Nov 032018

Winslow Homer Cloud shadows 1890


The World Has Two Years To Secure A Deal To Halt Species Extinction – UN (G.)
US Wage Growth Hits Nine-Year High (BBC)
America’s Wealth Bubble Is Boosting Consumer Confidence (Colombo)
Inside The Trump Gold Rush At CNN (VF)
Who’s Really ‘Undermining’ US Democracy? (Stephen Cohen)
Perpetual Hysteria ( Kunstler)
Trump Will Grant 8 Waivers To Buy Iranian Oil (CNBC)
Europe Vows To Defy US Sanctions Against Iran (RT)
Europe’s Top Banks Ease Past ECB’s Latest Stress Tests (CNBC)
Erdogan Says ‘Highest Level’ Saudi Officials Ordered Khashoggi Murder (RT)
Public Prosecutors Charge Catalan Independence Leaders With Rebellion



The actual headline of this Guardian piece is “Stop Biodiversity Loss Or We Could Face Our Own Extinction”. Mine is better, because it illustrates, providing it’s accurate, how hopeless the situation is. If only because of what’s already in the pipeline. The prospect of 2 more years of meetings doesn’t change a thing.

The World Has Two Years To Secure A Deal To Halt Species Extinction – UN (G.)

The world has two years to secure a deal for nature to halt a ‘silent killer’ as dangerous as climate change, says biodiversity chief

The world must thrash out a new deal for nature in the next two years or humanity could be the first species to document our own extinction, warns the United Nation’s biodiversity chief. Ahead of a key international conference to discuss the collapse of ecosystems, Cristiana Pasca Palmer said people in all countries need to put pressure on their governments to draw up ambitious global targets by 2020 to protect the insects, birds, plants and mammals that are vital for global food production, clean water and carbon sequestration.

“The loss of biodiversity is a silent killer,” she told the Guardian. “It’s different from climate change, where people feel the impact in everyday life. With biodiversity, it is not so clear but by the time you feel what is happening, it may be too late.” Pasca Palmer is executive director of the UN Convention on Biological Diversity – the world body responsible for maintaining the natural life support systems on which humanity depends. Its 196 member states will meet in Sharm el Sheikh, Egypt, this month to start discussions on a new framework for managing the world’s ecosystems and wildlife. This will kick off two years of frenetic negotiations, which Pasca Palmer hopes will culminate in an ambitious new global deal at the next conference in Beijing in 2020.

Conservationists are desperate for a biodiversity accord that will carry the same weight as the Paris climate agreement. But so far, this subject has received miserably little attention even though many scientists say it poses at least an equal threat to humanity. The last two major biodiversity agreements – in 2002 and 2010 – have failed to stem the worst loss of life on Earth since the demise of the dinosaurs. Eight years ago, under the Aichi Protocol, nations promised to at least halve the loss of natural habitats, ensure sustainable fishing in all waters, and expand nature reserves from 10% to 17% of the world’s land by 2020. But many nations have fallen behind, and those that have created more protected areas have done little to police them. “Paper reserves” can now be found from Brazil to China.

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3 days to midterms.

US Wage Growth Hits Nine-Year High (BBC)

Wages in the US grew at their fastest pace for nine years last month, the latest official figures show. The US Labor Department said wages grew at an annual rate of 3.1% in October, accelerating from a rate of 2.8% the month before. The economy also added 250,000 jobs last month, beating expectations, while the jobless rate remained at 3.7%. The report quickly became fodder for political debate ahead of next week’s high stakes congressional election. President Donald Trump celebrated the figures on Twitter as “incredible” and urged his followers to “Vote Republican”. In an unusual move, the White House also organised a briefing call for reporters to promote the gains.

The top Senate Democrat, Chuck Schumer of New York, issued a statement of his own, aiming to redirect voter attention. The latest numbers “may look good” but should be considered alongside other economic policies, he said. “When the average family sees their health care costs go up because of Republican actions, these numbers will mean little,” he said. Among economists, there was wider agreement that the jobs report pointed to strength in the US economy, despite recent worries that weakness may be emerging in some sectors such as housing and trade.

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There’s something wonderfully ironic in this. Getting your confidence from hot air.

America’s Wealth Bubble Is Boosting Consumer Confidence (Colombo)

ZeroHedge posted an interesting chart a few days ago showing how affluent Americans (those making over $50,000 a year) have not been more confident since the dot com bubble. While strong consumer confidence may seem like a good thing when taken at face value, the contrarian in me sees it as a warning of the kind of over-exuberance seen during bubbles like the dot-com bubble and housing bubble.

Unfortunately, I believe that the U.S. is experiencing an unsustainable, artificial household wealth bubble that is causing affluent consumers to be over-optimistic despite the fact that our economic boom is largely driven by cheap credit and is going to end in a painful bust. As I explained in a recent presentation, U.S. household wealth has surged by approximately $46 trillion or 83% since 2009 to an all-time high of $100.8 trillion. Since 1951, household wealth has averaged 379% of the GDP, while the Dot-com bubble peaked at 429%, the housing bubble topped out at 473%, and the current bubble has inflated household wealth to a record 505% of GDP (see the chart below):

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As I’ve said numerous times, Trump sells better than sex, and he’s keeping CNN alive. The suggestion that CNN allows both sides into teh debate is ludicrous, though.

Inside The Trump Gold Rush At CNN (VF)

Zucker was on the phone talking about why Trump sucks up so much of CNN’s oxygen. “People say all the time, ‘Oh, I don’t want to talk about Trump. I’ve had too much Trump,’ ” he told me. “And yet at the end of the day, all they want to do is talk about Trump. We’ve seen that, anytime you break away from the Trump story and cover other events in this era, the audience goes away. So we know that, right now, Donald Trump dominates.” Zucker, the guy who first brought our president to the small screen when he green-lighted The Apprentice in 2004 while running NBC, had arguably schooled Trump in the art of reality television.

Halfway through Trump’s first term, his instincts remain just as acute. If Fox News represents Trump’s base and MSNBC has become a friendly platform for the resistance, CNN is the arena where both sides show up for cantankerous battle. “On Fox, you rarely hear from people who don’t support Trump,” Zucker told me. “On MSNBC, you rarely hear from people who do support Trump. We want to be home to both those points of view.” He continued, as if rebuking a common critique of the network. “It is true some of these folks are not very good with the facts, but that’s O.K. in the sense that it’s our job then to call them out.”

[..] Even though CNN still trails Fox News and MSNBC in prime-time audience size, its ratings have never been better. The average number of people watching on a given day has been above 700,000 each year since 2016, compared to around 400,000 in the pre-Trump news cycle. That’s also considerably larger than any other time over the past 25 years, an astonishing feat given the ubiquity of news and the decline of cable.

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Russiagate undermines democracy.

Who’s Really ‘Undermining’ US Democracy? (Stephen Cohen)

Even though still unproven, charges that the Kremlin put Trump in the White House have cast a large shadow of illegitimacy over his presidency and thus over the institution of the presidency itself. This is unlikely to end entirely with Trump. If the Kremlin had the power to affect the outcome of one presidential election, why not another one, whether won by a Republican or a Democrat? The 2016 presidential election was the first time such an allegation became widespread in American political history, but it may not be the last. Now the same shadow looms over the November 6 elections and thus over the next Congress. If so, in barely two years, the legitimacy of two fundamental institutions of American representative democracy will have been challenged, also for the first time in history.

And if US elections are really so vulnerable to Russian “meddling,” what does this say about faith in American elections more generally? How many losing candidates on November 6 will resist blaming the Kremlin? Two years after the last presidential election, Hillary Clinton and her adamant supporters still have not been able to do so. We know from critical reporting and from recent opinion surveys that the origins and continuing fixation on the Russiagate scandal since 2016 have been primarily a product of US political-intelligence-media elites. It did not spring from the American people – from voters themselves. Thus a Gallup poll recently showed that 58 percent of those surveyed wanted improved relations with Russia. And other surveys have shown that Russiagate is scarcely an issue at all for likely voters on November 6. Nonetheless, it remains a front-page issue for US elites.

Indeed, Russiagate has revealed the low esteem that many US political-media elites have for American voters – for their ability to make discerning, rational electoral decisions, which is the bedrock assumption of representative democracy. It is worth noting that this disdain for rank-and-file citizens echoes a longstanding attitude of the Russian political intelligentsia, as recently expressed in the argument by a prominent Moscow policy intellectual that Russian authoritarianism springs not from the nation’s elites but from the “genetic code” of its people.

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Certainly looks like the Democrats need to hit some kind of bottom before they can rise again. If that ever happens.

Perpetual Hysteria ( Kunstler)

Back in the last century, when this was a different country, the Democrats were the “smart” party and the Republicans were the “stupid” party. How did that work? Well, back then the Democrats represented a broad middle class, with a base of factory workers, many of them unionized, and the party had to be smart, especially in the courts, to overcome the natural advantages of the owner class. In contrast, the Republicans looked like a claque of country club drunks who staggered home at night to sleep on their moneybags. Bad optics, as we say nowadays. [..] The Republican Party has, at least, sobered up some after getting blindsided by Trump and Trumpism. Like a drunk out of rehab, it’s attempting to get a life.

Two years in, the party marvels at Mr. Trump’s audacity, despite his obvious lack of savoir faire. And despite a longstanding lack of political will to face the country’s problems, the Republicans are being forced to engage on some real issues, such as the need for a coherent and effective immigration policy and the need to redefine formal trade relations. Meanwhile, the Democratic Party has become the party of bad ideas and bad faith, starting with the position that “diversity and inclusion” means shutting down free speech, an unforgivable transgression against common sense and common decency. It’s a party that lies even more systematically than Mr. Trump, and does so knowingly (as when Google execs say they “Do no Evil”).

[..] I hope that Democrats lose as many congressional and senate seats as possible. I hope that the party is shoved into an existential crisis and is forced to confront its astounding dishonesty. I hope that the process prompts them to purge their leadership across the board. If there is anything to salvage in this organization, I hope it discovers aims and principles that are unrecognizable from its current agenda of perpetual hysteria.

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Overreach. America’s anti-Iran stance hinges to a large extent on Saudi interests. Which have taken a huge hit.

Trump Will Grant 8 Waivers To Buy Iranian Oil (CNBC)

The Trump administration will grant eight jurisdictions special exceptions to continue importing oil from Iran after U.S. sanctions on the country snap back into place on Monday, according to cabinet members. President Donald Trump gave oil buyers 180 days to wind down purchases of Iranian crude when he pulled out of the Iran nuclear deal in May. The eight waivers will allow the jurisdictions to more gradually reduce their purchases after the Nov. 4 deadline. Oil market watchers have been closely monitoring the situation to determine how forcefully the Trump administration will enforce the sanctions.

State Department officials initially said importers must cut their purchases to zero by November, but administration officials subsequently telegraphed that some exceptions would be made. Secretary of State Mike Pompeo and Treasury Secretary Steven Mnuchin on Friday declined to name the eight jurisdictions during a conference call with reporters. The officials said all of the countries or territories have significantly reduced their purchases and will be given more time to further reduce their imports. [..] Japan, India and South Korea are among the countries, and China is still negotiating a waiver, Bloomberg News reported earlier on Friday, citing a senior administration official. Pompeo confirmed on Friday that the EU is not one of the jurisdictions that will receive a waiver.

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Russia and China will stand by Iran. Europe may as well.

Europe Vows To Defy US Sanctions Against Iran (RT)

European countries have vowed to maintain “effective financial channels” and to keep trading with Tehran after the US announced that the EU is not among those spared from its sweeping sanctions against Iran. European countries suddenly discovered that they were not on the list of the ‘lucky ones’ that their ally, the US, decided to exempt from the new wave of all-encompassing sanctions it plans to unleash on Iran. The sanctions, targeting Iran’s shipping, finance and energy sectors, which come into force on November 5, are also designed to punish those countries that dared to do business with the Islamic Republic in defiance of the US pressure.

Only eight nations were graciously granted exemptions by the US, according to Secretary of State Mike Pompeo. However, Pompeo made it clear that the EU as a single entity is not on the list, sparking an angry reaction from the US’ western allies. Washington also specifically mentioned that it plans to target the special mechanism the EU has been creating to circumvent the restrictions, prompting its allies to fight back.

In response, the EU foreign policy chief Federica Mogherini, together with the foreign and finance ministers of Germany, France and the UK, vowed to maintain “effective financial channels with Iran” and in particular to continue buying the Islamic Republic’s oil and gas. They also said that despite Washington’s pressure the EU is still committed to establishing a “Special Purpose Vehicle” for Iran-EU trade. The European nations will seek to protect its companies engaged in “legitimate business with Iran,” the statement said, adding that the EU will cooperate with Russia and China in particular to achieve these goals.

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Central banks are incapable of doing stress tests that matter.

Europe’s Top Banks Ease Past ECB’s Latest Stress Tests (CNBC)

Results of the stress test of Europe’s bigger banks released Friday revealed that all of the financial institutions in the EU wide examination passed the European Central Bank’s “adverse scenario”. The stress tests were carried out by the European Banking Authority (EBA) and the Single Supervisory Mechanism (SSM) to gauge the health of the European banking system. The EBA said in findings published on their website that all 48 banks beat the common tier ratio of 5.5 percent under adverse stress. British bank Barclays ranked lowest in the test, scoring a common tier ratio of just 6.37 percent in the adverse scenario. Fellow U.K. bank Lloyds also performed poorly with a score of 6.8 percent.

Commenting after the results, the Bank Of England said the results showed that U.K. banks could absorb the effect of the EBA’s worst scenario. Europe’s biggest bank, Deutsche Bank, performed better than some forecasters had predicted, registering a core tier of 8.14 percent, again in an adverse scenario. EBA said under their adverse scenario, the capital depletion across the banks at the end of 2020 was 236 billion euros ($268 billion) and 226 billion euros on a “transitional and fully loaded basis respectively.” The ECB added that the EBA test showed that banks in Europe were now “more resilient to financial shocks.”

Italian banks were also under scrutiny but managed to record satisfactory scores according to banking regulators. Unicredit, Italy’s largest lender, scored a common tier ratio of 9.34 while UBI Banca scored 7.42 percent. The lowest score among Italian banks was for Banco BPM which registered 6.67 percent.

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Erdogan was insulted by the Saudi chief prosecutor visiting Ankara/Istanbul.

Erdogan Says ‘Highest Level’ Saudi Officials Ordered Khashoggi Murder (RT)

The killing of journalist Jamal Khashoggi was sanctioned at the “highest levels” of the Saudi government, Turkey’s President Recep Tayyip Erdogan said, trying to play kingmaker in Riyadh and bolster his credentials in the West. “We know that the order to kill Khashoggi came from the highest levels of the Saudi government,” the Turkish leader wrote in a surprise contribution to Friday’s Washington Post, vowing to “reveal the identities of the puppet masters” behind the murder. “No one should dare to commit such acts on the soil of a NATO ally again,” Erdogan wrote dramatically. “Had this atrocity taken place in the United States or elsewhere, authorities in those countries would have gotten to the bottom of what happened.”

“It would be out of the question for us to act any other way,” he added, noting that Ankara has already “moved heaven and earth to shed light on all aspects of this case.” The Turkish leader also used the opportunity to burnish his credentials in the West, saying that as a responsible NATO member, Turkey will not just leave this case uninvestigated and will act in exactly the same way as the US or any of its allies would in its place. Erdogan openly accused Riyadh of “trying to cover up the murder” by stalling the investigation and refusing to cooperate with the Turkish authorities, singling out the Saudi chief prosecutor Saud Al Mojeb, who visited Turkey earlier this week. “The refusal of the Saudi public prosecutor… to cooperate with the investigation and answer even simple questions is very frustrating,” he wrote, adding that Al Mojeb’s “invitation for Turkish investigators to Saudi Arabia … felt like a desperate and deliberate stalling tactic.”

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Franco’s still alive and kicking.

Public Prosecutors Charge Catalan Independence Leaders With Rebellion

The public prosecution on Friday morning filed its written accusation against Catalan secessionist leaders who are in pretrial detention for their role in the unauthorized referendum of October 1, 2017 and the unilateral independence declaration that followed. As expected, prosecutors are seeking a 25-year prison term for ex-deputy premier Oriol Junqueras for rebellion and misuse of public funds, and they also want the Catalan Republican Party (ERC) leader barred from holding public office for the next 25 years. Prosecutors are also seeking 17-year jail terms for Jordi Sànchez and Jordi Cuixart, the former heads of civic associations that campaigned actively for independence, and for Carme Forcadell, the former speaker of the Catalan parliament.

Other defendants in the upcoming trial face penalties ranging from economic fines to prison terms of 16 years. Meanwhile, Spain’s Solicitor General, who represents the Spanish state in the courts, has not accused Catalan secessionist leaders of rebellion. Instead, the written accusation focuses on the crimes of sedition and misuse of public funds in connection with the referendum and unilateral independence declaration. In its written accusation, the Solicitor General’s Office has called for Junqueras to be sentenced to 12 years in prison and a 12-year ban on holding public office.

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Jul 292018

Pablo Picasso The old guitarist 1903-4


What the GDP Report Won’t Tell You About the Economy (DDMB)
Julian Assange Looks For Deal To End ‘Diplomatic Isolation’ (CNN)
In Refusing To Defend Assange, Mainstream Media Exposes Its True Nature (CJ)
Round the Bend (Jim Kunstler)
David Cameron’s Welfare Cuts Led Directly To The Brexit Vote (Ind.)
An Open Letter to Bernie Sanders: ‘No Bernie, It Wasn’t the Russians’ (MPN)
Putin Calls Christianity Foundation Of Russian State (AP)
Ten Arguments for Deleting Your Social Media Accounts Right Now (Star)
Nature’s Darkness-Creature Has Become Ours, Too (G.)
Migrant Arrivals Push Shelters To Breaking Point In Southern Spain (El Pais)
Number Of Fatalities In Greek Wildfires Rises To 88 (K.)



GDP may look strong, but sentiments are crumbling.

What the GDP Report Won’t Tell You About the Economy (DDMB)

Something is amiss in Corporate America. Both national and regional surveys reveal a sinking sense that the economy’s tailwinds are shifting to headwinds. The downtrodden confidence is a curiosity given many economists’ forecasts calling for second-quarter growth to have accelerated to a 4.2 percent annualized rate, the fastest since 2014. Soft though the survey data may be, the numbers don’t lie. If something doesn’t give – and fast – what follows is sure to be damaging to the real economy. The University of Michigan consumer sentiment survey for July revealed that the business outlook had slumped to the lowest level in over two years.

Odds are pretty good this number was dragged down by those with the highest incomes, many of whom are likely also business owners and corporate executives who’ve been on the front line of the rising costs to run their businesses. But there may be more than meets the eye among those whose incomes rank in the top third of households. While the majority of these respondents expressed concern over the tariffs, what they’re reading, hearing and seeing may be dampening their outlooks even further. As things stand, it’s as if January never happened, a month in which confidence was so high, the “news heard” among high income earners hit a 20-year high. By the beginning of July, “news heard” had slid to minus 18, the lowest in two years.

The six-month, 79-point swing is so severe it rivals August 2011, when the euro crisis shook world markets, Standard & Poor’s stripped the U.S. of its AAA credit rating and households were rattled by the debt ceiling debacle. [..] Consider the starting point for many companies. Last year’s weak dollar and natural disasters had many struggling to satisfy overseas demands and the massive needs required to rebuild. Labor and raw material costs were already on the rise to correct for the imbalances. The tariffs were the insult to injury many manufacturers could simply not afford.

“The actual economic impact will really come down to time,” cautioned Boockvar. “The longer this goes on, the more actual business activity will be negatively affected.” To Boockvar’s point, the collapse in business sentiment suggests many companies don’t foresee the ability to withstand further blows to their ability to profitably conduct business. Businesses are saying as much.

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Unbelievable garbage from CNN. That they pay attention to Assange now may be a ominous sign. They straight-faced claim that Assange fled rape allegations in Sweden. He did not. Sweden told him he was free to go to London. Only to turn around and issue a warrant for him.

Julian Assange Looks For Deal To End ‘Diplomatic Isolation’ (CNN)

Julian Assange walked into the Ecuadorian Embassy in London on June 19, 2012 to claim political asylum. He has been there ever since – a total of 2,230 days – rarely seeing daylight. But multiple sources say his situation is now untenable and he may soon leave, whether he wants to or not. The question is: what will happen to Assange as and when he does walk out of his bolt-hole around the corner from Harrods? The recent indictments issued by US Special Counsel Robert Mueller imply that Assange and WikiLeaks were a conduit for Russian intelligence in distributing hacked Democratic Party emails in 2016. According to the indictment document, “The conspirators (…) discussed the release of the stolen documents and the timing of those releases with Organisation 1 to heighten their impact.”

Assange has always maintained that he did not receive them from the Russian government. He told Fox News in January 2017: “Our source is not the Russian government, and it is not a state party.” A member of Assange’s legal team, Jennifer Robinson, told CNN this week: “WikiLeaks has made very clear they were not engaged in any way with the Russian state with respect to that publication. There is no connection between WikiLeaks and any of those who have been indicted.” His lawyers argue that all Assange did was publish the hacked emails, as did other media, after being in contact with a hacker called Guccifer 2.0. The Special Counsel alleges that Guccifer 2.0 was a cover for Russian intelligence, saying in the indictment that on July 14th [2016], Guccifer 2.0 sent WikiLeaks an encrypted attachment that contained “instructions on how to access an online archive of stolen DNC documents.”

Whether a sealed indictment awaits Assange in relation to the Russian hacking investigation is unknown. But according to US officials, charges have been drawn up relating to previous WikiLeaks disclosures of classified US documents. Assange would face arrest if/when he leaves the embassy because he skipped bail in 2012 – when Swedish authorities were seeking his extradition to face accusations of rape. Last year Sweden suspended the investigation, but Assange’s lawyers fear his arrest would be swiftly followed by a US extradition request. Assange maintains his innocence.

