Sep 152016
 
 September 15, 2016  Posted by at 8:59 am Finance Tagged with: , , , , , , , , , ,  Comments Off on Debt Rattle September 15 2016


Jack Delano Jewish stores in Colchester, Connecticut 1940

Bond Yields Are Surging Despite Deflation, And That Is Dangerous (AEP)
Wall Street ‘Fear Gauge’ Suggests Stock Market Is About To Get Wild (MW)
‘There’s Only So Much You Can Squeeze Out Of A Debt Cycle’: Ray Dalio (CNBC)
China Debt Default Looms As Growth Options Run Out: Nomura (VW)
PBOC Yuan Positions Drop to Lowest Since 2011 (BBG)
The Closing of the World Economy (Satyajit Das)
Wall Street’s Newest Money-Making Scheme Targets Your Home (MW)
Ford Shifting All US Small-Car Production To Mexico (DFP)
Vancouver Tax on Empty Homes to Target Near-Zero Rental Supply (BBG)
US Confidence In Media Hits Fresh Low (AFP)
US Rooftop Solar Boom Is Grinding To A Halt (BBG)
Latest Estimate Pegs US Cost of Wars at Nearly $5 Trillion (I’Cept)
Juncker Denies Alcohol Problem In Interview, Drinks 4 Glasses Of Champagne
Helping Homeless People Starts With Giving Them Homes (G.)

 

 

The Great Disconnect.

Bond Yields Are Surging Despite Deflation, And That Is Dangerous (AEP)

The growth rate of nominal GDP in the US has fallen to 2.4pc, the lowest level outside recession since the Second World War. It has been sliding relentlessly for almost two years, a warning signal that underlying deflationary forces may be tightening their grip on the US economy. Given this extraordinary backdrop, the violent spike in US and global bonds yields over the last four trading days is extremely odd. It is rare for AAA-rated safe-haven debt to fall out of favour at the same time as stock markets, and few explanations on offer make sense. We can all agree that oxygen is thinning as we enter the final phase of the economic cycle after 86 months of expansion. The MSCI world index of global equities has risen to a forward price-to-earnings ratio of 17, significantly higher than on the cusp of the Lehman crisis.

“We think that too much complacency has crept in,” says Mislav Matejka, equity strategist for JP Morgan. “After seven years of having a structural overweight stance on global equities, we believe the regime has fundamentally changed. We think that one should not be buying the dips any more, but use any rallies as selling opportunities,” he said. The correlation between bonds and equities has reached unprecedented levels, and that has the coiled the spring. The slightest rise in yields now has a potent magnifying effect across the spectrum of assets. Hence the angst over what is happening to US Treasuries. Yields on 10-year Treasuries – the benchmark borrowing cost for international finance – have jumped 19 basis points to 1.72pc since the middle of last week.

The amount of global government debt trading at rates below zero has suddenly fallen from $10 trillion to $8.3 trillion, with parallel effects for corporate bonds. You would have thought that inflation was picking up in the US and that the Fed was about to slam on the brakes, but that is not the case. The markets are pricing in a mere 15pc chance of a rate rise next week, and the figure has been falling.  If anything, the US inflation scare has subsided. There were grounds for worrying earlier this year that Fed would have to act. In February, core CPI inflation was steaming ahead at a rate of 2.9pc on a three-month annualized basis. This has since dropped back to 1.8pc. Other core measures are lower.

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Probably not going to calm down before next year.

Wall Street VIX ‘Fear Gauge’ Suggests Stock Market Is About To Get Wild (MW)

So much for the those calm markets. Wall Street’s “fear gauge” is rearing higher as U.S. equities logged a second sharp selloff in the past three sessions, as hand-wringing over central-bank monetary policy contributes to a renaissance of volatility. The CBOE Volatility Index often used as a measure of fear in the market, rose 18% on Tuesday at 17.85—its highest level since June 28 and implying that investors are starting to dial up bets that stocks could suffer further near-term swings turbulent. The VIX has hovered around 12 since mid-July. That level usually signals quiescence, while a reading of 20 or above indicates that investors are bracing for moves sharply south

The rise in the VIX comes as the Dow Jones Industrial Average and the S&P 500 index and the Nasdaq Composite relinquished all of the sharp gains racked up 24 hours ago. Monday’s rally followed another tumble on Friday that saw the VIX jump 40%—the largest daily move since Brexit on June 23. On Tuesday, volume in an exchange-traded fund that tracks the VIX, Barclays Bank PLC iPath S&P 500 VIX Short-Term Futures exceeded that of stocks on the S&P 500 for the first time ever, as Bloomberg highlights:

On Wednesday, the VIX ticked higher as the Dow and S&P 500 lost momentum to trade lower late in the session. Three straight days of swings of at least 1% for stocks, marks the first time since 1963 that the S&P 500 followed an extended period of calm—43 days—with a trio of such choppy trading days, according to Dow Jones data. That was the two-day period before and immediately following the assassination of President John F. Kennedy in November 1963, Dow Jones data show. “The pickup in volatility is notable, and typically characterizes pullbacks,” said Katie Stockton, chief market technician at BTIG.

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“We are to various degrees close to pushing on a string..”

‘There’s Only So Much You Can Squeeze Out Of A Debt Cycle’: Ray Dalio (CNBC)

The debt market is in a “dangerous situation” as central banks around the world lose their ability to stimulate growth, hedge fund giant Ray Dalio said Tuesday. As the world faces more than $11 trillion in negative-yielding debt, Dalio said central banks like the Fed, the ECB and the BOJ are facing a dilemma. “There’s only so much you can squeeze out of the debt cycle, and we’re there globally,” the head of Bridgewater Associates said at the Delivering Alpha conference presented by CNBC and Institutional Investor. “You can’t lower interest rates more.” Dalio spoke as Fed officials contemplate a rate hike at some point this year. Market-implied probability indicates that the Fed won’t hike until at least December. Its September meeting is next week. While monetary policy has been used as a fuel for growth and asset price appreciation, Dalio said its effectiveness is waning. “We are to various degrees close to pushing on a string,” he said.

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“..there is essentially only one practical way to reduce the stock of outstanding debts: defaults.”

China Debt Default Looms As Growth Options Run Out: Nomura (VW)

To alleviate its debt problem, China should adopt appropriate macro-economic policies encompassing currency depreciation and cutting interest rates to an ultra-low-level within two to three years, believe Nomura analysts. Yang Zhao and team said in their September 14 research piece titled “China: Solving the debt problem” that they believe RMB depreciation will continue and forecast USD/CNH at 7.1 at the end of 2017. Zhao and team highlight that debt-to-GDP ratio can be lowered either through reducing the numerator or increasing the denominator.

They believe that to contain or even reduce the debt-to-GDP ratio, the gap between debt growth and nominal GDP growth must shrink or turn negative. They believe lowering the ratio has to be premised on the acceptance of a slower rate of GDP growth: The Nomura analysts argue that default is the only practical way to trim the stock of outstanding debts. Instead of an outright default, per se, they suggest other approaches such as renegotiating terms, lowering interest rates, and tenure extension.

“Since increasing the denominator is unfeasible, policymakers must therefore look to lower the numerator. The only practical measures that can be taken to reduce the debt ratio are those aimed at reducing the growth of debt to below that of nominal GDP growth. “The outstanding stock of debt can only be reduced through either repayment or indeed default. One argument is that China’s corporate sector and/or local governments can, or should, simply repay their debts by selling the huge amount of assets that they have accumulated, but again, this is not a feasible solution.

The key reason behind the low level of corporate leverage despite the huge amount of debt is that asset prices have not collapsed. If the corporate sector or local governments repaid their debts by selling their assets – which are predominantly in real estate – their leverage will almost certainly spike higher due to the subsequent decline in the value of their remaining asset base. Hence, there is essentially only one practical way to reduce the stock of outstanding debts: defaults.”

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Selling USD to prepare for SDR basket?!

PBOC Yuan Positions Drop to Lowest Since 2011 (BBG)

The Chinese central bank’s yuan positions – which reflect the amount of foreign currency held on its balance sheet – fell to the lowest since 2011 in August, a sign that it sold dollars to support the yuan. The People’s Bank of China has been seen intervening in the market to stem the currency’s slide, with Bank of East Asia and Natixis saying that policy makers will prevent the exchange rate from slipping past 6.7 per dollar before its admission into the IMF’s basket of reserves on Oct. 1.

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The only thing left of globalization is a vague idea.

