Sep 192015
 
 September 19, 2015  Posted by at 10:14 am Finance Tagged with: , , , , , , , ,  7 Responses »


Arthur Siegel Bethlehem-Fairfield shipyards, Baltimore, MD May 1943

US Stocks Tumble As Fed Sows Fear And Confusion (MarketWatch)
The Fed Has To Deal With Its Own Zombie Apocalypse (CNBC)
A ‘Third Mandate’ For Fed As China Worries Take Hold (CNBC)
The Fed Is Trapped: The Naked Emperor’s New “Reaction Function” (Zero Hedge)
The Fed May Have Just Stoked A Currency War (CNBC)
Fed Is Riding The Tail Of A Dangerous Global Tiger (AEP)
Central Banks Fret Stimulus Efforts Are Falling Short (Reuters)
China Is Hoarding the World’s Oil (Bloomberg)
Occam’s Razor Says The Stock Market Is In A Downtrend (MarketWatch)
Three Reasons Why the US Government Should Default on Its Debt Today (Casey)
Treasury to Delay Enforcing Part of Tax Law That Curbs Offshore Tax Evasion (WSJ)
Moody’s Downgrades Credit Rating Of France (AP)
Negative Interest Rates ‘Necessary To Protect UK Economy’ – BOE (Telegraph)
The Orthodoxy Has Failed: Europe Needs A New Economic Settlement (Jeremy Corbyn)
Hungary Stops Train With 1,000 Asylum Seekers Escorted By 40 Croatian Police (RT)
We Are Double-Plus Unfree (Margaret Atwood)
Global Warming ‘Pause’ Theory Is Dead But Still Twitching (Phys Org)

As I wrote a few days ago: it’s all about credibility and confidence.

US Stocks Tumble As Fed Sows Fear And Confusion (MarketWatch)

U.S. stocks sank Friday, with the S&P 500 and the Dow Jones Industrial Average closing down for the week, as Federal Reserve’s decision to leave interest rates unchanged fueled fears about global economic growth. The central bank cited concerns about the global economy and a lack of inflation growth in its Thursday decision to leave interest rates unchanged. “Many are confused by the outcome of the recent Fed meeting,” said Kent Engelke at Capitol Securities. “Markets hate confusion and lack of clarity.” The S&P 500 skidded 32.16 points, or 1.6%, to close at 1,958.08 for a weekly loss of 0.2%. All S&P 500 sectors finished lower, led by energy shares. The Dow Jones dropped 289.95 points, or 1.7%, to close at 16,384.79 with all 30 components in the red. The blue-chip index edged down 0.3% for the week.

The Nasdaq shed 66.72 points, or 1.4% to 4,827.23. The tech-heavy index is the only one of the three major stock barometers to finish out the week higher with gains of 0.1%. Trading volume was elevated, with 5.74 billion shares changing hands on the New York Stock Exchange, due to “quadruple witching,” which means the expiration of various stock-index futures, stock-index options, stock options and single-stock futures. Friday is the second highest volume day of the year. “By not raising the rates, the Fed is now fanning global growth fears,” said Steven Wieting, global chief investment strategist, at Citi Private Bank. “The key for future market action depends largely on whether or not the Fed had any good cause to worry about international developments,” Wieting said.

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Setback of easy money: “..the bottom of the ladder has gotten more crowded..”

The Fed Has To Deal With Its Own Zombie Apocalypse (CNBC)

The Federal Reserve is scared—of lots of things, some obvious, some not so much. Thursday’s Fed decision to delay yet again the long-awaited liftoff from zero rates gave rise to still more speculation about why the U.S. central bank seems so perpetually reticent to normalize monetary policy. There are all the usual suspects, such as low inflation, weak wage gains despite strong job growth and China plus the rest of the emerging global economy. One reason that hasn’t gotten much attention is the need for the Fed to keep rates low both for government debt and the corporations that now have $12.5 trillion in debt. Among the prime beneficiaries of zero interest rates have been low-rated companies that have been able to borrow money at rates often in the 5% to 6% range.

A move to higher rates, even a small one, could have outsized impacts on those bad balance sheet companies.That puts the Fed in a bit of a Faustian bargain with issuers and holders that has become hard to break. Not only has high-yield issuance exploded in the days of the central bank’s ultra-easy accommodation, but the bottom of the ladder has gotten more crowded as well. About a quarter of all debt issued now in the junk universe is held by companies rated B3 or lower, according to Moody’s. Credit standards have continued to loosen as well, with the ratings agency reporting that its covenant quality index—essentially a read on how strict the conditions are on corporate borrowers—is at record lows.

“Businesses as a whole in the U.S. are better placed now to absorb any shocks that might hit them,” Bodhi Ganguli, senior economist at Dun & Bradstreet, said in a phone interview. “However, there are pockets of greater weakness like these zombie companies. These pockets are likely to see some more turbulence than overall conditions. Some companies definitely will go out of business.” It isn’t just the zombies, though, that should worry about higher rates. Corporate America overall has been piling on the debt, which grew 8.3 percent in the second quarter, according to figures the Fed released Friday.

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Would love to see a legal challenge to this. Can the Fed create its own mandates?

A ‘Third Mandate’ For Fed As China Worries Take Hold (CNBC)

Has the U.S. Federal Reserve become the world’s economic guardian? The central bank’s decision not to lift interest rates this week because of weakening global growth and a recent surge in market volatility has sparked talk of a “third mandate.” Analysts say that explicit references by the Fed following its meeting on Thursday to the China slowdown and its impact mark a significant departure for the central bank, which is mandated to ensure job creation and price stability in the U.S. economy. “The Federal Reserve’s third mandate appears to be global financial stability,” Mark Haefele at UBS said.

“The U.S. central bank has backed away from its first rate rise in over nine years, saying that international economic and financial weakness could dampen activity in the U.S.,” he said. Economists had been split over whether the Fed would deliver a long-anticipated rate increase this week and market expectations for when rates will rise have been pushed back further following a dovish Fed statement. In fact, one reason for the scaling back of rate-hike speculation in recent weeks has been growing concern about weakness in China – the world’s second-largest economy after the U.S. – and a sharp sell-off in emerging and developed markets in August. According to Deutsche Bank, global stock markets lost $5 trillion of their value in six days in August.

“The argument that global market developments are playing second fiddle to U.S. economic developments is a tenuous one, especially if the epicentre of global economic weakness is China – which is very important to U.S. economy,” Nicholas Spiro of Spiro Sovereign Strategy told CNBC. “It’s clear that what’s happening in China, especially in recent months, is having a massive deflationary impact so it’s about time we heard the Fed was concerned about China,” he said. Beijing is targeting a full-year growth rate of around 7%, which would be the slowest rate in almost 25 years. And there are concerns that the target will be missed amid weak economic data and a rout in Chinese stock markets that threaten to undermine confidence further.

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“..the FOMC would have been tightening into a tightening..”

The Fed Is Trapped: The Naked Emperor’s New “Reaction Function” (Zero Hedge)

Despite all the ballyhooing about moving to a more market-based exchange rate, the PBoC actually did the opposite on August 11. As BNP’s Mole Hau put it “whereas the daily fix was previously used to fix the spot rate, the PBoC now seemingly fixes the spot rate to determine the daily fix, [thus] the role of the market in determining the exchange rate has, if anything, been reduced in the short term.” Obviously, a reduced role for the market, means a greater role for the PBoC, and that of course means intervention via FX reserve drawdowns (i.e. the liquidation of US paper). Of course no one believed that China’s deval was “one and done” which meant that the pressure on the yuan increased and before you knew it, the PBoC was intervening all over the place.

By mid-September, PBoC intervention had cost some $150 billion between onshore spot interventions and offshore spot and forward meddling. The problem – as everyone began to pick up on some 10 months after we announced the death of the petrodollar – is that when EMs start liquidating their reserves, it works at cross purposes with DM QE. That is, it offsets it. Once this became suddenly apparent to everyone at the end of last month, market participants simultaneously realized – to their collective horror – that the long-running slump in commodity prices and attendant pressure on commodity currencies as well as the defense of various dollar pegs meant that, as Deutsche Bank put it, the great EM reserve accumulation had actually begun to reverse itself months ago. China’s entry into the global currency wars merely kicked it into overdrive.

What the above implies is that the Fed, were it to have hiked on Thursday, would have been tightening into a market where the liquidation of USD assets by foreign central banks was already sapping global liquidity and exerting a tightening effect of its own. In other words, the FOMC would have been tightening into a tightening. But that’s not all. When China devalued the yuan it also confirmed what the EM world had long suspected but what EM currencies, equities, and bonds had only partially priced in. Namely that China’s economy was crashing. For quite a while, the fact that Beijing hadn’t devalued even as the yuan’s dollar peg caused the RMB’s REER to appreciate by 14% in just 12 months, was viewed by some as a sign that things in China might not be all that bad.

After all, if a country with an export-driven economy can withstand a double-digit currency appreciation without a competitive devaluation even as the global currency wars are being fought all around it, then the situation can’t be too dire. Put simply, the devaluation on August 11 shattered that theory and reports that China is “secretly” targeting a much larger devaluation in order to boost export growth haven’t helped. For emerging markets, this realization was devastating. Depressed demand from China had already led to a tremendous amount of pain across emerging economies and the message the devaluation sent was that China’s economy wasn’t set to rebound any time soon, meaning global demand and trade will likely remain subdued, as will commodity prices.

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All this and that too.

The Fed May Have Just Stoked A Currency War (CNBC)

A lack of activity by the U.S. Federal Reserve on Thursday may not have been a surprise, but it’s left no doubt in analysts’ minds that other central banks will now look to ease policy further, a move that could send more shock waves across global currency markets. Valentin Marinov at Credit Agricole told CNBC Friday that he expects global “currency wars” to intensify from here. He predicts the Bank of Japan, the ECB and the People’s Bank of China (PBOC) has now effectively been pushed into unveiling more stimulus. “The Fed inaction could spur other central banks into action,” he said. “It is currency wars.” The dollar skidded to a three-week low against a basket of major currencies after Thursday’s decision.

This comes after the greenback had been appreciating significantly since the middle of last year in anticipation of higher interest rates in the U.S. A higher interest rate can mean a higher yield on assets and investors in the U.S. have been busy bringing their dollars home, and thus out of high-yielding foreign investments. A weaker dollar in the short term could now leave other global economies frustrated and dent export-focused companies that favor a weak domestic currency. Manipulating reserve levels can be one way that a country’s central bank can intervene against currency fluctuations. Other measures include altering benchmark interest rates and quantitative easing. Central banks often stress that exchange rates are not a primary policy goal and can be seen more as a positive by-product of monetary easing.

There have been discussions in the last few years that countries are purposefully debasing their own currencies – a concern that was termed “currency wars” by Brazil’s Finance Minister Guido Mantega in September 2010. Credit Agricole’s Marinov highlighted that the ECB could be the next to act by ramping up its current bond-buying program, thus weakening the single currency – even though its only mandate is to manage inflation. Analysts at BNP Paribas also stated Friday that the Fed decision had increased their conviction that the ECB would increase its quantitative easing program. Marc Ostwald, strategist at ADM ISI, said in a note Friday that the ECB and the BoJ who will now face “even bigger challenges, given that the Fed is clearly not in any hurry to live up to its part of the ‘policy divergence’ grand bargain.”

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Ambrose is lost. He claims the China crash bottomed out in April, because more debt has been added since then.

Fed Is Riding The Tail Of A Dangerous Global Tiger (AEP)

The US Federal Reserve would have been mad to raise interest rates in the middle of a panic over China and an emerging market storm, and doubly so to do it against express warnings from the IMF and the World Bank. The Fed is the world’s superpower central bank. Having flooded the international system with cheap dollar liquidity during the era of quantitative easing, it cannot lightly walk away from its global responsibilities – both as a duty to all those countries that were destabilized by dollar credit, and in its own enlightened self-interest. Dollar debt outside the jurisdiction of the US has reached $9.6 trillion, on the latest data from the Bank for International Settlements. Dollar loans to emerging markets have doubled since the Lehman crisis to $3 trillion.

The world has never been so leveraged, and therefore so acutely sensitive to any shift in monetary signals. Nor has the global financial system ever been so tightly inter-linked, and therefore so sensitive to the Fed. The BIS says total debt in the rich countries has jumped by 36%age points to 265pc of GDP since the peak of the last cycle, and by 50 points to 167pc in developing Asia, Latin America, the Middle East, Eastern Europe, and Africa. It is wishful thinking to suppose that the world can brush off a Fed rate rise on the grounds that most of the debt is in local currencies. BIS research shows that they will face a rate shock regardless. On average, a 100 point move in US rates leads to a 43 point move in local currency borrowing costs in EM and open developed economies.

Given that the Fed was forced to reverse course dramatically in 1998 when the East Asia crisis blew up – for fear it would take down the US financial system – it can hardly go ahead nonchalantly with rate rises into the teeth of the storm today when emerging markets are an order of magnitude larger and account for 50pc of global GDP. Even if you reject these arguments, Goldman Sachs says the strong dollar and the market rout in August already amount to 75 basis points of monetary tightening for the US economy itself. Headline CPI inflation in the US is just 0.2pc. Prices fell in August. East Asian is transmitting a deflationary shock to the West, and it is not yet clear whether the trade depression in the Far East is safely over.

The argument that zero rates are unhealthy and impure is to let Calvinist psychology intrude on the hard science of monetary management. The chorus of demands – and just from ‘internet-Austrians’ – that rates should be raised in order to build up reserve ammunition in case they need to be cut later, is a line of reasoning that borders on insanity. If acted on, it would risk tipping us all into the very deflationary trap that we are supposed to be protecting ourselves against, the Irving Fisher moment when a sailing boat rolls beyond the point of natural recovery, and capsizes altogether. So hats off to Janet Yellen for refusing to listen to such dangerous counsel. However, the Fed is damned if it does, and damned if it does not, for by recoiling yet again it may well be storing up a different kind of crisis next year.

