “we have no commitment to find the money exclusively from pension cuts”.

On the contrary, “the agreement provides the option of equivalent measures”, he said, admitting however, that the pension system is “on the brink of collapse” and needs to be overhauled. Greece’s proposals are due to be sent to the creditors via email on Monday. The aim is to reach an agreement when the representatives of the creditors return to Athens later in January. The proposals include increases in employer insurance contributions by 1% and employee contributions by 0.5%. Taxes on banking transactions may also be introduced to secure the targeted €600m and avoid any further cuts. But creditors have indicated that further pension cuts are inevitable.

They have already expressed their scepticism about increasing the contributions paid by employers and workers, stressing the potential wider economic impact on struggling businesses. Mr Tsipras’s comments were echoed by the finance minister Euclid Tsakalotos, who warned of forthcoming difficulties in negotiations with creditors. “There will be victories and defeats,” he said in an interview with Kathimerini newspaper. The government is rushing to finalise and submit the new pension bill to parliament for voting by January 15 so that the first review of the bailout package can be completed and discussion on debt relief can begin. Mr Tsipras’ governing majority is expected to be sorely tested by any pension reform legislation. The government’s majority has slid from 155 seats to 153, only two seats from the required minimum.

How much longer for the EU?

• Sweden To Impose ID Checks On Travellers From Denmark (Guardian)

Sweden is set to drastically reduce the flow of refugees into the country by imposing strict identity checks on all travellers from Denmark, as Scandinavian countries compete with each other to shed their reputations as havens for asylum seekers. For the first time since the 50s, from midnight on Sunday travellers by train, bus or boat will need to present a valid photo ID, such as a passport, to enter Sweden from its southern neighbour, with penalties for travel operators who fail to impose checks. Passengers who fail to present a satisfactory document will be turned back.

“The government now considers that the current situation, with a large number of people entering the country in a relatively short time, poses a serious threat to public order and national security,” the government said in a statement accompanying legislation enabling the border controls to take place. The move marks a turning point for the Swedish ruling coalition of Social Democrats and Greens, which earlier presented itself as a beacon to people fleeing conflict and terror in Asia and the Middle East. “My Europe takes in people fleeing from war, my Europe does not build walls,” Swedish prime minister Stefan Löfven told crowds in Stockholm on 6 September. But three months and about 80,000 asylum seekers later, the migration minister told parliament: “The system cannot cope.”

[..] Critics of Sweden’s refugee crackdown fear it will cause a “domino effect” as countries compete to outdo each other in their hostility to asylum seekers. “Traditionally, Sweden has been connected to humanitarian values, and we are very worried that the signals Sweden is sending out are that we are not that kind of country any more,” said Anna Carlstedt, president of the Red Cross in Sweden, whose staff and volunteers have often been the first line of support for new arrivals in the country. Other Scandinavian countries have recently announced their intention to stem the flow of refugees. In his new year address, Denmark’s liberal PM Lars Løkke Rasmussen said the country was prepared to impose similar controls on its border with Germany, if the Swedish passport checks left large numbers of asylum seekers stranded in Denmark.

The shame deepens still.

• Refugees Hold Terrified, Frozen Children Above The Waves Off Lesbos (DM)

Parents were forced to hold their children above freezing January waves as they struggled to reach shore on the Greek island of Lesbos on Sunday. The group of migrants and refugees were helped to disembark by volunteers, although several were forced to wade to the beach after falling overboard. Photographs show one father struggling to reach shore as he tried to hold his tiny, terrified daughter above the waves. Another image shows a group gathered around a woman in tears, while in another photograph, a little girl cries as she sits wrapped in a giant, silver thermal blanket after the harrowing crossing from Turkey. Once on shore, the group were handed thermal blankets stamped with the logo of the UNHCR as they sat on the beach near the town of Mytilene.

It comes the day after charity workers created a giant peace sign out of thousands of life-jackets on the hills of the Greek island, in honour of those who have died while making the perilous crossing in the hope of reaching Europe. The onset of winter and rougher sea conditions do not appear to have deterred the asylum-seekers, with boats still arriving on the Greek islands daily. Elsewhere, Turkish coastguards rescued a group of 57 migrants and refugees, including children, after they were left stranded on a rocky islet in the Aegean Sea. The group was trying to reach Greece by making the perilous journey across the sea, but they hit trouble after leaving the Turkish resort of Dikili, in Izmir province.

Debt Rattle December 31 2015

Dec 312015

December 31, 2015 Posted by Raúl Ilargi Meijer at 9:59 am Finance Tagged with: Brazil, China, Civil War, commodities, derivatives, Greece, mortgage, oil, refugees, yuan 1 Response »

DPC Market Street from Montgomery Street, San Francisco, after the earthquake 1906

• The Deadly Truth About the Great Boom and This “Recovery” (Dent)

• Asia’s Top Commodity Trader Ends a Turbulent Year With Cut To Junk (BBG)

• Mom And Pop Are The Greater Fools (ZH)

• Oil Ends 2015 In Downbeat Mood; Hangover To Be Long, Painful (Reuters)

• Impact Of Low Crude Prices On Oil Powers (Guardian)

• China’s Yuan Posts Biggest Annual Loss In 21 Years (BBG)

• China Fires a Warning Shot at Yuan Speculators With Bank Bans (BBG)

• China’s Financial Growing Pains Caused World of Hurt in 2015 (WSJ)

• Hong Kong Retail Slows as Mainland Tourists Stay Away (WSJ)

• Fannie and Freddie Give Birth to New Mortgage Bond (WSJ)

• The World’s Political And Economic Order Is Stronger Than It Looks (AEP)

• Derivatives vs Bank Deposits: Let the Bail-Ins Begin (Ellen Brown)

• It’s Every Snitch For Himself In Brazil’s Petrobras Scandal (BBG)

• For the Wealthiest, a Private Tax System That Saves Them Billions (NY Times)

• China Says Consulted Widely On Army Reform, Xi Closely Involved (Reuters)

• Turkey ‘One Step Away From A Civil War’ (NY Times)

• Greek Pension Cuts Back On The Table (Kath.)

• Greek House Price Drop Second To Worst In The World (Kath.)

• Merkel Urges Germans To See Refugee Arrivals As ‘An Opportunity’ (AFP)

“My forecast today: the stock market will start to crash by early February, if not sooner..”

• The Deadly Truth About the Great Boom and This “Recovery” (Dent)

Below is a chart that shows the office space per worker in square feet. It shows a rise into the height of the financial crisis, after which it’s fallen like a rock! At first this could seem counterintuitive. Why did the square footage per worker go up into the worst of the recession into mid- to late-2009? That’s because companies were laying off workers going into that recession, meaning there were more workers per square feet. But the real story comes in the recovery from late 2009 forward.

Square footage per worker has declined very sharply from 371 square feet to 270, down a whopping one-third in just over six years as businesses have rehired a large portion of the laid-off workers – which means largely NOT creating new jobs. You should not look at this chart and assume that because less square footage per worker means more workers than in the past that everything is hunky dory. What’s more important is that the sharp decrease in square footage implies a lack of demand in commercial real estate. And that’s because commercial real estate is already way over-expanded! We overbuilt it in the great boom of 1983 to 2007, so even these hires have not filled up the available space.

Which means businesses aren’t expanding their office or industrial space! So while hiring more workers sounds fine out of context… it’s masking much more severe, deeper-set issues in our capacity to build for the future. This is the hard truth that no one is looking at: businesses are merely re-employing their past capacity, and not creating new plants and offices for future employment. All the 200,000-plus jobs numbers per month, if they are even fully real, are just catching up with the past. And we shouldn’t be investing in such new work space as we already have all we need for decades ahead. This is the reality of demographics that clueless economists just don’t get.

[..] Folks, this “recovery” isn’t working! And no one has expected it to given the over-expansion in the greatest debt bubble in U.S. history from 1983 to 2008. Inflation hasn’t risen due to excess capacity here and around the world, especially China… Money velocity continues to drop without lending and productive investment to expand it… Businesses are struggling with stagnant earnings because we already hit the peak of debt capacity and demographic spending growth in the great boom that finally peaked in late 2007, as I forecast two decades before. Debt was running at 2.54 times GDP for 26 years. It doesn’t take a rocket scientist or nuclear physicist to tell you that pretty much guarantees a massive period of deleveraging and depression – not continued expansion.

So since growth is all but impossible, corporations have resorted to financial engineering to keep the wagon rolling – all courtesy of the Fed, with near-zero short- and long-term interest rates. They’ve had two options: either increase stock buybacks to leverage their stagnant earnings with rising earnings-per-share on fewer shares, or increase dividends to compete with lower and lower yielding bonds (also courtesy of the Fed). And they’ve been milking both options for all they’re worth! But financial engineering does not result in real growth. And speculation does not expand the money supply. It is only a sign of decreasing money velocity, and a bubble that will only burst – like in 1929, 2000, and now again! [..] My forecast today: the stock market will start to crash by early February, if not sooner [..].

There will be no recovery in commodities until the overcapacity is drained.

• Asia’s Top Commodity Trader Ends a Turbulent Year With Cut To Junk (BBG)

Asia’s top commodity trader exits 2015 in very different shape to how it began the year. Noble Group has lost almost two-thirds of its value, with its stock trading near the lowest since 2008, after a year of attacks on its finances by critics including the anonymous Iceberg Research and short-seller Muddy Waters LLC. The latest blow, amid a rout in raw materials, was the cut in its credit rating to junk by Moody’s Investors Service on concerns over its liquidity. It’s a downgrade that will test Chief Executive Officer Yusuf Alireza’s view that while an investment-grade rating is desirable, it isn’t required for the business, as Standard & Poor’s also reviews its assessment. Moody’s decision comes a week after the Hong Kong-based company agreed to sell the rest of its agriculture unit to Cofco for at least $750 million.

While the deal may help the company to cut debt, its liquidity will remain constrained, according to Moody’s, which expects a prolonged commodity slump. “They have had a really difficult year, not only fighting the commodity slump but also various allegations,” Bernard Aw at IG Asia said by e-mail. “Entering 2016, the performance of Noble will clearly hinge on the recovery in the commodity complex. Noble may continue to offload non-profitable assets, to improve its balance sheet and creditworthiness. These should help it better navigate the challenging landscape.” Noble Group stock fell 9.1% to end at 40 Singapore cents on Wednesday, and traded unchanged early Thursday. The shares are 65% lower this year and are the biggest losers in the Straits Times Index.

The company’s dollar bonds due in 2020, its most liquid, dropped on Wednesday to the lowest since they were issued in 2009. After the Noble Agri deal closes, Noble Group’s rating metrics will substantially exceed those required of an investment-grade credit, the company said in a statement on Tuesday. Noble Group still has its investment-grade ratings from S&P and Fitch Ratings, spokesman Stephen Brown said, referring to comments made on the company’s last earnings call. He added that its bank covenants aren’t ratings-dependent. “We are confident that the deal will be approved by our shareholders and will close before the end of February,” Noble Group said in a statement to the Singapore Exchange late on Wednesday. “The current environment is opportunity-rich and plays to our strengths.”

Question is, what keeps markets at their high levels?

• Mom And Pop Are The Greater Fools (ZH)

[..] while the market was surging last week, the smart money was selling. This comes at the same time as ICI reported major redemptions from both stock ($3.9 billion) and bond ($4.5 billion) mutual funds, even as corporate buybacks were decelerating, leading to the question of just who was buying stocks during the Santa rally of the past two weeks. But something even more surprising emerged when looking at the detailed breakdown of how the “smart money” has been flowing. As Bank of America clarifies, when explaining where its $0.7 billion in weekly outflows came from, “net sales were chiefly due to institutional clients last week” and adds that institutionals “have sold stocks for eight consecutive weeks”!

And then something even more surprising emerges when looking at the YTD breakdown of flows: while hedge funds and private clients (retail) have largely offset each other over the past year, the former selling $2.8BN and the latter buying $2.2BN in 2015, something odd has taken place at the institutional level: starting in early January, the largest financial institutions – mutual funds and various other asset managers – have unleashed an unprecedented selling spree for 11 consecutive months, which has brought their total outflow to $26.8 billion. Which leads to another question: if institutions are actively dumping stocks, perhaps mom and pop investors should show the following chart to their financial advisors, who directly or indirectly work for these institutions, and ask them: why should they be buying, when the counterparty they are buying from is, most likely, this very same financial advisor?

“..global crude production exceeds demand by anywhere between half a million and 2 million barrels every day..”

• Oil Ends 2015 In Downbeat Mood; Hangover To Be Long, Painful (Reuters)

Oil prices remained in a downbeat mood during their final Asian-hours trading session of 2015 after record U.S. crude inventories reinforced concerns about a global supply glut that has pulled down prices by a third over the past year. Crude inventories in the United States rose 2.6 million barrels last week, the U.S. Energy Information Administration said. Analysts polled by Reuters had expected a draw of 2.5 million barrels. Crude prices held losses after falling more than 3% in the previous session, with U.S. West Texas Intermediate (WTI) crude futures trading around $36.70 per barrel at 0300 GMT on Thursday and Brent around $36.60 per barrel. Both benchmarks are down by around a third over 2015.

The immediate outlook for oil prices remains bleak, with some analysts like Goldman Sachs saying prices as low as $20 per barrel might be necessary to push enough production out of business and allow a rebalancing of the market. U.S. bank Morgan Stanley said in its outlook for next year that “headwinds (are) growing for 2016 oil.” The bank cites ongoing increases in available global supplies, despite some cuts by U.S. shale drillers in particular, as well as a slowdown in demand as the main reasons. “The imbalance in the global oil market has been diminishing in 2H15, but the hope for a rebalancing in 2016 continues to suffer serious setbacks,” the bank said, reflecting a market consensus that meaningfully higher prices are not expected before late 2016.

Traders expect some U.S. oil to be taken out of America and supplied into global markets, following the surprise lifting of a decades-old U.S. crude export ban in December, which ended a years-old discount in U.S. crude prices to international Brent. “At a time when U.S. shale is facing headwinds due to the collapse in crude oil prices… U.S. crude oil exports are likely to help reduce congestion concerns in the U.S.,” ING bank said. [..] Analysts estimate global crude production exceeds demand by anywhere between half a million and 2 million barrels every day. This means that even the most aggressive estimates of expected U.S. production cuts of 500,000 bpd for 2016 would be unlikely to fully rebalance the market.

A painful graph. We smell unrest.

• Impact Of Low Crude Prices On Oil Powers (Guardian)

A glut of oil, the demise of Opec and weakening global demand combined to make 2015 the year of crashing oil prices. The cost of crude fell to levels not seen for 11 years – and the decline may have further to go. There have been four sharp increases in the price of oil in the past four decades – in 1973, 1979, 1990 and 2008 – and each has led to a global recession. By that measure, a lower oil price should be positive for the world economy, with lower fuel costs for consumers and businesses in those countries that import crude outweighing the losses to producing nations. But the evidence since oil prices started falling from their peak of $115 a barrel in August 2014 has not supported that thesis – or not yet.

Oil producers have certainly felt the impact of the lower prices on their growth rates, their trade figures and their public finances butthere has been no surge in consumer spending or business investment elsewhere. Economist still reckon there will be a boost from a lower oil price particularly if it looks as if the lower cost of crude will be sustained. Dhaval Joshi, an economist at BCA, a London-based research company, said: “A commodity bubble has deflated three times in the past 100 years: the first was after world war one; the second was after the 1980s oil shock; the third is happening right now.” For the big producer countries, this is a major headache, the ramifications of which are only starting to be felt. Oil powers base their spending plans on an assumed crude price. The graphic below shows just how far below water their budgets are.

How long before IMF starts complaining on behalf of US?

• China’s Yuan Posts Biggest Annual Loss In 21 Years (BBG)

There’s no need to panic, according to the yuan’s top forecaster, even as the currency posted the biggest annual loss in more than two decades and a majority of economists predicted a further depreciation in 2016. “While a weaker yuan could create fear initially, the market will realize it’s a natural consequence of a more flexible yuan and divergent U.S.-China monetary policy,” said Ju Wang at HSBC, which had the best estimates for the onshore yuan over the last four quarters as measured by Bloomberg Rankings. A more adjustable policy will allow for swift reactions to domestic conditions, which “would be structurally positive for China’s economy,” she said. The nation overhauled its foreign-exchange system in 2015, giving market forces greater say in setting the yuan’s reference rate, allowing more foreign participants onshore and doubling trading hours.

The central bank kept investors guessing as it supported the exchange rate from March to August, shocked global markets with an Aug. 11 devaluation, and then spent billions of dollars to prop up the yuan before winning reserve status at the IMF on Nov. 30. The currency tumbled 4.5% in 2015 to close at 6.4936 a dollar in Shanghai on Dec. 31, according to China Foreign Exchange Trade System prices. That’s the biggest decline in data going back to 1994. The central bank cut its daily fixing, which limits onshore moves to a maximum 2% on either side, by 6.1% for the year. The reduction was the most since 2005, when China unpegged its currency from the greenback and allowed it to fluctuate against a basket of exchange rates.

Beijing is feeding speculation with its constant manipulations.

• China Fires a Warning Shot at Yuan Speculators With Bank Bans (BBG)

China has a message for currency speculators: the free lunch is over. The People’s Bank of China has suspended at least two foreign banks from conducting some cross-border yuan business until late March, according to people with direct knowledge of the matter. The clampdown comes as the growing offshore-onshore spread makes it profitable for those who skirt capital controls to buy the currency at a discount in Hong Kong and sell it in Shanghai. By closing loopholes in its regulations, China is trying to stabilize the yuan after a surprising revamp of its currency-valuation system in August led to capital outflows and prompted policy makers to tap $213 billion of foreign reserves to support the yuan. The risk is that discouraging arbitrage will cause the exchange rates to diverge further, undermining the goal of unifying the two markets.

“The market should see this as a warning shot across the bow,” said Douglas Borthwick at Chapdelaine, a unit of the British inter-dealer brokerage Tullet Prebon. Chinese regulators don’t want onshore trades to be speculative in nature and “in the short term this will likely lead to further widening of the spread,” he said. A three-month ban on settling offshore clients’ yuan transactions in the onshore market was imposed Tuesday, the people said. The central bank didn’t immediately respond to questions on the matter, and it was unclear how widely the ban has applied among foreign banks or which institutions are suspended. Spokespeople for Citigroup, HSBC and Standard Chartered, which are among the largest foreign dealers allowed in China’s interbank foreign-exchange markets, declined to comment on the ban and whether their operations were affected.

The offshore yuan, which is freely traded overseas, touched a five-year low on Wednesday before erasing losses on speculation the government was intervening to support the currency. It traded at 6.5810 a dollar as of 12:32 p.m. in Hong Kong, leaving it about 1.3% cheaper than the rate in mainland China. The gap between the two rates has widened since August when China’s devaluation, part of the move to a more market-determined currency regime, fueled expectations among overseas investors for further yuan weakness. The divergence is undesirable because it means companies cannot use hedging tools tied to overseas rates to protect their onshore exposure. By imposing the ban, China is seeking to prevent speculators from bringing money in illegally to arbitrage, even though it helps narrow the difference.

It’s all in the choice of words, isn’t it? Growing pains sounds so much better than bursting bubble.

• China’s Financial Growing Pains Caused World of Hurt in 2015 (WSJ)

China’s long history of tempestuous trading spilled over its borders this year, signaling that a once-isolated market is moving to the center of global finance. Chinese volatility upended markets from Tokyo to London, and helped send some emerging-market currencies to their weakest levels in nearly two decades. Commodities including copper and aluminum plumbed six-year lows as China, one of the world’s biggest metals consumers, reined in buying. While a summer stock crash and the surprise devaluation of China’s yuan spooked investors world-wide, the repercussions also exposed the growing pains of a maturing financial market. With one trading day left in 2015, Shanghai’s stock market is still up 10.5% this year, despite losing more than 40% of its value over the summer.

That gain outpaces the 1% rise in the S&P 500 through Tuesday, and the 9.6% advance in Germany’s DAX and 7.35% gain in the Stoxx Europe 600 index through Wednesday. China’s smaller Shenzhen stock market is up 66%, one of the best-performing benchmarks globally. Japan’s Nikkei Stock Average is up 9.1% for the year, as the central bank’s two-year easing campaign weakened the yen. A weaker currency can help exporters by boosting profits repatriated from abroad. Meanwhile, China’s yuan is on track for its largest annual fall on record, down more than 4% so far this year. Goldman Sachs economists say China was “arguably the prime mover in global markets” this year, though foreigners hold less than 2% of the mainland’s $8 trillion stock market and less than 3% of the onshore bond market.

On Aug. 24, dubbed “Black Monday” by Chinese government media, the Shanghai Composite’s 8.5% fall sparked a global selloff that dragged U.S. stocks to an 18-month low. Yet the struggles have been felt most acutely in markets of China’s regional trading partners, where slackening demand from the world’s second-largest economy has put a chill on exports of commodities and gadgets, dimmed the corporate outlook and sent currencies into a tailspin. Investors have pulled money out of Asia’s emerging-market equities every month since July, with the exception of October, according to the Institute of International Finance. Investors put $47 billion into emerging-market Asia stocks and bonds this year through November, compared with $107.9 billion for the whole of 2014.

Confidence in China is sagging.

• Hong Kong Retail Slows as Mainland Tourists Stay Away (WSJ)

Hong Kong, once a shopping mecca for mainland Chinese seeking Swiss watches and luxury handbags, is expected to record its biggest annual decline in retail sales since the outbreak of severe acute respiratory syndrome, or SARS, in 2003. The city may also post the first annual decline in mainland tourists since visa relaxations allowed individual visitors from China, also in 2003, prompting calls for extensive diversification of tourism—a pillar of the city’s economy. Spending by Chinese tourists has been the main driver of retail and commercial property sectors in Hong Kong in recent years, as the number of mainland tourists rose. During the boom, long lines outside the city’s numerous Louis Vuitton, Chanel and Gucci shops were commonplace, as luxury goods sold in Hong Kong were up to 40% cheaper than in China.

Those lines have largely disappeared as inflows of Chinese tourists slowed. The number of Chinese tourist arrivals was 15.4% lower in November compared with a year ago, the steepest decline all year, extending the year-to-date fall in Chinese visitors. Hong Kong’s tourism commission says the city’s tourism industry has “entered a consolidation period” after a decade of growth, and says it is now targeting “high-spending overnight visitors” from other markets to help fill the city’s myriad shopping malls and hotel rooms. Meanwhile, retail sales in the formerly bustling shopping hub have fallen for eight straight months on lower tourist spending, with total retail sales down 2.7% year-over-year for the first 10 months of 2015. That is steeper than the 2.6% decline recorded in 2003, when tourists shunned Hong Kong for several months during the SARS outbreak.

In October, Hong Kong saw a 38.5% drop in sales of Swiss watches, said the Federation of the Swiss Watch Industry. Other brands, like Chanel, went the unusual route of slashing the price of an iconic bag by over 24% in Hong Kong, among other rare discount offers, in a sign of the trying times. [..] Luxury sales began to decline in late 2013 after Beijing started cracking down on corruption and conspicuous consumption. The slump spread to mass-market retailers this year as the Chinese economy slowed. Milan Station, a vendor of secondhand handbags, said revenue in its Hong Kong shops fell over 28% in the first half of the year, while cosmetic retailers Sa Sa and Bonjour reported revenue declines of 10.6% and 14.4% in the six months ended September and June, respectively.

Washington needs to get out of the housing market.

• Fannie and Freddie Give Birth to New Mortgage Bond (WSJ)

Fannie Mae and Freddie Mac are turning to crisis-era tools to reduce their exposure to mortgage losses and spark a new market for financing home buyers. Beginning in 2016, the two government-controlled housing giants will ramp up sales of a new type of security that will transfer most of the cost of defaults on all but their safest mortgages to private investors. The securities will be based on the value of a pool of underlying mortgages—but only indirectly, making them a derivative similar to those that figured in the financial crisis seven years ago. The insurance-like products are called Connecticut Avenue Securities by Fannie Mae and Structured Agency Credit Risk by Freddie Mac. Standard-issue bonds from the housing giants protect investors from the risk that home buyers will stop making payments on their loans.

With the new securities, however, investors could lose some or all of their principal if the underlying mortgages default. The effort marks a notable return to financial engineering in housing finance—elements of which served useful purposes before bloating in the years leading to the crisis. The new securities ultimately could help reduce the government’s role in mortgages by persuading investors to take on the risk of default. Right now, the U.S. housing market relies almost entirely on guarantees from Fannie, Freddie or other government-backed entities. The companies, along with government agency Ginnie Mae, back most mortgages and issued 96% of all mortgage bonds in the first 10 months of the year, according to trade publication Inside Mortgage Finance.

Banks used to issue hundreds of millions of dollars worth of mortgage bonds that didn’t carry Fannie or Freddie’s guarantees, but that market dried up after the financial crisis. Proponents hope the new securities could help restore investors’ appetite for mortgage risk. If it works, backers think the securities could become a mainstay of the bond and housing markets over time, perhaps even getting included in the major indexes tracked by bond funds.

Ambrose’s history lesson dissolves into confusion. Still worth reading, though. “Yes, the world is a mess, but it has always been a mess, forever climbing the proverbial wall of political worry even in its halcyon days. So let us drink a new year’s toast with a glass at least half full.”

• The World’s Political And Economic Order Is Stronger Than It Looks (AEP)

Readers have scolded me gently for too much optimism over the past year, wondering why I refuse to see that the world economy is in dire trouble and that the international order is coming apart at the seams. So for Christmas reading I have retreated to the “World of Yesterday”, the poignant account of Europe’s civilisational suicide in the early 20th century by the Austrian writer Stefan Zweig – the top-selling author of the inter-war years. From there it is a natural progression to Zweig’s equally poignant biography of Erasmus, who saw his own tolerant Latin civilization smothered by fanatics four centuries earlier. Zweig’s description of Europe in the years leading up to 1914 is intoxicating. Everything seemed to be getting better: wealth was spreading, people were healthier, women were breaking free.

He could travel anywhere without a passport, received with open arms in Paris, Milan or Stockholm by a fraternity of writers and artists. It was a cheerful, peaceful world that seemed almost untainted by tribal animosities. It was not an illusion, but it was only half the story. A handful of staff officers at the apex of the German high command under Helmuth von Moltke were already looking for their chance to crush France and Russia, waiting for a spark in the Balkans – it could only be the Balkans – that would lock the Austro-Hungarian empire into the fight as an ally. What is striking in Zweig’s account is that even during the slaughter of the First World War, Europe still had a moral conscience. All sides still bridled at any accusation that they were violating humanitarian principles.

Two decades later, even that had disappeared. Zweig lived to see his country amputated, cut off from its economic lifelines, and reduced to a half-starved rump. He saw Hitler take power and burn his books in Berlin’s Bebelplatz in 1933, then in stages extend the ban to France and Italy. He saw what remained of Austria extinguished in 1938, and his friends sent to concentration camps. As a Jewish refugee in England he slipped from stateless alien to enemy alien. He committed suicide with his wife in February 1942 in Brazil, too heart-broken to keep going after his spiritual homeland – Europe – had “destroyed itself”. Erasmus was also the best-selling author of his day, attaining a dominance that has probably never been challenged by any other author in history, expect perhaps Karl Marx posthumously.

More than 1m copies of his works had been printed by the early 16th century, devoured by a Latin intelligentsia in the free-thinking heyday of the Renaissance, chortling at his satires on clerical pedantry and the rent-farming of holy relics. But after lighting the fire of evangelical reform, he watched in horror as the ideologues took over and swept aside his plea that the New Testament message of love and forgiveness is the heart of Christianity. They charged headlong into the Augustinian cul-de-sac of original sin and predestination, led by Martin Luther, a rough, volcanic force of nature, or the “Goth” as Erasmus called him. Luther preferred to see the whole world burn and Christian Europe split into armed camps rather than yield an inch on abstruse points of doctrine. And burn they did. The killing did not end until the Treaty of Westphalia in 1648. By then the Thirty Years War had left a fifth of Germany dead.

“In principle, depositors are the most senior creditors in a bank. However, that was changed in the 2005 bankruptcy law, which made derivatives liabilities most senior.”

• Derivatives vs Bank Deposits: Let the Bail-Ins Begin (Ellen Brown)

Dodd-Frank states in its preamble that it will “protect the American taxpayer by ending bailouts.” But it does this under Title II by imposing the losses of insolvent financial companies on their common and preferred stockholders, debtholders, and other unsecured creditors. That includes depositors, the largest class of unsecured creditor of any bank. Title II is aimed at “ensuring that payout to claimants is at least as much as the claimants would have received under bankruptcy liquidation.” But here’s the catch: under both the Dodd Frank Act and the 2005 Bankruptcy Act, derivative claims have super-priority over all other claims, secured and unsecured, insured and uninsured. The over-the-counter (OTC) derivative market (the largest market for derivatives) is made up of banks and other highly sophisticated players such as hedge funds.

OTC derivatives are the bets of these financial players against each other. Derivative claims are considered “secured” because collateral is posted by the parties. For some inexplicable reason, the hard-earned money you deposit in the bank is not considered “security” or “collateral.” It is just a loan to the bank, and you must stand in line along with the other creditors in hopes of getting it back. State and local governments must also stand in line, although their deposits are considered “secured,” since they remain junior to the derivative claims with “super-priority.” Under the old liquidation rules, an insolvent bank was actually “liquidated” – its assets were sold off to repay depositors and creditors. Under an “orderly resolution,” the accounts of depositors and creditors are emptied to keep the insolvent bank in business.

