Oct 192018
 October 19, 2018  Posted by at 9:12 am Finance Tagged with: , , , , , , , , , ,  7 Responses »

Paul Gauguin Horsemen on the beach 1902


Implosion of Stock Market Double-Bubble in China Hits New Lows (WS)
Trump Trade War Forces Beijing To Retreat From Its Anti-Debt Battle (CNBC)
Italy’s Debt Crisis Thickens (DQ)
Italian Bond Yields Spike To 4-Year Highs As EU Slams New Budget Plan (CNBC)
EU Leaders Ready To Help May Sell Brexit Deal To Parliament (G.)
Tory MP Calls UK Government ‘A Shitshow’ (Ind.)
Greens Surge Across Europe As Centre-Left Flounders (G.)
Male Birds Can Be Good Singers Or Good Looking, But Not Both (NS)
Jurors Urge Judge To Uphold Monsanto Cancer Ruling (G.)
World’s Smallest Porpoise Faces Extinction (AFP)
Microplastics Found In 90% Of Table Salt (NatGeo)



Tomorrow is a travel day, no posts.



Up a bit this morning, plunge protection, but Shanghai down 30% for the year. Stocks are not Xi’s worst fear, though, the housing market is, along with debt. And you wonder how this is possible with all the GDP growth numbers.

Implosion of Stock Market Double-Bubble in China Hits New Lows (WS)

Today, the Shanghai Composite Index dropped another 2.9% to 2,486.42. In the bigger picture, that’s quite an accomplishment:

• Lowest since November 27, 2014, nearly four years ago
• Down 30% from its recent peak on January 24, 2018, (3,559.47)
• Down 52% from its last bubble peak on June 12, 2015 (5,166)
• Down 59% from its all-time bubble peak on October 16, 2007 (6,092)
• And back where it had first been on December 27, 2006, nearly 12 years ago.

The chart of the Shanghai Stock Exchange Composite Index (SSE) shows the 2015-bubble and its implosion, followed by a rise from the January-2016 low, which had been endlessly touted in the US as the next big buying opportunity to lure US investors into the China miracle. Investors who swallowed this hype got crushed again:

Over the longer view, the implosion is even more spectacular. Today’s close puts the SSE back where it had first been nearly 12 years ago, on December 27, 2007. This dynamic has created a double-bubble and a double-implosion, with every recovery rally in between getting finally wiped out. The index is now down 59% from its all-time high in October 2007, the super-hype era in the run-up to the Beijing Olympics. It is not often that a stock market of one of the largest economies in the world is whipped into two frenetically majestic bubbles that implode back to levels first seen 12 years earlier – despite inflation in the currency in which these stocks are denominated.

Read more …

Betcha China’s foreign reserves are dwindling.

Trump Trade War Forces Beijing To Retreat From Its Anti-Debt Battle (CNBC)

Just as China started to come to grips with the scale of its massive debt accumulation, the impact of the trade war with the U.S. is forcing a retreat. One expert said that could prove “disastrous” for the country’s economy. Years of big-ticket investment projects helped spur double-digit growth in China’s GDP, sending the country into position as the world’s second-largest economy — trailing only the United States. The price tag, however, was a mountain of debt that needed to be drawn down as authorities refashioned growth to a more sustainable model. The plan has been to base the more mature economy on the increasing spending power of China’s rising consumer class rather than old-fashioned investments in infrastructure.

But the trade war is denting China’s economic growth and forcing a rethink in debt reduction — known as deleveraging — as authorities look for ways to juice the economy to make up for hits resulting from U.S. President Donald Trump’s tariffs on Chinese exports. Economists increasingly see future tariffs as likely to apply to all shipments from China to the United States, meaning Beijing is set to even further loosen financial taps. That’s already been seen in the form of cuts to reserve requirement ratios for banks, which set the amount of funds they must keep on hand. The recent moves mean banks have more money to lend out, stimulating the economy with more debt.

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To what extent is this Brussels teaching Rome a lesson?

Italy’s Debt Crisis Thickens (DQ)

Italy’s government bonds are sinking and their yields are spiking. There are plenty of reasons, including possible downgrades by Moody’s and/or Standard and Poor’s later this month. If it is a one-notch downgrade, Italy’s credit rating will be one notch above junk. If it is a two-notch down-grade, as some are fearing, Italy’s credit rating will be junk. That the Italian government remains stuck on its deficit-busting budget, which will almost certainly be rejected by the European Commission, is not helpful either. Today, the 10-year yield jumped nearly 20 basis points to 3.74%, the highest since February 2014. Note that the ECB’s policy rate is still negative -0.4%:

But the current crisis has shown little sign of infecting other large Euro Zone economies. Greek banks may be sinking in unison, their shares down well over 50% since August despite being given a clean bill of health just months earlier by the ECB, but Greece is no longer systemically important and its banks have been zombies for years. Far more important are Germany, France and Spain — and their credit markets have resisted contagion. A good indicator of this is the spread between Spanish and Italian 10-year bonds, which climbed to 2.08 percentage points last week, its highest level since December 1997, before easing back to 1.88 percentage points this week.

Much to the dismay of Italy’s struggling banks, the Italian government has also unveiled plans to tighten tax rules on banks’ sales of bad loans in a bid to raise additional revenues. The proposed measures would further erode the banks’ already flimsy capital buffers and hurt their already scarce cash reserves. And ominous signs are piling up that a run on large bank deposits in Italy may have already begun.

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So far the government is sticking to its plans.

Italian Bond Yields Spike To 4-Year Highs As EU Slams New Budget Plan (CNBC)

Italian sovereign debt yields hit fresh multi-year highs Friday morning, as investors grow cautious over lending to the embattled government after it unveiled new budget plans. Ten-year and 30-year bond yields — yields have an inverse relationship to a bond’s price — hit their highest levels since early 2014, according to Reuters, just hours after the European Union warned of rule breaches in Italy’s draft budget. Investors have shown concerns over Italy’s 2019 budget, which was officially sent to the EU this week for analysis. The anti-establishment and partly right-wing government in Italy plans to increase public spending in the country, sticking with campaign pledges before the general election in March this year.

There are strong concerns that the fiscal plan will derail the reduction of the country’s debt pile — which is the second largest in the euro zone, totaling 2.3 trillion euros ($2.6 trillion). Italy’s prime minister has defended its free-spending budget this week, after officials in Brussels criticized the plans and labelled it an unprecedented breach of the EU’s budgetary rules.

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Picked up the graph apart from the article. It says exactly why there won’t be a deal: it’s not possible.

EU Leaders Ready To Help May Sell Brexit Deal To Parliament (G.)

EU leaders are preparing to back Theresa May in building a “coalition of the reasonable” in the UK parliament, in a desperate bid to avoid a no-deal Brexit. Following what has been described by diplomats as a “call for help” by the prime minister at a crunch summit in Brussels, the German chancellor, Angela Merkel, stressed that the EU had to pursue “all avenues” to find a deal that can get through the Commons.“I think where there is a will there is a way,” she said. Jean-Claude Juncker, the European commission president, said: “It will be done.” He is understood to have told EU leaders that May needed “help” to sell a deal in parliament.

While ruling out major concessions, Emmanuel Macron, the French president, said it was clear that the roadblock to a deal did not lie in Brussels. A potential agreement had been derailed on Sunday when Dominic Raab, the Brexit secretary, made an unscheduled visit to Brussels to inform the EU’s chief negotiator, Michel Barnier, that May could not get an agreement past her cabinet or the DUP, on whose votes her government relies.

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A bit of honesty.

Tory MP Calls UK Government ‘A Shitshow’ (Ind.)

A Tory MP has labelled the government “a shitshow” and said he would not vote Conservative. Johnny Mercer, a former army officer, claimed his party was being run by “technocrats and managers” and labelled Theresa May’s Brexit plan a sign of a “classic professional politician”. He vowed to launch a “serious shit-fight” to stop the UK heading “towards the edge of the cliff”. The Plymouth Moor View MP launched the astonishing attack on his own party as he voiced concerns that it no longer shared his values. He told The House magazine: “The party will never really change until you have somebody who is leading the party who has won a seat and knows what it’s like to go out every weekend and advocate for what you just voted for that week.

“We’ve lost this ability to fight, to scrap for what we believe in. Until we get that art back – ultimately our core business as politicians is winning elections. That is our basic core business. “We’ve lost focus on that for some very good, very capable but ultimately technocrats and managers. That’s not what Britain’s about.” [..] in a shock admission, he said that, were he not an MP, he would not vote for the Conservatives. Asked how the Johnny Mercer who left the military in 2012 would vote now, he said: “I wouldn’t go and vote. “Just being honest, I wouldn’t vote. Of course I wouldn’t, no.” He added: “There’s no doubt about it that my set of values and ethos, I was comfortable that it was aligned with the Conservative Party. I’m not as comfortable that that’s the case any more.”

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The political center vanishes everywhere.

Greens Surge Across Europe As Centre-Left Flounders (G.)

In conservative Bavaria, the Greens doubled their vote in state elections to become the second largest party. In Belgium’s local elections they achieved record scores of more than 30% and finished first in several Brussels districts, and runners-up overall. In Luxembourg’s general election they increased their tally of MPs by 50%. The elections in three countries last weekend suggest that as Europe’s historic mainstream parties plummet in the polls and struggle to see off the far right’s challenge, for liberal-minded voters the Greens look like an answer. Offering a pro-EU stance, a humane approach to migration and clear positions on issues such as climate change, biodiversity and sustainability, Green parties in several countries are now polling higher nationally than the traditional centre-left.

“They represent a clear place where people can go who are frustrated with the traditional mainstream parties but who don’t like the far right,” said Alexander Clarkson, a lecturer in European studies at King’s College London. “They offer a very clear counter-model to the positions and arguments of parties like Germany’s AfD. Also they’ve been around for a while now, more than 40 years, and they’ve governed responsibly both locally and regionally. They kind of look like the adults in the room.”

In Germany, where the Greens partner parties from the centre-right to the hard-left in nine of the 16 state governments, recent national polling put the party ahead of the centre-left SPD, Angela Merkel’s coalition partner, with a 17%-plus share of the vote, compared with 8.9% in last year’s federal election. In the Netherlands, the GreenLeft party boosted its representation from four to 14 MPs in elections last year and has advance further since then, from 9% to a second-placed 18% in the polls.

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Fun research.

Male Birds Can Be Good Singers Or Good Looking, But Not Both (NS)

The call of a male peacock is no pleasure to listen to, but its splendid tail means it doesn’t matter. Now an analysis of more than 500 species shows that this is a common trade-off in the bird world: the best lookers aren’t the most talented singers, while the best vocalists aren’t as easy on the eye. Sexual selection is an evolutionary process that shapes traits that animals use to attract mates, and birds are well known to resort to elaborate songs and flashy feathers in the name of reproduction. To investigate which species use which traits, Christopher Cooney at the University of Oxford and his colleagues collected the songs of 518 species, and compared these with their feather colours.

In particular, they looked at how much feathers differed between the males and females of each species – a sign that sexual selection has influenced their plumage. They found that birds in which one sex has more showy plumage than the other tend to have less interesting, more monotonous songs. In species in which the males and females more closely resemble each other, the males sing longer songs over a larger range of musical notes. The reason why bird evolution favours one trait over the other is unclear. It might be that birds living in dense forests with lower visibility rely more on their songs instead of colour to attract mates, but Cooney’s analysis didn’t find any relationship between sexually selected traits and habitat.

Instead, his team think that mate-attracting traits are costly to develop, so a species tends to evolve only one. Alternatively, once one attractive trait has begun to emerge, it may simply be pointless to develop a second.

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“Why do we have a jury system if the judge can just toss it out?”

Jurors Urge Judge To Uphold Monsanto Cancer Ruling (G.)

Jurors who ruled that Monsanto caused a dying man’s cancer are fighting to uphold their landmark $289m verdict, publicly urging a judge not to overturn their decision in a groundbreaking trial. Four California jurors told the Guardian that they were shocked and angry to learn that the judge overseeing their trial had moved to throw out their unanimous verdict, which said the agrochemical corporation failed to warn consumers that its popular weedkiller product posed health risks. The ruling in August, which sparked concerns across the globe about the Roundup herbicide, included $250m in punitive damages to the plaintiff, Dewayne “Lee” Johnson, who has terminal cancer.

But San Francisco superior court judge Suzanne Bolanos stunned campaigners and jurors last week when she issued a tentative ruling on Monsanto’s appeal motion, saying she would likely grant a new trial due to the “insufficiency of the evidence”. “I was just gobsmacked and outraged. I was astonished,” Robert Howard, juror No 4, said in an interview on Thursday. “Why do we have a jury system if the judge can just toss it out?” Bolanos hasn’t yet made a final ruling, leading to an unusual public plea from the jurors and mounting pressure on the judge in recent days. Some jurors said they became emotionally invested in the trial and now felt it was their duty to advocate for their decision and fight for Johnson to receive his award.

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The list is endless. They’re all leaving.

World’s Smallest Porpoise Faces Extinction (AFP)

The near-extinct vaquita marina, the world’s smallest porpoise, has not yet disappeared from its habitat off the coast of Mexico, a research team said Wednesday after spotting six of them. The vaquita has been nearly wiped out by illegal fishing in its native habitat, the Gulf of California, and the World Wildlife Fund (WWF) warned in May that it could go extinct this year. But “all hope is not lost” for saving the species after the recent sightings, said Lorenzo Rojas of the International Committee for the Recovery of the Vaquita (CIRVA), presenting the researchers’ findings. In an 11-day study conducted in late September and early October, marine scientists spotted six vaquitas, including a calf.

The team emphasized that the study was not a full population estimate, which they will present in January after further research. In the last full population estimate, carried out in 2017, CIRVA found there were only 30 vaquitas left. Known as “the panda of the sea” for the distinctive black circles around its eyes, the vaquita has been decimated by gillnets used to fish for another species, the also endangered totoaba fish. The totoaba’s swim bladder is considered a delicacy in China and can fetch up to $20,000 on the black market. Hollywood star Leonardo DiCaprio and Mexican billionaire Carlos Slim have thrown their backing behind the campaign to save the vaquita.

Read more …

Select your salt wisely.

Microplastics Found In 90% Of Table Salt (NatGeo)

Microplastics were found in sea salt several years ago. But how extensively plastic bits are spread throughout the most commonly used seasoning remained unclear. Now, new research shows microplastics in 90 percent of the table salt brands sampled worldwide. Of 39 salt brands tested, 36 had microplastics in them, according to a new analysis by researchers in South Korea and Greenpeace East Asia. Using prior salt studies, this new effort is the first of its scale to look at the geographical spread of microplastics in table salt and their correlation to where plastic pollution is found in the environment. “The findings suggest that human ingestion of microplastics via marine products is strongly related to emissions in a given region,” said Seung-Kyu Kim, a marine science professor at Incheon National University in South Korea.

Salt samples from 21 countries in Europe, North and South America, Africa, and Asia were analyzed. The three brands that did not contain microplastics are from Taiwan (refined sea salt), China (refined rock salt), and France (unrefined sea salt produced by solar evaporation). The study was published this month in the journal Environmental Science & Technology. The density of microplastics found in salt varied dramatically among different brands, but those from Asian brands were especially high, the study found. The highest quantities of microplastics were found in salt sold in Indonesia. Asia is a hot spot for plastic pollution, and Indonesia—with 34,000 miles (54,720 km) of coastline—ranked in an unrelated 2015 study as suffering the second-worst level of plastic pollution in the world.

Read more …

Nov 282017
 November 28, 2017  Posted by at 9:33 am Finance Tagged with: , , , , , , , ,  16 Responses »

Stanley Kubrick High Wire Act 1948


Millennials Will Have Similar Pensions To Baby Boomers – Thinktank (G.)
The Perfect Storm – Of The Coming Market Crisis (Roberts)
Markets Get Wake-Up Call From China’s Post-Congress Deleveraging Moves (R.)
Chance Of US Stock Market Correction Now At 70% – Vanguard (CNBC0
Exit Sign (Jim Kunstler)
Bitcoin Bubble Makes Dot-Com Look Rational (BBG)
London Homes Are Now Less Affordable Than Ever Before (BBG)
£300 Million A Week: The Output Cost Of The Brexit Vote (VoxEU)
The Irish Question May Yet Save Britain From Brexit (G.)
The Fat Cats Have Got Their Claws Into Britain’s Universities (G.)
Prince Harry Can Bring His Foreign Spouse To UK – 1/3 Of Britons Can’t (Ind.)
Wells Fargo Bankers Overcharged Clients For Higher Bonuses (CNBC)
Sao Paulo’s Homeless Seize The City (G.)



Think tanks will say anything if you pay them enough. But still this is quite the ‘report’. And it’s about Britain of all places!

Millenials will get NO pensions. They may get a UBI when the time comes, but people will have to wake up for that to happen.

Millennials Will Have Similar Pensions To Baby Boomers – Thinktank (G.)

Young adults will have retirement incomes similar to today’s pensioners, according to analysis which rejects widespread pessimism about the financial prospects for millennials. Men in their 40s will suffer a fall in their retirement incomes compared with today’s pensioners, but the generation behind them will see their incomes recover, analysis by the Resolution Foundation found. It said the average pension for a man will be about £310 a week in 2020, taking into account state and private pensions. This will fall to about £285 in the mid 2040s in real terms “before building again to about £300 a week by the end of the 2050s”.

For women, there will be no dip in pension income but a small improvement over time. The thinktank forecasts that average pensions incomes for women, typically lower than those of men because of lower pay and career breaks, will be about £225 a week in 2020, then rising to about £235 by the mid-2030s and staying at that level going forward. The analysis defies the popular view that today’s pensioners are a “golden generation” who benefited from final-salary pensions. It said that while pensioner incomes have risen sharply this century to match or even surpass those of working people, these levels can be broadly maintained in the future. The upbeat assessment is in sharp contrast to other a stream of reports which paint Britain’s pensions as among the worst in the developed world, with young workers facing penury in retirement.

Resolution said “auto enrolment”, the government scheme in which workers are automatically defaulted into paying into a private pension scheme, will be the chief driver behind a recovery in pension income. But the thinktank acknowledged that today’s younger generation are unlikely to build up the housing wealth acquired by baby boomers – people born between the early 1940s and mid-1960s – from the huge increase in house prices, and will not be entitled to a state pension until they are older than the current generation of retirees.

Read more …

Margin calls. Coming soon to a theater near you.

The Perfect Storm – Of The Coming Market Crisis (Roberts)

Of course, as investors begin to get battered by the “volatility and junk bond storms,” the subsequent decline in equity valuations begins to trigger “margin calls.” As the markets decline, there will be a slow realization “this decline” is something more than a “buy the dip” opportunity. As losses mount, the anxiety of those “losses” mounts until individuals seek to “avert further loss” by selling. There are two problems forming. The first is leverage. While investors have been chasing returns in the “can’t lose” market, they have also been piling on leverage in order to increase their return. It is often stated that margin debt is “nothing to worry about” as they are simply a function of market activity and have no bearing on the outcome of the market.

That is a very short-sighted view. By itself, margin debt is inert. Investors can leverage their existing portfolios and increase buying power to participate in rising markets. While “this time could certainly be different,” the reality is that leverage of this magnitude is “gasoline waiting on a match.” When an “event” eventually occurs, it creates a rush to liquidate holdings. The subsequent decline in prices eventually reaches a point which triggers an initial round of margin calls. Since margin debt is a function of the value of the underlying “collateral,” the forced sale of assets will reduce the value of the collateral further triggering further margin calls. Those margin calls will trigger more selling forcing more margin calls, so forth and so on.

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Imposing a 70% loss on creditors sounds like a confidence breaker to me.

Markets Get Wake-Up Call From China’s Post-Congress Deleveraging Moves (R.)

The pace at which Beijing is announcing deleveraging reforms following last month’s Communist Party Congress is a wake-up call for investors in Chinese markets: risk just got real. Sweeping new rules for the asset management industry, a crackdown on micro loans and losses imposed on the creditors of the state-owned Chongqing Iron & Steel are not yet a “Big Bang” of reforms. Some of the measures were well flagged and will only kick in 2019. But they are sending a signal to markets that policymakers are serious about deleveraging, something that has been urged by the INF and ratings agencies for years and flagged as a top priority by President Xi Jinping at the party congress.

Debt markets reacted first, with benchmark 10-year borrowing costs hitting three-year highs above 4% and yield spreads between government and corporate debt widening as policymakers appear more tolerant of defaults. Last week, the debt sell-off spilled over into equities, which saw their worst day in 19 months, and markets have since weakened further. [..] Two weeks ago, the central bank and the top regulators for banking, insurance, securities and foreign exchange announced unified rules covering asset management. The aim was to close loopholes that allow regulatory arbitrage, reduce leverage levels, eliminate the implicit guarantees some financial institutions offer against investment losses and rein in shadow banking.

Last week, a top-level Chinese government body issued an urgent notice to provincial governments urging them to suspend regulatory approval for new internet micro-lenders in a bid to curb household debt, which is currently low but rising rapidly. In the meantime, creditors of Chongqing Iron & Steel took a 70% loss in a debt-to-equity swap restructuring of nearly 40 billion yuan ($6 billion) of debt. [..] Debt-to-equity swaps are complex operations that are harder to undo than a missed bond payment and analysts say the move signals a clear path for tackling high corporate debt levels, which the BIS estimates at 1.6 times the size of the economy. “If you own the wrong stuff you’re in trouble because they are not going to bail you out any more,” said Joshua Crabb at Old Mutual Global Investors.

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Round it off to an even 100%, why don’t you.

Chance Of US Stock Market Correction Now At 70% – Vanguard (CNBC)

Don’t panic, but there is now a 70% chance of a U.S. stock market correction, according to research conducted by fund giant Vanguard Group. There is always the risk of a correction in stocks, but the Vanguard research shows that the current probability is 30% higher than what has been typical over the past six decades. Vanguard, which manages roughly $5 trillion in assets and is a proponent of long-term investing, isn’t sounding the alarm bells to scare investors out of the market. But according to Vanguard’s chief economist Joe Davis, investors do need to be prepared for a significant downturn.

“It’s about having reasonable expectations,” Davis said. “Having a 10% negative return in the U.S. market in a calendar year has happened 40% of the time since 1960. That goes with the territory of being a stock investor.” He added, “It’s unreasonable to expect rates of returns, which exceeded our own bullish forecast from 2010, to continue.” In its annual economic and investing outlook published last week, Vanguard told investors to expect no better than 4% to 6% returns from stocks in the next five years, its least bullish outlook since the post-financial crisis recovery began. Contributing to that outlook are market indicators that suggest “a little froth” in the market, according to the Vanguard chief economist.

“The risk premium, whether corporate bond spreads or the shape of yield curve, or earnings yields for stocks, have continued to compress,” Davis said. “We’re starting to see, for first time … some measures of expected risk premiums compressed below areas where we think it can be associated with fair value.” Many market participants have worried in recent months about the flattening in the yield curve — the spread between 2-year note yields and 10-year yields — at the lowest level since before the financial crisis. Meanwhile, the spread between junk bond yields and Treasurys recently has moved closer to the level before the financial crash than the long-term historical average.

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Bitcoin at the water cooler.

Exit Sign (Jim Kunstler)

I’m not so sanguine about Bitcoin’s supposed impregnability, nor about many of its other appealing claims. The Mt. Gox affair of 2014 must be forgotten now, but back then some sharpie hacked 850,000 Bitcoins (valued over $450,000,000) out of the exchange, which was processing almost two-thirds of all the Bitcoin trades in the world. Mt. Gox went out of business. Bitcoin tanked and then traded sideways for three years until (coincidentally?) the Golden Golem of Greatness was elected Leader of the Free World. Hmmmm….. Not many readers understand the first thing about block-chain math, your correspondent among them. But I am aware that the supposed safety of Bitcoin lies in its feature of being an algorithm distributed among a network of computers world-wide, so that it kind of exists everywhere-and-nowhere at the same time, a highly-valued ghost in the techno-industrial meta-machine.

