May 102016
 
 May 10, 2016  Posted by at 7:07 am Finance Tagged with: , , , , , , , , , ,  1 Response »


Alfred Palmer Women as engine mechanics, Douglas Aircraft, Long Beach, CA 1942

The World’s Most Extreme Speculative Mania Unravels in China (BBG)
Iron Ore, Rebar Crash Into Bear Market (ZH)
A Debt Bust Looms For China (Economist)
The Cold, Hard Facts Raining on China’s Commodity Parade (BBG)
In Historic -150% Net Short, Carl Icahn Bets on Imminent Market Collapse (ZH)
Trump Says US Will Never Default Because It Prints the Money (WSJ)
Zombies-To-Be and the Walking Dead of Debt (Steve Keen)
The Recession’s Economic Trauma Has Left Enduring Scars (WSJ)
Japan Will Leave Banks to Carry Out Their Own Stress Tests (BBG)
Trumptopia (Jim Kunstler)
Rousseff Impeachment Vote Annulled, Throwing Brazil Legislature Into Chaos (G.)
85% Of Fort McMurray Has Been Saved, Says Alberta Premier (G.)
Growth Crisis Threatens European Social Fabric, Warns ECB VP (Tel.)
The Choice For Europe: Rescue Greece Or Create A Failed State (Paul Mason)
Official Analysis Suggests Tough Talks Over Greek Debt Relief (WSJ)
Refugees Freed From Detention Centers, Trapped In Limbo On Greek Islands (R.)

The comparison to the Tulip Craze sounds apt.

The World’s Most Extreme Speculative Mania Unravels in China (BBG)

From the Dutch tulip craze of 1637 to America’s dot-com bubble at the turn of the century, history is littered with speculative frenzies that ended badly for investors. But rarely has a mania escalated so rapidly, and spurred such fevered trading, as the great China commodities boom of 2016. Over the span of just two wild months, daily turnover on the nation’s futures markets has jumped by the equivalent of $183 billion, outpacing the headiest days of last year’s Chinese stock bubble and making volumes on the Nasdaq exchange in 2000 look tame. What started as a logical bet – that China’s economic stimulus and industrial reforms would lead to shortages of construction materials – quickly morphed into a full-blown commodities frenzy with little bearing on reality.

As the nation’s army of individual investors piled in, they traded enough cotton in a single day last month to make one pair of jeans for everyone on Earth and shuffled around enough soybeans for 56 billion servings of tofu. Now, as Chinese authorities introduce trading curbs to prevent surging commodities from fueling inflation and undermining plans to shut down inefficient producers, speculators are retreating as fast as they poured in. It’s the latest in a series of boom-bust market cycles that critics say are becoming more extreme as China’s policy makers flood the financial system with cash to stave off an economic hard landing. “You have far too much credit, money sloshing about, money looking for higher returns,” said Fraser Howie, the co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.”

“Even in commodities where you could have argued there is some reason for prices to rise, that gets quickly swamped by a nascent bull market and becomes an uncontrollable bubble.” In many ways, China’s financial landscape was ripe for another round of mania. New credit soared to a record in the first quarter, giving individuals and businesses plenty of cash to invest at a time when several of the country’s traditional sources of return looked unattractive. Government debt yields were hovering near record lows, while wealth-management products and company bonds had been rattled by a growing number of corporate defaults. Stocks were still too risky for many investors burned by last year’s crash, and moving money offshore had become harder as the government clamped down on capital outflows.

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Crazy stuff. And not done yet.

Iron Ore, Rebar Crash Into Bear Market (ZH)

Real demand for steel in China dropped at least 7% in April from the year before, according to Citigroup’s Tracy Liao estimates, so it should not be a total surprise that the frenzied speculative buying in Iron Ore, Rebar, and various other industrial metals in China has crashed back to reality as volumes plunge, dragging The Baltic Dry Freight Index with it as yet another government-manipulated 'signal' collapses into a miasma of malinvestment and unintended consequences. As The Wall Street Journal reports, to the extent that China’s industrial recovery explains why iron ore and steel prices have jumped this year, China’s latest trade data served as a reminder of how brittle this reason is.

China’s steel net exports rose 8.8% in April from a year before and 9.4% between January and April from a year ago. That raises the question: Why are mills exporting more steel when Shanghai front-month futures prices for rebar steel rocketed 48% between January and April, and signaled a potential rise in demand? [..]Real demand for steel in China dropped at least 7% in April from the year before, Citigroup’s Tracy Liao estimates, based on changes in exports and inventories. The drop was at least 5% between January and April from the year before.

That reinforces fears that easy money-fueled speculation is the prime mover of steel and iron ore prices today. That "Churn" is over…

 

Chinese futures prices in both commodities fell sharply again Monday.

 

With Iron Ore now down 22% from the meltup highs, entering a bear market…

 

And Steel Rebar down 25%, extending losses in the US session…

 

And The Baltic Dry Index now down 7 days in a row, down 14% from its "everything is fine in China" highs from 715 to 616 today…

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Even the Economist is waking up to what we’ve been saying for ages…

A Debt Bust Looms For China (Economist)

China was right to turn on the credit taps to prop up growth after the global financial crisis. It was wrong not to turn them off again. The country’s debt has increased just as quickly over the past two years as in the two years after the 2008 crunch. Its debt-to-GDP ratio has soared from 150% to nearly 260% over a decade, the kind of surge that is usually followed by a financial bust or an abrupt slowdown. China will not be an exception to that rule. Problem loans have doubled in two years and, officially, are already 5.5% of banks’ total lending. The reality is grimmer. Roughly two-fifths of new debt is swallowed by interest on existing loans; in 2014, 16% of the 1,000 biggest Chinese firms owed more in interest than they earned before tax. China requires more and more credit to generate less and less growth: it now takes nearly four yuan of new borrowing to generate one yuan of additional GDP, up from just over one yuan of credit before the financial crisis.

With the government’s connivance, debt levels can probably keep climbing for a while, perhaps even for a few more years. But not for ever. When the debt cycle turns, both asset prices and the real economy will be in for a shock. That won’t be fun for anyone. It is true that China has been fastidious in capping its external liabilities (it is a net creditor). Its dangers are home-made. But the damage from a big Chinese credit blow-up would still be immense. China is the world’s second-biggest economy; its banking sector is the biggest, with assets equivalent to 40% of global GDP. Its stockmarkets, even after last year’s crash, are together worth $6 trillion, second only to America’s. And its bond market, at $7.5 trillion, is the world’s third-biggest and growing fast. A mere 2% devaluation of the yuan last summer sent global stockmarkets crashing; a bigger bust would do far worse.

A mild economic slowdown caused trouble for commodity exporters around the world; a hard landing would be painful for all those who benefit from Chinese demand. Optimists have drawn comfort from two ideas. First, over three-plus decades of reform, China’s officials have consistently shown that once they identified problems, they had the will and skill to fix them. Second, control of the financial system—the state owns the major banks and most of their biggest debtors—gave them time to clean things up. Both these sources of comfort are fading away. This is a government not so much guiding events as struggling to keep up with them. In the past year alone, China has spent nearly $200 billion to prop up the stockmarket; $65 billion of bank loans have gone bad; financial frauds have cost investors at least $20 billion; and $600 billion of capital has left the country.

To help pump up growth, officials have inflated a property bubble. Debt is still expanding twice as fast as the economy. At the same time, the government’s grip on finance is slipping. Despite repeated efforts to restrain them, loosely regulated forms of lending are growing quickly: such “shadow assets” have increased by more than 30% annually over the past three years. In theory, shadow banks diversify sources of credit and spread risk away from the regular banks. In practice, the lines between the shadow and formal banking systems are badly blurred.

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Encourage speculation, then crack down on it. Credibility?!

The Cold, Hard Facts Raining on China’s Commodity Parade (BBG)

There’s nothing like facts to get in the way of a good yarn. Prices of everything from steel rebar to cotton are extending losses in China as a slew of bearish data hastens the reversal of a rally last month triggered by speculation that economic stimulus and industrial reforms would drive up demand and curb supplies. Steel futures in Shanghai fell the most since trading began in 2009 after inventories rose while iron ore in Dalian sank as much as 7.1%, extending its retreat from a 13-month high, after data showed Chinese port stockpiles expanded to the highest level in more than a year. Cotton on the Zhengzhou Commodity Exchange, which had surged to an 11-month high, slid 1.5% after China unloaded supply from its reserves. Copper lost 2.1% after the nation’s imports shrank from a record.

“Investors are looking at fundamentals more closely now,” Zhang Yu, a senior analyst with Yongan Futures, said by phone from Hangzhou. “While inventories were built up with the price surges, recent data couldn’t convince people that China’s real economy is bottoming and going to bring demand back.” The rally last month was accompanied by a surge in trading volumes, with as much as 1.7 trillion yuan ($261 billion) in commodity futures changing hands in a single day. That drew comparisons with 2015’s credit-driven stock market rally that preceded a $5 trillion rout, and prompted exchanges to raised transaction fees and margins amid orders from regulators to limit speculation.

As the exchanges stepped in, trading volumes shrank. About 20 million contracts of everything from eggs to steel changed hands on the Dalian Commodity Exchange, Zhengzhou Commodity Exchange and Shanghai Futures Exchange on Friday, down from a peak of 80.6 million contracts on April 22. “Bullish enthusiasm in Chinese commodities futures has been rapidly declining, especially after the exchanges pushed out massive measures to curb speculative trading,” Yu said.

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Where the smart money sits…

In Historic -150% Net Short, Carl Icahn Bets on Imminent Market Collapse (ZH)

Over the past year, based on his increasingly more dour media appearances, billionaire Carl Icahn had been getting progressively more bearish. At first, he was mostly pessimistic about junk bonds, saying last May that “what’s even more dangerous than the actual stock market is the high yield market.” As the year progressed his pessimism become more acute and in December he said that the “meltdown in high yield is just beginning.” It culminated in February when he said on CNBC that a “day of reckoning is coming.” Some skeptics thought that Icahn was simply trying to scare investors into selling so he could load up on risk assets at cheaper prices, however that line of thought was quickly squashed two weeks ago when Icahn announced to the shock of ever Apple fanboy that several years after his “no brainer” investment in AAPL, Icahn had officially liquidated his entire stake.

As it turns out, Icahn’s AAPL liquidation was just the appetizer of how truly bearish the legendary investor has become. [..] In the just disclosed 10-Q of Icahn’s investment vehicle, Icahn Enterprises LP in which the 80 year old holds a 90% stake, we find that as of March 31, Carl Icahn – who subsequently divested his entire long AAPL exposure – has been truly putting money, on the short side, where his mouth was in the past quarter. So much so that what on December 31, 2015 was a modest 25% net short, has since exploded into a gargantuan, and unprecedented for Icahn, 149% net short position.

[..] starting in Q3 and Q4, Icahn proceeded to wage into net short territory, with roughly -25% exposure, a number that has increased a record six-fold in just the last quarter! What is just as notable is the dramatic leverage involved on both sides of the flatline, but nothing compares to the near 3x equity leverage on the short side (this is not CDS). As a reminder, Icahn Enterprises used to be run as a hedge fund with outside investors, but Icahn returned outside money in 2011, leaving IEP and Icahn as the two dominant investors. According to Barron’s, the entire fund appears to be about $5.8 billion, with $4 billion coming from Icahn personally. Which means that this is a very substantial bet in dollar terms.

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There’s no bigger pleasure -and confirmation- than have Krugman criticize you.

Trump Says US Will Never Default Because It Prints the Money (WSJ)

Donald Trump fired back at critics Monday over what he claimed was a misrepresentation of his comments on debt of the U.S. government, saying he never advocated the U.S. default on its debt. “First of all, you never have to default because you print the money,” Mr. Trump said in a telephone interview with CNN that was reported on by Politico. In an interview with Fox Business’s Maria Bartiromo, Mr. Trump said that he had proposed that the U.S. government could buy back its own debt at a discount if interest rates rise. The price of earlier issued bonds often fall when interest rates rise. “Certainly I’m not talking about renegotiating with creditors,” Mr. Trump said. Mr. Trump was responding to a New York Times article that ran on Friday that examined a CNBC interview on the prior day.

The article stated that Mr. Trump said he “might reduce the national debt by persuading creditors to accept something less than full payment.” “I would borrow, knowing that if the economy crashed, you could make a deal,” Mr. Trump said in the CNBC interview. “And if the economy was good, it was good. So therefore, you can’t lose.” This provoked alarm from commentators who interpreted it as Mr. Trump saying he would attempt to force Treasury holders to accept less than payment in full. “The reaction from everyone who knows anything about finance or economics was a mix of amazed horror and horrified amazement,” New York Times columnist Paul Krugman wrote.

The market in U.S. Treasuries, which are considered to be among the safest assets in the world, appeared to brush off the report of Mr. Trump’s remarks. Yields on 10-year Treasuries were slightly lower Monday than they were a week earlier. “All I said was that if interest rates goes up, we’ll have a chance to buy back bonds, which is standard,” Mr. Trump said. Mr. Trump’s remarks Monday echo a point made by former Federal Reserve chairman Alan Greenspan a few years ago. “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default,” Mr. Greenspan said.

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Anything Steve is a must.

Zombies-To-Be and the Walking Dead of Debt (Steve Keen)

Using the dynamics of credit –which most other economists ignore– I explain why Japan, the USA and UK are among the “Walking Dead of Debt” and why China, Canada, Australia and South Korea are on their way to joining the Debt Zombies. This presentation is based on work I’m doing for a new 25000 word book for Polity Press entitled “Can we avoid another financial crisis?”, which should be published later this year.

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What official numbers seek to hide away. But we all know anyway.

The Recession’s Economic Trauma Has Left Enduring Scars (WSJ)

About one in six U.S. workers became unemployed during the recession years of 2007, 2008 and 2009. Today, nearly 14 million people are still searching for a job or stuck in part-time jobs because they can’t find full-time work. Even for the millions of Americans back at work, the effects of losing a job will linger, the research suggests. They will earn less for years to come. They will be less likely to own a home. Many will struggle with psychological problems. Their children will perform worse in school and may earn less in their own jobs. “The average effects are severe and very long lasting,” said Jennie Brand, a sociologist at University of California, Los Angeles. “There’s no quick recovery.”

U.S. economic output remains stubbornly below its potential level, as estimated by the Congressional Budget Office. And many people probably won’t be back on their feet by the time the next recession arrives. J.P. Morgan Chase & Co. economists recently predicted a new recession was more likely than not within three years. Anger about stagnant wages, among other things, has helped fuel the presidential runs of Donald Trump and Bernie Sanders. When the John J. Heldrich Center for Workforce Development at Rutgers University surveyed Americans after the recession about the causes of high unemployment, their top responses were cheap foreign labor, illegal immigrants and Wall Street bankers.

Labor Department data show 40 million layoffs and other involuntary discharges during the recession that began in December 2007 and ended in June 2009. The official unemployment rate peaked at 10%. Princeton University economist Henry Farber calculated that the rate of job loss from 2007 through 2009 was 16%. As in previous recessions, millions of Americans faced a phenomenon economists sometimes call wage scarring. People who lose a job, even during economic expansions, usually earn less money when they re-enter the workplace. They are out of work for a time and often take a pay cut as the price of returning to work at a new employer or even in a new career.

This time, the damage was exacerbated by the job market’s painfully slow recovery. Extended or repeated spells of unemployment mean more severe earnings losses, and recent years have seen an unusually large number of job seekers out of work for more than six months or stuck in part-time positions. “They had a much harder time finding a job, and in particular a full-time job, which immediately turns into an earnings decline,” Mr. Farber said.

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Better at making things up than the government.

Japan Will Leave Banks to Carry Out Their Own Stress Tests (BBG)

Japan’s financial regulator is stepping up oversight of its biggest banks while stopping well short of imposing the type of intrusive stress tests that have been adopted in the U.S. and Europe. Unlike the Federal Reserve and the Bank of England, which conduct annual examinations of the large banks they supervise, Japan’s Financial Services Agency has no plans to impose its own stress tests on the country’s lenders. Instead, it is looking for ways to verify the banks’ own reviews. “We’re considering if we can come up with a stress test-like setup,” Toshihide Endo, the director-general of the FSA’s supervisory bureau, said in an interview last month. “We don’t plan to impose external tests.”

Japan’s regulator has already signaled a different approach than overseas peers in the way it oversees the country’s banks, with FSA Commissioner Nobuchika Mori condemning a supervisory approach to bankers where the “sentiment of trust seems to have become a thing of the past.” Mitsubishi UFJ Financial Group Inc.’s President Nobuyuki Hirano cautioned global regulators against restricting the use of banks’ own methods for gauging operational risk, questioning the need for authorities to impose a standardized regime when they’re able to review internal models. Japanese taxpayers didn’t have to bail out lenders during the global financial crisis as the nation’s banks escaped the scale of losses incurred by overseas financial institutions.

The regulator may analyze big banks with international operations to see if they’re adequately reflecting risks such as oil price movements and the economic performance of emerging nations in their own stress tests, according to Endo. The FSA may start scrutinizing the stress tests of banks from as early as the second half of this year, he said. MUFG, Japan’s largest lender by market value, runs a number of stress tests on its balance sheet using different scenarios that include measures of interest and exchange rates, stock-market movements and economic growth, according to an e-mailed reply from spokesman Kazunobu Takahara. The impact from the different tests on the bank’s assets and profitability are then estimated, he said.

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Where does the economy meet politics? Does anybody know?

Trumptopia (Jim Kunstler)

For years, it was easy to see the political storm clouds gather over Europe with its fractious coalitions and its ancient babble of conflicts. Marine Le Pen’s Daddy, severe old Jean-Marie, was on the scene in France decades before Donald Trump ascended to glory on the noxious clouds of America’s crapified culture, attended by heavenly hosts of Kardashian angels and the cherub Honey BooBoo. For all the strains in recent American life, the two-party system had seemed as solid as the granite towers of the Brooklyn Bridge. Not even the estimable Teddy Roosevelt could blow up the system when he tried in 1912 — though his Progressive (“Bull Moose”) Party carried California, Pennsylvania, and Minnesota, and he far out-polled the incumbent Republican President Taft, who garnered a measly 8 electoral votes (Democrat Woodrow Wilson won).

Ross Perot made an impact in 1992 — he certainly had a good point about NAFTA and “the giant sucking sound” of jobs draining out of the USA. But his popinjay manner didn’t go over so well, and at the critical moment in the general election he lost his nerve and withdrew, only to foolishly re-enter weeks later. Then there was the Ralph Nader in 2000, whose egoistic crusade arguably put George W. Bush in the White House. Since then, the country see-sawed between the long tenures of two Deep State errand boys from each major party, putting both parties in such a bad odor that Trump now rises on their mephitic fumes. Which raises the question, of course: what exactly is this Deep State? Answer: A leviathan of symbiotic rackets producing maximum incompetence affecting adversely the majority of citizens.

It’s a blood-sucking beast of a hundred-thousand heads draining the USA of its dwindling vitality, lying about its intentions while it advertises the pietistic certainties of the Left and superstitious shibboleths of the Right, leaving a smoking hole in the middle where the practical problems of everyday life used to be worked out by practical means. The Deep State is also the sum of unintended consequences and diminishing returns of a late-stage, bureaucratic, techno-industrial economy cannibalizing itself to stay alive. One obvious conclusion is that this economy has got to change before there is nothing left to eat, and no political figure on the scene, including Trump and Bernie Sanders, has a plausible vision of where this takes us.

Both really just assume that the engine keeps chugging down the track of ever more material wealth that can be distributed differently. The truth is, there will be a lot less material wealth of the kind we’re used to, and a lot less capital representation in the things we call “money.” In fact, the scene at hand today is just a spectacle of the shrewdest and biggest rodents scarfing up the table-scraps of a 200-year-long banquet.

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“..a twist that would stretch the credibility of a House of Cards plot..”

Rousseff Impeachment Vote Annulled, Throwing Brazil Legislature Into Chaos (G.)

Brazil’s new lower house speaker has annulled last month’s impeachment vote against Dilma Rousseff in a twist that would stretch the credibility of a House of Cards plot. The surprise move, which comes just days before the upper house was due to consider the motion, throws the legislature into chaos and could provide a lifeline to the embattled president. Waldir Maranhao, who took over as acting speaker last week, said a new congressional vote would be needed as a result of procedural flaws in the previous session. Maranhao is no friend of the government, prompting speculation that he may be acting on behalf of his predecessor, Eduardo Cunha, who was removed from his post by the supreme court on the grounds that he was interfering in a corruption investigation into his alleged kickbacks from the state-run oil company, Petrobras.

For the moment, however, uncertainty reigns. After last month’s lower house vote, the impeachment process was passed to the senate, where a committee recommended on Friday that the leftist president be put on trial by the full chamber for breaking budget laws. In a news release, Maranhao said the impeachment process should be returned by the senate so that the lower house can vote again. It remained unclear whether his decision could be overruled by the supreme court, the senate or a majority in the house. Brazilian markets fell sharply after the surprising decision was announced. Rousseff, who denies wrongdoing, has been fighting for her political survival for several months as opposition congressmen have pushed aggressively for her ouster.

The full senate had been expected to vote to put Rousseff on trial Wednesday, which would immediately suspend her for the duration of a trial that could last six months. During that period the vice-president, Michel Temer, would replace her as acting president. With appeals and counter-appeals still possible, Rousseff gave a cautious response to the news. “It’s not official. I don’t know the consequences. We should be cautious,” she said, but repeated her determination to keep fighting.

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Had the impression it was worse.

85% Of Fort McMurray Has Been Saved, Says Alberta Premier (G.)

Overwhelming and heart-breaking was how Rachel Notley, the Alberta premier, described the destruction left behind in the wake of a wildfire that continues to rage out of control in northern Alberta. “I was very much struck by the power of the devastation of the fire,” Notley said after touring the city of Fort McMurray on Monday. “It was really quite overwhelming in some spots.” Last week more than 88,000 residents frantically evacuated the oilsands city after shifting winds brought a nearby forest fire to the city’s doorstep. The fire swept through the city in a seemingly random path, leaving behind piles of rubble and twisted metal, burned-out pick-up trucks and charred swing sets in some neighbourhoods. In others, homes sat untouched, their green lawns sharply contrasting with the grey of the city’s worst-hit areas.

Some 2,400 homes and buildings were destroyed or damaged by the fire, said Notley. For the tens of thousands of residents now scattered across the province, many of them wondering whether they have a home to return to, Notley had good news. Some 85% of the city – around 25,000 structures – had been saved. “The city was surrounded by an ocean of fire only a few days ago,” said Notley. “But Fort McMurray and the surrounding community have been saved and it will be rebuilt.” But she cautioned: “That of course doesn’t mean that there aren’t going to be some really heartbreaking images for some people to see when they come back.” The fire has not completely released its grip on the city, said Notley. “There are smouldering hotspots everywhere. Active fire suppression is continuing.”

The wildfire continues to grow in the region, albeit at a much slower pace. By Monday it had swelled to 204,000 hectares – an area more than 22 times the size of Manhattan – but winds were pushing it east, away from communities. It now sits some 25km from the neighbouring province of Saskatchewan. Cooler weather helped crews continue to keep the fire at bay, away from Fort McMurray, Anzac and the Suncor Energy oilsands facility. Currently more than 700 firefighters are battling against the blaze, with another 300 expected to arrive in the area shortly. “This fire is burning out of control out there, it still is, but we are holding the line where we need to, at least for today,” said Notley.

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People like this are so utterly clueless it’s frightening.

Growth Crisis Threatens European Social Fabric, Warns ECB VP (Tel.)

The fragile global recovery could be derailed unless governments step up efforts to support growth and strengthen the European banking system, two central bankers have warned. Vítor Constâncio, vice president of the ECB, said policy inaction combined with declining productivity and weak demographics could lead to a dangerous spiral of lower growth, higher debt and reduced job prospects. This could create unrest in countries already blighted by sky-high unemployment, he warned. The world also faced the prospect of permanently lower growth, Mr Constâncio told an audience at a City Week conference in London. If this materialised, this could result in weaker spending by households and businesses. “There would also very likely be societal implications, as lower economic growth would not be able to create enough jobs for citizens and may exacerbate income inequality,” he said.

Mr Constâncio described the eurozone recovery as “continued” and “moderate”, but said it remained “subject to fragilities”. “While I expect the recovery in the global economy to gather momentum as the headwinds eventually dissipate, there are many factors which could potentially derail it,” he said. Mr Constâncio stressed that the ECB’s massive stimulus package was working, adding that policymakers would “allow some time for the package of measures adopted in March” – including interest rate cuts and an increase in its monthly asset purchases to €80bn, from €60bn – to take effect. But the central banker said government fiscal stimulus and action to boost productivity and “complete Europe’s banking and markets union” would also be needed to boost growth.

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All good and well, but there are strong forces in Brussels and beyond that deliberately seek to create a failed state. And they’re at least half way there.

The Choice For Europe: Rescue Greece Or Create A Failed State (Paul Mason)

Between now and mid-June the European political elite must give its answer to an existential question. Will it honour the deal it made to rescue Greece last July; or will it push the radical left government into default – effectively creating a failed state in Europe? That this is primarily Europe’s dilemma, not Greece’s or the IMF’s, is clear after Monday’s Eurogroup. The IMF boss, Christine Lagarde, warned the Europeans that the fund will not participate in further bailouts without a substantial debt write-off. In turn, the Greek prime minister, Alexis Tsipras, forced through the last of the main austerity measures demanded by creditors: reforms to the pension system that will leave worse off everyone who is receiving more than €1,000 a month, and demand much higher contributions from workers in future.

However, by delaying their approval until now, the lenders have managed, once again, to push Greece towards bankruptcy. Although growth is better than predicted, tax receipts are still dire and bailout disbursements suspended. Worse, and more insidious, the months of callous inaction have pushed the mood in Greek society into a dangerous place. A population that, two years ago, started demanding and giving printed receipts as an act of collective moral renewal, has given up on them once again. The most popular graffiti tag has become “all this political shit”. The only thing that can end the crisis is debt restructuring. One way or another, Europe’s creditors – the taxpayers of Germany, France, the Netherlands etc – have to lose money.

It may be dressed up by extending repayment dates; or it may take the form of the “haircut”, whereby the treasuries of northern Europe – and the ECB – write down the value of the €350bn they have lent Greece. But it has to happen. And that means Germany’s politicians must change their minds. The old problem in Europe was a transnational freemarket economy with no democratic government; a central bank obliged by treaty to impose deflation; and a Germany willing to take the upside of the project – 4% unemployment versus 25% in Greece – but never to lead it. The new problem is different: when the EU overturned the will of the Greek people last year July, it became, effectively, a political entity based on force, not law.

Those applying the force were the German elite and a collection of east European countries who have in common weak democratic traditions, mafia-infested economies and rightwing electorates still traumatised by the Soviet era. Then, in a second act of force, by overturning the Dublin Treaty and letting nearly a million refugees come to Germany, Angela Merkel destroyed the coalition that had imposed the defeat on Greece. Eastern Europe has defied Merkel’s call for refugee quotas and answered her appeal for humanitarianism by putting razor wire at every border choke-point. So, now it’s no longer about austerity: there is a three-way battle for the soul of Europe; between a beleaguered centre that’s seeing its consent to govern drain away; a resurgent nationalist and racist right; and a modernised radical left. The Greek request for debt relief poses to the European centre the question: which side are you on?

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No, it’s true. A team of highly overly paid EU economists has issued a report that ‘analyzes’ (note the first 4 letters) among other things what Greek debt could be 44 years from now. Your challenge: to name something even more useless than that. Hint: paint does dry at some point….

Official Analysis Suggests Tough Talks Over Greek Debt Relief (WSJ)

Greece’s debt may rise to as much as 258.3% of GDP by 2060 or fall to as low as 62.6% of GDP, according to an official analysis of the country’s debt trajectory that heralds tough talks ahead on potential measures to ease Athens’ payment burden. The so-called debt sustainability analysis, or DSA, was drawn up by Greece’s European creditors and has been seen by The Wall Street Journal. The wide divergences in the debt predictions are due to different forecasts on how much Greece’s economy will grow in the coming decades and how much money it can put aside to pay down debt. Under all but the most optimistic scenarios, the document points to serious concerns over Greece’s ability to repay its debt, which stood at 176.9% of GDP at the end of last year.

The results of “this analysis point to serious concerns regarding the sustainability of Greece’s public debt in the long term,” the document says. The document was distributed to officials from eurozone finance ministries Monday morning and will form the basis for a first discussion on possible debt relief among the bloc’s finance ministers Monday afternoon. To reach a deal, the ministers will also have to bring on board the IMF, one of Greece’s biggest creditors. The IMF has consistently had more pessimistic forecasts for Greece’s debt ratio and demanded far-reaching measures to cut the country’s payment burden. Here it has clashed with Germany, which has opposed further debt relief.

“Today we will only have a first discussion on what, when, if and how the debt sustainability or debt relief measures could take place,” said Jeroen Dijsselbloem, the Dutch finance minister who presides over the group of ministers, on his way into Monday’s meeting. The debt sustainability analysis looks at four different scenarios for Greece’s economy and assesses how the country’s debt-to-GDP ratio will fare in each case for the decades up to 2060. The analysis shows that Greece’s debt could fall to as low 62.6% of GDP—almost in line with the currency union’s budget rules—in the most favorable scenario. But under the most pessimistic scenario, debt could rise to 258.3% of GDP by the end of 2060. Under the baseline scenario, which assumes that Greece will fully implement the terms of its bailout program, its debt will peak at 182.9% of GDP in 2016 and fall to 104.9% of GDP by 2060.

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Curiously blind how NGOs blame Greece for conditions, while it’s being squeezed dry by the Troika. As if when you work for Amnesty -and get paid for it-, you can’t figure out that Greece can’t even take care of Greeks.

Refugees Freed From Detention Centers, Trapped In Limbo On Greek Islands (R.)

Migrants and refugees are being freed from detention centres in Greece but remain trapped on its islands until their asylum requests are processed, exposing them to dire living conditions and even the risk of people smugglers, human rights groups say. At least 1,100 people have been released from centres on three islands and more will follow as their 25-day detention limit expires, police officials said. They are forbidden from travelling to the mainland, where most state-run shelters are. Some 8,000 people, many escaping the Syrian war, have arrived on boats from Turkey since March and are held under a European Union deal with Ankara designed to seal off the main route into Europe for over a million people since 2015.

Under the deal, those who do not seek asylum in Greece – and those who are rejected – will be sent back to Turkey. Asylum applications are piling up and rulings can take weeks. The United Nations refugee agency UNHCR said it was supporting government efforts to create new spaces. “All parties are working very hard to meet the needs of the human beings present on Greek islands,” said Chris Boian, a spokesman in Greece. Asked if those stranded on the islands were vulnerable to human traffickers offering to take them to the mainland, Boian said: “The risk does exist and that is the one reason UNHCR advocates full access to asylum and expansion of the asylum service and alternative legal entry channels (to Europe).”

Human rights groups said the government was not doing enough to provide asylum seekers with shelter and medical care while they wait. On Lesbos, many head to an open, municipality-run site. Those who can afford it check into hotels. Others sleep in the open. “Every country that asks people to wait in a certain place has to provide them with basic facilities. That’s not done by Greece,” said Amnesty International’s deputy Europe director, Gauri van Gulik. “It’s either – you’re in prison, or you can sleep rough on an island..”. A government spokesman, Giorgos Kyritis, said the government was doing its best to support refugees and migrants in Greece at the open reception centres, nearly all of which are on the mainland. “The government cannot afford to support these people financially on an individual basis. It’s doing whatever it can to support them in the context of its limited capabilities,” he said.

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Apr 222016
 
 April 22, 2016  Posted by at 9:31 am Finance Tagged with: , , , , , , , , , , ,  5 Responses »


Harris&Ewing Less taxes, more jobs, US Chamber of Commerce campaign 1939

US Middle Class Flees The Stock Market (ZH)
China Markets Send Ominous Signals as Global Stocks Rally (BBG)
China Seizes Biggest Share Of Global Exports In Almost 50 Years (R.)
China Risks Global ‘Steel War’ As Tempers Flare (AEP)
Yen Falls By Most In 7 Weeks As BOJ Considers Negative-Rate Loans (BBG)
Draghi Defies German Disfavor With Claim ECB Stimulus Works (BBG)
Pension Cuts Loom For Millions of Dutch As Big Funds Struggle (DN)
Eurozone Mess Can’t Be Fixed; It Can Only Be ‘Muddled Through’ (MW)
US Regulators Line Up to Consider New Executive Compensation Proposal (WSJ)
How Goldman Sachs’ Vampire Squid Became A Flattened Slug (Tett)
Greek Talks With Lenders Fraught As Fears Grow Of Default (G.)
The Real Reason Dilma Rousseff’s Enemies Want Her Impeached (Miranda)
All Diesel Cars’ Emissions Far Higher On Road Than In Lab (G.)
Mitsubishi Scandal Deepens After US Demands Test Data (G.)
Why UK Landed Gentry Are So Desperate To Stay In The EU (G.)
Angela Merkel Faces Balancing Act On Visit To Turkey (G.)

“..no matter how hard the Fed works to prop and boost the market, nearly half of Americans no longer have any faith left in what has become clear to most is just a tool to push some crooked, crony-capitalist policy, but mostly to make the richest even richer.”

US Middle Class Flees The Stock Market (ZH)

Three recurring laments heard in the corridors of the Marriner Eccles building are why, with stocks at record highs after levitating in more or less a straight line for the past 7 years, i) has the economic recovery not been stronger, ii) has inflation not been higher, and iii) have consumer spending and sentiment never really recovered. A just released Gallup survey may have the answer. According to a poll of over 1,000 American adults, even with the Dow Jones industrial average near its record high, only slightly more than half of Americans (52%) say they currently have money in the stock market, matching the lowest ownership rate in Gallup’s 19-year trend.

The current figure is down slightly from 2014 and 2015, and continues a secular decline that started in 2007. But most troubling is that the generation which is expected to take over the stock ownership reins when the Baby Boomers start selling their equity holders, middle-class adults, especially those younger than 35, are the least likely to invest. As Gallup notes, “although Americans in all income groups are less likely to have stock investments now than before the Great Recession, middle-class Americans have been the most likely to flee the market” Gallup’s conclusion: “Fewer Americans – particularly those in middle-income families – are benefiting from the recent gains in stock values than would have been the case a decade ago.”

Which is the worst possible news for Janet Yellen, because no matter how hard the Fed works to prop and boost the market, nearly half of Americans no longer have any faith left in what has become clear to most is just a tool to push some crooked, crony-capitalist policy, but mostly to make the richest even richer.

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Wobbly.

China Markets Send Ominous Signals as Global Stocks Rally (BBG)

As equities climb around the world, Chinese traders aren’t celebrating. The Shanghai Composite Index has fallen 4.6% this week, the worst performance among 93 global benchmark gauges tracked by Bloomberg and the steepest decline since January. It’s not just the stock market. The yuan is trading around its lowest level against a basket of currencies since November 2014, while yields on corporate debt have risen for 10 of the past 12 days. Concern is mounting over rising credit defaults, while traders are also paring bets for more stimulus amid signs of stabilizing growth, according to Dai Ming at Hengsheng in Shanghai. A sudden 4.5% plunge by the benchmark equity gauge on Wednesday revived memories of January’s stomach-churning turmoil, when shares sank 23% over the course of the month. “People are still very skeptical, and with good reason,” said Hao Hong at Bocom International in Hong Kong.

International concern about the health of China’s economy has been fading from view as data showed an improving picture and volatility in its stock and currency markets waned. Wednesday’s equity tumble in Shanghai caused barely a ripple among global shares as international traders focused on surging commodity prices – spurred partly by expectations of higher Chinese demand. Questions are being asked about how long the Communist Party can keep pumping money into the economy to prop up growth. New credit topped $1 trillion in the first quarter, helping GDP to expand 6.7% – still the slowest pace in seven years. Much of that money flowed into the property market, spurring concerns of a bubble. “There’s still a lot of doubt over the sustainability of the turnaround in the Chinese macro numbers,” said Adrian Zuercher UBS’s wealth management unit. “It’s a very stimulus-driven rebound that we now see.”

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“..the highest share any country has enjoyed since the United States in 1968.”

China Seizes Biggest Share Of Global Exports In Almost 50 Years (R.)

Chinese exporters have found a silver lining in weak global demand by seizing market share from their competitors – good news for China but an expansion that is aggravating trade tensions. China’s proportion of global exports rose to 13.8% last year from 12.3% in 2014, data from the United Nations Conference on Trade and Employment shows, the highest share any country has enjoyed since the United States in 1968. The success belies widespread predictions rising costs for Chinese labor and a currency that has increased nearly 20% against the dollar in the last decade would cause China to lose market share to cheaper competitors. Instead, China’s manufacturing infrastructure built during the country’s industrial rise of recent decades is keeping exports humming and providing the basis for firms to produce higher-value products.

“China cannot be replaced,” said Fredrik Guitman, formerly China general manager for a Danish maker of silver products, adding that reliable delivery times were more important than price. “If they say 45 days, it will be 45 days.” Still, even as Chinese firms compete in more sophisticated product lines, they are unloading overstocked inventory from entrenched industrial overcapacity in sectors like steel, an irritant in global trading relationships. The United States and seven other countries this week called for urgent action to address a steel supply glut that many blame on China. At the same time, China’s imports from other countries fell sharply – down over 14% in 2015 – leading some economists to suggest China was deploying an “import substitution” strategy that is pushing foreign brands out of its domestic markets.

On Wednesday, Beijing rolled out fresh measures to support machinery exports, including tax rebates, and encouraged banks to lend more to exporters. Machinery and mechanical appliances make up the biggest portion of China’s exports. Such policies may not be welcomed in the United States, where Republican presidential hopeful Donald Trump has called for 45% tariffs on Chinese imports – a message that appears to resonate with American voters. The risk is that the Chinese firms successfully moving up the value chain will see their overseas profits destroyed by a trade war if Trump’s ideas find place in policy.

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Risk it? War is on.

China Risks Global ‘Steel War’ As Tempers Flare (AEP)

China is on a collision course with the world’s leading powers over excess steel output after it refused to sign up to an emergency global plan to cut capacity and eliminate subsidies. The clash comes as fresh data confirms fears that China is still cranking up production and even reopening shuttered plants supposedly due for closure, despite the massive glut on the world market. Chinese mills produced a record 70.65m tonnes in March, 51pc of global output and five times as much as the whole EU. “Just words from China are no longer good enough. It is now clear to everybody that the Chinese have no intention at all of changing the structure of their steel industry,” said Axel Eggert, head of the European steel federation Eurofer. “They refused even to accept basic principles. They don’t recognise the problem, and they are not looking for a compromise,” he said.

The world’s steel-making powers, led by the US, Japan and the EU, agreed to joint steps to tackle the crisis at special OECD summit in Brussels on Monday, but China’s name was conspicuously absent when the final document was released later. This renders the plan meaningless since China’s excesses capacity alone is 400m tonnes, greater than the entire production of Europe and North America. Officials were shocked by the tone of the encounter with the Chinese delegation. “It was eye-opening,” said one source. “The scale of the emergency in the sector means it is now life or death for many companies,” said Cecilia Malmstrom, the EU trade commissioner. Brussels has been slow to roll out anti-dumping sanctions, partly due to pressure from Britain and other states courting China for their own political reasons.

While the US has imposed penalties of 266pc on Chinese cold-rolled steel, the EU has acted more slowly and stopped at 13pc. But the mood is shifting. Mrs Malmstrom said there is no doubt that the surge in Chinese exports is the reason why steel prices have crashed by 40pc this year, insisting that it is imperative to “act quickly” before the crisis asphyxiates European industry. “The situation is putting hundreds of thousands of jobs in the EU at risk. It’s also undermining a strategic sector with importance for the wider economy,” she said. Emmanuel Macron, the French economy minister, said Europe can no longer tolerate the flood of Chinese supply. “You do not respect the rules of world trade. Your steel output is subsidised, and the excess capacity is dumped below cost. It is destroying our productive capacity, and it is unacceptable,” he said.