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This feels like too little too late. We know all this, we have for a long time. And it’s worse: as I wrote in May in I am Julian Assange, the Guardian engaged in an active smear campaign against Assange then. So does CNN -see above. That’s much more relevant than that they don’t defend him.

In Refusing To Defend Assange, Mainstream Media Exposes Its True Nature (CJ)

Last Tuesday a top lawyer for the New York Times named David McCraw warned a room full of judges that the prosecution of Julian Assange for WikiLeaks publications would set a very dangerous precedent which would end up hurting mainstream news media outlets like NYT, the Washington Post, and other outlets which publish secret government documents. “I think the prosecution of him would be a very, very bad precedent for publishers,” McCraw said. “From that incident, from everything I know, he’s sort of in a classic publisher’s position and I think the law would have a very hard time drawing a distinction between The New York Times and WikiLeaks.” Do you know where I read about this? Not in the New York Times.

“Curiously, as of this writing, McCraw’s words have found no mention in the Times itself,” activist Ray McGovern wrote for the alternative media outlet Consortium News. “In recent years, the newspaper has shown a marked proclivity to avoid printing anything that might risk its front row seat at the government trough.” So let’s unpack that a bit. It is now public knowledge that the Ecuadorian government is actively seeking to turn Assange over to be arrested by the British government. This was initially reported by RT, then independently confirmed by The Intercept, and is today full mainstream public knowledge being reported by mainstream outlets like CNN.

It is also public knowledge that Assange’s asylum was granted by the Ecuadorian government due to a feared attempt to extradite him to the United States and prosecute him for WikiLeaks publications. Everyone from President Donald Trump to Attorney General Jeff Sessions to now-Secretary of State Mike Pompeo to ranking House Intelligence Committee member Adam Schiff to Democratic members of the US Senate have made public statements clearly indicating that there is a US government interest in getting Assange out of the shelter of political asylum and into prison.

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The state of the media is something to behold. Can it slide even further? You bet.

Round the Bend (Jim Kunstler)

Some people you just can’t reason with, especially the hell-spawned man-beast who personally directed Russian “meddling” and “interference” in our election and stole certain victory from president-designee Hillary. (I know this because The New York Times and The Washington Post said so.) Another astonishment: in his testimony before the Senate Foreign Relations Committee this week, Secretary of State Mike Pompeo said the US would not recognize Crimea as part of Russia and would demand the return of the region to Ukraine. Not to put too fine a point on it, Mr. Pompeo is pissing up a rope on that one. Russia will not give up its warm-water naval bases on the Black Sea anymore than the US will return its San Diego naval installation to Mexico, and Mr. Pompeo knows it.

So do the posturing idiots on the senate committee, who apparently forgot that our own government officials fomented the 2014 Ukrainian coup that prompted Russia to annex Crimea and its military assets in the first place. How many of you feel a gnawing disgust and contempt for both sides of the US political spectrum? The news, day and night, reveals a nation unable to think, unable to discern reality from fantasy, avid to dissemble and lie about absolutely everything, eager to support any racketeering operation designed to fleece its own citizens, and utterly ignoring the genuine problems that can drive us into a new dark age.

On balance, and just for now, I’m more disturbed by the side represented by the Democratic Party, aka the “progressives” or “the Resistance,” because they are responsible for politicizing the FBI before, during, and after the 2016 election and that was a dastardly act of institutional debauchery in an agency with the power to destroy the lives and careers of American citizens. The product of that corruption is a dangerous manufactured hysteria inciting hostility and aggression against another nation that could lead to a war that humanity will not recover from.

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Austerity leads to right wing support everywhere.

David Cameron’s Welfare Cuts Led Directly To The Brexit Vote (Ind.)

As the Brexit negotiations roll on, we do see some signs of progress. Our understanding of the underlying causes of the referendum outcome has developed significantly in the last two years. Leave-supporting areas can be easily distinguished from those supporting Remain. Broadly speaking, they are more deprived, have lower levels of income, fewer high status-jobs, a weaker economic structure, and an ageing demographic with lower levels of educational attainment. Further, non-economic factors have also been highlighted as important correlates of support for Brexit . But an open question to economists, though, is what are the economic origins of the relationships between these characteristics and support for Leave?

An important cross-cutting observation that has been made over and over again is that Leave-supporting areas stand out in having an electorate that has been “left behind”, is particularly reliant on the welfare state and is thus exposed to welfare cuts. In a recent paper, I show that austerity-induced reforms, including widespread cuts to the welfare state since 2010, were an important factor behind the decision of many people to shift their political support to UKIP and, subsequently, support Leave in the EU referendum.

The austerity-induced reforms of the welfare state, implemented in the years after 2010, were broad and deep. In 2013, it was estimated that the measures included in the Welfare Reform Act of 2012 would cost every working-age Briton, on average, around £400 per year. Crucially, the impact of the cuts was far from uniform across the UK: it varied from around £900 in Blackpool to just above £100 in the City of London. Aggregate figures suggest that overall government spending for welfare and protection contracted by 16 per cent in real per capita terms, reaching levels last seen in the early 2000s.

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What is Bernie thinking?

An Open Letter to Bernie Sanders: ‘No Bernie, It Wasn’t the Russians’ (MPN)

Let me preface this open letter of sorts that I’m writing to Senator Bernie Sanders. I’m not penning this missive as though I’m a crestfallen supporter, after falling for the okie doke in 2008 and waking up to the deception of Obama, I decided to stop putting my faith in politicians. Rather, I write this article on behalf of Bernie’s legions of supporters and the millions of Americans who put their faith in someone who spoke against the iniquities that are ravaging our nation and our planet as a whole. Bernie, it was your decision to speak against this consolidated graft that is cratering society that captured the imagination of the disaffected and gave people hope that their voices could be heard above the cash extortion that dominates our government.

Instead of continuing your rebellion against the establishment and speaking against the corrosive nature of our politics, you are charting a course towards irrelevance by jumping on this cockamamie #Russiagate narrative. Here is what I don’t get about your decision to glom on to this most ridiculous assertion that 12 Russians had more impact on our elections than the billions of dollars that are spent by corporations and plutocrats to bend elected officials like pretzels. The insinuation the punditry is making is that Americans were duped to vote against their own self-interests because they refused to vote for Hillary Clinton.

Never mind that Hillary was one of the most divisive and disliked politician to run for president in modern American history. Never mind that the DNC essentially rigged the primaries to ensure her victory at your expense. Instead of focusing on the structural and systematic flaws that render our votes irrelevant, fingers are pointed at a manufactured villain halfway around the world in order to distract from the fact that our elections have been hijacked by moneyed interests and entrenched leeches who are sucking the citizenry dry. Whatever efforts Russia might have made to influence our elections were outweighed by a kleptocracy that hacked down our democracy with dark money and self-centered politicians who put their interests above that of the people they purportedly serve.

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This one’s for you, bible belt.

Putin Calls Christianity Foundation Of Russian State (AP)

Vladimir Putin says that the adoption of Christianity more than 1,000 years in territory that later became Russia marked the starting point for forming Russia itself. Putin’s comments came Saturday in a ceremony marking the 1,030th anniversary of the adoption by Christianity by Prince Vladimir, the leader of Kievan Rus, a loose federation of Slavic tribes that preceded the Russian state. Speaking to a crowd of thousands of clergy and believers at a huge statue of the prince outside the Kremlin, Putin said adopting Christianity was “the starting point for the formation and development of Russian statehood, the true spiritual birth of our ancestors, the determination of their identity. Identity, the flowering of national culture and education.” The comments underline strong ties between the government and the Russian Orthodox Church.

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Book review. Hope the book itself is better. What social media do to people’s brains and social lives is far more relevant.

Ten Arguments for Deleting Your Social Media Accounts Right Now (Star)

If you’re online these days, you likely sense that something’s wrong with the internet. You probably feel weird about how many times a day you check Facebook or Instagram, and likely a little uneasy about how annoyed or envious you feel when you do. Maybe the hostility online depresses you. Maybe you worry about the next generation, and how anxious they all seem. Maybe you’ve even considered deleting your accounts. This is exactly what Jaron Lanier, a leader in the tech world, says you should do. Right away. Lanier — a pioneer in the world of internet startups, and virtual reality in particular — has long been a critic of the Silicon Valley status quo. In this slim, highly-readable manifesto, he lays out his case against social media. And it is a devastating one.

In 10 simple arguments, the tech insider paints a picture of a wide-scale behaviour modification apparatus driven by social attention — both the carrot of approval and the stick of criticism, which generates the most intensity or “engagement.” “There is no evil genius seated in a cubicle in a social media company performing calculations and deciding that making people feel bad is more ‘engaging’ and therefore more profitable than making them feel good,” he writes. “Or at least, I’ve never met or heard of such a person. The prime directive to be engaging reinforces itself, and no one even notices that negative emotions are being amplified more than positive ones.”

According to Lanier, the social media apparatus has made people into lab rats, placing them under constant surveillance. He believes the process is making people angrier, more isolated, less empathetic, less informed about the world, and less able to support themselves financially. Add to all that: Lanier says this highly tuned behaviour modification system is for rent to anyone looking to influence the public. The constant stream of data, and the algorithms that tweak subsequent efforts to sway people, aren’t just used to sell soap, he notes, but to influence politics.

Read more …

Wonderful tale. But given the demise of insect numbers, bats must be under severe threat.

Nature’s Darkness-Creature Has Become Ours, Too (G.)

Here’s a flicker in the periphery. I notice it because of the way it moves; it’s a sort of fast fidget – staccato and angular in movement and path, like a movie projected at the wrong frame rate. It doesn’t swoop like a swallow, or bumble like a moth. The bat moves like a bat, and like nothing else. I’m sitting near my home under some trees, watching the coming night deepen the navy sky. The day has been airlessly hot, and with nightfall relief creeps into the air like a balm. Animals are out – I can hear twitches in the bushes behind me. Young frogs; hedgehogs maybe. Looking for water. Then I notice this bat. Seconds after I see it, I feel it pass so close that it makes my hair move, with it a split-second rustle of papery wings. I shiver.

Bats are just flying mice, people say, except they’re not, at all. Worldwide there are two main groups: Megachiroptera, big-eyed, placid-faced, small-eared – almost anthropomorphic, a man-bat; and Microchiroptera, the opposite. Nature’s darkness-creature has over time become ours, too. Their thorny outline is so conversant with the sinister that we nearly forget why. Light never catches them. They are opaque, darkly anonymous silhouettes into which humans project all manner of eerie ideas. Unwittingly, bats reinforce these with their habits. They haunt churches. Fly by night. Sleep subversively inverted. And the one far-flung species that feeds on blood bears the name “vampire” all too neatly.

This solitary bat flies about me in rapid loops. This one is maybe a noctule, or a pipistrelle. Catching insects perhaps. I worry that it will hit me but it won’t. It sees by echoing its sounds off nearby objects like aerial sonar, and it’s an excellent way to navigate. Those sounds are too high-pitched for the human ear to detect, and so to us, other than those wings, the bat makes no sound. None at all. I watch it. Bats need to catch air under their wings to fly. They can’t lift off like birds: they must drop. Their flight is a fall, arrested again and again with each frantic flap. That’s why they don’t move like anything else. Except, perhaps, a human trying to fly.

Read more …

And so the issue keeps shifting. But it doesn’t get resolved.

Migrant Arrivals Push Shelters To Breaking Point In Southern Spain (El Pais)

Shelters in the south of Spain are struggling to deal with a huge influx of migrants, many of whom are being left without a proper place to sleep. The arrivals – 1,300 in the past three days – have stretched services to their breaking point with the strain felt particularly hard in Algeciras as well as other municipalities along the coast of Andalusia. The number of undocumented migrants arriving in Spain has doubled since last year. Spain is now the main entry point into Europe, above Italy or Greece. But shelter services have been unable to keep up with the demand, leaving many migrants to sleep in overcrowded centers.

Up to 260 migrants spent the past two nights on the deck of a Maritime Rescue ship, more than 50 huddled together on a small courtyard of a police station in Algeciras, and 90 more jostled for a spot in the port of Barbate. Many more are left to wander the streets of towns like Medina Sidonia and Chiclana after spending the maximum legal 72-hour period in police custody. Immigration officials have traveled to Cádiz to look for a solution to what the Spanish government describes as a “collapse” of services. In a press release, the government said that 400 migrants had nowhere to go and blamed the problem on the former administration of Mariano Rajoy for its “lack of foresight.” “The number of arrivals has not stopped rising since 2017 but despite this nothing was done,” said a spokesperson for the Interior Ministry.

• The number of people arriving by sea has tripled in the past year. Since the beginning of the year, 22,711 migrants have reached Spain, 19,586 by sea.
• Spain has overtaken Greece and Italy as the country which received the highest number of migrants.
• An average of 54 people arrived in Spain by sea each day in the first five months of 2018. That average has since shot up to 220 per day.
• Since the beginning of the year, 294 people have died trying to reach Spain – almost double the figure from the same period last year.

Read more …

Your donations are now also feeding the people in Mati, where conditions are really bad. I’ll have much more on the Automatic Earth for Athens Fund soon, many new and very positive developments, after a bit of a lull. More donations of course are needed and welcome.

Number Of Fatalities In Greek Wildfires Rises To 88 (K.)

A 42-year-old woman who was in intensive care after suffering extensive burns in the deadly wildfire that ripped through the coastal town of Mati in east Attica this week died early Saturday morning, raising the number of fatalities to 88. On Friday night, authorities also identified the bodies of the nine-year-old twin girls and their grandparents that went missing after the wildfires. Their bodies were among a group of victims recovered by emergency crews on Tuesday lying close together near the top of a cliff overlooking a beach. The news was reported on broadcaster SKAI by the private investigator the family had hired to find the children. It was confirmed by a reported friend of the family on his Facebook page.

The twins’ father had provided forensic authorities with a DNA sample and appeared on several TV stations seeking help in finding them. A total of 46 adult burn victims are being treated in hospitals in Athens, with nine of them in intensive care. Two children remain in hospital but authorities said their injuries are not life-threatening. Five days after the deadly blaze, there was still confusion over the number of those missing. The Athens Medical School’s Forensics and Toxicology Lab said it has conducted autopsies on 86 bodies, of which only 25 have been identified. As sources explained to Kathimerini, in the first 48 hours after the fires, several authorities wrote up lists of missing persons, which means the same people may have been recorded twice or more.

Since there was no official information on where relatives should report missing persons, police started separate investigations, when the relevant authority in this case would have been the fire service. On Saturday, Dimitra Lambarou, the deputy mayor of Marathonas, which has administrational jurisdiction over the majority of the devastated coastal town on Mati, said she is resigning over the deadly fires. “Since no-one else did it, I will,” she told broadcaster SKAI on Saturday. “I’m really ashamed for all those people who are in positions of responsibility,” she said and accused Marathonas mayor Ilias Psinakis of “not rising to the occasion.”

Read more …

Nov 182017
 November 18, 2017  Posted by at 1:49 pm Finance Tagged with: , , , , , , , , ,  8 Responses »

Rembrandt van Rijn The Three Crosses 1653


John Rubino recently posted a graph from Bob Prechter’s Elliot Wave that points to some ominous signs. It depicts the S&P 500, combined with consumer confidence and savings rate. As the accompanying video at Elliott Wave, What “Too Confident to Save” Means for Stocks, shows, when the gap between high confidence and low savings is at its widest, a market crash -often- follows.

In 2000, the subsequent crash was 39%, in 2007 it was 54%. We are now again witnessing just such a gap, with the S&P 500 at record levels. Here’s the graph, with John’s comments:


Consumers Are Both Confident And Broke

Elliott Wave International recently put together a chart that illustrates a recurring theme of financial bubbles: When good times have gone on for a sufficiently long time, people forget that it can be any other way and start behaving as if they’re bulletproof. They stop saving, for instance, because they’ll always have their job and their stocks will always go up. Then comes the inevitable bust. On the following chart, this delusion and its aftermath are represented by the gap between consumer confidence (our sense of how good the next year is likely to be) and the saving rate (the portion of each paycheck we keep for a rainy day). The bigger the gap the less realistic we are and the more likely to pay dearly for our hubris.



John is mostly right. But not entirely. Not that I don’t think he knows, he simply forgets to mention it. What I mean is his suggestion that people stop saving because they’re confident, bullish. To understand where and why he slightly misses, let’s turn to Lance Roberts. Before we get to the savings, Lance explains why the difference between the Producer Price Index (PPI) and Consumer Price Index (CPI) is important to note.

Summarized, producer prices are rising, but consumer prices are not.


You Have Been Warned

There is an important picture that is currently developing which, if it continues, will impact earnings and ultimately the stock market. Let’s take a look at some interesting economic numbers out this past week. On Tuesday, we saw the release of the Producer Price Index (PPI) which ROSE 0.4% for the month following a similar rise of 0.4% last month. This surge in prices was NOT surprising given the recent devastation from 3-hurricanes and massive wildfires in California which led to a temporary surge in demand for products and services.



Then on Wednesday, the Consumer Price Index (CPI) was released which showed only a small 0.1% increase falling sharply from the 0.5% increase last month.



Such differences have real life consequences. In Lance’s words:


This deflationary pressure further showed up on Thursday with a -0.3% decline in Export prices. (Exports make up about 40% of corporate profits) For all of you that continue to insist this is an “earnings-driven market,” you should pay very close attention to those three data points above. When companies have higher input costs in their production they have two choices: 1) “pass along” those price increase to their customers; or 2) absorb those costs internally.

If a company opts to “pass along” those costs then we should have seen CPI rise more strongly. Since that didn’t happen, it suggests companies are unable to “pass along” those costs which means a reduction in earnings. The other BIG report released on Wednesday tells you WHY companies have been unable to “pass along” those increased costs.

The “retail sales” report came in at just a 0.1% increase for the month. After a large jump in retail sales last month, as was expected following the hurricanes, there should have been some subsequent follow through last month. There simply wasn’t. More importantly, despite annual hopes by the National Retail Federation of surging holiday spending which is consistently over-estimated, the recent surge in consumer debt without a subsequent increase in consumer spending shows the financial distress faced by a vast majority of consumers.


That already hints at what I said above about savings. But it’s Lance’s next graph, versions of which he uses regularly, that makes it even more obvious. (NOTE: I think he means to say 2009, not 2000 below)


The first chart below shows a record gap between the standard cost of living and the debt required to finance that cost of living. Prior to 2000(?!), debt was able to support a rising standard of living, which is no longer the case currently.



The cut-off point is 2009, unless I miss something in Lance’s comment. Before that, borrowing could create the illusion of a rising standard of living. Those days are gone. And it’s very hard to see, when you take a good look, what could make them come back.

Not only are savings not down because people are too confident to save, they are down because people simply don’t have anything left to save. The American consumer is sliding ever deeper into debt. And as for the Holiday Season, we can confidently -there’s that word again- predict that spending will be disappointing, and that much of what is still spent will add to increasing Consumer Credit Per Capita, as well as the Gap Between Real Disposable Income (DPI) And Cost Of Living.

The last graph, which shows Control Purchases, i.e. what people buy most, a large part of which will be basic needs, makes this even more clear.


With a current shortfall of $18,176 between the standard of living and real disposable incomes, debt is only able to cover about 2/3rds of the difference with a net shortfall of $6,605. This explains the reason why “control purchases” by individuals (those items individuals buy most often) is running at levels more normally consistent with recessions rather than economic expansions.



If companies are unable to pass along rising production costs to consumers, export prices are falling and consumer demand remains weak, be warned of continued weakness in earnings reports in the months ahead. As I stated earlier this year, the recovery in earnings this year was solely a function of the recovering energy sector due to higher oil prices. With that tailwind now firmly behind us, the risk to earnings in the year ahead is dangerous to a market basing its current “overvaluation” on the “strong earnings” story.

“Prior to 2009, debt was able to support a rising standard of living..” Less than a decade later, it can’t even maintain the status quo. That’s what you call a breaking point.

To put that in numbers, there’s a current shortfall of $18,176 between the standard of living and real disposable incomes. In other words, no matter how much people are borrowing, their standard of living is in decline.

Something else we can glean from the graphs is that after the Great Recession (or GFC) of 2008-9, the economy never recovered. The S&P may have, and the banks are back to profitable ways and big bonuses, but that has nothing to do with real Americans in their own real economy. 2009 was a turning point and the crisis never looked back.

Are the American people actually paying for the so-called recovery? One might be inclined to say so. There is no recovery, there’s whatever the opposite of that is, terminal decline?!. It’s just, where does that consumer confidence level come from? Is that the media? Is The Conference Board pulling our leg? Is it that people think things cannot possibly get worse?

What is by now crystal clear is that Americans don’t choose to not save, they have nothing left to save. And that will have its own nasty consequences down the road. Let’s raise some rates, shall we? And see what happens?!

One consolation: Europe, Japan, China are in the same debt-driven decline that Americans are. We’re all going down together. Or rather, the question is who’s going to go first. That is the only hard call left. America’s a prime candidate.



Dec 182015
 December 18, 2015  Posted by at 6:15 pm Finance Tagged with: , , , , , ,  9 Responses »

DPC Times Square seen from Broadway 1908

I was reading something yesterday by my highly esteemed fellow writer Charles Hugh Smith that had me first puzzled and then thinking ‘I don’t think so’, in the same vein as Mark Twain’s recently over-quoted quote:

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

I was thinking that was the case with Charles’ article. I was sure it just ain’t so. As for Twain, I’m more partial to another quote of his these days (though it has absolutely nothing to do with the topic:

“Eat a live frog first thing in the morning, and nothing worse will happen to you the rest of the day.”

Told you it had nothing to do with anything.

Charles’ article deals with money supply and the velocity of money. Familiar terms for Automatic Earth readers, though we use them in a slightly different context, that of deflation. In our definition, the interaction between the two (with credit added to money supply) is what defines inflation and deflation, which are mostly -erroneously- defined as rising or falling prices.