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Only solution: moar?!

Central Banks Fret Stimulus Efforts Are Falling Short (Reuters)

The world’s leading central banks are facing the risk that their massive efforts to revive economic growth could be dragged down again, with some officials arguing for bold new ideas to counter the threat of slow growth for years to come. A day after the U.S. Federal Reserve kept interest rates at zero, citing risks in the global economy, the Bank of England’s chief economist said central banks had to accept that interest rates might get stuck at rock bottom. In Japan, where interest rates have been at zero for more than 20 years, policymakers are already tossing around ideas for overhauling the Bank of Japan’s huge monetary stimulus program as they worry that it will be unsustainable in the future, according to sources familiar with its thinking.

Separately a top ECB official said the ECB’s bond-buying program might need to be rethought if low inflation becomes entrenched. But he added monetary policy would not restore economic growth over the long term. More than eight years after the onset of the financial crisis, the economies of the United States and Britain are growing at a healthier pace, in contrast to those of Japan and in many euro zone countries. But the risk of a sharp slowdown in China and other emerging economies has prevented the Fed from starting to raise interest rates and is being watched closely by the Bank of England.

Investors mostly think that the Fed’s delay will be short-lived and that it could begin raising rates before the end of the year, followed a few months later by Britain’s central bank. But the BoE’s chief economist, Andy Haldane, who has long been gloomy about the chances of a sustainable recovery, said the world might in fact be sinking into a new phase of the financial crisis – this time caused by emerging markets.

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Paid for with monopoly money. Where would the oil price be without this?

China Is Hoarding the World’s Oil (Bloomberg)

Even after China’s slowing economy dragged crude to a six-year low, oil’s second-biggest consumer remains the main safeguard against a further price meltdown. While China’s surprise currency devaluation helped trigger Brent crude’s slump to about $42 a barrel last month, the nation’s stockpiling of oil can staunch further losses. In the first seven months of the year, China purchased about half a million barrels of crude in excess of its daily needs, the most for the period since 2012, according to data compiled by Bloomberg. As the country gathers bargain barrels for its strategic petroleum reserve, the demand is cushioning an oversupplied market from a further crash, according to Columbia University’s Center on Global Energy Policy.

“It throws a lifeline to the market” that safeguards against the risk of crude touching $20 a barrel, Jeff Currie at Goldman Sachs said. “That lifeline lasts through late 2016.” Other countries have emergency oil-supply buffers, and while the U.S. Strategic Petroleum Reserve has been stable at about 700 million barrels for years, China is expanding its stockpiles rapidly. The Asian nation has accumulated about 200 million barrels of crude in its reserve so far and aims to have 500 million by the end of the decade, according to the International Energy Agency. It’s currently filling a 19 million-barrel facility at Huangdao and will add oil at six sites with a combined capacity of about 132 million barrels over the next 18 months, the Paris-based adviser on energy policy estimates.

“The fact that China is stockpiling crude for public strategic storage certainly offsets the weaker sentiment on China’s oil-product demand,” said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA in London. China’s demand growth is set to slow to an annual rate of 2.3% by the fourth quarter compared with 5.6% in the second quarter, a reflection of “weak car sales data, declines in industrial activity, plummeting property prices and fragile electricity output,” the IEA said in a report on Sept. 11.

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As in: you can’t taper a Ponzi scheme.

Occam’s Razor Says The Stock Market Is In A Downtrend (MarketWatch)

Investors can forget the “death cross,” “bearish divergences” and “symmetrical triangles,” and what the Federal Reserve says it will do about interest rates, and just focus on Occam’s razor: The S&P 500 abandoned its long-term uptrend in late August, meaning it is now in a downtrend. Occam’s razor is the philosophical principle that suggests, all things being equal, the simplest explanation tends to be the right one. One of the most elementary trading maxims on Wall Street is “the trend is your friend.” That’s basically what all the short-term technical patterns, economic data and earnings reports are used for, to determine which direction the longer-term trend is heading, and whether it’s about to change.

Once that trend is determined, a tenet of the century-old Dow Theory of market analysis says it is assumed to remain in effect, until it gives definite signals that it has reversed, according to the Market Technicians Associations knowledge base. In other words, the trend is your friend, until it isn’t. After cutting through all the noise, a trendline is probably the best chart pattern to determine the trend, as it is also the simplest. And the simplest way to tell if a trend has reversed, is if the trendline breaks. The S&P 500 had been riding a strong weekly uptrend, defined by the trendline connecting the bottom of the last correction in October 2011 with the bottom of the November 2012 pullback and the October 2014 low. The S&P 500 fell below that line in late August, meaning the uptrend flipped to a downtrend. Based on the Occam’s razor principle, the uptrend was the friend of investors for four years, but now it isn’t.

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And so should Greece?!

Three Reasons Why the US Government Should Default on Its Debt Today (Casey)

The overleveraging of the U.S. federal, state, and local governments, some corporations, and consumers is well known. This has long been the case, and most people are bored by the topic. If debt is a problem, it has been manageable for so long that it no longer seems like a problem. U.S. government debt has become an abstraction; it has no more meaning to the average investor than the prospect of a comet smacking into the earth in the next hundred millennia. Many financial commentators believe that debt doesn’t matter. We still hear ridiculous sound bites, like “We owe it to ourselves,” that trivialize the topic. Actually, some people owe it to other people. There will be big transfers of wealth depending on what happens.

More exactly, since Americans don’t save anymore, that dishonest phrase about how we owe it to ourselves isn’t even true in a manner of speaking; we owe most of it to the Chinese and Japanese. Another chestnut is “We’ll grow out of it.” That’s impossible unless real growth is greater than the interest on the debt, which is questionable. And at this point, government deficits are likely to balloon, not contract. Even with artificially low interest rates. One way of putting an annual deficit of, say, $700 billion into perspective is to compare it to the value of all publicly traded stocks in the U.S., which are worth roughly $20 trillion. The current U.S. government debt of $18 trillion is rapidly approaching the stock value of all public corporations – and that’s true even with stocks at bubble-like highs.

If the annual deficit continues at the $700 billion rate – in fact it is likely to accelerate – the government will borrow the equivalent of the entire equity capital base of the country, which has taken more than 200 years to accumulate, in only 29 years. You should keep all this in the context of the nature of debt; it can be insidious. The only way a society (or an individual) can grow in wealth is by producing more than it consumes; the difference is called “saving.” It creates capital, making possible future investments or future consumption. Conversely, “borrowing” involves consuming more than is produced; it’s the process of living out of capital or mortgaging future production.

Saving increases one’s future standard of living; debt reduces it. If you were to borrow a million dollars today, you could artificially enhance your standard of living for the next decade. But, when you have to repay that money, you will sustain a very real decline in your standard of living. Even worse, since the interest clock continues ticking, the decline will be greater than the earlier gain. If you don’t repay your debt, your creditor (and possibly his creditors, and theirs in turn) will suffer a similar drop. Until that moment comes, debt can look like the key to prosperity, even though it’s more commonly the forerunner of disaster.

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And why not…

Treasury to Delay Enforcing Part of Tax Law That Curbs Offshore Tax Evasion (WSJ)

The Treasury Department said Friday it would delay enforcement of one key part of a 2010 law that is aimed at curbing offshore tax evasion, in a regulatory victory for banks. The law, the Foreign Account Tax Compliance Act, or FATCA, requires foreign banks to start handing over information about U.S.-owned accounts to the Internal Revenue Service. It also would force banks and other financial institutions around the world to withhold a share of many types of payments to other banks that aren’t complying with the law. In effect, the withholding amounts to a kind of U.S. tax penalty on noncompliant financial institutions. The latest move by Treasury will push back the start of withholding for many types of transactions—such as stock trades—from 2017 until 2019.

Withholding for some other types of payments has already begun. The change will give banks more time to come into compliance with FATCA, and governments and the financial industry more time to work out some of the difficult details involved in withholding on more-complex financial transactions. The withholding provision is “the really big stick” in FATCA, said Michael Plowgian, a former Treasury official who is now at KPMG LLP. “The problem with it is that it’s really complicated…So Treasury and IRS have essentially punted” and created more time to solve some of the sticky technical issues, he added.

The Securities Industry and Financial Markets Association, a Wall Street trade group, applauded the move. Given some of the complexities involved, “the 2017 deadline didn’t seem to make sense,” added Payson Peabody, tax counsel for SIFMA. “They are giving themselves more time and giving everyone else a bit more time to comment” on some of the hard questions. Despite the delay in some withholding, experts say FATCA implementation continues to move ahead.

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First downgrade the country, then wax about how great France really is doing.

Moody’s Downgrades Credit Rating Of France (AP)

Moody’s Investors Service is downgrading the credit rating of France, saying the French economy will grow slowly for the rest of this decade while the country’s debt remains high. The firm lowered its rating to “Aa2” from “Aa1.” That means France has Moody’s third-highest possible rating. Moody’s said Friday the outlook for economic growth in France is weak, and it does not expect that to change soon. It says the high national debt burden probably will not be reduced in the next few years because of low growth and institutional and political constraints. Overall Moody’s says France’s creditworthiness is “extremely high” because of its large, wealthy, well-diversified economy, high per-capita income, good demographic trends, strong investor base and low financing costs. The outlook was raised to “stable” from “negative.”

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The only way to keep a system going that is drowning in ever more debt.

Negative Interest Rates ‘Necessary To Protect UK Economy’ – BOE (Telegraph)

The Bank of England may need to push its interest rates into negative territory to fight off the next recession, its chief economist has said. Andy Haldane, one of the Bank’s nine interest rate setters, made the case for the “radical” option of supporting the economy with negative interest rates, and even suggested that cash could have to be abolished. He said that the “the balance of risks to UK growth, and to UK inflation at the two-year horizon, is skewed squarely and significantly to the downside”. As a result, “there could be a need to loosen rather than tighten the monetary reins as a next step to support UK growth and return inflation to target”. Speaking at the Portadown Chamber of Commerce, Mr Haldane’s support for a possible cut in rates came as the Bank as a whole has signalled that the next move in rates would be up.

But recent volatility in financial markets, prompted by China, and a decision by the US Federal Reserve to delay rate hikes, have pushed back expectations of the Bank’s first rate rise to November 2016. Traditionally policymakers have resisted cutting rates below zero because when the returns on savings fall into negative territory, it encourages people to take their savings out of the bank and hoard them in cash. This could slow, rather than boost, the economy. It would be possible to get around the problem of hoarding by abolishing cash, Mr Haldane said, adding: “What I think is now reasonably clear is that the payment technology embodied in [digital currency] Bitcoin has real potential.” His remarks came as he made the case for raising the UK’s inflation target to 4pc from the current level of 2pc.

Mr Haldane said that a trend towards low interest rates across the globe has made it increasingly difficult to fight off recessions. In the past, central banks have helped stimulate economies by slashing interest rates. But with rates at rock bottom in many parts of the world, many have found their ammunition depleted. “Among the large advanced economies, official interest rates are effectively at zero,” Mr Haldane said. In the UK, the Bank’s interest rate has been stuck at 0.5pc for more than six years. One way to supply the Bank with more firepower would “be to revise upwards inflation targets”. The UK’s inflation target is currently 2pc, but this dates from an era when interest rates were closer to 6pc than 0.5pc. It might be necessary to double that target to 4pc, Mr Haldane argued.

Bank research has determined that slowing growth, ageing populations, weaker investment, rising inequality and a savings glut in emerging markets have all contributed to a generational decline in interest rates. Mr Haldane said: “These factors are not will-of-the-wisp. None is likely to reverse quickly. “That would mean there is materially less monetary policy room for manoeuvre than was the case a generation ago. Headroom of two%age points would potentially be insufficient.” However a hike in the inflation target to 4pc would provide extra “wiggle room”.

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The entire world does.

The Orthodoxy Has Failed: Europe Needs A New Economic Settlement (Jeremy Corbyn)

David Cameron is traversing Europe, apparently without much idea of what he wants to achieve in his much-feted renegotiation ahead of a referendum in 2016 or 2017. If the prime minister thinks he can weaken workers’ rights and expect goodwill towards Europe to keep us in the EU, he is making a great mistake. Mr Cameron’s support for a bill that would weaken the trade unions, and the cutting of tax credits this week, show that employment rights are under attack. One can imagine that the many rights we derive from European legislation, which underpins paid holidays, working time protection and improved maternity and paternity leave, are under threat too. There is a widely shared feeling that Europe is something of an exclusive club, rather than a democratic forum for social progress.

Tearing up our rights at work would strengthen that view. Labour will oppose any attempt by the Conservative government to undermine rights at work — whether in domestic or European legislation. Our shadow cabinet is also clear that the answer to any damaging changes that Mr Cameron brings back from his renegotiation is not to leave the EU but to pledge to reverse those changes with a Labour government elected in 2020. Workplace protections are vital to protect both migrant workers from being exploited and British workers from being undercut. Stronger employment rights also help good employers, who would otherwise face unfair competition from less scrupulous businesses. We will be in Europe to negotiate better protection for people and businesses, not to negotiate them away.

Too much of the referendum debate has been monopolised by xenophobes and the interests of corporate boardrooms. Left out of this debate are millions of ordinary British people who want a proper debate about our relationship with the EU. We cannot continue down this road of free-market deregulation, which seeks to privatise public services and dilute Europe’s social gains. Draft railway regulations that are now before the European Parliament could enforce the fragmented, privatised model that has so failed railways in the UK. The proposed Transatlantic Trade and Investment Partnership that is being negotiated behind closed doors between the EU and the US, against which I have campaigned, is another example of this damaging approach.

