copper Archives - The Automatic Earth

Janet Yellen offered up her best impression of a dove Tuesday. In other words, the Federal Reserve chairwoman stressed her intent to gradually lift benchmark interest rates off ultralow levels. Unsurprisingly, Wall Street cheered the prospect of an ever slower approach to raising interest rates as she spoke at a highly anticipated speech at the Economic Club of New York. The Dow Jones and the S&P 500 both posted their highest settlements of 2016. The dollar turned south and yields for rate-sensitive Treasurys touched one-month lows. What is worth taking note of is Yellen’s increased focus on forces outside of the U.S. as she outlines a plan to gingerly normalize interest rates, reiterating an updated March policy statement and the Fed’s reduced expectations for rate increases in 2016 (two versus an earlier projection for four).

In a note, Deutsche Bank chief international economist Torsten Slok pointed out that Yellen & Co. have been more influenced by events in the rest of the world since late May. Mentions of China, the dollar and the term “global” have been more readily used by the Yellen as the emergence of negative interest rates in Japan and Europe have underscored consternation about the state of the world economy and. in particular, a slowdown by the world’s second-largest economy: China. Slok’s bar graph below illustrates the point. The Fed’s mandate, as Yellen reiterated Tuesday, is centered on the twin goals of maximum employment and stable prices, the latter of which the Fed defines as inflation at or near its 2% target level. But lately, fears that storms brewing abroad could wash ashore in the U.S. have come into greater focus, as the excerpt from Yellen’s Tuesday comments show:

“One concern pertains to the pace of global growth, which is importantly influenced by developments in China. There is a consensus that China’s economy will slow in the coming years as it transitions away from investment toward consumption and from exports toward domestic sources of growth. There is much uncertainty, however, about how smoothly this transition will proceed and about the policy framework in place to manage any financial disruptions that might accompany it. These uncertainties were heightened by market confusion earlier this year over China’s exchange rate policy.”

How this is any different from interpreting the incoherent utterances of an oracle intoxicated by fumes, I don’t know.

• Yellen Says Caution in Raising Rates Is ‘Especially Warranted’ (BBG)

Federal Reserve Chair Janet Yellen said it is appropriate for U.S. central bankers to “proceed cautiously” in raising interest rates because the global economy presents heightened risks. The speech to the Economic Club of New York made a strong case for running the economy hot to push away from the zero boundary for the Federal Open Market Committee’s target rate. “I consider it appropriate for the committee to proceed cautiously in adjusting policy,” Yellen said Tuesday. “This caution is especially warranted because, with the federal funds rate so low, the FOMC’s ability to use conventional monetary policy to respond to economic disturbances is asymmetric.” Fed officials left their benchmark lending rate target unchanged this month at 0.25% to 0.5% while revising down their median estimate for the number of rate increases that will be warranted this year to two hikes, from four projected in December.

U.S. Treasuries advanced following her remarks, while the dollar weakened and U.S. stocks erased earlier losses. The Standard & Poor’s 500 Index was up 0.5% to 2,046.90 at 1:52 p.m. in New York, after falling as much as 0.4%. “Yellen has doubled down on the dovishness from the March statement and press conference,” said Neil Dutta at Renaissance Macro Research. “Global economic developments are cited very prominently.” Yellen said the FOMC “would still have considerable scope” to ease policy if rates hit zero again, pointing to forward guidance on interest rates and increases in the “size or duration of our holdings of long-term securities.”

“While these tools may entail some risks and costs that do not apply to the federal funds rate, we used them effectively to strengthen the recovery from the Great Recession, and we would do so again if needed,” she said. Fed officials’ quarterly economic forecasts for the U.S. didn’t change much in March, while Yellen stressed in a post-FOMC meeting press conference on March 16 that their sense of risks from global economic and financial developments had mounted. Yellen mentioned two risks in her New York speech. Growth in China is slowing, she noted, and there is some uncertainty about how the nation will handle the transition from exports to domestic sources of growth. A second risk is the outlook for commodity prices, and oil in particular. Further declines in oil prices could have “adverse” effects on the global economy, she said.

“The politics are more polarized than even the Depression and more like the Civil War – and we have over 300 million guns in this country.”

• The US Is in for Much Greater Civil Unrest Ahead (Dent)

I made a confession to our Boom & Bust subscribers last month. While I generally advise against owning most real estate, I have a secluded property in the Caribbean. It’s the only property I own (I rent my home in Tampa) and I know for a fact that its value will likely depreciate in the great real estate shakeout I see ahead, although likely by half as much as a high-end property in Florida. The reason I own this property is because I see rising chances for civil unrest in the inevitable downturn ahead, especially in the U.S. I want a place to go if things get really bad, and it looks increasingly likely that they will. The evidence for that is piling up in this year’s presidential race… What we have now, surprising to most political analysts, is a genuine voter revolt against the rich and the establishment.

Trump is taking over the Republican Party, and Sanders is threatening Clinton beyond what almost anyone would have forecast a year ago, even if he can’t quite seem to win. And it doesn’t matter if Trump can back up most of his statements with facts, or if Sanders’ policies have any chance of being viable economically. They understand what the pundits don’t. The people are angry and they want change. When the U.S. came out of World War II, it emerged with the strongest and most successful middle class in the decades that followed. Never before had there been such a middle class emerge in all of history. We had a vibrant workforce with higher wages… a baby boom… startling innovation… But now we have led the decline of that middle class, with wage competition from Asia, Mexico and other emerging countries, and the rapid rise of the professional and speculative classes.

Meanwhile, many higher-paid manufacturing jobs have moved overseas, and even service jobs like call centers have moved to places like India. More immigrants have come in and competed as well. That’s why a silent “near” majority of Americans are anti-immigrant and free trade… Duh! But here’s the real rub. Higher incomes help you survive at a better standard of living, and real wages have only been declining since 2000. They’ve barely risen even back to 1970s levels. That’s enough to be mad about. The ability to live as you want, to retire longer term, and to have power in society comes more from wealth – and that is way more skewed towards the upper class. And that’s where the middle class in America has lost the most ground. Look at this chart from a recent study by Credit Suisse of the share of wealth held by the middle class. Look at how we compare to the rest of the top countries.

The U.S. is the worst! No wonder the middle class here feels the most dis-empowered! It explains why America’s electorate either wants to nominate a political outsider who talks tough and promises to restore our power in the world… or an avowed socialist to combat income and wealth inequality by attacking Wall Street and the top 1%. I have said for a long time that the two countries I most expect to have the worst potential for civil unrest are China… and the U.S. China because it created the greatest over-expansion and urbanization bubble in modern history. Now, it has 250 million unregistered migrant urban workers from rural areas that will be stuck without jobs (and nowhere to go) after they can’t keep building infrastructures for no one. But the U.S. has the most polarized politics of any major country, and the greatest income and wealth inequality in the developed world. The politics are more polarized than even the Depression and more like the Civil War – and we have over 300 million guns in this country.

A minister mentioned temp government ownership of the steel industry this morning. Like China, I guess?!

• Steel Industry Dealt Hammer Blow As Tata Withdraws From UK (Tel.)

The steel industry was dealt a hammer blow on Tuesday as it emerged that Tata plans to completely withdraw from its British operation, putting thousands of jobs at risk. The Indian conglomerate’s board decided to pull out of the UK after rejecting a turnaround plan for Port Talbot, the nation’s biggest steelworks. The South Wales plant employs around 4,000 who face an uncertain future as Tata now seeks a buyer for its British steel assets. Steelworks in South Yorkshire, Northamptonshire and County Durham are also set to be put up for sale. A Tata spokesman said: “The Tata Steel Board came to a unanimous conclusion that the [turnaround] plan is unaffordable… the assumptions behind it are inherently very risky, and its likelihood of delivery is highly uncertain.”

Tata said it had ordered its European steel subsidiary to “explore all options for portfolio restructuring including the potential divestment of Tata Steel UK, in whole or in parts”. The decision by Tata placed the Government under pressure to step in to save Britain’s steel industry. Anna Soubry, the industry minister, has said that “in the words of the Prime Minister, we are unequivocal in saying that steel is a vital industry”. As Tata’s decision emerged from Mumbai, officials were looking at options to secure the survival of British steel making under new owners. It is understood they could include similar measures to those taken by the Scottish government to facilitate the acquisition of two former Tata mills by the commodities investor Liberty House. Taxpayers footed the bill to keep workers on standby and the plants were even temporarily nationalised while the deal was finalised.

“For energy companies, the price-book ratio is about 31% below its 10-year average, while the discount for miners is 44%.”

• Bonfire of the Commodities Writedowns is Just Starting (BBG)

What does $13 billion of burning money smell like? Commodity investors are getting a nose for it. Japanese trading houses Mitsui, Mitsubishi, and Sumitomo have announced 767 billion yen ($6.8 billion) of writedowns on assets this year, including copper, nickel, iron-ore and natural-gas projects. PetroChina wrote 25 billion yuan ($3.8 billion) off the value of oil and gas fields that have “no hope” of making a profit at current prices, President Wang Dongjin said last week, while Citic posted a HK$12.5 billion ($1.6 billion) impairment on an Australian iron-ore mine. Cnooc’s annual results last Thursday count as a good news story against that backdrop, with impairments of 2.75 billion yuan that were lower than the previous year’s.

Investors might hope after all this that we’d be reaching the level where mining and energy assets have been written back to normal levels, allowing companies to start the hard work of rebuilding. It doesn’t look that way. There’s certainly been a reality check of late. The balance sheets of major mining and energy companies have shrunk by $856 billion over the past 12 months, putting the value of their total assets at their lowest level since 2011, according to data compiled by Bloomberg. That looks dramatic until you compare it to the performance of the Bloomberg Commodities index. Companies are still more asset-rich than they were in 2011, which was the peak of a once-in-a-generation commodities boom. This delayed response to lower prices isn’t surprising.

Non-financial companies should have a high bar for reassessing their asset values to prevent manipulation of earnings (revaluations upward count as income, just as writedowns count against profit). That means a degree of inertia: after the 2008 financial crisis, the value of assets in the S&P 500 index didn’t bottom out until June 2010. Even if you blame weak-kneed accountants for that delay, an analogous pattern can be seen in the real economy. Default rates in the U.S. tend to peak well after economic slowdowns begin. To some extent, equity investors are already taking this in their stride. Price-to-book ratios of the Bloomberg World Energy Index and the Bloomberg World Mining Index are at their lowest levels since at least 2003, suggesting the market doesn’t believe companies’ balance sheets are worth as much as they appear on paper. For energy companies, the price-book ratio is about 31% below its 10-year average, while the discount for miners is 44%.

And projections for elections indicate Abe could get a 2/3 majority. How weird is that?

• Japan Industrial Output Drops 6.2% In February, Most Since 2011 (BBG)

Japan’s industrial production dropped the most since the March 2011 earthquake as falling exports sapped demand and a steel-mill explosion halted domestic car production at Toyota. Output slumped 6.2% in February after rising in January, the trade ministry said on Wednesday. Economists surveyed by Bloomberg had forecast a 5.9% drop. The government projects output will expand 3.9% this month. The data underscores the weakness of Japan’s recovery from last quarter’s contraction, with overseas shipments dropping for the last five months and sluggish domestic demand. With pressure building on policy makers to bolster growth, Prime Minister Shinzo Abe said Tuesday that the government would front load spending after parliament passed a record budget for the 12 months starting April 1. He resisted calls for a supplementary fiscal package.

“The slump in industrial output in February suggests that manufacturing activity will contract this quarter,” Marcel Thieliant, senior Japan economist at Capital Economics, wrote in a note. This means there is a growing risk that the economy won’t expand this quarter after the contraction in the final three months of last year, Thieliant wrote. Junichi Makino, chief economist at SMBC Nikko Securities, was more upbeat about the outlook. Production plans for March and April are strong, and there are signs of stronger demand for cars, electrical equipment and machinery, he said in a note. The size of the drop in February was due to both the fall in production at Toyota and the lunar new year, according to Makino.

“For years, traders on the mainland have used copper as collateral to finance trades in which they borrowed foreign currencies and invested the proceeds in higher-yielding assets denominated in renminbi.”

• China’s True Demand For Copper Is Only Half as Much as You Think (BBG)

Virtually every aspect of the commodities bust has a China angle. Forecasts for China’s consumption of raw materials have proved wildly optimistic, while domestic production of certain resources have resulted in particularly severe gluts in commodities such as steel and coal. But in one respect, China has been putting an artificial degree of upward pressure on a select resource—copper—sparing it from the worst of the rout in commodities. For years, traders on the mainland have used copper as collateral to finance trades in which they borrowed foreign currencies and invested the proceeds in higher-yielding assets denominated in renminbi. This carry trade with Chinese characteristics allowed them to net a tidy profit.

(As an aside, however, the devaluation of yuan in August prompted analysts to wonder whether this trade has reached its best-before date—something that would have implications for the future global demand for copper, if true. Meanwhile, there have been persistent rumors of regulators cracking down on such trades.) This practice of warehousing copper to help engage in financial arbitrage “inflated demand, kept prices higher, and led miners to raise output,” according to Bloomberg Intelligence Analysts Kenneth Hoffman and Sean Gilmartin, who sought to identify the extent to which demand for copper has been buoyed by its use as collateral for such trades. The decline in Chinese copper demand for household appliances and electronics since 2011 doesn’t jibe with the headline demand statistics, the analysts note, which show the country’s total copper demand increased of 45% from 2011 to 2015.

Moreover, when benchmarked against cement—another material widely used for construction purposes—copper’s rapid rise in China looks particularly suspicious. While cement intensity, or percentage used per square meter, rose 11% in the time period, copper intensity surged an astounding 117%. Putting all this together, Hoffman and Gilmartin conclude that “real Chinese demand may be 54% lower than anticipated” after stripping out the demand for copper tied to the carry trade. That amounts to nearly 7 million metric tonnes of copper procured for use as collateral in 2015 alone, according to the pair’s calculations—equal to the mass of more than 30,000 Statues of Liberty.

The banks will be stuck with the smelly bits. Lots of them.

• China’s Large Banks Wary on Beijing’s Plan for Bad Debt to Equity Swaps (BBG)

China’s proposal to deal with a potential bad-loan crisis by having banks convert their soured debt into equity is meeting with unexpected resistance from some of the biggest potential beneficiaries of the plan – the country’s large banks. Asked about the plan at the Boao Forum last week, China Construction Bank Chairman Wang Hongzhang said he needs to think of his shareholders and wouldn’t want to see a plan that simply converted “bad debt into bad equity.” China Citic Bank’s Vice President Sun Deshun said at a press conference last week that any compulsory conversion of debt into equity would have to be capped. And Bank of China Chairman Tian Guoli said in Boao that it’s “hard to evaluate” how effective debt-equity swaps will be, as so much has changed in China since the tool was used to bail out the banking system during a previous crisis in the late 1990s.

Behind the caution is a lack of clarity about how exactly the government will proceed with the conversion of up to 1.27 trillion yuan ($195 billion) of bad debt owed to the banks mostly by the country’s lumbering state-owned enterprises, and – crucially – about the level of support that will be available from the state. Bank of Communications, the first of China’s large banks to report 2015 earnings, said Tuesday it nearly doubled its bad-debt provisions in the fourth quarter of last year to 7.5 billion yuan. Without backing from the government, in the form of cash injections or easier capital rules for the banks, any debt-equity swaps would simply shift the bad-loan problem from the SOEs to the banks, with potentially disastrous consequences for the stability of the nation’s lenders. On the other hand it will be politically impossible to repeat the approach used in 1999 and again in 2004, when Chinese taxpayers effectively underwrote the bailouts, leaving the banks unscathed.

“You can’t kill three birds with one stone,” said Mu Hua at Guangfa Securities, referring to the need to balance the need to fix bank and SOE bad loans while protecting the interests of Chinese taxpayers. “Voluntary swaps won’t scale up unless the government offers enough incentive, such as lowering the risk weighting or setting up a platform for banks to dump the stakes.” The discussion of debt-equity swaps comes as China’s policymakers scramble for ways to cut corporate leverage that has climbed to a record high, and to clean up the mounting tally of bad loans on the banks’ books. Premier Li Keqiang said at the National People’s Congress earlier this month that the country may use the swaps to cut the leverage ratio of Chinese companies and to mitigate financial risks.

Growth comes from household debt.

• Eurozone ‘Flying On One Engine’: S&P (CNBC)

The euro zone economy is “flying on one engine,” according to the chief European economist at ratings agency Standard and Poor’s, which trimmed its growth and inflation forecasts for the euro zone. In his latest report on Wednesday, S&P’s Chief European Economist Jean-Michel Six likened the 19-country euro zone to a plane “flying on one engine” and “fighting for altitude” and said that while there are reasons to hope that the economy will pick up altitude, a “pre-crisis flight path” of robust growth is not likely. Since the start of the year, Six noted that global market turmoil had caused a “nosedive in financial conditions…(which) had taken some wind out of the euro zone economy” and although regional conditions had since improved – particularly due to what he called a “well-received” set of more accommodative measures from the ECB – the eurozone relied too much on domestic consumption for growth.

While the euro zone had seen its recovery “gathering momentum” over the last two years, Six warned that the “the current upswing in the euro zone has been a one-engine, consumer recovery.” To illustrate his point, Six noted that consumption represents 55% of the region’s GDP and has accounted for a “whopping” 72% of economic growth since 2014. That dependence on consumption entailed risks, he said, although the euro zone might well get away with it. “A recovery that mainly relies on one cylinder is by definition suspicious: It could quickly grind to a halt, as it did in the previous cycle in 2010-2011. Or, it could be a flash in the pan, caused simply by a one-off drop in household energy bills.”

ECB leaves nothing for others to invest in.

• Europe’s Bond Shortage Means Draghi Is About to Shock the Market (BBG)

As ECB Governor Mario Draghi prepares to increase and broaden his bond-buying program, the shrunken market might be in for a shock. While policy makers will expand their asset-purchase plan by €20 billion a month at the start of April, corporate debt won’t be included until later in the quarter. That’s leaving investors to face even higher demand for government bonds with supply unable to keep up and some of Europe’s biggest banks are predicting yields are headed for even more record lows. “All of that is going to be in covered bonds, in govvies, in agencies,” Vincent Chaigneau at Societe Generale in London said in an interview. “That’s going to create a shock on supply-demand in Europe.”

The prospect of increased largess from the ECB has pushed government bonds higher, with the yield on German 10-year bunds headed for their biggest quarterly slide in almost five years. They dropped to 0.15% on Tuesday, half where they were when the ECB announced an increase to its quantitative-easing program on March 10. French bank Societe Generale predicts the bund yield will slide not only to the record low of 0.049% posted in April 2015, but to negative 0.05% by the end of the next quarter. The ECB cut its main interest rates, announced the increase to QE and revealed a new targeted-loan program earlier this month as it ramped up efforts to boost inflation in the 19-member currency bloc. A report on Thursday will show consumer prices in the currency zone probably fell for a second month in March, according to economists surveyed by Bloomberg.

The rate hasn’t touched policy makers’ near-2% goal since 2013.The ECB has said it’s confident it has an “adequate” universe of assets to buy. But even when corporate debt purchases start, some investors are skeptical the ECB will be able to purchase sufficient quantities to alleviate pressure on government securities. Peter Schaffrik at Royal Bank of Canada in London said the consensus is that officials will be able to buy about €5 billion of company bonds, leaving an additional €15 billion of government and agency securities to be acquired each month.

The defaults are delayed not because of energy firms, but because of their lenders.

• Oil Explorers Face Challenge to Secure Financing as Oil Prices Fall (WSJ)

Just a few years ago, when oil sold for about $100 a barrel, banks [in London] were lining up to give international oil explorers access to billions of dollars to finance new drilling and projects. But as oil prices stay mired in a funk, the money is drying up. Senior executives from companies such as Tullow Oil and Cairn Energy have been meeting with their bankers for a biannual review of the loans that allow them to keep drilling and building out projects. For many European companies, it has been a nail-biting experience, as banks worry about the growing pile of debt taken on by oil companies with little or no profits. Several companies said they expect their ability to tap credit lines to be diminished after the reviews. Some lenders have brought in teams that specialize in corporate restructuring to scrutinize companies’ balance sheets, spending and assets, though not at Tullow or Cairn.

In the past, the reviews were generally conducted solely by banks’ energy specialists. The new scrutiny in Europe comes as oil-company debt emerges as an issue across the world with prices for crude near $40 a barrel—down more than 60% from June 2014. Globally, the net debt of publicly listed oil and gas companies has nearly tripled over the past decade to $549 billion in 2015, excluding state-owned oil companies, according to Wood Mackenzie, the energy consultancy. Reviews of these loans have high stakes. If a bank decides a company has already borrowed more than it can afford, the reviews could trigger a repayment, more cost cuts or even a fire sale of assets to raise cash. “There isn’t anyone in the oil independent sector that will be very relaxed at the moment,” said Thomas Bethel at Herbert Smith Freehills.

Oil companies are facing a similar set of biannual reviews in the U.S., where many small and midsize companies borrowed heavily to expand during the shale boom. The number of energy loans deemed in danger of default is on course to breach 50% at several major U.S. banks, The WSJ reported last week. But some American firms have been able to raise cash by issuing new stock or selling new debt, while in recent years Europe-based explorers have come to rely more on bank lending as investors that once pumped up the industry are fleeing in droves. In Europe, the focus is on a specialized type of borrowing known as reserves-based lending that has mushroomed in recent years. Europe’s top 10 non-state-owned oil companies have taken on over $12 billion in such loans, which are particularly exposed to energy prices as they are secured against the value of a company’s petroleum reserves and future production.

What happens when you plant Goldman’s MO in fertile ground.

• The Rise and Fall of Goldman’s Big Man in Malaysia (BBG)

The prime minister of Malaysia had a message for the crowd at the Grand Hyatt San Francisco in September 2013. “We cannot have an egalitarian society – it’s impossible to have an egalitarian society,” Najib Razak said. “But certainly we can achieve a more equitable society.” Tim Leissner, one of Goldman Sachs’s star bankers, enjoyed the festivities that night with model Kimora Lee Simmons, who’s now his wife. In snapshots she posted to Twitter, she’s sitting next to Najib’s wife, and then standing between him and Leissner. Everyone smiled. The good times didn’t last. At least $681 million landed in the prime minister’s personal bank accounts that year, money his government has said was a gift from the Saudi royal family. The windfall triggered turmoil for him, investigations into the state fund he oversees and trouble for Goldman Sachs, which helped it raise $6.5 billion.

Leissner, the firm’s Southeast Asia chairman, left last month after questions about the fund, his work on an Indonesian mining deal and an allegedly inaccurate reference letter. Few corporations have mastered the mix of money and power like New York-based Goldman Sachs, whose alumni have become U.S. lawmakers, Treasury secretaries and central bankers. Leissner’s rise and fall shows how lucrative and fraught it can be when the bank exports that recipe worldwide. In 2002, when the firm made him head of investment banking in Singapore, it had just cleaned up a mess there after offending powerful families. It took only a few years before the networking maestro was helping the bank soar in Southeast Asia – culminating in billion-dollar deals with state fund 1Malaysia Development Bhd., also known as 1MDB. But if his links to the rich and powerful fueled his Goldman career, they also helped end it.

How to kill an entire education system in a few easy steps.

• New Student Loans Targeted Straight at Mom and Dad (WSJ)

As rising tuition costs pile ever-higher debts on students, lenders and colleges are pushing for an alternative: Heap more on their parents. An increasing number of private student lenders are rolling out parent loans, which allow borrowers to get funds to pay for their children’s education without putting the students on the hook. The loans mimic a similar federal program but don’t charge the hefty upfront fee levied by the government, which could make them cheaper and encourage more use. SLM Corp., the largest U.S. private student lender by loan originations and better known as Sallie Mae, will introduce its version of the loan next month. Parents will be able to borrow at interest rates ranging from about 3.75% to 13%, with 10 years to pay it off.

“There’s an opportunity to expand our reach,” said Charles Rocha, chief marketing officer at Sallie Mae. The lender joins banks like Citizens Financial Group, which started offering a similar loan last year. Online lender Social Finance, or SoFi, first rolled one out in 2014 at the request of Stanford University. Stanford spokesman Brad Hayward said the university initiated discussions about the loan to help parents who were looking for more financing options. Colleges including Stanford, Boston College and Carnegie Mellon University are referring parents to the loans through emails or by putting them on lists of preferred loan options. An official at Boston College also said the school approached lenders to create the loans.

Lenders see the new products as an area of growth in an otherwise sluggish lending environment. Colleges are helping push them in part because of a quirk in federal calculations. Unlike ordinary federal student loans, the parent loans don’t count on a scorecard in which the U.S. Education Department discloses universities’ median student debt at graduation. That can ease the pressure to keep tuition increases in check at a time when heavy student debt has become a political issue.