I don’t want to get into the myriad different definitions of ‘money supply’, and for the subject at hand there is no need. The first FRED graph below uses TMS-2 (True Money Supply 2 consists of currency in circulation + checking accounts + sweeps of checking accounts + savings accounts). The second one uses M2 money stock. Not the same thing, but good enough for the sake of the argument.

In his piece, Charles seems to portray the two, money supply and velocity of money, as somehow being two sides of the same coin, but in a whole different way than we do. He thinks that the money supply can drive velocity up or down. And that’s where I think that just ain’t so. I also think he defeats his own thesis as he goes along.

Before going into details, two things: One, he doesn’t mention the term deflation even once, though he shows money velocity has been going off a cliff like a mountain range and a half full of lemmings. I find that curious.

Two, he doesn’t mention consumers in the context. That can’t be right either. 70% of US GDP is consumers. You can’t ignore that. You can’t just look at financial markets, at investors, even though they use up most of the stimulus, and think they are the main factor determining money velocity. Not when they’re less than a third of GDP.

Moreover, and this I think is crucial, the velocity of money talks to you about consumers in a way that the money supply never could.

There may be ‘positive’ reports coming out of the BLS on jobs numbers, but with 94+ million Americans not in the labor force, with the quality of jobs diminishing so fast and so profoundly that the middle class is all but disappearing, and with 40+ million US citizens on foodstamps, the impact of the deteriorating spending power of ‘consumers’ on money velocity had to be so enormous you can’t ignore them.

Simply because if and when people have a lot less to spend, velocity comes down. That there is even the very heart of deflation. Here’s Charles with my comments:

Money Velocity Is Crashing – Here’s Why

The inescapable conclusion is that Fed policies have effectively crashed the velocity of money.

I’ll get back to that, but no, it is not true.

That the velocity of money has been crashing while the money supply has been exploding doesn’t seem to bother the mainstream pundits. There is always a fancy-footwork explanation of why whatever is crashing no longer matters. Take a look at these two charts and tell me money velocity doesn’t matter.

No argument about that from me.

First, here’s money supply: notice how money supply leaped from 2001 to 2008 as the Federal Reserve pumped liquidity and credit into the economy, and then how it exploded higher as the Fed went all in after the Global Financial Meltdown.

Now look at a brief history of the velocity of money. There are various measures of money supply and various interpretations of velocity, but let’s set those quibbles aside and compare money velocity in the “golden era” of the 1950s/1960s and the stagflationary 1970s to the present era from 2008 to 2015-the era of “growth”:

Notice how the velocity of money remained in a mild uptrend during both good times and not so good times. The inflationary peak of 1979-1982 (Treasury yields were 16% and mortgages were 18%) generated a spike, but velocity soon returned to its uptrending channel. The speculative excesses of the dot-com era pushed velocity to unprecedented heights.

Given the extremes in velocity, it is unsurprising that it quickly fell in the dot-com bust. The Federal Reserve launched an unprecedented expansion of money, credit and liquidity that again pushed velocity up in the speculative frenzy of the housing bubble. But note that despite the vast expansion of money supply, the peak in the velocity of money was considerably lower than the dot-com peak.

OK, that’s the core of why I started thinking I was sure it just ain’t so. What Charles asserts here is that an expansion of the money supply lifts the velocity of money. In other words, that the velocity of both the pre-existing supply AND the additional supply increases as more supply is added. Even BECAUSE it is added. The more money, the faster it moves. The bigger you get, the faster you run.

And I don’t see that. To me, it’s counterintuitive. This implied correlation does not exist. The velocity of money doesn’t rise when you pump more of it into an economy, it rises because people feel more confident about spending it. For whatever reason that may be.

What’s happening today, and what Charles neglects to mention, is that huge amounts of Americans simply no longer have money to spend. And no matter how much extra is pumped in through QE, it fails to reach them. Moreover, they’re all maxed out on debt. So even if they would get some extra, it would go towards debt repayment. And it does.

That’s what the money velocity graph tells us. Velocity began to tank around 1997, and apart from the housing bubble borrowing boom, has kept tanking until now. Beware of the differences between the graphs: the first one, money supply, runs from 1986 to 2015, while the second one, velocity, covers 1960 to 2015. So you can focus on the second part of graph no.2 to get them to line up.

And the first growth spurt in the velocity graph doesn’t correspond with a similar spurt in supply. In fact, the correlation looks pretty much inverse: the more supply, the less velocity. Apart from the housing casino boom blip perhaps. Which Charles attempts to address next:

Since the collapse of that speculative bubble, the Fed’s all-in expansion of money, credit and liquidity has failed to stem the absolutely unprecedented collapse of money velocity. Clearly, expanding money, credit and liquidity no longer generates any velocity.

That’s because it never has. Expanding money, credit and liquidity has never generated any velocity. It’s always been only about confidence – and private debt levels.

Rather, the inescapable conclusion is that Fed policies have effectively crashed the velocity of money.

No, that conclusion is not just not inescapable, it’s flat out wrong. Unless perhaps you would mean that the policies have greatly impoverished the consumer, but that’s not what Charles is saying. He doesn’t mention consumers. His point seems to be that in earlier days, increases in supply did indeed lead to increases in velocity, ostensibly in the financial world.

To the extent that policies, Fed or otherwise, have tempted Americans to enter the ‘investment casino’, one might claim that down the road, such policies have crashed velocity. But the money supply was not rising all that much when the bubble was happening, and when the real big supply kahuna came, velocity crashed.

Not because of Fed policies, but because of debt, and of people being maxed out. And one could, if one were inclined to do so, blame that as much on the repeal of Glass-Steagall as on the Fed.

How is this possible? Longtime correspondent Eric A. proposed an insightful explanation. Here is Eric’s commentary:

“You know how you say that the economy is locked up in fiefdoms, and they’re picking winners and losers, as part of colluding the prices? Well this adjustment of prices locks out certain people, like say, the young from housing. So houses don’t sell, they stagnate. But what are we really looking at? Velocity.

Velocity is an indicator that buyers and sellers agree on a price, that the price is “right” and not an outlier. That’s why you see a stock move on high volume “confirming” the move, because it means the price wasn’t “right” at the previous level, while more people agree the new price is fair.

If prices are allowed to go where they need to without pressure and manipulation, you will always have velocity, as the most buyers and sellers will always agree at some price. Because this is true, low velocity cannot happen in a free market.

That is half right, but only half. because it suggests that there’s always a price at which people will buy. There isn’t if people have no money to buy with. That’s why the housing market crashed the way it did, and would be much worse to this day without ZIRP tempting people once more into foolish purchases (foolish because ZIRP distorts markets, but can’t do that forever).

Which means the only reason for low velocity (in this or the previous Depressions) is that someone has somehow managed to get an edge that prevents them from selling, from liquidating, at the true price, i.e. the one the buyers will agree to.

This has another corollary, that the measure of velocity on the Fed’s own chart is the measure of the level of unnatural price manipulation on the market. We can watch this aggregate indicator of their failure in real time, by the Fed’s own hand, and we can know the manipulation is ending when it rises.

Sort of right, but… You can’t even begin to understand the velocity of money without including what consumers have to spend. That’s essentially what the velocity of money measures. What they have to spend plus how confident they are of having it to spend (again) tomorrow.

And you can throw in price manipulation, but that’s not the core, though it can’t be said to have zero influence. What’s certain is that the connection to Fed policies is very weak, if not tenuous. The Fed didn’t blow the housing bubble (money supply remained just about flat from 2005-2008), politics did.

So yes, the Fed, the governments, the insiders can manipulate to their heart’s content, as they’ve been doing, but that unnatural pressure goes somewhere. And the pressure diverts into velocity. As we saw in the Great Depression, or the Roman Empire, velocity can stagnate for 10, 20, or 1,000 years until the manipulation ends, property rights are restored, and we have a free market. History has shown that may be a bargain they’re willing to make, but it won’t do the rest of us a lot of good.”

Sounds about right, but ignores the role of millions of Americans with nothing left to spend. To repeat: 94+ million Americans not in the labor force, the quality of jobs diminishing so fast and so profoundly that the middle class is all but disappearing, and 40+ million US citizens on foodstamps.

There’s what’s the velocity of money graph reflects. And that part of that is due to manipulation, sure. But without including debt, the whole argument rings kind of hollow.

Thank you, Eric, for an explanation that intuitively rings true. Manipulating the PR optics (i.e. perception management) as a substitute for an open market doesn’t make you omnipotent, it makes you a hubris-soaked fool.

No argument on the last sentence, but that is not the core of what ‘just ain’t so’ here. You essentially can’t tell anything from the US velocity of money without looking at the American people.

Velocity of money does not rise because -or when- the money supply does, it rises when consumer spending does. And that happens when people feel confident. No additional supply is needed for that, just for money to move faster. And money doesn’t move faster just because -or when- there’s more of it.

Sep 192015
 September 19, 2015  Posted by at 10:14 am Finance Tagged with: , , , , , , , ,  7 Responses »

Arthur Siegel Bethlehem-Fairfield shipyards, Baltimore, MD May 1943

US Stocks Tumble As Fed Sows Fear And Confusion (MarketWatch)
The Fed Has To Deal With Its Own Zombie Apocalypse (CNBC)
A ‘Third Mandate’ For Fed As China Worries Take Hold (CNBC)
The Fed Is Trapped: The Naked Emperor’s New “Reaction Function” (Zero Hedge)
The Fed May Have Just Stoked A Currency War (CNBC)
Fed Is Riding The Tail Of A Dangerous Global Tiger (AEP)
Central Banks Fret Stimulus Efforts Are Falling Short (Reuters)
China Is Hoarding the World’s Oil (Bloomberg)
Occam’s Razor Says The Stock Market Is In A Downtrend (MarketWatch)
Three Reasons Why the US Government Should Default on Its Debt Today (Casey)
Treasury to Delay Enforcing Part of Tax Law That Curbs Offshore Tax Evasion (WSJ)
Moody’s Downgrades Credit Rating Of France (AP)
Negative Interest Rates ‘Necessary To Protect UK Economy’ – BOE (Telegraph)
The Orthodoxy Has Failed: Europe Needs A New Economic Settlement (Jeremy Corbyn)
Hungary Stops Train With 1,000 Asylum Seekers Escorted By 40 Croatian Police (RT)
We Are Double-Plus Unfree (Margaret Atwood)
Global Warming ‘Pause’ Theory Is Dead But Still Twitching (Phys Org)

As I wrote a few days ago: it’s all about credibility and confidence.

US Stocks Tumble As Fed Sows Fear And Confusion (MarketWatch)

U.S. stocks sank Friday, with the S&P 500 and the Dow Jones Industrial Average closing down for the week, as Federal Reserve’s decision to leave interest rates unchanged fueled fears about global economic growth. The central bank cited concerns about the global economy and a lack of inflation growth in its Thursday decision to leave interest rates unchanged. “Many are confused by the outcome of the recent Fed meeting,” said Kent Engelke at Capitol Securities. “Markets hate confusion and lack of clarity.” The S&P 500 skidded 32.16 points, or 1.6%, to close at 1,958.08 for a weekly loss of 0.2%. All S&P 500 sectors finished lower, led by energy shares. The Dow Jones dropped 289.95 points, or 1.7%, to close at 16,384.79 with all 30 components in the red. The blue-chip index edged down 0.3% for the week.

The Nasdaq shed 66.72 points, or 1.4% to 4,827.23. The tech-heavy index is the only one of the three major stock barometers to finish out the week higher with gains of 0.1%. Trading volume was elevated, with 5.74 billion shares changing hands on the New York Stock Exchange, due to “quadruple witching,” which means the expiration of various stock-index futures, stock-index options, stock options and single-stock futures. Friday is the second highest volume day of the year. “By not raising the rates, the Fed is now fanning global growth fears,” said Steven Wieting, global chief investment strategist, at Citi Private Bank. “The key for future market action depends largely on whether or not the Fed had any good cause to worry about international developments,” Wieting said.

Read more …

Setback of easy money: “..the bottom of the ladder has gotten more crowded..”

The Fed Has To Deal With Its Own Zombie Apocalypse (CNBC)

The Federal Reserve is scared—of lots of things, some obvious, some not so much. Thursday’s Fed decision to delay yet again the long-awaited liftoff from zero rates gave rise to still more speculation about why the U.S. central bank seems so perpetually reticent to normalize monetary policy. There are all the usual suspects, such as low inflation, weak wage gains despite strong job growth and China plus the rest of the emerging global economy. One reason that hasn’t gotten much attention is the need for the Fed to keep rates low both for government debt and the corporations that now have $12.5 trillion in debt. Among the prime beneficiaries of zero interest rates have been low-rated companies that have been able to borrow money at rates often in the 5% to 6% range.

A move to higher rates, even a small one, could have outsized impacts on those bad balance sheet companies.That puts the Fed in a bit of a Faustian bargain with issuers and holders that has become hard to break. Not only has high-yield issuance exploded in the days of the central bank’s ultra-easy accommodation, but the bottom of the ladder has gotten more crowded as well. About a quarter of all debt issued now in the junk universe is held by companies rated B3 or lower, according to Moody’s. Credit standards have continued to loosen as well, with the ratings agency reporting that its covenant quality index—essentially a read on how strict the conditions are on corporate borrowers—is at record lows.

“Businesses as a whole in the U.S. are better placed now to absorb any shocks that might hit them,” Bodhi Ganguli, senior economist at Dun & Bradstreet, said in a phone interview. “However, there are pockets of greater weakness like these zombie companies. These pockets are likely to see some more turbulence than overall conditions. Some companies definitely will go out of business.” It isn’t just the zombies, though, that should worry about higher rates. Corporate America overall has been piling on the debt, which grew 8.3 percent in the second quarter, according to figures the Fed released Friday.

Read more …

Would love to see a legal challenge to this. Can the Fed create its own mandates?

A ‘Third Mandate’ For Fed As China Worries Take Hold (CNBC)

Has the U.S. Federal Reserve become the world’s economic guardian? The central bank’s decision not to lift interest rates this week because of weakening global growth and a recent surge in market volatility has sparked talk of a “third mandate.” Analysts say that explicit references by the Fed following its meeting on Thursday to the China slowdown and its impact mark a significant departure for the central bank, which is mandated to ensure job creation and price stability in the U.S. economy. “The Federal Reserve’s third mandate appears to be global financial stability,” Mark Haefele at UBS said.

“The U.S. central bank has backed away from its first rate rise in over nine years, saying that international economic and financial weakness could dampen activity in the U.S.,” he said. Economists had been split over whether the Fed would deliver a long-anticipated rate increase this week and market expectations for when rates will rise have been pushed back further following a dovish Fed statement. In fact, one reason for the scaling back of rate-hike speculation in recent weeks has been growing concern about weakness in China – the world’s second-largest economy after the U.S. – and a sharp sell-off in emerging and developed markets in August. According to Deutsche Bank, global stock markets lost $5 trillion of their value in six days in August.

“The argument that global market developments are playing second fiddle to U.S. economic developments is a tenuous one, especially if the epicentre of global economic weakness is China – which is very important to U.S. economy,” Nicholas Spiro of Spiro Sovereign Strategy told CNBC. “It’s clear that what’s happening in China, especially in recent months, is having a massive deflationary impact so it’s about time we heard the Fed was concerned about China,” he said. Beijing is targeting a full-year growth rate of around 7%, which would be the slowest rate in almost 25 years. And there are concerns that the target will be missed amid weak economic data and a rout in Chinese stock markets that threaten to undermine confidence further.

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“..the FOMC would have been tightening into a tightening..”

The Fed Is Trapped: The Naked Emperor’s New “Reaction Function” (Zero Hedge)

Despite all the ballyhooing about moving to a more market-based exchange rate, the PBoC actually did the opposite on August 11. As BNP’s Mole Hau put it “whereas the daily fix was previously used to fix the spot rate, the PBoC now seemingly fixes the spot rate to determine the daily fix, [thus] the role of the market in determining the exchange rate has, if anything, been reduced in the short term.” Obviously, a reduced role for the market, means a greater role for the PBoC, and that of course means intervention via FX reserve drawdowns (i.e. the liquidation of US paper). Of course no one believed that China’s deval was “one and done” which meant that the pressure on the yuan increased and before you knew it, the PBoC was intervening all over the place.

By mid-September, PBoC intervention had cost some $150 billion between onshore spot interventions and offshore spot and forward meddling. The problem – as everyone began to pick up on some 10 months after we announced the death of the petrodollar – is that when EMs start liquidating their reserves, it works at cross purposes with DM QE. That is, it offsets it. Once this became suddenly apparent to everyone at the end of last month, market participants simultaneously realized – to their collective horror – that the long-running slump in commodity prices and attendant pressure on commodity currencies as well as the defense of various dollar pegs meant that, as Deutsche Bank put it, the great EM reserve accumulation had actually begun to reverse itself months ago. China’s entry into the global currency wars merely kicked it into overdrive.

What the above implies is that the Fed, were it to have hiked on Thursday, would have been tightening into a market where the liquidation of USD assets by foreign central banks was already sapping global liquidity and exerting a tightening effect of its own. In other words, the FOMC would have been tightening into a tightening. But that’s not all. When China devalued the yuan it also confirmed what the EM world had long suspected but what EM currencies, equities, and bonds had only partially priced in. Namely that China’s economy was crashing. For quite a while, the fact that Beijing hadn’t devalued even as the yuan’s dollar peg caused the RMB’s REER to appreciate by 14% in just 12 months, was viewed by some as a sign that things in China might not be all that bad.

After all, if a country with an export-driven economy can withstand a double-digit currency appreciation without a competitive devaluation even as the global currency wars are being fought all around it, then the situation can’t be too dire. Put simply, the devaluation on August 11 shattered that theory and reports that China is “secretly” targeting a much larger devaluation in order to boost export growth haven’t helped. For emerging markets, this realization was devastating. Depressed demand from China had already led to a tremendous amount of pain across emerging economies and the message the devaluation sent was that China’s economy wasn’t set to rebound any time soon, meaning global demand and trade will likely remain subdued, as will commodity prices.

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All this and that too.

The Fed May Have Just Stoked A Currency War (CNBC)

A lack of activity by the U.S. Federal Reserve on Thursday may not have been a surprise, but it’s left no doubt in analysts’ minds that other central banks will now look to ease policy further, a move that could send more shock waves across global currency markets. Valentin Marinov at Credit Agricole told CNBC Friday that he expects global “currency wars” to intensify from here. He predicts the Bank of Japan, the ECB and the People’s Bank of China (PBOC) has now effectively been pushed into unveiling more stimulus. “The Fed inaction could spur other central banks into action,” he said. “It is currency wars.” The dollar skidded to a three-week low against a basket of major currencies after Thursday’s decision.

This comes after the greenback had been appreciating significantly since the middle of last year in anticipation of higher interest rates in the U.S. A higher interest rate can mean a higher yield on assets and investors in the U.S. have been busy bringing their dollars home, and thus out of high-yielding foreign investments. A weaker dollar in the short term could now leave other global economies frustrated and dent export-focused companies that favor a weak domestic currency. Manipulating reserve levels can be one way that a country’s central bank can intervene against currency fluctuations. Other measures include altering benchmark interest rates and quantitative easing. Central banks often stress that exchange rates are not a primary policy goal and can be seen more as a positive by-product of monetary easing.

There have been discussions in the last few years that countries are purposefully debasing their own currencies – a concern that was termed “currency wars” by Brazil’s Finance Minister Guido Mantega in September 2010. Credit Agricole’s Marinov highlighted that the ECB could be the next to act by ramping up its current bond-buying program, thus weakening the single currency – even though its only mandate is to manage inflation. Analysts at BNP Paribas also stated Friday that the Fed decision had increased their conviction that the ECB would increase its quantitative easing program. Marc Ostwald, strategist at ADM ISI, said in a note Friday that the ECB and the BoJ who will now face “even bigger challenges, given that the Fed is clearly not in any hurry to live up to its part of the ‘policy divergence’ grand bargain.”

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Ambrose is lost. He claims the China crash bottomed out in April, because more debt has been added since then.

Fed Is Riding The Tail Of A Dangerous Global Tiger (AEP)

The US Federal Reserve would have been mad to raise interest rates in the middle of a panic over China and an emerging market storm, and doubly so to do it against express warnings from the IMF and the World Bank. The Fed is the world’s superpower central bank. Having flooded the international system with cheap dollar liquidity during the era of quantitative easing, it cannot lightly walk away from its global responsibilities – both as a duty to all those countries that were destabilized by dollar credit, and in its own enlightened self-interest. Dollar debt outside the jurisdiction of the US has reached $9.6 trillion, on the latest data from the Bank for International Settlements. Dollar loans to emerging markets have doubled since the Lehman crisis to $3 trillion.

The world has never been so leveraged, and therefore so acutely sensitive to any shift in monetary signals. Nor has the global financial system ever been so tightly inter-linked, and therefore so sensitive to the Fed. The BIS says total debt in the rich countries has jumped by 36%age points to 265pc of GDP since the peak of the last cycle, and by 50 points to 167pc in developing Asia, Latin America, the Middle East, Eastern Europe, and Africa. It is wishful thinking to suppose that the world can brush off a Fed rate rise on the grounds that most of the debt is in local currencies. BIS research shows that they will face a rate shock regardless. On average, a 100 point move in US rates leads to a 43 point move in local currency borrowing costs in EM and open developed economies.

Given that the Fed was forced to reverse course dramatically in 1998 when the East Asia crisis blew up – for fear it would take down the US financial system – it can hardly go ahead nonchalantly with rate rises into the teeth of the storm today when emerging markets are an order of magnitude larger and account for 50pc of global GDP. Even if you reject these arguments, Goldman Sachs says the strong dollar and the market rout in August already amount to 75 basis points of monetary tightening for the US economy itself. Headline CPI inflation in the US is just 0.2pc. Prices fell in August. East Asian is transmitting a deflationary shock to the West, and it is not yet clear whether the trade depression in the Far East is safely over.

