Menu Icon

From Yellen Put To Yellen Massacre

Mar 122015
 
 March 12, 2015  Posted by at 9:21 am Finance Tagged with: , , , , , , , , ,  15 Responses »


NPC Kidwell’s Market on Pennsylvania Avenue, Washington DC 1920

I think I’ll just give you a slew of quotes, and then you can figure out if you can figure out why I chose to call this the Yellen Massacre. Which consists, by the way, of two separate but linked parts, not quite the Siamese twin perhaps, but close. What links them is the upcoming Fed decision to raise interest rates, and the timing of the announcement of that decision. It will blow up both bond markets and a large swath of emerging markets. People keep saying ‘the Fed won’t do it’, or ask ‘why would they do it’, but arguably they’re already quite late. It must be half a year ago now that I wrote it would hike rates, and also told you why: Wall Street banks. First, here’s a fine little ditty published at Econmatters:

Six Days Until Bond Market Crash Begins

Early on Thursday morning, realizing this was going to be a robust selloff in equities, the ‘smart money’, i.e., the big banks, investments banks, hedge funds and the like, ran to the old staple of buying bonds hand over fist with little regard for the yield they are getting paid for stepping in front of the freight train of rate rises coming down the tracks.

Just six days away from the most important FOMC meeting in the last seven years, and another 300k employment report in the rear view mirror, this looks like an excellent place to hide for nervous investors who have far more money than they have grains of common sense. Newsflash for these investors, yes markets are over-valued, and you need to get out of Apple, and about 100 other high flying overpriced momentum stocks, but you can`t hide out in bonds this time.

That party is over, and next Wednesday`s FOMC meeting is going to make this point abundantly clear. There is no place to hide except cash. You should have thought about that before you gorged yourself on ZIRP to the point where you have pushed stocks and bonds to unsupportable price levels, and you keep begging for the Fed to stall just another six months, so you can continue to buy more stocks and bonds.

Well you have done an excellent job hoodwinking the Fed to wait until June, you should thank your lucky stars you have done such a good job manipulating the Federal Reserve; but just like the boy crying wolf, this strategy loses its effectiveness over time. Throwing another temper tantrum right before another important FOMC meeting hoping that Janet Yellen will be alarmed by these Pre-FOMC Selloffs to put off another six months the inevitable rate hike, this blackmail strategy has run its course.

The Fed is forced to finally start the Rate Hiking Cycle after 7 plus years of Recession era Fed policies by an overheating labor market. You knew this day was going to come, but most of you are still in denial. What the heck were you buying 10-year bonds with a 1.6% yield five months before a rate hike?? You only have yourself to blame for the 65 basis point backup in yields on that disaster of an “Investment”.

But really what were you thinking here?? That is the problem when the Fed has incentivized such poor investment decisions and poor allocation of capital to useful, growth oriented projects over the past 7 plus years of ZIRP that these ‘investors’ don`t think at all, they have become behaviorally trained ZIRP Crack Addicts!

They can cry over the strong dollar, have a couple of 300 point Dow Selloffs, scare monger over Europe or Emerging Market currencies, but the fact is that the due date has come on your stupidity. You bought all this crap, and now you have to sell it! Well too freaking bad, boo hoo, you shouldn’t have bought so many worthless stocks and bonds at unsustainable levels in the first place. [..]

The positioning for this inevitability is as poor as I have seen in any market. The carnage in the bond market is just going to be gruesome, the denial is so strong, the lack of historical perspective of what normal bond yields look like, and what a normalized economy represents where savers actually get paid to save money in a CD or checking account. The fact that the Fed has so de-sensitized investors to what a normalized rate economy and healthy functioning financial system looks like is probably one of the biggest drawbacks of ZIRP Methodology.

The Federal Reserve, and now the European Union have set the stage for the biggest collapse in bond markets that will make the sub-prime financial crisis look like a cakewalk.

One may question whether 6 days is carved in stone; maybe THE announcement will come the next meeting, not this one. But does it really matter? Yellen has created a narrative about the US economy, especially the (un)employment rate. About which yet another narrative has been created by the BLS, which refuses to count many millions of Americans as unemployed, for various reasons. And that leads to the article’s claim of ‘an overheating labor market’. The only way the US jobs market is overheating is that it seems to have created a huge oversupply of underpaid waiters, greeters and burger flippers.

But the narrative is now firmly in place, so Yellen and her stooges can claim they have no choice but to hike. Not just once, but three times this year, suggests Ambrose Evans-Pritchard in the following very bleak read and weep portrait of the world today. In which he also describes how all of this plays out in sync with the soaring dollar, which will have devastating consequences around the world, starting in the poorer parts of the world (what else is new?).

Global Finance Faces $9 Trillion Stress Test As Dollar Soars

The report – “Global dollar credit: links to US monetary policy and leverage” – was first published by the Bank for International Settlements in January, but its biting relevance is growing by the day. It shows how the Fed’s zero rates and quantitative easing flooded the emerging world with dollar liquidity in the boom years, overwhelming all defences.[..]

Foreigners have borrowed $9 trillion in US currency outside American jurisdiction, and therefore without the protection of a lender-of-last-resort able to issue unlimited dollars in extremis. This is up from $2 trillion in 2000. The emerging market share – mostly Asian – has doubled to $4.5 trillion since the Lehman crisis, including camouflaged lending through banks registered in London, Zurich or the Cayman Islands. The result is that the world credit system is acutely sensitive to any shift by the Fed. “Changes in the short-term policy rate are promptly reflected in the cost of $5 trillion in US dollar bank loans,” said the BIS.

Markets are already pricing in such a change. The Fed’s so-called “dot plot” – the gauge of future thinking by Fed members – hints at three rate rises this year, kicking off in June. The BIS paper’s ominous implications are already visible as the dollar rises at a parabolic rate, smashing the Brazilian real, the Turkish lira, the South African rand and the Malaysian Ringitt, and driving the euro to a 12-year low of $1.06.

The dollar index (DXY) has soared 24pc since July, and 40pc since mid-2011. This is a bigger and steeper rise than the dollar rally in the mid-1990s – also caused by a US recovery at a time of European weakness, and by Fed tightening – which set off the East Asian crisis and Russia’s default in 1998. Emerging market governments learned the bitter lesson of that shock. They no longer borrow in dollars. Companies have more than made up for them.

“The world is on a dollar standard, not a euro or a yen standard, and that is why it matters so much what the Fed does,” said Stephen Jen, a former IMF official now at SLJ Macro Partners. He says the latest spasms of stress in emerging markets are more serious than the “taper tantrum” in May 2013, when the Fed first talked of phasing out quantitative easing. “Capital flows into these countries have continued to accelerate over recent quarters. This is mostly fickle money. The result is that there is now even more dry wood in the pile to serve as fuel,” he said. Mr Jen said Asian and Latin American companies are frantically trying to hedge their dollar debts on the derivatives markets, which drives the dollar even higher and feeds a vicious circle. “This is how avalanches start,” he said.

Companies are hanging on by their fingertips across the world. Brazilian airline Gol was sitting pretty four years ago when the real was the strongest currency in the world. Three quarters of its debt is in dollars. This has now turned into a ghastly currency mismatch as the real goes into free-fall, losing half its value. Interest payments on Gol’s debts have doubled, relative to its income stream in Brazil. The loans must be repaid or rolled over in a far less benign world, if possible at all.

You would not think it possible that an Asian sovereign wealth fund could run into trouble too, but Malaysia’s 1MDM state fund came close to default earlier this year after borrowing too heavily to buy energy projects and speculate on land. Its bonds are currently trading at junk level. It became a piggy bank for the political elites and now faces a corruption probe, a recurring pattern in the BRICS and mini-BRICS as the liquidity tide recedes and exposes the underlying rot.

BIS data show that the dollar debts of Chinese companies have jumped fivefold to $1.1 trillion since 2008, and are almost certainly higher if disguised sources are included. Among the flow is a $900bn “carry trade” – mostly through Hong Kong – that amounts to a huge collective bet on a falling dollar. Woe betide them if China starts to drive down the yuan to keep growth alive.

Manoj Pradhan, from Morgan Stanley, said emerging markets were able to weather the dollar spike in 2014 because the world’s deflation scare was still holding down the cost of global funding. These costs are now rising. Even Singapore’s three-month Sibor used for benchmark lending is ratcheting up fast. The added twist is that central banks in the developing world have stopped buying foreign bonds, after boosting their reserves from $1 trillion to $11 trillion since 2000.

The Institute of International Finance (IIF) calculates that the oil slump has slashed petrodollar flows by $375bn a year. Crude exporters will switch from being net buyers of $123bn of foreign bonds and assets in 2013, to net sellers of $90bn this year. Russia sold $13bn in February alone. China has also changed sides, becoming a seller late last year as capital flight quickened. Liquidation of reserves automatically entails monetary tightening within these countries, unless offsetting action is taken. China still has the latitude to do this. Russia is not so lucky, and nor is Brazil. If they cut rates, they risk a further currency slide.

In short, Janet Yellen will go down into history as the person responsible for what may be the biggest economic crash ever, or at least delivering the final punch of the way into it, a crash that will make the rich banks even much richer. And there is not one iota of coincidence in there. Yellen works for those banks. The Fed only ever held investors’ hands because that worked out well for Wall Street. And now that’s over. Y’all are on the same side of the same trade, and there’s no profit for Wall Street that way.

Debt Rattle December 28 2014

Dec 282014
 
 December 28, 2014  Posted by at 12:28 pm Finance Tagged with: , , , , , , , ,  4 Responses »


DPC Cuyahoga River, Lift Bridge and Superior Avenue viaduct, Cleveland, Ohio 1912

• Pope Francis Climate Change Encyclical To Anger Deniers, US Churches (Observer)
• Hungry Britain: Millions Struggle To Feed Themselves, Face Malnourishment (Ind.)
• Decline in Oil Could Cost OPEC $257 Billion in 2015 (Daily Finance)
• US Oil-Producing States See Budgets, Jobs at Risk as Price Falls (NY Times)
• China’s 3.5% Trade Growth in 2014 Falling Far Short Of 7.5% Target (Reuters)
• Japan Approves $29 Billion Stimulus Plan, Impact In Doubt (Reuters)
• Japan Approves $29 Billion Spending Package to Boost Economy
• The Keynesian End Game Crystalizes In Japan’s Monetary Madness (Stockman)
• How Central Banks Saved The World (Stocks) In 2014 (Zero Hedge)
• Now Whitehall’s Crazy Eco Zealots Want To Ban Your Gas Cooker (Daily Mail)
• Mexico Withdraws $3.4 Billion From Pemex as Oil Revenue Shrinks (Bloomberg)
• Greece Faces New ‘Catastrophe’ As PM Battles To Avert Snap Elections (Observer)
• Challenging UK Party Games Ahead As Greece Threatens 2nd Debt Crisis (Observer)
• You Can Put The Next Crash On Your 2016 Calendar Now (Paul B. Farrell)
• 2014: The Year The Internet Came Of Age (Guardian)
• China Needs Millions of Brides ASAP (Bloomberg)
• Rising Oceans Force Bangladeshi Farmers Inland for New Jobs (Bloomberg)
• Siberian Dog Allowed To Stay In Hospital Where Owner Died 1 Year Ago (RT)

A Papal Encyclical is a big deal.

• Pope Francis Climate Change Encyclical To Anger Deniers, US Churches (Observer)

He has been called the “superman pope”, and it would be hard to deny that Pope Francis has had a good December. Cited by President Barack Obama as a key player in the thawing relations between the US and Cuba, the Argentinian pontiff followed that by lecturing his cardinals on the need to clean up Vatican politics. But can Francis achieve a feat that has so far eluded secular powers and inspire decisive action on climate change? It looks as if he will give it a go. In 2015, the pope will issue a lengthy message on the subject to the world’s 1.2 billion Catholics, give an address to the UN general assembly and call a summit of the world’s main religions. The reason for such frenetic activity, says Bishop Marcelo Sorondo, chancellor of the Vatican’s Pontifical Academy of Sciences, is the pope’s wish to directly influence next year’s crucial UN climate meeting in Paris, when countries will try to conclude 20 years of fraught negotiations with a universal commitment to reduce emissions.

“Our academics supported the pope’s initiative to influence next year’s crucial decisions,” Sorondo told Cafod, the Catholic development agency, at a meeting in London. “The idea is to convene a meeting with leaders of the main religions to make all people aware of the state of our climate and the tragedy of social exclusion.” Following a visit in March to Tacloban, the Philippine city devastated in 2012 by typhoon Haiyan, the pope will publish a rare encyclical on climate change and human ecology. Urging all Catholics to take action on moral and scientific grounds, the document will be sent to the world’s 5,000 Catholic bishops and 400,000 priests, who will distribute it to parishioners. According to Vatican insiders, Francis will meet other faith leaders and lobby politicians at the general assembly in New York in September, when countries will sign up to new anti-poverty and environmental goals.

In recent months, the pope has argued for a radical new financial and economic system to avoid human inequality and ecological devastation. In October he told a meeting of Latin American and Asian landless peasants and other social movements: “An economic system centred on the god of money needs to plunder nature to sustain the frenetic rhythm of consumption that is inherent to it. “The system continues unchanged, since what dominates are the dynamics of an economy and a finance that are lacking in ethics. It is no longer man who commands, but money. Cash commands. “The monopolising of lands, deforestation, the appropriation of water, inadequate agro-toxics are some of the evils that tear man from the land of his birth. Climate change, the loss of biodiversity and deforestation are already showing their devastating effects in the great cataclysms we witness,” he said.

Read more …

Dickens never died.

• Hungry Britain: Millions Struggle To Feed Themselves, Face Malnourishment (Ind.)

Millions of the poorest people in Britain are struggling to get enough food to maintain their body weight, according to official figures published this month. The Government’s Family Food report reveals that the poorest 10% of the population – some 6.4 million people – ate an average of 1,997 calories a day last year, compared with the average guideline figure of about 2,080 calories. This data covers all age groups. One expert said the figures were a “powerful marker” that there is a problem with food poverty in Britain and it was clear there were “substantial numbers of people who are going hungry and eating a pretty miserable diet”. The use of food banks in the UK has surged in recent years. The Trussell Trust, a charity which runs more than 400 food banks, said it had given three days worth of food, and support, to more than 492,600 people between April and September this year, up 38% on the same period in 2013.

Based on an annual survey of 6,000 UK households, the Family Food report said the population as a whole was consuming 5% more calories than required. Tables of figures attached to the report reveal the average calorie consumption for the poorest 10%, but the report itself did not highlight this. Chris Goodall, an award-winning author who writes about energy, discovered the figures while investigating human use of food resources. “The data absolutely shocked me. What it shows is for the first time since the Second World War, if you are poor you cannot afford to eat sufficient calories,” he said. He also highlights a widening consumption gap between rich and poor. In 2001/2, there was little difference, with the richest 10th consuming a total of 2,420 calories daily, about 4% more than the poorest. But in 2013, the richest group consumed 2,294 calories, about 15% more than the poorest. The report, published by the Department for Environment, Food & Rural Affairs, also found that the poorest people spent 22% more on food in 2013 than in 2007 but received 6.7% less.

Read more …

2012 revenues: $900 billion. 2015: $446 billion.

• Decline in Oil Could Cost OPEC $257 Billion in 2015 (Daily Finance)

Falling oil prices are giving a huge boost to the U.S. economy just in time for the holidays, and the reprieve from high gas prices doesn’t look like it will stop anytime soon. But elsewhere around the world, the drop in oil might not be looked upon so kindly. Most of OPEC’s 12 member countries rely on oil as a major source of revenue, not only supporting their domestic economies but also balancing national budgets. The amount of potential revenue they’ve lost as crude oil prices have fallen is staggering. If you’re a country like Saudi Arabia, Kuwait or Iraq, which rely on oil as a major revenue source, the drop in oil prices can impact your country dramatically. The U.S. Energy Information Administration just estimated that next year’s OPEC oil export revenue (excluding Iran) will drop an incredible $257 billion to $446 billion. That’s off its peak of nearly $900 billion in 2012.

The chart above shows the scale of OPEC’s potential revenue drop and the chart below shows who has the most at stake. Interestingly, Saudi Arabia is leading the charge against cutting OPEC’s production, which is keeping oil prices low, despite having the most money at stake. The reason may be a long-term need for greater market share in the oil market.

Read more …

“Nothing is off the table at this point.”

• US Oil-Producing States See Budgets, Jobs at Risk as Price Falls (NY Times)

States dependent on oil and gas revenue are bracing for layoffs, slashing agency budgets and growing increasingly anxious about the ripple effect that falling oil prices may have on their local economies. The concerns are cutting across traditional oil states like Texas, Louisiana, Oklahoma and Alaska as well as those like North Dakota that are benefiting from the nation’s latest energy boom. “The crunch is coming,” said Gunnar Knapp, a professor of economics and the director of the Institute of Social and Economic Research at the University of Alaska Anchorage. Experts and elected officials say an extended downturn in oil prices seems unlikely to create the economic disasters that accompanied the 1980s oil bust, because energy-producing states that were left reeling for years have diversified their economies. The effects on the states are nothing like the crises facing big oil-exporting nations like Russia, Iran and Venezuela.

But here in Houston, which proudly bills itself as the energy capital of the world, Hercules Offshore announced it would lay off about 300 employees who work on the company’s rigs in the Gulf of Mexico at the end of the month. Texas already lost 2,300 oil and gas jobs in October and November, according to preliminary data released last week by the federal Bureau of Labor Statistics. On the same day, Fitch Ratings warned that home prices in Texas “may be unsustainable” as the price of oil continues to plummet. The American benchmark for crude oil, known as West Texas Intermediate, was $54.73 per barrel on Friday, having fallen from more than $100 a barrel in June. In Louisiana, the drop in oil prices had a hand in increasing the state’s projected 2015-16 budget shortfall to $1.4 billion and prompting cuts that eliminated 162 vacant positions in state government, reduced contracts across the state and froze expenses for items like travel and supplies at all state agencies. Another round of reductions is expected as soon as January.

And in Alaska – where about 90% of state government is funded by oil, allowing residents to pay no state sales or income taxes – the drop in oil prices has worsened the budget deficit and could force a 50% cut in capital spending for bridges and roads. Moody’s, the credit rating service, recently lowered Alaska’s credit outlook from stable to negative. States that have become accustomed to the benefits of energy production — budgets fattened by oil and gas taxes, ample jobs and healthy rainy-day funds — are now nervously eyeing the changed landscape and wondering how much they will lose from falling prices that have been an unexpected present to drivers across the country this holiday season. The price of natural gas is falling, too. “Our approach to the 2016 budget includes a full review of every activity in every agency’s budget and the cost associated with them,” said Kristy Nichols, the chief budget adviser to Gov. Bobby Jindal of Louisiana. “Nothing is off the table at this point.”

Read more …

“.. according to a report on the Ministry of Commerce’s website that was subsequently revised to remove the numbers.”

• China’s 3.5% Trade Growth in 2014 Falling Far Short Of 7.5% Target (Reuters)

China’s trade will grow 3.5% in 2014, implying the country will fall short of a current 7.5% official growth target, according to a report on the Ministry of Commerce’s website that was subsequently revised to remove the numbers. The initial version of the report published on the website on Saturday, which quoted Minister of Commerce Gao Hucheng, was replaced with a new version that had identical wording but with all the numbers and percentages removed. The Commerce Ministry did not answer calls requesting comment on the reason for the change. China’s trade figures have repeatedly fallen short of expectations in the second half of this year, providing more evidence that China’s economy may be facing a sharper slowdown. Foreign direct investment will amount to $120 billion for the year, the earlier version of Ministry of Commerce report said, in line with official forecasts.

The earlier version of the report also said outward non-financial investment from China could also come in around the same level. That would mark the first time outward flows have pulled even with inward investment flows in China, and would imply a major surge in outward investment in December given that the current accumulated level stands slightly below $90 billion. The earlier version of the report also predicted that retail sales growth would come in at 12% for 2014, in line with the current average growth rate. In a separate report, the Chinese Academy of Social Sciences predicted that real estate prices in Chinese cities would continue to slide in 2015, with third- and fourth-tier cities hit hardest. But it said the market would have a soft landing as local governments take action to provide further policy support to the market.

Read more …

“.. the government will avoid fresh debt issuance and fund the package with unspent money from previous budgets and tax revenues that have exceeded budget forecasts due to economic recovery ..”

• Japan Approves $29 Billion Stimulus Plan, Impact In Doubt (Reuters)

Japan’s government approved on Saturday stimulus spending worth $29 billion aimed at helping the country’s lagging regions and households with subsidies, merchandise vouchers and other steps, but analysts are skeptical about how much it can spur growth. The package, worth 3.5 trillion yen ($29.12 billion) was unveiled two weeks after a massive election victory by Prime Minister Shinzo Abe’s ruling coalition gave him a fresh mandate to push through his “Abenomics” stimulus policies. The government said it expects the stimulus plan to boost Japan’s GDP by 0.7%. Given Japan’s dire public finances, the government will avoid fresh debt issuance and fund the package with unspent money from previous budgets and tax revenues that have exceeded budget forecasts due to economic recovery.