There is no future for Europe if we engage in a race to the bottom. We need to invest in our future and harness the skills of Europe’s people. The treatment of Greece has appalled many who consider themselves pro-European internationalists. The Greek debt is simply not repayable, the terms are unsustainable and the insistence that the unpayable be paid extends the humanitarian crisis in Greece and the risks to all of Europe. The current orthodoxy has failed. We need a new economic settlement.

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Adding up: shame, insult, injury.

Hungary Stops Train With 1,000 Asylum Seekers Escorted By 40 Croatian Police (RT)

An unannounced train carrying over 1,000 asylum seekers, accompanied by around 40 Croatian police officers, has been intercepted by Hungarian authorities, who accused Zagreb of breaking international laws and intentionally participating in “human smuggling.” The train carrying up to 1,000 refugees was accompanied by some 40 Croatian police officers, who were reportedly detained and then sent back. Croatian police however refuted initial reports that officers accompanying the train were detained or disarmed, explaining that 36 officers “returned” to Croatia in the evening. “There was no disarming or arrests. It is not true,” Croatian police spokeswoman Jelena Bikic told Reuters, claiming that there was “an agreement about the escort between the police officers from the two sides in advance.”

Hungarian authorities said that the incident happened due to Croatia’s failure to coordinate train’s border crossing. According to the head of the Hungarian disaster unit, Gyorgy Bakondi, the Croatian train arrived at Magyarboly without any prior notice, bringing the number of unannounced arrivals to over 4,000 on Friday alone. Croatia’s FM Vesna Pusic claimed that the two countries had agreed “to provide a corridor” for refugees, Sky News reported. However Hungarian spokesman Zoltan Kovacs rejected the claim as a “lie.” “The Croatian system for handling migrants and refugees has collapsed basically in one day,” Kovacs added. “What we see today is the failure of the Croatian state to handle migration issues. What is more we see intentional, intentional, participation in human smuggling taking the migrants to the Hungarian border.”

After Hungary blocked off their border with Serbia this week with the aid of a metal fence and riot police, migrants flooded neighboring Croatia in search for an alternative route. More than 17,000 have arrived in the country since Wednesday morning. “We cannot register and accommodate these people any longer,” Croatian Prime Minister Zoran Milanovic told a news conference. “They will get food, water and medical help, and then they can move on. The European Union must know that Croatia will not become a migrant ‘hotspot’. We have hearts, but we also have heads.”

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Driven by fear.

We Are Double-Plus Unfree (Margaret Atwood)

Governments know our desire for safety all too well, and like to play on our fears. How often have we been told that this or that new rule or law or snooping activity on the part of officialdom is to keep us “safe”? We aren’t safe, anyway: many of us die in weather events – tornados, floods, blizzards – but governments, in those cases, limit their roles to finger-pointing, blame-dodging, expressions of sympathy or a dribble of emergency aid. Many more of us die in car accidents or from slipping in the bathtub than are likely to be done in by enemy agents, but those kinds of deaths are not easy to leverage into panic. Cars and bathtubs are so recent in evolutionary terms that we’ve developed no deep mythology about them.

When coupled with human beings of ill intent they can be scary – being rammed in your car by a maniac or shot in your car by a mafioso carry a certain weight, and being slaughtered in the tub goes back to Agamemnon’s fate in Homer, with a shower-murder update courtesy of Alfred Hitchcock in his film, Psycho. But cars and tubs minus enraged wives or maniacs just sit there blankly. It’s the sudden, violent, unpredictable event we truly fear: the equivalent of an attack by a hungry tiger. Yesterday’s frightful tigerish threat was communists: in the 1950s, one lurked in every shrub, ran the message. Today, it’s terrorists. To protect us from these, all sorts of precautions must, we are told, be taken. Nor is this view without merit: such threats are real, up to a point.

Nonetheless we find ourselves asking whether the extreme remedies outweigh the disease. How much of our own freedom must we sacrifice in order to defend ourselves against the desire of others to limit that freedom by subjugating or killing us, one by one? And is that sacrifice an effective defence? Minus our freedom, we may find ourselves no safer; indeed we may be double-plus unfree, having handed the keys to those who promised to be our defenders but who have become, perforce, our jailers. A prison might be defined as any place you’ve been put into against your will and can’t get out of, and where you are entirely at the mercy of the authorities, whoever they may be. Are we turning our entire society into a prison? If so, who are the inmates and who are the guards? And who decides?

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“..there never was a hiatus, a pause or a slowdown..”

Global Warming ‘Pause’ Theory Is Dead But Still Twitching (Phys Org)

A study released Thursday is the second this year seeking to debunk a 1998-2013 “pause” in global warming, but other climate scientists insist the slowdown was real, even if not a game-changer. When evidence of the apparent hiatus first emerged, it was seized upon by sceptics as evidence that climate change was driven more by natural cycles that humans pumping carbon dioxide into the atmosphere. “Our results clearly show that … there never was a hiatus, a pause or a slowdown,” Noah Diffenbaugh, the study’s main architect and a professor at Stanford University, said in a statement. The thermal time-out, his team found, resulted from “faulty statistical methods”.

In June, experts from the US National Oceanic and Atmospheric Administration (NOAA) came to the same conclusion, chalking up the alleged slowdown to a discrepancy in measurements involving ocean buoys used to log temperatures. Their results were published in the peer-reviewed journal Science. Beyond a strident public debate fuelled as much by ideology and facts, the “pause” issue has serious real-world implications. Scientifically, a discrepancy between climate projections and observations could suggest that science has overstated Earth’s sensitivity to the radiative force of the Sun. Politically, it could weaken the sense of urgency underlying troubled UN negotiations, tasked with crafting a global pact in December to beat back climate change.

At first, scientists sounding an alarm about the threat of greenhouse gases were stumped by the data, unable to explain the drop-off in the pace of warming. Even the UN’s Intergovernmental Panel on Climate Change (IPCC)—whose most recent 1,000-plus page report is the scientific benchmark for the UN talks—made note of “the hiatus”. Searching for explanations, the IPCC speculated on possible causes: minor volcano eruptions throwing radiation-blocking dust in the atmosphere, a decrease in solar activity, aerosols, regional weather patterns in the Pacific and Atlantic Oceans. To the general relief of the climate science community, the Stanford findings—a detailed review of statistical methodology—would appear to be the final word on the subject.

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Sep 182015
 
 September 18, 2015  Posted by at 9:57 am Finance Tagged with: , , , , , , , ,  8 Responses »

John Vachon Assassin of Youth November 1938

The Fed Gives Growth a Chance (NY Times ed.)
Fed Delay Looks Like 2013 All Over Again-Rate Hike in December? (Bloomberg)
Fed Rate Decision Roils Emerging-Market Currencies (WSJ)
It’s a New World: How China Growth Concerns Kept the Fed on Hold (Bloomberg)
Europe Lacks Strategy to Tackle Crisis, but Refugees March On (NY Times)
Losing Control Of Refugees, Croatia Closes Serbia Border Crossings (Reuters)
Croatia’s Resources Stretched as Thousands of Refugees Arrive (Bloomberg)
OPEC Assumes Oil Price Will Recover Gradually to $80 in 2020 (Bloomberg)
Defaults Mount in Beleaguered US Energy Industry (WSJ)
Central Banks’ Lesson: Easy Money Alone Isn’t a Growth Salve (WSJ)
China Outflows Said To Surpass A Staggering $300 Billion In Just 75 Days (ZH)
China’s Top Financial Firms Get Green Light for $3 Billion IPOs (WSJ)
Here’s Why China Could Drag The US Into Recession (Fortune)
Primary Dealers Rigged Treasury Auctions, Investor Lawsuit Says (Bloomberg)
Bitcoin Is Officially a Commodity, According to US Regulator (Bloomberg)
Beppe Grillo Gets One Year Jail Sentence for “Defamation” (Tenebrarum)
Scorching Year Continues With the Hottest Summer on Record (Bloomberg)

No, this is not the Onion. But it sure is funny, and not just the headline, try this one: “..the economy shows no signs of overheating..”

The Fed Gives Growth a Chance (NY Times ed.)

The Federal Reserve did the right thing on Thursday when it opted not to begin raising interest rates. By holding steady, the Fed is acknowledging, correctly, that the economy shows no signs of overheating. Price inflation, for example, has been below the Fed’s 2% target for years and shows no signs of accelerating. The Fed also acknowledged the dampening effect global economic weakness and financial-market volatility may have on the American economy. In the past, the Fed played down those dangers, assuming they would be transitory or bearable. In the statement released after its policy-making committee meeting, it shifted, saying international and financial conditions could slow the domestic economy, making an interest-rate increase to restrain the economy unnecessary, at least for now.

In one important respect, however, the Fed appears to be doing the right thing for the wrong reasons. Judging from its statement and its economic projections, the Fed believes that the labor market has largely returned to health. That suggests it will be poised to raise rates as soon as the global headwinds abate. But the labor market is not healthy, and until it is, rate increases would be premature. Unemployment, at 5.1% in August, is still higher than it was before the recession. The share of part-time workers who need full-time jobs is still elevated, while the share of working-age adults with jobs is still well below its prerecession level. Most telling, broad wage growth — the clearest sign of labor market health — has been virtually nil during the six-year-old recovery.

The Fed is supposed to conduct policy in a way that fosters full employment, meaning rates should not be raised until jobs and wages are on a robust growth trajectory. But it seems more concerned with its mandate to fight inflation. That focus would be questionable even if there were nascent signs of inflation; in the absence of any signs, it is indefensible. In fact, inflation has been so low for so long now, it could run somewhat above the Fed’s target for an extended period without being disruptive and, in the process, allow wages to grow in line with productivity.

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Just the fact that after two years we’re still stuck in the same spot should say plenty.

Fed Delay Looks Like 2013 All Over Again-Rate Hike in December? (Bloomberg)

Federal Reserve Chair Janet Yellen shows signs of taking a page out of her predecessor’s policy playbook as she inches toward the central bank’s first interest rate increase in nine years: Delay action in September only to move in December. While the Fed on Thursday opted to keep rates pinned near zero for now, Yellen told a press conference that most policy makers still expect to raise rates this year. She highlighted the strength of the U.S. economy, tying the decision to delay liftoff to fresh uncertainty about the outlook abroad and to financial market turbulence over the past month. “I do not want to overplay the implications of these recent developments, which have not fundamentally altered our outlook,” she said. “The economy has been performing well, and we expect it to continue to do so.”

Yellen’s approach has parallels to the strategy that former Fed Chairman Ben Bernanke pursued in 2013 as officials debated whether to start scaling back bond purchases. Citing uncertainties to the outlook, Bernanke put off a move to begin tapering in September before deciding to go ahead in December. Just like today, much of the Fed’s initial reservations about acting in 2013 centered on developments in emerging markets, which had been rocked by Bernanke’s suggestion a few months earlier that a taper was on its way. Looming in the background then, as it is now, was the threat of a U.S. government shutdown. Today’s situation “lines up in so many ways” with that of 2013, said Aneta Markowska at SocGen, pointing to the upcoming fiscal showdown and emerging market concerns. “If all of that is resolved by December, my expectation is that the data will definitely support a hike.”

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No matter what the Fed does, emerging markets can’t win.

Fed Rate Decision Roils Emerging-Market Currencies (WSJ)

Many emerging-market currencies slumped against the dollar on Thursday despite the Federal Reserve’s decision to hold interest rates near zero for now. Currencies in Brazil, Turkey and South Africa, which have been among the hardest-hit by fears of a U.S. rate increase, enjoyed a short-lived reprieve after the central bank’s announcement. But they gave back all the gains within hours, as investors realized the Fed is still on track to raise interest rates later in the year. Many investors said the Fed’s reluctance to raise rates on Thursday signaled policy makers’ concerns about slowing global growth, which reflects a deepening economic malaise across emerging markets.

Many emerging countries rely on external capital flows to finance growth. The prospect of higher rates in the U.S. has led to outflows from these countries, contributing to weakening currencies and higher bond yields that drive up borrowing costs. The continuation of easy-money policies in the U.S. “buys some time for further adjustments by emerging-market economies, but this decision also confirms the fact that the U.S. economy continues to expand at a modest pace, which is not particularly emerging-market friendly,” said George Hoguet at State Street Global Advisors.

The Brazilian real took a roller-coaster ride. The currency, which was under pressure early in the day, rallied immediately upon the release of the Fed statement at 2 p.m. Eastern time, rising as much as 1.3% against the dollar. But the gains quickly dissipated. By late afternoon, the real lost 1.5% against the dollar to 3.8974, the weakest level in 13 years. Indonesia’s rupiah, after a brief rally, closed at its lowest level against the greenback since July 1998. Both the South African rand and the Turkish lira appreciated against the dollar shortly after the Fed announcement, but ended the day with losses.

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A neat excuse to hide their ignorance behind.

It’s a New World: How China Growth Concerns Kept the Fed on Hold (Bloomberg)

Here’s the latest sign of China’s arrival as a global economic power: It’s roiled financial markets enough to nudge the Federal Reserve away from raising interest rates. Fed policy makers left their benchmark rate near zero Thursday, saying the U.S. economy and inflation may be restrained by “recent global economic and financial developments.” Fed Chair Janet Yellen elaborated in a press briefing, saying the financial turmoil reflected investor concerns about risks to Chinese growth. “If it weren’t for China and all the turmoil surrounding China, I think the Fed would have hiked rates,” said Mickey Levy at Berenberg in New York, who has analyzed Fed policy for more than 30 years.