Anger is also rising on Capitol Hill, with mounting calls from the US Congress for a much tougher stand, a theme echoed daily on the presidential campaign trail. “The American steel industry faces the greatest import crisis in modern history,” said Tim Murphy, head of the Congressional steel caucus. “We’re at the tipping point, with US mills averaging only 70pc of capacity utilisation, a level that is simply not sustainable. We are in real danger of losing this industry and becoming dependent on foreign countries. We can’t let that happen.”

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There’s no reason other than speculation and manipulation for the yen to be where it is.

Yen Falls By Most In 7 Weeks As BOJ Considers Negative-Rate Loans (BBG)

The yen dropped the most in seven weeks after people familiar with the matter said that the Bank of Japan may consider helping financial institutions to lend by offering a negative rate on some loans. Japan’s currency slid against all except one of its 16 major counterparts after the people said a discussion on this may happen in conjunction with any decision to make a deeper cut to the current negative rate on reserves. The people asked not to be named as the matter is private. The BOJ meets April 27-28 to decide on its next policy move. “We thought they would be doing more quantitative easing but it looks like they may be doing more on the negative interest-rate front,” said Joseph Capurso at Commonwealth Bank of Australia.

That’s driving the move lower in the Japanese currency and “if delivered, you’ll get a temporary but significant spike up in dollar-yen. The yen dropped 0.8% to 110.30 per dollar as of 7:06 a.m. in London, the biggest decline since March 1. Japan’s currency weakened 0.9% to 124.68 per euro. Twenty three of 41 analysts surveyed by Bloomberg predict the BOJ will expand stimulus next week. Nineteen forecast the central bank will increase purchases of exchange-traded funds, eight expect a boost in bond buying and eight project the BOJ will lower its negative rate, the survey conducted April 15-21 shows.

Commonwealth Bank recommended buying the dollar against the yen through two-week options to take advantage of the diverging monetary policies of the Fed and the BOJ. National Australia Bank Ltd. said in a report it favors purchasing dollars at current levels before the BOJ meeting, targeting an appreciation to 113 yen. The Federal Open Market Committee meeting April 26-27 will also be closely watched for guidance on how soon U.S. policy makers will raise the benchmark rate after an increase at the end of last year. Traders have increased the odds of a Fed move by December to 63% from about 50% at the end of last week, according to data compiled by Bloomberg based on fed fund futures.

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Isn’t it time to get serious yet?

Draghi Defies German Disfavor With Claim ECB Stimulus Works (BBG)

Mario Draghi has two stubborn adversaries – low inflation everywhere, and low regard in Germany. He’s now extending his offensive on both fronts. A recovery in credit, and output proving resilient to global shocks, are buttressing the European Central Bank’s argument that the range of stimulus measures it bolstered only last month is working. On Thursday, the ECB president used that evidence to make ground against German critics who say he’s on the wrong track. After more than four years at the helm of the central bank, Draghi is still fielding persistent attacks from the ECB’s host country, where a public perception of him as a profligate Italian whose low interest rates are killing retirement savings has become part of the political furniture.

At a press conference in Frankfurt, he fumed that the more critics undermine his stimulus, the more of it he’ll have to do. “Impatience in the markets and in politics can come up like a geyser sometimes, but the ECB has to continue to be as steady as a rock,” said Torsten Slok at Deutsche Bank in New York. “The more it shows up in the data, the easier it is for them to say that their policies are working. The ECB is defending itself and making sure the arguments are solid.” The backdrop to Thursday’s policy meeting, where the Governing Council kept its interest rates on hold after cutting them to record lows in March, was colored by a row stepped up by Germany’s Wolfgang Schaeuble.

Draghi deployed a volley of arguments against the finance minister’s charge that ECB policies are contributing to the rise of anti-euro populism, and the broader assumption that savers are being penalized, adding that Schaeuble either “didn’t mean what he said or didn’t say what he meant.” “In fact real rates today are higher than they were about 20-30 years ago,” Draghi said. “But I’m aware that to explain real interest rates to savers may be difficult.” Draghi has been dogged by sniping in Germany since taking office, with the popular press often using his nationality as shorthand for a tendency to allow high inflation. In fact, he’s had the opposite problem, with price gains too far below the 2% goal for more than three years.

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ZIRP and NIRP kill pensions sytems around the planet. And Draghi claims ‘ECB Stimulus Works’.

Pension Cuts Loom For Millions of Dutch As Big Funds Struggle (DN)

The assets of the Netherlands’ four biggest pension funds have fallen again, making it more likely that millions of people will face pension cuts next year. By law, a pension fund must have a coverage ratio of 105%, meaning its assets outweigh its obligations by 5%. However, that of the massive civil service fund ABP has now gone down to 90.4%, a drop of seven%age points since the end of 2015. Health service fund Zorg & Welzijn and the two engineering funds also have a coverage ratio of around 90%. ‘Our financial position remains worrying,’ said ABP chairwoman Corien Wortmann-Kool. ‘We are heading to the danger zone and that means there is a real risk of a pension cut in 2017.’ ABP is one of the biggest pension funds in the world. The heads of the other three funds have made similar statements. If the pension funds have a coverage ratio of below 90% at the end of the year, they will have to cut pensions.

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“..a joint currency that enabled its strongest member to execute a beggar-thy-neighbor mercantilist trade policy that penalized countries without the size or drive of Germany..”

Eurozone Mess Can’t Be Fixed; It Can Only Be ‘Muddled Through’ (MW)

If you’re waiting for international policy makers to pull a rabbit out of the hat and solve the euro problem, stop holding your breath. After a generally a desultory meeting of the IMF in Washington last week, the prevailing pessimism about the future of the euro came grimly to the fore in one of the many meetings held on the sidelines of the semiannual IMF gathering. Two dozen policy makers convened by the Official Monetary and Financial Institutions Forum (OMFIF), a private London-based group, met this week to discuss the future of the European Union’s joint currency. The off-the-record discussion involved an international array of current and former government officials, central bankers, and private-sector financiers.

The verdicts ranged from “deeply pessimistic” to “not ready to give up” – perhaps the most optimistic assessment at the meeting – and the group in its assembled wisdom concluded that there are no realistic solutions and the only course of action they could see is “muddling through.” They rehearsed all the usual analysis of what went wrong – an attempted common currency without the underpinning of joint fiscal policy, a banking union, and most importantly, a political union with an institutional infrastructure for making decisions. Without this follow-through on the original plan for “an ever closer union,” the EU has stumbled along a path of “incompetence,” with individual countries acting only in their own interests.

Even the ECB, the only EU-wide institution that has shown itself capable of taking action in this environment, came in for criticism because its successive moves to ease the stress in the system left the political leaders off the hook in coming to terms with the underlying issues. And yet, participants noted, the European public seems reluctant to give up the euro. Not even Greece, which has suffered terribly in the straitjacket of a common currency with Germany, is willing to give it up. So the answer is muddling through. And muddling through is one thing Europeans excel at, even though it has brought mixed results. Europe, after all, muddled through the arms buildup in the early 20th century to World War I. It muddled through to the banking collapse of 1931 (which contributed more to the Great Depression in the U.S. than the 1929 stock market crash).

Then it muddled through into fascism and World War II. Rebuilding from the rubble of that conflict led to a relatively brief period of constructive behavior as the continent, shielded by the U.S. defense umbrella, built new democracies and an ever-widening free trade zone. As U.S. influence — and interest — waned, Europe began again to resort to muddling through as a way of coping with stress. It muddled through the crisis in Bosnia and genocidal conflict at its very doorstep, until the U.S. intervened and sorted things out. It muddled through into a joint currency that enabled its strongest member to execute a beggar-thy-neighbor mercantilist trade policy that penalized countries without the size or drive of Germany, slashing their standard of living and reducing whole swaths of the populations to penury. Then it muddled through into a refugee crisis that threatens the very fabric and identity of individual nations, giving rise to a xenophobic backlash that harkens back to the days of Depression and fascism less than a century ago.

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Oh boy, are we getting tough or what?!

US Regulators Line Up to Consider New Executive Compensation Proposal (WSJ)

Federal regulators are lining up to consider a new rule to rein in Wall Street’s executive compensation nearly a decade after the financial crisis. The National Credit Union Administration plans to meet Thursday, giving Wall Street banks, investors and others the first glimpse of the regulators’ latest effort to overhaul Wall Street pay rules for top executives. Next week, two other regulators are scheduled to consider the revised plan, according to a government notice posted Wednesday. The rule would require banks to retain much of an executive’s bonus beyond the three years already adopted by many firms, people familiar with the matter said. The board of the Federal Deposit Insurance Corp., led by Chairman Martin Gruenberg, will meet Tuesday to vet the compensation proposal.

The FDIC board also includes Comptroller of the Currency Thomas Curry. The Office of the Comptroller of the Currency will likely consider the proposal separately later the same day, according to a person familiar with the matter. On Thursday, the NCUA will release documents, including a roughly 250-page preamble to the joint rule, when the board meets at 10 a.m. EDT. It will also unveil rules specifically drafted for a handful of federally insured credit unions with $1 billion or more in assets, including the Navy Federal Credit Union and State Employees Credit Union. Six agencies have joint responsibility for rewriting the original government plan on Wall Street pay: the FDIC, the OCC, the NCUA, the Federal Reserve Board, the Securities and Exchange Commission and the Federal Housing Finance Agency.

All six are required to sign off on the draft measure before it can be released to the industry and the public for comment. Representatives from the Fed and SEC declined to comment on the timing of their meetings to consider the proposal. The FHFA plans to consider the proposal soon, according to a person familiar with the matter. The effort to complete the rule, which has been under way for five years, got a nudge from President Barack Obama last month at a White House meeting of top financial regulators. The president urged regulators to wrap up the executive compensation rule before he leaves office early next year. It is unclear whether the agencies will be able to coordinate their efforts and get the rule completed by then.

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Little bit wishful thinking, perhaps, Gillian?!

How Goldman Sachs’ Vampire Squid Became A Flattened Slug (Tett)

A decade ago, Goldman Sachs reported that its return on common shareholder equity had hit a dazzling 39.8%. It symbolised a gilded age: back in 2006, as markets boomed, the power — and profits — of big banks seemed unstoppable. How times change. This week, American banks unveiled downbeat results, with revenues for the biggest five tumbling 16% year-on-year. But Goldman was even weaker: net income was 56% lower, while return on equity, a key measure of profitability, was 6.4%, below even the sector average in 2015 of 10.3%. A bank which was once so adept at sucking out profits that it was called a “vampire squid” (by Rolling Stone magazine) is thus producing returns more commonly associated with a utility. The phrase “flattened slug” might seem appropriate.

Is this just a temporary downturn? Financiers certainly hope so. After all, they point out, this week’s results did feature some upbeat (ish) points. None of America’s banks actually blew up in the first quarter of the year, even though markets gyrated in dramatic ways; the post-crisis reforms have improved risk controls and reserves. Meanwhile, banking in America looks healthier than in Europe, where the reform process has been slower. Overall credit quality at American banks, outside the energy sector, does not seem alarming. Net interest margins are now increasing a touch, after several years of decline, because the Federal Reserve has raised rates. The last quarter’s results might have been depressed by temporary geopolitical woes, such as business uncertainty about Brexit, the American elections, oil prices and the Chinese economy.

Once this angst fades away later this year, returns may rebound; analysts expect the Goldman ROE, for example, to move towards 10% later this year. “The market feels a little fragile,” says Harvey Schwartz, its chief financial officer. “[But] it feels like that is behind us.” Perhaps. But even if this “optimism” is justified, nobody should ignore the cognitive shift. After all, a decade ago, an ROE of 10% was considered a disaster, not a relief, at Goldman Sachs. So perhaps the most important lesson from this week is this: if American regulators had hoped to make the banks look truly dull — not dazzling — in this post-crisis era, they are now succeeding better than anyone might have thought.

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“If there is a haircut on bank deposits it will be the end and, so far, that is the only measure they haven’t taken. If Greece defaults it will be impossible to find oil, impossible to find medicines. And this time round everything seems possible.”

Greek Talks With Lenders Fraught As Fears Grow Of Default (G.)

The Hilton hotel in Athens makes the perfect backdrop for high-intensity talks. Its ambience is subdued, its corridors hushed, its meeting rooms an oasis of tranquility. When Greece, in one of its many stand-offs with the international creditors keeping it afloat, finally won the right to conduct negotiations outside the confines of government offices, it seemed only natural that they should be held at the hotel. However, in recent weeks the talks have assumed an increasingly nervous edge. An economic review that should have been completed months ago has been beset by wrangling as Alexis Tsipras’s leftist-led government has argued with lenders over the terms of a bailout agreed last summer.

The €86bn rescue programme agreed in July 2015 – the debt-stricken country’s third in six years – followed months of high-octane drama that saw Athens being pushed to the brink of bankruptcy and euro exit. Now, less than a year later – and with a crucial meeting of eurozone finance ministers lined up for Friday – a sense of crisis has returned to Greece. With politicians indulging in the angry rhetoric that put Athens on a collision course with lenders last year, investors have begun to worry. Yields on government bonds have risen, protesters have taken to the streets, and “Grexit” – the catch-all word that so conjured up Greece’s battle with economic meltdown – is being murmured again.

Against a backdrop of maturing debt – the country must repay €5bn to the ECB and IMF in June and July – commentators have begun to talk in terms of fatal miscalculation. “History is made of accidents which were not the result of some secret plan, but a string of errors, human weaknesses and obsessions,” wrote Alexis Papahelas in the conservative daily Kathimerini. “Lets hope we will avoid that.” On the street, the uncertainty has not only had a deadening effect on an economy already battered by years of withering austerity; it has also created mounting anxiety among a populace that has seen per capita GDP levels drop by 28%, unemployment nudge 30%, more than one in four businesses close and poverty afflict one in three.

After defying the doomsayers, there are fears Europe’s most indebted country could now be heading towards a disorderly default. “There is no one I know who isn’t worried,” says Yannis Tsandris, a private sector retiree whose pension has been cut by almost a third. “If there is a haircut on bank deposits it will be the end and, so far, that is the only measure they haven’t taken. If Greece defaults it will be impossible to find oil, impossible to find medicines. And this time round everything seems possible.”

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How peaceful do you think those Olympics are going to be?

The Real Reason Dilma Rousseff’s Enemies Want Her Impeached (Miranda)

The story of Brazil’s political crisis, and the rapidly changing global perception of it, begins with its national media. The country’s dominant broadcast and print outlets are owned by a tiny handful of Brazil’s richest families, and are steadfastly conservative. For decades, those media outlets have been used to agitate for the Brazilian rich, ensuring that severe wealth inequality (and the political inequality that results) remains firmly in place. Indeed, most of today’s largest media outlets – that appear respectable to outsiders – supported the 1964 military coup that ushered in two decades of rightwing dictatorship and further enriched the nation’s oligarchs. This key historical event still casts a shadow over the country’s identity and politics.

Those corporations – led by the multiple media arms of the Globo organisation – heralded that coup as a noble blow against a corrupt, democratically elected liberal government. Sound familiar? For more than a year, those same media outlets have peddled a self-serving narrative: an angry citizenry, driven by fury over government corruption, rising against and demanding the overthrow of Brazil’s first female president, Dilma Rousseff, and her Workers’ party (PT). The world saw endless images of huge crowds of protesters in the streets, always an inspiring sight. But what most outside Brazil did not see was that the country’s plutocratic media had spent months inciting those protests (while pretending merely to “cover” them). The protesters were not remotely representative of Brazil’s population.

They were, instead, disproportionately white and wealthy: the very same people who have opposed the PT and its anti-poverty programmes for two decades. Slowly, the outside world has begun to see past the pleasing, two-dimensional caricature manufactured by its domestic press, and to recognise who will be empowered once Rousseff is removed. It has now become clear that corruption is not the cause of the effort to oust Brazil’s twice-elected president; rather, corruption is merely the pretext. Rousseff’s moderately leftwing party first gained the presidency in 2002, when her predecessor, Luiz Inácio Lula da Silva, won a resounding victory.

Due largely to his popularity and charisma, and bolstered by Brazil’s booming economic growth under his presidency, the PT has won four straight presidential elections – including Rousseff’s 2010 election victory and then, just 18 months ago, her re-election with 54 million votes. The country’s elite class and their media organs have failed, over and over, in their efforts to defeat the party at the ballot box. But plutocrats are not known for gently accepting defeat, nor for playing by the rules. What they have been unable to achieve democratically, they are now attempting to achieve anti-democratically: by having a bizarre mix of politicians – evangelical extremists, far-right supporters of a return to military rule, non-ideological backroom operatives – simply remove her from office.

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Why bother with cheat software?

All Diesel Cars’ Emissions Far Higher On Road Than In Lab (G.)

Diesel cars are producing many times more health-damaging pollutants than claimed by laboratory tests, with some emitting up to 12 times the EU maximum when tested on the road, according to a government investigation undertaken following the Volkswagen scandal. A Department for Transport (DfT) study of cars made by manufacturers such as Ford, Renault and Vauxhall found there was a vast difference in nitrogen oxide emissions measured in the laboratory and under normal driving conditions. Not a single car among 37 models tested against the two most recent nitrogen oxide emissions standards met the EU lab limit in real-world testing, with the average emissions being more than five times as high. However, the DfT said it had found no vehicles outside the VW group with systems in place to deliberately rig emissions figures.

Robert Goodwill, the junior transport minister, said: “Unlike the Volkswagen situation, there have been no laws broken. This has been done within the rules.” The minister denied that the findings meant the current emissions testing regime was a farce. “But certainly I am disappointed that the cars that we are driving on our roads are not as clean as we thought they might be. It’s up to manufacturers now to rise to the real-world tests and the tough standards we’re introducing,” he said. The DfT exercise was ordered after it emerged that Volkswagen had allegedly used technology to cheat emissions tests. It measured Nox, or nitrogen oxide emissions. Nitrogen oxide helps to form ozone smog that can badly affect people with chest conditions such as asthma.

The tests were carried out by a team led by Ricardo Martinez-Botas, professor of mechanical engineering at Imperial College London. Among the vehicles tested were 19 models that meet the latest Euro 6 limit of 80mg/km NOx emissions in laboratory tests. Euro 6 was introduced for all new cars sold after September last year. When driven in a real-world simulation of urban, rural and motorway travel, the average was nearer to 500mg/km, with some cars getting close to 1,100mg/km. Among the new models tested that are meant to comply with the Euro 6 standard were the Ford Focus, which had a real-world emission about eight times above the EU limit, the Renault Megane, whose emissions were more than 10 times higher, and the Vauxhall Insignia, almost 10 times higher.

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Already “The scandal has wiped around 40% off Mitsubishi’s market value..”

Mitsubishi Scandal Deepens After US Demands Test Data (G.)

The scandal engulfing Mitsubishi Motors has deepened, sending its shares to a new low after US authorities said they had requested information from the Japanese automotive group. Mitsubishi admitted this week that it manipulated test data to overstate the fuel efficiency of 625,000 cars and there are fears that more models may be involved. Government officials raided one of its offices on Thursday. The scandal has wiped around 40% off Mitsubishi’s market value, amounting to losses of $3.2bn over three days. The shares fell nearly 14% on Friday, following declines of 20% on Thursday, when they were suspended, and 15% on Wednesday. An official at the US National Highway Traffic Safety Administration told Reuters that the regulator had asked Mitsubishi for information on vehicles sold in the US.

Japanese government officials said Mitsubishi could be responsible for reimbursing consumers and the government if investigations conclude that the vehicles were not as fuel-efficient as claimed. Transport minister Keiichi Ishii told a news conference on Friday: “This is a serious problem that could lead to the loss of trust in our country’s auto industry.” He said he wanted Mitsubishi to examine the possibility of buying back affected cars. Internal affairs minister Sanae Takaichi said the government would also ask the carmaker to pay for any subsidies granted to consumers if its cars are found to fail fuel economy standards, Jiji news agency reported. Japanese media reported that Mitsubishi had submitted misleading mileage data on its i-MiEV electric car, which is also sold overseas. The previously disclosed models whose fuel economy readings Mitsubishi has admitted to manipulating are only sold in Japan – four of its mini-cars, two of which it manufactured for Nissan.

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Subsidies.

Why UK Landed Gentry Are So Desperate To Stay In The EU (G.)

The estate agent Carter Jonas established its reputation running the estates of the Marquess of Lincolnshire. “Some of the biggest property owners in the country are our loyal clients,” boasts its website. And, in a recent poll of these landowning clients, 67% of them said that Britain should stay in the EU. So why all this Euro-enthusiasm in the Tory heartlands and among the landed gentry? “Should the UK vote to leave the EU, the CAP subsidies will likely be reduced,” Tim Jones, head of Carter Jonas’s rural division, explained. Thank you, Tim, for putting it so clearly. We understand. A massive 38% of the entire 2014-20 EU budget is allocated as subsidies for European farmers. It is far and away the biggest item of euro expenditure, about €50bn a year.

If these billions were being used to prop up a heavy industry – steel, for example – then the neoliberals would be up in arms, complaining like mad that if an industry can’t cope with a free market then it should be left to die. Creative destruction, they call it. But, for some reason, when it comes to agriculture, different rules apply. Farms are not called “uneconomic” in the same way that pits and factories are. So every British household coughs up about £250 a year and hands it over to the EU, which hands it over to people like the Duke of Westminster – already worth £7bn himself. In 2011, the duke received £748,716 in EU subsidies for his various estates. So, too, Saudi Prince Bandar (he of the dodgy al-Yamamah arms deal), who pocketed £273,905 of EU money for his estate in Oxfordshire.

The common agricultural policy is socialism for the rich. It’s a mechanism to buttress the aristocracy – who own a third of the land in this country – from the chill winds of economic liberalism. So why are we hearing so little about all of this in the current debate over Europe? Because the right doesn’t want to worry its landowning friends and the left has somehow persuaded itself that the EU is a progressive force – so it suits no one’s purpose to raise this issue. Yet it’s a huge deal. For the European Union has become a huge and largely invisible way of redistributing wealth from the poor to the rich, subsidising lord so-and so’s grouse moor, while redundancies are handed out to workers at Port Talbot (whose jobs the government can’t help subsidise because of EU rules).

But even more problematic is the way our massively subsidised agricultural sector negatively affects farmers in the developing world. “Trade not aid” has been David Cameron’s repeated mantra for dealing with poverty in the developing world. But not only does the CAP subsidy to European farmers make it impossible for the unsubsidised African farmer to compete fairly in European markets, but it also creates situations where food is overproduced in Europe – remember butter mountains, milk lakes etc.

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While this crazy barter goes on, the short stick is for the refugees.

Angela Merkel Faces Balancing Act On Visit To Turkey (G.)

Angela Merkel is facing dual pressure to both raise freedom of speech issues and patch up fraying diplomatic relations with Turkey during a visit to Gaziantep province on Saturday. The issue of visa-free travel, one of the key elements of the month-old deal between the European Union and Turkey, is expected to be at the top of the agenda as the German chancellor visits the country alongside the European Council president, Donald Tusk, and European commission vice-president Frans Timmermans. On Tuesday, Turkey’s prime minister, Ahmet Davutoglu, threatened to pull out of the deal if no progress was made on the visa arrangement.

But in Germany, Merkel is under growing pressure to show more spine in her dealings with the Turkish government, after giving in to Recep Tayyip Erdogan’s request for the comedian Jan Böhmermann to be prosecuted for reading out a poem that insulted the president. In the run-up to Merkel’s Gaziantep trip, the secretary general of the Social Democrats, a junior party in the governing coalition, has called on Merkel to send out a “strong message on the issue of freedom of speech”. “Without this basic right, democracy does not work – the Turkish government too has to recognise that,” Katarina Barley told the newspaper Bild.

Coming on the anniversary of the foundation of Turkey’s parliament, and a day before many people commemorate the start of the Armenian genocide, secularists and minorities in Turkey too will hope for a signal against Turkey’s authoritarian turn from the German chancellor. The German government has so far refrained from providing details of the chancellor’s schedule during her trip. In recent days Merkel has been struggling to limit the damage caused by the Böhmermann affair. Even though the comedian is unlikely to face more than a financial penalty, the incident has taken its toll on the chancellor’s authority in the public eye, with her personal approval ratings dropping by over 10 percentage points in a recent poll.

In another poll, 66% of the German public said they disapproved of the chancellor’s decision to authorise criminal proceedings against the comedian. The justice minister Heiko Maas announced on Thursday that he would present a draft bill to abolish the law on “insulting a foreign head of state” that lies at the centre of the Böhmermann affair before the end of this week. Merkel had originally promised to abolish the law by January 2018. Were the relevant paragraph of the penal code scrapped before Böhmermann goes on trial, the chancellor would look even more exposed. Diplomatic ties between Germany and Turkey were further strained when the journalist Volker Schwenck of the public broadcaster ARD was detained at Istanbul airport on Tuesday morning and denied entry to the country. Schwenck had previously reported from rebel-held areas in northern Syria.

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Apr 182016
 
 April 18, 2016  Posted by at 9:40 am Finance Tagged with: , , , , , , , , , , ,  2 Responses »


DPC Coaches at Holland House Hotel on Fifth Avenue, NY 1905

Oil Prices Plunge After Doha Output Talks Fail (AFP)
Oil Producers Get Worst Possible Outcome, Destroy Remaining Credibility (R.)
Failure To Reach Oil Output Deal Sparks Selloff Across Emerging Markets (BBG)
Loonie, Aussie Drop After Doha Failure; Yen Near 1 1/2-Year High (BBG)
The Bad Smell Hovering Over The Global Economy (G.)
Untried, Untested, Ready: Remedies for the Global Economy (BBG Ed.)
China’s QoQ and YoY GDP Data Don’t Add Up (BBG)
Is China Ready To Let More State-Owned Enterprises Default? (BBG)
China Makes Plans for 1.8 Million Workers Facing Unemployment (WSJ)
The Trucker’s Nightmare That Could Flatten Europe’s Economy (BBG)
George Osborne: Brexit Would Leave UK ‘Permanently Poorer’ (G.)
Brazilian Congress Votes To Impeach President Dilma Rousseff (G.)
Australia’s Debt Dilemma Raises Downgrade Fears (BBG)
Peter Schiff: ‘Trump’s Right, America Is Broke’ (ZH)
Make America Solvent Again (Jim Grant)
Is Capitalism Entering A New Era? (Kaletsky)
Fears Of ‘The Big One’ As 7 Major Earthquakes Strike Pacific In 96 Hours (E.)

A curious piece of two-bit theater. It failed before it started. Why do it then? The west trying to pit Saudi vs Iran/Russia?

Oil Prices Plunge After Doha Output Talks Fail (AFP)

Oil prices plunged on Monday after the world’s top producers failed to reach an agreement on capping output aimed at easing a global supply glut during a meeting in Doha. Hopes the world’s main producer cartel, OPEC, and other major exporters like Russia would agree to freeze output has helped scrape oil prices off the 13-year lows they touched in February. But crude tanked after top producer Saudi Arabia walked away from the talks, which many hoped would ease a huge surplus in world supplies, because of a boycott by its rival Iran. Oil tumbled in early Asian trade after the collapse of Sunday’s talks, with prices dropping as much as seven% in opening deals.

At around 0100 GMT, US benchmark West Texas Intermediate for May delivery was down $2.11, or 5.23%, from Friday’s close at $38.25 a barrel. Global benchmark Brent crude for June lost 4.71%, or $2.03, to $41.07. “Despite many of the 18 oil producers believing the meeting in Doha was merely a rubber stamp affair for an oil production freeze, Saudi Arabia managed to throw a spanner in the works,” said Angus Nicholson at IG Markets. “With Saudi Arabia fighting proxy wars with Iran in Yemen and Syria/Iraq, it is understandable that they had little inclination to freeze their own production and make way for newly sanctions-free Iran to increase their market share.”

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It’s impossible for a reporter to see that no output freeze was ever in the works, simply because no producer can afford a freeze.

Oil Producers Get Worst Possible Outcome, Destroy Remaining Credibility (R.)

It was the worst possible outcome for oil producers at their weekend meeting in Doha, with their failure to reach even a weak agreement showing very publicly their divisions and inability to act in their own interests. Expectations for the meeting had been modest at best, with sources in the producer group predicting an agreement to freeze output. But even this meagre hope was dashed by Saudi Arabia’s insistence Iran join any deal, something the newly sanctions-free Islamic republic wouldn’t countenance. From a producer point of view, an agreement including Iran that shifted market perceptions on the amount of oil supply available would have been the best outcome.

The acceptable result would have been an agreement that froze production at already near record levels, with an accord that Iran would join in once it had reached its pre-sanctions level of exports. What was delivered instead was confirmation that the Saudis are prepared to take more pain in order not to deliver their regional rivals Iran any windfall gains from higher prices and exports. The meeting in Qatar on Sunday effectively pushed a reset button on the crude markets, putting the situation back to where the market was before hopes of producer discipline were first raised. What happens now is that the market will have to continue along its previous path of re-balancing, without any assistance from the OPEC or erstwhile ally Russia. Brent crude fell nearly 7% in early trade in Asia on Monday, before partly recovering to be down around 4%.

The potential is for crude to fall further in coming sessions as long positions built up in the expectation of some sort of producer agreement are liquidated in the face of the reality of no deal. It’s likely that recriminations will follow for some time among the oil producers, with the Russians and Venezuelans said to be annoyed at what they see as the Saudi scuppering of a deal that had almost been locked in. This will make it harder for any future agreement, with the OPEC meeting on June 2 the next chance for the grouping to reach some sort of agreement. For the time being, OPEC’s credibility is shot, and won’t be restored by even a future agreement as it will take actual, verifiable action to convince a now sceptical market. However, as the events in Doha showed, the Saudis are unlikely to agree to anything in the absence of Iranian participation, and that is also equally unlikely.

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Naturally. Sell-off is waning already, by the way. But the trend is clear.

Failure To Reach Oil Output Deal Sparks Selloff Across Emerging Markets (BBG)

The failure by the world’s biggest oil producers to agree on an output freeze spurred a selloff across emerging markets, with stocks halting a seven-day rally as Brent crude plunged as much as 7%. The ringgit led declines in developing-nation currencies as the disappointment stemming from the weekend meeting in Doha disrupted a recovery in commodity prices, putting pressure on Malaysian finances as a net oil exporter. Hopes an agreement would be reached had pushed Brent above $44 a barrel for the first time since December and spurred gains across asset classes in recent days. It’s now headed back toward $41 as the discussions to address a global oil glut stalled after Saudi Arabia and other Gulf nations wouldn’t commit to any deal unless all OPEC members joined, including Iran.

“We have seen a high correlation between oil, commodity prices and emerging assets this year and we have seen a strong run up, so the latest development on the failure to agree on an oil output freeze should spark profit-taking among investors,” said Miles Remington, head of equities at BNP Paribas Securities Indonesia. Energy-related companies fell the most among the 10 industry groups of the MSCI Emerging Markets Index, which dropped 0.7% and retreated from last week’s highest level since November. While that was the biggest decline since April 5, the energy component slid 1.4% and industrial stocks 1%.

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Japan can’t keep this up much longer.

Loonie, Aussie Drop After Doha Failure; Yen Near 1 1/2-Year High (BBG)

The Canadian and Australian dollars dropped as crude tumbled after oil-producing nations failed to reach an accord to freeze output. The yen, used by investors as a haven, rose toward a 17-month high. The currencies of Australia, Canada, Malaysia and Norway all retreated at least 0.7% after negotiations in Doha ended without an agreement from OPEC and other oil producers to freeze supplies. Foreign-exchange traders sought the safety of Japan’s currency as the diplomatic failure threatens to send crude back toward the more than 13-year lows reached in February. World leaders at the end of last week signaled opposition to any efforts from Japan to directly halt the yen’s 11% climb this year.

“Lack of agreement from Doha has hit commodity currencies lower,” said Robert Rennie at Westpac Banking in Sydney. “The prospects of another near-term round of talks appear limited ahead of the June OPEC meeting.” The Aussie dropped 0.8% to 76.65 U.S. cents as of 7:01 a.m. London time, set for the largest decline since April 7. Canada’s loonie tumbled 1.1% to C$1.2962 against the greenback. Crude is the nation’s second-largest export. Malaysia’s ringgit slid 0.8% to 3.9348 per dollar. Oil futures fell as much as 6.8%, the biggest intraday drop since Feb. 1. “The oil price will reset lower and could even retest $30 over the next three months,”said James Purcell at UBS’s wealth-management business in Hong Kong.

“Short term, that will dampen enthusiasm for risk assets. However, markets are being slightly myopic. Economic data have improved in both China and the U.S. of late.” The lack of agreement at Doha highlights the deep divisions between OPEC members, and importantly, within Saudi Arabia, Westpac’s Rennie said. The Aussie should hold support from about 75.75 cents to 76 cents at least through the next day or so, he said. The yen jumped 0.7% to 107.96 per dollar, and touched 107.77. It reached 107.63 on April 11, the strongest since October 2014. Hedge funds and other large speculators pushed wagers on yen strength to a record last week as Japanese authorities appeared reluctant to intervene to reverse the strengthening currency.

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Price discovery is the economy’s biggest enemy.

The Bad Smell Hovering Over The Global Economy (G.)

All is calm. All is still. Share prices are going up. Oil prices are rising. China has stabilised. The eurozone is over the worst. After a panicky start to 2016, investors have decided that things aren’t so bad after all. Put your ear to the ground though, and it is possible to hear the blades whirring. Far away, preparations are being made for helicopter drops of money onto the global economy. With due honour to one of Humphrey Bogart’s many great lines from Casablanca: “Maybe not today, maybe not tomorrow but soon.” But isn’t it true that action by Beijing has boosted activity in China, helping to push oil prices back above $40 a barrel? Has Mario Draghi not announced a fresh stimulus package from the European Central Bank designed to remove the threat of deflation? Are hundreds of thousands of jobs not being created in the US each month?

In each case, the answer is yes. China’s economy appears to have bottomed out. Fears of a $20 oil price have receded. Prices have stopped falling in the eurozone. Employment growth has continued in the US. The International Monetary Fund is forecasting growth in the global economy of just over 3% this year – nothing spectacular, but not a disaster either. Don’t be fooled. China’s growth is the result of a surge in investment and the strongest credit growth in almost two years. There has been a return to a model that burdened the country with excess manufacturing capacity, a property bubble and a rising number of non-performing loans. The economy has been stabilised, but at a cost. The upward trend in oil prices also looks brittle. The fundamentals of the market – supply continues to exceed demand – have not changed.

Then there’s the US. Here there are two problems – one glaringly apparent, the other lurking in the shadows. The overt weakness is that real incomes continue to be squeezed, despite the fall in unemployment. Americans are finding that wages are barely keeping pace with prices, and that the amount left over for discretionary spending is being eaten into by higher rents and medical bills. For a while, consumer spending was kept going because rock-bottom interest rates allowed auto dealers to offer tempting terms to those of limited means wanting to buy a new car or truck. In an echo of the subprime real estate crisis, vehicle sales are now falling. The hidden problem has been highlighted by Andrew Lapthorne of the French bank Société Générale. Companies have exploited the Federal Reserve’s low interest-rate regime to load up on debt they don’t actually need.

“The proceeds of this debt raising are then largely reinvested back into the equity market via M&A or share buybacks in an attempt to boost share prices in the absence of actual demand,” Lapthorne says. “The effect on US non-financial balance sheets is now starting to look devastating.” He adds that the trigger for a US corporate debt crisis would be falling share prices, something that might easily be caused by the Fed increasing interest rates.

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BBG senior editor David Shipley displays the general fallacy: all that’s there are desperate attempts to go back to something that once was, only in a more centralized fashion. But there’s no going back.

Untried, Untested, Ready: Remedies for the Global Economy (BBG Ed.)

The deeper the slump, economists used to say, the stronger the recovery. They don’t say that anymore. The effects of the crash of 2008 still reverberate, with the latest forecasts for global growth even more dismal than the last. The persistently stagnant world economy is more than just a rebuke to economic theory, of course; it exacts a human toll. And while politicians and central bankers – or economists, for that matter – can’t be faulted for their creativity, their remedies might have more impact if they were bolder and better-coordinated. By ordinary standards, to be sure, governments haven’t been timid. Without fiscal stimulus and aggressive monetary easing in the U.S. and other countries, things would look even worse. And yet, worldwide output is predicted to rise only 3.2% this year, falling still further below the pre-crash trend.

Simply doubling down on current strategies is unlikely to work. Large-scale bond-buying, or so-called quantitative easing, has run into diminishing returns. Negative interest rates, where they’ve been tried, haven’t revived lending, and central banks are unable or unwilling to cut further. What about new fiscal stimulus? Where possible, that would be good – but it’s hardest to do in the very countries that need it most, because that’s where public debt is already dangerously high. True, as the IMF’s new fiscal report says, almost all countries could become more growth-friendly by combining measures to curb public spending in the longer term (for instance, raising the retirement age) with steps to increase demand in the short term (cutting payroll taxes, raising employment subsidies and building infrastructure).

Getting fiscal policy right country by country would surely help – yet probably wouldn’t be enough: No single country can adequately deal with a global shortfall of demand. A finance ministry for the world isn’t happening any time soon. Still, it’s a pity that governments aren’t trying harder to coordinate their fiscal policies more intelligently, or indeed at all. The global slump persists partly because of international spillovers. Better coordination would take these into account: Countries that could safely deploy fiscal stimulus would give some weight to global as well as national conditions, and fiscal policy would be formed interactively. Even within the EU, where you’d expect economic coordination to be the norm, and where the single currency makes it essential, there’s no sign of it.

At the global level, in forums such as the IMF, you might expect the U.S. to take the lead in any such effort. So it should – but it will need to mend its shattered policy-making machinery first. If Washington can’t come to a decision on its own on taxes or spending, the question of coordination doesn’t arise. The last resort, if the slump goes on and governments can’t coordinate better, might be to combine monetary and fiscal policy in a hybrid known (unfortunately) as helicopter money. Governments would cut taxes and/or spend more, but meet the cost by printing money rather than by borrowing. In one variant, central banks might simply send out checks to taxpayers. That’s a startling idea, no doubt – but so was quantitative easing not long ago.

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Quarter-on-quarter annualized growth rate is 4.5%..

China’s QoQ and YoY GDP Data Don’t Add Up (BBG)

China’s growth rates for quarter-on-quarter and year-on-year GDP for the past year don’t match. That, combined with confirmation that 1Q output was underpinned by an unsustainable resurgence in real estate, tarnishes the newly acquired shine on the country’s economic prospects. The initial reaction to the 1Q GDP data, published Friday, was a sigh of relief. Growth at 6.7% year on year was in line with expectations and comfortably inside the government’s 6.5-7% target range. If anyone noticed that the normal quarter-on- quarter data was missing from the National Bureau of Statistics release, few thought anything of it. Then, on Saturday, the quarter-on-quarter data was published, and some of the relief turned to consternation.

Quarter-on-quarter growth in 1Q was just 1.1% – an annualized growth rate of 4.5%, and the lowest print since the data series became available in 2011. Worse, based on the accumulated quarter-on-quarter data over the last year, annual growth in 1Q was just 6.3% – substantially below the NBS’s 6.7% reading for year-on-year growth. Explaining the inconsistency between the two data points is tough to do. Accumulated quarter-on-quarter growth over four quarters should add up to year-on-year growth. In the past, it has. The divergence in the 1Q readings might reflect something as simple as difficulties with seasonal adjustment. Even so, against a backdrop of concerns about data reliability, it can only add to skepticism about China’s true growth rate.

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Xi’s dilemma.

Is China Ready To Let More State-Owned Enterprises Default? (BBG)

China’s state-owned enterprises are likely to suffer more defaults over the next year as the government shows its readiness to shut companies in industries struggling with overcapacity, according to Standard & Poor’s. “In a major policy shift, the central government appears willing to close and liquidate struggling enterprises in the steel, mining, building materials, and shipbuilding industries,” S&P analyst Christopher Lee wrote in a report Monday. “We believe this stance will exacerbate the problems of companies in these cyclical and capital-intensive sectors, which are facing sluggish demand amid slowing investment growth.”

The warning follows S&P’s decision earlier this month to cut China’s sovereign rating outlook to negative from stable because economic rebalancing is likely to proceed more slowly than it had expected. Moody’s Investors Service also downgraded the outlook to negative in March, highlighting surging debt and the government’s ability to enact reforms. The revisions were biased, Finance Minister Lou Jiwei said in Washington on Friday. Premier Li Keqiang has pledged to withdraw support from so-called zombie firms that have wasted financial resources and dragged on economic growth, which is at the slowest in a quarter century. China’s central bank has lowered benchmark interest rates six times since 2014, underpinning a jump in debt to 247% of GDP.