With nationwide local elections planned in April which Abe’s ruling bloc must win to cement his grip on power, the package centers on subsidies to regional governments to carry out steps to stimulate private consumption and support small firms. Of the total, 1.8 trillion yen will be spent on measures such as distributing coupons to buy merchandise, providing low-income households with subsidies for fuel purchases, supporting funding at small firms and reviving regional economies. The remaining 1.7 trillion yen will be used for disaster-prevention and rebuilding disaster-hit areas including those affected by the March 2011 tsunami. Tokyo will also seek to bolster the housing market by lowering the mortgage rates offered by a governmental home-loan agency. “It’s better than doing nothing, but I don’t think this stimulus will have a big impact on boosting the economy,” said Masaki Kuwahara, a senior economist at Nomura Securities.

Read more …

Shopping vouchers?

• Japan Approves $29 Billion Spending Package to Boost Economy

Japan’s government approved a 3.5 trillion yen ($29 billion) fiscal stimulus package to boost the economy after April’s sales tax hike caused consumption to slump. The measures include shopping vouchers, subsidized heating fuel for the poor and low interest loans for small businesses hurt by rising input costs, and will boost gross domestic product by 0.7%, the government estimates. The spending will be paid for with tax revenue and unspent funds and won’t need new bond issuance, Economy Minister Akira Amari said today in Tokyo. Unexpected falls in output and retail sales in November underscore the continued weakness in the economy. With little sign of a rebound in domestic demand, getting growth back on a recovery track is a priority for Prime Minister Shinzo Abe.

“This will support private consumption and boost regional economies, so that the virtuous economic cycle spreads to all corners of the nation,” Abe said in Tokyo after the decision. About 1.7 trillion yen will be spent on public works in areas damaged by natural disasters and to improve disaster preparedness, with 600 billion yen for revitalizing regional economies and 1.2 trillion yen to support people and small businesses hurt by the current economic situation, according to documents released by the Cabinet Office. The package is part of an extra budget for the fiscal year through March which will be adopted by the cabinet on Jan. 9, Finance Minister Taro Aso said in Tokyo today. The budget then needs to be approved by parliament, which is controlled by the ruling coalition.

Abe last month delayed the planned further hike in the sales tax by 18 months after data showed the economy fell into recession. GDP shrank an annualized 1.9% last quarter, more than initially estimated, after a 6.7% contraction in the three months from April, when the levy was raised for the first time since 1997. The postponement fueled concern about the government’s effort to rein in the world’s heaviest debt and prompted Moody’s Investors Service to cut its credit rating on Japan.

Read more …

“Japan’s work force of 80 million will drop to 40 million by 2060.”

• The Keynesian End Game Crystalizes In Japan’s Monetary Madness (Stockman)

If the BOJ’s mad money printers were treated as monetary pariahs by the rest of the world, it would at least imply that a modicum of sanity remains on the planet. But just the opposite is the case. Establishment institutions like the IMF, the US treasury and the other major central banks urge them on, while the Keynesian arson squad led by Professor Krugman actually faults Japan for being too tepid with its “stimulus”. Now comes several new data points that absolutely confirm Japan is a financial mad house – even as its policy model is embraced by mainstream officials and analysts peering from a distance. Front and center is the newly reported fact from the Cabinet Office that Japan’s household savings rate plunged to minus 1.3% in the most recent fiscal year, thereby entering negative territory for the first time since records were started in 1955.

Indeed, Japan had been heralded as a nation of savers only a generation ago. During the era before it’s plunge into bubble finance in the late 1980s, households routinely saved 15-25% of income. But after nearly three decades of Keynesian policies, Japan has now stumbled into an insuperable demographic/financial trap; and one that is unusually transparent and rigidly delineated, to boot. Since Japan famously and doggedly refuses to accept immigrants, its long-term demographics are rigidly baked into the cake. Accordingly, anyone who will make a difference over the next several decades has already been born, counted, factored and attrited into the projections.

Japan’s work force of 80 million will thus drop to 40 million by 2060. At the same time, its current 30 million retirees will continue to rise, meaning that its retiree rolls will ultimately exceed the number of workers. Given those daunting facts, it follows that on the eve of its demographic bust Japan needs high savings and generous interest rates to augment retirement nest eggs; a strong exchange rate to attract foreign capital to help absorb its staggering $12 trillion of public debt, which already stands at a world leading 230% of GDP; and rising real incomes in order to shoulder the heavy taxation that is unavoidably necessary to close its fiscal gap and contain its mushrooming public debt.

With its debilitating Keynesian fiscal and monetary policies now re-upped on steroids under Abenomics, however, it goes without saying that nearly the opposite conditions prevail. Most notably, no household or institution anywhere in Japan can earn anything on liquid savings. The money market rate which determines deposit money yields was driven from a “high” of 100 basis points (as ridiculous as that sounds) at the time of the financial crisis to 10 basis points today, which is to say, nothing. But what is even more astounding is that the yield on the 10-year JGB dipped to an all-time low of 0.31% in recent trading. Given the militant insistence of the BOJ that it will hit its 2% inflation target come hell or high water, it is accurate to say that the official policy of Abenomics is to cause holders of the government’s long-term debt to loose their shirts.

Read more …

“Escape velocity”. Hadn’t heard that in while.

• How Central Banks Saved The World (Stocks) In 2014 (Zero Hedge)

2014 was awash with potentially status quo destabilizing ‘realities’ to the “we’re back on track and world economic growth is about to reach escape velocity” meme… but time after time, the well-conditioned ‘investor’ was rescued… here’s how… Because – fun-durr-mentals.

Read more …

Love the picture.

• Now Whitehall’s Crazy Eco Zealots Want To Ban Your Gas Cooker (Daily Mail)

As many as 14 million households slid their turkey into a gas oven yesterday, then waited for a succulent, browned and delicious meal to emerge. But such a familiar festive scene will be a thing of the past just a few years down the line, if the Government has its way. As for turning up the thermostat to ensure our gas boiler keeps our home snug and warm on a chilly festive morning – that simple action too, is under threat, even though some 90% of all homes in Britain are heated by gas. Householders across the country will be horrified to learn that, over the next decade or two, the Government plans to phase out all our gas-fired cookers and heating systems – forcing us to replace them at a cost of untold billions. Official documents reveal the Government is seriously contemplating that, within 25 years or so, gas will be all but banned — along with petrol and diesel.

The intention is that not only our cooking and heating but much else, including our cars and most of the vehicles on Britain’s roads, will have to be powered by electricity. The Government admits this astonishingly ambitious plan will be the most far-reaching energy revolution since electricity itself was discovered. But it is not being planned because our gas and oil supplies will have run out – or even because of any looming shortage. On the contrary, the world is now facing a glut of gas and oil, thanks in part to the ‘shale gas revolution’ led by the U.S., a country which almost overnight, has become the world’s largest natural gas producer as a result of a process called fracking – where water and sand are fired at high pressure into shale rock to release the oil and gas inside. This has led to plummeting prices, and prompted many industries to switch to gas.

Yet our own rulers want to abandon it. Astonishingly, the plan to change the way we cook our food and heat our homes is being instigated by the Government as the only way by which we can meet a statutory requirement under the Climate Change Act. This particular piece of legislative folly was pushed through Parliament six years ago by Ed Miliband, as our first ever Secretary of State for Energy and Climate Change, and decreed that Britain must cut its emissions of carbon dioxide from fossil fuels by a staggering 80% within 35 years. When this Act passed almost unanimously through Parliament in 2008, not a single MP, let alone Mr Miliband, had the faintest idea how we could actually meet such an improbable target.

Read more …

Got to admire the spin: “.. to “make management of public-sector finances more efficient ..”

• Mexico Withdraws $3.4 Billion From Pemex as Oil Revenue Shrinks (Bloomberg)

Mexico’s Finance Ministry took out 50 billion pesos ($3.4 billion) from the state oil company Petroleos Mexicanos, according to a statement sent to the Mexican Stock Exchange. The payment this month was meant to “make management of public-sector finances more efficient,” according to the filing from the oil company, known as Pemex. The withdrawal marks a departure from the government’s usual methods of obtaining revenue from Pemex, which include taxes and royalties.

Pemex typically provides about a third of the federal budget, and its contributions dropped this year as the oil company faced production declines and falling crude prices. During the first 11 months of 2014, taxes paid by Mexico City-based Pemex declined by about 260 billion pesos, or 22%, from the same period of 2013, according to records. The withdrawal shows “a near addiction to Pemex’s revenue by the ministry,” Fluvio Ruiz, a board member of the oil company’s petrochemical unit, said in a phone interview. He said he had no prior knowledge of the disclosure through his role at the company.

Read more …

I don’t think he still believes in it.

• Greece Faces New ‘Catastrophe’ As PM Battles To Avert Snap Elections (Observer)

Greece’s embattled prime minister, Antonis Samaras, issued an eleventh-hour appeal to parliamentarians on Saturday in an attempt to avert snap elections that would almost certainly plunge the eurozone into renewed crisis. In an impassioned plea, he urged MPs to rid the country of “menacing clouds” gathering over it by supporting the government’s presidential candidate when they gather for the final round of a three-stage vote on Monday. Failure would automatically trigger elections that radical leftists would be likely to win. The ballot has therefore electrified Greece, rattled markets and unnerved Europe. “I am once again appealing to all MPs, of all parties, to vote for the president of the republic,” Samaras told state television. “If we don’t elect a president the responsibility will hang heavily over those who don’t vote for [him]. They will be remembered by everyone, especially history.”

Samaras’s high-stakes gamble of calling the poll two months early has brought him face-to-face with the spectre of losing power if he fails to convince 12 MPs to back Stavros Dimas, his choice for the presidential post. A former European commissioner, Dimas received 168 ballots in a second round of voting last week – well short of the 200 required. On Monday he must amass 180 to be elected. Following a Christmas of frantic behind-the-scenes politicking, the prime minister warned of the perils of taking the debt-stricken country down the road of “absurd adventure” if deputies failed to endorse Dimas. “People do not want early elections… We gave sweat and blood in recent years to keep Greece standing upright.”

Read more …

Understatement of the day/week/month/year: “With so much cheap money sloshing around the global markets, a second financial crisis cannot be ruled out.”

• Challenging UK Party Games Ahead As Greece Threatens 2nd Debt Crisis (Observer)

Europe. Emerging markets. Earnings. Equality. And the election. Look out, because 2015 is going to be the year of the five Es. In the UK, it will be the election that dominates the economic and business scene, particularly in the first half of the year and for much longer if the result is inconclusive. The prospect of a minority government living from hand to mouth would certainly unsettle the markets. But the election result will be influenced by the four other Es, starting with Europe, where the first crunch moment comes tomorrow in Greece with the third and final chance for the government of Antonis Samaras to get its choice of a new president through parliament. If he fails to secure 180 votes, there will be a snap election that the anti-austerity Syriza party is currently favourite to win. That would prompt fears of a fresh leg to Europe’s debt crisis, which began in Greece more than six years ago. This is something Europe can ill afford. The eurozone economy is barely growing; the German locomotive is slowing; and falling oil prices bring with them the threat of deflation.

The issue for the European Central Bank in 2015 is whether to take the plunge with a quantitative easing programme, something the Germans have resisted up until now. Berlin’s hardline stance has, however, softened in recent months as the situation in Russia – the key emerging market to watch – has deteriorated. Europe’s trade links with Russia are not all that important, but there are two big concerns. The first is of heightened geopolitical risk. Russia is being squeezed by western sanctions and now faces the inevitability of a deep recession in 2015. This might make Vladimir Putin more willing to come to terms over Ukraine, but it might not. The second risk is that the collapse of the rouble puts intolerable strain on Russian companies and Russian banks, with corporate losses ricocheting through the entire global financial system through the sort of highly leveraged derivatives trades that caused the 2007 meltdown. With so much cheap money sloshing around the global markets, a second financial crisis cannot be ruled out.

The third E is equality, brought to prominence in the past year not just by the bestselling book Capital by the French economist Thomas Piketty, but by evidence from the IMF and the Organisation for Economic Co-operation and Development that inequality is bad for growth. Standing trickle-down economics on its head, the OECD said recently that UK growth in the two decades from 1990 to 2010 would have been nine percentage points higher had it not been for widening inequality. Given that the trend towards greater inequality has been evident for the past three decades, it is worth asking why it has become a political issue now. The answer is simple. In the years leading up to the financial crisis, incomes were rising across the board. People on low and middle incomes didn’t mind all that much that the bankers and hedge fund owners were earning stratospheric sums when their own pay packets were going up.

Read more …

Think it’ll take that long?

• You Can Put The Next Crash On Your 2016 Calendar Now (Paul B. Farrell)

With the recent budget bill, the too-big-to-fail banks were handed even more of what they’ve wanted: a further delay of the Volcker Rule, which could effectively kill it, and, worse, a rollback of Dodd-Frank provisions that protected taxpayers against abusive gambling in the shadowy global derivatives casino using Main Street depositors’ money. It’s as if we’re back to 1999, when the banks got Congress to erase the Glass-Steagall Act, which for 80 years protected Main Street by separating retail banks and investment banking. Now the banks are back to their speculation and gambling, exposing the economy to great risk, just as they were before the 1929 crash. As MarketWatch’s David Weidner put it, Yellen’s Fed looks to have forgotten that banks caused the Great Recession: that hellish era that was set off by the Bear Stearns, Lehman, Countrywide, AIG, Merrill, Freddie, Sallie and the other disasters.

Now Yellen’s Fed and our too-big-to-fail banks and their mainly Republican co-conspirators have set another big trap. A huge trap. As Stephen Roach, former chairman of Morgan Stanley Asia, wrote for Project Syndicate, Yellen’s Federal Reserve “is headed down a familiar — and highly dangerous — path.” “Steeped in denial of its past mistakes, the Fed is pursuing the same incremental approach that helped set the stage for the financial crisis of 2008-2009. The consequences,” writes Roach, “could be similarly catastrophic.” The next crash is due in 2016, around the presidential election. Why? Yellen’s brain is trapped in the same myopic capitalist dogma that blinded Greenspan for 18 years, forcing him to confess he “really didn’t get it till very late,” long after the $10 trillion market loss was a reality.

Same with Yellen. It will happen again. Losses bigger than 2000 and 2008 combined. Think I’m kidding? Bet against this at your peril. Jeremy Grantham’s already on record predicting that “around the presidential election or soon after, the market bubble will burst, as bubbles always do, and will revert to its trend value, around half of its peak or worse.” That could translate to the DJIA crashing – which on Friday posted the week’s (and history’s) second close above the 18,000 level – to around 10,000. The Dow crashing all the way back down to 10,000? Wow. Unimaginable. No wonder our brains tune out. Instead, we prefer the happy talk that will just keep coming out of Wall Street and Washington till 2016. We’ll keep denying reality … till it’s too late, and another $10 trillion loss is in the books.

Read more …

So the question is: did the internet facilitate the rise in propaganda?

• 2014: The Year The Internet Came Of Age (Guardian)

The best we can say about 2014 is that it was the year when we finally began to have a glimmer of what the internet might mean for society. Not the internet that we fantasised about in the early years, but the network as it has evolved from an exotic curiosity into the mundane underpinning of our lives – a general-purpose technology or GPT. And, in a way, the timescale is about right. The internet that we use today was switched on in January 1983, but it didn’t really become a mainstream medium until the web began to explode in 1993. So we’re about 21 years into the revolution. And what we know from the history of other GPTs is that it generally takes at least two decades before they form the unremarked-upon backdrops to everyday life.

In 1999, Andy Grove, then the CEO of Intel, the dominant chip-maker of the time, made a famous prediction. In five years’ time, he said, “companies that aren’t internet companies won’t be companies at all”. He was widely ridiculed for this pronouncement at the time. But in fact he was just being prescient. What he was trying to communicate was that the internet would one day become like the telephone or mains electricity – something that we take for granted. Grove’s point was that companies that boasted that they “were now on the internet” in 2004 would already be regarded as ridiculous. And so indeed they were.

Could we live without the net? Answer: on an individual level possibly, but on a societal level no – simply because so many of the services on which industrialised societies depend now rely on internet connectivity. In that sense, the network has become the nervous system of the planet. This is why it now makes no more sense to argue about whether the internet is good or bad than to debate whether oxygen or water are desirable. We’ve got it and we’re stuck with it. Which means that we’re also stuck with its downsides. While offline crime has decreased dramatically – car-related theft has reduced by 79% since 1995 and burglary by 67%, for example, what’s happened is that much serious crime has now moved online, where its scale is staggering, even if the official statistics do not count it.

The same goes for industrial espionage (at which the Chinese are currently the world champions) and counter-espionage and counter-terrorism (at which the NSA and GCHQ currently top the international league tables). And we’re just getting started on cyberwarfare. So here we are at the end of 2014, finally wising up to what we’ve got ourselves into: an internet that provides us with much that we love and value and would be hard put to do without. But an internet that is also dangerous, untrustworthy and comprehensively monitored. The question for 2015 and beyond is whether we can have more of the former and less of the latter. Happy New Year!

Read more …

A problem still in its infancy.

• China Needs Millions of Brides ASAP (Bloomberg)

In the villages outside of Handan, China, a bachelor looking to marry a local girl needs to have as much as $64,000 – the price tag for a suitable home and obligatory gifts. That’s a bit out of the price range of many of the farmers who live in the area. So in recent years, according to the Beijing News, local men have been turning to a Vietnamese marriage broker, paying as much as $18,500 for an imported wife, complete with a money-back guarantee in case the bride fled. But that fairy tale soon fell apart. On the morning of November 21, sometime after breakfast, as many as 100 of Handan’s imported Vietnamese wives – together with the broker – disappeared without a trace. It was a peculiarly Chinese instance of fraud. The victims are a local subset of a fast-growing underclass: millions of poor, mostly rural men, who can’t meet familial and social expectations that a man marry and start a family because of the country’s skewed demographics.

In January, the director of China’s National Bureau of Statistics announced that China is home to 33.8 million more men than women out of a population exceeding 1.3 billion. China’s vast population of unmarried men is sure to pose an array of challenges for China, and perhaps its neighbors, for decades to come. What’s already clear is that fraudulent mail-order wives are only the start of a much larger problem. The immediate cause of China’s gender imbalance is a long-standing cultural preference for boys. In China’s patrilineal culture, they’re expected to carry on the family name, as well as serve as a social security policy for aging parents. In the 1970s, China’s so-called One Child policy transformed this preference into an imperative that parents fulfilled via sex selective abortions (made possible by the widespread availability of ultrasounds). As a result, millions of girls never made it onto China’s population rolls.

In 2013, for example, the government reported 117.6 boys were born for every 100 girls. (The natural rate is 103 to 106 boys to every 100 girls.) In the countryside, the ratio can run much higher — Mara Hvistendahl, in her 2011 book, Unnatural Selection, reports on a town where ratios run as high as 150 to 100. Long-term, such imbalances can create an excess of males that might reach 20% of the overall male population by 2020, according to one estimate. Of course, social expectations aren’t just confined to boys. In China, daughters are expected to marry up – and in a country where men far outnumber women, the opportunities to do so are excellent, especially in the cities to which so many of China’s rural women move. The result is that bride prices – essentially dowries paid to the families of daughters – are rising, especially in the countryside. One 2011 study on bride prices found that they’d increased seventy-fold between the 1960s and 1990s in just one representative, rural hamlet.

Read more …

Very real. Not some theory.

• Rising Oceans Force Bangladeshi Farmers Inland for New Jobs (Bloomberg)

About seven years ago, Gaur Mondol noticed he couldn’t grow as much rice on his land as salty water seeped in from the Passur River, which stretches from his home in Bangladesh’s interior all the way to the Indian Ocean. Now the rice paddies are completely inundated, leaving the land barren. To find work, he must walk for miles each day to other villages. His annual income has fallen by half to 36,000 taka ($460). He makes about $4 a day if he’s lucky, and most of that goes to buy food for his family of four. “I’m always worried that my house will be washed away someday,” Mondol said from his home in Mongla sub-district, pointing to a river-side tamarind tree with water swirling around its exposed roots. “My family is constantly under threat as the river creeps in.” Rising sea levels are one of the biggest threats to the $150-billion economy over the next half a century, with farmers like Mondol already facing the consequences.

Bangladesh, which needs to grow at 8% pace to pull people out of poverty, stands to lose about 2% of gross domestic product each year by 2050, according to the Asian Development Bank. “The sea-level rise and extreme climate events are the two ways that salinity intrudes into the freshwater system,” Mahfuzuddin Ahmed, an adviser in the ADB’s regional and sustainable development department, said by phone from Manila. “The implication for food security is quite big.” Bangladesh is one of the world’s most densely populated countries, with half the U.S. population crammed into an area the size of New York state. About 50% of its citizens are directly dependent on agriculture for their livelihoods, a quarter live in the coastal zone, and 21% of these lands are affected by an excess of salinity.

