“Whatever it takes” is still popular. But there are limits. They’re cutting off FX trade and injecting liquidity. But what if they’re called on this? It’s only Monday… As I write this the lira has lost another 6.6% so far for the day.
Turkey’s central bank on Monday announced it was ready to take “all necessary measures” to ensure financial stability after the collapse of the lira, promising to provide banks with liquidity. “The central bank will closely monitor the market depth and price formations, and take all necessary measures to maintain financial stability, if deemed necessary,” the bank said in a statement, vowing to provide “all the liquidity the banks need”. The statement came after the Turkish lira hit record lows against the dollar amid a widening diplomatic spat with the United States. The detention of US pastor Andrew Brunson since October 2016 on terrorism charges has sparked the most severe crisis in ties between the two NATO allies in years.
The central bank announced the series of measures on Monday, a day after Erdogan’s son-in-law Berat Albayrak, who is treasury and finance minister, announced an action plan was in the pipeline. “In the framework of intraday and overnight standing facilities, the Central Bank will provide all the liquidity the banks need,” the bank said. The bank also revised reserve requirement ratios for banks, in a move also aimed at staving off any liquidity issues. It said with the latest revision, approximately 10 billion lira, $6 billion, and $3 billion equivalent of gold liquidity will be provided to the financial system. The nominally independent central bank has defied pressure to hike interest rates which economists said would curb the fall of the lira.
Turkey has pledged it will take action to calm markets after the lira plunged to a new record low in Asian trading. The details would be unveiled shortly, the country’s finance minister told Turkish newspaper Hurriyet. “From Monday morning onwards our institutions will take the necessary steps and will share the announcements with the market,” Berat Albayrak said. The lira lost 20% of its value versus the dollar on Friday. It had already fallen more than 40% in the past year. The latest blow came on Friday, when US President Donald Trump said he had approved the doubling of tariffs on Turkish steel and aluminium. Concerns about contagion prompted investors to sell riskier assets on Monday including emerging market currencies and stocks in Asia.
Mr Albayrak said the country would “act in a speedy manner” and its plan included help for the banks and small and medium-sized businesses most affected by the dramatic volatility in the lira. His assurance came after Turkey’s president blamed the lira’s plunge on a plot against the country. “What is the reason for all this storm in a tea cup? There is no economic reason… This is called carrying out an operation against Turkey,” he said. Recep Tayyip Erdogan once again urged Turks to sell dollars and buy liras to help boost the currency. “I am specifically addressing our manufacturers: Do not rush to the banks to buy dollars… You should know that to keep this nation standing is… also the manufacturers’ duty,” he said.
The Turkish lira fell almost 9% in early trading on Monday and the euro hit a one-year low as investors feared that the country’s financial crisis could spread to European markets. Despite defiant words by the Turkish president Erdogan over the weekend pledging as yet unspecified action to reverse the slide, the currency slipped alarmingly against the US dollar on Monday. In early trading it reached an all-time low of 7.24 before bouncing back after the country’s banking regulator announced late on Sunday night that it would limit the ability of Turkish banks to swap the battered lira for foreign currency. Asian stock markets were also down on Monday. The Nikkei in Japan lost 1.7%, Hong Kong was off 1.8%, Shanghai -1.7%, Sydney -0.5% and the Taiwanese bourse fell 3%.
The FTSE100 was expected to open down 0.4% later on Monday morning while Germany’s Dax 30 was set for a 0.65% fall. The euro dropped 0.3% to a one-year low against the US dollar on Monday as the falling lira fuelled demand for safe havens, including the greenback, Swiss franc and yen. The Vix volatility index measuring turbulence in financial markets – also known as the fear index – jumped 16% on Monday. There was also concern that other emerging market currencies – already under pressure from the rising US dollar – could be dragged into the lira’s downward spiral. The South African rand hit a low level not seen since mid-2016, the Russian rouble slumped again and the Indian rupee slid to an all-time trough. The lira has tumbled more than 40% this year on worries about Erdogan’s increasing control over the economy and deteriorating relations with the United States ..
Today’s financial turbulence can be traced back to Fed decisions in June 2017 to begin the “normalisation” of its balance sheet, gradually shedding its bond holdings in monthly stages. This monthly “runoff” of $10bn of maturing assets on to capital markets causes bond prices to fall, and yields to rise. On some estimates the Fed’s bond portfolio is expected to shrink by $315bn in 2018 and $437bn in 2019. This process of “normalisation” is no simple and stable matter. In the words of market analyst Kristina Hooper, it’s like “defusing a bomb”. To add to the strains caused by the “runoff” of assets, in June 2018, the Fed raised rates for the seventh time in three years and Libor followed suit.
These rising rates of interest have led to the strengthening of the dollar and capital flight from emerging markets. But above all, interest rate rises pose a threat to the heavily indebted global economy. In 2000, the stock of global private and public debt amounted to $142 trillion – 260% of global GDP or income. Today, 10 years after, the credit bubble at the heart of the GFC has nearly doubled to $247 trillion, or 318% of global GDP. Much of that debt is a result of the Federal Reserve’s largesse. Thanks to capital mobility, quantitative easing enabled companies, like many based in Turkey, to borrow in dollars on the international capital markets at low rates of interest.
Now, as Turkey’s currency and those of other emerging markets fall, the cost of servicing debt denominated in dollars rises dramatically, threatening default. But while it is necessary to point to the Fed’s actions to understand tremors in world markets, and to warn of the threat of another financial crisis, the fact is that central bankers should never have alone been held responsible for the restoration of macroeconomic stability.
[..] After the 1929 financial crisis, Keynes in 1931 and Roosevelt in 1933 got a grip, and as Erich Rauchway explains in his book The Money Makers, jointly began the process of ending the gold standard, and radically restructuring the global financial system to restore not just macroeconomic stability but, after 1945, a “golden age” in economics. Today, we are once again threatened by global financial turmoil. This may be the time to ditch economic orthodoxy, and revive the radical and revolutionary monetary theory and policies of John Maynard Keynes. Or do we have to endure another global crisis before economists come to their senses?
President Trump is giving special counsel Robert Mueller until September 1st for a sit-down interview under limited conditions, as an interview beyond that window “could interfere with the midterm elections,” reports the Wall Street Journal, citing Trump attorney Rudy Giuliani. Trump’s attorneys sent Mueller’s team a proposal indicating that the president would be willing to take questions on collusion with Russia in the 2016 elections, but not obstruction of justice alleged to have occurred after he took office – as Giuliani has previously said it could become a perjury trap. “We certainly won’t do [an interview] after Sept. 1, because we’re not going to be the ones to interfere with the election,” Mr. Giuliani told the Journal.
“Let him [Mr. Mueller] get all the bad publicity and the attacks for that.” “I think we made the offer we can live with,” said Giuliani. “Based on a prior meeting with Mr. Mueller, Mr. Giuliani said he had believed prosecutors wanted to wrap up the inquiry by September. “Now they’re not really rushing us,” he said. Mr. Mueller has made some moves that suggest the inquiry itself could stretch beyond the midterm elections and certainly past the September timeline Mr. Giuliani laid out.” -WSJ Last week the special counsel subpoenaed Roger Credico, comedian and radio host that former Trump adviser Roger Stone claims was a back channel to Wikileaks. Credico has denied this – instead calling himself a “confirming source” due to his contacts with WikiLeaks attorneys. He is set to testify in front of Mueller’s grand jury on September 7.
If he has to testify under oath, US President Donald Trump will deny he ever asked former FBI director James Comey to treat former national security adviser Michael Flynn leniently, his lawyer said on Sunday. “There was no conversation about Michael Flynn,” Rudy Giuliani said on CNN’s State of the Union program regarding the February 14, 2017, meeting in the Oval Office. The private chat figures prominently in Special Counsel Robert Mueller’s probe into possible obstruction of justice in the Russia election interference case.
Comey testified in Congress last year that Trump tried to persuade him to go easy on Flynn the day after the president sacked his national security adviser for lying about his contact with the Russian ambassador. “I hope you can see your way to letting Flynn go. He’s a good guy. I hope you can let this go,” Comey quoted Trump as saying. Trump sacked Comey in May 2017, later admitting on TV that the FBI’s Russia investigation was on his mind when he made the decision.
[..] whereas Fox News, Forbes, National Review, The Weekly Standard, American Spectator, Wall Street Journal, Investors Business Daily, Breitbart News, InfoWars, Reuters, and AP, are propagandists for the Republican Party; NPR, CNN, NBC, CBS, ABC, Mother Jones, The Atlantic, The New Republic, New Yorker, New York Magazine, New York Times, Washington Post, USA Today, Huffington Post, The Daily Beast, and Salon, are propagandists for the Democratic Party; but, they all draw their chief sponsors from the same small list of donors who are America’s billionaires, since these few people control the top advertisers, investors, and charities, and thus control nearly all of the nation’s propaganda. The same people who control the Government control the public; but, America isn’t a one-Party dictatorship. America is, instead, a multi-Party dictatorship. And this is how it functions.
Trump cancelled the Iran deal because a different group of billionaires are now in control of the White House, and of the rest of the US Government. Trump’s group demonize especially Iran; Obama’s group demonize especially Russia. That’s it, short. That’s America’s aristocratic tug-of-war; but both sides of it are for invasion, and for war. Thus, we’re in the condition of ‘permanent war for permanent peace’ — to satisfy the military contractors and the billionaires who control them. Any US President who would resist that, would invite assassination; but, perhaps in Trump’s case, impeachment, or other removal-from-office, would be likelier. In any case, the sponsors need to be satisfied — or else — and Trump knows this.
Trump is doing what he thinks he has to be doing, for his own safety. He’s just a figurehead for a different faction of the US aristocracy, than Obama was. He’s doing what he thinks he needs to be doing, for his survival. Political leadership is an extremely dangerous business. Trump is playing a slightly different game of it than Obama did, because he represents a different faction than Obama did. These two factions of the US aristocracy are also now battling each other for political control over Europe.
China’s solar stress could burn more dealmakers. The industry faces a glut of raw materials and panels after the Chinese government slashed support for the heavily indebted sector. The first victim of the switch is industry giant GCL-Poly Energy, which scrapped plans to flog assets to state-backed Shanghai Electric. It won’t be the last. The loss of official support has cast a shadow over the business. After Beijing in June limited the number of new projects and cut tariffs it pays to solar generators, analysts lowered their forecasts for new installations of solar capacity this year by as much as a third. That signals dark days ahead, as new projects drive growth for both power plant operators and manufacturers.
The industry’s dependence on hefty leverage – a legacy of hasty expansion and delayed subsidy payouts – makes its position more precarious. Some solar companies, such as Panda Green Energy, were already struggling with net borrowing of more than 10 times EBITDA. The squeeze is especially hard on manufacturers of solar materials and equipment, which must splash cash on research to stay competitive. Meanwhile, overcapacity has depressed prices: Chinese solar modules now trade at a 15% discount to the global average, according to Macquarie. Distress should spur consolidation. The Solactive China Solar Index has fallen nearly 20% since the policy shift. As valuations sink, less indebted players like LONGi Green Energy Technology can go bargain-hunting.
In an economy that has contracted by 26%, a fifth of the working population – two-fifths of young people – have been left unemployed, while about 500,000 people have fled, mostly to EU member states in Europe’s wealthier north. And the hardship isn’t over. The leftist-led government has signed up to a staggering array of ambitious targets. Post–bailout Greece has committed to produce primary surpluses of 3.5 % of GDP until 2022, a feat achieved by only a handful of countries since the 1970s, and 2.2 % until 2060. For Kevin Featherstone, who heads the Hellenic Observatory at the London School of Economics, such obligations amount to perpetual purgatory.
“No other government in Europe would choose to follow this path,” he said. “Greece has been saved in the sense of avoiding the armageddon of euro exit but how it has been saved is so disadvantageous that one can’t talk of a rescue or exit from crisis.” Although Tsipras is at pains to play down outside supervision, Greece will still be subject to a regime of enhanced surveillance initially. Further pension cuts are in store. In May he had unveiled a 106-page post-bailout growth plan. But no amount of preparation can conceal the country’s acute vulnerability to turbulence beyond its borders. Only days before the programme’s end, global market jitters saw yields on Greek bonds soared.
It is accepted that Greece has enough resources to meet funding needs for the next two years, but the IMF is far from persuaded that Athens will be able to sustain market access “over the longer run without further debt relief”. If so, the fund is likely to clamour ever more loudly that the landmark deal, reached in June, easing Greek debt repayments (extending maturities on some loans and improving interest rates on others) just does not go far enough. The crisis has lasted so long that many Greeks can no longer recall their country being “normal” or their pockets full. The middle class has been hardest hit with taxes as high as 70% of income earned. Controversial property levies have added to the toll. “In reality this exit will be a formality because in truth it isn’t going to change a thing,” said Stratos Paradias, who leads the Hellenic Property Federation.
[..] conditions in the Latin American country’s embassy in Knightsbridge are now very different to those that Assange experienced during the six years beginning 19 June 2012, when he arrived seeking political asylum. Ecuador’s government at the time, and its president Rafael Correa, openly accepted his request, believing Assange’s life to be in danger and admiring his fight to defend freedom of information and expression. At that time the Consul of Ecuador in the UK was Fidel Narváez, who was tasked with accompanying Assange from the day he first set foot in the embassy. Narváez had contacted Julian and Wikileaks in April 2011 to request that the organisation publish all the cables relating to Ecuador.
At that moment an amicable relationship was born, one which has continued to grow throughout the years. Fidel is no longer Consul. He was relieved of his duties for issuing a letter of safe-conduct for Edward Snowden without consulting his government. It was, he states, a completely personal decision, and one for which he feels absolutely no regret. “If I found myself in the same situation now, I would do the same thing again. It was the correct decision, the just decision. I knew who Snowden was, what he had done, why he was being pursued, and I knew how important it was to protect him. I do not regret it. I am proud of what I did.”
Everyone who’s asking “why did the stock market crash Monday?” is asking the wrong question. The real poser is “why did it take so long for this crash to happen?” The crash itself was significant—Donald Trump’s favorite index, the Dow Jones Industrial (DJIA) fell 4.6% in one day. This is about four times the standard range of the index—and so according to conventional economics, it should almost never happen. Of course, mainstream economists are wildly wrong about this, as they have been about almost everything else for some time now. In fact, a four% fall in the market is unusual, but far from rare: there are well over 100 days in the last century that the Dow Jones tumbled by this much. Crashes this big tend to happen when the market is massively overvalued, and on that front this crash is no different.
It’s like a long-overdue earthquake. Though everyone from Donald Trump down (or should that be “up”?) had regarded Monday’s level and the previous day’s tranquillity as normal, these were in fact the truly unprecedented events. In particular, the ratio of stock prices to corporate earnings is almost higher than it has ever been. There is only one time that it’s been higher: during the DotCom Bubble, when Robert Shiller’s “cyclically adjusted price to earnings” ratio hit the all-time record of 44 to one. That means that the average price of a share on the S&P500 was 44 times the average earnings per share over the previous 10 years (Shiller uses this long time-lag to minimize the effect of Ponzi Scheme firms like Enron).
The S&P500 fell more than 11% that day, so Monday’s fall is minor by comparison. And the market remains seriously overvalued: even if shares fell by 50% from today’s level, they’d still be twice as expensive as they have been, on average, for the last 140 years. After the 2000 crash, standard market dynamics led to stocks falling by 50% over the following two years, until the rise of the Subprime Bubble pushed them up about 25% (from 22 times earnings to 28 times). Then the Subprime Bubble burst in 2007, and shares fell another 50%, from 28 times earnings to 14 times. This was when central banks thought The End of the World Is Nigh, and that they’d be blamed for it. But in fact, when the market bottomed in early 2009, it was only just below the pre-1990 average of 14.5 times earnings.
Asian shares reversed their earlier gains on Wednesday as investors dumped U.S. stock futures for safer harbors, a sign market participants remain jittery after this week’s global markets rout. While most analysts believed this week’s distressed selling looks to have run its course for the moment, allowing volatility to abate a little, the prospect of monetary tightening across the globe remains a challenge for the long term. “If we look at some of the drivers of the recent volatility – the natural correction and the bond sell-off – we don’t foresee any of these factors contributing to a lengthy period of extreme volatility,” said Tom Kenny, senior economist at ANZ. “The correction is probably a healthy development and is not reflective of a souring of the macroeconomic outlook.”
Investors took their cues from a late rebound on Wall Street overnight, though many had an anxious eye on E-Mini futures for the S&P 500 which slipped about 1% in late Asian trading. Dow Minis were down 0.9%. MSCI’s broadest index of Asia-Pacific shares outside Japan was a tad softer, having risen as much as 2% in early trade. Japan’s Nikkei eased too but was still up 0.2%. Chinese blue chips and South Korea’s KOSPI index dropped more than 2%. “The only surprise about the current volatility is that it hasn’t happened sooner. Normally, even in a bull market, investors should expect a sell-off of 10-percent-plus at some point,” said Richard Titherington, chief investment officer of EM Asia Pacific Equities. “While a major market downturn is possible, it is not our current expectation. The underlying backdrop of an improving global economy, a weakening U.S. dollar and a pickup in global earnings all remain supportive factors.”
Two days after a sudden spike in volatility sparked a stock-market crash, market participants are left to ponder the wreckage of the sell-off and the mysterious dynamics that caused it. One theory that’s emerging: the curious case of the tail wagging the dog. Two exchange-traded products that democratized access to one of Wall Street’s most tried-and-true strategies – selling volatility – had just $3.6 billion in assets on Monday. That’s a tiny fraction of the roughly $2 trillion estimated to be linked to short-volatility strategies – and a speck of dust compared to the $23 trillion in market value of S&P 500 companies. Yet the popularity of these vehicles might have contributed to one of the most violent moves in U.S. equities in history: one that saw the Dow Jones Industrial Average slump more than 6% in a span of six minutes.
After the dust settled, the combined assets in the two exchange-traded products shrank to $135 million. One of them – the VelocityShares Daily Inverse VIX Short-Term ETN, known as XIV – will soon be extinct. No one knows for sure what played out on the afternoon of Feb. 5 on Wall Street, cautioned Societe Generale SA managing director Ramon Verastegui, but there’s reason to believe the sharpness of the retreat in equities was linked to traders’ understanding of how the exchange-traded products would behave. As funds’ assets swelled, so too had their power to move the underlying VIX futures markets, he suggests. And market participants knew it. Products such as XIV and its close relation, the ProShares Short VIX Short-Term Futures ETF (SVXY), aim to offer investors exposure to the inverse of the daily moves at the front portion of the VIX futures curve, and typically benefit from market tranquility.
Demand from leveraged VIX exchanged-traded products was “the major driver for the move post the cash close,” Barclays analysts led by Maneesh Deshpande said. There are other clues in the case — notably that the big fall in stocks hasn’t yet significantly affected other asset classes. That the volatility spike was concentrated in equities supports the notion of a VIX product-propelled plunge, according to George Pearkes, macro strategist at Bespoke Investment Group. During other eruptions of volatility — the aftermath of China’s shock devaluation of the yuan in August 2015, for instance – volatility in stocks, bonds, currencies and even oil jumped. “This is the exact opposite of a number of different volatility spikes we’ve seen in recent years,” he said in an interview on Bloomberg TV. “Frankly, it’s a reason to think that some of the worst of the recent moves in the VIX and the delta moves in cash equities have been driven specifically by equity-vol products that have not spread out to other asset classes.”
It was the hot trade on Wall Street, a seemingly sure thing that lulled everyone from hedge fund managers to small-time investors. Now newfangled investments linked to volatility in the stock market – until a few years ago, obscure niche products – have exploded in spectacular fashion. The shock waves have only just begun. How these investments proliferated is a classic story of Wall Street salesmanship and old-fashioned greed. In a few short years, financial engineering transformed expectations about the ups and downs of the stock market into an asset class that could be marketed and sold – as tradable as stocks but, it turns out, sometimes far riskier. Call it the volatility-financial complex. All told, financial players have created more than $8 billion of products tied to one index alone.
In a low-interest-rate world, investors desperate for returns snapped them up, and bankers collected fees along the way. But, as with mortgage investments a decade ago, complacency – in this case, over a history-defying period of market calm – masked potential dangers. No one is saying the wild swings of late presage a broad collapse like the one that hit in 2008. But the fallout nonetheless provides a glimpse into the myriad products, and growing complexity, driving global markets a decade after the last debacle. The risks, in hindsight, were clear enough even before the Dow Jones industrial average plummeted nearly 1,600 points on Monday, snapped back, and then took a wild bungee jump of nearly 1,200 points Tuesday. The CEO of Barclays, which pioneered notes linked to U.S. market volatility, warned only last month that investors might be losing their heads.
“If this thing turns, hold on to your hat,” Jes Staley told a panel at the World Economic Forum in Davos. Now, hats have been blown off by a whirlwind the likes of which Wall Street has never seen. To some, the volatility complex feels like a monster that’s been lurking in the shadows. Even one of the inventors of the VIX, Devesh Shah, is perplexed why these products exist in the first place. “Everybody knew that this was a huge problem,” said Shah, who was in his 20s when he helped create what’s become the market’s fear barometer. “Everybody knows that Inverse VIX is going to go to zero at some point, and all these inverse and leveraged products, not just in the VIX but elsewhere too, at the end of the day cost people a lot of money.”
Last year now-former FOMC Chair Janet Yellen downplayed the possibility of another financial crisis. In her hubris she believes the central banks have walled off the financial system from ‘contagion risks’ brought on by over-investment in synthetic derivative market products. Like generals, however, central planners are always fighting the last war. We’re experiencing a major correction in the equity markets brought on in a mean-reversion exercise thanks to central banks trying to shore up their defenses around the last battle they lost, namely off-exchange, unregulated CDOs — synthetic debt-based investment products. Humans are clever and will always find a way around a problem. The problem is incentives. he banks created CDO’s because there was a demand for investment returns far above what the central banks were allowing the market to pay, by setting interest rates well below the real risk profile of the investment community.
In other words, government bonds were over-priced and investors went looking for better returns. Now that Yellen et.al. have stamped out most of that market investors still need yield. And that’s where the equity markets and the VIX come in. The response to the 2008 financial crisis was zero-bound interest rates and trillions in liquidity created by the central banks sitting around looking for yield. It found its way into the equity markets which over the past six plus years been on an historic rally off the October 2011 low. During that time the VIX became more important. What was once only discussed by the real pros was now in the hands of everyone. Contagion risks jumped asset classes. For the uninitiated the VIX — or volatilty index — is a bet about the behavior of the S&P 500, itself an index of stocks. Higher VIX values equal higher implied future volatility in the S&P 500 and vice versa.
In mathematical terms the S&P 500 is the first derivative of any single stock. Stocks in the index trade in sympathy with it regardless of their current business. The VIX is then the 2nd derivative of any stock in your portfolio. During a rally the VIX falls. But, now with so many products out there, ETNs — Exchange Traded Notes — both leveraged and un-leveraged — to speculate in the VIX it became easier and more profitable to trade it than the S&P 500 or individual stocks. Trading volumes in these products have soared. The tail didn’t just wag the dog, it became the dog. Now these ETN’s are another derivative of the equity markets. And if they are leveraged, i.e. the note trades with twice or three times the volatility of the VIX itself (volatility of volatility), then options on these ETNs is the fourth derivative of the underlying stock. Volatilty of volatility of volatility.
Billionaire Carl Icahn told CNBC on Tuesday there are too many exotic, leveraged products for investors to trade, and one day these securities are going to blow up the market. The market is a “casino on steroids” with all these exchange-traded funds and exchange-traded notes, he said. These funds, especially the leveraged ones, are the “fault lines” that will eventually lead to an earthquake on Wall Street, he said. “These are just the beginnings of a rumbling.” The latest example is an obscure security, designed to be a bet on a calm market, that’s being blamed for causing an influx of selling in recent days. The VelocityShares Daily Inverse VIX Short-Term exchange-traded note (XIV) blew up overnight as investors were forced to sell when the market went haywire. As a result, Credit Suisse on Tuesday said as of Feb. 20, it will end trading for its XIV, which was supposed to give the opposite return of the Cboe Volatility Index (VIX), often referred to as the market’s fear gauge.
“The market itself is way over-leveraged,” Icahn said on “Fast Money Halftime Report,” predicting that “one day this thing is just going to implode.” He described the possible implosion as “maybe eventually worse than 1929,” making reference to the stock market crash that contributed to the Great Depression. “The market has become a much more dangerous place,” he said, adding the current volatility is a precursor of potential trouble. “It’s telling you something, giving you a warning.” Investors are piling into index funds thinking they’ll never go down, Icahn said. “Passive investing is the bubble right now, and that’s a great danger.” But as much as he was sounding alarm bells, Icahn said, “I don’t think this is the explosive time.” The market will “probably bounce back,” he continued. “I don’t think this is the beginning of the end.”
This is one for the record books. During Janet Yellen’s last week in office, the Dow dropped by 1,095 points or 4.1%. But by her lights, apparently, that wasn’t even a warning bell – just the market clearing its collective throat. So on the way out the door our Keynesian school marm could not resist delivering what will soon be seen as a grand self-indictment. There’s nothing to worry about, she averred, because Wall Street’s OK and main street is positively awesome: “I don’t want to label what we’re seeing as a bubble….(even if) asset valuations are generally elevated….(but) when I see the unemployment rate fall to 4.1%…I feel very good about the progress we’ve seen there.” No, there is a monumental bubble out there that was born, bred and nurtured at the hands of the Fed.
At the same time, Yellen and her merry band of money printers had virtually nothing to do with the 4.1% unemployment rate – even if that were a valid measure of return to full employment prosperity, which it is not. To the contrary, the mainstreet economy is sick as a dog, and it is the Fed’s giant Wall Street bubbles which made it so. That said, hereupon follows the ringing economic and financial indictment that Janet Yellen so richly deserves. In the first place, that Fed’s dangerous digression into massive QE and 100 months of near-ZIRP had virtually nothing to do with the limpid “recovery” that has transpired since the June 2009 bottom. And we do mean its contribution amounted to nothing – as in zero, zip and zilch.
[..] In general, our thesis is that central bank stimulus of household spending is equivalent to a one trick pony. Once all the latent headroom on household balance sheets and income statements to raise leverage levels is used up, cheap debt loses its efficacy in the main street economy. In fact, that is exactly what has happened. During the first 20-years of the Greenspan-incepted era of Bubble Finance, household leverage ratios exploded. Whereas wage and salary incomes rose by $4.2 trillion or 2.9X, household liabilities soared by nearly $12 trillion or 5.2X. Over the two decades, therefore, household leverage ratios (liabilities to earned income) nearly doubled from 124% to 224%.
Janet Yellen deserves exactly none of the adulation being conferred upon her tenure by the mainstream financial press. In fact, her reign will be judged by history as a spectacular failure that left main street high and dry—even as it finally and completely addicted Wall Street to the toxic monetary heroin that is the specialty of Keynesian central bankers. Accordingly, it may take a dozen or more episodes like the 12% crash of the last few days to finally purge the “buy the dips” addiction that is rampant in the casinos. Pending that day of deliverance, however, the soon-to-be shaking and shivering cold turkeys of Wall Street will surely come to see that Opioid Janet was not their friend at all, but their very worst nightmare.
[..] much of the mischief, madness and reckless speculation now implanted in the global financial markets happened during the Yellen-enabled global QE phase of 2014-2018. During that period, for example, corporate debt issuance set all-time records. But as we documented in Part 1, the proceeds went into financial engineering and bidding up the price of existing shares to ludicrous heights, not new growth capital. Likewise, carry trade speculation by front-runners went to mindless extremes, such as the fact that the Italian 10-year note traded under 1.0% during points in 2016. The facts that Italy’s public debt stood at 133% of GDP, that its political system was completely broken and dysfunctional and that its economy was 10% smaller than it had been earlier in this century were irrelevant to the price of its debt.
The latter was being set by front-running speculators who were buying on massive repo leverage what the idiot central banker, Mario Draghi, promised them he would be buying, too. Indeed, as Yellen dithered, deferred, ducked and delayed the urgent imperative of monetary normalization at the Fed, the other lesser central banks were given leave to expand their collective balance sheets at a stupendous $2.2 trillion annual rate during much of 2016-2017. With two massive central bank vaults swinging their doors wide open, it’s no wonder that upwards of $15 trillion of sovereign debt traded with a negative yield during the peak of the madness.
And that wasn’t the half of it. By killing the yield on sovereigns, Yellen and her convoy of Keynesian central bankers forced money managers into what will soon be evident as crazy-ass risk taking in order to scrape-up a semblance of yield. Not only did European junk bonds trade inside the UST 10-year yield at one point, but the corporate bond market was literally primed for an explosion of issuance by fund managers desperate for returns. The proceeds, of course, went almost entirely into funding giant, pointless M&A deals, stock buybacks and other forms of debt-financed recapitalization.
here are two European Unions, it seems. There is the EU that stands up for the citizen, for his or her rights; the EU that can face down the behemoths of global capitalism and rein in their avarice and callousness; the EU that has legally enshrined workers’ freedoms, and which exists as a bulwark against untrammelled neoliberalism. And then there is the real EU. That heroic EU is a castle in the anti-Brexit sky, built by those who identify themselves as left-wing. It is maintained by those Labour MPs and peers who, as they did on the eve of Labour’s autumn conference, ceaselessly urge Labour leader Jeremy Corybn ‘to commit to staying in the Single Market and Customs Union… and to work with sister parties and others across Europe to improve workers’ rights’.
It is fortified by the self-appointed keepers of the left-wing flame, those among the commentariat who never tire of telling us that ‘workers’ rights… would be imperilled’ by a so-called ‘Hard Brexit’. And it is peopled by all those who cling to this image of the EU as an essentially social-democratic institution, sticking it gently to the man, defying the Daily Mail, and protecting working men and women against the inhuman workings of capital. Then there’s the other EU, the one that actually exists. This is the EU that uses the pooled-without-consent sovereignty of its member states to pursue its own institutional self-preservation, impoverishing struggling Eurozone members, from Spain to Italy, in the name of economic stability; imposing leaders-cum-administrators on recalcitrant electorates in the interests of austerity; and brazenly betraying workers’ rights at every self-interested turn.
This EU – the actual EU, the one stubbornly committed to its own, not citizens’, interests – is not on the side of the worker. And it never was. Because this EU, when the economic imperative demands, is always against the worker. But those attached to their fantasy left-wing ideal of the EU refuse to see the reality. To face up to this reality would simply be too much. It would mock their left-wing pretensions, humiliate and expose them for what they are: a craven defence of the status quo – a status quo in which they have long prospered. This is presumably why so little attention has been given to what happened in Greece last month, when the real EU was there for all to see. The EU forced the Syriza-led government of Alex Tsipras to implement new anti-union legislation, rendering strike action illegal unless over 50% of union members have formally approved it. The effect of such a measure, as the British trade-union movement discovered in the 1980s, will be to strangle workers’ freedoms in bureaucracy, and emasculate organised labour.
A hard-fought deal on pay and working hours for industrial employees in southwestern Germany sets a benchmark for millions of workers across Europe’s largest economy and heralds wage growth in the coming years. The agreement between labour union IG Metall and the Suedwestmetall employers’ federation, struck overnight, foresees a 4.3% pay raise from April and other payments spread over 27 months. Tough pay negotiations are expected to end years of wage restraint in Germany, potentially aiding the ECB as it tries to get euro zone inflation back up to the bank’s target rate of just below 2%. On an annual basis, the agreement is equivalent to a 3.5% increase in wages, according to Commerzbank analyst Eckart Tuchtfeld, well below IG Metall’s initial demand for a 6% hike over 12 months, but was still seen as a good deal.
