Jan 222016
 
 January 22, 2016  Posted by at 6:55 pm Finance Tagged with: , , , , , , , , , ,  


Berenice Abbott Murray Hill Hotel, New York 1937

When David Bowie died, everybody, in what they wrote and said, seemed to feel they owned him, and owned his death, even if they hadn’t thought about him, or listened to him, for years. In the same vein, though the Automatic Earth has been talking about deflation (for 8 years, it’s our anniversary today) and the looming China Ponzi disaster for a long time, now that these things actually play out, everybody talks as if they own the story, and present it as new (because, for one thing, well, after all for them it is new…).

And that’s alright, it’s how people live, and function, they always have, and no-one’s going to change that. It’s just that for me, I’ve been wondering a little about what to write lately, because I’ve already written the deflation and China stories, many times, before most others tuned into them. But still, it’s strange to now, as markets start plunging, read things like ‘Deflation is Here’, as if deflation is something new on the block.

Deflation has been playing out for years. Central bank largesse has largely kept it at bay in the public eye, but that now seems over. Debt deflation is inevitable when -debt- bubbles burst, and when these bubbles are large enough, there’s nothing that can stop the process, not even miracle growth. But you’re not going to understand this if and when you look only at falling prices as the main sign of deflation; they’re merely a small part of the process, and a lagging one at that.

A much better indicator of deflation is the velocity of money, the speed at which ‘consumers’ spend money. And velocity has been going down for years. That’s where and how you notice deflation, when combined with the money and credit supply. Which have soared in most places, but were no match for a much faster declining velocity. People have much less money to spend. Which shouldn’t be a surprise if, just to name an example, new US jobs pay 23% less than the ones they’re -supposedly- replacing.

As I said a few weeks ago, it’s probably only fitting, given its pivotal role in our economies and societies, that it’s oil that’s leading the way down. Other commodities are not far behind, because demand for -and spending on- them has been plummeting too, as overproduction and overinvestment, especially in China, do the rest.

However you look at present global debt, percentage wise, or in absolute numbers, you name it, there’s never been anything like it. We outdid ourselves by so much we don’t have the rational or probably even subconscious ability to oversee what we’ve done. We live in the world’s biggest bubble ever by a margin of god only knows how much. And that bubble will deflate. It is already doing just that.

The next steps in the debt deflation process will of necessity be chaotic. A substantial part of that chaos is bound to emerge from denial, and the reluctance to accept reality. Which often rise from a poor understanding of the processes taking place. It certainly looks as if there’s lots of that in China, where both the working principles of financial markets and the grip authorities -can- have on them, seem to be met with a huge dose of incomprehension.

Mind you, given the levels of comprehension vs outright ‘theoretical religion’ among leading western politicians and economists, the ones who most often rise to decision-making positions in governments and financial institutions, we have nothing on China when it comes to truth and denial.

From all that follows what will be the next leg down in the ‘magnificent slump’: the awfully messy demise of currency pegs.

In a short explainer for the uninitiated, allow me to steal a few words from Investopedia: “There are two types of currency exchange rates—floating and fixed, still in existence. Major currencies, such as the Japanese yen, euro, and the US dollar, are floating currencies—their values change according to how the currency is being traded on forex markets. Fixed currencies, on the other hand, derive value by being fixed (or pegged) to another currency.”

While there are more currency pegs in the world today than we should care to mention -there are dozens-, it seems fair to say that in today’s deflationary environment, practically all are under siege. Most African currencies are pegged to the euro, and they do have to wonder how smart that is going forward. Still, the main, and immediate, problems seem to arise in pegs to the US dollar (with one interesting exception: the Swiss franc – more in a bit).

Most oil producing Gulf nations are pegged to the greenback. So is Hong Kong. And, for all intents and purposes, so is China, though you have to wonder what a peg truly is if you change it on a daily basis. China is on its way to a peg vs a basket of currencies, but that seriously interferes with its stated intention to become a reserve currency -of sorts-. If your currency can’t stand on its own two feet, i.e. float, you’re per definition weak.

China’s vice president Li Yuanchao said this week in Davos that Beijing has no plans to devalue the yuan, i.e. to cut the peg to the dollar. Then again, he also stated that “central command” would ‘look after’ stock market investors. Put the two statements together and you have to wonder what the one on the yuan (couldn’t help myself there) is worth.

The first “link in the chain” that appears vulnerable is the Hong Kong dollar, which is stuck between China and the US, and unlike the yuan still has a solid dollar peg, but, obviously, also has a strong link to the yuan. The issue is that if China continues on its current course of daily small yuan devaluations, the difference with the HKD will grow so large that ever more investments and savings will move to Hong Kong, despite a maze of laws designed to keep just that from happening.

And that is the overall danger to currency pegs as they still exist in today’s rapidly changing global financial world: all economies are falling, but some are falling -much- faster than others.

Not so long ago, the World Bank called on Saudi Arabia to defend its USD peg with its FX reserves. It even looked as if they meant it. But Saudi Arabia has no choice but to deplete those reserves to prevent other nasty things from happening that are much more important than a currency peg. Like social chaos.

It’s somewhat wonderfully ironic that the main most recent experience with abandoning a peg comes from a source that faced -and now feels- the exact opposite of what nations like Saudi Arabia and China do. That is, it became too costly and risky for Switzerland to keep its franc pegged (or ‘capped’, to be precise) to the euro any longer a year ago, because of upward, not downward pressure.

Since then, the euro went from 1.20 franc to 1.09 or thereabouts, which perhaps doesn’t look all that crazy, and many ‘experts’ seek to downplay the effects of the move, but it’s still estimated to have cost the Swiss some $25 billion. For comparison, the US has 40 times as many people as Switzerland’s 8 million, so the per capita bill would be close to $1 trillion stateside. That wouldn’t have added to Yellen’s popularity. Currency pegs and caps can be expensive hobbies.

And that’s why the Saudis and Chinese are so anxious about letting go of their pegs. That and pride. In their cases, their respective currencies wouldn’t, like the franc, rise versus the one they’re pegged to, they would instead lose a lot of value. And in the fake markets we live in today, where price discovery has long since been left behind, there’s no telling how much. Well, unless they seek to keep control, but then it would be just a matter of time until they need to rinse and repeat.

Even if it seems obvious to make a particular move, and if everybody knows you really should, showing what can be perceived as real weakness could be a killer when everything else around you is manipulated to the bone.

Still, neither Beijing nor Riyadh stand a chance in a frozen-over hell, to ultimately NOT sharply devalue their currencies or just simply let go of their pegs. Simply because China’s economy is falling to pieces, and the Saudi’s dependence on oil prices is dragging it into a financial gutter. Just look at what falling prices had done to the riyal vs non-pegged oil producer currencies by October 2015, when Brent was still at $45:

The Saudis could have been paid for their oil in a currency worth perhaps twice as much as their own, the one their domestic economy runs on. That’s overly simplistic, because the Saudi tie to the USD runs far and deep, but that doesn’t make it untrue.

What will bring down the Chinese and Saudi pegs, along with a long list of other pegs, is, how appropriately, the very same markets they’ve been relying on to NOT function. The bets against Hong Kong’s ability to maintain its USD peg have already started, and China is next, along with the House of Saud (the latter two just take more fire-power). Which of course is exactly why they speak their soothing ‘confident’ words. Words that are today interpreted as the very sign of weakness they’re meant to circumvent.

What worked for George Soros in his bet vs the Bank of England and the pound sterling in 1992, will work again unless these countries are ahead of the game and swallow their pride and -ultimately- smaller losses.

Granted, so much will have to be recalibrated if the yuan devalues by 50% or so, and the riyal does something similar (it’s very hard to see either not happening), that it will take some serious time before everyone knows where they -and others- stand. And since volatility tends to feed on itself once there’s enough of it, it seems to make sense that governments would seek control. But that doesn’t mean they -can- actually have any.

Today’s major currency pegs are remnants of a land of long ago lore; they have no place in this world, they are financial misfits. Who’ve been allowed to persist only because central banks and governments have been able to distort markets for as long as they have. But that ability is not infinite, and it’s in nobody’s longer term interest that it would be.

Not even those that now seem to profit most from it. We will end up with societies that function no better for the ridiculous Davos elites than they do for the bottom rung. But no elite will ever see that, let alone admit it voluntarily.

Deflation and foreign exchange chaos. There’s your future. As for stocks and oil, who’s left to buy any? Not the consumer who’s 70% of US and perhaps 60% of EU GDP, they’re maxed out on private debt. So why would investors put their money in either? And if they don’t, where do you see prices go?

Even more importantly, deflation makes a lot of money, and even much more virtual money, vanish into overnight thin air. That’s what everyone is running into when all these currencies, China, Saudi, Gulf states et al, are forced to recalibrate. $17 trillion disappeared from global equities markets in the past 6 months.

How much vanished from the value of ‘official’ oil reserves? How much from iron ore and aluminum? How much do all the world’s behemoth corporations and banks and commodity-exporting countries have their resource ‘wealth’ on their books for in their sunny creative accounting models? And how much of that is just thin hot air too?

We’re about to find out.

Aug 072015
 
 August 7, 2015  Posted by at 10:18 am Finance Tagged with: , , , , , , , ,  


DPC “Wood Street, Pittsburgh, Pennsylvania.” 1905

Emerging Market Mayhem: Gross Sees “Debacle” As Currencies, Bonds Collapse (ZH)
China Growth Probably Half Reported Rate Or Less, Say Sceptics (Reuters)
The World Should Worry More About China’s Politics Than The Economy (Economist)
Another Major Pillar of the Bull Market Is Collapsing (Bloomberg)
How America Keeps The World’s Poor Downtrodden (Stiglitz)
Europeans Against the European Union (Village)
Indebted Portugal Is Still The Problem Child Of The Eurozone (Telegraph)
Greece’s Tax Revenues Collapse As Debt Crisis Continues (Guardian)
Hollande And Tsipras Want Greek Bailout Agreed In Late August (Reuters)
German Finance Ministry Favors Bridge Loan For Greece (Reuters)
German Industrial Output Slumps Unexpectedly (Marketwatch)
Corbyn’s “People’s QE” Could Actually Be A Decent Idea (Klein)
Indonesia’s Economy Has Stopped Emerging (Pesek)
Malaysia Mess Puts Goldman Sachs In The Hot Seat (Reuters)
To Please Investors, Big Oil Makes Deepest Cuts in a Generation (Bloomberg)
Inside Shell’s Extreme Plan to Drill for Oil in the Arctic (Bloomberg)
The Shale Patch Faces Reality (Bloomberg)
German TV Presenter Sparks Debate And Hatred With Support For Refugees (Guardian)
Migrant Crisis Overwhelms Greek Government (Kathimerini)
It’s Not Climate Change, It’s Everything Change (Margaret Atwood)

Again: this is just starting.

Emerging Market Mayhem: Gross Sees “Debacle” As Currencies, Bonds Collapse (ZH)

One particularly alarming case that we’ve been keen to document lately is that of Brazil which, you’ll recall, is “up shit creek without a paddle” both figuratively and literally. For one thing, as Goldman recently noted, there’s not a single period in over a decade “with a strictly-worse growth-inflation outcome than that of 2Q2015.” In other words, “since 1Q2004 there has not been a single quarter in which we had simultaneously higher inflation and lower growth than during 2Q2015.” And here is what that looks like on a scale of 100 to -100 with 100 being “high growth, low inflation” and -100 being “stagflation nightmare”:

This helps to explain why CDS spreads have blown out to post-crisis wides. For those who favor a more qualitative approach to assessing an economy’s prospects, don’t forget that the Brazilian economy recently hit its metaphorical, and literal, bottom when AP reported that, with the Brazil Olympics of 2016 just about 1 year away, “athletes in next year’s Summer Olympics here will be swimming and boating in waters so contaminated with human feces that they risk becoming violently ill and unable to compete in the games.” So that’s Brazil, and while not every EM country is coping with the worst stagflation in 11 years while simultaneously trying to explain away rivers of raw sewage to the Olympic Committee, the combination of slumping commodity prices and the threat of an imminent Fed liftoff are wreaking havoc across the space.

Read more …

Finally, we can let go of the nonsense? Or will the MSM keep reporting ‘official’ numbers?

China Growth Probably Half Reported Rate Or Less, Say Sceptics (Reuters)

China’s economy is growing only half as fast as official data shows, or maybe even slower, according to foreign investors and analysts who increasingly challenge how the world’s second largest economy can be measured so swiftly and precisely. Beijing’s official statisticians reported last month that China’s economy grew by a steady 7.0% in the first two quarters of the year, spot on its official 2015 target. That statistical stability comes at a time when prices of global commodities, which China still hungers for despite a campaign to rebalance the economy away from investment and manufacturing toward consumer spending, have cratered.

But perhaps the biggest question is how a developing country of 1.4 billion people can publish its quarterly GDP statistics weeks before first drafts from developed economies like the United States, the euro zone or Britain, and then barely revise them later. “We think the numbers are fantasy,” said Erik Britton of Fathom Consulting, a London-based independent research firm and one of the more vocal critics of official Chinese data. “There is no way those numbers are even close to the truth.” The uncanny official calm in China GDP data may well be contributing to sceptics’ exit from Chinese assets just as the authorities struggle to manage a volatile stock market.

Fathom, which decided last year to stop publishing forecasts of the official GDP release and instead publish what it thinks is really happening, reckons growth will be 2.8% this year, slowing to just 1.0% next year. One issue is that so many other forecasters stick to the script. In the latest Reuters poll of mainly sell-side bank economists, based both inside and outside China, the range of opinion is 6.5-7.2%. For next year, it’s 6.3-7.5%.

Read more …

China is due for epic unrest.

The World Should Worry More About China’s Politics Than The Economy (Economist)

How much indeed has changed in China, Mr Xi might reflect, since he came to power nearly three years ago? The economy is on course for its slowest year of growth in a quarter of a century. The stockmarket, having risen to its highest level since the global financial crisis seven years ago, crashed last month. Once hailed as an economic miracle, China is now a source of foreboding: witness the latest falls in global commodity prices. Mr Xi likes to describe slower growth as the “new normal”—a welcome sign that the country is becoming less dependent on credit-fuelled investment. But debates rage within the party elite over how to keep the economy growing fast enough to prevent financial strains from erupting into a fully fledged crisis.

A year after he took over as China’s leader, Mr Xi promised to let market forces play a “decisive” role in shaping the economy. His government’s heavy-handed (and counterproductive) efforts to boost the price of shares have created doubts about his commitment to that aim. During discussions in Beidaihe, some officials will doubtless point to the stockmarket as evidence of what can go wrong when markets are given free rein. Others will suggest that, on the contrary, economic reform is still badly needed to help China avoid falling into the Japanese trap of long-term stagnation. Much depends on which camp Mr Xi heeds. During meetings in Beidaihe in 1988, China’s then leader, Deng Xiaoping, vacillated in the face of a backlash against his economic reforms.

By pandering to conservatives, he fuelled political divisions that erupted the following year into nationwide pro-democracy protests. The unrest, centred on Tiananmen Square, came close to toppling the party. It was not until 1992 that Deng was able to set his reforms back on track. China’s leadership does not appear anything like as divided as it did in the build-up to the Tiananmen upheaval. But appearances may be more deceptive now. Mr Xi is a leader of a very different hue from his predecessors. He has rewritten the rules of Chinese politics, in effect scrapping Deng’s system of “collective leadership” by taking on almost every portfolio himself, while waging a war on corruption of unprecedented scale and intensity.

The latest high-ranking official to be targeted, Guo Boxiong, was once the most senior general in the armed forces; he was expelled from the party on July 30th and now faces trial for graft. A dozen other generals, more than 50 ministerial-level officials and hundreds of thousands of lesser functionaries have met similar fates. That suggests Mr Xi is strong, but also that he has many enemies or is busy creating them. His rounding up of more than 200 civil-rights lawyers and other activists since early last month—the biggest such clampdown in years—hints at his insecurity.

Read more …

” In just five stocks – Disney, Time Warner, Fox, CBS and Comcast – almost $50 billion of value was erased in two days.”

Another Major Pillar of the Bull Market Is Collapsing (Bloomberg)

A bull market without Apple is one thing. Removing cable television and movie stocks from the 6 1/2-year rally in U.S. equities is a little harder to imagine. Ignited by a plunge in Walt Disney, shares tracked by the 15-company S&P 500 Media Index have tumbled 8.2% in two days, the biggest slump for the group since 2008. The drop erased all of 2015’s gains for a group that has posted annualized returns of more than 33% since 2009. More than technology or even biotech, media stocks have ruled the roost during the share advance that restored $17 trillion to American equity prices since the financial crisis. Companies from CBS to Tegna and Time Warner Cable are among stocks with the 60 biggest increases during the stretch.

“This sector stripped out is certainly not going to help,” Larry Peruzzi, director of international trading at Cabrera Capital Markets LLC in Boston, said by phone. “There are a lot of companies adding pressure here and there’s an argument to be made that it’s an indicator of consumer sentiment, because that’s where media revenues come from.” Disappointing results from Disney after the close of trading Tuesday sparked the two-day rout. Selling spread to other television and publishing companies as quarterly reports from CBS to 21st Century Fox Inc. and Viacom Inc. were marked by shrinking U.S. ad sales and profits propped up by stock buybacks.

Until Tuesday, media shares were the best-performing shares of the bull market, rising 531% to eclipse automakers, retail stores and banks. The industry’s market capitalization was about $650 billion, compared with $135 billion in March 2009. That value is evaporating. In just five stocks – Disney, Time Warner, Fox, CBS and Comcast – almost $50 billion of value was erased in two days. Viacom slid 14% on Thursday alone, its biggest drop since October 2008.

Read more …

Interesting developments. US interests are bound to keep resisting what is inevitable.

How America Keeps The World’s Poor Downtrodden (Stiglitz)

Much has changed in the 13 years since the first International Conference on Financing for Development was held in Monterrey, Mexico, in 2002. Back then, the G-7 dominated global economic policy making; today, China is the world’s largest economy (in purchasing-power-parity terms), with savings some 50% larger than that of the U.S. In 2002, Western financial institutions were thought to be wizards at managing risk and allocating capital; today, we see that they are wizards at market manipulation and other deceptive practices. Gone are the calls for the developed countries to live up to their commitment to give at least 0.7% of their gross national income in development aid.

A few Northern European countries – Denmark, Luxembourg, Norway, Sweden and, most surprisingly, the United Kingdom in the midst of its self-inflicted austerity – fulfilled their pledges in 2014. But the United States (which gave 0.19% of GNI in 2014) lags far, far behind. Today, developing countries and emerging markets say to the U.S. and others: If you will not live up to your promises, at least get out of the way and let us create an international architecture for a global economy that works for the poor, too. Not surprisingly, the existing hegemons, led by the U.S., are doing whatever they can to thwart such efforts. When China proposed the Asian Infrastructure Investment Bank to help recycle some of the surfeit of global savings to where financing is badly needed, the U.S. sought to torpedo the effort.

President Barack Obama’s administration suffered a stinging (and highly embarrassing) defeat. The U.S. is also blocking the world’s path toward an international rule of law for debt and finance. If bond markets, for example, are to work well, an orderly way of resolving cases of sovereign insolvency must be found. But today, there is no such way. Ukraine, Greece, and Argentina are all examples of the failure of existing international arrangements. The vast majority of countries have called for the creation of a framework for sovereign-debt restructuring. The U.S. remains the major obstacle.

Read more …

Must read. Very good.

Europeans Against the European Union (Village)

[..] since 2011, a rival, pro-European identity has emerged which is highly critical of the Troika and the increasingly undemocratic apparatus of the EU. Last month, in Greece, this movement was given a name: Generation No. The vote in Greece was striking in its breakdown. The average No voter rejecting the Troika’s ultimatum was young, working-class and held increasingly left-wing views. The percentage for ‘oxi’ under 25 was 85, under 35 was 78. These were a new generation, living in conditions of over 60% unemployment, often having to stretch out their studies over many years to afford to complete them, relying on cash from their parents to survive. But also, it is a generation increasingly willing to challenge the shibboleths of our societies – to experiment in unorthodox relationships to the economy, to housing, to politics.

The price of building up the reputation of the EU as an arena of opportunity for Europe’s periphery has been the weight of frustrated expectations when this turned out not to be the case. As a result not just in Greece but in an increasing number of states it isn’t Generation Yes which represents the future but Generation No. This shift in orientation towards the European project is not down to a turn against Europe. In fact, the Greek No vote enjoyed enormous support from across the continent – marches, direct actions, statements from social movements, trade unions, NGOs, academics and intellectuals. Instead what has happened is that the EU has been stripped back to its essence as a neoliberal economic project. Gone are the pretences of internationalism or a social element – the Greek crisis has demonstrated that bonds of solidarity stretch only as far as is profitable.

