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Volkswagen and China: A Perfect Fit

Nov 062015
 
 November 6, 2015  Posted by at 9:30 am Finance Tagged with: , , , , , , ,  1 Response »


Jack Delano Long stairway in mill district of Pittsburgh, Pennsylvania 1940

If Angela Merkel wants to get rid of one of her major headaches, we suggest she should tell Volkswagen to move its operations from Wolfsburg to China. It may seem a strange thing to do at first blush, with 750,000 German jobs on the line, but bear with us here, because this could well be the only way to preserve at least some value for VW’s stock- and bondholders.

And several layers of German government, as well as German pension funds, are major investors. In a company that has now lost 40%, over €32 billion, of its market cap, and, according to an estimate by UBS, faces €35 billion or more in costs over the various emissions scandals. Count your losses, German pensioners! And the way things are going, and the way the scandal is widening, this may still be a conservative number.

Here’s the ‘thing’: after the most recent admissions coming from the carmaker and its affiliates it may well have become impossible for -international- lawmakers and lawyers alike to not go after Volkswagen with all they’ve got. First the EPA found a few days ago that defeat devices were installed in larger diesel engines too, those used in Porsche and Audi cars, instead of just the smaller ones whose testing by the University of West Virginia started this whole Teutonic drama.

Now we find that for VW’s petrol engines, too, various emissions have gone severely underreported. Porsche’s official reaction to the new diesel findings was that the company was ‘surprised’. Maybe that has something to do with the fact that the new Volkswagen CEO, Mueller, ran Porsche before being promoted to his present gig?! ‘Surprised’?

Other than that ‘surprise’ comment, both Audi and Porsche have reportedly flatly denied the very existence of the defeat devices in their products, even as the EPA research looks solid. Perhaps they should have been advised by their vast legal staffs that flat denial at this point in the game is a dangerous move.

VW has had ample time to come clean, with the EPA, with German regulators, as well as with a wide range of other regulators across the globe. But it’s abundantly clear they haven’t come clean. Moreover, thus far they’ve mostly been allowed to do their own in-house testing. And yes, that is as crazy as it sounds.

If and when the company is found to not have spoken the truth and nothing but the truth after the initial EPA findings (which, remember, followed a multi-year period of blatant lies, denial and deceit), replacing a CEO or pointing fingers at employees will no longer suffice. Heads will have to roll, and they will have to roll straight into prison cells.

At the same time, the company will be ordered, by regulators, lawmakers and judges, to pay fines so hefty its very existence will be in danger. VW lost 40% of its market cap and stands to lose 40% more in fines. An attractive investment? Only until the next lie gets exposed, one would presume.

This is no longer about the cost of repairs. And it’s no longer about greater fools still buying VW cars either. You can’t keep on lying to disguise your earlier lies and expect to get away with it just because you’re a large corporation.

That may not seem obvious or intuitive in today’s environment, but because attacks on VW will come from a multitude of sources -a dozen countries and ten dozen lawyers from all over the world-, regulators won’t want to be found going easy on VW as -some of- their peers go for the jugular. At some point, it gets to be about credibility.

Credibility of the EPA, and of all the other regulators. South Korea and Japan sales are plummeting, and India of all places is now getting on the bandwagon. This is not just a Merkel headache, it’ll be a migraine attack soon. Move the whole thing to China, Angela! Cut your losses…

Why China? We first thought of the VW-China connection because of this Jen Sorensen comic, but thought right away that it would be even much more applicable to China than it is (and it very much is, of course) to the US. That is, the idea of a political system with a built-in defeat device. China’s defeat device is its ‘official numbers’. The government says it wants X% growth, and that’s what comes out a year later.

What defeat device? Well, for one thing, Chinese President Xi Jinping looks to be starting a new personality culture in the vein of Mao, and presumably to that end last week introduced a new 5-year plan. But let’s be frank, these are things that don’t fit in a 2015 economy that relies on trade with the entire world.

The 2016-20 plan, which spans all corners of nation-building, represents Xi’s best chance to enact his reforms and establish a legacy before party retirement rules compel him to clear the way for a successor in 2022. “It bears Xi Jinping’s fingerprints, as does everything else in the Chinese government now. He is the top man, not first among equals, just first. One-man rule is back in China,” said Stein Ringen, a professor of sociology and social policy at the University of Oxford. “This is Xi saying, ’I am in charge and I will continue to be in charge.’”

That Xi goes down this path anyway shows us that he still seeks total control in the Mao or Deng Xiao Ping tradition, even though that is not remotely possible in an even half-open economic system. In China’s economy today, GDP growth can neither be planned nor fabricated. But the numbers still can! Which is where the defeat device comes in.

Xi Jinping cannot resist the temptations of a personality culture and at the same time demands a minimum 6.5% GDP growth over the next five years. A volatile combination. Question then is: what happens if and when growth is much lower than that? Who is Xi going to blame? And who are the Chinese people going to blame? What are the odds that a sub-6.5% growth rate will lead to mayhem?

But that’s just one side of the tale. There are many western observers, quite a few of them quite knowledgeable, who put Chinese GDP growth already at much less than 6.5 %. Lombard Street, Chris Balding, the Li Keqiang Index, Capital Economics, Danny Gabay, you just Google them, there are far too many critical views to ignore. And they on average put REAL China GDP growth at less than half XI’s 6.5% number.

And so again: what will happen when Mao-wannabe Xi can no longer fudge the numbers enough to make his 1.3 billion people believe? What will happen when the PBoC cannot buy sufficient assets with sufficient printed mullah to keep markets appear steady that haven’t been steady in ages?

The 5-year plan calls for GDP to double from 2010-2010, and for per capita income to do the same. Imagine if the US or EU set such goals. There’s no prediction, whether from the OECD or IMF or one of various central banks that comes even close to being correct after just one year, let alone five.

Xi Jinping’s 5-year plan should be read in the same way that one reads Alice in Wonderland. It is wishful thinking devoid of any sense of reality, and it’s only the inbuilt ‘official number’ defeat device that can provide it with an air of importance.

Apparently, China’s emissions numbers follow the same path, and the link to Volkswagen is again awfully easy to make in that respect too:

China has been consuming as much as 17% more coal each year than reported, according to the new government figures. By some initial estimates, that could translate to almost a billion more tons of carbon dioxide released into the atmosphere annually in recent years, more than all of Germany emits from fossil fuels.

The adjusted data, which appeared recently in an energy statistics yearbook published without fanfare by China’s statistical agency, show that coal consumption has been underestimated since 2000, and particularly in recent years. The revisions were based on a census of the economy in 2013 that exposed gaps in data collection, especially from small companies and factories.

Illustrating the scale of the revision, the new figures add about 600 million tons to China’s coal consumption in 2012 — an amount equivalent to more than 70% of the total coal used annually by the United States.

In other words, the deceit is built-in, it’s a feature not a flaw. That goes for both China’s and Volkswagen’s emissions models, and it goes for Xi Jinping’s 5-year plan. One common element seems to be desperation, the knowledge that certain aspired conditions cannot be met, and the subsequent decision to then fudge and cheat. That decision is made necessary by one thing only: incompetence.

We don’t want to harp this horse to death, the overall idea should be clear by now. But while writing, we do get new ideas popping up. Like those 750,000 Germans who depend on Volkswagen, directly or indirectly, for their jobs, can all move to China, and settle in some of the abundant ghost cities.

Their homes in Wolfsburg et al can then be made available to the 1 million or so refugees that Germany expects to settle in this year. Win win win, everybody happy.

But we remain anxious about what will happen if and when it becomes clear that the Chinese doubling of GDP and incomes is just a weird fantasy of a man who feels omnipotent enough to think he can control global financial markets. China has malinvested to such an extent that major busts are inevitable.

The British steel industry knows exactly what we mean. And predictions are that a year from now, all US aluminum smelters will be closed. China exports deflation. And that is being felt in its domestic economy too. So it looks like either Xi will need to crack down on his people, or they will crack down on him. Neither is an enticing prospect.

But he can’t tell the truth either, because it’s too far removed from the fairy tales he’s been telling. Just like Volkswagen.

Debt Rattle September 23 2015

Sep 232015
 
 September 23, 2015  Posted by at 8:54 am Finance Tagged with: , , , , , , , , , ,  6 Responses »


Arthur Rothstein President Roosevelt tours drought area near Bismarck, ND 1936

• Signs Point To Deepening China Distress (FT)
• Shadow Finance Expansion by Chinese Banks Deepens Credit Mystery (Bloomberg)
• China Flash PMI Falls To Lowest Since May 2009 (CNBC)
• China’s Workers Stumble as Factories Stall (WSJ)
• Xi Jinping Defends China Stock Market Interventions On First US Visit (Guardian)
• China Has A Message Markets Don’t Understand (CNBC)
• VW Scandal Caused Nearly 1 Million Tonnes Of Extra Pollution (Guardian)
• California Tests To Include Larger Diesel Engines From Audi, Porsche (Reuters)
• VW Emissions Fallout Spreads To Asia (FT)
• VW Emissions Investigations To Widen to Entire Auto Industry (WSJ)
• VW Emissions Cheating Affects 11 Million Cars Worldwide (WaPo)
• Europe Stumbles Towards A Migrant Plan (BBC)
• EU’s East-West Rift Exposed In Refugee-Sharing Plan (Reuters)
• Hungary Mobilizes Troops, Prisoners, Jobless To Fence Out Refugees (Reuters)
• Hollande Wrongfooted on Refugee Surge, Fearing Le Pen’s Rise (Bloomberg)
• The Fed Just Made A Gigantic Mess (CNBC)
• Economic Policy Often Seems To Have Little To Do With Economists. Why? (Ind.)
• English Farmland Prices Double In Five Years (Guardian)
• Alaska Fossil Find Points To New ‘Lost World Of Dinosaurs’ (Guardian)

“Suddenly, the debate in China has shifted from a perception of too much money sloshing round and too many reserves earning meagre returns, to a concern about the adequacy of reserves given the extent of debt — much of it hidden.”

• Signs Point To Deepening China Distress

China’s foreign exchange reserves fell alarmingly in August, anywhere from $94bn to as much as $150bn according to various calculations. That was just another in a series of dramatic data points that are leading to an increasing sense both within the Middle Kingdom and without that all is not well. For a long time now many hedge funds have been short Macau, once the main beneficiary of both the Chinese propensity to gamble and the rise of China as a market for luxury goods. Then the anti-corruption campaign put a big chill on the junkets to the former Portuguese enclave, as it did on sales of everything from Rolex watches to shark fin soup and abalone in top restaurants. But now there is another strand to the story.

Macau has long been one of the more porous parts of the wall meant to keep capital flows in and out of China under strict control. For example, those who wanted to get significant amounts of money out of China would purchase a dozen watches, using their renminbi credit cards, only to return the time pieces instantly and receive cash refunds, with a discount for the jeweller’s trouble. The currency would then be converted and go straight into bank accounts and investments abroad. Today, the thesis of hedge fund managers putting on the Macau trade is that regulators will tighten up on such practices, causing further damage to Macau’s wounded economy. Suddenly, the debate in China has shifted from a perception of too much money sloshing round and too many reserves earning meagre returns, to a concern about the adequacy of reserves given the extent of debt — much of it hidden.

After all, the downdraft in the stock market was all about the use of borrowed money, invisible to regulators and almost everyone else. Meanwhile, the capital flows out of China continue. It is difficult to calculate what is prudent diversification and what is capital flight. At the same time, more alarmingly, the signs of distress in the real economy are deepening, with ripple effects far beyond the mainland. Greek shipyards, for example, report that the yards in China are desperately discounting the containers they construct. The Chinese shipbuilders have to discount to compensate for the fact they are competing against builders whose currencies have fallen dramatically against the renminbi.