The argument that zero rates are unhealthy and impure is to let Calvinist psychology intrude on the hard science of monetary management. The chorus of demands – and just from ‘internet-Austrians’ – that rates should be raised in order to build up reserve ammunition in case they need to be cut later, is a line of reasoning that borders on insanity. If acted on, it would risk tipping us all into the very deflationary trap that we are supposed to be protecting ourselves against, the Irving Fisher moment when a sailing boat rolls beyond the point of natural recovery, and capsizes altogether. So hats off to Janet Yellen for refusing to listen to such dangerous counsel. However, the Fed is damned if it does, and damned if it does not, for by recoiling yet again it may well be storing up a different kind of crisis next year.

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Only solution: moar?!

Central Banks Fret Stimulus Efforts Are Falling Short (Reuters)

The world’s leading central banks are facing the risk that their massive efforts to revive economic growth could be dragged down again, with some officials arguing for bold new ideas to counter the threat of slow growth for years to come. A day after the U.S. Federal Reserve kept interest rates at zero, citing risks in the global economy, the Bank of England’s chief economist said central banks had to accept that interest rates might get stuck at rock bottom. In Japan, where interest rates have been at zero for more than 20 years, policymakers are already tossing around ideas for overhauling the Bank of Japan’s huge monetary stimulus program as they worry that it will be unsustainable in the future, according to sources familiar with its thinking.

Separately a top ECB official said the ECB’s bond-buying program might need to be rethought if low inflation becomes entrenched. But he added monetary policy would not restore economic growth over the long term. More than eight years after the onset of the financial crisis, the economies of the United States and Britain are growing at a healthier pace, in contrast to those of Japan and in many euro zone countries. But the risk of a sharp slowdown in China and other emerging economies has prevented the Fed from starting to raise interest rates and is being watched closely by the Bank of England.

Investors mostly think that the Fed’s delay will be short-lived and that it could begin raising rates before the end of the year, followed a few months later by Britain’s central bank. But the BoE’s chief economist, Andy Haldane, who has long been gloomy about the chances of a sustainable recovery, said the world might in fact be sinking into a new phase of the financial crisis – this time caused by emerging markets.

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Paid for with monopoly money. Where would the oil price be without this?

China Is Hoarding the World’s Oil (Bloomberg)

Even after China’s slowing economy dragged crude to a six-year low, oil’s second-biggest consumer remains the main safeguard against a further price meltdown. While China’s surprise currency devaluation helped trigger Brent crude’s slump to about $42 a barrel last month, the nation’s stockpiling of oil can staunch further losses. In the first seven months of the year, China purchased about half a million barrels of crude in excess of its daily needs, the most for the period since 2012, according to data compiled by Bloomberg. As the country gathers bargain barrels for its strategic petroleum reserve, the demand is cushioning an oversupplied market from a further crash, according to Columbia University’s Center on Global Energy Policy.

“It throws a lifeline to the market” that safeguards against the risk of crude touching $20 a barrel, Jeff Currie at Goldman Sachs said. “That lifeline lasts through late 2016.” Other countries have emergency oil-supply buffers, and while the U.S. Strategic Petroleum Reserve has been stable at about 700 million barrels for years, China is expanding its stockpiles rapidly. The Asian nation has accumulated about 200 million barrels of crude in its reserve so far and aims to have 500 million by the end of the decade, according to the International Energy Agency. It’s currently filling a 19 million-barrel facility at Huangdao and will add oil at six sites with a combined capacity of about 132 million barrels over the next 18 months, the Paris-based adviser on energy policy estimates.

“The fact that China is stockpiling crude for public strategic storage certainly offsets the weaker sentiment on China’s oil-product demand,” said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA in London. China’s demand growth is set to slow to an annual rate of 2.3% by the fourth quarter compared with 5.6% in the second quarter, a reflection of “weak car sales data, declines in industrial activity, plummeting property prices and fragile electricity output,” the IEA said in a report on Sept. 11.

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As in: you can’t taper a Ponzi scheme.

Occam’s Razor Says The Stock Market Is In A Downtrend (MarketWatch)

Investors can forget the “death cross,” “bearish divergences” and “symmetrical triangles,” and what the Federal Reserve says it will do about interest rates, and just focus on Occam’s razor: The S&P 500 abandoned its long-term uptrend in late August, meaning it is now in a downtrend. Occam’s razor is the philosophical principle that suggests, all things being equal, the simplest explanation tends to be the right one. One of the most elementary trading maxims on Wall Street is “the trend is your friend.” That’s basically what all the short-term technical patterns, economic data and earnings reports are used for, to determine which direction the longer-term trend is heading, and whether it’s about to change.

Once that trend is determined, a tenet of the century-old Dow Theory of market analysis says it is assumed to remain in effect, until it gives definite signals that it has reversed, according to the Market Technicians Associations knowledge base. In other words, the trend is your friend, until it isn’t. After cutting through all the noise, a trendline is probably the best chart pattern to determine the trend, as it is also the simplest. And the simplest way to tell if a trend has reversed, is if the trendline breaks. The S&P 500 had been riding a strong weekly uptrend, defined by the trendline connecting the bottom of the last correction in October 2011 with the bottom of the November 2012 pullback and the October 2014 low. The S&P 500 fell below that line in late August, meaning the uptrend flipped to a downtrend. Based on the Occam’s razor principle, the uptrend was the friend of investors for four years, but now it isn’t.

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And so should Greece?!

Three Reasons Why the US Government Should Default on Its Debt Today (Casey)

The overleveraging of the U.S. federal, state, and local governments, some corporations, and consumers is well known. This has long been the case, and most people are bored by the topic. If debt is a problem, it has been manageable for so long that it no longer seems like a problem. U.S. government debt has become an abstraction; it has no more meaning to the average investor than the prospect of a comet smacking into the earth in the next hundred millennia. Many financial commentators believe that debt doesn’t matter. We still hear ridiculous sound bites, like “We owe it to ourselves,” that trivialize the topic. Actually, some people owe it to other people. There will be big transfers of wealth depending on what happens.

More exactly, since Americans don’t save anymore, that dishonest phrase about how we owe it to ourselves isn’t even true in a manner of speaking; we owe most of it to the Chinese and Japanese. Another chestnut is “We’ll grow out of it.” That’s impossible unless real growth is greater than the interest on the debt, which is questionable. And at this point, government deficits are likely to balloon, not contract. Even with artificially low interest rates. One way of putting an annual deficit of, say, $700 billion into perspective is to compare it to the value of all publicly traded stocks in the U.S., which are worth roughly $20 trillion. The current U.S. government debt of $18 trillion is rapidly approaching the stock value of all public corporations – and that’s true even with stocks at bubble-like highs.

If the annual deficit continues at the $700 billion rate – in fact it is likely to accelerate – the government will borrow the equivalent of the entire equity capital base of the country, which has taken more than 200 years to accumulate, in only 29 years. You should keep all this in the context of the nature of debt; it can be insidious. The only way a society (or an individual) can grow in wealth is by producing more than it consumes; the difference is called “saving.” It creates capital, making possible future investments or future consumption. Conversely, “borrowing” involves consuming more than is produced; it’s the process of living out of capital or mortgaging future production.

Saving increases one’s future standard of living; debt reduces it. If you were to borrow a million dollars today, you could artificially enhance your standard of living for the next decade. But, when you have to repay that money, you will sustain a very real decline in your standard of living. Even worse, since the interest clock continues ticking, the decline will be greater than the earlier gain. If you don’t repay your debt, your creditor (and possibly his creditors, and theirs in turn) will suffer a similar drop. Until that moment comes, debt can look like the key to prosperity, even though it’s more commonly the forerunner of disaster.

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And why not…

Treasury to Delay Enforcing Part of Tax Law That Curbs Offshore Tax Evasion (WSJ)

The Treasury Department said Friday it would delay enforcement of one key part of a 2010 law that is aimed at curbing offshore tax evasion, in a regulatory victory for banks. The law, the Foreign Account Tax Compliance Act, or FATCA, requires foreign banks to start handing over information about U.S.-owned accounts to the Internal Revenue Service. It also would force banks and other financial institutions around the world to withhold a share of many types of payments to other banks that aren’t complying with the law. In effect, the withholding amounts to a kind of U.S. tax penalty on noncompliant financial institutions. The latest move by Treasury will push back the start of withholding for many types of transactions—such as stock trades—from 2017 until 2019.

Withholding for some other types of payments has already begun. The change will give banks more time to come into compliance with FATCA, and governments and the financial industry more time to work out some of the difficult details involved in withholding on more-complex financial transactions. The withholding provision is “the really big stick” in FATCA, said Michael Plowgian, a former Treasury official who is now at KPMG LLP. “The problem with it is that it’s really complicated…So Treasury and IRS have essentially punted” and created more time to solve some of the sticky technical issues, he added.

The Securities Industry and Financial Markets Association, a Wall Street trade group, applauded the move. Given some of the complexities involved, “the 2017 deadline didn’t seem to make sense,” added Payson Peabody, tax counsel for SIFMA. “They are giving themselves more time and giving everyone else a bit more time to comment” on some of the hard questions. Despite the delay in some withholding, experts say FATCA implementation continues to move ahead.

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First downgrade the country, then wax about how great France really is doing.

Moody’s Downgrades Credit Rating Of France (AP)

Moody’s Investors Service is downgrading the credit rating of France, saying the French economy will grow slowly for the rest of this decade while the country’s debt remains high. The firm lowered its rating to “Aa2” from “Aa1.” That means France has Moody’s third-highest possible rating. Moody’s said Friday the outlook for economic growth in France is weak, and it does not expect that to change soon. It says the high national debt burden probably will not be reduced in the next few years because of low growth and institutional and political constraints. Overall Moody’s says France’s creditworthiness is “extremely high” because of its large, wealthy, well-diversified economy, high per-capita income, good demographic trends, strong investor base and low financing costs. The outlook was raised to “stable” from “negative.”

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The only way to keep a system going that is drowning in ever more debt.

Negative Interest Rates ‘Necessary To Protect UK Economy’ – BOE (Telegraph)

The Bank of England may need to push its interest rates into negative territory to fight off the next recession, its chief economist has said. Andy Haldane, one of the Bank’s nine interest rate setters, made the case for the “radical” option of supporting the economy with negative interest rates, and even suggested that cash could have to be abolished. He said that the “the balance of risks to UK growth, and to UK inflation at the two-year horizon, is skewed squarely and significantly to the downside”. As a result, “there could be a need to loosen rather than tighten the monetary reins as a next step to support UK growth and return inflation to target”. Speaking at the Portadown Chamber of Commerce, Mr Haldane’s support for a possible cut in rates came as the Bank as a whole has signalled that the next move in rates would be up.

But recent volatility in financial markets, prompted by China, and a decision by the US Federal Reserve to delay rate hikes, have pushed back expectations of the Bank’s first rate rise to November 2016. Traditionally policymakers have resisted cutting rates below zero because when the returns on savings fall into negative territory, it encourages people to take their savings out of the bank and hoard them in cash. This could slow, rather than boost, the economy. It would be possible to get around the problem of hoarding by abolishing cash, Mr Haldane said, adding: “What I think is now reasonably clear is that the payment technology embodied in [digital currency] Bitcoin has real potential.” His remarks came as he made the case for raising the UK’s inflation target to 4pc from the current level of 2pc.

Mr Haldane said that a trend towards low interest rates across the globe has made it increasingly difficult to fight off recessions. In the past, central banks have helped stimulate economies by slashing interest rates. But with rates at rock bottom in many parts of the world, many have found their ammunition depleted. “Among the large advanced economies, official interest rates are effectively at zero,” Mr Haldane said. In the UK, the Bank’s interest rate has been stuck at 0.5pc for more than six years. One way to supply the Bank with more firepower would “be to revise upwards inflation targets”. The UK’s inflation target is currently 2pc, but this dates from an era when interest rates were closer to 6pc than 0.5pc. It might be necessary to double that target to 4pc, Mr Haldane argued.

Bank research has determined that slowing growth, ageing populations, weaker investment, rising inequality and a savings glut in emerging markets have all contributed to a generational decline in interest rates. Mr Haldane said: “These factors are not will-of-the-wisp. None is likely to reverse quickly. “That would mean there is materially less monetary policy room for manoeuvre than was the case a generation ago. Headroom of two%age points would potentially be insufficient.” However a hike in the inflation target to 4pc would provide extra “wiggle room”.

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The entire world does.

The Orthodoxy Has Failed: Europe Needs A New Economic Settlement (Jeremy Corbyn)

David Cameron is traversing Europe, apparently without much idea of what he wants to achieve in his much-feted renegotiation ahead of a referendum in 2016 or 2017. If the prime minister thinks he can weaken workers’ rights and expect goodwill towards Europe to keep us in the EU, he is making a great mistake. Mr Cameron’s support for a bill that would weaken the trade unions, and the cutting of tax credits this week, show that employment rights are under attack. One can imagine that the many rights we derive from European legislation, which underpins paid holidays, working time protection and improved maternity and paternity leave, are under threat too. There is a widely shared feeling that Europe is something of an exclusive club, rather than a democratic forum for social progress.

Tearing up our rights at work would strengthen that view. Labour will oppose any attempt by the Conservative government to undermine rights at work — whether in domestic or European legislation. Our shadow cabinet is also clear that the answer to any damaging changes that Mr Cameron brings back from his renegotiation is not to leave the EU but to pledge to reverse those changes with a Labour government elected in 2020. Workplace protections are vital to protect both migrant workers from being exploited and British workers from being undercut. Stronger employment rights also help good employers, who would otherwise face unfair competition from less scrupulous businesses. We will be in Europe to negotiate better protection for people and businesses, not to negotiate them away.

Too much of the referendum debate has been monopolised by xenophobes and the interests of corporate boardrooms. Left out of this debate are millions of ordinary British people who want a proper debate about our relationship with the EU. We cannot continue down this road of free-market deregulation, which seeks to privatise public services and dilute Europe’s social gains. Draft railway regulations that are now before the European Parliament could enforce the fragmented, privatised model that has so failed railways in the UK. The proposed Transatlantic Trade and Investment Partnership that is being negotiated behind closed doors between the EU and the US, against which I have campaigned, is another example of this damaging approach.

There is no future for Europe if we engage in a race to the bottom. We need to invest in our future and harness the skills of Europe’s people. The treatment of Greece has appalled many who consider themselves pro-European internationalists. The Greek debt is simply not repayable, the terms are unsustainable and the insistence that the unpayable be paid extends the humanitarian crisis in Greece and the risks to all of Europe. The current orthodoxy has failed. We need a new economic settlement.

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Adding up: shame, insult, injury.

Hungary Stops Train With 1,000 Asylum Seekers Escorted By 40 Croatian Police (RT)

An unannounced train carrying over 1,000 asylum seekers, accompanied by around 40 Croatian police officers, has been intercepted by Hungarian authorities, who accused Zagreb of breaking international laws and intentionally participating in “human smuggling.” The train carrying up to 1,000 refugees was accompanied by some 40 Croatian police officers, who were reportedly detained and then sent back. Croatian police however refuted initial reports that officers accompanying the train were detained or disarmed, explaining that 36 officers “returned” to Croatia in the evening. “There was no disarming or arrests. It is not true,” Croatian police spokeswoman Jelena Bikic told Reuters, claiming that there was “an agreement about the escort between the police officers from the two sides in advance.”

Hungarian authorities said that the incident happened due to Croatia’s failure to coordinate train’s border crossing. According to the head of the Hungarian disaster unit, Gyorgy Bakondi, the Croatian train arrived at Magyarboly without any prior notice, bringing the number of unannounced arrivals to over 4,000 on Friday alone. Croatia’s FM Vesna Pusic claimed that the two countries had agreed “to provide a corridor” for refugees, Sky News reported. However Hungarian spokesman Zoltan Kovacs rejected the claim as a “lie.” “The Croatian system for handling migrants and refugees has collapsed basically in one day,” Kovacs added. “What we see today is the failure of the Croatian state to handle migration issues. What is more we see intentional, intentional, participation in human smuggling taking the migrants to the Hungarian border.”

After Hungary blocked off their border with Serbia this week with the aid of a metal fence and riot police, migrants flooded neighboring Croatia in search for an alternative route. More than 17,000 have arrived in the country since Wednesday morning. “We cannot register and accommodate these people any longer,” Croatian Prime Minister Zoran Milanovic told a news conference. “They will get food, water and medical help, and then they can move on. The European Union must know that Croatia will not become a migrant ‘hotspot’. We have hearts, but we also have heads.”

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Driven by fear.

We Are Double-Plus Unfree (Margaret Atwood)

Governments know our desire for safety all too well, and like to play on our fears. How often have we been told that this or that new rule or law or snooping activity on the part of officialdom is to keep us “safe”? We aren’t safe, anyway: many of us die in weather events – tornados, floods, blizzards – but governments, in those cases, limit their roles to finger-pointing, blame-dodging, expressions of sympathy or a dribble of emergency aid. Many more of us die in car accidents or from slipping in the bathtub than are likely to be done in by enemy agents, but those kinds of deaths are not easy to leverage into panic. Cars and bathtubs are so recent in evolutionary terms that we’ve developed no deep mythology about them.

When coupled with human beings of ill intent they can be scary – being rammed in your car by a maniac or shot in your car by a mafioso carry a certain weight, and being slaughtered in the tub goes back to Agamemnon’s fate in Homer, with a shower-murder update courtesy of Alfred Hitchcock in his film, Psycho. But cars and tubs minus enraged wives or maniacs just sit there blankly. It’s the sudden, violent, unpredictable event we truly fear: the equivalent of an attack by a hungry tiger. Yesterday’s frightful tigerish threat was communists: in the 1950s, one lurked in every shrub, ran the message. Today, it’s terrorists. To protect us from these, all sorts of precautions must, we are told, be taken. Nor is this view without merit: such threats are real, up to a point.

Nonetheless we find ourselves asking whether the extreme remedies outweigh the disease. How much of our own freedom must we sacrifice in order to defend ourselves against the desire of others to limit that freedom by subjugating or killing us, one by one? And is that sacrifice an effective defence? Minus our freedom, we may find ourselves no safer; indeed we may be double-plus unfree, having handed the keys to those who promised to be our defenders but who have become, perforce, our jailers. A prison might be defined as any place you’ve been put into against your will and can’t get out of, and where you are entirely at the mercy of the authorities, whoever they may be. Are we turning our entire society into a prison? If so, who are the inmates and who are the guards? And who decides?

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“..there never was a hiatus, a pause or a slowdown..”

Global Warming ‘Pause’ Theory Is Dead But Still Twitching (Phys Org)

A study released Thursday is the second this year seeking to debunk a 1998-2013 “pause” in global warming, but other climate scientists insist the slowdown was real, even if not a game-changer. When evidence of the apparent hiatus first emerged, it was seized upon by sceptics as evidence that climate change was driven more by natural cycles that humans pumping carbon dioxide into the atmosphere. “Our results clearly show that … there never was a hiatus, a pause or a slowdown,” Noah Diffenbaugh, the study’s main architect and a professor at Stanford University, said in a statement. The thermal time-out, his team found, resulted from “faulty statistical methods”.

In June, experts from the US National Oceanic and Atmospheric Administration (NOAA) came to the same conclusion, chalking up the alleged slowdown to a discrepancy in measurements involving ocean buoys used to log temperatures. Their results were published in the peer-reviewed journal Science. Beyond a strident public debate fuelled as much by ideology and facts, the “pause” issue has serious real-world implications. Scientifically, a discrepancy between climate projections and observations could suggest that science has overstated Earth’s sensitivity to the radiative force of the Sun. Politically, it could weaken the sense of urgency underlying troubled UN negotiations, tasked with crafting a global pact in December to beat back climate change.

At first, scientists sounding an alarm about the threat of greenhouse gases were stumped by the data, unable to explain the drop-off in the pace of warming. Even the UN’s Intergovernmental Panel on Climate Change (IPCC)—whose most recent 1,000-plus page report is the scientific benchmark for the UN talks—made note of “the hiatus”. Searching for explanations, the IPCC speculated on possible causes: minor volcano eruptions throwing radiation-blocking dust in the atmosphere, a decrease in solar activity, aerosols, regional weather patterns in the Pacific and Atlantic Oceans. To the general relief of the climate science community, the Stanford findings—a detailed review of statistical methodology—would appear to be the final word on the subject.

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Dec 012014
 December 1, 2014  Posted by at 11:10 pm Finance Tagged with: , , , , , , ,  14 Responses »

DPC Government Street, Mobile, Alabama 1906

Is the Plunge Protection Team really buying oil now? That would be so funny. Out of the blue, up almost 5%? Or was it the Chinese doing some heavy lifting stockpiling for their fading industrial base? Let’s get to business.

First, in the next episode of Kids Say The Darndest Things – oh wait, that was Cosby .. -, we have New York Fed head (rhymes with methhead) Bill Dudley. Dudley’s overall message is that the US economy is doing great, but it’s not actually doing great, and therefore a rate hike would be too early. Or something. Bloomberg has the prepared text of a speech he held today, and it’s hilarious. Look:

Fed’s Dudley Says Oil Price Decline Will Strengthen US Recovery

The sharp drop in oil prices will help boost consumer spending and underpin an economy that still requires patience before interest rates are increased, Federal Reserve Bank of New York President William C. Dudley said. “It is still premature to begin to raise interest rates,” Dudley said in the prepared text of a speech today at Bernard M. Baruch College in New York. “When interest rates are at the zero lower bound, the risks of tightening a bit too early are likely to be considerably greater than the risks of tightening a bit too late.” Dudley expressed confidence that, although the U.S. economic recovery has shown signs in recent years of accelerating, only to slow again, “the likelihood of another disappointment has lessened.”

How is this possible? ‘The sharp drop in oil prices will help boost consumer spending’? I don’t understand that: Dudley is talking about money that would otherwise also have been spent, only on gas. There is no additional money, so where’s the boost?