“The agreed pay rises, and accompanying measures, are at the top end of expectations and should result in annual wage increases of close to 4% over the next couple of years,” Pictet economist Frederik Ducrozet said. The “pilot” deal, struck against a backdrop of a strong economic recovery and the lowest unemployment since German unification in 1990, covers half a million employees in southwestern Germany, home to industrial powerhouses like car maker Daimler. It is expected to be applied in the rest of Germany as well and is likely to influence negotiations in other industries.
Germany’s second-biggest union, Verdi, is due to publish its wage demand for public sector workers on Thursday. Verdi and IG Metall together account for about 15% of the German workforce. IG Metall’s deal will reinforce market expectations for the ECB to dial back stimulus further this year as growth in the bloc is now self generating and wages are moving slowly upwards. It comes as world stock and bond markets are selling off on fears that a jobs bonanza in the United States may force early interest rate hikes there. But the euro zone outlook is much different with the jobless rate still at almost 9% and the broader slack, which includes part-time and temporary workers, perhaps twice as high, economists say.
Farmers say they can’t get people to harvest their crops. Question: have you tried raising their wages enough? Something tells us if you pay them well, they will be glad to come work. Something also tells us you haven’t done that. You may say: that makes my products uncompetitive, but that’s another discussion altogether.
Also: the article says “Enough broccoli to feed 15,000 people for a year was wasted..” on that farm. And: the farmer’s loss was “between £30,000 and £50,000.” Does that mean he can feed people for £2 a year? £3? It certainly reads that way.
British farmers have been forced to leave thousands of pounds worth of vegetables to rot in their fields, because of a drop in the number of farm workers from the EU. James Orr, whose farm outside St Andrews produces potatoes, carrots, parsnips, broccoli, cauliflower, said his farm suffered a 15% drop in the number of workers between August and November. “We simply could not harvest everything, and as a result we left produce in the field to rot,” he told Scotland’s Sunday Herald newspaper. Enough broccoli to feed 15,000 people for a year was wasted, he added. Mr Orr’s farm supplies more than 1,000 tones of the vegetable and he estimated he lost between £30,000 and £50,000.
The UK farming industry is heavily dependent on pickers from the EU, particularly those from eastern Europe. Britain’s low unemployment rate and the the seasonal nature of the work makes it difficult to attract domestic workers. But the fall in the value of sterling against the Euro since the Brexit vote, means the UK has become less attractive to seasonal workers from Romania and Bulgaria. Farmers also fear that a Brexit deal restricting freedom of movement could leave them with even fewer people to help harvest their crops. [..] NFU Scotland President Andrew Mr McCornick told the Herald access to workers was a key priority for the industry. “This year, there has been a shortage of between 10 and 20% of seasonal workers coming from the EU,” he said. It was essential a scheme was introduced in 2018 that would provide work permits for up to 20,000 workers from outside the EU, he added.
Migrant and refugee arrivals onto Greek shores have doubled since August 20 to reach as many as 180 people a day in clement weather, Migration Policy Minister Yiannis Mouzalas said on Tuesday. The increase in arrivals from Turkey has resulted “in a bad situation again” on the islands of the eastern Aegean that host migrant reception and processing centers, Mouzalas admitted, saying that the ministry is trying to improve conditions at overcrowded and under-resourced facilities. Speaking on Thema radio, Mouzalas accused the European Union of contributing to the problem by failing to honor its commitments to Turkey in a deal for that country to take back asylum seekers whose applications are rejected and to crack down on migrant trafficking from its shores.
Mouzalas was also critical of what he described as contradictory reactions from local authorities and communities on the affected islands. “On the one hand, they prevent moves to improve conditions and on the other they are hysterical about dissolving the deal with Turkey at any cost so as to transfer the migrants to the mainland,” Mouzalas said, referring to reactions toward ministry plans for increasing the number of housing units at certain island camps. “Whoever says that emptying the islands will improve the situation is wrong,” Mouzalas said, reiterating concerns that moving all migrants and refugees to the mainland will simply encourage more arrivals. “In 2017, we transferred 27,000 people to the mainland and 19,000 arrived on the islands,” he added.
Frustrated Democrats hoping to elevate their election fortunes have a resounding message for party leaders: Stop talking so much about Russia. Democratic leaders have been beating the drum this year over the ongoing probes into the Trump administration’s potential ties to Moscow, taking every opportunity to highlight the saga and forcing floor votes designed to uncover any business dealings the president might have with Russian figures. But rank-and-file Democrats say the Russia-Trump narrative is simply a non-issue with district voters, who are much more worried about bread-and-butter economic concerns like jobs, wages and the cost of education and healthcare.
In the wake of a string of special-election defeats, an increasing number of Democrats are calling for an adjustment in party messaging, one that swings the focus from Russia to the economy. The outcome of the 2018 elections, they say, hinges on how well the Democrats manage that shift. “We can’t just talk about Russia because people back in Ohio aren’t really talking that much about Russia, about Putin, about Michael Flynn,” Rep. Tim Ryan (D-Ohio) told MSNBC Thursday. “They’re trying to figure out how they’re going to make the mortgage payment, how they’re going to pay for their kids to go to college, what their energy bill looks like. “And if we don’t talk more about their interest than we do about how we’re so angry with Donald Trump and everything that’s going on,” he added, “then we’re never going to be able to win elections.”
Ryan is among the small group of Democrats who are sounding calls for a changing of the guard atop the party’s leadership hierarchy following Tuesday’s special election defeat in Georgia — the Democrats’ fourth loss since Trump took office. But Ryan is hardly alone in urging party leaders to hone their 2018 message. Rep. Tim Walz (D-Minn.) has been paying particularly close attention to voters’ concerns because he’s running for governor in 2018. The Russia-Trump investigation, he said, isn’t on their radar. “I did a 22-county tour. … Nobody’s focusing on that,” Walz said. “That’s not to say that they don’t think Russia and those things are important, [but] it’s certainly not top on their minds.”
More than a million households living in private rented accommodation are at risk of becoming homeless by 2020 because of rising rents, benefit freezes and a lack of social housing, according to a devastating new report into the UK’s escalating housing crisis. The study by the homelessness charity Shelter shows that rising numbers of families on low incomes are not only unable to afford to buy their own home but are also struggling to pay even the lowest available rents in the private sector, leading to ever higher levels of eviction and homelessness. The findings will place greater pressure on the government over housing policy following the Grenfell Tower fire disaster in west London, which exposed the neglect and disregard for people living in council-owned properties in one of the wealthiest areas of the capital.
The Shelter report highlights how a crisis of affordability and provision is gripping millions with no option but to look for homes in the private rented sector due to a shortage of social housing. Shelter says that in 83% of areas of England, people in the private rented sector now face a substantial monthly shortfall between the housing benefit they receive and the cheapest rents, and that this will rise as austerity bites and the lack of properties tilts the balance more in favour of landlords. Across the UK the charity has calculated that, if the housing benefit freeze remains in place as planned until 2020, more than a million households, including 375,000 with at least one person in work, could be forced out of their homes. It estimates that 211,000 households in which no one works because of disability could be forced to go.
Graeme Brown, the interim chief executive at Shelter, said: “The current freeze on housing benefit is pushing hundreds of thousands of private renters dangerously close to breaking point at a time when homelessness is rising.” A total of 14,420 households were accepted by local authorities as homeless between October and December 2016, up by more than half since 2009 – with 78% of the increase since 2011 being the result of people losing their previous private tenancy. Local authorities are under a legal obligation to find emergency accommodation, such as in bed and breakfasts.
As in any other religion, faith lies behind capitalism. Faith that capital is a panacea always and in any situation: to push economic growth or to help less developed countries to catch up. Yet the fact is that the EU countries that were the main receivers of cohesion funds, before the extension to the East, later became rescued countries – and we have never before had as much capital on tap along with current low growth.
Both these facts should be enough to break the faith in capital or, at least, to recognise its limits. Let’s see those limits in the above-mentioned causes. The virtue of capital transfers to help low developed countries is based in old Marshall Plan history, which attributes the successful German recovery after WW2 to USA loans. Sure, those loans helped, but the necessary knowledge was already there and the capital transfers allowed the Germans to rebuild their supply capacity. Conversely, in the EU rescued countries, entering the EU came with a local supply capacity destruction, in Schumpeterian terms, for which cohesion funds were unable to compensate. As a result, their domestic demand outstripped internal supply and trade deficits became recurrent until the financial crash.
The key element was not capital but knowledge and its absence or availability in both situations; something very obvious but all too often forgotten. If capital has any virtue it comes from its origin: the capacity to produce output sufficient to recover the inputs used, to satisfy consumption needs and to save a part to be invested as new inputs for raising future output. It means that the virtue is not in the savings/capital itself but in the capacity to generate it. That’s why capital transfers that simply increased the receivers’ inputs provision, without increasing the output/input ratio –or system efficiency–, were in the end wasted money. To avoid this, it would have been necessary to increase the receivers’ efficiency, which is much more correlated with parameters like educational levels than with capitalization! Again, knowledge is the key question.
Furthermore, capital on its own is not only unable to help less developed countries catch up on their wealthier peers but it’s also unable to propel economic growth on its own, as we are now seeing. After years of letting profits grow at the cost of wages, hoping that greater capital would bring greater growth, now we hear companies claiming that they do not invest because they do not have sufficient demand to justify the investment. The clear solution would be to increase wages, but no single company will do it out of fear that the others won’t follow suit. In fact, what any company hopes is that the others increase wages and salaries but not itself. That’s why a global agent is needed: trade unions and the public administration! The latter to increase its spending to guarantee full employment and the former profiting from full employment to bargain higher salaries.
Bloomberg New Energy Finance’s latest New Energy Outlook points the way to a sunny, windy future for the global electric power industry. That doesn’t mean that fossil fuels (or nuclear power) will vanish. It also doesn’t mean that all fossil fuels are the same. The future of natural gas and coal is a tale of two resources — one a story of rising fortunes, the other of slow decline. The latest outlook on natural gas is brighter than ever: BNEF’s forecast for gas shows a higher estimate for consumption in 2040 than in previous years, with a short decline at the end of this decade.
Coal is a different matter. Coal demand is expected to peak late next decade, then decline almost every year to reach a low of 3.1 billion metric tons in 2040, about 25% lower than at its peak.
This long-term outlook is nuanced, as it should be. The aggregated demand for each fuel from 2020 to 2040 has not changed much in three successive New Energy Outlook reports. Total gas consumption has only increased 6% since the 2015 report, while coal consumption from 2020 to 2040 – despite the plunge that is now expected, as noted above – has only changed 3.5%, and was exactly the same in 2016. However, the shape of that coal curve is still important, even if the volume hasn’t changed much. A coal mine that opens today could have a 60-year life, but it is likely to be one fraught with oversupply and competition from other coal producers, as well as other technologies. So how does the 2017 New Energy Outlook for gas and coal compare to how major oil companies and the International Energy Agency see it? For gas, everyone agrees: Consumption grows. Shell expects gas consumption to more than double and, perhaps not surprisingly, Exxon Mobil and BP also expect consumption to increase at least 50%. BNEF’s expectations are a bit more muted.
Reclaiming Public Services is vital reading for anyone interested in the future of local, democratic services like energy, water and health care. This is an in-depth world tour of new initiatives in public ownership and the variety of approaches to deprivatisation. From New Delhi to Barcelona, from Argentina to Germany, thousands of politicians, public officials, workers, unions and social movements are reclaiming or creating public services to address people’s basic needs and respond to environmental challenges. They do this most often at the local level. Our research shows that there have been at least 835 examples of (re)municipalisation of public services worldwide since 2000, involving more than 1,600 municipalities in 45 countries.
Why are people around the world reclaiming essential services from private operators and bringing their delivery back into the public sphere? There are many motivations behind (re)municipalisation initiatives: a goal to end private sector abuse or labour violations; a desire to regain control over the local economy and resources; a wish to provide people with affordable services; or an intention to implement ambitious climate strategies. Remunicipalisation is taking place in small towns and in capital cities, following different models of public ownership and with various levels of involvement by citizens and workers. Out of this diversity a coherent picture is nevertheless emerging: it is possible to build efficient, democratic and affordable public services. Ever declining service quality and ever increasing prices are not inevitable. More and more people and cities are closing the chapter on privatisation, and putting essential services back into public hands.
Ulli Sima, Vienna City Councilor for the Environment and Wiener Stadtwerke: “As early as 2001, Vienna protected drinking water with a constitutional decision. Municipal services must remain public and should not be sacrificed to private profit. We want to ally with other cities for strong municipal servicest.” Eloi Badia, the Barcelona Councilor for presidency, water and energy: “It is important to demystify the process of privatisation that has been launched in recent years by several governments, because it’s a model that has not proved its efficiency, failing to offer a better service or a better price.”
Célia Blauel, President of Eau de Paris and Deputy Mayor of Paris in charge of the environment, sustainable development, water and the energy-climate plan: “Bringing local public services under public control is a major democratic issue, especially for such essential services as energy or water. It means greater transparency and better citizen supervision. In the context of climate change, it can contribute to leading our cities toward energy efficiency, the development of renewables, the conservation of our natural resources, and the right to water. ”
When things get serious in the EU, laws get bent and loopholes get exploited. That is what is happening right now in Italy, where the banking crisis has reached tipping point. The ECB, together with the Italian government, have just this weekend to resolve Banca Popolare di Vicenza and Veneto Banca, two zombie banks that the ECB, on Friday night, ordered to be liquidated. Unlike Monte dei Pachi di Siena, they will not be bailed out primarily with public funds. Senior bondholders and depositors will be protected while shareholders and subordinate bondholders will lose their shirts. However, as the German daily Welt points out, subordinate bondholders at Monte dei Pachi di Siena had billions of euros at stake, much of it owned by its own retail customers who’d been sold these bonds instead of savings products such as CDs. So for political reasons, they were bailed out.
Junior bonds play a smaller role at the two Veneto-based banks. According to the Welt, the two banks combined have €1.33 billion (at face value) in junior bonds outstanding. They last traded between 1 cent and 3 cents on the euro. So worthless. Only about €100 million were sold to their own customers, not enough to cause a political ruckus in Italy. So they will be crushed. The good assets and the liabilities, such as the deposits, will be transferred to a competing bank. According to a rescue plan apparently drawn up by investment bank Rothschild that surfaced a few days ago, Intesa Sao Paolo, Italy’s second largest bank, would get these good assets and the deposits (liabilities), for the token sum of €1, while all the toxic assets (non-performing loans) would be shuffled off to a state-owned “bad bank” – and thus, the taxpayer.
According to the Italian daily Il Sole 24 Ore, the bad bank would be left holding over €20 billion of festering assets. “Intesa gets a free gift, the state takes on all the bad stuff and the taxpayer pays,” said at the time Renato Brunetta, parliamentary leader for former prime minister Silvio Berlusconi’s Forza Italia party. It is testament to just how desperate the situation has become in Italy’s banking crisis. The country’s largest lender, Unicredit, is in no position to help out: it had to raise €13 billion of new capital earlier this year just to keep itself afloat. Whether the deal with Intesa is still possible after the ECB’s decision to liquidate the banks, and what form this deal, if any, will take, and how much the taxpayer will have to fork over, and how to sugarcoat this in the most palatable terms is what the Italian government is currently trying to hammer out in its emergency meeting.
Health spending in Greece plunged 40% in the 2009-2015 period, Deloitte said in a survey released on Thursday. According to the survey, health spending fell to €14.1 billion in 2014, hit by a significant shrinking in medical/pharmaceutical coverage by the state and the social insurance system. It also stressed that this sharp decline mostly hit pharmacies and other professionals in the health sector and less the country’s hospitals. Hospital spending fell to €6.2 billion in 2015, from €9.0 billion in 2009, for an average annual decline of 6.0%, while average annual decline in the retail sector reached 7.0% and 9.0%, respectively. Deloitte said the state social insurance system covers 59.1% of total health spending in Greece, with patients covering 35.5% -a %age significantly higher compared with other European countries (UK 9.5%, France 6.7%, Italy 21.7%).
3.7% of total health spending is covered by private insurance contracts. Private hospitals were also hit during the 2009-2015 period, leading to more consolidation as the number of private hospitals fell by 6.0% and their size grew by around 1.0%. The total number of private and state hospitals in Greece was 283, mostly in Attica, offering 45,900 beds. The survey said that the number of beds surpassed demand by at least 18%. The survey noted that health spending recovered slightly to €14.7 billion in 2015 and stressed that international investors were showing strong interest for business deals in Greece.
Credit ratings agency Moody’s late Friday raised Greece’s long-term issuer rating to “Caa2” from “Caa3” after eurozone governments extended a credit lifeline to the country. Moody’s also changed its outlook to “positive”, up from “stable” previously, saying it saw signs that the heavily indebted country’s economy was stabilising. It pointed to a mid-June agreement reached by Greece’s creditors to relaunch an aid plan to the country, which had been blocked for months due to disagreements between eurozone countries – especially Germany – and the IMF. The move reduces the spectre of a short-term crisis, after eurozone governments agreed to give Greece a new credit lifeline of some €8.5 billion ($9.5 billion). Moody’s said it expected Greece’s debt ratio to stabilise this year at 179% of GDP, adding that growth should return to the economy this year and next.
Greece returned to growth in the first quarter of 2017, with a 0.4% increase in GDP, according to figures revised upwards in early June. “It is too early to conclude that economic growth will be durable,” Moody’s said. The IMF, which links financial aid to debt relief, has also signed an “agreement in principle” to allow immediate assistance that avoids a payment crisis in Athens this summer. It said Thursday that negotiations with creditors for debt reduction had “made progress”. “If we did not think there was a good chance of reaching a debt deal, we would not have chosen that route,” an IMF spokesman said. Moody’s also raised the long-term country ceilings for foreign-currency and local-currency bonds to B3 from Caa2.
The IMF, which day after day is busy “saving” economically suffering countries such as Greece, also happens to agree with this brave new worldview. In a working paper titled “The Macroeconomics of De-Cashing,” which the IMF claims does not necessarily represent its official views, the fund nevertheless provides a blueprint with which governments around the world could begin to phase out cash. This process would commence with “initial and largely uncontested steps” (such as the phasing out of large-denomination bills or the placement of upper limits on cash transactions). This process would then be furthered largely by the private sector, providing cashless payment options for people’s “convenience,” rather than risk popular objections to policy-led decashing.
The IMF, which certainly has a sterling track record of sticking up for the poor and vulnerable in society, comforts us by saying that these policies should be implemented in ways that would augment “economic and social benefits.” These suggestions, which of course the IMF does not necessarily officially agree with, have already begun to be implemented to a significant extent in the IMF debt colony known officially as Greece, where the IMF has been implementing “socially fair and just” austerity policies since 2010, which have resulted, during this period, in a GDP decline of over 25%, unemployment levels exceeding 28%, repeated cuts to what are now poverty-level salaries and pensions, and a “brain drain” of over 500,000 people—largely young and university-educated—migrating out of Greece.
Indeed, it could be said that Greece is being used as a guinea pig not just for a grand neoliberal experiment in both austerity, but de-cashing as well. The examples are many, and they have found fertile ground in a country whose populace remains shell-shocked by eight years of economic depression. A new law that came into effect on January 1 incentivizes going cashless by setting a minimum threshold of spending at least 10% of one’s income via credit, debit, or prepaid card in order to attain a somewhat higher tax-free threshold. Beginning July 27, dozens of categories of businesses in Greece will be required to install aptly-acronymized “POS” (point-of-sale) card readers and to accept payments by card.
usinesses are also required to post a notice, typically by the entrance or point of sale, stating whether card payments are accepted or not. Another new piece of legislation, in effect as of June 1, requires salaries to be paid via direct electronic transfers to bank accounts. Furthermore, cash transactions of over €500 have been outlawed. In Greece, where in the eyes of the state citizens are guilty even if proven innocent, capital controls have been implemented preventing ATM cash withdrawals of over €840 every two weeks. These capital controls, in varying forms, have been in place for two years with no end in sight, choking small businesses that are already suffering.
You may remember hearing back in September that Bayer, the largest pharmaceutical company in the world, made a deal to buy out Monsanto for $66 billion. Although Monsanto was voted the most evil company in the world in 2013 and its reputation has continued to fall since, Bayer still went ahead with the buyout. A merger between these two companies is unsurprising, as though they both have long histories of involvement with Nazism and chemical weapons like agent orange which have devastated Vietnam since the war. In fact, Bayer began as a break-off company of the infamous IG Farben, which produced the chemical weapons used on the Jews during the Nazi reign. After the war, Farben was forced to break up into several companies, including BASF, Hoeschst, and Bayer.
Soon after at the Nuremberg trials, 24 Farben executives were sent to prison for crimes against humanity. However, in a matter of just 7 years each of them was released and began filling high positions in each of the former Farben companies, and many of them began working for the Russian, British, and American governments through a joint intelligence venture called “Operation Paperclip”: (“IG (Interessengemeinschaft) stands for “Association of Common Interests”: The IG Farben cartel included BASF, Bayer, Hoechst, and other German chemical and pharmaceutical companies. As documents show, IG Farben was intimately involved with the human experimental atrocities committed by Mengele at Auschwitz. A German watchdog organization, the GBG Network, maintains copious documents and tracks Bayer Pharmaceutical activities.” – Alliance for Human Research Protection)
After all these years, Bayer is now richer and more powerful than their predecessor company I.G. Farben ever was. According to Big Buds Magazine, Monsanto and Scotts Miracle-Gro have a “deep business partnership” and plan on taking over the cannabis industry. Hawthorne, a front group for Scotts, has already purchased three of the major cannabis growing companies: General Hydroponics, Botanicare, and Gavita. Many other hydroponics companies have also reported attempted buyouts by Hawthorne. (“They want to bypass hydroponics retail stores…When we said we won’t get in bed with them they said, ‘Well, we could just buy your whole company like we did with Gavita and do whatever we want.’” – Hydroponics Lighting Representative) Jim Hagedorn, CEO of Scotts Miracle-Gro, has even said that he plans to “invest, like, half a billion in [taking over] the pot business… It is the biggest thing I’ve ever seen in lawn and garden.”
He has also invested in companies such as Leaf, which grows cannabis in an electronically regulated indoor terrarium accessible via smartphone. It is logical that Bayer, being the parent company, would work together with Monsanto in order to share secrets which would advance mutual business. Many people in the cannabis industry have been warning about this, including Michael Straumietis, founder and owner of Advanced Nutrients. (“Monsanto and Bayer share information about genetically modifying crops,” Straumietis notes. “Bayer partners with GW Pharmaceuticals, which grows its own proprietary marijuana genetics. It’s logical to conclude that Monsanto and Bayer want to create GMO marijuana.” – Michael Straumietis)
This past Wednesday we heard from the Federal Reserve with regard to monetary policy, and as I predicted they did raise the federal funds rate 25 basis points however, instead of yields rising, they are dropping. More than a year and a half ago I had said publicly that the Federal Reserve’s attempt at trying to normalize bond yields would backfire-and this is exactly what is happening. It is clear to me that the Federal Reserve has absolutely lost control of what is occurring in the bond market. Remember, this is uncharted territory, we have never been here before in the history of the financial world-so the Federal Reserve actually has no idea of how the market will react in the current environment with regard to their attempt at normalizing interest rates. The yield curve as seen in the picture above continues to flatten out, and this trend will continue until the curve inverts.
The last time the yield curve inverted, the 2008 economic meltdown occurred, and the time before that we suffered the.com bubble meltdown. The fact is we are existing in a multiple bubble economy at this time, worse, and unlike anything which has ever been seen before. The reason why these bubbles exist is simple: the Federal Reserve has not allowed the market to do its one and only job, and that is to determine fair value. The Federal Reserve’s interest rate suppression cycle has not only allowed, but has been the driving force behind mass malinvestments across the entire spectrum of asset classes and as such, bubbles have been created. The Federal Reserve has created distortions across the spectrum of asset classes which is frankly beyond belief, worse than has ever been witnessed in the history of finance. What this means is when the yield curve inverts this time, we will experience a meltdown magnitudes greater then the 2008 crash.
“The year 1915 was fated to be disastrous to the cause of the Allies and to the whole world. By the mistakes of this year the opportunity was lost of confining the conflagration within limits which though enormous were not uncontrolled. Thereafter the fire roared on till it burnt itself out. Thereafter events passed very largely outside the scope of conscious choice. Governments and individuals conformed to the rhythm of the tragedy, and swayed and staggered forward in helpless violence, slaughtering and squandering on ever-increasing scales, till injuries were wrought to the structure of human society which a century will not efface, and which may conceivably prove fatal to the present civilization.” – Winston S. Churchill – The World Crisis: 1915
After reading that quote several times, it remains shocking that the politicians and individuals of that era unconsciously “conformed to the rhythm of the tragedy.” The paragraph above from Winston Churchill, describes the mass mindset of World War I when it was still in its infancy. War-time narratives, nationalism, destruction and the tremendous loss of life led most people to quickly accept and acclimate to an event that was beyond atrocious. Amazingly, less than a year before the period Churchill discusses, the same people likely would have thought that acceptance of such a calamity would be beyond comprehension. Wars and markets are obviously on two different planes, and we want to make it clear the purpose of this article is not to compare the evils of war to financial markets. That said, we must recognize that quick acceptance of abnormal circumstances, as Churchill describes, is a trait that we all possess.
The seemingly unabated march upwards in stock prices occurring over the last eight years has had a mind-numbing effect on investors. The relentless grind higher is backed by weak fundamentals providing little to no justification for elevated prices. Indeed, if there was no justification for such valuations during the economically superior timeframe of the late 1990’s, how does coherent logic rationalize current circumstances? For example, feeble economic growth, stagnating corporate earnings, unstable levels of debt, income and wage inequality and a host of other economic ills typically do not command a steep premium and so little regard for risk. This time, however, is different, and investors have turned a blind eye to such inconvenient facts and instead bank on a rosy future. Thus far, they have been rewarded. But as is so often the case with superficial gratification, the rewards are very likely to prove fleeting and what’s left behind will be deep regret.
Despite our education and experience which teach the many aspects of the discipline of prudent investing, investors are still prone to become victims of the philosophy and psychology of the world around them. These lapses, where popular opinion-based investment decisions crowd out the sound logic and rationale for prudence and discipline, eventually carry a destructively high price. Investors, actually the entire population, have become mesmerized by the system as altered and put forth by the central bankers. We have somehow become accustomed to believe that debt-enabling low interest rates make even more debt acceptable. Ever higher valuations of assets are justifiable on the false premise of a manufactured and artificial economic construct.
Let’s start with the question of debt. Lord Adair Turner, who chaired the UK Financial Services Authority between 2008 and 2013 and helped redesign global banking, says the world since has not addressed this root cause of the crisis and that means it’s at risk of another one. Lord Turner, now chairman of New York-based Institute for New Economic Thinking, says the world is suffering from “irrational exuberance” and “debt overhang”. The latter term refers to countries trapped in a vicious cycle of debt, and when nations ultimately default on that debt – he predicts that the next crisis will come courtesy of China and that’s just a number of years away – it ends in their economic destruction.
The Institute of International Finance (IIF) says global levels of debt held by households, governments, and non-financial corporates jumped by over $US70 trillion in the past decade to a record high of $US215 trillion, equating to 325 per cent of global GDP. “There’s been no deleveraging,” Lord Turner says. “Once you’ve got too much debt in the economy … it’s incredibly difficult to get rid of it. “If you say, ‘I’m going to write it off’, your banks go bankrupt … if you try get rid of it by people paying down that debt … the attempt to pay it back is what drives the economy into recession.” To avoid that, interest rates then fall, and that simply encourages more borrowing, he says.
[..] Steve Keen, Professor of Economics at Kingston University in London, a long-time doomsayer on Australia’s mortgage binge, says simply: “It’s dangerous”. He says the Reserve Bank and Australian politicians ignore the dangers of private household debt today just as former US Federal Reserve chairman Ben Bernanke did before the GFC. Keen says the risk of recession is even higher now that APRA has slightly tightened lending standards. “It’s inevitable,” he says, sticking to his bold prediction that it will happen before year’s end.
Amazon, which is getting blamed profusely for the meltdown of brick-and-mortar stores and malls across the US, and which has been dabbling with its own initiatives into brick-and-mortar operations – including bookstores, after nearly wiping bookstores off the face of the US – said it would buy brick-and-mortar Whole Foods Market for $13.7 billion. Amazon will get Whole Foods’s $15.7 billion in annual sales and more importantly, its brand, semi-loyal customers, and about 450 brick-and-mortar stores across 42 states. Whole Food shares jumped 27%. But in early trading, the shares of the largest brick-and-mortar grocery sellers in the US are getting crushed: Wal-Mart Stores -6.5%; Kroger, largest supermarket chain in the US, -14%; Costco -7%; Target -10%.
Amazon already sells groceries online via AmazonFresh, and a few months ago announced it would create a grocery store pickup service, another foray into brick-and-mortar. Selling groceries online has been tough in the US, though everyone has been trying, from innumerable startups to Safeway and Google Express (in cooperation with Costco et al.). Consumers are used to buying at the store by running through the aisles with their carts and choosing what they see or what’s on their list, or both, and they want to touch and check their produce before buying it, and they don’t want the dented apples or squished grapes or wilted lettuce. And they need it now on the way home from work so they can fix dinner.
With this acquisition, Amazon’s efforts to muscle its way into the grocery business and even more into the every-day lives of Americans have thus taken a quantum leap forward. But what industry is Amazon muscling into? Over the past six years, sales at grocery stores are up a total of 14%, not adjusted for inflation, according to the retail trade report by the Commerce Department. Over the same period, the Consumer Price Index for food rose 14%, according to the Bureau of Labor Statistics. Hence, on an inflation-adjusted basis, “real” sales have been flat for six years.
Torture FBI special agent Colleen Rowley points out: Mueller was even okay with the CIA conducting torture programs after his own agents warned against participation. Agents were simply instructed not to document such torture, and any “war crimes files” were made to disappear. Not only did “collect it all” surveillance and torture programs continue, but Mueller’s (and then Comey’s) FBI later worked to prosecute NSA and CIA whistleblowers who revealed these illegalities.
Iraq War Rowley notes: When you had the lead-up to the Iraq War … Mueller and, of course, the CIA and all the other directors, saluted smartly and went along with what Bush wanted, which was to gin up the intelligence to make a pretext for the Iraq War. For instance, in the case of the FBI, they actually had a receipt, and other documentary proof, that one of the hijackers, Mohamed Atta, had not been in Prague, as Dick Cheney was alleging. And yet those directors more or less kept quiet. That included … CIA, FBI, Mueller, and it included also the deputy attorney general at the time, James Comey.
Post 9/11 Round-Up FBI special agent Rowley also notes: Beyond ignoring politicized intelligence, Mueller bent to other political pressures. In the aftermath of the 9/11 attacks, Mueller directed the “post 9/11 round-up” of about 1,000 immigrants who mostly happened to be in the wrong place (the New York City area) at the wrong time. FBI Headquarters encouraged more and more detentions for what seemed to be essentially P.R. purposes. Field offices were required to report daily the number of detentions in order to supply grist for FBI press releases about FBI “progress” in fighting terrorism. Consequently, some of the detainees were brutalized and jailed for up to a year despite the fact that none turned out to be terrorists.