However, the electric energy required for “mining” each Bitcoin — that is, the computations required for updating the block-chain network — is enough to boil almost 2000 liters of water. This is happening world-wide, and a lot of the Bitcoin “mining” is powered by coal-burning electric plants, making it the first Steampunk currency. If Bitcoin were to keep rising to $1,000,000 per unit, as many investors hope and pray, there wouldn’t be enough electric power in the world to keep it going. Pardon me if I seem skeptical about the whole scheme. Even without Bitcoin bringing extra demand onto the scene, America’s electrical grid is already an aging rig of rags and tatters. There are a lot of ways that the service could be interrupted, perhaps for a long time in the case of an electric magnetic pulse (EMP). I’m not convinced that crypto-currencies are beyond the clutches of government, either.

Around the world, in their campaign to digitize all money, there must be a deep interest in either hijiking existing block-chains, or creating official government Bit-monies to seal the deal of total control over financial transactions they seek. Anyway, there are already over 1300 private cryptos and, apparently, a theoretically endless ability to create ever new ones — though the electricity required does seem to be a limiting factor. Maybe governments will shut them down for being energy-hogs. My personal take on the phenomenon is that it represents the high point of techno-narcissism — the idea that technology is now so magical that it over-rides the laws of physics. That, for me, would be the loudest “sell” signal. I’d just hate to be in that rush to the exits. And who knows what kind of rush to other exits it could inspire.

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No problem is you think bitcoin is not a bubble.

Bitcoin Bubble Makes Dot-Com Look Rational (BBG)

Even compared with some extreme bubbles, bitcoins, which continued its climb toward $10,000 Monday afternoon, look bloated. Take dot-com stocks, which were the biggest bubble of the past few decades, and likely the largest in stock market history. At the height of the dot-com stock bubble, the technology-heavy Nasdaq stock index had a price-to-earnings ratio of 175. In the past year, bitcoins have generated transaction fees of nearly $219 million. And at $9,600 a piece, the total value of all bitcoins – their market cap – now tops $155 billion. That gives bitcoins the equivalent of a trailing P/E ratio of 708. That means based on valuation, bitcoins are four times more expensive than dot-com stocks were at the height of their bubble.

Valuation, though, is not what pops bubbles. Supply does. The dot-com bubble, like all bubbles, was driven by the fact that there were relatively few publicly traded internet stocks in the mid-1990s, just as investors were getting excited about them. So prices of the stocks that were public soared. Companies not actually in the internet business added “.com” to their names, or announced a web strategy, and those stocks rose as well. But from 1997 to 2000, there were $44 billion in initial public offerings of new dot-com stocks. Eventually the supply of dot-com companies became large and dubious enough that the bubble burst and the hot air holding up all the stocks rushed out.

The same will happen with bitcoin. The question is when. The combined market value of all digital currencies is just $300 billion. As my colleague David Fickling pointed out, that relatively tiny market cap of bitcoin compared with other asset classes means that a small amount of money coming out of say U.S. stocks, which have a market cap of more than $20 trillion, could send the price of bitcoin soaring. Just a 5 percentage point shift away from gold and into bitcoin could drive the price of the digital currency up by another 33%. But it’s not clear that the people who want the protection of owning gold would be comfortable with bitcoin instead. The percentage of stock investors interested or able to invest their 401(k) in bitcoin is likely small as well, though surely, as in all bubbles, growing.

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Britain is a class society. Might as well have castes.

London Homes Are Now Less Affordable Than Ever Before (BBG)

London homes are less affordable than ever before, despite slowing price growth and government attempts to cut the cost of housing for first-time buyers. It now costs the average Londoner 14.5 times their annual salary to purchase a home, the highest level on record, according to a report Tuesday by researcher Hometrack. Cambridge, Oxford and the English seaside town of Bournemouth also have price-to-earnings ratios in the double digits, the report shows. “Unaffordability in London has reached a record high, despite a material slowdown in the rate of house-price growth over the last year,” Richard Donnell, research director at Hometrack, said in an interview. “The gap between average earnings and house prices in the capital has never been wider.”

Even with the recent slowdown, the average cost of a first home in the U.K. capital is still up 66% since 2012 as supply fails to meet the demand from domestic buyers and overseas investors. Spiraling values have caused the number of younger buyers in the capital to fall, something that Chancellor of the Exchequer Philip Hammond sought to address last week when he abolished stamp duty for first-time buyers of homes worth up to 300,000 pounds ($400,290). London house prices rose an average 3% in the year ending October to 496,000 pounds, less than half the 7.7% growth rate of a year earlier, Hometrack said. The researcher defined London as the 46 boroughs in and around the U.K. capital.

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Not sure a comprehensive study is even possible.

£300 Million A Week: The Output Cost Of The Brexit Vote (VoxEU)

There is huge variation in the estimated cost of Brexit. Most studies forecast that a reduction in trade or a fall in foreign direct investment (FDI) – or both – will reduce output. For instance, HM Treasury (2016) uses a gravity model to assess the economic impact in several scenarios, and concludes that losses could be up to 6% of GDP in the long term. Yet the future relationship between the UK and the EU is highly uncertain (Baldwin 2016). As a result, estimating the cost of Brexit is difficult. Different assumptions about the deal that the UK will lead to different cost estimates.

That’s why we take a different approach in a recent paper (Born et al. 2017). Rather than making set of assumptions which are bound to be controversial, and using them to forecast the economic costs of Brexit, we measure the actual output loss from the UK’s decision to leave the EU. Our approach does not depend on having the right model for the British, the European, or even the global economy. We do not assume a particular Brexit deal, or construct specific scenarios for the outcome of the negotiations. Instead we create a transparent, unbiased, and entirely-data driven ‘Brexit cost tracker’ that relies on synthetic control methods (Abadie and Gardeazabal 2003).

[..] We then use the doppelganger of the pre-Brexit UK economy to quantify the cost of the Brexit vote. As the doppelganger is not treated with the Brexit vote, it will continue to evolve in a similar way to how the pre-Brexit economy would have evolved if the referendum had never happened. It shows, in other words, the counterfactual performance of the UK economy, and the divergent output paths between the UK economy and its doppelganger capture the effect of the referendum. This ‘synthetic control method’ has been successfully applied to study similar one-off events, such as German reunification and the introduction of tobacco laws in the US (Abadie et al. 2010, 2015).

Figure 2 zooms into the post-Brexit period. We find that the economic costs of the Brexit vote are already visible. By the third quarter of 2017, the economic costs of the Brexit vote are about 1.3% of GDP. The cumulative output loss is £19.3 billion. As 66 weeks have passed between the referendum and the end of the Q3 2017 (our last GDP data point), the average output cost is almost £300 million on a per-week basis.

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The Tories are not going to win this.

The Irish Question May Yet Save Britain From Brexit (G.)

It was always there for all to see, the great Celtic stone cross barring the way to Brexit. Finally, as crunch day nears, the government and its Brextremists have to confront what was always a roadblock to their fantasies. They pretended it was nothing. Reviving that deep-dyed, centuries-old contempt for the Irish, they have dismissed it with an imperial fly-whisk as a minor irritation. No longer. On 14 December, the time comes when the EU decides whether the UK has made “sufficient progress” on cash, citizens’ rights … and the Irish border. This roadmap was long ago agreed, and yet as the day approaches there is no plan for that 310-mile stretch with its 300 road crossings. The Irish government, which never wanted the UK to leave, demands, as it always did, that no hard border disrupts trade and breaks the Good Friday agreement.

Why would they expect anything else, when Theresa May herself made that one of her “red lines”? But she made three incompatible pledges: no single market, no customs union and no hard border, an impossible conundrum no nearer resolution than the day she uttered it. Labour’s Keir Starmer keeps pointing to the needless trap she jumped into: why not, like Labour, keep those options on the table? The Brexiteers turn abusive: the Irish are holding Britain to “ransom” and “blackmail” by conducting an “ambush”. The Sun leader told the taoiseach, Leo Varadkar, to “shut your gob and grow up”, and to stop “disrespecting 17.4 million voters of a country whose billions stopped Ireland going bust as recently as 2010”.

Brexit fanatic Labour MP Kate Hoey yesterday adopted a Trump-style demand that Ireland builds a wall and pays for it – for a border they never wanted. The Ukip MEP Gerald Batten tweeted: “UK threatened by Ireland. A tiny country that relies on UK for its existence …” and: “Ireland is like the weakest kid in the playground sucking up to the EU bullies.” Brexiteers, thrashing around, accuse the Irish of using the border crisis as a devious plot to further a united Ireland. But Varadkar rightly says he is not using a veto. There is complete unity among the EU 27: no hard border, loud and clear. He is right not to let this slip to the next stage without a written-in-blood pledge.

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Class society.

The Fat Cats Have Got Their Claws Into Britain’s Universities (G.)

Scandals aren’t meant to happen in British universities. Parliament, tabloid newsrooms, the City … those we expect to spew out sleaze. Not the gown-wearing, exam-sitting, quiet-in-the-library surrounds of higher education. Yet we should all be scandalised by what is happening in academia. It is a tale of vast greed and of vandalism – and it is being committed right at the top, by the very people who are meant to be custodians of these institutions. If it continues, it will wreck one of the few world-beating industries Britain has left. Big claims, I know, but easily supportable. Let me start with greed. You may have heard of Professor Dame Glynis Breakwell. As vice-chancellor of Bath University, her salary went up this year by £17,500 – which is to say, she got more in just one pay rise than some of her staff earn in a year.

Her annual salary and benefits now total over £468,000, not including an interest-free car loan of £31,000. Then there’s the £20,000 in expenses she claimed last year, with almost £5,000 for the gas bill – and £2 for biscuits. I knew there had to be a reason they call them rich tea. Breakwell is now the lightning rod for Westminster’s fury over vice-chancellor pay. As the best paid in Britain, she’s the vice-chancellor that Tony Blair’s former education minister, Andrew Adonis, tweets angrily about. She’s the focus of a regulator’s report that slams both her and the university. She’s already had to apologise to staff and students for a lack of transparency in the university’s pay processes – and may even be forced out this week.

But she’s not the only one. The sector is peppered with other vice-chancellors on the make. At Bangor University, John Hughes gets £245,000 a year – and lives in a grace-and-favour country house that cost his university almost £750,000, including £700-worth of Laura Ashley cushions. Two years ago, the University of Bolton gave its head, George Holmes, a £960,000 loan to buy a mansion close by. The owner of both a yacht and a Bentley, Holmes enjoys asking such questions as: “Do you want to be successful or a failure?” Yet as the Times Higher Education observed recently, he counts as a failure, having overseen a drop last year in student numbers, even while being awarded an 11.5% pay rise.

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The marriage meant to make you forget Brexit.

Prince Harry Can Bring His Foreign Spouse To UK – 1/3 Of Britons Can’t (Ind.)

Prince Harry is in a privileged position as he celebrates his engagement to US-born Meghan Markle, not only because he is royalty, but because he is part of a percentage of the population who can afford to marry a spouse from outside of the European Economic Area (EEA). Immigration rules introduced in 2012 under then-Home Secretary Theresa May set a minimum earnings threshold of £18,600 for UK citizens to bring a non-EEA spouse or partner to live here with them. The Migration Observatory in Oxford estimates that 40 per cent of Brits in full or part-time employment don’t earn enough to meet this threshold, narrowing the marriage choices of a significant proportion of the population.

The income requirement doesn’t just disadvantage minimum wage earners, but also the young, women and those with caring responsibilities, who are less likely to meet the threshold. Where you live matters too; Londoners earn higher salaries than those living outside the south-east of the country. But even within London, there are disparities – around 41 per cent of non-white UK citizens working in London earn below the income threshold compared to 21 per cent of those who identify as white. Consider that before hailing the dawn of a new post-racial era in the UK with Meghan Markle, who is mixed race, marrying into the Royal family. The £18,600 figure was calculated as the minimum income amount necessary to avoid a migrant becoming a “burden on the state”.

This makes sense in theory, but economics cannot be the only metric in a system that deals with people’s lives. The committee tasked with setting the amount was not asked to take into account other metrics, such as the wellbeing of UK citizens, permanent residents and their families. The question we need to ask ourselves is, should love have a price tag? Is it right or fair that Prince Harry and those who earn above the minimum wage are a select percentage of the population who can marry whoever they choose? The price of bringing your spouse to the UK rises with every child you include on your application, giving rise to “Skype families” who cannot afford or are otherwise unable to reunite and have to stay in touch over Skype. In 2015, the Children’s Commissioner reported that up to 15,000 children are affected by this rule, most of whom are British citizens. Families are put under immense stress and anxiety.

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This is what you call organized crime. There are laws covering that.

Wells Fargo Bankers Overcharged Clients For Higher Bonuses (CNBC)

Evidence that embattled bank Wells Fargo had swindled some of its clients emerged in a June conference call led by its managers, according to two employees who were present during the call, The Wall Street Journal reported Monday.The revelation, based on an internal assessment, reportedly came following years of rumors within the bank. Of the approximately 300 fee agreements for foreign exchange trades reviewed internally by Wells Fargo, only about 35 firms were billed the price they had been quoted, the employees told the Journal.

Wells Fargo charged one of the highest trading fees — at least two to eight times higher than industry standards, according to the bank’s employees and others in the sector, the Journal reported. The latest case shares important similarities to Wells Fargo’s ongoing sales scandal: Under a highly unusual policy, employees’ bonuses were tied to how much revenue they brought in, the report said. The practice reportedly led retail employees to open as many as 3.5 million fake accounts, in a controversy first brought to light last year.

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I kid you not: this article is ‘supported by the Rockefeller Foundation”.

Sao Paulo’s Homeless Seize The City (G.)

On the wall of an abandoned and occupied hotel in central Sao Paulo is a mural of a fiercely feral creature – part cat, part rat, part alien – that bears a red revolutionary banner with a single word: Resistencia! The surrounding courtyard is daubed with slogans of defiance – “10 years of struggle!”, “Whoever doesn’t struggle is dead” – and the initials MMLJ (the Movement of Residents Fighting for Justice). Young boys kick a ball against a wall decorated with a giant photograph of masked, armed protesters. In the surrounding blocks, 237 low-income families talk, cook, clean, watch TV, shop, practice capoeira, study literacy, sleep and go about their daily lives in Brazil’s most famous illegal squat.

This is the Maua Occupation, a trailblazer for an increasingly organised fair-housing movement that has reignited debate about whether urban development should aim at gentrification or helping the growing ranks of people forced to live on the street and in the periphery. When the Santos Dumont hotel was first taken over on the 25 March 2007, there were very few organised squats in South America’s biggest city. But recession, inequality and increasing political polarisation have turned the occupation movement into one of the most dynamic forces in the country. There are now about 80 organised squats in the city centre and its environs, including high-rise communities and centres of radical art.

The periphery is home to many more, such as the giant “Povos Sem Medo” (People Without Fear) cluster of 8,000 tents in the Sao Bernardo do Campo district. The burst of energy and activism has been compared to the key transitional periods for other major cities in the 1970s, 80s and 90s. “We are now seeing a boom of squatting in Sao Paulo that is like those once seen in New York, Berlin and Barcelona,” said Raquel Rolnik, a former UN Special Rapporteur and architect who has worked in the housing sector for more than three decades. “What is happening here is not unique but it is happening on a very wide scale.”

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Oct 152017
 October 15, 2017  Posted by at 9:21 am Finance Tagged with: , , , , , , , , , ,  5 Responses »

Piet Mondriaan Composition in color A 1917


Tesla Shareholders: Are You Drunk On Elon Musk’s Kool-Aid? (Lewitt)
ECB Suffers from “Corporate Capture at its Most Extreme” (DQ)
ECB Still Believes In Eventual Inflation, Wage Rise: Draghi (R.)
China Credit Growth Exceeds Estimates Despite Debt Curb Vow (BBG)
PBOC Governor Zhou Says China’s 6.9% Growth ‘May Continue’ (BBG)
In China, The War On Coal Just Got Serious (SMH)
IMF Steering Committee Warns Global Growth Is At Risk Of Faltering (BBG)
Corbyn Has A Washington Ally On Taxing The Rich. But No, It’s Not Trump (G.)
Brexit Has Made The UK The Sick Man Of Europe Once More (NS)
UK MPs Move To Block May From Signing ‘No Deal’ Brexit (G.)
Forget Catalonia, Flanders Is The Real Test Case Of EU Separatism! (OR)
Europe’s Migration Crisis Casts Long Shadow As Austria Votes (R.)



Funny but very serious. Recommend the whole article.

Tesla Shareholders: Are You Drunk On Elon Musk’s Kool-Aid? (Lewitt)

Tesla shareholders (and bullish Wall Street analysts) are either geniuses or delusional and I am betting on the latter. Typical of the lack of gray matter being applied to this investment is a recent post on Seeking Alpha, often a place where amateurs go to pump stocks they own. Someone calling himself “Silicon Valley Insights” issued an ungrammatical “Strong Buy” recommendation on October 11 based on the following syllogism: (1) “Tesla CEO Elon Musk has stated very firmly that they can and will reach his goal of producing 5,000 cars per week by the end of this year.” (2) “Musk has a history of setting aggressive targets (more for his staff than investors) [Editors’s Note: That is a lie.] and then missing them on initial timing but reaching them later. [Editor’s Notes: That is another lie–Musk has NEVER reached a production target.]

(3) “Reaching anything [sic] significant portion of that 5K target (say 1-2K) by the end of December could drive TSLA shares significantly higher.” This genius then suggests that investors stay focused on the Model 3 ramp as the key price driver over the coming weeks and months and argues that the announcement that only 260 Model 3s were produced in the third quarter leaves “much of the risk…now in the stock price.” He is correct – there is a great deal of risk embedded in a stock trading at infinity-times earnings with no prospect of profitability , a track record of breaking promises, a reluctance to sell equity to fund itself even at price levels above the targets of most analysts, and a market cap larger than rivals that are pouring tens of billions of dollars into putting it out of business.

Undeterred, he offers two investment strategies. The first he terms a “reasonable and conservative” one that waits to invest in TSLA shares until the early November third quarter earnings call. In my world, a reasonable and conservative strategy would be to run for the hills or short the stock (as I am doing). A “more aggressive and risky strategy” (compared to skydiving or bungee jumping) would be “to buy shares before that third quarter report and call on the bet that the Model 3 production update will be taken positively.” No doubt investors like Mr. Silicon Valley Insights will put a positive spin on whatever fairy tales Elon Musk spins on that call, but that is a big bet indeed.

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Bankers involved in LIbor and other scandals regulate themselves. This is the exact opposite of an independent central bank. It’s a criminal racket.

ECB Suffers from “Corporate Capture at its Most Extreme” (DQ)

No single institution has more influence over the lives of European citizens than the European Central Bank. It sets the interest rates for the 19 Member States of the Eurozone, with a combined population of 341 million people. Every month it issues billions of euros of virtually interest-free loans to hard-up financial institutions while splashing €60 billion each month on sovereign and corporate bonds as part of its QE program, thanks to which it now boasts the biggest balance sheet of any central bank on Planet Earth. Through its regulatory arm, the Single Supervisory Mechanism, it decides which struggling banks in the Eurozone get to live or die and which lucky competitor gets to pick up the pieces afterwards, without taking on the otherwise unknown risks. In short, the ECB wields a bewildering amount of power and influence over Europe’s financial system.

But how does it reach the decisions it makes? Who has the ECB’s institutional ear? The ECB has 22 advisory boards with 517 seats in total that provide ECB decision-makers with recommendations on all aspects of EU monetary policy. A new report by the non-profit research and campaign group Corporate Europe Observatory (CEO) reveals that 508 of the 517 available seats are assigned to representatives of private financial institutions. In other words, 98% of the ECB’s external advisors have some sort of skin in the game. Of the nine seats not taken by the financial sector, seven have gone to non-financial companies such as German industrial giant Siemens and just two to consumer groups, according to the CEO report. In response to questions by CEO, the ECB said that its advisory groups help it to gather information, effectively “discharge its mandate”, and “explain its policy decisions to citizens.”

[..] Many of the above institutions were implicated in two of the biggest financial crimes of this century, the Forex and Libor scandals. In fact, according to CEO, banks involved in a separate forex manipulation scandal that emerged in 2013 have been heavily represented on the ECB’s Foreign Exchange Contact Group. In other words, these banks are supposed to be under direct ECB supervision, and yet they have been repeatedly caught committing serious financial crimes. And now it turns out that they enjoy more influence over ECB decision making than anyone else..

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Spot the nonsense: ”..already bought over 2 trillion euros worth of bonds to cut borrowing costs and induce household and corporate spending..”

They buy bonds and magically households will start spending. They don’t belive that themselves either.

ECB Still Believes In Eventual Inflation, Wage Rise: Draghi (R.)

Wages and inflation in the 19-country euro zone will eventually rise but more slowly than earlier thought, requiring continued patience from policymakers, European Central Bank President Mario Draghi said on Saturday. Wage growth has failed to respond to stimulus for a list of reasons but the ECB remains convinced that labor markets and not a structural change in the nature of inflation is the chief culprit behind low prices, Draghi told a news conference on the sidelines of the International Monetary Fund annual meeting. Having fought low inflation for years, the ECB is due to decide at its Oct. 26 meeting whether to prolong stimulus, having to reconcile rapid economic expansion with weak wage and price growth.

Sources close to the discussion earlier told Reuters that the ECB will likely extend asset purchases but at lower volumes, signaling both confidence in the outlook but also indicating that policy support will continue for a long time. “The bottom line in terms of policy is that we are confident that as the conditions will continue to improve, the inflation rate will gradually converge in a self-sustained manner,” Draghi said. “But together with our confidence, we should also be patient because it’s going to take time.” Even as the euro zone has enjoyed 17 straight quarters of economic growth, wage growth has underperformed expectations, due in part to hidden slack in the labor market and low wage demands from unions.

Some policymakers also argue that globalization and technological changes have made value chains more international, making low inflation a global phenomenon and limiting central banks’ ability to control prices in their own jurisdiction. Draghi acknowledged the debate but said the ECB was convinced the main problem was the labor market and even if there was a broader issue, it would not lead to policy change. The ECB has kept interest rates in negative territory for years and already bought over 2 trillion euros worth of bonds to cut borrowing costs and induce household and corporate spending.

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They say one thing and do another.

China Credit Growth Exceeds Estimates Despite Debt Curb Vow (BBG)

China’s broadest gauge of new credit exceeded projections, signaling that the funding taps remain open even as the government pushes to curb excessive borrowing. Aggregate financing stood at 1.82 trillion yuan ($276 billion) in September, the People’s Bank of China said Saturday, compared with an estimated 1.57 trillion yuan in a Bloomberg survey and 1.48 trillion yuan the prior month. New yuan loans stood at 1.27 trillion yuan, versus a projected 1.2 trillion yuan. The broad M2 money supply increased 9.2%, exceeding estimates and picking up from the prior record low. Policy makers have been clamping down on shadow banking while also working to keep corporate borrowing intact to avoid impeding growth.

The central bank said Sept. 30 it will reduce the amount of cash some banks must hold as reserves from next year, with the size of the cut linked to lending to parts of the economy where credit is scarce. “Momentum continues to be very strong,” said Kenneth Courtis, chairman of Starfort Investment Holdings and a former Asia vice chairman for Goldman Sachs. “Loan demand of the private sector has finally turned up in recent months.” “This means that there is little hope of further policy easing in the fourth quarter as the monetary policy is very accommodative,” said Zhou Hao, an economist at Commerzbank in Singapore. “There could be even a tightening bias.”

“Household short-term loans have increased too rapidly, with some funds being invested in stock and property markets,” said Wen Bin, a researcher at China Minsheng Banking Corp. in Beijing. “Regulators have started to pay attention to the sector and required banks to strengthen credit review. I think the momentum will show signs of slowing in the fourth quarter.” “Deleveraging is not happening if we look at any measure of credit growth,” according to Christopher Balding, an associate professor at the HSBC School of Business at Peking University in Shenzhen. “Lending in 2017 has actually accelerated significantly from 2016.”