China Railway Materials, a state-backed commodities trader, is seeking to reorganize debt and halted trading on 16.8 billion yuan ($2.6 billion) of bonds this month. Baoding Tianwei last year became the first government-backed company to renege on onshore bonds. Sinosteel defaulted on onshore debt in October. Leverage among the largest state-owned enterprises has reached a “critical” level, according to Lee. It is likely to worsen in 2016 as a weak top line is not fully offset by cost cuts and capital expenditure reductions, he wrote in the report.

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1.8 million is a rounding error in China.

China Makes Plans for 1.8 Million Workers Facing Unemployment (WSJ)

China etched in details of plans to help workers laid off from the bloated coal and steel industries, saying assistance would include career counseling, early retirement and help in starting businesses, among other measures. New guidelines released by seven Chinese ministries over the weekend build on previously announced commitments to restructure the coal and steel industries, whose excess production is dragging on the economy, and to take care of an estimated 1.8 million workers who will be displaced. The new measures place priority on finding jobs and cushioning the transition to reduce the unemployment that the authoritarian government sees as a threat to social stability.

“Proper placement of workers is the key to working to resolve excess capacity,” said the document issued by the labor ministry, the top economic planning agency and others. It urged local governments to “take timely measures to resolve conflicts” and to “avoid ignoring the issue.” Unlike a far-reaching restructuring of state industries two decades ago, Beijing is taking a cautious approach this time around, prompting some economists to caution that the protracted pace may make the situation worse. Government data released Friday showed economic growth slowing slightly in the first quarter, buoyed by new loans, debt and investment in real estate and factories—methods that are likely to lengthen the transition to a more consumer-driven society from one driven by investment and manufacturing.

Western-style “restructuring is not on the horizon here,” said ING economist Tim Condon. “Rebalancing, forget that. That’s for another day.” Government plans call for reducing some 10% to 15% of the excess capacity in the steel and coal sectors over the next several years. That is less than half the portion analysts say is needed to bring supply closer in line with demand. And steel and coal are only two of numerous other industries plagued by overcapacity that haven’t been addressed. The large number of ministries that have signed off on the plan dated April 7 but released more than a week later underscore the sensitivity, importance and breadth of resources China is devoting to the unemployment problem.

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Europe goes blindly into the night.

The Trucker’s Nightmare That Could Flatten Europe’s Economy (BBG)

[..] Germany, Austria, France and Sweden, among others, have reintroduced border checkpoints in some places. They are pressured by Europe’s biggest refugee crisis since World War II – about 1 million migrants arrived in Greece and Italy in 2015 – terrorist attacks, and the growth of anti-immigration movements. But the economic cost of dumping Schengen, at a time when growth across the continent is still weak, would be massive. A permanent return to border controls could lop €470 billion of GDP growth from the European economy over the next 10 years, based on a relatively conservative assumption of costs, according to research published by Germany’s Bertelsmann Foundation. That’s like losing a company almost the size of BMW AG every year for a decade.

The open borders power an economy of more than 400 million people, with 24 million business trips and 57 million cross-border freight transfers happening every year, the European Parliament says. Firms in Germany’s industrial heartland rely on elaborate, just-in-time supply chains that take advantage of lower costs in Hungary and Poland. French supermarket chains are supplied with fresh produce that speeds north from Spain and Portugal. And trans-national commutes have become commonplace since Europeans can easily choose to, say, live in Belgium and work in France. For many Europeans, passport-free travel is part of being, simply, European. For the company hiring driver Unczorg, the security checks increase costs in terms of delays, storage and inventory.

Permanent controls would destroy the business model of German industry, says Rainer Hundsdoerfer, chairman of EBM-Papst. “You get the products you need for assembly here in Germany just in time,” he said by phone. “That’s why the trucks go nonstop. They come here, they unload, they load, and off they go. The cost isn’t the only prime issue” in reinstating border checks. “It’s that we couldn’t even do it.” Nor could anyone else, he adds: “Nothing in German industry, regardless of whether it’s automotives or appliances or ventilators, could exist without the extended workbenches in eastern Europe.”

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This sort of over the top comment could be the biggest gift to the Leave side. Then again, they have Boris Johnson and Nigel Farage as their figureheads. Not going to work.

George Osborne: Brexit Would Leave UK ‘Permanently Poorer’ (G.)

Britain would be “permanently poorer” if voters choose to leave the EU, George Osborne has warned, as a Treasury study claimed the economy would shrink by 6% by 2030, costing every household the equivalent of £4,300 a year. In the starkest warning so far by the government in the referendum campaign, the chancellor describes Brexit as the “most extraordinary self-inflicted wound”. Osborne will embark on one of the government’s most significant moves in the referendum campaign on Monday when he publishes a 200-page Treasury report which sets out the costs and benefits of EU membership. In a Times article the chancellor wrote: “The conclusion is clear for Britain’s economy and for families – leaving the EU would be the most extraordinary self-inflicted wound.”

Osborne warned that the option favoured by Boris Johnson – a deal along the lines of the EU-Canada arrangement – would lead to an economic contraction of 6% by 2030. Supporters of Britain’s EU membership say the EU-Canadian deal would be a disaster for the UK because it excludes financial services, a crucial part of the British economy. The chancellor asked whether this was a “price worth paying” as he said there was no other model for the UK that gave it access to the single market without quotas and tariffs while retaining a say over the rules. Osborne continued: “Put simply : over many years, are you better off or worse off if we leave the EU? The answer is: Britain would be worse off, permanently so, and to the tune of £4,300 a year for every household.”

“It is a well-established doctrine of economic thought that greater openness and interconnectedness boosts the productive potential of our economy. That’s because being an open economy increases competition between our companies, making them more efficient in the face of consumer choice, and creates incentives for business to innovate and to adopt new technologies.”

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One corrupt clan fights the other. Rousseff may well be the cleanest of the bunch.

Brazilian Congress Votes To Impeach President Dilma Rousseff (G.)

Brazilian president Dilma Rousseff suffered a crushing defeat on Sunday as a hostile and corruption-tainted congress voted to impeach her. In a rowdy session of the lower house presided over by the president’s nemesis, house speaker Eduardo Cunha, voting ended late on Sunday evening with 367 of the 513 deputies backing impeachment – comfortably beyond the two-thirds majority of 342 needed to advance the case to the upper house. As the outcome became clear, Jose Guimarães, the leader of the Workers party in the lower house, conceded defeat with more than 80 votes still to be counted. “The fight is now in the courts, the street and the senate,” he said. As the crucial 342nd vote was cast for impeachment, the chamber erupted into cheers and Eu sou Brasileiro, the football chant that has become the anthem of the anti-government protest.

Opposition cries of “coup, coup,coup” were drowned out. In the midst of the raucous scenes the most impassive figure in the chamber was the architect of the political demolition, Cunha. Watched by tens of millions at home and in the streets, the vote – which was announced deputy by deputy – saw the conservative opposition comfortably secure its motion to remove the elected head of state less than halfway through her mandate. There were seven abstentions and two absences, and 137 deputies voted against the move. Once the senate agrees to consider the motion, which is likely within weeks, Rousseff will have to step aside for 180 days and the Workers party government, which has ruled Brazil since 2002, will be at least temporarily replaced by a centre-right administration led by vice-president Michel Temer.

On a dark night, arguably the lowest point was when Jair Bolsonaro, the far-right deputy from Rio de Janeiro, dedicated his yes vote to Carlos Brilhante Ustra, the colonel who headed the Doi-Codi torture unit during the dictatorship era. Rousseff, a former guerrilla, was among those tortured. Bolsonaro’s move prompted left-wing deputy Jean Wyllys to spit towards him. Eduardo Bolsonaro, his son and also a deputy, used his time at the microphone to honour the general responsible for the military coup in 1964. Deputies were called one by one to the microphone by the instigator of the impeachment process, Cunha – an evangelical conservative who is himself accused of perjury and corruption – and one by one they condemned the president. Yes, voted Paulo Maluf, who is on Interpol’s red list for conspiracy. Yes, voted Nilton Capixiba, who is accused of money laundering. “For the love of God, yes!” declared Silas Camara, who is under investigation for forging documents and misappropriating public funds.

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Australia played all on red. Which can you take to mean either China, for exports, or debt, for housing. Realizing that in the ned the house always wins, it’s a suicide strategy.

Australia’s Debt Dilemma Raises Downgrade Fears (BBG)

1986 may seem like a long time ago, but for Australian Treasurer Scott Morrison some of the parallels with his current budget balancing act are getting too close for comfort. Back then, Moody’s and Standard & Poor’s pulled their AAA ratings as weak commodity prices wrecked government income and external finances. With resources again in a funk and a widening funding gap, National Australia Bank and JPMorgan said last week Morrison needs to undertake repairs in his May 3 budget to safeguard the country’s top rankings. Moody’s warned Thursday that debt will grow without revenue-boosting measures. “Moody’s are understandably getting impatient,” said Shane Oliver at Sydney-based AMP Capital Investors.

“We’ve seen each successive budget update push out the return to surplus. This time around – like back in the middle of the ’80s when we did suffer downgrades – we again have a twin deficit problem.” Thirty years ago, then-Treasurer Paul Keating warned the country risked becoming a “banana republic” because of its reliance on resources and it took nearly 17 years to regain the two top credit scores. While Morrison’s language hasn’t been as strident, he has said Australia must live within its means and indicated a focus on reduced spending. The government expects Australia’s budget position to improve in coming years despite the environment for commodity prices as it controls expenditure growth, Finance Minister Mathias Cormann said Thursday in an e-mailed response to questions.

“The Government is committed to responsible budget management which protects our AAA credit rating,” he said. “Our public debt remains low internationally and consistent with our plan, the government is committed to stabilizing and reducing our debt over time.” Australia’s general government net debt is projected to peak at 19.9% in 2017, lower than any Group of Seven economy, according to the IMF’s fiscal monitor. That number has climbed from minus 0.6% in 2009. “One differentiating feature between Australia and other Aaa rated sovereigns is that, while government debt has increased markedly in Australia, it has been more stable for other Aaa sovereigns,” Marie Diron at Moody’s in Singapore wrote. “We expect a further increase in debt and will look at policy measures and the economic environment to review our analysis on this.”

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Japan and Europe are in a much better position than the US? Really?

Peter Schiff: ‘Trump’s Right, America Is Broke’ (ZH)

Euro Pacific Capital’s Peter Schiff sat down with Alex Jones last week to discuss the state of the economy, and where he sees everything going from here. Here are some notable moments from the interview. Regarding how bad things are, and what’s really going on in the economy, Schiff lays out all of the horrible economic data that has come out recently, as well as making sure to take away the crutch everyone uses to explain any and all data misses, which is weather.

“It’s no way to know exactly the timetable, but obviously this economy is already back in recession, and if it’s not in a recession it’s certainly on the cusp of one” “We could be in a negative GDP quarter right now, and I think that if the first quarter is bad the second quarter is going to be worse” “The last couple years we had a rebound in the second quarter because we’ve had very cold winters. Well this winter was the warmest in 120 years so there is nothing to rebound from.”

On the Fed, and current policies, he very bluntly points out that nothing is working, nor has it worked, but of course the central planners will try it all anyway. He also takes a moment to agree with Donald Trump regarding the fact that the U.S. is flat out, undeniably broke.

“The problem for the Fed is how do they launch a new round of stimulus and still pretend the economy is in good shape.” “Negative interest rates are a disaster. It’s not working in Japan, it’s not working in Europe, it’s not going to work here. Just because it doesn’t work doesn’t mean we’re not going to do it, because everything we do doesn’t work and we do it anyway. It shows desperation, that you’ve had all these central bankers lowering interest rates and expecting it to revive the economy. And then when they get down to zero, rather than admit that it didn’t work, because clearly if you go to zero and you still haven’t achieved your objective, maybe it doesn’t work. Instead of admitting that they were wrong, they’re now going negative.”

“The United States, no matter how high inflation gets, we’ll do our best to pretend it doesn’t exist or rationalize it away because we have a lot more debt. America is broke, if you look at Europe and Japan even though there is some debt there, overall those are still creditor nations. The world still owes Europe money, the world still owes Japan money, but America owes more money than all of the other debtor nations combined. Trump is right about that, we are broke, we’re flat broke, and we’re living off this credit bubble and we can’t prick it. Other central banks may be able to raise their rates, but the Fed can’t.”

On how he sees everything unfolding from this point, Peter again points out that the economy is weak and it’s only a matter of time before this entire centrally planned manipulation is exposed for what it is, and becomes a disaster for the Federal Reserve. He likens how investors are behaving today to the dot-com bubble, and the beginning of the global financial crisis.

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“Let each wage-earning citizen hold the whole of his or her untaxed earnings–actually touch them. Then let the government pluck its taxes.” “..in six months we would have either a tax revolution or a startling contraction of the budget!”

Make America Solvent Again (Jim Grant)

[..] The public debt will fall due someday. It will have to be repaid or refinanced. If repaid, where would the money come from? It would come from you, naturally. The debt is ultimately a deferred tax. You can calculate your pro rata obligation on your smartphone. Just visit the Treasury website, which posts the debt to the penny, then the Census Bureau’s website, which reports the up-to-the-minute size of the population. Divide the latter by the former and you have the scary truth: $42,998.12 for every man, woman and child, as I write this. In the short term, the debt would no doubt be refinanced, but at which interest rate? At 4.8%, the rate prevailing as recently as 2007, the government would pay more in interest expense –$654 billion– than it does for national defense.

At a blended rate of 6.7%, the average prevailing in the 1990s, the net federal-interest bill would reach $913 billion, which very nearly equals this year’s projected outlay on Social Security. We always need protection against cockeyed economic experimentation. Once a national consensus on money and debt furnished this protective armor. Money was gold and debt was bad, Americans assumed. Most credentialed economists today will smile at these ancient prejudices. Allow me to suggest that our forebears knew something. Keynes himself would recoil at 0% bank-deposit rates, chronically low economic growth and the towering trillions that we have so generously pledged to one another. (All we have to do now is earn the money to pay them.) How do we escape from our self-constructed fiscal jail? According to the Government Accountability Office, unpaid taxes add up to more than $450 billion a year.

Even so, according to the Tax Foundation, Americans spend 6.1 billion hours and $233.8 billion each tax season complying with a federal tax code that runs to 10 million words. Are we quite sure we want no part of the flat-tax idea? An identical low rate on most incomes. No deductions, no H&R Block. Impractical? So is the debt. So is the spending (and the promises to spend more down the road). We need to stop the squandermania. How? By resuming the principled fight that Vivien Kellems waged against the IRS during the Truman Administration. It enraged Kellems, a doughty Connecticut entrepreneur, that she was forced to withhold federal taxes from her employees’ wages. She called it involuntary servitude, and she itched to make her constitutional argument in court. She never got that chance, but she published her plan for a peaceful revolution.

She asked her readers –I ask mine– to really examine the stub of their paycheck. Observe how much your employer pays you and how much less you take home. Notice the dollars withheld for Medicare, Social Security and so forth. If you are like most of us, you stopped looking long ago. You don’t miss the income that you never get to touch. Picking up where Kellems left off, I propose a slight alteration in payday policy. Let each wage-earning citizen hold the whole of his or her untaxed earnings–actually touch them. Then let the government pluck its taxes. “Such a payroll policy,” wrote Kellems in her memoir, Taxes, Toil and Trouble, “is entirely legal and if it were universally adopted, in six months we would have either a tax revolution or a startling contraction of the budget!” Black ink, sound money and the spirit of Vivien Kellems are the way forward. “Make America solvent again” is my credo and battle cry. You can fit it on a cap.

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“The message of today’s populist revolts is that politicians must tear up their pre-crisis rulebooks and encourage a revolution in economic thinking.” No, it’s that today’s politicians must go.

Is Capitalism Entering A New Era? (Kaletsky)

The defining feature of each successive stage of global capitalism has been a shift in the boundary between economics and politics. In classical nineteenth-century capitalism, politics and economics were idealized as distinct spheres, with interactions between government and business confined to the (necessary) raising of taxes for military adventures and the (harmful) protection of powerful vested interests. In the second, Keynesian version of capitalism, markets were viewed with suspicion, while government intervention was assumed to be correct. In the third phase, dominated by Thatcher and Reagan, these assumptions were reversed: government was usually wrong and the market always right. The fourth phase may come to be defined by the recognition that governments and markets can both be catastrophically wrong.

Acknowledging such thoroughgoing fallibility may seem paralyzing – and the current political mood certainly seems to reflect this. But recognizing fallibility can actually be empowering, because it implies the possibility of improvement in both economics and politics. If the world is too complex and unpredictable for either markets or governments to achieve social objectives, then new systems of checks and balances must be designed so that political decision-making can constrain economic incentives and vice versa. If the world is characterized by ambiguity and unpredictability, then the economic theories of the pre-crisis period – rational expectations, efficient markets, and the neutrality of money – must be revised. Moreover, politicians must reconsider much of the ideological super-structure erected on market fundamentalist assumptions.

This includes not only financial deregulation, but also central bank independence, the separation of monetary and fiscal policies, and the assumption that competitive markets require no government intervention to produce an acceptable income distribution, drive innovation, provide necessary infrastructure, and deliver public goods. It is obvious that new technology and the integration of billions of additional workers into global markets have created opportunities that should mean greater prosperity in the decades ahead than before the crisis. Yet “responsible” politicians everywhere warn citizens about a “new normal” of stagnant growth. No wonder voters are up in arms. People sense that their leaders have powerful economic tools that could boost living standards.

Money could be printed and distributed directly to citizens. Minimum wages could be raised to reduce inequality. Governments could invest much more in infrastructure and innovation at zero cost. Bank regulation could encourage lending, instead of restricting it. But deploying such radical policies would mean rejecting the theories that have dominated economics since the 1980s, together with the institutional arrangements based upon them, such as Europe’s Maastricht Treaty. Few “responsible” people are yet willing to challenge pre-crisis economic orthodoxy. The message of today’s populist revolts is that politicians must tear up their pre-crisis rulebooks and encourage a revolution in economic thinking. If responsible politicians refuse, “some rough beast, its hour come at last” will do it for them.

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Japan, Philippines, Tonga, Vanuatu, Ecuador and more

Fears Of ‘The Big One’ As 7 Major Earthquakes Strike Pacific In 96 Hours (E.)

Japan has been worst hit by the tremors. The latest quake to hit the country yesterday, measuring 7.3 on the Richter scale, injured more than 1,000 and trapped people in collapsed buildings, only a day after a quake killed nine people in the same region. Rescue crews searched for survivors of a magnitude 7.3 earthquake that struck Japan’s Kyushu Island, the same region rattled by a 6.2 quake two days earlier. Around 20,000 troops have had to be deployed following the latest 7.3 earthquake at 1.25am local time on Saturday. Roads have also been damaged and big landslides have been reported, there are also 200,000 households without power. The death toll in the latest Kyushu earthquake is 16 people and a previous earthquake that struck the area on Thursday had killed nine people.

There have been other large earthquakes recorded in recent days, including a major one in southern Japan which destroyed buildings and left at least 45 people injured, after Myanmar was rocked on Wednesday. Japan’s Fire and Disaster Management Agency said 7,262 people have sought shelter at 375 centers since Friday in Kumamoto Prefecture. Prime Minister Shinzo Abe vowed to do everything he could to save lives following the disaster. He said: “Nothing is more important than human life and it’s a race against time.” On Thursday, The Japanese Red Cross Kumamoto Hospital confirmed 45 were injured, including five with serious injuries after a quake of magnitude 6.2 to 6.5 and a series of strong aftershocks ripped through Kumamoto city.

Several buildings were damaged or destroyed and at least six people are believed to be trapped under homes in Mashiki. Local reports said one woman was rescued in a critical condition Scientists say there has been an above average number of significant earthquakes across south Asia and the Pacific since the start of the year. The increased frequency has sparked fears of a repeat of the Nepal quake of 2015, where 8,000 people died, or even worse. Roger Bilham, seismologist of University of Colorado, said: “The current conditions might trigger at least four earthquakes greater than 8.0 in magnitude. “And if they delay, the strain accumulated during the centuries provokes more catastrophic mega earthquakes.”

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Apr 142016
 


Unknown Butler’s dredge-boat, sunk by Confederate shell, James River, VA 1864

SocGen: Corporate America Is Nearing A ‘Toxic’ Debt Crisis (BI)
US Corporations Have $1.4 Trillion Hidden In Tax Havens: Oxfam (G.)
US Banks Not Prepared For Another Financial Crisis (G.)
The Beginning of the End of Central Bank Easing (BBG)
Negative Swap Rates Impede Kuroda’s Push To Boost Japan Lending (BBG)
Currencies Across Asia Fall Sharply Against US Dollar (WSJ)
China’s Trade Data Has Never Been This Fake (ZH)
China’s Leaders Are Blowing Their Last Chance To Avert An Economic Crisis (AEP)
Panama Papers Reveal Hong Kong’s Murky Financial Underbelly (AFP)
IMF: $1.3 Trillion In Corporate Bank Loans At Risk Of Default In China (Sky)
Is The IMF ‘Consistently Wrong’? (CNBC)
OPEC Warns of Deeper Cuts to Oil Demand (BBG)
Seen From The Future, Ours Is The Era Of Plastic (BBG)
Greenland’s Melt Season Started Nearly Two Months Early (CC)
EU Nations Use Foreign Aid Budgets To Pay For Refugee Costs (G.)

Where would they be without a stock market bubble, and without ZIRP?

SocGen: Corporate America Is Nearing A ‘Toxic’ Debt Crisis (BI)

US companies have a looming problem of their own making, and it may soon come back to crush them. According to Andrew Lapthorne, head of quantitative analysis at Societe Generale, the amount of debt that businesses have accumulated over the last five to six years has put them on the verge of a serious crisis. Lapthorne wrote in a note to clients on Tuesday: “This level of borrowing in some sectors of the economy is now booming (with the risk of spinning out of control) to such an extent that we think that the build-up of debt on US non-financial corporate balance sheets represents one of the largest mispriced risks in terms of future market stability, downside risk and future economic growth.”

Lapthorne’s argument is essentially that US corporations have decided to borrow money in order to fuel growth larger than that warranted by economic demand. But now with the assets backing this debt starting to decline in value, the wheels are going to fall off. Lapthorne believes there has been one cause of this behavior: central banks. “Aggressive monetary policy in the form of QE and zero or negative interest rates is all about encouraging (forcing?) borrowers to take on more and more debt in an attempt to boost economic activity, effectively mortgaging future growth to compensate for the lack of demand today,” he wrote. From the supply end, making financing debt easier through low interest rates and quantitative easing “encouraged” corporations to take on the debt loads.

On the demand end, investors loved the higher-yielding corporate debt, since US Treasury yields remained so low. Put it together and you have a central-bank-fueled bubble, which Lapthorne called “toxic.” And so with little economic growth to speak of or invest in, corporations have funneled this debt-financed money into share buybacks and mergers in order to improve profitability and the illusion of growth. In fact, Lapthorne said, companies are spending 35% more than their incoming cash flows, higher than previous peaks in 1998 and 2008. The upside is that as stock prices have risen, companies have been able to pay back debt either through raising new debt or still-growing profits. But now with profits on the decline and shakier asset markets, the danger is coming to a head.

So no matter how you look at it, argued Lapthorne, companies have mountains of debt. And as profits and eventually stock prices start to get squeezed from all-time highs, the ability of companies to pay back their debt will get worse.

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Something tells me the real number is much higher.

US Corporations Have $1.4 Trillion Hidden In Tax Havens: Oxfam (G.)

US corporate giants such as Apple, Walmart and General Electric have stashed $1.4tn (£980bn) in tax havens, despite receiving trillions of dollars in taxpayer support, according to a report by anti-poverty charity Oxfam. The sum, larger than the economic output of Russia, South Korea and Spain, is held in an “opaque and secretive network” of 1,608 subsidiaries based offshore, said Oxfam. The charity’s analysis of the financial affairs of the 50 biggest US corporations comes amid intense scrutiny of tax havens following the leak of the Panama Papers. And the charity said its report, entitled Broken at the Top was a further illustration of “massive systematic abuse” of the global tax system. Technology giant Apple, the world’s second biggest company, topped Oxfam’s league table, with some $181bn held offshore in three subsidiaries.

Boston-based conglomerate General Electric, which Oxfam said has received $28bn in taxpayer backing, was second with $119bn stored in 118 tax haven subsidiaries. Computing firm Microsoft was third with $108bn, in a top 10 that also included pharmaceuticals giant Pfizer, Google’s parent company Alphabet and Exxon Mobil, the largest oil company not owned by an oil-producing state. Oxfam contrasted the $1.4tn held offshore with the $1tn paid in tax by the top 50 US firms between 2008 and 2014. It pointed out that the companies had also enjoyed a combined $11.2tn in federal loans, bailouts and loan guarantees during the same period. Overall, the use of tax havens allowed the US firms to reduce their effective tax rate on $4tn of profits from the US headline rate of 35% to an average of 26.5% between 2008 and 2014.

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A bit moot as long as they’re TBTF?!

US Banks Not Prepared For Another Financial Crisis (G.)

Some of the US’s biggest banks still lack a proper plan for bankruptcy, in the event of another major financial crisis, US regulators said on Wednesday. In the wake of the great recession banks were required to come up with “living wills” to prove they had a credible plan for bankruptcy that would not require another bailout from the taxpayers. But after reviewing the plans of five institutions – JP Morgan Chase, Wells Fargo, Bank of America, Bank of New York Mellon and State Street Corp – the Federal Reserve and the Federal Deposit Insurance Corp (FDIC) have determined that the banks have yet to meet that requirement. “The goal to end too big to fail and protect the American taxpayers by ending bailouts remains just that: only a goal,” said Thomas Hoenig, FDIC vice-chairman. The banks are to submit revised proposals by 1 October.

According to feedback from the regulators, one of the main concerns with JP Morgan’s proposal was the bank’s liquidity in a time of need. Regulators were concerned the bank would not be able to shift money around to fund some of its operation during a time of stress or bankruptcy. “Obviously we were disappointed,” said Marianne Lake, JP Morgan’s chief financial officer. “The most important thing is that we work with our regulators to understand their feedback in more detail.” Bank of America also needs better processes for estimating its liquidity needs, the regulators said. And while Wells Fargo was deemed to have “firm-wide, high-quality liquid assets”, regulators raised concerns over “quality control, senior management oversight, and recovery and resolutions planning staffing”. In its statement, Wells Fargo said it was disappointed its plan was “determined to have deficiencies” but the feedback was “constructive and valuable to our resolution planning process”.

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As confidence recedes…

The Beginning of the End of Central Bank Easing (BBG)

Traders are now taking the long view on central bank easing, shifting focus to which monetary policymakers will be the first to change course and withdraw stimulus, according to Bank of America Merrill Lynch FX Strategist Athanasios Vamvakidis. The euro-area, Japan, Norway, New Zealand, and Sweden are the five major developed economies in which central banks have eased policy this year—and by some financial metrics, they don’t have much to show for it. In all of these instances, currencies have strengthened relative to the U.S. dollar in the wake of more accommodative monetary policy (denoted by a circle on the chart below.)

A possible counterpoint: it’s not necessarily that fighting central banks has worked, but that the Federal Reserve’s dovish surprise in March has meant more to these currency pairs than outright easing. That argument might not fully pass the smell test, however, as most of these domestic stocks markets have also declined since monetary policy became more accommodative. So with currencies getting stronger and equities falling (with the exception of New Zealand), Vamvakidis argues “that positioning for a scenario in which some central banks give up easing is worth the cost.” His observations support the notion that the marginal efficacy of stimulus is waning—or as this worry is more commonly expressed, that central banks are running out of ammunition.

He adds, “It is unlikely, in our view, that the next big FX trade will be from a central bank that surprises markets by easing policies more, which was the case in recent years.” A soft global economic backdrop prompted the Federal Reserve to telegraph a slower path for higher interest rates in March. As such, this shift to a focus on exit strategies might seem premature or optimistic, but the opposite may also be true. For instance, in the case of Japan, there are technical limits to the amount of sovereign bonds that can be bought, a dynamic which might force the central bank to begin dialing down this part of its asset-purchasing program. “Markets have already started testing central banks and have been reacting counterintuitively to policy easing,” concludes Vamvakidis. “Central banks can fight back, as the Fed has successfully done recently, but we do not believe that this is sustainable as long as the global recovery continues.”

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Boomerang.

Negative Swap Rates Impede Kuroda’s Push To Boost Japan Lending (BBG)

Negative rates for swapping interest payments are hindering the ability of corporate borrowers to hedge their liabilities – another way in which the Bank of Japan’s unorthodox attempt to revive lending could backfire. The fixed rate paid in exchange for floating-rate payments for a year in Japan’s interest rate swap market fell below zero after the BOJ started charging banks for reserves in February, and was at minus 0.049% on Thursday. Floating-rate loans in Japan aren’t allowed to have repayment rates below zero, causing a disconnect with traditional hedging methods. “Interest-rate swaps aren’t functioning properly” as hedging tools, said Satoshi Oda at Credit Agricole in Tokyo. “Without swaps, banks will have trouble making floating-rate loans and will need to extend fixed-rate loans, but most banks don’t like lending at fixed rates, so they’re becoming hesitant about making new loans.”

Lending growth in Japan excluding trusts slowed to 2% in March from a year earlier, the weakest pace in three years, according to BOJ data released Tuesday. Sumitomo Mitsui Trust Bank sees a drop in swap-market activity as companies avoid using the contracts amid uncertainty about whether regulators will allow floating-rate repayments below zero. When companies take out such loans, they often enter into a derivative deal to hedge, agreeing to pay the fixed swap rate in return for a floating-rate payment that protects them if borrowing costs rise. However, while loan deals stipulate that repayment rates won’t be negative, depriving companies of that benefit, swap transactions do allow for negative payments, meaning the hedger could wind up exposed to risks in both the swap and loan market.

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Can’t keep the greenback down forever. It’s too costly.

Currencies Across Asia Fall Sharply Against US Dollar (WSJ)

Currencies across Asia including the Chinese yuan dropped sharply against the U.S. dollar Thursday, with markets caught off-guard as the Singapore central bank restrained the appreciation of its currency to stoke growth. The yuan saw its biggest one-day depreciation since January, and the Singapore dollar fell by the most within a day this year. Meanwhile, the South Korean won weakened after the ruling party lost its parliamentary majority. Asian currencies had firmed up against the greenback in recent weeks, partly thanks to the Federal Reserve having signaled it would raise interest rates at a slower rate this year than previously expected. Economic policy makers from the Group of 20 nations had pledged at a meeting in February to avoid sparking a currency war through competitive devaluation.

A weakening of the yuan against the U.S. dollar in its daily fix weighed on currencies across the region, after a 0.46% depreciation—the biggest since January. The region’s currency markets had started the day on the back foot as traders assessed first the impact of South Korea’s elections, followed by a surprise easing of monetary policy by Singapore’s central bank. Movements of the yuan fix, which determines the levels at which the currency can trade inside mainland China, have recently been more determined by market forces. Today’s depreciation reflects strength in the U.S. dollar on Wednesday. Thursday’s yuan depreciation was the biggest since Jan. 7, when markets had speculated that moves to weaken the yuan could trigger a global currency war. Competitive currency devaluation hasn’t materialized among major economies since then, but other central banks in smaller countries in Asia are loosening policy in the meantime.

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“China’s March imports from Hong Kong soared an implausible 116% YoY!”

China’s Trade Data Has Never Been This Fake (ZH)

The narrative is set – today’s rally is predicated on “strong” Chinese trade data. So what happens when one chart explodes that narrative as totally fallacious for three simple reasons… First, the data is clearly cooked… As Bloomberg’s Tom Orlik notes, China’s March imports from Hong Kong soared an implausible 116% YoY! As it is clearly disguising capital flows… “Trade mis-invoicing as a way to hide capital flows remains a factor. In the past, over-invoicing for exports was used as a way to hide capital inflows. The latest data show the reverse phenomenon, with over-invoicing of imports as a way of hiding capital outflows.” Does this look “real”?

Second, there is the base effect which EVEN CHINA warned would be a factor: “But beware two factors; the government itself has warned that the base line from March 2015 is low. A reminder that observers shouldn’t get complacent about the downward pressures still threatening China’s economy”. And then finally, there’s the figures themselves, can they be trusted? But did anyone really need an excuse to buy the record highs in stocks, or send Trannie sup 3% on the day? Of course not!

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Ambrose loses faith.

China’s Leaders Are Blowing Their Last Chance To Avert An Economic Crisis (AEP)

China panic has abated. The Shanghai Composite index is back above 3,000. The much-feared devaluation never happened. The yuan has strengthened against the dollar this year, to the consternation of Western macro-tourists. Outflows of money have slowed as dollar debt is paid off and Chinese investors wind down ‘carry trade’ positions. The central bank (PBOC) is no longer depleting the country’s $3.2 trillion foreign reserves to defend the exchange rate, and thereby tightening monetary policy as a nasty side-effect. China has the apparatus of an authoritarian state to curb capital flight, and is not shy about using it. The IMF has just raised its forecast for Chinese growth this year to 6.5pc, insisting that it is still far too early to talk about a hard-landing. Yet that is where the good news ends, for there is a poisonous sting in the tail.

Maurice Obstfeld, the IMF’s chief economist, said the trade-off for this year’s growth spurt is even more trouble down the road. “While we have upgraded near-term projections, we have downgraded the farther out projections,” he said. “Our concern is some of the stimulus is likely to take the form of higher credit growth, more support for sectors that are in a secular sense declining and not that productive. We worry about the quality of growth more than the quantity of growth,” he said. There you have the nub of the matter. Stripped of IMF circumlocutions, he is telling us that the Communist Party has once again let rip with debt-driven stimulus for the housing market and rust-bowl industries already chocking with overcapacity, stoking yet another mini-cycle to put off the day of reckoning.

The likelihood that China will fail to grasp the nettle of reform in time to avert a structural crisis is rising from probable to almost certain. As the well-meaning premier Li Keqiang keeps warning his colleagues in the Standing Committee, the current course leads straight into the middle income trap. We can put away those charts projecting China’s ‘sorpasso’, the moment when the country overtakes the US to become the world’s biggest economy. It is not going to happen in 2020, and will look even less likely in 2030, when China’s demographic dividend turns to deficit and the workforce goes into precipitous decline. “Implementation of a more ambitious and comprehensive policy agenda is urgently needed to stay ahead of rising financial sector vulnerabilities,” said the IMF today in its Global Financial Stability Report.

The section on China reads like a horror story. The “credit overhang” has exploded to 25pc of GDP, perpetuating a vicious circle of falling factory gate prices and plunging profits. While the IMF does not use the term, China is basically in a ‘debt-deflation’ trap. Earnings have been dropping more quickly than nominal interest rates, automatically tightening the noose. “The ability of many Chinese listed firms to service their debt obligations is eroding,” it said. The ratio of gross debt to earnings (EBITDA) has doubled to four since 2010. Debt at risk – where earnings do not cover interest payments – has risen from 4pc to 14pc in five years. It has reached 39pc for steel, 35pc for mining and retail, and 18pc for manufacturing and transport.

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And thereby China’s.

Panama Papers Reveal Hong Kong’s Murky Financial Underbelly (AFP)

Jasmine Li was still a student when she opened her first offshore bank account through Mossack Fonseca Hong Kong, but the shady world she entered that day had been part of the city’s underbelly for decades. The granddaughter of China’s then fourth-ranked politician was among dozens named in a vast cache of documents leaked from the Panama law firm that have given a glimpse into how the rich and powerful hide their money. But the so-called Panama Papers, released by the International Consortium of Investigative Journalists this month, have also exposed the key role played by Hong Kong and Singapore in funnelling that wealth into tax havens.

Mossack Fonseca’s Hong Kong offices were their busiest in the world, the ICIJ analysis showed, setting up thousands of shell companies including some linked to China’s top political brass, the city’s richest man, Li Ka-shing, and movie star Jackie Chan. Experts say the Asian financial hubs have already channelled billions into tax havens, and the Boston Consulting Group predicts they will be the world’s fastest-growing offshore centres over the next five years. “Hong Kong is set up to make it easy for people to do business, and it is very easy to do business here,” said Douglas Clark, a barrister with one of Hong Kong’s largest chambers.

“But when it’s easy to do business then it’s easy to do any type of business, legal or illegal.” Offshore companies are not necessarily illegal, but they operate on the fringes of what is allowed and their opaque structures make it easy to conceal ill-gotten or politically inconvenient wealth. They have proved a boon for Hong Kong and Singapore, which are known not only for their financial expertise but also light-touch regulation, discretion and non-cooperation with foreign tax authorities. Both are already on regulators’ radars – the EU briefly added Hong Kong to its tax blacklist last year – but experts say they are unlikely to do anything to jeopardise the lucrative offshore business.

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For what it’s worth (It’s IMF, after all): “These loans could translate into potential bank losses of approximately 7% of GDP..”

IMF: $1.3 Trillion In Corporate Bank Loans At Risk Of Default In China (Sky)

The IMF has warned that $1.3tn (£913bn) in corporate bank loans are at risk of default in China. The fund’s latest Global Financial Stability Report said the figure was recognised by the authorities in Beijing and was “manageable” given the country’s rate of economic growth – currently running just below 7%. But the world’s lender of last resort said the situation underlined the concerns of financial markets over the sustainability of China’s economic model, given the volatility witnessed last summer and in January when stock values plunged. It said: “The magnitude of these vulnerabilities calls for an ambitious policy agenda”.

The IMF said the issue of corporate debt could not be ignored and it called for a further strengthening of China’s financial institutions, suggesting that another global stock market rout could knock world GDP growth by as much as 4%. Investor confidence has been damaged by a slowdown in the world economy – blamed on the deterioration in Chinese growth as it moves to rebalance its economy from a heavy infrastructure and industrial powerhouse towards a more services-based model. The IMF said falling profitability in China, linked to lower GDP growth, was behind its concern for borrowings at risk of default. There was clear evidence, it said, that a growing number of companies were not earning enough to cover interest payments. “These loans could translate into potential bank losses of approximately 7% of GDP,” it added.

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All these parties chiming in on Brexit will achieve the opposite of what they want.

Is The IMF ‘Consistently Wrong’? (CNBC)

Supporters of a British exit from the European Union were left enraged this week after a new report by the IMF led to calls of inaccuracy and political bias. The Washington D.C.-based organization said the U.K. referendum on its membership of the EU had already created uncertainty for investors and said a so-called “Brexit” could do “severe regional and global damage by disrupting established trading relationships.” U.K. Prime Minister Cameron and Finance Minister George Osborne both used their Twitter accounts Tuesday to promote the IMF’s latest assessment with the latter calling it “one of most important interventions yet in EU debate.” Bookmaker Ladbrokes is currently predicting there’s a 33% chance that Britons will vote to leave the European bloc in an upcoming referendum on June 23.

The fierce debate has strained relationships and seen major political heavyweights put forward opposing views. The warning – just weeks before the June 23 vote – was heavily criticized by John Longworth, a former director-general of the British Chambers of Commerce, who resigned from his role in March after being drawn into the political row. The British government is officially campaigning to stay within a renegotiated EU and Longworth claimed that it had “friends in high places” with this latest backing by the IMF. The IMF did not respond immediately when asked by CNBC about claims of bias and inaccuracy. “I’m fully expecting a whole series of international organizations to make comments saying we ought to stay in the EU running up to the 23rd of June, no doubt orchestrated by the U.K. government,” Longworth told CNBC Wednesday.

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Real demand cuts will be much deeper than OPEC lets on.

OPEC Warns of Deeper Cuts to Oil Demand (BBG)

OPEC said it may deepen cuts to its forecast for global oil demand growth due to slowing economic expansion in emerging markets, warmer weather and the removal of fuel subsidies. OPEC trimmed estimates for demand growth in 2016 by 50,000 barrels a day because of a slowdown in Latin America, projecting worldwide growth of 1.2 million barrels a day. Weakness in Brazil’s economy, the removal of fuel subsidies in the Middle East and milder winter temperatures in the northern hemisphere could prompt further cutbacks, the group said. “Current negative factors seem to outweigh positive ones and possibly imply downward revisions in oil demand growth, should existing signs persist going forward,” the organization’s Vienna-based secretariat said in its monthly market report.

