debt Archives - Page 5 of 30 - The Automatic Earth

The U.S. Treasury has been up against its debt ceiling since March 15 when the ceiling was re-imposed. Since then, there has been no net new issuance from the Treasury. The Treasury has run down its cash balances and borrowed internally from its own resources, which are not subject to the ceiling. This period has been very helpful to the financial markets. With the federal government not selling any net new supply of securities—just rolling the maturing stuff over—the markets have been flush with cash that would otherwise have been absorbed by the government. This hit of extra liquidity is about to disappear and then some. President Trump has made a three-month debt ceiling deal with the Democrats which means that the Treasury can resume borrowing without restrictions through December.

This increase in the debt ceiling is needed to reliquify the federal government (which is down to $38 billion in cash) and repay the internal funds the Treasury raided since the debt ceiling was imposed back in March. The Treasury needs to borrow a substantial amount of money. There hasn’t been a material increase in the Treasury’s borrowing schedule yet, but it is coming. The Treasury Borrowing Advisory Committee (TBAC), a group of senior Wall Street executives, has advised the Treasury to issue $501 billion in net new supply in the fourth quarter, virtually all in November and December, and the Treasury almost always follows the TBAC script. That’s an outrageous amount of money. The cash the Treasury needs is not sitting somewhere in primary dealer bank accounts; it’s invested in the financial markets. Securities will have to be sold to accommodate this new issuance.

This is not new. A borrowing spike happens every time we have an increase in the debt ceiling as the chart demonstrates. Note that this chart reflects an estimate of net new issuance needed to return to last year’s cash on hand and was produced before TBAC had issued its recommendations. TBAC is proposing to move more slowly. Nonetheless, past funding spikes are clearly demarcated and the next one is going to be big. While Treasury supply will increase, the trend of demand for Treasuries has been going the other way. Bid coverage at auctions has been declining in recent months and the largest banks have been reducing their inventories of Treasury securities. Falling demand in the face of increasing supply is a recipe for a bear market in bonds. Bond yields will rise and that will put pressure on stocks as well.

The Federal Reserve has given the market extraordinary support over the past eight years by financing most new Treasury supply. Even after it stopped outright QE in November of 2014, the Fed continued to buy $25–$45 billion per month in maturing Mortgage Backed Securities from the primary dealers. That cashed up the dealers and helped finance their purchases of new Treasuries. But now, the Fed intends to join the Treasury as a net seller of Treasuries (and MBS) as it starts to reduce its balance sheet this fall. Once the Fed stops buying that paper, the dealers will have a lot less cash and that means a lot more selling.

“These companies have a record amount of cash and they’re more deeply indebted than ever before.”

• The Great Corporate Cash Shell Game (BBG)

There’s a mystery hidden on the balance sheets of Corporate America: These companies have a record amount of cash and they’re more deeply indebted than ever before.This seems paradoxical and kind of silly. Why raise money from bond investors when you already have the liquid assets on hand? As Bloomberg News reported Thursday, non-financial companies’ liquid assets, which include foreign deposits, currency as well as money-market and mutual fund shares, reached a record of almost $2.3 trillion in the second quarter. That’s an increase of nearly 60% since mid-2009. This cash cushion also appears sort of comforting; companies can do whatever they want. They’re rich. But in reality, it is neither silly nor overly comforting.

First of all, a disproportionate amount of the cash is held by the biggest companies, such as Apple, Microsoft, Alphabet and General Electric, and it is mostly held in overseas accounts. These corporations can’t bring that cash back without incurring steep tax bills, so they’ve been keeping it offshore. When they need money, they simply raise dollars by borrowing from the bond market at record-low rates. Indeed, the amount of bonds issued by these companies has surged, rising 66% from mid-2009 to $5.24 trillion of bonds outstanding as of the end of June, Federal Reserve data show. That isn’t necessarily a recipe for default because a large chunk of this is an exercise in financial engineering aimed at avoiding onerous taxes. But it has consequences.

First, it limits the benefit to the economy if and when those tax policies are changed because much of the money has already been released through the bond market. And second, to the extent that companies have cash, they’re not using enough of it for exciting projects. There hasn’t been a tremendous wave of innovation or salary increases. Instead, companies have repurchased billions of dollars of their own shares, which is great for the stock market but doesn’t do a whole lot to bolster economic growth.

A bit poorly written, but still: “For each $1.00 the economy grew in this 1 year period the total debt outstanding increased by $5.48.”

• Debt Has Become A Way Of Life In Canada (OweC)

The borrowing and spending binge by Canadian households, businesses and governments (all levels) continues unabated. Growing the debt in the economy significantly faster than the economy itself grows seems to have developed into a way of life in Canada. At the end of June, 2017 the total debt outstanding in Canada was $7.51 trillion. At the end of June, 2016 it was $7.13 trillion. In the 1 year period from the end of June, 2016 to the end of June, 2017 it increased by $375 billion. This is an increase of 5.2%. The approximate beginning of the global financial crisis was June, 2007. At the end of June, 2007 the total debt outstanding in Canada was $3.99 trillion. In the last 10 years it has increased by $3.52 trillion. This is an increase of 88.3%. At the end of June, 2017 the total debt outstanding of domestic non-financial sectors was $5.32 trillion.

At the end of June, 2016 the total debt outstanding of domestic non-financial sectors was $5.04 trillion. In the 1 year period from the end of June, 2016 to the end of June, 2017 it increased by $278 billion. This is an increase of 5.5%. At the end of June, 2007 the total debt outstanding of domestic non-financial sectors was $2.84 trillion. In the last 10 years it has increased by $2.47 trillion. This is an increase of 86.9%. At the end of June, 2017 the annual GDP at market prices in Canada was $2.12 trillion, and in the preceding 1 year it grew by 6.3%, – ie: the size of the economy grew by $133.9 billion. In the 1 year period from the end of June, 2016 to the end of June, 2017 the total debt outstanding in Canada increased by $375 billion. For each $1.00 the economy grew in this 1 year period (using the GDP at market prices metric) the total debt outstanding increased by $2.80.

Looking at just the total debt outstanding of domestic non-financial sectors in Canada: In the 1 year period from the end of June, 2016 to the end of June, 2017 the total debt outstanding of domestic non-financial sectors increased by $278 billion. For each $1.00 the economy grew in this 1 year period (using the gdp at market prices metric) the total debt outstanding of domestic non-financial sectors increased by $2.08. At the end of June, 2017 the total debt outstanding in Canada was 3.5 times greater than our annual gdp at market prices, and looking at just the total debt outstanding of domestic non-financial sectors, that was 2.5 times greater than our annual gdp at market prices. [..] In the 1 year period from the end of June, 2016 to the end of June, 2017 the total debt outstanding in Canada increased by $375 billion. For each $1.00 the economy grew in this 1 year period the total debt outstanding increased by $5.48.

Communities and societies don’t matter. Only money does.

• Housing Affordability NEVER Worse…By a Long-Shot (Hanson)

My chart highlights how for DECADES the income required to buy a median priced house – using popular programs & rates for each era – remained mostly flat (red line) and WELL BELOW the level of household income (black line). How could house prices rise so much for decades but income required to buy (red) them remain flattish? Because of the accompanying falling rates/easing credit guideline cycle. In fact, during Bubble 1.0 house prices soared but exotic loans legitimately made them more affordable than ever, as shown.

But in ’12, as trillions in unorthodox capital, credit & liquidity began to drive massive speculation (just like Bubble 1.0) income required to buy began to surge, with prices, shooting above median HH income (boxed in yellow). Meaningful sales growth with this affordability backdrop is impossible. …This is the point in this inflationary cycle at which affordability detached from end-user fundamentals. Now, in ’17, end-user purchase power & house prices have never been more diverged from the multi-decade trend line and a mean reversion – via surging wages, new era exotic loans, plunging rates, and/or falling house prices, as speculation ebbs – is inevitable.

Must read. Like Charles, I don’t see it either. There is nothing to replace the USD for the foreseeable future.

• The Demise of the Dollar: Don’t Hold Your Breath (CH Smith)

Every form of credit/debt is denominated in a currency. A Japanese bond is denominated in yen, for example. The bond is purchased with yen, the interest is paid in yen, and the coupon paid at maturity is in yen. What gets tricky is debt denominated in some other currency. Let’s say I take out a loan denominated in quatloos. The current exchange rates between USD and quatloos is 1 to 1: parity. So far so good. I convert 100 USD to 100 quatloos every month to make the principal and interest payment of 100 quatloos. Then some sort of kerfuffle occurs in the FX markets, and suddenly it takes 2 USD to buy 1 quatloo. Oops: my loan payments just doubled. Where it once only cost 100 USD to service my loan denominated in quatloos, now it takes $200 to make my payment in quatloos. Ouch. Notice the difference between payments, reserves and debt: payments/flows are transitory, reserves and debt are not.

What happens in flows is transitory: supply and demand for currencies in this moment fluctuate, but flows are so enormous–trillions of units of currency every day–that flows don’t affect the value or any currency much. FX markets typically move in increments of 1/100 of a percentage point. So flows don’t matter much. De-dollarization of flows is pretty much a non-issue. What matters is demand for currencies that is enduring: reserves and debt.The same 100 quatloos can be used hundreds of times daily in payment flows; buyers and sellers only need the quatloos for a few seconds to complete the conversion and payment. But those needing quatloos for reserves or to pay long-term debts need quatloos to hold. The 100 quatloos held in reserve essentially disappear from the available supply of quatloos.

Another source of confusion is trade flows. If the U.S. buys more stuff from China than China buys from the U.S., goods flow from China to the U.S. and U.S. dollars flow to China. As China’s trade surplus continues, the USD just keep piling up. What to do with all these billions of USD? One option is to buy U.S. Treasury bonds (debt denominated in dollars), as that is a vast, liquid market with plenty of demand and supply. Another is to buy some other USD-denominated assets, such as apartment buildings in Seattle. This is the source of the petro-dollar trade. All the oil/gas that’s imported into the U.S. is matched by a flow of USD to the oil-exporting nations, who then have to do something with the steadily increasing pile of USD.

The USD is still the dominant reserve currency, despite decades of diversification. Global reserves (allocated and unallocated) are over $12 trillion. Note that China’s RMB doesn’t even show up in allocated reserves–it’s a non-player because it’s pegged to the USD. Why hold RMB when the peg can be changed at will? It’s lower risk to just hold USD. While total global debt denominated in USD is about $50 trillion, the majority of this is domestic, i.e. within the U.S. economy. $11 trillion has been issued to non-banks outside the U.S., including developed and emerging market debt:

Well, not entirely.

• China Slashes Trade Ties With North Korea (BBC)

China has moved to limit North Korea’s oil supply and will stop buying textiles from the politically isolated nation, it said on Saturday. China is North Korea’s most important trading partner, and one of its only sources of hard currency. The ban on textiles trade will hurt Pyongyang’s income, while China’s oil exports are the country’s main source of petroleum products. The tougher stance follows North Korea’s latest nuclear test this month. The United Nations agreed fresh sanctions – including the textiles and petroleum restrictions – in response. A statement from China’s commerce ministry said restrictions on refined petroleum products would apply from 1 October, and on liquefied natural gas immediately.

A limited amount, allowed under the UN resolution, would still be exported to North Korea. The current volume of trade between the two countries – and how much the new limits reduce it by – is not yet clear. But the ban on textiles – Pyongyang’s second-biggest export – is expected to cost the country more than $700m a year. China and Russia had initially opposed a proposal from the United States to completely ban oil exports, but later agreed to the reduced measures. North Korea has little energy production of its own, but does refine some petroleum products from crude oil it imports – which is not included in the new ban. The AFP news agency reports that petrol prices in Pyongyang have risen by about 20% in the past two months.

Spring cleaning: “Russia’s central bank has reportedly now closed more than a third of the country’s banks – approximately 300 lenders – in the last three years..”

• Russia Steps In To Prevent ‘Domino Effect’ In Its Banking Sector (CNBC)

Russia’s central bank has been forced to rescue two major lenders in less than a month, intensifying concerns among global investors that a systemic banking crisis could be in the offing. The Russian government’s latest rescue of a major bank was confirmed on Thursday, when the Central Bank of Russia (CBR) said it had nationalized the country’s 12th largest lender in terms of assets, B&N Bank. Last month, the CBR stepped in to launch one of the largest bank rescues in Russia’s history when Otkritie Bank required a bailout to help plug a $7 billion hole in its balance sheet. Russia’s central bank moved to dismiss intensifying concerns that a brewing systemic crisis could be forthcoming on Thursday, as it said its second major bank nationalization in three weeks had prevented a “domino effect” in the country’s ailing banking sector.

“We realized that it’s better to isolate a bit more so that the domino effect does not arise, and according to the results of this work the domino effect is excluded, there is no risk of this,” Vasily Pozdyshev, deputy governor at the CBR, told a press conference as reported by state media. B&N Bank requires an estimated capitalization of around $4.3 billion to $6 billion, according to Pozdyshev, an amount approximately equivalent to 25% of the lender’s balance sheet. The failure of two major lenders in relatively quick succession has fueled anxiety over the health of Russia’s banking sector, which has been hampered by an economic slowdown and Western sanctions in recent years.

In 2014, Russian regulators were jolted into action after a dramatic slump in oil prices as well as tough international sanctions for its annexation of Crimea and Russia’s perceived role in destabilizing eastern Ukraine. The CBR has been attempting to clean up the banking sector since 2013, shutting down scores of banks that it believed represented a risk to the system. Russia’s central bank has reportedly now closed more than a third of the country’s banks – approximately 300 lenders – in the last three years as it sought to eradicate undercapitalized institutions.

Brexit becomes expensive.

• UK’s Credit Rating Downgraded By Moody’s (BBC)

The UK’s credit rating has been cut over concerns about the UK’s public finances and fears Brexit could damage the country’s economic growth. Moody’s, one of the major ratings agencies, downgraded the UK to an Aa2 rating from Aa1. It said leaving the European Union was creating economic uncertainty at a time when the UK’s debt reduction plans were already off course. Downing Street said the firm’s Brexit assessments were “outdated”. The other major agencies, Fitch and S&P, changed their ratings in 2016, with S&P cutting it two notches from AAA to AA, and Fitch lowering it from AA+ to AA.

Moody’s said the government had “yielded to pressure and raised spending in several areas” including health and social care. It says revenues were unlikely to compensate for the higher spending. The agency said because the government had not secured a majority in the snap election it “further obscures the future direction of economic policy”. It also said Brexit would dominate legislative priorities, so there could be limited capacity to address “substantial” challenges. It added “any free trade agreement will likely take years to negotiate, prolonging the current uncertainty for business”. Moody’s has also changed the UK’s long-term issuer and debt ratings to “stable” from “negative”.

Uber was allowed to grow massively, elbowing any competition out of the way. It’s just dumb.

• The Scandals That Brought Down Uber (Ind.)

Transport for London has announced it will not renew ride-sharing app Uber’s licence, because it had identified a “lack of corporate responsibility” in the company. The statement highlighted four major areas of concern: the company’s approach to reporting criminal offences, the obtaining of medical certificates, its compliance with Enhanced Disclosure and Barring Service (DBS) checks on employees, and its use of controversial Greyball software to “block regulatory… access to the app”. The company has recently been dogged by a number of corporate scandals in the UK and its international operations, which ultimately led to the resignation of CEO Travis Kalanick in June. Uber has repeatedly come under fire for its handling of allegations of sexual assault by its drivers against passengers.

Freedom of Information data obtained by The Sun last year showed that the Metropolitan Police investigated 32 drivers for rape or sexual assault of a passenger between May 2015 and May 2016. In August, Metropolitan Police Inspector Neil Billany wrote to TfL about his concern that the company was failing to properly investigate allegations against its drivers. He revealed the company had continued to employ a driver after he was accused of sexual assault. According to Inspector Billany, the same driver went on to assault another female passenger before he was removed. The letter said: “By not reporting to police promptly, Uber are allowing situations to develop that clearly affect the safety and security of the public.”

The statement by London’s transport body also expresses concern about “its approach to explaining the use of Greyball in London”. In March it emerged that Uber had been secretly using a tool called Greyball to deceive law enforcement officials in a number of US cities where the company flouted state regulations. Greyball used personal data of individuals it believed were connected to local government and ensured that its drivers would not pick them up if they requested a ride on the app. It was used in Portland, Oregon, Philadelphia, Boston, and Las Vegas, as well as France, Australia, China, South Korea and Italy. Uber denies ever using the software in the UK.

Politicians are too scared to call for regulation of things they don’t understand.

• Uber Had This Coming – It Was Never Just A ‘Tech Platform’ (Ind.)

Uber isn’t the only sharing economy app that has become part of daily life in the capital. Since 2008, over four million people have stayed in an Airbnb in London. The company, which links guests up with empty rooms or homes in the capital, recently came under fire in the US for not properly screening a host who attempted to sexually assault a woman (a spokesman for Airbnb later told The Independent that a background check had been done on the host and that there had been no prior convictions). The legal ruling over Uber could now bring the responsibilities of other companies such as Airbnb into the limelight. The rapid proliferation of these types of “gig economy” companies over the past few years has meant that many of them have forgotten their basic responsibilities toward their customers.

As The Independent’s Josie Cox has written, they forgot that the sharing economy business model was based on trust – we had to have confidence that the strangers we were sharing cars with were safe, and they couldn’t provide that. For too long, Uber tried to evade its role as anything more than a provider of tech. But we were never just sharing software; we were sharing our lives. Uber tried to get away with pretending it was a neutral software platform for far too long – all it did was link people together, and its responsibilities went as far as fixing glitches. But it was always a private taxi hire firm. It was a company with employees, who it should have been paying properly from that start, and customers, who it should have been protecting.

“We’re only two days past the Hurricane Maria’s direct hit on Puerto Rico and there is no phone communication across the island, so we barely know what has happened. We’re weeks past Hurricanes Irma and Harvey, and news of the consequences from those two events has strangely fallen out of the news media. Where have the people gone who lost everything? The news blackout is as complete and strange as the darkness that has descended on Puerto Rico.”

• Puerto Rico Is Back In The 18th Century (Kunstler)

Ricardo Ramos, the director of the beleaguered, government-owned Puerto Rico Electric Power Authority, told CNN Thursday that the island’s power infrastructure had been basically “destroyed” and will take months to come back “Basically destroyed.” That’s about as basic as it gets civilization-wise. Residents, Mr. Ramos said, would need to change the way they cook and cool off. For entertainment, old-school would be the best approach, he said. “It’s a good time for dads to buy a ball and a glove and change the way you entertain your children.” Meaning, I guess, no more playing Resident Evil 7: Biohazard on-screen because you’ll be living it — though one wonders where will the money come from to buy the ball and glove? Few Puerto Ricans will be going to work with the power off.

And the island’s public finances were in disarray sufficient to drive it into federal court last May to set in motion a legal receivership that amounted to bankruptcy in all but name. The commonwealth, a US territory, was in default for $74 billion in bonded debt, plus another $49 billion in unfunded pension obligations. So, Puerto Rico already faced a crisis pre-Hurricane Maria, with its dodgy electric grid and crumbling infrastructure: roads, bridges, water and sewage systems. Bankruptcy put it in a poor position to issue new bonds for public works which are generally paid for with public borrowing. Who, exactly, would buy the new bonds? I hear readers whispering, “the Federal Reserve.” Which is a pretty good clue to understanding the circle-jerk that American finance has become.

Some sort of bailout is unavoidable, though President Trump tweeted “No Bailout for Puerto Rico” after the May bankruptcy proceeding. Things have changed and the shelf-life of Trumpian tweets is famously brief. But the crisis may actually strain the ability of the federal government to pretend it can cover the cost of every calamity that strikes the nation — at least not without casting doubt on the soundness of the dollar. And not a few bonafide states are also whirling around the bankruptcy drain: Illinois, Connecticut, New Jersey, Kentucky. Constitutionally states are not permitted to declare bankruptcy, though counties and municipalities can. Congress would have to change the law to allow it. But states can default on their bonds and other obligations. Surely there would be some kind of fiscal and political hell to pay if they go that route.

Nobody really knows what might happen in a state as big and complex as Illinois, which has been paying its way for decades by borrowing from the future. Suddenly, the future is here and nobody has a plan for it. The case for the federal government is not so different. It, too, only manages to pay its bondholders via bookkeeping hocuspocus, and its colossal unfunded obligations for social security and Medicare make Illinois’ predicament look like a skipped car payment. In the meantime — and it looks like it’s going to be a long meantime – Puerto Rico is back in the 18th Century, minus the practical skills and simpler furnishings for living that way of life, and with a population many times beyond the carrying capacity of the island in that era.

Still 8 days to go. How can this remian peaceful? Will Rajoy try to provoke violence (if he isn’t already) and blame it on the Catalans?

• It Gets Ugly in Catalonia (DQ)

Madrid’s crackdown on Catalonia is already having one major consequence, presumably unintended: many Catalans who were until recently staunchly opposed to the idea of national independence are now reconsidering their options. A case in point: At last night’s demonstration, spread across multiple locations in Barcelona, were two friends of mine, one who is fanatically apolitical and the other who is a strong Catalan nationalist but who believes that independence would be a political and financial disaster for the region. It was their first ever political demonstration. If there is a vote on Oct-1, they will probably vote to secede. The middle ground they and hundreds of thousands of others once occupied was obliterated yesterday when a judge in Barcelona ordered Spain’s militarized police force, the Civil Guard, to round up over a dozen Catalan officials in dawn raids.

Many of them now face crushing daily fines of up to €12,000. The Civil Guard also staged raids on key administrative buildings in Barcelona. The sight of balaclava-clad officers of the Civil Guard, one of the most potent symbols of the not-yet forgotten Franco dictatorship, crossing the threshold of the seats of Catalonia’s (very limited) power and arresting local officials, was too much for the local population to bear. Within minutes almost all of the buildings were surrounded by crowds of flag-draped pro-independence protesters. The focal point of the day’s demonstrations was the Economic Council of Catalonia, whose second-in-command and technical coordinator of the referendum, Josep Maria Jové, was among those detained. He has now been charged with sedition and could face between 10-15 years in prison. Before that, he faces fines of €12,000 a day.

[..] yesterday’s police operation significantly — perhaps even irreversibly — weakens Catalonia’s plans to hold a referendum on October 1, as even the region’s vice-president Oriol Junqueras concedes. But that doesn’t mean Spain has won. As the editor of El Diario, Ignacio Escolar, presciently notes, yesterday’s raids may have been a resounding success for law enforcement, but they were an unmitigated political disaster that has merely intensified the divisions between Spain and Catalonia and between Catalans themselves. Each time Prime Minister Rajoy or one of his ministers speak of the importance of defending democracy while the Civil Guard seizes posters and banners related to the October 1 vote and judges rule public debates on the Catalan question illegal and then fine their participants, a fresh clutch of Catalan separatists is born.

In the days to come they will be swarming the streets, waving their flags, clutching their red carnations and singing their songs. For the moment, the mood is still one of hopeful, resolute indignation. But the mood of masses is prone to change quickly, and it’s not going to take much to ignite the anger.

Pilger was a Vietnam correspondent. He knows what he’s talking about.

• The Killing of History (John Pilger)

One of the most hyped “events” of American television, The Vietnam War, has started on the PBS network. The directors are Ken Burns and Lynn Novick. Acclaimed for his documentaries on the Civil War, the Great Depression and the history of jazz, Burns says of his Vietnam films, “They will inspire our country to begin to talk and think about the Vietnam war in an entirely new way”. In a society often bereft of historical memory and in thrall to the propaganda of its “exceptionalism”, Burns’ “entirely new” Vietnam war is presented as “epic, historic work”. Its lavish advertising campaign promotes its biggest backer, Bank of America, which in 1971 was burned down by students in Santa Barbara, California, as a symbol of the hated war in Vietnam. Burns says he is grateful to “the entire Bank of America family” which “has long supported our country’s veterans”.