Read more …

Assessing China without including the shadows is of no use at all.

• Shadow Finance Expansion by Chinese Banks Deepens Credit Mystery (Bloomberg)

China’s riskier banks are investing more customer funds in financing that is kept off their loan books, making it harder for rating companies to gauge their asset quality. There has been a surge in a balance-sheet item known as receivables, which often includes shadow funding such as trusts and wealth products, said Moody’s Investors Service. Fitch Ratings said it is hard to analyze this escalation in activity. Listed banks excluding the Big Four saw short-term investments and other assets – which include receivables – jump 25% in the first half, compared with total asset growth of 12%, data compiled by Bloomberg show. Slower growth in the world’s second-largest economy coupled with “still significant” credit expansion prompted Standard & Poor’s to cut its view of the banking industry’s economic risk to negative from stable this week.

Shadow-finance assets, estimated at 41 trillion yuan ($6.4 trillion) by Moody’s at the end of 2014, have become more attractive as five interest-rate cuts by the central bank since November curbed profits from lending. “Our concern with some of these investment positions is banks are using them as a way to bypass lending restrictions,” said Grace Wu at Fitch in Hong Kong. “Unlike bank loans, they don’t get reported into loan provisions, so it’s more difficult for us to ascertain the asset quality.” The opacity of Chinese banks’ credit exposure helps explain why they are priced as if investors are expecting a nonperforming loan ratio of 10 to 12% next year, which would mark a “sizeable credit crisis” in other countries, according to Wei Hou at Sanford C. Bernstein.

The reported ratio is 1.5%, according to the China Banking Regulatory Commission. The nation’s shadow-banking industry emerged as a way for creditors to circumvent lending restrictions and for savers to attain yields higher than the legally capped deposit rate. It includes trusts, asset-management plans and wealth-management products, which package loans into products for buyers.

Read more …

As long as Xi is in the US, the homefront will keep things smooth and quiet. But this number points to contraction, even as Xi just reiterated growth is at 7%.

• China Flash PMI Falls To Lowest Since May 2009 (CNBC)

The preliminary Caixin China manufacturing purchasing managers’ index (PMI) fell to a six-and-a-half-year low of 47.0 in September, below the 47.5 forecast in a Reuters poll. This compares with a final reading of 47.3 in August, the lowest since March 2009. A print above 50 indicates an expansion in activity while one below points to a contraction. The closely-watched gauge of nationwide manufacturing activity focuses on smaller and medium-sized companies, filling a niche that isn’t covered by the official data. The decline in the flash PMI was mainly led by the new orders and new export orders sub-indexes, suggesting weak domestic and external demand. The new orders sub-index fell 0.6 percentage points to 46.0 in September, while the new export orders sub-index slipped 0.8percentage points to 45.8.

Wednesday’s data weighed on investor sentiment in Asia, with stock indices in Sydney and Seoul widening losses to more than 1% each in the morning trading session. China stocks, however, trimmed losses to 0.9%, from an over 1% decline at the open. “The principle reason for the weakening of manufacturing is tied to previous changes in factors related to external demand and prices,” said He Fan at Caixin Insight Group. “Fiscal expenditures surged in August, pointing to stronger government efforts on the fiscal policy front. Patience may be needed for policies designed to promote stabilization to demonstrate their effectiveness,” he added. A recent run of disappointing data has raised concerns around the health of China’s economy, leading several banks and international institutions to pare growth forecasts for the country.

Read more …

“..roughly 55% of China’s 1.37 billion people now live in cities, compared with just under 18% in 1978…”

• China’s Workers Stumble as Factories Stall (WSJ)

For decades, an army of migrant workers drove China’s boom times, flocking to its cities to sew T-shirts, assemble iPhones, or build apartment blocks and Olympic stadiums. The arrangement helped millions of poor, rural Chinese join a new consumer class, though many also paid a heavy price. Now, many migrant workers struggle to find their footing in a downshifting economy. As factories run out of money and construction projects turn idle across China, there has been a rise in the last thing Beijing wants to see: unrest. In Xiguozhuang, a village among cornfields some 155 miles south of Beijing, it had been rare to see working-age men for much of the year. This year, however, many of the men are at home, sidelined by a fading property boom.

“Times are tough now,” said Wang Hongxing, a 39-year-old father of three who has worked at building sites across China’s northeast since his teens, but who has spent the past two months tending his farmland plot. “There are too many workers and wages are dropping.” But for other migrants, especially those of a younger generation who took jobs in factories along China’s coast, a return to farming isn’t an option. Nor do they necessarily want to join the service sector China sees as a cornerstone in its shift to a new economic model. Wang Chao dropped out of school when he was 15 and left his home in Anhui province. After a series of jobs up and down China’s east coast, he felt he had struck gold with a job in a textile factory near his hometown.

The factory closed in July. Mr. Wang, now 19, and other workers gathered recently outside the factory premises to demand back wages. He says he is owed two months’ pay, or about 2,000 yuan, or $320. The owner of the factory, which produces cheap trousers, told workers he is in deep debt and can’t afford to pay them. He couldn’t be reached to comment. Mr. Wang hopes he can find another factory job. In Shanghai, he worked in a restaurant but doesn’t want to do that again. “Factory work is so much more comfortable in comparison, and better paid,” he said. As a result of a rural-to-urban flow that many scholars say is likely the largest in history, roughly 55% of China’s 1.37 billion people now live in cities, compared with just under 18% in 1978.

The migrant workforce now numbers some 274 million but the pace of its expansion has slowed, and many economists believe China now faces a shortage of unskilled labor in urban areas. A mismatch of workers’ skills and aspirations with actual labor demand has exacerbated the problem. “There’s a broad structural imbalance in China’s labor market—a shortage of low-end labor and surfeit of high-end workers,” said Peng Xizhe, professor of population and development at Fudan University in Shanghai. “In China’s job market today, we see university graduates struggling to find work, while employers are finding it hard to fill traditional blue-collar positions.”

Read more …

“Xi peppered his speech with US cultural references from Sleepless in Seattle and House of Cards to Henry David Thoreau, Walt Whitman, Ernest Hemingway..”

• Xi Jinping Defends China Stock Market Interventions On First US Visit (Guardian)

China’s president, Xi Jinping, has sought to reassure global concern about the world’s second-largest economy, defending his government’s actions in the stock market and saying growth will be maintained. “China’s economy will stay on a steady course with fairly fast growth. It’s still operating in a proper range with a growth rate of 7% … Our economy is under pressure but that is part of the path on the way toward growth,” the Chinese president said in a speech in Seattle on Tuesday, the first day of his state visit to the US. The president defended his government’s intervention into the country’s stock market saying the “recent abnormal ups and downs” in the market had now reached “a phase of self-recovery”.

Xi also reiterated there was no basis for continuing depreciation of the renminbi, saying Beijing was opposed to currency wars and would not devalue yuan to boost exports. World markets experienced more than a month of volatility after China devalued its currency, fuelling concerns about the state of the world’s No 2 economy. Intervention from authorities into the country’s bourses also added to worries Beijing had lost control over the economy. But just minutes after the speech, fresh data showed renewed signs of weakness in the Chinese economy with the Caixin China manufacturing flash PMI coming in at 47, the lowest since March 2009. [..]

Xi peppered his speech with US cultural references from Sleepless in Seattle and House of Cards to Henry David Thoreau, Walt Whitman, Ernest Hemingway – saying he once ordered a Mojito at El Floridita in Havana to better understand Hemingway and Cuba. Dismissing speculation that his sweeping anti-corruption campaign was about factional infighting, Xi said “We have punished tigers and flies. It has nothing to do with power struggles. In this case there is no House of Cards.”

Read more …

Or they understand it all too well.

• China Has A Message Markets Don’t Understand (CNBC)

China may be compounding its own problems by the way its leaders talk about them. With the country’s growth a concern for global markets, investors are trying to fathom the depth of China’s economic issues and understand what authorities are doing. Analysts say it is difficult to discern what’s really going on there and that the economy has always been difficult to measure. Ahead of his U.S. visit that kicked off Tuesday, Chinese President Xi Jinping said in an interview with The Wall Street Journal that recent intervention in capital markets was necessary or normal and that China is still on track to transform its economy. “I think they are mostly nothing new and simply a repeat of what other officials have said,” Ilya Feygin, managing director at WallachBeth Capital, said of Xi’s comments.

Sticking to policy lines casts doubt for many on whether Chinese leaders have a grip on maneuvering the country’s economic transition in a way that doesn’t shock global markets more than it already has. “I think it’s a combination of missteps that add up to a lot of worries, capacity of the Chinese government to manage its economy through a very challenging environment and not making it worse,” said Scott Kennedy of the Center for Strategic and International Studies. “It begins with their intervention to push up their stock market last year.” Rapid-fire policy changes in the last few months have befuddled outsiders on Chinese leaders’ intentions, which raise real concern on whether the world’s second-largest economy can make a timely transition from a manufacturing hub to a consumer-oriented system.

“The point is to recognize there’s a structural transition going on,” said Arthur Kroeber, head of research at Gavekal Dragonomics. “And the problem we have is the data we have on the bad part of the economy is actually pretty developed. The data on services (is) much better but fuzzier.” Most of the economic reports still focus on manufacturing-related aspects of the economy, such as electricity use and the producer price index. Data such as the Caixin nonmanufacturing PMI provide some light on services, which continued to hold above the 50 expansion/contraction line in August. Manufacturing PMI fell below that line.

Growth in the services sector has outpaced that of the manufacturing sector in the last year and a half, according to the latest National Bureau of Statistics of China data compiled by Wind information. Amid the transition, questions also surround the accuracy of China’s reports on headline GDP growth. The official figure is 7%, the slowest in more than two decades In a report Tuesday, the Asian Development Bank lowered its forecast for Chinese growth in 2015 to 6.8% from 7.2% previously. Other analyst estimates range from 2 to 4 percentage points lower.

Read more …

“..roughly the same as the UK’s combined emissions for all power stations, vehicles, industry and agriculture..”

• VW Scandal Caused Nearly 1 Million Tonnes Of Extra Pollution (Guardian)

Volkswagen’s rigging of emissions tests for 11m cars means they may be responsible for nearly 1m tonnes of air pollution every year, roughly the same as the UK’s combined emissions for all power stations, vehicles, industry and agriculture, a Guardian analysis suggests. The potential scale of the scandal puts further pressure on Volkswagen’s board and its chief executive, Martin Winterkorn. The company’s executive committee plans to meet on Wednesday to discuss the affair and to agree the agenda of a full board meeting scheduled for Friday, amid reports that Winterkorn could be replaced. The carmaker has recalled 482,000 VW and Audi brand cars in the US after the Environmental Protection Agency (EPA) found models with Type EA 189 engines had been fitted with a device designed to reduce emissions of nitrous oxides (NOx) under testing conditions.

A Guardian analysis found those US vehicles would have spewed between 10,392 and 41,571 tonnes of toxic gas into the air each year, if they had covered the average annual US mileage. If they had complied with EPA standards, they would have emitted just 1,039 tonnes of NOx each year in total. The company admitted the device may have been fitted to 11m of its vehicles worldwide. If that proves correct, VW’s defective vehicles could be responsible for between 237,161 and 948,691 tonnes of NOx emissions each year, 10 to 40 times the pollution standard for new models in the US. Western Europe’s biggest power station, Drax in the UK, emits 39,000 tonnes of NOx each year. [..] For years, UK air pollution measurements have failed to show improvements in air quality, even as standards have tightened.

