Apr 172018
 


Charles Sprague Pearce Lamentations over the Death of the First-Born of Egypt 1877

 

In Matthew 12:22-28, Jesus tells the Pharisees:

 

Every kingdom divided against itself is brought to desolation, and every city or house divided against itself will not stand.

In 1858, US Senate candidate Abraham Lincoln borrows the line:

 

On June 16, 1858 more than 1,000 delegates met in the Springfield, Illinois, statehouse for the Republican State Convention. At 5:00 p.m. they chose Abraham Lincoln as their candidate for the U.S. Senate, running against Democrat Stephen A. Douglas. At 8:00 p.m. Lincoln delivered this address to his Republican colleagues in the Hall of Representatives. The title reflects part of the speech’s introduction, “A house divided against itself cannot stand,” a concept familiar to Lincoln’s audience as a statement by Jesus recorded in all three synoptic gospels (Matthew, Mark, Luke).

Even Lincoln’s friends regarded the speech as too radical for the occasion. His law partner, William H. Herndon, considered Lincoln as morally courageous but politically incorrect. Lincoln read the speech to him before delivering it, referring to the “house divided” language this way: “The proposition is indisputably true … and I will deliver it as written. I want to use some universally known figure, expressed in simple language as universally known, that it may strike home to the minds of men in order to rouse them to the peril of the times.”

On April 12, 2018, the Washington Post runs this headline:

We need to go big in Syria. North Korea is watching.

The WaPo is undoubtedly disappointed that James Mattis prevailed over more hawkish voices in Washington and the least ‘expansive’ attack was chosen.

Then after the attack, Russian President Putin warns of global ‘chaos’ if the West strikes Syria again. And I’m thinking: Chaos? You ‘Predict’ Chaos? You mean what we have now does not qualify as chaos?

Yes, Washington Post, North Korea is watching. And you know what it sees? It sees a house divided. It sees an America that is perhaps as divided against itself as it was prior to the civil war. An America that elects a president and then initiates multiple investigations against him that are kept going seemingly indefinitely. An America where hatred of one’s fellow countrymen and -women has become the norm.

An America that has adopted a Shakespearian theater as its political system, where all norms of civil conversation have long been thrown out the window, where venomous gossip and backstabbing have become accepted social instruments. An America where anything goes as long as it sells.

 

In an intriguing development, while Trump pleased the Washington Post, New York Times, CNN and MSNBC, his declared arch-enemies until the rockets flew, his own base turned on him. While the ‘liberals’ (what’s in a word) cheered and smelled the blood, the right wing reminded the Donald that this is not what he was elected on – or for.

Can Trump afford to lose his base? Isn’t the right wing supposed to be the side that calls for guns and bombs? It’s unlikely that he can do without his base, it would weaken him a lot as the Lady Macbeths watch his every move looking for just that one opportunity, that one moment where his back is turned.

As for the right wing not being the bloodthirsty one, that is quite the shift. Not that it’s a 180 on a dime, it has been coming for a while. It’s not just interesting with regards to Trump, there are many war hawks who -will- see their support crumble too if or when they speak out for more boots in deserts. Maybe John McCain should consider changing parties?

 

So yeah, what does North Korea see? Should it be afraid? Will it have become more afraid? Kim Jong-Un will have watched for China’s reaction, much more important to him that what the US does. And China has condemned the attack. It would do the same if America were to attack North Korea, and a lot stronger. Therefore Kim Jong-Un doesn’t believe Washington will dare attack him.

An interesting line from Chinese state run newspaper Global Times illustrates how China sees the world, and the US in particular, at present:

 

“A weak country has no diplomacy. As a hundred years have passed, China is no longer that [weak] China, but the world is still that world.”

That is how China, and in its wake, North Korea, see America. And so does Russia. Americans may -and do- think that they are still no. 1, and the most powerful, economically, politically, militarily, but that’s no longer what the rest of the world sees.

Is the US still mightier than China militarily? Probably, but not certainly. Still, how do you conquer 1.3 billion people and keep them subdued? Xi Jinping is very aware of that, and he bides his time.

Is the US still mightier than Russia militarily? Almost certainly not. To quote Paul Craig Roberts once more (and he’s no amateur):

The Russians know that they can, at will within a few minutes, sink the entire US fleet, destroy every US airplane & ship in the ME & within range of the ME, completely destroy all of Israel’s military capability & wipe out the military of the two-bit punk state of Saudi Arabia.

I’ve written this before in the past: there is a big difference between how America sees and treats its military, and how Russia does it. A difference that explains how Russia can, with one tenth of American defense spending, still be militarily superior, or at least make any wars against it unwinnable.

That is, in the US the focus is not on making the best weapons, it’s on making the most money on weapons. Boeing, Raytheon, Lockheed will develop those weapons that are most profitable, not those that are most effective. The interminable story of the development of the Joint Strike Fighter is perhaps the best example of this, but there are many others. The Pentagon is a money pit.

Americans can perhaps still make the best weapons for the least money, but they don’t do it. Russia does. For Putin, the best weapons are a matter of survival. Russia has been under American threat as long as he can remember.

While Americans believe so strongly in their supremacy, and have grown so accustomed to the idea, that they no longer see having the best weapons as a matter of survival for the nation. They have come to see their superiority as something automatic and natural.

 

The attack on Syria is seen as a sign of weakness. Because there was no need for it. Because the evidence is flimsy at best. Because the world has international bodies to deal with such issues. Because there is no logic in allowing the blood to flow in the Gaza and Yemen but cite humanitarian reasons for bombing alleged chemical facilities elsewhere.

What the world sees is bluster emanating from a deeply divided nation (and we haven’t even tackled Britain). It sees that less than 48 hours after the airstrikes, a former FBI chief talks about his former boss in terminology that nobody would dare use in most countries, and throughout most of history,

James Comey is beyond Shakepeare. And in America, the issue is who’s right in the Comey-Trump conflict. In Russia, China et al it’s not. They see a house, a country divided. A weak country has no diplomacy.

That’s how all empires end. Complacency and division. That is what North Korea sees when it watches America, what China, and Russia see. And they may even know how Jesus put it. He didn’t just say a kingdom divided would become less powerful or wealthy, he said:

 

Every kingdom divided against itself is brought to desolation.

 

 

Jul 252017
 
 July 25, 2017  Posted by at 8:34 am Finance Tagged with: , , , , , , , , , ,  Comments Off on Debt Rattle July 25 2017


Vincent van Gogh Sunflowers 1887

 

The Next Financial Crisis Is Parked Out Front (G.)
Bank of England Warns of ‘Spiral Of Complacency’ on Household Debt (G.)
How Big Of A Deleveraging Are We Talking About? (Roberts)
IMF: US Looks Weaker, Rest Of The World Picks Up Economic Slack (CNBC)
Bloated London Property Prices Fuel Exodus (G.)
The Foreclosure ‘Pig’ Moves Through The Housing-Crisis ‘Python’ (MW)
Australian Housing Market At Risk Of Crash – UBS Research (CNBC)
It’s Time To Rethink Monetary Policy (Rochon)
Scandals Threaten Japanese Prime Minister Shinzo Abe’s Grip On Power (G.)
Brussels To Act ‘Within Days’ If US Sanctions Hurt EU Trade With Russia (RT)
EU Divided On How To Answer New US Sanctions Against Russia (R.)
US ‘May Send Arms’ To Ukraine, Says New Envoy (BBC)
Tsipras and Varoufakis Go Public With Spat (K.)
Alexis Tsipras’s Mixed Messages Over Appointing Me As Finance Minister (YV)
Greece Plans Return To Bond Market As Athens Sees End To Austerity (G.)
Greek Spending Cuts Prettify Budget Data (K.)

 

 

Can’t let a headline like that go to waste. More on the topic in the 2nd article.

The Next Financial Crisis Is Parked Out Front (G.)

Good morning – Warren Murray here with your Tuesday briefing. Britain’s rising level of personal debt has prompted a warning from the Bank of England about dire consequences for lenders and the economy. There are “classic signs” that the risks involved in car finance, credit cards and personal loans are being underestimated as financial institutions make hay while the sun shines, says Alex Brazier, the Bank’s director for financial stability. The economy defied expectations when it grew strongly in the six months after the EU referendum. But that was partly fuelled by consumers racking up their credit cards and loans, as lenders offered easier terms and longer interest-free deals. Much higher levels of borrowing compared with income are now being allowed, at a time when household incomes have only marginally risen.