Bank of America was a corporate prop to an invasion that killed perhaps as many as four million Vietnamese and ravaged and poisoned a once bountiful land. More than 58,000 American soldiers were killed, and around the same number are estimated to have taken their own lives. I watched the first episode in New York. It leaves you in no doubt of its intentions right from the start. The narrator says the war “was begun in good faith by decent people out of fateful misunderstandings, American overconfidence and Cold War misunderstandings”. The dishonesty of this statement is not surprising. The cynical fabrication of “false flags” that led to the invasion of Vietnam is a matter of record – the Gulf of Tonkin “incident” in 1964, which Burns promotes as true, was just one. The lies litter a multitude of official documents, notably the Pentagon Papers, which the great whistleblower Daniel Ellsberg released in 1971.

There was no good faith. The faith was rotten and cancerous. For me – as it must be for many Americans – it is difficult to watch the film’s jumble of “red peril” maps, unexplained interviewees, ineptly cut archive and maudlin American battlefield sequences. In the series’ press release in Britain – the BBC will show it – there is no mention of Vietnamese dead, only Americans. “We are all searching for some meaning in this terrible tragedy,” Novick is quoted as saying. How very post-modern. All this will be familiar to those who have observed how the American media and popular culture behemoth has revised and served up the great crime of the second half of the twentieth century: from The Green Berets and The Deer Hunter to Rambo and, in so doing, has legitimised subsequent wars of aggression. The revisionism never stops and the blood never dries. The invader is pitied and purged of guilt, while “searching for some meaning in this terrible tragedy”. Cue Bob Dylan: “Oh, where have you been, my blue-eyed son?”

I thought about the “decency” and “good faith” when recalling my own first experiences as a young reporter in Vietnam: watching hypnotically as the skin fell off Napalmed peasant children like old parchment, and the ladders of bombs that left trees petrified and festooned with human flesh. General William Westmoreland, the American commander, referred to people as “termites”. In the early 1970s, I went to Quang Ngai province, where in the village of My Lai, between 347 and 500 men, women and infants were murdered by American troops (Burns prefers “killings”). At the time, this was presented as an aberration: an “American tragedy” (Newsweek ). In this one province, it was estimated that 50,000 people had been slaughtered during the era of American “free fire zones”. Mass homicide. This was not news.

America Can’t Afford to Rebuild

Sep 092017

September 9, 2017 Posted by Raúl Ilargi Meijer at 1:21 pm Finance Tagged with: Banks, construction, credit, debt, fragile, Harvey, infrastructure, insurance, Irma, Trump, vulnerable 8 Responses »

Adolphe Yvon Genius of America c1870

A number of people have argued over the past few days that Hurricane Harvey will NOT boost the US housing market. As if any such argument would or should be required. Hurricane Irma will not provide any such boost either. News about the ‘resurrection’ of New Orleans post-Katrina has pretty much dried up, but we know scores of people there never returned, in most cases because they couldn’t afford to.

And Katrina took place 12 years ago, well before the financial crisis. How do you think this will play out today? Houston is a rich city, but that doesn’t mean it’s full of rich people only. Most homeowners in the city and its surroundings have no flood insurance; they can’t afford it. But they still lost everything. So how will they rebuild?

Sure, the US has a National Flood Insurance Program, but who’s covered by it? Besides, the Program was already $24 billion in debt by 2014 largely due to hurricanes Katrina and Sandy. With total costs of Harvey estimated at $200 billion or more, and Irma threating to cause far more damage than that, where’s the money going to come from?

It took an actual fight just to push the first few billion dollars in emergency aid for Houston through Congress, with four Texan representatives voting against of all people. Who then will vote for half a trillion or so in aid? And even if they do, where would it come from?

Trump’s plans for an infrastructure fund were never going to be an easy sell in Washington, and every single penny he might have gotten for it would now have to go towards repairing existing roads and bridges, not updating them -necessary as that may be-, let alone new construction.

Towns, cities, states, they’re all maxed out as things are, with hugely underfunded pension obligations and crumbling infrastructure of their own. They’re going to come calling on the feds, but Washington is hitting its debt ceiling. All the numbers are stacked against any serious efforts at rebuilding whatever Harvey and Irma have blown to pieces or drowned.

As for individual Americans, two-thirds of them don’t have enough money to pay for a $500 emergency, let alone to rebuild a home. Most will have a very hard time lending from banks as well, because A) they’re already neck-deep in debt, and B) because the banks will get whacked too by Harvey and Irma. For one thing, people won’t pay the mortgage on a home they can’t afford to repair. Companies will go under. You get the picture.

There are thousands of graphs that tell the story of how American debt, government, financial and non-financial, household, has gutted the country. Let’s stick with some recent ones provided by Lance Roberts. Here’s how Americans have maintained the illusion of their standard of living. Lance’s comment:

This is why during the 80’s and 90’s, as the ease of credit permeated its way through the system, the standard of living seemingly rose in America even while economic growth rate slowed along with incomes. Therefore, as the gap between the “desired” living standard and disposable income expanded it led to a decrease in the personal savings rates and increase in leverage. It is a simple function of math. But the following chart shows why this has likely come to the inevitable conclusion, and why tax cuts and reforms are unlikely to spur higher rates of economic growth.

There’s no meat left on that bone. There isn’t even a bone left. There’s only a debt-ridden mirage of a bone. If you’re looking to define the country in bumper-sticker terms, that’s it. A debt-ridden mirage. Which can only wait until it’s relieved of its suffering. Irma may well do that. A second graph shows the relentless and pitiless consequences of building your society, your lives, your nation, on debt.

It may not look all that dramatic, but look again. Those are long-term trendlines, and they can’t just simply be reversed. And as debt grows, the economy deteriorates. It’s a double trendline, it’s as self-reinforcing as the way a hurricane forms.

Back to Harvey and Irma. Even with so many people uninsured, the insurance industry will still take a major hit on what actually is insured. The re-insurance field, Munich RE, Swiss RE et al, is also in deep trouble. Expect premiums to go through the ceiling. As your roof blows off.

We can go on listing all the reasons why, but fact is America is in no position to rebuild. Which is a direct consequence of the fact that the entire nation has been built on credit for decades now. Which in turn makes it extremely vulnerable and fragile. Please do understand that mechanism. Every single inch of the country is in debt. America has been able to build on debt, but it can’t rebuild on it too, precisely because of that.

There is no resilience and no redundancy left, there is no way to shift sufficient funds from one place to the other (the funds don’t exist). And the grand credit experiment is on its last legs, even with ultra low rates. Washington either can’t or won’t -depending on what affiliation representatives have- add another trillion+ dollars to its tally, state capitals are already reeling from their debt levels, and individuals, since they have much less access to creative accounting than politicians, can just forget about it all.

Not that all of this is necessarily bad: why would people be encouraged to build or buy homes in flood- and hurricane prone areas in the first place? Why is that government policy? Why is it accepted? Yes, developers and banks love it, because it makes them a quick buck, and then some, and the Fed loves it because it keeps adding to the money supply, but it has turned America into a de facto debt colony.

If you want to know what will happen to Houston and whatever part of Florida gets hit worst, think New Orleans/Katrina, but squared or cubed -thanks to the 2007/8 crisis.

Debt Rattle September 8 2017

Sep 082017

September 8, 2017 Posted by Raúl Ilargi Meijer at 9:29 am Finance Tagged with: cronies, debt, earthquake, endgame, hack, Irma, Japan, José, Macron, Mexico 6 Responses »

Irma heads for Florida

• Irma Heads For Florida (R.)

• Magnitude 8.4 Earthquake Strikes Off Mexico’s Southern Coast (DW)

• Worst US Consumer Data Hack Ever? Equifax Confesses (WS)

• Consumer Credit & The American Conundrum (Roberts)

• Low Interest Rates Major Source Of Concern – German Financial Watchdog (CNBC)

• Japan’s April-June Economic Growth Much Slower Than Preliminary Reading (R.)

• The North Korean Endgame is Playing Out Now – Rickards (DR)

• Theresa May Apponts Cronies In ‘Sweeping Power Grab’ (Ind.)

• At Democracy’s Birthplace, Macron Dreams Of Europe 2.0 (AP)

650,000 mandatory evacuations. But gas shortages make it hard to get away. Irma is twice the size of hurricane Andrew.

• Irma Heads For Florida (R.)

The eye of Hurricane Irma grazed the Turks and Caicos Islands on Thursday, rattling buildings after it smashed a string of Caribbean islands as one of the most powerful Atlantic storms in a century, killing 14 people on its way to Florida. With winds of around 185 miles per hour (290 km per hour), the storm the size of France has ravaged small islands in the northeast Caribbean in recent days, including Barbuda, Saint Martin and the British and U.S. Virgin Islands, ripping down trees and flattening homes and hospitals. Winds dipped on Thursday to 165 mph as Irma soaked the northern coasts of the Dominican Republic and Haiti and brought hurricane-force winds to the Turks and Caicos Islands. It remained an extremely dangerous Category 5 storm, the highest designation by the National Hurricane Center (NHC).

Irma was about 55 miles (85 km) south of Great Inagua Island and is expected to bring 20-foot (6-m) storm surges to the Bahamas, before moving to Cuba and ploughing into southern Florida as a very powerful Category 4 on Sunday, with storm surges and flooding due to begin within the next 48 hours. Across the Caribbean authorities rushed to evacuate tens of thousands of residents and tourists. On islands in its wake, shocked locals tried to comprehend the extent of the devastation while simultaneously preparing for another major hurricane, Jose, now a Category 3 and due to hit the northeastern Caribbean on Saturday.

“Mexico earthquake is most powerful to hit the country in a century, president says”

• Magnitude 8.4 Earthquake Strikes Off Mexico’s Southern Coast (DW)

The quake struck late on Thursday, and was recorded as a magnitude 8.4 on the Richter scale according to Mexico’s National Seismological Service. Government officials said that at least five people died in the country’s south. The US Tsunami Warning Center has cautioned that widespread, devastating tidal waves were possible on Mexico’s coast, as well as in Guatemala, El Salvador, Costa Rica, Nicaragua, Panama, Honduras and Ecuador. Shortly thereafter, authorities reported a tsunami was indeed headed towards the coast, fortunately only 0.7 meters (2.3 feet) tall. While there were no immediate reports of major damage, Mexico’s civil protection agency reported that it was the strongest tremor to hit the country since a 1985 earthquake that killed thousands and destroyed entire buildings.

Its epicenter was about 123 km (76 miles) south of the town of Pijijiapan in Chiapas state, but the shock was felt as far away as Mexico City, sending residents fleeing swaying buildings and knocking out electricity in parts of the city. The quake was also felt in much of Guatemala, which borders Chiapas. Civil Defense officials wrote on Twitter that their personnel were patrolling the streets in Chiapas aiding residents and looking for damage. They also issued a warning for aftershocks, several of which themselves registered a 5.0 magnitude according to the US Geological Survey (USGS). Chiapas Governor Manuel Velasco told broadcaster Televisa some homes had been damaged and a shopping center had collapsed in the town of San Cristobal. “Homes, schools and hospitals have been affected,” Velasco said.

The execs delayed reporting the hack so they could offload their shares. Why are these guys walking around free?

• Worst US Consumer Data Hack Ever? Equifax Confesses (WS)

Equifax, as a consumer credit bureau, collects financial, credit, and other data on every US consumer. It has names, birth dates, social security numbers, driver’s license numbers, bank account numbers, credit card numbers, mortgage data, and payment history data, including to utilities, wireless service providers, and the like. It collects data on bank balances, loan balances, credit card balances, credit card purchases, and myriad personal details. It has massive digital dossiers on every consumer in the US and in some other countries. And it sells this data to other companies, such as banks, credit card companies, car dealerships, retailers, and others, as a routine part of its business model. That’s how it makes money. But when someone breaks in and steals this data without paying Equifax for it, well, that’s a huge deal. And it is.

Turns out, Equifax got hacked – um, no, not today. Today it disclosed that it had discovered on July 29 – six weeks ago – that it had been hacked sometime between “mid-May through July,” and that key data on 143 million US consumers was stolen. There was no need to notify consumers right away. They’re screwed anyway. But it gave executives enough time to sell 2 million shares between the discovery of the hack and today, when they crashed 13% in late trading. Given the quantity and sensitivity of the stolen data, it may well be the biggest and worst breach in US history. That stolen data “primarily includes”:• Names • Social Security numbers • Birth dates • Addresses • “In some instances,” driver’s license numbers.

In addition, the stolen data includes: • Credit card numbers of around 209,000 US consumers • “Certain dispute documents with personal identifying information” of around 182,000 US consumers. • “Limited personal information for certain UK and Canadian residents.” This is the kind of information with which identities can be stolen and money can be borrowed in your name. Those data points are the crown jewels for hackers.

It has all been built on debt for decades.

• Consumer Credit & The American Conundrum (Roberts)

Under more normal circumstances rising consumer credit would mean more consumption. The rise in consumption should, in theory, led to stronger rates of economic growth. I say, in theory, only because the data doesn’t support the claim. Prior to 1980, when the amount of debt used to support consumption was fairly stagnant, the economy, wages, and personal consumption expanded. However, as I noted previously, that all changed with financial deregulation in the early 80’s which fostered three generations of debt driven excesses. In the past, if they wanted to expand their consumption beyond the constraint of incomes they turned to credit in order to leverage their consumptive purchasing power. Steadily declining interest rates and lax lending standards put excess credit in the hands of every American. (Seriously, my dog Jake got a Visa in 1999 with a $5000 credit limit) .

This is why during the 80’s and 90’s, as the ease of credit permeated its way through the system, the standard of living seemingly rose in America even while economic growth rate slowed in America along with incomes. Therefore, as the gap between the “desired” living standard and disposable income expanded it led to a decrease in the personal savings rates and increase in leverage. It is a simple function of math. But the following chart shows why this has likely come to the inevitable conclusion, and why tax cuts and reforms are unlikely to spur higher rates of economic growth.

Draghi has a fight on his hands. And he’s going to lose it.

• Low Interest Rates Major Source Of Concern – German Financial Watchdog (CNBC)

The continued low interest environment in key markets such as Europe, the U.S. and the U.K. is a “major source of concern”, according to Felix Hufeld, the president of the German financial regulatory authority. Alluding to the results of a recent survey, the authority over which he presides carried out alongside staff at Germany’s central bank, the Bundesbank, Hufeld described the effect on domestic banks. “The impact is massive and is creeping into the balance sheets more and more. The longer it continues, the higher the risk for a change of interest rates is increasing as well,” he warned, speaking from the Handelsblatt annual banking summit in Frankfurt on Thursday. His wariness comes despite his acknowledgment that the banking system has become much more solid than it was 10 years ago when the financial crisis broke out.

“Both the amount as well as the quality of capital has been massively increased. Risk management procedures have been improved, governance procedures have been improved. Remuneration has been curbed – so all sorts of things – a very wide range of things have been done,” he explained before sounding a note of caution. “But one thing should be clear – no regulatory system and no financial market in the world is invulnerable. There can be and there will be new crises coming up somewhere in the future,” Hufeld declared, pointing to real estate as the most notable cause for concern. The BaFin president’s comments echoed those of fellow Handelsblatt summit participants such as Deutsche Bank CEO John Cryan and Goldman Sachs’s CEO Lloyd Blankfein. Cryan joined Hufeld in warning of the possibility of bubbles forming in certain asset classes, adding, “If you look at the higher risk end of the market, I don’t think you get the right reward for the risk you’re taking right now.”

What a surprise.

• Japan’s April-June Economic Growth Much Slower Than Preliminary Reading (R.)

Japan’s economic growth in the second quarter was much slower than seen in a stellar preliminary reading, government data showed on Friday, confounding hopes for a long awaited pick-up in domestic demand. The downgrade was widely expected after data used to revise gross domestic product figures showed capital spending in April-June rose at a slower annual pace than the previous quarter. While the disappointing data may weaken confidence in the government’s economic policies and the business outlook, analysts still expect the economy to sustain a steady recovery as robust global demand underpins exports and a tightening job market improves the prospects for higher wages.

Japan’s economy, the world’s third largest, expanded at an annualized rate of 2.5% in the April-June quarter, less than the initial estimate of annualized 4.0% growth, Cabinet Office data showed. That was also lower than a median market forecast for a revision to a 2.9%. On the quarter, the economy grew a revised 0.6% in real, price-adjusted terms, against a preliminary reading of a 1.0% increase and the median estimate of a 0.7% expansion. Capital expenditure, a key component of GDP, rose 0.5% for the quarter, marked down from the preliminary estimate of a 2.4% increase.

“The United States is facing a six month window to act and I believe they will.”

• The North Korean Endgame is Playing Out Now – Rickards (DR)

“North Korea has already beaten the world to the punch. They’ve been building up their strategic oil reserves. What that means is they have an estimated year’s worth of held in reserve and China has played a role in these things in the past.” “The area that would be effective for a reactionary measure would be for the United States to exclude the People’s Bank of China, the Industrial and Commercial Bank of China and some of the other major Chinese banks from within the U.S dollar payment systems. The U.S could completely shut down the U.S operations.” “Ultimately, the Chinese are facilitating the North Korean finance. The move would be a kind of sanction with bite behind it. My expectation would be that China wouldn’t necessarily put pressure on North Korea. In reaction we could see escalation of further sanctions from the Chinese against the United States leaving for a trade and financial war without solving the North Korean situation.”

“Currently, North Korea is in what is classified as a ‘break out.’ Under typical nuclear development phases, we’ve normally seen countries that are cheating on nuclear development programs complete their operations in baby steps. In the process they proceed gradually and when they do draw attention will stall programs until beginning again at a later date. North Korea has put that pattern aside and is in complete breakout.” “To give a U.S football comparison, they’re in the red zone and the quarterback is simply about to throw a pass into the end zone. The leader of North Korea is going for it and not hiding anything. The leadership in North Korea is hoping that the United States is bluffing and that they will be able to get a serviceable intercontinental ballistic missile (ICBM) with a hydrogen bomb that could threaten or destroy Los Angeles before the U.S could do anything. The United States is facing a six month window to act and I believe they will.”

The mess keeps getting bigger.

• Theresa May Apponts Cronies In ‘Sweeping Power Grab’ (Ind.)

Theresa May is poised to make an unprecedented attempt to fix the parliamentary system, allowing her to grab sweeping powers ahead of Brexit, The Independent can reveal. A late-night Commons vote to secure the Conservatives the muscle to use so-called “Henry VIII powers” to make new laws – behind the backs of MPs – will be staged next week. The move has been disguised on the Commons order paper under the innocuous description of “motions relating to House business”, but will be a decisive act in the Brexit process. It will allow the Tories to pack a crucial Commons committee with their own MPs, in defiance of Parliament’s rules, in order to carry out the power grab. To win the vote, the Conservatives will need the backing of the Democratic Unionist Party (DUP), under the much-criticised “cash-for-votes” deal that props up Ms May in power.

Opposition parties immediately accused the Prime Minister of a bid to “sideline Parliament and grant ministers unprecedented powers” – despite promises to restore sovereignty to MPs. “This is an unprecedented power grab by a minority government that lost its moral authority as well as its majority at the general election,” Valerie Vaz, Labour’s Shadow Commons Leader, told The Independent. And Alistair Carmichael, the Liberal Democrat chief whip, said: “The Tories seem determined to ram through their destructive hard Brexit even though they have no mandate for it.” The bid to seize control of the Committee of Selection comes despite unequivocal advice from parliamentary officials that the Tories must not do so, after losing their Commons majority at the election. Without the fix, it would be impossible to force through up to 1,000 “corrections” to EU law as intended through the EU (Withdrawal) Bill – the reason for the accusations of a power grab.

Europe 2.0 won’t be a democracy.

• At Democracy’s Birthplace, Macron Dreams Of Europe 2.0 (AP)

Standing at a Greek site where democracy was conceived, French President Emmanuel Macron called on members of the European Union to reboot the 60-year-old bloc with sweeping political reforms or risk a “slow disintegration.” Macron, on a visit on Thursday to Athens, urged EU nations to carry out six-month national reviews on EU reforms before imposing them — signaling his distance with the German-backed approach based on fiscal discipline within the eurozone. “It would be a mistake to abandon the European ideal,” Macron said. “We must rediscover the enthusiasm that the union was founded upon and change, not with technocrats and not with bureaucracy.” Elected by a landslide in May, the 39-year-old Macron has vowed to back efforts for closer integration in the EU, which has been rattled by a financial crisis, migration issues, a populist backlash and Britain’s decision to leave.

His proposal found enthusiastic support in bailout-stricken Greece, which considers France a vital ally and counterweight to fiscally hawkish Germany in its efforts to ease the stringent terms of its international rescue loans. Reinforcing his message, Macron urged the IMF to step back from its role in European bailouts — breaking with a widely accepted policy adopted when Greece sought international help seven years ago. “I don’t think it was the right method for the IMF to supervise European programs and intervene in the way it did,” he said. “Let’s work within Europe and not turn to outside agencies.” The eurozone rescue fund, the European Stability Mechanism, should play the lead role in financial rescue within the euro currency zone, he said. France, Europe’s No. 2 economy, had previously backed Germany’s insistence in involving the IMF to enforce austerity measures that came with bailout programs in Greece and other rescued economies including Ireland, Portugal and Cyprus.

Debt Rattle September 7 2017

Sep 072017

September 7, 2017 Posted by Raúl Ilargi Meijer at 9:14 am Finance Tagged with: Apple, Brexit, Caribbean, Catalunya, China, debt, deflation, Fed, Fisher, Greece, Irma, Macron, Trump 6 Responses »

St. Maarten seen through the eye of Irma

• Irma Devastates The Caribbean (AlJ)

• Trump Sides With Democrats On Debt Limit In Rare Bipartisan Deal (R.)

• Fed’s Fischer Resigns, Leaving Trump Earlier Chance To Shape Central Bank (R.)

• Deutsche Bank Boss Calls On ECB To Halt Cheap Money (R.)

• New Leak Of Brexit Papers Reveals Fissures Between Britain And EU (G.)

• Consumption Exhaustion (Lebowitz)

• China Realizes It Needs Foreign Companies (Balding)

• Apple Needs iPhone 8 To Solve A Giant Financial Headache (BI)

• Catalonia Launches Its Independence Challenge Against Spain (AFP)

• Emmanuel Macron To Outline Vision For Europe’s Future In Athens Speech (G.)

• Crisis-Ridden Greek Households Cut Even On Milk And Bread (KTG)

Too early to say much of anything. Barbuda is gone. So is much of St. Martin. Close to uninhabitable.

If Irma hits Puerto Rico anywhere near full force, that would be exceedingly dramatic. Ditto for Haiti, Miami. This has just started.

NOAA Hurricane Hunters flight director Richard Henning on CNN: “Irma “is actually getting stronger. … You can’t overhype this storm”.

• Irma Devastates The Caribbean (AlJ)

Nearly every building on the island of Barbuda has been damaged and almost 900,000 people have been left without power in Puerto Rico as the Category 5 Hurricane Irma continues its journey towards mainland US. About 60 percent of Barbuda’s roughly 1,400 people were left homeless, Gaston Browne, Antigua and Barbuda prime minister, told the Associated Press news agency, when the eye of the storm passed almost directly overhead early on Wednesday. “Either they were totally demolished or they would have lost their roof,” Browne said after returning to Antigua from a plane trip to the neighbouring island. “It is just really a horrendous situation.” Browne said roads and telecommunications systems were destroyed and recovery will take months. A two-year-old was killed as a family tried to escape a damaged home during the storm, he said.

Puerto Rico was buffeted by powerful winds and heavy rain as authorities struggled to get aid to small Caribbean islands already devastated by the storm. The US National Weather Service said Puerto Rico had not seen a hurricane of Irma’s magnitude since Hurricane San Felipe in 1928, which killed a total of 2,748 people in Guadeloupe, Puerto Rico and Florida. But as the storm moved west, it devastated the small islands in its path. Significant effects were reported on St Martin, an island split between French and Dutch control. Photos and video circulating on social media showed major damage to the airport in Philipsburg and the coastal village of Marigot heavily flooded. The US National Hurricane Center said Irma’s winds would fluctuate, but the storm would probably remain at Category 4 or 5 for the next day or two as it moves past just to the north of the Dominican Republic and Haiti on Thursday, nears the Turks & Caicos and parts of the Bahamas by Thursday night and touches Cuba on Friday night.

“Less than an hour before the meeting, Republican House of Representatives Speaker Paul Ryan had called the Democratic proposal that Trump later embraced a “ridiculous and disgraceful” idea..”