“Since 2003 scientists have been saying things are not right. It’s not just the VW story, this is part of something much bigger,” said Dr Gary Fuller of King’s College. “It has a serious public health impact.” Last week, a report from NGO Transport & Environment found that Europe’s testing regime was allowing nine out of every 10 new diesel vehicles to breach EU limits. Testing regimes in the EU are known to fail to pick up “real world” emissions because cars are not driven in the same way in the laboratory as on the road. Some studies suggest the discrepancy may be up to seven times the legal limit. Williams said being able to mask their NOx emissions would also enable carmakers to pass carbon emissions tests more easily as there was a trade-off between NOx and CO2 in diesel engines.

Read more …

Bets are open on this one.

• California Tests To Include Larger Diesel Engines From Audi, Porsche (Reuters)

The California Air Resources Board will broaden its testing of Volkswagen cars with diesel engines to include those with 3.0-liter V6 engines sold by two subsidiaries, a spokesman for the state regulator said on Tuesday. The latest models to be examined are the Porsche Cayenne and the Audi A6, Stanley Young, communications director for the Air Resources Board, told Reuters. Volkswagen said on Tuesday that engine software connected with a scandal over falsified U.S. vehicle emission tests could affect 11 million of its cars worldwide as investigations of its diesel models multiplied. The California Air Resources Board’s testing uncovered software in several Volkswagen models that allowed the company to cheat state and federal emissions requirements by switching performance levels between testing and real-world conditions.

“That investigation looked at two-liter four-cylinder engines,” said Young. “Now we’re going to start looking at six-cylinder, three-liter diesel engines.” Young said VW engineers acknowledged the use of a so-called defeat device – in fact, a software algorithm – to circumvent state and federal emissions standards during a Sept. 3 meeting in the board’s El Monte, California testing headquarters, attended by senior engineering executives of the regulator and the car company. It was the 10th meeting between the two sides, called by CARB to resolve the discrepancy between pollution levels measured on the road and those obtained under controlled testing conditions. “They literally ran out of excuses,” Young said, describing the meeting in which the car manufacturer “admitted there was a defeat device.”

Read more …

It’ll have to be worldwide. Wouldn’t it be funny if test results vary greatly?

• VW Emissions Fallout Spreads To Asia (FT)

South Korea’s environment ministry said it would investigate the emissions compliance of Volkswagen’s diesel cars, as the fallout for the German carmaker after its admission that it rigged US emissions tests spread to Asia. The announcement on Tuesday came a day after Germany called for a probe into the matter, confirming fears Volkswagen’s trouble was unlikely to be confined to the US and that breaches could have occurred in other regions. The US Environmental Protection Agency on Friday ordered the world’s second-biggest carmaker to recall nearly 500,000 cars in the US after it admitted that it had fitted “defeat devices” to bypass environmental standards.

In the first public appearance by a senior executive since the scandal emerged, Michael Horn, VW’s US chief executive, said at an event in New York on Monday that the carmaker had “screwed up”, vowing to fix the vehicles involved and ensure no repetition. Seoul’s environment ministry said it would conduct emissions tests on 4,000-5,000 of VW’s Jetta and Golf models and the Audi A3 sedan that were imported into South Korea since 2014. “We will review if the three car models sold here show the same problems as those in the US, although the carmaker says its cars here have no such problems,” said Park Pan-kyu, the ministry’s deputy director. “We plan to complete the investigation within two months and will come up with punitive measures if any problems are found.

“If South Korean authorities find problems in VW diesel cars, the probe could be expanded to all German diesel cars,” he said. If the cars are found to have breached air pollution standards, the ministry could issue a recall order for vehicles already sold in the country, or order the German carmaker to stop domestic sales of problematic models. It could also impose a maximum Won1bn ($850,000) fine on each model. The ministry said any punitive measures would be levied in consultation with the German government, in keeping with the Korea-EU trade agreement.Volkswagen is one of the best-selling foreign brands in South Korea. VW and Audi accounted for nearly 30% of all foreign cars sold in the country in the first eight months of this year, and more than 90% of the roughly 25,000 vehicles VW sold were diesel models.

Shares in South Korean carmakers Hyundai Motor and affiliate Kia Motors rose more than 3% on Tuesday, on the view that Asian competitors could benefit at VW’s expense. “Volkswagen’s brand value is expected be hit by this issue as its strong diesel engine technology has been the backbone of its brand recognition,” said Yim Eun-young, analyst at Samsung Securities. “This could lead to gains for Hyundai and Kia, which are competing with Volkswagen in the sedan segment.”

Read more …

As I said yesterday, if VW couldn’t even come close to required emissions, what are the odds others could?

• VW Emissions Investigations To Widen to Entire Auto Industry (WSJ)

Investigations into Volkswagen’s alleged manipulation of U.S. emissions tests should widen to include the entire auto industry, German and French officials said Tuesday, as regulators begin to ponder whether such deception is widespread. Calls for a broader probe came as Italy opened an investigation into the issue and a spokesman for the European Union said its regulators would soon meet with national authorities to discuss how to address the Volkswagen crisis. Concerns that the scandal could lead to broader damage for the industry hit the shares of car companies across Europe on Tuesday and those losses accelerated after Volkswagen warned that 11 million vehicles could be affected.

Shares in Volkswagen dived as much as 23% while those of Daimler AG dropped 5.5% and BMW AG slumped 5.4%. In France, Renault SA dropped 6.3% and PSA Peugeot Citroën was down 8.6%. The state of Lower Saxony, a major Volkswagen shareholder with 20% of the car maker’s voting stock, said the emissions allegations raised doubts about tailpipe data published by all car makers. The French government also called for a broader probe, suggesting a European-wide examination of the auto industry. “We need to do it at the European level,” French Finance Minister Michel Sapin said Tuesday.

In Germany, Olaf Lies, Lower Saxony’s economy minister and a member of the Volkswagen’s supervisory board, called for a wider probe and said investigations into the scandal would have consequences for any executives found guilty of deliberate manipulation. “I am convince that everyone is going to become intensely interested in knowing whether the emissions values that have been measured are the real emissions levels,” he said. “This question will not only affect Volkswagen, but the entire public debate and will certainly play a role at other companies.”

Read more …

“The only way to change auto company behavior is to put the responsible executives in jail..”

• VW Emissions Cheating Affects 11 Million Cars Worldwide (WaPo)

The deception perpetrated by Volkswagen in the United States reaches around the globe, with about 11 million cars worldwide equipped with software designed to cheat emissions tests, the company said Tuesday. The automaker said it will set aside $7.3 billion to cover fixes and other efforts to win back the trust of our customers. That amount is likely to fall many times short of the actual costs, including car repairs, lawsuits and government penalties around the world. Exactly what alterations are necessary on all of those cars is unknown, and independent engineers said it could be extremely difficult to repair the emissions systems without harming engine efficiency and performance. None could offer what they deemed a reliable estimate of the cost of a potential repair.

“In my German words, we have totally screwed up”, Volkswagen s U.S. chief, Michael Horn, said at an event in Brooklyn late Monday night. The broad scale of the deception suggests that knowledge of the emissions cheating was widespread, and Justice Department investigators are focusing on the actions of executives, according to two people familiar with the inquiry. German news outlets reported Tuesday that the firing of chief executive Martin Winterkorn is imminent, citing unidentified members of the company s board. Also Tuesday, new details of the cat-and-mouse interactions between suspicious regulators and the German car giant showed how far the company was willing to go to assure the government that, contrary to the best evidence, nothing was amiss in its diesel cars.

Last year, Volkswagen informed regulators that it was initiating a 500,000-car recall in the US that would fix the problem. The recall was either a technical failure or, as some U.S. officials said, a ruse. Whether those involved in the emissions cheating software will face more severe penalties is unknown, but anger among customers, who are stuck with cars that violate pollution standards, and dealers, who are left with unsold inventory, has become increasingly evident. Their appeals have been heard in Washington. “It is an outrage that VW would take advantage of its consumers by purposely deceiving them on their mileage on diesel vehicles …There ought to be some prosecutions, and corporate executives that knew this and have done it ought to be going to jail”, Sen. Bill Nelson (D-Fla.) said in a speech on the Senate floor Tuesday, citing the repeated failures of automakers.

“And I lay this not only on the corporate culture, I lay it at the feet of the U.S. regulatory agencies who ought to be doing their job, ought to be doing it in a forceful way”. Noting that Volkswagen had been accused of similar tactics in the United States in the early 1970s, when the company paid fines of $120,000, Clarence Ditlow, director of the Center for Auto Safety, argued that financial penalties are not enough to keep the company honest. “The only way to change auto company behavior is to put the responsible executives in jail,” he said.

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In firm denial.

• Europe Stumbles Towards A Migrant Plan (BBC)

There was a sense of grim determination about the crowd of cold and tired refugees and other migrants we met crossing the border one damp and windy night this week from Hungary into Austria. No euphoria. No desperation, such as we’ve seen at so many European borders over the last months, but more a sense of quiet purpose. The young men and families we spoke to were passing through what has become a relatively efficient people’s pipeline established on the ground from southern, into central and onto northern Europe. EU leaders may be in disarray over what to do next but in the meantime – for now – chaos on the ground has given way to an orderly means of transporting migrants from country to country.

One 19-year-old told us it had taken him five days to get from Turkey to Austria, passing through Greece, Macedonia, Serbia, Croatia and Hungary along the way. He still hoped to reach Germany, to join the Syrian community there, which is growing larger by the day. But this is no long-term solution to Europe’s migration conundrum. Europe’s prime ministers and heads of state will discuss that at their emergency meeting in Brussels on Wednesday. A quick or easy fix will be impossible to find and the meeting is likely to be fiery but leaders know they have to stumble towards some sort of plan or risk the unravelling of the EU itself. Look at the anger of Slovakia, Hungary, Romania and the Czech Republic forced on Tuesday at a meeting of European interior ministers to accept their share of 120,000 asylum seekers who will be re-located across the continent. [..]

EU leaders will discuss how to tighten the control of European borders. They’ll also debate a workable EU asylum policy, the more efficient deportation of economic migrants, defining who is a refugee, an asylum seeker or economic migrant, the better integration of refugees and their families already here and sending significant aid abroad to improve living conditions closer to people’s home countries so they shouldn’t be tempted to come to Europe in the first place. Decisions and debates tomorrow and in the months to come will affect all of our lives. Endre Sik is the director of the Centre for Refugee and Migration Studies in Budapest. He told me in 10 years’ time, we will look back and see this as a moment that changed Europe – its general landscape, its politics and its economics. There’s no turning back now from mass migration Europe, he says. This is an unprecedented social phenomenon.

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“We would have preferred a consensus but we could not reach that, and it is not for want of trying..”

• EU’s East-West Rift Exposed In Refugee-Sharing Plan (Reuters)

The European Union approved a plan on Tuesday to share out 120,000 refugees across its 28 states, overriding vehement opposition from four ex-communist eastern nations. The European Commission, the EU executive, had proposed the scheme with the backing of Germany and other big powers in order to tackle the continent’s worst refugee crisis since World War Two. But the rift it has caused between older and newer members was glaringly evident as the interior ministers of the Czech Republic, Slovakia, Romania and Hungary voted against the plan at a meeting in Brussels, with Finland abstaining. “We would have preferred a consensus but we could not reach that, and it is not for want of trying,” Luxembourg Interior Minister Jean Asselborn, whose country holds the rotating presidency of the EU, told a news conference.

Slovak Prime Minister Robert Fico said pushing through the quota system had “nonsensically” caused a deep rift over a highly sensitive issue and that, “as long as I am prime minister”, Slovakia would not implement a quota. And Czech Interior Minister Milan Chovanec tweeted: “We will soon realize that the emperor has no clothes. Common sense lost today.” This year’s influx of nearly half a million people fleeing war and poverty in the Middle East, Asia and Africa has already sparked unseemly disputes over border controls as well as bitter recriminations over how to share out responsibility. Refugees and migrants arriving in Greece and Italy have been streaming north to reach more affluent nations such as Germany, prompting countries in central and eastern Europe alternately to try to block the flow or shunt it on to their neighbors.