The focus on China comes after a market rout that wiped $5 trillion in value off the nation’s stocks and after a sudden move on Aug. 11 to change its exchange rate regime, a decision which triggered the yuan’s biggest depreciation in two decades and roiled global markets. The world’s second-largest economy is set to grow at its slowest pace in a quarter century this year even after five central bank interest rate cuts and fiscal stimulus. “China was an influence in this meeting, whereas in the past that would have been much less important,” said Tai Hui at JPMorgan Asset Management in Hong Kong. China affects the world more than ever before, and its influence over global markets will only increase as it approaches the U.S. economy in size. It accounted for 13.3% of global gross domestic product last year, from less than 5% a decade earlier, according to World Bank data.

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Croatia gave it their best, but they too need help.

Europe Lacks Strategy to Tackle Crisis, but Refugees March On (NY Times)

Europe’s failure to fashion even the beginnings of a unified solution to the migrant crisis is intensifying confusion and desperation all along the multicontinent trail and breeding animosity among nations extending back to the Middle East. With the volume of people leaving Syria, Afghanistan and other countries showing no signs of ebbing, the lack of governmental leadership has left thousands of individuals and families on their own and reacting day by day to changing circumstances and conflicting messages, most recently on Thursday when crowds that had been trying to enter Hungary through Serbia diverted to Croatia in search of a new route to Germany.

Despite the chaos, there were few signs that EU leaders, or the governments of other countries along the human river of people flowing from war and poverty, were close to imposing any order or even talking seriously about harmonizing their approaches and messages to the migrants. Instead, countries continue to improvise their responses, as Croatia did Thursday, and Slovenia — the next stop along the rerouted trail — is likely to do in coming days. The migrants did not shift course to Croatia on a whim. When Hungary effectively blocked their access on Tuesday with a border crackdown — which resulted in an ugly skirmish Wednesday between the police and migrants — they had few options.

And Macedonian and Serbian officials, along with many aid organizations, were urging them to circumvent a hostile Hungary and even providing maps and nonstop bus service to the Croatian frontier. Initially, Croatia’s foreign minister, Vesna Pusic, seemed to encourage them, too. “They can move freely in this period,” she said. “We will try to restore a decent face to this part of Europe.” So, since Wednesday morning, more than 11,000 migrants have entered Croatia, and officials said 20,000 more were already in Serbia, making their way to the Croatian border and likely to arrive soon — while untold tens of thousands more waited in Turkey and Greece for a clear signal about whether to follow.

But what the first arriving migrants found on the Croatian border was only more fog. The Croatian interior minister said that the country would abide by European Union rules and register all arriving asylum seekers and that they could not simply pass through the country unfettered. Then late Thursday, swamped by the crush of migrants, Croatia announced that the border would be closed altogether, indefinitely. Slovenian officials said that, no matter how many migrants Croatia lets through, they would register all arrivals and turn back any who do not qualify as refugees — a task that Hungary can attest is easier said than done.

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Dear MSM: Stop calling refugees ‘migrants’. And stop calling a meeting next week an ‘emergency’ meeting.

Losing Control Of Refugees, Croatia Closes Serbia Border Crossings (Reuters)

Croatia has closed seven of eight road border crossings with Serbia after complaining of being overwhelmed by an influx of more than 11,000 migrants who evaded police, trekked through fields and tried to sneak into Slovenia by train in a march westwards that is dividing Europe. Only the main Bajakovo crossing, on the highway between Belgrade and Zagreb, appeared to be open to traffic on Friday, while neighboring Slovenia stopped all rail traffic on the main line from Croatia after halting a train carrying migrants on the Slovenian side of the border. Migrants have been streaming into European Union member Croatia for two days, their path into the bloc via Hungary blocked by a metal fence, the threat of imprisonment and riot police who fired teargas and water cannon on Wednesday to drive back stone-throwing men.

There were desperate scenes at a railway station on Croatia’s eastern frontier with Serbia, where thousands were left stranded overnight under open skies. The EU has called an emergency summit next week to overcome disarray in the 28-nation bloc. Croatian Interior Minister Ranko Ostojic warned on Thursday that Croatia would close its border with Serbia if the flow of migrants continued at the same rate, saying his country was full to capacity. The president of Croatia told the military to be ready to join the effort to stop thousands of people criss-crossing the Western Balkans in their quest for sanctuary in the wealthy bloc. Late on Thursday, police announced they had banned all traffic at seven border crossings. “The measure is valid until further notice,” police said in a statement.

Serbia’s main highway north into Hungary is already closed by Hungarian riot police on the border. It remained unclear whether or how police would stop migrants, many of them refugees from Syria, from streaming through fields across the border away from official crossings, though their path across much of the frontier is made more difficult by the Danube river. Serbia warned its neighbors against shutting down the main arteries between them. “We want to warn Croatia and every other country that it is unacceptable to close international roads and that we will seek to protect our economic and every other interest before international courts,” Aleksandar Vulin, Serbia’s minister in charge of migration, told the Tanjug state news agency.

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And so we move from country to country and border to border, while Europe refuses to set up a meeting. To them, it’s an emergency only for refugees.

Croatia’s Resources Stretched as Thousands of Refugees Arrive (Bloomberg)

Croatia wavered in its commitment to accept a growing influx of migrants after 5,600 refugees poured into the country in one day, underscoring the massive task facing Europe as people flee war and poverty. “If migrants continued to arrive in larger numbers, Croatia would have to consider an entirely different approach,” Interior Minister Ranko Ostojic said in a statement on Thursday. Prime Minister Zoran Milanovic said Croatia will help refugees “as long as we can,” after throwing open its doors Wednesday. The people have been stranded in Serbia trying to enter the European Union through Hungary, which closed its southern frontier and fired tear gas and water cannons at migrants trying to break through a barrier on the border. Police said they used force to repel the crowd after refugees threw rocks and other projectiles.

European leaders have been at odds for weeks over how to deal with the region’s biggest refugee crisis since World War II, with Hungarian Prime Minister Viktor Orban fortifying his border to keep refugees out and German Chancellor Angela Merkel saying Europe has a moral responsibility to help. Orban has built a razor-wire fence along the border with Serbia and announced plans to extend the barrier to part of the frontier with Romania. The crisis claimed its first political casualty in Germany, with the government’s point person on the refugee crisis stepping down. The Interior Ministry announced Thursday that Manfred Schmidt, who headed the office for migration and refugees, was leaving for personal reasons.

Schmidt’s office was responsible for the initial decision to allow all Syrians entering the country to stay – a departure from an EU agreement requires refugees to be registered in the country where the arrive in the bloc and remain there to have their asylum applications processed. “The dramatically increased number of asylum seekers in Germany present the federal agency, as well as the states and municipalities, with an enormous challenge,” Interior Minister Thomas de Maiziere said in a statement thanking Schmidt for his “excellent work.” The departure comes after Merkel was criticized in recent days by some in her own coalition for her handling of the crisis as the country struggles to keep up with the influx. The chancellor has defended her decision to allow in refugees.

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What else are they going to say?

OPEC Assumes Oil Price Will Recover Gradually to $80 in 2020 (Bloomberg)

OPEC is assuming the oil price will rise gradually to $80 a barrel in 2020 as supply growth outside the group weakens, a slower recovery than several member nations have said they need. The average selling price of the Organization of Petroleum Exporting Countries’ crude will increase by about $5 annually to 2020 from $55 this year, according to an internal research report from the group seen by Bloomberg News. Iran and Venezuela said they would like to see a price of at least $70 this month and most member countries cannot balance their budgets at current prices. “It’s much harder for OPEC to lift prices” after the revolution of U.S. shale oil, said Bjarne Schieldrop, Oslo-based chief commodities analyst at SEB AB, which forecasts Brent crude at $73 by the end of the decade.

“Eighty dollars by 2020 is pretty close to consensus view.” The price of crude has tumbled more than 50% in the past year as OPEC followed Saudi Arabia’s strategy of defending its share of the global market against competitors like U.S. shale oil. While both OPEC and the International Energy Agency expect growth in global supply to slow as low prices bite, Goldman Sachs predicts that a persistent glut will keep crude low for the next 15 years. Production from nations outside OPEC will be 58.2 million barrels a day in 2017, 1 million lower than previously forecast, according to the internal report.

The impact low prices is “most apparent on tight oil, which is more price reactive than other liquids sources,” according to the report. “Supply reductions in U.S. and Canada from 2014 to 2016 are clearly revealed.” OPEC expects little stimulus to global demand in the medium term as a result of cheaper oil, with daily consumption growing by about 1 million barrels a year to 97.4 million in 2020, according to the report. While demand from China, Russia and OPEC members will grow more slowly than forecast a year ago, developing nations with still account for the bulk the expansion, it said.

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Debt dominoes.

Defaults Mount in Beleaguered US Energy Industry (WSJ)

The well is running dry for deeply indebted energy companies. Samson Resources became the latest, and largest, victim of an industry downturn, as it filed for chapter 11 protection late Wednesday. Industry experts say more oil-and-gas companies are poised to follow the Tulsa, Okla., company into bankruptcy as oil prices remain low following a steep drop that began last year. The default rate among U.S. energy companies has accelerated in recent months to 4.8%, the highest level since 1999 and up from 3.3% in August, according to Fitch Ratings. Within that group, exploration and production companies like Samson are defaulting at an even higher rate, 8.5%, Fitch said. Default volume for such companies is the highest it has been in five years, at $10.4 billion in debt.

The broader U.S. corporate default rate is 2.9%, according to Fitch. Meanwhile, the yield on a basket of U.S. junk-rated energy bonds has risen to 11%, just off its highest level since July 2009 and up from 5.9% a year ago, according to Barclays PLC. The increase indicates a lack of investor confidence that the bonds will be repaid in full. Yields on debt rise as prices fall. “Everything has been turned upside down,” said Marc Lasry, head of hedge- fund firm Avenue Capital Group, which recently raised $1.3 billion for an energy-focused fund. “If you’re equity it’s been total devastation. If you’re the high-yield guys you’re in total shock and you have no idea what to do,” he said, referring to investors in stocks and risky debt.

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It took 8 years to figure that one out?!

Central Banks’ Lesson: Easy Money Alone Isn’t a Growth Salve (WSJ)

Central bankers have injected roughly $8 trillion into the global economy since the financial crisis. In return, the world has remained in a low-growth rut. The Federal Reserve cited market turmoil and a weak economic picture overseas in deciding Thursday not to back off from one of the most aggressive global monetary policies in decades. Whenever the Fed moves to raise interest rates, one lesson remains: Cheap money alone can’t solve the world’s economic ills. The Fed noted positive developments at home, including increased household spending and business investment, but worried conditions overseas could restrain U.S. growth and put further downward pressure on near-term inflation.

“A lot of our focus has been on risks around China, but not just China—emerging markets more generally and how they may spill over to the U.S.,” said Fed Chairwoman Janet Yellen, noting “the significant economic and financial interconnections between the U.S. and the rest of the world.” Her unease underscores in part the limits of loose monetary policy as a singular response to economic weakness. Instead of using the breathing room of low interest rates to revamp their economies, governments around the globe have failed to enact longer-lasting policy overhauls as they try to combat an array of demographic and other challenges.

“Finance, especially as motivated by central banks, is really only a lubricant to growth,” said Raghuram Rajan, head of the Reserve Bank of India, at a recent meeting of top global finance officials. “It can’t be the underlying driver of growth.” Since the financial crisis began in 2007, the average key interest rate set by central banks has fallen by around 4 percentage points in advanced countries and 2 points in emerging markets. Central banks have also bought bonds and other assets equal to 10% of global output to stir growth in the postcrisis era.

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TEXT

China Outflows Said To Surpass A Staggering $300 Billion In Just 75 Days (ZH)

We’ve detailed the story exhaustively, so we won’t endeavor to recap it all here, but the short version is that what was billed as a move to give the market a greater role in setting the yuan’s exchange rate actually had the opposite effect – at least in the short run. That is, the PBoC used to manipulate the fix to control the spot and now they simply manipulate the spot to control the fix, but unabated devaluation pressure has forced China to intervene on a massive scale and that intervention recently moved into the offshore market as well, as Beijing scrambled to close the onshore/offshore spread. This is costing China dearly in terms of FX reserves, the liquidation of which was so massive in August as to prompt Deutsche Bank to brand it “Quantitative Tightening”, as the reserve drawdowns are effectively QE in reverse.

This is of course the same dynamic that’s been taking place in Saudi Arabia in the wake of the petrodollar’s demise and mirrors the response across EMs which are struggling to support commodity currencies as prices collapse. Attempts to quantify the scope of China’s reserve burn have become ubiquitous, as the cost of offsetting the outflows from China effectively serves as a proxy for the extent to which the Fed would, were they to hike, be “tightening into a tightening”, as we’ve put it. On Wednesday we showed that Beijing liquidated $83 billion in Treasurys in July. That, as we also noted, “is before China announced its devaluation on August 11 and before, as we also first reported, it sold another $100 billion in Treasurys in August.”

Today, we get a fresh look at the numbers courtesy of SAFE which shows that on net, banks sold $128 billion in FX to Chinese non-banks in August. Nothing too surprising there, given that we already knew positioning for FX purchases for the banking sector as a whole dropped by $115 billion for the month. As Goldman notes however, when you include banks’ forward books the picture worsens materially. An alternative gauge that we believe is a closer reflection of the underlying trend of currency demand shows a significantly larger outflow of $178bn. Today’s data at US$178bn on our preferred gauge of underlying currency demand (i.e., outright spot plus freshly-entered forward contracts) is significantly higher than any of [the previous] releases.

This means, as Goldman goes on to point out, that outflows are actually far worse than what’s indicated by simply looking at China’s reserve drawdown, as banks look to be shouldering some of the burden themselves. So between July and August (inclusive of freshly entered forwards), outflows total around $261 billion. But that’s not all. Nomura is out with an estimate of what’s taken place since the start of September. Between onshore spot intervention and offshore spot and forward intervention, the bank estimates China has spent some $47 billion month-to-date stabilizing the yuan, $25 billion of which in the offshore market, reinforcing what we said a week ago after CNH soared the most on record [..]