The proportion of arable land has fallen 7.3% between 2000-2010, faster than South Asia’s 2% decline, with geography playing a large role. Bangladesh is nestled at a point where tidal waves from the Indian Ocean flow into the Bay of Bengal. While these create the Sundarbans mangroves, home to the endangered Bengal tiger, winds and currents cause saline water to mix with upstream rivers. Global weather changes worsen this. Bangladesh’s average peak-summer temperature in May has climbed to 28.1 degrees Celsius (83 Fahrenheit) in 1990-2009 from 26.9 in 1900-1930, and could rise to 31.5 degrees in 2080-2099, World Bank data show. Average June rainfall has dropped to 467.1 millimeter from 517.5 in that time.

Read more …

Wonderful.

• Siberian Dog Allowed To Stay In Hospital Where Owner Died 1 Year Ago (RT)

The holiday spirit is alive and well in a hospital in Siberia, where Masha, Russia’s own ‘Hachiko’ dog was given permanent residence status. For a whole year the loyal pet kept ‘dogging’ the hospital, waiting for her owner who had passed away. Despite a number of attempts to have Masha adopted, the heartbroken pooch kept running away and coming back to the Novosibirsk District Hospital Number One, where she last saw her owner in December, 2013. “Masha will always stay here, because she is waiting for her owner. I think that even if we took her to his grave, she wouldn’t believe it. She’s waiting for him alive, not dead,” nurse Alla Vorontsova told the Siberian Times.

The dog’s heartbreaking story has gathered quite a bit of attention in Russia and even abroad, after it went viral in the media. The sad dachshund was adopted a number of times, but all unsuccessfully. “People in Russia tried to adopt her three times, but she always came back. I also heard that a number of foreigners wanted to adopt her too, but it is impossible – she doesn’t want to leave the hospital. And besides, we love her and she loves us. How could she live somewhere far away? She would just pine away,” Vorontsova said. For a year, hospital workers fed and walked Masha, and now they have finally managed to make it official; Masha has her own cozy spot inside the building.

“Here all the patients come to her, stroke her and give something tasty, especially the older people. She warms their hearts,” the nurse added. Masha’s elderly owner was admitted to the hospital and his dog was his sole visitor there. Masha’s loyalty earned her the media nickname Hachiko – in reference to the famous story of a Japanese Akita dog. Agricultural science professor Hidesaburo Ueno got Hachiko in 1924. The dog would greet the owner at the station every day. After Ueno passed away, Hachiko kept returning to the train station for 10 years, waiting for him to come back. The amazing story turned the pet into a national hero and later inspired a Hollywood movie, ‘Hachiko: A Dog’s Tale,’ starring Richard Gere.

Read more …

Debt Rattle December 15 2014

Dec 152014
 
 December 15, 2014  Posted by at 11:06 am Finance Tagged with: , , , , , , , , ,  2 Responses »


Wyland Stanley REO taxicab, San Francisco 1924

• Santa Got Run Over By An Oil Tanker (MarketWatch)
• U.A.E. Sees OPEC Output Unchanged Even If Oil Falls to $40 (Bloomberg)
• The Oil-Price-Shock Contagion-Transmission Pathway (Zero Hedge)
• UK Energy Firms Go Under As Oil Price Tumbles (Guardian)
• Oil Bust Veterans Brace While Shale-Boom Newbies Swagger (Bloomberg)
• Warning Over Horrible End To Japan’s QE Blitz (AEP)
• Time to Take Away the Punchbowl in Japan (Bloomberg)
• Samaras Grexit Talk Summons Bond Vigilantes to Greece (Bloomberg)
• EU Finance Chief Flies Into Athens As Grexit Fears Mount (Guardian)
• The EU Must Face Up To Austerity’s Failures (Steve Keen)
• The Eurozone Crisis History Is Repeating Itself … Again (Guardian)
• Time For Bottom Fishing In The Eurozone? (CNBC)
• London House Prices Fall By More Than £30,000 In A Month (Guardian)
• Fed Vice-Chairman Fisher: ‘Boy, Was I Wrong’ About Banks’ Political Power (WSJ)
• Krugman Says Fed Is Unlikely to Raise Interest Rates in 2015 (Bloomberg)
• Congress Deals A Blow To Financial Reform (Bloomberg ed.)
• Shiller Sees Risk In New Push For First-Time Homebuyers (CNBC)
• China Economic Growth May Slow To 7.1% In 2015 – PBOC (Reuters)
• Australia’s Budget Deficit Blows Out Amid Commodity Slide (Reuters)
• The Implosion Of American Culture (PhoM)
• Why Milennials Are Stuck Living At Home With Parents (Dr. Housing Bubble)

“.. a stunning $1.6 trillion annual loss, at oil’s current $57 low ..” What about $50, $45, $40?

• Crashing Crude May Blow $1.6 Trillion Annual Hole In The Global Oil Sector (MW)

Santa Got Run Over By An Oil Tanker

Talk about an oil spill. The spectacular unhinging of crude oil prices over the past six months is weighing mightily on the U.S. stock market. And while it may be too early to abandon all hope that the market will stage a year-end Santa rally, it appears that if Father Christmas comes, there’s a good chance his sleigh will be driven by polar bears, instead of gift-laden reindeer. Indeed, the Dow Jones Industrial Average already endured a bludgeoning, registering its second-worst weekly loss in 2014, shedding 570 points, or 3.2%, on Friday. That’s just shy of the 579 points that the Dow lost during the week ending Jan. 24, earlier this year.

It’s also the second worst week for the S&P 500 this year, which was down about 58 points, over the past five trading days, or 2.83%, compared to a cumulative weekly loss of 61.7 points, or 3.14%, during the week concluding Oct. 10. But all that carnage is nothing compared to what may be in store for the oil sector as crude oil tumbles to new gut-wrenching lows on an almost daily basis. On the New York Mercantile exchange light, sweet crude oil for January delivery settled at $57.81 on Friday, its lowest settlement since May 15, 2009. Moreover, the largest energy exchange traded fund, the energy SPDR off by 14% over the past month and has lost a quarter of its value since mid-June.

The real damage, however, is yet to come. By some estimates the wreckage, particularly for the oil-services companies, may add up to a stunning $1.6 trillion annual loss, at oil’s current $57 low, predicts Eric Lascelles, RBC Global Asset Management chief economist. Since it’s a zero-sum game, that translates into a big windfall for everyone else outside of oil players. In his calculation, Lascelles includes the cumulative decline in oil prices since July and current supply estimates of 93 million barrels a day. It’s a fairly simplistic tally, but it gets the point across that the energy sector is facing a serious oil leak. Here’s a look at a graphic illustrating the zero-sum, wealth redistribution playing out as oil craters:

Read more …

Setting the new price level in one fell swoop.

• U.A.E. Sees OPEC Output Unchanged Even If Oil Falls to $40 (Bloomberg)

OPEC will stand by its decision not to cut crude output even if oil prices fall as low as $40 a barrel and will wait at least three months before considering an emergency meeting, the United Arab Emirates’ energy minister said. OPEC won’t immediately change its Nov. 27 decision to keep the group’s collective output target unchanged at 30 million barrels a day, Suhail Al-Mazrouei said. Venezuela supports an OPEC meeting given the price slide, though the country hasn’t officially requested one, an official at Venezuela’s foreign ministry said Dec. 12. The group is due to meet again on June 5. “We are not going to change our minds because the prices went to $60 or to $40,” Mazrouei told Bloomberg at a conference in Dubai. “We’re not targeting a price; the market will stabilize itself.” He said current conditions don’t justify an extraordinary OPEC meeting. “We need to wait for at least a quarter” to consider an urgent session, he said.

OPEC’s 12 members pumped 30.56 million barrels a day in November, exceeding their collective target for a sixth straight month, according to data compiled by Bloomberg. Saudi Arabia, Iraq and Kuwait this month deepened discounts on shipments to Asia, feeding speculation that they’re fighting for market share amid a glut fed by surging U.S. shale production. The Organization of Petroleum Exporting Countries supplies about 40% of the world’s oil. Brent crude, a pricing benchmark for more than half of the world’s oil, slumped 2.9% to $61.85 a barrel in London on Dec. 12, for the lowest close since July 2009. Brent has tumbled 20% since Nov. 26, the day before OPEC decided to maintain production. U.S. West Texas Intermediate crude dropped 3.6% to $57.81 in New York, the least since May 2009.

The U.A.E. hasn’t been informed of any plan for an emergency meeting, Al-Mazrouei said. OPEC Secretary-General Abdalla El-Badri said, “we don’t know,” when asked at the same conference about the possibility of such a meeting. An increase of about 6 million barrels a day in non-OPEC supply, together with speculation in oil markets, triggered the recent drop in prices, El-Badri said, without specifying dates for the higher output by producers outside the group such as the U.S. and Russia. Prices will rebound soon due to changes in the global economic cycle, he said, without giving details. “We will not have a real picture about oil prices until the end of the first half of 2015,” El-Badri said. Price will have settled by the second half of next year, and OPEC will have a clear idea by then about “the required measures,” he said.

Read more …

Bet you there’s tons of similar notes around.

• The Oil-Price-Shock Contagion-Transmission Pathway (Zero Hedge)

As we noted previously, counterparty risk concerns (and thus financial system fragility) are starting to rear their ugly heads. In the mid 2000s, it was massive one-way levered bets on “house prices will never go down again.” When the cracks started to appear, the mark-to-market losses in derivatives led to forced liquidations and snowballed systemically. In the mid 2010s, it is massively levered one-way asymmetric bets on “commodity prices [oil] will never go down again.” Meet WTI-structured-notes… the transmission mechanism for oil-price-shocks blowing up the financial system. Because nothing says exuberant ignorance like limited upside, unlimited downside OTC (illiquid) derivatives… Here’s BNP Paribas’ 1-Yr WTI-linked notes that collapse if oil drops below $70…

Read more …

It’ll be a bloodbath. Or, it already is, but you can’t see it yet.

• UK Energy Firms Go Under As Oil Price Tumbles (Guardian)

The tumbling oil price has led to a trebling of insolvencies among UK oil and gas services companies so far this year, while £55bn of further oil projects reportedly under threat. Brent crude closed below $62 a barrel on Friday, a five-and-a-half-year low, amid fears of falling demand and oversupply as the global economy slows down. [..] On Sunday, the United Arab Emirates energy minister, Suhail Al-Mazrouei, said Opec would not cut crude output even if the price dropped as low as $40 a barrel. He told Bloomberg at a conference in Dubai: “We are not going to change our minds because the prices went to $60 or to $40. We’re not targeting a price; the market will stabilise itself.” A report due on Monday from accountancy firm Moore Stephens said 18 businesses in the UK oil and gas services sector had become insolvent in 2014 compared with just six last year. It said that although the increase was from a low base, it was significant because insolvencies in the sector had been rare over the last five years.

Jeremey Willmont at Moore Stephens said: “The fall in the oil price has translated into insolvencies in the oil and gas services sector remarkably quickly. The oil and gas services sector has enjoyed very strong trading conditions for the last 15 years, so perhaps they have not been quite so well prepared for a sustained deterioration in trading conditions as other sectors would have been. “There was a sharp drop in the oil price during the financial crisis, but the sense that oil prices could be depressed for some time is much more widespread this time around. “It is clear that oil and gas majors are already cutting costs. Both Shell and BP have recently announced cuts to investment in a number of major projects. Smaller players are also reconsidering their capital deployment. If this retrenchment continues the result will be less work for oil and gas services companies.”

Read more …

A lot of these guys are in for a nasty surprise next time they go see their bankers.

• Oil Bust Veterans Brace While Shale-Boom Newbies Swagger (Bloomberg)

Autry Stephens knows the look and feel of an oil boom going bust, and he’s starting to get ready. The West Texas wildcatter, 76, has weathered four such cycles in his 52 years draining crude from the Permian basin, still the most prolific U.S. oilfield. Though the collapse in prices since June doesn’t yet have him in a panic, Stephens recognizes the signs of another downturn on the horizon. And like many bust-hardened veterans in this region – which has made and broken the fortunes of thousands – he’s talking about it like a gathering storm. The ups and downs of oil are a way of life in Midland and Odessa, Texas, dating all the way back to the Great Depression. It’s as much a part of the culture as Gulf Coast hurricanes, and residents often prepare accordingly.

“We’re going to hunker down and go into survival mode,” Stephens, founder of Endeavor Energy Resources LP, said in an interview from his Midland office, where visitors are first greeted by a statuette of a Texas Longhorn steer. “Stay alive is our mantra, until the price recovers.” Go about 1,300 miles (2,100 kilometers) due north and you get a very different take from the rookie oil barons in North Dakota, where crude output from the Bakken formation went from 200,000 barrels a day in 2008 to about 1.2 million today. They’re not seeing any need to take shelter, and it shows in their swagger. Rich Vestal, who’s seen his trucking business double, double again and then double one more time in the past five years, is sipping root beer out of a Styrofoam cup at the Courthouse Cafe in Williston, North Dakota.

“I would welcome a slowdown,” he says, while believing one’s not really in the works. Of all the booming U.S. oil regions set soaring by a drilling renaissance in shale rock, the Permian and Bakken basins are among the most vulnerable to oil prices that settled at $57.81 a barrel Dec. 12. With enough crude by some counts to exceed the reserves of Saudi Arabia, they’re also the most critical to the future of the U.S. shale boom. For the Texas veteran, the forecast is telling him to batten down the hatches. Up in North Dakota, oil’s new kids on the block figure there’s just a few clouds floating by. Early signs are pointing in favor of the worriers.

Read more …

“The Year of Living Dangerously.”

• Warning Over Horrible End To Japan’s QE Blitz (AEP)

HSBC has warned that Japan’s barely-disguised attempt to drive down the yen is becoming dangerous and may spin out of control, leading to an exchange rate crisis next year and a worldwide currency storm. “It is entirely possible that the Yen decline becomes disorderly and swift,” said the bank, in one of the starkest criticisms so far of Japan’s radical stimulus policies. David Bloom and Paul Mackel, HSBC’s currency strategists, voiced growing concern that premier Shinzo Abe is backing away from fiscal retrenchment and may pressure the Bank of Japan (BoJ) to fund policies aimed at boosting household spending. “The temptation to drift towards increasingly generous fiscal programmes could grow. We do not expect a ‘helicopter drop’ of income into every household, but the yen would react very badly to any sign that the government is heading down a route of overt monetisation,” they wrote in a report entitled “The Year of Living Dangerously”.

The warning came as Mr Abe won a sweeping victory in Japan’s snap elections over the weekend, consolidating his power in the Diet and giving him a further mandate for deep reforms. “I promise to make Japan a country that can shine again at the centre of the world,” said Mr Abe. Japan’s recovery has faltered. Mr Abe’s Thatcherite shake-up, or Third Arrow, has yet to get off the ground, though he is now in a much stronger position to break monopolies and confront vested interests. The economy slumped back into recession in the middle of this year after a rise in the sales tax from 5pc to 8pc, a move that was clearly premature. The Abenomics experiment still depends largely on the BoJ’s asset purchases, running at 1.4pc of GDP each month, the most extreme monetary blitz ever attempted in a modern economy. Economists are deeply divided over whether this alone can overwhelm the fiscal shock, and lift the economy out a 20-year stagnation trap. HSBC said Mr Abe may succeed in driving up wages, setting off a “wage-inflation spiral”.

This may not necessarily lead to a bond rout since the Bank of Japan is effectively holding down bond yields. However, the exchange rate might take the strain instead. The worry is that this could set off a beggar-thy-neighbour devaluation process across Asia, eventually sucking in China. “The tentacle of the currency war would spread,” said the report. HSBC said China is determined to avoid joining this debasement game as it tries to wean its own economy off export-led growth, but there may be limits. The Chinese economy is slowing and is already in deep producer price deflation. Japanese exporters have been switching to a new strategy over the last six months, cutting export prices to gain market share as the yen falls, rather than pocketing the windfall as extra profit. “There are grounds to argue that China would join the currency war and devalue the yuan if currency moves elsewhere became disorderly,” it said. The warnings have raised eyebrows since HSBC has close policy ties with the Chinese authorities.

Read more …

Will Kuroda dare turn on Abe?

• Time to Take Away the Punchbowl in Japan (Bloomberg)

As the world watches to see what Prime Minister Shinzo Abe does with his renewed mandate in Japan, my eyes are on Haruhiko Kuroda instead. After all, the Bank of Japan governor probably deserves about 90% of the credit for whatever success Abe’s reflation efforts have had thus far – in particular, a more than 70% rise in the benchmark Topix index. Whether the prime minister now goes further and implements the real structural reforms Japan needs depends as much on Kuroda as anyone else. Abe’s victory was not as sweeping as might appear at first glance. Amid record-low turnout, his Liberal Democratic Party ended up with a couple fewer seats than previously – although still enough for the ruling coalition to maintain its two-thirds majority in the lower house of parliament.

Not surprisingly, officials in Tokyo are talking less about politically difficult reforms and more about putting money in the hands of Japanese to spend. Analysts are expecting a rush of new fiscal stimulus early in the new year. Kuroda, too, will face pressure to one-up himself when the BOJ meets on Friday. Like addicts looking for their next fix, markets want the central bank governor to outdo his “shock-and-awe” from April 2013 and recent Halloween surprise, when he boosted bond purchases to about $700 billion annually. It’s time for Kuroda to do exactly the opposite: hold his fire and prod Abe to begin doing his part to push through his “third arrow” structural reforms. To this point, Kuroda has been a dutiful and circumspect policymaker – perhaps to a fault. Other than a brief flash of impatience with Abe’s foot-dragging in a May Wall Street Journal interview – when he said “implementation is key, and implementation should be swift” – Kuroda has held his tongue.

Yet he bears a responsibility to play the honest broker role that monetary powers have over the years – from Paul Volcker at the Federal Reserve decades ago to Raghuram Rajan at the Reserve Bank of India today. On Friday, Kuroda should tell reporters, “Now that the election is over, it’s up to Prime Minister Abe to carry out the will of the people and deregulate the economy. For now, we at the BOJ have done all we can – and are willing to do – to make Abenomics a success.” Stock traders would abhor such candor from a central bank that’s spent the last 21 months refilling the punchbowl. But a smart economist and wise tactician like Kuroda has to know this Japanese experiment will end very badly if Abe fails to encourage innovation, loosen labor markets, lower trade tariffs and cut red tape. If bond traders drive government bond yields higher and credit-rating companies pounce, the blame will fall squarely on Kuroda.

Read more …

“Syriza leader Alexis Tsipras called Samaras “the prime minister of chaos” in a speech on Saturday.”

• Samaras Grexit Talk Summons Bond Vigilantes to Greece (Bloomberg)

As he enters a critical week for his premiership, Prime Minister Antonis Samaras has awoken the bond market to the dangers of a political rupture in Greece. Samaras will put forward his candidate for the presidency in the first of three votes on Dec. 17 in a process that risks toppling his government. He spent the weekend trading barbs with the Syriza party that leads in the polls, setting out the consequences of letting the anti-austerity group into power, as Syriza accused him of “begging” markets to attack Greece. A bond selloff pushed the yield on the three-year notes Greece sold earlier this year up more than 60 basis points in an hour on Dec. 11 after Samaras accused the opposition of reviving concerns that Greece could be forced out of the euro. The debt, which symbolized Greece’s financial rehabilitation when it was issued earlier this year, closed the week yielding more than 10-year bonds, a signal of the growing default risk.

“The leading party could be portraying the movement as a way to scare voters,” said Yannick Naud, a money manager at Pentalpha Capital in London. “They are blaming Syriza for the move, and rightly so, and it’s probably to tell the electorate it’s our way or chaos.” Samaras triggered the worst stock market selloff in 27 years last week when he decided to bring forward the vote in parliament on a new head of state. The prime minister will be forced to call a snap election unless he can find another 25 lawmakers for the supermajority required to confirm his nominee by Dec. 29. Samaras wrote in an article in Real News that anxiety about Greece is justified and caused by Syriza. Syriza leader Alexis Tsipras called Samaras “the prime minister of chaos” in a speech on Saturday.

Read more …

“The pressure from the European commission on the electoral process of a sovereign country is unbearable, and raises serious questions about the future of democracy in Europe ..“

• EU Finance Chief Flies Into Athens As Grexit Fears Mount (Guardian)

The EU’s finance commissioner, Pierre Moscovici, flies into Athens on Monday amid mounting political uncertainty following the Greek government’s abrupt decision to bring forward the presidential elections. The Frenchman’s visit comes as the country’s radical-left opposition leader, Alexis Tsipras, steps up claims that Greece is being subjected to a campaign of “frenetic fear-mongering” not only by its Prime Minister Antonis Samaras but senior European officials ahead of this week’s ballot, the first of three polls. “An operation of terror, of lies, is underway,” the leader of Syriza told supporters on Sunday. “An operation whose only aim is to sow terror among the Greek people and MPs, and to thrust the country ever deeper into the poverty and uncertainty of the memorandum,” he said referring to the EU-IMF-sponsored rescue programme to keep the debt-stricken economy afloat.

Tsipras was speaking after government leaders reiterated fears that Greece could be forced to exit the eurozone if parliament failed to elect a new head of state by 29 December. Should the ruling alliance lose the three-round race, the Greek constitution demands that general elections are called, a vote Tsipras’s party is tipped to win. “Everything is hanging by a thread … and if it is cut, it could lead the country to absolute catastrophe,” said the deputy premier, Evangelos Venizelos, whose centre-left Pasok party is junior partner in Athens’ two-party coalition. In a re-run of the drama that haunted Greece at the height of the eurozone crisis in 2012, markets have tumbled with the country’s borrowing costs soaring on the back of revived fears of a Greek exit – called Grexit – if a Syriza-led government assumes power.