The Closing of the World Economy (Satyajit Das)

Pundits and policymakers everywhere are bemoaning the rise of a new, inward-looking populism. Led by the likes of Donald Trump and Nigel Farage, those who’ve felt only globalization’s ill effects, not its benefits, have mounted a fierce counterattack. Border-hopping elites fret that the whole process of opening up and knitting together the world through trade, capital flows and immigration may soon go into reverse. They’re missing the point. Support for freer trade and greater openness had in fact begun to falter well before economic nationalists like Trump and Farage took center stage. The same governments that count themselves among globalization’s greatest champions have been rolling it back steadily since the global financial crisis.

Their excuses are innocent-sounding and several: to protect national industries and iconic businesses; to secure export markets and competitive advantage; and above all, to prop up employment and incomes. Despite oft-repeated warnings about avoiding the beggar-thy-neighbor policies of the 1930s, these governments allowed global trade talks – the so-called Doha Round – to stall as early as 2008. Nations including the U.S. have instead pursued narrower bilateral and regional deals where they don’t have to satisfy so many different negotiating partners and can continue to protect key sectors. If these pacts are better than nothing, they more or less foreclose the possibility of a more ambitious multilateralism.

Meanwhile, between 2009 and 2015, three times as many discriminatory trade measures were introduced as liberalizing ones. In the first 10 months of 2015 alone, the latest Global Trade Alert database recorded 539 such initiatives adopted by governments worldwide that harmed foreign traders, investors, workers or owners of intellectual property – a record. Efforts to control trade flows have grown increasingly sophisticated. Most governments no longer impose tariffs or other crude roadblocks that would violate WTO rules. Instead countries from the U.S. – with the auto bailouts – to the U.K., China, Brazil, Canada and several EU members have funneled aid to domestic industries. State procurement rules – which in China, say, forbid buying strategic and defense technology from abroad – favor domestic suppliers, as do “buy local” campaigns like the ones launched since 2009 in the U.S., U.K. and Australia.

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Innovation!?

Wall Street’s Newest Money-Making Scheme Targets Your Home (MW)

Do you want Wall Street to get a piece of your house? On Tuesday, the noted venture capitalist Marc Andreesen announced that he’d invested in a startup called Point. Point casts itself as a solution to an intrinsic problem with home ownership: Most Americans have most of their wealth tied up in their home. There are mechanisms for “taking out” some of the equity built up as a mortgage is paid down, such as home-equity lines of credit or home-equity loans. But they require paying interest – not to mention having good credit. They also don’t help homeowners diversify their investments. Diversification was the driver behind an earlier version of what Point offers. Allan Weiss, who helped create the S&P/Case-Shiller price indexes, created a platform he calls “indexed fractional ownership.”

His idea came in part from a conversation with a neighbor who said he was looking forward to “cashing out” of an expensive home he’d owned for a long time – just before the housing market crashed. If you own a home and offer some of the equity to an investor like Point, the idea goes, you could take that money and invest it in a different asset class, like stocks. And what does Point get? If the house appreciates before it is sold, Point benefits. If the house depreciates, according to Andreessen Horowitz’s website, “Point gets paid back after the bank, but before the homeowner, in the event of a sale.” A blog post on Point’s site notes that, in addition to an initial appraisal, Point may require a “risk adjustment” that “offsets the chance that the home will depreciate before the end of the term.”

Yet Weiss and Andreessen Horowitz both envision their products gaining the critical mass to move beyond one-off agreements between investors and individual homeowners into what the latter calls a “broad basket” of homes. “It’s rethinking the fundamentals of residential real estate ownership – making single-family residential real estate a liquid, tradeable asset class,” the venture capitalists wrote.

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By now, this is crazy.

Ford Shifting All US Small-Car Production To Mexico (DFP)

Ford is shifting all North American small-car production from the U.S. to Mexico, CEO Mark Fields told investors today in Dearborn. “Over the next two to three years, we will have migrated all of our small-car production to Mexico and out of the United States,” Fields said. The industry has known for decades that domestic manufacturers struggle to make a profit on small cars. Shifting their assembly to Mexico can reduce costs to a point. But some of these cars are over-engineered. For example, Field said the current Ford Focus can be ordered in 300 different configurations of options and colors. Ford wants to reduce that to 30, which will make the production process simpler and less expensive.

But Americans prefer larger vehicles, especially pickups and higher-riding SUVs and crossover vehicles for their personal use. The future of smaller cars in the U.S. may depend on the ability to electrify their powertrains and introduce them to ride-sharing fleets where they can generate revenue from fares paid by multiple riders. Along those lines, Fields and other Ford executives Wednesday outlined an aggressive plan to invest $4.5 billion over the next four years. These will include new models in segments such as commercial vehicles, trucks, SUVs and performance vehicles. Ford also reiterated its commitment to developing an autonomous vehicle by 2021. The company believes that autonomous vehicles could account for up to 20% of vehicle sales by 2030.

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Smart. But it may make prices fall even faster.

Vancouver Tax on Empty Homes to Target Near-Zero Rental Supply (BBG)

Vancouver, suffering from a near-zero supply of homes available for rent, plans to slap investors sitting on vacant properties with a new tax in an effort to make housing more accessible in Canada’s most-expensive property market. The levy, which would start in January, may be as high as 2% of the property’s assessed value, Kathleen Llewellyn-Thomas, the city’s general manager of community services, told reporters Wednesday. That would mean a minimum C$20,000 ($15,000) annual payment for the typical C$1 million-plus detached home in Vancouver based on July 2015 assessment data, the most recent available. “Vancouver is in a rental housing crisis,” said Mayor Gregor Robertson, whose announcement follows a separate measure by the province in July to impose a 15% tax on foreign buyers.

“Dangerously low vacancy rates across the city are near zero.” While the city, ranked the world’s third-most-livable, has drawn attention for its sky-high purchase prices fomented by global money flows, the rental market has been just as contentious locally. Vacancies can get scooped up within hours, while bidding wars drive up the cost of leases. Public scrutiny has focused on absentee landlords, particularly from overseas, who are accused of sitting on investment properties where windows remain dark throughout the year. Robertson estimated that more than 10,000 homes are empty and an additional 10,000 are “under-utilized.” The tax aims to get those properties into the rental supply so that the vacancy rate rises to about 3 to 5% from near zero today, he said. The city expects to raise about C$2 million from the tax in the first year.

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People do recognize propaganda to an extent.

US Confidence In Media Hits Fresh Low (AFP)

Americans’ trust in the media has sunk to a new low, and a bitter presidential race may be to blame, a Gallup survey showed Wednesday. The poll asking whether the media report the news “fully, accurately and fairly” found just 32% of Americans have a great deal or fair amount of trust, the lowest level in Gallup polling history and 8 percentage points below last year. Gallup began asking the question in 1972, and has polled Americans on a yearly basis since 1997. Trust and confidence in the media hit its highest point in 1976, at 72% following the investigative journalism coverage of the Vietnam and the Watergate scandal, according to the research group. But confidence has been below 50% since 2007.

“While it is clear Americans’ trust in the media has been eroding over time, the election campaign may be the reason that it has fallen so sharply this year,” Gallup said in its report. “With many Republican leaders and conservative pundits saying (Democratic presidential nominee) Hillary Clinton has received overly positive media attention, while (Republican nominee) Donald Trump has been receiving unfair or negative attention, this may be the prime reason their relatively low trust in the media has evaporated even more.” Gallup said Trump’s sharp criticism of the press may also have had an impact on public opinion.

Just 14% of Republicans said they trust the media, down sharply from 32% a year ago and the lowest level of confidence among Republicans in 20 years, according to Gallup. Among Democrats, 51% expressed confidence in the media, down from 55% a year ago, while the number of independents trusting news organizations fell to 30% from 33%. Trust was also low among younger adults: just 26% of those between the ages of 18 and 49 said they felt confidence in the media compared with 38% of those 50 and older.

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Bubble.

US Rooftop Solar Boom Is Grinding To A Halt (BBG)

Rooftop solar, which has surged more than 1,000% since 2010, will barely grow at all next year. Residential installations are expected to increase by 21% this year, but in 2017 the figure will inch upward by about 0.3%. The change comes as utilities push back against mandates to buy the electricity and shifting tax policies curb demand. Throw in sliding electricity rates and it’s clear the economic benefits of rooftop panels are no longer so obvious to consumers. That’s forcing rooftop developers including Vivint Solar, Sunrun and Elon Musk-backed SolarCity to focus on profitability instead of growth.