• Trump Sides With Democrats On Debt Limit In Rare Bipartisan Deal (R.)

President Donald Trump forged a surprising deal with Democrats in Congress on Wednesday to extend the U.S. debt limit and provide government funding until Dec. 15, embracing his political adversaries and blindsiding fellow Republicans in a rare bipartisan accord. Trump, living up to his reputation for unpredictability, met at the White House with congressional leaders from both parties and overruled Republicans and U.S. Treasury Secretary Steven Mnuchin, who wanted a longer-term debt-limit extension rather than the three-month Democratic proposal the president embraced. “We could have done a one-year deal today,” Mnuchin told reporters aboard Air Force One later in the day en route back to Washington from an event in North Dakota where Trump spoke about taxes.

Mnuchin said Trump chose a short-term deal to keep his options open on possibly raising military funding later this year, suggesting a longer-term government funding deal might have blocked that. Trump is very focused on military spending, “particularly with what’s going on in North Korea and other parts of the world today,” Mnuchin said. “The president wasn’t willing to give up his need for additional military spending.” If passed by the Republican-led Congress, the three-month agreement would avert an unprecedented default on U.S. government debt, keep the government funded at the outset of the fiscal year beginning Oct. 1 and provide aid to victims of Hurricane Harvey. “It was a really good moment of some bipartisanship and getting things done,” top Senate Democrat Chuck Schumer said. Less than an hour before the meeting, Republican House of Representatives Speaker Paul Ryan had called the Democratic proposal that Trump later embraced a “ridiculous and disgraceful” idea that would “play politics with the debt ceiling.”

Curious timing. Note that Reuters has fully entered the anti-Trump echo chamber.

• Fed’s Fischer Resigns, Leaving Trump Earlier Chance To Shape Central Bank (R.)

U.S. Federal Reserve Vice Chair Stanley Fischer, a veteran central banker who helped set the course for modern monetary policy, said on Wednesday he will step down from his position in mid-October, potentially accelerating President Donald Trump’s opportunity to reshape the direction of the central bank. In a letter to Trump, Fischer, 73, said he was resigning for personal reasons effective on or around Oct. 13, eight months before his term as vice chair expires in June. In the letter, Fischer said jobs growth had returned to the United States and that “steps to make the financial system stronger and more resilient” had been taken – actions that may now be weakened by the Trump administration.

His departure leaves the seven-person board of governors with as few as three sitting members, depending on whether and when the Senate confirms Trump nominee Randal Quarles to the role of vice chair for supervision, a job distinct from Fischer’s vice chairmanship. The Senate Banking Committee is scheduled to vote on the nomination on Thursday. The White House said it had no immediate comment on Fischer’s departure or on the timing for filling his spot or other positions at the Fed. Though the Fed often operates with fewer than its full complement of seven governors, it has never dipped as low as three. Fischer’s earlier-than-expected departure intensifies the urgency for Trump to decide how deeply he wants to overhaul U.S. monetary policy. Fed Chair Janet Yellen’s term expires in February. While Trump has spoken approvingly of her performance he has also kept the door open to naming his top economic adviser Gary Cohn, or someone else, to the job.

He thinks he’s taken all he’s going to get.

• Deutsche Bank Boss Calls On ECB To Halt Cheap Money (R.)

Deutsche Bank chief executive John Cryan has called on the European Central Bank to change course on providing cheap money, warning he sees price bubbles in stocks, bonds and property. “The era of cheap money in Europe should come to an end – despite the strong euro,” Cryan told a room full of bankers in Frankfurt on Wednesday, a day before the ECB’s governors meet to discuss policy. Low interest rates, money printing and a penalty charge for hoarding cash have been at the heart of attempts by the central bank to reinvigorate the 19-country euro zone economy in the wake of the 2008-09 financial crisis. But the policy, which has seen the ECB print more than €2 trillion ($2.4 trillion) so far, has been politically divisive, prompting fierce criticism from famously thrifty Germans.

It has also imposed a heavy cost on still fragile banks, turning deposits into a hot potato that many would rather avoid so as not to pay charges to their central bank for storing them. The head of Germany’s largest commercial bank warned of the fallout from cheap money, cautioning against using the strong euro as a justification for printing more. “We are now seeing signs of bubbles in more and more parts of the capital market,” he said. Cryan also said Frankfurt was the most natural location as a financial hub as banks move from London after Britain’s decision to leave the European Union – ahead of Paris, Dublin and Amsterdam. “There is only one European city which can fulfil these requirements and that city is Frankfurt,” he said, pointing to Frankfurt’s supervisory authorities, law firms, consultancies and airport.

Multiple papers have been leaked in recent days. They won’t be the last.

• New Leak Of Brexit Papers Reveals Fissures Between Britain And EU (G.)

The EU will risk heightening tensions with the UK on Brexit by publishing five combative position papers in the coming days, including one that places the onus on Britain to solve the problem of the Irish border, according to documents leaked to the Guardian. The Irish document shows that Michel Barnier, the EU’s chief negotiator, will call on the UK to work out “solutions” that avoid the creation of a hard border and guarantee peace on the island. The leaks come a day after the Guardian obtained a draft memo showing the British government’s position on post-Brexit EU migration, which has been denounced as “completely confused”, “economically illiterate” and “a blueprint on how to strangle London’s economy”. The Ireland paper is one of five due to be published by the European commission in the coming days. Each is dated 6 September and was drawn up by Barnier’s article 50 taskforce in Brussels.

Together, the papers lay bare the complexity of disentangling Britain from the European Union. Each paper is focused on withdrawal day, 29 March 2019, delving into technical minefields not dealt with during the referendum campaign. EU proposals include:
• A demand – likely to inflame Brexiters – for the UK to legislate for the “continued protection” of special foods such as Parma ham and feta cheese, as well as French burgundy and Spanish cava. Brussels wants to ensure that more than 3,300 food and drink products are protected from British copycats after Brexit.
• Ensuring that any goods in transit on Brexit day would be subject to the jurisdiction of the European court of justice. In effect, British companies and the British government would be liable to fines from Brussels for breaking EU VAT and customs rules.
• A warning to the government that it must guarantee EU data protection standards on classified EU documents. If not, the EU wants these documents erased or destroyed.
• Asking Britain not to discriminate against EU companies which are carrying out state-funded infrastructure projects that began before Brexit day.

How to spell deflation.

• Consumption Exhaustion (Lebowitz)

Debt serves as a regulator of economic growth and is the focus of ill-advised fiscal and monetary policy. It is no coincidence that no matter what economic topic we explore, debt is usually a central theme. Illustrated in the chart below is the actual trajectory of total U.S. debt outstanding (black) through March 2017 and a calculated parabolic curve (red). The parabolic curve uses 1951 as a starting point and a quarterly 1.82% compounding factor to create the best statistical fit to the actual debt curve. If we start with the $434 billion of debt outstanding on December 1951 and grow it by 1.82% each quarter thereafter, the result is the gray line. If debt outstanding continues to follow this parabolic curve, it will exceed $60 trillion by the first quarter of 2020, or nine quarters from now.

Many economists point to the stability of debt service costs as a reason to ignore the parabolic debt chart. Despite rising debt loads, falling interest rates have served as a ballast allowing more debt accumulation at little incremental cost. While that may have worked in the past, near zero interest rates makes it nearly impossible to continue enjoying the benefits of falling interest rates going forward. Importantly, social safety net obligations, demographics, and political dynamics argue that debt growth is likely to continue accelerating as implied by the chart above. Without interest rates falling in step with rising debt burdens, debt service costs will begin to rise appreciably.

The power of compounding, extolled by Albert Einstein as the eighth wonder of the universe, is as damning in its demands as it is merciful in its generosity. Barring negative interest rates, debt service costs will be an insurmountable burden by 2020. However, if the debt trajectory slows as it did in 2008 that too will bring about painful consequences. In other words, all roads lead to trouble.

“China maintains a quasi-pegged exchange rate, which requires balancing the inflow and outflow of capital. That means attracting foreign investment is a necessary precondition for investing abroad..”

• China Realizes It Needs Foreign Companies (Balding)

China is increasingly desperate for foreign investment. Yet foreign companies are less and less interested in what it has to offer. How this problem gets resolved may be one of the most important questions facing China’s economy. After China joined the World Trade Organization, in 2001, overseas investors couldn’t wait to jump in. Foreign direct investment grew at an annualized rate of 10.8% from 2000 to 2008. Enticed by China’s market size and development capacity, companies were willing tolerate almost any kind of restriction. They turned over intellectual property; entered into joint ventures as junior partners, essentially training their eventual competitors; and accepted restricted access to wide swathes of the economy. Since the financial crisis, however, things have changed.

Wages in China have risen by an average of 11% a year, making it less attractive for outsourcing. Despite years of complaints, intellectual property theft hasn’t abated (just ask Michael Jordan, who had to wage a four-year court battle to get ownership of his own name in China). Add in an increasingly hostile business environment, and it’s not surprising that overseas companies are losing enthusiasm. Since 2008, utilized foreign direct investment has increased by an average rate of only 4% a year. According to quarterly balance-of-payment data, FDI has amounted to only $55 billion this year through June. The last time China’s mid-year inflows were that low was in 2009, the year after the financial crisis. This could have serious economic consequences.

Due to shady invoicing – which many firms use to evade capital controls – the money flowing into China through its trade surplus has shrunk. From 2010 through 2014, banks reported net settlement inflows from goods trade of nearly $1.7 trillion. Since January 2015, net settlement by banks has amounted to only $278 billion, while the official trade surplus is $1.3 trillion. For a country that relies on capital accumulation to sustain growth, this is a significant problem. Making matters worse, China maintains a quasi-pegged exchange rate, which requires balancing the inflow and outflow of capital. That means attracting foreign investment is a necessary precondition for investing abroad, which is China’s main method of advancing its foreign-policy objectives.

All on red.

• Apple Needs iPhone 8 To Solve A Giant Financial Headache (BI)

Apple will launch its next-generation iPhone (expected to be called the iPhone 8 or the iPhone Edition) on September 12, and this chart from Guggenheim Securities analyst Robert Cihra gives you a good idea of the giant headache Apple needs that new phone to solve. The graph is interesting because it shows Apple’s business in a seldom-seen way: It charts only the revenue growth of the company, broken out by product. The chart does a good job of showing how Apple’s various product lines have increasingly stalled over the years. In each of the last four years, Apple had one or more major product lines with shrinking sales. In 2016, that came to a head, and Apple’s overall revenue went into decline for the first time ever.

Note that in 2016, Apple’s worst year, the only division growing revenues was Services — apps, content, and software in iTunes. The stakes for iPhone 8 and its kindred models — iPhone 7s and iPhone 7s Plus — couldn’t be higher. If they don’t grow revenues, then the company as a whole doesn’t grow. The task facing Apple is not trivial. As this chart from Deutsche Bank shows, the iPhone tends to grow more slowly than the smartphone market as a whole — and the smartphone market has flatlined.

Spain threatens criminal charges for people seeking self-determination.

• Catalonia Launches Its Independence Challenge Against Spain (AFP)

Catalonia’s regional parliament passed a law on Wednesday (Sep 6) paving the way for an independence referendum on Oct 1 which is fiercely opposed by Madrid, setting a course for Spain’s deepest political crisis in decades. The looming showdown comes three weeks after militant attacks in Barcelona, the capital of Catalonia, and a seaside resort which killed 16 people and wounded more than 120. The law was adopted with 72 votes in favour and 11 abstentions after 12 hours of often stormy debate in the regional assembly. Lawmakers who oppose independence for the wealthy northeastern region of Spain quit the chamber before the vote. After the law was passed, separatist lawmakers, who have a majority in the assembly, sang the Catalan anthem, “Els Segadors”, which recalls a 1640 revolt in the region against the Spanish monarchy.

Lawmakers approved the bill despite a February ruling by Spain’s Constitutional court declaring it would be unconstitutional. Shortly after the law was passed the president of Catalonia, Carles Puigdemont, and the rest of his cabinet signed a decree calling the referendum, presenting a show of unity in the face of threats of legal action by Madrid, which deems the plebiscite illegal. Deputy Prime Minister Soraya Saenz de Santamaria said before the law was passed that the government had asked the Constitutional Court to declare “void and without effect the agreements adopted” by the Catalan parliament. She also denounced the regional assembly’s agreement to quickly vote on the bill with little debate as an “act of force” characteristic of “dictatorial regimes”. At the same time, public prosecutors announced they would seek criminal charges for disobedience against the president of the Catalan parliament, Carme Forcadell, and other Catalan officials for allowing the vote on the referendum law.

Macron can only do what Merkel allows him.

• Emmanuel Macron To Outline Vision For Europe’s Future In Athens Speech (G.)

Emmanuel Macron will make Greece the launchpad for a major policy speech on the future of Europe as he starts his first official trip to the country on Thursday. From the dramatic setting of the ancient Pnyx in Athens, the French president is expected to outline his vision for the continent in what is being called his most important overseas address since taking office in May. Amid the rocky hills of the Pnyx beneath the Acropolis, the speech will focus on the virtues of democracy as the European Union – and Greece – finally show signs of economic revival. “It will be a message of confidence in Greece but also a European symbolic message, given that in many ways Greece has been a symbol of Europe’s crisis,” said an Élysée Palace source. “The restart of Greece is the restart of the eurozone.”

It is a measure of the significance the Greek government is attaching to the visit that Macron is making the address from such an august setting. From the earliest days of Athenian democracy, the Pnyx was a meeting place for popular assemblies. In more modern times its use has been limited to the rare photo op. The young president will be the first French leader to speak from it, in what Greeks are also calling a subliminal message of hope. Macron has been criticised at home for his carefully choreographed media appearances evoking the grandeur of eras past, and has seen his approval ratings drop dramatically. But officials say the rich symbolism of Macron’s Athens speech will underscore the argument that, despite its battle to stay in the eurozone and keep bankruptcy at bay, Greece remains at the heart of Europe’s tradition and history.

“We see it is as a very important visit,” said the deputy minister of economy and development, Stergios Pitsiorlas. “We are very much hoping it will not only deepen economic cooperation but also herald a change in the political dynamic in the EU which for so long has been dominated by a single state, Germany.” France has stood by Greece, often defending it in fraught negotiations, since international creditors, led by Berlin, were forced to come to the debt-stricken country’s rescue issuing the first of three bailouts in return for tough reforms in May 2010. Macron, a former economy minister, has long advocated debt relief for Athens – echoing the view of its leftist-led government that without it the Greek economy can never fully recover.

While politicians on all sides cheer the ‘recovery’.

• Crisis-Ridden Greek Households Cut Even On Milk And Bread (KTG)

The economic crisis continues to plague Greek households struggling too make ends meet – month in, month out. A survey conducted by Nielsen shows a decline in consumption and therefore the plight of thousands of families. Greeks cut on essential goods like milk and bread. The drop in the category of milk in the organized retail market reached 8.6% in the first half of 2017. Sales of essential consumer goods continue to drop, according to a Nielsen survey of the Greek market. Sales of milk, bread and alcoholic beverages are among the goods that suffer most. In the first half of 2017 the drop in the sale of milk reached 8.6%, while sales of packaged bread shrank by 5.3%. Sales of alcoholic beverages also recorded significant losses, as whiskey sales dropped by 6.8% over the same period.

Overall, retail trade lost 1.1% in value in the first half of the year compared to the same period last year. More pronounced downward trends were recorded in personal care products at 4.4%, and household goods at 3.5%. Sales of deodorants and diapers dropped by 7.3% and 7.2% respectively. In household goods, chlorine dropped by 8.9% and kitchen paper towel by 7.7%. The only positive trend in all sectors was in fresh / bulk products where sales increased by 2.0%. An earlier Nielsen survey has shown that food sales in Greece have dropped by 18 percent since 2009, when the current economic crisis begun. In 2009, food sales reached a record high, totalling 13.15 billion euros. However, as Greece entered the first bailout program in 2010, the demand for food items started to drop. The decrease was also attributed partly to the closing down of small grocery and convenience stores..

Debt Rattle September 4 2017

Sep 042017

September 4, 2017 Posted by Raúl Ilargi Meijer at 7:38 am Finance Tagged with: Canada, crash, debt, Greece, Heloc, immune, Italy, Merkel, NIRP, socialism, Texas, trinity 4 Responses »

Edouard Manet Jeanne Duval, Baudelaire’s Mistress, Reclining (Lady with a Fan) 1862

• How To Make The Financial System Radically Safer (AM)

• Funding Battle Looms As Texas Sees Harvey Damage At Up To $180 Billion (R.)

• Canadians Are Borrowing Against Real Estate At The Fastest Pace Ever (BD)

• China Battles “Impossible Trinity” (Rickards)

• Socialism For The Best Of Us, Capitalism For The Rest Of Us (CC)

• Britain’s Addicted To Debt And Headed For A Crash (G.)

• Global Negative Yielding Debt Hits One Year High Of $7.4 Trillion (ZH)

• Greece Property Auctions Certain To Drive Market Prices Even Lower (K.)

• Italy FinMin Says The Euro Zone Still Faces Problems – Even In Germany (CNBC)

• Italy’s 5-Star Says Euro Referendum Is ‘Last Resort’ (R.)

• Turkey Will Never Become EU Member, Says Angela Merkel (Ind.)

• How Our Immune Systems Could Stop Humans Reaching Mars (Tel.)

Take away the political power of central banks.

• How To Make The Financial System Radically Safer (AM)

At the same time, the new financial reforms haven’t minimized risk. Moreover, they’ve set taxpayers – that’s you – up for a future fleecing. Congressman Robert Pittenger elaborated this fact in a Forbes article last year: “Even Dodd-Frank’s biggest selling point, that it would end “too big to fail,” has proven false. Dodd-Frank actually created a new bailout fund for big banks–the Orderly Liquidation Authority–and the Systemically Important Financial Institution designation enshrines “too big to fail” by giving certain major financial institutions priority for future taxpayer-funded bailouts.” What gives? Regulations, in short, attempt to control something by edict. However, just because a law has been enacted doesn’t mean the world automatically bends to its will. In practice, regulations generally do a poor job at attaining their objectives. Yet, they often do a great job at making a mess of everything else.

Dictating how banks should allocate their loans, as Dodd-Frank does, results in preferential treatment of favored institutions and corporations. This, in itself, equates to stratified price controls on borrowers. And as elucidated by Senator Wallace Bennett over a half century ago, price controls are the equivalent of using adhesive tape to control diarrhea. The dangerous conceit of the clueless… the house of cards they have built is anything but “safe” and they most certainly can not “fix anything”. Listening to their speeches that seems to be what they genuinely believe. A rude awakening is an apodictic certainty, but we wonder what or who will be blamed this time. Not enough regulations? The largely absent free market? As they say, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” (this quote is often erroneously attributed to Mark Twain: we think it doesn’t matter whether he created it, it is often quite apposite and this is a situation that certainly qualifies).

The point is that planning for future taxpayer-funded bailouts as part of compliance with destructive regulations is asinine. In this respect, we offer an approach that goes counter to Fed Chair Janet Yellen and the modus operandi of all central planner control freaks. It’s really simple, and really effective. The best way to regulate banks, lending institutions, corporate finance and the like, is to turn over regulatory control to the very exacting, and unsympathetic, order of the market. That is to have little to no regulations and one very specific and uncompromising provision: There will be absolutely, unconditionally, categorically, no government funded bailouts. Without question, the financial system will be radically safer.

Want to bet it’ll be a lot more?

• Funding Battle Looms As Texas Sees Harvey Damage At Up To $180 Billion (R.)

U.S. Treasury Secretary Steven Mnuchin on Sunday challenged Congress to raise the government’s debt limit in order to free up relief spending for Hurricane Harvey, a disaster that the governor of Texas said had caused up to $180 billion in damage. Harvey, which came ashore on Aug. 25 as the most powerful hurricane to hit Texas in more than 50 years, has killed an estimated 50 people, displaced more than 1 million and damaged some 200,000 homes in a path of destruction stretching for more than 300 miles (480 km). As the city of Houston and the region’s critical energy infrastructure began to recover nine days after the storm hit, the debate over how to pay for the disaster played out in Washington. Texas Governor Greg Abbott estimated damage at $150 billion to $180 billion, calling it more costly than Hurricanes Katrina or Sandy, which devastated New Orleans in 2005 and New York in 2012.

The administration of President Donald Trump has asked Congress for an initial $7.85 billion for recovery efforts, a fraction of what will eventually be needed. Even that amount could be delayed unless Congress quickly increases the government’s debt ceiling, Mnuchin said, as the United States is on track to hit its mandated borrowing limit by the end of the month unless Congress increases it. “Without raising the debt limit, I am not comfortable that we will get money to Texas this month to rebuild,” Mnuchin told Fox News. Republican lawmakers, who control both houses of Congress, have traditionally resisted raising the debt ceiling, but linking the issue to Harvey aid could force their hand with people suffering and large areas of the fourth-largest U.S. city under water. Beyond the immediate funding, any massive aid package faces budget pressures at a time when Trump is advocating for tax reform or tax cuts, leading some on Capitol Hill to suggest aid may be released in a series of appropriations.

Katrina set the record by costing U.S. taxpayers more than $110 billion. In advocating for funds to help rebuild his state, Abbott said damage from Harvey would exceed that. Houston Mayor Sylvester Turner said the city expected most public services and businesses to be restored by Tuesday, the first day after Monday’s Labor Day holiday. “Over 95% of the city is now dry. And I‘m encouraging people to get up and let’s get going,” Turner told NBC News. Even so, Houston mandated the evacuation of thousands of people on the western side of town on Sunday to accommodate the release of water from two reservoirs that otherwise might sustain damage. The storm stalled over Houston, dumping more than 50 inches (1.3 m) on the region. Houston cut off power to homes on Sunday to encourage evacuations. The area was closed off on Sunday and military vehicles were stationed on the periphery to take people out.

What Canada learned from history.

• Canadians Are Borrowing Against Real Estate At The Fastest Pace Ever (BD)

Canadian real estate prices have soared, and so did borrowing against that value. Our analysis of domestic bank filings from the Office of the Superintendent of Financial Institutions (OSFI) shows that loans secured against property has reached an all-time high. More surprising is the unprecedented rate of growth experienced this year.

Loans secured against residential real estate shattered a few records in June. Over $313.66 billion in real estate was used to secure loans, up 3.43% from the month before. The rise puts annual gains 11.16% higher than the same month last year, an increase of $31.51 billion. The monthly increase is the largest increase since March 2012. The annual gain is unprecedented according to an aggregate of domestic bank filings. Not all borrowing against residential property is all bad, sometimes it’s a calculated risk. For example, someone may need to secure a business loan, and use the loan for operating risks. It doesn’t mean the property is safe, but it’s a risk that could potentially boost the economy.

This is opposed to non-business loans, which is used as short-term financing. This type of financing is often used for things like renovations, and putting a fancy car in the driveway. Experts have observed that more homeowners are using these to prevent bankruptcy. Bottom line, it’s not typically healthy looking debt. So let’s remove loans obtained for business reasons, and take a peek at higher risk debt. The majority of these loans are non-business related according to bank filings. The current total is over $266 billion as of June 2017, a 1.01% increase from the month before. This is a 4.9% increase from the same month last year, which works out to $12.49 billion more. Fun fact, that’s around $23,763 per minute. The number is astronomical.

“..no country can have an open capital account, a fixed exchange rate and an independent monetary policy at the same time..”

• China Battles “Impossible Trinity” (Rickards)

The Impossible Trinity theory was advanced in the early 1960s by Nobel Prize-winning economist Robert Mundell. It says that no country can have an open capital account, a fixed exchange rate and an independent monetary policy at the same time. You can have one or two out of three, but not all three. If you try, you will fail — markets will make sure of that. Those failures (which do happen) represent some of the best profit-making opportunities of all. Understanding the Impossible Trinity is how George Soros broke the Bank of England on Sept. 16, 1992 (still referred to as “Black Wednesday” in British banking circles. Soros also made over $1 billion that day). The reason is that if more attractive total returns are available abroad, money will flee a home country at a fixed exchange rate to seek the higher return.