The point of an “orderly resolution” is not to make depositors and creditors whole but to prevent another system-wide “disorderly resolution” of the sort that followed the collapse of Lehman Brothers in 2008. The concern is that pulling a few of the dominoes from the fragile edifice that is our derivatives-laden global banking system will collapse the entire scheme. The sufferings of depositors and investors are just the sacrifices to be borne to maintain this highly lucrative edifice. In a May 2013 article in Forbes titled “The Cyprus Bank ‘Bail-In’ Is Another Crony Bankster Scam,” Nathan Lewis explained the scheme like this:

At first glance, the “bail-in” resembles the normal capitalist process of liabilities restructuring that should occur when a bank becomes insolvent. . . . The difference with the “bail-in” is that the order of creditor seniority is changed. In the end, it amounts to the cronies (other banks and government) and non-cronies. The cronies get 100% or more; the non-cronies, including non-interest-bearing depositors who should be super-senior, get a kick in the guts instead. . . .

In principle, depositors are the most senior creditors in a bank. However, that was changed in the 2005 bankruptcy law, which made derivatives liabilities most senior. Considering the extreme levels of derivatives liabilities that many large banks have, and the opportunity to stuff any bank with derivatives liabilities in the last moment, other creditors could easily find there is nothing left for them at all. As of September 2014, US derivatives had a notional value of nearly $280 trillion.

A study involving the cost to taxpayers of the Dodd-Frank rollback slipped by Citibank into the “cromnibus” spending bill last December found that the rule reversal allowed banks to keep $10 trillion in swaps trades on their books. This is money that taxpayers could be on the hook for in another bailout; and since Dodd-Frank replaces bailouts with bail-ins, it is money that creditors and depositors could now be on the hook for. Citibank is particularly vulnerable to swaps on the price of oil. Brent crude dropped from a high of $114 per barrel in June 2014 to a low of $36 in December 2015.

What a story Brazil will be in 2016…

• It’s Every Snitch For Himself In Brazil’s Petrobras Scandal (BBG)

[..] all hail 2015, Brazil’s year of the snitch. Investigators in the city of Curitiba, where the so-called Operation Car Wash probe into corruption at Petrobras is based, have struck 40 such plea bargains, turning criminals into strategic witnesses for the prosecution. Negotiating reduced sentences is not new in Brazil. But until recently, most criminals preferred to gamble on the feeble court system and take their secrets to jail. Everything changed after 2012, when Brazil’s Supreme Federal Court sent two dozen moguls and political bosses to jail in a sweeping vote-buying scam. A rigorous anti-corruption law followed in 2013, and now criminals and cronies are lining up to cop their pleas.

Thanks largely to dishonor among thieves — not to mention financial trackers skilled in sniffing out hidden money — prosecutors have since secured 80 convictions of seemingly untouchable moguls and politicians, whose jail sentences total 782 years. So many criminals have been repurposed as state witnesses that police are running short on ankle bracelets. Brazilians would be forgiven for thinking that little has changed. By cutting deals with prosecutors, confessed criminals have managed to convert harsh jail terms into suspended sentences and house arrest. Yes, Fernando “Baiano” Soares, a lobbyist at the heart of the Car Wash cabal, had to forfeit a bundle of cash and two fancy vacation homes as part of his plea deal.

But when he left jail in November after agreeing to finger accomplices in the Petrobras scheme, he went home to his luxury apartment in one of Rio’s toniest beach districts. Pedro Jose Barusco Filho, sentenced last year to 18 years for turning his second-tier job at Petrobras into a bribe-collection counter, quickly signed an agreement with prosecutors and promised to return $615 million he’d skimmed from supply contracts. By Christmas, he was spotted kicking back at a luxury spa in the Rio hills. Two other guests reportedly left on the spot. Then there is Alberto Youssef, a shadowy money dealer who has been in and out of custody since 2005, when he first agreed to help authorities take down a money-laundering ring at a state-owned regional bank.

But he went back on his word and left investigators empty-handed. This time, the feds were cleverer. When, in early 2014, police again caught up to Youssef – now for helping high-rolling oil company executives and politicians on the take spirit their off-books earnings to offshore tax havens – they doubled down on the man known as “the black market’s central banker.” Jailed for breaking his earlier plea bargain, and with his name popping up in testimony from other state witnesses, Youssef buckled, agreed again to speak out, and led Brazil’s sleuths to the corner offices of Petrobras and beyond.

Snitch by snitch, the Car Wash case has made its way from the oil rigs to the Brazilian capital, where 54 senior politicians, former politicians and their associates are now under investigation. All eyes are now on Delcidio do Amaral, who is not only the first sitting Brazilian senator to be arrested but also a former Petrobras bureaucrat who served as a key dealmaker to the ruling Workers’ Party for the past 13 years. So far, Amaral hasn’t named any names, but the prospect that he might sing is roiling the political corridors. If anyone knows where the bodies in Brasilia are buried, it’s Amaral.

Money must be separated from political power, or huge trouble lies ahead.

• For the Wealthiest, a Private Tax System That Saves Them Billions (NY Times)

The hedge fund magnates Daniel S. Loeb, Louis Moore Bacon and Steven A. Cohen have much in common. They have managed billions of dollars in capital, earning vast fortunes. They have invested large sums in art — and millions more in political candidates. Moreover, each has exploited an esoteric tax loophole that saved them millions in taxes. The trick? Route the money to Bermuda and back. With inequality at its highest levels in nearly a century and public debate rising over whether the government should respond to it through higher taxes on the wealthy, the very richest Americans have financed a sophisticated and astonishingly effective apparatus for shielding their fortunes. Some call it the “income defense industry,” consisting of a high-priced phalanx of lawyers, estate planners, lobbyists and anti-tax activists who exploit and defend a dizzying array of tax maneuvers, virtually none of them available to taxpayers of more modest means.

In recent years, this apparatus has become one of the most powerful avenues of influence for wealthy Americans of all political stripes, including Mr. Loeb and Mr. Cohen, who give heavily to Republicans, and the liberal billionaire George Soros, who has called for higher levies on the rich while at the same time using tax loopholes to bolster his own fortune. All are among a small group providing much of the early cash for the 2016 presidential campaign. Operating largely out of public view — in tax court, through arcane legislative provisions and in private negotiations with the Internal Revenue Service — the wealthy have used their influence to steadily whittle away at the government’s ability to tax them.

The effect has been to create a kind of private tax system, catering to only several thousand Americans. The impact on their own fortunes has been stark. Two decades ago, when Bill Clinton was elected president, the 400 highest-earning taxpayers in America paid nearly 27% of their income in federal taxes, according to I.R.S. data. By 2012, when President Obama was re-elected, that figure had fallen to less than 17%, which is just slightly more than the typical family making $100,000 annually, when payroll taxes are included for both groups. The ultra-wealthy “literally pay millions of dollars for these services,” said Jeffrey A. Winters, a political scientist at Northwestern University who studies economic elites, “and save in the tens or hundreds of millions in taxes.”

Another example of why choice of words counts. Reform sounds much better than preparing for war.

• China Says Consulted Widely On Army Reform, Xi Closely Involved (Reuters)

China’s military consulted widely on its sweeping reform program, with President Xi Jinping closely involved by speaking with soldiers on the frontlines and hand-writing suggestions, the army’s newspaper said on Thursday. Xi unveiled a broad-brush outline of the reforms last month, seeking further streamlining of the command structure of the world’s largest armed forces, including job losses, to better enable it to win a modern war. He is determined to modernize at the same time as China becomes more assertive in territorial disputes in the East and South China Seas. China’s navy is investing in submarines and aircraft carriers and the air force is developing stealth fighters. The reforms, kicked off in September with Xi’s announcement he would cut service personnel by 300,000, have been controversial.

The military’s newspaper has published almost daily commentaries warning of opposition to the reforms and worries about lost jobs, and warnings that reforms are needed to win wars. In a lengthy front page commentary, the People’s Liberation Army Daily outlined the steps taken to listen to everyone’s opinions on the reforms, including Xi’s involvement. “Chairman Xi went into offices and visited colleges, went to the plateaus, visited the borders, sat in driving seats and cockpits, taking the pulse of reform with soldiers,” the newspaper said. The reform commission took opinions from more than 900 current and former senior officers and experts, issued questionnaires and received thousands of online suggestions, the report said.

There were more than 800 meetings about reform from March to October this year covering almost 700 military bases and units, the newspaper said. The article was also carried in the ruling Communist Party’s official People’s Daily. Xi “found time” to attend meetings on the feedback, saying he wanted to “listen to everyone’s opinion”, it said. “Every line, every word and every character – Chairman Xi earnestly reviewed every draft, putting forward many guiding suggestions, making many important changes with this own hand,” the report said. The enthusiasm for reform and willingness to listen to all sides meant the process was “ardently participated in” by soldiers throughout the ranks, it said.

We still label the PKK terrorists?! Why?

• Turkey ‘One Step Away From A Civil War’ (NY Times)

A major Turkish military operation to eradicate Kurdish militants in Turkey’s restive southeast has turned dozens of urban districts into bloody battlefields, displacing hundreds of thousands of civilians and shattering hopes of reviving peace as an old war reaches its deadliest level in two decades. Over the past week, Turkish tanks and artillery have pounded Kurdish targets across several southeast cities, killing at least 200 militants and more than 150 civilians, according to human rights groups and local officials. Their descriptions of the fighting and mass destruction in populated areas, which are off-limits to journalists, depict war zones not unlike the scenes in neighboring Syria to the south. The Kurds are a geographically dispersed minority whose aspirations for autonomy date back decades.

The flaring of their conflict with Turkey represents a dangerous complication in a region already convulsed by the upheavals in Syria, Iraq and Yemen. About half of all Kurds live in Turkey, a NATO member and American ally. Several Turkish cities are under tight lockdown, and many residents have been trapped without food or electricity as clashes between Kurdish militants and Turkish security forces have intensified. Militants of the Kurdistan Workers’ Party have dug trenches and put up barricades and are using heavy weaponry and rocket launchers to repel the Turkish police, according to local officials. Turkey has been fighting a counterinsurgency campaign against the Kurdistan Workers’ Party since the group ended a two-year cease-fire in July.

Analysts said the renewed conflict initially appeared to have been a calculated political strategy by President Recep Tayyip Erdogan to strengthen support for his Justice and Development Party ahead of parliamentary elections in November. When Justice and Development won by a landslide – a result that Mr. Erdogan interpreted as the public’s demand for stability – many had hoped it would lead to the revival of peace talks. Instead, the violence has sharply escalated, stoking fears that it might spread. Mr. Erdogan has vowed to eliminate the Kurdistan Workers’ Party, considered a terrorist organization by Turkey, the United States and the European Union. Having carried out an insurgency against Turkey for three decades, the group, now emboldened by a radicalized youth branch inspired by the war in Syria, has declared autonomous regions and stepped up its fight for self-rule.

One more red line fades.

• Greek Pension Cuts Back On The Table (Kath.)

The government’s proposal to Greece’s creditors for reform of the country’s ailing pension system is likely to foresee 50% of the savings coming from increases to social security contributions and the other half from cuts to pensions, chiefly through supplementary pensions. Though the government has consistently resisted calls by creditors for further cuts to primary pensions, it is likely to make some small concessions. Apart from reductions to supplementary pensions, it is expected that the government’s proposal will foresee reductions to the size of lump sums paid out to retirees. Government sources on Tuesday indicated that there could be some “adjustments” to primary pensions too but that these would only comprise small reductions and would only affect monthly pensions over €2,500 and cases where retirees receive more than one pension.

Authorities are also said to be considering the use of revenue from games of chance and from the state privatization agency to bolster the pension system. Further, ther is the possibility of a tax on bank transactions of more than 1,000 euros which Economy Minister Giorgos Stathakis on Tuesday confirmed was on the table. Members of the Government Council for Economic Policy (KYSOIP) met Tuesday under Deputy Prime Minister Yiannis Dragasakis and discussed the issue of pension reform as well as plans for social welfare initiatives aimed to helping poorer citizens. Sources indicated after the meeting that the government is committed to carry out a series of actions aimed at rebuilding the welfare state and fighting unemployment as well as boosting the health and education systems.

And then the Germans buy them all up?!

• Greek House Price Drop Second To Worst In The World (Kath.)

Greece has the unenviable distinction of having the second to worst performing residential property market in the world this year, according to data up to the end of September. A Global Property Guide survey shows that the annual price decline in Greece came to 6.03%, second only to Dubai in the United Arab Emirates (-10.4%). Compared to the second quarter of the year, Greece’s price slide amounted to 2% in Q3. Among European Union member-states, Cyprus was a distant second behind Greece, with a 2.2% annual decline in home prices, while Spain was in third after seeing a small drop of 0.45%. As Bank of Greece data also show, pressure on the market prices of residential properties continues, albeit to a lesser degree that previously.

However, an Alpha Bank analysis revealed that after seven consecutive quarters of slowdown in the annual price reduction rate, the trend reversed in the second and third quarters of this year, when the decline accelerated again to 5% and 6.1% respectively, against a drop of 3.9% in Q1 on an annual basis. Apartments in particular saw a milder decline this year, suffering a 5% drop in prices in the first nine months against an 8.1% slump in the same period of 2014 and a 7.5% decline in the whole of 2014. Apartment prices have dropped 40.9% from 2008 up to end-September 2015. The central bank forecasts that the slide is unlikely to reverse in the coming quarters, as the factors that have led to it have not been eliminated.

The problems will come in 2016.

• Merkel Urges Germans To See Refugee Arrivals As ‘An Opportunity’ (AFP)

Chancellor Angela Merkel in her New Year’s address on Thursday asked Germans to see refugee arrivals as “an opportunity for tomorrow” and urged doubters not to follow racist hate-mongers. The past year – when the country took in more than a million migrants and refugees – had been unusually challenging, she said in a pre-released text of the speech, also bracing Germans for more hardships ahead. But she stressed that in the end it would all be worth it because “countries have always benefited from successful immigration, both economically and socially”. With a view to right-wing populists and xenophobic street rallies, she said “It’s important we don’t allow ourselves to be divided.”

“It is crucial not to follow those who, with coldness or even hatred in their hearts, lay a sole claim to what it means to be German and seek to exclude others.” Merkel has earned both praise and criticism at home and abroad for her decision to open Germany to a record wave of refugees, about half from war-torn Syria. Germany took in almost 1.1 million asylum seekers this year, five times 2014’s total, the Saechsische Zeitung regional daily reported on Wednesday citing unpublished official figures. Merkel, faced with opposition in her conservative camp and popular concerns about the influx, has vowed steps to reduce numbers in 2016. Her plan involves convincing other European Union members to take in more refugees, so far with little success, and an EU deal with gateway country Turkey to better protect its borders.

Merkel said “there has rarely been a year in which we were challenged so much to follow up our words with deeds”. She thanked volunteers and police, soldiers and administrators for their “outstanding” accomplishments and “doing far, far more than their duty”. Looking to 2016, she said: “There is no question that the influx of so many people will keep demanding much of us. It will take time, effort and money.”

Debt Rattle December 29 2015

Dec 292015

December 29, 2015 Posted by Raúl Ilargi Meijer at 9:40 am Finance Tagged with: Abenomics, arctic, China, commodities, floods, mergers, oil, refugees, Saudi 2 Responses »

DPC Sloss City furnaces, Birmingham, Alabama 1906

• Weak Demand, Vessel Surplus Mean Horror 2016 For Commodities Shipping (Reuters)

• Energy Stocks Fall Along With Oil Prices (WSJ)

• Saudi Riyal In Danger As Oil War Escalates (AEP)

• Saudis Plan Unprecedented Subsidy Cuts to Counter Oil Plunge (BBG)

• Saudi Arabia Plans Subsidy Cuts as King Unveils 2016 Budget (BBG)

• Where Next For The Three Arrows Of Abenomics? (Telegraph)

• Record Merger Boom Won’t Stop In 2016, Because Money Is Still Cheap (Forbes)

• China Control Freaks (BBG)

• China Clamps Down on Online Lenders, Vows to Cleanse Market (BBG)

• China Central Bank Says To Keep Reasonable Credit Growth, Yuan Stable (Reuters)

• Cost Of UK Floods Tops £5 Billion, Thousands Face Financial Ruin (Guardian)

• UK Factories Forecast To Shed Tens Of Thousands Of Jobs In 2016 (Guardian)

• Questions and Answers (Jim Kunstler)

• Qatari Royals Rush To Switzerland In Nine Planes After Emir Breaks Leg (AFP)

• Freak Storm In Atlantic To Push Arctic Temps Over 50º Above Normal (WaPo)

• German States To Spend At Least €17 Billion On Refugees In 2016 (Reuters)

• Schaeuble Slams Greece Over Refugee Crisis, Aims For Joint EU Army (Reuters)

• Selfishness On Refugees Has Brought EU ‘To Its Knees’ (IT)

• Refugee Arrivals In Greece Rise More Than Tenfold In A Year (Kath.)

Forward looking.

• Weak Demand, Vessel Surplus Mean Horror 2016 For Commodities Shipping (Reuters)

Shipping companies that transport commodities such as coal, iron ore and grain face a painful year ahead, with only the strongest expected to weather a deepening crisis caused by tepid demand and a surplus of vessels for hire. The predicament facing firms that ship commodities in large unpackaged amounts – known as dry bulk – is partly the result of slower coal and iron ore demand from leading global importer China in the second half of 2015. The Baltic Exchange’s main sea freight index – which tracks rates for ships carrying dry bulk commodities – plunged to an all-time low this month. In stark contrast, however, tankers that transport oil have in recent months enjoyed their best earnings in years. As crude prices have plummeted, bargain-buying has driven up demand, while owners have moved more aggressively to scrap vessels to head off the kind of surplus seen in the dry bulk market.

Symeon Pariaros, chief administrative officer of Athens-run and New York-listed shipping firm Euroseas, said the outlook for the dry bulk market was “very challenging”. “Demand fundamentals are so weak. The Chinese economy, which is the main driver of dry bulk, is way below expectations,” he added. “Only companies with very strong balance sheets will get through this storm.” The dry bulk shipping downturn began in 2008, after the onset of the financial crisis, and has worsened significantly this year as the Chinese economy has slowed. The Baltic Exchange’s main BDI index – which gauges the cost of shipping such commodities, also including cement and fertiliser – is more than 95% down from a record high hit in 2008. The index is often regarded as a forward-looking economic indicator. With about 90% of the world’s traded goods by volume transported by sea, global investors look to the BDI for any signs of changes in sentiment for industrial demand.

Very thin trading.

• Energy Stocks Fall Along With Oil Prices (WSJ)

A fresh selloff in the oil market weighed down U.S. stocks, with energy shares posting sharp losses. Major U.S. indexes pared their steepest declines but still ended the day in negative territory, returning some of last week’s gains. The Dow Jones Industrial Average lost 23.90 points, or 0.1%, to 17528.27, after falling as much as 115 points intraday. The S&P 500 index fell 4.49, or 0.2%, to 2056.50. The Nasdaq Composite Index declined 7.51, or 0.1%, to 5040.99. Just 4.8 billion shares changed hands Monday, marking the lowest full day of U.S. trading volume this year, in a holiday-shortened week. Markets in London and Australia were closed Monday for Boxing Day. The U.S. stock market will be closed Friday for New Year’s Day. Energy stocks notched some of the steepest declines across the market. Chevron posted the heaviest loss among Dow components, falling $1.69, or 1.8%, to $90.36.

Marathon Oil shed 95 cents, or 6.8%, to 12.98. “We’re just following the price of oil,” said Peter Cardillo, chief market economist at brokerage First Standard Financial. December has been marked by unusually wide swings in U.S. stocks. A long-awaited interest-rate increase by the Federal Reserve earlier in the month has failed to quiet the recent volatility. A respite from the decline in oil prices last week helped lure investors into the energy sector. U.S. stocks last week posted their biggest weekly gains in more than a month, driven by the energy sector. But both oil prices and energy stocks remain sharply lower this year, even with last week’s rally. A global glut of crude oil has contributed to a 30% fall in U.S. oil prices this year. On Monday, U.S. crude prices fell 3.4% to $36.81 a barrel. Energy stocks in the S&P 500 are down 23% so far in 2015, while the S&P 500 is on track for a loss of 0.1%.

if the dollar stays strong, the peg is history.

• Saudi Riyal In Danger As Oil War Escalates (AEP)

Saudi Arabia is burning through foreign reserves at an unsustainable rate and may be forced to give up its prized dollar exchange peg as the oil slump drags on, the country’s former reserve chief has warned. “If anything happens to the riyal exchange peg, the consequences will be dramatic. There will be a serious loss of confidence,” said Khalid Alsweilem, the former head of asset management at the Saudi central bank (SAMA). “But if the reserves keep going down as they are now, they will not be able to keep the peg,” he told The Telegraph. His warning came as the Saudi finance ministry revealed that the country’s deficit leapt to 367bn riyals (£66bn) this year, up from 54bn riyals the previous year. The IMF has suggested Saudia Arabia could be running a deficit of around $140bn.

Remittances by foreign workers in Saudi Arabia are draining a further $36bn a year, and capital outflows were picking up even before the oil price crash. Bank of America estimates that the deficit could rise to nearer $180bn if oil prices settle near $30 a barrel, testing the riyal peg to breaking point. Dr Alsweilem said the country does not have deep enough pockets to wage a long war of attrition in the global crude markets, whatever the superficial appearances. Concern has become acute after 12-month forward contracts on the Saudi Riyal reached 730 basis points over recent days, the highest since the worst days of last oil crisis in February 1999. The contracts are watched closely by traders for signs of currency stress. The latest spike suggests that the riyal is under concerted attack by hedge funds and speculators in the region, risking a surge of capital flight.

A string of oil states have had to abandon their currency pegs over recent weeks. The Azerbaijani manat crashed by a third last Monday after the authorities finally admitted defeat. The dollar peg has been the anchor of Saudi economic policy and credibility for over three decades. A forced devaluation would heighten fears that the crisis is spinning out of political control, further enflaming disputes within the royal family. Foreign reserves and assets have fallen to $647bn from a peak of $746bn in August 2014, but headline figures often mean little in the complex world of central bank finances and derivative contracts. Dr Alsweilem, now at Harvard University, said the Saudi authorities have taken a big gamble by flooding the world with oil to gain market share and drive out rivals. “The thinking that lower oil prices will bring down the US oil industry is just nonsense and will not work.”

The policy is contentious even within the Saudi royal family. Optimists hope that this episode will be a repeat of the mid-1980s when the kingdom pursued the same strategy and succeeded in curbing non-OPEC investment, and preperaring the ground for recovery in prices. But the current situation is sui generis. The shale revolution has turned the US into a mid-cost swing producer, able to keep drilling at $50bn a barrel, according to the latest OPEC report. US shale frackers can switch output on and off relatively quickly, acting as a future headwind against price rises.

End of free money.

• Saudis Plan Unprecedented Subsidy Cuts to Counter Oil Plunge (BBG)

Confronting a drop in oil prices and mounting regional turmoil, Saudi Arabia reduced energy subsidies and allocated the biggest part of government spending in next year’s budget to defense and security. Authorities announced increases to the prices of fuel, electricity and water as part of a plan to restructure subsidies within five years. The government intends to cut spending next year and gradually privatize some state-owned entities and introduce value-added taxation as well as a levy on tobacco. The biggest shake-up of Saudi economic policy in recent history coincides with growing regional unrest, including a war in Yemen, where a Saudi-led coalition is battling pro-Iranian Shiite rebels.

In attempting to reduce its reliance on oil, the kingdom is seeking to put an end to the population’s dependence on government handouts, a move that political analysts had considered risky after the 2011 revolts that swept parts of the Middle East. “This is the beginning of the end of the era of free money,” said Ghanem Nuseibeh, founder of London-based consulting firm Cornerstone Global Associates. “Saudi society will have to get used to a new way of working with the government. This is a wake-up call for both Saudi society and the government that things are changing.” This is the first budget under King Salman, who ascended to the throne in January, and for an economic council dominated by his increasingly powerful son, Deputy Crown Prince Mohammed bin Salman.

In its first months in power, the new administration brought swift change to the traditionally slow-moving kingdom, overhauling the cabinet, merging ministries and realigning the royal succession. The new measures are the beginning of a “big program that the economic council will launch,” Economy and Planning Minister Adel Fakeih told reporters in Riyadh. The subsidy cuts won’t have a “large effect” on people with low or middle income, he said.

Immediate danger for House of Saud.

• Saudi Arabia Plans Subsidy Cuts as King Unveils 2016 Budget (BBG)

Saudi Arabia said it plans to gradually cut subsidies and sell stakes in government entities as it seeks to counter a slump in oil revenue. The government expects the 2016 budget deficit to narrow to 326 billion riyals ($87 billion) from 367 billion in 2015. Spending, which reached 975 billion riyals this year, is projected to drop to 840 billion. Revenue is forecast to decline to 513.8 billion riyals from 608 billion riyals. The budget is the first under King Salman, who ascended to the throne in January, and an economic council dominated by his increasingly powerful son, Deputy Crown Prince Mohammed bin Salman. The collapse in oil prices has slashed government revenue, forcing officials to draw on reserves and issue bonds for the first time in nearly a decade.

“The budget was approved amid challenging economic and financial circumstances in the region and the world,” the Finance Ministry said. “The deficit will be financed through a plan that considers the best available options, including domestic and external borrowing.” The 2015 deficit is about 16% of GDP, according to Alp Eke, senior economist at National Bank of Abu Dhabi. The median estimate of 10 economists in a Bloomberg survey was a shortfall of 20%. Oil made up 73% of this year’s revenue, according to the Finance Ministry. Non-oil income rose 29% to 163.5 billion riyals. The government has managed to reign in “some spending in the second half of the year,” Monica Malik at Abu Dhabi Commercial Bank said. “With the further fiscal retrenchment that we expect in 2016, we think that the fiscal deficit should narrow to about 10.8% of GDP.”

For 2016, the government allocated 213 billion riyals for military and security spending, the largest component of the budget as the kingdom fights a war in Yemen against Shiite rebels. “In terms of defense expenditure in particular there’s the burden of the war in Yemen,” Nasser Saidi, president of Nasser Saidi & Associates, said by phone. The outcome for 2016 depends on “the course of the war in Yemen, oil prices, how much will subsidies actually get reduced, how effective are they in reigning in public spending and rationalizing some of the spending on large projects, and finally how good are they at reigning in current spending,” he said.

” Japan’s debt pile is huge, at around 240pc of GDP, and the OECD warned this year that it could balloon to 400pc of GDP..”

• Where Next For The Three Arrows Of Abenomics? (Telegraph)

The last sales tax increase threw the world’s third largest economy into recession. For this reason, things may start getting more complicated at the checkout. Policymakers announced last week that they plan to exempt food from the next hike. This would be the first time Japan has adopted different consumption tax rates since it was introduced in 1989. The government estimates this will cost about one trillion yen (£5.5bn) in lost revenues – equivalent to about a fifth of what it expects the increase to bring in. While cynics highlight the move as a ploy to win votes ahead of next year’s upper house elections, it is also a reminder that steering Japan out of its two-decade malaise remains a challenge. It’s been three years since prime minister Shinzo Abe took power with a promise to smash deflation and “take back Japan”.

Under the stewardship of Bank of Japan governor Haruhiko Kuroda, the country launched a multi trillion yen quantitative easing programme in 2013 that was beefed up to ¥80 trillion (£446bn) annually last October. Pessimists argue that Japan’s monetary steroids have had little impact. As economists at BNP Paribas highlight, real GDP has grown by just 2.2pc between the fourth quarter of 2012 and the third quarter of this year – or an average of just 0.8pc per year – a poor performance compared with its G7 peers. Japan’s recovery has been lacklustre since the 2008 crisis, and the economy would currently be in a quintuple-dip recession if growth for the third quarter of 2015 had not been revised up this month. This month, the Bank of Japan revised down its growth forecast for the year ending next March to 1.2pc, from 1.7pc, citing weaker global growth.

It also pushed back its expectation of achieving 2pc inflation to the second half of the year or early 2017, from a previous forecast of mid-2016. This is the second time the target date has been moved since Mr Kuroda pledged in April 2013 to lift consumer inflation to 2pc in “around two years”. Policymakers are already talking down their chances of reflating the economy. Consumer prices rose by just 0.3pc in the year to October, while core inflation, which strips out the impact of volatile food and energy prices, stood at 0.7pc. “If consumer prices were rising more than 1.5pc then I don’t think you could complain when talking about the price target,” said Akira Amari, Japan’s economy minister.

On a brighter note, nominal GDP, or the cash size of the economy, has risen at a more robust pace. This is important because nominal GDP determines a country’s ability to pay down its debt, most of which is fixed in cash terms. Japan’s debt pile is huge, at around 240pc of GDP, and the OECD warned this year that it could balloon to 400pc of GDP unless policymakers implemented vital structural reforms.

M&A as a means to hide one’s indebtedness.