“..basic income could remove the need for a welfare state that is patronising and humiliating..”

• Free Lunch: Basic Welfare Policy (Sandhu)

There are ideas that refuse to die no matter how many times they are rejected. One such idea is Universal Basic Income. Basic income is the proposal to pay all citizens an unconditional regular amount sufficient for basic needs, and then leave them to seek their fortune as best they can in the market. Few trials have been held and those have not led to large-scale adoption, but the proposal keeps recurring in social policy debates. That is largely because it is an excellent idea. In the past century the attraction for thinkers on the left and the right has been that basic income could remove the need for a welfare state that is patronising and humiliating, creates perverse incentives against working, and whose complexity means it often fails to reach those truly in need of help while subsidising the middle class.

Today, with deepening anxiety that we will all be put out of work (or, alternatively, be enslaved) by robots, the appeal of basic income has returned to its roots. More than 200 years ago, Thomas Paine advocated it as a way to fairly distribute the “ground rent” generated by concentrated landholdings to the landless — the idea being that the earth was humanity’s common property. If technological change today means markets tilt the distribution of income towards capital owners and away from workers, a similar argument can be made for the redistribution of “rent” due to humanity’s technological ingenuity equally among every citizen.

“The reason to want to make problems worse is that problems are profitable..”

• Always Attack the Wrong Country (Dmitry Orlov)

There are numerous tactics available to those who aim to make problems worse while pretending to solve them, but misdirection is always a favorite. The reason to want to make problems worse is that problems are profitable—for someone. And the reason to pretend to be solving them is that causing problems, then making them worse, makes those who profit from them look bad. In the international arena, this type of misdirection tends to take on a farcical aspect. The ones profiting from the world’s problems are the members of the US foreign policy and military establishments, the defense contractors and the politicians around the world, and especially in the EU, who have been bought off by them. Their tactic of misdirection is conditioned by a certain quirk of the American public, which is that it doesn’t concern itself too much with the rest of the world.

The average member of the American public has no idea where various countries are, can’t tell Sweden from Switzerland, thinks that Iran is full of Arabs and can’t distinguish any of the countries that end in -stan. And so a handy trick has evolved, which amounts to the following dictum: “Always attack the wrong country.” Need some examples? After 9/11, which, according to the official story (which is probably nonsense) was carried out by “suicide bombers” (some of them, amusingly, still alive today) who were mostly from Saudi Arabia, the US chose to retaliate by attacking ~~Saudi Arabia~~ Afghanistan and Iraq. When Arab Spring erupted (because a heat wave in Russia drove up wheat prices) the obvious place to concentrate efforts, to avoid a seriously bad outcome for the region, was Egypt—the most populous Arab country and an anchor for the entire region. And so the US and NATO decided to attack ~~Egypt~~ Libya.

When things went south in the Ukraine, whose vacillating government couldn’t make up its mind whether it wanted to remain within the Customs Union with Russia, its traditional trading partner, or to gamble on signing an agreement with the EU based on vague (and since then broken) promises of economic cooperation, the obvious place to go and try to fix things was the Ukraine. And so the US and the EU decided fix ~~the Ukraine~~ Russia, even though Russia is not particularly broken. Russia was not amused; nor is it a country to be trifled with, and so in response the Russians inflicted some serious pain on the ~~Washington establishment~~ farmers within the EU.

Who was at fault exceedingly [became] clear once the Ukrainians that managed to get into power (including some very nasty neo-Nazis) started to violate the rights of Ukraine’s Russian-speaking majority, including staging some massacres, in turn causing a large chunk of it to hold referendums and vote to secede. (Perhaps you didn’t know this, but the majority of the people in the Ukraine are Russian-speakers, and there is just one city of any size—Lvov—that is mostly Ukrainian-speaking. Mind you, I find Ukrainian to be very cute and it makes me smile whenever I hear it. I don’t bother speaking it, though, because any Ukrainian with an IQ above bathwater temperature understands Russian.) And so the US and the EU decided to fix things by continuing to put pressure on ~~the Ukraine~~ Russia.

The exact opposite of what they -pretend to- want.

• European Border Crackdown Kickstarts Migrant-Smuggling Business (WSJ)

ATHENS—The leaders of 15 human-smuggling networks gathered behind the closed curtains of an Afghan restaurant here in late February, the air fragrant from grilled lamb and hookahs. It was time to celebrate a boost to their business, people present recall. Police in Macedonia had just stopped letting Afghans cross the border from Greece. Today, the entire human highway to Europe’s north, traveled by nearly a million refugees and other migrants last year, has been closed. The crackdown, complete with razor-wire fences guarded by riot police, has stranded about 50,000 migrants in Greece. Many are desperate to get out but too afraid to turn back. For those with cash left, smugglers are now the best hope.

The combination of closed borders and unrestrained migration has turned Athens’s Victoria Square and the nearby port city of Piraeus into the center of a barely disguised human-trafficking business. In grimy cafes, cheap hotels and dark alleys, business is booming for smugglers who arrange transit around closed borders and into relative safety. They say they even offer a money-back guarantee—most of the time. “If you stay here even for five minutes, you will see it. A human bazaar is taking place,” said Orestis Papadopoulos, owner of a kiosk on Victoria Square that sells cigarettes and magazines. “And when the police clear the square, they just go around the corner and come back minutes later.” One recent afternoon, Ali, who wouldn’t provide his last name, walked into the restaurant that hosted the February celebration. He said he is 33 years old, was born in Afghanistan and lives in Athens. He specializes in smuggling Afghans and Iraqis.

Followed by three associates, Ali grinned broadly, exposing a missing tooth. Then he hugged other men in the restaurant, including a passport forger. Thirty Afghan clients had just reached Germany, meaning Ali’s smuggling syndicate would get about €54,000 ($60,280). “I’m very happy today,” he said. Ali’s smartphone rang as he ate lamb with rice. A prospective customer wanted to reach Germany by plane, using a false passport. “It costs €4,700,” Ali said. He left the noisy restaurant to haggle. When Europe’s refugee crisis exploded last year, demand for smugglers fizzled once migrants had successfully crossed the Aegean Sea from Turkey. German Chancellor Angela Merkel ’s open-door policy for refugees largely made Ali and his rivals obsolete.

Since then, the Balkans and the EUhave clamped down on migration from Greece into the rest of the continent, threatening to turn the country into a giant, open-air refugee camp. The problem will likely be exacerbated by last week’s terrorist attacks in Brussels, which immediately led to toughened security at airports, train stations and borders. Europe is now even less likely to reopen its borders to legal transit for refugees and migrants. For smugglers, the job could get harder, but they can always push the prices they charge higher.

“If Europe were to welcome the same percentage of refugees as Lebanon in comparison to its population, it would have to take in 100 million refugees.”

• UN Chief Urges All Countries To Resettle Syrian Refugees (Reuters)

U.N. Secretary-General Ban Ki-moon called on all countries on Wednesday to show solidarity and accept nearly half a million Syrian refugees for resettlement over the next three years. Ban, kicking off a ministerial conference hosted by the U.N. refugee agency UNHCR in Geneva, said: “This demands an exponential increase in global solidarity.” The United Nations is aiming to re-settle some 480,000 refugees, about 10% of those now in neighboring countries, by the end of 2018, but has conceded it needs to overcome widespread fear and political manipulation. Ban urged countries to pledge new and additional pathways for admitting Syrian refugees, adding: “These pathways can include resettlement or humanitarian admission, family reunions, as well as labor or study opportunities.”

Filippo Grandi, U.N. High Commissioner for Refugees, said the refugees were facing increasing obstacles to find safety. “We must find a way to manage this crisis in a more humane, equitable and organized manner. It is only possible if the international community is united and in agreement on how to move forward,” Grandi said. The five-year conflict has killed at least 250,000 and driven nearly 5 million refugees abroad, mostly to neighboring Turkey, Lebanon, Jordan and Iraq. Grandi said: “If Europe were to welcome the same percentage of refugees as Lebanon in comparison to its population, it would have to take in 100 million refugees.” Ban, referring to U.N.-led efforts to end the war, said: “We have a cessation of hostilities, by and large holding for over a month, but the parties must consolidate and expand it into a ceasefire, and ultimately to a political solution through dialogue.”

Debt Rattle New Year’s Day 2016

Jan 012016

January 1, 2016 Posted by Raúl Ilargi Meijer at 10:29 am Finance Tagged with: Bailouts, China, copper, gold, jobs, lawsuits, oil, VW 1 Response »

Unknown Gurley-Lord service station, San Francisco 1929

• US Stocks Close Out The Worst Year For The Market Since 2008 (AP)

• Oil Drops 31% In 2015 On Global Crude Glut (MarketWatch)

• Gold Sinks 10% For 3rd Annual Loss as Platinum, Palladium Hit Hard (Reuters)

• Copper Ends Dismal Year on a Low Note (WSJ)

• Half a Million Bank Jobs Have Vanished Since 2008 Crisis (BBG)

• China December Factory Activity Shrinks (Reuters)

• Chicago PMI Plummets To Lowest Since 2009 (MarketWatch)

• VW Buybacks, Payments For Hard-to-Fix Diesels Will Be Very Costly (GCR)

• Keiser Report feat. Gerald Celente: ‘Bankism’, Oil Prices And More (RT)

• EU’s Trillion Euro Bank Bail-Outs Are Over (Telegraph)

• In Europe, 2016 Will Be The Year Of Lawsuits (Coppola)

“A very unrewarding year.” Yeah, well, brace yourselves.

• US Stocks Close Out The Worst Year For The Market Since 2008 (AP)

U.S. stocks closed lower on Thursday, capping the worst year for the market since 2008. The Standard & Poor’s 500 index ended essentially flat for the year after the day’s modest losses nudged it into the red for 2015. Even factoring in dividends, the index eked out a far smaller return than in 2014. The Dow Jones industrial average also closed out the year with a loss. The tech-heavy Nasdaq composite fared better, delivering a gain for the year. “It’s a lousy end to a pretty lousy year,” said Edward Campbell, portfolio manager for QMA, a unit of Prudential Investment Management. “A very unrewarding year.” Trading was lighter than usual on Thursday ahead of the New Year’s Day holiday. Technology stocks were among the biggest decliners, while energy stocks eked out a tiny gain thanks to a rebound in crude oil and natural gas prices.

The Dow ended the day down 178.84 points, or 1%, to 17,425.03. The S&P 500 index lost 19.42 points, or 0.9%, to 2,043.94. The Nasdaq composite fell 58.43 points, or 1.2%, to 5,007.41. For 2015, the Dow registered a loss of 2.2%. It’s the first down year for the Dow since 2008. The Nasdaq ended with a gain of 5.7%. The S&P 500 index, regarded as a benchmark for the broader stock market, lost 0.7% for the year. According to preliminary calculations, the index had a total return for the year of just 1.4%, including dividends. That’s the worst return since 2008 and down sharply from the 13.7% it returned in 2014. While U.S. employers added jobs at a solid pace in 2015 and consumer confidence improved, several factors weighed on stocks in 2015.

Investors worried about flat earnings growth, a deep slump in oil prices and the impact of the stronger dollar on revenues in markets outside the U.S. They also fretted about the timing of the Federal Reserve’s first interest rate increase in more than a decade. The uncertainty led to a volatile year in stocks, which hit new highs earlier in the year, but swooned in August as concerns about a slowdown in China’s economy helped drag the three major stock indexes into a correction, or a drop of at least 10%. The markets recouped most of their lost ground within a few weeks. “The market didn’t go anywhere and earnings didn’t really go anywhere,” Campbell said.

From $114(?) to $37 in two years time.

• Oil Drops 31% In 2015 On Global Crude Glut (MarketWatch)

Oil futures ended higher Thursday in the final trading session of 2015, but posted a steep annual drop for the second year in a row as markets continue to wrestle with a global glut of crude. On the New York Mercantile Exchange, light, sweet crude futures for delivery in February rose 44 cents, or 1.2%, to finish at $37.04 a barrel. For the year, the U.S. benchmark dropped 30.5% and has lost 62.4% over the last two years. Crude hadn’t dropped two years in a row since 1998. February Brent crude, the global benchmark, rose 82 cents, or 2.3%, on London’s ICE Futures exchange to settle at $37.28 a barrel. Brent fell 35% in 2015, marking its third straight yearly drop. Oil trimmed gains somewhat after oil-field services firm Baker Hughes said the total number of U.S. oil rigs fell by two this week to 536.

Oil’s bounceback on Thursday likely reflected some short covering ahead of year-end and a three-day weekend, said Phil Flynn at Price Futures. U.S. markets will be closed Friday for the New Year’s Day holiday. Flynn said traders might be nervous about maintaining short positions amid rising tensions within Iran that could threaten the implementation of a nuclear accord that was expected to result in the lifting of sanctions that have prevented the country from exporting oil. Iran’s president has ordered his defense minister to expedite the country’s ballistic missile program following newly planned U.S. sanctions, he said Thursday, according to The Wall Street Journal. With U.S. production “growing for the last few weeks and global inventories being near storage limits, this is yet another reminder that the supply glut could take a long time to clear, which may mean even lower oil prices in the near term,” said Fawad Razaqzad at Forex.com.

Platinum and palladium are the more interesting metals when it comes to determining where economies are going.

• Gold Sinks 10% For 3rd Annual Loss as Platinum, Palladium Hit Hard (Reuters)

Gold was steady on Thursday, ending the year down 10% for its third straight annual decline, ahead of another potentially challenging year in 2016 amid the prospect of higher U.S. interest rates and a robust dollar. Largely influenced by U.S. monetary policy and dollar flows, the price of gold fell 10% in 2015 as some investors sold the precious metal to buy assets that pay a yield, such as equities. The most-active U.S. gold futures for February delivery settled at $1,060.2 per ounce on Thursday, almost flat compared with Wednesday’s close of $1,059.8 and close to six-year lows of $1,046 per ounce earlier in December. Spot gold was down 0.2% at $1,061.4 an ounce at 1:57 p.m. EDT, during the last trading session of the year. Volumes were thin ahead of the New Year holiday on Friday.

“The key factor for gold remains the strong dollar and that ultimately trumps all other issues including the economy and the geopolitics,” said Ross Norman, CEO of bullion broker Sharps Pixley. The dollar was on track for a 9% gain this year against a basket of major currencies, making dollar-denominated gold more expensive for holders of other currencies. Other precious metals have also been hit by dollar strength and the gold slump, and were headed for sharp annual declines. The most-active U.S. silver futures settled at $13.803 per ounce on Thursday, down 0.3% from Wednesday and ending the year down 12%. Spot prices were down 0.2% at $13.83 an ounce. Industrial metals platinum and palladium were harder hit, notching up big yearly losses partly due to oversupply from mines and concerns about growth in demand. Platinum futures settled at $893.2 per ounce, down 26% from a year ago, while the most-active palladium futures ended at $562, down 30% on the year.

Copper and zinc -25%, nickel -42%, palladium -30%, platinum -26%.

• Copper Ends Dismal Year on a Low Note (WSJ)

Copper prices fell in London on Thursday ending a dismal year as industrial metals were battered by a toxic mix of oversupply and concern over demand from China. Analysts don’t expect much respite for copper in 2016, with the oversupply expected to continue and the macroeconomic picture still uncertain. Among other factors, commodity prices have been hit by a stronger dollar, and few economists expect the greenback to weaken in any meaningful way. “I think that the bear market is not totally complete,” said Boris Mikanikrezai, an analyst at financial markets research company Fastmarkets. “Although a temporary rally in metal prices is possible over a one-to-three-month horizon, the macro fundamental picture may warrant lower prices.”

On Thursday, the London Metal Exchange’s three-month copper contract was down 0.5% at $4,720.50 a metric ton in midmorning European trade. Other base metals were mixed. Copper has lost about a quarter of its value this year. Among other base metals, nickel has lost 42%, zinc is down 25% while aluminum fell 18% over the year. “In retrospect, 2015 will be considered a year that can be safely forgotten when it comes to copper,” analysts at Aurubis, Europe’s largest copper producer, said in a report.

Worries about the health of the Chinese economy will continue to roil metals markets in 2016, analysts said. The country is the biggest source of global demand for metals, accounting for nearly half of total global zinc consumption, 45% of global copper consumption and 40% of lead production. “It will be another challenging year for China and that will affect metals,” said Xiao Fu, head of commodity markets strategy at BOCI Global Commodities. “Still, we expect the government’s fiscal stimulus package announced this year to provide some support for demand in 2016.”

More to come.

• Half a Million Bank Jobs Have Vanished Since 2008 Crisis (BBG)

Staff reductions at some of the world’s biggest banks are far from over. Deutsche Bank, which has held employment close to its 2010 peak, plans to slash 26,000 positions by 2018, following a trend that began with the financial crisis. Announced cuts in the fourth quarter total at least 47,000, following 52,000 lost jobs in the first nine months of 2015. That would bring the aggregate figure since 2008 to about 600,000. UniCredit says it will eliminate about 18,200 positions. Citigroup, which has reduced its workforce by more than a third, plans to eliminate at least 2,000 more jobs next year.

Not growing slower, but contracting.

• China December Factory Activity Shrinks (Reuters)

China looked set for a soggy start to 2016 after activity in the manufacturing sector contracted for a fifth straight month in December, suggesting the government may have to step up policy support to avert a sharper slowdown. While China’s services sector ended 2015 on a strong note, the economy still looked set to grow at its slowest pace in a quarter of a century despite a raft of policy easing steps, including repeated interest rate cuts, in the past year or so. The world’s second-largest economy faces persistent risks this year as leaders have pledged to push so-called “supply-side reform” to reduce excess factory capacity and high debt levels.

The official manufacturing Purchasing Managers’ Index (PMI) stood at 49.7 in December, in line with expectations of economists polled by Reuters and up only fractionally from November. A reading below 50 suggests a contraction in activity. Still, economists seemed to find some comfort that there were no signs of a sharper deterioration which has been feared by global investors. The slight pick up in the manufacturing PMI “suggests that (economic) growth momentum is stabilizing somewhat … however, the sector is still facing strong headwinds, said Zhou Hao, China economist at Commerzbank in Singapore. “In order to facilitate the destocking and deleveraging process, monetary policy will remain accommodative and the fiscal policy will be more proactive.”

More contracting economic activity.

• Chicago PMI Plummets To Lowest Since 2009 (MarketWatch)

Economic activity in the Midwest contracted at the fastest pace in more than six years in December, according to the Chicago Business Barometer, also known as the Chicago PMI. The index fell to 42.9 from 48.7 in November. Economists had expected it to rise 1.3 points to 50 in the December reading. The index has spent much of the year below the 50 mark that separates expansion from contraction. Order backlogs were the biggest drag in December, dropping 17.2 points to 29.4. That’s the lowest since May 2009 and marked the 11th-straight month in contraction. The last time such a sharp decline was registered was 1951. New orders also sank to the lowest level since May 2009. That’s bad news for activity down the road. Still, 55.1% of survey respondents said they expect stronger demand in 2016 than in 2015.

TBTF banks will still be protected.

• EU’s Trillion Euro Bank Bail-Outs Are Over (Telegraph)

Europe has called an end to the era of mass bank bail-outs as new rules to stop taxpayers from footing the cost of financial rescues come into force. Private sector creditors will be forced to take the hit for bank failures as the EU seeks to end the age of “too big to fail”, which has cost member states more than €1 trillion since 2008. The measures – which will come into force on January 1 and apply to eurozone states – are designed to break the vicious cycle between lenders and governments that bought the single currency to its knees four years ago. Senior bondholders and depositors over €100,000 will be in line to be “bailed-in” if a bank goes bust, a departure from the mass government-funded rescues seen in Ireland, Portugal, Spain and Greece in the wake of the financial crisis.

Brussels’ tough new Bank Recovery and Resolution Directive (BRRD) will require shareholders and bond owners to incur losses of at least 8pc of their total liabilities before receiving official sector aid. Britain will not be subject to the rules. The EU’s commissioner for financial stability, Britain’s Jonathan Hill, said: “No longer will the mistakes of banks have to be borne on shoulders of the many”. Struggling banks in Italy, Portugal and Greece have rushed to recapitalise themselves in a bid to avoid falling foul of the new regime. The rules resemble the bail-in of creditors first seen in the eurozone during Cyprus’ banking crash in 2013, where savers were forced to endure losses as part of the international rescue package.

More than €1.6 trillion (£1.18 trillion) has been pumped into troubled banks by member states between October 2008 and December 2012, according to figures from the European Commission. This amounts to 13pc of the bloc’s total economic output (GDP) and imperiled the public finances of Ireland and Spain. “We now have a system for resolving banks and of paying for resolution so that taxpayers will be protected from having to bail-out banks if they go bust”, said Lord Hill. A new eurozone wide insolvency fund, the Single Resolution Mechanism, will also become operational on January 1. It will build up contributions from the banking industry over the next eight years to use in cases of financial collapse. Europe’s banks have been required to beef up their capital buffers and comply with tough new regulations in the wake of the financial crisis.

The ECB has also assumed direct supervisory responsibility for 129 “systemically” important lenders in a bid to create a fully-fledged banking union in the currency bloc. However, analysts have warned Brussels’ tentative steps towards banking union remain incomplete and could cause more uncertainty for ordinary depositors after January 1. “Taking 8pc losses from creditors has never been tested in reality”, said Nicolas Veron, of think-tank Bruegel. “The first few test cases will be very important . There is the combination of uncertainty over how the SRM will work with ECB, and then additional uncertainty over how creditor losses will work in practice.”

$10 billion in the US alone, before lawsuits?!

• VW Buybacks, Payments For Hard-to-Fix Diesels Will Be Very Costly (GCR)

Hundreds of thousands of diesel-VW owners are waiting to find out how their cars will be updated to meet emissions standards, once modifications are approved by regulators. And Volkswagen Group has clearly been tarnished by the emission-cheating scandal, which affects 11 million cars worldwide. But the costs of the entire affair remain to be tallied; some analysts have said that the $7.1 billion set aside several months ago will not be nearly enough. A Bloomberg article earlier this month cites an estimate by Bloomberg Intelligence that payments and buybacks for owners in the U.S. alone could range from $1.5 billion to $8.9 billion. And those are just the damages or buyback payments that “customers should get for being duped into buying high-polluting vehicles,” it notes.

About 157,000 of the 482,000 affected 2.0-liter TDI diesel cars sold in the U.S. with “defeat device” software are already fitted with Selective Catalytic Reduction after-treatment systems (also known as urea injection). They’re likely to require no more than software updates or perhaps minor hardware tweaks to bring them into compliance. VW then might only have to pay owners for diminished value, plus some penalty. But for 325,000 VW Golfs, Jettas, and Beetles and Audi A3 cars without the SCR systems fitted, the prognosis is much grimmer. Most analysts agree that the cost and complexity of retrofitting a urea tank, a different catalyst, and all the associated plumbing could exceed the value of cars that are now as much as seven years old. Those cars, some suggest, may all have to be bought back and either destroyed or exported.

Using an average price of $15,000, that would cost $4.9 billion alone–before any civil or criminal penalties are levied. On top of the hundreds of thousands of 2.0-liter four-cylinder TDI cars, 85,000 more VW, Audi, and Porsche vehicles were sold in the U.S. with a 3.0-liter V-6 TDI engine. That engine contains several undisclosed software routines, and one of those qualifies as a “defeat device” as well. The admission by Volkswagen that it cheated makes the case close to unique, suggests Paul Hanly, a plaintiffs’ lawyer quoted in the Bloomberg article. It may point to an early settlement, he says, since culpability doesn’t have to be established first. All that’s left is to settle on the costs and penalties. That just applies, however, to more than 450 lawsuits filed by Volkswagen customers in the wake of the mid-September disclosure.

On December 8, those lawsuits were consolidated and will be heard in California, where a high proportion of the affected TDI diesel vehicles were sold. The state also has a large number of VW dealers. Volkswagen had opposed the designation of California, asking that the suits be heard in Detroit instead. That did not happen. On top of the customer lawsuits, which will lead to cash payments and perhaps buybacks, Volkswagen faces criminal investigations in several states. But no settlements can move forward until regulators agree on modifications to the various sets of vehicles to bring them into compliance with tailpipe emission laws. Volkswagen submitted its proposals for those updates to the U.S. EPA and the California Air Resources Board in November.On December 18, CARB extended its own deadline for responding to VW’s proposal until mid-January. That leaves owners in a holding pattern at least until then, and likely far longer.

Andrew Jackson: “One man of courage makes a majority.”