To understand why this disconnect between growing internationalism of European peoples and the European Union exists, we have to explore its economic basis. The idea of a ‘social Europe’ has never been at the heart of this market-oriented project of European integration. At the same time as Jacque Delors was seducing Europe’s social democrats into this myth in the 1980s, he was trapping them into arrangements they would never agree to without it. First in 1988 the directive mandating for extensive free movement of capital and then, in 1992, the Maastricht Treaty. These arrangements provided the foundation for the euro – a currency which was to drive the stake of neoliberalism into the heart of the European Union. The money in our pockets is the most right-wing currency ever designed, with a central bank that doesn’t care about unemployment and won’t act as a lender of last resort, modelled to work only in the free-market utopias predicted to arrive at Francis Fukuyama’s end of history.

Read more …

Problems that are conveniently hidden behind ‘the Greece story’.

Indebted Portugal Is Still The Problem Child Of The Eurozone (Telegraph)

Portugal must carry out a bold programme of deep spending cuts and tax hikes to tackle its perilously high debt levels, the IMF has warned. A former bail-out economy often hailed as a poster child for the eurozone’s austerity medicine, Portugal continues to have the highest public and private debt ratio in the eurozone at over 360pc of GDP. The IMF has now told the government to redouble its belt-tightening efforts to reduce its debt overhang and meet a mandated budget deficit target of 2.7pc of GDP this year. Should Lisbon fail to cut spending, the deficit is expected to balloon to 3.2pc of economic output. Portugal officially exited its €78bn international bail-out programme last year.

The economy is now expected to expand by 1.6pc in 2015, an upturn largely attributed to favourable external factors such as low commodity prices and a weak euro, said the IMF. Despite noting the recovery was broadly “on track”, the IMF painted a precarious picture of an economy heavily exposed to a downturn in global fortunes and fears over Greece’s future in the euro. “A sudden change in market sentiment due to concerns about the direction of economic policies or re-pricing of risk could render Portugal’s capacity to repay more vulnerable,” warned the report. Four years of Troika-imposed measures has seen government debt hit 127pc of GDP this year, leaving the country “vulnerable to any prolonged financial market turbulence”, according to the IMF’s monitoring report.

Prohibitive debt levels are now expected to dampen domestic demand, “constrain the pace of recovery and weigh on medium-term growth prospects”. In further worrying signs that the recovery has already lost steam, Portugal’s unemployment rate crept back up to 13.7pc in the first quarter of the year, up from 13.1pc in late 2014. Since the IMF’s assessment, joblessless has fallen back to 11.9pc in the three months to June. Last year, the government was forced to inject €5bn to stave off a collapse of Portugal’s biggest lender – Banco Espírito Santo. But the country’s financial system continues to be plagued by rising “bad” non-performing loans which grew by 12.3pc in the first three months of the year.

Political risk could also throw the country’s fragile recovery off track and precipate a fresh crisis for Brussels in the southern Mediterranean. Despite five years under a compliant centre-right government, progress on implementing structural reforms demanded by creditors has eased off, said the IMF. The country goes to the polls in October, where the anti-austerity Socialists are on course to win a parliamentary majority. Party leader Antonio Costa has vowed to roll back Troika-imposed reforms and end the country’s “obsession with austerity”.

Read more …

The deal remains far from done. But Greece is set to receive ’emergency’ funds before it’s time to sign, and that is perhaps the pivotal event.

Greece’s Tax Revenues Collapse As Debt Crisis Continues (Guardian)

Fresh evidence of the dramatic impact of the Greek debt crisis on the health of the country’s finances has emerged with official figures showing tax revenues collapsing. As talks continued over a proposed €86bn third bailout of the stricken state, the Greek treasury said tax revenues were 8.5% lower in the first six months of 2015 than the same period a year earlier. The bank shutdown that brought much economic activity to a halt began on 28 June. Public spending fell even more dramatically, by 12.3%, even before the new austerity measures the prime minister Alexis Tsipras has been forced to pass to win the support of his creditors for talks on a new bailout. Greece is due to make a €3.2bn repayment to the ECB on 20 August.

Talks with the quartet of creditors, which includes the ECB, the IMF, the European commission and Europe’s bailout fund, the European stability mechanism, are continuing, and Tsipras has suggested they are “in the final stretch”. However, it remains unclear whether the prime minister, who was only able to pass the latest package of austerity measures with the help of opposition MPs, will be able to win the backing of his radical Syriza party for new reforms, at a special conference due to be held next month. The IMF has made clear that it will refuse to commit any new funds until Greece has signed up to a new economic reform programme, and eurozone countries have made a concrete offer to write off part of the country’s debt burden.

Sweden’s representative on the 24-member IMF board, Thomas Östros, said there was strong support for a new Greek rescue, “but it will take time”. He told Swedish daily Dagens Nyheter: “There is going to be a discussion during the summer and autumn and then the board will make a decision during the autumn.” He also noted that Greece must adopt wide-ranging reforms first. “They have an inefficient public sector, corruption is a relatively big problem and the pension system is more expensive than other countries.” Despite the grim news on the public finances, Greek stock markets bounced back yesterday, after three straight days of decline, with the main Athens index closing up 3.65%.

Read more …

Sorry, can’t really see that happen. The IMF will insist on debt relief, which the EU and ECB will resist, and SYRIZA will protest it all.

Hollande And Tsipras Want Greek Bailout Agreed In Late August (Reuters)

A new bailout for Athens should be agreed by late August, Greek Prime Minister Alexis Tsipras and French President Francois Hollande said on Thursday. Greece is in negotiations with the European Union and International Monetary Fund for as much as €86 billion in fresh loans to stave off financial ruin and economic collapse. Tsipras said the new deal would be agreed soon after Aug. 15; Hollande said by the end of the month. The two men were speaking in Egypt on the sidelines of a ceremony to inaugurate the New Suez Canal. It will be Greece’s third bailout since its financial troubles became evident more than five years ago. Negotiations in the past have been heated, but all sides are reporting progress this time around.

An accord must be settled – or a bridge loan agreed – by Aug. 20, when a €5 billion debt payment to the ECB falls due. In a statement, Tsipras’s office in Athens said he and Hollande had agreed that the deal “should and could be concluded right after Aug. 15”. That would give enough time for the Greek parliament to approve it to enable the Aug. 20 repayment to the ECB. “They also agreed that everything should be done for the Greek economy to rebound, especially after the effects of the banking crisis,” the statement said. Greece’s banks are in need of recapitalization by €10 billion to 25 billion, according to the EU. France has been generally supportive of Greek requests for aid, contrasting with a harder line taken by Germany which has demanded stringent reform and austerity measures from Athens.

Read more …

Greece can take the €10-15 billion and prepare to leave.

German Finance Ministry Favors Bridge Loan For Greece (Reuters)

Germany’s Finance Ministry favors a bridge loan for Greece to give Athens and its creditors sufficient time to negotiate a comprehensive third bailout, the Sueddeutsche Zeitung daily reported on Friday. “A program that should last three years and be worth over €80 billion needs a really solid basis,” the paper quoted a ministry source as saying. “A further bridge loan is better than just a half-finished program.” Greece is in negotiations with the EU and IMF for as much as €86 billion in fresh loans to stave off financial ruin and economic collapse. A €3.5 billion debt payment to the ECB falls due on August 20 and without a bailout deal, Athens would need bridge financing. The reported German preference for a bridge loan contrasts with the view of Greek Prime Minister Alexis Tsipras and French President Francois Hollande, who said on Thursday a new bailout should be agreed by late August.

Read more …

That “great” story is over too.

German Industrial Output Slumps Unexpectedly (Marketwatch)

Germany’s industrial output and exports both slumped unexpectedly in June, a sign that growth in Europe’s largest economy failed to gather much momentum in the second quarter. Industrial production, adjusted for inflation and seasonal swings, declined 1.4% from May, leaving output in the second quarter flat from the previous period, the economics ministry said Friday. But strong manufacturing orders in June and healthy business sentiment indicate that “the modest upward trend in industry should be continued,” the ministry said. In a separate publication, the federal statistics office said Friday that German exports, adjusted for inflation and seasonal swings, dropped 1.0% from May; imports declined 0.5%. But Germany’s adjusted trade surplus, at €22 billion in June, remained near May’s record high of €22.6 billion, an indication that foreign demand underpinned economic activity in the second quarter.

Read more …

Both the UK and US are far too focused on election entertainment.

Corbyn’s “People’s QE” Could Actually Be A Decent Idea (Klein)

If Jeremy Corbyn becomes leader of the UK Labour Party, one positive consequence will be the ensuing discussion of the monetary policy transmission mechanism. It all started with his presentation on “The Economy in 2020” given on July 22:

The ‘rebalancing’ I have talked about here today means rebalancing away from finance towards the high-growth, sustainable sectors of the future. How do we do this? One option would be for the Bank of England to be given a new mandate to upgrade our economy to invest in new large scale housing, energy, transport and digital projects: Quantitative easing for people instead of banks. Richard Murphy has been one of many economists making that case.

That passage seems to have been mostly ignored until August 3, when Chris Leslie, Labour’s shadow chancellor, attacked the policy, which in turn led to a detailed response from the aforementioned Richard Murphy (see also here and here), at which point what seems like the bulk of the British economics commentariat erupted. Just search the internet for “Corbynomics” if you don’t believe us. Much of the commentary has been negative – former Bank of England economist Tony Yates concluded, for example, that “People’s QE” would be “the first step along the road to undermining the social usefulness of money” – although Chris Dillow gave an intelligent defense. We don’t understand the negativity. Some of the specific arguments justifying the proposal may be flawed, but the core idea is sound and possesses an impressive intellectual pedigree.

In fact, it could help solve one of the most troublesome questions in central banking: how policymakers can accomplish their objectives using the tools at their disposal, without producing too many unpleasant side effects. One of the oddities of “monetary policy” is that it has almost no direct impact on how much money there is to go around. Virtually all of what we commonly think of and use as money is actually short-term debt issued and retired at will by private financial firms. Monetary policymakers can affect the incentives of these profit-seeking entities but they have little control over the amount of nominal spending occurring in the economy. Nudging the unsecured overnight interbank lending rate up and down can encourage lenders to adjust their leverage, but good luck tying that to the traditional price stability mandate.

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One among many.

Indonesia’s Economy Has Stopped Emerging (Pesek)

Indonesia has come a long way since Oct. 20, when Joko Widodo was sworn in as president. Unfortunately, the distance the country has traveled has been in the wrong direction. Expectations were that Widodo, known as Jokowi, would accelerate the reforms of predecessor Susilo Bambang Yudhoyono – upgrading infrastructure, reducing red tape, curbing corruption. Who better to do so than Indonesia’s first leader independent of dynastic families and the military? In 10 years at the helm, Yudhoyono dragged the economy from failed-state candidate to investment-grade growth star. Jokowi’s mandate was to take Indonesia to the next level, honing its global competitiveness, creating new jobs, preparing one of the world’s youngest workforces to thrive and combating the remnants of the powerful political machine built by Suharto, the dictator deposed in 1998.

After 291 days, however, Jokowi seems no match for an Indonesian establishment bent on protecting the status quo. Growth was just 4.67% in the second quarter, the slowest pace in six years. What’s more, a recent MasterCard survey detected an “extreme deterioration” in consumer sentiment, which had plummeted to the worst levels in Asia. Investors are already voting with their feet. The Jakarta Composite Index has fallen 13% from its April 7 record high, one of Asia’s biggest plunges in that time. And foreign direct investment underwhelmed last quarter, coming in at $7.4 billion, little changed from a year earlier in dollar terms. Jokowi has plenty of time to turn things around; 1,535 days remain in his five-year term. But the “halo effect” Jokowi carried into office is fast fading as Indonesia’s 250 million people flirt with buyer’s remorse.

First, Jokowi must step up efforts to battle weakening exports. Indonesia’s weak government spending, stifling bureaucracy and conflicting regulations would be impediment enough; slowing world growth makes matters much worse. Jokowi must greenlight infrastructure projects to boost competitiveness and increase the number and quality of jobs. Next, Jokowi must decide what kind of leader he wants to be: a craven populist or the modernizer Indonesia needs. He has too often resorted to nationalistic rhetoric that hearkens to the Indonesian backwater of old – a turnoff for the multinational executives Jakarta should be courting. Last month, Jokowi raised import tariffs, while asking visiting U.K. Prime Minister David Cameron to do the opposite by cutting U.K. duties for Indonesian goods. Jokowi isn’t helping his constituents by driving up prices for goods while their currency is weakening.

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These things should be held against daylight, but where?

Malaysia Mess Puts Goldman Sachs In The Hot Seat (Reuters)

An unfolding political scandal in Malaysia is starting to reverberate far from Kuala Lumpur to the downtown New York headquarters of Goldman Sachs. State fund 1Malaysia Development Berhad (1MDB) is at the centre of allegations of graft and mismanagement. The furore has prompted renewed scrutiny of hefty fees the Wall Street bank led by Lloyd Blankfein earned selling bonds for 1MDB. The affair threatens to expose a blind spot in Goldman’s processes for vetting sensitive deals. The latest uproar was triggered by reports that almost $700 million landed in the personal accounts of Najib Razak, Malaysia’s Prime Minister. Najib denies taking any money from 1MDB for personal gain. The country’s anti-corruption commission says the funds came from an unnamed donor.

Even so, the investigations into the source of Najib’s mystery money have intensified questions about the management of the fund, which borrowed heavily to buy power assets and finance investments in recent years, but is now effectively being wound down. Goldman helped 1MDB raise a total of $6.5 billion from three bond issues in 2012 and 2013. Even at the time, the deals were controversial because they were so lucrative for the bank. Goldman earned roughly $590 million in fees, commissions and expenses from underwriting the bonds, according to a person familiar with the situation – a massive 9.1% of the total raised. That was almost four times the typical rate for a quasi-sovereign bond at the time.

It exceeds what Wall Street firms can charge in what has traditionally been their most lucrative work: taking companies public in the United States. Goldman was able to book hefty fees because it put its balance sheet at risk for 1MDB, which did not yet have a credit rating. And it wanted to raise a large amount of money very quickly. Yet the bonanza has left the bank exposed to its client’s woes. Malaysian opposition politician Tony Pua said earlier this year that 1MDB had been “royally screwed” by the deals.

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Goes to show how bad things are.

To Please Investors, Big Oil Makes Deepest Cuts in a Generation (Bloomberg)

Oil companies are making the largest cost cuts in a generation to reassure investors. They’re risking their own future growth. From Chevron to Shell, producers are firing thousands of workers and canceling investments to defend their dividends. Cutbacks across the industry total $180 billion so far this year, the most since the oil crash of 1986, according to Rystad Energy. BP CEO Bob Dudley said last week his “first priority” was payouts to shareholders. Chevron CFO Patricia Yarrington said her company was committed to continuing its 27-year record of annual dividend increases. While the dividend payouts please investors, the producers risk repeating the patterns of 1986 and 1999, when prices slumped and they slashed spending.

It took years for them to rebuild their pipelines of production growth. “You need to question whether it’s optimal to base the whole strategy on keeping the dividend,” said Thomas Moore, a director at U.K. fund manager Standard Life Investments. “The response to low oil prices has been savage cost-cutting.” Exxon Mobil, Shell, Chevron, BP and Total told investors last week that future growth plans aren’t imperiled and maintained their multi-year output targets. The history of previous cost-cutting is a cautionary tale.

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Crazy wager.

Inside Shell’s Extreme Plan to Drill for Oil in the Arctic (Bloomberg)

Chevron, ConocoPhillips, ExxonMobil, Statoil, and Total have all put Arctic plans on hold. “Given the environmental and regulatory risks in the Arctic and the cost of producing in that difficult setting, assuming they ever get to producing, Shell must anticipate an enormous find—and future oil prices much higher than they are today,” says Nick Butler, a former senior strategy executive at BP who does energy research at King’s College London. “It’s a dangerous wager.” One of the most powerful women executives in a decidedly masculine industry, Pickard, 59, meets a reporter visiting Anchorage in jeans and a blue button-down shirt.

Her rise through the ranks, first at the pre-merger Mobil and since 2000 at Shell, is especially impressive as she lacks the engineering or geology pedigree normally required of senior oil industry management. She has a graduate degree in international relations and has overseen exploration and production in Africa, Australia, Latin America, and Russia. “Ann doesn’t suffer fools,” says a (male) subordinate who pleads for anonymity. In 2005, Shell put Pickard in charge of sprawling operations in Nigeria long shadowed by pipeline thievery, militant attacks, and accusations—denied by Shell—of collaboration with brutal government crackdowns. Fortune magazine in 2008 labeled her “the bravest woman in oil”—a silly accolade, perhaps, but one that accurately reflects her reputation at Shell.

Most of the world’s “easy oil” has already been pumped or nationalized by resource-rich governments, Pickard says, leaving independent producers such as Shell no choice but to pursue “extreme oil” in dicey places. “I enjoy the challenge,” she says. That’s why in 2013, when she was planning to retire to spend more time with her husband, a retired Navy commander, and their two adopted children, she changed her mind and took over the troubled Arctic project.

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Living on fumes: “Next year it’s really going to come to a head.”

The Shale Patch Faces Reality (Bloomberg)

Not long ago the oil industry looked like it had dodged a bullet. After the worst bust in a generation cut crude prices from $100 a barrel last summer to $43 in March, the oil market rallied. By June, prices were up 40%, passing $60 for the first time since December. Oil companies that had cut costs began planning to deploy more rigs and drill more wells. “We didn’t think we’d be quite this good,” Stephen Chazen, chief executive officer of Occidental Petroleum, told analysts in May. The runup was short-lived. Fears over weak demand from China, along with rising production in the U.S., Saudi Arabia, and Iraq pushed prices back below $50. In July, even as the summer driving season boosted U.S. gasoline demand close to record highs, oil posted its biggest monthly drop since October 2008.

“The much feared double-dip is here,” Francisco Blanch at Bank of America wrote in a July 28 report. The largest oil companies are reporting their worst results in years. ExxonMobil’s second-quarter net income fell 52%; Chevron’s fell 90%. ConocoPhillips lost $180 million. Billions of dollars in capital spending have been cut, and more layoffs are likely. Part of the problem facing the majors is that they’re producing in some of the most expensive places on earth: deep water and the Arctic. With their healthy cash reserves the majors can hold out for higher prices, even if they’re years away. The same can’t be said for many of the smaller companies drilling in the U.S. shale patch.

Shale producers had bought themselves time by cutting costs, locking in higher prices with oil derivatives, and raising billions from big banks and investors. Many cut drilling costs by as much as 30%, fired thousands of workers, and renegotiated contracts with oilfield service companies. “That postponed the day of reckoning,” says Carl Tricoli at Denham Capital Management. But it’s not clear what’s left to cut. The futures contracts and other swaps and options they bought last year as insurance against falling prices are beginning to expire. During the first quarter, U.S. producers earned $3.7 billion from these hedges, crucial revenue for companies that often outspend their cash flow. “A year ago, you could hedge at $85 to $90, and now it’s in the low $60s,” says Chris Lang at Asset Risk Management. “Next year it’s really going to come to a head.”

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Germans need to speak up against hatred.

German TV Presenter Sparks Debate And Hatred With Support For Refugees (Guardian)

A television presenter in Germany has triggered a huge online debate after calling for a public stand against the growth of racist attacks towards refugees. Anja Reschke used a regular editorial slot on the evening news programme to lambast hate-filled commentators whose language she said had helped incite arson attacks on refugee homes. She said she was shocked at how socially-acceptable it had become to publish racist rants under real names. “Until recently, such commentators were hidden behind pseudonyms, but now these things are being aired under real names,” she said. “Apparently it’s no longer embarrassing anymore – on the contrary – in reaction to phrases like ‘filthy vermin should drown in the sea’, you get excited consensus and a lot of ‘likes’.

If up until then you had been a little racist nobody, of course you suddenly feel great,” she said in the two-minute commentary. The segment went viral within minutes of being broadcast, and by Thursday afternoon had been viewed more than 9m times, clocked up over 250,000 likes, 20,000 comments, and had been shared more than 83,000 times on Facebook. Reschke said the “hate-tirades” had sparked “group-dynamic processes” that had led to “a rise in extreme rightwing acts”. Calling on “decent” Germans to act, she said: “If you’re not of the opinion that all refugees are spongers, who should be hunted down, burnt or gassed, then you should make that known, oppose it, open your mouth, maintain an attitude, pillory people in public.”

Her appeal came a day after the head of the intelligence service, Hans-Georg Maassen, warned that a small group of rightwing extremists was in danger of escalating a wave of anti-asylum attacks. He made specific mention of the group Der III Weg or “The Third Way”, calling them “dangerous rabble-rousers”.

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Europe’s biggest moral failure continues unabated. Blaming Tsipras, though, is nonsense.

