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What is this ‘Crisis’ of Modernity?

Jan 212017
 
 January 21, 2017  Posted by at 4:59 pm Finance Tagged with: , , , , , , , ,  17 Responses »


Workmen next to the screws of the RMS Titanic at Belfast shipyard, 1911

 

The people at Conflicts Forum, which is directed by former British diplomat and MI6 ‘ranking figure’ Alastair Crooke, sent me an unpublished article by Alastair and asked if the Automatic Earth would publish it. Since I like his work and I (re-)published two of his articles last year already, ‘End of Growth’ Sparks Wide Discontent in October 2016 and Obstacles to Trump’s ‘Growth’ Plans in November 2016, I’m happy to.

His arguments here are very close to much of what the Automatic Earth has been advocating for years, both when it comes to our financial crisis and to our energy crisis. Our Primers section is full of articles on these issues written through the years. It’s a good thing other people pick up too on topics like EROEI, and understand you can’t run our modern, complex society on ‘net energy’ as low as what we get from any of our ‘new’ energy sources. It’s just not going to happen.

Here’s Alastair:

 

 

Alastair Crooke: We have an economic crisis – centred on the persistent elusiveness of real growth, rather than just monetised debt masquerading as ‘growth’ – and a political crisis, in which even ‘Davos man’, it seems, according to their own World Economic Forum polls,is anxious; losing his faith in ‘the system’ itself, and casting around for an explanation for what is occurring, or what exactly to do about it. Klaus Schwab, the founder of the WEF at Davos remarked  before this year’s session, “People have become very emotionalized, this silent fear of what the new world will bring, we have populists here and we want to listen …”.

Dmitry Orlov, a Russian who was taken by his parents to the US at an early age, but who has returned regularly to his birthplace, draws on the Russian experience for his book, The Five Stages of Collapse. Orlov suggests that we not just entering a transient moment of multiple political discontents, but rather that we are already in the early stages of something rather more profound. From his perspective that fuses his American experience with that of post Cold War Russia, he argues, that the five stages would tend to play out in sequence based on the breaching of particular boundaries of consensual faith and trust that groups of human beings vest in the institutions and systems they depend on for daily life. These boundaries run from the least personal (e.g. trust in banks and governments) to the most personal (faith in your local community, neighbours, and kin). It would be hard to avoid the thought – so evident at Davos – that even the elites now accept that Orlov’s first boundary has been breached.

But what is it? What is the deeper economic root to this malaise? The general thrust of Davos was that it was prosperity spread too unfairly that is at the core of the problem. Of course, causality is seldom unitary, or so simple. And no one answer suffices. In earlier Commentaries, I have suggested that global growth is so maddeningly elusive for the elites because the debt-driven ‘growth’ model (if it deserves the name ‘growth’) simply is not working.  Not only is monetary expansion not working, it is actually aggravating the situation: Printing money simply has diluted down the stock of general purchasing power – through the creation of additional new, ‘empty’ money – with the latter being intermediated (i.e. whisked away) into the financial sector, to pump up asset values.

It is time to put away the Keynesian presumed ‘wealth effect’ of high asset prices. It belonged to an earlier era. In fact, high asset prices do trickle down. It is just that they trickle down into into higher cost of living expenditures (through return on capital dictates) for the majority of the population. A population which has seen no increase in their real incomes since 2005 – but which has witnessed higher rents, higher transport costs, higher education costs, higher medical costs; in short, higher prices for everything that has a capital overhead component. QE is eating into peoples’ discretionary income by inflating asset balloons, and is thus depressing growth – not raising it. And zero, and negative interest rates, may be keeping the huge avalanche overhang of debt on ‘life support’, but it is eviscerating savings income, and will do the same to pensions, unless concluded sharpish.

But beyond the spent force of monetary policy, we have noted that developed economies face separate, but equally formidable ‘headwinds’, of a (non-policy and secular) nature, impeding growth – from aging populations in China and the OECD, the winding down of China’s industrial revolution,  and from technical innovation turning job-destructive, rather than job creative as a whole. Connected with this is shrinking world trade.

But why is the economy failing to generate prosperity as in earlier decades?  Is it mainly down to Greenspan and Bernanke’s monetary excesses?  Certainly, the latter has contributed to our contemporary stagnation, but perhaps if we look a little deeper, we might find an additional explanation. As I noted in a Comment of 6 January 2017, the golden era of US economic expansion was the ‘50s and ‘60s – but that era had begun to unravel somewhat, already, with the economic turbulence of the 70s. However, it was not so much Reagan’s fiscal or monetary policies that rescued a deteriorating situation in that earlier moment, but rather, it was plain old good fortune. The last giant oil fields with greater than 30-to-one, ‘energy-return’ on ‘energy-cost’ of exploitation, came on line in the 1980s: Alaska’s North Slope, Britain and Norway’s North Sea fields, and Siberia. Those events allowed the USA and the West generally to extend their growth another twenty years.

And, as that bounty tapered down around the year 2000, the system wobbled again, “and the viziers of the Fed ramped up their magical operations, led by the Grand Vizier (or “Maestro”) Alan Greenspan.”  Some other key things happened though, at this point: firstly the cost of crude, which had been remarkably stable, in real terms, over many years, suddenly started its inexorable real-terms ascent.  And from 2001, in the wake of the dot.com ‘bust’, government and other debt began to soar in a sharp trajectory upwards (now reaching $20 trillion). Also, around this time the US abandoned the gold standard, and the petro-dollar was born.

 


Source: Get It. Got It. Good, by Grant Williams

 

Well, the Hill’s Group, who are seasoned US oil industry engineers, led by B.W. Hill, tell us – following their last two years, or so, of research – that for purely thermodynamic reasons net energy delivered to the globalised industrial world (GIW) per barrel, by the oil industry (the IOCs) is rapidly trending to zero. Note that we are talking energy-cost of exploration, extraction and transport for the energy-return at final destination. We are not speaking of dollar costs, and we are speaking in aggregate. So why should this be important at all; and what has this to do with spiraling debt creation by the western Central Banks from around 2001?

The importance? Though we sometimes forget it, for we now are so habituated to it, is that energy is the economy.  All of modernity, from industrial output and transportation, to how we live, derives from energy – and oil remains a key element to it.  What we (the globalized industrial world) experienced in that golden era until the 70s, was economic growth fueled by an unprecedented 321% increase in net energy/head.  The peak of 18GJ/head in around 1973 was actually of the order of some 40GJ/head for those who actually has access to oil at the time, which is to say, the industrialised fraction of the global population. The Hill’s Group research  can be summarized visually as below (recall that these are costs expressed in energy, rather than dollars):

 


Source: https://cassandralegacy.blogspot.it/2016/07/some-reflections-on-twilight-of-oil-age.html 

 

But as Steve St Angelo in the SRSrocco Reports states, the important thing to understand from these energy return on energy cost ratios or EROI, is that a minimum ratio value for a modern society is 20:1 (i.e. the net energy surplus available for GDP growth should be twenty times its cost of extraction). For citizens of an advanced society to enjoy a prosperous living, the EROI of energy needs to be much higher, closer to the 30:1 ratio. Well, if we look at the chart below, the U.S. oil and gas industry EROI fell below 30:1 some 46 years ago (after 1970):

 


Source: https://srsroccoreport.com/the-coming-breakdown-of-u-s-global-markets-explained-what-most-analysts-missed/ 

 

“You will notice two important trends in the chart above. When the U.S. EROI ratio was higher than 30:1, prior to 1970, U.S. public debt did not increase all that much.  However, this changed after 1970, as the EROI continued to decline, public debt increased in an exponential fashion”. (St Angelo).

In short, the question begged by the Hill’s Group research is whether the reason for the explosion of government debt since 1970 is that central bankers (unconsciously), were trying to compensate for the lack of GDP stimulus deriving from the earlier net energy surplus.  In effect, they switched from flagging energy-driven growth, to the new debt-driven growth model.

From a peak net surplus of around 40 GJ  (in 1973), by 2012, the IOCs were beginning to consume more energy per barrel, in their own processes (from oil exploration to transport fuel deliveries at the petrol stations), than that which the barrel would deliver net to the globalized industrial world, in aggregate.  We are now down below 4GJ per head, and dropping fast. (The Hill’s Group)

Is this analysis by the Hill’s Group too reductionist in attributing so much of the era of earlier western material prosperity to the big discoveries of ‘cheap’ oil, and the subsequent elusiveness of growth to the decline in net energy per barrel available for GDP growth?  Are we in deep trouble now that the IOCs use more energy in their own processes, than they are able to deliver net to industrialised world? Maybe so. It is a controversial view, but we can see – in plain dollar terms – some tangible evidence fo rthe Hill’s Groups’ assertions:  

 


Source: https://srsroccoreport.com/wp-content/uploads/2016/08/Top-3-U.S.-Oil-Companies-Free-Cash-Flow-Minus-Dividends.png 

(The top three U.S. oil companies, ExxonMobil, Chevron andConocoPhillips: Cash from operations less Capex and dividends)

 

 
Briefly, what does this all mean? Well, the business model for the big three US IOCs does not look that great: Energy costs of course, are financial costs, too.  In 2016, according to Yahoo Finance, the U.S. Energy Sector paid 86% of their operating income just to service the interest on the debt (i.e. to pay for those extraction costs). We have not run out of oil. This is not what the Hill’s Group is saying. Quite the reverse. What they are saying is the surplus energy (at a ratio of now less than 10:1) that derives from the oil that we have been using (after the energy-costs expended in retrieving it) – is now at a point that it can barely support our energy-driven ‘modernity’.  Implicit in this analysis, is that our era of plenty was a one time, once off, event.

They are also saying that this implies that as modernity enters on a more severe energy ‘diet’, less surplus calories for their dollars – barely enough to keep the growth engine idling – then global demand for oil will decline, and the price will fall (quite the opposite of mainstream analysis which sees demand for oil growing. It is a vicious circle. If Hills are correct, a key balance has tipped. We may soon be spending more energy on getting the energy that is required to keep the cogs and wheels of modernity turning, than that same energy delivers in terms of calorie-equivalence.  There is not much that either Mr Trump or the Europeans can do about this – other than seize the entire Persian Gulf.  Transiting to renewables now, is perhaps too little, too late.

And America and Europe, no longer have the balance sheet ‘room’, for much further fiscal or monetary stimulus; and, in any event, the efficacy of such measures as drivers of ‘real economy’ growth, is open to question. It may mitigate the problem, but not solve it. No, the headwinds of net energy per barrel trending to zero, plus the other ‘secular’ dynamics mentioned above (demography, China slowing and technology turning job-destructive), form a formidable impediment – and therefore a huge political time bomb.

Back to Davos, and the question of ‘what to do’. Jamie Dimon, the CEO of  JPMorgan Chase, warned  that Europe needs to address disagreements spurring the rise of nationalist leaders. Dimon said he hoped European Union leaders would examine what caused the U.K. to vote to leave and then make changes. That hasn’t happened, and if nationalist politicians including France’s Marine Le Pen rise to power in elections across the region, “the euro zone may not survive”. “The bottom line is the region must become more competitive, Dimon said, which in simple economic terms means accept even lower wages. It also means major political overhauls: “I say this out of respect for the European people, but they’re going to have to change,” he said. “They may be forced by politics, they may be forced by new leadership.”

A race to the bottom in pay levels?  Italy should undercut Romanian salaries?  Maybe Chinese pay scales, too? This is politically naïve, and the globalist Establishment has only itself to blame for their conviction that there are no real options – save to divert more of the diminished prosperity towards the middle classes (Christine Lagarde), and to impose further austerity (Dimon). As we have tried to show, the era of prosperity for all, began to waver in the 70s in America, and started its more serious stall from 2001 onwards. The Establishment approach to this faltering of growth has been to kick the can down the road: ‘extend and pretend’ – monetised debt, zero, or negative, interest rates and the unceasing refrain that ‘recovery’ is around the corner.