Investors’ expectations for a Fed rate increase in mid-2015 are reasonable, he said, and the pace at which the central bank tightens will depend partly on financial-market conditions and the economy’s performance. Crude oil suffered its biggest drop in three years after OPEC signaled last week it will not reduce production. Lower energy costs “will lead to a significant rise in real income growth for households and should be a strong spur to consumer spending,” Dudley said.

The drop will especially help lower-income households, who are more likely to spend and not save the extra real income, he said.

Extra income? Real extra income, as opposed to unreal? How silly are we planning to make it, sir? Never mind, the fun thing is that Dudley defeats his own point. By saying that lower-income households are more likely to spend and not save the ‘extra real income’, he also says that others won’t spend it, and that of course means that the net effect on consumer spending will be down, not up. He had another zinger, that the whole finance blogosphere will have a good laugh at:

[..] He also tried to disabuse investors of the notion that the Fed would, in times of sharp equity declines, ease monetary conditions, an idea known as the “Fed put.” “The expectation of such a put is dangerous because if investors believe it exists they will view the equity market as less risky,” Dudley said. That could cause investors to push equity markets higher, contributing to a bubble, he said. “Let me be clear, there is no Fed equity market put,” he said.

That’s in the category: ‘Read my lips’, ‘Mission Accomplished’ and ‘I did not have sex with that woman.’ I remain convinced that they’ll move rates up, and patsies like Dudley are being sent out to sow the seeds of confusion. Apart from that, this is just complete and bizarre nonsense. And that comes from someone with a very high post in the American financial world. At least a bit scary.

Another great one came also from Bloomberg today, when it reported that US holiday sales had missed by no less than 11%. Maybe Dudley should have put that in his speech?! This one turns the entire world upside down:

US Consumers Reduce Spending By 11% Over Thanksgiving Weekend

Even after doling out discounts on electronics and clothes, retailers struggled to entice shoppers to Black Friday sales events, putting pressure on the industry as it heads into the final weeks of the holiday season. Spending tumbled an estimated 11% over the weekend, the Washington-based National Retail Federation said yesterday. And more than 6 million shoppers who had been expected to hit stores never showed up. Consumers were unmoved by retailers’ aggressive discounts and longer Thanksgiving hours, raising concern that signs of recovery in recent months won’t endure.

The NRF had predicted a 4.1% sales gain for November and December – the best performance since 2011. Still, the trade group cast the latest numbers in a positive light, saying it showed shoppers were confident enough to skip the initial rush for discounts. “The holiday season and the weekend are a marathon, not a sprint,” NRF Chief Executive Officer Matthew Shay said on a conference call. “This is going to continue to be a very competitive season.” Consumer spending fell to $50.9 billion over the past four days, down from $57.4 billion in 2013, according to the NRF. It was the second year in a row that sales declined during the post-Thanksgiving Black Friday weekend, which had long been famous for long lines and frenzied crowds.

Shoppers are confident enough to not shop. And why do they not shop? Because the economy’s so strong. Or something. They were so confident that 6 million of them just stayed home. While those that did go out had the confidence to spend, I think, 6.4% less per capita. Maybe that confidence has something to do with at least having some dough left in our pocket.

On the – even – more serious side, two different reports on how much stocks in the US are overvalued. First John Hussman talking about his investment models, an where he did get it right:

Hard-Won Lessons and the Bird in the Hand

[..] the S&P 500 is more than double its historical valuation norms on reliable measures (with about 90% correlation with actual subsequent 10-year market returns), sentiment is lopsided, and we observe dispersion across market internals, along with widening credit spreads. These and similar considerations present a coherent pattern that has been informative in market cycles across a century of history – including the period since 2009. None of those considerations inform us that the U.S. stock market currently presents a desirable opportunity to accept risk.

I know exactly the conditions under which our approach has repeatedly been accurate in cycles across a century of history, and in three decades of real-time work in finance: I know what led me to encourage a leveraged-long position in the early 1990’s, and why were right about the 2000-2002 collapse, and why we were right to become constructive in 2003, and why we were right about yield-seeking behavior causing a housing bubble, and why we were right about the 2007-2009 collapse. And we know that the valuation methods that scream that the S&P 500 is priced at more than double reliable norms, and that warn of zero or negative S&P 500 total returns for the next 8-9 years, are the same valuation methods that indicated stocks as undervalued in 2008-2009.

As an important side note, the financial crisis was not resolved by quantitative easing or monetary heroics. Rather, the crisis ended – and in hindsight, ended precisely – on March 16, 2009, when the Financial Accounting Standards Board abandoned mark-to-market rules, in response to Congressional pressure by the House Committee on Financial Services on March 12, 2009. The decision by the FASB gave banks “significant judgment” in the values that they assigned to assets, which had the immediate effect of making banks solvent on paper despite being insolvent in fact.

Rather than requiring the restructuring of bad debt, policy makers decided to hide it behind an accounting veil, and to gradually make the banks whole by lowering their costs and punishing ordinary savers with zero interest rates, creating yet another massive speculative yield-seeking bubble in risky assets at the same time. [..]

This is 5.5 years ago. Do we still think about this enough? Do we still realize what the inevitable outcome will be? Hussman suggests the moment is near.

The equity market is now more overvalued than at any point in history outside of the 2000 peak, and on the measures that we find best correlated with actual subsequent total returns, is 115% above reliable historical norms and only 15% below the 2000 extreme. Based on valuation metrics that are about 90% correlated with actual subsequent returns across history, we estimate that the S&P 500 is likely to experience zero or negative total returns for the next 8-9 years. At this point, the suppressed Treasury bill yields engineered by the Federal Reserve are likely to outperform stocks over that horizon, with no downside risk.

As was true at the 2000 and 2007 extremes, Wall Street is quite measurably out of its mind. There’s clear evidence that valuations have little short-term impact provided that risk-aversion is in retreat (which can be read out of market internals and credit spreads, which are now going the wrong way). There’s no evidence, however, that the historical relationship between valuations and longer-term returns has weakened at all. Yet somehow the awful completion of this cycle will be just as surprising as it was the last two times around – not to mention every other time in history that reliable valuation measures were similarly extreme. Honestly, you’ve all gone mad.

115% above reliable historical norms. That’s what the equity put that doesn’t exist, plus the Plunge Protection Team, have achieved. None of that stuff is worth anything near what you pay for it. But people do it anyway, and think very highly of themselves for doing it. Because it makes them money. And anything that makes you money makes you smart.

Then, the crew at Phoenix Capital, courtesy of Tyler Durden:

Stocks Have Been More Overvalued Only ONCE in the Last 100 Years (Phoenix)

Stocks today are overvalued by any reasonable valuation metric. If you look at the CAPE (cyclical adjusted price to earnings) the market is registers a reading of 27 (anything over 15 is overvalued). We’re now as overvalued as we were in 2007. The only times in history that the market has been more overvalued was during the 1929 bubble and the Tech bubble. Please note that both occasions were “bubbles” that were followed by massive collapses in stock prices.


Then there is total stock market cap to GDP, a metric that Warren Buffett’s calls tge “single best measure” of stock market value. Today this metric stands at roughly 130%. It’s the highest reading since the DOTCOM bubble (which was 153%). Put another way, stocks are even more overvalued than they were in 2007 and have only been more overvalued during the Tech Bubble: the single biggest stock market bubble in 100 years.


1) Investor sentiment is back to super bullish autumn 2007 levels.
2) Insider selling to buying ratios are back to autumn 2007 levels (insiders are selling the farm).
3) Money market fund assets are at 2007 levels (indicating that investors have gone “all in” with stocks).
4) Mutual fund cash levels are at a historic low (again investors are “all in” with stocks).
5) Margin debt (money borrowed to buy stocks) is near record highs.

In plain terms, the market is overvalued, overbought, overextended, and over leveraged. This is a recipe for a correction if not a collapse.

If we combine Hussman and Phoenix, we see an enormous amount of people playing with fire. And their lives. And that of their families. All as ‘confident’ as those American shoppers are (were?) supposed to be. At least a whole bunch of those were smart enough not to show up. How smart will the investment world be? Their senses have been dulled by 6 years of low interest rates, handouts and other manipulations. They’re half asleep by now.

Nobody knows what anything is worth anymore, investors probably least of all. After all, their sentiment is back to ‘super bullish autumn 2007’ levels. And they listen to guys like Dudley, who don’t have their interests at heart. Everybody thinks they’ll outsmart the others, and the falling knife too. Me, I’m wondering how much y’all lost on oil stocks and bonds recently. And how much more you’re prepared to lose.

Nov 252014
 November 25, 2014  Posted by at 9:49 pm Finance Tagged with: , , , , , , , ,  8 Responses »

John Vachon Rain. Pittsburgh, Pennsylvania Jun 1941

US Q3 GDP was revised up by the BEA to 3.89%, but that’s no longer what financial markets react to. They sit and wait for more QE somewhere on the planet to be doled out. Will Americans, if they see this at all, take those numbers, add them to the sweet drop in prices at the pump and spend what they save on more holiday purchases? I’m not saying I know, but I do see that US consumer confidence is down, as is global business confidence – the latter at a five year low.

The Case/Shiller index reports a “broad-based slowdown” for US home prices, and that in the rear view mirror that looks at Q3. So that’s not where those 3.89% came from, it wasn’t housing (wonder what it was). The Gallup Christmas survey lost 8% of exuberance in one month. What this adds up to is that Americans may not spend all of that saved gas money, and that means there’s a real danger of deflation coming to America too – as if Japanese and European attempts to export their own were not enough yet.

While the media continue to just about exclusively paint a picture of recovery and an improving economy, certainly in the US – Europe and Japan it’s harder to get away with that rosy image -, in ordinary people’s reality a completely different picture is being painted in sweat, blood, agony and despair. Whatever part of the recovery mirage may have a grain of reality in it, it is paid for by something being taken away from people leading real lives. US unemployment numbers are being massages three ways to Sunday, as is common knowledge, or should be; the amounts of working age people not working, and not being counted as unemployed either, is staggering.

But there’s a very large, and growing, number of people who do work, but find it impossible to sustain either themselves or their families on their wages. That’s how the recovery, fake as it even is, is paid for. And this will have grave consequences for many years, if not decades, to come.

If a government would come clean with its citizens, explain the overwhelming debt situation a nation is in, that everyone will have to do with less at least for a while, and then openly start restructuring the debts, those consequences would be much less damaging. But all governments choose to talk about only recovery and growth, and to let their people suffer the consequences of the policies enacted to achieve these goals, even if after 6-7 years of crisis and dozens of trillions in stimulus, we’re no closer to either. Quite the contrary. We’re not in ‘drive’, we’re stuck in ‘reverse’. We’re backing up. We’re moving backwards.

Lance Roberts at StreetTalkLive provides stats on how many Americans have been made dependent on some sort of handout:

The Dismal Economy: 148 Million Government Beneficiaries

.. the Federal Reserve has stopped their latest rounds of bond buying and are now starting to discuss the immediacy of increasing interest rates. This, of course, is based on the “hopes” that the economy has started to grow organically as headline unemployment rates have fallen to just 5.9%. If such activity were real then both inflation and wage pressures should be rising – they are not. According to the Congressional Budget Office study that was just released, approximately 60% of all U.S. households get more in transfer payments from the government than they pay in taxes.

Roughly 70% of all government spending now goes toward dependence-creating programs. From 2009 through 2013, the U.S. government spent an astounding 3.7 trillion dollars on welfare programs. In fact, today, the percentage of the U.S. population that gets money from the federal government grew by an astounding 62% between 1988 and 2011. Recent analysis of U.S. government numbers conducted by Terrence P. Jeffrey, shows that there are 86 million full-time private sector workers in the United States paying taxes to support the government, and nearly 148 million Americans that are receiving benefits from the government each month.

Yet Janet Yellen, and most other mainstream economists suggests that employment is booming in the U.S. Okay, if we assume that this is indeed the case then why, according to the Survey of Income and Program Participation conducted by the U.S. Census, are well over 100 million Americans are enrolled in at least one welfare program run by the federal government. Importantly, that figure does not even include Social Security or Medicare. (Here are the numbers for Social Security, Medicaid and Medicare: More than 64 million are receiving Social Security benefits, more than 54 million Americans are enrolled in Medicare and more than 70 million Americans are enrolled in Medicaid.) Furthermore, how do you explain the chart below? With roughly 45% of the working age population sitting outside the labor force, it should not be surprising that the ratio of social welfare as a percentage of real, inflation-adjusted, disposable personal income is at the highest level EVER on record.

Tyler Durden addresses deteriorating wages in America with a great metaphor:

The Mystery Of America’s “Schrodinger” Middle Class, Which Is Either Thriving Or About To Go Extinct

On one hand, the US middle class has rarely if ever had it worse. At least, if one actually dares to venture into this thing called the real world, and/or believes the NYT’s report: “Falling Wages at Factories Squeeze the Middle Class.” Some excerpts:

For nearly 20 years, Darrell Eberhardt worked in an Ohio factory putting together wheelchairs, earning $18.50 an hour, enough to gain a toehold in the middle class and feel respected at work. He is still working with his hands, assembling seats for Chevrolet Cruze cars at the Camaco auto parts factory in Lorain, Ohio, but now he makes $10.50 an hour and is barely hanging on. “I’d like to earn more,” said Mr. Eberhardt, who is 49 and went back to school a few years ago to earn an associate’s degree. “But the chances of finding something like I used to have are slim to none.” Even as the White House and leaders on Capitol Hill and in Fortune 500 boardrooms all agree that expanding the country’s manufacturing base is a key to prosperity, evidence is growing that the pay of many blue-collar jobs is shrinking to the point where they can no longer support a middle-class life.

In short: America’s manufacturing sector is being obliterated: “A new study by the National Employment Law Project, to be released on Friday, reveals that many factory jobs nowadays pay far less than what workers in almost identical positions earned in the past.

Perhaps even more significant, while the typical production job in the manufacturing sector paid more than the private sector average in the 1980s, 1990s and early 2000s, that relationship flipped in 2007, and line work in factories now pays less than the typical private sector job. That gap has been widening — in 2013, production jobs paid an average of $19.29 an hour, compared with $20.13 for all private sector positions. Pressured by temporary hiring practices and a sharp decrease in salaries in the auto parts sector, real wages for manufacturing workers fell by 4.4% from 2003 to 2013, NELP researchers found, nearly three times the decline for workers as a whole.

How is this possible: aren’t post-bankruptcy GM, and Ford, now widely touted as a symbol of the New Normal American manufacturing renaissance? Well yes. But there is a problem: recall what we wrote in December 2010: ‘Charting America’s Transformation To A Part-Time Worker Society:”

.. one of the most important reasons for lower pay is the increased use of temporary workers. Some manufacturers have turned to staffing agencies for hiring rather than employing workers directly on their own payroll. For the first half of 2014, these agencies supplied one out of seven workers employed by auto parts manufacturers. The increased use of these lower-paid workers, particularly on the assembly line, not only eats into the number of industry jobs available, but also has a ripple effect on full-time, regular workers. Even veteran full-time auto parts workers who have managed to work their way up the assembly-line chain of command have eked out only modest gains.

And that’s not some isolated incident, as the Guardian makes clear, it’s the same thing in Britain.:

Record Numbers Of UK Working Families In Poverty Due To Low-Paid Jobs

Insecure, low-paid jobs are leaving record numbers of working families in poverty, with two-thirds of people who found work in the past year taking jobs for less than the living wage, according to the latest annual report from the Joseph Rowntree Foundation. The research shows that over the last decade, increasing numbers of pensioners have become comfortable, but at the same time incomes among the worst-off have dropped almost 10% in real terms. Painting a picture of huge numbers trapped on low wages, the foundation said during the decade only a fifth of low-paid workers managed to move to better paid jobs. The living wage is calculated at £7.85 an hour nationally, or £9.15 in London – much higher than the legally enforceable £6.50 minimum wage.

As many people from working families are now in poverty as from workless ones, partly due to a vast increase in insecure work on zero-hours contracts, or in part-time or low-paid self-employment. Nearly 1.4 million people are on the controversial contracts that do not guarantee minimum hours, most of them in catering, accommodation, retail and administrative jobs. Meanwhile, the self-employed earn on average 13% less than they did five years ago, the foundation said. Average wages for men working full time have dropped from £13.90 to £12.90 an hour in real terms between 2008 and 2013 and for women from £10.80 to £10.30.

Poverty wages have been exacerbated by the number of people reliant on private rented accommodation and unable to get social housing, the report said. Evictions of tenants by private landlords outstrip mortgage repossessions and are the most common cause of homelessness. The report noted that price rises for food, energy and transport have far outstripped the accepted CPI inflation of 30% in the last decade. Julia Unwin, chief executive of the foundation, said the report showed a real change in UK society over a relatively short period of time. “We are concerned that the economic recovery we face will still have so many people living in poverty. It is a risk, waste and cost we cannot afford: we will never reach our full economic potential with so many people struggling to make ends meet.

And it’s even worse in Greece and Spain and Italy, all so northern Europe and the Brussels politicos can keep alive the idea that Germany and Holland are doing well, and overall growth is almost at hand. That southern Europe must suffer for that idea has been justified away for years now, and it’s not even an issue deemed worth discussing anymore.

And that attitude will blow up in their faces, it’s inevitable that it will. Very few people understand how dangerous the games are that our governments and central banks play. And when the effects do play out, they will be blamed on other causes. Debt and propaganda rule our world supreme.

Excellent writer and great friend Jim Kunstler shows how simple the entire facade is to fathom, and how the next step away from the mess we’re in is so painfully obvious: downscale.

Buy the All Time High

Wall Street is only one of several financial roach motels in what has become a giant slum of a global economy. Notional “money” scuttles in for safety and nourishment, but may never get out alive. Tom Friedman of The New York Times really put one over on the soft-headed American public when he declared in a string of books that the global economy was a permanent installation in the human condition. What we’re seeing “out there” these days is the basic operating system of that economy trying to shake itself to pieces. The reason it has to try so hard is that the various players in the global economy game have constructed an armature of falsehood to hold it in place — for instance the pipeline of central bank “liquidity” creation that pretends to be capital propping up markets.

It would be most accurate to call it fake wealth. It is not liquid at all but rather gaseous, and that is why it tends to blow “bubbles” in the places to which it flows. When the bubbles pop, the gas will tend to escape quickly and dramatically, and the ground will be littered with the pathetic broken balloons of so many hopes and dreams. All of this mighty, tragic effort to prop up a matrix of lies might have gone into a set of activities aimed at preserving the project of remaining civilized. But that would have required the dismantling of rackets such as agri-business, big-box commerce, the medical-hostage game, the Happy Motoring channel-stuffing scam, the suburban sprawl “industry,” and the higher ed loan swindle.

All of these evil systems have to go and must be replaced by more straightforward and honest endeavors aimed at growing food, doing trade, healing people, traveling, building places worth living in, and learning useful things.

All of those endeavors have to become smaller, less complex, more local, and reality-based rather than based, as now, on overgrown and sinister intermediaries creaming off layers of value, leaving nothing behind but a thin entropic gruel of waste. All of this inescapable reform is being held up by the intransigence of a banking system that can’t admit that it has entered the stage of criticality. It sustains itself on its sheer faith in perpetual levitation. It is reasonable to believe that upsetting that faith might lead to war.

But that’s not yet where we are, though Ferguson sure looks close to that war Jim talks about. Our leading classes will not let us downscale, no matter how much sense that makes for the ‘lower’ 95% of the population, because that would risk their leading positions. And so we’ll have to deal with a lot more misery before the whole edifice finally blows up, and we’ll end up with huge swaths of traumatized people. In a great article, Lynn Stuart Parramore describes how that works:

So Many People Are Badly Traumatized by Life in America: It’s Time We Admit It

Recently Don Hazen, the executive editor of AlterNet, asked me to think about trauma in the context of America’s political system. As I sifted through my thoughts on this topic, I began to sense an enormous weight in my body and a paralysis in my brain. What could I say? What could I possibly offer to my fellow citizens? Or to myself? After six years writing about the financial crisis and its gruesome aftermath, I feel weariness and fear. When I close my eyes, I see a great ogre with gold coins spilling from his pockets and pollution spewing from his maw lurching toward me with increasing speed. I don’t know how to stop him. Do you feel this way, too?

All along the watchtower, America’s alarms are sounding loudly. Voter turnout this last go-round was the worst in 72 years, as if we needed another sign that faith in democracy is waning. Is it really any wonder? When your choices range from the corrupt to the demented, how can you not feel that citizenship is a sham? Research by Martin Gilens and Benjamin I. Page clearly shows that our lawmakers create policy based on the desires of monied elites while “mass-based interest groups and average citizens have little or no independent influence.” Our voices are not heard.

When our government does pay attention to us, the focus seems to be more on intimidation and control than addressing our needs. We are surveilled through our phones and laptops. As the New York Times recently reported, a surge in undercover operations from a bewildering array of agencies has unleashed an army of unsupervised rogues poised to spy upon and victimize ordinary people rather than challenge the real predators who pillage at will. Aggressive and militarized police seem more likely to harm us than to protect us, even to mow us down if necessary.

Our policies amplify the harm. The mentally ill are locked away in solitary confinement, and even left there to die. Pregnant women in need of medical treatment are arrested and criminalized. Young people simply trying to get an education are crippled with debt. The elderly are left to wander the country in RVs in search of temporary jobs. If you’ve seen yourself as part of the middle class, you may have noticed cries of agony ripping through your ranks in ways that once seemed to belong to worlds far away.

[..] A 2012 study of hospital patients in Atlanta’s inner-city communities showed that rates of post-traumatic stress are now on par with those of veterans returning from war zones. At least 1 out of 3 surveyed said they had experienced stress responses like flashbacks, persistent fear, a sense of alienation, and aggressive behavior. All across the country, in Detroit, New Orleans, and in what historian Louis Ferleger describes as economic “dead zones” — places where people have simply given up and sunk into “involuntary idleness” — the pain is written on slumped bodies and faces that have become masks of despair. We are starting to break down.