9/11 Cover Up Rowley points out: The FBI and all the other officials claimed that there were no clues, that they had no warning [about 9/11] etc., and that was not the case. There had been all kinds of memos and intelligence coming in. I actually had a chance to meet Director Mueller personally the night before I testified to the Senate Judiciary Committee … [he was] trying to get us on his side, on the FBI side, so that we wouldn’t say anything terribly embarrassing. …
Spain’s Banco Popular had the dubious honor of being the first financial institution to be resolved under the EU’s Bank Recovery and Resolution Directive, passed in January 2016. As a result, shareholders and subordinate bondholders were “bailed in” before the bank was sold to Santander for the princely sum of one euro. At first the operation was proclaimed a roaring success. As European banking crises go, this was an orderly one, reported The Economist. Taxpayers were not left on the hook, as long as you ignore the €5 billion of deferred tax credits Santander obtained from the operation. Depositors and senior bondholders were spared any of the fallout. But it may not last for long, for the chances of a similar approach being adopted to Italy’s banking crisis appear to be razor slim.
The ECB has already awarded Italy’s Monte dei Paschi di Siena (MPS) a last-minute reprieve, on the grounds that while it did not pass certain parts of the ECB’s last stress test, the bank is perfectly solvent, albeit with serious liquidity problems. By contrast, Popular was also liquidity challenged but, unlike MPS, it passed all parts of the ECB’s 2016 stress test, which shows you how ineffectual these tests are — and how subjective the resolution process of a European bank can be. In a speech to the Italian Banking Association on Thursday, the Vice President of the ECB, Vítor Constâncio, suggested that under certain circumstances, it might be wiser to save a bank than to resolve it. What’s more, taxpayers should be called upon not only to save banks like MPS but also to make whole all holders of the bank’s subordinate debt, under the pretext that they were misled into purchasing them (as indeed some retail customers, but certainly not all, were).
A taxpayer-funded bailout of bondholders is also on the cards for the two mid-sized Veneto-based banks, Banca Popolare di Vicenza and Veneto Banca, which have already received billions of euros in taxpayer assistance. Italy’s Minister of Economy Pier Carlo Padoan continues to insist the two banks will not be wound down. This is the same man who insisted last year that a) there would be no need of any future bail outs; and b) Italy did not even have a banking problem on its hands. Padoan has no choice but to deny all rumors of a bail-in; otherwise there would be a massive rush for the exits. In the weeks and even days leading up to Popular’s collapse, Spain’s Economy Minister Luis de Guindos repeatedly reassured investors that the bank was perfectly safe and solvent.
All the while government agencies, including Spain’s social security fund, and regional government authorities were emptying the deposits they held with the bank as fast as they could. The total is unknown but it certain ran into billions of euros. To avoid a similar fate, Banca Popolare di Vicenza and Veneto Banca were instructed by the European Commission last week to find an additional €1.25 billion in private capital. That money still hasn’t arrived, and now Italy’s government is trying to persuade the European Commission and the ECB to water down the requirement to €600-800 million, while also urging Italian banks to chip in to the bank rescue fund. If they don’t and the two Veneto-based banks end up being wound down, they will have to cough up as much as €11 billion to refund the banks’ depositors.
China’s smaller banks, caught between a seasonal cash squeeze and an official deleveraging drive, are stomaching record high borrowing costs to raise funds. Issuance of negotiable certificates of deposit jumped to 758 billion yuan ($111.5 billion) this week, the most since the securities were introduced in 2013 as a lifeline for smaller banks. The yield on one-month AAA rated NCDs has surged nearly one percentage point this month to an all-time high of 5.05%, while that on AA+ contracts reached 5.30%, according to data compiled by Bloomberg. The increase in NCD costs comes at a tough time for Chinese lenders, which face an unprecedented 4.5 trillion yuan of maturities this quarter. The pressure has been aggravated by the deleveraging drive, with the one-month Shanghai Interbank Offered Rate climbing for 22 days in a row to a two-year high.
The certificates are used mainly by smaller lenders – banks outside of China’s top 10 by market value accounted for 76% of total sales this year. “The smaller banks have no choice but to take the blow,” said Shan Kun, Shanghai-based head of China markets strategy at BNP Paribas. “They need to sell NCDs to get financing as they cut leverage gradually and as they have to cope with tighter liquidity this month. The rates will likely continue to climb, or at least stay elevated in the near term.” When cash supply tightens, small- and medium-sized lenders are usually among the hardest-hit because they lack the retail deposit arsenal of larger banks, said Yulia Wan, a Shanghai-based banking analyst at Moody’s Investors Service. They also may not have enough bonds to use as collateral to borrow money in the repo market. The banks need the money to finance longer-term and less liquid assets, such as debt and investment in loans and receivables, she added.
Almost all of a central London hospital is to be sold and its services diverted to already stretched facilities around the capital under plans for NHS modernisation seen by the Guardian. Charing Cross hospital, a flagship NHS facility in the heart of London, is to be cut to just 13% of its current size under proposals contained in sustainability and transformation plans published last year in 44 areas across England. Many of the officially published plans lacked precise detail about how local services would change, but internal supporting documents seen by the Guardian reveal the scale of the closures at the London site. The proposals claim much of the care currently offered at Charing Cross can be transferred to “community settings” such as local GP services, but health campaigners and clinicians say the transformation could endanger patients.
The documents include a map detailing how 13% of the current hospital site will remain, with the rest of its prime real estate in central London sold off. The plan is to introduce the changes after 2021. NHS chiefs have stated as recently as March that “there have never been any plans to close Charing Cross hospital”, and in March 2015 the then prime minister, David Cameron, said it was “scaremongering” to suggest that the Charing Cross A&E departmentwas earmarked for closure. The health secretary, Jeremy Hunt, echoed the claims. However, in the internal NHS documents the apparent downgrading of Charing Cross is outlined in great detail. The plan is to axe 10 major services at Charing Cross – 24/7 A&E, emergency surgery, intensive care and a range of complex emergency and non-emergency medical and surgical treatments. The remaining services would be a series of outpatient and GP clinics, X-ray and CT scans, a pharmacy and an urgent care centre for “minor injuries and illnesses”. Around 300 acute beds will be lost.
1 Yanis Varoufakis on power, populism and the future of the EU
2 Can Europe Make It? – Yanis Varoufakis speaks to openDemocracy
3 Yanis Varoufakis blows the lid on Europe’s hidden agenda
4 Yanis Varoufakis and his plan to take on Europe – again
5 Greece, Austerity, Brexit and Europe’s other darlings at GFMF2016
The Eurogroup of finance ministers may block an 8.5-billion-euro (7.44 billion pounds) loan to Greece if it does not grant immunity to privatisation agency officials from Spain, Italy and Slovakia, Spanish Economy Minister Luis de Guindos said on Friday. In 2015, a Greek prosecutor charged three officials at the country’s privatisation agency with embezzlement for withholding interest payments and breach of duty in relation to a sale and lease-back deal of 28 state-owned buildings. The case is still pending. “If there’s not a definitive solution for the situation of these three experts, the Eurogroup will block the payment,” de Guindos said in Luxemburg.
Greece would do “whatever necessary” to immediately settle the legal case, a Greek government official said. European Economic and Monetary Affairs Commissioner Pierre Moscovici said he was confident the problem would be resolved and that he would continue to discuss the issue with Spain during his visit to Madrid next week. “The problem has to be solved. We should not over dramatise it. The disbursement will happen and at the same time will find a solution to this problem,” Moscovici said on his arrival at a meeting of EU finance ministers in Luxemburg on Friday.
Gone are the days when an e-ticket was seen as cutting edge – one Swedish rail company is offering passengers the option of using a biometric chip implanted into their hand in lieu of a paper train ticket. SJ is the first travel company in the world to let people use this innovative method that seems straight out of a sci-fi film. The tiny chip has the same technology as Oyster cards and contactless bank cards – NFC (Near Field Communication) – to enable conductors to scan passengers’ hands. Before you pack your bags for Sweden, the scheme is only applicable to those who already have the biometric implant – SJ is not offering to chip people. Around 2,000 Swedes have had the surgical implant to date, most of them employed in the tech industry.
State-owned operator SJ has said it expects about 200 people to take up the microchip method, but users must be signed up as a loyalty programme member to access the service. Customers buy tickets in the normal way by logging onto the website or mobile app, and their membership number, which is the reference code for the ticket, is linked to their chip. There are still kinks to be ironed out with the scheme, which began in earnest last week. Some passengers’ LinkedIn profiles were appearing instead of their train tickets when conductors scanned their biometric chip, while a number of train crew haven’t got the new SJ app which facilitates the scanning of biometric chips yet. “It’s just a matter of days before everyone has it,” says a spokesperson for SJ.
Bank shares across Europe have slumped, as investors digested the results of health checks on major lenders and the impact of low interest rates on their long-term health. Shares in Germany’s Commerzbank hit record lows after a warning that profits would be down this year. This compounded the findings of stress tests by the European Banking Authority watchdog last week, which left the Frankfurt-based institution in the bottom half of the results from health checks on 51 major lenders. The worst performer in the stress tests, Italy’s Banca Monte dei Paschi di Siena (MPS), suffered a 16% in its shares on Tuesday and Italy’s biggest bank Unicredit fell 7% after heavy losses the day before.
The pan-European bank stock index was down 3.5% as the prospect of prolonged period of low interest rates makes it more difficult for banks to make profits. The Bank of England will conduct a bank industry assessment this year, which prompted the Adam Smith Institute – a leading thinktank – to publish a report calling for the abandonment of the “worse than useless” stress tests unless changes can be made. Kevin Dowd, professor of finance and economics at Durham University, and author of the report, said: “As the EU banking system goes into a renewed crisis, the UK banking system is in no fit state to withstand the storm. Once contagion spreads from Italy to Germany and then to the UK, we will have a new banking crisis but on a much grander scale than 2007-08.
“The Bank of England is asleep at the wheel again, and we will be back to beleaguered banksters begging for bailouts – and the taxpayer will be ripped off yet again, but bigger this time.”
The Bank of England’s annual stress tests of the UK’s banks, designed to ensure Britain’s lenders will not be at the heart of another destructive financial crisis, have been branded “worse than useless”, by a new report. Kevin Dowd, professor of finance and economics at Durham University, argues in a paper published today by the Adam Smith Institute that the Bank’s tests, which model various adverse economic scenarios each year such as a major fall in UK house prices or a Chinese property crash, have a series of “fatal flaws” and that the central bank is “asleep at the wheel”. “The purpose of the stress-testing programme should be to highlight the vulnerability of our banking system and the need to rebuild it. Instead, it has achieved the exact opposite, portraying a weak banking system as strong”.
Professor Dowd warns that the eurozone banking system is on the precipice of another crisis, which will also engulf the UK’s major lenders. “Once contagion spreads from Italy to Germany and then to the UK, we will have a new banking crisis but on a much grander scale than 2007-08” he said. “The Bank of England is asleep at the wheel again, and we will be back to beleaguered banksters begging for bailouts – and the taxpayer will be ripped off yet again, but bigger this time.” Among the flaws in the Bank’s testing exercise identified by Professor Dowd are the fact that the stress tests rely on analytical “risk weights” for banks’ assets, which have been much criticised for potentially underplaying the true riskiness of various assets such as mortgages and sovereign debt.
The record-setting global bond market rally is coming undone. Bonds in Bank of America’s G-7 Government Index yielded 0.58% on average, the highest level in five weeks. The move is a rebound from the record low of 0.45% set in July. Japan led the selloff, and yields are rising from Australia to Germany. Global bonds surged from the end of June as the U.K.’s vote to leave the EU drove expectations the global economy would slow enough to keep the Federal Reserve from raising interest rates. Now investors and analysts are questioning whether yields dropped too far. Donald Trump said U.S. interest rates are artificially low, while Bill Gross said record-low yields aren’t worth the risk. A rally in long-term Japanese government bonds is probably over, according to PIMCO.
HSBC has admitted it is breaching a US regulator’s order to bolster its defences against financial crime as it announced a slump in first-half profits. The UK’s biggest bank also announced a $2.5bn share buyback following the sale of its Brazilian business in a move intended to demonstrate its financial strength. As the bank reported a 29% fall in first-half profits to $9.7bn, it also made a series of legal disclosures that confirmed it had received requests for information from various regulatory and law enforcement authorities around the world in relation to Mossack Fonseca, the Panama law firm linked to tax-haven companies.
Among the legal disclosures is a reference to an order agreed in October 2010 with the US Office of the Comptroller of the Currency which required the bank to “establish an effective compliance risk management programme across HSBC’s US businesses”. “HSBC Bank USA is not currently in compliance with the OCC order. Steps are being taken to address the requirements of the orders,” HSBC said, without providing details. In February the bank had revealed an official monitor it installed after a $1.9bn fine over money laundering four years ago had raised “significant concerns” about the slow pace of change to its procedures to combat crime. “Through his country-level reviews the monitor identified potential anti-money laundering and sanctions compliance issues that the [department of justice] and HSBC are reviewing further.”
Bitcoin plunged after one of the largest exchanges halted trading because hackers stole about $65 million of the digital currency. Bitcoin slumped 5.3% against the dollar as of 10:17 a.m. on Wednesday in Tokyo, bringing its two-day drop to 13%. Prices also sank 6.2% on Monday, although it was not clear if that initial move was related to the hack. Hong Kong-based exchange Bitfinex said on Tuesday that it halted trading, withdrawals and deposits after discovering the security breach. The exchange said it was still investigating details and cooperating with law enforcement, but acknowledged that some bitcoin have been stolen from its users.
“Yes – it is a large breach,” Fred Ehrsam, co-founder of Coinbase, a cryptocurrency wallet and trading platform, wrote in an e-mail. “Bitfinex is a large exchange, so it is a significant short term event, although Bitcoin has shown its resiliency to these sorts of events in the past.” Bitfinex confirmed in a message to Bloomberg News on Wednesday that the hackers took 119,756 bitcoin, or about $65 million at current prices. More than $1.5 billion has been wiped out from bitcoin’s market capitalization this week, according to research from CoinDesk. “We will look at various options to address customer losses later in the investigation,” Bitfinex wrote in a blog post. “We ask for the community’s patience as we unravel the causes and consequences of this breach.”
The Hong Kong exchange was the largest for U.S. dollar-denominated transactions over the past month, according to bitcoincharts.com. Chinese exchange OKCoin was the largest overall bourse for trading in the digital currency, over 90% of which is denominated in the Chinese yuan.
It’s a given that the euro can’t have the right exchange rate for all of its 19 diverse members, all of the time. Yet at the helm of the ECB, Mario Draghi may be making it a closer fit for more countries, more of the time. Angel Talavera, an economist at Oxford Economics in London, has calculated for Bloomberg Benchmark what would have been the equilibrium exchange rate for 8 euro-area economies between 2011 and 2015 ” the rate that would be best suited to an economy’s domestic and external profiles. Germany’s economic strength and positive balance of payments would warrant the euro trading at around $1.40, while Greece’s woes would require it to be below parity with the dollar.
At the beginning of Draghi’s term, the euro was too strong for pretty much everyone, and has typically aligned itself more to the needs of “core” economies, Germany included. That hasn’t been helpful. “What would normally happen with a country that has its own currency is that the currency will appreciate or depreciate over time to help correct those imbalances,” Talavera said. “In the case of the Eurozone obviously you can’t have both things happening, so those imbalances are not correcting, but rather amplifying most of the time.” His calculations bear this out. At the height of the sovereign-debt crisis in 2011 the spread between the optimal rate for Germany and Greece was $0.32. By the end of last year the gap had widened to $0.42.
Given the structure of the euro, though, there may be only so much that the current set of policies can do. According to Talavera’s Oxford Economics study, the ECB’s monetary policy has always been plagued by a paradox: while it has has been “generally right for the common currency area as a whole, it has proven to be wrong for most of its individual members most of the time.”
Never before have China’s companies had so much cash and so little to spend it on. With investment opportunities sparse amid the country’s weakest economic expansion in a quarter century, Chinese firms reported an 18% jump in cash holdings during their latest quarter, the biggest increase in six years. The $1.2 trillion stockpile – which excludes banks and brokerages – grew at a faster pace than in the U.S., Europe and Japan, according to data compiled by Bloomberg. While there are worse problems than having too much cash, China Inc.’s unprecedented hoard is frustrating both policy makers and investors. Because companies lack the confidence to spend on new projects, government attempts to boost growth by pumping money into the financial system are falling short.
Stockholders, meanwhile, would rather see bigger dividends or share buybacks than a buildup of idle cash on corporate balance sheets. “This is actually becoming a bigger and bigger issue,” said Herald van der Linde at HSBC. “Cash is becoming a point of debate.” The impulse to hoard instead of invest is relatively new for a country where corporate risk-taking has been rewarded for much of the past 25 years. But as economic growth moves deeper below 7% from double-digit levels just a few years ago, the change in mindset has been stark. Growth in China’s private spending on fixed assets, which topped 10% last year, slowed to 2.8% in the six months through June, the weakest level on record. “The drivers aren’t there” for Chinese firms to invest, said Sean Taylor at Deutsche Asset Management in Hong Kong.
The collapse of China’s stock markets a year ago was eye-catching, but in the end, hardly earth-shattering. Despite the pain for millions of retail investors, the fact is that stocks remain a small part of the financial system in China. Their brief, giddy rise and spectacular collapse never really threatened the wider Chinese economy, let alone the global financial system. That doesn’t mean the rest of the world should rest easy, however. While equities remain subdued, bubbles are growing in bonds and real estate – two markets that play a much bigger role in the mainland economy. The question is whether Chinese regulators can handle a new crisis any better than the old one.
Faith that China can safely manage fast-growing, debt-fueled bubbles assumes its regulators aren’t just as good as their peers in the rest of the world, they’re better. Last year’s events should call that confidence into question. Throughout the first half of 2015, policymakers allowed leverage to grow unchecked. When the market peaked and margin calls accelerated the decline, the combined force of financial regulators, public security officials and the state press were powerless to stop the slide. The situation places a premium on policies, rather than personalities, that can prevent things from unraveling. China needs to find a way to tap the brakes on credit without sending the markets into a downward spiral. Tighter rules and larger capital requirements for wealth management products – a key source of risk – are a start.
But as long as loan growth continues to accelerate faster than GDP, it’s hard to argue that a true basis for stability has been established. For evidence the underlying problems remain unsolved, look no further than China’s other asset markets. One might’ve expected that after the trauma of the stock crash, Chinese investors would become a shade more cautious. Nothing could be further from the truth. The equity boom-and-bust was followed almost immediately by a similar cycle in the metal market, which saw steel prices surge almost 80%. Property prices in Shenzhen are up 64% in the last nine months. Leveraged bets in the fixed income market mean yields continue to creep down, even as default risks grow.
Investment in the Greek economy plummeted more than 60% between 2007 and 2015, according to data published in Eurobank’s weekly bulletin on Tuesday. According to the lender’s economists, fixed capital investment declined by €40 billion or 66.1% during the period in question. At the same time, Greece’s GDP fell €56.7 billion. The Eurobank document described the drop in investment since 2007 as “deep and prolonged.” The reduction in investment was mainly felt in the housing market (€23.8 billion euros), followed by machinery and equipment (€12.1 billion) and other types of construction (€2.3 billion).
Eurobank said some of the key reasons for the dramatic slide in the amount of capital being invested in the Greek economy were the increases and frequent changes in taxation, the rising cost of capital, the reduction in lending by banks, the rise of uncertainty, an inability to create an investor-friendly environment despite some progress in this area, and expectations of weak economic activity. The lender also notes that net fixed capital formation, which measures gross investment minus depreciation, has been in negative territory since the end of 2010. The most recent data show that the annual shortfall is close to €11 billion.
To underline how damaging the last few years, and the collapse in investment described earlier, have been for the Greek economy, Eurobank’s weekly report pointed out that unemployment in December 2007 was at 8.1%, meaning there were just 403,000 people out of work. By the end of 2015, the jobless rate had risen to 24.2%, with 1.1 million people without work. During this eight-year spell, 860,000 jobs disappeared.
US cereal giant Kellogg’s and New Zealand milk multinational Fonterra have put the squeeze on local suppliers by stretching their payment terms out to a crushing 120 days. Along with other multinationals such as Unilever and Nestle, Kellogg’s and Fonterra already had their suppliers on 90-day terms, a punishing delay for family businesses who have to pay staff and a slew of other costs within the month. The move to 120 days does not bode well for small business, already fed up with “being used as a bank”, as one framed it. “Small business is the engine room of the economy,” he said, declining to be named for fear of reprisals, “And we are bankrolling these multinationals. I’ve got staff, super, rent and electricity to pay: and GST and payroll tax to collect. I can’t tell my staff to wait for 120 days to be paid”.
Kellogg’s was ducking for cover when rung for comment, its media team refusing to return calls. Fonterra issued this statement via a spokesperson: “In 2011, we identified that international best practice was to pay vendors supplying goods and services on a 60 day global standard payment from the end of the month in which the invoice was received. Part of our 2015 business transformation was to speed up compliance to this global standard term. We have 20,000 vendors globally and 16,000 or 80% of them have had no change to their payment terms.” According to a Fonterra document seen by this reporter, however, the new terms are “1st of the month, 3 months following invoice date”.
As for Fonterra’s claim of “international best practice”, payment terms in Europe have been moving the other way, by law. Since March 2013, the maximum delay for companies in the EU to for pay for goods and services is 30 days, unless agreed by both parties in writing, in which case it may be 60 days.
As of Tuesday, foreign buyers of property in Vancouver, which like Sydney is one of the world’s hottest real estate markets, will have to pay a 15% transaction tax. Property prices in Vancouver trail only Sydney and Hong Kong on the list of the world’s least-affordable housing markets, a Demographia survey shows. Trying to correct that, the NSW government said two months ago that it would levy a 4% stamp-duty surcharge on foreign buyers beginning next year and also charge an extra 0.75% land-tax surcharge on residential real estate, where prices are buoyed by incoming investment from mainland China. British Columbia legislators passed the new law on Friday going into a three-day holiday weekend even as local property agents called for exemptions for deals made to buy but not yet complete.
The new tax means non-Canadian residents buying a $2 million home will have to pay an additional $300,000 in tax. “While investment from outside Canada is only one factor driving price increases, it represents an additional source of pressure,” British Columbia Finance Minister Michael de Jong said in a statement. “This additional tax on foreign purchases will help manage foreign demand while new homes are built to meet local needs. A surge in purchases by Chinese property buyers has resulted in driving up the value of more than 90% of detached homes in Vancouver to more than C$1 million ($1.04 million), compared with 19% 10 years ago. Vancouver’s average home price is Canada’s highest, at $1.2 million, the Royal Bank of Canada estimates.
you have to understand the way the electoral game is played. It is played with money—very large sums of money—with votes being quite secondary. In mathematical terms, money is the independent variable and votes are the dependent variable, but the relationship between money and votes is nonlinear and time-variant. In the opening round, the moneyed interests throw huge sums of money at both of the major parties—not because elections have to be, by their nature, ridiculously expensive, but to erect an insurmountable barrier to entry for average citizens. But the final decision is made on a relatively thin margin of victory, in order to make the electoral process appear genuine rather than staged, and to generate excitement.
After all, if the moneyed interests just threw all their money at their favorite candidate, making that candidate’s victory a foregone conclusion, that wouldn’t look sufficiently democratic. And so they use large sums to separate themselves from you the great unwashed, but much smaller sums to tip the scales. When calculating how to tip the scales, the political experts employed by the moneyed interests rely on information on party affiliation, polling data and historical voting patterns. To change the outcome from a “lose-win” to a “lose-lose,” you need to invalidate all three of these:
• The proper choice of party affiliation is “none,” which, for some bizarre reason, is commonly labeled as “independent,” (and watch out for American Independent Party, which is a minor right-wing party in California that has successfully trolled people into joining it by mistake). Be that as it may; let the Furious Sheep call themselves the “dependent” ones. In any case, the two major parties are dying, and the number of non-party members is now almost the same as the number of Democrats and Republicans put together.
• When responding to a poll, the category you should always opt for is “undecided,” up to and including the moment when you walk into the voting booth. When questioned about your stands on various issues, you need to remember that the interest in your opinion is disingenuous: your stand on issues matters not a whit (see study above) except as part of an effort to herd you, a Furious Sheep, into a particular political paddock. Therefore, when talking to pollsters, be vaguely on both sides of every issue while stressing that it plays no role in your decision-making. Should you be asked what does matter to you, concentrate on such issues as the candidates’ body language, fashion sense and demeanor.
It is no wonder that the notion of happiness has been taken into public ownership, given the remarkable spread of spiritual malaise around the globe. Around a third of American adults and close to half in Britain believe that they are sometimes depressed. Even so, more than half a century after the discovery of antidepressants, nobody really knows how they function. Work over which individuals have little control can heighten the risk of heart disease. (Co-operatives, by contrast, are apparently good for your health.) So-called austerity has made people sicker and driven some to death. Vastly unequal nations such as the UK and the US breed mental health problems far more than more egalitarian ones such as Sweden.
Illness, absenteeism and “presenteeism” (coming into work purely to be physically present) are estimated to cost the US economy as much as $550bn (£417bn) a year. There is evidence that a competitive ethos can trigger mental illness among the winners as well as the losers, not least in the case of sport stars. Despite the living disproof known as Donald Trump, the more you chase after money, status and power, the lower your sense of worth is likely to be. Given their pathologically upbeat culture, Americans tend to downplay their dejectedness, while the French, with their suspicion that happiness is unsophisticated, are more likely to under-report it. It is the kind of thing that cavorts at the end of piers wearing a striped jacket and red plastic nose.
Happiness is excellent for business. A cheerful worker is as much as 12% more productive. A science of human sentiments – what Davies calls “the surveillance, management and government of our feelings” – is thus one of the fastest growing forms of manipulative knowledge. So is market research into shopping, which now uses extensive face-scanning programmes in order to reveal customers’ emotional states. The more bright-eyed neuroscientists claim they are close to discovering a “buy button” in the brain.
Michaela community school in Wembley was widely criticised last week for placing children in “isolation” because their parents were late with lunch payments. The lunches are compulsory, with parents being charged £75 upfront for each six-week period. Fall even a week behind, and you may be warned that your child faces “lunch isolation”, where “they will receive a sandwich and a piece of fruit only”. That’s not counting the side order of segregation and humiliation. The child will spend the whole 60 minutes away from their friends, and “only when the entire outstanding amount is paid in full will they be allowed into ‘family lunch’ with their classmates”.
“A sandwich is fine – at least the child is being fed,” you might think. But a sandwich is not “fine”. The School Food Plan, by Leon founders Henry Dimbleby and John Vincent, states that only 1% of packed lunches, which typically comprise a sandwich and snacks, meet the nutritional requirements for school meals. It is easier to get nutrients into a hot meal. After the story broke, Michaela’s headteacher, Katharine Birbalsingh, insisted she was not punishing children for being poor: the sanction didn’t apply to pupils receiving free school meals (more than one in five of those at the school) or whose families had money problems. The problem was the small number of families who were “playing the system”, “trying to get other poor families to pay for their child’s food” and “betraying their children”.
We have heard these accusations before. Back in 2013, Lord Freud claimed that food bank users were simply abusing a free facility, thus demonstrating his lack of understanding of the obstacles between a hungry mother and a food bank parcel. A willingness to seek help, for example. Swallowed pride. A referral from a doctor or social worker. Perhaps the bus fare to the nearest centre, with children in tow.
The bodies of 120 migrants have washed up on the shores of Libya in the past 10 days, not from previously known shipwrecks in the Mediterranean, the International Organization for Migration (IOM) said on Tuesday. A total of 4,027 migrants or refugees have died worldwide so far this year, three-quarters of them in the Mediterranean while trying to reach Europe, IOM spokesman Joel Millman told a briefing. That represents a 35% increase on the global toll during the first seven months of 2015, he said.
“The Chinese economy is a giant Ponzi scheme. Tens of trillions of dollars are owed to essentially bankrupt banks – and worse, bankrupt near-banks that operate in the murky shadowlands of a deeply dysfunctional mix of Leninism and rapacious capitalism. “
There has always been a tension at the heart of capitalism. Although it is the best wealth-creating mechanism we’ve made, it can’t be left to its own devices. Its self-regulating properties, contrary to the efforts of generations of economists trying to prove otherwise, are weak. It needs embedded countervailing power – effective trade unions, law and public action – to keep it honest and sustain the demand off which it feeds. Above all, it needs an ordered international framework of law, finance and trade in which it can do deals and business. It certainly can’t invent one itself. The mayhem in the financial markets over the last fortnight is the result of confronting this tension. The oil price collapse should be good news. It makes everything cheaper. It puts purchasing power in the hands of business and consumers elsewhere in the world who have a greater propensity to spend than most oil-producing countries. A low oil price historically presages economic good times. Instead, the markets are panicking.
They are panicking because what is driving the lower oil price is global disorder, which capitalism is powerless to correct. Indeed, it is capitalism running amok that is one of the reasons for the disorder. Profits as a share of national income in Britain and the US touch all-time highs; wages touch an all-time low as the power of organised labour diminishes and the gig economy of short-term contracts takes hold. The excesses of the rich, digging underground basements to house swimming pools, cinemas and lavish gyms, sit alongside the travails of the new middle-class poor. These are no longer able to secure themselves decent pensions and their gig-economy children defer starting families because of the financial pressures.
The story is similar if less marked in continental Europe and Japan. Demand has only been sustained across all these countries since the mid-1980s because of the relentless willingness of banks to pump credit into the hands of consumers at rates much faster than the rate of economic growth to compensate for squeezed wages. It was a trend only interrupted by the credit crunch and which has now resumed with a vengeance. The result is a mountain of mortgage and personal debt but with ever-lower pay packets to service it, creating a banking system that is fundamentally precarious. The country that has taken this further than any other is China. The Chinese economy is a giant Ponzi scheme. Tens of trillions of dollars are owed to essentially bankrupt banks – and worse, bankrupt near-banks that operate in the murky shadowlands of a deeply dysfunctional mix of Leninism and rapacious capitalism.
The Chinese Communist party has bought itself temporary legitimacy by its shameless willingness to direct state-owned banks to lend to consumers and businesses with little attention to their creditworthiness. Thus it has lifted growth and created millions of jobs. It is an edifice waiting to implode. Chinese business habitually bribes Communist officials to put pressure on their bankers to forgive loans or commute interest; most loans only receive interest payments haphazardly or not at all. If the losses were crystallised, the banking system would be bust overnight. On top, huge loans have been made to China’s vast oil, gas and chemical industries on the basis of oil being above $60 a barrel, so more losses are in prospect.
China’s declining stock market has resulted in a sharp decrease in the market capitalization of the two bourses in Shanghai and Shenzhen. The market value of the Shanghai and Shenzhen bourses plummeted to 42.74 trillion yuan (about 6.5 trillion U.S. dollars) on Friday’s closing of market, down nearly 9% from the previous week. There are 1,081 and 1,747 listed companies in the Shanghai and Shenzhen stock markets, where the price-earnings ratio were 14.54 and 41.38 respectively. China’s has the world’s second-most capitalized stock market behind the United States, after overtaking Japan a year ago. After a bearish week, the Shanghai and Shenzhen bourses were valued at 24.26 trillion yuan and 18.48 trillion yuan respectively by the close of market on Friday.
