deflation Archives - Page 5 of 16

Declining business investment is hobbling an already sluggish U.S. expansion, raising concerns about the economy’s durability as the presidential campaign heads into its final stretch. GDP, the broadest measure of goods and services produced across the U.S., grew at a seasonally and inflation adjusted annual rate of just 1.2% in the second quarter, the Commerce Department said Friday, well below the pace economists expected. Economic growth is now tracking at a 1% rate in 2016—the weakest start to a year since 2011—when combined with a downwardly revised reading for the first quarter. That makes for an annual average rate of 2.1% growth since the end of the recession, the weakest pace of any expansion since at least 1949.

The output figures are in some ways discordant with other gauges of the economy. The unemployment rate stands at 4.9% after a streak of strong job gains, wages have begun to pick up, and home sales hit a post-recession high last month. Consumer spending also remains strong. Personal consumption, which accounts for more than two-thirds of economic output, expanded at a 4.2% rate in the second quarter, the best gain since late 2014. On the downside, the third straight quarter of reduced business investment, a large paring back of inventories and declining government spending cut into those gains. “Consumer spending growth was the sole element of good news” in the latest GDP figures, said Gregory Daco at Oxford Economics. “Weakness in business investment is an important and lingering growth constraint.”

“This is a market operation that will reinforce the capital position of the bank and free it completely of bad loans…” If it’s that easy, do it all over the place, I’d think. Who do they think they’re fooling?

• Rescue Package In Place For Europe’s Oldest Bank, Weakest In Stress Tests (G.)

A rescue package of the world’s oldest bank has been announced after a health check of the biggest banks across the EU showed that Banca Monte dei Paschi di Siena’s financial position would be wiped out if the global economy and financial markets came under strain. The much-anticipated result of the stress tests – for which there was no pass or fail mark – of 51 banks showed that Italy’s third largest bank emerged weakest from the assessment. But the test – which exposed banks to headwinds in the global economy and dramatic movements in currency markets – also underlined the drop in the capital position of bailed-out Royal Bank of Scotland and the hit taken by Barclays observed under the imaginary scenarios. Banks from Italy, Ireland, Spain and Austria fared worst.

Regulators said that the tests showed that the bank sector was much stronger than it had been at the time of the 2008 financial crisis, which led to the introduction of the stress tests. Even so, the European Banking Authority (EBA), which conducted the tests on lenders, acknowledged that more needed to done.Under the latest stress test scenario, some €269bn (£227bn) would be wiped off the capital bases of the banks. “The EBA’s 2016 stress test shows the benefits of capital strengthening done so far are reflected in the resilience of the EU banking sector to a severe shock,” said Andrea Enria, EBA chair. “This stress test is a vital tool to assist supervisors in accelerating the process of repair of banks’ balance sheets, which is so important for restoring lending to households and businesses.

“The EBA’s stress test is not a pass [or] fail exercise. While we recognise the extensive capital raising done so far, this is not a clean bill of health. There remains work to do which supervisors will undertake.” The bank that fared the worst was MPS, which suffered a dramatic 14 percentage point fall in its capital position. It had been expected to perform badly and talks had already been underway before the results of the stress tests were published to try to find a way to bolster its capital. New EU regulations prevented the Italian government from pumping any taxpayer money into MPS so efforts were needed to try to stop of tens of thousands of ordinary Italians – who had bought its bonds – losing their savings. Italy’s banks are in the spotlight as they are weighed down by €360bn of bad debts.

Italy’s finance minister, Pier Carlo Padoan – who as recently as Sunday said there was no crisis in Italy – endorsed the deal put together to raise €5bn from private investors and sell €9.2bn of bad debts. “The government is greatly satisfied with the operation [the deal] launched … by Monte dei Paschi of Siena,” he said. “This is a market operation that will reinforce the capital position of the bank and free it completely of bad loans. The operation will allow the bank to develop a solid industrial plan, thanks to which it will boost its support for the real economy through lending to families and businesses.”

Unintended consequences. Hilarious, really.

• ECB Bond Buying Risks Blocking Debt Restructurings (R.)

The European Central Bank could scupper future eurozone debt restructurings if it increases the amount of a country’s bonds it can buy under its economic stimulus program, a top debt lawyer warned. The problem, on the radar of European authorities suffering a hangover from the 2012 crisis, has been pushed to the fore by expectations the ECB will need to raise limits on its bond purchases to keep its quantitative easing scheme on track.

Kai Schaffelhuber, a partner at law firm Allen & Overy, said that if the ECB permitted itself to buy more than a third of a country’s debt it would make a restructuring of privately-held bonds more difficult, a move that could increase the likelihood of taxpayer rescues. In a debt restructuring, a quorum of investors has to agree the terms of a deal. The ECB cannot participate because it is forbidden from directly financing governments. “They (the ECB) should avoid a situation where they are holding so much (of a) debt that a restructuring becomes virtually impossible,” said Schaffelhuber, whose firm worked on Greece’s 2012 debt restructuring.

Samoa….

• Chinese Capital Outflows May Still Be Happening – But In Disguise (BBG)

When there’s a will to get money out of China, there’s a way: overpay. Authorities in the world’s second-largest economy have been able to pursue a policy of managed depreciation for the Chinese yuan without spooking markets and eliciting expectations of major foreign-exchange volatility, the way the one-off devaluation did last August. One big reason is that Beijing seems to have had success in cracking down on the flood of money leaving the country, which had been prompting sizable drawdowns in the central bank’s foreign currency reserves, to prop up the value of the yuan. But a report from a Nomura team led by Chief China Economist Yang Zhao says these capital outflows have merely taken another form: the over-invoicing of imports from select locales.

And this time, it’s not just a Hong Kong story. “A detailed breakdown by region shows imports from some tax haven islands or offshore financial centres surged” in the first half of the year, he writes, “against the backdrop of a large decline in overall imports.” Now, it may be the China’s appetite for copra and coconut oil, two key Samoan exports, has indeed surged. But Zhao has a different explanation. “This suggests to us that capital outflows may have been disguised as imports in China’s trade with these tax-haven or offshore financial centres, though the precise volumes are unknown,” according to the economist. “With stronger capital controls in place we believe continued capital outflows via the current account are likely.”

Exposing the uselessness of the whole idea.

• Bank of Japan’s Quest for 2% Inflation (BBG)

The U.S. Federal Reserve, the Bank of England and the ECB are among the world’s monetary authorities that have set an inflation target right around 2%. Nowhere, though, does the quest for this special number carry drama like it does in Japan, where Bank of Japan Governor Haruhiko Kuroda has vowed to do whatever it takes to stimulate prices. On Friday in Tokyo, the BOJ indicated there were risks to achieving this target anytime soon.

1. What’s so special about 2%? The BOJ set its current inflation target in January 2013, less than a month after Prime Minister Shinzo Abe came to power with a plan to pull the economy out of two decades of stagnation. In Japan and many other developed economies, prices rising by 2% a year is seen as optimal for encouraging companies to invest and consumers to spend. It’s also thought to be low enough to avoid sparking the runaway inflation that crippled Germany’s Weimar Republic in the 1920s and Zimbabwe in more recent times.

2. How close has Japan gotten to 2% inflation? Not very. What Japan has had, on-and-off since the late 1990s, is deflation – inflation below 0% – with prices dropping across a wide range of goods.

3. What caused deflation? It began with the bursting of a real estate and asset-price bubble. Wounded banks curbed lending, companies focused on cutting debt, wages stagnated and consumers reined in spending. Households became accustomed to falling prices and put off purchases. The global financial crisis of 2008, and the devastating earthquake, tsunami and nuclear meltdown at the Fukushima Daiichi plant in 2011, entrenched what Kuroda describes as a “deflationary mindset” among consumers and companies in Japan. The nation’s aging and shrinking population is now making matters worse.

I think they passed that crossroads long ago. Just didn’t recognize it for what it was.

• The Bank of Japan Is At A Crossroads (BBG)

After more than three years of pumping out wave after wave of cheap money that’s failed to secure its inflation target, the Bank of Japan has signaled a rethink. Instead of buying yet more government bonds, cutting interest rates or pushing further into uncharted territory, the BOJ disappointed some Friday when its policy meeting concluded with only a modest adjustment. Governor Haruhiko Kuroda, 71, and his colleagues declared it was time to assess the impact of their policies, which have variously spurred strong criticism from bankers, bond dealers and some lawmakers and former BOJ executives. The next gathering, on Sept. 20-21, offers a chance to either provide greater evidence that the current framework should continue, head further into uncharted territory, or scale back.

Regardless of the decision, this isn’t where one of the world’s most aggressive central bankers wanted to be in his fourth year in office. In early 2013, he expressed confidence the BOJ had the power to ensure its 2% inflation target could be reached within about two years. This year, with the shock adoption of a negative interest rate policy backfiring through a welter of warnings from commercial banks, there’s a growing perception monetary policy is losing effectiveness. “We are at a turning point” for the BOJ, because “it can no longer assume that stepping harder on the gas pedal would make this car go faster,” said Stephen Jen, co-founder of hedge fund SLJ Macro Partners and a former IMF economist. “Arrow 2 will take the lead now,” he said, in a reference to the three arrows of Abenomics – monetary, fiscal and structural-reform policies.

Yeah, that’ll result in some jail time….

• US Authorities Subpoena Goldman In 1MDB Probe (R.)

U.S. authorities have issued subpoenas to Goldman Sachs for documents related to the bank’s dealings with scandal-hit Malaysian state fund 1MDB, the Wall Street Journal reported late on Friday. Goldman received the subpoenas earlier this year from the U.S. Department of Justice and the Securities and Exchange Commission , the Journal reported, citing a person familiar with the matter. The authorities also want to interview current and former Goldman employees in connection with the inquiries, but none of those meetings had occurred by Friday, WSJ said.

1MDB, which was founded by Malaysian Prime Minister Najib Razak in 2009 shortly after he came to office, is being investigated for money-laundering in at least six countries including the United States, Singapore and Switzerland. Najib has consistently denied any wrongdoing. U.S. law enforcement officials are attempting to identify whether Goldman violated federal law after failing to flag a transaction in Malaysia, the Journal reported in June. New York state regulators have also asked the Wall Street bank for details about probes into billions of dollars it raised in a bond offering for 1MDB, Reuters reported in June, citing a person familiar with the matter.

Note – Steve says: “I’ve said “as early as” 2017 and “between 20% & 70% fall” but all people hear is 2017 & 70%..”

• Australia Headed For Recession As Early As Next Year – Steve Keen (ABC.au)

Australia’s credit binge will lead to a bust as soon as next year, with house prices to fall between 40 and 70% and unemployment to rise sharply, Professor Steve Keen says. The professor famously lost a bet when he predicted a catastrophic crash in Australian house prices following the GFC and had to walk from Canberra to Mount Kosciusko as a result. But he says, this time, he is right and does not have his hiking boots at the ready. “We have borrowed ourselves so much to the hilt that we are now dependent on that continuing to rise over time and it simply won’t,” he told the ABC’s The Business.

Many believe the Reserve Bank has been a steady guiding hand to the Australian economy in the years since the GFC, but Professor Keen believes it has guided the economy “straight toward the shoals” by encouraging households to borrow with low rates which has led to asset bubbles. “They don’t know what they’re doing,” he said. “Our debt level according to the Bank of International Settlements, private debt level, has gone from 150% of GDP to 210% of GDP.” He argued that means a large part of the growth that Australia has enjoyed since the GFC, while many other countries plunged into recession, has been fuelled by a 60% rise in household debt. “Ireland did the same thing when they called themselves the Celtic Tiger and they don’t call themselves that anymore,” he said.

“Spain was doing the same thing during its housing bubble and we’ve replicated the same mistakes. He believes the Reserve Bank will be forced to take rates down to zero from their current level of 1.75% as the economy continues to slow, but that will not stop the collapse of the credit binge that has kept the country afloat until now. “[Lower rates] will suck more people in, it will suck more people in for a while and the [Reserve Bank] can delay this for a while by cutting the rates,” he said. He said the catalysts for the recession were the declining terms of trade, the continued fall in investment into the economy and the Federal Government’s “stupid” pursuit of a budget surplus. “The Government is frankly stupid about the economy and is obsessed about running surpluses when it is bad economics.”

“The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong.”

• ‘Sell The House, Sell The Car, Sell The Kids’ – Gundlach (R.)

Jeffrey Gundlach, the chief executive of DoubleLine Capital, said on Friday that many asset classes look frothy and his firm continues to hold gold, a traditional safe-haven, along with gold miner stocks. Noting the recent run-up in the benchmark Standard & Poor’s 500 index while economic growth remains weak and corporate earnings are stagnant, Gundlach said stock investors have entered a “world of uber complacency.” The S&P 500 on Friday touched an all-time high of 2,177.09, while the government reported that U.S. GDP in the second quarter grew at a meager 1.2% rate. “The artist Christopher Wool has a word painting, ‘Sell the house, sell the car, sell the kids.’ That’s exactly how I feel – sell everything. Nothing here looks good,” Gundlach said in a telephone interview.

“The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong.” Gundlach, who oversees more than $100 billion at Los Angeles-based DoubleLine, said the firm went “maximum negative” on Treasuries on July 6 when the yield on the benchmark 10-year Treasury note hit 1.32%. “We never short in our mainline strategies. We also never go to zero Treasuries. We went to lower weightings and change the duration,” Gundlach said. Currently, the yield on the 10-year Treasury note is 1.45%, which has translated into some profits so far for DoubleLine. “The yield on the 10-year yield may reverse and go lower again but I am not interested. You don’t make any money. The risk-reward is horrific,” Gundlach said. “There is no upside” in Treasury prices.

The perks of trade agreements.

• British Columbia Violates NAFTA With Its Foreign Property Tax (FP)

The British Columbia government has suddenly introduced a penalty tax forcing non-Canadian purchasers of residential real estate in the Greater Vancouver Regional District to pay a 15% tax on all purchases registered from Aug. 2, 2016. This penalty tax discriminates by definition against foreign investors buying residential real estate in the Greater Vancouver Area: Canadian citizens buying residential real estate are exempt; foreign buyers must pay the tax. That discrimination is a glaring violation of our trade treaties. The North American Free Trade Agreement (NAFTA) and other Canadian trade agreements prohibit governments from imposing discriminatory policies that punish foreigners while exempting locals.

NAFTA’s national treatment obligation requires that citizens from other NAFTA partners investing in B.C. receive the same treatment from the government as the very best treatment received by Canadian investors. Americans and Mexicans forced to pay the 15% penalty tax would be able to pursue direct compensation for B.C.’s discriminatory tax from an independent international tribunal. [..] While the vast majority of Vancouver’s foreign property buyers might be Chinese, who were apparently the provincial government’s main target, enough investors from our dozens of treaty partners, comprising of hundreds of affected foreigners with trade rights, could be caught up in this tax, leading to mass claims. Those claims would be against the Canadian government, the signatory to NAFTA and the other international trade treaties, not B.C. Canadian taxpayers could be on the hook for hundreds of millions, or even billions, of dollars.

Big kahuna remains: the classified mails on Hillay’s server(s).

• Another “Smoking Gun” Looms As Hillary Campaign Admits Server Hacked (ZH)

In the third cyberattack on Democratic Party-related servers, Reuters reports that the computer network used by Democratic presidential candidate Hillary Clinton’s campaign was hacked. This follows hacks of the DNC and the DCCC (the party’s fund-raising committee) in the past week. Who to blame this time? Well with US intelligence head Jim Clapper having exclaimed that he was “somewhat taken aback by the hyperventilation [blaming Russia]” by Democratic surrogates, we suspect another scapegoat will need to be found. The latest attack, which was disclosed to Reuters on Friday, follows reports of two other hacks on the Democratic National Committee and the party’s fundraising committee for candidates for the U.S. House of Representatives.

“The U.S. Department of Justice national security division is investigating whether cyber hacking attacks on Democratic political organizations threatened U.S. security, sources familiar with the matter said on Friday. The involvement of the Justice Department’s national security division is a sign that the Obama administration has concluded that the hacking was state sponsored, individuals with knowledge of the investigation said. The Clinton campaign, based in Brooklyn, had no immediate comment and referred Reuters to a comment from earlier this week by campaign senior policy adviser Jake Sullivan criticizing Republican presidential candidate Donald Trump and calling the hacking “a national security issue.”

It was not immediately clear what information on the Clinton campaign’s computer system hackers would have been able to access, but the possibility of more ‘smoking guns’ only rises with each hack. Of course the finger will inevitably be pointed at Vladimir Putin (and his media-designated puppet Trump) but even The Director of Nation Intelligence has urged that an end be put to the “reactionary mode” blaming it all on Russia…

“We don’t know enough to ascribe motivation regardless of who it might have been,” Director of National Intelligence James Clapper said speaking at Aspen’s Security Forum in Colorado, when asked if the media was getting ahead of themselves in fingering the perpetrator of the hack. Speaking on Thursday, Clapper said that Americans need to stop blaming Russia for the hack, telling the crowd that the US has been running in “reactionary mode” when it comes to the numerous cyber-attacks the nation is continuously facing. “I’m somewhat taken aback by the hyperventilation on this,” Clapper said, as cited by the Washington Examiner. “I’m shocked someone did some hacking,” he added sarcastically, “[as if] that’s never happened before.”

Of course that won’t stop the endless distraction and guilt-mongering to avoid any accountability for actual content of anything that is released. Finally, does it not seem a little “reckless” that so many Democratic servers have been hacked so easily?

It’s starting to increase again.

• Greek Islands Appeal For Measures To Deal With Influx Of Refugees (Kath.)

As the influx of migrants from neighboring Turkey continues – with a slight but noticable increase – regional authorities and tourism professionals are calling for measures to support communities on the Aegean islands. Over the past two weeks, following a failed coup in Turkey on July 15, the influx of migrants has increased, according to government figures. Overall, more than 1,000 migrants landed on the five so-called hot spots: Lesvos, Chios, Kos, Samos and Leros since the failed coup. Those islands are now accommodating 9,313 migrants in camps, many of whom have been there for several months awaiting the outcome of asylum applications or deportation.

In a letter to Migration Policy Minister Yiannis Mouzalas and Alternate Defense Minister Dimitris Vitsas, the governor of the northern Aegean region, Christiana Kalogirou, asked for immediate steps to decongest the islands. “We are seeing a constant and apparently increasing flow of migrants and refugees toward the islands of the northern Aegean,” she wrote, noting that the maximum capacity of state reception centers has been exceeded on all the islands. A representative of an aid agency working on Lesvos said that the increase in migrant arrivals on the island has not yet fuelled tensions in the camps. “But if they keep arriving at the same rate, we’ll have a problem soon,” according to the worker who asked not to be identified.

That’s how hard that is. 5p.

• England’s Plastic Bag Usage Drops 85% Since 5p Charge Introduced (G.)

The number of single-use plastic bags used by shoppers in England has plummeted by more than 85% after the introduction of a 5p charge last October, early figures suggest. More than 7bn bags were handed out by seven main supermarkets in the year before the charge, but this figure plummeted to slightly more than 500m in the first six months after the charge was introduced, the Department for Environment, Food and Rural Affairs (Defra) said. The data is the government’s first official assessment of the impact of the charge, which was introduced to help reduce litter and protect wildlife – and the expected full-year drop of 6bn bags was hailed by ministers as a sign that it is working.

The charge has also triggered donations of more than £29m from retailers towards good causes including charities and community groups, according to Defra. England was the last part of the UK to adopt the 5p levy, after successful schemes in Scotland, Wales and Northern Ireland. Retailers with 250 or more full-time equivalent employees have to charge a minimum of 5p for the bags they provide for shopping in stores and for deliveries, but smaller shops and paper bags are not included. There are also exemptions for some goods, such as raw meat and fish, prescription medicines, seeds and flowers and live fish. Around 8m tonnes of plastic makes its way into the world’s oceans each year, posing a serious threat to the marine environment. Experts estimate that plastic is eaten by 31 species of marine mammals and more than 100 species of sea birds.

Debt Rattle July 29 2016

Jul 292016

July 29, 2016 Posted by Raúl Ilargi Meijer at 9:20 am Finance Tagged with: Abenomics, deflation, earnings, global trade, Greece, IMF, Japan, Kuroda, oil, recession, refugees 2 Responses »

Dorothea Lange Crossroads grocery store and filling station, Yakima, Washington, Sumac Park 1939

• IMF: Disastrous Love Affair With Euro, Apologies For Immolation Of Greece (AEP)

• Global Trade Is Not Growing Slower – It’s Not Growing At All (WEF)

• Not Even Fiscal Stimulus Will Save Global Growth – Deutsche Bank (BBG)

• Kuroda’s $26 Billion Gift to Stock Market Underwhelms Investors (BBG)

• Bank of Japan Blames Brexit As It Unleashes More Monetary Stimulus (G.)

• Japan Sees Weaker Consumer Spending, Manufacturing In June (AP)

• Japan Should Stop Chasing A Weaker Yen – Steen Jakobsen (CNBC)

• US Homeownership Rate Falls to Five-Decade Low (WSJ)

• Wholesale California Gasoline Prices Plunge, Consumers Still Pay Up (R.)

• Oil Glut Proves Harder To Kill Than Saudis To Goldman Predicted (BBG)

• In Past 50 Years Earnings Recession This Big Always Triggered Bear Market (F.)

• Barcelona Unveils ‘Shame Counter’ That Tracks Refugee Deaths (AFP)

” They had no fall-back plans on how to tackle a systemic crisis in the eurozone [..] because they had ruled out any possibility that it could happen.”

“Some staff members warned that the design of the euro was fundamentally flawed but they were overruled..”

Ambrose on Twitter: ”IMF seems to have slipped leash of political control. Even its own watchdog in dark on EMU crisis. Astonishing saga..”

• IMF: Disastrous Love Affair With Euro, Apologies For Immolation Of Greece (AEP)

The IMF’s top staff misled their own board, made a series of calamitous misjudgments in Greece, became euphoric cheerleaders for the euro project, ignored warning signs of impending crisis, and collectively failed to grasp an elemental concept of currency theory. This is the lacerating verdict of the IMF’s top watchdog on the Fund’s tangled political role in the eurozone debt crisis, the most damaging episode in the history of the Bretton Woods institutions. It describes a “culture of complacency”, prone to “superficial and mechanistic” analysis, and traces a shocking break-down in the governance of the IMF, leaving it unclear who is ultimately in charge of this extremely powerful organisation. The report by the IMF’s Independent Evaluation Office (IEO) goes above the head of the managing director, Christine Lagarde.

It answers solely to the board of executive directors, and those from Asia and Latin America are clearly incensed at the way EU insiders used the Fund to rescue their own rich currency union and banking system. The three main bail-outs for Greece, Portugal, and Ireland were unprecedented in scale and character. The trio were each allowed to borrow over 2,000% of their allocated quota – more than three times the normal limit – and accounted for 80pc of all lending by the Fund between 2011 and 2014. In an astonishing admission, the report said its own investigators were unable to obtain key records or penetrate the activities of secretive “ad-hoc task forces”. Mrs Lagarde herself is not accused of obstruction.

“Many documents were prepared outside the regular established channels; written documentation on some sensitive matters could not be located. The IEO in some instances has not been able to determine who made certain decisions or what information was available, nor has it been able to assess the relative roles of management and staff,” it said. The report said the whole approach to the eurozone was characterised by “groupthink” and intellectual capture. They had no fall-back plans on how to tackle a systemic crisis in the eurozone – or how to deal with the politics of a multinational currency union – because they had ruled out any possibility that it could happen. “Before the launch of the euro, the IMF’s public statements tended to emphasize the advantages of the common currency, “ it said. Some staff members warned that the design of the euro was fundamentally flawed but they were overruled.

The forecasts for Greek growth compared to what actually happened Credit: IMF

[..] While the Fund’s actions were understandable in the white heat of the crisis, the harsh truth is that the bail-out sacrificed Greece in a “holding action” to save the euro and north European banks. Greece endured the traditional IMF shock of austerity, without the offsetting IMF cure of debt relief and devaluation to restore viability. A sub-report on the Greek saga said the country was forced to go through a staggering squeeze, equal to 11pc of GDP over the first three years. This set off a self-feeding downward spiral. The worse it became, the more Greece was forced cut – what ex-finance minister Yanis Varoufakis called “fiscal water-boarding”. “The automatic stabilizers were not allowed to operate, thus aggravating the pro-cyclicality of the fiscal policy, which exacerbated the contraction,” said the report.

Who says we need global growth?

• Global Trade Is Not Growing Slower – It’s Not Growing At All (WEF)

Falling rates of global trade growth have attracted much comment by analysts and officials, giving rise to a literature on the ‘global trade slowdown’ (Hoekman 2015, Constantinescu et al. 2016). The term ‘slowdown’ gives the impression of world trade losing momentum, but growing nonetheless. The sense of the global pie getting larger has the soothing implication that one nation’s export gains don’t come at the expense of another’s. But are we right to be so sanguine? Using what is widely regarded as the best available data on global trade dynamics, namely, theWorld Trade Monitor prepared by the Netherlands Bureau of Economic Policy Analysis, the 19th Report of the Global Trade Alert, published today, evaluates global trade dynamics (Evenett and Fritz 2016).