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What grandmas can move their savings in.

China’s Top Financial Firms Get Green Light for $3 Billion IPOs (WSJ)

China International Capital and China Reinsurance each received approval from the Hong Kong stock exchange late Thursday to hold initial public offerings worth a combined $3 billion, people familiar with the deals said, signaling a possible revival of what has been a quiet quarter for the city’s capital market. CICC, which is China’s top investment bank, and China Reinsurance, its biggest reinsurer, have yet to decide when to go public due to volatile stock markets, though they are aiming to do so this year, the people said. The turmoil in Chinese stocks is hurting investor appetite for initial public offerings in Hong Kong, the world’s top venue for listings this year. In the third quarter, IPOs in Hong Kong have raised $1.8 billion, down significantly from $5.4 billion in the same period last year..

The two IPOs would be the first major offering since China Railway Signal & Communication’s $1.4 billion Hong Kong IPO in August. Hong Kong’s Hang Seng Index, which is weighted heavily with mainland Chinese stocks, has fallen 17% in the third quarter so far, as mainland stocks have tumbled. Those declines have weighed on investor sentiment. On Monday, the short-haul carrier Hong Kong Airlines called off indefinitely a planned listing in which it had hoped to raise $500 million. The potential listing of CICC would give its shareholders, including KKR & Co. and TPG Capital, the chance to exit their investments despite turmoil in Chinese stocks. Central Huijin Investment, the domestic investment arm of China’s sovereign-wealth fund, is the largest shareholder in CICC with a 43.35% stake.

Singapore’s sovereign-wealth fund GIC Pte. Ltd. holds 16.35%, while TPG Capital owns 10.3% and KKR holds 10%, according to its annual report. CICC was formed in 1995 by Morgan Stanley and China Construction Bank. as China’s first Sino-foreign joint-venture investment bank. Morgan Stanley sold its stake in December 2010 to a consortium that included GIC; Great Eastern Holdings, the insurer controlled by Oversea-Chinese Banking; and the private-equity firms KKR and TPG Capital. CICC has played a key role in advising the Chinese government on state-owned enterprise reform and guiding the listing of the country’s major overseas IPOs.

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Investment. In productive areas, that is.

Here’s Why China Could Drag The US Into Recession (Fortune)

No one can say for sure just how bad China’s economic situation has become, but analysts in the United States have been taking comfort in the fact that U.S. trade to China, and the Pacific Rim in general, constitutes a small sliver of U.S. GDP. And while the emerging world makes up a much bigger share of the global economy than it did a generation ago, the U.S. economy is still the largest in the world. When capital flees riskier economies like Brazil or Turkey, the U.S. is where it will run to. There’s one problem. These arguments ignore the fact that economists don’t agree on what, exactly, causes recessions. True, the Asian financial crisis of 1998 didn’t lead to slower growth in the U.S. But that doesn’t mean that a recession in the emerging world will fail to drag us down this time.

David Levy, economist and chairman of The Jerome Levy Forecasting Center, has been predicting that China would suffer an economic crisis and he believes that turmoil in emerging markets can take down the U.S. economy. Levy subscribes to what he calls “the profits perspective,” which examines global profits rather than country-specific GDP for indications of economic turmoil. How can global profits help predict recessions? Profits are the main factor that guides economic activity: when profits are high, businesses will invest and hire workers, and lenders will extend credit. When profits are low, the opposite occurs.

As it turns out, the largest contributor to global profits is net investment. When firms invest in capital equipment or when an individual invests in residential real estate, this is an act of wealth creation that does not require an immediate expense, in accounting terms. On a global scale, then, when investment is rising, we should also see profits rise and the global economy expand. But when we start to see investment stagnate or decline, we should expect profits to fall, putting recessionary conditions right around the corner.

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Slap that wrist!

Primary Dealers Rigged Treasury Auctions, Investor Lawsuit Says (Bloomberg)

The same analytical technique that uncovered cheating in currency markets and the Libor rates benchmark – resulting in about $20 billion of fines – suggests the dealers who control the U.S. Treasury market rigged bond auctions for years, according to a lawsuit. The analysis was part of a 115-page lawsuit filed in Manhattan federal court on Aug. 26 by Quinn Emmanuel Urquhart & Sullivan LLP and other law firms. The plaintiffs built their case against the 22 primary dealers who serve as the backbone of Treasury trading – including Goldman Sachs JPMorgan and Morgan Stanley – using data from Rosa Abrantes-Metz, an adjunct associate professor at New York University who has provided expert testimony in rigging cases.

Her conclusion: More than two-thirds of a certain type of Treasury auction appear to have been rigged. She found issues with other auctions, too. “The only plausible explanation is that Defendants coordinated artificially to influence the results of the auctions in the primary market,” according to the complaint filed by the Cleveland Bakers and Teamsters Pension Fund and other investors. The lawsuit, which seeks unspecified damages, comes as the U.S. Justice Department probes whether information in the Treasury auction market is being shared improperly by financial institutions, three people with knowledge of the investigation said in June.

Treasury traders at some banks learn of customer demand hours before auctions, and were communicating with their counterparts at other firms via chat rooms as recently as last year, Bloomberg News reported earlier this year. Abrantes-Metz’s analysis is similar to one used in lawsuits claiming bank and broker manipulation of the London interbank offer rate, or Libor. Those cases resulted in about $9 billion in settlements from the financial firms. Banks and brokers have paid about $9.9 billion in fines to global regulators related to manipulation of currency markets as of May.

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Bitcoin, rhubarb, it’s all the same.

Bitcoin Is Officially a Commodity, According to US Regulator (Bloomberg)

Virtual money is officially a commodity, just like crude oil or wheat. So says the Commodity Futures Trading Commission (CFTC), which on Thursday announced it had filed and settled charges against a Bitcoin exchange for facilitating the trading of option contracts on its platform. “In this order, the CFTC for the first time finds that Bitcoin and other virtual currencies are properly defined as commodities,” according to the press release. While market participants have long discussed whether Bitcoin could be defined as a commodity, and the CFTC has long pondered whether the cryptocurrency falls under its jurisdiction, the implications of this move are potentially numerous.

By this action, the CFTC asserts its authority to provide oversight of the trading of cryptocurrency futures and options, which will now be subject to the agency’s regulations. In the event of wrongdoing, such as futures manipulation, the CFTC will be able to bring charges against bad actors. If a company wants to operate a trading platform for Bitcoin derivatives or futures, it will need to register as a swap execution facility or designated contract market, just like the CME Group. And Coinflip—the target of the CFTC action—is hardly the only company that provides a platform to trade Bitcoin derivatives or futures.

“While there is a lot of excitement surrounding Bitcoin and other virtual currencies, innovation does not excuse those acting in this space from following the same rules applicable to all participants in the commodity derivatives markets,” said Aitan Goelman, the CFTC’s director of enforcement, in a statement. A request for comment sent to Coinflip’s chief executive via LinkedIn was not immediately returned. Coinflip consented to the order without admitting or denying any of its findings or conclusions. Since Coinflip is not alone in providing a platform to trade Bitcoin derivatives or futures, Goelman’s words imply that other unregulated exchanges could soon attract the attention of the CFTC.

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For calling a tool a tool.

Beppe Grillo Gets One Year Jail Sentence for “Defamation” (Tenebrarum)

Former Italian prime minister Silvio Berlusconi – the cavaliere – has been successful in fighting off legal challenges ranging from sex with minors to alleged tax fraud involving humungous amounts for well over adecade. On a number of occasions, the Italian State even created new laws specifically designed to keep the cavaliere out of jail. We admittedly just loved his constant successful evasions of justice. First of all, we were deeply worried by the thought of potentially losing this unsurpassed master of political entertainment. Secondly, when the Eurocracy decided it didn’t like him anymore, he was basically putsched out of office, and we greatly dislike the meddlers administering the Moloch in Brussels. Incidentally, ever since he has lost political power, Berlusconi’s successes in evading justice have been waning rather rapidly.

What was of course also great about Berlusconi’s brushes with the law was that they demonstrated unequivocally that the concept of “equality before the law” is a basically a bad joke. They showed the hoi-polloi that the modern-day rulers of the “democratic” societies of the West are in many respects really not much different from the feudal robber barons of the past. This seemed eminently useful from an educational perspective to us. This week we have been provided with yet another interesting demonstration by Italy’s justice system. An oppositional critic of the establishment who is seen as a genuine danger to the “European project” and the structures of the State because he enjoys massive voter support can evidently not hope to evade the long arm of the law as easily as the cavaliere was able to do in his heyday.

Beppe Grillo, leader of the wildly successful “5 Star Movement” has been handed a one year jail sentence (suspended, but still – one more misstep, and he’s locked up) and has been ordered to pay altogether 51,250 euro in fines and restitution. What was his crime? Did he defraud the tax man? Did he engage in bunga-bunga with minors? Did he have truck with the mafia? Nope – his alleged crime is defamation – and it appears that the law’s definition of “defamation” is “saying something about a public personality that said person doesn’t like”. Here is what happened, according to the press:

“Ascoli Piceno, September 14 – A judge here handed a suspended sentence of one year to 5-Star Movement (M5S) leader Beppe Grillo on Monday, for defamation of university professor Franco Battaglia. Grillo publicly insulted Battaglia during a speech on nuclear energy in May 2011 in the town of San Benedetto del Tronto, over an appearance Battaglia had made on the TV program Anno Zero. Referring to Battaglia’s comments, Grillo said, “You can’t let an engineer (…) go on television and say, with nonchalance, that no one died in Chernobyl. I’ll kick your ass, I’ll throw you out of television, I’ll report you to the police and send you to jail”. Battaglia testified that his car was also vandalized and he received a “strange phone call” prior to the act of vandalism. Grillo was ordered to pay a fine of €1,250 , and Battaglia was awarded compensation of €50,000.

It is well known that Beppe Grillo doesn’t mince words, but we can be reasonably sure that he was neither the man behind the “strange phone call” (we only have Battaglia’s say-so regarding this call), and that he probably didn’t vandalize the good professor’s car either. Most press reports didn’t go into too many details though – after all, Grillo had it coming, right?

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“Are the record temperatures due to climate change or due to El Niño? The answer is yes..”

Scorching Year Continues With the Hottest Summer on Record (Bloomberg)

Last month was the hottest August on record, topping out the hottest summer on record, according to data released on Thursday by the National Oceanic and Atmospheric Administration. It was the sixth month this year to set a new record: February, March, May, June, July, and August. This has been the hottest start to a year on record and the hottest 12 months on record. It follows the hottest calendar year (2014), and the hottest decade. In 136 years of global temperature data, we are in uncharted territory. And this year’s extremes are likely to continue as a strong El Niño weather pattern in the Pacific Ocean continues to rip more heat into the atmosphere. There’s now a 97% chance that 2015 will set yet another record, according to NOAA.

Results from the world’s top monitoring agencies vary slightly. NOAA and the Japan Meteorological Agency both listed August as the hottest month. NASA rated it one degree cooler than the previous record, set last year. All three agencies agree that 2015 is on track to be the hottest yet, by a long shot. The heat was experienced differently across the world, but few places escaped it altogether. In the U.S., chances are growing that above-normal temperatures will persist in Alaska and along the West Coast, as well as in the upper Midwest and Northeast, through February. That’s in line with what can happen during a strong El Niño. “Are the record temperatures due to climate change or due to El Niño? The answer is yes,” said Deke Arndt, chief of NOAA’s climate monitoring branch in Asheville, N.C.. “Long-term climate change is like climbing a flight of stairs. El Niño is like standing on tippy toes while you are on one of those stairs.”

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Feb 022015
 
 February 2, 2015  Posted by at 10:24 am Finance Tagged with: , , , , , , , , , ,  6 Responses »


DPC Fifth Avenue after a snow storm 1905

EU’s Juncker Wants To Scrap Troika’s Mission To Greece (Reuters)
Croatia Just Canceled The Debts Of Its Poorest Citizens (WaPo)
Greece’s Problems Result From Eurozone Having No Fiscal Policy (Guardian)
Greece Asks ECB to Keep Banks Afloat as Debt Deal Sought (Bloomberg)
Greece Wants Special ECB Help While Going ‘Cold Turkey’ on Aid (Bloomberg)
My Friend Yanis, The Greek Minister Of Finance (Steve Keen)
Obama Expresses Sympathy for New Greek Government (WSJ)
France Open to Easing Greek Debt Burden (Bloomberg)
Eurozone Alarm Grows Over Greek Bailout Brinkmanship (FT)
Syriza’s Cleaners Show Why Economics Needs A New Broom (Guardian)
Americans Are Failing To Pump Gas-Price Savings Back Into The Economy (WSJ)
Oil Workers in US on First Large-Scale Strike Since 1980 (Bloomberg)
Falling Prices Spread Pain Far Across The Oil Patch (WSJ)
Oil Companies Draw on Creative Financing to Stay Afloat (Bloomberg)
BP To Follow Shell In Cutting Spending (Guardian)
China’s Feeling the Pressure to Join Global Easing (Bloomberg)
ECB Bond-Buying Plan Has Investors Questioning How It All Works (Bloomberg)
Automakers Can’t Make Air Bags Work (Bloomberg)
Currency War Claims Another Casualty: Denmark (Bloomberg)
Is Reserve Bank of Australia The Next Central Bank To Ease? (CNBC)
US Companies Face Billions In Venezuela Currency Losses (Reuters)
Fleeing Capital Clips Wings On US Yields (CNBC)
Obama Targets Foreign Profits With Tax Proposal (Reuters)

Note that one down for Syriza. It’s the IMF that has the most detrimental impact, getting them out is a very good development.