“Much like PC manufacturers in the 1990s, solar installers need to realize substantial new customer sales each year just to tread water in terms of annual revenue,” Hugh Bromley at Bloomberg New Energy Finance said. Residential installations are already slowing from the 79% expansion in 2015. Developers are expected to add 2.76 gigawatts this year and that will inch upward to 2.77 gigawatts in 2017 as investment slips 6.4% to $6.8 billion, according to estimates from Bloomberg New Energy Finance. “After growing as much as it has, sustaining high double-digit growth rate forever is not realistic,” said Pavel Molchanov at Raymond James Financial.

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US can’t afford to go to war anymore.

Latest Estimate Pegs US Cost of Wars at Nearly $5 Trillion (I’Cept)

The total US budgetary cost of war since 2001 is $4.79 trillion, according to a report released this week from Brown University’s Watson Institute. That’s the highest estimate yet. Neta Crawford of Boston University, the author of the report, included interest on borrowing, future veterans needs, and the cost of homeland security in her calculations. The amount of $4.79 trillion, “so large as to be almost incomprehensible,” she writes, adds up like this:

• The wars in Iraq, Afghanistan, Pakistan, Syria, and other overseas operations already cost $1.7 trillion between 2001 and August 2016 with $103 billion more requested for 2017 • Homeland Security terrorism prevention costs from 2001 to 2016 were $548 billion. • The estimated DOD base budget was $733 billion and veterans spending was $213 billion. • Interest incurred on borrowing for wars was $453 billion. • Estimated future costs for veterans’ medical needs until the year 2053 is $1 trillion.

Crawford carried out a similar study in June 2014 that estimated the cost of war at $4.4 trillion. Her methodology mirrors that of the 2008 book The Three Trillion Dollar War: The True Costs of the Iraq Conflict by Linda Bilmes and Joseph Stiglitz. There are even more costs of war that Crawford does not include, she writes. For instance, “I have not included here state and local government expenses related to medical care of veterans and homeland security. Nor do I calculate the macro economic costs of war for the U.S. economy.” She also notes that she does not add the cost of war for other countries, nor try to put a dollar figures on the cost in human lives.

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How did he land that job again?

Juncker Denies Alcohol Problem In Interview, Drinks 4 Glasses Of Champagne

The controversial head of the European Commission has denied that he has a problem with alcohol during an interview in which he drank four glasses of champagne. Allegations have circulated around Brussels in recent years about Jean-Claude Juncker’s drinking and one senior diplomatic source has said he “has cognac for breakfast”. In an interview with a French newspaper he defended his record as he consumed numerous classes of champagne. In 2014 it emerged that Mr Juncker’s drinking habits had been discussed at the highest levels by European leaders who privately have concerns over his lifestyle. A week before the UK referendum vote a video emerged of an apparently-drunk Mr Juncker taken at a May 2015 EU summit welcoming Viktor Orban, the hardline Hungarian PM, as “the dictator” before giving him a playful slap on the cheek.

“The dictator is coming,” Mr Juncker is heard to say, before locking a shocked Mr Orban in a clumsy embrace while Donald Tusk, the president of the European Council looked on, visibly embarrassed. Defending himself in an interview with the Liberation, he said: “Orban, I always call dictator, I am like this. As soon as someone breaks the mould they are obviously crazy or an alcoholic. “You think I’d still be in office if I was having cognac for breakfast? It really makes me sad and it has even led my wife to question if I lie to her, as I do not drink when I’m home.” He also went on to blame his unsteady walking on problems with his leg after a serious car accident.

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Basic. Better. Cheaper.

Helping Homeless People Starts With Giving Them Homes (G.)

Finland is the only European country where homelessness has decreased in recent years. At the end of 2015 the number of single homeless people was for the first time under 7,000 and this number includes people living temporarily with friends and relatives, who constitute 80% of all homeless people. This development is mainly due to a national programme to reduce long-term homelessness. The main explanation for this success is quite simple: when the national programme started housing first was adopted as a mainstream national homelessness policy. This common framework made it possible to establish a wide partnership of state authorities, local communities and non-governmental organisations. Cooperation and targeted measures in the implementation of the programme led to the aforementioned results, which were backed up by independent international evaluations.

Implementing housing first is not reasonable without proper housing options. It should go without saying that you can’t offer homeless people homes if the homes do not exist. It is this scarcity of homes that engenders the system in Britain, with demand outstripping supply, and people in crisis forced to jump through hoops to avoid sleeping on the street. In Finland, housing options included the use of social housing, buying flats from the private market to be used as rental apartments for homeless people, and building new housing blocks for supported housing. An important part of the programme was the extensive conversion of shelters and dormitory-type hostels into supported housing, to address the huge need for accommodation that offered help to tenants.

The last big hostel for homeless people in Helsinki with 250 bed places was run by the Salvation Army. A couple of years ago this hostel was renovated and now consists of 80 independent apartments with on-site staff. The disappearance of temporary solutions like hostels has completely changed the landscape of Finnish homelessness policy in a very positive way, for vulnerable individuals and in combatting antisocial behaviour. All this costs money, but there is ample evidence from many countries that shows it is always more cost-effective to aim to end homelessness instead of simply trying to manage it. Investment in ending homelessness always pays back, to say nothing of the human and ethical reasons.

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Jun 172016
 
 June 17, 2016  Posted by at 8:58 am Finance Tagged with: , , , , , , , , ,  3 Responses »


Unknown Dutch Gap, Virginia. Bomb-proof quarters of Major Strong 1864

Stocks, Sterling Surge After British MP’s Death (ZH)
’I’d Risk Life And Limb For My Babies’: Jo Cox (G.)
There’s A New Kind Of Housing Crisis in America (MW)
US Housing Bubble 2.0: Shadow Demand vs Shelter-Buyer Fundamentals (Hanson)
America’s Dying Shopping Malls Have Billions in Debt Coming Due (BBG)
Sell The Stocks, Sell The Bonds, Get Out Of The Casino: Stockman (Fox)
Default Cycle: ‘It’s Only A Matter Of Time Before Many Of Them Blow Up’ (ZH)
China’s Debt Is 250% of GDP And ‘Could Be Fatal’, Says Government Expert (G.)
The Fed Has Brought Back ‘Taxation Without Representation’ (Black)
Forget Brexit, It’s Italy’s Turn (Stelter)
Austerity Kills! Greeks’ Health Deteriorating, Life Expectancy Shrinks (KTG)
Antarctic CO2 Hits 400ppm For First Time In 4 Million Years (G.)

The world drowns in cynicism.

Stocks, Sterling Surge After British MP’s Death (ZH)

The devastating news that British MP Jo Cox has died following the shooting incident earlier today by a mentally unstable man…

“U.K. Labour Party lawmaker Jo Cox died after being attacked as she met constituents in her electoral district in West Yorkshire in the north of England. Campaigning ahead of next week’s referendum on Britain’s membership of the European Union was suspended for the rest of Thursday by both sides after the attack, which happened just before 1 p.m. Jo was attacked by a man who inflicted serious and, sadly, ultimately fatal injuries,” West Yorkshire Police Temporary Chief Constable Dee Collins said in a televised press conference in Wakefield.

…has sparked a bullish buying binge in stocks as Sterling rallies on the market’s “hope” that the Brexit vote will be delayed. This evening’s major speech at Mansion House by Bank of England Governor Carney has been cancelled due to her death…

Bank of England says Governor Mark Carney will no longer deliver planned speech in London. BOE cites “dreadful attack today on Jo Cox MP” Governor will attend event and deliver a “short speech reflecting on today’s events”

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No further comment. Perhaps complete silence would be the most appropriate answer, but all we’ll hear all day and then some is comments and opinions. Spin doctors and conspiracies work overtime.

’I’d Risk Life And Limb For My Babies’: Jo Cox (G.)

Labour MP Jo Cox, who died on Thursday after being attacked in her constituency of Batley and Spen in West Yorkshire by an armed man, makes a speech in parliament about the need for the UK to help child migrants stranded unaccompanied in Europe. The speech was part of a debate on the issue which took place in April 2016.

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Unaffordability. Known to pop many a bubble.

