Dec 082015
 
 December 8, 2015  Posted by at 10:42 am Finance Tagged with: , , , , , , , , ,  


NPC Tank truck with plow clearing snow, Washington, DC 1922

Commodities Rout Deepens As Chinese Trade Data Signal Weaker Demand (Guardian)
China November Exports Down -6.8%, Imports -8.7% (Reuters)
Anglo American Scraps Dividend As Shares Fall 71% So Far This Year (BBG)
OPEC Forces Re-Rating Of Oil Majors (BBG)
Peter Schiff: ‘The Whole Economy Has Imploded; Collapse Is Coming’ (SHTF)
We Are Shrinking! The Neglected Drop In Gross Planet Product (VoxEU)
Beijing Issues First-Ever Red Alert for Hazardous Smog (WSJ)
Euro Regime Is Working Like A Charm For France’s Marine Le Pen (AEP)
EU Is In Danger And Can Be Reversed: European Parliament’s Schulz (Reuters)
Tsipras Says IMF Behavior In Greek Crisis Not Constructive (Reuters)
Greece’s Five Ticking Time Bombs (BBG)
New Zealand Named The World’s Most Ignorant Developed Country (NZH)
Albuquerque Revises Approach Toward Homeless, Offers Them Jobs (NY Times)
Swedish Legal Watchdog Rejects Proposal For Border Controls (Reuters)
Escapism Magazine Devotes Whole Issue To Reality Of Refugee Crisis (Guardian)

Huh? “Analysts were unsure if the numbers signalled a possible improvement in Chinese domestic demand..”

Commodities Rout Deepens As Chinese Trade Data Signal Weaker Demand (Guardian)

The accelerating rout in commodity prices has piled pressure on energy and resources shares in Asia Pacific amid more signs of slowing demand from China. Although oil prices pushed back on Tuesday from seven-year lows, stock markets around the region felt the pain from uncertainty about global growth and the likely rise in US interest rates later this month. The Nikkei index in Japan was down almost 1% on Tuesday and the Shanghai Composite and Hang Seng indices were down more 0.9% and 1.6% respectively. In resource-rich Australia, the ASX/S&P200 benchmark had a volaltile day but bears had the upper hand by the afternoon with the index off 0.91% at the close with the big oil and gas and mining companies bearing the brunt.

“Beyond the December hike, investors are concerned about the lack of Chinese demand which is acting as a millstone around the neck of risky assets and most investors will stay away until they see a clearer direction on rates,” said Cliff Tan, east Asian head of global markets at Bank of Tokyo-Mitsubishi UFJ in Hong Kong. Data showed on Tuesday that China’s exports fell by a more-than-expected 6.8% in November from a year earlier, their fifth straight month of decline. Imports fell 8.7%, which was not as much as expected but enough to signal continued weak demand from the world’s second biggest economy.

Analysts were unsure if the numbers signalled a possible improvement in Chinese domestic demand, which has been a key factor in driving world commodity prices to multi-year lows. “The big picture hasn’t really changed that much. The US is doing okay, but the problems with emerging markets are really quite big,” said Kevin Lai, chief economist Asia Ex-Japan at Daiwa Capital Markets in Hong Kong. “Imports have been slumping for more than a year now, so the year-on-year figures are benefiting from a much lower base, which statistically we should expect. But I’m not so sure the number today reflects a real fundamental change for the better in import demand.”

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“While some market watchers have pointed the blame squarely on China for this year’s global trade slowdown, the latest data highlighted weak demand globally..”

China November Exports Down -6.8%, Imports -8.7% (Reuters)

China’s trade performance remained weak in November, casting doubt on hopes that the world’s second-largest economy would level off in the fourth quarter and spelling more pain for its major trading partners. The sluggish readings will reinforce expectations of economists and investors that the government will have to do more to stimulate domestic consumption in coming months given persistent weakness in global demand. Exports fell a worse-than-expected 6.8% from a year earlier, their fifth straight month of decline, while imports tumbled 8.7%, their 13th drop in a row. Imports did not slide as much as some economists had feared, but analysts were unsure if that signaled a possible improvement in soft Chinese domestic demand, which has been a key factor in driving world commodity prices to multi-year lows.

“The big picture hasn’t really changed that much. The U.S. is doing okay, but the problems with emerging markets are really quite big,” said Kevin Lai, chief economist Asia Ex-Japan at Daiwa Capital Markets in Hong Kong. “Imports have been slumping for more than a year now, so the year-on-year figures are benefiting from a much lower base, which statistically we should expect. But I’m not so sure the number today reflects a real fundamental change for the better in import demand.” To be sure, China imported more copper, iron ore, crude oil, coal and soybeans in November by volume than in the preceding month, preliminary data from the General Administration of Customs showed on Tuesday. But analysts said opportunistic Chinese buyers may have merely been taking advantage of a fresh slump in commodity prices, and will likely continue to export large quantities of finished products such as steel and diesel fuel because demand is not strong enough at home.

By value, China’s imports from the United States, the European Union and Japan all dropped, and in the case of Australia by a double-digit rate. While some market watchers have pointed the blame squarely on China for this year’s global trade slowdown, the latest data highlighted weak demand globally, with China’s shipments to every major destination, except South Korea, declining year-on-year. “China’s trade performance remains weak, as the trade value is likely to drop 8% for the whole year of 2015, versus an increase of 3.7% in 2014, clearly reflecting a de-leveraging process in the manufacturing sector that has dragged down demand for commodities,” Zhou Hao at Commerzbank in Singapore said.

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Miners hurt.

Anglo American Scraps Dividend As Shares Fall 71% So Far This Year (BBG)

Anglo American scrapped its dividend for the first time since 2009, announced further spending reductions and plans to consolidate its business units to three from six as it accelerated a fight against a collapse in commodities. The company will suspend its payouts for the second half of 2015 and for 2016, it said in a statement Tuesday. Anglo is abandoning its practice of steadily increasing the dividend in favor of a system that allows the payment to rise and fall with the company’s profits, known as a dividend payout ratio. The producer reduced spending forecasts for 2015 to 2017 by $2.9 billion and increased the amount it plans to raise from asset sales to $4 billion from $3 billion, with its phosphates and niobium businesses confirmed for disposal, it said.

Anglo expects impairments of $3.7 billion to $4.7 billion because of weak prices and asset closures. “We will be consolidating our six business unit structures into three –De Beers, industrial metals and bulk commodities – providing further opportunity to reduce the cost burden on our business,” CEO Mark Cutifani said in the statement. Cutifani is seeking to turn around the company’s fortunes in the face of metal prices at the lowest in at least six years. It has sold assets and cut jobs to preserve cash as the shares tumbled 70% this year, the second-biggest decline in the U.K.’s FTSE 100 Index. The last time Anglo cut its dividend, during the depths of the global financial crisis in 2009, the shares plunged 17% in one day.

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Downgrades for all.

OPEC Forces Re-Rating Of Oil Majors (BBG)

For months, many executives at the world’s largest oil producers have been talking about prices staying lower for longer. After OPEC’s decision to keep pumping full pelt that could become lower for even longer. Even before Friday, the prolonged slump in crude had forced analysts to cut their earnings-per-share estimates for the world’s 10 largest integrated oil companies in recent weeks. With oil dropping to the lowest in more than six years after the OPEC meeting on Friday, further downgrades are probably on the way. “A potential OPEC cut was the last source of hope for the bulls near term,” Aneek Haq with Exane BNP Paribas said Dec. 4.

“The oil majors have already started to underperform the market over the past few weeks, but this now coupled with earnings downgrades and valuations that imply $70 a barrel should put further pressure on share prices.” Mean adjusted 2016 EPS estimates for Exxon Mobil and Shell have been cut by more than 8 cents over the past month, according to data compiled by Bloomberg. EPS projections for Total, Europe’s second-biggest oil company, and Repsol are lower for 2016 than those for this year. Those estimates assume a much higher price than the $41.06 a barrel that Brent traded at as of 8:19 a.m. in London on Tuesday. Oswald Clint at Sanford C. Bernstein has based his EPS estimates for oil majors at a Brent price of $60 a barrel. Alexandre Andlauer at AlphaValue SAS has assumed a price of $63.

“The re-rating of the oil companies downwards will accelerate now,” Andlauer said Dec. 7 by phone from Paris. “Valuations will have to drop.” Shell’s B shares, the most actively traded, dropped 4.6% on Monday, the most in more than three months. BP dropped 3.4%, while the benchmark FTSE 100 Index declined 0.2%. “The lower-for-longer scenario that oil companies are predicting is going to become lower-for-even-longer,” said Philipp Chladek, a London-based oil sector analyst with Bloomberg Intelligence. “We will see some revisions in EPS forecasts in the near future because most forecasts are assuming an oil price recovery during 2016. Many will be taking that out now.”

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“..we have to come to terms with paying the bill..”

Peter Schiff: ‘The Whole Economy Has Imploded; Collapse Is Coming’ (SHTF)

Peter Schiff continues to argue that the economy is on a downhill trajectory and this time there’ll be no stopping it. All of the emergency measures implemented by the government following the Crash of 2008 were merely temporary stop-gaps. The light at the end of the tunnel being touted by officials as recovery, Schiff has famously said, is actually an oncoming train. And if the forecast he laid out in his latest interview is as accurate as those he shared in 2007, then the the train is about to derail.

We’re broke. We’re basically living off of debt. We’ve had a huge transformation of the American economy. Look at all the Americans now on food stamps, on disability, on unemployment. The whole economy has imploded… the bottom hasn’t dropped out yet because we’re able to go deeper into debt. But the collapse is coming.

Fundamentally, America is worse off now than it was pre-crash. With the national debt rising unabated and money being printed out of thin air without reprieve, it is only a matter of time. Schiff notes that while government statistics claim Americans are saving again and consumers seem to be spending, the average Joe Sixpack actually has a negative net worth. But most people don’t even realize what’s happening:

I read a statistic… The average American has less than a $5000 net worth… it’s pathetic… we’re basically broke… but in fact it’s much less… If you actually took the national debt and broke it down per capita, the average American has a negative net worth because the government has borrowed in his name more than the average American is able to save.

What’s happening is pretty much what we would anticipate. I don’t see from the data any real economic recovery, certainly not in the United States. We’re spending more money, but it’s not because we’re generating more wealth. We’re generating more debt. We’re using that borrowed money to consume and so temporarily it feels that we’re wealthier because we get to spend all that money… but we have to come to terms with paying the bill. The bills are going to come due. Right now interest rates are being kept at zero which makes it possible to service the debt even though it’s impossible to repay it… at least we can service it. But once interest rates go up then we can’t even service it let alone repay it. And then the party is going to come to an end.

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Its own data makes the IMF’s words look silly.

We Are Shrinking! The Neglected Drop In Gross Planet Product (VoxEU)

The analysis and forecasts of the IMF are well covered in the press. This column deals with a less noted development in the data provided by the IMF, namely the nominal decrease in Gross Planet Product. Since the IMF forecast both positive growth and positive inflation, the nominal shrinkage of GPP puts into question the consistency of the IMF World Economic Outlook data and forecasts. Presenting the October 2015 IMF World Economic Outlook, Maurice Obstfeld (2015) identified the fall of commodity prices as one of the powerful forces shaping the outlook for the world economy.

The strength of this force, however, is underestimated by the official forecasts in the IMF’s flagship publication. As illustrated in Figure 1 the IMF world economic outlook database reports a reduction of Gross Planet Product (GPP) for the year 2015 by -$3,8 trillion (-4.9%). A nominal reduction of GPP of this size has occurred only once since 1980 (the starting year of the IMF database), namely at the start of the Great Recession when GPP contracted by -5.3%. Table 1 illustrates that all previous contractions of nominal GPP are associated with major crises in the world economy.

Figure 1. Gross Planet Product at current prices (trillions of dollars, 1980 – 2015)

Source: IMF World Economic Outlook Database, October 2015.

Table 1. Years with nominal contractions of GPP (1980-2015)

Source: IMF World Economic Outlook Database, October 2015.

The reduction at current prices is especially noteworthy in view of the official IMF forecasts that set real economic growth at 3.1% and planetary inflation at 3.3%. Taken at face value these forecasts imply a growth rate of GPP of + 6.5 %. By implication the IMF is either too optimistic about real growth, too optimistic about the avoidance of deflation or too optimistic about both these factors.

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Close factories?!

Beijing Issues First-Ever Red Alert for Hazardous Smog (WSJ)

Beijing’s residents have long wondered: Just how bad do the capital’s skies have to get before the government issues an emergency red alert? The serially ‘airpocalypse’-stricken city has in the past resisted issuing such an alert, which requires that authorities implement a series of smog-combating measures. Among other steps, under a red alert half of the city’s cars are ordered off the streets, the government recommends that schools be shuttered and outdoor construction must come to a halt. Such alerts are — in theory at least — to be issued when authorities forecast an air-quality index of above 300 for at least three consecutive days. China’s air-quality index has a maximum reading of 500, or what the government calls “severely polluted.”

On Monday, Beijing issued a red alert for the first time. The alert goes into effect Tuesday morning, with its environmental protection bureau saying that bad air was expected to last until Thursday, Dec. 10. According to an analysis released earlier this year, air pollution could prematurely kill more than 250,000 Chinese residents in major cities. Greenpeace campaigner Dong Liansai said that greater scrutiny from authorities, as well as public pressure, had likely helped spur Monday’s decision. “The cost of issuing a red alert is really high for the city, so officials weren’t willing to do it so easily,” Mr. Dong said. “But everyone has been talking about the issue lately and wondering why Beijing hasn’t issued it before, even during the really bad spells of smog.”

Last week, high concentrations of smog in Beijing at times made it seem like an eerie, artificial dusk had descended on the nation’s capital, with pollution across the city breaching the government’s official air quality index. Photos of the unnatural pall that swallowed up buildings across town went viral on social media, with even normally more restrained state media outlets such as national broadcaster China Central Television giving wide coverage to the spectacle.

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“The Socialist Party was reduced to 15pc of what was once its core constituency, and can no longer make any plausible claim to be the voice of the French working class.”

Euro Regime Is Working Like A Charm For France’s Marine Le Pen (AEP)

France is trapped in an economic slump that is hauntingly reminiscent of the inter-war years from 1929 to 1936 under the Gold Standard. Each tentative rebound proves to be a false dawn. The unemployment rate has continued to climb since the Lehman crisis, in stark contrast to Germany, Britain and the US. It jumped by 42,000 in October to an 18-year high of 10.6pc. The delayed political fuse has finally detonated. Marine Le Pen’s Front National – these days a blend of nationalist-Right and welfare-Left – swept half the communes of France in the first round of regional elections over the weekend. The Front won 55pc of voters classified as workers (ouvriers). The Socialist Party was reduced to 15pc of what was once its core constituency, and can no longer make any plausible claim to be the voice of the French working class.

“Nothing has been done about unemployment despite all the promises. Nobody has been listening to the distress,” said Professor Brigitte Granville, from Queen Mary University of London. Mrs Le Pen has filled the vacuum. She has abandoned the free-market views of her father, party founder Jean-Marie Le Pen, who once espoused “Reaganomics” and vowed to shrink the state. She is eating into the Socialist base from the Left, vowing to defend the French welfare model against the “neo-liberals” and to defeat the “dictatorship of the markets”. She calls globalisation the “law of the jungle” that allows multinationals to play off cheap labour in China against French labour Her plans include a national industrial strategy that swats aside EU competition law, as well as a cut in the retirement age to 60, and a “realignment of taxation against capital and in favour of workers”.

Pierre Gattaz, head of the employers federation MEDEF, calls it a radical agenda stolen from the Left that would destroy France. Yet it clearly makes a heady brew for voters when mixed with nationalist identity politics. Mrs Le Pen once told The Telegraph that her first act in the Elysee Palace would be to order the treasury to draw up plans for a restoration of the French franc. “The euro ceases to exist the moment that France leaves. What are they going to do about it, send in tanks?” she said. Professor Jacques Sapir, from l’École des hautes études (EHESS) in Paris, says the Front National made its biggest strides in regions that have suffered the full force of de-industrialisation and the “globalisation shock”. Many of these areas are in the centre of the country, or in Burgundy and Lorraine, or parts of Normandy and Picardy, that are not key battlegrounds of France’s immigration and culture wars.

Prof Sapir said French industry is slowly being hollowed out. It is a drip-drip effect of closures – typically hitting 150 or 200 workers at a time – that slips below the radar screen of the national press. “These are the regions of rural misery,” he said. Prof Granville said there is no doubt that France’s problems are home-grown. It is entangled in a thicket of unworkable laws. There are 383 taxes, of which 50 cost more to enforce than they yield. The labour code is more than 3,000 pages, acting as a gale-force headwind against job creation. Yet monetary union has played its part, too. The eurozone’s twin policies of fiscal and monetary contraction from 2011 to 2014 aborted the recovery and led to a deep recession that went on long enough to cause lasting economic damage through labour “hysteresis”.

Prof Granville said there is another twist. France and Germany moved in radically different directions after the launch of the euro. While Paris introduced the 35-hour working week, Berlin pushed through the Hartz IV wage squeeze and an internal devaluation within EMU – a beggar-thy-neighbour strategy. The result is that France has lost 20pc in labour cost competitiveness. It had a current account surplus of 2.5pc of GDP at the start of the last decade. It is now bleeding national wealth slowly – as is Britain, for different reasons – with a cyclically-adjusted deficit of 1.5pc. She compared it to the slow torture France endured in the early 1930s under the Gold Standard, stoically accepting the “500 deflation decrees” of premier Pierre Laval. The dam broke in 1936 with the election of spurned outsiders, then the Front Populaire.

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Reality bites.

EU Is In Danger And Can Be Reversed: European Parliament’s Schulz (Reuters)

The European Union is at risk of falling apart and supporters must fight to keep it, the head of the European Parliament said in a German newspaper interview. Martin Schulz told Die Welt’s Tuesday edition that the EU was in danger and that there were forces trying to pull it apart. He was responding to a recent warning from Jean Asselborn, Luxembourg’s foreign affairs and migration minister, that the EU might break apart, “No one can say whether the EU will still exist in this form in 10 years’ time. If we want that then we need to fight very hard for it,” Schulz said. He was not specific about what was threatening the EU, but much of the interview was focused on the migrant crisis, which has stretched Europe’s unity and tolerance during the year.

Schulz said that the EU was not without alternatives and “could of course be reversed”, adding that other options including a Europe in which nationalism, borders and walls were prevalent. “That would be disastrous because that kind of Europe has repeatedly led our continent into catastrophe,” he added. Divisions in the EU over the migrant crisis are rife, notably between German Chancellor Angela Merkel, who has led efforts to take in more Syrians, and leaders in the formerly Communist East who oppose EU schemes to make them take in some asylum seekers. And Europe’s passport-free Schengen zone looks under threat too, with some countries re-introducing border controls.

Last Thursday Greece asked for European help to secure its borders and care for crowds of migrants, defusing threats from EU allies to bar it from Schengen if it failed to get control. Schulz said no country could single-handedly tackle challenges like migration, adding that this was only possible together as the EU.

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And now debt relief is no longer important?!

Tsipras Says IMF Behavior In Greek Crisis Not Constructive (Reuters)

Greek Prime Minister Alexis Tsipras said on Monday the IMF was not playing a constructive role in Greece’s bailout and should make up its mind whether it wants to stay in the program. He accused the Washington-based global lender of making unrealistic demands both on Greece for tough reforms and on its euro zone partners for debt relief beyond what they can accept. “This is a stance that cannot be called constructive in this process,” the leftist leader said in a television interview. “The Fund must decide if it wants to compromise, if it will stay in the program,” Tsipras said. “If it does not want that compromise, it should say so publicly.” The IMF has taken the hardest line in demanding pension reform with benefit cuts, and a far-reaching liberalization of Greece’s labor market.

It has also said European governments need to grant Athens debt relief on a scale they have so far been unwilling to consider – including a possible 30-year debt service holiday – to make the public debt mountain sustainable. The IMF has not disbursed any aid to Greece since August 2014 under a previous program due to expire next March. Athens defaulted on an IMF loan repayment in June but has since made up the arrears after receiving a third bailout from euro zone creditors. An IMF spokesman said last week the Fund would decide whether to co-finance the new bailout after the first review of compliance with the program, expected early next year, and in light of how much debt relief Greece receives.

Tsipras acknowledged that it was important for creditor countries such as Germany and Finland for the IMF to stay in the program to ensure discipline. But he said Europe had the expertise to manage such programs on its own. The Fund was not being helpful by making reform demands that Greece’s political system and society could not bear, “and by going to the (EU) partners demanding solutions and proposals on debt sustainability which they know our partners cannot accept”.

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“Rather than pushing to write off some of the face value of the debt – a “haircut,” in bond market jargon – Greece’s government is likely to accept delayed repayment of principal..”

Greece’s Five Ticking Time Bombs (BBG)

Remember the Greek crisis? Last time we checked in, a newly mandated Greek government reached an agreement with creditors and the country was on its way to recovery, or at least stability. Well, not exactly. Several days in Athens spent talking with investors, business leaders and government officials last week made it clear to me that the chances of a fatal misstep remain high. While Prime Minister Alexis Tsipras got approval for his 2016 budget – narrowly, after 153 lawmakers backed the budget, with 145 parliamentarians voting against and two abstentions – the challenges ahead make his previous Houdini acts (especially ignoring the result of his own referendum) look easy. The budget calls for selling state-owned assets, reforming public-sector wages, dealing with bad loans at the nation’s banks and fixing a broken pensions system. Any one of these could prove unpalatable to the Greek parliament and trigger a renewed crisis. Trying to pin officials down on precise dates for implementing these reforms is an exercise in futility. So here are five ticking time bombs that lie ahead for Greece in the coming weeks.

1 ) NON-PERFORMING LOANS – The percentage of Greek loans that aren’t being repaid, including mortgages, consumer debt and company loans, is more than 48%, according to an October report by the European Central Bank. No wonder Greek bank stocks have lost 95% of their value this year.

2) PENSION REFORM – Everyone agrees that with Greek unemployment averaging more than 25% this year, the current pensions system is unsustainable. There aren’t enough people paying in, and a jobless rate that’s been above 20% for more than four years risks creating an underclass of people who’ve never contributed and will never qualify. Many households are currently dependent on the pension income of a single family member to stay financially afloat.

3) PRIVATIZATIONS – In July, the government promised a “significantly scaled-up privatization program” to generate 50 billion euros ($54 billion) of proceeds. Thus far, there’s little evidence of progress, although officials insist that agreements on selling ports and local airports are on the verge of completion.

4) CAPITAL CONTROLS AND THE BANKS – An American I met in Athens last week was joking about how many Greek bank shares he could buy for the price of a New York subway ticket. But if you’re a Greek taxpayer, it’s not funny; the money the government put into the banks has effectively disappeared. Shares of Piraeus Bank, for example, trade at 65 euro cents; a year ago, they were worth 134 euros apiece. Its market capitalization is 39 million euros, down from more than 8 billion euros.

5) DEBT RELIEF – The good news is that Greek officials are being pragmatic about what’s achievable on the debt-relief front. The not-so-good news is they’ll still want to come back from Brussels with something they can sell to their voters. Rather than pushing to write off some of the face value of the debt – a “haircut,” in bond market jargon – Greece’s government is likely to accept delayed repayment of principal, although it also wants even lower interest rates.

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Too much time on their hands.

New Zealand Named The World’s Most Ignorant Developed Country (NZH)

A new report shows New Zealanders have the wrong idea about the world around them. The Perils of Perception survey shows New Zealand is the most ignorant developed country, with most people misunderstanding the facts that make up our country’s society. The Ipsos-MORI poll showed inequality was one area where New Zealanders got it wrong. Kiwis hugely overestimated the proportion of wealth owned by the wealthiest 1% in the country. The average response on the percentage of wealth controlled by the wealthiest 1% in New Zealand was 50%. In reality, the wealthiest New Zealanders hold 18% of the country’s wealth. Most of the other countries believed the wealthiest 1% should own a smaller proportion of the country’s wealth than they currently do, but New Zealand responded the opposite.

In contrast, when asked what percentage of wealth the wealthiest New Zealanders should hold, Kiwis answered 27%, which is nearly 10 percentage points more than what they control currently. New Zealanders underestimated the rate of obesity or overweight people in the country, guessing 47% of the population was obese or overweight, when in fact 66% fall into those categories. Religion was another area where New Zealanders were off the mark. Asked how many people in 100 they believed did not affiliate with any religion, New Zealanders responded 49 people. In fact, 37 out of 100 people do not affiliate with any religion. New Zealanders overestimated the number of migrants living in the country, saying they believed 37% of the population are migrants. This was the third highest percentage answered to the question by any country. The correct answer was 25%.

The most ignorant country was Mexico, followed by India and Brazil taking second and third place respectively. New Zealand was the most ignorant developed country in fifth place overall.

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Sanity. The dignity of work. What should be obvious and normal has become left field. But we can still do it. Do the obvious. Give people pay for doing what they can see has an effect in their community. It’s not that hard.

Albuquerque Revises Approach Toward Homeless, Offers Them Jobs (NY Times)

Will Cole steered an old Dodge van along a highway access road one recent Tuesday, searching for panhandlers willing to work. Four men waved him away dismissively at his first attempt, turning their backs on the van as it rolled past. By the third stop, though, nine men and one woman had hopped inside. They were homeless. But suddenly, as part of a novel attempt to deal with rising poverty and destitution here, they were city workers for the day. Donning gloves and fluorescent vests, they raked a piece of messy ground by some railroad tracks on the edge of downtown, cleaning up residues of lives that may well have been their own: a soiled burgundy blanket, two Bibles soaked by melting snow, a trail of crushed cans of Hurricane High Gravity Malt Liquor.

For participants, the toil paid off decently: $9 an hour and a lunch of sandwiches, chips and granola bars, enjoyed in a park. For the city, it represented a policy shift toward compassion and utility. “It’s about the dignity of work, which is kind of a hard thing to put a metric on, or a matrix,” Mayor Richard J. Berry said. “If we can get your confidence up a little, get a few dollars in your pocket, get you stabilized to the point where you want to reach out for services, whether the mental health services or substance abuse services — that’s the upward spiral that I’m looking for.”

After a schizophrenic homeless man, James Boyd, was fatally shot by the police last year — prompting protests and calls for reform of the Albuquerque Police Department, a force of 1,000 whose rate of deadly shootings was eight times that of New York’s — this city has sought to recalibrate its approach toward homelessness. While other cities, including New York, Baltimore, Los Angeles and Washington, have tried to clear out homeless camps or move the homeless further into the shadows, this city has decided to move away from the punitive approach that had defined strategies in the past.

It is, in part, the result of an agreement with the Justice Department, which released a blistering review of the use of force by police officers over the years, citing a pattern of violence and mistreatment that disproportionately affected mentally ill people, including many who were living on the streets. For example, training in crisis intervention has become a requirement for police cadets, who must try to find their way out of staged real-life scenarios — encounters with distressed drug addicts, rape victims or suicidal war veterans — without pulling out their guns.

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“The proposal has been prepared in great haste,” the Council wrote, adding that meant the draft text had been poorly prepared. “This is particularly serious because the proposal is similar to martial law.”

Swedish Legal Watchdog Rejects Proposal For Border Controls (Reuters)

The top legal watchdog in Sweden, a major destination for migrants flocking to Europe this year, on Monday rejected a government request for the right to impose tighter border controls and shut a bridge to Denmark. The Swedish Council on Legislation said the centre-left government’s plan resembled martial law and would violate refugees’ right to seek asylum in Sweden. Stockholm imposed temporary border controls in early November, the first in over two decades and a turn-around in its open-doors policy. The country has welcomed almost 160,000 refugees and migrants this year, more per capita than any other European Union country. Its latest step would fast-track a bill giving it the legal right to tighten the border controls and to close down the bridge between Sweden and Denmark if deemed necessary.

“The proposal has been prepared in great haste,” the Council wrote, adding that meant the draft text had been poorly prepared. “This is particularly serious because the proposal is similar to martial law.” The council has no legal mandate to disqualify proposed legislation but it is unusual for Swedish lawmakers to disregard its opinion. However, in a comment to local news agency TT, a government spokesman said it had no plans to withdraw the proposal. “The Council on Legislation makes a different assessment than the government regarding seriousness of the current refugee situation,” said Erik Brom Anderson, State Secretary to Infrastructure Minister Anna Johansson. “The government’s assessment has not changed.”

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Good move.

Escapism Magazine Devotes Whole Issue To Reality Of Refugee Crisis (Guardian)

Escapism magazine, which is distributed to commuters in central London, usually tells readers where they can enjoy exotic holiday destinations, the world’s best beaches and the coolest hotels. But the latest issue of the travel magazine is very different indeed. All 84 pages are dedicated to explaining the refugee crisis. And, in what must rank as a first for a giveaway title, it is entirely free from adverts. It highlights the various refugee crises across the world through a series of graphics, carries features written by refugees about their experiences, and there is a moving report from the Greek island of Lesbos where so many of the refugees from Syria and Afghanistan are currently living in camps.

Escapism’s associate editor, Hannah Summers, says: “For our readers, escapism has been a way to get away with family and friends, to relax on holiday. But, for many, it takes on a much more literal meaning – an escape from poverty and war.” In the magazine, Summers writes: “When I became a travel writer I never expected to cover an issue like this, but I’m grateful for an opportunity that has opened my eyes to an unjust and painful reality that’s also full of courage, humanity and, ultimately, hope. “This crisis affects us all, and we all have a part to play in how it unfolds. There are many ways you can get involved, but the most important thing is that you do get involved. Please, take action today.” A final page calls on readers to join “a kind and big-hearted group of volunteers” to help the refugees in the camp in Calais. For those who do not journey into the central zones of the London tube, much of the magazine’s content can be accessed on the magazine’s website.

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Nov 262015
 
 November 26, 2015  Posted by at 10:46 am Finance Tagged with: , , , , , , , , , ,  


G.G. Bain Scramble for pennies – Thanksgiving, New York Nov 1911

China’s Desperate Commodity Sector Demands State Buy Up Surplus Metals (ZH)
China’s New Silk Road Dream (Bloomberg)
End of EU Border-Free System Could See Euro Fail, Warns Juncker (WSJ)
ECB Alternatives Could Include Penalties On Banks Hoarding Cash (Reuters)
UK Mortgage Lending Hit Seven-Year High In October (Guardian)
Osborne Plans To Eradicate Deficit Dissolve Into Puddle Of Excuses (Bell)
George Osborne Delays The Fiscal Pain But It Will Still Be Ferocious (AEP)
Osborne Quietly Cuts Funding For All Of Britain’s Opposition Parties (Ind.)
Big Banks Accused Of Interest Rate-Swap Fixing In Class Action Suit (Reuters)
Turkish President Erdogan’s Son Major Smuggler Of Illegal ISIS Oil (Engdahl)
How Walmart Keeps an Eye on Its Massive Workforce (Bloomberg)
Fossil Fuel Companies Risk Wasting $2 Trillion Of Investors’ Money (Guardian)
Germany Gives Greece Names Of 10,000 Suspected Tax Dodgers (Guardian)
Greek Residential Property Price Slide Gains Pace In Third Quarter (Reuters)
Dutch Court Rules Migrants’ Right To Food, Shelter Not Unconditional (Reuters)
Good Thing Native Americans Didn’t Treat Pilgrims Like We Treat Syrians (Nevius)

I smell international trouble.

China’s Desperate Commodity Sector Demands State Buy Up Surplus Metals (ZH)

China, which as documented extensively in the past, has clammed down on its unprecedented credit creation now that its debt/GDP is well over 300% and as a result conventional industries are dying a fast and violent death. In fact, months ago we, jokingly, suggested that what China should do, now that it has scared sellers and shorters to death, is to launch QE where it matters – the commodity space. That joke has become a reality according to Reuters, which reports that China’s aluminum and nickel producers have asked Beijing to buy up surplus metal, sources said, the first coordinated effort since 2009 to revive prices suffering their worst rout since the global financial crisis.

The state-controlled metals industry body, China Nonferrous Metals Industry Association, proposed on Monday that the government scoop up aluminum, nickel and minor metals including cobalt and indium, an official at the association and two industry sources with direct knowledge of the matter said. The request was made to the state planner, the National Development and Reform Commission (NDRC). One Reuters source familiar with the producers’ request said the China Nonferrous Metals Industry Association had suggested that the state buys 900,000 tonnes of aluminum, 30,000 tonnes of refined nickel, 40 tonnes of indium, and 400,000 tonnes of zinc. In other words, everything that is plunging because there is simply no end-demand should simply be bought by the state.

And why not: in “developed” countries, the same thing is being done by central banks, only instead of directly “monetizing” metals, the central banks indirectly push up stock prices which is where 70% of household net worth is located. For China, and largely investment driven economy, the same can be said about commodity prices. Furthemore, as reported two months ago, at current commodity prices, more than half of all companies with debt in the space are unable to make even one interest payment using organic cash flow which makes the decision for Beijing moot: either buy up the excess metals or reap the consequences of mass defaults.

Reuters: “In the United States, aluminum smelters have blamed ballooning exports from China for hurting international prices. Nickel prices on the London Metal Exchange, which sets the benchmark for global trade, plunged to their lowest in more than a decade on Monday amid concerns about waning demand from China, the world’s second-largest economy. Few, if any smelters, are making a healthy profit at prices as low as $8,200 per tonne, down almost 60% since last year. Aluminum prices have fallen nearly 30% over the past year.”

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“..about a quarter of all overseas investments and construction and engineering projects undertaken by Chinese companies from 2005 to 2014—worth $246 billion—have been stalled by snafus or failed.”

China’s New Silk Road Dream (Bloomberg)

[..] At home, Beijing is attempting to decrease the economy’s dependence on astronomical levels of credit-driven investment for growth, and that spells tougher times for Chinese construction companies, equipment makers, and other businesses that had gorged on the country’s building boom. A key motivation behind Beijing’s big infrastructure schemes is to find fresh outlets for these companies overseas. China understandably expects that its own companies will take the lead in planning, constructing, and supplying projects it’s also funding. In fact, a study by London-based merchant bank Grisons Peak showed that 70% of the overseas loans it examined from two Beijing policy banks were made on the condition that at least part of the funds be used to purchase Chinese goods.

Even with China’s banks and special funds running full tilt, it’s uncertain where all of the money will come from to finance the Silk Road scheme. A report on Chinese state media says the number of projects under its umbrella has already reached 900, with an estimated price tag of $890 billion. With many projects destined for economically weak countries with dubious governance, China’s money could get lost to corruption or wasted in poorly conceived plans. Chinese companies already have a suspect record of implementing such projects. According to data compiled by the American Enterprise Institute (AEI), about a quarter of all overseas investments and construction and engineering projects undertaken by Chinese companies from 2005 to 2014—worth $246 billion—have been stalled by snafus or failed.

Almost half were in transport and energy—just the sort of projects that will be key to One Belt, One Road. “China is currently trying to create the story of an economic success, and if it has some public failures, that could be damaging to its brand,” says Homi Kharas, deputy director of the Global Economy and Development program at the Brookings Institution. Nor is there any guarantee that China’s cash will win it camaraderie. In Africa, where China has a long record of investment, a Gallup poll released in August showed the approval rating of Beijing’s leaders had dropped among Africans in 7 of the 11 countries included in the survey. “The goodwill expressed at the highest levels doesn’t trickle down into warm sentiments,” says J. Peter Pham, director of the Africa Center at the Atlantic Council, a think tank based in Washington. “Chinese soft power is relatively weak.”

China’s infrastructure bonanza also presents dangers to its own economy. Local governments are jumping on the bandwagon, announcing a slew of projects aimed at connecting their provinces to Silk Road routes. In an April report, HSBC estimated that the projects already planned within China could total $230 billion. That may help sustain growth in the short run but delay the economy’s crucial transition away from investment-led growth, which would lead to even harder times in coming years. In fact, One Belt, One Road is in its essence the export of China’s old growth strategy—using state banks to fund investment by Chinese companies on foreign soil.

None of these concerns is likely to matter in the end. China’s international infrastructure push is, after all, a diplomatic endeavor, one to which the reputation of the state has become intimately tied. “The Chinese are going to work very hard—throw money at any and all problems—to make sure prized ‘belt and road’ projects all work out,” says Derek Scissors, an AEI scholar. That could turn China’s grand Silk Road dreams into an even grander disappointment.

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Not could but will.

End of EU Border-Free System Could See Euro Fail, Warns Juncker (WSJ)

The head of the European Union’s executive said Wednesday that the region’s Schengen border-free system was under threat and warned that if it fails, the single currency could fall with it. Speaking in the European Parliament in Strasbourg about the recent terror attacks in Paris, European Commission President Jean-Claude Juncker acknowledged that the “Schengen system is partly comatose.” “If the spirit of Schengen leaves us…we’ll lose more than the Schengen agreement. A single currency doesn’t make sense if Schengen fails,” he said. “You must know that Schengen is not a neutral concept. It’s not banal. It’s one of the main pillars of the construction of Europe.”

Faced with the biggest migration influx since the aftermath of the World War II and the recent terror attacks in Paris, a number of countries, including Germany, France and others have tightened controls of their borders. Member states are also looking to revise Schengen’s rules to tighten control of the EU’s external border and to change the way the free movement rules apply to asylum seekers. The Schengen Agreement, an arrangement that allows the free movement of European citizens between 26 countries across the continent, is under threat. The Wall Street Journal’s George Downs explains why. Schengen currently has 26 members, including several non-EU countries. It allows freedom of movement across the region and therefore plays a key role in underpinning the EU’s single market of goods, services and labor.

Mr. Juncker said that following the Nov. 13 Paris attacks, European politicians must resist the temptation to “mix up” asylum seekers and terrorists. He said those inciting violence in Europe’s capitals “are the same people who are forcing the unlucky of this planet to flee” Syria and other places. Mr. Juncker called for stepped-up coordination between intelligence agencies—a promise, he said, that had been made in the past but never followed up on. He confirmed the commission would make a proposal in December for an EU-wide border guard system and he pressed lawmakers to toughen the proposed EU passenger name records legislation to include people taking flights within the bloc. EU interior and justice ministers last week demanded this measure be included in the legislation which has been long delayed by the European Parliament.

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Yeah, we know that works…

ECB Alternatives Could Include Penalties On Banks Hoarding Cash (Reuters)

Euro zone central bank officials are considering options such as whether to stagger charges on banks hoarding cash or to buy more debt ahead of the next European Central Bank meeting, according to officials. Little over a week before the meeting to set the ECB’s policy course, numerous alternatives are open, from snapping up the bonds of towns and regions to introducing a two-tier penalty charge on banks that park money with the ECB. Officials, who spoke on condition of anonymity, said that even buying rebundled loans at risk of non-payment has been discussed in preparatory meetings, although such a radical step is highly unlikely for now. The ECB declined to comment. “They are still trying to figure out what will be in the package. A lot of people have different views,” said one official with knowledge of talks that have put ECB president Mario Draghi at loggerheads with sceptical German policy-makers.

“There are some who say you should surprise markets. But you cannot surprise indefinitely. Sooner or later, you are bound to disappoint.” A virtually stagnant euro zone economy and a heightened sense of concern at the ECB sets the backdrop for a series of high-level meetings of central bank officials in Frankfurt that take place this week. “We have deflation, so you have to do something,” said a second person. “How this all looks in a few years, nobody knows.” Yet after many weeks of discussion about what measures are needed to address persistently low price inflation, however, divisions are making it difficult to sign off any package to enhance quantitative easing and rock-bottom interest rates. Failing to do so risks disappointing investors who expect ECB policy setters to bolster a one-trillion-euro plus program of quantitative easing when they meet on December 3, in a move so significant it has been dubbed ‘QE2’.

Draghi has made it clear that he would be willing to extend ECB money printing, now used to buy chiefly government bonds, as well as increase the charge on banks holding money at the ECB – known as the negative deposit rate. In order to soften the impact of this on banks, officials are discussing a split-level rate, a contested step that would impose a higher charge on banks depending on the amount of cash they deposit with the ECB. “It could be combined with a ceiling, so that from a certain point onwards liquidity can only be parked overnight at a stronger rate,” said a second official. “Whether and how to shape a deposit rate cut in December is in discussion.” Any such staggered approach would blunt a straightforward increase in the charge, which would particularly hit banks from Germany or France, who park most with the ECB. Banks hold roughly €170 billion with the ECB in this way.

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Ponzi’s bubble.