Figure 1 World trade plateaued around the start of 2015

Our first finding that the rosy impression painted by some should be set aside. We demonstrate that: •World export volumes reached a plateau at the start of January 2015. The same finding holds if import volume or total volume data are used instead. •Both industrialised countries’ and emerging markets’ trade volumes have plateaued (Figure 1). •Except during global recessions, a plateau lasting 15 months is practically unheard of since the Berlin Wall fell. •In 2015 the best available data on world export volumes diverges markedly from that reported by the WTO, IMF, and World Bank, and probably explains why analysts at these organisations have missed this profound change in global trade dynamics (Table 1).

Table 1 Marked differences in reported global trade volume growth in 2015

“The fight against sluggish growth rates..” Maybe we should stop that fight?

• Not Even Fiscal Stimulus Will Save Global Growth – Deutsche Bank (BBG)

While monetary policy may be at — or beyond — the limits of its usefulness in stoking global growth, economists at Deutsche Bank say fiscal stimulus is unlikely to be much more effective. At least, not the kind that is politically possible. The fight against sluggish growth rates and low inflation has seen central banks from Europe to Japan buy up swaths of the bond market, and experiment with negative interest rates. Yet with growth still stubbornly slow, these efforts are seen either as ineffective or counterproductive, spurring calls for more active fiscal policy, whether it take the form of tax cuts or ‘helicopter money’ transfers to the private sector. Just this past weekend, finance ministers from the Group of Twenty meeting in China gave strong backing to this view.

“Monetary policy alone cannot lead to balanced growth,” they said. “Fiscal strategies are equally important to support our common growth objectives.” Those comments could signal a “new direction for fiscal policy,” according to Deutsche Bank economists led by Peter Hooper. Yet while they welcomed the potential dethroning of monetary policy as “the principal lever of support,” the economists expect that the boost to global growth from the most probable fiscal packages “is likely to be modest.” Europe is in greatest need of fiscal stimulus — even though the ECB has been gobbling up bonds since 2014, and has cut its deposit rate to minus 0.4% — and it’s also where fiscal stimulus would be most effective, according to the Deutsche Bank economists.

Are Kuroda and Abe drifting apart?

• Kuroda’s $26 Billion Gift to Stock Market Underwhelms Investors (BBG)

Welcome to Japan, where a central bank plan to pump $26 billion a year more into stocks and continue buying 30 times that in debt sees equities struggle to advance and bonds plunge. The Topix index slid as much as 1.4% in Tokyo after the Bank of Japan boosted its annual exchange-traded fund budget to 6 trillion yen ($58 billion), from 3.3 trillion yen. Japanese government bonds headed for their steepest slump since 2008, as policy makers retained a plan to expand the monetary base by an annual 80 trillion yen. Speculation among investors and analysts that Friday’s policy announcement might even see the adoption of so-called helicopter money, as well as a cut to the negative deposit rate, resulted in a lukewarm reception for the expanded stimulus program.

The yen surged as much as 2.4%, the most since the U.K. decision to leave the European Union, even as BOJ Governor Haruhiko Kuroda hinted more easing might still be in the pipeline. “The BOJ had a choice of about five boxes to tick today, but only chose one,” said Sean Callow, a senior FX strategist at Westpac Banking in Sydney. “Buying more ETFs was as widely expected as balloons dropping on Hillary.” [..] In an unexpected development, Kuroda has ordered an assessment of the effectiveness of BOJ policy, to be undertaken at the next meeting, which is scheduled for Sept. 20-21.

“The BOJ won’t admit it, but it has reached the limits of quantitative easing and negative rates.”

• Bank of Japan Blames Brexit As It Unleashes More Monetary Stimulus (G.)

The Bank of Japan has announced a modest expansion of its monetary easing programme, blaming Britain’s decision to leave the European Union as the biggest uncertainty facing world markets. The central bank acknowledged government pressure for more action to drive the yen lower and help Japan’s legion of exporters, but stopped short of upping its bond purchases or cutting interest rates. Instead the bank sanctioned an increase in purchases of exchange-traded funds as it attempted to accelerate inflation towards its 2% target. The moves disappointed the markets, which had expected another big influx of liquidity. The Nikkei stock average yo-yoed wildly in the aftermath of the move before falling nearly 2% in late afternoon trade.

Other stock markets in the region were also down while futures trading indicated the FTSE100 and Dow Jones would open slightly down on Friday morning. The yen rose 2% against the US dollar, which will frustrate government attempts to devalue the stubbornly high currency. [..] Some market experts said the lack of bold action suggested the bank had decided that the effectiveness of its huge monetary easing programme had reached its limits. “The BOJ did not live up to expectations … increasing ETF purchases makes no contribution to achieving 2% inflation,” said Norio Miyagawa, senior economist at Mizuho Securities. “The BOJ won’t admit it, but it has reached the limits of quantitative easing and negative rates.”

After Abenomics has been running for 3 years, deflation continues unabated.

• Japan Sees Weaker Consumer Spending, Manufacturing In June (AP)

Japan reported further signs of weakness in its economy in June, with industrial output and consumer spending falling from the year before. The data released Friday were in line with expectations the central bank may follow the government’s lead in opting for more stimulus at a policy meeting that ends Friday. Core inflation excluding volatile food prices dropped 0.5% from 0.4% in May. The Bank of Japan and government have made scant progress toward a 2% inflation goal set more than three year ago, partly due to the prolonged slump in crude oil prices.

Household spending fell 2.2% from a year earlier, while industrial output slipped 1.9% on an annual basis. Earlier this week Prime Minister Shinzo Abe announced plans to propose 28 trillion yen ($267 billion) in spending initiatives to help support the sagging economic recovery. Household incomes rose 0.3% in June, weak for a month when workers commonly receive bonuses.

Let’s not pretend there is a way out for Japan.

• Japan Should Stop Chasing A Weaker Yen – Steen Jakobsen (CNBC)

Japan has aimed a lot of firepower at keeping its currency weak, but a stronger yen might be just what the long moribund economy really needs, said Saxo Bank’s Chief Investment Officer Steen Jakobsen. “The government of Japan sort of quasi-promises to maintain a weak yen in order to support and buy time for the export companies,” Jakobsen said. “Having a focus only on the export sector takes away from [what] the focus should be: To reform the domestic economy.” Jakobsen’s comments came just as Japan appears set to level a double bazooka of easing at its sluggish economy, firepower that appears aimed, at least in part, at wiping out the recent gains in the newly resurgent yen.

The Bank of Japan was widely expected to announce another monetary easing bomb at the close of its two-day meeting on Friday, with analysts anticipating that the central bank would either cut interest rates deeper into negative territory or expand its asset purchase program or both. At the same time, fresh fiscal stimulus was expected to offer additional cross fire. News agency Jiji reported that Prime Minister Shinzo Abe had revealed a 28 trillion yen ($265 billion) injection, which Reuters estimated at 6% of Japan’s economy.

The double-barreled approach was in line with Abe’s plan to break Japan’s economy out of a decades-long deflationary spiral. That effort, dubbed Abenomics, was introduced in 2013 with a plan for three “arrows:” A first arrow of massive quantitative easing from the BOJ, followed by a second arrow of increased government spending and a third arrow of structural reforms, including immigration and labor changes. But Jakobsen noted that the latest plan for combined BOJ and fiscal easing just replayed the same strategy. “The present situation we’re talking about is just re-launching arrow one and two,” he said. “We’re still missing arrow number three, which is the reform side.”

It didn’t take long to kill the dream.

• US Homeownership Rate Falls to Five-Decade Low (WSJ)

The U.S. homeownership rate fell to the lowest level in more than 50 years in the second quarter of 2016, a reflection of the lingering effects of the housing bust, financial hurdles to buying and shifting demographics across the country. But the bigger picture also suggests more Americans are gaining the confidence to strike out on their own, albeit as renters rather than buyers. The homeownership rate, the proportion of households that are owner-occupied, fell to 62.9%, half a percentage point lower than the second quarter of 2015 and 0.6%age point lower than the first quarter 2016, the Census Bureau said on Thursday. That was the lowest figure since 1965.

There are many ways to interpret the numbers. Part of the story is the catastrophic housing market collapse, which was especially severe for Generation X—those born from 1965 to 1984. Younger households may struggle to save amid student debt, growing rents, rising home prices and limited inventories of starter homes. Indeed, the homeownership rate for 18- to 35-year-olds slipped to 34.1%, the lowest level in records dating to 1994. At 77.9%, the homeownership rate was highest for those 65 years and over.

But the broader picture suggests a degree of economic strength: Renters are spurring a steady increase in overall household formation. Renter-occupied housing units jumped by 967,000 from the same period a year earlier. Overall, household formation has been fairly steady since the early days of the expansion. A rising number of households suggests more people are optimistic enough to strike out on their own and helps further spur growth as they buy furniture, start families and move up the economic ladder. Indeed, moving into a rental unit has been entirely responsible for rising household formation since the recession began.

“It’s probably going to take a little longer than they expected.” “Demand growth has faltered a bit.”

• Oil Glut Proves Harder To Kill Than Saudis To Goldman Predicted (BBG)

The bullish spirit that gripped oil traders as industry giants from Saudi Arabia to Goldman Sachs declared the supply glut over is rapidly ebbing away. Oil is poised for a drop of 20% since early June, meeting the definition of a bear market. While excess crude production is abating, inventories around the world are brimming, especially for gasoline, and a revival in U.S. drilling threatens to swell supplies further. As the output disruptions that cleared some of the surplus earlier this year begin to be resolved, crude could again slump toward $30 a barrel, Morgan Stanley predicts. “The tables are turning on the bulls, who were prematurely constructive on oil prices on the basis the re-balancing of the oil market was a done deal,” said Harry Tchilinguirian at BNP Paribas in London.

“It’s probably going to take a little longer than they expected.” Oil almost doubled in New York between February and June as big names from Goldman and the International Energy Agency to new Saudi Energy Minister Khalid Al-Falih said declining U.S. oil production and disruptions from Nigeria to Canada were finally ending years of oversupply. Prices retreated to a three-month low near $41 a barrel this week amid a growing recognition the surplus will take time to clear. “There’s lots of crude and refined products around,” said David Fransen, Geneva-based head of Vitol SA, the biggest independent oil trader. “Demand growth has faltered a bit.”

Don’t worry, prices will come down.

• Wholesale California Gasoline Prices Plunge, Consumers Still Pay Up (R.)

Wholesale gasoline in California became the cheapest in the country this week, but that change has largely gone unseen at the pump, where consumers are still paying the highest prices in the continental United States to fill up their cars. Ample inventories along with relatively stable refinery operations and imports has driven down the spot value of gasoline in Los Angeles at the wholesale level by more than 60 cents since mid-June. However, that has not translated to similarly lower retail fuel prices for consumers because of peculiarities in California’s market. The declines in the state’s retail gasoline market over that period of time have averaged less than 14 cents, according to data from the U.S. Energy Information Administration.

On Thursday, wholesale California gasoline was trading below $1.20 a gallon. The spread between California’s wholesale and retail gasoline markets was about $1.50 a gallon the week to July 25, about 40 cents wider than a similar spread in the New York market. California is one of the most expensive places in the United States to produce gasoline because of the state’s unique blending requirements and its relative isolation from the rest of the country, which makes securing crude oil to refine pricier. Gasoline prices across the country have plunged as crude has also slumped in the past two years, pressured by a global supply glut. On the West Coast, gasoline stocks are at a five-year seasonal high of 29.6 million barrels, according to the EIA.

Lots of reports due later today.

• In Past 50 Years Earnings Recession This Big Always Triggered Bear Market (F.)

It’s earnings season once again and it looks as if, as a group, corporate America still can’t find the end of its earnings decline since profits peaked over a year ago. What’s more analysts, renowned for their Pollyannish expectations, can’t seem to find it, either. So I thought it might be interesting to look at what the stock market has done in the past during earnings recessions comparable to the current one. And it’s pretty eye-opening. Over the past half-century, we have never seen a decline in earnings of this magnitude without at least a 20% fall in stock prices, a hurdle many use to define a bear market. In other words, buying the new highs in the S&P 500 today means you believe “this time is different.” It could turn out that way but history shows that sort of thinking to be very dangerous to your financial wellbeing.

Great idea. There should be one in Athens too.

• Barcelona Unveils ‘Shame Counter’ That Tracks Refugee Deaths (AFP)

Spain’s seaside city of Barcelona on Thursday unveiled a large digital counter that will track the number of refugees who die in the Mediterranean, next to one of its popular beaches. “We are inaugurating this shame counter which will update all known victims who drowned in the Mediterranean in real time,” said Mayor Ada Colau. The monument consists of a large metal rectangular pillar that comes decked out with a digital counter above the inscription “This isn’t just a number, these are people.”

The counter kicked off with 3,034 — the number of migrants and refugees who have died trying to cross the Mediterranean to Europe in 2016, according to the International Organization for Migration (IOM). “We’re here to look the Mediterranean in the face and look at this number — 3,034 people who drowned because they were not offered a safe passage,” said Colau, as swimmers took advantage of the last rays of sunshine nearby.

Barcelona’s mayor Ada Colau poses in front a digital billboard that shows the number of refugees who died in the Mediterranean sea, named “the shame counter” (AFP Photo/Josep Lago)

Debt Rattle July 8 2016

Jul 082016

July 8, 2016 Posted by Raúl Ilargi Meijer at 8:05 am Finance Tagged with: AAA, Blair, bonds, Brexit, crisis, debt, deficit, deflation, Hillary, NATO, squeeze, yuan 4 Responses »

Lewis Wickes Hine Whole family works, Browns Mills, New Jersey 1910

• Brexit Opens Up Bank Fault Line From Milan To Lisbon (R.)

• Europe Banks Close to Breaching 2011 Crisis Lows on Italy Woes (BBG)

• EU Declares Spain, Portugal In Violation Of Deficit Rules (EuA)

• UK Property Fund Turmoil Continues As Three More Firms Cut Value (G.)

• World Faces Deflation Shock As China Devalues At Accelerating Pace (AEP)

• Forget Brexit, Watch China And The Renminbi (VW)

• Central Banks Put Squeeze on Sovereign-Debt Market (WSJ)

• Bond Market Is In An ‘Epic Bubble Of Colossal Proportions,’ Says Boockvar (CNBC)

• Race And Real Estate: How Hot Chinese Money Is Making Vancouver Unlivable (G.)

• Why Australia Could Be About To Lose Its AAA Rating (VW)

• Chilcot’s Judgment Is Utterly Damning – But It’s Still Not Justice (Monbiot)

• More Obscuration From The British Establishment (Paul Craig Roberts)

• The United States and NATO Are Preparing for a Major War With Russia (Klare)

• Pressure Mounts For Varoufakis’ Secret Plan X To Be Investigated (Kath.)

• The Strange Gaps in Hillary Clinton’s Email Traffic (Pol.)

• Marine’s Defense For Handling Classified Info Will Cite Hillary Case (WaPo)

• Europe Is Full … Of Empty Houses (LifeSeekers)

Beautiful Brexit bursts bubbles.

• Brexit Opens Up Bank Fault Line From Milan To Lisbon (R.)

The ripples from Britain’s decision to leave the EU have spread across Europe to its southwestern edge, where Portugal is quietly struggling to contain a banking crisis. Since Britain’s shock vote on June 23 for a “Brexit”, attention in the banking sector has mainly focused on Italy, where non-performing loans are causing concern, bank shares have tumbled and confidence has sunk. Political tensions in Europe have also deepened, with Rome and Lisbon trying to bend EU rules on helping laggard banks but meeting resistance from economic powerhouse Germany and the executive European Commission. “It’s putting the whole banking system under stress,” said Gunnar Hokmark, a lawmaker in the European Parliament, echoing the nervousness expressed by investors who spoke to Reuters.

“It will be serious for countries in a fragile situation,” said Hokmark, who helped write rules imposing losses on bondholders and large depositors of failing banks which Portugal and Italy want loosened to allow state help. Portugal’s problems have attracted fewer headlines than Italy’s but its predicament is potentially no less painful. Data show Portuguese savings are being spent, unlike in Italy, and private debt is much higher. A euro zone official who asked not be identified said Portugal’s situation was as critical as Italy’s but it was unlikely to be treated with leniency because it was smaller and posed no “systemic” threat to Europe’s financial stability. Portugal sees it differently. “Wherever you look, there is a threat or a risk,” said Filipe Garcia, a financial expert and consultant in Portugal.

How much did Draghi spend to reach this point?

• Europe Banks Close to Breaching 2011 Crisis Lows on Italy Woes (BBG)

European banks have fallen to levels not seen since the worst days of the region’s debt crisis as turmoil surrounding Italy’s lenders intensified. Worries about market contagion dragged the Stoxx Europe 600 Banks Index just 1.4% away from its 2011 low. Most of Europe’s banks lost at least 40% of their value in the last year – Banco Popular Espanol, Banca Monte dei Paschi di Siena, Deutsche Bank and Credit Suisse reached fresh record lows this week.

If EU sanctions Madrid and Lisbon, it can’t leave others be.

• EU Declares Spain, Portugal In Violation Of Deficit Rules (EuA)

The European Commission on Thursday (7 July) officially declared Spain and Portugal in violation of the EU rules on government overspending, the first step towards unprecedented penalties against members of the 28-country bloc. “The Commission confirms that Spain and Portugal will not correct their excessive deficits by the recommended deadline,” the EU’s executive arm said in a statement. If endorsed by the EU’s finance ministers, the Commission is then legally obliged to propose fines against the two neighbouring countries, which were both hit hard by the financial crisis. “Lately, the two countries have veered off track in the correction of their excessive deficits and have not met their budgetary targets,” said Valdis Dombrovskis, the EU Commission’s VP in charge of the euro.

“We stand ready to work together with the Spanish and Portuguese authorities to define the best path ahead,” he said. Many EU powers led by Germany have long hoped for the Commission to finally crack down on public overspenders, but with populist fires burning after the Brexit vote, ministers meeting in Brussels on Tuesday could decide to delay their immediate endorsement. “There is uncertainty creeping in light of the UK vote result,” an EU diplomat told AFP. France and Italy will be the most willing to delay the penalty process, fearing that their own years of EU rule breaking would put them next in line for a sanction by Brussels. Ahead of the Commission announcement, Portuguese Prime Minister Antonio Costa warned that Brussels would foster a rise in Euroscepticism in Portugal if EU sanctions are applied.

Brexit bursts bubbles. Is that a bad thing?

• UK Property Fund Turmoil Continues As Three More Firms Cut Value (G.)

Shopping centres, office blocks and warehouses worth up to £5bn could be put up for sale as the turmoil in the UK commercial property sector prompted by the Brexit vote forces fund managers to revalue their portfolios or temporarily prevent investors withdrawing their savings. With the pound under pressure on the foreign exchange markets, fund managers Legal & General, Foreign & Colonial and Dutch-owned Kames cut the value of their property funds on Thursday. L&G cut the value of its £2.3bn fund by 10% – following a 5% cut last week – while F&C and Kanes both cut by 5%. Aberdeen Fund Management announced on Wednesday it was halting trading in its property fund for 24 hours and devaluing it by 17% – thought to be the biggest adjustment ever made by a property fund.

Aberdeen has since extended the trading ban until Monday. Others have suspended dealings for longer, starting with Standard Life’s decision on Monday to halt trading in its £2.9bn commercial property fund, leading to a cascade effect with Aviva, Prudential’s M&G, Henderson, Columbia Threadneedle and Canada Life following suit – taking the total value of property funds suspended to £18bn. Mike Prew, equity analyst at Jefferies, said buildings could be sold to find the cash to repay investors in the funds: “We estimate that £3bn to £5bn of assets could be put up for sale but it’s a trading vacuum and what sells is likely to get a hefty Brexit discount. “Buildings are now being readied for sale but keys to cash can typically take three to six months.”

One of the factors weighing on sentiment is uncertainty about the role of London as a financial centre outside the EU. George Osborne, the chancellor, met the heads of major international banks including Goldman Sachs and Morgan Stanley on Thursday to discuss ways to keep the City as a major trading centre. “We are determined to work together,” they said in a joint statement.

Ambrose lags me by a week: Deflation Is Blowing In On An Eastern Trade Wind

• World Faces Deflation Shock As China Devalues At Accelerating Pace (AEP)

China has abandoned a solemn pledge to keep its exchange rate stable and is carrying out a systematic devaluation of the yuan, sending a powerful deflationary impulse through a global economy already caught in a 1930s trap. The country’s currency basket has been sliding at an annual pace of 12pc since the start of the year. This has picked up sharply since the Brexit vote, suggesting that the People’s Bank (PBOC) may be taking advantage of the distraction to push through a sharper devaluation. “This makes a mockery of the PBOC’s suggestion that its policy is to keep the currency’s value stable,” said Mark Williams, chief China economist at Capital Economics. “Markets will not take PBOC policy statements at face value in the future.”

Mr Williams said it is unclear whether Beijing intended to deceive investors all along when it gave categorical assurances earlier this year, or whether it is feeding on events. Either way the markets have stopped believing what they are told, storing serious trouble for the authorities should there be another surge in capital flight later this year, as widely expected. “When it comes, the PBOC will find itself sorely lacking in credibility. It may have to intervene on a large scale to maintain control,” he said. Factory gate prices within China are falling at a rate of 2.9pc, further amplifying the deflationary impact. Analysts fear that Beijing is engaged is an undeclared policy of beggar-thy-neighbour mercantilism, trying to avert an industrial crisis at home by exporting its overcapacity in steel, shipbuilding, chemicals, plastics, paper, glass, and even solar panels, to the rest for the world.

“When you have a relatively closed capital account like China, it means that any currency move like this is a policy decision,” said Hans Redeker, currency chief at Morgan Stanley. “They seem to be overriding their own model and letting the remnimbi (yuan) fall to improve competitiveness. They are in the same sort of deflationary syndrome as Japan in the 1990 but on a much bigger scale. The global economy is in no position to absorb this.”

Again, Deflation Is Blowing In On An Eastern Trade Wind.

• Forget Brexit, Watch China And The Renminbi (VW)

As the world’s attention has been fixed on Brexit and meltdown of the European financial system, China has been quietly devaluing its currency without causing too much turbulence in the financial markets as it did the last time policymakers attempted such a strategy. On Wednesday the yuan fell to a fresh five-and-a-half-year low against the dollar extending its slide to a fifth straight session, after China’s central bank sharply weakened its official guidance rate as the dollar surged. The yuan traded as low as 6.6955 against the dollar at one point, closing in on the psychologically important 6.7 level. China’s policymakers have made it clear that they are willing to let the yuan fall as low as 6.8 per dollar in 2016 to support struggling exporters, a depreciation of 4.5% for the full year matching last year’s decline.

This time around China’s central bank is trying to send a message to the markets that it has the depreciation under control. Reuters reports that traders believe state-owned banks across the country are offering dollars to soothe markets while the People’s Bank of China has been intervening in the foreign exchange market to slow down the yuan’s decline. Forex reserves fell by $27.9 billion in May to $3.19 trillion, their lowest since December 2011 although currency movements are almost entirely to blame for the decline. The renminbi depreciated by 1.8% during May. FX reserves increased by $10.3 billion during March and $7.1 billion during April.

Not enough paper left.

• Central Banks Put Squeeze on Sovereign-Debt Market (WSJ)

Christopher Sullivan, a money manager in New York, is worried that when he needs U.S. Treasury bonds one day, he might not be able to get them. On the surface, the concern might seem unwarranted: The U.S. Treasury has $13.4 trillion in debt securities outstanding, making the U.S. bond market the largest in the world and Treasurys among the most easily traded asset classes. But Mr. Sullivan, who oversees $2.3 billion as chief investment officer at the United Nations Federal Credit Union, said he is afraid that he may soon be squeezed out of that market as central banks continue to vacuum up high-quality debt around the world and nervous overseas investors turn to Treasurys for relief.

A buying spree by central banks is reducing the availability of government debt for other buyers and intensifying the bidding wars that break out when investors get jittery, driving prices higher and yields lower. The yield on the benchmark 10-year Treasury note hit a record low Wednesday. “The scarcity factor is there but it really becomes palpable during periods of stress when yields immediately collapse,’’ he said. ”You may be shut out of the bond market just when you need it the most.’’

On Wednesday, the yield on the 20-year Japanese government bond fell below zero for the first time, joining a pool of negative-yielding bonds around the world that has expanded rapidly over the past year. In Switzerland, government bonds through the longest maturity, a bond due in nearly half a century, are now yielding below zero. In Germany, government debt with maturities out as far as January 2031 is trading with negative yields.

Kuroda and Bernanke are meeting next week.

• Bond Market Is In An ‘Epic Bubble Of Colossal Proportions,’ Says Boockvar (CNBC)

One of the most crowded trades on Wall Street is about to implode, says one market watcher. “We’re in an epic bubble of colossal proportions,” Peter Boockvar, at The Lindsey Group, said Tuesday on CNBC’s ” Futures Now “. Global yields have been tumbling to record lows, with many dipping into negative territory. The U.S. 10-year hit its lowest level ever this week as traders continue to seek safety in the bond market. Yields move inversely to prices. However, Boockvar believes that this activity is a ticking time bomb for the global economy. He reasoned that U.S. Treasury yields are being dragged down by negative-yielding debt out of Germany, Japan and Switzerland and misplaced monetary policy, and is therefore skeptical as to how much longer the rally can continue.