• Record Merger Boom Won’t Stop In 2016, Because Money Is Still Cheap (Forbes)

It was a year for the record books when it comes to merger and acquisition activity. Nearly $5 trillion in deals were cut globally, a new all-time high, as dealmakers used consolidation to uncover cost cuts, bolster their scale and take advantage of historically low borrowing costs. Though 2016 may be a tougher year if emerging market growth slows further and the impact of a sharp rout in commodities hits North America, few expect today’s merger boom to slow. After all, most of the reasons M&A climbed from $3 trillion to $4 trillion and now a rounding error below $5 trillion remain. Corporations are using cheap debt financing to buy competitors and wrench out synergies that can quickly grow their earnings. Amid a mostly halting economic recovery in the United States, M&A has proven far more attractive and easy to pitch to investors than an expansion, which might require increased plant and equipment and rising expenses.

For the nation’s largest companies, there’s also been a race to increase market power, or respond to consolidation among competitors. In pharmaceuticals, these trends have manifest themselves in the race to merge with European-domiciled drugmakers who can access cash stockpiles without triggering repatriation tax and aren’t charged at U.S. rates globally. This has spurred a pharma merger wave that hit new records in 2015 and it isn’t expected to slow anytime soon. In technology, mergers are yet to hinge on tax savings. Instead, semiconductors facing tectonic shifts such as the adoption wireless devices and cloud computing are merging in an effort to round out their services. Consolidation in cable and telecommunications is being used to adapt to the commoditization of once lucrative services like video and data bundles.

The combination of overlapping wireless and broadband networks is also seen as an efficient way to build the infrastructure that’s needed to serve consumers’ shift to streaming media. Spongy financing markets have aided the M&A boom. Low economic growth, modest inflation and weak pricing power are all causing CEOs to look at engineering profits through share buybacks and mergers. Meanwhile, activist shareholders are putting pressure on C-Suites to provide a clear plan on how they reinvest profits. Bold bets have to be justified with credible return expectations and these days it seems the returns by way of M&A, not capital expenditure or expansion.

Casino control.

• China Control Freaks (BBG)

Can authorities in China really take a back seat? In the midst of a bull market (stocks are up more than 20% from their August lows), Beijing appears to be handing control over to companies for all new initial public offerings from March onward. The shift toward a more U.S.-style disclosure system, where any company can list so long as they provide the requisite information, has been a long time coming. In a more market-oriented system, the regulator concentrates on supervising publicly traded firms rather than acting as a gatekeeper. Such a system would give China’s cash-strapped corporates a funding alternative to shadow banks and online peer-to-peer lenders, and help clear a logjam of almost 700 companies waiting to sell shares for the first time. The question is, can Beijing truly stop its tinkering?

According to KPMG, China has imposed moratoriums on IPOs nine times in the A-share market’s relatively short 25-year history – four of those in the last decade during periods when things were heading south. The most recent halt, enforced in July after several blockbuster share sales and some stomach-churning stock declines, ended only last month when a government-engineered rally revived the market.Even when IPOs have been approved, social policy dominates. A few years ago, when China was trying to cool its then-heady real estate sector and rein in burgeoning bad loans, no developer or city commercial bank would have stood a chance getting listing approval. Instead, some went to Hong Kong to raise funds. The conundrum for the China Securities Regulatory Commission is that letting any (qualified) company sell shares would result in a glut and damp appetite for the state-owned firms that dominate the market.

However, rationing admittance to the IPO market means bureaucrats rather than investors are making the decisions, and has resulted in an insatiable demand for new stock. An even bigger challenge for the CSRC, whose seven-member listing committee currently vets IPO applications, is managing investor expectations. In a nation where investment options tend to be limited to volatile wealth management products, equally choppy real estate or low-yielding bank accounts, people have little recourse for their some $22 trillion in savings beyond stocks. That explains why retail investors own about 80% of publicly traded companies’ tradeable shares unlike the U.S., where institutional investors dominate. Such a prevalence of individuals, who don’t have class action lawsuits to fall back on in cases of corporate malfeasance, also makes for a stock market more akin to a casino than a funding tool.

Shadow banking clamp down.

• China Clamps Down on Online Lenders, Vows to Cleanse Market (BBG)

China’s banking regulator laid out planned restrictions on thousands of online peer-to-peer lenders, pledging to “cleanse the market” as failed platforms and suspected frauds highlight risks within a booming industry. Online platforms shouldn’t take deposits from the public, pool investors’ money, or guarantee returns, the China Banking Regulatory Commission said on Monday, publishing a draft rule that will be its first for the industry. The thrust of the CBRC’s approach is that the platforms are intermediaries – matchmakers between borrowers and lenders – that shouldn’t themselves raise or lend money. It rules out P2P sites distributing wealth-management products, a tactic that some hoped would diversify their revenue sources, and limits their use for crowdfunding.

“The rule is quite strict,” Shanghai-based Maizi Financial Services, which operates a P2P site and other investment platforms, said in a statement. “The industry’s hope of upgrading itself with wealth management products and adopting a diversified business model is completely dashed.” The banking regulator issued its plan at the same time as the central bank put out a rule to tighten oversight of online-payment firms. The looming clampdown – the regulator asked for feedback by Jan. 27 – comes as the police probe Ezubo, an online site that raised billions of dollars from investors according to Yingcan Group, a company which provides industry data. It also follows a stock boom and bust that was fueled by leverage, including some channeled through online lenders.

China had 2,612 online lending platforms operating normally as of November, with more than 400 billion yuan ($61.7 billion) of loans outstanding, while another 1,000 were “problematic,” the CBRC said. Firms such as Tiger Global Management, Standard Chartered and Sequoia Capital are among those to invest in the industry, which China initially allowed to develop without regulation. Under the planned rule, P2P platforms will need to register with local financial regulators and cannot help borrowers who want to raise money to invest in the stock market. They’re banned from crowdfunding “for equities and physical items,” a description that wasn’t clarified in the CBRC statement. “Many online lenders have strayed from the role of information intermediary,” the CBRC said in a separate statement, adding that it wanted to protect consumers and “cleanse the market.”

Control clowns: “..a goal of doubling GDP and per capita income by 2020 from 2010..”

• China Central Bank Says To Keep Reasonable Credit Growth, Yuan Stable (Reuters)

China’s central bank said on Monday that it would “flexibly” use various policy tools to maintain appropriate liquidity and reasonable growth in credit and social financing. The People’s Bank of China will keep the yuan basically stable while forging ahead with reforms to help improve its currency regime, it said in a statement summarizing the fourth-quarter monetary policy committee meeting. The PBOC said it would maintain a prudent monetary policy, keeping its stance “neither too tight nor too loose”. The prudent policy has been in place since 2011. “We will improve and optimize financing and credit structures, increase the proportion of direct financing and reduce financing costs,” it said. The central bank said it would closely watch changes in China’s economy and financial markets, as well as international capital flows.

Top leaders at the annual Central Economic Work Conference pledged to make China’s monetary policy more flexible and expand its budget deficit in 2016 to support a slowing economy as they seek to push forward “supply-side reform”. The PBOC has cut interest rates six times since November 2014 and lowered banks’ reserve requirements, or the amount of cash that banks must set aside as reserves. But such policy steps have yielded limited impact on the economy, as the government has been struggling to reach its growth target of about 7% this year. President Xi Jinping has said China must keep annual average growth of no less than 6.5% over the next five years to hit a goal of doubling GDP and per capita income by 2020 from 2010.

Betcha Cameron is more concerned right now with London’s flood control than Lancashire’s.

• Cost Of UK Floods Tops £5 Billion, Thousands Face Financial Ruin (Guardian)

The cost of the UK’s winter floods will top £5bn and thousands of families and businesses will face financial ruin because they have inadequate or non-existent insurance, a leading accountant has warned, as the government defended its record on flood defences. The prime minister faced growing anger from politicians in the north of England who accused the government of creating “a north-south gap” in financial support for flood-prevention schemes. On a tour of the region, David Cameron defended spending levels amid mounting criticism from MPs and council leaders. “We are spending more in this parliament than the last one and in the last parliament we spent more than the one before that,” he said during a stop in York.

“I think with any of these events we have to look at what we are planning to spend and think: ‘Do we need to do more?’ We are going to spend £2.3bn on flood defences in this parliament but we will look at what’s happened here and see what needs to be done. We have to look at what’s happened in terms of the flooding, what flood defences have worked and the places where they haven’t worked well enough.” But Judith Blake, leader of Leeds city council, said a flood prevention scheme for the city was ditched by the government in 2011, and warned that there was “a very strong feeling” across the region that the north was being short-changed.

“I think there’s a real anger growing across the north about the fact that the cuts have been made to the flood defences and we’ll be having those conversations as soon as we are sure that people are safe and that we start the clean-up process and really begin the assess the scale of the damage. “So there are some very serious questions for government to answer on this and we’ll be putting as much pressure on as possible to redress the balance and get the funding situation equalised so the north get its fair share.” Labour MP Ivan Lewis, meanwhile, challenged Cameron to back up his vision of the Northern Powerhouse by sending immediate help to residents and businesses in his Bury South constituency.

[..] On Monday, as the waters receded in the worst hit areas, residents began to face up the scale of the damage. In York telephone lines and internet connections were down and some cash machines were not working. Many of the bars and shops that were open were only taking cash. In Hebden Bridge in Calderdale, volunteers spent the day clearing out schools, shops and homes that had been overwhelmed by filthy floodwater – a scene repeated in scores of towns and cities across the region. Forecasters warned another storm – Storm Frank – is expected to bring more rain to the west and north of the UK on Wednesday. It is feared that up to 80mm (3in) will fall on high ground and as much as 120mm (4.7in) in exposed locations, accompanied by gale force winds..

Oh yeah, an economy others are jealous of.

• UK Factories Forecast To Shed Tens Of Thousands Of Jobs In 2016 (Guardian)

British manufacturers will shed tens of thousands of jobs next year as they battle a tough export market, the fallout from steel plant closures and a collapse in demand from the embattled North Sea oil industry, an industry group has forecast. The manufacturers’ organisation EEF said the factory sector will shrug off this year’s recession and eke out modest growth in 2016 but it warned a number of risks loom on the horizon, chief among them a sharper downturn in China that could trigger a global slump. A cautious mood has prompted many firms to plan cuts to both jobs and investment in a further blow to George Osborne, after the latest official figures showed UK economic growth had faltered and that his “march of the makers” vow had failed to translate into a manufacturing revival.

EEF said its latest snapshot of manufacturers’ mood shows some bright spots for 2016, however, particularly in the car, aerospace and pharmaceutical sub-sectors. They will be the main drivers behind overall manufacturing growth of 0.8% in 2016, following an expected 0.1% contraction this year. Those sub-sectors will also buck the wider manufacturing trend of job cuts with an employment increase in 2016, EEF predicts. “Some of the headwinds have been a consistent theme over 2015 – the collapse in oil and gas activity, weakness in key export markets, and strong sterling. Others, like disappointing construction activity and the breakdown in the steel industry, have piled on the pain since the second quarter of 2015,” said EEF’s chief economist, Lee Hopley, in the report. “It’s not all doom and gloom however, with the resilience of the transport sectors and the rejuvenation of the pharmaceuticals industry providing reasons for cheer in UK manufacturing.”

“..it would require dedication to clear goals and the hard work of altering all our current arrangements – and giving up these childish fantasy distractions about space and technology.”

• Questions and Answers (Jim Kunstler)

The really big item in last night’s 60-Minutes newsbreak was that the latest Star Wars movie passed the billion dollar profit gate a week after release. That says just about everything you need to know about our floundering society, including the state of the legacy news media. The cherry on top last week was Elon Musk’s SpaceX company’s feat landing the first spent stage of its Falcon 9 rocket to be (theoretically) recycled and thus hugely lowering the cost of firing things into space. The media spooged all over itself on that one, since behind this feat stands Mr. Musk’s heroic quest to land humans on Mars. This culture has lost a lot in the past 40 years, but among the least recognized is the loss of its critical faculties. We’ve become a nation of six-year-olds.

News flash: we’re not going Mars. Notwithstanding the accolades for Ridley Scott’s neatly-rationalized fantasy, The Martian (based on Andy Weir’s novel), any human journey to the red planet would be a one-way trip. Anyway, all that begs the question: why are we so eager to journey to a dead planet with none of the elements necessary for human life when we can’t seem to manage human life on a planet superbly equipped to support us? Answer: because we are lost in raptures of techno-narcissism. What do I mean by that? We’re convinced that all the unanticipated consequences of our brief techno-industrial orgy can be solved by… more and better technology! Notice that this narrative is being served up to a society now held hostage to the images on little screens, by skilled people who, more and more, act as though these screens have become the new dwelling place of reality.

How psychotic is that? All of this grandstanding about the glories of space goes on at the expense of paying attention to our troubles on this planet, including the existential question as to how badly we are fucking it up with burning the fossil fuels that power our techno-industrial activities. Personally, I don’t believe that any international accord will work to mitigate that quandary. But what will work, and what I fully expect, is a financial breakdown that will lead to a forced re-set of human endeavor at a lower scale of technological activity. The additional question really is how much hardship will that transition entail and the answer is that there is plenty within our power to make that journey less harsh.

But it would require dedication to clear goals and the hard work of altering all our current arrangements – and giving up these childish fantasy distractions about space and technology. Dreaming about rockets to Mars is easy compared to, say, transitioning our futureless Agri-Biz racket to other methods of agriculture that don’t destroy soils, water tables, ecosystems, and bodies. It’s easier than rearranging our lives on the landscape so we’re not hostage to motoring everywhere for everything. It’s easier than educating people to both think and develop real hands-on skills not dependent on complex machines and electric-powered devices.

Wild theories welcome.

• Qatari Royals Rush To Switzerland In Nine Planes After Emir Breaks Leg (AFP)

Unidentified individuals travelling in as many as nine planes belonging to Qatar’s royal family made an emergency trip to Switzerland over the weekend for medical reasons, according to a Swiss official. A spokesman for Switzerland’s federal office of civil aviation confirmed local media reports that multiple aircraft made unscheduled landings at the Zurich-Kloten airport overnight from 25 to 26 December and that the planes were part of the Qatari royal fleet. He gave no details as to who was on board or who any of the potential patients may have been. “The emergency landing clearance was given by the Swiss air force,” he told AFP, explaining that the civil aviation office was closed during the hours in question.

Qatari authorities later said that the country’s former ruler, Sheikh Hamad bin Khalifa Al Thani, had been flown to Switzerland over the weekend for surgery after breaking a leg. The Qatari government’s communications office said early on Tuesday that Sheihk Hamad suffered “a broken leg while on holiday” and was flown to Zurich on Saturday to receive treatment. The office says the 63-year-old sheikh underwent a successful operation and was in Zurich “recovering and undergoing physiotherapy.” The government declined to say how or where Sheikh Hamad broke his leg but the royal family had reportedly been on holiday in Morocco at a resort in the Atlas mountains. Night landings and takeoffs are typically forbidden at Zurich-Kloten to avoid disturbing local residents.

Swiss foreign ministry spokesman Georg Farago told AFP in an email that the federation was informed about the “stay of members of Qatar’s royal family in Switzerland”, without giving further details. According to Zurich’s Tages Anzeiger newspaper, the first Qatari plane, an Airbus, landed in Zurich from Marrakesh shortly after midnight on 26 December. A second flight landed at Zurich-Kloten at 5am (0400 GMT) on 26 December, with a third plane coming 15 minutes later, both having originated in Doha, the paper reported. According to Tages Anzeiger, the medical emergency in question was so significant that six more planes linked to the Qatari royal family and government landed in Zurich through the weekend. Sheikh Hamad is believed to have been in poor health for years. He ruled the oil-and-gas-rich Qatar from 1995 until handing over power to his son, Sheikh Tamim, in 2013.

“It’s as if a bomb went off. And, in fact, it did.”

• Freak Storm In Atlantic To Push Arctic Temps Over 50º Above Normal (WaPo)

The vigorous low pressure system that helped spawn devastating tornadoes in the Dallas area on Saturday is forecast to explode into a monstrous storm over Iceland by Wednesday. Big Icelandic storms are common in winter, but this one may rank among the strongest and will draw northward an incredible surge of warmth pushing temperatures at the North Pole over 50 degrees above normal. This is mind-boggling. And the storm will batter the United Kingdom, reeling from recent flooding, with another round of rain and wind. Computer model simulations show the storm, sweeping across the north central Atlantic today, rapidly intensifying along a jet stream ripping above the ocean at 230 mph. The storm’s pressure is forecast by the GFS model to plummet more than 50 millibars in 24 hours between Monday night and Tuesday night, easily meeting the criteria of a ‘bomb cyclone’ (a drop in pressure of at least 24 mb in 24 hours),

By Wednesday morning, when the storm reaches Iceland and nears maximum strength, its minimum pressure is forecast to be near 923 mb, which would rank among the great storms of the North Atlantic. (Note: there is some uncertainty as to how much it will intensify. The European model only drops the minimum pressure to around 936 mb, which is strong but not that unusual). Winds of hurricane force are likely to span hundreds of miles in the North Atlantic. Environmental blogger Robert Scribbler notes this storm will be linked within a “daisy chain” of two other powerful North Atlantic low pressure systems forming a “truly extreme storm system.” He adds: “The Icelandic coast and near off-shore regions are expected to see heavy precipitation hurled over the island by 90 to 100 mile per hour or stronger winds raging out of 35-40 foot seas. Meanwhile, the UK will find itself in the grips of an extraordinarily strong southerly gale running over the backs of 30 foot swells.”

[..] Ahead of the storm, the surge of warm air making a beeline towards the North Pole is astonishing. [..] It’s as if a bomb went off. And, in fact, it did. The exploding storm acts a remarkably efficient heat engine, drawing warm air from the tropics to the top of the Earth. The GFS model projects the temperature at the North Pole to reach near freezing or 32 degrees early Wednesday. Consider the average winter temperature there is around 20 degrees below zero. If the temperature rises to freezing, it would signify a departure from normal of over 50 degrees.

Hope some of that goes toward giving them jobs.

• German States To Spend At Least €17 Billion On Refugees In 2016 (Reuters)

Germany’s federal states are planning to spend around €17 billion on dealing with the refugee crisis in 2016, newspaper Die Welt said on Tuesday, citing a survey it conducted among their finance ministries. The sum, bigger than the €15.3 billion that the central government planned to allocate to its education and research ministry in 2015, is a measure of the strain that the influx is causing across the country as a whole. Germany is the favoured destination for many of the hundreds of thousands of refugees fleeing conflict and poverty in the Middle East and Africa, partly due to the generous benefits that it offers.

The German states have repeatedly complained that they are struggling to cope, and Chancellor Angela Merkel’s open-door policy has caused tensions within her conservative camp. Die Welt said that excluding the small city state of Bremen, which did not provide any details, current plans suggested the states’ combined expenditure would be €16.5 billion. The paper said actual costs would probably be even higher because the regional finance ministries had based their budgets on an estimate from the federal government that 800,000 refugees would come to Germany in 2015. In fact, 965,000 asylum seekers had already arrived by the end of November.

Finance ministers have no place intervening in politics.

• Schaeuble Slams Greece Over Refugee Crisis, Aims For Joint EU Army (Reuters)

Germany’s finance minister Wolfgang Schaeuble and a senior Bavarian politician criticized Greece on Sunday over the way it is managing its role in Europe’s biggest migration crisis since World War Two. Schaeuble, who has clashed repeatedly with Greek officials this year over economic policy, told Bild am Sonntag that Athens has for years ignored the rules that oblige migrants to file for asylum in the European Union country they arrive in first. He said German courts had decided some time ago that refugees were not being treated humanely in Greece and could therefore not be sent back there. “The Greeks should not put the blame for their problems only on others, they should also see how they can do better themselves,” Schaeuble said.

Greece, a main gateway to Europe for migrants crossing the Aegean sea, has faced criticism from other EU governments who say it has done little to manage the flow of hundreds of thousands of people arriving on its shores. Joachim Herrmann, the interior minister of the southern state of Bavaria, that has taken the brunt of the refugee influx to Germany, criticized the way Greece is securing its external borders. “What Greece is doing is a farce,” Herrmann said in an interview with Die Welt am Sonntag newspaper, adding any that any country that does not meet its obligations to secure its external borders should leave the Schengen zone, where internal border controls have been abolished.

[..] In contrast to his criticism of Greece, Schaeuble sought to offer to compromise with eastern European countries that have voiced reluctance to accept migrants under EU quotas. “Solidarity doesn’t start by insulting each other,” Schaeuble said. “Eastern European states will also have to take in refugees, but fewer than Germany.” The influx of hundreds of thousands of migrants, many fleeing war and poverty in the Middle East, also means that European countries will have to increase spending on defense, he said. “Ultimately our aim must be a joint European army. The funds that we spend on our 28 national armies could be used far more effectively together,” Schaeuble said.

No, EU indifference on refugees has brought it down.

• Selfishness On Refugees Has Brought EU ‘To Its Knees’ (IT)

The “ruinously selfish” behaviour of some member states towards refugees has brought the European Union to its knees, former attorney general Peter Sutherland has said. In a sharp denunciation of Europe’s failures on migration and social integration, Mr Sutherland, who is special representative to the United Nations secretary general for migration, said political “paralysis and ambivalence” was threatening the future of the EU and resulting in the rise of xenophobic and racist parties. With a population of 508 million, the EU should have had no insuperable problem welcoming even a million refugees “had the political leadership of the member states wanted to do so and had the effort been properly organised,” Mr Sutherland said. “But instead, ruinously selfish behaviour by some member states has brought the EU to its knees.”

There were several “honourable exceptions”, most notably German chancellor Angela Merkel, who he described as “a heroine” for showing openness and generosity towards refugees. Mr Sutherland made the remarks in the Littleton memorial lecture, which was broadcast on RTÉ radio on St Stephen’s Day. More than a million refugees and migrants arrived in the EU by land and sea in 2015, according to the International Organisation for Migration, making this the worst crisis of forced displacement on the continent since the second World War. Half of those arriving were Syrians fleeing a conflict that has left almost 250,000 people dead and displaced half the country’s pre-war population. A European Commission plan to use quotas to relocate asylum seekers arriving in southeastern Europe was adopted in the autumn against strong opposition from several states, including Hungary, Poland and the Czech Republic.

Slovakia said it would take in only a few hundred refugees, and they would have to be Christians. Mr Sutherland said the razor and barbed wire fences being erected on the Hungarian border to keep out migrants and refugees “are not just tragic but they are also particularly ironic, as Hungarians were for so long confined by the Iron Curtain.” He recalled that in 1956, after their failed revolution, 200,000 Hungarian refugees were immediately given protection throughout Europe and elsewhere. “Yet now, prime minister Viktor Orbán is the most intransigent and vociferous opponent of taking refugees in the EU.” Mr Sutherland accused some heads of government of “stoking up prejudice” by speaking of barring Muslim migrants and said the absence of EU agreement on a refugee-sharing scheme meant a Europe of internal borders was increasingly likely to become a reality across the continent.

Waiting for the next surge as soon as the weather gets better.

• Refugee Arrivals In Greece Rise More Than Tenfold In A Year (Kath.)

Over 800,000 refugees and migrants entered Greece between the start of the year and the end of November, with the number of arrivals increasing more than tenfold compared to last year’s total of 72,632, data published by the Greek Police showed Monday. The number tallies with figures from the United Nations High Commission for Refugees (UNHCR), which puts total arrivals in Greece from January 1 to December 24 at 836,672. The UNHCR also reported that in the three-day period from December 24 to 26, daily arrivals in Greece came to 2,950, with the monthly average at 3,400 per day, a significant drop from November’s average of 5,040. Most arrivals continue to enter Greece via the islands close to Turkey, the main transit point for refugees and migrants fleeing strife in the Middle East and South Asia and trying to enter the European Union.

On Lesvos alone, authorities estimate that they continue to receive from 2,000 to 2,500 arrivals every day, down from an average of over 5,000 in November. Police on the eastern Aegean island on Monday said that more than 3,500 refugees and migrants were waiting to be ferried to the mainland by this afternoon, while at the island’s main registration center in Moria, there are a further 4,000 people waiting to be processed and granted permission to leave for Athens, from where they will continue their journey north. In the capital, meanwhile, the Asylum Service of the Citizens’ Protection Ministry on Monday published data showing that only 82 of the 449 applications it has submitted so far for the relocation of refugees from Syria, Iraq and Eritrea to other parts of the European Union have been successful.

The initial plan drawn up by European authorities was for a total of 66,400 refugees to be transferred from Greece to other EU member-states, though only 13 countries have come forward, offering to take in a total of 565 asylum seekers. The repatriations that have been successful have been to Luxembourg, which took in 30 people, Finland (24), Portugal (14), Germany (10) and Lithuania, which accepted four relocations.

2016 Is An Easy Year To Predict

Dec 282015

December 28, 2015 Posted by Raúl Ilargi Meijer at 10:48 pm Finance Tagged with: 2016, central banks, China, commodities, debt, deflation, leverage, oil, over, risk 4 Responses »

AP Police Officer Carries Aylan Kurdi’s Body, Bodrum Sep 2 2015

No year is ever easy to predict, if only because if it were, that would take all the fun out of life. But still, predictions for 2016 look quite a bit easier than other years. This is because a whole bunch of irreversible things happened in 2015 that were not recognized for what they are, either intentionally or by ‘accident’. Things that will therefore now be forced to play out in 2016, when denial will no longer be an available option.

A year ago, I wrote 2014: The Year Propaganda Came Of Age, and though that was more about geopolitics, it might as well have dealt with the financial press. And that goes for 2015 at least as much. Mainstream western media are no more likely to tell you what’s real than Chinese state media are.

2015 should have been the year of China, and it was in a way, but the extent to which was clouded by Beijing’s insistence on made-up numbers (GDP growth of 7% against the backdrop of plummeting imports and exports, 45 months of falling producer prices and bad loans reaching 20%), by the western media’s insistence on copying these numbers, and by everyone’s fear of the economic and financial consequences of the ‘Great Fall of China‘.

2015 was also the year when deflation, closely linked -but by no means limited- to China, got a firm hold on the global economy. Denial and fear have restricted our understanding of this development just as much.

And while it should be obvious that 2015 was the year of refugees as well, that topic too has been twisted and turned until full public comprehension has become impossible. Both in the US and in Europe politicians pose for their voters loudly proclaiming that borders must be closed and refugees and migrants sent back to the places they’re fleeing due to our very own military interventions.

And that said politicians have the power to make that happen, the power to close borders to hundreds of thousands of fellow human beings arriving on their countries’ doorsteps. As if thousands of years of human mass migrations never occurred, and have no lessons to teach the present or the future.

The price of oil was a big story, and China plays the lead role in that story, even if again poorly understood. All the reports and opinions about OPEC plans and ‘tactics’ to squeeze US frackers are hollow, since neither OPEC as a whole nor its separate members have the luxury anymore to engage in tactical games; they’re all too squeezed by the demise of Chinese demand growth, if not demand, period.

Ever since 2008, the entire world economy has been kept afloat by the $25 trillion or so that China printed to build overleveraged overcapacity. And now that is gone, never to return. There is nowhere else left for our economies to turn for growth. Everyone counted on China to take them down the yellow brick road to la-la-land, forever. And then it didn’t happen.

What 2015 should have made clear, and did in a way but not nearly clear enough, is that the world economy is falling apart due to a Ponzi bubble of over-production, over-capacity, over-investment, over-borrowing, all of which was grossly overleveraged. And that this now is, for lack of a better word, over.

Most people who read this will have noticed the troubled waters investment funds -hedge funds, mutual funds, money market funds et al- have recently landed in. But perhaps not many understand what this means, and where it may lead. These things tend to be seen as incidents, as is anything that diverts attention away from the ‘recovery just around the corner’ narrative.

Not only do the losses and redemptions at investment funds drive these funds to the brink, everything they’ve invested in also tumbles. Add to this the fact that most of the investments are highly leveraged, which means that typically a loss of just a few percent can wipe out all of the principal, and a notion of the risks becomes clear.

Of course, since many of the funds hold the same or similar investments, we can add yet another risk factor: contagion. Things will blow up first where the risk is highest. Then everything else becomes riskier. Low interest rates have caused many parties to chase high yields -junk bonds-, and that’s where risks are highest.

This is the 2015 story of investment funds, and it will continue, and aggravate, in 2016. Ultra low interest rates drive economies into deflation and investors into ever riskier assets. This is a process of unavoidable deterioration, unstoppable until it has played out in full. A 0.25% rate hike won’t do anything to change that.

Why do interest rate hikes pose such a problem? Because ZIRP has invited if not beckoned everyone to be up to their necks in debt. The entire economy is being kept lopsidedly upright, Wile. E style, by debt. Asset prices, even as commodities have now begun to fall in serious fashion, still look sort of OK, but only until you start to look at the amount of leverage that’s pinning it all up.

Once you see that, you understand how fragile it all is. Go one step further, and it becomes clear that this exponentially growing ‘machinery‘ can only be ‘sustained’ by ever more debt and leverage. Until it no longer can.

Commodities prices have nowhere to go but down for a long time to come. These prices have been propped up by the illusionary expectations for Chinese growth and demand, and now that growth is gone. So, too, then, must the over-leveraged over-investments both in China and abroad.

Growth that was expected to be in double digits for years to come has shrunk to levels well below that ‘official’ 7%. China’s switch to a consumer driven economy is as much a fantasy as the western switch to a knowledge economy has proved to be. If you don’t actually produce things, you’re done. And producing for export markets is futile when there’s no-one left to spend in those markets.