• Keiser Report feat. Gerald Celente: ‘Bankism’, Oil Prices And More (RT)

In this special New Year’s Eve episode of the Keiser Report, Max Keiser and Stacy Herbert talk to trends forecaster Gerald Celente of TrendsResearch.com about the upcoming trends for 2016. They recall that a few years ago, Celente forecasted on the Keiser Report that we would see currency war, trade war and hot war, and they ask whether or not this has come true in 2015. They discuss ‘bankism’, oil prices and US election insanity and what they hold for the future of the global economy.

They should have devised a template long ago. They didn’t because the more chaos the more calls for more union.

• In Europe, 2016 Will Be The Year Of Lawsuits (Coppola)

2016 is fast approaching, and with it another phase in the EU’s attempts to make creditors pay for failed banks. The European Bank Recovery and Resolution Directive (EBRRD) has been law in all EU countries since January 2015, but up till now the bail-in rules have not been fully implemented. The EBRRD provides bank regulators with four main tools for resolving a failed bank:

• Sale of the failed bank partly or entirely to another entity
• Creation of a “bridge bank” containing the good assets, which would be sold to another entity or floated as an independent business
• Creation of a “bad bank”, or asset management vehicle, which would be gradually wound down over time (to prevent state aid rules being breached, this tool must be used in conjunction with at least one of the other tools)
• Write-down of creditor claims (or conversion to equity) in order of rank.

Mergers, “bad banks” and even “bridge” banks are all familiar tools from the financial crisis. But writing down creditor claims or converting them to shares (haircut or bail in) is more controversial. During the financial crisis, creditors – and sometimes even shareholders – were made good at taxpayer expense. But these expensive bailouts have left a very sour taste, and no-one has any appetite for them anymore. These days, creditors are expected to pay. Well, some of them, anyway. In all recent bank failures (apart from Duesseldorfer Hypothekenbank), subordinated debt holders have been bailed in, leaving senior creditors untouched. This sounds straightforward: subordinated debt holders rank junior to senior unsecured bondholders and all depositors, so should expect to lose their investments first in the event of bank insolvency.

However, bailing in subordinated debt holders has proved to be anything but simple. A roll-call of recent bail-ins shows just how difficult it can be:

• In 2013, the UK’s Co-Op Bank attempted to bail in its subordinated debt holders; but the deal failed and the subordinated debt holders took over the bank, to the considerable annoyance of the Co-Op Group (the bank’s owner), which lost the majority of its stake.

• In 2014, Portugal’s Banco Espirito Santo was split in two: subordinated debt holders were left in the residual “bad bank” along with the bank’s impaired assets, while senior and official creditors sailed off into a new entity, the aptly named Novo Banco, along with all the good assets. But the Bank of Portugal now faces lawsuits from disgruntled subordinated debt holders who claim they were never given a chance to provide more capital and rescue the bank themselves, Co-Op Bank style.

• In Austria – and increasingly in Germany too – the tangled web of claims and counterclaims in the Heta mess becomes ever more complex. These days it is not even clear exactly how the claims are ranked. The settlement agreement between Heta and the State of Bavaria in October effectively converted 60% of BayernLB’s subordinated claim into a senior claim, diluting the other senior creditors – many of whom are themselves only “senior” because of deficiency guarantees from the Province of Carinthia, which the Austrian federal government has repeatedly tried (but so far failed) to repudiate.

• In the Netherlands, the government was forced to offer compensation to SNS Reaal subordinated debt holders for its expropriation of their claims.

But why should a few problems with bail-in of subordinated debt holders spoil a good directive? Undeterred, the EU is pressing ahead with the next phase. From January 2016, senior as well as subordinated creditors will be bailed in in the event of bank insolvency. Bail-in of 8% of total liabilities (plus complete wiping of equity, of course) will be required before state aid can be granted.

Plunging Commodities Interfere With The New World Order

Dec 082015

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

Poached baby gorilla, Virunga Park

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Debt Rattle November 19 2015

Nov 192015

November 19, 2015 Posted by Raúl Ilargi Meijer at 9:51 am Finance Tagged with: antibiotics, China, copper, debt, EU, Fed, intolerance, refugees, steel, zinc 2 Responses »

Wyland Stanley REO taxicab, San Francisco 1924

• China’s Steel Industry Peers Into Abyss as Output to Plunge (Bloomberg)

• Rio Tinto’s Optimistic About Iron Ore And That’s Reason To Worry (Bloomberg)

• Zinc Lowest in 6 Years, Nickel at 12-Year Low on China Concerns (Bloomberg)

• Can Anything Stop Companies From Loading Up on Debt? UBS Says No. (Alloway)

• Debt, The Never-Ending Story (Economist)

• Finland’s Depression Is The Final Indictment Of Europe’s Monetary Union (AEP)

• China Inclusion In IMF Currency Basket Not Just Symbolic (FT)

• New Players Break Into Credit Derivatives (FT)

• Atlantic City’s Mayor Warns of Insolvency by April Without Aid (Bloomberg)

• Fed Tipping Toward December Rate Hike, Minutes Show (Hilsenrath)

• Australia Blocks Ranch Sale to Foreigners on Security Fears (Bloomberg)

• Turkey Could Cut Off Islamic State’s Supply Lines. So Why Doesn’t It? (Graeber)

• Trudeau Tells Canada To Reject Racism Amid Opposition To Refugee Plan (Reuters)

• History Is A Cruel Judge Of Intolerance In America (Bloomberg)

• Former Yugoslav Republic of Macedonia Building Fence Along Greek Border (Kath.)

• EU Nations Miss Deadline To Appoint Officers For Refugee Relocations (Guardian)

• 20 African Migrants Lost At Sea In Atlantic After Boat Sinks (Reuters)

• Antibiotic Resistance: World On Cusp Of ‘Post-Antibiotic Era’ (BBC)

Overleveraged overinvestment.

• China’s Steel Industry Peers Into Abyss as Output to Plunge (Bloomberg)

Crude steel production in China will collapse by 23 million metric tons next year, according to the nation’s leading industry group. That’s equivalent to more than a quarter of annual output from the U.S. Supply from the top producer may drop 2.9% to about 783 million tons from 806 million tons in 2015, according to the China Iron & Steel Association. The slump would be driven by a deepening downturn in local demand and as mills encounter stiffer opposition to exports, Deputy Secretary General Li Xinchuang said in an interview on Wednesday. “You can’t find any bright spots,” Li said in Shanghai, citing weakness across Asia’s largest economy.

“Property developments used to enjoy annual growth of 20% and now at best it is 5%. Infrastructure investments haven’t taken off due to lack of funds despite of all the planned numbers of projects. Manufacturing investments have also dropped like a stone.” China’s mills, which produce about half of worldwide output, are battling against losses, oversupply and sinking prices as local consumption shrinks for the first time in a generation. The fallout from the steelmakers’ struggles is hurting iron ore prices and boosting trade tensions as mills seek to sell their surplus overseas. Shanghai Baosteel Group Corp. has forecast that China’s steel production may eventually shrink 20%.

Li’s estimate of 783 million tons of Chinese production compares with supply from the U.S. of 88.3 million tons in 2014, according to data from the World Steel Association for 2014, the last complete year of figures. That year, output in China was 823 million tons. Steel demand in China would slump to about 654 million tons in 2016 from 668 million tons this year, said Li, who’s also president of the China Metallurgical Industry Planning & Research Institute. Iron ore imports may drop to 920 million tons in 2016 from about 930 million tons, according to Li. The oversupply of steel in China is so acute that David Humphreys, a former chief economist at mining company Rio Tinto Group, said that the country would do well to demolish unneeded mills. “There’s about 300 million tons of surplus capacity in China that needs to be not just shut down, it needs to be eradicated, it needs to be bulldozed,” Humphreys said ..

What can they do but talk their books?

• Rio Tinto’s Optimistic About Iron Ore And That’s Reason To Worry (Bloomberg)

You’re concerned about the slowdown in China’s economy. It bothers you that industrial output has plunged to the weakest levels since 2008. You’re unsettled that the China Iron & Steel Association “can’t see any bright spots” for the metal that’s driven the country’s urbanization. You’re perturbed Jim Chanos thinks the world’s second-biggest economy is heading the same way as Japan in the 1990s. Stop fretting: Rio Tinto, the world’s second-biggest iron ore miner, says China’s going to be O.K. The world should stop focusing on daily price gyrations for the steelmaking metal and concentrate on the long-term trend, CEO Sam Walsh told Bloomberg. The company’s analysts have been “very, very careful” in their forecasts that iron ore demand will reach 3 billion tons by 2030, up about 36% from last year, Megan Clark, a non-executive director at the miner, said.

That’s good news, right? Not so fast.The Anglo-Australian miner has good reason to err on the side of optimism. Like peers Vale and BHP Billiton, it has some of the world’s cheapest iron ore mines, and the least to lose from oversupply hitting the market.The big three miners are engaged in the same game with higher-cost competitors as the one Saudi Arabia is playing against the U.S. shale industry: Let’s flood the market, and see who’s left standing. Like Ali al-Naimi, the Saudi minister who said in June that Chinese oil demand was growing, Walsh and Clark are glass-half-full sorts of people. But their optimism stands in contrast to the industry’s own assessment. China’s steel sector needs to go through a “painful restructuring” and output will collapse by 20%, Baosteel Chairman Xu Lejiang said last month.

Demand is evaporating at “unprecedented speed” and oversupply is worsening, the deputy head of the China Iron & Steel Association said a week later. Steel demand in China fell in 2014 and will slip again in 2015 and 2016, the World Steel Association said in April. Even the flood of exports driven by lackluster domestic demand is shrinking as mills in other countries push governments to impose import charges and start trade disputes. The U.S. is levying tariffs of as much as 236% on some varieties of Chinese steel. A price index for the rebar used in making reinforced concrete for buildings dropped below 2,100 yuan a metric ton Monday for the first time since at least 2003:

For a reality check, see what the higher-cost producers have to say. Rio Tinto and BHP are in an “imaginary world” and more production needs to be halted, according to Lourenco Goncalves, the chief executive officer of U.S.-headquartered Cliffs Natural Resources. Steel demand in China has “plateaued”, Nev Power, his counterpart at the world’s fourth-largest producer Fortescue Metals, said last month. Commodity gluts do eventually correct themselves as the least profitable producers quit the market and bring supply back in line with demand. But there’s little sign of that happening right now. After a modest recovery during the third quarter, an index of Chinese iron ore prices compiled by Metal Bulletin has slipped, and on Tuesday was just 99 cents above July’s record-low $44.59 a metric ton.

Everything’s becoming a worry going into 2016.

• Zinc Lowest in 6 Years, Nickel at 12-Year Low on China Concerns (Bloomberg)

Zinc dropped to the lowest in more than six years amid signs of ample supply and concern that demand is faltering in China, the world’s biggest user. Nickel closed at the lowest in 12 years. Global refined zinc output of 10.486 million metric tons January through September exceeded demand of 10.298 million tons, the International Lead and Zinc Study Group said in a report Wednesday. China President Xi Jinping said the economy faces “considerable downward pressure,” while data showed the nation’s home-price recovery slowed in October. “It certainly continues to point to a more bearish view on China, and they haven’t released any other stimulative type of measure,” Mike Dragosits at TD Securities in Toronto, said. “The market continues to trade pessimistically on the Chinese demand outlook.”

ZIRP. How the Fed destroys markets.

• Can Anything Stop Companies From Loading Up on Debt? UBS Says No. (Alloway)

It’s no secret that companies have been taking advantage of years of low interest rates to sell cheap debt to eager investors, locking in lower funding costs that have allowed them to go on a spree of share buybacks and mergers and acquisitions. With fresh evidence that investors are becoming more discerning when it comes to corporate credit as the first U.S. interest rate rise in almost a decade approaches, it’s worth asking whether anything might stop the trend of companies assuming more and more debt on their balance sheets. In a note published on Wednesday, UBS analysts Matthew Mish and Stephen Caprio offer an answer to that question. After looking at four factors that could theoretically derail the corporate debt train they answer: pretty much nothing.

For a start, they note that higher funding costs are unlikely to dissuade companies from continuing to tap the debt market since, even after a rate hike, financing costs will remain near historic lows. “The predominant reason is the Fed[eral Reserve] is anchoring low interest rates,” the analysts wrote. When it comes to the hubris of corporate chief financial officers, who have been more than happy leveraging up balance sheets in order to reward shareholders, the analysts didn’t mince words. “We find that corporate CFOs historically are inherently backward-looking when setting corporate financing decisions, relying on past extrapolations of economic activity, even when current market pricing suggests future investment returns may be lower,” they wrote.

“Several management teams have been on the road indicating higher funding costs of up to 100 to 200 basis points would not impede attractive M&A deals, in their view.” Higher market volatility has often been cited as one factor that could knock the corporate credit market off its seat, but the UBS duo sees little reason for it to put a dent in debt issuance. “In a low-yield environment, we anticipate significant vol[atility] selling interest to resurface so long as fundamentals are not falling off a cliff,” they said. Even in the third quarter of 2015, when markets were roiled by a global stock selloff, sales of investment-grade bonds were up 32% year-on-year, they noted.

What goes up…

• Debt, The Never-Ending Story (Economist)

It is close to ten years since America’s housing bubble burst. It is six since Greece’s insolvency sparked the euro crisis. Linking these episodes was a rapid build-up of debt, followed by a bust. A third instalment in the chronicles of debt is now unfolding. This time the setting is emerging markets. Investors have already dumped assets in the developing world, but the full agony of the slowdown still lies ahead. Debt crises in poorer countries are nothing new. In some ways this one will be less dramatic than the defaults and broken currency pegs that marked crashes in the 1980s and 1990s. Today’s emerging markets, by and large, have more flexible exchange rates, bigger reserves and a smaller share of their debts in foreign currency.

Nonetheless, the bust will hit growth harder than people now expect, weakening the world economy even as the Federal Reserve begins to raise interest rates. In all three volumes of this debt trilogy, the cycle began with capital flooding across borders, driving down interest rates and spurring credit growth. In America a glut of global savings, much of it from Asia, washed into subprime housing, with disastrous results. In the euro area, thrifty Germans helped to fund booms in Irish housing and Greek public spending. As these rich-world bubbles turned to bust, sending interest rates to historic lows, the flow of capital changed direction. Money flowed from rich countries to poorer ones. That was at least the right way around. But this was yet another binge: too much borrowed too fast, and lots of the debt taken on by firms to finance imprudent projects or purchase overpriced assets.

Overall, debt in emerging markets has risen from 150% of GDP in 2009 to 195%. Corporate debt has surged from less than 50% of GDP in 2008 to almost 75%. China’s debt-to-GDP ratio has risen by nearly 50 percentage points in the past four years. Now this boom, too, is coming to an end. Slower Chinese growth and weak commodity prices have darkened prospects even as a stronger dollar and the approach of higher American interest rates dam the flood of cheap capital. Next comes the reckoning. Some debt cycles end in crisis and recession—witness both the subprime debacle and the euro zone’s agonies. Others result merely in slower growth, as borrowers stop spending and lenders scuttle for cover. The scale of the emerging-market credit boom ensures that its aftermath will hurt.

“The IMF warned this week against austerity overkill and “pro-cyclical” cuts before the economy is strong enough to take it. [..] Finland should not even be thinking of a “front-loaded” fiscal contraction or slashing investment at a time when its output gap is 3.2pc of GDP. The Finnish authorities admitted in their reply to the IMF’s Article IV report that they had no choice because they had to comply with the Stability Pact. This is what European policy-making has come to.”

• Finland’s Depression Is The Final Indictment Of Europe’s Monetary Union (AEP)

Finland is sliding deeper into economic depression, a prime exhibit of currency failure and an even more unsettling saga for theoretical defenders of the euro than the crucifixion of Greece. A full 6.5 years into the current global expansion, Finland’s GDP is 6pc below its previous peak. It is suffering a deeper and more protracted slump than the post-Soviet crash of the early 1990s, or the Great Depression of the 1930s. Nobody can accuse Finland of being spendthrift, or undisciplined, or technologically backward, or corrupt, or captive of an entrenched oligarchy, the sort of accusations levelled against the Greco-Latins. The country’s public debt is 62pc of GDP, lower than in Germany. Finland has long been held up as the EMU poster child of austerity, grit, and super-flexibility, the one member of the periphery that supposedly did its homework before joining monetary union and could therefore roll with the punches.

Finland tops the EU in the World Economic Forum’s index of global competitiveness. It comes 1st in the entire world for primary schools, higher education and training, innovation, property rights, intellectual property protection, its legal framework and reliability, anti-monopoly policies, university R&D links, availability of latest technologies, as well as scientists and engineers. Its near-perfect profile demolishes the central claim of the German finance ministry – through its mouthpiece in Brussels – that countries get into bad trouble in EMU only if they drag their feet on reform and spend too much. The country has obviously been hit by a series of asymmetric shocks: the collapse of its hi-tech champion Nokia, the slump in forestry and commodity prices, and the recession in Russia.

The relevant point is that it cannot now defend itself. Finland is trapped by a fixed exchange rate and by the fiscal straightjacket of the Stability Pact, a lawyers’ construct that was never intended for such circumstances. The Pact is being enforced anyway because rules are rules and because leaders in the Teutonic bloc have an idee fixee that moral hazard will run rampant if any country in the EMU core sets a bad example. Finland’s output shrank a further 0.6pc in the third quarter and the country’s three-year long recession is turning into a fourth year. Industrial orders fell 31pc in September. “It’s spooky,” said Pasi Sorjonen from Nordea. Sweden was able to navigate similar shocks by letting its currency take the strain at key moments over the last decade. Swedish GDP is now 8pc above its pre-Lehman level.

The divergence between Finland and Sweden is staggering for two Nordic economies with so much in common, and it has rekindled Finland’s dormant anti-euro movement. The Finnish parliament is to hold ‘Fixit’ hearings next year on exit from monetary union and a return to the Markka, the currency that saved Finland in the early 1990s (once the ill-judged hard-Markka policy and the fixed ECU-peg was abandoned). Paavo Väyrynen, a Euro-MP and honorary chairman of the ruling Centre party, forced the euro hearings onto the parliamentary agenda after collecting 50,000 signatures. “The eurozone is not an optimal currency area and people are becoming aware of the real reasons for our crisis,” he said. “We are in a similar situation to Italy and have lost a quarter of our industry. Our labour costs are too high,” he said. [..] .. if the euro cannot be made to work for what is supposed to be the most competitive country in the EU, who can it work for?

My gut says Xi’s going to regret this, and/or get into trouble with the rest of the world. He gives no sign of understanding hia own power limits.

• China Inclusion In IMF Currency Basket Not Just Symbolic (FT)

Back in 2009, the west was desperately seeking green shoots of recovery and paid little attention when Zhou Xiaochuan called for nothing less than a new world financial order. China’s central bank governor proposed replacing the US dollar as the international reserve currency with a global system controlled by the IMF. If, as expected, the IMF this month approves the inclusion of China’s renminbi as a reserve currency, it will mark a small step for Mr Zhou’s 2009 vision, but a big move for the renminbi. The prospect of China’s currency joining the dollar, euro, yen and sterling in backing the IMF’s Special Drawing Rights — its unit of account, restricted to member governments — has been described as everything from a symbolic ego trip by Beijing to the dawning of a new era.

In all probability it will be like many Chinese financial reforms: significant in hindsight, but harder to get excited about in its early stages. Market enthusiasm over early-stage reforms such as the de-pegging of the renminbi 10 years ago has gradually given way to a level of ennui as the changes get smaller and China gets bigger. The result is often disappointment in the numbers as China maintains a staunch antipathy to the sort of sweeping changes, accompanied by headline-grabbing figures, beloved of newly-installed western executives and politicians. Even the Shanghai-Hong Kong Stock Connect, one year old this week, was shrugged aside by many, because the absolute numbers involved are relatively small.

However, its real significance lies in the fact that it was the first scheme under which China had let foreign investors in “blind” — that is, without requiring approval of each investor. SDR inclusion risks being categorised the same way. That would miss the point, since this is not about boosting short-term demand from central banks for renminbi. Rather, it is about embedding the currency in the international system and committing China to financial reform. If China were to constitute up to 10% of the SDR basket, that would result in a need for reserve managers to buy just $28bn or its currency — not a particularly meaningful number compared with the $20bn traded daily in the onshore spot market. Reserve figures are thus another source of headline number disappointment.

If China were to make up 3% of the $11.5tn of reserves held globally by the end of 2016, as forecast by DBS economist Nathan Chow, the $340bn that implies would vault the renminbi straight into the top league alongside sterling and the yen. Yet the dollar comprises almost two-thirds of reserves and the euro a further 20%. Numbers aside, the bigger ramifications of SDR inclusion come from its effect on financial reform. Xiangrong Yu, economist at CICC, likens it to the impact of China joining the World Trade Organisation in 2002. “Even if the renminbi fails to be added this time around, it will be impossible to reverse these reform measures,” he adds.

Oh, lovely…

• New Players Break Into Credit Derivatives (FT)

New entrants are breaking into the dealer-dominated credit derivatives market as trading increasingly occurs on electronic platforms. Eagle Seven, a proprietary trading firm in Chicago, confirmed it began quoting prices on cleared index credit default swaps last week. Verition, a New York-based hedge fund and Stifel Nicolaus, a new bank entrant to CDS markets, have also been making inroads, according to people familiar with the matter. It comes as banks draw close to settling a court case in which investors allege they have been shut out of the clubby CDS market for years. Traditionally CDS has been traded bilaterally between banks and their clients.

But regulation mandating the electronic trading of index CDS has since been introduced in the US, with platforms like Bloomberg replicating the bilateral model using a “request for quote system”, whereby investors can request electronic quotes from market makers. The new entrants are active in RFQ, with Eagle Seven also streaming prices on to a public screen called a central limit order book — a nascent trading model for CDS investors. Similar changes have also occurred in interest rate swap markets with Citadel, a non-bank electronic market maker, claiming to be one of the leading participants on Bloomberg’s trading venue.

A number of firms have also actively been pushing single-name CDS — which tracks the likelihood of default of a single company — to trade electronically and with the counterparty risk of buyers and sellers pushed centrally into a clearing house. Centralised clearing mutualises counterparty risk across the market and helps reduce bank capital requirements. Michael Hisler, head of fixed income cleared products at Stifel, said central clearing also removes the need for bilateral execution documents because all trades face the clearing house. Investors hope this may help encourage more new entrants and improve liquidity in the product, which has waned since the 2008 financial crisis. “Central bank regulation is making uncleared derivatives punitive for banks to hold on their balance sheet,” said Mr Hisler.

“Consequently, the traditional financing of uncleared positions is being significantly reduced or eliminated and forcing clearing of all standardised products.” Some of the biggest CDS users are currently drafting a letter with the intention of collecting investor signatures to commit to begin clearing single name CDS starting in the new year, according to a person familiar with the matter. Some banks have also begun offering clients incentives to move old trades into clearing, including cutting fees or giving very favourable pricing. “Clearly there is an incentive,” the head of CDS sales at a European bank said. “You are trying to reduce your counterparty exposure and capital. There is a value attached to that.”

Detroit was never alone.

• Atlantic City’s Mayor Warns of Insolvency by April Without Aid (Bloomberg)

Atlantic City, the distressed New Jersey gambling hub that’s under state oversight, will run out of money by the end of April if bills aimed at bolstering its finances aren’t enacted, Mayor Don Guardian said. “Cash flow runs out April 29,” Guardian told reporters Wednesday during the New Jersey State League of Municipalities conference in his city. Governor Chris Christie conditionally vetoed legislation that would have redirected a portion of casino revenue to the city, which was counting on the money to help close a $101 million deficit this year. He requested changes that steps up the state’s power over the funds. Lawmakers must approve them by Jan. 12 to avoid having to re-introduce the bills in the next session.

The measures were aimed at addressing the financial strains that have gripped Atlantic City as its onetime dominance over East Coast gambling is eroded by competition from neighboring states. The closing of four of 12 casinos last year battered Atlantic City’s revenue, and some of those that remain have sought to lower their property-tax bills by challenging the city’s assessments. If the city runs out of cash, it won’t be able to borrow to stay afloat, Guardian said. Moody’s Investors Service grades the city’s debt Caa1, seven steps below investment grade. Standard & Poor’s ranks it B, five levels into so-called junk. “It would be foolish to bond at the rates we would have to,” he said. “If we could find anyone to take our bonds.”

Yada yada yada.

• Fed Tipping Toward December Rate Hike, Minutes Show (Hilsenrath)

The Federal Reserve sent out new signals that officials will raise interest rates in December as long as job growth and inflation trends don’t take a turn for the worse. Most officials meeting last month anticipated that December “could well be” the time to lift short-term rates after leaving them near zero for seven years, according to minutes of their last meeting three weeks ago, released Wednesday. Officials changed the wording of their policy statement at the October meeting—adding a reference to the possibility of a December increase—to ensure their options were open. The Fed has been waiting to see further improvement in the job market and to gain confidence that inflation, which is running below its 2% target, will start moving up.