“Economic developments in Latin America and China are of concern.” Oil climbed to a four-month high in London on Tuesday as OPEC nations prepare to meet with Russia and other non-members in Doha this weekend to complete an accord on freezing oil production, an effort to tame the global crude surplus. OPEC’s report said that “positive market sentiments continue to arise” from the freeze plan. The group’s data shows that the 11 OPEC members who are confirmed to attend the Doha talks are pumping 487,000 barrels a day below January levels, the benchmark proposed for the freeze deal.

Libya has said it won’t attend the meeting, and Iran has yet to decide. Saudi Arabia’s output has remained stable since January, the report showed. All 13 members pumped 32.25 million barrels a day in March, up 14,900 a day from February, according to external estimates compiled by OPEC. Global oil demand will average 94.18 million barrels a day in 2016, according to the report. This year’s growth rate of 1.2 million barrels a day is down from 1.54 million a day in 2015 amid a slowdown in consumption of industrial fuels and middle distillates in China and Latin America.

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The era of plastic is in fact simply the era of oil.

Seen From The Future, Ours Is The Era Of Plastic (BBG)

Historians may soon be looking back at the 20th and early 21st centuries as the time of computers and the Internet, bold ventures into space and the splitting of the atom. But what will scholars in the distant future find worthy of note? If there’s anyone around with a penchant for paleontology hundreds of thousands of years from now, a surprise awaits in the stratigraphic layers containing the remains of our time. Anyone digging into the earth would find a sudden, explosive increase in a new kind of material – plastic. Once underground, plastic will fossilize well, leaving a distinct signature. And there’s plenty of it. Until the 20th century, plastic was virtually nonexistent. Since then, humans have created 5 billion tons. The paleontologist Jan Zalasiewicz has calculated that if it were all converted into cling wrap, there would be enough to wrap the globe.

Until about 20 years ago, Zalasiewicz said, the idea that people could permanently change the planet was considered nonsense. Human beings were too puny and the planet too vast. “The scale of geological processes such as mountain building and volcanic eruptions have been held to be much greater than anything humans can rustle up,” he said. But over the last several decades, he added, it’s become clear that human-generated effects “can be big on a geological scale and can be more or less permanent.” Geologic maps of the future might refer to our time as the Slobocene era, or the Trashiferous period. Or maybe the name scientists recently coined – Anthropocene – will stick. It refers to the time when humankind started to make an indelible mark. Changes that characterize the Anthropocene include the widespread production of aluminum and concrete as well as plastics, and distinct changes in the chemistry of the atmosphere and oceans.

Plastics have been important for distributing clean food and water, for medical devices, surgical gloves and affordable clothing. They’ve played a big role in health and sanitation. The fact that they don’t dissolve or decay is a plus for most of their intended uses. But there are unintended consequences. Some plastics are recycled, but most go into landfills or become litter. Recently, scientists have come to realize that much of the plastic in the environment is in the form of invisible particles. Some of these come from the breakdown of bags and other floating trash in the oceans, some from toothpaste and cosmetics, and much of it from clothes, which are mostly made from synthetic materials and give off plastic fibers every time they go through a wash. These “microplastics” can be measured in sand from beaches around the world, and in the guts of many fish.

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Scary graph of the day.

Greenland’s Melt Season Started Nearly Two Months Early (CC)

To say the 2016 Greenland melt season is off to the races is an understatement. Warm, wet conditions rapidly kicked off the melt season this weekend, more than a month-and-a-half ahead of schedule. It has easily set a record for earliest melt season onset, and marks the first time it’s begun in April. Little to no melt through winter is the norm as sub-zero temperatures keep Greenland’s massive ice sheet, well, on ice. Warm weather usually kicks off the melt season in late May or early June, but this year is a bit different. Record warm temperatures coupled with heavy rain mostly sparked 12% of the ice sheet to go into meltdown mode. Almost all the melt is currently centered around southwest Greenland.

According to Polar Portal, which monitors all things ice-related in the Arctic, melt season kicks off when 10% of the ice sheet experiences surface melt. The previous record for earliest start was May 5, 2010. This April kickoff is so bizarrely early, scientists who study the ice sheet checked their analysis to make sure something wasn’t amiss before making the announcement. “We had to check that our models were still working properly” Peter Langen, a climate scientist at the Denmark Meteorological Institute (DMI), told the Polar Portal. But alas, the models are definitely working and weather data and stories coming out of West Greenland have borne that out. According to DMI, temperatures at Kangerlussuaq, a small village in southwest Greenland, set an April record for that location when they reached 64.4°F (17.8°C) on Monday. That’s just a scant .4°F (.2°C) off the all-time Greenland high for April. Heavy rain have also inundated local communities.

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As long as their own people don’t pay a penny….

EU Nations Use Foreign Aid Budgets To Pay For Refugee Costs (G.)

The amount of foreign aid money rich nations spend on dealing with the impact of the refugee crisis at home has almost doubled over the past year and now accounts for 9% of all development expenditure, according to the latest official figures. The preliminary statistics, from the OECD, show that wealthy donor countries spent a net total of $131.6bn (£92.5bn) on aid in 2015, compared with $135.2bn the previous year. Of that, $12bn went on domestic spending – or “in-donor refugee costs”, up from $6.6bn in 2014. Many of the European countries most affected by the mass migration of people recorded surges in their official development assistance (ODA) in 2015: Greece’s aid spending rose by 38.7%; Sweden’s by 36.8%; Germany’s by 25.9%; the Netherlands’ by 24.4%, and Austria’s by 15.4%. The OECD says that all these rises, to greater or lesser extents, were caused by growing in-donor refugee costs.

According to the organisation, members of its development assistance committee (DAC) spent 6.9% more in real terms in 2015 than they did the previous year, making it “the highest level ever achieved for net ODA”. It said ODA as a share of gross national income was 0.3%, putting it on a par with 2013, when aid reached a record, real terms high of $135.1bn. However, the European Network on Debt and Development (Eurodad) said many EU countries are now the biggest recipients of their own aid, adding that the latest figures had been “dramatically inflated” by the diversion of aid to cover the domestic costs of the refugee crisis. “While it is very important that we care for refugees arriving on our shores, our own costs should not be classed as international development aid, and money to cover this must come from other sources,” said Jeroen Kwakkenbos, Eurodad’s policy and advocacy manager.

“We must stop raiding aid budgets to solve our own problems at the expense of the poorest people who desperately need more and better aid. The figures presented today show clear issues with the reporting rules as the largest increases were for domestic budget gaps related to the refugee crisis.” Amy Dodd, of the Concord AidWatch initiative, said: “Unfortunately, official figures today confirm that despite some positive exceptions, the EU once again missed its overall aid target in 2015. “The figures are a real blow to the credibility of the EU and its member states at precisely the moment they should be demonstrating their commitment to implementing the promises they made to provide sufficient, high quality sustainable development financing for [the sustainable development goals].”

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Apr 062016
 


Jack Delano Residents of Miss Disher’s rooming house for rail workers, Clinton, Iowa 1943

The Global Liquidity Trap Turns More Treacherous (Minerd)
Global Profits Recession Leaves Investors With Nowhere to Hide (BBG)
Global Bond Yield Plunge to Record 1.3% Is Flashing Warning Sign (BBG)
Are We Facing A Global “Lost Decade”? (Steve Keen)
Default Tsunami Brewing (BBG)
China’s Global Investment Spree Is Fuelled By Debt (Economist)
China Bulls Become an Extinct Species (WSJ)
Bond Investors Looking to Get Ahead of ECB Turn to Derivatives (BBG)
The Panama Papers Could Hand Bernie Sanders The Keys To The White House (Ind.)
Bernie Sanders Predicted The Panama Papers In 2011 (AHT)
How America Became A World Leader In Tax Avoidance (Salon)
Panama Has Company as Bank-Secrecy Holdout: America (BBG)
Panama Secrecy Leak Claims First Casualty as Iceland PM Quits (BBG)
Mossack Fonseca Says Data Hack Was External, Files Complaint (Reuters)
David Cameron Left Dangerously Exposed By Panama Papers Fallout (G.)
The Enduring Certainty Of Radical Uncertainty (John Kay)
EU Executive To Present Steps To Tighten External Border Controls (Reuters)
With New Deal, A Refugee’s Rights Come Down To Luck (Reuters)
Greece Pauses Deportations As Asylum Claims Mount (AP)

Whaddaya know.. Someone other than me gets the link between money velocity and deflation. And Guggenheim’s Scott Minerd adds negative rates for good measure.

The Global Liquidity Trap Turns More Treacherous (Minerd)

For the first time since the Great Depression, the world is in a global liquidity trap. The unintended consequence of many central banks pushing negative interest rate policy is conjuring deflationary headwinds, stronger currencies, and slower growth — the exact opposite of what struggling economies need. But when monetary policy is the only game in town, negative rates are likely to beget even more negative rates, creating a perverse cycle with important implications for investors. When central banks reduce policy rates, their objective is to stimulate growth. Lower rates are designed to spur savers to spend, redirect capital into higher-return (ie riskier) investments, and drive down borrowing costs for businesses and consumers. Additionally, lower real interest rates are associated with a weaker currency, which stimulates growth by making exports more competitive.

In short, central banks reduce borrowing costs to kindle reflationary behaviour that helps growth. But does this work when monetary policy is driven through the proverbial looking glass of negative rates? There is a strong argument that when rates go negative it squeezes the speed at which money circulates through the economy, commonly referred to by economists as the velocity of money. We are already seeing this happen in Japan where citizens are clamouring for 10,000-yen bills (and home safes to store them in). People are taking their money out of the banking system to stuff it under their metaphorical mattresses. This may sound extreme, but whether paper money is stashed in home safes or moved into transaction substitutes or other stores of value like gold, the point is it’s not circulating in the economy.

The empirical data support this view — the velocity of money has declined precipitously as policymakers have moved aggressively to reduce rates. A decline in the velocity of money increases deflationary pressure. Each dollar (or yen or euro) generates less and less economic activity, so policymakers must pump more money into the system to generate growth. As consumers watch prices decline, they defer purchases, reducing consumption and slowing growth. Deflation also lifts real interest rates, which drives currency values higher. In today’s mercantilist, beggar-thy-neighbour world of global trade, a strong currency is a headwind to exports. Obviously, this is not the desired outcome of policymakers. But as central banks grasp for new, stimulative tools, they end up pushing on an ever-lengthening piece of string.

The BOJ and the ECB are already executing massive quantitative easing programmes, but as their balance sheets expand, assets available to purchase shrink. The BoJ now buys virtually all of the Japanese government bonds that are issued every year, and has resorted to buying exchange traded funds to expand its balance sheet. The ECB continues to grow the definition of assets that qualify for purchase as sovereign debt alone cannot satisfy its appetite for QE. As options for further QE diminish, negative rates have become the shiny new tool kit of monetary policy orthodoxy. If Doctor Draghi and Doctor Kuroda do not get the outcome they want from their QE prescriptions – which is highly likely – then more negative rates will be on the way.

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Greater fools and bubbles.

Global Profits Recession Leaves Investors With Nowhere to Hide (BBG)

The profits recession is global – and that’s bad news for the world economy and for equity markets. So say researchers at the Institute of International Finance, a Washington-based association that represents close to 500 financial institutions from 70 countries. In their April “Capital Markets Monitor,” IIF executive managing director Hung Tran and his team blamed the global decline in earnings on poor productivity growth, weak demand and a general lack of pricing power. U.S. companies also are being squeezed by rising labor costs as they add people to their payrolls. The pervasiveness of the downturn means there’s nowhere for corporations to turn. “In the past, if you had poor performance at home, you could recoup and compensate for that with overseas investment,” Tran said in an interview.

“But if you suffer declines in profits domestically and internationally, you tend to retrench.” That in turn raises the odds of an economic recession. He put the chances of a U.S. downturn within two years at around 30 to 35% due to the earnings slump, up from 20 to 25%. The prolonged profits recession makes Tran and his associates skeptical that the recent rebound in global stock markets can last. They see prices stuck in a downward trend. “With profits expected to remain under pressure for the foreseeable future, this situation will eventually exert downward pressure on equity prices,” they wrote in their report.

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Shares? No. Bonds? No.

Global Bond Yield Plunge to Record 1.3% Is Flashing Warning Sign (BBG)

Global bond yields fell to a record, a warning sign on the worldwide economy. The yield on the Bank of America Global Broad Market Index plunged to 1.3%, the lowest level in almost 20 years of data. Bonds in the gauge have returned 3.6% in 2016, while the MSCI All Country World Index of shares has slumped 1.5%, including dividends. “This is a sign of global disinflation,” said Hideaki Kuriki at Sumitomo Mitsui Trust Asset Management. “The U.S. cannot pull up the world economy.” The Treasury 10-year note yield was little changed on Wednesday at 1.73% as of 10:19 a.m. in Tokyo, based on Bloomberg Bond Trader data. The price of the 1.625% security due in February 2026 was 99 2/32. The yield dropped to a record 1.38% in 2012. The Federal Reserve is scheduled to issue the minutes of its March 15-16 meeting Wednesday. Chair Janet Yellen said last week U.S. central bankers need to “proceed cautiously” in raising interest rates because the global economy presents heightened risks.

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Don’t think a decade will do it.

Are We Facing A Global “Lost Decade”? (Steve Keen)

The era of low growth known as Japan’s “Lost Decade” commenced in 1990, and persists to this day. While most authors acknowledge that the seeds for the Lost Decade were sown by excessive credit growth in the preceding Bubble Economy years, only Richard Koo and Richard Werner have systematically argued that insufficient credit growth during the “Lost Decade” explains Japan’s now quarter-century long slump. Yet these arguments tell us more about the dilemmas facing today’s world economy than many more commonly accepted explanations of the current slowdown.

The insufficient credit growth story is rejected out of hand by most economists, for reasons summed up by Paul Krugman. From the perspective of mainstream economics, any event that negatively affects debtors is, to a large degree, offset by the positive effects of that event for creditors. Krugman therefore sees no possibility of Koo’s argument of “an entire economy being “balance-sheet constrained”: Maybe part of the problem is that Koo envisages an economy in which everyone is balance-sheet constrained, as opposed to one in which lots of people are balance-sheet constrained. I’d say that his vision makes no sense: where there are debtors, there must also be creditors, so there have to be at least some people who can respond to lower real interest rates even in a balance-sheet recession. (Krugman, 2013)

Koo is, however, correct: it IS possible for an entire economy to be balance-sheet constrained. Understanding why requires an appreciation of private credit creation that goes beyond the mere accounting truism that every entity’s liability is another entity’s asset. This paper will argue that the assumptions made by mainstream economists about the role of credit and banking in the economy are incorrect. When taking into account the “money creation” functions of banking, it becomes clear that the USA and most advanced economies as well as many emerging economies have joined Japan in being balance-sheet constrained, and face their own “lost decade” as a consequence of low credit growth. I will start with the empirical data and its implications, and then move on to the argument that an entire economy can be balance-sheet constrained.

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We’ve neglected emerging markets recently.

Default Tsunami Brewing (BBG)

Investors worried by a potential second wave of defaults in the U.S. should be even more concerned about emerging markets.Moody’s Investors Service says default rates currently stand at about 4% and could soar to as high as 14.9% by the end of the year under the most pessimistic scenario, Bloomberg News reports today. Its best-case projection is a 5.05% rate.Edward Altman, New York University professor and creator of the widely used Z-Score method for predicting bankruptcies, has also forecast rising U.S. defaults this year, saying in January that recession could follow even with a rate of less than 10%, given the increase in debt since the financial crisis.

Altman, a specialist in credit markets, hasn’t been able to create successful default rate statistics for emerging markets due to a lack of historical data, he told an audience at Hong Kong University last year. However, it was safe to assume that they would normally exceed those of developed markets such as the U.S., he concluded. If that’s the case, there’s trouble on the way. According to Standard & Poor’s, emerging markets recorded their highest number of defaults for 11 years in 2015, a tally of 26. The Bank of America Merrill Lynch High Yield Emerging Markets Corporate Plus index currently comprises 696 bonds, a number that’s risen from 346 eight years ago. Based on those numbers, the delinquency rate stands at only 3.7% (though the S&P figures don’t capture the entire universe of defaults).

A study by Moody’s published in February 2009 showed that the default rate among high-yield emerging-markets issues could reach as high as 22% in the five years following severe banking and sovereign crises. So far, most countries in the asset class have suffered currency and liquidity crises but have skirted the more severe sovereign and banking kind. A further cause for concern: Fitch Ratings said in January that 24% of companies in seven of the biggest emerging markets have raised money offshore. That increases their vulnerability to weakening currencies, an issue that’s dogging Chinese issuers. Fitch also said that the share of banks and sovereign ratings on negative outlook is at the highest since 2009.

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China debt=Monopoloy money.

China’s Global Investment Spree Is Fuelled By Debt (Economist)

[..] Chinese buyers, by and large, are far more indebted than the firms they are acquiring. Of the deals announced since the start of 2015, the median debt-to-equity ratio of Chinese buyers has been 71%, compared with 44% for the foreign targets, according to The Economist’s analysis of S&P Global Market Intelligence data. Cash cushions are generally also much thinner for Chinese buyers: their liquid assets are roughly a quarter lower than their immediate liabilities. The forbearance of their creditors makes these heavy debts more bearable in China than they would be elsewhere. But the Chinese buyers are financially stretched, all the same. Where, then, are they getting the money for the deals? For many, the answer is yet more debt. Chinese banks see lending to Chinese firms abroad as a safe way of gaining more international exposure.

The government has encouraged them to support foreign deals. As long as the firms to be acquired have strong cash flows, the banks are happy to lend against the targets’ balance-sheets, bringing debt to levels usually only seen in leveraged buy-outs. Foreign banks are also getting involved in some of the deals: HSBC, Credit Suisse, Rabobank and UniCredit are helping to arrange syndicated loans for ChemChina, which agreed to buy Syngenta, a Swiss seed and pesticide firm, for $43 billion. When the acquirers’ finances look shaky, bankers say they find solace in two things: that the deals themselves will generate returns and that the political pedigree of the buyers, especially that of state-owned companies, will protect them. “You have to trust that the acquirer has become too big to fail,” says an M&A adviser.

For the buyers, there are two strong financial rationales for the deals, albeit ones that highlight distortions in the Chinese market. First, debt-funded buyouts can actually make their debt burdens more tolerable. Take the case of Zoomlion, a construction-equipment maker with 83 times more debt than it earns before interest, tax, depreciation and amortisation. It wants to buy Terex, an American rival with debt just 3.5 times larger than its earnings, for $3.4 billion. Even if the purchase consists entirely of borrowed cash, the combined entity would still have a debt-to-earnings multiple of roughly 18, a marked improvement for Zoomlion.

Second, Chinese buyers know that one key financial metric works to their advantage: valuations in the domestic stockmarket are much higher than abroad. The median price-to-earnings ratio of Chinese buyers is 56, twice that of their targets. In effect, this means they can issue shares domestically and use the proceeds to buy what, from their perspective, are half-price assets abroad. This also gives them the firepower to outbid rivals in bidding wars. To foreign eyes, it might look like the Chinese are overpaying. But so long as their banks and shareholders are willing to stump up the cash, Chinese companies see a window of opportunity.

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Except in Beijing.

China Bulls Become an Extinct Species (WSJ)

The definition of a China “bull” used to be those who saw the Chinese economy rushing full speed ahead into the distant future. Their vision wasn’t so far-fetched. Remember: Annual growth was still hitting double digits until 2010. As recently as 2014, Justin Lin Yifu, a former World Bank chief economist, was publicly confident that growth could roll along at 8% a year for another 20 years, with the right mix of economic overhauls to oil the wheels. The minority “bear” proposition was for a severe slowdown, somewhere in the mid-to-low single digits. An even rarer breed of “permabears” warned of collapse. How quickly calculations have changed. We haven’t yet reached the point where the former bear case has become the bull case, but we’re getting close.

At a recent workshop hosted by the Council on Foreign Relations, a nonpartisan U.S. think tank, participants—35 or so academic economists, Wall Street professionals and geopolitical strategists—lined up around three different growth scenarios for China. Only 31% chose the optimistic one, defined as 4% to 6% annual growth, dependent on leaders successfully implementing reforms; 61% foresaw a “lost decade” of 1% to 3% growth; the rest thought a so-called hard-landing, or contraction, was most likely. Of course it wasn’t a scientific survey, but what’s interesting is that apparently nobody considered the possibility that the Chinese government could deliver on its promise of “medium to fast” growth, meaning 6.5% or higher.

If the old-style bulls are virtually extinct as a species, a major reason is widespread skepticism that the Chinese leadership under President Xi Jinping is focused on economic transformation. Instead, Mr. Xi’s attention seems to be fixated on his anticorruption drive, cracking down on internal dissent, bringing the media to heel, firming up his control over the security forces and challenging the U.S. for dominance in the South China Sea. Ironically, those predicting a hard landing in the Council on Foreign Relations workshop might have had the best rationale for optimism. Michael Levi, a council fellow and one of the organizers, says this crowd thought that the economy hitting rock-bottom would galvanize the leadership into action and that China would “come out better on the other side.”

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Liquidity vacuum.

Bond Investors Looking to Get Ahead of ECB Turn to Derivatives (BBG)

A rush for credit exposure in Europe is manifesting in the swaps market because investors are struggling to find enough bonds to satisfy their demand. The ECB’s plan to purchase corporate bonds is fueling demand for securities in anticipation of a rally when the purchases start. Investment-grade bond funds in euros had inflows each week since the ECB said on March 10 that it would expand measures to stimulate the economy. That’s already suppressed yields and made it harder to obtain the notes, making credit derivatives more attractive. Wagers on European credit-default swap indexes have more than doubled since the ECB’s announcement. Investors had sold a net $25 billion of protection as of March 25, near the highest since at least December 2013 and up from $11 billion as of March 4.

“There’s a dearth of bonds investors can get their hands on,” said Mitch Reznick at Hermes Investment Management. “In this liquidity vacuum, managers can use credit-default swaps as a proxy for the bonds that they can’t obtain in order to get longer in credit.” Investors placed the equivalent of $379 million into investment-grade bond funds in euros in the week through March 30, the fourth straight week of inflows, according to Bank of America. That helped push average borrowing costs for investment-grade companies to 1.07%, the lowest in almost a year, the bank’s bond index data show. They’re putting money into euro funds even as they withdraw from other segments, Bank of America said, citing EPFR Global data. Dollar and sterling funds had a combined $249 million of withdrawals in the period, the data show.

The ECB said it will start buying bonds from investment-grade companies in the euro area toward the end of the second quarter and investors are rushing to buy securities before then because they expect the purchases to sap liquidity and suppress yields even further. Some investors are also hoarding bonds, compounding the situation and making it more efficient to sell credit protection, Reznick said. “The quickest way to go long credit is by selling contracts tied to indexes in large size,” said Roman Gaiser at Pictet Asset Management. “That’s easier than buying lots of individual bonds. It’s a quick way of getting exposure to credit.”

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I have no such hope.

The Panama Papers Could Hand Bernie Sanders The Keys To The White House (Ind.)

The revelation that the rich and wealthy are shovelling money in overseas tax havens is not a particularly surprising one. Nevertheless, the sheer scale of the 11.5 million document leak from Panamanian law firm Mossack Fonesca has whipped up an overdue storm and forced the issue of tax justice back on the agenda. It is likely that the Panama papers is just the tip of the iceberg, and if even more is revealed about the financial affairs of world leaders, the implication for global politics will be huge. The Democratic presidential primaries in the US have been characterised by surging anger at the global elite. The Panama papers scandal will only fuel popular indignation at the actions of perceived establishment figures – those who have stood idly by and allowed this huge miscarriage of justice to take place.

Although there have been no major American casualties over the leak at this stage, all of the presidential candidates will be questioned about the scandal. And nobody is going to be under more pressure than Hillary Clinton. For some Americans, she is the embodiment of a “global elite”, while Bernie Sanders is its antithesis. The huge leak exposes governments across the globe wilfully ignoring tax avoidance by the rich. Although Clinton has not been linked to any malfeasance in the leak, there is a sense that she is among the elite rich, some of whose members have benefited from such schemes. It has been revealed Clinton pushed through the Panama Free Trade Deal at the same time that Sanders vocally opposed it, citing research warning that it would strictly limit the government’s ability to clamp down on questionable or even illegal activity.

Even if the Clintons remain unmentioned in future tax bombshells, Sanders can continue to exploit the narrative that Clinton is part of the demographic responsible, and has assisted in flagrant abuses of the system through trade deals. As this scandal looks intent on dragging on, it is now increasingly likely that undecided voters will swing towards the Sanders camp in the vital primaries coming up, including New York. In a general election, Republican favourite Donald Trump’s alleged historic tax dodging will leave him in hot water in comparison to Sanders’ squeaky clean record. He is the only candidate who even speaks in terms of the 1% vs the 99%. Should he secure the Democratic nomination, early general election polls suggest Sanders would knock Trump out of the park.

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“Sanders has opposed all free trade agreements in recent memory, such as NAFTA and the TPP. Clinton has supported them and even criticized Sanders for his lack of support.”

Bernie Sanders Predicted The Panama Papers In 2011 (AHT)

[..] the Panama Papers implicate 140 world leaders from 50 countries in stashing enormous sums of untaxed money in offshore shell corporations. Of course, this is part and parcel of the 1%, but the ubiquitousness shown in the leaks is astonishing. [..] No American leaders have been named in the leak as yet, but the editor of Süddeutsche Zeitung told other journalists “Just wait for what is coming next” in regards to American empire. Nevertheless, Senator and Democratic primary contender Bernie Sanders may very well have already come out ahead. In October 2011, Sanders criticized the Panama trade pact on the Senate floor.“Panama’s entire annual economic output is only $26.7 billion a year, or about two-tenths of one% of the U.S. economy. No one can legitimately make the claim that approving this free trade agreement will significantly increase American jobs.”

Sanders then asks the Senate, “why would we be considering a standalone free trade agreement with Panama?” The agreement in question, which was ultimately passed despite Sanders’ objections, is called The United States—Panama Trade Promotion Agreement (TPA). Sanders then answered his own question in a haunting premonition of things to come: “Well it turns out that Panama is a world leader when it comes to allowing wealthy Americans and large corporations to evade U.S. taxes by stashing their cash in offshore tax havens; and the Panama free trade agreement will make this bad situation much worse. Each and every year, the wealthiest people in our country and the largest corporations evade about $100 billion in U.S. taxes through abusive and illegal offshore tax havens in Panama and other countries…”

The D.C.-based progressive think tank Citizens for Tax Justice proclaims “that tax haven use is ubiquitous among America’s largest companies,” citing its volumes of research. In 2014, Fortune 500 companies held more than $2.1 trillion in accumulated profits offshore in order to evade taxes. Hillary Clinton, Sanders’ opponent in the Democratic primary, argued vehemently for the TPA in 2011. “The Free Trade Agreements passed by Congress tonight will make it easier for American companies to sell their products to South Korea, Colombia and Panama, which will create jobs here at home,” part of Clinton’s 13 October, 2011 statement read. Strangely enough, her full statement no longer exists on the State Department’s website. Sanders has opposed all free trade agreements in recent memory, such as the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP). Clinton has supported them and even criticized Sanders for his lack of support.

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We need a Delaware Papers.

How America Became A World Leader In Tax Avoidance (Salon)

What we have not yet seen is any U.S. individual implicated in the leak, which seems unlikely given our stable of international wealth. The editor of Süddeutsche Zeitung, the German newspaper which first received the documents, promises there will be more to come. But one reason why Americans haven’t yet been implicated is that they already have a perfectly good place for their tax avoidance schemes: right here in the United States. While several developed countries are already moving to reduce the anonymity behind shell companies, including a public registry of “beneficial ownership” information in the United Kingdom and a directive to collect similar information throughout the European Union, the United States has resisted such transparency. According to recent research, the United States is the second-easiest country in the world to obtain an anonymous shell corporation account. (The first is Kenya.) You can create one in Delaware for your cat.

While we force foreign financial institutions to give up information on accounts held by U.S. taxpayers through the Foreign Account Tax Compliance Act of 2010, we don’t reciprocate by complying with international disclosure requirements standardized by the OECD and agreed to by 97 other nations. As a result, the U.S. is becoming one of the world’s foremost tax havens. Several states – Delaware, Nevada, South Dakota, Wyoming – specialize in incorporating anonymous shell corporations. Delaware earns between one-quarter and one-third of their budget from incorporation fees, according to Clark Gascoigne of the FACT Coalition. The appeal of this revenue has emboldened small states, and now Wyoming bank accounts are the new Swiss bank accounts. America has become a lure, not only for foreign elites looking to seal money away from their own governments, but to launder their money through the purchase of U.S. real estate.

In addition, if the United States really wanted to stop Panama or the Cayman Islands or other offshore tax havens from allowing the wealthy to avoid hundreds of billions in payments, they could do so in about 15 minutes. Our recent free trade deal with Panama allegedly prevents Americans from creating offshore tax havens there, but in general, such tax information exchanges are insufferably weak. And the little America does abroad to police tax evasion dwarfs the next to nothing we do at home. The intertwining of global and political elites makes tax avoidance, whether legal or illegal, a secondary concern for the country, regardless of how it robs the country of resources and promotes the conception of a two-tiered economic and justice system where the upper class need not follow the same rules as the rest of us. Our politicians made a consistent choice that this rampant tax avoidance doesn’t bother them.

“Anonymous shell companies have been used to rip off Medicare,” said Gascoigne. “They’ve been used to evade U.S. sanctions. Arms dealers like Viktor Bout, the so-called Merchant of Death, used U.S. shell companies to launder money.” Indeed, Mossack Fonseca has affiliated offices in Wyoming, Nevada, and Florida. America is up to its eyeballs in this style of corruption.

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“..the U.S. is just as big a secrecy jurisdiction as so many of these Caribbean countries and Panama. We should not want to be the playground for the world’s dirty money, which is what we are right now.”

Panama Has Company as Bank-Secrecy Holdout: America (BBG)

Panama and the U.S. have at least one thing in common: Neither has agreed to new international standards to make it harder for tax evaders and money launderers to hide their money. Over the past several years, amid increased scrutiny by journalists, regulators and law enforcers, the global tax-haven landscape has shifted. In an effort to catch tax dodgers, almost 100 countries and other jurisdictions have agreed since 2014 to impose new disclosure requirements for bank accounts, trusts and some other investments held by international customers – standards issued by the OECD, a government-funded international policy group. Places like Switzerland and Bermuda are agreeing, at least in principle, to share bank account information with tax authorities in other countries.

Only a handful of nations have declined to sign on. The most prominent is the U.S. Another, Panama, is at the center of a storm over tax evasion and global cash flight that broke out over the weekend. A law firm there helped set up tens of thousands of shell companies, according to a report by the International Consortium of Investigative Journalists. ICIJ and other news organizations published reports they said showed global efforts to hide wealth, undertaken by global politicians and the ultra-rich, with the aid of banks and lawyers. The central tool: shell companies that people used to shield the identity of the owners’ assets. While such structures can be legal, they can also support efforts to avoid taxes.

The latest reporting “underscores the secrecy in Panama,” said Stefanie Ostfeld, the acting head of the U.S. office of the anti-corruption group Global Witness. “What’s lesser known, is the U.S. is just as big a secrecy jurisdiction as so many of these Caribbean countries and Panama. We should not want to be the playground for the world’s dirty money, which is what we are right now.” Advisers around the world are increasingly using the U.S. resistance to the OECD’s standards as a marketing tool — attracting overseas money to U.S. state-level tax and secrecy havens like Nevada and South Dakota, potentially keeping it hidden from their home governments.

[..] “The U.S. doesn’t follow a lot of the international standards, and because of its political power, it’s able to continue,” said Bruce Zagaris an attorney at Berliner Corcoran & Rowe who specializes in international tax and money laundering regulations. “It’s basically the only country that can continue to do that. Others like Panama have tried, but Panama can’t punch as high as the U.S.” Indeed, in a statement issued Monday by OECD secretary general Angel Gurria, the OECD said “Panama is the last major holdout that continues to allow funds to be hidden offshore from tax and law-enforcement authorities.” The statement didn’t mention the U.S., which is the OECD’s largest funder.

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Icelanders want a lot more: for the entire ruling class to be replaced.

Panama Secrecy Leak Claims First Casualty as Iceland PM Quits (BBG)

The Panama secrecy leak claimed its first casualty after Iceland’s Prime Minister Sigmundur David Gunnlaugsson resigned following allegations he had sought to hide his wealth and dodge taxes. The decision was announced in parliament after the legislature had been the focus of street protests that attracted thousands of Icelanders angered by the alleged tax evasion efforts of their leader. Gunnlaugsson, who will step down a year before his term was due to end, gave in to mounting pressure from the opposition and even from corners of his own party. “What this exemplifies more than anything else is that there’s a growing lack of tolerance over the way that the international financial system has been gamed and rigged by corrupt elites,” Carl Dolan, director of Transparency International’s EU division, said in a phone interview from Brussels.

The Panama files, printed in newspapers around the world, showed that the 41-year-old premier and his wife had investments placed in the British Virgin Islands, which included debt in Iceland’s three failed banks. The leaked documents therefore also raise questions about Gunnlaugsson’s role in overseeing negotiations with the banks’ creditors. Ironically, the offshore investments were held while Iceland enforced capital controls. Gunnlaugsson is the second Icelandic premier to resign amid a popular uprising, after Geir Haarde was forced out following protests in 2009. Gunnlaugsson always looked to be the most vulnerable of the politicians implicated in the documents. From Moscow to Islamabad and Buenos Aires, most public figures have managed to beat off the revelations with either outrage, denial or indifference.

None of those tactics worked for Gunnlaugsson, whose first response was to walk out of an interview with Swedish TV, a clip that went viral after the leaks were published on Sunday. “The Iceland PM is the tip of the iceberg in terms of how much political instability we’ll see long-term on the basis” of the leaks, Ian Bremmer, president of the New York-based Eurasia Group, said by phone on Tuesday. Iceland’s electorate balked at the alleged tax evasion and Gunnlaugsson’s initial refusal to budge. Police on Monday erected barricades around the parliament in Reykjavik as protesters beat drums and pelted the legislature with eggs and yogurt. Almost 10,000 people gathered, according to police, while organizers said the figure was twice as high. Thousands more had signed up on Facebook to attend a second round of protests that was due to take place on Tuesday afternoon.

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Will we ever find out how these files saw the light of day?

Mossack Fonseca Says Data Hack Was External, Files Complaint (Reuters)

The Panamanian lawyer at the center of a data leak scandal that has embarrassed a clutch of world leaders said on Tuesday his firm was a victim of a hack from outside the company, and has filed a complaint with state prosecutors. Founding partner Ramon Fonseca said the firm, Mossack Fonseca, which specializes in setting up offshore companies, had broken no laws and that all its operations were legal. Nor had it ever destroyed any documents or helped anyone evade taxes or launder money, he added in an interview with Reuters. Company emails, extracts of which were published in an investigation by the U.S.-based International Consortium of Investigative Journalists and other media organizations, were “taken out of context” and misinterpreted, he added.

“We rule out an inside job. This is not a leak. This is a hack,” Fonseca, 63, said at the company’s headquarters in Panama City’s business district. “We have a theory and we are following it,” he added, without elaborating. “We have already made the relevant complaints to the Attorney General’s office, and there is a government institution studying the issue,” he added, flanked by two press advisers. Governments across the world have begun investigating possible financial wrongdoing by the rich and powerful after the leak of more than 11.5 million documents, dubbed the “Panama Papers,” from the law firm that span four decades. The papers have revealed financial arrangements of prominent figures, including friends of Russian President Vladimir Putin, relatives of the prime ministers of Britain and Pakistan and Chinese President Xi Jinping, and the president of Ukraine.

On Tuesday, Iceland’s prime minister, Sigmundur David Gunnlaugsson, resigned, becoming the first casualty of the leak. “The (emails) were taken out of context,” Fonseca said. He lamented what he called journalistic activism and sensationalism, extolling his own investigative research credentials as a published novelist in Panama. “The only crime that has been proven is the hack,” Fonseca said. “No one is talking about that. That is the story.” France announced on Tuesday it would put the Central American nation back on its blacklist of uncooperative tax jurisdictions. Alvaro Aleman, chief of staff to President Juan Carlos Varela, told a news conference the government could respond with similar measures against France, or any other country that followed France’s lead.

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Question is, even if he held no shares: did he know what his dad did?

David Cameron Left Dangerously Exposed By Panama Papers Fallout (G.)

David Cameron was left dangerously exposed on Tuesday after repeatedly failing to provide a clear and full account about links to an offshore fund set up by his late father, as the storm over the Panama Papers gathered strength in both the UK and elsewhere around the world. The prime minister and his office have now offered three partial answers about the fund set up by his father Ian, which avoided ever paying tax in Britain. The key unanswered question is whether the prime minister’s family stands to gain in the future from his father’s company, Blairmore, an investment fund run from the Bahamas. After Downing Street said on Monday that the fund was a “private matter”, a journalist asked Cameron about it during a visit to Birmingham on Tuesday. Cameron replied: “I own no shares, no offshore trusts, no offshore funds, nothing like that. And, so that, I think, is a very clear description.”

He dodged the key part of the question about whether he or his family stood to benefit. Having failed to satisfy reporters, Downing Street issued a further statement that Cameron’s wife and children also do not benefit from offshore funds but again left the main question about the future unanswered. The Labour leader, Jeremy Corbyn, who had called earlier in the day for an independent investigation, told the Guardian: “Three times Downing Street has been asked to provide a full and comprehensive answer. The public has a right to know the truth. “We need to know the full extent of the links between Britain and the web of tax avoidance and evasion revealed by the Panama Papers at all levels.”

[..] The row embroiling Cameron picked up pace on Tuesday morning when Corbyn responded to Downing Street’s assertion that the matter was private by telling reporters: “Well, it’s a private matter insofar as it’s a privately-held interest. But it’s not a private matter if tax is not being paid. So an investigation must take place, an independent investigation, unprejudiced, to decide whether or not tax has been paid.” Later in the day, Cameron told reporters: “In terms of my own financial affairs, I own no shares. I have a salary as prime minister and I have some savings, which I get some interest from and I have a house, which we used to live in, which we now let out while we are living in Downing Street and that’s all I have.”

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More on the nonsense prevalent in ‘mainstream’ economics. No clue about risk.

The Enduring Certainty Of Radical Uncertainty (John Kay)

The excellent new book by Mervyn King, former governor of the Bank of England, is inevitably noticed mainly for its views on banking regulation and the outlook for the eurozone. For me the most important message of The End of Alchemy is its emphasis on radical uncertainty — or, to quote Donald Rumsfeld, former US defence secretary: “The things we do not know we do not know.” That emphasis reflects the parallel intellectual paths Lord King and I have taken since we were young dons 40 years ago. In a book published in 1976, economist Milton Friedman disparaged a tradition that “drew a sharp distinction between risk, as referring to events subject to a known or knowable probability distribution, and uncertainty, as referring to events for which it was not possible to specify numerical probabilities”.

Friedman went on: “I have not referred to this distinction because I do not believe it is valid. We may treat people as if they assigned numerical probabilities to every conceivable event.” Asked, “Who will win the war?”, Churchill might have responded, “Britain, with probability 0.7”; and Hitler with a similar answer but perhaps different number. However absurd, this is what we were taught and what we passed on to the next generation of students. It seemed an exciting time for young turks in finance; insider trading in an old-boy network was to be superseded by a new generation of quants and rocket scientists. We had the mathematical tools to revolutionise investment banking. Our theory came to underpin the risk models used in financial institutions and imposed by regulators.

But Friedman was wrong. There really are limits to the range of problems susceptible to the mathematics of classical statistics. He was, erroneously, rejecting the concept of radical uncertainty described 50 years earlier by the economists John Maynard Keynes and Frank Knight. “By uncertain knowledge,” wrote Keynes in 1921, “I do not mean merely to distinguish what is known for certain from what is only probable. The sense in which I am using the term is that in which the prospect of a European war is uncertain…There is no scientific basis to form any calculable probability whatever. We simply do not know.”