EU’s Juncker Wants To Scrap Troika’s Mission To Greece (Reuters)

European Commission President Jean-Claude Juncker wants to scrap the troika mission from international lenders that governs Greece’s €320 billion bailout, German daily Handelsblatt reported, quoting unnamed Commission sources. “We have to find an alternative quickly,” it quoted the sources as saying, in an extract from an article released ahead of publication on Monday. Berlin was also prepared to reform arrangements between the European Commission, ECB and IMF and Athens, seen by its new government as ‘insulting’ to Greek sovereignty, and establish more general economic targets, the paper quoted unnamed German government sources as saying.

However, this would only be possible if Greece accepted the need to stick to previously agreed reform and savings targets, the business newspaper said. The new left-wing government of Greek Prime Minister Alexis Tsipras has said it wants to end the bailout deal and will not cooperate with troika inspectors in Athens. It says it wants to negotiate directly with European authorities and the IMF over a new accord that will allow a reduction in its debt, which is equivalent to more than 175% of its gross domestic product. Juncker, who is due to meet Tsipras in Brussels on Wednesday, has said he was not prepared to accept any direct write-off of Greece’s public debt.

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More countriess should consider this. Restructuring, jubilee, call it what you want, it as old as society.

Croatia Just Canceled The Debts Of Its Poorest Citizens (WaPo)

Starting Monday, thousands of Croatia’s poorest citizens will benefit from an unusual gift: They will have their debts wiped out. Named “fresh start,” the government scheme aims to help some of the 317,000 Croatians whose bank accounts have been blocked due to their debts. Given that Croatia is a relatively small Mediterranean country of only 4.4 million inhabitants, the number of indebted citizens is significant and has become a major economic burden for the country. After six years of recession, growth predictions for Croatia’s economy remain low for this year. “We assess that this measure will be applicable to some 60,000 citizens,” Deputy Prime Minister Milanka Opacic was quoted as saying by Reuters. “Thus they will be given a chance for a new start without a burden of debt,” Opacic said earlier this month.

To be eligible, Croats need to fulfill certain criteria: Their debt must be lower than 35,000 kuna ($5,100), and their monthly income should not be higher than 1,250 kuna ($138). Those applying for the scheme are not allowed to own any property or have any savings. Among economists, the scheme is regarded as unprecedented and exceptional. “I can’t think of anything comparable,” Dean Baker at Center for Economic and Policy Research said. Although the program is expected to cost between 210 million and 2.1 billion Croatian kuna ($31 million and $300 million), according to conflicting reports by Austrian press agency APA and Reuters, the Croatian government expects economic long-term benefits that will outweigh the short-term investment.

Prime Minister Zoran Milanovic has convinced multiple cities, public and private companies, the country’s major telecommunications providers, as well as nine banks to clear some of their citizens of their debt. The government will not refund the companies for their losses. Overall, the debt of all Croats amounts to $4.11 billion – and the debt that is about to be wiped out accounts for about 1 to 7% of that. However, for those who are eligible the agreement will make a significant difference by enabling them to gain access to their bank accounts. By reducing debt by less than 10%, Croatia frees nearly 20% of the country’s debtors from their obligations.

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“Isn’t it the case that using Greece as a laboratory mouse for an austerity experiment has been a failure?”

Greece’s Problems Result From Eurozone Having No Fiscal Policy (Guardian)

Greece and Germany are on a collision course. Alexis Tsipras’s new Syriza-led government in Athens wants a big chunk of its debt written off. Angela Merkel is saying “nein” to that. If this were a western, Tsipras and Merkel would be the two gunslingers who have decided in time-honoured fashion that “this town ain’t big enough for the both of us”. But this isn’t Hollywood. There is no guarantee that this shootout will have a happy ending. Things look like getting nasty and messy. The five-year crisis in the eurozone has entered a dangerous new phase. How can this be? Isn’t Greece a small country, which accounts for less than 2% of the output of the European Union? Wouldn’t it be relatively easy and not particularly expensive for its creditors to write off its debts, mostly owned by governments or international bodies?

Isn’t it the case that using Greece as a laboratory mouse for an austerity experiment has been a failure? The answer to all three questions is yes. Greece is a small country. Writing off part of its debts or easing the repayment terms would be simple and painless. The obsession with deficit reduction has depressed growth not just in Greece, but in the whole of the eurozone. What’s more, the lesson from the last five years is that those countries that use the euro are paying a heavy price for the lack of a common system for transferring resources from one part of the single-currency area to another. There is one currency and one interest rate, but there is no fiscal union to stand alongside monetary union. So, unlike in the US or the UK, there is no large-scale method for recycling the taxes raised in those parts of the eurozone that are doing well into higher spending for those parts of the eurozone that are doing badly.

Mark Carney pointed out this weakness in a lecture in Dublin last week when he said: “It is difficult to avoid the conclusion that, if the euro were a country, fiscal policy would be substantially more supportive.” The governor of the Bank of England added that a “more constructive fiscal policy” would help mitigate the negative impact that structural reforms have on demand and would be consistent with the longer-term aim of closer integration. All this is music to the ears of Tsipras and his finance minister, Yanis Varoufakis, who will be in London for talks with George Osborne on Monday. Varoufakis, judging by his comments on Newsnight last week, thinks Germany should soften its approach not just because the current policy is not working but also as an act of European solidarity.

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This will not be denied.

Greece Asks ECB to Keep Banks Afloat as Debt Deal Sought (Bloomberg)

Greek Prime Minister Alexis Tsipras began the hunt for allies against German demands for austerity as his week-old government appealed to the European Central Bank not to shut off the money tap. Finance Minister Yanis Varoufakis said his country won’t take any more aid under its existing bailout agreement and wants a new deal with its official creditors by the end of May. While Greece tries to wring concessions on its debt and spending plans, it needs the ECB’s help to keep its banks afloat, Varoufakis said at a briefing in Paris late Sunday. “We’re not going to ask for any more loans,” Varoufakis said after meeting his French counterpart, Michel Sapin. “During this period, it is perfectly possible in conjunction with the ECB to establish the liquidity provisions that are necessary.”

Tsipras, who issued a statement Saturday promising to stick by Greece’s financial obligations, is seeking to repair damage after a rocky first week. Bond yields spiraled and banks stocks plummeted after German Chancellor Angela Merkel stonewalled his plans to ramp up spending and write down debt. The Greek leader visits Cyprus on Monday before trips to Rome, Paris and Brussels. He’s not scheduled to see Merkel, the biggest contributor to Greece’s financial rescue, until a EU summit on Feb. 12. Merkel wants to avoid getting drawn into a direct confrontation with Tsipras and is unlikely to agree to a face-to-face meeting with him at next week’s gathering of leaders, according to a German government official who asked not to be named because the discussions are private.

The chancellor’s goal is to show Tsipras that he is isolated, the official said. What’s more, she sees little margin for maneuver on the conditions of any further support for Greece and is skeptical about Tsipras’s claims that he can raise revenue by cutting corruption and increasing taxes on the rich, the official added. “Europe will continue to show solidarity with Greece, as well as other countries particularly affected by the crisis, if these countries undertake their own reforms and savings efforts,” Merkel said in an interview with Hamburger Abendblatt published Saturday.

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“During this period, it is perfectly possible in conjunction with the ECB to establish the liquidity provisions that are necessary.”

Greece Wants Special ECB Help While Going ‘Cold Turkey’ on Aid (Bloomberg)

Greece is counting on the European Central Bank to maintain a financial lifeline while the week-old government in Athens negotiates new terms on its international bailout package, Finance Minister Yanis Varoufakis said. While the country is “desperate” for funds, it will forgo further disbursements of emergency aid until negotiating a “new social contract” with its creditors, he said. He set an end-May deadline for reaching a deal on a revamped rescue with the euro area and the IMF. “For that period, we’re not going to ask for any more loans,” Varoufakis told reporters today in Paris after meeting French Finance Minister Michel Sapin. “During this period, it is perfectly possible in conjunction with the ECB to establish the liquidity provisions that are necessary.”

The danger for Prime Minister Alexis Tsipras, who won power on Jan. 25 following pledges to undo more than four years of austerity tied to emergency aid, is that both the country’s banks and the government could be left without funding as soon as next month. Greece has until end-February to qualify for an aid payment of as much as €7 billion and hasn’t indicated any willingness to seek an extension. Letting the review lapse under Greece’s €240 billion aid program could result in its banks effectively being excluded from ECB liquidity operations while the government is still shut out of international bond markets. At the moment, Greece has a special dispensation from the ECB because the country is considered to be complying with the bailout pact. That means its debt can be used in central-bank refinancing operations even though it is rated junk.

“There will be no surprises if we find out that a country is below that rating and there’s no longer a program that that waiver disappears,” ECB Vice President Vitor Constancio said at an event in Cambridge, England, on Saturday. Varoufakis, whose Paris visit was the first of a series of trips to European cities to press his case, said he intends travel to Frankfurt to seek support for Greek banks from the ECB while a political accord on an aid overhaul is negotiated with the euro area and the IMF. He’s scheduled to see British Chancellor of the Exchequer George Osborne in London tomorrow. A revamped rescue for Greece, where unemployment is more than 25%, would address a “humanitarian crisis,” the need for investment and the country’s debt mountain of about 180% of gross domestic product, he said. “What this government is all about is ending the addiction” to funds that are tied to demands for austerity, Varoufakis said. The government is willing to “go cold turkey for a while, while we’re deliberating,” he said.

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Steve paints a nice protrait.

My Friend Yanis, The Greek Minister Of Finance (Steve Keen)

I first met Yanis Varoufakis when he was a senior lecturer (the 3rd step in the 5-tiered Australian system, equivalent to a Professor in the USA) at Sydney University in the late 1980s, and I was a tutor (the 1st step) at the University of New South Wales. We’ve been friends ever since, and now he has become globally prominent as the Finance Minister of the most troubled and high profile economy on the planet, Greece. Yanis the man as well as Yanis the economist will come under intense scrutiny and pressure from the media and other politicians now. Much of this will have the intention of either cutting him down, or turning the dilemmas he faces in his serious role into a source of media entertainment. I want to describe the man and economist I know with neither objective in mind.

I’ll start with the man—since without doubt the first attacks on him will focus on his character rather than his intellect. Very few people make so strong an impression on you at first meeting that, decades later, you can still vividly remember the meeting itself. Yanis had such an impact. I went to attend a seminar at Sydney University where Yanis was the presenter. Most academic seminars are dull affairs; despite the fact that being an academic involves effectively being on stage, very few academics actually have stage presence. They will mumble, look around evasively, wander about talking as if in a madman’s monologue, or talk to their slides rather than the audience in what has rightly been called “Death By Powerpoint”. Yanis, in contrast, filled the stage as soon as he began to speak, engaged the audience with direct eye contact, and spoke like an orator rather than a mere academic.

His face also had a perennial wry smile to it, and his presentation included plenty as ironic humour as he pulled apart the conventional wisdom in his own field. That humour – and the penchant for oratorical expression – proved to be intimate aspects of his persona, as well as a general warmth and generosity of spirit towards humanity. Backing that generosity up is substantial strength – physical as well as intellectual and emotional. He can be angered by misanthropic individuals, as I can, but in confrontation with them he will attack their intellectual pretensions rather than the individuals themselves. This is reading like a hagiography, but only because Yanis is a genuinely good man. This was manifested in how he has reacted to the toughest experience in his life: having his daughter taken to Sydney against his will in 2005 by his Australian partner, after his return to Greece in 2000.

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Angela will not be amused.

Obama Expresses Sympathy for New Greek Government (WSJ)

President Barack Obama expressed sympathy for the new Greek government as it seeks to rollback its strict bailout regime, saying there are limits to how far its European creditors can press Athens to repay its debts while restructuring the economy. “You cannot keep on squeezing countries that are in the midst of depression. At some point there has to be a growth strategy in order for them to pay off their debts to eliminate some of their deficits,” Mr. Obama said in an interview with CNN’s Fareed Zakaria aired Sunday. He said Athens needs to restructure its economy to boost its competitiveness, “but it’s very hard to initiate those changes if people’s standards of livings are dropping by 25%. Over time, eventually the political system, the society can’t sustain it.” Mr. Obama expressed hope that an agreement would be reached so Greece can stay in the eurozone, saying, “I think that will require compromise on all sides.”

The comments come as Athens’s new antiausterity government begins a push this month to convince eurozone countries to ease the terms under which it received large international financial rescues in recent years. Options include reducing Greece’s budget constraints and debt-service burdens. Relations between Greece and the rest of the eurozone have been rocky since the left-wing Syriza party won Greek elections on Jan. 25. “More broadly, I’m concerned about growth in Europe, ” he added. He said fiscal prudence and structural changes are important in many eurozone countries, but “what we’ve learned in the U.S. experience…is that the best way to reduce deficits and to restore fiscal soundness is to grow. And when you have an economy that is in a free-fall there has to be a growth strategy and not simply the effort to squeeze more and more from a population that is hurting worse and worse.”

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Big opening.

France Open to Easing Greek Debt Burden (Bloomberg)

France is ready to offer Greece concessions on its debt to help the country’s new government revive its economy, Finance Minister Michel Sapin said. The French government is willing to discuss ways to ease Greece’s financial burden including extending the maturity of its debt, Sapin said Sunday in an interview with Canal Plus television before meeting with his Greek counterpart Yanis Varoufakis. He ruled out a full write-off and said the French government’s total exposure to Greece is €42 billion. “They say we cancel it, we just cancel it – no,” Sapin said. “We can discuss, we can postpone, we can alleviate. But we won’t cancel it.” The comments may offer encouragement to Greek Prime Minister Alexis Tsipras who begins a tour of European capitals tomorrow as he seeks support for a plan to ease the country’s debt burden to help him pay for a program of public spending to boost gross domestic product.