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Yeah. Financed by debt.

PBOC Governor Zhou Says China’s 6.9% Growth ‘May Continue’ (BBG)

Economic indicators show “stabilized and stronger growth” and the momentum of a 6.9% expansion in the first six months of 2017 “may continue in the second half,” People’s Bank of China Governor Zhou Xiaochuan said. Imports and exports increased rapidly, fiscal income grew, and prices have been steady, Zhou said, according to a statement the central bank released Saturday after he attended meetings of global finance chiefs this week in Washington. The effects of a campaign to rein in leverage are showing, and China will monitor and prevent shadow banking and real estate risk, he said. China’s broadest gauge of new credit, released Saturday, exceeded projections, signaling that the funding taps remain open even as the government pushes to curb excessive borrowing. “Positive progress has been achieved in economic transformation,” the statement said.

“China will continue to pursue a proactive fiscal policy and a prudent monetary policy, with a comprehensive set of policies to strengthen areas of weakness.” Zhou’s comments, delivered before a gathering of Group of 20 finance ministers and central bankers, come before the release of third-quarter GDP, scheduled for Oct. 19. Economists project a moderation to 6.8% growth from the 6.9% pace in the second quarter amid government efforts to reduce overcapacity and ease debt risk. Steady growth in the world’s second-largest economy gives policy makers additional room to push ahead with reforms. Zhou recently made a fresh call to further open up the financial sector, warning that such an overhaul will become more difficult if the window of opportunity is missed. Some analysts say they expect reforms will pick up should President Xi Jinping further consolidate power after the 19th Party Congress starting next week.

The IMF this week increased its global growth forecast amid brightening prospects in the world’s biggest economies. It also raised its China growth estimate to 6.8 percent this year and 6.5 percent in 2018, up 0.1 percentage point in each year versus July. “We expect that the authorities can and will maintain a sufficiently expansionary macro policy mix to meet their policy target of doubling 2010 GDP by 2020,” Changyong Rhee, the fund’s Asia and Pacific director, said at a briefing Friday in Washington. “However, as this expansionary policy comes at the cost of a further large increase in debt, it also implies that there’s more downside risk in the medium-term due to this rapid credit expansion.”

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Beijing seems to be getting scared of people’s reactions. Still, when you think about it, closing down 50% of steel production says something about the country’s needs for steel.

In China, The War On Coal Just Got Serious (SMH)

Beijing: In Australia, politicians continue to debate the existence of climate change. Donald Trump’s Environment Protection Agency declared this week that the “war on coal is over”. In China, the outlook could not be more different. The war on coal reached fever pitch here this month. As a deadline looms to achieve clean air targets by the end of 2017, October has seen unprecedented measures come into force to curb air pollution and reduce emissions. Steel production has been halved in major steel cities, coal banned in China’s coal capital, factories closed down for failing pollution inspections, and hundreds of officials sacked for failing to meet environmental targets. The complete shutdowns, or 50% production cuts, will stay in place for an unprecedented five months.

The winter heating season in China is approaching, when coal use has traditionally spiked, worsening northern China’s notorious air pollution. But cities are under pressure to meet important domestic targets for clean air, set five years ago by the State Council in response to a public outcry over pollution. China can’t allow a repeat of last winter, when, after several years of improvement, air quality suddenly worsened in some cities. For a few days in January 2016, the sky darkened and it looked possible that the “airpocalypse” of 2013 – which first drew global attention to Beijing’s severe air pollution – was back. Social media went into overdrive. Fighting air pollution is a matter of social stability, Environment Protection Minister Li Ganjie said a fortnight ago. So now the Chinese government has brought out the “iron fist”.

That was the phrase used by the environment protection bureau in China’s most polluted province, Hebei, as 69 government officials were sacked and 154 handed over to police for investigation last month for failing to implement pollution control measures. Meeting emissions targets has become a key performance indicator for local Communist Party bosses and mayors alike. Local governments that don’t enforce the pollution controls will have environmental assessments for new property developments suspended by the Ministry for Environment Protection, effectively blocking deals. A battle plan has been drawn up by the ministry to cover 28 northern cities, including Beijing and Tianjin, where 7000 pollution inspectors will be deployed to expose violations and look for data fraud. The curbs on industry, particularly steel making, are hitting world resources prices, including Australia’s biggest exports, as demand for iron ore and coal fall.

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Let me guess. They want more reforms.

IMF Steering Committee Warns Global Growth Is At Risk Of Faltering (BBG)

The IMF’s steering committee warned that global growth is at risk of faltering in coming years given uncomfortably low inflation and rising geopolitical risks, injecting a cautious note into an otherwise improving economic outlook. “The recovery is not yet complete, with inflation below target in most advanced economies, and potential growth remains weak in many countries,” the International Monetary and Financial Committee said in a communique released Saturday in Washington. “Near-term risks are broadly balanced, but there is no room for complacency because medium-term economic risks are tilted to the downside and geopolitical tensions are rising.” The panel didn’t specify which geopolitical risks it was most concerned about.

In the past few weeks the U.S. and North Korea have engaged in shrill rhetoric about Pyongyang’s nuclear weapons. And on Friday, U.S. President Donald Trump took steps to confront Iran and renegotiate a 2015 multinational accord to curb Tehran’s nuclear program. At the same time, the U.K. is in the middle of negotiations on the terms of its exit from the EU. The panel nonetheless described the global outlook as strengthening, with rising investment, industrial output and confidence – conditions that make it ripe for nations to “tackle key policy challenges” and enact policies that boost the speed limit of their economies. “It’s when the sun is shining that you need to fix the roof,” IMF Managing Director Christine Lagarde said at a press briefing to discuss the statement.

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The best part of the iMF is not the front office, it’s the anonymous workers.

Corbyn Has A Washington Ally On Taxing The Rich. But No, It’s Not Trump (G.)

The IMF has been on quite a journey from the days when it was seen as the provisional wing of the Washington consensus. These days the IMF is less likely to harp on about the joys of liberalised capital flows than it is to warn of the dangers of ever-greater inequality. The fund’s latest foray into the realms of progressive economics came last week when it used its half-yearly fiscal monitor – normally a dry-as-dust publication – to make the case for higher taxes on the super-rich. Make no mistake, this is a significant moment. For almost 40 years, since the arrival of Margaret Thatcher in Downing Street and Ronald Reagan in the White House, the economic orthodoxy on taxation has been that higher taxes for the 1% are self-defeating.

Soaking the rich, it was said, would punish initiative and lead to lower levels of innovation, investment, growth and, therefore, reduced revenue for the state. As the Conservative party conference showed, this line of argument is still popular. Minister after minister took to the stage to warn that Jeremy Corbyn’s tax plans would lead to a 1970s-style brain drain. The IMF agrees that a return to the income tax levels seen in Britain during the 1970s would have an impact on growth. But that was when the top rate was 83%, and Corbyn’s plans are far more modest. Indeed, it is a sign of how difficult it has become to have a grown-up debate about tax that Labour’s call for a 50% tax band on those earning more than £123,000 and 45% for those earning more than £80,000 should be seen as confiscatory.

The IMF’s analysis does something to redress the balance, making two important points. First, it says that tax systems should have become more progressive in recent years in order to help offset growing inequality, but have actually become less so. Second, it finds no evidence for the argument that attempts to make the rich pay more tax would lead to lower growth. There is nothing especially surprising about either of the IMF’s conclusions: in fact, the real surprise is that it has taken so long for the penny to drop. Growth rates have not picked up as taxes have been cut for the top 1%. On the contrary, they are much weaker than they were in the immediate postwar decades, when the rich could expect to pay at least half their incomes – and often substantially more than half – to the taxman.

If trickle-down theory worked, there would be a strong correlation between growth and countries with low marginal tax rates for the rich. There is no such correlation and, as the IMF rightly concludes, “there would appear to be scope for increasing the progressivity of income taxation without significantly hurting growth for countries wishing to enhance income redistribution”. With a nod to the work of the French economist Thomas Piketty, the fiscal monitor also says that countries should consider wealth taxes for the rich, to be levied on land and property.

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Why am I thinking it’s the Brit(on)s themselves who’ve done that?

Brexit Has Made The UK The Sick Man Of Europe Once More (NS)

Though it didn’t feel like it at the time, the years preceding 2017 now resemble an economic golden age for the UK. After the damage imposed by the financial crisis and excessive austerity, Britain recovered to become the fastest growing G7 country. Real earnings finally rose as wages increased and inflation fell (income per person grew by 3.5% in 2015). And then the Brexit vote happened. Though the immediate recession that the Treasury and others forecast did not materialise, the UK has already paid a significant price. Having previously been the fastest growing G7 country, Britain is now the slowest. Real earnings are again in decline owing to the inflationary spike caused by the pound’s depreciation (the UK has the lowest growth and the highest inflation – stagflation – of any major EU economy).

Firms have delayed investment for fear of future chaos and consumer confidence has plummeted. EU negotiator Michel Barner’s warning of a “very disturbing” deadlock in the Brexit talks reflects and reinforces all of these maladies. While Leavers plead with Philip Hammond to set money aside for “a no-deal scenario”, the referendum result is daily harming the public finances. The Office for Budget Responsibility has forecast a £15bn budgetary hit (the equivalent of nearly £300m a week). To the UK’s existing defects – low productivity, low investment and low pay – new ones have been added: political uncertainty and economic instability. The Conservatives, to annex former Chancellor George Osborne’s phrase of choice, failed to fix the roof when the sun was shining.

Rather than taking advantage of record-low borrowing rates to invest in infrastructure (and improve the UK’s dismal productivity), the government squandered money on expensive tax cuts. The Sisyphean pursuit of a budget surplus (now not expected until at least 2027) reduced the scope for valuable investment. Productivity in quarter two of this year was just 0.9% higher than a decade ago – the worst performance for 200 years. Having softened austerity, without abandoning it, the Conservatives are now stuck in a political no man’s land.

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Cross-party action against May. It’s quite something. But it’ll just be more fighting.

UK MPs Move To Block May From Signing ‘No Deal’ Brexit (G.)

A powerful cross-party group of MPs is drawing up plans that would make it impossible for Theresa May to allow Britain to crash out of the EU without a deal in 2019. The move comes amid new warnings that a “cliff-edge” Brexit would be catastrophic for the economy. One critical aim of the group – which includes the former Tory chancellor Kenneth Clarke and several Conservative ex-ministers, together with prominent Labour, SNP, Liberal Democrat and Green MPs – is to give parliament the ability to veto, or prevent by other legal means, a “bad deal” or “no deal” outcome. Concern over Brexit policy reached new heights this weekend after the prime minister told the House of Commons that her government was spending £250m on preparations for a possible “no deal” result because negotiations with Brussels had stalled.

Several hundred amendments to the EU withdrawal bill include one tabled by the former cabinet minister Dominic Grieve and signed by nine other Tory MPs, together with members of all the other main parties, saying any final deal must be approved by an entirely separate act of parliament. If passed, this would give the majority of MPs who favour a soft Brexit the binding vote on the final outcome they have been seeking and therefore the ability to reject any “cliff-edge” option. A separate amendment tabled by Clarke and the former Labour minister Chris Leslie says Theresa May’s plan for a two-year transition period after Brexit – which she outlined in her recent Florence speech – should be written into the withdrawal bill, with an acceptance EU rules and law would continue to apply during that period. If such a transition was not agreed, the amendment says, exit from the EU should not be allowed to happen.

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Some nice history, but a weird anti-Islam stance. And a somewhat dubious conclusion.

Forget Catalonia, Flanders Is The Real Test Case Of EU Separatism! (OR)

To concisely summarize, there’s a very distinct possibility that the EU’s liberal-globalist elite have been planning to divide and rule the continent along identity-based lines in order to further their ultimate goal of creating a “federation of regions”. Catalonia is the spark that could set off this entire process, but it could also just be a flash in the pan that might end up being contained no matter what its final result may be. Flanders, however, is much different because of the heightened symbolism that Belgium holds in terms of EU identity, and the dissolution of this somewhat artificially created state would be the clearest sign yet that the EU’s ruling elite intend to take the bloc down the direction of manufactured fragmentation. Bearing this in mind, the spread of the “Catalan Chain Reaction” to Belgium and the inspiration that this could give to Flanders to break off from the rest of the country should be seen as the true barometer over whether or not the EU’s “nation-states” will disintegrate into a constellation of “Balkanized” ones.

{..] It’s important to mention that the territory of what would eventually become Belgium had regularly been a battleground between the competing European powers of the Netherlands, the pre-unification German states, France, the UK, and even Spain and Austria during their control of this region, and this new country’s creation was widely considered by some to be nothing more than a buffer state. The 1830 London Conference between the UK, France, Prussia, Austria, and Russia saw the Great Power of the time recognize the fledgling entity as an independent actor, with Paris even militarily intervening to protecting it during Amsterdam’s failed “Ten Day’s Campaign” to reclaim its lost southern province in summer 1831.

[..] Flanders contributes four times as much to Belgium’s national economy as Catalonia does to Spain’s, being responsible for a whopping 80% of the country’s GDP as estimated by the European Commission, and it also accounts for roughly two-thirds of Belgium’s total population unlike Catalonia’s one-sixth or so. This means that Flemish independence would be absolutely disastrous for the people living in the remaining 55% of the “Belgian” rump state, which would for all intents and purposes constitute a de-facto, though unwillingly, independent Wallonia.

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Austria is as much of a threat to the EU as Flanders is. The Visograd anti-migrants idea is moving west. This worries Germany, which shares quite a long border with Austria.

Europe’s Migration Crisis Casts Long Shadow As Austria Votes (R.)

Austria holds a parliamentary election on Sunday in which a young conservative star hopes to beat the far right at its own game with a hard line on refugees and pledging to prevent a repeat of Europe’s migration crisis. Foreign Minister Sebastian Kurz, who is just 31, propelled his conservative People’s Party (OVP) to the top of opinion polls when he became its leader in May, dislodging the far-right Freedom Party from the spot it had held for more than a year. He is now the clear favorite to become Austria’s next leader. Kurz has pledged to shut down migrants’ main routes into Europe, through the Balkans and across the Mediterranean. Many voters now feel the country was overrun when it threw open its borders in 2015 to a wave of hundreds of thousands of people fleeing war and poverty in the Middle East and elsewhere.

Chancellor Christian Kern’s Social Democrats (SPO) are currently in coalition with Kurz’s OVP, but Kurz called an end to the alliance when he took over the helm of his party, forcing Sunday’s snap election. Opinion polls have consistently shown the OVP in the lead with around a third of the vote, and second place being a tight race between the Social Democrats and the Freedom Party (FPO), whose candidate came close to winning last year’s presidential election. “We must stop illegal immigration to Austria because otherwise there will be no more order and security,” Kurz told tabloid daily Oesterreich on Friday night. Campaigning has been dominated by the immigration issue. Kurz plans to cap benefit payments for refugees at well below the general level and bar other foreigners from receiving such payments until they have lived in the country for five years.

Now or never

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Jul 252017
 July 25, 2017  Posted by at 8:34 am Finance Tagged with: , , , , , , , , , ,  Comments Off on Debt Rattle July 25 2017

Vincent van Gogh Sunflowers 1887


The Next Financial Crisis Is Parked Out Front (G.)
Bank of England Warns of ‘Spiral Of Complacency’ on Household Debt (G.)
How Big Of A Deleveraging Are We Talking About? (Roberts)
IMF: US Looks Weaker, Rest Of The World Picks Up Economic Slack (CNBC)
Bloated London Property Prices Fuel Exodus (G.)
The Foreclosure ‘Pig’ Moves Through The Housing-Crisis ‘Python’ (MW)
Australian Housing Market At Risk Of Crash – UBS Research (CNBC)
It’s Time To Rethink Monetary Policy (Rochon)
Scandals Threaten Japanese Prime Minister Shinzo Abe’s Grip On Power (G.)
Brussels To Act ‘Within Days’ If US Sanctions Hurt EU Trade With Russia (RT)
EU Divided On How To Answer New US Sanctions Against Russia (R.)
US ‘May Send Arms’ To Ukraine, Says New Envoy (BBC)
Tsipras and Varoufakis Go Public With Spat (K.)
Alexis Tsipras’s Mixed Messages Over Appointing Me As Finance Minister (YV)
Greece Plans Return To Bond Market As Athens Sees End To Austerity (G.)
Greek Spending Cuts Prettify Budget Data (K.)



Can’t let a headline like that go to waste. More on the topic in the 2nd article.

The Next Financial Crisis Is Parked Out Front (G.)

Good morning – Warren Murray here with your Tuesday briefing. Britain’s rising level of personal debt has prompted a warning from the Bank of England about dire consequences for lenders and the economy. There are “classic signs” that the risks involved in car finance, credit cards and personal loans are being underestimated as financial institutions make hay while the sun shines, says Alex Brazier, the Bank’s director for financial stability. The economy defied expectations when it grew strongly in the six months after the EU referendum. But that was partly fuelled by consumers racking up their credit cards and loans, as lenders offered easier terms and longer interest-free deals. Much higher levels of borrowing compared with income are now being allowed, at a time when household incomes have only marginally risen.

As the anniversary of the global financial meltdown approaches, Brazier has suggested current low rates of default on personal credit may have again caused banks to become blinkered to the potential for disaster. Back in 2007, “banks – and their regulators – were blind to the basic fact that more debt meant greater risk of loss”. “Lenders have not entered, but they may be dicing with, the spiral of complacency. The spiral continues, and borrowers rack up more and more debt. “[In 2007] complacency gave way to crisis. Companies and households were unable to refinance their debts. The result was economic disaster.”

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The BoE creates huge bubbles, and afterwards starts warning about them. Typical central bank behavior.

Bank of England Warns of ‘Spiral Of Complacency’ on Household Debt (G.)

The Bank of England has told banks, credit card companies and car loan providers that they risk fresh action against reckless lending as it warned of a looming “spiral of complacency” about mounting consumer debt. In its toughest warning yet about the possibility of a rerun of the financial crisis that devastated the economy 10 years ago, Threadneedle Street admitted it was alarmed about the increase in the amount of money being borrowed on easy terms over the past year. “Household debt – like most things that are good in moderation – can be dangerous in excess”, Alex Brazier, the Bank director for financial stability, said in a speech in Liverpool. “Dangerous to borrowers, lenders and, most importantly from our perspective, everyone else in the economy.”

Brazier’s said there were “classic signs” of lenders thinking the risks were lower following a prolonged period of good economic performance and low losses on loans. The first signs of the Bank’s anxiety about consumer debt came from its governor, Mark Carney, a month ago, but Brazier’s comments marked a ratcheting up of Threadneedle Street’s rhetoric. “Lenders have been the lucky beneficiaries of the benign way the economy has evolved. In expanding the supply of credit, they may be placing undue weight on the recent performance of credit cards and loans in benign conditions,” Brazier said. The willingness of consumers to take on more debt to fund their spending helped the economy grow strongly in the six months after the EU referendum, a period when the Bank expected growth to fall sharply.

Over the past year, Brazier said, household incomes had grown by just 1.5% but outstanding car loans, credit card balances and personal loans had risen by 10%. He added that terms and conditions on credit cards and personal loans had become easier. The average advertised length of 0% credit card balance transfers had doubled to close to 30 months, while advertised interest rates on £10,000 personal loans had fallen from 8% to around 3.8%, even though official interest rates had barely changed.

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More great work by Lance. if these graphs and numbers don’t scare you, look again.

How Big Of A Deleveraging Are We Talking About? (Roberts)

Debt, if used for productive investments, can be a solution to stimulating economic growth in the short-term. However, in the U.S., debt has been squandered on increases in social welfare programs and debt service which has an effective negative return on investment. Therefore, the larger the balance of debt becomes, the more economically destructive it is by diverting an ever growing amount of dollars away from productive investments to service payments. The relevance of debt growth versus economic growth is all too evident as shown below. Since 1980, the overall increase in debt has surged to levels that currently usurp the entirety of economic growth. With economic growth rates now at the lowest levels on record, the growth in debt continues to divert more tax dollars away from productive investments into the service of debt and social welfare.

It now requires nearly $3.00 of debt to create $1 of economic growth.

In fact, the economic deficit has never been greater. For the 30-year period from 1952 to 1982, the economic surplus fostered a rising economic growth rate which averaged roughly 8% during that period. Today, with the economy growing at an average rate of just 2%, the economic deficit has never been greater.

But again, it isn’t just Federal debt that is the problem. It is all debt. As discussed last week, when it comes to households, which are responsible for roughly 2/3rds of economic growth through personal consumption expenditures, debt was used to sustain a standard of living well beyond what income and wage growth could support. This worked out as long as the ability to leverage indebtedness was an option. The problem is that eventually, the debt reaches a level where the level of debt service erodes the ability to consume at levels great enough to foster stronger economic growth. In reality, the economic growth of the U.S. has been declining rapidly over the past 35 years supported only by a massive push into deficit spending by households.

[..]The massive indulgence in debt, or a “credit induced boom”, has now begun to reach its inevitable conclusion. The debt driven expansion, which leads to artificially stimulated borrowing, seeks out diminishing investment opportunities. Ultimately these diminished investment opportunities lead to widespread malinvestments. Not surprisingly, we clearly saw it play out in “real-time” in 2005-2007 in everything from sub-prime mortgages to derivative instruments. Today, we see it again in mortgages, subprime auto loans, student loan debt and debt driven stock buybacks and acquisitions.

When credit creation can no longer be sustained the markets will begin to “clear” the excesses. It is only then, and must be allowed to happen, can resources be reallocated back towards more efficient uses. This is why all the efforts of Keynesian policies to stimulate growth in the economy have ultimately failed. Those fiscal and monetary policies, from TARP and QE to tax cuts, only delay the clearing process. Ultimately, that delay only potentially worsens the inevitable clearing process. That clearing process is going to be very substantial. With the economy currently requiring roughly $3 of debt to create $1 of real, inflation-adjusted, economic growth, a reversion to a structurally manageable level of debt would involve a nearly $35 Trillion reduction of total credit market debt from current levels.

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Difference: BOJ and ECB still buy trilions in ‘assets’.

IMF: US Looks Weaker, Rest Of The World Picks Up Economic Slack (CNBC)

Despite cutting the economic growth outlook for the U.S. and U.K., the IMF kept its global growth forecast unchanged on expectations the euro zone and Japanese growth would accelerate. In the July update of its World Economic Outlook, the IMF forecast global economic growth of 3.5% for 2017 and 3.6% for 2018, unchanged from its April outlook. That was despite earlier cutting its U.S. growth projection to 2.1% from 2.3% for 2017 and to 2.1% from 2.5% for 2018, citing both weak growth in the first quarter of this year as well as the assumption that fiscal policy will be less expansionary than previously expected. A weaker-than-expected first quarter also spurred the IMF to cut its forecast for U.K. growth for this year to 1.7% from 2.0%, while leaving its 2018 forecast at 1.5%.

But slowdowns in the U.S. and U.K. were expected to be offset by increased forecasts for many euro area countries, including Germany, France, Italy and Spain, where first quarter growth largely beat expectations, the IMF said. “This, together with positive growth revisions for the last quarter of 2016 and high-frequency indicators for the second quarter of 2017, indicate stronger momentum in domestic demand than previously anticipated,” the IMF said in its release. It raised its euro-area growth forecast for 2017 to 1.9% from 1.7%. For 2018, it increased its forecast to 1.7% from 1.6%.

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The Guardian has the guts to claim that people don’t move out because they don’t have the money to stay, but because they want to get on the f*cking property ladder.

Bloated London Property Prices Fuel Exodus (G.)