This will cause a foreign exchange crisis and a policy response that abandons one of the three policies. But just because the trinity is impossible in the long run does not mean it cannot be pursued in the short run. China is trying to peg the yuan to the U.S. dollar while maintaining a partially open capital account and semi-independent monetary policy. It’s a nice finesse, but isn’t sustainable. China cannot keep the capital account even partly closed for long without drying up direct foreign investment. Similarly, China cannot raise interest rates much higher without bankrupting state-owned enterprises. China is buying time until the Communist Party Congress in October. It’s important to realize that for Beijing, the Chinese economy is more than about jobs, goods and services. It’s a means of ensuring its legitimacy.

The Chinese regime is deeply concerned that a faltering economy and mass unemployment could threaten its hold on power. Chinese markets are wildly distorted by the actions of its central bank. Given the problems inherent in trying to manage an economy without proper price signals, the challenge facing Beijing gets harder by the day. China has a long history of violent political fracturing, and the government is deeply worried about regime survival if it stumbles. Many in the West fail to appreciate Beijing’s fears and overestimate the support it has among the disparate Chinese people. What does China do next? Under the unforgiving logic of the Impossible Trinity, China will have to either devalue the yuan or see its reserves evaporate. In the end, China will have to break the yuan’s peg to the dollar in order to stop capital outflows without killing the economy with high rates. The Impossible Trinity really is impossible in the long run. China will find this out the hard way.

How do we make government independent?

• Socialism For The Best Of Us, Capitalism For The Rest Of Us (CC)

To the elected darlings of the free market: I hate to burst your bubble but – you have been living a lie. Your lifetime government pensions: socialism. Overly generous retirement packages, Superannuation and 401ks: socialism. Travel budgets, expense accounts, access to private drivers and town cars, government reimbursement for travel and living arrangements: socialism, socialism, socialism, socialism, socialism. Central banking: socialism. Not to mention fossil-fuel & mining subsidies and tax concessions: socialism, socialism, socialism. The bank bail-outs of 2008: One of the greatest acts of socialism of all time. Where were our free-market representatives then? When the financial system went into melt-down, the banks were not told to suck it up and stand on their own two feet. More than a trillion dollars were poured into the banks, most of which went towards profit margins and CEO bonuses.

These so-called champions of capitalism have the nerve to claim that it is social welfare recipients that are a drain on the system while government representatives take home all kinds of state-provided benefits the rest of us could only dream of: the best health insurance the country has to offer, lifetime pensions and generous retirement packages which drain many more billions from the economy than social welfare ever will. Moreover, corporate welfare pales in comparison to either. The private sector has its own dole system paid for by Federal Governments. Yet many Congressmen, Representatives and MPs still have the nerve to stand before the people who elected them and rail against social spending, claiming people ought to pull themselves up by their bootstraps when no such obligation has ever existed for the corporate sector. Most of the world’s most successful corporations don’t get out of bed without a subsidy.

If it makes you feel better: Britain’s not alone.

• Britain’s Addicted To Debt And Headed For A Crash (G.)

[..] if the debtors at the bottom aren’t at crisis point yet, the signs of a surfeit of debt are everywhere. Alex Brazier, executive director of financial stability at the Bank of England, warned last month that consumer loans had gone up by 10% in the past year, with average household debt having already eclipsed 2008 levels. He warned against the economy having to sit through “endless repeats of the ‘Debt Strikes Back’ movie”. There is something obscurely insulting about being warned about household debt by the Bank of England. It never warns employers about stagnant wages, or the government about the benefit freeze. It only ever mentions these in terms of the impact of inflation, as if any consideration of the human decisions behind them are too political for comment. But personal debt, miraculously, isn’t political at all.

But that doesn’t make Brazier wrong. Edward Smythe of the campaign group Positive Money, breaks it down: “If you look at total outstanding consumer loans, in July, they’re at £200bn, an £18.5bn net increase every year.” Households spent more than their income by £17.5bn in the first quarter of this year. Economists are interested in where that money comes from – whether it’s access to credit, selling assets or spending savings. The government is presumably, in some dusty corner, interested in why that money is needed, whether it is a result of pauperised wages– real wage growth is negative and looks set to decrease – benefit changes, or some rush of blood to the head where we all suddenly need Sky Sports and cigarettes but aren’t prepared to work for them.

The sources of all this debt are changing: about half the net increase was in personal contract purchase car loans. Four in five new cars are now bought by PCP – an inherently unstable system that leaves both consumers and car manufacturers exposed. It’s a bit like a mortgage system for cars, except you don’t own it at the end, ideally you wouldn’t be living in it, and while a housing crash has been seen before, nobody yet knows what a car crash would look like. Student loan debt is counted separately from consumer loans, and stands at £13bn a year. However much you think you’ve accommodated student fees into your picture of Britons’ finances, it is always astounding to consider how life-changing that decision has been for the younger generation.

“What global recovery?!”

• Global Negative Yielding Debt Hits One Year High Of $7.4 Trillion (ZH)

Two weeks ago, we were surprised to find that despite the recent “growth promise” of what has been called a coordinated global recovery, the market value of bonds yielding less than 0% had quietly jumped by a quarter in just one month to the highest since October 2016. Since then, the paradoxical divergence between the reported “strong” state of the “reflating” global economy and the amount of negative yielding debt, has only grown, and as JPM reports as of Friday, Sept. 1, the global market value of government bonds trading with negative yield within the JPM GBI Broad index rose to $7.4 trillion, up 60% from its low of $4.6 trillion at the beginning of the year. Some more details from JPM:

We calculate the market value by multiplying the dirty price with the amount outstanding for each bond within JPM GBI Broad Index and then convert it to US dollars at today’s exchange rate. The market value of bonds trading with negative yield,including central banks’ purchases, stands at 30% of the total JPM GBI Broad index. What makes the latest rise in negative yielding debt especially bizarre is that it was mainly driven by Japan, where 10-year government bond yields have fallen significantly over the past month and have turned negative this week for first time since the US presidential election, even as the Bank of Japan has twice in the past month reduced the amount of JGB debt it purchases in the open market in the 5-to-10 year bucket, following on Friday, by a 30BN yen reduction of buying in the 3-to-5 year debt range.

As a result, the total universe of Japanese bonds trading with negative yield within the JPM global government bond index (GBI Broad) now stands at $4.6tr, or 62% of the outstanding amount. The remaining government bonds trading with negative yields worth $2.8 trillion are from Europe, of which more than half are from France and Germany.

Capital destruction 101 (thanks, Schaeuble!):

“..the stock of unsold properties of all types comes to 270,000-280,000, in a market with no more than 15,000 transactions per year..”

BTW, the only buyers left are those who want to profit from Airbnb. Mostly foreigners.

• Greece Property Auctions Certain To Drive Market Prices Even Lower (K.)

Professionals in the property sector are warning that the auctioning of tens of thousands of buildings in the next few years could evolve into an unknown – probably negative – factor regarding the course of prices in the market. It is estimated that a wave of auctions expected to begin soon will see market rates drop at least 10%. Clearing firms are currently involved in an extensive program of property valuations to establish starting prices for the auctions. Ilias Ziogas, head of property consultancy company NAI Hellas and one of the founding members of the Chartered Surveyors Association, said that the property market is certain to suffer further as a result of the auctions: “The impact on prices will be clearly negative, not because the price of a property will be far lower at the auction than a nearby property, but because it will diminish demand for the neighboring property.”

He added that a market with already reduced demand that receives more supply at more attractive rates through auctions will definitely see buyers turn to the latter. He also said that they will only look at other buildings if they are not satisfied with what the auctions have to offer. This view is also shared by Giorgos Litsas, head of the GLP Values chartered surveyor company, which cooperates with PQH. He told Kathimerini that the only way is down for market rates. “I believe that unless there is an unlikely coordination among the parties involved – i.e. the state (tax authorities, social security funds etc.), the banks and the clearing firms – in order to prevent too many properties coming onto the market at the same time, rates will go down by at least 10%.”

He noted that “we estimate the stock of unsold properties of all types comes to 270,000-280,000, in a market with no more than 15,000 transactions per year. Therefore the rise in supply will send prices tumbling.” Yiannis Xylas, founder of Geoaxis surveyors, added, “I fear the auctions will create an oversupply of properties without the corresponding demand, which translates into an immediate drop in rates that may be rapid if one adds the portfolios of bad loans secured on properties that will be sold to foreign funds at a fraction of their price.”

He sounds confused.

• Italy FinMin Says The Euro Zone Still Faces Problems – Even In Germany (CNBC)

Italy’s finance minister delivered an upbeat tone on his country’s banking sector but highlighted that major hurdles still remain in the euro zone, including in Germany. Germany might be known as the powerhouse of the euro zone economy but it has its own banking problems to deal with, Pier Carlo Padoan told CNBC on the sidelines of the Ambrosetti Forum on Sunday. “I think that there are some German banking problems and I’m confident the German authorities will deal with them,” Padoan said when asked about remarks made by former Prime Minister Matteo Renzi last year. “Germany has been the country that has by far poured much more public money into the banking sector in terms of the hundreds of billions of euros in the past when the rules where different of course.

This is a sign that maybe we all have to recognize that we have problems and we all have to recognize that we need to cooperate much more effectively to provide European solutions to those problems,” he said. Though Italy keeps making headlines due to its financial sector, analysts have also warned on banking problems in Germany. These include the reliance on the shipping industry, which used to be a stable investment before the euro zone debt crisis. Other issues include the sheer number of banks in Germany with very little consolidation. There are approximately 2,400 separate banks with more than 45,000 branches throughout the country and over 700,000 employees, according to Commercial Banks Guide, an industry website.

As such, Padoan told CNBC that it is crucial to conclude the banking union – a project created in 2012 in response to the sovereign debt crisis that aims to have one single set of rules for all banks across the European Union. He told CNBC that so far the banking union hasn’t been fully implemented, not because of resistance from certain countries, but because of different national perspectives. “We are however making progress in one thing: That we are building trust among ourselves and we are also recognizing that we have to reconcile historically-driven different traditions in banking sectors and they have to merge into a new European banking culture,” Padoan said.

He sounds like Varoufakis.

• Italy’s 5-Star Says Euro Referendum Is ‘Last Resort’ (R.)

A referendum on Italy’s membership of the euro currency would be held only as a “last resort” if Rome does not win any fiscal concessions from the European Union, a senior lawmaker from the anti-establishment Five-Star Movement said on Sunday. Luigi Di Maio’s comments reflect a striking change of tone by some senior officials in the party in recent months as they have retreated from 5-Star’s original pledge. Seeking to reassure an audience of bankers and business leaders, Di Maio – widely tipped to be 5-Star’s candidate for prime minister at a general election due by next year – played down the referendum proposal, calling it a negotiating tool with the EU. “Austerity policies have not worked, on monetary policy we deserve the credit for triggering a debate… this is why we raised the issue of a referendum on the euro, as a bargaining tool, as a last resort and a way out in case Mediterranean countries are not listened to,” he said.

Two years ago the party gathered the signatures from the public needed to pave the way for a referendum that it said was vital to restore Italy’s fiscal and monetary sovereignty. But now, running neck-and-neck with the ruling Democratic Party (PD) in opinion polls and with the election in sight – scheduled to be held by May 2018 – it is hitting the brakes on the idea. This underlines the crucial challenge facing the party as it seeks to please some core supporters, while trying to shed its populist image and convince foreign capitals and financial markets that it can be trusted in office. [..] The party wants several changes to the euro zone’s economic rules to help its more sluggish economies, like Italy. These include stripping public investment from budget deficits under the EU’s Stability Pact and creating a European “bad bank” to deal with euro zone lenders’ bad loans.

“We are not against the European Union, we want to remain in the EU and discuss some of the rules that are suffocating and damaging our economy,” said Di Maio, who serves as deputy speaker of the Chamber of Deputies. An opinion poll in La Stampa daily on Sunday had 24% of respondents saying Di Maio most deserved to run the country in the next five years, against 17% for former PD Prime Minister Matteo Renzi and 12% for center-right leader Silvio Berlusconi.

Schulz and Merkel are the same person.

• Turkey Will Never Become EU Member, Says Angela Merkel (Ind.)

Germany’s Chancellor, Angela Merkel, has said Turkey should categorically not become a member of the European Union in comments that are expected to further inflame tensions between the Nato allies. Speaking at a televised election debate with her rival, Martin Schulz, she said she would seek a joint EU position with other leaders to ensure Turkey never became a member. “The fact is clear that Turkey should not become a member of the EU,” she said after Mr Schulz said he would stop Turkey’s bid to join the EU if he was elected chancellor. “Apart from this, I’ll speak to my colleagues to see if we can reach a joint position on this so that we can end these accession talks,” she added.

[..] Her comments are likely to worsen already strained ties between the countries after Ms Merkel said Berlin should react decisively to Turkey’s detention of two more German citizens on political charges. It comes just weeks after German Foreign Minister Sigmar Gabriel told Turkey it will never become a member of the EU as long as it is governed by the current president, Recep Tayyip Erdogan. “It is clear that in this state, Turkey will never become a member of the EU,” Mr Gabriel said. Mr Erdogan has urged German Turks to boycott Germany’s main parties in next month’s general election.

Good to know. Still, if people really want to go, maybe we should just let them.

• How Our Immune Systems Could Stop Humans Reaching Mars (Tel.)

The astrophysicist Neil DeGrasse Tyson commented that ‘dinosaurs are extinct today because they lacked the opposable thumbs and brainpower to build a space programme’ Yet although we now have the technological ability to leave Earth, scientists have found another stumbling block to colonising new worlds – our own immune system. Although it is said we are all made of ‘star stuff’ when it comes to travelling away from our home planet humans are far more vulnerable to the rigours of space than our interstellar origins might suggest. Billions of years of evolution has effectively backed mankind into a corner of the Solar System that it may be now be tricky to leave. A team of scientists from Russia and Canada analysed the effect of microgravity on the protein make-up in blood samples of 18 Russian cosmonauts who lived on the International Space Station for six months.

They found alarming changes to the immune system, suggesting that they would struggle to shake off even a minor virus, like the common cold. “The results showed that in weightlessness, the immune system acts like it does when the body is infected because the human body doesn’t know what to do and tries to turn on all possible defense systems,” said Professor Evgeny Nikolaev, of Moscow Institute of Physics and Technology and theSkolkovo Institute of Science and Technology. The effects of spaceflight on the human body have been studied actively since the mid-20th century and it is widely known that microgravity influences metabolism, heat regulation, heart rhythm, muscle tone, bone density, the respiration system. Last year research from the US also found that astronauts who travelled into deep space on lunar missions were five times more likely to have died from cardiovascular disease than those who went into low orbit, or never left Earth.

Astronauts are fitter than the general population and have access to the best medical care, meaning that their health is usually better than the general population. Those of comparable age but who never flew, or only achieved low Earth orbit, had less than a one in 10 chance of death from cardiovascular disease. [..] To gain a deeper understanding of the changes in human physiology during space travel, the research team quantified concentrations of 125 proteins in the blood plasma of cosmonauts. Proteins change as the immune system alters and so can be used as a measure of how it is functioning. Blood was taken from the cosmonauts 30 days before they travelled to the ISS and then on their immediate return to Earth. They were also tested seven days after touchdown. Individual proteins were then counted using a mass spectrometer.

”When we examined the cosmonauts after their being in space for half a year, their immune system was weakened,” said Dr Irina Larina, the first author of the paper, a member of Laboratory of Ion and Molecular Physics of Moscow Institute of Physics and Technology. “They were not protected from the simplest viruses. We need new measures of disorder prevention during a long flight.

Debt Rattle September 1 2017

Sep 012017

September 1, 2017 Posted by Raúl Ilargi Meijer at 9:40 am Finance Tagged with: blockchain, debt, Harvey, Irma, pensions, Putin, stimulus, Trump, wages, Wells Fargo 5 Responses »

Vincent van Gogh Seine with Pont de Clichy 1887

• Monetary Stimulus: How Much Is Too Much? (Lebowitz)

• Yes, You Should Be Concerned With Consumer Debt (Roberts)

• Why We’re Doomed: Stagnant Wages (CHS)

• US Fuel Shortages From Harvey To Hamper Labor Day Travel (R.)

• Wells Fargo Says 3.5 Million Accounts Involved In Scandal (AP)

• World’s Biggest Wealth Fund Reveals Bleak View on Global Trade (BBG)

• New Math Deals Minnesota’s Pensions the Biggest Hit in the US (BBG)

• Six Big Banks To Create A Blockchain-Based Cash System (R.)

• Putin Warns Of ‘Major Conflict’ Over North Korea, Urges Talks (AFP)

• Trump, Nuclear War And Climate Change Among Gravest Threats To Humanity (PA)

• Greece Doesn’t Want Any More Rescues – But It Does Need Something Else (CNBC)

• Hurricane Irma Turning Into Monster (ZH)

Take their power away or else.

• Monetary Stimulus: How Much Is Too Much? (Lebowitz)

The amount of monetary stimulus increasingly imposed on the financial system creates false signals about the economy’s true growth rate, causing a vast misallocation of capital, impaired productivity and weakened economic activity. To help quantify the amount of stimulus, please consider the graph. Federal Reserve (Fed) monetary stimulus comes in two forms. First in the form of targeting the Fed Funds interest rate at a rate below the nominal rate of economic growth (blue). Second, it stems from the large scale asset purchases QE) by the Fed (orange). When these two metrics are quantified, it yields an estimate of the average amount of monetary stimulus (red) applied during each post-recession period since 1980. It has been almost ten years since the 2008 financial crisis and the Fed is applying the equivalent of 5.25% of interest rate stimulus to the economy, dwarfing that of prior periods.

The graph highlights that the Fed has been increasingly aggressive in both the amount of stimulus employed as well as the amount of time that such monetary stimulus remains outstanding. Amazingly few investors seem to comprehend that despite the massive level of monetary stimulus, economic growth is trending well below recoveries of years past. Additionally, as witnessed by historically high valuations, the rise in the prices of many financial assets is not based on improving economic fundamentals but simply the stimulative effect that QE and low interest rates have on investor confidence and financial leverage. Now consider the ramifications of a Fed that continues to increase the Fed Funds rate and moves forward with plans to slowly remove QE.

America: the House that Debt Built.

• Yes, You Should Be Concerned With Consumer Debt (Roberts)

First, the calculation of disposable personal income, income less taxes, is largely a guess and very inaccurate due to the variability of income taxes paid by households. Secondly, but most importantly, the measure is heavily skewed by the top 20% of income earners, needless to say, the top 5%. As shown in the chart below, those in the top 20% have seen substantially larger median wage growth versus the bottom 80%.

Lastly, disposable incomes and discretionary incomes are two very different animals. Discretionary income is what is left of disposable incomes after you pay for all of the mandatory spending like rent, food, utilities, health care premiums, insurance, etc. According to a Gallup survey, it requires about $53,000 a year to maintain a family of four in the United States. For 80% of Americans, this is a problem even on a GROSS income basis.

This is why record levels of consumer debt is a problem. There is simply a limit to how much “debt” each household can carry even at historically low interest rates. It is also the primary reason why we can not have a replay of the 1980-90’s. “Beginning 1983, the secular bull market of the 80-90’s began. Driven by falling rates of inflation, interest rates, and the deregulation of the banking industry, the debt-induced ramp up of the 90’s gained traction as consumers levered their way into a higher standard of living.”

“While the Internet boom did cause an increase in productivity, it also had a very deleterious effect on the economy. As shown in the chart above, the rise in personal debt was used to offset the declines in personal income and savings rates. This plunge into indebtedness supported the ‘consumption function’ of the economy. The ‘borrowing and spending like mad’ provided a false sense of economic prosperity. During the boom market of the 1980’s and 90’s consumption, as a%age of the economy, grew from roughly 61% to 68% currently. The increase in consumption was largely built upon a falling interest rate environment, lower borrowing costs, and relaxation of lending standards. (Think mortgage, auto, student and sub-prime loans.) In 1980, household credit market debt stood at $1.3 Trillion. To move consumption, as a% of the economy, from 61% to 67% by the year 2000 it required an increase of $5.6 Trillion in debt. Since 2000, consumption as a% of the economy has risen by just 2% over the last 17 years, however, that increase required more than a $6 Trillion in debt.

Doomed growth projections.

• Why We’re Doomed: Stagnant Wages (CHS)

Despite all the happy talk about “recovery” and higher growth, wages have gone nowhere since 2000–and for the bottom 20% of workers, they’ve gone nowhere since the 1970s. GDP has risen smartly since 2000, but the share of GDP going to wages and salaries has plummeted: this is simply an extension of a 47-year downtrend. [..] .. our system requires ever-higher household incomes to function–not just in the top 5%, but in the top 80%. Our federal social programs–Social Security, Medicare and Medicaid–are pay-as-you-go: all the expenditures this year are paid by taxes collected this year. As I have detailed many times, the so-called “Trust Funds” are fictions; when Social Security runs a deficit, the difference between receipts and expenses are filled by selling Treasury bonds in the open market–the exact same mechanism ther government uses to fund any other deficit.

The demographics of the nation have changed in the past two generations. The Baby Boom is retiring en masse, expanding the number of beneficiaries of these programs, while the number of full-time workers to retirees is down from 10-to-1 in the good old days to 2-to-1: there are 60 million beneficiaries of Social Security and Medicare and about 120 million full-time workers in the U.S. Meanwhile, medical expenses per person are soaring. Profiteering by healthcare cartels, new and ever-more costly treatments, the rise of chronic lifestyle illnesses–there are many drivers of this trend. There is absolutely no evidence to support the fantasy that this trend will magically reverse.

Costs are skyrocketing and the number of retirees is ballooning, but wages are going nowhere. Do you see the problem? All pay-as-you-go programs are based on the assumption that the number of workers and the wages they earn will both rise at a rate that is above the underlying rate of inflation and equal to the rate of increase in pay-as-you-go programs. If 95% of the households are earning less money when adjusted for inflation, and their wealth has also declined or stagnated, then how can we pay for programs which expand by 6% or more every year? The short answer is you can’t.

Are we going to add this to the cost of Harvey?

• US Fuel Shortages From Harvey To Hamper Labor Day Travel (R.)

Travelers and fuel suppliers across the United States braced for higher prices and shortages ahead of the Labor Day holiday weekend as the country’s biggest fuel pipelines and refineries curb operations after Hurricane Harvey. Just six days after Harvey slammed into the heart of the U.S. energy industry in Texas, the effects are being felt not just in Houston, but also in Chicago and New York, and prices at the pump nationwide have hit a high for the year. Supply shortages have developed even though there are nearly a quarter of a billion barrels of gasoline stockpiled in the United States. But much of it is held in places where it cannot be accessed due to massive floods, or too far away from the places it is needed. Some of it is unfinished, meaning it needs to be blended before it can go to gas stations.

Harvey has highlighted another weakness in the system: pipeline terminals typically only have a five-day supply in storage to load into the lines. Some of the biggest pipelines in the United States, supplying the northeast market and the Chicago area, have already shut down or reduced operations because they have no fuel to pump. “Gasoline is very much a ‘just-in-time’ fuel, for as many million barrels as they think we have,” said Patrick DeHaan, petroleum analyst at GasBuddy. “Sure, they are somewhere, but they still have to be mixed and blended together.” At least two East Coast refiners, including Philadelphia Energy Solutions and Irving Oil, have already run out of gasoline for immediate delivery as they have rushed to send supplies to the U.S. Southeast, Caribbean, Mexico and South America to offset the lack of exports since Harvey.

Lock them up!

• Wells Fargo Says 3.5 Million Accounts Involved In Scandal (AP)

The scope of Wells Fargo’s fake accounts scandal grew significantly on Thursday, with the bank now saying that 3.5 million accounts were potentially opened without customers’ permission between 2009 and 2016. That’s up from 2.1 million accounts that the bank had cited in September 2016, when it acknowledged that employees under pressure to meet aggressive sales targets had opened accounts that customers might not have even been aware existed. People may have had different kinds of accounts in their names, so the number of customers affected may differ from the account total. Wells Fargo said Thursday that about half a million of the newly discovered accounts were missed during the original review, which covered the years 2011 to 2015.