Migrant Crisis Overwhelms Greek Government (Kathimerini)

Prime Minister Alexis Tsipras is due to chair an emergency government meeting on Friday to address the refugee crisis facing Greece, which has been compounded by serious funding problems in Athens. The meeting was called in the wake of European Commissioner for Migration and Home Affairs Dimitris Avramopoulos informing Tsipras that Greece was missing out on more than €500 million in European Union funding because it has failed to set up a service to absorb and allocate this money for immigration and asylum projects. Kathimerini understands that Avramopoulos has told the prime minister Greece will be given as a down payment 4% of the total funding due over a six-year period. This will be followed by another 3% to cover actions this year.

Tsipras is due to discuss this issue, as well as the soaring number of refugees and migrants reaching Greece, with Alternate Minister for Immigration Policy Tasia Christodoulopoulou and several other cabinet members today. Christodoulopoulou admitted Thursday that the government has so far fallen short on this matter. “At the moment, nongovernmental organizations and charities are covering the gaps left by the state,” she told Mega TV. “Without them things would be worse.” The alternate minister said efforts were continuing to prepare a plot of land in Votanikos, near central Athens, so some 400 refugees currently living in tents in Pedion tou Areos park could be housed there. Authorities are currently carrying out work aimed at making the new site livable.

The refugees, including dozens of children, will be housed in prefabricated structures as well as large tents at Votanikos. Christodoulopoulou said the new site would operate as a reception, not detention, center. This means that up to 600 people who will be able to live there will be allowed to leave and enter the camp freely. The magnitude of the problem facing Greece was underlined by the United Nations on Thursday. A UN Refugee Agency (UNHCR) official told Agence-France Presse that by the end of July, around 224,000 refugees and migrants had arrived in Europe by sea and that of those, some 124,000 landed in Greece. More than 2,100 people have drowned or gone missing.

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Margaret!!

It’s Not Climate Change, It’s Everything Change (Margaret Atwood)

Oil! Our secret god, our secret sharer, our magic wand, fulfiller of our every desire, our co-conspirator, the sine qua non in all we do! Can’t live with it, can’t right at this moment live without it. But it’s on everyone s mind. Back in 2009, as fracking and the mining of the oil/tar sands in Alberta ramped up, when people were talking about Peak Oil and the dangers of the supply giving out, I wrote a piece for the German newspaper Die Zeit. In English it was called The Future Without Oil. It went like this:

The future without oil! For optimists, a pleasant picture: let’s call it Picture One. Shall we imagine it? There we are, driving around in our cars fueled by hydrogen, or methane, or solar, or something else we have yet to dream up. Goods from afar come to us by solar-and-sail-driven ship, the sails computerized to catch every whiff of air, or else by new versions of the airship, which can lift and carry a huge amount of freight with minimal pollution and no ear-slitting noise. Trains have made a comeback. So have bicycles, when it isn t snowing; but maybe there won’t be any more winter.

We ve gone back to small-scale hydropower, using fish-friendly dams. We re eating locally, and even growing organic vegetables on our erstwhile front lawns, watering them with greywater and rainwater, and with the water saved from using low-flush toilets, showers instead of baths, water-saving washing machines, and other appliances already on the market. We’re using low-draw lightbulbs; incandescents have been banned and energy-efficient heating systems, including pellet stoves, radiant panels, and long underwear. Heat yourself, not the room is no longer a slogan for nutty eccentrics: it’s the way we all live now.

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Jul 282015
 
 July 28, 2015  Posted by at 9:02 am Finance Tagged with: , , , , , , , ,  Comments Off on Debt Rattle July 28 2015


John Collier FSA housing project for Martin aircraft workers, Middle RIver, MD 1943

Weakness in Asia Batters Currencies Abroad (WSJ)
Wealth Doesn’t Trickle Down, It Just Floods Offshore -$32 Trillion (Guardian)
Hong Kong Is Feeling China’s Pain (Bloomberg)
The Good News in China’s Stock Plunge (Pesek)
How Much Worse Can the Junk-Bond Sell-Off Get? (WolfStreet)
The Few Who Won’t Say ‘Sorry’ for Financial Crisis (Ritholtz)
Varoufakis Unplugged: The London Call Transcript (FT)
Statement on the FinMin’s Plan B Working Group (Yanis Varoufakis’ office)
Varoufakis: It Would Be Irresponsible Not To Have Drawn Up Contingency Plans (E)
Yanis Varoufakis Admits ‘Contingency Plan’ For Euro Exit (Guardian) /td>
Contingency Plans (Paul Krugman)
Greece’s Headache: How To Lift Capital Controls (AFP)
Germany Rides Into Its Greek Colony On The “Quadriga” (Zero Hedge)
IMF Paints Dim Europe Picture, Says More Money Printing May Be Needed (Reuters)
How the Greek Deal Could Destroy the Euro (NY Times)
The Way To Fix Greece Is To Fix The Banks (Coppola)
France Wants To Outlaw Discrimination Against The Poor (Guardian)
Dutch Journalist, MH17 Expert: ‘UN Tribunal Attempt to Hide Kiev’s Role’ (RI)
Potemkin Party (Jim Kunstler)
It’s Really Very Simple (Dmitry Orlov)

Any country heavily dependent on commodities trade must suffer the inevitable.

Weakness in Asia Batters Currencies Abroad (WSJ)

The global commodities slump is testing the resilience of resource-driven economies, pushing currencies from Australia, Canada and Norway to lows not seen since the financial crisis. Weakening energy and metals prices are punishing investors, companies and governments. Slumping demand from China, the world’s biggest purchaser of many materials, is rippling through foreign-exchange markets, reflecting expectations that a valuable source of export growth is drying up. But few countries are being battered as badly as Canada, due to its dependence on the hard-hit energy industry and its central bank’s decision this month to cut its key overnight interest rate for the second time this year.

The Bank of Canada expects Canada’s gross domestic product to rise a paltry 1.1% this year, down from previous forecasts of 1.9% made earlier in the year, as a persistent decline in oil prices and a drop in exports that the central bank described as “puzzling” hampered growth. The decision to reduce rates is adding to the woes of the Canadian dollar, which is called the loonie, underscoring the delicate balance that policy makers must strike at a time of uneven global growth and whipsaw trading in currency markets. At the same time, a boost in exports—often billed as one of the silver linings of a currency’s decline—has yet to arrive.

“My gut feeling is that it’s going to be bad for some time to come,” said Thomas Laskey at Aberdeen Asset Management, which has US$483 billion under management. Mr. Laskey said he is shorting the Canadian dollar—a bet that the currency will fall—until he sees an improvement in Canadian oil-and-gas companies’ investment spending. The loonie is down 8.1% against the U.S. dollar since May 14 in New York trading, making it one of the biggest victims of the steep decline in global commodity prices since then. In that same period, the Australian dollar is down 10% and the Norwegian krone, which is pegged to the euro, has dropped 9.8% against its U.S. counterpart.

Plunging commodity prices and the end of a mining investment boom have pushed the Reserve Bank of Australia to cut interest rates twice this year. The central bank said that while it is open to further easing monetary policy, it is also wary of some of the unintended consequences of lower rates, such as burgeoning real-estate prices in Sydney. Norway’s central bank cut interest rates in June in a bid to boost its flagging economy, which is closely tied to oil exports. Norges Bank said more reductions are likely before the end of the year.

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“Inequality is much, much worse than official statistics show, but politicians are still relying on trickle-down to transfer wealth to poorer people. “This new data shows the exact opposite has happened..”

Wealth Doesn’t Trickle Down, It Just Floods Offshore -$32 Trillion (Guardian)

The world’s super-rich have taken advantage of lax tax rules to siphon off at least $21 trillion, and possibly as much as $32tn, from their home countries and hide it abroad – a sum larger than the entire American economy. James Henry, a former chief economist at consultancy McKinsey and an expert on tax havens, has conducted groundbreaking new research for the Tax Justice Network campaign group – sifting through data from the Bank for International Settlements (BIS), the IMF and private sector analysts to construct an alarming picture that shows capital flooding out of countries across the world and disappearing into the cracks in the financial system.

Comedian Jimmy Carr became the public face of tax-dodging in the UK earlier this year when it emerged that he had made use of a Cayman Islands-based trust to slash his income tax bill. But the kind of scheme Carr took part in is the tip of the iceberg, according to Henry’s report, entitled The Price of Offshore Revisited. Despite the professed determination of the G20 group of leading economies to tackle tax secrecy, investors in scores of countries – including the US and the UK – are still able to hide some or all of their assets from the taxman. “This offshore economy is large enough to have a major impact on estimates of inequality of wealth and income; on estimates of national income and debt ratios; and – most importantly – to have very significant negative impacts on the domestic tax bases of ‘source’ countries,” Henry says.

Using the BIS’s measure of “offshore deposits” – cash held outside the depositor’s home country – and scaling it up according to the proportion of their portfolio large investors usually hold in cash, he estimates that between $21tn and $32tn in financial assets has been hidden from the world’s tax authorities. “These estimates reveal a staggering failure,” says John Christensen of the Tax Justice Network. “Inequality is much, much worse than official statistics show, but politicians are still relying on trickle-down to transfer wealth to poorer people. “This new data shows the exact opposite has happened: for three decades extraordinary wealth has been cascading into the offshore accounts of a tiny number of super-rich.”

In total, 10 million individuals around the world hold assets offshore, according to Henry’s analysis; but almost half of the minimum estimate of $21tn – $9.8tn – is owned by just 92,000 people. And that does not include the non-financial assets – art, yachts, mansions in Kensington – that many of the world’s movers and shakers like to use as homes for their immense riches.

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“Chinese tour group visitors to Hong Kong plunged 40% in the first two weeks of July compared with the same period a year earlier..”

Hong Kong Is Feeling China’s Pain (Bloomberg)

For Hong Kong, it’s been one thing after another when it comes to China. A series of anti-China and pro-democracy protests last year prompted stores to close and mainland tour groups to cancel bookings. Meanwhile, a slowing Chinese economy and President Xi Jinping’s anti-corruption and austerity campaigns have also made the Chinese more wary of buying pricey cognac and Gucci bags in the city. While the biggest outbound destination for Chinese tour groups last year, Hong Kong is in danger of losing its lead to regional rivals such as Thailand and South Korea, as well as mainland alternatives including Shenzhen and Shanghai. Mainland Chinese travelers to Hong Kong last year grew by the slowest pace since 2009, Bloomberg Intelligence data show.

Chinese tour group visitors to Hong Kong plunged 40% in the first two weeks of July compared with the same period a year earlier, the Hong Kong Economic Times reported Monday, citing Michael Wu, head of the city’s Travel Industry Council. With fewer mainland Chinese staying overnight, average daily rates at Hong Kong’s hotels fell for a ninth straight month through June. In addition, China slashed tariffs on products such as face creams and imported sneakers from June 1, reducing Hong Kong’s draw as a cheaper shopping destination. The effect on Hong Kong’s retailers has been immediate and painful. Retail sales fell in four of the five months through May, with jewelry, watches and other high-end gifts the worst hit.

Burberry Group Plc, whose stores in Hong Kong’s Causeway Bay and Tsim Sha Tsui shopping districts sell HK$18,500 ($2,400) handbags and HK$24,000 dresses, has said it may try and lower its rent bill to offset a worsening slump in Hong Kong, while Emperor Watch & Jewellery, which sells Cartier and Montblanc watches, said it may shut one or two of its Hong Kong stores when their leases end this year. And the news out of China doesn’t inspire much confidence. French distiller Remy Cointreau reported first-quarter sales that missed analyst estimates as Chinese wholesalers continued to hold back on cognac orders. Prada also reported first-quarter profit that trailed analyst estimates on slumping sales in China, while foreign carmakers including Audi have stepped up discounts to woo buyers.

So there’s no relief in sight for Hong Kong. The tourism board forecasts overall visitor arrival growth to slow to 6.4% in 2015 from 12% last year, with mainland Chinese tourist arrivals expected to drop by half to 8%. Hong Kong’s economy expanded 2.1% in the first quarter from a year earlier, weaker than a revised 2.4% expansion in October through December. “We’re just too exposed to China,” said Silvia Liu at UBS. “Structurally, until the tourism sector consolidates and Hong Kong finds new growth engines, I don’t see the way out yet.”

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It will force a free market?!

The Good News in China’s Stock Plunge (Pesek)

Panic is in the air as China suffers its biggest one-day stock plunge since 2007. It shouldn’t be. The 8.5% slide in the Shanghai Composite Index is actually a development that could leave China better off eight years from now. I’m focusing on eight both because it’s an auspicious number in Chinese folklore (the Beijing Olympics didn’t begin on 8/8/08 by accident) and Beijing’s idea of nirvana. Growth returning to 8% (relative to this year’s 7% target) would buttress President Xi Jinping’s reformist bona fides. Instead, stocks fell by that much Monday as Xi’s magic has lost potency. Why is that a good thing? It’s at once a reminder that rationality is returning to mainland markets and a message to Xi to stop putting the financial cart before the proverbial horse.

Since mid-June, when shares began sliding, Xi’s market-rescue squad has tried everything imaginable: interest-rate cuts, margin-lending increases, bans on short selling, a moratorium on initial public offerings, hauling supposedly rogue traders in for a talking to, ordering state-run institutions to buy shares, halting trading in at least half of listed companies, you name it. What Xi hasn’t tried is upgrading the economy and financial system in such a way as to help the stock market thrive. To find out what he should do next, Xi could do worse than to check in with Henry Paulson. Even though Paulson might regard with scorn China’s love of the number eight, it was on his watch as Treasury secretary in 2008 that the U.S. had its own brush with financial collapse.

Paulson has been merciless in his all-hype-and-no-fundamentals critique of Xi’s government. “China is especially vulnerable at this point because while its economy has grown and matured, its capital markets have lagged behind,” he wrote in the Financial Times. “It is no surprise that those ideologically opposed to markets would use recent events to make the opposite argument — that to prevent market instability, Beijing should slow the pace of financial liberalisation or perhaps even abandon market-based reforms altogether.” Yet, he argued, “while Beijing’s instinct to protect investors is understandable, the best way of doing so is to create a modern capital market.”

That’s why ambivalence toward Xi’s titanically large market interventions could be a positive. It refocuses Beijing on what’s needed to re-create the vibrant markets that prevail in New York and Hong Kong. Xi’s Communist Party has tried and failed to stabilize things by edict. In fact, heavy-handed manipulation has set back Beijing’s designs on making the yuan a global reserve currency and getting Shanghai shares included in MSCI’s indexes.

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Junk bonds dive with commodities.

How Much Worse Can the Junk-Bond Sell-Off Get? (WolfStreet)

Commodities had once again an ugly week. Copper hit the lowest level since June 2009. Gold dropped below $1,100 an ounce. Other metals dropped too. Agricultural commodities fell; corn plunged nearly 7% for the week. Crude oil swooned, with West Texas Intermediate dropping nearly 7% to $47.97 a barrel, a true debacle for energy junk-bond investors. It was the kind of rout that bottom fishers a few months ago apparently didn’t think was possible. For example, in March, coal miner Peabody Energy had issued 10% second-lien notes due 2022 at 97.5 cents on the dollar. Now, these junk bonds are trading at around 49 cents on the dollar, having lost half their value in four months, and 17% in July alone, according to S&P Capital IQ’s LCD HY Weekly.

Yield-hungry fund managers that bought them at issuance and stuffed them into their bond funds that people hold in their retirement accounts should be sued for malpractice. Among the bonds: Cliffs Natural Resources down 27.6%, SandBridge down 30%, Murray Energy down 21.2%, and Linn Energy down 22.3%, according to Bloomberg. For example, Linn Energy 6.25% notes due in 2019 were trading at 78 cents on the dollar at the beginning of July and at 58 on Friday, according to LCD. There was bloodshed beyond energy, such as AK Steel’s 7.625% notes due in 2021. They were trading at 62 cents on the dollar, down 22% from the beginning of July. “The performance is a disappointment to investors who purchased about $40 billion of junk-rated bonds from energy companies this year, thinking that the worst of the slump was over,” Bloomberg noted.

The riskiest junk bonds, tracked by the BofA Merrill Lynch US High Yield CCC or Below Effective Yield Index, have been hit hard, with yields jumping from the ludicrous levels below 8% of last summer to 12.19% as of Thursday, the highest since July 2012. Note the spike in yield during the “Taper Tantrum” in the summer of 2013 when the Fed discussed ending “QE Infinity.” After which bonds soared once again and yields descended to record lows, until the oil panic set in, as investors in the permanently cash-flow negative shale oil revolution were coming to grips with the plunging price of oil. But in the spring, bottom fishers stepped in and jostled for position as energy companies sold them $40 billion in new bonds, including coal producer Peabody. Now a lot of people who touched these misbegotten bonds are scrutinizing their burned fingers.

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“..the Gramm-Leach-Bliley Act of 1999..”

The Few Who Won’t Say ‘Sorry’ for Financial Crisis (Ritholtz)

“Some people look at subprime lending and see evil. I look at subprime lending and I see the American dream in action. My mother lived it as a result of a finance company making a mortgage loan that a bank would not make. – Former U.S. Senator Phil Gramm”

Many elected or appointed officials have a specific belief system that they may act upon in the implementation of policies. When the policies that flow from those beliefs go terribly wrong, it is natural to want to learn why. As is so often the case, that underlying ideology is usually a good place to begin looking. In the aftermath of the great credit crisis, we have seen all manner of contrition from responsible parties. Most notably, Alan Greenspan admitted error, saying as much in Congressional testimony. Greenspan was unintentionally ironic when he answered a question about whether ideology led him down the wrong path when it came to preventing irresponsible lending practices in subprime mortgages: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”

Other contributors to the crisis have been similarly humbled. In “Bailout Nation,” I held former President Bill Clinton, and his two Treasury secretaries, Robert Rubin and Larry Summers, responsible for signing the ruinous Commodity Futures Modernization Act that exempted derivatives from regulation and oversight. The CFMA was passed as part of a larger bill by unanimous consent, and that Clinton signed on Dec. 21, 2000. Clinton joined Greenspan in admitting his contribution to the credit crisis, as well as saying the advice he received from his Treasury secretaries – Rubin and Summers – was wrong. The CFMA removed the standard regulations that all other financial instruments follow: reserve requirements, counter-party disclosures and exchange listings.

Bloomberg reported that Clinton said his advisers argued that derivatives didn’t need transparency because they were “expensive and sophisticated and only a handful of people will buy them and they don’t need any extra protection. The flaw in that argument was that first of all, sometimes people with a lot of money make stupid decisions and make it without transparency.” Even the American Enterprise Institute changed the name of its “Financial Deregulation Project” to the more benign “program on financial policy studies.” That is as close to an apology as we can expect for its part in pushing for market deregulation.

The exception to any post-crisis self-reflection is former Senator Phil Gramm. Although he was one of the chief architects of the radical gutting of financial regulations and oversight rules during the two decades that preceded the financial crisis, the former senator remains a stubborn believer that banks and markets can regulate themselves. Perhaps more than anyone else, Gramm drove the legislation that allowed banks to get much bigger and derivatives to run wild. His name is on the law – the Gramm-Leach-Bliley Act of 1999 – that overturned the Glass-Steagall Act, a Depression-era law that forced commercial banks to get out of the risky investment-banking business.

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It really is very revealing. How about: “Marsh wraps up the teleconference [..], reminding everyone Varoufakis’ remarks were under the so-called Chatham House rules, which means the information can be passed on but Varoufakis should not be cited as the source of the information.

Varoufakis Unplugged: The London Call Transcript (FT)

The London-based Official Monetary and Financial Institutions Forum, headed by two ex-Financial Times scribes – chairman John Plender and managing director David Marsh – on Monday released a 24-minute audiotape of a teleconference they held nearly two weeks ago with Yanis Varoufakis, the former Greek finance minister. Details of the call were first revealed by the Greek daily Kathimerini, and much of most sensational revelations Varoufakis made were about a surreptitious project he and a small team of aides worked on to set up a parallel payments system that could be activated if the European Central Bank forced the shutdown of the Greek financial system.

But Varoufakis also made some other interesting allegations, including claims the IMF believes the Greek bailout is doomed and that Alexis Tsipras, the Greek prime minister, offered him another ministry shortly after he was relieved as finance minister. We’ve had a listen to the entire call, and transcribed most of it – excluding some inconsequential asides to the teleconference’s hosts, Messrs Marsh and Norman Lamont, the former UK finance minister.

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Have the tapes taken Plan B off the table for good?