UK Mortgage Lending Hit Seven-Year High In October (Guardian)

Britain’s banks lent more money through mortgages in October than at any point since the summer of 2008, figures show, as low interest rates and rising incomes tempted more people into the market. Gross mortgage lending hit £12.9bn during the month, 26% higher than in October 2014 and the highest figure since August 2008, according to the latest data from the British Bankers’ Association (BBA). Mortgage lending for house purchases slowed in the latter half of 2014, but has been growing again this year, and in October there were 77,951 approvals – 21% more than in the same month last year. Remortgaging was up by 34% year on year, at 24,275 approvals. The BBA said the average value of mortgages approved for house purchases was £175,600, while remortgagers typically borrowed £172,800.

Recent months have seen a price war among mortgage lenders, which has led to some of the cheapest deals on record. Borrowers looking to fix their mortgage for five years can pay as little as 2.14%, while those fixing for two years can get a rate as low as 1.15%. Richard Woolhouse, chief economist at the BBA, said: “These statistics show that housing market activity remained strong in October, with gross mortgage borrowing 26% higher than a year ago and at its highest level for seven years. “Consumers remain confident and their incomes are growing. Mortgage rates are at multi-year lows and people are snapping up the competitive deals being offered by banks.” Personal loan rates have also been plummeting, leading to a rise in borrowing, which the Bank of England warned on Tuesday “ultimately might be an issue that the financial policy committee might want to look at fairly carefully”.

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“For the record, yet again: this Chancellor has missed every economic target he ever proclaimed.”

Osborne Plans To Eradicate Deficit Dissolve Into Puddle Of Excuses (Bell)

War is the great distraction. Right or wrong, foolish or wise, it suspends all the usual political and economic rules. Suddenly a chancellor who has spent five and a half years telling us “there is no money” can find ready billions for warfare. Though he might not wish it, George Osborne has been luckier than most. In what passed until recently for normal times, he would have approached today’s Autumn Statement under a black cloud of derision. To follow the tax credits debacle with the worst October borrowing figures in six years is more than just another bit of bad luck. Even in his own, narrow terms, Mr Osborne is bad at his job. Carnage and fear have, reasonably enough, given us other things to worry about. A chancellor’s task in an international crisis is to ensure that his Prime Minister has sufficient funds with which to keep the islands safe.

It is not (or not directly) Mr Osborne’s job to say whether F-35 Stealth aircraft are a lousy buy, or whether increasing billions should be earmarked for a Trident system that could be hacked by a laptop jockey. He just finds the cash. Recently, however, the Chancellor has taken to saying that you can’t have national security without economic security. It isn’t a new proposition, but Mr Osborne tried it for size again during his latest chat with the BBC’s Andrew Marr. Convoluted logic had him claiming, in essence, that you can’t fight terrorism unless he “balances the books”. It was a bold claim, not least because you could turn it on its head. Various police chiefs have stepped up to say that another round of Mr Osborne’s cuts will leave them ill-prepared to deal with events of the sort witnessed in Paris.

How’s that for a “long-term economic plan”? The funding for defence the Chancellor has meanwhile just discovered in the Treasury accounts in large part reinstates cash he has already cut. How’s that for shrewd economic management? The point is that the observation does not just apply to defence. Mr Osborne is improvising, even as his plans to eradicate a budget deficit – it was supposed to be gone by now – dissolve into a pile of excuses. So today, reportedly, he “finds” £3.8 billion to hold a politically-inconvenient winter crisis in NHS England at bay, as though winter has just been discovered. The reality is that the Chancellor is bringing forward one part of the £8.4bn the English NHS was meant to spend a couple of years from now.

And that sum – part of it still devoted to breaking junior doctors – was only supposed to keep the service alive while trusts edge towards insolvency. There is nothing “long-term” about this: it’s ad hoc, another skinned rabbit from a battered hat. Mr Osborne clings to the assumption that the only answer to a big borrowing problem is to cut spending hard and fast. When that doesn’t work, you cut again. If you meanwhile wish to lead the Tory Party and win a general election, you aim for an absurd budget surplus, detrimental to the wider economy, that might give scope for tax cuts circa 2020. And where does this austerity lead? To an £8.2bn government borrowing requirement in October, despite all previous cuts in state spending.

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Ambrose wants to embrace Osborne, but even he finds it hard.

George Osborne Delays The Fiscal Pain But It Will Still Be Ferocious (AEP)

George Osborne has wisely pulled back from a fiscal cliff and a welfare crisis next year but the austerity measures planned until the end of the decade will nevertheless be draconian. Citigroup and RBS both estimate that net retrenchment will be 3.5pc of GDP over the coming three years, roughly what we have already endured since the Lehman crisis. Much of it is from higher taxes – normally the reflex of Labour or the French socialists. This is in stark contrast to the eurozone, where policy is finally on a neutral setting after the bloodbath of 2011-2013. The US is even going into a period of net fiscal stimulus as state and local governments launch a blitz of spending. Unfortunately, Britain needs its bitter medicine. Cyclically-adjusted net borrowing is 3.4pc of GDP this year, the highest in the Western world.

This is courting fate at such a late stage of the economic cycle, leaving no safety margin against an external shock or a global recession. The current account deficit is the worst in the OECD club at 5.1pc of GDP. The country is systematically borrowing from global investors to fund a lifestyle beyond its means. The Bank of England warned in its Stability Report that the deficit leaves the UK vulnerable to a sudden cut-off at any time, if the mood changes. “We’re selling off assets to finance excessive spending,” said Philip Rush from Nomura. “Foreigners may be comfortable to do this now but what happens if the economy rolls over or there is a vote for Brexit?” Plundering the family silver has led to a slow deterioration of Britain’s “net international investment position”, now -25pc of GDP and ever closer to the danger line of 30pc flagged by the IMF.

Fiscal contraction is one way to deal with this, so long as the axe falls on over-consumption, and not on the pockets of spending that boost productivity. Osborne’s latest retreat on welfare ensures that it will not go beyond the correct therapeutic dose and bring the economy to a screeching halt. The lesson from Europe’s double-dip recession is that fiscal overkill is counter-productive, since the contraction of nominal GDP causes the debt ratio to rise even faster. One can only smile at Osborne’s mellifluous suggestion that he can ditch two-thirds of the spending cuts penciled in a recently as March, yet still achieve a budget surplus of £10.1bn by 2019-2020. [..] What Osborne has failed to do yet again in this Autumn Statement is to grasp the nettle of reform and start to sort out the chronic pathologies of the British economy.

That means a shift in the entire tax and regulatory system to reward output, to curb our proclivity to import and to raise the rate of savings and investment. It means a radical assault on Britain’s dire productivity levels, our lack of skills and our bad infrastructure, even if this means that the deficit comes down more slowly in the short run. We know the problems. They are listed in the World Economic Forum’s index of competitiveness. The UK ranks 126 for savings, 63 for maths and science in schools, 62 for days to start a business, 57 for procedures, 44 for government procurement of hi-tech products, 42 for business costs of crime, 33 for work incentives, 30 for quality of roads and so on. What we have is a typical British story: manufacturing stagnation and dismal exports, with economic growth once again reliant on a deeply unhealthy property market. Household debt ratios are about to take off again. We all know how this will end.

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“The UK already spends just a tenth of the European average on funding parties..”

Osborne Quietly Cuts Funding For All Of Britain’s Opposition Parties (Ind.)

The Government has moved to make sharp cuts to state funding to Britain’s opposition parties. So-called “short money”, an annual payment that has been paid to opposition parties since the 1970s, will be cut by 19% subject to parliamentary approval. Short money is not received by parties in Government and was introduced to allow oppositions to “more effectively fulfil their parliamentary functions”. It is generally used to employ parliamentary staff and meet political office costs. The cut will affect Labour the most and also take significant chunks of funding from the SNP, Green Party and smaller regional parties. The cut was not mentioned by George Osborne in his speech to the House of Commons but emerged later when full documentation was released.

“The government has taken a series of steps to reduce the cost of politics, including cutting and freezing ministerial pay, abolishing pensions for councillors in England and legislating to reduce the size of the House of Commons,” the spending review says. “However, since 2010, there has been no contribution by political parties to tackling the deficit. Subject to confirmation by Parliament, the government proposes to reduce Short Money allocations by 19%, in line with the average savings made from unprotected Whitehall departments over this Spending Review.” The payments will then be frozen in cash terms for the rest of the Parliament, removing automatic rises with inflation.

Grants for policy development will also be cut by the same amount. The Government says the cost of short money has risen from £6.9 million in 2010-11 to £9.3 million in 2015-16. Katie Ghose, chief executive of the Electoral Reform Society, which campaigns for democratic reform, said the cut would be likely to damage government accountability. “The decision to cut public funding for opposition parties by 19% is bad news for democracy. The UK already spends just a tenth of the European average on funding parties,” she said. “Short Money is designed to level the playing field and ensure that opposition parties can hold the government of the day to account. This cut could therefore be deeply damaging for accountability.”

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If governments won’t do it…

Big Banks Accused Of Interest Rate-Swap Fixing In Class Action Suit (Reuters)

A class action lawsuit, filed Wednesday, accuses 10 of Wall Street’s biggest banks and two trading platforms of conspiring to limit competition in the $320 trillion market for interest rate swaps. The class action lawsuit, filed in U.S. District Court in Manhattan, accuses Goldman Sachs, Bank of America Merrill Lynch, JPMorgan Chase, Citigroup, Credit Suisse, Barclays, BNP Paribas, UBS, Deutsche Bank, and the Royal Bank of Scotland of colluding to prevent the trading of interest rate swaps on electronic exchanges, like the ones on which stocks are traded. As a result, the lawsuit alleges, banks have successfully prevented new competition from non-banks in the lucrative market for dealing interest rate swaps, the world’s most commonly traded derivative. The banks “have been able to extract billions of dollars in monopoly rents, year after year, from the class members in this case,” the lawsuit alleged.

The suit was brought by The Public School Teachers’ Pension and Retirement Fund of Chicago, which purchased interest rate swaps from multiple banks to help the fund hedge against interest rate risk on debt. The plaintiffs are represented by the law firm of Quinn, Emanuel, Urquhart, & Sullivan LLP, which has taken the lead in a string of antitrust suits against banks. As a result of the banks’ collusion, the suit alleges, the Chicago teachers’ pension and retirement fund overpaid for those swaps. The suit alleged that since at least 2007 the banks “have jointly threatened, boycotted, coerced, and otherwise eliminated any entity or practice that had the potential to bring exchange trading to buyside investors.” “Defendants did this for one simple reason: to preserve an extraordinary profit center,” the lawsuit said.

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Doesn’t seem to be much doubt left on the Turkey-ISIS connection.

Turkish President Erdogan’s Son Smuggler Of Illegal ISIS Oil (Engdahl)

In October 2014 US Vice President Joe Biden told a Harvard gathering that Erdogans regime was backing ISIS with hundreds of millions of dollars and thousands of tons of weapons& Biden later apologized clearly for tactical reasons to get Erdogans permission to use Turkey’s Incirlik Air Base for airstrikes against ISIS in Syria, but the dimensions of Erdogan’s backing for ISIS since revealed is far, far more than Biden hinted. Erdogans involvement in ISIS goes much deeper. At a time when Washington, Saudi Arabia and even Qatar appear to have cut off their support for ISIS, they remaining amazingly durable. The reason appears to be the scale of the backing from Erdogan and his fellow neo-Ottoman Sunni Islam Prime Minister, Ahmet Davutoglu.

The prime source of money feeding ISIS these days is sale of Iraqi oil from the Mosul region oilfields where they maintain a stronghold. The son of Erdogan it seems is the man who makes the export sales of ISIS-controlled oil possible. Bilal Erdogan owns several maritime companies. He has allegedly signed contracts with European operating companies to carry Iraqi stolen oil to different Asian countries. The Turkish government buys Iraqi plundered oil which is being produced from the Iraqi seized oil wells. Bilal Erdogans maritime companies own special wharfs in Beirut and Ceyhan ports that are transporting ISIS smuggled crude oil in Japan-bound oil tankers.

Girsel Tekin, vice-president of the Turkish Republican Peoples Party, CHP, declared in a recent Turkish media interview: “President Erdogan claims that according to international transportation conventions there is no legal infraction concerning Bilal’s illicit activities and his son is doing an ordinary business with the registered Japanese companies, but in fact Bilal Erdogan is up to his neck in complicity with terrorism, but as long as his father holds office he will be immune from any judicial prosecution.” Tekin adds that Bilal’s maritime company doing the oil trades for ISIS, BMZ Ltd, is a family business and president Erdogans close relatives hold shares in BMZ and they misused public funds and took illicit loans from Turkish banks.

French geopolitical analyst, Thierry Meyssan [..] claims that the Syria strategy of Erdogan was initially secretly developed in coordination with former French Foreign Minister Alain Juppe and Erdogans then Foreign Minister Ahmet Davutoglu, in 2011, after Juppe won a hesitant Erdogan to the idea of supporting the attack on traditional Turkish ally Syria in return for a promise of French support for Turkish membership in the EU. France later backed out, leaving Erdogan to continue the Syrian bloodbath largely on his own using ISIS.

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1984 as the new normal.

How Walmart Keeps an Eye on Its Massive Workforce (Bloomberg)

In the autumn of 2012, when Walmart first heard about the possibility of a strike on Black Friday, executives mobilized with the efficiency that had built a retail empire. Walmart has a system for almost everything: When there’s an emergency or a big event, it creates a Delta team. The one formed that September included representatives from global security, labor relations, and media relations. For Walmart, the stakes were enormous. The billions in sales typical of a Walmart Black Friday were threatened. The company’s public image, especially in big cities where its power and size were controversial, could be harmed. But more than all that: Any attempt to organize its 1 million hourly workers at its more than 4,000 stores in the U.S. was an existential danger.

Operating free of unions was as essential to Walmart’s business as its rock-bottom prices. OUR Walmart, a group of employees backed and funded by a union, was asking for more full-time jobs with higher wages and predictable schedules. Officially they called themselves the Organization United for Respect at Walmart. Walmart publicly dismissed OUR Walmart as the insignificant creation of the United Food and Commercial Workers International (UFCW) union. “This is just another union publicity stunt, and the numbers they are talking about are grossly exaggerated,” David Tovar, a spokesman, said on CBS Evening News that November.

Internally, however, Walmart considered the group enough of a threat that it hired an intelligence-gathering service from Lockheed Martin, contacted the FBI, staffed up its labor hotline, ranked stores by labor activity, and kept eyes on employees (and activists) prominent in the group. During that time, about 100 workers were actively involved in recruiting for OUR Walmart, but employees (or associates, as they’re called at Walmart) across the company were watched; the briefest conversations were reported to the “home office,” as Walmart calls its headquarters in Bentonville, Ark.

The details of Walmart’s efforts during the first year it confronted OUR Walmart are described in more than 1,000 pages of e-mails, reports, playbooks, charts, and graphs, as well as testimony from its head of labor relations at the time. The documents were produced in discovery ahead of a National Labor Relations Board hearing into OUR Walmart’s allegations of retaliation against employees who joined protests in June 2013. The testimony was given in January 2015, during the hearing. OUR Walmart, which split from the UFCW in September, provided the documents to Bloomberg Businessweek after the judge concluded the case in mid-October. A decision may come in early 2016.

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But so do ‘renewable’ energy companies.

Fossil Fuel Companies Risk Wasting $2 Trillion Of Investors’ Money (Guardian)

Fossil fuel companies risk wasting up to $2tn (£1.3tn) of investors’ money in the next decade on projects left worthless by global action on climate change and the surge in clean energy, according to a new report. The world’s nations aim to seal a UN deal in Paris in December to keep global warming below the danger limit of 2C. The heavy cuts in carbon emissions needed to achieve this would mean no new coal mines at all are needed and oil demand peaking in 2020, according to the influential thinktank Carbon Tracker. It found $2.2tn of projects at risk of stranding, ie being left valueless as the market for fossil fuels shrinks. The report found the US has the greatest risk exposure, with $412bn of projects that could be stranded, followed by Canada ($220bn), China ($179bn) and Australia ($103bn).

The UK’s £30bn North Sea oil and gas projects are at risk, the report says, despite government efforts to prop up the sector. Shell, ExxonMobil and Pemex are the companies with the greatest sums potentially at risk, with over $70bn each. The failure of the fossil fuel industry to address climate change is laid out in a second report on Wednesday, in which senior industry figures state there is “a significant disconnect between the changes needed to reduce greenhouse gas emissions to the [2C] level and efforts currently underway”. Lord John Browne, former BP boss, Sir Mark Moody-Stuart, former Shell and Anglo American chair and others say there must be “fundamental reassessment of the fossil fuel industry’s business models” and that companies should seize commercial opportunities in low-carbon energy.

The Carbon Tracker report looked at existing and future projects being considered by coal, oil and gas companies up to 2025 and determined which could proceed if carbon emissions are cut to give a 50% chance of keeping climate change under 2C. Many high-cost projects, including Arctic and deepwater drilling, tar sands and shale oil are unneeded and therefore uneconomic in the 2C scenario, the report found, although some are required to replace fields that are already depleting.

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It’s been over 5 years since the Lagarde list.

Germany Gives Greece Names Of 10,000 Suspected Tax Dodgers (Guardian)

Germany has handed Athens the names of more than 10,000 of its citizens suspected of dodging taxes with holdings in Swiss banks. The inventory, which details bank accounts worth €3.6bn – almost twice the last instalment of aid Athens secured from creditors earlier this week – was given to the Greek finance ministry in an effort to help the country raise tax revenues. “This is an important step for the Greek government to create more honesty regarding tax in the country,” said Norbert Walter-Borjans, finance minister of the regional state of North Rhine-Westphalia. The state disclosed the data through Germany’s federal tax office. Greece’s leftist-led government vowed it would go after tax dodgers as one of the many policy commitments it signed up to when a €86bn bailout between Athens and its partners was agreed after months of wrangling in July.

The financial lifeline was the third since Athens’ near economic meltdown following the first revelations of runaway deficits in May 2010. A total of 10,588 depositors were said to be on the list, including private individuals and companies. Sources said it resembled a “who’s who” of the well-heeled upper echelons of Greek society – able to spend Christmas in villas in Gstaad in Switzerland and summer at sea in luxury pleasure boats. Prime minister Alexis Tsipras, who won snap polls in September pledging to do away with the “old order”, has promised to dismantle Greece’s oligarchical establishment. Mired in a sixth year of recession, with unprecedented levels of poverty and unemployment, it is ordinary Greeks hit by ever-increasing taxes who have borne the brunt of the country’s long-running economic crisis.

New levies are at the basis of the savings Athens agreed to make in exchange for its latest international bailout. With affluent Greeks spiriting their money abroad, the German chancellor Angela Merkel has seen fit to publicly chastise them for failing to pitch in. Tryfon Alexiadis, the deputy finance minister in charge of tax revenues, said the list would be acted on as quickly as possible – even if the government had to assume the innocence of those revealed to be on it. “It will not stay in a drawer for three years,” he told reporters outside parliament on Wednesday. “The list will be evaluated … and we will see what is hidden behind it. All the services of the ministry of finance and the ministry of justice will cooperate so that we have results as soon as possible.”

In October 2010 Greece was given a similar inventory by Christine Lagarde, then French finance minister, of more 2,000 Greeks with deposits at the Geneva branch of HSBC. Successive governments did little to follow up on it with Tsipras accusing predecessors of deliberately keeping the data in a drawer. Estimated at more than $35bn a year, tax dodging is thought to be the biggest drain on the Greek economy. Last month, Alexiadis got a letter in the post with a bullet in it and a note comparing him to a collaborator with Germany’s Nazi forces. Berlin has been the biggest contributor of the €326bn in bailout funding Athens has received to date.

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There is no market left.

Greek Residential Property Price Slide Gains Pace In Third Quarter (Reuters)

Greek residential property prices fell at a faster pace in the third quarter compared to the previous three-month period as economic contraction hit household income and employment, knocking values on banks’ outstanding real estate loans. Property accounts for a large chunk of household wealth in Greece, which has one of the highest home ownership rates in Europe – 80% versus a European Union average of 70%, according to the European Mortgage Federation. Bank of Greece data showed apartment prices fell by 6.1% in the third quarter of 2015 from a year earlier, with the annual pace of price declines accelerating from 5.0% in the second quarter. The price slide had started to ease after a 10.8% fall in 2013 up until the first quarter of 2015. Greece’s real estate market has been hit by property taxes to plug budget deficits, a tight credit market and a jobless rate hovering around 25%.

Residential property prices have dropped by 41.2% from a peak hit in 2008, when the country’s recession began. Greece has been pushed to the brink of default by a debt crisis that at one stage put into question its membership of the eurozone single currency bloc. Its economic prospects have improved after it signed up to a new bailout package worth up to 86 billion euros this summer. Apart from their negative effect on wealth, falling property prices also affect collateral values on banks’ outstanding real estate loans. Greece’s economy shrank 0.5% in the third quarter compared with the first three months of 2015, contracting by a milder-than-expected pace. The EC projects Greece will see a 1.4% recession this year, but the left-wing government expects the €173 billion economy to flatline.

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Slippery slope with regards to UN treaties. But what else is new?

Dutch Court Rules Migrants’ Right To Food, Shelter Not Unconditional (Reuters)

A Dutch high court on Thursday upheld a government policy of withholding food and shelter to rejected asylum-seekers who refuse to be repatriated, giving legal backing to one of Europe’s toughest immigration policies. The Raad van State or Council of State, which reviews the legality of government decisions, found that the new policy of conservative Prime Minister Mark Rutte does not contravene the European Convention on Human Rights. A rejected asylum seeker does not have the right to appeal to the European Social Charter, it said. The Dutch government “has the right, when providing shelter in so-called locations of limited freedom, to require failed asylum-seekers to cooperate with their departure from the Netherlands,” a summary of the ruling said.

As the Netherlands toughened its stance on newcomers in recent years, Dutch policy toward asylum-seekers and immigrants has been criticized by NGOs and the United Nations as overly strict. Thursday’s ruling counters an August report by the U.N.’s Committee on the Elimination of Racial Discrimination, which told the Dutch they should meet migrants’ basic needs unconditionally. “As long as they are in The Netherlands, they have to enjoy minimum standards of living,” co-author Ion Diaconu, wrote at the time. The EU’s leading human rights forum, the 47-nation Council of Europe admonished the Netherlands in 2014 for placing asylum seekers in administrative detention and leaving many “irregular immigrants” in legal limbo and destitution.

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“..they were leaving a homeland where they were fined, jailed and sometimes even executed for their views.”

Good Thing Native Americans Didn’t Treat Pilgrims Like We Treat Syrians (Nevius)

Thanksgiving is as known for being a day to delicately navigate talking to relatives with vastly different political beliefs as it is for overeating. And the hot-button topic certain to be on everyone’s lips will be what do about Syrian refugees. If it were up to 25 Republican governors and the US House of Representatives, the answer would be to keep them out. This is ironic. Today’s Syrian refugees today don’t look, sound or worship like us, but the Pilgrims that landed on Plymouth Rock 400 years ago also didn’t look, sound or worship like we do – and certainly neither looked, sounded nor worshipped like the native inhabitants of America do. They brought Calvinist determination to this country, and we celebrate that, but that determination came pre-packaged with with bigotry and narrow-mindedness.

What came to be known as the Protestant work ethic was driven by the same zeal that caused some of the British exiles who landed on American shores to persecute anyone already here, or who came here after, who wasn’t like them. We praise the Pilgrims’ work ethic as part of our American DNA, but rarely acknowledged the work ethic and determination of the people who already lived here, nor what the Pilgrims and those who came after them did to destroy the indigenous people they met. Though we may never know exactly what transpired on that First Thanksgiving, let’s never forget that it was the Native Americans’ land – and that they brought the food.

If we continue to celebrate the Pilgrims – or even just to use them as an excuse to eat too much pie – we and our lawmakers should acknowledge that turning our backs on Syrian refugees is akin to turning our back on our own foundations. While it’s true that the Pilgrims weren’t exactly fleeing a war-torn country, they were leaving a homeland where they were fined, jailed and sometimes even executed for their views. Calling themselves “saints” or “the godly”, the Pilgrims were religious separatists who argued for a complete break from the state-run Church of England, which ran them afoul of the law and the king. After a decade of exile in the Netherlands that saw “sundry of them taken away by death” and their children tempted by “the great licentiousness of youth in that country”, the Pilgrims partnered with financial backers in England to help them outfit the Mayflower for the long voyage.

In return, they agreed to work for the company to repay their debts. Then they sailed across the pond, exploited the locals and paved the way for the America we have today. Though their behavior in “the new world” was far from saintly, the Pilgrims were still refugees. But today’s conservatives – some of whom would go so far as to float the idea of World War II-style internment camps for Syrian refugees or registration lists for Muslims – can’t stomach the idea that if the Pilgrims were to show up today, the Republican Party would turn would them back at the border. They actually were a lot of what conservatives are mistakenly accusing Syrian refugees of being.

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townhall.com

Nov 252015
 
 November 25, 2015  Posted by at 10:39 am Finance Tagged with: , , , , , , , , ,  


Harris&Ewing F Street, Washington, DC 1935

European Banks Sitting On €1 Trillion Mountain Of Bad Debt (Guardian)
If China Killed Commodities Super Cycle, Fed Is About to Bury It (Bloomberg)
US, German Manufacturers Can’t Shake The Slowdown In China (Forbes)
China’s Latest Economic Indicators Make For Gloomy Reading (Bloomberg)
Iron Ore Rout Deepens as Rising Supply, Weaker Demand Feed Glut (Bloomberg)
Presenting SocGen’s 5 Black Swans For 2016 (Zero Hedge)
Elite Funds Prepare For Reflation And A Bloodbath For Bonds (AEP)
Russia: Ankara Defends ISIS, Financial Interest In Oil Trade With Group (RT)
Russia Ready For Joint Command Against Islamic State: Paris Envoy (Reuters)
VW Faces Fresh Probe Over Tax Violation Claims in Germany
This is The Day We Say Farewell To All That Was Good About Britain (Murphy)
UK Consumer Borrowing Binge Troubles Bank Of England (Guardian)
Consume More, Conserve More: Sorry, But We Just Can’t Do Both (Monbiot)
EU Countries Diverting Overseas Aid To Cover Refugee Bills (Guardian)
EU Refugee Numbers Drop for First Time This Year as Winter Nears (Bloomberg)
Rate Of Refugee Arrivals in Greece Picking Up (Kath.)
Greece Spends €800,000 On Migrant Healthcare With EU Funding Absent (Kath.)

All it takes is one spark.

European Banks Sitting On €1 Trillion Mountain Of Bad Debt (Guardian)

European banks are sitting on bad debts of €1tn – the equivalent to the GDP of Spain – which is holding back their profitability and ability to lend to high street customers and businesses. According to a detailed analysis of 105 banks across 21 countries in the European Union conducted by the European Banking Authority (EBA), the experience of Europe’s banks to troubled customers is worse than that of their counterparts in the US. The €1tn (£706bn) of so-called non-performing loans amount to almost 6% of the total loans and advances of Europe’s banks, and 10% when lending to other financial institutions are excluded. The equivalent figure for the US banking industry is around 3%.

Piers Haben, director of oversight at the EBA, said that while the resilience of the financial sector was improving because more capital was being accumulated in banks, he remained concerned about bad debts. “EU banks will need to continue addressing the level of non-performing loans which remain a drag on profitability,” Haben said. Banks in Cyprus have half their lending classified as non-performing while in the UK the figure is 2.8%. Capital ratios – a closely watched measure of financial strength – had reached 12.8% by June 2015, well above the regulatory minimum, as banks held on to profits and also took steps to raise capital – for instance, by tapping shareholders for cash. In 2011 the figure was 9.7%.

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“Without fail, every single industrial commodity company allocated capital horrendously over the last 10 years..”

If China Killed Commodities Super Cycle, Fed Is About to Bury It (Bloomberg)

For commodities, it’s like the 21st century never happened. The last time the Bloomberg Commodity Index of investor returns was this low, Apple’s best-selling product was a desktop computer, and you could pay for it with francs and deutsche marks. The gauge tracking the performance of 22 natural resources has plunged two-thirds from its peak, to the lowest level since 1999. That shows it’s back to square one for the so-called commodity super cycle, a hunger for coal, oil and metals from Chinese manufacturers that powered a bull market for about a decade until 2011. “In China, you had 1.3 billion people industrializing – something on that scale has never been seen before,” said Andrew Lapping, deputy chief investment officer at Allan Gray Ltd., a manager of $33 billion of assets in Cape Town.

“But there’s just no way that can continue indefinitely. You can only consume so much.” If slowing Chinese growth, now headed for its weakest pace in 25 years, put the first nail in the coffin of the super cycle, the Federal Reserve is about to hammer in the last. The first U.S. interest rate increase since 2006 is expected next month by a majority of investors, helping push the dollar up by about 9% against a basket of 10 major currencies this year. That only adds to the woes of commodities, mostly priced in dollars, by cutting the spending power of global raw-materials buyers and making other assets that generate yields such as bonds and equities more attractive for investors.

The Bloomberg Commodity Index takes into account roll costs and gains in investing in futures markets to reflect the actual returns. By comparison, a spot index that tracks raw materials prices fell to a more than six-year low Monday, and a gauge of industry shares to the weakest since 2008 on Sept. 29. The biggest decliners in the mining index, which is down 31% this year, are copper producers First Quantum Minerals, Glencore and Freeport-McMoran. With record demand through the 2000s, commodity producers such as Total SA, Rio Tinto Group and Anglo American Plc invested billions in long-term capital projects that have left the world awash with oil, natural gas, iron ore and copper just as Chinese growth wanes. “Without fail, every single industrial commodity company allocated capital horrendously over the last 10 years,” Lapping said.

Oil is among the most oversupplied. Even as prices sank 60% from June 2014, stockpiles have swollen to an all-time high of almost 3 billion barrels. That’s due to record output in the U.S. and a decision by OPEC to keep pumping above its target of 30 million barrels a day to maintain market share and squeeze out higher-cost producers. A Fed move on rates and accompanying gains in the dollar will make it harder to mop up excesses in raw-materials supply. Mining and drilling costs often paid in other currencies will shrink relative to the dollars earned from selling oil and metals in global markets as the U.S. exchange rate appreciates. Russia’s ruble is down more than 30% against the dollar in the past year, helping to maintain the profitability of the country’s steel and nickel producers and allowing them to maintain output levels.

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“..not only affecting our business in China but also in the other international operation markets outside of China because these economies are so dependent on China..”

US, German Manufacturers Can’t Shake The Slowdown In China (Forbes)

You wouldn’t know it from looking at stocks, but the US manufacturing sector came darn close to contracting in October. Readings above 50 indicate expansion in the ISM gauge of manufacturing activity, and the October reading of 50.1 was the lowest in 29 months. Overall manufacturing activity has expanded for 34 straight months, but the pace of growth in the main ISM gauge has deteriorated for four consecutive months. There is reason for optimism. Factories saw new orders come in at a faster pace and production was strong. But, other than that, the ISM details were far from impressive. Not surprisingly, the prices paid index came in below 40 for the third consecutive month, reflecting the deflationary headwinds flowing through the economy.

More importantly, the employment details showed a sharp contraction, down to 47.6 versus 50.5 in September. The market is more concerned about non-farm payroll figures, but this sure seems to be a leading indicator, especially when you consider the weakness from September’s NFP report. It’s the same story in Germany, where mechanical engineering orders slumped 13% Y/Y in September, hit by an 18% drop in foreign demand. In a sign that the weakness in September wasn’t just a blip, foreign orders from outside the eurozone were down 7% in the nine months through September from the same period a year earlier, hit by a slowdown in developing economies that account for around 42% of Germany’s plant and machinery exports. It’s clear that most of this industrial weakness is being driven by China.

Domestic orders for Germany’s mechanical engineering industry were up 2% in the nine months through September from the same period a year ago, while eurozone demand rose 13% over this period. European demand looks ok, it’s just not strong enough to offset the weakness driven by China. German car maker Audi said Monday that falling Chinese demand is forcing it to slash production of Audi models at a plant in Changchun nearly 11%. General Motors Chief Executive Mary Barra last month said the slowdown in China, the world’s second-largest economy, “is not only affecting our business in China but also in the other international operation markets outside of China because these economies are so dependent on China.”

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The divergence between the two indicators should be stunning, but we’re used to it.

China’s Latest Economic Indicators Make For Gloomy Reading (Bloomberg)

China’s economy is still showing a muted response to waves of monetary and fiscal easing as of the half-way mark for the last quarter of the year, some of the earliest indicators suggest. A privately compiled purchasing managers’ index and a gauge based on search engine interest in small and medium-sized businesses deteriorated this month, while a sentiment indicator dropped sharply from October. Combined, the reports make gloomy reading ahead of official releases, the earliest of which will be manufacturing and services PMI reports due Dec. 1. Six interest-rate cuts in a year and expedited fiscal spending have yet to revive growth as overcapacity and weakness in old drivers like manufacturing and residential construction weigh on the world’s second-biggest economy. If official data confirm the sluggishness, Premier Li Keqiang’s growth goal may be missed for a second-straight year.

Here’s a look at what the economy’s earliest tea leaves show: The unofficial purchasing managers indexes for manufacturing and services sectors both declined, snapping increases in the two previous months. The manufacturing PMI declined to 42.4 in November from 43.3 in October, while the non-manufacturing reading fell to 42.9 from 44.2, according to reports jointly compiled by China Minsheng Banking and the China Academy of New Supply-side Economics. Numbers below 50 signal deteriorating conditions. “China’s economy hasn’t bottomed yet and downward pressures are mounting,” Jia Kang, director of the Beijing-based academy and former head of the finance ministry’s research institute, wrote. “We expect authorities to step up growth stabilization measures.” The Minxin PMIs are based on a monthly survey covering more than 4,000 companies, about 70% of which are smaller enterprises. The private gauges have shown a more volatile picture than the official PMIs in the past year.

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Overleveraged overcapacity.

Iron Ore Rout Deepens as Rising Supply, Weaker Demand Feed Glut (Bloomberg)

Iron ore has taken a fresh beating, with prices sinking to the lowest level in six years as output cuts at Chinese mills hurt demand while low-cost supplies from the biggest miners expand. It may get worse. “The key problem for iron ore is oversupply: the iron ore heavyweights have overestimated China’s appetite,” Gavin Wendt, founding director at MineLife in Sydney, said after prices dropped on Tuesday to the lowest level since daily data began in 2009. “Further price weakness is inevitable.” The commodity has been hurt this year by increasing output from the biggest miners including BHP Billiton, Rio Tinto and Vale and faltering demand for steel in China, where mills account for half of global output. Goldman Sachs said last week that the global market is oversupplied, with steel consumption in China remaining weak. Mills are battling sinking prices that have eroded profit margins.

“We’re going through a very difficult time,” said Philip Kirchlechner, director of Iron Ore Research. “It was always expected that it would come down to the $40s again, but not over a sustained period,” said Kirchlechner, former head of marketing at Fortescue Metals Group Ltd. Ore with 62% content delivered to Qingdao fell 1.9% to $43.89 a dry metric ton on Tuesday, according to Metal Bulletin Ltd. The commodity is headed for a third annual retreat, and the latest fall eclipsed the previous low of $44.59 set in July. The steel industry in China is reaching a critical point, according to Andy Xie, an independent economist who’s been bearish for years and sees a drop below $40 before year-end. Mills will have to cut production, said Xie, a former Asia-Pacific chief economist at Morgan Stanley. Crude-steel output in China will drop 23 million tons to 783 million tons next year, according to the China Iron & Steel Association.

Last month, the nation’s leading industry group reported wider losses and noted that while official interest rates in China have been cut, mills faced higher funding costs. The biggest miners are betting that higher production will enable them to cut costs and raise market share while less efficient suppliers get squeezed. Rio’s Andrew Harding, chief executive officer for iron ore and Australia, said this month the company will keep defending market share and if it cut output, volumes would simply be taken by less efficient rivals. Kirchlechner said that the onset of winter in China may bring something of a reprieve for prices as local ore producers are forced to curtail supplies, spurring increased demand for cargoes from overseas.

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Not sure either Tyler Durden or SocGen defines ‘black swan’ right: they’re the things you’re not supposed to see coming, so how can you predict them?

Presenting SocGen’s 5 Black Swans For 2016 (Zero Hedge)

In its latest quarterly Global Economic Outlook, SocGen takes a look at five political and economic black swans that could touch down in 2016 and also warns that “high levels of public sector debt, already overburdened monetary policy, still high debt stocks and on-going balance sheet clean ups in a number of economies leave the global economy will a low level of ammunition to deal with new shocks.” Here’s the latest SG “swan chart” which is “dominated by downside risks”:

As we and a bevy of others have pointed out, QE is bumping up against the law of diminishing returns and it’s no longer clear that doubling and tripling down on monetization will do anything at all to boost aggregate demand, juice global trade, or raise inflation expectations (but what it surely will do is continue to inflate asset bubbles). In this environment, fiscal stimulus may be the only “solution.” As SocGen puts it, “in the event of a major new significant shock, our baseline scenario remains that both the US and Europe would opt first for further monetary policy stimulus. Later on, however, as this proves inefficient, we would expect fiscal stimulus to be considered.” China, of course, has already gone this route, boosting fiscal spending by 36% in Ocotber as the country’s credit impulse disappeared despite six rate cuts in less than a year. From SocGen:

• Brexit at a probability of 45%, remains our highest probability risk. At this time, a date has yet to be set for the referendum but 3Q16 seems a likely timing, based on the idea that Prime Minister Cameron will want to hold the referendum within a reasonable timeframe on concluding an agreement with his EU partners (which could come as early as the December 2015 Summit, but more likely in March 2016).

• China hard landing remains a significant risk at 30%. Medium-term, we set an even higher probability of 40% on a lost decade scenario. As opposed to a hard landing, however, such a risk scenario would manifest itself only gradually. The most likely trigger for a China hard- landing is policy error with miscalculation of how much financial risk management or structural reform the system can absorb. We identify three main triggers. In practice, a combination thereof seems the most likely cause of such a risk scenario.

• Credit crunch: An intensification of capital outflows, a growing number of non-performing loans and an insufficient response from the PBoC could result in a credit crunch. Such risks could be further exacerbated by pressure coming from Chinese corporations’ foreign exchange denominated debt and overall high level of leverage.

• Dry-up in housing demand: Should a new housing shock emerge, triggering a buyers strike, then real estate developers (also burdened with foreign currency loans) could suffer renewed stress, triggering a significant scaling back of investment.

• Capacity overhang: The still-large excess capacity in the manufacturing sector would be further exacerbated in such a scenario, weighing on corporate margins and profits. The risk is to see bankruptcies and unemployment increase in such a bleak scenario.

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We watch bemused as Ambrose continues to make his case for optimism and inflation.

Elite Funds Prepare For Reflation And A Bloodbath For Bonds (AEP)

One by one, the giant investment funds are quietly switching out of government bonds, the most overpriced assets on the planet. Nobody wants to be caught flat-footed if the latest surge in the global money supply finally catches fire and ignites reflation, closing the chapter on our strange Lost Decade of secular stagnation. The Norwegian Pension Fund, the world’s top sovereign wealth fund, is rotating a chunk of its $860bn of assets into property in London, Paris, Berlin, Milan, New York, San Francisco and now Tokyo and East Asia. “Every real estate investment deal we do is funded by sales of government bonds,” says Yngve Slyngstad, the chief executive. It already owns part of the Quadrant 3 building on Regent Street, and bought the Pollen Estate – along with Saville Row – from the Church Commissioners last year. But this is just a nibble.

The fund is eyeing a 15pc weighting in property, an inflation-hedge if ever there was one. The Swiss bank UBS – an even bigger player with $2 trillion under management – has issued its own gentle warning on bonds as the US Federal Reserve prepares to kick off the first global tightening cycle since 2004. UBS expects five rate rises by the end of next year, 60 points more than futures contracts, and enough to rattle debt markets still priced for an Ice Age. Mark Haefele, the bank’s investment guru, said his clients are growing wary of bonds but do not know where to park their money instead. The UBS bubble index of global property is already flashing multiple alerts, with Hong Kong off the charts and London now so expensive that it takes a skilled worker 14 years to buy a broom cupboard of 60 square metres.

Mr Haefele says equities are the lesser risk, especially in Japan, where the central bank has bought 54pc of the entire market for exchange-traded funds (ETFs) and is itching to go further. As of late November, roughly $6 trillion of government debt was trading at negative interest rates, led by the Swiss two-year bond at -1.046pc. The German two-year Bund is at -0.4pc. The Germans and Czechs are negative all the way out to six years, the Dutch to five, the French to four and the Irish to three. Bank of America says $17 trillion of bonds are trading at yields below 1pc, including most of the Japanese sovereign debt market. This is a remarkable phenomenon given that global core inflation – as measured by Henderson Global Investor’s G7 and E7 composite – has been rising since late 2014 and is now at a seven-year high of 2.7pc.