It is precisely their ‘kicking the can’ of inflated asset values, reaching into every corner of life, hiking the cost of living, that has contributed to making Europe the leveraged, ‘high cost’, uncompetitive environment, that it now is.  There is no practical way for Italians, for example, to compete with ‘low cost’ East Europe, or  Asia, through a devaluation of the internal Italian price level without provoking major political push-back.  This is the price of ‘extend and pretend’.

It has been claimed at Davos that the much derided ‘populists’ provide no real solutions. But, crucially, they do offer, firstly, the hope for ‘regime change’ – and, who knows, enough Europeans may be willing to take a punt on leaving the Euro, and accepting the consequences, whatever they may be. Would they be worse off? No one really knows. But at least the ‘populists’ can claim, secondly, that such a dramatic act would serve to escape from the suffocation of the status quo. ‘Davos man’ and woman disdain this particular appeal of ‘the populists’ at their peril.
 

 

 

Alastair Crooke is a former British diplomat who was a senior figure in British intelligence and in European Union diplomacy. He is the founder and director of the Conflicts Forum, which advocates for engagement between political Islam and the West.

 

 

Debt Rattle January 22 2015

Jan 222015
 
 January 22, 2015  Posted by at 11:59 am Finance Tagged with: , , , , , , , , ,  8 Responses »


DPC Steamer Tashmoo leaving wharf in Detroit 1901

Today is The Automatic Earth’s 7th anniversary!

• China’s Millions Of Government Workers To Get Huge 60% Pay Raise (Caixin)
• Oil Interests Clash Over Price Collapse (Reuters)
• Davos Oil Barons Eye $150 Oil As Investment Slump Incubates Future Crunch (AEP)
• OPEC Secretary General: Oil To Remain At Low Levels For A Month (CNBC)
• BP Boss Bob Dudley: Oil Prices ‘Low For Up To 3 Years’ (BBC)
• An Oilfield Turf War for Market Share Is Brewing (Bloomberg)
• ECB to Inject Up to €1.1 Trillion Into Economy in Deflation Fight (Bloomberg)
• Lagarde On European QE: It’s Already Working (CNBC)
• Mario Draghi May Need To Get A Bigger (QE) Boat (CNBC)
• Watch Europe Fumble QE (Bloomberg)
• German Opt-Out Could Fatally Weaken Eurozone QE (MarketWatch)
• Market Will Be Disappointed By Draghi: Dennis Gartman (CNBC)
• The Eurozone Can’t Afford A Greek Exit (Guardian)
• Populist Parties: Kryptonite For Europe’s Leaders? (CNBC)
• Revenge of Disaffected Europe Risks Crisis Sparked in Greece (Bloomberg)
• As Central Banks Surprise, Fed May Have To Throw In The Towel (MarketWatch)
• Is Canada’s Rate Cut A Race For The Bottom? (CNBC)
• Manager ‘Truly Sorry’ For Blowing Up $100 Million Hedge Fund (CNBC)
• The Davos Oligarchs Are Right To Fear The World They’ve Made (Guardian)
• ‘Safer GMOs’ Made By US Scientists (BBC)

Incredible.

• China’s Millions Of Government Workers To Get Huge 60% Pay Raise (Caixin)

China’s 39 million civil servants and public workers will get a pay raise of at least 60% of their base salaries as part of pension plan overhaul. Hu Xiaoyi, a vice minister of human resources and social security, said at a press conference Tuesday that government agencies and public institutions have been notified of detailed plans for the salary increase. The pay raise “will make sure that the overall incomes for most of these workers will not decrease after the reform, and some of them could actually earn a bit more,” he said. Hu did not provide details of the plan, which will cover civil servants and public workers, such as teachers and doctors. Copies of documents obtained by Caixin show that top civil servants, including President Xi Jinping and Premier Li Keqiang, will see their monthly base salaries rise to 11,385 yuan from 7,020 yuan (to $1,833 from $1,130), starting in October.

The base salaries of the lowest civil servants would more than double to 1,320 yuan. It is unclear if the plans Caixin saw are final. Data from the State Administration of Civil Service show that China had nearly 7.2 million civil servants and more than 31.5 million public-sector workers employed by institutions such as schools and hospitals at the end of 2013. Those workers do not contribute to their pension fund, meaning taxpayers fund their retirements. A reform announced on Jan. 14 by the State Council, China’s cabinet, will see civil servants and public workers start to contribute to the pension program in October. They will make contributions similar to those private-sectors workers, who have been paying in since the late 1990s. Government agencies and public institutions will pay 20% of their workers’ base salaries to the pension fund on behalf of their employees. The employees will contribute 8% of their salary.

The reform plan says government agencies and public institutions should also introduce an income annuity program for employees. That change will see employers contribute 8% of their employees’ salaries to an annuity fund, while employees pay 4%. The annuity program will provide retirees with another monthly payment. Hu Jiye, a professor in Beijing, said the annuity program and pension scheme will ensure government employees and public workers enjoy the same level of benefits after the reform. That assurance will help the reform make smooth progress, Hu said. Data from the China Statistical Yearbook show that in 2011 the average government pension paid 2,175 yuan a month per retiree. A private-sector pension paid 1,508 per month.

Read more …

Forecasts are all over the place.

• Oil Interests Clash Over Price Collapse (Reuters)

OPEC defended on Wednesday its decision not to intervene to halt the oil price collapse, shrugging off warnings by top energy firms that the cartel’s policy could lead to a huge supply shortage as investments dry up. The strain the halving of oil prices since June is putting on producers was laid bare when non-member Oman voiced its first direct, public criticism of the Organization of the Petroleum Exporting Countries’ November decision not to cut production but instead to focus on market share. Oil prices have collapsed to below $50 a barrel as a result of a large supply glut, due mostly to a sharp rise in U.S. shale production as well as weaker global demand. The rapid decline has left several smaller oil producing countries reeling and has forced oil companies to slash budgets.

Speaking at the World Economic Forum in Davos, Switzerland, the heads of two of the world’s largest oil firms warned that the decline in investments in future production could lead to a supply shortage and a dramatic price increase. Claudio Descalzi, the head of Italian energy company Eni Spa, said that unless OPEC acts to restore stability in oil prices, these could overshoot to $200 per barrel several years down the line. “What we need is stability… OPEC is like the central bank for oil which must give stability to the oil prices to be able to invest in a regular way,” Descalzi told Reuters Television. He expected prices to stay low for 12-18 months but then start a gradual recovery as U.S. shale oil production began falling. But both OPEC and Saudi Arabia, the group’s largest producer, stuck to their guns.

“If we had cut in November we would have to cut again and again as non-OPEC would be increasing production,” OPEC Secretary General Abdullah al-Badri said in Davos. “Everyone tells us to cut. But I want to ask you, do we produce at higher cost or lower costs? Let’s produce the lower cost oil first and then produce the higher cost,” Badri said. “Prices will rebound. I saw this 3-4 times in my life.” Al-Badri said the policy was not directed at Russia, Iran or the United States.

Read more …

Talking one’s book.

• Davos Oil Barons Eye $150 Oil As Investment Slump Incubates Future Crunch (AEP)

Rampant speculation by hedge funds and a rare confluence of short-term shocks have driven the price of oil far below its natural clearing level, coiling the springs for a fresh spike this year that may catch markets badly off-guard once again. “The price will rebound and we will go back to normal very soon,” said Abdullah Al-Badri, OPEC’s veteran secretary-general. “Yes, there is an over-supply, but fundamentals don’t justify this 50pc fall in price.” xperts from across the world – from both the West and the petro-powers – said the slump in fresh investment in 2015 is setting the stage for a much tighter balance of supply and demand, and possibly a fresh oil crunch. Mr Al-Badri said he had been through price swings before but recovery may be swifter today than in past cyclical troughs. “This time we have to be very careful to handle this crisis right. We must keep investing, and not lay off experienced people as we did last time,” he told the World Economic Forum in Davos.

Claudio Descalzi, chief executive of Italy’s oil giant ENI, said the last phase of the price crash from $75 a barrel to around $45 was driven by wild moves on the derivatives markets. Traders with “long” positions effectively capitulated once it became clear that OPEC was not going to cut output to shore up prices. This led to abrupt switch to massive “short” positions instead. “These contracts are 15 or 20 times the physical market,” he said. Mr Descalzi said the roller coaster move in prices is destructive for the oil industry and is leading to investment cuts that may store up serious trouble for the future. “What we need is stability: a central bank for oil. Prices could jump to $150 or even $200 over the next four or five years,” he said. Khalid Al Falih, president of Saudi Aramco, the world’s biggest oil producer, said the mix of financial leverage and the end of quantitative easing had “accelerated” the collapse in prices but the slide has lost touch with reality.

“We’re going to see higher demand this year. Investors are shaken and will now be more careful about committing money to mega-projects in the oil and gas industry,” he said. Fatih Birol, the chief economist for the International Energy Agency, said the dramatic crash since June has been caused by a unique set of events. Supply surged by 2m barrels a day (b/d) last year – the highest in 30 years – at exactly the same moment that China slowed sharply, Japan fell back into recession and Europe’s recovery stalled. “Oil at $45 is a temporary phenomenon, so don’t get too relaxed. We see upward pressures on prices by the end of this year. Oil investments are going to fall by 15pc or about $100bn dollars this year,” he said.

Read more …

Sure.

• OPEC Secretary General: Oil To Remain At Low Levels For A Month (CNBC)

The secretary general of OPEC told CNBC on Wednesday that oil prices were likely to remain around their current levels for around a month before rebounding. Speaking at the World Economic Forum in Davos, Abdullah al-Badri said it was hard to predict oil price movements given the ongoing fluctuations. “It will stay for another month at this low price, but I’m sure the price will rebound,” he told CNBC. Brent crude oil prices have dropped almost 50% since last year in the biggest annual fall since 2008, amid weakening demand and a refusal by OPEC to cut production in November. But al-Badri insisted that the group, which provides about a third of the world’s supply, “knew what it was doing.” “We know that there is over-supply in the market, that there is a lower demand—and we decided to keep production as it is,” he said.

If OPEC was going to reduce supply, it had to be alongside production cuts by non-OPEC members, such as U.S. shale producers, al-Badri said. If OPEC was going to reduce supply, it had to be alongside production cuts by non-OPEC members, such as U.S. shale producers, al-Badri said. He insisted that the group was not playing a “game of chicken” with its rivals, as some analysts have claimed, over who can absorb the dip in prices and not cut back on production. “This is a collective decision. It is agreed by all the ministers. … There is a pure economic decision. It is not targeted at anybody. … Whatever you hear is nonsense,” he said. “We are more united than ever. … We are a very strong group.”

Read more …

“Companies like us, at BP, we’re going to need to rebase the company based on no guarantees at all that the price will come back up..”

• BP Boss Bob Dudley: Oil Prices ‘Low For Up To 3 Years’ (BBC)

The boss of oil giant BP Bob Dudley has said that oil prices could remain low for up to three years. He added that could send UK petrol prices below £1 per litre. He told BBC Business editor Kamal Ahmed in Davos BP was planning for low oil prices for years to come. That is expected to lead to job losses and falling investment in the North Sea oil industry and elsewhere, curbing supply and eventually forcing the price back up. Italian oil group Eni has said the next spike could be around $200 a barrel. Eni’s chief executive, Claudio Descalzi, said the oil industry would cut capital spending by 10-13% this year because of slumping prices. He said that would create longer-term shortages and sharp price rises in four to five years’ time, if the OPEC cartel fails to cut supplies.

Mr Dudley said historically world oil prices have fluctuated, and sometimes have remained low for a number of years. He expects to see current low prices for at least a year, and that BP has to plan for that. “Companies like us, at BP, we’re going to need to rebase the company based on no guarantees at all that the price will come back up,” he said. “We have go to plan on this [price] being down, and we don’t know exactly what level, but certainly a year, I think probably two and maybe three years.” From 2010 until mid-2014, oil prices around the world were fairly stable, at around $110 a barrel. However, since June prices have more than halved. Brent crude oil is around $48 a barrel, and US crude is around $47 a barrel. Mr Dudley said lower oil prices could mean UK petrol could fall below £1 per litre. This kind of petrol price was “not far off”, despite taxation forming a part of the fuel price. “If prices keep going down, I’m sure you will [see £1 per litre],” he added.

