crash Archives - Page 2 of 5 - The Automatic Earth

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.

“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.

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 ..

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.

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.

“..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.”

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.

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.

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.

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.

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.

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.”

“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.

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.

Debt Rattle April 23 2017

Apr 232017

April 23, 2017 Posted by Raúl Ilargi Meijer at 8:30 am Finance Tagged with: bubble, China, crash, credit, Fed, France, Le Pen, pope, refugees, retail, upheaval 1 Response »

How we got here

• Disintegrating Left-Right Divide Sets Stage For French Political Upheaval (G.)

• The Main Issue in the French Presidential Election: National Sovereignty (CP)

• ECB Stands Ready to Support Banks If Needed After France Vote (BBG)

• It Is Time To Break Up The Fed (IFT)

• China’s Credit Excess Is Unlike Anything The World Has Ever Seen (Brown)

• The US Retail Bubble Has Now Burst (ZH)

• UK Retail Sales Volumes Fall At Fastest Rate In Seven Years (Ind.)

• BHS Crash Sets Trend For A Chain Of Store Closures On UK High Streets (G.)

• German Intelligence Spied On Interpol In Dozens Of Countries (R.)

• Pope Likens Refugee Holding Centers To ‘Concentration Camps’ (G.)

This is a global issue, the left has moved so far right it has no identity left. Nice detail: The Parti Socialiste of the current president could be bankrupted by its dismal campaign.

• Disintegrating Left-Right Divide Sets Stage For French Political Upheaval (G.)

Do they vote for or against? Do they choose a candidate who represents their politics or one who, opinion polls suggest, is most likely to defeat the woman whose presence as one of two candidates in the second-round runoff in a fortnight seems a given, but whose name still provokes a frisson of fear for many: the far-right Front National leader Marine Le Pen, with her anti-Europe, anti-immigration, “French-first” programme? As election day has approached, and with the added complication of the terrorist threat following the shooting of a police officer on the Champs-Elysées in Paris, the dilemma has caused particular anguish for France’s mainstream leftwing voters, whose candidate is trailing in fifth place.

There are no certainties, but barring all other candidates “dropping from a nasty virus”, as one political analyst put it, Benoît Hamon is facing a crushing defeat in the first round, ending his leadership dreams and putting the future of the country’s Socialist party (PS) in question. In a decline that mirrors that of Britain’s Labour party, the PS is facing years in a political desert, if it survives. If Hamon finishes last among the leading candidates, as polls predict, the party’s only hope of salvaging a thread of power will lie in winning enough parliamentary seats in the legislative elections that follow to form an influential group in the national assembly. Even then it will most likely be part of a coalition rather than a fully functioning opposition.

Even worse, and even more unthinkable, if leftwing voters turn en masse to Jean-Luc Mélenchon as their best hope of a place in the second round against the frontrunners – independent centrist Emmanuel Macron, Le Pen or the conservative François Fillon – and Hamon polls less than 5%, none of Hamon’s campaign expenses will be reimbursed, bankrupting the PS. “Under 5% and the situation is really catastrophic,” Marc-Olivier Padis, of the Paris-based thinktank Terra Nova, told the Observer. “And it’s possible. We are hearing many socialists wondering if they should vote Mélenchon or Macron. The only thing that can save the party in this election is if enough socialists vote for Hamon out of loyalty.”

It’s about the economy, guys. Too many people are left with too little. That’s when they choose to be their own boss -again-.

• The Main Issue in the French Presidential Election: National Sovereignty (CP)

The 2017 French Presidential election marks a profound change in European political alignments. There is an ongoing shift from the traditional left-right rivalry to opposition between globalization, in the form of the European Union (EU), and national sovereignty. Standard media treatment sticks to a simple left-right dualism: “racist” rejection of immigrants is the main issue and that what matters most is to “stop Marine Le Pen!” Going from there to here is like walking through Alice’s looking glass. Almost everything is turned around. On this side of the glass, the left has turned into the right and part of the right is turning into the left. Fifty years ago, it was “the left” whose most ardent cause was passionate support for Third World national liberation struggles.

The left’s heroes were Ahmed Ben Bella, Sukarno, Amilcar Cabral, Patrice Lumumba, and above all Ho Chi Minh. What were these leaders fighting for? They were fighting to liberate their countries from Western imperialism. They were fighting for independence, for the right to determine their own way of life, preserve their own customs, decide their own future. They were fighting for national sovereignty, and the left supported that struggle. Today, it is all turned around. “Sovereignty” has become a bad word in the mainstream left. National sovereignty is an essentially defensive concept. It is about staying home and minding one’s own business. It is the opposite of the aggressive nationalism that inspired fascist Italy and Nazi Germany to conquer other countries, depriving them of their national sovereignty.

The confusion is due to the fact that most of what calls itself “the left” in the West has been totally won over to the current form of imperialism – aka “globalization”. It is an imperialism of a new type, centered on the use of military force and “soft” power to enable transnational finance to penetrate every corner of the earth and thus to reshape all societies in the endless quest for profitable return on capital investment. The left has been won over to this new imperialism because it advances under the banner of “human rights” and “antiracism” – abstractions which a whole generation has been indoctrinated to consider the central, if not the only, political issues of our times.

The fact that “sovereignism” is growing in Europe is interpreted by mainstream globalist media as proof that “Europe is moving to the right”– no doubt because Europeans are “racist”. This interpretation is biased and dangerous. People in more and more European nations are calling for national sovereignty precisely because they have lost it. They lost it to the European Union, and they want it back. That is why the British voted to leave the European Union. Not because they are “racist”, but primarily because they cherish their historic tradition of self-rule.

French government debt could become ineligible as collateral if Le Pen and/or Melenchon do too well.

• ECB Stands Ready to Support Banks If Needed After France Vote (BBG)

ECB officials signaled that their liquidity facilities remain available to counter any market tension that may arise in the aftermath of France’s presidential election, the first round of which takes place Sunday. “The central bank should be ready for any shocks that should materialize,” Governing Council member Ignazio Visco said at a press conference during the IMF spring meetings in Washington on Saturday. “And if there were to be such a shock, the instruments are the instruments that a central bank should use, which are liquidity provision, refinancing when needed. And intervening very quickly is really very easy now given the instruments we have.” Like the U.K.’s vote on whether to continue its membership of the EU in June, central bank readiness to support the banking system has been sought given the potential for such political events to create market turmoil.

In this case, a strong showing in the first round by anti-euro candidate Marine Le Pen could cast doubt over the future of the single currency. Visco argued that the presence of central bank facilities makes it less likely they’ll actually be needed. [..] The euro area has years of experience with banking freeze-ups and has multiple instruments to address liquidity shortages that strike otherwise solvent banks. In particular, in the event a sudden credit-rating downgrade made French government debt ineligible as collateral for normal ECB refinancing operations, so-called Emergency Liquidity Assistance may be available from the Bank of France. “If there should be problems for specific French banks, liquidity-wise, then the ECB has instruments to help solvent banks with liquidity problems,” Governing Council member Ewald Nowotny said on Saturday. “This is ELA, emergency liquidity assistance. That could be given of course. But we don’t expect any special movements.”

“Donald Trump and the GOP need an easy, highly visible legislative victory. Breaking up the Fed meets this criteria.”

• It Is Time To Break Up The Fed (IFT)

Donald Trump and the GOP need an easy, highly visible legislative victory. Breaking up the Fed meets this criteria. In the aftermath of the Great Financial Crisis, policymakers rushed out the Dodd-Frank Act. This Act increased the Fed’s responsibilities. However, policymakers did this without examining the Fed’s performance in the run-up to the financial crisis. Had they done so, they would have seen the Fed failed as a bank supervisor and regulator. This failure alone mandates breaking up the Fed. After all, why should the Fed be given a second chance given how much its failure hurt the global real economy and taxpayers? Furthermore, this failure strongly suggests policymakers shouldn’t have rewarded the Fed with additional responsibilities. After all, there is no reason to believe the Fed’s failure as a bank supervisor and regulator won’t be repeated with any new responsibilities.

To the extent these new responsibilities exist in the Dodd-Frank Act, they too should be stripped away. What the Fed should be left with is responsibility for monetary policy and the payment system. All of the Fed’s bank supervision and regulatory responsibility should be transferred to the FDIC. There are many significant benefits from doing this including it reinforces market discipline on the banks. Unlike the Fed, the FDIC is responsible for protecting the taxpayers and has the authority to close a bank. The FDIC’s primary responsibility is minimizing the risk of loss by the taxpayer backed deposit insurance fund. It achieves this initially through regulation and supervision, but more importantly by a willingness to step in and close a bank that threatens to cause a loss to the fund.

Shareholders and unsecured bank creditors are keenly aware they are likely to lose their entire investment should the FDIC step up and close the bank they are invested in. As a result, they have an incentive to exert discipline on bank management to limit its risk taking so the bank is never taken over by the FDIC. For those who would argue that it is important to keep bank supervision and regulation together with monetary policy, I would point out there is no evidence showing this produces a better outcome. In the run-up to the Great Financial Crisis, the Bank of England and the ECB did not have supervision and regulation responsibility. The Fed did. Talk about a perfect controlled experiment.

China needs more than $13 to create $1 of growth.

• China’s Credit Excess Is Unlike Anything The World Has Ever Seen (Brown)

From a global macroeconomic perspective, we encourage readers to consider that the world is experiencing an extended, rolling process of deflating its credit excesses. It is now simply China’s turn. For context, Japan started deflating their credit bubble in the early 1990s, and has now experienced more than 20 years of deflation and very little growth since. The US began its process in 2008, and after eight years has only recently been showing signs of sustainable recovery. The euro zone entered this process in 2011 and is still struggling six years onward. We believe China is now entering the early stages of this process. Having said that, we believe that Chinese authorities have a viable plan for deflating their credit excess in an orderly fashion.

Please stay posted as we will review this multi-pronged, market-based approach in our next column. For now, let’s turn our attention to the size of the credit excess that China created and why we estimate it to be the largest in the world. A credit excess is created by the speed and magnitude of credit that is created – if too much is created in too short a time period, excesses inevitably occur and non-performing loans (NPLs) emerge. To illustrate the credit excess that has been created in China, let’s review several key indicators, including the: 1) flow of new credit; 2) stock of outstanding credit; 3) credit deviation ratio (i.e., excess credit); 4) incremental capital output ratio (efficiency of credit allocation).

The US created 58% of GDP between 2002-07, and the global financial crisis followed. Japan created credit equivalent to the entire size of its economy between 1985-90 and subsequently experienced more than 20 years of deflation (admittedly reflecting the lack of restructuring). Thailand created a significant real estate bubble between 1992-97 and ended up with about 45% NPL ratios. Spain created credit equivalent to 116% of GDP between 2002-07 and still is trying to address a 20% unemployment rate. China created 139% of GDP in new credit between the first quarter of 2009 and the third quarter of 2014 (when GDP growth peaked), far greater than what was created in other major credit bubbles globally.

[..] Another important measure to assess the amount of credit in the economy which is “excessive” is the credit-to-GDP gap, as reported by the Bank of International Settlements. This ratio measures the difference between the current credit-to-GDP ratio in an economy against its long-term trend of what is necessary to optimally support long-term GDP growth. It is akin to measuring the amount of credit that is productively deployed into an economy. This metric is used by the Basel III framework in determining countercyclical capital buffers for a country’s banking system when credit creation becomes too fast (i.e., high credit growth requires higher capital ratios for banks).

Finally, to show that the pace of credit creation will necessarily slow, thereby exposing misallocated credit and driving the emergence of new NPL formation, we turn to the deterioration in China’s incremental capital output ratio. This ratio is the measure of the number of units of input required to produce one unit of GDP. For the 15 years prior to the credit impulse in 2009-14, China’s incremental capital output ratio has been consistently between two and four. Meaning that two to four yuan in fixed asset investment created one yuan in GDP. But as a result of the credit-driven economic growth model, and the excessive credit that has been created (and the subsequent excess capacity in the industrial economy), China’s investment efficiency has deteriorated to the point that its incremental capital output ratio is now over 13. Said another way, every 1 yuan in new fixed asset investment is now creating only 7 fen in GDP.

Full employment, anyone?

• The US Retail Bubble Has Now Burst (ZH)

The devastation in the US retail sector is accelerating in 2017, and in addition to the surging number of brick and mortar retail bankruptcies, it is perhaps nowhere more obvious than in the soaring number of store closures. While the shuttering of retail stores has been a frequent topic on this website, most recently in the context of the next “big short”, namely the ongoing deterioration in the mall REITs and associated Commercial Mortgage-Backed Securities and CDS, here is a stunning fact from Credit Suisse:”Barely a quarter into 2017, year-to-date retail store closings have already surpassed those of 2008.”

According to the Swiss bank’s calculations, on a unit basis, approximately 2,880 store closings were announced YTD, more than twice as many closings as the 1,153 announced during the same period last year. Historically, roughly 60% of store closure announcements occur in the first five months of the year. By extrapolating the year-to-date announcements, CS estimates that there could be more than 8,640 store closings this year, which will be higher than the historical 2008 peak of approximately 6,200 store closings, which suggests that for brick-and-mortar stores stores the current transition period is far worse than the depth of the credit crisis depression.

As the WSJ calculates, at least 10 retailers, including Limited Stores, electronics chain hhgregg and sporting-goods chain Gander Mountain have filed for bankruptcy protection so far this year. That compares with nine retailers that declared bankruptcy, with at least $50 million liabilities, for all of 2016. On Friday, women’s apparel chain Bebe Stores said it would close its remaining 170 shops and sell only online, while teen retailer Rue21 Inc. announced plans to close about 400 of its 1,100 locations. Another striking fact: on a square footage basis, approximately 49 million square feet of retail space has closed YTD. Should this pace persist by the end of the year, total square footage reductions could reach 147M square feet, another all time high, and surpassing the historical peak of 115M in 2001.

There are several key drivers behind the avalanche of “liquidation” signs on store fronts. The first is the glut of residual excess retail space. As the WSJ writes, the seeds of the industry’s current turmoil date back nearly three decades, when retailers, in the throes of a consumer-buying spree and flush with easy money, rushed to open new stores. The land grab wasn’t unlike the housing boom that was also under way at that time. “Thousands of new doors opened and rents soared,” Richard Hayne, chief executive of Urban Outfitters Inc., told analysts last month. “This created a bubble, and like housing, that bubble has now burst.”

No matter how you try to explain it away, in the end it’s just people having less to spend.

• UK Retail Sales Volumes Fall At Fastest Rate In Seven Years (Ind.)

Retail sale volumes slumped in March, seeming to confirm doubts about the robustness of the consumer-led economy in the wake of last summer’s Brexit vote. According to the Office for National Statistics, sales were down 1.8% in the month, against City expectations of a 0.2% decline. The monthly data can be volatile and March’s decline follows a 1.7% spike in February, but the ONS itself highlighted the weakening trend this year and noted that over the three months to March there was the first quarterly decline in volumes since 2013. In the first quarter of 2017 sales were down 1.4%, the biggest decline since the first three months of 2010 when they fell 2%.

Retail sales performed much better than expected in the immediate wake of last June’s Brexit vote, helping to boost overall GDP growth and confounding widespread expectations that the economy would fall into recession. But economists said the latest data suggested gravity was now asserting itself as inflation, stemming from the sharp depreciation of the pound since last June, eats into incomes and wage growth remains chronically weak. “We should see these retail sales figures as the start of a period of much weaker consumer spending growth – which will act as a drag on the overall progress of the UK economy over this year and next,” said Andrew Sentance, senior economic adviser at PwC.

“This is the clearest indication yet that the expected slowdown in the UK economy has begun, and we should expect to see this confirmed in other economic data over the next few months.” James Knightley, an economist at ING described the figures as “dreadful”. “The story for the household sector isn’t great right now. Inflation is eating into household spending power with wages once again failing to keep pace with the rising cost of living. There is also a growing sense of job insecurity highlighted in some surveys, which may also be making households a little nervous,” he said. The household saving ratio, the gap between the sector’s aggregate income and spending, fell to just 3.3% in the final quarter of 2016, the weakest on record, prompting questions about the sustainability of the rate of consumer spending. Retail sales account for around 30% of household consumption, which in turn accounts for 60% of UK GDP.

“..1.5 million people work in low-paid UK retail jobs..” They can’t afford the products they sell. Henry Ford had a solution to that.

• BHS Crash Sets Trend For A Chain Of Store Closures On UK High Streets (G.)

The fact that Britain’s unemployment rate has fallen to its joint lowest level since 1975 belies the experience of thousands of BHS staff, who have struggled to find an equivalent job with a contract and regular hours. The jobless rate may be just 4.7% but official records show the number of people on zero-hours contracts hit a record high of 905,000 in the final three months of 2016. That was an increase of 101,000, or 13%, compared with the same period a year earlier. Last year, research by industry trade body the British Retail Consortium (BRC) identified a “lost generation” of predominantly female shop workers who – as thousands of BHS staff would find out – risk losing their jobs as structural change chews up the high street. It estimated there were nearly 500,000 retail workers, aged between 26 and 45, many of whom have children and need to work close to their family home, who would find it hard to find alternative jobs.

Using the benchmark of those earning less than £8.05 an hour, the BRC says 1.5 million people work in low-paid UK retail jobs. About 70% are female and one in five receive means-tested working age tax credits. Norman Pickavance, chair of the Fabian Society taskforce on the future of retail, says the majority of companies in the sector are trying to save money by moving towards less secure employment models. “There are more and more zero-hours-type contracts and self employment,” he says. “A year on from the demise of BHS, most retailers are continuing down that route of flexibility but there is a risk to them from Brexit. They have only been able to use these methods because of the abundance of labour and might have to rethink.”

[..] This trend is writ larger in the US, where analysts are talking about a “retail apocalypse”, as main street veterans like Macy’s and Sears line up to announce major store closure programmes. With American Apparel, Abercrombie & Fitch and JCPenney also axing stores, hundreds of American shopping mall outlets are closing for good. The cost in job terms has been stark, with more than 89,000 retail positions eliminated over the last six months. New York-based Global Data analyst Neil Saunders says the US and UK retail markets are not mirror images, with the American woes resulting from the fallout from a belated move by store chiefs to address the threat posed by the internet.

With more than five times more retail square footage per person than the UK, American store chiefs have also got a bigger problem on their hands than their British counterparts. “In terms of online penetration, the US is where the UK was five or so years ago,” continues Saunders. “What we are seeing is large US retailers scrabbling to adjust.” He adds: “Generally, UK retail is at a much later evolutionary stage than the US. There has already been quite a lot of adjustment in terms of the closure and adaptation of physical space.

Everyone spies on everyone. Growth industry.

• German Intelligence Spied On Interpol In Dozens Of Countries (R.)

Germany’s BND foreign intelligence agency spied on the Interpol international police agency for years and on the group’s country liaison offices in dozens of countries such as Austria, Greece and the United States, a German magazine said. Der Spiegel magazine, citing documents it had seen, said the BND had added the email addresses, phone numbers and fax numbers of the police investigators to its sector surveillance list. In addition, the German spy agency also monitored the Europol police agency Europol which is based in The Hague, the magazine said. Der Spiegel reported in February that the BND also spied on the phones, faxes and emails of several news organizations, including the New York Times and Reuters.

The BND’s activities have come under intense scrutiny during a German parliamentary investigation into allegations that the US National Security Agency conducted mass surveillance outside of the United States, including a cellphone used by Chancellor Angela Merkel. Konstantin von Notz, a Greens party member who serves on the investigative committee, described the latest report about the BND’s spying activities as “scandalous and unfathomable.” “We now know that parliaments, various companies and even journalists and publishers have been targeted, as well as allied countries,” von Notz said in a statement. He said the latest reports showed how ineffective parliamentary controls had been thus far, despite new legislation aimed at reforming the BND. “It represents a danger to our rule of law,” he said.

So what as the Pope done to alleviate the issue? How has he used the Vatican’s opulent riches to make life better for refugees?

• Pope Likens Refugee Holding Centers To ‘Concentration Camps’ (G.)

Pope Francis urged governments on Saturday to get migrants and refugees out of holding centers, saying many had become “concentration camps”. During a visit to a Rome basilica, where he met migrants, Francis told of his visit to a camp on the Greek island of Lesbos last year. There he met a Muslim refugee from the Middle East who told him how “terrorists came to our country”. Islamists had slit the throat of the man’s Christian wife because she refused to throw her crucifix the ground. “I don’t know if he managed to leave that concentration camp, because refugee camps, many of them, are of concentration (type) because of the great number of people left there inside them,” the pope said.

Francis praised countries helping refugees and thanked them for “bearing this extra burden, because it seems that international accords are more important than human rights”. He did not elaborate but appeared to be referring to agreements that keep migrants from crossing borders. In February, the European Union pledged to finance migrant camps in Libya as part of a wider European Union drive to stem immigration from Africa. Humanitarian groups have criticized efforts to stop migrants in Libya, where – according to a U.N. report last December – they suffer arbitrary detention, forced labor, rape and torture.

Debt Rattle April 18 2017

Apr 182017

April 18, 2017 Posted by Raúl Ilargi Meijer at 9:26 am Finance Tagged with: bonds, crash, dollar, endangered, Erdogan, Greece, IMF, refugees, taxation, TPP, Trump 2 Responses »

Albrecht Dürer Study of the left hand of an apostle (for the Heller Altar) c.1508

• Trump’s Next Big Policy Reversal Could Be On The TPP (CNBC)

• Strong Dollar Could Cause Bond Market Crash – Martin Armstrong (USAW)

• Stocks, Bonds Diverge Over Trump Tax Reform, Stimulus Odds (CNBC)

• We’re Borrowing Our Way to Economic Disaster – Stockman (DR)

• BMO Bundles Uninsured Mortgages in a Canadian Bond First

• UK Will Never Build Enough Homes To Keep Prices Down (Tel.)

• Greek Insurance Company Can Become a Weapon for China in Europe (GR)

• Greek Debt Must Be Sustainable For IMF To Join Bailout – Lagarde (R.)

• Taxation is Theft (Napolitano)

• Is America’s Alliance with Turkey Doomed? (SCF)

• Erdogan Says He Doesn’t Care What Europe Thinks About Turkey’s Vote (BBG)

• Opening Of UN Files On Holocaust Will ‘Rewrite Chapters Of History’ (G.)

• Critically Endangered Species Poached In World’s Protected Natural Sites (AFP)

• At Least 8,500 Migrants Rescued From Mediterranean In Three Days (CNN)

And why not? He flip-flopped 5 times in one day last week, and his popularity rose.

• Trump’s Next Big Policy Reversal Could Be On The TPP (CNBC)

From NATO to health care, President Donald Trump has evidenced he is comfortable making major policy flip-flops. His most recent reversal came last week, when a U.S. Treasury report declined to name China as a currency manipulator despite Trump’s repeated promises to formally accuse Beijing — a signature pledge during his campaign trail. So, what could Trump backtrack on next? One analyst said he hopes it will be the Trans-Pacific Partnership, the world’s largest trade deal that Trump withdrew from in January on the claim that it would hurt U.S. manufacturing. “Whoever thought that Trump would let China, a rival, off the hook on currency? If he can do that with a country that’s clearly not a friend, maybe he could reconsider reversing himself on TPP for a friend like Japan,” Sean King, senior vice president of Park Strategies, told CNBC on Tuesday.

Japan was set to be a major beneficiary of TPP, particularly the country’s auto sector that would have obtained cheaper access to U.S. markets. Tokyo, which has long lamented the trade pact would be “meaningless” without the U.S., has decided to forge ahead with the other remaining 10 participating nations to revive the deal but many are doubtful of whether the TPP will be a game-changer in Washington’s absence. Trump still has time to change his mind on TPP, King warned, noting that the treaty text remains valid until February 2018. “Trump said [TPP] was a disaster, but I’m sure the other members would be willing to make concessions to get the U.S. back in, just like South Korea was willing to make concessions to Obama for his endorsement of the U.S.-Korea [free trade agreement],” King said. “He’s certainly made greater reversals and claimed victory. Why not do this for our friends who want to stand with us against countries like China and North Korea? I’m all for it.”

“There is no place to go but the dollar at this point.” “..you don’t collapse the core economy. It’s always the peripheral coming in.”

• Strong Dollar Could Cause Bond Market Crash – Martin Armstrong (USAW)

Renowned financial expert Martin Armstrong says the biggest risk out there is the effect a strong U.S. dollar has on the global bond market. Armstrong explains, “There’s these people who keep saying the dollar is going to crash. If the dollar crashes, the world is happier and basically celebrating. You have half the U.S. debt equivalent in emerging market debt issued in dollars. If the dollar goes up, they are in trouble. Then you are going to see sovereign defaults .. The U.S. is not going to default, but as you start defaults elsewhere outside the country, it makes people begin to get concerned about sovereign debt. Sovereign debt is the worst of all. It’s not secured. If the U.S. government defaulted on its debt, what would happen? You cannot go down to the National Gallery and start lifting Picassos.”

So, a bond market crash is a distinct possibility? Armstrong says, “Yes. All these things are contagions .. The real risk is coming from Europe and Asia. That is the real risk .. There is no place to go but the dollar at this point.” If and when a global collapse comes, it will come from China or Europe. Armstrong says, “Yes, because you don’t collapse the core economy. It’s always the peripheral coming in. It was the same thing in the Great Depression. It wasn’t the fact that the U.S. defaulted. The problem was the first bank that went down was in Austria, and it happened to be owned in part by the Rothschilds. When people hear a bank owned by the Rothschilds went down, people started to sell off all other banks. Then all the countries defaulted.”

Armstrong says there is going to be a major “monetary reform” in the not so distant future, and the U.S. will end up with a dollar for domestic use and a dollar used for international trade, sort of like a “domestic dollar” and an “international trade dollar.” Armstrong says, “Yes. All it is doing is replacing the dollar as the reserve currency. That would satisfy China and Russia, and it would simply be maintained by an international board. I strongly advise against the IMF. It’s way, way too corrupt.” So, is gold a good asset to have with a coming currency reset? Armstrong says, “Yes, at that point, you are talking about a hedge against government. When you go through these monetary crises, effectively, all tangible assets rise in price, not just gold and silver. . . .

Tangible assets have a value to everybody globally. The downside is on real estate. I would never put 100% of my money in real estate because it is not moveable.” Fast-forward to now, and Armstrong predicts, “The economy is not going to come back. We are not going to see economic growth.” Where is all this taking the world? Armstrong, who is an expert on economic and political cycles, says, “You have to understand what makes war even take place? It does not unfold when everybody is fat and happy. Simple as that. You turn the economy down, and that’s when you get war. It’s the way politics works.”

Are bonds the lesser bubble then?

• Stocks, Bonds Diverge Over Trump Tax Reform, Stimulus Odds (CNBC)

Optimism that the Trump administration will be able to drive through a hefty pro-growth plan or tax package this year is fading by the day. Treasury Secretary Steve Mnuchin on Monday became the latest official to dial back expectations for a time table that included a tax plan by August. In an interview with the Financial Times, Mnuchin said getting tax reform by August was an “aggressive timeline” and would probably be delayed because of health care. In the bond market, there was little surprise. Bond yields, which move inversely to prices, have been falling for weeks as traders have become more skeptical that Washington will adopt any pro-growth policy this year. Stocks, meanwhile, have traded side ways recently, and the S&P 500 is still up 10% since election day, boosted by hope of fiscal stimulus and tax cuts.

Mnuchin’s remarks did not surprise markets, and, in fact, stocks rallied hard based on his comments that Treasury is looking at ways to raise funds to pay for the tax plan without the controversial border-adjustment tax. “That’s exactly why the [stock] market rallied. People hate the border-adjustment tax,” said Peter Boockvar at Lindsey Group. The tax is part of the Congressional tax reform plan and would slap a 20% tax on all imports but not tax exports. Opponents claim it could cause inflation and penalize consumers, while proponents say it would encourage more manufacturing in the U.S. and level the playing field for U.S. companies. The market was not surprised by the push back in the timeline for tax reform, since President Trump last week said health care would come ahead of taxes. Ever since Congress failed to vote on health care in March, the market has become increasingly doubtful a tax plan would get done any time soon.

“Donald Trump is a tourist in the Imperial City of Washington D.C. He’s flipping, flopping and making it up as he goes.”

• We’re Borrowing Our Way to Economic Disaster – Stockman (DR)

David Stockman joined the Fox Business and the show Mornings with Maria to discuss the tax reform highlights for the current White House and GOP platform and what he views as a real threat of economic disaster in the U.S. During the discussion Stockman highlights what to expect from a border adjustment tax possibility, the creation of jobs and the impact on Wall Street in the age of Donald Trump. Stockman takes to point the cause of tax reform in the current White House. He begins the segment noting, “I think the border adjustment tax will come out of the retailers margin – and it should. We do need revenue. We need to have a consumption tax, or a value added tax or a border adjustment tax – so that we may reduce taxation on wages and income. We desperately need more jobs in this country.

If you keep taxing the payroll at 15.5%, which we’re doing today, you’re not going to encourage the creation of jobs. You’re going to take what jobs there are and impact the take-home pay of those jobs.” David Stockman was then asked about his read on Donald Trump’s border tax proposals and the possibility of what the President described as a ‘reciprocal tax.’ “He has no idea what he’s talking about. He’s making it up as he goes along. Donald Trump is a tourist in the Imperial City of Washington D.C. He’s flipping, flopping and making it up as he goes.” “The border adjustment tax, or a value added tax is the way to get at the problem he’s talking about. Every other country in the world has a value added tax. You take it off the exports and put it on the imports. There is a proper way to do it and he ought to allow the republicans on the hill who understand that to move forward.

The idea that we can have a multi-trillion dollar tax cut and not pay for it with new revenue or spending cuts is dangerous. We are at $20 trillion in debt and it is headed to $30 trillion.” When asked about the pragmatic nature of a border adjustment tax, Stockman pressed “I think it’s basic math. If you want to cut the corporate tax rate to 20%, which I think would be wonderful, you’ve got to raise $2 trillion over the next ten years to pay for it. Where are you going to get the money? Are you going to close loopholes? I doubt that. The lobby effort will kill that. You need a new revenue source. If you don’t do that you’re stuck with the current tax system. You’re stuck with massive deficits that are going to kill this country. We are basically borrowing our way to economic disaster.”

[..] We are so “deep in the soup” debt wise and have such a massive, and building deficit that you have to have revenue neutral tax cuts. The border adjustment tax is dead. Without that you are not going to reduce the corporate tax rate down to 20% or 15%, etc.” “The Trump reflation fantasy is over. It is all downhill from here. The market it heading down 20 to 30% down, the 1600 on the S&P. We’re going to have negative shock after negative shock. It is about time they sober up. On April 28th the U.S government is going to shut down. That will be spring training on the continuing resolution until we get to MOAD in the summer.”

Never been tried before.