“It could be central banks that end this,” said Boockvar in regard to upward momentum for bonds. In his recent coverage, he reacted to the newly released FOMC minutes and further questioned the Fed’s ability to act effectively. “They’ll call it being ‘patient.’ Their forecasts are now irrelevant, their communication is now meaningless and their tools to handle whatever might come our way are toothless,” noted Boockvar when describing the Fed’s ability to address a flattening yield curve. In Europe, concern for Italy’s economy continues to rise as that nation struggles to maintain negative interest rates while simultaneously raising capital for its banking system, which is straddled with mounting debt.

“Maybe Italian banks are telling us that central bankers and their negative interest rate policies are actually destroying the Japanese and European banking system?” asked Boockvar in the CNBC interview. He reasoned that Bank of Japan Governor Haruhiko Kuroda and ECB President Mario Draghi could take a look at what’s happening in Italy and decide that their respective monetary policies are the wrong course of action. Ultimately, Boockvar warned of the fallout that could occur if multiple nations opt to end what he referred to as a “negative deposit rate regime.” “Even if they put it back to zero, imagine the carnage, at least in the short-term bond markets,” concluded Boockvar.

Once again: how to kill a city.

• Race And Real Estate: How Hot Chinese Money Is Making Vancouver Unlivable (G.)

Here’s one,” says Melissa Fong. She’s browsing online real estate listings in a cafe near Vancouver’s City Hall. Behind her, the mountains of the North Shore – the view that launched a thousand bidding wars – rise through mist. “Three-bedroom townhouse, 1,400 sq ft, C$1.5m (£800,000). You could start a family in a place like this. Way, way out of my price range, though.” Fong moves on, scrolling through half a dozen homes, each smaller than the last, until she arrives at a tiny, 500 sq ft condominium on the east side of the city. “Unassuming” would be a generous way to describe how it looks from the photos, which, tellingly, are all exterior shots. “You could live there if you only had one kid, right?” she says with a grim smile.

An urban planning researcher, Fong divides her time between Vancouver, where her elderly parents live, and Toronto, where she’s finishing a doctorate. She grew up in Vancouver, has deep roots in the city, and plans to settle here with her husband, a home renovator. But she has looked on with a mixture of frustration and horror as the cost of housing in Canada’s famously liveable city rise beyond the means of young professionals like her. “When you think it can’t get any worse, it does. So you keep adjusting your expectations, you know?”

Over the past year, the price of a single family house in Vancouver increased by an incredible 30%, to an average of $1.4m. It’s just the latest, most dramatic jump in an already dramatic long-term trend that has turned the beautiful but unassuming Canadian city into one of the world’s least affordable, with a housing price-to-income ratio of 10.8. That’s third after Hong Kong and Sydney, and well ahead of London, which ranks eighth at 8.5. Driving the rise is an unprecedented flood of foreign capital, mainly from China.

“What you have is a huge pool of very wealthy people who want to hedge against uncertainty back home,” says Thomas Davidoff, a real estate economist at the University of British Columbia (UBC). “Combine anxious money – a lot of it – with a beautiful gateway city that has limited space to build, low property taxes, lax regulation on capital flows, and wealth-friendly immigration programmes, and you get a market like this one,” – a market where an ordinary house with a waterfront view can sell for $15m while people earning local wages struggle to buy or rent a home.

Lemme guess. Because it’s f**king broke?

• Why Australia Could Be About To Lose Its AAA Rating (VW)

Australia’s AAA credit rating was under pressure even before the election and is now looking decidedly shaky. Ratings agency Standard & Poors has moved Australia’s rating outlook from “stable” to “negative”, due to debt and a poor chance of budget repair. This follows warnings from the other major credit rating agencies – Moody’s and Fitch Ratings. The problem is budget repair will only become harder over the coming years, whatever the final numbers in the parliament. On the parties’ approach to budget repair, the Coalition and Labor are virtually indistinguishable as far as the credit agencies are concerned. The May budget projected a deficit (in underlying cash terms) of A$37 billion in 2016-17, gradually falling to $6 billion over the four-year forward estimates.

Labor’s plan is to reduce the deficit from $39 billion to $11 billion over that time. Both Coalition and Labor forecast a return to surplus over the subsequent years and indeed quite large surpluses ten years from now. Budget repair on this scale was utterly implausible before the election and is fiction now. The government’s so-called “zombie” budget measures were baked into its projections over the forward estimate period. These were mainly the cuts to university funding, family payments and the Pharmaceutical Benefits Scheme. None of these had any prospect of being legislated with the past Senate, never mind with a larger, more powerful set of crossbench senators.

The Parliamentary Budget Office estimates these “zombie” measures to be worth $8 billion in total over the forward estimates. This accounts for roughly half of the difference between the total projected deficits of Coalition and Labor over the same period. In short, there is little or no prospect of achieving the budget repair that is a pre-requisite for maintaining Australia’s AAA credit rating. Both sides of politics need to spell out to all Australians what this means. The effect of a credit downgrade is like an income cut to households, businesses and government.

Blair won’t be jailed, neither will Dubya or Cheney. But we could at least try to make sure this can’t happen again. By telling them of consequences before they pull these things.

• Chilcot’s Judgment Is Utterly Damning – But It’s Still Not Justice (Monbiot)

Little is more corrosive of democracy than impunity. When politicians do terrible things and suffer no consequences, people lose trust in both politics and justice. They see them, correctly, as instruments deployed by the strong against the weak. Since the first world war, no British prime minister has done anything as terrible as Tony Blair’s invasion of Iraq. This unprovoked war caused the deaths of hundreds of thousands of people and the mutilation of hundreds of thousands more. It flung the whole region into chaos, which has been skillfully exploited by terror groups. Today, three million people in Iraq are internally displaced, and an estimated 10 million need humanitarian assistance.

Yet Blair, the co-author of these crimes, whose lethal combination of appalling judgment and tremendous powers of persuasion made the Iraq war possible, saunters the world, picking up prizes and massive fees, regally granting interviews, cloaked in a forcefield of denial and legal impunity. If this is what politics looks like, is it any wonder that so many people have given up on it? The crucial issue – the legality of the war – was, of course, beyond Sir John Chilcot’s remit. A government whose members were complicit in the matter under investigation (Gordon Brown financed and supported the Iraq war) defined his terms of reference.

This is a fundamental flaw in the way inquiries are established in this country: it’s as if a defendant in a criminal case were able to appoint his own judge, choose the charge on which he is to be tried and have the hearing conducted in his own home. But if Brown imagined Chilcot would give the authors of the war an easy ride, he could not have been more wrong. The Chilcot report, much fiercer than almost anyone anticipated, rips down almost every claim the Labour government made about the invasion and its aftermath. Two weeks before he launched his war of choice, Tony Blair told the Guardian: “Let the day-to-day judgments come and go: be prepared to be judged by history.” Well, that judgment has just been handed down, and it is utterly damning.

PCR gets mad: Elect Hillary and die.

• More Obscuration From The British Establishment (Paul Craig Roberts)

Sir John Chilcot, a member of the British establishment and also a member of the Butler Inquiry, the responsibility of which was to determine if the so-called “intelligence” used as the excuse for the US/UK invasion of Saddam Hussein’s Iraq was “fixed” to justify the invasion, has, after seven years of delay, finally issued its report. Remember, there was a leaked memo from the head of British intelligence that the intelligence justifying the Iraqi Invasion was “fixed” or orchestrated to produce the justification for the invasion, a war crime under the Nuremberg standard established by the United States. Chilcot’s job was to make this fact go away or assume less importance and to protect the Butler Inquiry’s orchestrated verdict that, despite the word of the head of British intelligence, the intelligence was not fixed.

In other words, Sir John’s assigned task under the guise of an “impartial inquiry” was to absolve former UK PM and war criminal Tony Blair not of all responsibility but of all responsibility deserving of prosecution. Sir John’s report is akin to FBI director Comey’s report on Hillary: They did it but they didn’t do it enough to be prosecuted. In the context of democratic politics, if such existed in England, Tony Blair would be in the crosshairs of the ruling UK party, the Tories or Conservatives. Yet, as both parties represent the same private interest groups, the Conservative Prime Minister, David Cameron, who has announced his resignation effective next October, rushed to the opposition party’s defense and gave in Parliament what former British Ambassador Craig Murray calls a “dishonest, apologia for the invasion that bore no relationship to the Chilcot report.”

The UK media, for the most part, also came out in defense of Tony Blair, the war criminal and liar, providing, according to Amb. Murray, “unlimited airtime to Blair and his defender Alastair Campbell” and “almost no airtime to those who campaigned against the war.” Here is the judgement of a British Ambassador, Craig Murray: “Blair is still a creature of absolute self-serving slime.” You could make the same judgment on almost every member of the Bill Clinton, George W. Bush, and Obama regimes. And Hillary’s regime would be even worse. My prediction is that life on earth would not survive Hillary’s first term. Elect Hillary and die.

Not Klare’s strongest effort, but the risk is there.

• The United States and NATO Are Preparing for a Major War With Russia (Klare)

For the first time in a quarter-century, the prospect of war—real war, war between the major powers—will be on the agenda of Western leaders when they meet at the NATO Summit in Warsaw, Poland, on July 8 and 9. Dominating the agenda in Warsaw (aside, of course, from the “Brexit” vote in the UK) will be discussion of plans to reinforce NATO’s “eastern flank”—the arc of former Soviet partners stretching from the Baltic states to the Black Sea that are now allied with the West but fear military assault by Moscow. Until recently, the prospect of such an attack was given little credence in strategic circles, but now many in NATO believe a major war is possible and that robust defensive measures are required.

In what is likely to be its most significant move, the Warsaw summit is expected to give formal approval to a plan to deploy four multinational battalions along the eastern flank—one each in Poland, Lithuania, Latvia, and Estonia. Although not deemed sufficient to stop a determined Russian assault, the four battalions would act as a “tripwire,” thrusting soldiers from numerous NATO countries into the line of fire and so ensuring a full-scale, alliance-wide response. This, it is claimed, will deter Russia from undertaking such a move in the first place or ensure its defeat should it be foolhardy enough to start a war.

The United States, of course, is deeply involved in these initiatives. Not only will it supply many of the troops for the four multinational battalions, but it is also taking many steps of its own to bolster NATO’s eastern flank. Spending on the Pentagon’s “European Reassurance Initiative” will quadruple, climbing from $789 million in 2016 to $3.4 billion in 2017. Much of this additional funding will go to the deployment, on a rotating basis, of an additional armored-brigade combat team in northern Europe.

As a further indication of US and NATO determination to prepare for a possible war with Russia, the alliance recently conducted the largest war games in Eastern Europe since the end of the Cold War. Known as Anakonda 2016, the exercise involved some 31,000 troops (about half of them Americans) and thousands of combat vehicles from 24 nations in simulated battle maneuvers across the breadth of Poland. A parallel naval exercise, BALTOPS 16, simulated “high-end maritime warfighting” in the Baltic Sea, including in waters near Kaliningrad, a heavily defended Russian enclave wedged between Poland and Lithuania.

Greek politics has degenerated into Class B theater, and that’s if you want to be overly generous.

• Pressure Mounts For Varoufakis’ Secret Plan X To Be Investigated (Kath.)

Opposition parties kept up the pressure on the government Wednesday to give a clearer account of its actions over the revelations in US economist James K. Galbraith’s latest book regarding preparations in Greece last year for a possible exit from the euro. The opposition pressed home its views on the matter despite the fact that coalition officials distanced themselves from the academic, who clarified exactly what role he played in 2015 while Yanis Varoufakis was finance minister. Writing on the website belonging to the DiEM25 movement founded by Varoufakis, Galbraith said that he had been asked by the then finance minister in March 2015 to “help with a delicate task.” “This was the preparation of a preliminary plan – requested by the prime minister – for the contingency that Greece might be forced out of the euro,” he wrote.

Galbraith said that he worked on a memorandum, called Plan X, for six weeks with a small group of experts that were sworn to secrecy. The economist insisted that the final note, which touched on issues such as issuing a new currency, setting up a new central bank and ensuring law and order, was not intended as a blueprint for exiting the euro but “an outline of measures that might have to be taken and of problems that could occur.” “It was not our mission to make recommendations, and we made none; we were preparing for a scenario that everyone had hoped to avoid,” wrote Galbraith. Despite the academic’s explanation, Alternate Finance Minister Giorgos Houliarakis launched a strong attack on Galbraith during a session in Parliament Wednesday. “Who is this gentleman?” said the ministry official. “What he is saying is unbelievably frivolous.”

“Clinton signed documents declaring she had turned over all of her work-related emails. We now know that is not true. But even more importantly, the absence of emails raises troubling questions about the nature of the correspondence that might have been deleted.”

• The Strange Gaps in Hillary Clinton’s Email Traffic (Pol.)

The past few weeks have brought a myriad of revelations about the private server Hillary Clinton used while she was secretary of state. First, there was the State Department inspector general’s devastating critique of the former secretary’s email practices. Then came sworn testimony of two key Clinton aides about how the server was set up and how the system worked (or didn’t). Just this weekend, Clinton met with the FBI to discuss her email arrangements. And on Tuesday, FBI Director James Comey announced that the agency would not recommend criminal charges over the handling of these emails, while at the same time offering a brutal assessment of how poorly Team Clinton handled classified information.

But, when it comes to Clinton’s correspondence, the most basic and troubling questions still remain unanswered: Why are there gaps in Clinton’s email history? Did she or her team delete emails that she should have made public? The State Department has released what is said to represent all of the work-related, or “official,” emails Clinton sent during her tenure as secretary—a number totaling about 30,000. According to Clinton and her campaign, when they were choosing what correspondence to turn over to State for public release, they deleted 31,830 other emails deemed “personal and private.” But a numeric analysis of the emails that have been made public, focusing on conspicuous lapses in email activity, raises troubling concerns that Clinton or her team might have deleted a number of work-related emails.

We already know that the trove of Clinton’s work-related emails is incomplete. In his comments on Tuesday, Comey declared, “The FBI … discovered several thousand work-related e-mails that were not in the group of 30,000 that were returned by Secretary Clinton to State in 2014.” We also already know that some of those work-related emails could be permanently deleted. Indeed, according to Comey, “It is also likely that there are other work-related e-mails that [Clinton and her team] did not produce to State and that we did not find elsewhere, and that are now gone because they deleted all emails they did not return to State, and the lawyers cleaned their devices in such a way as to preclude complete forensic recovery.”

Why does this matter? Because Clinton signed documents declaring she had turned over all of her work-related emails. We now know that is not true. But even more importantly, the absence of emails raises troubling questions about the nature of the correspondence that might have been deleted.

Saw that coming from miles away.

• Marine’s Defense For Handling Classified Info Will Cite Hillary Case (WaPo)

A Marine Corps officer who has been locked in a legal battle with his service after self-reporting that he improperly disseminated classified information will use Hillary Clinton’s email case to fight his involuntary separation from the service, his lawyer said. Maj. Jason Brezler’s case has been tied up in federal court since he sued the service in December 2014. He became a cause celebre among some members of Congress, Marine generals and military veterans after he sent a classified message using an unclassified Yahoo email account to warn fellow Marines in southern Afghanistan about a potentially corrupt Afghan police chief. A servant of that police official killed three Marines and severely wounded a fourth 17 days later, on Aug. 10, 2012, opening fire with a Kalashnikov rifle in an insider attack.

An attorney for Brezler, Michael J. Bowe, said that he intends to cite the treatment of Clinton “as one of the many, and most egregious examples” of how severely Brezler was punished. FBI Director James B. Comey announced Tuesday that he would not recommend the U.S. government pursue federal charges against Clinton, but he rebuked her “extremely careless” use of a private, unclassified email server while serving as secretary of state. The FBI found that 110 of her emails contained classified information. Bowe said it is impossible to reconcile President Obama’s statement that Clinton’s intentional act of setting up a secret, unsecured email server did not detract “from her excellent ability to carry out her duties” while Brezler received a “completely opposite finding… involving infinitely less sensitive and limited information.”

“..there are at least 15.8 million verified empty homes in Europe..”

• Europe Is Full … Of Empty Houses (LifeSeekers)

“Our country is full” is a statement you might often hear as a justification for not accepting any more migrants and refugees. According to this opinion, European countries do not have capacity to accept more newcomers, who put pressure on infrastructure – and especially housing. But when we look more closely, can it really be said that Europe is full? According to data from the censuses conducted across Europe in 2011, there are at least 15.8 million verified empty homes in Europe; in other words, there are enough empty homes in Europe to house all the asylum seekers that arrived in Europe last year, and all of Europe’s 4 million homeless people, several times over.

However, many Europeans are struggling with a housing market that makes it even more difficult for them to buy or rent a home. There are many reasons for this, including housing speculation, where investors buy houses to use simply as assets to be sold on when their value increases, as well as the economic situation and unstable employment. But what seems clear is that this market is not working for European people, and migrants and refugees are not the cause of the problem. This unfair housing market is especially serious for young people in Europe. Ever-rising rents mean that living situations for most young Europeans are unstable: it’s no surprise that over 48% of young people (aged 18-34) in the EU still live with their parents, unable to truly realise their independence. And meanwhile, there are millions of homes sitting empty.

Deflation Is Blowing In On An Eastern Trade Wind

Jul 022016

July 2, 2016 Posted by Raúl Ilargi Meijer at 4:38 pm Finance Tagged with: China, deflation, devaluation, Japan, money supply, monopoly money, spending, velocity, yen, yuan 1 Response »

Jack Delano “Lower Manhattan seen from the S.S. Coamo leaving New York.” 1941

Brexit is nowhere near the biggest challenge to western economies. And not just because it has devolved into a two-bit theater piece. Though we should not forget the value of that development: it lays bare the real Albion and the power hunger of its supposed leaders. From xenophobia and racism on the streets, to back-stabbing in dimly lit smoky backrooms, there’s not a states(wo)man in sight, and none will be forthcoming. Only sell-outs need apply.

The only person with an ounce of integrity left is Jeremy Corbyn, but his Labour party is dead, which is why he must fight off an entire horde of zombies. Unless Corbyn leaves labour and starts Podemos UK, he’s gone too. The current infighting on both the left and right means there is a unique window for something new, but Brits love what they think are their traditions, plus Corbyn has been Labour all his life, and he just won’t see it.

The main threat inside the EU isn’t Brexit either. It’s Italy. Whose banks sit on over 30% of all eurozone non-performing loans, while its GDP is about 10% of EU GDP. How they would defend it I don’t know, they’re probably counting on not having to, but Juncker and Tusk’s European Commission has apparently approved a scheme worth €150 billion that will allow these banks to issue quasi-sovereign bonds when they come under attack. An attack that is now even more guaranteed to occcur than before.

Still, none of Europe’s internal affairs have anything on what’s coming in from the east. Reading between the lines of Japan’s Tankan survey numbers there is only one possible conclusion: the ongoing and ever more costly utter failure of Abenomics continues unabated.

It’s developing in pretty much the exact way I said it would when Shinzo Abe first announced the policies in late 2012. Not that it was such a brilliant insight, all you had to know is that Abe and his central bank head Kuroda don’t understand what their mastodont problem, deflation, actually is, and that means they are powerless to solve it.

That Abe said somewhere along the way that all that was needed was his people’s confidence to make Abenomics work, says more than enough. The multiple flip-flops over a sales-tax increase say the rest. People don’t become more confident just because someone tells them to; that has the opposite effect. Deflation results from reduced spending, which in turn comes from not only decreasing confidence as well as a decrease in money people have available to spend.

That modern economics sees everything not spent as ‘savings’ adds significantly to the failure -on the part of Abe, Kuroda and just about everyone else- to understand what happened in Japan over the past 2-3 decades. To repeat once again, inflation/deflation is the velocity of money multiplied by money- and credit supply. The latter factor has in general gone through the roof, but that means zilch if the former -velocity- tanks.

That this velocity is -still- tanking, in Japan as well as in the western world, is due to, more than anything else, an unparalleled surge in debt. At some point, that will catch up with any economy and society. Even if they are growing, which our economies are not. Growth has been replaced with credit, and credit is debt. It’s safe to say that money velocity cannot possibly ‘recover’ until large swaths of debt have been cancelled, one way or another.

For Japan we saw this week that “..household spending fell for the third straight month in May and core consumer prices suffered their biggest annual drop since 2013..” (Reuters) while “..The Topix index dropped about 9% in June, plunging on June 24 with the Brexit vote, the most since the aftermath of the 2011 earthquake. The yen strengthened about 8% against the dollar in June..“ (Bloomberg).

Japan has an upper-house election in a little over a week, and it seems like Abe can still feel comfortable about his position. A remarkable thing. The country needs to stop digging, it’s in a more than 400% debt-to-GDP hole, but Abe won’t listen. The rising yen is suffocating what is left of the economy, as are the negative interest rates, but all the talk is about ‘further easing’.

Still, Japan is outta here, and this has been obvious for a long time to the more observant observer. In the case of China, it is a more recent phenomenon, and it will even be disputed for a while to come. It’s also one that will have a much more devastating effect on the west. We’ve seen problems in various markets in Singapore, Macau and Hong Kong, but the real issues on the mainland are still to be sprung on us.

Mainland stock exchanges are as good a place as any to begin with. The combined tally for Shanghai and Shenzhen looks like this -data till June 23-; yes, that’s a loss of over 40% in the past year.

Beijing has been trying very hard to paper over these numbers, even quit supporting it all for a while through 2014, only to do a 180º when they didn’t like what they saw (foreign reserves drawdown), and now PBoC injections have gone bonkers: $316 billion in one month would mean $4 trillion on a yearly basis in what is really nothing but monopoly money.

Meanwhile, corporate bonds are, perhaps partly because of volatility, becoming an endangered species. Maybe the PBoC can do something there as well, the way Draghi does in Europe (must be high on the agenda), but there’s already so much bad debt we hardly dare watch.

China must and will try to keep boosting exports by devaluing the yuan. It’s just waiting for an opportunity to do it without being accused of currency manipulation. Perhaps it can create that opportunity?! Create a crisis and then use it?! Regardless, this Reuters headline yesterday sounded very tongue in cheek:

China To ‘Tolerate’ Weaker Yuan

China’s central bank would tolerate a fall in the yuan to as low as 6.8 per dollar in 2016 to support the economy, which would mean the currency matching last year’s record decline of 4.5%, policy sources said. The yuan is already trading at its lowest level in more than five years, so the central bank would ensure any decline is gradual for fear of triggering capital outflows and criticism from trading partners such as the United States, said government economists and advisers involved in regular policy discussions. Presumptive U.S. Republican Presidential nominee Donald Trump already has China in his sights, saying on Wednesday he would label China a currency manipulator if elected in November.

Note: remember Japan above? The yen rose 8% against the USD just in June, as the yuan fell by just 4.5% in all of 2015 (6.8% over the past 2 years). Now you go figure what’s happening to Japan-China trade. And the yuan is still hugely overvalued. But the desire to be part of the IMF basket of currencies comes with obligations. Trump doesn’t help either.

I said in the beginning of this year that a 30% devaluation was something of a minimum, and that certainly continues to stand. So yeah, creating a crisis may be the only way out. An accident in the South China Sea perhaps. Combined with a ‘tolerance’ for a 50% weaker yuan….

All of the above leads us to the title of this essay: deflation is coming in from the east. China’s economy’s already in deflation, even though it will take some time yet to be acknowledged. A very ‘nice’ report from Crescat Capital provides a bunch of clues.

China QE Dwarfs Japan and EU

In July of 2014, we wrote about the huge imbalance with respect to China’s M2 money supply and nominal GDP relative to the US. At the time, China’s M2 money supply was 71% higher than the US but its economy was 56% smaller, which we said was an indication of the overvaluation of the Chinese currency. Since that time, the yuan has fallen by only 6.8% relative to the dollar. We haven’t seen anything yet.

Today, the circumstances have significantly worsened. Money supply has continued to grow faster than GDP. With over $30 trillion of assets in its banking system and an underappreciated non-performing loan problem, we are convinced that China is headed for a twin banking and currency crisis. Money velocity has reached historically low levels which reflects China’s extreme credit imbalance and its crimping impact on its ability to generate future real GDP growth.

Just as worrying as the immense amount of credit built up, China has been reporting major downward revisions in its balance of payments (BoP) accounts. For more than a decade, China had been reporting an impossible twin surplus in its BoP accounts. When we wrote about this issue in 2014, we emphasized the likelihood of massive illicit capital outflows that not been accounted for. At that time, according to the State Administration of Foreign Exchange of China (SAFE), China had accumulated a BoP imbalance that was close to $9.4 trillion surplus since 2000 which we believed represented capital outflows that should have been recorded in the capital account.