There’s A New Kind Of Housing Crisis in America (MW)

America has a housing crisis, and most Americans want policy action to address it. That’s the conclusion of an annual survey released Thursday by the MacArthur Foundation. The “crisis” is no longer defined by the layers of distress left behind after the subprime bubble burst, but about access to stable, affordable housing. A vast majority of respondents – 81% – said housing affordability is a problem, and one-third said they or someone they know has been evicted, foreclosed on, or lost their housing in the past five years. Over half the respondents, 53%, said they’d had to make sacrifices over the past three years to be able to pay their mortgage or rent. Yet most respondents believe the housing problem is solvable, and want policymakers to address it.

Nearly two-thirds of survey respondents from both parties say housing hasn’t received enough attention in the 2016 campaign. Most people supported a range of proposed policies to support affordable housing, both rentals and purchase. But people increasingly believe that owning a home is a “an excellent long-term investment.” Some 60% agreed with that statement, up from 56% a year ago and 50% in 2014. Access to stable, affordable housing – whether to rent or buy – is “about more than shelter,” the MacArthur Foundation noted in a release. “It is at the core of strong, vibrant, and healthy families and communities.”

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“If 2006 was a known bubble with housing prices at “X”, affordability never better, easy availability of credit, unemployment in the 4%’s, total workforce at record highs, and growing wages, then what do you call today with house prices at X+ 5% to 20%, worse affordability and credit, higher unemployment, weakening total workforce, and shrinking wages? Whatever you call it, it’s a greater thing than “X”.

US Housing Bubble 2.0: Shadow Demand vs Shelter-Buyer Fundamentals (Hanson)

[..] if everybody always had to purchase owner-occupied properties using the same down payment amount and a market rate, fixed-rate mortgage then house prices would always reflect the employment, income, and macro-economic conditions of the surrounding area. But, when ‘Shadow Demand’ cohorts enter the market using cheap and easy credit and liquidity prices can detach from local-area economics, especially if the Shadow Demand continues to gain market share. Heck, in the greater Phoenix region, over 50% of all households can’t afford the going rate on a two-bedroom apartment, yet house prices are some of the strongest in the nation. Obviously, this isn’t due to strong end-user, shelter-buyer fundamentals.

As Shadow Demand continues to gain share over end-user buyers, they settle for lower respective returns on their housing investments and prices continue to rise. Then, when appraisers use properties purchased by Shadow buyers — for unconventional purposes with cheap and easy credit and liquidity — as comparable sales, all property values rise. Sure, there are end-user, shelter-buyers who will be able to chase the market all the way up. But, the larger the bubble blows the more the end-user, shelter-buyer demand will get crowded out and/or turn into increased supply as they liquidate. We are seeing this happen all over the nation.

In Bubble 1.0, Shadow Demand continued to gain market share until it blew up. And we know that beginning in 2011 the four pillars of unorthodox, Shadow Demand — beginning with the distressed market — controlled housing demand and still does. The implosion of the mortgage securitization market in 2007 didn’t crash housing. Rather, when the Shadow Demand – reliant on cheap and easy credit and liquidity largely driven by securitization — left the market, housing “reset to end-user, shelter-buyer fundamentals”. In other words, the pendulum swung back to the fundamental, end-user, shelter-buyer with 20% down and a market-rate 30-year fixed mortgage, which was 30% lower. Again, this isn’t a housing crash per se, rather a demand-shift and a reset, or reattachment, to real fundamentals.

Bottom line: History will repeat because the drivers are identical. Bubble 2.0 will end with house prices once again “resetting to end-user fundamentals”, or to what the end-user shelter buyer can afford with a typical down payment and 30-year fixed rate mortgage. And it doesn’t have to be an MBS market blowing up to cause house prices to reattach to end-user fundamentals. It could be anything that swings this pendulum from being driven by Shadow Demand, which is where we are today.

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Erosion.

America’s Dying Shopping Malls Have Billions in Debt Coming Due (BBG)

Suburban Detroit’s Lakeside Mall, with mid-range stores such as Sears, Bath & Body Works and Kay Jewelers, is one of the hundreds of retail centers across the U.S. being buffeted by the rise of e-commerce. After a $144 million loan on the property came due this month, owner General Growth Properties Inc. didn’t make the payment. The default by the second-biggest U.S. mall owner may be a harbinger of trouble nationwide as a wave of debt from the last decade’s borrowing binge comes due for shopping centers. About $47.5 billion of loans backed by retail properties are set to mature over the next 18 months, data from BofAML show. That’s coinciding with a tighter market for commercial-mortgage backed securities, where many such properties are financed.

For some mall owners, negotiating loan extensions or refinancing may be difficult. Lenders are tightening their purse strings as unease surrounding the future of shopping centers grows, with bleak earnings forecasts from retailers including Macy’s and Nordstrom, and bankruptcy filings by chains such as Aeropostale and Sports Authority. Older malls in small cities and towns are being hit hardest, squeezed by competition from both the Internet and newer, glitzier malls that draw wealthy shoppers. “For many years, people thought the retail business in the U.S. was a bit overbuilt,” said Tad Philipp at Moody’s. “The advent of online shopping is kind of accelerating the separation of winners and losers.” Landlords that can’t refinance debt may either walk away from the property or negotiate for an extension of the due date. It can be hard to save a failing mall, leading to high losses for lenders on soured loans, Philipp said.

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“.. (low) interest rates are the mothers milk of speculation..”

Sell The Stocks, Sell The Bonds, Get Out Of The Casino: Stockman (Fox)

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“..central banks in their infinite wisdom have made the cost of money so cheap that it has created an environment that forces a complete misallocation of capital in the market ..”

Default Cycle: ‘It’s Only A Matter Of Time Before Many Of Them Blow Up’ (ZH)

It’s been a tough year for traders and bankers alike, as layoffs have gripped firms due to difficult trading environments and an overall sluggish economy. However, there is one area that is starting to actually pick up. As the number of bankruptcies begin to increase, firms are expanding their turnaround teams in order to handle all of the work headed their way – bankers with experience in turnarounds and restructuring are now in high demand. “Firms are hungry for experienced restructuring professionals, who are increasingly in short supply. You need to reach deep into your Rolodex to find people you know who are capable, and you need to move fast.” said Richard Shinder, hired by Piper Jaffray in March to help build out its restructuring team.

Both the number of bankruptcies and the amount of liabilities associated with them have picked up significantly, as Bloomberg points out. With the amount of companies in distress, firms such as Lazard, Guggenheim, Perella Weinberg and Alix are all hiring in anticipation of even more bankruptcies. “Cycles come and go, but when a wave hits, you want to make sure you are in the right seat with the right group of people. We are putting the band back together.” said Ronen Bojmel, who is helping to build the restructuring team at Guggenheim. Moody’s is forecasting high default rates in sectors that are largely expected given commodity prices, such as Metals & Mining and Oil & Gas, however trouble looks to be spilling over into other sectors such as Construction, Media, Durable Consumer Goods, and even Retail.

As we have discussed for quite some time, central banks in their infinite wisdom have made the cost of money so cheap that it has created an environment that forces a complete misallocation of capital in the market as the search for yield continues down every rabbit hole it can find. This will (and already is) inevitably catch up to the economy in the form of defaults and bankruptcies. “The wave is already here. Many risky debt deals have been done as people chased yield, and it’s a matter of time before many of them blow up.” said Tim Coleman, head of PJT Partners.

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Local governments = shadow banks. Would like to see someone dig into who owns them.

China’s Debt Is 250% of GDP And ‘Could Be Fatal’, Says Government Expert (G.)

China’s total debt was more than double its GDP in 2015, a government economist has said, warning that debt linkages between the state and industry could be “fatal” for the world’s second largest economy. The country’s debt has ballooned to almost 250% of GDP thanks to Beijing’s repeated use of cheap credit to stimulate slowing growth, unleashing a massive, debt-fuelled spending binge. While the stimulus may help the country post better growth numbers in the near term, analysts say the rebound might be short-lived. China’s borrowings hit 168.48 trillion yuan ($25.6 trillion) at the end of last year, equivalent to 249% of economic output, Li Yang, a senior researcher with the leading government think-tank the China Academy of Social Sciences (CASS), has told reporters.

But the huge number, which includes government, corporate and household borrowings, was lower than some non-government estimates. The consulting firm McKinsey Group said earlier this year that the country’s total debt had quadrupled since 2007 and was likely as high as $28 trillion by mid-2014. The debt-to-GDP ratio is not the highest in the world. The US has a ratio of 331%, for example, much of which is accounted for by federal debt. But part of the concern about China’s massive debt binge is that the most worrying risks lie in the non-financial corporate sector, where the debt-to-GDP ratio was estimated at 156%. This sector includes the liabilities of local government financing vehicles, Li said.