Tsipras said Saturday that Greece would repay its debts to the European Central Bank and the International Monetary Fund, leaving the focus of any debt reduction on the other euro-area governments. Varoufakis appointed Lazard as adviser on issues related to public debt and fiscal management on Saturday. “There is a range of possible solutions: extending the maturities, lowering interests rates, and the much more radical solution, the haircut,” Matthieu Pigasse, the head of Lazard’s Paris office who has advised Greece in the past, said in a Jan. 30 interview on BFM Business television. “If we could cut the debt by 50%” he said, “it would allow Greece to return to a reasonable debt to GDP ratio.” He said Greece’s debt to public creditors was about €200 billion. “That people in Greece say ‘we need a bit of air’ I can understand that,” Sapin said. “It’s legitimate for them to say we want to discuss how we can lower the weight of this debt.”

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The FT, on the side of the banks, tries to spread the fear, but “The finance chief said Athens would make proposals within a month for a “new contract” with the euro zone, which would be in place by the end of May.”

Eurozone Alarm Grows Over Greek Bailout Brinkmanship (FT)

Eurozone officials are increasingly worried that Greece’s brinkmanship over its bailout will plunge the country into financial chaos after its finance minister said on Sunday that it would take up to four months to agree a “new contract” with creditors. Yanis Varoufakis, Greece’s newly appointed finance minister, said Athens would reject any further loans under its international rescue plan, despite Greece’s €172bn bailout expiring at the end of the month. He also said he expected the ECB to prop up the country’s weakened banking system until a longer-term settlement could be reached. Mr Varoufakis said Greece had been living for the next loan tranche for the past five years. “We have resembled drug addicts craving the next dose. What this government is all about is ending the addiction,” he said, noting it was time to go “cold turkey”.

His comments on Sunday underscored the fears of euro zone officials that the Greek government was unaware of the precariousness of its financial situation. “Everybody [in the euro zone] wants a deal,” said one senior euro zone official. “But through their actions and their rhetoric, the new government is making a lot of people upset. They are putting themselves in an impossible situation.” Mr Varoufakis was speaking in Paris on the first leg of a European tour intended to garner support for a renegotiation of its debt burden. Greece’s anti-austerity government roiled markets during a tumultuous first week in power with 40% being wiped off the value of Greek banks following announcements to reverse spending cuts and privatizations.

Despite a more emollient tone from Alexis Tsipras, Greece’s radical left-wing prime minister, over the weekend, EU officials have been dismayed by Athens’ repeated rejection of a bailout extension — and refusal to co-operate with the troika of international creditors. German officials were also irritated at its refusal to engage with Berlin, although Mr Varoufakis said he had now been invited to the German capital. The finance chief said Athens would make proposals within a month for a “new contract” with the euro zone, which would be in place by the end of May. “We are not going to ask for any loans during this period. It is perfectly possible to establish liquidity provisions with the ECB.”

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The role of women.

Syriza’s Cleaners Show Why Economics Needs A New Broom (Guardian)

Among the most uplifting images from Syriza’s victory in Greece last week were the elated faces of a small group of fiercely determined women: the public sector cleaners who were laid off during the country’s brutal budget cuts and had been told they would be swiftly re-hired by the new government. The fate of a few low-paid mop operatives is a world away from the cut and thrust of international negotiations on debt relief for Greece. Yet it has so often been the fate of working-class women – standing in the bread queues, scrabbling to feed their families, laid off in their droves in the public sector job cuts mandated by the country’s troika of creditors – that has best illustrated the despair to which many in the recession-ravaged country have been driven.

Syriza had promised that “hope is coming”, injecting the language of emotion into dry debates about deficits and debt repayments. It remains to be seen how successful they will be in the high-stakes negotiation they must now enter with their eurozone partners, under the minute-by-minute scrutiny of the financial markets. But the party’s triumph – and the cleaning women’s plight – underlines the fact that economics is about not just the state of the public finances (improving, in Greece’s case) or GDP (on the up), but raw human experience in homes and families. One lesson from the crises that have roiled the eurozone over the past five-plus years is that anyone who tells you the only response to a public debt crisis is to slash spending and embark on “structural reform” is either masochistic or downright mad.

But we could take a more profound lesson away too, which so far most economists have failed to learn from the Great Recession and its long-drawn-out aftermath: the individualistic, neoliberal perspective on the world that bleaches out humanity in favour of equations needs to be junked too. Margaret Thatcher’s promise in 1979, “where there is despair, let us bring hope”, may have prefigured Syriza’s language, but her arrival in No 10 marked the start of an era in which we have increasingly come to see ourselves as “aspirational”, atomised individuals, scrabbling to make our way in a world without the support of the society Thatcher notoriously dismissed.

This approach was underpinned and apparently vindicated by the proliferation of economic models that conceived of people as cool, rational, drastically simplified robots who beetle around trying to maximise their utility. The market became seen as the ultimate expression of this calculating rationality, and its values – competition, self-interest, even greed – as the fundamental driving forces of life. Behavioural economists have spiced up this dull world with concepts such as irrational exuberance, helping to explain why even financial markets – supposedly the embodiment of hardnosed rationality – can experience moments of madness. And others show why the qualifier ceteris paribus – “all things being equal” – that always applies to these elegant mathematical constructions is a nonsense, because all things are never, ever equal.

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Economists are incapable of getting their head around the possibility that people may simply not have anything to spend.

Americans Are Failing To Pump Gas-Price Savings Back Into The Economy (WSJ)

Americans are taking the money they are saving at the gas pump and socking it away, a sign of consumers’ persistent caution even when presented with an unexpected windfall. This newfound commitment to frugality was illustrated this past week when the nation’s biggest payment-card companies said they aren’t seeing evidence consumers are putting their gasoline savings toward discretionary items like travel, home renovations and electronics. Instead, people are more often putting the money aside for a rainy day or using it to pay down debt. That more Americans are saving their bounty at the pump comes as a surprise, because the personal savings rate, after rising during and after the recession, has declined steadily over the past two years. “We haven’t seen the extra savings from lower gas prices translate into additional discretionary consumer spending,” said MasterCard CEO Ajay Banga on a conference call Friday.

The new data are perhaps the best indication to date that the pain of the recession remains fresh in the minds of many Americans, even as the economy picks up steam. The Commerce Department said Friday that the U.S. economy grew at a 2.6% annual rate in the fourth quarter. Personal consumption expenditures rose 4.3% at a seasonally adjusted annual rate in the last three months of 2014, representing the biggest increase since the first quarter of 2006. Also on Friday, the University of Michigan said consumer sentiment in January reached its highest level in 11 years. The closely watched index has increased in each of the past six months, rising 20% since July. But that positive outlook doesn’t mean consumers feel emboldened to splurge with their savings at the pump, and card-company executives said spending growth would have been higher if consumers had put their gas savings toward more big-ticket items rather than savings.

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“They continue to value production and profit over health and safety, workers and the community.”

Oil Workers in US on First Large-Scale Strike Since 1980 (Bloomberg)

The United Steelworkers union, which represents employees at more than 200 U.S. oil refineries, terminals, pipelines and chemical plants, began a strike at nine sites on Sunday, the biggest walkout called since 1980. The USW started the work stoppage after failing to reach agreement on a labor contract that expired Sunday, saying in a statement that it “had no choice.” The union rejected five contract offers made by Royal Dutch Shell Plc on behalf of oil companies including Exxon Mobil and Chevron since negotiations began on Jan. 21. The steelworkers’ union hasn’t called a strike nationally since 1980, when a stoppage lasted three months. A full walkout of USW workers would threaten to disrupt as much as 64% of U.S. fuel production. Shell and union representatives began negotiations amid the biggest collapse in U.S. oil prices since 2008.

“The problem is that oil companies are too greedy to make a positive change in the workplace,” USW International Vice President Tom Conway said in the statement. “They continue to value production and profit over health and safety, workers and the community.” Ray Fisher, a spokesman for Shell, said by e-mail on Saturday that the company remained “committed to resolving our differences with USW at the negotiating table and hope to resume negotiations as early as possible.” The USW asked employers for “substantial” pay increases, stronger rules to prevent fatigue and measures to keep union workers rather than contract employees on the job, Gary Beevers, the USW international vice president who manages the union’s oil sector, said in an interview in Pittsburgh in October.

The refineries called on to strike span the U.S., from Tesoro’s plants in Martinez, California; Carson, California; and Anacortes, Washington, to Marathon’s Catlettsburg complex in Kentucky to three sites in Texas, according to the USW’s statement. The sites in Texas are Shell’s Deer Park complex, Marathon’s Galveston Bay plant and LyondellBasell’s Houston facility, according to union. The walkout also includes Marathon’s Houston Green cogeneration plant in Texas and Shell’s Deer Park chemical plant. The refineries on strike can produce 1.82 million barrels of fuel a day, about 10% of total U.S. capacity, data compiled by Bloomberg show. “There will be a knee-jerk reaction in gasoline and diesel prices because we don’t know how long this is going to be or how extended it might be,” Carl Larry, director of oil and gas at Frost & Sullivan, said. “It’ll be bearish for crude, but we’ve already accounted for a lot of the fact that refineries are maintenance.”

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“Cutbacks aren’t yet reflected in broad data on employment, home sales or tax collections. For example, the federal Bureau of Labor Statistics says that employment in oil and gas extraction rose in December to 216,100, the highest level since 1986.”

Falling Prices Spread Pain Far Across The Oil Patch (WSJ)

Rumor became reality here last week when dozens of workers lost their jobs at Laredo. The Oklahoma-based energy outfit said it closed its regional office to cope with plunging oil prices. The layoffs were “kind of like a death in the family,” says Robert Silver, age 62, a geophysicist who had helped Laredo decide where to drill in the Permian Basin in West Texas. Trouble has been looming over the oil patch since crude prices began falling last summer, from over $100 a barrel to under $50 today. But only now are the long-feared effects of a bust starting to ripple through the complex energy ecosystem, affecting Houston executives, California landowners and oil old-timers in Oklahoma. Many big energy companies have said they plan to slash billions of dollars in spending along with thousands of jobs; energy giant ConocoPhillips told employees Thursday to expect a salary freeze and layoffs.

Indicators like drilling permits in Texas have fallen sharply. Cutbacks aren’t yet reflected in broad data on employment, home sales or tax collections. For example, the federal Bureau of Labor Statistics says that employment in oil and gas extraction rose in December to 216,100, the highest level since 1986. But fallout is beginning to affect people, starting with the legions working as suppliers to the energy industry. Eric Herschap is COO at Exclusive Energy a private company in Orange Grove, Texas, that offers services, including equipment rentals, to exploration companies. His customers are demanding price cuts of 15% to 25%, and Exclusive offers additional discounts beyond that, he says. So the company laid off 10 of its 45 employees and is cutting bonuses for those who remain. Mr. Herschap says his brightest engineers are now fielding phone calls from customers with technical questions.

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Casino.

Oil Companies Draw on Creative Financing to Stay Afloat (Bloomberg)

North America’s small and mid-sized energy companies are searching for creative ways to stay afloat as investors smell blood in the water from the almost 60 percent fall in the price of oil since June. Oil and natural gas companies are straining for solutions before cuts in credit lines and increases in lending rates hit home in April, when banks re-price the collateral used to secure revolving credit lines. Some are turning to more creative forms of financing as familiar sources of money dry up. That financing is coming from hedge funds, private equity shops and mega-wealthy investors like billionaire Carl Icahn who have the cash to weather a prolonged downturn and are on the hunt for deals among the wounded, bankers and analysts say. Oil operators, meanwhile, are laying off staff, freezing salaries and deferring investments to conserve cash.

“Companies have lived in a state of outspending cash flow, and the markets have facilitated that,” said Gregory Sommer at Deutsche Bank “But if prices persist at this level, you’re going to see some companies pulling back significantly” more than they already have. Eclipse turned to private equity investors in December after the cost to issue unsecured debt to fund capital spending became prohibitively expensive, according to Matthew DeNezza, the company’s chief financial officer. “Traditional, high-yield debt markets were not available” at reasonable prices, DeNezza said in a telephone interview. “The debt markets were closed to us.” Shares of the driller have fallen by 77% since it raised $818 million in its initial public offering on June 20, when U.S. oil prices were $107 a barrel.

In a deal announced three days before the new year, Eclipse sold $325 million in additional equity to its largest investor, EnCap Investments, and brought in extra money from private-equity firm KKR & Co. to help fund drilling operations in 2015, DeNezza said. Private equity investors, he said, can look past the market turmoil and “take a longer term view of what these assets are really worth.” The firms have already raised $15 billion for general energy investing in recent years. Carlyle Group LP, Apollo Global Management LLC, Blackstone Group LP and KKR are raising billions more for new funds created in the past few months to invest in distressed oil producers.

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As staff gets fired, “Bob Dudley, BP’s chief executive, is expected to further sweeten the pill for investors by making no changes to the dividend..”

BP To Follow Shell In Cutting Spending (Guardian)

BP will on Tuesday unveil plans to slash billions of pounds off its capital spending programme in a bid to counter the impact of plunging oil prices and a 40% fall in its fourth quarter profits. The company, which has already cut hundreds of jobs in Aberdeen and thousands around the world, is expected to announce spending reductions of over 10% bringing the official target below $22bn for 2015. Bob Dudley, BP’s chief executive, is expected to further sweeten the pill for investors by making no changes to the dividend while not making any further specific redundancies. BP said in December that it was taking a $1bn charge to pay for restructuring – almost all for job cuts – and has since made local announcements about new staffing levels in Houston, Trinidad and Azerbaijan. The latest cost-reductions come as BP is expected to report profits of around $1.5bn for the last three months of its financial year.