As the anniversary of the global financial meltdown approaches, Brazier has suggested current low rates of default on personal credit may have again caused banks to become blinkered to the potential for disaster. Back in 2007, “banks – and their regulators – were blind to the basic fact that more debt meant greater risk of loss”. “Lenders have not entered, but they may be dicing with, the spiral of complacency. The spiral continues, and borrowers rack up more and more debt. “[In 2007] complacency gave way to crisis. Companies and households were unable to refinance their debts. The result was economic disaster.”

Read more …

The BoE creates huge bubbles, and afterwards starts warning about them. Typical central bank behavior.

Bank of England Warns of ‘Spiral Of Complacency’ on Household Debt (G.)

The Bank of England has told banks, credit card companies and car loan providers that they risk fresh action against reckless lending as it warned of a looming “spiral of complacency” about mounting consumer debt. In its toughest warning yet about the possibility of a rerun of the financial crisis that devastated the economy 10 years ago, Threadneedle Street admitted it was alarmed about the increase in the amount of money being borrowed on easy terms over the past year. “Household debt – like most things that are good in moderation – can be dangerous in excess”, Alex Brazier, the Bank director for financial stability, said in a speech in Liverpool. “Dangerous to borrowers, lenders and, most importantly from our perspective, everyone else in the economy.”

Brazier’s said there were “classic signs” of lenders thinking the risks were lower following a prolonged period of good economic performance and low losses on loans. The first signs of the Bank’s anxiety about consumer debt came from its governor, Mark Carney, a month ago, but Brazier’s comments marked a ratcheting up of Threadneedle Street’s rhetoric. “Lenders have been the lucky beneficiaries of the benign way the economy has evolved. In expanding the supply of credit, they may be placing undue weight on the recent performance of credit cards and loans in benign conditions,” Brazier said. The willingness of consumers to take on more debt to fund their spending helped the economy grow strongly in the six months after the EU referendum, a period when the Bank expected growth to fall sharply.

Over the past year, Brazier said, household incomes had grown by just 1.5% but outstanding car loans, credit card balances and personal loans had risen by 10%. He added that terms and conditions on credit cards and personal loans had become easier. The average advertised length of 0% credit card balance transfers had doubled to close to 30 months, while advertised interest rates on £10,000 personal loans had fallen from 8% to around 3.8%, even though official interest rates had barely changed.

Read more …

More great work by Lance. if these graphs and numbers don’t scare you, look again.

How Big Of A Deleveraging Are We Talking About? (Roberts)

Debt, if used for productive investments, can be a solution to stimulating economic growth in the short-term. However, in the U.S., debt has been squandered on increases in social welfare programs and debt service which has an effective negative return on investment. Therefore, the larger the balance of debt becomes, the more economically destructive it is by diverting an ever growing amount of dollars away from productive investments to service payments. The relevance of debt growth versus economic growth is all too evident as shown below. Since 1980, the overall increase in debt has surged to levels that currently usurp the entirety of economic growth. With economic growth rates now at the lowest levels on record, the growth in debt continues to divert more tax dollars away from productive investments into the service of debt and social welfare.

It now requires nearly $3.00 of debt to create $1 of economic growth.

In fact, the economic deficit has never been greater. For the 30-year period from 1952 to 1982, the economic surplus fostered a rising economic growth rate which averaged roughly 8% during that period. Today, with the economy growing at an average rate of just 2%, the economic deficit has never been greater.

But again, it isn’t just Federal debt that is the problem. It is all debt. As discussed last week, when it comes to households, which are responsible for roughly 2/3rds of economic growth through personal consumption expenditures, debt was used to sustain a standard of living well beyond what income and wage growth could support. This worked out as long as the ability to leverage indebtedness was an option. The problem is that eventually, the debt reaches a level where the level of debt service erodes the ability to consume at levels great enough to foster stronger economic growth. In reality, the economic growth of the U.S. has been declining rapidly over the past 35 years supported only by a massive push into deficit spending by households.

[..]The massive indulgence in debt, or a “credit induced boom”, has now begun to reach its inevitable conclusion. The debt driven expansion, which leads to artificially stimulated borrowing, seeks out diminishing investment opportunities. Ultimately these diminished investment opportunities lead to widespread malinvestments. Not surprisingly, we clearly saw it play out in “real-time” in 2005-2007 in everything from sub-prime mortgages to derivative instruments. Today, we see it again in mortgages, subprime auto loans, student loan debt and debt driven stock buybacks and acquisitions.

When credit creation can no longer be sustained the markets will begin to “clear” the excesses. It is only then, and must be allowed to happen, can resources be reallocated back towards more efficient uses. This is why all the efforts of Keynesian policies to stimulate growth in the economy have ultimately failed. Those fiscal and monetary policies, from TARP and QE to tax cuts, only delay the clearing process. Ultimately, that delay only potentially worsens the inevitable clearing process. That clearing process is going to be very substantial. With the economy currently requiring roughly $3 of debt to create $1 of real, inflation-adjusted, economic growth, a reversion to a structurally manageable level of debt would involve a nearly $35 Trillion reduction of total credit market debt from current levels.

Read more …

Difference: BOJ and ECB still buy trilions in ‘assets’.

IMF: US Looks Weaker, Rest Of The World Picks Up Economic Slack (CNBC)

Despite cutting the economic growth outlook for the U.S. and U.K., the IMF kept its global growth forecast unchanged on expectations the euro zone and Japanese growth would accelerate. In the July update of its World Economic Outlook, the IMF forecast global economic growth of 3.5% for 2017 and 3.6% for 2018, unchanged from its April outlook. That was despite earlier cutting its U.S. growth projection to 2.1% from 2.3% for 2017 and to 2.1% from 2.5% for 2018, citing both weak growth in the first quarter of this year as well as the assumption that fiscal policy will be less expansionary than previously expected. A weaker-than-expected first quarter also spurred the IMF to cut its forecast for U.K. growth for this year to 1.7% from 2.0%, while leaving its 2018 forecast at 1.5%.

But slowdowns in the U.S. and U.K. were expected to be offset by increased forecasts for many euro area countries, including Germany, France, Italy and Spain, where first quarter growth largely beat expectations, the IMF said. “This, together with positive growth revisions for the last quarter of 2016 and high-frequency indicators for the second quarter of 2017, indicate stronger momentum in domestic demand than previously anticipated,” the IMF said in its release. It raised its euro-area growth forecast for 2017 to 1.9% from 1.7%. For 2018, it increased its forecast to 1.7% from 1.6%.

Read more …

The Guardian has the guts to claim that people don’t move out because they don’t have the money to stay, but because they want to get on the f*cking property ladder.

Bloated London Property Prices Fuel Exodus (G.)

In the Kent seaside town of Whitstable, long-term residents call them DFLs – people who have moved “down from London”, sometimes for the lifestyle but more often for cheaper housing. The number of people fleeing the capital to live elsewhere has hit a five-year high. In the year to June 2016, net outward migration from London reached 93,300 people – more than 80% higher than five years earlier, according to analysis of official statistics. A common theme among the leavers’ destinations is significantly cheaper housing, according to the estate agent Savills, which analysed figures from the Office for National Statistics and the Land Registry. Cambridge, Canterbury, Dartford and Bristol are reportedly among the most popular escape routes for people who have grown tired of London and its swollen property prices.

The most likely destination for people aged over 25 moving from Islington is St Albans in Hertfordshire, where the average home is £173,000 cheaper. People moving from Ealing to Slough – the most popular move from the west London borough – stand to save on average £241,000. Among all homeowners leaving London, the average house price was £580,000 while the average in the areas they moved to was £333,000. The exodus is not just of homeowners, but of renters too. Rents in London have soared by a third in the last decade, compared to 18% in the south-west, 13% in the West Midlands and 11% in the north-west of England.

The only age group that has a positive net migration figure in the capital is those in their twenties, the research found. Everyone else, from teens to pensioners, is tending to get out. Since 2009, the trend has been steadily increasing among people in their thirties with 15,000 more people in that age bracket leaving every year than at the end of the last decade – a 27% rise. The phenomenon is being driven by a widespread desire to “trade up the housing ladder”, something that is all too often impossible in London according to Lucian Cook, Savill’s head of residential research. “Five years ago people would have been reluctant [to move out] because the economy wasn’t as strong and some owners didn’t want to miss out on house price growth [in London],” he said.