In the eurozone, the M1 money supply is rising at a blistering pace of 11.9pc. A case can be made that the ECB should go for broke, deliberately stoking a short-term monetary boom to achieve “escape velocity” once and for all. The risk of a Japanese trap is not to be taken lightly. Yet even those who feared looming deflation in Europe two years ago are beginning to wonder whether the bank is losing the plot. If the ECB doubles down next week with more quantitative easing and a cut in the deposit rate to -0.3pc, as expected, it will validate the iron law that central banks are pro-cyclical recidivists, always and everywhere behind the curve. Caution is in order. The investment graveyard is littered with the fund managers who bet against Japanese bonds, only to see the 10-year yield keep falling for two decades, plumbing new depths of 0.24pc this January.

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Something tells me Russia’s info ain’t lying.

Russia: Ankara Defends ISIS, Financial Interest In Oil Trade With Group (RT)

Some Turkish officials have ‘direct financial interest’ in the oil trade with the terrorist group Islamic State, Russian PM Dmitry Medvedev said as he detailed possible Russian retaliation to Turkey’s downing of a Russian warplane in Syria on Tuesday. “Turkey’s actions are de facto protection of Islamic State,” Medvedev said, calling the group formerly known as ISIS by its new name. “This is no surprise, considering the information we have about direct financial interest of some Turkish officials relating to the supply of oil products refined by plants controlled by ISIS.” “The reckless and criminal actions of the Turkish authorities… have caused a dangerous escalation of relations between Russia and NATO, which cannot be justified by any interest, including protection of state borders,” Medvedev said.

According to Medvedev, Russia is considering canceling several important projects with Turkey and barring Turkish companies from the Russian market. Russia has already recommended its citizens not to go Turkey citing terrorist threats, which have resulted in several tourist operators withdrawing tours to Turkey from the market. Russia may further scrap a gas pipeline project, aimed at turning Turkey into a major transit country for Russian natural gas going to Europe, and the construction of the country’s first nuclear power plant. Turkey shot down a Russian bomber over Syria on Tuesday, claiming it had violated Turkish airspace. Russia says no violation took place and considers the hostile act as ‘a stab in the back’ and direct assistance to terrorist forces in Syria.

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Including Turkey.

Russia Ready For Joint Command Against Islamic State: Paris Envoy (Reuters)

Russia is prepared to coordinate strikes against Islamic State militants in a joint command with the United States, France and others who want to participate, including Turkey, Moscow’s envoy to Paris said on Wednesday. French President Francois Hollande is trying to rally more international support to destroy Islamic State following the Nov. 13 attacks in Paris. He visited Washington on Tuesday and is due to meet Russian President Vladimir Putin on Thursday. “This coalition is a possibility,” Russia’s ambassador to France, Alexandre Orlov, told Europe 1 radio. “For our part, we are prepared to go further, to plan strikes against Daesh (Islamic State) positions together and to set up a joint command with France, America and any country that wants to join this coalition,” he said, noting that this included Turkey.

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Tax cases have been easier to make for prosecutors since Al Capone.

VW Faces Fresh Probe Over Tax Violation Claims in Germany

Volkswagen is facing a new criminal investigation after publishing incorrect emissions data that gave some drivers tax breaks that may have been unjustified. Prosecutors in Braunschweig, already looking into Volkswagen diesels, are now formally examining tax issues linked to faulty carbon-dioxide readings as well, spokesman Klaus Ziehe said by phone Tuesday. A separate probe was necessary because the accusations involve other cars and other people, he said. Five suspects are being investigated, Ziehe said, without identifying them. “German prosecutors like these kinds of investigations,” said Michael Kubiciel, a criminal law professor at the University of Cologne. “It’s easier to pursue charges under German tax law than under environmental protection rules.”

Volkswagen has said the people who bought the cars won’t have to pay the difference in taxes. The bill adds to the mounting tab of recall costs and regulatory fines the carmaker faces over irregular and falsified vehicle emissions, a scandal that began more than two months ago with Volkswagen’s admission to rigging diesel engines in 11 million vehicles worldwide. The CO2 issue arose Nov. 3, after the automaker said about 800,000 cars, mostly in Europe, had emissions of the greenhouse gas that didn’t match up with the levels promised. That matters because CO2 is a key measure for setting tax rates for motor vehicles in many European countries. Improperly labeled cars with higher-than-marketed emissions may lead authorities to reclaim the tax breaks.

Volkswagen estimated the financial risk of manipulating the ratings at about €2 billion. That sum includes paying governments for missing tax revenue. The carmaker already set aside €6.7 billion in the third quarter to fix diesel cars with engine software that allowed them to pass emission tests by illegally restricting pollution during testing. European regulators have approved Volkswagen’s proposals for how to repair about 70% of the diesel engines affected worldwide, Chief Executive Officer Matthias Mueller told a gathering of executives in Wolfsburg, Germany, on Monday. Meanwhile, Volkswagen’s Audi division will resubmit a revised version of software that the EPA and California Air Resources Board has targeted in its latest probe. If approved, the fix for 85,000 Audi, Volkswagen and Porsche cars with 3.0-liter diesel engines should cost roughly €50 million. EPA and CARB will review and test the revised software.

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The man behind Jeremy Corbyn.

This is The Day We Say Farewell To All That Was Good About Britain (Murphy)

I think that today we will say farewell to all that made the UK a compassionate, decent, fair and civilised society. After George Osborne has had his way I have a deeply uncomfortable feeling that this country will be more brutal, unequal, divided and profoundly individualistic. Once Margaret Thatcher said there was no such thing as society. Today I feel like George Osborne is trying to prove it. Tax is not going to be the focus of today, I suspect. It should be: if George Osborne wants to pursue the goal of a balanced budget (which has no economic merit, at all) then tackling the tax gap and cutting tax expenditures would be the obvious thing to do and that would deliver increased economic fairness and social justice. But those will not be at the heart of today.

Today is about shrinking the state. Apart from the economic illiteracy of this (at the macro level cutting government spending is the same as cutting GDP if there is spare capacity in the economy, and so the policy Osborne is pursuing makes it harder for him to achieve his goal) there is the massive social injustice that this entails to worry about. Social inequality will increase as a result of today. The disabled will be worse off again. The young will suffer disproportionately. The education of many will be harmed. Our long term prospects will be reduced. Those in need of care will have less available. Society will be more vulnerable. And yes, some will die as a result of today. That has to be said.

Those are all choices. And none of them is necessary. The policy of austerity is a political affectation designed to increase the wealth of a few, to favour large companies and to appease bankers. It cannot work, although I think George Osborne does not realise that although the evidence is obvious. And so the question as to why it has been adopted has to be asked. And that comes down to greed, a sense of entitlement, a lack of empathy, and a blunt indifference to others.

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First encourage them, then…

UK Consumer Borrowing Binge Troubles Bank Of England (Guardian)

Bank of England policymakers may need to take action to prevent a risky consumer borrowing binge as the economy recovers, the bank’s chief economist has warned. Appearing before the cross-party Treasury select committee alongside the Bank’s governor, Mark Carney, Andy Haldane warned that consumer credit, in particular personal loans, had been “picking up at a rate of knots. That ultimately might be an issue that the financial policy committee [FPC] might want to look at fairly carefully.” The Financial Policy Committee (FPC), created after the financial crisis, is meant to prevent a future crash by allowing the Bank to take action in particular markets without using the blunter tool of interest rates. Chaired by the governor, it has 10 members – but does not include Haldane.

The FPC has already stepped in to constrain mortgage lending but its powers to confront a credit bubble are untested. The latest data from the Bank showed the rate of growth of consumer credit picking up sharply. Andrew Tyrie, the Conservative MP who chairs the Treasury select committee, said: “The FPC has huge new powers which only small numbers of the public have so far been aware of, and it is particularly important that we hold them accountable. Many of these decisions were formerly the preserve of politicians.” Carney told MPs he was limited as to how much he could say about the FPC, as he was in “purdah”, as its next meeting approached; but he confirmed the rapid pace of credit growth was something it might need to look at.

He added that the separate monetary policy committee (MPC), which sets interest rates, has to take into account the historically high debt levels of Britain’s households as it made interest rate decisions. “Without question, more indebted households are more vulnerable,” he said. “The pressure on households because of the debt burden is significant. There is less margin for error.”

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The main focus of that worse-than-useless Paris climate summit.

Consume More, Conserve More: Sorry, But We Just Can’t Do Both (Monbiot)

We can have it all: that is the promise of our age. We can own every gadget we are capable of imagining – and quite a few that we are not. We can live like monarchs without compromising the Earth’s capacity to sustain us. The promise that makes all this possible is that as economies develop, they become more efficient in their use of resources. In other words, they decouple. There are two kinds of decoupling: relative and absolute. Relative decoupling means using less stuff with every unit of economic growth; absolute decoupling means a total reduction in the use of resources, even though the economy continues to grow. Almost all economists believe that decoupling – relative or absolute – is an inexorable feature of economic growth. On this notion rests the concept of sustainable development.

It sits at the heart of the climate talks in Paris next month and of every other summit on environmental issues. But it appears to be unfounded. A paper published earlier this year in Proceedings of the National Academy of Sciences proposes that even the relative decoupling we claim to have achieved is an artefact of false accounting. It points out that governments and economists have measured our impacts in a way that seems irrational. Here’s how the false accounting works. It takes the raw materials we extract in our own countries, adds them to our imports of stuff from other countries, then subtracts our exports, to end up with something called “domestic material consumption”. But by measuring only the products shifted from one nation to another, rather than the raw materials needed to create those products, it greatly underestimates the total use of resources by the rich nations.

For instance, if ores are mined and processed at home, these raw materials, as well as the machinery and infrastructure used to make finished metal, are included in the domestic material consumption accounts. But if we buy a metal product from abroad, only the weight of the metal is counted. So as mining and manufacturing shift from countries such as the UK and the US to countries like China and India, the rich nations appear to be using fewer resources. A more rational measure, called the material footprint, includes all the raw materials an economy uses, wherever they happen to be extracted. When these are taken into account, the apparent improvements in efficiency disappear. In the UK, for instance, the absolute decoupling that the domestic material consumption accounts appear to show is replaced with an entirely different chart.

Not only is there no absolute decoupling; there is no relative decoupling either. In fact, until the financial crisis in 2007, the graph was heading in the opposite direction: even relative to the rise in our gross domestic product, our economy was becoming less efficient in its use of materials. Against all predictions, a recoupling was taking place. While the OECD has claimed that the richest countries have halved the intensity with which they use resources, the new analysis suggests that in the EU, the US, Japan and the other rich nations, there have been “no improvements in resource productivity at all”. This is astonishing news. It appears to makes a nonsense of everything we have been told about the trajectory of our environmental impacts.

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Which will only lead to more refugees.

EU Countries Diverting Overseas Aid To Cover Refugee Bills (Guardian)

A report published on Tuesday by Concord, the European NGO confederation for relief and development, documents an emerging trend among member states to divert aid budgets from sustainable development to domestic costs associated with hosting refugees and asylum seekers. Some of the expenditure items EU countries report as aid do not translate into a real transfer of resources to developing countries or, ultimately, to people who are poor and marginalised, the report has found. This is not the first time that NGOs have reported that EU monies are increasingly being spent on tackling the refugee crisis and border security, rather than fighting poverty and inequality.

But this time the Concord AidWatch report contains data from the OECD CRS dataset complemented by updated national figures. In some cases, data from the European commission and Eurostat is also used. Concord says that some EU countries are misreporting some of their official development assistance (ODA) expenses by including costs which, under existing guidelines, should not have been counted. The reporting of non-eligible migration-related expenses in Spain and Malta, or the misreporting of refugee costs in Hungary, are among the examples cited. Inflated aid is calculated on the bilateral component of EU aid. Many of the components – imputed student costs, refugee costs, interest and tied aid – do not apply to multilateral aid.

The report found that in 2014, the EU28 and the European institutions inflated their aid by €7.1bn, which represents 12% of all aid flows. Some countries inflate aid more than others. While the percentage of inflated aid for Luxembourg is estimated at 0.3% of the country s total aid, and at 0.5% for the UK, it is, in contrast, 50.6% for Malta, 30.9% for Austria and 27.2% for Portugal. The EU institutions are no different from the member states, having ‘inflated’ their aid by 9.9%.

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See next article.

EU Refugee Numbers Drop for First Time This Year as Winter Nears (Bloomberg)

The number of refugees arriving in the European Union from violence-scarred regions of the Middle East and Africa is set to fall in November as traveling conditions worsen and member states looked to strengthen the bloc’s external borders. The number of migrants crossing the Mediterranean Sea to reach the EU this month fell to 116,579 through Nov. 23 compared with a record 220,535 in October, according to the United Nations refugee agency. The deepening chaos in nations from Libya to Syria has spawned an unprecedented wave of more than 860,000 people seeking shelter within the EU this year. The influx opened divisions within the bloc as German Chancellor Angela Merkel insisted Europe must honor its asylum commitments while other leaders such as Hungary’s Viktor Orban complained of the strain on their communities.

The pressure on Merkel increased this month when jihadists who attacked restaurants and a music venue in Paris. At least two of the assailants are thought to have entered the EU as refugees. On Friday EU nations agreed to bolster controls on frontiers around the bloc. They agreed to start carrying out systematic registration, including fingerprinting of all migrants entering into the Schengen area. All travelers will have their passports checked when they arrive in Europe, extending the full-blown screening that is currently limited to non-EU passport holders. The number of people entering Hungary slowed to a trickle this month after Orban closed the country’s border with Croatia on Oct. 18. Austria overtook Croatia as the nation with most arrivals during the first two weeks of November as the number of people embarking on the journey to Europe declined.

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Betcha the Greeks know more and better than the UN.

Rate Of Refugee Arrivals in Greece Picking Up (Kath.)

After a brief dip in the number of refugees and migrants arriving on Greece’s eastern Aegean islands, an increase was noted on Tuesday in the quantity of boats reaching Greek shores from Turkey. The uptick came a day ahead of Frontex’s management board meeting in Warsaw on Wednesday, when it is expected that the European Union border agency will decide to move its operational office from Piraeus. The office has been located in the port city since 2010 and its removal would be seen as a diplomatic blow for Greece, especially given the current flow of refugees to the country. More than 60 dinghies carrying migrants arrived on Lesvos on Tuesday as Alternate Foreign Minister Nikos Xydakis and Immigration Policy Minister Yiannis Mouzalas guided the ambassadors of European Union countries around the island so they could get a closeup view of the impact of the refugee crisis.

Greece has been under pressure to improve the registration process for arrivals and Lesvos is expected to host a so-called hotspot at the Moria camp, where authorities are hoping to register between 1,000 and 1,500 people a day. Police officials said they expect the hotspot to be ready in less than two weeks. The recent letup in the number of people reaching Lesvos allowed authorities in Athens, where migrants are transferred, to empty the sports hall in Galatsi, which is being used for temporary shelter, and move everyone to the Tae Kwon Do Stadium in Faliro. Tuesday’s arrivals on Lesvos included a yacht carrying 140 migrants who had each paid around 3,000 euros to travel from Turkey in its relative safety. Two bodies also washed up in the island pn Tuesday.

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How it this possible. Greece needs that money for its own citizens’ health care.

Greece Spends €800,000 On Migrant Healthcare With EU Funding Absent (Kath.)

Greece has so far this year spent more than €800,000 in healthcare for about 2,000 migrants and refugees, according to data from the Health Ministry. According to the data, which were presented by General Secretary for Public Health Yiannis Baskozos during a conference of the World Health Organization (WHO) in Rome on Tuesday, demand for the EKAV emergency medical assistance service has increased by 42% compared to 2014. Ambulance calls doubled between June – November – when the refugee crisis peaked – over the same period last year. “[Greece] has managed to fulfill the current healthcare needs for refugees and migrants notwithstanding the absence of EU funding,” Baskozos told the conference.

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Nov 242015
 
 November 24, 2015  Posted by at 7:06 am Finance Tagged with: , , , , , , , , ,  


Russell Lee Proprietor of small store in market square, Waco, Texas Nov 1939

Negative Interest, the War on Cash and the $10 Trillion Bail-In (Ellen Brown)
Sub-Zero Debt Increases To $2 Trillion In Eurozone On Draghi (Bloomberg)
Soaring Global Debt – The Reality Check in Numbers (O’Byrne)
The Closing Of The Global Economy (Calhoun)
Harmless Commodity Crash Accelerates As Dollar Soars (AEP)
Ireland Is Backing Itself (David McWilliams)
Greek Home Rental Costs 40% Less Since 2011 (Kath.)
Four In 10 Greeks ‘Overburdened’ By Housing Costs (Kath.)
Greek Shipping Currency Inflows Drop 53% In September (Kath.)
Inadequate Dirty Money Regulation ‘Leaves UK Open To Terror Funds’ (Reuters)
Cameron Has Guns, Bombs And A Plane – And Not One Good Idea (Hitchens)
Scale Of Osborne’s Cuts To Police, Education, Councils ‘Unprecedented’ (Mirror)
Austeria – A Nation Robs Its Poor To Pay For The Next Big Crash (Chakrabortty)
Richard Russell, Publisher of Dow Theory Letters, Dies at 91 (Bloomberg)
VW Admits Second Illegal Device In 85,000 Audi Engines (FT)
Average House In Fort McMurray Lost $117,000, 20% Of Its Value In 1 Year (CH)
This Is The Worst Time For Society To Go On Psychopathic Autopilot (F. Boyle)
Varoufakis: Closing Borders To Muslim Refugees Only Fuels Terrorism (Guardian)
Average Stay Is 17 Years: Refugee Camps Are The “Cities Of Tomorrow” (Dezeen)
Canada To Turn Away Single Men As Part Of Syrian Refugee Resettlement Plan (AFP)
Stranded Migrants Block Railway, Call Hunger Strike (Reuters)

“..central banks have already pushed the prime rate to zero, and still their economies are languishing. To the uninitiated observer, that means the theory is wrong and needs to be scrapped.”

Negative Interest, the War on Cash and the $10 Trillion Bail-In (Ellen Brown)

Remember those old ads showing a senior couple lounging on a warm beach, captioned “Let your money work for you”? Or the scene in Mary Poppins where young Michael is being advised to put his tuppence in the bank, so that it can compound into “all manner of private enterprise,” including “bonds, chattels, dividends, shares, shipyards, amalgamations . . . .”? That may still work if you’re a Wall Street banker, but if you’re an ordinary saver with your money in the bank, you may soon be paying the bank to hold your funds rather than the reverse. Four European central banks – the European Central Bank, the Swiss National Bank, Sweden’s Riksbank, and Denmark’s Nationalbank – have now imposed negative interest rates on the reserves they hold for commercial banks; and discussion has turned to whether it’s time to pass those costs on to consumers.

The Bank of Japan and the Federal Reserve are still at ZIRP (Zero Interest Rate Policy), but several Fed officials have also begun calling for NIRP (negative rates). The stated justification for this move is to stimulate “demand” by forcing consumers to withdraw their money and go shopping with it. When an economy is struggling, it is standard practice for a central bank to cut interest rates, making saving less attractive. This is supposed to boost spending and kick-start an economic recovery. That is the theory, but central banks have already pushed the prime rate to zero, and still their economies are languishing. To the uninitiated observer, that means the theory is wrong and needs to be scrapped. But not to our intrepid central bankers, who are now experimenting with pushing rates below zero.

The problem with imposing negative interest on savers, as explained in the UK Telegraph, is that “there’s a limit, what economists called the ‘zero lower bound’. Cut rates too deeply, and savers would end up facing negative returns. In that case, this could encourage people to take their savings out of the bank and hoard them in cash. This could slow, rather than boost, the economy.” Again, to the ordinary observer, this would seem to signal that negative interest rates won’t work and the approach needs to be abandoned. But not to our undaunted central bankers, who have chosen instead to plug this hole in their leaky theory by moving to eliminate cash as an option. If your only choice is to keep your money in a digital account in a bank and spend it with a bank card or credit card or checks, negative interest can be imposed with impunity. This is already happening in Sweden, and other countries are close behind.

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His understanding of what he’s doing is sub-zero too.

Sub-Zero Debt Increases To $2 Trillion In Eurozone On Draghi (Bloomberg)

Investor expectations of expanded monetary easing from ECB President Mario Draghi have pushed the amount of euro-area government securities that yield below zero to more than $2 trillion. Bonds across the region climbed last week when Draghi said the institution will do what’s necessary to rapidly accelerate inflation. The statement recalled the language of his 2012 pledge to do “whatever it takes” to preserve the euro and it solidified investor bets on further stimulus at the ECB’s Dec. 3 meeting. While 10-year bonds fell Monday, the two-year note yields of Germany, Austria and the Netherlands all dropped to records. “The ECB is doing little to counter this market speculation,” said Christoph Rieger at Commerzbank in Frankfurt. “Should they not deliver now it would clearly cause a huge backlash with regards to the euro and overall valuations.”

The anticipation of greater easing has also undercut the euro. The single currency weakened to a seven-month low on Monday after futures traders added to bearish bets. A 10 basis- point cut in the deposit rate is now fully priced in, according to futures data compiled by Bloomberg, while banks from Citigroup to Goldman Sachs, are predicting an expansion or extension of the ECB’s €1.1 trillion quantitative-easing plan. Negative-yielding securities now comprise about one-third of the $6.4 trillion Bloomberg Eurozone Sovereign Bond Index. The amount compares with $1.38 trillion before Draghi’s Oct. 22 press conference, where he pledged to re-examine stimulus at the institution’s December meeting.

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“Indeed, not only does war lead to debt, but high levels of debt lead to more war.”

Soaring Global Debt – The Reality Check in Numbers (O’Byrne)

The fact that global debt is growing throughout the world is widely acknowledged and well documented. However, when faced with the numbers, the magnitude of the problem is still quite shocking to read. An article last week in Washington’s blog gives us a stark and timely reminder of those facts. The volatile geo-political environment we are entering into, coupled with this growth-stifling debt, makes for a dangerous economic combination.

“The debt to GDP ratio for the entire world is 286%. In other words, global debt is almost 3 times the size of the world economy. Both public and private debt are exploding and – despite what mainstream economists think – 141 years of history shows that excessive private debt can cause depressions”.

These global debt figures cannot be ignored. Indeed, many erudite economic commentators have been highlighting the reckless monetary policies being pursued by governments around the world that is feeding our debt crisis.

“The underlying cause of this debt glut is the $12 trillion of free or cheap money created by central banks since 2009, combined with near-zero interest rates. When the real price of money is close to zero, people borrow and worry about the consequences later.” Paul Mason.

Similiarly, Jeremy Warner’s recent warnings about our imminent slide into fiscal crisis in “Europe is sliding towards the abyss, and the terrorists know it” reminds us of the vast expense of going to war. A decision that has very long-term repercussions economically and is a situation over which it would appear we have little or no control over, if the threat of terrorism is to be contained. “Indeed, not only does war lead to debt, but high levels of debt lead to more war.”

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Borders, protectionism, the fiancial crisis makes them inevitable. And now it gets help.

The Closing Of The Global Economy (Calhoun)

I don’t often write about global geopolitics because I think, in general, investors spend too much time worrying about things they can’t control or aren’t going to happen or wouldn’t matter much if they did. The best example is the Middle East which has been a mess my entire life and long before it for that matter. Changing your investments based on the latest threat in or from the Levant is a recipe for constant chaos. The only accurate prediction about the Middle East will always be that the various factions that have been fighting for centuries will continue to fight. And that no matter who is in charge they will have to sell oil to make ends meet. And make no mistake oil is the only economic reason we care about the region.

The recent Paris attacks, though, have me thinking more about how global geopolitics is affecting the global economy. The terrorist attacks Europe has experienced in Madrid, London, Paris and other locales are raising old barriers across the continent. Borders where goods, people and capital have crossed freely for the last few decades are now manned and monitored again. Capital largely continues to flow freely but people and goods are starting to be restricted; you can’t restrict the flow of people without also obstructing the flow of goods. For now, the people and goods continue to flow, just more slowly. One can’t help but think though that if the borders become literal barriers again it won’t be long before the metaphoric ones – protectionist policies – return as well.

If one also considers the antipathy toward Germany that permeates most of Europe and the perception – and reality to some degree – that the EU and especially the EMU are much more favorable for the Teutonic members than the Latin ones, then one begins to see how the fragile union might devolve into its former squabbling, fractured self. The feared break up of Europe and the Euro has until now been based on economic considerations but physical security would seem a larger concern at this point. If the EU can’t guarantee physical security and has already failed at providing economic security, it’s raison d’etre is….what exactly? To provide employment for feckless bureaucrats?

The desire for physical security isn’t confined to Europe obviously; the Paris attacks have amped up the political debate in the US over immigration, with Syrian refugees and physical security now replacing Latin Americans and economic security as the targets. The emergence of Donald Trump as a right wing populist to challenge the near universally populist Democrats means that both parties are now pandering to the population’s baser instincts of fear and greed. That isn’t to say that their fears aren’t real or legitimate just that the solutions offered by populist politicians are simplistic and unlikely to achieve the intended results. Indeed, history says that walling ourselves off from the world is more likely to create less security, physical and economic, rather than more.

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A curious attempt at denial by Ambrose:”..the expected revival of Chinese metal demand disappoints yet again.”

Harmless Commodity Crash Accelerates As Dollar Soars (AEP)

Copper prices have crashed to their lowest level since the Lehman Brothers crisis and industrial metals have slumped across the board as a flood of supply overwhelms the market. The violent sell-off came as the US dollar surged to a 12-year high on expectations of an interest rate rise by the US Federal Reserve next month. The closely-watched dollar index rose to within a whisker of 100, and has itself become a key force pushing down commodities on the derivatives markets. Copper prices fell below $4,500 a tonne on the London Metal Exchange for the first time since May 2009, hit by rising inventories in China and warnings from brokers in Shanghai. Prices have fallen 32pc this year, and 55pc from their peak in 2011 when China’s housing boom was on fire.

Known to traders as Dr Copper, the metal is tracked as a barometer of health for the world economy but has increasingly become a rogue indicator. China consumes 45pc of the world’s supply, distorting the picture. Beijing is deliberately winding down its “old economy” of heavy industry and break-neck construction, switching to a new growth model that is less commodity-intensive. “Dr Copper should be struck off the list,” said Julian Jessop, from Capital Economics. “He is telling us a lot about China and the massive over-supply of copper on the market, but he is not telling us anything much about the economy in the US, Europe or the rest of the world.” The CPB index in the Netherlands shows that global trade began to recover four months ago after contracting earlier in the year, and the JP Morgan global PMI index for manufacturing has risen since then to 51.3 – well above the boom-bust line.

The trigger for the latest plunge in copper prices was a decision last week by the Chilean group Codelco to slash its premium for Chinese customers by 26pc, effectively launchng a price war for global market share. “We’re trying to lower costs. We’re not cutting production,” said the group’s chief executive, Nelson Pizarro. Glencore has already said it will suspend output in Zambia and the Congo for two years until new equipment is installed, and others are doing likewise. But Codelco is the key player. Kevin Norrish, at Barclays Capital, said Codelco is in effect copying Saudi Arabia’s tactics in the oil market: using its position as the copper industry’s low-cost giant with a 10pc global share to flush out the weakest rivals. The price war comes as the expected revival of Chinese metal demand disappoints yet again.

Warehouse stocks in Shanghai have risen to their highest in five years, though LME inventories have been falling since September. Views are starkly divided over the outlook for copper, as it is for the whole nexus of commodities. Goldman Sachs says the demise of China’s “old economy” will lead to a near permanent glut through to the end of the decade. Natasha Kaneva, from JP Morgan, said it would take another one to two years to touch the bottom of the mining cycle, predicting further price falls of 12pc-28pc. “We remain bearish on all the base metals,” she said. But the International Copper Study Group is sticking to its guns, insisting that there will be a global copper shortage of 130,000 tonnes next year.

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“..everyone knows that a balance sheet with too much debt, like Ireland’s, is made more robust by less debt, not more debt. The bailouts mean the opposite.”

Ireland Is Backing Itself (David McWilliams)

On the fifth anniversary of the troika’s arrival, let’s be clear on what has actually helped us recover Six years after its inaugural outing, the atmosphere at the Global Irish Economic Forum on Friday in Dublin Castle couldn’t have been more different. Back then, there was a palpable sense of panic and many reasons to be fearful; this time, there was a sense of a steadied ship and many reasons to be optimistic. This weekend also happens to be the fifth anniversary of the bailout. That was the weekend that the IMF rocked into town and nailed their demands to the door of the Department of Finance. One of the more galling episodes in the run-up to this anniversary has been watching the IMF’s chief negotiators pointing the finger of blame at the ECB about Frankfurt forcing successive Irish governments to take on odious bank debts rather than burning bondholders.

It’s a pity they were not so vocal on the issue of odious debt at the time, and it underscores just how pointless this institution now is, in Europe at least. Let’s remember what the bailout was in reality. The bailout wasn’t so much a bailout, which at least visually conjures up the image of a friend in a canoe bailing out water to keep the canoe afloat. These European bailouts were really a response to the financial markets declining to lend to the stricken states. Once the private sector refused to lend, the public sector had to, or the economies would have imploded. This is where the IMF and the EU came in. They lent to us, and we committed to do certain things – and this public commitment, and the troika’s oversight, coaxed the markets to lend to our government again.

But everyone knows that a balance sheet with too much debt, like Ireland’s, is made more robust by less debt, not more debt. The bailouts mean the opposite. A balance sheet that was laid low by too much debt was forced to take on more debt. However, as the ECB undertook to buy all this debt if necessary, the risk premium of this debt fell – the rate of interest fell. Is a country with more debt less or more risky? Traditionally, you would say more risky, but with the ECB backstopping the government bond market, the opposite has occurred. However, in terms of what prompted the Irish recovery, while Italy, Portugal and Greece remain in the doldrums, this bailout doesn’t explain things adequately.

For example, the chief baiter of debtor countries, Finland, is now in recession, so it’s clear that the state of the public finances isn’t sufficient to explain the recovery for the man on the street. If public finances alone were sufficient, Finland would be booming. What affects the man on the street are the employment opportunities around him in the real economy. The government’s narrative is that the recovery – which is still fitful – was due to some European confidence fairy which magically spread confidence dust all over Ireland after the bailout. But the bailout only replaced private creditors with public creditors. We are still debtors, just to different creditors. I don’t buy the government’s story – not because I don’t want to, but because I can’t, as a trained economist, see how this eurozone transmission mechanism might work.

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Yes, you can rent an apartment in Athens for €200.

Greek Home Rental Costs 40% Less Since 2011 (Kath.)

The price of rentals has declined considerably since the start of the financial crisis across all categories, with house rents costing an average of 40% less than in 2011, when the drop began. This decline has all but offset the rate growth recorded over the 11-year period from 2000 to 2011, estimated at 43% on average. The drop is even bigger in Attica, where, according to data collected by estate agents, rates have fallen by 7 to 8% in the last 12 months alone, despite an increase in demand for rented property. In Athens city center, rates for apartments have dropped by 50% or more since 2011, as this mostly concerns older flats covering a surface of 60-70 square meters.

This means that a one-bedroom flat will set a renter back by €150-200 a month, depending on the area and the condition of the property. Sector professionals stress that as long as citizens’ purchasing power declines, rental rates will continue to shrink. Most landlords, they say, would rather shave their asking price to ensure they will at least collect the rent due than insist on a higher rate they may never collect. Alpha Bank, however, reports a slowdown in the decline of rental rates in the second quarter of 2015.

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Real Greece: rental costs down 40%, but 40% of Greeks still can’t afford them.

Four In 10 Greeks ‘Overburdened’ By Housing Costs (Kath.)

Four in 10 Greeks spend more than 40% of their disposable income on housing costs, more than double the European Union average, according to a new study by Eurostat, the European Commission’s statistics service. On average, 11.4% of households in the 28-member EU spent more than 40% of their disposable income in 2014 on housing, a rate that that the Commission considers a housing cost “overburden.” Greece ranks first, with households spending 40.7% of their disposable income on housing, followed by Germany with 15.9%, the Netherlands with 15.4% and Romania with 14.9%. At the lower end of the scale are Malta and Cyprus, with 1.6% and 4% respectively, followed by France and Finland, both with 5.1%.

The continual reduction of household income in Greece since the crisis struck in 2010 – wages have been slashed and pensions cut several times – has been accompanied by higher electricity prices, higher value-added tax on food and more property taxes. According to figures presented over the weekend by the Panhellenic Federation of Property Owners (POMIDA), Greek households will be called upon to pay eight times more in property taxes next year than they did in 2010.

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Greece can’t catch a break: it also gets hit by the global demise of shipping.

Greek Shipping Currency Inflows Drop 53% In September (Kath.)

The drop in foreign currency inflows from shipping, which started in July following the introduction of capital controls in late June, has picked up again, with the reduction in September coming to 53%, on the back of a 46% decline in August and 60% in July, according to Bank of Greece figures. When one considers that the lion’s share of foreign currency in the sector comes from oceangoing shipping, it becomes clear that the capital controls have had a sinking effect on the foreign account balance and the cash flow of banks. In the first half of the year the inflow has posted an annual increase. The foreign currency inflow from shipping dropped to €598.2 million in September against €1.274 billion in the same month last year. In August it had amounted to €570.7 million (from €1.069 billion in August 2014) and in July it had come to €470.7 million from €1.172 billion in July 2014.

This means that the inflow declined by a total of €1.7 billion in the third quarter of the year. The decline is even greater considering that the exchange rate of the euro has fallen significantly from last year and the above amounts given in euros concern dollar payments. The decline is mainly attributed to the capital controls and the fact that a notable number of shipping firms, often under pressure from foreign shareholders, were forced to redirect their revenues from chartering and ship transactions to other countries so that they could meet their international obligations. Another factor is the fall in global dry-bulk market rates, which have reached historic lows. As most of the Greek-owned fleet comprises dry-bulk carriers – and not tankers whose rates are showing very good yields – it is estimated that the current, last quarter of the year will see a further decline in the foreign currency inflows from shipping.

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This is by design. Invariably is.

Inadequate Dirty Money Regulation ‘Leaves UK Open To Terror Funds’ (Reuters)

Britain’s “woefully inadequate” anti-money laundering system has left the country wide open to corrupt money and terrorism funds and needs radical overhaul, a leading anti-corruption group said on Monday. Each year billions of pounds of dirty money flow through Britain, but the system for identifying it is too fragmented and unaccountable to be effective, according to a report by Transparency International UK (TI-UK). “The UK supervision system which should be protecting the country from criminal and terrorist funding is not fit for purpose,” said TI-UK’s Head of Advocacy and Research Nick Maxwell. “Those vulnerabilities can be exploited by sophisticated terrorist organizations as well as the corrupt.” Penalties for professionals such as lawyers and estate agents who fail to comply with anti-money laundering regulations are also too small to act as a deterrent, the report said.

Money laundering is the process of disguising the origins of money obtained from crime and corruption by hiding it within legitimate economic activities. The government’s 2015 money laundering and terrorist financing national risk assessment said there was “evidence of terrorist financing activity in the UK” which uses the same methods as criminal money laundering and “poses a significant threat to the UK’s national security.” Money laundering is also pushing up London property prices because money commonly ends up in high-value physical assets such as real estate and art. Britain’s National Crime Agency’s economic crime director told The Times newspaper this year that London property prices were being artificially driven up by overseas criminals wanting to hide their assets.

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“..if grand personages like him had to shuffle through the security screens, belts off, shoes off, shampoo humourlessly confiscated, like the rest of us, these daft and illogical rules would have been reviewed long ago.”

Cameron Has Guns, Bombs And A Plane – And Not One Good Idea (Hitchens)

So far there is little sign of serious thought about the Paris atrocities. We are to have more spooks, though spooks failed to see it coming, and failed to see most of the other outrages coming, and the new ones will be no more clairvoyant than the old ones. France and Belgium are reaching for emergency laws, surveillance, pre-trial detention, more humiliation of innocent travellers and all the other rubbish that has never worked in the past and won’t work again. David Cameron (in a nifty bit of news management) takes the opportunity to announce that he will henceforth be spared from flying like a normal human being, in an ego-stroking Blaircraft paid for by you and me. Austerity must have been having a day off. Actually, if grand personages like him had to shuffle through the security screens, belts off, shoes off, shampoo humourlessly confiscated, like the rest of us, these daft and illogical rules would have been reviewed long ago.

British police officers dress up like Starship Troopers, something they’ve obviously been itching to do for ages and now have an excuse to do, the masked women involved looking oddly like Muslim women in niquabs. It’s not the police’s job to do this. If things are so bad that we need armed people on the streets, then we have an Army and should deploy it. If not, then spare us these theatricals, which must delight the leaders of ISIS, who long for us to panic and wreck our own societies in fear of them. Next comes the growing demand for us to bomb Syria. Well, if you want to. Only a couple of weeks ago all the establishment experts were saying that the Russian Airbus massacre was obviously the result of Vladimir Putin’s bombing of Syria. Now the same experts say it’s ridiculous to suggest that our planned bombing of Syria might bring murder to the streets of London or to a British aircraft.

Perhaps it’s relevant to this that Pierre Janaszak, a radio presenter who survived the Bataclan massacre in Paris, said he heard one fanatic in the theatre say to his victims, ‘It’s the fault of Hollande, it’s the fault of your President, he should not have intervened in Syria.’ There may be (I personally doubt it) a good case for what’s left of the RAF to drop what’s left of our bombs on Syria. It may be so good that it justifies risking a retaliation in our capital, and that we should brace ourselves for such a war. But I think those who support such bombing should accept that there might be such a connection, and explain to the British people why it is worth it. I am wholly confused by the Cameron government’s position on Syria.

It presents its desire to bomb that country as a rerun of the Parliamentary vote it lost in 2013. But in 2013, Mr Cameron wanted (wrongly, as it turned out) to bomb President Assad’s forces and installations, to help the Islamist sectarian fanatics who are fighting to overthrow the secular Assad state. This is more or less the exact opposite of what he seems to want now. Far from being a rerun, it is one of the most embarrassing diplomatic U-turns in modern British history.

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“People die this way and governments fall.”

Scale Of Osborne’s Cuts To Police, Education, Councils ‘Unprecedented’ (Mirror)

Chancellor George Osborne will this week take the axe to police, councils and welfare as he unleashes the most brutal cuts in history. He will brush aside warnings from police chiefs by pressing ahead with the reductions to their budgets when he unveils his spending review on Wednesday. Funding to local government, transport and higher education will also be slashed – and experts said the scale of the cuts was unprecedented. “We have never had anything like it,” said Paul Johnson of the Institute for Fiscal Studies economic think-tank. Mr Osborne is pushing on with the measures despite being told they may put services such as social care and child protection at risk – and also undermine the fight against terrorism . The Chancellor, when challenged, did not deny that police numbers could be reduced , saying: “Every public service has to make sure it is spending its money well.”

Senior police figures, including former Scotland Yard Commissioner Ian Blair, have warned that axing community support officers (PCSOs) will be a disaster because they work with Muslim youngsters who are being radicalised. Lord Blair said: “National security depends on neighbourhood security and the link between the local and the national is about to be badly damaged.” He added: “This is the most perilous terrorist threat in our history. “With their long, successful track record in counter-terrorism, police have adapted well to the changing circumstances and, at the last moment, the very best defences they have built, the neighbourhood teams and the fast and accurate response to multi-site concurrent attacks, are being degraded. “People die this way and governments fall.”

Mr Osborne revealed all departments had now signed up to the spending review which will see them have to make cuts of around 30% on average. The Chancellor is also likely to hit further education and welfare, including housing benefit and the universal credit, in his determination to have a budget surplus by the end of the decade. Council chiefs warned they would struggle to provide services such as care for the elderly, bin collections, street lighting, social work and pothole repairs. Town hall spending on key services has already fallen by up to a quarter since David Cameron became Prime Minister in 2010, while expenditure on roads and transport services has dropped 20% in the last five years and education budgets have fallen by 24%.

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“Osborne proudly promises a “permanent change” and “a new settlement” for the UK.“

Austeria – A Nation Robs Its Poor To Pay For The Next Big Crash (Chakrabortty)

A familiar dance begins on Wednesday, as soon as George Osborne reveals his blueprint for Britain. The analysts immediately begin poring over his plans for the next five years. They tell us how deep are the cuts in neighbourhood policing, how tight the squeeze for your local school – and the knock-on effect for the Tory leadership hopes of George and Theresa and Boris. But many will miss the backdrop forming right behind them. Britain is now halfway through a transformative decade: staggering out of a historic crash, reeling through the sharpest spending cuts since the 1920s, and being driven by David Cameron towards a smaller state than Margaret Thatcher ever managed. None of this is accidental. While much commentary still treats the Tories as merely muddling through a mess they inherited, Osborne proudly promises a “permanent change” and “a new settlement” for the UK.