Read more …

Oil service companies are also expanding.

• An Oilfield Turf War for Market Share Is Brewing (Bloomberg)

An oilfield brawl is taking shape between Halliburton and Schlumberger as the world’s two biggest energy service companies vie to grab more market share during a prolonged industry slump. Both companies have chosen to expand operations with an eye toward emerging from the downturn bigger and stronger than before. Schlumberger agreed Tuesday to pay $1.7 billion for a stake in a Russian drilling business, and Halliburton reaffirmed its commitment to buying rival Baker Hughes Inc. for $34.6 billion. The combined companies will be about half the size of Schlumberger. “There’s going to be some market share battles between the two of them,” James West, an analyst at Evercore ISI, said in a phone interview. “Both will attempt to take market share from companies that can’t provide very high efficiency, very high technology products and services.”

A backlog of work provided Halliburton, Baker Hughes and Schlumberger with one last growth spurt in the fourth quarter as the companies turned the corner into a year where they’re expected to have to cut prices for their work by as much as 20%. Amid tens of thousands of industry job cuts, some oil producers have already slashed budgets by as much as 30%, Dave Lesar, chief executive officer at Halliburton, said on a conference call with analysts. The three oilfield service giants are taking their own steps to conserve cash as they brace to weather one of the deepest industry slumps since the 1980s oil bust. U.S. Crude prices have collapsed more than 55% since last year’s high of $107.26 in June.

Fourth-quarter earnings, excluding certain items, exceeded analysts’ expectations for each of the big three service companies. Schlumberger, excluding a $1.77 billion one-time charge that included severance costs, reported a profit of $1.94 billion. Halliburton boosted profit 14% to $901 million, while Baker Hughes more than doubled earnings to $663 million. Schlumberger is buying a stake in Eurasia Drilling, with an option to purchase the rest of the Russian rig contractor’s shares three years after the deal closes. The world’s largest oilfield contractor is betting that economic sanctions in the country will be lifted “sooner or later” in order to gain from a growing Russian oil services market, Alexander Kornilov, an analyst at Alfa Bank, said in an e-mail.

Read more …

We’ll see later today.

• ECB to Inject Up to €1.1 Trillion Into Economy in Deflation Fight (Bloomberg)

Mario Draghi called on the European Central Bank to make its biggest push yet to fend off deflation and revive the economy by unleashing a debt-buying spree of €1.1 trillion ($1.3 trillion). The ECB president and his Executive Board proposed spending €50 billion a month through December 2016, two euro-area central-bank officials said. The plan still faces a tense debate in the Governing Council and may change before the final decision on Thursday, the people said, asking not to be identified as the talks are private. An ECB spokesman declined to comment. By urging Fed-style quantitative easing, Draghi is remodeling the ECB as an aggressive central bank that will take risks even against the wishes of Germany, the region’s biggest economy.

Bundesbank President Jens Weidmann and Executive Board member Sabine Lautenschlaeger have argued QE isn’t needed and reduces the incentive of governments to make structural reforms. The proposal “looks larger than implied by the ECB’s previous comments about the size of its balance sheet,” said Riccardo Barbieri Hermitte, chief European economist at Mizuho in London. “A lot will depend on the risk-sharing features of the program.” Draghi’s intention is to expand the ECB’s balance sheet to the level seen in early 2012, or about €3 trillion. While the central bank has assets of about €2.2 trillion currently, that may shrink as €200 billion of outstanding long-term loans mature in coming weeks.

The ECB chief is scheduled to hold a press conference at 2:30 p.m. in Frankfurt on Thursday to announce the Governing Council’s decision. The council’s debate will be complicated by arguments over whether the risks incurred in the new bond-buying plan should be shared across the region’s 19 central banks or kept within national boundaries. Dutch central-bank Governor Klaas Knot has said any decision to mutualize risk should be taken by elected politicians, not unelected central bankers. The tension over that issue surfaced this week at a conference in Dublin. Irish Finance Minister Michael Noonan said having national central banks buy government bonds would be “ineffective” – drawing a response from ECB Executive Board member Benoit Coeure.

Read more …

As goal-seeked as you can get.

• Lagarde On European QE: It’s Already Working (CNBC)

The World Economic Forum in Davos has many different topics on the agenda but this year it coincides with an hotly anticipated announcement by Mario Draghi, the president of the EC). As part of the ECB’s attempts to stimulate the deflation-hit euro zone, Draghi’s press conference at 13:30 GMT, with a rate decision due at 12:45 GMT, is widely expected to be the moment the Governing Council launches some form of government bond-buying. And with the some of the most powerful people on the planet all meeting in a conference center in Switzerland, QE was the hottest topic of the week Christine Lagarde, managing director of the International Monetary Fund (IMF), said on Wednesday that expectations of a bond-buying program in Europe had already had an effect.

“To a point you can say that it has already worked,” Lagarde said on a panel in Davos. “If you look at currency variation and where the euro is at the moment, you can’t deny that there is expectations there that QE is about to come and is announced and will be significant.” European laggard economies were poised to benefit from the higher inflation expectations which would come with quantitative easing, Lagarde added. Official figures released earlier this month revealed that the euro zone slipped into deflation in December for the first time since 2009. “If there is some re-anchoring of inflation in the euro area, those emerging European markets, which are pegged to the euro, will have the benefit of that,” she said.

“Those that are at the moment, importing the inflation so to speak from the euro area will also benefit from that. If there is more growth, more jobs in the euro area, the emerging markets in Europe will benefit from that, because half of their trade actually goes to the euro area.” Speaking on the same panel as Lagarde, Larry Summers, the former U.S. Treasury Secretary, added: “I am all for European QE.”

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The big issue is whether Draghi can find enough bonds to purchase – by no means a given – and what their emptying the market of available bonds will do to bond markets.

• Mario Draghi May Need To Get A Bigger (QE) Boat (CNBC)

If Mario Draghi wants to have a significant market impact after Thursday’s European Central Bank meeting, he better not think small. The financial world’s collective gaze will be focused on the ECB president after the session, during which policymakers are expected to launch a U.S.-style quantitative easing program aimed at injecting liquidity into the sputtering euro zone economy, and goosing asset prices in the process. History, at least that generated by the Federal Reserve’s historically ambitious three rounds of QE, would suggest that the initiative would boost stocks, commodities and bond yields and, hopefully, generate some real economic growth.

However, that’s likely dependent upon how aggressive Draghi wants to get with the ECB’s version of QE, and specifically whether it can shock a market that already is well aware of the plan. “Our view is that the extent to which the ECB will surprise markets depends on size (well above market expectation of €500 billion) and the extent to which markets will perceive QE as being open-ended,” Gilles Moec, European economist at Bank of America Merrill Lynch, wrote in a report for clients. “ECB communication will be the key.” The latter part of the remark refers to the post-meeting news conference Draghi will hold.

Indications from him that the ECB continues to plan a “whatever it takes” approach to easing could spark markets, while anything less would be a disappointment. Moec figures the program will entail government bond buying of between €500 billion and €700 billion ($580 billion and $810 billion) over the span of 18 months, a close-to-consensus expectation that likely already is priced in. When headlines leaked of what the ECB was considering, the euro briefly sold, then rebounded and eventually settled slightly higher against the dollar. The trading action was an indication of “how baked-in expectations are to current market prices,” said Christopher Vecchio, currency analyst at DailyFX.

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“..investors’ willingness to buy government debt without expecting any profit is indicative of how little they trust corporate lenders.”

• Watch Europe Fumble QE (Bloomberg)

Tomorrow, the European Central Bank is almost certainly going to start a quantitative easing program, buying up government debt to provide money to banks so they plow it into European economies and thus boost demand and growth. So the theory goes, but the practice of European QE will probably prove it wrong. ECB President Mario Draghi has no other option after months of political pressure fueled by the panicky fear of deflation. In a way, the ECB painted itself into a corner by targeting headline inflation, not core inflation, which excludes food and energy. When the oil price halved in the last months of 2014, there was no way for the ECB to fulfill its mandate of keeping price growth close to 2% a year. My Bloomberg View colleague Mark Gilbert has pointed out that deflation hasn’t undermined consumer confidence in Europe as economists warned it would, and people haven’t really been delaying purchases. Yet, according to Jacob Funk Kirkegaard of the Peterson Institute for International Economics, a different danger still exists:

In general, falling prices of specific goods or services do not deter economic activity. The prospect of lower prices of computers does not, for example, keep consumers from purchasing them now. A greater risk to economic growth is that euro area employers, suspecting that deflation will boost real wages, may insist on minimum or even zero nominal wage increases in upcoming negotiations, reducing their purchasing power and dampening growth prospects.

The question is whether the injection of freshly minted euros from the ECB’s government-debt purchases will somehow make employers more amenable to raising wages and stimulating demand. For that to happen, the new euros first need to filter down to businesses. There are two ways that can happen: through the capital markets and through banks. The first path depends on driving down interest rates on sovereign debt so that lenders become more interested in other types of bonds, generated by businesses, and borrowing costs fall. Sovereign debt, however, already yields next to nothing. Germany today sold €4 billion ($4.7 billion) of zero% five-year bonds. Unless the QE drives yields on European sovereign debt deep into negative territory, it’s hard to see how the relative attractiveness of corporate bonds could increase by much. In fact, investors’ willingness to buy government debt without expecting any profit is indicative of how little they trust corporate lenders.

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“The ability of Jens Weidmann, the Bundesbank president, to promote his well-known concerns about risk-sharing into powerful conditions for a sovereign-bond program will astonish many who believed Mario Draghi could push through full-scale QE..”

• German Opt-Out Could Fatally Weaken Eurozone QE (MarketWatch)

In the shadowy world of European Central Bank decision-making, all central banks are equal — but some are more equal than others. Important concessions have been offered to the German Bundesbank to facilitate an announcement on sovereign-debt purchases after the ECB’s meeting on Thursday. But those concessions could open further divisions within the 19-member economic and monetary union, without guaranteeing the effectiveness of the attempt to overcome the eurozone’s low inflation and rebuild political cohesiveness. The QE program that ensues looks set to fall well short of the across-the-board quantitative easing that many financial-markets practitioners had been expecting. A significant additional factor in the complex ECB discussions on full-scale quantitative easing is last week’s Swiss National Bank decision to end its unilateral peg, in force since September 2011, between the Swiss franc and the euro.

That decision led to a sharp revaluation of the Swiss currency. The revoking of the earlier Swiss pledge to buy unlimited amounts of foreign currency to depress the Swiss franc has lowered the general credibility of central-bank statements on exchange rates and removed a major source of euro support. It exposes the SNB to heavy currency write-downs on its end-2014 foreign-exchange holdings of more than 475 billion francs, built up through unprecedented intervention to hold down the franc. Switzerland’s official reserves, up 10-fold since 2008, are now among the highest in the world. However, they will almost certainly be a major loss-maker for the Swiss state in 2015, with big political repercussions in Switzerland that will have an influence in Germany too. Further, the Swiss climb-down revealed the full extent of euro-bloc strains.

The mechanism of the single currency has depressed the real (inflation-adjusted) value of the “German euro” by at least 20%, compared with its theoretical level outside EMU. Whatever happens on Thursday, the fragility, hesitancy and politicization of the ECB’s decision-making are likely to drive the euro still weaker, without necessarily helping equity markets. The ability of Jens Weidmann, the Bundesbank president, to promote his well-known concerns about risk-sharing into powerful conditions for a sovereign-bond program will astonish many who believed Mario Draghi, the ECB president, could push through full-scale QE without accepting German strictures. The effective German opt-out from comprehensive support for other EMU countries rekindles memories of the Bundesbank’s surprise revelation in September 1992, when it said it would no longer intervene to shore up the Italian lira in the exchange-rate mechanism of the European Monetary System, the EMU’s forerunner.

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“..at least let’s say he’ll give it a good college try..”