“Most participants anticipated that, based on their assessment of the current economic situation and their outlook for economic activity, the labor market, and inflation, these conditions could well be met by the time of the next meeting,” the October meeting minutes said. Since the Fed’s October gathering, economic data have generally supported the central bank’s view that the job market is improving and offered some evidence wage and inflation pressures are slowly and gradually starting to build. The U.S. central bank has now warned about rate increases so many times that investors appear to be getting used to the idea. Raising the cost of borrowing typically sends stock prices tumbling, but stocks rose Wednesday, a sign that a rate increase is already priced into markets.

[..] The minutes stated “some” Fed officials felt in October it was already time to raise rates. “Some others” believed the economy wasn’t ready. The wording meant that minorities on both sides of the Fed’s rate debate are pulling in different directions, with a large center inside the central bank inclined to move. Officials cited a number of reasons to avoid delay: They risked creating uncertainty in financial markets by holding off; they risked allowing financial market excesses to build if they kept rates too low; they risked signaling a lack of confidence in the economy if they didn’t move rates higher; and they risked ignoring cumulative gains in the economy already registered. At the same time, the Fed minutes included several new signals that after the Fed does move rates higher, the subsequent path of rate increases is likely to be exceptionally shallow and gradual.

They need to stop selling themselves. The reason why makes no difference.

• Australia Blocks Ranch Sale to Foreigners on Security Fears (Bloomberg)

Australia blocked the sale of the nation’s largest private landowner to an overseas buyer, saying the location of one of the company’s 10 cattle ranches in a weapons testing area could compromise national security. S. Kidman & Co.’s properties were listed for sale in April, with local media reporting that China’s Shanghai Pengxin Group was in exclusive talks to buy the string of ranches for about A$350 million ($250 million). Treasurer Scott Morrison said in a statement that half of Kidman’s Anna Creek station, the nation’s largest single property holding, sits within the Woomera Prohibited Area – a remote stretch of the outback that’s been used to test nuclear bombs, launch satellites and track space missions. Selling Kidman in its current form to a foreigner would be “contrary to Australia’s national interest,” Morrison said in the statement.

Australia’s government has increased scrutiny of foreign acquisitions of agricultural land and earlier this month passed legislation to set up a register of overseas holdings of farm properties. Kidman’s ranches span 101,000 square kilometers (39,000 square miles), or about 1.3% of the nation’s total land area, and carry about 185,000 cattle. The Woomera range “makes a unique and sensitive contribution to Australia’s national defense and it is not unusual for governments to restrict access to sensitive areas on national security grounds,” Morrison said. All bidders have withdrawn their applications to the Foreign Investment Review Board to buy Kidman, Morrison said without identifying them, and it was “now a matter for the vendor to consider how they wish to proceed.”

The world’s biggest hornet’s nest.

• Turkey Could Cut Off Islamic State’s Supply Lines. So Why Doesn’t It? (Graeber)

In the wake of the murderous attacks in Paris, we can expect western heads of state to do what they always do in such circumstances: declare total and unremitting war on those who brought it about. They don’t actually mean it. They’ve had the means to uproot and destroy Islamic State within their hands for over a year now. They’ve simply refused to make use of it. In fact, as the world watched leaders making statements of implacable resolve at the G20 summit in Antalaya, these same leaders are hobnobbing with Turkey’s president Recep Tayyip Erdogan, a man whose tacit political, economic, and even military support contributed to Isis’s ability to perpetrate the atrocities in Paris, not to mention an endless stream of atrocities inside the Middle East. How could Isis be eliminated? In the region, everyone knows.

All it would really take would be to unleash the largely Kurdish forces of the YPG (Democratic Union party) in Syria, and PKK (Kurdistan Workers party) guerillas in Iraq and Turkey. These are, currently, the main forces actually fighting Isis on the ground. They have proved extraordinarily militarily effective and oppose every aspect of Isis’s reactionary ideology. But instead, YPG-controlled territory in Syria finds itself placed under a total embargo by Turkey, and PKK forces are under continual bombardment by the Turkish air force. Not only has Erdoan done almost everything he can to cripple the forces actually fighting Isis; there is considerable evidence that his government has been at least tacitly aiding Isis itself. It might seem outrageous to suggest that a Nato member like Turkey would in any way support an organisation that murders western civilians in cold blood.

That would be like a Nato member supporting al-Qaida. But in fact there is reason to believe that Erdoan s government does support the Syrian branch of al-Qaida (Jabhat al-Nusra) too, along with any number of other rebel groups that share its conservative Islamist ideology. The Institute for the Study of Human Rights at Columbia University has compiled a long list of evidence of Turkish support for Isis in Syria. How has Erdogan got away with this? Mainly by claiming those fighting Isis are terrorists’ themselves And then there are Erdogan’s actual, stated positions. Back in August, the YPG, fresh from their victories in Kobani and Gire Spi, were poised to seize Jarablus, the last Isis-held town on the Turkish border that the terror organisation had been using to resupply its capital in Raqqa with weapons, materials, and recruits – Isis supply lines pass directly through Turkey.

What’s Justin going to do when the pressure increases?

• Trudeau Tells Canada To Reject Racism Amid Opposition To Refugee Plan (Reuters)

The Canadian prime minister, Justin Trudeau, urged Canadians to resist hatred and racism as a poll showed most Canadians were opposed to his plan to bring in 25,000 Syrian refugees by year-end and a flurry of racist incidents were reported around the country. The Liberals, who took power after an election last month, campaigned on a promise to bring in the refugees by 1 January. Critics say the number is too large and could threaten security following the Paris terror attacks. An Angus Reid poll released on Wednesday showed 54% of Canadians opposed the plan, up from 51% before the bloodshed in Paris.

But support for the plan also increased, with 42% in favour, up from 39% in October. Most of those who opposed Trudeau’s plan did so because of the short timeline, with 53% saying the schedule was too short to ensure all the necessary security checks were completed. Another 10% said 25,000 was too many, and 29% said Canada should not be accepting any Syrian refugees. Trudeau has vowed to stick to the plan despite the growing criticism. Travelling through Europe and Asia as part of his first global trip, Trudeau issued an appeal to Canadians to reject racism, and condemned attacks on “specific Canadians” in the aftermath of the attacks by Islamic State in Paris.

A mosque was burned in the Ontario city of Peterborough at the weekend, windows were smashed at a Hindu temple in another city, and a Muslim woman was attacked in Toronto by two men who called her a terrorist and said she should go home. “Diversity is Canada’s strength. These vicious and senseless acts of intolerance have no place in our country and run absolutely contrary to Canadian values of pluralism and acceptance,” Trudeau said. A separate poll by Leger for the TVA news network showed 73% of people in the predominantly French-speaking province of Quebec were worried about attacks in Canada while 60% felt that 25,000 refugees were too many.

Well, some of the intolerance lasted for centuries. And is over only in law, not in practice.

• History Is A Cruel Judge Of Intolerance In America (Bloomberg)

History is a cruel judge of intolerance in America. Let that be a warning to politicians rushing to bar Syrian refugees, especially Muslims, from seeking sanctuary in the U.S. Segregationists are condemned today, even those who later recanted; think of George Wallace. There are few kind words for the American nativist strain, embodied by political movements like the anti-Roman Catholic Know-Nothing Party that flourished in the 1850s. Even progressive icons like Franklin Delano Roosevelt and Chief Justice Earl Warren are censured for their role in interning Japanese-Americans in World War II. On the positive side, Seth Masket of Vox wrote this week about Governor Ralph Carr of Colorado, who in 1942 became a lonely voice for the rights of Japanese-Americans.

Now Republican presidential candidates and governors, and a handful of Democrats, are playing a politically motivated fear card. It doesn’t matter, they argue, if families and little children are fleeing mayhem and carnage in Syria. Don’t let them in, especially if they are Muslims. They cite, of course, the terrorist attack in Paris. Public concern about Syrian refugees is understandable; one of the Paris terrorists might have slipped into Europe with refugees. But real leaders shouldn’t exploit people’s fears. Sometimes their responsibility is to calm them. That’s not what we’re getting from Donald Trump, or from Governor Bobby Jindal of Louisiana, who is straining to get to the right of the other candidates.

Jindal and David Vitter, the Republican senator who is running to replace him – the election is Saturday – have warned of hordes of Syrian refugees threatening the citizens of Louisiana. Vitter said there’s an “influx coming” and that vetting can’t guard against possible “terrorist elements.” The New Orleans Times-Picayune reported this week that there are Syrian refugees in the Bayou State – 14 to be exact. The resettling agency is the New Orleans Archdiocese’s Catholics Charities. The general counsel for the Archdiocese is Wendy Vitter, the wife of Senator Vitter. After Pearl Harbor, the Roosevelt administration decided to put Japanese-Americans in guarded camps.

Colorado’s Carr objected. He said Japanese-Americans were entitled to the same constitutional rights as other citizens and decried the “shame and dishonor” of racial hatred. He was dumped by his own Republican party. The country overwhelmingly supported FDR and Earl Warren, then attorney general of California, who whipped up anti-Japanese sentiment. FDR is now celebrated as a great president. Warren went on to become governor of California and Chief Justice of the United States. His Supreme Court expanded civil rights and civil liberties. Both, however, get bad marks from most historians for their role in internment. Carr’s courage ended his political career. But history smiled. Today there’s a statue of him in downtown Denver. A scenic section of a highway bears his name. The Japanese-American Citizens League has an award in his honor.

Someone’s got to be getting wealthy over this?!

• Former Yugoslav Republic of Macedonia Building Fence Along Greek Border (Kath.)

The Former Yugoslav Republic of Macedonia is erecting a fence on its border with Greece in a bid to block refugees and migrants heading to Central Europe, Kathimerini understands. FYROM has threatened in recent days to put up a fence along the Greek border if countries further along the Balkan refugee trail reduce the number of refugees they are taking in. FYROM’s security council has also taken a decision foreseeing such a move. According to Christos Gountenoudis, the mayor of Paionia, close to the FYROM border, construction is already under way. “Machines have started work behind the border,” he told Kathimerini. The project, which is being overseen by the Balkan state’s army, is expected to raise a 1.5-kilometer-long barbed wire fence running from opposite the small Greek town of Idomeni to the bank of the Axios River.

It appears that FYROM authorities are rushing to get the fence up before countries further north close their borders. Hungary and Slovenia have already built fences along their respective borders with Croatia while Croatia has threatened to put up a fence along its border with Serbia. Thousands of migrants and refugees have crossed into FYROM from Greece in recent weeks. On Wednesday around 5,000 people gathered at Idomeni, while on Tuesday it was 4,600 and on Monday 6,892, sources said. Gountenoudis told Kathimerini he briefed Immigration Policy Minister Yiannis Mouzalas on the construction of the fence. He said he asked Mouzalas what will happen if thousands of refugees end up unable to leave Greece. “He told me the government has a plan,” he said. There are plans for reception centers in Thessaloniki, Kavala and Kilkis, the mayor said.

Found under ‘disgrace’ in your dictionary.

• EU Nations Miss Deadline To Appoint Officers For Refugee Relocations (Guardian)

EU nations have once again missed their own deadline for appointing liaison officers required to coordinate refugee relocations with Greece and Italy, according to information provided by the European commission this week. European council conclusions from 9 November noted that member states committed to appointing the liaison officers to Italy and Greece by 16 November. But the figures released the day after the self-imposed deadline show that 11 member states still have not done so – and six of these – Bulgaria, Croatia, the Czech Republic, Hungary, Latvia and Slovakia – have not provided liaison officers at all. At the council meeting member states had also said they would “endeavour to fill by 16 November 2015 the remaining gaps in the calls for experts and border guards” requested by the European Asylum Support Office (EASO) and Frontex, the European border control agency.

However, the commission figures reveal that only 177 of the 374 experts requested, and 392 border guards of the 775 requested, have so far been provided. The pace of relocation of refugees from the most affected countries – such as Greece and Italy – remains slow. Only 128 refugees from Italy and 30 from Greece have been relocated so far. EU member states agreed in September to relocate 160,000 people in “clear need of international protection” through a scheme set up to relocate Syrian, Eritrean and Iraqi refugees from the most affected EU states to others. The relocation is meant to take place over the next two years, but at this rate it would take 166 years to meet the commitment.

European nations are also falling short in terms of their funding pledges. As of 17 November there is a shortfall of €2.2bn (£1.5bn) to reach the €5.6bn pledged for the UN refugee agency, UNHCR, World Food Programme and other relevant organisations and funds. Member states have collectively provided €573m so far, while the EU, which is matching the national funds, has provided its €2.8bn share. Moreover, the latest data reveals that still too few member states have responded to calls from Serbia, Slovenia and Croatia to provide the resources they need to cope with the refugee crisis. Many items requested by the three countries have not been delivered, including essentials such as beds, blankets, winter tents, clothing and first aid kits.

Not even near Greece.

• 20 African Migrants Lost At Sea In Atlantic After Boat Sinks (Reuters)

Around 20 African migrants are missing at sea after their boat sunk in the Atlantic Ocean around 20 miles off the coast of Western Sahara, Spanish sea rescue services said on Wednesday. Spanish lifeguards rescued 22 African men from the sea late on Tuesday in stormy conditions and recovered the corpse of one man. The search continues for the remaining migrants. Survivors say there were over 40 people traveling in the boat, including one woman, the sea rescue services spokesman said. Photographs showed the survivors being transferred from the rescue boat to Gran Canaria island where they were attended to by Red Cross workers in makeshift tents set up in the port. The sea route from West Africa to Spain’s Canary Islands was a major route for migrants attempting to enter Europe until about 10 years ago when Spain stepped up patrols.

Only solution: immediate ban on feeding livestock antibiotics. Which won’t happen because the chemical industry likes its profits too much.

• Antibiotic Resistance: World On Cusp Of ‘Post-Antibiotic Era’ (BBC)

The world is on the cusp of a “post-antibiotic era”, scientists have warned after finding bacteria resistant to drugs used when all other treatments have failed. Their report, in the Lancet, identifies bacteria able to shrug off colistin in patients and livestock in China. They said that resistance would spread around the world and raised the spectre of untreatable infections. Experts said the worrying development needed to act as a global wake-up call. Bacteria becoming completely resistant to treatment – also known as the antibiotic apocalypse – could plunge medicine back into the dark ages. Common infections would kill once again, while surgery and cancer therapies, which are reliant on antibiotics, would be under threat.

Chinese scientists identified a new mutation, dubbed the MCR-1 gene, that prevented colistin from killing bacteria. It was found in a fifth of animals tested, 15% of raw meat samples and in 16 patients. The resistance was discovered in pigs, which are routinely given the drugs in China. And the resistance had spread between a range of bacterial strains and species, including E. coli, Klebsiella pneumoniae and Pseudomonas aeruginosa. There is also evidence that it has spread to Laos and Malaysia. Prof Timothy Walsh, who collaborated on the study, from the University of Cardiff, told the BBC News website: “All the key players are now in place to make the post-antibiotic world a reality. “If MRC-1 becomes global, which is a case of when not if, and the gene aligns itself with other antibiotic resistance genes, which is inevitable, then we will have very likely reached the start of the post-antibiotic era.

“At that point if a patient is seriously ill, say with E. coli, then there is virtually nothing you can do.” Resistance to colistin has emerged before. However, the crucial difference this time is the mutation has arisen in a way that is very easily shared between bacteria. “The transfer rate of this resistance gene is ridiculously high, that doesn’t look good,” said Prof Mark Wilcox, from Leeds Teaching Hospitals NHS Trust. His hospital is now dealing with multiple cases “where we’re struggling to find an antibiotic” every month – an event he describes as being as “rare as hens’ teeth” five years ago. He said there was no single event that would mark the start of the antibiotic apocalypse, but it was clear “we’re losing the battle”.

Debt Rattle November 10 2015

Nov 102015

November 10, 2015 Posted by Raúl Ilargi Meijer at 10:22 am Finance Tagged with: aid agencies, austerity, China, commodities, copper, deflation, Greece, oil, recession, refugees 3 Responses »

Ben Shahn Quick lunch stand in Plain City, Ohio 1938

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

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

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

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

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

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

• Volkswagen Moves To Appease Angry Customers, Workers (Reuters)

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

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

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

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

• Catalonia Votes To Start Breakaway Process From Spain (Reuters)

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

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

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

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

• The Leviathan (Jim Kunstler)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

All -industrial- commodities, raw materials.

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

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

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

The dollar comes home.

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

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

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

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

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

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

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

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

• Volkswagen Moves To Appease Angry Customers, Workers (Reuters)

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

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

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

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

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

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

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

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

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

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

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

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

Presented as an opportunity.

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

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

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

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

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

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

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

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

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

• Catalonia Votes To Start Breakaway Process From Spain (Reuters)

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

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

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

Slow torture. The love of thumbscrews.

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

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

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

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

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

Takeaway: France has no voice in Europe.

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

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

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

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

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

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

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

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

Oliver Twist redux.

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

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

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

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

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

• The Leviathan (Jim Kunstler)

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

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

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

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

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

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

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

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

The incompetence is blinding.

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

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

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

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

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

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

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

Debt Rattle October 19 2015

Oct 192015

October 19, 2015 Posted by Raúl Ilargi Meijer at 9:00 am Finance Tagged with: bubble, China, copper, credit, debt, Fed, Growth, refugees, Saudi, Turkey 5 Responses »

Jack Delano Truck service station on U.S. 1, NY Avenue, Washington, DC 1940

• China Economy Logs Weakest Growth Since 2009 Despite Easing (Reuters)

• The Fed Is Stuck, With US At The Mercy Of China (MarketWatch)

• UK In Economic Kowtow To Xi Seeks ‘Golden Era’ In China Trade (Bloomberg)

• Chinese Copper-Trading Surge Shakes Up Market (WSJ)

• China Ponders Tool Deemed Too Risky Post 2008 to Cut Bad Loans (Bloomberg)

• The World Hits Its Credit Limit, And The Debt Market Starts To Realize It (ZH)

• Saudi Crude Stockpiles at Record High in August as Exports Fell (Bloomberg)

• Saudi Arabia Said to Delay Contractor Payments After Oil Slump (Bloomberg)

• Deutsche Bank Restructures, Splits Investment Bank (CNBC)

• Why Americans Don’t Trust the Fed (Lowenstein)

• The Rise And Rise Of Australian Wussonomics (MB)

• US Military Quietly Builds Giant Security Belt Through Middle Of Africa (MGA)

• Thousands Stranded On New Migrant Route Through Europe (AP)

• Brussels Draws Up Plan To Resettle 200,000 Refugees Across Europe (FT)

• As Merkel, Erdogan Discuss Refugee Crisis, More Die In Aegean (Kath.)

• Italy Navy Says Eight Migrants Die In Mediterranean, 113 Rescued (Reuters)

• Five Refugees Drown Off Greek Islands, One Missing (Reuters)

Why do these ‘official’ numbers get any attention at all?

• China Economy Logs Weakest Growth Since 2009 Despite Easing (Reuters)

China’s economic growth dipped below 7% for the first time since the global financial crisis on Monday, hurt partly by cooling investment, raising pressure on Beijing to further cut interest rates and take other measures to stoke activity. The world’s second-largest economy grew 6.9% between July and September from a year ago, the National Bureau of Statistics said, slightly better than forecasts of a 6.8% rise but down from 7% in the previous three months. That hardened expectations that China would avoid an abrupt fall-off in growth, with analysts predicting a more gradual slide in activity stretching into 2016. “Underlying conditions are subdued but stable,” said Julian Evans-Pritchard at Capital Economics in Singapore.

“Stronger fiscal spending and more rapid credit growth will limit the downside risks to growth over the coming quarters.” Chinese leaders have been trying to reassure jittery global markets for months that the economy is under control after a shock devaluation of the yuan and a summer stock market plunge fanned fears of a hard landing. Some analysts were hopeful that the third-quarter cooldown could mark the low point for 2015 as a burst of stimulus measures rolled out by Beijing comes into force in coming months, but muted monthly data for September kept such optimism in check.

“As growth slows and risk of deflation heightens, we reiterate that China needs to cut reserve requirement ratio (RRR) by another 50bps in Q4,” economists at ANZ Bank said in a note to clients. “Looming deflation risk suggests that the People’s Bank of China will also adjust the benchmark interest rates, especially lending rate, down further.” In its battle against China’s worst economic cooldown in more than six years, the central bank has cut interest rates five times since November and reduced banks’ reserve requirement ratios three times this year. Despite the spate of easing, Monday’s GDP reading was still the worst since the first quarter of 2009, when growth tumbled to 6.2%.

The real problem is everyone’s lying about growth numbers.

• The Fed Is Stuck, With US At The Mercy Of China (MarketWatch)

The U.S. economy used to be like a muscleman surrounded by 98-pound weaklings. It regularly flaunted its power and was little swayed by what happened to the crowd on the beach. Those days, if they ever really existed, ended long ago. Although the U.S. is still more insular than its major economic rivals, some 30% of the nation’s economy involves trade through imports and exports. That’s a record high and about three times larger compared to several decades ago. The result: U.S. policy on interest rates and related matters are at the tender mercy of events around the globe, and the picture isn’t pretty. That’s why the Federal Reserve last month jettisoned a pending increase in interest rates and is now likely to wait until 2016.

Three things are holding the Fed back: Softer growth in China, a strong dollar and weak U.S. inflation. They are all tied together. Start with China. Evidence of slower growth caused stock markets worldwide to slump in August and September, freezing the Fed in place. Central bankers worry about spillover effects if the Asian giant’s slide continues. With a light U.S. economic calendar, investors will pay close attention this week when China gives an update on third-quarter gross domestic product. The pace of annual growth is expected to dip below 7%, but if it falls under 6.5%, another global stock rout could ensue. “There is a lot of fear about the news out of China,” said Scott Brown, chief economist of Raymond James. He thinks the worries are overblown.

Yet with China fresh on their minds, top Fed officials are worried that an increase in interest rates now could cause more harm than good. They are particularly concerned about making a move that would boost an already soaring dollar even further. The strongest dollar in more than a decade has dealt a heavy blow to manufacturers and companies that rely on exports, making American-made goods more expensive for foreigners to buy. Amid a slump in exports, those companies have responded in turn by cutting investments, postponing new hires or even eliminating jobs. That might help explain why hiring in the U.S. slowed sharply toward the end of the summer, giving the Fed even more reason to wait on rates.

Think anyone told Cameron China’s imports dropped by 20%?

• UK In Economic Kowtow To Xi Seeks ‘Golden Era’ In China Trade (Bloomberg)

The U.K. is rolling out the red carpet for Chinese President Xi Jinping’s state visit starting Monday. Amid the pomp of a 41-gun salute, lunch with Queen Elizabeth II and lodging at Buckingham Palace, Prime Minister David Cameron will be looking to Xi to open up the purse strings and dole out billions of pounds of new investment. China opening the investment spigot would help redress a lopsided trade relationship that’s left the U.K. lagging its continental peers in winning Chinese largess. Chinese officials have said the amount of deals Xi will announce during the trip will be “huge.” The U.K. is back in China’s good graces after Cameron’s May 2012 meeting with the Dalai Lama plunged the two countries into a near two-year diplomatic freeze.

Chancellor of the Exchequer George Osborne reflected the U.K.’s more accommodative tone on a September trip to China when he signaled the U.K. would refrain from criticism on human rights and not engage in “megaphone diplomacy.” The U.K., the first major Western country to get behind China’s Asian Infrastructure Investment Bank, was striving to be China’s “best partner in the West” and usher in a “golden era” between the countries, he said. While the U.K. is now China’s second biggest European Union trading partner after Germany, it has the biggest trade imbalance of the five largest EU economies. That trade deficit reflects its relatively weak exports of goods and services compared with imports from China. The U.K. is counting on Xi making progress in his drive to transform China’s economy from an export-driven model to a consumption-driven one to create new markets for British firms.

There’s always another bubble just around the corner. “If you stop the trading in one part of the market and there’s a proxy for offloading that risk elsewhere, you’ll use that proxy.”

• Chinese Copper-Trading Surge Shakes Up Market (WSJ)

Chinese investors hamstrung by stock-trading restrictions are piling into copper trading, a shift that analysts and traders say has distorted the global market for the metal. Since the start of July, when authorities began limiting stock trading in China, trading in stock-index futures has fallen 97% to around 65,000 contracts a day, while trading in Chinese copper futures has nearly doubled to roughly 710,000 contracts a day. Because investors now face obstacles in betting against stock futures, they have turned to the copper market as they seek avenues to bet on a deepening slowdown in the world’s second-largest economy, traders and other market experts say.