Statement on the FinMin’s Plan B Working Group (Yanis Varoufakis’ office)

During the Greek government’s negotiations with the Eurogroup, Minister Varoufakis oversaw a Working Group with a remit to prepare contingency plans against the creditors’ efforts to undermine the Greek government and in view of forces at work within the Eurozone to have Greece expelled from the euro. The Working Group was convened by the Minister, at the behest of the Prime Minister, and was coordinated by Professor James K. Galbraith. It is worth noting that, prior to Mr Varoufakis’ comfirmation of the existence of the said Working Group, the Minister was criticized widely for having neglected to make such contingency plans. The Bank of Greece, the ECB, treasuries of EU member-states, banks, international organisations etc. had all drawn up such plans since 2012.

Greece’s Ministry of Finance would have been remiss had it made no attempt to draw up contingency plans. Ever since Mr Varoufakis announced the existence of the Working Group, the media have indulged in far-fetched articles that damage the quality of public debate. The Ministry of Finance’s Working Group worked exclusively within the framework of government policy and its recommendations were always aimed at serving the public interest, at respecting the laws of the land, and at keeping the country in the Eurozone. Regarding the recent article by “Kathimerini” newspaper entitled “Plan B involving highjacking and hacking”, Kathimerini’s failure to contact Mr Varoufakis for comment and its reporter’s erroneous references to “highjacking tax file numbers of all taxpayers” sowed confusion and contributed to the media-induced disinformation.

The article refers to the Ministry’s project as described by Minister Varoufakis in his 6th July farewell speech during the handover ceremony in the Ministry of Finance. In that speech Mr Varoufakis clearly stated: “The General Secretariat of Information Systems had begun investigating means by which Taxisnet (Nb. the Ministry’s Tax Web Interface) could become something more than it currently is, to become a payments system for third parties, a system that improves efficiency and minimises the arrears of the state to citizens and vice versa.” That project was not part of the Working Group’s remit, was presented in full by Minister Varoufakis to Cabinet, and should, in Minister Varoufakis’ view, be implemented independently of the negotiations with Greece’s creditors, as it will contribute considerable efficiency gains in transactions between the state and taxpayers as well as between taxpayers.

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What I said yesterday.

Varoufakis: It Would Be Irresponsible Not To Have Drawn Up Contingency Plans (E)

Google Translate: Official statement issued by Yanis Varoufakis to be placed in relation to what came to light during the last two days after the publication of “Kathimerini” leaving clear spikes in the newspaper, noting that it would be irresponsible not to have alternative plans the Ministry of Finance . In its notification, the former Minister of Finance notes that “During the negotiations, and until the day of the Referendum, the t. Finance Minister. Yanis Varoufakis, as required, and at the behest of Prime Minister, oversaw working group which, coordinator Professor James K. Galbraith , elaborating emergency plan and response of the government to undermine plans by lenders , including the country known extrusion projects outside the eurozone. ”

Former Finance Minister points out that before the announcement that there was such a group accept continuous and intense criticism for the lack of response plan in the country to undermine plans by lenders. He adds, in fact, that “The Bank of Greece (which had, for example, ready PNP plan for a bank holiday), the ECB, the EU country governments, banks and international organizations have such groups and design by 2012. Indeed, it would be of utmost irresponsibility not drafted such plans the Ministry of Finance . ” “Since the t. Minister of Finance, announced the existence of that working group, the media inundated with imaginative “story” that affect the quality of public debate by trying to delineate as a group “conspiring” to restore national currency. This is pure slander.

The working group of the Ministry of Finance has always worked in the government policy and recommendations had as a permanent reference to the public interest, compliance with legality and stay in the country in the eurozone, “noted the statement of Yanis Varoufakis press office. In response to the “Daily report” leaves clear spikes in the newspaper stating that ” the pension “neglected” to request explanations and commentary by Mr. Varoufakis Before publishing inaccurate references to “tapping AFM of all taxpayers.” So, deliberately or not, sowed confusion contributed to widespread misinformation of SMEs “.

“In substance, the report appears to refer to plans of the Ministry of Finance that section. Minister stated boldly in the account at the ministry handover ceremony on July 6 with the following reference: The General Secretariat of Information Systems has started to process how whom taxisnet can become something more than what it is, be a payment system and to third parties, a system that increases efficiency and minimizes arrears of government to citizens and to businesses “noted the statement.

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What I said.

Yanis Varoufakis Admits ‘Contingency Plan’ For Euro Exit (Guardian)

Greece’s former finance minister, Yanis Varoufakis, has been thrust back in the spotlight as he vigorously defended plans to launch a parallel payment system in the event of the country being ejected from the euro. Saying it would have been “remiss” of him not to have a “plan B” if negotiations with the country’s creditors had collapsed, the outspoken politician admitted that a small team under his control had devised a parallel payment system. The secret scheme would have eased the way to the return of the nation’s former currency, the drachma. “Greece’s ministry of finance would have been remiss had it made no attempt to draw up contingency plans,” he said in a statement.

But Varoufakis, who resigned this month to facilitate talks between Athens’ left-led government and its creditors, denied that the group had worked as a rogue element outside government policy or beyond the confines of the law. “The ministry of finance’s working group worked exclusively within the framework of government policy and its recommendations were always aimed at serving the public interest, at respecting the laws of the land, and at keeping the country in the Eurozone,” the statement said. Earlier on Monday the Official Monetary and Financial Institutions Forum, which had organized a conference call between Varoufakis and investors, released a recording of the conversation held between the former minister and financial professionals on 16 July .

Varoufakis is heard saying that he ordered the ministry’s own software programme to be hacked so that online tax codes could be copied to “work out” how the payment system could be designed. “We were planning to create, surrepticiously, reserve accounts attached to every tax file number, without telling anyone, just to have this system in a function under wraps,” he says, adding that he had appointed a childhood friend to help him carry out the plan. “We were ready to get the green light from the PM when the banks closed.” The plan was denounced by Greek opposition parties, which in recent weeks have called for Varoufakis to be put on trial for treason. The academic-turned-politician has been blamed heavily for the handling of negotiations with Greece’s creditors which saw Greece come close to leaving the eurozone.

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” I think he called it wrong, but God knows it was an awesome responsibility – and we may never know who was right.”

Contingency Plans (Paul Krugman)

People are apparently shocked, shocked to learn that Greece did indeed have plans to introduce a parallel currency if necessary. I mean, really: it would have been shocking if there weren’t contingency plans. Preparing for something you know might happen doesn’t show that you want it to happen. Someday, maybe, we’ll know what kind of contingency plans the United States has had over the years. Plans to invade Canada? Probably. Plans to declare martial law in the event of a white supremacist uprising? Maybe. The issue now becomes whether Tsipras was right to decide not to invoke this plan in the face of what amounted to extortion from the creditors. I think he called it wrong, but God knows it was an awesome responsibility – and we may never know who was right.

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Be its own master?!

Greece’s Headache: How To Lift Capital Controls (AFP)

It is just the headache Greece’s government does not need right now: How can it loosen the capital controls that are shielding its banks, but strangling the rest of the economy? For the past month, Greece has been financially cut off from the rest of the world. It is almost impossible for most Greeks to take money out of the country, thanks to a raft of capital control measures put in place on June 29 amid fears of a catastrophic bank run. For companies, the capital controls have meant waiting for a government commission to sign off on large bills owed to foreign firms – a process that has slowed payments so much that distrustful suppliers started asking to be paid in advance.

Bank of Greece chief Yannis Stournaras on Friday loosened the restrictions to allow banks to greenlight companies’ foreign payments up to €100,000 But people remain unable to open new foreign bank accounts, buy shares, or transfer large sums of money. Athens is tolerating two main exceptions to the rules: Greek students abroad can receive €5,000 per quarter, while citizens having medical treatment in other countries can receive up to €2,000. Cash withdrawals were limited to €60 per day after Greeks emptied ATMs, worried for the safety of their savings. Greek Economy Minister Giorgos Stathakis warned on July 12 that it could be “several months” before it is deemed safe to lift the measures completely.

Announced in the throes of the crisis, when Greece appeared to be teetering on the brink of a chaotic eurozone exit, the capital controls were brought in with just one immediate concern in mind: protect the banks. Some €40 billion euros have left the banks’ coffers since December. As the world waits to see whether Greece and its creditors can hammer out a bailout worth up to €86 billion, staving off a panicked outpouring of the country’s cash remains a paramount concern. According to Diego Iscaro, an economist at consultancy IHS, the problem with capital controls is that they are “easy to implement but very difficult to lift.” Or as Moody’s analyst Dietmar Hornung put it: “Confidence (in the banks) is lost quickly, but it takes time to restore it.”

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“Apparently (and unfortunately), this is not a joke.”

Germany Rides Into Its Greek Colony On The “Quadriga” (Zero Hedge)

With creditors’ motorcades having officially returned to the streets of Athens in the wake of Greek lawmakers’ approval of the second set of bailout prior actions last Wednesday, tensions are understandably high. After all, these are the same “institutions” which Yanis Varoufakis famously booted from Greece after Syriza swept to power in January, and they’ve come to represent the oppression of the Greek people and are now a symbol of the country’s debt servitude. Although an absurd attempt was made to rebrand the dreaded “troika” earlier this year, the new and rather amorphous moniker – “the institutions” – never really stuck and perhaps because everyone involved felt the need to put a new name to the group that Greeks regard as the scourge of the Aegean in order to make negotiators feel safer on their trips to Athens, creditors have now added the ESM to their collective and rebranded themselves “The Quadriga.” Apparently (and unfortunately), this is not a joke. Here’s MNI:

The source from the Commission also noted that the group formerly known as Troika is now being renamed as “Quadriga”, to note the inclusion of the ESM in the talks. “Quadriga is the name inspired by Commission President, Jean-Claude Juncker for the new Greek project” the Commission source said, adding that “the EU side is a bit nervous of not knowing the IMF stance.”

We assume the reference to the IMF’s “stance” there refers to the size of the bailout and the prospects for debt relief and not to the new nickname choice, but whatever the case, here’s the definition of “quadriga” from Wikipedia:

A quadriga (Latin quadri-, four, and iugum, yoke) is a car or chariot drawn by four horses abreast (the Roman Empire’s equivalent of Ancient Greek tethrippon). It was raced in the Ancient Olympic Games and other contests. It is represented in profile as the chariot of gods and heroes on Greek vases and in bas-relief. The quadriga was adopted in ancient Roman chariot racing. Quadrigas were emblems of triumph; Victory and Fame often are depicted as the triumphant woman driving it. In classical mythology, the quadriga is the chariot of the gods; Apollo was depicted driving his quadriga across the heavens, delivering daylight and dispersing the night.

We’re not sure what’s more ironic there, the fact that an image which once appeared on Greek ceramics is now the symbol of serfdom or the fact that it’s the “chariot of the gods”, who in this case would be eurocrats and IMF officials. As amusing – and somewhat sad – as this is, perhaps the most tragically ironic part of the entire rebranding effort is that one of the most significant representations of a quadriga the world over sits atop the Brandenburg Gate in Berlin.

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IMF tells China central bank to cool it down, and at the same time tells ECB to turn up the heat. Vested interests?!

IMF Paints Dim Europe Picture, Says More Money Printing May Be Needed (Reuters)

The IMF warned on Monday that the euro zone’s prospects were modest and that more money printing than planned may be needed. Contrasting the IMF’s relative gloom, however, German think tank Ifo reported improving confidence the 19-country bloc’s largest economy. The IMF, saying medium-term growth would be subdued, urged the ECB to keep its money presses rolling, perhaps beyond the target late next year. “The important thing is that the ECB intends to stay the course until September 2016 and that, we think, will be necessary,” said Mahmood Pradhan, deputy director of the IMF’s European department, referring to QE. Letting the €1 trillion plus scheme to buy chiefly government bonds run longer could be better still, he suggested. “It may need to go beyond that,” he said.

Worries about the global economy, prompted by a slowdown in China where shares slid more than 8% on Monday , are weighing on many countries in Europe. Manufacturing confidence in the Netherlands, with huge exposure to international trade though several of Europe’s largest ports, slipped back in July, reflecting pessimism among companies over the prospects for the coming three months. Finnish consumer and industry confidence also weakened in July compared to the previous month. But the data was mixed, with the positive Ifo report on German business confidence after two monthly drops and the ECB reporting a boom in lending for home buyers, which could bolster the bloc’s economy.

The ECB also said is M3 measure of money circulating in the euro zone, which is often an early indicator of future economic activity, grew by 5.0% in June, in line with the previous month. But lending to companies fell by 0.2% in June. This was a slower pace of decline for the 11th month in a row, but still suggested most of the ECB’s largest is going to consumers not companies. In its report on the euro zone, the IMF said that the bloc was getting stronger thanks to lower oil prices, a weaker euro and central bank action, but that medium-term prospects were for an average potential growth of just 1%. The IMF said euro area GDP should accelerate to 1.7% next year from 1.5% in 2015, with inflation of 1.1% from zero.

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“In essence, Germany established that some democracies are more equal than others.”

How the Greek Deal Could Destroy the Euro (NY Times)

Indeed, the European institutions led by Germany seem to have decided that waging an ideological battle against a recalcitrant and amateurish far-left government in Greece should take precedence over 60 years of European consensus built painstakingly by leaders across the political spectrum. By imposing a further socially regressive fiscal adjustment, the recent agreement confirmed fears on the left that the EU could choose to impose a particular brand of neoliberal conservatism by any means necessary. In practice, it used what amounted to an economic embargo — far more brutal than the sanctions regime imposed on Russia since its annexation of Crimea — to provoke either regime change or capitulation in Greece. It has succeeded in obtaining capitulation.

Through its actions, Germany has made a broader political point about the governance of the euro. It has confirmed its belief that federalism by exception — the complete annihilation of a member state’s sovereignty and national democracy — is in order whenever a eurozone member is perceived to challenge the rules-based functioning of the monetary union. In essence, Germany established that some democracies are more equal than others. By doing so, the agreement has sought to remove politics and discretion from the functioning of the monetary union, an idea that has long been very dear to the French.

The negotiations leading to the Greek agreement also destroyed the constructive ambiguity created by the Maastricht Treaty by making it absolutely clear that Germany is prepared to amputate and obliterate one of its members rather than make concessions. Germany appears to believe that the single currency ought to be a fixed exchange-rate regime or not exist at all in its current form, even if this means abandoning the underlying project of political integration that it was always meant to serve. Finally, and perhaps most importantly, Germany signaled to France that it was prepared to go ahead alone and take a clear contradictory stand on a critical political issue.

This forceful attitude and the several taboos it broke reveal that the currency union that Germany wants is probably fundamentally incompatible with the one that the French elite can sell and the French public can subscribe to. The choice will soon be whether Germany can build the euro it wants with France or whether the common currency falls apart. Germany could undoubtedly build a very successful monetary union with the Baltic countries, the Netherlands and a few other nations, but it must understand that it will never build an economically successful and politically stable monetary union with France and the rest of Europe on these terms.

Over the long run, France, Italy and Spain, to name just a few, would not take part in such a union, not because they can’t, but because they wouldn’t want to. The collective GDP and population of these countries is twice that of Germany; eventually, a confrontation is inevitable.

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Yeah, but which banks? Only the Greek ones? Would that suffice? How about the rest of Europe?

The Way To Fix Greece Is To Fix The Banks (Coppola)

Successive bailout strategies for Greece have failed to grasp the nettle of the zombie banks. The banking sector is highly concentrated, with 90% of banking assets held by four players — Alpha Bank, Eurobank, Piraeus Bank and National Bank of Greece (not to be confused with Bank of Greece, which is the central bank). All four required recapitalisation in 2012 when the “public sector involvement” restructuring impaired their holdings of Greek sovereign debt. The funds to do this were provided by eurozone and IMF creditors via the Hellenic Financial Stability Fund, the entity created in 2010 to channel bailout funds to banks. The HFSF now holds majority stakes in all four. However, recapitalising did not mean restructuring them. Nor did it mean ensuring good practice in balance sheet management.

Although the proximate cause of the 2012 bailout was the PSI, their performance had declined sharply since 2008 and they have been persistently lossmaking since about 2010. The biggest single-year loss was in 2012, but the underlying decline in profitability is actually far more damaging both to the banks themselves and to the Greek economy. The headline explanation for the banks’ problems is lack of liquidity. From 2009, successive credit rating downgrades of their own bonds and Greek sovereign debt increased their cost of funding at the same time as deposit flight increased their need of it. They lost market access in 2009 and have since relied entirely on eurosystem aid, both funding from the ECB and emergency liquidity assistance from Bank of Greece. Since March 2015, only ELA has been available, and this is currently capped by the ECB.

The banks’ dependence on official sector liquidity makes it easy to claim that their problems are caused by the restriction of it — what the former Greek finance minister Yanis Varoufakis called “asphyxiation”. Although providing liquidity beyond their credit appetite does not increase lending, restricting liquidity does force them to avoid activities that could create funding gaps. Lending, by its very nature, creates a funding gap: if banks are not confident of being able to obtain the funding to settle loan drawdowns, they will not lend. But liquidity restriction is not the whole story. The other side of the banks’ balance sheets is also to blame for the credit crunch. Since 2009, non-performing loans have risen considerably and now make up at least a third of Greek bank assets: some estimates put the figure as high as 50%.

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They can start with Greece then.

France Wants To Outlaw Discrimination Against The Poor (Guardian)

In France it could soon be illegal to discriminate against people in poverty. Under proposed legislation – already approved by the senate and likely to be passed by the chamber of deputies – it would be an offence in France to “insult the poor” or to refuse them jobs, healthcare or housing. Similar laws banning discrimination on the grounds of social and economic origin already exist in Belgium and Bolivia, but the French version is said to be the most far-reaching. Anyone found guilty of discrimination against those suffering from “vulnerability resulting from an apparent or known economic situation” would face a maximum sentence of three years in prison and a fine of €45,000.

It is easy to judge the proposed French law as showing the worst excesses of the state, or to bemoan the practicalities of how difficult it could be to implement. But most of us are content to outlaw discrimination on the grounds of race, religion, or sex. Is it so ridiculous to add poverty to that list? And if it does feel ridiculous, why is that? Whether it’s the discrimination of people in poverty or how government should respond to it, this is not a problem just for other countries. “People think that because we are poor, we must be stupid,” Oréane Chapelle, an unemployed 31-year-old from Nancy told Le Nouvel Observateur. Micheline Adobati, 58, her neighbour, who is a single mother with no job and five children, said: “I can’t stand social workers who tell me that they’re going to teach me how to have a weekly budget.”

One study reported by The Times found that 9% of GPs, 32% of dentists and 33% of opticians in Paris refused to treat benefit claimants who lacked private medical insurance. Doctors say they are “reluctant to take on such patients for fear that they will not get paid”. Does any of this sound familiar? These are attitudes – and even outright discrimination – that have been growing in Britain for some time. You can hear it in stories about local authorities monitoring how much people drink or smoke before awarding emergency housing payments. Or when politicians respond to a national food bank crisis by saying the poor are going hungry because they don’t know how to cook. It is there in the fact that it’s now all too common for landlords to refuse to rent flats to people on benefits. Britain is front and centre of its own discrimination of the poor – whether that’s low-income workers, benefit claimants, or the recurring myth that these are two separate species.

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Another farce that keeps on giving.

Dutch Journalist, MH17 Expert: ‘UN Tribunal Attempt to Hide Kiev’s Role’ (RI)

The proposed UN-backed MH17 tribunal is a “desperate attempt to hide Kiev’s responsibility”, Dutch journalist and blogger Joost Niemoller argues in his post “How Chess Player Putin Wins the MH17 Game”. Niemoller is no layman. In October 2014 he published a book on the MH17 disaster whose title De Doofpotdeal (“The Cover Up Deal”) summarizes its key argument. The inside flap explains what the author means:

“The Netherlands took charge of the investigation into the cause of the disaster, but agreed to grant a covert deal to Kiev. It thus became a pawn in an international political chess game. Unvarnished Cold War rhetoric is making a comeback. Putin here is the ultimate bad guy. What he says is labeled as poisonous propaganda in the West. Meanwhile, it seems, all those concerned suffer from tunnel vision. Can we still be assured that the investigators do their work independently and objectively?”

In his piece, Niemoller laments the shortcomings of the Dutch Safety Board, the body charged with conducting the investigations on the MH17 disaster. The ever-postponed deadline – the final report might be released at the end of the year, hence one and a half year after the crash, but that too is still uncertain – he finds perplexing:

“When the co-operating countries, the JIT (Joint Investigation Team), intend to complete their probe, is not known. Then, something gets leaked to the press: ‘At the end of this year’. With which legal framework? It is not yet known. Under which conditions? No idea. How will the co-operation between the Ukrainian, the JIT and Dutch Safety Board unfold?” “Everything is vague and secret. That is not the way it should be for such an important study.”

Niemoller contrasts this with the approach taken by Moscow:

“Russia proposed last year to conduct an international study based on research carried out by the UN – and not by means of a secret deal of countries, where one of the possible culprits, namely Ukraine, has veto power.”