• BMO Bundles Uninsured Mortgages in a Canadian Bond First

Bank of Montreal is bundling uninsured residential mortgages into bonds in what could be the start of a new financing market for Canadian banks as the government scales back its support for home loans. The Toronto-based lender is planning to sell debt backed by nearly C$2 billion ($1.5 billion) of prime uninsured mortgages. That’s a new development in a country where big banks have historically packaged government-insured mortgages into bonds. If the Bank of Montreal deal is successful, other Canadian banks may follow its lead, providing banks with more financing to keep making mortgages, said Marc Goldfried, CIO at Canoe Financial. The net result may be that housing prices in Canada keep rising. “Right now the banks don’t have any other way to fund it, so there’s probably some form of internal limit on this kind of mortgage financing they’ll do,” Goldfried said by phone from Toronto.

But the Bank of Montreal deal may find headwinds, said Paul Gardner, partner and portfolio manager at Avenue Investment. Canada last year tightened access to the federal insurance to help tamp down rapid home price growth in areas like Toronto and Vancouver. The federal government or Ontario could craft more legislation to cool the housing market, Gardner said. The province’s finance minister is considering a foreign-buyers tax like the one that helped cool home prices in Vancouver. Canadian finance minister Bill Morneau, Ontario finance minister Charles Sousa, and Mayor John Tory are meeting in Toronto Tuesday to discuss the housing market in the Greater Toronto Area. “Residential mortgages, my God, it’s the last thing you want to invest in right now,” Gardner said by phone from Toronto. “When the capital markets are flush with cash, it makes sense that they would try at least to issue this stuff.”

[..] The bank will offer to renew the mortgage loans at the end of their term if the borrower is not in default, and if the borrowers satisfies the bank’s underwriting criteria at the time, which mitigates some of the risk of borrowers not being able to refinance. Canadian mortgage loans generally have a five-year term, and borrowers pay down their principal at a 25-to-30-year pace meaning they usually have to refinance a significant portion of their loan every five years.

Oh boy. If these are the kind of people you rely on for advice, you’re in trouble.

• UK Will Never Build Enough Homes To Keep Prices Down (Tel.)

Britain will never build enough houses to make property affordable for young people, according to research. A study presented to the Royal Economic Society’s annual conference said those hoping to get on the ladder may have to rely on windows of opportunity created by periodic slumps in the market. However, the overall trend will remain for residential property price rises to outpace salary growth, according to economists at the University of Reading. “The increases in housing supply required to improve affordability have to be very large and long-lasting; the step change would need to be much larger than has ever been experienced before on a permanent basis,” said Geoffrey Meen, Alexander Mihailov and Yehui Wang. The government has discussed moves to increase the supply of homes but the changes are on far too small a scale to act as a brake on price rises.

House prices in the UK stood at an average of £217,500 according to the Office for National Statistics. That is 7.7-times the average full-time salary in the UK of £28,200. By contrast in 2005 the average home cost £150,500, approximately 6.5-times the then-average full time salary of £22,888. Former Bank of England policymaker Kate Barker believes the country needs an additional 60,000 homes per year on top of those already being built. But the new paper argues there is little chance of this happening. “Although higher levels of house building are certainly desirable, the paper shows that there is a limit to what can be achieved by this route,” the report found. “The required increase in supply to stabilise the price to income ratio … is not feasible – permanent increases in construction would be required that have never been achieved in history.”

The risks of garage-selling an entire country.

• Greek Insurance Company Can Become a Weapon for China in Europe (GR)

It is no secret that the Chinese see Greece as a country that could help them get their foot (and saying) in the European Union. In GreekReporter’s recent documentary Athens Chinatown, it is the Cosco managing director in Greece who says the mediterranean country offers a strategic location and it was this factor that attracted Cosco to take over the Greek port of Piraeus. Furthermore, the editor of China-Greece times also states that the Chinese “see Greece as the gate to Europe.” The past few years, silently, China has looked into many Greek investments. After acquiring the Greek Port of Piraeus, now three Chinese companies are bidding for Greece’s biggest private insurer, Ethniki Asfalistiki. However what looks like a simple bidding, could possibly be of great importance to the future of Greece.

Established in 1891, Ethini Asfalistiki has invaluable contribution to the Greek economy for over a century. It is the largest insurance company in the country with total premiums of over €440 million and 18% market share, while it is in cooperation with the banking network for the sale of bank assurance products, provides access to a broad distribution network of about 500 offices. The estimated earnings for 2016 are €52 million. Ethniki Asfalistiki is also a sister company of Greece’s Ethniki Bank (National Bank), one of Greece’s four systemic banks. Whoever gets this bid will most likely acquire the bank as well. At the same time, another Chinese group has shown interest for Piraeus Bank. If they manage to close that deal then two out of Greece’s four main banks will be controlled by the Chinese. Eventually they will be able to have an important saying in the country’s economy, and maybe that’s what they are aiming for.

While the Chinese have done serious investments in Greece, this one, in combination with everything else they control can become a decisive factor on how much of a saying does Greece want the Chinese to have on the country’s future. Letting Ethniki Asfalistiki in the hands of China is probably allowing too much of their foothold in the Greek economy, which would mean a great political influence as well. China of course would like to be able to control and play with Greece’s economy in order to advance their interests. But it is dangerous for Greece when the country’s future becomes another argument on a geostrategic dialogue between the big powers. A forced Grexit threat, for example, could definitely be on the table and be directed to the EU or the U.S.A.

That record is definitely broken beyond repair.

• Greek Debt Must Be Sustainable For IMF To Join Bailout – Lagarde (R.)

The IMF will not take part in a bailout program for Greece if it deems the country’s debt is unsustainable, the international lender’s chief Christine Lagarde said in an interview published on Tuesday. Greece needs to implement reforms agreed by euro zone finance ministers earlier this month to secure a new loan under its €86 billion bailout programme, the third since 2010. The loan is needed to pay debt due in July, but talks continue and the IMF has not yet decided whether to join the bailout. The fund’s participation is seen as a condition for Germany to unblock new funds to Greece. “If Greek debts are not sustainable based on IMF rules and reasonable parameters, we will not take part in the program,” Lagarde told German newspaper Die Welt when asked if the IMF would take part in the plan if Greek debt is not restructured.

Minor problem: so many people are dependent on Social Security. Highly relevant going forward.

• Taxation is Theft (Napolitano)

With a tax code that exceeds 72,000 pages in length and consumes more than six billion person hours per year to determine taxpayers’ taxable income, with an IRS that has become a feared law unto itself, and with a government that continues to extract more wealth from every taxpaying American every year, is it any wonder that April 15th is a day of dread in America? Social Security taxes and income taxes have dogged us all since their institution during the last century, and few politicians have been willing to address these ploys for what they are: theft. During the 2012 election, then-Texas Gov. Rick Perry caused a firestorm among big-government types during the Republican presidential primaries last year when he called Social Security a Ponzi scheme. He was right. It’s been a scam from its inception, and it’s still a scam today.

When Social Security was established in 1935, it was intended to provide minimal financial assistance to those too old to work. It was also intended to cause voters to become dependent on Franklin Delano Roosevelt’s Democrats. FDR copied the idea from a system established in Italy by Mussolini. The plan was to have certain workers and their employers make small contributions to a fund that would be held in trust for the workers by the government. At the time, the average life expectancy of Americans was 61 years of age, but Social Security didn’t kick in until age 65. Thus, the system was geared to take money from the average American worker that he would never see returned.

Over time, life expectancy grew and surpassed 65, the so-called trust fund was raided and spent, and the system was paying out more money than it was taking in – just like a Ponzi scheme. FDR called Social Security an insurance policy. In reality, it has become forced savings. However, the custodian of the funds – Congress – has stolen the savings and spent it. And the value of the savings has been diminished by inflation. Today, the best one can hope to receive from Social Security is dollars with the buying power of 75 cents for every dollar contributed. That makes Social Security worse than a Ponzi scheme. You can get out of a Ponzi investment. You can’t get out of Social Security. Who would stay with a bank that returned only 75% of one’s savings?

Essential reading on how the region came to be what it is.

• Is America’s Alliance with Turkey Doomed? (SCF)

Shortly before his death in 1869, the pro-Western former Ottoman grand vizier and foreign minister Keçecizâde Mehmed Fuad Pasha commented, “It appeared preferable that . . . we should relinquish several of our provinces rather than see England abandon us.” In response to this commitment, the British made the territorial integrity of the Ottoman Empire against Russian aggression a key pillar of their foreign policy. Yet, in spite of the significance that Istanbul and London attached to their alliance in the 1850s, both sides were determined to eradicate each other by 1914. As Prime Minister Herbert Asquith put it, Britain was “determined to ring the death-knell of Ottoman dominion, not only in Europe, but in Asia as well.” In response, the Ottoman government described the British as “the greatest enemy” of not only the sultan’s empire but also of Islam itself.

The Anglo-Russian Great Game, waged across the vast lands stretching from Europe to Central Asia during the nineteenth century, rendered the Ottoman Empire an invaluable strategic asset in the eyes of British policymakers. Although the British public frowned upon the Ottoman Turks’ “peculiar Oriental ways,” and regarded them as “uncivilized Mohammedan barbarians” for their treatment of Christian subjects, Whitehall recognized that they could serve as a bulwark against Russia. The Ottomans, likewise, recognized the value of having Britain as an ally given the looming threats posed by their neighbors, Russia and Austria. Though the Ottomans previously regarded the British as an untrustworthy non-Muslim power, the cooperation was a win-win venture, and the two powers agreed to partner economically and militarily. The strategic collaboration between them reached its zenith in 1853 when, along with other allies, they successfully waged war against Russia in Crimea.

America’s relative indifference to the Ottoman Empire and the early Turkish Republic was reminiscent of Otto von Bismarck’s famous remark that European Turkey “was not worth the bones of a single Pomeranian grenadier.” The United States and the Ottoman Empire fought World War I on opposite sides, but did not clash with each other. Moreover, while President Woodrow Wilson discussed the future of the Ottoman Empire in his Fourteen Points, the United States did not actively participate in its partition. In 1922–23, Washington merely sent observers to the Conference of Lausanne, which produced the final peace treaty between the victors of World War I and Turkey.

Only Trump has congratulated him.

• Erdogan Says He Doesn’t Care What Europe Thinks About Turkey’s Vote (BBG)

Turkish President Recep Tayyip Erdogan treated a crowd of supporters gathered outside his presidential palace on Monday evening to a speech laced with invective against Europe, saying his victory in a referendum on Sunday took place under conditions that were democratic beyond compare. Erdogan belittled both domestic and foreign critics of the voting process, which culminated in a slim majority of Turks approving changes to 18 articles of the constitution that concentrate more power in his hands. A monitoring group from the Organization for Security and Cooperation in Europe – which said the referendum took place on an “unlevel playing field” – “should know its place,” he said. “We don’t care about the opinions of ‘Hans’ or ‘George,’” Erdogan said, using the names as stand-ins for his European critics. “All debates about the constitutional referendum are now over.”

The OSCE’s head of mission, Tana de Zulueta, said on Monday that freedom of expression was inhibited during the campaign, that the conditions of the vote fell “well short” of international standards, and that the OSCE was inhibited from the election monitoring that it was invited to do. The vote was held under a state of emergency that’s been in place since just after a failed coup last July, and which Turkey’s security council will meet tonight to consider extending. Since the coup attempt, some 40,000 of Erdogan’s alleged opponents have been jailed, and at least 100,000 more fired by decree. The European monitoring organization’s criticisms were echoed by opposition parties inside Turkey, which are asking for the result of the vote to be annulled, as well as by the U.S. state department, whose spokesman Mark Toner cited “observed irregularities” in the way the election was carried out.

Wonder how redacted the files are.

• Opening Of UN Files On Holocaust Will ‘Rewrite Chapters Of History’ (G.)

War crimes files revealing early evidence of Holocaust death camps that was smuggled out of eastern Europe are among tens of thousands of files to be made public for the first time this week. The once-inaccessible archive of the UN war crimes commission, dating back to 1943, is being opened by the Wiener Library in London with a catalogue that can be searched online. The files establish that some of the first demands for justice came from countries that had been invaded, such as Poland and China, rather than Britain, the US and Russia, which eventually coordinated the post-war Nuremberg trials. The archive, along with the UNWCC, was closed in the late 1940s as West Germany was transformed into a pivotal ally at the start of the cold war and use of the records was effectively suppressed.

Around the same time, many convicted Nazis were granted early release after the anti-communist US senator Joseph McCarthy lobbied to end war crimes trials. Access to the vast quantity of evidence and indictments is timed to coincide with the publication on Tuesday of Human Rights After Hitler: The Lost History of Prosecuting Axis War Crimes by Dan Plesch, a researcher who has been working on the documents for a decade. The documents record the gathering of evidence shortly after the UN was founded in January 1942. They demonstrate that rape and forced prostitution were being prosecuted as war crimes in tribunals as far apart as Greece, the Philippines and Poland in the late 1940s, despite more recent suggestions that this was a legal innovation following the 1990s Bosnian conflict.

[..] By the late 1940s, the US and British governments were winding down prosecutions of Nazis. President Harry Truman made anti-communism, rather than holding Nazis to account, a priority, Plesch says. “Even action against the perpetrators of the massacre of British RAF officers attempting to escape from prison camp Stalag Luft III, a flight made iconic by films such as The Great Escape, was curtailed.”

One of the most important questions we can ask ourselves, said polio vaccine pioneer Dr Jonas Salke, is “Are we being good ancestors?”

• Critically Endangered Species Poached In World’s Protected Natural Sites (AFP)

Illegal poaching, logging and fishing of sometimes critically endangered species is taking place in nearly half of the world’s most protected natural sites, environmental campaigners WWF warned Tuesday. Natural world heritage sites such as Australia’s Great Barrier Reef, Virunga National Park in the Democratic Republic of Congo and the Galapagos Islands support large populations of rare plant and animal species. But in a report WWF said species listed by the Convention on International Trade in Endangered Species (CITES) faced the threat of illegal harvesting and trafficking in 45% of the more than 200 natural world heritage sites on the planet. “Natural world heritage sites are among the most recognised natural sites for their universal value,” said Marco Lambertini, head of WWF International.

“Yet many are threatened by destructive industrial activities and… their often unique animals and plants are also affected by overexploitation and trafficking,” he added, stressing that “unless they are protected effectively, we will lose them forever.” Almost a third of the world’s remaining 3,890 wild tigers and 40% of all African elephants are found in UNESCO-listed sites, which are often a last refuge for critically endangered species such as the Javan rhino in Indonesia, the report said. Illegal poaching, logging and fishing inside such sites is therefore “driving endangered species to the brink of extinction”, WWF warned. The species most at risk because of illegal activity within natural world heritage sites is probably the vaquita, the world’s smallest porpoise, which is indigenous to Mexico’s Gulf of California, Colman O’Criodain, WWF’s wildlife policy manager, told AFP.

While the vaquita itself is not being fished illegally, it is being caught in nets used to poach the totoaba – a giant Mexican fish coveted in China for its swim bladder, which itself is considered a threatened species. “When I started working on the issue of vaquita two years ago, there were 96 left. Now it is less than 30,” O’Criodain said, adding that at the current rate the tiny porpoise could be extinct within a year. According to Tuesday’s report, poaching of vulnerable and endangered animal species such as elephants, rhinos and tigers occurs in 42 of the UNESCO-listed natural sites, while illegal logging of rosewood, ebony and other valuable plant species happens in 26 of them. Illegal fishing, including of sharks and rays occurs in 18 of 39 listed marine coastal world heritage sites, it said.

Until the world finally has the emergency UN conference I’ve been calling for, I don’t see this change. It’s a global issue, and no-one wants to touch it because it’s so politically toxic.

• At Least 8,500 Migrants Rescued From Mediterranean In Three Days (CNN)

Italian authorities were still bringing migrants and refugees to shore Monday after one of the busiest weekends ever for rescue services operating in the central Mediterranean sea. At least 8,500 refugees and migrants were plucked from small boats over the past three days in 73 separate rescue operations, the Italian Coastguard told CNN Monday. Thirteen bodies were recovered, including a pregnant woman and an eight-year-old boy. It is not known how many died before they were sighted. One 35-year-old woman from the Ivory Coast was giving birth as she was pulled aboard a rescue ship, Italian newspapers reported. The youngest migrant rescued over the weekend was just two weeks old. Asar was rescued along with her mother by the Migrant Offshore Aid Station (MOAS).

The Sea-Eye, a German charity boat that helped bring to safety hundreds of people stranded on rubber dinghies off the coast of Libya Sunday said in a statement it still had 210 on board “crowded closely together, exposed to the wind, the waves and the cold without protection. It said the Italian tanker La Donna and the coast guard ship CP920 was now accompanying the boat, whilst it waits for two smaller boats from the Italian island of Lampedusa, to bring the migrants to shore. The Italian Coastguard said 1004 migrants rescued on the board the ship the Panther would be disembarked in Messina in Sicily shortly. Frontex, the European Border and Coast Guard Agency, said in a statement it rescued more than 1,400 migrants in the central Mediterranean in 13 search and rescue operations from Friday to Sunday.

Debt Rattle March 31 2017

Mar 312017

March 31, 2017 Posted by Raúl Ilargi Meijer at 8:59 am Finance Tagged with: crash, deep subprime, ECB, Flynn, Juncker, Keynes, neo-liberalism, recession, refugees, reshuffle, wildlife Comments Off

Rene Magritte Memory 1944

• Last Two Times After US Reported Data Like This, Stocks Crashed (WS)

• One Third Of US Car Loans Is Deep Subprime (Roberts)

• The Fed Is Bedeviled by Keynes’s Paradox (DiMartino Booth)

• Flynn Lawyer: Client Wants Assurances Against ‘Witch-Hunt’ Prosecution (USAT)

• Who Gains When Income Grows? (Tcherneva)

• Puerto Rico Is Starting To Look An Awful Lot Like Greece (Setser)

• Former Australia PM: Neo-Liberalism Has Run Into A Dead End (SMH)

• Why Australia Hasn’t Had a Recession in Over 25 Years (BBG)

• Why Australia Is Addicted To Interest-Only Loans (AFR)

• Juncker In Jaw-Dropping Threat To Trump Over Support For Brexit (Exp.)

• The European Central Bank Doesn’t Understand The Economy (Steve Keen)

• Why Italy’s Banking Crisis Has Gone Off the Radar (DQ)

• Global Reshuffle Of Wildlife Will Have Huge Impacts On Humanity (G.)

• More Than 5 Million Syrian Refugees In Neighbouring Countries Now (G.)

Many scary graphs today. Let’s start here.

• Last Two Times After US Reported Data Like This, Stocks Crashed (WS)

The BEA offers various measures of corporate profits, slicing and dicing them in different ways. One of them is its headline number: “Corporate profits with inventory valuation and capital consumption adjustments.” It estimates “profits from current production,” based on profits before taxes, not adjusted for inflation, but with adjustments for inventory valuation (IVA) and capital consumption (CCAdj).These adjustments convert inventory withdrawals and depreciation of fixed assets (as they appear on tax returns) to the current-cost economic measures used in GDP calculations. It’s a broad measure, taking into account profits by all corporations, not just the S&P 500 companies. This measure is reflected in the first chart below.

Later, we’ll get into after-tax measures without those adjustments. They look even worse. In Q4, profits rose to $2.15 trillion seasonally adjusted annual rate. That’s what the annual profit would be after four quarters at this rate. But profits in the prior three quarters were lower. And so Q4 brought the year total to $2.085 trillion. This was down from 2015, and it was down from 2014, and it was up only 2.6% from 2013, not adjusted for inflation. This 20-year chart shows that measure. Note that the profits are not adjusted for inflation, and there was a lot of inflation over those 20 years:

Things get even more interesting when we look at after-tax profits on a quarterly basis. The chart below shows two measures: Dark blue line: Corporate Profits after tax without adjustments for inventory valuation and capital consumption (so without IVA & CCAdj). Light blue line: Corporate Profits after tax with adjustments for inventory valuation and capital consumption (so with IVA & CCAdj). Q4 profits, at a seasonally adjusted annual rate, but not adjusted for inflation, were back where they’d been in Q1 2012:

By this measure, corporate profits have been in a volatile five-year stagnation. However, during that time – since Q1 2012 – the S&P 500 index has soared 70%. [..] The chart also shows that there were two prior multi-year periods of profit stagnation and even decline while the stock market experienced a massive run-up: from 1996 through 2000, leading to the dotcom crash; and from 2005 through 2008, which ended in the Financial Crisis. This peculiar phenomenon – soaring stock prices during years of flat or declining profits – is now repeating itself. The end point of the prior two episodes was a lot of bloodletting in the markets that then refocused companies – the survivors – on what they needed to do to make money. For a little while at least, it focused executives on productive activities, rather than on financial engineering, M&A, and similar lofty projects. And it showed in their profits.

People have no money to spend. But they do need a car in the US.

• One Third Of US Car Loans Is Deep Subprime (Roberts)

Given the lack of wage growth, consumers are needing to get payments down to levels where they can afford them. Furthermore, about 1/3rd of the loans are going to individuals with credit scores averaging 550 which carry much higher rates up to 20%. In fact, since 2010, the share of sub-prime Auto ABS origination has come from deep subprime deals which have increased from just 5.1% in 2010 to 32.5% currently. That growth has been augmented by the emergence of new deep sub-prime lenders which are lenders who did not issue loans prior to 2012. While there has been much touting of the strength of the consumer in recent years, it has been a credit driven mirage.

With income growth weak, debt levels elevated and rent and health care costs chipping away at disposable incomes, in order to make payments even remotely possible, terms are often stretched to 84 months. The eventual issue is that since cars are typically turned over every 3-5 years on average, borrowers are typically upside down in their vehicle when it comes time to trade it in. Between the negative equity of their trade-in, along with title, taxes, and license fees, and a hefty dealer profit rolled into the original loan, there is going to be a substantial problem down the road. [..] Auto loans, in general, have been in a huge boom that reached $1.11 trillion in the fourth quarter 2016. As noted above, 33.5% of those loans are sub-prime, or $371.85 billion.

And that’s in a country in crisis. People are scared. “Some $11.7 trillion is sitting in bank deposits, up from $7.23 trillion at the start of 2009..”

• The Fed Is Bedeviled by Keynes’s Paradox (DiMartino Booth)

The economist John Maynard Keynes warned that ultra-low interest rates would backfire on central banks seeking to spur borrowing and spending, yet they seemed surprised that the current recovery is the weakest in postwar history after cutting rates to near zero, or even below in some cases. Keynes is credited with popularizing the “paradox of thrift,” which is the economic theory that posits people tend to save more during recessions as rates fall to offset the income their savings is not generating. Of course it is the case that when you save more, you spend less. Since the U.S. economy is fueled by consumption, it also stands to reason that growth suffers as a result.

It’s been two years since Swiss Re produced a report that calculated U.S. savers had foregone some $470 billion in interest income. The analysis was based on what rates would have been had the Federal Reserve followed the Taylor Rule, which would have put rates, then at zero, at 1.7%. Even as the Fed has begun to raise rates, it is clear that hundreds of billions of dollars have been squirreled away as savers play defense to counteract the Fed’s ultraloose monetary policy. Some $11.7 trillion is sitting in bank deposits, up from $7.23 trillion at the start of 2009 shortly after the Fed cut rates to near zero, central bank data show.

The WSJ was first, then all the media ran with it. But Flynn did NOT ask for immunity. At least not that we know. Both Nunes and Schiff deny it’s been discussed. Flyn’s lawyer doesn’t mention it. Smells like fake news. There’s so much wrong with the man, why make things up? Everyone’s salivating over potential problems he could cause for Trump, but we’ll get to that when it’s time.

• Flynn Lawyer: Client Wants Assurances Against ‘Witch-Hunt’ Prosecution (USAT)

The attorney representing President Trump’s former National Security Adviser Michael Flynn said late Thursday that his client would not submit to questioning in the ongoing investigations into Russian interference in the 2016 election without protection against possible prosecution. “No reasonable person, who has the benefit of advice from counsel, would submit to questioning in such a highly politicized, witch-hunt environment without assurances against unfair prosecution,” attorney Robert Kelner said in a written statement. Describing his client as the target of “unsubstantiated public demands by members of congress and other political critics that he be criminally investigated,” Kelner confirmed that there have been “discussions” regarding Flynn’s possible appearances before the House and Senate Intelligence committees now conducting formal inquires into Russia’s attempts to disrupt the American political system.

“Gen. Flynn certainly has a story to tell, and he very much wants to tell it, should the circumstances permit,” Kelner said. “Out of respect for the committees, we will not comment right now on the details of discussions between counsel for Gen. Flynn and the . . . committees.” Jack Langer, spokesman for the House Intelligence Committee Chairman Devin Nunes, R-Calif., said a deal for immunity has not been discussed. An aide to California Rep. Adam Schiff, the panel’s ranking Democrat, also said there had been no discussions about an immunity deal for Flynn. Earlier this week, Senate Intelligence Committee Chairman Richard Burr, R-N.C., signaled that the committee was seeking testimony from Flynn. “You would think less of us if Gen. Flynn wasn’t on that list’’ of potential witnesses, Burr told reporters Wednesday.

It’s gotten so out of hand you’d almost think it would be easy to mitigate.

• Who Gains When Income Grows? (Tcherneva)

Growth in the US increasingly brings income inequality. A striking deterioration in this trend has occurred since the 80s, when economic recoveries delivered the vast majority of income growth to the wealthiest US households. The chart illustrates that with every postwar expansion, as the economy grew, the bottom 90% of households received a smaller and smaller share of that growth. Even though their share was falling, the majority of families still captured the majority of the income growth until the 70s. Starting in the 80s, the trend reverses sharply: as the economy recovers from recessions, the lion’s share of income growth goes to the wealthiest 10% of families. Notably, the entire 2001-2007 recovery produced almost no income growth for the bottom 90% of households and, in the first years of recovery since the 2008 Great Financial Crisis, their incomes kept falling during the expansion, delivering all benefits from growth to the wealthiest 10%. A similar trend is observed when one considers the bottom 99% and top 1%% of households.

Figure 1: bottom 90% vs. top 10%, 1949-2012 expansions (incl. capital gains)

[..] Finally, Figure 6 shows how income growth has been distributed over the different business cycles (peak to peak, i.e., including both contractions and expansions). The data for the latest cycle is incomplete, as we are still in it. The graph indicates that in the current cycle, incomes for all groups are still lower than their previous peak in 2007, however the loss is disproportionately borne by the bottom 90% of households.

Figure 6: bottom 90% vs. top 10%, 1953-2015 business cycles, (incl. capital gains)

I made the same comparison a while back.

• Puerto Rico Is Starting To Look An Awful Lot Like Greece (Setser)

About two weeks ago, Puerto Rico’s oversight board approved Puerto Rico’s revised fiscal plan. The fiscal plan is roughly the equivalent in Puerto Rico’s case of an IMF program—it sets out Puerto Rico’s plan for fiscal adjustment. Hopefully it will make Puerto Rico’s finances a bit easier to understand.* I have been a bit slow to comment on the updated fiscal plan, but wanted to offer my own take:

1) Best I can tell, the new plan has roughly 2 percentage points of GNP in fiscal adjustment in 2018 and 2019, and then a percentage point a year in 2020 and 2021. The total consolidation is close to 6% of GNP (using a GNP of around $65 billion, and netting out the impact of replacing Act 154 revenues with new tax).

2) The board adopted a more conservative baseline. Puerto Rico’s real economy is projected to contract by between 3 and 4% in 2018 and 2019 and by 1 to 2% in 2020 and 2021. I applaud the board for recognizing that the large fiscal consolidation required in 2018 and 2019 will be painful. The risks to the growth baseline—and thus to future tax revenues—should be balanced. There though is a risk that the board may still be understating the drag from consolidation. If Puerto Rico is currently shrinking by 1.5% a year without any fiscal drag, and if the multiplier is 1.5, then growth might contract by 2 to 3% in 2020 or 2021.

3) While creditors have complained that Puerto Rico isn’t doing enough, I worry that there is still too much consolidation too fast: Puerto Rico’s output is projected to fall by another 10 percentage points over the next five years, which would make Puerto Rico’s ten year economic contraction as deep as that experienced by Greece.

“We have a comatose world economy held together by debt and central bank money..”

• Former Australia PM: Neo-Liberalism Has Run Into A Dead End (SMH)

Former prime minister Paul Keating – architect of some of the most profound economic reforms in the country’s history during the 1980s – has launched a surprise critique of the liberal economic philosophy he once championed, declaring it has “run into a dead end”. Mr Keating made his remarks in response to a speech delivered by the new leader of the ACTU, Sally McManus, at the National Press Club in Canberra on Wednesday. Ms McManus declared that “neo-liberalism” had run its course, and that experiments in privatisation had failed, slamming the government over mooted penalty rate cuts, accusing many employers of adopting “wage theft” as a business model, and declaring war on growing inequality.

“We are not saying that the people who introduced some of the policies that you could name as being neo-liberal were bad people, we are saying the experiment has run its course,” Ms McManus said, in response to questions. Earlier in her speech she had declared that “the Keating years created vast wealth for Australia but it has not been shared”. While many saw her remarks as a partial slapdown of the economic reforms of the Hawke/Keating years, Mr Keating told Fairfax Media he supported some of her assessments. “Liberal economics had [in the past] dramatically increased wealth around the world, as it had in Australia – for instance a 50% increase in real wages and a huge lift in personal wealth,” Mr Keating said.

“But since 2008, liberal economics has gone nowhere and to the extent that Sally McManus is saying this, she is right.” “We have a comatose world economy held together by debt and central bank money,” Mr Keating added.”Liberal economics has run into a dead end and has had no answer to the contemporary malaise.”

Simple story. China and private debt.

• Why Australia Hasn’t Had a Recession in Over 25 Years (BBG)

Australia is close to seizing the global crown for the longest streak of economic growth thanks to a mixture of policy guile and outrageous fortune. But the nation is creaking under the weight of its own success. While growth is being underpinned by population gains and resource exports to China, failure to spur productivity has meant stagnant living standards and electoral discontent; a property bubble fueled by record-low interest rates has driven household debt to levels that threaten financial stability; and a timid government facing political gridlock could lose the nation’s prized AAA rating as early as May because of spiraling budget deficits. Australia’s last recession – defined locally as two straight quarters of contraction – occurred in 1991 and was a devastating conclusion to eight years of reform designed to create an open, flexible and competitive economy. But it also proved cathartic, paving the way for a low-inflation, productivity-driven expansion.

As momentum started waning, China’s re-emergence as a pre-eminent global economic power sent demand for Australian resources skyrocketing, helping shield the nation from the worst of the global financial crisis. But the post-crisis return of the boom proved ephemeral, failing to boost government coffers and pushing the local currency higher, eroding competitiveness and driving another nail into the coffin of a fading manufacturing sector. [..] “There’s no country on Earth that’s derived more benefit from the rapid growth
and industrialization of China over the last 30-odd years than Australia,” said Saul Eslake, an independent economist who’s covered Australia for over three decades. “After the end of the mining-investment boom, high immigration is helping us avoid a statistical recession, but it’s also contributing to other problems” like soaring property prices and household debt.