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How is this Europe? How can Germany and France continue in a Union with Hungary?

• Hungary Mobilizes Troops, Prisoners, Jobless To Fence Out Refugees (Reuters)

Built in a matter of weeks by soldiers, prison laborers and cadres of the unemployed, a vast new wall along Balkan frontiers is a monument to the ruthless efficiency with which Prime Minister Viktor Orban has mobilized Hungary against migrants. Orban describes the arrival of hundreds of thousands of refugees and other migrants in Europe this year from Asia, Africa and the Middle East as an attack on the continent’s Christian welfare model. Until last week, most trekked through Hungary, the main overland entry route into the EU’s border-free Schengen zone from the Balkan peninsula, which they cross after arriving by dinghy in Greece.

While Europe dithered over a collective response, Hungary took matters into its own hands, shutting off the route with a new fence along its entire 175 km (110 mile) border with Serbia, topped with razor wire and guarded by helmeted riot police. It was erected at a cost of 22 billion forints (about $80 million), a rare example of efficiency in a country which built its last underground metro line ten years behind schedule at triple the projected cost. The government says it put the military in charge of the construction so that it could act more quickly. By swiftly mobilizing state resources, the authorities also managed to turn the fence into a national project, immensely popular at home even as it is denounced by European partners.

“It took a while but the government’s campaign to rouse public opinion against the refugees is bearing fruit, and having brought much of the media under control is paying dividends,” said Richard Szentpeteri Nagy, an analysts at Centre for Fair Political Analysis. “By properly filtering the message through public television, what viewers at home see is that this is a mob, throwing stones and attacking police.” In just days since it shut the Serbian frontier, Hungary has already moved even faster to shut the border with Croatia, which is inside the European Union but outside the Schengen zone. A 41-kilometre temporary fence was thrown up within four days. Work is already underway on a permanent barrier, with machines clearing the land, fence posts driven into the ground and razor wire rolled out.

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Hollande’s a dunce and a coward. Full stop.

• Hollande Wrongfooted on Refugee Surge, Fearing Le Pen’s Rise (Bloomberg)

As Europe searches for a solution to the migrant crisis, French President Francois Hollande is in his customary position: stuck in the middle and pleasing few. The Socialist leader finds himself playing second fiddle to German Chancellor Angela Merkel in the unfolding drama as European Union leaders meet Wednesday to seek a way out of their impasse on how to cope with thousands of migrants knocking on the region’s gates. France’s acceptance of migrants has been overshadowed by greater generosity shown next door by Germany. “The government is fearful of doing anything that would benefit the anti-immigration right,” said Francois Gemenne , researcher at Sciences Po University.

“At the same time, they have intellectuals in the press and much of their base saying that France, the nation of human rights, looks ridiculous next to Germany. The government doesn’t know what foot to dance on. They’ve ended up with a policy that satisfies no one.” That mirrors much of what Hollande has done in his three years in office. On the economy, his socialist base feels he has sold out by recent moves to liberalize labor markers and ease rules for business, while conservative parties pillory him for raising taxes. Hollande’s approval rating fell one point to 24% in September, according to the most recent Ifop poll. Hollande and Merkel on Sept. 4 jointly urged the EU to agree on a redistribution plan for refugees and to speed up processing in countries where they arrive.

Under a formula proposed by the European Commission, France and Germany agreed to take 30,000 and 44,000 refugees respectively, out of the 160,000 who had made their way to Italy, Greece and Hungary. Those pledges have been overtaken by events as thousands of Syrians a day cross to Greek islands from Turkey, and then try to reach northern Europe. The Organisation for Economic Cooperation and Development said Tuesday that 700,000 refugees have sought asylum in Europe so far this year and that it’ll be 1 million by year end, a record. That has led Hollande’s opponents to say he’s doing too much or too little.

Marine Le Pen, leader of the anti-immigration National Front and by some measures the most popular presidential candidate in France, has compared the influx of refugees to the barbarian invasions that destroyed the Roman empire. Former President Nicolas Sarkozy said France should reinstall border controls, has blamed Hollande’s handling of the Syrian crisis for the influx, and has called into question automatic citizenship for children born in France. “There are differences of tone between Le Pen and Sarkozy on this issue, but they are basically on the same page,” said Smain Laacher, a sociology professor at the University of Strasbourg.

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Damned if you do, doomed if you don’t.

• The Fed Just Made A Gigantic Mess (CNBC)

The Federal Reserve is creating a negative-feedback loop with its mixed messages on interest rates — and it’s messing with the markets. In explaining why the Fed opted to hold rates steady, Fed Chair Janet Yellen said that policy makers remain concerned about slowing economic growth — especially in China — and the impact on global markets and inflation. But then, she added that the Fed could still raise rates in before the year was out — as early as October. What? If slowing global growth and market turbulence was a reason to pause, how likely was it, then, that all of that would be resolved by October? Since Chair Yellen spoke, a number of Fed officials have spoken, reiterating that a rate hike in 2015 remains likely. This is cognitive dissonance at its worst. Investors are now simultaneously worried about incompatible outcomes.

If growth is weak, and inflation continues to fall, the Fed should NOT, and would NOT, raise rates. If this global problem is truly transitory (a word most Fed officials need to look up in the dictionary), then a rate hike should have already occurred. This is a problem of the Fed’s own making. By insisting that interest rate normalization is imminent, the Fed is creating the very problem it is combatting by delaying that very same process. From my vantage point, the Fed more clearly needs to define what it takes to meet its dual mandate — inflation and employment. Clearly, the Fed has reached many of its goals on the employment front, although wage inflation is not accelerating to the point where a rate hike would be justified to cool an overheating economy.

Low inflation, while “transitory,” has persisted for nearly six years and is being pushed even lower by the huge drop in oil prices; the crash in other commodities; slowing growth in China and Japan and Asian emerging markets; recessions in Russia and Brazil and uneven growth in Europe. If the world is not normal, why normalize policy at all? The world affects the U.S. As we have seen in innumerable instances in the past, global instability has altered the course of domestic monetary policy for decades. Factoring that in, does not mean that the Fed has a “third mandate” as some Fed bashers claim. It simply means that the Fed has an obligation to consider how all variables affect its mandate. With an economy only “half-normal,” the normalization of interest rates can wait. But if the Fed continues to convey confusing messages about the timing of normalization, in an abnormal world, it will only serve to exacerbate the very trends it is hoping will abate.

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Economics is just politics in disguise.

• Economic Policy Often Seems To Have Little To Do With Economists. Why? (Ind.)

With Jeremy Corbyn as leader of the Labour Party we will hear a great deal from his opponents that his economic policies are not “credible”. At the moment we do not have a clear idea of what these policies will be, but it is worth asking beforehand what exactly a credible economic policy is. A natural way to define a credible economic policy is one that accords with what most economists think. If this was true, you might expect it would be difficult to win an election based on a macroeconomic policy that most economists regard as mistaken. Unfortunately, the last General Election provides a clear counter-example. In that election George Osborne proposed eliminating the overall budget deficit within five years. That contradicted what most economists believe is a sensible fiscal policy, for at least two reasons.

First, it precluded any significant increase in public investment, on things like building schools and flood defences. Every economist I know agrees that now is an excellent time to increase infrastructure investment, because labour is cheap and interest rates are low. Second, another round of austerity is very risky when interest rates are so low. Osborne says we must reduce government borrowing quickly to prepare for the next crisis. That makes little economic or business sense. Firms that cut back on investment when borrowing is cheap and the economy is expanding generally fail. The more significant risk is that the world economy takes a turn for the worse in the next year or two because of events in China or elsewhere. If interest rates are already low because they are having to offset the impact of austerity, the Bank of England has little room to counter these global shocks.

So the prudent policy while interest rates are low is to avoid austerity. The fiscal policy platform on which the Conservatives won was not credible to most academic macroeconomists. The problem is that most people in politics and the media do not get their notion of credibility from this source. So where does their idea of economic credibility come from? Discussion of economic policy in the media is dominated by political rather than economic journalists. They routinely provide comment after major economic policy announcements and interview politicians. They spend most of their time talking to politicians, so the Westminster bubble defines what the media sees as a credible economic policy.

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How to turn farmers into serfs.

• English Farmland Prices Double In Five Years (Guardian)

The price of good quality English farmland has doubled over the past five years, making it the most expensive in the world and offering a better return than prime London property, the FTSE 100 or gold. According to agents Knight Frank demand from wealthy private individuals as well as pension funds, has driven up the average price for an acre of “investment grade” English farmland (large plots with economies of scale) to £12,500, up 100% since 2010. In comparison, the price of luxury London homes has risen 42% over the same period, the FTSE 100 has increased 33%, while gold has dropped 10%. Many recent buyers of prime farmland arelifestyle buyers, often London financiers, for whom farming can be more of a hobby than about making the land pay its way.

Even what Knight Frank describes as some of the best land in the world – the pampa west of Buenos Aires in Argentina – sells for just a third of the average price investors are paying for farmland in England. An acre of investment grade land in Argentina sells for £4,510, while in France it fetches about £4,490. On the vast wheat-producing prairies of Canada, quality land fetches just £800 an acre, only 7% of the price achieved in England. Australian farmland values, blighted by drought, have largely flatlined in recent years.

The inflation in English land values is taking place despite a crisis among farmers struggling with falling global prices, particularly for wheat. After peaking at about £214 a tonne in December 2012, feed wheat values have since fallen by more than 50%. Global demand for wheat was 679m tonnes in 2012/13, but only 657m tonnes was produced, pushing prices up sharply. But the situation has now reversed, with global production forecast to hit about 725m tonnes this year but consumption at about 715m tonnes, sending prices spiralling down on commodity markets. UK farm gate milk prices are down by a third since 2013, prompting a wave of closures among English dairy farmers.

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And now dinosaurs are literally cool.

• Alaska Fossil Find Points To New ‘Lost World Of Dinosaurs’ (Guardian)

Fossils from a unique plant eating dinosaur found in the high Arctic of Alaska may change how scientists view dinosaur physiology, Alaska and Florida university researchers have said. A paper published on Tuesday concluded that fossilized bones found along Alaska’s Colville river were from a distinct species of hadrosaur, a duck-billed dinosaur not connected to hadrosaurs previously identified in Canada and the Lower 48 states. It’s the fourth species unique to northern Alaska. It supports a theory of Arctic-adapted dinosaurs that lived 69m years ago in temperatures far cooler than the tropical or equatorial temperatures most people associate with dinosaurs, said Gregory Erickson, professor of biological science at Florida State university. “Basically a lost world of dinosaurs that we didn’t realise existed,” he said.

The northern hadrosaurs would have endured months of winter darkness and probably snow. “It was certainly not like the Arctic today up there – probably in the 40s (five to nine degrees ) was the mean annual temperature,” Erickson said. “Probably a good analogy is thinking about British Columbia.” The next step in the research program will be to try to figure out how they survived, he said. Mark Norell, curator of paleontology at the American Museum of Natural History in New York, said by email that it was plausible the animals lived in the high Arctic year-round, just like musk oxen and caribou do now. It’s hard to imagine, he said, that the small, juvenile dinosaurs were physically capable of long-distance seasonal migration. “Furthermore, the climate was much less harsh in the Late Cretaceous than it is today, making sustainability easier,” he said.