Moscovici, whose two-day visit is expected to focus on discussing stalled negotiations with the nation’s troika of creditors – the European commission, the IMF and the European Central Bank – will not be meeting Tsipras. Aides described the snub as “unbelievable”. Last week, the finance commissioner said he thought Samaras “knows what he is doing” and would win his gamble of expediting the vote for a new head of state. In an interview with Kathimerini on Sunday, he described the former EU environment commissioner Stavros Dimas, who is the government candidate for president, as “a good man.” But the newly installed president of the European commission Jean-Claude Juncker, who is a close friend of Samaras, has gone further, warning of the perils of the “wrong election result”. “I wouldn’t like extreme forces to come to power,” he said of the poll’s potential to trigger early general elections. “I would prefer if known faces show up.”

Although it is not the first time that the politics of fear have been invoked to ensure that the twice bailed-out Greece toes the line, the flagrant intervention of figures so directly linked to Athens’ €240bn financial rescue programme has been quick to stir angry reaction abroad. Rushing to the support of Syriza on Saturday, the Party of the European Left, the continent’s alliance of leftist groups, deplored what it said was evidence of declining levels of democracy in the EU. “The pressure from the European commission on the electoral process of a sovereign country is unbearable, and raises serious questions about the future of democracy in Europe,” Pierre Laurent, the organisation’s president said in a statement posted on the party’s website.

Read more …

There’s one solution, and one only: Grexit. Not sure what Steve feels about that, though.

• The EU Must Face Up To Austerity’s Failures (Steve Keen)

The Greek stockmarket slumped further overnight as investors continue to digest Prime Minister Antonis Samaras’ decision to call a snap presidential election. Greek stocks fell a further 7%, bringing the market’s loss for the year to 29%. Oliver Marc Hartwich commented in Business Spectator earlier this week that the election might “allow the radical anti-austerity forces to gain power. This would not only dash any hopes of a Greek recovery, it would also force the eurozone to make a choice between the lesser of two evils: to expel Greece from the monetary union and let it default on its debt, or to continue supporting it financially, despite an end to fiscal consolidation”. If, as appears likely, the leftist Syriza Party takes over in Greece, Hartwich lamented that “then, whatever may have been achieved on budget consolidation and reform in the meantime will not be worth much anymore.” This assumes that “whatever may have been achieved on budget consolidation and reform” was worth something in the first place.

So let’s stop assuming and check the data. Figure 1 shows Greek GDP since 1996, and it has clearly collapsed since the policy of austerity was imposed. If the Greeks feel inclined to kick out the incumbent government after a more than 25% fall in nominal GDP over the last six years, could you really blame them? Supporters of austerity, such as Hartwich, point to the tiny uptick in GDP in the last six months as a sign that austerity is working. But the original proponents of austerity actually argued that it would cause the economy to grow, not shrink. Some growth. Austerity began in February 2010 in Greece (as marked on Figure 1), and since then the economy has shrunk by almost 25%. Unemployment rose from 10% when the policy began to a peak of 27.5% — worse than the US experienced during the Great Depression. Rather than seeing the slight recovery in the last six months as signs of success, supporters of austerity should be asking why their policies failed so abjectly.

Read more …

“If by the time of the third vote at the end of the December, the centre right’s candidate Stavros Dimas, a former EU commissioner, has not secured 180 votes out of 300 – unlikely as things stand – there will be an election that Syriza could win.”

• The Eurozone Crisis History Is Repeating Itself … Again (Guardian)

It’s funny how history repeats itself. The inconclusive general election in 2010 took place when the economy appeared to be on the mend and against the backdrop of a crisis in the eurozone prompted by Greece. As things stand, we could be in for a repeat performance in May 2015. Be in no doubt, what’s happening in Europe matters to Britain. The eurozone is perhaps one crisis and one deep recession away from splintering. The more TV pictures of rioting on the streets of Athens or general strikes in Italy between now and the election, the better support for Nigel Farage’s UK Independence party will hold up. Stronger support for Ukip will encourage the Conservatives to adopt a more Eurosceptic approach, hardening their stance on the concessions required for them to continue supporting Britain’s membership of the EU.

Meanwhile, a permanently weak eurozone economy will push Britain’s trade balance into the red. The economic debate in the current parliament has been about sorting out the budget deficit; the debate in the next parliament will also be about sorting out the current account deficit. Let’s start with Greece, which was where the eurozone crisis began all those years ago. The French statesman Talleyrand once said of the Bourbons that they had learned nothing and forgotten nothing. The same applies to the bunch of incompetents in Brussels, Berlin and Frankfurt responsible for pushing Greece towards economic and political meltdown. Greece’s recent economic performance has been pretty good. The economy is growing, unemployment is on the decline and the debt to GDP ratio has come down a bit. Time, you might think, to cut Athens a bit of slack.

Not if you are the German government, the European commission or the European Central Bank. No, they are insisting on even more austerity and continued surveillance by the IMF. But the Greeks have had a bellyful of austerity. They have had enough of being pushed around. Predictably, support for the anti-austerity Syriza party is strong and the mood is angry. In an attempt to regain the initiative, the government in Athens brought forward the dates for the votes in parliament to elect a new president. If by the time of the third vote at the end of the December, the centre right’s candidate Stavros Dimas, a former EU commissioner, has not secured 180 votes out of 300 – unlikely as things stand – there will be an election that Syriza could win.

Read more …

” .. the sorry state of the French-German couple – the stalled engine of European integration..”

• Time For Bottom Fishing In The Eurozone? (CNBC)

By taking the euro area stocks down 2.9% in the course of last Friday’s trading, markets may be signaling that recessionary and stagnant economies have set the stage for unsettling political developments throughout the monetary union. There is no safe harbor left in that troubled region. Even Germany is moving toward the eye of the storm. When you see the German Chancellor Merkel’s blistering attack on its coalition partners – the Social Democrats – for having formed the government in the federal state of Thuringia with the far Left Party (Die Linke) and the Greens, you know that German political stability is gone. In fact, she sounded like she was actively searching for a new partner when, in the same speech last Tuesday (December 9), she invited the Greens (polling at 11%) to cooperate with her center-right party CDU/CSU (polling at 41%). Germany’s current governing coalition is at odds about euro area economic policies and the economic fallout from sanctions against Russia.

More generally, it seems, Chancellor Merkel’s hostile policies toward Russia have opened ominous differences on issues of European security. It looks like a perfect deal breaker may be in the offing. And then there is Germany’s deteriorating relationship with France. Invectives and name calling are flying across the Rhine, and things are seriously amiss at the highest political level. For example, in response to Chancellor Merkel’s repeated criticisms of France’s failure to meet budget deficit targets and to implement structural reforms, the French Prime Minister Valls is saying that France is doing its reforms for its own needs rather than to please foreign governments. In other words, what France is doing, or not doing, is none of Germany’s business. That is the sorry state of the French-German couple – the stalled engine of European integration.

Read more …

But asking prices are up!

• London House Prices Fall By More Than £30,000 In A Month (Guardian)

The average asking price of a home in London has tumbled by more than £30,000 over the past month, figures from property website Rightmove showed on Monday, with new sellers in all of the capital’s boroughs seemingly becoming less optimistic about the price they can achieve. Across the country, Rightmove reported the largest ever monthly fall in the price of properties coming to market, a 3.3% or nearly £9,000 decline to £258,424. Asking prices in Greater London have been falling since the summer, and the drop to an average of £570,796 from £601,180 in November, represents a 5.1% decline in sellers’ expectations over the month, the second biggest after August. Prices were down in all 32 London boroughs, with the biggest drops in Hammersmith & Fulham and Hackney, where new asking prices dropped by 7% and 6% respectively.

However despite the drop, average asking prices of homes coming onto the market across London are up by £57,000, or 11.1%, on December 2013. In Hackney, sellers are asking 22.5% more than in December last year, while in Haringey prices are 21% higher. Rightmove reported month-on-month drops everywhere except Wales, where new sellers put homes up for sale for 0.2% more than in November, at an average of £167,271. However asking prices are set to end the year up 7%, and the website said it expected further increases in the range of 4% to 5% in 2015. The falls come despite the changes to stamp duty announced in this month’s autumn statement. Estate agents have predicted the changes could lead to higher prices being paid for homes, particularly around the old “cliff edge” thresholds at which higher tax rates kicked in.

Read more …

“.. we are two bad decisions away from not being an independent central bank ..”

• Fed Vice-Chairman Fisher: ‘Boy, Was I Wrong’ About Banks’ Political Power (WSJ)

Did the political influence of big Wall Street banks wane after the financial crisis? Not according to the vice chairman of the Federal Reserve. Stanley Fischer gave some unscheduled remarks Friday morning at the Peterson Institute for International Economics, waxing philosophic about the global process for setting financial-system rules. Mr. Fischer suggested rules set directly by legislatures can be imperfect, lamenting the role of Wall Street banks in shaping the 2010 Dodd-Frank financial overhaul law.
“I thought that when Dodd-Frank started, that the banks would not succeed in influencing it, having lost all the prestige they lost,” he told a crowd of several dozen at the Washington, D.C., think tank. “Boy, was I wrong.”

His remarks came less than a day after the House passed a spending bill that included a provision, long sought by banks, to scale back a Dodd-Frank requirement. Mr. Fischer also recalled how during his time leading the Bank of Israel, he felt keenly aware of political considerations. When his central bank colleagues asserted that the institution acted independently of the elected government, his reply was, “Yes. And we are two bad decisions away from not being an independent central bank.”

Read more …

When did Krugman last get anything right? I still think he lost it in the Swedish schnapps he drank when picking up his Fauxbel.

• Krugman Says Fed Is Unlikely to Raise Interest Rates in 2015 (Bloomberg)

Nobel laureate Paul Krugman said the U.S. Federal Reserve is unlikely to raise interest rates next year as it struggles to meet its inflation target and global economic growth remains weak. “When push comes to shove they’re going to look and say: ‘It’s a pretty weak world economy out there, we don’t see any inflation, and the risk if we raise rates and turns out we were mistaken is just so huge’,” Krugman said in Dubai today. “It’s certainly a real possibility that they’ll go ahead and do it, but probably not.” Top Fed officials, including Vice Chairman Stanley Fischer and New York Fed President William C. Dudley, said this month they expect the drop in oil prices to spur domestic consumption, playing down the risk that it could push inflation further below the central bank’s 2% goal. Krugman, however, said he agrees with signals from financial markets suggesting that policy makers will delay raising borrowing costs.

U.S. Treasuries rallied, with 10-year yields falling the most since June 2012 on Dec. 12 while bond yields showed five-year inflation expectations fell to the lowest since 2010. The policy-setting Federal Open Market Committee, which next meets Dec. 16-17, will take energy prices into account in its assessment of inflation and the economy. While most major central banks view inflation of about 2% as the yardstick for price stability, more than a fourth of 90 economies monitored by researcher Capital Economics Ltd. are below 1%, the most since 2009. The outlook for world economic growth may deteriorate in 2015 with risks of crises in China and the euro-area, Krugman said, as the European Central Bank fails to dodge deflation and the world’s second-biggest economy struggles to bolster domestic demand. “The two scary spots are the euro-area and China,” Krugman said in a presentation about the state of the world economy at the Arab Strategy Forum in Dubai.

Read more …

It’ll take a crash for people to really understand what the swaps rule demise entails. And by then it’ll be too late by a wide margin.

• Congress Deals A Blow To Financial Reform (Bloomberg ed.)

Passing a last-minute spending bill to avoid shutting down the U.S. government might be better than another self-inflicted budget crisis, but the deal on the table is nothing to be proud of. The measure approved by the House of Representatives last night and now before the Senate carries with it a set of so-called riders, which change policy in ways that haven’t been examined or discussed. One of them is especially troublesome. It weakens the Dodd-Frank financial reforms. The rider in question removes the so-called swaps push-out rule, which was intended to reduce the risks posed by the largest U.S. banks’ trading in derivatives. Without it, regulators will have to work harder in other areas to promote stability. The rule addressed a dangerous incentive created by the pre-crash regulatory system. Various government backstops, such as deposit insurance and access to emergency loans from the Federal Reserve, have given the largest banks a great advantage in the derivatives market.

Counterparties assume that the government will help them make good on their obligations. This implicit subsidy encouraged them to build huge, interconnected trading operations. Trouble at any one of them could trigger a broader panic and necessitate a rescue. The size of the business is staggering. As of June, the top four banks – JPMorgan Chase, Citigroup, Goldman Sachs and Bank of America – had written derivative contracts on the equivalent of more than $200 trillion in stocks, bonds and other assets. The rule told banks to move some of their derivatives out of federally insured, deposit-taking subsidiaries and to put them in other units instead. This was never going to make the financial system safe on its own. In the case of the biggest banks, all units, not just deposit-takers, enjoy government support, as the bailouts of 2008 and 2009 plainly demonstrated. In addition, pleading practical difficulties, banks had already succeeded in narrowing the scope of the requirement. Still, the swaps rule would have been helpful. Its demise gives regulators more work to do.

They’ll probably need to take further steps to reduce the value of the government subsidy, by making banks less likely to need it. How? First, by making sure that banks have ample capital, and plenty of cash on hand, to cope with sudden setbacks. Here, the regulators have made a start but need to do more. Second, by requiring derivatives trades to be routed transparently through new central counterparties and by setting up trading hubs that let investors transact directly with one another. This strengthening of the financial infrastructure is in train. Third, by monitoring the market for dangerous concentrations of risk, such as the credit-derivative positions that almost brought down insurance giant AIG and a number of large banks in 2008. Here, progress has been sluggish at best. The killing of the swaps rule needn’t be a disaster. That’s what it would be, though, if it proved to be the first step in a broader rollback of financial reform, and if regulators failed to use their other powers to better effect.

Read more …

A ‘little risky’, clueless Robert? Check this for ‘deep thinking’: “Maybe neighborhoods are not as important. Or maybe there’s an urbanization trend going on.”

• Shiller Sees Risk In New Push For First-Time Homebuyers (CNBC)

Lax lending standards were widely faulted for triggering the 2008 financial crisis. If recent developments are any indication, those conditions may be making a comeback. In an effort to accelerate lending to lower- and middle-income borrowers, mortgage giants Fannie Mae and Freddie Mac are launching programs that will guarantee loans with down payments of as little as 3%. But could an ultralow down payment create a housing market boom, or could it lead to another mortgage bubble? A prominent housing market expert who made his name predicting the 2008 bust has at least some doubts. “It sounds a little risky,” Nobel Prize-winning economist Robert Shiller told CNBC. “Risky for the lender, and for the mortgage insurer who is going to insure” the mortgage obligations, he added.

Borrowing criteria tightened after the housing market crashed, but in recent days some of those strictures have been loosened. Lack of a big cash down payment has been cited by some as keeping many possible buyers from becoming homeowners. According to Fannie Mae and Freddie Mac, to get a mortgage with just 3% down, borrowers must have a credit score of at least 620. They must also be able to able to prove income, assets and job status, and purchase private mortgage insurance. However, Shiller still cast doubt on whether that would be the best course of action. “Because it’s only a 3% margin, if somebody defaults and they have to sell the house, they might not get all the money back.”

Although banks have implemented tighter lending standards, a spate of new borrowing programs have been aimed at first-time and lower-income homebuyers, most of whom have stayed on the sidelines of the housing market. According to recent data from the National Association of Realtors, first-time homebuyers account for just 33% of all home purchases. That’s the lowest level in 27 years. “Maybe there’s a cultural change. Our millennials spend more time on Facebook than standing over the backyard fence and talking to the neighbor,” Shiller said, attempting to explain the drop in new homebuyers. “Maybe neighborhoods are not as important. Or maybe there’s an urbanization trend going on.”

Read more …

Didn’t have the guts to go below 7%, did you?

• China Economic Growth May Slow To 7.1% In 2015 – PBOC (Reuters)

China’s economic growth could slow to 7.1% in 2015 from an expected 7.4% this year, held back by a sagging property sector, the central bank said in research report seen by Reuters on Sunday. Stronger global demand could boost exports, but not by enough to counteract the impact from weakening property investment, according to the report published on the central bank’s website. China’s exports are likely to grow 6.9% in 2015, quickening from this year’s 6.1% rise, while import growth is seen accelerating to 5.1% in 2015 from this year’s 1.9%, it said. The report warned that the Federal Reserve’s expected move to raise interest rates sometime next year could hit emerging-market economies.

Fixed-asset investment growth may slow to 12.8% in 2015 from this year’s 15.5%, while retail sales growth may quicken to 12.2% from 12%, it said. Consumer inflation may hold largely steady in 2015, at 2.2%, it said. China’s economic growth weakened to 7.3% in the third quarter, and November’s soft factory and investment figures suggest full-year growth will miss Beijing’s 7.5% target and mark the weakest expansion in 24 years. Economists who advise the government have recommended that China lower its growth target to around 7% in 2015. China’s employment situation is likely to hold up well next year due to faster expansion of the services sector, despite slower economic growth, said the report.

Read more …

Oz has different worries today.

• Australia’s Budget Deficit Blows Out Amid Commodity Slide (Reuters)

Australia’s government forecast its budget deficit would balloon to A$40.4 billion ($33.2 billion) in the year to June as falling prices for key resource exports and sluggish wage growth blew a gaping hole in tax revenues. Releasing his midyear budget outlook on Monday, Treasurer Joe Hockey predicted the economy would grow by 2.5% in 2014/15 before picking up to 3.5% over the next few years, while unemployment was likely to peak at 6.5%. “While there are positive signs of the Australian economy strengthening and transitioning towards broader-based drivers of growth, there is still much work to be done and budget repair will take time,” said Hockey. Just a year into office, Prime Minister Tony Abbott’s government has suffered record low approval ratings, with the economy running into strong external headwinds.

The deficit for 2014/15 had been forecasted at A$29.8 billion in the May budget, while the 2015/16 shortfall was now put at A$31.2 billion, instead of A$17.1 billion. The release was delayed for over an hour as the government reacted to a hostage siege in the heart of Sydney’s financial district, which has diverted media coverage away from the budget update and the government’s political troubles. Hockey predicted tax receipts would be A$31 billion less than first hoped in the four years to 2017/18, due largely to a slide in the price of iron ore, Australia’s biggest export earner. The government has had to cut its forecast from A$92 a ton in May, to A$60 a ton for the foreseeable future. The government has also faced problems getting unpopular cost cutting and revenue raising measures through the Senate, which Hockey said cost another A$10.6 billion.

Read more …

“The Cold War was the dialectic conditioning of the whole world ..”

• The Implosion Of American Culture (PhoM)

It was widely expressed by the mainstream media of the time that the collapse of the Soviet Union and the fall of the Berlin Wall could not have been predicted. In hindsight, the stagnation and drop in oil prices should have been the obvious signs that a dramatic change was coming. And when the USSR began to borrow from western banks, the fix was in. Western banks is something of a misnomer, as no bank, or conglomerate of banking interests, can exist separate and independent of the larger international banking structure which has been built throughout the the 20th Century. Stagnating growth and the deflationary oil prices which began in 1986 acted as fine toothed methods of transferring wealth from the social trust within the Soviet Union, forcing banks within the USSR to borrow from western banks, which was in fact an exchange of assets amongst financial institutions.

The inevitable policy shifts towards “perestroika” were obvious and planned well in advance. The agricultural crisis within the country was designed to parallel the mass movement towards “glasnost”, or openness. When we consider the larger mandates of the CSI, Cultural and Socioeconomic Interception, the same machinations as “perestroika” and ‘glasnost” can be observed in the social fragmentation and devolution of the American middle class. Where the Soviet Union enacted policies which instigated the CSI changes within the country, it will be Americas lack of enacting policy change which will precipitate the implosion of its culture.

To understand what this means we must consider the expansion of American culture around the globe since 1944, which was the year the USD became the primary reserve currency used in global trade. As use of the dollar increased, so did the acceptance of western culture. Everything from McDonald’s burgers to Hollywood creations were exported around the world. America has followed the Soviet Union down the path of re-engineering its ideological culture. Russia has no more moved towards democracy than America has moved towards Communism. Both have shifted towards a new socialist middle ground where centralization has woven the macro economic system tighter around a supra-sovereign statehood. The Cold War was the dialectic conditioning of the whole world.

Read more …

“Nearly half of those 25 years of age are living at home with parents. The rate is up to 30% for those 30 years of age.”

• Why Milennials Are Stuck Living At Home With Parents (Dr. Housing Bubble)

The Federal Reserve conducted a study on Millennials and tried to ascertain why so many of them are living at home. Is it too much student debt? Lower incomes? Or is it that home prices are simply unaffordable? The study finds that all of these factors have a big impact on why many Millennials are living at home and why the first time home buyer market is performing so badly. It also gives us insight into the shifting building demand of new construction. Many builders are focusing their energies on multi-unit structures to cater to an audience that will look for rentals or lower priced condos. There is a heavy renting trend undertaking this country. We are seeing a record numbers of young people living at home with mom and dad heading directly back into their childhood rooms to rock out the NES and attempting to pass Super Mario Brothers once again. There are major implications for housing because of this new structural change. First time home buying is down dramatically. Construction is catering to a lower income cohort. Let us look at what the Fed found in their report.