[..] A record-low 1.5% cash rate designed to steer Australia from mining investment back toward services is creating problems of its own. Sydney house prices have more than doubled since 2009 and Melbourne’s have also soared, sending private debt to a record 187% of income. The RBA frets that anemic wage growth will force heavily indebted households to slash consumption, which could prove disastrous given their spending accounts for more than half of GDP. Australia’s banking regulator further tightened lending curbs Friday to try to cool investor demand for residential property that’s helped drive up prices. Data released hours later showed investor lending increased 6.7% in February from a year earlier, the fastest growth in 12 months.

[..] iron ore prices have more than halved since 2011, when the local dollar hit a post-float record of $1.10. The Aussie would hover at or above parity with the greenback for the next two years. The currency’s strength then saw off the car industry: two of the three manufacturers in 2013 said they were quitting Australia, with the last following suit the next year. While the currency would eventually retreat to the 70s, the damage had been done. Worse still, the trillion-dollar windfall from the boom had been spent, not saved, leaving no cash to plug yawning budget deficits or build much-needed infrastructure for an expanding population that would also support growth.

Right. No crisis in 25 years.

• Why Australia Is Addicted To Interest-Only Loans (AFR)

When the head of one of America’s largest real estate firms was shown a chart tracking the rising share of interest-only loans in Australia, he gasped in horror. As a man that has “seen many cycles”, he told an Australian bank investor that a rise in interest-only loans was a classic indicator of a dangerously over-heating market. Friday’s move by the prudential regulator to combat the rise of interest-only loans shows they tend to agree with that assessment. High but rising household debt levels, elevated property prices and ultra low interest rates has made Australian Prudential Regulation Authority Wayne Byres decidedly uneasy about the nation’s preference not to repay their loans but simply service the interest.

They have therefore told the banks that less than 30% of new mortgages can be “interest only” – which is substantially below the last reported figure of 38% of total loans. In fact, the percentage of interest-only loans has not been below 30% since 2008. And while many would dismiss comparisons between the rise of interest only lending in Australia and the teaser rate loans that lured in sub-prime borrowers in the US ahead of its 2008 housing crash, a market propped up by artificially low borrowing rates is a recipe for disaster. Australia is of course different and there have been unique forces that have fuelled our historic addiction to interest-only loans. The first is a hot-button issue – negative gearing. Since Australia’s tax code allows households to tax deduct interest payments on investor loans, the incentive is to opt for interest only loans.

It’s in the investment lending area where interest only loans are most prevalent. The banks are also aware that most interest only loans are to investors that own two or more properties and are managing their overall cash flows by servicing the interest. In fact, interest only loans reached a peak of 45% of new loans in 2014 before APRA’s 10% cap on investor lending was introduced. That coincided with a decline to an average of around 35%. The other driver behind the rise of interest only loans has been the mortgage broking industry – which intermediates about half of all loans by the big banks.

For once he’s joking and they take him serious. When Juncker says he’s “..going to promote the independence of Austin, Texas..”, He doesn’t mean he’s literally going to do it.

• Juncker In Jaw-Dropping Threat To Trump Over Support For Brexit (Exp.)

EU boss Jean-Claude Juncker this afternoon issued a jaw-dropping threat to the United States, saying he could campaign to break up the country in revenge for Donald Trump’s supportive comments about Brexit. In an extraordinary speech the EU Commission president said he would push for Ohio and Texas to split from the rest of America if the Republican president does not change his tune and become more supportive of the EU. The remarks are diplomatic dynamite at a time when relations between Washington and Brussels are already strained over Europe’s meagre contributions to NATO and the US leader’s open preference for dealing with national governments. They are by far the most outspoken intervention any senior EU figure has made about Mr Trump and are likely to dismay some European leaders who were hoping to seek a policy of rapprochement with their most important ally.

Speaking at the centre-right European People Party’s (EPP) annual conference in Malta this afternoon, the EU Commission boss did not hold back in his disdain for the White House chief’s eurosceptic views. He said: “Brexit isn’t the end. A lot of people would like it that way, even people on another continent where the newly elected US President was happy that the Brexit was taking place and has asked other countries to do the same. “If he goes on like that I am going to promote the independence of Ohio and Austin, Texas in the US.” Mr Juncker’s comments did not appear to be made in jest and were delivered in a serious tone, although one journalist did report some “chuckles” in the audience and hinted the EU boss may have been joking. The remarks came in the middle of an angry speech in which the top eurocrat railed widely against critics of the EU Commission.

[..] Mr Juncker did not criticise Britain at all during his speech, and only made reference to Brexit in relation to Mr Trump and the opportunities it presents for Europe to reform itself. However his conservative colleague Antonio Tajani, the EU Parliament president, received a rapturous ovation as he launched an impassioned defence of Europe’s “Christian values”. In a series of thinly veiled comments about immigration, a major political issue in his homeland and Malta, the Italian official said Europe should do more to defend its historic identity. He said: “We shouldn’t be ashamed of saying we’re Christian. We’re Christian, it is our history. “If we leave our identity we will have in Europe all identities but not European identities. For this we need to strengthen our identity.”

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• The European Central Bank Doesn’t Understand The Economy (Steve Keen)

In 1992, Wynne Godley predicted that the Euro would amplify any future economic downturn into a crisis: ” If a country or region has no power to devalue, and if it is not the beneficiary of a system of fiscal equalisation, then there is nothing to stop it suffering a process of cumulative and terminal decline leading, in the end, to emigration as the only alternative to poverty or starvation…”

It’s inconvenient with the threat of elections and Beppe Grillo surging in the polls. And even without Beppe Italy is a huge threat to the EU economy.

• Why Italy’s Banking Crisis Has Gone Off the Radar (DQ)

[..] an article published in the financial section of Italian daily Il Sole lays out just how serious the situation has become. According to new research by Italian investment bank Mediobanca, 114 of the close to 500 banks in Italy have “Texas Ratios” of over 100%. The Texas Ratio, or TR, is calculated by dividing the total value of a bank’s non-performing loans by its tangible book value plus reserves – or as American money manager Steve Eisman put it, “all the bad stuff divided by the money you have to pay for all the bad stuff.” If the TR is over 100%, the bank doesn’t have enough money “pay for all the bad stuff.” Hence, banks tend to fail when the ratio surpasses 100%. In Italy there are 114 of them. Of them, 24 have ratios of over 200%.

Granted, many of the banks in question are small local or regional savings banks with tens or hundreds of millions of euros in assets. These are not systemically important institutions and can be resolved without causing disturbances to the broader system. But the list also includes many of Italy’s biggest banks which certainly are systemically important to Italy, some of which have Texas Ratios of over 200%. Top of the list, predictably, is Monte dei Paschi di Siena, with €169 billion in assets and a TR of 269%. Next up is Veneto Banca, with €33 billion in assets and a TR of 239%. This is the bank that, together with Banco Popolare di Vicenza (assets: €39 billion, TR: 210%), was supposed to have been saved last year by an intervention from government-sponsored, privately funded bank bailout fund Atlante, but which now urgently requires more public funds. Their combined assets place them seventh on the list of Italy’s largest banks.

Some experts, including the U.S. bank hired last year to save MPS, JP Morgan Chase, have warned that Popolare di Vicenza and Veneto Banca will not be eligible for a bailout since they are not regarded as systemically important enough. This prompted investors to remove funds from the banks, further exacerbating their financial woes. According to sources in Rome, the two banks’ failure would send shock waves through the wider Italian financial industry. [..] almost all of Italy’s largest banking groups, with the exception of Unicredit, Intesa Sao Paolo and Mediobanca itself, have Texas Ratios well in excess of 100%. But, as Eisman recently pointed out, the two largest banks, Unicredit and Intesa Sanpaolo, have TRs of over 90%. As long as the other banks continue to languish in their current zombified state, they will continue to drag down the two bigger banks. And if either Unicredit or Intesa begin to wobble, the bets are off.

“Land-based species are moving polewards by an average of 17km per decade, and marine species by 72km per decade..”

• Global Reshuffle Of Wildlife Will Have Huge Impacts On Humanity (G.)

Rising temperatures on land and sea are increasingly forcing species to migrate to cooler climes, pushing disease-carrying insects into new areas, moving the pests that attack crops and shifting the pollinators that fertilise many of them, an international team of scientists has said. They warn that some movements will damage important industries, such as forestry and tourism, and that tensions are emerging between nations over shifting natural resources, such as fish stocks. The mass migration of species now underway around the planet can also amplify climate change as, for example, darker vegetation grows to replace sun-reflecting snow fields in the Arctic. “Human survival, for urban and rural communities, depends on other life on Earth,” the experts write in their analysis published in the journal Science. “Climate change is impelling a universal redistribution of life on Earth.”

This mass movement of species is the biggest for about 25,000 years, the peak of the last ice age, say the scientists, who represent more than 40 institutions around the world. [..] “Land-based species are moving polewards by an average of 17km per decade, and marine species by 72km per decade” said Prof Gretta Pecl at the University of Tasmania in Australia, who led the new analysis. There are many documented examples of individual species migrating in response to global warming and some examples of extinctions. But Pecl said: “Our study demonstrates how these changes are affecting ecosystems, human health and culture in the process.” The most direct impact on humans is the movement of insects that carry diseases, such as the mosquitoes that transmit malaria shifting to new areas as they warm and where people may have little immunity.

Another example is the northward spread in Europe and North America of the animal ticks that spread Lyme disease: the UK has seen a tenfold rise in cases since 2001 as winters become milder. Food production is also being affected as crops have to be moved to cooler areas to survive, such as coffee, which will need to be grown at higher, cooler altitudes, causing deep disruption to a global industry. The pests of crops will also move, as will their natural predators, such as insects, birds, frogs and mammals. Other resources are being affected, with a third of the land used for forestry in Europe set to become unuseable for valuable timber trees in the coming decades. Important fish stocks are migrating towards the poles in search of cooler waters, with the mackerel caught in Iceland jumping from 1,700 tonnes in 2006 to 120,000 tonnes in 2010…

Another ‘species’ on the move.

• More Than 5 Million Syrian Refugees In Neighbouring Countries Now (G.)

The number of refugees who have fled Syria for neighbouring countries has topped five million people for the first time since the civil war began six years ago, according to the UN’s refugee agency. Half of Syria’s 22 million population has been uprooted by a conflict that has now lasted longer than the second world war, the figures released by the UNHCR show, with 6.3 million people who are still inside the country’s borders forced from their homes. The figure of five million refugees “fails to account for the 1.2 million people seeking safety in Europe”, the International Rescue Committee, an aid organisation, noted. Nearly 270,000 of these applied for asylum in Germany last year. The UN agency urged Europeans not to “put humanity on a ballot” in elections in France and Germany this year, where far-right candidates opposed to refugee arrivals could make gains.

A surge in violence in Aleppo, as government forces backed by Russian airstrikes retook Syria’s second city at the end of 2016, resulted in 47,000 people fleeing to neighbouring Turkey, it said. Camps for internally displaced people close to the Turkish border also hold those who have fled the fighting in northern Syria. The latest arrivals into Turkey mean the number of Syrians who have fled the country for neighbouring states stands at more than five million, four years after the UNHCR announced that one million people had fled. The five million figure includes refugees who have been resettled in Europe, but the UN high commissioner for refugees urged Europeans to do more to help share a burden that is still largely falling on countries bordering Syria, such as Turkey, Lebanon and Jordan, with more in Iraq and Egypt.

Turkey alone has nearly three million Syrians, the UNHCR pointed out. In Jordan, 657,000 Syrian refugees are registered with the UN, but the government says the true figure is 1.3 million. Tens of thousands of Syrians live in two large camps, Zaatari and Azraq, but the majority live in homes and flats, able to access the job market but competing for scarce employment.

Debt Rattle December 27 2016

Dec 272016

December 27, 2016 Posted by Raúl Ilargi Meijer at 9:47 am Finance Tagged with: bank run, Brexit, cheetah, crash, EU, Greece, Israel, Obama, recession, Trump, yuan 4 Responses »

Konstantinos Polychronopoulos, Athens Christmas Day 2016

• Recession, Market Crash Next Year, Expect Rate Cuts: Rickards (CNBC)

• Did Donald Trump Just Jump The ‘Dow 20,000’ Shark? (ZH)

• Yuan Trading Volume Has Been Surging In December (BBG)

• ECB: Monte dei Paschi Must Now Raise €8.8 Billion After Recent Withdrawals (R.)

• War & The Rejection of Peace (Rossini)

• Israel Claims ‘Evidence’ That Obama Orchestrated UN Resolution (G.)

• Corbyn Hits Back After Obama Suggests Labour Is ‘Disintegrating’ (G.)

• Hard Brexit ‘Could Boost UK Economy By £24 Billion’: Pro-Leave Group (Ind.)

• Mervyn King: Britain Should Be More Upbeat About Brexit (G.)

• EU Faces Two Major Problems – And Has Answers To Neither: King (Ind.)

• Exit, Hope and Change (Jim Kunstler)

• Cheetahs Heading Towards Extinction As Population Crashes (BBC)

• The Automatic Earth in Greece: Big Dreams for 2017 (Automatic Earth)

“..a “head-on collision” between perception and reality…”

• Recession, Market Crash Next Year, Expect Rate Cuts: Rickards (CNBC)

The Federal Reserve hiked interest rates just two weeks ago for the second time in a decade, but it will soon be cutting them again, said Jim Rickards on Tuesday. Speaking to CNBC’s Squawk Box, the director of The James Rickards Project said a stock market correction is coming as President-elect Donald Trump’s economic stimulus plans will not pan out, causing a “head-on collision” between perception and reality. “When the reality of no stimulus catches up with the perception of stimulus plus the Fed tightening: that’s the train wreck. Either we’re going to have a recession or a stock market correction,” he said. The markets have been rallying on the back of Trump’s win as investors bet on tax cuts and fiscal spending under the new administration.

However, “the stimulus is not going to come” as Trump’s proposed tax cuts will hit government revenue while the Congress is likely to block his stimulus plans as the U.S. is already $20 trillion in debt, Rickards added. This will lead to a recession or a “very severe correction” in the stock market, prompting rate cuts later next year, he said, prompting the Fed to cut rates. “They will raise (rates) in March and then something will hit the wall, either the economy or the stock market or both. Then the Fed will backpedal from there, starting with a forward guidance then perhaps a rate cut later in the year,” said Rickards, who recommends holding gold and U.S. 10-year Treasurys.

Ominous.

• Did Donald Trump Just Jump The ‘Dow 20,000’ Shark? (ZH)

It appears the sugar-high from holiday celebrations is still running through president-elect Trump's veins as his tweets took an even more narcisistic tone on this oh-so-aptly-named 'Boxing Day' in America. First Trump decided to take credit for the unprecedented short-squeeze in US stock markets – and the Christmas spending numbers…

The world was gloomy before I won – there was no hope. Now the market is up nearly 10% and Christmas spending is over a trillion dollars!

— Donald J. Trump (@realDonaldTrump) December 26, 2016

We just wonder what he will sat if/when Goldman Sachs stops rising and stocks tumble ("never gonna happen", probably The Fed's fault after all), but perhaps even more importantly, how does he feel about the $1.2 trillion of value he has erased from global capital markets since his election?

The drop in global debt and equity values in Q4 2016 is very reminiscent of the drop into 2015's Fed rate hike… which did not end well…

But, the last time that global stocks and global bonds decoupled so aggressively was following the end of QE3… here's what happened next…

But it's probably different this time, right? China is fine (oh wait, failed auctions and liquidity crisis), Europe is fine (oh wait, Italian banks are collapsing), and the US economy is great (oh wait, automakers are shuttering plants due to credit-created excess inventory).

* * *

But Trump was not done there, he took on the arrogance of Obama, as we detailed earlier…

President Obama said that he thinks he would have won against me. He should say that but I say NO WAY! – jobs leaving, ISIS, OCare, etc.

— Donald J. Trump (@realDonaldTrump) December 26, 2016

Invincible politician and stock market savior…Let's just hope nothing goes wrong to break that narrative in the next 4 years (or 4 weeks).

Beijing will be forced to take very unpopular decisions. Xi signaled tolerance for a lower growth target, and whoops goes the money. They’re stuck in their own bubbles.

• Yuan Trading Volume Has Been Surging In December (BBG)

The onshore yuan’s surging trading volume is another piece of evidence that capital is fleeing China at a faster pace. The daily average value of transactions in Shanghai climbed to $34 billion in December as of Monday, the highest since at least April 2014, according to data from China Foreign Exchange Trade System. That’s up 51% from the first 11 months of the year. The increase suggests quickening outflows, given that data in recent months showed banks were net sellers of the yuan, according to Harrison Hu at RBS This month’s jump in trading volume signals sentiment has kept deteriorating since November, when the nation’s foreign-exchange reserves shrank by the most since January.

The Chinese currency is headed for its steepest annual slump in more than two decades and when the year turns, authorities will be faced with a triple whammy of the renewal of citizens’ $50,000 conversion quota, prospects of further Federal Reserve interest-rate increases, and concern that U.S. President-elect Donald Trump may slap punitive tariffs on China’s exports to the world’s largest economy. “Capital outflow pressures will stay, and in near term, we should monitor the impact upon the reset of the annual quota,” said Frances Cheung at Societe Generale. The pressures will likely ease toward the end of the first quarter as foreign flows into China’s bond market quicken, she said.

If it quacks like a typical bank run… Don’t you think they could perhaps have done this deal in silence?

• ECB: Monte dei Paschi Must Now Raise €8.8 Billion After Recent Withdrawals (R.)

The ECB has told Monte dei Paschi it needs to plug a capital shortfall of €8.8 billion, higher than a previous €5 billion gap estimated by the bank, the lender said on Monday, confirming what sources told Reuters. Last Friday the Italian government approved a decree to bail out Monte dei Paschi after Italy’s No. 3 lender failed to win investor backing for a desperately needed €5 billion capital increase. The bank said on Monday it had officially asked the ECB last Friday for go ahead for a “precautionary recapitalization”. A precautionary recapitalization is a type of state intervention in a struggling bank that is still solvent. It means only a modest bail-in of investors though the government can buy shares or bonds only on market terms endorsed by EU state aid officials in Brussels.

In its reply, the ECB said it had calculated the capital it believed the bank needed on the basis of a shortfall emerging from European stress test of large lenders earlier this year. In those tests Monte dei Paschi was the only Italian bank to come short under an adverse scenario. The ECB said the lender was solvent but signaled the bank’s liquidity position had rapidly deteriorated between the end of November and December 21, Monte dei Paschi said. [..] The European Commission said on Friday it would work with Rome to establish conditions were met for a bailout of Monte dei Paschi. But on Monday ECB policymaker Jens Weidmann said plans for a state bailout of Monte dei Paschi should be weighed carefully as many questions remain to be answered.

“..He was awarded the Nobel Peace Prize, but ended up invading 7 countries. He also became the very first U.S. President to be at continuous war during his entire 8 years in office…”

• War & The Rejection of Peace (Rossini)

Try to think of a time in your life when the U.S. government was not militarily involved somewhere in the world. It’s a sad fact that a vast majority of us can’t recall such a time. [..] When war is all that a population knows to exist, the idea of peace becomes an anomaly. We all know that people are habitual. We cling to our habits (good and bad) and resist the unknown where change can occur. Well, in America the unknown has become peace! How sad to think that the idea of peace actually terrifies so many people both in and out of government. One can at least understand why governments would want to avoid peace. As Randolph Bourne famously pointed: “War is the health of the state.” During times of war, government capitalizes on the fear that it generates and concomitantly seizes unbelievable powers for itself.

We can at least see the benefit to government and those with a lust for power and the ability to dominate others. But what’s in it for the people? Here we can quote Samuel B. Pettengill who said: “War – after all, what is it that the people get? Why – widows, taxes, wooden legs and debt.” Sounds like a raw deal for the people. And yet, Americans have sat idly by, and have turned a blind eye to an incredible list of military interventions over the years. More war, less liberty …. More war, less liberty …. If it happens over an administration or two, it can be spun as government losing its way to a few bad apples. But 100+ years of more war, less liberty? That’s a system!

[..] There is a tremendous amount of upside to war for those who are in power. It provides them with an opportunity to swipe away liberties at an exponential pace. The populace will give up virtually everything. Is it any wonder that those in power run away from even the prospect of peace? We’re soon about to have a new president, and he’s coming into office with a lot of expectations. The outgoing president had high expectations as well. He was awarded the Nobel Peace Prize, but ended up invading 7 countries. He also became the very first U.S. President to be at continuous war during his entire 8 years in office. Will this new president keep the boots of war firmly pressed against American throats? Will he continue the asphyxiation of the American Dream?

So far, when it comes to the insane idea of confronting a nuclear Russia, he has shown admirable qualities of restraint and cordial behavior. Will that continue through his presidential term? Or will he keep the century old American tradition of military adventurism overseas? The world is much bigger than Russia. There are plenty of other places that America can mire itself. There are other nuclear powers (like China) where trouble can be fomented. The president-elect has already shown that he has a bone to pick with the Chinese. Are we merely exchanging trouble with one nuclear power for another? Let’s hope that Donald Trump doesn’t repeat the mistakes of history. Let’s hope that he doesn’t become just another bad example for future generations to study.

Wouldn’t it be nice for Americans to someday be born into a life of liberty and peace? That was the original idea in the ‘land of the free’. A return to a foreign policy of non-interventionism and peace is desperately needed.

Quite the allegation.

• Israel Claims ‘Evidence’ That Obama Orchestrated UN Resolution (G.)

Israel has escalated its already furious war with the outgoing US administration, claiming that it has “rather hard” evidence that Barack Obama was behind a critical UN security council resolution criticising Israeli settlement building, and threatening to hand over the material to Donald Trump. The latest comments come a day after the US ambassador to Israel, Dan Shapiro, was summoned by Netanyahu to explain why the US did not veto the vote and instead abstained. The claims have emerged in interviews given by close Netanyahu allies to US media outlets on Monday after the Obama administration denied in categorical terms the claims originally made by Netanyahu himself.

However, speaking to Fox News on Sunday, David Keyes – a Netanyahu spokesman – said Arab sources, among others, had informed Jerusalem of Obama’s alleged involvement in advancing the resolution. “We have rather iron-clad information from sources in both the Arab world and internationally that this was a deliberate push by the United States and in fact they helped create the resolution in the first place,” Keyes said. Doubling down on the claim a few hours later the controversial Israeli ambassador to Washington, Ron Dermer, went even further suggesting it had gathered evidence that it would present to the incoming Trump administration. “We will present this evidence to the new administration through the appropriate channels. If they want to share it with the American people, they are welcome to do it,” Dermer told CNN.

Curious things for Obama to say. It’s not obvious enough yet that his own party has fallen apart?

• Corbyn Hits Back After Obama Suggests Labour Is ‘Disintegrating’ (G.)

A spokesman for Jeremy Corbyn has hit back after Barack Obama appeared to suggest that the Labour party has moved away from “fact and reality” and is disintegrating. The spokesman said the Labour leader “stands for what most people want” and suggested that the outgoing president’s Democratic party needed to “challenge power if they are going to speak for working people”. Obama had earlier said he was not worried when asked if the US Democrats could undergo “Corbynisation” and “disintegrate” like Labour in the wake of Hillary Clinton’s election defeat by Donald Trump. The departing US president was giving an in-depth interview, in which he also said he would have won the 8 November contest if he ran for a third term, to David Axelrod, formerly an adviser to Corbyn’s predecessor as Labour leader, Ed Miliband.

The 55-year-old compared the way the Labour party and the US Republicans had chosen to swing away from the middle ground and claimed even left-wing senator Bernie Sanders was a centrist compared to Corbyn. Asked about a potential “Corbynisation” of his party, he said: “I don’t worry about that partly because I think that the Democratic party has stayed pretty grounded in fact and reality.” He added: “[The Republican party] started filling up with all kinds of conspiracy-theorising that became kind of common wisdom or conventional wisdom within the Republican party base. That hasn’t happened in the Democratic party. I think people like the passion that Bernie brought, but Bernie Sanders is a pretty centrist politician relative to … Corbyn or relative to some of the Republicans.” In response Corbyn’s spokesman said: “Both Labour and US Democrats will have to challenge power if they are going to speak for working people and change a broken system that isn’t delivering for the majority.

They’re going to continue to fight over this for much longer.

• Hard Brexit ‘Could Boost UK Economy By £24 Billion’: Pro-Leave Group (Ind.)

The UK economy could benefit by £24bn a year – more than £450m a week – by leaving the European single market and customs union, a pro-Brexit pressure group has claimed. The Change Britain group said that the option – which it describes as “clean Brexit” – is likely to deliver annual savings of almost £10.4bn from contributions to the EU budget and £1.2bn from scrapping “burdensome” regulations, while allowing the UK to forge new trade deals worth £12.3bn. The group said its estimate was “very conservative” and that the benefits of withdrawal from the single market and customs union could be as much as £38.6bn a year. Even the lowest forecast within its range of likely outcomes was a boost of £20bn.

But the figure does not factor in the possibility of large-scale loss of exports to the remaining 27 EU nations, which advocates of a “soft Brexit” argue could happen if the UK faces tariff and non-tariff barriers to trade as a result of leaving the single market. Britain exported around £220bn of goods and services to the EU in 2015, while imports from the EU totalled around £290bn. Change Britain said that the biggest prize on offer was in potential trade agreements outside the EU which Britain could strike if it left the customs union, which requires it to take part only in deals negotiated by the European Commission. Depending on how many deals the UK secures, GDP could be boosted by between £8.5bn and £19.8bn, said Change Britain.

Might as well. It’s just that King has been ‘unlucky’ in his predictions for years.

• Mervyn King: Britain Should Be More Upbeat About Brexit (G.)

Britain may be better off going for a hard Brexit that would mean leaving the single market and customs union, Mervyn King, the former governor of the Bank of England, has suggested. Lord King, who has been more optimistic about leaving the EU than many economic commentators, acknowledged that Brexit would bring great political difficulties and would not be a “bed of roses”. Speaking to BBC Radio 4’s Today programme, he also said there would be many opportunities economically for the UK striking out on its own. The crossbench peer, who led the bank for a decade until 2013, said the UK should leave the European single market and warned there were “real question marks” over whether it should seek to remain in the customs union, which would limit its ability to forge trade deals on its own.

Theresa May’s cabinet is split on the issue of the single market and customs union, with the most pro-Brexit ministers seeking a clean break and others warning of the economic dangers of being cut adrift from the UK’s closest trading partners. King said before the referendum that warnings of economic doom about leaving the EU were overstated. Since then, he has welcomed the fall in the pound and said he believes Britain can be better off out than in the EU. He told the BBC on Boxing Day: “I think the challenges we face mean it’s not a bed of roses – no one should pretend that – but equally it is not the end of the world and there are some real opportunities that arise from the fact of Brexit we might take. “There are many opportunities and I think we should look at it in a much more self-confident way than either side is approaching it at present. Being out of what is a pretty unsuccessful European Union – particularly in the economic sense – gives us opportunities as well as obviously great political difficulties.”

At least he’s right on this.

• EU Faces Two Major Problems – And Has Answers To Neither: King (Ind.)

The European Union is facing “existential problems” over migration and the single currency for which it does not yet have the answers, former Bank of England governor Lord King has warned. Lord King said the scale of the crises was such that Brexit amounted to little more than “minor irritant” by comparison. And he suggested that the factor which could bring the problems to a head was German voters asking whether they want to remain part of a project which involves them propping up less competitive eurozone economies like Italy, Portugal and France. Lord King said that the single currency project was flawed from the start, and that it would probably have been better to create two monetary unions for “premier league” and “second division” economies. But he said it was too late to move to this model now.

Speaking to BBC Radio 4’s Today programme, the former governor said: “I think the EU is facing two existential problems and it has answers to neither of them. “The first is the fate of the monetary union, which even the ECB is saying is in a critical position and needs major reform. “Secondly, migration from outside the EU into the EU and the knock-on consequences of that for the free movement of people. “I don’t think they have answers for either of those issues and it is a real crisis for the EU. “British membership is irrelevant to these two questions and from that perspective I think they regard our decision to leave the EU as a minor irritant.” Lord King said it was impossible to put any timescale on when the problems of the eurozone might come to a head. But he said: “They simply haven’t put in place the framework to make it a success, desperately trying to struggle from one month to the next.

“For a long period they were relying on the confidence that financial markets had in the words of (ECB) president Mario Draghi that they would do ‘whatever it takes’. But I think words in the end run out and you need to back them up by actions. “The problem now is that people in Germany and other countries in the northern part of the EU are deeply reluctant – understandably – to pay for countries in the south. That wasn’t the prospectus they were offered when they joined the monetary union. “In the long run, it would make some sense to recognise that it was a mistake to go to monetary union as early as 1999. I think they might have been able to divide it into two divisions – a premier league and a second division – but I think it may be too late to do. If you look at economies like Italy, Portugal and even France, they are really struggling.

Excellent from Jim, and that’s before his predictions for 2017.

• Exit, Hope and Change (Jim Kunstler)

From the get-go, he made himself hostage to some of the most sinister puppeteers of the Deep State: Robert Rubin, Larry Summers, and Tim Geithner on the money side, and the Beltway Neocon war party infestation on the foreign affairs side. I’m convinced that the top dogs of both these gangs worked Obama over woodshed-style sometime after the 2008 election and told him to stick with the program, or else. What was the program? On the money side, it was to float the banks and the whole groaning daisy chain of their dependents in shadow finance, real estate, and insurance, at all costs. Hence, the extension of Bush Two’s bailout policy with the trillion-dollar “shovel-ready” stimulus, the rescue of the car-makers, and a much greater and surreptitious multi-trillion dollar hand-off from the Federal Reserve to backstop the European banks with counter-party obligations to US banks.

In April of 2009, Obama’s new SEC appointees, strong-armed by bank lobbyists, pushed the Financial Accounting Standards Board (FASB) into suspending their crucial Rule 157, which had required publically-held companies to report their asset holdings based on standard market-based valuation procedures — called “mark-to-market.” After that, companies like Too-Big-Too-Fail banks could just make shit up. This opened the door to the pervasive accounting fraud that allowed the financial sector to pretend it was healthy for the eight years that followed. The net effect of their criminal fakery was to only make the financial sector artificially larger, more dangerously fragile, and more prone to cataclysmic collapse.

[..]in foreign affairs, there is Obama’s mystifying campaign against the Russian Federation. The US had an agreement with Russia after the fall of the Soviet Union that we would not expand NATO if they gave us a quantity of nuclear material that was in danger of falling into questionable hands in the disorder that followed the collapse. Russia complied. What did we do? We expanded NATO to include most of the former eastern European countries (except the remnants of Yugoslavia), and then under Obama, NATO began holding war games on Russia’s border. For what reason? The fictitious notion that Russia wanted to “take back” these nations — as if they needed to adopt a host of dependents that had only recently bankrupted the Soviet state. Any reasonable analysis would call these war games naked aggression by the West.