Read more …

Pretending it’s the last of the pig. We’ll see about that.

The Foreclosure ‘Pig’ Moves Through The Housing-Crisis ‘Python’ (MW)

As the effects of the housing crisis further recede, markers of distress are declining, with one notable exception: Among the batches of severely delinquent mortgages bought by institutional investors, foreclosures are on the rise. The trend is a reminder of the reasons many community advocates resisted allowing institutional investors to buy delinquent mortgages in government auctions that began in 2010. Wall Street, those advocates said, shouldn’t be rewarded for its role in creating the housing crisis with the chance to buy for pennies on the dollar the very assets whose values it dented. The government auctions promised a risk-sharing solution that would benefit nearly everyone: Homeowners whose mortgages had been bought dirt-cheap could get loan modifications, investors would get profitable assets, and communities would see tax revenues restored and neighborhoods revitalized.

But that win-win-win scenario may bring little relief to the most distressed among those troubled assets. A new Attom Data analysis for MarketWatch shows increasing foreclosures in the mortgages auctioned by the government. A subsidiary of private-equity firm Lone Star Investments, for example, has foreclosed on nearly 2,000 homeowners this year, through early July, and has increased foreclosures every year since 2013. And a Goldman Sachs subsidiary called MTGLQ, which has more than doubled foreclosures each year from 2014 to 2016, may do the same again this year, based on early 2017 data. Those figures stand in stark contrast to the housing market overall, where foreclosures fell 22% in the second quarter, touching an 11-year low of just over 220,000.

The institutional-investor foreclosure figures are a small fraction of the total, noted Daren Blomquist, Attom’s senior vice president of communications. And they don’t surprise investors who intentionally snatch up the most distressed mortgages available because their elevated risk promises higher yield. Attom Data does show an uptick in foreclosures by other lenders, though not all participated in the government auctions. But they’re a reminder that a decade after the housing downturn began, the pockets of foreclosures that still pop up represent the worst of the worst, prompting even those questioning the program to agree that some foreclosures were inevitable, no matter who owned the mortgages. Analysts call the current crop of foreclosures “the last of the pig moving through the python.”

Read more …

All bubble countries now face the issue. There’s no way out. So they’ll deny their bubble for a while longer.

Australian Housing Market At Risk Of Crash – UBS Research (CNBC)

The Australian housing market has peaked and could crash if the country’s central bank raises rates by too much or too quickly according to researchers at the Swiss bank, UBS. Property in Australia has boomed and the most recent government data marked growth in residential property prices at 10.2% year on year for the 2017 March quarter. In a note Monday, UBS Economist George Tharenou said any rash interest rate action from the Reserve Bank of Australia (RBA) could trigger a crash. “We still see rates on hold in the coming year, amid macroprudential tightening on credit growth and interest only loans. “Hence we still see a correction, but not a collapse, but if the RBA hikes too early or too much (as flagged by its hawkish minutes), it risks triggering a crash,” Tharenou warned.

Housing starts fell 19% in the first quarter of the year and May’s mortgage approvals also slid 20%. After a multi-year boom, the cost of an average home in the country now sits at 669,700 Australian dollars ($532,000) but Tharenou said price growth is certain to slow. “Despite weaker activity, house prices just keep booming with still strong growth of 10% y/y in June. However, this is unsustainably 4-5 times faster than income. “Looking ahead, we still see price growth slowing to 7% y/y in 2017 and 0-3% in 2018, amid record supply & poor affordability,” the economist added.

Read more …

Raising rates into a gigantesque bubble. No problem.

It’s Time To Rethink Monetary Policy (Rochon)

July 12 marks the date the Bank of Canada ignored common sense and increased its rate for the first time in seven years. Economists are largely divided on whether this was a good move, but in my opinion this was an ill-informed decision, largely based on the usually strong first quarter data, which may prove unsustainable in the longer term. In turn, it raises important questions about the conduct of monetary policy and the need to rethink the role and purpose of central bank policy. For the record, I don’t think there is much to fear from a single increase to 0.75% from 0.50, though it will have an immediate impact on mortgage rates — some Canadians will pay more for their homes. However, it is the prospect of what that move represents that sends chills down this economist’s spine.

As we know all too well, central banks never raise rates once or twice, but usually do so several times. Indeed, the consensus among economists is that there will be at least two more raises before the end of 2018, bringing the bank rate to 1.25%. This is still low by historical standards, but the raises begin to add up. I expect many more rate hikes through 2019 and 2020. You see, the Bank of Canada believes the so-called natural rate is 3%, which means we could possibly see nine more interest rate increases. Imagine the damage that will do. Yet, according to their own model, this rate is the “neutral” or “natural” rate and should have no far reaching impact. Try telling that to Canadians who have consumer debt and a mortgage. Clearly, there is nothing “neutral” about these rate increases. This alone is a reason to rethink monetary policy.

Second, the Bank of Canada targets inflation, and has been officially since 1991, a fact it reminds us of all the time. All other objectives, including economic growth and unemployment, or even household debt and income inequality, are far behind the principal objective of trying to keep the inflation rate on target. There is much to say about this, including whether interest rates and monetary policy in general are the best tool to deliver on the inflation crusade. Even if we accept this, inflation is currently at a near two-decade low. In other words, where’s the inflation beef? Inflation does not represent a current threat, and there are no inflationary pressures in the economy, which raises the question: Why raise rates?

Read more …

With Abenomics dead, so is Abe.

Scandals Threaten Japanese Prime Minister Shinzo Abe’s Grip On Power (G.)

Shinzo Abe is fighting for his future as Japan’s prime minister as scandals drag his government’s popularity close to what political observers describe as “death zone” levels. Apart from clouding Abe’s hopes of winning another term as leader of the Liberal Democratic Party (LDP) when a vote is held next year, the polling slump also undermines his long-running push to revise Japan’s war-renouncing constitution. Abe, who returned to the prime ministership four and a half years ago, was long seen as a steady hand whose position appeared unassailable – so much so that the LDP changed its rules to allow Abe the freedom to seek a third consecutive three-year term at the helm of the party. “He is no longer invincible and the reason why he is no longer invincible is he served his personal friends not the party,” said Michael Thomas Cucek, an adjunct professor at Temple University Japan.

Abe’s standing has been damaged by allegations of favours for two school operators who have links to him. The first scandal centred on a cut-price land deal between the finance ministry and a nationalist school group known as Moritomo Gakuen. The second related to the approval of a veterinary department of a private university headed by his friend, Kotaro Kake. Abe has repeatedly denied personal involvement, but polls showed voters doubted his explanations, especially after leaked education ministry documents mentioned the involvement of “a top-level official of the prime minister’s office” in the vet school story. Abe attempted to show humility in a parliamentary hearing this week by acknowledging it was “natural for the public to sceptically view the issue” because it involved his friend. “I lacked the perspective,” he said. Experts doubt that Abe’s contrition, combined with a planned cabinet reshuffle next week, will do much to reverse his sagging fortunes.

Read more …

The limits of the anti-Russia craze.

Brussels To Act ‘Within Days’ If US Sanctions Hurt EU Trade With Russia (RT)

The EU should act “within days” if new sanctions the US plans to impose on Russia prove to be damaging to Europe’s trade ties with Moscow, an internal memo seen by the media says. Retaliatory measures may include limiting US jurisdiction over EU companies. An internal memo seen by the Financial Times and Politico has emerged amid mounting opposition to a US bill seeking to hit Russia with a new round of sanctions. The bill, if signed into law, will also give US lawmakers the power to veto any attempt by the president to lift the sanctions. The document reportedly said European Commission chief Jean-Claude Juncker was particularly concerned the sanctions would neglect the interests of European companies. Juncker said Brussels “should stand ready to act within days” if sanctions on Russia are “adopted without EU concerns being taken into account,” according to the FT.