Niemoller, a Dutchman, laments the dubious role of his country, especially when considering that it was the one affected most by the MH17 tragedy: 193 of the 298 victims were Dutch. And yet, Niemoller says:

“What we know for sure is that the Netherlands from day zero intensely cooperates with Kiev. What we know is that the Russians are kept out and that there is a blame game played against Putin.”

Now Niemoller focuses his attention on the role Russia is about to play. He argues that Moscow holds all the cards, and that Kiev & co apparently hold none:

“When the Russians said that if a BUK had been fired by the separatists, they would have certainly seen it on their radar, the Russians indicated that they know much more”. “After a year, there is still no evidence of that alleged separatist Buk on the table. Kindergarten-level work from Bellingcat has been dismissed. And there was no ‘Buk-track’ through the Donbas region.”

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“..1) our society faces a crisis, and 2) the existing political parties are not up to the task of comprehending what society faces.”

Potemkin Party (Jim Kunstler)

The “to do” list for rearranging the basic systems of daily life in America is long and loaded with opportunity. Every system that is retooled contains jobs and social roles for people who have been shut out of the economy for two generations. If we do everything we can to promote smaller-scaled local farming, there will be plenty of work for lesser-skilled people to do and get paid for. Saying goodbye to the tyranny of Big Box commerce would open up vast vocational opportunities in reconstructed local and regional networks of commerce, especially for young people interested in running their own business.

We need to prepare for localized clinic-style medicine (in opposition to the continuing amalgamation and gigantization of hospitals, with its handmaidens of Big Pharma and the insurance rackets). The train system has got to be reborn as a true public utility. Just about every other civilized country is already demonstrating how that is done — it’s not that difficult and it would employ a lot of people at every level. That is what the agenda of a truly progressive political party should be at this moment in history. That Democrats even tolerate the existence of evil entities like WalMart is an argument for ideological bankruptcy of the party. Democratic Presidents from Carter to Clinton to Obama could have used the Department of Justice and the existing anti-trust statutes to at least discourage the pernicious monopolization of commerce that Big Boxes represented.

By the same token, President Obama could have used existing federal law to break up the banking oligarchy starting in 2009, not to mention backing legislation to more crisply define alleged corporate “personhood” in the wake of the ruinous “Citizens United” Supreme Court decision of 2010. They don’t even talk about it because Wall Street owns them. So, you fellow disaffected Democrats — those of you who can’t go over to the other side, but feel you have no place in your country’s politics — look around and tell me who you see casting a shadow on the Democratic landscape. Nobody. Just tired, corrupt, devious old Hillary and her nemesis Bernie the Union Hall Champion out of a Pete Seeger marching song.

I’ve been saying for a while that this period of history resembles the 1850s in America in two big ways: 1) our society faces a crisis, and 2) the existing political parties are not up to the task of comprehending what society faces. In the 1850s it was the Whigs that dried up and blew away (virtually overnight), while the old Democratic party just entered a 75-year wilderness of irrelevancy. God help us if Trump-o-mania turns out to be the only alternative. Oh, by the way, notice that the lead editorial in Monday’s New York Times is a plea for transgender bathrooms in schools. What could be more important?

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The western model has died.

It’s Really Very Simple (Dmitry Orlov)

The old world order, to which we became accustomed over the course of the 1990s and the 2000s, its crises and its problems detailed in numerous authoritative publications on both sides of the Atlantic—it is no more. It is not out sick and it is not on vacation. It is deceased. It has passed on, gone to meet its maker, bought the farm, kicked the bucket and joined the crowd invisible. It is an ex-world order. If we rewind back to the early 1980s, we can easily remember how the USSR was still running half of Europe and exerting major influence on a sizable chunk of the world. World socialist revolution was still sputtering along, with pro-Soviet regimes coming in to power here and there in different parts of the globe, the chorus of their leaders’ official pronouncements sounding more or less in unison.

The leaders made their pilgrimages to Moscow as if it were Mecca, and they sent their promising young people there to learn how to do things the Soviet way. Soviet technology continued to make impressive advances: in the mid-1980s the Soviets launched into orbit a miracle of technology—the space station Mir, while Vega space probes were being dispatched to study Venus. But alongside all of this business-as-usual the rules and principles according which the “red” half of the globe operated were already in an advanced state of decay, and a completely different system was starting to emerge both at the center and along the periphery. Seven years later the USSR collapsed and the world order was transformed, but many people simply couldn’t believe in the reality of this change.

In the early 1990s many political scientists were self-assuredly claiming that what is happening is the realization of a clever Kremlin plan to modernize the Soviet system and that, after a quick rebranding, it will again start taking over the world. People like to talk about what they think they can understand, never mind whether it still exists. And what do we see today? The realm that self-identifies itself as “The West” is still claiming to be leading economically, technologically, and to be dominant militarily, but it has suffered a moral defeat, and, strictly as a consequence of this moral defeat, a profound ideological defeat as well. It’s simple.

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Jul 252015
 
 July 25, 2015  Posted by at 9:09 am Finance Tagged with: , , , , , , ,  


Harris&Ewing Calvin Coolidge Inaugural Ball. March 4, Washington DC 1925

Emerging Market Currencies Fall to Record Low in ‘Violent’ Selloff (Bloomberg)
Emerging Market Currencies Crash On Fed Fears And China Slump (AEP)
China’s Global Ambitions, With Loans and Strings Attached (NY Times)
How China Can Create the $68 Trillion Consumer Economy (Bloomberg)
The Eurasian Big Bang – China, Russia Run Rings Around Washington (Pepe Escobar)
How Tsipras and Syriza Outmaneuvered Merkel and the Eurocrats (Slavoj Zizek)
Europe’s Civil War (Slaughter)
Greek Bonds To Resume Trading As Luxembourg Exchange Lifts Ban (Bloomberg)
Open Letter to Yanis Varoufakis & Dominique Strauss-Khan (Tremonti & Savona)
Syriza’s Covert Plot During Crisis Talks To Return To Drachma (FT)
Greek Debt Crisis Talks Stall Over Choice Of Hotel, Security Issues (Guardian)
The Great Greece Fire Sale (Guardian)
Greece Loosens Capital Restrictions On Businesses (Reuters)
The Rift Between France And Germany Can’t Be Papered Over Anymore (MarketWatch)
Upcoming French Vote Could Send Shock Waves Across Europe (MarketWatch)
The Euro Is Driving Finland To Depression (AdamSmith.org)
US, EU Battle Over ‘Feta’ In Trade Talks (Reuters)
Facing The Future At The International Monetary Fund (BBC)
Pearson In Talks To Sell The Economist Too (Politico)

USD=safe haven.

Emerging Market Currencies Fall to Record Low in ‘Violent’ Selloff (Bloomberg)

Emerging-market currencies are in free fall. An index of the major developing-nation currencies fell to an all-time low this week, extending its drop over the past year to 19%, according to data compiled by Bloomberg going back to 1999. The Russian ruble, Colombia’s peso and the Brazilian real have fallen more than 30% over the past year for some of the worst global selloffs. China’s economic slowdown is pushing down commodity prices, weighing on raw-material exporters from Brazil to Mexico and South Africa. Adding to the pain is the expectation that the Federal Reserve will soon embark on the first interest rate increase since 2006, threatening to lure capital away from developing nations.

“This combination of a soft landing in China and a Fed that will normalize rates soon poses significant risks to emerging markets, especially their currencies,” Stephen Jen, a former IMF economist who is now managing partner at SLJ Macro Partners in London, wrote in a July 23 note. Jen said he expects “a violent sell-off in some emerging-market currencies in the second half this year.” While currency depreciation tends to spur growth by making exports cheaper, so far this is not happening because global trade has stalled, according to Citigroup and UBS. The IMF forecasts emerging markets will grow 4.2% this year, the slowest since 2009.

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Once again: USD=safe haven.

Emerging Market Currencies Crash On Fed Fears And China Slump (AEP)

The currencies of Brazil, Mexico, South Africa and Turkey have all crashed to multi-year lows as investors flee emerging markets and commodity prices crumble. The drastic moves came as fears of imminent monetary tightening by the US Federal Reserve combined with shockingly weak figures from China, which stoked fears that the country may be sliding into a deeper downturn and sent tremors through East Asia, Latin America and Africa. The Caixin/Markit manufacturing survey for China fell to a 15-month low of 48.2 in July, with a sharp drop in new export orders. Danske Bank said the slide “pours cold water” on hopes of a quick recovery from the slump seen earlier this year. Brazil’s real plummeted to a 12-year low of 3.34 to the dollar, reflecting the country’s heavy reliance on exports of iron ore and other raw materials to China.

The devaluation tightens the noose on Brazilian companies saddled with $188bn in dollar debt taken out during the glory days of the commodity boom. The oil group Petrobras alone raised $52bn on the US bond markets. Mexico’s peso hit a record low of 16.24 against the dollar. The country’s foreign exchange commission is mulling emergency action to defend the currency, despite the extreme reluctance of the Mexican authorities to meddle with market forces. Colombia’s peso collapsed 5.2pc to a historic low on Friday, a huge move in a single day. Similar dramas played out in Chile and a string of countries deemed vulnerable to the combined spill-overs from China and the US. The MSCI index of emerging market equities fell to 1.8pc to 36.92 and may soon test four-year lows.

Bernd Berg, from Societe Generale, said Brazil faces a “perfect storm” as the economy slides into deeper recession and corruption scandals spread. New worries about political risk may soon push the real to 3.60, a once unthinkable level.There is mounting concern that President Dilma Rousseff could be impeached for her failure to stop pervasive malfeasance at Petrobras. Brazil’s travails come just as the US nears full employment and the Fed prepares to raise interest rates for the first time in eight years. issuing what amounts to a “margin call” for emerging markets that have borrowed $4.5 trillion in dollars. Mr Berg said Brazil’s debt may be cut to junk status over coming months. This would be a humiliating blow for a country that thought it had escaped the endless cycle of debt booms and populist misrule, and saw itself as a pillar of a new BRICS-led global order.

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How much longer will the yuan be a credible currency though?

China’s Global Ambitions, With Loans and Strings Attached (NY Times)

Where the Andean foothills dip into the Amazon jungle, nearly 1,000 Chinese engineers and workers have been pouring concrete for a dam and a 15-mile underground tunnel. The $2.2 billion project will feed river water to eight giant Chinese turbines designed to produce enough electricity to light more than a third of Ecuador. Near the port of Manta on the Pacific Ocean, Chinese banks are in talks to lend $7 billion for the construction of an oil refinery, which could make Ecuador a global player in gasoline, diesel and other petroleum products. Across the country in villages and towns, Chinese money is going to build roads, highways, bridges, hospitals, even a network of surveillance cameras stretching to the Galápagos Islands.

State-owned Chinese banks have already put nearly $11 billion into the country, and the Ecuadorean government is asking for more. Ecuador, with just 16 million people, has little presence on the global stage. But China’s rapidly expanding footprint here speaks volumes about the changing world order, as Beijing surges forward and Washington gradually loses ground. While China has been important to the world economy for decades, the country is now wielding its financial heft with the confidence and purpose of a global superpower. With the center of financial gravity shifting, China is aggressively asserting its economic clout to win diplomatic allies, invest its vast wealth, promote its currency and secure much-needed natural resources.

It represents a new phase in China’s evolution. As the country’s wealth has swelled and its needs have evolved, President Xi Jinping and the rest of the leadership have pushed to extend China’s reach on a global scale. China’s currency, the renminbi, is expected to be anointed soon as a global reserve currency, putting it in an elite category with the dollar, the euro, the pound and the yen. China’s state-owned development bank has surpassed the World Bank in international lending. And its effort to create an internationally funded institution to finance transportation and other infrastructure has drawn the support of 57 countries, including several of the United States’ closest allies, despite opposition from the Obama administration.

Even the current stock market slump is unlikely to shake the country’s resolve. China has nearly $4 trillion in foreign currency reserves, which it is determined to invest overseas to earn a profit and exert its influence. China’s growing economic power coincides with an increasingly assertive foreign policy. It is building aircraft carriers, nuclear submarines and stealth jets. In a contested sea, China is turning reefs and atolls near the southern Philippines into artificial islands, with at least one airstrip able to handle the largest military planes. The United States has challenged the move, conducting surveillance flights in the area and discussing plans to send warships.

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Just plain dumb.

How China Can Create the $68 Trillion Consumer Economy (Bloomberg)

You’ve heard of Made in China. Get ready for Sold in China. For decades, China has exported cheap goods to the rest of the world even while domestic consumption waned. Now, the country’s shoppers could be set for a reboot. If the government delivers on its promise to transform the economy by encouraging spending on the high street, China’s consumer base has the potential to hit $67 trillion over the next decade, according to The Demand Institute, a think tank jointly run by The Conference Board and Nielsen. Global interest in Chinese shoppers is already high. Music doyenne Taylor Swift has teamed up with JD.com Inc., the second-largest e-commerce company in China, to sell a new fashion line designed specifically for Chinese shoppers.

At the movies, ticket sales are surging, with first-half box office revenue this year rising to 20 billion yuan ($3.2 billion), compared with just 4 billion yuan in all of 2008. The hard economic data are also showing a shift, albeit slowly. Consumption in China contributed 60% to gross domestic product growth in the first half, even as the country grew at its slowest in 25 years. Part of the spending increase is down to a government led push to shift the economy away from debt fueled investment and more toward consumption. But that won’t happen overnight: Consumption’s share of the economy eased to 28% in 2011 from 76% in 1952, according to the Demand Institute. “There are signs that the decline in consumption’s share of GDP may have abated, but it has certainly not yet been reversed,” the report’s lead authors said.

In its analysis, the Demand Institute modeled two scenarios, both based on GDP growth slowing from around 7% to 4% by 2019 where it would stay until 2025. Under the first scenario – which they figure is the most likely – the consumption share of GDP would remain constant at about 28% between 2015 and 2025, with total spending reaching 330 trillion yuan or $53 trillion. In the second case, where consumption reaches 46% of output by 2025, or annual spending rises 126%, consumption would balloon to 420 trillion yuan, or $68 trillion. The analysis is based on the development of 167 countries between 1950 and 2011. Countries with similar underlying fundamentals to China saw consumption remain flat relative to GDP for some time after it stopped falling. If China’s shoppers do take off, it will be from a relatively low base. Using the latest available comparative data from 2011, consumption in China made up 28% of real GDP, according to the report. That compares with 76% in the U.S., 67% in Brazil, 60% in Japan, 59% in Germany, and 52% in India.

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Escobar continually fails to address the Chinese economic slump.

The Eurasian Big Bang – China, Russia Run Rings Around Washington (Pepe Escobar)

Let’s start with the geopolitical Big Bang you know nothing about, the one that occurred just two weeks ago. Here are its results: from now on, any possible future attack on Iran threatened by the Pentagon (in conjunction with NATO) would essentially be an assault on the planning of an interlocking set of organizations – the BRICS nations (Brazil, Russia, India, China, and South Africa), the SCO (Shanghai Cooperation Organization), the EEU (Eurasian Economic Union), the AIIB (the new Chinese-founded Asian Infrastructure Investment Bank), and the NDB (the BRICS’ New Development Bank) – whose acronyms you’re unlikely to recognize either. Still, they represent an emerging new order in Eurasia. Tehran, Beijing, Moscow, Islamabad, and New Delhi have been actively establishing interlocking security guarantees.

They have been simultaneously calling the Atlanticist bluff when it comes to the endless drumbeat of attention given to the flimsy meme of Iran’s “nuclear weapons program.” And a few days before the Vienna nuclear negotiations finally culminated in an agreement, all of this came together at a twin BRICS/SCO summit in Ufa, Russia – a place you’ve undoubtedly never heard of and a meeting that got next to no attention in the U.S. And yet sooner or later, these developments will ensure that the War Party in Washington and assorted neocons (as well as neoliberalcons) already breathing hard over the Iran deal will sweat bullets as their narratives about how the world works crumble.

With the Vienna deal, whose interminable build-up I had the dubious pleasure of following closely, Iranian Foreign Minister Javad Zarif and his diplomatic team have pulled the near-impossible out of an extremely crumpled magician’s hat: an agreement that might actually end sanctions against their country from an asymmetric, largely manufactured conflict. Think of that meeting in Ufa, the capital of Russia’s Bashkortostan, as a preamble to the long-delayed agreement in Vienna. It caught the new dynamics of the Eurasian continent and signaled the future geopolitical Big Bangness of it all. At Ufa, from July 8th to 10th, the 7th BRICS summit and the 15th Shanghai Cooperation Organization summit overlapped just as a possible Vienna deal was devouring one deadline after another.

Consider it a diplomatic masterstroke of Vladmir Putin’s Russia to have merged those two summits with an informal meeting of the Eurasian Economic Union (EEU). Call it a soft power declaration of war against Washington’s imperial logic, one that would highlight the breadth and depth of an evolving Sino-Russian strategic partnership. Putting all those heads of state attending each of the meetings under one roof, Moscow offered a vision of an emerging, coordinated geopolitical structure anchored in Eurasian integration. Thus, the importance of Iran: no matter what happens post-Vienna, Iran will be a vital hub/node/crossroads in Eurasia for this new structure.

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Zizek is an intriguing writer.

How Tsipras and Syriza Outmaneuvered Merkel and the Eurocrats (Slavoj Zizek)

Why this horror? Greeks are now asked to pay a high price, but not for a realist perspective of growth. The price they are asked to pay is for the continuation of the “extend and pretend” fantasy. They are asked to ascend to their actual suffering in order to sustain another’s—the Eurocrats’—dream. Gilles Deleuze said decades ago: “Si vous êtes pris dans le rêve de l’autre, vous êtes foutus” (“If you are caught into another’s dream, you are fucked.” This is the situation in which Greece now finds itself: Greeks are not asked to swallow many bitter pills for a realist plan of economic revival, they are asked to suffer so that others can go on dreaming their dream undisturbed. The one who now needs awakening is not Greece but Europe.

Everyone who is not caught in this dream knows what awaits us if the bailout plan is enacted: another €90 billion or so will be thrown into the Greek basket, raising the Greek debt to €400 or so billions (and most of those billions will quickly return back to Western Europe—the true bailout is the bailout of German and French banks, not of Greece), and we can expect the same crisis to explode again in a couple of years. But is such an outcome really a failure? At an immediate level, if one compares the plan with its actual outcome, obviously yes. At a deeper level, however, one cannot avoid a suspicion that the true goal is not to give Greece a chance but to change it into an economically colonized semi-state kept in permanent poverty and dependency, as a warning to others. But at an even deeper level, there is again a failure – not of Greece, but of Europe itself, of the emancipatory core of European legacy.

The “no” of the referendum was undoubtedly a great ethico-political act: against a well-coordinated enemy propaganda spreading fears and lies, with no clear prospect of what lies ahead, against all pragmatic and “realist” odds, the Greek people heroically rejected the brutal pressure of the EU. The Greek “no” was an authentic gesture of freedom and autonomy. The big question is, of course, what happens the day after, when we have to return from the ecstatic negation to the everyday dirty business? And here, another unity emerged, the unity of the “pragmatic” forces (Syriza and the big opposition parties) against the Syriza Left and Golden Dawn. But does this mean that the long struggle of Syriza was in vain, that the “no” of the referendum was just a sentimental empty gesture destined to make the capitulation more palpable?

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“The Greeks, for their part, have been putting their national identity ahead of their pocketbooks, in ways that economists do not understand and continually fail to predict. ”

Europe’s Civil War (Slaughter)

The negotiations leading up to the latest tentative deal on Greece’s debt brought into relief two competing visions of the European Union: the flexible, humane, and political union espoused by France, and the legalistic and economy-focused union promoted by Germany. As François Heisbourg recently wrote, “By openly contemplating the forced secession of Greece [from the eurozone], Germany has demonstrated that economics trumps political and strategic considerations. France views the order of factors differently.” The question now is which vision will prevail? The Greeks, for their part, have been putting their national identity ahead of their pocketbooks, in ways that economists do not understand and continually fail to predict.

It is economically irrational for Greeks to prefer continued membership in the eurozone, when they could remain in the EU with a restored national currency that they could devalue. But, for the Greeks, eurozone membership does not mean only that they can use the common currency. It places their country on a par with Italy, Spain, France, and Germany, as a “full member” of Europe – a position consistent with Greece’s status as the birthplace of Western civilization. Whereas that stance reflects the vision of an “ever-closer union” that motivated the EU’s founders, Germany’s narrower, economic understanding of European integration cannot inspire ordinary citizens to support the compromises necessary to keep the EU together. Nor can it withstand the inevitable attacks directed against EU institutions for every action and regulation that citizens dislike and for which national politicians want to avoid responsibility.