Then there was the 2014 US State Department-sponsored coup against Ukraine’s elected government and the ousting of President Viktor Yanukovych. Why? Because his government wanted to join the Russian-led Eurasian Customs Union instead of an association with European Union. We didn’t like that and we decided to oppose it by subverting the Ukrainian government. In the violence and disorder that ensued, Russia took back the Crimea — which had been gifted to the former Ukraine Soviet Socialist Republic (a province of Soviet Russia) one drunken night by the Ukraine-born Soviet leader Nikita Khrushchev. What did we expect after turning Ukraine into another failed state? The Crimean peninsula had been part of Russia for longer than the US had been a country. Its only warm water naval ports were located there.

One by one they leave us.

• Cheetahs Heading Towards Extinction As Population Crashes (BBC)

The sleek, speedy cheetah is rapidly heading towards extinction according to a new study into declining numbers. The report estimates that there are just 7,100 of the world’s fastest mammals now left in the wild. Cheetahs are in trouble because they range far beyond protected areas and are coming increasingly into conflict with humans. The authors are calling for an urgent re-categorisation of the species from vulnerable to endangered. According to the study, more than half the world’s surviving cheetahs live in one population that ranges across six countries in southern Africa. Cheetahs in Asia have been essentially wiped out. A group estimated to number fewer than 50 individuals clings on in Iran.

ZSL

Because the cheetah is one of the widest-ranging carnivores, it roams across lands far outside protected areas. Some 77% of their habitat falls outside these parks and reserves. As a result, the animal struggles because these lands are increasingly being developed by farmers and the cheetah’s prey is declining because of bushmeat hunting. In Zimbabwe, the cheetah population has fallen from around 1,200 to just 170 animals in 16 years, with the main cause being major changes in land tenure. [..] “The take-away from this pinnacle study is that securing protected areas alone is not enough,” said Dr Kim Young-Overton from Panthera, another author on the report. “We must think bigger, conserving across the mosaic of protected and unprotected landscapes that these far-reaching cats inhabit, if we are to avert the otherwise certain loss of the cheetah forever.”

We had a great Christmas Day live cooking event in Monastiraki square in Athens (see photos). I’ll get back to you on that. Donations through Paypal -top left hand corner of this page- of course remain welcome.

• The Automatic Earth in Greece: Big Dreams for 2017 (Automatic Earth)

Both Konstantinos and myself -and all the other volunteers at O Allos Anthropos- want to thank you so much for all the help you’ve given over the past year -and in 2015-. If I may make a last suggestion, please forward this ‘dream’ to anyone you know -and even those you don’t-, by mail, Twitter, Facebook, Instagram, word of mouth, any which way you can think of. Go to your local mayor or town council, suggest they can help and get -loudly- recognized for it. There may be a dream involved for 2017, but that was our notion a year ago as well, and look what we’ve achieved a year later: it is very real indeed. And anyone, everyone can become part of that reality for just a few bucks. If the institutions won’t do it, perhaps the people themselves should. That doesn’t even sound all that crazy or farfetched. There’s a lot of us.

Konstantinos Polychronopoulos, Athens Christmas Day 2016

Debt Rattle September 25 2016

Sep 252016

September 25, 2016 Posted by Raúl Ilargi Meijer at 8:50 am Finance Tagged with: crash, Deutsche, dividend, naked shorts, private debt, refugees, Vancouver, Wells Fargo Comments Off

Harris&Ewing Boy Scout farm 1917

• The Market Is In Line With History. The History Of Crashes (Stockman)

• How to Suffocate Your Economy: Drown it in Massive Private Debt (Vague)

• Vancouver Property Sales To Foreigners Crash 96% (ZH)

• Merkel Rules out State Assistance for Deutsche Bank (BBG)

• EU Must Turn Off the Dividend Spigot at Under-Capitalized Banks (PS)

• China Continues to Battle Massive Capital Flight Problem (Brink)

• Naked Shorts Can’t Stay Naked Forever (Dayen)

• Whistleblower Describes Years Of Fraudulent, Criminal Culture At Wells Fargo (BB)

• Former Employees File Class Action Against Wells Fargo (R.)

• Clinton Server Tech Told FBI Of Colleagues’ Worries About System (R.)

• America’s War On Its Own Children (G.)

• Death Toll In Migrant Shipwreck Off Egypt Rises To 300 (G.)

The level of high grade corporate debt is more than 2X its pre-crisis peak. As Capex is down 10%, and net fixed business investment is 20% below 2000 levels. Corporations are burning and bleeding cash left right and center. Question: what has the debt been used for?

• The Market Is In Line With History. The History Of Crashes (Stockman)

By punting again [this week], our dithering money printers at the Fed are continuing to fuel a monumental orgy of corporate bond issuance. It only enables companies to speculate in their own stocks with borrowed money, while heaping windfall gains on the fast money traders who hound corporate boards into strip-mining their own balance sheets. The level of high grade corporate debt outstanding has gone nearly parabolic in the last few years and now stands at more than 2X its pre-crisis peak. Yet even Yellen admitted during yesterday’s mindlessly meandering presser that business capital expenditure (CapEx) has been extraordinarily weak. In fact, non-defense CapEx orders excluding aircraft peaked in mid-2104 and are now down by 10%.

Even more to the point, real net fixed business investment after depreciation is still 20% below the level it reached way back in early 2000. That is, two bubbles ago. Perhaps the question about where all this hand-over-fist corporate borrowing is going might have occurred to at least one of the geniuses who voted to stand pat. But apparently it didn’t because once again Yellen insisted that “valuations are largely in line with their historical trends.” What in the world is our clueless school marm talking about? At the closing price yesterday, the S&P 500 traded at 25X the $87 per share reported for the last twelve month (LTM) period ending in June. And that was in the face of earnings that have plunged 19% since peaking in the September 2014 LTM period.

Yellen is right about the historical trends, of course. But not at all in a good way. In fact, on the eve of the last crash when the market peaked in October 2007 at about 1550, S&P 500 earnings during the most recent LTM period had posted at $79 per share. That means the peak pre-crash multiple was substantially lower than today at 19.7X. Even when S&P earnings peaked at $54 per share in September 2000, the multiple was only a tad higher than today at 26.5X. So, yes, the market is in line with history. That is, the history of crashes! The truth is, the Fed is inherently, relentlessly and radically in the financial bubble business. But the Keynesian school marm who runs it wouldn’t know a bubble if one transported her to the moon and back.

The role of debt has been growing for a long time.

• How to Suffocate Your Economy: Drown it in Massive Private Debt (Vague)

[..] if a country’s private debt to GDP ratio is low, let’s say 50%, then the households and businesses in that country generally have low loan-to-income ratios and are well positioned to power growth through increased leverage. And if a country’s private debt to GDP ratio is high, let’s say 200%, then the households and businesses in that country are generally overleveraged, with, on average, very high debt ratios. They are much less likely to be able to boost growth through more borrowing.

Chart 2 showed that private debt to GDP in major economies has been growing rapidly since World War II. However, it has been growing in size relative to GDP for a lot longer than that. It’s part of a process often described by economists as “financialization” or “financial deepening,” an increase in the size of a country’s debt and equity markets usually explained as simply the maturation of a market. But as we have seen, when it comes to debt, it is much more than that—it is the path from low leverage to overleverage for the participants in that economy. The benefit of increasing leverage from low levels has played a central role in the miraculous gains in incomes over the 200-plus years since the Industrial Revolution.

You can see this clearly in Chart 3. I have made a concerted effort to reconstruct more than 200 years of private debt history for the six countries in this chart—China, Japan, Germany, Britain, France, and the United States—because collectively, they have accounted for roughly 50% or more of global GDP since the Industrial Revolution. So studying the data of these six countries during this period gives us a fairly solid proxy for the world during the most important era of economic history. (This chart is a work-in-progress which will be augmented and refined in preparation for an upcoming book on this same subject.)

Auckland, Sydney, London etc. should do the same.

• Vancouver Property Sales To Foreigners Crash 96% (ZH)

China’s favorite offshore money laundering hub is officially no longer accepting its money. According to data released by British Columbia’s Ministry of Finance on Thursday, foreign investors officially disappeared from Vancouver’s property market last month after the local government imposed a 15% surcharge to curb a record-shattering surge in home prices. Overseas buyers accounted for a paltry 0.7% of the C$6.5 billion of residential real estate purchases in August in Metro Vancouver; this represents a 96% plunge from the seven weeks prior, when foreigners were responsible for 16.5% of transactions by value. According to the latest data overseas buyers snapped up C$2.3 billion of homes in the seven weeks before the tax was imposed, and less than C$50 million in the next four weeks.

[..] As Bloomberg notes, the plunge in foreign participation joins other signs of a slowdown in Canada’s most expensive property market. The silver lining is that while transactions may have ground to a halt, the government did pick up some extra tax revenues: British Columbia has raised C$2.5 million in revenue from the new levy since it took effect. Budget forecasts released last week indicated that the Pacific coast province expects foreign investors to scoop up about C$4.5 billion of real estate through March 2019. That may prove optimistic, because as reported two weeks ago as Chinese buyers wave goodbye to Vancouver, they have set their sights on another Canadian city: Toronto. According to the Star, sales of $1-million-plus Toronto-area single-family homes rose 83% year over year in July and August. That’s 3,026 homes, with 55% of them inside Toronto’s borders.

[..] if they are looking in Canada, we believe Toronto will be the most logical place for people to consider. Montreal and Calgary will probably also get a look-see,” Henderson said. Or maybe not. As CBC reported earlier this week, economist Benjamin Tal of CIBC said that Ontario will have little choice but to copy Vancouver and implement a tax on foreign house buyers. In a recent note to clients, the economist said the biggest problem facing policymakers with regard to hot housing markets in Toronto and Vancouver is a limit on the supply of new homes. “The main reason behind higher prices in the [Greater Toronto Area] is a policy-driven lack of land supply,” Tal said. “And with no change on that front, policymakers have to use demand tools to deal with what is essentially a supply problem.”

I’m going to have my doubts here.

• Merkel Rules out State Assistance for Deutsche Bank (BBG)

Chancellor Angela Merkel has ruled out any state assistance for Deutsche Bank in the year heading into the national election in September 2017, Focus magazine reported, citing unidentified government officials. The German leader also declined to step into the bank’s legal imbroglio with the U.S. Justice Department, which may seek as much as $14 billion in sanctions against Deutsche Bank’s mortgage-backed securities business, the magazine said. The finances of Germany’s biggest lender, which has lost almost half of its market value this year, are raising concern among German politicians.

At a closed session of Social Democratic finance lawmakers this week, Deutsche Bank’s woes came up alongside a debate over Basel financial rules, according to two people familiar with the matter. Germany’s government expects a “fair outcome” in the U.S. probe, the Finance Ministry said on Sept. 16. Deutsche Bank has said it’s unwilling to pay the maximum amount sought by U.S. authorities as investors fret about the bank’s capital. Chief Executive Officer John Cryan, 55, has struggled to boost profitability by selling riskier assets and eliminating jobs as unresolved legal probes and claims add to concerns that the lender will be forced to raise capital.

Cut off dividends and share prices will fall through the floor.

• EU Must Turn Off the Dividend Spigot at Under-Capitalized Banks (PS)

Dividend payments made by under-capitalized banks amount to a substantial wealth transfer from subordinated bondholders to shareholders, because it is bondholders who will suffer the losses in a crisis. Moreover, it is potentially a wealth transfer from taxpayers to private shareholders, because under new banking rules government bailouts are possible after bondholders have covered (bailed in) 8% of a bank’s equity and liabilities. By contrast, undercapitalized banks in the US are forced to halt all forms of capital distribution if they fail a stress test. Fortunately, following the 2016 round of stress tests, the EBA is now also considering this type of regulatory sanction. Thus, “competent authorities may also consider requesting changes to the institutions’ capital plan,” which “may take a number of forms such as potential restrictions on dividends required for a bank to maintain the agreed trajectory of its capital planning in the adverse scenario.”

We estimate that if European regulators had adopted this approach and forced banks to stop paying dividends in 2010 – the start of the sovereign debt crisis in Europe – the retained equity could have paid for more than 50% of the 2016 capital shortfalls. The figure above shows our calculated capital shortfalls, using the EBA stress test’s “adverse scenario” losses and the cumulative dividends these banks have distributed since 2010. Dividends paid out by some banks, such as BNP Paribas and Barclays, actually exceed the current capital shortfalls, while at others – such as Deutsche Bank, Commerzbank, and Société Générale – capital shortfalls far exceed dividends that would have been retained. The latter banks would still require substantial capital issuances on top of dividend restrictions to make up the difference. Nonetheless, our findings suggest a simple first step toward preventing bank capital erosion: stop banks with capital shortfalls from paying dividends (including internal dividends such as employee bonuses).

Not everyone believes the omnipotency tale Beijing likes to spread.

• China Continues to Battle Massive Capital Flight Problem (Brink)

Last summer, China’s stock market collapse and unexpected devaluation deepened its capital outflow problem and accelerated the fall of reserves, which had started in mid-2014. Since February, reserves have started to stabilize. While the situation is clearly better, China continues to struggle in terms of stabilizing its massive capital outflows. Within that context, foreign reserves seem to have become a policy target. Although capital outflows are still large, it’s not enough for reserves to start falling again. In 2015, the largest net outflows stemmed from the repayment of bank loans (close to $500 billion in “other investment” outflows), followed by unrecorded outflows of residents amounting to nearly $200 billion.

Portfolio flows (equity and bond) were also negative, but smaller. The situation has hardly improved in 2016, based on first quarter data. In fact, all types of capital recorded outflows, even net foreign direct investment (FDI), which was not the case in 2015. It’s important to note that Chinese residents have been driving capital outflows for years. The difference in 2015 is that non-residents stopped investing in China and started to move their capital out. Still, the bulk of the outflow was made by residents. These are unrecorded outflows and also include the investment of Chinese companies, as well as the loans of Chinese banks abroad (increasingly in the emerging world).

SEC? FBI? Who can be trusted to investigate?

• Naked Shorts Can’t Stay Naked Forever (Dayen)

A few years into his personal quest to understand how he had lost a million dollars on a penny stock, Chris DiIorio developed a sweeping hypothesis involving Knight Capital, the mammoth brokerage company that frequently traded in them. Knight earned $333 million in pre-tax profits in 2008, and another $232 million in 2009. But DiIorio didn’t think Knight was making that kind of money simply from executing transactions for clients. As a market maker, Knight was in the rare position of being able to legally sell a stock it didn’t have (the principle being that it will get that stock soon, so no worries). That’s called naked shorting. It’s illegal when regular people do it. DiIorio suspected that Knight, either on its own behalf or on behalf of clients, made a practice of artificially increasing the number of shares available in a stock through naked shorting, thereby depressing the price.

His suspicion grew when he noticed that Knight often traded in securities that were red-flagged on the Depository Trust Company’s “chill list.” The DTC is an obscure financial industry-owned company that manages the custody of more than $1 quadrillion in securities annually, recording the transfers with journal entries and guaranteeing the trade. The company makes it easy for people to buy and sell securities without needing to exchange paper stock But when the DTC senses trouble, it will stop clearing trades on a stock temporarily. A chilled stock can still trade — as long as the market participants handle the physical certificates themselves. But it can be a sign that something is gravely wrong. The DTC states on its website that it chills stocks “when there are questions about an issuer’s compliance with applicable law.” That doesn’t stop Knight from buying and selling them, though.

Its chief legal officer, Thomas Merritt, acknowledged at a 2011 Securities and Exchange Commission roundtable that the company actively traded chilled stocks, saying that as long as the security still trades, “we are going to be involved in that business.” And DiIorio found numerous examples of Knight trading chilled penny stocks. “I didn’t know they did that,” said Jim Angel, a Georgetown University business school professor. “I’m kind of shocked to think that Knight would be working with paper stock certificates.” He suggested that Knight might simply want to accommodate customers trying to get out of chilled stocks. “Or maybe they feel there’s enough interest in a security that they can trade profitably, even if they have to shuffle the certificates.” Because most other market makers flee chilled stocks, however, this means Knight can assume even more control over the stock price.

Upper management should be dragged before a public committe.

• Whistleblower Describes Years Of Fraudulent, Criminal Culture At Wells Fargo (BB)

Beth Jacobson was a Wells Fargo loan officer who blew the whistle on the bank’s predatory, racist loan-fraud in the runup to the 2008 financial crisis, which tanked the world’s economy and nearly wiped out Wells Fargo (they were rescued with a $36B taxpayer-funded bailout). Eight years later, Wells Fargo has fired 5,300 employees for participating in a scam that involved opening 2,000,000 fake accounts in its customers’ names, stealing their money and crashing their credit-ratings – the exec who oversaw this a $125M taxpayer-subsidized bonus, and CEO John Stumpf, who took home $200M in bonuses based on profits from the fraud, will keep the money and his job, but the whistleblowers who reported the fraud starting in 2011 were all illegally fired.

Jacobson describes how Stumpf – now CEO, then a top exec – was complicit in the fraud that helped precipitate the crash and the worst recession since the Great Depression. She pins blame for the loan-fraud on the bank’s aggressive sales targets – the same thing that caused the current fraud, suggesting that the bank hasn’t learned a fucking thing since 2008, except that it can get away with crime, every time. “One means of falsifying loan applications that I learned of involved cutting and pasting credit reports from one applicant to another. I was aware of A reps who would ‘cut and paste’ the credit report of a borrower who had already qualified for a loan into the file of an applicant who would not have qualified for a Wells Fargo subprime loan because of his or her credit history.

I was also aware of subprime loan officers who would cut and paste W-2 forms. IDs deception by the subprime loan officer would artificially increase the creditworthiness of the applicant so that Wells Fargo’s underwriters would approve the loan. I reported this conduct to management and was not aware of any action that was taken to correct the problem. “High-ranking Wells Fargo managers knew that this practice was going on, because after about a year of these standby explanations being given, underwriters in the underwriting department were told to call the customers directly rather than contact the loan officer who was working with the customer. The loan officers quickly figured out how to work around this by warning customers that underwriters might call them and then coaching the customers about what to say.

CEO gone.

• Former Employees File Class Action Against Wells Fargo (R.)

Two former Wells Fargo employees have filed a class action in California seeking $2.6 billion or more for workers who tried to meet aggressive sales quotas without engaging in fraud and were later demoted, forced to resign or fired. The lawsuit on behalf of people who worked for Wells Fargo in California over the past 10 years, including current employees, focuses on those who followed the rules and were penalized for not meeting sales quotas. “Wells Fargo fired or demoted employees who failed to meet unrealistic quotas while at the same time providing promotions to employees who met these quotas by opening fraudulent accounts,” the lawsuit filed on Thursday in California Superior Court in Los Angeles County said.

Wells Fargo has fired some 5,300 employees for opening as many as 2 million accounts in customers’ names without their authorization. On Sept. 8, a federal regulator and Los Angeles prosecutor announced a $190 million settlement with Wells. The revelations are a severe hit to Wells Fargo’s reputation. During the financial crisis, the bank trumpeted being a conservative bank in contrast with its rivals. The lawsuit accuses Wells Fargo of wrongful termination, unlawful business practices and failure to pay wages, overtime, and penalties under California law. Former employees Alexander Polonsky and Brian Zaghi allege Wells Fargo managers pressed workers to meet quotas of 10 accounts per day, required progress reports several times daily and reprimanded workers who fell short.

Polonsky and Zaghi filed applications matching customer requests and were counseled, demoted and later terminated, the lawsuit said. While executives at the top benefited from the activity, the blame landed on thousands of $12-per-hour employees who tried to meet the quotas and were often required to work off the clock to do so, the lawsuit said.

It’s time to scrutinize the FBI’s role in the whole ‘affair’. That the Hillary people have not been fully honest is now so obvious one wonders why Comey et al have granted many immunity and let them off the hook in general.

• Clinton Server Tech Told FBI Of Colleagues’ Worries About System (R.)

A technician hired by Hillary Clinton to run the private email system she used while U.S. secretary of state told investigators he tried to pass on colleagues’ concerns that the system might not comply with records laws, FBI interview summaries show. Bryan Pagliano, the technician Clinton hired when she joined the State Department in 2009, told federal investigators he relayed the concerns to Cheryl Mills, then Clinton’s chief of staff. Mills has previously testified under oath she could not recall anyone alerting her to potential problems with Clinton’s email arrangement.

The episode had not been disclosed until the Federal Bureau of Investigation released on Friday night nearly 200 pages of additional records from its year-long investigation into the handling of classified government documents by Clinton and her staff via an unauthorized email server in the basement of her New York home. Clinton has said the decision to use a private email system was a mistake, but the controversy has dogged her campaign as the Democratic candidate for the presidency and raised public doubts about her trustworthiness, public opinion polls show. Republicans have criticized her for putting national security at risk. The FBI closed the year-long investigation in July, recommending no charges, although FBI Director James Comey said Clinton and her staff had been “extremely careless” in handling classified government secrets.

Pagliano has declined to answer questions by Republican lawmakers about his work on Clinton’s server, but spoke to federal investigators after securing a form of immunity from prosecution. He told investigators two colleagues from the technology office approached him with concerns during Clinton’s first year after learning about the email system. One said it could lead to a “federal records retention issue,” Pagliano told investigators, and urged him to raise the concern with Clinton’s “inner circle.” A colleague also warned Pagliano “he wouldn’t be surprised” if classified information was being sent through Clinton’s unsecure system, Pagliano told the FBI.

“Every day, on average, seven children and teens are killed by guns in America.”

• America’s War On Its Own Children (G.)

It was just another day in America. And as befits an unremarkable Saturday, 10 children and teens were killed by gunfire. They died in altercations at gas stations, accidents in bedrooms, standing on stairwells and walking down the street, in gangland hits and by mistaken identity. Like the weather, none of them would make the national news because, like the weather, their deaths did not disturb the accepted order of things. Every day, on average, seven children and teens are killed by guns in America. Firearms are the leading cause of death among black children under 19, and the second greatest cause of death for all children of the same age, after car accidents. I picked this day at random, and spent two years trying to find out who these children were.

I searched for their parents, pastors, baseball coaches, and scoured their Facebook and Twitter feeds. The youngest child was nine, the oldest 19. Four years ago, for a moment, there was considerable interest in the fact that large numbers of Americans were being fatally shot. On 14 December 2012, 20-year-old Adam Lanza shot his mother, then drove to Sandy Hook Elementary School and shot 20 small children and six staff dead. Mass shootings comprise a small proportion of gun violence, but they disturb America’s self-image in a way that the daily torrent of gun deaths does not. “Seeing the massacre of so many innocent children … it’s changed America,” said the Democrat senator Joe Manchin, who championed a tepid gun-control bill. “We’ve never seen this happen.”

“At the current rate, the death toll for 2016 is expected to easily surpass the figure for 2015 of 3,771..”

• Death Toll In Migrant Shipwreck Off Egypt Rises To 300 (G.)

A record number of migrants is expected to drown in the Mediterranean in 2016, after the estimated death toll in this week’s latest shipwreck rose to about 300 on Friday. Egyptian officials have rescued about 160 survivors from Wednesday’s shipwreck off the country’s north coast, leaving about 150 people still unaccounted for, according to the International Organisation for Migration (IOM). Those confirmed dead include 10 women and a baby, taking the estimated number of migrants to die in the Mediterranean so far this year to more than 3,500. At the current rate, the death toll for 2016 is expected to easily surpass the figure for 2015 of 3,771, which was the highest ever recorded. By this stage in 2015, 2,887 people had drowned.

The number of people trying to reach Europe has fallen significantly since last year’s record levels, as a result of the deal struck between the EU and Turkey and the closure of a humanitarian corridor between Greece and Germany. The flow of migrants from the three main departure points – Libya, Turkey and Egypt – stands at roughly the same level as 2014.

Debt Rattle 4th of July 2016

Jul 042016

July 4, 2016 Posted by Raúl Ilargi Meijer at 8:23 am Finance Tagged with: arms, bailout, Brexit, crash, crisis, Ebay, Greece, Lehman, oil, recession 3 Responses »

Walker Evans “Sidewalk scene in Selma, Alabama.” 1935

• China Bank Bailout Calls Go Mainstream (BBG)

• Deutsche: Probability Of US Recession Surges To 60% (ZH)

• Druckenmiller, Soros, Spitznagel, Gross Warn Of Crisis (VW)

• Oil Rally Threatened as Gasoline Supply Surge Swamps US Demand (BBG)

• Brexit Is a Lehman Moment for European Banks (BBG)

• Angela Merkel ‘To Oust Juncker’ As Europe Splits Deepen Over Brexit (Tel.)

• Germany’s Schäuble Urges Post-Brexit Push to Curb EU Commission (BBG)

• French Economy Minister Macron Claims Euro-Clearing Business for Paris (BBG)

• Where Have Those Nice Britons Gone? (G.)

• Brexit Voters Are Not Thick, Not Racist: Just Poor (Spec.)

• German Arms Exports Almost Doubled In 2015 (R.)

• Kaczynski May Divert Polish Pension Cash to State Projects (BBG)

• Europe Puts Greece On Ebay (G.)

• How To Fix A Broken Auckland? Crash Home Prices By 40% (Grimes)

“Non-performing loans jumped by more than 40% in the 12 months ended March to 1.4 trillion yuan ($210 billion)..” “..CLSA estimating NPLs were probably closer to 11.4 trillion yuan at the end of last year..” That would be well over $2 trillion….

• China Bank Bailout Calls Go Mainstream (BBG)

Predictions of a Chinese banking system bailout are going mainstream. What was once the fringe view of permabears and short sellers is now increasingly being adopted by economists at some of the world’s biggest banks and brokerages. Nine of 15 respondents in a Bloomberg survey at the end of last month, including Standard Chartered and Commonwealth Bank of Australia, predicted a government-funded recapitalization will take place within two years. Among those who provided estimates of the cost, a majority said it will exceed $500 billion. While a bailout of that size would be a far cry from the $10 trillion forecast of U.S. hedge fund manager Kyle Bass in February, the responses reflect widespread concern that Chinese lenders will struggle to cope as bad loans surge.

Even as some analysts said a state recapitalization would put the banking system on a stronger footing, 80% of respondents predicted news of a rescue would weigh on Chinese markets – dragging down bank stocks and the yuan while pushing up government borrowing costs and credit risk. “A recapitalization will happen after the Chinese government comes clean with the true nonperforming loan figure,” said Kevin Lai at Daiwa Capital Markets. “That will require a lot of money creation.” [..] Chinese lenders are grappling with a growing mountain of bad debt after flooding the financial system with cheap credit for years to prop up economic growth.

Non-performing loans jumped by more than 40% in the 12 months ended March to 1.4 trillion yuan ($210 billion), or 1.75% of the total, according to government data. The figures are widely believed to understate the true scale of the problem, with CLSA estimating NPLs were probably closer to 11.4 trillion yuan at the end of last year.

Reading the yield curve.

• Deutsche: Probability Of US Recession Surges To 60% (ZH)

Over the weekend, following the latest collapse in long-term yields to new all time lows, Deutsche Bank looked at what implied recession odds are if one once-again adjust for Fed intervention. What it found, in the words of Deutsche Bank’s Dominic Konstam, is “worrisome.” From Deutsche Bank:

Since the UK referendum the US yield curve has flattened to new post-crisis lows. The 3m10y spread is now 115 bps compared to 210 bps at the start of the year, and the 2y10y spread is just 85 bps versus 120 bps on January 1. This relentless flattening of the curve is worrisome. Given the historical tendency of a very flat or inverted yield curve to precede a US recession, the odds of the next economic downturn are rising. In our probit model, the probability of a recession within the next 12 months has jumped to 60%, the highest it’s been since August 2008.

The model adjusts the 3m10y spread by the historically low level of short rates and it suggests that on an adjusted basis the curve has already appeared to be inverted for some time. The yield curve had successfully signaled the last two recessions when the model output rose above 70%. If 10y yields rally to 1.00% and the 3m rate is unchanged, the implied recession probability from our model will reach that number. At current market levels, the market is just 40 bps from that distinct possibility.

In other words, while the Fed is terrified of killing the recovery by “tightening” financial conditions, all that will take for the next recession to arrive is for the Fed and its central bank peers to ease just that much more to send the long end 40 bps lower, something which as we reported yesterday may happen even sooner than expected, now that pension funds are ready to throw in the towel and start buying 10Y and 30Y Tsys with wreckless (sic) abandon.

“One of the best indicators showing how healthy is the economy is the velocity of circulation of money.”

• Druckenmiller, Soros, Spitznagel, Gross Warn Of Crisis (VW)

Brexit referendum pushed financial markets into turmoil. Even if this is only the beginning of tough times the main reason behind this is definitely not the result of the UK referendum. What we see today is merely a result of financial markets being disconnected from the real condition of the global economy. The red flags signalling overpriced markets (especially in the case of the US) now are raised not only from statistical data but also from experienced investors having a good forecasting record.

From the start, I would like to focus on aforementioned statistical data. They can give us clear picture of the US economy and what happened after previous crisis until now. The financial situation of the US is crucial because it is the American stock exchange that delivers 44% of the global capitalisation of financial markets. American financial sector is responsible for setting trends and today those trends are pointing south. Developing markets are falling right behind the trendsetter. One of the best indicators showing how healthy is the economy is the velocity of circulation of money. The better the economy, the more money people and other participants of the economy spend – this increases money circulation.

At first glance, you can see that after 2008-09 crisis situation worsened. During official ‘post-crisis recovery’ velocity was slightly above 1.7 while during the first quarter of 20016 it fell below 1.5 (for comparison – before the crisis it around 2.0). The above chart is not the only data point. Low money velocity means also less consumption – this is visible in higher inventory-to-sales ratio. Below you can see a record of it. Today this indicator is above the Lehman level. What is more, it soon can match the levels of the worst phase of the 2008 meltdown. This clearly shows how American society is getting poorer.

Low prices, but falling demand.

• Oil Rally Threatened as Gasoline Supply Surge Swamps US Demand (BBG)

American drivers’ seemingly insatiable thirst for gasoline is running into a flood of supply. Refineries across the nation are operating full-out and imports are pouring into the East Coast, boosting gasoline supplies to a record. At the same time, consumption has turned out to be less robust than thought. That’s weighed on prices, threatening to stem oil’s rebound from a 12-year low. “Earlier this year there was a lot of hope that gasoline would lead crude higher,” said John Kilduff, partner at Again Capital, a New York hedge fund focused on energy. “That’s not turned out to be the case and gasoline will soon be a weight on the market.”

The Energy Information Administration said in a monthly report on June 30 that demand in April was 9.21 million barrels a day, down from 9.49 million seen in weekly data. “The monthly data for April raises doubts about the idea that we have reliably robust gasoline demand to support the entire complex,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. Gasoline stockpiles along the East Coast, which includes New York Harbor, the delivery point for U.S. futures contracts, surged to a record 72.5 million barrels in week ended June 24, EIA data show. Imports to the region jumped to a six-year seasonal high. Production climbed to a record in the previous week, as refiners typically run harder in the second quarter to meet summer peak driving season.