When our alarm systems are set off too often, they start to malfunction, and we can end up in a state of hyper-vigilance, unable to properly assess the threats. It’s easy for the powerful to manipulate this tense condition and present an array of bogeymen to distract our attention, from immigrants to the unemployed, so that we focus our energy on the wrong enemy. Guns give a false sense of control, and hatred of those who do not look like us channels our impotent rage. Meanwhile, dietary supplements and prescription painkillers lure us into thinking that if we just find the right pill, we can shut off the sound of the sirens. Popular culture brings us movies with loud explosions that deafen us to what’s crashing all around us.

The 21st century, forged in the images of flames and bodies falling from the Twin Towers, has sputtered on with wars, financial ruin and crushing public policies that have left us ever more shaken, angry and afraid. At each crisis, people at the top have seized the opportunity to secure their positions and push the rest of us further down. They are not finished, not by a long shot.

Trauma is not just about experiencing wars and sexual violence, though there is plenty of that. Psychology researchers have discussed trauma as something intense that happens in your life that you can’t adequately respond to, and which causes you long-lasting negative effects. [..] trauma comes with a very high rate of interest. The children of traumatized people carry the legacy of pain forward in their brains and bodies, becoming more vulnerable to disease, mental breakdown, addiction, and violence. Psychiatrist Bessel van der Kolk, an expert on trauma, emphasizes that it’s not just personal.

Trauma occupies a space much bigger than our individual neurons: it’s political. If your parents lost their jobs, their home or their sense of security in the wake of the financial crisis, you will carry those wounds with you, even if conditions improve. Budget cuts to education and the social safety net produce trauma. Falling income produces trauma. Job insecurity produces trauma.

There’s much more at the link, and every word is worth reading. The mental consequences of the gutting of our societies by governments and the financial industry does not get nearly enough scrutiny. We act, or politicians and media do, as if millions of people losing their jobs, and over half of young people in certain nations never having had a chance of a job, is just a matter of numbers, of mere statistics.

And then all sorts of ‘experts’ claim it’s all just the price to pay for technological progress, that will make everything so much better for everyone some sunny day soon. But that sunny say will never come, the techno happy ideal version of the future has already died with the debt incurred to facilitate it. We need to take a step backwards, or we’ll continue to drive backwards. Or be driven, to be more precise, since we’ve handed over the steering wheel to people who have no intention of taking us where we want to, and should, go. They are only intent on taking us where they can squeeze us most.

Thing is, there’s precious little left to squeeze. And they know that much better than most of us do. That’s why it’s imperative that we should get rid of these clowns, or there’ll be a whole lot more trauma. We can organize our societies, and we can even organize ways to downscale them peacefully . But not with those at the helm who see us only as mere entities to draw blood from.

We need to be a whole lot more assertive about this; we shouldn’t want to be surrounded by traumatized friends and family members and neighbors There’s nothing good for us in that. It’ll be used against us in increased surveillance and clampdowns and all that comes with it.

We can have good jobs for everyone, all it takes is to have what we need, produced in our own communities and societies, instead of having it shipped over from China. It’s not rocket science. It’s just that there’s a certain segment in society, which unfortunately happens to be the most powerful one, that doesn’t want us to do that. They want more and bigger, not smaller and better.

Until we solve that issue, things will keep getting worse. And not just a little bit. We need to find leaders that actually represent us, our needs and desires and ideas, and we need to find ways to elect them. If we don’t, we face a very bleak future in which there won’t be much left for us to choose. Or enjoy. We live in a pivotal moment in time, but we don’t recognize it for what it is. We seem to think it’s all some minor hiccup. We are dead wrong.

Nov 052014
 November 5, 2014  Posted by at 11:50 am Finance Tagged with: , , , , , ,  1 Response »

Arnold Genthe 17th century Iglesia el Carmen, Antigua, Guatemala 1915

I know I’ve written a lot about Japan lately, and that for some it’s been enough for a while, but still, what happens today under the no longer rising sun is going to have such repercussions worldwide that it would be foolish not to pay attention. Moreover, there’s something about what Bank of Japan Governor Haruhiko Kuroda said this morning that both perfectly and painfully illustrates to what depths, economically as well as morally, the country has sunk.

BOJ’s Kuroda Vows To Hit Price Goal, Stands Ready To Do More

Bank of Japan Governor Haruhiko Kuroda, who last week stunned global financial markets by expanding a massive monetary stimulus program, said the central bank is ready to do more to hit its 2% price goal and recharge a tottering economy. Kuroda stressed the BOJ is determined to do whatever it takes to hit the inflation target in two years and vanquish nearly two decades of grinding deflation.

“There’s no change to our policy of trying to achieve 2% inflation at the earliest date possible, with a roughly two-year time horizon in mind,” the central bank chief said in a speech at a seminar on Wednesday. “There are no limits to our policy tools, including purchases of Japanese government bonds .. “The BOJ shocked global financial markets last week by expanding its massive stimulus spending in a stark admission that economic growth and inflation have not picked up as much as expected after a sales tax hike in April.

Kuroda said while inflation expectations have been rising as a trend, the BOJ decided to ease to pre-empt risks that slumping oil prices will slow consumer inflation and delay progress in shaking off the public’s deflationary mind-set.

“In order to completely overcome the chronic disease of deflation, you need to take all your medicine. Half-baked medical treatment will only worsen the symptoms ..” While he stressed that Japan’s economy continued to recover moderately, Kuroda said falling commodity prices could be risks to the outlook if they reflected weakness in global growth.

The Japanese economy was hit hard in Q2, suffering its biggest slump since the global financial crisis after an April sales tax hike dented consumption, and is expected to rebound only moderately in the third quarter as the effects of the higher tax take time to wear off.

Kuroda stuck to his view that the pain from the tax hike will gradually subside, but warned that the BOJ must be mindful of how the higher levy could affect companies’ pricing power, particularly if household spending stagnates. On the yen’s plunge against the dollar after last week’s monetary expansion, Kuroda reiterated his view that overall, a weak yen was positive for Japan’s economy.

You would expect falling oil prices to provide the Japanese, like Americans, with some very welcome, even necessary, financial breathing room. But PM Abe and BoJ’s Kuroda will have none of it. And no matter how you look at it, there’s something at best curious about a central bank that decides to throw ‘free money’ at an economy BECAUSE it sees falling resource prices, which would supposedly make money available already.

What Kuroda in effect says is that he won’t allow the Japanese to profit from, or even feel the relief of, lower oil prices, because they can’t be trusted to spend it. The Japanese government and central bank have no confidence at all – anymore? – that people will spend the money which they save on gas, on something else. They expect for people to, exclusively, sit on those savings. And they’re probably right, which says plenty about how the Japanese people feel about their economy: there is no confidence left whatsoever, not in Abe, not in Kuroda.

Moreover, of course, many, the poorest, the indebted, simply won’t have any extra spending cash even if they do save a few yen on gas. For them, Kuroda’s policies are very damaging. Which further undermines their confidence, and makes more people sit on more money. This goes way beyond a central bank pushing on a string. This is the picture of the trust between a government and its people having been irrevocably broken. And Abenomics doesn’t repair that trust, it only damages it further.

The people don’t trust the government, and the government doesn’t trust the people. Neither thinks the other will deliver what it desires. And since it’s ultimately the government which hold the reins of power, it’s using those reins to throw the people under the bus.

Abe and Kuroda’s ‘logic’ is ‘if the people don’t do what I want them to do, why should I take them into account, or care about them’? The line of thinking is borderline psychopath.

Adding insult to injury, a beggar thy neighbor fall in the yen is supposed to be good for exports, even though that hardly pans out at all so far. It also, and more importantly, makes imported goods more expensive. In Abe and Kuroda’s twisted logic that should drive up prices, but in reality it means people buy even less than before, which accentuates deflation instead of ‘solving’ it. Who do you think Abe blames for this?

And the psychopaths are not done with their people. They not only control the monetary base through what is by now QE9 (not of which, just like in the US, reaches main street), they have also seized control of Japan’s pensions. The rationale is: we’re going to take their pensions and spend them in the casino disguised as the global stock markets, because that MIGHT give a better return that sovereign bonds, especially Japanese ones.

If there’s one thing that’s kept Japan more or less standing upright over the past 25 years, it’s that the vast majority of its wealth was invested domestically. No more. And you might argue this is Japan exporting its deflation across the globe, but at the very least that’s not what pension beneficiaries will experience. They will simply, when markets tumble, see their pensions vanish into thin air.

US Will Benefit Most From Japan’s Pension Fund Reform

U.S. assets will be the biggest benefactor of the Japanese Government Investment Pension Fund’s (GPIF) decision to more than double its target allocation of foreign stocks to 25%, analysts say. The changes to the $1.1 trillion pension fund coincided with the Bank of Japan’s shocking decision to ramp up stimulus on Friday, which sent global equity markets soaring.

“The shift for international equities going to 25% of pension fund holdings is fairly big news,” said Tobias Levkovich, chief equities strategist at Citigroup. “It establishes a new incremental buyer of shares and the U.S. should be a significant beneficiary,” he said. The overall contribution to non-Japanese stocks could approach $60 billion of new purchases, half of which could go to the U.S. by the end of 2015, said Levkovich, noting that stocks on Wall Street should start to feel the benefit this year.

“Foreign investors typically buy large cap stocks which have greater index impact,” he said. “Thus, one cannot ignore the possibility that stock prices jump above our year-end 2014 S&P 500 target on this news.” Other analysts agree. “It’s pretty realistic [that the U.S. will receive most of the benefit] if you look at where the Japanese feel comfortable investing their money,” Uwe Parpart, managing director and head of research at Reorient Financial Markets told CNBC.

“This is a pension fund making the investment they are not going to punt into small caps or anything of that sort, they need large, liquid stocks that over decades have had a reliable return,” he said. But Parpart is not convinced the inflows would make a huge difference to stock market performance. “$30 billion sounds like a lot of money, but stretched over a period of time it’s not going to move markets,” he said. “But obviously it’s a nice shot in the arm.”

Furthermore, an increase in the pension fund’s international bond allocation to 15% from 11% should boost demand for Treasurys, driving further inflows into the U.S., analysts at HSBC said in a note published Tuesday. Meanwhile, the GPIF will reduce its domestic bond allocation to 35% from 60%. “The BoJ’s increase in asset purchases should be more than enough to cover the aggressive reduction in Japanese Government Bond (JGB) holdings planned by the GPIF, allowing JGB yields to stay pinned down,” said Andre de Silva at HSBC.

“Ultra-low JGB yields imply that the relative valuations for other core rates ie. U.S. Treasuries and other bond substitutes have been further enhanced,” he said. “Demand for yield-grabbing would intensify amongst Japanese investors, boosting overseas investments.”

De Silva estimates that over $100 billion could be reallocated into foreign bonds as part of this trend and highlighted U.S. Treasurys as the most attractive for Japanese investors. France, Australia, India and Indonesia government bond markets are attractive alternatives, he said. Japan’s pension fund is under pressure from Prime Minister Shinzo Abe to shift funds to riskier, higher yielding investments to help boost returns, at a time when his Abenomics agenda appears to be running out of steam.

So tell me, what do you think, is this still an attempt to fight – domestic – deflation, or has it become a revenge on the Japanese people for not doing what Abe ‘ordered’ them to do? Note that early this year, he said Abenomics would work if only the people believed it would.

In his view, they let him down. In their view, he’s an abject failure. He is. Unless the Japanese people get rid of Abe and Kuroda real fast, they’re going to cause a lot more destruction. We need to see this in the context of a society in which obedience is considered much more important than in the west.

In Abe and Kuroda’s eyes, the people fail, because they fail to obey their edict of increased spending. The people, too, have a hard time not obeying, but after 20 years of deflation, they find it too risky to go out and spend. That’s not just a deflationary ‘mindset’, as the powers that be would have you believe, it’s something much more real than that.

If the global markets start leaning on Japan, something that may happen any moment now because of its behemoth debt levels, the entire country could start going up in smoke. Abe has given signs of seeking to take the blame for his failures out on China, and the nationalist streak in the population may follow him to an extent, but it doesn’t look like there’s enough trust left.

In that regard, it’s undoubtedly for the better (though we don’t know who will succeed Abe). But it’s still a highly volatile situation that Japan finds itself in, with huge potential downside effects for the whole world because it’s such a large economy that’s failing here.

Oct 262014
 October 26, 2014  Posted by at 9:17 pm Finance Tagged with: , , , , , ,  8 Responses »

Dorothea Lange Resettlement project, Bosque Farms, New Mexico Dec 1935

The EU and ECB claim they conducts their stress tests and Asset Quality Reviews to restore confidence in the banking sector. That is easier said than done. The problem with the confidence boosting game is that if the tests are perceived as not strong enough, nobody knows which banks to trust anymore. And, on the other hand, if the tests are sufficiently stringent, there’s a genuine risk not many banks are found healthy.

There’s the additional issue of quite a large group of banks having been declared ‘systemic’ by their mother nations, which is of course equal to Too Big To Fail, and, in layman’s terms, ‘untouchable’.

All in all, after the results were announced today, it’s hard not to have the feeling that Europe aims at restoring that confidence by not telling us the whole story. There are a lot of numbers, but there are even more questions. Which may well be because those answers the leaders of the political and the financial world would want to see are simply not available, other than by making the tests even less credible.

Letting the numbers sink in, would the markets really feel more confident about European banks, or would they simply continue to have faith in the ECB’s bail-out desire for as long as that lasts? When I read that the ‘Comprehensive Assessment’ issued today states that the stock of bad loans in Europe is estimated, after the tests, at €879 billion, but banks’ capital shortfall only at €25 billion, I wonder where the confidence should come from.

The data. Starting with a Bloomberg piece from last Wednesday.

Don’t Be Distracted by the Pass Rate in ECB’s Bank Exams

The largest impact may be on Italian lenders led by Banca Monte dei Paschi di Siena, Unione di Banche Italiane and Banco Popolare, according to a report last month from Mediobanca analysts. They foresee a gap of more than 3 percentage points between the capital ratios published by the companies and the results of the ECB’s asset quality review. Deutsche Bank may see its capital fall by €6.7 billion, cutting its ratio by 1.9 percentage points, the analysts said.

The biggest lenders may see their combined capital eroded by about €85 billion in the asset quality review because of extra provisioning requirements, according to Mediobanca. That’s equivalent to a reduction of 1.05 percentage points in their average common equity Tier 1 ratio, the capital measure the ECB is using to gauge the health of the banks under study, the analysts said.

The AQR evaluates lenders’ health by scrutinizing the value of their loan books, provisioning and collateral, using standardized definitions set by European regulators. To pass, a bank must have capital amounting to at least 8% of its assets, when weighted by risk. The bigger the hit to their capital, the more likely lenders will need to take steps to increase it.

Banks the ECB will supervise directly already bolstered their balance sheets by almost €203 billion since mid-2013, ECB President Mario Draghi said this month, by selling stock, holding onto earnings, disposing of assets, and issuing bonds that turn into equity when capital falls too low, among other measures.

Those €203 billion the banks managed to acquire can be interpreted as positive, since they managed to do it, but it can also be seen as negative, because they needed it in the first place. It also raises the question whether another €203 billion would be just as easy. Not very likely, the low hanging fruit always goes first. Question then is, could they perhaps need another €200 billion? Brussels clearly says not, but Brussels is a figment of the imagination of politicians. Then, the New York Times today:

25 European Banks Fail Stress Test

Banks in Europe are €25 billion, or about $31.7 billion, short of the money they would need to survive a financial or economic crisis, the European Central Bank said on Sunday. That conclusion was a result of a yearlong audit of eurozone lenders that is potentially a turning point for the region’s battered economy. The E.C.B. said that 25 banks in the eurozone showed shortfalls in their own money, or capital, through the end of 2013.

Of the 25 banks [that failed the tests], 13 have still not raised enough capital to make up the shortfall, the central bank said. By exposing a relatively small number of sick banks – of the 130 under review – the central bank aims to make it easier for the healthier ones to raise money that they can lend to customers.

Italy had by far the largest number of banks that failed the review, with nine, of which four must raise more capital. Monte dei Paschi di Siena, whose troubles were well known, must raise €2.1 billion, the central bank said, the largest of any individual bank covered by the review.

… the review also uncovered €136 billion in troubled loans that banks had not previously reported. In addition, banks had overvalued their other holdings by €48 billion, the E.C.B. said.

That’s €184 billion in troubled loans and overvaluations. That leaves €19 billion of the €203 billion banks bolstered their balance sheets with, for all other shortcomings. Doesn’t sound like a lot. On to today’s Bloomberg summary:

ECB Finds 25 Banks Failed Stress Test

Eleven banks need more capital, including Monte Paschi with a gap of €2.1 billion. “Although this should restore some confidence and stability to the market, we are still far from a solution to the banking crisis and the challenges facing the banking sector,” Colin Brereton, economic crisis response lead partner at PwC, said. “The Comprehensive Assessment has bought time for some for Europe’s banks.”

Banks will have from six to nine months to fill the gaps and have been urged to tap financial markets first. The ECB’s stress test was conducted in tandem with the London-based European Banking Authority, which also released results today. The EBA’s sample largely overlaps the ECB’s, though it also contains banks from outside the euro area.

The ECB assessment showed Italian banks in particular are in need of more funds as they cope with bad loans and the country’s third recession since 2008. [..] “The minister is confident that the residual shortfalls will be covered through further market transactions and that the high transparency guaranteed by the Comprehensive Assessment will allow to easily complete such transactions,” Italy’s finance ministry said in a statement.

“The Comprehensive Assessment allowed us to compare banks across borders and business models,” ECB Supervisory Board Chair Daniele Nouy said in a statement. “The findings will enable us to draw insights and conclusions for supervision going forward.” The ECB said lenders will need to adjust their asset valuations by €48 billion, taking into account the reclassification of an extra €136 billion of loans as non-performing. The stock of bad loans in the euro-area banking system now stands at €879 billion, the report said.

Under the simulated recession set out in the assessment’s stress test, banks’ common equity Tier 1 capital would be depleted by €263 billion, or by 4 percentage points. The median CET1 ratio – a key measure of financial strength – would therefore fall to 8.3% from 12.4%. Nouy has said banks will be required to cover any capital shortfalls revealed by the assessment, “primarily from private sources.”

Striking to note that the ECB doesn’t rule out having to save more banks. Discomforting too. For taxpayers. But the main question mark remains the simulated recession: what were the assumptions under which is was conducted? Make them too rosy and you might as well not test or simulate anything. Unless of course window dressing is the only goal.

Bloomberg’s Mark Whitehouse writes about quite a different stress test, which quite different outcomes. Makes you think.

Testing Europe’s Stress Tests

What would a really tough stress test look like? Research by economists at Switzerland’s Center for Risk Management at Lausanne offers an indication. By simulating the way the market value of banks’ equity tends to behave in times of stress, they estimate how much capital banks would need to raise in a severe crisis. The answer, as of Oct. 17, for just 37 of the roughly 130 banks included in the ECB’s exercise: €487 billion ($616 billion). Deutsche Bank, three big French banks and ING Groep NV of the Netherlands are among those with the largest estimated shortfalls. Here’s a breakdown by bank:

And here’s a breakdown by country, as a percentage of gross domestic product:

The economists’ approach, based on a model developed at New York University, isn’t perfect. It could, for example, overestimate capital needs if the quality of banks’ management and assets has improved in ways that the market has yet to recognize.

And, because crises are rare, the modelers had scant historical data with which to build estimates of how banks might fare in future disasters. That said, this relatively simple model has some important advantages over the ECB’s much more labor-intensive stress tests. The Swiss group’s approach is free of the political considerations that constrain the ECB, which can’t be too harsh for fear of reigniting the European financial crisis. In addition, the model implicitly includes crucial contagion effects, such as forced asset sales and credit freezes, that the ECB’s exercise ignores.

A bit of back-testing suggests that the economists’ approach works relatively well. The NYU model’s projection for the largest U.S. banks’ stressed capital needs before the 2008 crisis, for example, comes pretty close to the roughly $400 billion that the banks actually had to raise. If the ECB’s number is a lot smaller than the figure the model comes up with, that won’t be a good sign.

The ECB’s Comprehensive Assessment says $203 billion was raised since 2013, leaving ‘only’ €25 billion yet to be gathered. The Swiss report says €487 billion is needed just for 37 of the 130 banks the ECB stress-tested. Of the banks the Swiss identify as having the greatest capital shortfalls, most passed the EU tests. Judging from the graph, the 7 banks in need of most capital have an aggregate shortfall of some €300 billion alone.

Among them the 3 main, and TBTF, French banks, who all passed with flying colors and got complimented for it by French central bank governor Christian Noyer today, but according to the Center for Risk Management are about €200 billion short between them. Which means France as a nation has a stressed capital shortfall of over 10% of its GDP, more than twice as much as the next patient.

Wouldn’t it better to let an independent bureau do these tests, instead of the ECB which obviously has huge political skin in the game? Or are we all too afraid of what might come out?

Will the markets actually feel more confident, or are they going to fake that too? Was this really a yearlong audit, or did it only take that long because the spin doctors needed to make sure the lipstick was applied correctly on the pig?

We all deserve better than a yearlong exercise in futile tepid air. But Europe’s taxpayers deserve it most of all.

Jul 112014
 July 11, 2014  Posted by at 2:21 pm Finance Tagged with: , , , ,  4 Responses »

Jack Delano Eastbound freight on Atchison, Topeka & Santa Fe near Ash Fork, AZ March 1943

I know, I know, you’re probably thinking: why all the attention for Portugal, and for Esperito Santo (Holy Spirit), its second biggest but still smallish bank – it’s just 0.3% of eurozone assets -, especially now that European markets have already shaken off yesterday’s scare and are happily bubbling away all over again as if nothing happened.