In the Kent seaside town of Whitstable, long-term residents call them DFLs – people who have moved “down from London”, sometimes for the lifestyle but more often for cheaper housing. The number of people fleeing the capital to live elsewhere has hit a five-year high. In the year to June 2016, net outward migration from London reached 93,300 people – more than 80% higher than five years earlier, according to analysis of official statistics. A common theme among the leavers’ destinations is significantly cheaper housing, according to the estate agent Savills, which analysed figures from the Office for National Statistics and the Land Registry. Cambridge, Canterbury, Dartford and Bristol are reportedly among the most popular escape routes for people who have grown tired of London and its swollen property prices.

The most likely destination for people aged over 25 moving from Islington is St Albans in Hertfordshire, where the average home is £173,000 cheaper. People moving from Ealing to Slough – the most popular move from the west London borough – stand to save on average £241,000. Among all homeowners leaving London, the average house price was £580,000 while the average in the areas they moved to was £333,000. The exodus is not just of homeowners, but of renters too. Rents in London have soared by a third in the last decade, compared to 18% in the south-west, 13% in the West Midlands and 11% in the north-west of England.

The only age group that has a positive net migration figure in the capital is those in their twenties, the research found. Everyone else, from teens to pensioners, is tending to get out. Since 2009, the trend has been steadily increasing among people in their thirties with 15,000 more people in that age bracket leaving every year than at the end of the last decade – a 27% rise. The phenomenon is being driven by a widespread desire to “trade up the housing ladder”, something that is all too often impossible in London according to Lucian Cook, Savill’s head of residential research. “Five years ago people would have been reluctant [to move out] because the economy wasn’t as strong and some owners didn’t want to miss out on house price growth [in London],” he said.

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Pretending it’s the last of the pig. We’ll see about that.

The Foreclosure ‘Pig’ Moves Through The Housing-Crisis ‘Python’ (MW)

As the effects of the housing crisis further recede, markers of distress are declining, with one notable exception: Among the batches of severely delinquent mortgages bought by institutional investors, foreclosures are on the rise. The trend is a reminder of the reasons many community advocates resisted allowing institutional investors to buy delinquent mortgages in government auctions that began in 2010. Wall Street, those advocates said, shouldn’t be rewarded for its role in creating the housing crisis with the chance to buy for pennies on the dollar the very assets whose values it dented. The government auctions promised a risk-sharing solution that would benefit nearly everyone: Homeowners whose mortgages had been bought dirt-cheap could get loan modifications, investors would get profitable assets, and communities would see tax revenues restored and neighborhoods revitalized.

But that win-win-win scenario may bring little relief to the most distressed among those troubled assets. A new Attom Data analysis for MarketWatch shows increasing foreclosures in the mortgages auctioned by the government. A subsidiary of private-equity firm Lone Star Investments, for example, has foreclosed on nearly 2,000 homeowners this year, through early July, and has increased foreclosures every year since 2013. And a Goldman Sachs subsidiary called MTGLQ, which has more than doubled foreclosures each year from 2014 to 2016, may do the same again this year, based on early 2017 data. Those figures stand in stark contrast to the housing market overall, where foreclosures fell 22% in the second quarter, touching an 11-year low of just over 220,000.

The institutional-investor foreclosure figures are a small fraction of the total, noted Daren Blomquist, Attom’s senior vice president of communications. And they don’t surprise investors who intentionally snatch up the most distressed mortgages available because their elevated risk promises higher yield. Attom Data does show an uptick in foreclosures by other lenders, though not all participated in the government auctions. But they’re a reminder that a decade after the housing downturn began, the pockets of foreclosures that still pop up represent the worst of the worst, prompting even those questioning the program to agree that some foreclosures were inevitable, no matter who owned the mortgages. Analysts call the current crop of foreclosures “the last of the pig moving through the python.”

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All bubble countries now face the issue. There’s no way out. So they’ll deny their bubble for a while longer.

Australian Housing Market At Risk Of Crash – UBS Research (CNBC)

The Australian housing market has peaked and could crash if the country’s central bank raises rates by too much or too quickly according to researchers at the Swiss bank, UBS. Property in Australia has boomed and the most recent government data marked growth in residential property prices at 10.2% year on year for the 2017 March quarter. In a note Monday, UBS Economist George Tharenou said any rash interest rate action from the Reserve Bank of Australia (RBA) could trigger a crash. “We still see rates on hold in the coming year, amid macroprudential tightening on credit growth and interest only loans. “Hence we still see a correction, but not a collapse, but if the RBA hikes too early or too much (as flagged by its hawkish minutes), it risks triggering a crash,” Tharenou warned.

Housing starts fell 19% in the first quarter of the year and May’s mortgage approvals also slid 20%. After a multi-year boom, the cost of an average home in the country now sits at 669,700 Australian dollars ($532,000) but Tharenou said price growth is certain to slow. “Despite weaker activity, house prices just keep booming with still strong growth of 10% y/y in June. However, this is unsustainably 4-5 times faster than income. “Looking ahead, we still see price growth slowing to 7% y/y in 2017 and 0-3% in 2018, amid record supply & poor affordability,” the economist added.

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Raising rates into a gigantesque bubble. No problem.

It’s Time To Rethink Monetary Policy (Rochon)

July 12 marks the date the Bank of Canada ignored common sense and increased its rate for the first time in seven years. Economists are largely divided on whether this was a good move, but in my opinion this was an ill-informed decision, largely based on the usually strong first quarter data, which may prove unsustainable in the longer term. In turn, it raises important questions about the conduct of monetary policy and the need to rethink the role and purpose of central bank policy. For the record, I don’t think there is much to fear from a single increase to 0.75% from 0.50, though it will have an immediate impact on mortgage rates — some Canadians will pay more for their homes. However, it is the prospect of what that move represents that sends chills down this economist’s spine.

As we know all too well, central banks never raise rates once or twice, but usually do so several times. Indeed, the consensus among economists is that there will be at least two more raises before the end of 2018, bringing the bank rate to 1.25%. This is still low by historical standards, but the raises begin to add up. I expect many more rate hikes through 2019 and 2020. You see, the Bank of Canada believes the so-called natural rate is 3%, which means we could possibly see nine more interest rate increases. Imagine the damage that will do. Yet, according to their own model, this rate is the “neutral” or “natural” rate and should have no far reaching impact. Try telling that to Canadians who have consumer debt and a mortgage. Clearly, there is nothing “neutral” about these rate increases. This alone is a reason to rethink monetary policy.

Second, the Bank of Canada targets inflation, and has been officially since 1991, a fact it reminds us of all the time. All other objectives, including economic growth and unemployment, or even household debt and income inequality, are far behind the principal objective of trying to keep the inflation rate on target. There is much to say about this, including whether interest rates and monetary policy in general are the best tool to deliver on the inflation crusade. Even if we accept this, inflation is currently at a near two-decade low. In other words, where’s the inflation beef? Inflation does not represent a current threat, and there are no inflationary pressures in the economy, which raises the question: Why raise rates?

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With Abenomics dead, so is Abe.

Scandals Threaten Japanese Prime Minister Shinzo Abe’s Grip On Power (G.)

Shinzo Abe is fighting for his future as Japan’s prime minister as scandals drag his government’s popularity close to what political observers describe as “death zone” levels. Apart from clouding Abe’s hopes of winning another term as leader of the Liberal Democratic Party (LDP) when a vote is held next year, the polling slump also undermines his long-running push to revise Japan’s war-renouncing constitution. Abe, who returned to the prime ministership four and a half years ago, was long seen as a steady hand whose position appeared unassailable – so much so that the LDP changed its rules to allow Abe the freedom to seek a third consecutive three-year term at the helm of the party. “He is no longer invincible and the reason why he is no longer invincible is he served his personal friends not the party,” said Michael Thomas Cucek, an adjunct professor at Temple University Japan.

Abe’s standing has been damaged by allegations of favours for two school operators who have links to him. The first scandal centred on a cut-price land deal between the finance ministry and a nationalist school group known as Moritomo Gakuen. The second related to the approval of a veterinary department of a private university headed by his friend, Kotaro Kake. Abe has repeatedly denied personal involvement, but polls showed voters doubted his explanations, especially after leaked education ministry documents mentioned the involvement of “a top-level official of the prime minister’s office” in the vet school story. Abe attempted to show humility in a parliamentary hearing this week by acknowledging it was “natural for the public to sceptically view the issue” because it involved his friend. “I lacked the perspective,” he said. Experts doubt that Abe’s contrition, combined with a planned cabinet reshuffle next week, will do much to reverse his sagging fortunes.

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The limits of the anti-Russia craze.

Brussels To Act ‘Within Days’ If US Sanctions Hurt EU Trade With Russia (RT)

The EU should act “within days” if new sanctions the US plans to impose on Russia prove to be damaging to Europe’s trade ties with Moscow, an internal memo seen by the media says. Retaliatory measures may include limiting US jurisdiction over EU companies. An internal memo seen by the Financial Times and Politico has emerged amid mounting opposition to a US bill seeking to hit Russia with a new round of sanctions. The bill, if signed into law, will also give US lawmakers the power to veto any attempt by the president to lift the sanctions. The document reportedly said European Commission chief Jean-Claude Juncker was particularly concerned the sanctions would neglect the interests of European companies. Juncker said Brussels “should stand ready to act within days” if sanctions on Russia are “adopted without EU concerns being taken into account,” according to the FT.

The EU memo also warns that “the measures could impact a potentially large number of European companies doing legitimate business under EU measures with Russian entities in the railways, financial, shipping or mining sectors, among others.” Restrictions against Russia come as part of the Countering Iran’s Destabilizing Activities Act, targeting not only Tehran, but also North Korea. Initially passed by the Senate last month, the measures seek to impose new economic measures on major sectors of the Russian economy. The draft legislation would also introduce individual sanctions for investing in Gazprom’s Nord Stream 2 gas pipeline project, outlining steps to hamper construction of the pipeline and imposing sanctions on European companies which contribute to the project.

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So EU vs US, and EU vs EU. The problem seems to be that US companies could profit from the sanctions, as European ones suffer.

EU Divided On How To Answer New US Sanctions Against Russia (R.)

European Commission preparations to retaliate against proposed new U.S. sanctions on Russia that could affect European firms are likely to face resistance within a bloc divided on how to deal with Moscow, diplomats, officials and experts say. A bill agreed by U.S. Senate and House leaders foresees fines for companies aiding Russia to build energy export pipelines. EU firms involved in Nord Stream 2, a 9.5 billion euro ($11.1 billion) project to carry Russian gas across the Baltic, are likely to be affected. Both the European Union and the United States imposed broad economic sanctions on Russia’s financial, defense and energy sectors in response to Moscow’s annexation of Crimea from Ukraine in 2014 and its direct support for separatists in eastern Ukraine. But northern EU states in particular have sought to shield the supplies of Russian gas that they rely on.

Markus Beyrer, director of the EU’s main business lobby, Business Europe, urged Washington to “avoid unilateral actions that would mainly hit the EU, its citizens and its companies”. The Commission, the EU executive, will discuss next steps on Wednesday, a day after the U.S. House of Representatives votes on the legislation, knowing that the U.S. move threatens to reopen divisions over the bloc’s own Russia sanctions. Among the European companies involved in Nord Stream 2 are German oil and gas group Wintershall, German energy trading firm Uniper, Anglo-Dutch Royal Dutch Shell, Austria’s OMV and France’s Engie. The Commission could demand a formal U.S. promise to exclude EU energy companies; use EU laws to block U.S. measures against European entities; or impose outright bans on doing business with certain U.S. companies, an EU official said.

But if no such promise is offered, punitive sanctions such as limiting the access of U.S. companies to EU banks require unanimity from the 28 EU member states. Ex-Soviet states such as Poland and the Baltic states are unlikely to vote for retaliation to protect a project they have resisted because it would increase EU dependence on Russian gas. An EU official said most member states saw Nord Stream 2 as “contrary or at least not fully in line with European objectives” of reducing reliance on Russian energy. Britain, one of the United States’ closest allies, is also wary of challenging the U.S. Congress as it prepares to leave the EU and seeks a trade deal with Washington. In fact, the EU’s chief executive, Jean-Claude Juncker, has few tools that do not require unanimous support from the bloc’s 28 governments.

The Commission could act alone to file a complaint at the World Trade Organisation. But imposing punitive tariffs on U.S. goods would require detailed proof to be gathered that European companies were being unfairly disadvantaged — a process that would take many months. Diplomatic protests such as cutting EU official visits to Washington are unlikely to have much effect, since requests by EU commissioners for meetings with members of Trump’s administration have gone unanswered, EU aides say.

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Let’s hope they don’t try.

US ‘May Send Arms’ To Ukraine, Says New Envoy (BBC)

The new US special representative for Ukraine says Washington is actively reviewing whether to send weapons to help those fighting against Russian-backed rebels. Kurt Volker told the BBC that arming Ukrainian government forces could change Moscow’s approach. He said he did not think the move would be provocative. Last week, the US State Department urged both sides to observe the fragile ceasefire in eastern Ukraine. “Defensive weapons, ones that would allow Ukraine to defend itself, and to take out tanks for example, would actually to help” to stop Russia threatening Ukraine, Mr Volker said in a BBC interview.

“I’m not again predicting where we go on this, that’s a matter for further discussion and decision, but I think that argument that it would be provocative to Russia or emboldening of Ukraine is just getting it backwards,” he added. He said success in establishing peace in eastern Ukraine would require what he called a new strategic dialogue with Russia.

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Undoubtedly not the last we hear of this.

Tsipras and Varoufakis Go Public With Spat (K.)

The coalition on Monday rejected calls for an investigation to be launched into the first months of the government’s time in power, as a dispute between Prime Minister Alexis Tsipras and ex-finance minister Yannis Varoufakis over that period in 2015 became public. “The evaluation of this period has to be conducted with political criteria, not myth-making or gossip,” said government spokesman Dimitris Tzanakopoulos, who accused Varoufakis of trying to advertise his recent book via the “systemic media” he once attacked. Tzanakopoulos’s comments came after Tsipras gave an interview to The Guardian in which he admitted making “big mistakes” in the past and suggested that Varoufakis’s plan for a parallel payment system could not be considered seriously.

“Yanis is trying to write history in a different way,” said Tsipras. “When we got to the point of reading what he presented as his plan B it was so vague, it wasn’t worth the trouble of even talking about. It was simply weak and ineffective.” The former minister immediately responded to the premier’s comments by claiming they displayed a “deep incoherence,” as Varoufakis claims that he had made Tsipras aware of the plan before he came to office yet the SYRIZA leader still chose to appoint him to the cabinet. “Either I was the right choice to spearhead the ‘collision’ with the troika of Greece’s lenders because my plans were convincing, or my plans were not convincing and, thus, I was the wrong choice as his first finance minister,” he wrote in a letter to The Guardian.

New Democracy called for judicial and parliamentary investigations into the claims made by Varoufakis, as well as by former energy minister Panayiotis Lafazanis. The latter claimed in a radio interview on Saturday that he had secured an advance payment from Russia for a gas pipeline to be used to held fund Greece if it left the euro. “Varoufakis and Lafazanis described with clarity the SYRIZA leadership’s plans to take Greece out of the eurozone,” said the conservatives in a statement. “If these plans were seen through to the end, the country would have found itself in a dramatic situation like Venezuela, with unforeseeable social consequences.”

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Makes sense.

Alexis Tsipras’s Mixed Messages Over Appointing Me As Finance Minister (YV)

[..] the Greek prime minister, Alexis Tsipras, having admitted to “big mistakes”, was asked if appointing me as his first finance minister was one of them. According to the interviewer, Mr Tsipras said “Varoufakis … was the right choice for an initial strategy of ‘collision politics’, but he dismisses the plan he presented had Greece been forced to make the dramatic move to a new currency as ‘so vague, it wasn’t worth talking about’”. Given that I presented my plans to Mr Tsipras for deterring the troika’s aggression and responding to a potential impasse (and any move by the troika to evict Greece from the eurozone) before we won the election of January 2015, and I was chosen by him as finance minister (one presumes) on the basis of their merit, his answer reflects a deep incoherence.

Either I was the right choice to spearhead the “collision” with the troika of Greece’s lenders because my plans were convincing, or my plans were not convincing and, thus, I was the wrong choice as his first finance minister. Arguing, as Mr Tsipras does, that I was both the right choice for the initial confrontation and that my plan B was so vague it wasn’t worth the trouble of even talking about is disingenuous, albeit insightful, for it reveals the impossibility of maintaining a radical critique of his predecessors while adopting the Tina (There Is No Alternative) doctrine.

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A brand new line of lipstick for farm animals.

Greece Plans Return To Bond Market As Athens Sees End To Austerity (G.)

Athens has outlined plans to return to the financial markets for the first time since 2014, with a plan to sell new five-year bonds to investors. Existing Greek five-year bonds were trading at 3.6% on Monday morning compared with 63% at the height of the Greek financial crisis in 2012 when the finance ministry was unable to pay public sector wages and there were riots in the streets. Following the announcement that Athens would be returning to the market, the yield fell to 3.4%. The Greek finance ministry has set a goal of a 4.2% interest rate on the new bond. But banking sources believe that level will be hard to achieve and say an interest rate of between 4.3% to 4.5% is much more likely. Government sources say valuation will take place on Tuesday 25 July.

The market test is crucial to Greece for not only judging sentiment of the market, from which it has been essentially exiled since the start of its economic crisis, but also for weaning itself off borrowed bailout funds. Speaking after the bond issue was announced, the EU’s economy commissioner, Pierre Moscovici, described the public spending cuts imposed on Greece since it almost went bust as “too tough” but “necessary”, adding there was now “light at the end of austerity”. Reuters reported that Greece had employed six banks – BNP Paribas, Bank of America Merrill Lynch, Citigroup, Deutsche Bank, Goldman Sachs and HSBC – to act as joint lead managers for a five-year euro bond “subject to market conditions”. Greek ministers will provide more details on Monday afternoon about how much it hopes to borrow, and on what terms.

If the issue is successful, it could help Greece, which is still coping with a debt to GDP ratio of 180%, to exit its long cycle of austerity and rescue packages. Late on Friday, S&P upgraded its outlook on Greek government debt from stable to “positive”, thanks partly to renewed hopes that the country’s creditors could finally grant it debt relief.

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And here’s how it’s done.

Greek Spending Cuts Prettify Budget Data (K.)

Delays in the funding of hospitals, social spending cuts and low expenditure on the Public Investments Program served to prettify the picture of the state budget over the first half of the year, producing a primary surplus of 1.93 billion euros, Finance Ministry figures showed on Monday. At the same time budget revenues posted a marginal increase over the target the ministry had set for the January-June period. However, the big challenge for the government starts at the end of this month with the payment of the first tranche of income tax by taxpayers, followed later on by the Single Property Tax (ENFIA) and road tax at the end of the year.

In total the state will have to collect 33 billion euros by the end of the year, which is considerably higher than in the second half of 2016. According to the H1 budget data, the primary surplus amounted to 1.936 billion euros, against a primary surplus of 1.632 billion in the same period last year, and a target for 431 million for the year to end-June. Expenditure missed its target by 1.15 billion euros, amounting to 22.86 billion in the first half. Compared to last year it was down 757 million euros. Hospital funding missed its target by 265 million.

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Feb 152017
 February 15, 2017  Posted by at 10:34 am Finance Tagged with: , , , , , , , , ,  Comments Off on Debt Rattle February 15 2017

Times Square New York City, 1958


The Political Assassination of Michael Flynn (BBG)
Kucinich Pins Flynn Leak on Intel Community, Warns of Another Cold War (Fox)
America’s Spies Anonymously Took Down Flynn. That Is Deeply Worrying (Week)
Russian Foreign Ministry Says Crimea Will Not Be Returned To Ukraine (R.)
China Credit Surging to Record Underscores PBOC Shift to Tighten (BBG)
China Should Prudently Manage Deleveraging Process – PBOC (R.)
Nigel Farage – You’re In For a Bigger Shock in 2017 (TNTV)
Germany’s Burden: The Euro Is The Most Crisis-Ridden Currency (MW)
Greece Defies Creditors Over More Cuts As Economy Shrinks Unexpectedly (G.)
‘Fed Up’ Exposes The Elite Rot Inside The Federal Reserve (MW)
Why “Everyone Wins” When Housing Is More Expensive (AS)
Who Will Be Blamed if the Oroville Dam Fails? (McMaken)
The Technosphere: You Are Not In Control (Dmitry Orlov)
Greece’s Frozen Children: What Will Happen To Young Refugees? (NS)



So many diffferent angles. This one from Eli Lake is bearable. “Nunes told me Monday night that this will not end well. “First it’s Flynn, next it will be Kellyanne Conway, then it will be Steve Bannon, then it will be Reince Priebus,” he said. Put another way, Flynn is only the appetizer. Trump is the entree.”

The Political Assassination of Michael Flynn (BBG)

Representative Devin Nunes, the Republican chairman of the House Permanent Select Committee on Intelligence, told me Monday that he saw the leaks about Flynn’s conversations with Kislyak as part of a pattern. “There does appear to be a well orchestrated effort to attack Flynn and others in the administration,” he said. “From the leaking of phone calls between the president and foreign leaders to what appears to be high-level FISA Court information, to the leaking of American citizens being denied security clearances, it looks like a pattern.” Nunes said he was going to bring this up with the FBI, and ask the agency to investigate the leak and find out whether Flynn himself is a target of a law enforcement investigation. The Washington Post reported last month that Flynn was not the target of an FBI probe.

The background here is important. Three people once affiliated with Trump’s presidential campaign – Carter Page, Paul Manafort and Roger Stone – are being investigated by the FBI and the intelligence community for their contacts with the Russian government. This is part of a wider inquiry into Russia’s role in hacking and distributing emails of leading Democrats before the election. Flynn himself traveled in 2015 to Russia to attend a conference put on by the country’s propaganda network, RT. He has acknowledged he was paid through his speaker’s bureau for his appearance. That doesn’t look good, but it’s also not illegal in and of itself. All of this is to say there are many unanswered questions about Trump’s and his administration’s ties to Russia. But that’s all these allegations are at this point: unanswered questions.

It’s possible that Flynn has more ties to Russia that he had kept from the public and his colleagues. It’s also possible that a group of national security bureaucrats and former Obama officials are selectively leaking highly sensitive law enforcement information to undermine the elected government. Flynn was a fat target for the national security state. He has cultivated a reputation as a reformer and a fierce critic of the intelligence community leaders he once served with when he was the director the Defense Intelligence Agency under President Barack Obama. Flynn was working to reform the intelligence-industrial complex, something that threatened the bureaucratic prerogatives of his rivals. He was also a fat target for Democrats. Remember Flynn’s breakout national moment last summer was when he joined the crowd at the Republican National Convention from the dais calling for Hillary Clinton to be jailed.

In normal times, the idea that U.S. officials entrusted with our most sensitive secrets would selectively disclose them to undermine the White House would alarm those worried about creeping authoritarianism. Imagine if intercepts of a call between Obama’s incoming national security adviser and Iran’s foreign minister leaked to the press before the nuclear negotiations began? The howls of indignation would be deafening. In the end, it was Trump’s decision to cut Flynn loose. In doing this he caved in to his political and bureaucratic opposition. Nunes told me Monday night that this will not end well. “First it’s Flynn, next it will be Kellyanne Conway, then it will be Steve Bannon, then it will be Reince Priebus,” he said. Put another way, Flynn is only the appetizer. Trump is the entree.

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Interesting 8-minute, very clear take from Kucinich: “This is like the electronic version of Mad magazine; Spy vs Spy..”

Kucinich Pins Flynn Leak on Intel Community, Warns of Another Cold War (Fox)

During an interview on the FOX Business Network’s Mornings with Maria, former Democratic presidential candidate Dennis Kucinich said the intelligence community was responsible for leaking information that Trump’s national security advisor, Mike Flynn, had secretly discussed sanctions with Russian officials before the inauguration and argued their goal was to spoil the relationship between the U.S. and Russia. “What’s at the core of this is an effort by some in the intelligence community to upend any positive relationship between the U.S. and Russia,” Kucinich said.