One of the interesting findings is that the trend of young adults living at home has continued on an upward slope going all the way back to 1999. Even the toxic mortgage days of Housing Bubble 1.0 didn’t really shift this figure by much. But the homeownership rate increased which means that the push came from older cohorts or young buyers that had the misfortune of buying near the top (and of course many were burned in epic fashion).

So let us look at the findings: Nearly half of those 25 years of age are living at home with parents. The rate is up to 30% for those 30 years of age. These are dramatic increases from 1999. There has been paltry data on the makeup of housing composition because some were saying that many were shacking up with roommates. That does not appear to be the case. If you were placing a bet, you would be in a good position putting your money on those 25 years of age living at home with parents. The first time home buyer market continues to perform pathetically. Of course, with investors pulling back we now have the FHFA trying to push for 3% down payment loans to get the juices flowing again. We are already at 5% down payments so this move to 3% will likely offer minimal help for younger Americans.

Read more …

The 2014 Oil Price Crash Explained

Nov 242014
 
 November 24, 2014  Posted by at 2:33 pm Finance Tagged with: , , , , , , , ,  7 Responses »


NPC Capitol Refining Co. plant, Relee, Alexandria County 1925

This is an article by our good friend Euan Mearns at the University of Aberdeen. It was originally published here .

  • In February 2009 Phil Hart published on The Oil Drum a simple supply demand model that explained then the action in the oil price. In this post I update Phil’s model to July 2014 using monthly oil supply (crude+condensate) and price data from the Energy Information Agency (EIA).
  • This model explains how a drop in demand for oil of only 1 million barrels per day can account for the fall in price from $110 to below $80 per barrel.
  • The future price will be determined by demand, production capacity and OPEC production constraint. A further fall in demand of the order 1 Mbpd may see the price fall below $60. Conversely, at current demand, an OPEC production cut of the order 1 Mbpd may send the oil price back up towards $100. It seems that volatility has returned to the oil market.

Figure 1 An adaptation of Phil Hart’s oil supply demand model. The blue supply line is constrained by data (see Figure 4). The red demand lines are conceptual. Prior to 2004, oil supply was fairly elastic to changes in price, i.e. a small rise in price led to a large rise in production. This is explained by OPEC opening and closing the taps. Post 2004, oil supply became inelastic to price, i.e. a large change in price led to marginal increase in supply. This is explained by the world pumping flat out. Demand tends to be fairly inelastic and inversely correlated with price in that high price suppresses demand a little. Supply and price at any point in time is defined by the intersection of the supply and demand curves. 72 Mbpd and $40 / bbl in 2004 became 76 Mbpd and $120 / bbl in 2008 as demand for oil soared against inelastic supply.

Figure 2

Followers of the oil market will be familiar with the recent evolution of oil supply and price shown in Figure 2.

Figure 3

What is less widely appreciated is that a cross plot of the data shown in Figure 2 results in the well-ordered relationship shown in Figure 3. Oil supply and price are clearly following some well established rules. This relationship led to Phil Hart developing his model shown as Figure 1.

Figure 4

Separating the data into two time periods brings more clarity to the process at work. The data define a fairly well-ordered time series beginning at January 1994 at the bottom left rising slowly to January 2004 and then steeply to the Olympic Peak of July 2008. The financial crash then caused the oil price to give up all of its gains returning to 2004 levels by December 2008.

Figure 5

The second time period from January 2009 to the present shows some different forces at work. Starting in 2009 some new production capacity was built. This was not in OPEC and is concentrated in N America where the light tight oil (LTO) boom took off supplemented by steady expansion of tar sands production. Prior to 2009, the production peaks were of the order 74 Mbpd. Post 2009 peaks of the order 77 Mbpd were achieved. About 3 Mbpd new capacity has been added. In May 2011 there is a significant and curious excursion to lower production not accompanied by a fall in price. This coincides with Libya coming off line for the first time and the loss of 1.6 Mbpd production. It seems possible that this coincided with weak demand and the fortuitous loss of production cancelling weak demand leaving price unchanged.

The EIA are always running a few months behind with their statistics these days, not ideal in a rapidly changing world. Thus we do not yet have the data to see the recent crash in the oil price. But we know the price has fallen below $80 and production is unlikely to be significantly changed. So, how do we explain production of roughly 77 Mbpd and a price below $80?

Figure 6

Figure 6 updates Phil Hart’s model (Figure 1) to take account of the oil supply and price movements of the last 5 years. Capacity expansion is achieved by adding 3 Mbpd to the former, well-defined supply-price curve (blue arrow). There is no a-priori reason that this curve should hold in the new supply-price regime, but for the time being that is all I have to work with. The red lines, as described in the caption to Figure 1, conceptually represent inelastic demand where high price marginally suppresses demand for oil. The recent past has seen oil priced at $110 with supply running at about 77 Mbpd as defined by the right hand red coloured demand curve. Reducing demand by about 1 Mbpd brings the price below $80 / bbl (red arrow).

The Recent Past and the Future

Old hands will know that it is virtually impossible to forecast the oil price. The anomalous recent price stability of $110±10 I believe reflects great skill on the part of Saudi Arabia balancing the market at a price high enough to keep Saudi Arabia solvent and low enough to keep the world economy afloat. The reason Saudi Arabia has not cut production now, when faced with weak global demand for oil, probably comes down to their desire to maintain market share which means hobbling the N American LTO bonanza. Alternatively, they could be conspiring with the USA to wreck the Russian economy? But Saudi Arabia is not the only member of OPEC and the economies of many of the member countries will be suffering badly at these prices and that ultimately leads to elevated risk of civil unrest. It is not possible to predict the actions of the main players but it is easier to predict what the outcome may be of certain actions.

  1. If demand for oil weakens by about a further 1 Mbpd this may send the price down below $60 / bbl.
  2. If OPEC cuts supply by about 1 Mbpd at constant demand this may send the price back up towards $100 / bbl.
  3. Prolonged low price may see LTO production fall in N America and other non-OPEC projects shelved resulting in attrition of non-OPEC capacity. This may take one to two years to work through but with constant demand, this will inevitably send prices higher again.
  4. Prolonged low price may see many specialist LTO producers default on loans, risking a new credit crunch and reduced LTO production. This would likely lead to a major consolidation of operators in the LTO patch where the larger companies (the IOCs) pick up the best assets at knock down prices. That is the way it has always been.
  5. Black Swans and elephants in the room – with conflict escalation in Ukraine and / or Syria-Iraq and a new credit crunch, all bets will be off.

[Ilargi:] And this comment to the article from Euan’s friend and collaborator Roger Andrews certainly warrants attention as well. (check the grey dots!):

Hi Euan:

I put this XY plot of the data together from the data links you supplied. It shows the same trends as your Figures except that I’ve plotted all the points on one graph and segregated them into five periods, with trend lines and arrows showing the overall “direction of travel” for each (arrows in both directions for October 2004-May 2009, which as you noted goes zooming up and then comes right back down again).

I’ve also projected production data for the missing months since May 2014 (shouldn’t be too far off) so that we can at least get an idea of how the latest trend might compare with the old ones. We seem to be in uncharted territory.

Debt Rattle October 18 2014

Oct 182014
 
 October 18, 2014  Posted by at 11:16 am Finance Tagged with: , , , , , , , ,  1 Response »


John Vachon Koolmotor, Cleveland, Ohio May 1938

• The Stock Market, Inevitably, Is Going To Crash (MarketWatch)
• One Simple Reason Why Global Stock Markets Are Reeling (AEP)
• Jim Rogers: Sell Everything And Run For Your Lives (Zero Hedge)
• The Return Of The ‘Fear Trade’ (MarketWatch)
• Fannie, Freddie Plan Measures to Ease Lending to Riskier Borrowers (Bloomberg)
• Why US Banks Are Now Extremely Vulnerable (Simon Black)
• Just Try to Refinance. I Dare You (Ritholtz)
• Rates Below 4% Leave U.S. Refinancing Banker Sleepless (Bloomberg)
• ECB Policymakers Clash Over How To Treat Eurozone (Reuters)
• Eurozone: Five Years Of Bailouts, Market Turmoil And Protests (Guardian)
• Greece’s Latest Woes Signal Next Stage Of The Eurozone Crisis (Telegraph)
• Kudos To Herr Weidmann For Uttering Three Truths In One Speech (Stockman)
• Before Bailout, ECB Had Doubts Over Keeping a Cyprus Bank Afloat (NY Times)
• Moody’s Report Makes Grim Reading For British Supermarkets (Guardian)
• Putin Talks With EU, Ukraine ‘Difficult, Full Of Misunderstandings’ (Reuters)
• West Unwilling To Be Objective On Ukraine, Says Russia (WSJ)
• 1,000 Years Of Dust Bowls Now Inevitable (Paul B. Farrell)
• ‘We Have A Worst-Case Ebola Scenario, And You Don’t Want To Know’ (Bloomberg)

History says so.

• The Stock Market, Inevitably, Is Going To Crash (MarketWatch)

And you thought stock-market crashes were a thing of the past. One ancillary benefit of this week’s turmoil has been to remind us that a market crash could occur at any time. We had been lulled into a false sense of security by the markets’ exceptionally good performance in recent years, coupled with our too-short memories. At one point during the air pocket that hit during Wednesday’ session, the Dow Jones Industrial Average had fallen almost 508 points — which, coincidentally, was the same decline during the 1987 stock market crash, the worst in U.S. history. Piling on: This weekend marks the 27th anniversary of that crash.

Of course, 508 points in 1987 represented a far bigger drop than Wednesday’s intra-day decline, since the Dow at that time was trading for just a fraction of where it stands today. To decline as much in percentage terms today as it did then, the Dow would have to fall by more than 3,700 points. And, believe it or not, declines that big are also an inevitable, if rare, feature of the investment landscape. And we’re kidding ourselves if we think that market reforms will be able to prevent it. The only real solution is to devise investment strategies with the knowledge that big daily drops are unavoidable.

Read more …

Liquidity. The magic word.

• One Simple Reason Why Global Stock Markets Are Reeling (AEP)

It is no mystery why global liquidity is evaporating. Central banks have turned off the tap. They have reduced net stimulus by roughly $125bn a month since the end of last year, or $1.5 trillion annualized That is a shock for the financial system. The ratchet effect has been incremental, but relentless. We are finally seeing the consequences, with the usual monetary policy lag The Fed and People‘s Bank of China (PBOC) have stopped their two variants of global QE altogether (for now). Others have chopped their purchases of bonds by half or more. The Brazilians are net sellers, and in a sense they carrying out reverse QE. The Russians have just joined them again. Fed tapering has taken out $85bn a month. The markets are having to go it alone as of this month, without their drip feed. Less understood is the effect of global reserve accumulation by the BRICS, emerging Asia, and the Petro-states. This has collapsed. Nomura’s Jens Nordvig has crunched the latest numbers for Q3.

They show that China’s PBOC has completely withdrawn from global asset markets. In fact, it may have sold almost $9bn of bonds, (even adjusting for currency effects). This is a policy shift by Beijing. Premier Li Keqiang said in May that China’s $4 trillion foreign reserves are already so big they have become a “burden“. China bought $106bn as recently as the first quarter of 2014, so this is a very sudden shift. Yes, I know, China’s purchases of US Treasuries, Gilts, Bunds, French bonds, and Japanese JGBs are not quite the same as QE. There are complex sterilization effects. Yet there is a fungible effect whether the Fed is buying Treasuries or whether the Chinese central bank is buying them. It is all a form of global QE. It all helps to inflate asset prices, and vice versa if it reverses. This was really what Ben Bernanke meant when he first began talking of the “global savings glut“. The flood of money into the bond markets was compressing yields for everybody.

Hence the subprime debt crisis in the US, and hence too the Club Med debt bubble. The money had to go somewhere as the rising world powers boosted global FX reserves to $11.3 trillion from under $1 trillion in 2000. It went into safe-haven bonds, displacing that money into everything else. Over the latest quarter, almost every country has been choking back: the Bank of Korea has cut net purchases from $25bn to $9bn; the Reserve Bank of India from $43bn to $12bn; the petro-states have cut from $19bn in Q1 to $11bn. (That must surely turn steeply negative with oil at $86 a barrel). Net sellers were: China (-$9bn), Brazil (-$7bn), Singapore (-$7bn), Malaysia (-$5bn), Thailand (-$3bn), Turkey (-$1bn). Overall FX accumulation worldwide fell from $106bn to $22bn.

Read more …

Word: “we are all going to pay a terrible price for all this money-printing and debt.”

• Jim Rogers: Sell Everything And Run For Your Lives (Zero Hedge)

From Bitcoin to the Swiss gold referendum, and from Chinese trade and North Korean leadership, Jim Rogers covers a lot of ground in this excellent interview with Boom-Bust’s Erin Ade. Rogers reflects on the end of the US bull market. citing a number of factors from breadth to the end of QE, adding that he agrees with Albert Edwards’ perspective that now is the time to “sell everything and run for your lives,” as the “consequences of [The Fed] are now being felt.” Most notably though, Rogers believes the de-dollarization is here to stay as Western sanctions force many nations to find alternatives. Simply put, Rogers concludes, “we are all going to pay a terrible price for all this money-printing and debt.” Excerpts:

On US stocks: This is the end of the bull market. Stocks will fall 20%. Market breadth is waning as evidenced by the lower number of stocks hitting new highs and trading above their 200-day moving averages. Small cap stocks have already corrected over 10 percent and almost half of the Nasdaq is down 20 percent – a bear market already. Where is this headed? Consolidation is the bare minimum. But, depending on the real economy, it could be worse. “Any pension plans, endowments, etc., are suffering because they invest for the futures and are finding that their situation has gotten worse,” he says.

On The Fed: “We are all going to pay a terrible price for all this money-printing… They are doing this at the expense of people who save and invest. They are doing it to bail out the people who borrowed huge amounts of money. The consequences are already being felt.”

On de-dollarization: The move away from the U.S. dollar is yet another reaction to Western sanctions placed on Russia since it annexed Crimea from Ukraine in March. Russia and Iran have agreed to use their own national currencies in bilateral trade transactions rather than the U.S. dollar. An original agreement to trade in rials and rubles was made earlier this month in a meeting between Russian Energy Minister Alexander Novak and Iranian Oil Minister Bijan Namdar Zanganeh. Similarly, Russia and China also agreed to trade with each other using the ruble and yuan in early September, following a Russian deal with North Korea in June to trade in rubles

Read more …

Yeah, but you would have expected a move into gold as well, and that never happened. Maybe there’s isn’t that much fear yet?!

• The Return Of The ‘Fear Trade’ (MarketWatch)

Halloween came early this October. A vicious midweek selloff shows that investors can be still be scared out of their wits, at least for a few hours. And while the monster is now back in its cage, it is unlikely the “fear trade” has completely run its course. But first, what triggered the carnage? For once, few pundits were offering a pat, one-size-fits-all answer. That’s because there wasn’t one. Instead, it came down to a combination of nagging but interrelated worries surrounding Europe, collapsing oil prices, the threat of global deflation, and the Fed’s rate path. Throw in a steady drumbeat of Ebola headlines and suddenly folks were streaming toward the exits. But the most attention-grabbing moment occurred in the bond market. The rally in Treasurys that accompanied the stock-market selloff, temporarily dropped the yield on the 10-year note below 2%. While a flight to quality would be expected, the sharp one-third of a point drop in the yield had market veterans scratching their heads.

Yields have since rebounded as Treasurys gave back most of the Wednesday rally. Wall Street is enjoying a sharp Friday rebound as oil prices bounce from multiyear lows. But that still leaves traders to make sense of the mayhem. In a note, Eric Green, head of U.S. rates at TD Securities, succinctly summarized the midweek market turmoil as the extension of two competing forces: One was the continuation of a post-quantitative-easing correction in stocks “that should be viewed as healthy.” The other “is a fear trade that has been gathering momentum over the past several weeks, one that has its roots in a global recovery that looks to be weakening outside of the U.S., especially in Europe.” Indeed, Europe is still a primary source of anxiety. And for a good reason.

Read more …

First, let’s see you fog that mirror!

• Fannie, Freddie Plan Measures to Ease Lending to Riskier Borrowers (Bloomberg)

Fannie Mae, Freddie Mac and their regulator are nearing agreement with mortgage issuers on efforts to boost lending and ease banks’ concerns that they will get stuck with bad loans when borrowers default. The initiatives include a consensus on when defaulted loans are so flawed that lenders must buy them back from the two mortgage-finance companies, a key sticking point in efforts to unlock credit, according to three people familiar with the discussions. The steps are part of a broader push to increase lending after banks had to repurchase billions of dollars of mortgages that were issued during the housing bubble. The banks’ reticence has kept first-time homebuyers and others with weak credit out of the real-estate market and created a drag on the fragile housing recovery.

Melvin L. Watt, the director of the Federal Housing Finance Agency, will clarify in a Oct. 20 speech at the Mortgage Bankers Association conference in Las Vegas how some loans can be permanently exempted from the threat of buybacks, said the people, who asked not to be identified because the plans aren’t public. Watt will also discuss an effort that would allow borrowers to put down as little as three% of the purchase price on loans backed by Fannie Mae and Freddie Mac, enabling borrowers with lower incomes to access the mortgage market, the people said. The two companies currently require a 5% down payment on most loans.

Read more …

Loading up on Treasuries. Sure, risky down the line, but a bit overdone here.

• Why US Banks Are Now Extremely Vulnerable (Simon Black)

For a casual observer of the US economy (most “experts”), you could say that things look pretty good. Unemployment is at its lowest rate in six years. Earnings of S&P 500 companies are higher than ever, while their debt is lower than it’s been in the last 24 years. Nonetheless, rather than getting excited for good economic times, the big commercial banks are all battening down the hatches. They’re preparing for bad times ahead. I often stress the importance of being prepared, so in theory, that should be a great sign. But then, you look at what they are “defensively” investing in, and you see that what they consider as prudence is simply insanity. What banks are stockpiling these days are US government bonds, and they’re not doing this casually, they’re going nuts for them. In just the last month alone American banks increased their holdings of US treasuries by $54 billion, to a record $1.99 trillion. Citigroup, for example, held $103.8 billion worth of bonds at the end of June, up 19% from the end of last year.

This is like preparing for an earthquake by running out and buying whole new sets of porcelain dishes and glass vases. All it’s going to do is make things more dangerous, and even if you somehow make it through the disaster, you have a million more shards to clean up. With government bonds you are guaranteed to lose both in the short-term and the long-term. Bonds keep you consistently behind inflation (even the deceptively named TIPS—Treasury Inflation Protected Securities), so the value of your savings is slowly being chipped away. But that’s nothing compared to the long-term threats of the US government not being able to repay the loans. Facing $127 trillion in unfunded liabilities – which is nearly double 2012’s total global output – and with no inclination to reduce those numbers at all, at this point disaster for the US is entirely unavoidable. Never before in history has a government stretched itself so thin and accumulated anywhere close to this amount of debt.

So when the day comes, it won’t be a minor rumble. It will be completely off the Richter scale. These facts about the US government are in no way secret. Every bank out there knows it, yet they keep piling in. Why do they keep buying bonds that they know the government will never be good for? Even though people know in their guts that the government has no earthly possibility to ever repay its debt, on paper it’s a no risk investment. The US government’s sovereign debt has an AA+ rating after all. They might not make money off it, but no fund manager and investment banker is going to get fired for investing in “risk-free” US government debt.

Read more …

What is the truth in refinancing these days? Two articles that leave a lot of questions:

• Just Try to Refinance. I Dare You (Ritholtz)

The bond market seems to have had its own flash crash this week. The yield on the 10-year U.S. Treasury bond dipped briefly below 2%, as panicked equity sellers looked for a safe place to park their cash. Treasuries, of course, are the world’s option of choice, the safest and most liquid port during the storm. Demand for bonds has helped drive down mortgage rates as well. Bloomberg News reported that “U.S. mortgage rates plunged, sending borrowing costs for 30-year loans below 4% for the first time in 16 months, as signs of a slowing global economy drove investors to the safety of government bonds.” Almost immediately, lower rates worked their way through the entire credit complex. The average rate on 30-year fixed home loan is now 3.97%. To put this into context, the median U.S. home price is $219,800. Put down 10% and that $200,000 mortgage costs the homebuyer $951 a month. A decade ago the same mortgage would have cost this buyer as much as 6.34%. The monthly payment would have been more than 25% higher at $1,243.

Under normal circumstances, this decrease in rates should have far reaching and beneficial effects on the economy. It would spur increased investment in real estate. Mortgage refinancings also would rise, and that would put a little more discretionary cash in the hands of consumers each month. As rates fall, one would expect sales of new and existing homes to rise. Lower financing costs should mean higher sales volume, along with some price increases as well. An increase in home sales tends to boost purchases of washing machines, furniture, TVs, cars and other durable goods. The increased economic activity eventually results in more hiring, increased wages, higher spending, all leading to a virtuous cycle. The key phrase in the prior paragraph is “Under normal circumstances.” These are decidedly not normal circumstances today, thus the unsatisfying economic growth we confront today.