The original European Economic Community, created by the Treaty of Rome in 1957, was, as the name indicates, economic in nature. The Treaty itself was hard-headed, grounded in the converging economic interests of France and Germany, with the Benelux countries and Italy rounding out the basis of a new European economy. But economic integration was underpinned by a vision of peace and prosperity for Europe’s peoples, after centuries of unprecedented violence had culminated in two world wars that reinforced the seemingly eternal enmity between France and Germany. And, indeed, the language of a larger political union was embedded in Europe’s treaties, to be interpreted by the European Court of Justice and subsequent generations of European decision-makers in ways that supported the construction of a common European polity and identity, as well as a unified economy.

My mother, a young Belgian in the 1950s, remembers the idealism and the excitement of the European federalist movement, with its promise that her generation could create a different future for Europe and the world. To be sure, the vision of a United States of Europe, espoused by many of those early federalists, looked backward to the founding of the US, rather than forward to a distinctive European venture. Nonetheless, the EU that emerged – which pools sovereignty sufficiently to benefit from being a powerful regional entity in a world of almost 200 countries while maintaining its members’ distinct languages and cultures – is something new.

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At what rates, though?

Greek Bonds To Resume Trading As Luxembourg Exchange Lifts Ban (Bloomberg)

The Luxembourg Bourse said it authorized a resumption of trading Greek bonds on Friday. The exchange lifted a suspension on trading securities issued by 25 Greek entities, from government bonds to those of Alpha Bank SA and Hellenic Telecommunications Organization SA, according to a statement. Trading was halted at the end of June as the Greek government shuttered its financial markets. The nation’s banks reopened on July 20, though limits on withdrawals are only being eased gradually and officials said they will extend the shutdown of its stock and bond markets at least through Monday. Greek bond trading was scant even before the suspension, with the central bank’s electronic secondary securities market, or HDAT, recording no turnover on the government’s notes in June, according to Athens News Agency.

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Nice headline, not enough substance.

Open Letter to Yanis Varoufakis & Dominique Strauss-Khan (Tremonti & Savona)

Dear Yanis, dear Dominique: There is a place on earth that represents Europe’s very roots: Greece. Let us begin there. Athens, April 28, 1955. Albert Camus’ conference on “The future of Europe”.[1] On this occasion, participants agreed that the structural characteristics of European civilization are essentially two: the dignity of the individual; a spirit of critique. At that time (1955), human dignity was a focus of much debate in Europe. Nobody doubted, however, the European “spirit of critique”. There were no doubts about the rationalist, Cartesian, Enlightened vision, which was agent and engine of continuous progress on the continent, as much in terms of technical-scientific domination as for political, social and economic domination.

Today, more than half a century later, we might well invert these two: human dignity is widely appreciated throughout Europe, albeit challenged by dramatic problems generated by immigration; it is the force of reason in Europe that no longer underlies continuous progress. Why is this so? What happened? It was not some shadowy curse that descended upon the continent. It was not some evil hand that sowed our fields with salt. So what did happen? Just as the dinosaurs died off because an asteroid slammed into the planet, so was dinosaur Europe struck by 4 different phenomena. Each was revolutionary even when taken alone, but all together, one after another, they proved enough to cause an explosion, an implosion, paralysis: enlargement, globalization, the euro, the crisis.

And that is not all. During the process of political union, we took a wrong turn at one point. We failed to unite that which could be and needed to be united (such as defense). Instead, we united that which did not need to be united (for example, the size of vegetables). This is why, in Europe today, it is not “more union” that we need. What we need is to propose, discuss and design new “articles of confederation”. Dear Yanis, dear Dominique, we agree on the fact that life and civilization cannot be reduced to mere calculations of interest rates; we agree that today, in Europe, it is not the technicalities that need changing but the political vision. History teaches us that in order to reach our goal we must change what is inside people’s heads or – at the very least – admit that mistakes have been made. We agree that the piazzas of protest are to be avoided, but that we must find a new road, down which we can all walk, regardless of our country or political party of origin.

Paolo Savona, Emeritus professor of Political economy
Giulio Tremonti, Senator of the Italian Republic

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Some doubtful claims being made here, but an interesting insight. Let’s first see what Syriza has to say about it, though.

Syriza’s Covert Plot During Crisis Talks To Return To Drachma (FT)

Arresting the central bank’s governor. Emptying its vaults. Appealing to Moscow for help. These were the elements of a covert plan to return Greece to the drachma hatched by members of the Left Platform faction of Greece’s governing Syriza party. They were discussed at a July 14 meeting at the Oscar Hotel in a shabby downtown district of Athens following an EU summit that saw Greece cave to its creditors, leaving many in the party feeling despondent and desperate. The plans have come to light through interviews with participants in the meeting as well as senior Greek officials and sympathetic journalists who were waiting outside the gathering and briefed on the talks.

They offer a sense of the chaos and behind-the-scenes manoeuvring as Greece nearly crashed out of the single currency before prime minister Alexis Tsipras agreed to the outlines of an €86bn bailout at the EU summit. With that deal still to be finalised, they are also a reminder of the determination of a sizeable swath of Mr Tsipras’ leftwing party to return the country to the drachma and increase state control of the economy. Chief among them is Panayotis Lafazanis, the former energy and environment minister and leader of Syriza’s Left Platform, which unites a diverse group of far left activists — from supporters of the late Venezuelan president Hugo Chávez to old-fashioned communists. He was eventually sacked in a cabinet reshuffle after voting against reforms tied to the bailout.

“Obviously it was a moment of high tension,” a Syriza activist said, describing the atmosphere as the meeting opened. “But you were also aware of a real revolutionary spirit in the room.” Yet even hardline communists were taken aback when Mr Lafazanis proposed that the Syriza government should seize control of the Nomismatokopeion, the Greek mint, where the bulk of the country’s cash reserves are kept. “Our plan is that we go for a national currency. This is what we should have done already. But we can do it now,” he said, according to people present at the meeting. Mr Lafazanis said the reserves, which he claimed amounted to €22bn, would pay for pensions and public sector wages and also keep Greece supplied with food and fuel while preparations were made for launching a new drachma.

Meanwhile, the central bank would immediately lose its independence and be placed under government control. Its governor, Yannis Stournaras, would be arrested if, as expected, he opposed the move. “For people planning a conspiracy to undermine the Greek state, they were pretty open about it,” said one reporter who staked out the event. The plan demonstrates the apparently ruthless determination of Syriza’s far leftists to pursue their political aims — but also their lack of awareness of the workings of the eurozone financial system. For one thing, the vaults at the Nomismatokopeion currently hold only about €10bn of cash — enough to keep the country afloat for only a few weeks but not the estimated six to eight months required to prepare, test and launch a new currency.

The Syriza government would have quickly found the country’s stash of banknotes unusable. Nor would they be able to print more €10 and €20 banknotes: From the moment the government took over the mint, the ECB would declare Greek euros as counterfeit, “putting anyone who tried to buy something with them at risk of being arrested for forgery,” said a senior central bank official. “The consequences would be disastrous. Greece would be isolated from the international financial system with its banks unable to function and its euros worthless,” the official added. As the details of the Left Platform meeting have leaked out, some political opponents are demanding an accounting.

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Permit me a chuckle.

Greek Debt Crisis Talks Stall Over Choice Of Hotel, Security Issues (Guardian)

In an inauspicious start to talks over awarding Greece a third bailout, international officials have postponed the negotiations after failing to agree with their hosts where they will stay and how they will operate when in Athens. Mission chiefs representing the troika of creditors – the European commission, European Central Bank and International Monetary Fund – were forced to delay discussions over the €86bn (£61bn) programme after it emerged they had been unable to agree on a secure venue in the capital. “There are some logistical issues to solve, notably security-wise,” said a European commission official. “Several options are on the table.”

The leftwing government in Athens, which had previously vowed to never let the auditors step foot in Greece again, is understood to be irritated by demands that the creditor team is given free access to ministries and files. Acutely aware of the anger the monitors have triggered in the past, due to the austerity measures attached to previous bailouts, it has insisted the mission heads stay in a hotel outside the Greek capital. “A lot of trust has been lost and the big issue is who they are going to see, what ministries they are going to be let into, what files are going to be made available,” said Anna Asimakopoulou, a shadow finance minister with the main opposition New Democracy party. “That, of course, will be a big defeat for the government given that negotiations have moved to Brussels for the past six months but that is what they want, due diligence at a deeper level. Holding talks in a hotel is just not practical.”

Symbolically, the inspectors’ return is humiliating for Prime Minister Alexis Tsipras who won power in January promising to dismantle the troika. The European commission wants a deal to be reached on a bailout programme by the second half of August when Greece must honour a €3.4bn debt repayment to the ECB. But with the talks also expected to be extremely tough there are few who believe that deadline will be met. Instead EU officials have signalled the debt-stricken country will likely be given a bridging loan – as it was earlier this week – to avert default. “It is difficult to envisage these negotiations ending before early September at the earliest,” said Asimalopoulou, the shadow finance minister.

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Dead in the water.

The Great Greece Fire Sale (Guardian)

While Tsipras has been forced into a humiliating climbdown over the sale of state assets, he has repeatedly branded the entire bailout plan as a bad deal that he doesn’t believe in. Unions with ties to the governing party have already vowed to “wage war” to stop the sale of docks in Piraeus, where the Chinese conglomerate, Cosco, currently manages three piers. With the debt-stricken country on its knees, officials have stressed that the prime minister will fight to ensure the denationalisations are not seen as a fire sale. However, independent observers fear just that. “Privatisation in Greece right now means a fire sale,” political economist Jens Bastian said.

Bastian was one of the officials responsible for privatisation under the European commission’s Taskforce for Greece, a body of experts distinct from the troika. He thinks it was a “political mistake” to set a target to raise €50bn from asset sales, in the absence of support from Greek politicians across the political spectrum, from the centre-right New Democracy party, to Pasok on the centre-left and Syriza on the left. “We have never had a political majority to embrace the idea of privatisation. How are you going to create the political momentum that has been absent in the past years under more difficult conditions today?” he asks. Greece’s creditors share such scepticism. Their answer is tighter controls. The privatisation fund will be managed by Greeks under the close watch of creditors.

The privatisation fund has few precedents, although it has been compared to the Treuhandanstalt, the German agency created in the dying days of the GDR to privatise East German assets shortly before reunification. Greece’s former finance minister, Yanis Varoufakis, was one of the first to draw the parallel, although others offer the comparison unprompted. Peter Doyle, a former IMF economist, says the Treuhand offers the closest parallels: the agency had full control over government ministries to sell assets quickly. “The principal task was to sell these things to somebody for cash.”

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Big relief for the entire economy. Hospitals, zoos, tourist industry, anywhere there’s a need for money transfers.

Greece Loosens Capital Restrictions On Businesses (Reuters)

Greece started loosening restrictions on foreign transfers by businesses on Friday, unblocking imports held up after the country introduced capital controls last month. “The daily limit (on money transfers) has been raised to 100,000 euros from 50,000 euros,” central bank governor Yannis Stournaras told reporters, adding that this covered almost 70% of requests. Greek businesses have been hit by limits on transferring money abroad to pay for imports of raw material and other items since capital controls started on June 29, and have had to apply to a special committee for permission to pay their foreign suppliers, a time-consuming process. Stournaras said conditions for businesses were improving and authorities aimed to resolve pending issues in the next 10 days.

“As far as approvals are concerned, we are now very close to the monthly imports the Greek economy was registering before the crisis,” he said after meeting business leaders on Friday. Greece reopened its banks on Monday after it secured a €7.2 billion bridging loan to pay its debt obligations and enacted tough reforms demanded by its lenders to start negotiations on a third bailout. The banks’ three-weeks shutdown has cost Greek businesses €3 billion, said the head of Athens Chamber of Commerce and Industry Constantinos Michalos, with many firms warning of closures as a result of the capital curbs. Greece has approved requests for money transfers totaling €1.585 billion from June 29 to July 23, much of it earmarked for energy imports, according to the Bank of Greece on Friday.

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But its economy says that France can be made to kowtow.

The Rift Between France And Germany Can’t Be Papered Over Anymore (MarketWatch)

A “temporary” Greek exit from economic and monetary union, proposed by Germany, supported by many German-leaning euro members, yet hotly opposed by France and Italy, was narrowly averted in the marathon negotiations that ended on July 13. But the suggestion may still eventually decide Greece’s fate in the euro. The divergence between the two countries traditionally seen as the motor of the European Union demonstrates new fragility in Franco-German relations that looks likely to cast a shadow over European cooperation for some time to come. Wolfgang Schaeuble, the German FinMin, whose hard line on Greece ended up determining Angela Merkel’s negotiating stance, has made clear in the week since the ill-tempered European summit on Greece that he still favors a Greek exit from the euro .

Once it would have feared European isolation, but Germany now puts forward views opposed by France with demonstrative self-confidence. This reflects not only manifest German economic strength but also EMU membership by several smaller nations from central and eastern Europe that take an even more robust attitude than Germany on the Greek economy. From the Baltic to former Yugoslavia, small euro states that were previously part of the Eastern bloc have been converted to German allies and steadfast proponents of monetary orthodoxy. European changes since German reunification 25 years ago represent a double blow for France. The Germans used to be France’s buffer zone against the Soviet Union.

Yet as the new round of EMU antagonism shows, a cluster of small ex-communist countries now play a similar role – but now as buffer states to protect Germany against France. We shall see reinforced efforts in coming months by French President François Hollande and Italian Prime Minister Matteo Renzi to build a European coalition opposing German-style austerity — an alliance that could find support (depending on economic and political developments) in Madrid and Lisbon. The problem for Hollande is the same one that faces Sigmar Gabriel, the German Social Democrat leader and deputy chancellor in Merkel’s coalition. Full-blooded efforts to resist the Merkel-Schaeuble line on Greece, and downgrade efforts at economic discipline or supply-side reforms, are likely to generate strong countervailing pressures.

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Nothing new.

Upcoming French Vote Could Send Shock Waves Across Europe (MarketWatch)

Much has been made of the rift between Germany and France over how the European Union has handled the Greek crisis, with Berlin maintaining a hard line on debt and austerity and Paris, belatedly, calling for a more flexible approach. [..] it is the partnership of equals between these two countries that has driven European integration. The problem is that France has fallen into a political malaise with a series of weak leaders and a disenchantment with politicians as a whole. This malaise results largely from prolonged economic doldrums — stagnant growth, persistent high unemployment — as France tries to conform to the fiscal strictures dictated by Germany’s narrow view of economics and enshrined in the treaty terms for monetary union.

French President François Hollande and his prime minister, Manuel Valls, have abandoned the campaign pledges to foster growth that brought them to power and instead are trying to make France more like Germany. To call the results disappointing would be an understatement. The political backlash creates an opening for the anti-euro, anti-EU National Front under Marine Le Pen, who continues to surge in polls as a leading contender for president in 2017. Le Pen, the daughter of National Front founder Jean-Marie Le Pen, announced this month that she will put her electability to the test this December in regional elections as she heads the party’s campaign in the depressed Nord-Picardy region in northern France.

The elections for governing councils in France’s 13 newly re-constituted regions will provide the broadest test yet of Marine Le Pen’s efforts to soften the National Front’s image and make it more acceptable to mainstream voters. Polls have her winning that election in two rounds of voting, which wouldgive her considerable leverage heading into the presidential campaign. In addition, her niece, Marion Maréchal-Le Pen, the 25-year-old granddaughter of Jean-Marie Le Pen and currently a National Front member of Parliament, is leading the regional election polls in the more prosperous Provence region in southern France.

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Brussels elects to look the other way, but Finland can be the black swan that tears it all apart.

The Euro Is Driving Finland To Depression (AdamSmith.org)

The Finnish economy has been hit by three shocks over the past decade:
• Nokia has more or less disappeared;
• The paper industry is in crisis;
• And recently the Russian crisis has hurt Finland’s economy too.

These have all caused a very significant change in Finland’s current account balance, which over the past 15 years has gone from a sizeable surplus (around 9% of GDP in 2001) to a small deficit (around -1% of GDP in past four years). This would under normal circumstances require a (real) exchange rate depreciation to restore competitiveness. However, as Finland is a member of the euro such adjustment has not been possible through a nominal depreciation of the currency and instead Finland has had to rely on an internal devaluation through lower price and wage growth. However, Finland’s labour market is excessively regulated and non-wage costs are high, which means that the internal devaluation has been very sluggish. As a result growth has suffered significantly.

In fact, Finland’s real GDP level today is around 5% lower than at the onset of the crisis in 2008. This makes the present recession – or rather depression – deeper and longer than the Great Depression in 1930 and the large Finnish banking crisis of the 1990s. Rightly we should call the present crisis Finland’s Greater Depression. ECB policy obviously has not helped. First of all, the 2011 rate hikes from the ECB had a significantly negative impact on Finnish growth. Second, the shocks that have hit the economy are decisively asymmetrical in nature. This means that Finnish growth increasingly has come out of sync with the core Eurozone countries – such as Germany, Belgium and France.

Hence, Finland is a very good example that the eurozone is not an “Optimal Currency Area”, where one monetary policy fits all countries. Concluding, the crisis would likely have been a lot shorter and less deep had Finland had its own currency. This would not have protected Finland from the shocks – Nokia would still have done badly, and exports to Russia would still have been hit by the crisis in the Russian economy, but a currency depreciation would have done a lot to offset these shocks.

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Guess who’ll win?

US, EU Battle Over ‘Feta’ In Trade Talks (Reuters)

EU plans to seal the world’s largest free trade deal with the United States are threatened by intractable differences over food names, none more so than the right of cheese makers to use the term “feta”. Negotiators talk of accelerated progress and hope to thrash out a skeleton agreement on a Transatlantic Trade and Investment Partnership (TTIP) within a year, aiming for a major boost to growth in the advanced Western economies. But geographical indications (GIs), a 1,200-long list ranging from champagne to Parma ham, present a major headache. At the same time as euro zone leaders are ordering Greece to balance its budget and liberalise its product markets, EU trade negotiators are fighting to defend its signature cheese.

GIs are a cornerstone of EU agricultural and trade policy, designed to ensure that only products from a given region can carry a name. To the United States, it smacks of protectionism. “It’s politically extremely important in Europe. As (the EU) phases out direct agricultural support, there has to be a trade-off by promising to do more in trade policy,” said Hosuk Lee-Makiyama, director of the European Centre for International Political Economy. “For 20 years they have been fighting about it at the World Trade Organisation even if the economic value is disputed.” EU member states will have to approve any deal and will need food name protection as compensation for EU farmers facing a flood of U.S. beef and pork imports.

Agriculture is not a sizeable part of either the EU or the U.S. economy, but farmers retain political muscle, as French livestock and dairy producers showed this week by forcing the government to offer aid after protests including road blockades. Washington does not object to protection of niche items such as British Melton Mowbray pork pies. But negotiators face a very difficult task to find a balance for widely produced feta, Parma ham or parmesan, the biggest maker of which is America’s Kraft Foods. The EU introduced GIs and designations of origin in 1992, securing protection for Greek feta, which means “slice”, 10 years later when it declared that non-Greek producers’ use of the term was “fraudulent”.

It is a view echoed by Christina Onassis, marketing manager at the Lytras & Sons dairy in central Greece. She describes the unique plants and microflora of Greece’s mountainous regions and says feta “imitations” mostly use cow’s milk. “For 6,000 years, Greece has produced continuously using milk from ewes and goats,” she said. “We also ripen the cheese for days, which does not happen in any other feta production.”

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Dinosaur fund.

Facing The Future At The International Monetary Fund (BBC)

Maybe it has been the strange twists and turns of the Greek financial crisis that have brought the anomalies of who it is that runs the the IMF into sharper focus – whatever the reason the Fund’s leaders certainly seem concerned. “Our governance needs to be fully modernised to reflect an ever-changing world,” said David Lipton, the IMF’s first deputy managing director – spelling out the problem facing the organisation as he sees it. “If you’re China or a fast-growing country, you need to know that there’ll be a series of changes that enable your role at the IMF to grow,” he told the BBC World Service’s In the Balance programme. Since being set up in 1944 at the Bretton Woods Conference along with the World Bank, the IMF has played a critical and at times controversial role in stabilising the global economy.

It has intervened in national economies with huge loans and often a highly prescriptive set of loan conditions as it did in the 1997 and 1998 East Asian crisis, in Africa throughout the last three decades and most recently in the eurozone in Ireland in 2010, in Portugal in 2011 – and of course, now in Greece. IMF loan agreements usually require severe cut-backs in government spending – austerity with a capital ‘A’ – tax reform, pensions reforms and a crackdown on corruption. The Fund rarely leaves a country with more friends than it had when it arrived. But recently there has the increasingly noisy criticism of the IMF’s pecking order. For many outside the Fund there is the nagging question which comes along with its loans and the calls for countries to reform their economies: “Says who?”