The chancellor has the ambition, the power and the time – 10, perhaps 15 years in office – to do exactly that. Between 1979 and 1990 Thatcher permanently altered Britain and, going by what we already know, Osborne is on course to engineer a similar shift. I think of the country we are morphing into as Austeria. It has three defining characteristics: it is shockingly unequal, as a deliberate choice of its rulers; it looks back to the past rather than investing in its future; and it has shrunk its public services for the benefit of its distended, crisis-prone banking sector. Let’s start with the unfairness. Remember Osborne’s promise, “we’re all in it together”? He is ensuring the opposite.

Wanting to make massive cuts without rendering his party unelectable, the chancellor is deliberately targeting austerity at those sections of society where he calculates he can get away with it. That means slashing local council funding, hoping angry voters will turn on their town halls rather than Whitehall. It means running down prisons. What may be clever Tory politics is desperately unfair policy. The Centre for Welfare Reform calculates Osborne’s austerity programme has so far hit disabled Britons nine times harder than the average, while those with severe disabilities were 19 times worse off. Watch for them to be punished again on Wednesday, as the government looks to cut welfare and local government again.

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Icon.

Richard Russell, Publisher of Dow Theory Letters, Dies at 91 (Bloomberg)

Richard Russell, who shared his technical analysis with subscribers through the influential Dow Theory Letters since 1958, has died. He was 91. He died Nov. 21 at his home in La Jolla, California, his family said in a message to subscribers on the publication’s website. He had entered a hospital a week earlier and was diagnosed with blood clots in his leg and lungs “and other untreatable ailments,” his family said. He returned home under hospice care. An adherent of the investing principles of Charles Dow, founder of the Wall Street Journal, Russell published his newsletter continuously from 1958, never missing an issue in more than half a century. In his last column, published Nov. 16, Russell wrote: “I read 10 newspapers a day, but the news is getting increasingly difficult to digest down to something understandable, and the vast array of news sources becomes more and more complex. I can only imagine what the newspapers will look like in 10 years.”

Stock analyst Robert Prechter wrote in his 1997 book: “Russell has made many exceptional market calls. He recommended gold stocks in 1960, called the top of the great bull market in stocks in 1966 and announced the end of the great bear market in December 1974.” In 1969 Russell devised the Primary Trend Index, composed of eight market indicators that he never publicly divulged – his own secret recipe. When his index outperformed an 89-day moving average, it was time to buy. When it underperformed the 89-day moving average, a bear market was at hand. “The PTI is a lot smarter than I am,” Russell said. The benchmark is unrelated to the Russell 2000 and other indexes maintained by Seattle-based Russell Investments.

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How much crazier can it get? They’re lying about something or the other new every single day.

VW Admits Second Illegal Device In 85,000 Audi Engines (FT)

Audi has conceded that the engines in a further 85,000 cars from the Volkswagen group contained an illegal defeat device, raising questions of how systematic the cheating was at the German carmaker. The luxury car brand of the VW group said it estimated that correcting the engine management software used in Audi, VW and Porsche models would cost in the mid-double-digit millions of euros. It admitted that the software was in all three-litre V6 diesel engines manufactured by Audi and sold from 2009 until this year. The admission further undermines VW’s insistence that the cheating in the two-month-old emissions scandal was limited to a rogue group of engineers. The German carmaker has already admitted installing a defeat device in 11m diesel cars worldwide.

It is also facing a third emissions problem after disclosing that 800,000 cars, including some with petrol engines, had been sold with the stated carbon dioxide levels as too low and the fuel efficiency too high. Audi sent its chief executive and engineers to meet the US Environmental Protection Agency last week. Late on Monday night, it sent out a statement saying that it had failed to disclose three auxiliary emissions control devices (AECDs) to regulators. Without disclosure and subsequent approval from regulators, AECDs are not legal. Audi added: “One of them is regarded as a defeat device according to applicable US law. Specifically, this is the software for the temperature conditioning of the exhaust-gas cleaning system.” The admission causes significant embarrassment to VW, which appeared set for a confrontation with the EPA over the issue. When the EPA first disclosed in early November that it had found a defeat device in the three-litre engines, VW sent out a terse statement, saying that it would co-operate with the EPA.

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Will the tar sands ever be cleaned up? Who would pay for that?

Average House In Fort McMurray Lost $117,000, 20% Of Its Value In 1 Year (CH)

The slumping oilpatch in Alberta continues to take its toll on the Fort McMurray housing market, as the average MLS sale price of a home in that northern community plunged by more than $117,000 in October. Data obtained from the Canadian Real Estate Association indicates that the average sale price for the month of $468,199 was down 20% from $585,438 in October 2014. Sales also plunged by 41% to 85 from 144 a year ago. Year-to-date, MLS sales in Fort McMurray are down by 44.8%. In October, Lloydminster saw MLS sales dip by 54.3%, falling to 43 transactions from 94 last year while the Alberta West area experienced a decline of 52.7%, dropping to 70 from 148 a year ago.

Year-to-date MLS sales in Alberta are down 21.1% from last year. Besides Fort McMurray, the CREA statistics show the hardest hit areas in the province are Lloydminster (down 34.1%); South Central Alberta (down 31.6%) and Calgary, (down 28.9%). Calgary’s resale housing market led the country in October — in a negative way. MLS sales in the Calgary region were 1,810 for the month, down 36.4% from a year ago. The rate of decline was the highest among Canada’s major housing markets, according to a report by the Canadian Real Estate Association. In Alberta, sales fell 28.9% to 4,327 transactions. Across the country, however, MLS sales were up 0.1% to 41,653. CREA said national activity stood near the peak recorded earlier this year and reached the second highest monthly level in almost six years.

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“Abdelhamid Abaaoud? ..they’d have got him even if they just went through lists of terrorists alphabetically.”

This Is The Worst Time For Society To Go On Psychopathic Autopilot (F. Boyle)

There were a lot of tributes after the horror in Paris. It has to be said that Trafalgar Square is an odd choice of venue to show solidarity with France; presumably Waterloo was too busy. One of the most appropriate tributes was Adele dedicating Hometown Glory to Paris, just as the raids on St-Denis started. A song about south London where, 10 years ago, armed police decided to hysterically blow the face off a man just because he was a bit beige. In times of crisis, we are made to feel we should scrutinise our government’s actions less closely, when surely that’s when we should pay closest attention. There’s a feeling that after an atrocity history and context become less relevant, when surely these are actually the worst times for a society to go on psychopathic autopilot. Our attitudes are fostered by a society built on ideas of dominance, where the solution to crises are force and action, rather than reflection and compromise.

If that sounds unbearably drippy, just humour me for a second and imagine a country where the response to Paris involved an urgent debate about how to make public spaces safer and marginalised groups less vulnerable to radicalisation. Do you honestly feel safer with a debate centred around when we can turn some desert town 3,000 miles away into a sheet of glass? Of course, it’s not as if the west hasn’t learned any lessons from Iraq and Afghanistan. This time round, no one’s said out loud that we’re going to win. People seem concerned to make sure that Islam gets its full share of the blame, so we get the unedifying circus of neocons invoking God as much as the killers. “Well, Isis say they’re motivated by God.” Yes, and people who have sex with their pets say they’re motivated by love, but most of us don’t really believe them. Not that I’m any friend of religion – let’s blame religion for whatever we can.

Let’s blame anyone who invokes the name of any deity just because they want to ruin our weekend, starting with TGI Friday’s. The ringleader, Abdelhamid Abaaoud, evaded detection by security services by having a name too long to fit into one tweet. How could the most stringent surveillance in the world not have picked up Abdelhamid Abaaoud before? I mean, they’d have got him even if they just went through lists of terrorists alphabetically. We’re always dealing with terror in retrospect – like stocking up on Imodium rather than reading the cooking instructions on your mini kievs. The truth is that modern governments sit at the head of a well-funded security apparatus. They are told that foreign military adventures put domestic populations at risk and they give them the thumbs up anyway.

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“..if somebody knocks on your door at three in the morning, and they’re wet, they’re bleeding, they’ve been shot at, and they’re frightened, what do you do?”

Varoufakis: Closing Borders To Muslim Refugees Only Fuels Terrorism (Guardian)

Europe must not close its borders to refugees in the wake of the Paris terrorist attacks, Greece’s former finance minister Yanis Varoufakis has cautioned, saying rising intolerance towards Muslim refugees would only fuel further violence. Speaking on the Q&A program on Australia’s ABC, Varoufakis said he was proud of the Greek people’s response to the refugee crisis, despite the country being gripped by economic crises. “We have two [thousand], three [thousand], 5,000, 10,000 people being washed up on our shores, on the Aegean Islands, every day. In a nation, by the way, that is buffeted by a great depression, where families, on those islands in particular, are finding it very hard to put food on the table for their children at night.

“And these people in their crushing majority, I’m proud to report, opened their doors to these wretched refugees. And the thought comes to my mind very simply: if somebody knocks on your door at three in the morning, and they’re wet, they’re bleeding, they’ve been shot at, and they’re frightened, what do you do? I think there’s only one answer: you open the door, and you give them shelter, independently of the cost-benefit analysis, independently of the chance that they may harm you.” [..] Varoufakis said while Europe was struggling to cope with both the refugee crisis and Paris attacks, it was a mistake to read one as the cause of the other. “There’s no doubt that when you have a massive exodus of refugees that there may very well be a couple of insurgents that infiltrate [that population], but it’s neither here nor there.”

“Both the terrorist attacks and the refugee influx are symptoms of the same problem. But one doesn’t cause the other.“ The vast majority of the people who exploded bombs, and blew themselves up, and took AK47s to mow people down, these were people who were born in France, in Belgium. Think of the bombings in London. Britain doesn’t have free movement [over its borders] it is not part of the Schengen treaty. So the notion that we’re going to overcome this problem by erecting fences, electrifying them, and shooting people who try to scale them … the only people who benefit from that are the traffickers, because their price goes up … and Isis. They are the only beneficiaries.”

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Good point.

Average Stay Is 17 Years: Refugee Camps Are The “Cities Of Tomorrow” (Dezeen)

Governments should stop thinking about refugee camps as temporary places, says Kilian Kleinschmidt, one of the world’s leading authorities on humanitarian aid (+ interview). “These are the cities of tomorrow,” said Kleinschmidt of Europe’s rapidly expanding refugee camps. “The average stay today in a camp is 17 years. That’s a generation.” “In the Middle East, we were building camps: storage facilities for people. But the refugees were building a city,” he told Dezeen. Kleinschmidt said a lack of willingness to recognise that camps had become a permanent fixture around the world and a failure to provide proper infrastructure was leading to unnecessarily poor conditions and leaving residents vulnerable to “crooks”. “I think we have reached the dead end almost where the humanitarian agencies cannot cope with the crisis,” he said.

“We’re doing humanitarian aid as we did 70 years ago after the second world war. Nothing has changed.” Kleinschmidt, 53, worked for 25 years for the United Nations and the United Nations High Commission for Refugees in various camps and operations worldwide. He was most recently stationed in Zaatari in Jordan, the world’s second largest refugee camp – before leaving to start his own aid consultancy, Switxboard. He believes that migrants coming into Europe could help repopulate parts of Spain and Italy that have been abandoned as people gravitate increasingly towards major cities. “Many places in Europe are totally deserted because the people have moved to other places,” he said.

“You could put in a new population, set up opportunities to develop and trade and work. You could see them as special development zones which are actually used as a trigger for an otherwise impoverished neglected area.” Refugees could also stimulate the economy in Germany, which has 600,000 job vacancies and requires tens of thousands of new apartments to house workers, he said. “Germany is very interesting, because it is actually seeing this as the beginning of a big economic boost,” he explained. “Building 300,000 affordable apartments a year: the building industry is dreaming of this!” “It creates tons of jobs, even for those who are coming in now. Germany will come out of this crisis.”

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Bit of a weird compromise?!

Canada To Turn Away Single Men As Part Of Syrian Refugee Resettlement Plan (AFP)

Canada will accept only whole families, lone women or children in its mass resettlement of Syrian refugees while unaccompanied men – considered a security risk – will be turned away. Since the Paris attacks launched by Syria-linked jihadis, a plan by the new prime minister, Justin Trudeau, to fast-track the intake of 25,000 refugees by year’s end has faced growing criticism in Canada. Details of the plan will be announced Tuesday but Canada’s ambassador to Jordan confirmed that refugees from camps in Jordan, Lebanon and Turkey will be flown to Canada from Jordan starting 1 December. Speaking in Jordan on Monday, ambassador Bruno Saccomani said the operation would cost an estimated C$1.2bn (US$900m), the official Petra news agency reported.

According to Canadian public broadcaster CBC, the resettlement plan will not extend to unaccompanied men. Québec premier Philippe Couillard seemed to corroborate that report ahead of a meeting with Trudeau and Canada’s provincial leaders where the refugee plan was high on the agenda. “All these refugees are vulnerable but some are more vulnerable than others, for example women, families and also members of religious minorities who are oppressed,” he said, although he rejected the notion of “exclusion” of single men. Faisal Alazem of the Syrian Canadian Council, a nonprofit group in talks with the government to sponsor refugees, told Radio-Canada of the plans: “It’s a compromise.”

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Sweet Jesus.

Stranded Migrants Block Railway, Call Hunger Strike (Reuters)


Migrant with his mouth sewn shut at Greek/Macedonian border Nov 23, 2015 (Reuters/Ognen Teofilovski)

Moroccans, Iranians and Pakistanis on Greece’s northern border with Macedonia blocked rail traffic and demanded passage to western Europe on Monday, stranded by a policy of filtering migrants in the Balkans that has raised human rights concerns. One Iranian man, declaring a hunger strike, stripped to the waist, sewed his lips together with nylon and sat down in front of lines of Macedonian riot police. Asked by Reuters where he wanted to go, the man, a 34-year-old electrical engineer named Hamid, said: “To any free country in the world. I cannot go back. I will be hanged.” Hundreds of thousands of migrants, many of them Syrians fleeing war, have made the trek across the Balkan peninsula having arrived by boat and dinghy to Greece from Turkey, heading for the more affluent countries of northern and western Europe, mainly Germany and Sweden.

Last week, however, Slovenia, a member of Europe’s Schengen zone of passport-free travel, declared it would only grant passage to those fleeing conflict in Syria, Iraq and Afghanistan, and that all others deemed “economic migrants” would be sent back. That prompted others on the route – Croatia, Serbia and Macedonia – to do the same, leaving growing numbers stranded in tents and around camp fires on Balkan borders with winter approaching. Rights groups have questioned the policy, warning asylum should be granted on merit, not on the basis of nationality.

“To classify a whole nation as economic migrants is not a principle recognized in international law,” said Rados Djurovic, director of the Belgrade-based Asylum Protection Center. “We risk violating human rights and asylum law,” he told Serbian state television.On the Macedonian-Greek border, crowds of Moroccans, Iranians and others blocked the railway line running between the two countries, halting at least one train that tried to cross, a Reuters photographer said. A group of Bangladeshis had stripped to the waist and written slogans on their chests in red paint. “Shoot us, we never go back,” read one. “Shoot us or save us,” read another.

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 November 23, 2015  Posted by at 10:14 am Finance Tagged with: , , , , , , , , ,  


Kennedy and Johnson Dallas, Morning of November 22 1963

Commodity Slump Deepens as Dollar Gains; European Stocks Slide (Bloomberg)
Europe Warned On ‘Permanent’ Downturn Amid PMIs (CNBC)
Euro Drops To Seven-Month Low As Draghi Feeds Bears (Bloomberg)
Zinc Producers Keep Cutting Back, Yet Prices Keep Falling (Bloomberg)
Barclays Bets On Stock Boom As World Money Growth Soars (AEP)
Masters of the Finance Universe Are Worried About China (Bloomberg)
Is the Surge in Stock Buybacks Good or Evil? (WSJ)
You’re Not the Yuan That I Want (Bloomberg)
UK Deficit Could Hit £40 Billion By 2020 On Ill-Advised Cuts (Guardian)
Everything We Hold Dear Is Being Cut To The Bone. Weep For Our Country (Hutton)
Five Years Into Austerity, Britain Prepares For More Cuts (Reuters)
Save The Library, Lose The Pool: Britain’s Austere New Reality (Guardian)
Greek Disposable Income Shrinks Twice As Fast As GDP (Kath.)
Cut Oil Supply or Drop Riyal Peg? Saudis Face ‘Critical’ Choice (Bloomberg)
Oil Deal of the Year: Mexico Set for $6 Billion Hedging Windfall (Bloomberg)
London House Prices Have Nothing on Auckland (Bloomberg)
We Still Haven’t Grasped That This Is War Without Frontiers (Robert Fisk)
Yanis Varoufakis: Europe Is Being Broken Apart By Refugee Crisis (Guardian)
Life After Schengen: What a Europe With Borders Would Look Like (Bloomberg)
Greek Concerns Mount Over Refugees As Balkan Countries Restrict Entry (Guardian)
Why Syrian Refugees Are Not A Threat To America (Forbes)

Can’t believe people would still seek to ignore this. It’s China grinding to a halt.

Commodity Slump Deepens as Dollar Gains; European Stocks Slide (Bloomberg)

A slump in commodities deepened, with industrial metals and oil leading losses as the dollar extended gains. European equities retreated after the region’s equities posted their biggest weekly advance in four weeks. Crude extended its drop below $42 a barrel and copper fell to levels unseen since 2009 as comments from Federal Reserve officials about the prospect of a December rate increase bolstered the greenback. Nickel plunged 4.1% and gold declined, helping send the Bloomberg Commodity Index to a 16-year low. Russia’s ruble and the Australian dollar led commodity-producers’ currencies lower. The Stoxx Europe 600 Index slid, while the euro touched the weakest level in seven months against the dollar.

“This is not a really welcoming environment for risk taking,” said Tim Condon at ING in Singapore. “Liquidity is beginning to dry up as people are waiting for what happens in December with the Fed. Worries about China persist.” The greenback’s surge this year has weighed on material prices at the same time as demand slows in China, the world’s biggest commodity consumer. John Williams, president of the Fed Bank of San Francisco, said at the weekend that there was a “strong case” for a U.S. rate hike at the Fed’s last meeting of 2015. Agricultural commodities face a new headwind after Sunday’s election of Mauricio Macri as Argentina’s president, according to growers and analysts, who said the result heralds the end of punitive export taxes and may unleash an estimated $8 billion in shipments of stored crops.

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But wasn’t eurozone business activity supposed to be great?

Europe Warned On ‘Permanent’ Downturn Amid PMIs (CNBC)

The economic downturn experienced by Europe and its after-effects, such as high unemployment and labor market weakness, could become a permanent fixture in the region, according to a leading think tank. “Europe continues to face the significant challenges of tackling unemployment, underemployment and inactivity,” the Institute for Public Policy Research (IPPR), a U.K.-based left-leaning think tank, said in its latest report on Monday. “The southern European economies in particular are still combating the effects of the sovereign debt crisis – high levels of joblessness and insecure or temporary work.” Across the rest of the continent, the IPPR said that workers could be left behind due to advances in automation and global competition which “act as more long-term headwinds blowing skill supply and demand out of alignment.”

Such headwinds, the IPPR added, “threaten to consolidate some of the medium-term effects of recession into more permanent features of the economy – a prospect that would be deeply alarming.” The 19-country euro zone bloc was plunged into a deep crisis and regional recession following the 2008 financial crisis. The most acute effect of the crisis was the widespread loss of jobs as a result of industry and business cutbacks and closures. The crisis hit southern euro zone countries more than their more prosperous northern counterparts with a number of countries, Greece, Portugal, Spain, Cyprus and Ireland, requiring bailouts of various magnitudes.

Despite a slow economic recovery in most of the euro zone over recent years, unemployment remains a problem and is stubbornly high in several countries. While Germany has the lowest rate of unemployment, at 4.5% in September, according to Eurostat, joblessness in Greece and Spain remains high, at 25%. in Greece (in July) and 21.6% in Spain. For young people aged 16-25, the statistics are even worse. The IPPR said that policymakers needed to respond “by minimizing the long-term erosion of skills as a result of recession, and investing to reshape and re-skill the labor force for the jobs of the future.”

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Wish he would go do just that. In the Arctic.

Euro Drops To Seven-Month Low As Draghi Feeds Bears (Bloomberg)

The euro weakened to a seven-month low after futures traders added to bearish bets and ECB President Mario Draghi encouraged speculation his board will ease policy next week. Europe’s common currency dropped versus the majority of its 10 developed-market peers after Draghi said Friday the ECB will do what it must to raise inflation “as quickly as possible.” The Governing Council meets in Frankfurt on Dec. 3 for its next monetary-policy decision. Hedge funds ramped up wagers on dollar strength last week by the most since August 2014. The Australian dollar tumbled as copper and nickel prices plunged to multi-year lows. “It’s probably reasonable to think we can spend time down below $1.05 now,” for the euro, said Ray Attrill at National Australia Bank in Sydney. “It looks to me like we’re building up into a fairly classic sell the rumor, buy the fact.”

The euro slid 0.2% to $1.0623 at 6:46 a.m. in London Monday. It earlier touched $1.0601, the lowest since April 15. The shared currency traded at 130.83 yen after declining 0.9% to 130.77 at the end of last week. The dollar rose 0.3% to 123.17 yen. Japanese markets are shut for a holiday. The Aussie dollar dropped 0.8% to 71.79 U.S. cents, following a two-week, 2.8% advance. Copper fell through $4,500 for the first time since 2009, while nickel dropped to the lowest level since 2003 after Chinese smelters announced plans to cut production. “The commodity washout is weighing on Aussie sentiment,” Stephen Innes at foreign- exchange broker Oanda wrote.

New Zealand’s dollar weakened 0.7% to 65.17 U.S. cents. Swaps traders increased the odds the Reserve Bank will cut its benchmark interest rate next month to 55%, from 46% a week ago, according to data compiled by Bloomberg. “A mix of U.S. dollar strength and rising expectations of more RBNZ rate cuts” dragged the kiwi lower, said Elias Haddad, a currency strategist at Commonwealth Bank of Australia in Sydney. “The accumulation of unimpressive New Zealand economic data and declining dairy prices are weighing on short-term swap rates.” New Zealand’s currency will depreciate to 59 cents by the middle of next year, he said.

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Overcapacity bites.

Zinc Producers Keep Cutting Back, Yet Prices Keep Falling (Bloomberg)

Zinc producers keep on cutting back and yet prices keep on falling. After Glencore cut a third of its supply last month to combat a rout, the price rallied 10% and the gains lasted a month. When producers in China did the same on Friday, the jump was smaller and got rolled back after a day. “The benefit of previous such announcements have been fleeting, and we are not expecting this occasion to be any different,” Australia & New Zealand Banking analyst Daniel Hynes said in a note on Monday. “The market is intently focused on slowing growth in manufacturing activity in China.”

The rapid rollback of zinc’s bounce, which followed the announcement by China suppliers of output cuts for 2016, signals supply curtailments by producers probably won’t be sufficient on their own to change the course of the rout in base metals. That tallies with the view from Goldman Sachs, which said in a note this month recent output cuts aren’t large enough to rescue prices, and that will require a substantial rise in Chinese demand. In addition to zinc, producers have also announced reductions in copper and aluminum. “If you look at the track record of these vaguely worded statements, unless there is a specificity to it, they are generally not fully carried through,” Ivan Szpakowski at Citibank in Hong Kong, said by phone on Monday. “The market is very suspicious.”

A group of 10 Chinese smelters – including Zhuzhou Smelter Group, the country’s top producer – said they planned to lower refined output 500,000 tons next year, according to a joint statement. That represents about 7% of China’s production and over 3.5% of world supply, according to ANZ. Still, prices fell on Monday as base metals sank. Zhuzhou Smelter hasn’t yet completed drafting its production plan for 2016, according to Liu Huichi, the company’s securities representative. The company is still working on meeting the production target for this year, Liu said by phone on Monday.

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Ambrose loves taking “the other side”, but ignores that a soaring money supply is meaningless if there’s no-one to spend it. And that means people, not companies buying their own stock.

Barclays Bets On Stock Boom As World Money Growth Soars (AEP)

Barclays has advised clients to jump into world stock markets with both feet, citing the fastest growth in the global money supply in over thirty years and an accelerating recovery in China. Ian Scott, the bank’s global equity strategist, said the sheer force of liquidity will overwhelm the first interest rate rises by the US Federal Reserve, expected to kick off next month. Global equities rose by an average 15pc over the six months after the last three US tightening cycles began, on average, and Barclays argues that this time stocks are cheaper. The cyclically-adjusted price to earnings ratio (CAPE) for the world’s equity markets is currently 18, compared to 25.5 at the beginning of the last rate rise episode in 2004.

This is roughly 14pc below the CAPE average since 1980, though critics say earnings have been artificially inflated by companies borrowing a rock-bottom rates to buy back their own stock. Mr Scott said the growth of global M1 money – essentially cash and checking accounts – has surged to 11pc in real terms, led by China and the eurozone. This is higher than during the dotcom boom and the pre-Lehman BRICS boom. It is likely to ignite a powerful rally in equities nine months later if past patterns are repeated, although the lags can be erratic, and the M1 data gave false signals in the mid 1990s. Barclays said American stocks are trading at a 30pc premium to the rest of the world. This gap is likely to close as emerging markets – “the epicentre of negative sentiment” – come back from the dead.

The pattern of foreign fund flows into the reviled sector has triggered a contrarian buy-signal. Everything hinges on China where real M1 money has ignited after languishing for over a year. Floor space sold is growing at 20pc and house prices have stabilized. Simon Ward from Henderson Global Investors says real M1 is now surging in China at the fastest rate since the post-Lehman credit blitz, though money data is cooling in the US Chinese fiscal spending has jumped by 36pc from a year ago and bond issuance by local governments has taken off, drawing a line under the recession earlier this year. “A growth revival is under way and will gather strength into the first half of 2016,” he said.

[..] Sceptics abound. Nobody knows for sure what will happen to the most indebted countries if the Fed embarks on a serious tightening cycle. Dollar debts in emerging markets have jumped to $3 trillion, and much higher under some estimates. Private credit in all currencies has risen from $4 trillion to $18 trillion in a decade in these countries. Research by the Bank for International Settlements suggests that rate rises by the Fed ineluctably lifts borrowing costs everywhere.

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“..Singer wrote that the world could face a more severe scenario like a “global central bank panic.”

Masters of the Finance Universe Are Worried About China (Bloomberg)

David Tepper says a yuan devaluation may be coming in China. John Burbank warns that a hard landing there could spark a global recession. Tepper, the billionaire owner of Appaloosa Management, said last week at the Robin Hood Investor’s Conference that the Chinese yuan is massively overvalued and needs to fall further. His comments follow similar forecasts from some of the biggest hedge fund managers, including Crispin Odey, founder of the $12 billion Odey Asset Management, who predicts China will devalue the yuan by at least 30%. The money managers are losing faith in China’s ability to revive its economy, which suffers from rising nonperforming loans and falling exports, after the surprise 1.9% currency devaluation in August and global market rout that followed.

The investors made their dire forecasts after shares of U.S.-traded Chinese companies, which their funds sold in the third quarter, began to rebound in October. “The downside scenario for China seems more intimidating than ever before,” billionaire Dan Loeb wrote on Oct. 30 to investors at Third Point, which manages $18 billion. “The new question is not whether but how severe the slowdown of the world’s foremost growth machine will be.” Goldman Sachs on Thursday echoed the managers’ concerns, saying the biggest risk to a rebound in emerging-market assets next year is a “significant depreciation” of the yuan. Policy makers, facing a stronger dollar and slower growth, may let the currency decline, which would ripple through emerging markets, strategists led by Kamakshya Trivedi wrote. “In our view, the fallout from such a shift is the primary risk,” the analysts said.

[..] Elliott Management’s Paul Singer also warned about global contagion from China’s decline. Singer told investors in an October letter that emerging market countries are “choking” on U.S. dollar-denominated debt that was extended due to low interest rates and monetary stimulus. He said many emerging economies, which are in recession, are “scared to death” about even a 25 basis-point increase in U.S. interest rates. While “muddling along” is still an option, Singer wrote that the world could face a more severe scenario like a “global central bank panic.” He said that policy makers will probably “double down on monetary extremism” in response to deteriorating economies in emerging markets and China.

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It’s about discounting the future as much as you can. Faustian.

Is the Surge in Stock Buybacks Good or Evil? (WSJ)

Corporate stock buybacks are climbing toward a post-financial-crisis high this year, furthering the debate about the use of hundreds of billions of dollars in company cash to enhance quarterly earnings reports. Stock repurchases boost earnings per share, even if total earnings don’t change, by reducing the number of shares. Analysts and investors typically track per-share earnings, not overall earnings. Buybacks have drawn criticism from some fund managers including Larry Fink, chief executive of BlackRock, which oversees $4.5 trillion in assets. He has said some companies invest too much in buybacks and too little in longer-term business growth. Repurchases also have become a political issue. Democratic presidential candidate Hillary Clinton has called for more-frequent and fuller disclosure of them by the companies involved, even as some activist investors push for more buybacks as a way of returning cash to investors.

In the year’s first nine months, U.S. companies spent $516.72 billion buying their own shares, with third-quarter reports still not complete, according to Birinyi Associates. That is the highest amount for the first three quarters since the record year of 2007, the year before the financial crisis. It leaves this year on track for a post-2007 high if fourth-quarter buybacks hold up. Buybacks can have a significant impact on earnings, as was illustrated this quarter by companies including Microsoft, Wells Fargo, Pfizer and Express Scripts. Microsoft turned a decline in total earnings into a per-share gain by repurchasing a little more than 3% of its shares in the past 12 months. Its total third-quarter earnings were down 1.3% from a year earlier, but per-share earnings rose 3.1%, according to FactSet.

For Wells Fargo, a 0.6% increase in total earnings became a 2.9% gain in earnings per share after buybacks. At Pfizer, a 2% overall earnings gain became a 5.3% per-share jump. Express Scripts, a large drug-benefits manager, turned a 2.8% overall gain into a 12.4% per-share increase. Apple Inc. is by far the biggest buyback spender this year, with $30.22 billion, followed by Microsoft, Qualcomm and AIG. This year isn’t on pace to surpass 2007 in total buybacks. But Birinyi’s data show that announcements of planned future buybacks are the highest for any year’s first 10 months, more even than in 2007. “If companies execute their plans, we are looking at a record amount being deployed over the next couple of years,” said Birinyi analyst Robert Leiphart.

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“No one’s ever suggested including the loonie in the SDR.”

You’re Not the Yuan That I Want (Bloomberg)

In its ongoing quest for glory and global influence, China appears to have won a notable victory. The IMF is set to anoint the renminbi – the “people’s currency,” also known by the name of its biggest unit, the yuan – as one of the world’s reserve currencies along with the dollar, pound, euro and yen. For those who fear (or hope) that China will eventually transform the postwar economic order, this appears to be the first step toward dethroning the dollar. The IMF’s decision, however, is mere political theater. The yuan will now be included among the basket of currencies that make up its so-called Special Drawing Rights. As the IMF itself notes, “the SDR is neither a currency, nor a claim on the IMF.” Holders simply have the right to claim the equivalent value in one or more of the SDR’s component currencies. Central banks and investors won’t suddenly be required or even explicitly encouraged to use the yuan.

Indeed, all that’s changed is that it’s now clear that the IMF isn’t blocking the yuan from becoming a true global reserve currency: China is. To the contrary, the IMF appears to be doing everything it can to help China. SDR currencies are meant to be “freely usable,” which the IMF defines as “widely used to make payments for international transactions” and “widely traded in the principal exchange markets.” The yuan’s champions note that the currency has grown from being used in less than one% of international payments in September 2013 to 2.5% in October – among the top five globally. This simple metric, however, enormously overstates the yuan’s influence. Globally, it’s still barely used more than the Canadian and Australian dollars. No one’s ever suggested including the loonie in the SDR.

True, China is the world’s second-largest economy and its biggest trading nation. Yet at the same time, more than 70% of payments made in yuan still go through Hong Kong, primarily due to its strategic location as a shipping and trading hub for the mainland. All but 2% of yuan-denominated letters of credit are issued to Hong Kong, Macau, Singapore, and Taiwan to facilitate trade with China. Even in Asia, the yuan isn’t accepted as collateral for derivatives trading and similar financial transactions. Instead it’s used almost exclusively for trade in physical goods where China is one of the counterparties. Nor is the currency widely traded in financial markets. Hong Kong, the largest center of yuan deposits outside of China, holds less than 900 billion renminbi, or about $140 billion.

That’s $40 billion less than Coca-Cola’s market cap (and barely a fifth the value of Apple’s). The entirety of yuan deposits held outside of China still amounts to less than the market capitalization of the Thai stock market. This isn’t the result of prejudice against China, but deliberate policy. Take the oft-cited statistic that 2% of global reserves are already held in renminbi. Virtually all yuan reserves are held under swap agreements with the People’s Bank of China, rather than as physical currency. That means China’s central bank maintains control over the currency and its pricing and can refuse transactions if needed, as it did last week when it ordered banks to halt renminbi lending offshore. While other central banks have significant latitude to engage in onshore renminbi purchases, they face restrictions on using the currency outside China.

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As Greece and Britain show us, yes you CAN cut a society to death.

UK Deficit Could Hit £40 Billion By 2020 On Ill-Advised Cuts (Guardian)

George Osborne could be forced to borrow billions of pounds more than forecast by 2020 if he sticks with spending cuts that will damage hit economic growth, according to a report by City University. With only days to go before the chancellor’s autumn statement, the report said the Treasury has underestimated the impact of welfare and departmental spending cuts on the broader economy and especially cuts to public sector investment. Without a boost to public infrastructure, private sector businesses will limit their own investment plans, leading to lower productivity and depressed GDP growth over the next four years. By 2020 the government will be forced to report a £40bn deficit instead of the planned £10bn surplus, the report concludes, undermining Osborne’s fiscal charter, which dictates that governments borrow only in times of distress.

The study by two academics from City University comes only days before the chancellor is expected to tell parliament that he plans to achieve a budget surplus by 2020 from a mixture cuts to departmental spending, welfare and from higher tax receipts, especially income tax and national insurance. But he is already off track in the current 2015/16 year after a run of poor figures for the public finances. Last week the Office for National Statistics reported that higher government spending and lower corporation tax receipts than expected in October had sent borrowing to highest for that month since 2009. Richard Murphy, an academic at City University who has advised the Labour leader Jeremy Corbyn, said the £50bn gap in borrowing is likely because the Treasury will repeat the same mistakes it made between 2010 and 2015, when the coalition government borrowed £160bn more than predicted.

He said the government planned to ignore a detailed study by the IMF that showed cuts to public expenditure during the recovery from a financial crash can result in lower growth, depressed tax receipts and the need for higher borrowing. The analysis of the multiplier effect from spending cuts shows that far from allowing private consumption and investment to accelerate, it remains modest at best, limiting growth and tax receipts. Murphy said: “The very low multiplier the Treasury uses assumes that cuts in government spending will stimulate growth. That’s an assumption, and not a fact. “It is one the IMF now disagree with. And the result of basing policy on that multiplier is we have more cuts than we need, lower growth in the UK economy as a result, lower earnings for most households and so lower tax revenues – which actually makes balancing the government’s books harder,” he added.

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The world view of a handful crazed rich sociopaths is ruining an entire formerly proud nation.

Everything We Hold Dear Is Being Cut To The Bone. Weep For Our Country (Hutton)

Last Thursday, my wife was readmitted to hospital nearly two years after her first admission for treatment for acute lymphoblastic leukemia. She is very ill, but the nursing, always humane and in sufficient numbers two years ago, is reduced to a heroic but hard-pressed minimum. She has been left untended for hours at a stretch, reduced to tearful desperation at her neglect. The NHS, allegedly a “protected” public service, is beginning to show the signs of five years of real spending cumulatively not matching the growth of health need. Between 2010 and 2015, health spending grew at the slowest (0.7% a year) over a five-year period since the NHS’s foundation. As the Health Foundation observed last week, continuation of these trends is impossible: health spending must rise, funded if necessary by raising the standard rate of income tax.

There will be tens of thousands of patients suffering in the same way this weekend. Yet my protest on their behalf is purposeless. It will cut no ice with either the chancellor or his vicar on earth, Nick Macpherson, permanent secretary at the Treasury. Their twin drive to reduce public spending to just over 36% of GDP in the last year of this parliament is because, as Macpherson declares more fervently than any Tory politician, the budget must be in surplus and raising tax rates is impossible. Necessarily there will be collateral damage. It is obviously regrettable that there are too few nurses on a ward, too few police, too few teachers and too little of every public service. but this is necessary to serve the greater cause of debt reduction. To reduce the stock of the public debt to below 80% of GDP and not pay a penny more in income or property tax, let alone higher taxes on pollution, sugar, petrol or alcohol, is now our collective national purpose.

Everything – from the courts to local authority swimming pools – is subordinate to that aim. Not every judgment George Osborne makes is wrong. He is right to advocate the northern powerhouse, to spend on infrastructure, to stay in the EU, radically to devolve control of public spending to city regions in return for the creation of coherent city governance and to sustain spending on aid and development. It is hard to fault raising the minimum wage or to try to spare science spending from the worst of the cuts. But the big call he is making is entirely misconceived. There is no economic or social argument to justify these arbitrary targets for spending and debt, especially when the cost of debt service, given low interest rates and the average 14-year term of our government debt, has rarely been lower over the past 300 years.

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But £12 billion more for the military.

Five Years Into Austerity, Britain Prepares For More Cuts (Reuters)

After laying off nearly half its staff over the last five years, scaling back street cleaning and relying on volunteers to work at some of its libraries, the London borough of Lewisham is getting ready for what could be much more painful spending cuts. Officials in Lewisham’s town hall, like those across the country, know they will have to shoulder much of finance minister George Osborne’s renewed push to fix Britain’s budget. Osborne is due to announce on Wednesday the details of a new spending squeeze which, according to International Monetary Fund data, ranks as the most aggressive austerity plan among the world’s rich economies between now and 2020. It is also a gamble by Osborne, a leading contender to be the next prime minister, that voters can stomach more cuts.

He rejects accusations that his insistence on a budget surplus by the end of the decade is a choice, saying Britain needs fiscal strength to fight off future shocks to the economy. As in the first five years of his austerity push – which Osborne originally hoped would wipe out the budget deficit – he plans to spare Britain’s health service, schools and foreign aid budget from his new cuts and will increase defense spending. That means that cuts for unprotected areas of government, such as local councils, will be all the deeper. Kevin Bonavia, a councilor who oversees Lewisham’s budget, said the borough had just agreed to merge computing teams with another one on the other side of London as it seeks to make more savings in its back-office operations and protect services.

But voters are likely to notice the cuts more in the years ahead than they have done so far. Rubbish bins may no longer be emptied weekly. Delivery of cooked meals could be replaced with help for people in need to do their own online shopping. Lewisham will also have to find savings in the way it provides social care for the elderly and children, which accounts for the lion’s share of its spending. “We are always trying to rationalize. But we have to do it at pace now, and when you do it at pace, you can make mistakes,” Bonavia, a member of the opposition Labour Party, said.

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You read that right: £12 billion more for the military

Save The Library, Lose The Pool: Britain’s Austere New Reality (Guardian)

On a weekday morning in Blakelaw, two miles from the heart of Newcastle, the scene inside a community centre suggests a perfect example of what David Cameron used to call the “big society”. Local women have gathered for a “coffee and conversation” session, while people nearby are cutting flyers for a residents’ association’s Christmas fair. Meanwhile, an effervescent 36-year-old councillor called David Stockdale is discussing plans to bring a key amenity into community ownership. The prime minister would presumably balk at his terminology: Stockdale proudly talks about a “socialist post office”. Since March 2013, the Blakelaw neighbourhood centre has been run as a not-for-profit local partnership, raising money and rising to the challenges presented by austerity.

When the library that extends off the foyer was threatened with closure, the partnership took over its funding. About six months after Newcastle city council cut all money for youth services, the partnership appointed a full-time youth worker. For all Stockdale’s collectivist passions, if you believe wonders can result from the enforced retreat of the state, what happens here might hint at a positive case study – but scratch the surface and it is a lot more complicated. The coffee-and-conversation women say the weekly sessions are pretty much all the area’s pensioners have left: cuts in council grants stopped the exercise classes and local history group. Doreen Jardine, chair of the residents’ association, says that in the past she had enough money from the council to organise up to seven annual coach trips for local children. She’s now down to two.