Well, I’m sorry, but we got to do this, and I think you’ll see why: it’s because there are a bunch of underlying issues that would otherwise go mainly undetected. That is, until they blow up the next victim. Let’s start with a Bloomberg piece from earlier today, about how only after yesterday’s blow-up, the bank revealed a number of missing pieces. I suggest you read this properly, don’t just look it over. First, we set the stage:

Espirito Santo Discloses €1.2 Billion Exposure to GES

Banco Espirito Santo SA, Portugal’s second-biggest bank by market value, said it has exposure of €1.18 billion ($1.6 billion) to companies of Grupo Espirito Santo and is waiting for the release of that group’s restructuring plan to assess any potential losses. “Banco Espirito Santo’s executive committee believes that the potential losses resulting from the exposure to Grupo Espirito Santo do not compromise the compliance with the regulatory capital requirements,” the Lisbon-based bank said in a regulatory filing. “Banco Espirito Santo is committed not to increase its total exposure to Espirito Santo Group.”

The bank said that it has a capital buffer of €2.1 billion above the regulatory minimum of 8% for the common equity Tier 1 ratio as of March 31, taking into account a capital increase completed in June. The figure for exposure includes loans, securities and other items as of June 30. The Portuguese lender provided the update after a parent company, Espirito Santo International, said it missed payments on commercial paper to “a few clients”. While the nation’s central bank sought to reassure markets that Banco Espirito is protected, the lack of transparency in the corporate structure has disturbed investors in Portugal and abroad.

Banco Espirito Santo’s stock dropped more than 17% yesterday before being suspended from trading by the securities regulator, and the bank’s bonds fell to record lows. The regulator last night said short selling of Banco Espirito Santo shares is banned during today.

Ok, stage set, here comes the corporate structure. Pay attention:

Espirito Santo Financial Group SA, which owns 25% of Banco Espirito Santo, yesterday said it decided to suspend its shares and listed bonds on the Luxembourg and Euronext exchanges due to “ongoing material difficulties” at Espirito Santo International SA, its biggest shareholder. Espirito Santo Financial said it’s assessing the financial impact of its exposure to Espirito Santo International. Espirito Santo Financial is 49% owned by Espirito Santo Irmaos SGPS SA, which in turn is fully owned by Rioforte Investments SA, which is fully owned by Espirito Santo International.

[Swiss ‘affiliate’] Banque Privee Espirito Santo SA, which is fully owned by Espirito Santo Financial, on July 8 said there was a delay in payments of some of the latest maturities of short-term debt securities issued by Espirito Santo International. The delays affect “only a few clients,” Banque Privee said.

If you got all that after just one read-through, you’re probably on pills of one kind or the other. Me, I have no such talent. This sort of thing always makes me think back of that famous Groucho quote:

Well, art is art, isn’t it? Still, on the other hand, water is water! And east is east and west is west and if you take cranberries and stew them like applesauce they taste much more like prunes than rhubarb does. Now you tell me what you know.

The ‘tidbits’ revealed by Banco Espirito Santo SA clarify some of what hides behind the veil, but it also adds to the confusion:

Banco Espirito Santo said in the statement released late yesterday that its retail clients hold €255 million of commercial paper issued by Espirito Santo International, €342 million of commercial paper issued by Rioforte, €44 million of commercial paper issued by Rioforte subsidiaries and €212 million of commercial paper and bonds issued by Espirito Santo Financial and its subsidiaries. Espirito Santo Financial Group has issued a €700 million guarantee to cover debt instruments issued by Espirito Santo Group companies and distributed to Banco Espirito Santo retail clients, the statement said.

I have no doubt that some if not all of this is considered mightily smart in the world of finance, and it pays an entire flock of lawyers and accountants hefty salaries, but I’m afraid I don’t share that admiration.

Moreover, there are other parties involved who either didn’t get it either or are hiding what they found and/or lying about it. Another Bloomberg contribution explains:

Espirito Santo Turmoil Shows ECB Systemic Risk Challenge

“This shows that even a bank in a peripheral country can have systemic reach,” said Jerome Forneris at Banque Martin Maurel in Marseille. “A solution must be found, but it must be found quickly.” Banco Espirito Santo SA [..] has assets equal to less than 0.3% of the euro-area’s total banking assets.

Its ability to roil markets shows the task confronting the European Central Bank as it works toward a banking union with the creation of a supervisory body for the bloc’s lenders. The ECB has been charged with overseeing the euro-area’s banks to prevent a repeat of the taxpayer-funded bailouts during the financial crisis. Lenders are currently being subjected to an unprecedented, yearlong review of their assets, the results of which will be released in October. Lenders from Italy’s Banca Monte dei Paschi to Banco Espirito Santo bolstered capital as the ECB reviewed their balance sheets.

European banks and insurers sold $55 billion of stock this year, already exceeding the $49.3 billion raised in all of 2013, data compiled by Bloomberg show. “The implication of what’s happening are huge,” Inigo Lecubarri, who helps manage the $800 million Abaco Financials Fund in London. “Investors are finding out new information just weeks after the regulators and the underwriters scrutinized the bank before its rights offer. This is a blow to confidence in regulators and supervisors and it puts the risk premium up.” The Portuguese central bank’s assurances that Banco Espirito Santo’s solvency is solid failed to ease investor concern.

The ECB regulators had already told Banco Espirito Santo to bolster its capital, so clearly they went through the books, but they still somehow failed to see the problems that emerged yesterday? And then a few weeks later the whole thing falls apart? Are these ECB guys, who undoubtedly also get paid well, so much less competent than the ones who set up the structure? If that were so, they should be classified as useless. Or is it more likely that they did see what was going on and decided not to reveal what they saw, hoping it would all blow over and go unnoticed?

In both options, ECB regulation enforcement falls short of its mandate by a mile and several halves. That raises serious questions about the health of all of Europe’s banking system, and especially southern Europe’s. If the ECB has in its infinite wisdom determined that it’s ‘better’ not to reveal the flaws it finds, or worse still, it simply doesn’t find them, confidence and trust will soon be going going gone out the window of one those high speed trains.

Using that same infinite wisdom, that same ECB has decided that hiding essential details about the problems it finds in Europe’s banks will now become official policy. Bloomberg reports on a draft document:

ECB Plans to Limit Stress-Test Inputs in Bank Checks

The European Central Bank plans to limit the amount of data it carries over from its asset review into a subsequent stress test as it tries to manage the burden from an unprecedented health check of euro-area lenders. Instead of entering all loan values obtained in the Asset Quality Review that ends this month into its stress test, officials will apply a “materiality threshold” to ensure only significant results are incorporated, according to a draft ECB document seen by Bloomberg News. Regulators have yet to sign off on the methodology, including a definition for that term. ECB officials have vaunted the credibility of the stress test that it is conducting with the European Banking Authority compared with previous exercises, citing the use of scrubbed data from 160,000 credit files to enhance its reliability.

The document, scheduled for publication on July 17, shows the degree of pragmatism the ECB is applying as it tries to square a desire for methodological rigor with a schedule to start supervising around 120 banks in November. “The ECB plans to publish the manual for the join-up of the AQR and the stress test in August, and it will include the definition of the materiality threshold,” the ECB said in a statement. The stress test pits bank balance sheets against a range of negative, hypothetical economic events to gauge their robustness, and are designed to help the ECB take over supervision with a clear picture of the banking system’s health.

[..] By late October, the ECB will release results that show a detailed picture of bank capital levels and provisioning, as well as a level of harmonized data on non-performing loans that has never before been available.

I can’t help but admire the choice of words in phrases like “the degree of pragmatism the ECB is applying”, “materiality threshold”, “scrubbed data” and “harmonized data”. Those phrases sound good and healthy, and completely paper over the impression that the ECB is either absolutely overwhelmed (“it tries to square a desire for methodological rigor with a schedule to start supervising“), or it’s working with the banks to keep daylight out of their vaults.

And I must admit I’m confused by “Regulators have yet to sign off on the methodology, including a definition for that term.” What does that even mean?

What I think is happening is that the ECB grossly underestimates the role and importance of confidence in financial markets. The central bank’s idea seems to have become that confidence is something it can control at will, a notion that was built and reaffirmed by Mario Draghi’s “whatever it takes” bazooka speech. I also think that playing these kinds of games will always, and necessarily, end in failure. Investors have taken notice of the recently announced German plan to use Cyprus style bail-ins for failing financial institutions, and its aversion to QE style measures. They’ve seen Esperito Santo and it labyrinthian structure. These things hurt confidence, and having Draghi flash yet another bazooka out of his hip pocket may not be enough to restore it, certainly if and when another “small” issue like Esperito Santo occurs.

It’s not just the ECB either. Regulators globally are tasked more with hiding problems than they are with solving them, it comes with the notion of systemic (aka too big to fail) banks. No matter how bad the situation certain banks find themselves in, if they can’t fail, what’s a regulator to do but lie about its findings? Systemic banks must of necessity lead to systemic lies about systemic risks.

The IMF does it too (no surprise), as Simon Black notes:

IMF Pronounces Bulgaria’s Banks Safe Just Two Weeks Before Bank Run

Earlier this summer, IMF bureaucrats went to Sofia, Bulgaria to study the country’s economic progress. And roughly a month ago, they released an official report which stated, among other things, that Bulgarian banks are “stable and liquid.” Talk about epic timing. Because less than two weeks later, Bulgaria’s banking system was in the throes of a full-blown crisis. There was a run on two of the nation’s largest banks – several hundred million dollars had been withdrawn in a matter of hours. And the Bulgarian central bank had to step in and take over both of them or risk a collapse in the entire system.[..]

In the case of Bulgaria, the EU Commission soothingly announced that “the Bulgarian banking system is well-capitalized and has high levels of liquidity compared to its peers in other member states.” Whoa whoa wait a minute. Are these geniuses really saying that the country experiencing a bank run due to its LACK of liquidity is MORE liquid than the rest of Europe?? Yes, that is exactly what they’re saying. So it begs the question – if Bulgarian banks with their “high levels of liquidity” can suffer such shocks, what can happen to other European banks which are worse off?

When a central bank labels a commercial and/or investment bank too big to fail aka systemic, it doesn’t actually bolster confidence – other than perhaps temporarily -, it destroys confidence. Inside any systemic bank, everyone knows it’s labeled that, there may be gigantic hidden losses. By treating even those banks that are not systemic the same way, which is what the ECB is -stealthily – announcing it plans to do, more confidence will be lost. As long as problems are not properly dealt with, they’re only getting bigger. It’s just a matter of time until investors demand to be compensated for the actual risk they are taking, not the illusional one Draghi and Yellen are attempting to portray. That compensation will come in the shape of higher interest rates. But no – formerly – rich economy today can afford those.

Eh, could you say that one more time, please?

“Espirito Santo Financial Group SA, which owns 25% of Banco Espirito Santo, yesterday said it decided to suspend its shares and listed bonds due to “ongoing material difficulties” at Espirito Santo International SA, its biggest shareholder.” “Espirito Santo Financial is 49% owned by Espirito Santo Irmaos SGPS SA, which in turn is fully owned by Rioforte Investments SA, which is fully owned by Espirito Santo International. Banque Privee Espirito Santo SA, which is fully owned by Espirito Santo Financial … ”

Espirito Santo Discloses €1.2 Billion Exposure to Parent Company (Bloomberg)

Banco Espirito Santo SA, Portugal’s second-biggest bank by market value, said it has exposure of €1.18 billion ($1.6 billion) to companies of Grupo Espirito Santo and is waiting for the release of that group’s restructuring plan to assess any potential losses. “Banco Espirito Santo’s executive committee believes that the potential losses resulting from the exposure to Grupo Espirito Santo do not compromise the compliance with the regulatory capital requirements,” the Lisbon-based bank said in a regulatory filing. “Banco Espirito Santo is committed not to increase its total exposure to Espirito Santo Group.”

The bank said that it has a capital buffer of €2.1 billion above the regulatory minimum of 8% for the common equity Tier 1 ratio as of March 31, taking into account a capital increase completed in June. The figure for exposure includes loans, securities and other items as of June 30. The Portuguese lender provided the update after a parent company, Espirito Santo International, said it missed payments on commercial paper to “a few clients”. While the nation’s central bank sought to reassure markets that Banco Espirito is protected, the lack of transparency in the corporate structure has disturbed investors in Portugal and abroad. European stocks and Portuguese bonds tumbled yesterday, while U.S. Treasuries and gold rallied.

Banco Espirito Santo’s stock dropped more than 17% yesterday before being suspended from trading by the securities regulator, and the bank’s bonds fell to record lows. The regulator last night said short selling of Banco Espirito Santo shares is banned during today.

Espirito Santo Financial Group SA, which owns 25% of Banco Espirito Santo, yesterday said it decided to suspend its shares and listed bonds on the Luxembourg and Euronext exchanges due to “ongoing material difficulties” at Espirito Santo International SA, its biggest shareholder. Espirito Santo Financial said it’s assessing the financial impact of its exposure to Espirito Santo International. Espirito Santo Financial is 49% owned by Espirito Santo Irmaos SGPS SA, which in turn is fully owned by Rioforte Investments SA, which is fully owned by Espirito Santo International.

Banque Privee Espirito Santo SA, which is fully owned by Espirito Santo Financial, on July 8 said there was a delay in payments of some of the latest maturities of short-term debt securities issued by Espirito Santo International. The delays affect “only a few clients,” Banque Privee said.

Banco Espirito Santo said in the statement released late yesterday that its retail clients hold €255 million of commercial paper issued by Espirito Santo International, €342 million of commercial paper issued by Rioforte, €44 million of commercial paper issued by Rioforte subsidiaries and €212 million of commercial paper and bonds issued by Espirito Santo Financial and its subsidiaries. Espirito Santo Financial Group has issued a €700 million guarantee to cover debt instruments issued by Espirito Santo Group companies and distributed to Banco Espirito Santo retail clients, the statement said.

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“Investors are finding out new information just weeks after the regulators and the underwriters scrutinized the bank before its rights offer.”

Espirito Santo Turmoil Shows ECB Systemic Risk Challenge (Bloomberg)

The Espirito Santo saga is giving believers in the end of the euro-area crisis cause for pause. Although a return to the panic days of the crisis may be unlikely, the case, involving the inability of a parent company of a bank in Portugal to make some short-term debt payments, has sent government bonds of Europe’s most-indebted nations and the stocks of lenders tumbling, showing how fragile investor confidence in the region’s banking recovery is. “This shows that even a bank in a peripheral country can have systemic reach,” said Jerome Forneris, who helps manage $9 billion at Banque Martin Maurel in Marseille. “A solution must be found, but it must be found quickly.” Banco Espirito Santo SA, the bank at the heart of the turmoil, is Portugal’s second-largest lender by market value and has assets equal to less than 0.3% of the euro-area’s total banking assets.

Its ability to roil markets shows the task confronting the European Central Bank as it works toward a banking union with the creation of a supervisory body for the bloc’s lenders. The ECB has been charged with overseeing the euro-area’s banks to prevent a repeat of the taxpayer-funded bailouts during the financial crisis. Lenders are currently being subjected to an unprecedented, yearlong review of their assets, the results of which will be released in October. Lenders from Italy’s Banca Monte dei Paschi di Siena SpA to Banco Espirito Santo bolstered capital as the ECB reviewed their balance sheets.

European banks and insurers sold $55 billion of stock this year, already exceeding the $49.3 billion raised in all of 2013, data compiled by Bloomberg show. “The implication of what’s happening are huge,” Inigo Lecubarri, who helps manage the $800 million Abaco Financials Fund in London. “Investors are finding out new information just weeks after the regulators and the underwriters scrutinized the bank before its rights offer. This is a blow to confidence in regulators and supervisors and it puts the risk premium up.” The Portuguese central bank’s assurances that Banco Espirito Santo’s solvency is solid failed to ease investor concern. Its shares were suspended yesterday after tumbling 17% as its bonds dropped to record lows. Portuguese government debt fell along with securities from other European nations, while banks dragged stock indexes in the region down more than 1%.

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Hang On, Portugal, Europe’s Crisis Isn’t Over (Bloomberg)

Europe has come a long way since the darkest days of 2012, when the common currency at the center of its union seemed on the verge of falling apart. But it hasn’t come far enough. This week’s turmoil surrounding a Portuguese bank shows how fragile the euro area’s financial system still is. At issue is the condition of Espirito Santo International SA, the ultimate parent of Portugal’s second-largest lender by market value, Banco Espirito Santo SA. The parent missed some debt payments amid concerns about its accounting. A frenzy of speculation sent the bank’s shares plummeting until trading was halted today. Espirito Santo is small by global standards, about a 20th the size of Germany’s Deutsche Bank by assets. Even so, Portugal can’t easily afford to support the bank, should support be needed. Its government has to run a big budget surplus to get its debts below European Union-directed limits. That has already put fiscal policy under an enormous strain.

Recognizing Portugal’s vulnerability, investors have pushed the yield on its government bonds up sharply, further worsening its finances. It’s akin to the vicious circle that drove several euro-area nations close to financial collapse in 2012. Europe’s recent reforms were supposed to have severed the link between the finances of banks and sovereigns. In a new banking union, euro-area nations said they would assume joint responsibility for oversight and recapitalization. Unfortunately, as Portugal’s latest travails demonstrate, their efforts have fallen short. The risk-sharing that’s needed isn’t yet in place. By failing to provide deposit insurance throughout the euro area, and by creating an underfunded and overly complex mechanism for rescuing banks, Europe has told investors, in effect, that struggling governments are still largely on their own.

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Here’s What’s Happening In Portugal (CNBC)

After several months of rumbling, Portuguese conglomerate Espírito Santo International this week delayed payments to some of the holders of its short-term debt securities. Its Swiss banking arm Banque Privee Espirito Santo is at the center of the concerns after it failed to pay some of its clients earlier this week. The Portuguese media reported the company blamed the issue on an IT mistake, while at the same time making sure that the investors with this exposure were being protected. However by, Wednesday, investors holding the commercial paper issued by Espírito Santo International were being asked to swap their debt securities for shares. And by Thursday, the country’s Economico news publication reported that it was seeking judicial protection against its creditors.This comes against the backdrop of reorganization at the conglomerate with investors waiting eagerly for details of a restructuring plan.

A general meeting is touted for July 29. Back in May, an audit by the country’s central bank showed there were “irregularities” in the accounts of Espírito Santo International with doubts surrounding its financial condition. All this sparked concerns over another part of the conglomerate – and Portugal’s leading bank – Banco Espirito Santo, with investors speculating that it could be ready to default on its debt. Shares in Banco Espirito Santo were down 19 percent before being suspended by market regulators and Espirito Santo Financial Group dropped 8% before also being suspended. These concerns rolled over into the wider European equity markets, triggering a sell-off across the rest of Europe. In the debt markets, Banco Espirito Santo bonds continue to underperform, with the knock-on effect on Portuguese government bonds, with the yield on its 10-year sovereign debt moving higher throughout Thursday.

Still shuddering at the memory of the euro zone financial crisis, investors sent the yields for other euro zone “peripheral” countries – Greece, Italy and Spain – higher during the morning session. Claus Vistesen, the chief euro zone economist at Pantheon Macroeconomics believes that credit market stress quickly feeds into the sovereign bond markets. Thus, this reinforces the idea that banks and governments are too closely knit in the region, in what many have called a “doom loop” which could place more additional stress in the case of any potential crisis. Portugal’s banking problems could further hit debt markets and make it costlier for its government to borrow. This would make it harder for its economy to recover from the sovereign debt crisis of 2011. However, Jim Iuorio, managing director at TJM Institutional Services, told CNBC that the current problems may be hitting so-called peripheral Europe but wouldn’t be a full-blown fear for the greater region until core countries like France were being affected. “One thing we can almost all agree on is that there probably is some sort of bubble in European peripherals and it could have a destabilizing effect,” he said.

The euro zone’s periphery had enjoyed a significant bounce-back over the past few months with the yields on some Spanish and Portuguese bonds beating those of even the U.S. Are Portuguese and Greek bonds mispriced?” asked Iuorio, “Of course they are, and it’s just a function of every central bank throwing tons of money into this system.” He added that the situation was “worth watching” with the real trigger point in asset markets being when French government bonds begin to sell off. Analysts Gildas Surry and Geoffroy de Pellegars at French bank BNP Paribas said there was potentially three outcomes for Banco Espirito Santo. These were either an orderly resolution at the bank, a going concern or even a forced liquidation. Any resolution, they said, could involve the intervention of cash-rich investors – such as sovereign wealth funds from Angola or Venezuela – which would solve the funding crisis for the parent company, Espírito Santo International .

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Portugal Banking Turmoil Revives Darkest Nightmares About Europe (MarketWatch)

Just what Europe needed: another banking crisis. Thursday’s turmoil in Portuguese financial conglomerate Espirito Santo International has sent stock markets tumbling, driven bond yields skyward and re-awoken niggling fears about the robustness of Europe’s banking system. Sound familiar? Well, there are striking similarities to daily headlines from the crisis two years ago, when European Central Bank President Mario Draghi was forced to calm panicky bond markets with his famous “do whatever it takes” speech. And as Peter Garnry, head of equity strategy at Saxo Bank, put it in a note on Thursday: “The event has hit European financials like a torpedo and has revived investors’ darkest nightmares about Europe.” If your definition of that nightmare is a selloff, his description is pretty much spot-on. Portuguese government bonds are tanking, sending the benchmark 10-year yield to levels not seen since before the June ECB meeting, when the central bank launched an aggressive package of liquidity measures.

The 10-year borrowing costs for government paper were up 21 basis points on Thursday, to 3.97%, according to electronic trading platform Tradeweb. That’s on top of the 13 basis-point rise on Wednesday. At the same time, the PSI 20, Portugal’s benchmark stock index, slumped 4.2% to 6,105.24, its biggest drop since July last year and the lowest closing level since October. Why? All due to troubles at Portuguese multi-industry conglomerate Espírito Santo, the general consensus says. Earlier this week, ESI missed a payment on some short-term debt. This triggered massive nervousness over the health of Portugal’s financial sector and sent shares of its subsidiaries Espirito Santo Financial Group and Banco Espirito Santo deep into the red. Trading in both subsidiaries was suspended on Thursday , when their losses amounted to 9% and 17%, respectively.