After Wells Fargo acknowledged the fake accounts last year, evidence quickly appeared that the sales practices problems dated back even further. So Wells Fargo hired an outside consulting firm to analyze 165 million retail bank accounts opened between 2009 and 2016. Wells said the firm found that, along with the 2.1 million accounts originally disclosed, 981,000 more accounts were found in the expanded timeline. And roughly 450,000 accounts were found in the original window. The scandal was the biggest in Wells Fargo’s history. It cost then-CEO John Stumpf his job, and the bank’s once-sterling industry reputation was in tatters. The company ended up paying $185 million to regulators and settled a class-action suit for $142 million. New managers have been trying to amends with customers, politicians and the public.

But it’s been tough, as new revelations keep coming. Wells Fargo said last month that roughly 570,000 customers were signed up for and billed for car insurance that they didn’t need or necessarily know about. Many couldn’t afford the extra costs and fell behind in their payments, and in about 20,000 cases, cars were repossessed. Other customers have filed lawsuits against Wells Fargo saying they were victims of unfair overdraft practices. Wells Fargo is also still under several investigations for its sales practices problems, including a congressional inquiry and one by the Justice Department. Wells Fargo said Thursday that of the 3.5 million accounts potentially opened without permission, 190,000 of those incurred fees and charges. That’s up from 130,000 that the bank originally said. Wells Fargo will refund $2.8 million to customers, in addition to the $3.3 million it already agreed to pay.

Wise.

• World’s Biggest Wealth Fund Reveals Bleak View on Global Trade (BBG)

Yngve Slyngstad, chief executive officer of Norges Bank Investment Management, as the fund is known, says the heyday of cross-border trade is probably behind us. “The question investors are asking themselves is if the easy wins already have been made,” Slyngstad said in an Aug. 29 interview from his office on the top floor of Norway’s central bank in Oslo. “The global supply chains have in a way had a one-time gain primarily through outsourcing of multinationals to China.” Norway’s wealth fund owns 1.3% of globally listed stocks, spread out over almost 80 countries. And with interest rates at record lows, the investor has cut its long-term return expectations to about 3% from 4%, even after winning approval from parliament to raise its share of equities to 70% from 60%.

Slyngstad, who became CEO in 2008 just as the global economy was sinking into the worst crisis since the Great Depression, noted that back then the fund rode out the turmoil by dumping bonds and buying stocks. “I don’t expect that we will act differently in any similar crisis in the future,” he said. During a recent conference on globalization, the fund’s chief strategist, Bjorn Erik Orskaug, suggested the world might be at an “inflection point” in trade, with shallower value chains and less cross-border production. And then there’s the protectionist agenda some governments are pursuing. “Is there also a political situation that could make it more challenging?” Slyngstad said. “Time will tell, but there’s of course a risk on the horizon.” He says the wealth fund’s extremely long-term investment timeline allows it to look past the noise coming from governments that come and go.

The fund will probably stay over-weighted in Europe, where it’s more of an active investor. But the only two economies that really matter are the U.S. and China, Slyngstad said. [..] As the fund approaches $1 trillion in value, its stated goal is to safeguard today’s oil wealth for future generations of Norwegians. It has surged in size since its inception two decades ago, generating an annual nominal return of 5.89%. Norway’s government last year started taking cash out of the fund for the first time, to make up for lower oil revenue. Withdrawals are set to hit about 72 billion kroner ($9.3 billion) in 2017, and remain at that level in coming years amid stricter fiscal rules.

Once the creative accounting is removed, there won’t be much left.

• New Math Deals Minnesota’s Pensions the Biggest Hit in the US (BBG)

Minnesota’s debt to its workers’ retirement system has soared by $33.4 billion, or $6,000 for every resident, courtesy of accounting rules. The jump caused the finances of Minnesota’s pensions to erode more than any other state’s last year as accounting standards seek to prevent governments from using overly optimistic assumptions to minimize what they owe public employees decades from now. Because of changes in actuarial math, Minnesota in 2016 reported having just 53% of what it needed to cover promised benefits, down from 80% a year earlier, transforming it from one of the best funded state systems to the seventh worst, according to data compiled by Bloomberg. “It’s a crisis,” said Susan Lenczewski, executive director of the state’s Legislative Commission on Pensions and Retirement.

The latest reckoning won’t force Minnesota to pump more taxpayer money into its pensions, nor does it put retirees’ pension checks in any jeopardy. But it underscores the long-term financial pressure facing governments such as Minnesota, New Jersey and Illinois that have been left with massive shortfalls after years of failing to make adequate contributions to their retirement systems. The Governmental Accounting Standards Board’s rules, ushered in after the last recession, were intended to address concern that state and city pensions were understating the scale of their obligations by counting on steady investment gains even after they run out of cash – and no longer have money to invest. Pensions use the expected rate of return on their investments to calculate in today’s dollars, or discount, the value of pension checks that won’t be paid out for decades.

Everybody wants their share of the pie.

• Six Big Banks To Create A Blockchain-Based Cash System (R.)

Six new banks have joined a UBS-led effort to create a digital cash system that would allow financial markets to make payments and settle transactions quickly via blockchain technology. The group aims to launch the system late next year. Barclays, Credit Suisse, Canadian Imperial Bank of Commerce, HSBC, MUFG and State Street have joined the group developing the “utility settlement coin” (USC), a digital cash equivalent of each of the major currencies backed by central banks, UBS said on Thursday. The group is in discussions with central banks and regulators and is aiming for a “limited ’go live’” in the latter part of 2018, UBS’s head of strategic investment and fintech innovation told the Financial Times.

The Swiss bank first launched the concept in September 2015 with London-based blockchain company Clearmatics, and was later joined on the project by BNY Mellon, Deutsche Bank, Santander and brokerage ICAP. The USC would be convertible at parity with a bank deposit in the corresponding currency, making it fully backed by cash assets at a central bank. Spending a USC would be the same as spending the real currency it is paired with. Blockchain works as a tamper-proof shared ledger that can automatically process and settle transactions using computer algorithms, with no need for third-party verification. Because it does not require manual processing, nor authentication through intermediaries, the technology can make payments faster, more reliable and easier to audit.

Better talk with him.

• Putin Warns Of ‘Major Conflict’ Over North Korea, Urges Talks (AFP)

Russian President Vladimir Putin warned Friday of a “major conflict” looming on the Korean Peninsula, calling for talks to alleviate the crisis after Pyongyang fired a missile over Japan this week. “The problems in the region will only be solved via direct dialogue between all concerned parties, without preconditions,” Putin said. “Threats, pressure and insulting and militant rhetoric are a dead end,” a statement from his office said, adding that heaping additional pressure on North Korea in a bid to curb its nuclear programme was “wrong and futile.” Tensions on the Korean Peninsula are at their highest point in years after a series of missile tests by Pyongyang.

Early on Tuesday, the reclusive state fired an intermediate-range Hwasong-12 over Japan, prompting US President Donald Trump to insist that “all options” were on the table in an implied threat of pre-emptive military action. The UN Security Council denounced North Korea’s latest missile test, unanimously demanding that Pyongyang halt the programme. US heavy bombers and stealth jet fighters took part in a joint live fire drill in South Korea on Thursday, intended as a show of force against the North, Seoul said. Putin said he feared the peninsula was “on the verge of a major conflict” and called for all sides to sign up to a mediation programme drawn up by Moscow and Beijing. He echoed comments by Foreign Minister Sergei Lavrov who in a Wednesday telephone call with US counterpart Rex Tillerson “underscored… the need to refrain from any military steps that could have unpredictable consequences.”

Prime candidate for worst report ever. The Independent tweeetd: “12 Nobel Prize winners just warned Trump is one of the gravest threats to humanity “. But that’s not what the article by the Press Association says. It says two.

• Trump, Nuclear War And Climate Change Among Gravest Threats To Humanity (PA)

Nobel Prize winners consider nuclear war and US President Donald Trump as among the gravest threats to humanity, a survey has found. More than a third (34%) said environmental issues including over-population and climate change posed the greatest risk to mankind, according to the poll by Times Higher Education and Lindau Nobel Laureate Meetings. But amid rising tensions between the US and North Korea, almost a quarter (23%) said nuclear war was the most serious threat. Of the 50 living Nobel Prize winners canvassed, 6% said the ignorance of political leaders was their greatest concern – with two naming Mr Trump as a particular problem. Peter Agre, who won the Nobel Prize for chemistry in 2003, described the US President as “extraordinarily uninformed and bad-natured”. He told Times Higher Education: “Trump could play a villain in a Batman movie – everything he does is wicked or selfish.”

Laureates for chemistry, physics, physiology, medicine and economics took part in the survey, with some highlighting more than one threat. Peace Prize and Literature Prize recipients were not canvassed. Infectious diseases and drug resistance were considered the gravest threats to humankind by 8% of respondents, while 8% cited selfishness and dishonesty and 6% cited terrorism and fundamentalism. Another 6% spoke of the dangers of “ignorance and the distortion of truth”. Despite high-profile figures Elon Musk and Professor Stephen Hawking expressing concern about the dangers associated with artificial intelligence, just two of those surveyed identified it as among the biggest threats facing humans.

John Gill, editor of Times Higher Education, said the survey offers “a unique insight into the issues that keep the world’s greatest scientific minds awake at night”. He said: “There is a consensus that heading off these dangers requires political will and action, the prioritisation of education on a global scale, and above all avoiding the risk of inaction through complacency.”

Stockholm Syndrome?

• Greece Doesn’t Want Any More Rescues – But It Does Need Something Else (CNBC)

Greece wants nothing more than to avoid another bailout — which means it needs debt relief. And so far, that’s the sticking point. “There is now light at the end of the tunnel,” Greek Finance Minister Euclid Tsakalotos said hopefully in June. After months of wrangling, the European Union and International Monetary Fund had just agreed to release more rescue funds to the perennially troubled nation, bringing the total from its third bailout alone to €40.2 billion ($47.75 billion). Euro zone finance ministers took very light steps toward debt relief at that time — they said they were willing to keep deferring interest on financial assistance Greece had already received — but those measures fell short of the relief Greek Prime Minister Alexis Tsipras was pressing for.

The current bailout program is set to end in September of next year. Greece has been wracked by perennial financial crises since 2010, and it even appeared at risk of leaving the euro zone altogether in 2015. Tsipras’s objective is to re-gain full market access to international bond markets and to leave institutional help behind, so the subject of long-term debt is one that will continue to dominate discussions as it draws closer to September 2018. In July, Greece dipped into bond markets after a 3-year hiatus, issuing 5-year debt at an average yield of 4.66%. Greece is expected to return to the market again in the next 12 months. But Greece’s debt isn’t manageable in the long-run without being either extended or forgiven, according to the IMF, which is pressing for easier budgetary targets for Greece while simultaneously undertaking reforms.

Its European creditors currently require it to achieve a primary surplus before debt service of 3.5% of gross domestic product. The ECB has also been emphatic that it will not include Greek government bonds in its own debt-buying mechanism, the Public Sector Purchase Program. In a June letter, ECB President Mario Draghi ruled out that possibility, saying the central bank’s staff wasn’t in a position to fully analyze Greece’s public debt. Analysts at Barclays have estimated that the inclusion of Greek debt into ECB’s bond-buying program would entail monthly purchases of around 115 million euros ($136.5 million).

Not looking good.

• Hurricane Irma Turning Into Monster (ZH)

Hurricane Irma continues to strengthen much faster than pretty much any computer model predicted as of yesterday or even this morning. Per the National Hurricane Center’s (NHC) latest update, Irma is currently a Cat-3 storm with sustained winds of 115 mph but is expected to strengthen to a devastating Cat-5 with winds that could top out at 180 mph or more. Longer term computer models still vary widely but suggest that Irma will make landfall in the U.S. either in the Gulf of Mexico or Florida. Meteorological Scientist Michael Ventrice of the Weather Channel is forecasting windspeeds of up to 180 mph, which he described as the “highest windspeed forecasts I’ve ever seen in my 10 yrs of Atlantic hurricane forecasting.”

In a separate tweet, Ventrice had the following troubling comment: “Wow, a number of ECMWF EPS members show a maximum-sustained windspeed of 180+mph for #Irma, rivaling Hurricane #Allen (1980) for record wind”. The Weather Channel meteorologist also calculated the odds for a landfall along the eastern seaboard at 30%. Meanwhile, the Weather Channel has the “most likely” path of Irma passing directly over Antigua, Puerto Rico and Domincan Republic toward the middle of next week.

Debt Rattle August 19 2017

Aug 192017

August 19, 2017 Posted by Raúl Ilargi Meijer at 10:00 am Finance Tagged with: crisis, debt, eclipse, Google, pensioners, poaching, Tesla, Trump, Washington, Wells Fargo 6 Responses »

Fred Stein Man in pushcart, New York 1944

• We’re Racing Towards Another Private Debt Crisis (Graeber)

• China Moves To Curb Overseas Acquisitions As Firms’ Debt Levels Rise (G.)

• Wells Fargo Troubles Shift From Phony Bank Accounts To Real Ones (R.)

• Total Eclipse (Jim Kunstler)

• A House Divided Against Itself Cannot Stand (Paul Craig Roberts)

• The Truth Will Not Be Googled (Connelly)

• Greek Pensioners Set For Another Blow (K.)

• The Super Gangs Behind Africa’s Poaching Crisis (G.)

• Want To Fight Climate Change? Don’t Invest In Tesla (MW)

David Graeber on the all too obvious. So yeah, let’s have that inquiry.

• We’re Racing Towards Another Private Debt Crisis (Graeber)

This is a call for a public inquiry on the current situation regarding private debt. For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And – this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That’s what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don’t do something about it, the results will, inevitably, be another catastrophe. These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.” As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt. We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened. Now, if this seems to have very little to do with the way politicians talk about such matters, there’s a simple reason: most politicians don’t actually know any of this. A recent survey showed 90% of MPs don’t even understand where money comes from (they think it’s issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

It’s getting serious.

• China Moves To Curb Overseas Acquisitions As Firms’ Debt Levels Rise (G.)

The Chinese government has served notice on the country’s foreign investment spree in football clubs, skyscrapers and Hollywood as it moves to curb rising levels of debt among domestic companies. The announcement of restrictions in a range of sectors follows a buying spree around the globe during which Chinese firms and business tycoons have taken control of assets including Legendary Entertainment, the US film producer behind Jurassic World and Warcraft, buildings such as the Cheesegrater in London, and English football clubs including Southampton and Aston Villa. The curbs were announced in a document released on Friday by the state council, China’s cabinet, in the latest move to halt a string of foreign acquisitions. This week the IMF described China’s credit-fuelled economic strategy as dangerous, in a strongly worded statement warning that the country’s approach risks financial turmoil.

Raising concerns that some of the companies involved may be taking on too much debt, the council said: “There are great opportunities for our nation’s companies to embark on foreign investment, but they also face numerous risks and challenges.” It added that through the new guidance, the government hopes to promote the “rational, orderly and healthy development of foreign investment while effectively guarding against risks”. The document limits overseas investments in areas such as hotels, cinemas, the entertainment industry, real estate and sports clubs. It also bans outright investments in enterprises related to gambling and the sex industry. The Chinese government had already flagged hotels as an area of concern, having reportedly asked the insurance group Anbang to sell the Waldorf Astoria hotel in New York.

One of China’s biggest conglomerates, Wanda Group, also bowed to pressure from the government when it abandoned the $1bn (£780m) purchase of the entertainment company Dick Clark Productions earlier this year. In 2016 Wanda bought Legendary Entertainment for $3.5bn, having become the world’s biggest cinema operator in 2012 with its purchase of a majority stake in US chain AMC for $2.6bn. At the same time, the document encourages companies to plough money into projects related to the “Belt and Road” project, President Xi Jinping’s signature foreign policy initiative that seeks to link China with other parts of Asia and eastern Europe through multibillion-dollar investments in ports, highways, railways, power plants and other infrastructure.

Why is Wells Fargo a going concern? Close it.

• Wells Fargo Troubles Shift From Phony Bank Accounts To Real Ones (R.)

After paying customers millions of dollars for opening phony accounts they did not want, Wells Fargo has said it is now grappling with the possibility it harmed customers by closing real accounts they needed, leaving them without access to funds. Wells, the third-largest U.S. bank, disclosed in a regulatory filing on Aug. 4 that the Consumer Financial Protection Bureau (CFPB) is looking into the matter, one of many regulatory probes the bank faces over its treatment of depositors and borrowers. A Reuters review of the regulator’s complaints database found several instances of customers reporting financial hardship in recent years after Wells Fargo unexpectedly froze or closed their accounts. Some of the complaints described fraudulent deposits of unknown origin.

Others said they were victims of identity theft and Wells Fargo closed their accounts and refused to reopen them or open new ones. One customer said the bank closed an account after a hacker changed personal information, and then Wells Fargo improperly sent funds to the wrong address. The complaints had consistent themes of confusion about why accounts were frozen or closed, and reflected desperation over being unable to access money, as well as frustration over not getting help from Wells Fargo’s customer service. “I moved money from my mother’s savings account into her checking account the day before she passed away,” one Wells Fargo customer wrote. “This checking account has been ‘locked’ by the fraud department for almost 3 months … Now her debts are delinquent and mortgage about to go into foreclosure.”

Rename the capital!

• Total Eclipse (Jim Kunstler)

I’d like to hear to hear an argument as to why the Washington Monument should remain dedicated to that vicious slave-driver and rebellious soldier, and indeed the name of the city that is the federal seat of government. Or the District of Columbia (after Columbus, who initiated the genocide of Native Americans). Or America, cribbed out of Amerigo Vespucci, the wicked Florentine cartographer who ascertained that the place called Brazil today was not the east coast of Asia but actually a New World — and so all our troubles began![..] Just as empires tend to build their most grandiose monuments prior to collapse, our tottering empire is concocting the most monumentally ludicrous delusions before it slides down the laundry chute of history.

It’s as if the Marx Brothers colluded with Alfred Hitchcock to dream up a melodramatic climax to the American Century that would be the most ridiculous and embarrassing to our posterity. In the meantime, many citizens await Monday’s spectacle of a total solar eclipse in parts of the country. They apparently don’t realize that another eclipse has been underway for months: the total eclipse of reality across the entire landscape of the USA. Now that has been an event to behold, not just some twenty-minute freak of astronomy. What’s being blacked out is the perilously fragile condition of the financial system — a great groaning Rube Goldberg contraption of accounting fraud, grift, statistical deceit, and racketeering that pretends to support the day-to-day activities of our national life.

For months, the recognition of this oncoming financial monster has been blocked by the hallucination of gremlins from the Kremlin infiltrating the recent presidential election. But just as that mirage was dissolving, along comes the treacherous invasion of the Confederate statues. It begins to look like the final piece of the puzzle in the Deep State’s quest to eject Donald Trump from the oval office. His response to the deadly statue situation (“…why not Washington and Jefferson…?”) was deemed so obtuse and unfeeling that even the rodents of his own nominal Republican Party want to jump his ship of state.

So, the set-up could not be more perfect! The country will now get down to the business of a months-long 25th Amendment circle-jerk at the very moment that the financial system flies apart. The damage from the financial clusterfuck will be much more real, and much worse, than anything that might be spun out of the anti-statue crusade hogging the headlines today. It will be interesting to see whether the old legacy media even reports on it as it happens, or whether they will cook up new and more bizarre entertainments to distract the public from what might be the ultimate swindling of a lifetime.

The echo chamber causes hearing damage.

• A House Divided Against Itself Cannot Stand (Paul Craig Roberts)

The liberal/progressive/left are enjoying their drunkfest of denunciation. I can’t say I have ever witnessed anything like it. These are the people who sat on their hands for 16 years while Washington destroyed in whole or part seven countries. Not being satisfied with this level of warmongering and crimes against humanity, Washington orchestrated a conflict situation with Russia. Americans elected a president who said he would defuse this dangerous conflict, and the liberal/progressive/left turned on him. In contrast, one person is killed after the hated Charlottesville protest event was over, and there is endless absurd outrage against the president of the US. Three New York Times presstitutes yesterday blamed the crisis on Trump, declaring him “increasingly isolated in a racial crisis of his own making.”

Apparently, Trump is responsible for the crisis because he blamed both protest groups for the violence. But isn’t that what happened? Wasn’t there violence on both sides? That was the impression I got from the news reporting. I’m not surprised that Trump got the same impression. Indeed, many readers have sent emails that they received the same impression of mutual violence. So Trump is being damned for stating the truth. Let’s assume that the impression Trump and many others got from the news is wrong. That would make Trump guilty of arriving at a mistaken conclusion. Yet, he is accused of instigating and supporting Nazi violence. How is it possible to transform a mistake into evil intent? A mistaken impression gained from news reporting does not constitute a “defense of white nationalist protesters.”

An assertion by the New York Times cannot turn the absence of intent into intent. What the Establishment is trying to do is to push Trump into the arms of white supremacists, which is where they want him. Clearly, there is no basis for this charge. It is a lie, an orchestration that is being used to delegitimize President Trump and those who elected him. The question is: who is behind this orchestration? The orchestration is causing people to run away from Trump or is being used as an excuse by them to further the plot to remove him from office. Trump’s Strategic and Policy Forum headed by Stephen A. Schwarzman ran away, just as members of the Carter Center’s board deserted President Jimmy Carter when he criticized Israel for its apartheid policy toward the Palestinians. The New York Times says that the armed services chiefs are running away. And the entire Republican Party.

The hypocrisy is stunning. For 16 years the armed services chiefs, the New York Times and the rest of the presstitute media, both political parties and the liberal/progressive/left have participated actively or passively in massive crimes against humanity. There are millions of dead, maimed, and displaced people. Yet one death in Charlottesville has produced a greater outpouring of protest. I don’t believe it is sincere. I don’t believe that people who are insensitive to the deaths of millions at the hands of their government can be so upset over the death of one person. Assume that Trump is responsible for the death of the woman. How much blood is it compared to the blood on the hands of Bill Clinton, George W. Bush, and Obama?

Too much monopoly, too much power.

• The Truth Will Not Be Googled (Connelly)

While web-hosting services have been criticised for cancelling the registration of neo-Nazi website, Daily Stormer, progressive left-leaning sites are losing Google ranking and traffic because of a deliberate move to censor “fake” news by the internet search giant. New data released by World Socialist Websites (WSWS) revealed that sites such as Wikileaks, The Intercept, Electronic Frontiers Foundation, the American Civil Liberties Organisation, CounterPunch and many other organisations with the audacity to provide context about the activities of federal governments not reported in mainstream publications have experienced a significant drop in traffic after Google altered its algorithm. (WSWS is an online news and information service founded by the International Committee of the Fourth International, the leadership of the world socialist movement).

Earlier this week, internet hosting provider, GoDaddy, announced it had cancelled US neo-Nazi website, Daily Stormer, for posting an attack on Heather Heyer, the protester who was murdered at the Klan rally in Charlottesville last week. Google and CloudFlare likewise cancelled its registration after the site tried to move its hosting over to their respective services. But while these hosting services are being congratulated by some – and condemned by others on free-speech grounds – for ensuring that those looking to commit violence have to work slightly harder to get access to their like-minded Nazi communities, those who own the means of transmission – namely Google, Facebook and Twitter – are still preventing the rest of us from accessing information that allows people to make sense of the world around us.

Earlier this month, Google altered its algorithm – allegedly in an attempt to address the ‘fake news’ problem – and in doing so, a broad array of anti-establishment news organisations, whistleblower, civil-rights and anti-war websites were censored from its search listings. But most people were too distracted by the opinions of some low-level engineer on Google’s diversity hiring policies and its intolerance of conservative views in the workplace to take notice. The data released by WSWS shows that since Google altered its algorithm, Wikileaks experienced a 30% decline in traffic from Google searches. Democracy Now fell by 36%. Truthout dropped by 25%. Its own traffic dropped by 67% percent over the same period. Alternet saw a 63% decline in traffic. Media Matters saw a 36% drop in traffic. Counterpunch.org fell by 21%. The Intercept fell by 19%.

Ongoing.

• Greek Pensioners Set For Another Blow (K.)