Amid global market turbulence accompanying lackluster domestic economic data, the benchmark Shanghai index lost 8.96% to end at 2,900.97 points, and the Shenzhen index shrank 8.18% to close at 9,997.92 points over the week. On Saturday, China’s securities watchdog vowed to learn a lesson from the stock market rout. “Wild market swings revealed our supervision and management loopholes,” said Xiao Gang, head of the China Securities Regulatory Commission, at a national conference on securities market regulation. “We will improve regulation mechanisms, intensify supervision and guard against risks so as to create a stable and sound market,” Xiao said.
This week the Chinese government will attempt to take back control of the narrative. The release of its 2015 economic growth estimate on January 19 provides an opportunity for Beijing to argue that a renewed outburst of stock market chaos and currency policy confusion over recent weeks was just surface noise, while the underlying economy remains sound. That China’s once vaunted economic managers suddenly find themselves in this position is a reminder of how dramatically they too can be wrong-footed by events, albeit ones that were under their control until a series of self-inflicted policy errors. Until China’s stock market bubble burst on June 15 — President Xi Jinping’s birthday of all days — the rest of the world was obsessed with the country’s downwards economic growth trajectory.
An ill-advised stock market rescue in July, followed by a poorly communicated currency policy adjustment in August, gave the world a bigger issue to worry about — the competence of China’s leadership, or lack thereof. In this context, the second and third quarter gross domestic product estimates, in line with the government’s 7% growth target, were reassuring. Chinese officials now freely admit that the country’s growth story is a tale of two economies. There is the bad old industrial economy — credit-fuelled and investment-led, resulting in chronic overcapacity and unsold apartment blocks. And there is the good new services economy — innovative and consumption-driven. Their key point is that the rise of the latter will balance the decline of the former, as has been the case this year.
As a result, they argue, the overall economy will hum along at a “sustainable” rate of about 6.5% over the next five years. This spells trouble for the African, Australian, Russian and South American commodity producers who have grown fat off Chinese demand over the past 20 years. But it should benefit European and US service providers, market access permitting, as well as Japanese and South Korean gadget makers. If only it were that simple. There are at least two known unknowns that could disrupt China’s smooth glide path. The first is what happens to rust-belt regions that have plenty of the old economy but not much of the new. “It will be very difficult for those who work in the old economy to transition into the new economy,” says Chen Long, China economist at Gavekal Dragonomics.
“Coal miners do not become internet programmers overnight, or even delivery men.” The second is a potential debt crisis of historic proportions, stemming in part from the government’s fears about the consequences for coal country if they were to turn off the credit taps. In 2007, on the eve of the global financial crisis, China’s overall debt to GDP ratio was 147%. Now it is at 231% and climbing. “They absolutely have no room left for further debt accumulation,” says Rodney Jones at Wigram Capital, an economic advisory firm. “That’s the central issue — not the exchange rate, not the stock market. These are symptoms. The problem is unsustainable growth and continued rapid accumulation of debt, leverage and credit.”
Global markets are poised for more volatility next week with key economic data from China expected to show that the world’s second-largest economy continues to grow at its slowest pace since the financial crisis, despite aggressive measures taken by the central bank to boost growth. “There has been ongoing fear bubbling since August that the China slowdown is worse than expected. Investors are nervous that we’ll see a massive downside correction in China’s economy. That’s why this data is so important to markets,” said James Rossiter at TD Securities. China is expected to release fourth-quarter GDP, industrial production and retail sales data Tuesday morning. Wasif Latif at USAA Investments agrees.
“These data reports next week could be very important in their power to either confirm or refute the current narrative that China is experiencing a very bad slowdown,” said Latif. The kick-off to 2016 has been challenging to say the least for China which continues to show signs of weakness, particularly on the manufacturing and services front. This downbeat data has pushed investors to alter their global forecasts, readjust earnings expectations and talk about what life with a slowing China means for trading stocks bonds and commodities this year. Markets around the world have been under pressure due in part to China worries. The Shanghai Composite is already down 18% this year and down over 40% from its June 2014 high.
Barclays strategists wrote that China remains a key source of turmoil as it affects currencies, commodities and financial volatility. Analysts also point to Beijing’s unpredictable nature in addressing the country’s economic woes and market structure. For instance in the last week, China reversed a new rule on circuit breakers that had brought stocks to a complete halt after just minutes of trading. Questions remain over whether the central bank of China will respond to weak data through its currency, or if the government will intervene in new ways if stocks continue to fall on the domestic markets.
China’s economy grew by around 7% in 2015, with the services sector accounting for half of GDP, Premier Li Keqiang said on Saturday. The premier also said that employment had expanded more than expected and that consumption contributed nearly 60% of economic growth. Li made theremarks at the opening ceremony for the China-backed Asian Infrastructure Investment Bank (AIIB) in Beijing. China’s fourth-quarter and full-year 2015 GDP figures are expected to be released on Jan. 19. Analysts polled by Reuters have forecast 2015 growth cooled to 6.9%, down from 7.3% in 2014 and the slowest pace in a quarter of a century. China does not intend to use a cheaper yuan as a way to boost exports and has the tools to keep the currency stable, the premier said, state news agency Xinhua had reported earlier Saturday.
“China has no intention of stimulating exports via competitive devaluation of currencies,” the premier said at the meeting in Beijing, which marks China’s previously announced official entry into the bank. Li added that China is capable of keeping the yuan’s exchange rate basically stable at an appropriate and balanced level, Xinhua reported. After a nearly 3% devaluation in mid August 2015 which rattled markets, China’s yuan has fallen over 1% so far in 2016, as the nation has struggled to contain capital outflows in the wake of a dramatic equity market collapse and weak economic data. Despite recent declines, China has the world’s largest foreign exchange reserves, and policymakers have repeatedly said they have the firepower to keep the yuan stable.
China’s economic expansion may be far less than official estimates of 6.8% and could be closer to 2.4%, according to a new report. The GDP growth of the world’s second-largest economy has slowed steadily since 2010, although levels remain far higher than those achieved by most developed and many developing economies. Last month, China’s central bank forecast that GDP would slow to 6.8% in 2016 from an estimated in 6.9% in 2015. However, Fathom, a macro research consultancy based in London, claimed in a report that China’s economy is only expanding at 2.4% per annum.
“We have long questioned the legitimacy of China’s official GDP statistics. Pointing to only a mild growth deceleration, we find these impossible to reconcile with a whole host of alternative evidence, not least our own measure of China’s economic activity which suggests that growth could be as low as 2.4%,” Fathom said in the report published Friday entitled “The fantasy and the reality of China’s economic rebalancing.” This year, global markets remain alert to any hints that China’s economic slowdown might be accelerating. Major U.S. stock indexes lost around 6% or more last week, as these fears helped fuel a rout in global stocks. International analysts and economists have long suspected that Chinese official GDP figures were inflated. Not many have suggested that annual growth could actually be as low as 2.4%, however. The IMF, for instance, estimates that China’s economy grew by 6.8% in 2015 and forecasts it will expand by 6.3% in 2016.
“While there is evidence that the old growth engine, powered by manufacturing, investment and exports, has started to stutter, we find far fewer indicators that point to a pickup in consumption. This is contrary to China’s official GDP breakdown, which suggests that activity in the tertiary sector is not only the largest as a share of nominal GDP but also the fastest growing, with annual growth outpacing that of both primary and secondary industries,” Fathom said. The official GDP data reported by Chinese regional government is particularly questionable. In December, China official news agency, Xinhua, reported that economic levels in parts of China’s northeastern rust belt were overstated. One county in Liaoning province posted extra fiscal revenue of 847 million yuan ($129 million) in 2013, 127% higher than the real figure, according to media reports.
“The slumping stock market, fleeing liquidity, speedy deleveraging activities, augmented by self-defeating redemption at mutual funds and selloffs in futures, spiraled into a full-scale crisis like a domino effect..”
The Chinese equities watchdog has acknowledged loopholes and ineptitude within its regulatory system after a review of the turmoil that’s shaken markets since last June. An immature bourse and participants, incomplete trading rules, an inadequate market system and an inappropriate regulatory system were to blame and regulators will learn from their mistakes, Xiao Gang, chairman of China Securities Regulatory Commission, said in a transcript of an internal meeting of the regulator that was posted on the agency’s website on Saturday. Chinese shares fell into a bear market again on Friday, wiping out gains from an unprecedented state rescue amid waning confidence in the government’s ability to manage the country’s financial markets.
The initial collapse in June, which came after cheerleading by state media helped fuel an unprecedented boom in mainland equities, triggered stock purchases by the government, restrictions on trading and a temporary ban on initial public offerings. Xiao was criticized for helping to talk up the market as the bubble developed. “The slumping stock market, fleeing liquidity, speedy deleveraging activities, augmented by self-defeating redemption at mutual funds and selloffs in futures, spiraled into a full-scale crisis like a domino effect,” Xiao said in the transcript. “During the abnormal volatility in the stock market, some institutions let illegal and irregular activities ride instead of taking responsibility to stabilize the market.”
It’s been a wild ride for Chinese stock investors. The Shanghai Composite Index more than doubled in the 12 months through May before losing 34% by the end of September as regulators failed to manage a surge in leveraged bets by individual investors. A state-sponsored market rescue campaign sparked a rally toward the end of the year but those gains have been wiped out this month. “The stock market developed so fast that the regulations failed to catch up,” said Ronald Wan, chief executive of Partners Capital International Ltd., an investment bank in Hong Kong. “Only when the laws and regulations improve, can the market develop in a healthy way. That cannot be done in one or two months.”
Losses this year were fueled by a controversial circuit-breaker system, which authorities scrapped in the first week of January after finding that it spurred investors to rush for the exits on big down days. The turbulence in China has rippled through global markets this year, contributing to a 8.5% drop in the MSCI All-Country World Index. The CSRC will try to learn from its overseas counterparts but will avoid wholesale adoption of another nation’s regulatory system, said Xiao. IPO reforms will be gradual and the registration system for offerings won’t be settled in one step, he said. China plans to shift to a registration-based system for IPOs, loosening the grip of the CSRC, which has controlled the timing and pricing of listings.
The head of the newly opened Asia Infrastructure Investment Bank said the China-led group is aiming to approve its first loans before the end of the year, part of Beijing’s efforts to weave together regional trade partners and solidify its global status. The AIIB officially opened at a ceremony on Saturday in Beijing, formalizing the emergence of a competitor to the Washington-led World Bank and strengthening China’s influence over global development and finance. AIIB’s inaugural president, the Chinese banker Jin Liqun, said Sunday that Asia still faces “severe connectivity gaps and significant infrastructure bottlenecks.” The bank would welcome the US and Japan, two economic powers that have declined invitations to join the organization, said Jin, who was previously a high-ranking official at both the World Bank and Japan-led Asian Development Bank.
Washington has said it welcomes the additional financing for development but had expressed concern looser lending standards might undercut efforts by existing institutions to promote environmental and other safeguards. Chinese officials have said the bank will complement existing institutions and promised to adhere to international lending standards. Chinese President Xi Jinping has outlined a broad plan called “One Belt One Road” to deepen trade relations with neighboring countries and open new markets, with the AIIB a key component of that strategy. Leaders in the world’s No. 2 economy have long felt they don’t have proportional influence inside international financial institutions dominated by Western powers. China pledged to put up most of the bank’s $50 billion in capital and says the total will eventually be as high as $100 billion. Xi on Saturday unveiled an additional $50 million fund for infrastructure projects in less-developed countries.
We can now make it official, because moments ago we got confirmation from a second source who reports that according to an energy analyst who had recently met Houston funds to give his 1H16e update, one of his clients indicated that his firm was invited to a lunch attended by the Dallas Fed, which had previously instructed lenders to open up their entire loan books for Fed oversight; the Fed was shocked by with it had found in the non-public facing records. The lunch was also confirmed by employees at a reputable Swiss investment bank operating in Houston. This is what took place: the Dallas Fed met with the banks a week ago and effectively suspended mark-to-market on energy debts and as a result no impairments are being written down.
Furthermore, as we reported earlier this week, the Fed indicated “under the table” that banks were to work with the energy companies on delivering without a markdown on worry that a backstop, or bail-in, was needed after reviewing loan losses which would exceed the current tier 1 capital tranches. In other words, the Fed has advised banks to cover up major energy-related losses. The reason for such unprecedented measures by the Dallas Fed? Our source notes that having run the numbers, it looks like at least 18% of some banks’ commercial loan book are impaired, and that’s based on just applying the 3Q marks for public debt to their syndicate sums.
In other words, the ridiculously low increase in loss provisions by the likes of Wells and JPM suggest two things: i) the real losses are vastly higher, and ii) it is the Fed’s involvement that is pressuring banks to not disclose the true state of their energy “books.” Naturally, once this becomes public, the Fed risks a stampeded out of energy exposure because for the Fed to intervene in such a dramatic fashion it suggests that the US energy industry is on the verge of a subprime-like blow up. Putting this all together, a source who wishes to remain anonymous, adds that equity has been levitating only because energy funds are confident the syndicates will remain in size to meet net working capital deficits. Which is a big gamble considering that as we firsst showed ten days ago, over the past several weeks banks have already quietly reduced their credit facility exposure to at least 25 deeply distressed (and soon to be even deeper distressed) names.
The Wall Street banks that financed the U.S. shale boom are facing growing losses as oil falls below $30 a barrel. Losses are spreading from bondholders to banks amid the worst oil crash in a generation. Wells Fargo, Citigroup and JPMorgan have set aside more than $2 billion combined to cover souring energy loans and will add to that safety net if prices remain low, the companies reported this week. Losses are mounting as more oil and natural gas producers default on debt payments and declare bankruptcy. Wells Fargo lost $118 million on its energy portfolio in the fourth quarter and Citigroup lost $75 million. “It takes time for losses to emerge, and at current levels we would expect to have higher oil and gas losses in 2016,” John Stumpf, Wells Fargo’s chairman and CEO, said during a Friday earnings call.
Oil plunged 36% in the past year, putting an end to the debt-fueled drilling spree that pushed U.S. oil production to the highest in more than 40 years. After years of spending more than they made, shale companies have parked drilling rigs and fired thousands of workers in an effort to conserve cash. In 2015, 42 oil and and gas producers went bust owing more than $17 billion, according to law firm Haynes & Boone. The weakness in oil and gas lending was a hot topic during bank earnings calls this week, and it’s clear that the potential for losses is snowballing the longer prices remain low. Wells Fargo’s energy reserves of $1.2 billion are enough to cover 7% of the $17 billion of the bank’s outstanding oil and gas loans.
JPMorgan Chase boosted energy loan-loss reserves by $550 million last year and said it will add another $750 million if oil stays at $30 for 18 months. Citigroup increased reserves by $250 million and that will go up by an additional $600 million in the first half of 2016 if oil prices remain at $30. If oil falls to $25, that number may double. Lenders are walking a tightrope between helping their clients stay afloat and looking out for their own bottom line. Borrowers with risky credit typically put up their oil and gas properties as collateral for their loan. Historically, lenders managed to get all of their money back, even in bankruptcy, by liquidating the assets. However, foreclosing on a troubled borrower comes with the risk that the properties will sell for less than is owed to the bank.
Federal Reserve officials who spent months debating their first interest-rate increase in almost a decade are turning next to the thorny question of what to do with a balance sheet equivalent to the size of Japan’s economy. A month after liftoff, turmoil in global financial markets has pushed out expectations for more rate hikes and raised concern about what tools are available to fight the next downturn. Vice Chairman Stanley Fischer has suggested the $4.5 trillion balance sheet could be maintained as a way to hold down longer-term Treasury yields while the short-term policy rate was lifted. Fischer’s idea – discussed in a Jan. 3 speech partly on strategies for pulling the short-term rate away from zero – was taken up in more practical terms by New York Fed President William C. Dudley Friday.
Reinvesting maturing bonds and putting off a reduction in the balance sheet until the federal funds rate is raised somewhat higher “makes sense,” Dudley said. “Having more ‘dry powder’ in the form of higher short-term interest rates seems more desirable than less dry powder and a smaller balance sheet,” he said. Fed Chair Janet Yellen made similar comments in her Dec. 16 press conference, meaning the three most senior officials still view the central bank’s vast holdings of debt as an active policy tool rather than a relic of the financial crisis that needs to be shrunk as soon as possible. “Dudley’s view is if we get to choose our tool” to tighten policy, “then we are going to choose interest rates,” said Michael Hanson, senior economist at Bank of America.
That’s the safer choice, Hanson said, because officials are highly uncertain what shrinking the balance sheet would do to financial markets. The preference to maintain trillions in bond holdings for months to come, however, isn’t likely to be popular with all Federal Open Market Committee participants. Richmond Fed President Jeffrey Lacker favors an “expeditious” unwinding of the Fed’s bond holdings. The Fed’s balance sheet swelled to $4.5 trillion in 2014 from about $900 billion in 2008 on purchases of Treasuries and mortgage-backed securities, during three stages of a strategy known as quantitative easing.
The possible selloff of at least part of Aramco, previously considered the country’s crown jewel, has stunned the global energy and investment sectors as much as locals. One Wall Street report claimed an American financial adviser was forced to stop his car because he was laughing so much from sheer incredulity when the Aramco float news broke. But plans for an initial public offering by what may be most secretive – but almost certainly the most valuable – company in the world have been confirmed by its chairman, Khalid al-Falih. “We are considering … a listing of the main company and obviously the main company will include upstream,” he said last week, thereby indicating that the flotation plan could give access to the country’s 260bn barrels of oil reserves and 263 trillion cubic feet of gas.
Among the more than 100 oil and gas fields controlled by Aramco – which began life as the California-Arabian Standard Oil Company in 1933 – are Ghawar, the world’s largest onshore oil location, plus Safaniya, the biggest offshore field in the world. The scale of the Aramco empire dwarfs every other corporation in the world. Its oil assets alone are 10 times more than those held by the world’s largest publicly quoted oil company, ExxonMobil. If the Texas-based business has a stock market value of $400bn, that would make Aramco’s oil assets potentially worth $4tn. Energy analysts admit they find it impossible to accurately calculate the exact worth of a company that boasts of producing 9.5m barrels of oil a day – one in every eight of the world’s production.
But some estimates go as high as $10tn. That is 10 times the combined value of Apple and Alphabet (the new parent company of Google). They know Aramco has huge oil and gas reserves, a raft of refineries and other business interests, but details are scant. The company does not publish its accounts or even its revenues, never mind its profits.
A record losing streak in the loonie, plunging bond yields and about $150 billion wiped out in the stock market have left Canadian investors hanging by a thread. Panic is starting to set in. “The word fear is finally starting to come up,” said Martin Pelletier, managing director and portfolio manager at TriVest Wealth Counsel in Calgary. “Clients and people are starting to panic. It’s sinking in, but no one knows what to do.” North American stock markets wrapped up one of their most turbulent weeks in recent memory Friday as oil prices and the dollar plunged further. The commodity-sensitive loonie plumbed depths not seen since 2003 as it fell for an 11th-straight day, losing 0.81 of a U.S. cent to close at 68.82 cents US.
The benchmark Standard & Poor’s/TSX Composite Index dropped 262.57, or 2.13%, to 12,073.46 — its lowest close since June 2013 — after rebounding more than 165 points on Thursday. Yields on five-year government bonds fell to a record low of 0.511% Wednesday as speculation builds the Bank of Canada will cut interest rates next week. Canada’s economy, heavily weighed toward resource industries, has been rocked by concerns about the slowdown in China that has pushed the price of West Texas Intermediate crude below $30 for the first time since 2003. Prices for Canada’s heavy crude, which trades at a discount to the U.S. benchmark, have sunk to around $15 a barrel.
The February contract for WTI crude fell $1.78 to US$29.42 on Friday, while February natural gas fell four cents to US$2.10 per mmBTU. “Right now … people are looking at oil and saying the price of oil is dropping, ergo the economic outlook doesn’t look good. I think it’s as simple as that,” said Ian Nakamoto, director of research at 3Macs. “If oil rallies like it did (Thursday), I think the markets rise here.” But Nakamoto isn’t betting we’ve seen the bottom for oil just yet. “One thing we do know is the supply is greater than demand, so structurally it looks likes prices still have further to go here on the downside.”
Lawmakers allied with German Chancellor Angela Merkel say it’s time for the ECB to outline an exit strategy from record-low interest rates and she should tell Mario Draghi so. As Merkel hosted the ECB president for a private meeting in Berlin on Friday, German banks, her party bloc and Bundesbank head Jens Weidmann are pushing for Draghi to explain how he’ll get out of quantitative easing. Designed to counter “economic malaise” as Europe’s debt crisis recedes, the policy is seen by critics as hurting German savers and retail investors, who tend to prefer low-risk investments. “I trust that the chancellor will clearly address the concerns related to the ECB’s policy” when she hosts Draghi at the chancellery, said Alexander Radwan, a member of the German parliament’s finance committee and lawmaker from Merkel’s party bloc.
Merkel should help to ensure “that Europe recognizes the limits of central-bank policy,” he said. While ECB policy is out of Merkel’s hands, low borrowing costs for the 19 euro-area nations are adding to dissatisfaction among members of her party, whose loyalty is already strained by euro-area bailouts and a record influx of refugees to Germany. Draghi argues that the central bank’s €1.5 trillion bond-buying program is needed to try to revive inflation and he’s pledged to do more if prices don’t pick up. Merkel and Draghi held what Steffen Seibert, Merkel’s chief spokesman, described as an “informal and confidential” meeting. The chancellor’s office declined to comment on what they discussed.
That reticence hasn’t stopped Wolfgang Schaeuble, Merkel’s finance minister since 2009 and one of her key allies, from publicly prodding the ECB and portraying its policies as a threat to financial stability. Monetary policy has fueled a tendency toward “exaggeration in financial markets,” with liquidity spurring nervousness “that’s materializing in China now,” Schaeuble said in Brussels on Thursday. “I will not deny that the low interest rates are worrying us,” Antje Tillmann, the finance-policy spokeswoman of Merkel’s party bloc, said in an interview. Germany can manage the low-rate environment only in the short term “and I hope therefore that this will change. I believe Mr. Draghi knows that we’re waiting for this.” Weidmann warned on Tuesday in Paris that low rates over an extended period squeeze bank profits and risk fueling financial bubbles.
Last year Hamdi Ulukaya, a Kurdish entrepreneur who created the billion-dollar US-based Chobani yoghurt empire, travelled to Greece to see the swelling refugee crisis with his own eyes. Unsurprisingly, he was horrified by the human suffering that he witnessed, particularly as he shares a cultural affinity with many of the refugees — he grew up near the Syrian border in Turkey, before moving to the US as a student. But Ulukaya was also appalled by something else: the hopelessly bureaucratic and old-fashioned nature of the organisations running the aid efforts. “The refugee issue is being dealt with using [methods from] the 1940s and it’s in the hands of the UN and mostly government and you don’t see a lot of private sector and entrepreneurs involved,” he told me last week.
“I decided we have got to hack this — we have got to bring another perspective into this issue, there are technologies that can be used.” So Ulukaya decided to act. Last year he established a foundation, Tent, to channel financial aid and innovation efforts into refugee work. He also declared that he would give half his fortune to refugee causes (he has made an eye-popping $1.4bn from his wildly popular Chobani yoghurts in recent years). And he has stepped up efforts to hire as many refugees as he can at his yoghurt plants, where they currently account for 30 per cent of the total workforce, or 600 people. “There are 11 or 12 languages spoken in our factories,” says Ulukaya. “We have translators 24 hours a day.”
Now, however, Ulukaya wants to take his campaign further. At next week’s World Economic Forum (WEF) meeting in Davos, he will call on other CEOs to join a campaign to channel corporate money, lobbying initiatives, services and jobs to refugees. Five companies have already signed up: Ikea, MasterCard, Airbnb, LinkedIn and UPS — and Ulukaya says more are poised to join. I daresay some FT readers will shrug their shoulders at this; indeed, as a journalist, part of me feels a little cynical. Over the past couple of years, there has been a string of philanthropy initiatives from American billionaires. And this year’s WEF meeting is likely to produce another wave of pious pledges, not least because many corporate elites will be arriving in Switzerland keenly aware that they need to do more to quell a popular backlash over income inequality.
But what makes Ulukaya’s move unusual — and admirable — is his unashamed embrace of the refugee cause. And that illustrates a bigger point: the voice of business has been extraordinarily muted, if not absent, from this wider policy debate. To be sure, some companies, such as American Express, Starbucks, Google and Uniqlo, have made donations to humanitarian groups involved in helping refugees. Others have offered practical services: Daimler, for example, has provided buildings and medical devices. Most companies, however, have avoided getting too embroiled in the issue, preferring to concentrate on less political causes such as medical aid. “With few exceptions, the business community has been absent from the debate about how to best deal with the refugee crisis, not only in the short term but, importantly, in the long term,” says Ioannis Ioannou, a professor at London Business School.
German Finance Minister Wolfgang Schaeuble has proposed the introduction of a special tax on gasoline in European Union member states to finance refugee-related costs such as strengthening the continent’s joint external borders. Schaeuble’s proposal drew criticism from members of his own conservative party, the Christian Democratic Union (CDU), as well as from the Social Democrats (SPD), junior partner in Chancellor Angela Merkel’s ruling coalition. “I’ve said if the funds in the national budgets and the European budget are not sufficient, then let us agree for instance on collecting a levy on every liter of gasoline at a specific amount,” Schaeuble told Sueddeutsche Zeitung newspaper in an interview published on Saturday.
“We have to secure Schengen’s external borders now. The solution of these problems must not founder due to a limitation of funds,” the veteran politician said. Asked if all EU countries should increase their payments to Brussels to finance joint refugee-related costs, Schaeuble said: “If someone is not willing to pay, I’m nonetheless prepared to do it. Then we’ll build a coalition of the willing.” Schaeuble gave no details on how high the extra levy on gasoline should be and whether Brussels or the EU member states would be in charge of collecting it. Schaeuble’s was met with criticism across the party political spectrum. “I’m strictly against any tax increase in light of the good budgetary situation,” said CDU deputy Julia Kloeckner who wants to win a regional election in the western state of Rhineland-Palatinate in March.
When describing dead bodies they know nothing about, AP chooses to go with “most likely migrants”. Whereas, obviously, they’re at least as likely to be refugees. They know it, we know it, but the bias is too strong to overcome. Plus, it’s like saying all refugees are migrants. And if you repeat it often enough… Does any of you people ever think about the lack of respect for the dead you promote?
Five people, most likely migrants, have been found dead off the eastern Greek island of Samos, Greek authorities report. The Greek coast guard has recovered the bodies of two men and three women, and are trying to recover the sixth in rough seas, a coast guard spokeswoman told AP. No vessel has been recovered yet. The rescue operation continues, said the spokeswoman, who was not authorized to be identified because of the continuing operation. Samos, which lies very close to the Turkish coast, is one of the main points of entry for migrants, most refugees from Syria and Iraq.
Turn those machines back on. So demands the unscrupulous banker, Mortimer Duke, when he finds he and his brother Randolph have been ruined by their speculative scam in the film Trading Places. Having lost all his money betting wrongly on orange juice futures, Mortimer demands that trading be restarted so that he can win it back. It’s not known whether Christine Lagarde is a secret fan of John Landis movies. As a French citizen, François Truffaut might be more her taste. There is, though, more than a hint of Trading Places about the advice being handed out by Lagarde’s IMF to global policymakers. To Europe and Japan, the message is to print some more money. Keep those machines turned on, in other words.
To the US and the UK, there was a warning that raising interest – something central banks in both countries are contemplating – could have nasty spillover effects around the rest of the world. Think long and hard before turning those machines off because you may have to turn them back on again before very long, Lagarde is saying, because the big risk to the global economy is not that six years of unprecedented stimulus has caused inflation but that the recovery is faltering. These are indeed weird times. Share prices are rising and so is the cost of crude oil, but the sense in financial markets is that the next crisis is just around the corner. The world is one recession away from a period of stagnation and prolonged deflation in which the challenge would be to avoid a re-run of the Great Depression of the 1930s.
That fate was avoided in 2008-09 by strong and co-ordinated policy action: deep cuts in interest rates, printing money, tax cuts, higher public spending, wage subsidies and selective support for strategically important industries. But what would policymakers do in the event of a fresh crisis? Would they double down on measures that have already been found wanting or go for something more radical? Ideas are already being floated, such as negative interest rates that would penalise people for holding cash, or the creation of money by central banks that would either be handed straight to consumers or used to finance public infrastructure, also known as “people’s QE”.
Time people understood this. “QE is deflationary because it shrinks net interest margins for banks via depressing treasury bond yields. It also enriches the already wealthy via asset price inflation but they do not raise their consumption in response..”
Why were the inflation hawks so wrong about quantitative easing? Why didn’t all the money printing lead to commodity prices skyrocketing? One answer is that, while bank reserves were boosted, lending didn’t take off and there was no uptick in the velocity of money the speed at which capital zooms through the economy and turns over. Absent velocity of money, QE could be looked at as either ineffective or actually causing a deflationary environment, where capital is hoarded and everyone is too petrified to risk it on productive endeavors. Christopher Wood (CLSA) explains further in his new GREED & fear note:
To GREED & fear the best way to illustrate that quantitative easing is not working is the continuing decline in velocity and the resulting lack of a credit multiplier since the unorthodox monetary regime was introduced. In America, Japan and the Eurozone velocity has continued to decline since the financial crisis in 2008. Thus, US, Japan and Eurozone money velocity, measured as the nominal GDP to M2 ratio, has declined from 1.94x, 0.7x and 1.29x respectively in 1Q98 to 1.5x, 0.55x and 1.05x in 2Q15 (see Figure 3).
Indeed, US money velocity is now at a six-decade low. This is why those who have predicted a surge in inflation in recent years caused by the Fed printing money have so far been proven wrong. For inflation, as defined by conventional economists like Bernanke in the narrow sense of consumer prices and the like, will not pick up unless the turnover of money increases. This is the problem with the narrow form of mechanical monetarism associated with the likes of American economist Milton Friedman.
Wood goes on to make the point that QE is deflationary because it shrinks net interest margins for banks via depressing treasury bond yields. It also enriches the already wealthy via asset price inflation but they do not raise their consumption in response, because how much more shit can they possibly buy? Finally, it leads to a preference of share buybacks vs investment spending because the payback from financial engineering is so much easier and more immediate.
The slow recovery of western economies means the US Federal Reserve should not raise interest rates yet, according to the Chinese finance minister. Speaking on the sidelines of the annual meeting of the World Bank and International Monetary Fund in Lima, Lou Jiwei said developed economies were to blame for the global economic malaise because their slow recoveries were not creating enough demand. “The United States isn’t at the point of raising interest rates yet and under its global responsibilities it can’t raise rates,” Lou said in an interview published in the China Business News on Monday. The minister said the US “should assume global responsibilities” because of the dollar’s status as a global currency.