And in his opinion, there is a big money motive behind it. “And I tell you there’s a marching band and Chowder Society out there. There’s gold in them there hills,” he said. “There are people trying to separate the U.S. and Russia so that this military industrial intel axis can cash in.” Kucinich added the intelligence community could start a war to succeed. “There’s a game going on inside the intelligence community where there are those who want to separate the U.S. from Russia in a way that would reignite the Cold War,” he said.

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Many on both the left and the right have these worries.

America’s Spies Anonymously Took Down Flynn. That Is Deeply Worrying (Week)

The United States is much better off without Michael Flynn serving as national security adviser. But no one should be cheering the way he was brought down. The whole episode is evidence of the precipitous and ongoing collapse of America’s democratic institutions — not a sign of their resiliency. Flynn’s ouster was a soft coup (or political assassination) engineered by anonymous intelligence community bureaucrats. The results might be salutary, but this isn’t the way a liberal democracy is supposed to function. Unelected intelligence analysts work for the president, not the other way around. Far too many Trump critics appear not to care that these intelligence agents leaked highly sensitive information to the press — mostly because Trump critics are pleased with the result.

“Finally,” they say, “someone took a stand to expose collusion between the Russians and a senior aide to the president!” It is indeed important that someone took such a stand. But it matters greatly who that someone is and how they take their stand. Members of the unelected, unaccountable intelligence community are not the right someone, especially when they target a senior aide to the president by leaking anonymously to newspapers the content of classified phone intercepts, where the unverified, unsubstantiated information can inflict politically fatal damage almost instantaneously.

President Trump was roundly mocked among liberals for that tweet. But he is, in many ways, correct. These leaks are an enormous problem. And in a less polarized context, they would be recognized immediately for what they clearly are: an effort to manipulate public opinion for the sake of achieving a desired political outcome. It’s weaponized spin. This doesn’t mean the outcome was wrong. I have no interest in defending Flynn, who appears to be an atrocious manager prone to favoring absurd conspiracy theories over more traditional forms of intelligence. He is just about the last person who should be giving the president advice about foreign policy. And for all I know, Flynn did exactly what the anonymous intelligence community leakers allege — promised the Russian ambassador during the transition that the incoming Trump administration would back off on sanctions proposed by the outgoing Obama administration.

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Silly idea. The New Cold War.

Russian Foreign Ministry Says Crimea Will Not Be Returned To Ukraine (R.)

Russia will not hand back control of Crimea to Ukraine, Russia’s foreign ministry said on Wednesday, responding to comments from the White House that the United States expected the Black Sea peninsula to be returned. “We don’t give back our own territory. Crimea is territory belonging to the Russian Federation,” Maria Zakharova, spokeswoman for the Russian Foreign Ministry, told a news briefing. On Tuesday, the White House said U.S. President Donald Trump had made it clear that he expects Russia to relinquish control of the territory. Russia annexed Crimea in 2014, prompting the United States and the European Union to impose sanctions on Russia, plunging Western relations with the Kremlin to their worst level since the end of the Cold War.

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Shadow banking resurgence? It was never gone.

China Credit Surging to Record Underscores PBOC Shift to Tighten (BBG)

China added more credit last month than the equivalent of Swedish or Polish economic output, revving up growth and supporting prices but also fueling concerns about the sustainability of such a spree. Aggregate financing, the broadest measure of new credit, climbed to a record 3.74 trillion yuan ($545 billion) in January, exceeding the median estimate of 3 trillion yuan in a Bloomberg survey. New yuan loans rose to a one-year high of 2.03 trillion yuan, less than the 2.44 trillion yuan estimate. The credit surge highlights the challenges facing Chinese policy makers as they seek to balance ensuring steady growth with curbing excess leverage in the financial system. The PBOC recently moved to tighten monetary policy by raising the interest rates it charges in open-market operations and on funds lent via its Standing Lending Facility.

“China is learning what other central banks realized decades ago: trying to control monetary aggregates in a modern financial system is next to impossible,” said James Laurenceson, deputy director of the Australia-China Relations Institute in Sydney. “I expect the PBOC will focus more on interest rates and prudential regulation and supervision going forward.” China’s major state-backed banks tend to splurge at the start of the year as they seek to maximize their profits on lending. The main categories of shadow finance all increased significantly. Bankers acceptances – a bank-backed guarantee for future payment – soared to 613.1 billion yuan from 158.9 billion yuan the prior month. “The PBOC is restraining loans but allowing private credit to flow through shadow banks,” said Andrew Collier, an independent analyst and former president of Bank of China International USA. “This is not a policy designed to conquer China’s debt burden.”

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Yeah, well, it does nothing of the kind.

China Should Prudently Manage Deleveraging Process – PBOC (R.)

China should prudently manage the country’s debt deleveraging process and seek to avoid a liquidity crisis and asset bubbles, according to a central bank working paper published on Wednesday. While overall debt ratios in the world’s second-largest economy were still not high relative to many other countries, the pace of increase has been rapid in recent years, the paper said. China’s debt to GDP ratio rose to 277% at the end of 2016 from 254% the previous year, with an increasing share of new credit being used to pay debt servicing costs, UBS analysts said in a recent note.

China’s top leaders have pledged to focus on addressing rising financial risks and asset bubbles this year. The People’s Bank of China has moved to a moderate tightening bias, raising some key primary money rates this year, which analysts said was part of a bid to control risks from rising leverage. The working paper said China should avoid the negative consequences of both increases in leverage and rapid deleveraging. China should let market forces play a decisive role in the deleveraging process, including allowing defaults, the paper published on the People’s Bank of China website said.

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h/t Mish. “The people want less Europe. We see this again and again when people have referendums and they reject aspects of EU membership. But something more fundamental is going on out there.”

Nigel Farage – You’re In For a Bigger Shock in 2017 (TNTV)

I feel like I am attending a meeting of a religious sect here this morning. It’s as if the global revolution of 2016, Brexit, Trump, the Italian rejection of the referendum, has completely bypassed you. You can’t face up to the fact that this bandwagon is going to roll across Europe in these elections in 2017. A lot of citizens now recognize this form of centralized government simply doesn’t work. … At the heart of it is a fundamental point: Mr. Verhofstadt this morning said, the people want more Europe. They don’t. The people want less Europe. We see this again and again when people have referendums and they reject aspects of EU membership. But something more fundamental is going on out there. ….

No doubt, many of you here will probably despise your own voters for what I am about to say because just last week, Chatham House, the reputable group, published a massive survey from 10 Europen states, and only 20% of people want immigration from Muslim countries to continue. Just 20%. … Which means your voters have a harder line position on this than Donald Trump, or myself, or frankly any party sitting in this Parliament. I simply cannot believe you are blind to the fact that even Mrs. Merkel has now made a u-turn and wants to send people back. Even Mr. Schulz thinks it is a good idea. And the fact is, the Europen Union has no future at all in its current form. And I suspect you are in for as big a shock in 2017 as you were in 2016.

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Throw this into the German election campaign and see what happens.

Germany’s Burden: The Euro Is The Most Crisis-Ridden Currency (MW)

Target-2 occupies a central place. According to latest Bundesbank figures, the German central bank’s claims under the system rose to €796 billion at the end of January, from €754 billion at the end of December, well above the previous record €751 billion in August 2012. The Bundesbank’s ECB claims make up more than half of Germany’s net foreign assets of €1.5 trillion, which have themselves increased enormously since the euro was launched in 1999. If the eurozone broke up, or euro members redenominated their liabilities in a new, lower valued currency, Germany would relinquish a large part of these assets — a loss of German savings that would rival the country’s forced write-downs after the first and second world wars.

Both the ECB and the Bundesbank are playing down the renewed Target-2 increase, saying it reflects technical reasons linked to cross-border payments stemming from the ECB’s asset purchase program. On the one hand, these facts would argue for Germany keeping the system going. On the other, they would suggest that the Germans should try to renegotiate the Target-2 arrangements. At the present rate of increase, the Target-2 balances could be close to €1 trillion by the German elections in seven months. Target was developed during the 1990s as a technical transfer mechanism for facilitating payments within the eurozone. The innocuous name — Trans-European automated real-time gross settlement express transfer — signals its original arcane purpose.

According to Helmut Schlesinger, former Bundesbank president, the system was expected to advance credit simply for overnight settlement. Two decades later, as Schlesinger explains, it has become an overdraft system under which Germany, through its central bank, extends interest-free credit without any repayment date and without economic conditions to the central banks of heavily indebted nations.

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Paradox: BECAUSE the economy shrinks, more cuts ‘reforms’ will be demanded. The IMF wants more pension cuts. But that’s what half the population lives on.

Greece Defies Creditors Over More Cuts As Economy Shrinks Unexpectedly (G.)

The standoff between Greece and its creditors has escalated, with the embattled Athens government vowing it will not give in to demands for further cuts as data showed the country’s economy unexpectedly contracting. As thousands of protesting farmers rallied in Athens over spiralling costs and unpopular reforms, the Hellenic statistical authority revealed that Greek GDP shrank by 0.4% in the last three months of 2016. After growth of 0.9% in the previous three-month period the fall was steep and unforeseen. On Monday the European commission announced that the eurozone’s weakest member was on course to achieving a surplus on its budget of 2.3% after exceeding its 2016 fiscal targets “significantly”.

The setback came as prime minister Alexis Tsipras’ lefist-led coalition said it would not consent to additional austerity beyond the cuts the country had already agreed to administer under its third, EU-led bailout programme. Speaking on state TV, the digital policy minister Nikos Pappas, Tsipras’ closest confidant, insisted that ongoing differences between the EU and IMF over how to put the debt-stricken state back on the road to recovery were squarely to blame for the failure to conclude a compliance review at the heart of the standoff. The IMF has argued vigorously that extra measures worth 2% of GDP will have to be enforced with immediate effect if Greece is to achieve a high post-programme primary surplus of more than 1.5%. “The negotiations should have ended. Greece has done everything that it was asked to do,” he said and added there would be “no more measures”.

The future of the €86bn financial aid programme is contingent on Athens implementing agreed economic reforms. The IMF has repeatedly said it will not sign up to the programme unless the crisis-plagued country is given more generous debt relief in the form of a substantial write-down. With Greece facing a €7bn debt repayment to the ECB in July, fears of a Greek default have once again hit markets with shares falling and interest rates on Greek debt rising. But Tsipras is also under pressure from back-benchers in his fragile two-party administration. After seven years of adopting grueling austerity in return for emergency bailout aid many are openly questioning the wisdom of applying yet more measures that have already put Greece in a permanent debt deflationary cycle.

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Yellen was “oblivious as the housing market in her region imploded on multiple fronts.”

‘Fed Up’ Exposes The Elite Rot Inside The Federal Reserve (MW)

She came armed with an M.B.A., not a Ph.D., which made her suspect in the eyes of staff economists as she gradually worked her way up to Class I Clearance, with access to all policy-related material and briefings. In her columns, DiMartino Booth had warned about lax mortgage-lending standards, a housing bubble and escalating systemic risk. Once ensconced at the Fed, she was left to wonder why so many “highly educated and well-paid economists” were “oblivious as the worst financial crisis since the Great Depression was about to break over their heads.” (One of the main reasons is the Fed’s reliance on econometric models that don’t include anything related to the financial system, such as debt or credit.) It wasn’t just the staff economists who were blind to what was going on in the real world.

Neither former Fed chairman Alan Greenspan, who can boast of two bubbles on his watch, nor his successor Ben Bernanke saw the train wreck coming. Greenspan said a national housing bubble was “unlikely” while Bernanke expected any fallout from the subprime mortgage crisis to be “contained.” Janet Yellen, the current Fed chairwoman, is subject to withering criticism in the book. From 2004-2010, Yellen was president of the San Francisco Fed, whose district encompasses nine Western states and was ground zero for the housing bubble and subsequent bust. DiMartino Booth portrays Yellen as an uber-dove and devout Keynesian, someone who was “oblivious as the housing market in her region imploded on multiple fronts.”

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Why bubbles are blown.

Why “Everyone Wins” When Housing Is More Expensive (AS)

The perceived creditworthiness of a nation is largely dependent on market sentiment of that nation insofar as that the volume and indeed the acceleration of capital flow from that nation towards traditionally hedge instruments is indicative of their realisation of mania and is often known as the Minsky moment. Human nature inherently creates inefficiencies in markets as the incentives for those involved continue to grow, and it is that immutable fact that creates opportunities for those that see the market as being overwhelmingly influenced by self interest. The housing market is a fantastic example of this incentivised self interest. There are layers of self interest that largely go ignored as driving factors for housing price growth and poor risk modelling.

On the lowest level, buyers see property as a safe investment, and most of the time they seek to either make a return on their investment either through rental that exceeds the cost of the mortgage repayments (positive gearing) or to make money by a perceived increase in market value of the property that they can realise once they resell the property, or in many cases a combination of both. There are also people who seek to reduce their tax payment by charging less for rent than they pay in mortgage repayments, however these losses are eventually passed on to tax payers as the government thinks this is a suitable method for reducing rental costs for low income earners and that it reduces overall rental costs. The next level up from this is a combination of brokers, people employed to undertake property valuations and real estate agents, all of whom receive commission as a percentage of the sale price of the property.

There exists such a thing as home equity loans wherein banks and borrowers agree upon a valuation of the property which allows mortgagees or property owners to take on debt based on the perceived value of the property, which extends further credit than the initial loan. This feature of home equity lends itself to false market valuations by appraisers, real estate agents and brokers, in particular because it means that they are incentivised to originate additional loans that then pay commissions based on the appreciation of the previous property investment. Even if the current broker, appraiser or real estate agent is not used by the borrower for financing further property purchases, the industry wide practice almost certainly means that these people will continue to receive additional income as a direct result of the availability of credit in the form of home equity for property purchases.

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Maintenance is far less sexy than building.

Who Will Be Blamed if the Oroville Dam Fails? (McMaken)

While everyone likes to see a shiny new dam or railroad or bridge, the problem with infrastructure projects is that they require maintenance. Unfortunately, while it’s fun to build new dams and promise cheap water to many voters and powerful special interests, maintaining those projects is less exciting. As The Mercury News has reported, 12 years ago, both California and federal officials refused to consider a demand that California heighten precautions and maintenance standards at the Oroville Dam. In response to the demands, the Federal Energy Regulatory Commission (FERC) said the dam’s emergency features were perfectly fine and that the emergency spillway “was designed to handle 350,000 cubic feet per second and the concerns were overblown.”

But, in a development reminiscent of the Army Corp of Engineers’ failure in New Orleans, state officials began ordering evacuations when flows over the spillway reached a mere “6,000 to 12,000 cubic feet per second” or “5% of the rate that FERC said was safe.” Basically, thanks to poorly maintained spillways — and perhaps other oversights — the dam itself is being eroded away, and may soon face total failure. If it does fail, the dam will have failed less than 50 years after its initial — and very, very expensive — construction. The “experts” assure us that this sort of thing has never happened before, of course, and it’s the fault of global warming or it’s just a fluke. But, it’s not as if the dam has never been under strain before. As Reisner recounted in 1987:

“In February of 1980, in the midst of a long spell of wet Pacific fronts, Oroville Reservoir, despite its capacity of something like a trillion gallons, was full, and the dam was spilling — 70,000 cubic feet per second, the Hudson River in full flood, roaring down the spillway at forty miles per hour, sending a plume of mist a thousand feet in the air.” At the time, the dam was only 12 years old. Today, the now-49-year old dam isn’t looking nearly as robust.

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Excellent Dmitry: “..there are at least 5.8 billion people alive in the world who don’t own a car. How can something be considered a necessity if 82% of us don’t seem to need it?”

The Technosphere: You Are Not In Control (Dmitry Orlov)

A good example of how the technosphere controls our tastes is the personal automobile. Many people regard it as a symbol of freedom and see their car as an extension of their personalities. The freedom to be car-free is not generally regarded as important, while the freedoms bestowed by car ownership are rather questionable. It is the freedom to make car payments, pay for repairs, insurance, parking, towing and gasoline. It is the freedom to pay tolls, traffic tickets, title fees and excise taxes. It is the freedom to spend countless hours stuck in traffic jams and to suffer injuries in car accidents. It is the freedom to bring up neurologically damaged children by subjecting them to unsafe carbon monoxide levels (you are encouraged to have a CO detector in your house, but not in your car—because it would be going off all the time). It is the freedom to suffer indignities when pulled over by police, especially if you’ve been drinking. In terms of a harm/benefit analysis, private car ownership makes no sense at all.

It is often argued that a car is a necessity, although the facts tell a different story. Worldwide, there are 1.2 billion vehicles on the road. The population of the planet is over 7 billion. Therefore, there are at least 5.8 billion people alive in the world who don’t own a car. How can something be considered a necessity if 82% of us don’t seem to need it? In fact, owning a car becomes necessary only in a certain specific set of circumstances. Here are some of the key ingredients: a landscape that is impassable except by motor vehicle, single-use zoning that segregates land by residential, commercial, agricultural and industrial uses, a lifestyle that requires a daily commute, and a deficit of public transportation. In turn, widespread private car ownership is what enables these key ingredients: without it, situations in which private car ownership becomes a necessity simply would not arise.

Now, moving people about the landscape is not a productive activity: it is a waste of time and energy. If you can live, send your children to school, shop and work all without leaving the confines of a small neighborhood, you are bound to be more efficient than someone who has to drive between these four locations on a daily basis. But the technosphere is rational to a fault and is all about achieving efficiencies. And so, an obvious question to ask is, What is it about the car-dependent living arrangement, and the landscape it enables, that the technosphere finds to be efficient? The surprising answer is that the technosphere strives to optimize the burning of gasoline; everything else is just a byproduct of this optimization.

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Not the strongest effort, but at the same time, children should always receive our protection.

Greece’s Frozen Children: What Will Happen To Young Refugees? (NS)

The snow-covered tents were an ugly spectacle around the island of Lesbos as this harsh winter gripped Greece. It was in this same area that an accident involving a gas heater had killed a mother and child in late November, when their tent – and others near it – went up in flames. It was pure luck that there weren’t more victims. The incident served as a stark reminder that there are numerous children living in these miserable conditions and that sometimes they die as a result. I had visited the camp just days earlier, hoping to talk to some of the approximately 80 unaccompanied minors who live there. Facilities for refugees around Greece can look anything from decent to shabby, but none resembles a prison as much as the Moria camp on Lesbos. It looks the last place you would host vulnerable children, some of whom are as young as 13.

Yet more than 5,000 children have arrived in Greece without their parents and, like everyone else, they have to be sorted through “hot spots” such as Moria. About 2,500 are still in Greece, and some of them have to live in places like this. While adults and children accompanied by their parents can leave the camp, unaccompanied children, who are placed formally under the guardianship of the district attorney, cannot. The facility, guarded by police in full riot gear and surrounded by concrete walls topped with barbed wire, is both home and prison. It takes nine months on average for an unaccompanied child to be reunited with family in another country – if indeed the child has one. The alternative is that they remain in Greece until they turn 18, when they can try to claim asylum. If a child’s application is rejected, he is then deported back to the country he left years earlier as a child.

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Jan 182016
 January 18, 2016  Posted by at 10:39 pm Finance Tagged with: , , , , , , , , ,  8 Responses »

Berenice Abbott Columbus Circle, Manhattan 1936

We’ve only really been in two weeks of trading in the new year, things are looking pretty bad to say the least, so predictably the press are asking -and often answering- questions about when the slump will be over. Rebound, recovery, the usual terminology. When will we get back to growth?

For me personally, but that’s just me, that last question sounds a bit more stupid every single time I hear and read it. Just a bit, but there’s been a lot of those bits, more than I care to remember. Luckily, the answer is easy. The slump will not be over for a very long time, there will be no rebound or recovery, and please stop talking about a return to growth unless you can explain what you want to grow into.

I’m sorry, I know that’s not what you want to hear, but life’s a bitch and so’s the economy. You’ve lived on pink fumes for a long time, most of you for their whole lives, but reality dictates that real ‘growth’ stopped decades ago, and you never figured that out because, and I quote here (see below), you and the world you’re part of became “addicted to borrowing money, spending it, and passing this off as ‘growth'”.

That you believed this was actual growth, however, is on you. You fell for a scam and you’re going to have to pay the price. If there’s one single thing people are good at, it’s lying. It’s as old as human history, and it happens every day, so you’re no exception to any rule. You’re perhaps just not particularly clever.

How do we know a ‘recovery’ is so far off it’s really no use to even talk about it? As I said, it’s easy. Let me lead this in with a graph I saw just today, which deals with a topic the Automatic Earth has covered a lot: marginal debt, or more precisely, the productivity/growth gained from each additional dollar of debt.

Please note, this particular graph deals with private non-financial debt only, we’ll get to other kinds of added debt, but that restriction is actually quite illuminating.

Now of course, you have to wonder about the parameters the St. Louis Fed uses for its data and graphs, and whether ‘growth’ was all that solid in the run up to 2008. There’s plenty of very valid arguments that would say growth in the 1960’s was a whole lot more solid than that in the naughties, after the Glass-Steagall repeal, and after the dot.com blubber.

However, that’s not what I want to take away from this, I use this to show what has happened since 2008, more than before, when it comes to “passing debt off as ‘growth'”.

But it’s another thing that has happened since 2008, or rather not happened, that points out to us why this slump will have legs. That is, in 2008 a behemoth bubble started bursting, and it was by no means just US housing market. That bubble should have been allowed to fully deflate, because that is the only way to allow an economy to do a viable restart.

Instead, all that has been done since 2008, QE, ZIRP, the works, has been aimed at keeping a facade ‘alive’, and aimed at protecting the interests of the bankers and other rich parties. That facade, expressed most of all in rising stock markets, has allowed for societies to be gutted while people were busy watching the S&P rise to 2,100 and the Kardashians bare 2,100 body parts.

It was all paid for, apart from western QE, with $28 trillion and change of newfangled Chinese debt. The problem with this is that if you find yourself in a bubble and you don’t go through the inevitable deleveraging process that follows said bubble in a proper fashion, you’re not only going to kill economies, you’ll destroy entire societies.

And that is not just morally repugnant, it also works as much against the rich as it does against the poor. It’s just that that is a step too far for most people to understand. That even the rich need a functioning society, and that inequality as we see it today is a real threat to everyone.

Recognizing this simple fact, and the consequences that follow from it, is nothing new. It’s why in days of old, there were debt jubilees. It’s also why we still quote the following from Marriner Eccles, chairman of the Federal Reserve under FDR and Truman from 1934-1948, in his testimony to the Senate Committee on the Investigation of Economic Problems in 1933, which prompted FDR to make him chairman in the first place.

It is utterly impossible, as this country has demonstrated again and again, for the rich to save as much as they have been trying to save, and save anything that is worth saving. They can save idle factories and useless railroad coaches; they can save empty office buildings and closed banks; they can save paper evidences of foreign loans; but as a class they cannot save anything that is worth saving, above and beyond the amount that is made profitable by the increase of consumer buying.

It is for the interests of the well to do – to protect them from the results of their own folly – that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit. This is not “soaking the rich”; it is saving the rich. Incidentally, it is the only way to assure them the serenity and security which they do not have at the present moment.

Everything would all be so much simpler if only more people understood this, that you need a – fleeting, ever-changing equilibrium- to prosper.

Instead, we’re falling into that same trap again. Or, more precisely, we already have. We have been fighting debt with more debt and built the facade put up by the Fed, the BoJ and the ECB, central banks that all face the same problems and all take the same approach: save the rich at the cost of the poor. Something Eccles said way back when could not possibly work.

Anyway, so here are the graphs that prove to us why the slump has legs. There’s been no deleveraging, the no. 1 requirement after a bubble bursts. There’s only been more leveraging, more debt has been issued, and while households have perhaps deleveraged a little bit, though that is likely strongly influenced by losses on homes etc. plus the fact that people were simply maxed out.