Spikes in activity on China’s main commodities exchange have coincided with a period of heightened volatility in copper prices and are driving copper-trading volumes world-wide. Global volumes are on track to hit a record high this year, with traders in China accounting for the largest share. The rising prominence of Chinese investors in the copper market is the latest example of the country’s increased heft in financial markets. In recent years, Chinese investors who used physical metals as collateral for bank loans were credited with driving up demand for copper, zinc and nickel and contributing to higher global prices.

Now, some industry officials have said the heavy selling of copper futures in China has skewed prices so much that they no longer accurately reflect the supply and demand for a metal used in everything from iPhones to refrigerators. “We saw copper being sold heavily [by Chinese traders] when trading was first being restricted in Chinese equities; it was an outlet to be able to sell risk,” said David Donora, who oversees $600 million invested in commodities at Columbia Threadneedle Investments. “If you stop the trading in one part of the market and there’s a proxy for offloading that risk elsewhere, you’ll use that proxy.”

Sounds terrifc: “..bad-debt securitization..”

• China Ponders Tool Deemed Too Risky Post 2008 to Cut Bad Loans (Bloomberg)

China is facing calls to bring back an instrument to fight bad loans it had deemed too dangerous after the global financial crisis: debt tied to failed assets. China Construction Bank said in August it’s exploring bad-debt securitization, in which lenders package soured loans into notes sold to investors. While a central bank official said in May such products are under study, regulators this month declined to comment on the plans. Only three Chinese firms have issued such bonds before a 2009 halt to all asset-backed securities that ended in 2012 with products tied only to performing assets. President Xi Jinping faces pressure to help banks cut the biggest pile of bad loans since 2008 as sliding corporate profits, rising defaults and a stock rout worsen credit strains.

Structures that allow lenders to move troubled credit off their books won’t encourage prudence among banks and Chinese raters are unlikely to be better than their U.S. counterparts that failed to anticipate the 2008 global turmoil, according to R&R Consulting. “Although China has some genuine strengths in ABS market building, risk measurement is its Achilles heel,” said Ann Rutledge, founding principal at the firm that assesses structured products and has its main offices in New York and Hong Kong. “The U.S. rating agencies that are active in China would probably be relied upon by investors, and it is well to bear in mind, they did not do a stellar job rating NPL securitizations in 1997-98, not to mention their role in non-performing securities production in the 2000s.”

Debt deflation.

• The World Hits Its Credit Limit, And The Debt Market Starts To Realize It (ZH)

One month ago, when looking at the dramatic change in the market landscape when the first cracks in the central planning facade became evident and it appeared that central banks are in the process of rapidly losing credibility, and the faith of an entire generation of traders whose only trading strategy is to “BTFD”, we presented a critical report by Citigroup’s Matt King, who asked “has the world reached its credit limit” summarized the two biggest financial issues facing the world at this stage. The first is that even as central banks have continued pumping record amount of liquidity in the market, the market’s response has been increasingly shaky (in no small part due to the surge in the dollar and the resulting Emerging Market debt crisis), and in the case of Junk bonds, a downright disaster.

As King summarized it “models linking QE to markets seem to have broken down.” Needless to say this was bad news for everyone hoping that just a little more QE is all that is needed to return to all time S&P500 highs. And while this concern has faded somewhat in the past few weeks as the most violent short squeeze in history has lifted the market almost back to record highs even as Q3 earnings season is turning out just as bad, if not worse, as most had predicted, nothing has fundamentally changed and the fears over EM reserve drawdown will shortly re-emerge, once the punditry reads between the latest Chinese money creation and capital outflow lines.

The second, and far greater problem, facing the world is precisely what the Fed and its central bank peers have been fighting all along: too much global debt accumulating an ever faster pace, while global growth is stagnant and in fact declining. King’s take: “there has been plenty of credit, just not much growth.” Our take: we have – long ago – crossed the Rubicon where incremental debt results in incremental growth, and are currently in an unprecedented place where economic textbooks no longer work, and where incremental debt leads to a drop in global growth. Much more than ZIRP, NIRP, QE, or Helicopter money, this is the true singularity, because absent wholesale debt destruction – either through default or hyperinflation – the world is doomed to, first, a recession and then a depression the likes of which have never been seen.

Space for stockpiling is always limited. Then it’s on to dumping.

• Saudi Crude Stockpiles at Record High in August as Exports Fell (Bloomberg)

Saudi Arabia’s crude inventories rose to a record level in August as production and exports by the world’s biggest oil shipper declined. Commercial crude stockpiles increased to 326.6 million barrels, the highest since at least 2002, from 320.2 million barrels in July, according to data posted on the website of the Riyadh-based Joint Organisations Data Initiative. Exports slumped 3.8% in August to 7 million barrels a day from 7.28 million the previous month. Saudi international shipments dropped each month since March except for June, the data show.

Brent crude oil prices have slid 12% this year as Saudi Arabia led the Organization of Petroleum Exporting Countries in boosting production to defend the group’s market share amid a global supply glut. Brent futures for December settlement closed Friday at $50.46 a barrel in London, up 73 cents. Saudi Arabia cut back oil production in August to 10.27 million barrels a day from 10.36 million in July, according to the JODI data. The kingdom told OPEC that it produced 10.23 million barrels daily in September. It pumped at an all-time high of 10.56 million barrels a day in June, exceeding a previous record from 1980.

In worse shape than anyone lets on.

• Saudi Arabia Said to Delay Contractor Payments After Oil Slump (Bloomberg)

Saudi Arabia is delaying payments to government contractors as the slump in oil prices pushes the country into a deficit for the first time since 2009, according to three people with knowledge of the matter. Companies working on infrastructure projects have been waiting six months or more for payments as the government seeks to preserve cash, the people said, asking not to be identified as the information is private. Delays have increased this year and the government has also been seeking to cut prices on contracts, the people said. Saudi Arabia is tackling the slump in crude, which accounts for about 80% of revenue, by tapping foreign reserves, cutting spending and selling bonds. Net foreign assets fell by about $82 billion at the end of August after reaching an all-time high last year.

The country has raised 55 billion riyals ($15 billion) from debt issuance this year. The government is also seeking to cut capital spending and delay projects. “It’s hard to hold back from boosting spending when oil is on the rise, but very hard to cut when oil prices fall,” Simon Williams at HSBC said in e-mailed comments. “Cuts are coming – the budget deficit is too large to ignore and pretend it’s business as usual.” Payment delays could slow the completion of projects under construction, including the $22 billion Riyadh metro, and curb the expansion needed to create jobs for a rising population. In the past, government spending has been a catalyst for growth. For example, when authorities announced $130 billion in social spending in 2011, the economy expanded 10%.

This year, growth will probably be about 3%, according to data compiled by Bloomberg. Crude’s decline – it’s about halved in the past 12 months – coupled with the kingdom’s spending plans, will leave Saudi Arabia with a budget deficit exceeding 400 billion riyals this year ($107 billion), according to the IMF. The aggregate deficit for 2015 to 2017 is likely to exceed $300 billion, according to a report by HSBC.

A bank in big trouble.

• Deutsche Bank Restructures, Splits Investment Bank (CNBC)

German banking giant Deutsche Bank on Sunday announced a sweeping reorganization plan designed to “fundamentally change” how it does business, cleaving its investment bank into two parts and parting ways with some of its key executives. As the bank continues to grapple with the fallout of trading and governance scandals, Deutsche made an announcement that was widely anticipated by Wall Street watchers. In a statement, Deutsche said it plans to combine its corporate finance and global transaction banking businesses, while making its private and business clients division an independent business unit. As a result of the changes, its asset management arm will operate as a stand-alone division focused solely on institutional clients and funds.

In what it called “an extraordinary meeting” at the bank’s headquarters in Frankfurt, Deutsche’s management “resolved to restructure the bank’s business divisions,” including reorganizing its senior ranks and abolishing certain units. “The Supervisory Board’s guiding principle, in light of the Bank’s Strategy 2020, was to reduce complexity of the Bank’s management structure enabling it to better meet client demands and requirements of supervisory authorities,” the statement added. In addition, the bank said it would abolish its group executive committee, while putting a representative of each of its four core operations on a newly constituted board. In recent months, Deutsche has been enmeshed in investigations, amid allegations that it was rigging financial markets. Since taking the reins after the departure co-CEO Anshu Jain earlier this year, analysts have been anticipating that newly installed CEO John Cryan would move quickly to restructure the bank.

Centralization.

• Why Americans Don’t Trust the Fed (Lowenstein)

When Woodrow Wilson ran for president in 1912, he was forced to declare himself “opposed to the idea of a central bank”—though in his heart, he was an avid supporter. Rep. Carter Glass, a Virginia Democrat, drafted a bill to restructure the banking system along regional lines. Not unlike Sen. Paul a century later, Glass didn’t trust Washington experts. But Wilson, after his election, insisted that Glass’s bill include a Reserve Board under federal control. The Federal Reserve Act, which Wilson signed in 1913, traveled a tortuous legislative path. Westerners and farmers worried that the new bank would crimp the money supply, preventing farmers from raising prices. But many bankers feared that the Fed would print too much money.

Today, these groups have switched sides. Wall Street has largely supported Fed Chairwoman Janet Yellen’s low-interest-rate policy while populist critics have castigated the Fed for promoting inflation. Still, inflation remains low; a basket of goods that cost $20 a decade ago costs $24.41 today. And with the U.S. economy growing (albeit at a modest rate) for six straight years, credit eminently affordable, and the dollar still prized world-wide, it is hard not to conclude that the Fed is doing at least a reasonable job. But if the Federal Reserve didn’t exist, Congress would have a hard time enacting it now.

Gary Gorton, a banking expert at the Yale School of Management, says that if the Fed were designed today, “It would have severely restricted powers. It might not be independent at all.” This is what several bills that are now before Congress attempt to bring about. Current criticism of the Fed is basically twofold: Some object to ultralow interest rates, fearing that they will lead to economic distortions, while others resent the bailouts and other programs designed to ease the 2008 financial crisis. Acting as this sort of “lender of last resort” was the Fed’s original purpose, of course, but many Americans still think that the Fed has too much power. Jackson’s ghost lives on.

“Our leaders celebrate dying coal not rising solar. Terrified of the household debt underpinning banks, they preen “confidence” instead of shifting funding structures to productive lending.”

• The Rise And Rise Of Australian Wussonomics (MB)

I put it to you that there are four main drivers of Australian wussonomics, some deeper than others, and all of them go to the heart of the economic challenge confronting Australia’s future. The first pillar of wussonomics is our peculiar economic structure. After a three decade run of good fortune, we are left with a massively inflated cost structure that means the only two economic activities of any magnitude that are left are shipping dirt and borrowing money to inflate house prices. This in itself leads to Banana Republic dynamics in which two dominant rent-seeking sectors – mining and banking – control policy, and various bizarre ideologies rise to justify that concentration.

The second pillar of wussonomics is the cyclical implications of the above. As we pass through cycles, bad decisions are made over and again, and those making them become more and more compromised. One example is the extraordinary turnover in our political leadership. As each new leader takes on the trappings of the dominant rent-seekers, wussonomics is sustained as economic narrative of the day. Our leaders celebrate dying coal not rising solar. Terrified of the household debt underpinning banks, they preen “confidence” instead of shifting funding structures to productive lending. A second example is the RBA which went from over-egging a commodity bubble and setting policy to let it run and, when its first bubble popped, shifting to over-egging a housing bubble and setting policy to let it run.

Each blunder begets another as institutions and their leaders sink further and further into arse-covering over national interest. Then, one after another, these same leaders are torn down by a disaffected polity because wussonomics only makes things worse by entrenching the economic vandals while promising the world. The third pillar of wussonomics is a really sick media. The timing here is unfortunate in that media is undergoing huge disruption that has bereft it of its traditional business model. That has killed vigorous journalism as cost cuts destroy corporate memory and talent, and as advertising becomes advertorial because managers are afraid to upset a narrowing set of business clients, that tend again to be in the dominant rent seeking sectors. One needs only to observe the centrality of real estate and banks to media profit growth to see this.

The fourth pillar of wussonomics is older and deeper. It is Australia’s unique sub-altern identity, it’s long term inferiority complex, a mind set that over-celebrates achievements and buries failures, which leaves Australians at constant peril of psychological colonisation.

This will not end well either.

• US Military Quietly Builds Giant Security Belt Through Middle Of Africa (MGA)

Nigeria has welcomed a US decision to send up to 300 military personnel to Cameroon to help the regional fight against Boko Haram, despite having itself requested more direct help from Washington. President Muhammadu Buhari’s spokesman Garba Shehu on Thursday said the deployment was a “welcome development” while the military said it demonstrated cooperation was needed against the Islamists. Washington last year provided intelligence, surveillance and reconnaissance expertise to Nigeria in the hunt for more than 200 schoolgirls abducted from their school. The assistance included drones and spy planes as well as up to 80 military personnel sent to Chad’s capital, N’Djamena. In 2013, the US set up a drone base in neighbouring Niger.

But the US is not only involved in fighting back Boko Haram on the continent. In recent years, the US has quietly ramped up its military presence across Africa, even if it officially insists its footprint on the continent is light. The decisive point seems to have been the election of President Barack Obama in 2008. For years, the United States Africa Command (known by the acronym AFRICOM) has downplayed the size and scope of its missions on the continent, and without large battalions of actual boots on the ground, as was the case in Afghanistan and Iraq, you’d be forgiven for missing its unfolding.

But behind closed doors, US military officials are already starting to see Africa as the new battleground for fighting extremism, and have begun to roll out a flurry of logistical infrastructure and personnel from West to East – colloquially called the “ new spice route” – and roughly tracing the belt of volatility on the southern fringes of the Sahara Desert; the deployment to Cameroon is just the latest of many. These support all the activities that American troops are currently involved in Africa: airstrikes targeting suspected militants, night raids aimed at seizing terror suspects, airlifts of French and African troops onto the battlefields, and evacuation operations in conflict zones.

Winter is coming.

• Thousands Stranded On New Migrant Route Through Europe (AP)

Tension was building among thousands of migrants as they remained stranded in fog and cold weather in the Balkans on Sunday local time in their quest to reach a better life in Western Europe, a day after Hungary closed its border with Croatia and the flow of people was redirected to a much slower route via Slovenia. Tiny Slovenia has said it will only take in 2,500 people a day, significantly stalling the movement of people as they flee their countries in the Middle East, Asia and Africa. On Saturday, more than 6,000 people reached Croatia, but most of them were stuck in the country as well as in neighboring Serbia on Sunday – and thousands kept on arriving. On the Serbian-Croatian border, tensions flared and scuffles erupted as hundreds of irritated migrants faced a cordon of Croatian policemen preventing them from entry.

The Balkan migrant route switched to Slovenia early Saturday after Hungary’s right-wing government closed its border to Croatia for the influx, citing security concerns and saying it wants to protect the European Union from an uncontrolled flow of people. Slovenian officials said they can’t accept 5,000 migrants per day as asked by Croatia, which is likely to cause a further backlog in the flow. Interior Ministry official Bostjan Sefic said Slovenia can’t take more than neighboring Austria, which said it can accept 1,500 per day. “If we would accept 5,000 migrants per day that would mean 35,000 would be in Slovenia in 10 days,” Sefic said, taking into account those who leave for Austria. “That would be unacceptable.”

Craziest thing of all in this cattle trade: Turkey asking for “a change in the EU’s stance on the 1915 massacres of Ottoman Armenians..”

• Brussels Draws Up Plan To Resettle 200,000 Refugees Across Europe (FT)

Brussels will propose a large-scale refugee resettlement scheme early next year in a move that could see 200,000 migrants distributed across the bloc directly from camps in countries such as Turkey, Jordan and Lebanon. The European Commission plans to propose a “structural EU-wide resettlement scheme” in March as part of a host of reforms aimed at stemming the flow of people from Turkey and nearby countries into the EU. Massive resettlement is seen as part of a quid pro quo of any deal with Turkey, which the EU is hoping to persuade to play a bigger role in stemming the flow of migrants to Europe. Angela Merkel, Germany’s chancellor, met Recep Tayyip Erdogan, Turkey’s president, in Istanbul on Sunday and promised her government would help breathe life into the country’s stalled accession negotiations with the EU in exchange for its help in stemming the tide of migrants and refugees into Europe.

“Germany is ready this year to open chapter 17, and fix benchmarks for 23 and 24,” Ms. Merkel said at a press conference with Turkey’s prime minister Ahmet Davutoglu, referring to three areas, or chapters, of EU law that make up the membership talks. “We can talk about the details.” A candidate for EU membership since 1999, Turkey has opened only 14 out of 35 chapters since talks began in 2005. It has closed only one. Ms. Merkel, however, stopped short of endorsing a list of separate demands to which Turkey appears to have tied its support for the EU plan, including lifting visa restrictions for Turkish nationals by next summer and a change in the EU’s stance on the 1915 massacres of Ottoman Armenians, referred to by many historians as the first genocide of the 20th century.

Last week, EU member states agreed a package of up to €3bn in aid for Turkey to cope with its 2.5m refugees, mostly from neighbouring Syria. Brussels will also re-examine whether Turkish citizens should automatically qualify for Schengen visas in exchange for Ankara’s help. Mr. Erdogan has poured scorn on what he and many of his countrymen see as Europe’s inability to cope with the influx. “They announce they’ll take in 30,000 to 40,000 refugees and then they are nominated for the Nobel for that,” the Turkish leader said on Friday, in a pointed reference to Ms. Merkel. “We are hosting 2.5 million refugees but nobody cares.”

They’re having the wrong discussion.

• As Merkel, Erdogan Discuss Refugee Crisis, More Die In Aegean (Kath.)

As German Chancellor Angela Merkel and Turkish President Recep Tayyip Erdogan prepared to discuss the refugee crisis in Istanbul on Sunday, at least five more migrants died in the Aegean. A boy was pronounced dead after arriving on the island of Farmakonisi with another 109 migrants aboard a smuggling vessel. According to an account by the boy’s parents, who were also on the boat, the child fell off the boat close to shore. He was pulled back aboard but remained unconscious and was pronounced dead by a local doctor. In another incident, off Kastellorizo, a sailing boat reported the discovery of a dead baby on Sunday morning. A Coast Guard vessel was subsequently dispatched and discovered the bodies of two women and a small boy. According to the accounts of the 11 survivors, a man remained unaccounted for.

It’s not just off the Greek coast.

• Italy Navy Says Eight Migrants Die In Mediterranean, 113 Rescued (Reuters)

Eight bodies have been recovered from a rubber boat carrying migrants trying to cross the Mediterranean, the Italian navy said in a Tweet on Sunday. It said the ship Bersagliere had rescued 113 migrants from the boat. It gave no further details. On Saturday, the navy rescued 562 migrants trying to reach Europe on five boats. Nearly all of those rescued on Saturday were from sub-Saharan African countries.

Dead children’s bodies are piling up. It’s what we have become.

• Five Refugees Drown Off Greek Islands, One Missing (Reuters)

Five people, including a baby and two children, drowned and one was missing in two separate incidents of migrants trying to reach Greece from nearby Turkey on Sunday, the Greek coastguard said. The service said a sail boat early on Sunday reported it had recovered the body of a baby and had rescued 11 migrants off the Kastellorizo island. The coast guard, which then rushed to the spot, recovered the corpses of another two women and a boy, while it was looking for a missing man, it said. Thousands of refugees – mostly fleeing war-torn Syria, Afghanistan and Iraq – attempt daily to cross the Aegean Sea from neighboring Turkey, a short trip but a perilous one in the inflatable boats the migrants use, often in rough seas.

Almost 400,000 people have arrived in Greece this year, according to the U.N. refugee agency UNHCR, overwhelming the cash-strapped nation’s capacity. In a separate incident, a boy, part of a group of about 110 people, drowned when he fell off a boat en route to the island of Farmakonisi. The rest of the people managed to get ashore. The EU has offered Turkey 3 billion euros ($3.4 billion) in aid and the prospect of easier travel visas and “re-energized” talks on joining the bloc if it helps stem the flow across its territory.

Debt Rattle April 13 2015

Apr 132015

April 13, 2015 Posted by Raúl Ilargi Meijer at 10:16 am Finance Tagged with: Australia, BIS, China, collapse, copper, exports, Greece, housing bubble, London, New Zealand, oil 3 Responses »

George N. Barnard Nashville, Tennessee. Rail yard and depot. 1864

• China’s March Exports Shrink 15% Year-on-Year In Shock Fall (Reuters)

• China’s March Exports Come In Far Worse Than Expected (WSJ)

• China’s Trade Collapse Raises Fears Of Growth Slowdown (Telegraph)

• World Bank Warns Of Hit To Australia As Chinese Growth Falters (AAP)

• China’s Stock Surge May Very Well End In Tears (MarketWatch)

• The $9 Trillion Short That’s Seen Sending the Dollar Even Higher (Bloomberg)

• Saudi Arabia’s Plan to Extend the Age of Oil (Bloomberg)

• Greece May Have Blown Best Hope Of Debt Deal (Reuters)

• Greece Defends Bailout Tactics As Latest Deadline Looms (Guardian)

• UK Economy Poised To Welcome ‘Deflation’ For First Time Since 1960 (Guardian)

• Sales Of London Luxury Homes Drop 80% In One Year (FT)

• Quarter Of World’s Copper Mines Operating At A Loss (Reuters)

• Bundesbank Tells German Heta Creditors To Expect 50% Loss (Bloomberg)

• Sweden Confirms Mystery ‘Russian Sub’…Was In Fact A Workboat (RT)

• Default In Ukraine ‘Virtual Certainty’: S&P Cuts Rating To ‘CC’ (RT)

• Protests Across Brazil Seek Ouster Of President (AP)

• Auckland Housing Bubble ‘Floats Off Into Its Own Orbit’ (Hickey)

• 40% Of Houses In Auckland Are Bought By Investors (Interest.co.nz)

• New Zealand PM Denies There Is A Housing Bubble (NZ Herald)

• The Shadowy History of the Secret Bank that Runs the World (LeBor)

15% is a devastating number. But they’re just going to announce 7% GDP growth no matter what.

• China’s March Exports Shrink 15% Year-on-Year In Shock Fall (Reuters)

China’s export sales contracted 15% in March while import shipments fell at their sharpest rate since the 2009 global financial crisis, a shock outcome that deepens concern about sputtering Chinese economic growth. The tumble in exports – the worst in about a year – compared with expectations for a 12% rise and could heighten worries about how a rising yuan CNY=CFXS has hurt demand for Chinese goods and services abroad, analysts said. In a sign that domestic demand was also tepid, imports into the world’s second-biggest economy shrunk 12.7% last month from a year ago, the General Administration of Customs said on Monday. That was the biggest slump in imports since May 2009, and compared with a Reuters poll forecast for a 11.7% drop.

“It’s a very bad number that was much worse than expectations,” Louis Kuijs, an economist at RBS in Hong Kong, said in reference to the export data. “It leads to warning flags both on global demand and China’s competitiveness.” Buffeted by lukewarm foreign and domestic demand, China’s trade sector has wobbled in the past year on the back of the country’s cooling economy, unsettling policymakers. Chinese Vice Premier Wang Yang was quoted by Xinhua state news agency as saying earlier this month that authorities must act to arrest China’s export slowdown lest it further dampens economic growth.

“The fall defied the expectations of economists who said exports usually rebound after the Lunar New Year..”

• China’s March Exports Come In Far Worse Than Expected (WSJ)

China’s exports fell sharply in March while imports slumped once again, suggesting to economists that the world’s second largest economy is being hit with sluggish demand at home and abroad. The nation’s exports slid 15% from a year earlier in March while imports dropped 12.7%, according to data released Monday by the General Administration of Customs. “Domestic demand is still sluggish,” said Kevin Lai, economist at Daiwa Capital. “Other than the U.S., the export situation isn’t looking very strong.” The fall defied the expectations of economists who said exports usually rebound after the Lunar New Year, which fell in February this year. In February, customs data showed exports up 48.3% from a year earlier while imports were down 20.5%.

Exports are no longer the big engine for the Chinese economy that they once were but the absence of growth in that once-critical area is a further drag on already weak growth. China’s economy posted growth of 7.4% last year, its slowest pace in 24 years, and the government has set an even lower target of about 7% growth for this year. Beijing has used a host of targeted measures to boost the economy, ranging from increased infrastructure spending and reductions in electricity tariffs to two cuts in interest rates to lower the cost of borrowing for domestic companies.

Data for the first quarter are due to be released Wednesday, and many economists project growth at less than 7% from a year earlier. Economists expected an increase of about 10% for exports in March and a drop of 12% for imports, according to a poll of analysts by The Wall Street Journal. China posted a trade surplus of 18.16 billion yuan in March, or about $2.93 billion, well below the $60.6 billion surplus in February.