The EU memo also warns that “the measures could impact a potentially large number of European companies doing legitimate business under EU measures with Russian entities in the railways, financial, shipping or mining sectors, among others.” Restrictions against Russia come as part of the Countering Iran’s Destabilizing Activities Act, targeting not only Tehran, but also North Korea. Initially passed by the Senate last month, the measures seek to impose new economic measures on major sectors of the Russian economy. The draft legislation would also introduce individual sanctions for investing in Gazprom’s Nord Stream 2 gas pipeline project, outlining steps to hamper construction of the pipeline and imposing sanctions on European companies which contribute to the project.

Read more …

So EU vs US, and EU vs EU. The problem seems to be that US companies could profit from the sanctions, as European ones suffer.

EU Divided On How To Answer New US Sanctions Against Russia (R.)

European Commission preparations to retaliate against proposed new U.S. sanctions on Russia that could affect European firms are likely to face resistance within a bloc divided on how to deal with Moscow, diplomats, officials and experts say. A bill agreed by U.S. Senate and House leaders foresees fines for companies aiding Russia to build energy export pipelines. EU firms involved in Nord Stream 2, a 9.5 billion euro ($11.1 billion) project to carry Russian gas across the Baltic, are likely to be affected. Both the European Union and the United States imposed broad economic sanctions on Russia’s financial, defense and energy sectors in response to Moscow’s annexation of Crimea from Ukraine in 2014 and its direct support for separatists in eastern Ukraine. But northern EU states in particular have sought to shield the supplies of Russian gas that they rely on.

Markus Beyrer, director of the EU’s main business lobby, Business Europe, urged Washington to “avoid unilateral actions that would mainly hit the EU, its citizens and its companies”. The Commission, the EU executive, will discuss next steps on Wednesday, a day after the U.S. House of Representatives votes on the legislation, knowing that the U.S. move threatens to reopen divisions over the bloc’s own Russia sanctions. Among the European companies involved in Nord Stream 2 are German oil and gas group Wintershall, German energy trading firm Uniper, Anglo-Dutch Royal Dutch Shell, Austria’s OMV and France’s Engie. The Commission could demand a formal U.S. promise to exclude EU energy companies; use EU laws to block U.S. measures against European entities; or impose outright bans on doing business with certain U.S. companies, an EU official said.

But if no such promise is offered, punitive sanctions such as limiting the access of U.S. companies to EU banks require unanimity from the 28 EU member states. Ex-Soviet states such as Poland and the Baltic states are unlikely to vote for retaliation to protect a project they have resisted because it would increase EU dependence on Russian gas. An EU official said most member states saw Nord Stream 2 as “contrary or at least not fully in line with European objectives” of reducing reliance on Russian energy. Britain, one of the United States’ closest allies, is also wary of challenging the U.S. Congress as it prepares to leave the EU and seeks a trade deal with Washington. In fact, the EU’s chief executive, Jean-Claude Juncker, has few tools that do not require unanimous support from the bloc’s 28 governments.

The Commission could act alone to file a complaint at the World Trade Organisation. But imposing punitive tariffs on U.S. goods would require detailed proof to be gathered that European companies were being unfairly disadvantaged — a process that would take many months. Diplomatic protests such as cutting EU official visits to Washington are unlikely to have much effect, since requests by EU commissioners for meetings with members of Trump’s administration have gone unanswered, EU aides say.

Read more …

Let’s hope they don’t try.

US ‘May Send Arms’ To Ukraine, Says New Envoy (BBC)

The new US special representative for Ukraine says Washington is actively reviewing whether to send weapons to help those fighting against Russian-backed rebels. Kurt Volker told the BBC that arming Ukrainian government forces could change Moscow’s approach. He said he did not think the move would be provocative. Last week, the US State Department urged both sides to observe the fragile ceasefire in eastern Ukraine. “Defensive weapons, ones that would allow Ukraine to defend itself, and to take out tanks for example, would actually to help” to stop Russia threatening Ukraine, Mr Volker said in a BBC interview.

“I’m not again predicting where we go on this, that’s a matter for further discussion and decision, but I think that argument that it would be provocative to Russia or emboldening of Ukraine is just getting it backwards,” he added. He said success in establishing peace in eastern Ukraine would require what he called a new strategic dialogue with Russia.

Read more …

Undoubtedly not the last we hear of this.

Tsipras and Varoufakis Go Public With Spat (K.)

The coalition on Monday rejected calls for an investigation to be launched into the first months of the government’s time in power, as a dispute between Prime Minister Alexis Tsipras and ex-finance minister Yannis Varoufakis over that period in 2015 became public. “The evaluation of this period has to be conducted with political criteria, not myth-making or gossip,” said government spokesman Dimitris Tzanakopoulos, who accused Varoufakis of trying to advertise his recent book via the “systemic media” he once attacked. Tzanakopoulos’s comments came after Tsipras gave an interview to The Guardian in which he admitted making “big mistakes” in the past and suggested that Varoufakis’s plan for a parallel payment system could not be considered seriously.

“Yanis is trying to write history in a different way,” said Tsipras. “When we got to the point of reading what he presented as his plan B it was so vague, it wasn’t worth the trouble of even talking about. It was simply weak and ineffective.” The former minister immediately responded to the premier’s comments by claiming they displayed a “deep incoherence,” as Varoufakis claims that he had made Tsipras aware of the plan before he came to office yet the SYRIZA leader still chose to appoint him to the cabinet. “Either I was the right choice to spearhead the ‘collision’ with the troika of Greece’s lenders because my plans were convincing, or my plans were not convincing and, thus, I was the wrong choice as his first finance minister,” he wrote in a letter to The Guardian.

New Democracy called for judicial and parliamentary investigations into the claims made by Varoufakis, as well as by former energy minister Panayiotis Lafazanis. The latter claimed in a radio interview on Saturday that he had secured an advance payment from Russia for a gas pipeline to be used to held fund Greece if it left the euro. “Varoufakis and Lafazanis described with clarity the SYRIZA leadership’s plans to take Greece out of the eurozone,” said the conservatives in a statement. “If these plans were seen through to the end, the country would have found itself in a dramatic situation like Venezuela, with unforeseeable social consequences.”

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Makes sense.

Alexis Tsipras’s Mixed Messages Over Appointing Me As Finance Minister (YV)

[..] the Greek prime minister, Alexis Tsipras, having admitted to “big mistakes”, was asked if appointing me as his first finance minister was one of them. According to the interviewer, Mr Tsipras said “Varoufakis … was the right choice for an initial strategy of ‘collision politics’, but he dismisses the plan he presented had Greece been forced to make the dramatic move to a new currency as ‘so vague, it wasn’t worth talking about’”. Given that I presented my plans to Mr Tsipras for deterring the troika’s aggression and responding to a potential impasse (and any move by the troika to evict Greece from the eurozone) before we won the election of January 2015, and I was chosen by him as finance minister (one presumes) on the basis of their merit, his answer reflects a deep incoherence.

Either I was the right choice to spearhead the “collision” with the troika of Greece’s lenders because my plans were convincing, or my plans were not convincing and, thus, I was the wrong choice as his first finance minister. Arguing, as Mr Tsipras does, that I was both the right choice for the initial confrontation and that my plan B was so vague it wasn’t worth the trouble of even talking about is disingenuous, albeit insightful, for it reveals the impossibility of maintaining a radical critique of his predecessors while adopting the Tina (There Is No Alternative) doctrine.

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A brand new line of lipstick for farm animals.

Greece Plans Return To Bond Market As Athens Sees End To Austerity (G.)

Athens has outlined plans to return to the financial markets for the first time since 2014, with a plan to sell new five-year bonds to investors. Existing Greek five-year bonds were trading at 3.6% on Monday morning compared with 63% at the height of the Greek financial crisis in 2012 when the finance ministry was unable to pay public sector wages and there were riots in the streets. Following the announcement that Athens would be returning to the market, the yield fell to 3.4%. The Greek finance ministry has set a goal of a 4.2% interest rate on the new bond. But banking sources believe that level will be hard to achieve and say an interest rate of between 4.3% to 4.5% is much more likely. Government sources say valuation will take place on Tuesday 25 July.