Ergo, commodities, raw materials, the very building blocks of our economies, from oil all the way to steel, are caught in a fire sale. Everything must go! Eventually, commodities prices will more or less stabilize, but at much lower levels than they -still- are at present. That we will need to figure this out in 2016 instead of 2015 is our own fault. We could have been healing, but we’ve yet to face the pain.

Trying to guesstimate how low oil will go is a way of looking at things that seems very outdated. It’s interesting just about exclusively for people who ‘invest’ in the markets, but the reality is that the Fed, BoJ, PBoC and ECB have first made sure through QE and ZIRP/NIRP that there no longer are functioning markets, and they are now losing their relevance because of these very ‘policies’.

Price discovery has already started (oil, commodities), and central banks have benched themselves. They could only re-enter the game if they quit interfering in the markets, but they’re too afraid, all of them, of the consequences that might have, not even so much for their economies but for their TBTF banks.

Yellen’s rate hike will mean some extra profits for those same banks at the cost of the rest of the financial world, but with growth gone to not return for a very long time, and with deflation hitting everything in sight and then some, there is no pretty picture left.

And none of this is really hard to process or understand. It’s just that there’s these concerted efforts to keep you from understanding, that keep you believing in some miracle salvation effort. Which would, so goes the narrative, have to come from the same central banks and the same Wall Street banks that put everyone and their pet guinea pig as deep in debt as they are.

If you have been reading the Automatic Earth over the past 8 years and change, you know what this is about. There are a few, but unfortunately only a few, other sources that may have put you on the same trail.

I was impressed with the following earlier this month from David Stockman, Reagan’s Director of the Office of Management and Budget, who now seems to have firmly caught up with the deflation theme Nicole Foss and I have been warning about ever since we started writing – pre-TAE – at the Oil Drum 10 years ago. Stockman today says that we are entering an epic deflation and the world economy is actually going to shrink for the first time since the 1930s. (!)

The End Of The Bubble Finance Era

There has been so much over-investment in energy, mining, materials processing, manufacturing and warehousing that nothing new will be built for years to come. [..] .. there will be a severe curtailment in the production of mining and construction equipment, oilfield drilling rigs, heavy trucks and rail cars, bulk carriers and containerships, materials handling machinery and warehouse rigging, machine tools and chemical processing equipment and much, much more.

It’s good to see people finally acknowledging this. It’s still rare. But there’s another, again interlinked, development that is very poorly understood. Which is that in a debt deflation, the ‘money’ that appears to be real and present in leveraged investments more often than not doesn’t get pulled out of one ‘investment’ only to be put into another, it just goes POOF, it vanishes.

And though it may seem strange, conventional economics has a very hard time with that. In the eyes of that field, if you don’t spend your money, you must be saving it. The possibility of losing it altogether is not a viable option. Or, if you lose it, someone else must be gaining it, zero-sum style.

But that view ignores the entire ‘pyramid’ of leveraged loans and investments and commodity prices, which precisely because that pyramid contained no more than a few percentage points of ‘real collateral’ to underpin everything it kept afloat, should have been a red flag. Because this is the very essence of debt deflation.

Just one little example of how and why this happens comes from this Bloomberg item. The key word is ‘evaporates’:

$100 Billion Evaporates as World’s Worst Oil Major Plunges 90%

Colombia is nursing paper losses of more than $100 billion after its oil boom fell short of expectations, wiping out 90% of the value of what was once Latin America’s biggest company. From being the world’s fifth-most valuable oil producer at its zenith in 2012, worth more than BP, state-controlled Ecopetrol now ranks 38th. Its market capitalization has fallen to $14.5 billion, down from its peak of $136.7 billion. “They just haven’t found oil, it’s as simple as that,” Rupert Stebbings at Bancolombia said from Medellin. “The whole oil sector got massively over-bought, and people assumed that one day they’d hit an absolute gusher.”

2016 will be the year when a lot of ‘underlying wealth’ evaporates. Trillions of dollars already have in the commodities markets, but, again, our media don’t tell us about it, or at least they frame it in different terms. They use deflation to mean falling consumer prices, but then insist on calling falling prices at the pump a positive thing. Without recognizing to what extent those falling prices eat away at the entire economy, and at society at large.

To summarize for now: we have elected to deny and ignore what has happened to our economies, our societies and our lives in 2015, only to be forced to face all of it in 2016. That makes the year an easy one to predict. But there are of course a lot of other possible spokes and wheels and other things.

Any government that sees its nation slide down into a deep enough pit will always consider going to war. One or more central banks may opt for a Hail Mary helicopter ride. A volcano may erupt. But none of these things will prevent the bubbles we have blown from deflating. They may divert attention, they may delay the inevitable a bit more, sure. But bubbles never last.

I have a whole list of key words I wanted to use in this, but I think I’ll turn them into a separate article. The main point is you understand the gist of it all. There are no markets, and what has posed as markets is crumbling before our very eyes, inexorably. The best we can do is say ‘see you on the other side’, if we’re lucky.

Debt Rattle December 18 2015

Dec 182015

December 18, 2015 Posted by Raúl Ilargi Meijer at 10:15 am Finance Tagged with: China, commodities, EU, Fed, Greece, IMF, Japan, NatGas, oil, refugees, shipping, stimulus 3 Responses »

James F. Gibson Tent of A. Foulke, Horse Artillery, Brandy Station, Virginia 1864

• Sell The Bonds, Sell The Stocks, Sell The House – Dread The Fed! (Stockman)

• Oil Below $35, Set For Third Weekly Loss As Supply Glut Seen Relentless (BBG)

• Natural Gas Falls to All-Time Inflation-Adjusted Low (WSJ)

• This Year’s Worst Commodity Is One You Probably Can’t Pronounce (BBG)

• Slowing Boats From China Provide Clue to Health of World Trade (BBG)

• Fed Will Have To Reverse Gears Fast If Anything Goes Wrong (AEP)

• The ‘Rate Hike’ Means More Looting By The 1% (Paul Craig Roberts)

• Japan To Craft $27 Billion Extra Stimulus Budget To Spur Growth (Reuters)

• Beijing Probes Architects of Stock-Market Rescue (WSJ)

• China Beige Book Shows ‘Disturbing’ Economic Deterioration (BBG)

• IMF’s Lagarde to Face Trial for ‘Negligence’ in Tapie Case (BBG)

• IMF Admits Mistakes Over Greece’s Bailout Program (GR)

• Beijing Grinds To Halt As Second Ever ‘Red Smog Alert’ Issued (Reuters)

• EU Puts Blame On Greece, Turkey At Refugee Summit (Kath.)

• EU To Fast-Track Border Control Plans (RTE)

• Greece Risks Becoming A ‘Black Box’ For Stranded Migrants (FT)

Got to love it when Stockman gets mad.

• Sell The Bonds, Sell The Stocks, Sell The House – Dread The Fed! (Stockman)

There is going to be carnage in the casino, and the proof lies in the transcript of Janet Yellen’s press conference. She did not say one word about the real world; it was all about the hypothecated world embedded in the Fed’s tinker toy model of the US economy. Yes, tinker toys are what kids used to play with back in the 1950s and 1960s, and that’s when Janet acquired her school-girl model of the nation’s economy. But since that model is so frightfully primitive, mechanical, incomplete, stylized and obsolete, it tells almost nothing of relevance about where the markets and economy now stand; or what forces are driving them; or where they are headed in the period just ahead. In fact, Yellen’s tinker toy model is so deficient as to confirm that she and her posse are essentially flying blind.

That alone should give investors pause – especially because Yellen confessed explicitly that “monetary policy is an exercise in forecasting”. Accordingly, her answers were riddled with ritualistic reminders about all the dashboards, incoming data and economic system telemetry that the Fed is vigilantly monitoring. But all that minding of everybody else’s business is not a virtue – its proof that Yellen is the ultimate Keynesian catechumen. This stupendously naïve old school marm still believes the received Keynesian scriptures as penned by the 1960s-era apostles James (Tobin), John (Galbraith), Paul (Samuelson) and Walter (Heller). But c’mon.Those ancient texts have no relevance to the debt-saturated, state-dominated, hideously over-capacitated global economy of 2015.

They just convey a stupid little paint-by-the-numbers simulacrum of what a purportedly closed domestic economy looked like even back then. That is, before Richard Nixon had finally destroyed Bretton Woods and turned over the Fed’s printing presses to power aggrandizing PhDs; and before Mr. Deng had thrown out Mao’s little red book in favor of a central bank based credit Ponzi. As you listened to Yellen babble on about the purported cyclical “slack” remaining in the US economy, the current unusually low “natural rate” of federal funds, all the numerous and sundry “transient” factors affecting the outlook, and the Fed’s fetishly literal quest for 2.00% inflation (yes, these fools apparently think the can hit their inflation target to the second decimal place), only one conclusion was possible. To wit, sell the bonds, sell the stocks, sell the house, dread the Fed!

“Crude stockpiles surged to 490.7 million barrels, the highest for this time of year since 1930..”

• Oil Below $35, Set For Third Weekly Loss As Supply Glut Seen Relentless (BBG)

Oil traded below $35 a barrel and headed for a third weekly decline amid a worsening U.S. supply glut and the first interest rate increase by the Federal Reserve in almost a decade. Futures held losses in New York after closing Thursday at the lowest in almost seven years, and were down 2.2% this week. Crude stockpiles surged to 490.7 million barrels, the highest for this time of year since 1930, according to the Energy Information Administration. Goldman Sachs warned of “high risks” that prices may sink further as supplies swell. The Fed decision bolstered the dollar, diminishing the investment appeal of commodities.

Oil is trading near levels last seen during the global financial crisis on signs the surplus will be exacerbated. OPEC abandoned output limits at a Dec. 4 meeting while the White House announced its support Wednesday for a deal reached by congressional leaders that would end the nation’s 40-year restrictions on crude exports. “The major driver this week has been U.S. dollar strength against a backdrop of ongoing refusal to respond rationally to the current market surplus on the supply side,” Michael McCarthy, a chief markets strategist at CMC Markets in Sydney, said by phone. “We’re just not seeing the normal production cuts we’d expect given the plummet in prices.”

Blame it on the weather.

• Natural Gas Falls to All-Time Inflation-Adjusted Low (WSJ)

Natural-gas fell to the lowest ever inflation-adjusted price in its history of Nymex trading on Wednesday as extremely warm weather continues to limit demand. Prices for the front-month January contract settled down 3.2 cents, or 1.8%, at $1.79 a million British thermal units on the New York Mercantile Exchange. That is the lowest settlement since March 24, 1999. Gas prices have been falling precipitously in recent weeks because of the combination of record-high stockpiles and a December that could be the worst for heating demand in history. Prices have fallen 25% in just one month and have dropped 39% from their high in August. Wednesday settlement put gas below the inflation-adjusted low of $1.801 that had been in place since January 1992.

Gas did make a move up to small gains in after-hours trading, but many traders and brokers had little explanation for that rebound. The trader Marc Kerrest said he noticed prices and spreads moving higher for months far away, a sign front-month prices could follow. He closed out some of his bearish bets before settlement, he said. “But in no way would I consider going [bullish on] gas just because of what it’s done,” in recent weeks, said Mr. Kerrest, who manages his own gas-focused fund, Cornice Trading. Warm weather in the U.S. caused by the El Niño weather phenomenon has sharply limited demand for the heating fuel this year. The natural-gas market is oversupplied, and some traders and analysts say the industry could run out of storage space for gas by mid-2016.

Production was so high and demand was so soft that storage levels likely shrank by just 41 billion cubic feet last week, according to the average forecast of 17 analysts, brokers and traders surveyed by The Wall Street Journal. That is only a third of their five-year average drawdown for the week. If the forecast is correct, stockpiles on Dec. 11 would have been 16% above levels from a year ago and 8.9% above the five-year average for the same week.

We’re just getting started.

• This Year’s Worst Commodity Is One You Probably Can’t Pronounce (BBG)

An obscure metal used to make steel has become this year’s worst-performing commodity, after China’s stumbling economy and a collapse in the energy industry drove outsized losses. Molybdenum – that’s mo.lyb.de.num for the uninitiated – is used in many steel building materials and to help harden the drills used to extract oil and natural gas from deep underground. Prices plunged 49%, the most among 79 raw materials tracked by Bloomberg, as the white metal was undermined by the flagging demand and oversupply that plagued global commodity markets throughout 2015. Use of the metal tumbled 5.1% this year, the biggest contraction since 2009, driven by a slowdown in China, the world’s biggest metals and energy consumer, according to Macquarie.

Prices have dropped for eight straight months, the longest slump since 2011, weighing on returns for mining companies including Freeport-McMoRan Inc., the world’s top producer. “It’s like a poster child for the commodity bear market,” said Paul Christopher atWells Fargo Investment Institute. “We don’t have a positive outlook on metals, including molybdenum, because they’ve been overproduced. They will continue to do the worst, not just because China’s demand is slipping still, but also because there’s not been enough supply adjustment.” Prices for molybdenum oxide tumbled to a 12-year low of $4.616 a pound in November, according to monthly data from Metal Bulletin. The drop exceeded the 34% decline for crude oil and the 27% slide in the Bloomberg Commodity Index, a gauge of returns from 22 items that is headed for its biggest annual decline since the recession in 2008.

Molybdenum for immediate delivery traded on the London Metal Exchange slumped 43% this year to $11,628 a metric ton ($5.27 a pound). About half of molybdenum is produced as a byproduct of extracting other metals, mainly copper. Because it makes up a small portion of revenue for mining companies, suppliers are slower to respond with output cuts when prices tumble, said Mu Li at CPM Group in New York. Production topped demand by 40.9 million pounds in 2015, the biggest surplus since at least 2002, according to Bank of America. The market will remain oversupplied through 2020, the bank estimates.

No hurries, mate.

• Slowing Boats From China Provide Clue to Health of World Trade (BBG)

If you want to know how China’s economy is doing, take a slow boat from one of its ports. Even with fuel at its cheapest price in almost a decade, the ships that carry goods around the world have been reducing speed in line with the slowdown in China, the biggest exporter. Shipping companies have been “slow steaming” since the global financial crisis in 2008, as a way to save costs and keep as many ships active as possible. Vessels are now operating at an average of 9.69 knots, compared with 13.06 knots seven years ago, according to data compiled by Bloomberg. That means Nike sneakers and Barbie dolls made in China can now take two weeks to arrive in Los Angeles and a month to reach Le Havre, France – a week longer than if the ships were moving at full speed.

And there’s scope for ships to go even slower, according to A.P. Moeller-Maersk. “This is the new norm,” said Rahul Kapoor at Drewry Maritime Services. “The overall speed of the industry has gone down and there’s no going back.” In the boom years before the 2008 financial crisis, shipping lines expanded fleets and ran ships as fast as they could to keep up with the surging demand for goods manufactured half a world away. As demand dropped, the lines were left with too many vessels, and customers eager to reduce inventory, who would rather pay a lower rate to receive goods than guarantee quick delivery. “In 2003, if you were on a tanker, container ships would zoom past and in a matter of a few minutes you couldn’t see them on the horizon,” Kapoor said.

“Since 2008, it’s been a different story.” Fuel costs are the biggest expense for shipping lines and the drop in oil has given them some relief from plunging freight rates driven lower by overcapacity and sluggish global growth. Reducing a ship’s speed by 10% can cut fuel consumption by as much as 30%, according to ship assessor Det Norske Veritas.

Lots of things will go wrong.

• Fed Will Have To Reverse Gears Fast If Anything Goes Wrong (AEP)

The global policy graveyard is littered with central bankers who raised interest rates too soon, only to retreat after tipping their economies back into recession or after having misjudged the powerful deflationary forces in the post-Lehman world. The European Central Bank raised rates twice in 2011, before the economy had achieved “escape velocity” and just as the Club Med states embarked on drastic fiscal austerity. The result was the near-collapse of monetary union. Sweden, Denmark, Korea, Canada, Australia, New Zealand, Israel and Chile, among others, were all forced to reverse course, and some have since swung into negative territory to compensate for the damage. The US Federal Reserve has waited longer before pulling the trigger, and circumstances are, in many ways, more propitious.

Four years of budget cuts and fiscal drag are finally over. State and local spending will add stimulus worth 0.5pc of GDP this year. The unemployment rate has dropped to 5pc. Payrolls have risen by 509,000 over the past two months. The rate of job openings is the highest since the peak of the dotcom boom in 2000. The M1 and M2 money supply figures have switched from green to amber but are not flashing the sort of stress warnings so clearly visible in mid-2008. Yet it is a very murky picture. This is the first time the Fed has ever embarked on tightening cycle when the ISM gauge of manufacturing is below the boom-bust line of 50. Nominal GDP growth in the US has been trending down from 5pc in mid-2014 to barely 3pc. Danny Blanchflower, a Dartmouth professor and a former UK rate-setter, said the US labour market is not as tight as it looks.

Inflation is nowhere near its 2pc target and the world economy is still gasping for air. He sees a 50/50 chance that the Fed will have to pirouette and go back to the drawing board. “All it will take is one shock,” said Lars Christensen, from Markets and Money Advisory. “It is really weird that they are raising rates at all. Capacity utilization in industry has been falling for five months.” Mr Christensen said the rate rise in itself is relatively harmless. The real tightening kicked off two years ago when the Fed began to slow its $85bn of bond purchases each month. This squeezed liquidity through the classic quantity of money effect. Fed tapering slowly turned off the spigot for a global financial system running on a “dollar standard”, with an estimated $9 trillion of foreign debt in US currency.

China imported US tightening through its dollar-peg, compounding the slowdown already under way. It was the delayed effect of this crunch that has caused the “broad” dollar index to rocket by 19pc since July 2014, the steepest dollar rise in modern times. It is a key cause of the bloodbath for commodities and emerging markets. Mr Christensen said the saving grace this time is that Fed has given clear assurances – like the Bank of England – that it will roll over its $4.5 trillion balance sheet for a long time to come, rather than winding back quantitative easing and risking monetary contraction.

The big banks will be alright.

• The ‘Rate Hike’ Means More Looting By The 1% (Paul Craig Roberts)

The Federal Reserve raised the interbank borrowing rate today by one quarter of one% or 25 basis points. Readers are asking, “what does that mean?” It means that the Fed has had time to figure out that the effect of the small “rate hike” would essentially be zero. In other words, the small increase in the target rate from a range of 0 to 0.25% to 0.25 to 0.50% is insufficient to set off problems in the interest-rate derivatives market or to send stock and bond prices into decline. Prior to today’s Fed announcement, the interbank borrowing rate was averaging 0.13% over the period since the beginning of Quantitative Easing. In other words, there has not been enough demand from banks for the available liquidity to push the rate up to the 0.25% limit.

Similarly, after today’s announced “rate hike,” the rate might settle at 0.25%, the max of the previous rate and the bottom range of the new rate. However, the fact of the matter is that the available liquidity exceeded demand in the old rate range. The purpose of raising interest rates is to choke off credit demand, but there was no need to choke off credit demand when the demand for credit was only sufficient to keep the average rate in the midpoint of the old range. This “rate hike” is a fraud. It is only for the idiots in the financial media who have been going on about a rate hike forever and the need for the Fed to protect its credibility by raising interest rates.

Look at it this way. The banking system as a whole does not need to borrow as it is sitting on $2.42 trillion in excess reserves. The negative impact of the “rate hike” affects only smaller banks that are lending to businesses and consumers. If these banks find themselves fully loaned up and in need of overnight reserves to meet their reserve requirements, they will need to borrow from a bank with excess reserves. Thus, the rate hike has the effect of making smaller banks pay higher interest expense to the mega-banks favored by the Federal Reserve. A different way of putting it is that the “rate hike” favors banks sitting on excess reserves over banks who are lending to businesses and consumers in their community. In other words, the rate hike just facilitates more looting by the One%.

Their debt is not high enough yet.

• Japan To Craft $27 Billion Extra Stimulus Budget To Spur Growth (Reuters)

Japan’s cabinet is set to approve on Friday an extra budget worth $27 billion to fund stimulus spending for the current fiscal year ending in March to rev up the flagging economy, government sources told Reuters. The 3.3213 trillion yen ($27.14 billion) extra stimulus budget includes spending for steps to support elderly pensioners with cash benefits and farmers seen hit by the Trans-Pacific Partnership (TPP) trade deal, the sources said on condition of anonymity because the plan has not been finalised. In a show of efforts to fix dire public finances, the government will fund the stimulus without resorting to fresh borrowing, while tapping cash reserves left from the previous year’s budget and higher-than-expected tax revenue, they said.

These funding sources will allow the government to reduce its plans to issue new bonds by 444.7 billion yen from the initially planned 36.9 trillion yen, they said. The government revised up the tax revenue estimate for this fiscal year by 1.899 trillion yen to a 24-year high of 56.4 trillion yen, reflecting increase in corporate tax payments on the back of rising profits. Non-tax revenue was cut by 346.6 billion yen from an initial estimate of 4.95 trillion yen, due to expected cuts in the Bank of Japan’s payment into the government’s coffers because of the bank’s plan to replenish its reserves. The extra budget will be sent to parliament for approval early next year, along with an annual budget for the coming fiscal year that starts in April.

“..investigating whether officials inside the China Securities Regulatory Commission used their knowledge of the rescue effort to enrich their friends or themselves..”

• Beijing Probes Architects of Stock-Market Rescue (WSJ)

Having already investigated investors and brokerages in connection with a bungled summer stock-market rescue totaling more than $200 billion, Beijing is now probing the rescuers. Communist Party graft busters are investigating whether officials inside the China Securities Regulatory Commission used their knowledge of the rescue effort to enrich their friends or themselves, say agency officials familiar with the probe. In recent weeks, they have been taking officials, one by one, to a hotel close to the agency’s headquarters to press them to come clean or report on others, the officials say. The investigators also have set up shop on the top floor of the agency’s 22-story headquarters in downtown Beijing, banned agency officials from leaving China and set up a hotline and red mailbox in the lobby for anonymous tips, the officials say.

Already two top CSRC officials have been removed from their posts and placed under investigation on suspicion of leaking the government’s moves to private investors who used it to reap profits, according to officials with knowledge of the probe. The officials familiar with the probe told The Wall Street Journal that one focus is suspected chummy ties between the regulators and those they regulate. “They’re trying to determine what went wrong with the action to save the market this summer,” one of the officials said. “Was there anyone who inappropriately profited from the action?” [..]

The investigation was sparked by a stock-market rescue effort that called into question China’s ability to manage a market-driven economy, a stated national goal. That effort included a massive government-led buying binge, with a state lender plowing 1.2 trillion yuan ($188 billion) into the stock market and brokerages vowing to spend 120 billion yuan more, while other state-backed companies spent an undisclosed amount. Chinese officials have said those unprecedented measures were necessary to preventing the stock rout from spreading to other parts of China’s financial system.

The not-official numbers.

• China Beige Book Shows ‘Disturbing’ Economic Deterioration (BBG)

China’s economic conditions deteriorated across the board in the fourth quarter, according to a private survey from a New York-based research group that contrasted with recent official indicators that signaled some stabilization in the country’s slowdown. National sales revenue, volumes, output, prices, profits, hiring, borrowing, and capital expenditure were all weaker than the prior three months, according to the fourth-quarter China Beige Book, published by CBB International. The indicator is modeled on the survey compiled by the Federal Reserve on the U.S. economy, and was first published in 2012. The world’s second-largest economy lacks the kind of comprehensive data available on developed nations, making it harder for investors to get a clear read – particularly as China transitions from reliance on manufacturing and investment toward services and consumption.

Official data on industrial production, retail sales and fixed-asset investment all exceeded forecasts for November, while consumer inflation perked up and a slide in imports moderated. The Beige Book’s profit reading is “particularly disturbing,” with the share of firms reporting earnings gains slipping to the lowest level recorded, CBB President Leland Miller wrote in the release. While retail and real estate held up reasonably well, manufacturing and services performed poorly, with revenues, employment, capital expenditure and profits weakening. The survey shows “pervasive weakness,” Miller wrote in the report. “The popular rush to find a successful manufacturing-to-services transition will have to be put on hold for a bit. Only the part about struggling manufacturing held true.”

After efforts including six interest-rate cuts since late 2014 failed to revive growth, policy makers are switching focus to fix problems like overcapacity on the supply side. President Xi Jinping – seeking to keep growth at a minimum 6.5% a year through 2020 – is juggling short-term stimulus with long-term prescriptions to avoid the middle-income trap that has ensnared developing nations after bouts of rapid growth before they became wealthy. China’s leaders convene their annual economic work meeting Friday, according to the People’s Daily. Officials typically set the growth target for the coming year at the conference, which lasts a few days.

“She shares the prosecutors’ view that there is no basis for any charge against her.”

• IMF’s Lagarde to Face Trial for ‘Negligence’ in Tapie Case (BBG)

IMF Managing Director Christine Lagarde will be tried for “negligence” in relation to a settlement the French government reached with businessman Bernard Tapie during her time as finance minister, a French court said Thursday. Lagarde, 59, has repeatedly denied wrongdoing and will appeal the decision to put her on trial, her lawyer said. The decision was made by a special commission of the court against the advice of the prosecutor, a court official said. The trial concerns Lagarde’s 2008 decision to allow an arbitration process to end a dispute between Tapie, a supporter of then-French President Nicolas Sarkozy, and former state-owned bank Credit Lyonnais. The court has been looking into whether she erred in agreeing to the arbitration, which resulted in the tycoon being awarded about €403 million.

Having to face trial in France could have serious implications for Lagarde’s future at the helm of the IMF, though her job may not be in any immediate danger. Her five-year term as managing director expires in July. At the fund’s annual meeting in Lima in October, Lagarde said she’d be open to serving another term. “I assume this would probably go quickly, if only to remove the cloud of suspicion over her,” said Christopher Mesnooh, a Paris-based lawyer at Field Fisher Waterhouse, who isn’t involved in the Lagarde case. “Everyone knows the importance of Christine Lagarde to the world economy. They won’t want to leave this unresolved.”

Lagarde reaffirms that she “acted in the best interest of the French State and in full compliance with the law,” according to an e-mailed statement from her attorney Yves Repiquet. “She shares the prosecutors’ view that there is no basis for any charge against her.” The IMF board said Thursday that it sees Lagarde as still able to do her job. “The Executive Board continues to express its confidence in the managing director’s ability to effectively carry out her duties,” IMF spokesman Gerry Rice said in an e-mailed statement. “The board will continue to be briefed on this matter.”

Banks are more important than countries.

• IMF Admits Mistakes Over Greece’s Bailout Program (GR)

The IMF acknowledged that it made mistakes and omissions in the Greek bailout program approved in May 2010, as it did not include debt restructuring. The IMF Board of Directors approved the evaluation report on the programs during the economic crisis. An independent committee will examine the issue, especially on debt restructuring, which, as highlighted on the report, multiplied difficulties in Greece. According to a Mega television report, the Board expects the report of the Independent Office Fund Evaluation on the role played by its members on the Eurozone crisis. However, the report will be delayed at the request of Poul Thomsen, on the grounds that “the program is still running.”

Regarding the restructuring of the Greek debt, the report states that there was no restructuring because of the fear that the crisis would spread to other Eurozone countries. There was also the fear of exposure of European banks to the Greek debt. Only when the ECB intervened to protect the Eurozone and two years of uncertainty passed, then the Eurozone was secure, the report says. When it was decided to restructure private debt (PSI) the “haircut” was great for the creditors compared to others, but at the same time chances that it would prove insufficient to restore debt sustainability were increased, the report says, according to Mega.

Regarding restructuring of the Greek debt, it is implicitly admitted in the report that it was absolutely necessary in 2010. It is also admitted that for the 2010 and 2012 programs, internal devaluation through reforms in labor and product markets was the main goal. To this end, they decided measures such as reducing nominal wages and benefits in the public sector, reducing minimum wages, the reform of the collective bargaining system, promoting privatization, reducing bureaucracy and promoting competition.

This can not end well. A revolt is building.

• Beijing Grinds To Halt As Second Ever ‘Red Smog Alert’ Issued (Reuters)

China’s capital city issued a “red alert” for pollution on Friday, hard on the heels of its first-ever such warning earlier in December, as Beijing’s leadership vowed to crack down on often hazardous levels of smog. Authorities in the Chinese capital warned the city would be shrouded by heavy pollution from Saturday until next Tuesday, prompting the highest-level warning that leads to emergency responses such as limiting car use and closing schools. After decades of unbridled economic growth, China’s leadership has vowed to tackle heavy air, water and soil pollution, including the thick smog that often blankets major cities. Beijing’s second red alert comes after a landmark climate agreement was reached in Paris in December, setting a course to move away from a fossil fuel-driven economy within decades in a bid to arrest global warming.

The city’s first red alert was issued on 7 December, restricting traffic and halting outdoor construction. The Beijing Meteorological Service said in a statement vehicle use would be severely restricted, and that fireworks and outdoor barbecues would be banned. It also recommended schools cancel classes. City residents have previously criticised authorities for being too slow to issue red alerts for heavy smog, which often exceeds hazardous levels on pollution indices. The environmental protection minister, Chen Jining, vowed in December to punish agencies and officials for any failure to implement a pollution emergency response plan quickly, the state-run Global Times tabloid said. Many cities around China suffer high levels of pollution, with Shanghai schools banning outdoor activities and authorities limiting work at construction sites and factories earlier this week.

In the eyes of the richer Europeans, they are the victims, not the refugees or Greece.

