May 142018
 
 May 14, 2018  Posted by at 8:56 am Finance Tagged with: , , , , , , , , , , , ,  


Alfred Wertheimer Elvis 1956

 

S&P 500 Should Be 1,000+ Points Lower Than Today – David Rosenberg (MW)
Why I Think the Stock Market Cannot Crash in 2018 (WS)
Italy’s Nascent Government Has Tough Economic Circles To Square (R.)
US Threatens European Companies With Sanctions After Iran Deal Pullout (G.)
May Faces Deadlock Over Brexit Customs Rules As Both Options Rubbished (Ind.)
Shoppers Desert UK High Streets (G.)
UK Metropolitan Police’s Facial Recognition Technology 98% Inaccurate (Ind.)
UK To Host Summit On Why Six Other Countries Should Join The EU (Ind.)
Xi Might Join Trump And Kim In Singapore (MS)
Prosecutors Seek Complete Media Ban On Cardinal George Pell Trial (NM)
Greek Pensions Under €1,000 Will Also Be Cut In 2019 (K.)
Greece Considers Boosting Capacity Of Refugee Centers

 

 

“..there are some serious people out there saying some very serious things about the longevity of the cycle..”

S&P 500 Should Be 1,000+ Points Lower Than Today – David Rosenberg (MW)

A reversion to the mean in U.S. stock prices could mean the market will fall by at least 20%, according to David Rosenberg of Gluskin Sheff and Associates, who gave his prediction at the Strategic Investment Conference 2018 in San Diego. Rosenberg, the chief economist and strategist at Toronto-based Gluskin Sheff, said this is one of the strangest securities-market rallies of all time. That’s because all asset classes have gone up, even ones that are inversely correlated. He thinks a breaking point is a year away, and so investors should start taking precautions now.

The beginning of this year started off great for investors. The S&P 500 Index hit record highs at around 2,750 points, and stocks had their best January since 1987. As if that was not enough, Rosenberg pointed out, many Wall Street strategists raised their target to 3,000. The media extrapolating record returns only added to the rise in investors’ unreasonable expectations. However, increasingly more hedge fund managers and billionaire investors who timed the previous crashes are backing out.

One of them is Sam Zell, a billionaire real estate investor, whom Rosenberg says is a “hero” of his. Zell predicted the 2008 financial crisis, eight months early. But, essentially, he was right. Today, his view is that valuations are at record highs. Then we have Howard Marks, a billionaire American investor who is the co-founder and co-chairman of Oaktree Capital Management. He seconds Zell’s view that valuations are unreasonably high and says the easy money has been made. “And I don’t always try to seek out corroborating evidence. But there are some serious people out there saying some very serious things about the longevity of the cycle,” said Rosenberg.

According to Rosenberg’s calculations, the S&P 500 should be at least 1,000 points lower than it is today based on economic growth. In spite of this, equity valuations sit at record highs. Another historically accurate indicator that predicts the end of bull cycles is household net worth’s share of personal disposable income. As you can see in the chart below, the last two peaks in this ratio almost perfectly coincided with the dot-com crash and the 2008 financial crisis.

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There is no market.

Why I Think the Stock Market Cannot Crash in 2018 (WS)

The 85% of S&P 500 companies that have reported earnings so far disclosed they’d bought back $158 billion of their own shares in Q1, according to the Wall Street Journal. The quarterly record of $164 billion was set in Q1 2016. If the current rate applies to all S&P 500 companies, they repurchased over $180 billion of their own shares in Q1, thus setting a new record. At this trend, including a couple of slower quarters, S&P 500 companies are likely to buy back between $650 billion and $700 billion of their owns shares in 2018. This would handily beat the prior annual record of $572 billion in 2007.

Here are the top buyback spenders in Q1: Apple: $22.8 billion, Amgen: $10.7 billion, Bank of America: $4.9 billion, JPMorgan Chase: $4.7 billion, Oracle: $4 billion, Microsoft: $3.8 billion, Phillips 66: $3.5 billion, Wells Fargo: $3.34 billion, Boeing: $3 billion, Citigroup: $2.9 billion. Buybacks pump up share prices in several ways. One is the pandemic hype and media razzmatazz around the announcements which cause investors and algos to pile into those shares and create buying pressure. Since May 1, when Apple announced mega-buybacks of $100 billion in the future, its shares have surged 11%. The magic words.

Other companies with big share buyback programs have also fared well: Microsoft shares are up 14% year-to-date. And if buybacks don’t push up shares, at least they keep them from falling: Amgen shares are flat year-to-date. Shares of the 20 biggest buyback spenders in Q1 are up over 5% on average year-to-date, according to the Wall Street Journal, though the S&P 500 has edged up only 2%.

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Basic income AND a parallel currency. How can this fit inside the eurozone?

Italy’s Nascent Government Has Tough Economic Circles To Square (R.)

The Italian coalition taking shape 10 weeks after March’s inconclusive election has made economic promises that seem incompatible with Europe’s fiscal rules and will be hard, if not impossible, to keep. These include slashing taxes for companies and individuals, boosting welfare provision, cancelling a scheduled increase in sales tax and dismantling a 2011 pension reform which sharply raised the retirement age.The marriage being sealed between the anti-establishment 5-Star Movement and the far-right League was seen as an unlikely and worrying prospect by most analysts before the March 4 election ended in a hung parliament.

The pre-election adversaries have spent the last few days trying to fuse their very different programs into a “contract” of mutually acceptable policy commitments. What they have in common is that they are extremely expensive. On the face of it their plans, which they say may also include a form of parallel currency, could push the budget deficit far above targets agreed with the EU, setting up a clash with the European Commission and Italy’s partners. “We will need to renegotiate EU agreements to stop Italy suffocating,” League leader Matteo Salvini said on Saturday after a day of talks with his 5-Star counterpart Luigi Di Maio.

5-Star’s flagship policy of a universal income for the poor has been costed at around 17 billion euros ($20 billion) per year. The League’s hallmark scheme, a flat tax rate of 15 percent for companies and individuals, is estimated to reduce tax revenues by 80 billion euros per year. Scrapping the unpopular pension reform would cost 15 billion euros, another 12.5 billion is needed to head off the planned hike in sales tax, and the parties are also considering printing a new, special-purpose currency to pay off state debts to firms. “If implemented, it would be the biggest shake-up of the Italian economic system in modern times,” said Wolfgang Munchau, head of the London-based Eurointelligence think-tank.

[..] olfango Piccoli, co-president of Teneo Intelligence, said taking on Brussels would be popular with Italian voters, and the new government had little to fear from a European Commission which “is very weak and on its way out”. The Commission, with just a year of its term remaining, “can’t really do much other than put Italy’s finances under greater scrutiny, and markets don’t care about that”, he said.

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Bolton.

US Threatens European Companies With Sanctions After Iran Deal Pullout (G.)

Donald Trump is prepared to impose sanctions on European companies that do business in Iran following his withdrawal of the US from the international nuclear deal, his administration reiterated on Sunday. Trump’s most senior foreign policy aides signalled that the US would continue pressuring allies to follow Washington in backing out of the pact, which gave Tehran relief from sanctions in exchange for halting its nuclear programme. John Bolton, Trump’s national security adviser, predicted that “the Europeans will see that it’s in their interests to come along with us” rather than continue with the 2015 deal, under which major European corporations have signed billions of dollars of contracts in Iran.

Asked on CNN’s State of the Union whether that meant the Trump administration would impose sanctions against those firms, Bolton said: “It’s possible. It depends on the conduct of other governments.” US sanctions on Iran reimposed following Trump’s withdrawal not only block American firms from doing business in the country, but also bar foreign firms that do business there from accessing the entire US banking and financial system. Mike Pompeo, Trump’s secretary of state, said on Sunday wealth created in Iran under the terms of the nuclear deal “drove Iranian malign activity” in the region. He declined to rule out sanctions against European firms. “The sanctions regime that is in place now is very clear on what the requirements are,” Pompeo said on Fox News Sunday.

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Britain better get rid of her.

May Faces Deadlock Over Brexit Customs Rules As Both Options Rubbished (Ind.)

Theresa May faces deadlock over the key controversy of customs rules after Brexit, after senior politicians rubbished both of the options being studied by her warring cabinet. Michael Gove – picked by the prime minister to examine her preferred “customs partnership” model – warned there were “significant question marks over the deliverability of it”. Meanwhile, the Irish deputy prime minister insisted Dublin would block a Brexit withdrawal agreement if she pursued an alternative technology-based solution, saying: “It won’t work.” The warnings left Ms May with few apparent options to resolve the impasse, with a deadline set by the EU just six weeks away.

Two working groups of key ministers have been set up to study both the customs partnership – under which the UK would collect tariffs on behalf the EU – and the tech-based “max-fac” proposal. Mr Gove, the environment secretary, speaking on the BBC’s The Andrew Marr Show, declined to back Boris Johnson’s description of the partnership model as “crazy”. But he said: “Boris pointed out that because it’s novel, because no model like this exists, there have to be significant question marks over the deliverability of it on time.” Crucially, Mr Gove also suggested the proposal would break Ms May’s key promise – stated again today – to ‘take back control” of borders and laws.

“What the customs partnership requires the British government to do is in effect to act as the tax collector and very possibly the effective deliverer of regulation for the European Union,” he claimed. A proposal to seek EU agreement to keep the UK in the single market and customs union past the end of 2020, while a solution is found, was also stamped on by Mr Gove. “I don’t believe in an extension,” he said – arguing it was “critical to meet that deadline” of ending the post-Brexit transition period after 21 months.

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Slowly, people are starting to get very afraid of Brexit.

Shoppers Desert UK High Streets (G.)

Shoppers are deserting the high street in greater numbers than during the depths of the recession in 2009, creating a brutal climate that is putting thousands more retail jobs at risk. The coming days will be crucial to the future of a handful of household names, including Mothercare and Carpetright, which are trying to persuade investors to make vital cash injections so they can jettison unwanted stores. There is also the spectre of job losses at Poundworld, the struggling discount chain, which is being cut adrift by its American owners. Dwindling shopper numbers tally with weak spending figures for April, which show Britons slashed spending on gadgets, furniture and even nights out.

Consumer spending dropped 2% last month, according to Visa’s consumer spending index, which has recorded declines in 11 of the past 12 months. “With inflation beginning to fall and wages growing faster than expected in recent months, it would have been easy to assume we might be over the worst of the consumer squeeze,” Mark Antipof, the chief commercial officer at Visa, said. “Yet there has been no corresponding improvement in spending. It is clear that consumers remain in belt-tightening mode.” High street visits declined 3.3% in April, according to the BRC-Springboard monthly tracker, which also highlighted nearly one in 10 town centre shops are lying empty.

The drop in footfall came on the back of a disastrous performance in March, when shopper numbers declined by 6%. Taken together there has been an unprecedented 4.8% drop over the two months – a bigger decline than was recorded in the same months of 2009 when the UK was mired in recession. “Not since the depths of recession in 2009 has footfall over March and April declined to such a degree, and even then the drop was less severe at -3.8%,” said the Springboard analyst Diane Wehrle. “Much could be made of the adverse impact on April’s footfall of Easter shifting to March but even looking at March and April together still demonstrates that footfall has plummeted.”

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Priceless.

UK Metropolitan Police’s Facial Recognition Technology 98% Inaccurate (Ind.)

Facial recognition software used by the UK’s biggest police force has returned false positives in more than 98 per cent of alerts generated, The Independent can reveal, with the country’s biometrics regulator calling it “not yet fit for use”. The Metropolitan Police’s system has produced 104 alerts of which only two were later confirmed to be positive matches, a freedom of information request showed. In its response the force said it did not consider the inaccurate matches “false positives” because alerts were checked a second time after they occurred. Facial recognition technology scans people in a video feed and compares their images to pictures stored in a reference library or watch list. It has been used at large events like the Notting Hill Carnival and a Six Nations Rugby match.

The system used by another force, South Wales Police, has returned more than 2,400 false positives in 15 deployments since June 2017. The vast majority of those came during that month’s Uefa Champion’s League final in Cardiff, and overall only 234 alerts – fewer than 10 per cent – were correct matches. Both forces are trialling the software. The UK’s biometrics commissioner, Professor Paul Wiles, told The Independent that legislation to govern the technology was “urgently needed”. He said: “I have told both police forces that I consider such trials are only acceptable to fill gaps in knowledge and if the results of the trials are published and externally peer-reviewed. We ought to wait for the final report, but I am not surprised to hear that accuracy rates so far have been low as clearly the technology is not yet fit for use.

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Irony is dead.

UK To Host Summit On Why Six Other Countries Should Join The EU (Ind.)

The British government will host a summit encouraging six European countries to join the EU for the sake of their “security, stability and prosperity”, months before it is due to sign its own Brexit withdrawal deal with Brussels. London will in July play host to Western Balkans governments including Serbia and Albania, as well as existing EU member states, to discuss reforms to pave the way to future EU enlargement. The summit is part of the so-called Berlin Process – a series of meetings aimed at supporting the region towards joining the bloc and described by the European parliament’s research arm as “bringing a new perspective and impetus to the enlargement process”.

Critics said the UK government must have “a sense of humour” for hosting a conference on EU enlargement and extolling the benefits of accession as Britain itself headed towards the exit door. The leaders of EU candidate countries Albania, Montenegro, Macedonia, and Serbia will attend, as well as those of Bosnia and Herzegovina, and Kosovo – two states who have both expressed an interest in joining the bloc but have not yet been accepted as candidates. They will be joined by representatives of the governments of EU countries with an interest in the region such as Austria, Croatia, France, Germany, Italy, Poland, Slovenia and Bulgaria.

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Makes sense.

Xi Might Join Trump And Kim In Singapore (MS)

The prospect of China’s president Xi Jinping coming to Singapore on June 12, 2018 to meet with United States President Donald Trump and North Korea leader Kim Jong-un has been raised. This is according to mainstream media reports in Singapore on May 11, which re-reported a Japanese newspaper, Mainichi Shimbun, that cited American diplomatic sources. In the Friday report, Mainichi Shimbun quoted a senior international negotiator with the National Security Council saying that “there is a possibility” the leader of a third country may take part. It is understood that this leader is Xi. The suggestion that the three leaders will descend upon Singapore at the same time is not without merit.

On Tuesday, May 8, Trump spoke to Xi about Kim’s recent visit to China. The Chinese president and North Korean leader met Monday and Tuesday, May 7 and 8, in China again in a second meeting. This meeting followed Kim’s first visit to Beijing in March. However, as of Friday morning, there were no news reports on North Korean media outlets of the date and venue of Kim’s meeting with Trump, Japanese broadcaster NHK reported. Previously, Kim and South Korean president Moon Jae-in issued a joint declaration to say that both sides aim to realise complete denuclearisation for a nuclear-free Korean Peninsula, at the historic inter-Korea summit on April 27. They also agreed to pursue three-way talks involving the two Koreas and the US, or four-way talks involving the two Koreas, the US and China.

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People no longer have a right to know?

Prosecutors Seek Complete Media Ban On Cardinal George Pell Trial (NM)


On Friday, the Victorian Department of Public Prosecutions lodged an application with the Country Court of Victoria for a ‘super injunction’ against media coverage of the trial of Cardinal George Pell, who is accused of a number of historical sexual offences. Cardinal Pell – the Vatican’s treasurer and the third highest ranked Catholic in the world – was committed to stand trial a fortnight ago. The orders being sought by the DPP, which will be decided on Wednesday morning in the County Court in Melbourne before Chief Judge Peter Kidd, are:

(1) Publication is prohibited of any report of the whole or any part of these proceedings and any information derived from this proceeding and any court documents associated with this proceeding. (2) The prohibition on publication applies within all States and Territories of Australia and on any website or other electronic or broadcast format accessible within Australia. (3) For the purpose of this order, ‘publication’ has the meaning attributed to it by s3 of the Open Courts Act, that is to say, it means the dissemination or provision of access to the public by any means including, publication in a book, newspaper, magazine or other written publication, or broadcast by radio or television; or public exhibition; or broadcast or electronic communication. (4) The order will expire upon a jury verdict in respect of the charges on the final indictment, or by further order of the court.

Ordinarily, an injunction against media reporting of a trial prevents outlets from reporting the details of the trial. But they can report the existence of the injunction and explain to readers why they’re not reporting the matter. The order that the DPP is seeking in the Pell matter is so broad that it will operate as a super injunction. The suppression order would be ‘any part of’ the proceedings, meaning the trial could not be reported, nor could media report the fact they’re not allowed to report. If Wednesday’s application for a super injunction is successful, this story will have to be removed from publication. [..] Cardinal Pell, aged 76, is the most senior Catholic charged with sexual offences anywhere in the world. Cardinal Pell has strongly denied the allegations levelled against him.

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We’re on a road to nowhere..

Greek Pensions Under €1,000 Will Also Be Cut In 2019 (K.)

The planned pension cuts for people who have already retired and which will be implemented as of January 2019 will also affect pensions under 1,000 euros, Deputy Minister for Social Security Tasos Petropoulos admitted on Sunday. “In October we will see the exact cuts in pensions […] and will improve them,” he told broadcaster Skai. “We have seven months ahead.” Petropoulos said the 18 percent cut in pensions includes benefits, and estimated that about 25-30 percent of pensioners will be affected by the new reductions. He also pledged to pay all pending main pensions by August, “except in some particular cases.”

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Now Turkish citizens fleeing Erdogan are added.

Greece Considers Boosting Capacity Of Refugee Centers

The Migration Policy Ministry is reportedly considering increasing the capacity of existing refugee and migrant centers on the mainland as a first step in managing a recent spike in arrivals from neighboring Turkey, in a plan ministry sources say the European Union agrees with. “Practically, this means tents will be set up between the containers, exacerbating the already difficult situation for the residents,” a nongovernmental organization official said. Increasing capacity also means that the current logistics involved in running the camps will have to be adjusted. For example, if daily food costs are €3.50 per person per day (according to the specifications cited in official announcements), an additional 16,478 additional refugees will mean an extra €57,673 per day.

According to official data, 6,632 refugees crossed into Greece in April alone and 16,478 people in the first five months of the year, of whom 9,375 arrived on the islands and 7,103 from the Evros border in northeastern Greece. The government is also hoping to reduce arrivals and overcrowding on the islands by investing in diplomacy with Turkey and speeding up the asylum process through a bill which is being discussed in Parliament. At the same time, the reactions of residents on the islands that have borne the brunt of migration, even if they do not reflect the views of the entire population, show their patience is wearing thin. Authorities have also recorded increased arrivals of Turkish nationals from Evros. About 30 Turks have been arriving on a daily basis since Turkish President Recep Tayyip Erdogan called elections for next month, versus zero arrivals previously.

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Feb 202018
 
 February 20, 2018  Posted by at 11:00 am Finance Tagged with: , , , , , , , , , , ,  


Emanuel Leutze Washington Crossing the Delaware 1851

 

Morgan Stanley Says Stock Slide Was Just Appetizer for The Real Deal (BBG)
Weak Dollar Could Bring 3% Boost To Global Trade Growth (BBG)
More Than 80% Of American Adults Owe Somebody Else Money (Snyder)
Thirteen Russians and a Ham Sandwich (Jim Kunstler)
Seeking Post-Brexit Unity, EU Leaders Find More Fights (AFP)
UK Has a Secret Plan to Hold Brexit Cash If EU Refuses to Trade (BBG)
London’s Property Crash Has Begun (Reilly)
BOJ To Keep Retreating From Stimulus Under Kuroda (R.)
Italians Find Way Around Election Poll Ban With ‘Horse Races’ (BBG)
Turkey Threatens to Invade Greece (Bulut)
The Royal Society and the GMO-Agrochemical Sector (CP)
France To Let Wolf Population Grow By 40% Despite Anger From Farmers (AFP)
Ocean Plastic Tide ‘Violates International Law’ (BBC)

 

 

A very safe bet.

Morgan Stanley Says Stock Slide Was Just Appetizer for The Real Deal (BBG)

The U.S. stock market only had a taste of the potential damage from higher bond yields earlier this year, with the biggest test yet to come, according to Morgan Stanley. “Appetizer, not the main course,” is how the bank’s strategists led by London-based Andrew Sheets described the correction of late January to early February. Although higher bond yields proved tough for equity investors to digest, the key metric of inflation-adjusted yields didn’t break out of their range for the past five years, they said in a note Monday. uld be at worst neutral, if they boost earnings along the way. Higher real yields, on the other hand, mean a bigger discount rate to value future earnings. Should they break out of the range over the past five years as investors anticipate greater central bank policy normalization, that could hit stocks harder, according to the Morgan Stanley thinking.

Relatively low real yields were a big support for equity valuations, so a break higher would indicate that stocks will have to rely on earnings – not multiple expansion – to drive them higher, Sheets and his colleagues wrote. And the challenge there is that a slowdown may loom starting in the second quarter, they said. “It’s when growth softens while inflation is still rising that returns suffer most,” the strategists wrote. “Strong global growth and a good first-quarter reporting season provided an important offset. We remain on watch for ‘tricky handoff’ in the second quarter, as core inflation rises and activity indicators moderate.”

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That’s real growth, right?!

Weak Dollar Could Bring 3% Boost To Global Trade Growth (BBG)

The weak greenback may prove to be a boon for global trade. On top of the boost already coming from robust global GDP growth, the dollar’s fall over the past year may add over 3% to the level of world trade, according to Gabriel Sterne, global head of macro research at Oxford Economics Ltd. Tipping further dollar weakness, the risks are skewed to the upside for Oxford’s baseline forecast for 5% growth in world trade in 2018. “Falls in the value of the dollar oil the wheels of the global financial system, boosting global liquidity by strengthening balance sheets and alleviating currency mismatches,” Sterne wrote in a note.

“One important channel is variation in the differential between the cost of raising dollars onshore and offshore. Dollar weakness reduces the cross-currency basis, increases cross-border lending and boosts bank equities.” The biggest winners will likely be emerging economies given the weaker dollar will lower the value of their dollar-denominated debt, taking pressure off their balance sheets and from credit conditions more generally. “The seven-year link between dollar strength and U.S. recovery (2009-16) now appears broken, and we think it will remain so, with relatively strong U.S. growth and a weakening dollar providing a significant boost to global activity,” Sterne wrote.

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“..As debt levels spread through the system it consumes greater amounts of capital until it eventually kills the host…”

More Than 80% Of American Adults Owe Somebody Else Money (Snyder)

How long can our debt levels keep growing much, much faster than the overall economy? We haven’t had a year of 3 percent growth for the U.S. economy since the middle of the Bush administration, but we keep borrowing money as if there is no tomorrow. Much of the focus has been on the exploding debt of the federal government, and that is definitely something I plan to address once I get to Washington. But on an individual level, U.S. consumers have been extremely irresponsible as well. In fact, one new survey has found that more than 80 percent of all American adults are currently in debt… It’s no secret that America is a nation that runs on debt, but it may surprise you to learn that the overwhelming majority of U.S. adults owe money in some way, shape, or form. According to new data from Comet, here’s how many Americans have debt at present:

• 80.9% of Baby Boomers • 79.9% of Gen Xers • 81.5% of Millennials For most of us, it starts very early. We were told that going into debt to get a college education would not be a problem because we would be able to pay those loans off with the good jobs we would get after graduation. Unfortunately, those good jobs never really materialized for many of us, and now millions of former college students are absolutely drowning in debt. A study released Friday by the Brookings Institution finds that most borrowers who left school owing at least $50,000 in student loans in 2010 had failed to pay down any of their debt four years later. Instead, their balances had on average risen by 5% as interest accrued on their debt.

As of 2014 there were about 5 million borrowers with such large loan balances, out of 40 million Americans total with student debt. Large-balance borrowers represented 17% of student borrowers leaving college or grad school in 2014, up from 2% of all borrowers in 1990 after adjusting for inflation. Large-balance borrowers now owe 58% of the nation’s $1.4 trillion in outstanding student debt. In addition to owing more than a trillion dollars on student loans, Americans are also now carrying more than a trillion dollars of auto loan debt and more than a trillion dollars of credit card debt. Corporations have been incredibly irresponsible as well. Corporate debt has doubled since the last financial crisis, and corporate bankruptcies have been rising steadily in recent years. All it would take for the dominoes to really start falling is some sort of a major economic downturn.

[..] We can’t keep doing this to ourselves. Our incessant greed is literally destroying the future, but anyone that tries to warn about the collective insanity that has descended upon our society is mocked and ridiculed. Let me ask you a question. Would you willingly choose to give yourself cancer? Of course not, but that is essentially what we are doing to ourselves as a society. Debt is economic cancer, and as Lance Roberts has pointed out, if we continue to allow debt levels to grow like this eventually it will kill our entire economy… Debt is, by its very nature, a cancer on economic growth. As debt levels rise it consumes more capital by diverting it from productive investments into debt service. As debt levels spread through the system it consumes greater amounts of capital until it eventually kills the host.

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“..the greatest act of bureaucratic ass-covering in US history.”

Thirteen Russians and a Ham Sandwich (Jim Kunstler)

Remember that one from 1996? Funny, that was the American mainstream media bragging, after the fact, about our own meddling in another nation’s election.

WASHINGTON — A team of American political strategists who helped [California] Gov. Pete Wilson with his abortive presidential bid earlier this year said this week that they served as Russian President Boris N. Yeltsin’s secret campaign weapon in his comeback win over a Communist challenge. —The Los Angeles Times, July 9, 1996

The beauty in Robert Mueller’s indictment of thirteen Russian Facebook trolls is that they’ll never face trial, so Mr. Mueller will never have to prove his case. In the new misrule of law made popular by the #Me Too movement, accusations suffice to convict the target of an investigation. Kind of sounds like going medieval to me, but that’s how we roll now in the Land of the Free. Readers know, of course, that I’m not a Trump supporter, that I regard him as a national embarrassment, but I’m much more disturbed by the mindless hysteria ginned up Washington’s permanent bureaucracy in collusion with half a dozen major newspapers and cable news networks, who have run a psy-ops campaign to shove the country into a war mentality. The New York Times published a doozy of a lead story on Saturday, the day after the indictments were announced.

The headline said: Trump’s Conspicuous Silence Leaves a Struggle Against Russia Without a Leader. Dean Baquet and his editorial board are apparently seeking an American Napoleon who will mount a white horse and take our legions into Moscow to teach these rascals a lesson — or something like that. I’m surely not the only one to notice how this hysteria is designed to distract the public attention from the documented misconduct among FBI, CIA, NSA, State Department officials and the leaders of the #Resistance itself: the Democratic National Committee, its nominee in the 2016 election, HRC, and Barack Obama’s White House inner circle. You would think that at least some of this mischief would have come to Robert Mueller’s attention, since the paper trail of evidence is as broad and cluttered as the DC Beltway itself. It actually looks like the greatest act of bureaucratic ass-covering in US history.

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How to fake democracy.