Pension applications submitted after May 13, 2016 – after the so-called Katrougalos law was legislated – reveal significant cuts in pension payments. According to the relevant data, five categories of pensioners will suffer cuts due to the new way pensions are calculated. Overall, experts estimate that by the year 2020 some 200,000 retirees will receive pensions that do not correspond to the amount of money they contributed to the funds during their working lives. In some cases, pensioners will receive 30% less than what they would have received had the Katrougalos law not come into effect. The overall reduction is estimated at 12 to 16%. The hardest hit will be civil servants, especially those who have worked for more than 30 years and belong to the categories of University and Technological Education. Other categories of pensioners that will be negatively impacted are those who made above-average contributions to the IKA social security foundation for more than 30 years.

Meanwhile, those who made medium or large contributions to the TEVE fund for the self-employed will also lose out. Others who can expect to be affected by pension cuts are people who contributed for 30 years to the retailer’ insurance fund (TAE) or the professional drivers’ pension fund (TSA). The new pension system, however, will favor retirees with monthly gross earnings below €700 and less than 30 years of insurance – in line with the declaration made by former labor minister Giorgos Katrougalos that the new system would be classless and favor people with low incomes. This category includes people insured for 20 to 30 years with IKA, who will retire with a gross remuneration of around €1,000, or the former social security fund for professional drivers (TSA). Those insured at several public enterprises (DEKO) and bank funds will also be entitled to an increase in their pension because they pay very high contributions.

Man is losing the world to his own greed. Selling mother earth.

• The Super Gangs Behind Africa’s Poaching Crisis (G.)

“It’s not hundreds of groups involved in ivory trafficking – there are just a handful of networks operating across Africa,” says Paula Kahumbu, a conservationist and elephant expert who runs Wildlife Direct, a Kenyan organisation working to stop the ivory trade and which deploys teams to closely observe trials such as Ali’s. lose scrutiny of cases – including making copies of court documents and video recording proceedings – keeps courts and judges honest and prevents the disappearance of files that so often scuppers trials. Wildlife Direct’s pressure was instrumental in ensuring Ali’s case went the distance. At the end, says Kahumbu, there was “a phenomenal sense of achievement”. “It was a huge surprise,” says Ofir Drori, an Israeli wildlife activist and co-founder of the Eagle Network, a group responsible for the prosecution of hundreds of traffickers, big and small, over the years, and who was involved in tracking Ali.

“Every Kenyan will tell you: what’s supposed to happen is that if you belong to a strong syndicate, you’re out.” It was the syndicate aspect that interested Gretchen Peters. A former foreign correspondent in Afghanistan and Pakistan, Peters had become fascinated by the links between drugs and terrorism that she saw in the Taliban’s heroin operation, and by the hidden connections between other forms of criminality. Ditching journalism, she decided to tackle wildlife crime. Peters set up the Satao Project – named after one of Kenya’s magisterial “tusker” bull elephants, killed by a poacher’s poisoned arrow in 2014 – to investigate criminal gangs in 2015 but quickly ran into the underlying problem: corruption. “If there’s a network that is moving illegal goods from one country to another, there are inevitably government officials involved, protecting them or looking the other way,” she says. “It is impossible for that not to be happening.”

Hired by the US department of state, Peters began by studying ivory supply chains in Tanzania and Kenya, but her investigations quickly enveloped Uganda too and spread into other forms of trafficking. There is in East Africa, she says, “a regional ecosystem moving ivory, drugs and guns … a matrix of different organisations that collaborate to move illegal goods along the Swahili coast.” The overlap between drugs and ivory smuggling came as no surprise to her. “I’m not aware of any syndicate trafficking ivory transnationally that is only moving ivory,” she says. No illicit commodity is as profitable as drugs, so: “When you get up to the traffickers they’re almost inevitably moving narcotics too.”

Thermodynamics 101.

• Want To Fight Climate Change? Don’t Invest In Tesla (MW)

Morgan Stanley identified 39 stocks that generate at least half their revenue “from the provision of solutions to climate change,” something it said was a central component of investing to make a difference, as opposed to just a making a buck. “In our view, impact investing needs to begin with companies whose products and services have a notable positive environmental or social impact,” wrote Jessica Alsford, an equity strategist at the investment bank. Not surprisingly, alternative-energy companies ranked the highest in terms of their positive impact, and the “top five climate-change impact stocks” were all manufacturers of solar and wind energy: Canadian Solar, China High Speed Transmission, GCL-Poly, Daqo New Energy and Jinko Solar. Not among the top companies? Electric-car makers, including Tesla. Elon Musk’s company has been an investor favorite for years, even eclipsing Ford and General Motors in market cap.

Tesla shares are up nearly 66% so far this year, but the good it may have been doing for portfolios may not translate to it doing good for the planet. Morgan Stanley said this was one of the “biggest surprises” of its study. The bank grouped the “climate-change impact stocks” into four sector categories: utilities, renewable manufacturers, green infrastructure companies and transportation stocks. It then analyzed them on a number of metrics, including “the CO2 [carbon dioxide] savings achieved from the products and services sold by the companies,” as well as secondary and tertiary factors centered around the environmental impact of the making of these products. This is where Tesla, along with China’s Guoxuan High-Tech, fall short.

“Whilst the electric vehicles and lithium batteries manufactured by these two companies do indeed help to reduce direct CO2 emissions from vehicles, electricity is needed to power them,” Morgan Stanley wrote. “And with their primary markets still largely weighted towards fossil-fuel power (72% in the U.S. and 75% in China) the CO2 emissions from this electricity generation are still material.” In other words, “the carbon emissions generated by the electricity required for electric vehicles are greater than those saved by cutting out direct vehicle emissions.” Morgan Stanley calculated that an investment of $1 million in Canadian Solar results in nearly 15,300 metric tons of carbon dioxide being saved every year. For Tesla, such an investment adds nearly one-third of a metric ton of CO2.

Debt Rattle August 16 2017

Aug 162017

August 16, 2017 Posted by Raúl Ilargi Meijer at 8:57 am Finance Tagged with: American Dream, China, crazy, crisis, debt, fish, leverage, plastic, property, Syria, war 2 Responses »

Fred Stein Hydrant, New York 1947

• The Greatest Crisis In World History Is About To Be Unleashed (von Greyerz)

• After 100 Months of Buying The Dips – Peak Crazy (Stockman)

• China Has Got To Fix Its Debt Problem, IMF Says (CNBC)

• China Money Supply Growth Slips Again as Leverage Crunch Goes On (BBG)

• UK Risks ‘Losing Its Place As Property-Owning Democracy’

• The New American Dream: Rent Your Home From A Hedge Fund (Black)

• Trump Signs Order to Speed Up Public-Works Permits (BBG)

• German Challenge To ECB QE Asset Buys Sent To European Court (R.)

• Washington’s Long War on Syria (Ren.)

• Fish Confusing Plastic Debris In Ocean For Food (G.)

Debt leads to war.

• The Greatest Crisis In World History Is About To Be Unleashed (von Greyerz)

Totally irresponsible policies by governments and central banks have created the most dangerous crisis that the world has ever experienced. Risk doesn’t arise quickly as the result of a single action or event. No, risk of the magnitude that the world is experiencing today is the result of many years or decades of economic mismanagement. Cycles are normal in nature and in the world economy. And cycles that are the result of the laws of nature normally play out in an orderly fashion without extreme tops or bottoms. “Just take the seasons. They go from summer to autumn, winter and spring, with soft transitions that seldom involve drama or catastrophe. Economic cycles would be the same if they were allowed to happen naturally without the interference of governments.

But power corrupts and throughout history leaders have always hung on to power by interfering with the normal business cycle. This involves anything from reducing the precious metals content of money from 100% to nothing, printing money, leveraging credit, manipulating interest rates, taking total taxes from at least 50% + today from nothing 100 years ago etc, etc. Governments will always fail when they believe that they are gods. But not only governments believe they perform godly tasks but also hubristic investment bankers like the ex-CEO of Goldman Sachs who proclaimed that the bank was doing God’s work. It must be remembered that Goldman, like most other banks, would have gone under if they and JP Morgan hadn’t instructed the Fed to save them by printing and guaranteeing $25 trillion. Or maybe that was God’s hand too?

We now have unmanageable risks at many levels – politically, geopolitically, economically and financially. This is a RISK ON situation that is extremely dangerous and will have very grave consequences. There are numerous risks that can all cause the collapse of the world economy and they all have equal relevance. However, the political situation in the USA is very dangerous for the world. This the biggest economy in the world, albeit bankrupt with debt growing exponentially and real deficits every year since 1960. Before the dollar has collapsed, the US will still be seen as a powerful nation, although a massive economic decline will soon weaken the country burdened by debt at all levels, government, state, and private.

“There is absolutely no reason for the stock markets to be at current levels, let alone melting-up day after day.”

• After 100 Months of Buying The Dips – Peak Crazy (Stockman)

Just call it Peak Crazy and move on. There is absolutely no reason for the stock markets to be at current levels, let alone melting-up day after day. The fact that this is happening is a measure of how impaired capital markets have become as a result of massive central bank intrusion. The robo-machines and day traders keep buying the dips because that has “worked” for the last 100 months. There is nothing more to it than residual momentum. Under a regime of honest money and price discovery, the stock market discounts the future. There is no plausible future from here that’s worth 24 times S&P 500 value or 96 times the Russell 2000. Surely the year-ahead earnings boom that Wall Street’s artists have penciled in is not in the slightest bit plausible. With 84% of the S&P 500 reporting Q2 results, LTM earnings are still 1.3% below where they were in September 2014.

Nothing has happened to corporate earnings in the last three years except deflation in the energy, materials and industrial sectors. After hitting $106 per share in September 2014, the global deflation cycle brought them to a low point of $86.44 per share in March 2016 in response to low $30s oil prices. The latter has since recovered to the $50 dollar zone – bringing S&P 500 earnings back to $104.61 during the current quarter. The question remains: How does an aging business cycle and immense global headwinds justify the expectation of a red hot earnings breakout during the next 18 months? Yet that’s what’s happening on Wall Street. We’ve hit nearly $133 per share of GAAP earnings (and $145 of the ex-items variety) for the LTM period ending in December 2018, meaning a prospective surge of 27%.

[..] In this machine driven market, any of these indices could resume their mad momentum based climb. But negative divergences are breaking out everywhere, and that’s usually a sign that the end is near. Margins on debt has again reached an all-time high of $550 billion. The chart below leaves little doubt as to what comes next. After the 2000 peak, margin debt collapsed by 50% as stocks were violently liquidated to meet margin calls. All this while in 2008 the shrinkage of margin debt was even larger – nearly 60%. This time, however, a similar shrinkage would cause a $325 billion decline in margin balances. That’s a lot of stocks on a fire sale.

“..outstanding bank loans and total social financing, both of which rose roughly 13% in July versus the same period last year..”

• China Has Got To Fix Its Debt Problem, IMF Says (CNBC)

China’s economy is looking good enough that the IMF is raising its outlook, but the organization is doing so with a strong warning over growing debt in the world’s second-largest economy. The IMF issued its annual review of China on Tuesday, and has revised its growth forecast to 6.7% for 2017, which was up from 6.2%. The organization also said it expects China to average 6.4% growth between now and 2021, versus its previous estimate of 6%. Still, the organization warned that things were far from peachy. “The growth outlook has been revised up reflecting strong momentum, a commitment to growth targets, and a recovering global economy,” the IMF said. “But this comes at the cost of further large and continuous increases in private and public debt, and thus increasing downside risks in the medium term.”

What Beijing needs to do is to seize its current strong growth momentum “to accelerate needed reforms and focus more on the quality and sustainability of growth,” said the report. At the top of that list is working to tackle the debt issue: Going forward, the IMF sees China’s non-financial sector debt to hit nearly 300% of GDP by 2022, up from around 240% last year. Debt-fueled growth, the IMF warned, is a short-term solution that isn’t sustainable in the long run unless China tackles deeper structural issues. Experts have been sounding the alarm bell over this issue for years, urging China to rein in its old model of opening credit lines to fuel investment and spending and to find a better balance between supporting growth and controlling risks to the economy.

Chinese banks extended 825.5 billion yuan (about $123.44 billion) in new loans in July, down from 1.54 trillion yuan in June. Outstanding total social financing — a broad measure of credit and liquidity — came in at 1.22 trillion yuan last month versus 1.78 trillion yuan in June. Part of the drop is seasonal, and it’s “masking an uptick in underlying credit growth,” wrote China economist Julian Evans-Pritchard at Capital Economics. A better way to look at credit creation is to gauge growth in outstanding bank loans and total social financing, both of which rose roughly 13% in July versus the same period last year.

As long as things look good for the Party Congress, who cares?

• China Money Supply Growth Slips Again as Leverage Crunch Goes On (BBG)

Growth in China’s broad money supply slipped to a fresh record low, signaling authorities aren’t letting up in their drive to curb excess borrowing and safeguard the financial system. Aggregate financing stood at 1.22 trillion yuan ($182.7 billion) in July, the People’s Bank of China said on Tuesday, compared with an estimated 1 trillion yuan in a Bloomberg survey. New yuan loans stood at 825.5 billion yuan, versus an projected 800 billion yuan. Broad M2 money supply increased 9.2%, while economists forecast a 9.5% increase . Authorities pushing to cut excess leverage have squeezed the massive shadow bank sector, which shrank for the first time in nine months. Yet with aggregate financing remaining robust and bond issuance rebounding, the central bank is still providing ample support for businesses to avoid derailing growth ahead of a key Communist Party congress this fall.

Slower M2 growth will become a “new normal,” the PBOC said Friday in its quarterly monetary policy report. “The relevance of M2 growth to the economy and its predictability has reduced, and its changes should not be over-interpreted.” “The deleveraging campaign is still focused on the financial sector, which leads to the slowdown in M2 growth,” said Yao Shaohua at ABCI Securities in Hong Kong. “Bank support for the real economy remains solid.” “The easing in credit conditions in July was probably part of the concerted stability play ahead of the Party Congress, thus more likely to be temporary,” said Yao Wei, chief China economist at Societe Generale in Paris. “We’re still looking for more deleveraging measures and tougher regulations afterwards.”

“The divergence between M2 growth and aggregate financing reflects that the PBOC is trying to balance cutting leverage while ensuring enough funds to support the real economy,” said Wen Bin at China Minsheng Banking in Beijing. “Single-digit M2 growth is likely to stretch until year-end. And with ample support from the central bank’s credit supply, the drag effect of financial deleveraging on the economic expansion will be limited.” “Banks are still creating credit, and this credit is important to support economic growth,” said Iris Pang, an analyst at ING in Hong Kong. “If liquidity is too tight, or credit growth shrinks, the whole deleveraging reform will run into the risk that there will be too many defaults and the whole banking system will be shaken up.”

“..first-time buyer registrations drop by almost 20% on the year..”

• UK Risks ‘Losing Its Place As Property-Owning Democracy’

The UK risks losing its place as a property-owning democracy if house prices continue to rise, according to the boss of the UK’s largest independent estate agent. Paul Smith, chief executive of haart, said that “unaffordability is reaching crisis point” and urged the Government to stop “excessive profiteering” at the expense of aspiring home owners. The call comes as official figures showed that the price of the average house in the UK increased by £10,000 last year to £223,000. Property values increased by 0.8% between May and June according to joint figures from the Office for National Statistics, Land Registry and other bodies. In the year to June average prices were up 4.9%, down marginally from 5% growth in the year to May.

The report released on Tuesday said the annual growth rate had slowed since mid-2016 but has remained steady at about 5% this year so far. “House prices continued to rally with unflinching determination once again in June despite the ongoing economic uncertainty,” Mr Smith said. “However this means that the average UK buyer now has to fork out an extra £10,000 more to own a home than the same time last year. “Along with consumer price hikes and falling wage growth, unaffordability is reaching a crisis point. This is creating real impact on the ground as we see first-time buyer registrations drop by almost 20% on the year across our branches.”

“..if you’re lucky enough to not be living in your parents’ basement, you’ll be relegated to renting your house from Blackstone.”

• The New American Dream: Rent Your Home From A Hedge Fund (Black)

About a month ago I joined the Board of Directors of a publicly-traded company that invests in US real estate. The position brings a lot of insight into what’s happening in the US housing market. And from what I’m seeing, the transformation that’s taking place today is extraordinary. Buying and renting out single-family homes has long been the mainstay investment of small, independent, individual investors. The big banks and hedge funds pretty much monopolize everything else. They own the stock market. They own the bond market. They own all the commercial real estate. They even own the farmland. Single-family homes were one of the last bastions of investment freedom for the little guy. (Real estate is how I got my own start in business and investing so many years ago; I was a 21-year-old Army lieutenant fresh out of the academy when I bought my first rental property.)

But all that’s changing now. Last week a huge merger was announced between Invitation Homes (owned by private equity giant Blackstone Group) and Starwood Waypoint Homes (owned by real estate giant Starwood Capital). If the deal goes through, the combined entity would be the largest owner of single-family homes in the United States with a portfolio worth over $20 billion. And this is only the latest merger in an ongoing trend. Three years ago, for example, American Homes 4 Rent bought Beazer Pre-Owned Rental Homes, creating another enormous player. A few months later, Starwood Waypoint bought Colony American Homes. And of course, Blackstone was one of the first institutional investors to start buying distressed homes, forking over around $10 billion on houses since the Great Financial Crisis.

[..] medium-sized funds are buying up all the little guys. And mega-funds like Blackstone are buying up all the medium-sized funds. This means there’s essentially an ‘arms race’ building among the world’s biggest funds to control the market, squeezing small, individual investors out of the housing market. [..] the average guy isn’t making any more money, or able to save anything… all while home prices soar to record levels as major funds gobble up the supply. This means that the new reality in America, especially for young people, is that if you’re lucky enough to not be living in your parents’ basement, you’ll be relegated to renting your house from Blackstone.

Prolonging the emergency with America’s own bridges to nowhere.

• Trump Signs Order to Speed Up Public-Works Permits (BBG)

President Donald Trump signed an executive order Tuesday that’s designed to streamline the approval process for building roads, bridges and other infrastructure by establishing “one federal decision’’ for major projects and setting an average two-year goal for permitting. “This over-regulated permitting process is a massive self-inflicted wound on our country,” Trump said in a press conference at Trump Tower in New York. “It’s disgraceful.” Among other things, the president’s order will rescind a previous decree signed by former President Barack Obama that required federal agencies to account for flood risk and climate change when paying for roads, bridges or other structures.

It also allows the Office of Management and Budget to establish goals for environmental reviews and permitting of infrastructure projects and then track their progress – with automatic elevation to senior agency officials when deadlines are missed or extended, according to the order. The order calls for tracking the time and costs of conducting environmental reviews and making permitting decisions, and it allows the budget office to consider penalties for agencies that fail to meet established milestones. Critics say there’s danger in streamlining the reviews. “This is yet another outrageous example of Trump’s insistence on putting corporate interests ahead of people’s health and safety,” said Alex Taurel, deputy legislative director with the League of Conservation Voters, a political advocacy group.

Way too late.

• German Challenge To ECB QE Asset Buys Sent To European Court (R.)

The European Central Bank may be violating laws on monetary financing in its €2.3 trillion ($2.7 trillion) asset purchase programme, Germany’s constitutional court said on Tuesday, and it asked Europe’s top court to make a ruling. In the biggest challenge yet to the ECB’s unprecedented effort to revive growth, the court said bond buys under the scheme may go beyond the bank’s mandate and inhibit euro zone members’ activities. “Significant reasons indicate that the ECB decisions governing the asset purchase programme violate the prohibition of monetary financing and exceed the monetary policy mandate of the European Central Bank, thus encroaching upon the competences of the Member States,” the court said. It said it would ask the European Court of Justice to review the programme.

The ECB acted swiftly to defend the scheme. “The extended asset purchase programme is in our opinion fully within our mandate,” it said in a statement. “That is ultimately for the European Court of Justice to assess.” It said the €60 billion per month asset buys would continue as normal. The European court has already backed the ECB’s more contentious emergency bond purchase scheme known as Outright Monetary Transactions or OMT with only relatively minor limitations, suggesting that the challenge – lodged by several academics and politicians – may face an uphill battle. The decision to pass the issue over to the ECJ means any final ruling will come either after the bond purchases end or near the end of the scheme, which has already been running for over two years and is expected to be wound down next year.

“The same State Department Official had written of Gadaffi in Libya that combining its oil wealth with public ownership of the economy “enabled Libyans to live beyond the wildest dreams of their fathers, and grandfathers.”

• Washington’s Long War on Syria (Ren.)

From Syria, to Iraq, Iran to Libya, our understandings of the long-wars in the Middle-East as moral, humanitarian interventions designed to democratise and civilise are the result of a carefully crafted propaganda campaign waged by the US and its allies. Each of these uprisings were launched by US proxies, designed to destabilize the regions, justifying regime change that suit the economic interests of its investors, banks and corporations, captured comprehensively in a new book by Canadian author and analyst, Stephen Gowans, Washington’s Long War on Syria. You might be surprised to know that both the Libyan, Syrian and Iraqi government, led by Muammar Gaddafi, Hafez Al Assad, (succeeded by Bashaar Al Assaad) and Sadaam Hussein respectively, were socialist governments. Or Ba’ath Arab Socialist governments, to be precise.

Ba’ath Arab Socialism can be summed up in their constitutions supporting the values of: ‘freedom of the Arab world, freedom from foreign powers and freedom of socialism’. Its doctrine was supported in Libya, as it was in Iraq and Syria. Of course, particularly in Hussein’s case, we cannot claim that these governments were without their problems. Ethnic cleansing is not to be overlooked, but condemned on the strongest grounds. But of course these were not the reasons the US and its allies decided to get into it. In the case of Iraq, it had combined its oil wealth with public ownership of the economy, leading to what is known as ‘The Golden Age’, where, according to a State Department Official: “Schools, universities, hospitals, factories, museums and theatres proliferated employment so universal, a labour shortage developed.”

When the Ba’ath Arab Socialists were driven from power in Iraq, the US installed military dictator, Paul El Briener who set about a ‘de-Ba’athification’ of the government, expelling every member of the Ba’ath Arab Socialist party and imposed a constitution forbidding any secular Arab leader from ever holding office in Iraq again. The same State Department Official had written of Gadaffi in Libya that combining its oil wealth with public ownership of the economy “enabled Libyans to live beyond the wildest dreams of their fathers, and grandfathers.” Gadaffi would soon be removed by Islamists, backed by NATO forces after Western oil companies agitated for his removal because he was “driving a hard bargain”. Canadian paramilitary forces even quipped that they were “al-Qaeda’s air-force”.

And then we eat it. Carbon will kill us yet.

• Fish Confusing Plastic Debris In Ocean For Food (G.)

Fish may be actively seeking out plastic debris in the oceans as the tiny pieces appear to smell similar to their natural prey, new research suggests. The fish confuse plastic for an edible substance because microplastics in the oceans pick up a covering of biological material, such as algae, that mimics the smell of food, according to the study published on Wednesday in the journal Proceedings of the Royal Society B. Scientists presented schools of wild-caught anchovies with plastic debris taken from the oceans, and with clean pieces of plastic that had never been in the ocean. The anchovies responded to the odours of the ocean debris in the same way as they do to the odours of the food they seek. The scientists said this was the first behavioural evidence that the chemical signature of plastic debris was attractive to a marine organism, and reinforces other work suggesting the odour could be significant.

The finding demonstrates an additional danger of plastic in the oceans, as it suggests that fish are not just ingesting the tiny pieces by accident, but actively seeking them out. Matthew Savoca, of the National Oceanic and Atmospheric Administration and lead author of the study, told the Guardian: “When plastic floats at sea its surface gets colonised by algae within days or weeks, a process known as biofouling. Previous research has shown that this algae produces and emits DMS, an algal based compound that certain marine animals use to find food. [The research shows] plastic may be more deceptive to fish than previously thought. If plastic both looks and smells like food, it is more difficult for animals like fish to distinguish it as not food.”