While the long-term future of interest rates or copper prices, about which Keynes also speculated, might be approached probabilistically, questions about the social system 50 years hence are too open-ended, and the outcomes too varied and insufficiently specific, to be described in probabilistic terms. A recent book on superforecasters, co-written by Philip Tetlock, illustrates the point well. By trying to turn multi-faceted questions into ones precise enough to enable those who proffer answers to be assessed for their accuracy, he makes the questions narrow and uninteresting: “How will the Syrian war develop” and “How will Europe manage its refugee crisis?” become: “How many Syrian refugees will land in Europe in 2016?”

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To get rid of refugees, the EU has no qualms about shamelessly linking them to terrorism.

EU Executive To Present Steps To Tighten External Border Controls (Reuters)

The EU’s executive will propose on Wednesday a raft of technical measures to strengthen its external borders as it seeks to tackle both an uncontrolled influx of migrants and security threats following deadly attacks in Paris and Brussels. More than 160 people were killed in the November shooting and bombing attacks in Paris and suicide bombings in Brussels in March. The deadly strikes, claimed by Islamic State, strengthened the hand of those campaigning for tighter security checks and data sharing against those who warn of the risks of abuse and undermining privacy through enhanced surveillance. In its proposal on Wednesday, seen by Reuters ahead of official publication, the European Commission said the carnage in Paris and Brussels “brought into sharper focus the need to join up and strengthen the EU’s border management, migration and security cooperation.”

Europol chief Rob Wainwright highlighted separately on Tuesday an “indirect link” between Europe’s migration crisis, which saw more than a million people arriving over the last year, and the Islamist militant threat, saying some militants had used the chaotic migrant influx to sneak in. EU border agency Frontex also said that two of the perpetrators of the Nov. 13 attacks in Paris had entered through Greece and been registered by Greek authorities after presenting fraudulent Syrian documents. “EU citizens are known to have crossed the external border to travel to (Middle East) conflict zones for terrorist purposes and pose a risk upon their return. There is evidence that terrorists have used routes of irregular migration to enter the EU,” the Commission said in its proposal.

But the EU has a dozen-or-so different sets of fragmented databases for border management and law enforcement that are plagued with gaps and often not inter-operable. Custom authorities’ data are held largely separate. The Commission on Wednesday will therefore set out technical proposals to beef them up and improve the way they communicate with one another, including a joint search interface.

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Rich Europeans have one priority only: to remain rich and privileged.

With New Deal, A Refugee’s Rights Come Down To Luck (Reuters)

Through a barbed wire fence, 17-year-old Syrian refugee Asma attempted to tell us about her journey to Greece. We didn’t have much time to listen. Greek police officers were breathing down our necks, threatening to arrest us unless we left. We learned that Asma traveled alone on a tiny rubber boat from Turkey, and broke her arm – still wrapped in a white bandage – when a building collapsed in her hometown of Daraa, the birthplace of the Syrian uprising. As she started to tell us about her hope for a fresh start in Germany, the policemen issued their final warning before escorting us off Moria camp’s fenced perimeter. “We’re animals now,” Asma shouted after us. “We’re no longer humans.” If Turkey is a crowded departure hall to a better life, Greece is now a transit lounge for those who’ve missed their connection.

Many will never move onward to northern Europe; others will only move backward. With more than 52,000 refugees and migrants stranded in the country, Greece has become exactly what Prime Minister Alexis Tsipras warned months ago: a “warehouse of souls.” And the new deal between the EU and Turkey, intended to stem the refugee flow into Europe, only redirects it. Under the terms of the deal, most asylum seekers who illegally travel to Greece from Turkey are to be sent back to Turkey. The first returns took place Monday at dawn. For every returnee to Turkey, a Syrian living in a Turkish refugee camp will be legally resettled by plane to EU countries. As such, a refugee’s rights come down to luck. If Asma had arrived in Greece last month, she’d likely be in Germany by now.

If she had arrived three weeks ago, she’d likely be trapped in a makeshift camp on the Greece-Macedonia border – not much of an upgrade, but she’d have more access to the outside world than she does in Lesbos, where more than 3,000 refugees are locked in a former military base. For refugees like her, who arrived after the deal took effect March 21, most will be sent back to Turkey; that is, unless they can individually prove Turkey is “unsafe” for them. Even many Syrians, Iraqis and Eritreans – who have special protections under international law and qualify for the EU’s official “relocation” program – will be returned to Turkey. Officials insist the deal isn’t about restricting access to asylum in Europe, but eliminating illegal smuggling routes that sent more than 1 million refugees and migrants to Europe from Turkey over the past year.

Indeed, as ferryboats carrying migrants returned to Turkey on Monday, Syrians from Turkish refugee camps were being resettled in Germany and Finland. But this “one-for-one” deal struck in Brussels – which creates a kind of human carousel – is disconnected from the reality on the ground in Greece. The deal’s byzantine complexities have sowed confusion, fear and anxiety among asylum-seekers and authorities alike. Humanitarian groups such as the United Nations refugee agency, Doctors Without Borders and Save the Children have suspended activities on several Greek islands to protest its terms. They argue that the deal turns reception centers for refugees into inhumane, de facto detention facilities.

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This is going to get so messy..

Greece Pauses Deportations As Asylum Claims Mount (AP)

Authorities in Greece have temporarily suspended deportations to Turkey and acknowledged that most migrants and refugees detained on Greek islands have applied for asylum. The EU began sending back migrants Monday under an agreement with Turkey, but no transfers were planned Tuesday. Maria Stavropoulou, director of Greece’s Asylum Service, told state TV that some 3,000 people held in deportation camps on the islands are seeking asylum, with the application process to formally start by the end of the week. She says asylum applications typically take about three months to process, but would be “considerably faster” for those held in detention.

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Feb 072016
 
 February 7, 2016  Posted by at 9:34 am Finance Tagged with: , , , , , , , , , ,  3 Responses »


DPC Chamber of Commerce, Boston MA 1904

$100 Trillion Up in Smoke (Mauldin)
As Big Oil Shrinks, Boards Plot Different Paths Out Of Crisis (Reuters)
Exxon Ends Share Buybacks – It Must Be Acquisition Time (Forbes)
Hess Oil: A “Folly For The Ages” (ZH)
Debt, Defaults, And Devaluations: A Crash Like Nothing Before (Telegraph)
Our Dysfunctional Monetary System (Steve Keen)
Why The Bulls Will Get Slaughtered (Stockman)
Obscure Chinese Firm Dives Into $22 Trillion US Market (BBG)
China’s FX Reserves Decline to $3.23 Trillion (BBG)
The Great Escape from China (Rogoff)
Albert Edwards: China Has Only “Months Left” To Stop Collapse (VW)
Why Doesn’t 4.9% Unemployment Feel Great? (CNN)
Risk of WWIII as Saudi Arabia, Turkey –and Ukraine– Wade Into Syria (Trayner)
EU Ministers Want To Buttress Borders To Stem Refugee Flow (AP)
Austria Threatens To Extend Border Controls (Reuters)
Austria Wants EU To Cover Costs Of Additional Migrants (Reuters)

That is a big number. Add losses in commodities, and you’re talking destruction, of money, credit, virtual wealth, it doesn’t matter anymore what you call it..

$100 Trillion Up in Smoke (Mauldin)

If energy powers the world, then whoever owns that energy must have power over the world. That’s certainly been the case for the last century or two. Ownership of our primary energy source, crude oil, is what made billionaires of John D. Rockefeller, H.L. Hunt, and assorted Middle Eastern kings, emirs, and sheikhs. Oil in the ground is wealth only on paper – you may own that oil, but it earns you nothing until you recover and sell it. Yet paper wealth is still wealth. It goes on your balance sheet as an asset that you can sell. You can use it as collateral to borrow cash and buy other assets. The ongoing oil price collapse is having a severely negative impact on the wealth of those who own oil reserves. The numbers, as you will see below, are almost incomprehensibly big.

They are so big, in fact, that many analysts have simply tuned out. The attitude seems to be, “These numbers blow up my models, so I will ignore them.” Today we’ll stop dancing around the truth and call the oil collapse what it is: global wealth destruction of epic proportions. In mid-2014, crude oil prices were about $100, depending on which grade you wanted to buy. Now prices hover near $30 – roughly a 70% decline in 18 months. That’s well-known, but we usually discuss the price collapse in terms of particular countries or companies: we don’t look at the bigger picture. Last week someone showed me this from Twitter. I almost fell out of my chair.

Stop for a minute. Let that sink in. The total value of all the world’s oil reserves is over $100 trillion less than it was just a year and a half ago.

(By the way, I verified Mr. Levine’s reserve total by consulting the CIA’s World Fact Book. It says total world “proved” oil reserves were 1.656 trillion barrels as of January 1, 2015.) To put these figures in perspective, consider that Google’s parent company, Alphabet, briefly surpassed Apple last week as the planet’s largest publicly traded company. Both are worth around $500 billion, depending on the day. The lost value in crude oil is equivalent to a couple of hundred Googles and Apples going up in smoke. If stock values were crashing to that degree, we would call the losses earth-shattering. Yet otherwise intelligent people are saying the oil collapse is a minor issue.

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They’re all fully unprepared. Deer and headlights.

As Big Oil Shrinks, Boards Plot Different Paths Out Of Crisis (Reuters)

As oil and gas companies cut ever-deeper into the bone to weather their worst downturn in decades, boards have adopted contrasting strategies to lead them out of the crisis. Crude prices have tumbled around 70 percent over the past 18 months to around $35 a barrel, leading to five of the world’s top oil companies reporting sharp declines in profits in recent days. Executives at energy firms face a tough balancing act: they must cut spending to stay financially afloat while preserving the production infrastructure and capacity that will allow them to compete and grow when the market recovers. Companies have opted for differing approaches to secure future growth, often choosing to narrow focus to their areas of expertise and the geographic location of their main assets.

American firms Chevron, ConocoPhillips and Hess are withdrawing from more costly deepwater projects to focus on shale oil fields on their home turf, for example. Britain’s BP is betting on offshore gas in Egypt, while Royal Dutch Shell has opted for an alternative route as it seeks to safeguard its future: the $50 billion takeover of BG Group. In the five years before the downturn began in mid-2014, when crude prices held above $100 a barrel, big energy firms had raced to expand production capacity, including buying stakes in vast, costly fields sometimes located thousands of meters under the sea, and miles from land.

Over the past year however, companies have slashed their overall capital expenditure, scrapping plans for mega projects that cost billions to develop and take up to a decade to bring online. “Companies want to strike a balance between long and short-cycle investments while maintaining a robust balance sheet to fund their way through the down cycle,” said BMO Capital analyst Brendan Warn. Focusing on a specific set of expertise and geographies allowed them to offer investors a “unique value proposition”, he added.

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Quick, before somone figures out what you’ve lost.

Exxon Ends Share Buybacks – It Must Be Acquisition Time (Forbes)

If the company was happy buying its own stock in 2014, it should be all the more eager to buy now that shares are down 25%. Unless it sees a better bargain elsewhere. In its fourth-quarter financial release Tuesday, Exxon Mobil announced a halt to share buybacks. The company purchased $4 billion of its own shares in 2015, and has averaged about $20 billion a year in buybacks over the past decade, according to Reuters. The peak buyback year was 2008, when oil prices hit a record high and Exxon bought in $35 billion worth. At first glance, halting buybacks might seem reasonable. Perhaps amid this oil industry depression Exxon just wants to conserve cash — it also expects to reduce capital spending by $8 billion this year.

But think about it. The key to good investing is to buy low and sell high. If Exxon was happy buying back shares in 2014, when its stock price hit $103, it should be all the more eager to continue buying now that shares are down to $74.50. If Exxon didn’t think its own shares weren’t a great investment it wouldn’t have bought $200 billion of them over the past decade. Don’t take my word for it. As CEO Rex Tillerson said in a statement Tuesday, “The scale and diversity of our cash flows, along with our financial strength, provide us with the confidence to invest through the cycle to create long-term shareholder value.” It’s a hallmark of Exxon’s discipline that it continues to invest whether oil prices are low or high. In 2015 it brought on six big projects with 300,000 barrels per day of new production.

Exxon is not worried about running out of cash. Cash flows were on the order of $30 billion for the year. Even in the fourth quarter it generated net income of $2.8 billion (and $16 billion for the year). And don’t think for a second that Exxon intends to cut its dividend payouts, which totaled $12 billion last year. A more plausible reason Exxon is ending buybacks: it’s preparing to acquire another company whose shares are even more deeply discounted than Exxon’s. And with “just” $3.7 billion in cash on hand at the end of the fourth quarter, its likely that Exxon would use its shares as currency for a buyout. Who would they buy? The options abound for a company still sporting an equity market cap of $318 billion. Anadarko Petroleum has long been rumored to be a prime Exxon target; its shares are down about 65% to a market cap of $19 billion.

Occidental Petroleum float is $51 billion, ConocoPhillips $47 billion and Apache is at $15 billion. Deeper in the discount bin, Marathon Oil shares could be had for $6.5 billion, or Devon Energy for $11 billion. Of course Exxon would also need to assume any debt carried by an acquisition target. But that wouldn’t be a problem — compared with the averaged overleveraged oil company, Exxon has modest gearing with $38 billion in debt outstanding. Other than Royal Dutch Shell ’s $52 billion takeover of BG Group , we haven’t seen a landmark merger during this downturn. The last time things got this bad for the industry, back in 1998, BP bought Amoco for $48 billion and Exxon bought Mobil for $75 billion. Ending buybacks is just Exxon’s way of telling the market it’s ready to make a deal.

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Hess oil is the case study. “..Hess just sold 25 million shares at a price of $39 after purchasing 63 million shares through 2015 at an average price that was more than double, or $83 a share..”

Hess Oil: A “Folly For The Ages” (ZH)

[..] back in 2013, when it was trading at a discount to its peers, Hess became the target of an activist campaign led by Paul Singer’s Elliott Management who demanded a quick boost in the stock price, as a result of which the energy producer decided to exit its refining business (arguably the only line of business that would have benefited from the current depressed oil price) while not only raising its dividend but also authorizing a $4 billion share buyback. The company then boosted its buyback further with proceeds from the sale of its retail gas stations (for $2.9 billion) while growing its debt by $1 billion from 2013 to 2015, leading to the repurchase of a total of 62.7 million shares through the end of 2014 at an average price of $83. The stock price reacted as expected: it soared past $100 from below $60 before Elliott turned up. It then continued to spend more billions under additional buyback all the way through the third quarter of 2015, which however took place just as the worst oil downturn in history was taking place.

And then the stock crashed, as investors finally realized that plunging oil, sliding cash flow and surging debt meant the company found itself in a life and death fight for survival. Which brings us to yesterday, when in an attempt to shore up liquidity and avoid halting its dividend, Hess sold 25 million shares at a price of $39/share: a 10% discount to the prior closing price. As Reuters puts it, the “Hess folly is one for the ages.” The silver lining? Unlike before, when Hess’ weak management team was kicked around by a hedge fund, at least it is being proactive now and scrambling to preserve its business even it means huge pain and dilution for shareholders. The company ended 2015 with $2.7 billion in cash and a big revolving line of credit it hasn’t dipped into yet. Capital just raised will push net debt from 5.4x EBITDA to below four times, according to Cowen estimates.

That should allow Hess to keep investing in future production and pay dividends. If oil remains at $30, however, it has just bought itself a few quarters of time. Still, that does not absolve management of pandering to a vocal shareholder: if instead of spending billions on buybacks Hess had done the right thing and saved the cash, it would not only have avoided the wild swings in the stock price which rewarded just activist investors while punishing long-term holders, and have a far bigger war chest to defend itself from $30 oil. The bottom line: Hess just sold 25 million shares at a price of $39 after purchasing 63 million shares through 2015 at an average price that was more than double, or $83 share. As Reuters concludes, “this modern Hess era is a case study that should be required reading in boardrooms everywhere.”

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The right wing is getting concerned.

Debt, Defaults, And Devaluations: A Crash Like Nothing Before (Telegraph)

A global recession is on the way. This truism of economics holds at any point in which the world is not in the grips of a contraction. The real question is always when and how deep the upcoming downturn will be. “The crash will come, but it would be nice if it came two years from now”, Thomas Thygesen, head of economics at SEB told over 200 commodity investors and analysts in London last month. His audience was rapt with unusual attention. They could be forgiven for thinking the slump had not already arrived. Commodity prices have crashed by two thirds since their peaks in 2014. Oil has borne the brunt of the sell-off, suffering the worst price collapse in modern history. Brent crude has fallen from $115 a barrel in the summer of 2014, to just $27.70 in mid-January.

Plenty of investors sitting in the blue-lit, cavernous surrounds of Bloomberg’s London HQ would have had their fingers burnt by the price capitulation. “They tell you should start your presentations with a joke, but making jokes at a commodities seminar is hardly appropriate these days,” Thygesen told his nervous audience. Major oil price falls have a number of historical precedents. Today’s glutted oil market is often compared to the crash of 1986, the last major episode over global over-supply. Back in the late 90s, a barrel of Brent crude fell to as low as $10 in the wake of the Asian financial crisis. But is the current oil price collapse really like anything the world economy has ever experienced?

For many market watchers, a confluence of factors – led by oil, but encompassing China, the emerging world, and financial markets – are all brewing to create a perfect storm in a global economy that has barely come to terms with the Great Recession. “We are in a very unusual situation where market sentiment is of a different nature to anything we’ve seen before,” says Thygesen. Unlike previous pre-recessionary eras, the current sell-off has seen commodity prices, equities and credit conditions all move in dangerous lockstep. Although a 75pc oil price collapse should represent an unmitigated positive for the world’s fuel thirsty consumers, the sheer scale of the price rout is already imperiling the finances of producer nations from Nigeria to Azerbaijan, and is now threatening to unleash a wave of bankruptcies across corporate America.

It is the prospect of this vicious feedback loop – where low oil prices create financial tail risks that spill over into the real economy – which could now propel the world into a “full blown crisis” adds Thygesen. So will it materialise? The world economy is throwing up reasons to worry, as the globe’s largest emerging markets have shown signs of deterioration over the last six months, says Olivier Blanchard, the former long-serving chief economist of the IMF. “China’s growth is probably less than officially reported. Russia and Brazil are doing very badly. South Africa is flirting with recession. Even India may not be doing as well as was forecast,” says Blanchard, who left the Fund after seven years late last year. As it stands however, he says market ructions still represent a classic case of “herd” behaviour. “Investors worry that other investors know something bad, and so just sell, although they themselves have no new information.”

But a tipping point may well be approaching. According to Blanchard’s calculations, a 20pc decline in stock markets that persists for more than six months, will translate into a decline in consumption of between 0.5pc to 1.0pc. “This would be a serious shock. My biggest fear is precisely that the dramatic shift in mood becomes self-fulfilling”. For now, oil-induced financial stress is concentrated in the energy sector. With Brent set to languish around $30-35 barrel for the rest of the year, prices will persist below the $40-60 barrel break-even point that renders the bulk of US oil and gas companies profitable. Spreads on high yield US energy corporates have soared to unprecedented highs. “They make Lehman look like a walk in the park” says Thygesen. More than a third of the entire US high yield bond index is now vulnerable to crude prices remaining low or falling even further, according to calculations from Oxford Economics.

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My friend Steve is losing his cool, and high time too. Is he really the only economist who undertands this, and can explain it? Y’all better listen closely, then.

“As someone who spent 2 years warning about this crisis before it happened, and another 8 years diagnosing it (and proposing remedies that would, I believe, be effective, if only banks and governments together would implement them), I find this dual idiocy incredibly frustrating. Rather than understanding the real cause of the crisis, we’ve seen the symptom—rising public debt—paraded as its cause. Rather than effective remedies, we’ve had inane policies like QE, which purport to solve the crisis by inflating asset prices when inflated asset prices were one of the symptoms of the bubble that caused the crisis.”

Our Dysfunctional Monetary System (Steve Keen)

The great tragedy of the global economic malaise is that it is caused by a shortage of something that is essentially costless to produce: money. Both banks and governments can produce money at physically trivial costs. Banks create money by creating a loan, and the establishment costs of a loan are miniscule compared to the value of the money created by it—of the order of $3 for every $100 created. Governments create money by running a deficit—by spending more on the public than they get back from the public in taxes. As inefficient as government might be, that process too costs a tiny amount, compared to the amount of money generated by the deficit itself. But despite how easy the money creation process is, in the aftermath to the 2008 crisis, both banks and governments are doing a lousy job of producing the money the public needs, for two very different reasons.

Banks aren’t creating money now because they created too much of it in the past. The booms that preceded the crisis were fuelled by a wave of bank-debt-financed speculation on some useful products (the telecommunications infrastructure of the internet, the DotCom firms that survived the DotCom bubble) and much rubbish (the Liar Loans that are the focus of The Big Short). That lending drove private debt levels to an all-time high across the OECD: the average private debt level is now of the order of 150% of GDP, whereas it was around 60% of GDP in the “Golden Age of Capitalism” during the 1950s and 1960s—see Figure 1.


Figure 1: The private debt mountain that has submerged commerce

In the aftermath of the Subprime bubble, credit-money creation has come to a standstill across the OECD. In the period from 1955 till 1975, credit grew at 8.7% per year in the United States; from 1975 till 2008, it grew at 8% per year; since 2008, it has grown at an average of just 1.5% per year. The same pattern is repeated across the OECD—see Figure 2. Globally, China is the only major country with booming credit growth right now, but that will come crashing down (this probably has already started), and for the same reason as in the West: too much credit-based money has been created already in a speculative bubble.


Figure 2: Credit growth is anaemic now, and will remains so as it has in Japan for 25 years

Japan, of course, got mired in this private debt trap long before the rest of the world succumbed. As Figure 1 shows, its private debt bubble peaked in 1995, and since then it’s had either weak or negative credit growth, so that its private debt to GDP level is now in the middle of the global pack. Economic growth there has come to a standstill since: Japan’s economy grew at an average of 5.4% a year in real terms from 1965 till 1990, when its crisis began; since then, it has grown at a mere 0.4% a year. That gives us a simple way to perform a “what if?”. What if the rest of the OECD is as ineffective at escaping from the private debt trap as Japan has been? Then the best case scenario for global credit growth is that it will match what has happened since Japan “hit the credit wall” in 1990

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Seasonally adjusted slaughter, that is.

Why The Bulls Will Get Slaughtered (Stockman)

Needless to say, none of that stink was detected by Steve Liesman and his band of Jobs Friday half-wits who bloviate on bubblevision after each release. This time the BLS report actually showed the US economy lost 2.989 million jobs between December and January. Yet Moody’s Keynesian pitchman, Mark Zandi described it as “perfect” Yes, the BLS always uses a big seasonal adjustment (SA) in January——so that’s how they got the positive headline number. But the point is that the seasonal adjustment factor for the month is so huge that the resulting month-over-month delta is inherently just plain noise. To wit, the seasonal adjustment factor for the month was 2.165 million. That means the headline jobs gain of 151k reported on Friday amounted to only 7% of the adjustment amount!

Any economist with a modicum of common sense would recognize that even a tiny change in the seasonal adjustment factor would mean a giant variance in the headline figure. So the January SA jobs number cannot possibly reveal any kind of trend whatsoever – good, bad or indifferent. But that didn’t stop Beth Ann Bovino, US chief economist at Standard & Poor’s Rating Services, from dispatching the usual all is swell hopium: “Today’s numbers are about momentum, so while 151,000 new jobs in January is below expectations and off pace from prior months, the data shows America’s recovery is continuing. Amid all the global economic turmoil and domestic market gyrations, positive job growth, the drop in the unemployment rate to 4.9%, and the uptick in wages show the U.S. is heading in the right direction.” Actually, it proves none of those things.

For one thing, the January NSA (non-seasonally adjusted) job loss this year of just under 3 million was 173,000 bigger than last January – suggesting that things are getting worse, not better. In fact, this was the largest January job decline since the 3.69 million job loss in January 2009 during the very bottom months of the Great Recession. So are we really “heading in the right direction” as claimed by Bovino, Zandi and the rest of the Cool-Aid crowd? Well, just consider two alternative seasonal adjustment factors for January that have been used by the BLS in the last five years. Had they used the January 2013 adjustment factor this time, the headline gain would have been 171,000 jobs; and had they used the 2010 adjustment factor there would have been a headline loss of 183,000 jobs. We could say in a variant of the Fox News motto – we report, you decide. But believe me, you can look at years of seasonal adjustment factors for January (or any other month) and not find any consistent, objective formula. They make it up, as needed.

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“..to help bring Chinese companies to U.S. markets..” Which is not that easy on most exchanges.

Obscure Chinese Firm Dives Into $22 Trillion US Market (BBG)

When Cromwell Coulson heard that an obscure Chinese real estate firm had agreed to buy the Chicago Stock Exchange, he was shocked. “My first reaction was, ‘Wow, that’s who they’re selling to?”’ said Coulson, CEO of OTC Markets in New York. “These new buyers have no connection to Chicago’s existing business. They’re completely disconnected from the current business of supporting the Chicago trading community. So wow, that’s out of left field.” While the world has gotten used to seeing Chinese companies snap up overseas businesses, the purchase of a 134-year-old U.S. stock market by Chongqing Casin Enterprise – a little-known property and investment firm from southwestern China – raises a whole host of questions. For starters, why does a provincial Chinese business with no apparent ties to the securities industry have any interest in buying one of America’s smallest equity exchanges? And will U.S. regulators sign off?

So far, Casin Group’s intentions are unclear, with calls to the company’s Chongqing headquarters going unanswered on Friday. If the deal does pass muster with American regulators, it would mark the first-ever Chinese purchase of a U.S. equity exchange, giving Casin Group a foothold in a $22 trillion market where even the smallest bourses have room to grow if they can provide the best price for a stock at any given moment. The Chicago Stock Exchange – a subsidiary of CHX Holdings – is minority-owned by a group including E*Trade, Bank of America, Goldman Sachs and JPMorgan, according to the company. The minority shareholders are also selling their stake, Chicago Stock Exchange CEO John Kerin said. The deal values the exchange at less than $100 million, according to a person familiar with the matter.

Casin Group’s offer, announced on Friday in a statement from the Chicago exchange, comes amid an unprecedented overseas shopping spree by Chinese companies. Businesses from Asia’s largest economy have announced $70 billion of cross-border acquisitions and investments this year, on track to break last year’s record of $123 billion, according to data compiled by Bloomberg. While many of those deals had obvious business rationales, the reasons for Casin Group’s bid are less clear. The company, founded in the 1990s through a privatization of state-owned assets, initially focused on developing real estate projects in Chongqing, before expanding into the environmental and financial industries. While the firm owns stakes in banks and insurers, it has no previous experience owning an exchange. Lu Shengju, the majority owner and chairman of Casin Group, wants to help bring Chinese companies to U.S. markets, according to the statement from Chicago’s bourse.

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Another $100 billion spent. That leaves about 2 months at this pace till alarm bells will start going off.

China’s FX Reserves Decline to $3.23 Trillion (BBG)

China’s foreign-exchange reserves shrank to the smallest since 2012, indicating that the central bank sold dollars as the yuan’s retreat to a five-year low exacerbated depreciation pressure. The world’s largest currency hoard declined by $99.5 billion in January to $3.23 trillion, according to a People’s Bank of China statement released on Sunday. The stockpile fell by more than half a trillion dollars in 2015, the first-ever annual decline. Policy makers fighting to hold up the weakening yuan amid slower economic growth, plunging stocks and increasing outflows have been burning through the reserves. The draw-down has continued since the central bank’s surprise devaluation of the currency in August, when the stockpile tumbled $94 billion, a monthly record at the time.

“While the remaining reserves represent a substantial war chest, the rapid pace of depletion in recent months is simply unsustainable,” said Rajiv Biswas at IHS Global Insight in Singapore. “Domestic private investors and global currency traders see a one-way bet against the currency. This has resulted in large-scale private capital outflows since early 2015 as expectations mount that the PBOC will eventually be forced to capitulate once its reserves are sufficiently depleted.” Capital outflows increased to $158.7 billion in December, the most since September and were $1 trillion last year, according to estimates from Bloomberg Intelligence. That’s more than seven times the amount of cash that left in 2014. The PBOC has stepped up efforts to stem the exodus, warning speculators that they will be punished.

It intervened in the Hong Kong market last month after the yuan’s offshore exchange rate sank to a record 2.9% discount to the onshore rate. Apart from selling dollars, the monetary authority also gave guidance to some Chinese lenders in the city to suspend yuan lending to curb short selling, a move that contributed to the overnight interbank lending rate surging to an all-time high of 66.8% on Jan. 12.

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“Now that Chinese firms have bought up so many US and European companies, money laundering can even be done in-house. ”

The Great Escape from China (Rogoff)

Since 2016 began, the prospect of a major devaluation of China’s renminbi has been hanging over global markets like the Sword of Damocles. No other source of policy uncertainty has been as destabilizing. Few observers doubt that China will have to let the renminbi exchange rate float freely sometime over the next decade. The question is how much drama will take place in the interim, as political and economic imperatives collide. It might seem odd that a country running a $600 billion trade surplus in 2015 should be worried about currency weakness. But a combination of factors, including slowing economic growth and a gradual relaxation of restrictions on investing abroad, has unleashed a torrent of capital outflows. Private citizens are now allowed to take up to $50,000 per year out of the country.

If just one of every 20 Chinese citizens exercised this option, China’s foreign-exchange reserves would be wiped out. At the same time, China’s cash-rich companies have been employing all sorts of devices to get money out. A perfectly legal approach is to lend in renminbi and be repaid in foreign currency. A not-so-legal approach is to issue false or inflated trade invoices – essentially a form of money laundering. For example, a Chinese exporter might report a lower sale price to an American importer than it actually receives, with the difference secretly deposited in dollars into a US bank account (which might in turn be used to purchase a Picasso). Now that Chinese firms have bought up so many US and European companies, money laundering can even be done in-house.

The Chinese hardly invented this idea. After World War II, when a ruined Europe was smothered in foreign-exchange controls, illegal capital flows out of the continent often averaged 10% of the value of trade or more. As one of the world’s largest trading countries, it is virtually impossible for China to keep a tight lid on capital outflows when the incentives to leave become large enough. Indeed, despite the giant trade surplus, the People’s Bank of China has been forced to intervene heavily to prop up the exchange rate – so much so that foreign-currency reserves actually fell by $500 billion in 2015. With such leaky capital controls, China’s war chest of $3 trillion won’t be enough to hold down the fort indefinitely. In fact, the more people worry that the exchange rate is going down, the more they want to get their money out of the country immediately.

That fear, in turn, has been an important factor driving down the Chinese stock market. There is a lot of market speculation that the Chinese will undertake a sizable one-time devaluation, say 10%, to weaken the renminbi enough to ease downward pressure on the exchange rate. But, aside from providing fodder for the likes of Donald Trump, who believes that China is an unfair trader, this would be a very dangerous choice of strategy for a government that financial markets do not really trust. The main risk is that a big devaluation would be interpreted as indicating that China’s economic slowdown is far more severe than people think, in which case money would continue to flee.

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But they can’t afford to wait that long.

Albert Edwards: China Has Only “Months Left” To Stop Collapse (VW)

In this week’s issue of Société Générale’s Global Strategy research note, Edwards writes that “China has burned through almost $800bn of its FX reserves mountain since it peaked at almost $4 trillion in mid-2014. January’s FX data to be released this weekend is set to register another sharp drop of $120bn (consensus estimate).” He goes on: “But at $3.2bn the market remains content that massive firepower remains to support the renminbi. It does not. Our economists estimate that when FX reserves reach $2.8 trillion – which should only take a few more months at this rate – FX reserves will fall below the IMF’s recommended lower bound. If that occurs in the next few months, expect to see a tidal wave of speculative selling, forcing the PBoC to throw in the towel and let the market decide the level of the renminbi exchange rate.”

Edwards’ view is based on the predictions of Société Générale’s China economist Wei Yao. Wei Yao has written that in her view, the PBoC might, “move to a free-float within six months, after burning through a significant amount of FX reserves.” Both Yao and Edwards’ doom-mongering is based on the level of China’s FX reserves. China has been depleting its FX reserves in an effort to slow the pace of currency depreciation. However, if the country continues to spend its reserves at the current rate, FX reserves will fall through the $2.8 trillion level that the IMF believes is the lowest acceptable level. The IMF’s ‘lowest acceptable’ reserves level is based on four specific elements that reflect potential drains on the balance of payments: (1) exports, (2) broad money, (3) short-term external debt, and (4) other liabilities (long-term external debt and portfolio liabilities).

Société Générale’s analysts believe that (assuming the level of short-term external debt at remaining maturity was unchanged from year-end 2014) China’s reserves are at 118% of the recommended level (estimated to be $2.8 trillion). If China’s reserves fall below the key $2.8 trillion level, the market could lose confidence in the PBoC’s ability to resist currency depreciation and manage future balance of payments shocks. Only two major emerging market countries (Malaysia and South Africa) have reserves that are below the IMF’s recommended range and many EM countries now have a more robust reserve balance than China in terms of the percentage above the IMF’s recommended minimum.

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Because it’s just a narrative. More right wing worry signs.

Why Doesn’t 4.9% Unemployment Feel Great? (CNN)

The U.S. unemployment rate just fell below 5% for the first time since 2008. Normally, this would merit a celebration. But these aren’t normal times. The economy is better than it was in the Great Recession, but not even President Obama is ready to declare it’s booming. In a special speech Friday touting the job gains during his presidency, Obama admitted there’s more “to tackle.” “We should be proud of the progress we’ve made…we’ve recovered from the worst economic crisis since the 1930s,” Obama said. He doesn’t believe he gets enough credit for creating over 14 million jobs. People as diverse as Democrat Bernie Sanders and Republican Donald Trump don’t put it gently. They claim the “real” unemployment rate is much higher. Sanders calls the economy “rigged,” and Trump says the U.S. never wins anymore. There are three key reasons why everyone from Main Street to Wall Street isn’t cheering 4.9% unemployment.

1. Fewer adults are working Only 62.7% of adult Americans are working. The so-called Labor Force Participation rate hasn’t been this low since the late 1970s. The rate measures how many people over age 16 are working or actively seeking work. Back in the ’70s, it was low because fewer women worked outside the home. That’s not the story today. Now, three factors are driving the decrease in workers. The first is that a huge part of the adult population, Baby Boomers, are retiring. That’s expected and healthy. It explains about half of the decline in the workforce. The second is more young people are going to college and graduate school. They are studying more, which should be a positive for the nation. But the third one is alarming: some people have just given up on finding work. It’s hard to quantify how many people fall into this dropout category, but it’s large enough to matter. Politicians like Trump talk about it in stump speeches.The WSJ estimates that about 2.6 million of the roughly 92 million American adults who don’t work want a job but aren’t looking for one.

2. Long-term unemployment is still high Another reason why the jobs picture still looks gloomy is that an unusually high number of people can’t find jobs even though they have been looking for a long time. About 2.1 million Americans have been unable to get a job for over half a year. The government calls these people the “long-term unemployed.” During the worst of the Great Recession, 6.8 million people were long-term unemployed. So there’s been improvement, but there are still roughly double the number of long-term unemployed than in normal times.

3. Wage growth is anemic The last big issue is that wages aren’t going up for many Americans. The typical take home pay (often called “median income” by the Census Bureau) is about the same today as it was 20 years ago, once you adjust for inflation. In other words, middle class families aren’t really getting ahead. They’re just getting by. To be fair, this was a problem even before the Great Recession came along, but experts keep predicting wages will go up and it’s not happening. On Friday, Obama tried to celebrate the small gains that have been made in recent months. “This progress is finally starting to translate into bigger paychecks,” he said. But the reality is wage growth is only 2.5% a year. As Sharon Stark of D.A. Davidson notes, normally when unemployment is this low, wage growth should be humming along at about 4% a year.

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So many crazies. Trying to provoke Russia by sending Ukraine’s fascist troops into Syria.

Risk of WWIII as Saudi Arabia, Turkey –and Ukraine– Wade Into Syria (Trayner)

A terrifying array of rival superpowers are wading into the chaotic conflict on opposing sides. Analysts now fear the bloodbath – already longer than World War One – is mutating into a full-scale regional war. Saudi Arabia has threatened to send in ground troops and intelligence reports suggest Turkey is preparing to invade. Ukraine is also weighing up sending in soldiers. If their forces clashed with Russians or Iranians already on the ground, NATO – including Britain – could be dragged into an apocalyptic World War 3. Most military experts see the conflict as a proxy war between Sunni Muslim Saudi Arabia – supported by the US – on one side and Shia Muslim Iran – backed by Russia – on the other. The civil war in Yemen is also a victim of the new power struggle for control of the Middle East – which dates back to the death of Muhammed in 632 AD.

But the new Cold War – which some claim involved Saudi Arabia arming ISIS and Iran backing militants such as the Houthi rebels in Yemen – would turn searing hot if Saudi troops met the Iranian Army on the battlefield. The US fears Saudi Arabia may have obtained – or tried to obtain – nuclear weapons for an final battle with its centuries-old enemy. Tom Wilson, a research fellow for think tank the Henry Jackson Society, said: “The proxy war between Saudi Arabia and Iran is now in a rapid state of escalation. “Saudi talk of sending troops to Syria may be a bluff to try and force the West to take more decisive action in that country instead. “But if the Saudis do put troops on the ground in Syria then this would represent the opening of a major new front in what is increasingly a full scale regional conflict.”

Russia claims aerial photographs reveal Turkey is preparing to invade Syria, its neighbour. Turkish Islamic extremists are already fighting in Syria – some on the side of ISIS – with well-attended funerals for “martyrs” held back home in Turkey. Ultra-nationalist “Grey Wolves” – who want to protect Turkmen living in northern Syria and restore the Ottoman Empire – are also battling the Syrian army and Russian forces. Enmity between Black Sea rivals Russia and Turkey dates back so long a Jewish “oracle” prophesied an apocalyptic war between Russia and Turkey would usher in the End of Days 200 years ago. Turkey is now a member of NATO and if the old enemies came to blows again – as almost happened when Turkey shot down a Russian jet last year – the US and UK would be compelled to back Turkey. Britain has already been dragged into war with Russia by Turkey once: the Crimean War.

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Everything they can do wrong, they do.

EU Ministers Want To Buttress Borders To Stem Refugee Flow (AP)

European Union nations anxious to stem the flow of asylum-seekers coming through the Balkans are increasingly considering sending more help to non-member Former Yugoslav Republic of Macedonia (FYROM) as a better way to protect European borders instead of relying on EU member Greece. With Athens unable to halt the tens of thousands of people making the sea crossing from Turkey, EU nations fear that Europe’s Schengen border-free travel zone could collapse, taking with it one of the cornerstones on which the 28-nation bloc is built. “If Greece is not ready or able to protect the Schengen zone and doesn’t accept any assistance from the EU, then we need another defense line, which is obviously Macedonia and Bulgaria,” Hungarian Foreign Affairs Minister Peter Szijjarto said at Saturday’s meeting of EU foreign ministers in Amsterdam.

An estimated 850,000 migrants arrived in Greece in 2015, overwhelming its coast guard and reception facilities. Aid groups say cash-strapped Greece has shelter for only about 10,000 people, just over 1% of those who have entered. Most of the asylum-seekers then travel on across the Balkans and into the EUs heartland of Germany and beyond. Szijjarto said EU nations are “defenseless from the south. There are thousands of irregular migrants entering the territory of the EU on a daily basis.” Austrian Foreign Minister Sebastian Kurz said the cash-strapped government in Athens still underestimates the crisis. “I still don’t have the feeling that it has dawned on Greece how serious the situation is” for receiving nations like Austria, he said.

The situation has pushed some EU nations to send bilateral aid to FYROM, a non-EU nation, to control its border with EU member Greece. There has been even talk of sending military troops to FYROM to beef up the Greek border. FYROM Foreign Minister Nikola Poposki said after the meeting it did not matter what the aid was technically called. “The essential thing is that we have people and equipment to control the border and do registration where legal crossing should happen,” he said. He said FYROM has already put its own military on the job. “They’re making sure that we have decreased the illegal crossings through our border and were going to continue to make these efforts,” he said.

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There certainly is no such thing as an EU policy.