“..concerns about the state of the global recovery..” No kidding.

• China’s Trade Collapse Raises Fears Of Growth Slowdown (Telegraph)

China’s exports fell by a spectacular 15pc in March reviving fears of a slowdown in the world’s second largest economy. Trade data showed imports also fell by 12pc year-on-year, resulting in a sharp drop in the country’s trade surplus and leading to concerns economic growth will register a significant slowdown when figures are released on Wednesday. China’s economy has been in the throes of a managed slowdown in the last few years. Beijing has set a target of 7pc GDP growth in 2015 as the country seeks to move towards a more sustainble rate of growth. GDP expanded by 7.4pc in 2014, its slowest rate of output growth in nearly a quarter of a century.

The Australian dollar, which is closely linked to the trade fortunes of the Chinese economy, fell to a six-year low on the back of the news. A significant brake on Chinese growth could now “ripple out across the globe,” said Michael Hewson of CMC Markets. “These data misses raise concerns that not only is the Chinese economy failing to rebalance with demand remaining low, but also the global economy’s demand for Chinese exports is also falling back raising concerns about the state of the global recovery as well,” said Mr Hewson. The sluggish numbers come despite stimulative action from China’s central bank to cut interest rates, and ease bank reserve targets.

Australia already knows.

• World Bank Warns Of Hit To Australia As Chinese Growth Falters (AAP)

A Chinese economic slowdown will hit Australia as iron ore prices tumble, the World Bank has said. The bank said Australia’s growth pace had deteriorated sharply since the first quarter of 2014 as declining prices for export commodities depressed mining investment and weakened the Australian dollar. The warning came as poor Chinese trade figures underlined the continued slowdown in the world’s second-largest economy. Exports were down 14.6% in March from a year ago while imports fell 12.3% on the same measure. The Australian dollar fell more than half a US cent to hover around the US76c mark. The World Bank predicted that a further slowdown in China, Australia’s biggest trading partner, would affect Australia and its neighbours.

The bank’s east Asia and Pacific economic update said: “The significant negative impact on Australia and New Zealand, among the world’s largest commodity suppliers, would lead to indirect spillovers on the Pacific Island countries, given their tight links through trade, investment and aid.”. China’s growth pace in 2014 was the weakest since 1990 but the World Bank said things were set to get worse – just a month after the Chinese government cut its growth target to 7%. Chinese growth would ease from 7.4% in 2014, to 7.1% in 2015, 7% in 2016 and 6.9% in 2017.

China is a major buyer of Australian iron ore, which is used to make steel. The World Bank said: “In China, as it shifts to a consumption-led, rather than an investment-led, growth model, the main challenge is to implement reforms that will ensure sustainable growth in the long run.” Sudhir Shetty, the World Bank’s chief economist for east Asia and the Pacific region, said many risks remained for east Asia Pacific region “both in the short and long run”. The gloomy prediction comes as the treasurer, Joe Hockey, forecast the iron ore price dropping to $35 a tonne, which could see commonwealth revenue fall $25bn over four years.

Again: they’re just going to say 7% growth no matter what.

• China Growth Last Quarter Seen Worst Since Global Recession

While the central bank has cut interest rates twice in the last six months to cushion a slowdown, rising bad debts and a crackdown on shadow lending are making banks reluctant to lend to smaller firms. “It’s a structural problem that can’t be quickly addressed,” said Zhao Yang, the Hong Kong-based chief China economist at Nomura. “China’s financial system is not friendly to private businesses, and for the central bank, it has few short-term options but to cut required reserve ratios or benchmark interest rates further.” The benchmark one-year lending rate in China is now 5.35%, versus near-zero levels in the U.S., euro zone and Japan. The Wenzhou Private Finance Index, a measure of non-bank lending rates among private companies, is around 20%. State-owned enterprises, traditionally with easier access to credit, have seen output weighed by a restructuring drive and crackdown on corruption and pollution.

That leaves People’s Bank of China Governor Zhou Xiaochuan juggling financial reforms to try to steer toward a more market-driven economy with the need to ensure growth doesn’t slow too fast. GDP data scheduled for Wednesday will probably show the economy expanded 7% in the first quarter from a year earlier, according to the median estimate of 38 economists in a Bloomberg survey as of April 10. That would be the slowest pace since the first quarter of 2009, when China was hit by the global financial crisis, prompting then Premier Wen Jiabao to unleash a massive stimulus package that featured a record credit boom. To achieve this year’s growth target of about 7%, current Premier Li Keqiang may need to add policy support, something he flagged last month he stood ready to do. The consumer-prices index held steady at a 1.4% increase in March from a year earlier, giving room to act.

Fighting in the streets more likely.

• China’s Stock Surge May Very Well End In Tears (MarketWatch)

Once dismissed as a “ghost train,” the trading scheme — known variously as the “new China through train” or Shanghai-Hong Kong Stock Connect — roared to life last week, helping send the Hang Seng Index HSI, +2.22% to a seven-year high. But this awakening brings not just welcome stock gains, but also fear of a rerun of the euphoric boom and bust of 2007, when a previous through-train plan was announced, only to be later shelved. This time, a possible bust may also challenge the Hong Kong dollar’s currency peg. Unlike the failed 2007 scheme, the new Stock Connect was designed to limit exuberant cross-border money flows, as it operates under a closed loop.

That may be easier said than done. Hong Kong holds a unique position as the first and only stop for mainland Chinese who want to buy foreign equities. This will not be lost on global funds which may want to hitch a ride on this through train, even if it is a roller coaster. All signs suggest the trading scheme will be extended. Hong Kong’s political leader, Chief Executive C.Y. Leung, has been quick to laud the “win-win” of deepening cooperation with Shanghai. Already, it is expected daily trading limits — 10.5 billion yuan ($1.69 billion) going south, and 13 billion yuan going north — will be expanded. Many were caught unaware by the by speed of the post-Easter-holiday surge in southbound investment. As these quotas were filled for the first time, the benchmark Hang Seng Index finished the week up 7.9%.

One explanation for the rush south was a new insurance-investment policy, which allows Chinese mutual funds to participate in the Stock Connect. Another is an inevitable catch-up, with the A-share (Shanghai) rally spilling into H-shares (Hong Kong) as mainland investors come south to pick up bargains. (See previous column on the divergence between the two markets.) Yet turnover figures suggest the Hang Seng Index’s surge past the 27,000 mark cannot be a result of the Stock Connect alone. On Thursday, for instance, volume reached a record 293.9 billion Hong Kong dollars ($37.9 billion), three times normal levels. Analysts are offering different explanations for the surge. Bank of America writes that we are witnessing a “Keynes beauty contest,” in which the jump in money flows is likely driven by some investors anticipating other investors’ reaction to government policy.

“Sovereign and corporate borrowers outside America owe a record $9 trillion in the U.S. currency, much of which will need repaying in coming years..”

• The $9 Trillion Short That’s Seen Sending the Dollar Even Higher (Bloomberg)

Investors speculating the dollar rally is fizzling out may be overlooking trillions of reasons why it will keep on going. There’s pent-up demand for the U.S. currency that will underpin years of appreciation because the world is “structurally short” the dollar, according to investor and former International Monetary Fund economist Stephen Jen. Sovereign and corporate borrowers outside America owe a record $9 trillion in the U.S. currency, much of which will need repaying in coming years, data from the Bank for International Settlements show. In addition, central banks that had reduced their holdings of the greenback are starting to reverse course, creating more demand. The dollar’s share of global foreign reserves shrank to a record 60% in 2011 from 73% a decade earlier, though it has since climbed back to 63%.

So, the short-term ebbs and flows caused by changes in Federal Reserve policy or economic data releases may be overwhelmed by these larger forces combining to fuel more appreciation, according to Jen, the London-based co-founder of SLJ Macro Partners LLP and the former head of currency research at Morgan Stanley. “Short-covering will continue to power the dollar higher,” said Jen, who predicts a 10% advance in the next three months to 96 cents per euro. “The dollar’s strength is not just about cyclical factors such as growth. The recent consolidation will likely prove to be temporary.” The U.S. currency was at $1.0593 per euro at 12:09 p.m. in Tokyo. The last time it traded at 96 cents was June 2002.

Most strategists and investors agree on the reasons for the dollar’s advance versus each of its major counterparts during the past year: the prospect of higher U.S. interest rates while other nations are loosening policy. Bloomberg’s Dollar Spot Index, which tracks the U.S. currency against 10 major peers including the euro and yen, has surged 20% since the middle of 2014. The gains stalled recently, sending the index down more than 3% in the three weeks through April 3, as Fed officials tempered investors’ expectations about the pace of rate increases.

“Demand will peak way ahead of supply..”

• Saudi Arabia’s Plan to Extend the Age of Oil (Bloomberg)

Last fall, as oil prices crashed, Ali al-Naimi, Saudi Arabia’s petroleum minister and the world’s de facto energy czar, went mum. He still popped up, as is his habit, at industry conferences on three continents. Yet from mid-September to the middle of November, while benchmark crude prices plunged 21% to a four-year low, Naimi didn’t utter a word in public. For 20 years, Bloomberg Markets reports in its May 2015 issue, the world’s $2 trillion oil market has parsed Naimi’s every syllable for signs of where supply and prices are heading. Twice during previous routs—amid the Asian financial crisis in 1998 and again when the global economy melted down 10 years later—Naimi reversed oil’s free fall by orchestrating production cutbacks among members of OPEC. This time, he went to ground.

At the cartel’s semiannual meeting on Nov. 27 in Vienna, Naimi shot down proposed output reductions supported by a majority of the 12 members in favor of a more daring strategy: keep pumping and wait for lower prices to force high-cost suppliers out of the market. Oil prices fell a further 10% by the end of the next day and kept going. Having averaged $110 a barrel from 2011 through the middle of 2014, Brent crude, the global benchmark, dipped below $50 in January. “What they did was historic,” Daniel Yergin, the pre-eminent historian of the oil industry, told Bloomberg in February. “They said: ‘We resign. We quit. We’re no longer going to be the manager of the market. Let the market manage the market.’ That’s when you got this sort of shocked reaction that took prices down to those levels we saw.”

Naimi, 79, dominated the debate at the November meeting, according to officials briefed on the closed-door proceedings. He told his OPEC counterparts they should maintain output to protect market share from rising supplies of U.S. shale oil, which costs more to get out of the ground and thus becomes less viable as prices fall. In December, he said much the same thing in a press interview, arguing that it was “crooked logic” for low-cost producers such as Saudi Arabia to pump less to balance the market. Supply was only half the calculus, though. While the new Saudi stance was being trumpeted as a war on shale, Naimi’s not-so-invisible hand pushing prices lower also addressed an even deeper Saudi fear: flagging long-term demand.

Naimi and other Saudi leaders have worried for years that climate change and high crude prices will boost energy efficiency, encourage renewables, and accelerate a switch to alternative fuels such as natural gas, especially in the emerging markets that they count on for growth. They see how demand for the commodity that’s created the kingdom’s enormous wealth—and is still abundant beneath the desert sands—may be nearing its peak. This isn’t something the petroleum minister discusses in depth in public, given global concern about carbon emissions and efforts to reduce reliance on fossil fuels. But Naimi acknowledges the trend. “Demand will peak way ahead of supply,” he told reporters in Qatar three years ago. If growth in oil consumption flattens out too soon, the transition could be wrenching for Saudi Arabia, which gets almost half its gross domestic product from oil exports.

“There’s just no appetite in the euro zone for a grand bargain to take over Greece’s debt to the IMF and the ECB.”

• Greece May Have Blown Best Hope Of Debt Deal (Reuters)

Even if it survives the next three months teetering on the brink of bankruptcy, Greece may have blown its best chance of a long-term debt deal by alienating its euro zone partners when it most needed their support. Prime Minister Alexis Tsipras’ leftist-led government has so thoroughly shattered creditors’ trust that solutions which might have been on offer a few weeks ago now seem out of reach. With a public debt equivalent to 175% of economic output and an economy struggling to pull out of a six-year depression, Athens needs all the goodwill it can summon to ease the burden. It owes 80% of that debt to official lenders after private bondholders took a hefty writedown in 2012.

Since outright debt forgiveness is politically impossible, the next best solution would be for Greece to pay off its expensive IMF loans early, redeem bonds held by the ECB and extend the maturity of loans from euro zone governments to secure lower interest rates for years to come. “This step would save Greece’s budget billions of euros, while reforming the Troika arrangement, eliminating the IMF’s and the ECB’s financial exposure to Greece,” said Jacob Funk Kirkegaard, senior fellow at the Peterson Institute for International Economics, who advocates such an arrangement. It would lower the effective interest rate on Greek debt to less than 2%, far less than Athens was paying before the euro zone debt crisis began in 2009, and radically reduce the principal amount to be repaid over the next decade, giving Greece fiscal breathing space to revive its economy.

And unlike ideas floated by Greek Finance Minister Yanis Varoufakis to swap euro zone loans for GDP-linked bonds and ECB holdings with perpetual bonds, paying out the IMF and the ECB early would be legal and supported by precedent. But if the economics make sense for Greece, the politics no longer add up for its partners. A euro zone official said there had been exploratory talks with the previous conservative-led Greek government about such a plan last year, before then Prime Minister Antonis Samaras chose to bring forward an election he lost rather than complete a bitterly unpopular bailout program. “Now it’s a political non-starter,” said a euro zone official. “There’s just no appetite in the euro zone for a grand bargain to take over Greece’s debt to the IMF and the ECB.”

“..the newspaper will have difficulty justifying its headline and the content of its article.”

• Greece Defends Bailout Tactics As Latest Deadline Looms (Guardian)

Greece has denied being intransigent in its dealings with eurozone officials, ahead of another crucial week for the cash-strapped country. Greece’s finance ministry dismissed on Sunday a report by a German newspaper which reported that eurozone officials were “disappointed” by Greece’s failure to come up with plans for economic reforms at last week’s talks in Brussels. The mood between Greece’s leftist government and its eurozone partners has remained tense during negotiations to determine whether or not the country qualifies for further financial aid from international lenders. Frankfurter Allgemeine Sonntagszeitung (FAS) cited officials at last week’s meeting as saying they were shocked by the lack of progress, and that the new Greek representative just asked where the money was – “like a taxi driver” – and insisted his country would soon be bankrupt.

Eurozone officials disagreed with this assessment, saying Athens was still able to meet its international obligations, and regarded its ability to pay public sector wages and pensions as a domestic problem, according to the report. They deplored Greece’s unwillingness to discuss cuts to public sector pensions. The finance ministry in Athens hit back on Sunday, saying: “When the readers of FAS read the minutes … the newspaper will have difficulty justifying its headline and the content of its article. Such reports undermine the negotiation and Europe.” Greece made a €450m loan repayment to the International Monetary Fund last week. A further €747m payment is due on 12 May. There are fears that Athens could run out of cash in coming weeks. It needs to pay out more than €1.5bn of social security payments for April this week.

IMF managing director Christine Lagarde said last week that talks between Greece and its creditors had been “difficult on almost a daily basis”. She added: “What really matters now is for Greece and the three institutions to get on with the work so we can identify together the measures that will take Greece out of the very bad economic situation it could be in if those measures are not taken.” A meeting of deputy finance ministers – called the Euro Working Group – last Thursday gave Athens six working days to come up with a convincing economic reform plan before eurozone finance ministers meet on 24 April to decide whether to unlock €7.2bn of bailout funds. Greece has been on the verge of bankruptcy since 2009 and has depended on rescue loans totalling €240bn from the EU and IMF to stay afloat.

“..describing the falling oil price as “unambiguously good” for the economy…”

• UK Economy Poised To Welcome ‘Deflation’ For First Time Since 1960 (Guardian)

Britain could fall into deflation this week for the first time in more than half a century, the result of an escalating supermarket price war and falling energy prices. Inflation, as measured by the consumer prices index, fell to zero in February for the first time since comparable records began in 1989. Estimates from the Office for National Statistics suggested that it was the lowest reading since 1960. The statistics office will release the latest inflation figures, for March, on Tuesday morning. City economists say it is going to be a close call between a zero reading and a 0.1% dip. Petrol prices rose 3.6% last month, reflecting a rebound in global oil prices, which is expected to push up the inflation rate by 0.1 %age points.

This will be offset, however, by the 5% cut in gas prices by British Gas, Britain’s largest energy supplier, and low food price inflation. Fierce competition from discount chains has forced the major supermarket groups to slash prices on basic items such as bread, with the discounter Aldi overtaking Waitrose to become the UK’s sixth-largest grocer recently. Alan Clarke, an economist at Scotiabank, said: “While food price deflation of close to 4% year on year may sound extreme, this represents something of a relief after years of rapid price increases. More specifically, over the seven years between 2007 and 2013, the average annual pace of increase in food price inflation was 5% per year. Enjoy the cheap food and fuel while it lasts!”

Even if the UK avoids deflation in March, it will probably enter a period of falling prices at some point soon – following in the footsteps of other countries. Eurozone inflation has been negative since December, and the US rate turned negative in January before recovering to zero in February. There is no reason to panic, according to the Bank of England and City analysts. They claim any period of UK deflation is likely to prove temporary, unlike the deflationary spiral in Japan, where people have lived with falling prices for two decades. Bank of England governor Mark Carne, has sought to allay fears that Britain faces a 1930s-style deflationary spiral, describing the falling oil price as “unambiguously good” for the economy. An oil glut pushed the price of Brent crude, the international benchmark, down by more than 50% from last summer to a six-year low earlier this year.

“It is like the 1970s again, when waves of wealthy people left Britain and it was a disaster..”

• Sales Of London Luxury Homes Drop 80% In One Year (FT)

Wealthy foreigners are shunning London’s luxury housing market following Labour’s announcement that it will end their “non-dom” status if it wins the UK’s general election, according to estate agents. Property deals have begun to fall through in the days since Ed Miliband laid out his plans, they revealed, with some foreign residents also putting their homes up for sale and fleeing the UK. The announcement, combined with Labour’s plan to introduce a mansion tax on high-value homes, has led many foreigners to conclude that the UK is no longer an attractive and reliable home for the rich, agents said. During the past two years Conservative chancellor George Osborne has also made tax changes that have increased the burden on the affluent.

The introduction of capital gains tax on the proceeds of property sales came into force on April 6 and is believed by agents to have contributed to owners’ jitters. Ed Mead, a director of Douglas & Gordon estate agents, said his company had carried out 37 valuations in the past month for owners of high-end homes who were thinking of selling up, when the normal level is about six. “It is like the 1970s again, when waves of wealthy people left Britain and it was a disaster,” Mr Mead said. Sales of homes worth more than £2m have dropped by 80% in the past year, according to Douglas & Gordon.

Commodities are a disaster across the board.

• Quarter Of World’s Copper Mines Operating At A Loss (Reuters)

Nearly a quarter of the world’s major copper mines are running in the red, even after producers including Codelco and BHP Billiton engage in their deepest cost-cutting in years, according to a Reuters analysis. A 17% slump since last July has pushed copper futures on the London Metals Exchange to under $6,000 a ton, the lowest since 2009, is the first major test of producers’ margins since the global economic crisis, forcing a new reckoning after five years of relatively consistent profitability. Codelco, the Chilean state miner that produces about 8% of the world’s copper, will review the cost reduction plan at its Salvador mine as it prepares to restart operations there after torrential rains shuttered the complex in March, said a source close to the state-run miner.

The company has an ambitious target to slash total costs by as much as $1 billion this year. Salvador produced copper at a cost of some $11,439 per tonne in the fourth quarter last year, the highest out of 91 mines analyzed by Thomson Reuters unit GFMS as part of its Copper Mine Economics database. The mines account for more than two-thirds of global output, and almost a quarter of them had production costs late last year above current prices. The GFMS analysis, which is based on quarterly and semi-annual filings by 26 mining companies, gives the deepest insight yet into the voracious pace of cost-cutting by miners late last year as the sell-off in copper quickened, a hot topic at CRU Copper’s conference in Santiago this week.

Austria’s pulling off quite a feat. In almost total silence.

• Bundesbank Tells German Heta Creditors To Expect 50% Loss (Bloomberg)

German banks should expect to lose at least half of their investments in bonds of Austrian bad bank Heta Asset Resolution and make the appropriate provisions, the Bundesbank director responsible for bank supervision said. “I think this situation has to be taken seriously by the German banks,” Andreas Dombret, also a member of the board of the ECB’s Single Supervisory Mechanism, said in an interview in Johannesburg on Friday. “It’s advisable and recommendable to take provisions on this, and if I were to put a number on this I would say it should be a minimum of a 50% provision for potential losses.” German lenders and insurers have emerged as the biggest creditors of the bad bank set up after the collapse of Hypo Alpe-Adria-Bank, with about €7.1 billion at risk.

Heta was taken over last month by Austrian regulators, who ordered a debt moratorium and said they will impose losses on creditors to fund the bank’s wind-down. Bayerische Landesbank, a former owner of Hypo Alpe, has the biggest exposure among German banks, as around €2.4 billion of loans to the former subsidiary weren’t repaid. Commerzbank, Deutsche Pfandbriefbank, NordLB, and a German unit of Dexia all own Heta debt. While BayernLB has said it will set aside provisions equal to about half of what Heta owes it, Dombret’s recommendation goes further than some of the disclosed provisions other banks have made. Deutsche Pfandbriefbank said it wrote down its €395 million investment by €120 million, or 30%. Austria’s Hypo NOE Gruppe Bank said it provisioned its €225 million holding by “about a quarter.”

“The massive hunt was used by the Swedish Defense Ministry to justify a six billion kronor ($696 million) hike in defense spending..”

• Sweden Confirms Mystery ‘Russian Sub’…Was In Fact A Workboat (RT)

The unknown foreign vessel the Swedish Navy searched for near Stockholm last autumn was actually a “workboat,” a senior navy official says. Local media had alleged a hunt was on to try and find a Russian submarine, which was believed to be in the area. Swedish Rear Admiral Anders Grenstad told the Swedish TT news agency on Saturday that what was thought to be a vessel or a foreign submarine was actually just a “workboat.” The Swedish Navy changed the wording from “probable submarine” to “non-submarine” when referring to the reconnaissance mission connected to the unidentified vessel spotted in the Stockholm archipelago. The massive hunt was used by the Swedish Defense Ministry to justify a six billion kronor ($696 million) hike in defense spending between 2016 and 2020.

The drama started after an amateur photograph of an alleged underwater vessel of unidentified origin was sent to the ministry. The man who took the photo raised the alarm because he thought he saw the object surface and disappear again. Sweden undertook an intense one-week search in late October, looking for possible “foreign underwater activity” near Stockholm. During the operation, the Swedish Navy reportedly used over 200 troops, helicopters, stealth ships and minesweepers to search the waters of the Baltic Sea. During the search, the Swedish media exaggerated the story, claiming country’s navy was looking for a submarine in the Baltic Sea, which allegedly belonged to Russia.

Meanwhile, naval officials from Sweden and Russia maintained there was no substance to the reports, which was confirmed by Grenstad. “From the information we have, we cannot draw the same conclusion as the media that there is a damaged U-boat. We have no information about an emergency signal or the use of an emergency channel,” the navy official said. A full report of the search operations will be published later this spring, the Swedish newspaper Svenska Dagbladet reported.

“Ukraine’s total debt is estimated at $50 billion, and it has to service about $10 billion of that debt this year..”

• Default In Ukraine ‘Virtual Certainty’: S&P Cuts Rating To ‘CC’ (RT)

Standard & Poor’s has downgraded Ukraine’s long-term foreign currency sovereign credit rating to CC, a notch lower than the previous CCC- level. A default on Ukraine’s foreign-currency debt is a “a virtual certainty,” according to the agency. The ratings agency has said that the outlook remains negative. Ukraine’s foreign currency rating is the world’s second worst, behind Argentina which has a rating of ‘SD’. It is still ahead of Venezuela, which S&P has assigned a ‘CCC’ rating. “The negative outlook reflects the deteriorating macroeconomic environment and growing pressure on the financial sector, as well as our view that default on Ukraine’s foreign currency debt is virtually inevitable,” the ratings agency said in a statement.

Ukraine’s total debt is estimated at $50 billion, and it has to service about $10 billion of that debt this year, including corporate and sovereign loans and bonds. It will receive about $40 billion in IMF loans in the next four years, as well as separate loan guarantees from the US, Europe, and other allies. Public sector debt rose to 71% of Ukraine’s gross domestic product, and is due to rise to 94% of GDP in 2015, according to the National Bank of Ukraine.