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Interesting observation.

The Fed Has Brought Back ‘Taxation Without Representation’ (Black)

In February 1768, a revolutionary article entitled “No taxation without representation” was published London Magazine. The article was a re-print of an impassioned speech made by Lord Camden arguing in parliament against Britain’s oppressive tax policies in the American colonies. Britain had been milking the colonists like medieval serfs. And the idea of ‘no taxation without representation’ was revolutionary, of course, because it became a rallying cry for the American Revolution. The idea was simple: colonists had no elected officials representing their interests in the British government, therefore they were being taxed without their consent. To the colonists, this was tantamount to robbery.

Thomas Jefferson even included “imposing taxes without our consent” on the long list of grievances claimed against Great Britain in the Declaration of Independence. It was enough of a reason to go to war. These days we’re taught in our government-controlled schools that taxation without representation is a thing of the past, because, of course, we can vote for (or against) the politicians who create tax policy.

But this is a complete charade. Here’s an example: Just yesterday, the Federal Reserve announced that it would keep interest rates at 0.25%. Now, this is all part of a ridiculous monetary system in which unelected Fed officials raise and lower rates to induce people to adjust their spending habits. If they want us little people to spend more money, they cut rates. If they want us to spend less, they raise rates. It’s incredibly offensive when you think about it– the entire financial system is underpinned by a belief that a committee of bureaucrats knows better than us about what we should be doing with our own money.

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It’s too late to even try bridging the gaps.

Forget Brexit, It’s Italy’s Turn (Stelter)

If the Germans really want to avoid a Brexit or the exit of other countries from the Eurozone, they will have to change their policies. Unfortunately, German politicians and economists prefer to criticize the other countries instead of doing their homework. They oppose spending more money at home, they oppose a debt restructuring, they oppose debt monetization by the ECB, they oppose exits from the eurozone. In doing so, they increase the pressure in the system as Europe remains locked in recession. Irrespective of how the British vote next week, the problems of Europe keep on growing. It is only a question of when, not if, a euroskeptic party gets into power in one of the largest EU economies, promising to solve all problems by exiting the Euro and the EU.

I continue to see Italy as the prime candidate for such a move. The country suffers under a recession which has by now lasted longer than the recession of the 1930s. It still has not managed to get back to 2008 GDP levels. Unemployment is high, government debt is out of control. Closing the competitive gap to Germany by lowering wages by 30% is a ridiculous idea and an impossible task. The alternative is to leave the eurozone. Italy could then devalue the new lira and regain competitiveness overnight. An Italian uscita (exit) – or “Uscitaly” in the latest clever term of art – is the true risk for the eurozone. And it would be too late when Der Spiegel comes up with a new cover: “Mon dio, Italia. Si prega di non uscire!”

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This is the EU Britain must vote for or against. This is what it does. It turns member states into third world nations. Greece had a great health care system. But nobody can afford it anymore.

Austerity Kills! Greeks’ Health Deteriorating, Life Expectancy Shrinks (KTG)

The economic crisis and the strict austerity bound to the loan agreement kill. They kill Greeks. The Bank of Greece may not write it in such a melodramatic way on its Monetary Policy Report 2015-2016. However, the conclusions in the chapter about “Reforms in health, economic crisis and impact on the health of population” are shocking and confirm what we have been hearing and reading around from relatives and friends in the last years: that the physical and mental health of Greeks has been deteriorating – partly due to economic insecurity, high unemployment, job insecurity, income decrease and constant exposure to stress. Partly also due to economic problems that have patients cut their treatment, partly due to the incredible cuts and shortages in the public health system. The Report notes that “while it takes longer to record the exact effect, trends show a deterioration of the health of Greeks in the years of loan agreements and austerity cuts.”

The BoG states:
• Suicides increased. “The risk of suicidal behavior increases when there are so-called primary risk factors (psychiatric-medical conditions), while the secondary factors (economic situation) and tertiary factors (age, gender) affects the risk of suicide, but only if primary risk factors pre-exist.
• Infant mortality increased by nearly 50%, mainly due to increase of deaths of infants younger than one year, and the decline of births by 22,1%. Infant mortality increase: 2.65% in 2008 and 3.75% in 2014
• Increase of parts of population with mental illness, especially with depression. Increase: 3.,3% in 2008 to 6.8% in 2009, to 8.2% in 2011 and to 12.3% in 2013. In 2014, a 4.7% of the population above 15 years old declared it suffered form depression – that was 2.6% in 2009.
• Chronic diseases increased by approximately 24%.

The BoG notes that “the large cuts in public expenditure have not been accompanied by changes and improvement of the health system in order to limit the consequences for the weakest citizens and vulnerable groups of the society.” [..] Citing OECD data of 2013, the BoG underlines that 79% of the population in Greece was not covered with insurance and therefore without medical and medicine due to long-term unemployment, while self-employed could not afford to pay their social contributions.

[..] One of the neighborhood pharmacists has been telling me on and off about the dramatic number of patients who cannot afford the self-participation in prescription medicine. Many of his clients cut their treatment into half – like 1 tablet for cholesterol not daily but every other day basis – and that some have given up the whole treatment. “For some people the choice is: either have treatment or food.” And this has been going on since 2012, when then Greek Health Minister adopted the German model of “self-participation in prescription medicine, laboratory tests” and cut some primary health services but forgot to adopt also that aspect of the German model that provides that patients would not spend more than 2% of their income for medical services and medication.

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4 million years ago is well before anything closely resembling man appeared. That makes this so dangerous for us. It creates an environment that we did not evolve in. As more and more of what was there when we did evolve will also disappear.

Antarctic CO2 Hits 400ppm For First Time In 4 Million Years (G.)

We’re officially living in a new world. Carbon dioxide has been steadily rising since the start of the Industrial Revolution, setting a new high year after year. There’s a notable new entry to the record books. The last station on Earth without a 400 parts per million (ppm) reading has reached it. A little 400 ppm history. Three years ago, the world’s gold standard carbon dioxide observatory passed the symbolic threshold of 400 ppm. Other observing stations have steadily reached that threshold as carbon dioxide spreads across the planet’s atmosphere at various points since then. Collectively, the world passed the threshold for a month last year.

In the remote reaches of Antarctica, the South Pole Observatory carbon dioxide observing station cleared 400 ppm on May 23, according to an announcement from the National Oceanic and Atmospheric Administration on Wednesday. That’s the first time it’s passed that level in 4 million years (no, that’s not a typo). There’s a lag in how carbon dioxide moves around the atmosphere. Most carbon pollution originates in the northern hemisphere because that’s where most of the world’s population lives. That’s in part why carbon dioxide in the atmosphere hit the 400 ppm milestone earlier in the northern reaches of the world.

But the most remote continent on earth has caught up with its more populated counterparts. “The increase of carbon dioxide is everywhere, even as far away as you can get from civilization,” Pieter Tans, a carbon-monitoring scientist at the Environmental Science Research Laboratory, said. “If you emit carbon dioxide in New York, some fraction of it will be in the South Pole next year.”

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May 302016
 
 May 30, 2016  Posted by at 7:59 am Finance Tagged with: , , , , , , , , , ,  9 Responses »


Jack Delano Foggy night in New Bedford, Massachusetts 1941

The Mystery of Weak US Productivity (Luce)
China Default Chain Reaction Threatens Products Worth 35% of GDP (BBG)
China’s Veiled Loans May Prove Lethal (BBG)
How Many Bad Loans Might China Have? (BBG)
Easy Money = Overcapacity = Trade Wars = Deflation (Rubino)
Negative Rates Fail to Spur Investment for Corporate Europe (BBG)
Saudi Arabia’s Petrodollar Reserves Fall to 4-Year Low (BBG)
CEO of No. 1 Asian Commodity Trader Noble Group Resigns In Surprise Move (R.)
Japan Must Delay Sales-Tax Rise to Recover, Abe Aide Says (BBG)
The Butterfly Effect: Cheap Oil Means Fewer Nose Jobs (BBG)
The Source of Failure: We Optimize What We Measure (CH Smith)
30.4% Of Americans Were Obese In 2015 (Forbes)
Tory Turmoil Escalates With Open Call For Cameron To Quit (G.)
Half Of Central, Northern Great Barrier Reef Corals Are Dead (SMH)

“This year, for the first time in more than 30 years, US productivity growth will almost certainly turn negative..”