Austria Threatens To Extend Border Controls (Reuters)

Austria will extend its border controls if Turkey does not take back refugees picked up at sea on their way to Greece, Chancellor Werner Faymann said in an interview with the daily Oesterreich, being published on Sunday. He had earlier said that migrants picked up at the Greek external EU border should be sent back directly to Turkey because this was the only measure that would make a radical enough impact. Austria is set to introduce a new border management system at Spielfeld, a key crossing point on its south-eastern border with Slovenia, which aims at speeding up applications and making the country less attractive to asylum seekers. More such border management facilities on other routes may be needed if Turkey does not respond to his proposal, the chancellor was quoted as saying.

Faymann said Turkey must make a decision by Feb. 18, when EU leaders meet for a summit. It would not be a solution if Turkish border controls led to 10,000 refugees arriving at EU borders instead of 20,000, Faymann was quoted as saying in the interview. “Then we must secure our borders even more,” Faymann said. “To protect internal borders is a makeshift solution. But we have to be prepared.” Ankara and Brussels agreed to slow down the flow of migrants in a Nov. 29 deal, but refugees continue to stream into Greece. Austria, which has a population of 8.4 million and last year received 90,000 applications for asylum, has said that the number of refugees it will accept this year will be limited to 37,500.

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And let me guess, Greece should pay its share?!

Austria Wants EU To Cover Costs Of Additional Migrants (Reuters)

Austria’s Finance Minister Hans-Joerg Schelling has asked the European Commission to provide €600 million to cover the costs of taking in additional refugees, a ministry spokesman said on Saturday. Austria budgeted for 35,000 asylum seekers annually at a cost of €11,000 per person but took in some 90,000 people in 2015, the spokesman quoted the minister as saying in a letter to the head of the EU executive, Jean-Claude Juncker. “Concerning the migration crisis it is high time the Commission returned to its normal function as an independent institution representing the general Community interest and start acting as such,” Schelling said in the letter, part of which was published by the daily Kurier.

Austria and neighboring Germany threw open their borders last year to hundreds of thousands of people pouring into Europe, many of them fleeing conflicts in Syria and elsewhere. Despite an initial outpouring of sympathy for the migrants, public concern about the influx has fueled a rise in support for the far right in Austria. Last week Vienna said it would step up deportations of migrants to countries it deems safe.

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Jan 242016
 
 January 24, 2016  Posted by at 7:56 am Finance Tagged with: , , , , , , , ,  5 Responses »


Harris&Ewing “Street scene with snow, F STreet Washington, DC” 1918

Iraq Sells Oil For $22 A Barrel, Calls For IMF Help (BBG)
American Oil Companies Are Starting To Scream “Mayday” (CNN)
US Shale’s Big Squeeze (FT)
Squeezed Primary Dealers Quit European Government Bond Markets (Reuters)
US Banks Cut Off Mexican Clients as Regulatory Pressure Increases (WSJ)
Ideological Divisions Undermine Economics (Economist)
A Greek Conspiracy: How The ECB Crushed Varoufakis’ Plans (Häring)
Britain ‘Poised To Open Door To Thousands Of Migrant Children’ (Guardian)
Germany Scolds Austria For Greek Schengen Threats (AFP)
EU Leaders Consider Two-Year Suspension Of Schengen Rules (Telegraph)

The battle gets ugly.

Iraq Sells Oil For $22 A Barrel, Calls For IMF Help (BBG)

Prime Minister Haidar al-Abadi said the plunge in oil prices means Iraq needs IMF support to continue its fight against Islamic State, a battle he says his country is winning despite little support from its neighbors. “We’ve been anticipating there would be some drop of prices but this has taken us by surprise,” Abadi said of the oil collapse in an interview at the World Economic Forum in Davos, Switzerland. “We can defeat Daesh but with this fiscal problem, we need the support” of the IMF, he said. “We have to sustain the economy, we have to sustain our fight.” The conflict with Islamic State, which swept through swaths of northern Iraq in the summer of 2014, has destroyed economic infrastructure, disrupted trade and discouraged investment.

Iraq is now facing the “double shock” of war as well as the crude-oil price drop, and has “urgent” balance-of-payment and budget needs, the IMF said in January as it approved a staff-monitored program to pave the way for a possible loan. Under the program, Iraq will seek to reduce its non-oil primary deficit. “We have cut a lot of our expenditures, government expenditures,” Abadi said in the interview. But the war brings its own costs. “We are paying salaries for the uniformed armies, for our fighters” and their weapons, Abadi said in Davos. Speaking later in a panel session in the Swiss resort, Abadi said Iraqi oil sold on Thursday for $22 a barrel, and after paying costs the country is left with $13 per barrel.

He called for neighbors to do more to help. The only country to have provided financial assistance is Kuwait, he said, which gave Iraq $200 million. “Daesh is on the retreat and it is collapsing but somebody is sending a life line to them,” Abadi said, citing victories for his forces in the key western city of Ramadi and using an Arabic acronym for Islamic State. “Neighbors are fighting for supremacy, using sectarianism.” Shiite Iran supports several of the biggest militias aiding Iraqi forces in the fight against Islamic State. Its rivalry with the Middle East’s biggest Sunni power, Saudi Arabia, has flared in recent weeks, complicating efforts to end conflicts in Iraq, Syria and Yemen. Iraq has managed to stop the advance of Islamic State in Iraq but if neighbors continue to inflame sectarianism, successes can be reversed, he said. “We are supposed to be in the same boat,” Abadi said. “In reality, we aren’t.”

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“..42nd driller to file for bankruptcy in this commodity crunch..”

American Oil Companies Are Starting To Scream “Mayday” (CNN)

Last year, 42 North American drillers filed for bankruptcy, according to law firm Haynes and Boone. It’s only likely to get worse this year. Experts say there are a lot of parallels between today’s crisis and the last oil crash in 1986. Back then, 27% of exploration and production companies went bust. Defaults are skyrocketing again. In December, exploration and production company defaults topped 11%, up from just 0.5% the previous year, according to Fitch Ratings. That’s a 2,000%-plus jump. It’s just the beginning, says John La Forge, head of real assets strategy at Wells Fargo. If history repeats, people should prepare for the default rate to double in the next year or so. No wonder America’s biggest banks are setting aside a lot of money in anticipation that more energy companies will go belly up.

Energy companies borrowed a lot of money when oil was worth over $100 a barrel. The returns seemed almost guaranteed if they could get the oil out of the ground. But now oil is barely trading just above $30 a barrel and a growing number of companies can’t pay back their debts. “The fact that a price below $100 seemed inconceivable to so many is kind of astonishing,” says Mike Lynch, president of Strategic Energy and Economic Research. “A lot of people just threw money away thinking the price would never go down.” On the last day of 2015, Swift Energy, an “independent oil and gas company” headquartered in Houston, became the 42nd driller to file for bankruptcy in this commodity crunch. The company is trying to sort out over $1 billion in debt at a time when the firm’s earnings have declined over 70% in the past year.

Trimming costs and laying off workers can’t close that kind of gap. “In the 1980s, there was a bumper sticker that people in Texas had that said, ‘God give me one more boom and I promise not to screw it up,'” says Lynch. “People should have those bumper stickers ready again.” The last really big oil bust was in the late 1980s. The Saudis really controlled the price then, says La Forge. Now the Saudis (and other members of OPEC) are in a battle with the United States, which has become a major player again in energy production. No one wants to cut back on production and risk losing market share. “It will be the U.S. companies that go out of business,” predicts La Forge. OPEC countries don’t have a lot of smaller players like the United States does. It’s usually the government that controls oil drilling and production in OPEC nations.

La Forge predicts the governments can hold their position longer. As the smaller players run out of cash, they will get swallowed up by bigger ones. “The big boys and girls will snap up a lot of cheap assets,” predicts Lynch. There’s a lot of debate about whether oil prices have bottomed out. Crude oil hit its lowest price since 2003 this week. But even if prices have stabilized, the worst isn’t over for oil companies. “Some companies went under in 1986-’87 even when prices rebounded,” says La Forge. This week, Blackstone (BGB) CEO Stephen Schwarzman said his firm is finally taking a close look at bargains in the energy sector. One of the largest bankruptcies so far is Samson Resources of Oklahoma. In 2011, private equity firm KKR (KKR) bought it for over $7 billion. Now it’s struggling to deal with over $1 billion in debt that’s due this year alone.

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Can’t read on shale without mention of default anymore.

US Shale’s Big Squeeze (FT)

The boom years left the US oil industry deep in debt. The 60 leading US independent oil and gas companies have total net debt of $206bn, from about $100bn at the end of 2006. As of September, about a dozen had debts that were more than 20 times their earnings before interest, tax, depreciation and amortisation. Worries about the health of these companies have been rising. A Bank of America Merrill Lynch index of high-yield energy bonds, which includes many indebted oil companies, has an average yield of more than 19%. Almost a third of the 155 US oil and gas companies covered by Standard & Poor’s are rated B-minus or below, meaning they are at high risk of default.

The agency this month revised down its expectations of future oil prices, meaning that many of those companies’ ratings are likely to be cut even further. Credit ratings for the more financially secure investment grade companies are also likely to be lowered this time. Some companies under financial strain will be able to survive by selling assets. Private capital funds raised $57bn last year to invest in energy, according to Preqin, an alternative assets research service, and most of that money is still looking for a home. Companies with low-quality assets or excessive debts will not make it. Tom Watters of S&P expects “a lot more defaults this year”. Bankruptcies, a cash squeeze and poor returns on investment mean companies will continue to cut their capital spending.

The number of rigs drilling oil wells in the US has dropped 68% from the peak in October 2014 to 510 this week, and it is likely to fall further. So far, the impact on US oil production has been minimal. Output in October was down 4% from April, as hard-pressed companies squeeze as much revenue as possible out of their assets. Saudi Arabia’s strategy of allowing oil prices to fall to curb competing sources of production appears to be succeeding But Harold Hamm, chief executive of Continental Resources, one of the pioneers of the shale boom, says the downturn in activity is likely to intensify. “We’re seeing capex being slashed to almost nothing,” he says. “At low prices, people aren’t going to keep producing.” He expects US oil production to fall sharply this year, and says people may be surprised by how fast it goes.

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Poor banks.

Squeezed Primary Dealers Quit European Government Bond Markets (Reuters)

A rise in the number of banks giving up primary dealer roles in European government bond markets threatens to further reduce liquidity and eventually make it more expensive for some countries to borrow money. Increased regulation and lower margins have seen five banks exit various countries in the last three months. Others look set to follow, further eroding the infrastructure through which governments raise debt. While these problems are for now masked by the European Central Bank buying €60 billion of debt every month to try to stimulate the euro zone economy, countries may feel the effects more sharply when the ECB scheme ends in March 2017. Since 2012, most euro zone governments have lost one or two banks as primary dealers, while Belgium – one of the bloc’s most indebted states – is down five.

Primary dealers are integral to government bond markets, buying new issues at auctions to service demand from investors and to maintain secondary trading activity. Without their support, countries would find it harder to sell debt, forcing them to offer investors higher interest rates. Over the last quarter alone, Credit Suisse pulled out of most European countries, ING quit Ireland, Commerzbank left Italy, and Belgium did not re-appoint Deutsche Bank as a primary dealer and dropped Nordea as a recognised dealer. In that time, only Danske Bank has added to its primary dealer roles in the bloc’s main markets. But even Danske is worried. “I’ve never seen it so bad,” said Soeren Moerch, head of fixed income trading at Danske Markets.

“When further banks reduce their willingness to be a primary dealer then liquidity will go even lower…we could have more failed auctions and we could see a big washout in the market.” Acting as a dealer has become increasingly expensive for banks under new regulations because of the amount of capital it requires, while trading profits that once made up for the initial spend have diminished in an era of ultra-low rates. “Shareholders would be shocked if they knew the scale of the costs that some businesses are taking,” said one banker who has worked at several major investment houses with primary dealer functions. The decline in dealers comes as many of the world’s largest financial firms, such as Morgan Stanley and Deutsche Bank, launch strategic reviews that are likely to impact their fixed income operations.

The risk that the euro zone could slide back into recession, having barely recovered from its long-running debt crisis, could exacerbate the withdrawal by prompting banks to retreat into their home markets. “It is a negative trend. The opposite that we saw in the first 10 years of the euro,” said Sergio Capaldi at Intesa SanPaolo. “For smaller countries…the fact that there are less players is something that could have a negative affect on market liquidity and borrowing costs.”

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Squeezed them for all they’re worth.

US Banks Cut Off Mexican Clients as Regulatory Pressure Increases (WSJ)

U.S. banks are cutting off a growing number of customers in Mexico, deciding that business south of the border might not be worth the risks in the wake of mounting regulatory warnings. At issue are correspondent-banking relationships that allow Mexican banks to facilitate cross-border transactions and meet their clients’ needs for dealing in dollars—in effect, giving them access to the U.S. financial system. The global firms that provide those services are increasingly wary of dealing with Mexican banks as well as their customers, according to U.S. bankers and people familiar with the matter.

The moves are consistent with a broader shift across the industry, in which banks around the world are retreating from emerging markets as regulators ramp up their scrutiny and punishment of possible money laundering. For many banks, the money they can earn in such countries isn’t worth the cost of compliance or the penalties if they step across the line. U.S. financial regulators have long warned about the risks in Mexico of money laundering tied to the drug trade. The urgency spiked more than a year ago, when the Financial Crimes Enforcement Network, a unit of the Treasury Department, sent notices warning banks of the risk that drug cartels were laundering money through correspondent accounts, people familiar with the advisories said. Earlier, the Office of the Comptroller of the Currency sent a cautionary note to some big U.S. banks about their Mexico banking activities.

But the pain Mexican firms are experiencing is relatively new. The fallout is affecting Mexican banks of various sizes such as Grupo Elektra’s Banco Azteca, Grupo Financiero Banorte and Monex Grupo Financiero, and their customers, the people said. Regulators have consistently said they don’t direct banks to cut ties with specific countries or a large swath of customers. But the advisories, which had nonpublic components that haven’t been previously reported, were interpreted by several big banks as a fresh signal that they do business in Mexico at their own peril, according to people familiar with the matter. “All they know is that sanctions are big and revenues are small,” said Luis Niño de Rivera, vice chairman of Banco Azteca, based in Mexico City. “It’s simple arithmetic: ‘I make a million dollars and they’re going to fine me a billion? I won’t do that.’”

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A field of pretense.

Ideological Divisions Undermine Economics (Economist)

Dismal may not be the most desirable of modifiers, but economists love it when people call their discipline a science. They consider themselves the most rigorous of social scientists. Yet whereas their peers in the natural sciences can edit genes and spot new planets, economists cannot reliably predict, let alone prevent, recessions or other economic events. Indeed, some claim that economics is based not so much on empirical observation and rational analysis as on ideology. In October Russell Roberts, a research fellow at Stanford University’s Hoover Institution, tweeted that if told an economist’s view on one issue, he could confidently predict his or her position on any number of other questions. Prominent bloggers on economics have since furiously defended the profession, citing cases when economists changed their minds in response to new facts, rather than hewing stubbornly to dogma.

Adam Ozimek, an economist at Moody’s Analytics, pointed to Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis from 2009 to 2015, who flipped from hawkishness to dovishness when reality failed to affirm his warnings of a looming surge in inflation. Tyler Cowen, an economist at George Mason, published a list of issues on which his opinion has shifted (he is no longer sure that income from capital is best left untaxed). Paul Krugman chimed in. He changed his view on the minimum wage after research found that increases up to a certain point reduced employment only marginally (this newspaper had a similar change of heart). Economists, to be fair, are constrained in ways that many scientists are not. They cannot brew up endless recessions in test tubes to work out what causes what, for instance.

Yet the same restriction applies to many hard sciences, too: geologists did not need to recreate the Earth in the lab to get a handle on plate tectonics. The essence of science is agreeing on a shared approach for generating widely accepted knowledge. Science, wrote Paul Romer, an economist, in a paper* published last year, leads to broad consensus. Politics does not. Nor, it seems, does economics. In a paper on macroeconomics published in 2006, Gregory Mankiw of Harvard University declared: “A new consensus has emerged about the best way to understand economic fluctuations.” But after the financial crisis prompted a wrenching recession, disagreement about the causes and cures raged. “Schlock economics” was how Robert Lucas, a Nobel-prize-winning economist, described Barack Obama’s plan for a big stimulus to revive the American economy. Mr Krugman, another Nobel-winner, reckoned Mr Lucas and his sort were responsible for a “dark age of macroeconomics”.

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Nice details.

A Greek Conspiracy: How The ECB Crushed Varoufakis’ Plans (Häring)

A central bank governor in Athens conspires with the President of the Republic to sabotage the negotiation strategy of his government to weaken it in its negotiations with the European Central Bank. After the government has capitulated, this governor, who is a close friend of the new finance minister and boss of the finance ministers wife, and the President of the Republic travel together to the ECB to collect their praise and rewards. This is not an invention, this is now documented. On 19 January the German Central Bank in Frankfurt informed the media that the Greek President Prokopis Pavlopoulos visited the ECB and met with ECB-President Mario Draghi, and that he was accompanied by the President of the Greek central Bank, Yanis Stournaras.

Remember. When the Syriza-led government in Athens was in tense negotiations with the European institutions, the ECB excerted pressure by cutting Greek banks off the regular financing operations with the ECB. They could get euros only via Emergency Liquidty Assistance from the Greek central bank and the ECB placed a strict limit on these. Finance minister Yanis Varoufakis worked on emergency plans to keep the payment system going in case the ECB would cut off the euro supply completely. It has already been reported and discussed that a close aide of Stournaras sabotaged the government during this time by sending a memo to a financial journalist, which was very critical with the governments negotiation tactics and blamed it for the troubles of the banks, which the ECB had intensified, if not provoked.

A few days ago, Stournaras himself exposed a conspiracy. He bragged that he had convened former prime ministers and talked to the President of the Republic to raise a wall blocking Varoufakis emergency plan. In retrospect it looks as if Alexis Tsipras might have signed his capitulation to Stournaras and the ECB already in April 2015, when he replaced Varoufakis as chief negotiator by Euklid Tsakalotos, who would later become finance minister after Varoufakis resigned. In this case the nightly negotiating marathon in July, after which Tsipras publicly signed his capitulation, might just have been a show to demonstrate that he fought bravely to the end. Why would I suspect that? Because I learned in a Handelsblatt-Interview with Tsakalotos published on 15 January 2016 that he is a close friend of Stournaras. Looking around a bit more, I learned that Tsakalotos wife is ‘Director Advisor’ to the Bank of Greece.

This is the Wikipedia entry: “Heather Denise Gibson is a Scottish economist currently serving as Director-Advisor to the Bank of Greece (since 2011). She is the spouse of Euclid Tsakalotos, current Greek Minister of Finance.” At the time she entered, Stournaras was serving as Director General of a think tank of the Bank of Greece. The friendship of the trio goes back decades to their time together at a British university. They even wrote a book together in 1992. Thus: The former chief negotiator of the Greek government is and was a close friend of the central bank governor and the central bank governor was the boss of his wife. The governor of the Bank of Greece, which is part of the Eurosystem of central banks, gets his orders from the ECB, i.e. the opposing side in the negotiations. He actively sabotaged the negotiation strategy of his government. If this does not look like an inappropriate association for a chief negotiator, I don’t know what would.

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Someone grabbed Cameron by the nuts?

Britain ‘Poised To Open Door To Thousands Of Migrant Children’ (Guardian)

David Cameron is considering plans to admit thousands of unaccompanied migrant children into the UK within weeks, as pressure grows on ministers to provide a haven for large numbers of young people who have fled their war-torn homelands without their parents. Amid growing expectation that an announcement is imminent, Downing Street said ministers were looking seriously at calls from charities, led by Save the Children, for the UK to admit at least 3,000 unaccompanied young people who have arrived in Europe from countries including Syria and Afghanistan, and who are judged to be at serious risk of falling prey to people traffickers. Government sources said such a humanitarian gesture would be in addition to the 20,000 refugees the UK has already agreed to accept, mainly from camps on the borders of Syria, by 2020.

Following a visit to refugee camps in Calais and Dunkirk on Saturday, Labour leader Jeremy Corbyn called on Cameron to offer children not just a refuge in the UK but proper homes and education, equivalent to the welcome received by those rescued from the Nazis and brought to the UK in 1939. “We must reach out the hand of humanity to the victims of war and brutal repression,” he said. “Along with other EU states, Britain needs to accept its share of refugees from the conflicts on Europe’s borders, including the horrific civil war in Syria. “We have to do more. As a matter of urgency, David Cameron should act to give refuge to unaccompanied refugee children now in Europe – as we did with Jewish Kindertransport children escaping from Nazi tyranny in the 1930s.

And the government must provide the resources needed for those areas accepting refugees – including in housing and education – rather than dumping them in some of Britain’s poorest communities.” Signs that the prime minister may act came after a week in which concern has risen in European capitals, and among aid agencies and charities, about the high number of migrants still pouring into the EU just as cold weather bites along the routes many are taking through the Balkans and central and eastern Europe. With one week of January to go, about 37,000 migrants and refugees have already arrived in the EU by land or sea, roughly 10 times the equivalent total for the month last year. The number of Mediterranean deaths stands at 158 this year.

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It’s a free for all now.

Germany Scolds Austria For Greek Schengen Threats (AFP)

This week Greece slammed a Financial Times report saying several European ministers and senior EU officials believed threatening suspension from Schengen could persuade Greece to protect its borders more effectively. Junior interior minister for migration Yiannis Mouzalas said the report contained ”falsehoods and distortions” but Mikl-Leitner said temporary exclusion was a real possibility. “If the Athens government does not finally do more to secure the (EU’s) external borders then one must openly discuss Greece’s temporary exclusion from the Schengen zone,” Mikl-Leitner said in an interview with German daily Die Welt. “It is a myth that the Greco-Turkish border cannot be controlled,” Mikl-Leitner said.

“When a Schengen signatory does not permanently fulfil its obligations and only hesitatingly accepts aid then we should not rule out that possibility,” she added. “The patience of many Europeans has reached its limit ... We have talked a lot, now we must act. It is about protecting stability, order and security in Europe.” Germany’s Steinmeier criticised Vienna’s warning however. “There won’t be any solution to the refugee crisis if solidarity disappears,” he said. “On the contrary, we must work together and concentrate all our efforts to fight against the causes that are pushing the refugees into flight, to reinforce the EU’s outer borders and to achieve a fair redistribution (of asylum seekers) within Europe.”

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Chance of Schengen survival below zero.

EU Leaders Consider Two-Year Suspension Of Schengen Rules (Telegraph)

The Schengen system of free movement could be suspended for two years under emergency measures to be discussed by European ministers on Monday, as the French Prime Minister warned the crisis could bring down the entire European Union. Manuel Valls said that the “very idea of Europe” will be torn apart until the flows of migrants expected to surge in spring are turned away. On Monday, interior ministers from the EU will meet in Amsterdam to discuss emergency measures to allow states to reintroduce national border controls for two years. The powers are allowed under the Schengen rules, but would amount to an unprecedented abandonment of the 30-year old agreement that allows passport-free travel across 26 states. The measure could be brought in from May, when a six-month period of passport checks introduced by Germany expires.

The European Commission would have to agree that there are “persistent serious deficiencies” in the Schengen zone’s external border to activate it. “This possibility exists, it is there and the Commission is prepared to use it if need be,” said Natasha Bertaud, a spokesman for Jean-Claude Juncker. Greece has been blamed by states for failing to identify and register hundreds of thousands of people flowing over its borders. Other states that have introduced emergency controls are Sweden, Austria, France, Denmark and Norway, which is not in the EU but is in Schengen. “We’re not currently in that situation,” Ms Bertaud added. “But interior ministers will on Monday in Amsterdam have the opportunity to discuss and it’s on the agenda what steps should be taken or will need to be taken once we near the end of the maximum period in May.”

In a further blow, Mr Valls said that France would keep its state of emergency, which has included border checks, until the Islamic State of Iraq and Levant network is destroyed. “It is a total and global war that we are facing with terrorism,” he said. He warned that without proper border controls to turn away refugees, the 60-year old European project could disintegrate. “It’s Europe that could die, not the Schengen area. If Europe can’t protect its own borders, it’s the very idea of Europe that could be thrown into doubt. It could disappear, of course – the European project, not Europe itself, not our values, but the concept we have of Europe, that the founding fathers had of Europe.

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Jan 212016
 
 January 21, 2016  Posted by at 9:43 am Finance Tagged with: , , , , , , , , , ,  8 Responses »


Harris&Ewing Goodyear Blimp at Washington Air Post ,DC 1938

Global Shareholders Have $27 Trillion Locked in Bear Markets (BBG)
US Futures Drop With Asia Stocks as Oil Falls (BBG)
Emerging Markets Lost $735 Billion in 2015, $2 Trillion in 2016 (BBG)
US Oil Posts Biggest One-Day Percentage Loss Since September (WSJ)
Energy Sector’s Default Risk Higher Than In Great Recession (MW)
Some Bankrupt Oil and Gas Drillers Can’t Give Their Assets Away (BBG)
PBOC Injects Most Cash in Three Years in Open-Market Operations (BBG)
China Stock Rout Seen Getting Uglier as Derivative Trigger Looms (BBG)
China Is Drowning In Private Sector Debt (Ormerod)
Deutsche Bank Shares Fall 6% On News Of €2.1 Billion Loss (BBG)
One In 6 Americans Go Hungry, One In 3 Kids Will Develop Diabetes (Ind.)
For the Sake of Capitalism, Pepper Spray Davos (Yra Harris)
6 Years Suffering The Violence Of A 1,000 Economic Cuts (DI)
We’ve Hugely Underestimated The Overfishing of The Oceans (WaPo)
Italy’s Blockbuster Quo Vado? Draws On Bitter Economic Reality (Guardian)
EU Chief Tusk Gives Refugee Plan 2 Months To Work (AP)
‘We Will Come To Athens And Burn Them All’: Protest Returns To Greece (Guardian)
IMF Cancels Systemic Exemption Rule Created In 2010 To Bail Out Greece (AFP)
Greece Re-Opens Refugee Camp On Border in Sub-Zero Weather (Kath.)
Two Refugees –One 5-Year Old Child– Die Of Hypothermia Off Lesvos (Kath.)

Losses to date estimated at $15 trillion.

Global Shareholders Have $27 Trillion Locked in Bear Markets (BBG)

At least 40 stock markets around the world with a total value of $27 trillion are in bear territory, as investors witness the worst start to a year on record. The U.K. was the latest market to fall 20% from its peak, while India is 1% away from crossing the threshold that traders describe as the onset of bear market. Nineteen countries with $30 trillion have declined between 10% and 20%, thereby entering a so-called correction, according to data compiled by Bloomberg from the 63 biggest markets.

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“People are just bottom-fishing.”

US Futures Drop With Asia Stocks as Oil Falls (BBG)

U.S. index futures declined after a rally in Asian stocks reversed, pushing a gauge of global equities back to the brink of a bear market. Oil fell and the yen strengthened. Benchmark share measures in Tokyo, Shanghai and Manila slumped at least 2.8%, while Standard & Poor’s 500 Index contracts erased early gains to trade 0.9% lower. European index futures slid after the region’s stocks plunged the most since August on Wednesday. China’s equitiesfell despite a drop in money-market rates as the People’s Bank of China injected the most cash via open-market operations since 2013. The yen approached a one-year high reached Wednesday. Copper pared an advance.

Volatility has coursed through financial markets in 2016, amid turmoil in Chinesemarkets and the almost uninterrupted selloff in crude oil. The S&P 500’s plunge Wednesday triggered a technical signal indicating U.S. stocks were oversold, spurring a paring of losses that prevented the MSCI All-Country World Index from entering a bear market. The ECB meets Thursday, the first major monetary authority to review interest rates and policy since turmoil gripped markets at the start of the year. “The ground right now is so unstable, and there’s so much anxiety,” said Ayako Sera at Sumitomo Mitsui Trust. “We saw a rally, but I wouldn’t say that we’re in a full rebound yet. People are just bottom-fishing.”

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“The 31 biggest developing markets have lost a combined $2 trillion in equity values since the start of 2016.”

Emerging Markets Lost $735 Billion in 2015, More to Go (BBG)

Global investors and companies pulled $735 billion out of emerging markets in 2015, the worst capital flight in at least 15 years, the Institute of International Finance said. The amount was almost seven times bigger than what was recorded in 2014, the Washington-based think tank said in a report on Wednesday. China was the biggest loser, with $676 billion leaving its markets. The IIF predicted investors may withdraw $348 billion from developing countries this year. Emerging-market stocks are trading at the lowest levels since May 2009 and a gauge of 20 currencies has slumped to a record. A meltdown in commodity prices and concern over the slowdown in China’s growth to the weakest since 1990 are spurring investors to dump assets from China to Russia and Brazil.

The 31 biggest developing markets have lost a combined $2 trillion in equity values since the start of 2016. “We’ve seen massive outflows from emerging markets to the benefit of the euro zone and Japan,” said Ibra Wane at Amundi Asset Management. “Institutional investors have been more attracted by these regions.” Wane said the shift in flows is a result of monetary-policy changes, as the Federal Reserve raised interest rates in December for the first time in almost a decade, which is also partly to blame for the volatility in emerging-market currencies. “I’d rather look first at stabilization of currencies,” Wane said. “If this were to come true, then probably also flows would come on top of it.”

All 24 emerging-market currencies tracked by Bloomberg have depreciated against the dollar in the past year, with the Argentine peso, the Brazilian real and the South African rand getting hit the worst. “Countries with large current-account deficits, high levels of foreign-exchange corporate indebtedness and questionable macro policy frameworks would come under particular pressure in the event of further emerging-market retrenchment,” the IIF report said. “At-risk countries include Brazil, South Africa and Turkey.” The Chinese yuan’s 5.5% drop in the past 12 months was one of the drivers of outflows from the world’s second biggest economy, according to the IIF report. “The 2015 outflows largely reflected efforts by Chinese corporates to reduce dollar exposure after years of heavy dollar borrowing, as expectations of persistent RMB appreciation were replaced by rising concerns about a weakening currency,” the report said.

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If global equities lost $15 trillion so far, what’s the tally for oil?

US Oil Posts Biggest One-Day Percentage Loss Since September (WSJ)

The selloff in oil prices accelerated Wednesday, intensifying a slide in global financial markets as investors worried that oil’s relentless downdraft signaled global economic gloom. The front-month U.S. oil contract settled down 6.7%, posting the biggest one-day loss since September. Oil prices have dropped more than 25% this year. Much of the 19-month oil-market selloff has been driven by concerns about ample supplies. What’s increasingly weighing on investors is the fear that demand growth is wilting, particularly in China, which could reflect deeper economic woes. “Global economic forces appear to be driving down demand for commodities, ” Citigroup said in a note. “There is no doubt that declining expectations of global growth are exacerbating the results of oversupply across commodity markets.”

Light, sweet crude for February delivery settled down $1.91 to $26.55 a barrel on the New York Mercantile Exchange. The February contract expires at settlement Wednesday. Brent, the global benchmark, fell 82 cents, or 2.9%, to $27.94 a barrel on ICE Futures Europe, also on track for the lowest settlement since 2003. Oil investors fear that demand in China, which consumes about 12% of world’s crude, may falter as the country shifts to a less energy-intensive economic model. On Tuesday, the Chinese authorities announced the country’s gross domestic product rose 6.9% in 2015, its slowest pace in 25 years. ESAI Energy said Wednesday that the pace of demand growth in China from 2015 to 2030 will be 60% slower than the pace of demand growth from 2000 to 2015.

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Spring cleaning?!

Energy Sector’s Default Risk Higher Than In Great Recession (MW)

Markets are pricing in a higher default risk for the energy sector than they did at the peak of the Great Recession, according to data from Schwab and Barclays. As continued concerns about oil’s global supply glut pushed crude futures below $27 a barrel, sparking a global stock selloff, energy spreads surpassed their 2009 peak. A spread is a yield differential between the index and comparable risk-free Treasurys. Widening spreads mean investors are pricing in more risk for the energy sector and require a higher yield as compensation for their risk. As the following chart shows, the spread on the energy sector of the Barclays U.S. Corporate High-Yield Bond Index, a widely followed gauge of market-priced risk, reached 1,530 basis points as of Tuesday’s close, compared with 1,420 basis points reached during the height of the financial crisis seven years ago. One basis point is equivalent to 0.01% or one hundredth of a percentage point.

Credit-market spreads are often viewed as a leading indicator for equity markets. Spreads in the energy sector have been widening since the summer of 2014, and spiked over the past few months amid the recent rout in oil prices. That dynamic has certainly played out lately. Stocks followed oil’s decline, weighed by sinking shares of energy companies. The energy sector was the worst performer on the S&P 500 on Wednesday, and is down nearly 15% since the beginning of the year. Meanwhile, energy companies led decliners among the Dow industrials. Widening credit spreads imply that “the market is clearly expecting the default rate to pick up, as the balance sheets of some of the riskier energy companies won’t be able to sustain this drop in oil prices” said Collin Martin, director of fixed-income strategy for the Schwab Center for Financial Research.

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Orderly way down or mayhem?

Some Bankrupt Oil and Gas Drillers Can’t Give Their Assets Away (BBG)

Oil is in free fall and Terry Clark couldn’t be happier. In mid-2014, when the crude price topped $100 a barrel, Clark made an offer to buy properties from Dune Energy, a small driller with money trouble. Dune turned him down. A year later, as oil plunged to $60 a barrel, Dune filed for bankruptcy and Clark’s White Marlin Oil & Gas picked up the assets at auction at a deep discount. “What we offered versus what we got it for, it’s a great price,” Clark said. “We’re going to continue to play these bankruptcies. We’re participating in two more right now.” Winners and losers are emerging from the energy bust. What’s a meal for Clark is indigestion for banks that financed the boom using oil and gas properties as collateral. The four biggest U.S. banks – Bank of America, Citigroup, JPMorgan and Wells Fargo – have set aside at least $2.5 billion combined to cover souring energy loans and have said they’ll add to that if prices stay low.

There’s plenty to keep Clark bargain-hunting. Last year, 42 U.S. energy companies went bankrupt, owing more than $17 billion, according to a report from law firm Haynes & Boone. Dune went belly up owing $144.2 million. Its assets sold for $20 million. In May, American Eagle filed for bankruptcy with debts of $215 million. Its properties sold for $45 million in October. BPZ Resources owed $275.2 million. Its assets fetched about $9 million. Endeavour went into bankruptcy owing $1.63 billion. The company sold some assets for $9.65 million and handed over the rest to lenders. ERG Resources opened an auction with a minimum bid of $250 million. Response? No takers. “A lot of people got into this business and didn’t really understand the ups and downs of price cycles,” said Becky Roof, a managing director for turnaround and restructuring with the consulting firm AlixPartners. “They’re getting a very bad dose of reality right now.”

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It worked for mere hours. Reminiscent of Bernanke’s 2008 moves.

PBOC Injects Most Cash in Three Years in Open-Market Operations (BBG)

The People’s Bank of China injected the most cash in almost three years in its open-market operations, helping ease a cash squeeze as the coming Chinese New Year holiday spurs demand for funds at a time when capital outflows are mounting. The central bank said it conducted 110 billion yuan ($16.7 billion) of seven-day reverse-repurchase agreements and 290 billion yuan of 28-day contracts. That compares with 160 billion yuan of contracts that matured and resulted in a net cash injection of 315 billion yuan for this week’s two auctions. Other lending tools were used to add about 700 billion yuan this week for terms ranging from three days to a year.

China is trying to hold borrowing costs down to support its economy without spurring an exodus of funds that drove the yuan to a five-year low this month. Gross domestic product rose last year at the slowest pace in a quarter century and intervention to prop up the exchange rate led to a record $513 billion plunge in the nation’s foreign-exchange reserves. The Chinese New Year holiday – a period for feasting and exchanging gifts – will shut China’s financial markets throughout the week starting Feb. 8. “The market is a bit nervous and liquidity is also needed to cover the Chinese New Year,” said Frances Cheung, Hong Kong-based head of rates strategy for Asia ex-Japan at Societe Generale.

“The fact that they are going for longer tenors on reverse repos and its MLF does add to market expectations for a delay in a reserve-ratio cut, which in itself could be linked to the currency market performance.” The central bank injected 410 billion yuan into the banking system via three- and 12-month loans under its Medium-Term Lending Facility this week, while Short-term Liquidity Operations were used to add 55 billion yuan of three-day loans on Monday and another 150 billion yuan of six-day funds on Wednesday. The PBOC also auctioned 80 billion yuan of treasury deposits on behalf of the Ministry of Finance this week.

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“Many of those products have a “knock-in” feature at the 8,000 level that will spur banks to cut futures positions..”

China Stock Rout Seen Getting Uglier as Derivative Trigger Looms (BBG)

If Bank of America is right, Chinese stocks in Hong Kong are poised for a fresh wave of selling. That’s because the benchmark Hang Seng China Enterprises Index is approaching a level that forces investment banks to pare back their bullish futures positions, according to William Chan, the head of Asia Pacific equity derivatives research at BofAML in Hong Kong. The trades, tied to banks’ issuance of structured products, are likely to start unwinding when the index falls through 8,000, a level it briefly breached on Wednesday. The gauge dropped 1% to 7,932.24 at 1:05 p.m. local time on Thursday. Banks have purchased futures on the gauge of so-called H shares to hedge exposure to structured products that they’ve sold to clients, according to Chan.

Many of those products have a “knock-in” feature at the 8,000 level that will spur banks to cut futures positions to maintain the effectiveness of their hedges, he said. Additional pressure points may also come at lower levels, Chan said. “As the market goes lower from here, the downward move may accelerate,” he said. “There will be a large amount of hedging in futures which dealers need to unwind.” While the opaque nature of structured products makes it difficult to gauge how much money is riding on any particular level of the Hang Seng China index, Chan came to his conclusion by analyzing regulatory data from South Korea, one of the few countries that publicizes such figures.

The nation is among the region’s biggest markets for structured products and there’s currently a notional value of about $34 billion from Korea linked to the Hang Seng China measure, according to Chan. When banks sell the structured products to investors, they take on an exposure that’s similar to purchasing a put option on the index, Chan said. To hedge against the possibility of a rally, the banks buy Hang Seng China index futures. If the stock gauge falls below knock-in levels for the structured products – the price at which investors begin to lose their principal – the sensitivity of the bank’s position to index swings gets smaller, and banks respond by selling futures to reduce their hedge.

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Along with everyone else.

China Is Drowning In Private Sector Debt (Ormerod)

The eyes of the financial and economic worlds are now fixed on China, with focus predominantly on Chinese stock markets and the country’s GDP figures. A fascinating perspective was provided last week in the leafy borough of Kingston upon Thames. The university there has recruited the Australian Steve Keen as head of its economics department, and it was the occasion of his inaugural lecture. Keen was one of the few economists to highlight the importance of private sector debt before the financial crisis began in 2008. The title of the lecture itself was exciting: “Is capitalism doomed to have crises?” Judging by the beards and dress style of the audience, many may have expected a Corbynesque rant. Instead, we heard an elegant exposition based on a set of non-linear differential equations.

Private sector debt is the sum of the debts held by individuals and companies, excluding financial sector firms like banks. Keen pointed out that, in the decade prior to the massive crash of 1929, the size of private debt relative to the output of the economy as a whole (GDP) rose by well over 50%. The increase from the late 1990s onwards meant that debt once again reached dizzy heights. In ten years, it rose from being around 1.2 times as big as the economy to being 1.7 times larger. This may seem small. But American GDP in 2007 was over $14 trillion. If debt had risen in line with the economy, it would have been about $17 trillion. Instead, it was $24 trillion, an extra $7 trillion of debt to worry about. Japan experienced a huge financial crash at the end of the 1980s.

The Nikkei share index lost no less than 80% of its peak value, and land values in Tokyo fell by 90%. During the 1980s, private sector debt rose from being some 1.4 times as big as the economy to 2.1 times the size. In China, in 2005, the value of private debt was around 1.2 times GDP. It is now around twice the size. Drawing parallels with the previous experiences of America and Japan, a major financial crisis is not only overdue but it is actually happening. And Keen suggests there is still some way to go. So is it all doom and gloom? Up to a point, Lord Copper. High levels of private sector debt relative to the size of the economy do indeed seem to precede crises. But there is no hard and fast rule on the subsequent fall in share prices.