The same accumulated BoP number today, revised by SAFE several times since, is now a deficit of about $2.8 trillion. Essentially, with its revisions, the SAFE has acknowledged even more capital outflows over the last 16 years than we had initially identified. On the capital account side, there was a downward revision of $10.1 trillion – from a $4.2 trillion surplus to a $5.9 trillion deficit. On the current account side, the revisions show that Chinese exports have not been as strong as initially reported over the last decade and a half. China’s current account surplus has been reduced by $2.1 trillion– going from $5.1 trillion to $2.9 trillion over the last 16 years. What we initially considered to be a $9.4 trillion imbalance has been more than proven by a $12.2 trillion revision.

Those are some pretty damning numbers, if you sit on them for a bit. There was another graph that came with that report that takes us head first into deflationary territory. China’s velocity of money:

That is utterly devastating. It’s what we see in the US, EU and Japan too, but ‘we’ have thus far been able to export our deflation -to an extent- to … China. No more. China has started exporting its own deflation to the west. Beijing MUST devalue its currency anywhere in the range of 30-50% or its export sector will collapse. It is not difficult.

That it will have to achieve this despite the objections of Donald Trump and the IMF is just a minor pain; Xi Jinping has more pressing matters on his mind. Like pitchforks.

The ‘normal’ response in economics would be: in order to fight deflation, increase consumer spending (aka raise money velocity)! But as we’ve seen with Japan, that’s much easier said than done. Because there are reasons people are not spending. And the only way to overcome that is to guarantee them a good income for a solid time into the future, in an economy that induces confidence.

That is not happening in Japan, or the US or EU, and it’s now gone in China too. Beijing has another additional issue that (formerly) rich countries don’t have. This is from a recent Marketwatch article on Andy Xie:

China Is Headed For A 1929-Style Depression

[..] Xie said China’s trajectory instead resembles the one that led to the Great Depression, when the expansion of credit, loose monetary policy and a widespread belief that asset prices would never fall contributed to rampant speculation that ended with a crippling market crash. China in 2016 looks much the same, according to Xie, with half of the country’s debt propping up real-estate prices and heavy leverage in the stock market – indicating that conditions are ripe for a correction. “The government is allowing speculation by providing cheap financing .. China “is riding a tiger and is terrified of a crash. So it keeps pumping cash into the economy. It is difficult to see how China can avoid a crisis.”

And then check this out:

China’s GDP grew 6.9% in 2015, its slowest pace in a quarter-century. For 2016, Beijing has set a GDP target of 6.5% to 7%; The latest spate of global uncertainties prompted Bank of America Merrill Lynch and Deutsche Bank to trim their forecasts to 6.4% and 6.6%, respectively. The export sector, long a driver of Chinese growth, is sputtering due to global saturation and household consumption is barely 30% of China’s GDP, Xie said. In the U.S., household consumption accounted for more than 68% of GDP in 2014, according to the World Bank.

Yeah, China is supposed to be going from an export driven- to a consumer driven economy. Problem with that seems to be that those consumers would need money to spend, and to earn that money they would need to work in export industries (since there is not nearly enough domestic demand). Bit of a Catch 22. And definitely not one you would want to find yourself in when the global economy is tanking.

The more monopoly money Beijing prints, the more pressure there will be on the yuan. And if they themselves don’t devalue the yuan, the markets will do it for them.

Kyle Bass says China’s $3 trillion corporate bond market is “freezing up” (see the third graph above), which threatens to undermine the $3.5 trillion market for the wealth management products Chinese mom and pops invest in. He expects a whopping $3 trillion in bank losses, an amount equal to the entire corporate bond market (!) “to trigger a bailout, with the central bank slashing reserve requirements, cutting the deposit rate to zero and expanding its balance sheet – all of which will weigh on the yuan.”

With the yuan down by as much as it would seem to be on course for, wages and prices in the west will plummet. This wave of deflation is set to hit western economies already in deflation and already drowning in private debt, and therefore equipped with severely weakened defenses.

Leonard Cohen once wrote a song called “Democracy Is Coming To The USA”. Maybe someone can do a version that says deflation is coming too. Not sure that’s good for democracy, though.

Have a great Holiday Weekend.

Debt Rattle July 1 2016

Jul 012016

July 1, 2016 Posted by Raúl Ilargi Meijer at 9:26 am Finance Tagged with: bonds, Canada, China, deflation, Italy, Japan, jet stream, price discovery, refugees 2 Responses »

Harris&Ewing Oil for salads 1918

• Japan Deflation Intensifies (R.)

• Japan’s Prices Keep Falling in Challenge to Abe, Kuroda (BBG)

• China QE Dwarfs Japan and EU (VW)

• China To ‘Tolerate’ Weaker Yuan (R.)

• China Is Headed For A 1929-Style Depression: Andy Xie (MW)

• Asian Factories Struggle, Brexit Throws Up New Threats (R.)

• Europe Post-Brexit (Brad Setser)

• EU Approves Italian Contingency Plan To Guarantee Bank Liquidity (R.)

• The Italian Job (DDMB)

• Standard & Poor’s Cuts EU Credit Rating (G.)

• Price Discovery, RIP (David Stockman)

• Scientists Warn Of ‘Global Climate Emergency’ Over Jet Stream Shift (Ind.)

• Refugees Encounter a Foreign Word: Welcome (NY Times)

Abenomics and BOJ stimulus are dismal failures. So what to do? Moar of the same of course. How much longer can Abe remain in power?

• Japan Deflation Intensifies (R.)

Japanese manufacturers’ confidence was subdued in June and service-sector sentiment deteriorated from three months ago on weak consumption, a central bank survey showed, in discouraging signs for a fragile economy grappling with a strong yen and slack overseas demand. The results of the survey could have been much worse had it captured the gloom from Britain’s vote last week to leave the EU, which spread turmoil in financial markets and put pressure on the Bank of Japan to expand its stimulus later this month. Separate data on Friday showed household spending fell for the third straight month in May and core consumer prices suffered their biggest annual drop since 2013, keeping policymakers under pressure to do more to spur growth.

“Worsening sentiment for non-manufacturers represents weak demand. This gives the government an incentive to increase stimulus spending,” said Daiju Aoki at UBS Securities. “If the government announces the size of stimulus spending shortly after the upper house election next week, the BOJ could ease policy at the end of the month,” he said. The BOJ’s closely-watched quarterly tankan survey showed the headline index for big manufacturers’ sentiment stood at plus 6, unchanged from three months ago and better than a median market forecast of plus 4. Big non-manufacturers’ sentiment index worsened to plus 19 from plus 22, the survey showed, as retailers felt the pain from weak domestic consumption and a slowdown in spending among overseas tourists.

“The yen strengthened about 8% against the dollar in June.”

• Japan’s Prices Keep Falling in Challenge to Abe, Kuroda (BBG)

With a little more than a week until Japan goes to the polls for an upper-house election, a batch of economic data released Friday underscores the challenge Prime Minister Shinzo Abe faces in convincing voters that his policies are working. Consumer prices excluding fresh food fell for a third straight month and household spending declined, undermining efforts to revitalize the world’s third-largest economy. While corporate confidence and unemployment were unchanged, there is still little pressure for higher wages. Friday’s data followed reports earlier this week showing that industrial production fell more than economists had forecast and retail sales were flat in May, adding to concern that Japan’s recovery may be faltering after the economy returned to growth in the first quarter.

The U.K.’s vote to leave the European Union has strengthened the yen and roiled financial markets, increasing risks to corporate earnings for Japanese companies. The data will put more pressure on Bank of Japan Governor Haruhiko Kuroda to expand monetary stimulus at the policy meeting later this month, especially with the stronger yen and the central bank far from its 2% inflation target. “Given concerns over the effects of the Brexit vote and the strengthening yen, there is a high chance that the BOJ will ease further at its July meeting,” said Hiroaki Muto at Tokai Tokyo Research Center. “If the BOJ doesn’t move this time, there’s a possibility that the yen will strengthen further.” The Topix index dropped about 9% in June, plunging on June 24 with the Brexit vote, the most since the aftermath of the 2011 earthquake. The yen strengthened about 8% against the dollar in June.

Chinese deflation.

• China QE Dwarfs Japan and EU (VW)

In July of 2014, we wrote about the huge imbalance with respect to China’s M2 money supply and nominal GDP relative to the US. At the time, China’s M2 money supply was 71% higher than the US but its economy was 56% smaller, which we said was an indication of the overvaluation of the Chinese currency. Since that time, the yuan has fallen by only 6.8% relative to the dollar. We haven’t seen anything yet. Today, the circumstances have significantly worsened. Money supply has continued to grow faster than GDP. With over $30 trillion of assets in its banking system and an underappreciated non-performing loan problem, we are convinced that China is headed for a twin banking and currency crisis. Money velocity has reached historically low levels which reflects China’s extreme credit imbalance and its crimping impact on its ability to generate future real GDP growth.

Just as worrying as the immense amount of credit built up, China has been reporting major downward revisions in its balance of payments (BoP) accounts. For more than a decade, China had been reporting an impossible twin surplus in its BoP accounts. When we wrote about this issue in 2014, we emphasized the likelihood of massive illicit capital outflows that not been accounted for. At that time, according to the State Administration of Foreign Exchange of China (SAFE), China had accumulated a BoP imbalance that was close to $9.4 trillion surplus since 2000 which we believed represented capital outflows that should have been recorded in the capital account.

The same accumulated BoP number today, revised by SAFE several times since, is now a deficit of about $2.8 trillion. Essentially, with its revisions, the SAFE has acknowledged even more capital outflows over the last 16 years than we had initially identified. On the capital account side, there was a downward revision of $10.1 trillion – from a $4.2 trillion surplus to a $5.9 trillion deficit. On the current account side, the revisions show that Chinese exports have not been as strong as initially reported over the last decade and a half. China’s current account surplus has been reduced by $2.1 trillion– going from $5.1 trillion to $2.9 trillion over the last 16 years. What we initially considered to be a $9.4 trillion imbalance has been more than proven by a $12.2 trillion revision.

Cryptic fun.

• China To ‘Tolerate’ Weaker Yuan (R.)

China’s central bank would tolerate a fall in the yuan to as low as 6.8 per dollar in 2016 to support the economy, which would mean the currency matching last year’s record decline of 4.5%, policy sources said. The yuan is already trading at its lowest level in more than five years, so the central bank would ensure any decline is gradual for fear of triggering capital outflows and criticism from trading partners such as the United States, said government economists and advisers involved in regular policy discussions. Presumptive U.S. Republican Presidential nominee Donald Trump already has China in his sights, saying on Wednesday he would label China a currency manipulator if elected in November.

The economists and advisers are not directly briefed on policy by the People’s Bank of China (PBOC), but they have regular meetings and interactions with central bank officials and they provide policy recommendations. They said the central bank would tolerate a further weakening of the yuan this year to between 6.7-6.8 per dollar. “The central bank is willing to see yuan depreciation, as long as depreciation expectations are under control,” said a government economist, who requested anonymity due to the sensitivity of the matter. “The Brexit vote was a big shock. The market volatility may last for some time.”

Good read.

• China Is Headed For A 1929-Style Depression: Andy Xie (MW)

Andy Xie isn’t known for tepid opinions. The provocative Xie, who was a top economist at the World Bank and Morgan Stanley, found notoriety a decade ago when he left the Wall Street bank after a controversial internal report went public. Today, he is among the loudest voices warning of an inevitable implosion in China, the world’s second-largest economy. Xie, now working independently and based in Shanghai, says the coming collapse won’t be like the Asian currency crisis of 1997 or the U.S. financial meltdown of 2008. In a recent interview with MarketWatch, Xie said China’s trajectory instead resembles the one that led to the Great Depression, when the expansion of credit, loose monetary policy and a widespread belief that asset prices would never fall contributed to rampant speculation that ended with a crippling market crash.

China in 2016 looks much the same, according to Xie, with half of the country’s debt propping up real-estate prices and heavy leverage in the stock market — indicating that conditions are ripe for a correction. “The government is allowing speculation by providing cheap financing,” Xie told MarketWatch. China “is riding a tiger and is terrified of a crash. So it keeps pumping cash into the economy. It is difficult to see how China can avoid a crisis.” Xie’s viewpoints have at times attracted unwelcome attention. In 2006, when he was a star Asia economist at Morgan Stanley a leaked email to colleagues in which he said money laundering was bolstering growth in Singapore led to his abrupt departure from the bank. In early 2007, he termed China’s surging markets a “bubble” that could lead to a banking crisis,” and in 2009 he likened them to a “Ponzi scheme.”

“Most of the responses from manufacturers also preceded the Brexit vote, suggesting July could be even tougher.”

• Asian Factories Struggle, Brexit Throws Up New Threats (R.)

China’s vast factory sector flatlined in June as exports shrank and jobs were cut, a worrying trend evident across Asia that argues for yet more policy stimulus as doubts gather over the potency of measures taken so far. The hard times signaled by a range of surveys was not what the world needed a week after Britain’s vote to leave the European Union condemned that bloc to months, if not years, of political and economic instability. Most of the responses from manufacturers also preceded the Brexit vote, suggesting July could be even tougher. “The unimaginable has happened and the UK vote will cast a long shadow over the UK, Europe and global markets for some time to come,” warned Westpac head currency strategist Robert Rennie.

“A structurally weaker pound, a softer euro and weaker global growth beckons.” Among the many surveys out on Friday, China’s official Purchasing Managers’ Index (PMI) slipped a tick to 50 in June, dead on the level that is supposed to separate growth from contraction. One saving grace was the services sector measure, which nudged up to 53.7 in a positive sign for consumer activity. More worrying was the Caixin version of the PMI, which covers a greater share of smaller firms, where the index fell to a four-month trough of 48.6 in June, from 49.2 in May.

“..the euro area’s aggregate fiscal impulse will be negative in 2017—exactly the opposite of what it should be when a surplus region is faced with a shock to external demand..”

• Europe Post-Brexit (Brad Setser)

A few thoughts, focusing on narrow issues of macroeconomic management rather than the bigger political issues. The U.K. has been running a sizeable current account deficit for some time now, thanks to an unusually low national savings rate. That means, on net, it has been supplying the rest of Europe with demand—something other European countries need. This isn’t likely to provide Britain the negotiating leverage the Brexiters claimed (the other European countries fear the precedent more than the loss of demand) but it will shape the economic fallout. The fall in the pound is a necessary part of the U.K.’s adjustment. It will spread the pain from a downturn in British demand to the rest of the euro area.

Brexit uncertainty is thus a sizable negative shock to growth in Britian’s euro area trading partners not just to Britain itself: relative to the pre-Brexit referendum baseline, I would guess that Brexit uncertainty will knock a cumulative half a%age point off euro area growth over the next two years.* Of course, the euro area, which runs a significant current account surplus and can borrow at low nominal rates, has fiscal capacity to counteract this shock. Germany is being paid to borrow for ten years, and the average ten year rate for the euro area as a whole is around 1%. The euro area could provide a fiscal offset, whether jointly, through new euro area investment funds or simply through a shift in say German policy on public investment and other adjustments to national policy.

I say this knowing full-well the political constraints to fiscal action. The Germans do not want to run a deficit. The Dutch are committed to bringing an already low deficit down further. France, Italy and especially Spain face pressure from the Commission to tighten policy. The Juncker plan never really created the capacity for shared funding of investment. The euro area’s aggregate fiscal stance is, more or less, the sum of national fiscal policies of the biggest euro area economies. If I had to bet, I would bet that the euro area’s aggregate fiscal impulse will be negative in 2017—exactly the opposite of what it should be when a surplus region is faced with a shock to external demand. A lot depends on the fiscal path Spain negotiates once it forms a new government, given that is running the largest fiscal deficit of the euro area’s big five economies.

€150 billion. Chump change. Wait, there was a eurozone debt crisis in 2011?

Italy’s banks can now issue bonds with the same guarantee sovereign bonds have. But only the solvent ones, as in: those who don’t need it.

This is worse than a band-aid. Just wait till the vultures wake up.

• EU Approves Italian Contingency Plan To Guarantee Bank Liquidity (R.)

The European Commission has authorized an Italian government plan to guarantee liquidity for banks in the event of a financial crisis in the euro zone’s third-largest economy, an EU executive spokeswoman said on Thursday. The Commission approved the scheme last Sunday, another EU official said, days after Britain voted to leave the EU, triggering a sell-off in European bank stocks, especially in Italy, home to roughly a third of the euro zone’s bad debts. The scheme, worth up to €150 billion according to some media reports, would only be triggered in circumstances similar to the euro zone debt crisis of 2011, when some banks in the currency bloc needed to be bailed out and the interbank market had ceased to function. “Given the financial markets turmoil of recent days, the government saw it fit to prepare for all scenarios, even the most improbable, to be ready to step in to protect savers,” the Italian Treasury said in a statement.

Italian officials stressed they did not expect Italy to suffer a 2011-style meltdown in confidence but said it was prudent to plan for a worst-case scenario. Italian bank shares ended up 2% on Thursday after news of the scheme. Under the scheme, a bank can ask the government to guarantee its bond issues, ensuring that it can raise money even in troubled markets, but it only applies until the end of this year and only to banks with solvent balance sheets. “In this way, they can issue bonds that, with the assistance of the public guarantee, are similar to an Italian government bond,” said one source familiar with the scheme. [..] Rome has said it is concerned that Italian banks, which hold €360 billion of bad loans, risk attack by hedge funds betting that market turmoil, increased by last week’s Brexit vote, could tip them into a full-blown crisis.

How Germany is blowing up the very EU that is making it rich.

• The Italian Job (DDMB)

More than any of its peers, the Italian economy has suffered since joining the euro in 1999. Since 2007, its economy has contracted by 10% and suffered not one, not two, but three recessions. Competitive export-led growth has been deeply impaired by virtue of Italy’s being effectively yoked to the massive German economy. Despite the rise of China, Germany has been able to maintain its top three ranking among world exporters. The secret weapon? That would be the euro. In 1998, the year before Germany switched to the euro, the country exported $540 billion. By 2015, that figure had swelled to $1.3 trillion. Italy’s exports have also grown, but not nearly as robustly, coming in last year at $459 billion compared to $242 billion the year before it joined the euro.

Just as it once was the case with China, Germany benefits from its relatively weak currency. If Germany was not tethered to its weaker-economy neighbors and was still on the Deutsche Mark, it would have a significantly stronger currency and substantially lower exports due to the price of its exports being much more expensive for world markets. Back in 2011, UBS put pencil to paper and figured that losing the common currency would trigger an immediate effective tax increase for the average German citizen of about €7,000 and between €3,500 to €4,000 every single year going forward. By contrast, swallowing half the debt of Greece, Ireland and Portugal at that time would have generated a little over €1,000 tab per citizen.

Now you see why bailing out is so easy to do, though the Germans do put on a great show of irritation at having to foot such bills. But let’s be honest. Consider the alternative. Reverse that effect and, with all else being equal, you begin to appreciate why Italy’s exports have become relatively more expensive, burdened as they are with a more expensive currency than they would have had. Consider that globalization had already done a number on the country’s once magnificent industrial base when Italy opted into the euro and left the lire behind. Since then, the country’s industrial capacity has been further decimated, shrinking by 15%. To take but one example, in 2007, Italy manufactured 24 million appliances; by 2012 it had declined to 13 million.

S&P doesn’t mind doing useless things.

• Standard & Poor’s Cuts EU Credit Rating (G.)

The European Union has suffered a downgrade of its long-term credit rating following the UK’s Brexit vote last week. In a move that will increase the borrowing costs for the 28-member bloc, the credit ratings agency S&P said the EU should see its status as a safe haven for investors reduced to AA from AA+. The agency said: “After the decision by the UK electorate to leave the EU … we have reassessed our opinion of cohesion within the EU, which we now consider to be a neutral rather than positive rating factor.” International investors use credit agency reports to gauge the safety of their funds and the likelihood that their investments will become insolvent. Pension funds and other investors typically move their money to safe havens in times of uncertainty.

But concerns that the ripple effects of the Brexit vote will hit the profits of corporations in Europe, the US and Japan and hurt government finances have grown in recent days. Earlier this week S&P became the last of the three major ratings agencies to strip the UK of its last AAA rating as it warned that the economic, fiscal and constitutional risks the country faced had increased following the EU referendum result. The UK was placed on negative watch, which puts the government on notice of possible further downgrades, after S&P described the result of the vote as “a seminal event” that would “lead to a less predictable, stable and effective policy framework in the UK”. The agency added that the vote to remain in Scotland and Northern Ireland “creates wider constitutional issues for the country as a whole”.

“..the ECB apparently determined it will not go broke in subzero land even if it is driving insurance companies, pension funds, banks and plain old savers in exactly that direction.”

• Price Discovery, RIP (David Stockman)

That was quick. With nearly 85% of the Brexit loss recovered in three days and the market now up for the quarter and the year, what’s not to like? After all, the central banks are purportedly at the ready, and, in the case of the ECB and BOE, are already swinging into action according to their shills in the MSM. MarketWatch thus noted,

Markets were boosted by reports indicating the ECB is weighing changes to its bond-buying program, while “the Bank of England also said they are all in,” said Joe Saluzzi at Themis Trading. The ECB is considering changing the rules regarding the types of bonds it can buy as part of its stimulus package to amid concerns it could run out of securities to buy under current stipulations, according to Bloomberg News. The report followed comments from BOE Gov. Mark Carney, who indicated the central bank is poised to further ease monetary policy to combat.

Well now, by the sound of it you would think that the madman Draghi is fixing to uncork the mother of all QEs if there is a danger that the ECB will “run out of securities to buy”. Who would have thought that the debt engorged governments of the eurozone couldn’t manufacture enough IOUs to satisfy Mario’s “buy” button? In fact, with public debt at 91% of GDP you would think that the $12.5 trillion outstanding would be enough to go around. It turns out, however, that the operative phrase is “under current stipulations”. In a fit of apparent prudence, the ECB determined that in buying $90 billion of government bonds and other securities per month, it would only purchase securities with a yield higher than its negative 0.4% deposit rate.

That’s right. Stumbling around in their monetary puzzle palace, the geniuses at the ECB determined that subzero rates are just fine with one condition. Namely, so long as they don’t have to pay more to own German bonds, for example, than German banks are paying to deposit excess funds at the ECB. Stated differently, the ECB apparently determined it will not go broke in subzero land even if it is driving insurance companies, pension funds, banks and plain old savers in exactly that direction. But then comes the catch-22. The more bonds Draghi promises to buy, the more the casino front-runners scarf-up those same bonds on 95% repo leverage – knowing that Mario will gift them with a big fat gain on their tiny sliver of capital at risk.

“The behaviour of the jet stream suggests massive hits to the [global] food supply and the potential for massive geopolitical unrest. There’s very strange things going on on planet Earth right now.”

• Scientists Warn Of ‘Global Climate Emergency’ Over Jet Stream Shift (Ind.)

Environmental scientists have declared a “global climate emergency” after the Northern hemisphere jet stream was found to have crossed the equator, bringing “unprecedented” changes to the world’s weather patterns. Robert Scribbler and University of Ottawa researcher Paul Beckwith warned of the “weather-destabilising and extreme weather-generating” consequences of the jet stream shift. The scientists said the anomalies were most likely precipitated by man-made climate change, which caused the jet stream to slow down and create larger waves. Scribbler wrote in a post on his environmental blog on Tuesday: “It’s the very picture of weather-weirding due to climate change. Something that would absolutely not happen in a normal world.

Something, that if it continues, basically threatens seasonal integrity. The blogger explained the barrier between the two jet streams generates the strong divide between summer and winter, and the “death of winter” could commence if it is eroded as warm weather leaks into the “winter zone” of the year. He continued: “As the poles have warmed due to human-forced climate change, the Hemispherical Jet Streams have moved out of the Middle Latitudes more and more. You get this weather-destabilising and extreme weather generating mixing of seasons.” Meanwhile, Mr Beckwith confirmed the changes would usher in a sustained period of “climate system mayhem” which could prove difficult to resolve.

He said: “Our climate system behaviour continues to behave in new and scary ways that we have never anticipated, or seen before. “Welcome to climate chaos. We must declare a global climate emergency. “The behaviour of the jet stream suggests massive hits to the [global] food supply and the potential for massive geopolitical unrest. There’s very strange things going on on planet Earth right now.”

Absolute must read. How is it possible that my adopted home away from home gets it so right, yet no-one else tries to learn from it?

• Refugees Encounter a Foreign Word: Welcome (NY Times)

Much of the world is reacting to the refugee crisis – 21 million displaced from their countries, nearly five million of them Syrian — with hesitation or hostility. Greece shipped desperate migrants back to Turkey; Denmark confiscated their valuables; and even Germany, which has accepted more than half a million refugees, is struggling with growing resistance to them. Broader anxiety about immigration and borders helped motivate Britons to take the extraordinary step last week of voting to leave the EU. In the United States, even before the Orlando massacre spawned new dread about “lone wolf” terrorism, a majority of American governors said they wanted to block Syrian refugees because some could be dangerous.

Donald J. Trump, the presumptive Republican presidential nominee, has called for temporary bans on all Muslims from entering the country and recently warned that Syrian refugees would cause “big problems in the future.” The Obama administration promised to take in 10,000 Syrians by Sept. 30 but has so far admitted about half that many. Just across the border, however, the Canadian government can barely keep up with the demand to welcome them. Many volunteers felt called to action by the photograph of Alan Kurdi, the Syrian toddler whose body washed up last fall on a Turkish beach. He had only a slight connection to Canada – his aunt lived near Vancouver – but his death caused recrimination so strong it helped elect an idealistic, refugee-friendly prime minister, Justin Trudeau.