First, global debt and the opposite of deleveraging:

And global debt from a longer, 65 year, more historical perspective:

It’s a global debt graph, but it’s perhaps striking to note that big ‘growth’ spurts happened in the days when Reagan, Clinton and Obama were the respective US presidents. Not so much in the Bush era.

Next, China. What we’re looking at is what allowed the post 2008 global economic facade to have -fake- credibility, an insane rise in debt, largely spent on non-productive overinvestment, overcapacity highways to nowhere and many millions of empty apartments, in what could have been a cool story had not Beijing gone all-out on performance enhancing financial narcotics.

Today, the China Ponzi is on its last legs, and so is the global one, because China was the last ‘not-yet-conquered’ market large enough to provide the facade with -fleeting- credibility. Unless Elon Musk gets us to Mars very soon, there are no more such markets.

So US debt will have to come down too, belatedly, with China, and it will have to do that now. because there are no continents to conquer and hide the debt behind. We’re all going to regret engaging in the debt game, and not letting the bubble deflate in an orderly fashion when we still could, but all those thoughts are too late now.

What the facade has wrought is not just the idea that deleveraging was not needed (though it always is, after every single bubble), but that net US household worth rose by 55% in the 6-7 years since the bottom of the crisis, an artificial bottom fabricated with…more debt, with QE, and ZIRP.

Meanwhile, in today’s world, as stock markets go down at a rapid clip, China, having lost control of a market system it never had the control over that Politburos are ever willing to acknowledge they don’t have, plays a game of Ponzi whack-a-mole, with erratic ‘policies’ such as circuit breakers and CIA-style renditions of fund managers and the like.

And all the west can do is watch them fumble the ball, and another one, and another. And this whole thing is nowhere near the end.

China bad loans have now become a theme, but the theme doesn’t mean a thing without including the shadow banking system, which in China has been given the opportunity to grow like a tumor, on which Beijing’s grip is limited, and which has huge claims on local party officials forced by the Politburo to show overblown growth numbers. If you want to address bad loans, that’s where they are.

Chinese credit/debt graphs paint only a part of the picture if and when they don’t include shadow banks, but keeping their role hidden is one of Xi’s main goals, lest the people find out how bad things really are and start revolting. But they will anyway. That makes China a very unpredictable entity. And unpredictable means volatile, and that means even more money flowing out of, and being lost in, markets.

The ‘least worst’ place to be for what money will be left is US dollars, US treasuries and perhaps metals. But there’ll be a whole lot less left than just about anyone thinks. That’s the price of deleveraging.

The price of not deleveraging, on the other hand, is what we see in the markets today. And there is no cure. It must be done. The price for keeping up the facade rises sharply with each passing day, and the effort will in the end be futile. All bubbles have limited lifespans.

I’ll close this with a few recent words from Tim Morgan, who puts it so well I don’t feel the need to try and do it better.

The Ponzi Economy, Part 1

In order to set the Ponzi economy into some context, let’s put some figures on it. In the United States, total “real economy” debt (which excludes inter-bank borrowing) increased by $19.4 trillion – in real, inflation-adjusted terms – between 2000 and 2014, whilst real GDP expanded by only $3.7 trillion. Britain, meanwhile, added £1.9 trillion of new debt for less than £400bn on “growth” over the same period. I spent part of the holiday period unearthing quite how much debt countries added for each dollar of “growth” over a period starting at the end of 2000 and ending in mid-2015.

Unsurprisingly, the league is topped by Portugal ($5.65 for each $1 of growth), Ireland ($5.42) and Greece ($5.39). Britain’s ratio ($3.46) is somewhat flattering, in that the UK has used asset sales as well as borrowing to sustain its consumption. The average for the Eurozone ($3.54) covers ratios as diverse as Germany (just $1.87) and France ($4.22).

China’s $2.56 looks unexceptional until you note that the more recent (post-2007) number is much worse. Economies which seem to have been growing without too much borrowing (such as Brazil and Russia) are now experiencing dramatic worsening in their ratios, generally in the wake of tumbling commodity prices.

In the proverbial nutshell, then, the world has become addicted to borrowing money, spending it, and passing this off as “growth”. This is a copybook example of a pyramid scheme, which in turn means that the world’s most influential economic mentor is neither Keynes nor Hayek, but Charles Ponzi.

[..] How, in the absence of growth, can inflated capital values be sustained? The answer, of course, is that they can’t. Like all Ponzi schemes, this ends with a bang, not a whimper. This is why I find forecasts of a ‘big fall’ or ‘sharp correction’ in markets hard to swallow. Ponzi schemes don’t end gradually, any more than someone can fall off a cliff gradually, or be “slightly pregnant”.

The Ponzi economy simply continues for as long as irrationality prevails, and then implodes. Capital markets, though, are the symptom, not the cause. The fundamental problem is an inability to escape from an addictive practice of manufacturing supposed “growth” on the basis of borrowed money.

There may be shallow lulls in the asset markets, nothing ever only falls down in a straight line in the real world, but that debt I’ve described here will and must come down and be deleveraged.

The process will in all likelihood lead to warfare, and to refugee movements the likes of which the world has never seen just because of the sheer numbers of people added in the past 50 years.

When your children reach your age, they will not live in a world that you ever thought was possible. But they will still have to live in it, and deal with it. They will no longer have the facade you’ve been staring at for so long now, to lull them into a complacent sleep. And the Kardashians will no longer be looking so attractive either.

Oct 222015
 October 22, 2015  Posted by at 9:38 am Finance Tagged with: , , , , , , ,  11 Responses »

LIFE Freedom in peril 1941

Whenever we at the Automatic Earth explain, as we must have done at least a hundred times in our existence, that, and why, we refuse to define inflation and deflation as rising or falling prices (only), we always get a lot of comments and reactions implying that people either don’t understand why, or they think it’s silly to use a definition that nobody else seems to use.

-More or less- recent events, though, show us once more why we’re right to insist on inflation being defined in terms of the interaction of money-plus-credit supply with money velocity (aka spending). We’re right because the price rises/falls we see today are but a delayed, lagging, consequence of what deflation truly is, they are not deflation itself. Deflation itself has long begun, but because of confusing -if not conflicting- definitions, hardly a soul recognizes it for what it is.

Moreover, the role the money supply plays in that interaction gets smaller, fast, as debt, in the guise of overindebtedness, forces various players in the global economy, from consumers to companies to governments, to cut down on spending, and heavily. We are as we speak witnessing a momentous debt deleveraging, or debt deflation, in real time, even if prices don’t yet reflect that. Consumer prices truly are but lagging indicators.

The overarching problem with all this is that if you look just at -consumer- price movements to define inflation or deflation, you will find it impossible to understand what goes on. First, if you wait until prices fall to recognize deflation, you will tend to ignore the deflationary moves that are already underway but have not yet caused prices to drop. Second, when prices finally start falling, you will have missed out on the reason why they do, because that reason has started to build way before a price fall.

A different, but useful, way to define -debt- deflation comes from Andrew Sheng and Xiao Geng in a September 24 piece at Project Syndicate, China in the Debt-Deflation Trap:

The debt-deflation cycle begins with an imbalance or displacement, which fuels excessive exuberance, over-borrowing, and speculative trading, and ends in bust, with procyclical liquidation of excess capacity and debt causing price deflation, unemployment, and economic stagnation.

That’s of course just an expensive way of saying that after a debt bubble must come a hangover. And how anyone can even attempt to deny we’re in a gigantic debt bubble is hard to understand. Our entire economic system is propped up, if not built up, by debt.

The mention of the excess capacity that has been constructed is useful, but we’re not happy with ‘price deflation’, since that threatens to confuse people’s understanding, the same way terms like ‘consumer deflation’ or ‘wage inflation’ do.

Central banks can postpone the deflation of a gigantic debt bubble like the one we’re in, but only temporarily and at a huge cost. And it looks like we’ve now reached the point where they’re essentially powerless to do anything more, or else. We are inclined to point to August 24 as a pivotal point in this, the China crash where people lost faith in the Chinese central bank, but it doesn’t really matter, it would have happened anyway.

And today we’re up to our necks in deflation, and nobody seems to notice, or call it that. Likely because they’re all waiting for CPI consumer prices to fall.

But when you see that Chinese producer prices are down 5.9%, in the 43rd straight month of declines, and Chinese imports are down 20% (with Japan imports off 11%), don’t you hear a bell ringing? What does it take? If the dramatic fall in oil prices hasn’t done it either, how about steel? How about the tragedy British steel has been thrown in, how about the demise of Sinosteel even as China is dumping steel on world markets like there’s no tomorrow?

How about the reversal of funds that once flowed into emerging markets and are now flowing right back out?

Or how about major global banks, all of whom see their profits and earnings deplete, and many of whom are laying off staff by the thousands?

Wait, how about global wealth down by 5% since 2008 despite all the QE and ZIRP policies? And global trade off by -8.4% YoY?!

Here’s from Tyler Durden last week:

Credit Suisse’s latest global wealth outlook shows that dollar strength led to the first decline in total global wealth (which fell by $12.4 trillion to $250.1 trillion) since 2007-2008.

[..] from HSBC: “We are already in a global USD recession. Global trade is also declining at an alarming pace. According to the latest data available in June the year on year change is -8.4%. To find periods of equivalent declines we only really find recessionary periods. This is an interesting point. On one metric we are already in a recession. [..] global GDP expressed in US dollars is already negative to the tune of $1,37 trillion or -3.4%.

How about companies like Walmart and Glencore, just two of the many large entities that have large troubles? These are not individual cases, they are part of a global trend: deflation. As evidence also by the increase in US corporate downgrades and defaults:

Moody’s issued 108 credit-rating downgrades for U.S. nonfinancial companies, compared with just 40 upgrades. That’s the most downgrades in a two-month period since May and June 2009, the tail end of the last U.S. recession. Standard & Poor’s downgraded U.S. companies 297 times in the first nine months of the year…

Everything and everyone is overindebted. All of the above stats, and a million more, point to the beginning of a deleveraging of that debt, something that curiously enough hasn’t happened at all since the 2007/8 crisis. On the contrary, a massive amount of additional debt has been added to a global system already drowning in it. China alone added $20-15 trillion, and that kept up appearances.

But now China’s slowing down everywhere but in its official GDP numbers. And unless we build a base on the moon, there is no other country or region left that can take the place of China in propping up western debt extravaganza. This will come down.

The only way a system that looks like this could be kept running is by issuing more debt. But even that couldn’t keep it going forever. We all understand this. We just don’t know the correct terminology for what’s happening. Which is that debt that has been inflated to such extreme proportions, must lead to deflation, and do so in spectacular fashion.

As long as politicians and media keep talking about disinflation and central bank inflation targets, and all they talk actually about is consumer prices, we will all fail to acknowledge what’s happening right before our very eyes. That is, the system is imploding. Deflating. Deleveraging. And before that is done, there can and will be no recovery. Indeed, this current trend has a very long way to go down.

So far down that you will have a very hard time recognizing the world, and its economic system, on the other side of the process. But then again, you have a hard time recognizing the world for what it is on this side as well.

Sep 042015
 September 4, 2015  Posted by at 9:35 am Finance Tagged with: , , , , , , , , ,  19 Responses »

John Vachon Houses in Atlanta, Georgia May 1938

A Global Deleveraging On A Scale The World Has Never Experienced (CNBC)
Foreigners Flee Japan Stocks at Fastest Pace Since at Least 2004 (Bloomberg)
Europe Responds To Desperate Refugees With Razor Wire And Racism (WaPo ed.)
Hungarian Police And Refugees In Standoff After Train Returns To Camp (Guardian)
Greek Government Says €1 Billion Needed To Tackle Refugee Crisis (Kath.)
Greece Wants EU Funding To Tackle Migrant Influx (Reuters)
UN Calls For 200,000 Refugees To Be Distributed Across EU (AFP)
The Refugee Crisis That Isn’t (Kenneth Roth, Human Rights Watch)
Germany Presses Europe Into Sharing Refugees (Guardian)
Refugees Brave Europe’s Deadly Seas Over Wealthy Arab Neighbors (Bloomberg)
Cameron’s EU Dilemma Grows With Bigger Refugee Crisis and Bills (Bloomberg)
Refugee Crisis: Much More Must Be Done, And Not Just By The UK (Guardian Ed.)
The US Dollar Is Stronger Than Steel (Bloomberg)
The Oil-Sands Glut Is About to Get a Lot Bigger (Bloomberg)
Australia PM’s Decision To Drop Bank Tax ‘Bizarre’ (Afr)
A Secretive Agency Hunts for China’s Crooked Officials Worldwide (Bloomberg)
New York’s Pension Fund Pact With the Devil (HuffPo)
EU Parliament Claims Role In Greek Bailout Supervision (EUObserver)
Varoufakis: I Don’t Think Tsipras Believes In Bailout (CNBC)
Food Sovereignty (Beppe Grillo)
Regenerative Agriculture: The Popular Face Of Permaculture (Lebo)

“.. markets do not like uncertainty and investors tend to shoot first and ask questions later. Therefore we are probably in for a lot more volatility. This global deleveraging is the cause of all the market turmoil, including the problems in China…”

A Global Deleveraging On A Scale The World Has Never Experienced (CNBC)

Everyone is blaming China for the recent stock-market rout, but this blame is misguided. China was the beneficiary of global expansion of money supply at the hands of activist central banks. In fact, my view is that Chinese leadership had little to do with the growth “miracle” it experienced over the last decade. As central banks in the U.S., Japan and Europe eased policy, money sought a higher-yielding home in China. This capital inflow was the cause of the growth “miracle” and now that the expansionary monetary policy is ending, it is only natural that the Chinese economy would begin to slow. Unfortunately, this “search for yield” has created the largest shadow banking system the world has even seen … and it could be in trouble.

According to the Bank for International Settlements (BIS), since 2010 the amount of U.S. dollar-denominated debt issued by foreign companies has grown by 50% from $6 trillion to $9 trillion. The proximate cause of this debt buildup was the impact of U.S. Federal Reserve quantitative easing on bond yields — as the Federal Reserve bought bonds, yields were pushed lower and investors were forced to search globally for higher-yielding financial instruments. This demand for yield fueled a credit binge of unprecedented scale. The epicenter of this pro-cyclical expansion of credit was the fast-growing emerging markets. Investors perceived that investing in countries like China, Brazil and Turkey was worth the risk, especially if emerging-market companies were offering higher yields.

Some of the credit extended to emerging-market companies was used for real economic projects, but a BIS report released in late August concludes that most of the money was simply invested in higher yielding shadow-banking instruments. This is the so-called global carry trade. The global carry trade works like this: An emerging-market company issues bonds denominated in U.S. dollars; critically, the yield on these bonds is above the yield of U.S. corporate bonds but BELOW the yield on shadow-banking instruments within the emerging markets. The relatively higher yielding bonds attract investors searching for yield; at the same time, the emerging-market company can invest the proceeds of the bond sale into higher yielding instruments. The emerging-market company earns the difference between its low yielding U.S. dollar bonds and its high yield emerging-market investments. This is financial engineering by another name.

The global carry trade works especially well under three conditions: 1) There is a large interest-rate differential between the U.S. and the emerging country, 2) The emerging country’s currency is rising, and 3) Currency volatility is very low. All three of these conditions have been present since 2010 and have been fuel for this massive build in debt. However the economic slowdown in China coupled with the U.S. Federal Reserve ending quantitative easinghas resulted in a strong U.S. dollar (weak emerging-market currencies) and tremendous currency volatility — thereby significantly reducing the attractiveness of the carry trade. The credit expansion of the carry trade resulted in emerging-market money supply growth that was the basis for economic growth.

In fact, it was the virtuous spiral of credit/money growth fueling economic growth that produced investor demand for emerging market bonds. Now, I fear, that process is beginning to reverse. The reversal of this process means a reversal of the capital flows from emerging market back to the United States. The strength of the U.S. dollar and weakness in emerging market currencies is a reflection of the process reversing. What this means is that the world is beginning a global deleveraging on a scale that it has never experienced. One of the knock-on effects of this global deleveraging is a slowdown in China. I do not mean to suggest that the sky is falling, but markets do not like uncertainty and investors tend to shoot first and ask questions later. Therefore we are probably in for a lot more volatility. This global deleveraging is the cause of all the market turmoil, including the problems in China.

Read more …


Foreigners Flee Japan Stocks at Fastest Pace Since at Least 2004 (Bloomberg)

Global investors are pulling money out of Japan’s equity market at the fastest pace since at least 2004, according to Mizuho. Foreigners last week sold a net 1.85 trillion yen ($15.4 billion) of Japanese stocks and equity index futures, the biggest combined outflow since Mizuho began tracking the data more than a decade ago, said Yutaka Miura, a Tokyo-based senior technical analyst at the brokerage. Investors are fleeing amid concern about China’s economic outlook and the prospect of higher interest rates in the U.S., he said. “This is a result of investors dumping global risk assets,” said Miura. “Japanese stocks have performed well since the start of the year, so similar to what’s happening in Europe, we’re seeing people take profits.”

The Topix index is down 13% from its Aug. 10 high, paring its 2015 advance to 4.8%. The nation’s shares are among the world’s worst performers since China unexpectedly devalued the yuan last month, roiling markets worldwide and intensifying concern about the outlook for Japan’s biggest trading partner. Foreigners dumped 1.43 trillion yen of Japanese equities in the three weeks through Aug. 28, Tokyo Stock Exchange data updated Thursday show. That’s the most for any three-week span on record, overtaking the period when Bear Stearns Cos. collapsed in 2008.

Net stock sales totaled 707 billion yen last week, and investors also reduced positions in index futures by 1.14 trillion yen, exchange data show. Cumulative flows for 2015 are still positive, with foreigners buying a net 1.1 trillion yen of equities through last week. Andrew Clarke at Hong Kong brokerage Mirabaud Asia said investors who needed to reduce positions in Asia and couldn’t offload stocks in China because of share suspensions turned to Tokyo instead. “The sell-off started in China,” Clarke said. “Investors couldn’t sell there in the end so selling spread to Asia, and Japan especially as it has a greater liquidity. This eventually spread to Europe and the U.S.”

Read more …

Orban is a loose cannon, easy pickings. But Orban did not order that train to halt. Merkel did.

Europe Responds To Desperate Refugees With Razor Wire And Racism (WaPo ed.)

The wrenching photographs of Aylan Kurdi , the 3-year-old Syrian boy whose body washed ashore on a Turkish beach this week, are an emblem of the moral and legal abdication of Western nations in the face of the worst refugee crisis the world has seen in decades. Hundreds of thousands of desperate Syrians, Afghans, Iraqis, Somalis and others have embarked this summer on dangerous voyages across the Mediterranean or arduous treks through southeastern Europe in the hope that rich, democratic nations will grant them safe harbor, in keeping with international law and their own commitments. To a shocking degree, they have been met with indifference, disregard or the cold hostility of razor wire and racism.

According to published reports, Aylan s family was denied a refugee visa by the Canadian government and an exit visa by Turkey, propelling it into the overcrowded boat that capsized while attempting to reach Greece. The boy was one of more than 2,600 refugees who have died trying to reach Europe this spring and summer, a toll driven by the abject failure of the European Union to create safe and legal means for refugees to seek asylum. The response to the crisis from leaders whose nations boast of their humanitarianism almost beggars belief. Britain has resettled just more than 200 of the 4 million Syrians who have fled the country, yet Prime Minister David Cameron this week claimed his government was taking its fair share.

So far this year, Hungary has granted asylum to 278 out of 148,000 applicants, according to the United Nations, even though two-thirds or more of those applying are fleeing war zones and have a right to refuge under international conventions. While Aylan s body was washing ashore, another disgraceful drama was playing out at Budapest s main train station, where authorities refused to allow thousands of refugees to board trains for Germany even though German authorities stood ready to receive them. Hungarian Prime Minister Viktor Orban has built a razor-wire fence along his country s southern border and promised to dispatch troops to stop asylum seekers. He has been shockingly blunt about his motivations: to defend Europe’s Christian culture from an influx of Muslims.

Such attitudes reveal the deeper stakes of the refugee crisis for the West. If intolerant demagogues such as Mr. Orban are allowed to prevail, then the EU’s identity as a community of states committed to human rights and the rule of law will be shattered. As German Chancellor Angela Merkel put it on Monday, “If Europe fails on the question of refugees, if this close link with universal civil rights is broken, then it won’t be the Europe we wished for”.

Read more …

Blame Germany. All these people could have been safe by now.

Hungarian Police And Refugees In Standoff After Train Returns To Camp (Guardian)

Hundreds of people remained on a train in the Hungarian town of Bicske over Thursday night following a botched attempt by authorities to move on some of the thousands gathered in Budapest’s main railway station. The Hungarian authorities earlier appeared to trick hundreds of people into taking a train to a refugee camp outside Budapest in an attempt to end a two-day standoff at the station where thousands have been trying to get to western Europe. There was confusion at Keleti rail terminus in the morning when departures were initially cancelled and then passengers piled on to a newly arrived train they hoped would take them to Austria or Germany.

Instead, the train stopped in the town of Bicske, outside the capital, where riot police were waiting to take the refugees to an overcrowded facility that many had left a few days earlier in the hope of finding sanctuary in Germany. There were chaotic scenes at the station when one man pulled his wife and child on to the tracks, begging police not to force them to go to the camp. “We won’t move from here,” he shouted repeatedly. The man was later handcuffed and taken away by officers. A large group of people was surrounded in a hot and cramped underpass leading out of the station, chanting “no camp, no camp”. Other passengers clashed with police and forced their way back on to the train to begin a standoff in the sweltering heat.

Police brought water but many of the migrants refused to take the bottles, vowing to go on hunger strike. Later, volunteers tried to offer them food but people refused to eat. “We don’t need food and water. Just let us go to Germany,” one said from an open train window. Hungarian police declared the area an “operation zone” and removed reporters from the station. Later, reporters were allowed to gather on a platform. About 100 people were on the opposite platform and about 50 riot police blocked the route across the tracks. The travellers on the train resorted to holding signs up against the train windows, which said “no camp for children” and “save our souls, we are children”.

Read more …

They’re not going to get it.

Greek Government Says €1 Billion Needed To Tackle Refugee Crisis (Kath.)

Greece is to make an immediate request for more funding from the European Commission to tackle the refugee crisis on the eastern Aegean islands but this will only represent a fraction of the €1 billion that the caretaker government believes it needs to address the situation. Kathimerini understands that the Greek police will on Friday request €6 million in emergency funding from Brussels to cover the cost of new equipment and sending more personnel to islands such as Lesvos, Kos, Samos and Chios, where around 2,000 refugees a day are landing in dinghies that set sail from Turkey. Police chiefs want to send a significant number of officers to these islands to help register refugees and migrants who arrive there. However, they also need more equipment, including fingerprint scanners.

The Commission approved an emergency transfer of €2.8 million to the Greek coast guard earlier this summer. However, the extra funds will fall well short of the total that Athens believes it needs to deal with the refugee crisis. Speaking at a news conference with several other cabinet members, Economy Minister Nikos Christodoulakis said that Greece needs around €1 billion but cannot be sure that it will receive this amount. “The minimum sum Greece needs is €400 million from the [EU] asylum fund and €330 million from the fund for the poor to tackle urgent infrastructure needs,” he said. His comments came as European Commission Vice President Frans Timmermans and European Commissioner for Migration Dimitris Avramopoulos arrived in Athens.

“We are here today to discuss with the Greek government the best way that we can quickly implement the decisions that are necessary for us to be able to assist financially and with people and material so that the situation becomes better,” said Timmermans after talks with caretaker Prime Minister Vassiliki Thanou. The EU officials are due to visit the eastern Aegean islands on Friday.

Read more …

Betcha EU is going to bring up trust issues.