Paying back debt is becoming more difficult for Ukraine as the national currency, the hryvnia, continues to plummet in value. It was the worst performing currency in 2014, and lost more than 34% on February 5, when the Central bank said it could no longer support the beleaguered currency. On February 5 the currency hit a historic low of 24.5 per 1 USD, and at the time of publication has only recovered slightly, to 23.4 versus the US dollar. Officially, foreign currency reserves stood at $5.6 billion at the end of March, compared to the $36 billion level in 2011.

Rousseff had better wisen up and leave. But that would open her up to prosecution.

• Protests Across Brazil Seek Ouster Of President (AP)

Nationwide demonstrations calling for the impeachment of President Dilma Rousseff swept Brazil for the second day in less than a month, though turnout at Sunday’s protests appeared down, prompting questions about the future of the movement. A poll published over the weekend suggested the majority of Brazilians support opening impeachment proceedings against Rousseff, whose second term in office has been buffeted by a corruption scandal at Brazil’s largest company, oil giant Petrobras, as well as a stalled economy, a sliding currency and political infighting. Only 13% of survey respondents evaluated Rousseff’s administration positively.

Sunday’s protests, which took place in cities from Belem, in the northern Amazonian rainforest region, to Curitiba in the south, were organized mostly via social media by an assortment of groups. Most were calling for Rousseff’s impeachment, but others’ demands ranged for urging looser gun control laws to a military coup. While last month’s protests drew substantial crowds in several large cities, Sunday’s turnout was lackluster. In Rio, several thousand people marched along the golden sands of Copacabana beach, many dressed in the yellow and green of the Brazilian flag. The March 15 protest, by contrast, drew tens of thousands. In the opposition stronghold of Sao Paulo, about 100,000 people marched on the city’s main thoroughfare, according to an estimate by the respected Datafolha polling agency.

The crowd was less than half the size of last month’s demonstration here, when more than 200,000 people turned out, making it the biggest demonstration in Sao Paulo since 1984 rallies demanding the end of the military dictatorship. “I was on the avenue on March 15 and without a doubt, today’s demonstration was much smaller,” said Antonio Guglielmi, a 61-year-old sales representative for construction materials company, vowing, “I will keep coming back to demonstrations like this one — big or small — because it is the best way for us to make our voices heard and demand an end to the Dilma government and the PT and end to corruption. The country cannot go on like this.”

New Zealand’s set to land very hard.

• Auckland Housing Bubble ‘Floats Off Into Its Own Orbit’ (Hickey)

If you are reading this and you don’t own Auckland property, then it would be a good idea not to read any further because it will probably ruin your Sunday. Figures released this week by Barfoot & Thompson, Auckland’s biggest real estate agency group, confirmed everyone’s worst fears (or biggest hopes if they owned property in the city). Auckland’s housing market has officially floated off its New Zealand moorings into its own orbit. The Reserve Bank can now have no doubts or caveats around the seasonality or size of the trend — the housing market in New Zealand’s biggest city is booming. The average three bedroom house price on the isthmus of Auckland that used to be the old Auckland Council rose over NZ$1 million for the first time in March.

The average house price in West Auckland rose 20.5% over the last year to NZ$632,032. Barfoot sold 420 homes worth more than NZ$1 million each in the 31 days of March, while selling just 300 homes for less than NZ$500,000. Barfoot’s agents would have collected almost NZ$1 million of commissions each day in March as they sold over NZ$1.2 billion worth of houses over the month. Auckland house prices are now rising at double digit rates on an annual basis, while the rest of the country is growing at less than 5%, or not at all. Even in Christchurch, house price inflation is subdued as a wall of new houses hits the market to soak up demand and replace quake-damaged buildings. Prices are still falling in some regional cities where populations and work are drying up.

Unfortunately for the Reserve Bank, taxpayers outside of Auckland and Auckland’s renters, there is no relief in sight. Net migration is rollicking along at record highs and at least half of new migrants end up in Auckland, or just as importantly, aren’t leaving Auckland. Longer term fixed mortgage rates are low and falling. Employment growth is strong and rental property investors are stocked up with plenty of fresh equity to gear up with much bigger and often interest-only mortgages. New mortgage lending is growing at over 20% per year.

Bubbles have their own dynamics. Politicians won’t touch them.

• 40% Of Houses In Auckland Are Bought By Investors (Interest.co.nz)

All we are hearing is about supply and what’s being done there, through such strategies as the Auckland Housing Accord. In his Radio NZ interview the PM banged on and on about what the Government is doing to help supply. There’s two issues here: One, it will take years not months to ramp up the supply of Auckland housing. Two, the Government and other politicians can happily talk and talk and talk about supply because it’s essentially a positive thing to talk about. We’ll build houses, and we’ll create jobs and people will have places to live. Marvellous. But, dear politicians, there’s another side to this and it’s the side you don’t want a bar of because if you are seen to be doing anything about this, well, then it would be negative. Yes, I’m talking about demand.

Reserve Bank Governor Graeme Wheeler recently suggested that about 40% of houses in Auckland were being bought by investors. Now, whatever you want to say about Auckland’s perceived housing supply shortage, if 40% of the available houses are being bought as investments then clearly there’s a hell of a demand issue as well. But what’s the Government doing about that? They could immediately do something about about the high levels of immigration that have seen a net 55,000 people arrive in New Zealand – about 25,000 of them in Auckland – in the past 12 months. They could do something to limit the numbers of offshore-based investors buying properties by introducing a rule that any overseas buyer of a house has to come and actually live in the house, or alternatively that offshore investors must build new houses.

They could introduce capital gains tax on investment properties. They won’t. Why not? Because these things would be unpopular. It’s much easier to talk about building new houses than any measures that might discourage investors from pumping more and more money into the inflated Auckland market. So, we’ll keep talking and talking and talking about supply. And who knows, if enough people believe the mantra then maybe there really will be a whole lot more houses built in Auckland eventually – possibly just in time to coincide with a global event that sees our 40% of investor-buyers take fright of the housing market and disappear overnight.

But of course. With exports plunging, the housing bubble is what keeps up appearances.

• New Zealand PM Denies There Is A Housing Bubble (NZ Herald)

Prime Minister John Key has again denied there is a housing crisis or bubble developing in Auckland, despite figures from Barfoot and Thompson last week showing average prices hitting record highs of over NZ$1 million in the old Auckland Council area of the isthmus and the Government itself seeing a supply shortage in Auckland of more than 20,000 dwellings. Key told Morning Report the current double-digit price rises were not sustainable, but the Government had already taken action to free up land supply in Auckland and that restricting migration would frustrate employers looking for skilled staff. “In the end, it’s not sustainable for house prices to rise 10-12-13% per year. The only answer to that is to do what what we’re doing, which is allocate new land and build more houses,” he said, adding continued inflation “forever” at that level would lead to a “bubble”, although he denied it was currently a bubble.

He said the Government’s moves to introduce Special Housing Areas to circumvent the Metropolitan Urban Limit would add new housing supply to the market and slow that double-digit house price inflation, although this would take time while the necessary infrastructure and housing was built. He would not give a time-frame for the supply-driven slowdown in Auckland house price inflation, but “sooner as opposed to later is my guess.” Key referred to the recent supply-driven slowdown in Christchurch house price inflation and downplayed suggestions of tightening migration rules, saying the Government would have to reduce the numbers coming in for skilled occupations and for construction if it was to use the migration lever.

Must read.

• The Shadowy History of the Secret Bank that Runs the World (LeBor)

The world’s most exclusive club has eighteen members. They gather every other month on a Sunday evening at 7 p.m. in conference room E in a circular tower block whose tinted windows overlook the central Basel railway station. Their discussion lasts for one hour, perhaps an hour and a half. Some of those present bring a colleague with them, but the aides rarely speak during this most confidential of conclaves. The meeting closes, the aides leave, and those remaining retire for dinner in the dining room on the eighteenth floor, rightly confident that the food and the wine will be superb. The meal, which continues until 11 p.m. or midnight, is where the real work is done. The protocol and hospitality, honed for more than eight decades, are faultless. Anything said at the dining table, it is understood, is not to be repeated elsewhere.

Few, if any, of those enjoying their haute cuisine and grand cru wines— some of the best Switzerland can offer—would be recognized by passers-by, but they include a good number of the most powerful people in the world. These men—they are almost all men—are central bankers. They have come to Basel to attend the Economic Consultative Committee (ECC) of the Bank for International Settlements (BIS), which is the bank for central banks. Its current members [ZH: as of 2013] include Ben Bernanke, the chairman of the US Federal Reserve; Sir Mervyn King, the governor of the Bank of England; Mario Draghi, of the ECB; Zhou Xiaochuan of the Bank of China; and the central bank governors of Germany, France, Italy, Sweden, Canada, India, and Brazil. Jaime Caruana, a former governor of the Bank of Spain, the BIS’s general manager, joins them.

In early 2013, when this book went to press, King, who is due to step down as governor of the Bank of England in June 2013, chaired the ECC. The ECC, which used to be known as the G-10 governors’ meeting, is the most influential of the BIS’s numerous gatherings, open only to a small, select group of central bankers from advanced economies. The ECC makes recommendations on the membership and organization of the three BIS committees that deal with the global financial system, payments systems, and international markets. The committee also prepares proposals for the Global Economy Meeting and guides its agenda.

Debt Rattle January 18 2015

Jan 182015

January 18, 2015 Posted by Raúl Ilargi Meijer at 11:27 am Finance Tagged with: copper, correction, cyber war, debt, dollar, ECB, fracking, NSA, QE, torture, Ukraine 1 Response »

DPC Main Street north from Sixth, Little Rock, Arkansas 1911

• How The US Dollar Stacks Up Against Major World Currencies (AP)

• This Is The Case For A ‘Large, Sharp Correction’ (CNBC)

• Copper’s Rout May Be A Red Flag (MarketWatch)

• Swiss Central Bank’s Shock Therapy Leaves Policy Vacuum (Reuters)

• Swiss Franc Trade Is Said to Wipe Out Everest’s Main Fund (Bloomberg)

• Making Sense Of The Swiss Shock (Project Syndicate)

• Beware Of Politicians Bearing Household Analogies (Steve Keen)

• Draghi Primes His Rocket, Could End Up Shooting Europe In The Foot (Observer)

• Market to European Central Bank: Size of QE Matters! (CNBC)

• A New Idea Steals Across Europe – Should Greece Debt Be Forgiven? (Observer)

• Ireland ‘Not Dismissive’ Of EU Debt Conference SYRIZA Wants (Kathimirini)

• Aberdeen: In Scotland’s Oil Capital The Party’s Not Yet Over (Observer)

• Buying A Home In Britain Should Not Be An Impossible Dream (Observer)

• Obama’s State Of The Union To Call For Closing Tax Loopholes (Reuters)

• Russia May Lift Food Import Ban From Greece If It Quits EU (TASS)

• Donetsk Shelled As Kiev ‘Orders Massive Fire’ On East Ukraine (RT)

• New Snowden Docs Reveal Scope Of NSA Preparations For Cyber War (Spiegel)

• Guantánamo Diary Exposes Brutality Of US Rendition And Torture (Guardian)

• Price Tag Of Saving The World From A Pandemic: $344 Billion (CNBC)

• Is Lancashire Ready For Its Fracking Revolution? (Observer)

• Pope Francis: Listen To Women, Men Are Too Machista (RT)

“The dollar has soared a staggering 96% against the Russian ruble since June 30.”

• How The US Dollar Stacks Up Against Major World Currencies (AP)

The U.S. dollar has been rolling. Since June 30, its value has jumped 16% against a collection of world currencies. Investors are embracing the dollar because the U.S. economy is strong, especially compared with most other nations. U.S. economic growth clocked in at a 5% annual rate from July through September, the fastest quarterly pace in more than a decade. During 2014, American employers added nearly 3 million jobs, the most in any year since 1999. Investors also like the safety of U.S. Treasurys, which pay a higher yield than government bonds in Japan and most big European countries do. Another lure: The Federal Reserve is expected to raise short-term interest rates this summer or fall, making U.S. rates even more attractive for investors. But the dollar’s strength also reflects weakness elsewhere:

• JAPAN: The dollar is up 16% against the Japanese yen since mid-2014. Japan slid into recession last quarter after the government imposed an ill-timed sales tax increase. The Bank of Japan has tried to revive the economy by buying bonds to lower rates, boost inflation and drive down the value of the yen to aid Japanese exporters.

• EURO: The dollar has surged 18% against the euro since June 30. Economic growth among the 19 countries that use the euro has flat-lined. Last year, the European Central Bank slashed rates and sought to stimulate lending by promising to buy bundles of bank loans. Next week, the ECB is expected to announce a program to buy bonds — a version of what the Fed did three times since 2008 — to lower long-term rates and stimulate the eurozone economy.

• BRAZIL: The dollar has gained nearly 20% against the Brazilian real since the middle of last year. The Brazilian economy is beset by a combination of slow growth and high inflation. The Brazilian Central Bank will likely raise rates next week to try to fight inflation and rally the real, economists at Barclays predict.

• RUSSIA: The dollar has soared a staggering 96% against the Russian ruble since June 30. Plummeting oil prices and economic sanctions have devastated the Russian economy, which is likely headed toward recession. Money is fleeing the country. In mid-December, the Russian central bank raised rates to try to salvage the currency. The move has at least slowed the free-fall.

“People are underestimating what a strong U.S. dollar can do and oil is just one of those things.”

• This Is The Case For A ‘Large, Sharp Correction’ (CNBC)

Pain in the market may just be getting started, according to Raoul Pal of the Global Macro Investor. “The chance of a large sharp correction? Absolutely, because volatility is there and people will be forced to reduce risk, ” Pal said on CNBC’s “Fast Money.” “I would put that as a reasonably high probability that the S&P falls possibly from here down to the 1,800 level.” Pal thinks there will be a lot of volatility in the market this year and currency volatility will be the driving force. He expects the sharp currency moves that have happened globally to hit the U.S. equity markets. A violent move in the Swiss franc on Thursday shook investors as the Switzerland National Bank removed its cap on its currency relative to the euro.

The cap was in place to prevent the franc from gaining ground against the euro while Europe remained in recovery mode. Switzerland has been a beacon of financial stability throughout the euro zone’s recession. Brokerage and financial firms reported millions of dollars of losses from the sudden gains in the Swiss franc on Thursday and that may not be the end of it. Currency swings are an issue at home with the U.S. dollar on a tear over the past year. “The biggest risk to U.S. equities is if the long dollar trades unwind. If that happens, then you may see people unwinding their stock positions as well,” said “Fast Money” trader Brian Kelly.

Pal also believes a strengthening dollar will be part of the U.S. market downfall this year, “People are underestimating what a strong U.S. dollar can do and oil is just one of those things.” Oil is down nearly 10% so far this year and that’s after a 45% drop in 2014. Pal isn’t alone in pointing to hard times ahead in the market. On Wednesday, Dennis Gartman told Fast Money he was now net short of stocks. “As of this afternoon, I am slightly, very slightly net short.” As the markets sold off, Gartman did say that he was long the tanker stocks, which had managed to rise on the back of falling oil prices.

Chinese data coming this week.

• Copper’s Rout May Be A Red Flag (MarketWatch)

Economists are bullish on growth, but copper’s big plunge on Wednesday appeared to be suggesting that +they’re wrong. For investors, the crucial question is ‘Who is right?’ An ugly 24-hour period drove copper to mid-2009 lows on Wednesday—it fell 5% to $2.1590 a pound. In New York on Tuesday, copper fell 8 cents, but the big crack came later in that day when it crashed through key support at $6,000 a tonne on the London Metal Exchange. That drop was followed by heavy falls in Shanghai on Wednesday, said Ole Hansen, Saxo Bank’s head of commodity strategy.

Known as Dr Copper, the commodity is a chief building and manufacturing material and to some a harbinger of the global economy. So when investors start to bail on it, some say that is a sign of the proverbial canary in the coal mine is starting to keel over. Some blamed copper’s losses on the World Bank, which cut its global-growth outlook, including for China, a country that is a big global buyer of copper. Investors inured to oil serving as the whipping boy for the market’s global-growth worries, were taken aback by yet another commodity caving. Copper falling alone would be less of a worry for Adam Sarhan, chief executive officer of Sarhan Capital. A range of commodities, hard and soft, have joined oil lower: gasoline, corn, sugar, to name a few, Sarhan said.

A combination of this pressure “supports that notion that deflation is getting stronger not weaker and if that is the case then that bodes poorly for both main street and Wall Street,” he said. For its part, oil has lost nearly 60% of its value since peaking in June. Equally concerned was Keith McCullough, CEO of Hedgeye Risk Management, who says he has been telling his clients to short copper for months. “Oil, copper, etc.—they are all legacy carry trades associated with the simple expectation that the Fed could perpetually inflate asset prices,” he said. “Now deflation is dominating expectations, and all of those who underestimated how nasty the deleveraging associated with deflation can be,” said McCullough.

“.. a serious threat for tens of thousands of Swiss jobs.”

• Swiss Central Bank’s Shock Therapy Leaves Policy Vacuum (Reuters)

The Swiss National Bank had little choice but to abandon its three-year-old cap on the franc but its execution of the move left a vacuum of policy uncertainty where a pillar of stability stood before. With the euro diving against the dollar as the European Central Bank gears up for fresh stimulus as early as next week, the SNB felt the 1.20-francs-per-euro cap was not sustainable and chose to give it up rather than accumulate further risk. Yet in pulling off the move, the SNB – a conservative institution in a safe-haven state – failed to tip off its peers and shocked investors, who were left wondering whether central banks are now less a source of stability and more one of a risk. “The bottom line: central banks are a lot less predictable than in the past few years,” said Christian Gattiker, chief strategist at Swiss bank Julius Baer. The SNB, whose three board members make their decisions behind closed doors, acted in isolation.

IMF Managing Director Christine Lagarde lamented the lack of a warning from SNB Chairman Thomas Jordan. “I find it a bit surprising that he did not contact me,” she said. For ECB policymaker Ewald Nowotny, the move was “a surprising decision”. In contrast with the ECB, which has 25 policymakers from across the continent who debate major decisions, just three men call the shots at the SNB, albeit in consultation with staff advisers. Details of ECB policy debates often leak because of the large numbers of officials also involved; if President Mario Draghi announces next week that the ECB is to launch quantitative easing, he will surprise no one. Draghi has made no secret of the fact that such a programme is under discussion on the ECB Governing Council.

While officials at central banks generally play down the idea that they offer each other advance notice, they almost always prepare financial markets, businesses and each other for important policy shifts by openly discussing their thinking in the run up to any move. But Adam Posen, a former Bank of England official who heads the Peterson Institute for Economics in Washington, said transparency at times needed to be sacrificed. “Central bank communication is overrated,” Posen said at an event in Washington when asked about the SNB’s move. It’s more important to get a policy right than to stick to a “foolish consistency” of communicating everything, he said. For exporters and the tourism industry in Switzerland, the move that has led to a near 18% rise in the franc against the euro is far from understandable. Christian Levrat, president of the left-wing Social Democrat party, called the move “a serious threat for tens of thousands of Swiss jobs”.

And many more.

• Swiss Franc Trade Is Said to Wipe Out Everest’s Main Fund (Bloomberg)

Marko Dimitrijevic, the hedge fund manager who survived at least five emerging market debt crises, is closing his largest hedge fund after losing virtually all its money this week when the Swiss National Bank unexpectedly let the franc trade freely against the euro, according to a person familiar with the firm. Everest Capital’s Global Fund had about $830 million in assets as of the end of December, according to a client report. The Miami-based firm, which specializes in emerging markets, still manages seven funds with about $2.2 billion in assets. The global fund, the firm’s oldest, was betting the Swiss franc would decline. The SNB’s decision to end its three-year policy of capping the franc at 1.20 a euro triggered losses at Citigroup, Deutsche Bank and Barclays as well as hedge funds and mutual funds.

The franc surged as much as 41% versus the euro on Jan. 15, the biggest gain on record, and climbed more than 15% against all of the more than 150 currencies tracked by Bloomberg. Everest grew to $2.7 billion by the start of 1998 after navigating crises in Mexico and Southeast Asia. Russia’s default and currency devaluation proved trickier and assets fell by half amid losses. He revived the firm and a decade later Everest managed $3 billion. Then the global financial crisis hit, and assets shrunk by $1 billion. Last year, the main fund rose 14.1%, driven by Chinese equities and bets against currencies, including a wager that the Swiss franc would fall after citizens rejected a referendum that would require the central bank to hold at least 20% of its assets in gold, the investor report said.

“The negative effects for the Swiss economy – through the decreased competiveness of its export industries (including tourism and medicine) – may already be showing that abandoning the euro peg was not a good idea.”

• Making Sense Of The Swiss Shock (Project Syndicate)

There is historical precedent for the victory of political pressure, and for the recent Swiss action. In the late 1960s, the Bundesbank had to buy dollar assets in order to stop the Deutsche mark from rising, and to preserve the integrity of its fixed exchange rate. The discussion in Germany focused on the risks to the Bundesbank’s balance sheet, as well as on the inflationary pressures that came from the currency peg. Some German conservatives at the time would have liked to buy gold, but the Bundesbank had promised the Fed that it would not put the dollar under downward pressure by selling its reserves for gold. In 1969, Germany unilaterally revalued the Deutsche mark. But that was not enough to stop inflows of foreign currency, and the Bundesbank was obliged to continue to intervene. It continued to reduce its interest rate, but the inflows persisted. In May 1971, the German government – against the wishes of the Bundesbank – abandoned the dollar peg altogether and floated the currency.

Politics had prevailed over central-bank commitments. Within three months, the fallout destroyed the entire international monetary system, and US President Richard Nixon took the dollar off the gold standard. The credibility of the entire system of central bank commitments had collapsed, and international monetary policy became extremely unstable. The Deutsche mark appreciated, and life became very hard for German exporters. Today, the global ramifications of a major central bank’s actions are much more pronounced than in 1971. When the Bundesbank acted unilaterally, German banks were not very international. But now finance is global, implying large balance-sheet exposures to currency swings. Big Swiss banks fund themselves in Swiss francs, because so many people everywhere want the security of franc assets. They then acquire assets worldwide, in other currencies. When the exchange rate changes abruptly, the banks face large losses – a large-scale version of naive Hungarian homeowners’ strategy of borrowing in Swiss francs to finance their mortgages.

Though the SNB had given many warnings that the euro peg was not permanent, and though it had imposed a higher capital ratio on banks, the uncoupling from the euro came as a huge shock. Swiss bank shares fell faster than the general Swiss index. The risks created by the SNB’s decision – as transmitted through the financial system – have a fat tail. The negative effects for the Swiss economy – through the decreased competiveness of its export industries (including tourism and medicine) – may already be showing that abandoning the euro peg was not a good idea. But the consequences will not be limited to Switzerland. After years of wondering whether the exit of a small, fiscally weak country like Greece could undermine the euro, policymakers will have to deal with an even bigger shock stemming from the exit of a small, fiscally strong country that is not even a member of the European Union.

Steve’s first piece for Forbes.

• Beware Of Politicians Bearing Household Analogies (Steve Keen)

The British election campaign has begun, and Prime Minister David Cameron is running with the slogan that his Conservative Party will deliver “A Britain living within its means” by running a surplus on day-to-day government spending by 2017/18. It is, as the UK Telegraph noted, hardly an inspiring slogan. But it is one that resonates with voters, because it sounds like the way they would like to manage their own households. And a household budget—whether you balance yours or not—is something we can all understand. If a household spends less than it earns, it can save money, or pay down its debt, or both. So it has to be good if a country does the same thing, right? If only it worked that way. In fact, a government surplus has the opposite effect on Joe Public: a government surplus means that the public has to either run down its savings, or increase its debt.

And if the government runs a sustained surplus, then—unless the country in question has a huge export surplus, like Japan or Germany—a financial crisis is inevitable. That’s the opposite of what both politicians and most of the public think that running a government surplus will achieve—and yet it’s easy to prove that that is the outcome a sustained surplus will lead to. Firstly, a government surplus means that, in a given year, the taxes the government imposes on the public exceed the money it spends (and gives) to the public. There is therefore a net flow of money from the public to the government. As a once-off, that doesn’t have to be a problem. But if it’s sustained for many years, then the public has to provide a continuous flow of money to the government. Let’s call this flow NetGov: a sustained surplus requires the situation shown in Figure 1 (where a deficit is shown in red and a surplus in black).

Figure 1: A sustained government surplus requires the private sector to supply the government with a continuous flow of money

One way that the public can do this is to run down its own money stock—to reduce its savings. But that’s the opposite of what the policy is intended to achieve: the expectation of enthusiasts for government surpluses is that it will enable the public to save more, not less. But as a simple matter of accounting, increased public savings—increased balances in the public’s bank accounts—are only compatible with a government surplus if the public can produce more money than it pays to the government to maintain its surplus. This raises the question “how does the public produce money?”. Anyone in the private sector can produce goods and services for sale, but the production of money is a very different thing to production of goods. The public in general can’t “produce money”—but the banks can.