The market test is crucial to Greece for not only judging sentiment of the market, from which it has been essentially exiled since the start of its economic crisis, but also for weaning itself off borrowed bailout funds. Speaking after the bond issue was announced, the EU’s economy commissioner, Pierre Moscovici, described the public spending cuts imposed on Greece since it almost went bust as “too tough” but “necessary”, adding there was now “light at the end of austerity”. Reuters reported that Greece had employed six banks – BNP Paribas, Bank of America Merrill Lynch, Citigroup, Deutsche Bank, Goldman Sachs and HSBC – to act as joint lead managers for a five-year euro bond “subject to market conditions”. Greek ministers will provide more details on Monday afternoon about how much it hopes to borrow, and on what terms.

If the issue is successful, it could help Greece, which is still coping with a debt to GDP ratio of 180%, to exit its long cycle of austerity and rescue packages. Late on Friday, S&P upgraded its outlook on Greek government debt from stable to “positive”, thanks partly to renewed hopes that the country’s creditors could finally grant it debt relief.

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And here’s how it’s done.

Greek Spending Cuts Prettify Budget Data (K.)

Delays in the funding of hospitals, social spending cuts and low expenditure on the Public Investments Program served to prettify the picture of the state budget over the first half of the year, producing a primary surplus of 1.93 billion euros, Finance Ministry figures showed on Monday. At the same time budget revenues posted a marginal increase over the target the ministry had set for the January-June period. However, the big challenge for the government starts at the end of this month with the payment of the first tranche of income tax by taxpayers, followed later on by the Single Property Tax (ENFIA) and road tax at the end of the year.

In total the state will have to collect 33 billion euros by the end of the year, which is considerably higher than in the second half of 2016. According to the H1 budget data, the primary surplus amounted to 1.936 billion euros, against a primary surplus of 1.632 billion in the same period last year, and a target for 431 million for the year to end-June. Expenditure missed its target by 1.15 billion euros, amounting to 22.86 billion in the first half. Compared to last year it was down 757 million euros. Hospital funding missed its target by 265 million.

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Sep 102016
 
 September 10, 2016  Posted by at 9:02 am Finance Tagged with: , , , , , , , , , , ,  1 Response »


Harris&Ewing Balancing act, John “Jammie” Reynolds, Washington DC 1917

Rate-Rise Fears Trip Up Markets (WSJ)
Surprise Fed Speech Throws Markets For A Loop (CNBC)
Stocks Sink With Bonds, Dollar Rallies as Complacency Broken (BBG)
Draghi Asset Buying Deepens the Hole in Europe’s Pension Funds (BBG)
Gundlach Puts His Finger On Bond Market Inflection Point (BBG)
VW Engineer Pleads Guilty in US Criminal Case Over Diesel Emissions (NYT)
Sweden Says No to NATO (BBG)
One “Lifelong Socialist” Norwegian’s Perspective on America (Nordmann)
Eurozone Woes Continue: German Exports Plunge, French Industry Weakens (Tel.)
Why the Eurozone Will Destruct (Mish)
EU’s Poor Nations Plot Next Move As North-South Divide Erupts (CNBC)
Greece Rejects Return Of EU’s Dublin Regulation On Reverse Migration Flow (AP)

 

 

Finally, something happened. But still: there are no markets, there’s only a faint surrogate of a market left. And that has consequences, none of which are positive.

Rate-Rise Fears Trip Up Markets (WSJ)

Major markets had one of their worst days in months, as doubts over central banks’ willingness or ability to stimulate economic growth sent stocks and bonds tumbling. The Dow Jones Industrial Average fell nearly 400 points, and sinking bond prices pushed yields on government debt to their highest levels since early summer. The yield on Germany’s 10-year bund, which had been negative almost without exception since Brexit on June 23, popped into positive territory Friday. The wave of selling shattered weeks of summer torpor and was a reminder of the extent to which long-running rallies in stocks and bonds are reliant upon continued support from central banks.

The ECB damped market sentiment on Thursday by deciding to leave its bond-buying and interest-rate policies unchanged, rather than expanding them as some investors had hoped. An official with the Federal Reserve deepened concerns by suggesting Friday that the Fed still might raise interest rates even after a week of relatively weak U.S. economic data. “A reasonable case can be made for continuing to pursue a gradual normalization of monetary policy,” Federal Reserve Bank of Boston President Eric Rosengren said in a speech. [..] Mr. Rosengren, who has tended to support keeping rates low in the past, helped push markets into a deeper rout.

The Dow industrials plunged 394.46 points, or 2.1%, to 18085.45. The S&P 500 declined 53.49 points, or 2.5%, to 2127.81. The percentage drop was the biggest for both indexes since June 24. The Nasdaq Composite Index lost 133.57 points, or 2.5%, to 5125.91. Yields on 10-year Treasury notes jumped to 1.671%, their highest level since June 23. Bond yields rise as prices fall. “Once the snowball starts rolling down the hill, everybody jumps on board,” said Jonathan Corpina, senior managing partner at Meridian Equity Partners.

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“[Fed] Governor Lael Brainard will be delivering a previously unannounced speech Monday..”

Surprise Fed Speech Throws Markets For A Loop (CNBC)

Those figuring that the Fed still might hike rates in September are getting one more bite at the apple. As the week drew to a close and the Fed’s “quiet period” before meetings was about to settle in, investors recoiled over news that the central bank’s most dovish official, Governor Lael Brainard, will be delivering a previously unannounced speech Monday at The Chicago Council on Global Affairs. The news sent a chill through markets Friday, with major stock market averages taking a beating and short-term government bond yields and the U.S. dollar moving higher, and it set off yet another round of speculation over whether the Fed is ready to come off its historically loose monetary policy. The S&P 500 was down more than 1% Friday afternoon, on track to close with its biggest percentage move since July 8.

“When a market is quiet, it’s susceptible to rumors, whether we’re talking about a path to freeze oil production or whether the Fed is going to raise rates in September,” said Quincy Krosby at Prudential Financial. “This may be a market that has too much time on its hands right now.” Indeed, the guessing game over whether the Fed might enact its first rate rise since December and only its second tightening in more than a decade has set off a fever pitch of horse trading. At one point Friday morning, markets put the chance of a hike later this month as high as 30% before backing off. The probability had been reduced amid a week’s worth of poor economic data, including the worst services reading in six years, a contraction in manufacturing and a weaker-than-expected nonfarm payrolls report.

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You can’t keep ‘markets’ at a completely fake level forever.

Stocks Sink With Bonds, Dollar Rallies as Complacency Broken (BBG)

Tranquility that has enveloped global markets for more than two months was upended as central banks start to question the benefits of further monetary easing, sending government debt, stocks and emerging-market assets to the biggest declines since June. The dollar jumped. The S&P 500 Index, global equities and emerging-market assets tumbled at least 2% in the biggest rout since Brexit. The yield on the 10-year Treasury note jumped to the highest since June and the greenback almost erased a weekly slide as a Federal Reserve official warned waiting too long to raise rates threatened to overheat the economy. German 10-year yields rose above zero for the first time since July after the ECB downplayed the need for more stimulus.

Fed Bank of Boston President Eric Rosengren’s comments moved him firmly into the hawkish camp, sending the odds for a rate hike this year above 60%. He spoke a day after ECB President Mario Draghi played down the prospect of an increase in asset purchases, while DoubleLine Capital Chief Investment Officer Jeffrey Gundlach said it’s time to prepare for higher rates. “Dovish Fed members getting called up to bat for a hike is putting people on edge,” Yousef Abbasi, a global market strategist at JonesTrading, said by phone. “The more hawkish-leaning investors are grabbing onto that and it’s certainly one of those days where people are positioning for that September hike being back on the table.”

Calm had dominated financial markets in late summer with equity volatility and bond yields near historic lows and measures of cross-asset correlation at the highest levels since at least the financial crisis. The rise in the influence of different markets on each other has been attributed to the growing impact of central bank policy on prices, and rising concern that the era of easing may be nearing an end roiled assets from bonds to currencies and stocks on Friday.

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It will take years for people to realize what central banks and their incompetence have done to fixed income.

Draghi Asset Buying Deepens the Hole in Europe’s Pension Funds (BBG)

As he tries to jump start the economies of today, ECB President Mario Draghi is punching holes in the retirements of tomorrow. Draghi on Thursday said the ECB may continue asset buying beyond March 2017 until it sees inflation consistent with its targets. The purchases, along with low and negative interest rates from the ECB and the region’s national banks, are pushing more and more bond yields below zero, hurting European pension managers that are already struggling to fund retirement plans. “Pension funds can’t meet their future obligations if interest rates remain as low as they currently are,” said Olaf Stotz at the Frankfurt School of Finance and Management. “Some sponsors will have no choice but to add more capital” to their pension plans.