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Debt Rattle September 22 2015

Sep 222015
 
 September 22, 2015  Posted by at 9:38 am Finance Tagged with: , , , , , , , , , , ,  3 Responses »


Arthur Rothstein Accident on US 40 between Hagerstown and Cumberland, MD 1936

• “We Are On The Precipice Of A Liquidation In Emerging Markets” (FT)
• Currency Market Braces For Renminbi Weakness (FT)
• ‘Made In Germany’ Lies In The ‘Gutter’ After Volkswagen Caught Cheating (AEP)
• Volkswagen Said Focus of U.S. Criminal Probe on Emissions (Bloomberg)
• It Took More Than a Year of EPA Pressure to Get VW to Admit Fault (NY Times)
• VW’s Worst Nightmare Is For The Scandal To Spread To Europe (Bloomberg)
• VW Emissions Scandal Could Snare Other Firms, Whistleblower Claims (Guardian)
• VW Faces More Legal Fallout From Cheating – This Time at Home (Bloomberg)
• Volkswagen: The Curse Of The World’s Biggest Carmaker (Forbes)
• Alexis Tsipras Has Been Set Up To Fail (Yanis Varoufakis)
• Greece’s New Government ‘Doomed To Fail’ Over Flawed Bail-Out (Telegraph)
• Greece’s Tsipras To Demand EU Action On Refugees (Reuters)
• Eastern European Leaders Defy EU Effort To Set Refugee Quotas (Guardian)
• EU Set To Water Down Refugee Relocation Plan (AFP)
• Putin’s Plan: Moscow Handles Syria, US Looks After Iraq (AlArabiya)
• Are Financial Markets Losing Faith In The Fed? (CNBC)
• Fed Cred Dead (Jim Kunstler)
• Catalans Threaten Not To Pay Public Debt If Spain Refuses Secession Deal (SP)
• Joris Luyendijk: ‘Bankers Are The Best Paid Victims’ (Standard)
• Sumatran Rhinos Likely To Become Extinct (Guardian)

“The wrong people got the capital..”

• “We Are On The Precipice Of A Liquidation In Emerging Markets” (FT)

The world economy is locked on a course towards an emerging markets crisis and a renewed slowdown in the US, regardless of the Federal Reserve holding off on a rise in rates last week, according to one of 2015’s most successful hedge fund managers. John Burbank, whose Passport Capital has placed a raft of lucrative bets against commodities and emerging markets this year, forecast that the Fed would eventually be forced into a fourth round of quantitative easing to shore up the economy. In an interview with the Financial Times, Mr Burbank said years of QE had caused a misallocation of capital across the world, while the end of QE last year triggered a dollar rally with consequences that were only now beginning to be realised.

“The wrong people got the capital — emerging markets countries and corporates and a lot of cyclical companies like mining and energy, particularly shale companies — and this is now a major problem for the credit markets,” he said. Passport, based in San Francisco, manages $4.1bn in three main funds. Its $2.1bn Passport Global fund was up 14.6% at the end of August and a smaller, more concentrated “special opportunities” fund was up 30.6%. Both funds are in the top 15 best performers, year to date, according to the industry league table compiled by HSBC. Among Passport’s publicly-declared short positions is Glencore, the commodities trader that has suffered a 55% tumble in its share price this year.

The Fed last week decided against raising US interest rates from their present level of zero. Although one dissident member of its Federal Open Market Committee did vote for a quarter of a point increase, the committee took a cautious stance, warning of “global economic and financial developments” that could restrain US growth.

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“I don’t think [China] had any idea just how many people there are out there who think their economy is collapsing..”

• Currency Market Braces For Renminbi Weakness (FT)

It is hard to say who was more surprised by China’s devaluation of the renminbi last month — international markets, with no inkling whatsoever it was coming, or Chinese officials, stunned by the resulting reaction overseas. This week, President Xi Jinping’s visit to Washington will at least allow officials from both sides to have it out. The common view outside of the mainland is that China bungled it, rocking asset prices from government bonds to iron ore as well as the currency world with its unexpected promise of a “market-based” regime — a pledge its subsequent heavy intervention implies is dead at least for now. The biggest casualty came last week, however, with the Federal Reserve’s decision to hold, not raise, overnight interest rates following the market turmoil triggered by China’s move to shift exchange rate policy and push the renminbi lower.

For Fed chair Janet Yellen, the move by the People’s Bank of China clearly rankled as she highlighted global concerns, pointedly questioning “the deftness with which [Chinese] policymakers were addressing those concerns”. Hence, what China does next with its currency is critical — to the dollar’s path, market sentiment, the Fed’s rate deliberations and the US economy. Stuart Oakley, managing director, global EM, Nomura, says the renminbi would remain stable for the duration of the state visit. “After that, the chance of another leg of weakness for the [renminbi] rises considerably,” he said. “The PBoC will undoubtedly be very mindful of how its own policy decisions on the [renminbi] will affect the dollar on the broader level. I think they will have no issue with seeing the dollar stronger still from here.”

To China bears, the PBoC’s dramatic 1.9% devaluation of August 11 looked like a desperate attempt to bolster flagging exports by starting a currency war under the figleaf of introducing the sort of market-friendly reform designed to impress the IMF. Another interpretation is that Beijing really was focused on the IMF and winning acceptance for the renminbi as a reserve currency, and misjudged the likely reaction. “I don’t think [China] had any idea just how many people there are out there who think their economy is collapsing,” said Chris Wood at CLSA, the pan-Asia brokerage. He thinks further big moves this year are unlikely as officials continue to focus on moving from an investment-led to a consumer-driven economy. “A big devaluation would be an admission their economic shift had failed,” he added.

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“The US press is already calling VW the “Lance Armstrong” of the car market..”

• ‘Made In Germany’ Lies In The ‘Gutter’ After Volkswagen Caught Cheating (AEP)

Volkswagen has suffered a shocking loss of credibility after conspiring to violate US pollution laws and dupe customers on a systemic scale. The scandal has once again exposed a culture of corrupt practices at the top of German export industry. “We are facing a blatant abuse of consumer trust and a degradation of the environment,” said Jochen Flasbarth, the German state secretary in charge of pollution enforcement. The scandal is intrinsically worse than the explosion of BP’s Deepwater Horizon drilling rig in the Gulf of Mexico in 2010. While BP and its contractors may have been negligent, VW appears to have engaged in a cynical plan to trick regulators in a wholesale breach of the US Clean Air Act.

“It is profoundly serious. The accusation is that VW deliberately set out to mislead regulators with a cleverly hidden piece of software,” said Max Warburton from AllianceBernstein. It is of an entirely different character from earlier breaches of US law by Hyundai and Ford, which stemmed mostly from errors. The US Justice Department is weighing serious criminal charges. “‘Made in Germany’ in the gutter,” said German newspaper Bundesdeutsche Zeitung. The financial daily Handelsblatt called the deception a “catastrophe for the whole of German industry”, warning that it had completely undermined a joint campaign by Audi, BMW, Mercedes, Bosch and VW to convince Americans that diesel is no longer dirty and is the best way to meet tougher US emission standards.

Germany is the world leader in clean diesel. Its car companies have bet heavily on the technology, hoping to win the strategic prize in the US as new rules come into force imposing fuel efficiency of 54.5 miles per gallon by 2025. “We are worried that the justifiably excellent reputation of the German car industry and in particular that of Volkswagen will suffer,” said Sigmar Gabriel, the country’s vice-chancellor and economy minister. Volkswagen’s own vow to become the “greenest” car producer in the world by 2018 has been exposed as a hollow publicity stunt. Theoretically, the company could face fines of $18bn in the US, based on a standard penalty of $37,500 for each of the 482,000 cars fitted with “defeat devices”, which allowed them to mask exhaust emissions of nitrogen oxide (NOx) in pollution control tests.

The actual release of these toxic particles – blamed for emphysema and respiratory diseases – is in reality 40 times above the acceptable levels imposed by the US Environmental Protection Agency. The cars will be recalled and modified, greatly reducing their fuel efficiency. The US press is already calling VW the “Lance Armstrong” of the car market, an apt allusion to drug cheating in sport, and a deadly epithet in an industry where brand image and goodwill are the lifeblood of sales. VW’s share price crashed 19pc in Frankfurt. The company’s strategic ambition to dominate clean diesel sales in the US lies in ruins. “There is no way to put an optimistic spin on this. The best case for VW is probably still a multi-billion dollar fine, pariah status in the US, and damage to its leading position in diesel,” said Mr Warburton.

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Don’t hold your breath.

• Volkswagen Said Focus of U.S. Criminal Probe on Emissions (Bloomberg)

The U.S. Justice Department is investigating Volkswagen over its admission that it cheated on federal air pollution tests, according to two U.S. officials familiar with the inquiry. That adds the specter of criminal proceedings to challenges the world’s biggest automaker already faces from regulators, lawmakers and vehicle owners in the three days since it admitted that it had rigged diesel vehicles to pass emissions tests in the lab. The vehicles emitted as much as 40 times the legal limit of pollutants when they were on the road, the Environmental Protection Agency alleges.

The criminal probe, which the officials described on condition of anonymity because it is continuing, will provide an early test of the Justice Department’s newly stated commitment to holding individuals to account for corporate wrongdoing. Earlier this month, the department said companies that want credit for cooperating with investigators must name individuals they allege are responsible for misconduct. The probe is being led by the Justice Department’s Environment and Natural Resources Division, which prosecutes violations of pollution-control laws, according to the officials.

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Good account.

• It Took More Than a Year of EPA Pressure to Get VW to Admit Fault (NY Times)

Two years ago, the International Council on Clean Transportation, a nonprofit environmental group staffed by a number of former E.P.A. officials, had been testing the real-world performance of so-called clean diesel cars in Europe, and were less than impressed with the emissions results. The group decided it would test diesel-powered cars in the United States, where regulations were much more strict, as a way of almost shaming the European automakers to tighten their compliance. The group fully expected the American cars to do well, and run cleaner than their counterparts across the pond. What they could not have foreseen was that they would stumble onto one of the biggest frauds in recent automotive history.

Further, on the campus of West Virginia University, a group of emissions researchers who mainly dealt with heavy trucks noticed an unusual posting by the transportation council, which was looking for a partner to test diesel-powered cars. “No one had done that before in the U.S.,” said Arvind Thiruvengadam, a professor at the university. “It sounded very interesting, to test light-duty diesel vehicles in real-world conditions. We looked around at each other said, ‘Let’s do it.’ ” The university’s team bid on the project and got the contract. Mr. Thiruvengadam and his colleagues never envisioned where it would lead. “We certainly didn’t have an aim of catching a manufacturer cheating,” he said. “It didn’t even cross our minds.” The study also did not target Volkswagen specifically.

It was something of a fluke, he said, that two out of three diesel vehicles bought for the testing were VWs. It did not take long for suspicions to set in. The West Virginia researchers were well-versed in diesel performance on real roads, and had certain expectations for how the test cars should ebb and flow in their emissions. But the two Volkswagens behaved strangely. “If you’re idling in traffic for three hours in L.A. traffic, we know a car is not in its sweet spot for good emissions results,” Mr. Thiruvengadam said. “But when you’re going at highway speed at 70 miles an hour, everything should really work properly. The emissions should come down. But the Volkswagens didn’t come down.”

Even then, however, it is difficult for most researchers to be sure exactly what is going on. There are so many factors involved in real-world driving — speed, temperature, topography, braking habits. It is not unheard-of for cars to perform much differently in on-the-road tests than one expected. But this time there was a key difference: the California Air Resources Board heard about the groups’ tests and signed on to participate. The regulators tested the same vehicles in their specially equipped lab used to judge cars’ compliance with state emissions standards. That gave the project what most studies lacked: a baseline. “That broke loose everything,” Mr. Thiruvengadam said.

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But in Europe, Merkel reigns. And she won’t want one of Germany’s largest corporations to go down.