Read more …

• Rates Below 4% Leave U.S. Refinancing Banker Sleepless (Bloomberg)

The drop in mortgage rates below 4% has cut into Debra Shultz’s sleep. The New York City banker is busier than she’s been in months, working with three dozen homeowners eager to lower their payments. Shultz helped a Greenwich Village homeowner on Wednesday lock in a 3.63% interest rate for a 30-year fixed jumbo mortgage of more than $900,000. An hour later, the rate jumped to 3.75%. One lender changed its rate sheet six times that day. “It just went crazy,” said Shultz, a senior vice president of mortgage lending at Guaranteed Rate in New York. “I sent out a blast e-mail to 1,600 clients and had 30 responses right away.” Mortgage rates are following a slide in 10-year Treasury yields as weaker-than-expected economic data from Germany to China combine with concern about the Ebola virus, sparking demand for safe investments.

The average rate for a 30-year fixed mortgage dropped to 3.97%, the lowest since June 2013, Freddie Mac said yesterday. Borrowing costs spiked in September before dropping for the last four weeks, giving owners a new opportunity to refinance. “This is bizarro world,” said Anthony B. Sanders, an economics professor at George Mason University in Fairfax, Virginia. “Usually we associate lower interest rates with lower volatility. Now you’re seeing the opposite.” A gauge of U.S. mortgage refinancing jumped 10.6% last week, the most since early June, the Mortgage Bankers Association said Wednesday. The share of home-loan applicants seeking to refinance climbed to 58.9%, the highest since mid-February, from 56.4%, the group said. In December of 2012, after the 30-year average rate hit a record low of 3.31% in November, borrowers wanting to refinance accounted for 84% of applications.

Read more …

Times turn desperate.

• ECB Policymakers Clash Over How To Treat Eurozone (Reuters)

European Central Bank policymakers clashed on Friday over what policy medicine to administer to the sickly euro zone economy, laying bare deep-seated tensions within the Governing Council. Bundesbank President Jens Weidmann said he saw no need for fiscal stimulus in Germany, rejecting a thinly veiled appeal from ECB President Mario Draghi for Berlin to increase its public investment levels to help support the euro zone. Germany, a strong advocate of fiscal austerity, has come under pressure from other countries including the United States, and finance officials around the globe to use its large current account surplus and budgetary room for manoeuvre to invest. Earlier, Draghi’s lieutenant at the ECB, Benoit Coeure, said governments could help counteract lower prices with “fiscal policy, when it is available without questioning long-term debt sustainability” – a cue for governments like Germany to invest.

The discord between the hawkish Weidmann and policymakers closer to Draghi such as Coeure highlights deep divisions within the Council about how far the ECB should go to support the economy, and comes just as jittery markets look for reassurance.
Weidmann brushed off the suggestion that more German public investment could help other euro zone economies, and also took aim at ECB plans to buy asset-backed securities, or bundled loans — a dig that a further ECB policymaker rejected. “The boost to the peripheral countries from an increase in German public investment is … likely to be negligible,” Weidmann told a conference in Riga, where Coeure also spoke. “And with the economy operating at normal capacity utilisation, Germany is not in need of stimulus either – and this will remain the case with the revised forecasts that still foresee growth in line with potential,” he added. On Tuesday, German Chancellor Angela Merkel rejected calls for Berlin to ditch its plans for a balanced budget next year.

Read more …

A great overview of five years of utter failure.

• Eurozone: Five Years Of Bailouts, Market Turmoil And Protests (Guardian)

The eurozone crisis didn’t emerge from a clear blue sky five years ago. Greece’s economic problems were well known; in 2004, it admitted fudging its deficit figures to qualify for euro membership, and a year later Athens brought in an austerity budget to, it hoped, bring down borrowing. But the left-wing Pasok government still shocked the financial markets and its EU neighbours on 18 October. Fresh from winning a general election, it announced that Greece’s budget problems were far worse than imagined; a deficit equal to 12% of national output, not the 6% forecast by the previous government. That admission triggered market panic, tumbling share prices, credit rating downgrades – setting the tone for the years ahead.

Read more …

They signal the hopelessness of the whole project, of the idea that Greece will be as rich as Germany.

• Greece’s Latest Woes Signal Next Stage Of The Eurozone Crisis (Telegraph)

If Greece is the canary in the coal mine, then we are all in trouble. Interest rates on Greek debt have jumped in recent days, rocketing to around 9pc on 10-year bonds, an unsustainable financing cost for such a troubled government. The last time this sort of thing happened, in 2010, the eurozone was soon plunged into near-fatal crisis. Four years later, the debt crisis in the eurozone’s periphery was meant to be over, so Greece’s sudden relapse is one reason why so many equity, bond and commodity investors are running for the hills. Unlike last time, no hidden debt has been discovered, and Greece’s budget deficit has actually fallen significantly. While not quite a model student, Greece had at least been trying to mend its ways. The proximate trigger for the surge in bond yields is that the Athens government had been over-exuberant since the start of the year, hoping to leave the bail-out programme early, partly for the wrong, anti-austerity reasons.

None of this will now happen, and the European Central Bank has promised to help out, which may temporarily calm matters down. The stark reality is that Greece is not out of the woods, contrary to what many had claimed – yet its crisis is containable. Its economy is too small; even under a worst-case scenario it would not be able to take down the whole of the eurozone. But what this latest flare-up confirms is that merely reducing budget deficits is not enough. Having an excessive national debt remains a major problem, especially now that economists are slashing their growth forecasts for the eurozone as a whole and continent-wide deflation is looming. In such a Japanese-style scenario, the traditional debt-eroding mechanisms of inflation and growth no longer apply. Falling prices – caused by a defective, one-size-fits-all monetary policy, and thus insufficient demand – will push up debt ratios as a share of GDP, especially when economic output is stagnating at best.

As Capital Economics points out, any eurozone country with high and rising debt ratios is vulnerable; Italy and Portugal, which both have debt to GDP ratios of about 130pc, could be next in the firing line. Once again, excess debt is the problem – though this time, burdens are rising for partly different reasons. The euro has seen its value slide by 5pc against a trade-weighted basket of currencies since March, with Citigroup predicting that the total depreciation will hit 10pc over the next 12 months. In the past, this would have generated a 5pc boost to exports, translating to a 1pc rise in GDP over three years. Sadly, the impact this time around is likely to be far more muted. Demand for the sorts of goods the eurozone exports has weakened significantly. A greater share of the value of the region’s exports is in turn made up of imported components or raw materials, limiting the beneficial impact of the weaker euro, Citigroup correctly points out.

Read more …

“The biggest bottleneck for growth in the euro area is not monetary policy, nor is it the lack of fiscal stimulus: it is the structural barriers that impede competition, innovation and productivity ..” Eh, what about the debt, Mr Weidmann?

• Kudos To Herr Weidmann For Uttering Three Truths In One Speech (Stockman)

Once in a blue moon officials commit truth in public, but the intrepid leader of Germany’s central bank has delivered a speech which let’s loose of three of them in a single go. Speaking at a conference in Riga, Latvia, Jens Weidmann put the kibosh on QE, low-flation and central bank interference in pricing of risky assets. These days the Keynesian chorus in favor of policy activism is so boisterous that a succinct statement to the contrary rarely gets through – especially at Rupert Murdoch’s Wall Street yarn factory. But here’s what penetrated even Brian Blackstone’s filters:

“The biggest bottleneck for growth in the euro area is not monetary policy, nor is it the lack of fiscal stimulus: it is the structural barriers that impede competition, innovation and productivity,” he said.

Needless to say, that is not only the truth but its one that is distinctly unwelcome to the policy apparatchiks in Brussels and the politicians in virtually every European capital. Self-evidently, printing money and running up the public debt are pleasurable and profitable tasks for agents of state intervention. But reducing “structural barriers” like restrictive labor laws, private cartel arrangements and inefficiency producing crony capitalist raids on the public till are a different matter altogether. In the political arena, they involve too much short-term pain to achieve the long-run gain.

But implicit in Weidmann’s plain and truthful declaration is an even more important proposition. Namely, rejection of the mechanistic Keynesian notion that the state is responsible for every last decimal point of the GDP growth rate. Indeed, the latter has now become such an overwhelming consensus in the political capitals that to suggest doing nothing on the “stimulus” front sounds almost quaint – a throwback to the long-ago and purportedly benighted times of laissez faire. But perhaps stolid German statesmen like Weidmann remember a thing or two about history, and have noted that what is failing in the present era is not private capitalism, but the bloated omnipresent public state. And having almost uniquely among DM nations resisted the siren song of Keynesian activism, Germans can also observe that their economy has not plunged into some depressionary dark hole for want of sufficient fiscal activism.

Read more …

A line that will soon return (stress test results due out October 26): “It was not the governing council’s job to keep afloat banks that were awaiting recapitalization and were not currently solvent .. ”

• Before Bailout, ECB Had Doubts Over Keeping a Cyprus Bank Afloat (NY Times)

As the Cypriot economy reeled from the collapse of its second-largest bank in 2013, the European Central Bank faced a thorny question: Should it keep the institution, Cyprus Popular Bank, alive with short-term loans or pull the plug? By many financial measures, the bank was failing. Stung by a disastrous bet on Greek government bonds, Cyprus Popular Bank had been in trouble for the better part of 2012 and depositors were withdrawing their savings in ever larger numbers. It needed cash and fast. Under E.C.B. rules, troubled banks that can no longer raise funds on the open markets are allowed to borrow from their national central bank, which assumes responsibility for this so-called emergency liquidity assistance, or E.L.A. Still, strict rules govern this process. The bank in question must be solvent. And if the loans surpass 2 billion euros, or $2.56 billion, the E.C.B. reserves the right to refuse additional requests for money. The methodology for valuing the collateral used to secure the credit also has to be disclosed.

Fearing possible contagion if the bank failed, the E.C.B.’s governing council, a decision-making arm consisting of 24 members, had approved an emergency loan request by one its members, the Central Bank of Cyprus, in late 2011. As 2013 approached, the short-term loans to Cyprus Popular Bank had grown to €9 billion, about two thirds the size of the Cypriot economy, and Jens Weidmann, the hawkish head of the German Bundesbank, had begun to forcefully argue that this exposure was too large, according to the minutes of governing council meetings. By approving the loans – which were disbursed by the central bank of Cyprus – Mr. Weidmann said that the E.C.B. was violating a core tenet. That rule holds that banks on the verge of failure should not be bailed out with additional loans. “It was not the governing council’s job to keep afloat banks that were awaiting recapitalization and were not currently solvent,” he said at a meeting in December 2012, according to internal documents from the bank.

Read more …

It’s not just increased competition, the economy is reeling. But that is largely overlooked.

• Moody’s Report Makes Grim Reading For British Supermarkets (Guardian)

Britain’s big four supermarkets will be forced to cut prices further in a race to the bottom with the German discounters Aldi and Lidl, according to a report from the credit ratings agency Moody’s. Tesco, Sainsbury’s, Morrisons and Asda will have to reduce prices to slow the pace of falling sales and loss of business to Aldi and Lidl, Moody’s said. But the big grocers will not win the war as their operating margins halve from their historical averages, Moody’s said. Despite the expected price cuts, the discounters will continue to take market share from the big four. Though Aldi’s and Lidl’s sales growth will probably slow, they will open more branches, putting extra pressure on the big grocers’ larger stores, which shoppers are abandoning, Moody’s predicted.

Moody’s analysts Sven Reinke and Michael Mulvaney said in the report: “We believe the big four will have to cut prices further to stem their sales declines and slow market share losses… We believe Aldi and Lidl are now entrenched and their combined market share could reach 10% over the next couple of years from 8.3% today. Over time the discounter’s UK market share could be similar to that of discounters in other European countries at around 12%-15%.” After decades of growth, Britain’s supermarkets are in crisis as they battle to compete with Aldi and Lidl. Customers changed their habits during the recession and started shopping locally, and little and often to reduce waste. Squeezed by falling real wages, they opted to save money at the German discounters’ small branches instead of making a weekly trip to the big four’s vast stores.

Read more …

[..] … “certain participants” had taken an “absolutely biased, non-flexible, non-diplomatic” approach to Ukraine …

• Putin Talks With EU, Ukraine ‘Difficult, Full Of Misunderstandings’ (Reuters)

Talks between Russia, Ukraine and European governments on Friday were “full of misunderstandings and disagreements”, the Kremlin said, undercutting more upbeat messages from leaders hoping for a breakthrough in the Ukraine crisis. Russian President Vladimir Putin shook hands with his Ukrainian counterpart Petro Poroshenko at the start of a meeting with European leaders aimed at patching up a ceasefire in eastern Ukraine and resolving a dispute over gas supplies. The various leaders emerged an hour later telling reporters some progress had been made and promising further talks. “It was good, it was positive,” a smiling Putin told reporters after the meeting, held on the margins of a summit of Asian and European leaders in Milan.

However, Kremlin spokesman Dmitry Peskov later poured cold water on hopes of any breakthrough, saying “certain participants” had taken an “absolutely biased, non-flexible, non-diplomatic” approach to Ukraine. “The talks are indeed difficult, full of misunderstandings, disagreements, but they are nevertheless ongoing, the exchange of opinion is in progress,” he said. A similar message emerged overnight after Putin met German Chancellor Angela Merkel, a formerly cordial relationship that has come under heavy strain from Moscow’s support for pro-Russian rebels in eastern Ukraine. The meeting was reported by both sides to have made little progress, with the Kremlin saying “serious differences” remained in their analysis of a crisis. Putin, Poroshenko, Merkel and French President Francois Hollande were due meet later in the day, their aides said.

Read more …

They all just seem to want Putin to say he did it. Not going to happen. There’s still zero proof.

• West Unwilling To Be Objective On Ukraine, Says Russia (WSJ)

German Chancellor Angela Merkel sparred with Russian President Vladimir Putin over Ukraine in front of other world leaders Friday, as the most intense diplomatic effort in months aimed at defusing tensions there ended with little sign of progress. Mr. Putin’s arrival in Milan late Thursday for a two-day summit of Asian and European leaders spurred a flurry of top-level meetings over the crisis in Ukraine, but both sides sounded pessimistic afterward. “On this, I can’t see any kind of breakthrough whatsoever,” Ms. Merkel said at a news conference Friday, referring to differences over implementing the cease-fire and peace plan signed Sept. 5 between Ukraine and Russia-backed rebels. Kremlin spokesman Dmitry Peskov said Friday that “there was a complete unwillingness to be objective on the part of some participants.”

The mood was illustrated by what two European officials described a curt exchange between Ms. Merkel and Mr. Putin at a private retreat with Asian and European leaders. Mr. Putin had spoken of Russia’s annexation of Ukraine’s Crimea region in March as being lawful, and Ms. Merkel contested that in front of the other leaders, said one senior European Union official. Another official confirmed a terse exchange between the two. In a news briefing after the talks, Mr. Putin referred several times to the rebels in eastern Ukraine as representatives of “Novorossiya,” a tsarist-era term that spans large swaths of what is now southern and eastern Ukraine. The term has been widely used by Russian nationalists to justify claims on much of Ukraine’s territory.

Read more …

Capitalism at war with the planet.

• 1,000 Years Of Dust Bowls Now Inevitable (Paul B. Farrell)

Yes, capitalism’s at war, fighting against all efforts to limit global warming and climate change. This is WWIII, the defining moment of the 21st century. Why? “One word in the latest draft report from the United Nations Intergovernmental Panel on Climate Change (IPCC) sums up why climate inaction is so uniquely immoral: Irreversible.” Irreversible? Not to capitalists. They’re betting the future of the human race they’re right. Big Oil, the GOP and right-wing fundamentalists are all climate-science deniers, absolutely certain they are right, they will win WWIII: Exxon Mobil is spending $37 billion annually on new drilling. U.S. Chamber of Commerce CEO Tom Donohue says we have enough oil to last over two centuries. Texas Gov. Rick Perry’s a Luddite. Oklahoma GOP Senator Jim Inhofe published “The Greatest Hoax: How the Global Warming Conspiracy Threatens Your Future.” But, what if the Right is wrong? What if global warming really is irreversible? What if their gamble doesn’t pay off? Too bad. Too late. Capitalism has no Plan B.

So billions of humans just won’t survive the 1,000-year Dust Bowl that’s ahead if Plan A fails. Yes, it’s that huge a bet. The damage to our civilization is irreversible. And inaction is immoral. Soon we’ll pass a point of no return. After that, the damage takes 1,000 years to repair, warns ClimateProgress editor Joe Romm. Why? Because of today’s “ongoing failure to cut carbon pollution: The catastrophic changes in climate we are voluntarily choosing to impose on our children and grandchildren, and countless generations after them, cannot be undone for hundreds of years or more.” Conservative opposition is based on the economics of Big Oil and the energy industry. They believe any regulations or taxation of carbon emissions will have a negative impact on corporate earnings, shareholder dividends, production costs. As California Gov. Jerry Brown put it: There’s “virtually no Republican” in Washington that accepts climate science. And most GOP governors “openly deny climate science” despite widespread scientific evidence. Worse, Big Oil deniers spend hundreds of millions annually on lobbying for GOP votes.

Read more …

“That would be like a bad science fiction movie”.

• ‘We Have A Worst-Case Ebola Scenario, And You Don’t Want To Know’ (Bloomberg)

There could be as many as two dozen people in the U.S. infected with Ebola by the end of the month, according to researchers tracking the virus with a computer model. The actual number probably will be far smaller and limited to a couple of airline passengers who enter the country already infected without showing symptoms, and the health workers who care for them, said Alessandro Vespignani, a Northeastern University professor who runs computer simulations of infectious disease outbreaks. The two newly infected nurses in Dallas don’t change the numbers because they were identified quickly and it’s unlikely they infected other people, he said.

The projections only run through October because it’s too difficult to model what will occur if the pace of the outbreak changes in West Africa, where more than 8,900 people have been infected and 4,500 have died, he said. If the outbreak isn’t contained, the numbers may rise significantly. “If by the end of the year the growth rate hasn’t changed, then the game will be different,” Vespignani said. “It will increase for many other countries.” The model analyzes disease activity, flight patterns and other factors that can contribute to its spread. “We have a worst-case scenario, and you don’t even want to know,” Vespignani said. “We could have widespread epidemics in other countries, maybe the Far East. That would be like a bad science fiction movie.”

Read more …

Russian Union Of Engineers Accuses Ukraine Airforce In MH17 Crash

Sep 182014
 
 September 18, 2014  Posted by at 9:17 am Finance Tagged with: , , ,  31 Responses »


DPC Old Charter Street burying ground, Salem, Massachusetts 1906

The Russian Union of Engineers has issued a report on what happened to flight MH17. The report has now been translated. It doesn’t leave open the option that MH17 was downed by a ground-to-air missile, something all other sources have so far labeled the most likely explanation for what happened on July 17. The Russian Union of Engineers instead claims the plane was attacked by a fighter jet, and that, since the east Ukraine rebels have no such jets, and multiple sides have confirmed there were no Russian jets in the vicinity, this jet had to have been Ukrainian air force.

At the very least the report should be broadly discussed in western media, and western experts asked to refute what parts of it they find fault with.

The full report can be downloaded here.


(Turn on subtitles)

Here is the conclusion of the report:



9. Reconstructing the event

Based on the above, we can draw the following conclusions:

9.1. In relation to the circumstances of the crash of the Malaysia Airlines Boeing 777 jet.

The Malaysia Airlines Boeing 777 was carrying out the 17.07.2014 flight Amsterdam – Kuala Lumpur in the flight corridor established by the dispatchers. At the same time, it is likely that manual control was turned off and the plane was on autopilot, flying in a horizontal plane along the route laid out and adjusted by air traffic controllers on the Ukrainian side.

At 17.17-17.20, the Boeing 777 was in Ukrainian airspace near the city of Donetsk at the height of 10100 m. An unidentified combat aircraft (presumably a Su-25 or MiG -29), which was a tier below, on a collision course, in the cloud layer, sharply gained altitude and suddenly appeared out of the clouds in front of the civilian aircraft and opened fire on the cockpit, firing from a 30 mm caliber cannon or smaller. The pilot of a fighter jet can do this while in “free hunting” mode (using onboard radar) or with the help of navigational guidance using airspace situation data from ground-based radar.

As a result of multiple hits from shells there was damage to the cockpit, which suddenly depressurized, resulting in instant death for the crew due to mechanical influences and decompression. The attack was sudden and lasted a fraction of a second; in such circumstances the crew could not sound any alarm as the flight had been proceeding in regular mode and no attack was expected.

Since neither the engines or hydraulic system, nor other devices required for the continuation of the flight were out of commission, the Boeing 777, running on autopilot (as is standard), continued on its horizontal flight path, perhaps gradually losing altitude.

The pilot of the unidentified combat aircraft maneuvered to the rear of the Boeing 777. After that, the unidentified plane remained on the combat course, the pilot provided a target tracking aircraft equipment, took aim and launched his R-60 or R-73 missiles.