And while Stockdale extols self-organisation, he also wonders how his area has reached this point. “This is one of the most deprived communities in Newcastle,” he says. “Can you imagine what we could be doing if we didn’t have to meet the costs of running our library? We run this thing on a shoestring, with the goodwill of a lot of people. And it’s difficult.” It is my fourth journalistic visit to Newcastle in three years. The last time I was here, in November 2014, I talked to people anxious about the city’s fate, and pieced together the story of local austerity with the city’s Labour leader, Nick Forbes.

The council was in the midst of a £100m programme of cuts to be spread from 2013 to 2016. Its projections pointed to additional cuts in 2016-17 of £30m then £20m the next year – and Forbes suggested by that point the financial position would be impossible. “By 2017-18,” he told me, “our estimate is that we will have less than £7m to spend on everything the city council does, above and beyond adult and children’s social care. So it’s completely untenable.” Now, in the buildup to George Osborne’s spending review, the position seems even tougher. The projected cuts for 2017-18 have gone up by £20m, and thanks chiefly to Osborne’s failure to pay down the deficit by his original deadline, another £30m is set to follow in 2018-19.

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That sinking feeling persists.

Greek Disposable Income Shrinks Twice As Fast As GDP (Kath.)

Despite the major decline in disposable incomes, Greece remains among the most expensive countries in Europe in dozens of products and services. For instance, a kilogram of flour in Spain costs €1.03, while in Greece it costs €1.25. An iPhone 6s, with a capacity of 16 gb costs €789 in Greece against €739 in Germany, Portugal and Austria, €749 in France and €770 in Italy, all of them countries with a considerably higher per capita income than Greece.

While prices have started declining marginally in this country since 2013, disposable incomes started shrinking from 2008 by an average rate of 6.7% every year, according to figures collected by the Organization for Economic Cooperation and Development (OECD): This stands nowadays at €17,448 per household, far below the OECD member-state average of €24,339 per year. That means Greece ranks only 27th among the OECD’s 36 member-states in terms of people’s disposable income, way below fellow countries of the European south, such as Portugal, Spain and Italy. In practice the disposable income in Greece appears to have shrunk in the last seven years at a rate almost twice as big as the country’s economic contraction rate.

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Cutting production is not on the table. They simply can’t.

Cut Oil Supply or Drop Riyal Peg? Saudis Face ‘Critical’ Choice (Bloomberg)

The longer oil languishes, the more pressure builds on Saudi Arabia to abandon its currency peg. Contracts used to speculate on the riyal’s exchange rate in the next 12 months climbed to a 13-year high on Thursday, before trimming the increase a day later, according to data compiled by Bloomberg. Six-month agreements rose to near the highest in seven years on Friday. Saudi Arabia is pumping oil at a record level this year, leading OPEC’s effort to defend market share even as oil trades near the lowest level in six years. That’s forced the kingdom to tap savings and sell debt to make up for a plunge in revenue and defend its 30-year-old peg to the dollar. For Bank of America Corp., the country may face a choice next year: cut production to help boost prices or adjust the riyal’s rate to stem a decline in foreign reserves.

“A depeg of the Saudi riyal is our number one black-swan event for the global oil market in 2016, a highly unlikely but highly impactful risk,” BofA strategists led by Francisco Blanch in New York wrote in a Nov. 19 report. “It is a lot easier politically to implement a modest supply cut at first than allow for a full-blown currency devaluation.” One-year forward points for the riyal jumped 167.5 points to 525 on Thursday, before falling to 455 a day later. That reflects expectations for the currency to weaken about 1.2% to 3.7962 per dollar in the next 12 months. Six-month agreements rose on Friday to 152.5, near the highest level since 2008. Weak global growth and inflation as well as a strong dollar will remain a “huge” headwind for dollar-based commodity prices, BofA said. Brent crude closed last week at $44.66 per barrel, down 44% from a year earlier.

Still, Saudi Arabia’s reserves are hardly depleted. While net foreign assets fell to a near three-year low in September as the government drew down financial reserves accumulated over the past decade, they’re among the highest in the region at $646.9 billion. The country’s peg survived low oil prices in the 1990s and revaluation pressure resulting from surging prices in the late 2000s, Shaun Osborne at Scotiabank wrote last week. Pressure may also build on the Chinese yuan amid declining reserves at central banks across the world and with expected U.S. interest-rate increases, BofA said. A meltdown of the yuan may ultimately force Saudi Arabia’s hand because of the “very high sensitivity” of commodities to the currency, the bank said.

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Betting against your own resources is the only way to make money.

Oil Deal of the Year: Mexico Set for $6 Billion Hedging Windfall (Bloomberg)

Mexico is set to get a record payout of at least $6 billion from its oil hedges this year, according to data compiled by Bloomberg. The Latin American country locks in oil sales as a shield against price declines through a series of financial deals with banks including Goldman Sachs, JPMorgan and Citigroup. For 2015, Mexico guaranteed sales at almost $30 a barrel higher than average prices over the past year. The 2015 payment, due next month, is set to surpass the record from 2009, when the Mexican government said it received $5.1 billion after prices plunged with the global financial crisis. The country’s crude has fallen by almost half over the hedging period so far this year. Crude sales historically cover about a third of the government budget.

“The windfall is huge,” said Amrita Sen, chief oil analyst at Energy Aspects Ltd., a London-based consulting company. “This gives Mexico breathing space.” The hedge, which runs from Dec. 1 to Nov. 30, covered 228 million barrels at $76.40 each for the Mexican oil basket, according to government documents and statements. With less than two weeks to the end of the program, the basket has averaged $46.61 a barrel over the period. The difference would result in a payment of around $6.8 billion, not including fees. The final figure could vary from the Bloomberg estimate as some details of the hedge aren’t public and oil prices will change over the next two weeks. The Mexican oil basket fell on Nov. 18 to $33.28 a barrel – its lowest since December 2008.

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“People are sick of seeing these people in the paper who made a million after just mowing the lawn three times,” said Wetzell, the realtor in Devonport.”

London House Prices Have Nothing on Auckland (Bloomberg)

Even with its mold-streaked bathroom and kitchen without a sink, the duplex in bayside Auckland attracted a frenzied bidding war. Now it’s one of the city’s newest million-dollar government-built houses. The two-bedroom, brick cottage on Kerr Street on the city’s inner north shore fetched NZ$1.04 million ($685,000) at an auction in September, netting the vendor, New Zealand’s government, double a valuation used for taxes. Long symbols of economic disadvantage, homes built by the state last century for low-income tenants are on a tear, thanks to their typically generous land sizes and proximity to the city.

The changing fortunes of these modest dwellings — loved and derided by New Zealanders for their functionality over style — reflect a fervor that’s spurred Auckland’s biggest property boom in two decades. The average house price in New Zealand’s largest city is now higher than London’s. “It’s like the supermarket before it closes on Christmas Day — everyone thinks they’d better get in or they’ll miss out,” said Carol Wetzell, a realtor at Barfoot & Thompson in Devonport, the agency that sold the 82-year-old Kerr Street home. State homes, particularly those built from local timber in a wave of government-led construction in the 1940s, are regarded as iconic — products of a time when the government was determined to ensure no one lived in squalor.

Prime Minister John Key was raised in a state house in Christchurch by his widowed immigrant mother, and the Auckland municipal government plans to create a NZ$1.5 million sculpture of one on the city’s waterfront. Now, with house prices up 24% in Auckland in the past year alone, the government can count more than 650 state homes, or “staties,” worth at least NZ$1 million in its Auckland property portfolio, according to data obtained by Bloomberg News via a freedom of information request. Among the most valuable listed by property researcher CoreLogic: a two-bedroom home in the leafy, inner-city suburb of Westmere with a rotting clapboard facade. With the prospect of sea views if renovated, plus space for a tennis court and swimming pool, it’s valued at NZ$2.2 million.

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Blowback for the west’s handling of the Middle East in the past 150 years.

We Still Haven’t Grasped That This Is War Without Frontiers (Robert Fisk)

[..] Isil’s realisation that frontiers were essentially defenceless in the modern age coincided with the popular Arab disillusion with their own invented nations. Most of the millions of Syrian and Afghan refugees who have flooded into Lebanon, Turkey and Jordan and then north into Europe do not intend to return- ever – to states that have failed them as surely as they no longer – in the minds of the refugees – exist. These are not “failed states” so much as imaginary nations that no longer have any purpose. I only began to understand this when, back in July, covering the Greek economic crisis, I travelled to the Greek-Macedonian border with Médecins Sans Frontières. In the fields along the Macedonian border were thousands of Syrians and Afghans.

They were coming in their hundreds through the cornfields, an army of tramping paupers who might have been fleeing the Hundred Years War, women with their feet burned by exploded gas cookers, men with bruises over their bodies from the blows of frontier guards. Two of them I even knew, brothers from Aleppo whom I had met two years earlier in Syria. And when they spoke, I suddenly realised they were talking of Syria in the past tense. They talked about “back there” and “what was home”. They didn’t believe in Syria any more. They didn’t believe in frontiers. Far more important for the West, they clearly didn’t believe in our frontiers either.

They just walked across European frontiers with the same indifference as they crossed from Syria to Turkey or Lebanon. The creators of the Middle East’s borders found that their own historically created national borders also had no meaning to these people. They wanted to go to Germany or Sweden and intended to walk there, however many policemen were sent to beat them or smother them with tear gas in a vain attempt to guard the national sovereignty of the frontiers of the EU. The West’s own shock – indeed, our indignation – that our own precious borders were not respected by these largely Muslim armies of the poor was in sharp contrast to our own blithe non-observance of Arab frontiers.

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No, Europe is being broken apart by the EU.

Yanis Varoufakis: Europe Is Being Broken Apart By Refugee Crisis (Guardian)

Europe’s stumbling response to the refugee crisis is the result of the divisions caused by the six-year monetary crisis which has fragmented the continent and turned nations against each other, former Greek finance minister Yanis Varoufakis has told the Guardian. With thousands of migrants travelling to Europe from Africa, the Middle East and south Asia, Varoufakis said the future of the European Union was threatened by the worst such crisis since 1945. European leaders have agreed a plan to share 120,000 refugees through a quota system, but countries on the Balkan route have begun refusing people of certain nationalities as part of a backlash against migrants in the wake of the Paris attacks. The issue has become symbolic of Europe’s inability to act together.

Countries such as Britain were gripped by “moral panic” at the sight of refugees camped out at Calais, Varoufakis said, while countries such as Hungary had erected razor-wire fences to prevent migrants getting in. “Take a glance at events in Europe over the last 10-15 years ever since monetary union. The project has failed spectacularly,” said Varoufakis, who quit his job in July after failing to win the deal on debt relief that he believed was necessary for the Greek economy to turn the corner. “Europeans are a people divided by a common currency. The euro crisis has fragmented Europe, turning Greeks against Germans, Irish against Spanish etc. “It makes it hard for the EU to function as a political entity, as a unified entity. The centrifugal force of monetary union has made it harder to deal with the refugee crisis. In a sense, it is the straw that has broken the camel’s back.”

Varoufakis, speaking during a short speaking tour of Australia, admitted that he did not have the solution to the refugee crisis. “I don’t have the answer. The numbers of people are very large. But if someone knocks on my door at three in the morning, scared, hungry and having been shot at, as a human it is my moral duty to let them in and give them a drink and feed them. And then ask questions later. Anything else is an affront to European civilisation. “From a European perspective, we have a lot to answer for. Countries such as Iraq and Syria are creations of western imperialism and the cynicism of the west’s treatment of the region in the past has caused a backlash. “The invasion of Iraq was a great example of the inanity of the west. Syria and Iraq were very fragile states but by creating the rupture, it propelled a shockwave.”

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Back to the future.

Life After Schengen: What a Europe With Borders Would Look Like (Bloomberg)

Continental Europeans have gone so long – two decades – without internal border controls that the younger generation doesn’t know what life is like with them. For a glimpse of the past, and the fortress mentality setting in after the Paris terrorist attacks, look no further than France’s frontier with Luxembourg. Five days after the Paris murder spree, the highway into Luxembourg resembled a truck parking lot, with a two-hour wait as the police stopped and, occasionally, searched. “What a pain in the neck,” said Alban Zammit, 43, a shaven-headed French truck driver who travels back and forth across the border with cargoes ranging from batteries to sacks of sugar. “Is it just to give people the impression of increased security?”

To grasp the economic toll in the time-is-money society, imagine commuters and truckers lining up for passport checks every morning to take the George Washington Bridge or Lincoln Tunnel from New Jersey into Manhattan. Rush hour is slow enough as it is. Luxembourg is central to the border-free story. The Grand Duchy is at the heart of Europe, and every day its population of 550,000 swells by 157,000 commuters taking the train or bus, or driving or carpooling in from bedroom communities in France, Germany and Belgium. Schengen, a Luxembourg town just across the Moselle river from where Germany meets France, was the site of the signing of the open-borders treaty in 1985. Border controls were fully abolished in 1995, initially between seven countries.

Now passport-free travel is the norm between 26 European countries, with the island nations of Britain and Ireland as the notable exceptions. Some 400 million people live in the zone that makes travel within Europe like travel between American states, with only signs like “Bienvenue en France” to denote a change of country. The European Commission guesstimates that there are 1.25 billion cross-border journeys annually, but the unsupervised nature of the system makes the true number unknowable. Incantations such as “Schengen is the greatest achievement of European integration” – intoned by the European Union’s home affairs commissioner, Dimitris Avramopoulos, on Wednesday – are now coupled with the fear that the system will be rolled back, and in the worst case abolished.

Before the Paris attacks, five countries had temporarily reimposed passport controls to cope with the unprecedented wave of refugees from the Middle East. France followed suit as the Europe-wide manhunt got under way for the Paris culprits. Brief suspensions are nothing new, and are foreseen during security scares and for countries staging big events like the Group of Seven summit in southern Germany in June or the European soccer championship in Poland in 2012. But never before has there been so much pressure for a wholesale tightening of the system.

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Wonder what Christmas they will have,

Greek Concerns Mount Over Refugees As Balkan Countries Restrict Entry (Guardian)

Concerns are mounting in Greece that the country could have to deal with thousands of trapped migrants and refugees, after border crossings to Balkans countries to the north were abruptly closed. Macedonia’s decision to prohibit entry to anyone not perceived to be from wartorn countries such as Syria, Afghanistan and Iraq has ignited concern that the EU’s weakest member may be left picking up the pieces. “The nightmare scenario has started to develop where Greece is turned from a transit country to a holding country due to the domino effect of European nations closing their borders,” said Dimitris Christopoulos, vice-president of the International Federation for Human Rights. “There is no infrastructure in place to handle people being stuck here,” he told the Guardian.

An estimated 3,600 Europe-bound migrants were stranded on the Greek side of the frontier on Sunday. “More and more are arriving all the time,” said Luca Guanziroli, field officer with the United Nations refugee agency in the border village of Idomeni. “There is a lot of anxiety, a lot of tension.” Labouring under its worst crisis in modern times, debt-stricken Athens is ill-placed to deal with any emergency that might put more burden on a fragile state apparatus. As spontaneous protests erupted at the weekend, the government dispatched its junior interior minister for migration, Yiannis Mouzalas, to Idomeni to hold talks with local officials. One said: “We are very worried. We can hardly cope, and that’s just waving them [refugees] through.”

Those affected by the ban – mainly Iranians, north Africans, Pakistanis and Bangladeshis – demonstrated within spitting distance of Macedonian border guards on Saturday, shouting “we are not terrorists” and “we are not going back”. The UNHCR said it was wrong to profile people on the basis of nationality. “You cannot assume that they are all economic migrants,” said Guanziroli. “You cannot assume that a lot of them aren’t persecuted in their own countries.” Macedonia is not the only state to tighten border controls. In the wake of the Paris attacks, many nations along Europe’s refugee corridor – in the western Balkans and further north – have also restricted access to those not thought to be fleeing war. “This business of placing restrictions and erecting fences to keep terrorists out when terrorists are already in their countries makes no sense whatsoever,” said Ketty Kehayiou, a UNHCR spokeswoman in Athens. “Profiling by nationality defies every convention.”

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“..some of the attackers were French citizens, so they could have come to New York without needing a visa.”

Why Syrian Refugees Are Not A Threat To America (Forbes)

The days following the Paris attacks have seen a backlash against Syrian refugees. The governors of 31 states have refused to accept Syrian refugees, citing security fears. But the numbers don’t back them up. Here are a few powerful statistics. Only 2% of Syrian refugees admitted to America are males of military age. 50% are children, and 25% are above the age of 65, according to the the U.S. Committee for Refugees and Immigrants. There are very few Syrian refugees in the United States. Since Oct. 1 2012, a total of 2,128 of the world’s four million Syrian refugees have been resettled across the United States, with 4,900 more in the pipeline. That’s hardly the unmanageable torrent some Republicans are fearfully describing. Six of the states that are refusing to accept refugees have not had a single refugee settle there since 2012.

For comparison, the U.S. State Department issues visas to tens of thousands of tourists and students each year. They go through some security checks, but they avoid the stringent refugee screening process. It takes at least four years for refugees to be approved to enter the U.S.. The United Nations High Commissioner For Refugees (UNHCR) puts refugees through its own two-year screening process before referring them to the U.S.. The American screening process takes about another two years as well. Lavinia Limon, the chief executive officer of USCRI points out that that’s a long time for undercover terrorists to wait. ”It seems to me that terror networks are better funded than to keep someone in a refugee camp for four years to hope that they’ll be the half of 1% that will get to come in,” she said.

“That’s not very efficient!” She pointed out that some of the attackers were French citizens, so they could have come to New York without needing a visa. Once they get that UNHCR referral, refugees are vetted by a high number of American agencies. Lee Williams of USCRI names a few. “We know they go through the CIA, the FBI, the national counter-terrorism database, and the Department of Defense,” he said. Then they’re vetted by “agencies with acronyms that none of us know about,” he added, describing the process as a “black box.” It works, for the most part.

Since 9/11 just three refugees out of the 784,000 admitted have been arrested on terrorism charges. Two weren’t planning an attack on American soil, and the plans of the third were “barely credible,” according to the Migration Policy Institute. None of the three were Syrian. Once the refugees get to America, they’re placed in one of 300 resettlement sites by one of nine resettlement agencies. The goal of these agencies is to get the refugees to self-sufficiency as quickly as possible, Simon said. 85 percent of family groups are self-sufficient four months after they arrive.

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Nov 102015
 
 November 10, 2015  Posted by at 10:22 am Finance Tagged with: , , , , , , , , ,  


Ben Shahn Quick lunch stand in Plain City, Ohio 1938

Moody’s Warns Of Global Shockwaves From China Slowdown (CityAM)
OECD Rings Alarm Bell Over Threat Of Global Growth Recession (Ind.)
China Deflation Pressures Persist As Producer Prices Fall 44th Month (Bloomberg)
Copper Sinks to Six-Year Low as Chinese Demand Slumps (WSJ)
Emerging Economies See Half Trillion In Capital Flight in 6 Months (Zero Hedge)
EU Leaders Vow Measures To Halt Cheap Chinese Steel Imports (Guardian)
Volkswagen Moves To Appease Angry Customers, Workers (Reuters)
World’s Largest Banks to Be Forced to Hold Big Capital Cushions (WSJ)
Banking Giants Learn Cost of Preventing Another Lehman Moment (Bloomberg)
Saudi Arabia To Tap Global Bond Markets As Oil Fall Hits Finances (FT)
Germany Loses Key Ally In Portugal As Austerity Regime Crumbles (AEP)
Catalonia Votes To Start Breakaway Process From Spain (Reuters)
Eurozone Finance Ministers Press Greece to Move Forward With Overhauls (WSJ)
Greece Wants Political Solution On Bad Debt Dispute Blocking Review (Reuters)
Hedge Funds Give Politicians Cover To Short-Change Pension Plans (Ritholtz)
Housing Next Target In Cameron’s Dismantling Of The Welfare State (Guardian)
The Leviathan (Jim Kunstler)
Court Again Blocks Obama’s Plan To Protect Undocumented Migrants (Reuters)
EU Plans New Refugee Centers as Influx Overwhelms Greece (Bloomberg)
Major Aid Agencies Are Deceiving The General Public on Refugees (Kempson)

At least if you read the Automatic Earth this is no shock.

Moody’s Warns Of Global Shockwaves From China Slowdown (CityAM)

Global economic stability is at risk from financial shocks in the face of a bigger-than-expected fallout from China’s slowing growth, a new report from Moody’s has warned. The credit ratings agency also said that policymakers may find it difficult to act against potential shockwaves as they “lack the ample fiscal and monetary policy buffers” needed to stave off troubles. “Global economic growth will not support significant reductions in government debt or increases in interest rates by major central banks,” said Moody’s global macro outlook. “As a result, authorities lack the ample fiscal and monetary policy buffers usually created at the top of the business cycle, leaving growth and global financial stability particularly vulnerable to shocks for an extended period of time.”

The report comes a day after the OECD cut its global growth forecast, citing a “deeply concerning” slowdown in emerging markets. Although growth in western economies has been on a steady upward trajectory over the past few years, Moody’s warned that authorities lack the fiscal and monetary ammunition to sustain growth and to mitigate mounting corporate and national debt piles. “Advanced economies would be unable to do much to shore up global growth, given policymakers’ limited room for manoeuvre on fiscal and monetary policy and the high leverage we’re seeing in a number of sectors and countries,” said Marie Diron, senior vice president at Moody’s Investors Service.

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But still manages to see higher growth ahead. That would mean the factors playing now would be mostly finished next year? That China’s giant bubble is done deflating?!

OECD Rings Alarm Bell Over Threat Of Global Growth Recession (Ind.)

China’s economic slowdown is set to drag the global economy to the verge of recession, according to the latest forecasts from the Organisation for Economic Co-operation and Development (OECD). The Paris-based multilateral organisation said the world economy will expand by just 2.9% this year, slipping below the 3% level often used to classify a global “growth recession”. The OECD’s latest forecast is lower than the already gloomy 3.1% estimate from the IMF. And it would represent the weakest level of global output expansion since 2009, when the world was in the midst of the biggest financial crisis since the 1930s. The OECD said China’s domestic economic deceleration was “at the heart” of the downgrade in its twice-yearly global outlook.

Global trade is set to expand by just 2% this year, a pace described by Catherine Mann, the OECD’s chief economist, as “deeply concerning”. Ms Mann noted there have been just five years in the past half century in which trade growth was so weak. “World trade has been a bellwether for global output” she warned. “The growth rates of global trade observed so far in 2015 have, in the past, been associated with global recession”. The OECD said the trade deceleration was largely explained by a sharp decline in Chinese imports. China’s slowing levels of domestic investment have led to a collapse in the global price of commodities ranging from oil to copper, hammering emerging market exporters from Brazil to Russia and wreaking havoc among commercial commodity producers.

The OECD forecast global growth to pick up to 3.3% in 2016 and 3.6% in 2017. But Angel Gurria, the OECD’s secretary general, noted that by historical standards even this was lacklustre. “Ten years after the onset of the crisis we still would not have achieved the global rate of growth enjoyed before the crisis,” he said. Mr Gurria also remarked that “Even this improvement hinges on supportive macroeconomic policies, investment, continued low commodity prices for advanced economies and a steady improvement in the labour market.”

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And not a little either: “The producer-price index fell 5.9%, its 44th straight monthly decline.”

China Deflation Pressures Persist As Producer Prices Fall 44th Month (Bloomberg)

China’s consumer inflation waned in October while factory-gate deflation extended a record streak of negative readings, signaling policy makers may need to hit the gas again to ease deflationary pressures. The consumer-price index rose 1.3% in October from a year earlier, according to the National Bureau of Statistics, missing the 1.5% median estimate in a Bloomberg survey and down from 1.6% in September. The producer-price index fell 5.9%, its 44th straight monthly decline. The lingering deflation risks, along with weakening trade, open the door for additional stimulus as inflation remains about half the government’s target pace. The People’s Bank of China – which has cut interest rates six times in the past year – is seeking to stabilize the economy without fueling a renewed surge in debt.

“The risk of deflation has accentuated,” said Liu Li-Gang, the chief Greater China economist at Australia & New Zealand Banking in Hong Kong. “This requires the PBOC to engage in more aggressive policy easing.” China’s stocks halted a four-day rally after the data, with the Shanghai Composite Index losing 0.2%. Food prices rose 1.9% from a year earlier, from 2.7% in September. Non-food prices climbed 0.9%. Prices of consumer goods increased 1%, while services increased 1.9%, the data showed. The inflation reading follows a tepid trade report that suggested the world’s second-biggest economy isn’t likely to get a near-term boost from global demand. Overseas shipments dropped 6.9% in October in dollar terms while weaker demand for coal, iron and other commodities from declining heavy industries helped push imports down 18.8%, leaving a record trade surplus of $61.6 billion..

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All -industrial- commodities, raw materials.

Copper Sinks to Six-Year Low as Chinese Demand Slumps (WSJ)

Copper prices skidded to a six-year low and mining shares tumbled on Monday after China’s import data showed declining demand from the world’s top buyer of the industrial metal. China’s imports of copper and copper products for the first 10 months of 2015 fell 4.2%, to 3.82 millions tons, from the year-earlier period, the country’s General Administration of Customs said Monday. Imports are on track for their first year-on-year drop since 2013. “This is further evidence of that slowing in China and that their demand for copper is going to continue to decline,” said Paul Nolte, a portfolio manager with Kingsview Asset Management in Chicago. “Obviously, declining demand is going to keep the pressure on copper prices.”

China accounts for about 40% of global copper demand and the import data highlighted long-running concerns that the country’s economic slowdown would translate into lower copper imports. Recent reports showed that Chinese factory activity continues to contract and construction starts lag behind last year’s pace. Monday’s fall in copper prices rattled the mining sector, which has been battered by a prolonged slump in prices of metals and other commodities. The S&P Metals and Mining Select Index, which tracks the share prices of 30 companies, fell 1% on Monday, bringing year-to-date losses to 46%. Shares of Glencore, one of the world’s largest copper producers, declined 5.3%. Copper’s selloff has been particularly painful for Glencore, which got 20% of its operating income from copper production in the first half of 2015.

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The dollar comes home.

Emerging Economies See Half Trillion In Capital Flight in 6 Months (Zero Hedge)

When Janet Yellen and the rest of the Eccles cabal decided to stay on hold in September, the “new” reaction function was all anyone wanted to talk about. Of course, the idea that the Fed was to that point “data dependent” (versus market dependent) was something of a joke in the first place, but the specificity the FOMC employed when referring to global financial markets still took some observers off guard. The worry for the Fed revolved primarily around the possibility that a hike could accelerate EM capital outflows at a time when a series of idiosyncratic factors (like a civil war in Turkey, a political crisis in Brazil, and the 1MDB scandal in Malaysia) had already pushed the emerging world to the brink of crisis. Enormous outflows from China as a result of the yuan deval didn’t help.

In short, the theory was that even a “symbolic” 25 bps hike had the potential to trigger an EM exodus that would make the taper tantrum look like a walk in the park as a soaring dollar exacerbated an already tenuous scenario playing out across the space. Now, as we look back at Q2 and Q3, we learn that all told, well more than a half trillion in capital fled EM over six months. Here’s JP Morgan who calls the capital flight “unprecedented”: “Recent capital outflows from EM have raised fears of a potential credit crunch, which if it materializes, could exacerbate the economic downshifting of EM economies. On our estimates $360bn of capital left China during the previous two quarters and an additional $210bn left from the rest of EM.” This of course led directly to a massive FX reserve drawdown and indeed, over the past 18 or so months, the end of the so-called “Great Accumulation” of USD assets has come to a rather unceremonious end.

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Sounds hollow. Protectionism is not as easy as it sounds.

EU Leaders Vow Measures To Halt Cheap Chinese Steel Imports (Guardian)

European politicians have promised “full and speedier” measures to stem the tide of cheap Chinese imports blamed for bringing Britain’s steel industry to its knees. The pledge came as Europe’s largest steelmakers called for immediate action to save an industry that has shed 85,000 jobs across the continent since 2008. It followed a crunch EU summit on Monday attended by the Conservative business secretary, Sajid Javid, amid fierce criticism of the UK government’s handling of the steel crisis. UK steel companies have announced 5,000 job cuts in a matter of weeks, blaming unfairly subsidised Chinese imports, high energy costs and business rates, and a strong pound. Unions have expressed huge disappointment at the outcome of the meeting.

Roy Rickhuss, general secretary of the Community union, said: “Council ministers and the (European) Commission have clearly failed to grasp the urgency of the current situation. Steelworkers whose jobs are at risk and who are seeing the impact of the dumping of cheap steel will take very little comfort from the conclusions of today’s meeting. “We need action now and would have at least expected a clear statement of intent from the meeting that they will speed up reform of trade defence instruments or introduce other measures so that European steel producers are better protected from dumping. “The promise of yet another meeting of steel stakeholders only delays the action the industry requires. The summit also failed to give a proper view on the impact of China gaining market economy status, which will pose an existential threat to the European steel industry.

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VW still gets to be its own cop, juror and judge. That is so insane.

Volkswagen Moves To Appease Angry Customers, Workers (Reuters)

Volkswagen took new steps on Monday to appease U.S. customers and German union leaders unhappy with the company’s response to a sweeping emissions cheating scandal that claimed another high-profile executive. Volkswagen is offering a $1,000 credit, of which half is to be spent at VW and Audi dealerships, to U.S. owners of certain diesel models that do not comply with government emissions standards, VW’s U.S. subsidiary said. The automaker said eligible U.S. owners of nearly 500,000 VW and Audi models equipped with 2.0 liter TDI diesel engines can apply to receive a $500 prepaid Visa card and a $500 dealership card, and three years of free roadside assistance services.

The move was the latest attempt to pacify owners who have been frustrated by how the German automaker plans to fix affected models. The company has warned it could rack up multi-billion-euro costs to remedy the issue and repair the damage to its reputation. “I guess it’s a very small step in the right direction. But far from what I’d like to see in terms of being compensated,” said Jeff Slagle, a diesel Golf owner in Wilton, Connecticut. The scandal erupted in September when VW admitted it had rigged U.S. tests for nitrogen oxide emissions. The crisis deepened last week when it said it had understated the carbon dioxide emissions and fuel consumption of vehicles in Europe.

VW said on Monday it continues to discuss potential remedies with U.S. and California emissions regulators, including the possibility that some of the affected cars could be bought back from customers. In Washington, Democratic Senators Richard Blumenthal and Edward Markey on Monday decried VW’s consumer program as “insultingly inadequate” and “a fig leaf attempting to hide the true depths of Volkswagen’s deception.” The senators said VW “should offer every owner a buy-back option” and “should state clearly and unequivocally that every owner has the right to sue.” Slagle, who bought his vehicle in 2011, said he was surprised there was still no plans for how to fix the cars: “Even though they’re clearly culpable, somehow they’re in the driver’s seat.”

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What does it matter? They’d still be TBTF.

World’s Largest Banks to Be Forced to Hold Big Capital Cushions (WSJ)

Global financial regulators published new rules aimed at stopping banks from becoming “too big to fail,” which could force the world’s largest lenders to raise as much as $1.19 trillion by 2022 in debt or other securities that can be written off when winding down failing banks. The rules, published Monday, are intended to prevent a repeat of the 2008 financial crisis, when taxpayers had to bail out banks whose collapse would have threatened large-scale financial panic. The plan, drawn up by the Financial Stability Board in Basel, Switzerland, is meant to ensure that the world’s biggest lenders maintain sizable financial cushions that can absorb losses as a bank is failing, without threatening a crisis in the broader banking system.

The new standards aim to make banks change the way they fund themselves to better weather a crisis, and to ensure that the cost of a giant bank’s failure will be borne by its investors, not taxpayers. The rules will apply to the world’s top 30 banks, such as HSBC, J.P. Morgan and Deutsche Bank, which the FSB classifies as “systemically important.” Banks are considered to be systemically important if their failure would pose a broad threat to the economy. “The FSB has agreed [to] a robust global standard so that [systemic banks] can fail without placing the rest of the financial system or public funds at risk of loss,” said Mark Carney, governor of the Bank of England and chairman of the FSB. The rules “will support the removal of the implicit public subsidy enjoyed by systemically important banks,” he said Monday.

The standard, which comes seven years after the 2008 financial crisis, “is an essential element for ending too-big-to-fail for banks,” he added. The FSB rule doesn’t have any legal force until it is implemented by regulators in the countries where the affected banks reside. In the U.S., where eight of the banks are located, the Federal Reserve earlier this month proposed a somewhat stricter version of the regulation. But the Fed estimated that those eight U.S. firms had a collective shortfall of about $120 billion in debt or other securities – a figure that equals roughly 10% of the FSB’s estimate for the 30 affected global banks. That suggests the other 22 global banks have more ground to make up to comply than their U.S. counterparts.

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Why are Chinese state owned banks included? To show us the political power our own banks also have?

Banking Giants Learn Cost of Preventing Another Lehman Moment (Bloomberg)

Banking behemoths led by HSBC and JPMorgan now know the cost they’ll have to shoulder so the global financial system doesn’t have another Lehman moment. The Financial Stability Board, created by the Group of 20 nations in the aftermath of the crisis, published its plan for tackling banks seen as too big to fail. The most systemically important lenders must have total loss-absorbing capacity equivalent to at least 16% of risk-weighted assets in 2019, rising to 18% in 2022, the FSB said on Monday. A leverage ratio requirement will also be imposed, rising from 6% initially to 6.75%. The shortfall banks face under the 18% measure ranges from €457 billion to €1.1 trillion, depending on the instruments considered, according to the FSB. Excluding the four Chinese banks in the FSB’s list of the world’s 30 most systemically important institutions, that range drops to €107 billion to €776 billion.

“The TLAC announcement is hugely important; it’s a milestone of the first order in bank reform and ending too big to fail,” Wilson Ervin, vice chairman of the Group Executive Office at Credit Suisse, said before the announcement. “There are a lot of important details to consider and hopefully improve, but the big picture is, if you have a bank rescue fund with $4 trillion to $5 trillion of resources, you can break the back of this problem.” [..] The FSB rules separate the liabilities needed to keep a bank running from purely financial debts such as notes issued for funding. By “bailing in” the bonds — writing them down or converting them to equity — regulators aim to ensure a lender in difficulty has the resources to be recapitalized without using public money, and to allow the resolved firm to continue to operate. In a departure from previous practice, senior debt issued by banks is explicitly exposed to loss.

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Presented as an opportunity.

Saudi Arabia To Tap Global Bond Markets As Oil Fall Hits Finances (FT)

Saudi Arabia has decided to tap international bond markets for the first time, in a sign of the damage lower oil prices are inflicting on its public finances. Saudi officials say the kingdom could increase debt levels to as much as 50% of gross domestic product within five years, up from a forecasted 6.7% this year and 17.3% in 2016. Work on finalising the bond programme is likely to start in January, according to a senior official. While banks have yet to receive any mandates, some lenders have already sent unsolicited proposals to guide the kingdom in approaching international markets. The authorities are in the meantime looking to set up a debt management office to help oversee the process of raising local and international bonds.

“Debt levels are still very low — tapping international debt markets will be an important way to fund spending without absorbing liquidity from domestic banks,” said Monica Malik at Abu Dhabi Commercial Bank. The decision to tap bond markets underscores the impact on the kingdom’s revenues from the plunge in the oil price, from $115 a barrel last year to $50 now, as well as Riyadh’s expensive military intervention in Yemen. Over the past year, Saudi Arabia has seen its foreign reserves decline from last year’s high of $737bn to a three-year low of $647bn in September. Riyadh started to issue domestic bonds in the summer to fund its budget deficit. The government could continue to issue domestically for another 12 to 18 months, officials say, but it will need to diversify globally to leave liquidity available for private sector lending.

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“‘We don’t have a coup here: we have democracy. Whoever lacks the votes in the national assembly cannot govern,’ says the leader of the Left Bloc.”

Germany Loses Key Ally In Portugal As Austerity Regime Crumbles (AEP)

Portugal’s Communists and radical Left Bloc are poised to take power in a historic departure as part of an anti-austerity coalition led by the Socialists, despite being branded too dangerous for office by the country’s president just 11 days ago. While it is not a replay of the “Syriza moment” in Greece last January, the ascendancy of the Left marks a clear break with the previous austerity regime and with the policies of the now-departed EU-IMF Troika. “Political risks are rising,” said Alberto Gallo from RBS. While Portugal has been a model of good behaviour in the eurozone until now, largely immune to radical politics, it has extremely high debt levels. He warned that the country may be skating on thin ice. The bond markets reacted badly to news that the three rival parties had overcome bitter differences and struck a definitive deal on a detailed governing programme.

Yields on 10-year Portuguese bonds jumped 21 basis points to 2.86pc. The risk-spread over German Bunds has risen 68 points since March. A Socialist-led government under Antonio Costa will deprive Germany of a stalwart ally in its efforts to uphold fiscal discipline and drive reform in the eurozone. It has always been crucial to the German political narrative of the EMU debt crisis that the pro-austerity arguments should be made for them by political leaders in the peripheral states. The change of regime in Lisbon could usher in a clean sweep by Left-leaning forces across southern Europe if the Spanish Socialists unite with the country’s new insurgent parties to dislodge the Right in the country’s elections next month. The race is currently too close to call.

There would then be an emerging “Latin bloc” with the heft to confront Germany and push for a fundamental overhaul of EMU economic strategy. At the very least, the political chemistry of the eurozone would change beyond recognition. Portugal’s Left-wing alliance won a majority in the country’s parliament last month but was initially rebuffed by President Anibal Cavaco Silva, who insisted on re-appointing a conservative government even though it had lost its working majority, and even though the political centre of gravity in the country has shifted markedly to the Left, and austerity fatigue is palpable. In an incendiary speech he incited Socialist deputies to break ranks with their own party and the support the Right, arguing that it was in effect a national emergency. This high-risk gambit failed totally. The triple-Left has held together, overcoming bitter differences in the past.

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Beware the Spanish army. They’ve been threatening Catalonia for years.

Catalonia Votes To Start Breakaway Process From Spain (Reuters)

Catalonia’s regional assembly voted on Monday in favor of a resolution to split from Spain, energizing a drive towards independence and deepening a standoff with central government in Madrid. The declaration, which pro-independence parties in the northeastern region hope will lead to it splitting from Spain altogether within 18 months, was backed by a majority in the regional parliament. The fraught debate over Catalan secession has railroaded campaigning for national elections on December 20, away from the country’s lopsided emergence from an economic crisis. “The Catalan parliament will adopt the necessary measures to start this democratic process of massive, sustained and peaceful disconnection from the Spanish state,” the resolution, in Catalan, said.

Parties favoring independence from Spain won a majority of seats in the Catalan assembly, representing one of Spain’s wealthiest regions, in September. But the Spanish constitution does not allow any region to break away and the center-right government of Prime Minister Mariano Rajoy has repeatedly dismissed the Catalan campaign out of hand. The government would file an appeal with the Constitutional Court to ensure that Monday’s resolution had “no consequences,” Rajoy said. “I understand that many Spaniards have had a bellyful (…) of this continued attempt to delegitimise our institutions.” Polls show that opposition to Catalan independence is a vote winner across the political spectrum in the rest of Spain.

Catalan secessionists argue that they have tried to persuade the government to discuss the independence issue and have been blocked by unionist parties. The declaration said it considered that judicial decisions “in particular those of the Constitutional Court” were not legitimate, setting the region and Madrid on a collision course.

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Slow torture. The love of thumbscrews.

Eurozone Finance Ministers Press Greece to Move Forward With Overhauls (WSJ)

Eurozone finance ministers on Monday said Greece needs to deliver on new foreclosure rules and other promised overhauls within a week to get a delayed slice of financial aid valued at €2 billion. The ministers, at their monthly meeting in Brussels, also urged Athens to deliver swiftly on overhauls to its financial system, including measures aimed at strengthening bank governance, in order to proceed with the recapitalization of its banks. Under the €86 billion bailout deal reached this summer, Greece has to implement around 50 promised overhauls, known as milestones, in return for loans meant to help the government pay salaries and bills, and settle domestic arrears.

But while progress has been made on some issues—including measures to substitute a tax on private education, the governance of the country’s bailed-out banks and the treatment of overdue loans—ministers said Athens was falling behind in putting some promised measures into action. “Implementation needs to be finished over the course of the coming week,” said Dutch Finance Minister Jeroen Dijsselbloem, who presides over the meetings with his eurozone counterparts. He added that senior officials from eurozone finance ministries would meet early next week to assess whether Greece delivered on the overhauls and sign off on the disbursement of €2 billion in financial aid.