• Market Will Be Disappointed By Draghi: Dennis Gartman (CNBC)

The market will likely be a bit disappointed by whatever economic stimulus European Central Bank President Mario Draghi announces Thursday, noted investor Dennis Gartman told CNBC on Wednesday. The ECB is expected to start a quantitative easing program it hopes will provide a boost to the European economy. “We’re going to end up seeing that Mr. Draghi will not be able to do what the market really wants him to do. He needs to get the balance sheet of the ECB back to $3 trillion, where it was several years ago. The problem that he has is that he doesn’t have the ammunition or he doesn’t have the capability to get it there,” the editor and publisher of The Gartman Letter said in an interview with “Closing Bell.”

While the U.S. has broad federal debt securities, the ECB has 19 different treasury securities from which to buy. “He would like to get it done. Size counts. Size matters. But I’m not sure he can get the size accomplished. So it will probably be a bit of a disappointment but at least let’s say he’ll give it a good college try,” Gartman said. The markets are anticipating about 500 billion euros ($580 billion) in bond purchases, but some economists think it could be higher. On Wednesday, sources confirmed to CNBC that the central bank is planning to announce it will purchase 50 billion euros of bonds a month. The Wall Street Journal first reported that figure.

“Let’s give him credit for being able to accomplish anything. This is a very tendentious group of people, of countries, that he has to try to get together,” Gartman said. Whatever Draghi can get done will help the European economy, he said, and will also put downward pressure upon the euro two to three weeks from now. “But you’re likely to get a small bounce. Any bounce that you get on the euro predicated upon disappointment … in tomorrow’s action … should be sold into,” Gartman added.

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“Europe can’t afford a Greek exit.”

• The Eurozone Can’t Afford A Greek Exit (Guardian)

Eurozone officials have spent the last four years building a financial buffer big enough to cope with a Greek exit. Ever since 2010 when Athens found itself unable to refinance its foreign loans and asked for a €120bn bailout, Brussels has sought to prevent another collapse and repeat of the crisis that swamped all ideas of recovery. Today a Grexit would weaken German and French banks, and cost the German government up to €77bn and the International Monetary Fund a slug of its loans, but would be unlikely to frighten global markets or undermine the 14-year-old currency bloc. In the last few weeks eurozone government bonds, which reflect the stability of a country’s finances, have remained steady while the leftist Syriza party’s polling has jumped.

In part, analysts say the €440bn European Financial Stability Facility (EFSF) amassed by Brussels is a big enough buffer. They have also scrutinised Syriza’s stance and reasoned that leader, Alex Tsipras, has given himself enough wriggle room to soften his previously hardline stance. Still, there are fears that the binding that holds the eurozone together will be loosened, especially if Greece is allowed to default while remaining inside the zone. The Bruegel Institute in Brussels is not the only thinktank to believe the estimated €250bn cost of a Grexit, while covered by the bailout funds, would cripple the eurozone and delay recovery for a decade. Zsolt Darvas, one of the institute’s economists said: “I am convinced that Greece will need new funding from European partners, but its volume should be a few dozen billion euros, say €20bn-€30bn.

“Compare the inconveniences of these additional funds to the losses on the existing approximate €250bn share of official lenders in Greek public debt (Greek Loan Facility, EFSF loans, IMF loans, money owed to the ECB and national central bank holdings of Greek bonds) and on various kinds of European Central Bank claims on Greece in the case of a Grexit.” Darvas said Greek loans can be extended to help Athens delay payments and use the money for reconstruction. Joachim Poss, the German Social Democratic party’s deputy finance spokesman in the German parliament, said earlier this month the total was unaffordable. “Europe as a whole would pick up a very, very large bill and Germany the biggest part – let there be no mistake,” he said, concluding: “Europe can’t afford a Greek exit.”

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“Syriza could embolden other anti-establishment parties challenging the mainstream political elite and their policies.”

• Populist Parties: Kryptonite For Europe’s Leaders? (CNBC)

Elections in Greece this weekend could prove a test bed for anti-establishment, populist parties throughout Europe which continue to make their plague mainstream parties in the opinion polls, general elections and on the streets. If Greek opinion polls are anything to go by, the Sunday’s snap election could be a nasty shock for Europe as the anti-establishment, anti-bailout party Syriza looks poised to win. Apart from concerns that Syriza would try to renegotiate Greece’s bailout terms with international lenders, reverse austerity measures and seek debt forgiveness – reasons enough to destabilize markets within the euro zone’s fragile, inter-connected economy – Syriza could embolden other anti-establishment parties challenging the mainstream political elite and their policies.

Among those that could stand to gain the most is Spain’s anti-establishment party “Podemos” (We Can). Despite being set up only one year ago, Podemos is leading opinion polls ahead of Prime Minister Mariano Rajoy’s People’s Party. Crucially, a general elections are due in Spain later this year — giving Podemos a real shot at power. “The rise of Syriza to power will represent an important test for the ability of an anti-establishment party to secure a better deal from Greece’s international creditors that will be closely watched by similar political movements, like Podemos,” Wolfango Piccoli, managing director of risk consultancy Teneo Intelligence told CNBC.

Anti-establishment movements such as the U.K. Independence Party (UKIP) and the Alternative for Germany (AfD) have spread throughout Europe over the last few years, accompanying a period of economic stress and unpopular austerity programs that have led voters to seek an alternative to the old political elite. “Behind the success of anti-establishment parties across Europe these days is the economic vulnerability in a growing subset of national electorates. From Syriza to UKIP, populist forces try to cash in on this insider-outsider politics, but each in their own national contexts,” Piccoli added.

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“Our homeland unfortunately is taking us backwards – paltry wages, miserable pensions – and we’re looking for something better.”

• Revenge of Disaffected Europe Risks Crisis Sparked in Greece (Bloomberg)

They speak different languages, they come from different backgrounds, yet all have the same message of frustration that’s threatening to redraw the European political map over the next year. Starting with elections this Sunday in Greece and heading west to Ireland via Britain and Spain, polls show Europeans will vent their anger over issues from widening income disparities and record unemployment to unprecedented immigration. For Athens pensioner Irini Smyrni, the moment she’d had enough was when her younger daughter lost her job with the government last year. For Dublin florist Nicola Johns, it was when her business fell behind on rent. “We pay, we pay, we pay,” said Smyrni, 73. “Our homeland unfortunately is taking us backwards – paltry wages, miserable pensions – and we’re looking for something better.”

English electrical technician David Liddle wants someone to stick up for people like him rather than immigrants and “scroungers.” Virginia Sanchez, an unpaid university researcher in Madrid, said she just grew tired of being failed by the usual politicians unable to improve her prospects. “I keep going because there’s nothing else to do,” said Sanchez, 23, who graduated in biology last year. Disaffection with what is seen as a ruling elite and a sense of being left behind in an increasingly globalized world are complaints heard across Europe on varying points of the political spectrum as the continent struggles to recover from successive waves of financial and economic crises.

European Central Bank President Mario Draghi today is expected to announce the latest efforts by his monetary policy makers to foster economic growth in the euro region by injecting money into the financial system. It’s unlikely to make enough of a difference to deter people from protesting at the ballot box. “Political elites have lost track of their citizens, who feel insecure amid all the economic and social pressures,” said Daniela Schwarzer, director of the German Marshall Fund’s Europe program in Berlin. “There’s a growing questioning of the political establishment across Europe.” The result is that people are abandoning parties used to being in government, those deemed safe to lead by creditors, investors and European bureaucrats.

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My bet is still they won’t.

• As Central Banks Surprise, Fed May Have To Throw In The Towel (MarketWatch)

The surprises coming out of the Swiss National Bank, the European Central Bank, the Bank of England and the Bank of Canada spell tectonic shifts occurring in the global economy that inevitably will hit these shores. The Swiss of course unearthed the biggest surprise last week, by ending their policy of buying up euros, but on Wednesday there were at least three further surprises as well. The surprises started as Bank of England minutes revealed that two hawks no longer supported rate hikes. That’s particularly newsworthy as the U.K. economy, along with the U.S., has been one of the strongest performers of industrialized nations. Then came news leaks on the European Central Bank’s quantitative easing plans.

That the ECB is about to start buying bonds is not a surprise, but the reports that they’ll do so each month is. While some in the market may be disappointed the headline size of 50 billion euros per month is not blockbuster, an open-ended campaign makes it easier for the ECB to continue the purchases and ramp them up. The Bank of Canada then shocked the market with a quarter-point rate cut, to 0.75%. The Bank of Canada is concerned that the sharp drop in oil prices will not just mute inflation but dampen growth in the export-intensive economy. The central bank even reported concerns that the oil-price collapse will have on foreign demand, exports, investment and jobs growth. With this backdrop, it seems almost ludicrous that the Fed will just stick to the plan it had in the fall, to start a rate-hike campaign in the middle of 2015.

In order for the Fed to do so, the U.S. economy will not only have to be resilient to some of the overseas pain, and its own domestic energy sector, but the inflows into government bonds and the dollar will have to slow. St. Louis Fed President James Bullard says the reason yields on U.S. Treasurys are so low is due to overseas investment and not fears over weak domestic growth. But even if right, that’s almost irrelevant. If the Fed starts hiking in this turbulent global environment, it will only accelerate overseas investment here — further dampening already-muted inflationary pressure and making life difficult for exporters, and possibly furthering risky behavior that some on the Fed want to clamp.

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Why the question mark?

• Is Canada’s Rate Cut A Race For The Bottom? (CNBC)

Commodity currencies may face a race to the bottom as the Bank of Canada’s surprise rate cut sent the Canadian dollar to five-year lows and could pressure Australia’s central bank to follow suit. “The reason [the Bank of Canada] cut rates is largely weaker oil prices. Australia is also a commodity exporter. The market could be excused for anticipating the RBA (Reserve Bank of Australia) would adopt a similar viewpoint,” said Greg Gibbs, senior foreign-exchange strategist at RBS. Discussions among market participants of whether successive rounds of central bank easing are making for a “tacit currency war” are increasing, he said.

On Wednesday, the Bank of Canada (BOC) cut its benchmark rate to 0.75% from 1%, its first rate change since late 2010, and cut its inflation and growth forecasts, citing the more than 50% decline in oil prices since mid-2014. The Canadian dollar, also known as the loonie, tanked, shedding as much as 4% against the dollar compared with Tuesday’s levels. The U.S. dollar was fetching levels not seen since 2009, during the Global Financial Crisis. Other central banks have also moved to weaken their currencies, with the Bank of Japan’s quantitative easing partly aiming for a weaker yen and Australia’s central bank trying to talk down its dollar.

The ECB’s likely move to announce plans Thursday to start buying assets set to further dent the euro, already at its weakest against the U.S. dollar since 2003. “Every central bank is trying to get rates down to zero, if not lower than zero,” Kumar Palghat at bond manager Kapstream told CNBC. “The only question is, you take rates down to zero, you depreciate your currency, you buy as much bonds as you want, if it doesn’t work, then what else are they going to do?” Energy and commodity exporters have particularly felt the heat. “Oil extraction now comprises roughly 3% of Canadian gross domestic product (GDP) and crude oil about 14% of Canadian exports,” Wells Fargo Securities said in a note Wednesday.

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“My only hope is that you understand that I acted in an attempt—however misguided—to generate higher returns for the fund and its investors..”

• Manager ‘Truly Sorry’ For Blowing Up $100 Million Hedge Fund (CNBC)

A hedge fund manager told clients he is “truly sorry” for losing virtually all their money. Owen Li, the founder of Canarsie Capital in New York, said Tuesday he had lost all but $200,000 of the firm’s capital—down from the roughly it ran as of late March. “I take responsibility for this terrible outcome,” Li wrote in a letter to investors, which was obtained by CNBC.com. “My only hope is that you understand that I acted in an attempt—however misguided—to generate higher returns for the fund and its investors. But even so, I acted overzealously, causing you devastating losses for which there is no excuse,” he added.