The result was a loss of cabin pressure, the aircraft control system was destroyed, the autopilot failed, the aircraft lost the ability to maintain its level flight path, and went into a tailspin. The resulting overload led to mechanical failure of the airframe at high altitudes.

The aircraft, according to the information available from the flight recorders, broke up in the air, but this is possible only in the case of a vertical fall from a height of ten thousand meters, which can only happen when the maximum permissible overload is exceeded. One reason for stalling and going into a tailspin is the inability of the crew to control the aircraft as a result an emergency in the cockpit and the subsequent instantaneous depressurization of the cockpit and the passenger cabin. The aircraft broke up at a high altitude, which explains the fact that the wreckage was scattered over the territory of more than 15 square kilometers.

9.2. In relation to the party responsible for the death of 283 passengers and 15 crew members.

On 17.07.2014, the armed forces of the self-proclaimed Donetsk National Republic had no relevant combat aircraft capable of destroying an aerial target similar to the Boeing 777, nor the necessary airfield network, nor the means of radar detection, targeting and tracking.

No combat aircraft of the Armed Forces of the Russian Federation violated the airspace of Ukraine, which the Ukrainian side confirms as well as third parties who conduct space surveillance over the situation in Ukraine and in its airspace.

To establish the truth, it is necessary to objectively and impartially investigate all the circumstances of the destruction of the Malaysian Boeing 777, to interview the thousands of citizens who may have seen something. Naturally, experienced professionals should conduct the surveys. To ask the right questions – this is a rigorous science, and a great art in advancing the truth. Important information is contained in the wreckage of the aircraft and the remains of the dead, but this precise information is easy to destroy, distort and hide. And there are plenty of parties interested in concealing the real facts.

As confirmation, Ukraine, the Netherlands, Belgium and Australia signed an agreement on August 8 providing that information about the crash investigation would be disclosed only upon the consent of all parties. “The investigation is ongoing, [utilizing] expertise and other investigative actions” – announced the Spokesman of the Prosecutor General of Ukraine, Yuri Boychenko. “The results will be announced at the conclusion of the investigation and with the consent of all parties that have executed the agreement.”

Procrastination and the evasion of an objective investigation by all sides, with the participation of prestigious international organizations, raises doubts whether the concerned parties will make public the true circumstances surrounding the crash of the Malaysia Airlines Boeing 777.

Debt Rattle Jun 17 2014: A Crash Is A System Fixing Itself

Jun 172014
 
 June 17, 2014  Posted by at 4:13 pm Finance Tagged with: , ,  13 Responses »


Dorothea Lange No food, no work, baby died, to be sent back to OK from CA Spring 1937

Just a bunch of numbers Reuters published today. Read and weep. While remembering that this spring, after that horrible winter that threw the recovery so terribly off course, would see pent-up demand go crazy. That after the Q1 GDP growth, which has by now been revised to -2% after initially having been predicted to be in the 3%+ range, Q2 would certainly, according to pundits, economists and government agencies, top 3%, if not more. We already know for a fact that’s not going to happen. Unless the US grows faster in June than China did in its heyday. The American economy is getting very seriously hammered, and nobody with access to all the right channels will ever let you know about it other than in a long range rear view mirror where things always look smaller than they appear. The American consumer is necessarily getting hammered just as badly, but as long as the message remains one of growth, bread and circuses (or pink slime and Kardashians), (s)he will wait it out until that glorious promised tomorrow on the horizon just around the corner arrives.

May Home Construction Data Paint Gloomy Picture

U.S. housing starts and building permits fell more than expected in May, suggesting the housing recovery will likely remain slow for a while. Groundbreaking for homes fell 6.5% to a seasonally adjusted annual pace of 1 million units, the Commerce Department said on Tuesday. March’s starts were revised down to show a 12.7% increase instead of the previously reported 13.2% rise. Groundbreaking for single-family homes, the largest part of the market, fell 5.9% in May to a 625,000-unit pace, while starts for the volatile multi-family homes segment decreased 7.6% to a 376,000-unit rate.

Permits to build homes declined 6.4% to a 991,000-unit pace in May, pulling back from the 1.06 million units touched in April. Economists had expected permits to dip to a 1.05-million unit pace. Permits for single-family homes rose 3.7% to a 619,000 unit-pace. They continue to lag groundbreaking, suggesting single-family starts could fall in the months ahead. A survey on Monday showed confidence among single-family home builders increased in June, but fell short of reaching the threshold considered favorable for building conditions. Permits for multi-family housing tumbled 19.5% to a 372,000-unit pace.

Michael Snyder throws together some numbers on US debt, and I’m not even sure he counts all entitlement programs in the proper manner.

Total Debt In America Hits A New Record High Of Nearly 60 Trillion Dollars

What would you say if I told you that Americans are nearly $60 trillion in debt? When you total up all forms of debt including government debt, business debt, mortgage debt and consumer debt, we are $59.4 trillion in debt. That is an amount of money so large that it is difficult to describe it with words. For example, if you were alive when Jesus Christ was born and you had spent $80 million every single day since then, you still would not have spent $59.4 trillion by now. And most of this debt has been accumulated in recent decades. If you go back 40 years ago, total debt in America was sitting at about $2.2 trillion. Somehow over the past four decades we have allowed the total amount of debt in the United States to get approximately 27 times larger.

Total consumer credit in the U.S. has risen by 22% over the past three years alone, 56% of all Americans have a subprime credit rating, 52% of Americans cannot even afford the house that they are living in. There is more than $1.2 trillion dollars of student loan debt, $124 billion dollars of which is more than 90 days delinquent. Only 36% of all Americans under the age of 35 own a home, a new record. US national debt is $17.5 trillion dollars. Almost all of that debt has been accumulated over the past 40 years. In fact, 40 years ago it was less than half a trillion dollars.

By now I’m thinking it’s no wonder the housing numbers for May were so atrocious. What else can you expect? Michael also points to a WSJ article from May 2013 on global debt numbers:

Total World Debt Load at $223.3 trillion, 313% of GDP

Economists at ING found that debt in developed economies amounted to $157 trillion, or 376% of GDP. Emerging-market debt totaled $66.3 trillion at the end of last year, or 224% of GDP. The $223.3 trillion in total global debt includes public-sector debt of $55.7 trillion, financial-sector debt of $75.3 trillion and household or corporate debt of $92.3 trillion. (The figures exclude China’s shadow finance and off-balance-sheet financing.) Per-capita indebtedness is still just $11,621 in emerging economies (and rises to $12,808 if you exclude the two largest populations, China and India). For developed economies, it’s $170,401. The U.S. alone has total per-capita indebtedness of $176,833, including all public and private debt.

Every child born in America has a $176,833 debt sticker on its head. But wait! Central banks to the rescue! As I wrote yesterday, US and UK and Japanese and Chinese government debt, which still keep growing very rapidly, have increasingly been swallowed up whole by their respective central banks, which are now well on their way to buy up their own and each other’s asset markets too. And that, too, increases debt, and not a little bit, though it’s perhaps through a backdoor. The process keeps the money- and powerholders of a present failed and long since broke(n) system in place at a huge cost to everyone else, including future generations. And perhaps the only hope of escaping it is a crash, which will be far more severe than merely heartbreaking. Excerpts from a Nassim Taleb and Mark Spitznagel discussion explain how that might work.

Inequality, Free Markets, and Crashes

Mark Spitznagel and Nassim Taleb started the first equity tail-hedging firm in 1999. Since then these two friends and colleagues have helped popularize so-called “black swan” investing, with Spitznagel as the founder and CIO of hedge fund Universa Investments and Taleb as an academic and author of The Black Swan. The two men recently sat down to discuss Spitznagel’s new book, The Dao of Capital.

Nassim Taleb: Mark, your book is the only place that understands crashes as natural equalizers. In the context of today’s raging debates on inequality, do you believe that the natural mechanism of bringing equality — or, at the least, the weakening of the privileged — is via crashes?

Mark Spitznagel: … one can absolutely say logically and empirically that asset-market crashes diminish inequality. They are a natural mechanism for this, and a cathartic response to central banks’ manipulation of interest rates and resulting asset-market inflation, as well as other government bailouts, that so amplify inequality in the first place. So crashes are capitalism’s homeostatic mechanism at work to right a distorted system.

Taleb: I see you are distinguishing between equality of outcome and equality of process. Actually one can argue that the system should ensure downward mobility, something much more important than upward one. The statist French system has no downward mobility for the elite. In natural settings, the rich are more fragile than the middle class and we need the system to maintain it.

Spitznagel: … what’s hidden beneath all the aggregate income-inequality data is much cross-sectional downward mobility, in that most people in the right tail of income spend very little time there. The transience of success is assured by natural entrepreneurial capitalism, and is precisely what works about it: unseating the top, driving out the lucky and unworthy. Without this dynamic, capitalism doesn’t work. It isn’t even capitalism, but rather oligarchic central planning. Yet modern government chips away at this dynamic in so many ways, most significantly by providing floors and safety nets to crony bankers and other financial punters.

That we so casually ignore the implications of this goes to the main point of my book: In the words of Bastiat, we pursue a small present good which will be followed by a great evil to come, rather than a great good to come at the risk of a small present evil. The latter is what I call roundaboutness, which is central to strategic decision making, especially investing. It is about counter-intuitively heading right in order to better go left, or taking small losses now — and willingly looking like an idiot — to build a strategic advantage for later. In Daoism it is wei wuwei or shi. In economics it is Robinson Crusoe, who starves himself by not spending all his time fishing by hand and instead spends time making a boat and net, in order to catch many more fish later. We have roundaboutness to thank for civilization itself.

Taleb: … we need a “negative state” for law enforcement, something like the U.S. federal state or the traditional empire during Pax Romanaor Pax Ottomana. In this idea the role of the state is protection, not to promote education or, say, corn fructose, which we know have worse adverse consequences when coming top-down from a powerful centralizer and, hence, implemented at a large scale. In my work the central mission of the state is to protect the environment, to shield me from irreversible harm done to my backyard by people who don’t have skin in the game and are protected by limited liability. There are things that can be done by the state, and only the central state. Do you agree?

Spitznagel: I definitely agree that the only conception of the state that makes any sense is the “night watchman” variety, which exists only to enforce the rules of the game rather than trying to pick the winners and losers (whether it’s financial institutions or monoculture crops). There is a deep tradition in classical liberalism and modern libertarianism that stresses the importance of limiting government action to the defense of life and limb — a defense of “negative liberty” — rather than the “positive” conception where it is the job of the government to promote literacy, full employment, equality, and so forth. [..]

… I see the whole “R>G” [meaning return on capital is greater than the rate of growth] thing as taking bubble observations and rationalizing their extrapolation forever, thus simultaneously neglecting both the incidence of asset bubbles and what’s so bad about them. Such enormous shortsighted errors follow from the noisy duration of the “long term.” And exploiting these errors is the name of the game. In everyone’s scorn of the roundabout lies its greatest edge.

The main metaphor of my book is the “Yellowstone effect”: A massive fire in Yellowstone Park in 1988 opened the eyes of foresters to the fact that a century of wildfire-suppression, and with it competition- and turnover-suppression, had only delayed, concentrated, and by far worsened the destruction — not prevented it. This isn’t just about dead-wood accumulation creating a fragile tinderbox network. The real issue is how our tinkering artificially short-circuits the fundamental capacity of the system to allocate its limited resources, correct its errors, and find its own balance through the internal communication of information that no forestry manager could ever possibly possess.

But that capacity is still there, and homeostasis ultimately wins through a raging inferno. This is a cautionary tale for our economy. A crash, or the liquidation of assets that have grown unimpeded by economic reality (as if there were more nutrients in the ecosystem than there actually are), looks to academics and bureaucrats – and just about everyone else as well – like the system breaking down. It is actually the system fixing itself.

Taleb: … First, intervention — in general, whether medical, governmental, or other — has side effects and needs to be treated exactly as we do with other complex systems: only when extremely necessary. Second, counter to naïve conservatism, nature is not conservative, it destroys and creates species every day, but it does so in a certain pattern: Its destruction has the effect of isolating the system from large-scale harm. It does not try to preserve the past; it only tries to preserve the system. Finally, liberty is not an economic good, but an existential one. The economic good is a mere bonus. The argument that liberty is good for economic activity or for growth of the system feels lowly and commercial. If you were a wild animal, would you elect to be in a zoo because the economy is better over there than in the wild?

It may seem unacceptable, or tough, or unfair, that the only way out of the present illusionary economic system, and all the trinkets we have to thank it for, is by a giant crash. But once you realize that it must crash no matter what, and that you are really nothing but an animal caged by the system, what should you choose? I think perhaps it’s a choice between your weaknesses and your strengths. Though I know it’s not nearly as simple as that, because the crash will erase much of what we hold dear, for whatever reason we do that. It’s probably good to acknowledge that the choice is not between crash or no crash, but between weakness and strength, and that a crash is a system fixing itself back to health, something that has a lot of positive connotations, even if that is the only positive feature it has. Wait, there’s one other: our children will see a lot of the debts they are now being born with, disappear. But it will come at an unprecedented price.

And of course if you add entitlement programs ….

• Total US Debt Soars To Nearly $60 Trillion, Foreshadows New Recession (RT)

America – its government, businesses, and people – are nearly $60 trillion in debt, according to the latest economic data from the St. Louis Federal Reserve. And private debt – not government borrowing – is the biggest reason for the huge deficit. Total US debt at the end of the first quarter of 2014, on March 31 totaled almost $59.4 trillion – up nearly $500 billion from the end of the fourth quarter of 2013, according to the data. Total debt (the combination of government, business, mortgage, and consumer debt) was $2.2 trillion 40 years ago. “In 50 short years, debt has gone from being a luxury for a few to a convenience for many to an addiction for most to a disease for all,” James Butler wrote in an Independent Voters Network (IVN) op-ed. “It is a virus that has spread to every aspect of our economy, from a consumer using a credit card to buy a $0.75 candy bar in a vending machine to a government borrowing $17 trillion to keep the lights on.”

Read more …

Nuff said: “needs” of Chinese issuers will increase to $20 trillion through the end of 2018, a third of the $60 trillion in global funding “needs”. Who’s going to print all those needs?

• China Bigger Than U.S. With $14 Trillion in Company Debt (Bloomberg)

Chinese companies borrow more than their American counterparts as the world’s second-largest economy takes center stage in corporate-debt markets. Borrowers from China had $14.2 trillion in debt at the end of last year, exceeding every other country including the U.S., which had $13.1 trillion in company obligations, according to a report dated June 15 by Standard & Poor’s. Needs of Chinese issuers will increase to $20 trillion through the end of 2018, a third of the $60 trillion in global funding needs.

Borrowings in the Asia-Pacific region will overtake both North America and Europe by 2016 as China and neighboring countries widen their lead as the world’s largest group of corporate borrowers, according to S&P. Bonds, as opposed to loans, will also become a more important source of financing, increasing 3.5%, or almost $3.1 trillion. “Higher risk for China’s borrowers means higher risk for the world,” Jayan Dhru, S&P’s global head of corporate ratings in New York, wrote in the report. “The U.S. continues on the path to economic recovery while the euro zone struggles with marginal growth, but the bottom line is that this is a China story.”

Read more …

We know why.

• Why Japan’s Debt Markets Are Frozen (Bloomberg)

As Japan gets the inflation it’s been craving all these years, the bond market is doing something very surprising: nothing. Far from panicking over each uptick in the consumer price index, traders are pushing Japanese government bond yields lower. Today’s 10-year bond rate is 0.58% compared with 0.735% at the start of 2014, even though the CPI is rising at a 3.4% year-over-year rate. Anyone else confused? This disconnect owes much to Haruhiko Kuroda’s unprecedented asset-buying spree. By gobbling up an ever-larger number of bonds at auction and in the secondary market, the Bank of Japan governor has essentially paralyzed the market. What’s more, this is becoming a global phenomenon as hedge fund managers from New York to London to Singapore bemoan the death of market volatility.

My Bloomberg View colleague Mark Gilbert looked through the lens of economist Hyman Minsky, who argued that long periods of market stability and harmony can reach tipping points, which then rapidly degenerate into chaos. What worries me is that central banks in Frankfurt, Tokyo and Washington now find themselves on a treadmill from which there’s no escape. As it accelerates, their bond-buying efforts will have to keep pace. Over time, there’s no doubt that the world’s biggest central banks are headed toward the widespread monetarization of debt – effectively nationalizing bond markets and raising troubling questions. Not least of them: How exactly does a central bank withdraw from a market it essentially owns? Kuroda is now the biggest player in Japan’s $9.6 trillion bond market. As I pointed out last August, Kuroda appears to have one eye on the playbook of Korekiyo Takahashi, whose radical debt-buying policies as finance minister back in the 1930s had the Tokyo establishment calling him their John Maynard Keynes.

Former Federal Reserve Chairman Ben Bernanke credited Takahashi with “brilliantly rescuing Japan from the Great Depression through reflationary policies.” Yet three problems arise when it becomes hard to know where a central bank’s balance sheet ends and the debt market begins. One is the loss of volatility that traders and companies need to buy and sell things. Heavily sedated from the BOJ’s monetary tonic, bond-market transacting has all but stopped and price ranges are stuck in their tightest ranges ever. That’s also carried over into the stock market, where big price swings are becoming a thing of the past.

A second problem is losing the vital information that a liquid debt market affords. If Japan’s bond bubble does pop one day, as shortsellers like J. Kyle Bass of Hayman Capital Management have long predicted, it could come out of nowhere. The normal warning signals — yield spikes and spreads between debt instruments — are being deadened as we speak. The third is finding an exit strategy. If Japan’s experience with quantitative easing these last dozen years tells us anything, it’s that restoring normalcy is devilishly hard. Debt markets become addicted to central-bank stimulants and weaning them off is easier said than done. Just yesterday, International Monetary Fund head Christine Lagarde said the Fed may have scope to keep interest rates at zero for longer than investors expect. How right she is about that!

Read more …

China buys real assets with virtual money.

• How China Is Keeping US Bond Yields Low (CNBC)

China’s efforts to weaken its currency could be bolstering U.S. Treasurys and weighing on a rally in the dollar against the euro. The Asian nation’s currency actions, thought to be an effort to boost its slowing economy, have contributed to these unlikely trading patterns, market participants say. It’s the latest way in which China’s economy has become intertwined with the U.S., five years after an American real estate bust elicited finger-pointing at the role Chinese funds played in cheap U.S. mortgages. The 10-year Treasury yield fell from over 3% at the start of the year to an 11-month low of 2.44% at the end of the May; it more recently traded at 2.60%. The push lower in yields came even amid signs that the U.S. labor market recovery is picking up. All things being equal, yields were primed to rise.

The dollar has similarly moved at cross-purposes to what’s expected as the economy strengthens and the Federal Reserve starts to tighten monetary policy. The dollar fell 0.2% against the euro in the first quarter, even as declining euro-zone inflation made it more likely that the European Central Bank would have to ease further. The dollar is up 1.5% against the euro this year, a modest bump compared to expectations. As U.S. Treasury yields have fallen this year, companies and consumers have found it less expensive to borrow money. Simultaneously, the lack of a major dollar rally against the euro means that U.S. exports are more competitive than they were expected to be.

Among the variety of explanations, demand from China continues to grab the attention of traders and strategists. It starts with the depreciation of the Chinese yuan against the dollar in 2014. Some attributed the move to the government’s desire to shake out speculators betting on a continued rise in the Chinese currency, while others point to the fact that a weaker currency makes Chinese exports more attractive. Whatever the reason, the dollar rose 2.7% against the yuan in the first quarter of 2014, marking the first quarterly gain since the three months ended June 2012, according to FactSet data. To accomplish that depreciation, China has sold yuan and bought dollars, leaving it with a huge pile of American currency in its reserve. In the first quarter, China’s official data show its foreign-exchange reserves rose by $129 billion to $3.95 trillion, touching an all-time high.

Read more …

The myth of central bank omnipotence.

• Don’t Worry, Central Banks Have Your Back! (Alhambra)

The biggest bubble in the world right now is the belief in central bank omnipotence. The biggest risk takers in the world right now reside within the confines of the global central banks, especially the US Federal Reserve. They are taking huge risks with policies they barely understand and while one could excuse them for at least attempting to do what other policymakers won’t, it is hubris to believe they will see in real time what they have until recently denied even with the benefit of hindsight. This belief in omnipotence is not just something the general public has swallowed but extends even to the people who run the world’s central banks. The bulls of the world believe the world’s central banks have it all under control. So Don’t Worry, Be Bullish. You’ll probably be right until the myth of central bank omnipotence, one the Fed has fostered and has no macro-prudential policy to offset, is finally punctured.

Read more …

Get ’em out.

• Central Banks Becoming Major Investors In Stock Markets (MarketWatch)

Some leading central banks have become major players on world equity markets in a development that could potentially contribute to overheated asset prices. The buildup of central-banking interest in equities is one of the unexpected consequences of the last few years’ fall in interest rates, which has depressed the returns on central banks’ foreign exchange reserves and driven them to find alternative investment targets. In the years since the financial crisis, central banks have leapt to the forefront of public policy making. They have taken responsibility for lowering interest rates, for maintaining stability of financial institutions, and for buying up government debt to help economies recover from recession. Now it seems that they have become important in another area, too, in starting to build up holdings of equities. Central banks as investors need to cope with demands wrought by sheer size — competition, complexity and cost.