“Unless we become smarter at how we work, growth will start to exhaust itself too.” Er, no, that has already happened.

“For the first time the next generation of US workers will be less educated than the previous..”

The Mystery of Weak US Productivity (Luce)

Look around you. From your drone home delivery to that oncoming driverless car, change seems to be accelerating. Warren Buffett, the great investor, promises that our children’s generation will be the “luckiest crop in history”. Everywhere the world is speeding up except, that is, in the productivity numbers. This year, for the first time in more than 30 years, US productivity growth will almost certainly turn negative following a decade of sharp slowdown. Yet our Fitbits seem to be telling us otherwise. Which should we trust — the economic statistics or our own lying eyes? A lot hinges on the answer. Productivity is the ultimate test of our ability to create wealth. In the short term you can boost growth by working longer hours, for example, or importing more people.

Or you could lift the retirement age. After a while these options lose steam. Unless we become smarter at how we work, growth will start to exhaust itself too. Other measures bear out the pessimists. At just over 2%, US trend growth is barely half the level it was a generation ago. As Paul Krugman put it: “Productivity isn’t everything, but in the long run it is almost everything.” It is possible we are simply mismeasuring things. Some economists believe the statistics fail to capture the utility of setting up a Facebook profile, for example, or downloading free information from Wikipedia. The gig economy has yet to be properly valued. Yet this argument cuts both ways. Productivity is calculated by dividing the value of what we produce by how many hours we work — data provided by employers.

But recent studies — and common sense — say our iPhones chain us to our employers even when we are at leisure. We may thus be exaggerating productivity growth by undercounting how much we work. The latter certainly fits with the experience of most of the US labour force. It is no coincidence that since 2004 a majority of Americans began to tell pollsters they expected their children to be worse off — the same year in which the internet-fuelled productivity leaps of the 1990s started to vanish. Most Americans have suffered from indifferent or declining wages in the past 15 years or so. A college graduate’s starting salary today is in real terms well below where it was in 2000. For the first time the next generation of US workers will be less educated than the previous, according to the OECD, which means worse is probably yet to come. Last week’s US productivity report bears that out.

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“All the risks are accumulating in an overcrowded financial system.”

China Default Chain Reaction Threatens Products Worth 35% of GDP (BBG)

The risk of a default chain reaction is looming over the $3.6 trillion market for wealth management products in China. WMPs, which traditionally funneled money from Chinese individuals into assets from corporate bonds to stocks and derivatives, are now increasingly investing in each other. Such holdings may have swelled to as much as 2.6 trillion yuan ($396 billion) last year, based on estimates from Autonomous Research this month. The trend has China watchers worried. For starters, it means that bad investments by one WMP could infect others, causing a loss of confidence in products that play an important role in bank funding. It also suggests WMPs are struggling to find enough good assets to meet their return targets.

In the event of widespread losses, cross-ownership will create more uncertainty over who’s vulnerable – a key source of panic in 2008 when soured U.S. mortgage securities triggered a global financial crisis. Those concerns have become more pressing this year after at least 10 Chinese companies defaulted on onshore bonds, the Shanghai Composite Index sank 20% and China’s economy showed few signs of recovery from the weakest expansion in a quarter century. “There’s abundant liquidity in the financial system, but a scarcity of high-yielding assets to invest in,” said Harrison Hu, the chief Greater China economist at RBS in Singapore. “All the risks are accumulating in an overcrowded financial system.”

Issuance of WMPs, which are sold by banks but often reside off their balance sheets, exploded over the past three years as lenders competed for funds and fees while savers sought returns above those offered on deposits. The products, which offer varying levels of explicit guarantees, are regarded by many as having the implicit backing of banks or local governments. The outstanding value of WMPs rose to 23.5 trillion yuan, or 35% of China’s gross domestic product, at the end of 2015 from 7.1 trillion yuan three years earlier, according to China Central Depository & Clearing Co. An average 3,500 WMPs were issued every week last year, with some mid-tier banks, such as China Merchants Bank and China Everbright Bank, especially dependent on the products for funding.

Interbank holdings of WMPs swelled to 3 trillion yuan as of December from 496 billion yuan a year earlier, according to figures released by the clearing agency last month. As much as 85% of those products may have been bought by other WMPs, according to Autonomous Research, which based its estimate on lenders’ public disclosures and data on interbank transactions. The firm speculates that in some cases the products are being “churned” to generate fees for banks. “We’re starting to see layers of liabilities built upon the same underlying assets, much like we did with subprime asset-backed securities, collateralized debt obligations, and CDOs-squared in the U.S.,” Charlene Chu, a partner at Autonomous who rose to prominence in her former role at Fitch Ratings by warning of the risks of bad debt in China, said in an interview on May 17.

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“The unconsolidated structured entities managed by the Group consist primarily of collective investment vehicles (“WMP Vehicles”) formed to issue and distribute wealth management products (“WMPs”), which are not subject to any guarantee by the Group of the principal invested or interest to be paid.”

China’s Veiled Loans May Prove Lethal (BBG)

Credit is a risky business, but loans that dare not speak their name? They are possibly even more dangerous, as China is about to find out.As many as 15 publicly traded Chinese lenders, large and small, report roughly $500 billion of such debt between them, which they hold not as loans but as receivables from shadow banking products. While the traditional credit business of these banks is 16 times bigger, receivables have jumped sixfold in three years. Explosive growth of this type usually ends badly. It’s hard to see why it’ll be different for the People’s Republic. Before they can brace themselves – or embrace the risk, if they think the rewards are worth it – equity investors need to know where to look. Flitting from one explanatory note to another in dense annual reports isn’t everybody’s idea of a day well spent.

But the effort may be worth it. For instance, page 184 of Agricultural Bank’s 2015 annual report informs us that the bank has 557 billion yuan ($85 billion) worth of assets tied in “debt instruments classified as receivables.” On page 245, we further learn that most of this is old hat, and the only fast-growing portion is an 18.7 billion yuan chunk helpfully titled as “Others.” A footnote adds that the category primarily consists of “unconsolidated structured entities managed by the group.” Give up? Then you miss the big reveal that occurs 34 pages later: “The unconsolidated structured entities managed by the Group consist primarily of collective investment vehicles (“WMP Vehicles”) formed to issue and distribute wealth management products (“WMPs”), which are not subject to any guarantee by the Group of the principal invested or interest to be paid.” That’s broadly how Chinese lenders disclose their cryptic linkages with shadow banks.

The names keep changing, from “investment management products under trust scheme” and “investment management products managed by securities companies” to “trust beneficiary rights” and “wealth management products.” The latter have swelled to the equivalent of 35% of GDP, and account for 3 trillion yuan of interbank holdings. The common thread to these products is that they’re all exposed to corporate credit and designed to get around lenders’ minimum capital requirements and maximum loan-to-deposit norms, with scant loss provisioning in case things go wrong.There’s plenty that could. The reported nonperforming loan ratio of 1.75% is a joke. CLSA says bad loans have already snowballed to 15 to 19% of the loan book; Autonomous Research partner Charlene Chu estimates the figure will reach 22% by the end of this year. A 20% loss on a $500 billion portfolio of loans masquerading as receivables would wipe out 58% of annual profit of the 15 banks under our scanner.

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” In the basic resources sector, 46% of loans are with firms without enough income to cover interest payments. ”

How Many Bad Loans Might China Have? (BBG)

How many of China’s loans could turn bad? The official data show a non-performing loan ratio of 1.75%, but that’s widely believed to reflect optimistic accounting. Bloomberg Intelligence Economics has estimated the %age of “at risk” loans – those where the borrower doesn’t have sufficient earnings to cover interest payments. The results show 14% of corporate borrowing at risk of default, up from a low of 5% in 2010. By sector, the basic resources, retail and industrial sectors are among the highest risk. In the basic resources sector, 46% of loans are with firms without enough income to cover interest payments.

Telecommunications, utilities, and travel and leisure sectors look more secure, reflecting stronger earnings and lower debt. The methodology is based on an approach used by the IMF. For a universe of 2,865 Chinese listed firms (excluding financial companies), we screened for firms with interest costs higher than their EBITDA. We then calculated total debt of those firms as a %age of total debt of all listed firms. We assume that the ratio of “at risk” loans for the corporate sector as a whole is the same as for listed companies.