Li is a former trader at Raj Rajaratnam’s Galleon Group, which collapsed amid insider trading charges. Rajaratnam is now in prison for the illegal activity, but Li was never accused of wrongdoing. Li’s lieutenant at Canarsie is Ken deRegt, who joined in 2013 after retiring as the global head of fixed income sales and trading at Morgan Stanley. His son Eric deRegt also worked at Canarsie, according to filings with the SEC as of March 2014. Li said in the letter that he made a series of “aggressive transactions” over the last three weeks to make up for poor returns in December. He said he bet on stock price options, predicated on the broader market rising. But stock indexes fell, causing the huge losses along with several undisclosed direct investments, according to the note.

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“Just 80 individuals now have the same net wealth as 3.5 billion people – half the entire global population.”

• The Davos Oligarchs Are Right To Fear The World They’ve Made (Guardian)

The billionaires and corporate oligarchs meeting in Davos this week are getting worried about inequality. It might be hard to stomach that the overlords of a system that has delivered the widest global economic gulf in human history should be handwringing about the consequences of their own actions. But even the architects of the crisis-ridden international economic order are starting to see the dangers. It’s not just the maverick hedge-funder George Soros, who likes to describe himself as a class traitor. Paul Polman, Unilever chief executive, frets about the “capitalist threat to capitalism”. Christine Lagarde, the IMF managing director, fears capitalism might indeed carry Marx’s “seeds of its own destruction” and warns that something needs to be done. The scale of the crisis has been laid out for them by the charity Oxfam.

Just 80 individuals now have the same net wealth as 3.5 billion people – half the entire global population. Last year, the best-off 1% owned 48% of the world’s wealth, up from 44% five years ago. On current trends, the richest 1% will have pocketed more than the other 99% put together next year. The 0.1% have been doing even better, quadrupling their share of US income since the 1980s. This is a wealth grab on a grotesque scale. For 30 years, under the rule of what Mark Carney, the Bank of England governor, calls “market fundamentalism”, inequality in income and wealth has ballooned, both between and within the large majority of countries. In Africa, the absolute number living on less than $2 a day has doubled since 1981 as the rollcall of billionaires has swelled.

In most of the world, labour’s share of national income has fallen continuously and wages have stagnated under this regime of privatisation, deregulation and low taxes on the rich. At the same time finance has sucked wealth from the public realm into the hands of a small minority, even as it has laid waste the rest of the economy. Now the evidence has piled up that not only is such appropriation of wealth a moral and social outrage, but it is fuelling social and climate conflict, wars, mass migration and political corruption, stunting health and life chances, increasing poverty, and widening gender and ethnic divides. Escalating inequality has also been a crucial factor in the economic crisis of the past seven years, squeezing demand and fuelling the credit boom.

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It would still mean Monsanto et al own the rights and patents on our food, and that is as wrong as it can be.

• ‘Safer GMOs’ Made By US Scientists (BBC)

US scientists say they have taken the first step towards making “safer” GMOs that cannot spread in the wild, using synthetic biology. They have re-written the genetic code of bacteria to use only synthetic chemicals to grow. The GM bacteria would die if they escaped into nature. The research, published in Nature, is proof of concept for a new generation of GMOs, including plants, say Harvard and Yale university experts. Genetically engineered micro-organisms are used in Europe, the US and China to produce drugs or fuels under contained industrial conditions. Scientists want to build in safety measures so that their spread could be controlled if they were ever used in the outside world, perhaps to mop up oil spills or to improve human health.

“What we’ve done is engineered organisms so that they require synthetic amino acids for survival or for life,” Prof Farren Isaacs of Yale University, who led one of two studies, told BBC News. He said the future challenge was to re-engineer the code of other lifeforms. “What we’re seeing here is an important proof of concept that re-coding genomes and engineering dependence on synthetic amino acids is technically feasible in not just E coli but other micro-organisms and multicellular organisms such as plants.” GMOs have a number of potential practical uses, including the production of drugs and fuels, and removing pollutants from contaminated areas. However, strict containment measures would be needed to use them in open spaces to stop them spreading in the wild.

The US researchers describe their research, published in Nature journal, as a “milestone” in synthetic biology. Prof George Church of Harvard Medical School, who led the other study, said in order to protect natural ecosystems and address public concern the scientific community needed to develop robust biocontainment mechanisms for GMOs. “This work provides a foundation for safer GMOs that are isolated from natural ecosystems by a reliance on synthetic metabolites.”

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Debt Rattle January 21 2015

Jan 212015
 
 January 21, 2015  Posted by at 11:28 am Finance Tagged with: , , , , , , , , ,  3 Responses »


DPC Cab stand at Madison Square, NY 1900

• All Empires Die By Deflation – Not Inflation (Martin Armstrong)
• Global Dollar Economy Hits ‘Deflationary Vortex’ (Zero Hedge)
• Albert Edwards: ‘Markets Will Riot’ On Deflation (Huebscher)
• QE Warfare Pushing World Financial System Out Of Control (AEP)
• Fed Officials on Track to Raise Short-Term Rates Later in the Year (WSJ)
• Central Bankers Lurch From ‘Whatever It Takes’ To ‘Whatever Next’ (Reuters)
• Storm Clouds Gather Over US Economy: Can The Miracle Last? (CNBC)
• Davos Is About More Control And Banksterism, Not Solutions: Lew Rockwell (RT)
• Brokers Reveal Details Of Damage From Swiss Chaos (Independent)
• Iran Oil Minister Sees ‘No Threat’ From $25 Oil (MarketWatch)
• BHP Billiton Cuts US Shale Oil Rigs By 40% Amid Sliding Price (AFP)
• Chinese Stocks’ Booms and Busts Getting Bigger on Margin Debt (Bloomberg)
• The Era Of 7% Growth Is Over For China (CNBC)
• Defiant Obama Pushes ‘Middle-Class Economics’ (Reuters)
• Credit Rater S&P to Be Banned for Year From Commercial-Bond Market (Bloomberg)
• If Money Speaks Louder Than Words, Is It Speech? (Reuters)
• No Clear Majority Yet In EU For TTIP Trade Deal (Reuters)
• Ukraine Crisis ‘Turning Point’ Close: Russian Deputy PM (CNBC)
• If Christine Lagarde And Her EU Pals Are Our Friends, Who Needs Enemies? (IM)
• Pope Francis: Failing to Care for Environment Is a Betrayal of God (Slate)

“This is the death-spiral of empires. They consume all wealth until none is left.”

• All Empires Die By Deflation – Not Inflation (Martin Armstrong)

A lot of people have asked what to do because property taxes keep rising and they can see they are unable to retire under such circumstances. The politicians are wiping out the elderly diminishing their savings and exploiting them in every way. There are no exceptions for taxation when you sell your home as there are in Britain. You pay no tax on the profits from a primary residence there. In the USA, you are taxed until you die. and then they want what is left. Property taxes are the worst of all taxes for they prevent you from really owning your home. Can’t pay the tax – they take it and sell it for pennies on the dollar. You have to pay taxes as if you were still working so all you can do is sell and move south and then pay taxes on your gains. New Jersey even put in an exit tax on the people it has been forcing to leave.

California has been hunting former residents who moved demanding taxes on pensions claiming they earned it when living in that state. It is a wonder why we do not yet have a sea of grey hair people with guns and pitchforks storming Washington yet. This is how empires die. Taxes in Rome kept rising. Its population peaked about 180AD and as corruption began to rise, people began to leave. The higher the taxes, the more people left town. Eventually, people could not afford the taxes and were forced to just abandon their homes. This is the death-spiral of empires. They consume all wealth until none is left. Indeed, Ben Franklin got it right – our fate is always doomed by death and taxes. By the Middle Ages, the Roman Forum, was the grazing grounds for animals. Edward Gibbon wrote the best epitaph:

“Her primeval state, such as she -might–appear in a remote age, when Evander entertained the stranger of Troy, has been delineated by the fancy of Virgil. This Tarpeian rock was then a savage and solitary thicket; in the time of the poet, it was crowned with the golden roofs of a temple, the temple is overthrown, the gold has been pillaged, the wheel of Fortune has accomplished her revolution, and the sacred ground is again disfigured with thorns and brambles. The hill of the Capitol, on which we sit, was formerly the head of the Roman Empire, the citadel of the earth, the terror of kings; illustrated by the footsteps of so many triumphs, enriched with the spoils and tributes of so many nations. This spectacle of the world, how is it fallen! how changed! how defaced!

The path of victory is obliterated by vines, and the benches of the senators are concealed by a dunghill. Cast your eyes on the Palatine hill, and seek among the shapeless and enormous fragments the marble theatre, the obelisks, the colossal statues, the porticos of Nero’s palace: survey the other hills of the city, the vacant space is interrupted only by ruins and gardens. The forum of the Roman people where they assembled to enact their laws and elect their magistrates, is now enclosed for the cultivation of pot-herbs, or thrown open for the reception of swine and buffaloes. The public and private edifices that were founded for eternity lie prostrate, naked, and broken, like the limbs of a mighty giant, and the ruin is the more visible from the stupendous relics that have survived the injuries of time and fortune.”

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“..if the trade weighted dollar is appreciating, then this exerts downward pressure on the dollar economy on a near one-to-one basis.”

• Global Dollar Economy Hits ‘Deflationary Vortex’ (Zero Hedge)

One of the macroeconomic observations that has gotten absolutely no mention in recent months is the curious fact that while global economic growth has not imploded in recent quarters, it is because GDP has been represented, as is customary, in local currency terms. Of course, this comes as a time when local currencies (at least those which are not the USD) have been plunging against the greenback on the back of the expectations that the Fed will hike rates some time in the summer or later in 2015. Which also means that in “dollar economy” terms, i.e., converted in USD, things are not nearly as good.

In fact, as the chart below shows, the global dollar economy is not only shrinking fast, but it is doing so at the fastest pace since the Lehman collapse, having shrunk by $4 trillion, or a whopping 5%, in just the last 6 months! By way of comparison the dollar economy lost $7 trillion, or a 10% contraction, during the Lehman crisis. Should the USD continue to appreciate, the global dollar economy collapse may surpass the plunge observed just as the great financial crisis struck. SocGen calls it “a deflationary vortex”; CNBC would call it a “global recovery.” Here is SocGen on this largely undiscussed topic with “The deflationary vortex of a shrinking dollar economy”:

As the ECB prepares to race faster in a bid to export deflation, the risk is that the dollar economy (world GDP measured in US dollars) will shrink further. The dollar economy is down by just over 5% since July, marking a loss of just over $4tn in nominal terms. The last sharp contraction of the dollar economy took place in 2008. Back then the economy shrank by just over $7tn, marking a loss in excess of 10%. The foreign trade mix of the US fairly closely mirrors the composition of world GDP. As such, if the trade weighted dollar is appreciating, then this exerts downward pressure on the dollar economy on a near one-to-one basis.

Any offset then comes from nominal GDP growth in local currency terms. Since July, the trade weighted dollar has gained just over 10%. Viewing the global economy from the vantage point of the dollar economy, it is hardly surprising that when the trade weighted dollar appreciates, commodity demand is eroded as economies with depreciating currencies lose purchasing power. To the extent that central banks actively seek currency depreciation, this could see further shrinkage of the dollar economy and add further downward pressure to commodity prices.

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“This is the year the markets really panic about deflation. You haven’t had that panic yet.”

• Albert Edwards: ‘Markets Will Riot’ On Deflation (Huebscher)

Albert Edwards admits that his “uber bear” reputation is well deserved, at least with respect to equities, an asset class he has dismissed for the last 10 years. His bearishness has not abated, and for the coming year, he fears that “deflation will overwhelm the west.” Markets, he said, will riot. Edwards is the chief global strategist for Societe Generale and he spoke at that firm’s annual global strategy conference in London on January 13. Global markets face three risks, according to Edwards: bearishness in the U.S. government bond market, a flawed confidence that the U.S. is in a self-sustaining recovery and undue faith in the relationship between quantitative easing (QE) and the equity markets. Deflation is the main threat, though, according to Edwards. “This is the year the markets really panic about deflation. You haven’t had that panic yet.”