“When the biggest bank in Europe’s biggest economy, with annual revenue of about €37 billion, is worth about the same as Snapchat – a messaging app that generated just $59 million of revenue last year – you know something’s wrong.”

Italy’s efforts at aiding its banks risk leading to a big problem with Germany, but Brexit makes the latter hesitant. But it can’t give in, it would set a precedent the EU can’t handle. So is Italy the next Greece?

• Brexit Is a Lehman Moment for European Banks (BBG)

European banks are undergoing a real-life stress test in the wake of Britain’s vote to leave the European Union. Their share prices were already down 20% this year; since the referendum result was announced, they’ve doubled that decline. If the rot isn’t stopped soon, Europe will have found a novel solution to the too-big-to-fail problem — by allowing its banks to shrink until they’re too small to be fit for purpose. The answer is found in the adage never let a good crisis go to waste. The current situation should be both a motivation and an excuse to do what Europe failed to do after the 2008 collapse of Lehman Brothers brought the financial world to its knees: fix its banking system. Here’s a snapshot of this year’s drop in value of some of the region’s biggest institutions:

Deutsche Bank, which once had pretensions to be Europe’s contender on the global investment banking stage, is now worth just €17 billion. When the biggest bank in Europe’s biggest economy, with annual revenue of about €37 billion, is worth about the same as Snapchat – a messaging app that generated just $59 million of revenue last year – you know something’s wrong. No wonder the billionaire investor George Soros was betting against Deutsche Bank shares this month. Greece has recapitalized its banks three times, to almost no effect. Piraeus Bank, for example, is worth less than €1.5 billion, down from €4 billion in December after the last cash injection, and as much as €40 billion just two years ago.

UniCredit, Italy’s biggest bank, has suffered particularly badly this year. It has a market capitalization of just €12 billion, dwarfed by its non-performing loans worth €51 billion. Italian banks as a whole have non-performing debts worth €198 billion, a total that’s been rising ever since the financial crisis and is illustrative of Europe’s failure to tackle its banking problems. Add in so-called “sofferenze,” Italian for doubtful loans, and the total value of Italian debt at risk of non-payment rises to about €360 billion. That explains why Italy has seized upon Brexit to justify trying to shovel €40 billion of state aid into its banking system, much to the annoyance of Germany, which views the move as contravening rules on state aid.

The end of the ever closer union.

• Angela Merkel ‘To Oust Juncker’ As Europe Splits Deepen Over Brexit (Tel.)

Angela Merkel could move to oust Europe’s federalist chief Jean-Claude Juncker ‘within the next year’, a Germany government minister has said, in a sign of deepening European divisions over how to respond to Britain’s Brexit vote. The German chancellor’s frustration with the European Commission chief came as Europe split over whether to use the Brexit negotiations as a trigger to deepen European integration or take a more pragmatic approach to Britain as it heads for the exit door. “The pressure on him [Juncker] to resign will only become greater and Chancellor Merkel will eventually have to deal with this next year,” an unnamed German minister told The Sunday Times, adding that Berlin had been furious with Mr Juncker “gloating” over the UK referendum result.

Mr Juncker’s constant and unabashed calls for “more Europe”, as well as his reported drinking problem has led to several of Europe other dissenting members – including Poland, Hungary and the Czech Republic – to lay some of the blame for Brexit at his door. Since the June 23 vote both the Czech and Polish foreign ministers have called publicly for Mr Juncker to resign – moves that one senior EU official dismissed last week as “predictable”. However, the rumblings from Berlin now represent a much more serious threat to Mr Juncker’s tenure. The split also offers a glimmer of hope for British negotiators who are preparing for fractious EU-UK divorce talks and are desperate to avoid a repeat of February’s failed negotiations which – controlled as they were by Mr Juncker and the Commission – left David Cameron without enough ‘wins’ to avoid Brexit.

“Everyone is determined that this negotiation is handled in the European Council – i.e. between the 27 heads of government – and not by the Commission, the eurocrats and the EU ‘theologians’ in Brussels,” a senior UK source told The Telegraph. In a signal that battle has partly already been won, Mrs Merkel pointedly met with French and Italian leaders in Berlin last week, excluding Mr Juncker from the conversation. The Commission has also declined to fight the Council for the role of “chief negotiator”. British strategists hope that creating a much broader negotiation that includes the UK’s role in keeping Europe geopolitically relevant through its deep Nato ties, defence contributions and links to Washington, they can avoid a narrow tit-for-tat negotiation on trade where the UK has only very limited leverage.

The problem with the end of the ever closer union is who will then decide. And that can only be Germany. The quintessential EU conundrum is unsolvable.

• Germany’s Schäuble Urges Post-Brexit Push to Curb EU Commission (BBG)

Finance Minister Wolfgang Schaeuble signaled that Germany wants national governments to set the pace for future cooperation within the European Union, saying in a newspaper interview that they should sidestep the European Commission in Brussels if needed. Schaeuble’s comments to Welt am Sonntag outline the emerging response by Chancellor Angela Merkel’s government to the U.K. referendum on June 23 to leave the EU. It signals a looming clash with advocates of EU integration such as European Commission President Jean-Claude Juncker. EU countries must seek to reach agreements even if not all of the 27 non-U.K. members want to participate and should circumvent the commission, the EU’s executive arm, if it isn’t willing to cooperate, the newspaper quoted Schaeuble as saying.

“Now is the time for pragmatism,” Schaeuble told the newspaper. “If not all 27 want to pull together from the beginning, then we’ll just start with a few. If the Commission isn’t along, then we’ll take matters into our own hands and solve problems between governments.” Schaeuble expressed frustration that EU officials in Brussels took too long to respond to the refugee crisis last year. Many people’s dissatisfaction with the EU is because rules weren’t respected, including by the European Commission in its response to the sovereign-debt crisis, he was quoted as saying. The U.K. and the EU have a shared interest in starting exit talks quickly to limit the fallout and because “market pressure” may rise the longer it takes, Schaeuble told the newspaper.

Another sociopath striving for power.

• French Economy Minister Macron Claims Euro-Clearing Business for Paris (BBG)

Scruples be damned. The dust has barely settled on the June 23 British vote to take the U.K. out of the European Union, and the French Economy Minister Emmanuel Macron is claiming the euro-clearing business for Paris. Speaking Sunday in a Bloomberg interview, Macron laid out why the French capital is a contender for the business as other euro-area cities from Frankfurt to Dublin gear up for a battle for transactions currently done in London, Europe’s largest financial center. German officials have said Paris is dreaming if it thinks it can beat out Frankfurt, the home of the ECB and Deutsche Boerse’s Eurex operations. “On clearing, we will have a full discussion on a series of issues,” the 38-year-old French minister said.

“We have many more players now in Paris than in Frankfurt, and a much deeper market place.” London’s role in clearing trades in the $493 trillion derivatives market has returned as an issue since Britain voted to exit the 28-nation bloc. EU courts blocked a previous ECB effort to bring clearing under its regulatory control by shifting it to a euro-area country. But that was before the Brexit vote. While echoing President Francois Hollande’s insistence last week that euro-clearing won’t remain in London, Macron went further, saying that Paris may be the best place to move the process.

ECB Executive Board member Benoit Coeure warned his French compatriots to cool down on the prospect, insisting that London’s status as the biggest executor of euro financial transactions will depend on the kind of separation agreement the U.K. negotiates with the remaining 27 countries in the EU. “It is premature to have this type of discussion,” he said in Aix-en-Provence Saturday. “Everything will depend on the legal framework. This landscape, will it change? It depends on the relationship between the U.K. and the single market. Right now, we have no idea.” Separately, Macron also said he doesn’t rule out running for president next year, even though he insisted it was too early to declare.

Hi hi. “The rest of the EU wanted to be able to restrain eastern Europeans for another seven years. Most of us did. You kept true to your word and did not.”

• Where Have Those Nice Britons Gone? (G.)

Who are you and what have you done with those Britons I used to know and like so much? Have you no idea how disruptive uncertainty is for our countries, for business? Forgive me, of course you do – it’s you British who taught us that. The single market, for heaven’s sake, the EU’s largest and most formidably lucrative business venture, was very much down to you. It was your Lord Cockfield who worked out a plan, and if your then prime minister Margaret Thatcher had not used all her force to push it through in the face of reluctant protectionists on the continent, it might never had happened. Trade is your thing, after all and here it was: full freedom of movement for capital, goods, services and people. Yes, for people, including for eastern Europeans, not long after the Berlin Wall came down.

That happened because you British insisted on uniting the whole of Europe, the sooner, the better, while the French, the Italians and others all held back for as long as they could. They were so worried that the eastern European workers would come storming in their millions to the west, taking our jobs, pushing our wages down. But you insisted. Openness, inclusiveness, freedom – we have come to associate that with you. And you have, or had, such a way with words. You’re so gifted at persuasion, winning us over with your thoroughly prepared and elegant arguments. In the end, all agreed to do the enlargement your way. Except for the instant freedom of movement for all. The rest of the EU wanted to be able to restrain eastern Europeans for another seven years. Most of us did. You kept true to your word and did not.

You also have such a way with people. Your politicians are well schooled in parliament, aspiring to hold their own in any heated debate with their opponents. For decades, you have applied the brakes in the EU and watered down proposals to suit you. (Thanks by the way. You have never been an easy partner but the less-than-perfect compromise that is the EU has been improved by your hard work in Brussels.) And your Foreign Office comes better prepared than anyone else with numbers and facts, closely following what is going on in other countries, and sometimes managing diplomatic acrobatics that stun others into a deal. How on earth did Thatcher talk the others into giving one of the richest countries billions of pounds’ worth of a rebate to its EU fee? Permanently!

Amen.

• Brexit Voters Are Not Thick, Not Racist: Just Poor (Spec.)

The most striking thing about Britain’s break with the EU is this: it’s the poor wot done it. Council-estate dwellers, Sun readers, people who didn’t get good GCSE results (which is primarily an indicator of class, not stupidity): they rose up, they tramped to the polling station, and they said no to the EU. It was like a second peasants’ revolt, though no pitchforks this time. The statistics are extraordinary. The well-to-do voted Remain, the down-at-heel demanded to Leave. The Brexiteer/Remainer divide splits almost perfectly, and beautifully, along class lines. Of local authorities that have a high number of manufacturing jobs, a whopping 86% voted Leave. Of those bits of Britain with low manufacturing, only 42% did so.

Of local authorities with average house prices of less than £282,000, 79% voted Leave; where house prices are above that figure, just 28% did so. Of the 240 local authorities that have low education levels — i.e. more than a quarter of adults do not have five A to Cs at GCSE — 83% voted Leave. Then there’s pay, the basic gauge of one’s place in the pecking order: 77% of local authorities in which lots of people earn a low wage (of less than £23,000) voted Leave, compared with only 35% of areas with decent pay packets. It’s this stark: if you do physical labour, live in a modest home and have never darkened the door of a university, you’re far more likely to have said ‘screw you’ to the EU than the bloke in the leafier neighbouring borough who has a nicer existence.

Of course there are discrepancies. The 16 local authorities in Scotland that have high manufacturing levels voted Remain rather than Leave. But for the most part, class was the deciding factor in the vote. This, for me, is the most breathtaking fact: of the 50 areas of Britain that have the highest number of people in social classes D and E – semi-skilled and unskilled workers and unemployed people – only 3 voted Remain. Three. That means 47 very poor areas, in unison, said no to the thing the establishment insisted they should say yes to. Let’s make no bones about this: Britain’s poor and workless have risen up. And in doing so they didn’t just give the EU and its British backers the bloodiest of bloody noses. They also brought crashing down the Blairite myth of a post-class, Third Way Blighty, where the old ideological divide between rich and poor did not exist, since we were all supposed to be ‘stakeholders’ in society.

Amoral.

• German Arms Exports Almost Doubled In 2015 (R.)

German arms exports almost doubled last year to their highest level since the beginning of this century, a German newspaper said on Sunday, citing a report from the Economy Ministry that is due to be presented to the cabinet on Wednesday. Newspaper Welt am Sonntag said the value of individual approvals granted for exporting arms was €7.86 billion last year compared with €3.97 billion worth of arms exports in 2014. It said the Economy Ministry had pointed to special factors that boosted arms exports such as the approval of four tanker aircraft for Britain worth €1.1 billion.

It also pointed to the approval of battle tanks and tank howitzers along with munitions and accompanying vehicles worth €1.6 billion for Qatar – a controversial deal that the report said was approved in 2013 by the previous government. In February German Economy Minister Sigmar Gabriel said preliminary figures showed that Germany had given approval for around €7.5 billion worth of arms shipments in 2015. The Federal Office for Economics and Export Control (Bafa), a subsidiary of the economy ministry, is responsible for licensing arms export deals and Gabriel had promised to take a much more cautious approach to licensing arms exports, especially with regard to the Middle East. Germany is one of the world’s main arms exporters to EU and NATO countries and has been cutting its sales of light weapons outside those states.

This happens everywhere: pensions being moved into risky and/or politically driven ‘assets’. That will be the end of pensions.

• Kaczynski May Divert Polish Pension Cash to State Projects (BBG)

Poland is considering diverting funds from the country’s $35 billion pension industry and piling them into government-backed projects, ruling party leader Jaroslaw Kaczynski said. Poland’s privately run pension funds, set up in 1999 to provide long-term financing for the nation’s companies and make Warsaw into a regional capital hub, own a fifth of the shares traded on the Warsaw stock exchange. The proposed shift of money from the funds could help the eight-month-old government fulfill its election promises, including higher social benefits, cheap housing as well as state-backed investments into industries ranging from ship building to the production of coal and electric buses.

“We must think what to do with the money in the pension funds, there are already proposals,” Kaczynski, who was reappointed as head of the Law & Justice party on Saturday, said at the party’s congress. “That money is now losing its value,” while it could be the “basis for new, important investments, that will help build strong economic policy and support millions of Polish households.” Kaczynski said his party seeks to implement a new “economic order,” one based on redistributing wealth and rejection of free-market reforms. The Law & Justice government imposed the European Union’s highest levies on banks, rolled out unprecedented child benefits and is in a stand-off with the EU over democratic standards, which triggered the country’s first-ever credit rating downgrade and spooked investors.

From May 30. Just loved the Simpsons’ image.

• Europe Puts Greece On Ebay (G.)

In Greece today, government power comes with few trappings. Unable to tap capital markets and dependent wholly on international aid, the debt-stricken country’s senior officials are acrobats in a tightrope act. They are placating creditors, whose demands at times seem insatiable, and citizens, whose shock is never far away. Few know this better than Stergios Pitsiorlas, the head of Greece’s privatisation agency. The agency’s asset portfolio – readily available online – goes some way to explaining why. A catalogue of beaches, islands, boutique hotels, golf courses, Olympic venues and historic properties in Plaka on the slopes beneath the ancient Acropolis, it could be a shopping list for the scenery in a movie – rather than a list of possessions that Athens is under immense pressure to offload.

In the coming months, the list will grow as the contours of a “super fund” – established to expedite the sale of ailing utilities and state-owned properties – take shape. The fund, the product of last week’s agreement to disburse an extra €10.3bn (£7bn) in bailout loans in return for further reforms, takes the divestment of state holdings to new heights. More than 71,000 pieces of public property will be transferred to the umbrella entity in what will amount to the biggest privatisation programme on the continent of Europe in modern times. Seven years into Greece’s seemingly unstoppable financial crisis, lenders are not taking any chances. The EU and IMF, which to date have poured more than €250bn into Greece in the form of three bailouts, have demanded that the organisation operates for 99 years.

Greeks have reacted with anger and derision, viewing the fund as the lowest point in the country’s epic struggle to remain anchored to the eurozone. For many, it is the ultimate depredation, another dent to their dignity at a time of unprecedented unemployment, poverty and suffering. If this is the way, they say, then only the Acropolis will retain a patina of Greekness about it. “There is nothing we are not giving up,” splutters Maria Ethymiou, a small business owner encapsulating the mood. “The Germans are going to take everything. I hear that even beaches are up for sale. Is this the Europe that we want? Is this the united Europe of our dreams?”

Absolutely right and horribly mistaken at the same time. Arthur Grimes is former chief economist of the Reserve Bank.

• How To Fix A Broken Auckland? Crash Home Prices By 40% (Grimes)

In March 2016, the REINZ Auckland median house price reached $820,000. Four years previously, it was $495,000 – that’s a 66% increase in 4 years. What’s more alarming is that in 2012, many people considered that house prices were already getting of reach for most people. That was particularly the case for young people and low income earners. That extraordinary increase – coupled with the already high level in 2012 – was behind my call to a recent Auckland Conversations event that policy-makers should strive to cause a 40% collapse in house prices to bring the median back to around $500,000.

My call for policies to drive a house price collapse is driven by my personal value judgement that it’s great for young families and families on lower incomes, to be able to afford to buy a house if they wish to do so. My concern is not for older, richer families, couples or individuals who already own their own (highly appreciated) house. Others may have a different value judgement to mine – but rarely do they make such a judgement explicit. Or, they may argue that such a collapse would cause financial instability given banks’ loans to mortgage-holders. Luckily, New Zealand’s banks are well-capitalised and stress tests have shown that they can survive a large fall in house prices – mostly because the bulk of their loans pertain to older mortgages with plenty of equity behind them.

For those who share my wish to bring house prices back to a level at which ordinary people can afford, what is to be done? One possibility is to try and stem the demand. Many Aucklanders seem to want their city to remain something like a rural town. In world terms, however, Auckland is a smallish city; while in Australasian terms, it is a mid-sized city sitting between Adelaide and Perth in size, and well behind the big three (Sydney, Melbourne, Brisbane). If New Zealand is to have one city of moderate size where head offices, R&D facilities and other wealth-generating activities reside, Auckland needs to be that city. To curb its growth is tantamount to saying that development should take place in Australia, not here. I favour Auckland being competitive in attracting high-value activities at least within the Australasian context. So I am not in favour of curbing Auckland’s growth.

Debt Rattle February 20 2016

Feb 202016

February 20, 2016 Posted by Raúl Ilargi Meijer at 9:18 am Finance Tagged with: Brexit, China, commodities, crash, EMU, Fannie Mae, FX, oil, refugees, Shale 3 Responses »

Russell Lee “Yreka, California. Magazine stand” 1942

• Commodities’ $3.6 Trillion Black Hole (BBG)

• ‘It’s Going To Be Much Worse Than 2008’ (FS)

• Has The Market Crash Only Just Begun? (ZH)

• The US Economy Has Not Recovered and Will Not Recover (PCR)

• Worldwide M&A Activity Falls 23% (Reuters)

• US Shale Faces March Madness With $1.2 Billion in Interest Due (BBG)

• Moody’s Tallies 28 Downgrades In The Energy Sector Since December (MW)

• Why Oil Rout Is Hurting The Global Economy Instead Of Helping (MW)

• China’s Foreign Exchange Reserves Dwindling Rapidly (NY Times)

• China ‘Removes’ Top Securities Regulator (Reuters)

• Fannie Mae At Risk Of Needing A Bailout (FT)

• Independent Modelling May Show Way Out Of Oz Housing Bubble (SMH)

• Brexit!? France And Germany Can Not Wait (Gefira)

• Tsipras, Merkel, Hollande Agree On Open Borders Until March 6 Summit (Kath.)

• EU Summit On Refugee Crisis Ends In Disarray (FT)

• Two Children Drown Every Day On Average Trying To Reach Europe (UNHCR)

” If the remaining $1.5 trillion is indeed on the balance sheets of financial institutions, that would represent about 1.5% of the total assets of all the world’s publicly traded banks. [..] U.S. subprime mortgages represented less than 1% of listed banks’ assets at the end of 2007.

• Commodities’ $3.6 Trillion Black Hole (BBG)

Markets rallied this week after it became clear that some of the world’s biggest oil producers were going to curb production to stop prices from dropping any further. The news also buoyed other commodities, from coal to iron ore. Then everything dropped on Thursday with oil. Before the global financial crisis, a rise in raw-materials prices used to be bad news for the economy and stocks in general. Since central bank easy-money policies took off, that’s become a thing of the past:

One possible explanation is the level of exposure that banks and investors have to the industry. The 5,000 biggest publicly traded companies tracked by Bloomberg in the iron and steel, metals and mining, and energy sectors have a combined $3.6 trillion in debt, according to their most recent financial reports, double what they had at the end of 2008. Much of the increase is due to money that was borrowed to dig mines and wells whose output, at previous prices, would have easily repaid most maturing bonds and loans. But as commodity prices have tumbled, so has the ability of companies to meet their obligations. The Bloomberg Commodity Index is still only 3.9% higher than a 25-year low hit on Jan. 20. Five years ago, those companies tracked by Bloomberg had more operating income than debt, on average. Now, it would take them more than eight years’ worth of current earnings, without provisioning for interest, taxes, depreciation or amortization, to clear their combined net obligations.

Yield-hungry bond investors sucked up a lot of the debt that was issued and now hold about $2.1 trillion of outstanding notes. They’ll be first to feel the pain considering Standard & Poor’s has already downgraded securities equivalent to 47% of that amount and made some 400 negative-ratings moves in the basic materials and energy sectors over the past 12 months alone. Such scale and depth is reminiscent of the way banks were slaughtered by ratings companies during the 2008 financial crisis. It’s unclear where the other portion of the $3.6 trillion in liabilities lies but probably, most of it is owed to banks. If the remaining $1.5 trillion is indeed on the balance sheets of financial institutions, that would represent about 1.5% of the total assets of all the world’s publicly traded banks. That doesn’t seem very significant, or any cause for concern. But to put it in some context, U.S. subprime mortgages represented less than 1% of listed banks’ assets at the end of 2007.

“You have every major economic zone in the world in big, big trouble including the US and that is why I say this crisis has the potential of becoming much, much worse than the last one.” (h/t Stockman)

• ‘It’s Going To Be Much Worse Than 2008’ (FS)

Bert Dohmen, founder of Dohmen Capital Research, is uber-bearish and believes that it is time for investors to panic (before everyone else does) given a potential collapse of the stock market greater than what we saw in 2008. Here’s what he had to say on Thursday’s podcast: “Over a year ago we said that we are now in a transition year from a bull market to a bear market and from a growing economy to a recession—and this could be a very deep recession… now we see that we are finally there and more and more people are starting to realize it. But I raise the question here, ‘Is it too late to panic?’ Because…the advice given by so many analysts is ‘Don’t panic, don’t sell, don’t panic.’ And I say, ‘Yes, panic!’ And it’s not too late to panic. Panicking at the right time can save you a lot of money…

I predict in this bear market you will see the majority of stocks—majority meaning over 50% of the stocks—selling at $5 or less. Okay, just put that into your portfolio and see if you should be selling some stocks… We here other analysts say, ‘Oh, this is nothing like 2008’ and I agree with that, but I say that because I think it’s going to be much worse. 2008 was really a crisis triggered by the subprime mortgage market and the confetti that the Wall Street firms distributed around the world. They took those subprime mortgages, put them into pools, they sold participations in these pools, in these CDOs…they got a triple-AAA rating on all this garbage and sold it around the world and then they started defaulting. That caused ripples throughout the financial system and a global financial crisis, okay; but it was basically a mortgage crisis—that’s how it started.

Now, look at what we have currently. We have every major economic zone in the world in financial trouble. You have Japan with a debt-to-GDP ratio of 280%. You have China at 300% debt-to-GDP. China has over $34 trillion of debt and the banking system is flooded with bad loans. The best estimate—and this was two years ago I wrote a book called The Coming China Crisis—and I said the best estimate is that they have $11 trillion of bad loans in the banking system. $11 trillion is the annual GDP of China—this is huge! You have Europe, you have Latin America in trouble, you have Russia in big trouble, you have Saudi Arabia even thinking about doing an IPO on their big oil company in order to make up for the shortfall of oil revenues. You have every major economic zone in the world in big, big trouble including the US and that is why I say this crisis has the potential of becoming much, much worse than the last one.”

“..it can’t be done in a non-messy way.”

• Has The Market Crash Only Just Begun? (ZH)

Having successfully called the market’s retreat in the fall of 2015, Universa’s Mark Spitznagel is not taking a victory lap as he warns Bloomberg TV that “the crash has only just begun.” Investors are facing the most binary “let’s make a deal” market in history in Spitznagel’s view: choose Door #1 to bet on Keynesianism, central planners, and monetary interventionism; or Door #2 to bet on free markets and natural price discovery. “There is massive cognitive dissonance here,” Spitznagel explains as history teaches us that door #2 is the right choice… but it’s not possible to do that today as investors have been coerced to choose door #1, but when door #1 is slammed open “we will see that dreaded black swan monster.” That is what is going on right now:

“Investors want to go with The Fed when it’s working – like David Zervos… the problem is, when do you know that it is not working?” “At some point this stops working…” “the market is going through a resolution process, transitioning from the cognitive dissonance of Door #1 to the harsh reality of Door #2… if everyone were to change doors at the same time, that is a market crash… it can’t be done in a non-messy way.”

Must watch reality check behind the smoke and mirrors we call markets… (we note Mark’s excellent analogy starting at around 3:10)

Amen Paul Craig Roberts.

• The US Economy Has Not Recovered and Will Not Recover (PCR)

The US economy died when middle class jobs were offshored and when the financial system was deregulated. Jobs offshoring benefitted Wall Street, corporate executives, and shareholders, because lower labor and compliance costs resulted in higher profits. These profits flowed through to shareholders in the form of capital gains and to executives in the form of “performance bonuses.” Wall Street benefitted from the bull market generated by higher profits. However, jobs offshoring also offshored US GDP and consumer purchasing power. Despite promises of a “New Economy” and better jobs, the replacement jobs have been increasingly part-time, lowly-paid jobs in domestic services, such as retail clerks, waitresses and bartenders.

The offshoring of US manufacturing and professional service jobs to Asia stopped the growth of consumer demand in the US, decimated the middle class, and left insufficient employment for college graduates to be able to service their student loans. The ladders of upward mobility that had made the United States an “opportunity society” were taken down in the interest of higher short-term profits. Without growth in consumer incomes to drive the economy, the Federal Reserve under Alan Greenspan substituted the growth in consumer debt to take the place of the missing growth in consumer income. Under the Greenspan regime, Americans’ stagnant and declining incomes were augmented with the ability to spend on credit. One source of this credit was the rise in housing prices that the Federal Reserves low interest rate policy made possible.

Consumers could refinance their now higher-valued home at lower interest rates and take out the “equity” and spend it. The debt expansion, tied heavily to housing mortgages, came to a halt when the fraud perpetrated by a deregulated financial system crashed the real estate and stock markets. The bailout of the guilty imposed further costs on the very people that the guilty had victimized. Under Fed chairman Bernanke the economy was kept going with Quantitative Easing, a massive increase in the money supply in order to bail out the “banks too big to fail.” Liquidity supplied by the Federal Reserve found its way into stock and bond prices and made those invested in these financial instruments richer.

Corporate executives helped to boost the stock market by using the companies’ profits and by taking out loans in order to buy back the companies’ stocks, thus further expanding debt. Those few benefitting from inflated financial asset prices produced by Quantitative Easing and buy-backs are a much smaller%age of the population than was affected by the Greenspan consumer credit expansion. A relatively few rich people are an insufficient number to drive the economy. The Federal Reserve’s zero interest rate policy was designed to support the balance sheets of the mega-banks and denied Americans interest income on their savings. This policy decreased the incomes of retirees and forced the elderly to reduce their consumption and/or draw down their savings more rapidly, leaving no safety net for heirs.

As trade plummets, so does M&A. So how are they going to pump up stock prices now? All buybacks all the time?

• Worldwide M&A Activity Falls 23% (Reuters)

Worldwide mergers and acquisitions deals have fallen 23% to $336 billion so far this year compared with last year, but cross-border activity by amount targeting U.S.-based companies reached a record high, Thomson Reuters data shows. After hitting a record high by deals value in 2015, worldwide M&A activity has been hurt this year by falling oil prices, worries about slowing growth in China and the health of the financial sector. A trio of deals for U.S. companies topped the list of M&A announced this week, including Chinese company Tianjin Tianhai’s $6.3 billion offer for U.S.-based Ingram Micro, bringing year-to-date China outbound M&A targeting the U.S. to $23.3 billion. China, Ireland and Canada account for 88% of cross-border acquirers in the U.S. so far this year. European M&A activity, which lagged the U.S. in 2015, has hit $92 billion so far this year, up 4% compared with a year ago, after state-owned ChemChina announced it would buy Swiss seeds and pesticides group Syngenta for $43 billion in February.

$9.8 billion for the year. With hedges disappearing.

• US Shale Faces March Madness With $1.2 Billion in Interest Due (BBG)

The U.S. shale industry must come up with $1.2 billion in interest payments by the end of March as $30-a-barrel oil makes it harder for companies to scrape up the cash needed to stay current on their debts. Almost half of the interest is owed by companies with junk-rated credit, according to data compiled by Bloomberg on 61 companies in the Bloomberg Intelligence index of North American independent oil and gas producers. Energy XXI said in a filing Tuesday that it missed an $8.8 million interest payment. The following day, SandRidge announced that it didn’t make a $21.7 million interest payment. “You’ve seen two of these happen in two days, and I wouldn’t be surprised to see more in the next month as these payments come due,” said Jason Wangler at Wunderlich in Houston.

Energy XXI may not be able to meet its commitments in the next 12 months, raising “substantial doubt regarding the Company’s ability to continue as a going concern,” according to a company filing with the U.S. Securities and Exchange Commission. A company representative didn’t return a phone call and e-mail seeking comment. SandRidge “has sufficient liquidity to make these interest payments, but has elected to use the 30-day grace period in connection with its ongoing discussions with stakeholders,” the company said in a statement released Wednesday. “Today’s actions will preserve liquidity and flexibility as we continue to engage in constructive dialogue with our stakeholders,” James Bennett, SandRidge president and chief executive officer, said in the statement.

Oil has tumbled about 70% since a June 2014 peak of $107 a barrel. While prices were high, many drillers spent more money than they earned, plugging the shortfall with debt. That debt has become increasingly burdensome as prices collapse. Since the start of 2015, 48 North American oil and gas producers have declared bankruptcy, owing more than $17 billion, according to law firm Haynes & Boone. Deloitte said this week that bankruptcies in the oil and gas industry could surpass levels seen in the Great Recession.

And with hedges gone, borrowing gets much more expensive at the same time.

• Moody’s Tallies 28 Downgrades In The Energy Sector Since December (MW)

Moody’s Investors Service said Friday it has downgraded a total of 28 energy companies since December, as it continues a global review of the troubled sector. The agency surprised investors in January when it placed the credit ratings of 120 energy companies and 55 mining companies from around the world on review for a possible downgrade. The move came after a deep slump in the price of oil and other commodities, hurt by oversupply and the slowdown in China, a major consumer of natural resources. Today’s tally includes issuers that had already been placed on review in December and surprised some in the market. “Moody’s drops another hammer,” is how analysts at credit research firm CreditSights described the move Friday.