Japanese shares fell 80% and have not yet recovered their late 1980s levels. In the 1930s, US equities fell 75%, and took until 1952 to bounce back. In the latest financial crisis, they fell by 50% but are even now above their 2007 high. Equally, output responds to these falls in completely different ways. In the 1930s, American GDP fell by 25%, compared to just 3% in the late 2000s. Japan has struggled, but never experienced a major recession. Still, Keen’s arguments leave much food for thought.

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World’s biggest bank. Huge derivatives holdings.

Deutsche Bank Shares Fall 6% On News Of €2.1 Billion Loss (BBG)

Deutsche Bank AG, Germany’s biggest lender, expects to post a €2.1 billion loss for the fourth quarter after setting aside more money for legal matters and taking a restructuring charge. The stock is at the lowest since 2009. About €1.2 billion were earmarked for litigation and €800 million for restructuring and severance costs, mainly in the private and business clients division, the Frankfurt-based firm said Wednesday in a statement. “Challenging market conditions” also hurt earnings at the investment bank during the quarter, cutting group revenue to about €6.6 billion, it said. The bank had reported €7.8 billion of net revenue a year earlier. Co-CEO John Cryan has been seeking ways to restore investor confidence and earnings growth battered by costs tied to past misconduct.

Under his overhaul, Deutsche Bank plans to shrink headcount by 26,000, or a quarter of the workforce, by 2018 while planning to suspend the dividend to help shore up capital buffers. “A real fresh start means even lower stated net profits for some time,” Daniele Brupbacher at UBS in Zurich who has a neutral rating on the shares, wrote in a note on Thursday. Conditions for the company will probably “remain challenging” in the first quarter, he wrote. The stock fell as much as 6% and was down 3.5% at 17.10 euros as of 9:16 a.m. in Frankfurt, the biggest decline in the 46-member Stoxx Europe 600 Banks Index. Deutsche Bank’s 24% decline this year means it’s the worst-valued global bank.

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“..obesity and poverty “are neighbours”

One In 6 Americans Go Hungry, One In 3 Kids Will Develop Diabetes (Ind.)

Film director Lori Silverbush has spoken out on hunger in the US and says it is still a massive problem three years after making a documentary on the subject. The US faces staggering statistics on food poverty – the highest under the current government administration since the 1970s when hunger was almost eradicated in the US. One in six Americans are hungry, while 30% of Americans are described as “food insecure” – meaning they can’t guarantee they can always put food on the table. Mrs Silverbush’s film “A Place At The Table”, which she co-directed alongside Kristi Jacobsen, reveals that 44 million Americans rely on food stamps, which are worth around $3 to $4 per day.

Insufficient funds mean that people can’t afford to buy fresh fruit or vegetables, which have gone up in price by 40% since the obesity crisis began, according to author Marion Nestle, and instead they rely on cheap, processed foods. As a result, obesity and poverty “are neighbours”, said End Hunger Network founder Jeff Bridges. Speaking at the Brooklyn Historical Society on Tuesday evening, Mrs Silverbush said her “blood boiled” when she realized that food poverty is a result of politics. The government has spent $0.75 trillion since 1995 on subsidies to wealthy agriculture companies that are responsible for processed foods, a policy that started during the Great Depression of the 1930s.

“We didn’t know there was hunger in every county or that there were millions of working families that were hungry,” she said. “Malnutrition and hunger cause a cascade of terrible, life-long consequences for kids.” The film also revealed that one in three children born in the year 2000 will be diagnosed with type 2 diabetes. Hunger is expensive. It costs the US government $167 billion a year, according to the film. One interviewee, Barbie Izquierdo, lives in Philadelphia with two children, and her food stamps were taken away once she secured full time employment, leaving her without enough money to feed her family. “Define starving,” she said. “Are you starving if you don’t eat for a day?“

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Can’t we just ignore it instead?

For the Sake of Capitalism, Pepper Spray Davos (Yra Harris)

Please, PEPPER SPRAY ALL THE ATTENDEES OF DAVOS in order to halt the rape of taxpayers and consumers across the globe. This annual conclave is responsible for more wealth destruction and the widening disparity in GINI coefficients than any public policy. I believe that the cost of attending Davos is priced at such an extravagant rate because it is a giant insider scam. Hobnob with politicians and policy makers in an effort to be part of the “smart money” crowd. It was the great moral philosopher and economist Adam Smith who so presciently noted: “People of the same trade seldom meet together, even for the merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” The conspiracy against the public has been the financial repression of the global middle class in an effort to bail out those who are attached themselves to the public treasury to maintain the “animal spirits” of crony capitalism.

The cost of an entrance pass to this private/public congress of mover and shakers should sound an alarm to all those who desire transparency in financial markets. In contemporizing the words of Adam Smith, Samuel Huntington was credited in the online research cite, Acton Commentary, as creating the phrase DAVOS MAN: “A soulless man, technocratic, nationless and cultureless, severed from reality. The modern economics that undergirded Davos capitalism is equally soulless, a managerial capitalism that reduces economics to mathematics and separates it from human action and human creativity.”

Friday’s release of the 2010 FOMC transcripts reveals that Chair Bernanke raised concerns “… about inappropriate access to information by outsiders other than the media, including consultants, market people and so on.” It was earlier revealed that Bernanke had held discussions with ECB President Trichet about the seriousness of the European sovereign debt crisis. The Reuters story post-transcript release–“Fed Helped ECB With Swaps after Trichet ‘Personal Appeal’”–quotes Chairman Bernanke: “Yesterday [ECB Chief] Jean-Claude Trichet called me and made what I would characterize as a personal appeal to re-open the swaps that we had before,” Bernanke told his colleagues at the UNSCHEDULED meeting.”

In a further analysis by Reuters, the article notes, “The transcripts, which are released after five years, show how closely Bernanke worked with Trichet, who shared ‘highly confidential’ information about the ECB’s part in a trillion-dollar ‘shock and awe’ rescue plan launched by EU leaders to combat an escalating financial crisis in Europe.” Ten months later Chairman Bernanke is openly warning FOMC members about leaks from its meetings. Curious about how much the DAVOS crowd made from the whispers emanating from the Fed Board Room? It costs more than $600,000 to be a strategic partner at Davos and be allowed into the most high-level meetings with the most important CEOs and policy makers. But if the inside scoop is info beyond the ears of mere mortals PRICE IS NO OBJECT BUT INSIDER PROFITS CERTAINLY ARE. More pepper spray to stop the rapes.

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H/t Steve Keen.

6 Years Suffering The Violence Of A 1,000 Economic Cuts (DI)

“My generation can’t afford houses. My generation can’t afford to have children. My generation are either leaving the country or jumping in rivers. That’s my generation, man,” Blindboy said on RTE’s Late Late Show on 8 January. “My generation is dealing with neoliberalism [sic] economic policies that are similar enough to the economic liberalism at the time of the Famine,” he said. “It’s a laisse-faire system, where our resources of the country are being sold for private interests and our generation, my generation is screwed.” When I saw that, it got me thinking: negative perceptions of the working class are so strong in Irish society that people who use food banks would rather call themselves “poor” than “working class”. This is the result of successful divide-and-conquer tactics.

Because the truth is that these days – the poor, the working poor, the working class, the middle-class – almost all of us are screwed. The wealth is trickling upwards to a very few. You can see it in a survey the Dublin think tank TASC released in December, which laid out the division of wealth in Ireland. The top 20% are the ones squeezing everybody’s middle: they have almost 73% of Ireland’s wealth. So if we look at a financial definition of working class, rather than a cultural one, the majority of us fit right in there together, even those notionally middle-class people who would recoil if you tried to tell them they were working class. Given this situation, I would expect to see howls of protest in the mainstream media, all the time. But I don’t see this kind of media outcry, and I wonder why.

Maybe it’s because the mainstream media usually take the side of the market, seeing issues from a market perspective. And I guess the market doesn’t care if our generation is screwed. It might actually be a good thing, from a market perspective, because it ensures there’s a steady supply of young people desperate for jobs, which keeps demand for wages and benefits to a minimum. And that would be rather attractive to multinationals looking for cheap workers. Meanwhile, journalists are just trying to survive too. Most of them are in precarious positions, and, unless they want a ticket to the hunger games, it’s human nature for them to keep their heads down and go with the status quo.

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Eat jellyfish.

We’ve Hugely Underestimated The Overfishing of The Oceans (WaPo)

The state of the world’s fish stocks may be in worse shape than official reports indicate, according to new data – a possibility with worrying consequences for both international food security and marine ecosystems. A study published Tuesday in the journal Nature Communications suggests that the national data many countries have submitted to the UN’s Food and Agriculture Organization (FAO) has not always accurately reflected the amount of fish actually caught over the past six decades. And the paper indicates that global fishing practices may have been even less sustainable over the past few decades than scientists previously thought. The FAO’s official data report that global marine fisheries catches peaked in 1996 at 86 million metric tons and have since slightly declined.

But a collaborative effort from more than 50 institutions around the world has produced data that tell a different story altogether. The new data suggest that global catches actually peaked at 130 metric tons in 1996 and have declined sharply – on average, by about 1.2 million metric tons every year – ever since. The effort was led by researchers Daniel Pauly and Dirk Zeller of the University of British Columbia’s Sea Around Us project. The two were interested investigating the extent to which data submitted to the FAO was misrepresented or underreported. Scientists had previously noticed, for instance, that when nations recorded “no data” for a given region or fishing sector, that value would be translated into a zero in FAO records – not always an accurate reflection of the actual catches that were made.

Additionally, recreational fishing, discarded bycatch (that is, fish that are caught and then thrown away for various reasons) and illegal fishing have often gone unreported by various nations, said Pauly. “The result of this is that the catch is underestimated,” he said. So the researchers teamed up with partners all over the world to help them examine the official FAO data, identify areas where data might be missing or misrepresented and consult both existing literature and local experts and agencies to compile more accurate data. This is a method known as “catch reconstruction,” and the researchers used it to examine all catches between 1950 and 2010. Ultimately, they estimated that global catches during this time period were 50% higher than the FAO reported, peaking in the mid-1990s at 130 million metric tons, rather than the officially reported 86 million. As of 2010, the reconstructed data suggest that global catches amount to nearly 109 million metric tons, while the official data only report 77 million metric tons.

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Bigger than Star Wars.

Italy’s Blockbuster Quo Vado? Draws On Bitter Economic Reality (Guardian)

A comedy that captures Italians’ love for il posto fisso – a job for life – has become an unlikely blockbuster hit in Italy. Quo Vado? – or Where Am I Going? – is close to overtaking Avatar as the highest-grossing film in Italian box office history, having generated €59m since its opening on New Year’s Day and beaten international rivals such as Star Wars: The Force Awakens. Even Matteo Renzi, the energetic Italian prime minister, is said to have seen the film with his children. He told one newspaper that he laughed “from the beginning to the end”. The success of Quo Vado? reflects a relatively recent change in Italy: the cushy public sector jobs promising steady income and great benefits that were a staple of the country’s economic engine are now considered a thing of the past.

In their place has come high unemployment – which, while improving, is still at 11.3% – and job insecurity, which has hit young workers particularly hard. Alessandro Giuggioli, a film-maker who produced an independent film, In Bici Senza Sella (On a Bike Without a Saddle), about precarious jobs, said the posto fisso was like the holy grail in Italy: “You know it is a possibility and that you are never going to reach it.” While his parents’ generation enjoyed lifelong job security, Giuggioli said young people in Italy today had to make do with rolling short-term contracts, which have become the new normal. He partly blames Italy’s tax system and bureaucracy. “If an employer wants to hire you for €1,000 (£770) a month, they end up paying €2,500 a month. It’s crazy. And so they hire you for three months instead, paying €600,” he said.

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Tusk is the bottom of the barrel, he represents the lowest the EU has to offer. Brussels is setting itself up for a world of pain.

EU Chief Tusk Gives Refugee Plan 2 Months To Work (AP)

The European Union’s top official warned Tuesday the bloc has just two months to get its migration strategy in order amid criticism that its current policies are putting thousands of people in danger and creating more business for smugglers. “We have no more than two months to get things under control,” European Council President Donald Tusk told EU lawmakers, warning that a summit of EU leaders in Brussels on March 17-18 “will be the last moment to see if our strategy works.” The EU spent most of 2015 devising policies to cope with the arrival of more than 1 million people fleeing conflict or poverty but few are having a real impact. A refugee sharing plan launched in September has barely got off the ground and countries are still not sending back people who don’t qualify for asylum.

A package of sweeteners earmarked for Turkey – including €3 billion, easier visa access for Turkish citizens and fast-tracking of the country’s EU membership process – has borne little fruit. The failure has raised tensions between neighbors, particularly along the Balkan route used by migrants arriving in Greece to reach their preferred destinations like Germany or Sweden further north. Tusk warned that if Europe fails to make the strategy work “we will face grave consequences such as the collapse of Schengen,” the 26-nation passport-free travel zone.

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2016 can only be a hot year.

‘We Will Come To Athens And Burn Them All’: Protest Returns To Greece (Guardian)

Farmers’ roadblocks, ferries immobilised in ports, pensioners taking to the streets: protest has returned to Greece in what many fear could be the beginning of the crisis-plagued country’s most confrontational winter yet. From the Greek-Bulgarian frontier to the southern island of Crete, farmers are up in arms over the spectre of more internationally mandated austerity. “It’s war,” says Dimitris Vergos, a corn grower speaking from the northern town of Naoussa. “If they [politicians] go on pushing us to the edge, if they want to dehumanise us further, we will come to Athens and burn them all.” With the rhetoric at such levels, prime minister Alexis Tsipras’s leftist-led administration has suddenly found itself on the defensive. Faced with a series of demonstrations – fishermen and stockbreeders will join blockades on Thursday when public and private sector workers also take to the streets – analysts say any honeymoon period Tsipras may once have enjoyed is over.

On Wednesday, convoys of tractors in Thessaly, the nation’s breadbasket, blocked the road at Tempi, effectively cutting the country’s main north-south highway. Hundreds more lined the seafront in Thessaloniki while, further north, police were forced to fire rounds of tear gas at protestors barricading Evangelos Apostolou, the agriculture minister, in an administrative building as fierce clashes erupted in Komotini. The focus of their fury was proposed pension and tax measures, the latest in a battery of reforms set as the price of the debt-stricken nation receiving a third, €86bn, bailout last summer. For farmers, the draft policies are tantamount to the kiss of death. “We are going for all out confrontation,” said the prominent unionist Yannis Vangos, warning that by Friday roadblocks would be erected across a large swath of the county.

“It seems we can’t see eye to eye at all. Things are out of control. It’s not just one thing we have to negotiate.” Six years into Athens’ economic crisis, even more Greeks claim they have been pushed to the point where they can no longer survive the rigours of austerity. With an unprecedented 1.2 million people unemployed – more than 25% of the population – many have been pauperised by the biting effects of keeping bankruptcy at bay. Pensioners, whose incomes have been reduced 12 times at the behest of the EU and IMF, this week also upped the ante taking to the streets. Creditors argue that at 17% of GDP, Greece’s pension system is Europe’s costliest and to great degree the generator of its fiscal dysfunction. But those who stand to be affected by the overhaul counter the changes go too far. For farmers, the reforms will not only raise social security contributions from 6.5% to 27%, but double income tax payments from 13% to 26%, eradicating more than three quarters of their annual earnings.

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How can AFP write this without questioning what the IMF did to bail out Ukraine?

IMF Cancels Systemic Exemption Rule Created In 2010 To Bail Out Greece (AFP)

The IMF abolished Wednesday a rule created in 2010 that allowed it to participate in an international bailout of Greece despite doubts about the country’s debt sustainability. “Today the executive board of the IMF approved an important reform to the Fund’s exceptional access lending framework, including the removal of the systemic exemption,” IMF spokesman Gerry Rice said in a brief statement. The “systemic exemption” amounted to a loophole in the IMF’s longstanding policy that required the crisis lender to judge a member country’s public debt to be sustainable with “high probability” before it could provide financial assistance that exceeds a member’s contribution to the institution.

Reeling from budget and banking crises in 2010, deeply indebted Greece did not meet the sustainability condition and the IMF decided that a debt restructuring could pose severe negative spillovers on the rest of the eurozone. The IMF thus created the “systemic exemption” provision which paved the way for it to join the EU and the ECB in the so-called “troika” of international lenders throwing a lifeline to Greece. For the IMF, that amounted to 30 billion euros ($32.7 billion) in May 2010, then an additional 18 billion euros in a second bailout two years later. The systemic exemption was used more than 30 times to permit loan payments to Greece but also for Ireland and Portugal, two other eurozone members receiving assistance from the troika, by end-May 2014.

Its use, nevertheless, has stirred criticism, notably from some emerging-market countries that saw it as giving favorable treatment to European states in response to pressure from Western powers. With the elimination of the loophole, the IMF is seeking to close a controversial chapter in its recent history as it decides whether to join the EU and ECB in a third bailout of Greece launched last August. In a sign that the abolition of this “systemic exemption” was already effectively in place, the IMF is demanding this time, before unblocking any new loans, that the Europeans first agree to ease Greece’s debt burden to ensure its sustainability.

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Greece needs to protest much louder in Brussels.

Greece Re-Opens Refugee Camp On Border in Sub-Zero Weather (Kath.)

Some 350 refugees and migrants, including many children, had gathered by Wednesday night in freezing conditions near Idomeni on Greece’s border with the Former Yugoslav Republic of Macedonia (FYROM) after the latter closed its borders. Greek officials said that the border has been closed since Tuesday night, leaving dozens of people unable to cross into FYROM and continue their journeys to Central and Northern Europe. Seven coaches full of refugees and migrants that had traveled north from Greece’s Aegean islands arrived at the border on Wednesday, prompting the government to allow the camp in Idomeni that had been constructed by nongovernmental organizations during the summer to be used to provide shelter and medical assistance to the migrants. Over the last few weeks, officials had refused to allow the camp to be used due to fears that hundreds of people would start gathering at the border again. The cold weather has also made conditions difficult on the islands.

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Neverending?!

Two Refugees –One 5-Year Old Child– Die Of Hypothermia Off Lesvos (Kath.)

Two refugees – one a 5-year-old child – died from hypothermia on Lesvos on Wednesday. The child died after the dinghy it was traveling in capsized off the island. It was taken to a medical center on Lesvos but doctors were unable to save its life. The coast guard rescued 46 people. The other person who died was a woman who reached the island safely but succumbed to the subzero temperature. Authorities said that despite the worsening weather, about 1,000 people arrived on Lesvos on Tuesday and another 1,000 reached the island on Wednesday.

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Jan 022016
 
 January 2, 2016  Posted by at 10:09 am Finance Tagged with: , , , , , , , , ,  6 Responses »


Earl Theisen Walt Disney oiling scale model locomotive at home in LA 1951

After a Tumultuous 2015, Investors Have Low Expectations for Markets (WSJ)
Will Corporate Investment and Profits Rebound This Year? (WSJ)
A Year of Sovereign Defaults? (Carmen Reinhart)
The Next Big Short: Amazon (Stockman)
The Real Financial Risks of 2016 (Taleb)
High-Yield Bonds: Worthy of the Name Again (WSJ)
Slowdown In Chinese Manufacturing Deepens Fears For Economy (Guardian)
Opinion Divided On State Of Chinese Economy, But Not Its Importance (Guardian)
‘Indigestion’ Hits Diamond Companies: Too Much Supply, Too Little Demand (FT)
Iraq Says It Exported More Than 1 Billion Barrels of Oil in 2015 (BBG)
The Federal Reserve’s Brave New Interest Rate World (Coppola)
Economic Sweet Spot Of 2016 Before The Reflation Storm (AEP)
New Year Brings Minimum Wage Hikes For Americans In 14 States (Reuters)
Swiss Bank Admits Cash and Gold Withdrawals Cheated IRS (BBG)
Edward Hugh, Economist Who Foresaw Eurozone’s Struggles, Dies At 67 (NY Times)
As 2016 Dawns, Europe Braces For More Waves Of Refugees (AP)

Watch out below.

After a Tumultuous 2015, Investors Have Low Expectations for Markets (WSJ)

After a year of disappointment in everything from U.S. stocks to emerging markets and junk bonds, investors are approaching 2016 with low expectations. Some see the past year as a bad omen. Two major stock indexes posted their first annual decline since the financial crisis, while energy prices fell even further. Emerging markets and junk bonds also struggled. Others view the pullback as a sensible breather for some markets after years of strong gains. While large gains were common as markets recovered in the years after the 2008 financial crisis, many investors say such returns are growing harder to come by, and expect slim gains at best this year.

“You have to be very muted in your expectations,” said Margie Patel, senior portfolio manager at Wells Fargo Funds who said she expects mid-single percentage-point gains in major U.S. stock indexes this year. “It’s pretty hard to point to a sector or an industry where you could say, well, that’s going to grow very, very rapidly,” she said, adding that there are “not a lot of things to get enthusiastic about, and a long list of things to be worried about.” As the year neared an end, a fierce selloff hit junk bonds in December, while U.S. government bond yields rose only modestly despite the Federal Reserve’s decision to raise its benchmark interest rate in December, showing investors weren’t ready to retreat from relatively safe government bonds.

For the U.S., 2015’s rough results stood in contrast to three stellar years. After rising 46% from 2012 through 2014, the Dow Jones Industrial Average fell 2.2% last year. The S&P 500 fell 0.7%. While most Wall Street equity strategists still expect gains for U.S. stocks this year, they also once again expect higher levels of volatility than in years past. Of 16 investment banks that issued forecasts for this year, two-thirds expect the S&P 500 to finish 2016 at a level less than 10% above last year’s close, according to stock-market research firm Birinyi Associates. Some investors say a pause for stocks is normal for a bull market of this length, which has been the longest since the 1990s. Including dividends, the S&P 500 has returned 249% since its crisis-era low of 2009.

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How could they? On what? “This recovery still stinks.”

Will Corporate Investment and Profits Rebound This Year? (WSJ)

In 2015, the American corporate landscape was dominated by activist investors, buybacks, currencies and deals. This year, the question is whether U.S. businesses will shake off the weight of a strong dollar and lower commodity prices to expand profit growth, end their dependence on boosting returns with buybacks, and turn to investing in their operations. The Federal Reserve had enough confidence in the economic recovery to raise interest rates in December, but it remains unclear whether global growth will be buoyant enough reverse weak business investment. Many big companies are reining in spending. 3M, with thousands of products from Scotch tape to smartphone materials, forecasts capital spending roughly unchanged from 2015.

Telecom companies AT&T and Verizon both plan to hold capital spending generally level in the coming year. Meanwhile, industrial giants like General Electric and United Technologies are aggressively cutting costs and seeking to squeeze more savings from suppliers. Capital expenditures by members of the S&P 500 index fell in the second and third quarters of 2015 from a year earlier, the first time since 2010 that the measure has fallen for two consecutive quarters, according to data from S&P Dow Jones Indices. Another measure of business spending on new equipment—orders for nondefense capital goods, excluding aircraft—was down 3.6% from a year earlier in the first 11 months of 2015, according to data from the U.S. Department of Commerce.

More broadly, only 25% of small companies plan capital outlays in the next three to six months, according to a November survey of about 600 firms by the National Federation of Independent Business. That compares with an average of 29% and a high of 41% since the surveys began in 1974. “Our guys are in maintenance mode,” said William Dunkelberg, chief economist for the trade group. “This recovery still stinks.” Profit growth for the constituents of the S&P 500 index stalled in 2015 thanks to a combination of a strong dollar and falling prices for steel, crude oil and other commodities. Deutsche Bank estimates total net income for companies in the index fell 3% in 2015, while sales declined 4%. For 2016, Deutsche Bank forecasts net income growth of 4.3% and a 4% increase in revenue.

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Given the reliance on dollar-denominated low interest loans, it seems all but certain.

A Year of Sovereign Defaults? (Carmen Reinhart)

When it comes to sovereign debt, the term “default” is often misunderstood. It almost never entails the complete and permanent repudiation of the entire stock of debt; indeed, even some Czarist-era Russian bonds were eventually (if only partly) repaid after the 1917 revolution. Rather, non-payment – a “default,” according to credit-rating agencies, when it involves private creditors – typically spurs a conversation about debt restructuring, which can involve maturity extensions, coupon-payment cuts, grace periods, or face-value reductions (so-called “haircuts”). If history is a guide, such conversations may be happening a lot in 2016. Like so many other features of the global economy, debt accumulation and default tends to occur in cycles.

Since 1800, the global economy has endured several such cycles, with the share of independent countries undergoing restructuring during any given year oscillating between zero and 50% (see figure). Whereas one- and two-decade lulls in defaults are not uncommon, each quiet spell has invariably been followed by a new wave of defaults. The most recent default cycle includes the emerging-market debt crises of the 1980s and 1990s. Most countries resolved their external-debt problems by the mid-1990s, but a substantial share of countries in the lowest-income group remain in chronic arrears with their official creditors. Like outright default or the restructuring of debts to official creditors, such arrears are often swept under the rug, possibly because they tend to involve low-income debtors and relatively small dollar amounts.

But that does not negate their eventual capacity to help spur a new round of crises, when sovereigns who never quite got a handle on their debts are, say, met with unfavorable global conditions. And, indeed, global economic conditions – such as commodity-price fluctuations and changes in interest rates by major economic powers such as the United States or China – play a major role in precipitating sovereign-debt crises. As my recent work with Vincent Reinhart and Christoph Trebesch reveals, peaks and troughs in the international capital-flow cycle are especially dangerous, with defaults proliferating at the end of a capital-inflow bonanza.

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Big call from Dave.

The Next Big Short: Amazon (Stockman)

If you have forgotten your Gulliver’s Travels, recall that Jonathan Swift described the people of Brobdingnag as being as tall as church steeples and having a ten foot stride. Everything else was in proportion – with rats the size of mastiffs and the latter the size of four elephants, while flies were “as big as a Dunstable lark” and wasps were the size of partridges. Hence the word for this fictional land has come to mean colossal, enormous, gigantic, huge, immense or, as the urban dictionary puts it, “really f*cking big”. That would also describe the $325 billion bubble which comprises Amazon’s market cap. It is at once brobdangnagian and preposterous – a trick on the casino signifying that the crowd has once again gone stark raving mad.

When you have arrived at a condition of extreme “irrational exuberance” there is probably no insult to ordinary valuation metrics that can shock. But for want of doubt consider that AMZN earned the grand sum of $79 million last quarter and $328 million for the LTM period ending in September. That’s right. Its conventional PE multiple is 985X! And, no, its not a biotech start-up in phase 3 FDA trials with a sure fire cancer cure set to be approved any day; its actually been around more than a quarter century, putting it in the oldest quartile of businesses in the US. But according to the loony posse of sell-side apologists who cover the company – there are 15 buy recommendations – Amazon is still furiously investing in “growth” after all of these years.

So never mind the PE multiple; earnings are being temporarily sacrificed for growth. Well, yes. On its approximate $100 billion in LTM sales Amazon did generate $32.6 billion of gross profit. But the great builder behind the curtain in Seattle choose to “reinvest” $5 billion in sales and marketing, $14 billion in general and administrative expense and $11.6 billion in R&D. So there wasn’t much left for the bottom line, and not surprisingly. Amazon’s huge R&D expense alone was actually nearly three times higher than that of pharmaceutical giant Bristol-Myers Squibb. But apparently that’s why Bezos boldly bags the big valuation multiples.

Not so fast, we think. Is there any evidence that all this madcap “investment” in the upper lines of the P&L for all these years is showing signs of momentum in cash generation? After all, sooner or later valuation has to be about free cash flow, even if you set aside GAAP accounting income. In fact, AMZN generated $9.8 billion in operating cash flow during its most recent LTM period and spent $7.0 billion on CapEx and other investments. So its modest $2.8 billion of free cash flow implies a multiple of 117X.

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“Zero interest rates turn monetary policy into a massive weapon that has no ammunition.”

The Real Financial Risks of 2016 (Taleb)

How should we think about financial risks in 2016? First, worry less about the banking system. Financial institutions today are less fragile than they were a few years ago. This isn’t because they got better at understanding risk (they didn’t) but because, since 2009, banks have been shedding their exposures to extreme events. Hedge funds, which are much more adept at risk-taking, now function as reinsurers of sorts. Because hedge-fund owners have skin in the game, they are less prone to hiding risks than are bankers. This isn’t to say that the financial system has healed: Monetary policy made itself ineffective with low interest rates, which were seen as a cure rather than a transitory painkiller. Zero interest rates turn monetary policy into a massive weapon that has no ammunition.

There’s no evidence that “zero” interest rates are better than, say, 2% or 3%, as the Federal Reserve may be realizing. I worry about asset values that have swelled in response to easy money. Low interest rates invite speculation in assets such as junk bonds, real estate and emerging market securities. The effect of tightening in 1994 was disproportionately felt with Italian, Mexican and Thai securities. The rule is: Investments with micro-Ponzi attributes (i.e., a need to borrow to repay) will be hit. Though “another Lehman Brothers” isn’t likely to happen with banks, it is very likely to happen with commodity firms and countries that depend directly or indirectly on commodity prices.

Dubai is more threatened by oil prices than Islamic State. Commodity people have been shouting, “We’ve hit bottom,” which leads me to believe that they still have inventory to liquidate. Long-term agricultural commodity prices might be threatened by improvement in the storage of solar energy, which could prompt some governments to cancel ethanol programs as a mandatory use of land for “clean” energy.

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Yield rises with risk. Risk leads to losses.

High-Yield Bonds: Worthy of the Name Again (WSJ)

By mid-2014, some were starting to wonder whether the high-yield bond market needed to find a new name for itself. U.S. yields fell below 5%, while European yields dipped beneath 4%, according to Barclays indexes. But at the end of 2015, the market once again has an appropriate moniker. U.S. yields are ending the year at 8.8%, the Barclays index shows, returning to levels last seen in 2011. They have risen by about 2.3 percentage points this year. European yields stand at 5% — not huge in absolute terms, but high relative to ultralow European government bond yields. Of course, for existing investors that has been bad news. The ride—including the high-profile meltdown of Third Avenue Management’s Focused Credit Fund, which shook the market in December—has been rough.

It has taken its toll on borrowers too. The U.S. high-yield bond market has recorded the slowest pace of fourth-quarter issuance since 2008, when the collapse of Lehman Brothers essentially shut the market down, according to data firm Dealogic. Global issuance has fallen 23% this year to $366.5 billion, the lowest level since 2011. The market is likely to face further tests in 2016. Defaults are set to rise, and companies may find it tougher to get financing. But at least investors will now get chunkier rewards for taking risk. Arguably, high-yield investors should always be focused on absolute rather than relative yields, given the need to compensate for defaults. From that point of view, 2015 was the year high-yield bonds got their mojo back.

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China will find it much harder to keep up appearances in 2016.

Slowdown In Chinese Manufacturing Deepens Fears For Economy (Guardian)

A further slowdown in China’s vast manufacturing sector has intensified worries about the year ahead for the world’s second largest economy. The latest in a string of downbeat reports from showed that activity at China’s factories cooled in December for the fifth month running, as overseas demand for Chinese goods continued to fall. Against the backdrop of a faltering global economy, turmoil in the country’s stock markets and overcapacity in factories, Chinese economic growth has slowed markedly. The country’s central bank expects growth in 2015 to be the slowest for a quarter of a century. After growing 7.3% in 2014, the economy is thought to have expanded by 6.9% in 2015 and the central bank has forecast that it may slow further in 2016 to 6.8%.

A series of interventions by policymakers, including interest rate cuts, have done little to revive growth and in some cases served only to heighten concern about China’s challenges. Friday’s figures showed that the manufacturing sector limped to the end of 2015. The official purchasing managers’ index (PMI) of manufacturing activity edged up to 49.7 in December from 49.6 in November. The December reading matched the forecast in a Reuters poll of economists and marked the fifth consecutive month that the index was below 50, the point that separates expansion from contraction. “Although the PMI slightly rebounded this month, it still lies below the critical point and is lower than historic levels over the same period,” Zhao Qinghe, a senior statistician at the national bureau of statistics, said.

Analysts said the latest manufacturing PMI pointed to falling activity, but that some hope could be taken from the improvement on November’s three-year low. The small rise “suggests that growth momentum is stabilising somewhat … however, the sector is still facing strong headwinds,” said Zhou Hao at Commerzbank. “In order to facilitate the destocking and deleveraging process, monetary policy will remain accommodative and the fiscal policy will be more proactive.”

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Can China let go of the peg and let the yaun plunge, while it’s in the IMF basket?

Opinion Divided On State Of Chinese Economy, But Not Its Importance (Guardian)

It was perhaps fitting that China’s latest lacklustre industrial survey was the first fragment of financial data to greet the new year. Economists are divided about the risks facing the vast Chinese economy, but agree that how they play out will have profound consequences for the rest of the world in 2016. The optimists point to China’s large and growing middle class, the vast foreign currency reserves that give Beijing ample ammunition to respond to any crisis that emerges, and the authoritarian regime that allows its policymakers to force through economic change. And official figures do suggest that economic growth may have stabilised at about 6.5% – considerably weaker than the double-digit pace that was the norm before the financial crisis, but not the feared “hard landing”.

Yet pessimists argue that the official figures radically overestimate the true pace of growth: using alternative indicators such as freight volumes and electricity usage, City analysts Fathom calculate that growth could be below 3%. And last summer’s share price crash, and the chaos that surrounded Beijing’s decision to devalue the yuan, suggested there is no reason to think Chinese policymakers are any more in control of the forces of capitalism than their western counterparts were in the run-up to the financial crisis. China’s latest five-year plan involves a conscious attempt to switch growth away from the export-led model that has driven its rise to the economic premier league, and towards more sustainable, domestic consumption-led growth.

But with many of the country’s powerful state-owned enterprises loaded up with debt, property bubbles deflating and the knock-on effects of the share price crash still being felt, domestic demand has so far failed to pick up the slack. The challenge of maintaining politically acceptable rates of economic growth may become tougher in 2016, particularly if the US Federal Reserve presses ahead with its bid to return interest rates to somewhere near normal. The value of the Chinese yuan is not allowed to move too far out of line with the dollar, under a “crawling peg” – effectively a semi-fixed exchange rate.

But as the greenback moves upwards to reflect the strengthening US economy and rising rates, it is taking the yuan with it, and making it harder for Chinese exporters to compete. As the dollar continues to appreciate, it may become increasingly tempting for policymakers to abandon the peg and let the currency plunge, returning to the familiar export-led pattern of growth. And if Beijing does devalue sharply, it would damage China’s exporting rivals, and send deflation rippling out through the global economy, increasing the risk of a lengthy period of economic weakness. China’s true fragility is impossible to gauge; but it matters.

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Not a good sign for gold.

‘Indigestion’ Hits Diamond Companies: Too Much Supply, Too Little Demand (FT)

De Beers was hoping its “Live your love today” campaign would entice Chinese consumers to buy diamond jewellery this holiday season. It is unlikely to be enough to turn round the miner’s fortunes. While auction prices set records for some big gems in 2015 — Lucara Diamond found one of the largest stones to date — the sector has had its toughest year since the global financial crisis as it struggles with too much supply and too little demand. Miners including De Beers, which is owned by Anglo American, and Canada’s Dominion Diamond have acknowledged falling revenues and lower prices for rough diamonds. In China, the big jewellers are suffering. Chow Tai Fook, the largest by market value, reported a 42% fall in net profits in interim results.

But the pain has been most acute for the trade’s “midstream”, the hundreds of cutters and polishers, mostly in India, which buy rough stones from miners and supply retailers. “The raw [rough] diamond price is still high but the polishers [like us] have to sell cheaper because of the drop in demand,” said Chirag Kakadia of Sheetal, an Indian diamond polisher, speaking at a Hong Kong trade show. “We are forced to purchase higher but sell lower. Our production has dropped 40% from 2014 but our sales are 50% less.” Companies such as Sheetal have been hit by a bout of what Johan Dippenaar, chief executive of Petra Diamonds, has described as industry “indigestion”, stemming from an over-optimistic assessment of demand from China.

Retailers that had geared up for years of growth were caught out by a slowing economy and an anti-corruption drive, with officials banned from receiving gifts. A person in the industry who asked not to be named said demand in Hong Kong and Macau had been “absolutely mullered” by the corruption crackdown. The lack of interest from consumers has left cutters and polishers holding too much stock. In turn, their need to buy from miners has declined, forcing down rough prices. Analysts said that, even if midstream groups wanted to restock, many would find it hard to do so. Much of the credit in the sector has been withdrawn as banks have grown wary of lending to businesses that are family-owned and tend to be opaque. The question is whether the market will bounce back or be altered for good.

De Beers, which has lost much of its power as a supplier but remains a dominant participant, says the industry does not face a long-term bust and once the temporary oversupply is dealt with equilibrium will be restored. Philippe Mellier, chief executive, told industry analysts in December: “This is a stock crisis, not a demand crisis.” De Beers has allowed midstream companies to put regular purchases on hold. “We just want our customers to buy what they need and not increase the stock problem,” said Mr Mellier. The miner has also cut production and closed two diamond mines. Consultants at Bain say the diamond pipeline should return to normal functioning once midmarket businesses and retailers clear excess inventories, provided that miners and polishers manage supplies adroitly.

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And now Iran will follow.

Iraq Says It Exported More Than 1 Billion Barrels of Oil in 2015 (BBG)

Iraq said it exported 1.097 billion barrels of oil in 2015, generating $49.079 billion from sales, according to the oil ministry. It sold 99.7 million barrels of oil in December, generating $2.973 billion, after selling a record 100.9 million barrels in November, said oil ministry spokesman Asim Jihad. The country sold at an average price of $44.74 a barrel in 2015, Jihad said. Iraq, with the world’s fifth-biggest oil reserves, needs to keep increasing crude output because lower oil prices have curbed government revenue. Oil prices have slumped in the past year as OPEC defended market share against production in the U.S. OPEC’s second-largest crude producer is facing a slowdown in investment due to lower oil prices while fighting a costly war on Islamist militants who seized a swath of the country’s northwest. The nation’s output will start to decline in 2018, Morgan Stanley said in a Sept. 2 report, reversing its forecast for higher production every year to 2020.

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The real rate rise is still substantially lower than 0.25%, though.

The Federal Reserve’s Brave New Interest Rate World (Coppola)

On December 17th, 2015, the FOMC raised interest rates for the first time since the 2008 financial crisis. To be sure, it had little choice. The Fed had been signalling an interest rate rise persistently for months, and had already disappointed markets twice by delaying rate rises in September and October. It had painted itself into the same corner as the ECB did over QE earlier in the year. The ECB signalled for months that it was going to start QE, and backed off several times, to the disappointment of market participants. Eventually, ECB was forced to start QE for the simple reason that NOT doing so threatened financial stability, because markets had already priced it in. So with the FOMC. Encouraged by broadly good economic data, and by the Fed’s approving noises, markets priced in a 25bps interest rate rise.

The FOMC was all but obliged to act, simply to avoid sparking a market rout. It was yet another fine example of markets being willing to let the Fed guide them along the road that they were already travelling. Since that small but oh-so-significant rate rise, the Fed Funds rate has obediently remained firmly within its new 25 to 50 bps corridor. Indeed, it has hovered persistently around the midpoint of the range. Given that the system is still awash with excess reserves and the Fed Funds rate therefore has little effect on bank lending, it is remarkable that the rate has stayed both elevated and stable. How has this been achieved? Yesterday, the FT reported that the Fed absorbed $475bn of excess reserves through overnight reverse repo operations in its last monetary operation of 2015, a record amount.

Overnight reverse repos allow certain non-bank financial institutions to place funds at the Fed overnight in return for USTs (yes, the ones bought in the Fed’s QE programs) and 25bps interest. The interest rate is no accident: it is the floor of the target Fed Funds rate range. These reverse repos provide competition for banks in the funding markets, forcing banks to offer higher interest rates on funds they lend to non-banks. The Fed said in December that it would make $2tn worth of USTs available as collateral for reverse repo transactions: it is actually needing to use considerably less to maintain the Fed Funds rate well above its floor. But reverse repos are only half the story. The Fed also set the interest rate it pays on excess reserves (IOER) to the top of the Fed Funds target range. This pulls the funding rate upwards, since banks will not lend reserves to each other at less than the IOER rate.