• VW’s Worst Nightmare Is For The Scandal To Spread To Europe (Bloomberg)

Just days after General Motors settled with federal prosecutors for its deadly negligence over faulty ignition switches, Volkswagen has admitted that it cheated for years on U.S. Environmental Protection Agency emissions tests. Having built its brand in the U.S. around diesel technology, VW faces severe damage to its reputation here, along with billions in EPA fines and now a federal criminal investigation. Worse for consumers, there’s no guarantee that the fallout of this scandal will be limited to VW alone. Clearly, shareholders are spooked: No amount of damage to VW’s relatively weak U.S. market position could justify the huge declines in VW’s stock price (near 23% on the day, for a market-value hit of $17.6 billion).

The fear, almost certainly, is that this scandal could end up affecting VW’s European market dominance, which is also highly dependent on diesel sales. Having to bring its entire EU fleet into compliance could cost orders of magnitude more than U.S. market repairs, as well as the firm’s widely-respected chief executive officer, Martin Winterkorn, his job. In the U.S., nearly a half-million vehicles equipped with VW’s 2.0 liter TDI engine have been deemed out of compliance with EPA regulations after the International Council on Clean Transportation, a nonprofit watchdog group, discovered they emitted far more nitrogen oxide in normal driving than in testing environments. Faced with an EPA threat to decertify new diesel models, VW admitted that it had installed a “defeat device” to give artificially low emissions results in Audi A3, VW Jetta, Beetle, Golf and Passat models.

The EPA is raining righteous fury down on Volkswagen, but its record of clamping down on automakers’ malfeasance shows it’s on thin ice here. A 2012 scandal in which Hyundai and Kia goosed the numbers on fuel-efficiency tests provided ample evidence that the agency’s protocol – which allows automakers “broad latitude” to test their own vehicles and involves spot-checks on just 10% to 15% of all models – is an invitation to corner-cutting and outright cheating. Until emissions tests are improved, or a consistent complimentary “real world” testing regime is put into place, regulators will lack the leverage to pressure automakers into admitting who is cheating and who is merely gaming the rules. Nor will the agency know if the common discrepancies between test and real-world results reflect shortcomings in the test procedure itself.

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Seems inevitable. But political pressure will be severe.

• VW Emissions Scandal Could Snare Other Firms, Whistleblower Claims (Guardian)

The emissions-fixing scandal that has engulfed Volkswagen in the US could extend to other companies and countries, one of the officials involved in uncovering the alleged behaviour has told the Guardian. Billions of pounds have been wiped off the value of global carmakers amid growing concerns that emissions tests may have been rigged across the industry. “We need to ask the question, is this happening in other countries and is this happening at other manufacturers? Some part of our reaction is not even understanding what has happened exactly,” said John German, one of the two co-leads on the US team of the International Council for Clean Transportation (ICCT), the European-based NGO that raised the alarm.

Shares in Volkswagen fell by almost a fifth after the world’s second biggest carmaker issued a public apology in response to US allegations that it used a defeat device to falsify emissions data. South Korea said on Tuesday it would investigate emissions of VW Jetta and Gold models and Audi A3 cars produced in 2014 and 2015. If problems are found, South Korea’s environment ministry said its probe could be expanded to all German diesel imports, which have surged in popularity in recent years in a market long dominated by local producers led by Hyundai. US Congress confirmed it is investigating the scandal on Monday. House energy and commerce committee chairman Fred Upton and oversight and investigations subcommittee chairman Tim Murphy announced that the Oversight and Investigations Subcommittee will hold a hearing.

The US Justice Department is conducting a criminal investigation of Volkswagen admission, according to Bloomberg, which cited two officials familiar with the inquiry. The company could face a fine of up to $18bn, criminal charges for its executives, and legal action from customers and shareholders. The US law firm Hagens Berman has already launched a class-action law suit on behalf of customers who bought the affected cars. VW shares fell by 19% in Frankfurt, wiping almost €15bn off its value. Shares in Renault, Volkswagen’s French rival, also dropped by 4%, while Peugeot was down 2.5%, Nissan 2.5% and BMW 1.5% amid concerns they could be caught up in investigations.

The US Environmental Protection Agency (EPA) said on Friday that VW had installed illegal software to cheat emission tests, allowing its diesel cars to produce up to 40 times more pollution than allowed. The US government ordered VW to recall 482,000 VW and Audi cars produced since 2009. In response, Martin Winterkorn, chief executive of VW, said on Sunday he was “deeply sorry” for breaking the trust of the public and ordered an external investigation. German tipped off regulators at the California Air Resources Board (Carb) and the EPA after conducting tests that showed major discrepancies in the amount of toxic emissions some VW cars were pumping out compared with the legal limits. Max Warburton, an analyst at the financial research group Bernstein, said: “There is no way to put an optimistic spin on this – this is really serious.”

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The biggest challenge may come from investors, car owners and environmental groups.

• VW Faces More Legal Fallout From Cheating – This Time at Home (Bloomberg)

Volkswagen’s legal problems started in the U.S., but the world’s biggest carmaker is finding the fallout over its cheating on U.S. environmental tests and declining share price is extending to its home market. The German company’s shares lost nearly a quarter of their value Monday in Frankfurt, and financial regulator Bafin is looking at possible violations of German rules. VW also faces legal threats from investors and environmental groups. “Like in comparable cases, with strong share movements we look at the VW stock as to insider trading, market manipulation, and ad-hoc disclosure rules,” Bafin spokeswoman Anja Schuchhardt said in an e-mail. “But this is a matter of routine.”

The Wolfsburg, Germany-based company admitted to fitting its U.S. diesel vehicles with software that turns on full pollution controls only when the car is undergoing official emissions testing, the Environmental Protection Agency said Friday. With 482,000 autos part of the case, the U.S. fine could total more than $18 billion. During normal driving, the cars with the software – known as a “defeat device” – would pollute 10 times to 40 times the legal limits, the EPA estimated. The discrepancy emerged after the International Council on Clean Transportation commissioned real-world emissions tests of diesel vehicles including a Jetta and Passat, then compared them to lab results. VW halted sales of the models involved on Sunday and said it’s cooperating with the probe and ordered its own external investigation.

Chief Executive Officer Martin Winterkorn, who has led the company since 2007, said he was “deeply sorry” for breaking the public’s trust and that VW would do “everything necessary in order to reverse the damage this has caused.” Andreas Tilp, a lawyer representing investors in German court, says VW may have to pay damages to stockholders in Germany if the allegations of U.S. authorities are upheld. Investors may seek to recover losses incurred because of the stock’s decline. “We’re convinced that VW failed to properly inform the markets and is liable to investors who can seek billions,” Tilp said. “Concealing for years the immense risks of the pollution manipulation and the U.S. probes is a violation of capital market rules.”

Environmental group Deutsche Umwelthilfe said it will sue carmakers to have diesel vehicles removed from the streets starting 2016. It will also take legal action to have Germany’s Federal Motor Transport Authority revoke licenses for the vehicles. While rules on emissions are similar in the U.S. and Germany, the Federal Motor Transport Authority isn’t properly controlling its implementation, Juergen Resch, DUH’s director, said in an e-mailed statement. The German agency isn’t controlling pollution, and should use recalls in case of violations of environmental rules, Resch said.

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It’s lonely at the top.

• Volkswagen: The Curse Of The World’s Biggest Carmaker (Forbes)

GM ruled as the No. 1 seller for decades before the problems that led to its 2009 bankruptcy and federal bailout. But those issues caused GM to lose the title in 2008 to Toyota, which spent that decade on a deliberate expansion plan. Once it got to the top, however, Toyota found itself awash in an existential safety crisis that its chief executive, Akio Toyoda, blamed in part on Toyota’s quest to build a global manufacturing empire. Now comes VW, which has been on its own worldwide march over the past five years. It was not aiming to achieve dominance of the car market before 2018, only to find itself taking the top spot this past year, due to its manufacturing growth, especially in China.

Veteran auto industry executives know not to gloat when a car company runs into difficulty. They understand that any carmaker can have “its turn in the barrel,” as the saying goes. The industry has seen what happens when a Japanese company gets in trouble with American regulators, and what transpires when an American company encounters its own scandal. Now, as with Volkswagen’s reign at the top of the industry, the automobile world will see how it handles its emissions case. The one saving grace for VW is that unlike GM or Toyota, the emissions situation did not result in fiery crashes or devastation for the families of accident victims.

It’s primarily a technology issue, on a specific type of vehicle, and in far smaller numbers than affected GM and Toyota. So, it’s possible that recalls can be handled faster, and VW can get the issue behind it more quickly. Nonetheless, it will likely be a huge challengefor Winterkorn,who could face skepticism that he should continue to lead VW, according to at least one analyst. At a time when his company otherwise could have reveled in its industry dominance, VW should expect scrutiny from Congress, legal problems, a potential multibillion-dollar fine and a batch of uncomfortable headlines. GM and Toyota know what that’s like.

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Greece as a country has been set up. As I wrote on July 19: Was Greece Set Up To Fail?

• Alexis Tsipras Has Been Set Up To Fail (Yanis Varoufakis)

Alexis Tsipras has snatched resounding victory from the jaws of July’s humiliating surrender to the troika of Greece’s lenders. Defying opposition parties, opinion pollsters and critics within his ranks (including this writer), he held on to government with a reduced, albeit workable, majority. The question is whether he can combine remaining in office with being in power. The greatest losers were smaller parties occupying the extremes of the debate following the referendum. Popular Unity failed stunningly to exploit the grief felt by a majority of “No” voters following Tsipras’s U-turn in favour of a deal that curtailed national sovereignty further and boosted already vicious levels of austerity. Potami, a party positioning itself as the troika’s reformist darling, also failed to rally the smaller “Yes” vote.

With the all-conquering Tsipras now firmly on board with the troika’s programme, new-fangled, pro-troika parties had nothing to offer. The greatest winner is the troika itself. During the past five years, troika-authored bills made it through parliament on ultra-slim majorities, giving their authors sleepless nights. Now, the bills necessary to prop up the third bailout will pass with comfortable majorities, as Syriza is committed to them. Almost every opposition MP (with the exception of the communists of KKE and the Nazis of Golden Dawn) is also on board. Of course, to get to this point Greek democracy has had to be deeply wounded (1.6 million Greeks who voted in the July referendum did not bother to turn up at the polling stations on Sunday) – no great loss to bureaucrats in Brussels, Frankfurt and Washington DC for whom democracy appears, in any case, to be a nuisance.

Tsipras must now implement a fiscal consolidation and reform programme that was designed to fail. Illiquid small businesses, with no access to capital markets, have to now pre-pay next year’s tax on their projected 2016 profits. Households will need to fork out outrageous property taxes on non-performing apartments and shops, which they can’t even sell. VAT rate hikes will boost VAT evasion. Week in week out, the troika will be demanding more recessionary, antisocial policies: pension cuts, lower child benefits, more foreclosures.

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“Greece would return to economic growth if it complied with economic reforms, the European Commission said…” Only in fairy tales can economies grow in which people are forced to reduce spending.

• Greece’s New Government ‘Doomed To Fail’ Over Flawed Bail-Out (Telegraph)

Investors cheered the return of Alexis Tsipras as Greece’s new prime minister despite concerns that the new government was doomed to fail in its bid to keep the country in the eurozone. Greece’s 10-year bond yields, a key indicator of default risk, dropped to a yearly low of 8.09pc, as markets bet that political continuity would ease the implementation of the country’s draconian third bail-out programme. Economists, however, warned that the left-wing Syriza party – who lost only four seats in Sunday’s general election – would struggle to jump through the hoops of an €86bn bail-out programme. Athens faces a punishing schedule over the next few months, where it will be required to pass 60 “prior action” laws through parliament by the end of the year. These include hiking taxes on food, hotels and baked goods.