Funds that supply retirement income of millions of European workers face a growing gap between the money they have and what they must pay out. To make up the shortfalls, they may have to tap their sponsoring companies or institutions, reduce or delay payouts or try to boost returns by investing in riskier assets. That mirrors the dilemma faced by pension managers from the U.S. to Japan who are also being affected by central bank monetary policy. Low yields force funds to buy a greater variety of bonds or diversify their investments to generate a long-term income for their retirees. While some are profiting now by selling bonds purchased at lower prices in the past, they will struggle to get the same kind of returns from any new bonds they purchase.

Occupational funds in Europe currently have resources to pay only about 76% of their commitments on average, according to the European insurance and pensions regulator Eiopa. “Pension funds are more liberal in their investment decisions than insurers,” said Martin Eling at the University of St. Gallen in Switzerland. “Regulators will need to closely watch them as they are driven into higher-return assets such as corporate bonds and emerging markets investments.” EU regulations on the industry “might underestimate the risks,” Eiopa said by e-mail. It recommends measures including improved public disclosure so more beneficiaries know how their funds are investing. While pension systems and controls differ from country to country in Europe, regulators typically approve a pension plan’s design and set limits for certain investments.

They also can intervene to make sure a fund can meet its obligations.] Eiopa’s first stress test of the industry in Europe, published earlier this year, showed that occupational pension fund assets were 24% short of liabilities, a deficit of €428 billion ($484 billion) even before applying a shock scenario. Central banks in Europe and Japan are relying on stimulus packages that include negative deposit rates to fuel inflation and revive the economy. That has pushed yields in countries such as Germany and Japan below zero, bringing the global pile of bonds with negative yields to about $8.9 trillion. Pension liabilities for the 30 members of the benchmark DAX Index in Germany rose by about €65 billion this year to a record €426 billion as interest rates declined, according to consulting firm Mercer.

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“Traders have started dumping government bonds, leading to the biggest rout in Japanese debt in 13 years…”

Gundlach Puts His Finger On Bond Market Inflection Point (BBG)

DoubleLine’s Jeffrey Gundlach indicated in a webcast on Thursday that financial markets are on the brink of turmoil, saying “this is a big, big moment.” He’s right. It is. The mood has shifted suddenly. Investors are losing faith in the efficacy of monetary stimulus, and it appears that perhaps central bankers may be, too. The BOJ and ECB have refrained from committing to additional rounds of stimulus and are quickly running out of bonds to buy under their existing programs. The BOJ may run out of bonds within the next 18 months, while the ECB may run into a wall sooner than that, according to analysts cited by the WSJ and the FT.

The Federal Reserve, meanwhile, is still planning to raise benchmark interest rates despite underwhelming economic data. This is in large part because policy makers are increasingly concerned about the threats to longer-term financial stability by keeping rates so low. Meanwhile, inflation expectations are rising on bets that government officials will embark on spending plans to stimulate growth. This multifaceted dynamic is a game changer, and markets have taken note. Traders have started dumping government bonds, leading to the biggest rout in Japanese debt in 13 years. [..] “Interest rates have bottomed,” Gundlach said in the webcast. “They may not rise in the near term as I’ve talked about for years. But I think it’s the beginning of something, and you’re supposed to be defensive.”

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So VW guys will be thrown in jail but bankers will not.

VW Engineer Pleads Guilty in US Criminal Case Over Diesel Emissions (NYT)

A Volkswagen engineer pleaded guilty on Friday to conspiring to defraud regulators and car owners, in the first criminal charges stemming from the American investigation into the German carmaker’s emissions deception. The plea by the engineer, James Robert Liang, a Volkswagen veteran, suggests that the Justice Department is trying to build a larger criminal case and pursue charges against other higher-level executives at the carmaker. Mr. Liang was central in the development of software that Volkswagen used to cheat pollution tests in the United States, which the company admitted last year to installing in more than 11 million diesels vehicles worldwide. He was also part of the cover-up, lying to regulators when they started asking questions about discrepancies in emissions.

Mr. Liang’s admissions, made in the United States District Court for the Eastern District of Michigan, portray a broader conspiracy by executives, making Mr. Liang a potentially valuable resource for the developing criminal investigation. The Justice Department said Mr. Liang, who faces a maximum sentence of five years in prison, would cooperate. The Volkswagen case comes at a time when the government is trying to get tough on white-collar crime and hold more individuals responsible. After being criticized for going soft on executives, the Justice Department introduced new policies last year that emphasized the prosecution of individual employees. And the Volkswagen case provides one of the first real tests of the government’s commitment.

The Volkswagen case has escalated quickly. In June, the Justice Department and other agencies secured a record $15 billion settlement in a civil suit with the company. At the time, officials were quick to note that the settlement was just a first step, saying they would aggressively pursue a criminal case against the company and individuals. “There’s considerable pressure on the Department of Justice to see how far up the chain of management the knowledge goes,” said Daniel Riesel, a principal at the New York-based environmental law firm Sive, Paget & Riesel. One way for investigators to do that was “to indict and cut deals with lower-level people,” he added. Mr. Liang is “a high enough official who is culpable on his own right, and maybe in a position to start unraveling this chain of responsibility.”

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Good on them! Still, while they do this, they still persist in terrorizing Assange for the US.

Sweden Says No to NATO (BBG)

Sweden’s government affirmed its military neutrality even as a government-commissioned report broadly sided with those in favor of joining the North Atlantic Treaty Organization amid rising tensions with Russia. “Our non-alignment policy serves us well,” Foreign Minister Margot Wallstroem said in Stockholm Friday after receiving the report. Joining NATO “would expose Sweden to risks, both political and otherwise, and we don’t think that’s the right direction.” The country has been forging closer ties with the military alliance, taking part in joint military exercises that have angered authorities in Moscow.

A stable, geographically strategic democracy such as Sweden would be a welcome addition for NATO as it struggles to contain a more assertive Russia on its eastern flank. The review released on Friday in Stockholm refrained from making a formal recommendation. While NATO membership would “increase common conflict-deterrent capabilities,” it would also spark a political crisis with Russia and possibly lead to a regional arms race, the review concluded. And although Russian attacks on Sweden or its Baltic neighbors are considered “unlikely,” being a part of NATO would help “remove uncertainty in case of conflict.”

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Zero Hedge has an interesting ‘alternative’ view from Norway. Tyler calls it a view of Trump, but it’s definitely wider than that.

One “Lifelong Socialist” Norwegian’s Perspective on America (Nordmann)

I find it interesting that the very wealthy are suddenly vocal, vigorously opposing Donald J Trump’s presidency. Mark Cuban, Warren Buffet, Bill Gates and George Soros have all made statements against “The Donald.” Buffet, Gates, and Soros are avid supporters of Hillary Clinton. Goldman Sachs top management are not allowed to donate to Trump’s campaign. As an average seventy-something Norwegian farmer, looking at American from the outside, I find the vigorous billionaire opposition “interesting.” Moreover, this is amplified by CNN (which we get here in Norway as part of our standard cable package). CNN used to be fact based news only. Now they morphed into the Clinton News Network, attempting to shape public opinion, garnering support for globalism.

Perhaps the billionaire’s enterprises benefit from bloated government spending (this is speculation and worthy of investigation)? These Billionaires are so rich that the interest earned on their idle cash and investments amounts to tens of thousands of dollars per day. What do they have to lose either way? Why is this so important to them? Maybe it’s to their advantage that the ladder (better known as the American Dream), where people can ascend through the rungs, achieving different levels of success through hard work, is broken? Don’t Americans find it strange, despite technological advancements and increased productivity, that medical care, education, and housing costs are rising. I thought technology was supposed to make things cheaper, easier and more abundant.

Remember when people went from horse and buggy to the Ford Model T – what happened? (A middle mobile middle class was born). Based on what I read about American life, it seems like now, when there is a new technology or innovation to make life easier, things get worse. Jobs become less stable than decades earlier. People are working longer hours for less. The housing standard is now a cramped condo instead of a house with a yard. It appears a lot of people are on edge. American’s need to ask themselves, reflecting back one generation (20 years), how billionaires have made their lives better? Billionaires have substantially increased their wealth in the past 20 years, have you? American’s have a history of being rebellious, unpredictable, self-reliant and wild, rooting for the underdog. In this case, the underdog is Trump.