Seeking Post-Brexit Unity, EU Leaders Find More Fights (AFP)

EU leaders face difficult talks this week on the thorny issues of how to plug holes in the post-Brexit budget and choose a successor for European Commission chief Jean-Claude Juncker. A special one-day summit in Brussels on Friday of the 27 leaders without Britain is meant to be a key step in the roadmap to a leaner and more unified bloc after Britain leaves in just over a year. But cracks have already appeared between French President Emmanuel Macron, leading the charge for a reformed Europe, and Juncker with his federalist vision of how top EU officials should be chosen in future. The row means the EU’s attempts to overcome the shock of losing a major member are running into the classic problems that have bedevilled it for its six decades of existence: money and sovereignty.

Juncker was picked after European elections in 2014 by a controversial “Spitzenkandidat” system — German for “lead candidate” — under which the political group with the most votes gets to nominate its candidate for the job. Both the European Parliament and Juncker back a repeat after the May 2019 European election, saying it gives the public a direct say in who heads the commission, the EU’s powerful executive arm. European Council President Donald Tusk — who coordinates summits and represents the EU member states — is expected to lay out options at the summit, including whether to continue with the Spitzenkandidat system. Leaders are expected to say it is their own “right and obligation” to choose the commission chief, while “taking into account” the views of parliament, as the EU treaties state, an EU source told AFP.

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“Formerly” secret?

UK Has a Secret Plan to Hold Brexit Cash If EU Refuses to Trade (BBG)

Prime Minister Theresa May’s team is eyeing up a contingency plan to hold back billions of pounds in Brexit payments, if the EU refuses to give the U.K. the trade deal it wants. Senior British officials have privately discussed the idea as a fall-back option that could be triggered if negotiations go wrong, three people familiar with the matter said. The plan is not the U.K.’s preferred outcome, but some in May’s administration believe it could be necessary in case the EU tries to renege on a future commitment to a free-trade deal. The proposal comes at a sensitive time, with British ministers seeking in public to build mutual trust with the EU rather than stoke suspicions. The U.K. is trying to persuade the bloc to cooperate on plans for an ambitious trade agreement, which will come into force after the split.

On Tuesday, Brexit Secretary David Davis will outline his idea for collaboration, promising the other 27 member countries that the U.K. won’t try to undercut them by tearing up regulations when it leaves. May is planning to announce her goals for a detailed draft trade accord in a major speech next week, with the aim of having a deal drafted by October to be signed soon after Brexit in March 2019. But the EU says a full trade agreement will be impossible to finish before Brexit. October’s conclusions are likely to form only an outline political declaration rather than a legally binding contract, raising fears among British lawmakers that the U.K. could be vulnerable if the EU backslides on the deal.

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It’ll be a steep fall.

London’s Property Crash Has Begun (Reilly)

The average age of a first time mum at London’s Chelsea and Westminster hospital is 37, a statistic that tells you everything you need to know about the choices supposedly affluent city dwellers are being forced to make in the capital. For the middle classes, the cost of living in London -the cost of getting by- long ago went past insane (£17,040: the cost per year of educating a four year-old child at Thomas’s school in Fulham, not including uniform). It’s the incredible price of property, of course, that’s been the engine driving this madness, ratcheting the pressure ever higher on Londoners who don’t own a home while making very wealthy, on paper at least, those who do.

For the last two decades and more, the capital’s property market to all intents and purposes has behaved like a giant Ponzi scheme played on a global scale. Money from all over the world has poured into London bricks, inflating values unrealistically in relation to wages, while the lavish bonuses paid to European bankers working in the City have also stoked momentum responsible for pushing up, for example, the average price of a London semi-detached house by 553 per cent between January 1995 and November 2017, from £133,820 to £873,603. Over the same period, the average cost of a detached house in the capital went from £257,748 to £1,453,271.

At last, however, the party is over. London property prices, now still flailing cartoonishly in mid-air despite being well over the edge of a cliff, are at the start of what we can call, for want of a better term, a death plunge. Although the carnage is only just beginning in earnest, desperate homeowners looking to sell are already dropping asking prices by tens of thousands of pounds and more. They know the tide is going out quickly. The reasons you would have to be clinically insane to buy property in London today are blessedly easy to understand. Describing a modern financial disaster normally requires some pretence of understanding, say, derivatives markets or the myriad immensely complex ways international banks package and trade debt. Not this time.

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Abenomics continues to its last breath.

BOJ To Keep Retreating From Stimulus Under Kuroda (R.)

The reappointment of Bank of Japan Governor Haruhiko Kuroda for another five-year term means the central bank will continue to gradually edge away from crisis-mode stimulus, former BOJ board member Takahide Kiuchi said. Premier Shinzo Abe’s decision to reappoint Kuroda, whose massive easing efforts failed to accelerate inflation to his 2% target since becoming governor in 2013, is a sign the government is no longer insisting that the BOJ meet its price goal quickly, he said. Since abandoning a policy targeting the pace of money printing in 2016, the BOJ is already whittling down its sweeping stimulus program by slowing its bond purchases, Kiuchi said.

“A de-facto normalization of monetary policy is already taking place and will continue under a reappointed Kuroda,” said Kiuchi, who served at the BOJ’s nine-member board until July. “The reappointment was a signal from the government that it wants continuity in monetary policy,” he told Reuters on Monday. The government reappointed Kuroda for another five-year term on Friday, signaling its hope the BOJ will keep up efforts to reflate the economy. During his tenure at the BOJ, Kiuchi has warned of the pitfalls of Kuroda’s monetary experiment and rightly predicted that the bank would be forced to slow its bond buying given the rising costs of its stimulus program. He retains deep insight into the workings of BOJ policy.

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Does that come with actual betting?

Italians Find Way Around Election Poll Ban With ‘Horse Races’ (BBG)

Italians have hit on a way around a ban on publishing polls in the two weeks before March 4 general elections: turn them into horse races. Bloggers Andrea Mancia and Simone Bressan have begun writing up the results of fictitious “underground” races as a means of conveying the performance of various political parties and coalitions without falling foul of the law. Hence, avid politics watchers can check on favorites like Burlesque and his stable — a not-so-thinly veiled reference to former Premier Silvio Berlusconi and his center-right coalition. They can also learn more about the performance of jockeys like Louis le Subjonctif, a reference to Five Star Movement lead candidate Luigi Di Maio and his supposed difficulties in correctly using the subjunctive tense in Italian.

This isn’t the first time the two bloggers have attempted to circumvent blackout legislation and they are not the only ones. Another blog, YouTrend.it, is known for publishing supposed polls with references to papal conclaves and names of imaginary cardinals to indicate the different candidates. During the two-week blackout period, pollsters continue to conduct surveys which circulate among politicians, market analysts and others, but are barred from publishing their findings. Newspapers and other media are also banned from publishing any indications of voting intentions so as not to influence the election.

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Jihad. Inside NATO.

Turkey Threatens to Invade Greece (Bulut)

In an incident that took place less than two weeks after the Greek Defense Ministry announced that Turkey had violated Greek airspace 138 times in a single day, a Turkish coast guard patrol boat on February 13 rammed a Greek coast guard vessel off the shore of Imia, one of many Greek islands over which Turkey claims sovereignty. Most of the areas within modern Greece’s current borders were under the occupation of the Ottoman Empire from the mid-15th century until the Greek War of Independence in 1821 and the establishment of the modern Greek state in 1832. The islands, however, like the rest of Greece, are legally and historically Greek, as their names indicate. Turkey’s ruling Justice and Development Party (AKP), however, and even much of the opposition seem intent on, if not obsessed with, invading and conquering these Greek islands, on the grounds that they are actually Turkish territory.

[..] The Ottoman dynasty and empire was established by a nomadic Turkmen chief sometime around the year 1300. During the more than 600 years of the Ottoman period, the Ottoman Turks, who also represented the Islamic Caliphate, regularly launched wars of jihad, invading and occupying lands across five continents. Neo-Ottomanists in Turkey still proudly embrace the concept of jihad (Islamic holy war) against the kafirs (infidels). The head of the state-funded Directorate of Religious Affairs, the Diyanet, has openly described Turkey’s recent military invasion of Afrin as “jihad.”

This designation makes sense when one considers that Muslim Turks owe their demographic majority in Asia Minor to centuries of Turkish Muslim persecution and discrimination against the Christian, Yazidi and Jewish inhabitants of the area. In the 11th century, Turkic jihadists from Central Asia invaded and conquered the Greek-speaking, Christian Byzantine Empire, paving the way for the gradual Turkification and Islamization of the region through methods such as murder, kidnapping, rape and forced conversions.

The greatest 20th century Turkish assault against Christians took place in the 1914-1923 genocide of Greeks, Armenians and Assyrians (Syriacs/Chaldeans) in Ottoman Turkey. This did not prevent Turkey, which continues to deny the genocide, from becoming a member of NATO in 1952. The assault also did not stop Turkey, three years after joining NATO, from committing a savage anti-Greek pogrom in Istanbul or from forcibly expelling the remaining Greeks from Turkey in 1964. It is precisely because the Turks have never been held accountable for their criminal actions and aggression that they continue to threaten the security and sovereignty of their neighbors. It is high time for the West wake up and take Ankara to task.

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The church of science is not objective.

The Royal Society and the GMO-Agrochemical Sector (CP)

The Royal Society in the UK is a self-governing fellowship of distinguished scientists. Its purpose is reflected in its founding charters of the 1660s: to recognise, promote and support excellence in science and to encourage the development and use of science for the benefit of humanity. Its motto, nullius in verba, is taken to mean ‘take nobody’s word for it’. It is an expression of the determination to withstand the domination of authority and to verify all statements by an appeal to facts based on experiment. In 2015, Steven Druker challenged the Royal Society to justify its outspoken and partisan support of GMO crops and to correct any errors of fact in his book ‘Altered Genes,Twisted Truth’. Not long after the book’s release, he wrote an open letter to the Society calling on it to acknowledge and correct the misleading and exaggerated statements that is has used to actively promote GMOs and in effect convey false impressions.

Druker cited specific instances where members of the Royal Society have at various times made false statements and the Society’s actions were not objective or based on scientific reasoning but biased and stridently pro-GMO. He argued that the Royal Society has misrepresented the case for GMOs and has effectively engaged in a campaign of disinformation. Almost three years later, from what we can gather, the Royal Society has not responded to Druker. [..] In a new, fully-referenced 45-page open letter, environmentalist Dr Rosemary Mason is strident in her criticism of the Royal Society: “The Royal Society of London has thrown its hand in with the agrochemical industry, has received funding from it and accepted its word that GM crops are safe. The scientists who founded The Royal Society (Wren, Boyle, Wilkins and Newton) would turn in their graves.”

Rosemary Mason’s letter is addressed to Venkatraman Ramakrishnan, president of the Royal Society. She sets out in some detail the disturbing effects of the rising use of agrochemicals on human health, the environment, biodiversity and ecology in the UK and beyond. As she notes, many have sounded the alarm over global mass poisoning as a result of tens of thousands of synthetic chemicals entering world markets with no evidence of safety. It has reached the point where we now have an ‘ecological Armageddon’ after a dramatic plunge in insect numbers. Given Mason’s concerns about the Royal Society’s collusion with corporate interests, she refers Ramakrishnan to the reputation of Monsanto and the findings of the Monsanto Tribunal, the Monsanto Papers and the dozens of lawsuits in the US involving that company.

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You can try… But French farmers are what they are..

France To Let Wolf Population Grow By 40% Despite Anger From Farmers (AFP)

The French government has announced it will allow the wolf population to grow 40% despite pressure from farmers in mountain regions who are worried about their sheep flocks. A new strategy unveiled by the centrist government of President Emmanuel Macron will enable the number of wolves to increase from an estimated 360 now to 500 by 2023. Hunting wiped out the grey wolf in France during the 1930s and they only returned in 1992 via Italy – currently home to around 2,000 wolves – before spreading into Switzerland and Germany. The regeneration of the population in France has led to tensions between the government and farmers in the Alps and Pyrenees mountains who complain that attacks on their livestock cause major financial losses.

In a bid to respond to that anger, hunters will be allowed to kill 10% of the population every year, which can be raised to 12% if attacks are more frequent than usual. “We place trust in all of the stakeholders and local lawmakers to calm the debate and enable a co-existence over the long-term,” agriculture minister Stephane Travert and environment minister Nicolas Hulot wrote in a foreword to the report. Hulot, a celebrity environmentalist, spoke recently of how wolf culling “makes me sick to the stomach” but he accepted it was a necessary measure to take farmers’ concerns into account. Hundreds of sheep were let loose on the streets of the city of Lyon last November in one of a number of protests against the wolf, which has protected status.

The 100-page wolf strategy will also enable livestock owners to apply for state funds to shield their animals, but it will make compensation contingent on them installing fencing and taking other protective measures. Wolves eat between 2-4kg (4.4 to 8.8lb) of meat a day on average and the predators have been blamed for an explosion in the number of attacks on livestock in mountainous areas. A total of 10,000 sheep were killed in the Alps region in 2016, according to official figures from the regional government, but the wolf is also known to feast on deer, wild boar or even domestic animals.

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When everyone’s guilty, who goes to jail?

Ocean Plastic Tide ‘Violates International Law’ (BBC)

The global tide of ocean plastic pollution is a clear violation of international law, campaigners say. They have been urging for a new global treaty to tackle the problem. But a new report – to be presented to a Royal Geographical Society conference on Tuesday – says littering the sea with plastics is already prohibited under existing agreements. The report urges those governments that are trying to tackle the issue to put legal pressure on those that are not. The paper has been written by the veteran environment journalist Oliver Tickell. His conclusions are backed by ClientEarth, the legal group that successfully sued the UK over failures to meet air pollution laws. Tickell says legal action against big polluters such as China, India and Indonesia can be taken only by a nation state.

So he calls for governments and green groups to support small island nations suffering most from plastic pollution. Tickell maintains that marine plastic litter can already be controlled through the United Nations Convention on the Law of the Sea (UNCLOS); the London Convention; the MARPOL Convention; the Basel Convention; Customary Law, and many other regional agreements. Article 194 of UNCLOS, for instance, requires states to “prevent, reduce and control pollution of the marine environment from any source. “Measures shall include, inter alia, those designed to minimize to the fullest possible extent… the release of toxic, harmful or noxious substances, especially those which are persistent, from land-based sources… [and] shall include those necessary to protect and preserve rare or fragile ecosystems as well as the habitat of depleted, threatened or endangered species and other forms of marine life.”

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Feb 092018
 
 February 9, 2018  Posted by at 10:41 am Finance Tagged with: , , , , , , , , , , , , , ,  


Horacio Coppola Florida y Bartolomé Mitre, Buenos Aires 1936

 

Dow Plummets 1032 Points, Down 10% From Record; S&P 500 Drops 3.7% (CNBC)
Is The Decades-Long Downtrend In Interest Rates Finally Over? (MW)
US Senate Approves Budget Deal, Too Late To Avert Shutdown (R.)
Stock Market Value Wiped Out Equals $2.5 Trillion And Counting… (CNBC)
The Stock Market Is In Turmoil And It’s Not Likely To End Anytime Soon (CNBC)
Stock, Bond Investors Pay For Fed’s Dangerous Experiment (Katsenelson)
Hong Kong And Mainland China Shares Tank In Global Rout (CNBC)
PBOC Releases Nearly 2 Trillion Yuan In Temporary Liquidity (R.)
50,000 American Bridges Are “Structurally Deficient” (ZH)
Bank Of England Signals An Interest Rate Hike Is Coming (G.)
The Biggest Privatisation You’ve Never Heard Of: Land (G.)
Northern Ireland Will Stay In Single Market After Brexit – EU (G.)
EU’s Moscovici ‘Especially Optimistic’ On Greek Debt Relief (R.)
Greek Pensions Keep Getting Smaller (K.)
Italy Accused Of Subjecting 10,000 Refugees To ‘Deplorable’ Conditions (Ind.)

 

 

Will it be labeled ‘The Olympics Crash’?

Dow Plummets 1032 Points, Down 10% From Record; S&P 500 Drops 3.7% (CNBC)

Stocks fell sharply on Thursday as strong earnings and economic data were not enough to quell jitters on Wall Street about higher interest rates. The Dow Jones industrial average closed 1,032.89 points lower at 23,860.46, entering correction territory. The 30-stock index also closed at its lowest level since Nov. 28. The Dow is also on track to post its biggest weekly decline since October 2008. “This whole correction is really about rates. It’s really about inflation creeping up. It’s really about people thinking the Fed is either behind the curve or actually has to be more aggressive,” Stephanie Link, global asset management managing director at TIAA, told CNBC’s “Closing Bell.” “That fear, that unknown is really what’s driving a lot of the anxiety,” Link said.

This is the third drop for the Dow greater than 500 points in the last five days. Despite the decline Thursday, the average is still a ways from its low for the week hit on Tuesday of 23,778.74. American Express and Intel were the worst-performing stocks in the index, sliding more than 5.4%. J.P. Morgan Chase, meanwhile, was down by more than 4%. The S&P 500 pulled back 3.75% to 2,581, reaching a new low for the week. The index also broke below its 100-day moving average and closed under 2,600, two important thresholds. For the S&P 500, it is its third drop of greater than 2% in the last five days. The Nasdaq composite fell 3.9% to close at 6,777.16 as Facebook, Amazon and Microsoft all fell at least 4.5%.

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That second chart is scary alright.

Is The Decades-Long Downtrend In Interest Rates Finally Over? (MW)

The yield on the benchmark 10-year Treasury note has an effect on all parts of the economy, as it influences everything from borrowing costs for the smallest and biggest companies, to rates for fixed and adjustable mortgages, car loans and credit cards. For three decades, one thing everyone could count on was if you were patient enough, rates would eventually be lower. Not anymore. The scariest thing for investors and consumers is often the unknown. But while some market pundits acknowledge that a “new norm” for rates is in the works, it’s not that rates are expected to spike back up to where they were in the 1980s. Besides, some people, such as those living off a fixed income, should actually welcome the new trend.

T[..] Arbeter Investments president Mark Arbeter: From a “very long-term perspective, yields appear to be tracing out a “massive bottom.” If the 10-year yield gets above the 2013 high of 3.04%, a bullish long-term “double bottom” reversal pattern would be completed, opening the door for an eventual rise toward the 4.75% area. A double bottom, according to the CMT Association, the keepers of the Chartered Market Technician certification, is this: “The price forms two distinct lows at roughly the same price level. For a more significant reversal, look for a longer period of time between the two lows.” The two bottoms Arbeter refers to are the 2012 monthly low of 1.47% and the 2016 low of 1.45%. Arbeter noted that while rates may not yet be ready to soar, equity investors may have reason to be worried. When the yield bumped up against the downtrend line before, as happened in 1987, 1990, 1994, 2000 and 2007, bad things happened on Wall Street.

T[..] Frank Cappelleri, CFA, CMT, executive director of institutional equities at Instinet LLC: In the medium term, he believes the bullish “inverted head and shoulders” reversal pattern that has formed over the last few years suggests a return toward the peaks seen in 2008 through 2010.

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Rand Paul.

US Senate Approves Budget Deal, Too Late To Avert Shutdown (R.)

The U.S. Senate approved a budget deal including a stopgap government funding bill early on Friday, but it was too late to prevent a federal shutdown that was already underway in an embarrassing setback for the Republican-controlled Congress. The shutdown, which technically started at midnight, was the second this year under Republican President Donald Trump, who played little role in attempts by party leaders earlier this week to head it off and end months of fiscal squabbling. The U.S. Office of Personnel Management advised millions of federal employees shortly after midnight to check with their agencies about whether they should report to work on Friday.

The Senate’s approval of the budget and stopgap funding package meant it will go next to the House of Representatives, where lawmakers were divided along party lines and passage was uncertain. House Republican leaders on Thursday had offered assurances that the package would be approved, but so did Senate leaders and the critical midnight deadline, when current government funding authority expired, was still missed. The reason for that was a nine-hour, on-again, off-again Senate floor speech by Kentucky Republican Senator Rand Paul, who objected to deficit spending in the bill. The unexpected turn of events dragged the Senate proceedings into the wee hours and underscored the persistent inability of Congress and Trump to deal efficiently with Washington’s most basic fiscal obligations of keeping the government open.

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The S&P 500 lost $2.49 trillion, and global markets $5.2 trillion.

Stock Market Value Wiped Out Equals $2.5 Trillion And Counting… (CNBC)

The U.S. stock market officially fell into correction territory Thursday and now we now the total damage: $2.49 trillion. That’s the market value that has been wiped out from the S&P 500 during its 10% rapid slide from a record on Jan. 26. The total is even bigger for global stock markets with $5.20 trillion gone as they followed the U.S. market’s lead. Both figures are from S&P Dow Jones Indices. Traders are worried the selling isn’t near over after the S&P 500 fell back below its Tuesday low during its 3.8% plunge Thursday. The benchmark is now at its lowest point since last November. The energy, health care, financials, materials and technology sectors are all in correction territory as well, according to S&P Dow Jones. President Donald Trump need not worry yet as the S&P 500 is still up $3.55 trillion since his election in November 2016, according to S&P Dow Jones.

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The floor is for Jay Powell. Let’s see some tricks.

The Stock Market Is In Turmoil And It’s Not Likely To End Anytime Soon (CNBC)

There’s a not-so-quiet rebellion going on in the bond market, and it threatens to take 10-year yields above 3% much faster than expected just a few weeks ago. As a result, the bumpy ride for stocks could continue for a while. There are some powerful forces at work, with global growth strong, central banks moving to tighten policy and the government’s deficit spending creating more and more Treasury supply. So, the bond market has entered a zone of no return for now, where Treasurys are expected to price in higher yields in a global sea change for bonds. Thursday’s sharp sell-off in stocks, with the S&P 500 closing down 3.8% , reversed a sharp move higher in bond yields, as buyers sought safety. The 10-year yield was at 2.81% from a high of 2.88% earlier in the day and the rising yields had started the stock market spiral lower.

“There’s going to be an interplay, a bit of push and pull between the rates market and equity market,” said Mark Cabana at Bank of America Merrill Lynch. Cabana said his call for a 2.90% 10-year this year is clearly at risk. He said technicians are watching 2.98%, and then 3.28% on the charts. The bipartisan spending bill, expected to pass Congress, called for a higher-than-expected spending cap of $300 billion. Cabana said it was encouraging in that the deal was bipartisan and that means the debt ceiling won’t be an issue. But it also had a negative impact on the bond market and resulted in forecasts of more Treasury supply and higher $1 trillion deficits. “It signals that fiscal austerity out of D.C. is a thing of the past, and Republicans aren’t nearly as concerned with the overall trajectory of the deficit as they have been and the president is worried about it,” he said.

The 10-year Treasury is the one to watch, and while many strategists targeted rates under 3% for this year, they acknowledge the risk is to the upside with yields potentially climbing to 3.25%. The 10-year is the benchmark best known to investors, and its yield influences a whole range of loans, including home mortgages. Strategists say the level of the yield is not so much the problem. Rather, it’s the rapidity of the move that has proven unnerving for global stock markets.”We’re in a vicious cycle here. If the yields go up, you have to sell stocks. If you sell stocks, and they crash, yields come back down,” said Art Hogan at B. Riley FBR.

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True, but ironically, they profited most from the experiment as well.

Stock, Bond Investors Pay For Fed’s Dangerous Experiment (Katsenelson)

In a capitalist economy, the invisible hand serves a very important but underappreciated role: It is a signaling mechanism that helps balance supply and demand. High demand leads to higher prices, telegraphing suppliers that they’ll make more money if they produce extra goods. Additional supply lowers prices, bringing them to a new equilibrium. This is how prices are set for millions of goods globally on a daily basis in free-market economies. In the command-and-control economy of the Soviet Union, the prices of goods often had little to do with supply and demand but were instead typically used as a political tool. This in part is why the Soviet economy failed — to make good decisions you need good data, and if price carries no data, it is hard to make good business decisions. When I left Soviet Russia in 1991, I thought I would never see a command-and-control economy again. I was wrong.

Over the past decade the global economy has started to resemble one, as well-meaning economists running central banks have been setting the price for the most important commodity in the world: money. Interest rates are the price of money, and the daily decisions of billions of people and their corporations and governments should determine them. Like the price of sugar in Soviet Russia, interest rates today have little to do with supply and demand (and thus have zero signaling value). For instance, if the Federal Reserve hadn’t bought more than $2 trillion of U.S. debt by late 2014, when U.S. government debt crossed the $17 trillion mark, interest rates might have started to go up and our budget deficit would have increased and forced politicians to cut government spending. But the opposite has happened: As our debt pile has grown, the government’s cost of borrowing has declined.

The consequences of well-meaning (but not all-knowing) economists setting the cost of money are widespread, from the inflation of asset prices to encouraging companies to spend on projects they shouldn’t. But we really don’t know the second-, third-, and fourth derivatives of the consequences that command-control interest rates will bring. We know that most likely every market participant was forced to take on more risk in recent years, but we don’t know how much more because we don’t know the price of money. Quantitative easing: These two seemingly harmless words have mutated the DNA of the global economy. Interest rates heavily influence currency exchange rates. Anticipation of QE by the European Union caused the price of the Swiss franc to jump 15% in one day in January 2015, and the Swiss economy has been crippled ever since.

Americans have a healthy distrust of their politicians. We expect our politicians to be corrupt. We don’t worship our leaders (only the dead ones). The U.S. Constitution is full of checks and balances to make sure that when (often not if) the opium of power goes to a politician’s head, the damage he or she can do to society is limited. Unfortunately, we don’t share the same distrust for economists and central bankers. It’s hard to say exactly why. Maybe we are in awe of their Ph.D.s. Or maybe it’s because they sound really smart and at the same time make us feel dumber than a toaster when they use big terms like “aggregate demand.” For whatever reason, we think they possess foresight and the powers of Marvel superheroes.

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Got to love the creativity: “..the current market downturn appears to be technical in nature..”

Hong Kong And Mainland China Shares Tank In Global Rout (CNBC)

The global market rout continued into Asia as Hong Kong and China shares fell sharply Friday after the U.S. stock market tanked overnight. The Hang Seng Index was down about 3.8% at 29,306.63 at 11.08 a.m. HK/SIN while the Shanghai composite was down 4.5% at 3,114.0472. Despite the sell-off, equities may just be in their “first leg of correction,” said William Ma, chief investment officer of Noah Holdings in Hong Kong. Even though the mainland market is not fully connected to the global market, fund managers on the mainland are talking about the global economy “half the time,” underscoring the international nature of markets that is causing a “synchronized collapse” in both Hong Kong and China, Ma told CNBC. With everything happening, it’s still too early to jump into the market for bargains, he said.