Debt Rattle August 9 2017

Aug 092017

August 9, 2017 Posted by Raúl Ilargi Meijer at 7:56 am Finance Tagged with: bombshell, debt, ECB, Google, inequality, innocence, Korea, opioids, QE, refugees, Trump 2 Responses »

Fred Stein Police car, New York 1942

• The Only Thing Keeping Italy’s Debt Alive is the ECB (DQ)

• Federal Bank Regulator Drops a Bombshell as Corporate Media Snoozes (Martens)

• Officials Spend Big In The Run Up To China’s Communist Party Congress (BBG)

• China Is Taking on the ‘Original Sin’ of Its Mountain of Debt (BBG)

• Jeff Gundlach Predicts He Will Make 400% On Bet Against Stock Market (CNBC)

• Our Broken Economy, in One Simple Chart (NYT)

• The Economic Crash, Ten Years On (Pettifor)

• Opioid Deaths In US Break New Record: 100 People A Day (RT)

• New Hampshire Sues Purdue Pharma Over Opioid Marketing Practices (R.)

• Americans Are Dying Younger, Saving Corporations Billions (BBG)

• Unlearning The Myth Of American Innocence (G.)

• EU Nations Start Process Of Returning Refugees, Migrants To Greece (AP)

As Trump sinks into opioids and nuke threats (talking to Kim in his own language, and no, Trump does not like the Korea thing), and Google sinks into its self-dug moral morass, let’s not forget this one thing: we would not have what poses as an economy if not for central banks buying anything not bolted down. And they cannot keep doing that. And what then?

“At current government debt net issuance rates and announced QE levels, the ECB will have been responsible for financing 100% of Italy’s deficits from 2014 to 2019”

• The Only Thing Keeping Italy’s Debt Alive is the ECB (DQ)

New statistical data from the investment bank Jefferies LLC has revealed a startling new trend that could have major implications for Europe’s economic future: Italian banks have begun dumping unprecedented volumes of Italian sovereign debt. Holdings of government debt by Italian financial institutions slumped by a record €20 billion in June – almost 10% of the total – after €9.4 billion of sales in May. As the FT reports, the selling by Italian banks is the most emphatic example yet of a broader trend: banks sold €46 billion of government paper in June across Europe, taking the total reduction since the start of this year to €257 billion. The banks’ mass sell-off is probably being driven by two main factors: first, as an attempt to preempt a pending Basel III reform package that could eliminate the equity capital privilege for EU government bonds and second, to position themselves for an anticipated autumn announcement from the ECB that it will begin tightening monetary policy.

“Maybe we are seeing an indication of Italian banks catching up with what their counterparts in Spain have known for a long time – that sovereign debt is not the place to be in a world of rising interest rates, said Jefferies’ senior European economist, Marchel Alexandrovich. But then: who’s buying it? The answer, in the case of Italy, is the ECB and its Italian branch office, the Bank of Italy, where Italian bank deposits rose by €22 billion in June and €50 billion since the start of 2017. The ECB “overbought” Italian government debt in July with purchases of €9.6 billion — its highest monthly quota since quantitative easing began. As Italian banks offload their holdings, the ECB, with Italian native and former Bank of Italy governor Mario Draghi at the helm, is picking up the slack.

In doing so, the central bank surpassed its own capital key rules by which member state debt is bought in proportion to the size of each country’s economy. By contrast, the ECB’s German Bund purchases slipped below its capital key rules for the fourth month in a row, which further depressed the spread between Italian and German 10-year debt to 152 basis points, its lowest level of the year. This spread is artificial, derived from the ECB’s binge buying of European sovereign bonds, particularly those belonging to countries on the periphery. A report published in May by Astellon Capital revealed that since 2008, 88% of Italy’s government debt net issuance was acquired by the ECB and Italian Banks. At current government debt net issuance rates and announced QE levels, the ECB will have been responsible for financing 100% of Italy’s deficits from 2014 to 2019. That was before taking into account the current sell-down of Italian bonds by Italian banks.

As central banks buy 100% of a country’s new debt, US banks pay out more than 100% of earnings, and “share buybacks represent 72% of the total payouts for the 10 largest bank holding companies”. What better way to characterize a non-functioning economy?

• Federal Bank Regulator Drops a Bombshell as Corporate Media Snoozes (Martens)

Last Monday, Thomas Hoenig, the Vice Chairman of the Federal Deposit Insurance Corporation (FDIC), sent a stunning letter to the Chair and Ranking Member of the U.S. Senate Banking Committee. The letter contained information that should have become front page news at every business wire service and the leading business newspapers. But with the exception of Reuters, major corporate media like the Wall Street Journal, Bloomberg News, the Business section of the New York Times and Washington Post ignored the bombshell story, according to our search at Google News. What the fearless Hoenig told the Senate Banking Committee was effectively this: the biggest Wall Street banks have been lying to the American people that overly stringent capital rules by their regulators are constraining their ability to lend to consumers and businesses.

What’s really behind their inability to make more loans is the documented fact that the 10 largest banks in the country “will distribute, in aggregate, 99% of their net income on an annualized basis,” by paying out dividends to shareholders and buying back excessive amounts of their own stock. Hoenig writes that the banks are starving the U.S. economy through these practices and if “the 10 largest U.S. Bank Holding Companies were to retain a greater share of their earnings earmarked for dividends and share buybacks in 2017 they would be able to increase loans by more than $1 trillion, which is greater than 5% of annual U.S. GDP.” Backing up his assertions, Hoenig provided a chart showing payouts on a bank-by-bank basis. Highlighted in yellow on Hoenig’s chart is the fact that four of the big Wall Street banks are set to pay out more than 100% of earnings: Citigroup 127%; Bank of New York Mellon 108%; JPMorgan Chase 107% and Morgan Stanley 103%.

What’s motivating this payout binge at the banks? Hoenig doesn’t offer an opinion in his letter but he does state that share buybacks represent 72% of the total payouts for the 10 largest bank holding companies. What share buybacks do for top management at these banks is to make the share price of their bank’s stock look far better than it otherwise would while making themselves rich on their stock options. If just the share buybacks (forgetting about the dividend payouts) were retained by the banks instead of being paid out, the banks could “increase small business loans by three quarters of a trillion dollars or mortgage loans by almost one and a half trillion dollars.” Hoenig also urged in his letter that there be a “substantive public debate” on what the biggest banks are doing with their capital rather than allowing this “critical” issue to be “discussed in sound bites.” Most corporate media responded to this appeal by ignoring Hoenig’s letter altogether.

They all want to show nice numbers at the Congress. Shadow banks lend them the money to do it. In exchange for power.

• Officials Spend Big In The Run Up To China’s Communist Party Congress (BBG)

In the run up to China’s blockbuster Communist Party congress later this year, officials have spent big to ensure the economy is humming along nicely when the conclave begins. It’s after that that things get interesting. With the central government’s deficit limit capped at 3%, officials usually turn on the taps around November and December, once they know they’ll have raised enough to fund a late-year splurge. Not this time. A push to smooth out spending means the fiscal pump is unlikely to go into high gear at year end, which is when economists see growth moderating toward the government’s baseline of 6.5%. While policy makers have quasi-fiscal options up their sleeve – like accelerating infrastructure project approvals or ratcheting up lending via policy banks – efforts to curb profligate local governments and limit debt may restrain those channels too.

“It’s China’s political-business cycle: this year is very important for the political transition, so they front-loaded fiscal spending to ensure a stable economic backdrop,” Larry Hu, head of China economics at Macquarie in Hong Kong. “China’s economy has a fiscal system and a shadow fiscal system. If growth really slows to threaten the target, then we’re going to see spending.” The question is, how much. China ran a fiscal deficit of 918 billion yuan ($137 billion) in the first half, or more than 2% of economic output during the period, Bloomberg calculations show. That’s a record both by value and share. The spending fueled better-than-expected economic growth of 6.9% in the first six months, and infrastructure investment surging at over 20%.

China International Capital Corp. analysts led by Liu Liu say the budgeted deficit will be 1.46 trillion yuan in the second half, versus 2.46 trillion yuan in the same period last year. The world’s second-largest economy still depends on government spending at all levels, as construction of things like roads and railways can be a key buffer when private investors start pulling back or, as now, political sensitivities make robust growth especially important. But those priorities are now clashing with the need to clamp down on indebtedness at lower levels of government, and the desire to avoid a year-end spending glut. In the past, officials have been able to use off-balance sheet spending, such as policy bank loans and funds raised through local government financing vehicles, to keep their deep pockets open.

It’s starting to feel increasingly like a big fat Ponzi.

• China Is Taking on the ‘Original Sin’ of Its Mountain of Debt (BBG)

China’s much-vaunted campaign to tackle its leverage problem has captured headlines this year. But to understand why they’re taking on the challenge – and the threat it could pose to the world’s second-largest economy – you need to dig into the mountain. Characterized in state media as the “original sin” of China’s financial system, leverage has swelled over the past decade – partly because policy makers were trying to cushion a slowdown in growth from the old normal of 10% plus. What’s fueled the leverage has been a rapid expansion in household and corporate wealth looking for higher returns in a system where bank interest rates have been held down. The unprecedented stimulus unleashed since 2008 effectively brought to life the “monster” China’s leadership is now trying to tackle, says Andrew Collier at Orient Capital Research in Hong Kong and author of “Shadow Banking and the Rise of Capitalism in China.”

Implicit backing from the central government meant borrowers had free license to take on debt. “You basically have anybody selling anything they want as they think they can’t lose,” Collier said. Deleveraging – championed by President Xi Jinping and the Communist Party Politburo in April – hasn’t truly begun, as “they’re trying to forestall the pain as long as possible,” he said. The equivalent of trillions of dollars are now held in all manner of assets in China, from high-yielding wealth management products to so-called entrusted investments. Taking the heftiest piece of the leverage mountain first, wealth management products had a precipitous rise over the past several years.

A way for borrowers who have trouble getting traditional bank loans to win funding, WMPs have grown in popularity as they typically offer savers much higher yields than banks offer on deposits. WMPs are also a hit because they give lenders a way to keep loans off of their balance sheets, and to skirt regulatory requirements when channeling funds to borrowers, according to Raymond Yeung at Australia & New Zealand Banking in Hong Kong. The regulatory crackdown this year — mostly in the form of more stringent guidelines on use of financial products — has seen the amount of WMPs outstanding taper off from a peak in April, while yields on them have surged as providers competed for funds. In July, the bank watchdog is said to have told some lenders to cut the rates they offered on the products.

“It’s not really a bear call on the S&P 500. It’s more of a bull call on volatility..”

• Jeff Gundlach Predicts He Will Make 400% On Bet Against Stock Market (CNBC)

DoubleLine CEO Jeffery Gundlach expects his bet for a decline in the S&P 500 will return 400%. “I’ll be disappointed if we don’t make 400% on the puts, and we don’t even need a big market decline for that to happen,” Gundlach said Tuesday on CNBC’s “Halftime Report.” He said that in his firm’s analysis, volatility is so low that it can make a big return by buying put options — bets for a decline — on the S&P 500 for December. “It’s not really a bear call on the S&P 500. It’s more of a bull call on volatility,” he said. In its slow grind higher, the S&P 500 has only closed more than 1% higher or lower on four trading days this year.

As a result of the muted market performance, the CBOE Volatility Index (.VIX), widely considered the best gauge of fear in the market, has persistently held near historical lows around 10 or below this year and hit an all-time low of 8.84 on July 26. The VIX was near 10.1 midday Tuesday as the S&P 500 edged up to a record high. “I think going long the VIX is really sort of free money at a 9.80 VIX level today,” Gundlach said. “I believe the market will drop 3% at a minimum sometime between now and December. And when it does I don’t think the VIX will be at 10.” Gundlach reiterated his expectations for a snap higher in the VIX once volatility picks up, since hedge funds have piled heavily into bets that volatility will remain low.

OK, got it. Now what?

• Our Broken Economy, in One Simple Chart (NYT)

Many Americans can’t remember anything other than an economy with skyrocketing inequality, in which living standards for most Americans are stagnating and the rich are pulling away. It feels inevitable. But it’s not. A well-known team of inequality researchers — Thomas Piketty, Emmanuel Saez and Gabriel Zucman — has been getting some attention recently for a chart it produced. It shows the change in income between 1980 and 2014 for every point on the distribution, and it neatly summarizes the recent soaring of inequality.= The line on the chart (which we have recreated as the red line above) resembles a classic hockey-stick graph. It’s mostly flat and close to zero, before spiking upward at the end. That spike shows that the very affluent, and only the very affluent, have received significant raises in recent decades.

This line captures the rise in inequality better than any other chart or simple summary that I’ve seen. So I went to the economists with a request: Could they produce versions of their chart for years before 1980, to capture the income trends following World War II. You are looking at the result here. The message is straightforward. Only a few decades ago, the middle class and the poor weren’t just receiving healthy raises. Their take-home pay was rising even more rapidly, in%age terms, than the pay of the rich. The post-inflation, after-tax raises that were typical for the middle class during the pre-1980 period — about 2% a year — translate into rapid gains in living standards. At that rate, a household’s income almost doubles every 34 years. (The economists used 34-year windows to stay consistent with their original chart, which covered 1980 through 2014.)

In recent decades, by contrast, only very affluent families — those in roughly the top 1/40th of the income distribution — have received such large raises. Yes, the upper-middle class has done better than the middle class or the poor, but the huge gaps are between the super-rich and everyone else. The basic problem is that most families used to receive something approaching their fair share of economic growth, and they don’t anymore.

Nice try, Ann. But people have no political power left. Just look at the mess that all parties are in, in both the UK and US. So are you going to break the power of finance?

• The Economic Crash, Ten Years On (Pettifor)

Challenging and dismantling gargantuan financial markets that operate beyond democratic regulatory oversight will not be easy, but it is long overdue. Some believe that the management of financial markets by governments will never be restored. I do not agree. Because of global imbalances, economic and financial tensions could lead to the onset of wars. These could dismantle global financial markets just as the two world wars did. There is a more peaceful way of restoring finance to the role of servant to, and not master of, economies and regions. For that to happen the public must realise that citizens can exercise economic power over global financial markets. The global ‘House of Finance’ is almost entirely dependent, and indeed largely parasitic, on the public sector. In other words, private finance is largely dependent for its capital gains on taxpayers like you and me.

Commercial banks do not need savings or tax revenues to lend. All they need is to provide finance to viable projects that will generate employment and income in the future – which will repay the loans. The most viable projects today are those needed to protect Britain from climate change. Any government with political spine would have insisted that the banks lend, at low affordable rates, to transformative projects in the real, productive economy where jobs are created, income generated, and society protected. And if shareholders and executives object to such conditions, then politicians should withdraw access to the Bank of England’s QE and low interest rates, and to government guarantees for deposits.

Quantitative easing – the creation of liquidity currently directed only at the financial sector – is only possible because central banks, if not directly publicly owned, are dependent for their legitimacy and money-creation powers, on taxpayers. The Federal Reserve is ultimately backed by US taxpayers. The Bank of England is a nationalised bank, whose authority is derived from Britain’s 31 million-plus taxpayers.

” ..in 2015, the amount of opioids prescribed in the US was enough for every American to be medicated around the clock for three weeks.”

• Opioid Deaths In US Break New Record: 100 People A Day (RT)

The first nine months of 2016 saw a sharp increase in opioid drug overdoses in the US compared to the prior year, according to new data by the National Center for Health Statistics (NCHS). The government is struggling to respond to the crisis. Deaths due to drug overdose peaked in the third quarter of last year – 19.7 cases for every 100,000 people, compared to 16.7 in the same period the year before, according to newly released numbers from the NCHS, which is part of the US Centers for Disease Control and Prevention (CDC). The Centers attributed 33,000 deaths in 2015 to opioid drugs, including legal prescription painkillers as well as illicit drugs like heroin and street fentanyl. “Opioid prescribing continues to fuel the epidemic. Today, nearly half of all US opioid overdose deaths involve a prescription opioid,” according to the CDC.

A new study published in the American Journal of Preventive Medicine says actual opioid mortality rate changes are on average 22% higher than federal statistics indicate, due to information missing from CDC records. “Opioid mortality rate changes were considerably understated in Pennsylvania, Indiana, New Jersey and Arizona,” said the study’s author, Dr. Christopher Ruhm, a health economist at the University of Virginia. Top US officials have consistently raised the alarm about the addiction crisis in the US, but a solution is yet to be found. [..] Last week, the Trump-appointed commission on combating the drug addiction crisis in America called on the president to declare “a national emergency.”

After the meeting with Trump on Tuesday, Price said the administration will act without such a declaration. “Here is the grim reality,” the commission wrote in their letter to Trump. “Americans consume more opioids than any other country in the world. In fact, in 2015, the amount of opioids prescribed in the US was enough for every American to be medicated around the clock for three weeks.”

And this is how the opioid disaster started, and still rolls on. Easy fix (pun intended), but who’s going to do it?

• New Hampshire Sues Purdue Pharma Over Opioid Marketing Practices (R.)

New Hampshire sued OxyContin maker Purdue Pharma LP on Tuesday, joining several state and local governments in accusing the drugmaker of engaging in deceptive marketing practices that have helped fuel a national opioid addiction epidemic. The lawsuit filed in Merrimack County Superior Court claimed that Purdue Pharma significantly downplayed the risk of addiction posed by OxyContin and engaged in marketing practices that “opened the floodgates” to opioid use and abuse. The lawsuit came after the state’s top court in June overturned a ruling that barred the enforcement of subpoenas against Purdue and four other drugmakers because of the use of a private law firm by the office of the attorney general.

The complaint said the Stamford, Connecticut-based company had spent hundreds of millions of dollars since the 1990s on misleading marketing that overstated the benefits of opioids for treating chronic, rather than short-term, pain. Purdue and three executives in 2007 pleaded guilty to federal charges related to the misbranding of OxyContin, and agreed to pay a total of $634.5 million to resolve a U.S. Justice Department probe. That year, the privately held company reached a $19.5 million settlement with 26 states and the District of Columbia. It agreed in 2015 to pay $24 million to resolve a lawsuit by Kentucky. The lawsuit by New Hampshire, which was not among those settled, said Purdue has continued to benefit from its earlier misconduct and has since 2011 expanded the market for opioids in the state.

No wonder with the opioid cases.

• Americans Are Dying Younger, Saving Corporations Billions (BBG)

Steady improvements in American life expectancy have stalled, and more Americans are dying at younger ages. But for companies straining under the burden of their pension obligations, the distressing trend could have a grim upside: If people don’t end up living as long as they were projected to just a few years ago, their employers ultimately won’t have to pay them as much in pension and other lifelong retirement benefits. In 2015, the American death rate—the age-adjusted share of Americans dying—rose slightly for the first time since 1999. And over the last two years, at least 12 large companies, from Verizon to General Motors, have said recent slips in mortality improvement have led them to reduce their estimates for how much they could owe retirees by upward of a combined $9.7 billion, according to a Bloomberg analysis of company filings.

“Revised assumptions indicating a shortened longevity,” for instance, led Lockheed Martin to adjust its estimated retirement obligations downward by a total of about $1.6 billion for 2015 and 2016, it said in its most recent annual report. Mortality trends are only a small piece of the calculation companies make when estimating what they’ll owe retirees, and indeed, other factors actually led Lockheed’s pension obligations to rise last year. Variables such as asset returns, salary levels, and health care costs can cause big swings in what companies expect to pay retirees. The fact that people are dying slightly younger won’t cure corporate America’s pension woes—but the fact that companies are taking it into account shows just how serious the shift in America’s mortality trends is.

It’s not just corporate pensions, either; the shift also affects Social Security, the government’s program for retirees. The most recent data available “show continued mortality reductions that are generally smaller than those projected,” according to a July report from the program’s chief actuary. Longevity gains fell short of what was projected in last year’s report, leading to a slight improvement in the program’s financial outlook. [..] Absent a war or an epidemic, it’s unusual and alarming for life expectancies in developed countries to stop improving, let alone to worsen. “Mortality is sort of the tip of the iceberg,” says Laudan Aron, a demographer and senior fellow at the Urban Institute. “It really is a reflection of a lot of underlying conditions of life.” The falling trajectory of American life expectancies, especially when compared to those in some other wealthy countries, should be “as urgent a national issue as any other that’s on our national agenda,” she says.

Not sure where this article aims to go, but Americans entering another dimension is a nice starting point.

• Unlearning The Myth Of American Innocence (G.)

I grew up in Wall, a town located by the Jersey Shore, two hours’ drive from New York. Much of it was a landscape of concrete and parking lots, plastic signs and Dunkin’ Donuts. There was no centre, no Main Street, as there was in most of the pleasant beach towns nearby, no tiny old movie theatre or architecture suggesting some sort of history or memory. Most of my friends’ parents were teachers, nurses, cops or electricians, except for the rare father who worked in “the City”, and a handful of Italian families who did less legal things. My parents were descendants of working-class Danish, Italian and Irish immigrants who had little memory of their European origins, and my extended family ran an inexpensive public golf course, where I worked as a hot-dog girl in the summers. The politics I heard about as a kid had to do with taxes and immigrants, and not much else. Bill Clinton was not popular in my house. (In 2016, most of Wall voted Trump.)

We were all patriotic, but I can’t even conceive of what else we could have been, because our entire experience was domestic, interior, American. We went to church on Sundays, until church time was usurped by soccer games. I don’t remember a strong sense of civic engagement. Instead I had the feeling that people could take things from you if you didn’t stay vigilant. Our goals remained local: homecoming queen, state champs, a scholarship to Trenton State, barbecues in the backyard. The lone Asian kid in our class studied hard and went to Berkeley; the Indian went to Yale. Black people never came to Wall. The world was white, Christian; the world was us. We did not study world maps, because international geography, as a subject, had been phased out of many state curriculums long before. There was no sense of the US being one country on a planet of many countries. Even the Soviet Union seemed something more like the Death Star – flying overhead, ready to laser us to smithereens – than a country with people in it.

I have TV memories of world events. Even in my mind, they appear on a screen: Oliver North testifying in the Iran-Contra hearings; the scarred, evil-seeming face of Panama’s dictator Manuel Noriega; the movie-like footage, all flashes of light, of the bombing of Baghdad during the first Gulf war. Mostly what I remember of that war in Iraq was singing God Bless the USA on the school bus – I was 13 – wearing little yellow ribbons and becoming teary-eyed as I remembered the video of the song I had seen on MTV. “And I’m proud to be an American; Where at least I know I’m free”. That “at least” is funny. We were free – at the very least we were that. Everyone else was a chump, because they didn’t even have that obvious thing. Whatever it meant, it was the thing that we had, and no one else did. It was our God-given gift, our superpower.

Because Greece has the absolutely worst accomodations for them.

• EU Nations Start Process Of Returning Refugees, Migrants To Greece (AP)

European Union countries have begun the process of sending migrants who arrived in Europe via Greece over the last five months back to have their asylum applications assessed there. EU rules oblige migrants to apply for asylum in the country they first enter. But the rules were suspended as hundreds of thousands of people, many of them Syrian refugees, entered Greece in 2015. The European Commission recommended in December that EU countries gradually resume transfers to Greece of unauthorized migrants arriving from March 15 onwards. “Some member states have made requests but transfers have not begun. Greece has to give assurances that they have adequate reception conditions,” European Commission spokeswoman Tove Ernst said Tuesday.

“Reception conditions in Greece have significantly improved since last year, which is why the Commission recommended a gradual resumption of transfers,” she said. The recommendation is not binding on EU countries. Greece’s asylum service says requests have been made to return more than 400 migrants. Seven requests have been accepted so far. In Athens, Greece’s migration minister said the returns would involve “tiny numbers.” “We will accept a few dozen people in coming months,” Yiannis Mouzalas told private Skai TV Tuesday. “This will be done provided we have the proper conditions to receive them.” Mouzalas said it was a “symbolic move” dictated by Greece’s EU obligations.

Debt Rattle August 8 2017

Aug 082017

August 8, 2017 Posted by Raúl Ilargi Meijer at 9:06 am Finance Tagged with: Big Pharma, China, debt, forfeiture, Greece, Kurds, NATO, property, refugees, subsidies, Trump, whoosh Comments Off

Vincent van Gogh Tree Roots 1890 (painted July 28, the day before he died)

• That Whoosh You Heard? It’s The Great Chinese Property Pullback (BBG)

• Has China’s Rise Topped Out? (BBG)

• Credit Card Debt; Student, Auto Loans All Set New Record Highs (ZH)

• Asking Prices Slashed At High End of the House Price Bubble (WS)

• Is Trump Winning? (Robert Gore)

• Jeff Sessions Endorses Theft (Ron Paul)

• Just Wait a Little While (Jim Kunstler)

• Fossil Fuel Subsidies Are A Staggering $5 Trillion Per Year (G.)