Edwards said that U.S. equities are “stuck in a secular-valuation bear market” and have been inflated by QE. Though he did not predict a recession, he said stocks would react very negatively if one were to happen. “The market embraces a recession by going to a new lower low on valuations,” he said. He offset that pessimism with a bullish view on the U.S. bond market. He said the 10-year yield could go below 1% and “converge on what is happening in Japan.” “Markets move on extreme surprises,” Edwards said, “and when expectations are so firmly held and they are shown not to be the case, you get these extreme moves.”

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“QE is not going to help at all. Europe has far greater reliance than the US on small and medium-sized companies and they get their money from banks, not from the bond market..”

• QE Warfare Pushing World Financial System Out Of Control (AEP)

The economic prophet who foresaw the Lehman crisis with uncanny accuracy is even more worried about the world’s financial system going into 2015. Beggar-thy-neighbour devaluations are spreading to every region. All the major central banks are stoking asset bubbles deliberately to put off the day of reckoning. This time emerging markets have been drawn into the quagmire as well, corrupted by the leakage from quantitative easing (QE) in the West. “We are in a world that is dangerously unanchored,” said William White, the Swiss-based chairman of the OECD’s Review Committee. “We’re seeing true currency wars and everybody is doing it, and I have no idea where this is going to end.” Mr White is a former chief economist to the Bank for International Settlements – the bank of central banks – and currently an advisor to German Chancellor Angela Merkel. He said the global elastic has been stretched even further than it was in 2008 on the eve of the Great Recession.

The excesses have reached almost every corner of the globe, and combined public/private debt is 20% of GDP higher today. “We are holding a tiger by the tail,” he said. He warned that QE in Europe is doomed to failure at this late stage and may instead draw the region into deeper difficulties. “Sovereign bond yields haven’t been so low since the ‘Black Plague’: how much more bang can you get for your buck?” he told The Telegraph before the World Economic Forum in Davos. “QE is not going to help at all. Europe has far greater reliance than the US on small and medium-sized companies (SMEs) and they get their money from banks, not from the bond market,” he said. “Even after the stress tests the banks are still in ‘hunkering down mode’. They are not lending to small firms for a variety of reasons. The interest rate differential is still going up,” he said.

The warnings come just as the ECBprepares a blitz of bond purchases at a crucial meeting on Thursday. Most ECB-watchers expect QE of around €500bn now that the eurozone is already in deflation. Even the Bundesbank is struggling to come with fresh reasons to oppose it. The psychological potency of this largesse will depend on whether the ECB opts for shock-and-awe concentration or trickles out the stimulus slowly. It also depends on the exact mechanism used to conduct QE, a loose term at best. ECB president Mario Draghi hopes that bond purchases will push money out into the broader economy through a “wealth effect”, but critics fear this will be worse than useless if it leads to an asset bubble without gaining traction on the real economy. Classic moneratists say the ECB may end up spinning its wheels should it merely try to expand the money base. Mr White said QE is a disguised form of competitive devaluation. “The Japanese are now doing it as well but nobody can complain because the US started it,” he said.

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Jon Hilsenrath is the unofficial Fed bullhorn. So pay attention.

• Fed Officials on Track to Raise Short-Term Rates Later in the Year (WSJ)

Federal Reserve officials are staying on track to start raising short-term interest rates later this year, even though long-term rates are going in the other direction amid new investor worries about weak global growth, falling oil prices and slowing consumer price inflation. The Fed’s stance, as it prepares for a policy meeting later this month, is striking because European Central Bank officials are poised to take the opposite approach later this week. The ECB is nearing a decision on whether to launch a controversial stimulus program known as quantitative easing on Thursday. It is widely expected to announce it will buy hundreds of billions or more of euro-denominated government bonds in an effort to beat back Japan-style deflation.

The world hasn’t seen an economic divergence like this since the mid-1990s, when growth in the U.S., Japan and Europe went in different directions. Back then, Japan was mired in a post-real-estate bubble downturn, Europe was grappling with the consequences of the collapse of the Soviet Union and the U.S. was enjoying a burgeoning technology boom. The looming moves have important implications for markets and growth. Investors have already been driving up the value of the U.S. dollar in anticipation of the moves and driving down long-term interest rates across the globe. “I think it is important to get started and to start normalizing policy,” St. Louis Fed President James Bullard said in an interview with The Wall Street Journal on Monday. “Even once we start to normalize, interest rates would be extraordinarily low.” [..]

“The level of inflation is not so low that it can alone justify a policy rate of zero,” Mr. Bullard said in a speech Friday. He wants the Fed to start raising rates by March, earlier than most other officials. San Francisco Fed President John Williams said in a speech Friday the middle of the year may still be the best time for the U.S. central bank to increase rates. Given the health of the broader economy, “what I’m really watching for is underlying inflation—wage growth, prices [..] My forecast is once we get through this slow path in inflation it will start moving back,” he said, adding, “I’m not expecting inflation to be 2% when we raise interest rates.I don’t need to be at the goal when we raise the rates.”

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“Monetary methadone..”

• Central Bankers Lurch From ‘Whatever It Takes’ To ‘Whatever Next’ (Reuters)

The Swiss currency shock has raised an awkward question many investors have been fearful of asking – what if central banks become as unpredictable and fallible as they are powerful? The Swiss National Bank’s sudden decision to abandon its three-year-old cap on the franc – the “cornerstone” of its monetary policy just three days before – led to the biggest one-day move in major exchange rates in the post-1973 floating rates era. To some it was a warning sign of other U-turns, mishaps and possible failures by central banks still ahead, outcomes not fully appreciated by long-becalmed markets. For decades the power of currency printing presses has held markets in thrall. “Don’t fight the Fed” and all its international variations has been a devout belief among financial traders.

Even after the failure of Alan Greenspan’s Federal Reserve to spot and headoff one of the biggest credit booms and busts in history, the ability of the Fed, Bank of England, Bank of Japan, European Central Bank and others to flood their money supply to ease the fallout helped anaesthetise fractious markets. The subsequent waves of cheap credit, currency fixes and “quantitative easing” drove down borrowing rates and erased volatility. The demonstrations of central bank might culminated in ECB chief Mario Draghi’s declaration in 2012 that he would do “whatever it takes” to save the euro. In the face of the power of the money printing press, speculation became pointless. So much so that one of the biggest conundrums of recent years became the persistently low implied volatility in markets even in the face of outsized economic, political and policy risks.

Not everyone was pleased by the complacency. “Monetary methadone was the best of no choice but we have become addicted to cheap money everywhere and, somehow, that central bankers are prophetic,” Nigel Wilson, chief executive of UK insurer Legal & General told Reuters. The first cracks appeared last summer, when it became clear the Fed was turning off the printing presses even as counterparts in Europe and Japan were still cranking up theirs. The idea the world’s largest economy was about to suck dollars back out of the world just as others were pumping in euros and yen sent once-steady exchange rates lurching. The power of the central banks was as daunting as ever, but no longer such a reassuring and calming influence.

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No.

• Storm Clouds Gather Over US Economy: Can The Miracle Last? (CNBC)

The world just got a bit scarier for risk assets. On Thursday morning, the Swiss National Bank shocked the world by removing its cap on the Swiss franc against the euro, causing its currency to soar and the euro to plunge—and creating fears about more sudden central bank moves. Meanwhile, global growth concerns continue to drive industrial commodities like copper and crude oil to multi-year lows. With the U.S. serving as one of the world’s few bastions of security and growth, the dollar continues to soar and Treasury yields are plummeting in a bid for safe havens. The question now: How long can America continue to shine in an increasingly uncertain and slow-growing world? A key clue could come in the week ahead, as a slate of major companies report their fourth-quarter results and release forward guidance.

Most closely watched will be energy companies like Halliburton and Baker Hughes, consumer discretionary names like Starbucks and McDonald’s, and industrial giants like GE. The overarching questions will be whether the soaring dollar and plunging energy prices are helping or hurting—and just how much the weakening global environment is a concern for corporate managers. “What I’m going to be watching for is some clarity from the companies in terms of the decline in the price of oil, and the decline of interest rates and the rise of the dollar,” said John Conlon, chief investment officer at People’s United Bank. “I’m going to see if there’s some consensus developing in terms of the price of oil and interest rates.”

Thus far, the “blended” estimate for fourth quarter earnings growth (which combines reported earnings with analyst estimates for yet-to-be-reported earnings) stands at a meager 0.6%, according to FactSet. That’s down from 1.7% on December 31st, mostly due to misses from Citigroup, Bank of America and JPMorgan. It’s worth noting that since more companies beat than miss, actual earnings growth tends to be prettier than the estimates. But if the growth rate does stand at 0.6% after the dust has settled, that would mark the slowest earnings growth since the third quarter of 2012, when S&P 500 companies reported an earnings decline of 1%.

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“..what they actually are doing is plotting even more wars, interventions, more economic controls, more ‘banksterism’, more benefits to the power elite versus the people”

• Davos Is About More Control And Banksterism, Not Solutions: Lew Rockwell (RT)

The Davos meeting is not looking for world crisis solutions but plotting more controls, ‘banksterism’ and power elite benefits, says economic journalist Lew Rockwell. They are going to tax and rip off their own people to even greater extent, he added.

RT: The main theme of the Davos forum in the past has largely been finding solutions for world economic problems. How about today? Is it still about that?

Lew Rockwell: No, it is actually about control. I think it has always been about control for the US Empire, for the oligarchs associated with it. They may talk about wanting to solve problems, or make people’s lives better, [but] what they actually are doing is plotting even more wars, interventions, more economic controls, more ‘banksterism’, more benefits to the power elite versus the people. We don’t know what is going on there. I’d like to put chest cams on all of them so we can see what they are doing, what they are talking about. It is not good for the cause of freedom, for the cause of prosperity, not good for the cause of human rights what goes on in Davos.

RT: Let’s talk about numbers. For example, this year companies have to pay $20,000 per executive for a ticket. A simple dinner in an average restaurant was $40 last year. A night in a mid-range hotel has gone from roughly $600 to $700. Do the Forum’s participants need all these special arrangements to make an effective decision?

LR: It is a meeting of the very rich and it’s a meeting of the politicians that they own. They all live very well; they are not staying in the middle range hotels and are not eating at the regular restaurants. They are having the times of their lives; they lived the life of riley at the expense of everybody else. I don’t think we need to worry about cost to them. They are happy to spend the money. It is not theirs after all; they are taking it from the rest of us.

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“The aftermath is like a black hole that can suck massive amounts of credit from currency trading as we have known it.”

• Brokers Reveal Details Of Damage From Swiss Chaos (Independent)

The UK’s biggest spread-betting firm, IG Group, said yesterday that it would “learn lessons” from last week’s stunning reversal by the Swiss National Bank (SNB), which cost it £30m. IG is nursing £18m in client losses from the SNB’s shock scrapping of the franc’s cap against the euro, as well as £12m in market exposure. IG honoured the loss limits of clients but was unable to close its hedging positions on bets because of the extreme volatility, which saw the euro tumble 30% against the “Swissie” at one stage. The company intends to maintain the dividend at last year’s level. “Although this was because of an unprecedented and unforeseeable degree of movement in a major global currency, and only a few hundred clients were affected, we will seek to learn lessons from this incident which we can incorporate into our risk-management approach,” the company said.

The Swiss blow took the gloss off strong results from the company, which has seen 1,700 clients sign up to a new stockbroking account. IG generated its highest monthly revenue in October, when global markets sank on growth fears, helping half-year profits up 2.8% to £101.4m. Another victim of the SNB’s currency earthquake, the US broker FXCM, also revealed the punishing terms of a $300m (£198m) rescue loan from investment firm Leucadia National, owner of a wide range of companies that includes broker Jefferies. FXCM will pay an eye-watering 10% annual interest on the loan, with the rate increasing by 1.5% a quarter up to a maximum of 17%, to encourage a sale of the business within three years. Leucadia will get half the proceeds on a sale of FXCM after the loan is repaid, although it will claim an even bigger share on a sale above $500m.