Ma recommends waiting for the Hang Seng Index to tank another 15% before putting money into the Chinese tech giant trio Baidu, Alibaba and Tencent — collectively known as BAT. Even amid the sharp slide, some experts recommended calm. One, Philip Li, senior fund manager at Value Partners, said the current market downturn appears to be technical in nature. Asia will be under pressure as long as its markets are correlated to the Dow, but earnings expectations for companies and the growth outlooks for regional economies are solid, so the current rout appears divorced from any fundamentals, Li added. The Chinese markets were already under pressure even before this week’s market sell-off as investors took profit ahead of the long Lunar New Year public holidays that start later next week.

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China’s small banks have -interbank- liquidity issues. Can’t have that with Lunar New Year coming up.

PBOC Releases Nearly 2 Trillion Yuan In Temporary Liquidity (R.)

China’s central bank said on Friday that it has released temporary liquidity worth almost 2 trillion yuan ($316.28 billion) to satisfy cash demand before the long Lunar New Year holidays. The People’s Bank of China had announced in December that it would allow some commercial banks to temporarily keep less required reserves to help them cope with the heavy demand for cash ahead of the festivities, which begin later next week. Interbank liquidity levels will remain reasonably stable, the PBOC said on its official microblog.

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Yeah, because who needs big government, right?

50,000 American Bridges Are “Structurally Deficient” (ZH)

Last week, President Trump announced his proposal for a $1.5 trillion infrastructure program in his State of The Union address to the American people. He failed to mention that over the next decade, the federal government would provide very little money whatsoever for America’s crumbling bridges, rails, roads, and waterways. In fact, Trump’s plan counts on state and local governments working in tandem with private investors to fork up the cash for projects. In overhauling the nation’s crumbling infrastructure, the federal government is only willing to pledge $200 billion in federal money over the next decade, leaving the remainder of $1.3 trillion for cities, states, and private companies.

Precisely how Trump’s infrastructure program would work remains somewhat of a mystery after his Tuesday night speech, as state transportation officials warned that significant hikes to taxes, fees, and tolls would be required by local governments to fund such projects. To get an understanding of the severity of America’s crumbling infrastructure. The American Road & Transportation Builders Association (ARTBA) has recently published a shocking report specifying more than 50,000 bridges across the country are rated “structurally deficient. Here are the highlights from the report: • 54,259 of the nation’s 612,677 bridges are rated “structurally deficient.” • Americans cross these deficient bridges 174 million times daily. • Average age of a structurally deficient bridge is 67 years, compared to 40 years for non-deficient bridges. • One in three (226,837) U.S. bridges have identified repair needs. • One in three (17,726) Interstate highway bridges have identified repair needs.

Dr. Alison Premo Black, chief economist for the American Road & Transportation Builders Association (ARTBA), who conducted the analysis, said, “the pace of improving the nation’s inventory of structurally deficient bridges slowed this past year. It’s down only two-tenths of a% from the number reported in the government’s 2016 data. At current pace of repair or replacement, it would take 37 years to remedy all of them. ” Black says, “An infrastructure package aimed at modernizing the Interstate System would have both short- and long-term positive effects on the U.S. economy.” She adds that traffic jams cost the trucking industry $60 billion in 2017 in lost productivity and fuel, which “increases the cost of everything we make, buy or export.”

Other key findings in the ARTBA report: Iowa (5,067), Pennsylvania (4,173), Oklahoma (3,234), Missouri (3,086), Illinois (2,303), Nebraska (2,258), Kansas (2,115), Mississippi (2,008), North Carolina (1,854) and New York (1,834) have the most structurally deficient bridges. The District of Columbia (8), Nevada (31), Delaware (39), Hawaii (66) and Utah (87) have the least. At least 15% of the bridges in six states – Rhode Island (23%), Iowa (21%), West Virginia (19%), South Dakota (19%), Pennsylvania (18%) and Nebraska (15%)—fall in the structurally deficient category. As Staista’s Niall McCarthy notes, U.S. drivers cross those bridges 174 million times a day and on average, a structurally deficient bridge is 67 years old.

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More currency wars?!

Bank Of England Signals An Interest Rate Hike Is Coming (G.)

The Bank of England has signalled that an interest rate hike is coming from as early as May and that there are more to come, as the economy accelerates with help from booming global growth. Threadneedle Street said it would need to raise rates to tackle stubbornly high inflation “somewhat earlier and by a somewhat greater extent” than it had anticipated towards the end of last year. While the Bank’s rate-setting monetary policy committee (MPC) voted unanimously to leave rates at 0.50% this month, the tone of its discussion suggests the cost of borrowing will not remain this low for much longer. The Bank’s governor, Mark Carney, had previously suggested there could be two further rate hikes to curb inflation over the next three years – but speculation will now mount over the chance of additional rate hikes.

The pound rose on foreign exchanges following the interest rate decision, hitting almost £1.40 against the dollar. City investors give a 75% chance of a rate hike in May, after having previously given a 50-50 probability. The FTSE 100 sold off sharply, falling by more than 108.7 points to below 7,200, amid a global stock market rout triggered by concerns among investors that central banks will need to raise interest rates faster than expected to curb rising inflation. On Wall Street, the Dow Jones Industrial Average was down more than 400 points by lunchtime. Threadneedle Street said inflation would fall more gradually than it had previously anticipated, because workers’ pay is slowly beginning to pick-up and as the oil prices is rising. “The outlook for growth and inflation [is] likely to require some ongoing withdrawal of monetary stimulus,” the MPC said.

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Land must belong to communities, societies. Who may lease it to individuals and firms for a good fee, but never sell it. You don’t sell seas and oceans either.

The Biggest Privatisation You’ve Never Heard Of: Land (G.)

Over the past 12 months, the issue of privatisation has surged back into the news and the public consciousness in Britain. Driven by mounting concerns about profiteering and mismanagement at privatised enterprises, Jeremy Corbyn’s Labour party has made the renationalisation of key utilities and the railways a central plank of its agenda for a future Labour administration. And then, of course, there is Carillion, a stark, rotting symbol of everything that has gone wrong with the privatisation of local public services, and which has prompted Corbyn’s recent call for a rebirth of municipal socialism. Yet in all the proliferating discussion about the rights and wrongs of the history of privatisation in Britain – both from those determined to row back against the neoliberal tide and those convinced that renationalisation is the wrong answer – Britain’s biggest privatisation of all never merits a mention.

This is partly because so few people are aware that it has even taken place, and partly because it has never been properly studied. What is this mega-privatisation? The privatisation of land. Some activists have hinted at it. Last October, for instance, the New Economics Foundation (NEF), a progressive thinktank, called in this newspaper for the government to stop selling public land. But the NEF’s is solely a present-day story, picturing land privatisation as a new phenomenon. It gives no sense of the fact that this has been occurring on a massive scale for fully 39 years, since the day that Margaret Thatcher entered Downing Street. During that period, all types of public land have been targeted, held by local and central government alike.

And while disposals have generally been heaviest under Tory and Tory-led administrations, they definitely did not abate under New Labour; indeed the NHS estate, in particular, was ravaged during the Blair years. All told, around 2 million hectares of public land have been privatised during the past four decades. This amounts to an eye-watering 10% of the entire British land mass, and about half of all the land that was owned by public bodies when Thatcher assumed power.

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The mess gets messier.

Northern Ireland Will Stay In Single Market After Brexit – EU (G.)

UK negotiators have been warned that the EU draft withdrawal agreement will stipulate that Northern Ireland will, in effect, remain in the customs union and single market after Brexit to avoid a hard border. The uncompromising legal language of the draft agreement is likely to provoke a major row, something all parties to the negotiations have been trying to avoid. British officials negotiating in Brussels were told by their counterparts that there could be a “sunset clause” included in the legally binding text, which is due to be published in around two weeks. Such a legal device would make the text null and void at a future date should an unexpectedly generous free trade deal, or a hitherto unimagined technological solution emerge that could be as effective as the status quo in avoiding the need for border infrastructure.

As it stands, however, the UK is expected by Brussels to sign off on the text which will see Northern Ireland remain under EU law at the end of the 21-month transition period, wherever it is relevant to the north-south economy, and the requirements of the Good Friday agreement. The move is widely expected to cause ructions within both the Conservative party and between the government and the Democratic Unionist party, whose 10 MPs give Theresa May her working majority in the House of Commons. The UK will be put under even greater pressure to offer up a vision of the future relationship that will deliver for the entire UK economy, but the inability of that model to ensure frictionless trade is likely to be exposed. A meeting of the cabinet to discuss the Irish border on Wednesday failed to come to any significant conclusions.

“There will be no wriggle room for the UK government,” said Philippe Lambert MEP, the leader of the Greens in the European parliament, who was briefed in Strasbourg earlier this week by the EU’s chief negotiator, Michel Barnier. “We are going to state exactly what we mean by regulatory alignment in the legal text. It will be very clear. This might cause some problems in the UK – but we didn’t create this mess.”

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This is the Big Trap now. No debt relief unless and until strong growth. As even the IMF has said strong growth depends on debt relief first.

EU’s Moscovici ‘Especially Optimistic’ On Greek Debt Relief (R.)

European Commissioner for Economic and Financial Affairs Pierre Moscovici said on Thursday he was “especially optimistic” about efforts to reach a solution on Greek debt relief. Greece’s third bailout ends in August and debt relief is expected to come up in negotiations over its bailout exit terms in the coming months. Athens and its eurozone lenders are expected to flesh out a French-proposed mechanism that was presented in June and which will link debt relief to Greek growth rates. The economy is forecast to grow by up to 2.5% this year and in 2019.

“On the issue of debt relief I am especially optimistic and I believe that our efforts will be implemented and they will be successful,” Moscovici said, through an interpreter, at a meeting with Greek President Prokopis Pavlopoulos. Greek public debt is forecast at 180% of GDP this year. Greece has received a record 260 billion euros in three bailouts since 2010. Moscovici, who is in Greece for talks on the next steps in the program, said it was up to Athens to devise a strategy for exiting its bailout and the post-bailout surveillance period. “The exit from the bailout is becoming apparent and under very good circumstances,” Moscovici said.

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A great big swirling black hole.

Greek Pensions Keep Getting Smaller (K.)

One in three pensioners has to live on less than 500 euros a month at a time when pensions in Greece have been constantly falling, according to the Helios online data system’s monthly reports. The Labor Ministry platform showed that the average income of Greek retirees amounts to 894 euros per month: The average main pension from all social security funds comes to 722 euros a month while the average auxiliary pension amounts to just 171 euros a month. The average dividend from the funds comes to 98 euros. More than two in three pensioners (66.39%) are on less than 1,000 euros a month, and 31.03% of pensions do not exceed 500 euros. In December the number of pensioners fell by 3,311 from November to 2,586,480. Compared to October’s 2,592,950, that’s a reduction of 6,470 pensioners.

Monthly expenditure on pensions decreased by 1.44 million euros from November and by 4.07 million from October. In total, 117,148 people were issued with new and definitive main and auxiliary pensions as well as dividends in 2017. As the year drew to a close, more and more new pensions issued were calculated according to the law introduced in 2016, meaning that the benefits handed out were considerably smaller. Therefore, while the average new pension for retirees who paid into the former Social Security Foundation (IKA) amounted to 640.66 euros in January 2017, this dropped to just 521.01 euros in December. Even the average IKA pension for those for whom it was first issued before May 2016 shrank considerably over the year, dropping to 618 euros per month.

Notably, more than a quarter of pensioners (26.32%) are under 65, while the distribution of retirees per age and pension category shows that the younger a person retires, the higher a pension they will receive. Meanwhile the Hellenic Statistical Authority (ELSTAT) announced on Thursday that the unemployment figures for last November showed no improvement from October, staying put at 20.9%. In November 2016 the jobless rate came to an upwardly revised 23.3%.

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Italians have had enough. Elections March 4. This will be the main theme.

Italy Accused Of Subjecting 10,000 Refugees To ‘Deplorable’ Conditions (Ind.)

Ten thousand migrants are living in “deplorable” conditions in Italy without shelter, food and clean water, Médecins Sans Frontières (MSF) has warned in a damning indictment of the country’s border practices. “Inadequate” reception policies are forcing refugees into slums, squats and abandoned buildings with limited access to basic services, the charity said. Increasing marginalisation of asylum seekers and a growing prevalence of forced evictions has led to small groups of migrants living in increasingly hidden places, the charity found, exposing them to “inhumane” living conditions. The findings, released as part of the second edition of the charity’s Out of Sight report, reveal the torturous reality facing huge swathes of Italy’s migrant population. But the survey shows Italians are increasingly uneasy over the numbers of refugees that have reached their country’s shores by boat over the past four years.

The report’s release coincides with a spike in anti-immigration rhetoric ahead of the 4 March parliamentary elections. On Saturday, a far-right extremist was arrested on suspicion of shooting six Africans in a racially motivated attack in Macerata. Days later, Silvio Berlusconi, the former Prime Minister whose Forza Italia (Go Italy!) party has entered a coalition with the Northern League and the smaller Brothers of Italy, promised to deport 600,000 migrants if their coalition came to power. “These 600,000 people, we will pick them up using police, law enforcement and the military… everyone can help identify them by pointing them out, and they will be picked up,” he said, claiming immigration was a “social bomb” linked to crime. Northern League leader Matteo Salvini also promised “irregular” migrants would be rounded up and sent home “in 15 minutes” if he and his allies take power.

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Feb 072018
 
 February 7, 2018  Posted by at 11:07 am Finance Tagged with: , , , , , , , , , ,  


Jean-Michel Basquiat Aboriginal 1984

 

Why Did US Stock Market Crash On Monday? Blame The Central Banks (Steve Keen)
Asian Shares On Edge As US Futures Slip (R.)
Two Tiny Volatility Products Helped Fuel Sudden Stock Slump (BBG)
Inside Wall Street’s $8 Billion VIX Time Bomb
The Death Of The “Death Of Contagion” Central Bank Meme (Luongo)
Icahn: “One Day This Thing Is Just Going To Implode” (CNBC)
Good Riddance, Janet, You Were A Colossal Failure, Part 1 (Stockman)
How “Opioid Janet” Got Wall Street Hooked On Monetary Heroin, Part 2 (Stockman)
The EU Is The Enemy Of The Working Classes (Spiked)
German Pay Deal Heralds End Of Wage Restraint In Europe’s Largest Economy (R.)
UK Crops Left To Rot After Drop In EU Farm Workers In Britain (Ind.)
Refugee Arrivals Have Doubled Since August, Greek Migration Minister Says (K.)

 

 

Coming to you from a Russian propaganda channel.

Why Did US Stock Market Crash On Monday? Blame The Central Banks (Steve Keen)

Everyone who’s asking “why did the stock market crash Monday?” is asking the wrong question. The real poser is “why did it take so long for this crash to happen?” The crash itself was significant—Donald Trump’s favorite index, the Dow Jones Industrial (DJIA) fell 4.6% in one day. This is about four times the standard range of the index—and so according to conventional economics, it should almost never happen. Of course, mainstream economists are wildly wrong about this, as they have been about almost everything else for some time now. In fact, a four% fall in the market is unusual, but far from rare: there are well over 100 days in the last century that the Dow Jones tumbled by this much. Crashes this big tend to happen when the market is massively overvalued, and on that front this crash is no different.

It’s like a long-overdue earthquake. Though everyone from Donald Trump down (or should that be “up”?) had regarded Monday’s level and the previous day’s tranquillity as normal, these were in fact the truly unprecedented events. In particular, the ratio of stock prices to corporate earnings is almost higher than it has ever been. There is only one time that it’s been higher: during the DotCom Bubble, when Robert Shiller’s “cyclically adjusted price to earnings” ratio hit the all-time record of 44 to one. That means that the average price of a share on the S&P500 was 44 times the average earnings per share over the previous 10 years (Shiller uses this long time-lag to minimize the effect of Ponzi Scheme firms like Enron).

The S&P500 fell more than 11% that day, so Monday’s fall is minor by comparison. And the market remains seriously overvalued: even if shares fell by 50% from today’s level, they’d still be twice as expensive as they have been, on average, for the last 140 years. After the 2000 crash, standard market dynamics led to stocks falling by 50% over the following two years, until the rise of the Subprime Bubble pushed them up about 25% (from 22 times earnings to 28 times). Then the Subprime Bubble burst in 2007, and shares fell another 50%, from 28 times earnings to 14 times. This was when central banks thought The End of the World Is Nigh, and that they’d be blamed for it. But in fact, when the market bottomed in early 2009, it was only just below the pre-1990 average of 14.5 times earnings.

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Give it a few days, and complacency may well be reinstated.

Asian Shares On Edge As US Futures Slip (R.)

Asian shares reversed their earlier gains on Wednesday as investors dumped U.S. stock futures for safer harbors, a sign market participants remain jittery after this week’s global markets rout. While most analysts believed this week’s distressed selling looks to have run its course for the moment, allowing volatility to abate a little, the prospect of monetary tightening across the globe remains a challenge for the long term. “If we look at some of the drivers of the recent volatility – the natural correction and the bond sell-off – we don’t foresee any of these factors contributing to a lengthy period of extreme volatility,” said Tom Kenny, senior economist at ANZ. “The correction is probably a healthy development and is not reflective of a souring of the macroeconomic outlook.”

Investors took their cues from a late rebound on Wall Street overnight, though many had an anxious eye on E-Mini futures for the S&P 500 which slipped about 1% in late Asian trading. Dow Minis were down 0.9%. MSCI’s broadest index of Asia-Pacific shares outside Japan was a tad softer, having risen as much as 2% in early trade. Japan’s Nikkei eased too but was still up 0.2%. Chinese blue chips and South Korea’s KOSPI index dropped more than 2%. “The only surprise about the current volatility is that it hasn’t happened sooner. Normally, even in a bull market, investors should expect a sell-off of 10-percent-plus at some point,” said Richard Titherington, chief investment officer of EM Asia Pacific Equities. “While a major market downturn is possible, it is not our current expectation. The underlying backdrop of an improving global economy, a weakening U.S. dollar and a pickup in global earnings all remain supportive factors.”

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Why have these things ever been allowed into existence? Who and what do they serve? The American people?

Two Tiny Volatility Products Helped Fuel Sudden Stock Slump (BBG)

Two days after a sudden spike in volatility sparked a stock-market crash, market participants are left to ponder the wreckage of the sell-off and the mysterious dynamics that caused it. One theory that’s emerging: the curious case of the tail wagging the dog. Two exchange-traded products that democratized access to one of Wall Street’s most tried-and-true strategies – selling volatility – had just $3.6 billion in assets on Monday. That’s a tiny fraction of the roughly $2 trillion estimated to be linked to short-volatility strategies – and a speck of dust compared to the $23 trillion in market value of S&P 500 companies. Yet the popularity of these vehicles might have contributed to one of the most violent moves in U.S. equities in history: one that saw the Dow Jones Industrial Average slump more than 6% in a span of six minutes.

After the dust settled, the combined assets in the two exchange-traded products shrank to $135 million. One of them – the VelocityShares Daily Inverse VIX Short-Term ETN, known as XIV – will soon be extinct. No one knows for sure what played out on the afternoon of Feb. 5 on Wall Street, cautioned Societe Generale SA managing director Ramon Verastegui, but there’s reason to believe the sharpness of the retreat in equities was linked to traders’ understanding of how the exchange-traded products would behave. As funds’ assets swelled, so too had their power to move the underlying VIX futures markets, he suggests. And market participants knew it. Products such as XIV and its close relation, the ProShares Short VIX Short-Term Futures ETF (SVXY), aim to offer investors exposure to the inverse of the daily moves at the front portion of the VIX futures curve, and typically benefit from market tranquility.

Demand from leveraged VIX exchanged-traded products was “the major driver for the move post the cash close,” Barclays analysts led by Maneesh Deshpande said. There are other clues in the case — notably that the big fall in stocks hasn’t yet significantly affected other asset classes. That the volatility spike was concentrated in equities supports the notion of a VIX product-propelled plunge, according to George Pearkes, macro strategist at Bespoke Investment Group. During other eruptions of volatility — the aftermath of China’s shock devaluation of the yuan in August 2015, for instance – volatility in stocks, bonds, currencies and even oil jumped. “This is the exact opposite of a number of different volatility spikes we’ve seen in recent years,” he said in an interview on Bloomberg TV. “Frankly, it’s a reason to think that some of the worst of the recent moves in the VIX and the delta moves in cash equities have been driven specifically by equity-vol products that have not spread out to other asset classes.”

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If it were just $8 billion, we wouldn’t be having this talk.

Inside Wall Street’s $8 Billion VIX Time Bomb

It was the hot trade on Wall Street, a seemingly sure thing that lulled everyone from hedge fund managers to small-time investors. Now newfangled investments linked to volatility in the stock market – until a few years ago, obscure niche products – have exploded in spectacular fashion. The shock waves have only just begun. How these investments proliferated is a classic story of Wall Street salesmanship and old-fashioned greed. In a few short years, financial engineering transformed expectations about the ups and downs of the stock market into an asset class that could be marketed and sold – as tradable as stocks but, it turns out, sometimes far riskier. Call it the volatility-financial complex. All told, financial players have created more than $8 billion of products tied to one index alone.

In a low-interest-rate world, investors desperate for returns snapped them up, and bankers collected fees along the way. But, as with mortgage investments a decade ago, complacency – in this case, over a history-defying period of market calm – masked potential dangers. No one is saying the wild swings of late presage a broad collapse like the one that hit in 2008. But the fallout nonetheless provides a glimpse into the myriad products, and growing complexity, driving global markets a decade after the last debacle. The risks, in hindsight, were clear enough even before the Dow Jones industrial average plummeted nearly 1,600 points on Monday, snapped back, and then took a wild bungee jump of nearly 1,200 points Tuesday. The CEO of Barclays, which pioneered notes linked to U.S. market volatility, warned only last month that investors might be losing their heads.

“If this thing turns, hold on to your hat,” Jes Staley told a panel at the World Economic Forum in Davos. Now, hats have been blown off by a whirlwind the likes of which Wall Street has never seen. To some, the volatility complex feels like a monster that’s been lurking in the shadows. Even one of the inventors of the VIX, Devesh Shah, is perplexed why these products exist in the first place. “Everybody knew that this was a huge problem,” said Shah, who was in his 20s when he helped create what’s become the market’s fear barometer. “Everybody knows that Inverse VIX is going to go to zero at some point, and all these inverse and leveraged products, not just in the VIX but elsewhere too, at the end of the day cost people a lot of money.”

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VIX as CDOs with lipstick on.

The Death Of The “Death Of Contagion” Central Bank Meme (Luongo)

Last year now-former FOMC Chair Janet Yellen downplayed the possibility of another financial crisis. In her hubris she believes the central banks have walled off the financial system from ‘contagion risks’ brought on by over-investment in synthetic derivative market products. Like generals, however, central planners are always fighting the last war. We’re experiencing a major correction in the equity markets brought on in a mean-reversion exercise thanks to central banks trying to shore up their defenses around the last battle they lost, namely off-exchange, unregulated CDOs — synthetic debt-based investment products. Humans are clever and will always find a way around a problem. The problem is incentives. he banks created CDO’s because there was a demand for investment returns far above what the central banks were allowing the market to pay, by setting interest rates well below the real risk profile of the investment community.

In other words, government bonds were over-priced and investors went looking for better returns. Now that Yellen et.al. have stamped out most of that market investors still need yield. And that’s where the equity markets and the VIX come in. The response to the 2008 financial crisis was zero-bound interest rates and trillions in liquidity created by the central banks sitting around looking for yield. It found its way into the equity markets which over the past six plus years been on an historic rally off the October 2011 low. During that time the VIX became more important. What was once only discussed by the real pros was now in the hands of everyone. Contagion risks jumped asset classes. For the uninitiated the VIX — or volatilty index — is a bet about the behavior of the S&P 500, itself an index of stocks. Higher VIX values equal higher implied future volatility in the S&P 500 and vice versa.

In mathematical terms the S&P 500 is the first derivative of any single stock. Stocks in the index trade in sympathy with it regardless of their current business. The VIX is then the 2nd derivative of any stock in your portfolio. During a rally the VIX falls. But, now with so many products out there, ETNs — Exchange Traded Notes — both leveraged and un-leveraged — to speculate in the VIX it became easier and more profitable to trade it than the S&P 500 or individual stocks. Trading volumes in these products have soared. The tail didn’t just wag the dog, it became the dog. Now these ETN’s are another derivative of the equity markets. And if they are leveraged, i.e. the note trades with twice or three times the volatility of the VIX itself (volatility of volatility), then options on these ETNs is the fourth derivative of the underlying stock. Volatilty of volatility of volatility.

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No doubt there.

Icahn: “One Day This Thing Is Just Going To Implode” (CNBC)

Billionaire Carl Icahn told CNBC on Tuesday there are too many exotic, leveraged products for investors to trade, and one day these securities are going to blow up the market. The market is a “casino on steroids” with all these exchange-traded funds and exchange-traded notes, he said. These funds, especially the leveraged ones, are the “fault lines” that will eventually lead to an earthquake on Wall Street, he said. “These are just the beginnings of a rumbling.” The latest example is an obscure security, designed to be a bet on a calm market, that’s being blamed for causing an influx of selling in recent days. The VelocityShares Daily Inverse VIX Short-Term exchange-traded note (XIV) blew up overnight as investors were forced to sell when the market went haywire. As a result, Credit Suisse on Tuesday said as of Feb. 20, it will end trading for its XIV, which was supposed to give the opposite return of the Cboe Volatility Index (VIX), often referred to as the market’s fear gauge.

“The market itself is way over-leveraged,” Icahn said on “Fast Money Halftime Report,” predicting that “one day this thing is just going to implode.” He described the possible implosion as “maybe eventually worse than 1929,” making reference to the stock market crash that contributed to the Great Depression. “The market has become a much more dangerous place,” he said, adding the current volatility is a precursor of potential trouble. “It’s telling you something, giving you a warning.” Investors are piling into index funds thinking they’ll never go down, Icahn said. “Passive investing is the bubble right now, and that’s a great danger.” But as much as he was sounding alarm bells, Icahn said, “I don’t think this is the explosive time.” The market will “probably bounce back,” he continued. “I don’t think this is the beginning of the end.”

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I read far too much praise for Yellen. Stockman doesn’t swallow it either.

Good Riddance, Janet, You Were A Colossal Failure, Part 1 (Stockman)

This is one for the record books. During Janet Yellen’s last week in office, the Dow dropped by 1,095 points or 4.1%. But by her lights, apparently, that wasn’t even a warning bell – just the market clearing its collective throat. So on the way out the door our Keynesian school marm could not resist delivering what will soon be seen as a grand self-indictment. There’s nothing to worry about, she averred, because Wall Street’s OK and main street is positively awesome: “I don’t want to label what we’re seeing as a bubble….(even if) asset valuations are generally elevated….(but) when I see the unemployment rate fall to 4.1%…I feel very good about the progress we’ve seen there.” No, there is a monumental bubble out there that was born, bred and nurtured at the hands of the Fed.