Many of these challenges are self-feeding. Whereas 20 years ago only a small number of public investors carried genuine weight in investment markets, the proliferation of such institutions is now a fact of life. Central banks’ foreign-exchange reserves have grown unprecedentedly fast, especially in the developing world. The same authorities that are responsible for maintaining financial stability are often the owners of the large funds that add to liquidity in many markets. Large and similar-minded public-sector investors can show herd-like behavior, seeking the illusive return, for example in the “search for yield” in many markets and thus creating fresh volatility. Evidence of an increase in equity-buying by central banks and other public-sector investors has emerged from a survey of publicly owned or managed investments compiled by the Official Monetary and Financial Institutions Forum (OMFIF), a global research and advisory group.

The OMFIF research publication, Global Public Investor (GPI) 2014, launched on June 17, is the first comprehensive survey of $29.1 trillion worth of investments held by 400 public-sector institutions in 162 countries. The report focuses on investments by 157 central banks, 156 public pension funds and 87 sovereign funds. There are worries that central banks may be over-stretching themselves by operating in too many areas. Jens Weidmann, president of Germany’s Bundesbank – which retains a highly important, conservative role in the euro area in spite of the establishment of the supranational European Central Bank to run the continent’s single currency – spoke yearningly last week of the need for “central banks to shed their role as decision-makers of last resort and, thus, to return to their normal business.” He said this “would help to preserve the independence of central banks, which is a key precondition to maintaining price stability in the long run.”

Read more …

A 10-year old vulture funds suit.

• Argentina Refuses To Submit To US Supreme Court ‘Extortion’ On Debt (FT)

President Cristina Fernández said that Argentina cannot comply with US court orders to pay $1.5bn in cash to winners of a decade-long debt dispute, the position her country was left in on Monday when the US Supreme Court refused to hear her government’s final appeal. Delivering a nationally broadcast address Monday night, Ms Fernández expressed willingness to negotiate, but said there was no way that Argentina could pay in cash, in full, starting just two weeks from now, which is what the US courts have ordered. “What I cannot do as president is submit the country to such extortion,” Ms Fernández said. Under the US court orders, Argentina must hand over $907m to the plaintiffs, or lose the ability to use the US financial system to pay an equal amount due June 30 to holders of other Argentine bonds.

Ms Fernández said the total owed to the plaintiffs is $1.5bn including interest, and paying it all immediately in cash in the way that the courts had ordered could trigger another $15bn in other cash payments to the remaining holders of defaulted debt. That “is not only absurd but impossible”, since it represents more than half the central bank’s remaining foreign reserves, she said. She vowed to keep making payments on the vast majority of the country’s performing debts, which are held by bondholders who agreed previously to provide debt relief that enabled Argentina to rebound from its economic crisis of 2001. Even if Argentina cannot use the US financial system to do so, she said, teams of experts were working on ways to avoid such a default and keep Argentina’s promises. Meanwhile, she suggested that she has a moral obligation not to make the court-ordered payments to NML Capital and other investors she calls “vulture funds”.

Read more …

This could be the consequence.

• Argentina Debt Crisis Fears Grow After US Supreme Court Ruling (Guardian)

Fears of a fresh debt crisis in Argentina intensified after a ruling by the US supreme court left South America’s second biggest economy facing the choice of paying so-called “vulture funds” in full or risk a fresh debt default. Share prices fell by 6% at the start of trading in Buenos Aires and the price of Argentinian bonds fell after America’s highest court refused to hear an appeal against a ruling by a lower court that came down in favour of creditors who bought up debt worth $1.3bn (£770m) at rock-bottom prices after the financial crisis of more than a decade ago. The ruling is the culmination of a decade-long legal battle in which Argentina has sought to avoid paying creditors who refused to accept the terms of a debt restructuring that followed the country’s savage financial crisis of 2001-2.

In an attempt to make the country’s debt more manageable, the then government in Buenos Aires offered bondholders a deal in which they would get regular payments of interest provided they accepted a more than 70% reduction in the value of their investment. More than 92% of creditors agreed to the offer – in many cases reluctantly – but a number of hedge funds, spearheaded by Paul Singer’s NML corporation held out. Argentina argued that the funds bought most of the debt at a deep discount after the default and have sought to thwart the country’s efforts to restructure in two separate debt swaps in 2005 and 2010. The country, which grew rapidly after it devalued the peso and defaulted on around $100bn of debt in 2002 but has since suffered from uncomfortably high levels of inflation, is now under pressure to come to terms with the hedge funds before the next scheduled payments on the restructured debt at the end of the month. If it refuses or fails to do so, it would technically be in default.

Read more …

And it will cut it again. And again.

• IMF Cuts US 2014 Growth Forecast by 30% (WSJ)

The International Monetary Fund, forecasting that U.S. inflation will sit below the Federal Reserve’s 2% target through 2017, said the central bank should keep its policy rate near zero even longer than investors now expect. In its annual review of the U.S. economy, the IMF cut its forecast for U.S. economic growth this year by 0.8%age point to 2%, citing a harsh winter, a struggling housing market and weak international demand for the country’s products. The fund maintained its 3% growth outlook for next year, saying a meaningful economic rebound is under way. Still, the IMF said significant slack remains in the economy and U.S. officials must do more to stimulate growth in the near term. At the same time, the U.S. must cut spending and raise revenue in the long term to avoid public debt overwhelming the country’s finances, the fund said.

The remarks came ahead of a Fed policy meeting this week where officials will consider whether to change or clarify guidance on future rate decisions. Markets currently expect the Fed to begin raising rates—from near zero where they’ve been since late 2008—in the middle of next year. “We’re not that certain,” IMF Managing Director Christine Lagarde said in a news conference. She pointed to uncertainty over how much unemployment will fall over the next year. Nigel Chalk, the IMF’s U.S. mission chief, said the fund expects “relatively high unemployment and a lot of slack in the labor market” to persist, and consumer inflation to remain well below target into 2017. That is why the fund said the U.S. government should boost near-term spending, notably on infrastructure, education, job training and child-care subsidies. Fund economists argue more government stimulus would take the burden off the Fed and reduce the risk that easy-money policies fuel too much risky investing.

Read more …

Lip service.

• IMF Urges US To Raise Minimum Wage (MarketWatch)

The International Monetary Fund on Monday called on the U.S. to raise its minimum wage, but refrained from naming a specific level, saying that’s up to Congress. In its annual review of the U.S. economy, the IMF said increasing the minimum wage and expanding the Earned Income Tax Credit would help raise the incomes of millions of poor, working Americans. Christine Lagarde, the IMF’s managing director, told reporters an increase in the minimum wage — now $7.25 an hour — “would be helpful from a macroeconomic point of view.” The fund’s recommendation will be well received by congressional Democrats and the Obama administration, both of which have been pushing for an increase to $10.10. The proposed increase has been hampered by an election-year stalemate over major policy issues. House Republicans don’t plan to take up a bill to increase it and Senate Democrats don’t have enough members to get it through their chamber. Lagarde said the amount of an increase “needs to be decided by legislators.”

Read more …

Pension funds and 401(k)’s are the only remaining source of wealth that has not been borrowed. Vultures circling.

• Retirees Suffer as 401(k) Rollover Boom Enriches Brokers (Bloomberg)

Kathleen Tarr says AT&T employees looked to her as “their de facto 401(k) expert.” Visiting their homes and offices, she advised them on their retirement plans as they called up balances on computer screens. Actually, Tarr worked for Royal Alliance Associates, a brokerage firm owned by insurer AIG. She encouraged hundreds of departing AT&T employees to roll over their retirement money into the kind of risky high-commission investments that Wall Street’s self-regulatory agency warns against on its website.

Tarr and her business partner reaped hundreds of thousands of dollars a year in commissions and trips to the Bahamas and Florida resorts. Not all of her clients fared as well, and 37 of them have filed complaints against her, according to Financial Industry Regulatory Authority records reviewed by Bloomberg News. Tarr and Royal Alliance say the investment choices were appropriate. “It’s scary,” said Maria Lew, a former AT&T administrative assistant and Tarr client whose account balance has fallen to $100,000 from $390,000. She fears she will lose her home, and her kitchen ceiling has a gaping hole because of a leak that will strain her budget to fix. “There are days when I go to sleep and I can’t stop thinking about it.”

Read more …

• Study Asserts Startling Numbers Of Insider Trading Rogues (NY Times)

There is often a tip. Before many big mergers and acquisitions, word leaks out to select investors who seek to covertly trade on the information. Stocks and options move in unusual ways that aren’t immediately clear. Then news of the deals crosses the ticker, surprising everyone except for those already in the know. Sometimes the investor is found out and is prosecuted, sometimes not. That’s what everyone suspects, though until now the evidence has been largely anecdotal. Now, a groundbreaking new study finally puts what we’ve instinctively thought into hard numbers — and the truth is worse than we imagined. A quarter of all public company deals may involve some kind of insider trading, according to the study by two professors at the Stern School of Business at New York University and one professor from McGill University. The study, perhaps the most detailed and exhaustive of its kind, examined hundreds of transactions from 1996 through the end of 2012.

The professors examined stock option movements — when an investor buys an option to acquire a stock in the future at a set price — as a way of determining whether unusual activity took place in the 30 days before a deal’s announcement. The results are persuasive and disturbing, suggesting that law enforcement is woefully behind — or perhaps is so overwhelmed that it simply looks for the most egregious examples of insider trading, or for prominent targets who can attract headlines. The professors are so confident in their findings of pervasive insider trading that they determined statistically that the odds of the trading “arising out of chance” were “about three in a trillion.” (It’s easier, in other words, to hit the lottery.) But, the professors conclude, the Securities and Exchange Commission litigated only “about 4.7% of the 1,859 M.&A. deals included in our sample.”

Read more …

• They’re Lying To Us, Part 1: Unemployment (John Rubino)

One of the frustrating things about the monthly US jobs report is the way everyone focuses on the wrong number. The headline says “unemployment falls…” which sounds great, while the small print, which almost no one seems to read, explains that most of the improvement is due to people dropping out of the labor force. The number of new jobs created is frequently small or negative. It’s understandable – though of course not admirable – that the government would try to spin its economic statistics to make itself look good. What is less understandable is why the media, whose job is supposedly to report the truth, are willing to take the lie at face value. So it’s worth noting when someone breaks from the pack and actually analyzes the data, as the New York Times did today:

Measuring Recovery? Count the Employed, Not the Unemployed

South Carolina’s unemployment rate dropped to 5.3% in April, lower than in December 2007, when it stood at 5.5% on the eve of the Great Recession. The share of South Carolina adults with jobs, however, has barely rebounded. The same contrast is visible in most states. Unemployment rates, the most familiar and famous of labor market indicators, are nearing pre-recession lows. But the shares of adults with jobs — or employment rates — look much less healthy. The reason is that the numbers are not quite two sides of a coin. The employment rate counts everyone with a job, while the unemployment rate counts only people actively seeking work. It excludes most people who are unemployed.

Here’s a chart from John Williams at ShadowStats showing how unemployment would look if the government counted the people dropping out of the workforce as unemployed. The blue line includes all drop-outs, and is not only at Depression-era levels but is still rising. In an honest world, this “bleak reality,” as the New York Times puts it, would be the story. And though the Times omits the obvious discussion of why the government is focusing on the wrong number, the paper still deserves recognition for lifting the curtain a bit.

Read more …

Do you want your environmentalists to play with your donations in the casino? If not, maybe there are nobler goals.

• Greenpeace Loses $5.2 million in Failed Currency Wager (Bloomberg)

Add Greenpeace International to the ranks of losers in the $5.3 trillion-a-day global foreign exchange market. The Amsterdam-based nonprofit organization said it lost $5.2 million last year after an employee bet that the euro wouldn’t strengthen against other currencies, Greenpeace said on its website. Greenpeace, which runs environmental campaigns in more than 40 countries, didn’t name the employee, who worked in its international finance unit and has been relieved of his position. “We are obviously very embarrassed and we are apologetic,” said Mike Clark, interim executive director of Greenpeace USA, in a telephone interview from Washington. “Mistakes do happen and we will make sure something like this will not happen again.”

Greenpeace said it entered into contracts last year to buy foreign currency at a fixed exchange rate while the euro was gaining in strength. This resulted in a loss against a range of other currencies. The euro rose 4.2% against the dollar in 2013. The organization said it didn’t find evidence of fraud and will conduct an independent audit into the employee’s actions. The loss added to Greenpeace’s €6.8 million 2013 budget deficit. Greenpeace said it had income of €72.9 million in 2013 out of a global budget of about €300 million. Greenpeace said it is funded with many different currencies and valuations change rapidly. The nonprofit said it will make changes to planned infrastructure projects, and won’t reduce spending on its core campaigns on environmental change.

Read more …

• Heads, You Lose (Jim Kunstler)

The Iraq fiasco already threatens to spike oil prices way beyond the $107 level of today. That will crush whatever remains of the US economy all over again. God knows what it might do to the financialized Rube Goldberg shadow economy of counterparty booby traps that overlays an abyss of unpayable debt. You can’t squash price discovery forever, and one morning you might wake up to discover that the price of all those shenanigans was your political heritage. Oh, one more thing: not much attention is being paid to Saudi Arabia, but note that it has been the chief sponsor of Sunni insurgency everywhere but Saudi Arabia itself, and that the genie they let out of that flask will probably come back and tear that country to shreds, especially in so far as King Abdullah at age 90 is a virtual mummy, and that many other clans besides the Saud tribe have designs on the throne (and its mighty revenue stream from oil production).

Add to that inter-tribal tension the possibility of an ISIS-style insurgency in Saudi Arabia itself, with righteous Islamic puritan warriors drawn from all over the region, and you have quite the recipe for a global clusterfuck. Surely a lot of things would get broken in the event. Given all the jealousy and ill-feeling and toward Saudi Arabia, it is a wonder that over the last 30 years no mischief-makers have, for instance, blown up the Ras Tenura oil terminal on the Persian Gulf. That would put the schnitz on global oil supply lines on a world war scale. For the moment, it is hard to see how anything can be salvaged in Iraq. The ISIS may cause enough havoc there to shut down Iraqi oil production forever. They can start World War III. They can inspire insurgencies across the whole Islamic world and beyond. The caliphate they establish will then have to figure out how to support a population twenty times as great as the region truly can support with a medieval economy. Sooner or later, they’ll be selling shrunken heads in the souks.

Read more …

• Bailout Economics 2014: Predators Prosper, Prey Perish (Tavakoli)

Almost six years after the financial crisis, JPMorgan, Citigroup, and Bank of America face fines of around $12 billion each for their role in mortgage malfeasance. In the context of the damage done and the bailout money poured into banks; the fines are miniscule and won’t even cover reparations in one or two blighted areas. This is after a series of post-crisis banking scandals revealing the fragility of the banking system and after JPMorgan Chase was the only bank to receive an SEC fine combined with an admission of wrongdoing for its well-publicized London Whale incident. Officers of JPMorgan Chase have not been held accountable. Moreover, banks harbor massive balance sheet risk against which they hold insufficient capital. Timothy Geithner, former president of the Federal Reserve Bank of New York, a bank regulator during the run up to the financial crises, and later the Secretary of the Treasury, claims that no one knew housing prices could fall.

He sounded like a very silly man when he said over and over on his recent book tour that sophisticated financiers didn’t understand the dynamics of a housing bubble. I never once heard him mention well-documented fraud, despite the massive fraud uncovered by Congressional investigations. With men of Geithner’s ilk having their back and the potential of huge financial rewards, many rational men of weak character assessed the risks and rewards of fraud and chose to enrich themselves, since the chances of being held accountable were slim. It turns out they were correct. No one I know disputes the need for bailouts and interventions, but all of us—except a handful who have banking officers’ direct numbers on speed dial for deal purposes—question the absence of indictments of senior banking officials (for a variety of forms of malfeasance) and the corrupt people they funded: among others, mortgage lenders. All of these banks continue to benefit from opacity and massive government support.

Read more …

Nice graph.

• The History Of Oil Prices Since The Lincoln Presidency (BI)

Today, BP released its statistical energy review for 2014. Among the highlights: • Energy consumption accelerated despite sluggish economic growth, • Coal was the world’s fastest-growing energy source, thanks to China and India, • Average oil prices exceeded $100 per barrel for a third consecutive year, despite massive supply growth in the US. But our favorite chart is here: It shows the price of oil every year since Abraham Lincoln became president. It’s annotated with major oil shock events — though the first major event cited, the oil gusher in Titusville, Pennsylvania is slightly misleading. That in itself did not cause markets to surge, but rather a host of factors including the Civil War and the changing face of transport in America.

Read more …

As was obvious from the get go. The economy trumps the environment.

• Coal’s Share Of Energy Market At Highest Level In 44 Years (Guardian)

Coal has reached its highest market share of global energy consumption for more than 40 years, figures reveal, despite fears that its high carbon emissions make it a prime cause of climate change. The use of coal for power generation and other purposes grew by 3% in 2013 – faster than any other fossil fuel – while its share of the market breached 30% for the first time since 1970, the BP Statistical Review reports. The figures were published as Prof Nick Stern, author of the influential climate change report the Stern Review, said his latest research indicated the economic risks of unchecked climate change were bigger than previously estimated. Europe is among the regions using more coal, increasing imports from the US, where coal has been displaced in power stations by even cheaper shale gas.

But developing countries such as China and India are also huge coal users, although BP pointed out that energy growth overall in China dropped to 4.7% last year from 8.4% in 2012. Christof Ruhl, BP’s chief economist and author of its statistical review, said this “dramatic slowdown” put a question mark over China’s official economic growth figure for 2013 of 7.7%. The accuracy of Chinese economic statistics have long been a subject for debate but few are willing to directly challenge them for fear of upsetting such an important emerging powerhouse. “It is not easy to reconcile the slowdown in energy growth numbers and official [gross domestic product] numbers … you can draw your own conclusions from that,”Ruhl said.

Read more …

Wonder how many people who’ve lived off fishing for generations become the victims of industrial overfishing here.

• Pacific Nation Bans Fishing in One of World’s Largest Marine Parks (NatGeo)

A tiny island nation that controls a vast area of the Pacific Ocean has announced it will ban all commercial fishing in a massive marine park that is the size of California. Anote Tong, the president of Kiribati—a chain of islands about halfway between Hawaii and Fiji—announced Monday that commercial fishing will end in the country’s Phoenix Islands Protected Area on January 1, 2015. “We will also close the area around the southern Line Islands to commercial fishing to allow the area to recover,” said Tong, who spoke at the Our Ocean conference hosted by the U.S. State Department in Washington, D.C. The southern Line Islands also will be closed to fishing by the beginning of next year.

The Phoenix Islands and the southern Line Islands represent some of the most pristine coral reef archipelagos in the Pacific, says National Geographic Explorer-in-Residence Enric Sala, who led the first underwater expedition to the five uninhabited southern Line Islands in 2009 as part of National Geographic’s Pristine Seas project. Sala’s team of scientists found healthy coral reefs, abundant predator populations, and pristine lagoons carpeted with giant clams and shark nurseries. “Diving in the southern Line Islands is like getting in a time machine and traveling back to the reefs of the past, when sharks—and not humans—were the top predators,” says Sala. Marine scientist Amanda Keledjian of Oceana, an international nonprofit focused on ocean conservation, calls Kiribati’s announcement “very significant.” Decreasing the impact of fishing will “preserve biodiversity, large predators, and reefs,” says Keledjian.

Read more …

Good.

• Obama Will Propose Vast Expansion Of Pacific Ocean Marine Sanctuary (WaPo)

President Obama on Tuesday will announce his intent to make a broad swath of the central Pacific Ocean off-limits to fishing, energy exploration and other activities, according to senior White House officials. The proposal, slated to go into effect later this year after a comment period, could create the world’s largest marine sanctuary and double the area of ocean globally that is fully protected. The announcement — details of which were provided to The Washington Post — is part of a broader push on maritime issues by an administration that has generally favored other environmental priorities. The oceans effort, led by Secretary of State John F. Kerry and White House counselor John D. Podesta, is likely to spark a new political battle with Republicans over the scope of Obama’s executive powers.

The president will also direct federal agencies to develop a comprehensive program aimed at combating seafood fraud and the global black-market fish trade. In addition, the administration finalized a rule last week allowing the public to nominate new marine sanctuaries off U.S. coasts and in the Great Lakes. Obama has used his executive authority 11 times to safeguard areas on land, but scientists and activists have been pressing him to do the same for untouched underwater regions. President George W. Bush holds the record for creating U.S. marine monuments, declaring four during his second term, including the one that Obama plans to expand. Under the proposal, the Pacific Remote Islands Marine National Monument would be expanded from almost 87,000 square miles to nearly 782,000 square miles — all of it adjacent to seven islands and atolls controlled by the United States. The designation would include waters up to 200 nautical miles offshore from the territories.

Read more …

 Newer Entries