Under the rules agreed when the IMF was established, every IMF managing director must be a European. Currently it is Christine Lagarde – and in fact five of the 11 IMF’s leaders have been French. Meanwhile, the head of the World Bank must be an American, say those same rules. So when unpopular measures are demanded by the IMF in exchange for funding for a country, there is a sense that the West, the world’s richer economies, the ones that have been calling the shots for the last 70 years and are seemingly willing to ignore the rapidly shifting global economic landscape – are still calling the shots. Harvard University’s Prof Kenneth Rogoff, and formerly chief economist at the IMF said: “The number one issue for the IMF, is to dispense with the ridiculous requirement that the managing director be a European, and that the World Bank be run by an American.” “It’s an incredible anachronism.”

Prof Ngaire Woods, an expert in global governance and dean of the Blavatnik school of government, Oxford University, goes further: “I think the risk to the IMF is irrelevance and marginalisation.” “Emerging economies are using other things – anything but rely on the IMF. If you’re sitting in Zambia, Brazil or China, it looks like an organisation that’s still run by the USA and Europe.”

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Dinosaur rag.

Pearson In Talks To Sell The Economist Too (Politico)

Pearson is in advanced talks to sell its 50% stake in the Economist magazine, people familiar with the matter say. The deal would be valued at about £500 million, one of the people said. The prospective buyer of the stake was described as a “diversified, western media company.” The planned deal, which would come on the heels of Pearson’s sale of the Financial Times to Japan’s Nikkei earlier this week, would represent the 171-year-old U.K. group’s latest major divestiture as it seeks to focus on its core education business. The price tag implies a value for the entire Economist Group of £1 billion, a multiple of 17 times the company’s annual operating earnings of £60 million. That’s about half the 35 times the FT’s operating profit that Nikkei agreed to pay Pearson.

But in contrast to that sale, the Economist deal would not offer the buyer a controlling stake. Pearson had hoped to announce the sale concurrently with the FT transaction and its half-year earnings this week, but last minute complications prevented it from doing so, according to a source. Founded in 1843 in London, the weekly “newspaper” as the Economist refers to itself, has long been an influential voice in global journalism, renowned for its sharp, often irreverent analysis of the world stage. Like the FT, the Economist is considered a trophy asset with an influence that outstrips its global circulation of 1.6 million.

The remaining 50% of the Economist not controlled by Pearson is owned by a diverse group of shareholders including Evelyn Robert Adrian de Rothschild, an heir to the banking dynasty and a former chairman of the magazine group. His wife, American-born Lynn Forester de Rothschild, is a member of the Economist’s board. The Rothschild Group, the boutique M&A firm controlled by the family, advised Nikkei on its purchase of the FT. Under a complex shareholder agreement, Pearson would have to obtain the approval of four trustees charged with preserving the magazine’s legacy and independence before transferring any shares to a different owner. That narrows considerably the pool of potential buyers.

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Nov 262014
 
 November 26, 2014  Posted by at 11:11 am Finance Tagged with: , , , , , , , , , , ,  


Arthur Rothstein Oregon or Bust, family fleeing South Dakota drought Jul 1936

Banking’s Toxic Culture ‘Will Take A Generation To Clean Up’ (Guardian)
Consumer Confidence in US Unexpectedly Dropped in November (Bloomberg)
Case Shiller Reports “Broad-Based Slowdown For Home Prices” (Zero Hedge)
BEA Revises 3rd Quarter 2014 US GDP Growth Upwards to 3.89% (CMI)
Refinancing Boom Exposing Risks in US Property Bonds (Bloomberg)
Abe Sales Tax Backfiring With More Debt Not Less (Bloomberg)
Japan Is Running Out of Options (Bloomberg)
Eurozone ‘Major Risk To World Growth’: OECD (CNBC)
Do German Bonds Face Japanification? (CNBC)
UK Housing Market Cools Rapidly (Guardian)
Commodity Exporters Like Cheaper Currencies (A. Gary Shilling)
On This Day, 138 Years Ago, The Idea Of QE Was Born (Art Cashin)
A Bearish Hedge Fund Bets Against the Bulls and Still Profits (NY Times)
Saudi Arabia Says No One Should Cut Output, Oil Will Stabilize
Pre-OPEC Producer Meeting Fails to Deliver Oil Output Cut (Bloomberg)
The Unbearable Over-Determination Of Oil (Ben Hunt)
Who Will Wind Up Holding the Bag in the Shale Gas Bubble? (Naked Capitalism)
US Oil Producers Can’t Kick Drilling Habit (FT)
The Environmental Downside of the Shale Boom (NY Times)
Obama Climate Envoy: Fossil Fuels Will Have To Stay In The Ground (Guardian)
Cracks Form in Berlin Over Russia Stance (Spiegel)
Europe Looks ‘Aged And Weary’: Pope Francis (CNBC)

Why should it? Just regulate the heebees out of them or close them down.

Banking’s Toxic Culture ‘Will Take A Generation To Clean Up’ (Guardian)

Overhauling the broken culture of high street banking will take a generation to achieve, according to a report that found UK banks have received 20m customer complaints since the financial crisis. The report, by the thinktank New City Agenda, calculated that in the last 15 years the retail operations of banks had incurred £38.5m in fines and redress for mistreatment of customers. Andre Spicer, a professor at Cass Business School and the report’s lead author, said: “Most people we spoke to told us that real change will take at least five years. “There was some uncertainty as to how these changes were being translated into good practice at the customer coalface. Many culture change initiatives are fragile, and their success is not ensured. It’s clear to us that much work still needs to be done.”

The report concluded that it will take a generation to end a sales culture exposed by the 2008 crisis. It said UK banks did not address cultural change until the eruption of the Libor scandal in 2012, having failed to act after the emergence of mis-selling debacles such as the payment protection insurance scandal. “A toxic culture, decades in the making, will take a generation to clean up,” said the founders of New City Agenda, who are Labour peer Lord McFall, Conservative MP David Davis, and Liberal Democrat peer Lord Sharkey. They added: “Some frontline staff told us they still feel under significant pressure to sell. Complaints continue to rise and trust remains extremely low. Most of the people we talked to believed that real change, and as a consequence the better treatment of customers, will take some time to achieve.”

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Will they ever stop using the word ‘unexpectedly’? It’s certainly a favorite over at Bloomberg, and not just there.

Consumer Confidence in US Unexpectedly Dropped in November (Bloomberg)

Consumer confidence unexpectedly declined in November to a five-month low as Americans became less upbeat about the economy and labor market. The Conference Board’s index fell to 88.7 this month from an October reading of 94.1 that was the strongest since October 2007, the New York-based private research group said today. The figure last month was weaker than the most pessimistic estimate in a Bloomberg survey of economists. The decline this month interrupts a steady pickup in sentiment since the middle of the year and shows attitudes about the economy would benefit from bigger wage gains. While confidence slipped, buying plans picked up, indicating spending will be sustained on the heels of stronger job growth and lower fuel costs.

The drop this month “doesn’t change our view that the trend in consumer confidence is moving upwards,” said David Kelly, chief global strategist at JPMorgan Funds in New York. “Gasoline prices are down, the unemployment rate is down, home prices are gradually rising, and stock prices are certainly rising.” The median forecast of 75 economists in the Bloomberg survey called for a reading of 96, with estimates ranging from 93.5 to 99 after a previously reported October index of 94.5. The Conference Board’s measure averaged 96.8 during the last expansion and 53.7 during the recession that ended in June 2009.

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I’m wondering how this squares with that GDP revision.

Case Shiller Reports “Broad-Based Slowdown For Home Prices” (Zero Hedge)

While the just revised Q3 GDP surprised everyone to the upside, the Case Shiller index for September which was also reported moments ago, showed yet another month of what it called a “Broad-based Slowdown for Home Prices.” The bad news: the 20-City Composite gained 4.9% year-over-year, compared to 5.6% in August. However, this was modestly above the 4.6% expected. However, what was more troubling is that on a sequential basis, the Top 20 Composite MSA posted a modest -0.03% decline, the first sequential drop since February. And from the report itself: “The National Index reported a month-over-month decrease for the first time since November 2013. The Northeast region reported its first negative monthly returns since December 2013 and its worst annual returns since December 2012 due to weaknesses in Washington D.C. and Boston.”

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Some useful details.

BEA Revises 3rd Quarter 2014 US GDP Growth Upwards to 3.89% (CMI)

In their second estimate of the US GDP for the third quarter of 2014, the Bureau of Economic Analysis (BEA) reported that the economy was growing at a +3.89% annualized rate, up +0.35% from their first estimate for the 3rd quarter but still down some -0.70% from the 4.59% annualized growth rate registered during the second quarter. The modest improvement in the headline number masks substantial changes in the reported sources of the annualized growth. The previously reported significant inventory draw-down almost vanished completely (dropping to a mere -0.12% impact on the headline number). Improving fixed investments added +0.23% to the headline, with nearly all of that improvement from spending for commercial equipment. Consumer spending for goods was also reported to be growing 0.27% in this report, while consumer spending for services was essentially unchanged (+0.02%).

Offsetting those upside revisions was a significant erosion in the previously reported export growth, which subtracted -0.38% from the headline. The contribution from imports in the headline number also weakened, taking the annualized growth down another -0.17%. Governmental spending was also revised down slightly, knocking another -0.07% from the headline. Nearly all of that downward revision to governmental spending was from reduced state and local investment in infrastructure. Despite the increased consumer spending, households actually took a disposable income hit in this revision – losing $146 in annualized per capita disposable income (now reported to be $37,525 per annum). This is down $344 per year from the 4th quarter of 2012. The spending growth reported above came exclusively from reduced household savings, which dropped a full 0.5% in this report.

As mentioned last month, softening energy prices play a major role in this report, since during the 3rd quarter dollar-based energy prices were plunging (and have continued their dive since). US “at the pump” gasoline prices fell from $3.68 per gallon to $3.32 during the quarter, a 9.8% quarter-to-quarter decline and a -33.8% annualized rate – pushing most consumer oriented inflation indexes into negative territory. During the third quarter (i.e., from July through September) the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) was actually mildly dis-inflationary at a -0.10% (annualized) rate, and the price index reported by the Billion Prices Project (BPP — which arguably reflected the real experiences of American households) was slightly more dis-inflationary at -0.18% (annualized).

Yet for this report the BEA effectively assumed a positive annualized quarterly inflation of 1.40%. Over reported inflation will result in a more pessimistic growth data, and if the BEA’s numbers were corrected for inflation using the appropriate BLS CPI-U and PPI indexes the economy would be reported to be growing at a spectacular 5.42% annualized rate. If we were to use just the BPP data to adjust for inflation, the quarter’s growth rate would have been an astounding 5.52% annualized rate.

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The smell of volatility on the morning.

Refinancing Boom Exposing Risks in US Property Bonds (Bloomberg)

A $40 million penalty wasn’t enough to keep the owner of San Francisco’s Parkmerced apartment complex from the chance to lock in record-low interest rates and take advantage of the property’s $1.5 billion value. While a landlord willing to pay almost 63 times the average fee to refinance early is a bullish sign for commercial real estate, it’s less so for bond investors facing $295 billion of mortgages that come due during the next three years. That’s because the securities are increasingly tied to the market’s weakest properties, many of them financed during the peak of the real-estate boom in 2007, as the strongest are paid off. More property owners are jumping on a drop in financing costs and loosening terms to pay off their mortgages. That helped shrink the amount of debt maturing before the end of 2017 from $332 billion at the start of 2014, according to Bank of America data.

“If you’re a well-capitalized entity, you’re going to do it,” Richard Hill, a debt analyst at Morgan Stanley, said. That could leave commercial-mortgage bond investors “holding the bag on a bunch of lower-quality loans.” Properties such as skyscrapers, shopping malls, hotels and apartment complexes are attracting investors from sovereign wealth funds to insurance companies as they seek higher-yielding assets amid six years of Federal Reserve policies to hold short-term interest rates near zero. Wall Street banks are on pace to issue $100 billion of securities backed by commercial real estate this year after issuance doubled to $80 billion in 2013, according to data compiled by Bloomberg. Sales, which peaked at $232 billion in 2007, are poised to climb to $140 billion in 2015, Credit Suisse Group AG analysts led by Roger Lehman forecast in a Nov. 21 report.

Sales of the securities also are being fueled by rules that will require banks to retain some portion of loans that are sold to investors as securities, according to Morgan Stanley’s Hill. That may increase financing costs when they take effect in 2016. Ray Potter, founder of R3 Funding, a New York-based firm that arranges financing for landlords and investors, said he’s advising clients not to wait to refinance as economists forecast the Fed will raise rates next year for the first time since 2006. There has been a surge in borrowers looking to refinance in the past couple of months, Potter said. “If you like that coupon, lock it in for 10 years,” he said. While the interest rate could dip even lower, it’s not worth the risk because “when it moves higher it moves fast,” he said.

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“Japan remains doomed by its demographics and, of course, by its horrible debt.”

Abe Sales Tax Backfiring With More Debt Not Less (Bloomberg)

What started as a plan to reduce Japan’s debt is turning into a reason to issue more bonds. Prime Minister Shinzo Abe’s administration implemented a higher sales tax in April to boost revenue as government liabilities ballooned to 1 quadrillion yen ($8.5 trillion), more than double the nation’s yearly economic output. Consumption plunged and the economy fell into a recession, prompting companies including Mirae Asset Global Investments Co. and High Frequency Economics to predict even more sovereign debt sales to revive growth. “The government’s policies have failed,” Will Tseng, a money manager in Taipei at Mirae Asset, which manages about $62 billion, said in an e-mail Nov. 20. “They’re still issuing more debt and printing more money to try to help the economy. They’re in a really bad cycle.” He said he’s staying away from Japanese bonds.

The cost of protecting Japan’s debt from default surged for eight straight days and the yen tumbled to a seven-year low as Abe called a snap election and delayed plans to further increase the sales tax by 18 months. Bank of Japan Governor Haruhiko Kuroda on Oct. 31 boosted the amount of government bonds he plans to buy to as much as 12 trillion yen a month, a record. Japan will go back to its routine of borrowing more to fund plans to spur growth, said Carl Weinberg, the chief economist at High Frequency Economics in Valhalla, New York. What it needs to do is allow immigration to keep the population from shrinking, he said Nov. 18 on the “Bloomberg Surveillance” radio program. “The population and the economy are contracting, and the debt is growing, and that’s an unsustainable trend,” Weinberg said. “Japan remains doomed by its demographics and, of course, by its horrible debt.”

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” .. Kuroda now has a budding mutiny on his hands. Many of his staffers think the central bank has already gone too far to weaken the yen and buy virtually every bond in sight.”

Japan Is Running Out of Options (Bloomberg)

The New York Times recently lit up the Japanese Twittersphere with a cartoon that was a little too accurate for comfort. In it, a stretcher marked “economy” is loaded into an ambulance with “Abenomics” painted on the side; the vehicle lacks tires and sits atop cinder blocks. Prime Minister Shinzo Abe looks on nervously, holding an IV bag. The image aptly sums up Japan’s failure to gain traction in its push to end deflation. The Bank of Japan’s unprecedented stimulus and Abe’s pro-growth reforms have yet to spur a recovery in inflation and gross domestic product growth, and the country is yet again in recession. Worse, BOJ Governor Haruhiko Kuroda is rapidly running out of weapons in his battle to eradicate Japan’s “deflationary mindset.”

Minutes from the central bank’s Oct. 31 board meeting, at which officials surprised the world by expanding an already massive quantitative-easing program, show that Kuroda now has a budding mutiny on his hands. Many of his staffers think the central bank has already gone too far to weaken the yen and buy virtually every bond in sight. That’s a problem for Kuroda and Abe in two ways.

First, board members warned that the costs of further monetary stimulus outweigh the benefits. We already knew that Kuroda had only won approval for his shock-and-awe announcement by a paper-thin 5-4 margin, and that Takahide Kiuchi dissented when the BOJ boosted bond sales to about $700 billion annually. But the minutes suggest Kuroda came as close to any modern BOJ leader ever has to defeat on a policy move. Cautionary voices like Kiuchi’s worry that the BOJ could be “perceived as effectively financing fiscal deficits.” I’d say it’s too late for that. Of course the BOJ is acting as the Ministry of Finance’s ATM, just as Abe intended when he hired Kuroda. Still, the fact is that Kuroda’s odds of getting away with yet another Friday surprise are nil at best.

Second, maintaining stability in the bond market just got harder. The only way Kuroda can stop 10-year yields – currently 0.44% – from spiking as he tries to generate 2% inflation is by making ever bigger bond purchases. But fellow BOJ board members will be giving Kuroda less latitude to cap market rates. Japan is lucky in one way: Given that more than 90% of public debt is held domestically, Tokyo can the avoid wrath of the “bond vigilantes.” Kuroda further neutralized these activist traders by saying there’s “no limit” to what he can do to make Abenomics work. The fact that so many of his colleagues are skeptical of the policy, however, undermines Kuroda’s credibility. If markets begin to doubt his staying power, yields are sure to rise.

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The entire world is a risk to world growth.

Eurozone ‘Major Risk To World Growth’: OECD (CNBC)

The eurozone poses a serious danger for global growth, with the world’s economy already “in low gear”, the Organisation for Economic Co-operation and Development (OECD) said on Tuesday. “The euro area is grinding to a standstill and poses a major risk to world growth, as unemployment remains high and inflation persistently far from target,” the OECD said in the 96th edition of its Economic Outlook. The euro zone’s fledgling recovery—which started at the end of 2013—has been a cause for concern over recent months, with gross domestic product (GDP) rising only 0.2% quarter-on-quarter between July and September. Policymakers are also battling with very low inflation and high unemployment—around one-quarter of Spaniards and Greek remain without jobs.

The OECD sees euro zone economic growth at 0.8% this year. This is better than the economic contraction the currency union suffered in 2012 and 2013, but below average growth of 1.1% between 2002 and 2011. By comparison, the OECD expects the world’s economy to expand by 3.3% this year. As with the euro zone, this is an improvement on 2012 and 2013, but below the 2002-2011 average of 3.8%.”A moderate improvement in global growth is expected over the next two years, but with marked divergence across the major economies and large risks and vulnerabilities,” the OECD said.

A euro zone analyst at the Economist Intelligence Unit said the risks to the world economy posed by the euro zone were even larger than the OECD forecast.”The euro zone’s fundamental institutional deficiencies are now exacting a damaging price, by hampering the formulation and implementation of policy responses to the ongoing slump,” said Aengus Collins in a research note emailed after the OECD report.”In addition, the OECD overlooks political risk, which is rising sharply in line with voter disaffection.” Major countries expected to post solid growth include the U.S., which the OECD predicts will expand by 2.2% this year and 3.1% next. China, meanwhile, is seen growing by an impressive 7.3% in 2014, before slowing to 7.1% in 2015.

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More interestingly, where will that leave Spanish and Italian bonds?

Do German Bonds Face Japanification? (CNBC)

The euro zone’s long disinflation has spurred fears it will tumble all the way to Japan-style deflation, with some concerned yields on the continent’s safe-haven bond, the German bund, could remain depressed for the long haul. “While we are still not convinced that the euro zone is the new Japan, despite the many similarities in their economic predicaments, we are increasingly of the view that the 10-year Bund yield will remain exceptionally low for at least the next couple of years,” John Higgins, chief markets economist at Capital Economics, said in a note Wednesday. The 10-year bund is yielding around 0.75%, around all-time lows, compared with the 10-year Japanese government bond (JGB) at around 0.45% after a decades-long downtrend.

Japan’s central bank cut its benchmark interest rate to 0.5% in 1995, a move that pushed the 10-year JGB yield below 1% after three years, Higgins noted. “Investors did not know in 1998 that Japan’s key policy rate would remain near zero for the next 16 years (and counting). But the prospect of it remaining there for the foreseeable future was enough to keep the 10-year yield quite firmly anchored,” he said. “We see no reason why a similar outcome couldn’t happen in Germany,” as the bund yield fell below 1% after the ECB cut its main rate to 0.5% in mid-2013.

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” .. new mortgage approvals hit a 17-month low of 37,076 in October. That total was down nearly a quarter from January’s 76-month high of 48,649. It was also down 16% year on year ..”

UK Housing Market Cools Rapidly (Guardian)

Britain’s housing market is cooling rapidly as a result of tougher Bank of England mortgage market requirements, high prices and the uncertainty caused by the coming general election. The prospect of higher interest rates at some point in 2015 is also dampening demand. Figures from the British Bankers’ Association showed a sharp slowdown in mortgage approvals, while Nationwide building society has reported a drop in lending volumes. The BBA said that new mortgage approvals hit a 17-month low of 37,076 in October. That total was down nearly a quarter from January’s 76-month high of 48,649. It was also down 16% year on year. However, a house price crash is unlikely, according to new forecasts. Halifax’s forecasts for 2015 point to a further rise in values of 3% to 5% next year, despite uncertainty about the general election. Earlier this month Halifax reported that house prices fell during October and recorded their smallest quarterly increase in nearly two years.