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Europe’s core will take this out on the periphery.

Eurozone Woes Continue: German Exports Plunge, French Industry Weakens (Tel.)

German exports fell at the fastest pace in more than a year in July as French industrial production shrank for a third straight month, fuelling fears of a wider eurozone slowdown. Exports in Germany fell 2.6pc in July compared with June, according to Destatis. This was the biggest fall since August 2015, and compares with expectations for a 0.4pc rise. The decline was driven by a drop in sales outside the EU, including China and the US, while demand from the UK also fell. June’s month-on-month rise of 0.3pc was also revised down to 0.2pc. Separate data showed French industrial production declined by 0.6pc in July on a monthly basis. Analysts had expected French production to bounce back following declines in May and June when activity was hit by strike action.

Chantana Sam, an economist at HSBC, said: “This is a bad sign for the prospects of a rebound in business investment. Recent manufacturing surveys also point to a deteriorating outlook and persistent weak demand. “All in all, this bad start to the third quarter of industrial production and puts some downside risks on our expectations for a rebound in GDP growth in the third quarter, after flat growth in the second quarter.” Wolfgang Schaeuble, the German finance minister, said Europe’s largest economy had no intention of reining in export growth. Critics, including ECB chief Mario Draghi, say the country’s current account surplus, which includes trade, has contributed to imbalances and hindered growth in the 19 nation bloc. “Even before the ECB decided its policies of unusual monetary policy, which also led to the euro exchange rate falling significantly, I said that we will increase German export surplus,” Mr Schaueble told reporters.

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Love mish, but I’ll write an article on where he goes off the rails on the issue.

Why the Eurozone Will Destruct (Mish)

No discussion of eurozone problems would be complete without a discussion of Target2, an abomination created by the eurozone founders and one of the fundamental flaws of the euro. Target2 stands for Trans-European Automated Real-time Gross Settlement System. It is a reflection of capital flight from the “Club-Med” countries in Southern Europe (Greece, Spain, and Italy) to banks in Northern Europe. Pater Tenebrarum at the Acting Man blog provides this easy to understand example: “Spain imports German goods, but no Spanish goods or capital have been acquired by any private party in Germany in return. The only thing that has been ‘acquired’ is an IOU issued by the Spanish commercial bank to the Bank of Spain in return for funding the payment.”

Monetary policy can help external balances but it cannot fix internal target2 balances. Germany will pay one way or another for the massive imbalances between the creditor and debtor Eurozone countries. Eventually Spain, Greece, or Italy will realize it is impossible for them to pay back what is owed. Once that realization sets in, some country will default on their euro-denominated liabilities. Beppe Grillo’s Five Star Movement in Italy is on board with that idea already. There are only three possible paths at this point: 1) Germany and the creditor nations forgive enough debt for Europe to grow; 2) Permanently high unemployment and slow growth in Spain, Greece, Italy, with stagnation elsewhere in Europe; 3) Breakup of the eurozone.

Germany will not allow #1. It is unreasonable to expect #2 to last forever. The only door left open is door #3. The best move would be for Germany to leave the eurozone. Germany is in the best shape to suffer the consequences. Unfortunately, the most likely outcome is still a destructive breakup of the eurozone, starting in Italy or Greece.

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Any ‘subversive’ moves from the south will be crushed by the north.

EU’s Poor Nations Plot Next Move As North-South Divide Erupts (CNBC)

In order to tame the euro zone sovereign debt crisis over the last seven years, the richer countries of Northern Europe have called for austerity measures and budget cuts, coupled with stronger EU sanctions for countries that do not adhere to this policy. In practice, this economic recipe, led by Germany, proved economically and politically disastrous, as it fueled the recession and nourished populism. In some cases it has become increasingly difficult for political parties to pursue an economic agenda that deviates from these fiscal norms without questioning EU membership. Tspiras and his colleagues believe the current situation in southern Europe makes this a good time to address austerity issues and its effect on long-term growth throughout the region.

The stars may be aligning, considering in Italy a referendum on constitutional reform will take place between Nov. 15 and Dec. 5 and the first round of the presidential election in France next April. This may help the Greek prime minister’s cause, which is to convince its lenders that the targeted 3.5 percent primary surplus for 2018 is too high and would negatively affect crisis-stricken Greeks. Terms of the Greek bailout program assumed that tax revenues would exceed program spending, ex-interest on outstanding debt. But within the southern EU bloc, many believe this is an unrealistic target for an aching economy that for seven years has been in a recession and austerity mode. Tsipras does not want to give the impression that he does not respect the agreements with Greece’s creditors.

In an informal government meeting held on September 6, Tsipras asked his ministers to progress rapidly with the fiscal and structural measures that Greece’s lenders set as a prerequisite last June. This effort comes ahead of a mandated second review of its current international bailout, which the Greek government is expected to start in October and which includes controversial reforms. In turn, lenders have promised that the European Stability Mechanism, the EU’s bailout fund, will outline how it will offer Greece debt-relief measures. The austerity measures in southern European nations create the conditions for dividing the EU further, as the Germans and their northern allies insist on tight budgets, despite the persistent deflation in the region and weak growth.

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This is the craziest European idea yet. Merkel suspended Dublin, and now she wants to flood already severely overburdened Greece with the people she invited to Germany last year? Note: Greece is overburdened because Europe refuses to help out.

Greece Rejects Return Of EU’s Dublin Regulation On Reverse Migration Flow (AP)

The Greek government is adamantly opposing the revival of a European Union rule that would allow the forcible return to its territory of asylum-seekers who entered the bloc via Greece – a path followed by more than a million people in the past two years. Immigration is high on the agenda of a meeting Friday in Athens of southern European leaders. The group includes Italian Prime Minister Matteo Renzi, whose country, with Greece, is Europe’s main immigration gateway. Ahead of the talks, a government spokesman on immigration said Athens rejects reactivation of the so-called Dublin Regulation, which would allow other EU members to send asylum-seekers back to Greece.

“A country such as Greece which receives a large number of refugees from Turkey, and also hosts a large number of refugees – practically without any outside help – cannot be asked to receive refugees from other European countries,” Giorgos Kyritsis told The Associated Press. “That would be outrageous.” The Dublin Regulation that governs the Schengen passport-free area stipulates that people wishing to apply for asylum must do so in the first member country they arrive in. In most cases that was Greece, whose eastern islands were overwhelmed last year by migrants packed into smugglers boats from Turkey. But even before last year’s migration crisis, many of its EU partners had stopped enforcing the rule because Greece’s asylum and migrant reception systems were below standard.

Now, however, both Germany and the EU executive are pressing for the rule to be restored, with EU officials saying that Greece must meet the Dublin standards by the end of this year.

Read more …

Jun 292015
 
 June 29, 2015  Posted by at 7:31 am Finance Tagged with: , , , , ,  26 Responses »


G. G. Bain At Casino, Belmar, Sunday, NJ 1910

It is with immense pleasure that I can introduce the return to The Automatic Earth of my friend and co-founder Nicole Foss. If only because I myself can now retire to a beach chair…. (not).

With the violent swings that have started and been amplified in Asia overnight, as well as in European and US futures, Nicole’s piece on volatility is quite pertinent.

Nicole Foss: A recent Business Insider chart of the day feature was particularly interesting. Called The stock market is asleep, it observed that the US market has been in a period of very low volatility:

Market technician Ryan Detrick noted that it’s been 8 weeks since we’ve seen a weekly move of at least 1% up or down in the S&P 500. That’s the longest such streak we’ve seen in 21 years.

The suggestion in the article is that the market will go on rising until the economy enters a recession, the implication being that a long period of low volatility is a sign of market health. In fact it is quite the opposite. A sleep-walking market is a reflection of complete disregard as to risk.

Markets enter such periods of complacency when there has been a long uptrend, with periods of very low volatility reflecting where the market has come from, not where it is going. Such periods are far more likely to be a sign of an impending trend reversal than of a continued uptrend.