• Bernie Sanders Tells Big Pharma: Stop Making Americans Pay Twice

• Call For ‘Military Schengen’ To Get NATO Troops Moving (Pol.)

• Erdogan Says Turkey To Tackle – US-Supported – Kurds In Syria (R.)

• Greece Accepts Resettlement of Refugees from Germany (GR)

China needs foreign reserves. It needs to stop bleeding them.

• That Whoosh You Heard? It’s The Great Chinese Property Pullback (BBG)

That whoosh you just heard? It’s Chinese money pulling back from property in London to Sydney to New York. Capital centres globally should brace for tumbling real-estate prices as Beijing manages to do what Brexit and higher interest rates haven’t. Reflecting tighter regulations, China overseas direct property investment could drop 84% to $US1.7 billion ($2.15 billion) this year and about another 15% to $US1.4 billion in 2018, according to Morgan Stanley. Mainland money began piling into offshore commercial property in 2013. Land prices were expensive at home, and investors wanted to find a hedge against a weakening yuan. Another draw was the prospect of higher returns in cities such as Sydney where yield spreads – the difference between rental yields and what government bonds pay – are higher.

A slumping British pound post June 2016’s Brexit vote helped, too. While some marquee transactions are still being inked – think the purchase earlier this year of London’s “Cheesegrater” tower by Chongqing-based, Hong Kong-listed CC Land Holdings – their numbers are dwindling. A strengthening yuan, along with China’s One Belt One Road initiative that needs funding, will see many property deals dry up. Over the past few months, Beijing has made it tougher to get money out, clamped down on more fanciful transactions such as the buying of football clubs and luxury hotels, and is now going after some of the country’s most prolific acquirers. Dalian Wanda Group, Anbang Insurance Group, HNA Group and Fosun International have all included real estate in their global buying binges.

Against that backdrop, and with increasing foreign-government scrutiny thrown into the mix, it’s hard to see how Chinese offshore real estate acquisitions can continue at such a pace. Domestic developers are already finding it harder to tap international debt markets, and have been resorting to short-term securities instead. This matters because Chinese capital accounted for one-quarter of commercial property transactions in central London last year, up from 1% a decade ago. China is now the second-largest foreign investor in the US after Canada, and is responsible for between 12 and 25% of all office transactions by value in Australia over the past two to three years.

Again, China needs foreign reserves: “Nowhere is the disconnect between China’s global ambitions and actual policy greater than with the government’s interference in overseas direct investment.”

• Has China’s Rise Topped Out? (BBG)

Most people around the world still seem to believe China’s ascent is relentless and inevitable. A recent survey by the Pew Research Center showed that while more of those polled still see the U.S. as the world’s leading economy, China is quickly narrowing the gap. Chinese President Xi Jinping has been feeding that positive image by presenting his country as a champion of globalization, trade and economic progress. Statistics tell a different story. The common perception is that China is swamping the world with exports of everything from mobile phones to steel to sneakers. In fact, the entire Chinese export machine is sputtering. Between 2006 and 2011, China’s total merchandise exports nearly doubled, powering the country through the Great Recession. Since then, they’ve increased less than 11%, according to World Trade Organization data.

The same trend holds for China’s currency. In late 2014, the renminbi broke into the top five most-used currencies for global payments, reaching an almost 2.2% share. China seemed well on the way to achieving its long-stated goal of turning the yuan into a true rival to the dollar. But that progress has reversed. In June, the renminbi chalked up only a 2% share, according to Swift, slipping behind the Canadian dollar. The situation isn’t very different in China’s capital markets. While the government has cracked open its stock and bond markets to foreign investors, they still prefer buying Chinese shares listed in Hong Kong or New York to those in Shanghai or Shenzhen. For instance, domestically traded A-shares in a China equities fund managed by Zurich-based GAM account for less than 10% of its holdings.

In part, China is simply running into the difficult transition every country faces when losing its low-cost advantage. Facing stiff competition from countries like India and Vietnam, where wages are lower, China is losing ground in apparel and textile exports to the United States. Meanwhile, the Chinese economy isn’t replacing these traditional exports with new, high-value ones quickly enough. For example, in 2016, China exported 708,000 passenger and commercial vehicles, a sharp deterioration from the more than 910,000 shipped abroad in 2014. Rather than boosting China’s global expansion, government policy is holding it back. The renminbi remains a sideshow in currency markets because the state can’t stop fussing with its value. In May, the central bank actually reversed its stated policy to liberalize the renminbi’s trading and imposed more control.

[..] Nowhere is the disconnect between China’s global ambitions and actual policy greater than with the government’s interference in overseas direct investment. For a while, officials were encouraging big companies to shop abroad, resulting in a surge of deal-making by firms like Anbang. That led to a debt-crazed buying binge. Having created the problem, the government then stepped in to “fix” it, by suddenly changing course and clamping down on foreign deals. According to the American Enterprise Institute, China’s offshore investment still grew by 9% in the first half of 2017, but only because of one giant deal – state-owned China National Chemical Corp.’s acquisition of Syngenta AG. Take that one out, and overseas investment would have fallen by about a third.

Masters and debt slaves.

• Credit Card Debt; Student, Auto Loans All Set New Record Highs (ZH)

Who would have expected that today’s otherwise boring monthly consumer credit report would be the day’s most exciting event. Well, moments ago the monthly update from the Federal Reserve confirmed that as of the end of June, total revolving (i.e. credit card) credit rose to $1,021.7 billion, an increase of $4.1 billion on the month, and a new all time high, taking out the previous record high set during the summer of 2008.

Coupled with the monthly $8.3 billion increase in non-revolving credit, which also rose to an all time high of $2,834.1 billion…

… means that total consumer credit in June increased by $12.4 billion, slightly less than the $13.9 billion expected and modestly less than the $18.4 billion increase in May, to $3,855.8 billion, also a record high.

Taking a closer look at the quarterly update in non-revolving debt, we find that for another consecutive quarter, both student and auto loans hit record highs, of $1.450 trillion and $1.131 trillion respectively, although there does appears to be a modest slowdown in credit issuance for these two largest categories.

“Aspirational pricing”: pumping the market.

• Asking Prices Slashed At High End of the House Price Bubble (WS)

No, Cantor Fitzgerald CEO Howard Lutnick didn’t “save” $81 million when he bought the most expensive listing in New York City, the 12,000-square-foot, 16-room triplex penthouse on the 41st, 42nd, and 43rd floors of The Pierre, a co-op tower on Fifth Avenue dating from 1930s. By the way, the owner also pays monthly maintenance charges for the apartment of $51,840). Asking price was $125 million when it was first listed in March 2013. In December that year, the price was slashed to $95 million. In 2015, it was cut to $63 million. That’s half of the original asking price. But it still didn’t sell. So it was taken off the market. After it underwent a modern redesign, it was re-listed in April 2016 for $57 million. It still didn’t sell. But on August 2, Page Six reported that Lutnick bought it for $44 million. At 65% below asking.

“Cantor Fitzgerald CEO buys iconic triplex at $81M discount,” said the Page Six headline. “Best Real Estate Headline Ever,” said Jonathan Miller, real-estate appraiser and author of the Elliman Report series, in his Housing Notes. Miller has a word for this phenomenon of enormous blue-sky asking prices that trigger subsequent massive and serial price reductions until finally someone bites: “Aspirational pricing.” “The very idea that a home seller would discount their home by $81 million to make the sale is an insane thought. This speaks to the concept I call “aspirational pricing.” The asking price was set to a price so ridiculous that it would literally sit on the market for years and the market would unlikely catch up in a lifetime. More importantly, it serves as misdirection for other high-end properties coming to the market by influencing them to also wildly over price as well.”

The 6,800-square-foot fully furnished penthouse occupying the top floor of the beachfront condo tower at 321 Ocean in South Beach, Miami Beach, was listed for sale in December 2015 for $53 million. The sellers had bought it when the building was completed six months earlier, for $20 million. “Financier Aims for Ambitious $53 Million Miami Penthouse Flip,” The Wall Street Journal said at the time. The hopeful flippers are Boris Jordan and Elizabeth Jordan: Founder of the private-equity and advisory firm the Sputnik Group, Mr. Jordan previously served as chief executive of the state-controlled Russian media conglomerate Gazprom-Media, and as head of the Russian television network NTV. But the hot air has come out of the condo market in Miami Beach. In the second quarter, after years of soaring, the median sale price for non-distressed condos dropped 7.5%, and the average price plunged 15.2%, according to the Elliman Report.

A different look.

• Is Trump Winning? (Robert Gore)

We’ve asserted that President Trump is far smarter and the powers that be far stupider and weaker than current consensus estimates. Trump’s primary motivation is power. The nonstop vilification campaign against him has little to do with policy differences and instead reflects establishment fears that Trump will investigate, expose, and punish its criminality. The upshot of these hypotheses: Trump is winning and has consolidated his power. [..] Even the Washington Post has admitted the Russia probe is “crumbling.” Trump and Sessions know Special Prosecutor Robert Mueller won’t find much because there’s nothing there, although there may be a sacrificial offering or two to propitiate the investigatory gods.

Trump read Sessions the riot act via Twitter and a Wall Street Journal interview about not investigating Hillary Clinton, intelligence community leaks to the press, and Ukrainian efforts to sabotage his presidential campaign. He’s been roundly condemned for publicly criticizing Sessions, but here’s a speculative leap: perhaps publicly criticizing Sessions was not really what Trump was doing. Perhaps Trump was giving his attorney general political cover to pursue investigations against high-profile Democrats who cannot help Trump, sub rosa or otherwise. Investigations of Hillary Clinton, former Attorney General Loretta Lynch, Susan Rice, Samantha Power, Fusion GPS, and Debbie Wasserman Schultz would demoralize the Democrats, preoccupy and harass key players, expose criminality, and electrify Trump’s base.

Providing Sessions further cover, twenty Republican representatives have sent a letter to the Attorney General and Deputy Attorney General Rod Rosenstein demanding the appointment of a second Special Counsel to look into potentially illegal acts by Clinton, Lynch, and former FBI director James Comey. After recusing himself from the Russiagate investigation, which he knows is pointless, and being “scolded” by Trump, Sessions is now a sympathetic, squeaky-clean figure; even Democrats have expressed support. He has far more latitude to pursue the investigations his boss wants him to pursue. Most of the ensuing criticism will be directed at Trump, which will bother Trump not at all (although there will undoubtedly be answering Twitter blasts).

Trump has quietly (when Trump does anything quietly, take note) made two sea changes in US policy in Syria. At the G20 summit, he negotiated a cease fire with Vladimir Putin for southwest Syria. Last week he ended a CIA program that armed Syrian jihadists fighting Bashar al-Assad’s regime. Both changes are anathema to the US Deep State, the mainstream media, and US allies Saudi Arabia, the Gulf States, Israel, and Turkey, yet other than “rote denunciation,” they have been surprisingly docile. The latter change could presage abandonment of a pillar of US foreign and military policy since President Carter supplied arms and other aid to the mujahideen in Afghanistan during their successful fight against the Soviet Union. The US may be out of the business of arming Islamic insurgents against regimes it seeks to change.

Another look, different from the last one.

• Jeff Sessions Endorses Theft (Ron Paul)

Attorney General Jeff Sessions recently ordered the Justice Department to increase the use of civil asset forfeiture, thus once again endorsing an unconstitutional, authoritarian, and increasingly unpopular policy. Civil asset forfeiture, which should be called civil asset theft, is the practice of seizing property believed to be involved in a crime. The government keeps the property even if it never convicts, or even charges, the owner of the property. Police can even use civil asset theft to steal from people whose property was used in criminal activity without the owners’ knowledge. Some have even lost their homes because a renter or houseguest was dealing drugs on the premises behind the owners’ backs. Civil asset theft is a multi-billion dollar a year moneymaker for all levels of government.

Police and prosecutors receive more than their “fair share” of the loot. According to a 2016 study by the Institute for Justice, 43 states allow police and prosecutors to keep at least half of the loot they got from civil asset theft. Obviously, this gives police an incentive to aggressively use civil asset theft, even against those who are not even tangentially involved in a crime. For example, police in Tenaha, Texas literally engaged in highway robbery — seizing cash and other items from innocent motorists — while police in Detroit once seized every car in an art institute’s parking lot. The official justification for that seizure was that the cars belonged to attendees at an event for which the institute had failed to get a liquor license. The Tenaha police are not the only ones targeting those carrying large sums of cash.

Anyone traveling with “too much” cash runs the risk of having it stolen by a police officer, since carrying large amounts of cash is treated as evidence of involvement in criminal activity. Civil asset theft also provides an easy way for the IRS to squeeze more money from the American taxpayer. As the growing federal debt increases the pressure to increase tax collections without raising tax rates, the IRS will likely ramp up its use of civil asset forfeiture. Growing opposition to the legalized theft called civil asset forfeiture has led 24 states to pass laws limiting its use. Sadly, but not surprisingly, Attorney General Jeff Sessions is out of step with this growing consensus. After all, Sessions is a cheerleader for the drug war, and civil asset theft came into common usage as a tool in the drug war. President Trump could do the American people a favor by naming a new attorney general who opposes police state policies like the drug war and police state tactics like civil asset theft.

“We’ll use every kind of duct tape and baling wire we can find to keep the current systems operating, and we have..”

• Just Wait a Little While (Jim Kunstler)

The authorities in this nation, including government, business, and academia, routinely lie about our national financial operations for a couple of reasons. One is that they know the situation is hopeless but the consequences are so awful to contemplate that resorting to accounting fraud and pretense is preferable to facing reality. Secondarily, they do it to protect their jobs and reputations — which they will lose anyway as collapse proceeds and their record of feckless dishonesty reveals itself naturally.

The underlying issue is the scale of human activity in our time. It has exceeded its limits and we have to tune back a lot of what we do. Anything organized at the giant scale is headed for failure, so it comes down to a choice between outright collapse or severe re-scaling, which you might think of as managed contraction. That goes for government programs, military adventures, corporate enterprise, education, transportation, health care, agriculture, urban design, basically everything.

There is an unfortunate human inclination to not reform, revise, or re-scale familiar activities. We’ll use every kind of duct tape and baling wire we can find to keep the current systems operating, and we have, but we’re close to the point where that sort of cob-job maintenance won’t work anymore, especially where money is concerned. Why this is so has been attributed to intrinsic human brain programming that supposedly evolved optimally for short-term planning. But obviously many people and institutions dedicate themselves to long-term thinking. So there must be a big emotional over-ride represented by the fear of letting go of what used to work that tends to disable long-term thinking.

It’s hard to accept that our set-up is about to stop working — especially something as marvelous as techno-industrial society. But that’s exactly what’s happening. If you want a chance at keeping on keeping on, you’ll have to get with reality’s program. Start by choosing a place to live that has some prospect of remaining civilized. This probably doesn’t include our big cities. But there are plenty of small cities and small towns out in America that are scaled for the resource realities of the future, waiting to be reinhabited and reactivated. A lot of these lie along the country’s inland waterways — the Ohio, Mississippi, Missouri river system, the Great Lakes, the Hudson and St. Lawrence corridors — and they also exist in regions of the country were food can be grown.

You’ll have to shift your energies into a trade or vocation that makes you useful to other people. This probably precludes jobs like developing phone apps, day-trading, and teaching gender studies. Think: carpentry, blacksmithing, basic medicine, mule-breeding, simplified small retail, and especially farming, along with the value-added activities entailed in farm production. The entire digital economy is going to fade away like a drug-induced hallucination, so beware the current narcissistic blandishments of computer technology. Keep in mind that being in this world actually entitles you to nothing. One way or another, you’ll have to earn everything worth having, including self-respect and your next meal. Now, just wait a little while.

Political power.

• Fossil Fuel Subsidies Are A Staggering $5 Trillion Per Year (G.)

Fossil fuels have two major problems that paint a dim picture for their future energy dominance. These problems are inter-related but still should be discussed separately. First, they cause climate change. We know that, we’ve known it for decades, and we know that continued use of fossil fuels will cause enormous worldwide economic and social consequences. Second, fossil fuels are expensive. Much of their costs are hidden, however, as subsidies. If people knew how large their subsidies were, there would be a backlash against them from so-called financial conservatives. A study was just published in the journal World Development that quantifies the amount of subsidies directed toward fossil fuels globally, and the results are shocking. The authors work at the IMF and are well-skilled to quantify the subsidies discussed in the paper.

Let’s give the final numbers and then back up to dig into the details. The subsidies were $4.9 tn in 2013 and they rose to $5.3 tn just two years later. According to the authors, these subsidies are important because first, they promote fossil fuel use which damages the environment. Second, these are fiscally costly. Third, the subsidies discourage investments in energy efficiency and renewable energy that compete with the subsidized fossil fuels. Finally, subsidies are very inefficient means to support low-income households. With these truths made plain, why haven’t subsidies been eliminated? The answer to that is a bit complicated. Part of the answer to this question is that people do not fully appreciate the costs of fossil fuels to the rest of us. Often we think of them as all gain with no pain.

So what is a subsidy anyway? Well, that too isn’t black and white. Typically, people on the street think of a subsidy as a direct financial cost that result in consumers paying a price that is below the opportunity cost of the product (fossil fuel in this case). However, as pointed out by the authors, a more correct view of the costs would encompass: “..not only supply costs but also (most importantly) environmental costs like global warming and deaths from air pollution and taxes applied to consumer goods in general.” The authors argue, persuasively, that this broader view of subsidies is the correct view because they “reflect the gap between consumer prices and economically efficient prices.”

Without getting too deep into the weeds, the authors discuss both consumer subsidies (when the price paid by a consumer is below a benchmark price) and producer subsidies (when producers receive direct or indirect support which increases their profitability). The authors then quantify what benefits would be achieved if the fossil fuel subsidies were reformed. Interested readers are directed to the paper for further details, but the results are what surprised me. Pre-tax (the narrow view of subsidies) subsidies amount to 0.7% of global GDP in 2011 and 2013. But the more appropriate definition of subsidies is much larger (8 times larger than the pre-tax subsidies). We are talking enormous values of 5.8% of global GDP in 2011, rising to 6.5% in 2013.

Just how simple it really is. If you can’t stop this, forget about it.

• Bernie Sanders Tells Big Pharma: Stop Making Americans Pay Twice

While both political parties have denounced the rising cost of prescription drugs, neither Democrats nor Republicans have done much to address the problem. But this summer, a new tool to restrict the rising prices of drugs developed with taxpayer dollars has been introduced by the two U.S. senators who don’t belong to either party. The mechanism works like this: Drug manufacturers who take federal money to develop drugs must keep their U.S. prices in line with the prices they charge in other economically advanced nations — typically much lower than drug prices in the U.S. The system would prevent pharmaceutical companies from effectively double-charging U.S. consumers by using their tax money for research and then charging them some of the steepest prices in the world at the pharmacy.

Pharmaceutical companies, who pour millions of dollars into both the Democratic and Republican parties, are against the idea, which is perhaps why the fix is being pushed by Bernie Sanders of Vermont and Angus King of Maine, the only independents in congress. The U.S. has the highest level of per capita pharmaceutical spending of any nation on Earth, according to the OECD. And while Americans spend more than any other country to buy their drugs, they also spend more than any other country to develop those same drugs. In June, King successfully added an amendment to the 2018 military spending bill (still working its way through congress) that would allow the Department of Defense to take away exclusive patents from drug companies that benefitted from DoD funding if their drug price in the U.S. rises above the median price in seven foreign countries with similar economies.

Then last week, Sanders introduced legislation that would tie the prices of drugs made with government funding to costs in other countries. Unlike King’s amendment, Sanders’ bill would expand the concept beyond the DoD. The bill requires companies taking federal funds to develop drugs to enter into “reasonable pricing” agreements with the Secretary of Health and Human Services. “Under this insane system, Americans pay twice. First we pay to create these lifesaving drugs, then we pay high prices to buy those drugs,” wrote Sanders in a New York Times op-ed. “Our government must stop being pushovers for the pharmaceutical industry and its 1,400 lobbyists.”

Soon to come: US soldiers parading in your streets. Will German and Estonian batallions appear in Kansas and Texas as well?

• Call For ‘Military Schengen’ To Get NATO Troops Moving (Pol.)

European leaders have made a priority of greater military cooperation, yet the ability of NATO forces to operate in Europe is still hindered by border restrictions and mismatched infrastructure, according to uniformed commanders and EU defense ministers. While NATO has made substantial progress in surmounting legal hurdles to cross-border operations, lingering bureaucratic requirements — such as passport checks at some border crossings and infrastructure problems, like roads and bridges that can’t accommodate large military vehicles — could slow or even cripple any allied response to an emerging threat, officials warned. To lift the roadblocks, and speed coordinated military action, the Dutch defense minister, Jeanine Hennis-Plasschaert, called on EU officials to create a so-called military Schengen zone.

The idea, loosely modeled on the open-border travel zone that has covered most of Europe since 1996, has also been a long-time goal of the senior United States Army commander in Europe, Lieutenant General Ben Hodges. “We must be able to move quickly to any place where there is a threat,” Hennis-Plasschaert said in a statement announcing her proposal at a meeting of NATO defense ministers in June. NATO leaders insist they have addressed the most problematic obstacles to cross-border operations, but nonetheless welcomed the Dutch proposal as a way to raise political pressure and create a sense of urgency around further improving the “interoperability” of allied countries. Officials say the obstacles are only apparent during peacetime exercises and planning, and that during a real military emergency, NATO’s supreme allied commander for Europe — based in Mons, Belgium — would simply warn allies and deploy as needed.

“Turkey, which has the second largest army in NATO after the United States..”

• Erdogan Says Turkey To Tackle – US-Supported – Kurds In Syria (R.)

Days after a reshuffle of Turkey’s top military commanders, President Tayyip Erdogan has revived warnings of military action against Kurdish fighters in Syria that could set back the U.S.-led battle against Islamic State. Kurdish militia are spearheading an assault against the hardline militants in their Syrian stronghold Raqqa, from where Islamic State has planned attacks around the world for the past three years. But U.S. backing for the Kurdish YPG fighters in Syria has infuriated Turkey, which views their growing battlefield strength as a security threat due to a decades-old insurgency by the Kurdish PKK within in its borders. There have been regular exchanges of rocket and artillery fire in recent weeks between Turkish forces and YPG fighters who control part of Syria’s northwestern border.

Turkey, which has the second largest army in NATO after the United States, reinforced that section of the border at the weekend with artillery and tanks and Erdogan said Turkey was ready to take action. “We will not leave the separatist organization in peace in both Iraq and Syria,” Erdogan said in a speech on Saturday in the eastern town of Malatya, referring to the YPG in Syria and PKK bases in Iraq. “We know that if we do not drain the swamp, we cannot get rid of flies.” The YPG denies Turkish allegations of links with Kurdish militants inside Turkey, saying it is only interested in self-rule in Syria and warning that any Turkish assault will draw its fighters away from the battle against Islamic State which they are waging in an alliance with local Arab forces.

Bend over. We have something for you.

• Greece Accepts Resettlement of Refugees from Germany (GR)

For the first time since 2011, Germany will again begin the resettlement of refugees to Greece under the EU Dublin Regulation. Migration Policy Minister Yiannis Mouzalas confirmed on German television that Greece will accept refugees who are currently in Germany and whose first entry into the EU was from Greece. The regulation applies to all refugees entering the EU since March 2017. The Dublin Regulation determines the EU Member State responsible to examine an application for asylum seekers seeking international protection. Usually, the responsible Member State will be the state through which the asylum seeker first entered the EU.

In an interview with the German TV to be aired on Monday evening, Mouzalas says: “A few days ago, we approved a small number of refugee returns related to the Dublin Regulation, by Germany and some other EU member states. Greek asylum authorities have undertaken the implementation of the procedure. “There was pressure from EU countries to start accepting resettlements. I understand that governments want to convince their citizens that they are doing something [about the refugee crisis]. That’s why I want to help them.” Deutsche Welle reports that according to the German Ministry of Interior, up to July 31, a total of 392 applications for resettlement were filed with the Greek authorities. The German ministry adds that “the specific dates for their return to Greece depends on the Greek authorities.”

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