Mr. Dijsselbloem also said €10 billion in bailout funds set aside for the recapitalization of Greek banks would be disbursed once Athens completed the agreed overhauls and delivered some key financial-sector measures, including on bank governance. “Next thing to do is to have all the financial sector measures in place before the completion of the recapitalization process,” he said. Thanks to recent stress tests that uncovered lower-than-expected capital requirements at Greece’s banks and new forecasts that predict the economy will shrink less than previously expected, pressure on the government in Athens has eased in recent months. But the disagreement over overhauls is also putting off talks on how to reduce the country’s debt load.

At the same time, postponing payments to government employees and contractors risks weighing on Greece’s economic recovery. Under this summer’s agreement, Athens was meant to implement a full set of overhauls by mid-October. But national elections in September and disagreements over some unpopular and painful measures have held up talks with creditors. Key among these is a new set of rules for when banks can foreclose on homeowners who haven’t been paying their mortgages. Greece’s left-wing Syriza government wants to protect citizens at risk of losing their primary residence and had initially asked banks not to take possession of homes worth less than €300,000—an amount creditors have deemed too high.

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Takeaway: France has no voice in Europe.

Greece Wants Political Solution On Bad Debt Dispute Blocking Review (Reuters)

Greece said on Monday it would take a political decision to overcome a dispute with international lenders over the treatment of non-performing loans at Greek banks, an issue it says threatens less well-off homeowners. Athens insists resolving the issue should not result in thousands of poor Greeks at risk of losing their homes and says a deal may have to be taken by Europe’s leaders to bridge the dispute. “The thorny issue is the distance that separates us on the issue of protecting primary residences,” Economy Minister George Stathakis told Real FM radio. “I think the negotiations we conducted with the institutions has closed its cycle .. so its a political decision which must be taken,” he said.The comments came ahead of a euro zone finance ministers’ meeting in Brussels which is to assess if Athens qualifies for more bailout funds.

Stathakis said that there was progress on most of the remaining issues holding up the review and that “a compromise will be reached” on the regulation of tax and pension fund arrears. The country’s progress in meeting the terms of the bailout is due to be assessed at the Eurogroup later on Monday. An accord would have released €2 billion to Athens, part of an initial tranche of €26 billion under the bailout, worth in total up to €86 billion. Greek Prime Minister Alexis Tsipras and European Commission President Jean-Claude Juncker discussed the bad-loans issue by telephone on Sunday. French President Francois Hollande and German Chancellor Angela Merkel also talked about it by phone. “Greece is making considerable efforts. They are scrupulously respecting the July agreement,” French Finance Minister Michel Sapin told reporters. “I want an agreement to be reached today. France wants an agreement today.”

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Just like CDS are supposedly insurance against volatility, but are really just a way to hide losses.

Hedge Funds Give Politicians Cover To Short-Change Pension Plans (Ritholtz)

A new report poses an interesting question: “Would public pension funds have fared better if they had never invested in hedge funds at all?” This is a subject we have investigated numerous times. The conclusion of the report confirms our earlier commentary: a small number of elite funds generate alpha (market-beating returns) after fees for their clients while the vast majority underperform yet still manage to overcharge for their services. One wouldn’t imagine that a market pitch built around “Come for the poor performance; stay for the excessive fees” would work. And yet the industry continues to attract assets. This year, gross hedge fund assets under management crossed the $3 trillion mark.

[..] People do care about performance, as well as fees. It is just that in the hierarchy of public-pension fund needs, both take a back seat to expected returns. This is because the higher the expected return, the lower the capital contributions required of some obligated public entity. Here is the punchline: Those expected returns are a myth. They don’t exist, except for the most elite funds, which are a tiny percentage of the industry. A few can generate alpha; most of the rest are mere wealth-transfer machines. As the chart below shows, none of the major classes of hedge funds beats the market. In other words, hedge funds aren’t used to generate higher returns; they simply make it possible for some public entity to reduce contributions to the underlying pension. This is the primary driving force in the rise of hedge funds for public pensions.

This fiction has been perpetuated by consultants and others with a vested interest. The myth has been swallowed whole by politicians, who can make the finances of the local and state governments they oversee appear better than they really are. I have yet to find the source of the idea that hedge funds outperform the market. It was created out of whole cloth as a sales pitch. There is no basis in accepted academic theory or actual practice to expect the hedge-fund industry to deliver returns above beta (market-matching returns). But the huge gap between pension-fund obligations and their actual assets has encouraged fund managers to invest more in hedge funds because of these inflated return expectations. This misrepresentation is creating an even bigger shortfall in the future for pension funds. The sooner they figure this out, the better off they will be.

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Oliver Twist redux.

Housing Next Target In Cameron’s Dismantling Of The Welfare State (Guardian)

Before he was elected, David Cameron had Harold Macmillan’s picture on his desk to show he, too, was a one-nation, noblesse oblige, postwar consensus sort of politician – part of his “big society” disguise. But how misleading to choose Macmillan – who, appalled by what he’d seen of the great depression while MP for Stockton-on-Tees, built a record 350,000 council homes a year as prime minister. Now Cameron has embarked on the abolition of social housing, both council- and housing association-owned. This isn’t an accident of the cuts, but a deliberate dismantling of another emblem of the 1945 welfare state. Instead of social housing for rent, the only money is for starter homes and shared ownership, out of reach of most average and below-average earners.

A third of the population can never own, without some radical redistribution of earnings and wealth currently flowing the other way. But plummeting home ownership is all that worries this government. Those who can never own will only have an unregulated private sector of rising rents, with housing benefit failing to keep up, and insecure six-month tenancies, where 1.5 million children are already at risk of regularly moving and shifting school. This is the end of a 70-year era of secure tenancies in social housing. This makes political sense as part of Cameron and George Osborne’s still under-recognised attempt to reduce the state permanently to 35% of GDP, a level below anything resembling British and European standards for public services.

As with tax credits, Osborne’s spending review cuts this month may prove politically impossible, but he will hope areas such as social housing are invisible, certainly to most Conservative voters. Osborne has purloined the word “affordable” to mean the opposite – an 80% of market rent that typical council renters can’t afford. The housing and planning bill, now in the Commons, is designed to finish off social renting. It carries out the manifesto pledge of a right to buy housing association properties at heavy discounts. Local authorities have to sell their most valuable homes to pay towards that discount – so two social homes are lost for every one sold.

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“The world is bankrupt after thirty years of borrowing from the future to throw a party in the present, and the authorities can’t acknowledge that. But they can provide the conditions for disguising it…”

The Leviathan (Jim Kunstler)

The economic picture manufactured by the national consensus trance has never been more out of touch with reality in my lifetime. And so the questions as to what anyone might do can hardly be addressed. How can I protect my savings? Who do I vote for? How do I think about where my country is going? Incoherence reigns, especially in the circles ruled by those who guard the status quo, which includes the failing legacy news media. The Federal Reserve has morphed from being a faceless background institution of the most limited purpose to a claque of necromancers and astrologasters, led by one grand vizier, in full public view pretending to steer a gigantic economic vessel that has, in fact, lost its rudder and is drifting into a maelstrom.

For more than a year, the fate of the nation has hung on whether the Fed might raise their benchmark interest rate one quarter of a %. They talk about it incessantly, and therefore the mob of financial market observers has to chatter about it incessantly, and the chatter itself has appeared to obviate the need for any actual action on the matter. The Fed gets to influence markets without ever having to do anything. And mostly it has worked to produce the false narrative of an advanced economy that is working splendidly well to the advantage of the common good.

This is all occurring against the background of a larger global network of economic relations that is quite clearly breaking apart. The rising tensions between the US, Russia, China, and the Euro Union grew out of monetary mischief “innovated” by our central bank, especially the shenanigans around debt monetization, which have created dangerous distortions in markets, trade, and perceptions of national interest. Nations are rattling sabers at one another and bluster is in the air. The world is bankrupt after thirty years of borrowing from the future to throw a party in the present, and the authorities can’t acknowledge that.

But they can provide the conditions for disguising it, especially in the statistical hall of mirrors that once-upon-a-time produced meaningful signals for the movement of capital. Instead of reality-based choices and decisions, the task at hand for the people in charge has been the ever more baroque elaboration of a Potemkin economic false-front, behind which lies a landscape of ruin scavenged by desperate racketeers. That this racketeering has moved so seamlessly into the once-sacred precincts of medicine and higher ed ought to inform us how desperate and perilous it has become.

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“The Texas attorney general, Ken Paxton, said in a statement that the ruling meant the state, which has led the legal challenge, “has secured an important victory to put a halt to the president’s lawlessness”.

Court Again Blocks Obama’s Plan To Protect Undocumented Migrants (Reuters)

Barack Obama’s executive action to shield millions of undocumented immigrants from deportation has suffered a legal setback with an appeal to the supreme court now the administration’s only option. A 2-1 decision by the fifth US circuit court of appeals in New Orleans has upheld a previous injunction – dealing a blow to Obama’s plan, which is opposed by Republicans and challenged by 26 states. The states, all led by Republican governors, said the federal government exceeded its authority in demanding whole categories of immigrants be protected. The Obama administration has said it is within its rights to ask the Department of Homeland Security to use discretion before deporting non-violent migrants with US family ties.

The case has become the focal point of the Democratic president’s efforts to change US immigration policy. Seeing no progress on legislative reform in Congress, Obama announced in November 2014 that he would take executive action to help immigrants. He has faced criticism from Republicans who say the program grants amnesty to lawbreakers. Part of the initiative included expansion of a program called Deferred Action for Childhood Arrivals, protecting young immigrants from deportation if they were brought to the US illegally as children. In its ruling the appeals court said it was denying the government’s appeal to stay the May injunction “after determining that the appeal was unlikely to succeed on its merits”. Republicans hailed the ruling as a victory against the Obama administration.

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The incompetence is blinding.

EU Plans New Refugee Centers as Influx Overwhelms Greece (Bloomberg)

European Union governments acknowledged that policies to channel migration aren’t working, announcing new processing centers to deal with refugees who slip through Greece without being registered. With little more than 100 of a planned 160,000 asylum-seekers sent from Greece and Italy to future homes in other European countries and winter setting in, EU interior ministers said the record-setting influx threatens to overwhelm some governments. “It is time to shift gears and start delivering on all fronts,” EU Home Affairs Commissioner Dimitris Avramopoulos told reporters Monday after the ministers met in Brussels. “We have talked a lot, it is the moment to deliver.”

European clashes over sheltering the mostly Muslim, mostly poor newcomers were accompanied by warnings of the risk to the system of passport-free travel between most EU countries, which is regularly hailed as one of the bloc’s greatest achievements. “There can be a Europe without internal borders only if Europe’s external borders are secured,” Austrian Interior Minister Johanna Mikl-Leitner said. EU leaders will grapple with refugee policy Wednesday and Thursday in Malta, at a summit with African officials that was called in April when the biggest numbers were coming across the central Mediterranean Sea. Now most are fleeing Syria’s civil war, traveling through Turkey, entering the EU in Greece and moving further northwest.

Some 200,000 came ashore on the Greek island of Lesbos in October alone, making it impossible for economically strapped Greece to cope, Luxembourg Foreign Minister Jean Asselborn said. “It’s an illusion, it’s impossible to ask a country, especially Greece, to welcome 10,000 people a day and to manage the screening,” said Asselborn, who chaired the meeting. New processing centers will be set up further north, to screen and register asylum-seekers who make it through Greece without stopping at reception centers dubbed “hotspots” in EU jargon.

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Please watch. Eric Kempson is a 60-year old British artist who lives on Lesvos and devotes his life to saving refugees. This is what he has to say about aid agencies. Lots of F words.

Major Aid Agencies Are Deceiving The General Public on Refugees (Kempson)

When the agancies finally made it to Lesvos a year late, they turned out to be horrible failures. UNHCR, Red Cross, just take it in…

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Oct 222015
 
 October 22, 2015  Posted by at 9:38 am Finance Tagged with: , , , , , , ,  


LIFE Freedom in peril 1941

Whenever we at the Automatic Earth explain, as we must have done at least a hundred times in our existence, that, and why, we refuse to define inflation and deflation as rising or falling prices (only), we always get a lot of comments and reactions implying that people either don’t understand why, or they think it’s silly to use a definition that nobody else seems to use.

-More or less- recent events, though, show us once more why we’re right to insist on inflation being defined in terms of the interaction of money-plus-credit supply with money velocity (aka spending). We’re right because the price rises/falls we see today are but a delayed, lagging, consequence of what deflation truly is, they are not deflation itself. Deflation itself has long begun, but because of confusing -if not conflicting- definitions, hardly a soul recognizes it for what it is.

Moreover, the role the money supply plays in that interaction gets smaller, fast, as debt, in the guise of overindebtedness, forces various players in the global economy, from consumers to companies to governments, to cut down on spending, and heavily. We are as we speak witnessing a momentous debt deleveraging, or debt deflation, in real time, even if prices don’t yet reflect that. Consumer prices truly are but lagging indicators.

The overarching problem with all this is that if you look just at -consumer- price movements to define inflation or deflation, you will find it impossible to understand what goes on. First, if you wait until prices fall to recognize deflation, you will tend to ignore the deflationary moves that are already underway but have not yet caused prices to drop. Second, when prices finally start falling, you will have missed out on the reason why they do, because that reason has started to build way before a price fall.

A different, but useful, way to define -debt- deflation comes from Andrew Sheng and Xiao Geng in a September 24 piece at Project Syndicate, China in the Debt-Deflation Trap:

The debt-deflation cycle begins with an imbalance or displacement, which fuels excessive exuberance, over-borrowing, and speculative trading, and ends in bust, with procyclical liquidation of excess capacity and debt causing price deflation, unemployment, and economic stagnation.

That’s of course just an expensive way of saying that after a debt bubble must come a hangover. And how anyone can even attempt to deny we’re in a gigantic debt bubble is hard to understand. Our entire economic system is propped up, if not built up, by debt.

The mention of the excess capacity that has been constructed is useful, but we’re not happy with ‘price deflation’, since that threatens to confuse people’s understanding, the same way terms like ‘consumer deflation’ or ‘wage inflation’ do.

Central banks can postpone the deflation of a gigantic debt bubble like the one we’re in, but only temporarily and at a huge cost. And it looks like we’ve now reached the point where they’re essentially powerless to do anything more, or else. We are inclined to point to August 24 as a pivotal point in this, the China crash where people lost faith in the Chinese central bank, but it doesn’t really matter, it would have happened anyway.

And today we’re up to our necks in deflation, and nobody seems to notice, or call it that. Likely because they’re all waiting for CPI consumer prices to fall.

But when you see that Chinese producer prices are down 5.9%, in the 43rd straight month of declines, and Chinese imports are down 20% (with Japan imports off 11%), don’t you hear a bell ringing? What does it take? If the dramatic fall in oil prices hasn’t done it either, how about steel? How about the tragedy British steel has been thrown in, how about the demise of Sinosteel even as China is dumping steel on world markets like there’s no tomorrow?

How about the reversal of funds that once flowed into emerging markets and are now flowing right back out?

Or how about major global banks, all of whom see their profits and earnings deplete, and many of whom are laying off staff by the thousands?

Wait, how about global wealth down by 5% since 2008 despite all the QE and ZIRP policies? And global trade off by -8.4% YoY?!

Here’s from Tyler Durden last week:

Credit Suisse’s latest global wealth outlook shows that dollar strength led to the first decline in total global wealth (which fell by $12.4 trillion to $250.1 trillion) since 2007-2008.

[..] from HSBC: “We are already in a global USD recession. Global trade is also declining at an alarming pace. According to the latest data available in June the year on year change is -8.4%. To find periods of equivalent declines we only really find recessionary periods. This is an interesting point. On one metric we are already in a recession. [..] global GDP expressed in US dollars is already negative to the tune of $1,37 trillion or -3.4%.

How about companies like Walmart and Glencore, just two of the many large entities that have large troubles? These are not individual cases, they are part of a global trend: deflation. As evidence also by the increase in US corporate downgrades and defaults:

Moody’s issued 108 credit-rating downgrades for U.S. nonfinancial companies, compared with just 40 upgrades. That’s the most downgrades in a two-month period since May and June 2009, the tail end of the last U.S. recession. Standard & Poor’s downgraded U.S. companies 297 times in the first nine months of the year…

Everything and everyone is overindebted. All of the above stats, and a million more, point to the beginning of a deleveraging of that debt, something that curiously enough hasn’t happened at all since the 2007/8 crisis. On the contrary, a massive amount of additional debt has been added to a global system already drowning in it. China alone added $20-15 trillion, and that kept up appearances.

But now China’s slowing down everywhere but in its official GDP numbers. And unless we build a base on the moon, there is no other country or region left that can take the place of China in propping up western debt extravaganza. This will come down.

The only way a system that looks like this could be kept running is by issuing more debt. But even that couldn’t keep it going forever. We all understand this. We just don’t know the correct terminology for what’s happening. Which is that debt that has been inflated to such extreme proportions, must lead to deflation, and do so in spectacular fashion.

As long as politicians and media keep talking about disinflation and central bank inflation targets, and all they talk actually about is consumer prices, we will all fail to acknowledge what’s happening right before our very eyes. That is, the system is imploding. Deflating. Deleveraging. And before that is done, there can and will be no recovery. Indeed, this current trend has a very long way to go down.

So far down that you will have a very hard time recognizing the world, and its economic system, on the other side of the process. But then again, you have a hard time recognizing the world for what it is on this side as well.

Oct 122015
 
 October 12, 2015  Posted by at 9:02 am Finance Tagged with: , , , , , , , , , ,  


Dorothea Lange Country filling station, Granville County, NC July 1939

The Golden Age Of Central Banks Is At An End – Time To Tax And Spend? (Guardian)
QE Causes Deflation, Not Inflation (Josh Brown)
Western Economies Still Too Weak To Handle Fed Rate Rise, Says China (Guardian)
The World Still Needs A Way To Stop Hot Money Scalding Us All (Guardian)
Glencore Shares Halted Pending Statement On Proposed Asset Sales (Bloomberg)
Commodity Contagion Sparks Second Credit Crisis As Investors Panic (Telegraph)
Japan Inc. Sounds Alarm On Consumer Spending (Reuters)
World Cannot Spend Its Way Out Of A Slump, Warns OECD Chief (Telegraph)
Growing Government Debt Will Test Euro-Zone Solidarity (Paul)
EU Bank Chief ‘Could Recall Volkswagen Loans’ (BBC)
UK Government Emissions Tester Paid £80 Million By Car Firms (Telegraph)
Volkswagen’s Home City Enveloped In Fear, Anger And Disbelief (FT)
The Russians Are Fleeing London’s Stock Market (Bloomberg)
Soaring London House Prices Sucking Cash Out Of Economy (Guardian)
Australia Housing Bust Now The Greatest Recession Risk (SMH)
Don’t Let The Nobel Prize Fool You. Economics Is Not A Science (Joris Luyendijk)
The Tragic Ending To Obama’s Bay Of Pigs: CIA Hands Over Syria To Russia (ZH)
EU Must Stop ‘Racist Criteria’ In Refugee Relocation – Greece (Reuters)

“The world is one recession away from a period of stagnation and prolonged deflation in which the challenge would be to avoid a re-run of the Great Depression of the 1930s.”

The Golden Age Of Central Banks Is At An End – Time To Tax And Spend? (Guardian)

Turn those machines back on. So demands the unscrupulous banker, Mortimer Duke, when he finds he and his brother Randolph have been ruined by their speculative scam in the film Trading Places. Having lost all his money betting wrongly on orange juice futures, Mortimer demands that trading be restarted so that he can win it back. It’s not known whether Christine Lagarde is a secret fan of John Landis movies. As a French citizen, François Truffaut might be more her taste. There is, though, more than a hint of Trading Places about the advice being handed out by Lagarde’s IMF to global policymakers. To Europe and Japan, the message is to print some more money. Keep those machines turned on, in other words.

To the US and the UK, there was a warning that raising interest – something central banks in both countries are contemplating – could have nasty spillover effects around the rest of the world. Think long and hard before turning those machines off because you may have to turn them back on again before very long, Lagarde is saying, because the big risk to the global economy is not that six years of unprecedented stimulus has caused inflation but that the recovery is faltering. These are indeed weird times. Share prices are rising and so is the cost of crude oil, but the sense in financial markets is that the next crisis is just around the corner. The world is one recession away from a period of stagnation and prolonged deflation in which the challenge would be to avoid a re-run of the Great Depression of the 1930s.

That fate was avoided in 2008-09 by strong and co-ordinated policy action: deep cuts in interest rates, printing money, tax cuts, higher public spending, wage subsidies and selective support for strategically important industries. But what would policymakers do in the event of a fresh crisis? Would they double down on measures that have already been found wanting or go for something more radical? Ideas are already being floated, such as negative interest rates that would penalise people for holding cash, or the creation of money by central banks that would either be handed straight to consumers or used to finance public infrastructure, also known as “people’s QE”.

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Time people understood this. “QE is deflationary because it shrinks net interest margins for banks via depressing treasury bond yields. It also enriches the already wealthy via asset price inflation but they do not raise their consumption in response..”

QE Causes Deflation, Not Inflation (Josh Brown)

Why were the inflation hawks so wrong about quantitative easing? Why didn’t all the money printing lead to commodity prices skyrocketing? One answer is that, while bank reserves were boosted, lending didn’t take off and there was no uptick in the velocity of money the speed at which capital zooms through the economy and turns over. Absent velocity of money, QE could be looked at as either ineffective or actually causing a deflationary environment, where capital is hoarded and everyone is too petrified to risk it on productive endeavors. Christopher Wood (CLSA) explains further in his new GREED & fear note:

To GREED & fear the best way to illustrate that quantitative easing is not working is the continuing decline in velocity and the resulting lack of a credit multiplier since the unorthodox monetary regime was introduced. In America, Japan and the Eurozone velocity has continued to decline since the financial crisis in 2008. Thus, US, Japan and Eurozone money velocity, measured as the nominal GDP to M2 ratio, has declined from 1.94x, 0.7x and 1.29x respectively in 1Q98 to 1.5x, 0.55x and 1.05x in 2Q15 (see Figure 3).

Indeed, US money velocity is now at a six-decade low. This is why those who have predicted a surge in inflation in recent years caused by the Fed printing money have so far been proven wrong. For inflation, as defined by conventional economists like Bernanke in the narrow sense of consumer prices and the like, will not pick up unless the turnover of money increases. This is the problem with the narrow form of mechanical monetarism associated with the likes of American economist Milton Friedman.

Wood goes on to make the point that QE is deflationary because it shrinks net interest margins for banks via depressing treasury bond yields. It also enriches the already wealthy via asset price inflation but they do not raise their consumption in response, because how much more shit can they possibly buy? Finally, it leads to a preference of share buybacks vs investment spending because the payback from financial engineering is so much easier and more immediate.

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And China too.

Western Economies Still Too Weak To Handle Fed Rate Rise, Says China (Guardian)

The slow recovery of western economies means the US Federal Reserve should not raise interest rates yet, according to the Chinese finance minister. Speaking on the sidelines of the annual meeting of the World Bank and International Monetary Fund in Lima, Lou Jiwei said developed economies were to blame for the global economic malaise because their slow recoveries were not creating enough demand. “The United States isn’t at the point of raising interest rates yet and under its global responsibilities it can’t raise rates,” Lou said in an interview published in the China Business News on Monday. The minister said the US “should assume global responsibilities” because of the dollar’s status as a global currency.

Lou’s comments were published hours after Fed vice-chairman Stanley Fischer said policymakers were likely to raise interest rates this year, but that that was “an expectation, not a commitment”. Asked about the global economic situation, Lou said the problem was not with developing countries. “Rather, it is the continued weak recovery of developed countries” that’s hindering the global economy, he said. “Developed countries should now have faster recoveries to give developing countries some external demand.” Lou welcomed the structural reforms in Europe as a positive development, but said geopolitics and the Syrian refugee crisis would have an impact on its economy. He described the slowdown in China’s economy as a healthy process, but said policy makers needed to manage it carefully.

“The slowing of China’s economic growth is a healthy process, but it is a sensitive period. The Chinese government must make accurate adjustments, keeping the economy within a predictable space while continuing to promote internal structural reforms,” he said.

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Stop issuing it?!

The World Still Needs A Way To Stop Hot Money Scalding Us All (Guardian)

Bill Gross, America’s “bond king”, who made his fortune betting on IOUs from companies and governments, is suing his erstwhile employer for $200m, we learned last week. He says his colleagues were driven by greed and “a lust for power”. His chutzpah was a timely reminder of the vast sums won and lost in the world of globalised capital, but also of the power that still lies in the hands of men (they are mostly men) like Gross, who sit atop a system that remains largely untamed despite the lessons of the past seven years. To those caught up in it, America’s sub-prime crash and its aftermath felt like a unique – and uniquely dreadful – chain of events, a financial and human disaster on an unprecedented scale. Yet it was just the latest in a series of periodic convulsions in modern capitalism, from the east Asia crisis to the Argentine default, to Greece’s humiliation at the hands of its creditors.

The first tremors of the next earthquake could be sensed by the central bankers and finance ministers gathered in Lima for the IMF’s annual meetings this weekend. Many were fretting about the knock-on effects of the downturn in emerging economies – led by China. Take a step back, though, and both the emerging market slowdown and the boom that preceded it are just the latest symptom of the ongoing malaise afflicting the global financial system. Seven years on from the Lehman collapse in September 2008, there has been some re-regulation – the Bank of England will soon announce details of the Vickers reforms, which will make banks split their retail arms from the riskier parts of their business – but many elements of the financial architecture remain unchallenged.

Capital swills unchecked around the world; governments feel compelled to prioritise the whims of international investors such as Gross – who tend to have a neoliberal bent – over the needs of domestic businesses; and credit ratings agencies remain all-powerful, despite their dismal record. The theory behind free-flowing capital is that it allows the world’s savings to find the most profitable opportunities – even far from home – and provides the impetus for investment and entrepreneurialism, aids economic development and boosts growth. Yet as Unctad, the UN’s trade and development arm, detailed in its annual report last week, the reality is very different. Capital flows are often driven more by the global financial weather than by the investment prospects in emerging economies; they can be disproportionately large; and they can change abruptly with the market mood, overwhelming domestic efforts to promote stable development.

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Not a good sign: “The company is seeking to raise more than $1 billion by selling future production of gold and silver”

Glencore Shares Halted Pending Statement On Proposed Asset Sales (Bloomberg)

Glencore, which has flagged divestments as part of a plan to cut debt by about $10 billion after commodity prices plunged, halted trading in Hong Kong Monday pending an announcement on proposed asset sales in Australia and Chile. The Swiss trader and miner said last month it’s planning to raise about $2 billion from the sale of stakes in its agricultural assets and precious metals streaming transactions. While the company didn’t identify specific assets in the statement requesting the trading halt, it has copper operations in Chile and coal, zinc and copper mines in Australia. The potential sales are part of the debt-cutting program that Glencore CEO Ivan Glasenberg announced in early September. The plan includes selling $2.5 billion of new stock, asset sales, spending cuts and suspending the dividend. Taken together, the measures aim to reduce debt from $30 billion nearer to $20 billion.

The company is seeking to raise more than $1 billion by selling future production of gold and silver, two people familiar with the situation said Oct. 1. The company produced 35 million ounces of silver last year and 955,000 ounces of gold from mines in South America, Australia and Kazakhstan. Investors including Qatar Holding, the direct investment arm of the Gulf state’s sovereign wealth fund, have expressed an interest in buying a minority stake in Glencore’s agriculture business, according to three people familiar with the conversations. Citigroup, one of the banks hired to run the sale alongside Credit Suisse, said earlier this month that the whole business could be worth as much as $10.5 billion. The company has also announced cuts to copper and zinc output in an effort to support metal markets.

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“Without the oxygen of cheap debt, commodity trading houses are finished. Each trade in oil or iron ore might generate only 1pc to 2pc in margin – but this greatly increases when magnified by debt. The only limit on profits is then how much you can borrow. Greed drives returns. ”

Commodity Contagion Sparks Second Credit Crisis As Investors Panic (Telegraph)

The collapse in commodity prices has sparked a second credit crisis as investors dump high-yield bonds, shattering the fragile confidence necessary to support global markets. Those calling it a Lehman moment forget their history. Current events have chilling similarities to the Bear Stearns collapse and mark the start of a new crisis, not the end. The world of commodity trading has been thrown into chaos as the cost of borrowing to fund operations soars. Glencore has become the poster child for the sector’s woes as its shares have more than halved in value during the past six months. More worrying has been the impact on the group’s credit profile. Glencore’s US bonds due for repayment in 2022 have collapsed to around 82 cents in the dollar. Only four months earlier, they had been stable at around 100 cents, implying that those who lent money would get it back plus interest.

Now for every dollar lent to Glencore, banks face losses, and as the price of bonds falls the yield has risen to 7.4pc. Without the oxygen of cheap debt, commodity trading houses are finished. Each trade in oil or iron ore might generate only 1pc to 2pc in margin – but this greatly increases when magnified by debt. The only limit on profits is then how much you can borrow. Greed drives returns. Glencore is a profitable business when it can borrow at around 4pc, but if it has to refinance at 7pc to 10pc those slim profit margins evaporate. The fear of those holding Glencore debt can be seen in the soaring price for the insurance against a default, or credit default swaps (CDS). Glencore five-year CDS has soared to 625, from about 280 just a month ago. A rule of thumb is that a CDS above 400 means a serious risk of a default, or about a 25pc chance in the next five years.

Glencore has taken drastic action to reduce its $50bn debts, or $30bn if all its stocks of metals are deducted, which it reported at the end of September. A $2.5bn equity raising has been completed, the dividend has been axed and assets sold as part of a $10bn debt reduction plan. However, if borrowing costs remain where they are, the game may already be over. If Glencore itself were to fold, it would be a huge problem with its $221bn in annual revenues, but when combined with the other commodity trading houses, Trafigura, Vitol and Noble, the fallout would be disastrous. Trafigura is not listed but its debt is publicly traded and the bonds have collapsed to 86 cents in the dollar, or a yield of 8.9pc. Noble, the Singapore trading house, has also seen its shares collapse as commodity prices slump. First-half profits from Noble’s metals trading have fallen 98pc to just $3m. This has been offset by strong results in oil trading, but the problems remain.

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Deflation.

Japan Inc. Sounds Alarm On Consumer Spending (Reuters)

Do not believe in official statistics, Japanese retailers seem to be saying, as they cut earnings forecasts and warn of lackluster consumer spending, a key growth engine for Japan at a time when exports and factory output are stalling. If you go by the larger-than-expected 2.9% gain in household spending in August – the first year-on-year rise in three months – then consumption looks like it is finally alive and well again, after a sales tax hike last year stifled the economy. But profits of retailers suggest the spending data, which has a small sample size, has not captured the full picture. Restrained household consumption raises the stakes for a central bank policy meeting on Oct. 30, and for the government’s plan to flesh out new economic policies before the year-end.

“Consumer spending has ground to a halt,” said Noritoshi Murata, president of Seven & i Holdings (3382.T). “There are a lot of concerns about the global economy and not many positives for consumption. Weak spending could continue into the second half of the fiscal year.” Seven & i, which operates Japan’s ubiquitous 7-Eleven convenience stores, on Oct. 8 trimmed its full-year profit forecast by 1.6% to 367 billion yen ($3.05 billion) and cut its revenue forecast by 3.9% to 6.15 trillion yen, triggering a fall in its shares in Tokyo. The main problem is wages are not rising fast enough to keep pace with rising food prices, and consumers are starting to cut back on other goods. Real wages, adjusted for inflation, rose 0.5% in July from a year earlier. That was the first gain in 27 months.

But wage growth subsequently slowed to 0.2% in August, and summer bonuses fell from last year, government data shows. Another problem is more and more workers are getting stuck in jobs with low pay. Part-time and irregular workers comprised a record 37.4% of the workforce last year, according to the National Tax Bureau. Irregular workers earn on average less than half of what regular full-time workers earn, tax data show. The third problem is the government plans to raise the nationwide sales tax again, to 10% in 2017 from 8%, and households are already changing their behavior.

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Structural changes for the OECD means opening stores on Sundays. It doesn’t get more clueless.

World Cannot Spend Its Way Out Of A Slump, Warns OECD Chief (Telegraph)

Countries that try to spend their way out of crisis risk becoming stuck in a permanent malaise, according to the head of the Organisation for Economic Co-operation and Development (OECD). Angel Gurria said central banks were running out of firepower to boost economies in the event of another sharp slowdown, while governments had limited space to ramp up spending. The secretary general said structural reforms and more international co-operation were badly needed in a world of deteriorating growth. “Countries that say: I’ll spend my way out of this third slump. I say: no you won’t, because you’ve already done that, and you ran out of space,” Mr Gurria said on the sidelines of the IMF’s annual meeting in Lima, Peru.

“Now countries are trying to reduce the deficit and debt because that’s a sign of vulnerability and the rating agencies are breathing down their neck – they’ve already downgraded Brazil and France. “We don’t have room to inflate our way out of this one. So we go back to the same issue: it’s structural, structural, structural.” The OECD has been working with countries such as Greece to liberalise product markets, which deal with competitiveness issues and labour laws. Mr Gurria, who has urged countries for years to implement structural reforms, said he was frustrated at the lack of progress: “If you listen to the conversations we have on opening on Sundays you wouldn’t believe it. Or the debates we have about [the] 35 hour [working week]. These are the real issues.

“The people, the trade unions, they all have a stake and their arguments are strong. But where countries have room is to make structural changes, and central banks can help by continuing to ease. “[With quantitative easing] there is a question of whether we’re entering a territory of diminishing returns. Of course we must use it, but there’s not a lot of room left.” Mr Gurria conceded that the benefits of reform were gradual. “Germany modified its labour laws 12 years ago, and it’s reaping the benefits brilliantly and gallantly because of much better performance during the crsis. Spain did it three years ago, and they’re reaping the benefits now. Italy did it last month, and it will take a couple of years.”

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France as the black shhep. But Germany’s recent woes should not be underestimated.

Growing Government Debt Will Test Euro-Zone Solidarity (Paul)

The German chancellor and the French president stood side by side last Wednesday to address the European Parliament. But beneath that show of solidarity lies a story of two diverging economies at the heart of the euro zone. At the time the euro was born, Germany’s economy – bearing close to $2 trillion in reunification costs – looked not too dissimilar to France’s. Today, however, the gap between the two countries is the widest since the reunification. Not only is the debt-to-gross-domestic-product ratio of France and Germany the widest in 20 years, but – more importantly in a currency union without a federal state – the latter has a huge and increasing current surplus, while the former is in deficit.

This is not surprising. Germany, while benefiting greatly from the opened markets of its fixed exchange rate partners, undertook a series of reforms to improve its economic position. France was not only unable to reform but indulged in the 35-hour workweek. If we were still living under the European Monetary System that predated the euro, France would simply have had to devalue, as it did many times before the euro. Under the euro, helped by its trade surplus, Germany kept a tighter budget, while the French state kept spending an ever-higher percentage of its GDP in repeated attempts to support its faltering economy. As a result, its debt is now close to the symbolic 100% of GDP level, not accounting for unfunded pension liabilities, and the rating agencies have stripped it of its AAA rating and continue to downgrade it. The European Commission, in its last assessment, speaks of France facing “high sustainability risk” in the medium term.

This is not just a French problem though; it’s a euro-zone one. According to Eurostat, in the first quarter of 2015, the euro-zone debt-to-GDP ratio was 92.9% — the highest it has been since the creation of the euro. Never has the zone been so far away from its own Maastricht fiscal sustainability criteria. Huge differences between countries exist, but the only country of the original 12 euro-zone members still respecting the debt and deficit levels is tiny Luxembourg. What does this say for the future of the euro?

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More billions to slide out of VW coffers.

EU Bank Chief ‘Could Recall Volkswagen Loans’ (BBC)

The European Investment Bank (EIB) could recall loans it gave to Volkswagen, its president told a German newspaper. Werner Hoyer told Sueddeutsche Zeitung that the EIB gave loans to the German carmaker for things like the development of low emissions engines. He said they could be recalled in the wake of VW’s emissions cheating. The paper reported that about €1.8bn of those loans are still outstanding. Mr Hoyer is quoted as saying that the EIB had granted loans worth around €4.6bn to Volkswagen since 1990. “The EIB could have taken a hit [from the emissions scandal] because we have to fulfil certain climate targets with our loans,” the Sueddeutsche Zeitung quoted Mr Hoyer as saying. Mr Hoyer was attending the IMFs meeting in Lima, Peru. He added that the EIB would conduct “very thorough investigations” into what VW used the funds for.

Mr Hoyer told reporters that if he found that the loans were used for purposes other than intended, the EU bank would have to “ask ourselves whether we have to demand loans back”. He also said he was “very disappointed” by Volkswagen, adding the EIB’s relationship with the carmaker would be damaged by the scandal. Volkswagen admitted that about 11 million of its vehicles had been fitted with a “defeat device” – a piece of software that duped tests into showing that VW engines emitted fewer emissions than they really did. Mr Hoyer’s comments come days after VW’s US chief Michael Horn faced a Congress panel to answer questions about the scandal, which has prompted several countries to launch their own investigations into the carmaker. On Monday, VW’s UK managing director Paul Willis is due to appear before members of parliament at an informal hearing.

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TEXT

UK Government Emissions Tester Paid £80 Million By Car Firms (Telegraph)

The state agency that carries out emissions tests on new vehicles has been paid more than £80 million by car companies over the last decade, The Daily Telegraph can disclose. The Vehicle Certification Agency, whose chief will appear on Monday before a Commons committee looking at the Volkswagen scandal, has reported a year-on-year rise in profits, receiving almost £13 million in 2014/15 alone. Campaigners claim Europe’s national certification agencies are competing so fiercely for business it is not in their interests to catch out car-makers. Samples of new cars must undergo checks by approval agencies to ensure they meet European performance standards. Once a car has been type-approved by the manufacturer s chosen national agency, it can be sold anywhere in Europe.

“Car makers are able to go type-approval shopping around Europe to get the best deals for them”, said Greg Archer, of campaign group Transport & Environment. “No one is checking that type approval authorities are doing an impartial or good job and this needs to change”, he added. Last month Volkswagen admitted that it had systematically installed software in VW and Audi diesels since 2009 to deceive regulators who were measuring their exhaust fumes. Since 2005 the VCA -an executive agency of the Department for Transport- has received a total of £84million from “product certification/type-approval services”, according to a Greenpeace investigation. It said the VCA’s outgoing CEO Paul Markwick, interim chief executive Paul Higgs and chief operating officer John Bragg had held senior positions with major car manufacturers.

MPs on the Commons select committee on transport will question Volkswagen bosses, Transport Secretary Patrick McLoughlin and the VCA’s acting chief, Mr Higgs, over the emissions violations. A Department for Transport spokesman said the VCA charged car-makers in order to cover its operating costs and to provide value for taxpayers. He added: “Whilst the VCA charges the industry for its services, its governance framework is set by government.” It claimed there was “a conflict of interest” . A Greenpeace spokesman said: The Government s testing regime failed the public. The question is why? “Our evidence suggests it’s not actually in the VCA’s interests to catch out the car-makers. Their business model -and it has become a business- is to attract manufacturers to test their cars with them. It’s a conflict of interest.”

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They’re right to be scared.

Volkswagen’s Home City Enveloped In Fear, Anger And Disbelief (FT)

Few cities are as dependent on one company as Wolfsburg. Situated 200km west of Berlin, it is home not just to the world’s biggest factory and Volkswagen’s headquarters, it also has a VW Arena where Champions League football is played, a VW bank, and even a VW butcher that makes award-winning curried sausage. “VW is God here,” says a Turkish baker on the main shopping street of Porschestrasse. But news of VW’s diesel emissions scandal has hit the city hard, sparking anger and dismay as well as worries of the financial and employment consequences for both the carmaker and Wolfsburg. Some are even invoking the decline of another motor city Detroit in the US.

“I am worried. It’s not good for Wolfsburg. Detroit stands as a negative example for what can happen: the city has collapsed. The same here is also thinkable,” says Uwe Bendorf, who was born and raised in Wolfsburg and now works at a health insurer. VW’s sprawling factory employs about 72,000 in a city with just 120,000 inhabitants. Over an area of more than 6 sq km, three times the size of the principality of Monaco, the plant churns out 840,000 cars a year, including the VW Golf, Tiguan and Touran models. Among workers, the scandal dominates rather like the chimney stacks of the factory’s power station tower over Wolfsburg.

“It was shock. Then anger. How could they be so stupid?” says one worker, describing his emotions on hearing last month that VW had admitted to large scale cheating in tests on its diesel vehicles for harmful emissions of nitrogen oxides. Another worker says: “Everyone is worried. Will we get our bonus still? Will there be job cuts? There is so much uncertainty.” Outside the factory gates, few are keen to be seen speaking to the media. But this is a city in which VW is omnipresent, and a VW worker never far away.