Bail-out monitors will carry out their first review of the government’s progress in October. The reforms are unlikely to be blocked in the majority pro-euro parliament, but Mr Tsipras, who was sworn into office on Monday, still faces a sizeable majority of disgruntled MPs in his own party Failure to make satisfactory progress is set to hinder the prime minister’s battle for much-needed debt relief for the ravaged economy. “Mr Tsipras is unlikely to lie down and accept every new measure forced upon Greece by its creditors and the eurozone’s ‘institutions’,” said Jonathan Loynes, at Capital Economics. “The days of extended negotiations at late-night Brussels summits are not necessarily over,” he added. Despite being plunged into recession, Greece would return to economic growth if it complied with economic reforms, the European Commission said.

GDP is set to contract by more than 2pc this year.] “The underlying growth potential is still there,” said EU vice-president Valdis Dombrovskis. “If the reforms agreed in the new ESM programme are properly implemented, Greece can grow again quite quickly.” But cracks were already beginning to emerge between the new government and Brussels. European parliament president Martin Schulz welcomed Mr Tsipras’s reappointment but questioned the premier’s “bizarre” decision to continue his coalition with the anti-bail-out Independent Greeks (Anel). “I called [Tsipras] a second time to ask him why he was continuing a coalition with this strange, far-right party,” Mr Schulz told French radio on Monday. “He pretty much didn’t answer. He is very clever, especially by telephone. He told me things that seemed convincing, but which ultimately in my eyes are a little bizarre.”

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He’s had 10 months to do that. Why would it work now?

• Greece’s Tsipras To Demand EU Action On Refugees (Reuters)

As an icon for many on Europe’s left, Greece’s newly elected prime minister, Alexis Tsipras, can be expected to rattle the cages of the continent’s elite whenever he can. After Sunday’s solid re-election, he may start with the migrant crisis, which he believes is emblematic of the European Union’s failure to stick with its founding principles of unity. “When the Mediterranean turns into a watery grave, and the Aegean Sea is washing dead children up on its shores, the very concept of a united Europe is in crisis, as is European culture,” he told a campaign rally last week. European unity, Tsipras reckons, was also sorely lacking when the EU began imposing harsh austerity on his country when it needed to be bailed out over debt.

But not unlike in the debt crisis, Tsipras must balance his outrage at what he sees as the European Union’s failure to respond to the migrants with a need for its help in meeting the cost to frontline Greece. And as over debt, the criticism goes both ways. Most of the refugees who make their way to Europe arrive via Greece, which transports them from its islands to the mainland, from where they trek north via the Balkans. Croatia said on Monday it would demand Greece stop moving the migrants on. Athens received €33 million in EU aid earlier this month to help cope with the migrants. But Nicos Christodoulakis, caretaker economy minister during the election campaign, said a lack of preparation meant Greece was missing out on up to €400 million in EU aid for the crisis.

Tsipras’ first international meeting after re-election will be a Wednesday discussion in Brussels with his EU counterparts about the hundreds of thousands of refugees and migrants pouring into Europe, many via Greek islands that border Turkey. Officials from his leftist Syriza party say he will ally again with other EU countries bordering the Mediterranean such as Italy and demand that the bloc shares the burden of dealing with hundreds of thousands of refugees. “Member states (must) take and share the responsibility, that’s where the rupture is,” a senior Syriza official said.

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Will this be the straw that breaks the Union’s back?

• Eastern European Leaders Defy EU Effort To Set Refugee Quotas (Guardian)

Central and eastern European leaders have defied attempts by Brussels and Berlin to impose refugee quotas ahead of two days of high-stakes summits in Brussels to try to decide on what already looks like a vain attempt to limit the flow of refugees and migrants into Europe. After months of being consistently behind the curve in grappling with the EU’s huge migration crisis, interior ministers will meet on Tuesday to focus on the highly divisive issue of mandatory quotas to share refugees across the union. There will then be an emergency summit of leaders on Wednesday. Jean Asselborn, Luxembourg’s foreign minister, who is chairing Tuesday’s meeting, failed to reach a breakthrough in Prague on Monday with his counterparts from the Czech Republic, Poland, Slovakia, Hungary and Latvia.

The Czech government wrote to Brussels arguing that compulsory quotas were illegal and that it could take the issue to the European court of justice in Luxembourg, while the anti-immigration Hungarian government brought in new laws authorising the army to use non-lethal force against refugees massing on its borders. “There are still a few problems to solve,” said Asselborn. “We still have 20 hours.” “The terrain is still very uncertain,” said a senior source from Luxembourg. “We don’t yet have agreement. It’s going to be very, very difficult.” This week’s fresh attempt to agree on a quota system comes amid the deepest divisions between western and eastern Europe since the former Soviet-bloc countries joined the EU a decade ago.

At issue is the paltry figure of 66,000 refugees being shared across the EU after being moved from Italy and Greece. They have already agreed to share 40,000 and were to redistribute a further 120,000. But 54,000 of those were from Hungary, which passed a law on Monday allowing the army to use non-lethal force on migrants and whose hardline government wants no part of the scheme. Given that up to a million people are expected to enter Germany alone this year and that Frontex, the EU’s border agency, says 500,000 are currently preparing to leave Turkey for the EU, the figures being fought over in Brussels are risible.

But the numbers are not the real issue. The row is about power and sovereignty. In the end it seems that all countries will join in sharing refugees, with the exception of Britain, which has opted out of the scheme. The other two countries with opt-outs – Ireland and Denmark – have agreed to take part, leaving the UK isolated.

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Oh, wait, there’s always backpaddling…

• EU Set To Water Down Refugee Relocation Plan (AFP)

EU ministers are considering a watered down plan to relocate 120,000 refugees throughout the bloc, which drops binding quotas and leaves Hungary out of the scheme, sources said Monday. The softer stance emerged on the eve of a new emergency meeting in Brussels of the 28 EU interior ministers, who last week failed to agree on a European Commission plan for compulsory quotas for refugees fleeing war in Syria, Afghanistan and elsewhere. “Whether voluntary or mandatory, that is an artificial debate,” a source from Luxembourg, which holds the rotating EU presidency, told reporters, despite Commission officials insisting that they still want compulsory quotas. Another Luxembourg source said the word “mandatory” will not appear in the draft document that will go before the ministers when they meet Tuesday afternoon to discuss how many refugees each country will take.

Hopes of a unanimous deal last week collapsed in the face of opposition from Hungary, the Czech Republic, Slovakia and Romania, officials said. With populist parties exploiting anti-immigrant sentiment, many eastern countries argued that a Europe-wide relocation plan made little sense for refugees who preferred to settle in wealthier northern European nations. The original plan envisaged quotas for the relocation to other EU states of 54,000 asylum seekers from Hungary, 50,400 from Greece and 15,600 from Italy. But Hungarian Prime Minister Viktor Orban has insisted that by being included in the plan, his country would be erroneously confirmed as a frontline state for refugee arrivals. He insists that many of the migrants are coming from Greece and should have been registered there first and kept there under EU rules.

“It is established that Hungary will not appear in the draft as a beneficiary country,” a Luxembourg source told AFP. “However, it will have to join the solidarity” by hosting refugees from Greece and Italy, the source added. The figure of 120,000 to be relocated will remain in the draft, but it is not immediately clear which countries will now benefit from the relocation of the 54,000 asylum seekers that were originally earmarked in Hungary, sources said. One proposal is for Italy and Greece to benefit, while a second is for other countries along the Western Balkans route, such as Croatia and Slovenia, to be given relief. Despite failing to reach a deal on the larger figure, the EU ministers last week formally approved a plan first aired in May to relocate 40,000 refugees from Greece and Italy.

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Obama’s new headache.

• Putin’s Plan: Moscow Handles Syria, US Looks After Iraq (AlArabiya)

At the end of this month, New York will be see several initiatives, talks, understandings, and deals come together under two main themes: terrorism and immigration. Both issues in the minds of world leaders are closely linked to Syria and other crises in the Arab world. U.S. President Barack Obama called for a world summit on terrorism, with ISIS first and foremost in his mind. And Russian President Vladimir Putin tasked his foreign minister Sergei Lavrov to chair a ministerial session of the U.N. Security Council titled “Maintenance of International Peace and Security: Settlement of Conflicts in the Middle East and North Africa and Countering the Terrorist Threat in the Region.” The common denominator between the U.S. and Russian priorities today is reducing the Syrian issue to a terrorism issue.

President Putin has effectively declared to the world that Russia intends to fight a war directly against ISIS and similar groups in Syria, while keeping the Syrian regime as a key ally in this war. Russia wants the United States to be a military partner – including of the Syrian regime – in this bid. Putin wants to meet with Obama on the sidelines of the 70th session of the General Assembly of the United Nations. Obama is now considering whether the meeting will serve one of the key goals behind the Russian leader’s movements in Syria, namely, diverting attention away from Ukraine. The U.S. president is also considering whether he really wants to be drawn into the Syrian crisis, which he has avoided for years. He might therefore bless Russia’s involvement in the Syrian war against ISIS, as long as Putin does not ask the US to officially bless the alliance with the Assad regime.

It is worth quickly examining what Vitaly Churkin, Russia’s shrewd envoy to the U.N., told the U.S. network CBS about the Russian strategy. He said: “I think this is one thing we share now with the United States, with the U.S. government: They don’t want the Assad government to fall. They don’t want it to fall. They want to fight (ISIS) in a way which is not going to harm the Syrian government.” He added: “On the other hand, they don’t want the Syrian government to take advantage of their campaign against [ISIS]. But they don’t want to harm the Syrian government by their action. This is very complex.” It is not clear whether what Churkin is saying is based on assumptions or whether it is a fact that the U.S. government does not acknowledge publicly. If this is just a Russian interpretation of U.S. policy, then it is part of its strategy to sell its pitch because it assumes that Washington will not demur.

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Long lost.

• Are Financial Markets Losing Faith In The Fed? (CNBC)

When the U.S. Federal Reserve kept rates on hold on Thursday, the central bank explained it made the decision because of the unstable global outlook. However, some investors have criticized the move, warning that the world could soon lose faith in the Fed. “They (Fed) should not base a rate decision on market volatility, because if you do that, then nobody is going to predict what you’re going to do,” David Kelly, chief global strategist at JPMorgan Funds, told CNBC Monday. “Not only does this now put into doubt when the first rate hike will be, but it means when they begin to raise rates, we don’t know if something could happen in overseas markets and suddenly they stop raising rates.”

In last Thursday’s statement, the central bank pointed to concerns over “global economic and financial developments” as reasons to delay a rate hike, but now investors worry whether this is the right decision and whether this would greatly influence the U.S. economy. St. Louis Fed president, James Bullard, echoed this Monday, telling CNBC it is “inappropriate” for the U.S. central bank to react to financial market turmoil, and focus more on growth and labor markets. Bullard added that to avoid a “1994 scenario”, the Fed should “go early, go gradually”, giving them flexibility to react to future problems that occur. If the U.S. central bank publicizes its concerns over financial markets, markets will in turn become more uncertain over when the Fed will hike, Kelly added.

“Markets hate uncertainty and what the Federal Reserve managed to do is add a huge serving of uncertainty to markets,” Kelly argues, adding that before the Fed had a clear criteria as to what should trigger a first hike and how to maintain, but now talk about China, volatility and commodities adds a whole host of uncertainty for markets. By keeping rates so low, the Federal Reserve is actually helping subdue the U.S. economy, Kelly adds, saying that instead of speeding up economic growth, the central bank is afraid over fears that the economy could be too weak. “If they are going to get derailed by any move in market volatility, then it just makes it more and more cloudy. That is not good for financial markets.”

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“The Federal Reserve itself is the victim du jour of its own grandiose fatuous fecklessness, in particular the idea that it could play a national economy like a three-button flugelhorn.”