“Over the past several weeks, it has become increasingly clear in our discussions with clients and in hearing from company managements that the agency was taking a very Draconian view of the sector,” they wrote in a note. Moody’s said it downgraded two energy companies by five notches each, sending them deep into speculative-grade, or “junk” territory. Denbury Resources was cut to Caa2 from Ba3, and Whiting Petroleum was cut to Caa1 from Ba2. The agency downgraded seven energy companies by four notches, nine companies by three notches and five companies by two notches. The agency affirmed ratings on another nine companies. It continues to review a total of 137 global issuers for a possible downgrade.

Oil is everywhere in society. And lots of places rely on mostly high, but certainly somewhat stable, prices.

• Why Oil Rout Is Hurting The Global Economy Instead Of Helping (MW)

Saudi Arabia saw Standard & Poor’s cut its credit rating cut two notches this week to A-minus—an unsurprising move that nevertheless helps illustrate why collapsing oil prices haven’t seemed to be the economic boon many had anticipated. In a Thursday note, Carl Weinberg, chief economist at High Frequency Economics, used the downgrade—along with cuts in ratings for Bahrain, Oman and Kazakhstan—to remind clients of his explanation of how falling commodity prices can weigh on global growth. Weinberg has calculated that a $100 drop in the price of a barrel of crude would reduce global income from extraction alone by $3.2 trillion, or about 4.5% of world gross domestic product. That’s to say nothing of the impact on global economic activity from oil sales, transportation and exploration.

The U.S. benchmark settled below $31 a barrel on Thursday, or about $76 below its mid-2014 high after settling as low as $26.21 earlier this month. Brent crude, the global benchmark, ended Thursday at $34.28. It traded around $115 a barrel in mid-2014. It isn’t wrong to assume that those losses would rebound to the benefit of oil consumers, Weinberg says. But the rub lies in the fact that consumers in oil-importing countries may be more likely to stash those savings away while workers in oil-exporting countries would have been more likely to spend that lost income. That means it can take “years or decades” before that savings is translated into spending. He writes:

If purchasing power is transferred from one country to another, and if the countries receiving the windfall have a higher marginal propensity to save than the countries that are paying the transfer, then world GDP will be reduced. So if oil-importing countries tend to have higher incomes and higher savings rates, then world GDP will be reduced. In other words, halving the weekly income of an oil field worker in Nigeria earning near-subsistence wages will likely affect his or her consumption more than reducing the monthly auto fuel bill of a dentist in Belgium by the equivalent amount.

Needless to say, the oil market carnage has translated into real fiscal problems for oil-producing nations. It feeds into ideas that this week’s talk of a production freeze that would include OPEC members and Russia—seemingly shot down by Saudi Arabia after Iran refused to comply—was a sign of desperation. While freezing output at record levels wasn’t seen as likely to do much to alleviate a global glut, oil futures have rallied on the idea that producers are at least talking to each other is an important step. Helima Croft, global head of commodities at RBC Capital Markets, said this week’s talks were “one of the first clear acknowledgments by the oil heavyweights that all isn’t entirely well in the current price environment.”

It might even lay the groundwork for a “more proactive” approach later in the year after OPEC has had a chance to gauge the impact of Iran’s post-sanctions return to the global oil market as well as the trajectory of non-OPEC production, Croft said in a Tuesday note. ”Recently, some leading Saudi experts have suggested that by the June meeting, those variables will be known, and with the supply-and-demand balance expected to be tighter by then, it will be easier for cartel to pull additional barrels if needed in order to accelerate a price recovery,” she wrote.

“Beijing has also instructed bank branches in Hong Kong to limit their lending of renminbi to make it harder for traders and investors to place bets against the Chinese currency in financial markets.”

• China’s Foreign Exchange Reserves Dwindling Rapidly (NY Times)

During China’s biggest boom years, its currency could have risen in value as huge sums in dollars, euros and yen flowed into the country. Instead, Beijing tightly controlled the value of the renminbi, buying up much of the inflows and putting them into its reserves instead. That brought angry accusations from the United States and Europe that it was manipulating its currency to help keep Chinese exports inexpensive and competitive in foreign countries. Now that the renminbi faces pressure to fall, China is spending its reserves in an effort to prop up the currency. But many American lawmakers and presidential candidates still accuse China of keeping its currency artificially weak. The reserves are still considerable, more than double Japan’s, which has the world’s second-largest amount.

The central bank chief, Mr. Zhou, and others have questioned whether the reserves are too big and the money could be better invested if left in the private sector. Mr. Zhou led a move over the last two years to make it easier for Chinese companies and families to invest their own money overseas, only to find in recent months that the outflows have been disconcertingly fast at times. China has taken steps to stem further flows out of the country. This winter the Chinese authorities arrested the leaders of underground banks that were converting billions of renminbi into dollars and euros. They also made it harder for Chinese citizens to use their renminbi to buy insurance policies in dollars. More quietly, Beijing bank regulators have halted sales within China of investment funds known as wealth management products that are denominated in dollars.

Beijing has also instructed bank branches in Hong Kong to limit their lending of renminbi to make it harder for traders and investors to place bets against the Chinese currency in financial markets. “We did receive notice from Beijing in the earlier part of January to be more stringent in approving renminbi-denominated loans,” said a Hong Kong-based China bank executive, who insisted on anonymity for fear of employer retaliation. “It is no fun being caught in the middle, with marketing officers wanting to do more business and the higher-ups telling you to be tougher when reviewing credit proposals.” The erosion of reserves is also politically awkward, given public perception, and Beijing has taken steps aimed directly at shoring them up.

Big deal. He offered to step down last month. Beijing should understand that heavy-handedness does not boost confidence. What does this say about how Chinese securities have been regulated until today? Not much good.

• China ‘Removes’ Top Securities Regulator (Reuters)

China has removed the head of its securities regulator following a turbulent period in the country’s stock markets, appointing a top state banking executive as his replacement, as leaders move to restore confidence in the economy. The announcement on the official Xinhua news agency on Saturday follows a string of assurances from senior leaders following the Lunar New Year holiday that China will underpin its slowing economy and steady its wobbly currency. Xinhua said Xiao Gang, chairman of the China Securities Regulatory Commission (CSRC) since 2013, had been succeeded by Liu Shiyu, chairman of the Agricultural Bank of China Ltd. (AgBank) and a former deputy governor of the central bank. “Xiao’s departure is not a surprise following the recent stock disaster. This is a role vulnerable to public criticism because most Chinese retail investors are destined to lose money in such a market,” said Zhang Kaihua, a fund manager of Nanjing-based hedge fund Huyang Investment.

Xiao and the CSRC came under fire as China’s Shanghai and Shenzhen stock markets slumped as much as 40% in just a few months last summer. In a further blow, a stock index “circuit breaker” introduced in January to limit stock market losses was deactivated after four days of use because it was blamed for exacerbating a sharp selloff. Online media nicknamed Xiao “Mr. Circuit Breaker.” Reuters reported in January that Xiao, 57, had offered to resign following the “circuit-breaker” failure. The CSRC said at the time the information did not conform to the facts. The gyrations in China’s stock markets, an unexpected devaluation of the yuan in August and sharp falls in currency reserves rattled global markets, raising concerns about the health of the economy and Beijing’s ability to steer the country through both a protracted slowdown in growth and a shift away from manufacturing towards services.

They do it on purpose. Set it up so poorly losses are inevitable, and meanwhile use it to keep housing prices propped up. The taxpayer can fork over the difference.

• Fannie Mae At Risk Of Needing A Bailout (FT)

Fannie Mae, the state-sponsored U.S. mortgage backer, is at risk of needing a government bailout that could shake confidence in the housing finance market, senior officials have warned. Fannie Mae’s chief executive and its regulator are sounding the alarm on a decline in the institution’s capital cushion, which is on course to vanish in 2018, when it would have to ask the US Treasury for emergency funds. Their warnings highlight Washington’s inaction on housing policy and its failure to reform the institution, which guarantees nearly $3 trillion of securities and enables 30-year fixed rate loans, following the last financial crisis. Since 2008 Fannie Mae has been in the post-crisis limbo of state-sponsored “conservatorship,” neither fully nationalized nor private, following several unsuccessful attempts by Congress to overhaul it.

Because the government does not let Fannie Mae retain profits, Tim Mayopoulos, its chief executive, told the Financial Times on Friday that its capital buffer, which has dwindled from $30 billion before the crisis to $1.2 billion today, was on track to disappear by January 2018. At that point it would be unable to weather quarterly losses and would need to draw on Treasury funds to avoid being placed into receivership. So far investors who own Fannie Mae’s mortgage-backed securities have not been spooked, Mr. Mayopoulos said, but he added: “We are a major source of liquidity to the mortgage markets and it would be better to avoid testing the market as to what the breaking point is well in advance of us getting to that point.” His comments came the day after Mel Watt, Fannie Mae’s top regulator, thrust the issue into the spotlight.

Addressing both Fannie Mae and its counterpart Freddie Mac, Mr Watt, director of the Federal Housing Finance Agency, said: “The most serious risk and the one that has the most potential for escalating in the future is the enterprises’ lack of capital.” “If investor confidence in enterprise securities went down and liquidity declined as a result, this could have real ramifications on the availability and cost of credit for borrowers,” he said in a speech. Fannie Mae’s inability to retain profits, which must instead be swept into government coffers, also makes it almost impossible for the institution to exit federal control.

Refusing to kill the golden goose.

• Independent Modelling May Show Way Out Of Oz Housing Bubble (SMH)

Independent modelling has dented the Turnbull government’s attack on Labor’s negative gearing policy, finding it will generate billions for the Commonwealth with the vast bulk of revenue coming from just the top 10% of households who negatively gear their properties. The report’s author says the policy would likely slow the pace of house-price growth and boost new housing construction, making it “potentially the biggest housing affordability policy the country has seen.” Prime Minister Malcolm Turnbull launched a scathing attack on Labor’s negative gearing policy on Friday, saying home owners across the country would see the value of the family home “smashed” by the “very blunt, very crude” idea.

In a clear sign his government is preparing to launch a massive scare campaign in the lead-up to the 2016 election over Labor’s proposal, which is designed to save $32 billion over a decade, Mr Turnbull warned the policy was “calculated” to reduce the value of all homes. n”The Labor Party’s negative gearing policy and its wind-back on the capital gains discount – its increase in tax on capital gains – is a very dangerous one. It’s been very, very poorly thought out,” Mr Turnbull said on Friday. “The consequence of it will be a decline in property prices, every home owner in Australia has a lot to fear from Bill Shorten.”

But independent modelling shows there will be “significant” long-term savings from Labor’s proposal to quarantine negative gearing to new housing investments from July 2017, eventually raising between $3.5 to $3.9 billion a year. It also shows Labor’s proposal to cut the capital gains tax discount from 50% to 25% would raise about $2 billion a year in the long term. It shows the vast majority of savings would be at the expense of the top 10% of earners who negatively gear their properties. It also estimates that by restricting negative gearing to new housing, the policy would “increase the share of investment housing devoted to newly built housing” by 10 to 20%. It does not say house prices would drop. “Our modelling shows that negative gearing benefits high-income families with 52.6% of the benefit going to the top 20% of incomes,” the paper says.

EU must turn into EMU. Which nobody wants outside of Brussels and EU capitals. Anyway, the coming economic downturn will turn the EMU into a crumbling ruin.

• Brexit!? France And Germany Can Not Wait (Gefira)

If London decides to leave the European Union nobody in Europe will even notice. Great Britain is an entirely separate country, isolated from the European Union and does not participate in the Euro or Schengen Agreement. The EU as a political platform is disintegrating and becoming more and more irrelevant and will be displaced by the European Monetary Union (EMU). The center of power in Europe has shifted from the EU to the EMU and London politicians are fully aware of it. A Brexit will accelerate the process of political integration of the EMU members and make the EU politically less significant.

Over the past decade we saw:
• Countries can enter the European Union;
• The very core values of the European Union can be set aside as we saw happening in Turkey just before the European Commission announced to restart Turkey’s accession negotiations;
• Trade relations with Great Britain can be suspended without any upheaval, as we saw it concerning non-EU member Russia;
• Borders can be opened and closed as is the case in south-east Europe due to the refugee crisis;
• The Dublin Regulation can be dissolved overnight in the face of the fact that more than a million refugees have entered Europe since the summer of 2015;

All these events hardly changed the life of the Europeans. Being a member of the European Monetary Union is of another magnitude. The Greek euro crisis changed the lives of millions of Greeks. During the tense days in July 2015, when the future of Greece, the EMU and indirect the future of Europe was at stake, Chancellor Merkel and President Hollande held 24 hours emergency meetings as did the Eurogroup. Great Britain and the European Parliament did not play any role whatsoever in these decisive moments for the future of Europe. Cameron was not even invited to share his opinion.

The European Monetary Union is doomed for further political integration; the euro members have no other option but to create a fiscal union and a banking union. Without these two pillars, the whole Euro will fall apart dragging with it the complete Western financial system. A fiscal and banking union means that these countries have to integrate far beyond the European Union framework. Prime Minister Cameron is an annoyance for the already struggling EMU. The European Monetary Union faces extreme difficulties, as on one hand further integration of the Euro countries is inevitable and on the other hand, the widespread support for this integration is eroding. In 2011, French President Sarkozy told Cameron:”We’re sick of you criticizing us and telling us what to do. You say you hate the euro, you didn’t want to join, and now you want to interfere in our meetings”.

The EMU countries face a big political problem that is to be solved. Germany and France will never let countries outside the EMU have a say in their affairs as Cameron proposed. The diplomatic words from French Prime Minister Manuel Valls make it all clear to London as he said; “a Brexit is a shock for Europe but still members can not pick and choose rules that suit them”. The UK leaving the EU will make life easier for Paris and Berlin as Figaro writes: “Brexit? An opportunity for Europe, for France and for Paris”. When the UK is outside the EU Frankfurt and Paris will have more opportunities to crush London as a financial center. London could not miss Merkel’s warning against gains for British banks under ‘Brexit’. If the UK decides to leave, Berlin and Paris will do definitely more than prevent London banks from making any gain; they will do everything to establish Paris or Frankfurt as the financial center of the EMU at London’s expense.

Expect refugee numbers to soar over next 2 weeks.

• Tsipras, Merkel, Hollande Agree On Open Borders Until March 6 Summit (Kath.)

Greek Prime Minister Alexis Tsipras met with German Chancellor Angela Merkel and French President Francois Hollande on the sidelines of a European Union summit in Brussels on Friday. At the meeting, which reportedly lasted for an hour, the three leaders discussed the refugee crisis and the Greek bailout. According to a close Tsipras aide, the Greek premier reiterated that Greece would not accept any action against its interests. The three leaders agreed that the key with regard to decreasing the migration flow was Turkey and that NATO’s involvement was a positive development. Tsipras reportedly received assurances from Germany and France that assistance would be provided if necessary.

A pivotal point in the discussion was that the three leaders stressed that there would be no change in the European borders’ status quo until March 6, when a new summit on the refugee crisis is scheduled to take place, after Turkish PM Ahmet Davutoglu canceled his trip to Brussels following a bomb attack in Ankara which claimed the lives of 28 people on Wednesday. The leaders also agreed that representatives of the institutions should return to Athens as soon as possible in order to complete the review.

Because Brexit allows convenient alternate story line. Much more important than human misery.

• EU Summit On Refugee Crisis Ends In Disarray (FT)

Chancellor Angela Merkel hoped this week’s EU summit on migration would provide at least a show of European unity in the refugee crisis. Instead, it ended in disarray. An Austrian plan to cap the entry of asylum-seekers at just 80 a day left the German leader isolated, Greece threatening to scupper any deal on Brexit in response, and leaders more divided than ever over the EU’s biggest challenge in decades. European leaders, from Berlin to Vienna to Athens, are now improvising and pursuing often contradictory policies. Ms Merkel took even her own officials by surprise when she demanded another summit on the refugee crisis on March 6, just before three key German regional elections on March 13 and before the onset of spring boosts the numbers crossing the Aegean.

Refugee arrivals have picked up, with more than 4,800 arriving in Greece from Turkey on Thursday a rate not far off the autumn peak, when an average of 7,000 people a day were arriving. A backlog is building up along the western Balkans route, where fractious states have had to pull together to cope with the arrival of more than 1m people since the start of 2015. In private, previously optimistic officials are starting to despair, with worries shifting to a potential humanitarian disaster on the bloc s south eastern border. An EU leader said: “It’s a serious situation”. Ms Merkel is still banking on a deal with Ankara to secure the vulnerable Greek-Turkish frontier. As the chancellor said in the early hours on Friday: “It is an absolute given that we must urgently move faster”.

But bad luck waylaid even this plan: Turkish prime minister Ahmet Davutoglu cancelled a planned trip to Brussels to discuss migration following a car-bomb attack in Ankara. After the stormy summit debate, a tired looking Ms Merkel put a brave face on events at the 2.30am press conference, pointing to the efforts made in recent weeks to engage with Turkish president Recep Tayyip Erdogan and boost Greece’s sea defences by deploying Nato ships. Meanwhile, Vienna has been accused of trampling on international law, including the Geneva Convention on refugees, throwing already barely enforced rules on asylum into further doubt. “Conventions are like fairies; if you stop believing in them, they die”, said Elizabeth Collett, a director at the Migration Policy Institute.

However, the Austrian public backs its chancellor Werner Faymann’s migrant cap, with Der Standard newspaper on Friday defending him, saying that Brussels had scored “an own goal” by criticising Vienna. Ms Merkel, who rarely criticises EU partners in public, said that she had been “surprised” by Mr Faymann. Privately, German officials are furious that an old ally has broken ranks. Brussels had desperately attempted to force member states to abide by the rules, with little success. Despite EU member states agreeing to share out 160,000 refugees from Italy and Greece among themselves, fewer than 600 have actually been moved. While some leaders such as Viktor Orban, Hungary’s prime minister, have noisily disagreed, others — such as Madrid and Paris — have simply dragged their feet.

Here’s warning you once again, Brussels, you’re not going to survive this, somone will have your head on a platter for it, and it ain’t going to be silver. Even this UNHCR piece tries to blame the smugglers, but Europe could have provided safe passage all along.

• Two Children Drown Every Day On Average Trying To Reach Europe (UNHCR)

Two children have drowned every day on average since September 2015 trying to cross the eastern Mediterranean to find safety with their families in Europe, UNHCR, the UN Refugee Agency, said today. In a joint statement, issued in Geneva, UNHCR, UNICEF and the IOM warned that the number of child deaths was on the increase and called for more measures to increase safety for those escaping conflict and despair. Since last September, when the tragic death of toddler Aylan Kurdi captured the world’s attention, more than 340 children, many of them babies and toddlers, have drowned in the eastern Mediterranean. The total number of children who have died may be even greater, the sister organisations said, with their bodies lost at sea and never recovered.

One of those statistics was seven-year-old Houda from Afghanistan who went missing in a shipwreck off the Greek island of Kos at the end of January. Her mother, father, two sisters and one of her brothers had left Kabul for Istanbul earlier that month after her father, a middle-ranking police officer, received death threats. In Turkey, the family made a deal with a smuggler who promised them an “extra-safe trip in a spacious large boat” to Greece. To pay for the trip, Houda’s father had sold his house and borrowed money from family and friends. At night in a dark bay as they prepared to leave, they saw the boat was little more than a sailing coffin. It was small, old and massively overcrowded with around 80 passengers covering a few metres of deck. They tried to step back, but were forced by the smuggler to board the boat with no questions.

Smugglers allow no last-minute change of mind. Houda’s sister Aisha and her brother Aziz survived that deadly trip, along with 26 others, but her mother, father and an older sister perished. Their bodies were recovered. Houda’s was never found. Aisha and Aziz, 16 and 15 respectively, had learned to swim in school and that saved them. The stretch of the Aegean Sea between Turkey and Greece is now among the deadliest routes in the world for refugees and migrants. “These tragic deaths in the Mediterranean are unbearable and must stop,” said UN High Commissioner for Refugees Filippo Grandi. “Clearly, more efforts are needed to combat smuggling and trafficking. Also, as many of the children and adults who have died were trying to join relatives in Europe, organising ways for people to travel legally and safely, through resettlement and family reunion programmes for example, should be an absolute priority if we want to reduce the death toll,” he added.

With children now accounting for 36% of those on the move, the chance of them drowning on the Aegean Sea crossing from Turkey to Greece has grown proportionately. During the first six weeks of 2016, 410 people drowned out of the 80,000 people crossing the eastern Mediterranean. This amounts to a 35-fold increase year-on-year from 2015. Aisha and Aziz are now accommodated at a transit facility UNHCR runs with a national NGO offering specialized services to unaccompanied refugee children in Greece until they are assigned to a permanent facility. They wish to reunite as soon as possible with what remains of their family. They have a brother in Germany and hope one day to be able to join him there.

“These children expressed incredible dignity and courage throughout the many challenges they faced after the shipwreck. After already identifying the corpses of his own family members at the Coast Guard, Aziz insisted on seeing more pictures in order to recognize fellow travellers and help in their identification so that their families could also find out what had happened to them. They repeatedly expressed their gratitude towards me and other colleagues for the help we provided,” said Georgios Papadimitriou, a senior protection officer with UNHCR.

Debt Rattle February 2 2016

Feb 022016

February 2, 2016 Posted by Raúl Ilargi Meijer at 9:41 am Finance Tagged with: BP, China, crash, Greece, Hong Kong, Iceland, oil, refugees, Saudi 1 Response »

NPC Minker Motor Co, 14th Street NW, Washington, DC 1922

• The Citi Market-Crash Clock Says It’s 5 Minutes To Midnight (BI)

• Time Running Out For China On Capital Flight, Warns Bank Chief (AEP)

• China Announces 400,000 Steelworker Job Cuts, 3 Million More Expected (WSWS)

• Hong Kong Property Sales Slump To 25 Year Low (BBG)

• Hong Kong Short Sellers Could Find The Weak Link In Real Estate (MW)

• Oil-Price Poker: Why the Saudis Won’t Fold ‘Em (WSJ)

• BP Reports 91% Decline In Fourth-Quarter Earnings (BBG)

• BP Posts Biggest Loss In 20 Years, Axes 7000 Jobs, Shares Lose 5% (Guardian)

• Flood Of Oil Asset Writedowns Across Asia (BBG)

• Iceland Central Bank Preparing New Weapons To Fight Capital Rush (Reuters)

• World Index Of Economic Freedom Tells Us That EU Should Be Broken Up (AEP)

• Ground Control to Captain Zhou Xiaochuan (Jim Kunstler)

• Progress On Migration Could ‘Facilitate’ Greece’s Bailout Review (Kath.)

• Europe’s Refugee Story Has Hardly Begun (Paul Mason)

• Where Are Our Principles? (Boukalas)

Nice concept.

• The Citi Market-Crash Clock Says It’s 5 Minutes To Midnight (BI)

Citi published a scary update to its market clock chart at the end of last month. According to Citi’s analysis, the economy has moved into Phase 4 of the economic cycle, the point at which both credit and equities move into recessionary downward cycles. The US is further along in the clock rotation than the eurozone is. But both are heading into the dreaded Phase 4.

The last time Business Insider looked at the Citi clock, in August 2014, it was still in Phase 3. Here is how the clock works, according to Citi global strategy analyst Robert Buckland:

• Phase 1: This begins at the end of a recession, when interest rates have fallen, money is cheap, but stocks are still battered.

• Phase 2: A bull market sets in during phase 2, when stocks start to rise as easy credit lubricates the economy.

• Phase 3: This is the tricky part. Stocks are still flying high, but credits spreads are widening as investors become increasingly unwilling to finance further risk. Corporate CEOs have now experienced a lengthy period of gains and become risk-happy. (And we’d note that central banks are already talking about tightening credit by raising interest rates.) Bubbles can form in Phase 3, as the high-flying stock market ignores the early warning signs of the deteriorating credit market. Hello, tech startup IPOs!

• Phase 4: Stocks react to the lack of available credit by collapsing, and we see the kinds of things you get in a recession: “This is the classic bear market, when equity and credit prices fall together. It is usually associated with collapsing profits and worsening balance sheets,” Buckland said last year.

“At the moment they won’t impose losses on anybody..”

• Time Running Out For China On Capital Flight, Warns Bank Chief (AEP)

China is rapidly losing the confidence of global lenders and capital outflows risk turning virulent if the current policy paralysis continues, the world’s top banking body has warned. “There is a perception that the renminbi could weaken drastically,” said Charles Collyns, the managing-director of the Institute of International Finance in Washington. Mr Collyns said the authorities have so far failed to articulate a coherent strategy, and there are serious worries that outflows of capital could accelerate, broadening into a flood beyond Beijing’s control. “The Chinese have not been rigorous and they have not been very convincing,” he told The Telegraph. Mr Collyns said China has already allowed the renminbi (yuan) to weaken against the country’s new trade-weighted basket of currencies, stoking suspicions that the recent shift from a crawling dollar-peg to a more opaque foreign-exchange regime is really a cover for devaluation.

The IIF, the chief global body for the banking industry, calculates that capital outflows from China reached $676bn last year. The central bank has been burning through foreign exchange reserves to offset the bleeding and shore up the currency, culminating in intervention of $140bn in December, by some estimates. A big drop in the yuan would send a deflationary shockwave through a fragile world economy already on the cusp of a debt-deflation trap, and do so at a time when the eurozone and Japan are actively driving down their currencies. It would risk a pan-Asian currency storm along the lines of 1998, but on a much bigger scale. China is not just another country. Its fixed capital investment has been running at $5 trillion a year, matching the combined total of North America and Europe.

This has led to excess capacity across swathes of industry that casts a shadow over the entire global system. Chinese officials insist solemnly that the new basket rate is the “decided policy of China” and will be upheld come what may, but concerns are mounting that they may be overwhelmed by market forces. The crucial question is whether the exodus of money is chiefly a one-off move by Chinese companies and investors to pay off dollar debt – and to unwind “carry trade” positions in dollars – as the US Federal Reserve raises interest rates and drains liquidity. If so, the outflows are largely benign and should make the world’s financial system safer. Mark Tinker, head of equities for AXA Framlington in Asia, said the bulk of the outflows are to pay off liabilities. “Chinese corporates are issuing corporate bonds in record quantities and using the capital to restructure their balance sheets, both onshore and offshore. This is not capital flight, it is asset liability matching, both duration and currency. It is a good thing being presented as a bad thing,” he said.

The IIF’s Mr Collyns, a former assistant US Treasury Secretary, is less sanguine. He calculates that total dollar debt in China peaked at roughly $1.5 trillion in late 2014, if all forms of exposure are included. “We think they have paid off a third of this. Half of the outflows are to repay dollar debt,” he said. “What is worrying is that there could be a broadening of the outflows. There has been a surge in ‘errors and emissions’ and this is ominous. A lot of this is a capital outflow below board through inflated trade invoices and other forms of subterfuge, and some of it is ending up in the London property market,” he said.

Mr Collyns said there is no guarantee that the outflows will slow even if all the dollar debt is paid off since Chinese companies may start taking out “long” dollar positions (short renminbi) in the currency markets if they fear that Beijing is losing control. “The Chinese have to restore confidence by pushing through reforms. There must be greater transparency in fiscal and monetary policy, and they must tackle excess industrial capacity. At the moment they won’t impose losses on anybody,” he said.

“..it is estimated that for every job lost in steel, another 3 jobs are lost in related and supporting industries.”

• China Announces 400,000 Steelworker Job Cuts, 3 Million More Expected (WSWS)

An estimated 400,000 steelworkers in China will lose their jobs, in line with plans to slash crude steel production capacity by between 100 million and 150 million tons. The announcement was posted Sunday on government web sites, and reports a decision made by the State Council on January 22 to cut steel, coal and other basic industrial production in response to the global slump and declining growth in China. Li Xinchuang, head of the China Metallurgical Industry Planning and Research Institute, said that the cuts in production would translate into 400,000 steelworkers losing their jobs. “Large-scale redundancies in the steel sector could threaten social stability,” Li Xinchuang told the official Xinhua News Agency Monday.

The State Council did not say when the cuts would be made, but China, which produces half of the world’s steel, has already cut capacity by 90 million tons in response to the growing slowdown in the Chinese and world economy, and is under enormous pressure to do more. Along with the cuts already made, the new cuts will amount to about a 20% reduction in steelmaking capacity. The reductions will have an enormous impact on Chinese workers. In addition to those directly employed in steel making, it is estimated that for every job lost in steel, another 3 jobs are lost in related and supporting industries. Three million workers in the steel, coal, cement, aluminum and glass industries are expected to lose their jobs in the next few years as these industries seek to cut production by 30%.

Many of these employees are first-generation workers who migrated from impoverished rural villages with hopes of a better life. Often their families are dependent upon money these workers are able to send home. As in the United States and every other country, investors responded to the announced job cuts with joy. The stock price of China’s largest steelmaker, Hebei Iron & Steel, rose 4.3% on the news, and the second-biggest, Baoshan Iron & Steel, rose by 5.3%. The stock prices of China’s coal producers also rose on the news of the layoffs. According to the World Steel Association, China’s steel production in 2014 amounted to 822.7 million tons, or 49.4% of the world output of steel. Japan is the second largest steel producer, at 110.7 million tons, followed by the United States at 88.2 million tons and India at 86.5.

Square peg in a round trap.

• Hong Kong Property Sales Slump To 25 Year Low (BBG)

In a city that saw demand propel property prices to a record last year, the estimate that transactions reached a 25 year-low in Hong Kong shows how quickly sentiment has turned. Home prices have slumped almost 10% since September and monthly sales in January fell to the lowest since at least 1991, according to Centaline Property. Amid a spike in flexible mortgage rates this month and anemic demand for new developments, the low transactions volume for January is the latest evidence that prices have further to fall. “The danger is that when sentiment turns negative, it’s very hard to turn things around,” Michael Spencer, Deutsche Bank’s Hong Kong-based Asian chief economist, said in a telephone interview. “Developers realize they missed the best opportunity to sell.”

Hong Kong’s property market has been showing signs of weakening amid a rising supply of homes, higher short-term interest rates and slowing growth in China. Developers have been slow to make outright price cuts to move real estate while would-be buyers are delaying purchases in anticipation of further price declines, creating a standoff that could put more pressure on prices and drag down the city’s economy. Falling property prices may create a negative wealth effect on consumption by prompting buyers to cut back on their purchases, Deutsche Bank’s Spencer said. That could deal a huge blow to an already vulnerable economy where half the population owns homes and consumption accounts for nearly two-thirds of gross domestic product.