The Toronto Star greeted the first planeload by splashing “Welcome to Canada” in English and Arabic across its front page. Eager sponsors toured local Middle Eastern supermarkets to learn what to buy and cook and used a toll-free hotline for instant Arabic translation. Impatient would-be sponsors — “an angry mob of do-gooders,” The Star called them — have been seeking more families. The new government committed to taking in 25,000 Syrian refugees and then raised the total by tens of thousands. In the ideal version of private sponsorship, the groups become concierges and surrogate family members who help integrate the outsiders, called “New Canadians.” The hope is that the Syrians will form bonds with those unlike them, from openly gay sponsors to business owners who will help them find jobs to lifelong residents who will take them skating and canoeing.

Ms. McLorg’s group of neighbors and friends includes doctors, economists, a lawyer, an artist, teachers and a bookkeeper. Advocates for sponsorship believe that private citizens can achieve more than the government alone, raising the number of refugees admitted, guiding newcomers more effectively and potentially helping solve the puzzle of how best to resettle Muslims in Western countries. Some advocates even talk about extending the Canadian system across the globe. (Slightly fewer than half of the Syrian refugees who recently arrived in Canada have private sponsors, including some deemed particularly vulnerable who get additional public funds. The rest are resettled by the government.)

Debt Rattle June 30 2016

Jun 302016

June 30, 2016 Posted by Raúl Ilargi Meijer at 8:32 am Finance Tagged with: Brexit, deflation, Deutsche, EU, homeless, lies, pound, refugees, yuan 1 Response »

Harris&Ewing F.W. Grand store, Washington, DC 1925

• The End Of The EU Is Coming: Ron Paul (CNBC)

• ‘British Pound Signals US Stocks Are About To Fall Hard’ (CNBC)

• US Banks Beat Fed Stress Test as Deutsche Bank, Santander Fail Anew (BBG)

• Deutsche Bank Is The Riskiest Financial Institution In The World: IMF (ZH)

• Steve Keen on Brexit (Hartmann)

• Singapore Bank Suspends London Property Loans (R.)

• Was Brexit Fear A Giant Hoax Or Is This The Calm Before The Next Storm? (AEP)

• Poland Calls For Juncker To Quit As Others Fume EU Has Too Much Power (EUK)

• Japan Factory Output Hits 3-Year Low On Weak Domestic Demand, Exports (R.)

• China’s Analysts Haven’t Been This Wrong on Equities Since 2009 (BBG)

• Yuan Heads for Worst Quarter on Record as Outflows Seen Rising (BBG)

• New Zealand Businessmen Mull Buying Cruise Ship To House Homeless (G.)

• More Than 57,000 Migrants And Refugees Stranded In Greece (Kath.)

“It really is coming to an end. It doesn’t mean tomorrow or the next day, but people are going to be really unhappy…”

• The End Of The EU Is Coming: Ron Paul (CNBC)

The historic U.K. vote to leave the European Union is a sign of a major global meltdown, not just a watershed that marks the end of a unified continent, former Rep. Ron Paul says. “I think [the EU] will become nonfunctional,” Paul told CNBC’s “Futures Now” on Tuesday. “It really is coming to an end. It doesn’t mean tomorrow or the next day, but people are going to be really unhappy. The end is coming, but it isn’t coming because of the breakup,” he added. Paul attributed the fallout to “bad fiscal policies” around the globe. He said that as long as interest rates remain low, the markets will remain in bubble territory.

“I think what everyone is looking at is there was a vote, an important vote and it went differently than expected and it sent shock waves through the markets, but I think the concentration is on the wrong issue,” the former Libertarian and Republican Party presidential candidate said. Instead, he said, what has caused so much turmoil is what happened before the recent declines. “What has been preceding this situation that we have throughout the world and this country as well is artificially low interest rates. It causes people to make mistakes in buying bonds,” he said.

Interesting correlation.

• ‘British Pound Signals US Stocks Are About To Fall Hard’ (CNBC)

The euro’s considerable rise against the British pound signals trouble to come for U.S. markets, according to Evercore ISI technical analyst Rich Ross. The euro and the pound fell against the dollar after the U.K. voters opted to leave the EU, but sterling fell further, hitting three-decade lows against the dollar. According to Ross, the relative weakness in the British currency mirrors the euro’s huge rally against the British pound from 2007 to 2009. During that period, U.S. stocks plummeted. As a result, Ross is particularly wary of the euro’s recent strength against the pound.

“This surge that we’re seeing is breaking this multiyear downtrend, breaking out through that 200-week moving average,” Ross said Tuesday on CNBC’s “Trading Nation.” “That could potentially spell problems for the S&P 500 and for risk assets [based on the past], so we want to watch that euro-pound.” Ross believes that the euro’s strength against the pound could just be getting started. “I think there could eventually be upside in the euro-pound to just around 86 cents, and that would likely correspond with further downside for risk assets like stocks, like the S&P 500,” Ross added.

Take a pinch of salt with every stress test.

• US Banks Beat Fed Stress Test as Deutsche Bank, Santander Fail Anew (BBG)

Federal Reserve officials cleared dozens of U.S. banks to boost shareholder payouts after conducting annual stress tests that proved too rigorous, again, for subsidiaries of Deutsche Bank and Banco Santander. JPMorgan Chase, Citigroup, Bank of America and 27 other firms with major U.S. operations passed the exam Wednesday, with many unveiling plans to distribute more capital through dividends and stock buybacks. Even Morgan Stanley, which must shore up internal systems before the Fed issues a final verdict, got conditional permission to boost its dividend 33%. Deutsche Bank and Santander were alone in failing, due to “broad and substantial weaknesses across their capital planning processes,” the Fed said.

While both had adequate capital and showed improvement after failing last year, their plans still relied on assumptions and analyses that “are not reasonable or appropriate,” the regulator said. The findings show U.S. banks have largely adapted to the Fed’s stiffer oversight of capital and internal controls in the wake of 2008’s financial crisis. After years spent cleaning up their balance sheets and stumbling in past exams, Citigroup and Bank of America cleared handily this time and are now moving beyond the penny and nickel dividends they’ve been stuck paying. Deutsche Bank and Santander, meantime, both vowed anew to do better next time.

We knew from their derivatives portfolio.

• Deutsche Bank Is The Riskiest Financial Institution In The World: IMF (ZH)

[..] not only did Deutsche Bank just flunk the Fed’s stress test for the second year in a row, but moments ago in a far more damning analysis, none other than the IMF disclosed that Deutsche Bank poses the greatest systemic risk to the global financial system, explicitly stating that the German bank “appears to be the most important net contributor to systemic risks.” Yes, the same bank whose stock price hit a record low just two days ago. Here is the key section in the report:

Domestically, the largest German banks and insurance companies are highly interconnected. The highest degree of interconnectedness can be found between Allianz, Munich Re, Hannover Re, Deutsche Bank, Commerzbank and Aareal bank, with Allianz being the largest contributor to systemic risks among the publicly-traded German financials. Both Deutsche Bank and Commerzbank are the source of outward spillovers to most other publicly-listed banks and insurers. Given the likelihood of distress spillovers between banks and life insurers, close monitoring and continued systemic risk analysis by authorities is warranted.

Among the G-SIBs, Deutsche Bank appears to be the most important net contributor to systemic risks, followed by HSBC and Credit Suisse. In turn, Commerzbank, while an important player in Germany, does not appear to be a contributor to systemic risks globally. In general, Commerzbank tends to be the recipient of inward spillover from U.S. and European G-SIBs. The relative importance of Deutsche Bank underscores the importance of risk management, intense supervision of G-SIBs and the close monitoring of their cross-border exposures, as well as rapidly completing capacity to implement the new resolution regime.

The IMF also said the German banking system poses a higher degree of possible outward contagion compared with the risks it poses internally. This means that in the global interconnected game of counterparty dominoes, if Deutsche Bank falls, everyone else will follow.

Notwithstanding moderate cross-border exposures on aggregate, the banking sector is a potential source of outward spillovers. Network analysis suggests a higher degree of outward spillovers from the German banking sector than inward spillovers. In particular, Germany, France, the U.K. and the U.S. have the highest degree of outward spillovers as measured by the average percentage of capital loss of other banking systems due to banking sector shock in the source country.

Obviously, I’m with Steve on this.

• Steve Keen on Brexit (Hartmann)

Thom Hartmann talks to Prof. Steve Keen of Kingston University, London, about why Brexit is a response to failed neoliberal policies and why that could be good for all of us.

One less bubble maker.

• Singapore Bank Suspends London Property Loans (R.)

United Overseas Bank, Singapore’s number 3 lender, became the first bank in the city state to suspend its loans program for London properties in the wake of uncertainties caused by Britain’s vote to leave the European Union. As Brexit spooked global markets and pushed the pound to multi-year lows, other Singaporean banks were also advising clients about risks such as currency losses even though they have not followed UOB’s move. “We will temporarily stop receiving foreign property loan applications for London properties,” a UOB spokeswoman said in an email.

“As the aftermath of the UK referendum is still unfolding and given the uncertainties, we need to ensure our customers are cautious with their London property investments.” The Singaporean dollar has gained 10% against the British pound since the referendum, eroding the value of assets held in Britain. Other risks for Singaporean banks have been exacerbated in recent months by an economic slowdown in Asia and rising bad debts in energy-related industries. Moody’s Investors Service on Thursday revised the outlook on Singapore’s banks to negative from stable. This reflected the “weaker operating conditions” against the backdrop of softer regional economic and trade growth, Moody’s said.

Deflation is coming from the east.

• Was Brexit Fear A Giant Hoax Or Is This The Calm Before The Next Storm? (AEP)

Devaluation strikes no fear in a chronic deflationary world where almost every major country is trying to push down its currency to break out of the trap, and largely failing to do so. It would facetious to suggest that Britain has pulled off this trick. Crumbling investor confidence is never a good thing. But the UK has stolen a march of sorts, carrying out a beggar-thy-neighbour devaluation by accident. The pound needs to fall further. It is still too strong for a country with a current account deficit running consistently above 5pc of GDP. The IMF said just before Brexit that sterling was 12pc to 18pc overvalued, and may have to fall more than this to force a lasting realignment of the British economy.

This cure has hardly begun. As of today, sterling is 5pc below its trading range for the last month against the euro and the Chinese yuan. It is weaker against the US dollar but the dollar is on steroids, much to the horror of the US Treasury. The more sterling falls, the greater the net stimulus for the British economy. The reverse holds for the eurozone. It is a further deflationary shock at a time when Europe is already in deflation, when inflation expectations are in free-fall and bond yields are collapsing below zero, and when the ECB is running out of options. There are two dangers for the world economy. One is that China is exporting deflation with alarming intensity. Morgan Stanley estimates that China’s trade-weighted devaluation is running at an annual rate of 11pc, and factory gate deflation adds another 2pc.

This is a tsunami coming from the epicentre of global overcapacity. The other danger is that British and European politicians fail to understand what is coming straight at them from Asia. Britain’s Brexiteers must come up with a coherent policy on trade very fast, and the EU must come off their ideological high-horse and face the reality that they have absolutely no margin for economic error. US Secretary of State John Kerry warned in stark terms on his post-Brexit swoop into Europe that nobody should lose their head, or go off half-cocked, or “start ginning up scatter-brained or revengeful premises.” Nobody seemed to heed his words at the EU’s imperial summit in Brussels, an exercise in righteous anger but not much else. The markets may yet speak in harsher language.

Why do I have the impression the right is sharper these days than the left?

• Poland Calls For Juncker To Quit As Others Fume EU Has Too Much Power (EUK)

After Britain’s shock vote to quit the EU, remaining countries are looking for better deals for themselves, and ordering the union to learn from its mistakes or face further calls for a total break up. Poland, Slovakia, Hungary and the Czech Republic called on Tuesday for the powers of the European Commission to be curbed with Warsaw calling for the dismissal of Mr Juncker, the executive’s head. Last week’s referendum alarmed governments in the former communist eastern region of the EU who had seen London as their main eurosceptic ally in efforts to reduce centralised control from Brussels. Poland’s Foreign Minister Witold Waszczykowski said: “We are asking if this leadership of the European Commission has a right to continue functioning, fixing Europe.

“In our opinion, it does not. New politicians, new commissioners should undertake this task, and first of all we should give new prerogatives to the European Council, because it consists of politicians who have a democratic mandate.” Warsaw has clashed with the Commission over its controversial attempt to curb the powers of the constitutional court, which led Brussels to launch an investigation into the rule of law in Poland. Tension between the Brussels executive, which drafts and enforces EU legislation, and member states, which exercise their authority collectively in the EU Council, has been a permanent feature of the bloc over six decades.

And then throw a surging yen into the mix.

• Japan Factory Output Hits 3-Year Low On Weak Domestic Demand, Exports (R.)

Japan’s industrial output slid in May at the fastest rate in three months to its lowest level since June 2013, highlighting concerns about falling exports and weak consumer spending. May’s 2.3% fall in industrial output considerably exceeded the median estimate for a 0.1% decline forecast in a Reuters poll. “The decline in industrial output is directly related to the decline in exports,” said Hidenobu Tokuda, senior economist at Mizuho Research Institute. “Another factor is the slow recovery in domestic consumer spending. The government should consider some measures to improve domestic demand.” Japan’s government plans to announce more fiscal stimulus spending this autumn to revive Prime Minister Shinzo Abe’s economic agenda.

Strengthening domestic demand has become even more urgent as gains in the yen further threaten exports. Output fell in May due to declines in the production of chemicals, cosmetics, construction equipment and semiconductors, data from the Ministry of Economy, Trade and Industry showed. Manufacturers surveyed by the ministry expect output to rise 1.7% in June and increase 1.3% in July. Exports fell at the fastest pace in four months in May on supply chain disruptions from an earthquake and slow growth in emerging markets, data earlier this month showed. The Bank of Japan’s closely-watched tankan business sentiment survey due on Friday is forecast to show confidence fell to the lowest in three years in April-June.

When things get serious, you lie. Shanghai’s 49% crash over the past year is serious.

• China’s Analysts Haven’t Been This Wrong on Equities Since 2009 (BBG)

China’s gap between profit forecasts and reality is turning into a chasm. Firms in the Shanghai Composite Index reported earnings per share for the past year that were 33% below what analysts had predicted 12 months ago, according to data compiled by Bloomberg. The gap, which this month widened to the most since 2009, far outstrips the difference between projections and actual earnings in the U.S., and is more than double that of Chinese companies in Hong Kong. So how did they get it so wrong? China’s industrial giants are being squeezed as the government reorients the economy around services, leaving excess capacity that translates into volatile earnings.

Those stocks dominate the Shanghai Composite and have been among its steepest decliners in 2016, helping drag the gauge down 17%. As to why analysts didn’t anticipate the scale of the shift: Foundation Asset Management says in a market where short-selling is almost impossible, there’s little demand for negative research and strategists face more pressure to present an optimistic outlook. “The transitioning of the economy from exports to consumer, that’s a painful adjustment that occurs over a number of years,” said Ben Surtees at Jupiter Asset Management in London. “Analysts aren’t capturing the changes that are occurring.”

[..] In just over a year, China’s stock forecasters have weathered a rally that took the Shanghai Composite to a 7-year high in June 2015, and then a 49% crash that prompted authorities to crack down on alleged market manipulation by discouraging short-selling and targeting brokerage executives and journalists. That backdrop is an added reason to present positive research, Ample Capital’s Alex Wong said.

“..37 times more money [left] China than enter[ed] so far this year.”

• Yuan Heads for Worst Quarter on Record as Outflows Seen Rising (BBG)

The yuan’s worst quarterly performance on record is raising the risk of capital flight. China’s currency has slumped 2.9% since the end of March, the most since the nation unified the official and market rates at the start of 1994, to trade near its lowest level in five years. Losses deepened after the U.K.’s vote to secede from the European Union led to a jump in the dollar and dented the outlook for Chinese exports. After turmoil in its currency and stock markets in the past year shook investor confidence, China stopped granting quotas for residents to invest overseas and clamped down on illegal fund transfers to restrain capital outflows.

Policy makers are trying to guide the currency lower versus its trading partners as the economy slows while simultaneously damping expectations of faster depreciation. Goldman Sachs warned Thursday that metals investors are concerned China may sharply weaken its exchange rate. “We see a rising risk that capital outflows could pick up again causing negative headlines and adding to the fragility of current market sentiment,” said Allan von Mehren at Danske Bank. “We expect the depreciation pressure on the Chinese currency to continue over the coming years.” [..] A program allowing some domestic and Hong Kong mutual funds to be sold on either side of the border has seen about 37 times more money leave China than enter so far this year.

Yes, housing bubbles leave people homeless in their wake.

• New Zealand Businessmen Mull Buying Cruise Ship To House Homeless (G.)

A group of New Zealand businessman have come up with an idea to help New Zealand’s homeless – place them on a cruise ship. Charity groups in Auckland estimate hundreds of people are sleeping rough in the city every night, with dozens of working families also bedding down in cars, garages and Te Puea Marae (Maori meeting houses). Christchurch businessman Garry House said: “Living on a cruise ship is not a long-term solution but things are so bad for so many families now it could help ease the pressure for two or three years while longer-term strategies are put into place.”

House has, with a number of colleagues, begun investigating purchasing a 400-bed Italian cruise liner and docking it in Auckland harbour. He estimates the cost of purchasing and transporting it to New Zealand to be at least NZ$5m. It could reach New Zealand from Europe in a month, House said. Auckland’s housing market is one of the most expensive in the world; property prices have increased 77.5% in the past five years, and the average house price is more than NZ$940,000 (£498,000), according to property data provider CoreLogic New Zealand.

Europe’s human values.

• More Than 57,000 Migrants And Refugees Still Stranded In Greece (Kath.)

A total of 57,155 migrants and asylum-seekers are currently in Greece according to fresh data provided by the government. According to the data, 23,675 individuals are currently in northern Greece, 1,703 in central Greece, and 240 in southern Greece. An estimated 8,643 people are scattered around the Aegean islands. No arrivals were recorded in the past 24 hours, the government said. Meanwhile, up to 10,198 refugees are currently staying at official centres set up in Attica region, while the number of those camping out at makeshift facilities is 4,915.

Debt Rattle June 9 2016

Jun 092016

June 9, 2016 Posted by Raúl Ilargi Meijer at 8:33 am Finance Tagged with: asylum, deficit, deflation, Draghi, Erdogan, Iceland, junk, oil, QE, refugees 2 Responses »

G. G. Bain Temporary footpath, Manhattan Bridge 1908

• Everything’s a Buy as Central Banks Keep on Greasing Markets (BBG)

• Draghi Starts Buying Junk Bonds, “Means Business” (BBG)

• FinMin: Greece In ECB’s QE Program By This Fall (Kath.)

• Europe Junk Borrowers Rush to Refinance Before Brexit Vote (BBG)

• China’s Factory-Gate Deflation Eases Somewhat (BBG)

• Chinese Trade Data Lies Exposed -Again- (ZH)

• Cheap Oil Will Weigh On Global Economy, Says World Bank (G.)

• Gulf Nations Must Cut Deficits to Keep Currency Pegs, IMF Says (BBG)

• Hedge Funds’ Fast Money Not Welcome as Iceland Bolsters Defenses (BBG)

• Britain’s Defiant Judges Fight Back Against Europe’s Imperial Court (AEP)

• Greek Asylum Service Starts Process Of Recording Applications (Kath.)

• Erdogan’s Draconian New Law Demolishes Turkey’s EU Ambitions (G.)

As per the apt title of my article yesterday, ‘the only thing that grows is debt’. Markets need price discovery to function, but right now it’s everyone’s biggest fear. “Oil at 8-month high!”

• Everything’s a Buy as Central Banks Keep on Greasing Markets (BBG)

Misery is making strange bedfellows in global markets. At a time when risky assets including stocks, commodities, junk bonds and emerging-market currencies are rallying to multi-month highs, so are the havens, from gold, government bonds to the Swiss franc and the Japanese yen. No matter that the U.S. labor market is deteriorating and the World Bank has just cut its estimates for global economic growth. Investors either don’t believe the news is bad enough to kill a global recovery that’s already long in the tooth, or they’re betting that sluggishness in some of the biggest economies means central banks will stay more accommodative for longer.

“Everything is being driven by high liquidity that ultimately is being provided by central banks,” Simon Quijano-Evans at Commerzbank, Germany’s second-largest lender, said in London. “It’s an unusual situation that’s a spill over from the 2008-09 crisis. Fund managers just have cash to put to work.” For much of the time since the financial meltdown eight years ago, investors have been in the mindset that bad economic data is good news for markets. The near-zero interest-rate policies by major central banks – and negative borrowing costs in Japan and some European nations – have pushed traders to grab anything that offers yield. And every indication that the liquidity punch bowl will stay in place is greeted by markets with a cheer.

Paraphrasing Springsteen: “Someday we’ll look back on this and it will all seem not one bit funny.”

• Draghi Starts Buying Junk Bonds, “Means Business” (BBG)

Since a surprise interest-rate cut at his first meeting as ECB President, Mario Draghi has shown a penchant for pushing the envelope. The bank’s entry into the corporate bond market on Wednesday was no exception: buying bonds with junk ratings. Purchases on the first day included notes from Telecom Italia, according to people familiar with the matter, who aren’t authorized to speak about it and asked not to be identified. Italy’s biggest phone company has speculative-grade ratings at both Moody’s Investors Service and S&P Global Ratings. The company’s bonds only qualifies for the central bank’s purchase program because Fitch Ratings ranks it at investment grade.

By casting his net as wide as the program allows, Draghi ensured that the first day of corporate bond purchases made an impact. While the ECB has said it would buy bonds from companies with a single investment-grade rating, investors expected the central bank to start with the region’s highest-rated securities. “It’s been an aggressive start to the program,” said Jeroen van den Broek at ING Groep in Amsterdam. “The wide-reaching nature of the purchases shows Draghi means business.” [..] Telecom Italia’s bonds are in Bank of America Merrill Lynch’s Euro High Yield Index and credit-default swaps insuring the notes against losses are part of the Markit iTraxx Crossover Index linked to companies with mostly junk ratings.

Moody’s and S&P have ranked Telecom Italia one level below investment grade, at Ba1 and an equivalent BB+ respectively, since 2013. Fitch puts the company at the lowest investment-grade rating and only revised its outlook on that level to stable from negative in November. “This dispels any doubts investors may have had about the commitment of the ECB and the central banks to tackle lower-rated names,” said Alex Eventon at Oddo Meriten Asset Management. “Telecom Italia is firmly at the weak end of the spectrum the ECB can buy.”

I’ll have to see it to believe it. Draghi buys everything not bolted down, but not Greece.

• FinMin: Greece In ECB’s QE Program By This Fall (Kath.)

Greece will enter the ECB’s quantitative easing (QE) program “soon,” Finance Minister Euclid Tsakalotos told Bloomberg in an interview on Wednesday. However, the Greek government’s optimism is not shared by banking sources and analysts, who estimate that Greece’s inclusion in ECB Governor Mario Draghi’s bond-buying program will be tied to the successful completion of the second bailout review in the fall, as well as the progress in talks on settling the problem of the Greek national debt.

In his interview Tsakalotos went as far as to say that Greece will join the QE program by September, stressing that such a development would open the way for the lifting of the capital controls and the gradual restoration of investor trust. He also said that the ECB will start accepting Greek bonds as collateral for loans after Athens completes the July debt repayments to Frankfurt. “I feel confident the Greek bonds will be eligible” by September, he predicted. He also forecast that once Greece enters the QE program, depending also on the decisions on the country’s debt, “you can take Grexit off the table,” referring to the possibility of a Greek exit from the eurozone. “Then you have a straight runway for investors,” he added in the same optimistic spirit.

Draghi’s got your back, guys.

• Europe Junk Borrowers Rush to Refinance Before Brexit Vote (BBG)

Junk-rated companies in Europe are hurrying to refinance debt, locking in borrowing costs at one-year lows amid concerns that a U.K. referendum on EU membership will paralyze markets. Leveraged-loan borrowers are poised to raise more money in euros this week for refinancing than in the whole of May, according to data compiled by Bloomberg. The amount amassed for repaying old debt from selling high-yield bonds is on track to be equal to about two-thirds of comparable sales last month. Companies including Altice and Verisure Holding have entered the market as the start of corporate-bond purchases by the ECB on Wednesday has driven down borrowing costs across the continent.

The window may prove short-lived as banks including Goldman Sachs have said a June 23 vote in favor of a Brexit could roil European markets and endanger economic growth. “It’s possible that uncertainty will rise as we approach the Brexit referendum,” said Colm D’Rosario at Pioneer Investment Management. “Issuers won’t want to wait until then.” Companies may sell about €2.5 billion of leveraged loans and at least €2.6 billion of high-yield bonds for refinancing this week, the Bloomberg data show.

The new reality: “..raw-material producer prices fell 7.2%, less than the prior month’s 7.7% decline..” And what does BBG call this? Yes, that’s right: “Firmer producer prices..”