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ECB Plans to Limit Stress-Test Inputs in Bank Checks (Bloomberg)

The European Central Bank plans to limit the amount of data it carries over from its asset review into a subsequent stress test as it tries to manage the burden from an unprecedented health check of euro-area lenders. Instead of entering all loan values obtained in the Asset Quality Review that ends this month into its stress test, officials will apply a “materiality threshold” to ensure only significant results are incorporated, according to a draft ECB document seen by Bloomberg News. Regulators have yet to sign off on the methodology, including a definition for that term. ECB officials have vaunted the credibility of the stress test that it is conducting with the European Banking Authority compared with previous exercises, citing the use of scrubbed data from 160,000 credit files to enhance its reliability.

The document, scheduled for publication on July 17, shows the degree of pragmatism the ECB is applying as it tries to square a desire for methodological rigor with a schedule to start supervising around 120 banks in November. “The ECB plans to publish the manual for the join-up of the AQR and the stress test in August, and it will include the definition of the materiality threshold,” the ECB said in a statement provided by a spokeswoman. The stress test pits bank balance sheets against a range of negative, hypothetical economic events to gauge their robustness, and are designed to help the ECB take over supervision with a clear picture of the banking system’s health.

The ECB’s supervisory board is due to meet next week to sign off on the methodology for joining up the AQR and the stress test, the two parts of its so-called Comprehensive Assessment. Banks, which have submitted templates on how they assume the negative scenarios will affect balance sheets, will be required to adjust their numbers after a review by the ECB. “The quality assurance process of the bottom-up stress-test results of the banks has started and will continue until early September,” the document shows. “Thereafter, the AQR findings and the stress-test results will be joined up, and only then meaningful results of the comprehensive assessment can be determined.” Lenders across the euro area’s 18 countries are taking part in the exercise, which started last November. By late October, the ECB will release results that show a detailed picture of bank capital levels and provisioning, as well as a level of harmonized data on non-performing loans that has never before been available.

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Fun and tragedy in one.

Some Recent Euphoric Comments About Portugal (Zero Hedge)









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Strange comparison, but not entirely untrue.

Does Asia Face Portugal-Style Debt Risks? (CNBC)

Rising corporate debt levels in Asia could make investors nervous after missed debt payments by one of Portugal’s conglomerates spurred renewed fears over debt defaults. “It’s not so much the [debt] level of individual companies that raises concern,” Wilfried Verstraete, CEO of Euler Hermes, the trade-finance insurance arm of Allianz, said in an interview. “What might be more of a concern is the balance sheets of banks themselves.” If regional banks restrict lending because of excessive bad loans or because of monetary tightening, as is currently the case in China, it can tighten the noose on some companies, he said. “Never forget that the definition of a bankruptcy is when you don’t have the liquidity to pay your debts,” he said. “If the banks suddenly no longer provide the necessary liquidity, you’re in trouble.”

The inability of Portuguese conglomerate Espirito Santo International to make some of its short-term debt payments has fueled concerns one of its units, Portugal’s leading bank, Banco Espirito Santo, might default on its debt. The region’s banks and governments are considered too closely knit, so that had a knock-on effect on Portuguese government bonds, and with memories of the European credit crisis still fresh, spurred fears of “doom loop” around the continent. Within Asia, corporate borrowing picked up in recent years. Data from the Bank for International Settlements show international corporate bond issuance from 2010 to the first half of 2013 was up over 133% by China companies, while India and Korea saw around 39% and 21% increases respectively, with the rest of Asia seeing a more than 54% increase.

While many analysts believe contagion from Portugal is unlikely, Asia’s companies may face knock-on effects from a credit issue closer to home: China’s Qingdao port is investigating whether cargos of metal were used and re-used as collateral to obtain financing from different banks and trading houses, possibly leaving banks and firms around the region holding the bag. In these types of cases, the main risk isn’t the payment default by the company abusing collateral, it’s the domino effect on subcontractors and suppliers, which will also not be paid, Verstraete said.

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IMF Pronounces Bulgaria’s Banks Safe Just Two Weeks Before Bank Run (Black)

Earlier this summer, IMF bureaucrats went to Sofia, Bulgaria to study the country’s economic progress. And roughly a month ago, they released an official report which stated, among other things, that Bulgarian banks are “stable and liquid.” Talk about epic timing. Because less than two weeks later, Bulgaria’s banking system was in the throes of a full-blown crisis. There was a run on two of the nation’s largest banks – several hundred million dollars had been withdrawn in a matter of hours. And the Bulgarian central bank had to step in and take over both of them or risk a collapse in the entire system. This is the modern miracle of fractional reserve banking. When you make a deposit, your bank only holds a tiny percentage of that cash.

The rest of it gets loaned out or invested in securities that pay a much higher rate of return than the pitiful amount you receive in interest. Needless to say, the less money banks hold in reserve, the more money they’re able to invest… and the more profit they make. This puts their incentives and our incentives at odds. Because as depositors, it’s better for us if the bank holds most (if not all) of our funds. In typical form, though, governments stepped in to settle this dispute. And a century ago, they sided with the banks. Because of this, it’s perfectly legal for banks to hold a tiny percentage of customer deposits. So now, anytime there’s the slightest spook (as happened in Bulgaria), it creates a panic. Naturally that’s when politicians step in to calm nerves.

In the case of Bulgaria, the EU Commission soothingly announced that “the Bulgarian banking system is well-capitalized and has high levels of liquidity compared to its peers in other member states.” Whoa whoa wait a minute. Are these geniuses really saying that the country experiencing a bank run due to its LACK of liquidity is MORE liquid than the rest of Europe?? Yes, that is exactly what they’re saying. So it begs the question – if Bulgarian banks with their “high levels of liquidity” can suffer such shocks, what can happen to other European banks which are worse off? I think the lesson here is clear: The people in charge of regulating the system and making these proclamations about bank safety are totally CLUELESS. Of course they’re going to say that the banks are safe. Of course they’re going to compliment the system’s liquidity and solvency.

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Or the end of Japan as we know it.

The End of ‘Made in Japan’? (Bloomberg)

Historical comparisons can admittedly be facile. But given the bleak turn Japanese economic data has taken, I can’t help but be reminded of the downturn in 1997, the last time Tokyo raised sales taxes. A huge drop in machinery orders – the biggest on record – is yet another reminder Japanese executives remain reluctant to invest their massive cash reserves or raise wages. Even more ominously, M2 money supply growth is now in negative territory. Such measures should be surging 14 months after the Bank of Japan unleashed history’s biggest monetary bonanza. Instead the tepid 3% rise in M2 last month put Japan’s money supply in the red in real terms, a clear sign BOJ Governor Haruhiko Kuroda’s bond-buying spree has lost potency. “The reality is this: so far, the spending retrenchment in April-May tracks fairly closely the retrenchment seen in 1997,” says Richard Katz, publisher of the New York-based Oriental Economist Report.

Economists are clamoring for another jolt of monetary audacity after Prime Minister Shinzo Abe’s ill-advised sales tax increase in April. Clearly, the sugar high from the BOJ’s April 2013 move to double bond purchases has worn off. Yet the BOJ is expected to keep policy unchanged at its July 14-15 meeting. “The BOJ’s inaction risks turning the quantitative-easing program from a qualified success into a failure,” says Adam Slater, senior economist at Oxford Economics in London. “Now, the danger is increasing that this will instead be a tardy response to a significant deterioration in economic conditions.” All along, the hope was that Kuroda’s yen-printing spree would get corporate Japan to deploy its $2.3 trillion cash stockpile in ways that would quicken growth and spur inflation. The 19.5% plunge in machinery orders in May from April underscores the degree to which that’s not happening.

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Boom! Bang!

China Stimulus Magnifies Housing Risk (CNBC)

Chinese authorities’ use of targeted stimulus measures deepened risks in the housing market, according to Societe Generale. Analysts have grown increasingly concerned about the impact of declining house prices on China’s economy, especially as property represents 30% of the overall economy. “Such a selective policy approach is hardly good news to the housing sector,” said Societe Generale in a note published on Thursday, referring to the government’s mini stimulus moves. “There is no room for complacency when it comes to housing sector risk,” they added. So far stimulus has targeted weaker areas of the economy – a stark contrast to the far-reaching policies of 2008-2009, which critics argue contributed to excessive credit growth.

However, because recent measures were smaller and more selective, they stabilized credit growth rather than boosting it and the housing market is suffering as a result, SocGen said. “The housing sector downturn, as suggested by very recent price data, is deepening further and very likely to be protracted, in the absence of another credit boom,” the analysts said. Earlier this week, an independent survey by private data provider Soufun showed house prices in 100 major Chinese cities fell 0.5% on month in June, the second consecutive month of declines.

The survey also showed that new apartments offered deeper discounts, as developers are eager to boost sales in order to liquidate inventories – a worrying sign for future housing construction and investment. SocGen acknowledged that the stimulus moves boosted growth prospects, however, especially infrastructure spending. It now sees the economy growing 7.5% in the second quarter, up from its previous forecast of 7.1%, and in line with the government’s annual target. But the bank warned that higher infrastructure spending is not entirely positive as it detracts cash from the housing market, exacerbating risks there. “This lift in short-term growth does not mean lower risk going forward. Surging infrastructure investment growth with steady total credit growth means that the funding for other sectors, especially housing, continues to dwindle,” they added.

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Beijing still thinks it’s in control.

China’s Structured Product Offerings Drop on Shadow Bank Curbs (Bloomberg)

Chinese structured product offerings dropped by the most in six months in June after the government put in place measures to curb the shadow-banking industry, restricting issuers’ ability to sell the investments. The number of securities fell 14% to 197, compared with average growth of 8.4% in the first five months, according to Cnbenefit, a consulting firm that focuses on wealth management. The company collected the data from publicly available information and also through agreements with some banks. Premier Li Keqiang has sought to stem expansion of trust companies, wealth management products and other forms of shadow banking, which Barclays Plc estimates was worth 38.8 trillion yuan ($6.3 trillion) as of the end of last year.

The central bank introduced steps in May that included ordering lenders to curb interbank borrowing. The banking regulatory tightened regulation of new trust products in April. “The Chinese central bank’s move to curb interbank borrowing may dry up liquidity and affect funding for wealth management products,” said Francis Chan, who follows the financial sector in Asia for Bloomberg Industries. “Together with a clampdown on trust-related wealth management products, that may have caused sales of structured products to fall.” The data from Cnbenefit, based in the southwest Chinese city of Chengdu, include structured notes offered through the qualified domestic individual investor program, which allows Chinese investors to buy certain overseas securities.

They also cover structured deposits and other wealth-management products that combine a fixed-income security with derivatives, Cnbenefit said. The People’s Bank of China’s measures in May closed off routes for banks to offer wealth products with attractive yields, according to Xiaoning Meng, a portfolio manager at CSOP Asset Management Ltd. “For banks to offer higher yields than deposit rates on the products, they have to go through non-loan channels,” Hong Kong-based Meng said. “The central-bank move sealed off a lot of these channels and now, banks won’t have a method to support the higher yields of the structured products.”

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This is how the Chinese buy up the US.

China State Banks Offer ‘Money Laundering’ Services (SCMP)

A day after Bank of China (BOC) was accused by the state broadcaster of breaking foreign exchange rules by helping people take money out of the country, it has emerged a second state bank has also been offering the service. Industry sources told the South China Morning Post yesterday that China Citic Bank – controlled by the Citic Group, which in turn is directly controlled by the State Council, China’s cabinet – also facilitated the movement of currency overseas, including Hong Knog. “It is definitely not an illegal business,” said one source. “Both BOC and Citic Bank have been able to do this business only after they got approval from the Guangzhou branch of the People’s Bank of China. So the PBOC definitely knows what the business is about,” said the source, who declined to be named as he was not authorised to speak to the media.

“If there is any problem, it should not be a problem about whether this business is legal or illegal but more about how exactly the business is done, especially about internal risk controls and customer background checks at those banks.” Another source said Hong Kong regulators were unlikely to get involved because the issue did not violate local laws against money laundering. “The case is not about money laundering but more about whether the mainland banks have got the authorisation to transfer money out of the country,” the source said. A Hong Kong Monetary Authority spokeswoman said: “The mainland authorities and banks should be responsible for verifying whether the transactions undertaken are in compliance with the relevant rules and requirements on the mainland.”

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Before it costs someone an election?

US Student Loan Forgiveness May Be Coming (CNBC)

For many members of the class of 2014 who borrowed money to attend college, the clock is ticking on what is likely to be their biggest expense after graduation. They’ll have to start paying back their federal student loans in November or December—as the six-month grace period that lenders give new grads comes to an end. But depending on their income—or lack of income, if they’re still looking for work—some borrowers may be eligible for much lower payments than they’d anticipated. And eventually they could have their federal loans forgiven altogether. “If total student debt exceeds one’s annual income, then you will likely qualify for some sort of payment plan and receive a financial benefit from participation” in an income-driven repayment plan, said Mark Kantrowitz, senior vice president and publisher of, a website that provides information, advice and tools for helping families plan and pay for college.

The Consumer Financial Protection Bureau estimates that 1 out of 4 American workers may be eligible for public service loan-forgiveness programs, but many graduates still are not aware of their options. The “Pay As You Earn” plan introduced by Obama caps a federal student loan borrower’s payments at 10% of their income, and the balance will be forgiven after 20 years of on-time payments. Borrowers who opt for careers in the nonprofit or public sector could have loans forgiven in 10 years. However, this payment plan is only available to borrowers whose loans were disbursed on or after Oct. 1, 2007. Borrowers with older loans may be eligible for an income-based repayment plan, which caps monthly payments at 15% of your income. Payments change as your income changes, but may be forgiven after 25 years. Or they may qualify for income-contingent repayment plans, where payments are calculated each year based on your adjusted gross income, family size and the total amount of your federal loans.

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Selloff Masks Real Concern For Stocks (CNBC)

Stocks sold off on concerns about the global economy, but the real worry for the market is the second-quarter earnings season. The selloff was sparked by worries about insolvency at a Portugese bank and global growth concerns after a stream of negative data. This comes after the Federal Reserve announced an end date of October for its bond buying program, formalizing what markets had expected The Dow opened sharply lower, with an 180 point or 1% decline, but recovered more than half its losses to close down 70 at 16,915. That was the biggest reversal for the Dow since June, 2013. The S&P 500 was off 8 at 1964, and the Nasdaq finished 22 lower at 4396. The Russell 2000 was the worst performer, down 1% to 1161. “I don’t think people are too enthused to commit new money up here. I also don’t think they want to sell,” said Jones Trading chief market strategist Michael O’Rourke.

“We’ve gone up 10% since mid-April and today was the biggest pullback we had in the last couple of months and we can’t even stay down 1%. There definitely was some dip buying. It’s not like we hit any point where there was panic selling.” O’Rourke said trading volume was about normal. “Usually, on a big down day, volume is 20% higher than the average,” he said. Overnight, weaker-than-expected Chinese exports and a stunning 19.5% drop in May Japanese machine orders stoked concerns that growth is not picking up as expected. Surprising declines in industrial production in France and Italy added to the unease, and French inflation fell to its lowest level since the recession. Investors flocked to the safety of gold, U.S. Treasurys and German bunds, while tossing stocks and peripheral European debt, including Portugese, Italian, Spanish and Greek bonds.

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“Not all Germans believe in God, but they all believe in the Bundesbank.” -Jacques Delors

History Lesson: Why Merkel Loves Her Central Bank (MarketWatch)

In his definitive Financial Times series on the euro currency crisis, Peter Spiegel tells the story of a tearful German Chancellor Angela Merkel rejecting a U.S.-French proposal to use central bank reserves to backstop the beleaguered common currency. The drama took place in November 2011 on the sidelines of the Group of 20 summit hosted by then-French President Nicholas Sarkozy. According to Spiegel — unknown to the Germans — Sarkozy and Barack Obama had hatched a plan in which the Germans and other European Union members would apportion some of their reserves for a contingency fund to be used if the euro came under speculative attack. Spiegel writes that at a late-night gathering of the German, French and American leaders at the Cannes summit Merkel broke into tears, saying she would not “commit political suicide” by agreeing to an action vigorously opposed by the Bundesbank, the independent German central bank.

Regaining composure, Merkel reminded her interlocutors that it was the Western powers themselves — France and America — who mandated Bundesbank independence, writing it into the constitution they approved for war-ravaged Germany in 1949. Merkel has her history correct. As Stalin’s iron curtain descended across Europe, the Americans responded to the imposition of Communist regimes in the East with Marshall Plan economic assistance to forestall similar takeovers in the West. In 1948 America and Britain countered Stalin’s blockade of the German capital with the Berlin airlift and merged their occupation zones into what became the German Federal Republic. A common currency — the deutsche mark — was established with a central bank to manage it placed in Frankfurt, the headquarters of the American military and the Marshall Plan.

The man most responsible for the decentralized structure of an independent Bundesbank was Joe Dodge, a respected Detroit banker who served as financial advisor to American military governor Gen. Lucius Clay. Dodge insisted that the new German central bank be modeled on the Federal Reserve with powers dispersed to regional central banks. The Americans were equally opposed to the universal banking model in which Germany’s biggest financial institutions had dominated industry. Dodge collaborated with like-minded Germans such as Ludwig Erhard, who became economics minister and later chancellor, and former Reichsbank deputy Wilhelm Vocke, who had vehemently opposed Hitler’s suspension of central bank autonomy in the 1930s. In 1947 Vocke became the head the Bank of the German States, the precursor of the Bundesbank. West Germany’s 1949 constitution specifically declared that the central bank was not subject to instructions from political authorities.

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Lacy Hunt is no fool.

Far From Wall Street, An Inflation Dove Flies (The Tell)

Lacy Hunt’s outpost in Austin, Texas, is half a continent away from the soaring investment bank headquarters in Manhattan. His outlook on the U.S. economy reflects a similar distance from many of those firms. Hunt, an economist at Hoisington Investment Management, has long maintained a view that inflation is poised to fall on weak economic growth. As Wall Street firms raise their inflation forecasts along with upgrades to their outlooks, Hunt believes as strongly as ever in his contrarian mantra. There’s a lot hinging on the outcome: The Wasatch-Hoisington US Treasury fund rode that lowflation bet to returns of over 15% so far this year by buying long-term Treasury bonds, whose yields surprised most analysts by falling. MarketWatch mentioned Hunt as one of the few who wasn’t fooled by the bond market so far this year.

But if inflation and economic growth pick up, long-term bonds yields could rise, sending prices on those bonds lower. As yields rose sharply in 2013, the fund lost nearly 17%, though the fund still has trailing total returns of over 10% during the past three years, according to Morningstar. The latest reading of the consumer price index data showed a 2.1% rise in the cost of goods over the past year ending in May, the highest inflation reading since late 2012. That’s been welcome news to inflation hawks. But Hunt says such a phenomenon is temporary, and inflation is likely to fall under the weight of slow growth and a lack of real household earnings. “When you have episodic inflation and wages are not accelerating because GDP is too weak, you get a deceleration in real wage income,” Hunt said, referring to a drop in inflation-adjusted earnings.

In other words, if the costs of goods are rising for consumers, but the earnings that consumers use to buy those goods aren’t, they won’t be able to afford the higher costs, which which will eventually have to fall. In the meantime, rising costs are merely a headache for most people — not a sign of rebound. “The episodic price increases actually serve as a tax on the broad middle-income earners in the economy,” Hunt said. Wage growth won’t accelerate because economic growth remains weak, he asserts. Over the long haul, he posits that the economy will remain constrained by, among other things, a large U.S. debt load.

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Poor Man’s Polar Vortex To Make Shock Return To Eastern US Next Week (WaPo)

Call it the ghost of the polar vortex, the polar vortex sequel, or the polar vortex’s revenge. Meteorological purists may tell you it’s not a polar vortex at all. However you choose to refer to the looming weather pattern, unseasonably chilly air is headed for parts of the northern and northeastern U.S at the height of summer early next week. Bearing a haunting resemblance to January’s brutally cold weather pattern, a deep pool of cool air from the Gulf of Alaska will plunge into the Great Lakes early next week and then ooze towards the East Coast. Of course, this is July, not January, so temperatures forecast to be roughly 10 to as much as 30 degrees below average won’t have quite the same effect. But make no mistake, in parts of the Great Lakes and Upper Midwest getting dealt the chilliest air, hoodies and jeans will be required. Highs in this region could well get stuck in the 50s and 60s – especially where there is considerable cloud cover.

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Or Scottish?

Falling North Sea Oil Revenue ‘To Hit UK Government Finances’ (BBC)

Dwindling revenue from North Sea oil will increase the pressure on government finances over the coming decades, according to the Office for Budget Responsibility (OBR). The OBR has cut its estimate of tax income from the North Sea between 2020 and 2041 by a quarter, to £40bn. The fall is down to lower production forecasts over the next few years. But its assessment was dismissed as “stuff and nonsense” by Scottish First Minister Alex Salmond. The Scottish government has argued that the OBR figures are based on a “very low estimate of future total production”, which resulted in them being more pessimistic than other estimates, including those produced by industry body Oil and Gas UK.

The OBR was created by George Osborne in 2010 in one of his first acts as chancellor to provide independent economic forecasts and analysis of the UK’s public finances. Its latest fiscal sustainability report predicted that UK government debt will peak in 2015-16, a year earlier than expected, at 78.7% of GDP. This is 6.9% lower than previously forecast. The latest figures also showed total debt at £1.273bn, or 76.1% of GDP. This is the equivalent of £48,200 per household. The OBR warned that governments will have to raise taxes or implement further spending cuts in the coming decades, mainly because, as life expectancy grows, the cost of health, social care and the state pension will increase. Lower revenue from taxes on North Sea oil producers will exacerbate the problem, along with falling income from road taxes as cars become more efficient, it added.

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