At the same time, Yellen and her merry band of money printers had virtually nothing to do with the 4.1% unemployment rate – even if that were a valid measure of return to full employment prosperity, which it is not. To the contrary, the mainstreet economy is sick as a dog, and it is the Fed’s giant Wall Street bubbles which made it so. That said, hereupon follows the ringing economic and financial indictment that Janet Yellen so richly deserves. In the first place, that Fed’s dangerous digression into massive QE and 100 months of near-ZIRP had virtually nothing to do with the limpid “recovery” that has transpired since the June 2009 bottom. And we do mean its contribution amounted to nothing – as in zero, zip and zilch.

[..] In general, our thesis is that central bank stimulus of household spending is equivalent to a one trick pony. Once all the latent headroom on household balance sheets and income statements to raise leverage levels is used up, cheap debt loses its efficacy in the main street economy. In fact, that is exactly what has happened. During the first 20-years of the Greenspan-incepted era of Bubble Finance, household leverage ratios exploded. Whereas wage and salary incomes rose by $4.2 trillion or 2.9X, household liabilities soared by nearly $12 trillion or 5.2X. Over the two decades, therefore, household leverage ratios (liabilities to earned income) nearly doubled from 124% to 224%.

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Yellen has been a terribly destructive force for America. It’s just that the consequences take time to seep through.

How “Opioid Janet” Got Wall Street Hooked On Monetary Heroin, Part 2 (Stockman)

Janet Yellen deserves exactly none of the adulation being conferred upon her tenure by the mainstream financial press. In fact, her reign will be judged by history as a spectacular failure that left main street high and dry—even as it finally and completely addicted Wall Street to the toxic monetary heroin that is the specialty of Keynesian central bankers. Accordingly, it may take a dozen or more episodes like the 12% crash of the last few days to finally purge the “buy the dips” addiction that is rampant in the casinos. Pending that day of deliverance, however, the soon-to-be shaking and shivering cold turkeys of Wall Street will surely come to see that Opioid Janet was not their friend at all, but their very worst nightmare.

[..] much of the mischief, madness and reckless speculation now implanted in the global financial markets happened during the Yellen-enabled global QE phase of 2014-2018. During that period, for example, corporate debt issuance set all-time records. But as we documented in Part 1, the proceeds went into financial engineering and bidding up the price of existing shares to ludicrous heights, not new growth capital. Likewise, carry trade speculation by front-runners went to mindless extremes, such as the fact that the Italian 10-year note traded under 1.0% during points in 2016. The facts that Italy’s public debt stood at 133% of GDP, that its political system was completely broken and dysfunctional and that its economy was 10% smaller than it had been earlier in this century were irrelevant to the price of its debt.

The latter was being set by front-running speculators who were buying on massive repo leverage what the idiot central banker, Mario Draghi, promised them he would be buying, too. Indeed, as Yellen dithered, deferred, ducked and delayed the urgent imperative of monetary normalization at the Fed, the other lesser central banks were given leave to expand their collective balance sheets at a stupendous $2.2 trillion annual rate during much of 2016-2017. With two massive central bank vaults swinging their doors wide open, it’s no wonder that upwards of $15 trillion of sovereign debt traded with a negative yield during the peak of the madness.

And that wasn’t the half of it. By killing the yield on sovereigns, Yellen and her convoy of Keynesian central bankers forced money managers into what will soon be evident as crazy-ass risk taking in order to scrape-up a semblance of yield. Not only did European junk bonds trade inside the UST 10-year yield at one point, but the corporate bond market was literally primed for an explosion of issuance by fund managers desperate for returns. The proceeds, of course, went almost entirely into funding giant, pointless M&A deals, stock buybacks and other forms of debt-financed recapitalization.

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“Workers” and “working classes” is the language of the 1850s. It‘s not going to get you anywhere today.

The EU Is The Enemy Of The Working Classes (Spiked)

here are two European Unions, it seems. There is the EU that stands up for the citizen, for his or her rights; the EU that can face down the behemoths of global capitalism and rein in their avarice and callousness; the EU that has legally enshrined workers’ freedoms, and which exists as a bulwark against untrammelled neoliberalism. And then there is the real EU. That heroic EU is a castle in the anti-Brexit sky, built by those who identify themselves as left-wing. It is maintained by those Labour MPs and peers who, as they did on the eve of Labour’s autumn conference, ceaselessly urge Labour leader Jeremy Corybn ‘to commit to staying in the Single Market and Customs Union… and to work with sister parties and others across Europe to improve workers’ rights’.

It is fortified by the self-appointed keepers of the left-wing flame, those among the commentariat who never tire of telling us that ‘workers’ rights… would be imperilled’ by a so-called ‘Hard Brexit’. And it is peopled by all those who cling to this image of the EU as an essentially social-democratic institution, sticking it gently to the man, defying the Daily Mail, and protecting working men and women against the inhuman workings of capital. Then there’s the other EU, the one that actually exists. This is the EU that uses the pooled-without-consent sovereignty of its member states to pursue its own institutional self-preservation, impoverishing struggling Eurozone members, from Spain to Italy, in the name of economic stability; imposing leaders-cum-administrators on recalcitrant electorates in the interests of austerity; and brazenly betraying workers’ rights at every self-interested turn.

This EU – the actual EU, the one stubbornly committed to its own, not citizens’, interests – is not on the side of the worker. And it never was. Because this EU, when the economic imperative demands, is always against the worker. But those attached to their fantasy left-wing ideal of the EU refuse to see the reality. To face up to this reality would simply be too much. It would mock their left-wing pretensions, humiliate and expose them for what they are: a craven defence of the status quo – a status quo in which they have long prospered. This is presumably why so little attention has been given to what happened in Greece last month, when the real EU was there for all to see. The EU forced the Syriza-led government of Alex Tsipras to implement new anti-union legislation, rendering strike action illegal unless over 50% of union members have formally approved it. The effect of such a measure, as the British trade-union movement discovered in the 1980s, will be to strangle workers’ freedoms in bureaucracy, and emasculate organised labour.

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The country with the most political power in the EU already has the richest citizens. And they stand to get richer. Those is Spain, Italy, Greece: not so much. Two-tier Europe is here.

German Pay Deal Heralds End Of Wage Restraint In Europe’s Largest Economy (R.)

A hard-fought deal on pay and working hours for industrial employees in southwestern Germany sets a benchmark for millions of workers across Europe’s largest economy and heralds wage growth in the coming years. The agreement between labour union IG Metall and the Suedwestmetall employers’ federation, struck overnight, foresees a 4.3% pay raise from April and other payments spread over 27 months. Tough pay negotiations are expected to end years of wage restraint in Germany, potentially aiding the ECB as it tries to get euro zone inflation back up to the bank’s target rate of just below 2%. On an annual basis, the agreement is equivalent to a 3.5% increase in wages, according to Commerzbank analyst Eckart Tuchtfeld, well below IG Metall’s initial demand for a 6% hike over 12 months, but was still seen as a good deal.

“The agreed pay rises, and accompanying measures, are at the top end of expectations and should result in annual wage increases of close to 4% over the next couple of years,” Pictet economist Frederik Ducrozet said. The “pilot” deal, struck against a backdrop of a strong economic recovery and the lowest unemployment since German unification in 1990, covers half a million employees in southwestern Germany, home to industrial powerhouses like car maker Daimler. It is expected to be applied in the rest of Germany as well and is likely to influence negotiations in other industries.

Germany’s second-biggest union, Verdi, is due to publish its wage demand for public sector workers on Thursday. Verdi and IG Metall together account for about 15% of the German workforce. IG Metall’s deal will reinforce market expectations for the ECB to dial back stimulus further this year as growth in the bloc is now self generating and wages are moving slowly upwards. It comes as world stock and bond markets are selling off on fears that a jobs bonanza in the United States may force early interest rate hikes there. But the euro zone outlook is much different with the jobless rate still at almost 9% and the broader slack, which includes part-time and temporary workers, perhaps twice as high, economists say.

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Farmers say they can’t get people to harvest their crops. Question: have you tried raising their wages enough? Something tells us if you pay them well, they will be glad to come work. Something also tells us you haven’t done that. You may say: that makes my products uncompetitive, but that’s another discussion altogether.

Also: the article says “Enough broccoli to feed 15,000 people for a year was wasted..” on that farm. And: the farmer’s loss was “between £30,000 and £50,000.” Does that mean he can feed people for £2 a year? £3? It certainly reads that way.

UK Crops Left To Rot After Drop In EU Farm Workers In Britain (Ind.)

British farmers have been forced to leave thousands of pounds worth of vegetables to rot in their fields, because of a drop in the number of farm workers from the EU. James Orr, whose farm outside St Andrews produces potatoes, carrots, parsnips, broccoli, cauliflower, said his farm suffered a 15% drop in the number of workers between August and November. “We simply could not harvest everything, and as a result we left produce in the field to rot,” he told Scotland’s Sunday Herald newspaper. Enough broccoli to feed 15,000 people for a year was wasted, he added. Mr Orr’s farm supplies more than 1,000 tones of the vegetable and he estimated he lost between £30,000 and £50,000.

The UK farming industry is heavily dependent on pickers from the EU, particularly those from eastern Europe. Britain’s low unemployment rate and the the seasonal nature of the work makes it difficult to attract domestic workers. But the fall in the value of sterling against the Euro since the Brexit vote, means the UK has become less attractive to seasonal workers from Romania and Bulgaria. Farmers also fear that a Brexit deal restricting freedom of movement could leave them with even fewer people to help harvest their crops. [..] NFU Scotland President Andrew Mr McCornick told the Herald access to workers was a key priority for the industry. “This year, there has been a shortage of between 10 and 20% of seasonal workers coming from the EU,” he said. It was essential a scheme was introduced in 2018 that would provide work permits for up to 20,000 workers from outside the EU, he added.

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Mouzalas says: “Whoever says that emptying the islands will improve the situation is wrong..” That doesn’t seem an honest assessement, because it would certainly improve the situation on the islands.

Refugee Arrivals Have Doubled Since August, Greek Migration Minister Says (K.)

Migrant and refugee arrivals onto Greek shores have doubled since August 20 to reach as many as 180 people a day in clement weather, Migration Policy Minister Yiannis Mouzalas said on Tuesday. The increase in arrivals from Turkey has resulted “in a bad situation again” on the islands of the eastern Aegean that host migrant reception and processing centers, Mouzalas admitted, saying that the ministry is trying to improve conditions at overcrowded and under-resourced facilities. Speaking on Thema radio, Mouzalas accused the European Union of contributing to the problem by failing to honor its commitments to Turkey in a deal for that country to take back asylum seekers whose applications are rejected and to crack down on migrant trafficking from its shores.

Mouzalas was also critical of what he described as contradictory reactions from local authorities and communities on the affected islands. “On the one hand, they prevent moves to improve conditions and on the other they are hysterical about dissolving the deal with Turkey at any cost so as to transfer the migrants to the mainland,” Mouzalas said, referring to reactions toward ministry plans for increasing the number of housing units at certain island camps. “Whoever says that emptying the islands will improve the situation is wrong,” Mouzalas said, reiterating concerns that moving all migrants and refugees to the mainland will simply encourage more arrivals. “In 2017, we transferred 27,000 people to the mainland and 19,000 arrived on the islands,” he added.

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Feb 062018
 
 February 6, 2018  Posted by at 9:53 am Finance Tagged with: , , , , , , , , , , , ,  


 

Dow Jones Hit By Biggest Single-Day Points Drop Ever (Ind.)
Stocks Crumble In Vicious Sell-off As ‘Goldilocks’ Trade Unravels (R.)
Europe Joins Global Stock Selloff With Biggest Drop in 20 Months (BBG)
‘Short-Volatility Armageddon’ Craters Two Of Wall Street’s Favorite Trades (MW)
Volatility Spike Boosts US Options Hedging Activity (R.)
Traders Panic As XIV Disintegrates -90% After The Close (ZH)
Machines Had Their Fingerprints All Over a Dow Rout for the Ages (BBG)
Commodities Dragged Into Global Selloff as Oil to Copper Get Hit (BBG)
Bitcoin Tumbles Almost 20% as Crypto Backlash Accelerates (BBG)
The Fed’s Dependence On Stability (Roberts)
A Quandary (Jim Kunstler)
21st Century Plague (MarkGB)
UK Court To Rule On Lifting Assange Arrest Warrant (AFP)
Robots Will Care For 80% Of Elderly Japanese By 2020 (G.)
Berlusconi Pledges To Deport 600,000 Illegal Immigrants From Italy (G.)

 

 

4% is nothing.

Dow Jones Hit By Biggest Single-Day Points Drop Ever (Ind.)

Newfound market volatility has shattered what had been a long period of stability and mounting value. The Dow’s dive erased gains for the year so far and extended a multi-day slump that saw the Dow drop by some 600 points on Friday. In addition setting a new record for number of points dropped in a day, the Dow’s 4.6% decline in value was the most substantial since 2011. It was still less severe than declines during market-rocking events like the 2008 financial crisis, when the Dow shed 7% of its value in its worst single-day hit. Earlier in the day the Dow had plummeted by nearly 1,600 points before recovering much of that value. It has swung some 2,100 points in the last week of trading, a slide approaching 8%.

In addition to the Dow shedding value, the S&P 500 index and the Nasdaq both saw declines of around 4%. The S&P 500 declined to about 7.8% below its all-time high. With thriving markets toppling records in recent months, some analysts said the pullback was all but inevitable. After cresting to a record high in January, the Dow has retreated by 8.5% from that apex. “It’s like a kid at a child’s party who, after an afternoon of cake and ice cream, eats one more cookie and that puts them over the edge,” David Kelly, the chief global strategist for JPMorgan Asset Management, told the Associated Press.

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Worldwide.

Stocks Crumble In Vicious Sell-off As ‘Goldilocks’ Trade Unravels (R.)

A rout in global equities deepened in Asia on Tuesday as inflation worries gripped financial markets, sending U.S. stock futures sinking further into the red after Wall Street suffered its biggest decline since 2011 in a vicious sell-off. S&P mini futures fell as much as 3.0% to four-month lows in Asia, extending their losses from the record peak hit just over a week ago to 12%. MSCI’s broadest index of Asia-Pacific shares outside Japan slid 4.3%, which would be its biggest fall since the yuan devaluation shock in August 2015, turning red on the year for the first time in 2018. Japan’s Nikkei dived 6.8% to near four-month lows while Taiwan shares lost 5.5% and Hong Kong’s Hang Seng Index dropped 4.9%.

Monday’s stock market rout left two of the most popular exchange-traded products that investors use to benefit from calm rather than volatile conditions facing potential liquidation, market participants said. The ructions in markets come after investors have ridden a nearly nine-year bull run, with low global rates sparking a revival in economic growth and bright corporate earnings. That good times may be nearing at end if Wall Street is anything to go by. U.S. stocks plunged in highly volatile trading on Monday, with the Dow industrials falling nearly 1,600 points during the session, its biggest intraday decline in history, as investors grappled with rising bond yields and potentially higher inflation.

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They’ll all keep claiming that fundamentals are solid.

Europe Joins Global Stock Selloff With Biggest Drop in 20 Months (BBG)

European stocks headed for their worst drop since the aftermath of the Brexit referendum as traders in the region caught up with an overnight selloff in the U.S. and Asia. The Stoxx Europe 600 Index fell 2.6% as of 8:16 a.m. in London, with all industry groups firmly in the red. After a strong start to 2018, most European stock benchmarks have wiped out gains for the year in a rout that is extending into a seventh day for the broader regional benchmark. Sentiment has been hurt by worries over rising government bond yields and the outlook for the trajectory of interest rates. “There is a sense out there that this is, in a way, a release of some of the pent-up low volatility we’ve seen over the past year,” said Ben Kumar, an investment manager at Seven Investment Management in London, which oversees about 12 billion pounds.

“We have been sitting on quite a large cash pile for some time and at some point, we will look to invest that. There may be a bit more pain to come before we start seeing a real dip to buy.” Cyclicals including automakers, technology and basic resources were among the worst sector performers. Still, data on Monday showed economic momentum in the euro-area climbed to the fastest pace in almost 12 years, and German factory orders surged in the last month of 2017. That’s leading some fund managers and traders to bet that equities are experiencing an overdue pullback rather than a deeper correction. “Market tops have probably been set for a pretty long time now on many equity indexes,” Stephane Barbier de la Serre, a strategist at Makor Capital Markets, said by phone.

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They’ll have a hard time accepting the demise of easy money.

‘Short-Volatility Armageddon’ Craters Two Of Wall Street’s Favorite Trades (MW)

One of the most popular trades in the market, betting a period of unnatural calm would continue, may have amplified selling pressure in the stock market on Monday market participants said. At least two products tied to volatility bets were severely whacked with the hemorrhaging that could pose challenges to the exchange-traded notes. One popular product, the VelocityShares Daily Inverse VIX Short Term ETN, was down 90% in after-hours trade on Monday, following a session in which the Dow Jones Industrial plunged by 1,175 points, or 4.6%, while the S&P 500 index tumbled 4.1%—both benchmarks coughed up all of their gains for 2018.

The Cboe Volatility Index, meanwhile, skyrocketed by about 118%, marking its sharpest daily rise on record. The VIX uses bullish and bearish option bets on the S&P 500 to reflect expected volatility over the coming 30 days, and it typically rises as stocks fall. The XIV, meanwhile, was designed to allow investors to bet against a rise in volatility and such bets had been a winning proposition until recently, when equities accelerated a multisession unraveling fueled by fears that the Federal Reserve will be forced to raise borrowing costs faster than anticipated due to a potential resurgence in inflation, which had pushed Treasury yields higher. Monday’s stock-market drop may have been amplified because those making bets that volatility, as measured by the VIX, would remain relatively subdued, were caught wrong-footed.

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Ultra low volatility is purely artificial.

Volatility Spike Boosts US Options Hedging Activity (R.)

Wall Street’s “fear gauge” notched its biggest one-day jump on Monday in over two years, as U.S. stocks slumped and investors took to the options market in search of protection against a further slide in equities prices. Stocks slid in highly volatile trading on Monday, with the benchmark S&P 500 index and the Dow Jones Industrials suffering their biggest respective%age drops since August 2011 as a long-awaited pullback from record highs deepened. For the Dow, the fall at one point of nearly 1,600 points was the biggest intraday point loss in Wall Street history. The CBOE Volatility Index, better known as the VIX, is the most widely followed barometer of expected near-term volatility for the S&P 500 Index. On Monday, the index ended up 20.01 points at 37.32, its highest close since August 2015.

“The day started out fairly orderly, but somehow it took a turn for a worse, and then panic set in,” Randy Frederick, vice president of trading and derivatives for Charles Schwab. “There may have been some pretty sizeable program trades that were clicked in. It just looks like some institutional program selling,” he said. The intensity of the selloff drove traders to the options market and trading volume surged to 35.5 million contracts – the third busiest day ever and the busiest day since Aug. 21, 2015, according to options analytics firm Trade Alert. VIX call options, primarily used to protect against a spike in volatility, accounted for nine of Monday’s 10 most heavily-traded contracts. Overall VIX options volume hit 3.6 million contracts, or about three times its average daily volume.

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VIX can trigger some pretty dramatic events.

Traders Panic As XIV Disintegrates -90% After The Close (ZH)

Today’s market turmoil has left more questions than answers. “What was frightening was the speed at which the market tanked,” said Walter “Bucky” Hellwig, Birmingham, Alabama-based senior vice president at BB&T Wealth Management, who helps oversee about $17 billion. “The drop in the morning was caused by humans, but the free-fall in the afternoon was caused by the machines. It brought back the same reaction that we had in 2010, which was ‘What the heck is going on here?” Some tried to blame it on a fat-finger or ‘machines’, but in this case it was not the normal cuprits per se… “There was not a single self-help; there were no outs; there were no fat fingers that we saw,” Doug Cifu, CEO of high-speed trading firm Virtu, told CNBC. “There were no busted trades, no repricing. It was just an avalanche of orders around 3 o’clock-ish.”

But while we noted earlier that US equity futures were extending losses after the close, but the real panic action is in the volatility complex. Putting today’s VIX move in context, this is among the biggest ever… And it appears Morgan Stanley was right to bet on VIX hitting 30…

But the real action is in the super-crowded short-vol space. XIV – The Short VIX ETF – after its relentless diagonal move higher as one after another Target manager sold vol for a living… just disintegrated after-hours, down a stunning 90% to $10.00.

Which is a problem because as we explained last summer, the threshold for an XIV termination event is a -80% drop. What does this mean? Well, in previewing today’s events last July, Fasanara Capital explained precisely what is going on last July:

“Additional risks arise as ‘liquidity gates’ may be imposed, even in the absence of a spike in volatility. In 2012, for example, the price of TVIX ETN fell 60% in two days, despite relatively benign trading conditions elsewhere in the market. The reason was that the promoter of the volatility-linked note announced that it temporarily suspended further issuances of the ETN due to “internal limits” reached on the size of the ETNs. Furthermore, for some of the volatility-linked notes, the prospectus foresee the possibility of ‘termination events’: for example, for XIV ETF a termination event is triggered if the daily percentage drop exceeds 80%. Then a full wipe-out is avoided insofar as it is preceded by a game-over event.” The reaction of the investor base at play – often retail – holds the potential to create cascading effects and to send shockwaves to the market at large. This likely is a blind spot for markets.

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Algorithms rule what is left.

Machines Had Their Fingerprints All Over a Dow Rout for the Ages (BBG)

Risk parity funds. Volatility-targeting programs. Statistical arbitrage. Sometimes the U.S. stock market seems like a giant science project, one that can quickly turn hazardous for its human inhabitants. You didn’t need an engineering degree to tell something was amiss Monday. While it’s impossible to say for sure what was at work when the Dow Jones Industrial Average fell as much as 1,597 points, the worst part of the downdraft felt to many like the machines run amok. For 15 harrowing minutes just after 3 p.m. in New York a deluge of sell orders came so fast that it seemed like nothing breathing could’ve been responsible. The result was a gut check of epic proportion for investors, who before last week had been riding one of the most peaceful market advances ever seen. The S&P 500, which last week capped a record streak of never falling more than 3% from any past point, ended the day down 4.1%, bringing its loss since last Monday to 7.8%.

“We are proactively calling up our clients and discussing that a 1,600-point intraday drop is due more to algorithms and high-frequency quant trading than macro events or humans running swiftly to the nearest fire exit,” said Jon Ulin, of Ulin & Co. in an email. To be sure, not all of the rout requires inhuman agency to explain. Markets are jittery. Bond yields had been surging and stock valuations are approaching levels last seen in the internet bubble. Much of today’s selloff was perfectly rational, if harrowing – particularly coming after last week’s plunge in which the Dow fell 666 points on Friday. Observers looking for an electronic villain trained most of their attention on the roughest part of the tumble, a 15-minute stretch starting about an hour before the close. That’s when an orderly selloff snowballed, taking the Dow from down about 700 points to down a whopping 1,600. It quickly recovered.

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When commodities trade is separated from what industries actually use, and they become financial tools only, inevitable.

Commodities Dragged Into Global Selloff as Oil to Copper Get Hit (BBG)

Commodities from crude oil to metals and iron ore dropped as the global equity rout and surge in market volatility spurred investors to pare risk, cutting positions in raw materials even as banks and analysts stood by the asset class given the backdrop of solid global growth. Brent crude slid as much as 1.2% to $66.82 a barrel, heading for a third daily drop and the longest losing run since November. On the London Metal Exchange, copper sank as much as 2% to $7,025 a metric ton as zinc, lead and nickel declined. Iron ore futures fell 1.2% in Singapore. Global equity markets are in retreat after Wall Street losses that began in the final session of last week worsened on Monday, with the Dow Jones Industrial Average posting its biggest intraday point drop in history.

The selloff – triggered in part by an initial rise in bond yields and concerns about the pace at which the Federal Reserve will raise interest rates – is spilling into commodities, which rallied in late January to the highest level since 2015. Still, Citigroup said now’s the time for investors to add positions in metals. “Clearly there is a risk off tone in the markets that will weigh on the sector,” said Daniel Hynes at Australia & New Zealand Banking. “But there is no fundamental reason for this selloff to change our view of commodity markets.” Miners and energy companies fell as share benchmarks spiraled downward. In the U.S. on Monday, Exxon Mobil and Chevron were among the worst performers in the Dow. In Sydney, BHP Billiton, the world’s largest mining company, dropped 2.7% as Rio Tinto traded lower. Oil producer PetroChina lost as much as 7.3% in Hong Kong.

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6,100 as I write this.

Bitcoin Tumbles Almost 20% as Crypto Backlash Accelerates (BBG)

Bitcoin tumbled for a fifth day, dropping below $7,000 for the first time since November and leading other digital tokens lower, as a backlash by banks and government regulators against the speculative frenzy that drove cryptocurrencies to dizzying heights last year picks up steam. The biggest digital currency sank as much as 22% to $6,579, before trading at $7,054 as of 4:08 p.m. in New York. It has erased about 65% of its value from a record high $19,511 in December. Rival coins also retreated on Monday, with Ripple losing as much as 21% and Ethereum and Litecoin also weaker. “Although no fundamental change triggered this crash, the parabolic growth this market has experienced had to slow down at some point,” Lucas Nuzzi, a senior analyst at Digital Asset Research, wrote in an email. “All that it took this time was a large lot of sell orders.”

Weeks of negative news and commercial setbacks have buffeted digital tokens. Lloyds joined a growing number of big credit-card issuers have said they’re halting purchases of cryptocurrencies on their cards, including JPMorgan and Bank of America. Several cited risk aversion and a desire to protect their customers. SEC Chairman Jay Clayton said he supports efforts to bring clarity to cryptocurrency issues and that existing rules weren’t designed with such trading in mind, according to prepared remarks for a Senate Banking Committee hearing Tuesday on virtual currencies. Bitcoin’s longest run of losses since Christmas day has coincided with investors exiting risky assets across the board, with stocks retreating globally. Bitcoin so far seems to be struggling to live up to any comparison with gold as a store of value, which is an argument made by some of its supporters. Bullion edged higher as other safe havens – the yen, Swiss franc and bonds – also gained.

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Stability breeds instability. Minsky.

The Fed’s Dependence On Stability (Roberts)

Last week, I discussed how the Federal Reserve will likely be the culprits of whatever sparks the next major financial crisis. To wit: “In the U.S., the Federal Reserve has been the catalyst behind every preceding financial event since they became ‘active,’ monetarily policy-wise, in the late 70’s. As shown in the chart below, when the Fed has lifted the short-term lending rates to a level higher than the 10-year rate, bad ‘stuff’ has historically followed.” This past week, as Ms. Yellen relinquished her control over the Federal Reserve to Jerome Powell, the Fed stood by its position they intend to hike rates 3-more times in 2018.