• China’s Factory-Gate Deflation Eases Somewhat (BBG)

Deflationary pressures in China’s industries eased further in May, while consumer price gains continued to be subdued enough to offer the central bank scope for more easing if needed. Amid a drive by the Communist Party leadership to cut excess capacity, producer prices fell 2.8%, the least since late 2014 and less than the 3.2% decline economists had estimated in a Bloomberg survey. The consumer price index rose 2% from a year earlier, less than the median forecast of 2.2%. Easing factory-gate deflation is the latest signal of stabilization after more than four years of falling producer prices. Tepid consumer price gains may allow the People’s Bank of China, which has kept interest rates at a record low since October, room to add further stimulus in the short term to help prop up growth.

“The deflationary threat has substantially diminished,” said Raymond Yeung at Australia & New Zealand Banking Group in Hong Kong. “Domestic demand has stabilized so we don’t see a strong upward pressure either. We still think the PBOC will remain moderately accommodative.” [..] Mining and raw-materials producer prices slumped less in May than the previous month, though still recorded the biggest declines. Mining producer goods fell 9.6% last month, versus a 13% drop in April, while raw-material producer prices fell 7.2%, less than the prior month’s 7.7% decline, the statistics bureau reported.

“Firmer producer prices reflect a combination of factors,” Bloomberg Intelligence economists Tom Orlik and Fielding Chen wrote in a note. “Commodity prices are a big part of the picture, with oil and iron ore both down less sharply than in 2015. So, too, is slightly more resilient domestic demand. Capacity utilization remains extremely low in historical comparison, but has ticked up over the last few months.”

Different version of the graph I posted yesterday with the comment: “Where would China’s imports be without the fake invoices?”

• Chinese Trade Data Lies Exposed -Again- (ZH)

If March’s 116.5% surge in China imports from Hong Kong didn’t raise eyebrows as the veracity of the trade data, then perhaps following last night’s data drop, this month’s 242.6% explosion year-over in China imports from Hong Kong must at minimum deserve a second glance. As Bloomberg’s Tom Orlik previously noted, the implausible 242.6% YoY surge screams that China is clearly disguising capital flows… Trade mis-invoicing as a way to hide capital flows remains a factor. In the past, over-invoicing for exports was used as a way to hide capital inflows. The latest data show the reverse phenomenon, with over-invoicing of imports as a way of hiding capital outflows. Does this look “real”?

Yes, that’s right. Cheap oil is now bad, all of a sudden. Who could have thought? Oh wait, me.

• Cheap Oil Will Weigh On Global Economy, Says World Bank (G.)

Global growth will slow this year as oil exporters in the developing world struggle to cope with lower energy prices, the World Bank has said in its half-yearly economic health check. The benefit of cheaper oil prices for Europe, Japan and other oil importing nations, which has sustained their growth through 2015 and 2016, has failed to offset a slowdown in parts of Africa, Asia and South America that depend on selling energy to sustain their incomes. In one of the gloomiest predictions by an international forecaster, the bank said the effect of the collapse in oil income on developing countries would restrict global growth to 2.4% this year, well down on its January forecast of 2.9%.

In the UK the growth rate will be restricted to 2% this year and 2.1% in 2017 and in 2018. The US will also stabilise at about 2% annually for the next couple of years, while the eurozone will expand at a more modest 1.6% in 2016 and in 2017 before slipping to 1.5% in 2018. The tumbling price of metals and food on world markets last year hit emerging and developing economies without triggering a significant rise in spending by richer countries. The Washington-based bank, which lends more than £25bn a year to developing countries, said weaker global trade, a downturn in private and public investment and a slump in manufacturing added to the woes of economies that have become dependent on high oil prices to bolster growth.

They all pray for growing demand. There won’t be any.

• Gulf Nations Must Cut Deficits to Keep Currency Pegs, IMF Says (BBG)

Gulf oil exporters must cut spending and narrow their budget shortfalls to keep their currencies pegged to the dollar, the IMF said. While substantial foreign assets have allowed the six members of the Gulf Cooperation Council to fix the value of their currencies to the greenback, keeping the status quo comes at a price as lower crude prices strain public finances, the lender said in a report titled “Learning to Live with Cheaper Oil.” “When a country faces prolonged fiscal and external deficits, policy adjustment must come from fiscal consolidation measures,” the IMF said in the report authored by Martin Sommer, deputy chief of its regional studies division. Maintaining the currency pegs “will require sustained fiscal consolidation through direct expenditure cutbacks and non-oil revenue increases,” it said.

As investors increased bets that currency fixes may become too expensive to maintain, the United Arab Emirates and Saudi Arabia renewed their commitment to their pegs – with the latter also said to ban betting against its currency. Gulf oil producers’ budgets swung from surplus to deficit as Brent crude fell by as much as 75% from June 2014 to January this year, before a partial recovery in recent months. Even after cutting spending, the combined budget gap in the GCC region – which also includes Kuwait, Qatar, Bahrain and Oman – as well as Algeria is expected to reach $900 billion for the period 2016-2021, and represent 7% of their gross domestic product in the final year, the IMF said. Their debt-to-GDP ratio is expected to rise to 45% in 2021 from 13% last year as governments issue debt to plug their budget gaps.

Iceland’s learned a lesson or two.

• Hedge Funds’ Fast Money Not Welcome as Iceland Bolsters Defenses (BBG)

Iceland has gone its own way since its three largest lenders collapsed in 2008 under a mountain of debt almost eight times the size of its economy. The steps included capital controls that locked in hedge funds, mortgage writedowns and throwing bankers in jail. With the recovery well under way, the island nation – once a hedge fund paradise – is continuing on its isolated path. Lawmakers have effectively outlawed the kind of trade that inflated the bubble a decade ago, protecting against a repeat. Surrounded by sub-zero interest rates, Iceland’s benchmark gauge of 5.75%, the highest in the developed world, is luring cash from abroad. That’s unlikely to change any time soon.

“The problem is the ability to have an independent monetary policy and an independent monetary policy means the ability to have a different interest rate than the rest of the world,” central bank Governor Mar Gudmundsson said on Monday. “If that’s not possible, then you can’t have an independent monetary policy. And the problem of very significant interest rate differential – interest rates in Iceland are higher than the rest of the world – will not disappear overnight.” Both geographically and financially Iceland is a small island in vast, turbulent waters. Under the law enacted last week, the central bank over the weekend set rules that will force investors in Icelandic bonds to keep 40% of their investments in a 0% account for a year. That will limit the profit to be made from investing in Iceland, where government bonds offer yields of more than 6%.

Those type of returns are tempting in a world of near zero and even negative key rates. As evidence, the Icelandic krona has strengthened this year even as the central bank has been selling the currency to build up foreign holdings as it prepares to lift the capital controls that have been in place since 2008. But the country may have seen nothing yet, according to the governor. The new rules are a “precautionary” measure to stifle any major flows after the controls are lifted, he said. “There have been certain inflows in the last few months,” he said. “We thought there was a possibility of much greater inflows going forward, especially if the auction goes well and we take further steps to liberalize the capital account and the economy is booming and interest rates are high.”

As I’ve said many times, the EU is made up of sovereign countries, and they’re not going to give up their sovereignty, not a single one of them.

• Britain’s Defiant Judges Fight Back Against Europe’s Imperial Court (AEP)

The British judiciary has begun to draw its sword. For the first time since the European Court asserted supremacy and launched its long campaign of teleological conquest, our own judges are fighting back. It is the first stirring of sovereign resistance against an imperial ECJ that acquired sweeping powers under the Lisbon Treaty, and has since levered its gains to claim jurisdiction over almost everything. What has emerged is an EU supreme court that knows no restraint and has been captured by judicial activists – much like the US Supreme Court in the 1970s, but without two centuries of authority and a ratified constitution to back it up. This is what the Brexit referendum ought to be about, for this thrusting ECJ is in elemental conflict with the supremacy of Parliament. The two cannot co-exist. One or the other must give.

It is the core issue that has been allowed to fester and should have been addressed when David Cameron went to Brussels in February to state Britain’s grievances. It was instead brushed under the carpet. The explosive importance of Lisbon is not just that it enlarged the ECJ’s domain from commercial matters (pillar I), to broad areas of defence, foreign affairs, immigration, justice and home affairs, nor that this great leap forward was rammed through without a referenda – after the French and the Dutch had already rejected it in its original guise as the European Constitution. Lisbon also made the Charter of Fundamental Rights legally-binding. As we have since discovered, that puts our entire commercial, social, and criminal system at the mercy of the ECJ.

The Rubicon was crossed in Åklagaren v Fransson, a VAT tax evasion case in non-euro Sweden. The dispute had nothing to do with the EU. The Charter should come into force only when a country is specifically applying EU law. The ECJ muscled into the case on the grounds that since VAT stems from an EU directive, Sweden was therefore operating “within the scope of EU law”. This can mean anything, and that is the point. To general consternation, it ruled that Sweden had violated the double-jeopardy principle of Article 50 of the Charter. Almost nothing is safe when faced with a court like this, neither the City of London, nor our tax policies or labour laws, nor even our fiscal and monetary self-government. The ECJ can strike down almost any law it wants, with no possibility of appeal.

The EU slowly but surely forces Greece to take in 10s of 1000s of refugees on a -much more- permanent basis. But Erdogan can send a million more.

• Greek Asylum Service Starts Process Of Recording Applications (Kath.)

Greece’s asylum service on Wednesday launched a new scheme for processing registrations from migrants who want to apply for asylum in the country, a process that could take up to a year for many of the applicants, according to sources. The “recognition documents” issued to migrants to date will have their validity extended to cover a year. Many of the documents held by migrants in camps across the country have expired as they apply for six months for Syrians and just one month for all other nationalities.

Once the migrants have been registered, they will be issued with a yellow bracelet bearing their name and other personal details. The registration document and bracelet will grant each migrant the right to legal residence in Greece and access to free healthcare but will not give them permission to work in Greece which must be sought separately. The applicants will be informed by SMS about their interview, according to an official of Greece’s asylum service who said the interview could take place several months after their application “due to the large population of refugees in the country.”

Got the feeling he’s just getting started.

• Erdogan’s Draconian New Law Demolishes Turkey’s EU Ambitions (G.)

Any chance Turkey could join the EU by 2020, as Brexit campaigners have asserted, went up in smoke on Wednesday after the country’s president, Recep Tayyip Erdogan, signed a draconian new law that in effect demolishes any notion that his country is a fully functioning, western-style democracy. EU rules dating to 1993, known as the Copenhagen criteria, insist all applicant states must adhere to a system of democratic governance and uphold other basic principles, such as the rule of law, human rights, freedom of speech, and protection of minorities. Turkey is struggling to meet these standards. The new measures make EU membership even more of a chimera.

They are expected to eviscerate parliamentary opposition to Erdog an’s ruling neo-Islamist Justice and Development party (AKP) by allowing politically inspired, criminal prosecutions of anti-government MPs. The main target is the pro-Kurdish Peoples’ Democratic party (HDP), which Erdog an accuses of complicity in terrorism, although other opposition parties are also affected. By signing the new law, Erdog an, who has dubbed the EU a “Christian club”, has signalled the end of any realistic chance of Turkey joining the union for the foreseeable future. Critics say he may also have sounded the death knell for Turkey’s secular democracy and set the stage for intensified armed conflict with Kurdish groups. Erdogan’s move comes against a backdrop of heightened violence between Turkey’s security forces and militants belonging to the outlawed Kurdistan Workers’ party (PKK) and its radical offshoots.

Debt Rattle May 30 2016

May 302016

May 30, 2016 Posted by Raúl Ilargi Meijer at 7:59 am Finance Tagged with: Abe, bad loans, Brexit, coral, debt, default, deflation, NIRP, obesity, productivity, WMP 9 Responses »

Jack Delano Foggy night in New Bedford, Massachusetts 1941

• The Mystery of Weak US Productivity (Luce)

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

• China’s Veiled Loans May Prove Lethal (BBG)

• How Many Bad Loans Might China Have? (BBG)

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

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

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

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

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

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

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

• 30.4% Of Americans Were Obese In 2015 (Forbes)

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

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

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

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

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

• The Mystery of Weak US Productivity (Luce)

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

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

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

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

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

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

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

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

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

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

• China’s Veiled Loans May Prove Lethal (BBG)

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

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

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

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

• How Many Bad Loans Might China Have? (BBG)

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

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

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

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

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

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

Because they are deflationary.

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

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

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

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

Might as well devalue now.

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

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

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

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

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

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

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

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

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

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

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

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

Unexpected advantages.

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

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

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

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

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

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

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

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

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

• 30.4% Of Americans Were Obese In 2015 (Forbes)

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

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

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

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

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

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

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

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

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

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

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

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

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

Debt Rattle May 27 2016

May 272016

May 27, 2016 Posted by Raúl Ilargi Meijer at 8:19 am Finance Tagged with: basic income, Brexit, China, deflation, G7, Gross, helicopter money, Japan, oil, refugees, tariffs 5 Responses »

Jack Delano Near Shawboro, North Carolina, Florida migrants on way to Cranberry, NJ 1940

• Bill Gross Trying to Short Credit to Reverse Four Decades of Instinct (BBG)

• “Japan Is Already Doing Helicopter Money” (BBG)

• “China’s Economy Resembles A Spinning Top Running Out Of Momentum” (RD)

• US-China Economic Poker Game Looms With Market Calm at Stake (BBG)

• China Stocks Head for Longest Weekly Losing Streak in Four Years (BBG)

• Chinese Buyers Are Losing Interest In Australian Property (BBG)

• EU Warns China To Expect New Steel Tariffs (FT)

• Japan Fails in Bid to Have G-7 Warn of Global Crisis Risk (BBG)

• Corporate Japan Much More Downbeat About Escape From Deflation (R.)

• Debt Repayments In Crude Cripple Poorer Oil Producers (R.)

• Wells Fargo Launches 3% Down-Payment Mortgage (CNBC)

• Universal Basic Income: Money For Nothing (FT)

• After 7 Years, UK Workers Still Waiting For Decent Pay Rises (FT)

• Cameron Denies Being A “Closet Brexiteer” (R.)

• Australia Erased From UN Climate Change Report As Government Intervenes (G.)

• ‘Disaster in the Making’: The Many Failures of the EU-Turkey Refugee Deal (Sp.)

• Up To 80 Dead In Shipwreck Off Libya (MEE)

“I’m an investor that ultimately does believe in the system, but believes that the system itself is at risk.”

What Gross says is that being an investor is no longer any use. Or, as I said quite a while ago, in a market as manipulated as this one, with no price discovery, there are no investors. You’d have to fully redefine the term. For now, there are only people pretending to be investors.

• Bill Gross Trying to Short Credit to Reverse Four Decades of Instinct (BBG)

Bill Gross, who built a career and a $1.9 billion personal fortune trading bonds, is trying to go short on credit, a position that he said runs contrary to his instincts and training as an investor. Gross, who manages the $1.3 billion Janus Global Unconstrained Bond Fund, said he is moving to sell credit risk and insurance on market volatility rather than buying long-term debt, because he believes a day of reckoning will come when central banks will no longer be able to prop up asset prices and investors will withdraw from markets. “It’s really hard to change your psychological makeup and to be a hedge manager that is comfortable with being short,” he said in an interview with Bloomberg’s Erik Schatzker. “I’m working on it, because I’m an investor that ultimately does believe in the system, but believes that the system itself is at risk.”

Central bankers, seeking to stimulate economies, have lowered rates below zero in Europe and Japan, driving down returns on national debt, while investors seeking higher yield have pushed up the value of other credit. Stimulus from central banks worldwide has artificially pushed up values of stocks and credit, which has made Gross cautious on such assets, he said. Eliminating credit as an investment means “not buying stocks, not buying high-yield bonds,” Gross said. “It means going the other way, which comes at a price.” The U.S. Fed Funds target rate is between 0.25% and 0.5%. Eventually, central bankers will have to raise rates to reward individual savers, insurance companies and other investors who depend on fixed-income returns, or the economy and markets will suffer, according to Gross.

The Fed will boost the rate in June and should continue a gradual path of increases, Gross said. Since last week when the Fed released minutes of an April meeting indicating the economy has strengthened enough for a rate increase, the probability of a hike at the June 15 Federal Open Market Committee meeting has climbed to 34%, according to futures information compiled by Bloomberg.

Shinzo Abe approaches full panic mode. Dangerous.

• “Japan Is Already Doing Helicopter Money” (BBG)

Yukio Noguchi, a former Ministry of Finance official whose business books are best sellers, envisages a scenario in which a failure of Japan’s economic stimulus could drive the yen to weaken beyond 300 per dollar. “If these fiscal and monetary policies continue, the yen’s value is at great risk,” the 75-year-old professor at Tokyo’s Waseda University said in an interview on May 11. “If you base your thinking on the efficient-markets hypothesis, you can’t predict a level for the currency. But, if the nation’s economic strength weakens, it is possible the yen could drop to 300, or 500, or 1,000 to the dollar.” Growth has stagnated for a decade despite fiscal and monetary stimulus efforts that left the government with a debt burden that is the highest in the world, at about 2.5 times the value of the nation’s economic output.

Noguchi believes the Bank of Japan is already financing fiscal spending, providing so-called helicopter money. That echoes comments by billionaire bond investor Bill Gross, who said the likely endgame was for the BOJ to forgive sovereign debt. The problem with the extremely cheap money is that it gets channeled into unproductive areas, and allows “zombie companies” to continue to stay in business, said Noguchi, who has a Ph.D. in economics from Yale, and is currently an adviser at Waseda University in Tokyo. Even so, this stimulus hasn’t been effective, and capital investment, wages, and prices aren’t rising, he said. “Japan is already doing helicopter money, as Bernanke describes it,” said Noguchi, whose economics books and life-hacking scheduler have sold millions of copies in Japan. “That’s what’s happening now under the BOJ’s asset purchase policy, with banks buying longer-maturity bonds and immediately selling them to the BOJ.”

Duncan’s not fooling around.

• “China’s Economy Resembles A Spinning Top Running Out Of Momentum” (RD)

Economist and financial author Richard Duncan has published a stark look at China’s economy as it enters a new phase of slower growth, assessing the implications for a global economy that has become reliant on Chinese demand as a driver. Duncan believes that China’s economic boom ended in 2015 and that a protracted slump lies ahead. He has published a series of videos explaining why, in his opinion, China’s economic development model of export-led and investment-driven growth is now in crisis. The South China Morning Post brings you the first video in that series.

“China’s economy resembles a spinning top that is running out of momentum. It is wobbling and gyrating erratically,” Duncan said. A former Hong Kong-based banking analyst, Duncan has also worked as an analyst at the World Bank, and as global head of investment strategy at ABN AMRO Asset Management in London. He has authored three books on the global economic crisis, including The Dollar Crisis: Causes, Consequences, Cures. He is now chief economist at the Singapore-based hedge fund Blackhorse Asset Management.

Cats in a sack.

• US-China Economic Poker Game Looms With Market Calm at Stake (BBG)

As top American and Chinese officials prepare for their annual powwow against the backdrop of a looming Federal Reserve interest-rate increase, the policy actions of the world’s two-biggest economies have never been so closely bound. In what could be likened to a poker game, officials from the world’s two biggest economies will attempt to assess each others’ policy plans – and their potential domestic implications – when they sit down in Beijing June 6-7. China wants to loosen the yuan’s link with the dollar while averting an exodus of capital. The Fed wants to gradually move away from near-zero interest rates, with almost all officials penciling in at least two quarter-point hikes this year.

The past nine months have made clear how the two sides’ goals can conflict, with the withdrawal of U.S. stimulus encouraging Chinese outflows and a surprise August yuan devaluation generating market ructions that put a pause on a Fed rate move. A Fed-induced surge in the U.S. currency would put pressure on the yuan, lighting a match under money outflows that have eased significantly after a record $1 trillion left in 2015. Avoiding another financial conflagration is one task for Fed Vice Chairman Stanley Fischer, U.S. Treasury Secretary Jacob J. Lew and other officials when they meet their Chinese counterparts. The gathering will be the eighth and final Strategic and Economic Dialogue since the Obama administration agreed on the annual sessions, which were an extension of a Bush administration initiative.

Listening to the ‘authorative voice’.

• China Stocks Head for Longest Weekly Losing Streak in Four Years (BBG)

China’s stocks headed for their longest stretch of weekly losses since July 2012 amid concern a pick-up in earnings growth is losing steam as the nation’s economy slows. The Shanghai Composite Index was poised for a sixth week of declines after slipping 0.3% on Friday. Industrial, drug and consumer-staples producers were the worst performers this week. China Southern Airlines and Air China slumped more than 6% during the period, hurt by rising fuel prices and a weakening yuan. Data on Friday showed industrial companies’ profit growth slowed to 4.2% in April. Hong Kong stocks halted a three-day advance after Tingyi Cayman Islands reported slumping earnings.

Sentiment toward Chinese stocks turned bearish after March’s pick up in economic indicators didn’t carry over to April and a high-profile warning by the People’s Daily about the nation’s high levels of debt damped hopes for more easing. Adding to the concern this week is the prospect of higher U.S. interest rates spurring capital outflows. Despite dwindling optimism, the Shanghai Composite hasn’t strayed more than 51 points from 2,800 in the past two weeks, with declines limited by suspected buying from state-backed funds aimed at preventing the benchmark from ending below that level. “The market is slowly searching for a bottom and testing investors’ patience,” said Wu Kan at JK Life Insurance in Shanghai. “Stocks are fluctuating in a small range near 2,800 amid waning turnover, as investors cautiously await clarity over issues such as the timing of U.S. rate hikes. Small rebounds, if any, will be followed by declines.”

Losing interest? Are we sure that’s the only reason?

• Chinese Buyers Are Losing Interest In Australian Property (BBG)

Buyers from China, often blamed for the sharp rise in home prices in Sydney and Melbourne, are starting to lose interest. In the first four months of the year, visits by potential buyers from China to realestate.com.au’s listings in New South Wales state, which has Sydney as its capital, declined 25% from the same period last year. Views of properties in Victoria state, whose capital is Melbourne, fell 8.9%, while the mining state of Western Australia saw the biggest drop of 35%, according to the portal, one of the nation’s two biggest property websites.

At some point China must retaliate.

• EU Warns China To Expect New Steel Tariffs (FT)

The EU has warned China that it faces new anti-dumping tariffs on steel, amid growing pressure for the west to block Beijing’s bid for “market economy status” and greater access to world markets. Speaking ahead of the G-7 summit in Japan, European Commission president Jean-Claude Juncker declared: “If somebody distorts the market, Europe cannot be defenseless.” The issue of Chinese steel exports will be discussed by G-7 leaders on Thursday against the backdrop of a steel crisis in many western countries, including Britain where efforts are under way to save Tata Steel’s UK operations. Draft language prepared for discussions on the G-7 communique, while not mentioning China, expresses concern about the excess supply of steel around the world and says it has distorted the global market.

A Japanese government official said the issue went beyond steel to other commodities as well. Juncker claimed Chinese overcapacity amounted to double the EU’s annual steel production and that it had contributed to the loss of “thousands of jobs since 2008”. “We will step up our trade defense measures,” he said. Juncker also said there would be an impact assessment of Chinese steel exports and detailed discussion on Beijing’s bid for market economy status under WTO rules. China expects to achieve that status in December on the 15th anniversary of its 2001 accession to the WTO, giving it greater access to world markets and making it harder for third parties such as the EU to impose anti-dumping sanctions.

So it’s G7, but not really, since Juncker and Tusk are also invited, while Putin and Xi are not. You make it up as you go along.

• Japan Fails in Bid to Have G-7 Warn of Global Crisis Risk (BBG)

Japanese Prime Minister Shinzo Abe failed in his bid to have Group of Seven leaders warn of the risk of a global economic crisis in a communique issued as their summit wraps up Friday in central Japan. The final statement declares that G-7 countries “have strengthened the resilience of our economies in order to avoid falling into another crisis.” Japan had pressed G-7 leaders to note “the risk of the global economy exceeding the normal economic cycle and falling into a crisis if we did not take appropriate policy responses in a timely manner.” On Thursday, Abe presented documents to the G-7 indicating there was a danger of the world economy careering into a crisis on the scale of the 2008 Lehman shock.

Abe has frequently said he would proceed with a planned increase in Japan’s sales tax in April 2017 unless there is an event on the scale of Lehman or a major earthquake. He is expected to announce next week he is deferring the tax rise, Japanese media reported. One of the biggest topics at the meeting was China, which is not a member of the G-7. A slowdown in China, alongside a global steel glut, has spurred concerns among developed economies and at times disagreement on how best to spur growth. Abe has advocated greater government spending to back up monetary policy action. The communique urged a coordinated, albeit differentiated, response to storm clouds gathering over the global economy. Leaders pledged to use a mix of tools depending on their circumstances.

Fast looming gloom: “70% of companies see no decisive escape from deflation for the foreseeable future, up from 48% in January”

• Corporate Japan Much More Downbeat About Escape From Deflation (R.)