Greece Wants EU Funding To Tackle Migrant Influx (Reuters)

Greece will ask the European Union for about 700 million euros to build infrastructure to shelter the hundreds of refugees and migrants arriving on its shores daily, the government said on Thursday. The cash-strapped country has seen a rise in the number of refugees and migrants – mostly from Syria, Iraq and Afghanistan – arriving on rubber dinghies from nearby Turkey. Aid agencies estimate about 2,000 people cross over to Greek islands including Kos, Lesbos, Samos and Chios every day. The interim government said it planned to set up a new operations centre and take steps to improve conditions at existing refugee centers.

Economy Minister Nikos Christodoulakis said the country will seek EU funds earmarked to address the crisis. “There is a major funding issue which should be addressed urgently,” Christodoulakis told a news conference. “The minimum sum Greece needs is €400 million from the asylum fund and €330 million from the fund for poor to tackle urgent needs for infrastructure.” Frans Timmermans, first vice president of the European Commission and EU Commissioner for Migration Dimitris Avramopoulos, are in Athens to meet Greek officials. They will meet police and coast guard officials on Kos on Friday. Christoudoulakis said Greece will also provide financial help to the many eastern Greek islands that are feeling the pressure from the migrants influx.

“Many northern and southern Aegean islands have faced a dive in tourist traffic in recent months,” he said. “If we don’t address that, we will have a new domestic wave of unemployed and poor.” He also called Greek ship-owners to offer vessels as temporary accommodation for refugees and blamed Europe for a lukewarm response to the migration issue. “These difficult problems cannot be solved at the sitting rooms in Europe or in other countries but at the piers and at the shores who receive scores of refugees every day,” he said.

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How many will go to America?

UN Calls For 200,000 Refugees To Be Distributed Across EU (AFP)

The UN High Commissioner for Refugees called Friday on the European Union to admit up to 200,000 refugees as part of a “mass relocation programme” that would be binding on EU states. “People who are found to have a valid protection claim… must then benefit from a mass relocation programme, with the mandatory participation of all EU member states,” Antonio Guterres said in a statement. “A very preliminary estimate would indicate a potential need to increase relocation opportunities to as many as 200,000 places,” he added. His call came ahead of a meeting later Friday of EU foreign ministers to discuss the continent’s refugee crisis, of which Syrian toddler Aylan Kurdi, whose lifeless body was found face down in the surf on a Turkish beach on Wednesday, has become a searing symbol. Referring to the pictures of the dead child, which “had stirred the hearts of the world public”, Guterres said: “Europe cannot go on responding to this crisis with a piecemeal or incremental approach.”

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No, true, it’s a Europe crisis.

The Refugee Crisis That Isn’t (Kenneth Roth, Human Rights Watch)

European leaders may differ about how to respond to the asylum-seekers and migrants surging their way, but they seem to agree they face a crisis of enormous proportions. Germany’s Angela Merkel has called it “the biggest challenge I have seen in European affairs in my time as chancellor.” Italian Foreign Minister Paolo Gentiloni has warned that the migrant crisis could pose a major threat to the “soul” of Europe. But before we get carried away by such apocalyptic rhetoric, we should recognize that if there is a crisis, it is one of politics, not capacity. There is no shortage of drama in thousands of desperate people risking life and limb to reach Europe by crossing the Mediterranean in rickety boats or enduring the hazards of land journeys through the Balkans.

The available numbers suggest that most of these people are refugees from deadly conflict in Syria, Afghanistan, Iraq and Somalia. Eritreans – another large group – fled a brutally repressive government. The largest group – the Syrians – fled the dreadful combination of their government’s indiscriminate attacks, including by barrel bombs and suffocating sieges, and atrocities by ISIS and other extremist groups. Only a minority of migrants arriving in Europe, these numbers suggest, were motivated solely by economic betterment. This “wave of people” is more like a trickle when considered against the pool that must absorb it. The EU population is roughly 500 million. The latest estimate of the numbers of people using irregular means to enter Europe this year via the Mediterranean or the Balkans is approximately 340,000.

In other words, the influx this year is only 0.068% of the EU’s population. Considering the EU’s wealth and advanced economy, it is hard to argue that Europe lacks the means to absorb these newcomers. To put this in perspective, the U.S., with a population of 320 million, has some 11 million undocumented immigrants. They make up about 3.5% of the U.S. population. The EU, by contrast, had between 1.9 and 3.8 million undocumented immigrants in 2008 (the latest available figures), or less than 1% of its population, according to a study sponsored by the EC. Put another way, nearly 13% of the U.S. population (some 41 million residents) are foreign-born – twice the proportion of non-EU foreign-born people living in Europe.

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Playing the good cop and getting away with it. But we know better.

Germany Presses Europe Into Sharing Refugees (Guardian)

The German chancellor, Angela Merkel, looks set for victory in her campaign to press Europe into a new system of sharing refugees after France caved in to a proposed new quotas system and Brussels unveiled plans to quadruple the number of people spread across most of the EU. In a major policy speech on Europe’s worst migration emergency, Jean-Claude Juncker, the president of the European commission, is to table proposals next Wednesday for the mandatory sharing of 160,000 refugees between 25 of the EU’s 28 countries. Britain, Ireland and Denmark are exempted from having to take part, but Dublin has already agreed to participate and David Cameron is under increasing pressure for Britain to pull its weight as the migration crisis escalates with scenes of chaos and misery on Europe’s borders.

Berlin and Paris have sought to maintain a common position for weeks, but the French equivocated on the key issue of binding quotas. On Thursday, the president, François Hollande, aligned himself with Merkel’s drive for compulsory EU sharing of refugees. Merkel announced from Switzerland that both sides had agreed a common platform and Hollande said there should be a “permanent and obligatory mechanism” for receiving refugees in the EU. “The president and the chancellor have today decided to forward joint proposals on the organisation of the reception of refugees and a fair sharing in Europe,” said the Élysée Palace. Germany, along with the European commission, has been pushing hard for a new mandatory system since May when Juncker tabled much more modest proposals for the compulsory sharing of 40,000 bona fide asylum-seekers over two years.

A summit of EU leaders in June rejected the quotas, saying they could only be voluntary and eventually agreeing to share only 32,000. The east European countries and Spain were the main opponents. Four east European prime ministers are to meet on Friday to consider their positions. Mariano Rajoy, the Spanish prime minister, reiterated his opposition to quotas in Berlin this week. But the speed of developments on the ground is dictating political responses. Donald Tusk, who chairs EU summits as president of the European council, said the EU should agree to share at least 100,000 refugees. In June, he opposed the quotas system. The proposed figures – 100,000 to 160,000 – refer merely to a mandatory quotas system, beyond the much higher numbers of asylum claims that the countries will have to process in any case. Germany alone expects 800,000 this year.

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Our friends the Saudis.

Refugees Brave Europe’s Deadly Seas Over Wealthy Arab Neighbors (Bloomberg)

Searching for a new home, Yassir Batal says Germany and its unfamiliar voices and customs are more enticing for his wife and five children than the wealthy Arab states whose culture, religion and language they share. Like so many other Syrians who have escaped civil war, the 36-year-old has ruled out heading south through Jordan to Saudi Arabia or beyond. They wouldn’t be welcomed the same way, he said. “In Europe, I can get treatment for my polio, educate my children, have shelter and live an honorable life,” said Batal, as he left a United Nations office in Beirut, the city that’s been the crossroads for more than a million refugees since the violence started in March 2011. “Gulf countries have closed their doors in the face of Syrians.”

Stories of fellow refugees suffocating in trucks or small children drowning in the Mediterranean Sea are doing little to tarnish the allure of Europe and the struggle to get there. As countries argue over how to cope with the scale of the tide of humanity, safer routes to the Gulf states remain blocked because of the difficulties gaining entry and concern over how migrants would be treated there. Gulf countries have been active in the Syrian conflict and millions of dollars raised in some states have found their way to rebel groups, including extremists. While they also spent billions of dollars of aid to displaced people in camps in Jordan and Lebanon, they maintain strict controls on who can cross their borders. Most of the migrants fleeing the war are Sunni Muslim, like most Gulf citizens.

“I’m most indignant over the Arab countries who are rolling in money and who only take very few refugees,” Danish Finance Minister Claus Hjort Frederiksen said in an interview this week at his office in Copenhagen. “Countries like Saudi Arabia. It’s completely scandalous.”

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Whichever way the wind blows, that’s where you’ll find David.

Cameron’s EU Dilemma Grows With Bigger Refugee Crisis and Bills (Bloomberg)

Europe is giving David Cameron a migraine. Accused of not caring about the refugee crisis, the prime minister is struggling yet again to navigate Britain’s ever-problematic relationship with the European Union following confirmation that his country had quietly paid a bill he once derided as “appalling” to the bureaucrats in Brussels. The U.K.’s unwillingness to take the same share of refugees threatens to undermine Cameron’s efforts to whip up support among his Europeans peers to win back powers from the 28-nation bloc ahead of a referendum on membership brought on by a growing tide of euroskepticism. In his quest to re-write terms for the U.K., Cameron heads to Spain and Portugal on Friday to meet with leaders.

“He’s quite clearly got a perception problem and has soured his relationships,” said Raoul Ruparel, co-director at the Open Europe think-tank. “There is a risk that will have an impact on what he’s trying to do in terms of renegotiation.” The 48-year-old Conservative leader is on the defensive. He said Thursday that the U.K. would fulfill its duty in helping asylum seekers as lawmakers from both sides of the aisle joined a global chorus of voices demanding he do more. After British newspapers ran a photograph of a dead child on a Turkish beach, Cameron was forced to respond. “Britain is a moral nation that always fulfills its moral obligations,” he said in a pooled television interview. “We are taking thousands of people and we will take thousands of people.”

Following a comfortable re-election in May that left the opposition in shambles, Cameron’s tact in handling the worst humanitarian crisis since World War II has been brought to task as the EU borders buckle under the weight of migrant flows from Syria and other troubled spots in Africa and the Middle East. EU governments now need to house at least 100,000 refugees, a far larger number than what had been envisaged, EU President Donald Tusk said on Thursday. Several countries have balked at an earlier proposal to redistribute 40,000, whittling that number down to 32,000. The U.K. did not participate at all.

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“What appears on our TV screens as a sudden emergency is really the culmination of years of failure..” Ongoing.

Refugee Crisis: Much More Must Be Done, And Not Just By The UK (Guardian Ed.)

Britain cannot open its borders to everyone fleeing war anywhere in the world, but this does not excuse the government’s shameful determination to keep our borders closed to as many refugees as possible. Our international treaty obligations, as well as the promptings of our collective conscience, entail a duty to offer meaningful sanctuary when a humanitarian catastrophe unfolds before our eyes. The prime minister surely understands this. He is personally capable of compassion, but his political instincts have been conditioned by defensive parochialism: fear of alienating those parts of the press and the electorate where hostility to foreigners is visceral. His reluctance to engage with pan-European efforts to accommodate refugees stems from a refusal to articulate any circumstances in which national questions should be answered at continental level.

This makes his argument for focusing on the causes of mass displacement, above all the war in Syria, sound disingenuous – hard-heartedness camouflaged as strategy. But the underlying point is valid. What appears on our TV screens as a sudden emergency is really the culmination of years of failure to confront Syria’s bloody collapse. This, sadly, is symptomatic of a more profound myopia in European security policy. Not only Britain is responsible for European paralysis. There is a wide arc of conflict-ridden, repressive and failed states running from the Middle East, round the Horn of Africa and along the southern Mediterranean coast. There are tens of millions of people living in that region who might reasonably decide that the only future for them and their families lies in Europe.

There is little sign that European leaders have even begun to engage with each other or with their electorates on the questions this raises for the security, legitimacy and stability of the European Union. Although it is essential in discussion of the current crisis to remember the legal distinction between refugees – seeking sanctuary from imminent danger – and the wider category of people who migrate in search of a better future for themselves and their families, it is also important to acknowledge that, in places where economic activity, law and order are breaking down, the line between the two categories is technically and ethically hard to draw.

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Much stronger.

The US Dollar Is Stronger Than Steel (Bloomberg)

When John Pierpont Morgan bought Andrew Carnegie’s steel business and combined it with two competitors to create U.S. Steel in 1901, the result was the world’s first billion-dollar corporation. Its roughly $1.4 billion market value would translate into about $33 billion in current dollars. But the company is worth less than a tenth of that today, at just under $2.5 billion. While the steel industry has been fading in the U.S. for decades, things have gotten worse recently. A strong U.S. dollar, combined with a slowing Chinese economy, is bringing unprecedented amounts of cheap, foreign steel to the U.S., swamping domestic producers. Average monthly imports spiked by almost 1 million metric tons in 2014, a 38% increase from 2013. Through June of this year, steel imports averaged 3.3 million metric tons a month, roughly the same as last year.

A lot of that is coming from China, the world’s largest producer. Although its economy has cooled, leading to the first dip in steel demand there in a generation, China’s mills have kept chugging along. Much of the excess output is being shipped overseas. In the first half of this year, China’s steel exports rose 28% compared with the same period in 2014. The recent devaluation of the yuan could make Chinese steel even more attractive to U.S. buyers. Exports from Brazil and Russia have also jumped as the real and ruble have fallen sharply against the greenback. U.S. producers have had no choice but to pull back. Andrew Lane, an analyst at Morningstar, expects U.S. steel production to come in at around 85 million metric tons this year, down from 98 million in 2007. “I don’t think we’ll get back to that level until 2020,” Lane says.

Things are particularly hard for U.S. Steel, the country’s No. 2 producer after Nucor. The company lost money in the first two quarters of this year and has laid off more than 1,700 employees, shaving its total workforce to 34,000. “The strong dollar is the icing on the cake,” says Mario Longhi, U.S. Steel’s Brazilian-born chief executive officer. Longhi says foreign producers have been unfairly dumping steel in the U.S. for several years, and trade laws need to be revamped to deal with the problem. “Our laws have not caught up to the 21st century,” he says. Since June, U.S. steel producers have filed three trade cases with the Department of Commerce, alleging that countries including Brazil, China, Japan, and South Korea are either benefiting from government subsidies or selling steel abroad for cheaper than they do at home, in violation of international trade laws.

Although a strong dollar is particularly bad for companies at the beginning of the supply chain, such as steel producers, it’s weighing on the entire U.S. industrial sector. After growing faster than the rest of the economy during the early years of the recovery, manufacturing activity, as measured by the ISM Manufacturing Index, dropped to its lowest level in two years in August. Manufacturing is on pace to post a record trade deficit for the third straight year. That’s dampened some of the enthusiasm around the “reshoring” trend of companies bringing outsourced factory jobs back to the U.S. Rising wages in China have helped make U.S. workers more competitive. But a stronger dollar, coupled with a slowing China, could blunt those gains..

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Who is financing this madness, and why?

The Oil-Sands Glut Is About to Get a Lot Bigger (Bloomberg)

The last place oil producers want to be when prices plummet to profit-demolishing lows is midstream on a billion-dollar project in one of the costliest parts of the planet to extract crude. Yet that’s exactly where half a dozen oil sands operators from Suncor to Brion find themselves with prices for Canadian oil now hovering around $30 a barrel. While all around them projects have been postponed or canceled, their investments were judged too far along when the oil game suddenly moved from offense to defense. These projects will add at least another 500,000 barrels a day – roughly a 25% increase from Alberta – to an oversupplied North American market by 2017.

For companies stuck spending billions in a downturn, the time required to earn back their investments will lengthen considerably, said Rafi Tahmazian at Canoe Financial. “But the implications of slowing down a project are worse,” said Tahmazian, who helps oversee about C$1 billion ($758 million) in energy funds at the Calgary investment firm. A general rule of thumb says new plants require a West Texas Intermediate price of $80 a barrel to break even. Western Canada Select, a blend of heavy Alberta crude, is currently selling at a discount of about $14 a barrel to the WTI benchmark. This differential for Alberta’s oil, based on such factors as quality and pipeline capacity, has ranged from $7 to $20 this year and exceeded $40 a barrel in late 2012 and part of 2013.

Cenovus Energy a Calgary-based producer that uses steam technology to melt bitumen and pump it to the surface, has postponed two new projects until the oil price recovers. But it’s pressing ahead with expansions started before the downturn that will add 100,000 barrels of capacity by next year. “We do not want short-term pricing to dictate our investment in long-life, high-return oil sands projects,” Cenovus Chief Executive Officer Brian Ferguson told analysts in July, when WTI was trading near $50. Oil companies plan for price variations during the lives of long-term projects. Cenovus “stress tested” its expansion down to a price of $50 a barrel, a level that will allow it to continue paying a reduced dividend and fund some further growth, Ferguson said in July.

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Abbott is bizarre, period.

Australia PM’s Decision To Drop Bank Tax ‘Bizarre’ (Afr)

So let me get this straight. After the four peak government agencies that oversee Australia’s financial system recommended taxpayers should receive a proper fee for the free default insurance they provide for $750 billion of bank deposits, Tony Abbott rolled his Treasurer’s correct call on the matter because he doesn’t want another “Labor tax”? “The last way to make our banks strong, the last way to protect depositors, is to hit banks with more taxes,” Abbott dissembled. “That’s the Labor way. It’s not the Coalition’s way.” The truth is that the policy principle of not giving away public insurance to banks for free has been embraced by pretty much every developed economy in the world, and was explicitly advocated in writing by the Council of Financial Regulators and only then belatedly backed by Labor’s Treasurer, Chris Bowen.

Contrary to Abbott’s misleading claims, this is neither a tax nor a Labor proposal. We are talking about a premium for free deposit insurance that was advised by our best bureaucrats because it minimises the “moral hazards” that arise when you give bankers a “heads we win, tails taxpayers lose” incentive structure. The Liberal Party is meant to reflexively support policies that remove or minimise public subsidies of private companies and here we have Abbott giving a free kick to the world’s most profitable banks. The decision is demonstrably bizarre on at least four levels. First, it was always going to be popular with main street. Holding the big banks to account and justifiably transferring wealth from the oligarchs and their shareholders back to taxpayers’ coffers would be welcomed by most.

Second, there was no political battle to be had here – Labor was not going to oppose an initiative it had already backed. Third, Abbott’s decision undermined his own Treasurer, who privately agrees with the idea of pricing free public insurance and eliminating moral hazards. This only reinforces the impression the Liberals are a divisive, clueless bunch of amateurs that struggle with rational action. Finally, the revenue generated by pricing the deposit insurance would have raised tens of billions of dollars over time that could have helped reduce Australia’s net debt, which is inflating every day towards dangerous (non-AAA rated) levels as the economy decelerates, care of the commodity price slump and a sharp contraction in Asian demand. Enough said.

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Xi is one desperate puppy.

A Secretive Agency Hunts for China’s Crooked Officials Worldwide (Bloomberg)

Qiao Jianjun seemed a model bureaucrat: strict on expense accounts, a stickler for rules. But the director of a sprawling state enterprise that controlled grain stockpiles for a chunk of Henan province had a secret, Chinese officials say: He was embezzling millions. In October 2011, he abandoned his government-issue black sedan at a local airport and disappeared — apparently headed for a favorite destination among China’s wayward party members: the U.S. China’s government released a list of 100 fugitives in April; Qiao was among 40 suspected of being in America. As President Xi Jinping’s nationwide corruption hunt has punished more than 100,000 officials over three years, many of those who’ve found bolt-holes abroad have remained frustratingly out of reach.

Rounding them up, in an operation called “Sky Net,” falls to China’s much feared Central Commission for Discipline Inspection (CCDI). In a rare interview in May with Bloomberg Businessweek, Sky Net’s leaders discussed their work with the U.S. in catching and returning fugitives. Despite a recent success – a U.S. indictment against Qiao, the grain official – such collaboration remains fraught with sensitivities, adding to tensions ahead of Xi’s U.S. trip this month. CCDI traces its origins to 1927, when the young Chinese Communist Party established a commission to monitor its members’ behavior. Its headquarters now occupy a cement-and-glass rectangle of a building behind a massive stone gateway in central Beijing, not far from the Forbidden City.

While there’s no sign on the gate, the traditionally secretive Party disciplinary arm has embraced a more public profile under Xi. Its website debuted in 2013; this year, it released an app that makes it a cinch to snitch using a mobile phone. The Xi-era drive to crack down on corruption has meant more work and growth for CCDI, including the expansion of its inspection offices to 12 from eight. The agency doesn’t publish staff numbers, but Chinese media reports estimate its size at up to 1,000. Job postings advertise for candidates with good computer skills, preferably with a degree from a top university. Party membership is mandatory.

If Sky Net sounds like a James Bond film, the role of M. could be played by Fu Kui, 53, CCDI’s head of international cooperation until last month when he was put in charge of the agency’s Hunan province operations. He’s square-headed and blunt-looking in a white button-down with no tie, and smokes as he talks. “Our work is about winning people’s hearts for the party,” Fu said in the May interview, in a conference room lined with world maps. “Now that we’re starting to hunt them down, the public is happy to see it.”

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New York’s Pension Fund Pact With the Devil (HuffPo)

I did some digging around and, confirmed that a recent New Yorker article by Pulitzer nominee Jennifer Gonnerman was true. I found that both the New York City and New York State pension funds have a direct stake in corporations that are second cousins to slavery, the private prison industry. This is a shocking revelation. I know and respect the stewards of these funds, Tom Dinapoli and Scott Stringer. They both have impressive civil rights records. As members of the New York State Assembly, the two were loyal supporters of the grassroots movement to repeal the racist Rockefeller Drug Laws. It is hard to believe that two of the most progressive elected officials in New York would take workers’ wages and invest them into such an inhumane enterprise.

The only explanation I could come up with is that they must have not have known that their respective pension funds were directly connected to such a repulsive operation. I brought my concerns to the attention of both men weeks ago, and, as of this writing, nothing has changed. Well, it’s one thing not to know, it’s quite another matter not to care. As Michelle Alexander put it in “The New Jim Crow,” mass incarceration in the United States has emerged as “a stunningly comprehensive and well-disguised system of racialized social control that functions in a manner strikingly similar to Jim Crow.” Investing in companies that profit from this system is morally indefensible. I know both Dinapoli and Stringer have voiced opposition to mass incarceration.

Yet in order to realize an increased value in the private prison portion of their equity portfolio, they must hope for what they claim to oppose — the expansion of the private prison system and the growth of mass incarceration. But it’s not just morally reprehensible to invest in prisons, it is also fiscally irresponsible. Two of the private prison stocks the city and state have wagered sacred pension fund money on, the GEO Group and Correctional Corporation of America (CCA), companies that control approximately 75% of the prison market, are heading south, daily hitting new 52 week lows. From President Obama’s recent spate of pardons, to pending state and federal legislation to cut prison sentences for low level, non-violent offenders, to the #BlackLivesMatter movement calling for an end to the Prison Industrial Complex, the writing is on the wall. Prisons are no longer a growth industry.

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Lest we forget: “..the sole European institution with a direct popular mandate..”

EU Parliament Claims Role In Greek Bailout Supervision (EUObserver)

The European Parliament and the European Commission are set to discuss the parliament’s role in the supervision of the Greek bailout programme after parliament leaders gave the green light to proceed.( ( Parliament president Martin Schulz received a mandate on Thursday (3 September) from the leaders of the assembly’s political groups to “explore” with commission president Jean-Claude Juncker “the possibilities” of such an involvement. An agreement could be announced as soon as next week, when Juncker participates in the parliament’s plenary session in Strasbourg. Juncker will attend the conference of presidents, the group that gave Schulz the green light. The parliament’s move comes in response to a request sent by former Greek PM Alexis Tsipras on 20 August.

Tsipras wrote to Schulz, asking for “the direct and full involvement of the European Parliament in the regular review process regarding the implementation of the loan agreement” between Greece and its creditors – the European Commission, the ECB, the European Stability Mechanism (ESM), and the IMF. “I deem it politically imperative that the sole European institution with a direct popular mandate acts as the ultimate guarantor of democratic accountability , Tsipras wrote. The basis of the discussion between the two presidents will be the so-called two-pack regulation, which sets up a monitoring and surveillance mechanism of eurozone countries.