• EU Puts Blame On Greece, Turkey At Refugee Summit (Kath.)

EU leaders meeting in Brussels on Thursday pressed Turkey to curb the flow of migrants entering the bloc via Greece and urged Athens to speed up its efforts to accommodate and repatriate migrants. Prime Minister Alexis Tsipras met his Turkish counterpart Ahmet Davutoglu on the sidelines of the mini-summit in Brussels which brought together 11 EU leaders and Davutoglu. According to sources, Tsipras urged European officials to ensure that a recent agreement between the EU and Turkey to stem migrant flows is being observed. Tsipras repeated Greece’s position that refugees should be transferred directly from Turkey to other EU member-states. But, according to sources, several EU leaders made it clear to Davutoglu that refugee relocations from Turkey would not begun until Ankara makes good on commitments to the EU to curb the flow of migrants to the EU via Greece.

Turkey was not the only country to come under pressure at the summit, which is to continue on Friday. Greece was criticized, chiefly by German Chancellor Angela Merkel, for delays in completing a series of screening centers for migrants on Aegean islands, dubbed hot spots. Merkel also complained about the slow rate of repatriations of migrants from Greece. Tsipras countered that Greek authorities face problems in returning migrants to countries such as Pakistan where authorities are not always cooperative. As for a proposal for the creation of an EU border force with stronger powers, the majority of leaders present, including Tsipras, backed the idea in principle. The leaders of Hungary, Malta and Poland were the most cautious while Tsipras insisted that any upgraded border force should not compromise national sovereignty. Meanwhile back in Athens, Greek authorities continued their efforts to accommodate hundreds of migrants in temporary accommodation centers.

But many appeared reluctant to stay in the designated facilities. Of some 1,300 migrants who have been staying in the Tae Kwo Do Stadium in Palaio Faliro, only 235 were at the old Olympic hockey venue in nearby Elliniko following a relocation on Thursday night. It is unclear where the rest of the migrants went though large numbers have been gathering in squares in central Athens since the Former Yugoslav Republic of Macedonia tightened its border with Greece. Athens Mayor Giorgos Kaminis on Thursday expressed concern at the presence of thousands of migrants who do not merit refugee status, from countries such as Morocco, Algeria and Pakistan, stuck in the capital and other Greek cities. “We do not want these people to be wandering around unable to survive, with no prospects,” he said, adding that he had called on authorities to make use of abandoned military facilities as temporary accommodation.

This can only end badly. Someone get a good lawyer before this mess gets any bigger.

• EU To Fast-Track Border Control Plans (RTE)

EU leaders have pledged to fast-track the establishment of an EU border and coast guard force. At a summit in Brussels, they last night urged each other to implement measures agreed this year to curb migration across the Mediterranean. By the middle of next year, they decided, they would agree the details of the new border force which was proposed by the EU executive earlier this week. Some leaders, including Greek PM Alexis Tsipras, made clear, however, that they wanted to strike out a controversial element of the proposal which would give Brussels power to send in EU border guards without a country’s consent. Summing up the three-hour discussion, European Council President Donald Tusk, said leaders had agreed there was a “delivery deficit” in making good on a series of measures agreed over recent months to stem chaotic movements that have put Europe’s Schengen open-borders area in jeopardy.

“Over the past months, the European Council has developed a strategy aimed at stemming the unprecedented migratory flows Europe is facing,” the final agreement read. “However, implementation is insufficient and has to be speeded up. “For the integrity of Schengen to be safeguarded it is indispensable to regain control over the external borders.” Greece and Italy are under pressure to do more to manage and identify those arriving, a million or more so far this year, while governments in general have yet to make good on promises to help take in asylum seekers and deport unwanted migrants. There are only two fully operational “hotspots” for screening of migrants arriving to Italy and Greece from 11 that are supposed to be set up.

Exactly what Berlin and brussels hope to achieve.

• Greece Risks Becoming A ‘Black Box’ For Stranded Migrants (FT)

Greece risks becoming a vast holding pen for tens of thousands of migrants arriving by boat from Turkey as neighbouring countries close their borders, prime minister Alexis Tsipras has warned. Mr Tsipras also expressed frustration with plans to create a new EU border force that could be deployed to the bloc’s external borders even against the objections of the relevant national government. “Greece stands accused of not being able to protect its border but they [other EU countries] don’t tell us what they expect us to do,” Mr Tsipras told the FT. “We have to rescue people in danger of losing their lives [at sea crossing from Turkey]. If they want us to carry out pushbacks, they must say so,” he added.

He was speaking as the European Commission unveiled its proposal for the new border force, which is widely viewed as a means to address a porous Greek frontier that has become an entry point for hundreds of thousands of migrants seeking to reach Germany and other, more prosperous parts of the EU. Greece only reluctantly accepted 400 officials from the EU’s current border agency, Frontex, to help police its frontier with Macedonia, and the issue of sovereignty cuts deep in a nation that has lost control of much of its economic policymaking as a consequence of its international bailouts. Crossings to Greece’s eastern islands have slowed somewhat of late – possibly because of bad weather – but still averaged about 3,400 per day this month.

According to a EU report on Turkey’s efforts to stem the flow, sent to national capitals on Wednesday, Brussels remains unconvinced the reduction was owing to any new efforts by Ankara following a pledge last month to crack down in exchange for €3bn in EU aid. The report comes ahead of a meeting between Turkey’s prime minister and a group of EU prime ministers on the sidelines of a two-day Brussels summit. That meeting, hosted by Austria and including Mr Tsipras and Angela Merkel, the German chancellor, concerns a voluntary programme in which refugees currently in Turkey would be resettled among willing member states. While Berlin had hoped the scheme would total as many as 500,000 refugees, it is likely to include only about 50,000, according to estimates from officials involved in the talks. They also made clear the scheme will not go ahead unless Turkey manages to cut the number of people entering Europe.

Athens has become increasingly concerned that it will be stuck in the middle – with Ankara failing to stop the influx and countries to the north blocking those migrants they believe are motivated by economic despair and therefore would not qualify as war refugees. For the past four weeks, only migrants fleeing wars and violence in Syria, Iraq and Afghanistan have been allowed to cross Greece’s northern border into Macedonia and continue the journey to central Europe. “Greece is in danger of becoming a black box [for refugees] if these flows don’t decrease,” Mr Tsipras said. “Slovenia, Croatia, the former Yugoslav Republic of Macedonia, all took the decision to filter people by nationality, for example, not accepting those from north African countries and Iran. This is not correct,” he added.

Debt Rattle December 15 2015

Dec 152015

December 15, 2015 Posted by Raúl Ilargi Meijer at 9:53 am Finance Tagged with: China, commodities, deflation, Fed, gas, iron, junk, oil, refugees Comments Off

Unknown No Dog Biscuits Today

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• Miners Shoveling Furiously Prop Up Aussie GDP as Iron Ore Melts (BBG)

• US Natural-Gas Prices Plunge Toward A 14-Year Low (MarketWatch)

• Never Mind $35, The World’s Cheapest Oil Is Already Close to $20 (BBG)

• Junk Rated Stocks Flashing Same Signal as High-Yield Bond Market (BBG)

• Big Banks In Europe And US Announced 100,000 New Job Cuts This Year (FT)

• Yahoo Told: Cut 9,000 Of Your 10,700 Staff (AP)

• Economic Pain In US Heartland As Likely Fed Hike Nears (Reuters)

• The Mystery of Missing Inflation Weighs on Fed Rate Move (WSJ)

• Are Negative Rates Fueling Deflation? (Martin Armstrong)

• Fedpocalypse Now? (Jim Kunstler)

• Throwing Out Granny: Abe Wants Elderly Japanese To Move To Countryside (BBG)

• Absolute Good -Us- vs Absolute Evil -Them- (Crooke)

• EU To Offer Turkey No Guarantee On Taking In Refugees (Reuters)

• Where The Dream Of Europe Ends (Gill)

• EU Backs Housing Scheme For Migrants And Refugees In Greece (AP)

• Three Of Six Missing Migrants Confirmed Drowned (Kath.)

“The Bloomberg Commodity Index, a measure of returns for 22 raw materials, closed at the lowest in 16 years on Monday..”

• Stephen Roach: China Is The Biggest Commodities Story Since WWII (BBG)

Commodities are at risk of extending declines as China’s slowdown hurts demand and the world’s largest user shifts its economic model away from raw materials, according to Stephen Roach, who said some producers haven’t yet faced up to the change. “The China factor can’t be emphasized enough,” Roach, a senior fellow at Yale University, said in a Bloomberg Television interview in Hong Kong on Tuesday. China “has been the most commodities-intensive story that the world economy has seen in the post-WWII period. Now China is shifting the model to more of a commodity-light, services-led economy.”

Raw materials sank to the lowest level since 1999 this week as China’s slowest expansion in a quarter of a century cut demand in a reversal of the pattern seen a decade ago, when booming growth in Asia fueled a surge across commodity prices that was dubbed the super-cycle. Continued concern about China, coupled with a rising dollar as the Federal Reserve raises rates, will make it difficult for commodities to rebound, according to Roach, a former non-executive chairman for Morgan Stanley in Asia. “Commodities are, after a super-cycle, obviously going the other way, big time,” Roach said. Some companies “are in denial that China is changing its character, its structure. It’s going to take a while for that to sink in, and until it sinks in, there’s still downward pressure on commodity markets and prices.”

The Bloomberg Commodity Index, a measure of returns for 22 raw materials, closed at the lowest in 16 years on Monday as supplies of everything from oil to copper outstripped demand. Base metals and crude oil fell on Tuesday, with copper trading 0.6% lower at $4,645 a metric ton in London, down 26% this year. The best way to heal lower prices are lower prices, as that takes supply out of the system, according to Roach. Metals companies in China including producers of copper, aluminum, zinc and nickel have all announced cuts to supply or plans to rein in capacity growth to stem the price rout. Outside China, Glencore pared copper production from mines in Africa, while Alcoa has curbed aluminum output.

A test run that puts China GDP growth at 2.3%. A number picked by accident?

• Fitch Warns Of Effects Of Sharp China Slowdown (CNBC)

A sharp slowdown in the world’s second largest economy China would hit global growth hard, according to a report by Fitch ratings agency, which warned of “significant knock-on effects” for the rest of the world. In its report published Tuesday, Fitch warned that a sharp slowdown in China’s GDP growth rate to 2.3% during 2016-2018 “would disrupt global trade and hinder growth, with significant knock-on effects for emerging markets and global corporates. In turn, this would keep short-term interest rates and commodity prices lower for longer.” Global GDP growth is currently expected to be 3.1% in 2017, according to Oxford Economics’ global economic model which was used by Fitch to frame its “shock” China scenario. But if a slowdown of such a magnitude materialized in China, Fitch said global GDP growth would slow to 1.8% in 2017.

As a result, any rise in U.S. and euro zone short-term interest rates would be postponed, and oil prices would remain under pressure, Fitch said. ‘Lower-for-longer in terms of growth, interest rates and commodity prices, could be the defining mantra of this decade for the major advanced economies if a Chinese shock scenario materializes,’ Bill Warlick, senior director of Macro Credit Research at Fitch, noted in the study. While Fitch emphasized that this hypothetical scenario did not reflect its current expectations for China’s growth, it was “designed to test credit connections between China and the rest of the world.”

In terms of these “credit connections”, a China slowdown would “impair” the credit profiles of many companies globally, particularly commodity-dependent ones in oil and gas, steel, and mining, Fitch said. “Shipping companies would also suffer, as commodities account for a significant portion of freight volume. The global technology, heavy manufacturing and automotive sectors would also feel increased credit pressure due to a slowdown in Chinese demand,” the agency warned. [..] Within Fitch’s rated portfolio, 25 percent of oil and gas companies and 52 percent of other commodities companies are already sub-investment grade. If the slowdown scenario materialized, it could create ripple effects through the high-yield bond market, the agency said.

They should have checked his hands, too.

• Rio Tinto CEO Says Iron Ore Rivals ‘Hanging on by Their Fingernails’ (BBG)

The iron ore collapse has pushed producers to the brink of survival, according to the head of the world’s second-biggest mining company. “There are a lot of producers that we believed would leave the market that are hanging on by their fingernails,” Sam Walsh, chief executive officer of Rio Tinto Group, said in an interview with Bloomberg TV. “They are burning up cash reserves of their shareholders.” Iron ore’s 45% retreat this year has left the industry on the precipice of an unprecedented shake-out as higher-cost suppliers are slowly forced to exit the market. Prices are continuing to fall as the largest companies, including Vale, Rio Tinto and BHP Billiton, expand production and grab market share. Iron ore fell below $39 a metric ton last week, a record low in daily prices dating back to 2009. That’s down from near $190 in 2011, when Chinese demand was booming.

“I suspect that right now, even at a price of $39 a ton, there are people that are suffering pretty loudly,” Walsh said. “Sooner or later the adjustment will take place.” The slump has hurt miners’ shares. Rio stock has lost 28% in Sydney this year, dropping to A$40.39 on Dec. 9, the lowest price since 2009, while BHP has fallen 40%. In Brazil, Vale has dropped 49%. Rio and its rivals have been criticized by analysts, competitors and governments for pursuing a strategy of expanding lower-cost mines even as prices fell amid a global glut. Walsh said it would be abnormal for his company to consider withholding supply given that Rio is the lowest cost producer. Rio and BHP are in an “imaginary world” because their strategy hurts themselves as much as their competitors, Lourenco Goncalves, the CEO of Cliffs Natural Resources, the biggest U.S. iron ore producer, said last month. Prices below $50 are “not comfortable to anyone,” he said.

It’s same all over commodities: overproduce to stay alive. Run and still move backwards.

• Miners Shoveling Furiously Prop Up Aussie GDP as Iron Ore Melts (BBG)

The price of Australia’s top export has been almost slashed in half this year. That makes it all the more surprising economists increasingly see iron ore propping up growth as they assemble their 2016 forecasts. The reason: Australian producers are making up for the price destruction by doubling down on volume, in the process worsening a global supply glut. There’s even a new entrant to the market – Gina Rinehart, Australia’s richest person, last week oversaw her company’s first shipment of iron ore to South Korea. The surging exports are also papering over a massive drag on the economy from collapsing mining investment and could account for most of next year’s growth, according to Citigroup and Goldman Sachs.

Still, the fall in commodity prices will hurt fiscal revenue, making it more difficult for the government to pare back a deficit and reach its goal for a surplus by the end of the decade. “We’re running faster to stand still when it comes to national income,” said James McIntyre at Macquarie in Sydney. Australia is forecasting an 8% rise in the volume of iron ore exports next year to 824 million metric tons, which would be almost double the amount the country shipped five years earlier. Goldman Sachs estimates that the country’s net exports will contribute 2 percentage points to growth next year without which the economy would stall.

It’s everywhere. NatGas could bounce back a little if winter sets in.

• US Natural-Gas Prices Plunge Toward A 14-Year Low (MarketWatch)

The winter heating season has begun, but natural-gas prices have plunged toward levels they haven’t seen since January 2002. Natural gas for January delivery fell 10.9 cents, or 5.5%, to trade at $1.881 per million British thermal units Monday. It suffered a weekly loss of nearly 11% last week. Prices traded as low as $1.862 and based on the most active contracts, prices haven’t seen an intraday level this low since January 2002, according to FactSet data. A settlement around the current level would be the lowest since September 2001. The price drop comes amid a glut in supply. Domestic natural-gas supplies in storage topped out just above 4 trillion cubic feet the week of Nov. 20, the largest storage level on record, based on U.S. government data.

There is “too much natural gas, not enough demand—that is even with the shutdown of coal facilities,” said Richard Gechter, Jr., principal and president of Richard W. Gechter Natural Gas Consulting. “Supply has increased beyond anyone’s expectations.” The winter season historically runs from November to March of the following year. Supplies in storage stood at 3.88 trillion cubic feet as of Dec. 4, and the U.S. Energy Information Administration expects inventories will finish the end of the winter season at 1.862 trillion cubic feet. That would be a smaller drawdown than what’s typically seen in the winter. “Strong inventory builds, continuing production growth and expectations for warmer-than-normal winter temperatures have all contributed to low natural-gas prices,” the EIA said.

“It’s really a dramatic situation that really cannot continue for a very long time for many producers.”

• Never Mind $35, The World’s Cheapest Oil Is Already Close to $20 (BBG)

As oil crashes through $35 a barrel in New York, some producers are already living with the reality of much lower prices. A mix of Mexican crudes is already valued at less than $28, an 11-year low, according to data compiled by Bloomberg. Iraq is offering its heaviest variety of oil to buyers in Asia for about $25. In western Canada, some producers are selling for less than $22 a barrel. “More than one-third of the global oil production is not economical at these prices,” Ehsan Ul-Haq at KBC Advanced Technologies said. “Canadian oil producers could have difficulty in covering their operational costs.” Oil has slumped to levels last seen in the global financial crisis in 2009 amid a global supply glut.

While the prices of benchmarks West Texas Intermediate and Brent hover in the $30s, they represent a category of crude – light and low in sulfur – that is more highly valued because it’s easier to refine. Some producers of thicker, blacker and more sulfurous varieties have suffered heavier losses and are already living in the $20s. A blend of Mexican crude has plunged 73% in 18 months to $27.74 on Dec. 11, its lowest level since 2004, according to data compiled by Bloomberg. Venezuela is experiencing similar lows. Western Canada Select, which is heavy and sulfurous, has slumped 75% to $21.82, the least in seven years. Other varieties including Ecuador’s Oriente, Saudi Arabia’s Arab Heavy and Iraq’s Basrah Heavy were selling below $30, the data show.

Crudes of this type trade at a discount to lighter varieties because to process them “refiners have to invest in upgrading facilities such as coking plants, which are very expensive,” KBC’s Ul-Haq said. “Most places in the world, a lot of the producers they don’t really get the Brent price, and they don’t get the WTI price,” Torbjoern Kjus at DNB ASA in Oslo said. “It’s really a dramatic situation that really cannot continue for a very long time for many producers.”

Interconnected.

• Junk Rated Stocks Flashing Same Signal as High-Yield Bond Market (BBG)

Think equity investors have been blind to warning signs coming from junk bonds? Not quite. For most of the year pessimists have warned that equity markets were missing signals in high-yield credit, where losses snowballed even as gauges like the Standard & Poor’s 500 Index remained relatively stable. While true, most of that is an illusion of index composition – not evidence of complacency. As one of the broadest share gauges, the S&P 500 has companies that span the credit spectrum from junk to investment grade – or have no debt at all. From that perspective, it’s less surprising that the full index wouldn’t mimic the plunge in junk bonds themselves, where annual losses for related exchange-traded funds exceed 10%. And that’s what happened: until Friday, the equity gauge was virtually flat for the year.

What if you look at stocks that are representative of the high-yield universe? A basket compiled by Bloomberg of below investment-grade companies, including Chesapeake and Cliffs Natural Resources, has dropped a lot more – 51% in 2015. The slump in stocks with the lowest credit quality reflects the same concern gripping the debt market, that the commodity selloff and the Federal Reserve’s plan to start raising interest rates will jeopardize solvency. While near record cash and the resilience in large technology firms have sheltered the S&P 500 from deeper losses, junk-rated stocks are vulnerable to a credit contagion with a smaller size and a tilt toward commodities. “It’s really the same kind of signal,” Curtis Holden at Tanglewood Wealth Management, which oversees about $840 million, said. “The market is saying through how well the S&P 500 is holding up on a relative basis, ‘Look for quality. Don’t look for junk companies.”’

They would like you to believe this is due to “robots and regulation”.

• Big Banks In Europe And US Announced 100,000 New Job Cuts This Year (FT)

Big banks in Europe and the US announced almost 100,000 new job cuts this year, and thousands more are expected from BNP Paribas and Barclays early next year, as the wave of lay-offs that began in 2007 shows no sign of abating. The 2015 cuts – which exclude the impact of major asset sales — amount to more than 10% of the total workforce across the 11 large European and US banks that announced fresh lay-offs, according to analysis by the Financial Times. The most recent came last week, as workers at Dutch lender Rabobank learnt of 9,000 cuts across their bank the day after Morgan Stanley announced 1,200 lay-offs, including at its ailing fixed income division.

Barclays and BNP Paribas, two of Europe’s biggest banks, will unveil job cuts when they announce strategies that are designed to strip out 10 to 20% of the costs at their investment banks, people familiar with the situations said. At Barclays, the axe will fall on March 1 when chief executive Jes Staley unveils a fresh strategy with the bank’s annual results. The announcement will include Barclays’ plans to move more quickly to shrink its investment bank, which employs about 20,000 people. BNP Paribas’s new corporate and institutional banking chief Yann Gérardin will announce a new cost cutting plan in February. The French bank has already said it is planning to cut more than 1,000 jobs in its Belgian retail network.

Banks have found that they have been carrying too many staff, as they suffer falls in revenues from a combination of tougher post-crisis regulation, ultra-low interest rates and sluggish activity among clients. Those under new leadership — such as Deutsche Bank, Credit Suisse and Barclays — have been under particular scrutiny, as incoming chief executives try to turn the ailing banks they inherited into the more profitable companies demanded by investors.

Good by and thanks for all the fish.

• Yahoo Told: Cut 9,000 Of Your 10,700 Staff (AP)

Yahoo is facing shareholder pressure to pursue other alternatives besides a complex spin-off of its internet operations while chief executive Marissa Mayer struggles to revive the company’s revenue growth. The demands from SpringOwl Asset Management and Canyon Capital Advisors reflect shareholders’ frustration with Ms Mayer’s inability to snap the company out of a financial downturn after three-and-half years in the top job. Ms Mayer hoped to placate investors with last week’s announcement of a revised spin-off, but the company’s shares have slid 6pc since then. The shares fell 32 cents to close at $32.59 on Monday. SpringOwl, a New York hedge fund, has sent a 99-page presentation to Yahoo’s board that calls for the company to lay off 9,000 of its 10,700 workers and eliminate free food for employees to help save $2bn annually.

Canyon Capital, a Los Angeles investment firm, wants Yahoo to sell its internet business instead of spinning it off. Yahoo has warned the spin-off could take more than a year to complete, a time frame that Canyon Capital called “simply unacceptable” after Yahoo spent most of 2015 preparing to hive off its $31bn stake in China’s Alibaba in an attempt to avoid paying taxes on the gains from its initial investment of $1bn. Yahoo scrapped the Alibaba spin-off after another shareholder, Starboard Value, threatened an attempt to overthrow the board if the company stuck to that plan. Starboard and other investors were worried the Alibaba stake would be taxed at a cost of more than $10bn after the Internal Revenue Service declined to guarantee it would qualify for an exemption.

Now that two more shareholders expressing their dismay with Yahoo’s direction, Ms Mayer’s fate could be tied to a cost-cutting reorganisation that she has been working on for the past two months. Ms Mayer, who is on a brief maternity leave after giving birth to twins last week, says the overhaul will jettison Yahoo’s least profitable products – a shake-up that could lay off a large number of workers.

The truth is slipping through the cracks of propaganda. American recovery my…

• Economic Pain In US Heartland As Likely Fed Hike Nears (Reuters)

America’s heartland, the vast area in the middle of the country that produces much of the nation’s food and energy and is home to many of its traditional manufacturers, is sending warning signals that all is not well with the economy. From agriculture to heavy equipment and small business lending, farmers, manufacturers and transport companies that serve them are taking hits from a stronger dollar or plunging prices for farm commodities and oil. Industry executives worry that the expected move by the U.S. Federal Reserve to raise interest rates on Wednesday – which would be the first hike in a decade – could put more jobs at risk.

“Many of the companies that we do business with are hurting and some have already gone away,” said Bill Hickey, president of Chicago-based steel company Lapham-Hickey Steel, which has seven mills across the country and supplies processed steel to car makers and construction firms. He worries banks could start cutting off credit to troubled industrial companies. The Thomson Reuters/PayNet Small Business Lending Index fell 5% in October from the previous month and was flat on the year, marking only the second time it had failed to rise since February 2010. Weakness in the manufacturing, farm and transport sectors likely will not deter a rate increase by the Fed, economists say. There is “no doubt that manufacturing weakness is costing growth,” said Harm Bandholz at UniCredit Research.

However, the sector only accounts for about 12% of the U.S. economy and some areas like automotive are performing well. “You can’t say that everything is perfect,” he said. “But the United States is not doing so bad anymore that we need 0% interest rates.” The downbeat indicators from heartland industries illustrate the economy’s lumpiness. Preliminary data show that November U.S. orders for heavy, over-the-road trucks fell 59% from a year earlier – the worst November since 2009, according to transportation analysis firm FTR. Freight at the U.S. major railroads was off 1.9% for the year through Dec. 5. Coal accounts for much of the decline. But shipments of consumer goods by container – or intermodal shipments – were only up 1.6%. “The numbers are as bad as I’ve seen them,” said Anthony Hatch, an independent railroad analyst.

Farmers are under pressure from declining crop prices and weak demand. U.S. farm incomes are expected to drop 38% for all of 2015, the steepest year-on-year drop since 1983. Nathan Kauffman, an economist with the Kansas City Fed, said higher rates would create “the potential for more financial stress.”

Set a target, make a prediction, see both fail miserably, rinse and repeat.

• The Mystery of Missing Inflation Weighs on Fed Rate Move (WSJ)

Federal Reserve officials this week are expected to raise interest rates for the first time in nine years on the expectation that employment and inflation will hit targets reflecting a healthy U.S. economy. But Fed officials face a troubling question: Jobs are on track, but inflation isn’t behaving as predicted and they don’t know why. Unemployment has fallen to 5%, a figure close to estimates of full employment, while inflation remains stuck at less than 1%, well below the Fed’s 2% target. Central bank officials predict inflation will approach their target in 2016. The trouble is they have made the same prediction for the past four years. If the Fed is again fooled, it may find it raised rates too soon, risking recession.

Low inflation—and low prices—sound beneficial but can stall growth in wages and profits. Debts are harder to pay off without inflation shrinking their burden. For central banks, when inflation is very low, so are interest rates, leaving little room to cut rates to spur the economy during downturns. The Fed’s poor record of predicting inflation has set off debate within the central bank over the economic models used by central bank officials. Fed Chairwoman Janet Yellen, in a 31-page September speech on the subject, acknowledged “significant uncertainty” about her prediction that inflation would rise. Conventional models, she said, have become “a subject of controversy.”

Ms. Yellen faces dissent from Fed officials who want to keep interest rates near zero until there is concrete evidence of inflation rising, voices likely to try to put a drag on future rate increases. While the job market is near normal, “I am far less confident about reaching our inflation goal within a reasonable time frame,” Charles Evans, president of the Chicago Fed, said in a speech this month. “Inflation has been too low for too long.” For a generation, economists believed central banks had control over the rate of inflation and could use it as a policy guide: If inflation was too low, then lower interest rates could boost the economy; high inflation could be checked by raising rates.

If the Fed would just listen to Martin Armstrong… (or the Automatic Earth, for that matter) “..lowering interest rates is DEFLATIONARY, not inflationary, for it reduces disposable income.”

• Are Negative Rates Fueling Deflation? (Martin Armstrong)

Those in power never understand markets. They are very myopic in their view of the world. The assumption that lowering interest rates will “stimulate” the economy has NEVER worked, not even once. Nevertheless, they assume they can manipulate society in the Marxist-Keynesian ideal world, but what if they are wrong? By lowering interest rates, they ASSUME they will encourage people to borrow and thus expand the economy. They fail to comprehend that people will borrow only when they BELIEVE there is an opportunity to make money. Additionally, they told people to save for their retirement. Now they want to punish them for doing so by imposing negative interest rates (tax on money) to savings. They do not understand that lowering interest rates, when there is no confidence in the future anyhow, will not encourage people to start businesses and expand the economy.

It wipes out the income of savers and then the only way to make and preserve money becomes ASSET investment, as in the stock market — not creating business startups. So lowering interest rates is DEFLATIONARY, not inflationary, for it reduces disposable income. This is particularly true for the elderly who are forced back to work to compete for jobs, which increases youth unemployment. Since the only way to make money has become ASSET INFLATION, they must withdraw money from banks and buy stocks. Now, they are in the hated class of the “rich” who are seen as the 1% because they are making money when the wage earner loses money as taxation rises and the economy declines. As taxes rise, machines are replacing workers and shrinking the job market, which only fuels more deflation.

Then you have people like Hillary who say they will DOUBLE the minimum wage, which will cause companies to replace even more jobs with machines. Democrats, in particular, are really Marxists. They ignore Keynes who also pointed out that lowering taxes would stimulate the economy. Keynes, in all fairness, did not advocate deficit spending year after year nor never paying off the national debt. Keynes wrote regarding taxes: “Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance, than an increase, of balancing the budget.” Keynes obviously wanted to make it clear that the tax policy should be guided to the right level as to not discourage income.

Keynes believed that government should strive to maximize income and therefore revenues. Nevertheless, Democrats demonized that as “trickle-down economics.” Keynes explained further: “For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more–and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.

“There is something in the air like a gigantic static charge, longing for release.”