• Fed Cred Dead (Jim Kunstler)

Last week was the watershed for central banking and for the illusion that the current disposition of things has a future. The Federal Reserve blinked on its long-touted Fed funds interest rate hike and chairperson Janet Yellen was left standing naked in the hot glare of her own carbonizing credibility, a pitiful larval creature, still maundering about “the data,” and “the median growth projection,” and other previously-owned figments spun out of the great PhD wonk machine in the Eccles Building. The Federal Reserve itself is the victim du jour of its own grandiose fatuous fecklessness, in particular the idea that it could play a national economy like a three-button flugelhorn.

What seemed like a good idea at the time when Alan Greenspan and then Ben Bernanke stepped into the pilot house now just looks like the fraud of frauds: enabling corporations to borrow ever more money from the future to pretend that their balance sheets are sound. That scam has nowhere left to go, except into the black hole that has been waiting for it. All the Fed really has left is to destroy the value of the dollar (to save it! Just like Vietnam!). This ought to be an interesting week in the financial markets as the players have had a long, anxious weekend to absorb the death of Fed cred. And October, too. Expect dramatic re-pricing. Sometime a few months down the line, financial markets will present a “relief rally.” Don’t get suckered on that one.

Meanwhile, what remains on the other head of this two-headed economy besides driving to-and-from the Walmart? Pornography? The tattoo industry? Meth and narcotics? Prostitution? Professional sports on the flat screen? Kim and Kanye? Grand theft auto? Do you really think Donald Trump can fix this?

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This may be quite the event this weekend. More Merkel headaches.

• Catalans Threaten Not To Pay Public Debt If Spain Refuses Secession Deal (SP)

The First Minister of Catalonia, Artur Mas, decried the comments made by the Governor of the Bank of Spain, Luis María Linde, earlier in the day as “immoral, irresponsible and indecent” and warned an independent Catalonia might not pay its share of the public debt if Spain refused to do a deal. Mr. Mas, echoing what other Junts Pel Sí candidates had said over the weekend, said the central government was promoting a pre-electoral climate of fear to pressure Catalans before the vote on Sunday: “It won’t work, we won’t swallow it”. “The stakes are high for Spain”, he said, according to a report in El País: “Imagine there is no agreement on Spanish public debt. How would the state face its debt if there is no agreement for Catalonia to assume its part?”

On Monday morning, the governor of the Bank of Spain, Luis María Linde, had said during a breakfast meeting in Madrid that capital controls in a newly independent Catalonia were a possibility, although he said his remarks were made in reference to a “highly unlikely future scenario”, according to a report in Europa Press. He also confirmed what others had said before him—including Angela Merkel, David Cameron and European Commission chief spokesman Margaritis Schinas—about a newly independent Catalonia immediately being left out of the European Union. “There are people who have power and don’t want to lose out”, said Mr. Mas in reference to Mr. Linde: “Today we have another example, the governor of the Bank of Spain. People at the service of the state who don’t want to lose power”.

“It is irresponsible and indecent”, said the First Minister: “to threaten things that no democratic country would dare to insinuate”. On Friday evening, after the close of business, Spain’s leading banks issued a statement via the Spanish Banking Association (AEB) warning of the risks of secession to financial security and the banks’ own continued presence in Catalonia should an attempt at secession be made. The governor of the Bank of Spain said on Monday that the banks’ statement “said very obvious things” and that the secession of Catalonia would create “insecurity, uncertainty and tension”.

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” If interest rates return to a historical average of 6%, [London] is finished. It will just go boom.”

• Joris Luyendijk: ‘Bankers Are The Best Paid Victims’ (Standard)

When Joris Luyendijk was interviewing bankers, many clearly felt his deepest desire was to be them. “It’s cult-like,” he says of the City. “The macho, master of the universe type has bought into this idea so deeply: ‘I may be working 80 hours a week, I don’t see my family, and my body looks 10 years older than it is, but I am living the life. Everybody wants to be me.’” And as in a cult, insiders were afraid to speak out, fearing expulsion. Whenever he was talking to a financier in a coffee shop and a colleague walked in, they would morph into a “shivering wreck”: “How much of a master of the universe are you if you’re afraid to give your views to a fellow citizen?” Yet many still spoke to him. “I wondered why they would risk their jobs. Some said: ‘I am terrified about what my bank can do to society, and how it is being run’.”

Luyendijk, a 43-year-old investigative journalist, used to cover the Middle East — “interviewing real terrorists not financial terrorists”. But then he started talking to banking employees about the 2008 financial meltdown. The conversations became a Guardian blog and now a book, Swimming With Sharks. It has been so successful in his native Netherlands that he jokingly calls it “Fifty Shades of Joris”. He wants the book to help others see past the obfuscation of the City: “It’s a fundamental misunderstanding that we’re too stupid to understand the problems of finance. A seven-year-old understands perverse incentives. Tell them: ‘Half the class doesn’t do their homework, half does and they all get the same grade; what will happen?’ That’s the bank.”

His view of the future is frightening. “We’ll continue to have ever bigger crashes, until we can no longer save the system. And then we will do what we could do now: rebuild it.” He feels little has changed in banking in the seven years since the crash. “The old mindset is intact: ‘If it’s legal, we’ll do it, and our well-paid lobbyists will ensure it’s legal’. You have these financial empires: too vast, too complex, too toxic to manage. Something happens and they blow up like nuclear reactors.” He has two major predictions. The first is that the next crisis could be caused by terrorists hijacking banking IT systems. “They’re so vulnerable. Because banks were merging and acquiring like crazy, they glued systems together. Imagine if a bank says we can no longer access our data and companies can no longer get their money.”

The second is that the London housing bubble will burst. “It’s a when and not an if. If interest rates return to a historical average of 6%, this city is finished. It will just go boom. Everybody knows this, just as all the [analysts] knew the subprime market in America would explode. It’s just really attractive for George Osborne to reinflate the bubble, so all the home-owning voters are happy.” On the 2008 crisis, Luyendijk argues it wasn’t a failure of capitalism: it showed finance wasn’t really capitalist at all. “I go to the heart of capitalism and I find…” he pauses for effect. “Socialism. Because in most niches, four or five banks control the market, divide it up among themselves and they can’t go bust. Rather than going on about greed, we should make sure there are free market forces in finance again.”

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Another notch in our belts.

• Sumatran Rhinos Likely To Become Extinct (Guardian)

Earth’s last remaining Sumatran rhinos are edging perilously close to extinction, according to one of the world’s top conservation bodies. There are fewer than 100 of the animals left in the rainforests of the Indonesian island of Sumatra and the Kalimantan province of Borneo. The last Sumatran rhino (Dicerorhinus sumatrensis) in Malaysia was spotted two years ago in the Sabah region of Borneo but experts last month declared the species extinct in that country. That has prompted the International Union for the Conservation of Nature to sound the alarm over the species’ fate, which it said is headed for extinction if urgent action is not taken.

“It takes the rhino down to a single country,” said Simon Stuart, chair of the IUCN’s species survival commission. “With the ongoing poaching crisis, escalating population decline and destruction of suitable habitat, extinction of the Sumatran rhino in the near future is becoming increasingly likely.” The rhino is the smallest of the three Asian rhino species – there are also just 57 Javan rhinos (Rhinoceros sondaicus) and more than 3,000 Indian rhinos (Rhinoceros unicornis). The population of the Sumatran species is believed to have halved in the last decade. The last official assessment in 2008 put their number at about 250 but Stuart said, with hindsight, the true number then had probably been about 200.

Poachers kill the rhinos for their horn, which is even more valuable than that of African rhinos. “For hundreds of years, we’ve been unable to stem the decline of this species. That’s due to poaching. It’s due to the fact they get to such a low density the animals don’t find each other and they don’t breed. It’s due to the fact that if the females don’t breed regularly, they develop these tumours in their reproductive tract that render them infertile,” he said. A large number of females in the wild were likely infertile because they do not breed often enough, he said. The only Sumatran rhino in the western hemisphere, a male called Harapan, is due to be flown from Cincinnati Zoo in the US to a rhino sanctuary in Sumatra this autumn to help the species breed. There are only nine of the animals in captivity worldwide.

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Merkel’s Next Big Headache: Volkswagen’s ‘Defeat Device’

Sep 222015
 
 September 22, 2015  Posted by at 8:26 am Finance Tagged with: , , , ,  7 Responses »


NPC Oldsmobile Golden Rocket 88 Holiday Sedan for 1957, Columbus GA 1908

Angela Merkel has another huge headache on her plate. She seems to attract those these days. And given how she’s been dealing with the last few migraines coming her way, perhaps she deserves them.

For now, it’s a story of one carmaker, Volkswagen. And in one country, the USA. A country in which the diesel engine is somewhat of an orphan, making up just a few percent of the total car market. But the “defeat device” scandal will not stop there.

In Europe, diesel accounts for about half of all vehicles sold. And there’s no reason to presume VW didn’t use the same software tricks in Europe that it did in America. Nor, for that matter, does it seem reasonable to think VW is the only carmaker to apply sleight of hand to its emissions tests. The competition would have had to be profoundly asleep at the wheel not to know about the “device”.

What Volkswagen has been caught cheating on concerns emissions of nitrous oxide. As for its CO2 levels, who knows what can, and maybe will, be found? The crucial question perhaps is, are we ever going to know?

Volkswagen spent the past few years as the biggest carmaker in the world. It’s safe to put that in the past tense now. But given the size of the company, it’s equally safe to assume that Merkel’s people are cooperating with the company on damage control. Whoever may come down hardest on VW, it won’t be Merkel. There’s too much at stake, economically and therefore politically.

Perhaps France, where way more than half the cars are diesel powered, will see an opportunity to bash VW in order to provide a boost to its own automobile industry. But Merkel would see that coming from miles away, and threaten Hollande into submission. Moreover, how ‘clean’ are French engines? Can Hollande be confident about that?

Perhaps this will not go anywhere unless private investors and citizens align in massive litigation, class action suits. That might work, but it also might take many years to move through court.

The EPA has acted at least somewhat faster, though not as fast as you might think. It has forced VW to recall 500,000 cars in the US, and suspend all further sales. However, it took over a year of EPA pressure for Volkswagen to even admit to what it was doing.

And it took a while before that for the EPA to pick up on research conducted by the California Air Resources Board. Who in turn had joined up with studies already underway at West Virginia University and the non-profit International Council on Clean Transportation, which started ‘investigating’ diesel emissions two years ago.

The fact that the EPA has ordered recalls of vehicles dating back as far as 2009 is an indication of how long’s it’s taken to get this thing to the surface.

Sales of diesel luxury cars are set to plummet; not only Volkswagens, and not only in the US. Which is a big headache, too, for the likes of Mercedes, Renault, Peugeot-Citroën, and a handful of Japanese carmakers.

It’s time for everyone, government agencies, environmental groups, to engage in very thorough testing. We at least know what to look for, and at, now. Or let’s say we know at least one thing that requires severe scrutiny.

But this risks turning into one big political game, being conducted from Merkel’s offices in Berlin. Carmakers are powerful corporations, as of course are diesel producers.

We must first of all look at the reasons why Volkswagen went as far as to develop specialized software systems to hide real emissions. Surely it must have tried to develop engines that would not emit the 10-40 times legal limits they have been found to do at present, before turning to its programmers to ‘solve’ the issue.

And if Volkswagen couldn’t make those engines, why should other carmakers be able to? They all have the ability to take each other’s vehicles apart and find out exactly how they function. It’s not an industry that has too many secrets lying around. Once your product’s on the market, your secrets are too.

Investigators should go talk to the programmers who wrote the software, see what they have to say about why they did it, and who ordered them to. There must be pockets of deep shame and guilt, and fear of repercussions, among programmers and engineers alike. Someone’s bound to give up the goods.

If anything, this could be a good test of the transparency of our societies, our legal systems, and the political clout of major corporations. And that last bit should temper our expectations.