Danish investment bank and broker Saxo said it would incur losses from the SNB move but that its capital position was not in peril. The firm gave its clients less leverage to bet on the currency last year, reducing its exposure. Analysts said that the full impact of the scrapping of the Swiss franc-euro ceiling by the Swiss central bank won’t be known for months. “[It is] closer to a nuclear explosion than a 1,000-kilogram conventional bomb” said Javier Paz, senior analyst in wealth management at Aite Group. “The aftermath is like a black hole that can suck massive amounts of credit from currency trading as we have known it.”

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“If the oil prices drop to $25 a barrel, there will yet again be no threat posed to Iran’s oil industry..”

• Iran Oil Minister Sees ‘No Threat’ From $25 Oil (MarketWatch)

Do I hear $25-a-barrel oil? Iran’s oil Minister Bijan Namdar Zanganeh hinted at even lower prices for crude as he declared his well positioned for plunging crude oil prices. “If the oil prices drop to $25 a barrel, there will yet again be no threat posed to Iran’s oil industry,” said Zanganeh at a conference in Tehran on Monday. That means the country should be sitting pretty as the OPEC sticks to its guns on production cuts. But Zanganeh also predicted that OPEC and non-OPEC countries will eventually “cooperate to restore balance to the oil market.” Wishful thinking perhaps in a situation where the market only reads: too much supply, not enough demand. On Sunday, his Iraq counterpart, Adel Abdul-Mehdi, said his country pumped out a record four million barrels per day of oil in December

Recently, billionaire Saudi businessman Prince Alwaleed bin Talal, said the market can kiss $100-a-barrel oil goodbye forever. “I said a year ago [that] the price of oil above $100 is artificial,” Alwaleed said. “It’s not correct.” Over at Project Syndicate last week, Anatole Kaletsky, a former Times of London columnist said $50 oil should really be the ceiling for a much lower price range, which could drop all the way down to $20 a barrel. “As it happens, estimates of shale-oil production costs are mostly around $50, while marginal conventional oilfields generally break even at around $20. Thus, the trading range in the brave new world of competitive oil should be roughly $20 to $50,” said Kaletsky, chief economist and co-chairman of Gavekal Dragonomics.

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“The announcement that BHP will reduce the number of US onshore oil rigs it operates by the end of this financial year is a pointer to the industry-wide supply response yet to come..”

• BHP Billiton Cuts US Shale Oil Rigs By 40% Amid Sliding Price (AFP)

The world’s biggest miner BHP Billiton is cutting back its operating US shale oil rigs by 40% amid slumping prices. BHP said on Wednesday it would reduce the number of rigs from 26 to 16 by the end of the June in response to weaker oil prices. However, shale volumes were still forecast to grow by approximately 50% during the period. “In petroleum, we have moved quickly in response to lower prices and will reduce the number of rigs we operate in our onshore US business by approximately 40% by the end of this financial year,” chief executive Andrew Mackenzie said. “The revised drilling programme will benefit from significant improvements in drilling and completions efficiency.” Mackenzie said while the firm’s drilling operations would focus on its Black Hawk field in Texas, “we will keep this activity under review and make further changes if we believe deferring development will create more value than near-term production”.

Oil prices slid again Tuesday after the International Monetary Fund slashed its forecast for world economic growth and revived concerns about the strength of crude demand. US benchmark West Texas Intermediate for February sank US$2.30, or 4.7%, to US$46.39 a barrel, not far from its lowest level since March 2009. “The announcement that BHP will reduce the number of US onshore oil rigs it operates by the end of this financial year is a pointer to the industry-wide supply response on lower oil prices that is yet to come,” CMC Markets’ chief market analyst Ric Spooner said in a note. BHP added that its iron ore output had risen by 16% for the three months to December compared to a year earlier, hitting 56.4m tonnes. Prices in iron ore, one of BHP’s core commodities, slumped 47% in 2014 amid a global supply glut and softening demand from China.

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“When the tide turns, it’s going to be very ugly, because you will have a forced exit from the market.”

• Chinese Stocks’ Booms and Busts Getting Bigger on Margin Debt (Bloomberg)

The one thing China’s bulls and bears can agree on is that swings in the world’s most-volatile major stock market are only going to get bigger after equity traders took on record amounts of debt. Both Bank of America strategist David Cui, who predicts Chinese shares will fall, and JPMorgans Adrian Mowat, who has an overweight rating, say the surge in margin lending to all-time highs is amplifying price fluctuations in the $4.9 trillion market. Volatility in the benchmark Shanghai Composite Index reached the highest level since 2009 this week after rising more than fourfold since July. While the flood of borrowed money into Chinese stocks added fuel to a 59% rally in the Shanghai Composite during the past 12 months through yesterday, the gauge’s 7.7% tumble on Monday illustrates how leverage can also accelerate declines.

Margin traders unloaded shares at the fastest pace in 19 months during the rout, which was sparked by regulatory efforts to cool the growth of margin debt in a market where individuals drive 80% of equity volumes. “Margin trading will add more up-and-down to the market and increase volatility,” Xie Weiyu at Shenyin & Wanguo in Shanghai, said. “If a correction starts, the magnitude will be bigger than the past few years.” In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest from a brokerage. The loans are backed by the investors’ equity holdings, meaning they may be forced to sell when prices fall to repay their debt.

The Shanghai Composite sank the most in six years on Monday after the China Securities Regulatory Commission suspended the nation’s two biggest brokerages from lending money to new equity-trading clients and said securities firms shouldn’t lend to investors with assets below 500,000 yuan ($80,467). Outstanding margin loans on both the Shanghai and Shenzhen exchanges surged more than tenfold in the past two years to a record 1.1 trillion yuan as of Jan. 16, or about 3.5% of the nation’s market value. On the New York Stock Exchange, margin debt amounts to about 2.1% of market cap on the NYSE Composite Index. Margin lending is a “new phenomenon in China,” said Cui, who anticipates the Shanghai Composite will fall about 5% by year-end. “When the tide turns, it’s going to be very ugly, because you will have a forced exit from the market.”

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Again: China is doing far worse than it pretends.

• The Era Of 7% Growth Is Over For China (CNBC)

Brace for growth numbers starting with “6” from China this year, economists say, after data showed the world’s second largest economy expanded at its slowest pace in over two decades in 2014. China’s GDP release on Tuesday showed the economy grew 7.3% in the fourth quarter from the year-ago period, bringing growth in the full year to 7.4% – the weakest performance since 1990. “The challenges facing China’s economy remain as large or even larger compared to a year prior,” Brian Jackson, chief economist at IHS Global Insight wrote in a note, citing the cooling property sector, industrial overcapacity and high debt levels as persistent headwinds for the economy.

IHS predicts growth will moderate to 6.5% in 2015, far short of a 7% official target the government is expected to announce in March, as the government prioritizes economic reform over stimulus While December monthly indicators, including industrial production and retail sales also released Tuesday, pointed to some upward momentum in the economy, economists say this will proved short-lived. “Brief spells of accelerating Chinese growth are taking place within a larger narrative of China’s secular slowdown, a trend which bouts of mini-stimulus and lower commodity prices cannot fully reverse,” Jackson said.

For example, the pickup in industrial output growth to 7.9% on year in December, from 7.2% in November, is a result of the re-opening of factories following a temporary shutdown during the time of the Asia-Pacific Economic Cooperation (APEC) conference, according to Nomura. Of all the headwinds facing the economy, analysts expect the property sector will be the top drag for the economy in the first half of 2015. Real estate is an important pillar of the economy, accounting for approximately 15% of GDP and directly affecting dozens of other sectors from steel to construction. “Chinese growth will continue to face downward pressure because of the slowdown in property investment,” said Tommy Xie, economist at OCBC Bank, who sees growth dipping below 7% in the first-half.

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Empty.

• Defiant Obama Pushes ‘Middle-Class Economics’ (Reuters)

President Barack Obama struck a defiant tone for his dealings with the new Republican-led Congress on Tuesday, calling on his opponents to raise taxes on the rich and threatening to veto legislation that would challenge his key decisions. Dogged by an ailing economy since the start of his presidency six years ago, Obama appeared before a joint session of Congress for his State of the Union speech in a confident mood, buoyed by an economic revival that has trimmed the jobless rate to 5.6% and eager to use this as a mandate. It is now time, he told lawmakers and millions watching on television, to “turn the page” from recession and war and work together to boost those middle-class Americans who have been left behind.

But by calling for higher taxes that Republicans are unlikely to approve and chiding those who suggest climate change is not real, Obama set a confrontational tone for his final two years in office. He vowed to veto any Republican effort to roll back his signature healthcare law and his unilateral loosening of immigration policy. Any attempt to increase sanctions on Iran while negotiations with Tehran over its nuclear program are still under way would also be rejected, he said. In sum, Obama appeared liberated: no longer having to face American voters again after his election victories in 2008 and 2012, a point that he reminded Republicans about. “I have no more campaigns to run,” Obama said. When a smattering of applause rose from Republicans at that prospect, he added with a tight smile: “I know because I won both of them.”

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Costly.

• Credit Rater S&P to Be Banned for Year From Commercial-Bond Market (Bloomberg)

Standard & Poor’s will be suspended for a year from rating bonds in one of its most lucrative businesses in a $60 million settlement with the U.S. Securities and Exchange Commission, according to a person with knowledge of the matter. The deal, which the person said may be announced as soon as tomorrow, is the agency’s toughest action yet in an industry blamed for fueling the 2008 financial crisis by assigning inflated grades to risky mortgage debt. Instead of securities created during that period, though, the SEC’s investigation has looked at whether S&P bent its criteria to win business on commercial-mortgage bonds issued in 2011.

The suspension will ban S&P from rating debt in the biggest portion of that market, those that bundle multiple loans tied to anything from shopping malls to skyscrapers, into securities that are sold to bond investors, according to the person, who asked not to be identified because the discussions are private. In addition to the SEC fine, the unit of McGraw Hill is also facing a penalty to settle probes of the same ratings by Attorneys General in New York and Massachusetts, said the person and a second with knowledge of the talks. The CMBS probe is separate from a lawsuit by the Justice Department tied to subprime home loans that S&P rated before the credit crisis. S&P is expected to settle that matter as soon as this quarter for about $1 billion in penalties, people familiar with the matter said this month.

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” One has a right, for example, to procreative liberty — yet no right to buy a baby. Money would help some people exercise these rights, too. But we don’t treat laws restricting baby selling as if they were restricting procreative liberty.”

• If Money Speaks Louder Than Words, Is It Speech? (Reuters)

Citizens United may have been just what the United States needed — a decision by the U.S. Supreme Court so dramatically wrongheaded that people across the country paid attention to it and said, “Hold on, something is wrong here.” Though the actual ruling simply extended the flawed approach to campaign-finance laws that the court had been following for decades, Citizens United shined a light on the justices’ reasoning and demonstrated its shortcomings by taking that rationale to its logical — if absurd — conclusion. The Supreme Court treats restrictions on both giving and spending money on elections as restrictions on “speech” under the First Amendment. While the case law has been dotted with victories for both advocates and opponents of campaign-finance restrictions over the past 40 years, it is vital to step back and look at the bigger picture.

In the seminal 1976 campaign-finance case, Buckley v. Valeo, the court laid out the line of reasoning relied on ever since. Buckley said that restrictions on giving and spending money in politics should be treated as if they are restrictions on speech. This approach was not obvious or uncontroversial. Campaign-finance laws do not “prohibit” speech — using the word in its ordinary way. Rather, they restrict giving and spending money used on political speech. The decision to treat campaign-finance laws as restrictions on speech was based on the argument that money facilitates speech. “[V]irtually every means of communicating ideas in today’s society requires the expenditure of money,” the court argued. Though that may be somewhat less true today — given the Internet — it is still largely correct.