• Fedpocalypse Now? (Jim Kunstler)

If ever such a thing was, the stage is set this Monday and Tuesday for a rush to the exits in financial markets as the world prepares for the US central bank to take one baby step out of the corner it’s in. Everybody can see Janet Yellen standing naked in that corner — more like a box canyon — and it’s not a pretty sight. Despite her well-broadcasted insistence that the economic skies are blue, storm clouds scud through every realm and quarter. Equities barfed nearly four% just last week, credit is crumbling (nobody wants to lend), junk bonds are tanking (as defaults loom), currencies all around the world are crashing, hedge funds can’t give investors their money back, “liquidity” is AWOL (no buyers for janky securities), commodities are in freefall, oil is going so deep into the sub-basement of value that the industry may never recover, international trade is evaporating, the president is doing everything possible in Syria to start World War Three, and the monster called globalism is lying in its coffin with a stake pointed over its heart.

Folks who didn’t go to cash a month ago must be hyperventilating today. But the mundane truth probably is that events have finally caught up with the structural distortions of a financial world running on illusion. To everything there is a season, turn, turn, turn, and economic winter is finally upon us. All the world ‘round, people borrowed too much to buy stuff and now they’re all borrowed out and stuffed up. Welcome to the successor to the global economy: the yard sale economy, with all the previously-bought stuff going back into circulation on its way to the dump. A generous view of the American predicament might suppose that the unfortunate empire of lies constructed over the last several decades was no more than a desperate attempt to preserve our manifold mis-investments and bad choices.

The odious Trump has made such a splash by pointing to a few of them, for instance, gifting US industrial production to the slave-labor nations, at the expense of American workers not fortunate enough to work in Goldman Sachs’s CDO boiler rooms. Readers know I don’t relish the prospect of Trump in the White House. What I don’t hear anyone asking: is he the best we can come up with under the circumstances? Is there not one decent, capable, eligible adult out there in America who can string two coherent thoughts together that comport with reality? Apparently not.

The Ballad of Narayama. 1983 version is a great movie. Don’t think I ever saw the 1958 one.

• Throwing Out Granny: Abe Wants Elderly Japanese To Move To Countryside (BBG)

Mayor Yukio Takano has a problem. Since 1980, the number of children in his Tokyo ward has halved while the elderly population has doubled – and he’s running out of space to build more nursing homes in the Japanese capital’s most densely populated borough. A possible solution: Relocate his older constituents to the countryside. It’s an audacious idea, and it’s none other than Prime Minister Shinzo Abe who is pushing it. His government sees an exodus of elderly to rural precincts as the best way of coping with Tokyo’s rapidly aging population and shrinking numbers elsewhere. Then again, asking seniors to decamp to the countryside may also be unpopular.

“For sure, people are going to say this is like throwing out your granny, or pushing out people out who don’t want to go, but that’s not the case,” says Takano who is surveying residents of his Toshima ward on such a plan before moving ahead. “Japan is doomed if people in Tokyo can’t co-exist, and we can’t get the countryside reinvigorated.” For many in Japan, the idea of moving seniors to the countryside rekindles the legend of “ubasuteyama,” meaning granny-dumping mountain. Legend has it that old people in ancient times were carried off to the hills and left to die. There’s even a mountain named after the folk story in Nagano, central Japan. Abe put tackling Japan’s declining population at the top of his agenda in September in a revamp of his economic policies known as Abenomics. The government is trying to reverse two unwelcome trends.

A surge in Tokyo’s elderly population over the next 10 years may overwhelm urban healthcare systems; while depopulation and stagnant economies in rural Japan are set to leave nursing homes and hospitals half-empty. Eighty minutes by express train from Takano’s ward is the mountain town of Chichibu where the population has been decreasing since 1975. While the town’s center is lined with shuttered businesses and abandoned buildings, it does have plenty of empty nursing-home beds and underused medical facilities. [..] Japan’s population is set to drop by more than 700,000 a year on average between 2020 and 2030, when a almost third of the population will be 65 or older, according to the National Institute of Population and Social Security Research. At the same time, the government’s ability to extend financial incentives to spur population growth is limited, according to Ishiba, with central government debt at more than double that of GDP.

“It’s the old apocalyptic tale: God’s people versus Satan’s.”

• Absolute Good -Us- vs Absolute Evil -Them- (Crooke)

We all know the narrative in which we (the West) are seized. It is the narrative of the Cold War: America versus the “Evil Empire.” And, as Professor Ira Chernus has written, since we are “human” and somehow they (the USSR or, now, ISIS) plainly are not, we must be their polar opposite in every way. “If they are absolute evil, we must be the absolute opposite. It’s the old apocalyptic tale: God’s people versus Satan’s. It ensures that we never have to admit to any meaningful connection with the enemy.” It is the basis to America’s and Europe’s claim to exceptionalism and leadership. And “buried in the assumption that the enemy is not in any sense human like us, is [an] absolution for whatever hand we may have had in sparking or contributing to evil’s rise and spread.

How could we have fertilized the soil of absolute evil or bear any responsibility for its successes? It’s a basic postulate of wars against evil: God’s people must be innocent,” (and that the evil cannot be mediated, for how can one mediate with evil). Westerners may generally think ourselves to be rationalist and (mostly) secular, but Christian modes of conceptualizing the world still permeate contemporary foreign policy. It is this Cold War narrative of the Reagan era, with its correlates that America simply stared down the Soviet Empire through military and – as importantly – financial “pressures,” whilst making no concessions to the enemy. What is sometimes forgotten, is how the Bush neo-cons gave their “spin” to this narrative for the Middle East by casting Arab national secularists and Ba’athists as the offspring of “Satan”: David Wurmser was advocating in 1996, “expediting the chaotic collapse” of secular-Arab nationalism in general, and Baathism in particular.

He concurred with King Hussein of Jordan that “the phenomenon of Baathism” was, from the very beginning, “an agent of foreign, namely Soviet policy.” Moreover, apart from being agents of socialism, these states opposed Israel, too. So, on the principle that if these were the enemy, then my enemy’s enemy (the kings, Emirs and monarchs of the Middle East) became the Bush neo-cons friends. And they remain such today – however much their interests now diverge from those of the U.S. The problem, as Professor Steve Cohen, the foremost Russia scholar in the U.S., laments, is that it is this narrative which has precluded America from ever concluding any real ability to find a mutually acceptable modus vivendi with Russia – which it sorely needs, if it is ever seriously to tackle the phenomenon of Wahhabist jihadism (or resolve the Syrian conflict).

What is more, the “Cold War narrative” simply does not reflect history, but rather the narrative effaces history: It looses for us the ability to really understand the demonized “calous tyrant” – be it (Russian) President Vladimir Putin or (Ba’athist) President Bashar al-Assad – because we simply ignore the actual history of how that state came to be what it is, and, our part in it becoming what it is. Indeed the state, or its leaders, often are not what we think they are – at all. Cohen explains: “The chance for a durable Washington-Moscow strategic partnership was lost in the 1990 after the Soviet Union ended. Actually it began to be lost earlier, because it was [President Ronald] Reagan and [Soviet leader Mikhail] Gorbachev who gave us the opportunity for a strategic partnership between 1985-89.

Then Turkey will simply have to ask for more billions.

• EU To Offer Turkey No Guarantee On Taking In Refugees (Reuters)

The European Union will set no minimum on the number of Syrian refugees its member states are willing to take from Turkey in a resettlement scheme to be unveiled on Tuesday, a senior EU official said on Monday. The European Commission, the bloc’s executive, will present the proposal following an agreement with Ankara two weeks ago that European leaders hope can help stem the flow of refugees and economic migrants reaching the EU from Turkey via Greece. It will mention no number, the official said, in its plan for deserving cases to be flown directly from Turkey to the EU – an omission that could disappoint Turkish leaders. Nor will there be any system to send them to certain states – rather, EU countries can volunteer to take part in the scheme.

Germany under Chancellor Angela Merkel has led efforts for an EU agreement on taking in substantial numbers of the 2.3 million Syrians now sheltering in Turkey as a way of cutting back on people risking their lives in chaotic migration by sea. But few other states have been so enthusiastic, particularly following bitter rows inside the bloc in recent months caused by a German-backed push to impose mandatory quotas on governments to take in asylum seekers from frontier states Italy and Greece. An agreement among EU states in the summer to take in up to 22,000 refugees, mainly from the Middle East, has yet to become fully operational. The same is true for schemes to relocate up to 160,000 asylum seekers already inside the EU. Some countries argue against more schemes until capacity is reached in others.

They open the door and then close it. Just like that.

• Where The Dream Of Europe Ends (Gill)

Macedonia has shut its borders to all but three nationalities and the backlog has been returned to Athens where they wonder what to do next. Idomeni, the small Greek village that represents the final Greek frontier and the doorway to Europe for refugees fleeing war and poverty in their countries, was strangely empty on Wednesday night. After days of a stalemate when Macedonia closed its border to everyone except refugees from Syria, Afghanistan and Iraq, Greek authorities took measures to transport around 2,000 refugees back to Athens where they will be accommodated at Elaionas camp and, most recently, the Tae Kwon Do stadium, built for when Athens hosted the Olympic games in 2004 and converted into a temporary shelter.

Most refugees arriving in Greece want to move onward, heading through Macedonia mainly towards the promised lands of Germany, the Netherlands or Sweden. When the border shut, a backlog of desperate people became stranded at Idomeni in freezing conditions and with little food and water. These were people mainly from Iran, Pakistan, Eritrea, Sudan and other countries deemed non eligible by the Macedonian authorities. Back in Athens, their time is running out. At Victoria Square in central Athens, brothers Saif Ali, 18 and Ali 15 from Lahore in Pakistan were pondering their next move after reluctantly returning to Athens the previous day. Having wasted their money on an unsuccessful trip to Idomeni, they are currently staying at Elaionas camp, which is now full.

“We knew when we paid to take a bus to Idomeni that the border was closed, but we decided to take the risk. They didn’t let us pass, they beat us with sticks. They sent us back. Our money got wasted. “We were stuck there for five days, it was so cold.” said Saif Ali. “We tried to pass through with everyone else, they check your papers one by one. People had fake papers, and I saw some people borrow the papers of Afghanis, show them to the guards and then slip them back to the owners.”

Crazy.

• EU Backs Housing Scheme For Migrants And Refugees In Greece (AP)

The European Union has pledged to spend €80 million on a housing scheme for migrants and asylum speakers stranded in Greece. Kristalina Georgieva, the EU Commissioner for Budget and Human resources, signed an agreement Monday for a rent subsidy program due to launch next year. Thousands of stranded refugees are currently housed in old venues from the 2004 Olympics or are sleeping in tents pitched in city squares and parks in Athens. More than 750,000 migrants and refugees have crossed through Greece this year, hoping to travel to central and northern Europe, but Macedonia and other Balkan countries last month toughened border rules, restricting crossings to nationals from Syria, Iraq and Afghanistan. Under the scheme, migrants will receive hotel vouchers or checks to live in vacant apartments.

And why not drown some more people.

• Three Of Six Missing Migrants Confirmed Drowned (Kath.)

Greek coast guard officers recovered the bodies of three of the six people who were reported missing after their boat capsized off the coast of Kastelorizo as they tried to reach Greece from Turkey on Tuesday morning. The authorities said three of the passengers were confirmed drowned as the search continued for the other three. Greek coast guards were alerted by their Turkish counterparts after the latter rescued 12 migrants who had managed to swim to a small islet off Turkey’s coast and another five people from the sea. The nationality of the passengers was not clear.

Marine Le Pen Will Reap What The EU Has Sown

Dec 142015

December 14, 2015 Posted by Raúl Ilargi Meijer at 3:43 pm Finance Tagged with: border force, Brussels, commodities, economy, EU, Greece, Le Pen, refugees 6 Responses »

Dorothea Lange White Angel Breadline San Francisco 1933

Many people are cheering now that yesterday Marine Le Pen and her Front National (FN) party didn’t get to take over government in any regions in the France regional elections. They should think again. FN did get a lot more votes than the last time around, and, though she will be a little disappointed after last weekend’s results, it’s exactly as Le Pen herself said: “Nothing can stop us”.

And instead of bemoaning this, or even not believing it, it might be much better to try and understand why she’s right. And that has little to do with any comparisons to Donald Trump. Or perhaps it does, in that in the same way that Trump profits from -people’s perception of- the systemic failures of Washington, Le Pen is being helped into the saddle by Brussels.

The only -remaining- politicians in Europe who are critical of the EU are on the -extreme- right wing. The entire spectrum of politics other than them don’t even question Brussels anymore. Which is at least a little strange, because support for the EU on the street is not nearly as strong as among politicians, as referendum after referendum keeps on showing.

Some of which have rejected (more power to) the EU outright, like the one in Denmark last week, while others do it indirectly, by voting for anti-EU parties -see France this and last weekend-. There’s a long list of these votes going back through the years, with for instance both France and Holland saying No to the EU constitution in 2005, which led to many countries to postpone their own votes on the topic.

Brussels had an answer, though: by 2007, the Constitution proposal was converted into a Treaty (of Lisbon), which said basically the same but in a different order, and only through amendments to existing treaties. It was still rejected again in an Irish referendum, but in a second vote in 2009 accepted.

Importantly, the switch from Constitution to Treaty meant unanimity among EU nations was no longer needed; a majority was good enough. And so the whole thing was pushed through regardless of what people thought -and voted .

The overall picture is clear: Europeans in general are fine with the EU, but when it tries to grab more sovereign powers, they say NO, time and again. Only to be overruled by their own domestic politicians as well as Brussels. Their worries, frictions and arguments have only one way to go: the far right. All other political currents are united in unwavering support for the EU, basically no matter what.

But people see what’s happening in Greece, and with refugees, they see the way the Union treats the Russia and Ukraine issue, they see the new-fangled unholy plans with the EU border force, and they don’t want Brussels to tread on their respective nation’s sovereignty anymore than it already has.

They find no resonance for their worries at home, however, other than with people like Le Pen, Nigel Farage and similar ‘political outcasts’. And therefore that’s where they will turn. All Le Pen has to do is wait for the economy to get worse, and it will, and she can reap what the EU has sown.

As soon as Brussels threatens to turn into an authoritarian body, something it has already very evidently done, people will resist it.

The European Union could have been a very useful and appreciated organization, with many obvious advantages for the people of Europe. But as soon as it oversteps its boundaries, it is destined to self-implode. This process and outcome has become inevitable, because the Union has de facto appointed itself the arbiter of these boundaries.

The unelected high lords of Brussels have become too greedy, and too unaccountable, and they will end up achieving the exact opposite of what they claim the EU stands for: they will lead the continent into conflict, armed and otherwise.

The new border force concept is the perfect example for what is going wrong in Europe. A group of the largest, and therefore most powerful EU nations, have agreed on a rainy Monday afternoon that they’re going to set up some sort of military police force that will ‘protect’ the borders of member nations even if these nations don’t ask for such protection and/or outright resist it.

This is obviously directed mostly at Greece for now, and the EU thinks it can do with Greece as it pleases. But ask any German, French or British citizen if they want entrance to their countries controlled and decided by a para-military bunch of foreigners, and they’ll think you’ve lost it. But that’s the idea behind the border force: take away nations’ sovereignty. Start with the smaller and weaker and work your way up.

That this has some interesting legal implications, as I wrote recently in Greece Is A Nation Under Occupation, that few seem to even contemplate, will add to the entertainment.

There are 28 separate constitutions in the EU. Under which of these is it legal for a government to sign away control of its own borders? In how many of these countries will this be appealed at their own version of the Supreme Court? And how many of these courts will say: sure, sovereignty is way overrated anyway!?

The EU could have been a useful union. Not all those border checks, for one thing, not all those forms to fill out all the time. But with the advent of the euro, things got out of hand. You can have a functioning union between very different entities. But only as long as those differences are recognized and respected.

The euro is an idea that seeks to deny the differences between the people(s) of Europe, it seeks to claim that Germany IS Greece. To that end, it must then take away all nations’ sovereignty. The euro cannot exist without that. To function properly as a currency, it needs a banking union, a fiscal union. And then take it from there.

These are all things that nobody properly thought or talked about before it was introduced. Perhaps because everyone knew that these things would be unacceptable to the European people. And now the euro’s here, and all these things will have to be pushed through anyway. Brussels thinks it has plenty experience pushing things through despite the will of the people, so this one will work too.

But all it takes is for someone to point this out in clear language to people. Unfortunately, the only ones who do today connect this with resistance to refugees, to open societies, to all sorts of things that have nothing to do with why the euro is a failure.

Meanwhile, as I’ve written many times before, the EU is this body that self-selects for sociopaths in its hierarchy, being its undemocratic self. What few people recognize is that it also self-selects for the likes of Marine Le Pen.

And we haven’t seen anything yet. As I said before, all Le Pen has to do is for the economy to pine for the fjords. And looking at the current commodities slaughter, that might happen before anyone can look it up in the dictionary.

And Angela Merkel, after having pushed aside the Dublin accord on refugees and opened German doors, now wants to close them again. As if that works. The EU now wants to hand Greece tens of millions of euros just to keep refugees in the country.

But what happens when the recent projection of another 3 million arriving in Europe in 2016 comes to fruition? What happens when the refugees don’t listen to the Berlin/Brussels dictates? One can only imagine the chaos. The EU has offered Turkey €3+ billion to keep them there, but president Erdogan doesn’t look like the kind of guy you can make a deal with and expect him to live up to it.

Europe seriously risks being flooded with people, while its economy shrinks like a cotton jersey in an autumn rain storm. And who’s going to be looking at the wannabe dictators in Brussels for help then? Nations will end up deciding to decide for themselves. And because all politicians but the far right have unequivocally supported the Union for many years, guess who’ll be coming to dinner?

Today the victims are the Greeks and the refugees. And all those whose governments cut their benefits to ‘balance their budgets’. Tomorrow, those budgets must be balanced all over Europe, in this line of thinking.

As we witness the commodities plunge, and the stock market crash that must of necessity follow it, it becomes hard to see how countries like Italy, Spain, even France, could escape resembling Greece a whole lot more in 2016. And then Europe will be right back where it left off 70 years ago.

Debt Rattle December 10 2015

Dec 102015

December 10, 2015 Posted by Raúl Ilargi Meijer at 9:42 am Finance Tagged with: bonds, China, collapse, commodities, credit, debt, middle class, mining, refugees, retail, stocks 2 Responses »

Unknown GMC truck Associated Oil fuel tanker, San Francisco 1935

• If It Owns a Well or a Mine, It’s Probably in Trouble (NY Times)

• Credit Card Data Reveals First Core Retail Sales Decline Since Recession (ZH)

• America’s Middle Class Meltdown (FT)

• Chinese Devaluation Is A Bigger Danger Than Fed Rate Rises (AEP)

• China Swallows Its Mining Debt Bomb (BBG)

• China’s Plan to Merge Sprawling Firms Risks Curbing Competition (WSJ)

• Billions of Barrels of Oil Vanish in a Puff of Accounting Smoke (BBG)

• Bond King Gets Antsy as Junk Bonds, Which Lead Stocks, Spiral to Heck (WS)

• Banks Buy Protection Against Falling Stock Markets (BBG)

• Dividends Could Be the Next Victim of the Commodity Crunch (BBG)

• Copper, Aluminum And Steel Collapse To Crisis Levels (CNN)

• US Companies Turn To European Debt Markets (FT)

• Italy Needs a Cure for Its Bad-Debt Headache (BBG)

• Swiss to Give Up EVERYTHING & EVERYBODY (Martin Armstrong)

• Trump’s ‘Undesirable’ Muslims of Today Were Yesteryear’s Greeks (Pappas)

• It’s Too Late to Turn Off Trump (Matt Taibbi)

• War Is On The Horizon: Is It Too Late To Stop It? (Paul Craig Roberts)

• Greek Police Move 2,300 Migrants From FYROM Border To Athens (Kath.)

Good headline.

• If It Owns a Well or a Mine, It’s Probably in Trouble (NY Times)

The pain among energy and mining producers worsened again on Tuesday, as one of the industry’s largest players cut its work force by nearly two-thirds and Chinese trade data amplified concerns about the country’s appetite for commodities. The full extent of the shakeout will depend on whether commodities prices have further to fall. And the outlook is shaky, with a swirl of forces battering the markets. The world’s biggest buyer of commodities, China, has pulled back sharply during its economic slowdown. But the world is dealing with gluts in oil, gas, copper and even some grains. “The world of commodities has been turned upside down,” said Daniel Yergin, the energy historian and vice chairman of IHS, a consultant firm.

“Instead of tight supply and strong demand, we have tepid demand and oversupply and overcapacity for commodity production. It’s the end of an era that is not going to come back soon.” The pressure on prices has been significant. Prices for iron ore, the crucial steelmaking ingredient, have fallen by about 40% this year. The Brent crude oil benchmark is now hovering around $40 a barrel, down from more than a $110 since the summer of 2014. Companies are caught in the downdraft. A number of commodity-related businesses have either declared bankruptcy or fallen behind in their debt payments. Even more common are the cutbacks. Nearly 1,200 oil rigs, or two-thirds of the American total, have been decommissioned since late last year.

More than 250,000 workers in the oil and gas industry worldwide have been laid off, with more than a third coming in the United States. The international mining company Anglo American is pulling back broadly, with a goal to reduce the company’s size by 60%. Along with the layoffs announced on Tuesday, the company is suspending its dividend, halving its business units, as well as unloading mines and smelters.

How bad will the holiday shopping season get?

• Credit Card Data Reveals First Core Retail Sales Decline Since Recession (ZH)

While we await the government’s retail sales data on December 11, the last official economic report the Fed will see before its December 16 FOMC decision, Bank of America has been kind enough to provide its own full-month credit card spending data. And while a week ago the same Bank of America disclosed the first holiday spending decline since the recession, in today’s follow up report BofA reveals that if one goes off actual credit card spending – which conveniently resolves the debate if one spends online or in brick and mortar stores as it is all funded by the same credit card – the picture is even more dire. According to the bank’s credit and debit card spending data, core retail sales (those excluding autos which are mostly non-revolving credit funded) just dropped by 0.2% in November, the first annual decline since the financial crisis!

At this point, BofA which recently laid out its bullish 2016 year-end forecast which sees the S&P rising almost as high as 2,300, and is thus conflicted from presenting a version of events that does not foot with its erroenous economic narrative, engages in a desperate attempt to cover up the ugly reality with the following verbiage, which ironically confirms that a Fed hike here would be a major policy error and lead to even more downside once it is digested by the market.

Not usual FT language: “..the forces of technological change and globalisation drive a wedge between the winners and losers in a splintering US society.”

• America’s Middle Class Meltdown (FT)

America’s middle class has shrunk to just half the population for the first time in at least four decades as the forces of technological change and globalisation drive a wedge between the winners and losers in a splintering US society. The ranks of the middle class are now narrowly outnumbered by those in lower and upper income strata combined for the first time since at least the early 1970s, according to the definitions by the Pew Research Center, a non-partisan think-tank in research shared with the Financial Times. The findings come amid an intensifying debate leading up to next year’s presidential election over how to revive the fortunes of the US middle class.

The prevailing view that the middle class is being crushed is helping to feed some of the popular anger that has boosted the populist politics personified by Donald Trump’s candidacy for the Republican presidential nomination. “The middle class is disappearing,” says Alison Fuller, a 25-year-old university graduate working for a medical start-up in Smyrna, Georgia, who sees herself voting for Mr Trump. Pew used one of the broadest income classifications of the middle class, in a new analysis detailing the “hollowing out” of a group that has formed the bedrock of America’s postwar success. The core of American society now represents 50% or less of the adult population, compared with 61% at the end of the 1960s. Strikingly, the change has been driven at least as much by rapid growth in the ranks of prosperous Americans above the level of the middle class as it has by expansion in the numbers of poorer citizens.

Exporting commodities and deflation: “The excess capacity is cosmic.”

• Chinese Devaluation Is A Bigger Danger Than Fed Rate Rises (AEP)

The world has had a year to brace for monetary lift-off by the US Federal Reserve. A near certain rate rise next week will come almost as a relief. Emerging markets have already endured a dollar shock. The currency has risen 20pc since July 2014 in expectation of this moment, based on the Fed’s trade-weighted “broad” dollar index. The tightening of dollar liquidity is what caused a global manufacturing recession and an emerging market crash earlier this year, made worse by China’s fiscal cliff in January and its erratic, stop-start, efforts to wind down a $26 trillion credit boom. The shake-out has been painful: hopefully the dollar effect is largely behind us. The central bank governors of India and Mexico, among others, have been urging the Fed to stop dithering and get on with it. Presumably they have thought long and hard about the consequences for their own economies.

It is a safe bet that Fed chief Janet Yellen will give a “dovish steer”. She has already floated the idea that rates can safely be kept far below zero in real terms for a long time to come, even as unemployment starts to fall beneath the 5pc and test “NAIRU” levels where it turns into inflation. Her apologia draws on a contentious study by Fed staff in Washington that there is more slack in the economy than meets the eye. She argues that after seven years of drought and “supply-side damage” it may make sense to run the economy hotter than would normally be healthy in order to draw discouraged workers back into the labour market and to ignite a long-delayed revival of investment. There are faint echoes of the early 1970s in this line of thinking. Rightly or wrongly, she chose to overlook a competing paper by the Kansas Fed arguing the opposite.

Such a bias towards easy money may contain the seeds of its own destruction if it forces the Fed to slam on the brakes later. But that is a drama for another day. The greater risk for the world over coming months is that China stops trying to hold the line against devaluation, and sends a wave of corrosive deflation through the global economy. Fear that China may join the world’s currency wars is what haunts the elite banks and funds in London. It is why there has been such a neuralgic response to the move this week to let the yuan slip to a five-year low of 6.4260 against the dollar. Bank of America expects the yuan to reach 6.90 next year, setting off a complex chain reaction and a further downward spiral for oil and commodities. Daiwa fears a 20pc slide. My own view is that a fall of this magnitude would set off currency wars across Asia and beyond, replicating the 1998 crisis on a more dangerous scale.

Lest we forget, China’s fixed capital investment has reached $5 trillion a year, as much as in North America and Europe combined. The excess capacity is cosmic. Pressures on China are clearly building up. Capital outflows reached a record $113bn in November. Capital Economics says the central bank (PBOC) probably burned through $57bn of foreign reserves that month defending the yuan peg. A study by the Reserve Bank of Australia calculates that capital outflows reached $300bn in the third quarter, an annual pace of 10pc of GDP. The PBOC had to liquidate $200bn of foreign assets. Defending the currency on this scale is costly. Reserve depletion entails monetary tightening, neutralizing the stimulus from cuts in the reserve requirement ratio (RRR). It makes a “soft landing” that much harder to pull off.

China is trying to find ways to hide debts and losses…

• China Swallows Its Mining Debt Bomb (BBG)

Remember that Bugs Bunny scene where the Tasmanian Devil survives an explosion by eating the bomb? China’s government is trying to do that for its indebted miners. Rather than let the domestic mining industry be dragged down by its $131 billion of debts, the authorities are looking at setting up what amounts to a state-owned “bad bank” to segregate the worst liabilities and allow the remaining businesses to survive. China Minmetals, the metals trader and miner tasked with swallowing up China Metallurgical Group in a state-brokered merger, will be one taker, these people said. That should help with its net debt, which already stood at 136 billion yuan ($22 billion) in December 2014. There’ll be no shortage of others lining up for relief.

Seven of the 17 most debt-laden mining and metals companies worldwide are in China, and all are state-owned or -controlled. Western credit investors have become so chary of miners’ debts that you can pick up bonds with a 100% annual yield if you’re confident the companies will last the year. Anglo American is firing 63 percent of its workforce and selling at least half its mines to cut debt, while Glencore today announced plans to further decrease its borrowings. The political strategist James Carville once joked that he’d like to be reincarnated as the bond market so he could “intimidate everybody.” In China, things are considerably more relaxed. Chalco, one of the top five global aluminum producers, hasn’t generated enough operating income to pay its interest bills in any half-year since 2011. Over the four-year period, interest payments have exceeded earnings by about 29 billion yuan.

It’s a similar picture in China’s coal industry. China Coal Energy, Yanzhou Coal, and Shaanxi Coal, the second-, fourth-, and fifth-biggest domestic producers by sales, have collectively spent 3.3 billion yuan more on interest over the last 12 months than they’ve earned from their operations. This situation can’t go on. While Chalco still has about 47 billion yuan in shareholders’ equity on its balance sheet, it doesn’t have an obvious path back to profitability and most of its excess interest payments were made before aluminum prices started to really slump, back in May. There are also some worrying dates looming: The company has 13.6 billion yuan in bonds maturing next year, and another 20.9 billion yuan in the two years following

Beijing is trying to centralize control.

• China’s Plan to Merge Sprawling Firms Risks Curbing Competition (WSJ)

Already massive, China Inc. is about to get bigger—and that may not be good for the country’s economy or consumers. Beijing is considering combining some of its biggest state-owned companies in a move that would tighten its grip over key parts of the world’s No. 2 economy. The government said Tuesday it would merge two of the country’s largest metals companies. Already it has combined train-car makers and nuclear technology firms and is in the process of combining its two largest shipping lines. It is considering combining more companies in areas ranging from telecommunications to air carriers. In recent weeks, shares of major state-owned enterprises like mobile-phone service China Unicom (Hong Kong) and China Telecom and carriers China Southern Airlines and Air China have surged amid speculation they will be next.

China Telecom said it doesn’t comment on speculation, while the others said they haven’t received any information about mergers. Beijing hopes to form national champions that can better compete abroad. But experts say the moves will likely reduce competition, lead to higher prices for consumers and do little to clean up China’s sprawling and largely wasteful portfolio of state-owned enterprises. “China is throwing the gears of reform into reverse,” said Sheng Hong, director of the Unirule Institute of Economics in Beijing, an independent research group. “Unprofitable state-owned companies should be closed, rather than merged,” he said.