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“..over-investment produces slow growth and falling prices while ever-more-aggressive monetary policy distorts markets beyond recognition and encourages new over-investment in different sectors, which then proceed to follow oil and steel into the deflationary abyss.”

Easy Money = Overcapacity = Trade Wars = Deflation (Rubino)

So what happens to all that Chinese steel that was on its way to the US and EU before slamming into those prohibitively high tariffs? One of three things: Either it’s sold elsewhere, probably at even steeper discounts, thus pricing US and EU steel exports out of those markets. Or it’s stockpiled in China for future use, thus lowering future demand for new steel production and, other things being equal, depressing tomorrow’s prices. Or many of China’s newly-built steel mills will close, and China will eat the losses related to this malinvestment. Each scenario results in lower prices and financial losses somewhere. Put another way, as far as steel is concerned, the world’s fiat currencies are rising in value, which is the common definition of deflation.

And since steel is just one of many basic industries burdened with massive overcapacity, it’s safe to assume that the process which began with oil and recently spread to steel will continue to metastasize throughout the developed and developing worlds. Next up: real estate. “Modern” monetary policy, designed to achieve exactly the opposite outcome (that is, rising prices for real things), will in response be ratcheted up to ever-more-extreme levels — which in this analytical framework is like trying to douse a fire with gasoline. The result is a world in which past over-investment produces slow growth and falling prices while ever-more-aggressive monetary policy distorts markets beyond recognition and encourages new over-investment in different sectors, which then proceed to follow oil and steel into the deflationary abyss. And so on, until the system collapses under the weight of its own absurdity.

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Because they are deflationary.

Negative Rates Fail to Spur Investment for Corporate Europe (BBG)

A prolonged period of negative interest rates is failing to revive investment at Europe’s companies, with the vast majority of businesses in the region saying the stimulus measures have had no affect at all on their growth plans. Some 84% of the 9,440 companies surveyed by Swedish debt collector Intrum Justitia AB for its European Payment Report 2016 say low interest rates haven’t affected their willingness to invest. And perhaps more alarmingly, the number is up from 73% last year. “Creating economic growth requires stability and optimism,” Intrum Justitia Chief Executive Officer Mikael Ericson said in the report. “Evidently, the strategy of keeping interest rates record low for more than a year has not created the much sought-after stability.”

Signs of stalling investment mark a blow to central banks hoping to revive growth across Europe through negative rates and quantitative easing. Europe needs its businesses to invest more if it’s to create the jobs needed to spur growth. In the euro area, where interest rates have been negative since mid-2014, gross domestic product will slow to 1.6% this year, compared with 2.3% in the U.S., the European Commission estimates. “A calculation of an investment includes assumptions of the future,” Intrum said. “To get the calculation to go together those assumptions need to include a belief in stability and prosperity in that future. Perhaps the negative interest rates do not signal that stability at all – rather that we are still in an extraordinary situation?”

The survey also identified another threat to growth, namely late payments. Some 33% of survey participants said they regard not being paid on time as a threat to overall survival while 25% said they are likely to cut jobs if clients pay late or not at all. That problem is more pronounced among Europe’s 20 million small and medium-sized companies, with many reporting that bigger firms are forcing them to accept late payments. “It is a market failure that costs job opportunities for millions of Europeans that big corporations deliberately force SMEs to finance their cash flow,” Ericson said. “As much as two out of five SMEs say late payments prohibit growth of the company. That large corporations use their much smaller sub-suppliers to act as financier of their own cash-management processes is not only wrong, it also creates an imbalance in society.”

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Might as well devalue now.

Saudi Arabia’s Petrodollar Reserves Fall to 4-Year Low (BBG)

Saudi Arabia’s net foreign assets fell for a 15th month in April, as the kingdom announced its “vision” for a post-oil future. The Saudi Arabian Monetary Agency said on Sunday net foreign assets declined 1.1% to $572 billion, the lowest level in four years. The slump in crude prices has forced the government to sell bonds and draw on its currency reserves, still among the world’s largest. Net foreign assets fell by $115 billion last year, when the kingdom ran a budget deficit of nearly $100 billion.

The fiscal crunch has pushed Saudi Arabia’s rulers to look beyond oil, consider new taxes, and plan an initial public offering of state giant Saudi Arabian Oil Co. Deputy Crown Prince Mohammed bin Salman sketched out the planned changes dubbed Saudi Vision 2030 on April 25. The strain on reserves has also fueled speculation that the kingdom will adjust its decades-old riyal peg to the dollar. New central bank Governor Ahmed Alkholifey told Al-Arabiya on Thursday that Saudi Arabia doesn’t plan to change its exchange rate policy.

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Firesale. Given what’s happened in commodities the past year, not surprising.

CEO of No. 1 Asian Commodity Trader Noble Group Resigns In Surprise Move (R.)

Embattled commodity trader Noble Group announced the surprise resignation of CEO Yusuf Alireza on Monday and said it planned to sell a U.S. unit to bolster its balance sheet as it seeks to regain investor confidence. Alireza, a former Goldman Sachs banker had steered Asia’s biggest commodity trader to sell assets, cut business lines and take big writedowns as it battled weak commodity markets and the fallout from an accounting dispute. “With this transformation process now largely complete, Mr. Alireza considered that the time was right for him to move on,” Noble said in a statement. It appointed senior executives William Randall and Jeff Frase as co-chief executive officers and said it would begin a sale process for Noble Americas Energy Solutions, “expected to generate both significant cash proceeds and profits to substantially enhance the balance sheet.”

Noble came under the spotlight in February last year when it was accused by Iceberg Research of overstating its assets by billions of dollars, claims which Noble rejected. Its shares have since plunged by about 75% and its debt costs have risen as the company has been hit hard by credit rating downgrades and weak investor confidence. “The first task is to stabilize the situation and convey stability and continuity,” said Nirgunan Tiruchelvam at Religare Capital Markets. “That would be the immediate task of somebody in this business which has volatility,” he said. Noble won the backing of banks earlier this month to refinance its debt. In February, Noble reported its first annual loss since 1998, battered by a $1.2 billion writedown for weak coal prices. The company’s shares slumped 65% last year, knocking it out of the benchmark Straits Times index.

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So a delay in the tax hike would trigger elections. And Abe counts on the Japanese to be blind enough to re-elect him.

Japan Must Delay Sales-Tax Rise to Recover, Abe Aide Says (BBG)

Japan needs to delay increasing its sales tax until late 2019 to sustain its economic recovery, an aide to Prime Minister Shinzo Abe said Sunday. There is a possibility that such a move could trigger a general election. The government will probably hold off raising the tax because it needs to give priority to economic growth, Abe aide Hakubun Shimomura said on Fuji television. Japan’s lower house of parliament would need to be dissolved for a general election if the planned increase is delayed again, Finance Minister Taro Aso was cited by Kyodo News as saying on Sunday at a meeting of the ruling party’s members. Abe has said he’ll make a decision before an upper-house election this summer on whether to go ahead with a planned increase in the levy next April to 10%, from 8% at present.

He had previously said the matter would be decided at an appropriate time and that it would be postponed only if there was a shock on the scale of a major earthquake or a corporate collapse like that of Lehman Brothers. An increase in the levy in 2014 pushed Japan into a recession. “We have no other options but to postpone the sales-tax increase,” Shimomura said. “If the increase means a decline in tax revenue for the government, that would threaten the achievement of the goals under Abenomics.” The prime minister told Finance Minister Taro Aso and LDP’s Secretary General Sadakazu Tanigaki on Saturday to delay the sales-tax increase to October 2019, NHK reported.

Aso advised the prime minister to be cautious about the idea, NHK said. “If the tax increase is delayed, a general election is needed to put the plan to the public,” Aso was quoted by Kyodo News as saying on Sunday. Kyodo reported later that Abe doesn’t plan to call snap elections on the same day as the Upper House vote. If Abe fails to go ahead with his plan of raising the tax in April, it means his economic policies have failed and he and his cabinet members should resign to take responsibility, Tetsuro Fukuyama, vice secretary general of the opposition Democratic Party of Japan, said in a program aired by public broadcaster NHK on Sunday.

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Unexpected advantages.