Under normal circumstances, markets can be expected to show more variation, with regular inhalation and exhalation indicative of healthy risk perception. The loss of that pattern, indicating extreme complacency, is a leading indicator of a rude awakening. The VIX index, or volatility/fear index, is at extreme lows, indicating a historic level of complacency. It is no surprise that this coincides with a market extreme.

In short, market sentiment is a very effective contrarian indicator. When fear and volatility are low, there are typically few opportunities left and investors are openly flirting with danger they fail to perceive or acknowledge in their search for returns. Leverage balloons as riskier and riskier bets are made, along with bets on top of bets on top of bets.

Continuance of the prevailing uptrend becomes received wisdom as the combination of optimism and leverage drive the market higher in a self-fulfilling feedback loop. Bears capitulate over time, and as the last holdouts capitulate, the trend reversal become imminent. Risk typically returns with a vengeance, taking market participants by surprise.

The perception of risk shifts dramatically, from complacency to extreme risk aversion, and it can do so very quickly. In fact there already appears to be a shift underway, a mere two days after such an expression of complacency. Volatility and fear go hand in hand, and as increasing fear drives financial contraction and deleveraging, volatility goes through the roof.

The increasing and cumulative risks previously taken begin to manifest, piling on top of each other on the way down. A flood of margin calls overwhelms a mountain of IOUs, rendering them largely worthless. Excess claims to underlying real wealth are destroyed. Ironically, it is at this time that opportunity increases dramatically, for the relatively few who perceive it and are in a position to take advantage of it.

We are approaching just such a juncture at the moment. The long uptrend appears to be finally coming to an end. It is at extremes when it pays most to be a contrarian. Apart from the misinterpretation of low volatility as being good news for the stock market, another misconception is that market corrections are driven by recession.

Causation runs in the other direction. It’s not that a recession causes the markets to fall, but that a market trend change to the downside is a leading indicator of economic recession. Changes in finance, which is largely virtual, happen far more quickly than changes in the real economy.

When the trend change comes in finance, a similar direction change in the real economy can be expected to follow, with a time lag thanks to the longer time constant for change in the real economy. If the downward shift of the last couple of days does indeed mark the long-awaited trend reversal, then economic recession is sure to follow.

There is a substantial potential for the reversals in both finance and the real economy to be very large, as we have been predicting here at TAE for some time. This is yet another high risk juncture. Be careful.

Oct 122014
 
 October 12, 2014  Posted by at 8:30 pm Finance Tagged with: , , , , , , ,  25 Responses »


Dorothea Lange 4 families, 15 children, from Texas Dust Bowl, in roadside camp, Calipatria, CA Mar 1937

Ebola was until a few weeks ago mostly a forgotten affliction in the western world. Something that flared up in the Congo or thereabouts, parts of the world we’re aware of only because of the horrors of machete attacks and other mayhem induced by our own secret services in order to keep ‘our’ access to their mind-boggling amounts of resources going, while their populations live in conditions many miles below squalor.

We have applied divide and rule in the Congo better, or more ferociously, depending on your point of view, than anywhere else, ever. Hardly a word about western cruelty seeps through to our own media. A true imperium success story.

But the present ebola epidemic is not taking place where the disease was mostly raging. It’s in western Africa now. Where immense segments of native forest have been cut down, which in turn brought long-time ebola carrying fruit bats closer to other animals, and in turn to humans long dependent on bushmeat for survival.

Somewhere in that chain of events it was probably inevitable that an epidemic would break out. Of ebola or any other of a long list of viral or bacterial diseases. It’s also inevitable that a next epidemic will follow.

Until recently, my own personal knowledge of ebola was limited to the idea that it was one of, if not the worst way for a human being to die. Intense internal bleeding will do that. Something I find sorely missing in western media coverage of the people dying by the side of the road in west Africa. How they’re dying, that is.

It’s treated in a very detached way, as if it doesn’t really concern us until it might spread our way. ‘Western’ cases get treated with experimental drugs, while 4000+ Africans so far have been left to perish by the side of dirt roads in excruciating pain.

The ones that did receive treatment were attended to by local doctors, and that has led to dozens of the best and bravest doctors in Sierra Leone and Liberia succumbing to ebola themselves, a major feat in countries where per capita access to a doctor is mostly a tenth or a hundredth of what it is where we live. Take away doctors out of that situation, and that’s not even including nurses, and you have a disaster on your hands.

I’m not an expert on ebola or infectious diseases in general by any means, but I can read, and I can think, and occasionally I manage to bo both simultaneously. And what I see so far is a sweet mix of complacency, denial, stupidity and human error.

There’s a lot of political interest in downplaying the danger ebola poses. There’s even more economic interest in doing that, but then the two are Siamese twins. As of today in America, and last week in continental Europe, that attitude has become a threat to potentially millions of people.

I saw someone comparing HIV deaths to Ebola deaths, with the intent to downplay the threat, 1 million HIV deaths, ‘only’ 4000 ebola deaths. But ebola’s just getting started, and it’s much more contagious. Which makes such comparisons as irrelevant as it makes them dangerous.

The first Ebola infection on US soil that was announced today developed in the exact same way the one in Spain last week did: a health care worker tending to a confirmed ebola case got him/herself infected. Both ‘2nd generation’ cases have no idea how they were infected. The US nurse was allegedly wearing full-body protective gear all the time, while the Spanish nurse herself said she had no clue how she could have gotten the disease.

In the US case, we know that the first deadly victim, Thomas Duncan, had been in Liberia. He was sent home by several medical services after both reporting symptoms, and stating he’d been in ebola infected territory.The very same thing happened to the Spanish nurse, who was sent away from at least 3 clinics with a Tylenol prescription, after she had said she’d been attending to an ebola patient.

The patient she had been nursing was a priest who had been flown in from Africa after exhibiting symptoms. He was, however, the second Spanish priest in that situation. The first one reportedly died in the same hospital in Madrid as long ago as August.

Madrid got a lot of flack for the infected nurse: it was accused of not having its precautions properly in place. We should now review how well the Texas Presbyterian is doing in that regard. Given the fact that the Texas nurse diagnosed, or rather confirmed, today, was allowed to lead a normal personal life, socializing, shopping etc., until (s)he started exhibiting obvious symptoms, should make us feel queasy.

There will always be plenty political voices more than willing to declare that ‘there is no need to panic’ or ‘now is not the time to panic’, but we need to realize that what politicians and media say is inevitable based on economic grounds.

It might be worth contemplating to isolate western Africa from the rest of the world, halt flights etc., and meanwhile give them all the support we can, no matter what the cost. We choose instead to do everything related to support on the ground on the cheap, bleeding WHO coffers dry while we’re at it, and we let transportation options continue, because it would cost ‘too much’ not to. Money will rule our approach to ebola, like to everything else, until it’s too late.

Ironically, it was George W. Bushmeat government’s bio-terrorist anthrax and flu paranoia in the wake of 9/11 that injected a lot of money into America’s epidemiology protection layers. If not for those paranoid billions, I kid you not, G-d help us. His epitaph will read not only that he was an accomplishes portrait painter, he may well also have saved America from a much worse epidemic than it’s yet to get. America could sure use some of that paranoia right now.

And so could Europe, where everyone to a man solemnly declares that the chances of ebola appearing in their country are slim to none. And where dozens of flights arrive daily from west Africa. To paraphrase the CDC’s Mike Osterholm: the virus moves at virus time, we move at bureaucrat time.

The nurse is Madrid is reportedly healing, she’s been given the experimental ZMapp drug. We better get a million doses of that to Liberia and Sierra Leone. But we’ll probably fight over the economics of that until we need 10 million doses.

We’ve maybe grown so accustomed to living in a casino economy that we think the world is a crap table. But some things had better not be wagered on. Remember the Spanish Flu. Or should I say: Remember the Spanish Flu? Again, we tell ourselves no major epidemic could hurt us. We understand viruses as poorly as we do the exponential function. Which happen to have lots in common.

Judging from what we’ve seen so far, our health care systems are woefully unprepared for even single cases of ebola infection occurring on our soil. What’s going to happen when there’s dozens? Are we just going to say that there’s ‘only’ a 25% chance of that, based on some computer model? Or are we going to make sure we do what we can to keep ebola away from our lands?

There’s only one way to make sure: get into western Africa now, with all we have. Good for us, and good for our karma.