With the entirety of the financial ecosystem now more heavily levered than ever, due to the Fed’s profligate measures of suppressing interest rates and flooding the system with excessive levels of liquidity, the “instability of stability” is now the biggest risk. The “stability/instability paradox” assumes that all players are rational and such rationality implies avoidance of complete destruction. In other words, all players will act rationally and no one will push “the big red button.” The Fed is highly dependent on this assumption. After more than 9-years of the most unprecedented monetary policy program in human history, they are now trying to extricate themselves from it. The Fed is dependent on “everyone acting rationally,” particularly as they try to reduce their balance sheet. The first attempt was seen in January. Well…sort of…but not really.

While the Fed did “reduce” their holding by $28 billion in January, it followed an increase of $21 billion in December. Which brings up several questions? Was the ramp up/run down just a test of the market’s stability? (Seems likely.) With the market throwing a “conniption fit” last week, will the Fed rethink their balance sheet reduction program? (Probably) More importantly, with the government on the verge of another “shut down” this coming week due to the expiration of the “continuing resolution” from three weeks ago, will the Fed continue its current path in the face of an event that could lead to fiscal instability? (Probably not) We will soon find out.

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There will be a second Special Counsel.

A Quandary (Jim Kunstler)

The Resistance pulled out all the stops last week in its shrieking denunciation of the Nunes Memo, and the various complaints had one thing in common: a complete lack of interest in the facts of the matter, in particular the shenanigans in the upper ranks of the FBI. Give a listen, for instance, to last Thursday’s Slate’s Political Gabfest with David Plotz, John Dickerson, and Emily Bazelon, the three honey-badgers of Resistance Radio (like the fabled honey-badgers of the veldt, they don’t give a shit about any obstacles in pursuit of their quarry: Trump). They’ve even been able to one-up Nassim Taleb’s defined category of “intellectuals-yet-idiots” to intellectuals-yet-useful-idiots.

The New York Times, with its termite-mound of casuistry artists, managed to concoct a completely inside-out “story” alleging that the disclosure in the Nunes memo of official impropriety at the FBI was in itself an “obstruction of justice,” since making the FBI look bad might impede their ability to give Trump the much wished-for bum’s rush from the White House. There was already enough dishonesty in our national life before the Left side of the political transect decided to ally itself with the worst instincts of the permanent Washington bureaucracy: the faction devoted to ass-covering. The misconduct at the FBI and DOJ around the 2016 election is really quite startling.

How is it not disturbing that Associate Deputy Attorney General Bruce Ohr brokered the Steele Dossier between the Fusion GPS psy-ops company and the FBI, when Fusion GPS was employed by the Clinton campaign, and Ohr’s wife worked for Fusion GPS? How is it okay that this janky dossier was put over on a FISA court judge to get warrants to surveil US citizens in an election campaign? How was it okay for Deputy FBI Director Andrew McCabe’s wife to accept $700,000 from the Clinton family’s long-time bag-man, Terry McAuliffe, when she ran for a Virginia State Senate seat, a few months before McCabe assumed command of the Hillary email investigation? How was it not fishy that FBI Deputy Assistant Director of the Counterintelligence Division, Peter Strock, and his workplace girlfriend, FBI lawyer (for Andrew McCabe), Lisa Page appeared to plot against Trump in their many cell-phone text exchanges?

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Deceit as the big killer.

21st Century Plague (MarkGB)

The Black Death was a medieval pandemic which swept through the ‘old world’ in the 14th Century. It arrived in Europe from Asia in the 1340s and killed an estimated 25 million people, about 50% of the population. The social and economic consequences of this were ‘permanent’: it created a labour shortage which ended the medieval institution of serfdom. In short: Increased demand for labour + reduced supply of labour + chaos = collapse of status quo. What emerged from the chaos was a rudimentary ‘free market’ in labour and goods. The age of capitalism had begun…the unforeseen consequence of a plague, borne on a creature that looked like this:

The pandemic we face in the 21st Century is a psychological phenomenon rather than a biological one, but in my view, it is equally parasitic. Its name is ‘deceit’, and our political & economic institutions are riddled with it. The majority of people I speak to know that something is badly wrong with our societies and our economies – they feel it when they pick up a newspaper, turn on the TV or engage with the internet. Some of us try to disconnect from the drama and the constant stream of claim and counterclaim, in order to try to ‘get on with normal lives’ – but we feel something is badly wrong nevertheless. Some of us gather ourselves into political parties, protest movements, and/or intellectual cliques in order to discuss how to ‘fix’ what ails us.

And every 4 or 5 years, the majority of us go out and vote for an individual or a group of people that we hope will bring change…and then…we get more of the same. We just got, for example, the 3rd president in a row who ran on a promise of peace, and then immediately went looking for war. What the majority of people have not yet realised is that the politician’s ‘promise’ is part of the deceit – it’s what keeps you coming back for more, hoping this time will be different. It never is – it’s just a new coat of paint on a crumbling wall. What the majority of people have not yet realised is that the politician’s ‘promise’ is part of the deceit – it’s what keeps you coming back for more

It matters little whether you believe an individual candidate is a ‘good’ person, or a ‘bad’ person. Once in office he or she becomes a tool for the maintenance of the status quo – evidently. Why is this? Because the system is not run for your benefit. Its primary function is the concentration of power and wealth within the system itself, to serve the vested interests of a relatively tiny group of people. These are the manifestations of the 21st-century plague – the institutions of deceit: 1) A monetary system rigged for the banks and globalised corporations. 2) A military-industrial complex that requires endless war. 3) Politicians that are controlled by 1 & 2. 4) A mainstream media that is complicit with 1 to 3.

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Expect appeal after appeal.

UK Court To Rule On Lifting Assange Arrest Warrant (AFP)

A British court is to decide Tuesday whether to lift a UK arrest warrant for Julian Assange, potentially paving the way for the WikiLeaks founder to leave the Ecuadorian embassy in London where he has spent the last five years. If the court rules in Assange’s favour, allowing him to leave the embassy in the British capital without fear of arrest, it would be the first time that he has stepped outside embassy grounds since seeking asylum there in June 2012. Assange entered the Ecuadoran embassy to dodge a European arrest warrant and extradition to Sweden over a 2010 probe in the Scandinavian country into rape and sexual assault allegations.

Sweden dropped its investigation last year, but British police are still seeking to arrest Assange for failing to surrender to a court after violating bail terms during his unsuccessful battle against extradition. Assange’s lawyer Mark Summers told a London court last week that the warrant had “lost its purpose and its function”. He said Assange had been living in conditions “akin to imprisonment” and his “psychological health” has deteriorated and was “in serious peril”. The court heard that the 46-year-old was suffering from a bad tooth, a frozen shoulder and depression. But prosecutor Aaron Watkins called Assange’s court bid “absurd”. “The proper approach is that when a discrete, standalone offence of failing to surrender occurs, it always remains open to this court to secure the arrest,” Watkins said.

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You like this future? It’s all yours. Who needs people?

Robots Will Care For 80% Of Elderly Japanese By 2020 (G.)

Japan’s elderly are being told to get used to being looked after by robots. With Japan’s ageing society facing a predicted shortfall of 370,000 caregivers by 2025, the government wants to increase community acceptance of technology that could help fill the gap in the nursing workforce. Developers have focused their efforts on producing simple robotic devices that help frail residents get out of their bed and into a wheelchair, or that can ease senior citizens into bathtubs. But the government sees a wider range of potential applications and recently revised its list of priorities to include robots that can predict when patients might need to use the toilet. Dr Hirohisa Hirukawa, director of robot innovation research at Japan’s National Institute of Advanced Industrial Science and Technology, said the aims included easing the burden on nursing staff and boosting the autonomy of people still living at home.

“Robotics cannot solve all of these issues; however, robotics will be able to make a contribution to some of these difficulties,” he said. Hirukawa said lifting robotics had so far been deployed in only about 8% of nursing homes in Japan, partly because of the cost and partly because of the “the mindset by the people on the frontline of caregiving that after all it must be human beings who provide this kind of care”. He added: “On the side of those who receive care, of course initially there will be psychological resistance.” Hirukawa’s research centre has worked on a government-backed project to help 98 manufacturers test nursing-care robotic devices over the past five years, 15 of which have been developed into commercial products.

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This is what Brussels and Berlin invite by ignoring the issue.

Berlusconi Pledges To Deport 600,000 Illegal Immigrants From Italy (G.)

Silvio Berlusconi has pledged to deport 600,000 illegal immigrants from Italy should his centre-right coalition enter government after elections on 4 March, as tensions simmer over the shooting of six Africans by a far-right extremist on Saturday. The 81-year-old rightwing former prime minister said in a TV interview that immigration was a “social bomb ready to explode in Italy” and that the shooting in Macerata posed a security problem. “Immigration has become an urgent question, because after years with a leftwing government, there are 600,000 migrants who don’t have the right to stay,” said Berlusconi. “We consider it to be an absolute priority to regain control over the situation.” Berlusconi’s Forza Italia has forged an alliance with two far-right parties, the Northern League and the smaller Brothers of Italy, for the elections.

The three-time former prime minister is banned from running for office after being convicted of tax fraud, but could still end up pulling the strings of power should the coalition gain enough of a majority to govern. “When we’re in government we will invest many resources in security,” he said. “We will boost police presence and reintroduce the ‘Safe Streets’ initiative … Our soldiers will patrol the streets alongside police officers.” Berlusconi took a swipe at the EU for failing to share the burden of Italy’s migrant arrivals, saying: “Today, Italy counts for nothing in Brussels and the world. We will make it count again.” Italy is a favoured landing point on Europe’s southern coastline for people making the perilous journey across the Mediterranean, often on board unseaworthy boats, to enter the continent. However, 2017 was a turning point for Italy: the country went from large-scale arrivals in the first six months to a sharp drop-off, thanks to a controversial agreement between the EU and Libya.

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Sep 212017
 
 September 21, 2017  Posted by at 8:57 am Finance Tagged with: , , , , , , , , ,  


Pablo Picasso Jacqueline in Turkish costume 1955

 

Yellen Brushes Aside Inflation ‘Mystery’ While Fed Eyes Rate Hike (BBG)
Federal Reserve Will Continue Cutting Economic Life Support (Smith)
What Shiller Says Is Preventing A 1929-Like Stock Market Crash (CNBC)
Stock Market Bubbles in Perspective (Ma)
We’re Officially In The 2nd-Largest Bull Market Since World War II (BI)
Who’s Pulling The Strings? (Ren.)
144 Years Ago A Panic Shut Down The Stock Market For The First Time (Cashin)
China’s Dangerous House Price Boom Is Spreading (BBG)
Japan’s “Deflationary Mindset” Grows (ZH)
Greece Considers Bond Swap As It Looks To Bailout Exit (R.)
Abbas Says Trump May Have Mideast ‘On the Verge’ of Peace Deal
4-6 Months To Restore Puerto Rico Electricity After Hurricane Maria (NBC)
Global Mass Extinction Set To Begin By 2100 (Ind.)

 

 

Inflation is arguably the Fed’s no. 1 concern left. Yellen admits they don’t know what it is or does, though. Still, decisions concerning billions and trillions are taken. No direction home.

Yellen Brushes Aside Inflation ‘Mystery’ While Fed Eyes Rate Hike (BBG)

Federal Reserve Chair Janet Yellen acknowledged that the fall in inflation this year was a bit of a “mystery” but suggested that the central bank was on course to raise interest rates again in 2017 nonetheless. She told reporters on Wednesday that the economy was robust enough to withstand further rate increases and an imminent reduction in the Fed’s $4.5 trillion balance sheet, as it exits from a crisis-era policy a decade after the onset of the Great Recession.“We continue to expect that the ongoing strength of the economy will warrant gradual increases” in rates, she told a press conference after the Federal Open Market Committee announced that it will slowly begin to pare its bond holdings next month. As expected, the target range for the federal funds rate was held at 1% to 1.25%. The central bank’s intention to press ahead with another rate hike this year and three more in 2018 caught investors by surprise, sending bond yields and the dollar higher.

The strategy represents a bit of a gamble because it risks cementing inflation permanently below the Fed’s 2% target. As measured by the personal consumption expenditures price index, inflation has ebbed this year even as the economy and the labor market have continued to improve. After briefly poking above 2% earlier this year, it fell to 1.4% in June and July. “I will not say that the committee clearly understands what the causes are of that,” Yellen, 71, said. While transitory forces such as a one-time cut in mobile-phone service charges were part of the story, they did not fully explain the shortfall, she said. The Fed chief though argued that the ongoing strength of the economy and the labor market would ultimately help lift inflation, while she kept open the possibility the central bank would alter course if that proved not to be the case.

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The Fed doesn’t serve the people. Never forget.

Federal Reserve Will Continue Cutting Economic Life Support (Smith)

First, let’s be clear, historically the Fed’s predictable behavior has been to skip major policy actions in September and then startle markets with renewed and aggressive actions in December. People placing bets on a Fed rate hike in September would look at this pattern and say “no way.” However, the narrative I see building in Fed rhetoric and in the mainstream media is that stock markets have become “unruly children” and that the Fed must become a “stern parent,” reigning them in before they are crushed under the weight of their own naive enthusiasm. In my view, the Fed will continue to do what it says it is going to do — raise interest rates and reduce and remove stimulus, and that the mainstream narrative will soon be adjusted to suggest that this is “necessary;” that stock markets need a bit of tough love.

If the Fed means to follow through with its stated plans for “financial stability” in markets, then the only measure that would be effective in shell-shocking stocks back to reality would be a surprise hike, a surprise announcement of balance sheet reduction or both at the same time If the Fed intends to continue cutting off life support to equities and bonds in preparation for a controlled demolition of the U.S. economy, then there is a high probability at the very least of a balance sheet reduction announcement this week with strong language indicating another rate hike in December. I also would not completely rule out a surprise rate hike even though September is usually a no-action month for central banks. This would fit the trend of central banks around the globe strategically distancing themselves from artificial support for the financial structure.

Last week, the Bank of England surprised investors with an open indication that they may begin raising interest rates “in the coming months.” The Bank Of Canada surprised some economists with yet another rate hike this month and mentions of “more to come.” The European Central Bank has paved the way for a tapering of stimulus measures according to comments made during its latest meeting early this month. And, the Bank of Japan initiated taper measures in July. Even Forbes is admitting that there appears to be a “coordinated tightening of monetary policy” coming far sooner than the mainstream expects. If you understand how the Bank for International Settlements controls policy initiatives of national central bank members, then you should not be surprised that central banks all over the world are pursuing the same actions and the same rhetoric. The only difference between any of them is the pace they have chosen in taking the punch bowl away from the party.

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Psychology and obesity. Gee, thanks Bob! Feel much more confident now.

What Shiller Says Is Preventing A 1929-Like Stock Market Crash (CNBC)

It’s a comparison no one wants to hear — that this stock market bears striking similarities to that of 1929. The observation is coming from Nobel Prize-winning economist Robert Shiller, who’s been arguing valuations are extremely expensive. But instead of predicting an epic stock market crash, he’s finding reasons to be optimistic. “The market is about as highly priced as it was in 1929,” said Shiller on Tuesday’s “Trading Nation.” “In 1929 from the peak to the bottom, it was 80% down. And the market really wasn’t much higher than it is now in terms of my CAPE [cyclically adjusted price-to-earnings] ratio. So, you give pause when you notice that.” In his first interview since penning an op-ed on Sept. 15 in The New York Times, the Yale University economics professor reiterated to CNBC that there’s one vital characteristic protecting investors from losing their nest eggs: Market psychology.

“It’s not just a matter of low interest rates, it’s something about the American atmosphere. It’s partly the Trump atmosphere. Investors love this. I can’t exactly explain – maybe it has something to do with prospective tax cuts. But I don’t think it’s just that. It’s something deeper, and it’s pushing the American market up,” he added. Unlike 1929, Shiller points out there’s not much talk about people borrowing exorbitant amounts of money to buy stocks. Plus, he notes there’s now more regulation. But don’t mistake the Yale University economics professor for a bull. “I don’t want to encourage people too much to put a lot into the most expensive market in the world,” said Shiller. “The U.S. has the highest CAPE ratio of 26 countries. We are number one.”

[..] Shiller may see red flags, but he isn’t ruling out a market that continues to churn out fresh records for months, if not years. “I wouldn’t call it healthy, I’d call it obese. But you know, some of these obese people live to be 100 years, so you never know,” said Shiller.

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Still feeling good, Shiller?

Stock Market Bubbles in Perspective (Ma)

A better type of average would be the median. It literally represents the middle of a sequence of ranked numbers. In most cases, it is not influenced by outliers. By using median (instead of mean) earnings, I refer to this valuation approach as the CAPME ratio. It currently shows the S&P Composite is not the second or third most expensive stock market cycle. This finding supports those who criticize the traditional CAPE ratio of overstating the valuation of the S&P Composite Index. The problem for critics though is using the CAPME ratio still shows the U.S. stock market is very expensive right now. In fact, it is the fourth most expensive, behind the stock market cycle that occurred during the Subprime Mortgage Bubble. Based on the data Professor Shiller uses, you can see this in the graph below that looks back 135 years.

You will notice in the graph above that the past 5 stock market bubbles were all valued at one point at more than 20-times median, annual, inflation-adjusted earnings. The valuation range of those peaks is wide though given the Tech Bubble was valued at more than 40-times at its peak. This makes the Tech Bubble potentially an outlier. Furthermore, all 5 stock market bubbles did not last long. They were fleeting. To put this all into perspective, consider these valuations by their percentile ranks. You can see this from the orange lines in the graph below. [It] shows the aforementioned 5 stock market cycles turned into bubbles when their CAPME valuation ratios reached a very high level of roughly the 90th percentile (red dotted line). In other words, these bubbles formed when their valuations were near or at the most expensive decile.

Investors beware: the valuation of the S&P Composite Index is currently ranked at the 94th percentile. This puts the U.S. stock market smack-dab at the heart of bubble territory. It has been argued lots that the high stock market valuation is justified by low interest rates. This argument does not work for me. Let me tell you why. Yields on 10-year U.S. treasury bonds in early-1941 were lower than they are now. Despite lower interest rates in early-1941, the stock market CAPME valuation ratio was quite low at that time ranking at around the 30th percentile. Furthermore, the amount of debt provided by stock brokers used to fuel the current stock market cycle is at a record level. This could prove problematic given bubbles driven by financial leverage are particularly dangerous.

The aforementioned 5 stock market cycles turned into bubbles when their CAPME valuation ratios reached the 90th percentile. The U.S. stock market is back there again. Its valuation is squarely in the middle of that very expensive decile looking back 135 years. The 5 previous instances of stock market bubbles suggest this will not end well. Bubbles never do, particularly ones driven by financial leverage.

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Whcih goes to show how easily markets are manipulated.

We’re Officially In The 2nd-Largest Bull Market Since World War II (BI)

We’re officially in the second-largest bull market since World War II. A week ago Monday, the S&P 500 index’s bull market became the second-best performing in the modern economic era. Stocks have climbed by about 270% from their March 2009 low over the past eight years, according to data from LPL Financial. Today’s bull market has eclipsed the 267% gain seen from June 1949 to August 1956. But the bull market from October 1990 to March 2000 remains in the top spot. “The logical question we continue to receive is: how much further can it go? We have an old bull market and an old expansion. When will the music stop?” Ryan Detrick, the senior market strategist for LPL Financial, wrote in commentary. “The current bull market is officially 101 months old, which might sound old (and it is), but remember that bull markets don’t die of old age, they die of excesses.”

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“The central bankers of the world have dumped $30 trillion into the global economy over the last eight years and we’ve got 2% growth and change..”

Who’s Pulling The Strings? (Ren.)

Feierstein cited the Resolution Trust debacle as an example of what should have happened. The Trust was declared insolvent as a consequence of the 1980s Savings and Loans Crisis and up to 300 bankers were jailed. “This is what should have happened this time around, instead of taking hundreds of trillions of dollars taxpayer’s money and placing the taxpayer at incredible peril and just added liquidity to the markets,” he said. “Giving more money to an insolvent institution is not the solution. You cannot pay your way out of debt with borrowed money. It’s not going to cure the underlying problem of insolvency.” This is why Feierstein refers to the entire global economy as a Ponzi scheme. “The amount of debt in the global financial system is a Ponzi scheme because the United States government has over $240 trillion in debt which is more than three times global GDP.

That’s the sum of all goods and services produced with zero consumption for three years. We’ll never pay out the debt that’s owed.” Feierstein says the government has tried to replace consumer demand with debt and printed money and consumers haven’t come back into the market. “That’s why we’ve got a huge government that thinks they can control everything and price action manipulating volatility to unrealistically low levels,” he said. “They think the consumer will eventually come back but they won’t because the jobs have disappeared and the unemployment rate which we’ve spoken about before is a lie. It’s not 4.3%, it’s closer to 20% because you’ve got people who aren’t participating in the workforce. And that’s probably over 100 million people in America.” Financial times journalist, Rana Foroohar says consumers are all tapped out.

“Credit is what we do to sort of keep middle class voters happy,” she said. “We’re tapped out.” The good news and the bad news is that when the next financial crisis comes the US government will not have as much firepower to throw at it. “The central bankers of the world have dumped $30 trillion into the global economy over the last eight years and we’ve got 2% growth and change,” she said. “It’s pathetic.” Feierstein said it is important to highlight how derivative products have contributed massively to this problem. “When I say there is too much leverage, basically derivative products allows financial institutions and investors to create 100 to 1 leverage. You put up $1 to control $100, or $500 dollars in assets. Think about that on a big scale. If you take $1 million you can control something worth $100 million, or even $500 million depending upon how you gear the leverage ratio.

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Art Cashin tells a story.

144 Years Ago A Panic Shut Down The Stock Market For The First Time (Cashin)

“[O]n Saturday, September 20, 1873, for the first time in its history, the NYSE closed in response to a panic. (The word circuit breaker had not been invented yet….er…..neither had circuits.) A week or more before, one of the most renowned firms in American finance and especially U.S. Treasury auctions came under a cloud of suspicion. The firm was Jay Cooke & Company. And, on most continents, it was seen as a key player. After all, its aggressive style had made it the key underwriter for the billions of Treasury bonds issued during and after the Civil War. (Contemporary competitors had shied back fearing that deficit spending had gotten out of control.) Anyway, the concern about in this key brokerage firm only confused the market at first. But as this day approached, there were hints that the problems would spread to other brokers. On the 18th, liquidation of equities showed up at the ‘first call.’

For most of its first century of existence, the NYSE was a ‘call market.’ The chairman, or other senior officer, would call out the name of one of the listed issues. Brokers who had an interest in that ‘issue’ would arise from their ‘seats’ and begin to bargain with any other brokers arisen from their ‘seats’. When transactions ended in that issue (assuming they were not all buyers), brokers returned to their ‘seats’ and the chairman called the next issue on the roll. When the last issue was called, the session officially ended. There were two sessions each day. […] So, here they were. Rumors surfaced that, perhaps some other brokers were involved and the first call on the 18th turned soft. The second call turned soggy. Prices were down and with no on-going after market; all you could do (as the banks did) is await the next call.

The morning call on the 19th was messy and the afternoon call was just a disaster. Outside, in a heavy rain, crowds gathered on Wall Street to withdraw securities and money from brokers. By the morning of the 20th anyone who was in the phone book (if there had been one at the time) was rumored to have been impacted by the problem. So, naturally the morning call on Saturday the 20th was a disaster. So much so that the Exchange opted to close until the crisis calmed (skipping the P.M. call). Close they did and for a lot more than one ‘call.’ But, but perhaps because banks and investors naturally needed some means of evaluating holdings, they reopened about ten days later. However, the rumors would not go away and liquidations and defaults continued. The history books call it the Panic of 1873. And, it put the American economy in a tailspin for years. (Nearly 10,000 businesses failed.)”

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Until recently, Chinese hardly borrowed at all. Now, debt is the only way to keep up.

China’s Dangerous House Price Boom Is Spreading (BBG)

Hefty mortgages have pushed up Chinese household debt, reducing their room for maneuver should income growth stall, according to recent research by Gene Ma, chief China economist at the Institute of International Finance in Washington. In general, it’s debt that’s the warning sign. As developers and households become more leveraged, the risk is that a price downturn doesn’t remain contained within the property market. “The high leverage will amplify the damage to the economy if a property bust happens,” said Bloomberg Intelligence economist Fielding Chen. “The shock wave will be passed onto the entire financial system, and losses will be greater,” he said. Once home prices tumble, about 40% of Chinese banks will be hit hard, according to a recent research note from Ping An Securities.

Analysts have argued that the debt load in the Chinese property market is far from a carbon copy of the situation in Japan’s bubble era before its bust in the 1990s, nor is it similar to the sub-prime crisis in the U.S. a decade ago. With down payment requirements of at least 20% for first purchases and as much as 70% for second homes, China’s household mortgages still stand at relatively safe levels, said Wang Qiufeng, an analyst at China Chengxin International in Beijing. Ping An Securities also argues that the odds of a property crash happening in the near term are very small. But as household debt-to-income ratios have risen almost to levels seen in advanced economies, the potential impact on the economy of a popping bubble would be considerable.

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Abenomics is (was) an attempt to force people into spending. That scares them into not spending. It doesn’t come any simpler.

Japan’s “Deflationary Mindset” Grows (ZH)

After being force-fed more stimulus than John Belushi, and endless rounds of buying any and every asset that dares to expose any cracks in the potemkin village of fiat folly, Japan remains stuck firmly in what Abe feared so many years ago – a “deflationary mindset.” As Bloomberg reports, cash and deposits held by Japanese households rose for 42nd straight quarter at the end of June as the nation’s consumers continued to favor saving over spending. The “deflationary mindset” that the Bank of Japan is battling to overcome was also evident in the money laying idle in corporate coffers, which stayed near an all-time high, according to quarterly flow of funds data released by the BOJ on Wednesday. Still, as Bloomberg optimistically notes, with the economy expanding much faster than its potential growth rate, greater inflationary pressures could be on the way, which may prompt a shift in behavior by consumers and companies… or not!

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Musical chairs.

Greece Considers Bond Swap As It Looks To Bailout Exit (R.)

Greece is considering swapping 20 small bond issues for four or five new ones, government sources said, as it prepares to exit its international bailout and resume normal financing operations. The country has been surviving on rescue funds since 2010 and is anxious to draw a line under its bailout phase next year. The government is considering a swap that would consolidate the secondary market into a few benchmark issues, replacing 20 separate bonds with a face value of around 32 billion euros, said officials familiar with the proposal. “We are planning to proceed with some debt management actions … to improve liquidity and tradeability,” one senior government official said. Officials said the move was still under discussion and did not say when it might happen, adding that bondholders had yet to be sounded out.