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“Total equity sales by Russian companies this year are set to be about 30 times lower than the 2007 peak..”

The Russians Are Fleeing London’s Stock Market (Bloomberg)

Russian expansionism is going into reverse, at least on the London stock market. Three of Russia’s major commodity-related companies are already preparing to withdraw their listings after the bursting of the raw-materials boom and a slump in share sales by the nation’s companies from more than $30 billion in 2007 to below $1 billion this year. Eurasia Drilling, the country’s largest oil driller, said last week its owners and managers offered to buy shareholders out and take the company private. That follows a move by potash miner Uralkali PJSC to buy back a major part of its free float, saying in August it may delist shares in London as a result. Billionaire Suleiman Kerimov’s family also plans to take Polyus Gold private.

More may follow as their owners’ interest in using foreign shares as a route to expansion wanes in tandem with overseas investors’ appetite for raw-material and emerging-market stocks, said Kirill Chuyko at BCS Financial Group in Moscow. “Each company has a specific reason, but the common one is that investors’ appetite for commodities-related stocks, especially from the emerging markets, is exhausted,” Chuyko said. “At the same time, the owners see that the companies’ valuations don’t reflect their hopes and wishes, while maintaining the listing requires some effort and expenditure.” Total equity sales by Russian companies this year are set to be about 30 times lower than the 2007 peak, when global commodity prices were about 90% higher than current levels.

A gauge of worldwide emerging-market stocks has declined 14% in the past year. Russia has been among the hardest-hit emerging economies as prices of oil and gas, making up half of the national budget, collapsed since last year. The economy shrank 4.6% in the second quarter from a year earlier. That’s a reversal from when oil prices and growth were high and local companies talked up expanding overseas. Polyus planned to merge with a global rival to become one of the world’s top three gold miners, billionaire Mikhail Prokhorov, who controlled the company at the time, said in December 2010. The producer, which redomiciled to the U.K. in 2012 as part of the plan, never achieved his goal.

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How on earth has this not been obvious for years now?

Soaring London House Prices Sucking Cash Out Of Economy (Guardian)

Soaring London house prices are costing the economy more than £1bn a year and preventing the creation of thousands of jobs, as individuals plough money into buying and renting instead of spending their cash elsewhere, a report has claimed. London’s housing market recovered quickly from the financial downturn of 2008-2009 and in recent years rents and house prices have rocketed. House prices are more than 46% above their pre-crisis peak, at an average of £525,000 according to the Office for National Statistics, while rents in the private sector have risen by a third over the past decade. The report, by business group London First and consultancy CEBR, found that workers in many sectors were now priced out of the capital, while companies were being forced to pay more to attract staff and help them meet living expenses.

The report said there was a knock-on effect on consumer spending, with money being spent on expensive mortgages and rents rather than other goods. It said as much as £2.7bn could have been spent elsewhere in 2015 if housing costs had kept in line with inflation over the past decade. This additional spending could have supported almost 11,000 more jobs, and meant a boost to the economy of more than £1bn this year. Workers in shops, cafés and restaurants, and those performing administrative office roles would have to pay their entire pre-tax salary to rent an average private home in London, the report found, while social workers, librarians, and teachers faced rents equivalent to more than half their salaries.

It said only the best-paid workers, including company directors and those working in financial services, earned enough to rent in central London “affordably”; that is paying less than one-third of their salaries on housing. “The housing crisis is making it difficult to attract and retain staff in retail, care and sales occupations,” it said. “Even if they spend a limited amount on other goods and services, they are effectively priced out of living independently in the capital. They need to co-habit with partners, friends or family, or be eligible for social housing in the capital.” To compensate for high housing costs, employees expected higher salaries, which meant firms were paying an average of £1,720 a year more to workers than they would have had accommodation costs risen only in line with inflation since 2005. This meant an extra wage bill for firms of £5bn this year, and the figure was set to grow to £6.1bn by 2020.

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No worries, mate, there’ll be loud denials right up to the end.

Australia Housing Bust Now The Greatest Recession Risk (SMH)

House prices are set for a 7.5% decline from March next year, with the resulting slowdown in housing lending and construction activity set to hit the broader economy, according to a range of investment banks. “Our economics team are forecasting quarter-on-quarter house prices to fall from the March 2016 quarter before beginning to recover from June 2017,” said Macquarie Research in a briefing note entitled: “Australian Banks: What goes up, must come down”. Macquarie said there would be a “7.5% reduction from peak to trough”. Another economist says heavy household debt and softening house prices pose a greater recession risk to the Australian economy than the slowdown in China.

Bank of America Merrill Lynch Australian economist Alex Joiner says high historic indebtedness, coupled with the chance of a downturn in house-building and prices, could further crimp consumer spending and property investment once the Reserve Bank of Australia was forced to tackle inflation by lifting interest rates. He said while the chance of a “hard landing” in the Chinese economy – on which Australia depends heavily for exports and inward investment – was small, a sharp decline in demand for housing in overheated markets such as Melbourne and Sydney was more probable and would drag the broader economy with it. “We are not forecasting collapse or the bursting of any perceived bubble,” Mr Joiner wrote in a note.

“That said, it is not difficult to envisage a more hard landing scenario in the property market. “This would clearly have a greater negative macro-economic impact channelled through households and the residential construction cycle,” he said. His fears are based on current household indebtedness measures, which have soared to the highest ever. These include the dwelling price-to-income ratio, currently at “never before observed” levels of five and a half times, and a household debt-to-gross-domestic-product ratio, which is at a “record high” 133.6%.

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I know Joris has read at least some of the many articles I wrote on the topic. Wonder what he took away from that.

Don’t Let The Nobel Prize Fool You. Economics Is Not A Science (Joris Luyendijk)

Business as usual. That will be the implicit message when the Sveriges Riksbank announces this year’s winner of the “Prize in Economic Sciences in Memory of Alfred Nobel”, to give it its full title. Seven years ago this autumn, practically the entire mainstream economics profession was caught off guard by the global financial crash and the “worst panic since the 1930s” that followed. And yet on Monday the glorification of economics as a scientific field on a par with physics, chemistry and medicine will continue. The problem is not so much that there is a Nobel prize in economics, but that there are no equivalent prizes in psychology, sociology, anthropology. Economics, this seems to say, is not a social science but an exact one, like physics or chemistry – a distinction that not only encourages hubris among economists but also changes the way we think about the economy.

A Nobel prize in economics implies that the human world operates much like the physical world: that it can be described and understood in neutral terms, and that it lends itself to modelling, like chemical reactions or the movement of the stars. It creates the impression that economists are not in the business of constructing inherently imperfect theories, but of discovering timeless truths. To illustrate just how dangerous that kind of belief can be, one only need to consider the fate of Long-Term Capital Management, a hedge fund set up by, among others, the economists Myron Scholes and Robert Merton in 1994. With their work on derivatives, Scholes and Merton seemed to have hit on a formula that yielded a safe but lucrative trading strategy. In 1997 they were awarded the Nobel prize.

A year later, Long-Term Capital Management lost $4.6bn in less than four months; a bailout was required to avert the threat to the global financial system. Markets, it seemed, didn’t always behave like scientific models. In the decade that followed, the same over-confidence in the power and wisdom of financial models bred a disastrous culture of complacency, ending in the 2008 crash. Why should bankers ask themselves if a lucrative new complex financial product is safe when the models tell them it is? Why give regulators real power when models can do their work for them?

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Excellent overview by Tyler Durden.

The Tragic Ending To Obama’s Bay Of Pigs: CIA Hands Over Syria To Russia (ZH)

One week ago, when summarizing the current state of play in Syria, we said that for Obama, “this is shaping up to be the most spectacular US foreign policy debacle since Vietnam.” Yesterday, in tacit confirmation of this assessment, the Obama administration threw in the towel on one of the most contentious programs it has implemented in “fighting ISIS”, when the Defense Department announced it was abandoning the goal of a U.S.-trained Syrian force. But this, so far, partial admission of failure only takes care of one part of Obama’s problem: there is the question of the “other” rebels supported by the US, those who are not part of the officially-disclosed public program with the fake goal of fighting ISIS; we are talking, of course, about the nearly 10,000 CIA-supported “other rebels”, or technically mercenaries, whose only task is to take down Assad.

The same “rebels” whose fate the AP profiles today when it writes that the CIA began a covert operation in 2013 to arm, fund and train a moderate opposition to Assad. Over that time, the CIA has trained an estimated 10,000 fighters, although the number still fighting with so-called moderate forces is unclear.

The effort was separate from the one run by the military, which trained militants willing to promise to take on IS exclusively. That program was widely considered a failure, and on Friday, the Defense Department announced it was abandoning the goal of a U.S.-trained Syrian force, instead opting to equip established groups to fight IS.

It is this effort, too, that in the span of just one month Vladimir Putin has managed to render utterly useless, as it is officially “off the books” and thus the US can’t formally support these thousands of “rebel-fighters” whose only real task was to repeat the “success” of Ukraine and overthrow Syria’s legitimate president: something which runs counter to the US image of a dignified democracy not still resorting to 1960s tactics of government overthrow. That, and coupled with Russia and Iran set to take strategic control of Syria in the coming months, the US simply has no toehold any more in the critical mid-eastern nation. And so another sad chapter in the CIA’s book of failed government overthrows comes to a close, leaving the “rebels” that the CIA had supported for years, to fend for themselves. From AP:

CIA-backed rebels in Syria, who had begun to put serious pressure on President Bashar Assad’s forces, are now under Russian bombardment with little prospect of rescue by their American patrons, U.S. officials say. Over the past week, Russia has directed parts of its air campaign against U.S.-funded groups and other moderate opposition in a concerted effort to weaken them, the officials say. The Obama administration has few options to defend those it had secretly armed and trained.

The Russians “know their targets, and they have a sophisticated capacity to understand the battlefield situation,” said Rep. Mike Pompeo, R-Kan., who serves on the House Intelligence Committee and was careful not to confirm a classified program. “They are bombing in locations that are not connected to the Islamic State” group.

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Seems racism is the only way they can barely keep their distribution plans alive.

EU Must Stop ‘Racist Criteria’ In Refugee Relocation – Greece (Reuters)

The EU must stop countries picking and choosing which refugees they accept in its relocation programme, otherwise it will turn into a shameful “human market”, Greece’s new migration minister said. The EU has approved a plan to share out 160,000 refugees, mostly Syrians and Eritreans, across its 28 states in order to tackle the continent’s worst refugee crisis since World War Two. The first 19 Eritrean asylum seekers were transferred from Italy to Sweden on Friday. Some countries, such as Slovakia and Cyprus, have expressed a preference for Christian refugees and Hungary has said the influx of large numbers of Muslim migrants threatens Europe’s “Christian values”. Migration Minister Yannis Mouzalas said that Greece was having trouble finding refugees to send to certain countries because the receiving nations had set what he called “racist criteria”.

He declined to name the states concerned. “Views such as ‘we want 10 Christians’, or ’75 Muslims’, or ‘we want them tall, blonde, with blue eyes and three children,’ are insulting to the personality and freedom of refugees,” Mouzalas told Reuters. “Europe must be categorically against that.” An EU official said a group of Syrian refugees was due to be relocated from Greece to Luxembourg under the EU scheme around Oct. 18, the first to be officially reassigned from Greece. A gynaecologist and founding member of the Greek branch of aid agency Doctors of the World, Mouzalas urged the EU to enforce strict quotas “otherwise it will turn into a human market and Europe hasn’t got the right to do that”. The refugees are generally not allowed to select the country to which they are assigned.

Greece has seen a record of about 400,000 refugees and migrants – mainly from Syria, Afghanistan and Iraq – arrive on its shores this year from nearby Turkey, hoping to reach wealthier northern Europe. Those who can afford it move on quickly to other countries, sometimes on tour buses taking them straight from the main port of Piraeus, near Athens, to the Macedonian border. But several thousand, mostly Afghans, have ended up trapped in Greece for lack of money. European authorities are reluctant to treat Afghans systematically as refugees, and a result, they are shut out of the relocation process. “It’s absurd to think that Afghans are coming to find better work. There is a long-lasting war, you aren’t safe anywhere, that’s the reality,” Mouzalas said.

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Oct 052015
 
 October 5, 2015  Posted by at 8:50 am Finance Tagged with: , , , , , , , , ,  


Jack Delano Cars being precooled at the ice plant, San Bernardino, CA 1943

Germany Now Expects Up To 1.5 Million Asylum Seekers In 2015 (Reuters)
Baby’s Body Washes Up On Greek Island Kos (AFP)
Two Children Drown Off Kos In Latest Refugee Tragedy (Kath.)
Caution: More Commodity Price Weakness Ahead (A. Gary Shilling)
Emerging Market Turmoil Flashes Warning Lights For Global Economy (FT)
Junk Bond Market Like A ‘Slow-Moving Train Wreck’ (CNBC)
Saudi Arabia Cuts Oil Prices Amid OPEC Price War (WSJ)
Russia PM Medvedev: Oil Prices Will Stay Low For Quite Long (WSJ)
China’s Middle-Class Dreams in Peril (WSJ)
Senior China Official Proposes Punitive FX Restrictions (Chang)
Volkswagen’s ‘Uniquely Awful’ Governance At Fault In Emissions Scandal (FT)
You Can Print Money, So Long As It’s Not For The People (Guardian)
Forest Fires In Indonesia Choke Much Of South-East Asia (Guardian)
Majority Of EU Nations Seek Opt-Out From Growing GMO Crops (Reuters)
How Monsanto Mobilized Academics to Pen Articles Supporting GMOs (Bloomberg)
Greece’s Euro Area Ties Risk More Strain Amid Refugee Crisis (Bloomberg)
EU And Turkey To Discuss Plan To Stem Flow Of Migrants (Reuters)
Hamburg, Bremen To Seize Commercial Property To House Refugees (BBC)

The estimate just doubled in two weeks time.

Germany Now Expects Up To 1.5 Million Asylum Seekers In 2015 (Reuters)

German authorities expect up to 1.5 million asylum seekers to arrive in Germany this year, the Bild daily said in a report to be published on Monday, up from a previous estimate of 800,000 to 1 million. Germany’s top-selling newspaper cited an internal forecast from authorities that it said had been classed as confidential. Many of the hundreds of thousands of people pouring into Europe to escape conflicts and poverty in the Middle East, Africa and beyond have said they are heading to Germany, Europe’s largest economy. Bild said the German authorities were concerned about the risk of a “breakdown of provisions” and that they were already struggling to procure enough living containers and sanitary facilities for the new arrivals. “Migratory pressures will increase further. We now expect seven to ten thousand illegal border crossings every day in the fourth quarter,” Bild cited the report as saying.

“This high number of asylum seekers runs the risk of becoming an extreme burden for the states and municipalities,” the report said. The authorities’ report also cited concerns that those who are granted asylum will bring their families over to Germany too, Bild said. Given family structures in the Middle East, this would mean each individual from that region who is granted asylum bringing an average of four to eight family members over to Germany in due course, Bild quoted the report as saying. German Finance Minister Wolfgang Schaeuble said on Sunday Europe needs to restrict the number of people coming to the continent. Chancellor Angela Merkel, who said Germany would grant asylum to those fleeing Syria’s civil war, has recently seen her popularity ratings slump to a four-year low.

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Give this baby the Nobel Peace Prize, not Merkel, who let it drown.

Baby’s Body Washes Up On Greek Island Kos

The decomposed body of a baby has been found on the shore of Greece’s Kos island, which is on the frontline of the asylum seeker influx coming from Turkey. The body of the baby boy, estimated to be 6 to 12 months old, was found dressed in green trousers and a white t-shirt on the beach of a hotel, the Greek coast guard said. Authorities believe the child was a member of an asylum seeker family that tried to reach Kos in a dinghy, according to local media reports. The body was transferred to Kos General Hospital for an autopsy. The grim discovery recalls the case of three-year-old Syrian boy Aylan Kurdi, whose body was found face down on a Turkish beach last month.

Pictures of the lifeless body of the Syrian toddler face down on a Turkish beach shocked the world and helped spur European nations to seek an effective response to the growing asylum seeker crisis. The Greek Coast Guard continues the grim job of recovering bodies from the sea and the shores of its islands, fearing that things will only get worse as winter approaches and the weather deteriorates. In September, at least 15 babies and children drowned when their overcrowded boat capsized in high winds off the Aegean island of Farmakonisi. [..] Nearly 3,000 others have died or disappeared during the crossing.

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Daily events.

Two Children Drown Off Kos In Latest Refugee Tragedy (Kath.)

The Greek coast guard has found the bodies of two children off the eastern Aegean island of Kos, which has been a main point of entry for refugees and migrants this year. Authorities said one of the dead children was aged between 6 and 12 months. The other is thought to be between three and five years old. Their nationalities were not immediately known. Last week the UN Refugee Agency (UNHCR) said that at least 102 people have died trying to reach Greece by sea this year. At least 3,000 have died in the Mediterranean as a whole. The UNHCR said on Friday that a total of 396,500 people have entered Greece by sea since January 1, more than 153,000 of them in September.

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“Prepare for further big declines.”

Caution: More Commodity Price Weakness Ahead (A. Gary Shilling)

It’s hard not to notice that commodity prices have been plummeting. It seems the price of everything that is grown or pulled out of the ground – from oil and gas to sugar and copper – has declined 46% since early 2011, causing bankruptcies and industry consolidation. Prepare for further big declines. Directly or indirectly, developed countries consume most commodities. Yet economic growth and demand for commodity-based products remain weak as North America and Europe continue to unwind their financial excesses. The earlier rapid expansion of debt, which helped fuel robust growth, is being reversed. US real GDP has risen at just a 2.2% annual rate since the business recovery began in mid-2009 – about half the rate you’d expect after a recession.

The euro area is limping along at a 1.2% annual growth rate, with recovery from the 2007-2009 recession interrupted by a mild downturn in 2011-2013. Economic gains in Japan’s stop-go economy have averaged only 1%. The world is now eight years into a deleveraging cycle. At this rate, it will probably take more than the historical average of 10 years to complete. Meanwhile, supplies of almost every commodity are huge and growing. China joined the World Trade Organization in late 2001 and, not by coincidence, commodity prices took off in early 2002. As manufacturing shifted from North America and Europe to China, it sucked up global commodity output. From 2000 to 2014, China’s share of global copper consumption leaped to 43% from 12%. China’s portion of iron ore purchases similarly zoomed to 43% from 16%, while aluminum went to 47% from 13%.

By the mid-2000s, industrial commodity producers were dazzled by China’s seemingly insatiable demand and made the same big mistake that always occurs in every economic cycle: They assumed surging demand from China would last indefinitely. Producers embarked on massive projects that often take a decade to complete. These included digging copper mines in Latin America, removing iron ore in Brazil and producing coal in Australia. All that new capacity began to come onstream in 2011, just as it became clear that the hoped-for post-recession return to rapid global economic growth wasn’t occurring. [..] But muted demand in North America and Europe for Chinese exports has slowed economic growth in China. Meanwhile, over-investment in ghost cities and building of excess infrastructure, in which China engaged to create jobs, has spawned huge debts. I estimate that the true rate of inflation-adjusted growth in China is about 3% to 4%, half the 7% official number.

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“The impotence of monetary policy in boosting growth and staving off deflationary pressures has become painfully apparent..”

Emerging Market Turmoil Flashes Warning Lights For Global Economy (FT)

Emerging economies risk “leading the world economy into a slump”, with lower growth and a rout in financial markets, according to the latest Brookings Institution-FT tracking index. Released ahead of the annual meetings of the IMF and World Bank in Lima, Peru, the index paints a much more pessimistic outlook than the fund is likely to predict later this week. According to Eswar Prasad of Brookings, weak economic data across most poorer economies has created “a dangerous combination of divergent growth patterns, deficient demand, and deflationary risks”. Christine Lagarde, IMF managing director, said last week that the global economic patterns were “disappointing and uneven” with weaker growth than last year and the forecasts published on Tuesday showing only a “modest acceleration expected in 2016”.

The fund’s reasonably sanguine view stems from an expectation that China will succeed in transforming its economy slowly from investment and manufacturing towards consumption and services. By contrast, the Brookings-FT index, which summarises the latest figures, suggests the downturn is more serious alongside “sharp divergences in growth prospects between the advanced economies and emerging markets, and within these groups as well”. The Tiger index — Tracking Indices for the Global Economic Recovery — shows how measures of real activity, financial markets and investor confidence compare with their historical averages in the global economy and within each country.

The extreme weakness in the emerging market component of the Tiger growth index shows that data releases have been significantly weaker than their historic averages. Divergence is almost as important as a new trend highlighted in the index, however, with India emerging as a bright spot and commodity importers such as Brazil and Russia mired in recession. Because emerging economies are now much more important in the global economy and growth rates are still higher than their developed counterparts, global growth is still hovering around 3%, close to its long-term average. The concern, according to Mr Prasad is that the slump in emerging economies’ confidence will infect advanced economies in the months ahead.

[..] there are increasing concerns that monetary policy has become ineffective in providing the necessary boost, Mr Prasad said. “The impotence of monetary policy in boosting growth and staving off deflationary pressures has become painfully apparent, especially when it is acting in isolation and when a large number of countries are resorting to the same limited playbook”, he said.

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“Contopoulos contended that the problem is much bigger than retail cash leaving the junk bond market. “This is fundamentals, and that actually, I would argue, is much worse, because it takes it from a technical story to a fundamental story.”

Junk Bond Market Like A ‘Slow-Moving Train Wreck’ (CNBC)

Billionaire investor Carl Icahn has long warned about the dangers of the high-yield market. Now, those sentiments are being echoed by a top strategist at a major bank who called the market for riskier bonds a “slow-moving train wreck.” In an interview on CNBC’s “Fast Money,” Michael Contopoulos, head of high-yield strategy at Bank of America, called high yield credit a “big, big problem,” and laid out the reasons why a turn in the credit cycle is currently underway. The dramatic rout of commodity prices is having a spillover effect on corporate bonds, especially those linked to energy. Last week, ratings agency Standard & Poor’s said the speculative-grade corporate default rate jumped to 2.5% in September, its highest level since 2013.

That figure is expected to rise to nearly 3% by the middle of next year, S&P added. “You’re going to see defaults pick up,” Contopoulos said. “This isn’t just a commodity story, this isn’t just metals and mining and energy. It’s broader than that. And the fundamentals are as poor as we have seen them.” The iShares High Yield Corporate Bond ETF has dropped nearly 5% in the past month, and is down more than 10% so far this year. On Friday, the ETF hit a 52-week low on an intraday basis. The lower oil prices go, the more stress is being placed on the high-yield bond sector. Evidence is mounting that the outlook is unlikely to improve anytime soon. Last week, ratings firm Moody’s said its high-yield Liquidity Stress Index fell in September amid a rash of energy company downgrades.

Meanwhile, in a recent note, Contopoulos wrote that 50% of sectors in Bank of America’s high-yield index have had negative price returns for the past five months in a row. “That’s the longest such streak since late 2008,” he said. A large part of the weakness over that period, he said, can be attributed to the end of the Fed’s quantitative easing program. The excess liquidity from the Fed’s massive bond buying and super-low interest rates “have created an environment where high yield corporates have been able to gather funding at incredibly cheap levels,” Contopoulos said. “At some point, unless you have meaningful earnings, you can’t sustain incredibly high leverage indefinitely.”

Since the Fed started tapering its bond purchases, Contopoulos said about $30 billion has flowed out of the high yield bond market. “Many of the weak hands have already been flushed out to the market, but that doesn’t mean that you can’t still have price loss,” he said. However, Contopoulos contended that the problem is much bigger than retail cash leaving the junk bond market. “This is fundamentals, and that actually, I would argue, is much worse, because it takes it from a technical story to a fundamental story.”

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Wars are expensive.

Saudi Arabia Cuts Oil Prices Amid OPEC Price War (WSJ)

Saudi Arabia on Sunday made deep reductions to the prices it charges for its oil, hard on the heels of cuts last month by rival producers in the Gulf. With U.S. production still increasing despite lower oil prices, members of the Organization of the Petroleum Exporting Countries are battling to keep their share of the last growing markets in Asia. In a list of official prices sent to customers, state-oil company Saudi Aramco cut the price of its light-crude deliveries to Asia by $1.7 a barrel. As a result, it switched to a discount of $1.6 a barrel against the rival Dubai benchmark from a premium of 10 cents a barrel previously. The company also cut its prices for heavy oil by $2 a barrel to the Far East and by 30 cents a barrel to the U.S.

The move come as Iran, Iraq and other countries in the Middie East made deeper cuts in their official prices than Saudi Arabia last month. Saudi Arabia has vowed to keep pumping at high levels as it hopes lower oil prices will stimulate Asian demand and hit rival production in the U.S. that is expensive to produce. But while Chinese economic growth is slowing, U.S. production rose by about 68,000 barrels a day in July, according to the U.S. Energy Information Administration.

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Realism.

Russia PM Medvedev: Oil Prices Will Stay Low For Quite Long (WSJ)

Russia should seek alternative sources for economic growth as its previous driver, oil prices, will stay at low levels for a long time, the Russian Prime Minister said Friday. “Because of prices for oil, that are likely to stay close to current levels for quite a long time, we will need to refocus the economy from commodities to other growth drivers as soon as possible,” Dmitry Medvedev said. As Russia’s economy has slid into recession for the first time since 2009 due to a drop in oil prices and Western sanctions, Moscow has started looking for ways to limit the economic and financial crisis. The consensus is that Russia’s oil-dependent economy needs diversification, but the idea lacks real initiatives and tools.

Speaking to state officials and top businessmen at an investment forum in the Black Sea town of Sochi, Mr. Medvedev reiterated that Russia needs to improve its business climate and work on import substitution. “Russia’s business climate leaves much to be desired. And unless we change it drastically, we will lose investment, revenue, pace of economic growth and our intellectual potential,” Mr. Medvedev said. He also said there has already been some import substitution in particular investment projects, referring to Moscow’s ban on food from states that imposed sanctions against Russia. Mr. Medvedev added that Russia shouldn’t impose a total ban on imports as it would fuel inflation and result in lower competition on the domestic market.

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The model has died.

China’s Middle-Class Dreams in Peril (WSJ)

Xinxiang, China—In this city of almost 6 million people, a successful English-language school illustrates the aspirations of an emerging middle class. Deng Yi’ou, its 38-year-old owner, owns a house and car, and her school is flourishing as more parents pay 650 yuan (around $100) a month for afternoon English classes for their children. “Parents all over China have the same dream, even in smaller cities like Xinxiang. They want their children to have a good education, a better future, see them become richer than they are,” said Ms. Deng, who is saving to buy a second, larger house. Xinxiang, originally a small market town that traces its roots back more than 1,000 years, is one of 1,600 smaller cities on the cusp of the economic transformation China is attempting. If it is to succeed, the ability of people like Ms. Deng to spend is crucial.

On the one hand, Xinxiang embodies the promise and potential for growth that still propels the Chinese economy, even in slowdown, with the spending power of millions waiting to be unlocked. But the perils of previous excesses are also more evident here: There is too much debt, too many factories and too many vacant apartments. Like many Chinese cities, Xinxiang built industrial parks, ornate bridges and six-lane roads during China’s boom years. Another mark of its furious pace of growth: In the May, Xinxiang was ranked as the city with the most polluted air in Henan province. The idea, widely embraced, was that its growth would turn its residents into stronger consumers. “Smart home, enjoy life,” says one of the hundreds of billboards trying to sell real estate by evoking the good life with images of designer bags, gold coins and wine bottles.

Even outside China, investors are keeping an eye on lower-tier Chinese cities as markets in Beijing and Shanghai become saturated. A key focus for U.S. companies hoping to lift sales of everything from shampoo to cars are the more than 74 million households poised to earn more than 9,000 yuan a month, according to consultancy McKinsey & Co., many of them in cities like Xinxiang. And many here have indeed ramped up their consumption. Now, however, Xinxiang’s growth is slowing: The city’s economy expanded 5.1% in the first half of 2015, down from 9.8% a year earlier. Residential towers in various stages of construction spread out from its city center. A new development area has almost no traffic on roads abutting huge empty lots. Whether the city’s many empty industrial zones that have sprung up over the last dozen years, some the size of small airports, will ever be filled is now an open question.

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With present outflows, what options does Beijing have left?

Senior China Official Proposes Punitive FX Restrictions (Chang)

Yi Gang, writing in China Finance, has just proposed that China impose a Tobin tax, specifically, a punitive levy on forex trades and “handling” fees to discourage currency trading. Most analysts think Beijing will not adopt such draconian measures, but the call for them, by a deputy governor of the People’s Bank of China in its official magazine, is bound to further shake confidence in China’s management of its currency and trigger even greater outflows of capital. Yi is obviously partial to the tax. He proposed its imposition about a year ago, when the renminbi appeared strong. Nobody, therefore, paid attention. Now, the currency is weak, and his endorsement of strict measures, in an article titled “Direction for the Reforms and Liberalization of Foreign-Exchange Management,” is significant.

At the moment, the Chinese currency, also informally known as the yuan, is on a troubled path. On August 11, Beijing shocked global markets by devaluating it 1.9% against the dollar. In August, it fell 2.9% in the domestic market. Since the end of that month, the currency has strengthened 0.5%. The renminbi has apparently stabilized. So why the need for a Tobin tax, among the worst ideas ever proposed by a Nobel laureate? The PBOC, the central bank, has been selling dollars at an unprecedented rate to support its money. The country’s foreign exchange reserves, as reported by the State Administration of Foreign Exchange, fell by a record $93.9 billion in August. That number, as large as it is, could be an underreporting. Some had thought the reserves in fact fell by $150 billion that month.

In any event, China at one point was spending about $20 billion a day defending the yuan, and it is no surprise the burn rate was that high. Beijing was not only intervening in the onshore renminbi market—something it had been doing for decades—but for the first time was intervening in offshore markets. Assuming no inflows of cash, China will exhaust its foreign reserves in a year at the current rate of intervention. There will be inflows, but on the other side of the ledger burn rates skyrocket as crises progress. No one expects Beijing will allow the current crisis to exhaust its reserves, so it will undoubtedly impose measures to halt the outflow of cash. In fact, it has already started.

A month ago, the central bank required financial institutions to set aside a reserve, for a year at no interest, equal to 20% of renminbi forward and swap contracts as well as a 10% reserve for options. Moreover, just a little over a month ago SAFE, which Yi Gang heads, ordered banks to scrutinize currency trading. One result of the edict is that bank branches now must obtain approval from their Beijing headquarters for purchases of foreign currencies in amounts over $1 million. Last week, the central bank turned its attention to UnionPay cards, imposing limitations on withdrawals of cash outside China. Now, a cardholder can take out only a total of 50,000 yuan ($7,854) in the last three months of this year and 100,000 yuan next year. UnionPay processes virtually all card transactions in China..

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Time for Merkel to stand up. But she’s notoriously slow to do that.

Volkswagen’s ‘Uniquely Awful’ Governance At Fault In Emissions Scandal (FT)

Volkswagen’s decision to nominate a long-serving executive as chairman has once more highlighted the carmaker’s corporate governance and culture, which some experts argue were a root cause of the diesel-emissions scandal. Top directors on Thursday announced that Hans-Dieter Pötsch, VW’s chief financial officer since 2003, would become chairman in the coming weeks, filling the spot vacated by patriarch Ferdinand PiIch, who resigned in April. Hans-Christoph Hirt, a director of Hermes Equity Ownership Services, an adviser to pension fund investors in companies including VW, said the appointment created a “serious conflict of interest”. “[Potsch] was a key VW executive for more than a decade and under German law the management board has a collective responsibility … The lawyers will surely demand that he recuse himself from any supervisory board meetings when management’s role is discussed,” Mr Hirt said.

VW’s response has been compared with the way Siemens dealt with a huge bribery scandal in 2006. For the first time in its 150-year history the German engineering conglomerate appointed an outside chairman (Gerhard Cromme from ThyssenKrupp) and chief executive (Peter Loscher from Merck in the US). Together they transformed Siemens’ culture and Mr Cromme took legal action against former Siemens executives for not stopping the bribery. “How is Mr Pötsch supposed to do that?” said Mr Hirt. VW has admitted installing software in engines over several years so they passed laboratory emission tests but belched out dangerous nitrogen oxides when on the road. Martin Winterkorn resigned last month as chief executive, insisting he knew nothing of the cheating, which analysts fear could cost VW billions of euros in fines, lawsuits and recall costs.

[..] governance experts argue the cheating was predictable because of VW’s lax boardroom controls and peculiar corporate culture. “The scandal clearly also has to do with structural issues at VW …There have been warnings about VW’s corporate governance for years, but they didn’t take it to heart and now you see the result,” says Alexander Juschus, director at IVOX, the German proxy adviser. Even before the diesel scandal, VW’s shares traded at a discount to other carmakers partly because of governance concerns. A former chairman of a large German industrial company says “Germany has corporate governance problems but VW has long been uniquely awful”.

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“..we do have a magic money tree, it’s called the Bank of England”

You Can Print Money, So Long As It’s Not For The People (Guardian)

In its broadest sense, the phrase “there’s no magic money tree” is just a variation on “money doesn’t grow on trees”, a thing you say to children to indicate that wealth comes not from the beneficence of a magical universe, but from hard graft in a corporeal reality. The pedantic child might point to the discrepant amounts of work required to yield a given amount of money, and say that its value is a social construction. Over time, that loose, rather weak-minded meaning has ceded to a specific economic critique; Jeremy Corbyn – along with anyone who challenges the prevailing fiscal narrative – is dangerous and wrong, since he wants to print money. Money cannot be created from nowhere, because there’s no magic money tree. End of. The flaw in that argument is that all money is created from nowhere.

In normal circumstances, it is created from nowhere as credit, by private banks, and lent to us, usually (85% of the time) in the form of a mortgage on an existing residential property. Decades of credit extension have perverted the housing market to turn a mortgage into a lifetime’s bonded servitude. The economists Jordá, Schularick and Taylor argued convincingly last year that the causes of this economic crisis, the next and the one before are all, fundamentally, the extension of credit and its impact on house prices. So the magic money tree isn’t gushing cash in a socially responsible fashion (if it were used responsibly, it wouldn’t be magic) but the idea that we have a centrally planned, carefully stewarded monetary policy, with finite creation and demonstrable long-term aims, which some loonie leftie wants to come along and unravel, is simply wrong.

In abnormal circumstances, such as the ones we’ve lived through since the financial crisis, central banks are also magic money trees. In the bizarre construction of current economic orthodoxy, you’re not allowed to say so, even though the Bank of England has created £375bn in quantitative easing (QE); the Fed bought $1.25tn worth of mortgage-backed securities in its first round of QE; the ECB had as a core principle that it couldn’t create money until, suddenly, in awesome amounts, it could; the Bank of Korea has a stimulus package, as does the People’s Bank of China; and Japan started it. Central banks typically justify money creation on the basis that it’s temporary, it’s unfortunate, it’s driven by the crisis and it will ultimately get back to normal.

None of that alters the fact that no bank had that money in savings. I recently said out loud, “we do have a magic money tree, it’s called the Bank of England” in a Newsnight debate with a former adviser to Blair, John McTernan. He made a face like a politician accidentally talking to a member of the public but what the camera didn’t catch was Evan Davis, who stuck his tongue out, like a cat taking a pill. It was days ago, and people are still tweeting me pictures of the Zimbabwean dollar and the Weimar Republic, saying “is this what you want? IS IT?”

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Mankind at its best.

Forest Fires In Indonesia Choke Much Of South-East Asia (Guardian)

The illegal burning of forests and agricultural land across Indonesia has blanketed much of south-east Asia in an acrid haze, leading to one of the most severe regional shutdowns in years. Malaysian PM Najib Razak said Indonesia needs to convict plantation companies for the noxious smoke, created by the annual destruction of plants during the dry season. Burning the land is a quick way to ready the soil for new seed. “We want Indonesia to take action,” he was quoted as saying by the state news agency Bernama, adding the smog was affecting the economy. “Indonesia alone can gather evidence and convict the companies concerned.” In Singapore, races for the FINA swimming world cup were cancelled on Saturday. A marathon in Malaysia on Sunday was also abandoned and all schools were closed on Monday and Tuesday.

Tens of thousands of people in Indonesia and Malaysia have sought medical treatment for respiratory problems. The annual burning is decades old and Indonesia has faced mounting pressure to end the practice. Scientists say the pollution could surpass 1997 levels when the haze created an environmental disaster that cost an estimated US$9 billion in damage. “If the forecasts for a longer dry season hold, this suggests 2015 will rank among the most severe events on record,” said Robert Field, a Columbia University scientist based at NASA’s Goddard Institute for Space Studies. In Singapore, news websites post near-hourly updates on the danger of being outside. Some shops were providing free masks for children and elderly people.

The National Environment Agency in Singapore said Monday’s haze will enter the “unhealthy range”. “Healthy persons should reduce prolonged or strenuous outdoor physical exertion … Persons who are not feeling well, especially the elderly and children, and those with chronic heart or lung conditions, should seek medical attention,” it said.

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Just make it EU-wide then. You’re talking 2/3 of all countries.

Majority Of EU Nations Seek Opt-Out From Growing GMO Crops (Reuters)

Nineteen EU member states have requested opt-outs for all or part of their territory from cultivation of a Monsanto genetically-modified crop, which is authorised to be grown in the EU, the European Commission said on Sunday. Under a law signed in March, individual countries can seek exclusion from any approval request for genetically modified cultivation across the 28-nation EU. The law was introduced to end years of stalemate as genetically modified crops divide opinion in Europe. Although widely grown in the Americas and Asia, public opposition is strong in Europe and environmentalists have raised concerns about the impact on biodiversity. Commission spokesman Enrico Brivio on Sunday confirmed in an email the Commission had received 19 opt-out requests following the expiry of a deadline on Saturday.

The requests are for opt-outs from the approval of Monsanto’s GM maize MON 810, the only crop commercially cultivated in the EU, or for pending applications, of which there are eight so far, the Commission said. The requests have been or are being communicated to the companies, which have a month to react. Under the new law, the European Commission is responsible for approvals, but requests to be excluded also have to be submitted to the company making the application. In response to the first exclusion requests in August from Latvia and Greece, Monsanto said it was abiding by them, even though it regarded them as unscientific.

The new EU law has critics from both sides. The industry has said it breaks rules on free movement, while environment campaigners say it is a weak compromise open to court challenges from biotech companies. The Commission spokesman said the number of requests proved that the new law provides “a necessary legal framework to a complex issue”. The 19 requests are from Austria, Belgium for the Wallonia region, Britain for Scotland, Wales and Northern Ireland, Bulgaria, Croatia, Cyprus, Denmark, France, Germany (except for research), Greece, Hungary, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland and Slovenia.

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You don’t have to be smart to be a scientist.

How Monsanto Mobilized Academics to Pen Articles Supporting GMOs (Bloomberg)

Monsanto’s undisclosed recruitment of scientists from Harvard University, Cornell University and three other schools to write about the benefits of plant biotechnology is drawing fire from opponents. The company’s role isn’t noted in the series of articles published in December by the Genetic Literacy Project, a nonprofit group that says its mission is “to disentangle science from ideology.” The group said that such a disclosure isn’t necessary because the the company didn’t pay the authors and wasn’t involved in writing or editing the articles. Monsanto says it’s in regular contact with public-sector scientists as it tries to “elevate” public dialog on genetically modified organisms, or GMOs.

U.S. Right to Know, a nonprofit group funded by the Organic Consumers Association that obtained e-mails under the Freedom of Information Act, says correspondence revealing Monsanto’s actions shows the “corporate control of science and how compliant some academics are.” The articles have become the latest flashpoint in an information war being waged over plant biotechnology by its supporters, who sometimes have corporate funding, and its opponents, some of whom are funded by the fast-growing organic food industry. The challenge for the pro-GMO lobby is the yawning gulf between scientific consensus and public perception. A Pew Research Center poll in January found 88% of scientists believed GMOs to be “generally safe” versus 37% of U.S. adults.

That gap was the widest among 13 questions asked by Pew, surpassing divides on climate change and evolution. The articles in question appeared on the Genetic Literacy Project’s website in a series called “GMO – Beyond the Science.” Eric Sachs, who leads Monsanto’s scientific outreach, wrote to eight scientists to pen a series of briefs aimed at influencing “public policy, GM crop regulation and consumer acceptance.” Five of them obliged. “I need to step aside so I don’t compromise the project,” Sachs said in an Aug. 8, 2013, e-mail obtained by U.S. Right to Know. He suggested specific topics for each scientist before turning the project over to CMA Consulting, a public relations firm paid by Monsanto. “I am keenly aware that your independence and reputations must be protected,” Sachs wrote.