[..] Economists say state-owned enterprises are a drag on China’s economy. They enjoy cheap lands, government subsidies and easy access to bank loans. Private firms face barriers to entering sectors such as oil and banking, and state-run companies’ dominance allow them to keep prices high. However, the performance of SOEs has been deteriorating. According to Morgan Stanley, the gap of return-on-assets between SOEs and private enterprises is the widest since the late 1990s. China’s SOEs had an average return-on-assets rate of 4% in 2014, compared with private companies’ 10%, said Kelvin Pang, an analyst at the bank. State-run Economic Information Daily, a newspaper published by the official Xinhua News Agency, reported in April that Beijing was considering merging its biggest state-owned companies to create around 40 national champions from the existing 111.

“The rule change will cut Chesapeake’s inventory by 45%..” Its market cap will fall right along with it.

• Billions of Barrels of Oil Vanish in a Puff of Accounting Smoke (BBG)

In an instant, Chesapeake Energy will erase the equivalent of 1.1 billion barrels of oil from its books. Across the American shale patch, companies are being forced to square their reported oil reserves with hard economic reality. After lobbying for rules that let them claim their vast underground potential at the start of the boom, they must now acknowledge what their investors already know: many prospective wells would lose money with oil hovering below $40 a barrel. Companies such as Chesapeake, founded by fracking pioneer Aubrey McClendon, pushed the Securities and Exchange Commission for an accounting change in 2009 that made it easier to claim reserves from wells that wouldn’t be drilled for years. Inventories almost doubled and investors poured money into the shale boom, enticed by near-bottomless prospects.

But the rule has a catch. It requires that the undrilled wells be profitable at a price determined by an SEC formula, and they must be drilled within five years. Time is up, prices are down, and the rule is about to wipe out billions of barrels of shale drillers’ reserves. The reckoning is coming in the next few months, when the companies report 2015 figures. “There was too much optimism built into their forecasts,” said David Hughes, a fellow at the Post Carbon Institute. “It was a great game while it lasted.” The rule change will cut Chesapeake’s inventory by 45%, regulatory filings show. Chesapeake’s additional discoveries and expansions will offset some of its revisions, the company said in a third-quarter regulatory filing.

“The problem is the risk investors piled on over the past seven years, when they still believed in the Fed’s hype that risks didn’t matter..”

• Bond King Gets Antsy as Junk Bonds, Which Lead Stocks, Spiral to Heck (WS)

“We are looking at real carnage in the junk bond market,” Jeffrey Gundlach, the bond guru who runs DoubleLine Capital, announced in a webcast on Tuesday. He blamed the Fed. It was “unthinkable” to raise rates, with junk bonds and leveraged loans having such a hard time, he said – as they’re now dragging down his firm’s $80 billion in assets under management. “High-yield spreads have never been this high prior to a Fed rate hike,” he said – as the junk bond market is now in a precarious situation, after seven years of ZIRP and nearly as many years of QE, which made Grundlach a ton of money. When he talks, he wants the Fed to listen. He wants the Fed to move his multi-billion-dollar bets in the right direction. But it’s not a measly quarter-point rate hike that’s the problem. Bond yields move more than that in a single day without breaking a sweat.

The problem is the risk investors piled on over the past seven years, when they still believed in the Fed’s hype that risks didn’t matter, that they should be blindly taken in large quantities without compensation, and that rates would always remain at zero. Those risks that didn’t exist are now coming home to roost. They’re affecting the riskiest parts of the credit spectrum first: lower-rated junk bonds and leveraged loans. Grundlach presumably has plenty of them in his portfolios. Tuesday, the day Grundlach was begging the Fed for mercy, was particularly ugly. The average bid of S&P Capital IQ LCD’s list of 15 large and relatively liquid high-yield bond issues – the “flow-names,” as it calls them, that trade more frequently – dropped 181 basis points to about 87 cents on the dollar, for an average yield of 10%, the worst since July 23, 2009.

Sign of things to come?!

• Banks Buy Protection Against Falling Stock Markets (BBG)

For more than a year, dealers in the U.S. equity derivatives market have noted a widening gap in the price of certain options. If you want to buy a put to protect against losses in the Standard & Poor’s 500 Index, often you’ll pay twice as much as you would for a bullish call betting on gains. New research suggests the divergence is a consequence of financial institutions hoarding insurance against declines in stocks. The pricing anomaly is visible in a value known as skew that measures how much it costs to buy bearish options relative to those that appreciate when shares rise. In 2015, contracts betting on a 10% S&P 500 decline by February have traded at prices averaging 110% more than their bullish counterparts. That compares with a mean premium of 68% since the start of 2005, according to data compiled by Bloomberg.

While various explanations exist including simply nervousness following a six-year bull market, Deutsche Bank says in a Dec. 6 research report that the likeliest explanation may be that demand is being created for downside protection among banks that are subject to stress test evaluations by federal regulators. In short, financial institutions are either hoarding puts or leaving places for them in their models should markets turn turbulent. “Since so many banking institutions are facing these stress tests, the types of protection that help banks do well in these scenarios obtain extra value,” said Rocky Fishman, an equity derivatives strategist at Deutsche Bank. “The way the marketplace has compensated for that is by driving up S&P skew.”

They already are…

• Dividends Could Be the Next Victim of the Commodity Crunch (BBG)

As commodity prices tumble to the lowest since the global financial crisis, the dividends paid by the world’s largest oil producers and miners look increasingly hard to justify. Take the world’s largest 500 companies by sales. Of the 20 expected to pay the highest dividend yields over the next 12 months, 17 are natural resources companies, according to data compiled by Bloomberg. They include BHP Billiton Ltd., the world’s largest miner, with a yield – or dividend divided by share price – of more than 10% on its London shares. Plains All American Pipeline LP tops the list with a yield of 13.7%. Ecopetrol, Colombia’s largest oil producer, has a payout of 11.6%. That compares with an average among all 500 companies of 3.5%. “Investors are suggesting that dividend rates announced as recently as half-year results are generally not sustainable,” said Jeremy Sussman at Clarksons Platou Securities.

“The current environment is among the toughest we have seen across the resource space, putting increased pressure on management teams to deliver cost savings.” Miners Anglo American and Freeport-McMoran have suspended payments to preserve cash, following Glencore Plc earlier in the year. Eni SpA, Italy’s largest oil producer, and Houston-based pipeline owner Kinder Morgan have both reduced dividends. While other chief executive officers, especially at oil producers like Shell and Chevron have promised to keep paying, investors appear to be pricing in the likelihood of more cuts to come. “The fall in oil companies’ share prices and the increase in the dividend yield to historical levels is signaling that the market is fearing a cut,” Ahmed Ben Salem at Oddo & Cie in Paris, said by e-mail.

They should have seen it coming when oil collapsed.

• Copper, Aluminum And Steel Collapse To Crisis Levels (CNN)

It’s no secret that commodities in general have had a horrendous 2015. A nasty combination of overflowing supply and soft demand has wreaked havoc on the industry. But prices for everything from crude oil to industrial metals like aluminum, steel, copper, platinum, and palladium have collapsed even further in recent days. Crude oil crumbled below $37 a barrel on Tuesday for the first time since February 2009. The situation is so bad that this week the Bloomberg Commodity Index, which tracks a wide swath of raw materials, plummeted to its weakest level since June 1999. “Sentiment is horrendous. It’s the worst since the financial crisis – and it’s getting worse every day,” said Garrett Nelson, a BB&T analyst who covers the metals and mining industry.

There was fresh evidence of the sector’s financial stress from De Beers owner Anglo American. The mining giant said it was suspending its dividend and selling off 60% of its assets, which could lead to a reduction of 85,000 jobs. The commodities rout is knocking stock prices, with the Dow falling over 200 points so far this week. It’s also raising concerns about the state of the global economy. “Markets are in the midst of another global growth scare,” analysts at Bespoke Investment Group wrote in a recent report. Soft demand is clearly not helping commodity prices. China and other emerging markets like Brazil have slowed dramatically in recent quarters, lowering their appetite for things like steel, iron ore and crude oil.

More developed markets don’t look great either. Europe’s economy continues to underperform, Japan is barely avoiding recession and U.S. manufacturing activity contracted in November for the first time in three years. But the real driver of the recent commodity crash is on the supply side, compared to the collapse in demand during the Great Recession. Cheap borrowing costs and an inability to predict China’s slowdown led producers to expand too much in recent years. Now they’re flooding the market with too much supply. “There’s a lot of froth and excess production capacity that needs to go away permanently. It’s hard to imagine we’re not in a low-commodity price environment for a fairly long time,” said Nelson.

That means you should brace for more plant closure and announcements like the one announced by Anglo American. In the U.S., roughly 123,000 jobs have disappeared from the mining sector, which includes oil and energy workers, since the end of 2014, according to government statistics. It’s also likely some companies won’t survive the depressed pricing environment. Financial trouble for commodity companies have already lifted global corporate defaults to the highest level since 2009, according to Standard & Poor’s.

Debt addicts getting their fix wherever they can.

• US Companies Turn To European Debt Markets (FT)

US tyremaker Goodyear Dunlop sold a €250m eight-year euro-denominated bond on Wednesday – its first such deal in four years – as US companies raise record amounts in the eurozone. The sale was the latest example of a reverse Yankee — euro-denominated debt issued by US companies. US companies have been the biggest issuers of euro bonds by nationality this year. Last week Ball Corporation, an avionics and packaging company, issued euro and dollar bonds to fund its acquisition of Rexam, a UK drinks maker. “Given the recent [US] disruption, the European market looks more positive,” said Henrik Johnsson, head of the Emea debt syndicate at Deutsche Bank. Diverging monetary policy has reduced the cost of issuing debt in euros as the European Central Bank continues to ease while the Federal Reserve is expected to increase its main interest rate from near zero this month.

Previously companies would issue debt in euros and convert it back into dollars. But the strong dollar has increased the cost of doing this. Many reverse Yankee issuers have significant euro-denominated cash flows and so have a “natural hedge” against exchange rate movements. The sell-off in the debt of US commodity companies – particularly in the energy sector – had been damaging for dollar credit, said Mr Johnsson. “As a matter of investor psychology, you’re not seeing losses in significant portions of your portfolio every day in Europe. It’s the same with fund flows, Europe is consistently receiving inflows.” Market participants expect the trend to continue into next year as successful deals demonstrate the depth of Europe’s markets. US companies have also issued a record amount in dollars, however.

“In the third quarter, for example, GDP was worth €409 billion while the banks were saddled with more than €200 billion of non-paying loans.”

• Italy Needs a Cure for Its Bad-Debt Headache (BBG)

Italy’s economy dragged itself out of recession this year, posting annual growth in GDP of 0.8% in the third quarter. That, though, was only half the pace achieved by the euro zone as a whole. And unless the Italian government gets serious about tackling the bad debts that are crushing the nation’s banking system, its economy will continue to underperform its peers. Economists are only mildly optimistic about Italy’s prospects next year. The consensus forecast is that growth will peak at 1.3% this quarter, slowing for the first three quarters of next year before rallying back to that high by the end of the year. One of the biggest drags on the country’s growth is the sheer volume of non-performing loans, typically defined as debts that have been delinquent for 90 days or more.

Italy’s bad loans have soared to more than €200 billion, a fourfold increase since the end of 2008. Moreover, more and more borrowers have fallen behind even as the economic backdrop has improved. That’s in sharp contrast with Spain, where bad loans peaked at the start of 2014 and have since declined by almost a third. The figures for Italy are even more worrying when you compare them with the growth environment. The burden of bad debts is approaching half of what the economy delivers every three months. In the third quarter, for example, GDP was worth €409 billion while the banks were saddled with more than €200 billion of non-paying loans. If that trend continues, Italy will soon be in a worse position than Spain, even though its economy is 50% bigger.

Here’s the rub: If a euro zone country’s banks are weighed down with bad debts, the ECB’s attempt to boost growth and consumer prices by channeling billions of euros into the economy through its quantitative easing program are doomed to failure. And it’s pretty clear that domestic investment in Italy isn’t showing any evidence of recovery despite the ECB’s best efforts.

“The Swiss should have joined the Euro. What is the point of remaining separate when you surrender all your integrity and sovereignty anyway?”

• Swiss to Give Up EVERYTHING & EVERYBODY (Martin Armstrong)

As of January 1, 2016, Switzerland is handing over the names of everyone who has anything stored in its Swiss freeport customs warehouses. For decades, people have stored precious metals and art in Swiss custom ports — tax-free — as long as they did not take it into Switzerland. Now any hope on trusting Switzerland is totally gone. That’s right — the Swiss handed over everyone with accounts in its banks. Now, they must report the name, address, and item descriptions of anyone storing art in its tax-free custom ports. This also applies to gold, silver, and other precious metals along with anything else of value. Back in 1986, the FBI walked into my office to question me about where Ferdinand Marcos (1917–1989) stored the gold he allegedly stole from the Philippines.

Marcos had been the President of the Philippines from 1965 to 1986 and had actually ruled under martial law from 1972 until 1981. I told them that I had no idea. They never believed me, as always, and pointed out that Ferdinand Marcos was a gold trader before he became president and he made his money as a trader. They told me he was a client and that I had been on the VIP list for the grand opening of Herald Square in NYC, which he funded through a Geneva family. I explained that I never met him, and if he were a client, he must have used a different name. But the rumor was that the gold was stored in the Zurich freeport customs warehouse. His wife, Imelda, was famous for her extravagant displays of wealth that included prime New York City real estate, world-renowned art, outlandish jewelry, and more than a thousand pairs of shoes.

Reportedly, there is a diamond tiara containing a giant 150-carat ruby that is locked up in a vault at the Swiss central bank. Some have valued it at more than US$8 million. The missing gold that people have spent 30 years searching for will surface if there are mandatory reports on whatever is hidden in the dark corners of these warehouses. This action to expose whatever whomever has everywhere in Switzerland may cause many to just sell since they will be taxed by their governments for daring to have private assets. They will not be able to get it out once it sees the light of day for every government is watching.

The Swiss should have joined the Euro. What is the point of remaining separate when you surrender all your integrity and sovereignty anyway? This is what bureaucrats are for. They act on their own circumventing the people. Welcome to the New Age of hunting for loose change. Your sofa and car glove box are next. Oh yeah – what about gold or silver fillings in your mouth? Time to see the dentist?

Good to know one’s history.

• Trump’s ‘Undesirable’ Muslims of Today Were Yesteryear’s Greeks (Pappas)

There are some things you might not know about Greek immigration to the United States. This history becomes particularly relevant when watching today’s news and political candidates like Donald Trump, supported by huge and vociferous crowds, call for the complete ban of people from entering the United States based on their race or religion. This is nothing new. In fact– today’s “undesirable” Muslims (in Donald Trump’s eyes), were yesteryear’s Greeks. It’s a forgotten history— something that only occasionally comes up by organizations like AHEPA or the occasional historian or sociologist. In fact, many Greek Americans are guilty of not only perpetuating— but also creating— myths of our ancestors coming to this country and being welcomed with open arms.

A look back at history will prove that this usually wasn’t the case for the early Greek immigrants to the United States. Greeks, their race and religion, were seen as “strange” and “dangerous” to America and after decades of open discrimination, Greeks were finally barred— by law— from entering the United States in large numbers. The Immigration Act of 1924 imposed harsh restrictions on Greeks and other non-western European immigrant groups. Under that law, only one hundred Greeks per year were allowed entry into the United States as new immigrants. Much like today, when politicians and activists like Donald Trump use language against a particular ethnic group— like his call to ban all Muslims from entering the United States, the same was the case a hundred years ago. Except then, Greeks were one of the main targets.

There was a strong, loud and active “nativist” movement that was led by people who believed they were the “true Americans” and the immigrants arriving— mainly Greeks, Italians, Chinese and others who were deemed “different” and even “dangerous” to American ideals, were unfit to come to America. As early as 1894 a group of men from Harvard University founded the Immigration Restriction League (IRL), proponents of a United States that should be populated with “British, German and Scandinavian stock” and not by “inferior races.” Their biggest targets were Greeks and Italians and the group had a powerful influence with the general public and leaders in the U.S. government in their efforts to keep “undesirables” out of America.

The well-known cartoon “The Fool Pied Piper” by Samuel Erhart appeared in 1909 portraying Uncle Sam as the Pied Piper playing a pipe labeled “Lax Immigration Laws” and leading a horde of rats labeled “Jail Bird, Murderer, Thief, Criminal, Crook, Kidnapper, Incendiary, Assassin, Convict, Bandit, Fire Brand, White Slaver, and Degenerate” toward America. Some rats carry signs that read “Black Hand,” referring to the Italian Mafia. In the background, rulers from France, Russia, Germany, Italy, Austria-Hungary, Turkey and Greece celebrate the departure of the fleeing rats.

“..Trump does have something very much in common with everybody else. He watches TV….”

• It’s Too Late to Turn Off Trump (Matt Taibbi)

[..] in Donald Trump’s world everything is about him, but Trump’s campaign isn’t about Trump anymore. With his increasingly preposterous run to the White House, the Donald is merely articulating something that runs through the entire culture. It’s hard to believe because Trump the person is so limited in his ability to articulate anything. Even in his books, where he’s allegedly trying to string multiple thoughts together, Trump wanders randomly from impulse to impulse, seemingly without rhyme or reason. He doesn’t think anything through. (He’s brilliantly cast this driving-blind trait as “not being politically correct.”) It’s not an accident that his attention span lasts exactly one news cycle. He’s exactly like the rest of America, except that he’s making news, not following it – starring on TV instead of watching it.

Just like we channel-surf, he focuses as long as he can on whatever mess he’s in, and then he moves on to the next bad idea or incorrect memory that pops into his head. Lots of people have remarked on the irony of this absurd caricature of a spoiled rich kid connecting so well with working-class America. But Trump does have something very much in common with everybody else. He watches TV. That’s his primary experience with reality, and just like most of his voters, he doesn’t realize that it’s a distorted picture. If you got all of your information from TV and movies, you’d have some pretty dumb ideas. You’d be convinced blowing stuff up works, because it always does in our movies. You’d have no empathy for the poor, because there are no poor people in American movies or TV shows – they’re rarely even shown on the news, because advertisers consider them a bummer.

Politically, you’d have no ability to grasp nuance or complexity, since there is none in our mainstream political discussion. All problems, even the most complicated, are boiled down to a few minutes of TV content at most. That’s how issues like the last financial collapse completely flew by Middle America. The truth, with all the intricacies of all those arcane new mortgage-based financial instruments, was much harder to grasp than a story about lazy minorities buying houses they couldn’t afford, which is what Middle America still believes. Trump isn’t just selling these easy answers. He’s also buying them.

Trump is a TV believer. He’s so subsumed in all the crap he’s watched – and you can tell by the cropped syntax in his books and his speech, Trump is a watcher, not a reader – it’s all mixed up in his head. He surely believes he saw that celebration of Muslims in Jersey City, when it was probably a clip of people in Palestine. When he says, “I have a great relationship with the blacks,” what he probably means is that he liked watching The Cosby Show. In this he’s just like millions and millions of Americans, who have all been raised on a mountain of unthreatening caricatures and clichés. TV is a world in which the customer is always right, especially about hard stuff like race and class. Trump’s ideas about Mexicans and Muslims are typical of someone who doesn’t know any, except in the shows he chooses to watch about them.

“Unless Russia can wake up Europe, war is inevitable.”

• War Is On The Horizon: Is It Too Late To Stop It? (Paul Craig Roberts)

[..] Washington is not opposed to terrorism. Washington has been purposely creating terrorism for many years. Terrorism is a weapon that Washington intends to use to destabilize Russia and China by exporting it to the Muslim populations in Russia and China. Washington is using Syria, as it used Ukraine, to demonstrate Russia’s impotence to Europe— and to China, as an impotent Russia is less attractive to China as an ally. For Russia, responsible response to provocation has become a liability, because it encourages more provocation. In other words, Washington and the gullibility of its European vassals have put humanity in a very dangerous situation, as the only choices left to Russia and China are to accept American vassalage or to prepare for war.

Putin must be respected for putting more value on human life than do Washington and its European vassals and avoiding military responses to provocations. However, Russia must do something to make the NATO countries aware that there are serious costs of their accommodation of Washington’s aggression against Russia. For example, the Russian government could decide that it makes no sense to sell energy to European countries that are in a de facto state of war against Russia. With winter upon us, the Russian government could announce that Russia does not sell energy to NATO member countries. Russia would lose the money, but that is cheaper than losing one’s sovereignty or a war. To end the conflict in Ukraine, or to escalate it to a level beyond Europe’s willingness to participate, Russia could accept the requests of the breakaway provinces to be reunited with Russia.

For Kiev to continue the conflict, Ukraine would have to attack Russia herself. The Russian government has relied on responsible, non-provocative responses. Russia has taken the diplomatic approach, relying on European governments coming to their senses, realizing that their national interests diverge from Washington’s, and ceasing to enable Washington’s hegemonic policy. Russia’s policy has failed. To repeat, Russia’s low key, responsible responses have been used by Washington to paint Russia as a paper tiger that no one needs to fear. We are left with the paradox that Russia’s determination to avoid war is leading directly to war. Whether or not the Russian media, Russian people, and the entirety of the Russian government understand this, it must be obvious to the Russian military.

All that Russian military leaders need to do is to look at the composition of the forces sent by NATO to “combat ISIS.” As George Abert notes, the American, French, and British aircraft that have been deployed are jet fighters whose purpose is air-to-air combat, not ground attack. The jet fighters are not deployed to attack ISIS on the ground, but to threaten the Russian fighter-bombers that are attacking ISIS ground targets. There is no doubt that Washington is driving the world toward Armageddon, and Europe is the enabler. Washington’s bought-and-paid-for-puppets in Germany, France, and UK are either stupid, unconcerned, or powerless to escape from Washington’s grip. Unless Russia can wake up Europe, war is inevitable.

Europe’s creating no man’s land.

• Greek Police Move 2,300 Migrants From FYROM Border To Athens (Kath.)

Police on Wednesday rounded up some 2,300 migrants from a makeshift camp near the border with the Former Yugoslav Republic of Macedonia and put them on buses to Athens, where they are to be put up in temporary reception facilities, including two former Olympic venues. The police operation, which Greek authorities heralded last week, was carried out relatively smoothly following weeks of tensions along the border. A group of 30 migrants who initially resisted efforts by police to remove them from the camp on Wednesday morning were briefly detained before being put on a bus to the capital. A total of 45 buses were used to transfer the migrants from a makeshift camp in Idomeni and the surrounding area to the capital, according to a police statement which said most the migrants are from Pakistan, Somalia, Morocco, Algeria and Bangladesh.

The migrants are to be put up in former Olympic venues in Elliniko and Galatsi and in a temporary reception facility for immigrants that opened in Elaionas over the summer. Police officers on Wednesday were stopping buses heading toward Idomeni with more migrants from the Aegean islands and conducting checks. All migrants that are not from Iraq, Afghanistan and Syria – the nationalities that FYROM border guards are allowing to pass – were being taken off the buses and sent to Athens, the official said. Complicating matters, FYROM police were said to have started building a second fence on the Balkan country’s frontier with Greece in a bid to keep out migrants trying to slip through.

The crackdown on the Greek-FYROM border is expected to lead to a buildup of migrants in Greece and encourage traffickers to resort to new routes to Europe. The United Nations refugee agency (UNHCR) indicated on Wednesday that an alternative route traffickers are likely to favor could be via Albania, Montenegro, Croatia and Bosnia.

Debt Rattle December 9 2015

Dec 092015

December 9, 2015 Posted by Raúl Ilargi Meijer at 9:38 am Finance Tagged with: China, commodities, EM, IMF, mining, oil, refugees, Russia, Schaeuble 1 Response »

Dorothea Lange Refugees: Drought hit OK farm family on way to CA Aug 1936

• When It Rains It Pours as China Unleashes Commodity Torrent (BBG)

• Oil Producers Prepare For Prices To Halve To $20 A Barrel (Guardian)

• Anglo American To Slash Workforce By 85,000 Amid Commodity Slump (Guardian)

• OPEC Provides Economic Stimulus Central Bankers Can’t or Won’t (BBG)

• Copper Meltdown Burning Miners Is Boon to Builders as Costs Sink (BBG)

• Iron Ore in $30s Seen Near Tipping Point for Largest Miners (BBG)

• Emerging Markets Warned of Capital Drought as Fed Nears Liftoff (BBG)

• China’s Illicit Outflows Estimated at $1.4 Trillion Over Decade (BBG)

• The IMF Forgives Ukraine’s Loan To Russia (Michael Hudson)

• Tension Grows Between Tsipras, Schaeuble Over IMF Role In Greek Program (Kath.)

• Schaeuble Fights EU Deposit Insurance Plan in Clash With ECB (BBG)

• Australian Police Raid Sydney Home Of Reported Bitcoin Creator (Reuters)

• Australian Housing Boom Leaves Swath of Empty Properties (BBG)

• Germany Takes In More Refugees In 2015 Than US Has In Past 10 Years (Quartz)

• How Germany’s Right-Wing Tabloid Bild Learned to Love Refugees (BBG)

• 6 Afghan Migrant Children Drown Off Turkish Coast On Way To Greece (AP)

• 11 Refugees, Including 5 Children, Drown Near Greek Island, 13 Missing (GR)

Note: total Chinese exports have fallen for 5 months now. While commodity exports are rising fast. So outside of commodities, the fall in exports is that much bigger.

• When It Rains It Pours as China Unleashes Commodity Torrent (BBG)

There’s no let-up in the onslaught of commodities from China. While the country’s total exports are slowing in dollar terms, shipments of steel, oil products and aluminum are reaching for new highs, according to trade data from the General Administration of Customs. That’s because mills, smelters and refiners are producing more than they need amid slowing domestic demand, and shipping the excess overseas. The flood is compounding a worldwide surplus of commodities that’s driven returns from raw materials to the lowest since 1999, threatening producers from India to Pennsylvania and aggravating trade disputes. While companies such as India’s JSW Steel decry cheap exports as unfair, China says the overcapacity is a global problem.

“It puts global commodities producers in a bad situation as China struggles with excess supplies of base metals, steel and oil products,” Kang Yoo Jin at NH Investment & Securities said. “The surplus of commodities is becoming a real pain for China and to ease the glut, it’s increasing its shipments overseas.” Net fuel exports surged to an all-time high of 2.22 million metric tons in November, 77% above the previous month, customs data showed. Aluminum shipments jumped 37% to the second-highest level on record while sales of steel products climbed 6.5%, taking annual exports above 100 million tons for the first time. Chinese oil refiners are tapping export markets to reduce swelling fuel stockpiles, particularly diesel. The nation is also encouraging overseas shipments by allowing independent plants to apply for export quotas to sustain refining operation rates and ease an economic slowdown, according to Yuan Jun at oil trader China Zhenhua Oil.

A boon for the economy, you said?

• Oil Producers Prepare For Prices To Halve To $20 A Barrel (Guardian)

The world’s leading oil producers are preparing for the possibility of oil prices halving to $20 a barrel after a second day of financial market turmoil saw a fresh slide in crude, the lowest iron ore prices in a decade, and losses on global stock markets. Benchmark Brent crude briefly dipped below $40 a barrel for the first time since February 2009 before speculators took profits on the 8% drop in the cost of crude since last week’s abortive attempt by the oil cartel Opec to steady the market. But warnings by commodity analysts that the respite could be shortlived were underlined when Russia said it would need to make additional budget cuts if the oil price halved over the coming months.

Alexei Moiseev, Russia’s deputy finance minister, told Reuters: “If oil goes to $20, we will need to do additional [spending] cuts. Clearly we have shown that we are very willing to cut fiscal spending in line with an oil price at $60, for example. In order for us to be long-term sustainable [with the] oil price at $40, we need to do additional cuts, but if the oil price goes to $20 we need to do even more cuts.” Russia and Saudi Arabia – the world’s two biggest oil producers – both increased spending when oil prices rose to well above $100 a barrel. The fall from a recent peak of $115 a barrel in August 2014 has left all Opec members in financial difficulty, but Saudi Arabia has refused to relent on a strategy of using a low crude price to knock out US shale producers.

Hopes that Opec would announce production curbs to push prices up were dashed when the cartel met in Vienna last Friday, triggering the latest downward lurch in the cost of oil. Lord Browne, the former chief executive of BP, refused to rule out the possibility that oil could halve again in price when he was interviewed by Bloomberg TV. Asked if oil could hit $20 a barrel, Browne – who ran BP from 1995 to 2007 during a period when the cost of crude rose from $10 to $100 a barrel, said in the short term nothing was impossible. He added: “In the long run, $20 is probably wrong, but that’s as far as I’d go.”

Some jobs to be transferred to new owners of assets Anglo sells off.

• Anglo American To Slash Workforce By 85,000 Amid Commodity Slump (Guardian)

Anglo American has suspended its dividend and announced plans to cut its workforce by 85,000 and dispose of more than half its mines in response to the plunging price of iron ore and other metals. The UK mining company said it would not pay a dividend for the second half of this year and all of next year. The last time Anglo American cut its dividend was during the worst of the financial crisis in 2009. In a presentation to investors, Anglo American said it would sell or close up to 35 mines, leaving it with about 20 sites and cutting employee and contractor numbers from 135,000 to fewer than 50,000 after 2017. It will halve the number of business units from six to three: the De Beers diamond operation, industrial metals and bulk commodities.