Based on housing and economic growth data going back to 2000, Spencer said that consumption growth declined on average by one percentage point for every 10% decline in housing prices. That suggests economic growth in Hong Kong could be halved to 1.1% this year assuming a 20% drop this year, he said. [..] Housing prices are down 9.5% since their September peak, according to the Centaline Property Centa-City Leading Index and may fall another 20% in 2016, according to some estimates. Centaline estimates that transactions reached 3,000 units last month. The previous low was 3,786 units in November 2008, according to a Jan. 31 release.

How can Beijing stop this one?

• Hong Kong Short Sellers Could Find The Weak Link In Real Estate (MW)

Hong Kong’s monetary chief warned Monday that speculators are wasting their time trying to short the Hong Kong dollar. But could Hong Kong’s property market be the government’s weak spot as more hedge funds line up to short China? The Hong Kong dollar has recently come into the spotlight amid reports that U.S. hedge funds are stepping up bets against the Chinese yuan. This comes after capital outflows have extended from China to Hong Kong in recent weeks as investors’ lack of confidence spreads. Since last week, Beijing’s job to hold the line on the yuan became even more difficult,thanks to the Bank of Japan’s surprise move to negative interest rates on a portion of bank reserves, which sent the yen on a renewed downward trend.

The move by the world’s third-largest economy to effectively target its exchange rate came only hours after Premier Li Keqiang pledged that China would not engage in a trade war by depreciating its currency. This is inconvenient as the market already views the yuan as overvalued as shown by accelerating foreign currency outflows. The latest move to weaken the yen just adds to the yuan’s perceived overvaluation. As well as unhelpful currency moves, confidence in the yuan is unlikely to be helped by renewed signs that China’s extended debt binge will be followed by a messy hangover.

New reports have emerged of multiple arrests after the discovery of a 50 billion yuan ponzi scheme, which may have seen 900,000 people lose money in a people-to-people lending scam. This comes on the heels of a 3.9 billion yuan loss at Agricultural Bank of China after staff reportedly devised a scam where bills of exchange were illegally funneled into the stock market before it crashed. The concern is that this is just the tip of the iceberg and that authorities will have a sizable cleanup bill as they deal with the aftermath of the stock market bubble and the loosely regulated shadow-banking sector. Still, for those with a bear view on China’s economy and currency, this is only likely to strengthen the conviction that the yuan will need to go lower.

It’s not tactics, it’s sheer desperation.

• Oil-Price Poker: Why the Saudis Won’t Fold ‘Em (WSJ)

The game being played in the global oil market today bears more than a passing resemblance to poker. Nobody wants to quit while they’re losing. That is important for investors to keep in mind as they ponder what have become almost daily spikes and drops in the price of crude. So, too, is the role of Saudi Arabia in the game. It remains within Saudi Arabia’s ability to foster at least a partial recovery in crude prices on its own. A sharp rally in prices last Thursday morning was based on comments from Russia’s energy minister that the Saudis might get the ball rolling on 5% output cuts. That was quickly refuted and oil gave up much of the gains. All major producers are suffering financially at today’s low prices—while oil has bounced from its sub-$30 nadir of January, it is still down nearly 7% in 2016 and nearly 70% from its 2014 peak.

And Saudi Arabia hasn’t forfeited only a couple of hundred billion dollars and counting in forgone revenue, but also market share. That has mainly been to a relative newcomer, U.S. shale producers. But going forward it may be to an old adversary: Iran. The Shiite powerhouse is ramping up production following the lifting of nuclear sanctions. And its export surge is occurring against the backdrop of ongoing proxy wars in Syria and Yemen. Those make it difficult for Sunni champion Saudi Arabia to take the lead with output cuts. Russia, meanwhile, is pumping the most crude ever, hitting a post-Soviet Union peak. But it may have difficulty maintaining today’s pace given a lack of investment in its aging Siberian fields. The chief executive of Russian oil giant Lukoil predicted that Russian output would drop in 2016 for the first time in several years.

Nervous boardrooms.

• BP Reports 91% Decline In Fourth-Quarter Earnings (BBG)

BP reported a 91% decline in fourth-quarter earnings after average crude oil prices dropped to the lowest in more than a decade. Profit adjusted for one-time items and inventory changes totaled $196 million, the London-based company said Tuesday in a statement. That missed the $814.7 million average estimate of 10 analysts surveyed by Bloomberg, and compares with year-earlier profit of $2.24 billion. Crude’s collapse has driven BP’s market value below $100 billion for the first time since the Gulf of Mexico oil spill in 2010. CEO Bob Dudley has cut billions of dollars of spending, removed thousands of jobs and deferred projects in an attempt to protect the balance sheet. Dudley was one of the first of his peers to start preparing for a prolonged slump and that puts BP in a better position, according to Barclays.

Profit has been lower year-on-year for six consecutive quarters as oil prices tumbled. The average price of benchmark Brent crude slumped 42% in the fourth quarter from a year earlier to $44.69 a barrel, the lowest since 2004. PetroChina said last week it expects 2015 profit to fall at least 60%. Chevron Corp. on Friday reported its first quarterly loss since 2002, while Royal Dutch Shell said last month that fourth-quarter profit is likely to drop at least 42%. The European oil major is scheduled to report full earnings on Thursday. BP started cutting costs and selling assets following the 2010 oil spill. In October, it lowered its 2015 capital-spending forecast to about $19 billion after investing about $23 billion in 2014. The company said then it expects to spend $17 billion to $19 billion a year through 2017.

But: “We’re making good progress in managing and lowering our costs and capital spending, while maintaining safe and reliable operations..”

• BP Posts Biggest Loss In 20 Years, Axes 7000 Jobs, Shares Lose 5% (Guardian)

BP is to cut another 3,000 jobs after reporting a loss of $6.5bn, its worst annual loss in at least 20 years. The latest job cuts are in addition to the 4,000 job cuts already announced. The group also said it has set aside a further $440m (£305m) over the last three months for liabilities associated with the Deepwater Horizon disaster, bringing the total bill so far to $55bn. The latest financial blow from the US Gulf accident nearly six years ago helped to drag BP into a fourth quarter loss of $2.2bn and an annual loss of $6.5bn.. Shares in the group fell by more than 5% as the results underlined the impact of falling oil prices. Despite this, Bob Dudley, BP’s chief executive, blamed low oil prices for the losses but gave an upbeat message saying the company was continuing to move rapidly to “adapt and rebalance” to cope with a changing environment.

“We’re making good progress in managing and lowering our costs and capital spending, while maintaining safe and reliable operations and continuing disciplined investment into the future of our portfolio.” The underlying profit for the last three months, not counting the Gulf and other factors, was down from $2.2bn last time to $196m, much worse than analysts had expected. A consensus among 17 analysts ahead of the results predicted that underlying profits would fall in the final three months to $730m down almost 70% on the same period a year earlier. The biggest problem for BP has come from low crude prices with Brent averaging $44 a barrel across the fourth quarter compared with $77 for the same period 12 months earlier. Brent is now down to just above $33, 42% less than a year ago.

Deflation.

• Flood Of Oil Asset Writedowns Across Asia (BBG)

Investors in Asian oil and gas companies should prepare for a wave of writedowns after a collapse in crude prices. CNOOC, Santos and Inpex are among explorers and producers that may report full-year net losses because of writedowns that may be equal to as much as 10% of book value, analysts at Sanford C. Bernstein in Hong Kong wrote in a report Tuesday. “The future value of oil and gas properties has been significantly reduced,” according to the Bernstein analysts, including Neil Beveridge. “The impairment loss will likely be larger than earnings for the year for some companies, pushing several E&P’s in the region into a loss.” Oil prices have tumbled almost 70% in the past two years, weighing on earnings and forcing explorers to cut spending.

Writedowns at Santos, the Adelaide-based energy company that built the $18.5 billion Gladstone liquefied natural gas project in Australia, may exceed A$3.4 billion ($2.4 billion), according to UBS. Companies including PTT Exploration & Production that have been active in mergers and acquisitions over the past five years also are expected to write down the value of assets, the analysts wrote. Writedowns at Chevron last week pushed the company to its first quarterly loss in 13 years. “Investors should look through impairment losses at the underlying earnings or cash flow for each company,” according to the Bernstein analysts, who expect a recovery in oil in the second half of the year. “Assuming an oil price of greater than $50 a barrel, we see value in the sector.”

Iceland remains a unique and interesting story.

• Iceland Central Bank Preparing New Weapons To Fight Capital Rush (Reuters)

Iceland is drawing up plans to tax foreigners who buy its bonds or to remove certain interest privileges to keep from being overwhelmed by a flood of money drawn by the highest interest rates in western Europe. The country is about to start the tricky process of removing the capital controls that have been in place since what the central bank governor, Mar Gudmundsson, calls “the third biggest bankruptcy in the history of mankind”. With its economy recovering and interest rates at 5.75% compared with virtually zero in the rest of Europe, concern is growing about a destabilizing rush of cash coming in. “The conditions are good for lifting capital controls – they have never been better,” Gudmundsson said in an interview with Reuters. “A current account surplus, high level of reserves, a fiscal surplus and, hopefully, inflation that is still not too high.”

He expects the first stage of that process to come in the next few months, which is to remove restrictions on foreigners’ ‘offshore crown’ funds, which are worth around 14% of Iceland’s annual economic output. Once that it is done, the bank has said, it will use some of its foreign exchange reserves to prevent any bad reaction, before taking the more uncertain step of lifting controls for the wider population. “Possibly in the Autumn or hopefully at least before the end of the year” controls on domestic residents can be lifted, Gudmundsson said. With interest rates higher in Iceland than in virtually every other developed economy in the world, Gudmundsson said, it was unlikely locals would be rushing to take their money out of their bank accounts. It was more likely foreign investors will put more in.

Foreign cash flowing into the country’s banks was one reason Iceland got into so much trouble in the first place. It has introduced a raft of measures to prevent those kind of problems. But now has a different one: so many people are buying its government bonds that interest rate increases are losing their effect. As a result, it is drawing up some counter measures. “We are working on designing certain tools that hopefully we do not need to use often but are there on the shelf if capital inflows into the bond market are making it very difficult for us to run our own monetary policy,” Gudmundsson said. “Theoretically we can do it through a tax, so instead of having an interest rate of say 6%, you are getting an interest rate of 3 or 4% in effective terms.

“The message is that a country can keep most of its economic freedoms within the EU (provided it does not join the euro)..”

• World Index Of Economic Freedom Tells Us That EU Should Be Broken Up (AEP)

Britain has overtaken the United States in the global index of economic freedom, jumping three points to 10th place. What is striking about the 2016 index released today by the Heritage Foundation is the shockingly “unfree” state of the European Union. “Greece has dropped to 138 because it has lost control over its economic levers and monetary policy” What you have is a northern free-zone clustered around the UK, Ireland (7), the Netherlands (16), and the Nordic-Baltic region of the old Hanseatic League, with Switzerland (4) as ever near the top, and safely beyond the clutches of Brussels and regulatory asphyxiation. Or put another way, it is the Protestant alliance that battled reactionary Habsburg absolutism in the late 16th and early 17th Centuries – with Germany split within, torn in both directions.

This Northern grouping is roughly that which would emerge as a closely linked area of prosperity if Britain left the EU. In my view most of these states would also pull out within 10 to 15 years – de facto, if not jure – once Britain had set the ball rolling. Germany would be left trying to manage two deeply troubled blocs with demographic crises: a poor sphere to the East where a fragile rule of law is breaking down in one country after another; and a heavily indebted bloc in the South that is trapped in deflation and labour hysteresis, and has yet to claw back its lost competitiveness within the structure of monetary union. The index shows that EU countries are on average less free than other countries with a comparable per capita income and level of development, an indictment that should give cause for thought. Several of them are disasters.

Greece is ranked “mostly unfree” and is deteriorating five years after it crashed into the arms of the Troika, which claimed to be pushing through reforms to make the country more efficient, transparent, modern and competitive – but was in reality collecting debts for northern creditors under false guise. Greece has dropped to 138 – sandwiched between Bangladesh and Mozambique – precisely because it has lost control over its economic levers and monetary policy. Capital controls have been relaxed somewhat since the banking crisis last summer, yet Greeks are still limited to ATM withdrawals of €420 a week. Italy is only “moderately free” at 86. Heritage says it is plagued by high taxes and rigid labour laws. It has yet to sell off the rump of state-owned industries. Court procedures are “extremely slow”. State contracts are tainted by “high-level corruption scandals” and the “involvement of local organized crime.”

“..this sucker could go down so much further than they imagined, that whatever fortunes they gain from its descent will be foiled by the destruction of the very economic system needed for them to enjoy their gains.”

• Ground Control to Captain Zhou Xiaochuan (Jim Kunstler)

Why would anybody suppose that the Peoples Bank of China might want to tell the truth about anything that was within their power to lie about? Especially the soundness of any loan portfolio vested unto the grasp of its tentacles? Of course, most of what China has done in speeding toward the wall of financial crack-up, it learned from watching US bankers slime their way into Too Big To Fail nirvana — most particularly the array of swindles, dodges, and frauds constructed in the half-light of shadow banking to hedge the sudden, catastrophic appearance of reality-based price discovery. When so many loans end up networked as collateral in some kind of bet against previous bets against other previous bets, you can be sure that cascading contagion will follow.

And so that is exactly what’s happening as China’s rocket ride into Modernity falls back to earth. Like most historical fiascos, it seemed like a good idea at the time: take a nation of about a billion people living in the equivalent of the Twelfth Century, introduce the magic of money printing, spend a gazillion of it on CAT and Kubota earth-moving machines, build the biggest cement industry the world has ever seen, purchase whole factory set-ups, and flood the rest of the world with stuff. Then the trouble starts when you try to defeat the business cycles associated with over-production and saturated markets. Poor China and poor us. Escape velocity has failed. Which raises the question: escape from what, exactly? Answer: the implacable limits of life on earth.

The metaphor for all this, of course, is the old journey-into-space idea, which still persists in the salesmanship of Elon Musk, the ragged remnants of NASA, and even the nightmares of Stephen Hawking. Get off this messed-up home planet and light out of the territories, say Mars. Of course, this is a vain and stupid idea, since we already have a planet engineered to perfection for all the life systems associated with the human project. We just can’t respect its limits. So now, that dynamic duo, Nature and Reality, the actual owners of the planet, have showed up to read the riot act to the renters throwing a wild party.

The fourth and perhaps ultimate financial crisis of the last twenty years begins to express itself in terms that only the raptors and vultures can see from on high. George Soros, Kyle Bass, and the other flocking shadow banking scavengers prepare to short the living shit out of the old Middle Kingdom. The immortal words of G.W. Bush ring in their ears: “This sucker is going down,” and they are sure to win big by betting on the obvious. Trouble is, this sucker could go down so much further than they imagined, that whatever fortunes they gain from its descent will be foiled by the destruction of the very economic system needed for them to enjoy their gains.

Refugees are back on sale.

• Progress On Migration Could ‘Facilitate’ Greece’s Bailout Review (Kath.)

Greek authorities are scrambling to set up screening centers for migrants and refugees as soon as possible as German officials have made it clear to Athens that more efficient management of the refugee crisis could help along creditors’ review of the country’s third bailout, Kathimerini understands. According to sources, German Chancellor Angela Merkel has indicated to Prime Minister Alexis Tsipras that success in tackling the migration crisis could boost the country’s prospects for progress with the review, which Athens hopes could ease the way for debt talks. Combined with a burgeoning debate about Greece’s future in the passport-free Schengen area, the message from Berlin is said to have encouraged action by Greek officials.

A source close to Tsipras who participated in a meeting of government officials on the refugee crisis over the weekend told Kathimerini that the prospect of a “European solution” to the migration crisis and Schengen issue was “becoming increasingly remote” as EU governments face a backlash from their own people about rising migrant arrivals. Tsipras is expected to meet Merkel on the sidelines of a Syria donors’ conference in London on Thursday where Greece’s response to the refugee crisis is likely to be the key topic of conversation. A broader meeting including Turkish Prime Minister Ahmet Davutoglu and key officials from other European countries, among them Austria and the Netherlands, is also probable, sources indicated.

On Monday Tsipras met in Athens with visiting European Home and Migration Commissioner Dimitris Avramopoulos and reassured him that the Defense Ministry, despite initial objections, would actively participate in finding a solution for accommodating thousands of migrants and refugees arriving in Greece. He insisted, however, that others must also share the burden, indicating other European states.

Nice try, but Mason drops the ball somewhere.

• Europe’s Refugee Story Has Hardly Begun (Paul Mason)

The refugee story has hardly begun. There will be, on conservative estimates, another million arriving via Turkey this year and maybe more. The distribution quotas proposed by Germany, and resisted by many states in eastern Europe, are already a fiction and will fade into insignificance as the next wave comes. Germany itself will face critical choices: if you’re suddenly running a budget deficit to meet the needs of asylum seekers, how do you justify not spending on the infrastructure that s supposed to serve German citizens, which has crumbled through underinvestment in the Angela Merkel era? But these problems are sideshows compared with the big, existential issues that a second summer of uncontrolled migration into Greece would bring.

[..] Greece is not going to push back or sink inflatables containing refugees. However many compromises Alexis Tsipras s government made over austerity, it is full of human rights lawyers, criminology professors and people who spent their lives fighting fascism. There is outrage at Europe s demands inside the Greek political establishment, ranging well beyond the radical-left party Syriza and its small nationalist coalition partner. Eastern Europe is, by and large, going to let the refugees go to hell. There is very little compassion in the media coverage of the refugees east of the former Iron Curtain. Poland, Hungary and Slovakia have swung towards populist nationalism. While there are tens of millions of liberal-minded, largely young people who are prepared to show compassion and adhere to international obligations, they do not control east Europe’s governments.

As for Turkey, it has, to date, taken no visibly stronger measures to keep Syrian refugees inside its own borders and prevent the deadly traffic across the sea to Greece. For a state that can arrest its own newspaper editors at will and bomb its own cities, that demonstrates a clear set of priorities. So there are only two variables: what the EU does next and what the European peoples do. If Germany has given up trying to organise the orderly distribution of refugees inside the EU, then free movement itself is on borrowed time. Everybody understands this, except the political and media classes who have to maintain the fiction that everything is fine. Germany had, by December, registered just over half the 900,000 asylum claims it is facing. The hard-right AfD party has sprung from sixth to third in the polls. Angela Merkel seems frozen in the headlights of the oncoming train.

Which leaves the people. Quietly, and without rhetoric, one of the most spectacular, cross-border solidarity movements ever formed has emerged to help the refugees. Churches, NGOs, communities, police forces and social services – plus ordinary people with no big agenda – just got on and saved people, moved them along, gave them water, food and clothing, and are right now helping them to settle in.

Solid.

• Where Are Our Principles? (Boukalas)

When neo-Nazis are seen heading out in force on a new kind of safari, hunting down and assaulting refugees and migrants, preferably young Africans, in Sweden, a country regarded as a paradigm of prosperity and openness, Europe has a duty to have a good think about what it represents – all of Europe, together, honestly and methodically, not alone, hypocritically and intermittently. When in Germany, which has seen successive neo-Nazi attacks against refugee camps, the head of the anti-immigration Alternative for Germany party – polling at 13% – demands that refugees be stopped from entering the country by use of force if necessary, we should all be afraid. We should be afraid that not enough people in Europe would mind if Greece were to allow migrant boats to sink, as some of the harder cynics have suggested with a hint of blackmail, even though their problem would not be solved by 244 drowned in January alone.

When European states and regions are caught up in competing over who will further reduce the amount of money refugees are allowed to keep on them (from what wasn’t lost to the extortionate greed of people smugglers and thieves en route) and seize what’s left over so that the beleaguered Asians and African don’t get too comfortable, then “something is rotten in the state of Denmark.” Denmark here extends to various parts of Europe: to Denmark proper, where the maximum “fortune” a refugee is allowed has been set at €1,340, to Switzerland, where it’s €915, Bavaria, €750, and Baden-Wurttemberg, where it’s just €350. Many already regard this as too much. When in Italy noble merchants are selling “boy and girl refugee costumes” for the Carnival, then every European, not just the Italians, ought to wonder how much longer we will allow our masks to present us as sympathetic champions of a culture that is about solidarity and hospitality.

When countries of the European Union intervene in a non-member state (our neighbor the Former Yugoslav Republic of Macedonia) wielding a whip in one hand and a carrot of monetary reward and diplomatic support in the other in order to force it to control the flow of migrants and refugees to Northern Europe at the pace the north sees fit, then many of the principles touted as being inviolate in the EU are exposed as a myth: solidarity between partners and avoidance of unilateral decisions and intervention in third countries. What solidarity is there to talk about when instead of admitting that the refugee crisis is a huge added weight on the exhausted shoulders of Greece and, looking for ways to ease the burden, many Europeans are using it as another opportunity to blackmail the country? Even if Greece has delayed in setting up “hot spots,” who gave the tough guys of Europe the moral authority to threaten it with drowning?

Debt Rattle January 18 2016

Jan 182016

January 18, 2016 Posted by Raúl Ilargi Meijer at 9:24 am Finance Tagged with: 1%, China, crash, housing, Iran, oil, pollution, refugees, Saudi, slump, stocks, VW 2 Responses »

DPC Chicago & Alton Railroad, Joliet, Illinois 1901

• Asian Shares Drop To 2011 Levels As Oil Slump Intensifies (Reuters)

• Oil Slides To Lowest Since 2003 As Iran Sanctions Are Lifted (Reuters)

• Hedge Funds Are Betting The Commodities Collapse Isn’t Over Yet (BBG)

• Gulf Stock Crash Wipes $38.5 Billion Off Markets As Iran Enters Oil War (Tel.)

• Richest 1% Now Wealthier Than The Rest Of Humanity Combined (BBG)

• Stock Market Crash Could Burst UK Property Bubble (Express)

• It’s Not Time For Britain To Be ‘Intensely Relaxed’ Over Household Debt (Ind.)

• China’s Securities Czar Casts Wide Blame for Market Turmoil (WSJ)

• China To Clean-up ‘Zombie’ Companies By 2020 (Reuters)

• The Problem With Getting Money Out Of China (China Law Blog)

• Gloom Gathers Over The Challenges That Germany Faces (FT)

• “Everything Has Come to a Standstill”: Politics Hits Business in Spain (WS)

• Canadian Officials Under Pressure to Stimulate Economy (WSJ)

• Shock Figures To Reveal Deadly Toll Of Global Air Pollution (Observer)

• False Emissions Reporting Undermines China’s Pollution Fight (Reuters)

• Weak EU Tests For Diesel Emissions Are ‘Illegal’ (Guardian)

• 66 Institutional Investors To Sue Volkswagen In Germany (FT)

• Obama Declares Emergency In Flint, But Not Disaster (DFP)

• When Peace Breaks Out With Iran… (Ron Paul)

• Syria 4 Years On: Shocking Images Of A Post-US-Intervention Nation (ZH)

• The Economics Of The Refugee Crisis Lay Bare Our Moral Bankruptcy (Guardian)

China contagion spreads.

• Asian Shares Drop To 2011 Levels As Oil Slump Intensifies (Reuters)

Asian shares slid to their lowest levels since 2011 on Monday after weak U.S. economic data and a massive fall in oil prices stoked further worries about a global economic downturn. Spreadbetters expected a subdued open for European shares, forecasting London’s FTSE to open modestly higher while seeing Germany’s DAX and France’s CAC to start flat-to-slightly-weaker. Crude prices faced fresh pressure after international sanctions against Iran were lifted over the weekend, allowing Tehran to return to an already over-supplied oil market. Brent oil futures fell below $28 per barrel touching their lowest level since 2003. “Iran is now free to sell as much oil as it wants to whomever it likes at whatever price it can get,” said Richard Nephew at Columbia University’s Center on Global Energy Policy.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell to its lowest since October 2011 and was last down 0.5%. Japan’s Nikkei tumbled as much as 2.8% to a one-year low. It has lost 20% from its peak hit in June, meeting a common definition of a bear market. The volatile Shanghai Composite index initially pierced through intraday lows last seen in August before paring the losses and was last up 1%. It was still down 17% this month. On Wall Street, S&P 500 hit a 15-month low on Friday, ahead of Monday’s market holiday. “The fact that U.S. and European shares fell below their August lows, failing to sustain their rebound, is significant,” said Chotaro Morita at SMBC Nikko Securities.

They knew Iran was coming, so that’s not the main driver.

• Oil Slides To Lowest Since 2003 As Iran Sanctions Are Lifted (Reuters)

Oil prices hit their lowest since 2003 in early trading on Monday, as the market braced for a jump in Iranian exports after the lifting of sanctions against the country at the weekend. On Saturday, the U.N. nuclear watchdog said Tehran had met its commitments to curtail its nuclear program, and the United States immediately revoked sanctions that had slashed the OPEC member’s oil exports by around 2 million barrels per day (bpd) since their pre-sanctions 2011 peak to little more than 1 million bpd. “Iran is now free to sell as much oil as it wants to whomever it likes at whatever price it can get,” said Richard Nephew, program director for Economic Statecraft, Sanctions and Energy Markets at Columbia University’s Center on Global Energy Policy.

Iran is ready to increase its crude exports by 500,000 bpd, its deputy oil minister said on Sunday. International Brent crude fell to $27.67 a barrel early on Monday, its lowest since 2003, before recovering to $28.25, still down more than 2% from their settlement on Friday. U.S. crude was down 58 cents at $28.84 a barrel after hitting a 2003 low of $28.36 earlier in the session. “The lifting of sanctions on Iran should see further downward pressure on oil and commodities more broadly in the short term,” ANZ said on Monday. “Iran’s likely strategy in offering discounts to entice customers could see further downward pressure on prices in the near term,” it added. Iran’s potential new exports come at a time when global markets are already reeling from a chronic oversupply as producers pump a million barrels or more of crude every day in excess of demand, pulling down crude prices by over 75% since mid-2014 and by over a quarter since the start of 2016.

And although analysts expect Iran to take some time before being able to fully revive its export infrastructure, suffering from years of underinvestment during the sanctions, it does have at least a dozen Very Large Crude Carrier super-tankers filled and in place to sell into the market. The oil price rout is also hurting stock markets, with Asian shares set to slide to near their 2011 troughs on Monday, stoking further worries about a global economic downturn. “Growth keeps slowing … Lower commodity prices, including oil, partly reflect weakening demand itself. In addition, the downturn in mining capex and the declining income of commodity producers is weighing on exports from Asia,” said Frederic Neumann at HSBC, Hong Kong.

Must be a crowded trade.

• Hedge Funds Are Betting The Commodities Collapse Isn’t Over Yet (BBG)

The commodity meltdown that pushed oil to a 12-year low and copper to the cheapest since 2009 isn’t over yet. At least, that’s how hedge funds see it. Money managers increased their combined net-bearish position across 18 raw materials to the biggest ever, doubling the negative bets in just two weeks. A measure of returns on commodities last week slid to the lowest in at least 25 years. Metals, crops and energy futures all slumped amid supply gluts and an anemic outlook for the global economy. Market turmoil in China, the biggest commodity buyer, is adding to worries over consumption. A stronger dollar is also eroding the appeal of raw materials as alternative investments. While Goldman Sachs predicts that the prolonged slump will start to spur more supply cuts, the bank doesn’t expect prices to rebound until later this year.

“There’s fear in the marketplace,” said Lara Magnusen at Altegris Investments. People are “very concerned about slower economic growth and what’s going on with China and the contagion effect,” she said. With a strong U.S. dollar and the Federal Reserve considering more interest-rate increases, “there’s not a lot of places where you can put your money right now,” she said. “Short commodities is a pretty good place.” The net-short position across 18 U.S.-traded commodities expanded to 202,534 futures and options as of Jan. 12, according to U.S. Commodity Futures Trading Commission figures published three days later. That’s the largest since the government data begins in 2006 and compares with 164,203 contracts a week earlier.

Add that to the low oil price losses.

• Gulf Stock Crash Wipes $38.5 Billion Off Markets As Iran Enters Oil War (Tel.)

Stock markets across the Middle East saw more than £27bn ($38.5 billion) wiped off their value as the lifting of economic sanctions against Iran threatened to unleash a fresh wave of oil onto global markets that are already drowning in excess supply. All seven stock markets in Gulf states tumbled as panic gripped traders. Dubai’s DFM General Index closed down 4.65pc to 2,684.9, while Saudi Arabia’s Tadawul All Share Index, the largest Arab market, collapsed by 7pc intraday, before recovering marginally to end down 5.44pc at 5,520.41, its lowest level in almost five years. The Qatar stock exchange, fell 7.2pc to close at 8,527.75, and the Abu Dhabi Securities Exchange shed 4.24pc to finish at 3,787.4. The Kuwait market returned to levels not seen since May 2004 as it slid 3.2pc lower, while smaller markets in Oman and Bahrain dropped 3.2pc and 0.4pc respectively.

The Iranian stock index gained 1pc, making it one of the best performing markets in the world with gains of 6pc since the start of the year. The dramatic moves came following the historic report from the UN nuclear watchdog, which showed that Iran has met its obligations under the nuclear deal, clearing the way for the lifting of sanctions. The Vienna-based International Atomic Energy Agency issued the landmark document late on Saturday evening, sparking mayhem as markets opened on Sunday, the first day of trading in the Middle East. The stock markets in Dubai and Saudi Arabia have been plunged into a painful bear market, losing 42pc and 38pc respectively, ever since Saudi Arabia decided to ramp up oil production in November 2014.

Oil prices fell below $30 for the third time last week as traders prepared for the prospect of Iranian oil flooding global markets. The Islamic Republic has vowed to return its oil production to pre-sanction levels, with estimates suggesting Tehran will add a further 500,000 barrels a day (b/pd) to the world’s bloated stockpiles within weeks. Fears that the Islamic Republic could quickly ramp up production sent Brent crude falling by 3.3pc to $29.43 on Friday – matching lows last seen in 2004. West Texas Intermediate also slipped back to $29.60, a decline of 4.5pc.

“..the wealth of the poorest 50% dropped by 41% between 2010 and 2015..”

• Richest 1% Now Wealthier Than The Rest Of Humanity Combined (BBG)

The richest 1% is now wealthier than the rest of humanity combined, according to Oxfam, which called on governments to intensify efforts to reduce such inequality. In a report published on the eve of the World Economic Forum’s annual meeting in Davos, Switzerland, the anti-poverty charity cited data from Credit Suisse in declaring the most affluent controlled most of the world’s wealth in 2015. That’s a year earlier than it had anticipated. Oxfam also calculated that 62 individuals had the same wealth as 3.5 billion people, the bottom half of the global population, compared with 388 individuals five years earlier. The wealth of the most affluent rose 44% since 2010 to $1.76 trillion, while the wealth of the bottom half fell 41% or just over $1 trillion.

The charity used the statistics to argue that growing inequality poses a threat to economic expansion and social cohesion. Those risks have already been noted in countries from the U.S. to Spain, where voters are increasingly backing populist political candidates, while it’s sown tensions on the streets of Latin America and the Middle East. “It is simply unacceptable that the poorest half of the world’s population owns no more than a few dozen super-rich people who could fit onto one bus,” said Winnie Byanima, executive director of Oxfam International. “World leaders’ concern about the escalating inequality crisis has so far not translated into concrete action.” Oxfam said governments should take steps to reduce the polarization, estimating tax havens help the rich to hide $7.6 trillion. Politicians should agree on a global approach to ending the practice of using offshore accounts, it said.