Lou’s comments were published hours after Fed vice-chairman Stanley Fischer said policymakers were likely to raise interest rates this year, but that that was “an expectation, not a commitment”. Asked about the global economic situation, Lou said the problem was not with developing countries. “Rather, it is the continued weak recovery of developed countries” that’s hindering the global economy, he said. “Developed countries should now have faster recoveries to give developing countries some external demand.” Lou welcomed the structural reforms in Europe as a positive development, but said geopolitics and the Syrian refugee crisis would have an impact on its economy. He described the slowdown in China’s economy as a healthy process, but said policy makers needed to manage it carefully.
“The slowing of China’s economic growth is a healthy process, but it is a sensitive period. The Chinese government must make accurate adjustments, keeping the economy within a predictable space while continuing to promote internal structural reforms,” he said.
Bill Gross, America’s “bond king”, who made his fortune betting on IOUs from companies and governments, is suing his erstwhile employer for $200m, we learned last week. He says his colleagues were driven by greed and “a lust for power”. His chutzpah was a timely reminder of the vast sums won and lost in the world of globalised capital, but also of the power that still lies in the hands of men (they are mostly men) like Gross, who sit atop a system that remains largely untamed despite the lessons of the past seven years. To those caught up in it, America’s sub-prime crash and its aftermath felt like a unique – and uniquely dreadful – chain of events, a financial and human disaster on an unprecedented scale. Yet it was just the latest in a series of periodic convulsions in modern capitalism, from the east Asia crisis to the Argentine default, to Greece’s humiliation at the hands of its creditors.
The first tremors of the next earthquake could be sensed by the central bankers and finance ministers gathered in Lima for the IMF’s annual meetings this weekend. Many were fretting about the knock-on effects of the downturn in emerging economies – led by China. Take a step back, though, and both the emerging market slowdown and the boom that preceded it are just the latest symptom of the ongoing malaise afflicting the global financial system. Seven years on from the Lehman collapse in September 2008, there has been some re-regulation – the Bank of England will soon announce details of the Vickers reforms, which will make banks split their retail arms from the riskier parts of their business – but many elements of the financial architecture remain unchallenged.
Capital swills unchecked around the world; governments feel compelled to prioritise the whims of international investors such as Gross – who tend to have a neoliberal bent – over the needs of domestic businesses; and credit ratings agencies remain all-powerful, despite their dismal record. The theory behind free-flowing capital is that it allows the world’s savings to find the most profitable opportunities – even far from home – and provides the impetus for investment and entrepreneurialism, aids economic development and boosts growth. Yet as Unctad, the UN’s trade and development arm, detailed in its annual report last week, the reality is very different. Capital flows are often driven more by the global financial weather than by the investment prospects in emerging economies; they can be disproportionately large; and they can change abruptly with the market mood, overwhelming domestic efforts to promote stable development.
Glencore, which has flagged divestments as part of a plan to cut debt by about $10 billion after commodity prices plunged, halted trading in Hong Kong Monday pending an announcement on proposed asset sales in Australia and Chile. The Swiss trader and miner said last month it’s planning to raise about $2 billion from the sale of stakes in its agricultural assets and precious metals streaming transactions. While the company didn’t identify specific assets in the statement requesting the trading halt, it has copper operations in Chile and coal, zinc and copper mines in Australia. The potential sales are part of the debt-cutting program that Glencore CEO Ivan Glasenberg announced in early September. The plan includes selling $2.5 billion of new stock, asset sales, spending cuts and suspending the dividend. Taken together, the measures aim to reduce debt from $30 billion nearer to $20 billion.
The company is seeking to raise more than $1 billion by selling future production of gold and silver, two people familiar with the situation said Oct. 1. The company produced 35 million ounces of silver last year and 955,000 ounces of gold from mines in South America, Australia and Kazakhstan. Investors including Qatar Holding, the direct investment arm of the Gulf state’s sovereign wealth fund, have expressed an interest in buying a minority stake in Glencore’s agriculture business, according to three people familiar with the conversations. Citigroup, one of the banks hired to run the sale alongside Credit Suisse, said earlier this month that the whole business could be worth as much as $10.5 billion. The company has also announced cuts to copper and zinc output in an effort to support metal markets.
“Without the oxygen of cheap debt, commodity trading houses are finished. Each trade in oil or iron ore might generate only 1pc to 2pc in margin – but this greatly increases when magnified by debt. The only limit on profits is then how much you can borrow. Greed drives returns. ”
The collapse in commodity prices has sparked a second credit crisis as investors dump high-yield bonds, shattering the fragile confidence necessary to support global markets. Those calling it a Lehman moment forget their history. Current events have chilling similarities to the Bear Stearns collapse and mark the start of a new crisis, not the end. The world of commodity trading has been thrown into chaos as the cost of borrowing to fund operations soars. Glencore has become the poster child for the sector’s woes as its shares have more than halved in value during the past six months. More worrying has been the impact on the group’s credit profile. Glencore’s US bonds due for repayment in 2022 have collapsed to around 82 cents in the dollar. Only four months earlier, they had been stable at around 100 cents, implying that those who lent money would get it back plus interest.
Now for every dollar lent to Glencore, banks face losses, and as the price of bonds falls the yield has risen to 7.4pc. Without the oxygen of cheap debt, commodity trading houses are finished. Each trade in oil or iron ore might generate only 1pc to 2pc in margin – but this greatly increases when magnified by debt. The only limit on profits is then how much you can borrow. Greed drives returns. Glencore is a profitable business when it can borrow at around 4pc, but if it has to refinance at 7pc to 10pc those slim profit margins evaporate. The fear of those holding Glencore debt can be seen in the soaring price for the insurance against a default, or credit default swaps (CDS). Glencore five-year CDS has soared to 625, from about 280 just a month ago. A rule of thumb is that a CDS above 400 means a serious risk of a default, or about a 25pc chance in the next five years.
Glencore has taken drastic action to reduce its $50bn debts, or $30bn if all its stocks of metals are deducted, which it reported at the end of September. A $2.5bn equity raising has been completed, the dividend has been axed and assets sold as part of a $10bn debt reduction plan. However, if borrowing costs remain where they are, the game may already be over. If Glencore itself were to fold, it would be a huge problem with its $221bn in annual revenues, but when combined with the other commodity trading houses, Trafigura, Vitol and Noble, the fallout would be disastrous. Trafigura is not listed but its debt is publicly traded and the bonds have collapsed to 86 cents in the dollar, or a yield of 8.9pc. Noble, the Singapore trading house, has also seen its shares collapse as commodity prices slump. First-half profits from Noble’s metals trading have fallen 98pc to just $3m. This has been offset by strong results in oil trading, but the problems remain.
Do not believe in official statistics, Japanese retailers seem to be saying, as they cut earnings forecasts and warn of lackluster consumer spending, a key growth engine for Japan at a time when exports and factory output are stalling. If you go by the larger-than-expected 2.9% gain in household spending in August – the first year-on-year rise in three months – then consumption looks like it is finally alive and well again, after a sales tax hike last year stifled the economy. But profits of retailers suggest the spending data, which has a small sample size, has not captured the full picture. Restrained household consumption raises the stakes for a central bank policy meeting on Oct. 30, and for the government’s plan to flesh out new economic policies before the year-end.
“Consumer spending has ground to a halt,” said Noritoshi Murata, president of Seven & i Holdings (3382.T). “There are a lot of concerns about the global economy and not many positives for consumption. Weak spending could continue into the second half of the fiscal year.” Seven & i, which operates Japan’s ubiquitous 7-Eleven convenience stores, on Oct. 8 trimmed its full-year profit forecast by 1.6% to 367 billion yen ($3.05 billion) and cut its revenue forecast by 3.9% to 6.15 trillion yen, triggering a fall in its shares in Tokyo. The main problem is wages are not rising fast enough to keep pace with rising food prices, and consumers are starting to cut back on other goods. Real wages, adjusted for inflation, rose 0.5% in July from a year earlier. That was the first gain in 27 months.
But wage growth subsequently slowed to 0.2% in August, and summer bonuses fell from last year, government data shows. Another problem is more and more workers are getting stuck in jobs with low pay. Part-time and irregular workers comprised a record 37.4% of the workforce last year, according to the National Tax Bureau. Irregular workers earn on average less than half of what regular full-time workers earn, tax data show. The third problem is the government plans to raise the nationwide sales tax again, to 10% in 2017 from 8%, and households are already changing their behavior.
Countries that try to spend their way out of crisis risk becoming stuck in a permanent malaise, according to the head of the Organisation for Economic Co-operation and Development (OECD). Angel Gurria said central banks were running out of firepower to boost economies in the event of another sharp slowdown, while governments had limited space to ramp up spending. The secretary general said structural reforms and more international co-operation were badly needed in a world of deteriorating growth. “Countries that say: I’ll spend my way out of this third slump. I say: no you won’t, because you’ve already done that, and you ran out of space,” Mr Gurria said on the sidelines of the IMF’s annual meeting in Lima, Peru.
“Now countries are trying to reduce the deficit and debt because that’s a sign of vulnerability and the rating agencies are breathing down their neck – they’ve already downgraded Brazil and France. “We don’t have room to inflate our way out of this one. So we go back to the same issue: it’s structural, structural, structural.” The OECD has been working with countries such as Greece to liberalise product markets, which deal with competitiveness issues and labour laws. Mr Gurria, who has urged countries for years to implement structural reforms, said he was frustrated at the lack of progress: “If you listen to the conversations we have on opening on Sundays you wouldn’t believe it. Or the debates we have about [the] 35 hour [working week]. These are the real issues.
“The people, the trade unions, they all have a stake and their arguments are strong. But where countries have room is to make structural changes, and central banks can help by continuing to ease. “[With quantitative easing] there is a question of whether we’re entering a territory of diminishing returns. Of course we must use it, but there’s not a lot of room left.” Mr Gurria conceded that the benefits of reform were gradual. “Germany modified its labour laws 12 years ago, and it’s reaping the benefits brilliantly and gallantly because of much better performance during the crsis. Spain did it three years ago, and they’re reaping the benefits now. Italy did it last month, and it will take a couple of years.”
The German chancellor and the French president stood side by side last Wednesday to address the European Parliament. But beneath that show of solidarity lies a story of two diverging economies at the heart of the euro zone. At the time the euro was born, Germany’s economy – bearing close to $2 trillion in reunification costs – looked not too dissimilar to France’s. Today, however, the gap between the two countries is the widest since the reunification. Not only is the debt-to-gross-domestic-product ratio of France and Germany the widest in 20 years, but – more importantly in a currency union without a federal state – the latter has a huge and increasing current surplus, while the former is in deficit.
This is not surprising. Germany, while benefiting greatly from the opened markets of its fixed exchange rate partners, undertook a series of reforms to improve its economic position. France was not only unable to reform but indulged in the 35-hour workweek. If we were still living under the European Monetary System that predated the euro, France would simply have had to devalue, as it did many times before the euro. Under the euro, helped by its trade surplus, Germany kept a tighter budget, while the French state kept spending an ever-higher percentage of its GDP in repeated attempts to support its faltering economy. As a result, its debt is now close to the symbolic 100% of GDP level, not accounting for unfunded pension liabilities, and the rating agencies have stripped it of its AAA rating and continue to downgrade it. The European Commission, in its last assessment, speaks of France facing “high sustainability risk” in the medium term.
This is not just a French problem though; it’s a euro-zone one. According to Eurostat, in the first quarter of 2015, the euro-zone debt-to-GDP ratio was 92.9% — the highest it has been since the creation of the euro. Never has the zone been so far away from its own Maastricht fiscal sustainability criteria. Huge differences between countries exist, but the only country of the original 12 euro-zone members still respecting the debt and deficit levels is tiny Luxembourg. What does this say for the future of the euro?
The European Investment Bank (EIB) could recall loans it gave to Volkswagen, its president told a German newspaper. Werner Hoyer told Sueddeutsche Zeitung that the EIB gave loans to the German carmaker for things like the development of low emissions engines. He said they could be recalled in the wake of VW’s emissions cheating. The paper reported that about €1.8bn of those loans are still outstanding. Mr Hoyer is quoted as saying that the EIB had granted loans worth around €4.6bn to Volkswagen since 1990. “The EIB could have taken a hit [from the emissions scandal] because we have to fulfil certain climate targets with our loans,” the Sueddeutsche Zeitung quoted Mr Hoyer as saying. Mr Hoyer was attending the IMFs meeting in Lima, Peru. He added that the EIB would conduct “very thorough investigations” into what VW used the funds for.
Mr Hoyer told reporters that if he found that the loans were used for purposes other than intended, the EU bank would have to “ask ourselves whether we have to demand loans back”. He also said he was “very disappointed” by Volkswagen, adding the EIB’s relationship with the carmaker would be damaged by the scandal. Volkswagen admitted that about 11 million of its vehicles had been fitted with a “defeat device” – a piece of software that duped tests into showing that VW engines emitted fewer emissions than they really did. Mr Hoyer’s comments come days after VW’s US chief Michael Horn faced a Congress panel to answer questions about the scandal, which has prompted several countries to launch their own investigations into the carmaker. On Monday, VW’s UK managing director Paul Willis is due to appear before members of parliament at an informal hearing.
The state agency that carries out emissions tests on new vehicles has been paid more than £80 million by car companies over the last decade, The Daily Telegraph can disclose. The Vehicle Certification Agency, whose chief will appear on Monday before a Commons committee looking at the Volkswagen scandal, has reported a year-on-year rise in profits, receiving almost £13 million in 2014/15 alone. Campaigners claim Europe’s national certification agencies are competing so fiercely for business it is not in their interests to catch out car-makers. Samples of new cars must undergo checks by approval agencies to ensure they meet European performance standards. Once a car has been type-approved by the manufacturer s chosen national agency, it can be sold anywhere in Europe.
“Car makers are able to go type-approval shopping around Europe to get the best deals for them”, said Greg Archer, of campaign group Transport & Environment. “No one is checking that type approval authorities are doing an impartial or good job and this needs to change”, he added. Last month Volkswagen admitted that it had systematically installed software in VW and Audi diesels since 2009 to deceive regulators who were measuring their exhaust fumes. Since 2005 the VCA -an executive agency of the Department for Transport- has received a total of £84million from “product certification/type-approval services”, according to a Greenpeace investigation. It said the VCA’s outgoing CEO Paul Markwick, interim chief executive Paul Higgs and chief operating officer John Bragg had held senior positions with major car manufacturers.
MPs on the Commons select committee on transport will question Volkswagen bosses, Transport Secretary Patrick McLoughlin and the VCA’s acting chief, Mr Higgs, over the emissions violations. A Department for Transport spokesman said the VCA charged car-makers in order to cover its operating costs and to provide value for taxpayers. He added: “Whilst the VCA charges the industry for its services, its governance framework is set by government.” It claimed there was “a conflict of interest” . A Greenpeace spokesman said: The Government s testing regime failed the public. The question is why? “Our evidence suggests it’s not actually in the VCA’s interests to catch out the car-makers. Their business model -and it has become a business- is to attract manufacturers to test their cars with them. It’s a conflict of interest.”
Few cities are as dependent on one company as Wolfsburg. Situated 200km west of Berlin, it is home not just to the world’s biggest factory and Volkswagen’s headquarters, it also has a VW Arena where Champions League football is played, a VW bank, and even a VW butcher that makes award-winning curried sausage. “VW is God here,” says a Turkish baker on the main shopping street of Porschestrasse. But news of VW’s diesel emissions scandal has hit the city hard, sparking anger and dismay as well as worries of the financial and employment consequences for both the carmaker and Wolfsburg. Some are even invoking the decline of another motor city Detroit in the US.
“I am worried. It’s not good for Wolfsburg. Detroit stands as a negative example for what can happen: the city has collapsed. The same here is also thinkable,” says Uwe Bendorf, who was born and raised in Wolfsburg and now works at a health insurer. VW’s sprawling factory employs about 72,000 in a city with just 120,000 inhabitants. Over an area of more than 6 sq km, three times the size of the principality of Monaco, the plant churns out 840,000 cars a year, including the VW Golf, Tiguan and Touran models. Among workers, the scandal dominates rather like the chimney stacks of the factory’s power station tower over Wolfsburg.
“It was shock. Then anger. How could they be so stupid?” says one worker, describing his emotions on hearing last month that VW had admitted to large scale cheating in tests on its diesel vehicles for harmful emissions of nitrogen oxides. Another worker says: “Everyone is worried. Will we get our bonus still? Will there be job cuts? There is so much uncertainty.” Outside the factory gates, few are keen to be seen speaking to the media. But this is a city in which VW is omnipresent, and a VW worker never far away.
Russian expansionism is going into reverse, at least on the London stock market. Three of Russia’s major commodity-related companies are already preparing to withdraw their listings after the bursting of the raw-materials boom and a slump in share sales by the nation’s companies from more than $30 billion in 2007 to below $1 billion this year. Eurasia Drilling, the country’s largest oil driller, said last week its owners and managers offered to buy shareholders out and take the company private. That follows a move by potash miner Uralkali PJSC to buy back a major part of its free float, saying in August it may delist shares in London as a result. Billionaire Suleiman Kerimov’s family also plans to take Polyus Gold private.
More may follow as their owners’ interest in using foreign shares as a route to expansion wanes in tandem with overseas investors’ appetite for raw-material and emerging-market stocks, said Kirill Chuyko at BCS Financial Group in Moscow. “Each company has a specific reason, but the common one is that investors’ appetite for commodities-related stocks, especially from the emerging markets, is exhausted,” Chuyko said. “At the same time, the owners see that the companies’ valuations don’t reflect their hopes and wishes, while maintaining the listing requires some effort and expenditure.” Total equity sales by Russian companies this year are set to be about 30 times lower than the 2007 peak, when global commodity prices were about 90% higher than current levels.
A gauge of worldwide emerging-market stocks has declined 14% in the past year. Russia has been among the hardest-hit emerging economies as prices of oil and gas, making up half of the national budget, collapsed since last year. The economy shrank 4.6% in the second quarter from a year earlier. That’s a reversal from when oil prices and growth were high and local companies talked up expanding overseas. Polyus planned to merge with a global rival to become one of the world’s top three gold miners, billionaire Mikhail Prokhorov, who controlled the company at the time, said in December 2010. The producer, which redomiciled to the U.K. in 2012 as part of the plan, never achieved his goal.
Soaring London house prices are costing the economy more than £1bn a year and preventing the creation of thousands of jobs, as individuals plough money into buying and renting instead of spending their cash elsewhere, a report has claimed. London’s housing market recovered quickly from the financial downturn of 2008-2009 and in recent years rents and house prices have rocketed. House prices are more than 46% above their pre-crisis peak, at an average of £525,000 according to the Office for National Statistics, while rents in the private sector have risen by a third over the past decade. The report, by business group London First and consultancy CEBR, found that workers in many sectors were now priced out of the capital, while companies were being forced to pay more to attract staff and help them meet living expenses.
The report said there was a knock-on effect on consumer spending, with money being spent on expensive mortgages and rents rather than other goods. It said as much as £2.7bn could have been spent elsewhere in 2015 if housing costs had kept in line with inflation over the past decade. This additional spending could have supported almost 11,000 more jobs, and meant a boost to the economy of more than £1bn this year. Workers in shops, cafés and restaurants, and those performing administrative office roles would have to pay their entire pre-tax salary to rent an average private home in London, the report found, while social workers, librarians, and teachers faced rents equivalent to more than half their salaries.
It said only the best-paid workers, including company directors and those working in financial services, earned enough to rent in central London “affordably”; that is paying less than one-third of their salaries on housing. “The housing crisis is making it difficult to attract and retain staff in retail, care and sales occupations,” it said. “Even if they spend a limited amount on other goods and services, they are effectively priced out of living independently in the capital. They need to co-habit with partners, friends or family, or be eligible for social housing in the capital.” To compensate for high housing costs, employees expected higher salaries, which meant firms were paying an average of £1,720 a year more to workers than they would have had accommodation costs risen only in line with inflation since 2005. This meant an extra wage bill for firms of £5bn this year, and the figure was set to grow to £6.1bn by 2020.
House prices are set for a 7.5% decline from March next year, with the resulting slowdown in housing lending and construction activity set to hit the broader economy, according to a range of investment banks. “Our economics team are forecasting quarter-on-quarter house prices to fall from the March 2016 quarter before beginning to recover from June 2017,” said Macquarie Research in a briefing note entitled: “Australian Banks: What goes up, must come down”. Macquarie said there would be a “7.5% reduction from peak to trough”. Another economist says heavy household debt and softening house prices pose a greater recession risk to the Australian economy than the slowdown in China.
Bank of America Merrill Lynch Australian economist Alex Joiner says high historic indebtedness, coupled with the chance of a downturn in house-building and prices, could further crimp consumer spending and property investment once the Reserve Bank of Australia was forced to tackle inflation by lifting interest rates. He said while the chance of a “hard landing” in the Chinese economy – on which Australia depends heavily for exports and inward investment – was small, a sharp decline in demand for housing in overheated markets such as Melbourne and Sydney was more probable and would drag the broader economy with it. “We are not forecasting collapse or the bursting of any perceived bubble,” Mr Joiner wrote in a note.
“That said, it is not difficult to envisage a more hard landing scenario in the property market. “This would clearly have a greater negative macro-economic impact channelled through households and the residential construction cycle,” he said. His fears are based on current household indebtedness measures, which have soared to the highest ever. These include the dwelling price-to-income ratio, currently at “never before observed” levels of five and a half times, and a household debt-to-gross-domestic-product ratio, which is at a “record high” 133.6%.
Business as usual. That will be the implicit message when the Sveriges Riksbank announces this year’s winner of the “Prize in Economic Sciences in Memory of Alfred Nobel”, to give it its full title. Seven years ago this autumn, practically the entire mainstream economics profession was caught off guard by the global financial crash and the “worst panic since the 1930s” that followed. And yet on Monday the glorification of economics as a scientific field on a par with physics, chemistry and medicine will continue. The problem is not so much that there is a Nobel prize in economics, but that there are no equivalent prizes in psychology, sociology, anthropology. Economics, this seems to say, is not a social science but an exact one, like physics or chemistry – a distinction that not only encourages hubris among economists but also changes the way we think about the economy.
A Nobel prize in economics implies that the human world operates much like the physical world: that it can be described and understood in neutral terms, and that it lends itself to modelling, like chemical reactions or the movement of the stars. It creates the impression that economists are not in the business of constructing inherently imperfect theories, but of discovering timeless truths. To illustrate just how dangerous that kind of belief can be, one only need to consider the fate of Long-Term Capital Management, a hedge fund set up by, among others, the economists Myron Scholes and Robert Merton in 1994. With their work on derivatives, Scholes and Merton seemed to have hit on a formula that yielded a safe but lucrative trading strategy. In 1997 they were awarded the Nobel prize.
A year later, Long-Term Capital Management lost $4.6bn in less than four months; a bailout was required to avert the threat to the global financial system. Markets, it seemed, didn’t always behave like scientific models. In the decade that followed, the same over-confidence in the power and wisdom of financial models bred a disastrous culture of complacency, ending in the 2008 crash. Why should bankers ask themselves if a lucrative new complex financial product is safe when the models tell them it is? Why give regulators real power when models can do their work for them?
One week ago, when summarizing the current state of play in Syria, we said that for Obama, “this is shaping up to be the most spectacular US foreign policy debacle since Vietnam.” Yesterday, in tacit confirmation of this assessment, the Obama administration threw in the towel on one of the most contentious programs it has implemented in “fighting ISIS”, when the Defense Department announced it was abandoning the goal of a U.S.-trained Syrian force. But this, so far, partial admission of failure only takes care of one part of Obama’s problem: there is the question of the “other” rebels supported by the US, those who are not part of the officially-disclosed public program with the fake goal of fighting ISIS; we are talking, of course, about the nearly 10,000 CIA-supported “other rebels”, or technically mercenaries, whose only task is to take down Assad.
The same “rebels” whose fate the AP profiles today when it writes that the CIA began a covert operation in 2013 to arm, fund and train a moderate opposition to Assad. Over that time, the CIA has trained an estimated 10,000 fighters, although the number still fighting with so-called moderate forces is unclear.
The effort was separate from the one run by the military, which trained militants willing to promise to take on IS exclusively. That program was widely considered a failure, and on Friday, the Defense Department announced it was abandoning the goal of a U.S.-trained Syrian force, instead opting to equip established groups to fight IS.
It is this effort, too, that in the span of just one month Vladimir Putin has managed to render utterly useless, as it is officially “off the books” and thus the US can’t formally support these thousands of “rebel-fighters” whose only real task was to repeat the “success” of Ukraine and overthrow Syria’s legitimate president: something which runs counter to the US image of a dignified democracy not still resorting to 1960s tactics of government overthrow. That, and coupled with Russia and Iran set to take strategic control of Syria in the coming months, the US simply has no toehold any more in the critical mid-eastern nation. And so another sad chapter in the CIA’s book of failed government overthrows comes to a close, leaving the “rebels” that the CIA had supported for years, to fend for themselves. From AP:
CIA-backed rebels in Syria, who had begun to put serious pressure on President Bashar Assad’s forces, are now under Russian bombardment with little prospect of rescue by their American patrons, U.S. officials say. Over the past week, Russia has directed parts of its air campaign against U.S.-funded groups and other moderate opposition in a concerted effort to weaken them, the officials say. The Obama administration has few options to defend those it had secretly armed and trained.
The Russians “know their targets, and they have a sophisticated capacity to understand the battlefield situation,” said Rep. Mike Pompeo, R-Kan., who serves on the House Intelligence Committee and was careful not to confirm a classified program. “They are bombing in locations that are not connected to the Islamic State” group.
The EU must stop countries picking and choosing which refugees they accept in its relocation programme, otherwise it will turn into a shameful “human market”, Greece’s new migration minister said. The EU has approved a plan to share out 160,000 refugees, mostly Syrians and Eritreans, across its 28 states in order to tackle the continent’s worst refugee crisis since World War Two. The first 19 Eritrean asylum seekers were transferred from Italy to Sweden on Friday. Some countries, such as Slovakia and Cyprus, have expressed a preference for Christian refugees and Hungary has said the influx of large numbers of Muslim migrants threatens Europe’s “Christian values”. Migration Minister Yannis Mouzalas said that Greece was having trouble finding refugees to send to certain countries because the receiving nations had set what he called “racist criteria”.
He declined to name the states concerned. “Views such as ‘we want 10 Christians’, or ’75 Muslims’, or ‘we want them tall, blonde, with blue eyes and three children,’ are insulting to the personality and freedom of refugees,” Mouzalas told Reuters. “Europe must be categorically against that.” An EU official said a group of Syrian refugees was due to be relocated from Greece to Luxembourg under the EU scheme around Oct. 18, the first to be officially reassigned from Greece. A gynaecologist and founding member of the Greek branch of aid agency Doctors of the World, Mouzalas urged the EU to enforce strict quotas “otherwise it will turn into a human market and Europe hasn’t got the right to do that”. The refugees are generally not allowed to select the country to which they are assigned.
Greece has seen a record of about 400,000 refugees and migrants – mainly from Syria, Afghanistan and Iraq – arrive on its shores this year from nearby Turkey, hoping to reach wealthier northern Europe. Those who can afford it move on quickly to other countries, sometimes on tour buses taking them straight from the main port of Piraeus, near Athens, to the Macedonian border. But several thousand, mostly Afghans, have ended up trapped in Greece for lack of money. European authorities are reluctant to treat Afghans systematically as refugees, and a result, they are shut out of the relocation process. “It’s absurd to think that Afghans are coming to find better work. There is a long-lasting war, you aren’t safe anywhere, that’s the reality,” Mouzalas said.
In the past few years, the job market has vastly improved and home prices have rebounded — yet Americans are becoming even more irresponsible when it comes to saving for emergencies. According to a survey of 1,000 adults released by Bankrate.com on Tuesday, nearly one in three (29%) American adults (that’s roughly 70 million) have no emergency savings at all – the highest percentage since Bankrate began doing this survey five years ago. What’s more, only 22% of Americans have at least six months of emergency savings (that’s what advisers recommend) – the lowest level since Bankrate began doing the survey. These findings mirror others – all of which paint an abysmal picture of Americans’ ability to withstand an emergency. For example, a survey released in March by national nonprofit NeighborWorks America also found that roughly one third (34%) of Americans don’t have emergency savings.
Greg McBride, the chief financial analyst for Bankrate.com, says these low savings reflect that households haven’t seen their incomes ramp up and thus “household budgets are tight.” Plus, he adds “people don’t pay themselves first – they wait until the end of the month to save what’s left over and then nothing is left over.” The problem with this lack of savings is that emergencies can and do happen, and when they do, you may be forced into an expensive solution like credit cards or personal loans – and in extreme cases having to declare bankruptcy. Indeed, half of Americans had experienced an unforeseen expense in the past year, according to a 2014 survey by American Express; of those, 44% had a health care-related unforeseen expense and 46% had one related to their car – both of which tend to be things you can’t avoid paying.
Thus, advisers recommend that most Americans have at least six months worth of income in their emergency fund — and more if they have children or other dependents. To build this up, “start an automatic transfer to a savings account and set a task to revisit and increase the amount in a month,” says Robert Schmansky, the founder and a financial adviser at Clear Financial Advisors. “See how much you can increase the amount until it becomes noticeable and then stop.” Scott Cole, the founder of Cole Financial Planning, says to put the money in an FDIC-insured, high-yield savings account. Schmansky says that you want this account to be separate from your checking account “to prevent frivolous withdrawals.” He adds that while it’s important to find a good rate, it’s “equally important” that the money is accessible and the bank has “a long history of paying higher than market rates” as “too many banks in the past that started out as high yield payers dropped those rates after some time.”
Marine Le Pen, a frontrunner in France’s 2017 presidential election, says a Greek exit from the euro is inevitable. And if it’s up to her, France won’t be far behind. “We’ve won a few months’ respite but the problem will come back,” Le Pen said of Greece in an interview at her National Front party headquarters in Nanterre, near Paris, on Tuesday. “Today we’re talking about Grexit, tomorrow it will be Brexit, and the day after tomorrow it will be Frexit.” Le Pen, 46, is leading first-round presidential election polls in France, ahead of President Francois Hollande, ex-leader Nicolas Sarkozy and Prime Minister Manuel Valls. She’s the only one of the four calling for France to exit the euro, banking on people’s exasperation with the Greek crisis and Britain’s proposed referendum on the European Union to win over voters.
“I’ll be Madame Frexit if the European Union doesn’t give us back our monetary, legislative, territorial and budget sovereignty,” Le Pen said. She’s calling for an orderly breakup of the common currency, with France and Germany sitting around the table to dismantle the 15-year-old monetary union. Since she took over from her father as head of the National Front in 2011, Marine Le Pen has done her best to push the anti-immigration party into the French political mainstream. She came third in the 2012 presidential race and currently has two members in the country’s National Assembly for the first time since 1997. The combination of tepid economic growth and high unemployment at home, together with hundreds of thousands of African and Middle Eastern immigrants seeking jobs or asylum in Europe, has given Le Pen increased traction.
Even German Chancellor Angela Merkel has expressed concern about the level of support Le Pen will receive in 2017 and how that power might weigh on French economic policy. “She knows perfectly well that if France leaves, there’s no more euro,” Le Pen said. Although Le Pen hasn’t given a full, detailed plan of how she would lead her country out of the euro, she says she doesn’t believe France would be shut out of the borrowing market or rejected by investors as a result.