The Butterfly Effect: Cheap Oil Means Fewer Nose Jobs (BBG)

Oil slumps. Middle Eastern patients cancel treatments abroad. Thai hospital stocks slide. It’s the butterfly effect in action. Weak growth outlooks in the Gulf states are prompting greater competition from local clinics, stemming the flow of visitors to the world’s top medical tourism destination. That’s clouding the outlook for Thailand’s health-care shares, which surged more than 800% over the past seven years, as valuations start to look stretched amid the falling demand. Bangkok’s Bumrungrad Hospital, known as the grandaddy of international clinics, has slumped 16% since early March after patient volumes from the United Arab Emirates, its second-biggest source of overseas visitors, fell 20% in the first quarter.

Thailand attracted as many as 1.8 million international patients in 2015, many of whom stayed on afterward for a beach holiday. More than one in three foreigners treated at Bumrungrad are from the Gulf states and Kasikorn Securities says declining growth in the region and a rise in competition from clinics in the U.A.E., where the government is encouraging its citizens to stay home for medical care, are curbing demand. “In the short term, the economic slowdown in the the Middle East will weaken some investors’ confidence on earnings growth for domestic hospital operators,” said Jintana Mekintharanggur at Manulife Asset Management. “We are still bullish on the sector” in the long term as it will benefit from growth in countries like Myanmar and Vietnam that have less-developed health systems, she said.

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Hey, look, we are born as liars. And we will lie to ourselves about that, too.

The Source of Failure: We Optimize What We Measure (CH Smith)

The problems we face cannot be fixed with policy tweaks and minor reforms. Yet policy tweaks and minor reforms are all we can manage when the pie is shrinking and every vested interest is fighting to maintain their share of the pie. Our failure stems from a much deeper problem: we optimize what we measure. If we measure the wrong things, and focus on measuring process rather than outcome, we end up with precisely what we have now: a set of perverse incentives that encourage self-destructive behaviors and policies. The process of selecting which data is measured and recorded carries implicit assumptions with far-reaching consequences. If we measure “growth” in terms of GDP but not well-being, we lock in perverse incentives to boost ‘growth” even at the cost of what really matters, i.e. well-being.

If we reward management with stock options, management has a perverse incentive to borrow money for stock buy-backs that push the share price higher, even if doing so is detrimental to the long-term health of the company. Humans naturally optimize what is being measured and identified as important. If students’ grades are based on attendance, attendance will be high. If doctors are told cholesterol levels are critical and the threshold of increased risk is 200, they will strive to lower their patients’ cholesterol level below 200. If we accept that growth as measured by GDP is the measure of prosperity, politicians will pursue the goal of GDP expansion.

If rising consumption is the key component of GDP, we will be encouraged to go buy a new truck when the economy weakens, whether we need a new truck or not. If profits are identified as the key driver of managers’ bonuses, managers will endeavor to increase net profits by whatever means are available. The problem with choosing what to measure is that the selection can generate counterproductive or even destructive incentives. This is the result of humanity’s highly refined skill in assessing risk and return. All creatures have been selected over the eons to recognize the potential for a windfall that doesn’t require much work to reap.

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Can’t leave out the ones that are diabetic without knowing it. Oh, and: “..these obesity rates are calculated from self-reported heights and weights.”

30.4% Of Americans Were Obese In 2015 (Forbes)

If recent headlines are to be believed, we are rapidly approaching the future depicted in Wall-E, with a morbidly obese population that can get from place to place only with the help of a hover-scooter. “Americans are fatter than ever, CDC finds,” trumpets CNN. “This Many Americans Need To Go On A Diet ASAP, According To New CDC Report,” content farm Elite Daily smugly proclaims. But is it really that cut-and-dried? The report both articles refer to is succinctly titled “Early Release of Selected Estimates Based on Data from the National Health Interview Survey, 2015.” It was released on Tuesday, and it provides an early look at annual data from the titular survey on 15 different points, from health insurance and flu shots to smoking rates and, yes, obesity.

The publication says 30.4% of Americans were obese in 2015, with a 95% confidence interval (so somewhere between 29.62% and 31.27%). That’s compared to 19.4% in 1997. Obesity rates were higher among middle-aged people (ages 40 to 59), with the rate for that group hitting 34.6%. Ages 20 to 39, perhaps predictably, were the least obese, with 26.5% of that population having a BMI of 30 or more. Obesity was highest for black women (45%), followed by black men (35.1%), Latina women (32.6%), Latino men (32%), white men (30.2%) and white women (27.2%). The data in the release didn’t provide any information on other ethnic or racial groups, nor did it break obesity rates down by household income.

In concert with rising obesity rates, Americans are getting more diabetic. In 1997, 5.1% of U.S. adults had been diagnosed with diabetes. By 2015, that number had nearly doubled, to 9.5%. Although, again, the data here don’t break everything down to my satisfaction–there are no numbers for each specific type of diabetes, for instance–it’s safe to say that these correlations are the consequence of rising obesity, as 95% of people diagnosed with diabetes have type 2.

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Managed to monopolize the entire Brexit debate, but they can’t leave well enough alone…

Tory Turmoil Escalates With Open Call For Cameron To Quit (G.)

David Cameron’s hopes of being able to avoid terminal damage to Conservative party unity after the EU referendum campaign were dented on Sunday when two rebel MPs openly called for a new leader and a general election before Christmas. The attacks came from Andrew Bridgen and Nadine Dorries – both Brexiters, and longstanding, publicity-hungry opponents of the prime minister – and their claim that even winning the EU referendum won’t stop Cameron facing a leadership challenge in the summer was dismissed by fellow Tories. But their comments coincided with the ministers in charge of the leave campaign launching some of their strongest personal attacks yet on Cameron, prompting Labour’s Alan Johnson to say that the Tory infighting was getting “very ugly indeed”.

Bridgen told the BBC’s 5 Live that Cameron had been making “outrageous” claims in his bid to persuade voters to back remain and that, as a consequence, he had effectively lost his parliamentary majority. “The party is fairly fractured, straight down the middle and I don’t know which character could possibly pull it back together going forward for an effective government. I honestly think we probably need to go for a general election before Christmas and get a new mandate from the people,” he said. Bridgen said at least 50 Tory MPs – the number needed to call a confidence vote – felt the same way about Cameron and that a vote on the prime minister’s future was “probably highly likely” after the referendum.

Dorries told ITV’s Peston on Sunday she had already submitted her letter to the chairman of the Tory backbench 1922 committee expressing no confidence in the prime minister. “[Cameron] has lied profoundly, and I think that is actually really at the heart of why Conservative MPs have been so angered. To say that Turkey is not going to join the European Union as far as 30 years is a lie.”

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Australia will keep debating this while the last bits die off.

Half Of Central, Northern Great Barrier Reef Corals Are Dead (SMH)

More than one-third of the coral reefs of the central and northern regions of the Great Barrier Reef have died in the huge bleaching event earlier this year, Queensland researchers said. Corals to the north of Cairns – covering about two-thirds of the Great Barrier Reef – were found to have an average mortality rate of 35%, rising to more than half in areas around Cooktown. The study, of 84 reefs along the reef, found corals south of Cairns had escaped the worst of the bleaching and were now largely recovering any colour that had been lost. Professor Terry Hughes, director of the ARC Centre of Excellence for Coral Reef Studies at James Cook University, said he was “gobsmacked” by the scale of the coral bleaching which far exceeded the two previous events in 1998 and 2002.

“It is fair to say we were all caught by surprise,” Professor Hughes said. “It’s a huge wake up call because we all thought that coral bleaching was something that happened in the Pacific or the Caribbean which are closer to the epicentre of El Nino events.” The El Nino of 2015-16 was among the three strongest on record but the starting point was about 0.5 degrees warmer than the previous monster of 1997-98 as rising greenhouse gas emissions lifted background temperatures. Reefs in many regions, such as Fiji and the Maldives, have also been hit hard. Bleaching occurs when abnormal conditions, such as warm seas, cause corals to expel tiny photosynthetic algae, called zooxanthellae. Corals turn white without these algae and may die if the zooxanthellae do not recolonise them.

The northern end of the Great Barrier Reef was home to many 50- to 100-year-old corals that had died and may struggle to rebuild before future El Ninos push tolerance beyond thresholds. “How likely is it that they will fully recover before we get a fourth or a fifth bleaching event?” Professor Hughes said. The health of the reef has been a contentious political issue, with Environment Minister Greg Hunt pledging more funds in the May budget to improve water quality – one aspect affecting coral health. But Mr Hunt has also had to explain why his department instructed the UN to cut out a section on Australia from a report that dealt with the threat of climate change to World Heritage sites including the Great Barrier Reef and Kakadu.

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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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