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Ambroze has been smoking. A lot. The sudden surge in China M1 in the graph looks like panic to me, and moreover, it hasn’t done any good either.

Economic Sweet Spot Of 2016 Before The Reflation Storm (AEP)

Sunlit uplands beckon. Almost $2 trillion of annual stimulus from cheap oil has been accumulating for months, pent up and waiting to be spent. It will soon come flooding through in a burst, catching the world by surprise. But beware: the more beguiling it is over coming months, the more traumatic it will be later as the reflation scare comes alive. Since the rite of New Year predictions is to stick one’s neck out, let me hazard hopefully that this treacherous moment can be deferred until 2017. The positive oil shock will hit just as austerity ends in the US, and big-spending states and cities ice the cake with a fiscal boost worth 0.5pc of GDP. Americans broke records with the purchase 1.7m new cars and trucks in December, a foretaste of blistering sales to come. There is a ‘deficit’ of 20m cars left from the Long Slump yet to be plugged.

The eurozone is nearing the sweet spot, a fleeting nirvana of 2pc growth, conjured by the trifecta of a cheap euro, budgetary break-out, and the end of bank deleveraging. Mario Draghi’s printing presses are firing on all cylinders. The ‘broad’ M3 money supply is growing at turbo-charged rates of 5pc in real terms. This is a 12-month leading indicator for the economy, so enjoy the ride, at least until the demonic Fiscal Compact returns at the dead of night to smother Europe once again. In China, the dogs bark, the caravan moves on. There will be no devaluation of the yuan this year, because there is no urgent need for it. Premier Li Keqiang has vowed to keep the new exchange basket stable. Armed with a current account surplus of $600bn, $3.5 trillion of reserves, and capitol controls, that is exactly what he will do.

The lingering hangover from the Great Chinese Recession of early 2015 has faded. The PMI services gauge has just jumped to a 15-month high of 54.4, and this is now the relevant index since the Communist Party is systematically winding down chunks of the steel, shipbuilding, and chemical industries. China’s money supply is also catching fire. Growth of ‘real true M1’ has spiked to 10pc, a giddy shot of caffeine not seen since the post-Lehman spree. Combined credit and local government bond issuance is surging at a rate of 14pc. The Communist Party cranked up fiscal spending by 18.9pc in November. Whether or not you think this recidivist stimulus is wise – given that the law of diminishing returns set in long ago for debt-driven growth – it will paper over a lot of cracks for the time being.

One thing that will not happen is a housing revival in the mid-sized T3 and T4 cities of the hinterland. It will be a long time before the latest reform of the medieval Hukou system unleashes enough rural migrants to fill the ghost towns. The stock of 4.5m unsold homes on the books of developers is frightening to behold. The epic dollar rally has come and gone. The world’s currency will drift down over coming months, and that will be a reprieve for the likes of Brazil, Turkey, South Africa, Indonesia, and Colombia. Those at the wrong end of $9 trillion of off-shore debt in US dollars may breath easier: they will not escape. The MSCI index of emerging market stocks will return from the dead, clawing back most of the 28pc in losses since last April, but only to lurch into a greater storm.

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Barely a start. But a strong sign of how much less ‘new’ jobs pay.

New Year Brings Minimum Wage Hikes For Americans In 14 States (Reuters)

As the United States marks more than six years without an increase in the federal minimum wage of $7.25 an hour, 14 states and several cities are moving forward with their own increases, with most set to start taking effect on Friday. California and Massachusetts are highest among the states, both increasing from $9 to $10 an hour, according to an analysis by the National Conference of State Legislatures. At the low end is Arkansas, where the minimum wage is increasing from $7.50 to $8. The smallest increase, a nickel, comes in South Dakota, where the hourly minimum is now $8.55.

The increases come in the wake of a series of “living wage” protests across the country, including a November campaign in which thousands of protesters in 270 cities marched in support of a $15-an-hour minimum wage and union rights for fast food workers. Food service workers make up the largest group of minimum-wage earners, according to the Bureau of Labor Statistics. With Friday’s increases, the new average minimum wage across the 14 affected states rises from $8.50 an hour to just over $9. Several cities are going even higher. Seattle is setting a sliding hourly minimum between $10.50 and $13 on Jan. 1, and Los Angeles and San Francisco are enacting similar increases in July, en route to $15 an hour phased in over six years.

Backers say a higher minimum wage helps combat poverty, but opponents worry about the potential impact on employment and company profits. In 2014, a Democratic-backed congressional proposal to increase the federal minimum wage for the first time since 2009 to $10.10 stalled, as have subsequent efforts by President Barack Obama. More recent proposals by some lawmakers call for a federal minimum wage of up to $15 an hour. Alan Krueger, an economics professor at Princeton University and former chairman of Obama’s Council of Economic Advisers, said a federal minimum wage of up to $12 an hour, phased in over five years or so, “would not have a noticeable effect on employment.”

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Many such banks did the same.

Swiss Bank Admits Cash and Gold Withdrawals Cheated IRS (BBG)

Large cash and gold withdrawals were one way Bank Lombard Odier & Co allowed U.S. clients to sever a paper trail on their assets and cheat the Internal Revenue Service, the Swiss lender admitted, agreeing to pay $99.8 million to avoid prosecution. That penalty is the second-largest paid under a program to help the U.S. clamp down on tax evasion through Swiss banks. Total penalties have reached more than $1.1 billion as banks have revealed how they helped clients hide money and where the assets went. DZ Privatbank (Schweiz) AG will also pay almost $7.5 million under accords released Thursday. The U.S. has struck 75 such non-prosecution agreements this year, with the tempo and dollar amount increasing in recent weeks as it rushes to finish. Geneva-based Lombard Odier, founded in 1796, had 1,121 U.S. accounts with $4.45 billion in assets from 2008 through 2014, according to the agreement, announced Thursday.

The bank adopted a policy in 2008 to force U.S. clients to disclose undeclared assets to the IRS or face account closures. However, the policy authorized large cash or gold withdrawals, donations to U.S. relatives or charitable institutions, resulting in further wrongdoing, according to the statement. In 2009 alone, the bank processed 14 cash withdrawals of more than $1 million each for clients closing 11 accounts, according to the non-prosecution agreement. One client closed an account by withdrawing more than $3 million in gold, the bank admitted. “These withdrawals of cash and precious metals enabled U.S. persons to sever the paper trail for their assets and further conceal their income and assets from U.S. authorities,” according to the agreement. The bank also closed at least 12 U.S. accounts worth $15.7 million with “fictitious donations” to other accounts at the bank, Lombard Odier admitted.

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“..Mr. Hugh insisted time and again that economists and policy makers were glossing over the extent to which swift austerity measures in countries like Greece, Ireland, Spain and Portugal would result in devastating recessions..”

Edward Hugh, Economist Who Foresaw Eurozone’s Struggles, Dies At 67 (NY Times)

Edward Hugh, a freethinking and wide-ranging British economist who gave early warnings about the European debt crisis from his adopted home in Barcelona, died on Tuesday, his birthday, in Girona, Spain. He was 67. The cause was cancer of the gallbladder and liver, his son, Morgan Jones, said. Mr. Hugh drew attention in 2009 and 2010 for his blog posts pointing out flaws at the root of Europe’s ambition to bind together disparate cultures and economies with a single currency, the euro. In clear, concise essays, adorned with philosophical musings and colorful graphics, Mr. Hugh insisted time and again that economists and policy makers were glossing over the extent to which swift austerity measures in countries like Greece, Ireland, Spain and Portugal would result in devastating recessions.

Mr. Hugh’s insights soon attracted a wide and influential following, including hedge funds, economists, finance ministers and analysts at the IMF. “For those of us pessimists who believed that the eurozone structure was leading to an unsustainable bubble in the periphery countries, Edward Hugh was a must-read,” said Albert Edwards, a strategist based in London for the French bank Société Générale. “His prescience in explaining the mechanics of the crisis went almost unnoticed until it actually hit.” As the eurozone’s economic problems grew, so did Mr. Hugh’s popularity, and by 2011 he had moved the base of his operations to Facebook. There he attracted many thousands of additional followers from all over the world.

If Santa Claus and John Maynard Keynes could combine as one, he might well be Edward Hugh. He was roly-poly and merry, and he always had a twinkle in his eye, not least when he came across a data point or the hint of an economic or social trend that would support one of his many theories. His intellect was too restless to be pigeonholed, but when pressed he would say that he saw himself as a Keynesian in spirit, but not letter. And in tune with his view that economists in general had become too wedded to static economic models and failed their obligation to predict and explain, he frequently cited this quotation from Keynes: “Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past, the ocean is flat again.”

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3 million forecast for 2016.

As 2016 Dawns, Europe Braces For More Waves Of Refugees (AP)

Bitter cold, biting winds and rough winter seas have done little to stem the seemingly endless flow of desperate people fleeing war or poverty for what they hope will be a brighter, safer future in Europe. As 2016 dawns, boatloads continue to reach Greek shores and thousands trudge across Balkan fields and country roads heading north. More than a million people reached Europe in 2015 in the continent’s largest refugee influx since the end of World War II – a crisis that has tested European unity and threatened the vision of a borderless continent. Nearly 3,800 people are estimated to have drowned in the Mediterranean last year, making the journey to Greece or Italy in unseaworthy vessels packed far beyond capacity.

The EU has pledged to bolster patrols on its external borders and quickly deport economic migrants, while Turkey has agreed to crack down on smugglers operating from its coastline. But those on the front lines of the crisis say the coming year promises to be difficult unless there is a dramatic change. Greece has borne the brunt of the exodus, with more than 850,000 people reaching the country’s shores, nearly all arriving on Greek islands from the nearby Turkish coast. “The (migrant) flows continue unabated. And on good days, on days when the weather isn’t bad, they are increased,” Ioannis Mouzalas, Greeces minister responsible for migration issues, told AP. “This is a problem and shows that Turkey wasn’t able – I’m not saying that they didn’t want – to respond to the duty and obligation it had undertaken to control the flows and the smugglers from its shores.”

Europe’s response to the crisis has been fractured, with individual countries, concerned about the sheer scale of the influx, introducing new border controls aimed at limiting the flow. The problem is compounded by the reluctance of many migrants’ countries of origin, such as Pakistan, to accept forcible returns. “If measures are not taken to stop the flows from Turkey and if Europe doesn’t solve the problems of the returns as a whole, it will be a very difficult year,” Mouzalas warned. “It’s a bad sign, this unabated flow that continues,” Mouzalas said. “It creates difficulties for us, as the borders have closed for particular categories of people and there is a danger they will be trapped here.”

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Nov 282015
 
 November 28, 2015  Posted by at 9:35 am Finance Tagged with: , , , , , , , , , ,  Comments Off on Debt Rattle November 28 2015


Russell Lee Secondhand store in Council Bluffs, Iowa 1936

US Energy Sector “On The Cusp Of A Staggering Default Wave” (EI)
Black Friday Crowds Thin In Subdued Start To US Holiday Shopping (Reuters)
Salting The Economy To Death (Gordon)
Student Debt in America: Lend With a Smile, Collect With a Fist (NY Times)
China Calm Shattered as Brokerage Probe Sparks Selloff in Stocks (Bloomberg)
Half of Gold Output May Not Be ‘Viable’ as Price Sags (Bloomberg)
HSBC Whistleblower Falciani Sentenced To 5 Years By Swiss Court (Guardian)
NYSE Is Delisting National Bank of Greece After 91% Plunge (Bloomberg)
Future Of Human Gene Editing To Be Decided At Landmark Summit (Guardian)
The Monkey King: China’s Clone Factory (FT)
Piketty Says Russia Robbed of Bigger Reserves by Capital Flight (Bloomberg)
How Turkey Exports ISIS Oil To The World: The Scientific Evidence (Zero Hedge)
Turkey’s Erdogan Warns Russia Not To ‘Play With Fire’ (Reuters)
Russia to Keep Visa Regime With Turkey as Long as ‘Ankara Helps ISIL’ (Sputnik)
EU, Turkey Driving Hard Bargain Before Refugee Summit (Reuters)
Migrants At FYROM Border Crossing Block Trains (Kath.)
Six Migrant Children Drown On Way To Greece (AP)

Losses among lenders will be stunning.

US Energy Sector “On The Cusp Of A Staggering Default Wave” (EI)

The US E&P sector could be on the cusp of massive defaults and bankruptcies so staggering they pose a serious threat to the US economy. Without higher oil and gas prices – which few experts foresee in the near future – an over-leveraged, under-hedged US E&P industry faces a truly grim 2016. How bad could things get and when? It increasingly looks like a number of the weakest companies will run out of financial stamina in the first half of next year, and with every dollar of income going to service debt at many heavily leveraged independents, there are waves of others that also face serious trouble if the lower-for-longer oil price scenario extends further.

“I could see a wave of defaults and bankruptcies on the scale of the telecoms, which triggered the 2001 recession,” Timothy Smith, president of consultancy Petro Lucrum, told a Platts energy conference in Houston last week. Much has been made about the resiliency of US oil production in the face of low prices, but the truth is that many producers are maximizing their output — even unprofitable volumes — because they need the cash flow to service their debt (related). “As an industry, we’re at the point where every dollar of free cash flow now goes to paying back debt,” Angle Capital’s Steve Ilkay told the same conference. Ilkay, who advises North American producers on asset management, said during the boom years of 2012-14 about 55% of the sector’s free cash flow, which is calculated by subtracting capital expenditures from operating cash flow, was allocated toward debt repayment.

With West Texas Intermediate (WTI) stuck below $50 per barrel since August – and closer to $40 recently – the industry has responded with deeper cuts to capex and a greater focus on efficiency. However, experts say this won’t be enough to avoid a bloody reckoning with persistent low oil and gas prices, as the sector grapples with some $200 billion-plus in high-yield debt, which it absorbed to finance the shale oil boom. Credit quality has been steadily deteriorating since June 2014, when WTI peaked at $108/bbl. Standard and Poor’s says there have been 19 defaults so far in 2015 across the US oil and gas industry, while another 15 companies have filed for bankruptcy. Besides those that have missed interest or principal payments, the default category also includes companies that have entered into “distressed exchanges” with their creditors, including Halcon, SandRidge, Midstates, Goodrich, Warren, Exco, Venoco and Energy XXI.

Of the 153 oil and gas companies that S&P applies credit ratings to, roughly two-thirds are E&P firms. Among these E&Ps, 77% now have high-yield or “junk” ratings of BB+ or lower. 63% are rated B+ or worse, and 31% – or 51 companies – are rated below B-. What does this all mean in layman’s terms? “Quite frankly it’s a lot of gloom and doom,” says Thomas Watters, managing director of S&P’s oil and gas ratings. “I lose sleep over what could unfold.” He says companies with ratings of B- or below are “on life support,” while those further down the ratings scale at C+ or lower are “maybe looking at a year, year-and-a-half before they default or file for bankruptcy.”

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Disappointing won’t begin to describe it, but a suitable narrative will be found.

Black Friday Crowds Thin In Subdued Start To US Holiday Shopping (Reuters)

America’s annual Black Friday shopping extravaganza was short on fireworks this year as U.S. retailers’ discounts on electronics, clothing and other holiday gifts failed to draw big crowds to stores and shopping malls. Major retail stocks including Best Buy and Wal-Mart closed lower while Target, picked out by one analyst for its promotion strategy, saw its shares tick up. Bargain hunters found relatively little competition compared with previous years. Some had already shopped Thursday evening, reflecting a new normal of U.S. holiday shopping, where stores open up with deals on Thanksgiving itself, rather than waiting until Black Friday. Retailers “have taken the sense of urgency out for consumers by spreading their promotions throughout the year and what we are seeing is a result of that,” said Jeff Simpson, director of the retail practice at Deloitte.

Traffic in stores was light on Friday, while Thursday missed his expectations, he said. As much as 20% of holiday shopping is expected to be done over the Thanksgiving weekend this year, analysts said. But the four days are not considered a strong indicator for the entire season. A slow start last year led to deeper promotions and a shopping rush in the final ten days of December. Steve Bratspies, chief merchandising officer at Wal-Mart, told Reuters he was not surprised that a store would see thinner crowds on Friday after it kicked off Black Friday deals on Thursday night. Suntrust Robinson Humphrey analysts were more blunt, calling Thursday a “bust”. “Members of our team who went to the malls first had no problem finding parking or navigating stores,” he wrote in a note.

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“Debt based stimulus is both sustaining and killing the economy at the same time.”

Salting The Economy To Death (Gordon)

One popular delusion that won’t seem to go away is the notion that policy makers can stimulate robust economic growth by setting interest rates artificially low. The general theory is that cheap credit compels individuals and businesses to borrow more and consume more. efore you know it, the good times are here again. Profits increase. Jobs are created. Wages rise. A new cycle of expansion takes root. These are the supposed benefits to an economy that central bankers can impart with just a little extra liquidity. Unfortunately, this policy antidote doesn’t always work out in practice. Certainly cheap credit can have a stimulative influence on an economy with moderate debt levels. But once an economy has reached total debt saturation, where new debt fails to produce new growth, the cheap credit trick no longer works to stimulate the economy.

In fact, the additional credit, and its counterpart debt, actually strangles future growth. Present monetary policy has landed the economy at the unfavorable place where more and more digital monetary credits are needed each month just to stand still. After seven years of ZIRP, financial markets have been distorted to the point where a zero bound federal funds rate has become restrictive. At the same time, applications of additional debt only serve to further the economy’s ultimate demise. The fundamental fact is that the current financial and economic paradigm, characterized by heavy handed Federal Reserve intervention into credit markets, is dying. Debt based stimulus is both sustaining and killing the economy at the same time. No doubt, this is a strange situation that has developed.

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No government has the right to play such a role.

Student Debt in America: Lend With a Smile, Collect With a Fist (NY Times)

The American student loan crisis is often seen as a problem of profligacy and predation. Wasteful colleges raise tuition every year, we are told, even as middle-class wages stagnate and unscrupulous for-profit colleges bilk the unwary. The result is mounting unmanageable debt. There is much truth in this diagnosis. But it does not explain the plight of Liz Kelley, a Missouri high school teacher and mother of four who made a series of unremarkable decisions about college and borrowing. She now owes the federal government $410,000, and counting. This is a staggering and unusual sum. The average undergraduate who borrows leaves school with about $30,000 in debt. But Ms. Kelley’s circumstances are not unique.

Of the 43.3 million borrowers with outstanding federal student loans, 1.8%, or 779,000 people, owe $150,000 or more. And 346,000 owe more than $200,000. Ms. Kelley’s debt woes are also mostly a matter of interest, not principal, a growing problem for the nation’s student debtors. According to the Federal Reserve Bank of New York, the number of active borrowers enrolled in college has declined to roughly nine million today from about 12 million in 2010. Yet the total amount of outstanding debt continues to increase, because many borrowers are not paying back their older loans. This is partly a function of continuing economic hardship. But it also reflects how the federal government has become the biggest, nicest and meanest student lender in the world.

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Xi plays with a fire he doesn’t understand.

China Calm Shattered as Brokerage Probe Sparks Selloff in Stocks (Bloomberg)

China’s stocks tumbled the most since the depths of a $5 trillion plunge in August as some of the nation’s largest brokerages disclosed regulatory probes, industrial profits fell and two more companies said they’re struggling to repay bonds. The Shanghai Composite Index sank 5.5%, with a gauge of volatility surging from the lowest level since March. Citic Securities and Guosen Securities plunged by the daily limit in Shanghai after saying they were under investigation for alleged rule violations. The probe into the finance industry comes as the government widens an anti-corruption campaign and seeks to assign blame for the selloff earlier this year. Authorities are testing the strength of a nascent bull market by lifting a freeze on initial public offerings and scrapping a rule requiring brokerages to hold net-long positions, just as the earliest indicators for November signal a deterioration in economic growth.

A Chinese fertilizer maker and a pig iron producer became the latest companies to flag debt troubles after at least six defaults this year. “The sharp decline will raise questions whether the authorities’ confidence that we are seeing stability in the Chinese markets may be a tad premature,” said Bernard Aw, a strategist at IG Asia in Singapore. “The rally since the August collapse was not fundamentally supported. The removal of restrictions for large brokers to sell and the IPO resumptions may not have been announced at an opportune time.” Friday’s losses pared the Shanghai Composite’s gain since its Aug. 26 low to 17%. The Hang Seng China Enterprises Index slid 2.5% in Hong Kong. The Hang Seng Index retreated 1.9%. A gauge of financial shares on the CSI 300 slumped 5%. Citic Securities and Guosen Securities both dropped 10%. Haitong International Securities slid 7.5% for the biggest decline since Aug. 24 in Hong Kong.

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Deflation.

Half of Gold Output May Not Be ‘Viable’ as Price Sags (Bloomberg)

Half of the gold coming from mines may not be viable at current prices, underscoring the industry’s need for consolidation and output cuts, according to the best-performing producer of the metal in the past decade. “The more we continue to produce unprofitable gold, the more pressure we put on the gold price,” Randgold Resources CEO Mark Bristow said in Toronto on Friday. “In the medium term, it’s a very bullish outlook for the gold industry. The question is, how long are we going to supply it with unprofitable gold?” Gold fell to a five-year low on Friday as a rising dollar and speculation that U.S. policy makers will boost interest rates next month curbed the appeal of bullion as a store of value. While industrial metal producers have promised output cuts, “we don’t have that psyche in the gold industry, we just send it off our mine and somebody buys it,” Bristow said.

Gold miners buffeted by the drop in prices are shortening the life of mines by focusing only on the best quality ore, a practice known as high grading, which will restrict future output and support higher prices, according to Bristow. He said in a presentation to bankers in Toronto that the industry life span is down to about five years because companies have been aggressively high grading at the expense of future production. “The industry has moved away from looking at optimal life of mines because everyone is trying to demonstrate short-term delivery,” he said in the interview after the presentation. “Where is all this value that people promised in the gold industry? It’s not there.”

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Way to go! Lock up all whistleblowers! Leave the bankers alone!

HSBC Whistleblower Falciani Sentenced To 5 Years By Swiss Court (Guardian)

The whistleblower who exposed wrongdoing at HSBC’s Swiss private bank has been sentenced to five years in prison by a Swiss court. Hervé Falciani, a former IT worker, was convicted in his absence for the biggest leak in banking history. He is currently living in France, where he sought refuge from Swiss justice, and did not attend the trial. The leak of secret bank account details formed the basis of revelations – by the Guardian, the BBC, Le Monde and other media outlets – which showed that HSBC’s Swiss banking arm turned a blind eye to illegal activities of arms dealers and helped wealthy people evade taxes. While working on the database of HSBC’s Swiss private bank, Falciani downloaded the details of about 130,000 holders of secret Swiss accounts. The information was handed to French investigators in December 2008 and then circulated to other European governments.

It was used to prosecute tax evaders including Arlette Ricci, the heir to France’s Nina Ricci perfume empire, and to pursue Emilio Botín, the late chairman of Spain’s Santander bank. Switzerland’s federal prosecutor had requested a record six-year term for Falciani for aggravated industrial espionage, data theft and violation of commercial and banking secrecy. It was the longest sentence ever demanded by the confederation’s public ministry in a case of banking data theft. The trial was also the first conducted by the country’s federal criminal court in which the accused had not been present. The defendant’s lawyers had demanded a reduced sentence, of between two and three years, “compatible with the granting of a reprieve”.

Falciani himself refused to appear in the dock, on the grounds that he would not be allowed a fair trial. He described the process as a “parody of justice”. [..] Falciani’s lawyer, Marc Henzelin, pointed out that his client was on trial at a time when Switzerland was in the process of dismantling its banking secrecy practices with proposals for new laws that would pave the way for automatic information exchange about offshore accounts held in Switzerland. In fact, Switzerland announced on 4 November that the country’s finance ministry temporarily shelved the plans for reform. “It is not Falciani who is being judged. It is the court. It is Switzerland,” said Henzelin.

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The inevitable result of the Troika’s forced fire sale of Greek bank shares to global investment funds.

NYSE Is Delisting National Bank of Greece After 91% Plunge (Bloomberg)

The New York Stock Exchange is delisting American depositary receipts of National Bank of Greece SA after they lost 91% of their value this year. The ADRs were suspended on Friday, when their value slumped to 16 cents from as much as $1.96 in February. NYSE cited an “abnormally low” price in a statement. Losses spiraled to a record this month, after the Greek lender sold new shares at a more than 90% discount to market prices. The nation’s four largest banks have been raising capital to help fill a €14.4 hole in their accounts identified by the European Central Bank. National Bank of Greece has the right to appeal the decision to a committee of the board of directors of NYSE. The stock in Athens closed at a record low of 8 euro cents, taking its weekly slump to 64%.

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“What is unsettling is that the organisers are from the three areas of the world where there seems to be, among scientists at least, the most enthusiasm for going forward.”

Future Of Human Gene Editing To Be Decided At Landmark Summit (Guardian)

The question could hardly be more profound. Having stumbled upon a simple means to make precise changes to the code of life, should humans take control of their genetic fate, and rewrite the DNA of future generations? Once an idea explored only in fiction, the prospect is now a real one. The inexorable rise of gene editing has put the technology in labs across the globe. The first experiments on human embryos have been done, in a bid to correct faulty genes that cause disease. To thrash out an answer, or at least find common ground, an international group of experts will descend on Washington DC next week for a three day summit. Convened with some urgency by the US, UK and Chinese national academies, the meeting is billed as a “global discussion”. It is a chance to take stock of a revolutionary technology that has the power to do good, and the potential to wreak havoc.

“This new technology for gene editing, that is, selectively inserting and removing genes from an organism’s DNA, is spreading around the world,” says Ralph Cicerone, president of the US National Academy of Sciences, where the summit will take place. With the number of experiments ballooning, the uses and risks the technology brings must be worked through now, he adds. The last time scientists met like this was in 1975, when it became clear that the DNA from one species could be spliced into another. One experiment underway at the time aimed to put DNA from a cancer-causing monkey virus into bacteria that infect humans. The potential for disaster led to a meeting in Asilomar, California, to agree and make public fresh safeguards for the experiments.

Jennifer Doudna, an inventor of a gene editing tool called Crispr-Cas9, said Asilomar was much in mind when the summit was organised. “I think it’s this generation’s version of Asilomar,” she says. “It’s a very exciting time, but as with any powerful technology, there is always the risk that something will be done either intentionally or unintentionally that somehow has ill effects.” [..] Marcy Darnovsky, director of the Center for Genetics and Society, and a speaker at the summit, said that the meeting could make a real contribution to the debate, but needed to be far more inclusive. “What is unsettling is that the organisers are from the three areas of the world where there seems to be, among scientists at least, the most enthusiasm for going forward.”

Darnovsky wants a total ban on editing human embryos that are destined to become people. “It’s way too risky and it’s likely to remain that way,” she says. If editing was allowed to prevent diseases being passed on, it would quickly lead to designer babies, she argues. “People say it is a slippery slope. I don’t call that a slippery slope, I call that jumping off a cliff,” she says. “We would be well on the way to a world in which people who could afford to do so would attempt to give their children the best start in life, and competitive and commercial pressures would kick in. We’d end up in a world of genetic haves and have-nots, and risk introducing new kinds of inequality when we already have shamefully way too much.”

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“Starting with 100,000 cloned cattle embryos a year in “phase one”, Mr Xu envisages 1 million annually at some point in the future..”

The Monkey King: China’s Clone Factory (FT)

In Chinese mythology, the Monkey King is a beast with magical fur. All he has to do is pull out a hair, blow on it and it is instantly transformed into a clone of himself. Xu Xiaochun, chief executive of BoyaLife, says the fable is not far from reality, as far as his Chinese biotechnology company is concerned. This week he announced an investment of $31m in a joint venture with South Korea’s Sooam Biotech that aims to clone 1m cows a year from their hair cells. The Monkey King “sounds like a fairy tale but we are really doing the same thing”, he says. “We pull out 200 hairs, blow on them — and boom!” Sometime next year, researchers in BoyaLife’s laboratory on the outskirts of the coastal city of Tianjin will take skin cells from a few carefully chosen cattle (Kobe beef is Mr Xu’s favourite).

The scientists will extract the nucleus from each cell and place it into an unfertilised egg from another cow. The cloned embryos will then be implanted in surrogate dairy cows housed on cattle ranches throughout China. His ambition is staggering. Starting with 100,000 cloned cattle embryos a year in “phase one”, Mr Xu envisages 1 million annually at some point in the future. That would make BoyaLife by far the largest clone factory in the world. Mr Xu says the latest techniques enable cloning to be carried out in an “assembly line format” at a rate of less than 1 minute per cell. Based on a four- hour shift and 250 working days a year, a proficient cloner would “manufacture” 60,000 cloned cow embryos a year, he says, adding that a team of 50 will be sufficient for the planned scale of the project. Mr Xu plans to have a staff of 300 and eventual total investment is estimated at $500m.

If the venture comes anywhere near achieving its goal, it will be another example of the recent surge of path-breaking, taboo-busting biotechnology research, with China introducing mass production and commercialisation of projects that are still in the experimental and clinical stages elsewhere. China’s flag-bearer in biotech is BGI, formerly known as Beijing Genomics Institute and now based in Shenzhen. BGI has grown into the world’s biggest genomics organisation, with a huge capacity to read, analyse and alter DNA from plants, microbes, people and animals. It employs more than 2,000 PhD-level scientists and 200 top-of-the-range gene-sequencing machines. In September BGI captured the public imagination with an announcement that “micropigs”, originally developed for biomedical research through gene editing and cloning, would be sold as pets.

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Sanctions.

Piketty Says Russia Robbed of Bigger Reserves by Capital Flight (Bloomberg)

Count Russian reserves as another casualty of income inequality that Thomas Piketty believes is reshaping the world’s biggest economies. Russia, which is struggling to rebuild holdings depleted during last year’s currency crisis, has missed out on building a bigger stockpile in the past 15 years by failing to create a more transparent financial system to ease inequality and distribute the spoils of a boom in commodities prices, said Piketty, the author of the bestselling “Capital in the 21st Century.” Jailing “a couple of billionaires from time to time” is no way to address the challenge, the French economist said in an interview in Moscow on Thursday. “In the long term, Russia should have much more reserves, given the level of its trade surplus,” he said.

“It’s important to realize that Russia is being stolen money from, by capital flight and by the fact that billionaires and millionaires outside Russia and sometimes inside Russia are able to benefit from natural resources of Russia much more than they should.” Piketty, 44, who gave a lecture at the Higher School of Economics in Moscow, may already be preaching to the converted. The government is looking to wring greater revenue from the energy industry with a tax increase, while the Bank of Russia has set a target of about $500 billion for reserves after burning through a fifth of its holdings to prop up the ruble last year. Vladimir Putin, in power for 16 years as premier or president, has backed efforts to repatriate as much as $1 trillion in capital held by companies and high-ranking officials abroad as part of what he’s called the “de-offshorization” of the economy.

Putin, who introduced a 13% flat income tax rate in 2001, has also seen top ministers broach the subject of re-instituting a progressive tax system. The current income levy is “relatively small” in a country with “a lot of inequality” and “far too little transparency,” Piketty said. “Russia would be in a much better situation today if this reform for more transparency, progressive taxation would have been conducted before,” Piketty said. “It’s time, especially in the current crisis, to change course and to deal with inequality and transparency in a much more front-faced way.”

The debate is gaining urgency after the government allowed household finances to bear the brunt of the country’s first recession in six years, putting Russia on track for the biggest drop in consumption during Putin’s rule. This year, 21.7 million people, or about 15% of the population, are living beneath the subsistence level, according to the Federal Statistics Service. The crisis marks the “first significant” increase in Russia’s poverty since the crisis in 1998-1999, according to the World Bank.

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Long display.

How Turkey Exports ISIS Oil To The World: The Scientific Evidence (Zero Hedge)

Over the course of the last four or so weeks, the media has paid quite a bit of attention to Islamic State’s lucrative trade in “stolen” crude. On November 16, in a highly publicized effort, US warplanes destroyed 116 ISIS oil trucks in Syria. 45 minutes prior, leaflets were dropped advising drivers (who Washington is absolutely sure are not ISIS members themselves) to “get out of [their] trucks and run away.” The peculiar thing about the US strikes is that it took The Pentagon nearly 14 months to figure out that the most effective way to cripple Islamic State’s oil trade is to bomb… the oil. Prior to November, the US “strategy” revolved around bombing the group’s oil infrastructure.

As it turns out, that strategy was minimally effective at best and it’s not entirely clear that an effort was made to inform The White House, Congress, and/or the public about just how little damage the airstrikes were actually inflicting. There are two possible explanations as to why Centcom may have sought to make it sound as though the campaign was going better than it actually was, i) national intelligence director James Clapper pulled a Dick Cheney and pressured Maj. Gen. Steven Grove into delivering upbeat assessments, or ii) The Pentagon and the CIA were content with ineffectual bombing runs because intelligence officials were keen on keeping Islamic State’s oil revenue flowing so the group could continue to operate as a major destabilizing element vis-a-vis the Assad regime.

Ultimately, Russia cried foul at the perceived ease with which ISIS transported its illegal oil and once it became clear that Moscow was set to hit the group’s oil convoys, the US was left with virtually no choice but to go along for the ride. Washington’s warplanes destroyed another 280 trucks earlier this week. Russia claims to have vaporized more than 1,000 transport vehicles in November. Of course the most intriguing questions when it comes to Islamic State’s $400 million+ per year oil business, are: where does this oil end up and who is facilitating delivery?

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There will come a point when Erdogan’s own people turn against him.

Turkey’s Erdogan Warns Russia Not To ‘Play With Fire’ (Reuters)

Turkish President Tayyip Erdogan warned Russia on Friday not to “play with fire”, citing reports Turkish businessmen had been detained in Russia, while Moscow said it would suspend visa-free travel with Turkey. Relations between the former Cold War antagonists are at their lowest in recent memory after Turkey shot down a Russian jet near the Syrian border on Tuesday. Russia has threatened economic retaliation, a response Erdogan has dismissed as emotional and indecorous. The incident has proved a distraction for the West, which is looking to build support for the U.S.-led fight against Islamic State in Syria. The nearly five-year-old Syrian civil war has been complicated by Russian air strikes in defense of President Bashar al-Assad.

Turkey, which has long sought Assad’s ouster, has extensive trade ties with Moscow, which could come under strain. Erdogan condemned reports that some Turkish businessmen had been detained for visa irregularities while attending a trade fair in Russia. “It is playing with fire to go as far as mistreating our citizens who have gone to Russia,” Erdogan told supporters during a speech in Bayburt, in northeast Turkey. “We really attach a lot of importance to our relations with Russia … We don’t want these relations to suffer harm in any way.” He said he may speak with Russian President Vladimir Putin at a climate summit in Paris next week. Putin has so far refused to contact Erdogan because Ankara does not want to apologize for the downing of the jet, a Putin aide said.

Erdogan has said Turkey deserves the apology because its air space was violated. Russian Foreign Minister Sergei Lavrov said on Friday Moscow would suspend its visa-free regime with Turkey as of Jan. 1, which could affect Turkey’s tourism industry. Turkey’s seaside resorts are among the most popular holiday destinations for Russians, who make up Turkey’s largest number of tourist arrivals after Germany. An association of Russian defense factories, which includes the producers of Kalashnikov rifles, Armata tanks and Book missile systems, has recommended its members suspend buying materials from Turkey, according to a letter seen by Reuters. That could damage contracts worth hundreds of millions of dollars. Russia’s agriculture ministry has already increased checks on food and agriculture imports from Turkey, in one of the first public moves to curb trade.

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“This is exactly what the French did after the Paris attacks..”

Russia to Keep Visa Regime With Turkey as Long as ‘Ankara Helps ISIL’ (Sputnik)

Russia may resume visa-free travel with Turkey if Ankara stops helping the Islamic State terrorists, the head of the State Duma’s international affairs committee said on Friday. Russia has decided to suspend the visa-free regime with Turkey from the January 1, 2016, Foreign Minister Sergei Lavrov said on Friday after a meeting with his Syrian counterpart Walid Muallem in Moscow. “Relations between Russia and Turkey are the main factor here… If Ankara continues its de-facto support for ISIL militants, provides them with everything they need and endorses their actions in Syria, then we will not be able to restore the visa-free regime,” Alexei Pushkov said at a news briefing in Moscow.

Driving the Islamic State militants out of the territories they now control in Iraq and Syria would help lessen the threat they pose to the rest of the world. Destroying the ISIL headquarters would facilitate our joint fight against the terrorist threat, Pushkov added. “The terrorists use Turkish territory as a transit zone to bring reinforcements and arms to the conflict zone in Syria. Some of these militants may be sent to carry out terrorist attacks here in Russia, so our decision to suspend the visa-free regime with Turkey will help keep them out. This is exactly what the French did after the Paris attacks and the EU is now considering a closure of its external borders in the face of the terrorist threat,” Pushkov noted.

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Immoral dealmaking that the EU should never have been party to.

EU, Turkey Driving Hard Bargain Before Refugee Summit (Reuters)

European and Turkish officials are working to smooth out their remaining differences on an agreement to help stem flows of migrants to Europe, which they hope will be signed on Sunday by European Union leaders and Turkey’s prime minister. Turkish President Tayyip Erdogan broadly accepted a proposed action plan last month, under which the EU would provide €3 billion in aid for the 2.3 million Syrian refugees in Turkey. It will also “re-energize” talks on Ankara’s joining the bloc and ease visas for Turks visiting Europe. But diplomats and officials said on Friday that differences remained on just what Turkey would commit to do in return – and when – to prevent migrants from making the short but risky crossing to Greek islands and to accept the return of people who reach the EU but fail to qualify for asylum.

German Chancellor Angela Merkel, a driving force behind seeking Turkish help in easing the refugee crisis, has faced criticism from EU allies for encouraging Erdogan to increase his demands. A senior German official stressed on Friday that Ankara also had much to gain from greater cooperation. Bolstered by the victory of his AK party in a parliamentary election early this month, Erdogan re-appointed Prime Minister Ahmet Davutoglu and, EU officials and diplomats say, Turkey is now driving a hard bargain – notably seeking 3 billion euros per year instead of the EU offer of the same amount over two.

“There are things that can still go wrong. It’s not a simple negotiation. Among the 28 member states, there are different sensibilities about Turkey, then with Turkey itself a dialogue needs to be found,” a senior EU official said on Friday. “It’s always possible there won’t be an agreement.” A diplomat in Ankara said: “Turkey is pushing its luck. They’re asking for a lot and the atmospherics aren’t good. “At the same time, there are a lot of important actors within Europe that have a soft spot for Turkey and really want to find ways of taking the relationship forward.”

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“..no trains have come in or out of Greece for the last week.”

Migrants At FYROM Border Crossing Block Trains (Kath.)

A protest by migrants on Greece’s border with the Former Yugoslav Republic of Macedonia (FYROM) is putting railway operator Trainose at risk of losing major international clients. Migrants have over the last few days been protesting FYROM’s decision not to let them cross from Greece. Many migrants have camped on the railway lines connecting the two countries, which means that no trains have come in or out of Greece for the last week. This means that the freight Trainose is responsible for carrying has not been able to reach its destinations. The railway company serves major international clients such as Hewlett Packard and Sony.

There is concern that if the protest does not end soon, these companies will be forced to transport their goods by road. “The issue is not paying compensation to the companies, which we can pay even if the situation is not our fault,” said Trainose CEO Thanasis Ziliaskopoulos. “What is more important is that the country’s credibility is at stake.” Trainose’s contract with Chinese giant Cosco to transport goods that arrive at Piraeus port is seen as a key part of the goal to make Greece a logistics hub in Southeastern Europe.

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What will future generations say about us?

Six Migrant Children Drown On Way To Greece (AP)

Turkish state media say six children have drowned when boats carrying migrants to Greece sank in two incidents off the Turkish coast. A wooden boat smuggling some 20 people to the island of Kos capsized in bad weather off the Aegean resort of Bodrum early on Friday. The state-run Anadolu Agency says most of the migrants made it to shore with the help of rescuers, but two sisters aged 4 and 1 drowned. Their nationalities were not immediately known. The agency says a second boat carrying as many as 55 migrants from Syria and Afghanistan sank hours later off the town of Ayvacik, further north. Four Afghan children drowned in that incident, Anadolu reported. Ayvacik is a main crossing point for migrants trying to reach the island of Lesvos.

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