The Delphi Conference on the European/Russian crisis created by Washington issued a declaration repudiating the EU attack on the Greek nation. The Delphi Declaration asks the European peoples, especially the Germans, to do the right thing and object to the plunder of Greece by the One%. This appeal to good will is likely to fall on deaf ears even though the pillage of Greece will create a precedent that can then be applied to Italy, Spain, France, and even Germany.
THE DELPHI DECLARATION: European governments, European institutions and the IMF, acting in close alliance, if not under direct control of big international banks and other financial institutions, are now exercising a maximum of pressure, including open threats, blackmailing and a slander and terror communication campaign against the recently elected Greek government and against the Greek people. They are asking from the elected government of Greece to continue the “bail-out” program and the supposed “reforms” imposed on this country in May 2010, in theory to “help” and “save” it.
As a result of this program, Greece has experienced by far the biggest economic, social and political catastrophe in the history of Western Europe since 1945.It has lost 27% of its GDP, more than the material losses of France or Germany during the 1st World War. The living standards have fallen sharply, the social welfare system all but destroyed, Greeks have seen social rights won during one century of struggles taken back. Whole social strata were completely destroyed, more and more Greeks are falling from their balconies to end a life of misery and desperation, every talented person who can leaves from the country. Democracy, under the rule of a “Troika”, acting as collective economic assassin, a kind of Kafka’s “Court”, has been transformed into a sheer formality in the very same country where it was born!
Greeks are experiencing now the same feeling of insecurity about all basic conditions of its life, that French have experienced in 1940, Germans in 1945, Soviets in 1991. In the same time, the two problems which this program was supposed to address, the Greek sovereign debt and competitiveness of the Greek economy have, both, sharply deteriorated. Now, European institutions and governments are refusing even the most reasonable, elementary, minor concession to the Athens government, they refuse even the slightest face-saving formula, if it could be. They want a total surrender of SYRIZA, they want its humiliation, its destruction. By denying to the Greek people any peaceful and democratic way out of its social and national tragedy, they are pushing Greece into chaos, if not civil war.
By the way, even now, an undeclared social civil war of “low intensity” is waged inside this country, especially against the unprotected, the ill, the young and the very old, the weaker and the unlucky. Is this the Europe we want our children to live? We want to express our total, unconditional solidarity with the struggle of the Greek people for its dignity, its national and social salvation, for its liberation from the unacceptable neocolonial rule “Troika” is trying to impose on a European country. We denounce the illegal and unacceptable agreements successive Greek governments have been obliged, under threat and blackmail, to sign, in violation of all European treaties, of the Charter of UN and of the Greek constitution.
Greece’s parliament will have only a few days to pass all the economic reforms Athens promises its creditors to unlock desperately need bailout aid, putting intense pressue on prime minister Alexis Tsipras to build domestic political support for controversial concessions. Berlin has insisted on full and immediate legislative approval of measures that may be agreed at a meeting of eurozone finance ministers on Wednesday even though officials now concede a deal may come too late for Athens to meet a €1.5bn debt repayment to the IMF due on June 30. People briefed on Berlin’s thinking said months of fraught negotiations since the radical anti-austerity government came to power have undermined trust in Greece’s ability to fuflill its promises.
German officials want Greek parliamentary approval before an extension of its bailout programme is presented to the Bundestag before it expires on Tuesday. Greek authorities have already begun preparations for a hasty and potentially rancorous parliamentary debate over the weekend amidst growing signs Mr Tsipras’ new reform plan – which would be presented to eurozone leaders on Thursday — faces fierce resistance at home. A handful of more radical members of Mr Tsipras’ governing Syriza party have already vowed to mutiny over the proposal, and thousands of Greek pensioners took to the streets of Athens on Tuesday evening to decry the plans. “We have nothing, no money, we cannot live like this anymore,” shouted Thomas Yanakakis, 63, with tears in his eyes. “Enough is enough. Everyone must take to the streets now to stop this.”
The real question is why Europe is forcing Greece to do any more austerity at all. It’s already done so much that, before this latest showdown, it actually had a budget surplus before interest payments. And that’s all it should shoot for, really: the point at which it doesn’t need any more bailouts from Europe. Anything more than that, though, would just inflict unnecessary — and self-defeating! — harm to the economy. When interest rates are zero, like they are now, budget cuts of 3% of GDP would, by Paul Krugman’s calculation, make the economy shrink something like 7.5%. So even though you have less debt, your debt burden isn’t much better since you have less money to pay it back.
There’s only one reason to make Greece do more austerity, and it makes no sense at all. That’s to try to make it pay back what it owes. Indeed, one European official said that the entire point of this was that they “want to get our money back some day.” The problem, though, is everybody knows Greece will never do that. Its debt should have been written down in 2010, but it wasn’t because it was “bailed out” to the extent that it was given money to then give to French and German banks. The longer Europe pretends this new debt will be paid back, the longer Greece’s depression will go on. Now, it’s true that Europe has lowered the interest rates and extended the maturities on Greece’s debt so far out that, for now at least, it’s like a lot of it doesn’t exist.
But eventually it will, and at that point they’ll either need to extend-and-pretend some more or hope that Greece has returned to growth. Until then, Greece will be stuck in its economic Groundhog Day. It keeps trying to resist these pointless budget cuts that just keep it in a perpetual state of high unemployment, but then gives in at the last minute. On second thought, history is just repeating itself as tragedy over and over again.
Margarita sits cross-legged on a shiny parquet floor in a small Athens apartment, surrounded by piles of cardboard boxes. Within them are her family’s possessions. “I never expected to set up house in my late parents’ place,” the 42-year-old says. Her husband George, a banker made redundant three years ago, is overseeing workers installing security shutters in the two-bedroom, one-balcony space, while her 16-year-old daughter Christina brews coffee in a cramped kitchen. The Athenian family, who asked for their surname not to be used, moved to a downtown residential district from a villa in the northern suburbs to avoid defaulting on their mortgage. “We restructured it twice, thanks to my old colleagues at the bank but we still couldn’t keep up with the payments,” says George, now a struggling investment consultant.
“Things were looking pretty bleak but then we found a tenant so we could move out.” The family still owes a year’s worth of school fees at the private international school their daughter attended, which George admits is not a priority. He is no longer embarrassed by his inability to pay, he says, because so many other parents are in the same situation. Such strategic defaults have become a way of life among Greece’s formerly affluent middle-class. Many borrowed heavily as local banks competed to offer consumer loans at accessible interest rates after Greece joined the euro in 2001. When the crisis struck they resisted changes to their lifestyle, convinced that it was only a blip on a continuous upward path to income levels matching those of Italy and Spain.
But they have since been forced to make harsh adjustments. With their own savings depleted and the country’s immediate future so uncertain — will Greece default on its debts and leave the euro? — many have simply stopped making payments altogether, virtually freezing economic activity. Tax revenues for May, for example, fell €1bn short of the budget target, with so many Greek citizens balking at filing returns. That has put more pressure on the country’s leftwing government as it desperately scrapes up cash to pay wages and salaries and foreign creditors. The government, itself, has contributed to the chain of non-payment by freezing payments due to suppliers. That has had a knock-on effect, stifling the small businesses that dominate the economy and building up a mountain of arrears that will take months, if not years, to settle.
Business-to-business payments have almost been paused, one Athens businessman says. “They are just rolling over postdated cheques”. For Greek banks, mortgage loans left unserviced by strategic defaulters have become a particular headache, especially since the Syriza-led government says it is committed to protecting low-income homeowners from foreclosures on their properties “There’s a real issue of moral hazard… Around 70% of restructured mortgage loans aren’t being serviced because people think foreclosures will only be applied to big villa owners”, one banker said.
Unlike most eurozone members, Greece’s welfare system is relatively weak, with effectively no social housing or rent assistance programs, while the jobless only receive benefits and state health coverage for up to one year. Families are left to provide the safety net. Pensioner Assimina Griva, who helps run a community center for the retired in a hillside suburb of Athens, illustrates what many Greeks live. With her monthly pension of €600 she gives financial assistance to her son, who was laid off from the steel industry and otherwise depends on his wife’s salary of €400. “I help my child, and I keep €100 for the whole month,” says Griva. The problem, experts agree, is that the system is speeding toward insolvency.
State spending on pensions has risen from 11.7% of GDP before the financial crisis to 16.2% as the economy shrank. The average in the European Union is about 12%. The burden on the state is set to grow dramatically as the number of pensioners — currently 2.6 million out of a total population of 11 million — is set to keep rising. Greece has the sixth oldest population in the world, according to United Nations data. Over 20% of Greeks are aged 65 and over, a share the EU statistics agency expects to jump to 33% in 2060. Added to that is the impact of the financial crisis. High unemployment, undeclared labor, and arrears from struggling businesses have hammered state revenues.
A 2012 write-down of Greece’s privately-held national debt saw pension funds’ reserves lose more than half their value, as they were required by law to buy government bonds. “The pension system in Greece is not sustainable. But how could it be?” Finance Minister Yanis Varoufakis said at a business conference in Berlin this month. “We want to reform it … (But) pensions have already been cut by 40%. Forty%! Is cutting further a reform? I don’t think it is a reform. Any butcher can take a clever and start chopping things down. We need surgery.”
For Greece, the small concessions the creditors now seem prepared to make on pensions and tax increases on the poor will at least allow Alexis Tsipras to save face with his electorate and overcome the difficulty of getting the proposals through his parliament. But he will also have seen off the threat of capital controls being imposed to stop any further outflow of money from Greece and a humiliating take-it-or-leave-it message from the creditors should the ECB have pulled the plug and stopped providing emergency liquidity assistance to the beleaguered Greek banking system. Yet the reality is also that the extra austerity will now be tougher for Greece to bear and the cost of restoring the economy will be much greater.
Just as the rest of the eurozone is showing small signs of recovery the Greek economy has gone back into recession, with GDP falling by 0.4% in the last three months of 2014 and by 0.2% in the first three months of 2015. The signs are that the decline has continued, with unemployment rising again to 26%. Many companies have gone out of business as activity stalled during the uncertainty surrounding the negotiations and banks’ non-performing loans now account for some 35% of their total lending. As a result, the effort required to restore health to the economy will be much greater. It is hard to imagine it now, but strong tourist receipts last year brought the first rise in Greek GDP after a five-year decline in which the economy had slid by 25% under the IMF-inspired austerity programme.
The recent reversal has wiped out much of that progress. Years of austerity loom. More bailout money, but also more hardship and no – or very slow – growth. In itself that is not a recipe for social and political tranquillity. The creditor institutions, the old troika of the IMF, the ECB and the European commission, will be as visible as ever. So actually, not much advance on the status quo of the last few years. This gets us back to the perennial elephant in the room whenever Greece is discussed. The truth is, there won’t be sustainable growth again until the huge debt overhang (180% of GDP) is dealt with decisively. Greece would need to grow by at least 4% a year to service its current debt. If forced down that road, nothing can be seen ahead for the Greek people but continuous belt-tightening and misery.
One of the insights gleaned during the Great Depression was that it does not make a lot of sense for governments to try to balance budgets during a severe downturn, because tax increases and spending cuts reduce demand. That deepens the slump, leaving an even bigger hole in the public finances. In Greece, though, it as if the clock has been turned back to the pre-FDR days when Herbert Hoover was US president. Weak growth means that Athens continues to miss the deficit targets the troika sets for it. The troika responds by insisting on additional savings to put the budget back on track. Paul Krugman posted a chart last week based on IMF data that illustrates what happened to the underlying public finances of the eurozone members in 2014.
This measure of budgetary discipline looks at the primary budget surplus – the gap between revenues and spending excluding debt interest payments – adjusted for the state of the economic cycle. Measured in this way, Greece ran a surplus of more than 5% of GDP last year, comfortably higher than any other eurozone country. It is, however, not enough for the troika. In order to avoid a debt default and a run on its banks that would threaten its continued membership of the single currency, Greece has now had to table proposals that will suck an additional €8bn out of the economy in the next 18 months. Consumer spending will be hit by an increase in VAT and higher pension contributions, while investment will be dampened by a one-off levy and an increase in corporation tax.
Greece has a number of severe economic problems. It suffers from a lack of demand, and a five-year slump has pushed it into deflation. Falling prices have added to the real, inflation-adjusted burden of the government’s debt, which currently stands at 175% of GDP. A fresh dose of austerity will make all these problems worse. One way for Greece to get out of its mess would be for it to leave the euro, devalue its currency and renege on all or part of its debt. That is not an option if it stays in the single currency, which the public wants. Another way out would be for the creditors to cut Greece some slack. That would involve immediate debt relief and more realistic targets. The troika, though, will continue with policies that have failed before in the hope that they will succeed this time. Einstein had a definition for this – insanity.
“..the single currency’s most troublesome state will remain inside the euro as long as Greek nuisance value (GNV), both political and economic, is held to be lower inside the system (I) than it would be outside (O)..”
Acres of column inches have been expended on Greece and the future. Here are eight succinct truths to guide observers through the next few days.
1. There will be no quick and easy end to the Greek affair. Unstable disequilibria can last a long time. For four centuries, Greece was part of the Ottoman Empire. Tonight’s unhappy meeting of eurozone leaders will not be the last time they gather to consider an intractable imbroglio.
2. Greece holds a lot of the cards. No doubt some kind of deal will be done to prevent — for the moment at least — full-scale ejection from the euro EURUSD, +0.3761% bloc.
As I wrote four months ago, the single currency’s most troublesome state will remain inside the euro as long as Greek nuisance value (GNV), both political and economic, is held to be lower inside the system (I) than it would be outside (O). For the time being, GNV-I is — just — less than GNV-O. All sorts of Greek maneuvering — whether talks with President Vladimir Putin or speculation about a Greek exit bringing down the euro “house of cards” — are useful ploys to stoke up European fears of GNV-O.
3. The funds that are now leaving Greek banks to the tune of €1 billion a day, whether being taken abroad or simply kept under the mattress, are all effectively liabilities of the European Central Bank, to be paid ultimately (if things go wrong) by European taxpayers. The ECB, as an unelected body run by technocrats, cannot by itself pull the plug on Greece and declare the banks insolvent. The Greek government has no great wish to bring in exchange controls (although soon it may be forced to) since withdrawn euros represent a negotiating tool against its creditors and a store of value that many Greeks can use to hedge against a return of the drachma.
4. The IMF is unlikely to get its money back on time. An internal IMF assessment two years ago ruled that the Fund’s exceptional loan to Greece in 2010 was made on far-too-optimistic assumptions about the country’s debt sustainability and ability to carry out adjustment, breaching the IMF’s own rules. U.S. taxpayers will lose money. So please forget any idea that Congress will agree on IMF governance and voting reforms any time in the next few years.
5. Angela Merkel, the German chancellor, will be a big loser. The pressure is on her to hold the euro area together and maintain Germany’s European credentials without damaging the pocketbooks of German taxpayers and turning the euro into an overt transfer union. This is an impossible task. Her biggest adversaries are likely to be within her own coalition with the Social Democratic Party, which, however unfairly, will publicly blame her for any unsavory outcome. Shaming Merkel over Greek debt may be unscrupulous, but if it delivers the SPD a chance of winning the 2017 election, then the party will seize it.
6. Karl Otto Pöhl, the former Bundesbank president who died in December, was right when he said, a few days after the May 2010 bailout, that it was decided to save (roughly in that order) rich Greeks, and French and German banks. The Bundesbank’s qualms over the ECB’s purchases of the bonds of Greece and other peripheral countries, publicly though impotently voiced at the time, were never likely to derail the action. But we will hear more of them now that taxpayers in Germany and other creditor countries start to weigh up the bill.
Draghi and his posse of financial dimwits have created what amounts to a hideous financial scam – a disgrace to any notion of central banking which existed before 2008. Had he not announced he would massively monetize euro sovereign debt in July 2012, Greece would have been bankrupt long ago, and the peripheral borrowers like Italy, Spain and Portugal would have had their day of fiscal reckoning, too. The eurozone would have blown sky high, and the ECB would be no more. Likewise, were not the ECB now supplying $125 billion of funding to the Greek banking system—or actually more than its current level of fast vanishing deposits – the latter would have crashed and burned months ago, thereby triggering a crisis which would have eventually destroyed the euro.
Ironically, the angel of mercy now hovers in the form of Greece’s intrepid prime minister, Alexis Tsipras. Too be sure, his left-wing statist economics is a complete abomination that would cause the Greek people catastrophic suffering if were ever to be implemented. But he is absolutely correct on the matter of political self-governance: “We have no right to bury the European democracy in the land where it was born.” That’s the essence of the issue. If Greece’s democracy is to survive, it must be cut loose from the destructive regime of superstate dictation from Brussels and monetary falsification from Frankfurt. Ironically, going back to the Drachma would put Greece’s politicians right were they were before they were betrayed by the false monetary regime of eurozone central banking.
They would be forced to run a primary surplus because they would not be able to borrow on world markets after a massive default on the debt forced upon them by the eurozone, ECB and IMF. But the mix of taxing the rich, cutting the pensioners, catching the tax cheats, selling state assets, shrinking the bureaucracy and squeezing the crony capitalist leeches which feed on the Greek state would be up to them, not the inspectors and pompous bureaucrats from the IMF and European superstate. More importantly, faced with a honest bond market and real bond vigilantes, the Greek state would rediscover the requisites of sustainable fiscal governance. If they should ever again choose to run large fiscal deficits in the future, they would have to deal with an altogether different kind of committee. Namely, the pricing committee of their bond underwriters syndicate.
If the bond vigilantes needed a 15% yield to buy the state’s debt based on the facts and fiscal prospects at hand, there would not ensue months and years of can-kicking, phony restructuring plans and promises and endless PR maneuvers and leaks to the financial press. Greece’s politicians would be required to either hit the bid or cut the pension checks the very next day. Tsipras is now confronted with this kind of hard choice in an altogether different venue. If he sells out Greece one more time to the paymasters of his country’s crushing debt, it will be only a matter of time before another Greek prime minister will be forced to walk the same plank on which he now totters. By doing what’s right for Greek democracy, by contrast, he would prove to be an angel of mercy. There is no way that the euro and ECB could survive a Greexit, nor could worlwide Keynesian central banking survive the blow of their demise.
Gripped by the prospect of default in Greece? You may be looking in the wrong direction. The southern European nation may have the world’s highest debt burden, equal to 175% of its economy or gross domestic product, but according to credit rating agencies that does not make Greece the riskiest borrower for bond investors. That title is held by Ukraine, presently engaged in fighting a war with pro-Russian separatists as well as battling creditors over $15bn of debt the country says it cannot afford to service. The difference between Greece and Ukraine is reflected in the prices at which the sovereign debt of the two countries trades. Prices for Greek bonds have crashed over the past year as investors took fright at the political success of the anti-austerity Syriza party, yet they remain above 50 cents in the euro – considered a benchmark default level.
Ukraine’s equivalent bonds trade below 50 cents in the dollar, suggesting a far higher risk of a default. Indeed, this week, Ukraine was declared a “credit event”, triggering insurance payouts in the credit derivatives market. According to credit rating agency Standard & Poor’s, default is all but certain. All told, 11 countries, including Greece, are currently at serious risk of defaulting according to global credit rating agency Moody’s. Around the world the euphoric credit boom in emerging markets driven by low interest rates in the US, Europe and Japan now appears vulnerable, piling on the pressure for borrowers. A weakening trend in EM sovereign credit that began in 2013 has continued this year thanks to the slowdown in Chinese economic growth, weakness in commodity prices and higher US dollar borrowing costs, according to UBS.
(June 9): I believe the illogical movement in 10yr Treasury yields reflects the fact the Fed is losing control of its tight grip on the bond market and longer term interest rates. Note that German bunds have also experienced a similar spike up in interest rates and volatilty. In the context of my view that there was a derivatives accident somewhere in the global banking system in the last two weeks, it could well have been an OTC interest rate swap bomb that detonated. As of the latest OCC quarterly report on bank derivatives activity (Q4 2014), JP Morgan held $63.7 trillion notional amount of derivatives, $40 trillion of which were various interest rate derivatives.
If you look at the ratio of interest rate derivatives to total holdings for the top 4 U.S. banks, they all own roughly same proportion of interest rate derivatives as % of total holdings. Deutsche Bank is reported to have about a $73 trillion derivatives book. If we assume that ratio of interest rate derivatives is likely similar to JP Morgan’s, it means that DB’s potential derivatives exposure to interest rates is around $46 trillion. Interestingly, the price of the 10yr moved abruptly higher after the Fed ended QE. This is the opposite of what many of us would have expected. It wasn’t until early February that 10yr bond price began to decline (yields move higher). The 10yr bond price also crashed through its 200 day moving average – an ominous technical signal. Both of these events happened within the last week.
Again, I believe that this action in the bond market is pointing to the fact that the Fed is losing control of the markets. I also believe that the catalyst for this loss of control is a big derivatives accident of some sort in the last two weeks. Another clear indication that something has melted down “behind the scenes” recently is an ominous market call by self-made hedge fund billionaire Paul Singer, founder and CEO of Elliott Management. In his latest letter to investors, released the last week of May, he stated that the best trade in a generation is to short “long term claims on paper money.
Investors risk falling into liquidity traps as they seek to boost yields depressed by the ECB’s €1.1 trillion bond-buying program, according to Pimco. The search for yield has caused investors to buy riskier and less frequently traded bonds, which may be hard to sell quickly, said Mike Amey at Pimco, which oversees about $1.59 trillion of assets. Overall bond trading has slumped since the global financial crisis because banks have cut inventories to preserve capital in response to tighter regulations. “If you want to find some yield-enhancing assets, then make sure you’re paid for tighter liquidity,” said Amey, a speaker at Euromoney’s Global Borrowers & Investors Forum in London, which starts Tuesday. “If you’re going to take a liquidity premium, be prepared to hold the asset for years.”
One measure of bond-market liquidity is down 10% in the past year and 90% since 2006, RBS said in March. In the U.S., less than 5% of the market changes hands each month, down from about 20% in 2007, according to a November report by the Bank for International Settlements. “My biggest worry for the market going forward is liquidity,” said Kris Kowal at DuPont Capital Management, which oversees $30.8 billion of assets. Investors are “trading illiquidity for a bit more yield, and I don’t think that’s the right approach at this stage in Europe’s economic cycle.”
Structured securities and loans are among the most illiquid assets, said Wilmington, Delaware-based Kowal, who is also speaking at the Euromoney conference. Investors who need liquidity should hold cash or highly traded government bonds, Amey said. The ECB’s quantitative easing will continue to provide liquidity for the time being, said David Zahn, head of European fixed income at Franklin Templeton Investments, which manages about $890 billion of assets. Still, he is ensuring that his funds have enough liquidity to meet redemptions and to act on new opportunities.
A proposed deal between the United States and European Union is a “corporatist scam”, Ukip’s MP has said. Douglas Carswell said that TTIP, which stands for the Transatlantic Trade and Investment Partnership, was not what its proponents made it out to be. “Ukip [is] making clear we are the most staunchly free trade party in the UK,” he tweeted. “TTIP is not free trade. It’s a corporatist scam.” Tellingly, the message was retweeted by Conservative MP Zac Goldsmith, a leading contender for his party’s nomination for Mayor of London. TTIP’s proponents say it is a free trade deal that would benefit both the United States and European Union.
One controversial aspect of drafts of the deal would be to establish a quasi-judicial trade court to which the two blocs would be subject. This could allow large corporations to ‘sue’ national governments for enacting any policy that potentially harmed their profits. Critics say that this would erode democracy and increase corporate power. The deal is also controversial because of the secret way in which it is been negotiated, with press and campaigners relying heavily on leaks to determine its direction. A Ukip spokesperson told the Independent that the party feared the destruction of public services by the deal.
“Ukip is a party that believes that free trade between people is the surest way to greater prosperity,” he said. “However the TTIP agreement is not a free trade deal, but one that favours big multinational corporates over the interests of smaller businesses, and most importantly the democratic right of people to set policy through elections. “TTIP as it currently stands could hand the NHS lock, stock, and barrel to huge corporations against the wishes of the British people.”
While much of the world focused last week on whether or not the Federal Reserve was going to raise interest rates, or whether the Greek debt crisis would bring Europe to a crisis, the Permanent Court of Arbitration in The Hague awarded a $50 billion judgment to shareholders of the former oil company Yukos in their case against the Russian government. The governments of Belgium and France moved immediately to freeze Russian state assets in their countries, naturally provoking the anger of the Russian government.[..] The US government is desperately trying to cling to the notion of a unipolar world, with the United States at its center dictating foreign affairs and monetary policy while its client states dutifully carry out instructions.
But the world order is not unipolar, and the existence of Russia and China is a stark reminder of that. For decades, the United States has benefited as the creator and defender of the world’s reserve currency, the dollar. This has enabled Americans to live beyond their means as foreign goods are imported to the US while increasingly-worthless dollars are sent abroad. But is it any wonder after 70-plus years of a depreciating dollar that the rest of the world is rebelling against this massive transfer of wealth? The Europeans tried to form their own competitor to the dollar, and the resulting euro is collapsing around them as you read this.
But the European Union was never considered much of a threat by the United States, existing as it does within Washington’s orbit. Russia and China, on the other hand, pose a far more credible threat to the dollar, as they have both the means and the motivation to form a gold-backed alternative monetary system to compete against the dollar. That is what the US government fears, and that is why President Obama and his Western allies are risking a cataclysmic war by goading Russia with these politically-motivated asset seizures. Having run out of carrots, the US is resorting to the stick. The US government knows that Russia will not blithely accept Washington’s dictates, yet it still reacts like a petulant child flying into a tantrum whenever Russia dares to exert its sovereignty.
The existence of a country that won’t kowtow to Washington’s demands is an unforgivable sin, to be punished with economic sanctions, attempting to freeze Russia out of world financial markets; veiled threats to strip Russia’s hosting of the 2018 World Cup; and now the seizure of Russian state assets. Thus far the Russian response has been incredibly restrained, but that may not last forever. Continued economic pressure from the West may very well necessitate a Sino-Russian monetary arrangement that will eventually dethrone the dollar. The end result of this needless bullying by the United States will hasten the one thing Washington fears the most: a world monetary system in which the US has no say and the dollar is relegated to playing second fiddle.
Today, 23 June 2015, WikiLeaks began publishing “Espionnage Élysée”, a collection of TOP SECRET intelligence reports and technical documents from the US National Security Agency (NSA) concerning targeting and signals intelligence intercepts of the communications of high-level officials from successive French governments over the last ten years. The top secret documents derive from directly targeted NSA surveillance of the communications of French Presidents Francois Hollande (2012–present), Nicolas Sarkozy (2007–2012), and Jacques Chirac (1995–2007), as well as French cabinet ministers and the French Ambassador to the United States.
The documents also contain the “selectors” from the target list, detailing the cell phone numbers of numerous officials in the Elysee up to and including the direct cell phone of the President. Prominent within the top secret cache of documents are intelligence summaries of conversations between French government officials concerning some of the most pressing issues facing France and the international community, including the global financial crisis, the Greek debt crisis, the leadership and future of the European Union, the relationship between the Hollande administration and the German government of Angela Merkel, French efforts to determine the make-up of the executive staff of the United Nations, French involvement in the conflict in Palestine and a dispute between the French and US governments over US spying on France.
A founding member state of the European Union and one of the five permanent members of the UN Security Council, France is formally a close ally of the United States, and plays a key role in a number of US-associated international institutions, including the Group of 7 (G7), NATO and the World Trade Organization (WTO). The revelation of the extent of US spying against French leaders and diplomats echoes a previous disclosure in the German press concerning US spying on the communications of German Chancellor Angela Merkel and other German officials. That disclosure provoked a political scandal in Germany, eventuating in an official inquiry into German intelligence co-operation with the United States, which is still ongoing.
French President Francois Hollande has called a high-level emergency meeting for 9 a.m. on Wednesday after WikiLeaks reported that the U.S. had spied on him and two of his predecessors. The meeting with the defense, interior, foreign and justice ministers will “evaluate the nature” of the report posted on the WikiLeaks website, said an official in Hollande’s office who asked not to be identified. WikiLeaks, which has published unauthorized documents since it started in 2006, reported that the NSA spied on Hollande, Nicolas Sarkozy and Jacques Chirac from 2006 to 2012, listening in on discussions about the euro debt crisis and French relations with German Chancellor Angela Merkel, including secret meetings of French government ministers about the possibility of Greece leaving the euro area.
The NSA also eavesdropped on French complaints about U.S. spying, WikiLeaks said. “We are not targeting and will not target the communications of President Hollande,” said Ned Price, a spokesman for the U.S. National Security Council, which advises the White House on its foreign policy. “We do not conduct any foreign intelligence surveillance activities unless there is a specific and validated national security purpose.” Sarkozy’s office didn’t respond to requests for comment. Agence France-Presse reported that his office had said the spying as reported was “unacceptable in general, and certainly between allies.” WikiLeaks has been releasing documents about U.S. wiretapping since 2010, detailing how the NSA spied on world leaders including Brazilian President Dilma Rousseff.
Emerging markets and commodity suppliers have grappled with reduced demand from China as a property downturn weighed on the world’s second-largest economy. U.S., Japanese and German exporters did better, supplying capital goods like machines that China still demanded. That may soon change, according to a study of global exposure to China by UBS Group AG economists Donna Kwok, Wang Tao and Jennifer Zhong. “As the multiyear Chinese property downshift continues to unfold beyond this year, we may see a longer-term decline in China’s appetite for foreign industrial imports,” the analysts wrote in a report June 22. “Commodity, reprocessing, and developed country exporters alike should brace themselves for the impact of weakening China demand this year, irrespective of whether U.S. or EU imports pick up.”
That’s not good news for a world economy increasingly reliant on China. China quadrupled the number of countries to which it was the biggest export market in the decade to 2014, the UBS analysts wrote. In the same period, the U.S. almost halved the number of countries for which it held the same title. In terms of exports as a share of GDP, nearly all countries UBS covers saw their China exposure rise; some doubled – Japan, South Korea, U.S., Brazil, Canada, Chile – while some tripled – Germany, the EU – and some even quadrupled, like Australia. For commodity exporters including South Africa, Australia, Indonesia and Brazil, the impact of a slowing China has been predictably negative.
Shell is fighting to prevent the public release of an audit of their Arctic drilling operations. Last week, in response to Greenpeace’s Freedom of Information Act (FOIA) request, Shell argued to government regulators that the entire document is “confidential business information” and should be kept from public disclosure. The problem is that – in order to comment on Shell’s Exploration Plan – the public should have had access to this document months ago. The deadline for that passed on 1 May yet the government department in charge – Bureau of Safety and Environmental Enforcement (BSEE) – has had the first part of Shell’s audit since November 2014. With Shell’s fleet already heading north to Alaska the failure to disclose is becoming more serious every day.
After Shell’s disastrous 2012 attempt at drilling in the Arctic Ocean — which ended with one of their drilling rigs beached on an Alaskan island and eight felony charges related to violations on the other rig — Secretary of the Interior Ken Salazar ordered a review of Shell’s operations to find out what went wrong, including an audit of Shell’s Safety and Environmental Management Systems (SEMS). The audit was designed to ensure “that the management and oversight shortcomings identified with respect to all aspects of the company’s 2012 operation have been addressed and that the company’s management structure and systems are appropriately tailored to Shell’s Arctic exploration program” – before the firm was to drill again in the Arctic.