Or the other way around?

• Stock Market Crash Could Burst UK Property Bubble (Express)

Property seems to be immune from the fear now gripping the global economy, but that may not always be the case. If the share price meltdown continues and the global economy slows, eventually the UK’s house of cards may collapse as well. Chinese stock markets have plunged since the start of the year, with the FTSE 100 falling 6.5% so far. There seems no end in sight to the share sell-off, but still property powers on. The latest figures from Halifax show that property prices in the final quarter of 2015 were almost 10% higher than one year earlier. The growth seems unstoppable, with new figures from estate agency Your Move showing the average property in England and Wales has leapt £18,000 in the last year to £292,077, a growth rate of an incredible £1,500 a month.

Many Britons suspect the property market is overvalued, with the average UK home now costing more than 10 times earnings. Given that most lenders will not grant mortgages worth more than three or four times your income, this looks unsustainable. Yet few property experts are willing to say openly that the market is in peril. Most remain deaf to warnings of contagion from the share price rout, even though it has scared the life out of some investment experts. Last week, Andrew Roberts, research chief at Royal Bank of Scotland, warned investors to “sell everything except high-quality bonds” because the stock market and oil price crash has only just begun. He is worried about the growing public and company debt burden, and British households have plenty to worry about on that score.

All-time low interest rates have fuelled a borrowing spree that has seen Britons rack up a mind-boggling debt of £40billion. The latest figures show family that household debt rose by 42% in the last six months alone, according to research from Aviva. The average family now owes £13,520 on credit cards, personal loans and overdrafts, up from £9,520 last summer. Throw in a 20% increase in average mortgage debt to £62,739 over five years and households are more vulnerable than ever. Worse, family incomes are falling and many have lost the savings habit as their finances are stretched.

The entire issue is hugely distorted by insanely elevated home prices. Take those out, and you see how bad things truly are.

• It’s Not Time For Britain To Be ‘Intensely Relaxed’ Over Household Debt (Ind.)

There seem to be three main arguments against the idea we should be concerned about household leverage. The first is that the official statistics belie the claim that the aggregate debt burden of UK households is rising and the recovery has been fuelled by borrowing. Second, we’re told UK household debt is mainly mortgage debt and reflects high domestic house prices. For each of these liabilities there is an asset, so we must look at the overall balance sheets of households, which are healthy. Plus, with interest rates still on the floor, aggregate debt-servicing costs are comfortable. Finally, we’re assured that as long as the supply of new homes remains severely restricted, high debt presents no serious financial threat because house prices are pretty unlikely to collapse.

To illustrate this final point, it is pointed out that the banks failed in 2008 because of their dodgy overseas lending, not because of their dodgy UK mortgage books. There are problems with all three arguments. Let’s take them in turn. Measured as a share of household incomes, it is true that household debt has not actually been growing. Since 2008, when the debt to income ratio peaked at 170%, households have been deleveraging. Yet at 140% of gross income, debt levels are still very high, both by historic and international standards. In the G7 only Canada has a higher household leverage ratio today. There is potential fragility here if another economic shock were to hit, as the Bank of England itself admits. To point to the UK’s deleveraging in recent years as a reason for relief is akin to a mountaineer getting halfway down Everest in a vicious storm and saying “job done”.

Debt has not been rising as a share of income but the aggregate household savings ratio, excluding pension rights, has fallen from a peak of 6% in 2010 to less than zero today. That change in household behaviour has certainly helped the economy recover. So not a recovery fuelled by debt, but a recovery fuelled by a lower savings ratio. Incidentally, there was no such savings collapse envisaged by the Office for Budget Responsibility (OBR) in 2010, reflecting how unbalanced the recovery has been relative to hopes six years ago. Moreover, the OBR today predicts that the debt to income ratio is going to race back close to pre-crisis levels over the coming five years. Why? Because the Treasury’s official forecaster expects house prices to rise faster than incomes and for people to keep buying houses. The OBR is very far from being omniscient. But that is surely one of the more plausible assumptions from Robert Chote and his team, given the dismal evolution of the housing market in recent years and decades.

Lemme guess: anyone but Xi?!

• China’s Securities Czar Casts Wide Blame for Market Turmoil (WSJ)

What’s wrong with China’s stock market? Just about everything, according to a statement from Xiao Gang, the country’s chief securities regulator, delivered at a national meeting of Chinese securities officials and posted on his agency’s website Saturday. In the statement, Mr. Xiao defended his handling of successive market meltdowns, blaming the “abnormal volatility” on “an immature market, inexperienced investors, imperfect trading system, flawed market mechanisms and inappropriate supervision systems.” The turmoil in China’s stock market—which on Friday entered “bear” territory of 20% below its recent peak—has cast a harsh light on the performance of Mr. Xiao, 57, a former central banker and chairman of the Bank of China before he was appointed chairman of the China Securities Regulatory Commission in 2013.

During the summer, when Chinese stocks tumbled more than 40%, Mr. Xiao oversaw a slew of measures to prop up the market that many investors criticized as heavy-handed and interventionist. Those ranged from banning certain kinds of short selling and share sales to approving the purchase of hundreds of billions of yuan in equities by government-affiliated funds. Two weeks ago, Mr. Xiao was forced to abandon a circuit-breaker mechanism he’d championed as a way to halt big trading swings, when it instead ended up fanning panic selling. In his Saturday statement, Mr. Xiao defended his efforts, saying they were a successful attempt to stave off a bigger crisis.

“The response to the abnormal volatility in the stock market was essentially crisis management,” Mr. Xiao said. Various departments “addressed market dysfunctions and prevented a potential systemic risk through joint efforts.” Mr. Xiao did admit there had been “supervision and management loopholes” and he promised to crack down on illegal activities, increase market transparency and better educate investors, although he didn’t outline specific proposals. He briefly touched on the detention of some top-ranking officials in the securities industry in relation to a police investigation on alleged violation of rules, but without naming his own agency. Mr. Xiao chastised listed companies for “exaggerated storytelling” to hype up stock prices, and urged market participants to cultivate a stronger sense of social responsibility and to “huddle together for warmth”—or cooperate in the greater interest—when times are bad.

They want to take five years to do what should have been done already. Dangerous.

• China To Clean-up ‘Zombie’ Companies By 2020 (Reuters)

China’s top state-owned asset administrator has vowed to clean-up the country’s so-called “zombie” industrial companies by 2020, the official Xinhua News Agency has reported. Zhang Yi, Chairman of the State-owned Assets Supervision and Administration Commission (SASAC), told a central and local enterprise work conference convened at the weekend that the agency will “basically” resolve the problem of unproductive “zombie” firms over the next three years. Dealing with “zombie companies” is very difficult, Zhang said, according to the report, but “officials need to… use today’s ‘small tremors’ to prevent a future earthquake.” The central government last September rolled out the most ambitious reform program in two decades to resolve the problems at its hugely inefficient public sector companies, encouraging the greater use of “mixed ownership” while promoting more mergers to create globally-competitive conglomerates.

Zhang Xiwu, deputy head of SASAC, told a news briefing at the time that China would work to reorganize state firms to centralize state-owned capital in key industries, while restricting investment in industries not in line with national policies. Zhang said that China would use stock exchanges, property exchanges and other capital markets to sell the assets of low performing state owned enterprises. Profits at China’s state firms dipped 9.5% in the first 11 months of 2015 from a year earlier, led by profits at SASAC-controlled firms, which fell 10.4%, the Ministry of Finance said in December. On Friday, SASAC told state media that the steep decline in profits for the sector had been curtailed, and that 99 of the 106 SASAC-controlled enterprise groups achieved profitability in 2015.

Interesting angle via ZH.

• The Problem With Getting Money Out Of China (China Law Blog)

Regular readers of our blog probably know that our basic mantra about getting money out of China is that if you have consistently follow all of China’s laws, it ought to be no problem. Not true lately. In the last week or so, our China lawyers have probably received more “money problem” calls than in the year before that. And unlike most of these sorts of calls, the problems are brand new to us. It has reached the point that yesterday I told an American company (waiting for a large sum in investment funds to arrive from China) that two weeks ago I would have quickly told him that the Chinese company’s excuse for being unable to send the money was a ruse, but with all that has been going on lately, I have no idea whether that is the case or not. So what has been going on lately? Well if there is a common theme, it is that China banks seem to be doing whatever they can to avoid paying anyone in dollars. We are hearing the following:

1. Chinese investors that have secured all necessary approvals to invest in American companies are not being allowed to actually make that investment. I mentioned this to a China attorney friend who says he has been hearing the same thing. Never heard this one until this month.

2. Chinese citizens who are supposed to be allowed to send up to $50,000 a year out of China, pretty much no questions asked, are not getting that money sent. I feel like every realtor in the United States has called us on this one. The Wall Street Journal wrote on this yesterday. Never heard this one until this month.

3. Money will not be sent to certain countries deemed at high risk for fake transactions unless there is conclusive proof that the transaction is real — in other words a lot more proof than required months ago. We heard this one last week regarding transactions with Indonesia, from a client with a subsidiary there. Never heard this one until this month.

4. Money will not be sent for certain types of transactions, especially services, which are often used to disguise moving money out of China illegally. This is not exactly new, but it appears China is cracking down on this.

5. Get this one: Money will not be sent to any company on a services transaction unless that company can show that it does not have any Chinese owners. The alleged purpose behind this “rule” is again to prevent the sort of transactions ordinarily used to illegally move money out of China. Never heard this one until this month.

What are you seeing out there? No really, what are you seeing out there?

You just wait till the German economy starts stumbling.

• Gloom Gathers Over The Challenges That Germany Faces (FT)

This is going to be a difficult year for Germany, one in which the policies of the past may turn out to be unsustainable. The most unsustainable of all was Angela Merkel’s invitation to open the doors to Syrian refugees without limitation. The German chancellor must either have misjudged the effect or acted recklessly — or both. A few months and 1m refugees later, the discontent is growing inside the Christian Democratic Union, her party, and in the country at large. Gerhard Schröder, her Social Democratic predecessor, last week came out against the policy with exactly the same arguments as the right-wingers in Ms Merkel’s own party: Germany cannot absorb such a large number. More than 1m refugees arrived in the country in 2015. It could be twice as many this year and the same again next — more if you include family members who will eventually follow.

It is tempting to think of refugees and migrants as a new source of labour. But in this case this just is not true, at least not for now. The majority of those who arrive in Germany lack the skills needed in the local labour market. They will enter the low wage sector of the economy, and drive down wages, producing another deflationary shock. This is the last thing Germany and the eurozone need right now. I expect that this policy will change at some point this year. What I do not see, however, is a successful political coup against Ms Merkel from inside her own party. What protects her is the grand coalition with the Christian Social Union and the SPD. There is no majority to the right of her, or to the left for that matter.

The second challenge is the economic downturn in emerging markets. There are few large countries as dependent on the global economy as Germany, and few where there is so little awareness of that fact, at least in public debate. Germany has a current account surplus of 8% of gross domestic product. A global downturn tends to affect German industrial companies with a delay of one or two years because many operate in sectors like plant and machinery where multiyear contracts are customary. But eventually, the German and the global business cycles begin to synchronise once more. This will be the year when that starts to happen.

The third challenge for Germany in 2016 is the fallout from the Volkswagen emissions scandal. This could be the single biggest shock of all because Germany has been over-reliant on the car industry for far too long. Last week, suspicion fell on Renault, when the offices of the French carmaker were raided by the authorities. This is not the crisis of a single company, therefore, but of a whole industry. Nor is it just a German problem; it is a pan-European one. It appears that VW behaved more recklessly than the others, and it will pay a heavy price for its behaviour. Whether legal action in the US and in Germany will weaken VW or force it into outright bankruptcy is almost irrelevant, given the bigger picture.

Political capital rules the EU.

• “Everything Has Come to a Standstill”: Politics Hits Business in Spain (WS)

On Friday, Spain’s benchmark stock index, the Ibex 35, plumbed depths it had not seen since the worst days of 2013, the year that the country’s economy began its “miraculous” recovery. Of the 35 companies listed on the index, 15 (or 40%) are – to quote El Economista – “against the ropes,” having lost over a third of their stock value in the last 9 months. Only one of the 35 companies — the technology firm Indra — is still green for 2016. This doesn’t make Spain much different from other countries right now, what with financial markets sinking in synchronized fashion all over the world. What does make Spain different is that it has no elected government to try to navigate the country though these testing times, or at least take the blame for the pain.

Inevitable comparisons have been drawn with Belgium, which between 2011 and 2012 endured 541 days of government-free living. However, Spain is not Belgium: its democratic system of governance is younger, less firmly rooted, and more fragile, and its civil service is more politically compromised. To make matters worse, Spain’s richest region, Catalonia, which accounts for 20% of the country’s economy, bucked expectations last week by cobbling together a last-minute coalition government that seems intent on declaring independence within the next 15 months. Meanwhile, business confidence, the cornerstone of any economic recovery, is beginning to crumble. Spain’s leading index of business confidence, ICEA, just registered a drop of 1.3%, breaking a straight eleven-quarter run of positive results.

For the first time in almost three years more business leaders are pessimistic than optimistic about the economy’s outlook. This should come as little surprise in a country where unemployment is still firmly on the wrong side of the 20% mark, over a quarter of the new jobs created last year had a contract lasting less than one week, and public debt is higher than it’s ever been. And now that there’s no elected government in office, businesses that depend on public sector contracts, including the country’s heavily indebted construction and infrastructure giants, face weeks or perhaps even months of inertia. “Everything has come to a standstill,” a contact in a Madrid-based research consultancy told me. “No decisions are being made, no funds are being released. It’s a vacuum.”

For the moment, the political backdrop has had limited impact on the price of Spanish government debt. The 10-year yield is at 1.75%, below the 10-year US Treasury yield, though it’s up a smidgen since the general elections on December 20. In its latest update, S&P left Spain’s rating unchanged, predicting 2.7% growth for 2016, despite the prevailing mood of political and economic uncertainty. In a similar vein, Deutsche Bank has forecast growth of 2.5%, regardless of what happens within or beyond Spanish borders. In other words, every effort will be made to safeguard the economic order in Spain, including putting a ridiculously positive spin on a desperate situation. To paraphrase Europe’s chief financial alchemist, Mario Draghi: do not underestimate the amount of political capital that has been invested in the European project, in particular in the Eurozone’s fourth largest economy.

“General sentiment is downright toxic in Canada..”

• Canadian Officials Under Pressure to Stimulate Economy (WSJ)

Canadian policy makers are heading into a tough week as pressure mounts on them to revive an economy that has been among the hardest hit by the commodity rout. Prime Minister Justin Trudeau and his cabinet colleagues will convene in a seaside resort town on Canada’s east coast Monday amid more evidence growth may have stalled again after sputtering to life in last year’s third quarter. A recent string of dismal economic news—and a free-falling Canadian dollar—has led to calls for Mr. Trudeau’s government to move sooner rather than later on major infrastructure investments to stimulate growth.

On Wednesday, Bank of Canada Gov. Stephen Poloz will deliver his latest interest-rate decision, and economists are split not only on whether he will opt to cut rates, but whether such a move would do much to help the economy at this time. Analysts say the onus has shifted to Mr. Trudeau’s government to help mitigate the negative fallout from the oil-price rout. Last week the Canadian dollar hit near-13-year lows as prices for oil, a major Canadian export, continued to weaken. As of Friday, the currency has fallen 4.8% against the U.S. dollar since the start of the year and was down 17.8% year-to-year. The drop came as Canada’s stock market lost ground—it is now off 22.2% from its 2015 peak—and the central bank said Canadian companies’ investment and hiring intentions had recently weakened.

“General sentiment is downright toxic in Canada,” said Jimmy Jean, economist at Desjardins Capital Markets. Talk around Mr. Trudeau’s cabinet table likely will revolve around the appropriate response to an economic tailspin fueled by a fresh downturn in the price of crude. While the prime minister last week voiced optimism about Canada’s prospects despite disappointing growth, government officials have privately said they are very worried about the economy. Meanwhile, economists have told the government it should boost the amount of infrastructure spending planned for this year to help offset weak conditions.

But we’ll keep driving along. Soon, in our new clean cars powered by coal plants.

• Shock Figures To Reveal Deadly Toll Of Global Air Pollution (Observer)

The World Health Organisation has issued a stark new warning about deadly levels of pollution in many of the world’s biggest cities, claiming poor air quality is killing millions and threatening to overwhelm health services across the globe. Before the release next month of figures that will show air pollution has worsened since 2014 in hundreds of already blighted urban areas, the WHO says there is now a global “public health emergency” that will have untold financial implications for governments. The latest data, taken from 2,000 cities, will show further deterioration in many places as populations have grown, leaving large areas under clouds of smog created by a mix of transport fumes, construction dust, toxic gases from power generation and wood burning in homes. The toxic haze blanketing cities could be clearly seen last week from the international space station.

Last week it was also revealed that several streets in London had exceeded their annual limits for nitrogen dioxide emissions just a few days into 2016. “We have a public health emergency in many countries from pollution. It’s dramatic, one of the biggest problems we are facing globally, with horrible future costs to society,” said Maria Neira, head of public health at the WHO, which is a specialist agency of the United Nations. “Air pollution leads to chronic diseases which require hospital space. Before, we knew that pollution was responsible for diseases like pneumonia and asthma. Now we know that it leads to bloodstream, heart and cardiovascular diseases, too – even dementia. We are storing up problems. These are chronic diseases that require hospital beds. The cost will be enormous,” said Neira.

[..] According to the UN, there are now 3.3 million premature deaths every year from air pollution, about three-quarters of which are from strokes and heart attacks. With nearly 1.4 million deaths a year, China has the most air pollution fatalities, followed by India with 645,000 and Pakistan with 110,000. In Britain, where latest figures suggest that around 29,000 people a year die prematurely from particulate pollution and thousands more from long-term exposure to nitrogen dioxide gas, emitted largely by diesel engines, the government is being taken to court over its intention to delay addressing pollution for at least 10 years.

Follow the money, that’s all there’s to it. All the rest is window dressing and lip service, for Beijing as much as for Volkswagen.

• False Emissions Reporting Undermines China’s Pollution Fight (Reuters)

Widespread misreporting of harmful gas emissions by Chinese electricity firms is threatening the country’s attempts to rein in pollution, with government policies aimed at generating cleaner power struggling to halt the practice. Coal-fired power accounts for three-quarters of China’s total generation capacity and is a major source of the toxic smog that shrouded much of the country’s north last month, prompting “red alerts” in dozens of cities, including the capital Beijing. But the government has found it hard to impose a tougher anti-pollution regime on the power sector, with China’s energy administration describing it as a “weak link” in efforts to tackle smog caused by gases such as sulfur dioxide. No official data on the extent of the problem has been released since a government audit in 2013 found hundreds of power firms had falsified emissions data, although authorities have continued to name and shame individual operators.

“There is no guarantee of avoiding under-reporting (of emissions) at local plants located far away from supervisory bodies. Coal data is very fuzzy,” said a manager with a state-owned power company, who did not want to be named because he is not authorized to speak to the media. The manager said firms could easily exaggerate coal efficiency by manipulating their numbers. For example, power companies that also provided heating for local communities could overstate the amount of coal used for heat generation, which is not subject to direct monitoring, and understate the amount used for power. “Data falsification is a long-standing problem: China will not get its environmental house in order if it does not deal with this first,” said Alex Wang, an expert in Chinese environmental law at UCLA.

Money trumps laws.

• Weak EU Tests For Diesel Emissions Are ‘Illegal’ (Guardian)

Planned new ‘real driving emissions’ (RDE) test limits that would let cars substantially breach nitrogen oxide (NOx) standards are illegal under EU law, according to new legal analysis seen by the Guardian. The proposed ‘Euro 6’ tests would allow diesel cars to emit more than double the bloc’s ‘80 mg per km’ standard for NOx emissions from 2019, and more than 50% above it indefinitely from 2021. The UK supported these exemptions. But they contradict the regulation’s core objective of progressively scaling down emissions and improving air quality, according to an opinion by the European Parliament’s legal services, which the Guardian has seen. In principle, the exemptions and loopholes “run counter [to] the aims and content of the basic regulation as expressed by the Euro 6 limit values,” says the informal paper prepared for MEPs on the parliament’s environment committee.

“The commission has taken a political decision to favour the commercial interests of car manufacturers over the protection of the health of European citizens,” adds a second analysis by the environmental law firm ClientEarth, also seen by the Guardian. “The decision is therefore illegal and should be vetoed by the European Parliament,” the ClientEarth advice says. Catherine Bearder, a Liberal Democrat MEP on the environment committee, told the Guardian that as well as being morally unjustifiable, the agreement to water down the emissions limits was now “legally indefensible”. “This was a political decision, not a technical one, and so it should have been subject to proper democratic accountability,” she told the Guardian. “MEPs must veto this shameful stitch-up and demand a stronger proposal, based on the evidence and not on pressure from the car industry.”

Might as well close it down.

• 66 Institutional Investors To Sue Volkswagen In Germany (FT)

Sixty-six institutional investors are to take legal action against Volkswagen in its German home market after the carmaker cheated emissions tests in the US. The first claim will be made within the next seven days. The legal action will heap further pressure on Volkswagen, which earlier this month said its annual sales fell last year for the first time in more than a decade. Klaus Nieding, a lawyer at Nieding and Barth, the German law firm, said a capital market model claim, which is similar to a collective lawsuit in the US, will be filed “within the next week” in Germany on behalf of a US institutional investor that has suffered a “big loss”. The other 65 institutional investors are expected to join that claim.

Investors have been nursing heavy losses after the US’s Environmental Protection Agency revealed last September that the world’s second-largest carmaker had cheated US emissions tests by fitting vehicles with “defeat devices” designed to bypass environmental standards. Billions of euros have been wiped off the value of Volkswagen as a result. Nieding and Barth is working with MüllerSeidelVos, a fellow German firm, and Robbins Geller Rudman and Dowd, a US law firm, to represent investors that have contacted DSW, a German shareholder protection association. Mr Nieding said the law firms collectively represent “many foreign institutional investors, primarily from the US, with claims of several hundred million euros”. He added: “We are representing, as far as we know, the largest number of claims and of shareholders [in Germany].”

Bentham Europe, a litigation finance group backed by Elliott Management, the US hedge fund, and Australian-listed IMF Bentham, is also expected to file a damages claim in Germany. Volkswagen is facing additional legal action outside its home market. Class actions against the carmaker, which allow one person to sue on behalf of a group of individuals or companies, have already been filed in the US and Australia. Last week, the Arkansas State Highway Employees Retirement System, a $1.4bn pension fund, was named the lead plaintiff in a class action against VW in the US. “We will be prosecuting the claims on behalf of the class vigorously,” said Jeroen van Kwawegen, a lawyer at Bernstein Litowitz Berger and Grossmann. The law firm is acting on behalf of investors who put money in Volkswagen’s American depositary receipts, a type of stock that represents shares in a foreign corporation.

Snyder should be taken to court over his decisions that led to the mayhem. Instead, Wshington sends HIM the money to solve the issue.

• Obama Declares Emergency In Flint, But Not Disaster (DFP)

President Barack Obama on Saturday declared a federal emergency in Flint, freeing up to $5 million in federal aid to immediately assist with the public health crisis, but he denied Gov. Rick Snyder’s request for a disaster declaration. A disaster declaration would have made larger amounts of federal funding available more quickly to help Flint residents whose drinking water is contaminated with lead. But under federal law, only natural disasters such as hurricanes and floods are eligible for disaster declarations, federal and state officials said. The lead contamination of Flint’s drinking water is a manmade catastrophe. The president’s actions authorize the FEMA to coordinate responses and cover 75% of the costs for much-needed water, filters, filter cartridges and other items for residents, capped initially at $5 million.

The president also offered assistance in finding other available federal assistance, a news release Saturday from the White House said. Snyder, who on Thursday night asked Obama for federal financial aid in the crisis through declarations of both a federal emergency and a federal disaster, said in a news release Saturday he appreciates Obama granting the emergency request “and supporting Flint during this critical situation.” “I have pledged to use all state resources possible to help heal Flint, and these additional resources will greatly assist in efforts under way to ensure every resident has access to clean water resources,” he said. U.S. Rep. Dan Kildee, D-Flint, welcomed the emergency declaration and issued a statement: “I welcome the president’s quick action in support of the people of Flint after months of inaction by the governor,” Kildee said.

“The residents and children of Flint deserve every resource available to make sure that they have safe water and are able to recover from this terrible manmade disaster created by the state.” On Friday, Kildee led a bipartisan effort in support of the request for federal assistance. Kildee had long called for Snyder to request federal aid. Typically, federal aid for an emergency is capped at $5 million, though the president can commit more if he goes through Congress. Snyder’s application said as much as $55 million is needed in the near term to repair damaged lead service lines and as much as $41 million to pay for several months of water distribution and providing residents with testing, water filters and cartridges.

In what’s become a huge government scandal, garnering headlines across the country and around the world, Flint’s drinking water became contaminated with lead after the city temporarily switched its supply source in 2014 from Lake Huron water treated by the Detroit Water and Sewerage Department to more corrosive and polluted Flint River water, treated at the Flint water treatment plant. The switch was made as a cost-cutting move while the city was under the control of a state-appointed emergency manager.

Dr. Paul has been consistently on the case for years.

• When Peace Breaks Out With Iran… (Ron Paul)

This has been the most dramatic week in US/Iranian relations since 1979. Last weekend ten US Navy personnel were caught in Iranian waters, as the Pentagon kept changing its story on how they got there. It could have been a disaster for President Obama’s big gamble on diplomacy over conflict with Iran. But after several rounds of telephone diplomacy between Secretary of State John Kerry and his Iranian counterpart Javad Zarif, the Iranian leadership – which we are told by the neocons is too irrational to even talk to – did a most rational thing: weighing the costs and benefits they decided it made more sense not to belabor the question of what an armed US Naval vessel was doing just miles from an Iranian military base. Instead of escalating, the Iranian government fed the sailors and sent them back to their base in Bahrain.

Then on Saturday, the Iranians released four Iranian-Americans from prison, including Washington Post reporter Jason Rezaian. On the US side, seven Iranians held in US prisons, including six who were dual citizens, were granted clemency. The seven were in prison for seeking to trade with Iran in violation of the decades-old US economic sanctions. This mutual release came just hours before the United Nations certified that Iran had met its obligations under the nuclear treaty signed last summer and that, accordingly, US and international sanctions would be lifted against the country. How did the “irrational” Iranians celebrate being allowed back into the international community?

They immediately announced a massive purchase of more than 100 passenger planes from the European Airbus company, and that they would also purchase spare parts from Seattle-based Boeing. Additionally, US oil executives have been in Tehran negotiating trade deals to be finalized as soon as it is legal to do so. The jobs created by this peaceful trade will be beneficial to all parties concerned. The only jobs that should be lost are the Washington advocates of re-introducing sanctions on Iran. Events this week have dealt a harsh blow to Washington’s neocons, who for decades have been warning against any engagement with Iran. These true isolationists were determined that only regime change and a puppet government in Tehran could produce peaceful relations between the US and Iran.

Instead, engagement has worked to the benefit of the US and Iran. Proven wrong, however, we should not expect the neocons to apologize or even pause to reflect on their failed ideology. Instead, they will continue to call for new sanctions on any pretext. They even found a way to complain about the release of the US sailors – they should have never been confronted in the first place even if they were in Iranian waters. And they even found a way to complain about the return of the four Iranian-Americans to their families and loved ones – the US should have never negotiated with the Iranians to coordinate the release of prisoners, they grumbled. It was a show of weakness to negotiate! Tell that to the families on both sides who can now enjoy the company of their loved ones once again!

What they flee.

• Syria 4 Years On: Shocking Images Of A Post-US-Intervention Nation (ZH)

While US intervention in its various forms has likely been ongoing for decades, March 2011 is often cited as the start of foreign involvement in the Syrian Civil War (refering to political, military and operational support to parties involved in the ongoing conflict in Syria, as well as active foreign involvement). Since then the nation has collapsed into chaos with an endless array of superlatives possible to describe the economic and civilian carnage that has ensued. However, while a picture can paint a thousand words, these four shocking images describe a canvas of US foreign policy “success” that few in the mainstream media would be willing to expose… Mission un-accomplished?

I’m getting a bit antsy seeing people presenting arguments as new that I’ve made umpteen times in the past. We move far too slow.

• The Economics Of The Refugee Crisis Lay Bare Our Moral Bankruptcy (Guardian)

The Germans want to introduce a pan-European tax to pay for the refugee crisis. The Danish want to pass a law to seize any jewellery worth more than £1,000 as refugees arrive – apart from wedding rings. That’s what marks you out as a civilised people, apparently, that you can see the romance in a stranger’s life and set that aside before you bag them up as a profit or a loss. In Turkey people smugglers are charging a thousand dollars for a place in a dinghy, $2,500 in a wooden boat, with more than 350,000 refugees passing through one Greek island – Lesbos – alone in 2015. The profit runs into hundreds and millions of dollars, and the best EU response so far has been to offer the Turkish government more money to either hold refugees in their own country or – against the letter and the spirit of every pledge modern society has made on refugees – send them back whence they came.

Turkey is a country of 75 million that has already taken a million refugees, accepting impossible and cruel demands from a continent of more than 500 million people that, apparently, can’t really help because of the threat to its “social cohesion”. Our own government has pledged to take 20,000 refugees but only the respectable ones, from faraway camps: the subtext being that the act of fleeing to Europe puts refugees outside the purview of human sympathy, being itinerant, a vagrant, on the take. Institutions and governments represent an ever narrower strain of harsh opinion. The thousands of volunteers in Greece, the Guardian readers who gave more at Christmas to refugee charities than to any appeal before, the grassroots organisations springing up everywhere to try and show some human warmth on this savage journey to imagined safety – none of these are represented, politically, in a discourse that takes as its starting point the need to make the swarms disappear, to trick them into going somewhere else.

It’s those neutral-sounding, just-good-economics ideas that give the game away: if a million people in any given European nation suffered a natural disaster, nobody would be talking about how to raise a tax so that help could be sent. We would help first and worry about the money second. When the EU wants to rescue a government, or the banks of a member state (granted, at swingeing cost for the rescued), it doesn’t first float a “rescue tax”. The suggestion that the current crisis needs its own special tax may well be an attempt to force individual governments to confront the reality of their current strategy, which is to have no strategy. Yet it sullies the underlying principle of the refugee convention: that anyone fleeing in fear for their life be taken in on that basis, not pending a whip-round.

To repudiate that is essentially to say that human rights are no longer our core business. But without that as an organising principle, the ties that bind one nation to another begin to fray: alliances must at the very least be founded on ideas you’re not ashamed to say out loud.

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