The 20 bonds were issued in 2012 in a voluntary scheme whereby private bondholders took a 53.5% haircut on their investments. It was the world’s biggest debt restructuring involving bonds with a total face value of 206 billion euros. Major holders included banks and pensions funds in Greece and abroad. Two years later in 2014, Greece made two forays as part of a plan to regain full bond market access. This time the plan is more modest but would represent a major step toward for bigger debt issues. Greece issued a five-year bond in July, and investors that bought the new bond are already making a profit of about 1.5% since the beginning of the year. Greece’s borrowing costs have fallen sharply this year back to pre-crisis levels, as investors see the prospect further bailouts diminishing as well as signs of economic improvement.

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Wouldn’t that be something.

Abbas Says Trump May Have Mideast ‘On the Verge’ of Peace Deal

Palestinian Authority President Mahmoud Abbas said Wednesday that President Donald Trump’s diplomatic efforts in the Mideast give him confidence that the region is “on the verge” of peace. Abbas said his government has met with U.S. diplomats more than 20 times since Trump took office in January. “If this is an indication of anything, it indicates how serious you are about peace in the Middle East,” Abbas said through a translator at a meeting with the U.S. president during the United Nations General Assembly in New York. “I think we have a pretty good shot, maybe the best shot ever,” Trump said. “I certainly will devote everything within my heart and within my soul to get that deal made.” “Who knows, stranger things have happened,” he added. “No promises, obviously.”

Trump met with Abbas two days after a similar meeting with Israeli Prime Minister Benjamin Netanyahu, where the U.S. president said he was hopeful Israelis and Palestinians would be able to come to a peace agreement during his presidency. The president recently dispatched his son-in-law and senior adviser, Jared Kushner, to the region in a bid to restart peace talks. Kushner was joined by Jason Greenblatt, the president’s envoy for Israeli-Palestinian peace, and deputy national security adviser Dina Powell. The White House is trying to take advantage of a period of relative calm following violent clashes earlier this summer over Israeli security arrangements at the Jerusalem shrine known to Jews as Temple Mount and to Muslims as Haram al-Sharif, said a senior administration official who requested anonymity to discuss the negotiations.

Trump has said he’s hopeful Kushner can help restart a peace process that has made little headway over the past 25 years. He made addressing the Israeli-Palestinian conflict an early priority, hosting both Abbas and Netanyahu at the White House during the opening months of his presidency and visiting Israel during his first international trip as president. The last round of U.S.-led talks, a pet project of former Secretary of State John Kerry, broke down three years ago amid mutual recriminations.

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How does a country, state, territory survive without power for half a year?

4-6 Months To Restore Puerto Rico Electricity After Hurricane Maria (NBC)

Hurricane Maria is likely to have “destroyed” Puerto Rico, the island’s emergency director said Wednesday after the monster storm smashed ripped roofs off buildings and flooded homes across the economically strained U.S. territory. Intense flooding was reported across the territory, particularly in San Juan, the capital, where many residential streets looked like rivers. The National Weather Service issued a flash flood warning for the entire island shortly after 12:30 a.m. ET. Yennifer Álvarez Jaimes, Gov. Ricardo Rosselló’s press secretary, told NBC News that all power across the island was knocked out. “Once we’re able to go outside, we’re going to find our island destroyed,” Emergency Management Director Abner Gómez Cortés said at a news briefing. [..] Maria, the strongest storm to hit Puerto Rico since 1928, had maximum sustained winds of 155 mph when it made landfall as a Category 4 storm near the town of Yabucoa just after 6 a.m. ET.

But it “appears to have taken quite a hit from the high mountains of the island,” and at 11 p.m. ET, it had weakened significantly to a Category 2 storm, moving away from Puerto Rico with maximum sustained winds of 110 mph, the agency said. [..] “Extreme rainfall flooding may prompt numerous evacuations and rescues,” the agency said. “Rivers and tributaries may overwhelmingly overflow their banks in many places with deep moving water.” San Juan San Juan Mayor Carmen Yulín Cruz told MSNBC that the devastation in the capital was unlike any she had ever seen. “The San Juan that we knew yesterday is no longer there,” Yulín said, adding: “We’re looking at four to six months without electricity” in Puerto Rico, home to nearly 3.5 million people. “I’m just concerned that we may not get to everybody in time, and that is a great weight on my shoulders,” she said.

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Nice math, but many questions.

Global Mass Extinction Set To Begin By 2100 (Ind.)

Planet Earth appears to be on course for the start of a sixth mass extinction of life by about 2100 because of the amount of carbon being pumped into the atmosphere, according to a mathematical study of the five previous events in the last 540 million years. Professor Daniel Rothman, co-director of MIT’s Lorenz Centre, theorised that disturbances in the natural cycle of carbon through the atmosphere, oceans, plant and animal life played a role in mass die-offs of animals and plants. So he studied 31 times when there had been such changes and found four out of the five previous mass extinctions took place when the disruption crossed a “threshold of catastrophic change”. The worst mass extinction of all – the so-called Great Dying some 248 million years ago when 96 per cent of species died out – breached one of these thresholds by the greatest margin.

Based on his analysis of these mass extinctions, Professor Rothman developed a mathematical formula to help predict how much extra carbon could be added to the oceans – which absorb vast amounts from the atmosphere – before triggering a sixth one. The answer was alarming. For the figure of 310 gigatons is just 10 gigatons above the figure expected to be emitted by 2100 under the best-case scenario forecast by the IPCC. The worst-case scenario would result in more than 500 gigatons. Some scientists argue that the sixth mass extinction has already effectively begun. While the total number of species that have disappeared from the planet comes nowhere near the most apocalyptic events of the past, the rate of species loss is comparable. Professor Rothman stressed that mass extinctions did not necessarily involve dramatic changes to the carbon cycle – as shown by the absence of this during the Late Devonian extinction more than 360 million years ago.

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Sep 192017
 
 September 19, 2017  Posted by at 12:52 pm Finance Tagged with: , , , , , , , , ,  


Wynn Bullock Child on a Forest Road 1958

 

A few days ago, former Reagan Budget Director and -apparently- permabear (aka perennial bear) David Stockman did an interview (see below) with Stuart Varney at Fox -a permabull?!-, who started off with ‘the stock rally goes on’ despite a London terror attack and the North Korea missile situation. His first statement to Stockman was something in the vein of “if I had listened to you at any time after the past 2-3 years, I’d have lost a fortune..” Stockman shot back with (paraphrased): “if you’d have listened to me in 2000, 2004, you’d have dodged a bullet”, and at some point later “get out of bonds, get out of stocks, it’s a dangerous casino.” Familiar territory for most of you.

I happen to think Stockman is right, and if anything, he doesn’t go far enough, strong enough. What that makes me I don’t know, what’s deeper and longer than perennial or perma? But it’s Varney’s assumption that he would have lost a fortune that triggered me this time around. Because it’s an assumption built on an assumption, and pretty soon it’s assumptions all the way down.

First, that fortune is not real, unless and until he sells the stocks and bonds he made it with. If he has, that would indicate that he doesn’t believe in the market anymore, which is not very likely for a permabull to do. So Varney probably still has his paper ‘fortune’. I’m using him as an example, of course, of all the permabulls and others who hold such paper.

Presumably, they often also think they have made a fortune, and presumably they also think that means they are smart. But that begs a question: how can it be smart to put one’s money into paper that is ‘worth’ what it is today ONLY because the world’s central banks have been handed the power to save the ailing banks that own them with many trillions of freshly printed QE? And no, there can be no doubt of that.

And there are plenty other data that tell the story. The world’s central banks have blown giant bubbles all over the place. That’s where the bulls’ “fortunes” come from. They are bubble fortunes. It has nothing to do with being smart. And of course, as I’ve said many times before, there are no investors left to begin with, because you can’t be an investor if there are no functioning markets, and for a market to function you need price discovery.

Which is exactly what central banks have killed. No-one has one iota of a clue what anything is really worth, what the difference between ‘price’ and ‘value’ is. Stockman at one point suggests people should hold on to Microsoft, but does he really believe that Bill Gates will remain standing when everyone around him crashes? That tech stocks are immune to the impending crash for some reason? If true, that would seem to indicate that tech stocks represent real value while -virtually- no others do. Hard to believe.

Please allow me to insert a graph. This one is from Tyler Durden the other day, and it paints a clear picture as much as it raises a big question. It suggests that until December 2016 the S&P and the ‘real economy’ were in lockstep. I think not. But one thing’s for sure: ever since January, i.e. the Trump presidency, the gaping gap between the two has grown so fast it’s almost funny.

 

 

Not that I would for one moment wish to blame Trump for that; he’s merely caught up in a wave much larger than an election or a White House residency. What is happening to the US -and global- economy goes back decades, not months. Which makes the graph puzzling, too, obviously. Just ask the new-fangled platoons of waiters and greeters with multiple jobs in America. And/or the 50-60-70% who can’t afford a $500 emergency bill, the 97 million who live paycheck to paycheck.. America’s already crashing, it’s just a matter of waiting for the markets to catch up with America’s reality. That’s what price discovery is about. Here’s another, similar, graph. Note: I don’t really want to go and find the best graphs, we’ve posted and re-posted so many of them it would feel like an insult to everyone involved.

 

 

But I digress. This was to be about Stuart Varney and the platoons and legions of permabulls out there. As I said, many of them, make that most, will feel they’ve made their fortune because they’re smart. Even if riding a Yellen and Draghi and Abenomics wave has zilch to do with intelligence. But there’s another side to that supposed smartness. And Stockman is on to it.

The large majority of people who think they got rich because they’re smart will also lose their ‘fortunes’ because they think they’re smart. It is inevitable, it’s a mathematical certainty. And not only because the central banks are discussing various forms of tapering. It’s a certainty because those who think they’re smart will hold on to their ‘assets’ too long. Because the markets will become much less liquid. Because the doors through which people will have to pass to escape the fire are too narrow to let them all though at the same time.

Fortunes built on central banks largesses are virtual. You have to sell your assets to make them real. But the same mechanics that blew the bubbles in housing, stocks, bonds et al also keep people from selling them. Until it’s too late. It may seem easier to sell stocks and bonds than homes, and it is, but in a crash it’s harder than one might think. And prices can come down very rapidly in very little time.

So perhaps the right way to look at this is to tell yourself you were not smart at all when you made that fortune, but now you’re going to smarten up. There will be a few people who do that, but only a few. Most will feel confident that they can see the crash coming in time to get out. Because they’re smart enough. After all, they just made a fortune, right?

It’s not just individuals. Pension funds have been accumulating huge portfolios in ever riskier ‘assets’. Which of them will be able to react fast enough if things start unraveling? And for the lucky few that will, what are they going to buy with the money? Bonds, stocks? Gold perhaps? Crypto? Everyone at once?

Don’t let’s forget that one of the main characteristics -and its consequences- of the everything bubble the central banks granted us is far too often overlooked: leverage. Low interest rates have made borrowing stupidly cheap, and so everyone has borrowed. As soon as things start crashing, there will be margin calls, lines of credit will be withdrawn, people and institutions will have to panic sell (everything including crypto) just to try to stay somewhat afloat, it’s all very predictable and we’ve seen it all before.

But yes, you’re right. The rally continues. And we can’t know what will trigger the downfall, nor can we pinpoint the timing. Still, it should be enough to know that it’s coming. Alas, for many it is not. They’re blinded by the light. But even that light is not real. It’s entirely virtual.

 

 

 

 

 

Sep 042017
 
 September 4, 2017  Posted by at 7:38 am Finance Tagged with: , , , , , , , , , , ,  


Edouard Manet Jeanne Duval, Baudelaire’s Mistress, Reclining (Lady with a Fan) 1862

 

How To Make The Financial System Radically Safer (AM)
Funding Battle Looms As Texas Sees Harvey Damage At Up To $180 Billion (R.)
Canadians Are Borrowing Against Real Estate At The Fastest Pace Ever (BD)
China Battles “Impossible Trinity” (Rickards)
Socialism For The Best Of Us, Capitalism For The Rest Of Us (CC)
Britain’s Addicted To Debt And Headed For A Crash (G.)
Global Negative Yielding Debt Hits One Year High Of $7.4 Trillion (ZH)
Greece Property Auctions Certain To Drive Market Prices Even Lower (K.)
Italy FinMin Says The Euro Zone Still Faces Problems – Even In Germany (CNBC)
Italy’s 5-Star Says Euro Referendum Is ‘Last Resort’ (R.)
Turkey Will Never Become EU Member, Says Angela Merkel (Ind.)
How Our Immune Systems Could Stop Humans Reaching Mars (Tel.)

 

 

Take away the political power of central banks.

How To Make The Financial System Radically Safer (AM)

At the same time, the new financial reforms haven’t minimized risk. Moreover, they’ve set taxpayers – that’s you – up for a future fleecing. Congressman Robert Pittenger elaborated this fact in a Forbes article last year: “Even Dodd-Frank’s biggest selling point, that it would end “too big to fail,” has proven false. Dodd-Frank actually created a new bailout fund for big banks–the Orderly Liquidation Authority–and the Systemically Important Financial Institution designation enshrines “too big to fail” by giving certain major financial institutions priority for future taxpayer-funded bailouts.” What gives? Regulations, in short, attempt to control something by edict. However, just because a law has been enacted doesn’t mean the world automatically bends to its will. In practice, regulations generally do a poor job at attaining their objectives. Yet, they often do a great job at making a mess of everything else.

Dictating how banks should allocate their loans, as Dodd-Frank does, results in preferential treatment of favored institutions and corporations. This, in itself, equates to stratified price controls on borrowers. And as elucidated by Senator Wallace Bennett over a half century ago, price controls are the equivalent of using adhesive tape to control diarrhea. The dangerous conceit of the clueless… the house of cards they have built is anything but “safe” and they most certainly can not “fix anything”. Listening to their speeches that seems to be what they genuinely believe. A rude awakening is an apodictic certainty, but we wonder what or who will be blamed this time. Not enough regulations? The largely absent free market? As they say, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” (this quote is often erroneously attributed to Mark Twain: we think it doesn’t matter whether he created it, it is often quite apposite and this is a situation that certainly qualifies).

The point is that planning for future taxpayer-funded bailouts as part of compliance with destructive regulations is asinine. In this respect, we offer an approach that goes counter to Fed Chair Janet Yellen and the modus operandi of all central planner control freaks. It’s really simple, and really effective. The best way to regulate banks, lending institutions, corporate finance and the like, is to turn over regulatory control to the very exacting, and unsympathetic, order of the market. That is to have little to no regulations and one very specific and uncompromising provision: There will be absolutely, unconditionally, categorically, no government funded bailouts. Without question, the financial system will be radically safer.

Read more …

Want to bet it’ll be a lot more?

Funding Battle Looms As Texas Sees Harvey Damage At Up To $180 Billion (R.)

U.S. Treasury Secretary Steven Mnuchin on Sunday challenged Congress to raise the government’s debt limit in order to free up relief spending for Hurricane Harvey, a disaster that the governor of Texas said had caused up to $180 billion in damage. Harvey, which came ashore on Aug. 25 as the most powerful hurricane to hit Texas in more than 50 years, has killed an estimated 50 people, displaced more than 1 million and damaged some 200,000 homes in a path of destruction stretching for more than 300 miles (480 km). As the city of Houston and the region’s critical energy infrastructure began to recover nine days after the storm hit, the debate over how to pay for the disaster played out in Washington. Texas Governor Greg Abbott estimated damage at $150 billion to $180 billion, calling it more costly than Hurricanes Katrina or Sandy, which devastated New Orleans in 2005 and New York in 2012.

The administration of President Donald Trump has asked Congress for an initial $7.85 billion for recovery efforts, a fraction of what will eventually be needed. Even that amount could be delayed unless Congress quickly increases the government’s debt ceiling, Mnuchin said, as the United States is on track to hit its mandated borrowing limit by the end of the month unless Congress increases it. “Without raising the debt limit, I am not comfortable that we will get money to Texas this month to rebuild,” Mnuchin told Fox News. Republican lawmakers, who control both houses of Congress, have traditionally resisted raising the debt ceiling, but linking the issue to Harvey aid could force their hand with people suffering and large areas of the fourth-largest U.S. city under water. Beyond the immediate funding, any massive aid package faces budget pressures at a time when Trump is advocating for tax reform or tax cuts, leading some on Capitol Hill to suggest aid may be released in a series of appropriations.

Katrina set the record by costing U.S. taxpayers more than $110 billion. In advocating for funds to help rebuild his state, Abbott said damage from Harvey would exceed that. Houston Mayor Sylvester Turner said the city expected most public services and businesses to be restored by Tuesday, the first day after Monday’s Labor Day holiday. “Over 95% of the city is now dry. And I‘m encouraging people to get up and let’s get going,” Turner told NBC News. Even so, Houston mandated the evacuation of thousands of people on the western side of town on Sunday to accommodate the release of water from two reservoirs that otherwise might sustain damage. The storm stalled over Houston, dumping more than 50 inches (1.3 m) on the region. Houston cut off power to homes on Sunday to encourage evacuations. The area was closed off on Sunday and military vehicles were stationed on the periphery to take people out.

Read more …

What Canada learned from history.

Canadians Are Borrowing Against Real Estate At The Fastest Pace Ever (BD)

Canadian real estate prices have soared, and so did borrowing against that value. Our analysis of domestic bank filings from the Office of the Superintendent of Financial Institutions (OSFI) shows that loans secured against property has reached an all-time high. More surprising is the unprecedented rate of growth experienced this year.

Loans secured against residential real estate shattered a few records in June. Over $313.66 billion in real estate was used to secure loans, up 3.43% from the month before. The rise puts annual gains 11.16% higher than the same month last year, an increase of $31.51 billion. The monthly increase is the largest increase since March 2012. The annual gain is unprecedented according to an aggregate of domestic bank filings. Not all borrowing against residential property is all bad, sometimes it’s a calculated risk. For example, someone may need to secure a business loan, and use the loan for operating risks. It doesn’t mean the property is safe, but it’s a risk that could potentially boost the economy.

This is opposed to non-business loans, which is used as short-term financing. This type of financing is often used for things like renovations, and putting a fancy car in the driveway. Experts have observed that more homeowners are using these to prevent bankruptcy. Bottom line, it’s not typically healthy looking debt. So let’s remove loans obtained for business reasons, and take a peek at higher risk debt. The majority of these loans are non-business related according to bank filings. The current total is over $266 billion as of June 2017, a 1.01% increase from the month before. This is a 4.9% increase from the same month last year, which works out to $12.49 billion more. Fun fact, that’s around $23,763 per minute. The number is astronomical.

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“..no country can have an open capital account, a fixed exchange rate and an independent monetary policy at the same time..”

China Battles “Impossible Trinity” (Rickards)

The Impossible Trinity theory was advanced in the early 1960s by Nobel Prize-winning economist Robert Mundell. It says that no country can have an open capital account, a fixed exchange rate and an independent monetary policy at the same time. You can have one or two out of three, but not all three. If you try, you will fail — markets will make sure of that. Those failures (which do happen) represent some of the best profit-making opportunities of all. Understanding the Impossible Trinity is how George Soros broke the Bank of England on Sept. 16, 1992 (still referred to as “Black Wednesday” in British banking circles. Soros also made over $1 billion that day). The reason is that if more attractive total returns are available abroad, money will flee a home country at a fixed exchange rate to seek the higher return.

This will cause a foreign exchange crisis and a policy response that abandons one of the three policies. But just because the trinity is impossible in the long run does not mean it cannot be pursued in the short run. China is trying to peg the yuan to the U.S. dollar while maintaining a partially open capital account and semi-independent monetary policy. It’s a nice finesse, but isn’t sustainable. China cannot keep the capital account even partly closed for long without drying up direct foreign investment. Similarly, China cannot raise interest rates much higher without bankrupting state-owned enterprises. China is buying time until the Communist Party Congress in October. It’s important to realize that for Beijing, the Chinese economy is more than about jobs, goods and services. It’s a means of ensuring its legitimacy.

The Chinese regime is deeply concerned that a faltering economy and mass unemployment could threaten its hold on power. Chinese markets are wildly distorted by the actions of its central bank. Given the problems inherent in trying to manage an economy without proper price signals, the challenge facing Beijing gets harder by the day. China has a long history of violent political fracturing, and the government is deeply worried about regime survival if it stumbles. Many in the West fail to appreciate Beijing’s fears and overestimate the support it has among the disparate Chinese people. What does China do next? Under the unforgiving logic of the Impossible Trinity, China will have to either devalue the yuan or see its reserves evaporate. In the end, China will have to break the yuan’s peg to the dollar in order to stop capital outflows without killing the economy with high rates. The Impossible Trinity really is impossible in the long run. China will find this out the hard way.

Read more …

How do we make government independent?

Socialism For The Best Of Us, Capitalism For The Rest Of Us (CC)

To the elected darlings of the free market: I hate to burst your bubble but – you have been living a lie. Your lifetime government pensions: socialism. Overly generous retirement packages, Superannuation and 401ks: socialism. Travel budgets, expense accounts, access to private drivers and town cars, government reimbursement for travel and living arrangements: socialism, socialism, socialism, socialism, socialism. Central banking: socialism. Not to mention fossil-fuel & mining subsidies and tax concessions: socialism, socialism, socialism. The bank bail-outs of 2008: One of the greatest acts of socialism of all time. Where were our free-market representatives then? When the financial system went into melt-down, the banks were not told to suck it up and stand on their own two feet. More than a trillion dollars were poured into the banks, most of which went towards profit margins and CEO bonuses.

These so-called champions of capitalism have the nerve to claim that it is social welfare recipients that are a drain on the system while government representatives take home all kinds of state-provided benefits the rest of us could only dream of: the best health insurance the country has to offer, lifetime pensions and generous retirement packages which drain many more billions from the economy than social welfare ever will. Moreover, corporate welfare pales in comparison to either. The private sector has its own dole system paid for by Federal Governments. Yet many Congressmen, Representatives and MPs still have the nerve to stand before the people who elected them and rail against social spending, claiming people ought to pull themselves up by their bootstraps when no such obligation has ever existed for the corporate sector. Most of the world’s most successful corporations don’t get out of bed without a subsidy.

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If it makes you feel better: Britain’s not alone.

Britain’s Addicted To Debt And Headed For A Crash (G.)

[..] if the debtors at the bottom aren’t at crisis point yet, the signs of a surfeit of debt are everywhere. Alex Brazier, executive director of financial stability at the Bank of England, warned last month that consumer loans had gone up by 10% in the past year, with average household debt having already eclipsed 2008 levels. He warned against the economy having to sit through “endless repeats of the ‘Debt Strikes Back’ movie”. There is something obscurely insulting about being warned about household debt by the Bank of England. It never warns employers about stagnant wages, or the government about the benefit freeze. It only ever mentions these in terms of the impact of inflation, as if any consideration of the human decisions behind them are too political for comment. But personal debt, miraculously, isn’t political at all.

But that doesn’t make Brazier wrong. Edward Smythe of the campaign group Positive Money, breaks it down: “If you look at total outstanding consumer loans, in July, they’re at £200bn, an £18.5bn net increase every year.” Households spent more than their income by £17.5bn in the first quarter of this year. Economists are interested in where that money comes from – whether it’s access to credit, selling assets or spending savings. The government is presumably, in some dusty corner, interested in why that money is needed, whether it is a result of pauperised wages– real wage growth is negative and looks set to decrease – benefit changes, or some rush of blood to the head where we all suddenly need Sky Sports and cigarettes but aren’t prepared to work for them.

The sources of all this debt are changing: about half the net increase was in personal contract purchase car loans. Four in five new cars are now bought by PCP – an inherently unstable system that leaves both consumers and car manufacturers exposed. It’s a bit like a mortgage system for cars, except you don’t own it at the end, ideally you wouldn’t be living in it, and while a housing crash has been seen before, nobody yet knows what a car crash would look like. Student loan debt is counted separately from consumer loans, and stands at £13bn a year. However much you think you’ve accommodated student fees into your picture of Britons’ finances, it is always astounding to consider how life-changing that decision has been for the younger generation.

Read more …

“What global recovery?!”

Global Negative Yielding Debt Hits One Year High Of $7.4 Trillion (ZH)

Two weeks ago, we were surprised to find that despite the recent “growth promise” of what has been called a coordinated global recovery, the market value of bonds yielding less than 0% had quietly jumped by a quarter in just one month to the highest since October 2016. Since then, the paradoxical divergence between the reported “strong” state of the “reflating” global economy and the amount of negative yielding debt, has only grown, and as JPM reports as of Friday, Sept. 1, the global market value of government bonds trading with negative yield within the JPM GBI Broad index rose to $7.4 trillion, up 60% from its low of $4.6 trillion at the beginning of the year. Some more details from JPM:

We calculate the market value by multiplying the dirty price with the amount outstanding for each bond within JPM GBI Broad Index and then convert it to US dollars at today’s exchange rate. The market value of bonds trading with negative yield,including central banks’ purchases, stands at 30% of the total JPM GBI Broad index. What makes the latest rise in negative yielding debt especially bizarre is that it was mainly driven by Japan, where 10-year government bond yields have fallen significantly over the past month and have turned negative this week for first time since the US presidential election, even as the Bank of Japan has twice in the past month reduced the amount of JGB debt it purchases in the open market in the 5-to-10 year bucket, following on Friday, by a 30BN yen reduction of buying in the 3-to-5 year debt range.

As a result, the total universe of Japanese bonds trading with negative yield within the JPM global government bond index (GBI Broad) now stands at $4.6tr, or 62% of the outstanding amount. The remaining government bonds trading with negative yields worth $2.8 trillion are from Europe, of which more than half are from France and Germany.

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Capital destruction 101 (thanks, Schaeuble!):

“..the stock of unsold properties of all types comes to 270,000-280,000, in a market with no more than 15,000 transactions per year..”

BTW, the only buyers left are those who want to profit from Airbnb. Mostly foreigners.

Greece Property Auctions Certain To Drive Market Prices Even Lower (K.)

Professionals in the property sector are warning that the auctioning of tens of thousands of buildings in the next few years could evolve into an unknown – probably negative – factor regarding the course of prices in the market. It is estimated that a wave of auctions expected to begin soon will see market rates drop at least 10%. Clearing firms are currently involved in an extensive program of property valuations to establish starting prices for the auctions. Ilias Ziogas, head of property consultancy company NAI Hellas and one of the founding members of the Chartered Surveyors Association, said that the property market is certain to suffer further as a result of the auctions: “The impact on prices will be clearly negative, not because the price of a property will be far lower at the auction than a nearby property, but because it will diminish demand for the neighboring property.”

He added that a market with already reduced demand that receives more supply at more attractive rates through auctions will definitely see buyers turn to the latter. He also said that they will only look at other buildings if they are not satisfied with what the auctions have to offer. This view is also shared by Giorgos Litsas, head of the GLP Values chartered surveyor company, which cooperates with PQH. He told Kathimerini that the only way is down for market rates. “I believe that unless there is an unlikely coordination among the parties involved – i.e. the state (tax authorities, social security funds etc.), the banks and the clearing firms – in order to prevent too many properties coming onto the market at the same time, rates will go down by at least 10%.”