Japan Inc has become increasingly pessimistic about the country’s ability to beat deflation, with the vast majority of firms now expecting no escape for the foreseeable future, a Reuters poll showed. Most Japanese companies also said they did not think Prime Minister Shinzo Abe’s latest growth strategy that centers on lifting the mininum wage and investment in technology would help bring significant improvement to a faltering economy. Abe swept into office three years ago with bold plans to end decades of deflation and bring about sustainable growth. But while unprecedented monetary policy in tandem with fiscal stimulus met with some initial success, any gains in ridding the country of a deflationary mindset look like they could be slipping away.

The Reuters Corporate Survey, conducted May 9-23, found 70% of companies see no decisive escape from deflation for the foreseeable future, up from 48% in January when the same question was asked. “Demand is not on an upward trend, and household spending is not rising because base pay is not rising,” wrote a manager at a chemicals company. “It has become difficult for companies to lift prices.” Japan has only managed very mild inflation since Abe took office and the pace of price gains has been slowing since 2014. Core consumer prices in March fell 0.3% from a year earlier, the fastest decline in three years due to lower oil prices. The survey also found that 79% of companies were worried that consumer prices could return to deflation either this year or next.

Stunning from earlier in the week. ‘Weaker producers’ are forced to flood the market, but with nothing in return.

• Debt Repayments In Crude Cripple Poorer Oil Producers (R.)

Poorer oil-producing countries which took out loans to be repaid in oil when the price was higher are having to send three times as much to respect repayment schedules now prices have fallen. This has crippled the finances of countries such as Angola, Venezuela, Nigeria and Iraq and created a further division within OPEC. Ahead of an OPEC meeting next week, poorer members have continued to push for output cuts to lift prices but wealthier Gulf Arab members such as Saudi Arabia, which are free of such debts, are resisting taking any action despite prices falling 60% in the past 2 years. Angola, Africa’s largest oil producer has borrowed as much as $25 billion from China since 2010, including about $5 billion last December, forcing its state oil firm to channel almost its entire oil output toward debt repayments this year.

This year Angola, Nigeria, Iraq, Venezuela and Kurdistan are due to repay a total of between $30 billion and $50 billion with oil, according to Reuters calculations based on publicly disclosed information and details given by participants in ongoing restructuring talks. Repaying $50 billion required only slightly over 1 million barrels per day (bpd) of oil exports when it was trading at $120 per barrel but with prices of around $40, the same repayment would require exports of over 3 million bpd. “All of those oil nations – Angola, Nigeria, Venezuela – have taken money for survival but haven’t got any money left for investments. “That is very damaging to their long-term growth prospects,” said Amrita Sen from Energy Aspects think-tank.

“People tend to look at current production volumes but if you have committed your entire production to China or other buyers under loans – then you cannot invest to keep growing and won’t benefit from higher prices in the future.” China has also become Venezuela’s top financier via an oil-for-loans program which since 2007 has funneled $50 billion into Venezuelan coffers in exchange for repayment in crude and fuel, including a $5 billion deal last September. While details of the loans have not been made public, analysts from Barclays estimate Caracas owes $7 billion to Beijing this year and needs nearly 800,000 bpd to meet payments, up from 230,000 bpd when oil traded at $100 per barrel.

But of course. Got to keep them sales going until they don’t.

• Wells Fargo Launches 3% Down-Payment Mortgage (CNBC)

First-time buyers and low- to moderate-income buyers have largely been sidelined by today’s housing recovery. The common cry is too-tight credit. Lenders have kept the credit box restrictive because they are gun-shy from the billions of dollars in buy backs and judicial settlements stemming from the mortgage crisis that they still face today. Now, the nation’s largest lender, Wells Fargo, says it is opening that box with a new low down payment loan — a loan it claims is low-risk to the bank. “We are fully underwriting the borrowers, we are partnering with Fannie Mae to originate and sell these loans, we are ensuring the borrowers have an ability to repay and that they’re qualified for home ownership, but we’re simplifying things for the homebuyer,” said Brad Blackwell, executive vice president and portfolio business manager at Wells Fargo.

Branded “yourFirstMortgage,” Wells Fargo’s new product has a minimum down payment of 3% for a fixed-rate conventional mortgage of up to $417,000. Down payment help can come from gifts and community-assistance programs. Customers are not required to complete a homebuyer education course, but if they do, they may earn a 1/8% interest rate reduction. The minimum FICO score for these loans, which are underwritten according to Fannie Mae standards, is 620. Mortgage insurance can either be rolled in to the cost of the loan or purchased separately by the borrower. Blackwell said either way, the monthly payment is less than a government-insured FHA loan. More importantly, it’s simpler than other 3% down payment products already in the market, some of which have specific income and counseling requirements.

“We’ve taken all the complexity of the home mortgage lending process, removed it from the front-line consumer, so that it’s easy for them to understand and Wells Fargo is taking care of all the capital markets and other types of complexities behind the scenes,” added Blackwell. Other 3% down payment products from Bank of America with Freddie Mac or Fannie Mae’s HomeReady program have not been popular because lenders find them bureaucratic and hard to use. “To the extent that Wells is using this product as liberally as they can, that’s a positive for most borrowers,” said Guy Cecala, CEO of Inside Mortgage Finance.

Sort of like Brexit, a discussion conducted on the wrong terms. It can’t only be about robots taking jobs. That is far too narrow. Economic collapse is a much larger factor.

• Universal Basic Income: Money For Nothing (FT)

Switzerland’s traditionally conservative electorate will next month vote on the superficially preposterous idea of handing out an unconditional basic income of SFr30,000 ($30,275) a year to every citizen, regardless of work, wealth or their social contribution. Opinion polls suggest the June 5 referendum will be heavily defeated. And even if some kind of electoral convulsion results in the proposal being unexpectedly approved by voters, it is certain to be shot down by the 26 cantons that would have to implement it. But the very fact that one of the world’s most prosperous countries is holding such a vote highlights how a centuries-old dream of radical thinkers is seeping into the political mainstream.

In countries as diverse as Brazil, Canada, Finland, the Netherlands and India, local and national governments are experimenting with the idea of introducing some form of basic income as they struggle to overhaul inefficient welfare states and manage the social disruption caused by technological change. Daniel Häni, a chirpy Basel entrepreneur who is one of the Swiss initiative’s main supporters, said modern welfare states provide basic social support but are failing to adapt to the needs and values of our times. The trouble is that they are too costly and cumbersome, assume that a citizen’s worth is determined solely by their value as an employee and rely on means testing by an overly intrusive state. “Our social system is 150 years old and is based on Bismarck’s response to Industrialisation 1.0,” he said. “Our idea is simple. We want to render the conditional unconditional. UBI is about shifting power back to the citizen.”

The idea of providing money for nothing to all citizens dates back centuries and was nurtured by a radical cult before resurfacing in recent times. In the 20th century it was championed by thinkers on the left, such as John Kenneth Galbraith and Martin Luther King, as a means of promoting social justice and equal opportunity. But it was also backed by some libertarians and economists on the right, including Milton Friedman, as a way of restricting the coercive state and restoring individual choice and freedom. Incredible as it seems today, President Richard Nixon came very close to implementing a negative income tax (a variant of basic income) across the US in 1970. Nixon’s initiative, part of his Family Assistance Plan, was strongly backed by the House of Representatives but failed in the Senate, where some Democrats considered it unambitious, and several Republicans considered it too bold.

Something tells me they will get to wait a lot longer.

• After 7 Years, UK Workers Still Waiting For Decent Pay Rises (FT)

Britain’s workers have gone seven years without a decent pay rise — and data published on Thursday suggest they will have to wait a while longer. In the three months to the end of April, the busiest month of the year for pay settlements, the median pay settlement dipped from 2% to 1.7%. XpertHR, the company that gathers the data, said almost half the awards were lower than the same group of employees received last year, while only a fifth were higher. Economics textbooks would not have predicted such figures. Wages are meant to rise when unemployment falls since there are fewer jobless people around who are willing to work for low pay. Yet though unemployment has dropped to a pre-crisis low of 5.1%, average wage growth remains stubbornly slow at about 2% a year — roughly half the pace that was typical before the crash.

Adopting the slogan “Britain deserves a pay rise”, the government has tried to force the issue by raising the minimum wage sharply in April but this does not seem to have affected average pay. Britain is not alone: wage growth has weakened across the developed world and economists in Germany and the US, where unemployment is similarly low, are just as puzzled. Employers are less mystified. “We keep referring back to the old world, where full employment meant pay should be rapidly rising but I think the new world we’re in now is [that] we have still got underemployment, low productivity and low inflationary environments, which means there’s no need to raise pay,” said James Hick, managing director of ManpowerGroup Solutions, which supplies 35,000 contractors and temps per week to UK employers.

There are plenty of lower-paid people who would work more hours if they could, said Mr Hick, which lessens the pressure on employers to pay more. The unemployment rate may be the same as it was in 2006 but 14% of part-time workers say they cannot find full-time work, compared with 9% a decade ago. [..] The most important factor in the long term is that Britain has suffered a productivity slowdown since the financial crisis, much like many other countries, including the US. British workers are now 14% less productive than they would have been if the pre-crisis growth trend had continued. Employer lobby groups such as the CBI say wages cannot rise sustainably until workers increase their output per hour.

Could have fooled me… Why else make such crazy claims?

• Cameron Denies Being A “Closet Brexiteer” (R.)

British Prime Minister David Cameron said on Friday he was not a “closet Brexiteer” and that leaving the European Union would hurt Britain’s economic future and complicate trade deals with countries such as Japan. Speaking at a meeting of the G7 industrial powers, Cameron rejected a description by a former aide this week that he secretly supported a vote to leave the EU at a referendum on June 23. “So I have never been a closet Brexiteer,” he told a news conference in Japan. “I am absolutely passionate about getting the right result, getting this reform in Europe and remaining part of it. It’s in Britain’s interests and that’s what it is all about.”

Almost funny.

• Australia Erased From UN Climate Change Report As Government Intervenes (G.)

Every reference to Australia was scrubbed from the final version of a major UN report on climate change after the Australian government intervened, objecting that the information could harm tourism. Guardian Australia can reveal the report “World Heritage and Tourism in a Changing Climate”, which Unesco jointly published with the United Nations environment program and the Union of Concerned Scientists on Friday, initially had a key chapter on the Great Barrier Reef, as well as small sections on Kakadu and the Tasmanian forests. But when the Australian Department of Environment saw a draft of the report, it objected, and every mention of Australia was removed by Unesco. Will Steffen, one of the scientific reviewers of the axed section on the reef, said Australia’s move was reminiscent of “the old Soviet Union”.

No sections about any other country were removed from the report. The removals left Australia as the only inhabited continent on the planet with no mentions. Explaining the decision to object to the report, a spokesperson for the environment department told Guardian Australia: “Recent experience in Australia had shown that negative commentary about the status of world heritage properties impacted on tourism.” As a result of climate change combined with weather phenomena, the Great Barrier Reef is in the midst of the worst crisis in recorded history. Unusually warm water has caused 93% of the reefs along the 2,300km site to experience bleaching. In the northern most pristine part, scientists think half the coral might have died. The omission was “frankly astounding,” Steffen said.

The German view of a doomed deal.

• ‘Disaster in the Making’: The Many Failures of the EU-Turkey Refugee Deal (Sp.)

It is becoming increasingly difficult to maintain the claim that Turkey is a safe place for refugees. According to Amnesty International, Turkish authorities have deported hundreds of refugees from Turkey back to Syria in recent months. In early May, Human Rights Watch documented the cases or five Syrian refugees who were shot dead while attempting to enter Turkey, allegedly by Turkish border troops. The Syrian Observatory for Human Rights reported 16 deaths at the Syrian-Turkish border between December 2015 and March 2016. The EU has sent 390 migrants from Greece back to Turkey since early April, far fewer than planned. About 8,000 migrants, a third of them Syrians, remain in the Aegean islands. The European Commission now believes that Greek appellate judges may stop one in three deportations of Syrians.

“This strikes at the core of the deal,” said a senior Brussels official. Europe’s goal with the Turkey agreement is deterrence. In recent weeks, a number of migrants have indeed chosen not to leave Turkey for Greece, fearing that they would be sent back. If it now emerges that the Greeks are not deporting migrants nearly as quickly as anticipated, many more refugees could risk the voyage across the sea again soon, predicts Metin Çorabatir, chairman of the Ankara-based Research Center on Asylum and Migration (IGAM). But the camps on the Greek island are already overcrowded. Food is scarce and migrants have set garbage cans on fire to protest conditions in the camps. “We don’t know what we’ll do if even more people arrive,” says an official with the Greek Ministry of Migration. Political consultant Knaus calls it a “disaster in the making.”

Nevertheless, the EU is clinging to the deal, despite the tense climate between Brussels and Ankara. Erdogan has threatened to cancel the agreement altogether if EU refuses to grant Turkish citizens visa-free travel, while Europe has countered that Ankara needs to reform the Turkish anti-terrorism law first, as agreed. The Turkish president hardly misses an opportunity to show that he couldn’t care less about what Europeans think – of his plan, for instance, to revoke the immunity of members of parliamentarians who refuse to toe the line, so that they can then be sidelined with the help of the judiciary. And now that Prime Minister Ahmet Davutoglu has been ousted, the EU has lost a level-headed dialog partner in Turkey. His successor, Transportation Minister Binali Yildirim, is seen as an Erdogan acolyte.

Thousands are being rescued every single day. The idea that you can just stop the flow is a lethal illusion. But still no emergency UN meetings.

• Up To 80 Dead In Shipwreck Off Libya (MEE)

Up to 80 people are feared dead after a shipwreck off Libya, while at least 50 refugees and migrants have been rescued from the waves, the EU’s naval force said on Thursday. The wreck comes during a week in which more than 6,000 migrants and refugees have been rescued by Libyan, Italian and other authorities off the coast of Libya. On Thursday, a Luxembourg reconnaissance plane spotted the capsized boat around 64km off the Libyan coast with about 100 refugees and migrants in the water or clinging to the sinking vessel, captain Antonello de Renzis Sonnino, spokesman for the EU’s Sophia military operation to combat people smugglers in the Mediterranean, told AFP. The Spanish frigate Reina Sofia and Italian coast guard raced to the scene and threw life-floats and jackets to those in the water.

“Unfortunately, there were bodies too,” de Renzis Sonnino said, adding that the rescue operation was still ongoing. In photographs released by EUNAVFOR MED on Twitter people could be seen waving their arms for help as they balance perilously on the deck of the boat, already underwater but clearly visible in the limpid aquamarine sea. The shipwreck followed sharply on the heels of a disaster on Wednesday when a migrant boat overturned leaving five people dead, and another sinking on Tuesday which left a baby girl orphaned after both her parents died. Video footage of the incident released by the Italian navy showed people toppling into the sea as the overcrowded vessel capsized. A bout of good weather as summer arrives has kicked off a fresh stream of boats attempting to cross from Libya to Italy. The survivors will be added to the list of nearly 40,000 migrants and refugees to arrive in the country’s southern ports so far this year.

Debt Rattle May 4 2016

May 042016

May 4, 2016 Posted by Raúl Ilargi Meijer at 9:20 am Finance Tagged with: casino, China, debt, deficit, deflation, eggs, rebar, TTIP, USD, whistleblower, yen 9 Responses »

Jack Delano Myrtle Beach, S.C. Air Service Command Technical Sergeant Choken 1943

• US Dollar Plunges As World Plays Dangerous Game Of Pass The Parcel (AEP)

• 90% of Americans Worse Off Today Than in 1970s (VW)

• High Anxiety: Markets Get Roiled (WSJ)

• China’s Improbable Commodities Frenzy Leaves Stocks in the Dust (BBG)

• Commodities Are China’s Hottest New Casino (FT)

• China’s $1 Trillion In Bad Debt Makes A Sharp Slowdown Inevitable (BI)

• $571 Billion Debt Wall Points to More Defaults in China (BBG)

• The Global Economy is at Stall Speed, Rapidly Losing Lift (Stockman)

• Fed Expected To Drag Hedge Funds Into Plan To Halt Next Lehman (BBG)

• Barclays Launches First 100% Mortgages Since Crisis (FT)

• Whistleblowing Is Not Just Leaking, It’s an Act of Resistance (Snowden)

• Whistle-Blower Needed a Smoke Before Giving Up LuxLeaks Data (BBG)

• The Kleptocrats’ $36 Trillion Heist Keeps Most of the World Impoverished (DB)

• France Threatens To Block TTiP Deal (G.)

• TTIP Has Been Kicked Into The Long Grass … For A Very Long Time (G.)

• After The Leaks Showing What It Is, This Could Be The End For TTIP (Ind.)

• Spain, France, Italy, Portugal To Miss EU Deficit, Debt Reduction Targets (R.)

• Theft Of Sausage And Cheese By Hungry Homeless Man ‘Not A Crime’ (G.)

“..the Fed is pursuing a “weak dollar policy” [..] “They are forcing currency appreciation onto weaker economies. It is irrational..” No, it’s not irrational, but it certainly is short term only. “.. the soaring euro is in the end self-correcting since the eurozone cannot withstand the pain for long..”

• US Dollar Plunges As World Plays Dangerous Game Of Pass The Parcel (AEP)

The US dollar has plunged to a 16-month low in the latest wild move for the global financial system, tightening the currency noose on the eurozone and Japan as they struggle to break out of a debt-deflation trap. The closely-watched dollar index fell below 92 for the first time since January 2015, catapulting gold through $1300 an ounce in early trading and setting off steep falls on stock markets in Asia and Europe. The latest data from the US Commodity Futures Trading Commission shows that speculative traders have switched to a net “short” position on the dollar. This is a massive shift in sentiment since the end of last year when investors were betting heavily that the US Federal Reserve was on track for a series of rate rises, which would draw a flood of capital into dollar assets.

Markets have now largely discounted a rate rise in June, and are pricing in just a 68pc likelihood of any increases this year. The dollar slide has been a lifeline for foreign borrowers with $11 trillion of debt in US currency, notably companies in China, Brazil, Russia, South Africa, and Turkey that feasted on cheap US liquidity when the Fed spigot was open, and were then caught in a horrible squeeze when the Fed turned to tap off again and the dollar surged in 2014 and 2015. But it increases the pain for the eurozone and Japan as their currencies rocket. The world is in effect playing a high-stakes game of pass the parcel, with over-indebted countries desperately trying to export their deflationary problems to others by nudging down exchange rates. The Japanese yen appreciated to 105.60, the strongest since September 2014 and a shock to exporters planning on an average of this 117.50 this year.

The wild moves over recent weeks have blown apart the Japan’s reflation strategy. Analysts from Nomura said Abenomics is now “dead in the water”. The eurozone is also in jeopardy, despite enjoying a sweet spot of better growth in the first quarter. The euro touched $1.16 to the dollar early in the day. It has risen over 7pc in trade-weighted terms since the Europe Central Bank first launched quantitative easing in a disguised bid to drive down the exchange rate. Prices fell by 0.2pc in April and deflation is becoming more deeply-lodged in the eurozone economy, with no safety buffers left against an external shock. The European Commission this week slashed its inflation forecast to 0.2pc this year from 1.0pc as recently as November.

There is little that the Bank of Japan or the ECB can do to arrest this unwelcome appreciation. The Obama Administration warned them at the G20 summit in February that any further use of negative interest rates would be regarded by Washington as covert devaluation, and would not be tolerated. “These central banks have reached the limits of what they can do with monetary policy to influence their exchange rates, and this is putting their entire models at risk,” said Hans Redeker, currency chief at Morgan Stanley. “Europe and Japan are operating in a Keynesian liquidity trap. We are nearing a danger point like 2012 when it could lead to an asset market sell-off. We’re not there yet,” he said.

Stephen Jen from SLJ Macro Partners said the Fed is pursuing a “weak dollar policy”, reacting to global events in a radical new way. “They are forcing currency appreciation onto weaker economies. It is irrational,” he said. Yet it may not last long if the US economy comes roaring back in the second quarter a after a soft patch. “I doubt this is really the end of multi-year run for the dollar,” he said. Neil Mellor from BNY Mellon says the soaring euro is in the end self-correcting since the eurozone cannot withstand the pain for long, and as this becomes evident the currency will start sliding again.

“Many believe that globalization is largely to blame.”

• 90% of Americans Worse Off Today Than in 1970s (VW)

A recent study in March from the Levy Economics Institute found that 90% of Americans were worse off financially in 2015 than at any time since the early 1970s. Furthermore, for the vast majority of Americans, the nation’s economy is in a prolonged stagnation, far worse than that of Japan. Worse than Japan? When we think of the Japanese economy, we think of the “Lost Decades.” Japan’s economy was the envy of the world in the 1980s, but starting in 1991, it fell into a prolonged recession and deflation which lasted from then to 2010. Japan’s GDP fell from $5.33 trillion to $4.36 trillion during that period, which saw wages fall by apprx. 5%. So are we really worse off today than Japan? The Levy Economics Institute at Bard College thinks the answer is YES, when it comes to real income – that is, income adjusted for inflation.

According to their findings, 90% of Americans earn roughly the same real income today as the average American earned back in the early 1970s. As a result of this stagnation in incomes and the plunge in housing values during the Great Recession, 99% of American households have seen their net worth fall since 2007 according to the study. Economic stagnation hasn’t reached the remaining 1% of the US population, which has seen a recovery in their real incomes over the same period to near new highs. The chart below has not been updated to include results for 2015, but the trends are clear. The bottom 99% of US income-earning households have seen their net worth decline since the financial crisis of 2007-2009.

Once upon a time, the American economy worked for nearly everybody, and even the middle class got richer. Things were quite different in the decades preceding the 70s, a period that stretches back to the late 1940s, when real incomes rose for both groups. Simply put, for the vast majority of Americans, the dream of a steady increase in income was lost back in the early 1970s. What can explain this big shift in the income distribution in the last four decades? One clue is in the timeframe of the shift, which coincides with the growing openness of the American economy to international trade and investments. Many believe that globalization is largely to blame.

The game is getting dangerous. But it’s the only game in town.

• High Anxiety: Markets Get Roiled (WSJ)

Stocks and oil futures tumbled and Japan’s yen hit its highest intraday level against the dollar since October 2014, as investors struggled to reconcile recent market gains with unease over the pace of global growth. The latest tumult erupted after the Reserve Bank of Australia on Tuesday cut its benchmark rate by one-quarter of a percentage point to 1.75%. The move reflects soft inflation and economic sluggishness driven in part by weak demand from China, the largest buyer of Australian exports. Adding to concerns were a drop in Chinese manufacturing and signals that eurozone growth is slowing more than previously forecast, traders said.

Tuesday’s developments reflect worries that have shadowed a surprising 2016 recovery in the prices of stocks and many commodities. Global growth has slowed this year, prompting major forecasters to cut their outlooks. Yet in recent months the decline of the U.S. dollar and easier policy from global central banks have helped fuel gains in many riskier assets, allowing the Dow industrials to recover from a decline of as much as 10% earlier this year. The action has vexed many portfolio managers and traders, who came into the year expecting the dollar to gain against the yen and euro as the Fed prepared to further tighten its policy and its peers loosened theirs. Instead, both currencies have surged against the dollar.

The dollar fell as low as ¥105.53 during trading Tuesday before retracing to ¥106 later in the session. The dollar traded at ¥120 at the start of the year, according to CQG. The gains threaten to add to economic turmoil in the world’s third-largest economy while deepening investors’ anxiety. “The financial markets are on edge,’’ said Jack McIntyre at Brandywine Global Investment Management. ”Economic growth is still hard to come by.’’

Hard to imagine that this still has legs..

• China’s Improbable Commodities Frenzy Leaves Stocks in the Dust (BBG)

The wild ride in China’s commodity futures is making the nation’s $5.9 trillion stock market look docile. Compared with the stock market, even eggs have been a better investment in China in 2016, with futures climbing 27%. That’s as the cost of a dozen eggs in the U.S. slumped 24% in the first quarter. The epicenter of the commodities boom, however, has been steel reinforcement bars, which have surged 38%. The dizzying increase in speculative activity prompted the head of the world’s largest metals exchange to say that some traders probably don’t even know what they are buying or selling. The Shanghai Composite Index is down 15% this year.

Fluctuations in steel futures have sent a gauge of price swings to the highest level on record. Rebar surged 29% in Shanghai from the end of March through April 22, before dropping about 11%. Bourses in Dalian, Shanghai and Zhengzhou have announced measures to cool the commodities boom including higher fees and a reduction in night hours. Meanwhile, volatility on the Shanghai Composite, which saw gut-wrenching moves over the summer and the start of 2016, has fallen to the lowest level in more than a year as the market turned flat. The intensity of futures trading on Chinese commodities exchanges is making some of the world’s most liquid markets look leisurely. The average iron ore and steel rebar contracts on the Shanghai Futures Exchange are held for less than four hours, compared with almost 40 hours for WTI crude futures on the New York Mercantile Exchange.

Time to get out. The House wins.

• Commodities Are China’s Hottest New Casino (FT)

China’s market regulator may have succeeded in taking much of the froth off the country’s surging commodities markets last week, but the message is not filtering down to many dedicated retail traders. As Chinese markets reopened on Tuesday after the May Day holiday, a few dozen young traders in Shanghai crowded into a small room provided by a local brokerage. The mostly 20-something male traders, dressed in jeans and T-shirts, were looking forward to another week of fevered risk-taking in China’s hottest new casino. “It’s better for futures traders to be young because they can learn faster,” said Zhang Jun, 26, who has been trading commodities on the Shanghai Futures Exchange for three years but has only recently begun to make any money.