Draghi should leave, and Weidmann be appointed head of the ECB.

• Draghi Primes His Rocket, Could End Up Shooting Europe In The Foot (Observer)

Mario Draghi, the urbane boss of the European Central Bank, is about to print hundreds of billions of euros to rescue the faltering continental economy. The City expects him to launch his financial bazooka, otherwise known as quantitative easing (QE), on Thursday after the central bank governing council’s monthly meeting. His hand was forced last week by events in Zurich, where his Swiss counterpart said the policy of pegging the franc to the euro was no longer tenable. The markets were impatient for QE, the Swiss central bank chief said – they have already waited months for a decision. The ECB funds will begin to flow six years after the world’s other major economies adopted QE. The US has spent around $4 trillion, the UK £375bn, and last year the Japanese promised to spend almost $700bn a year, up from $560bn in 2013.

If Draghi goes ahead, the Super-Mario headlines will proliferate across Europe and gigabytes of the web will be devoted to analysing the consequences of the move for the 19-member currency zone – and for its trading partners, such as the UK. The ECB’s aim is to flood the eurozone banking system with money to boost lending after a collapse in the value of consumer and business borrowing. Draghi’s supporters say the very fact of taking action will increase confidence and invigorate a stuttering economic bloc. According to this argument, Brussels has done little apart from impose austerity. Now, with the ECB throwing its weight behind a strategy for growth, confidence and spending will begin to rise.

QE has clearly played a big part in rescuing the global economic system after the crash. But its usefulness as a spur for growth is less clear. As Labour’s Ed Balls has said, governments need to step in with their own funds – albeit borrowed – for investment that ensures growth is sustainable. QE is like an adrenalin shot to revive a stricken patient. It is useless when the patient is in recovery and crying out for something more substantial. But persistently printing vast quantities of a currency has one major effect. It drives down its value against other currencies. Since Christmas, the yen has been trading 50% below where it was in October 2012 against the dollar. That means Japanese exports of cars, TVs and kimonos cost 50% less in the US and, just as importantly, in China, which has pegged the renminbi to the dollar.

No, it doesn’t. Well, other than for bringing down the euro. All else has long been priced in.

• Market to European Central Bank: Size of QE Matters! (CNBC)

Earnings and economic reports all take a back seat to the European Central Bank in the holiday-shortened trading week ahead. Investors are looking to the ECB to on Thursday announce a program of government bond purchases, or quantitative easing. “The only thing that is important next week is the ECB meeting,” Mark Luschini, chief investment strategist at Janney Montgomery Scott, said. “The ECB is going to be the biggest driver next week, what they decide to do as far as rates and their QE should have a big impact on global markets,” said Paul Nolte at Kingsview Asset Management.

“The markets are expecting a very impressive QE, a la United States, a la Japan. Some investors may be playing both sides, and by that I mean playing for a big move. If they do come down with a big package, global markets will rally strongly, if they don’t do much of anything, you could see markets fall apart,” Nolte said. “There’s a huge amount of anticipation, and a lot of volatility around this ECB decision on Thursday. It’ll be a combination of what they say they’re going to do, and their intentions after that,” Scott Wren, senior equity strategist at Wells Fargo Investment Institute, said.

“I think the ECB will act next week, and make some type of announcement. But the market is likely to be disappointed by the magnitude that the ECB initially says they’re going to do, as the market would like to see a trillion. Let’s say they come out with €500 billion, and some sort of statement of more”. Switzerland’s central bank upended markets Thursday by removing its cap on the Swiss franc versus the euro, with the action viewed as a preemptive one to shield its currency from pressure should the ECB make a move. “I suspect (ECB President Mario) Draghi gave a wink to the Swiss National Bank and allowed them to get in front of that, the question mark at this juncture is the order of magnitude. The market is vulnerable to an underwhelming response. The key, basically, is trying to restore the balance sheet to 2012 levels, so we’d have to at least have to see €1.3 trillion,” Luschini said.

“The country’s overall debt burden has actually increased in the almost five years since it was first “rescued..”

• A New Idea Steals Across Europe – Should Greece Debt Be Forgiven? (Observer)

Forgiveness: it’s a rare enough quality in family life, let alone international policymaking. But if, as the polls suggest, the populist Syriza party wins next weekend’s Greek election, Athens will be asking its European brothers and sisters to forgive and forget some of the €317bn (£240bn) it still owes, so that its economy – and society – can recover from more than six years of austerity and recession. Instead of the defiant tone that once saw Syriza’s leader, Alexis Tsipras, threatening to ditch the euro altogether, the party now hopes to negotiate an agreement with Germany and other creditors that could allow Greece to remain in the single currency – but set it on the path to recovery.

London-based pressure group Jubilee Debt Campaign, which has studied the fate of heavily indebted countries around the world, says Greece is right to demand a more generous approach from its creditors, because although it has received an extraordinary €252bn in bailouts since 2010, just 10% of that has found its way into public spending. Much of the rest poured straight back out of the country: in debt repayments and interest to its creditors, many of them banks and hedge funds in the core eurozone countries, including Germany and France; and in sweeteners to persuade lenders to sign up to the 2012 bond restructuring that helped prevent the country crashing out of the euro. In effect, the “troika” of the European Central Bank, the International Monetary Fund and the European commission has simply replaced the banks and the hedge funds as Greece’s paymasters.

The country’s overall debt burden has actually increased in the almost five years since it was first “rescued”, and of the amount still outstanding, 78% is now owed to public sector institutions, primarily the EU. Stephany Griffith-Jones, an economist who is an expert on debt crises in developing countries, says: “They have got quite a lot of relief already; but a lot of that money that came to the government has gone to servicing the debt, including to the private banks. It wasn’t really money to help the Greeks. This is exactly like when I used to study Latin America in the 1980s: then, it was American and British banks, now it’s German and French banks.”

Of coursethere should be such a conference. A fully public one.

• Ireland ‘Not Dismissive’ Of EU Debt Conference SYRIZA Wants (Kathimirini)

SYRIZA leader Alexis Tsipras has seized on comments by Irish Finance Minister Michael Noonan as evidence that not just “progressive economists and the European Left” are coming round to his party’s argument that the European Union needs to hold a meeting to discuss how to reduce the debt of some of its members, including Greece. “In all of Europe, only Mr Samaras called this nonsene,” wrote Tsipras in Sunday’s Kathimerini. The Irish Times reported on Wednesday that Noonan told Irish ambassadors and civil servants he “would not be dismissive” of a European debt conference being held as long as the issue of Irish, Spanish and Portuguese debt could be discussed.

“.. nobody believes the party’s over. That’s probably because most employees are older than 40 and have golden handshakes on a Midas scale.”

• Aberdeen: In Scotland’s Oil Capital The Party’s Not Yet Over (Observer)

It has been a strange old week in the self-proclaimed oil capital of Europe. According to some members of Aberdeen’s energy sector, a group with a code of silence that would trump any Trappist throng, the North Sea is a busted flush, a dead zone of drilled-out fields with a long-term future to match. There will certainly be some transient pain in the industry; BP has confirmed 300 job losses and other subsidiaries will view the plummeting price of oil as a wonderful opportunity to trim any perceived excess fat. But if there is any panic in Aberdeen over the end of the gravy train, it is being well concealed. One executive told me on Friday: “Times are tough. And they might get tougher.” But nobody believes the party’s over. That’s probably because most employees are older than 40 and have golden handshakes on a Midas scale.

I walked along Aberdeen’s Union Street last week and one particular image struck me. It’s a once-glorious, now-dowdy thoroughfare with a few refulgent granite buildings surrounded by an excess of eyesores. On one side of the street, the Pound Shop announced that it was closing; on the other, the staff at the recently opened Eclectic Fizz champagne bar were preparing to welcome their steady stream of customers. At another location just outside the city on Thursday evening, a few hours after the BP news had broken, a group of four senior oil officials awaited their trip to the airport in Dyce. After a few minutes, four separate cabs arrived to pick them up: it didn’t matter the quartet were all travelling to the same destination. It may be a recession, Jim. But in Aberdeen, not as we usually know it.

‘To make the impossible possible. To rise, and rise”

• Buying A Home In Britain Should Not Be An Impossible Dream (Observer)

‘To make the impossible possible. To rise, and rise”. Uttered in a movie-trailer tone, it sounds like the mission statement for a Mars probe – but, set against the backdrop of the twinkling lights of night-time London, it’s actually the voiceover for a particularly obnoxious Redrow ad for flats in one of the capital’s now-ubiquitous glass and steel skyscrapers, launched and hastily withdrawn earlier this month after a furious outburst on social media. Its sharply suited, go-getting protagonist is whisked through the streets in a cab, reminiscing about all the hours he had to put in (“the mornings … that felt like night”); the calls from mates he was forced to ignore; and the terrible soul-searching he had to endure to succeed (apparently he felt the urge to “be more than individual”).

Without encountering another soul, our hero strides into an anonymous lobby and is whisked up to a vast, sparkling eyrie, worthy of a Bond villain’s hideout. An outraged viewer captured the ad for posterity; rival builder Berkeley Homes pulled its own equally nauseating effort (this one involving a private jet) a few days later. Prices for apartments at One Blackfriars, the tower block being marketed by Berkeley, range up to £23m. And judging by the ad, its lucky inhabitants in their hermetically sealed penthouses will never have to rub shoulders with hoi polloi down at ground level. It’s hard to think of a more powerful symbol of Britain’s divisive, winner-takes-all property market. Of course, the rich have always been with us, and to some extent have always cut themselves off. Strolling through the Geffrye Museum in east London recently, I was intrigued by a painting from 1936.

An elegant, bejewelled woman in a shimmering gown peers languorously out on to a crowded London thoroughfare, perhaps Regent Street or Piccadilly, from a plush, warmly lit salon, while a man faces away from the window with studied nonchalance, blowing smoke rings. Only on reading the inscription does it become clear that the lively scene outside the window is not a celebration or a festival, but the arrival of the Jarrow marchers. Britain in the 21st century is a very long way from the Great Depression; yet that well-heeled couple’s cosy imperviousness to their fellow humans’ suffering is all there in the “because I’m worth it” high-rise property porn churned out by Redrow, Berkeley and the rest (“They said nothing comes easy; but if it was easy, then it wouldn’t feel as good,” goes the voiceover).

Yada yada.

• Obama Speech To Call For Closing Tax Loopholes (Reuters)

– President Barack Obama’s State of the Union address will propose closing multibillion-dollar tax loopholes used by the wealthiest Americans, imposing a fee on big financial firms and then using the revenue to benefit the middle class, senior administration officials said on Saturday. Obama’s annual address to a joint session of Congress on Tuesday night will continue his theme of income equality, and the administration is optimistic it will find some bipartisan support in the Republican-dominated House of Representatives and Senate. The proposals administration officials listed on Saturday may still generate significant opposition from the Republicans because they would increase taxes.

In a conference call with reporters to preview the taxation aspect of Obama’s address, one official said some of the ideas the president is outlining already have “clear congressional bipartisan support or are ideas that are actually bipartisan in their nature.” Obama’s proposals call for reforming tax rules on trust funds, which the administration called “the single largest capital gains tax loophole” because it allows assets to be passed down untaxed to heirs of the richest Americans. They also would raise the capital gains and dividends rates to 28 percent, the level during the 1980s Republican presidency of Ronald Reagan. As a way of managing financial risk that could threaten the U.S. economy, Obama also wants to impose a fee of seven basis points on the liabilities of U.S. financial firms with assets of more than $50 billion, making it more costly for them to borrow heavily.

The changes on trust funds and capital gains, along with the fee on financial firms, would generate about $320 billion over 10 years, which would more than pay for benefits Obama wants to provide for the middle class, the official said. The benefits mentioned on Saturday would include a $500 credit for families with two working spouses, tripling the tax credit for child care to $3,000 per child, consolidating education tax incentives and making it easier for workers to save automatically for retirement if their employer does not offer a plan. The price tag on those benefits, plus a plan for free tuition at community colleges that Obama announced last week, would be about $235 billion, the official said. Specifics on the figures will be included in the budget Obama will send to Congress on Feb. 2. “We’re proposing more than enough to offset the new incremental costs of our proposals without increasing the deficit,” the administration official said.

Greece has historically had close ties to Russia.

• Russia May Lift Food Import Ban From Greece If It Quits EU (TASS)

Russia may lift its ban on food imports from Greece in the event it quits the European Union, Russian Minister of Agriculture Nikolai Fyodorov told a news conference in Berlin on Friday. Fyodorov is leading an official Russian delegation to the International Green Week public exhibition for the food, agriculture, and gardening industry. If Greece has to leave the European Union, we will build our own relations with it, the food ban will not be applicable to it, he said. He said that European Union countries, which felt discomfort from the slump in proceeds from exports of foods to Russia, were asking Russia to cushion the impacts of the Russian food import ban by expanding other types of imports.

We are looking at such possibility, he said, adding that these countries offer new formats of cooperation in those areas that are not covered by the Russian food sanctions. Meanwhile he stressed that Russia did not plan to toughen its sanctions. As concerns possible new sanctions, we are not looking at any such proposals from any structures, he added. Earlier on Friday, Fyodorov met with his German counterpart, Christian Schmidt, to discuss possible expansion of cooperation and mutual trade in agricultural products. The two ministers agreed that Russia and Germany may expand mutual trade in food products in the framework of the current laws.

“We cannot solve pressing political problems, but we can maintain dialogue in the current conditions, the German minister said. We can make trade between our countries more intensive. The Russian minister shared this opinion saying, the Berlin exhibitions was a non-political event working on problems of food security. We discussed possible expansion of cooperation and mutual trade in agricultural products and agreed to work in the new conditions strictly within the frameworks of the current legislation of Russia, the Customs Union, Germany and the European Union, Fyodorov said.

This is effectively the US and EU killing women and children.

• Donetsk Shelled As Kiev ‘Orders Massive Fire’ On East Ukraine (RT)

Violence escalated in eastern Ukraine as Kiev’s troops launched a massive assault on militia-held areas Sunday morning. The army was ordered to start massive shelling of all rebel positions, a presidential aide said. The order to launch the offensive was issued early approximately at 6:00 am, according to Yury Biryukov, an aide to President Petro Poroshenko. “Today we will show HOW good we are at jabbing in the teeth,” he wrote on his Facebook page, a mode of conveying information favored by many Ukrainian officials. In a later post he said: “They are now striking a dot. Uuu…” in a reference to Tochka-U (‘tochka’ means ‘dot’ in Russian), a tactical ballistic missile, one of the most powerful weapons Ukraine so far deployed against rebel forces. “That wasn’t a dot but ellipsis. Strong booms,” he added.

Reports from the ground confirmed a sharp escalation of clashes across the front line, with particularly heavy artillery fire reported at Gorlovka. “Locals in Donetsk said they haven’t heard such intensive shelling since summer,” Valentin Motuzenko, a military official in the self-proclaimed Donetsk People’s Republic, told Interfax news agency. “The Ukrainian military are using all kinds of weapons, Grad multiple rocket launchers, mortars…” Motuzenko said. Several residential buildings, a shop and a bus station have been seriously damaged by artillery fire in the city, RIA Novosti reported. There were also reports of attacks on the town of Makeevka and several nearby villages. The militia added that at least one shell hit a residential area in central Donetsk rather than the outskirts of the city. There were no immediate reports of how many casualties resulted from the offensive.

“Canadian media theorist Marshall McLuhan foresaw these developments decades ago. In 1970, he wrote, “World War III is a guerrilla information war with no division between military and civilian participation.”

• New Snowden Docs Reveal Scope Of NSA Preparations For Cyber War (Spiegel)

[..] the intelligence service isn’t just trying to achieve mass surveillance of Internet communication, either. The digital spies of the Five Eyes alliance – comprised of the United States, Britain, Canada, Australia and New Zealand – want more. According to top secret documents from the archive of NSA whistleblower Edward Snowden seen exclusively by SPIEGEL, they are planning for wars of the future in which the Internet will play a critical role, with the aim of being able to use the net to paralyze computer networks and, by doing so, potentially all the infrastructure they control, including power and water supplies, factories, airports or the flow of money. During the 20th century, scientists developed so-called ABC weapons – atomic, biological and chemical. It took decades before their deployment could be regulated and, at least partly, outlawed.

New digital weapons have now been developed for the war on the Internet. But there are almost no international conventions or supervisory authorities for these D weapons, and the only law that applies is the survival of the fittest. Canadian media theorist Marshall McLuhan foresaw these developments decades ago. In 1970, he wrote, “World War III is a guerrilla information war with no division between military and civilian participation.” That’s precisely the reality that spies are preparing for today. The US Army, Navy, Marines and Air Force have already established their own cyber forces, but it is the NSA, also officially a military agency, that is taking the lead. It’s no coincidence that the director of the NSA also serves as the head of the US Cyber Command. The country’s leading data spy, Admiral Michael Rogers, is also its chief cyber warrior and his close to 40,000 employees are responsible for both digital spying and destructive network attacks.

From a military perspective, surveillance of the Internet is merely “Phase 0” in the US digital war strategy. Internal NSA documents indicate that it is the prerequisite for everything that follows. They show that the aim of the surveillance is to detect vulnerabilities in enemy systems. Once “stealthy implants” have been placed to infiltrate enemy systems, thus allowing “permanent accesses,” then Phase Three has been achieved – a phase headed by the word “dominate” in the documents. This enables them to “control/destroy critical systems & networks at will through pre-positioned accesses (laid in Phase 0).” Critical infrastructure is considered by the agency to be anything that is important in keeping a society running: energy, communications and transportation. The internal documents state that the ultimate goal is “real time controlled escalation”.

Chilling.

• Guantánamo Diary Exposes Brutality Of US Rendition And Torture (Guardian)

The groundbreaking memoir of a current Guantánamo inmate that lays bare the harrowing details of the US rendition and torture programme from the perspective of one of its victims is to be published next week after a six-year battle for the manuscript to be declassified. Guantánamo Diary, the first book written by a still imprisoned detainee, is being published in 20 countries and has been serialised by the Guardian amid renewed calls by civil liberty campaigners for its author’s release. Mohamedou Ould Slahi describes a world tour of torture and humiliation that began in his native Mauritania more than 13 years ago and progressed through Jordan and Afghanistan before he was consigned to US detention in Guantánamo, Cuba, in August 2002 as prisoner number 760. US military officials told the Guardian this week that despite never being prosecuted and being cleared for release by a judge in 2010, he is unlikely to be released in the next year.

The journal, which Slahi handwrote in English, details how he was subjected to sleep deprivation, death threats, sexual humiliation and intimations that his torturers would go after his mother. After enduring this, he was subjected to “additional interrogation techniques” personally approved by the then US defence secretary, Donald Rumsfeld. He was blindfolded, forced to drink salt water, and then taken out to sea on a high-speed boat where he was beaten for three hours while immersed in ice. The end product of the torture, he writes, was lies. Slahi made a number of false confessions in an attempt to end the torment, telling interrogators he planned to blow up the CN Tower in Toronto. Asked if he was telling the truth, he replied: “I don’t care as long as you are pleased. So if you want to buy, I am selling.”

“.. a massive flu outbreak could cost anywhere between $71 billion to $166.5 billion.”

• Price Tag Of Saving The World From A Pandemic: $344 Billion (CNBC)

Infectious diseases are incubating everywhere across the world—ranging from the deadly Ebola virus to the more common yet debilitating influenza—to often devastating effect. It raises the question of how large a premium should world governments pay to insulate their economies from global pandemics. Would you believe $343.7 billion? That eye-popping figure is one of several takeaways of a group of scholars calling for a “global strategy” to mitigate the impact of threats to public health. In a recent paper published in the Proceedings of the National Academy of Sciences (PNAS) journal, economists and public health experts said emerging pandemics were increasing in their virulence and frequency.

The grim circumstances, which include the Ebola outbreak ravaging parts of Africa and an increasingly tough flu season in the U.S., calls for “globally coordinated strategies to combat” the hydra-headed threats posed by widespread disease—which the scientists say have their origins in animals. By pooling resources and implementing a host of programs and policies, governments could curtail the spread of infectious viruses by 50% if the measures were implemented within a 27-year span, the paper said. Of course, there’s the matter of the price tag, which is more than South Africa’s nominal GDP and is nearly as large as the U.S. Defense Department’s fiscal year 2015 budget. In response to questions, co-author Peter Daszak said the money would be funneled into “mitigation programs” that isolate the first cluster of cases at their source. The funds would also be spent on hospitals and diagnostic labs in West Africa, and creating a web of information to identify and track diseases. [..]

The study arrives at a time when public health officials are struggling to contain a blitz of mysterious outbreaks. In recent months, isolated cases of Ebola, Legionnnaire’s disease, enterovirus and Chikungunya—all sicknesses most common in developing economies—have all appeared in the U.S. In the larger scheme, the nearly $344 billion call to arms may be a reasonable price to pay to prevent yet another shock to global growth, one that’s already taking a heavy toll on African economies. In a December study, the World Bank said West Africa’s Ebola pandemic had shaved off about two-thirds of Liberia’s and Sierra Leone’s growth. For those who think the flu isn’t that pernicious, think again: A Centers for Disease Control study once estimated that a massive flu outbreak could cost anywhere between $71 billion to $166.5 billion.

Absolute madness.

• Is Lancashire Ready For Its Fracking Revolution? (Observer)

The Fylde, the flat, rich pasture land and villages stretching from Preston and the M6 to the Blackpool coast, is set to host the UK’s first full-scale fracking exploration, if Lancashire county council gives planning permission at the end of January. Nationally David Cameron and the government have declared they are “going all out” for fracking, hoping to emulate the shale gas revolution in the US. But on the frontline the mood is more equivocal. Fears of the effects on health and plummeting house prices compete with the promise of jobs and money for communities, accompanied by accusations of misinformation and hysteria from both sides.

The site owned by Sanderson’s uncle and aunt is near Roseacre, and as you wind down the pot-holed lanes towards it, past the huge communication masts of the Royal Navy’s Inskip site, placards of opposition appear: “Don’t frack with Fylde”, “Health not wealth” and “What price fracking? Clean air? Clean water?” At the site, an unspectacular stretch of grassland whose only current features are a black water butt and a dull rumble from the M55, Cuadrilla’s head of well development, Eric Vaughan, explains the company’s plans for up to four wells, each of which would see dozens of fracking blasts to release gas. “I am excited we may finally get going again,” he says. “You have to be optimistic. We have tried to answer every question. Hopefully the planning permission will go through, so we can show people what it really looks like.”

A single frack at Cuadrilla’s Preese Hall site on the Fylde in 2011 produced good flow results, says Vaughan, but it also produced two small earthquakes, a government investigation and a false start for the company. “Because we had the earthquake, we decided to abandon that well,” says Vaughan, who is originally from Kentucky and for the past 30 years has been fracking all over the world, from the US to Thailand to Turkmenistan. Fracking at Roseacre, and at a second proposed site at nearby Preston New Road, will be under way by Christmas, if all goes Cuadrilla’s way. On Friday, the Environment Agency granted the environmental permits Cuadrilla needs for Preston New Road, and has already said it is minded to grant the permits for Roseacre as well.

So true.

• Pope Francis: Listen To Women, Men Are Too Machista (RT)

Pope Francis has called on men to listen to women as they have “much to tell us.” Women are able to ask questions that men can’t grasp, the pontiff told an audience in the Philippines, where his comments drew instant applause. “Women have much to tell us in today’s society,” Francis told a mostly male audience at the Catholic University of Santo Tomas in Manila, on the last day of a weeklong visit to Philippines and Sri Lanka. His impromptu comments were welcomed with applause from the audience, which according to organizers’ estimates was 30,000 people. “At times we men are too ‘machista’, the Argentinian pontiff said using word for the term for extreme male chauvinism in his native Spanish. According to the 78-year-old Catholic leader, we “don’t allow room for women but women are capable of seeing things with a different angle from us, with a different eye.”

His comments come after he noted that four out of five people who asked him questions on the stage were male. “There is only a small representation of females here, too little,” he said, to laughter. He added that it was a 12-year-old girl who posed the toughest question to him. Glyzelle Palomar, who was living on the streets before being taken in by a church charity, broke into tears when she was posing her question. “Many children are abandoned by their parents. Many children get involved in drugs and prostitution. Why does God allow these things to happen to us? The children are not guilty of anything,” Palomar said. Francis took her into his arms and hugged her for a few seconds. “She is the only one who has put a question for which there is no answer and she wasn’t even able to express it in words, but in tears,” he said.