He noted that “we estimate the stock of unsold properties of all types comes to 270,000-280,000, in a market with no more than 15,000 transactions per year. Therefore the rise in supply will send prices tumbling.” Yiannis Xylas, founder of Geoaxis surveyors, added, “I fear the auctions will create an oversupply of properties without the corresponding demand, which translates into an immediate drop in rates that may be rapid if one adds the portfolios of bad loans secured on properties that will be sold to foreign funds at a fraction of their price.”

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He sounds confused.

Italy FinMin Says The Euro Zone Still Faces Problems – Even In Germany (CNBC)

Italy’s finance minister delivered an upbeat tone on his country’s banking sector but highlighted that major hurdles still remain in the euro zone, including in Germany. Germany might be known as the powerhouse of the euro zone economy but it has its own banking problems to deal with, Pier Carlo Padoan told CNBC on the sidelines of the Ambrosetti Forum on Sunday. “I think that there are some German banking problems and I’m confident the German authorities will deal with them,” Padoan said when asked about remarks made by former Prime Minister Matteo Renzi last year. “Germany has been the country that has by far poured much more public money into the banking sector in terms of the hundreds of billions of euros in the past when the rules where different of course.

This is a sign that maybe we all have to recognize that we have problems and we all have to recognize that we need to cooperate much more effectively to provide European solutions to those problems,” he said. Though Italy keeps making headlines due to its financial sector, analysts have also warned on banking problems in Germany. These include the reliance on the shipping industry, which used to be a stable investment before the euro zone debt crisis. Other issues include the sheer number of banks in Germany with very little consolidation. There are approximately 2,400 separate banks with more than 45,000 branches throughout the country and over 700,000 employees, according to Commercial Banks Guide, an industry website.

As such, Padoan told CNBC that it is crucial to conclude the banking union – a project created in 2012 in response to the sovereign debt crisis that aims to have one single set of rules for all banks across the European Union. He told CNBC that so far the banking union hasn’t been fully implemented, not because of resistance from certain countries, but because of different national perspectives. “We are however making progress in one thing: That we are building trust among ourselves and we are also recognizing that we have to reconcile historically-driven different traditions in banking sectors and they have to merge into a new European banking culture,” Padoan said.

Read more …

He sounds like Varoufakis.

Italy’s 5-Star Says Euro Referendum Is ‘Last Resort’ (R.)

A referendum on Italy’s membership of the euro currency would be held only as a “last resort” if Rome does not win any fiscal concessions from the European Union, a senior lawmaker from the anti-establishment Five-Star Movement said on Sunday. Luigi Di Maio’s comments reflect a striking change of tone by some senior officials in the party in recent months as they have retreated from 5-Star’s original pledge. Seeking to reassure an audience of bankers and business leaders, Di Maio – widely tipped to be 5-Star’s candidate for prime minister at a general election due by next year – played down the referendum proposal, calling it a negotiating tool with the EU. “Austerity policies have not worked, on monetary policy we deserve the credit for triggering a debate… this is why we raised the issue of a referendum on the euro, as a bargaining tool, as a last resort and a way out in case Mediterranean countries are not listened to,” he said.

Two years ago the party gathered the signatures from the public needed to pave the way for a referendum that it said was vital to restore Italy’s fiscal and monetary sovereignty. But now, running neck-and-neck with the ruling Democratic Party (PD) in opinion polls and with the election in sight – scheduled to be held by May 2018 – it is hitting the brakes on the idea. This underlines the crucial challenge facing the party as it seeks to please some core supporters, while trying to shed its populist image and convince foreign capitals and financial markets that it can be trusted in office. [..] The party wants several changes to the euro zone’s economic rules to help its more sluggish economies, like Italy. These include stripping public investment from budget deficits under the EU’s Stability Pact and creating a European “bad bank” to deal with euro zone lenders’ bad loans.

“We are not against the European Union, we want to remain in the EU and discuss some of the rules that are suffocating and damaging our economy,” said Di Maio, who serves as deputy speaker of the Chamber of Deputies. An opinion poll in La Stampa daily on Sunday had 24% of respondents saying Di Maio most deserved to run the country in the next five years, against 17% for former PD Prime Minister Matteo Renzi and 12% for center-right leader Silvio Berlusconi.

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Schulz and Merkel are the same person.

Turkey Will Never Become EU Member, Says Angela Merkel (Ind.)

Germany’s Chancellor, Angela Merkel, has said Turkey should categorically not become a member of the European Union in comments that are expected to further inflame tensions between the Nato allies. Speaking at a televised election debate with her rival, Martin Schulz, she said she would seek a joint EU position with other leaders to ensure Turkey never became a member. “The fact is clear that Turkey should not become a member of the EU,” she said after Mr Schulz said he would stop Turkey’s bid to join the EU if he was elected chancellor. “Apart from this, I’ll speak to my colleagues to see if we can reach a joint position on this so that we can end these accession talks,” she added.

[..] Her comments are likely to worsen already strained ties between the countries after Ms Merkel said Berlin should react decisively to Turkey’s detention of two more German citizens on political charges. It comes just weeks after German Foreign Minister Sigmar Gabriel told Turkey it will never become a member of the EU as long as it is governed by the current president, Recep Tayyip Erdogan. “It is clear that in this state, Turkey will never become a member of the EU,” Mr Gabriel said. Mr Erdogan has urged German Turks to boycott Germany’s main parties in next month’s general election.

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Good to know. Still, if people really want to go, maybe we should just let them.

How Our Immune Systems Could Stop Humans Reaching Mars (Tel.)

The astrophysicist Neil DeGrasse Tyson commented that ‘dinosaurs are extinct today because they lacked the opposable thumbs and brainpower to build a space programme’ Yet although we now have the technological ability to leave Earth, scientists have found another stumbling block to colonising new worlds – our own immune system. Although it is said we are all made of ‘star stuff’ when it comes to travelling away from our home planet humans are far more vulnerable to the rigours of space than our interstellar origins might suggest. Billions of years of evolution has effectively backed mankind into a corner of the Solar System that it may be now be tricky to leave. A team of scientists from Russia and Canada analysed the effect of microgravity on the protein make-up in blood samples of 18 Russian cosmonauts who lived on the International Space Station for six months.

They found alarming changes to the immune system, suggesting that they would struggle to shake off even a minor virus, like the common cold. “The results showed that in weightlessness, the immune system acts like it does when the body is infected because the human body doesn’t know what to do and tries to turn on all possible defense systems,” said Professor Evgeny Nikolaev, of Moscow Institute of Physics and Technology and theSkolkovo Institute of Science and Technology. The effects of spaceflight on the human body have been studied actively since the mid-20th century and it is widely known that microgravity influences metabolism, heat regulation, heart rhythm, muscle tone, bone density, the respiration system. Last year research from the US also found that astronauts who travelled into deep space on lunar missions were five times more likely to have died from cardiovascular disease than those who went into low orbit, or never left Earth.

Astronauts are fitter than the general population and have access to the best medical care, meaning that their health is usually better than the general population. Those of comparable age but who never flew, or only achieved low Earth orbit, had less than a one in 10 chance of death from cardiovascular disease. [..] To gain a deeper understanding of the changes in human physiology during space travel, the research team quantified concentrations of 125 proteins in the blood plasma of cosmonauts. Proteins change as the immune system alters and so can be used as a measure of how it is functioning. Blood was taken from the cosmonauts 30 days before they travelled to the ISS and then on their immediate return to Earth. They were also tested seven days after touchdown. Individual proteins were then counted using a mass spectrometer.

”When we examined the cosmonauts after their being in space for half a year, their immune system was weakened,” said Dr Irina Larina, the first author of the paper, a member of Laboratory of Ion and Molecular Physics of Moscow Institute of Physics and Technology. “They were not protected from the simplest viruses. We need new measures of disorder prevention during a long flight.

Read more …

Aug 102017
 
 August 10, 2017  Posted by at 9:18 am Finance Tagged with: , , , , , , , ,  


Dorothea Lange Rooms for Rent, Mission District. Slums of San Francisco, California 1936

 

An Indicator of Peril (Lebowitz)
Former CBO Director: Fall 2017 Will Be “Very Scary”, Expect A Market Crash (ZH)
US Still Stuck Firmly In The Great Recession (BI)
10 Years After Crisis, Another Crash Is ‘Almost Inevitable’ – Steve Keen (RT)
This $5 Trillion Time Bomb Will Devastate Americans (IM)
New Report Raises Big Questions About Last Year’s DNC Hack (N.)
Unverified ‘Russiagate’ Allegations a Grave Threat to America (Stephen Cohen)
European Commission Spending Thousands On ‘Air Taxis’ For Top Officials (G.)
Refugee Crisis Triggers Heightened Risk Of Slavery In EU Supply Chains (G.)

 

 

“The data point, Real Value Added, is currently in negative territory and may, therefore, be a harbinger of an economic downturn. If it is a false signal, it would be the first in a 70-year history of observations.”

An Indicator of Peril (Lebowitz)

Gross Value Added (GVA) and Real Value Added (RVA). GVA is a measure of economic activity, like GDP, but formulated from the production side of the economy. It measures the dollar value of all goods and services produced less all the costs required to produce those goods or services. For example, if 720Global buys $100 worth of wood, $20 worth of other materials and employs $30 worth of labor to build a chair, we have produced a good for $150. If that good is sold for $200, 720Global has created $50 of economic value. Gross Domestic Product (GDP), the more popular measure of economic activity, calculates the level of commerce based on the dollar value of the final goods and services produced. It may help to think of GDP as economic activity measured from the demand side and GVA as measured from the supply side.

Despite the differences, the levels of economic activity reported are remarkably consistent. Since 1948, nominal GDP has averaged annual growth of 6.55% while GVA has averaged 6.50%. It is important to note that, while they track each other very well over the longer term, they are less correlated quarter to quarter. Economists prefer to measure economic activity without the effect of inflation. If inflation were rampant when making the chair in the example above, some of the incremental value was due to the general trend of rising prices and not value added by 720Global. To strip out the effect of inflation and compute a pure measure of value added, it is commonplace to subtract inflation from GVA. The result is Real Value Added (RVA = GVA less CPI). The graph below plots RVA since 1948. Periods deemed recessionary by the National Bureau of Economic Research (NBER) are denoted in gray.

Currently, three of the last four quarters have produced negative RVA levels. Real GDP is not producing similar results, having averaged 2% growth over the same quarters. As mentioned earlier, RVA and Real GDP may not be well correlated over short time frames. RVA is just one source of data arguing that economic trouble lies ahead, therefore, we would be wise not to read too much into this one indicator. Of concern, however, is that negative RVA readings have an impeccable pattern of signaling recession as a coincident indicator.

Read more …

Debt ceiling solution far from done.

Former CBO Director: Fall 2017 Will Be “Very Scary”, Expect A Market Crash (ZH)

Rudy Penner, the former director of the Congressional Budget Office and the person described by MarketNews international as “one of Washington’s most respected fiscal policy experts”, told MNI Wednesday in an exclusive interview that he expects a “very scary” fall 2017 due to fiscal issues, with market-disrupting battles ahead on both the debt ceiling and fiscal year 2018 spending. Penner directed the CBO under president Reagan, worked at high level posts in the White House budget office, and the Council of Economic Advisers. He is currently a fellow at the Urban Institute and sits on the board of the Committee for a Responsible Federal Budget. “There are so many politically hard issues and so little consensus on budget and tax policy. I assume we’ll somehow get through this, but not without getting frightened on a regular basis,” Penner said.

“Probably the best we can hope for is muddling through the (FY 2018) budget and the debt limit and getting very limited health, tax, and infrastructure legislation. There is not going to be significant stimulus coming out of Washington in the foreseeable future,” he said, echoing what many other pundits have said before. Penner said a “bipartisan negotiation is badly needed” to forge even a limited FY 2018 spending agreement. But he’s not certain this will occur. “Even a very limited spending agreement might be an impossible dream. We may just stumble into a series of short-term CRs,” he said, referring to temporary spending bills to keep the government funded. While the “record polarization” rhetoric is familiar, the clock is starting to tick ever louder: the 2018 fiscal year begins on October 1, 2017 and extends until September 30, 2018. None of the 12 annual spending bills for FY 2018 have yet been approved by Congress.

On to the debt ceiling, the one item on the calendar which Morgan Stanley (and others) have said will be the biggest hurdle for the market in the next two months, Penner said he believes it will be “very challenging” for Congress to pass legislation this fall to increase the statutory debt ceiling. Treasury Secretary Steve Mnuchin has asked Congress to lift the debt ceiling by the end of September. Penner countered that a “plausible path” for dealing with the debt ceiling is to pass legislation in September to suspend the debt ceiling until after the November 2018 mid-term elections. However, such legislation, he said, may have to be negotiated by an unusual coalition assembled by House Speaker Paul Ryan, a Republican, and House Minority Leader Nancy Pelosi, a Democrat. Such an agreement, Penner said, “could put Speaker Ryan’s job in peril” by conservative Republicans who oppose it. He said he believes the debt ceiling is “an incredibly stupid law that makes no logical sense.”

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What happens when you save banks only.

US Still Stuck Firmly In The Great Recession (BI)

Expectations are everything, especially in economics. That’s why a distinct lack of progress in a few basic measures of economic progress, particularly relative to pre-crisis expectations, has left many Americans questioning how much they have personally benefitted from the economic recovery. A new report from the Roosevelt Institute, a liberal think tank in Washington, highlights a number of ways in which “the recovery since 2009 is, in a sense, a statistical illusion.” The study finds the nation’s total economic output, its gross domestic product, “remains about 15% below the pre-recession trend, a larger gap than at the bottom of the recession.” The first chart below shows that lag, while the second offers insights into just how badly the crisis dented expectations about the future.

Strong employment gains in recent months have brought the jobless rate down to a historically-low 4.3%. However, this decline has not been accompanied by rising incomes or consumer prices, generally associated with a sustainable economic boom. Some Federal Reserve policymakers have found this trend puzzling, while many labor economists point to underlying weaknesses in the job market, including high levels of underemployment and long-term joblessness, as drags on income. Stagnant wages amid rising profits have meant that the wage share in US national income has fallen from 63% to 57% in the last 15 years, according to the report. “It is impossible for the wage share to ever rise if the central bank will not allow a period of ‘excessive’ wage growth,” writes J.W. Mason, who authored the report. “A rise in the wage share necessarily requires a period in which wages rise faster than would be consistent with longterm macroeconomic stability.”

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Zombie-to-be economies.

10 Years After Crisis, Another Crash Is ‘Almost Inevitable’ – Steve Keen (RT)

Speaking to RT, Keen said another financial crisis could be just around the corner unless a fundamentally different approach to debt is adopted. He says we are too focused on government debt, when what actually caused the crisis was “run-away private debt.” “The economy in the UK is not stable. It’s in the aftermath of the biggest financial crisis since the great depression, and there’s still a lack of awareness in the political classes about what actually caused the crisis in the first place,” Keen said. “The Tories were incredibly successful in convincing the electorate that the crisis was caused by government spending, which is absurd. That is technically saying government spending in the UK caused the financial crisis in the United States. Which is just nonsense. “And that gave us austerity for the last 10 years. That austerity has actually further weakened the economy.”

Keen says the level of private debt in the UK peaked at about 195% of GDP post-crisis. While it is now down to about 170% of GDP, it is roughly three times the level of debt England carried before the Margaret Thatcher era, he says. “That’s the stuff that’s being ignored. Nothing is really being done about that. With the amount of debt just sitting there we are still likely to have another crisis – but more likely, we are going to have stagnation.” What is cause for concern, Keen says, is what he calls the “zombie-to-be” economies, such as Australia, Belgium, China, Canada, and South Korea, which avoided the 2008 crisis by borrowing their way through it. Now they have a bigger debt burden to deal with when the next crisis hits, which could be between 2017 and 2020, he says.

“[The ‘zombie-to-be’ economies] are roughly equivalent in size to the American economy. So when they fall, then there will be a crisis that affects the rest of the world, including the UK.” Keen sees China as a terminal case. It has expanded credit at an annualized rate of around 25% for years on end. With private sector debt exceeding 200% of GDP, China resembles the over-indebted economies of Ireland and Spain prior to 2008. He also has little hope for his native Australia, whose credit and housing bubbles failed to burst in 2008. Last year, Australian private sector credit nudged above 200% of GDP, up more than 20 percentage points since the global financial crisis. Australia shows “that you can avoid a debt crisis today only by putting it off until tomorrow,” Keen says.

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Pensions.

This $5 Trillion Time Bomb Will Devastate Americans (IM)

Over 3,000 millionaires have fled Chicago in recent months. This is the largest outflow of wealthy people from any US city right now. It’s also one of the largest outflows of wealthy people in the world. But it’s not just millionaires… Every five minutes someone leaves Illinois. In a recent poll, 47% of people in Illinois said they want to leave the state. Over the last decade, more than half a million people have done just that. This is the largest outflow of people from any state in the country. The people who leave are generally better educated, more skilled, and earn more money than those who stay. Entire towns of affluent Illinois refugees have sprouted up in Florida, Arizona, and other states. Illinois is bleeding productive people. This is a major warning sign. Wealthy people are often the first to leave a bad situation. They have the means to simply get up and go.

And when they do, they take their money and their businesses with them. This hurts the local property market and the rest of the local economy. Many of Illinois’ millionaires own businesses that employ large numbers of people. As they leave, there are fewer people and businesses left to shoulder the state’s enormous and growing financial burdens. Many of these people are leaving for one simple reason: rising taxes. Illinois’ leftist tax-and-spend politicians are continuing to increase all sorts of taxes, which were already high in the first place. The state just passed a 32% income tax hike. Rising taxes are pushing more and more productive people to make the chicken run… and at the worst possible moment for the state’s coffers. Illinois is the most financially distressed state in the US. Every month, it spends $600 million more than it takes in.

It’s now $15 billion behind on its bills and counting. Illinois is about to become America’s first failed state. Even its governor has described it as a “banana republic.” Today, Illinois can’t pay contractors to fix the roads. It doesn’t have enough cash to pay lottery winners. (What happened to the money it collected selling lottery tickets?) The state can’t even afford food for its prisoners. Here are the sad facts. Illinois has: Nearly $15 billion in overdue bills (including $800 million in interest). A $7 billion budget deficit. And an eye-watering $250 billion bottomless pit of unfunded pension obligations. This $250 billion tab is one of the worst public pension crises in the US.

[..] While Illinois has the worst pension situation, it’s not the only state or city in crisis. California’s public pension system is also broken beyond repair. It’s $750 billion underfunded. State pension plans in Connecticut, Pennsylvania, New Jersey, and many other states are taking on water, too. Unfunded public pension liabilities in the US have surpassed $5 trillion. And that’s during an epic stock and bond market bubble.

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A long overview of all the evidence.

New Report Raises Big Questions About Last Year’s DNC Hack (N.)

It is now a year since the Democratic National Committee’s mail system was compromised—a year since events in the spring and early summer of 2016 were identified as remote hacks and, in short order, attributed to Russians acting in behalf of Donald Trump. A great edifice has been erected during this time. President Trump, members of his family, and numerous people around him stand accused of various corruptions and extensive collusion with Russians. Half a dozen simultaneous investigations proceed into these matters. Last week news broke that Special Counsel Robert Mueller had convened a grand jury, which issued its first subpoenas on August 3. Allegations of treason are common; prominent political figures and many media cultivate a case for impeachment.

The president’s ability to conduct foreign policy, notably but not only with regard to Russia, is now crippled. Forced into a corner and having no choice, Trump just signed legislation imposing severe new sanctions on Russia and European companies working with it on pipeline projects vital to Russia’s energy sector. Striking this close to the core of another nation’s economy is customarily considered an act of war, we must not forget. In retaliation, Moscow has announced that the United States must cut its embassy staff by roughly two-thirds. All sides agree that relations between the United States and Russia are now as fragile as they were during some of the Cold War’s worst moments. To suggest that military conflict between two nuclear powers inches ever closer can no longer be dismissed as hyperbole.

All this was set in motion when the DNC’s mail server was first violated in the spring of 2016 and by subsequent assertions that Russians were behind that “hack” and another such operation, also described as a Russian hack, on July 5. These are the foundation stones of the edifice just outlined. The evolution of public discourse in the year since is worthy of scholarly study: Possibilities became allegations, and these became probabilities. Then the probabilities turned into certainties, and these evolved into what are now taken to be established truths. By my reckoning, it required a few days to a few weeks to advance from each of these stages to the next. This was accomplished via the indefensibly corrupt manipulations of language repeated incessantly in our leading media.

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America still ignores its no. 1 Russia expert.

Unverified ‘Russiagate’ Allegations a Grave Threat to America (Stephen Cohen)

Considering all these unprecedented factors, it needs to be emphasized again: President Trump is right about this “all-time low & very dangerous” moment in US-Russian relations. Having recently returned from Russia, Cohen reports that the political situation there is also worsening, primarily because of the Cold War fervor in Washington, including the politics of Russiagate and and new sanctions. Contrary to opinion in the American political-media establishment, Putin has long been a moderate, restraining factor in the new Cold War, but his political space for moderation is rapidly diminishing. His reaction to the congressional sanctions—reducing the number of personnel in US official outposts in Russia to the far lesser number of Russians in American ones—was the least he could have done.

Far harsher political and economic countermeasures are being widely discussed in Moscow, and urged on Putin. For now, he resists, explaining, “I do not want to make things worse,” but he too has a surrounding political elite and it is playing a growing role against any accommodation or restraint in regard to US policy. Meanwhile, the pro-American faction in Russian governmental circles is being decimated by Washington’s actions; and, as always happens in times of escalating Cold War, the space for Russian opposition and other dissident politics is rapidly shrinking.

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Well, if you build yourselves €1 billion offices, who cares?

European Commission Spending Thousands On ‘Air Taxis’ For Top Officials (G.)

Jean-Claude Juncker and his top officials are spending tens of thousands of euros on chartering private planes, according to documents detailing the European commission’s travel expenses. After three years of battling with transparency campaigners fighting for full disclosure, the EU’s executive has released two months of travel costs for 2016, revealing regular use of chartered planes to transport Brussels’ 28 commissioners. The most expensive mission for which details have been released was in the name of Federica Mogherini, the EU’s high representative for foreign affairs. It cost €77,118 for her and aides to travel by “air taxi” to summits in Azerbaijan and Armenia between 29 February and 2 March 2016.

A two-day visit by Juncker, the European commission president, with a delegation of eight people to see Italy’s political leaders in Rome in February 2016 cost €27,000, again due to the chartering of a private plane. Mina Andreeva, a commission spokeswoman, said the use of air taxis was only allowed where commercial flights were either not available or their flight plans did not fit in with a commissioner’s agenda. Security concerns would also allow the chartering of a private plane under commission rules. She said of Juncker’s trip that there had been “no available commercial plane to fit the president’s agenda” in Italy, where he met the Italian president and prime minister, among other dignitaries. The spokeswoman added that the EU’s total spending on such administrative costs was publicly available and that the organisation led the way in being transparent in their work.

The commission was not able to provide details of how many planes are chartered by Brussels every year, although she insisted the number was limited. The travel costs accumulated by the commissioners come out of the general budget, agreed by the member states. [..] According to documents relating to the two months in 2016, total travel and accommodation costs for visits by commissioners to European parliament sessions in Strasbourg, the World Economic Forum in Davos and official missions to countries came to €492.249, an average of €8,790 a month per commissioner.

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That’ll teach them to stay home.

Refugee Crisis Triggers Heightened Risk Of Slavery In EU Supply Chains (G.)

The migrant crisis has increased the risk of slavery and forced labour tainting supply chains in three-quarters of EU countries over the past year, researchers have found. Romania, Italy, Cyprus and Bulgaria – all key entry points into Europe for migrants vulnerable to exploitation – were identified by risk analysts as particularly vulnerable to slavery and forced labour. The annual modern slavery index, produced by Verisk Maplecroft, assessed the conditions that make labour exploitation more likely. Areas covered by the index include national legal frameworks and the severity, and frequency, of violations. Countries outside Europe, such as North Korea and South Sudan, were judged to be at the greatest risk of modern slavery, but the researchers said the EU showed the largest increase in risk of any region over the past year.

“In the past, the slavery story has been in supply chains in countries far away, like Thailand and Bangladesh,” said Dr Alexandra Channer, a human rights analyst at Verisk Maplecroft. “But it is now far closer to home and it something that consumers, governments and businesses in the EU have to look out for. With the arrival of migrants, who are often trapped in modern slavery before they enter the workplace, the vulnerable population is expanding.” The International Labour Organisation estimates that 21 million people worldwide are subject to some form of slavery. The biggest global increase in the risk of slavery was in Romania, which rose 56 places in the indexand is the only EU country classified as “high risk”. Turkey came a close second, moving up 52 places, from medium risk to high risk.

The influx of hundreds of thousands of Syrians fleeing war, combined with Turkey’s restrictive work permit system, has led to thousands of refugees becoming part of an informal workforce, said the study. The government, which is focused on political crackdown, does not prioritise labour violations, further adding to the risk. Over the past year, several large brands from Turkish textile factories have been associated with child labour and slavery. The picture in Romania is more complex, researchers said. The country’s high risk category reflects more severe and frequent instances of modern slavery, but also reflects a greater number of criminal investigations in Romania, usually in collaboration with EU enforcement authorities. Both Romania and Italy, which rose 17 places, have the worst reported violations in the EU, including severe forms of forced labour such as servitude and trafficking, the study said.

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Jun 262017
 
 June 26, 2017  Posted by at 9:29 am Finance Tagged with: , , , , , , , , , ,  


Pablo Picasso Etude Pour Mercure 1924

 

The Next Global Crash Could Arrive ‘With A Vengeance’ – BIS (CNBC)
Push On With The ‘Great Unwinding’, BIS Tells Central Banks (R.)
Japanese Banks at Risk as Borrowing in Dollars Doubles – BIS (BBG)
Four Pronged Proposal to End Japanese Deflation (Mish)
Japan’s Bond Market Grinds To A Halt (ZH)
“It’ll Be An Avalanche”: Hedge Fund CIO Sets The Day Of The Next Crash (ZH)
A Stock Market Crash Scenario (CH Smith)
The Fed Is Going to Cause a Recession (James Rickards)
US Dollar Will Strengthen on Fed Hikes – Credit Agricole (CNBC)
The $1.5 Trillion US Business Tax Change Flying Under the Radar (WSJ)
Two Failed Italian Banks Split Into Good And Bad Banks, Taxpayers Pay (G.)
Investors Call For Greece To Accelerate Reforms (K.)
Germans Fearing China’s World Order? Worry About The EU Instead (CNBC)
China’s Hydropower Frenzy Drowns Sacred Mountains (AFP)

 

 

“..the end may come to resemble more closely a financial boom gone wrong..”