“This is not relevant to anything you study before you get here. I don’t know anyone who studied a relevant major,” said Mr Zhang, a mechanical engineer by training. On April 29, the China Securities Regulatory Commission ordered the country’s three commodities futures exchanges to curb speculation. The exchanges had already taken steps in that direction, by increasing margin requirements and transaction fees while reducing trading hours. The measures appeared to be aimed primarily at large institutional traders who have contributed to price surges for commodities ranging from steel to eggs, which have increased 50% and 10% respectively over recent months. Liu Shiyu, the CSRC’s new boss, wants to avoid the fate of his recently sacked predecessor, who last year presided over a boom and bust on the Shanghai and Shenzhen stock exchanges.

Poor economic data helped Mr Liu’s cause on Tuesday, with the price of the Shanghai exchange’s most popular steel rebar contract falling 4.52% to Rmb2,451 a tonne. Futures for iron ore, the key ingredient in steel production, also took a hit. The most actively traded contract on the Dalian Futures Exchange, which largely trades steel industry inputs, dropped 2.96% to Rmb442.5 per tonne. At the peak of last month’s China commodities fever, the number of steel rebar contracts traded in Shanghai exceeded volumes for the world’s two most important crude oil benchmarks, Brent and West Texas Intermediate.

More dangerous by the day, but nothing to stop it.

• China’s $1 Trillion In Bad Debt Makes A Sharp Slowdown Inevitable (BI)

The amount of debt being carried in the Chinese economy – mostly by state-owned “zombie” companies – is now so high that it could lead to a financial crisis, according to Macquarie analyst Viktor Shvets and his team. “Unless this vicious cycle is broken, financial crisis or at least a sharp slowdown is an inevitable ultimate outcome,” he wrote in a note to investors on April 29. The China debt problem is simple, at least in concept. To grow its economy, the Chinese government and its central bank have extended credit generously to all sorts of Chinese companies. Many of those are “state owned enterprises,” which are often old-fashioned, uncompetitive, or kept alive by political will rather than economic necessity.

These “zombie” companies exist largely to pay back those debts, but as time goes by some of them default, or fail to pay back all if their loans. This was not much of a problem until recently, Shvets argues, because China’s economy was growing so robustly that it eclipsed the rate of non-performing loans (NPLs). But as the economy has grown, so has its debt, to roughly $35 trillion, or nearly 350% of GDP. If too many companies fail to repay their debts, private lenders and banks will become fearful of lending more. And when that happens, it would plunge China into a financial crisis as liquidity dries up. The size of the debt at risk is so large – and the Chinese economy is such a global driving force – that such a crisis would cause a contagion into the markets of the rest of the world.

It can’t be called an accident, but it sure is waiting to happen.

• $571 Billion Debt Wall Points to More Defaults in China (BBG)

Chinese debt investors are turning bearish at just the wrong time for the nation’s corporate borrowers, which face a record 3.7 trillion yuan ($571 billion) of local bond maturities through year-end. With this year’s biggest note payments concentrated in some of the country’s most-cash strapped industries, China needs buoyant markets to help its companies refinance. Instead, yields in April rose at the fastest pace in more than a year and issuance tumbled 43% as borrowers canceled 143 billion yuan of planned debt sales. Deteriorating investor sentiment has heightened the risk of defaults in a market that’s already seen at least seven companies renege on obligations this year, matching the total for all of 2015.

While government-run banks may step in to help weaker borrowers, missed debt payments by three state-owned firms in the past three months suggest policy makers are becoming more tolerant of corporate failures as the economy slows. “The biggest risk to the onshore bond market is refinancing risk,” said Qiu Xinhong at First State Cinda Fund. “With such a big amount of bonds maturing, if Chinese issuers can’t sell new bonds to repay the old, more will default.”Repayment pressures are most extreme in China’s “old economy” industries, the biggest losers from the nation’s slowdown. Listed metals and mining companies, which generated enough operating profit to cover just half of their interest expenses in 2015, face principal payments of 389 billion yuan through year-end.

Power generation firms owe 332 billion yuan, while maturities at coal companies have swelled to 292 billion yuan. SDIC Xinji Energy, a state-owned coal producer that canceled a bond sale on March 11, must repay 1 billion yuan of notes on May 15, according to Bloomberg-compiled data. China International Capital highlighted the company as one of the riskiest onshore issuers in the second quarter. Fei Dai, SDIC’s board secretary, said Tuesday that the firm will arrange bank loans and other measures to avoid a default. The shares fell 5% to the lowest level since December 2014 in Shanghai on Wednesday. [..] “If you have a large number of companies in high-risk sectors that lose access to financing, there will be defaults or restructuring,” said Raja Mukherji, head of Asian credit research at PIMCO.

“China can’t be growing at 6.7% when its export machine has run out of gas..”

• The Global Economy is at Stall Speed, Rapidly Losing Lift (Stockman)

South Korea’s exports tumbled to $41 billion in April, marking the 16th consecutive month of declining foreign sales. Last month’s result represented a 11.2% decline from prior year, and an 18% drop from April 2014. Moreover, within that shrinking total, exports to China were down by 18.4% last month, following a 12.2% drop in March. The Korean export slump is no aberration. The same pattern is evident in the entire East Asia export belt. That’s because the Red Ponzi is in its last innings. Beijing is furiously pumping on the credit accelerator, but to no avail. As can’t be emphasized enough, printing GDP by means of wanton credit expansion does not create wealth or growth; it just results in an eventual day of reckoning when the speculative excesses inherent in central bank money printing collapse in upon themselves.

China is surely close to that kind of implosion. During Q1 total credit, or what Beijing is please to call “social financing”, expanded at a $4 trillion annualized rate. This was up 57% over prior year and represented debt growth at a 38% of GDP annual rate. Stated differently, during the first 90 days of 2016 China piled another $1 trillion of debt on its existing $30 trillion debt mountain, while its nominal GDP expanded by less than $175 billion. That’s right. The Red Ponzi is generating barely $1 of GDP for every $6 of new debt. And much of the “GDP” purportedly generated during Q1 reflected new construction of empty apartments and redundant public infrastructure. By now it ought to be evident that the Chinese economy is a brobdingnagian freak of nature that is destined for a collapse, and that its economic statistics are a tissue of fabrications and delusions.

Even its export figures, which are constrained toward minimum honesty because they can be checked against Chinese imports reported by the rest of the world, are padded to some considerable degree by phony export invoicing designed to hide illegal capital flight. Still, the implication of its export trends are unmistakable. When you put aside the statistical razzmatazz of the Chinese New Year’s timing noise in the data, exports were down by 10% in Q1 as a whole. That is the worst quarterly drop since 2009 amidst the global Great Recession, and was nearly twice the rate of decline during Q4 and Q3 2015. Here’s the thing. China can’t be growing at 6.7% when its export machine has run out of gas, as is so starkly evident in the graph below.

Still festering in the dark.

• Fed Expected To Drag Hedge Funds Into Plan To Halt Next Lehman (BBG)

Hedge funds, insurers and other companies that do business with Wall Street megabanks will pay a price for regulators’ efforts to make sure any future collapse of a giant lender doesn’t tank the entire financial system. The Federal Reserve is set to propose so-called stays on derivatives and other contracts that would prevent counterparties from immediately pulling collateral from a failed bank. The plan released Tuesday is meant to give authorities ample time to unwind a firm, hopefully heading off the frantic contagion that spread through markets when Lehman Brothers toppled in 2008. Though the world’s largest banks have already made strides to include such protections in transactions with each other, the Fed’s proposal insists that the shield be expanded to more contracts – including with non-bank firms.

The curbs would apply to any new contract signed by eight of the biggest and most complex U.S. bank holding companies and the U.S. arms of major foreign banks. So, hedge funds and asset managers that want to keep doing business with such lenders would have to comply. Fed Governor Daniel Tarullo said the proposal is “another step forward in our efforts to make financial firms resolvable without either injecting public capital or endangering the overall stability of the financial system.” Industry groups representing firms such as Citadel, BlackRock and MetLife have resisted efforts to rewrite financial contracts, arguing that it abuses investors’ rights and could make things worse by encouraging trading partners to try to pull away from a bank at the first whiff of trouble, even before a failure. But asset managers and insurers would face a tough task in persuading the Fed to change course.

Party! It’ll be Britain’s last for a while…

• Barclays Launches First 100% Mortgages Since Crisis (FT)

Barclays has become the first high street bank since the financial crisis to launch a 100% mortgage in the latest sign of a return to riskier lending. The bank is allowing some buyers to take out a mortgage to 100% of the value of the property, without needing a deposit. Most banks require at least a 5-10% lump sum. Barclays said the mortgage only needed to be supported by a family member or guardian, who must set aside 10% of the purchase price in cash for three years in return for interest. It said the new mortgage was designed to remove the issue of borrowers drawing from the “bank of Mum and Dad” to stump up a deposit. Ray Boulger, of broker John Charcol, said: “It is the first true 100% mortgage since the financial crisis.” The move marks a shift back to higher loan-to-value lending reminiscent of the boom times before the crisis of 2008, when 100% mortgages were widely available.

The defunct bank Northern Rock became renowned for its aggressive lending, with its “Together” mortgages offering 125% of the property value. Regulators have since clamped down on risky lending through regulation in 2014, called the Mortgage Market Review, designed to ensure borrowers can repay — although it does not prohibit 100% loans. The Bank of England would also be likely to take a dim view of any widespread return to deposit-free mortgage lending. So far, no other bank has offered such loans. “We haven’t seen a resurgence of 100% mortgages; I don’t think regulation would allow that,” said Charlotte Nelson, of consumer site Moneyfacts. “I don’t think it’s something many other banks will take on. If they’re seen to be lending at 100%, even with a guarantee, it doesn’t look great. Seeing 100% deals back on the market can come off as negative.”

The attitude towards whistleblowers still feels medieval.

• Whistleblowing Is Not Just Leaking, It’s an Act of Resistance (Snowden)

“I’ve been waiting 40 years for someone like you.” Those were the first words Daniel Ellsberg spoke to me when we met last year. Dan and I felt an immediate kinship; we both knew what it meant to risk so much — and to be irrevocably changed — by revealing secret truths. One of the challenges of being a whistleblower is living with the knowledge that people continue to sit, just as you did, at those desks, in that unit, throughout the agency, who see what you saw and comply in silence, without resistance or complaint. They learn to live not just with untruths but with unnecessary untruths, dangerous untruths, corrosive untruths. It is a double tragedy: What begins as a survival strategy ends with the compromise of the human being it sought to preserve and the diminishing of the democracy meant to justify the sacrifice.

But unlike Dan Ellsberg, I didn’t have to wait 40 years to witness other citizens breaking that silence with documents. Ellsberg gave the Pentagon Papers to the New York Times and other newspapers in 1971; Chelsea Manning provided the Iraq and Afghan War logs and the Cablegate materials to WikiLeaks in 2010. I came forward in 2013. Now here we are in 2016, and another person of courage and conscience has made available the set of extraordinary documents that are published in The Assassination Complex, the new book out today by Jeremy Scahill and the staff of The Intercept. We are witnessing a compression of the working period in which bad policy shelters in the shadows, the time frame in which unconstitutional activities can continue before they are exposed by acts of conscience.

And this temporal compression has a significance beyond the immediate headlines; it permits the people of this country to learn about critical government actions, not as part of the historical record but in a way that allows direct action through voting — in other words, in a way that empowers an informed citizenry to defend the democracy that “state secrets” are nominally intended to support. When I see individuals who are able to bring information forward, it gives me hope that we won’t always be required to curtail the illegal activities of our government as if it were a constant task, to uproot official lawbreaking as routinely as we mow the grass. (Interestingly enough, that is how some have begun to describe remote killing operations, as “cutting the grass.”)

Case in point.

• Whistle-Blower Needed a Smoke Before Giving Up LuxLeaks Data (BBG)

The man who uncovered secret Luxembourg deals that helped companies slash tax rates was actually looking for training documents when he stumbled upon the files on his computer at PricewaterhouseCoopers. On the eve of his departure from the accounting firm in 2010, Antoine Deltour wasn’t fully aware of what he had discovered. He copied the folder and within half an hour had about 45,000 pages detailing confidential tax agreements that became known as the LuxLeaks. Deltour’s discovery triggered the first in a wave of scandals over how thousands of international companies, including Walt Disney, Microsoft’s Skype and PepsiCo, moved money around the globe to avoid taxes. It also landed him in trouble after PwC sued and prosecutors charged him and two other men with theft and violation of business secrets.

“I had discovered gradually the administrative practice of these deals,” Deltour, 30, told a three-judge panel at his trial in Luxembourg Tuesday. “The opportunity to have stumbled over this folder led me to copy it at that moment without a clear goal in mind,” knowing about the “sensitive and highly confidential nature of these files.” Deltour “felt a bit surprised by the volume of the” files and “didn’t immediately do anything with this mass of information,” he told the court. He felt “isolated” and “alone” and unsure of who to turn to. Months later he was contacted by journalist Edouard Perrin, who was working on a documentary about tax practices. The pair met only once, at Deltour’s home in Nancy, France, where Deltour said he needed a moment before handing over the files. “Of course I hesitated,” Deltour told the judge. “I went to smoke a cigarette on the balcony to think a few moments about this.”

The resulting 2012 documentary by Perrin, who is also a defendant in the case, led to interest from the International Consortium of Investigative Journalists. The group put the documents online in 2014, triggering the LuxLeaks scandal. Perrin, 44, another French citizen, was charged in April 2015 with being the accomplice of Raphael Halet, another ex-PwC staffer who is accused of stealing 16 corporate tax returns from the accounting firm and giving them to the journalist. Perrin is also accused of having urged Halet to search for specific documents, a charge both men rejected.

Grand Theft Auto. Redux.

• The Kleptocrats’ $36 Trillion Heist Keeps Most of the World Impoverished (DB)

For the first time we have a reliable estimate of how much money thieving dictators and others have looted from 150 mostly poor nations and hidden offshore: $12.1 trillion. That huge figure equals a nickel on each dollar of global wealth and yet it excludes the wealthiest regions of the planet: America, Canada, Europe, Japan, Australia, and New Zealand. That so much money is missing from these poorer nations explains why vast numbers of people live in abject poverty even in countries where economic activity per capita is above the world average. In Equatorial Guinea, for example, the national economy’s output per person comes to 60 cents for each dollar Americans enjoy, measured using what economists call purchasing power equivalents, yet living standards remain abysmal.

The $12.1 trillion estimate—which amounts to two-thirds of America’s annual GDP being taken out of the economies of much poorer nations—is for flight wealth built up since 1970. Add to that flight wealth from the world’s rich regions, much of it due to tax evasion and criminal activities like drug dealing, and the global figure for hidden offshore wealth totals as much as $36 trillion. In 2014 the net worth of planet Earth was about $240 trillion, which means about 15% of global wealth is in hiding, significantly reducing the capital available to spur world economic growth. That $12.1 trillion figure for money looted from poorer countries has been hiding in plain sight. It comes from numbers in the global economic data—derived by comparing statistics from the IMF and the World Bank, supplemented by some figures from the United Nations and the CIA—that do not match up, but which until now no one had bothered to analyze.

You might think that with their vast staffs of economists and analysts the IMF, the World Bank, and other institutions would have run the numbers long ago, but no. Instead, one determined person combed 45 years of official statistics from around the world to calculate the flight wealth for nearly 200 countries that publish comparable economic data. That’s Jim Henry, who was a rising corporate star until he gave it all up to document illicit flows of money and the damage they do to billions of people. Henry has been the chief economist at McKinsey, arguably the world’s most influential business consultancy, and worked directly under Jack Welch at General Electric. A Harvard-educated economist and lawyer, Henry calls himself an investigative economist. His approach is simple: “Just look at the effing data and solve the puzzle” of mismatches between the various official sources.

Seems like a bad time to keep on pushing through ever more deals people obviously don’t want.

• France Threatens To Block TTiP Deal (G.)

Doubts about the controversial EU-US trade pact are mounting after the French president threatened to block the deal. François Hollande said on Tuesday he would reject the Transatlantic Trade and Investment Partnership “at this stage” because France was opposed to unregulated free trade. Earlier, France’s lead trade negotiator had warned that a halt in TTIP talks “is the most probable option”. Matthias Fekl, the minister responsible for representing France in TTIP talks, blamed Washington for the impasse. He said Europe had offered a lot but had received little in return. He added: “There cannot be an agreement without France and much less against France.” All 28 EU member states and the European parliament will have to ratify TTIP before it comes into force.

But that day seems further away than ever, with talks bogged down after 13 rounds of negotiations spread over nearly three years. The gulf between the two sides was highlighted by a massive leak of documents on Monday, first reported by the Guardian, which revealed “irreconcilable” differences on consumer protection and animal welfare standards. The publication of 248 pages of negotiating texts and internal positions, obtained by Greenpeace and seen by the Guardian, showed that the two sides remain far apart on how to align regulations on environment and consumer protection. Greenpeace said the leak demonstrated that the EU and the US were in a race to the bottom on health and environmental standards, but negotiators on both sides rejected these claims.

The European commission, which leads negotiations on behalf of the EU, dismissed the “alarmist headlines” as “a storm in a teacup”. But Tuesday’s comments from the heart of the French government reveal how difficult TTIP negotiations have become. France has always had the biggest doubts about TTIP. In 2013 the French government secured an exemption for its film industry from TTIP talks to try to shelter French-language productions from Hollywood dominance. Hollande, who is beset by dire poll ratings, indicated on Tuesday that the government has other concerns about TTIP. Speaking at a conference on the history of the left, Hollande said he would never accept “the undermining of the essential principles of our agriculture, our culture, of mutual access to public markets”. Fekl told French radio that the agreement on the table is “a bad deal”. “Europe is offering a lot and we are getting very little in return. That is unacceptable,” he said.

With growth gone, so is the desire for deals. Too much domestic backlash.

• TTIP Has Been Kicked Into The Long Grass … For A Very Long Time (G.)

As talks to broker a global trade deal entered a second tortuous decade, the US and the European Union came up with an idea. Since it was proving impossible to find agreement among the 150 or so members of the World Trade Organisation about how to tear down barriers to freer commerce, they would strike their own agreement. Talks on the Transatlantic Trade and Investment Partnership (TTIP) began in the summer of 2013 with officials in Washington and Brussels confident they could iron out any difficulties by the time American voters decide on who should succeed Barack Obama as president in November this year. This always looked a ridiculously tight timetable and so it has proved. Cutting trade deals is an agonisingly slow process. The last successful global deal – the Uruguay Round – took seven years before being concluding in 1993.

Talks continued on the Doha Round from 2001 until 2015 before terminal boredom and frustration set in. Was it really feasible that TTIP could be pushed through in little more than three years? Not a chance. There are three reasons for that. First, the main barriers to trade between the US and the EU are not traditional tariff barriers, which have been steadily whittled away in the decades since the second world war, but the differing regulatory regimes that operate on either side of the Atlantic. America and Europe have different views on everything from GM food to safety standards on cars so harmonising standards was always going to take a lot of time. Second, the talks have involved controversial issues and have been taking place when trust in politicians and business has rarely been lower. The main driving forces behind TTIP have been multinational corporations and business lobby groups, who stand to gain from harmonised regulations.

With information about the secret negotiations having to be chiselled out by groups hostile to TTIP, voters have drawn the obvious conclusion: the aim of the talks is to enrich big business even if it means playing fast and loose with environmental and health standards. Which leads to the final and most important factor: there are no votes in trade. It would have been no surprise had Angela Merkel voiced strong opposition to the state of the TTIP negotiations, given the level of public antipathy to the trade deal in Germany and her delicate position in the polls ahead of elections next year. Instead, the German chancellor was beaten to it by François Hollande (also facing a showdown with the voters in 2017) who has made it clear he will not sign TTIP in its current form. Years not months of hard slog lie ahead, by which time the US is likely to have a president much less wedded to the idea of striking trade deals. TTIP has just been kicked into the long grass for a very long time, and perhaps for good.

Can we have no more of this please?! “The European Commission slapped a 30-year ban on public access to the TTIP negotiating texts at the beginning of the talks in 2013..”

• After The Leaks Showing What It Is, This Could Be The End For TTIP (Ind.)

Today’s shock leak of the text of the Transatlantic Trade and Investment Partnership (TTIP) marks the beginning of the end for the hated EU-US trade deal, and a key moment in the Brexit debate. The unelected negotiators have kept the talks going until now by means of a fanatical level of secrecy, with threats of criminal prosecution for anyone divulging the treaty’s contents. Now, for the first time, the people of Europe can see for themselves what the European Commission has been doing under cover of darkness – and it is not pretty. The leaked TTIP documents, published by Greenpeace this morning, run to 248 pages and cover 13 of the 17 chapters where the final agreement has begun to take shape.

The texts include highly controversial subjects such as EU food safety standards, already known to be at risk from TTIP, as well as details of specific threats such as the US plan to end Europe’s ban on genetically modified foods. The documents show that US corporations will be granted unprecedented powers over any new public health or safety regulations to be introduced in future. If any European government does dare to bring in laws to raise social or environmental standards, TTIP will grant US investors the right to sue for loss of profits in their own corporate court system that is unavailable to domestic firms, governments or anyone else. For all those who said that we were scaremongering and that the EU would never allow this to happen, we were right and you were wrong.

The leaked texts also reveal how the European Commission is preparing to open up the European economy to unfair competition from giant US corporations, despite acknowledging the disastrous consequences this will bring to European producers, who have to meet far higher standards than pertain in the USA. According to official statistics, at least one million jobs will be lost as a direct result of TTIP – and twice that many if the full deal is allowed to go through. Yet we can now see that EU negotiators are preparing to trade away whole sectors of our economies in TTIP, with no care for the human consequences.

The European Commission slapped a 30-year ban on public access to the TTIP negotiating texts at the beginning of the talks in 2013, in the full knowledge that they would not be able to survive the outcry if people were given sight of the deal. In response, campaigners called for a ‘Dracula strategy’ against the agreement: expose the vampire to sunlight and it will die. Today the door has been flung open and the first rays of sunlight shone on TTIP. The EU negotiators will never be able to crawl back into the shadows again.

That must be over half the eurozone right there.

• Spain, France, Italy, Portugal To Miss EU Deficit, Debt Reduction Targets (R.)

Three of the euro zone’s four biggest economies look set to break European Union deficit and debt reduction targets this year and next unless they take urgent action, European Commission forecasts showed on Tuesday. The Commission forecast that the three – France, Italy and Spain – were likely to miss goals set for them set by EU finance ministers under a disciplinary procedure for those that run excessive budget deficits and have too high public debt. Portugal would also likely be in breach of EU budget rules. The euro zone’s biggest economy Germany, was in rude fiscal health, the forecasts showed. The Commission’s forecasts, together with medium-term fiscal consolidation plans submitted by governments last month will be the basis for a Commission decision, in the second half of May, on whether to step up the disciplinary procedure against those in breach of the rules.

“..for supreme court judges, the right to survive still trumped property rights, a fact that would be considered blasphemy in America..”

• Theft Of Sausage And Cheese By Hungry Homeless Man ‘Not A Crime’ (G.)

Italy’s highest court has ruled that the theft of a sausage and piece of cheese by a homeless man in 2011 did not constitute a crime because he was in desperate need of nourishment. The high court judges in the court of cassation found that Roman Ostriakov, a young homeless man who had bought a bag of breadsticks from a supermarket but had slipped a wurstel – a small sausage – and cheese into his pocket, had acted out of an immediate need by stealing a minimal amount of food, and therefore had not committed a crime. The case, which drew comparisons to the story of Jean Valjean, the hero of Victor Hugo’s Les Misérables, was hailed in some media reports as an act of humanity at a time when hundreds of Italians are being added to the roster of the country’s “hungry” every day, despite improvements in the economy.

One columnist writing in La Stampa said that, for supreme court judges, the right to survive still trumped property rights, a fact that would be considered “blasphemy in America”. But others commented that the case highlighted Italy’s notoriously inefficient legal system, in which the theft of food valued at about €4.70 (£3.70) was the subject of a three-part trial – the first hearing, the appeal, and the final supreme court ruling – to determine whether the defendant had in fact committed a crime. “Yes, you read that right,” an opinion column in Corriere della Sera said, “in a country with a burden of €60bn in corruption per year, it took three degrees of proceedings to determine ‘this was not a crime’.”

Ostriakov, who was described as a homeless 30-year-old from Ukraine, had been sentenced to six months in jail and a €100 fine by a lower court in Genoa, but that punishment was vacated by the supreme court. “The supreme court has established a sacrosanct principle: a small theft because of hunger is in no way comparable to an act of delinquency, because the need to feed justifies the fact,” said Carlo Rienzi, president of Codacons, an environmental and consumer rights group, told Il Mesaggero. “In recent years the economic crisis has increased dramatically the number of citizens, especially the elderly, forced to steal in supermarkets to be able to make ends meet.”

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