The audit was meant to be a full third party assessment – but Shell paid for the audit and was allowed to handpick the auditor (Houston-based Endeavor Management). A SEMS audit assesses the management and operational systems put in place on offshore oil rigs to protect worker safety and the environment, such as analysing potential hazards and operating procedures. The auditor will typically review documents and systems as well as conduct interviews and site visits. It was also disclosed that the audit would be split into two parts. Stage 1 would take place in Shell’s Anchorage, AK office, and Stage 2 would take place on board the drillship Noble Discoverer once it was operating in the waters of the Alaskan Outer Continental Shelf.
The in-office portion of the audit was completed in 2014 and the audit report was provided to BSEE towards the end of that year. However, this document has never been made public and Greenpeace submitted a FOIA request for its release. Despite the promise that the audit would be a requirement “before” Shell was allowed to return to the Arctic, Stage 2 has yet to be completed and will presumably happen this summer while Shell is drilling.
Russia surpassed Saudi Arabia to become China’s top crude supplier as the fight for market share in the world’s second-largest oil consumer intensifies. China imported a record 3.92 million metric tons from its northern neighbor in May, according to data emailed by the Beijing-based General Administration of Customs. That’s equivalent to 927,000 barrels a day, a 20% increase from the previous month. Saudi sales slumped 42% from April to 3.05 million tons. China is becoming a key market for global oil exporters as surging output from shale fields from Texas to North Dakota allows the U.S., the biggest crude consumer, to rely less on overseas supplies. The Asian nation will account for more than 11% of world demand this year, the Paris-based International Energy Agency predicted this month.
“This is a clear sign of how spoilt Asia is for choice these days, with Middle Eastern crude now having to compete with oil from other regions,” Amrita Sen at Energy Aspects said in an e-mail. “Russia is increasingly looking east and the various deals made between Rosneft and China are likely to see more Russian crude head to China permanently.” Russia is China’s top crude supplier for the first time since October 2005 as it seeks new markets for its crude amid western sanctions over its dispute with Ukraine. Rosneft in 2013 agreed to supply 365 million tons over 25 years to China National under a $270 billion deal. The same year, the company agreed an $85 billion, 10-year deal with China Petrochemical. Russia isn’t the only crude shipper to overtake Saudi Arabia last month. Angola sold 3.26 million tons to China, 14% more from April, rising two places to take second spot.
In last month’s article Where are the Unicorns?, I discussed the fact that the commercial cellulosic ethanol plants that were announced with great fanfare over the past couple of years are obviously running at a small fraction of their nameplate capacity. In fact, April was a record month for cellulosic ethanol production according to the EPA’s database that tracks this information, but that meant that at least 8 months into the learning curves for these plants actual production for that month was only about 6% of nameplate capacity. May’s numbers are now in, and the situation has gotten worse. After reporting 288,685 gallons of cellulosic ethanol in April, May’s numbers only amounted to 114,018 gallons.
This is only about 2.4% of the nameplate capacity of the announced commercial cellulosic ethanol plants. If we use year-to-date numbers, the annualized capacity is still less than 3% of nameplate capacity for facilities that cost hundreds of millions of dollars to build. Let that soak in. POET alone spent $275 million, with U.S. taxpayers footing more than $100 million of that bill. Abengoa reportedly received $229 million from taxpayers for its project. For this (plus however much that was spent by INEOS), the combined plants are running at an annualized capacity of 1.7 million gallons of ethanol, which would sell on the spot market today for $2.6 million.
We can conclude from this that the three companies with announced commercial cellulosic ethanol facilities – INEOS, POET, and Abengoa – are finding the going much tougher than expected. I believe that the costs to produce their cellulosic ethanol are higher than the price they will receive for the ethanol. This is the sort of monthly cash drain that led to the shutdown of everyone else that ever tried to produce cellulosic ethanol commercially.
Greek premier Alexis Tsipras has accused Europe’s creditor powers of trying to subvert Greece’s elected government after five years of “pillaging”, warning in solemn terms that his country will defend its sovereign dignity whatever the consequences. The defiant stand came as the European Commission lashed out at the Greeks and warned that the country would collapse into a “state of emergency” unless there is a deal to avert a financial crash. Germany’s EU Commissioner Guenther Oettinger said the creditor powers must draw up urgent plans to cope with social unrest in Greece and a break-down of energy supplies and medicine as soon as July. In a terse statement, Mr Tsipras called on the EU institutions and the IMF to “adhere to realism”.
He accused the creditors of “political motives” for demanding further pension cuts, hinting that their real goal is to destroy the credibility of his radical-Left Syriza government and force regime change. “We are not only carrying a historical past underlined with struggles. We are carrying our people’s dignity as well as the aspirations of all Europeans. We cannot ignore this responsibility. It has to do with democracy,” he said. Germany’s Suddeutsche Zeitung reported that the creditors are drawing an ultimatum to the Greeks, threatening to cut off Greek access to the European payments system and forcing capital controls on the country as soon as this weekend. The plan would lead to the temporary closure of the banks, followed by a rationing of cash withdrawals.
Syriza sources have told the Telegraph that Greece may seek an injunction from the European Court of Justice to stop the creditors and the EU institutions acting in a way that breaches Greek treaty rights. This would be an unprecedented move, greatly complicating the picture. Equity markets fell across the Europe and bonds sold off sharply in the high-debt Latin states as investors start to think through the dramatic implications of a Greek default, followed by EMU rupture. “The Greek saga is finally reaching its climax, we think,” said Hans Redeker from Morgan Stanley. Yields on 10-year Portuguese bonds have jumped almost 170 basis points since their lows in March, reaching an eight-month high of 3.22pc. Spain’s yields have jumped by 120 points to 2.35pc.
While these levels are nothing like the panic spikes in past spasms of the EMU debt crisis, they are approaching levels that could soon tighten borrowing conditions for companies and mortgages. It may become harder for these countries to shake off deflation. Mario Draghi, the head of the European Central Bank, said the authorities could handle the immediate fall-out from a Greek default but refused to offer any further assurances. “The consequences in medium to long term to the Union is not something we are in a position to foresee,” he said.
Syriza, the new Greek government that intended to rescue Greece from austerity, has come a cropper. The government relied on the good will of its EU “partners,” only to find that its “partners” had no good will. The Greek government did not understand that the only concern was the bottom line, or profits, of those who held the Greek debt. The Greek people are as out to lunch as their government. The majority of Greeks want to remain in the EU even though it means that their pensions, their wages, their social services, and their employment opportunities will be reduced. Apparently for Greeks, being a part of Europe is worth being driven into the ground. The alleged “Greek crisis” makes no sense whatsoever.
It is obvious that Greece cannot with its devastated economy repay the debts that Goldman Sachs hid and then capitalized on the inside information, helping to cause the crisis. If the solvency of the holders of the Greek debt, apparently the NY hedge funds and German and Dutch banks, depends on being repaid, the ECB could just follow the example of the Federal Reserve and print the money to secure the Greek debt. The ECB is already printing 60 billion euros a month to save the European financial system, so why not include Greece? A conservative might say that such a course of action would cause inflation, but it hasn’t. The Fed has been creating money hands over fists for seven years, and according to the government there is no inflation.
We even have negative interest rates attesting to the absence of inflation. Why will creating money for Greece create inflation but not for Goldman Sachs, Citibank, and JPMorganChase? Obviously, the Western world doesn’t want to help Greece. The West wants to loot Greece. The deal is that Greece gets new loans with which to repay existing loans in exchange for selling municipal water companies to private investors (water rates will go up on the Greek people), for selling the state lottery to private investors (Greek government revenues drop, thus making debt repayment more difficult), and for other such “privatizations” such as selling the protected Greek islands to real estate developers. This is a good deal for everyone but Greece.
If the 100,000 people of my native Bath all use different currencies then trade between the citizenry is going to be rather difficult. If we all use the same currency it will be easier and there will be more trade. Since trade is what gives us Smithian growth (from Adam Smith, the specialisation and division of labour and the trade in the resultant production), makes us all richer, this is a good idea. However, it’s possible to have too much of a good thing. If we’re using the same currency then we must, by definition, have the same monetary policy. And the larger the area we cover the more likely it is that we’ll have two more more areas within which it will react differently to an external or asymmetric shock (the definition of that second simply being a shock that hits different areas in different ways).
This is what Paul Krugman has been talking about with Finland and everyone has been talking about with respect to the property booms in Ireland and Spain a decade back. All of this is background: people have been chewing over how optimal the euro area is ever since the idea was first floated (hint: it’s not optimal). However, note that the size of that optimality depends upon the strength of the two effects. And if that increased trade effect is smaller then the optimal area becomes smaller. And what this most recent research seems to be showing is that there’s no extra trade effect at all:
“More importantly, we find that the trade effects of EMU are different from other currency unions. But, most disturbingly, we find that the precise econometric methodology used to estimate the currency effect on trade matters. A lot. In the large, we find no consistent evidence that EMU stimulated trade. Indeed, we are forced to conclude that econometric methodology matters so much that it undermines confidence in our ability to estimate the effect of currency union on trade.”
A reasonable rule of thumb is that if the effect you’re looking for varies a lot dependent upon the method you’re using to look for it (assuming that all the methods you are using are reasonable) then what you’re finding is not actually the effect, but variances due entirely to the measurement method. But even putting that aside they find that there’s a small through zero to possibly even negative effect upon trade of the currency union of the euro. Or, as we might put it, there’s no benefit and we’re left just with the costs. Things that cost us but have no benefit are things that we shouldn’t be doing. Thus, clearly, we shouldn’t be having the euro. Or, as we might put it, everyone should leave it, not just Greece.
The narrative of the euro zone crisis, the epicentre of which is Greece, has been airbrushed. Germany’s insistence that the 2012 bailout programme is a realistic reference point for current discussion is misconceived. Its assertion that debt relief can be discussed only after the completion of the current programme, rather than being the obvious starting point for a new agreement, is profoundly mistaken. The tenor of the euro zone’s criticism of the government of Alexis Tsipras has shifted from the patronising to the denunciatory, from faux long-suffering indulgence with a brash upstart to near visceral condemnation. The message is that the grown-ups are “exasperated” and “running out of patience” with Greece.
Germany’s minister for economic affairs, Sigmar Gabriel, argues that “Greece’s game theorists are gambling the future of their country. And Europe’s too.” This is revisionist rhetoric. Greece is more right than its critics. One doesn’t have to agree with the politics of the far left in Greece to vindicate the integrity of their economic case. What is true of a relationship is true also for a country: dependence is never healthy. Continued membership means continued dependence. Given the pressures being exerted on Greece, exit rather than dependence would be the better option. In February German finance minister Wolfgang Schäuble insisted that Greece complete the 2012 programme, regardless of the sea change in politics since then and the evidence that austerity was taking Greece further into recession.
He warned Athens not to question the framework of existing agreements or “everything is over”. It was a calamitous misjudgment. The “negotiations” have demonstrated how big countries behave when small countries step out of line and just how easily history can be rewritten. Tsipras, in an interview with Le Monde, said the euro zone’s dominant players were, by degrees, bringing about the “complete abolition of democracy in Europe” and were ushering in a technocratic monstrosity with powers to subjugate states that refuse to accept the “doctrines of extreme neoliberalism”.
Italian, Spanish and Portuguese bond yields leapt on Tuesday in one of the most serious episodes of contagion since the height of Europe’s debt crisis after the latest breakdown in talks between Greece and its creditors. Except for a jump in May during a global bond sell-off driven by improving inflation expectations, yields on bonds issued by the eurozone’s most vulnerable states were on track for their biggest three-day move since mid-2013. Similarly sharp moves were seen in 2012 as the crisis peaked, although yields on the three countries’ bonds remain far below the highs of above 7% hit in that period.
The moves, analysts say, could impact the dynamic of the negotiations between Greece and European leaders, who may have thought that the relative calm in markets during the protracted talks was a sign that investors thought a Grexit was manageable. “A lot of people, especially in Germany, have seemed relaxed about Greece. We’ve seen comments saying that if Greece exits it’s not such a big thing,” said Jean-Francois Robin, head of rates strategy at Natixis. “The market is just showing exactly the opposite of that.”
Alexis Tsipras, the Greek prime minister, vowed not to give in to demands made by his country’s international creditors, accusing them of “pillaging” Greece for the past five years and insisting it was now up to them to propose a new rescue plan to save Athens from bankruptcy. Mr Tsipras’ remarks came less than 24 hours after the collapse of last-ditch talks aimed at reaching agreement on the release of €7.2bn in desperately needed rescue funds. The comments were part of a chorus of defiance in Athens that left many senior EU officials convinced they can no longer clinch a deal with Greece to prevent it from crashing out of the eurozone.
Without a deal to release the final tranche of Greece’s current bailout, Athens is likely to default on a €1.5bn loan repayment due to be paid to the IMF in two weeks, an event officials fear would set off a financial chain reaction from which Greece would be unable to recover. “One can only suspect political motives behind the fact that [bailout negotiators] insist on further pension cuts, despite five years of pillaging,” Mr Tsipras said in a statement. “We are carrying our people’s dignity as well as the aspirations of all Europeans. We cannot ignore this responsibility. It is not a matter of ideological stubbornness. It has to do with democracy.”
Reflecting the growing fears of a Greek default, Günther Oettinger, Germany’s European commissioner, called for an “emergency plan, a ‘Plan B’” in case Athens failed to reach a deal, saying this would lead to “a state of emergency” in Greece, including difficulties paying for energy, police services and medicines. The growing signs of breakdown sent the Athens stock exchange down nearly 5% and borrowing costs on Greek bonds sharply higher. The jitters appeared to spread to other peripheral eurozone bonds as well, with sell-offs in benchmark Italian, Spanish and Portuguese debt.
Governments sometimes need to restructure their debts. Otherwise, a country’s economic and political stability may be threatened. But, in the absence of an international rule of law for resolving sovereign defaults, the world pays a higher price than it should for such restructurings. The result is a poorly functioning sovereign-debt market, marked by unnecessary strife and costly delays in addressing problems when they arise. We are reminded of this time and again. In Argentina, the authorities’ battles with a small number of “investors” (so-called vulture funds) jeopardized an entire debt restructuring agreed to — voluntarily — by an overwhelming majority of the country’s creditors.
In Greece, most of the “rescue” funds in the temporary “assistance” programs are allocated for payments to existing creditors, while the country is forced into austerity policies that have contributed mightily to a 25% decline in gross domestic product and have left its population worse off. In Ukraine, the potential political ramifications of sovereign-debt distress are enormous. So the question of how to manage sovereign-debt restructuring — to reduce debt to levels that are sustainable — is more pressing than ever. The current system puts excessive faith in the “virtues” of markets. Disputes are generally resolved not on the basis of rules that ensure fair resolution, but by bargaining among unequals, with the rich and powerful usually imposing their will on others.
The resulting outcomes are generally not only inequitable, but also inefficient. Those who claim that the system works well frame cases like Argentina as exceptions. Most of the time, they claim, the system does a good job. What they mean, of course, is that weak countries usually knuckle under. But at what cost to their citizens? How well do the restructurings work? Has the country been put on a sustainable debt path? Too often, because the defenders of the status quo do not ask these questions, one debt crisis is followed by another. Greece’s debt restructuring in 2012 is a case in point. The country played according to the “rules” of financial markets and managed to finalize the restructuring rapidly; but the agreement was a bad one and did not help the economy recover.
Three years later, Greece is in desperate need of a new restructuring. Distressed debtors need a fresh start. Excessive penalties lead to negative-sum games, in which the debtor cannot recover and creditors do not benefit from the larger repayment capacity that recovery would entail.
it is not just the quantum of austerity that divides Athens from its creditors, it is also the method of execution. So the eurozone and IMF want further pension cuts and an increase in VAT on electricity. These measures are toxic for the Greek Syriza government because they are regressive, they disproportionately hurt the poorer Greeks who elected Syriza. So “why insist on pensions?”, says Blanchard. His answer is that pension expenditure in Greece is 16% of GDP, and “transfers from the budget to the pension system are close to 10% of GDP”. Now here in Britain we would think that public spending on pensions of close to a tenth of GDP is incredibly lavish: the equivalent figure for the UK, and indeed for most anglophone countries like the US and Canada, is much lower (at around 6% of GDP in Britain).
But in the UK, US and Canada, private pension saving is much higher than on the continent of Europe. And Greece’s government spending on pensions, as a share of GDP, is very much in the ballpark of spending in the rest of the eurozone: on the basis of the last official OECD figures, which admittedly are five years old, Greece spent less than Italy, France and Austria on pensions and only a bit more than Germany. And there is another thing: in 2009 the OECD calculated that Greek government cash spending on old-age and survivors benefits was 13% of its GDP. If the equivalent figure today is 10%, which is what Blanchard seems to suggest, that implies the outlay on pensions has already been reduced by around 40%, given that Greece’s GDP has shrunk by a quarter.
That said, on the basis of the last Eurostat figures, which are for 2012, Greece’s old-age outlay – including disability and incapacity payments – was considerably higher than the euro area average. So the stats are murky. But it is worth pointing out that Greece has proportionately more old people than the eurozone average, and more poor people (thanks to five years of slump). In other words, it is not obvious that there is outrageous excess in the Greek pension system (and there certainly isn’t in comparison with provision in Blanchard’s French home).
To state the obvious, which seems however to be lost on the leaders of the eurozone, once the euro is not forever for any member, it is not forever for all members. And once that clonking penny drops for global investors, the notion that the whole project will fall apart – not tomorrow, but one day – will increasingly become the default view.
Greece’s former representative at the IMF, Panayiotis Roumeliotis, appeared before the parliamentary inquiry into the country’s debt and argued that Greece’s lenders have contributed to worsening the Greek crisis through the policies they advocated. “The mistake made by lenders is that they placed emphasis on the fiscal side and high taxes, which they are continuing to do now,” he said. “This resulted in the recession.” Roumeliotis was Greece’s envoy to the IMF when the first bailout was signed in 2010 and he claimed at the hearing that there was contact at the time between German and French officials to ensure that there would not be a restructuring of Greece debt as much of it was held by German and French banks. “They took too long to restructure Greece’s debt,” he said. “We should have fought for this from the start.”
On our way back from Berlin on Tuesday, Greek Finance Minister Yanis Varoufakis remarked to me that current usage of the word “reform” has its origins in the middle period of the Soviet Union, notably under Khrushchev, when modernizing academics sought to introduce elements of decentralization and market process into a sclerotic planning system. In those years when the American struggle was for rights and some young Europeans still dreamed of revolution, “reform” was not much used in the West. Today, in an odd twist of convergence, it has become the watchword of the ruling class.[..]
What is missing from the creditors’ demands is, well, reform. Cuts in pensions and VAT increases are not reform; they add nothing to economic activity or to competitiveness. Fire-sale privatization can lead to predatory private monopolies as anyone living in Latin America or Texas knows. Labor market deregulation is in the nature of an unethical experiment, the imposition of pain as therapy, something the internal records of the IMF as far back as 2010 confirm. No one can suggest that wage cuts can bring Greece into effective competition for jobs in traded goods with either Germany or Asia. Instead, what will happen is that anyone with competitive skills will leave. Reform in any true sense is a process that requires time, patience, planning, and money.
Pension reform and social insurance, modern labor rights, sensible privatizations and effective tax collection are reforms. So are measures relating to public administration, the justice system, tax enforcement, statistical integrity and other matters, which are agreed in principle and which the Greeks would implement readily if the creditors would permit it – but for negotiating reasons they do not. So would be an investment program emphasizing the advanced services Greece is well-suited to provide, including in health care, elder-care, higher education, research, and the arts. It requires recognizing that Greece cannot succeed by being the same as other countries; it must be different – a country with small shops, small hotels, high culture, and open beaches. A debt restructuring that would bring Greece back to the markets (and yes, that could be done, and the Greeks have a proposal to do it) would also be, on any reasonable reckoning, a reform.
The plain object of the creditors’ program is therefore not reform. It is the doubling-down on debt collection in the face of disaster. Pension cuts, wage cuts, tax increases and fire sales are offered up on the magical thought that the economy will recover despite the burden of higher taxes, lower purchasing power, and external repatriation of profits from privatization. The magic has already been tested for five years, with no success in the Greek case. That is why, instead of recovering as predicted after the bailout of 2010, Greece has suffered a loss of over 25% of its income with no end in sight. That is why the debt burden has gone from about 100% of GDP to 180%, when measured in terms of face values. But to admit this failure, in the case of Greece, would be to undermine the entire European policy project and the authority of those who run it.
Greeks may be only 0.2% of the world population but 3% of top international scientists are of Greek nationality, says a survey. John Ioannidis, Professor of Medicine at Stanford University, conducted the research and presented it on Saturday at the Panhellenic Medical Conference in Athens. Ioannidis gave a lecture in memory of prominent Doctor and Professor Dimitris Trichopoulos who died in December 2014. The title was “The exodus of Greek scientists – a meta-analysis,” and the survey showed statistics for a total of 672 scientists with Greek names who have the most influence in the international scientific bibliography. The professor used statistical data from the Google Scholar database.
On average, the 672 Greek scientists have received 17,000 reports each in the international scientific bibliography. Only one in seven of them (14%) lived or live in Greece, 86% of them live abroad where several of them were born, and 33 of them have passed away. In the wider scientific community there are about 20 million authors who have made at least one scientific publication. Greek names represent about 1% of those, meaning 200,000, while Greek names represent 3% of all scientists. The most ancient Greek scientist, Aristotle, is constantly used as a reference in the scientific bibliography. Statistically, out of the 672 leading Greek scientists, only 95 (14%) are located in Greece.
The idea that increased income inequality makes economies more dynamic has been rejected by an IMF study, which shows that the widening income gap between rich and poor is bad for growth. A report by five IMF economists dismissed “trickle down” economics, and said that if governments want to increase the pace of growth they should concentrate on helping the poorest 20% of their citizens. The study, covering advanced, emerging and developing countries, said technological progress, weaker trade unions, globalisation and tax policies that favoured thewealthy had all played their part in making widening inequality “the defining challenge of our time”. The IMF report said the way income is distributed matters for growth.
“If the income share of the top 20% [the rich] increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20% [the poor] is associated with higher GDP growth,” said the report. Echoing the frequent warnings about rising inequality from the Fund’s managing director Christine Lagarde, the report says governments around the world need to tackle the problem. It said: “Raising the income share of the poor, and ensuring that there is no hollowing-out of the middle class, is actually good for growth.” The study, however, reflects the tension between the IMF’s economic analysis and the harder-line policy advice given to individual countries, such as Greece, that need financial support.
During its negotiations with Athens, the IMF has been seeking to weaken worker rights, but the research paper found that the easing of labour market regulations was associated with greater inequality and a boost to the incomes of the richest 10%. “This result is consistent with forthcoming IMF work, which finds the weakening of unions is associated with a higher top 10% income share for a smaller sample of advanced economies,” said the study.
The total number of millionaire households around the world reached a record 17.4 million in 2014, up 13.7% from 15.3 million the year before. Meanwhile, the ultra high net worth set is expected to grow at an equally impressive rate over the next five years. According to the Boston Consulting Group, wealth for the richest global families worth more than $100 million is projected to cross the $18 trillion mark by 2019. Currently, private wealth held by families with a fortune of more than $100 million total a combined $10 trillion, or roughly 6% of global wealth. Those ultra rich fortunes grew by 11% in 2014. To get to $18 trillion by 2019, the report predicts that household wealth will grow at a compound annual rate of about 12% in the next five years.
The report, published Monday, says there are more than 5,000 U.S. households worth $100 million or more. China follows with more than 1,000 ultra rich households. “This top segment is expected to be the fastest growing, in both the number of households and total wealth,” the reports’ authors wrote. In addition, the research shows that the top 1% of households in 2014 made up 42% of total private global wealth. Keep in mind, the survey only analyzes cash deposits, securities and life and pension plans. That means other big drivers of wealth like real estate, business ownership and collections aren’t included in the estimates.
Forbes’ own billionaires list, which analyzes all assets an individual can hold, counts 1,826 individuals from across the world with personal 10-figure fortunes, according to the World Billionaires list released in March. They controled an estimated $7.05 trillion at the time of the report. In the U.S. alone, Forbes estimates that there’s nearing 450 American billionaires. Many investors are “benefiting from the markets going up,” senior partner and wealth management expert Bruce Holley said at a Monday briefing. The amount of wealth held in equities rose to 64.1 trillion, up 17.5% from 2013, according to the report.
U.S. real estate purchases by foreign nationals over a recent 12-month period totaled $92 billion. The negative impact of foreign investments in American residential real estate might have been badly overlooked by some U.S. government officials — and the potential harm it might cause is largely unknown to the average American. Reports from a variety of sources suggest that a housing recovery is taking place, though not at the pace expected. As of last month, it was still some 16% below its peak in 2008. Yet at the same time, some U.S. cities are experiencing an unusually high demand for residential real estate, with buyers outbidding each other, often by tens, and sometimes hundreds of thousands of dollars.
The same kind of outbidding was going on just prior to the 2007 real-estate crash where wealthy buyers, mostly foreign, were buying homes by paying for them in cash. Average American home owners, of whom one in three is on the verge of financial ruin, aren’t fueling such buying frenzies. Skyrocketing real-estate prices in America’s selected urban centers are likely the result of a foreign influx of cash, more particularly mainland Chinese money, which is now flooding major American cities in the billions of dollars. Last year, Bloomberg revealed a secret path that allows wealthy Chinese to transfer billions overseas. Before that, The Wall Street Journal outlined the questionable mechanics of moving cash out of China, where wealthy mainland Chinese bring their funds to Hong Kong and from there to other parts of the world.
Most of it ends up invested in favorite foreign destinations — namely the U.S., Australia, and Canada. Despite some Chinese banks across the border from Hong Kong allowing for a trial program (introduced in 2011) for overseas property purchases and emigration, the Bloomberg report noted that, “China’s foreign-exchange rules cap the maximum amount of yuan that individuals are allowed to convert at $50,000 each year and ban them from transferring the currency abroad directly.” So it’s illegal for mainland Chinese to take more than $50,000 out of the country — but wealthy Chinese are smuggling out billions. You can bet your last dollar that a good chunk of that Chinese money (of dubious origin) was earmarked for residential real-estate purchases, that is, the roofs over American heads.
If you haven’t realized by now that a lot of people are worried about bond-market liquidity, then I’m not sure why you’re bothering to read me. But in the hope that you’ll at least start taking an interest in where your pension fund is hanging out these days, maybe you’ll listen when a guy who manages $112 billion tells you that if bad things happen in bond land, the fire doors might turn out to be locked. Martin Gilbert runs Aberdeen Asset Management which, as previously mentioned, manages rather a lot of money. On Monday, he explained why he’s lined up a $500 million overdraft facility and has a further $1 billion of cash: “It will get ugly. You want bank lines in place in case you have to meet a redemption and there is no market.”
Let’s pause for a second to parse that sentence. Gilbert was talking about the risk of either Greece leaving the euro or the U.S. starting to raise borrowing costs. Either or both could spook investors, who in turn might ask Aberdeen for their money back. Except Aberdeen is concerned it might not be able to sell the things it bought with their money – so it would either have to deplete its cash to make the repayments, or borrow money to meet those redemptions. Setting aside a rainy day fund of $1.5 billion, just in case, is “a substantial amount but you’ve got to be prepared,” Gilbert said.
With the benefit of hindsight, I decided a while ago that the starting gun for the credit crunch was fired on Aug. 9, 2007. That day, BNP Paribas told investors it was freezing redemptions from three of its investment funds because it had decided there was no reliable way to determine the value of the assets in the funds, which in turn would make it impossible to sell things to repay investors. In other words, to echo Aberdeen’s Gilbert, there was no market.
On June 3, 2015, WikiLeaks released 17 key documents related to TiSA, which is considered perhaps the most important of the three deals being negotiated for “fast track” trade authority. The documents were supposed to remain classified for five years after being signed, displaying a level of secrecy that outstrips even the TPP’s four-year classification. TiSA involves 51 countries, including every advanced economy except the BRICS. The deal would liberalize global trade in services covering close to 80% of the US economy, including financial services, healthcare, education, engineering, telecommunications, and many more. It would restrict how governments can manage their public laws, and it could dismantle and privatize state-owned enterprises, turning those services over to the private sector.
Recall the secret plan devised by Wall Street and U.S. Treasury officials in the 1990s to open banking to the lucrative derivatives business. To pull this off required the relaxation of banking regulations not just in the US but globally, so that money would not flee to nations with safer banking laws. The vehicle used was the Financial Services Agreement concluded under the auspices of the World Trade Organization’s General Agreement on Trade in Services (GATS). The plan worked, and most countries were roped into this “liberalization” of their banking rules. The upshot was that the 2008 credit crisis took down not just the US economy but economies globally. TiSA picks up where the Financial Services Agreement left off, opening yet more doors for private banks and other commercial service industries, and slamming doors on governments that might consider opening their private banking sectors to public ownership.
The Central Intelligence Agency had explicit guidelines for “human experimentation” before, during and after its post-9/11 torture of terrorism detainees, the Guardian has learned, which raise new questions about the limits on internal oversight over the agency’s in-house and contracted medical research. Sections of a previously classified CIA document, made public by the Guardian on Monday, empower the agency’s director to “approve, modify, or disapprove all proposals pertaining to human subject research”. The leeway provides the director, who has never in the agency’s history been a medical doctor, with significant influence over limitations the US government sets to preserve safe, humane and ethical procedures on people.
CIA director George Tenet approved abusive interrogation techniques, including waterboarding, designed by CIA contractor psychologists. He further instructed the agency’s health personnel to oversee the brutal interrogations – the beginning of years of controversy, still ongoing, about US torture as a violation of medical ethics. But the revelation of the guidelines has prompted critics of CIA torture to question how the agency could have ever implemented what it calls “enhanced interrogation techniques” – despite apparently having rules against “research on human subjects” without their informed consent.
Indeed, despite the lurid name, doctors, human-rights workers and intelligence experts consulted by the Guardian said the agency’s human-experimentation rules were consistent with responsible medical practices. The CIA, however, redacted one of the four subsections on human experimentation. “The more words you have, the more you can twist them, but it’s not a bad definition,” said Scott Allen, an internist and medical adviser to Physicians for Human Rights. The agency confirmed to the Guardian that the document was still in effect during the lifespan of the controversial rendition, detention and interrogation program.
The pension funds of millions of people across the world, including teachers, public sector workers, health staff and academics in the UK and US, are heavily exposed to the plummeting coal sector, a Guardian analysis has revealed. It has also found that just a dozen people, including the owner of Chelsea FC, Roman Abramovich, own coal reserves equivalent to the annual carbon emissions of China, the world’s biggest polluter. The UN, which advocates a shift to clean energy, has more than $100m (£65m) invested in coal through its own pension fund. The Guardian examined the ownership of the biggest 50 publicly traded coal companies, ranked by the reserves held which in total are equivalent to more than 11 years of global emissions.
This alone could push the planet past beyond the 2C of climate change deemed dangerous by the world’s governments. A fast-growing, global fossil fuel divestment movement, backed by the Guardian’s Keep it in the Ground campaign, is having particular success in persuading investors to dump coal stocks. The world’s largest sovereign wealth fund, held by Norway, decided earlier this month to sell off more than $8bn of coal assets. The World Bank and the Bank of England have both warned that global action to cut carbon emissions could render fossil fuel reserves worthless, as analyses show most must remain in the ground. Coal, the most polluting fuel, is particularly at risk and investment bank Goldman Sachs declared in January the fuel had reached “retirement age”.