What this rationale misses is that money facilitates speech not because there is any special connection between the two, but because money is useful stuff. It facilitates the exercise of many other constitutionally protected rights, as well as the fulfillment of many goals and interests. Yet, and here’s the important part, no one — and especially not this Supreme Court — is likely to conclude that restrictions on spending money in connection with the exercise of all other rights would violate these rights. One has a right, for example, to procreative liberty — yet no right to buy a baby. Money would help some people exercise these rights, too. But we don’t treat laws restricting baby selling as if they were restricting procreative liberty.

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Here’s how you spell democracy in Europe today: “The EU has said the final wording would, however, remain confidential until an agreement was reached..”

• No Clear Majority Yet In EU For TTIP Trade Deal (Reuters)

No clear majority has so far emerged among EU states for a free-trade agreement between the European Union and the United States and both sides need to explain the benefits of such a deal, the EU’s health chief said. Chancellor Angela Merkel has urged the 28-nation EU to speed up negotiations with the United States on what would be the world’s biggest trade deal. But there is public opposition in Europe based on fears of weaker food and environmental standards. “We have to take people’s concerns seriously,” Vytenis Andriukaitis, European commissioner for health and food safety, told German daily Tagesspiegel, adding that the trade agreement ultimately needed to be ratified by all national parliaments.

“At the moment, I don’t see a safe majority for this yet,” he said in an interview published on Monday, adding the EU Commission had published some negotiating papers to improve transparency. The EU has said the final wording would, however, remain confidential until an agreement was reached on the Transatlantic Trade and Investment Partnership (TTIP). Negotiations for the TTIP were launched in July 2013 and officials are seeking a deal that goes well beyond trade to remove barriers to businesses. There is concern in Europe that U.S. multinationals would use a proposed investment protection clause to bypass national laws in EU countries. In Berlin, more than 25,000 people joined a rally against the TTIP and genetically modified food over the weekend.

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Went to Diplomat School: “Russia is interested in stabilizing the situation globally and in Ukraine in particular..”

• Ukraine Crisis ‘Turning Point’ Close: Russian Deputy PM (CNBC)

The conflict over Ukraine’s borders with Russia, which has soured Moscow’s relationship with the West and stirred up new concerns about global unrest, may be close to a “turning point”, according to Arkady Dvorkovich, Russia’s deputy Prime Minister. “Russia is interested in stabilizing the situation globally and in Ukraine in particular,” Dvorkovich told CNBC at the World Economic Forum in Davos, where he is one of Russia’s most senior representatives after both President Vladimir Putin and Prime Minister Dmitry Medvedev declined to make the trip. He extended the possibility of reducing the price of gas to Ukraine, after Russia hiked it earlier in the conflict. This week, military activity in Donetsk and Luhansk, the disputed parts of eastern Ukraine where Russian-backed militants are battling the Ukrainian army, had escalated after falling back over Christmas and New Year.

Petro Poroshenko, the Ukrainian President, who came to power last year, has acknowledged this week that a military solution to the fighting, which has claimed nearly 5,000 lives so far, does not exist. Economic sanctions enacted by Western countries against Russia, following the outbreak of conflict, combined with the falling price of oil and gas, its biggest export, and a tumbling ruble, have helped send the country into economic turmoil. Nonetheless, Dvorkovich argued that thanks to the country’s currency reserves “we have the resources to keep the economy in a relatively normal stance.” “We have resources, we have an anti-crisis plan.” There has also been a lack of external investment in Russia, as Western companies are concerned that they may fall foul of current or future sanctions. But Dvorkovich dismissed this, arguing “CEOs of foreign companies are all saying that they will continue investments in Russia, with the ruble at this low level.”

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“Christine Lagarde must be smiling to herself and thinking we are thick Paddies alright.”

• If Christine Lagarde And Her EU Pals Are Our Friends, Who Needs Enemies? (IM)

There is nothing worse than a posh bird arriving into town and insulting the intelligence of the natives. That’s exactly what IMF chief Christine Lagarde did yesterday. She and her friends in Europe robbed around €10,000 a year out of the pocket of every Irish citizen to save the rich on the continent and to ensure no French or German bank would collapse for lending to the bankrupt Irish banks. And then she has the cheek to tell us we are the real heroes of the recovery. What’s even worse, our Taoiseach Enda Kenny stood there applauding her as she praised the victims of brutal austerity. If Lagarde and her cohorts from Europe can be classed as friends, who needs enemies? This country is sick to death of being the best boys and girls in the class in the EU. Let’s tell the truth Brussels couldn’t give a damn about us and never will. They will protect the euro at any cost and we as a nation paid a horrendous price. We have been landed with debt that will take generations to clear, if ever.

The whole crisis set this country back 20 years. Not one treacherous banker has gone to jail. Not one politician or civil servant has been held to account for horrendous decisions taken on the night of the bank guarantee. Europe has been a failure for the Republic of Ireland, they hung this country out to dry. So lets start having the debate about it. There is also no recovery here yet – very few people have any spare cash. The country is taxed to the hilt and the working man and woman is surviving by the skin of the teeth. That’s why the water charge was a tax too far and the people took to the streets. Our politicians are still living in a Leinster House bubble. They may mean well but the majority of them haven’t a clue what’s going on in the real world. They have no vision where Ireland is going it is all a game of retaining power. Christine Lagarde must be smiling to herself and thinking we are thick Paddies alright.

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“Respect for the environment means more than simply using cleaner products or recycling what we use.”

• Pope Francis: Failing to Care for Environment Is a Betrayal of God (Slate)

Pope Francis has been wading into environmental issues during his week-long Asian tour, but he issued the strongest words on Sunday, when he said that man was betraying God’s calling by destroying nature. Or at least that’s what he was supposed to say at a rally with young people at a university in Manila. But the pope ended up being moved by the story of an abandoned girl so he improvised a speech. Still, the Vatican has said that when the pope decides to improvise, the prepared text is official, notes Reuters. “As stewards of God’s creation, we are called to make the earth a beautiful garden for the human family,” the pope said in the prepared text. “When we destroy our forests, ravage our soil and pollute our seas, we betray that noble calling.” The pope also pointed out that youth in the Philippines should feel a special obligation to care for the environment.

“This is not only because this country, more than many others, is likely to be seriously affected by climate change,” he said in the prepared text. “You are called to care for creation not only as responsible citizens, but also as followers of Christ!” He also appeared to chastise those who think that simply by buying environmentally friendly products and recycling they are doing enough for the cause. “Respect for the environment means more than simply using cleaner products or recycling what we use. These are important aspects, but not enough,” he said. God “created the world as a beautiful garden and asked us to care for it,” Francis said. “Through sin, man has disfigured that natural beauty. Through sin, man has also destroyed the unity and beauty of our human family, creating social structures that perpetuate poverty, ignorance and corruption.”

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The Only Road Out Of Davos

Jan 202015
 
 January 20, 2015  Posted by at 11:08 pm Finance Tagged with: , , , , , ,  20 Responses »


Unknown Charleston, SC, after bombardment. Ruins of Cathedral of St John and St Finbar 1865

After 6+ (BIG +) years of deepening poverty and rising stock markets, of creative accounting, of QE and ultralow interest rates, of extend and pretend and outright propaganda and of what have you, all of which have led us to where we are today, facing yet more rounds of stumbling from crisis into multiple crises, it would seem clear that the model, if not the mold, is broken. In order to fix it, let alone replace it altogether, we need to understand to what extent it is broken. And to do that, we first need to know what exactly the model is.

Now, it would be tempting, even seem logical, to consult with the people who designed and built the model. Who, after all, not only claim to be the only ones capable of fixing the broken mold, but who also have occupied all positions of power that have any say in the process. But that’s less obvious than it may seem. Because, mind you, the model is broken. They built a flawed model. Or rather, they built one that works for them, for some, but not for the rest of us.

There are gatherings and festivities ongoing in Davos. Only some are invited: the rich, the powerful and their court jesters. Those who profited most from the broken model. They’re least likely to fix it, they won’t even admit to it being broken. It works just fine for them. The people in Davos believe in one model only, the one of ever increasing centralization and globalization, because that’s the model that got them where they are.

That means that what’s in their interest is 180º removed from what’s in your interest. And it means that whatever these people propose you do, you should probably do the exact opposite.

The more our economic activities become part of the global economy, the more the rich can skim off. That ‘principle’ got them where they are. They all, to name one thing, keep talking about the need for more reforms, in order to make economies more competitive. Even sounds reasonable at first glance; but only because we haven’t thought it over. It’s mere propaganda.

When it comes to basic necessities, to food, water and shelter, we shouldn’t strive to compete with other economies. That is not good for us, or for our peers in those other economies; it’s good only for those who skim off the top. The larger and more globalized the top, the more there is to skim off. All the ‘reform’ is geared towards making our economies ever more dependent on the global economy. And that is not in our best interest.

It’s not all just even about money, it’s about our security, and independence. Everybody likes the idea of being independent, but at the same time few realize that globalization is the exact opposite of independence. Global trade is fine, as long as it’s limited to things we don’t need to survive, but it’s not fine if and when it takes away the ability of a community or a society to provide for itself.

Protectionism has acquired a really bad reputation, as if it’s inherently evil to try and protect your community from being gutted by economic ideas and systems it has no defense against, or to make sure it can generate and provide for its own basics at all times. But that’s just propaganda too.

If our societies are not designed and constructed to provide for themselves, they’ll end up with no choice but to go to war with each other. Along the same lines, if our societies don’t have strict laws in place that guarantee we can’t and won’t destroy the natural resources of the land we live on comes with, we’ll also end up going to war with each other.

We’re not going to solve the Gordian knot of the entire global economy and all the hubris and propaganda the present leading politicians, businessmen and ‘reporters’ bring to the table. And we probably shouldn’t want to. Our brains did not develop to do things on a global scale. The clowns will blow themselves up sooner or later. We should focus on what we can do, meanwhile, in our immediate surroundings.

And it’s pretty easy from there, really. The economic problems we have are mostly artificial. They have been induced by the broken economic model the Davos crowd, the central bankers and you know who else would have us believe is the one and only, and that they are busy fixing for our sake and greater glory. But they care only about their own glory.

The IMF lowered its global GDP forecast yet again. But who cares? Who has any faith in the IMF? Those numbers are released for consumption by the masses, and duly reported by the media six ways to Sunday. China says its economy grew 7.4% in 2014. But there is no more reason to believe China than there is the IMF. If China’s economy had really grown 7.4% in 2014, oil would not be below $50.

Trying, and desiring, to be part of this global economy idea the clowns propagate, or even a new world order, which can only lead to misery and mayhem for billions of people just because of the way it was set up, is the worst thing we can do now. We owe it to our people, and our children, to leave them with something better than that.

It’s fine to compete with others when it comes to technology and fashion and gadgets and whatever luxury items you can or cannot yet imagine. But it’s not fine to compete with them for the food and water your own children will need to survive. But still, that is the path we’re on. The path the Davos crowd has set us on. Because they get richer as we compete for food and water. Divide and rule stems from Roman times, if not before. And ‘we’ – or they, if you like that better – have perfected it. To the extent that we are now so divided amongst ourselves that a small minority can see its wealth grow at ever increasing speed at our cost.

The Davos crowd are not the important people, it’s just propaganda that makes you see them in that light. There’s no glory in wealth. The important people are your neighbors, your families, and most of all your children. And the answer to their insidious schemes is really simple; its that very simplicity which may well be the reason you never saw it.

You see, a dollar spent on locally made products goes much further than one spent on products that are shipped in. About 4 times further. Because if you buy local products, you support local jobs, which in turn support the community you live in through taxes that pay for strengthening the community, and so forth. Ergo: if something produced locally costs twice as much as what’s available from 1000 miles away, you’d still be better off. Even if it’s three times more expensive, you’ll still end up richer.

The only setback is, you’ll have to work to make it work. You’ll have to get people around you to understand why buying what their neighbors make at double or triple the price of what they pay for what comes from China will make them richer and better people. Sounds stupid and naive and easy to dismiss and unrealistic at first bite, I know. But I don’t mind, because I’m none of those things.

And, moreover, this is the only road out of Davos. All you need to do is wean yourself off the clowns. And I know you can’t do it alone, but then, why should you want to?

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