The Next Global Crash Could Arrive ‘With A Vengeance’ – BIS (CNBC)

A new financial crisis is brewing in the emerging economies and it could hit “with a vengeance”, an influential group of central bankers has warned. Emerging markets such as China are showing the same signs that their economies are overheating as the US and the UK demonstrated before the financial crisis of 2007-08, according to the annual report of the Bank for International Settlements (BIS). Claudio Borio, the head of the BIS monetary and economic department, said a new recession could come “with a vengeance” and “the end may come to resemble more closely a financial boom gone wrong”. The BIS, which is sometimes known as the central bank for central banks and counts Bank of England Governor Mark Carney among its members, warned of trouble ahead for the world economy.

It predicted that central banks would be forced to raise interest rates after years of record lows in order to combat inflation which will “smother” growth. The group also warned about the threat poised by rising debt in countries like China and the rise in protectionism such as in the US under Donald Trump, City AM reported. Chinese corporate debt has almost doubled since 2007, now reaching 166% of GDP, while household debt rose to 44% of GDP last year. In May, Moody’s cut China’s credit rating for the first time since 1989 from A1 to Aa3 which could potentially raise the cost of borrowing for the Chinese government. The BIS’s credit-to-GDP gap indicator also showed debt, which is seen as an “early warning indicator” for a country’s banking system, is rising far faster than growth in other Asian economies such as Thailand and Hong Kong.

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“The BIS identified four main risks to the global outlook in the medium-term. A sudden flare-up of inflation which forces up interest rates and hurts growth, financial stress linked to the contraction phase of financial cycles, a rise in protectionism and weaker consumption not offset by stronger investment.”

Push On With The ‘Great Unwinding’, BIS Tells Central Banks (R.)

Major central banks should press ahead with interest rate increases, the Bank for International Settlements said on Sunday, while recognizing that some turbulence in financial markets will have to be negotiated along the way. The BIS, an umbrella body for leading central banks, said in one of its most upbeat annual reports for years that global growth could soon be back at long-term average levels after a sharp improvement in sentiment over the past year. Though pockets of risk remain because of high debt levels, low productivity growth and dwindling policy firepower, the BIS said policymakers should take advantage of the improving economic outlook and its surprisingly negligible effect on inflation to accelerate the “great unwinding” of quantitative easing programs and record low interest rates.

New technologies and working practices are likely to be playing a roll in suppressing inflation, it said, though normal impulses should kick in if unemployment continues to drop. “Since we are now emerging from a very long period of very accommodative monetary policy, whatever we do, we will have to do it in a very careful way,” BIS’s head of research, Hyun Song Shin, told Reuters. “If we leave it too late, it is going to be much more difficult to accomplish that unwinding. Even if there are some short-term bumps in the road it would be much more advisable to stay the course and begin that process of normalization.” Shin added that it will be “very difficult, if not impossible” to remove all those bumps. The BIS identified four main risks to the global outlook in the medium-term. A sudden flare-up of inflation which forces up interest rates and hurts growth, financial stress linked to the contraction phase of financial cycles, a rise in protectionism and weaker consumption not offset by stronger investment.

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The death of the dollar has been greatly exaggerated.

Japanese Banks at Risk as Borrowing in Dollars Doubles – BIS (BBG)

Japanese banks have more than doubled their borrowing and lending in dollars since 2007, leaving them vulnerable to funding shocks such as those that exacerbated the last financial crisis, the Bank for International Settlements warned in a report released Sunday. Assets denominated in dollars on the balance sheets of Japanese banks surged to about $3.5 trillion by the end of 2016, the coordinating body for the world’s central banks said in its annual report about the global economy. Those exceed liabilities in dollars by about $1 trillion, creating a massive so-called long position in the currency. The report also cited Canadian lenders for following a similar trend, almost doubling their dollar exposure since the crisis. Their net long positions reached almost $200 billion, the BIS said.

European firms, by contrast, have reduced exposure to dollars since the crisis, the report said. German banks, which had among the highest net dollar positions in 2007, now have matching assets and liabilities denominated in the currency after cutting dollar assets by about half. During the financial crisis, European banks’ net dollar exposures, which peaked at $2 trillion, ended up causing several firms to collapse when funding sources dried up and their efforts to dump U.S. mortgage-related assets led to huge losses. Even as post-crisis regulation has strengthened banks’ capital resources to cope with such losses and some funding has shifted to more stable sources, risks haven’t been completely eliminated, according to the Basel, Switzerland-based group.

[..] the biggest portion of dollar funding for non-U.S. banks – $4.1 trillion – now comes from deposits outside the U.S., according to BIS data. That shift toward offshore dollar deposits also presents risks because the Federal Reserve’s funding backstop during the 2008 crisis wouldn’t be present in non-U.S. jurisdictions if dollar funds became scant, the BIS said. The Fed provided $538 billion of emergency loans to European banks that lost dollar funding from U.S. sources during the 2008 crisis ..

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Is Mish missing out on confidence as a factor? You can lead a horse to water, but…

Four Pronged Proposal to End Japanese Deflation (Mish)

Negative Sales Taxes People hoard cash, especially the miserly wealthy. We need to unlock that cash and put it to work. To free up this money, I propose negative sales taxes. The more you spend, the more money you get back as a direct tax credit against income taxes. I leave specific details to economists Larry Summers and Paul Krugman. What can possibly go wrong?

One Percent Tax Per Month on Government Bonds Negative interest rates are in vogue. However, all negative interest rates have done is to get those with money to hoard bonds. Bond buyers effectively bet on capital gains of still more negative rates. Phooey! Just yesterday I noted Bank of Japan Corners 33% of Bond Market: All Japanese Bonds, 40 Years and Below, Yield 0.3% or Less. 33% cornering of the bond market is truly inadequate as this sentiment implies: Makoto Yamashita, a strategist for Japanese interest rates at Deutsche Bank’s securities unit in Tokyo said “There are investors who have no choice but to buy.” We need to end this “no choice” hoarding sentiment right here, right now. I have just the solution. Tax government bonds at the rate of 1% per month.

No one will want them. Hedge funds and pension plans will dump sovereign bonds en masse. This will allow governments to buy every bond in existence immediately, if not sooner. As soon as the government corners the bond market (at effectively zero cost), debt and interest on the debt will truly be owed to itself. Once the bond market is 100% cornered, I propose government debt be declared null and void annually. This would effectively wipe out the entirety of Japan’s debt. Japan’s debt-to-GDP ratio would immediately plunge from 250% to 0%.

National Tax Free Lottery Japan desperately needs to get people to spend, continually. Once again, I have a logical proposal. For every purchase one makes on a credit card, that person gets a free lottery ticket for a weekly drawing worth $10,000,000 tax free. Each week, a random day of the week is selected and separately a random taxpayer ID is selected. If the person drawn made a credit card purchase exceeding $10 on the day of the week drawn, they win $10,000,000 tax free. If there is no winner, the amount rolls over. This beautiful plan will cost no more than $520 million annually, peanuts these days.

Hav-a-Kid Demographics in Japan are a huge problem. Although various incentives have been tried, none of them have gone far enough. I propose a reduction in income taxes for everyone starting a family. The following scale applies. One new child: 50% reduction in income taxes for a period of ten years. Two new children: 100% reduction in income taxes for a period of twenty years. Three new children: Subsidized housing, free healthcare, free schooling, and no income taxes for thirty years. Those with one new child in the last five years get full credit if they add at least one more child in the next five years.

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Well, Mish does have the answer to that above: One Percent Tax Per Month

Japan’s Bond Market Grinds To A Halt (ZH)

The Bank of Japan may or may not be tapering, but that may soon be moot because by the time Kuroda decides whether he will buy less bonds, the bond market may no longer work. As the Nikkei reports, while the Japanese central bank ponders its next step, the Japanese rates market has been getting “Ice-9ed” and increasingly paralyzed, as yields on newly issued 10-year Japanese government bonds remained flat for seven straight sessions through Friday while the BOJ continued its efforts to keep long-term interest rates around zero. The 10-year JGB yield again closed at 0.055%, where it has been stuck since June 15m and according to data from Nikkei affiliate QUICK, this marks the longest period of stagnation since 1994, Because what comes after record low volatility? Simple: market paralysis.

And that’s what Japan appears to be experiencing right now as private bondholders no longer dare to even breathe without instructions from the central bank. Meanwhile, the implied volatility of JGBs tumbled to the lowest level since January 2008 for the same reason we recently speculated may be the primary driver behind the global collapse in volatility: nobody is trading. This means that trading in newly issued 10-year debt has become so infrequent that broker Japan Bond Trading has seen days when no bonds trade hands. It’s not just cash bonds that find themselves in trading limbo: trading in short-term interest rate futures has also thinned and on Tuesday of last week the Nikkei reports that there were no transactions in three-month Tibor futures – the first time that has happened since such trading began in 1989.

As more market participants throw in the towel on a rigged, centrally planned market, the result will – no could – be a further loss of market function, and a guaranteed crash once the BOJ and other central banks pull out (which is why they can’t). As the Nikkei politely concludes, “if the bond and money markets lose their ability to price credit based on future interest rate expectations and supply and demand, the risk of sudden rate volatility from external shocks like a global financial crisis will rise.” Translation: in a world where only central banks trade, everyone else is destined to forget forget what trading, and certainly selling, means.

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“..when the global credit impulse reverses, it’ll be a cascade, an avalanche. And I pin the tail on that donkey to be Valentine’s Day 2018.”

“It’ll Be An Avalanche”: Hedge Fund CIO Sets The Day Of The Next Crash (ZH)

While most asset managers have been growing increasingly skeptical and gloomy in recent weeks (despite a few ideological contrarian holdouts), joining the rising chorus of bank analysts including those of Citi, JPM, BofA and Goldman all urging clients to “go to cash”, none have dared to commit the cardinal sin of actually predicting when the next crash will take place. On Sunday a prominent hedge fund manager, One River Asset Management’s CIO Eric Peters broke with that tradition and dared to “pin a tail on the donkey” of when the next market crash – one which he agrees with us will be driven by a collapse in the global credit impulse – will take place. His prediction: Valentine’s Day 2018. Here is what Peters believes will happen over the next 8 months, a period which will begin with an increasingly tighter Fed and conclude with a market avalanche:

“The Fed hikes rates to lean against inflation,” said the CIO. “And they’ll reduce the balance sheet to dampen growing financial instability,” he continued. “They’ll signal less about rates and focus on balance sheet reduction in Sep.” Inflation is softening as the gap between the real economy and financial asset prices is widening. “If they break the economy with rate hikes, everyone will blame the Fed.” They can’t afford that political risk. “But no one understands the balance sheet, so if something breaks because they reduce it, they’ll get a free pass.”

“The Fed has convinced itself that forward guidance was far more powerful than QE,” continued the same CIO. “This allows them to argue that reversing QE without reversing forward guidance should be uneventful.” Like watching paint dry. “Balance sheet reduction will start slowly. And proceed for a few months without a noticeable impact,” he said. “The Fed will feel validated.” Like they’ve been right all along. “But when the global credit impulse reverses, it’ll be a cascade, an avalanche. And I pin the tail on that donkey to be Valentine’s Day 2018.”

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One must remember there are no markets left. That makes talking about them dicey.

A Stock Market Crash Scenario (CH Smith)

After 8+ years of phenomenal gains, it’s pretty obvious the global stock market rally is overdue for a credit-cycle downturn, and many research services of Wall Street heavyweights are sounding the alarm about the auto industry’s slump, the slowing of new credit and other fundamental indicators that a recession is becoming more likely. Next February is a good guess, as recessions and market downturns tend to lag the credit market by about 9 months. My own scenario is based not on cycles or technicals or fundamentals, but on the psychology of the topping process, which tends to follow this basic script:

When there are too many bearish reports of gloomy data, and too many calls to go long volatility or go to cash, the market perversely goes up, not down. Why? This negativity creates a classic Wall of Worry that markets can continue climbing. (Central banks buying $300 billion of assets a month helps power this gradual ascent most admirably.) The Bears betting on a decline based on deteriorating fundamentals are crushed by the steady advance. As Bears give up, the window for a Spot of Bother decline creaks open, however grudgingly, as central banks make noises about ending their extraordinary monetary policies by raising interest rates a bit (so they can lower them when the next recession grabs the global economy by the throat). As bearish short interest and bets on higher volatility fade, insiders go short.

A sudden air pocket takes the market down, triggered by some bit of “news.” (Nothing like a well-engineered bout of panic selling to set up a profitable Buy the Dip opportunity.) And since traders have been well-trained to Buy the Dips, the Spot of Bother is quickly retraced. Nonetheless, doubts remain and fundamental data is still weak; this overhang of negativity rebuilds the wall of Worry. Some Bears will reckon the weakened market will double-top, i.e. be unable to break out to new highs given the poor fundamentals, and as a result we can anticipate a nominal new high after the Wall of Worry has been rebuilt, just to destroy all those who reckoned a double-top would mark The Top. Mr. Market (and the central banks) won’t make it that easy to reap a fortune by going short.

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I think the Fed has already done that. By manoeuvering themselves into a position they cannot escape from.

The Fed Is Going to Cause a Recession (James Rickards)

Why did the Federal Reserve (Fed) hike rates last week, and what will its policy look like in the future? They’re trying to prepare for the next recession. They’re not predicting a recession, they never do, but they know a recession will come sooner rather than later. This expansion is 96 months old. It’s one of the longest expansions in U.S. history. It’s also the weakest expansion in U.S. history. A lot of people say, “What expansion? Feels like a depression to me.” I think it is a depression defined as depressed growth, but we’re not in a technical recession and haven’t been since June 2009. So it’s been an eight-year expansion at this point, but it won’t fare well, and the Fed knows that. When the U.S. economy goes into recession, you have to cut interest rates about 3% to get the United States out of that recession. Well, how do you cut interest rates by 3% when you’re only at 1%?

The answer is, you can’t. You’ve got to get them up to 3% to cut them back down, maybe to zero, to get out of the next recession. So that explains why the Fed is raising interest rates. That’s the fourth rate hike getting them up to 1%. They would like to keep going; they would like to get them up to 3, 3.5% by 2019. My estimate is that they’re not going to get there. The recession will come first. In fact, they will probably cause the recession that they’re preparing to cure. So let’s just say we get interest rates to 1% and now you go into recession. We can cut them back down to zero. Well, now what do you do? You do a new round of QE. The problem is that the Fed’s balance sheet is so bloated at $4.5 trillion. How much more can you do—$5 trillion, $5.5 trillion, $6 trillion—before you cause a loss of confidence in the dollar? There are a lot of smart people who think that there’s no limit on how much money you can print. “Just print money. What’s the problem?”

I disagree. I think there’s an invisible boundary. The Fed won’t talk about it. No one knows what it is. But you don’t want to find out the hard way. [..] You probably want to get from $4.5 trillion, down to $2.5 trillion. Well, you can’t sell any treasury bonds. You destroy the market. Rates would go up, putting us in recession, and the housing market would collapse. They’re not going to do that. What they’re going to do is just let them mature. When these securities mature, they won’t buy new ones. They won’t roll it over, and they actually will reduce the balance sheet and make money disappear. They’re going to do it in tiny increments, maybe $10 billion a month or $20 billion a month. They want to run this quantitative tightening in small increments and pretend nothing’s happening. But that’s nonsense. It’s just one more way of tightening money in a weak economy; it will probably cause a recession.

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Views on the dollar are all over the place.

US Dollar Will Strengthen on Fed Hikes – Credit Agricole (CNBC)

While investors seem to have come to a consensus view that the U.S. dollar rally is coming to an end, Credit Agricole has offered a contrarian take: There is room for the greenback to strengthen. David Forrester, the bank’s FX strategist told CNBC Monday that markets have been predominantly focused on U.S. inflation data and pricing in an overly cautious Federal Reserve. But, he thinks the Fed will be more hawkish than what is currently expected, which will support the U.S. dollar. “The Fed seems to have changed its policy response function. Yes it’s going to pay attention to the data, but less so. It now wants to get its rates normalized so that it actually has room to cut rates in the next downturn,” Forrester said.

“Let’s not forget here: The U.S. expansion, while being soft, is actually pretty mature so the Fed is getting lined up here in preparation for the next downturn. That’s why we think they’re going to hike rates and we will see a steepening of the U.S. Treasury curve and that will be supportive of the U.S. going forward.” Credit Agricole expects the Fed to hike rates once more this year, followed by three times in 2018. U.S. inflation — still below its 2% target despite a low unemployment rate — has been a key point in the argument on whether the Fed should continue normalizing rates. Forrester said the divergence between the unemployment rate and inflation is not unique to the U.S. Globally, economies face structural issues such as ageing populations and automation replacing jobs, which could increase the risks of a recession.

But, he said U.S. inflation should pick up on the back of further wage growth and a rebound in oil prices. “We expect the U.S. economy to continue to recover and strengthen, we will believe in the Philips curve in the U.S. We do expect wages growth to accelerate and inflation expectation(s) to pick back up. So all-in-all, we do expect that re-steepening,” he said. The Philips curve relates to a supposed inverse relationship between the level of unemployment and the inflation rate. Forrester’s views are in contrast to that of many analysts, who expect weakness in the U.S. dollar. Ken Peng, Asia investment strategist at Citi Private Bank, told CNBC’s “Squawk Box” that the greenback is headed for a “new cycle” after a six-year rally since 2011. He added that the dollar weakness will be “one of the greatest market trends” for global investors.

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Desperately seeking something.

The $1.5 Trillion US Business Tax Change Flying Under the Radar (WSJ)

Republicans looking to rewrite the U.S. tax code are taking aim at one of the foundations of modern finance—the deduction that companies get for interest they pay on debt. That deduction affects everyone from titans of Wall Street who load up on junk bonds to pay for multibillion-dollar corporate takeovers to wheat farmers in the Midwest looking to make ends meet before harvest. Yet a House Republican proposal to eliminate the deduction has gotten relatively little sustained public attention or lobbying pressure. Thanks in part to the deduction, the U.S. financial system is heavily oriented toward debt, which because of the tax code is often cheaper than equity financing—such as sales of stock. It also is widely accessible. In 2015, U.S. businesses paid in all $1.3 trillion in gross interest, according to Commerce Department data, equal in magnitude to the total economic output of Australia.

Getting rid of the deduction for net interest expense, as House Republicans propose, would alter finance. It also would generate about $1.5 trillion in revenue for the government over a decade, according to the Tax Foundation, a conservative-leaning think thank. The plan would raise money to help offset Republicans’ corporate tax cuts and reduce a “huge bias” toward debt financing, said Robert Pozen, a senior lecturer at MIT’s Sloan School of Management. That bias, he said, hurts companies built around innovation, which tend to not have the physical assets that banks usually require as collateral. [..] Midsize businesses may also get squeezed. “The people that utilize debt, they utilize it because they don’t have the cash and they don’t have the access to equity,” said Robert Moskovitz, CFO of Leaf Commercial Capital, which finances businesses’ purchases of items like copiers and telephone systems.

“A dry cleaner in Des Moines, Iowa? Where is he going to get equity? He can’t do an IPO.” The idea behind the Republican plan is to pair the elimination of this deduction with immediate deductions for investments in equipment and other long-lived assets. Party leaders expect the capital write-offs would encourage more investment and growth and greater worker productivity, but not the debt often associated with it.

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Dijsselbloem et al made a big circus about how taxpayers would never again foot the bill. It was never worth a thing.

“German conservative MEP Markus Ferber (EPP): “With this decision, the European Commission accompanies the Banking Union to its deathbed. The promise that the tax payer will not stand in to rescue failing banks anymore is broken for good. I am very disappointed that the commission has approved this course of action. By doing so the Commission has massively undermined the credibility of the Banking Union. If the common set of rules governing banking resolution is so blatantly ignored, there is no point in negotiating any further on a common deposit insurance scheme. The precondition for a working Banking Union is a common understanding of its rules. If such a basic common understanding is lacking, there is no point in further deepening the Banking Union and mutualising risk.”

Two Failed Italian Banks Split Into Good And Bad Banks, Taxpayers Pay (G.)

The Italian government is stepping in to wind up two failing lenders and prevent a bank run, at a total cost of up to €17bn. After an emergency cabinet meeting on Sunday, ministers agreed to a decree splitting Veneto Banca and Banca Popolare di Vicenza into ‘good’ and ‘bad’ banks, keeping branches open. The ‘good’ assets are being acquired by Italy’s biggest retail bank, Intesa Sanpaolo, with the Italian government handing about €5bn to Intesa as part of the deal. The lenders will then be liquidated, which leaves the state footing the bill for bad loans on both banks’ books, plus restructuring costs.

The Italian government would provide state guarantees worth up to €12bn to cover potential losses at the ‘bad’ bank, Pier Carlo Padoan, the finance minister, told reporters in Rome. That means the total cost could reach €17bn. Padoan added that both banks would operate normally on Monday. The deal is meant to ward off the threat of a bank run, by reassuring nervous savers and deterring them from withdrawing their funds when branches reopen. Paolo Gentiloni, Italy’s prime minister, insisted that the decree fully respected EU rules, even though taxpapers are no longer meant to stump the cost to rescue a failing bank. The funds will come from a €20bn fund created last year to help struggling lenders, so will not affect Italy’s public borrowing, according to the government.

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Lower pensions solve everything.

Investors Call For Greece To Accelerate Reforms (K.)

The return of investor confidence in Greece will require time and the acceleration of the government’s reform program, foreign fund managers told Greek officials during two investment conferences that took place in the last couple of weeks in New York and London with the participation of Greek listed firms. In their meetings with hundreds of funds from the US and Europe, the representatives of Greek companies said that while the recent Eurogroup decision may have banished uncertainty about Greece, the government will need to put in some serious effort and work in addressing the issues of speed and efficiency. This was after Greece had failed to secure any debt-easing measures, while the entry of Greek bonds to the ECB’s QE remains pending.

The main subject at the two investment events was the titanic effort being made by Greek banks to reduce the bad loans in their portfolios. As for the Athens stock market, Alpha Finance noted in its presentation at the 6th Greek Investment Forum in New York on June 21-22 that “there is a light at the end of the tunnel.” The Alpha Bank subsidiary noted that “the Greek market has recorded bigger returns than its European peers and prospects appear very encouraging as Greece has beaten its fiscal targets and restored investor confidence in the timetable of the Greek [bailout] program.”

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“the U.S. will not be indifferent to the mistreatment of the long suffering Greece. That is America’s key strategic base in the Mediterranean, and a location of new military installations on the island of Crete to monitor the Middle East.”

Germans Fearing China’s World Order? Worry About The EU Instead (CNBC)

Criticizing what he saw as Washington’s isolationist bent, German Finance Minister Wolfgang Schäuble voiced a concern in a speech earlier this month that the West could be threatened as China (and Russia) might fill the void. That, he feared, “would be the end of our liberal world order.” He also said that the U.S. was no longer willing to act as a “guardian of global order,” apparently because Washington withdrew from the agreement on climate change, and it allegedly showed no interest for cooperative migration and security policies. The U.S. Department of State has probably something to say about that, but I wish Schäuble were at least partly right. Arguably, the U.S. could cut back on some foreign engagements and pay more attention to pressing domestic problems.

That said, I wonder how the German minister fails to see that the U.S. is all over the map in active, proxy and hybrid warfare — Afghanistan, the Middle East and North Africa, Korean Peninsula, Central and Eastern Europe and the South China Sea. What else would he want? A nuclear war with China and Russia? Germany may wish to think about whether it is in its interest to fuel and broaden the points of friction with the United States. In my view, Berlin should leave the big power dealings alone. Washington and Beijing are engaged on a broad range of issues to build a historically unique relationship between an established superpower and a runner-up that needs space to develop and contribute to the world in peace and harmony. In trying to do that, the two countries are blazing totally new trails of modern statecraft.

Ubiquitous analogies of Sparta (an established power) and Athens (a rapidly developing strategic competitor), and their ensuing Peloponnesian War, are worthless in the case of countries with huge nuclear arsenals and ground, sea, air and airspace delivery vehicles. So, yes, Germany should leave that alone and get over its fury at Washington’s decision to stop the hemorrhage of foreign trade accounts that are killing jobs, incomes and whatever is left of American manufacturing industries. China got that message and is doing something about it. In the first four months of this year, American export sales to China soared 16.1%. By contrast, U.S. exports to the EU, which account for one-fifth of the total, barely eked out a 2.7% increase.

Germany has to make up its mind with regard to the European integration. Bullying the Visegrad Group (and Baltic States) — a task that Germany has subcontracted to France due to dark pages of its history — and pillorying Greece (a task Germany was eager to continue) won’t work. These countries will run to the U.S. for cover, as some of them are doing now by demanding large contingents of U.S. armed forces on their soil. Also, the U.S. will not be indifferent to the mistreatment of the long suffering Greece. That is America’s key strategic base in the Mediterranean, and a location of new military installations on the island of Crete to monitor the Middle East.

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Proud supporters of the Paris Agreement.

China’s Hydropower Frenzy Drowns Sacred Mountains (AFP)

Beijing is building hydropower at a breakneck pace in ethnically Tibetan regions as part of an ambitious undertaking to reduce the country’s dependence on coal and cut emissions that have made it the world’s top polluter. China had just two dams in 1949, but now boasts some 22,000 – nearly half the world total – in all but one of the country’s major waterways. Mountains and rivers are revered as sacred in Tibetan Buddhism, and the extensive construction, which began in 2014, has alarmed locals who believe they can only live peacefully if the nature around them is protected. “Last year, people said that a big forest fire happened because they blasted a road into the holy mountain, and it took revenge,” said villager Tashi Yungdrung, who tends a small herd of yaks in the pastures above her stone, square-windowed home.

Most would not dare remove so much as a single stone from the mountain Palshab Drakar, an important pilgrimage site, she said. Villagers are bracing for mass relocations, an experience that has previously caused havoc elsewhere in China. Beginning in the 1990s, more than a million were moved for the Three Gorges Dam, the world’s largest in terms of capacity, with thousands still mired in poverty. Plans posted at the Lianghekou construction site showed that 22 power plants will be built along the Yalong, a Yangtze tributary, collectively capable of generating 30 gigawatts of electricity – a fifth of China’s current total installed hydropower capacity. Li Zhaolong, a Tibetan from Zhaba village, said he received 300,000 yuan ($44,000) in government compensation to build a new home on higher ground, where he will move next year.

But the 28,000 yuan moving fee his family received per person will not last long once their crops are submerged and they have no other sources of income. “Before we were farmers, and now we have no land,” said Li. [..] Some 80% of China’s hydropower potential lies along the high-flow, glacier-fed rivers of the Tibetan plateau, but dams there bring minimal local benefits because most of the power goes to smog-choked cities in the east, according to the non-governmental organisation International Rivers. Construction worker Zeng Qingtao said the state-owned Power Construction Corporation had brought in some 10,000 employees, but none are locals. “We can’t hire Tibetans. They aren’t reasonable,” he said.

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