The company, which mines materials such as iron ore, manganese, coal, copper and nickel, said it would cut capital spending by a further $1bn (£670m) to the end of 2016, taking the reduction in capital spending to $2.9bn by the end of 2017. It increased the amount it plans to raise from asset sales to $4bn from $3bn. The plan is the biggest restructuring by a mining company in reaction to the commodities rout. Prices have plunged because of slowing world economic growth and falling demand from China, the world’s biggest consumer of iron ore, copper, nickel and most other commodities. Anglo American’s shares, which have lost almost three-quarters of their value this year, fell more than 12% to a new all-time low of 323p.

Its announcement sent all other mining shares down in London with the sector at a 10-year low. The biggest mining companies are slashing spending and cutting costs to protect their financial strength as metal prices plunge. Glencore, the British miner and commodities trader, has suspended its dividend and is selling assets to cut its debt in an effort to rebuild investor confidence. Anglo American has been affected more severely by the commodities crash than some of its rivals because of its reliance on iron ore, whose value has fallen by almost 40% this year as demand from China has fallen.

The commodities dump puts the entire global economy in jeopardy and Bloomberg says it’s all great. “..the world has enjoyed a windfall equivalent to 2% of GDP it would otherwise have spent on crude..” The crude does come from the world, though, right?

• OPEC Provides Economic Stimulus Central Bankers Can’t or Won’t (BBG)

The world’s central bankers just got a helping hand from the world’s oil ministers. As the ECB delivers less monetary stimulus than investors sought and with the Federal Reserve set to tighten next week, the world economy may find support instead from the weakest oil price in more than six years. West Texas Intermediate is trading at about $40 a barrel four days after OPEC chose not to limit output, extending the commodity’s decline from its June 2014 peak of $107.73 and this year’s high of $62.58 in May. While its earlier slide failed to provide the economic pickup some anticipated, economists at UniCredit, Commerzbank and Societe Generale are still banking on cheaper fuel to spur spending by consumers and companies in 2016.

“On net, central bankers should take this as a positive,” said Peter Dixon, an economist at Commerzbank in London. “This does help to stimulate demand by leaving a little bit of money in the pocket and providing a feel-good factor.” At Societe Generale, Michala Marcussen, global head of economics, reckons every $10 drop in the price of oil lifts global growth by 0.1 percentage point. She estimates that since 2014, the world has enjoyed a windfall equivalent to 2% of GDP it would otherwise have spent on crude. “Our biggest relief last week was that OPEC decided no output cut, promising consumers inexpensive oil for longer,” said Marcussen. Even though falling oil may weaken the inflation rates central bankers are struggling to lift, Erik Nielsen at UniCredit said it was important to recognize that it’s “‘good’ disinflation, because it stems from supply rather than demand and so should raise real income, thereby propelling consumption and the recovery.”

“A drop in energy prices is the equivalent of a tax cut, with no implications for debt,” he said, adding that faster expansions as a result should end up bolstering prices too and so investors should be wary of wagering on a deterioration in inflation.

That sounds very similar to what they said about cheaper oil, and we said from the get-go it wouldn’t work out well. Besides, copper producers? There’s no production, it’s mining. There’s some ‘purification’ involved, but no ‘production’. Like a refinery doesn’t ‘produce’ oil. BTW, that’s one mighty ugly graph.

• Copper Meltdown Burning Miners Is Boon to Builders as Costs Sink (BBG)

Copper producers from Glencore to Freeport-McMoRan spent most of this year getting slammed by the metal’s worst slump since the recession. But there are some folks who are cheering. With prices heading for a third straight annual decline, the rout is a welcome reprieve for metal buyers like electricians and builders who put about 400 pounds (181 kilograms) of copper into the average U.S. home. As recently as 2011, copper traded in New York was at all-time-highs, after more than five-fold gains in the previous decade. Now, with demand growth cooling in China, the biggest user, global surpluses have emerged. “Business has been so much better – the best in about 10 years,” said David Chapin, the president Willmar Electric Service, a Minnesota-based company that spends about $1 million a year on copper wire it installs for clients in several Midwest states.

While that’s only 5% of Willmar’s total costs, cheaper metal is boosting profit on projects that a few years ago were close to being money losers, Chapin said. On the Comex, copper futures fell 28% this year to $2.048 a pound and are heading for the biggest annual retreat since 2008. The metal touched $2.002 on Nov. 23, a six-year low. Prices haven’t traded below $2 since 2009. Copper’s role in construction and architecture dates as far back as ancient Egypt, where temple doors were clad with the metal, according to the Copper Development Association. In modern times, the commodity’s conductive properties and it’s resistance to corrosion have made it sought after for pipes and wires. Globally, construction accounts for about 30% of demand, Bloomberg Intelligence data show. The transportation industry makes up about 13%, including for use in cars and trucks.

Richardson, Texas-based Lennox International Inc., which makes and markets heating and cooling equipment, said on an Oct. 19 earnings call that cheaper metals and commodities provided a benefit of $15 million to earnings in 2015. There’s about 50 pounds of copper in the average air-conditioning unit. “The winner here will be anyone who purchases and uses copper,” Dane Davis, a metals analyst at Barclays Plc in New York, said in a telephone interview. “The construction industry stands to benefit from cheaper copper pipes. On a national scale, automobile producers are also going to be winners because it’s an important part of car production.”

As commodities prices sink, so does the market cap of these huge corporations.

• Iron Ore in $30s Seen Near Tipping Point for Largest Miners (BBG)

Iron ore’s tumble into the $30s threatens the world’s biggest miners as prices approach break-even costs, according to Capital Economics. BHP Billiton shares slumped to the lowest in 10 years and Rio Tinto dropped to the lowest since 2009. The most expensive operations at the four largest suppliers are on the verge of making losses at rates below $40 a metric ton, said John Kovacs at Capital Economics in London, who estimates their break-even levels at $28 to $39, taking into account freight and other costs. While these producers will keep output strong, they’ll be constrained by low prices, he said. Iron ore’s plunge below $40 comes as producers including Vale in Brazil and Rio and BHP in Australia press on with expansions to cut costs and defend market share just as demand from the largest consumer China slows.

They’re the world’s biggest suppliers along with Fortescue. Prices of the raw material have lost 45% this year and have plunged 80% from their peak in 2011. “The big four will find it hard to maintain output at below $40,” Kovacs said in response to questions. “If prices remain weak, output from the highest-cost mines of the big four will be under pressure.” Ore with 62% content delivered to Qingdao sank 1.1% to $38.65 a dry ton on Monday, a record low in daily prices compiled by Metal Bulletin Ltd. dating back to May 2009. The raw material peaked at $191.70 in 2011. Kovacs said that while rates will stay low over the next year, he doesn’t believe they’ll remain below $40 for a significant length of time. He expects prices to recover slowly because demand won’t fall much further and the biggest miners will find it difficult to keep up output at these levels.

Oh, you think they couldn’t figure out that one by themselves?

• Emerging Markets Warned of Capital Drought as Fed Nears Liftoff (BBG)

A sudden capital drought in emerging markets could undermine the fragile global expansion, World Bank economists said in a report Tuesday that questions whether the international lender’s main poverty-reduction target is achievable given the bleaker outlook. Now in its sixth year, the slowdown in developing economies is the broadest since the 1980s, World Bank economists said in a research paper released on Tuesday. While emerging nations are better prepared for shocks than they were in the 1980s and 1990s, the recent “rough patch” could signal a new era of slow growth, according to the Washington-based development bank. Even worse, a surge in financial turbulence could cause capital flows into emerging markets to dry up, the World Bank said.

Net capital flows in emerging markets have been declining since last year and stalled to zero in the first half of 2015. The warning comes a little over a week before what investors expect will be the U.S. Federal Reserve’s first increase in its benchmark borrowing rate since 2006. Tightening financial conditions and a slump in commodity prices have hurt resource-rich emerging markets such as Russia and Brazil, a nation which Goldman Sachs has warned may be on the verge of a depression. “Deteriorating external conditions, perhaps resulting from U.S monetary policy tightening or elevated uncertainty about growth prospects in a major emerging market, could potentially combine with domestic factors into a ‘perfect storm’ by sparking a sudden stop in capital inflows to multiple emerging markets,” the World Bank said in the paper.

World Bank President Jim Yong Kim has made it part of the institution’s mission to reduce extreme poverty – living on less than $1.90 a day – to 3% of the world’s population. That milestone will be a challenge to reach “under most plausible scenarios,” the report stated. “In light of the significant global risks going forward, emerging markets urgently need to put in place an appropriate set of policies to address their cyclical and structural challenges and promote growth,” the authors wrote. The report’s authors cite a number of reasons for the slowdown, including weak global trade, the commodities slump as demand from China has weakened, and slowing productivity growth in emerging economies..

Lowballing.

• China’s Illicit Outflows Estimated at $1.4 Trillion Over Decade (BBG)

China’s illicit financial outflows were estimated at almost $1.4 trillion over a decade, the largest amount for any developing nation, as money exited the country through channels including fake documentation on trade deals. The estimate for the 10 years through 2013 was published Wednesday by Global Financial Integrity, a Washington-based group researching cross-border money transfers. The study is based on data reported to the IMF and covers money which GFI believes to be illegally earned, transferred or utilized. Money flowing out of China this year has helped to pump up property markets from Sydney to Vancouver, while prospects for a weaker yuan may drive more cash abroad.

On Wednesday, China cut the currency’s reference rate to the weakest since 2011. The bulk of $7.8 trillion of illicit money that exited developing nations over the 10-year period was disguised as trade through fake invoicing, the report said. That’s a method that was highlighted in China in 2013 when the government cracked down on false documentation that was hiding money flows and distorting the nation’s trade data. While citizens are officially limited to converting $50,000 per person a year, a range of tools exist for getting around that restriction, from pooling quotas to transactions through so-called underground banks.

“..on Tuesday, the IMF joined the New Cold War..”

• The IMF Forgives Ukraine’s Loan To Russia (Michael Hudson)

On December 8, the IMF’s Chief Spokesman Gerry Rice sent a note saying: “The IMF’s Executive Board met today and agreed to change the current policy on non-toleration of arrears to official creditors. We will provide details on the scope and rationale for this policy change in the next day or so.” Since 1947 when it really started operations, the World Bank has acted as a branch of the U.S. Defense Department, from its first major chairman John J. McCloy through Robert McNamara to Robert Zoellick and neocon Paul Wolfowitz. From the outset, it has promoted U.S. exports – especially farm exports – by steering Third World countries to produce plantation crops rather than feeding their own populations. (They are to import U.S. grain.) But it has felt obliged to wrap its U.S. export promotion and support for the dollar area in an ostensibly internationalist rhetoric, as if what’s good for the United States is good for the world.

The IMF has now been drawn into the U.S. Cold War orbit. On Tuesday it made a radical decision to dismantle the condition that had integrated the global financial system for the past half century. In the past, it has been able to take the lead in organizing bailout packages for governments by getting other creditor nations – headed by the United States, Germany and Japan – to participate. The creditor leverage that the IMF has used is that if a nation is in financial arrears to any government, it cannot qualify for an IMF loan – and hence, for packages involving other governments. This has been the system by which the dollarized global financial system has worked for half a century. The beneficiaries have been creditors in US dollars.

But on Tuesday, the IMF joined the New Cold War. It has been lending money to Ukraine despite the Fund’s rules blocking it from lending to countries with no visible chance of paying (the “No More Argentinas” rule from 2001). With IMF head Christine Lagarde made the last IMF loan to Ukraine in the spring, she expressed the hope that there would be peace. But President Porochenko immediately announced that he would use the proceeds to step up his nation’s civil war with the Russian-speaking population in the East – the Donbass. That is the region where most IMF exports have been made – mainly to Russia. This market is now lost for the foreseeable future. It may be a long break, because the country is run by the U.S.-backed junta put in place after the right-wing coup of winter 2014. Ukraine has refused to pay not only private-sector bondholders, but the Russian Government as well.

This should have blocked Ukraine from receiving further IMF aid. Refusal to pay for Ukrainian military belligerence in its New Cold War against Russia would have been a major step forcing peace, and also forcing a clean-up of the country’s endemic corruption. Instead, the IMF is backing Ukrainian policy, its kleptocracy and its Right Sector leading the attacks that recently cut off Crimea’s electricity. The only condition on which the IMF insists is continued austerity. Ukraine’s currency, the hryvnia, has fallen by a third this years, pensions have been slashed (largely as a result of being inflated away), while corruption continues unabated.

Wolfie’s back…

• Tension Grows Between Tsipras, Schaeuble Over IMF Role In Greek Program (Kath.)

Tension between Greece and its lenders grew on Tuesday when German Finance Minister Wolfgang Schaeuble seized on comments by Greek Prime Minister Alexis Tsipras regarding the involvement of the International Monetary Fund in the Greek bailout program. During a TV interview on Monday night, Tsipras indicated that he is not keen on the IMF joining the program because of the demands it is likely to make. “The Fund must decide if it wants a compromise, if it will remain a part of the program,” said Tsipras. “If it does not want to, it should come out publicly and say so.” Speaking on the sidelines of yesterday’s Ecofin meeting, Schaeuble slammed Tsipras’s stance. “It is not in Greece’s interests for it to question the IMF’s involvement in the bailout program,” he said.

“I believe we negotiated at length with Mr Tsipras in July and August,” added Schaeuble. “I also believe that he signed the agreement and then held elections to get a mandate from the Greek people so he could implement what he signed.” The German finance minister also indicated that he has the impression Tsipras is having second thoughts about adopting some of the measures demanded by Greece’s lenders. “They should focus their attention on doing what they have to do,” he said. “As always, they are behind schedule. Maybe questioning the agreement is necessary for domestic reasons; he has a slim majority I have noticed. This may be the easy route but it is not in Greece’s interests.”

Schaeuble’s comments prompted an immediate response from Athens. “We remind that the Greek government is responsible for deciding what is in the country’s interests,” said government spokeswoman Olga Gerovasili. “We expect the German Finance Ministry to separate its stance from the unacceptably tough stance of the IMF,” she added. “Europe should and is able to solve its problems on its own.” Greek government sources believe that Schaeuble’s comments indicate there is a split within the German government over Greece.

…and he’s picking fights wherever he can see them…

• Schaeuble Fights EU Deposit Insurance Plan in Clash With ECB (BBG)

German Finance Minister Wolfgang Schaeuble lashed out at plans for joint European deposit insurance, saying the proposal threatens central-bank independence and may be illegal under European Union treaties. Schaeuble’s comments on Tuesday pitted him against officials from the ECB, Italy and Ireland during a public discussion that underscored disputes holding up shared deposit backing, including how to address the risks of government bonds on banks’ balance sheets. The ECB “strongly” supports the European Commission’s plan to introduce common deposit insurance over eight years, ECB Vice President Vitor Constancio said. Schaeuble countered that sovereign risk weighs down banks in too many nations, which shouldn’t benefit from more joint insurance until that’s been addressed.

In addition, the ECB is breaching the barrier between monetary policy and its new bank-oversight goals, he said. “There must be a clear Chinese wall or at least a division by primary law between banking supervision and monetary policy,” said Schaeuble, who called for a treaty change on the ECB’s role and questioned whether current treaties allow deposit insurance as envisaged. As European banks are generally allowed to treat sovereign debt on their balance sheets as free of default risk, any move to add risk weighting or limit such holdings could cause shocks.

In Tuesday’s debate, Constancio called for working globally to address the sovereign-risk question to avoid market disruptions. The European Commission’s proposal would apply to euro-area countries and any others that want to join. Schaeuble’s calls for risk reduction won more allies than his legal questions about the EU proposal. Finnish Finance Minister Alexander Stubb said his view of the legal issues was “a little bit softer” than Schaeuble’s, though risks needed to be addressed before deposit insurance moves ahead. Dutch Finance Minister Jeroen Dijsselbloem called for concrete plans on how to limit banking risks.

Hours after his identity is suggested in the press, his home is raided. But that has nothing to do with each other?

• Australian Police Raid Sydney Home Of Reported Bitcoin Creator (Reuters)

Australian Federal Police raided the Sydney home on Wednesday of a man named by Wired magazine as the probable creator of cryptocurrency bitcoin, a Reuters witness said. The property is registered under the Australian electoral role to Craig Steven Wright, whom Wired outed as the likely real identity of Satoshi Nakamoto, the pseudonymous figure that first released bitcoin’s code in 2009. More than a dozen federal police officers entered the house, on Sydney’s north shore, on Wednesday after locksmiths broke open the door. When asked what they were doing, one officer told a Reuters reporter that they were “clearing the house”.

The Australian Federal Police said in a statement that the officers’ “presence at Mr. Wright’s property is not associated with the media reporting overnight about bitcoins”. The AFP referred all inquiries about the raid to the Australian Tax Office, which did not immediately respond to requests for comment. The police raid in Australia came hours after Wired magazine and technology website Gizmodo published articles saying that their investigations showed Wright, who they said was an Australian academic, was probably the secretive bitcoin creator. Their investigations were based on leaked emails, documents and web archives, including what was said to be a transcript of a meeting between Wright and Australian tax officials.

The identity of Satoshi Nakamoto has long been a mystery journalists and bitcoin enthusiasts have tried to unravel. He, she or a group of people is the author of the paper, protocol and software that gave rise to the cryptocurrency. The New York Times, Newsweek and other publications have guessed at Nakamoto’s real identity, but none has proved conclusive. Uncovering the identity would be significant, not just to solving a long-standing riddle, but for the future of the currency. And as an early miner of bitcoins, Nakamoto is also sitting on about 1 million bitcoins, worth more than $400 million at present exchange rates, according to bitcoin expert Sergio Demian Lerner.

Governments should not be allowed to blow these bubbles for short-term popularity. They’re far too disruptive for societies.

• Australian Housing Boom Leaves Swath of Empty Properties (BBG)

Australia’s three-year property boom is leaving Melbourne awash with empty homes. In the country’s second-biggest city, growing numbers of local landlords and absent overseas owners have locked up their properties — forgoing rental income as they focus instead on price gains, a report by Prosper Australia said Wednesday. Some 82,724 properties, or 4.8% of the city’s total housing stock, appear to be unused, said the report, which estimated occupancy rates by gauging water usage. In the worst-hit areas, a quarter of all homes are empty, said Prosper. The research group is lobbying for more affordable housing through tax reform. Driven by a wave of Chinese buyers and record-low interest rates, average home prices have soared to about A$700,000 ($505,000) in Melbourne and around A$1 million in Sydney.

But with prices now cooling, the empty accommodation also masks a hidden glut of supply that could worsen any housing slump. “Those properties need to be utilized,” said Catherine Cashmore, author of the Prosper report, Speculative Vacancies. “Having property sitting vacant has a very high cost on the economy. It’s very destructive to our national prosperity.” The study, now in its eighth year, assessed 1.7 million residential properties in and around Melbourne during 2014. Those using less than 50 liters of water a day – the rough equivalent of one shower and a flush of a toilet – were deemed vacant. Sydney, where high-rise blocks have sprouted in the inner suburbs, is also likely to have a vacancy problem, said Cashmore. Data on water usage at individual apartments isn’t as comprehensive in Sydney as in Melbourne, she said.

Surging home prices triggered a boom in high-rise construction in Melbourne’s inner-city suburbs, squashing rental yields and leaving landlords with little incentive to find a tenant, said Cashmore. Analysts at Credit Suisse estimated this year that Chinese buyers were on course to take out 20% of new homes across Australia in 2020, up from the current 15%. While the Prosper report doesn’t identify overseas-owned properties, it said a “significant proportion” of foreign-owned real estate is empty, inflating prices. “There is a wall of money that is trying to get into Australia,” Cashmore said. “To fight those forces is going to be very difficult.”

But what if next year millions more arrive?

• Germany Takes In More Refugees In 2015 Than US Has In Past 10 Years (Quartz)

Germany is on pace to take in one million asylum-seekers this year. In the last 11 months, the country has taken in 964,574 new migrants, including more than 200,000 just in November. According to Die Welt, more than half of the potential refugees—about 484,000 migrants—came from Syria. Germany has accepted the largest number of asylum-seekers of all European countries, according to the UN High Commissioner for Refugees. “Germany is doing what is morally and legally obliged,” chancellor Angela Merkel said in September. “Not more, and not less.” It’s extraordinary also because it’s larger than the total number of refugees that the US—with a population of 320 million to Germany’s 80 million—has accepted in the last 10 years.

Since 2005, the US has accepted a total of 675,982 refugees from regions all over the world, according to data from the Refugee Processing Center, an arm of the US Department of Justice’s Bureau of Population, Refugees and Migration. President Barack Obama in September announced a plan for the US to resettle 10,000 Syrian refugees over the next year, and has recently called on Americans to welcome Syrian families as modern-day pilgrims. But his campaign to show the US can shoulder more of the weight of Europe’s migrant crisis has faced its own challenges: Obama’s refugees plan has drawn criticism from several, mostly Republican state governors who cite security concerns for US citizens after the Nov. 13 terror attacks in Paris. Just last week, Texas filed a lawsuit against the federal government for moving forward with plans to resettle two Syrian families in the state—although in recent years, the state has taken in more refugees than any other in the US.

Think this is what you call opportunism.

• How Germany’s Right-Wing Tabloid Bild Learned to Love Refugees (BBG)

Bild’s 2015 embrace of refugees was as though Fox News had suddenly endorsed President Obama on climate change. Throughout September, Bild stayed upbeat, dramatizing the journeys of Syrians across the continent, rallying behind Merkel, and shaming European leaders such as David Cameron and Viktor Orbán, who closed their borders. If there were a common thread in Bild’s anti-Greece coverage and its pro-refugee coverage, it was a chest-beating confidence in Germany’s superiority to its European neighbors. Bild was one of the first German newspapers to print a photo of Alan Kurdi, the Syrian boy who drowned on Sept. 2; when some readers criticized the choice, Bild stood its ground, running a subsequent issue without any photos whatsoever.

At the same time, Bild developed “Wir Helfen” into a national campaign. It publicized the volunteer efforts of its readers; teamed with German soccer clubs to promote aid for refugees; and published in Arabic a free welcome guide for refugees in Berlin. “In the past, it was not so often that Germany gave a great example to the world,” Diekmann said. “This is a historic situation, and if we don’t take up this challenge, who else will be able to do so?” Few media critics have accepted Bild’s change of heart at face value. “They are really eager to be positive,” said Mats Schönauer, editor of BildBlog, Germany’s main media criticism outlet, which started in 2004 as a site devoted solely to pointing out Bild’s errors. “The question is first, how long does it last? And second, how honest is it?”

To Schönauer, Bild’s refugee coverage reeks of hypocrisy. “For years, they created this fire, and now they’re playing the role of fireman,” he said. Others attribute the coverage to opportunism. “Bild will never put itself against the mood on the ground of the population,” said Wolfgang Storz, former editor of the Frankfurter Rundschau. “If the mood in Germany swings against refugees, then Bild will undoubtedly campaign against refugees.” Diekmann does not dispute that Bild has largely tracked public opinion rather than shaped it. “No medium is strong enough to create a culture that is not actually there,” he said. “From the beginning, it was clear that this atmosphere would not be there all the time.” In early October, as public support for Merkel dipped, Bild’s tone began to waver.

On Oct. 8, Bild published a poll asking readers whether they supported Merkel or Horst Seehofer, the Bavarian politician who has emerged as the biggest critic of her refugee policy. Ninety% of Bild readers supported Seehofer. A few days later, the tabloid ran a story about a meeting in Sumte, a town of 100 people that was due to house 1,000 refugees in an empty office complex. It quoted one citizen who worried that refugees would rape women on Sumte’s poorly lit streets. “The question that lurks behind every question that is asked this evening: Is one allowed to say that one has fears about the large number of refugees? Or does that make one a Nazi?” the paper asked.

Just another day at the office…

• 6 Afghan Migrant Children Drown Off Turkish Coast On Way To Greece (AP)

Turkey’s state-run news agency says six children have drowned after a rubber dinghy carrying Afghan migrants to Greece sank off Turkey’s Aegean coast. The Anadolu Agency said the coast guard rescued five migrants from the sea on Tuesday and were still looking for two others reported missing. The bodies of the children were recovered. Anadolu didn’t report their ages, but said one of them was a baby. The migrants were apparently hoping to make it to the island of Chios from the resort of Cesme despite bad weather. Turkey has stepped up efforts to stop migrants from leaving to Greece by sea. Last week, authorities rounded up around 3,000 migrants in the town of Ayvacik, north of Cesme, who were believed to be waiting to make the journey to the Greek island of Lesbos.

For letting this happen, Brussels should be dismantled as soon as possible. This is a scar on all Europeans, for the rest of their lives.

• 11 Refugees, Including 5 Children, Drown Near Greek Island, 13 Missing (GR)

Eleven dead, including five children, is the latest toll in the ongoing inflow of refugees on Greek islands near the Turkish coasts. A Frontex boat received a call on Tuesday night about dozens of people in the water northeast of Farmakonisi island. A coast guard rescue boat and a Greek Navy gunboat rushed on the spot and rescued 26 people (17 men, 5 women and 4 children). The rescue team pulled out of the water five children, four men and two women dead, while the survivors said that there are 13 people missing. They said there were 50 passengers on the wooden boat that capsized, despite the fact that the weather conditions were good. A rescue mission is taking place in the area to locate the missing persons.

Plunging Commodities Interfere With The New World Order

Dec 082015

December 8, 2015 Posted by Raúl Ilargi Meijer at 7:17 pm Finance Tagged with: Anglo, CIA, commodities, Congo, copper, geopolitics, iron ore, MI5, miners 8 Responses »

Poached baby gorilla, Virunga Park

Anglo American, a British company, and one of the world’s biggest miners, and a ‘producer’ (actually just a miner, how did those two terms ever get mixed up?!) of platinum (world no. 1), diamonds, copper, nickel, iron ore and coal, said today it would scrap dividends AND fire 85,000 of it 135,000 global workforce (that’s 63%!).

Anglo is just the first in a long litany line we’ll see going forward. Commodities ‘producers’ are being completely wiped out, hammered, killed, murdered. They’ve been able to hedge their downside risks so far, but now find they can’t even afford the price of the hedges (insurance) anymore. And then there’s all the banks and funds that financed them.

And they’ve all been gearing up for production increases too, with grandiose plans and -leveraged- investments aiming for infinity and beyond. You know, it’s the business model. 2016 will be a year for the record books.

Just check this Bloomberg graph for copper supply and demand as an example. How ugly would you like it today?

And what’s true for copper goes for the whole range of raw materials. Because China went from double-digit growth to shrinking imports and exports in pretty much no time flat. And China was all they had left.

Iron ore is dropping below $40, and that’s about the break-even point. Of course, oil has done that quite a while ago already. It’s just that we like to think oil’s some kind of stand-alone freak incident. It is not. With oil today plunging below $37 (down some 15% since the OPEC meeting last week), it doesn’t matter anymore how much more efficient shale companies can get.

They’re toast. They’re done. And with them are their lenders. Who have hedged their bets too, obviously, but hedging has a price. Or else you could throw money at any losing enterprise.

But there’s another side to this, one that not a soul talks about, and it has Washington, London and Brussels very worried. Here goes:

These large mining -including oil- corporations most often operate in regions in the world that are remote and located in countries with at best questionable governments (the corporations like it like that, it’s how they know who to bribe to be able to rape and pillage).

The corporations de facto form a large part of the US/UK/EU political/military control system of these areas. They work in tandem with the CIA, MI5, the US and UK military, to keep the areas ‘friendly’ to western industries and regime.

This has caused unimaginable misery across the globe, in for instance (a good example) the Congo, one of the world’s richest regions when it comes to minerals ‘we’ want, but one of the poorest areas on the planet. No coincidence there.

Untold millions have died as a result. ‘We’ have done a lot more damage there than we are presently doing in Syria, if you can imagine. And many more millions are forced to live out their lives in miserable circumstances on top of the world’s richest riches. But that will now change.

Thing is, with the major miners going belly up, ‘our’ control of these places will also fade. Because it’s all been about money all along, and the US won’t be able to afford the -political and military- control of these places if there are no profits to be made.

They’ll be sinkholes for military budgets, and those will be stretched already ‘protecting’ other places. The demise of commodities is a harbinger of a dramatically changing US position in the world. Washington will be forced to focus on protecting it own soil, and move away from expansionist policies.

Because it can’t afford those without the grotesque profits its corporations have squeezed out of the populations in these ‘forgotten’ lands. That’s going to change global politics a lot.

And it’s not as if China will step in. They can’t afford to take over a losing proposition; the Chinese economy is not only growing at a slower pace, it may well be actually shrinking. Beijing’s new reality is that imports and exports both are falling quite considerably (no matter the ‘official’ numbers), and the cost of a huge expansion into global mining territory makes little sense right now.

With the yuan now part of the IMF ‘basket‘m Beijing can no longer print at will. China must focus on what happens at home. So must the US. They have no choice. Other than going to war.

And, granted, given that choice, they all probably will. But the mining companies will still be mere shells of their former selves by then. There’s no profit left to be made.

This is not going to end well. Not for anybody. Other than the arms lobby. What it will do is change geopolitics forever, and a lot.

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