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EU tries to blame refugee crisis on Greece too.

Greece’s Euro Area Ties Risk More Strain Amid Refugee Crisis (Bloomberg)

First overwhelmed by debt and now overwhelmed by refugees, Greece offers a tempting target for European leaders left to handle the fallout. With wounds only just healing after the euro area agreed to throw Greece another financial lifeline, the country’s inability to process tens of thousands of refugees turning up at its doorstep threatens to reopen them all over again. Local Greek authorities are inundated by some 3,000 arrivals a day, most of whom are allowed to head north through the Balkans toward Germany and Scandinavia, sewing political tensions as they go. Patience is already thin after years subsidizing the Greek economy and months of chaotic bailout talks this year, so EU leaders haven’t had far to look to find a scapegoat for their latest emergency.

The risk is that by vilifying the Greek authorities, EU officials may jeopardize the fragile political settlement that is the foundation for the country’s economic recovery and continued membership in the euro. “There are very low levels of trust and a lot of baggage,” said Mark Leonard, director of the European Council on Foreign Relations in London. “It’s inevitable that when you have so many major crises going on at the same time with the same cast of characters you will get read-across from one crisis to the other.” Finance ministers of the euro area’s 19 economies gather in Luxembourg on Monday for the first time since Alexis Tsipras’s September election victory, and are due to pick over the 48 milestones Greece needs to meet to qualify for its next bailout payouts.

For all his railing against the European establishment, Tsipras is the first Greek leader to win re-election after signing a bailout deal. With all eyes on his Syriza-led government’s efforts to stick to the reform path, the unprecedented refugee crisis adds another layer of uncertainty. Greece finds itself the first EU port of call for people fleeing war and civil strife from countries such as Syria, many of whom pay traffickers to take them across the short sea passage from the Turkish coast to one of the Greek islands sprinkled throughout the Aegean Sea. Greece, which also shares a land border with Turkey, has seen almost 400,000 migrants arrive by sea in 2015 compared to 43,500 in the whole of 2014, the Office of the United Nations High Commissioner for Refugees said on Friday.

The Syriza government’s inability to cope with the sheer numbers involved “will only provide further fodder to its critics, as well as increase the pressure for the government to deliver on reforms or die,” said Dimitrios Triantaphyllou, chairman of the department of international relations at Kadir Has University in Istanbul. “Greece’s image as a functioning state has already hit rock bottom.”

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Leave them all in Turkey? if they had wanted that, wouldn’t they have stayed to begin with?

EU And Turkey To Discuss Plan To Stem Flow Of Migrants (Reuters)

The European Commission has worked out an action plan with Turkey to stem the flow of refugees to Europe, a German newspaper cited sources in the Commission and the German government as saying on Sunday. Frankfurter Allgemeine Sonntagszeitung said that according to the plan, Turkey would be obliged to better protect its border with Greece – a frontier that many migrants have crossed on perilous boat journeys. It said the Turkish and Greek coastguards would work together to patrol the eastern Aegean, coordinated by Frontex, the European Union’s border control agency, and send all refugees back to Turkey. In Turkey, six new refugee camps for up to two million people which would be set up, partly financed by the EU, the newspaper said.

The EU states would commit to taking some of the refugees so that up to half a million people could be relocated to Europe without having to use traffickers or take the dangerous journey across the Mediterranean, the newspaper said. It said the Commission and representatives had agreed on this plan last week and that EC President Jean-Claude Juncker also coordinated on this with German Chancellor Angela Merkel and French President Francois Hollande. Turkish President Tayyip Erdogan is due to meet with Juncker on Monday.

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Most cities will do this; no choice.

Hamburg, Bremen To Seize Commercial Property To House Refugees (BBC)

Hamburg has become the first German city to pass a law allowing the seizure of empty commercial properties in order to house migrants. The influx of migrants has put pressure on the authorities of the northern city to find accommodation. Some migrants are sleeping rough outdoors. Hamburg’s law takes effect next week. In a separate development, prosecutors filed charges of inciting racial hatred against a co-founder of the anti-Islamic Pegida movement. The prosecutors in the eastern city of Dresden said they acted after Lutz Bachmann had on Facebook described asylum seekers “trash” and “animals”. Pegida (Patriotic Europeans Against the Islamisation of the Occident) members have staged a number of rallies in recent months, attracting tens of thousands of people.

Meanwhile, a new survey by broadcaster ARD said 51% of people admitted the influx of migrants scared them. It suggests a four-year low in Chancellor Angela Merkel’s popularity. She has said Germany can accommodate migrants who have genuinely fled war or persecution – a humanitarian gesture towards the many thousands risking their lives to reach Europe this year. But many politicians – including her conservative Bavarian CSU allies and various EU partners – have criticised the open-door policy. Hamburg’s new law is described as a temporary, emergency measure. Owners of empty commercial properties will be compensated. The law does not include residential properties. The authorities in Bremen, a city just west of Hamburg, are considering passing a similar law. Germany expects to host at least 800,000 asylum seekers this year – about four times the number it had last year.

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Oct 022015
 
 October 2, 2015  Posted by at 8:45 am Finance Tagged with: , , , , , , , , , ,  


Edwin Rosskam Service station, Connecticut Ave., Washington, DC 1940

‘Destruction Of Wealth’ Warning Looms Over Stocks (MarketWatch)
Key Global Equity Index Has Fallen Off The Precipice (Dana Lyons)
Is This The Mother Of All Warnings On Emerging Markets? (CNBC)
Global Investors Brace For China Crash (Guardian)
Over Half Of China Commodity Companies Can’t Pay The Interest On Their Debt (ZH)
Here’s How Ugly The Third Quarter Was For Stocks And Commodities (MarketWatch)
This Is The Endgame, According To Deutsche Bank (Jim Reid)
Goldman: Buyback Burst Could Be Enough to Save the S&P 500’s Year (Bloomberg)
There Are Five Times More Claims On Dollars As Dollars In Existence (Brodsky)
Few Understand Why Glencore Lost 1/3 Of Its Value. That’s Worrying (BBG)
Global Economy Loses Steam As Chinese, European Factories Falter (Reuters)
BOE Says Market May Be Underpricing Risks of Falling Liquidity (Bloomberg)
JPMorgan Said to Pay Most in $1.86 Billion CDS Rigging Settlement (Bloomberg)
IMF’s Botched Involvement In Greece Attacked By Former Watchdog Chief (Telegraph)
Volkswagen Too Big to Fail For Germany’s Political Classes (Bloomberg)
VW Says Emissions Probe Will Take Months as It Faces Fines (Bloomberg)
World’s Biggest Pension Fund Is Moving Into Junk and Emerging Bonds (Bloomberg)
How The Banks Ignored The Lessons Of The Crash (Joris Luyendijk)

The warnings come from all sides now.

‘Destruction Of Wealth’ Warning Looms Over Stocks (MarketWatch)

A new health indicator for the S&P 500 Index of the largest U.S. stocks shows a rising likelihood of a broad, long-term decline. The benchmark has fallen 6.8% this year, pulled down by an 11% correction from Aug. 17 through Aug. 25. Earlier this year, the S&P 500 SPX, +0.20% had been setting new highs. Investors are now bracing for more declines as there are plenty of indications of trouble ahead. For one thing, the S&P 500 trades for 16 times aggregate consensus 2015 earnings estimates, which is near a 10-year high. Another headwind is the coming rise in interest rates by the Federal Reserve. Fed Chairwoman Janet Yellen said last week that she anticipated an increase of short-term rates “later this year, followed by a gradual pace of tightening thereafter.”

The federal funds rate has been locked in a range of zero to 0.25% since late 2008. That, combined with the massive expansion of the central bank’s balance sheet, made stocks attractive to investors who might otherwise have been tempted by decent yields form other asset classes. Reality Shares, a San Diego-based firm founded in 2012, has a new market-health indicator called the Guardian Gauge, which uses volatility and price-momentum data to give a long-term outlook for the S&P 500. For the past 15 days, the Guardian Gauge has been in the red. Reality Shares CEO Eric Ervin explained it this way: “Guardian looks at the 10 sectors of the S&P 500. If three of the sectors go negative, it signals a very high probability of going into a bear market. Over the past 15 years, it would have predicted the tech wreck and the financial crisis.”

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“Each and every day, we are witnessing the ongoing global selloff inflict more and more damage to the post-2009 cyclical bull market.”

Key Global Equity Index Has Fallen Off The Precipice (Dana Lyons)

On September 8, we posted a chart showing how a key worldwide equity index – the Global Dow – was “hanging on the precipice”. To refresh, the Global Dow is an equally-weighted index of the world’s 150 largest stocks. Therefore, while it may not directly be the target of a lot of money changing hands, it most certainly represents the stocks that see the most money trading hands. Thus, The Global Dow is a fairly important barometer of the state of the global large cap equity market. The “precipice” that we referenced in the September 8 post was the UP trendline from the bull market bottom in 2009. Not surprisingly, the index did attempt to climb up off of the precipice in the weeks following the post. However, as we suggested, “another test of the precipice here at 2280 would not be surprising”. The Global Dow did return to test that area and is now officially off of the precipice – having fallen down off of it in the last few days, as the following charts illustrate.

Additionally, as the charts indicate, the post-2009 UP trendline also coincided with a cluster of important Fibonacci Retracement levels shown below. Therefore, this breakdown wasn’t just about the trendline but a myriad of significant levels, making it even more consequential. [..] this is one more in a rapidly growing list of examples of indexes around the globe that are breaking long-term UP trendlines and other significant levels of various magnitude. Each and every day, we are witnessing the ongoing global selloff inflict more and more damage to the post-2009 cyclical bull market. And while that bull may not be declared dead for some time, it is now being wounded enough daily to warrant very seriously considering that possibility.

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For 27 years, money has flown into emerging markets. That trend has now reversed.

Is This The Mother Of All Warnings On Emerging Markets? (CNBC)

The last time emerging markets had it nearly this bad, Ronald Reagan was the U.S. President, KKR purchased RJR Nabisco, and a future popstar named Rihanna was born. Net capital flows for global emerging markets will be negative in 2015, the first time that has happened since 1988, the Institute of International Finance (IIF) said in its latest report. Net outflows for the year are projected at $541 billion, driven by a sustained slowdown in EM growth and uncertainty about China, it added. In other words, investors will pull out more money out of emerging markets than they will pump in. The data come on the heels of a separate IIF report this week that showed portfolio capital outflows in EMs amounted to $40 billion during the third quarter, the worst performance since 2008.

Indeed, relief from the Federal Reserve’s decision to delay its first interest rate hike in a decade has proved to be short-lived for EMs amid fresh evidence of a slowing Chinese economy, precipitous currency declines, a sustained slide in commodity prices, and political uncertainty in countries such as Brazil and Turkey. Covering a group of 30 economies, the IIF report estimates net non-resident inflows at $548 billion for 2015 from $1,074 billion last year—levels not seen since the global financial crisis. “As a share of GDP, non-resident inflows have fallen to about 2% from a record high of almost 8% in 2007.” The situation is exacerbated by the fact that investors residing in emerging market countries are buying more foreign assets.

Known as resident outward investment flows, 2015’s reading is expected to hit a historical high of $1,089 billion, which is likely to further pressurize reserves, exchange rates and asset prices of EMs, the IIF said. “On a net basis, lower inflows and rising outflows imply that private capital is leaving EMs for the first time since the early 1980s.” So, which region is the weakest? No surprises here. “It is noteworthy that a large part of the decline in overall flows this year is attributable to flows out of China, which intensified after the People’s Bank of China announced a mini-devaluation of the renminbi and a shift to a more market-oriented exchange rate fixing regime in August.”

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“Global investors will suck capital out of emerging economies this year for the first time since 1988..”

Global Investors Brace For China Crash (Guardian)

Global investors will suck capital out of emerging economies this year for the first time since 1988, as they brace themselves for a Chinese crash, according to the Institute of International Finance. Capital flooded into promising emerging economies in the years that followed the global financial crisis of 2008-09, as investors bet that rapid expansion in countries such as Turkey and Brazil could help to offset stodgy growth in the debt-burdened US, Europe and Japan. But with domestic investors in these and other emerging markets squirrelling their money overseas, at the same time as international investors calculate the costs of a sharp downturn in Chinese growth, the IIF, which represents the world’s financial industry, said: “We now expect that net capital flows to emerging markets in 2015 will be negative for the first time since 1988.”

Unlike in 2008-09, when capital flows to emerging markets plunged abruptly as a result of the US sub-prime mortgage crisis, the IIF’s analysts say the current reversal is the latest wave of a homegrown downturn. “This year’s slowdown represents a marked intensification of trends that have been underway since 2012, making the current episode feel more like a lengthening drought rather than a crisis event,” it says, in its latest monthly report on capital flows. The IIF expects “only a moderate rebound” in 2016, as expectations for growth in emerging economies remain weak. Mohamed El-Erian, economic advisor to Allianz, responding to the data, described emerging markets as “completely unhinged”, and warned that US growth may not be enough to rescue the global economy. “It’s not that powerful to pull everybody out,” he told CNBC.

Capital flight from China, where the prospects for growth have deteriorated sharply in recent months, and the authorities’ botched handling of the stock market crash in August undermined confidence in economic management, has been the main driver of the turnaround. “The slump in private capital inflows is most dramatic for China,” the institute says. “Slowing growth due to excess industrial capacity, correction in the property sector and export weakness, together with monetary easing and the stock market bust have discouraged inflows.” At the same time, domestic Chinese firms have been cutting back on their borrowing overseas, fearing that they may find themselves exposed if the yuan continues to depreciate, making it harder to repay foreign currency loans.

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“What wasn’t known were the specifics of just how severe this bubble deterioration was for the most critical for China, in the current deflationary bust, commodity sector. We now know, and the answer is truly terrifying.”

Over Half Of China Commodity Companies Can’t Pay The Interest On Their Debt (ZH)

Earlier today, Macquarie released a must-read report titled “Further deterioration in China’s corporate debt coverage”, in which the Australian bank looks at the Chinese corporate debt bubble (a topic familiar to our readers since 2012) however not in terms of net leverage, or debt/free cash flow, but bottom-up, in terms of corporate interest coverage, or rather the inverse: the ratio of interest expense to operating profit. With good reason, Macquarie focuses on the number of companies with “uncovered debt”, or those which can’t even cover a full year of interest expense with profit. The report’s centerprice chart is impressive. It looks at the bond prospectuses of 780 companies and finds that there is about CNY5 trillion in total debt, mostly spread among Mining, Smelting & Material and Infrastructure companies, which belongs to companies that have a Interest/EBIT ratio >100%, or as western credit analysts would write it, have an EBIT/Interest <1.0x. As Macquarie notes, looking at the entire universe of CNY22 trillion in corporate debt, the "percentage of EBIT-uncovered debt went up from 19.9% in 2013 to 23.6% last year, and the percentage of EBITDA-uncovered debt up from 5.3% to 7%. Therefore, there has been a further deterioration in financial soundness among our sample." To be sure, both the size (the gargantuan CNY22 trillion) and the deteriorating quality (the surge in "uncovered debt" companies) of cash flows, was generally known. What wasn't known were the specifics of just how severe this bubble deterioration was for the most critical for China, in the current deflationary bust, commodity sector. We now know, and the answer is truly terrifying.

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“..September picked up many of the unresolved issues that we left behind in August..”

Here’s How Ugly The Third Quarter Was For Stocks And Commodities (MarketWatch)

Needless to say, September and the third quarter overall were tough for many investors. “The third quarter of 2015 proved to be the weakest quarter for risk assets for some years and most market participants are probably glad to see the back of it,” wrote Jim Reid, global strategist at Deutsche Bank, in a Thursday note. “Indeed Q3 saw the poorest quarterly performance for the S&P 500 and the Stoxx 600 since Q3 2011. It was also the worst quarter for the Nikkei since 2010 whereas in [emerging markets] the Shanghai Composite and Bovespa posted their worst quarterly scorecard since 2008. Reid breaks down the quarterly performance in a series of charts…

September on its own was pretty brutal, with 27 of Deutsche Bank’s 42 selected global asset classes ending the month with losses. “In many ways, September picked up many of the unresolved issues that we left behind in August,” Reid wrote. The selloff in commodities and emerging markets gained more momentum on deepening recession fears that, in turn, raised more questions about the sustainability of global growth, he said.

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More Jim Reid: “Although we don’t think QE and zero interest rates does much apart from prop up an inefficient financial system it’s all we’ve got until we have a huge policy sea change..“

This Is The Endgame, According To Deutsche Bank (Jim Reid)

From Jim Reid, Deutsche Bank’s chief credit strategist: “Our thesis over the last few years has basically been that the global financial system/economic fundamentals are so bad that its good for financial assets given it forces central banks into extraordinary stimulus and for them to continue to buy assets in never before seen volumes. The system failed in 2008/09 and rather than allow a proper creative destruction cleansing, policy makers have been aggressively propping it up ever since. This has surely led to a large level of inefficiency in the system which helps explain weak post crisis growth and thus forces them to do even more thus supporting asset prices if not the global economy. However since the summer this theory has been severely tested by China’s equity bubble bursting, China’s small ‘shock’ devaluation and the start of a rundown in reserves for the first time in over a decade.

We’ve also seen associated commodities and EM woes, endless unsettling speculation about the Fed’s next move and more recently the idiosyncratic corporate scandal around VW and funding concerns around Glencore. The hits keep on coming. Is it now so bad it’s actually bad again? The most recent leg of the sell-off begun after the Fed held rates steady two weeks ago as the narrative focused on either this reflecting worrying economic concerns or a Fed that is a slave to financial markets and losing credibility. So do we think we’re now entering a period where central banks are increasingly impotent? The answer is that they have been for a while on growth so not much has changed. However they can still buy more assets and continue to keep policy loose.

Although we don’t think QE and zero interest rates does much apart from prop up an inefficient financial system it’s all we’ve got until we have a huge policy sea change which probably only happens in the next recession (more later). So for now we think central banks are trapped into continuing on the same high liquidity path. The BoJ and the ECB are likely to do more QE in my opinion and the Fed is going to have a real struggle raising rates this year which has been our long-term view. Indeed we have sympathy with DB’s Dominic Konstam that they may also struggle in 2016. At the moment central banks are fortunate that they have the conditions to do more as virtually all are failing on their mandate to keep inflation close to or at 2%. The real problem would be if inflation was consistently looking like breaching 2%.

Then central banks would generally be going beyond their mandate by printing money and keeping rates close to zero. So in short the ‘plate spinning’ era continues for a number of quarters yet and certainly while inflation is so low. We think the end game is that when the next global recession hits, then QE/zero rate world will be re-appraised. Perhaps the G20 will get together and decide to try a different approach. In our 2013 long-term study we speculated how we thought the end game was ‘helicopter money’ – ie money printing to finance economic objectives (tax cuts, infrastructure etc). While it has obvious flaws and huge risks (eg political manipulation and inflation), one can argue it will always have more economic impact than QE in its current form. However that’s perhaps a couple of years away still.”

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The only thing left to prop up the US economy is companies buying their own stock. Let that sink in.

Goldman: Buyback Burst Could Be Enough to Save the S&P 500’s Year (Bloomberg)

Stock repurchases may accelerate enough toward the end of the year to salvage an annual gain for the Standard & Poor’s 500 Index, according to David Kostin, Goldman’s chief U.S. equity strategist. November is the busiest month of the year for buybacks among S&P 500 companies. 13% of annual spending occurs during the month, according to figures that Kostin presented in a report two days ago. The data is based on averages for 2007 and 2009-2014. The fourth quarter is the year’s busiest three-month period for S&P 500 repurchases, accounting for 30% of outlays, according to Kostin’s data. The total compares with 18% during the first quarter, 25% in the second and 26% in the third. These figures don’t add up to 100% because of rounding.

“Buybacks represent the single largest source of demand for U.S. equities,” he wrote, adding that he expects companies in the index to spend more than $600 billion this year on their own shares. “The typical year-end surge in buyback activity could help boost the market above our year-end target.” Kostin reduced his projection for the S&P 500 to 2,000 from 2,100. Assuming the latest estimate from the strategist is accurate, the index would post a loss of 2.9% for the year. A return to optimism among investors may also help the index exceed 2,000, according to Kostin. He cited a Goldman sentiment indicator, based on S&P 500 futures trading, that has been at the lowest possible reading for seven of the past eight weeks. That’s the longest stretch in the gauge’s eight-year history, the report said.

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TAE’s long lasting adage in action: “Multiple claims to underlying real wealth”.

There Are Five Times More Claims On Dollars As Dollars In Existence (Brodsky)

According to the Fed, there is about $60 trillion of US Dollar credit (claims for US dollars):

Also according to the Fed, there are about $12 trillion US dollars:

So, the data show plainly there are five times as many claims for US dollars as US dollars in existence. Does this matter to investors? Well, yes, it matters a lot. Not only is there not enough money to repay outstanding debt; the widening gap between credit and money is making it more difficult to service the debt and more difficult for nominal US GDP to grow through further credit extension and debt assumption. Remember, only a dollar can service and repay dollar-denominated debt. Principal and interest payments cannot be made with widgets or labor, only dollars. This means that future demand and output growth generated through more credit issuance and debt assumption is self-defeating. In fact, it adds to the problem.

Credit-generated growth is not growth in real (inflation-adjusted) terms because rising GDP, which engenders an increase in money, is also accompanied by a larger increase in claims on that money. Why larger? Because debt comes with interest. By definition then, debt compounds while real growth does not. In fact, economies naturally economize because innovation and competition tend to drive prices lower. This natural deflation works against debt service and repayment that needs perpetual inflation. As we know, for thirty years beginning in the early 1980s the Fed helped the US and global economies grow consistently more or less by reducing interest rates, which gave consumers of goods, services and assets incentive to take on more debt. Following the inevitable debt crisis in 2008, the Fed had to reduce the overnight interest rate it targets to 0%.

As we also know, to keep the economy growing from there, the Fed then had to begin creating money, which it did through quantitative easing (QE). It bought assets directly from the money center banks it deals with (primary dealers), and paid for them with the newly created money. At the same time, the Fed paid these banks – and continues to pay them – interest on the money they created for them (Interest on Excess Reserves). This provides a disincentive for banks to lend to the public, which is how the Fed is trying to control US growth and inflation today.

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Leverage.

Few Understand Why Glencore Lost 1/3 Of Its Value. That’s Worrying (BBG)

From London to New York to Hong Kong, the frantic question kept coming: could this be another Lehman? But nowhere did it cause more alarm than inside Glencore – the Swiss commodities giant that had suddenly found itself at the epicenter of a global panic on Monday. What began that morning in London, with a sudden plunge in Glencore’s share price, cascaded across oceans and time zones and left the company’s billionaire chief executive, Ivan Glasenberg, scrambling to calm anxious shareholders, creditors and trading partners. Days later, even as Glencore regained most of the $6 billion of shareholder wealth erased in a few hours, many investors wondered if Glasenberg can hold the markets at bay.

Few market players, including people close to Glencore, are able to pinpoint why a blue-chip member of the FTSE-100 Index – even one that had been under pressure from sliding commodities prices – lost almost a third of its value in a blink. And that, investors worry, suggests this could all happen again. “There’s more pain to be had,” said Serge Berger at Zurich-based Blue Oak Advisors. “I don’t think the story is over.”

Monday started out as just another workday in Baar, the tiny town where Glencore is based. The village could easily pass for a Swiss backwater, except for the billions of dollars worth of commodities that quietly course through Glencore’s headquarters on Baarermattstrasse, between the lake and the Alpine hills. Glasenberg, a former coal trader, has honed his skills over more than 30 years in the commodity-trading business since he joined a predecessor firm, Marc Rich & Co., in 1984. He was part of a $1.2 billion management buyout from Rich in 1994, when the company was renamed Glencore. A 2011 initial public offering – at the peak of a 10-year commodity boom – made him a billionaire on paper, with a stake worth about $9 billion. At the worst of Monday’s panic, that holding was worth $1.2 billion. What unfolded when the London markets opened at 8 a.m. stunned mining-industry veterans.

“Monday was certainly very scary,” said Benno Galliker, a trader at Luzerner Kantonalbank. “It had a similar feeling to that before Lehman collapsed.” There’d been no news of consequence over the weekend; the last major headline – a Bloomberg story about Glencore’s hiring of banks to sell a stake in its agriculture unit – had sent its shares up. In China, whose coal plants and steel mills are the largest consumers of Glencore’s products, there’d been some discouraging economic data. But this year’s drumbeat of negative news about the world’s second-largest economy was hardly a new phenomenon. Meanwhile, South African bank Investec had published a provocative note in which analyst Marc Elliott suggested the company could see its equity all but vanish if commodity prices stayed weak. While that was an alarming prediction, Elliott could hardly have expected his views to have much of an effect on an operation with almost $200 billion in annual turnover.

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“..the data highlight just how difficult it will be for policymakers to steer China’s economy out of the biggest slowdown in decades..”

Global Economy Loses Steam As Chinese, European Factories Falter (Reuters)

The world economy lost momentum in September, with China’s vast factory sector shrinking again and euro zone manufacturing growth weakening slightly, both casualties of waning global demand. The latest business surveys across Asia and Europe paint a darkening picture and are likely to prompt more calls for central banks around the world to loosen monetary policy even further. “The data probably increases the case for more stimulus in certain parts of the world, especially from the People’s Bank of China and the ECB,” said Philip Shaw, economist at Investec in London. “Those economies that are at less advanced paths of the recovery cycle – the key example is the euro zone, where we’re looking at more disinflation – may well find more stimulus is in order.”

Surveys of China’s factory and services sectors showed the world’s second largest economy may be cooling more rapidly than earlier thought, with deeper job cuts. Taken together with a stock market crash in Shanghai during the summer and a surprise devaluation of the Chinese yuan, the data highlight just how difficult it will be for policymakers to steer China’s economy out of the biggest slowdown in decades.

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“..a global bond rout in the second quarter erased more than a half a trillion dollars in the value of sovereign debt..”

BOE Says Market May Be Underpricing Risks of Falling Liquidity (Bloomberg)

Financial markets may not be alert to the potential damage caused by drops in liquidity, according to stability officials at the Bank of England. “Market prices might not yet sufficiently be factoring in the potential for a deterioration in liquidity conditions given changes in market functioning and elevated tail risks” related to emerging markets, the officials said, according to the record of the Financial Policy Committee meeting held on Sept. 23 in London. Concern about liquidity is intensifying since a global bond rout in the second quarter erased more than a half a trillion dollars in the value of sovereign debt. Exacerbating matters, the world’s biggest banks are scaling back their bond-trading activities to comply with higher capital requirements imposed in the wake of the financial crisis.

Stability officials at the BOE have already asked for more work to be done on the topic, including dealers’ ability to act as intermediaries in markets, contagion and investment funds. The record of the September meeting published Thursday also noted the increased importance of emerging markets and said “there was the potential for a material impact on U.K. financial stability.” Officials also discussed the appropriate settings for the countercyclical capital buffer, currently at zero, given that credit conditions were normalizing. When officials reconsider the setting in light of the 2015 stress-test results, they will assess the appropriate level for all stages of the credit cycle. There was a “possible benefit of moving the CCB in smaller increments, especially when credit growth was not unusually strong,” the record said.

In a wide-ranging record that follows last week’s statement, the FPC highlighted its need for new powers to intervene in the buy-to-let housing market. “The rapid growth of the market underscored the importance of FPC powers of direction for use in future,” the FPC said in its record. “Housing tools were important for the FPC,” given the potential for systemic risks.

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They’re all involved in scheming yet another system. But jail? Hell, no! Slap on the wrist fines to be paid not by the bankers, but by their corporations, that’s all.

JPMorgan Said to Pay Most in $1.86 Billion CDS Rigging Settlement (Bloomberg)

JPMorgan Chase is set to pay almost a third of a $1.86 billion settlement to resolve accusations that a dozen big banks conspired to limit competition in the credit-default swaps market, according to people briefed on terms of the deal. JPMorgan is paying $595 million, with the lender’s portion of the accord largely based on the plaintiffs’ measure of market share, said the people, who asked not to be identified because the firms haven’t disclosed how they’re splitting costs. The settlement also enacts reforms making it easier for electronic-trading platforms to enter the CDS market, according to a statement Thursday from attorneys for the plaintiffs, which include the Los Angeles County Employees Retirement Association. Morgan Stanley, Barclays and Goldman Sachs are paying about $230 million, $175 million and $164 million, respectively, the people said.

Plaintiffs’ lawyers disclosed the approximate size of the settlement in Manhattan federal court last month, saying they were still ironing out details. They updated the total Thursday. The accord averts a trial following years of litigation by hedge funds, pension funds, university endowments, small banks and other investors, who sued as a group. They alleged that global banks – along with Markit Group, a market-information provider in which the banks owned stakes – conspired to control the information about the multitrillion-dollar credit-default-swap market in violation of U.S. antitrust laws. Credit Suisse, Deutsche Bank and Bank of America will pay about $160 million, $120 million and $90 million, respectively, the people said. BNP Paribas, UBS, Citigroup, RBS and HSBC also would pay less than $100 million apiece, the people said.

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The IMF needs an independent chief. Or its credibility will continue to erode until it is irrelevant.

IMF’s Botched Involvement In Greece Attacked By Former Watchdog Chief (Telegraph)

The IMF has come under fire for failing in its duty of care towards Greece by pushing self-defeating austerity measures on the battered economy. The fund was told it should have eased up on the spending cuts and tax hikes, pushed for an earlier debt restructuring and paid more “attention” to the political costs of its punishing policies during its five-year involvement in Greece. The recommendations came from a former deputy director of IMF’s Independent Evaluation Office (IEO) David Goldsbrough.The IEO is an independent watchdog tasked with scrutinising the fund’s activities. Mr Goldsbrough worked at the body until 2006. His suggestions are set to embolden critics of the IMF’s handling of the Greek crisis. They follow previous admissions from the fund that it has over-stated the benefits of imposing excessive austerity on successive Greek governments.

The suggestions from the former watchdog chief come as reports suggest the IMF is still poised to pull out of Greece’s third international rescue in five years over the sensitive issue of debt relief. The fund is pushing for a restructuring of at least €100bn of Greece’s debt pile, according to a report in Germany’s Rheinische Post. Such bold measures to extend maturities and reduce interest payments are set to be rejected by its European partners, who are unwilling to impose massive lossess on their taxpayers. The head of Greece’s largest creditor – Klaus Regling of the European Stability Mechanism – told the Financial Times that such radical restructuring was “unnecessary”. This intransigence could now see the IMF withdraw its involvement when its programme ends in March 2016.

In addition to his findings on Greece, Mr Goldsbrough urged the IMF to question its involvement in many bail-out countries for the sake of the institution’s credibility. “Few reports probe more fundamental questions – either about alternative policy strategies or the broader rationale for IMF engagement,” said the report. Accounts from 2010 show the IMF was railroaded into a Greek rescue programme on the insistence of European authorities, vetoing the objections of its own board members from the developing world. The IMF is prevented from lending to bankrupt nations by its own rules. But it deployed an “exceptional circumstances” justification to provide part of a €110bn loan package to Athens five years ago. Greece has since become the first ever developed nation to default on the IMF in its 70-year history.

Despite privately urging haircuts for private sector creditors in 2010, the IMF was ignored for fear of triggering a “Lehman” moment in Europe, by then ECB chief Jean-Claude Trichet. Greece later underwent the biggest debt restructuring in history in 2012. The findings of the fund’s research division have largely discredited the notion that harsh austerity will bring debtor nations back to health. However, this stance has been at odds with its negotiators during Greece’s new bail-out talks where officials have continued to demand deep pension reforms and spending cuts for Greece. Diplomatic cables between Greece’s ambassador to Washington have since revealed the White House pressed the fund to make vocals calls for mass debt relief to keep Greece in the eurozone during fraught negotiations in the summer. However, the issue of debt relief is not due to be discussed when eurozone finance ministers gather to meet for talks on Monday, said EU officials.

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“Cars accounted for almost 20% of Germany’s near $1.5 trillion in exports last year, or to put it in blunt political terms: one in seven jobs.”

Volkswagen Too Big to Fail For Germany’s Political Classes (Bloomberg)

At Volkswagen AG, political connections come already fitted. In part, it’s due to Volkswagen’s iconic role as a symbol of West Germany’s economic revival after Nazi rule and the destruction of World War II. Angela Merkel, who grew up under communism in East Germany, has said her first car after the fall of the Berlin Wall in 1989 was a VW Golf compact. Mostly it’s about jobs: around a third of Volkswagen’s almost 600,000 positions are in Germany, and that’s not to mention the company’s supply chain. For Volkswagen, however, proximity to political power is enshrined in statute. When Germany privatized the automaker in 1960, its home state of Lower Saxony kept a blocking minority and a supervisory board seat for the region’s premier. Future presidents, chancellors and cabinet ministers have cut their political teeth in the state with VW at their side.

That nexus of political affinity and economic awareness ensures the scandal engulfing VW is too big a threat to national prosperity for the government to be a neutral observer. “It’ll be important for the German government to look at scenarios for the worst possible outcome,” Stefan Bratzel at the University of Applied Sciences in Bergisch Gladbach said. Merkel’s options could include helping the state of Lower Saxony increase its stake in VW or tax incentives to promote electric cars, he said. Merkel is thus far trying to keep VW’s scandal over cheating on diesel-car emissions at arm’s length, simply demanding that the automaker come clean quickly. Her restraint signals a reluctance by chancellery officials to exercise direct influence on private companies, according to a person familiar with government policy making. In any case, the full scope of the scandal is still not clear, the person said.

“Of course German governments take business interests into account,” Marcel Fratzscher, head of the Berlin-based DIW economic institute, said by phone. Still, “if you look at France, the ties between business and politics are much closer there than in Germany,” he said. With almost 35% wiped off VW’s share value since the affair came to light, that’s a luxury that might not be granted for long if the company’s position deteriorates further. [..] Merkel has experience of intervening when it comes to autos. In 2013, she watered down European pollution-control legislation aimed at reducing CO2 emissions from cars, an action for which she was lauded by German auto-industry lobby VDA. Justifying her decision to defend jobs, Merkel said at the time there was a need “to take care that, notwithstanding the need to make progress on environmental protection, we don’t weaken our own industrial base.” Cars accounted for almost 20% of Germany’s near $1.5 trillion in exports last year, or to put it in blunt political terms: one in seven jobs.

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Stalling as a last defense.

VW Says Emissions Probe Will Take Months as It Faces Fines (Bloomberg)

Volkswagen said its investigation into rigged diesel engines will probably take months to complete, highlighting the complexity of the scandal that upended the carmaker two weeks ago. The company set up a five-person committee led by Berthold Huber, interim chairman of the supervisory board. The group will work closely with U.S. law firm Jones Day to unravel how software to cheat diesel-emissions tests was developed and installed for years in millions of vehicles, the company said Thursday. Volkswagen stuck to a pre-crisis plan that CFO Hans Dieter Poetsch will become the permanent chairman. Frank Witter, 56, head of the financial-services division, will succeed Poetsch as CFO.

The automaker is facing a significant financial impact, including at least €6.5 billion it already set aside for repairs and recalls and a U.S. fine that may reach $7.4 billion, according to analysts from Sanford C. Bernstein. A sales stop in September already put a dent in its U.S. deliveries. The board’s leadership panel met for seven hours on Wednesday night with CEO Matthias Mueller, who was appointed after his predecessor Martin Winterkorn stepped down under pressure last week. “We’re at the beginning of a long process,” said Olaf Lies, who is economy minister of the German state of Lower Saxony, which owns one-fifth of Volkswagen’s voting shares, and a member of Volkswagen’s investigation committee. “In the end, a series of people will be held accountable, and that doesn’t mean the software developers but those responsible at the senior level.”

Volkswagen postponed an extraordinary shareholders’ meeting that had been planned for Nov. 9, saying “it would not be realistic to provide well-founded answers which would fulfill the shareholders’ justified expectations” by that time. Some investors have criticized the appointment of Poetsch. Though Volkswagen hasn’t assigned blame for the diesel scandal to the CFO or to ousted CEO Winterkorn, the two were close associates. “Making Poetsch the chairman at this point while the investigation into the diesel scandal is ongoing isn’t the right way to go about rebuilding trust in the company,” said Ingo Speich, a fund manager at Volkswagen shareholder Union Investment. “Volkswagen needs a strong chairman right now, and he’ll be in a weak position.”

The company is facing an “enormous recall” in the U.S., though it’s still not clear what hardware and software corrections it will use to fix the problem, U.S. Energy Secretary Ernest Moniz said Thursday in an interview in Istanbul. “Obviously there’s a discussion of fines, of very, very major fines” from the Environmental Protection Agency, Moniz said. The amount of the penalties VW faces is “going to depend upon what corrective actions” the company takes, he said. Volkswagen’s 600,000-person workforce is starting to feel the impact of the scandal as the carmaker cuts spending in anticipation of fines, recalls and a drop in U.S. sales.

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Taking your pensions into the casino is an obvious last desperate step.

World’s Biggest Pension Fund Is Moving Into Junk and Emerging Bonds (Bloomberg)

Japan’s $1.2 trillion Government Pension Investment Fund, the world’s largest, unveiled sweeping changes to its foreign bond investments, hiring more than a dozen new asset managers and creating mandates for junk and emerging-market securities. The fund picked managers for eight categories of active investments in overseas debt, it said Thursday. GPIF chose Nomura Asset Management to oversee U.S high-yield bonds and UBS Global Asset Management for European speculative-grade debt. Janus Capital Management will handle part of the pension giant’s U.S. bond investments as a subcontractor for Diam Co., according to GPIF’s statement, which didn’t specify whether the money would go to Bill Gross’s fund.

Ashmore Japan, a specialist in developing-country investment, won the only local-currency emerging-market contract. GPIF faces mounting pressure to boost returns and diversify assets as pension payouts for the world’s oldest population swell. The fund has pared domestic bonds in the past year in favor of equities, inflation-linked debt and alternative assets. Its foray into high-yield bonds comes as the securities hand investors the biggest losses in four years. “I’m worried,” said Naoki Fujiwara, chief fund manager at Shinkin Asset Management in Tokyo. “The timing isn’t good. We’re talking about the Fed raising rates, and the assets that are likely to be affected the most by this are junk bonds. Investing in emerging-market currencies is worrying, too.”

A gauge of global speculative-grade debt compiled by Bank of America Merrill Lynch dropped for a fourth month in September, the longest stretch since the data began in 1998. This year is shaping up as one to forget for investors in risky assets, with stocks, commodities and currency funds all in the red amid concern about the outlook for the global economy and as the Federal Reserve prepares to raise interest rates. Investors pulled $40 billion out of emerging markets in the third quarter, fleeing at the fastest pace since the height of the global financial crisis.

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Joris should get into today’s events, things move too fast to linger on the past.

How The Banks Ignored The Lessons Of The Crash (Joris Luyendijk)

I spent two years, from 2011 to 2013, interviewing about 200 bankers and financial workers as part of an investigation into banking culture in the City of London after the crash. Not everyone I spoke to had been so terrified in the days and weeks after Lehman collapsed. But the ones who had phoned their families in panic explained to me that what they were afraid of was the domino effect. The collapse of a global megabank such as Lehman could cause the financial system to come to a halt, seize up and then implode. Not only would this mean that we could no longer withdraw our money from banks, it would also mean that lines of credit would stop.

As the fund manager George Cooper put it in his book The Origin of Financial Crises: “This financial crisis came perilously close to causing a systemic failure of the global financial system. Had this occurred, global trade would have ceased to function within a very short period of time.” Remember that this is the age of just-in-time inventory management, Cooper added – meaning supermarkets have very small stocks. With impeccable understatement, he said: “It is sobering to contemplate the consequences of interrupting food supplies to the world’s major cities for even a few days.” These were the dominos threatening to fall in 2008. The next tile would be hundreds of millions of people worldwide all learning at the same time that they had lost access to their bank accounts and that supplies to their supermarkets, pharmacies and petrol stations had frozen.

The TV images that have come to define this whole episode – defeated-looking Lehman employees carrying boxes of their belongings through Wall Street – have become objects of satire. As if it were only a matter of a few hundred overpaid people losing their jobs: Look at the Masters of the Universe now, brought down to our level! In reality, those cardboard box-carrying bankers were the beginning of what could very well have been a genuine breakdown of society. Although we did not quite fall off the edge after the crash in the way some bankers were anticipating, the painful effects are still being felt in almost every sector. At this distance, however, seven years on, it’s hard to see what has changed. And if nothing has changed, it could all happen again.

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