The October survey by the Royal Institution of Chartered Surveyors found that buyer inquires shrank for the fourth month running. Half-year results from Nationwide building society added to the gathering evidence of a weakening market, with net lending down by £2bn to £3.6bn in the six months to 30 September – although lending to landlords rose slightly. The society, which reported a doubling in pre-tax profits and higher savings inflows, said part of the reason net lending was down was tougher competition from other major mortgage providers, such as Halifax and Santander. “The BBA data add to now pretty widespread and compelling evidence that the housing market has come well off the boil,” said Howard Archer, an economist at IHS Insight. “The fact that mortgage approvals are substantially below their January peak levels – and falling – after lenders have got to grips with the new mortgage regulations points to an underlying moderation in housing market activity.”

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“The Canadian, Australian and New Zealand dollars as well as the Brazilian real, Russian ruble and other emerging economies are all playing this game. Those countries want weaker currencies to offset declining commodity exports ..”

Commodity Exporters Like Cheaper Currencies (A. Gary Shilling)

The U.S. dollar is strengthening for reasons that go beyond deliberate devaluations of the euro and yen. Major commodity exporters are also purposely pushing down their currencies as commodity prices drop. The Canadian, Australian and New Zealand dollars as well as the Brazilian real, Russian ruble and other emerging economies are all playing this game. Those countries want weaker currencies to offset declining commodity exports. In the past year, the head of the Reserve Bank of Australia has expressed sympathy for a weaker Aussie in view of soft mineral exports and a moderately growing economy.

Recently, the head of the Reserve Bank of New Zealand said that, even with the drop in the New Zealand dollar, the kiwi is at “unjustifiable” levels and isn’t reflecting the weakness in the global commodity market. Earlier, the kiwi was propelled by strong meat and dairy exports to China and robust prices for milk, which have plunged. New Zealand’s economic growth is in jeopardy. The Bank of Canada recently left its benchmark interest rate unchanged at 1% and expects inflation to be near its 2% target. But a decline in energy and other commodity prices has hurt the Canadian economy, which is growing at the same slow 2% rate as the U.S. The commodity bubble in the early 2000s prompted producers of industrial commodities, such as copper, zinc, iron ore and coal, to increase production. New output resulted just in time for the price collapse in the 2007 to 2009 recession.

The subsequent rebound didn’t hold and commodity prices have been falling since early 2011, no doubt due to excess supply of industrial commodities and slower growth in China, the world’s biggest commodity user. The price decreases are also due to sluggish expansions in developed countries and, in the case of agricultural products, good weather and more acreage being planted. So far this year, grain prices are falling, as are industrial commodity prices. Crude oil prices rose until mid-June, but have since dropped 25% and now are the lowest in six years. Spurred by fracking, U.S. oil output is exploding as economic softness in Europe and China and increased conservation have curtailed consumption. Copper, which is used in everything from plumbing fixtures to computers, is dropping in price as supply leaps and demand lags.

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“Several months earlier, the stock market had begun to plunge violently. Soon there were layoffs and business closings and the economy was having a tough time getting back in gear.”

On This Day, 138 Years Ago, The Idea Of QE Was Born (Art Cashin)

On this day in 1876, a group of influential, yet irate, Americans met in Indianapolis. Their primary purpose was to send a message to Washington on how to get the economy moving again. America at the time was going through a difficult and unusual period. Several months earlier, the stock market had begun to plunge violently. Soon there were layoffs and business closings and the economy was having a tough time getting back in gear. And for months now, strange things were happening, the money supply seemed not to be growing, real estate values were stagnant to slipping, and commodity prices were heading lower. (How unusual.)

So this group decided that what was needed was re-inflation (put more money in everyone’s hands, you see). The method they proposed was to issue more and more money. Cynics called them “The Greenback Party”. And on this day, the Greenbacks challenged Washington by running an independent for President of the United States. His name was Peter Cooper. He lost but several associate whackos were elected to Congress. To celebrate stop by the “Printing Press Lounge”. (It’s down the block from the Fed.) Tell the bartender to open the tap and just keep pouring it out till you say stop. Reassure the guy next to you (while you can still talk) that now we have more enlightened people in Washington. Try not to spill your drink if he falls off the stool laughing. There wasn’t much raucous laughter on Wall Street Monday, but the bulls were beaming with smiles as they managed to continue their string of bull runs.

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” .. the stimulus policies of the Federal Reserve and other central banks have the power to drive stocks higher. But they will ultimately be self-defeating ..”

A Bearish Hedge Fund Bets Against the Bulls and Still Profits (NY Times)

The stock market has been rising for years, hitting new highs almost every week. So how is it that one of Wall Street’s most bearish investors can claim to have profited strongly over this period? Universa Investments, a hedge fund founded by Mark Spitznagel, is one of the few firms that is set up with the aim of making money in an economic and financial collapse. In the market turmoil of 2008, Mr. Spitznagel earned large returns. Large pessimistic bets usually lose a lot of money when stocks are rising, as they have ever since 2009. But Universa is saying that its investment strategy has been able to produce consistent gains since then, including a 30% return last year, according to firm materials that were reviewed by The New York Times.

In comparison, the benchmark Standard & Poor’s 500-stock index in 2013 had a return of 32% with dividends reinvested. Insurance policies that pay out after disasters do not produce big returns when the catastrophe fails to occur. But since 2008, some investors have been looking for ways to ride the market higher while having bets in place that will notch up huge gains if the system teeters on the brink once again. At Universa, Mr. Spitznagel’s strategy stems from his skepticism toward government efforts to revive the economy. He acknowledges that the stimulus policies of the Federal Reserve and other central banks have the power to drive stocks higher. But they will ultimately be self-defeating, he contends.

This theory holds that another crash will occur when the Fed stops being able to stoke the economy. Universa’s strategy seeks to profit when confidence in the central banks is strong — and when it evaporates. “The Fed has created a trap in this yield-chasing environment,” Mr. Spitznagel said in an interview, during which he gave an overview of Universa’s approach. “It allows you to be long, but it gets you in position to be short when it’s all over,” he said.

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Beggar thy neighbor, oil edition.

Saudi Arabia Says No One Should Cut Output, Oil Will Stabilize

Saudi Arabia’s oil minister said tumbling crude prices will stabilize and there’s no need for producing nations to cut output. “No one should cut and market will stabilize itself,” Ali Al-Naimi told reporters a day before OPEC meets in Vienna. “Why Saudi Arabia should cut?The U.S. is a big producer too now. Should they cut?” Oil ministers from the 12 nations in the Organization of Petroleum Exporting Countries meet tomorrow in Vienna to discuss their combined production at a time when prices have fallen 30 percent since June. Crude fell in part on speculation that Saudi Arabia and other OPEC states wouldn’t take the necessary measures to curb a surplus. Venezuela’s Foreign Minister Rafael Ramirez met with officials from Saudi Arabia, Mexico and Russia yesterday. While they agreed to monitor prices, they made no joint commitment to lower their supplies.

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It’s not going to happen. They are in too much distress.

Pre-OPEC Producer Meeting Fails to Deliver Oil Output Cut (Bloomberg)

Nations supplying a third of the world’s oil failed to pledge output cuts after meeting in Vienna today. Russia can withstand prices even lower than they are now, the country’s biggest producer said. Officials from Venezuela, Saudi Arabia, Mexico and Russia said only that they would monitor prices. Crude futures sank to a four-year low in New York. OPEC meets in two days, with analysts split evenly over whether the group will lower output in response to the crash in prices. Crude fell into a bear market this year amid the highest U.S. production in 31 years and speculation that Saudi Arabia and other members of OPEC won’t do enough to curb a surplus. Prices are below what nine of group’s 12 members need to balance their national budgets, data compiled by Bloomberg show.

“All these countries are significantly affected by lower prices and want to see cuts, but it is a big step between having these talks and taking actual coordinated action to achieve this,” Richard Mallinson, geopolitical analyst at Energy Aspects, said by phone today. “The key is going to be what happens amongst OPEC members.” Brent, the global benchmark, fell as much as 2.1% in London, having gained 1% before the four-way meeting concluded. It settled at $78.33 a barrel. West Texas Intermediate sank 2.2% to $74.09, the lowest since Sept. 21, 2010. The discussions didn’t result in any joint commitment to reduce supplies, Rafael Ramirez, Venezuela’s Foreign Minister and representative to OPEC, told reporters after the meeting. All parties said they were worried about the oil price, he said.

“There is an overproduction of oil,” Igor Sechin, Chief Executive of OAO Rosneft, Russia’s largest oil company, said after the meeting. “Supply is exceeding demand, but not critically” and Russia wouldn’t need to cut production immediately even if oil fell below $60 a barrel, he said. Russia, Saudi Arabia, Mexico and Venezuela between them produced 27.8 million barrels a day of oil last year, according to data from BP Plc. Total global output was 86.8 million barrels daily, the oil company’s figures show. OPEC, which meets to discuss output in Vienna on Nov. 27, pumped 30.97 million barrels a day last month, according to data compiled by Bloomberg.

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Too many opinions, too many variables.

The Unbearable Over-Determination Of Oil (Ben Hunt)

You know you’re in trouble when the Fed’s Narrative dominance of all things market-related shows up in the New York Times crossword puzzle, the Saturday uber-hard edition no less. It’s kinda funny, but then again it’s more sad than funny. Not a sign of a market top necessarily, but definitely a sign of a top in the overwhelming belief that central banks and their monetary policies determine market outcomes, what I call the Narrative of Central Bank Omnipotence. There is a real world connected to markets, of course, a world of actual companies selling actual goods and services to actual people. And these real world attributes of good old fashioned economic supply and demand – the fundamentals, let’s call them – matter a great deal. Always have, always will. I don’t think they matter nearly as much during periods of global deleveraging and profound political fragmentation – an observation that holds true whether you’re talking about the 2010’s, the 1930’s, the 1870’s, or the 1470’s – but they do matter.

Unfortunately it’s not as simple as looking at some market outcome – the price of oil declining from $100/bbl to $70/bbl, say – and dividing up the outcome into some percentage of monetary policy-driven causes and some percentage of fundamental-driven causes. These market outcomes are always over-determined, which is a $10 word that means if you added up all of the likely causes and their likely percentage contribution to the outcome you would get a number way above 100%. Are recent oil price declines driven by the rising dollar (a monetary policy-driven cause) or by over-supply and global growth concerns (two fundamental-driven causes)? Answer: yes. I can make a case that either one of these “explanations” on its own can account for the entire $30 move. Put them together and I’ve “explained” the $30 move twice over. That’s not very satisfying or useful, of course, because it doesn’t help me anticipate what’s next.

Should I be basing my risk assessment of global oil prices on an evaluation of monetary policy divergence and what this means for the US dollar? Or should I be basing my assessment on an evaluation of global supply and demand fundamentals? If both, how do I weight these competing explanations so that I don’t end up overweighting both, which (not to get too technical with this stuff) will have the effect of sharply increasing the volatility of my forward projections, even if I’m exactly right in the ratio of the relative contribution of the potential explanatory factors. Here’s the short answer. I can’t.

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Note: this is shale gas, not oil. That’s another bubble, and just as big.

Who Will Wind Up Holding the Bag in the Shale Gas Bubble? (Naked Capitalism)

We’ve been writing off and on about how the sudden fall in gas prices has been expected to put a lot of shale gas development on hold. In fact, quite a few analysts believe that one of the big Saudi aims in refusing to support oil prices was to dent the prospects for competitive energy sources, not just renewables like wind and hydro power, but shale gas. Even though OilPrice reported that US rig count had indeed fallen as oil prices plunged, John Dizard at the Financial Times (hat tip Scott) gives a more intriguing piece of the puzzle: the degree to which production is still chugging along despite it being uneconomical. The oil majors have been criticized for levering up to continue developing when it is cash-flow negative; they are presumably betting that prices will be much higher in short order. But the same thing is happening further down the food chain, among players that don’t begin to have the deep pockets of the industry behemoths: many of them are still in “drill baby, drill” mode. Per Dizard:

Even long-time energy industry people cannot remember an overinvestment cycle lasting as long as the one in unconventional US resources. It is not just the hydrocarbon engineers who have created this bubble; there are the financial engineers who came up with new ways to pay for it.

And while the financial engineers will as always do just fine, lenders are another matter:

By now, though, there is an astonishing amount of debt that continues to build up on the smaller E&P companies’ balance sheets. According to Gavekal, the research group, even before the oil price plunge, aggregate debt-to-equity ratios in the smaller publicly traded energy companies are now at 93%, up from around 70% in 2012 and 2013, and around 50% between 2005 and 2011. This in a highly cyclical industry that used to go through periodic banker-driven shakeouts and even bankruptcies.

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John Dizard from last Friday: the debt boom can’t stop without wreaking havoc across the industry.

US Oil Producers Can’t Kick Drilling Habit (FT)

You would think, what with the recent oil price crash, the people who finance US oil and gas producers would have learnt their lesson. But not yet. For the past several years, and despite the once again widening gap between capital spending and cash flow, Wall Streeters have stepped in like an overindulgent parent to pay for the producers’ drilling habit. “Isn’t he cute!” they exclaim, as an exploration and production boy crashes another budget. “So talented! Did you see how many frac stages he can do now, and how tight his well spacing is?” Of course the exploration and production companies and their lenders have been to expensive accounting therapy sessions, where the concerned Wall Street family, accompanied by the sullen E&P operators, are told that they have to make a really sincere effort to match finding, drilling and completion expenditures to internally generated cash flow.

Everyone promises the accountant that that irresponsible land purchase or midstream commitment was the last mistake. From now on, cash flow break-even. Right. By now, though, there is an astonishing amount of debt that continues to build up on the smaller E&P companies’ balance sheets. According to Gavekal, the research group, even before the oil price plunge, aggregate debt-to-equity ratios in the smaller publicly traded energy companies are now at 93%, up from around 70% in 2012 and 2013, and around 50% between 2005 and 2011. This in a highly cyclical industry that used to go through periodic banker-driven shakeouts and even bankruptcies.

Particularly in the gas and natural gas liquids drilling directed sector, every operator (and their financier) is waiting for every other operator to stop or slow their drilling programmes, so there can be some recovery in the supply-demand balance. I have been hearing a lot of buzz about cutbacks in drilling budgets for 2015, but we will not really know until the companies begin to report in January and February. Then we will find out if they really are cutting back, using their profits on in-the-money hedge programmes to keep their debt under control, and taking impairment charges on properties that did not really pay off.

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Nasty report.

The Environmental Downside of the Shale Boom (NY Times)

Since 2006, when advances in hydraulic fracturing — fracking — and horizontal drilling began unlocking a trove of sweet crude oil in the Bakken shale formation, North Dakota has shed its identity as an agricultural state in decline to become an oil powerhouse second only to Texas. A small state that believes in small government, it took on the oversight of a multibillion-dollar industry with a slender regulatory system built on neighborly trust, verbal warnings and second chances. In recent years, as the boom really exploded, the number of reported spills, leaks, fires and blowouts has soared, with an increase in spillage that outpaces the increase in oil production, an investigation by The New York Times found. Yet, even as the state has hired more oil field inspectors and imposed new regulations, forgiveness remains embedded in the Industrial Commission’s approach to an industry that has given North Dakota the fastest-growing economy and lowest jobless rate in the country. [..]

Continental Resources hardly seems likely to walk away from its 1.2 million leased acres in the Bakken. It has reaped substantial profit from the boom, with $2.8 billion in net income from 2006 through 2013. But the company, which has a former North Dakota governor on its board, has been treated with leniency by the Industrial Commission. From 2006 through August, it reported more spills and environmental incidents (937) and a greater volume of spillage (1.6 million gallons) than any other operator. It spilled more per barrel of oil produced than any of the state’s other major producers. Since 2006, however, the company has paid the Industrial Commission $20,000 out of $222,000 in assessed fines.

Continental said in a written response to questions that it was misleading to compare its spill record with that of other operators because “we are not aware other operators report spills as transparently and proactively as we do.” It said that it had recovered the majority of what it spilled, and that penalty reductions came from providing the Industrial Commission “with precisely the information it needs to enforce its regulations fairly.” What Continental paid Mr. Rohr, the injured driller, is guarded by a confidentiality agreement negotiated after a jury was impaneled for a trial this September. His wife, Winnie, said she wished the trial had gone forward “so the truth could come out, but we just didn’t have enough power to fight them.”

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You wish.

Obama Climate Envoy: Fossil Fuels Will Have To Stay In The Ground (Guardian)

The world’s fossil fuels will “obviously” have to stay in the ground in order to solve global warming, Barack Obama’s climate change envoy said on Monday. In the clearest sign to date the administration sees no long-range future for fossil fuel, the state department climate change envoy, Todd Stern, said the world would have no choice but to forgo developing reserves of oil, coal and gas. The assertion, a week ahead of United Nations climate negotiations in Lima, will be seen as a further indication of Obama’s commitment to climate action, following an historic US-Chinese deal to curb emissions earlier this month. A global deal to fight climate change would necessarily require countries to abandon known reserves of oil, coal and gas, Stern told a forum at the Center for American Progress in Washington.

“It is going to have to be a solution that leaves a lot of fossil fuel assets in the ground,” he said. “We are not going to get rid of fossil fuel overnight but we are not going to solve climate change on the basis of all the fossil fuels that are in the ground are going to have to come out. That’s pretty obvious.” Last week’s historic climate deal between the US and China, and a successful outcome to climate negotiations in Paris next year, would make it increasingly clear to world and business leaders that there would eventually be an expiry date on oil and coal. “Companies and investors all over are going to be starting at some point to be factoring in what the future is longer range for fossil fuel,” Stern said.

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Merkel has problems keeping her stance.

Cracks Form in Berlin Over Russia Stance (Spiegel)

Within the European Union, the interests of the 28 member states are diverging in what are becoming increasingly clear ways. Taking a tough stance against Russia is generally less important to southern Europeans than it is to eastern Europeans. In the past, the German government had sought to serve as a bridge between the two camps. But in Berlin itself these days, significant differences in the assessment of the situation are starting to emerge within the coalition government pairing Merkel’s conservative Christian Democrats and the center-left Social Democrats (SPD). It’s one that pits Christian Democrat leaders like Merkel and Horst Seehofer, who heads the CDU’s Bavarian sister party, the Christian Social Union (CSU), against Foreign Minister Frank-Walter Steinmeier of the SPD and Social Democratic Party boss Sigmar Gabriel, who is the economics minister.

“The greatest danger is that we allow division to be sown between us,” the chancellor said last Monday in Sydney. And it’s certainly true to say that this threat is greater at present than at any other time since the crisis began. Is that what the Russian president has been waiting for? Last week, German Foreign Minister Steinmeier traveled to Moscow to visit with his Russian counterpart Sergey Lavrov. With Steinmeier standing at his side, the Russian foreign minister praised close relations between Germany and Russia. “It’s good my dear Frank-Walter that, despite the numerous rumors of recent days, you hold on to our personal contact.” Steinmeier reciprocated by not publically criticizing contentious issues like Russian weapons deliveries to Ukrainian separatists. Afterwards, Vladimir Putin received him, a rare honor. It was a prime example of just how the Russian strategy works.

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Don’t want to be a prick, and I like the man, but so does he a bit.

Europe Looks ‘Aged And Weary’: Pope Francis (CNBC)

Pope Francis has warned European politicians and policymakers that Europe is becoming less of a protagonist in the world as it looks “aged and weary.” Addressing the European Parliament in Strasbourg on Tuesday, Pope Francis, the spiritual leader of one billion Catholics worldwide, suggested that Europe risks becoming irrelevant. “Europe gives the impression of being aged and weary,feeling less and less a protagonist in a world which frequently looks on itwith aloofness, distrust and even, at times, suspicion…As a grandmother, no longer fertile and lively,” he said. “The great ideas that once inspired Europe…seem to have been replaced by the bureaucratic technicalities of Europe’s institutions.” Speaking at the plenary session of the parliament, he told lawmakers that they had the task of protecting and nurturing Europe’s identity “so that its citizens can experience renewed confidence in the institutions of the (European) Union and its project of peace and friendship that underlies it.”

Pope Francis’ visit to the European Parliament is the first by a pontiff since Pope John Paul II’s visit in 1988. He is also visiting the Council of Europe – the region’s human rights body – later on Tuesday. “I encourage you to work so that Europe rediscovers the best of its health,” he added. The pope also spoke about the importance of education and work. On the question of migration, a hot topic in Europe, Pope Francis said there needed to be a “united response.” “We cannot allow the Mediterranean to become a large graveyard,” he said, referring to the number of migrants who die during their attempts to cross the sea and reach Europe. “Rather than adopting policies that focus on self-interest which increase and feed conflicts, we need to act on the causes (for migration) and not only on the effects,” he added.

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