Peers such as Shell will reduce expenditure by $15bn over the next three years, Chevron is to cut 13% of spending to $35bn after reporting a 30% plunge in final quarter earnings, while ConocoPhillips slashed its capital expenditure by 33% to $11.5bn. ExxonMobil, the world’s largest quoted oil company, will also unveil its strategy for dealing with a Brent blend oil prices which has fallen to around $50 a barrel from $115 in June last year. BP’s previous target was to spend between $24bn and $25bn in 2014 although the final outturn for the year was expected to have already fallen to $23bn and the company is now expected to try to ensure the official target in 2015 is even lower. The company is particularly vulnerable to lower commodity prices because it is still suffering financially from ongoing fallout from the Deepwater Horizon accident of 2010 in the Gulf of Mexico and from its risky investments in Russia.

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As if it hasn’t yet?!

China’s Feeling the Pressure to Join Global Easing (Bloomberg)

The case for China to join the latest wave of global monetary easing has increased, with a manufacturing gauge signaling the first contraction in more than two years. The government’s Purchasing Managers’ Index fell to 49.8 last month from 50.1 in December, missing the median estimate of 50.2 in a Bloomberg survey of analysts and below the 50 level separating expansion and contraction. The slide follows the biggest weekly stock market drop in a year and fiscal data that showed the weakest revenue growth since 1991. Central banks from the euro zone to Canada and Singapore last month added monetary stimulus as slumping oil prices damp the outlook for inflation and global momentum outside the U.S. moderates.

China’s central bank, which cut interest rates in November for the first time in two years, has since added liquidity in targeted measures rather than with follow-up rate reductions or cuts to banks’ required reserve ratios. “We expect such data will weaken further and push the government to take further easing actions,” said Zhang Zhiwei, chief China economist at Deutsche Bank in Hong Kong. Zhang and Lu Ting of Bank of America have been among economists who said the People’s Bank of China would delay lowering banks’ RRRs for risk of stoking an equities bubble. The benchmark Shanghai Composite Index fell for a fifth day and was 2% lower at 10:17 local time. The yuan weakened.

Seasonal reasons, falling commodity prices, and weak domestic and international demand caused the decline in manufacturing PMI, Zhao Qinghe, senior statistician at NBS, said in a statement on the bureau’s website. Most sub-indexes fell, including new orders and new export orders. The sub-index of raw material purchasing prices decreased to 41.9, the lowest in at least a year, on the decline in commodity prices “China’s manufacturing sector is still facing de-leveraging pressure,” said Liu Li-Gang, head of Greater China economics at Australia & New Zealand Bank in Hong Kong. “Deflation in the manufacturing sector continues and the destocking process has not yet completed.”

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In the end, it’s all just words. ‘Whatever it takes’ worked wonders too, after all.

ECB Bond-Buying Plan Has Investors Questioning How It All Works (Bloomberg)

Mario Draghi’s trillion-euro puzzle is missing some key pieces. When the European Central Bank president announced a program on Jan. 22 to buy €60 billion of assets a month for at least 19 months to avert deflation, he surprised investors with the size of the stimulus. He also provided more details than anticipated. Yet analysts poring over the ECB’s statements are finding that several critical points remain unclear. “The ECB had to present a lot of details right from the beginning as they wouldn’t have been credible without them,” said Johannes Gareis at Natixis. “What is missing somewhat is the fine print, which might have quite an impact on the implementation.” Here’s what the ECB has and hasn’t revealed about Europe-style quantitative easing.

What will the asset mix be? The ECB’s monthly spending will include its existing programs to buy covered bonds and asset-backed securities. Of the added purchases, Draghi said 12% will be debt issued by European Union institutions and agencies, and the rest will be government bonds. The question is: how much does the ECB envisage spending on each type of asset? Draghi also said officials will buy bonds with maturities from 2 years to 30 years, without specifying an average target that could affect yield curves and borrowing costs. And while the central bank said eligible debt includes inflation-linked bonds, floating-rate notes and securities with a negative yield, it hasn’t given any indication of what the breakdown of purchases might be.

How transparent will the purchasing be? The ECB hasn’t said much about the mechanics of QE. When it bought sovereign debt from 2010 to 2012 under its now-halted, and far smaller, Securities Markets Program, it dipped into the market without prior announcement. ABS and covered-bond purchases are carried out by external asset managers. Those strategies contrast with the Federal Reserve, which issued a calendar for when it would make purchases under its QE programs and what type of securities it would buy. A public calendar would “ensure greater transparency and minimize market distortion,” said Riccardo Barbieri Hermitte at Mizuho in London.

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More recalls than sales.

Automakers Can’t Make Air Bags Work (Bloomberg)

U.S. regulators’ push for a second recall of 2.1 million cars and trucks whose air bags could go off while driving delivered more cautionary tales about a complex life-saving technology that’s had a very bad year. The National Highway Transportation Safety Administration held an unusual Saturday press briefing to warn the public that an earlier recall of nine models from Fiat Chrysler, Honda and Toyota didn’t work entirely. The agency is asking vehicle owners who haven’t completed the first repair to do so now. That may mean a second trip to the dealership for consumers, assuming replacement parts for the new fix are available, which they may not be until year-end.

Added to the mix: Some of the cars being recalled for a second time were part of last year’s massive 10-automaker recall of Takata air bags for a different defect: inflators that could explode with deadly results. “If you own an affected vehicle, this means driving around with the knowledge your air bag might still randomly deploy,” said Karl Brauer, a senior analyst at Kelley Blue Book. “And just to keep it interesting, some of these vehicles are equipped with Takata air bags, meaning the random deployment could include metal shrapnel. What a mess.” It’s the biggest challenge to the technology since the mid-1990s, when NHTSA began investigating reports that first-generation air bags deployed with such force that children and small adults riding in front seats were being killed and, in some cases, decapitated.

“TRW is supporting its customers in these recalls fully, and will cooperate with NHTSA and provide information to the agency if requested,” John Wilkerson, a spokesman for TRW, said in an e-mailed statement. About 1 million of the Honda and Toyota vehicles listed on Saturday were previously recalled for defective Takata air bags, the agency said. “This is unfortunately a complicated issue for consumers, who may have to return to their dealer more than once,” said NHTSA Administrator Mark Rosekind. “But this is an urgent safety issue, and all consumers with vehicles covered by the previous recalls should have that remedy installed.” General Motors recalled at least 7 million vehicles in North America last year to fix faulty ignition switches that could cut power and disable air bags.

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“At some point, Denmark may well decide the fight isn’t worth it.”

Currency War Claims Another Casualty: Denmark (Bloomberg)

After half a decade of growing ever sleepier, the currency market has started the year with its most volatile period since 2011. As the victims of the Swiss franc detonation lick their wounds, Denmark is battling to avoid its krone becoming the next victim of the global currency wars, wielding a combination of negative interest rates plus market interventions to sell its own currency plus scrapping government bond sales as it defends its peg to the euro. I’ve seen this movie before; it never ends well. Denmark sprang a rate-cut surprise last week; the central bank will now charge you 0.5% for the privilege of having kroner on deposit. The bank’s third easing in less than two weeks came after it spent as much as 100 billion kroner ($15 billion) this month trying to weaken its currency, according to estimates by Scandinavian lender Svenska Handelsbanken. Taking on traders is an expensive business.

The Swiss National Bank reminded us a fortnight ago that nothing is ever truly sacred in financial markets, abandoning its cap to the euro just days after declaring the policy sacrosanct. Since then, keeping the Danish krone close to a central rate against the euro of 7.46 – the official wiggle room is a 2.25% corridor around that level, the actual room for maneuver has been more like 1% – has kept the central bank’s trading desk busy. The central bank shocks have certainly come thick and fast this year, from the European Central Bank finally getting religion on quantitative easing, to the Federal Reserve adding “international developments” to its list of metrics to watch, to the deployment of negative official interest rates as a deterrent to speculators. No wonder overall volatility in foreign exchange has spiked higher.

The genesis of the present currency war is the desire of every country for a weaker currency to boost exports and growth. That, of course, can’t happen, any more than you can mix heavy-metal music by making everything louder than everything else. So far, Denmark is a casualty of these wars, wounded but still in the fight. Economists are betting, though, that it will need to drive interest rates even further into negative territory to prevent speculators from bidding up the currency, which effectively punishes the nation’s savers. At some point, Denmark may well decide the fight isn’t worth it.

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Yes.

Is Reserve Bank of Australia The Next Central Bank To Ease? (CNBC)

Speculation is high that the Reserve Bank of Australia (RBA) will be the next central bank to ease monetary policy at its meeting this week following a month of surprise policy changes across the globe. January saw unexpected loosening measures from a handful of central banks including Denmark, India and Singapore against a backdrop of increasing deflationary pressures as crude oil prices continue their descent. “Judging by price action in the market, there is a real belief the RBA are going to join New Zealand, Europe, Denmark, Switzerland and Canada in easing policy,” said Chris Weston, chief market analyst at IG in a note last week, adding that swaps markets are now pricing a 65% chance of a rate cut.

The RBA has held rates at 2.5% since August 2013. Many analysts expect the RBA to announce a 25 basis-point interest rate cut at Tuesday’s policy meeting to tackle 6% unemployment and sliding iron ore prices, one of the country’s biggest exports. Comments by Australian journalist Terry McCrann last week that a rate cut is “almost certain” heightened expectations, sending the Australian dollar to fresh five-and-a-half year lows at 77.22 U.S. cents on Friday. McCrann, a long-time RBA watcher, reasoned that the RBA will forecast inflation to be lower than the mid-point of its 2-3% target range, opening the way for further easing.

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“The official rate is at 6.3 bolivars to the dollar… The black market rate, though, was at about 190 bolivars to the dollar on Sunday..”

US Companies Face Billions In Venezuela Currency Losses (Reuters)

At least 40 major U.S. companies have substantial exposure to Venezuela’s deepening economic crisis, and could collectively be forced to take billions of dollars of write downs, a Reuters analysis shows. The companies, all members of the S&P 500, and including some of the biggest names in Corporate America such as autos giant General Motors and drug maker Merck, together carry at least $11 billion of monetary assets in the Venezuelan currency, the bolivar, on their books. The official rate is at 6.3 bolivars to the dollar and there are two other rates in the government system – known as SICAD 1 and SICAD 2 – at about 12 and 50. The black market rate, though, was at about 190 bolivars to the dollar on Sunday, according to the website dolartoday.com.

The problem is that the dollar value of the assets as disclosed in many of the companies’ accounts is based on either the rates at 6.3 or 12 and only a limited number of transactions are allowed at those rates. The assets would be worth a lot fewer dollars at the 50 rate in the government system and the dollar value would almost be wiped out at the black market rate. The currency system is also about to be shaken up following an announcement by Venezuela President Nicolas Maduro on Jan. 21, leading to fears of a further devaluation. American companies will also have additional exposure to the bolivar that isn’t disclosed because they don’t see the size of that exposure as material to their results. The Reuters analysis also doesn’t look at the thousands of publicly traded and private American companies that aren’t in the S&P 500 and will in some cases have bolivar assets.

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Bring home the buck.

Fleeing Capital Clips Wings On US Yields (CNBC)

The relentless fall in longer term U.S. Treasury yields doesn’t signal declining U.S. inflation expectations, but instead is a side effect of funds fleeing low yields elsewhere, say analysts. “Yields of U.S. Treasury’s have actually become increasingly appealing relative to those of government bonds in other developed countries,” Capital Economics Chief Markets Economist John Higgins said in a note published last week. “Increased appetite from overseas investors” have contributed – along with the now-phased out asset purchases by the Federal Reserve and extra demand from banks in response to the launch of Basel 3 – to the downward pressure on U.S. Treasury yields, he said. At the longer end, 10-year Treasury yields broke below the key 1.7% level and closed at 1.6329%.

The 10-year Treasury’s are just a tad off levels seen in early March 2013, before the Fed first broached the idea that it would begin tapering its purchases of Treasury’s, a process it completed in October of last year. The 30-year was seen at 2.2229%, close to a record low. In comparison, massive central bank bond purchase operations in Japan and Europe have sent yields tumbling, especially in Germany and Japan, where they are still hovering around record lows: the 10-year German bund yields just 0.304% and the 10-year Japanese Government Bonds (JGB) are at 0.290%. At the 30-year end, German yields are at 0.887% and its Japanese equivalent at 1.280%. Another central bank joined in two weeks ago – yields on Swiss government bonds sunk into the negative after a surprise rate cut and scrapping of its currency peg to the euro.

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“Given Washington’s current political division, much of what will be laid out on Monday is unlikely to become law.”

Obama Targets Foreign Profits With Tax Proposal (Reuters)

President Barack Obama’s fiscal 2016 budget will seek new taxes on trillions of dollars in profits accumulated overseas by U.S. companies, and a new approach to taxing foreign profits in the future, but Republicans were skeptical of the plan on Sunday. Reviving a long-running debate about corporate tax avoidance, Obama will target a loophole that lets companies pay no tax on earnings held abroad, the White House said. But his proposal was certain to encounter stiff resistance from Republicans. In his budget plan to be unveiled on Monday, Obama will call for a one-time, 14% tax on an estimated $2.1 trillion in profits piled up abroad over the years by multinationals such as General Electric, Microsoft, Pfizer and Apple.

He will also seek to impose a 19% tax on U.S. companies’ future foreign earnings, the White House said. At present, those earnings are supposed to be taxed at a 35-percent rate, but many companies avoid that through the loophole that defers taxation on active income that is not brought into the United States, or repatriated. The $238 billion raised from the one-time tax would fund repairs and improvements to roads, bridges, transit systems and freight networks that would replenish the Highway Trust Fund as part of a $478 billion package, the White House said. The annual budget proposal is as much a political document as a fiscal roadmap, requiring approval from Congress. Given Washington’s current political division, much of what will be laid out on Monday is unlikely to become law.

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