The coal price has crashed by 60% since 2011, as gas, renewable energy and climate policies have damaged demand. Tom Sanzillo, a former New York State comptroller who oversaw a $156bn pension fund, said: “Coal is arguably the worst performing sector in the whole world. Pension funds, which have a fiduciary duty to make money, have no business owning any of these companies. It is not a prospective risk, it is a now risk.” “The coal sector is falling into a financial death spiral,” said Mark Campanale, founder of the Carbon Tracker Initiative, which has pioneered analysis of the financial risks of fossil fuels. “The members of university, healthcare and UN pension funds are smart and informed people; they will be shocked to discover just how far exposed their funds are to coal investment risk.”
Pope Francis will this week call for changes in lifestyles and energy consumption to avert the “unprecedented destruction of the ecosystem” before the end of this century, according to a leaked draft of a papal encyclical. In a document released by an Italian magazine on Monday, the pontiff will warn that failure to act would have “grave consequences for all of us”. Francis also called for a new global political authority tasked with “tackling … the reduction of pollution and the development of poor countries and regions”. His appeal echoed that of his predecessor, pope Benedict XVI, who in a 2009 encyclical proposed a kind of super-UN to deal with the world’s economic problems and injustices.
According to the lengthy draft, which was obtained and published by L’Espresso magazine, the Argentinean pope will align himself with the environmental movement and its objectives. While accepting that there may be some natural causes of global warming, the pope will also state that climate change is mostly a man-made problem. “Humanity is called to take note of the need for changes in lifestyle and changes in methods of production and consumption to combat this warming or at least the human causes that produce and accentuate it,” he wrote in the draft. “Numerous scientific studies indicate that the greater part of the global warming in recent decades is due to the great concentration of greenhouse gases … given off above all because of human activity.”
The pope will also single out those obstructing solutions. In an apparent reference to climate-change deniers, the draft states: “The attitudes that stand in the way of a solution, even among believers, range from negation of the problem, to indifference, to convenient resignation or blind faith in technical solutions.” The leak has frustrated the Vatican’s elaborate rollout of the encyclical on Thursday. Journalists were told they would be given an early copy on Thursday morning and that it would be released publicly at noon following a press conference. On Monday evening, the Vatican asked journalists not to publish details of the draft, emphasising that it was not the final text. A Vatican official said he believed the leak was an act of “sabotage against the pope”.
The world economy is about to discover if to be forewarned by the Federal Reserve is to be forearmed. Two years since the Fed triggered a selloff of their assets in the so-called “taper tantrum,” the finance chiefs of emerging markets left Washington meetings of the IMF praising Chair Janet Yellen for the way she is signaling plans to raise U.S. interest rates. The test now is whether developing nations have done enough to insulate their economies from the threats of a higher U.S. dollar and capital flight once the Fed boosts borrowing costs for the first time since 2006. How successful they are will help determine the strength of global growth that’s already taking a hit from weaker expansions in China and Brazil.
“The Fed is trying its best to be as transparent as possible, to explain its considerations,” Tharman Shanmugaratnam, Singapore’s finance minister, said in an interview. “But it doesn’t mean that ensures us of an orderly exit. One way or another there’s going to be some disturbance.” Yellen is seeking to avoid the May 2013 episode of her predecessor Ben S. Bernanke, when his suggestion that the Fed might soon wind down its bond-buying program prompted investors to flee the risk in emerging markets. India’s rupee and the Turkish lira both tumbled to record lows. While Yellen didn’t speak publicly during the IMF’s spring gathering, officials said her message behind closed doors was reassuring.
Russian Finance Minister Anton Siluanov told reporters that Yellen informed fellow Group of 20 officials that any U.S. rate increases would be “transparent and understandable.” The latest Bloomberg survey shows 71% of participating economists expect the Fed to raise rates from near zero in September after a slowing of U.S. activity diluted speculation it would act as soon as June. “The Fed has been very clear about saying it would be a very steady process rather than an abrupt process, and I think that should calm people down,” Reserve Bank of India Governor Raghuram Rajan said in Washington. Malaysian central bank Governor Zeti Akhtar Aziz said in an interview that markets may be calmer following the Fed’s move than before. “I believe that when this interest-rate adjustment occurs, conditions will actually stabilize,” she said.
The IMF has sounded the alarm on the exorbitant levels of debt across the world, this time literally. The theme trailer to its fiscal forum on the ‘political economy of high debt’ plays on our fears with the haunting tension of a Hitchcock thriller. A quote from Thomas Jefferson flashes across the screen in blood-red colours: “We must not let our rulers load us with perpetual debt.” We learn that public debt in the rich economies fell from 124pc of GDP at the end of Second World War to 29pc in 1973, a dream era that we have left behind. The debt burden has since climbed at a compound rate of 2pc a year, accelerating into an upward spiral to 105pc of GDP after the Lehman crash. It is as if we had fought another world war. A baby boom and surging work-force enabled us to grow out of debt in the 1950s and 1960s without noticing it.
No such outcome looks plausible today. The IMF’s World Economic Outlook describes a prostrate planet caught in a low-growth trap as the population ages across the Northern Hemisphere, and productivity splutters. Nor is this malaise confined to the West. The fertility rate has collapsed across the Far East. China’s work-force is shrinking by three million a year. The report warned of a “persistent reduction” in the global growth rate since the Great Recession of 2008-2009, with no sign yet of a return to normal. “Lower potential growth will make it more difficult to reduce high public and private debt ratios,” it said.
Christine Lagarde, the Fund’s managing-director, calls it the “New Mediocre”. The height of elegance as always, and seemingly inexhaustible as she holds court at IMF Headquarters, Mrs Lagarde has learned the hard way that something is badly out of kilter in the world. The painful ritual of her IMF tenure has been to admit at each meeting that the previous forecasts were too hopeful. First it was Europe’s debt crisis. Now it is because China, Brazil, Russia, and a host of mini-BRICS have hit the limits of easy catch-up growth. This year the curse was finally broken. There will be no downgrade. The IMF is crossing its fingers that world growth will still be 3.5pc for 2015.
Yet the Fund’s underlying message is that sky-high debt ratios and old-age populations are a dangerous mix, leaving the world prone to the “Japanese” diseases of deflation and atrophy. The monetary and fiscal buffers are largely exhausted. Authorities have little left in their policy arsenal to fight the next downturn, whenever it comes. There is of course a time-honoured way to clear unpayable debts and wipe the slate clean. It is called default. Some wicked wit at the IMF ended the Hitchcock trailer with a killer quote, this one from the Canadian poet and novelist Margaret Atwood, strangely constructed but pithy in its way: “And then the REVENGE that comes when they are not paid back.
This touches a raw nerve, for that is more or less what may happen within weeks if an angry Greece – aggrieved at the way it was sacrificed to save Europe’s banks in 2010 – becomes the first developed country to miss a payment to the IMF, and perhaps the first of a long string of debtor-nations to turn the tables on their foreign creditors. Athens is where it all begins. George Osborne said talk of a Grecian debacle was on everybody’s lips at this year’s Spring Meeting. “The mood is notably more gloomy, and it is now clear to me that a misstep or a miscalculation by either side could easily return European economies to the kind of perilous situation we saw three or four years ago. The crunch appears to be coming in May,” he said.
IMF member nations are discussing how to expand the lender’s mandate to include keeping markets liquid during a financial crisis, a role played by a group of major central banks led by the Federal Reserve in 2008. The IMF’s main committee of central bank governors and finance ministers is working on ways for the fund to provide a better financial “safety net” during a crisis, said Singapore Finance Minister Tharman Shanmugaratnam, who last month finished a four-year term as chairman of the panel. Singapore remains a member of the International Monetary and Financial Committee.
“In the last crisis, the Fed and some other central banks had a system of swaps that was applied to only certain financial centers, but you can’t leave it to an individual central bank to make those decisions,” he said in an interview Friday in Washington, as officials from around the world gathered for the IMF’s spring meetings. “It has to be a global player, and the IMF is the only credible institution to perform that role.” The Washington-based IMF needs to evolve into more of a “system-wide policeman” that enforces global financial stability, rather than solely a lender to individual countries that run into trouble, said Shanmugaratnam, 58, who also serves as Singapore’s deputy prime minister.\ IMF Managing Director Christine Lagarde said this month that the world could be in for a “bumpy ride” when the Fed starts raising interest rates, with commodity-exporting emerging economies likely to take a major hit.
The Fed set up foreign-exchange swap lines during the crisis with major central banks, including the ECB, Bank of Japan and Bank of Canada, as well as some smaller and emerging-market nations such as Singapore, South Korea, Mexico and New Zealand. Under the program, foreign central banks exchanged their countries’ currencies for U.S. dollars, which they loaned to local financial institutions to shore up their liquidity. Outstanding swaps peaked at almost $600 billion in late 2008. Some emerging-market economies were rebuffed for swap agreements with the Fed, including Indonesia, India, Peru and the Dominican Republic, according to the book “The Dollar Trap” by Eswar Prasad, a former IMF official.
With a “defiant” Syriza determined to hold onto any shred of dignity and legitimacy that may remain in the wake of months of painful negotiations with its creditors and with a €5 billion advance from Russia (a large chunk of which will promptly be paid to the IMF which use it to bailout Ukraine which will hand it right back to Russia) shaping up to be the last lifeline for Greece before Athens is reduced to issuing IOUs to pay pensions and salaries, the focus is beginning to shift away from Grexit and towards contagion risk. The worry is that once Greece goes, both the credit market and periphery depositors will suddenly realize that the EMU is not “indissoluble,” but is in fact nothing more than a confederation of fixed exchange rates.
This realization could (and to a certain extent already has) cause credit investors to begin pricing redenomination risk back into sovereign spreads and, far more importantly (because as UBS recently noted, bonds don’t cause breakups, bank runs do), may lead depositors to question the wisdom of holding their euros in bank accounts where they’re earning next to no interest and where, should some “accident” occur, they are subject to conversion into a national currency that would swiftly collapse against the euro once introduced.
And so, with every sell side European credit strategist trying to figure out what happens when €60 billion in monthly asset purchases by a central bank collide head on with an unprecedented sovereign default and with speculators’ net short position on the EUR now at levels last seen in 2012, it’s time to bring out the big guns with Mario Draghi staging a sequel to his now famous “whatever it takes” speech which came in the summer of 2012, when spreads were blowing out across the periphery and when euro net shorts looked a lot like they do today. While conceding that a Greek exit from the euro would put everyone in “uncharted waters,” Draghi says he has the tools to combat contagion and as for shorting the euro, well, perhaps the best way to sum up Draghi’s position is to quote Clint Eastwood: “go ahead, make my day.”
Greece’s Finance Minister Yanis Varoufakis said in an interview broadcast on Sunday that if Greece were to leave the euro zone, there would be an inevitable contagion effect. “Anyone who toys with the idea of cutting off bits of the euro zone hoping the rest will survive is playing with fire,” he told La Sexta, a Spanish TV channel, in an interview recorded 10 days ago. “Some claim that the rest of Europe has been ring-fenced from Greece and that the ECB has tools at its disposal to amputate Greece, if need be, cauterize the wound and allow the rest of euro zone to carry on.”
“I very much doubt that that is the case. Not just because of Greece but for any part of the union,” he said, speaking in English. “Once the idea enters peoples’ minds that monetary union is not forever, speculation begins … who’s next? That question is the solvent of any monetary union. Sooner or later it’s going to start raising interest rates, political tensions, capital flight.” His comments were recorded before those of Mario Draghi, the European Central Bank’s president, who this weekend said the euro zone was better equipped than it had been in the past to deal with a new Greek crisis but warned of uncharted waters if the situation deteriorates.
Authorities in China face the delicate task of taming an equity bull market of their own making, which could now be spiraling out of control. Last week, the announcement of new measures to allow fund managers to short stocks not only hit Chinese shares, but also spooked the global markets. This was followed up by warnings from China’s securities regulator to small investors not to borrow money or sell property to buy stocks. A warning for equity bulls to cool off certainly looks overdue. Stock turnover reached a record 1.53 trillion yuan ($247 billion) on Friday, with stock-trading accounts reportedly being opened at a rate of 1 million every two days. Margin account balances reached a record 1.16 trillion yuan. But should global markets worry if day traders in Shenzhen or Shanghai are about to lose their shirts?
China’s casino-like equity markets are largely sealed off from the outside world, after all. Foreign ownership of domestic Chinese shares is still a fraction of 1%, even with new initiatives such as the recent opening of the Shanghai-Hong Kong Stock Connect. The concern for global markets, however, is not equity-market contagion but the potential hole a stock-market bust could blow in the world’s second-largest economy. This bull run is taking place as the Chinese economy slumps under a sea of debt, with exports now also going south along with the property market. This hardly sounds like conditions ripe for rallying shares — but this is no normal rally. The real wild card to consider is the fact that this bull market has the fingerprints of the ruling Communist Party all over it.
They initiated it, meaning an official policy shift could also see it reverse — although that looks unlikely for now. Official state media have been cheerleading this rally by extolling the benefits of share ownership in a series of articles since last year. But what has really unleashed “animal spirits” of day traders has been the re-opening of the domestic initial public offering (IPO) market. Thanks to systematic underpricing orchestrated by the state regulator, investors have been all but guaranteed spectacular gains. According to a first-quarter report from accountants Ernst & Young, there were 70 domestic Chinese IPOs, all of which rose by the maximum 44% allowed on the first day of trading. Average gains for IPOs have been around 200% this year.
China’s central bank on Sunday cut the amount of cash that banks must hold as reserves, the second industry-wide cut in two months, adding more liquidity to the world’s second-biggest economy to help spur bank lending and combat slowing growth. The People’s Bank of China (PBOC) lowered the reserve requirement ratio for all banks by 100 basis points to 18.5%. The reduction is effective from April 20, the central bank said in a statement on its website www.pbc.gov.cn. The latest cut in the reserve requirement shows how the central bank is stepping up efforts to ward off a sharp slowdown in the economy.
Weighed down by a property downturn, factory overcapacity and local debt, growth is expected to slow to a quarter-century low of around 7% this year from 7.4% in 2014, even with expected additional stimulus measures. The PBOC last cut the reserve requirement ratio for all commercial banks by 50 basis points on February 4, the first industry-wide cut since May 2012. The central bank has also cut interest rates twice since November in a bid to lower borrowing costs and spur demand.
The People’s Bank of China (PBoC) is “desperate” to control Shanghai’s red-hot equity rally, analysts said, after the central bank slashed the reserve requirement ratio (RRR) on Sunday. The 100 basis-point RRR cut to 18.5% is the biggest since 2008 and comes in response to a sharp selloff in stock futures on Friday after the China Securities Regulatory Commission (CSRC) tightened margin trading rules. The CSRC aims to cool Shanghai’s stock market, which is up over 30% year to date at seven-year highs. Futures plunged during late trading on Friday, with the China A50 futures contract down 6% in New York.
“After the announcement on Friday, stock futures were looking horrible so something needed doing to put a floor under that from a short-term point of view. But everybody’s going to take a look at this and say ‘hold on, why are they [PBoC] overreacting so strongly?’ People are going to start sensing desperation here,” Paul Gambles, co-founder of MBMG Group, told CNBC on Monday. Indeed, policy watchers were scratching their heads over the series of conflicting announcements. The PBoC is scrambling to ensure stability in China’s notoriously volatile share market, said Mark Andersen, global co-head of Asset Allocation at UBS CIO Wealth Management. “They want to see markets go up to some extent, but not out of control. With some of this margin financing, they want to see a relatively stable capital market with property prices falling so they don’t mind equity prices moving up a bit to support the broader economy, but they don’t want to see bubble territory,” Anderson said.
After the longest-ever rally in Chinese equities, investors are getting a reminder that the $7.3 trillion market isn’t just a one-way bet. China’s securities regulator jolted traders after the close of local bourses Friday when it banned a source of financing for margin trades and made it easier for short sellers to wager that stocks will fall. Offshore futures and exchange-traded funds linked to the world’s second-largest stock market sank, with the iShares China Large-Cap ETF tumbling 4.2% in the U.S. While China bulls will draw some comfort from the central bank’s biggest cut to lenders’ reserve requirements since 2008 on Sunday, last week’s sell-off in offshore markets shows how vulnerable the Shanghai Composite Index is to a pullback after going 452 days without a 10% drop from a recent high.
The benchmark gauge posted an average peak-to-trough retreat of 28% after six previous rounds of policy intervention to curtail stock speculation since 1996, according to Bank of America. “Institutional investors as well as authorities have had some concerns over the sharp rise in prices and trading,” Michael Kass at Baron Capital, whose $1.53 billion emerging-markets fund has outperformed 95% of peers tracked by Bloomberg over the past three years, said by e-mail on Friday. “This will likely cool some of the recent enthusiasm.” The Shanghai Composite’s 115% surge from last year’s low on Jan. 20 is challenging authorities as they seek to weigh the benefits of rising share prices against the risk that individual investors will get burned by excessive speculation.
Traders in Shanghai have borrowed a record 1.2 trillion yuan ($194 billion) to buy equities via margin trades, while new investors have opened an unprecedented number of stock accounts this year. The Shanghai Composite trades at 16.5 times estimated earnings for the next 12 months, the highest valuation in five years, even after data last week showed economic growth slowed to the weakest pace since 2009 in the first quarter. On Friday, the China Securities Regulatory Commission prohibited the margin-trading businesses of brokerages from using so-called umbrella trusts, which allow investors to take on more leverage. Authorities also allowed fund managers to lend shares for short sales, a move that will make it easier to execute bearish bets, and expanded the number of stocks available for this kind of trading.
President Xi Jinping’s crackdown on vice and corruption in China has gone after drugs, gambling, prostitution, ill-gotten wealth and overflowing banquet tables. Now it has turned to a less obvious target: golf. In a flurry of recent reports, state-run news outlets have depicted the sport as yet another temptation that has led Communist Party officials astray. A top official at the Commerce Ministry is under investigation on suspicion of allowing an unidentified company to pay his golf expenses. The government has shut down dozens of courses across the country built in violation of a ban intended to protect China’s limited supplies of water and arable land.
And in the southern province of Guangdong, home to the world’s largest golf facility, the 12-course Mission Hills Golf Club, party officials have been forbidden to golf during work hours “to prevent unclean behavior and disciplinary or illegal conduct.” The provincial anticorruption agency has set up a hotline for reporting civil servants who violate nine specific regulations, including prohibitions on betting on golf, playing with people connected to one’s job, traveling on golf-related junkets or holding positions on the boards of golf clubs. “Like fine liquor and tobacco, fancy cars and mansions, golf is a public relations tool that businessmen use to hook officials,” the newspaper of the party’s antigraft agency declared on April 9. “The golf course is gradually changing into a muddy field where they trade money for power.”
China’s President Xi Jinping is due in Pakistan, where he is expected to announce $46bn of investment. The focus of the spending is on building a China-Pakistan Economic Corridor (CPEC), running from Gwadar in Pakistan’s Balochistan province to China’s western Xinjiang region. Pakistan hopes the investment will boost its struggling economy and help end chronic power shortages. Leaders are also expected to discuss co-operation on security. Mr Xi will spend two days holding talks with his counterpart Mamnoon Hussain, Prime Minister Nawaz Sharif and other ministers. He will address parliament on Tuesday. Deals worth some $28bn are ready to be signed during the visit, with the rest to follow. The sum significantly outweighs American investment in Pakistan.
Under the CPEC plan, China’s government and banks will lend to Chinese companies, so they can invest in projects as commercial ventures. A network of roads, railways and energy developments will eventually stretch some 3,000km (1,865 miles). Some $15.5bn worth of coal, wind, solar and hydro energy projects will come online by 2017 and add 10,400 megawatts of energy to Pakistan’s national grid, according to officials. A $44m optical fibre cable between the two countries is also due to be built. The projects will give China direct access to the Indian Ocean and beyond, marking a major advance in its plans to boost its economic influence in central and south Asia. Pakistan, meanwhile, hopes the investment will enable it to transform itself into a regional economic hub.
Ahsan Iqbal, the Pakistani minister overseeing the plan, told the AFP news agency that these were “very substantial and tangible projects which will have a significant transformative effect on Pakistan’s economy”. Mr Xi is also expected to discuss security issues with Mr Sharif, including China’s concerns that Muslim separatists from Xinjiang are linking up with Pakistani militants. “China and Pakistan need to align security concerns more closely to strengthen security co-operation,” he said in a statement to Pakistani media on Sunday. “Our cooperation in the security and economic fields reinforce each other, and they must be advanced simultaneously.”
I’ve just come back from the annual Institute for New Economic Thinking conference in Paris, where the President of INET Rob Johnson is infamous for opening every session he chairs with an apt set of lyrics from the 1960s. I’ve aped Rob here by misquoting one of Bob Dylan’s great lines “You don’t need a weatherman to know which way the wind blows”. In fact, you do. Why? Because Weathermen know a lot more about which way the wind blows now that they did back in the 1960s, thanks to the work of a lesser-known icon of the 1960s, Edward Lorenz. A mathematician and a meteorologist, Lorenz was dissatisfied with the methods then used to predict the weather—which were a combination of looking for patterns in historical data, and using what mathematicians call linear models.
He demonstrated the importance of nonlinear effects in the weather in a seminal paper in 1963 (two years before Dylan released Subterranean Homesick Blues), and meteorologists rapidly moved from linear to nonlinear thinking. Why is nonlinear thinking better than linear? Ironically, given how defensive the Old Guard in economics is of its generally linear approach, one of the best explanations of what linear thinking is, and why it is misleading, was recently given by the chief economist at the IMF, Olivier Blanchard. Looking back at the failure of mainstream economic models to forewarn of the 2008 economic crisis, Blanchard noted that these models only made sense if “small shocks had small effects and a shock twice as big as another had twice the effect on economic activity”:
These techniques however made sense only under a vision in which economic fluctuations were regular enough so that, by looking at the past, people and firms (and the econometricians who apply statistics to economics) could understand their nature and form expectations of the future, and simple enough so that small shocks had small effects and a shock twice as big as another had twice the effect on economic activity.
The reason for this assumption, called linearity, was technical: models with nonlinearities—those in which a small shock, such as a decrease in housing prices, can sometimes have large effects, or in which the effect of a shock depends on the rest of the economic environment—were difficult, if not impossible, to solve under rational expectations. (Blanchard, “Where Danger Lurks”, September 2014)
Then along came the economic crisis, and suddenly in the real world—unlike in their models—“the effect of a shock depended on the rest of the economic environment”, and what appeared to economists to be a small shock (the Subprime mortgage crisis) had a very large impact on the global economy. Lorenz’s criticism of linear weather models was essentially the same: linear models grossly underestimated the interconnectedness of the weather. Meteorologists took this message to heart, and developed highly nonlinear models in which “‘cause and effect’ relationships between the basic variables can become ferociously complex”. This required some very difficult work in mathematics and computing—but it was worth it, given the devastating real-world impact of an unanticipated hurricane on the real world. The world has benefited enormously from this work by meteorologists over the last half century.
As house prices in the country’s biggest city spiral out of control, Auckland homeowners are cashing in their chips and buying mansions in the regions.Thousands of property owners are now sitting on million-dollar goldmines thanks to rampant capital gain. The lure of a traffic-free, laid-back lifestyle with outdoor space for the children is proving tempting for many, and one-in-10 Hawkes Bay sales are now to ex-pat Aucklanders. The Bay of Islands and Marlborough are also drawing “Jafa” homeowners keen to escape the rat race. They have newly acquired equity thanks to soaring Auckland house prices which hit a median of $720,000 last month – a 13% jump in the past year alone.
In Marlborough, with its climate, vineyards and scenery, the median selling price last month was $316,500. Bayleys Marlborough director Andy Poswillo said the median price of a home in Auckland would buy a dated two-to-four-bedroom house or unit, with single car garaging set on a “pocket-handkerchief of lawn”.In Marlborough, the same money could buy a modern three-to-five-bedroom house, some with great views, a swimming pool, hobby orchard and up to 4000sq m of land.”It is easy to see why the temptation is there to cash up, do away with the mortgage and move down the line.”Mr Poswillo said at least eight Auckland families had bought local properties in the past three months.
Many buyers had negotiated “work from home” or satellite office arrangements to maintain their city careers. “They all share the same sentiment; they are tired of chipping away at their colossal mortgages for homes that are failing to serve their needs.”Put simply they want a better lifestyle for their kids and to dump the financial stress of living in the big smoke.”On Saturday the Weekend Herald revealed the average Auckland home had earned nearly $230 a day in the past year – nearly twice what the average worker earned from their job.
Aloof. Polite. Cajoling. Extremely attentive. Restrained. Dishonest. Inscrutable. Malicious. The rebels from northern Syria, remembering encounters with him months later, recall completely different facets of the man. But they agree on one thing: “We never knew exactly who we were sitting across from.” In fact, not even those who shot and killed him after a brief firefight in the town of Tal Rifaat on a January morning in 2014 knew the true identity of the tall man in his late fifties. They were unaware that they had killed the strategic head of the group calling itself “Islamic State” (IS). The fact that this could have happened at all was the result of a rare but fatal miscalculation by the brilliant planner. The local rebels placed the body into a refrigerator, in which they intended to bury him.
Only later, when they realized how important the man was, did they lift his body out again. Samir Abd Muhammad al-Khlifawi was the real name of the Iraqi, whose bony features were softened by a white beard. But no one knew him by that name. Even his best-known pseudonym, Haji Bakr, wasn’t widely known. But that was precisely part of the plan. The former colonel in the intelligence service of Saddam Hussein’s air defense force had been secretly pulling the strings at IS for years. Former members of the group had repeatedly mentioned him as one of its leading figures. Still, it was never clear what exactly his role was.
But when the architect of the Islamic State died, he left something behind that he had intended to keep strictly confidential: the blueprint for this state. It is a folder full of handwritten organizational charts, lists and schedules, which describe how a country can be gradually subjugated. SPIEGEL has gained exclusive access to the 31 pages, some consisting of several pages pasted together. They reveal a multilayered composition and directives for action, some already tested and others newly devised for the anarchical situation in Syria’s rebel-held territories. In a sense, the documents are the source code of the most successful terrorist army in recent history.
Faced with the triple whammy of plunging oil prices, currency volatility and Western sanctions, there’s no dearth of challenges for Russia’s ailing economy, but Deputy Prime Minister Arkady Dvorkovich said what hurts most is the scarcity of financing for new investments. “The shortness of financing for new investments is where the Russian economy is being hit in the most important way,” Dvorkovich told CNBC on the sidelines of World Economic Forum on East Asia in Jakarta. “How do we deal with this? We are working with new partners. This is why we are in China, in other countries, looking for new partners who can bring new investments into the country,” he added.
Russia’s economy, which grew by just 0.6% in 2014, is expected to enter a deep recession this year under the weight of lower oil prices and sanctions, which have compounded the country’s underlying structural weaknesses and undermined business and consumer confidence. Earlier this month, the IMF slashed its growth outlook for the country, forecasting a contraction of 3.8% in 2015 and 1.1% in 2016. Its earlier estimate was for a contraction of 3% this year and 1% next. Nevertheless, Dvorkovich says the country has built up enough reserves to weather the rout in the commodities market.
“We were not counting on higher oil prices in our economic policies. We were saving some money for the times like what we face now, so we have reserves that allow us to smooth this stage and to help poor families and increase unemployment benefits,” he said. As for the precipitous fall in the ruble over the past year, Dvorkovich said the implications are not all negative as it gives Russian manufacturing and agricultural exports a pricing edge in global markets. Responding to criticism over the Kremlin’s decision to lift a self-imposed ban on supplying a sophisticated missile air defense system to Iran, Dvorkovich said: “We are not breaking any sanctions.” “We will fulfill our commitments and responsibilities in full compliance with international legislations. Our partners shouldn’t doubt that we would work in that manner,” he said.
Five years after the nation’s worst offshore oil spill, the industry is working on drilling even further into the risky depths beneath the Gulf of Mexico to tap massive deposits once thought unreachable. Opening this new frontier, miles below the bottom of the Gulf, requires engineering feats far beyond those used at BP’s much shallower Macondo well. But critics say energy companies haven’t developed the corresponding safety measures to prevent another disaster or contain one if it happens — a sign, environmentalists say, that the lessons of BP’s spill were short-lived.
These new depths and larger reservoirs could exacerbate a blowout like what happened at the Macondo well. Hundreds of thousands of barrels of oil could spill each day, and the response would be slowed as the equipment to deal with it — skimmers, boom, submarines, containment stacks — is shipped 100 miles or more from shore. Since the Macondo disaster, which sent at least 134 million gallons spewing into the Gulf five years ago Monday, federal agencies have approved about two dozen next-generation, ultra-deep wells. The number of deepwater drilling rigs has increased, too, from 35 at the time of the Macondo blowout to 48 last month, according to data from IHS Energy, a Houston company that collects industry statistics.
Department of Interior officials overseeing offshore drilling did not provide data on these wells and accompanying exploration and drilling plans, information that The Associated Press requested last month. But a review of offshore well data by the AP shows the average ocean depth of all wells started since 2010 has increased to 1,757 feet, 40% deeper than the average well drilled in the five years before that. And that’s just the depth of the water. Drillers are exploring a “golden zone” of oil and natural gas that lies roughly 20,000 feet beneath the sea floor, through a 10,000-foot thick layer of prehistoric salt — far deeper than BP’s Macondo well, which was considered so tricky at the time that a rig worker killed in the blowout once described it to his wife as “the well from hell.”
US army commander in Europe says Russia is a “real threat” urging NATO to stay united. The alliance is not interested in a “fair fight with anyone” and wants to have “overmatch in all systems,” Lieutenant-General Frederick “Ben” Hodges believes. “There is a Russian threat,” Hodges told the Telegraph, maintaining that Russia is involved in ongoing conflict in eastern Ukraine. A key objective for NATO is not to let Russia outreach it in terms of capabilities, the general said. “We’re not interested in a fair fight with anyone,” General Hodges stated. “We want to have overmatch in all systems. I don’t think that we’ve fallen behind but Russia has closed the gap in certain capabilities. We don’t want them to close that gap,” he revealed.
“The best insurance we have against a showdown is that NATO stands together,” he said, pointing to recent moves by traditionally neutral Sweden and Finland to cooperate more closely on defense with NATO. Moscow has expressed “special concern” over Finnish and Swedish moves towards the alliance viewing it as a threat aimed against Russia. “Contrary to past years, Northern European military cooperation is now positioning itself against Russia. This can undermine positive constructive cooperation,” Russia’s Foreign Ministry said in a statement. Hodges also said US expects its allies to contribute financially to the security umbrella provided by the NATO alliance, as its member states have been failing to allocate 2% of every member nation’s GDP to NATO budget.
“I think the question for each country to ask is: are they security consumers or security providers?” the general demanded. “Do they bring capabilities the alliance needs?” However, the general does not believe that the world is on the brink of another Cold War, saying that “the only thing that is similar now is that Russia and NATO have different views about what the security environment in Europe should be.” “I don’t think it’s the same as the Cold War,” he said, recalling “gigantic forces” and “large numbers of nuclear weapons” implemented in Europe a quarter of a century ago. “That [Cold War] was a different situation.”