In his letter, Tsipras mentioned article 3 of the two-pack, which says parliament should be kept informed and provides possibilities for exchanges of views with officials from the commission or the member state under surveillance. “There was large agreement between political groups , a parliament source told EUobserver. “It is not a surprise , Schulz said, “because the troika report at the end of the parliament’s last mandate already asked for a permanent structure of accompaniment on a parliamentarian level [of] all the actions of the institutions in the framework of the programme. The discussion between Schulz and Juncker could lead to a mechanism that gives the parliament more than the right to be simply informed about implementation of the bailout programme, but less than a deciding role in the monitoring of it.

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Lots of media.

Varoufakis: I Don’t Think Tsipras Believes In Bailout (CNBC)

Yanis Varoufakis, the controversial former Greek finance minister, has told CNBC that he doesn’t think Alexis Tsipras, who is currently campaigning for re-election as its Prime Minister, believes in the conditions of the country’s third bailout. “He considers it to be unreliable, as does the IMF,” Varoufakis said on Friday. Tsipras was still a personal friend and an “excellent politician”, the economist, who resigned as finance minister this summer after a brutal six months attempting to re-negotiate the austerity conditions of Greece’s bailout by international creditors, added. Varoufakis became the focal point for criticism of Greece for not accepting the austerity program, despite other programs being accepted by bailed-out countries like Portugal and Spain.

Tsipras eventually accepted another bailout with controversial austerity conditions, as the threat of Greece having to leave the euro zone in a disorderly fashion loomed. The third bailout is “unviable on an economy which is in this great depression and debt spiral,” Varoufakis said. Tsipras has recently called new elections in Greece, the second within a year. “I cannot look my electors in the eye and say to them that our party is capable now of stabilizing the economy,” Varoufakis added.

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“Food is the weapon of the future, not bombs.”

Food Sovereignty (Beppe Grillo)

Does Italy still exist, or is it, as Metternich puts it, a geographic expression? By joining the Euro, it lost its monetary sovereignty. It lost its territorial sovereignty after its defeat in the second world war with occupation by the Americans who have never left since then. It lost its military sovereignty as it is now reduced to taking orders from the USA and organising pretend peace missions in Afghanistan and in Iraq, and bombing Libya (thanks also to grandpa Napolitano)/ The fall of Gaddafi is the cause of the immigration of biblical proportions – from that country that no longer has connections with Italy What’s still left of this devastated country where the words “Patria” {fatherland} and “Nazione “ {nation} are considered to be offensive? If a country has no sovereignty and has leaky borders, can it still call itself a country?

Among the many types of sovereignty that have been lost, there’s also food sovereignty. Food sovereignty implies control by the people in relation to the production and consumption of food. The countries must be able to define their own agricultural and food policies on the basis of their own needs. In the period from 1971 to 2010, Italy lost five million hectares of agricultural land because people were abandoning the land, because of hydrological disturbances and because of “cementification”. Unless there are policies providing incentives for agriculture, people will continue to abandon the land. There are whole areas of Italy that are becoming depopulated with young people fleeing towards the cities. That’s something that started after the second world war and it has never let up. The total area of land now used for agriculture has reduced by 28% in 40 years. Our ability to provide our own food is approaching 80% and it is going down all the time. Only 20 years ago it was 92%.

Italy is the third country in Europe and the fifth in the world as regards the lack of land. It’s a country that is over-populated (we have roughly the same population as France with only half the area of usable land.) To cover our food needs, another 61 million hectares are needed. Every day, 100 hectares of land is being built on, that’s 10 square metres every second. An Italian-style suicide. The Great Public Works are given precedence. But the only thing about them that’s “great” are the associated kickbacks. Instead there should be a long-term plan to put an end to the hydrogeological disruption and to clean up the terrain that has been polluted by every type of waste product. The paradox of Expo 2015 is that it focuses on “Feeding the planet“ and yet to bring it into being, a million (yes – one million) square metres of agricultural land has been used. That’s beyond belief. Food is the weapon of the future, not bombs.

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From our friend Nelson in Wanganui.

Regenerative Agriculture: The Popular Face Of Permaculture (Lebo)

“Hippy farms always fail.” These were the words of Chuck Barry, a small-scale organic farmer I met in Montrose, Colorado about ten years ago. Chuck made a comfortable living growing high quality vegetables on two acres in a dry and seasonally cold environment that may be compared with Central Otago high country. His comment was based on observations of some people going into farming with good intentions but little understanding of the amount of work involved and inadequate business sense. There is popular, quaint, romantic notion among many people about growing food organically. But at the end of the day, when faced with actually doing it, most hippies opt out because it turns out to be just too hard.

On the other end of the spectrum – as we have been hearing recently in the news – many conventional farms also fail. Conventional farming wisdom over the last decade goes something like this: 1) borrow lots of money from the bank; 2) convert to dairy; 3) borrow more money; 4) rely on ever-increasing dairy pay outs; 5) borrow more money; 6) rely on ever-increasing land prices; 7) get rich; 8) what could possibly go wrong? Well, now we know. Dairy pay outs have fallen through the floor and many farmers are pushed to the wall. On one hand I feel sorry for those famers who have to sell because of their now un-payable debts. But on the other hand, I question why they bought into the paradigm described above in the first place, which appears to me to be very risky.

Alongside financial debt, many conventional farms also run a large soil debt. We see it every day flowing past our city and out into the Tasman Sea. Like financial debt, soil debt is difficult to repay but not impossible. Rebuilding soil fertility while growing food is sometimes called regenerative agriculture. Regenerative agriculture can include organic farming practices, some biodynamic techniques, and holistic range management. All three of these fall within the scope of the eco-design system known as permaculture. I see permaculture as the middle ground between failed hippy farms and failed conventional farms.

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 August 13, 2015  Posted by at 9:28 pm Finance Tagged with: , , , , , , ,  28 Responses »

Gustave Doré The Ninth Circle of Hell (Treachery) 1857

Eventful days in the middle of summer. Just as the Greek Pandora’s box appears to be closing for the holidays (but we know what happens once it’s open), and Europe’s ultra-slim remnants of democracy erode into the sunset, China moves in with a one-off but then super-cubed renminbi devaluation. And 100,000 divergent opinions get published, by experts, pundits and just about everyone else under the illusion they still know what is going on.

We’ve been watching from the sidelines for a few days, letting the first storm subside. But here’s what we think is happening. It helps to understand, and repeat, a few things:

• There have been no functioning financial markets in the richer parts of the world for 7 years (at the very least). Various stimulus measures, in particular QE, have made sure of that.

A market cannot be said to function if and when central banks buy up stocks and bonds with impunity. One main reason is that this makes price discovery impossible, and without price discovery there is, per definition, no market. There may be something that looks like it, but that’s not the same. If you want to go full-frontal philosophical, you may even ponder whether a country like the US still has a functioning economy, for that matter.

• There are therefore no investors anymore either (they would need functioning markets). There are people who insist on calling themselves investors, but that’s not the same either. Definitions matter, lest we confuse them.

Today’s so-called ‘investors’ put to shame both the definition and the profession; I’ve called them grifters before, and we could go with gamblers, but that’s not really it: they’re sucking central bank’s udders. WHatever we would settle on, investors they’re not.

• The stimulus measures, QE, were never designed to induce economic recovery. They were meant to transfer private losses to public purses. In that, they have been wildly successful.

• China is the end of the line. It was the only economy left that until recently could boast actual growth on a scale that mattered to the global economy. Growth stopped when China, too, introduced stimulus measures. To the tune of some $25 trillion or more, no less.

The perhaps most pivotal importance of China is that it was the world’s latest financial hope. The yuan devaluation shatters that hope once and for all. The global economy looks a lot more bleak for it, even if many people already didn’t believe official growth numbers anymore.

Because we’ve reached the end of the line, the game changes. Of course there will be additional attempts at stimulus, but China’s central bank has de facto conceded that its measures have failed. The yuan devaluations, three days in a row now, mean the central People’s Bank of China has, openly though reluctantly, acknowledged its QE has failed, and quite dramatically at that. They just hope you won’t notice, and try to bring it on with a positive spin.

Central banks are not “beginning” to lose control, they lost control a long time ago. The age of central bank omnipotence has “left and gone away” like Joltin’ Joe. Omnipotence has been replaced by impotence.

This admission will reverberate across the globe. China is simply that big. It may take a while longer for other central bankers to admit to their own failures (though ‘failures’, in view of the wealth transfer, is a relative term here), but it won’t really matter much. One is enough.

What will happen from here on in will be decided by how, where and in what amounts deleveraging will take place. This will of necessity be a chaotic process.

Debt deleveraging leads to, or can even be seen as equal to, debt deflation. This is a process that has already started in various places and parts of economies (real estate), but was kept at bay by QE programs. It will now accelerate to wash over our societies like a biblical plague.

The Automatic Earth started warning about this upcoming deflation wave many years ago. I am wondering if I should rerun some of the articles we posted over the past 8 years or so. I might just do that soon.

It is fine for people to say that since it hasn’t happened yet, we were wrong about this, but for us it was never, and is not now, about timing. If you think like an investor -or at least you think you do- timing may seem to be the most important thing in the world. But that’s just another narrow point of view.

When deflation takes its inevitable place center stage, it will wipe away so much wealth, be it real or virtual or plain zombie, that the timing issue will be irrelevant even retroactively. Whether the total sum of global QE measures is $22 trillion or $42 trillion, its deflation-driven demise will wipe out individuals, companies and nations alike at such a pace, people will wonder why they ever bothered with trying to get the timing right.

This may be hard to understand in today’s world where so many eyes are still focused on central banks and asset- and equity markets, on commodities and precious metals, on housing markets. In that regard, again, it is important to note that there have been no functioning markets for many years. Those eyes are focused on something that merely poses as a market.

For us this was clear years ago. It was never about the timing, it was always about the inevitability. Back in the day there were still lots of voices clamoring for – near-term or imminent – hyperinflation. Not so much now. We always left open the hyperinflation option, but far into the future, only after deflation was done wreaking its havoc. A havoc that will be so devastating you’ll feel silly for ever even thinking about hyperinflation.

Deflation will obliterate our economies as we know them. Imagine an economy for instance where next to no-one sells cars, or houses, or college educations, simply because next to no-one can afford any of it.

Where everything that today is bought on credit will no longer be bought, because the credit will be gone. Where homes are not worth more than the cardboard they’re made of, and still don’t sell.

Where ships won’t sail because letters of credit won’t be issued, where stores won’t open in the morning because they can’t afford their inventory even if it arrives in a nearby port.

As for today’s reality, the Chinese leadership has been eclipsed by its own ignorance about economic systems, the limits of their control over them, and the overall hubris they live in on a daily basis. These people were educated in the 1960s and 70s China of Mao and Deng Xiaoping. In the same air of omnipotence that today betrays all central bankers. Why try to understand the world if you’re the one who shapes it?!

It was obvious this moment would arrive in Beijing as soon as the one millionth empty apartment was counted. There are some 60 million ’empties’ now, a number equal to half the total US housing contingent.

Beijing then heavily promoted the stock market for its citizens, as a way to hide the real estate slump. All the while, it kept the dollar peg going. And now all this is gone. And all that’s left is devaluation. As Bill Pesek put it: “China Adds a Chainsaw to Its Juggling Act”.

Ostensibly to improve the country’s trade position, for lack of a better word. Whether that will work is a huge question. For one thing, the potential increase in capital flight may turn out to be a bigger problem than the devaluation is a solution.

Moreover, one of the main reasons to devalue one’s currency is the idea that then people will start buying your stuff again. But in today’s deflationary predicament, one of the main failures of mainstream economics pops up its ugly head: the refusal to see that many people have little or nothing left to spend.

This as opposed to economists’ theories that people must be sitting on huge savings whenever they don’t spend “what they should”. Ignoring the importance of personal debt levels plays a major part in this. Any which way you define it, the result is a drag on the velocity of money in either a particular economy, or, as we are increasingly witnessing, a major spending slowdown in the entire global economy.

Seen in that light, what good could a 1.9% devaluation (or even a, what is it, super-cubed 5% one, now?!) possibly do when China producer prices fell for the 40th straight month, exports were down 8.3% in July, and cars sell at 30% discounts? Those numbers indicate a fast and furious reduction in spending.

Which in turn lowers the velocity of money in an economy. If money doesn’t move, an economy can’t keep going. If money velocity slows down considerably, so does the entire economy, its GDP, job creation, everything.

This of course is the moment to, once again, point out that we at the Automatic Earth define deflation differently from most. Inflation/deflation is not rising/falling prices, but money and credit supply relative to available good and services, and that, multiplied by the velocity of money.

When this whole debate took off, even before Lehman, there were only a few people I can remember who emphasized the role of deflation the way we did: Steve Keen, Mike Mish Shedlock and Bob Prechter.

And Mish doesn’t even seem think the velocity of money is a big factor, if only because it is hard to quantify. We do though. Steve is a good friend, he’s the very future of economics, and a much smarter man than I am, but still, last time I looked, stumbling over the inflation equals rising prices issue (note to self: bring that up next time we meet). Prechter gets it, but believes in abiotic oil, as Nicole just pointed out from across the other room.

So yeah, we’re sticking out our necks on this one, but after 8+ years of thinking about it, we’re more sure than ever that we must insist. Rising prices are not the same as inflation, and falling prices are but a lagging effect of deflation.

Spending stops when people are maxed out and dead broke. And then prices drop, because no-one can afford anything anymore.

We’ve had a great deal of inflation in the past decade or two, like in US housing. We still have some, for instance in global stock markets and Canada and Australia housing. But these things are nothing but small pockets, where spending persists for a while longer.

Problem is, those pockets pale in comparison to diving -consumer- spending in the US, China, Europe, Japan. Spending that wouldn’t even exist anymore if not for QE, ZIRP and cheap credit.

The yuan devaluation tells us the era of cheap credit is now over. The first major central bank in the world has conceded defeat and acknowledged the limits to its alleged omnipotence.

It always only took one. And then nothing would stand in the way of the biblical plague. It was never a question. Only the timing was. And the timing was always irrelevant.

Aug 022015

DPC Heart of Chinatown, San Francisco, after earthquake and fire 1906

Nicole Foss: Our consistent theme here at the Automatic Earth since its inception has been that we are facing a very powerful deflationary depression, following on from the bursting of an epic financial bubble. What we have witnessed in our three decades of expansion and inflation is nothing short of a monetary supernova, and that period has been the just culmination of a much larger upward trend going back many decades at least. We have lived through a credit hyper-expansion for the record books, with an unprecedented generation of excess claims to underlying real wealth. In doing so we have created the largest financial departure from reality in human history. 

Bubbles are not new – humanity has experienced them periodically going all the way back to antiquity – but the novel aspect of this one, apart from its scale, is its occurrence at a point when we have reached or are reaching so many limits on a global scale. The retrenchment we are about to experience as this bubble bursts is also set to be unprecedented, given that the scale of a bust is predictably proportionate to the scale of the excesses during the boom that precedes it. We have built an incredibly complex economic system, but despite its robust appearance it is over-extended, brittle and fragile after decades of fuelling its continued expansion by feeding on its own substance.

The Automatic Earth, December 2011: The lessons of the past are sadly never learned. Each time the optimism is highly contagious. In the larger episodes, it crescendos into euphoria, leading societies into a period of collective madness where risk is embraced and caution is thrown to the wind. Sky-high valuations are readily rationalized – it’s different here, it’s different this time. 

We come to believe that just this once there might be a free lunch, that we can have something for nothing. We throw ourselves into ponzi finance, chasing the mirage of speculative gains, often through highly questionable and outright fraudulent practices. Enron, Lehman Brothers, and recently MF Global, are but a few egregious examples of what has become an endemic phenomenon.

The increasing focus on chasing speculative profits parasitizes the real economy to a greater and greater extent over time. After all, why work hard for small profits in the real world, when profits on money chasing its own tail are so much greater for so little effort?

Who even notices the hollowing out of the real economy, or the conversion of large amounts of capital into waste, or the often pointless depletion of non-renewable resources, or the growing structural dependency trap, when there is so much short term material prosperity to pursue? 

In such times, the expansionary impulse drives the development of multiple engines of credit expansion. The reserve requirements for fractional reserve banking (already a ponzi scheme) are whittled away to almost nothing. Since the reserve requirement effectively determines the money supply multiplier effect, that multiplier becomes almost infinite.

The extension of credit through the shadow banking system removes the semblance of central bank control over monetary expansion. Securitization and financial innovation also create putative wealth from thin air, using underlying collateral to derive layers of additional illusory value. In this way, excess claims to underlying real wealth are created. The connection between the rapidly expanding virtual worth of the derivative instruments and the real value of the underlying collateral becomes ever more tenuous.

Shadow Banking and Phantom Wealth

Since 2011, in our desperate attempt to avoid the consequences of an imploding bubble, we doubled down on the doomed strategy of ponzi credit expansion. In doing so, we have only succeeded in digging ourselves into a deeper hole, and have done so on a massive scale. While the aggregate balance sheet of the world’s central banks grew exponentially from $3 trillion to $22 trillion over the last 15 years, the expansion in the shadow banking sector has been even more dramatic, and its role in fostering the overall credit hyper-expansion has become increasingly clear:

Shadow banks are that exploding growth segment of global finance capital that share the following characteristics: they are largely unregulated, they invest primarily in financial asset securities of various kinds (i.e. stocks, government and corporate junk bonds, foreign exchange, derivatives, etc.) instead of real asset investment (plant, equipment, software, etc.), they target high risk-high return opportunities based on asset price appreciation and volatility to realize financial capital gains, their investments are highly leveraged and debt driven, their investment targets are highly liquid financial markets worldwide that enable a quick entry, price appreciation, and subsequent just as quick short term profit extraction.

Their client base is predominantly composed of the global finance capital elite – i.e. the roughly 200,000 worldwide ultra and very high net worth individuals with net annual additional income from investment flows of $20 million or more—for whom they invest individually as well as for themselves as shadow bank institutions.

Shadow bank ‘forms’ include private equity firms, hedge funds, asset and wealth management companies, mutual funds, money market funds, investment banks, insurance companies, boutique banks, trust companies, real estate investment trusts – to note just a short list – as well as dozens of other forms and newly emerging initiatives like peer to peer lending networks, online investment funds, and the like.

Shadow banks have been estimated to have investable assets (i.e. relatively short term and liquid) of about $75 trillion globally as of year end 2014, a total that does not include revenue from ‘portfolio’ shadow-shadow banking. That is projected to exceed $100 trillion well before 2020.

The exponential growth of both central banks and shadow banking during the long global boom constitutes a gargantuan increase in the supply of money plus credit relative to available goods and services, which is inflation by definition. This huge supply of virtual wealth has acted to push up asset prices, creating a plethora of asset price bubbles and a cascade of malinvestment based on those price distortions. The explosive growth of shadow banking in particular, following the 2009 bottom, was accompanied by a return to extreme risk complacency and rock bottom interest rates, leading to a frantic search for investment returns in riskier and riskier places. 

Inherently risky emerging markets became a major focus during this time, and the search for outsized returns not only sought out risk, but actively increased it. Volatility provides the momentum that generates trading profits, but it also creates considerable instability. Given that finance is virtual, and that changes in the financial world therefore unfold far more quickly than the real economy can realistically adapt to, large influxes and exoduses of hot money looking for quick profits are very destablizing to target sectors of the real economy, and to entire countries. The phantom wealth generated by the shadow banking bonanza has both created and subsequently fed upon real world destruction:

What China, Argentina, Greece, Venezuela, and Ukraine all share in common is an ongoing struggle with global shadow bankers, who continue to destabilize their financial systems and drive their real economies, at different rates, toward recession and worse….

….Shadow banks and their finance capital elite clients make money when financial asset prices are volatile, i.e. when such prices rapidly rise or fall or both. It is thus in their direct interest to cause asset price volatility and instability—whether in provoking a rapid rise in government bonds rates (Greece), in contributing to the collapse in currencies (Venezuela, Argentina), or in IMF-enforced ‘firesales’ of companies (Ukraine).  Their strategy is to exacerbate, or even create, financial price inflation in the targeted market and financial instruments, be they stocks, junk bonds, real estate, foreign exchange, derivatives, etc. That same financial price instability, however, is what causes havoc with the real economies of countries—like those in southern Europe in recent years, in Asia in the late 1990s, Japan in early 1990s, and which led to the global financial crash of 2008-09 itself….

….Shadow banks generate profits from excess lending and debt creation, from financial speculation, and from creating financial asset bubbles that primarily benefit their wealthy investors….Shadow banks add little to the real economy or real economic growth.  And in the process of generating excess financial profits for themselves and their finance capital elite, they destabilize economies and can often lead to major financial asset collapses, general credit crunches and at times even credit crashes, that in turn lead to deep recessions and prolonged, difficult recoveries….

….Shadow banks are the preferred institutions of the global finance capital elite. They always work to the benefit of that elite, often at the direct expense of the real economy, including non-financial businesses, and always at the expense of working classes who never share in the capital gains but pay the price in slower economic growth and repeated financial-economic crashes.

Recovery? No, Endgame

Since 2009 we have collectively told ourselves that recovery was underway, and this became the mainstream received wisdom. Optimism made a substantial return, even though it was, for insiders, tinged with desperation, and was grounded in the catabolic consumption of peripheral economies. Fears of deflation, which had been widespread during 2008/2009, receded again, and once again deflationist commentators were ridiculed. Commentators returned to speaking of inflationary risks, as they always do after a long enough period of upward momentum, given humanity’s proclivity for extrapolating current trends forward, and relative inability to anticipate trend changes, however obvious they may be if one is paying attention.

The supposed recovery is a temporary fantasy – a smoke and mirrors game grounded in ponzi finance on steroids. The excess claims to underlying real wealth, created during the both the initial boom and the false recovery, are set to evaporate once the extent of our crisis of under-collateralization become evident, and that moment is rapidly approaching. The deflation which was always the obvious endgame of credit expansion, is now underway and picking up momentum. A gigantic pile of IOUs is set to be defaulted upon, and the resulting monetary contraction will slash demand for almost everything, not for lack of desire to purchase or consume, but for lack of ability to pay for the privilege. This will undercut price support for almost everything many years. 

As we wrote in 2011:

In the process of credit expansion, we borrow from the future through the creation of debt. Our focus on virtual wealth has very significant real world effects, as it distorts our decision-making in ways that guarantee bust will follow boom. We bring forward tomorrow’s demand to over-consume today, frantically building out productive capacity in order to satisfy that seemingly insatiable demand.

As money supply increase leads the development of productive capacity during this manic phase, increasing purchasing power chases limited supply and consumer prices rise. Increasing virtual wealth also drives up asset prices across the board, strengthening speculative feedback loops that inevitably strain the fabric of our societies, all too easily to the breaking point….

….Decades of inflation lie behind us. It is deflation – the contraction of the supply of money plus credit relative to available goods and services – that lies ahead….When a credit expansion reaches the point where the debt created can no longer be serviced by a hollowed-out real economy, and the marginal productivity of debt becomes negative, continued growth is no longer possible….

….The process of monetary contraction following a ponzi expansion is implosive because it involves the destruction of virtual value – the fairly abrupt realization that the emperor has no clothes….It is an economic seizure, and its effect is devastating. Credit in its myriad forms represents the vast majority of the money supply, and it is about to lose its money equivalency. This will leave only cash, and that cash will be extremely scarce. Aggravating the effect of crashing the money supply will be a substantial fall in the velocity of money, meaning that money will largely cease to circulate in the economy as people hang on to every penny they can get their hands on….

….Nothing moves in an economic depression. This is the polar opposite of the frenetic activity of the inflationary boom years. Instead of the orgy of consumption to which we have become accustomed, we will experience austerity on a scale we cannot yet imagine.

This is exactly what we are currently seeing places like Greece and Cyprus – the canaries in the coal mine. As much trouble as such places are currently in, however, this is still the thin edge of the wedge even for them. And for places as yet unaffected, the storm is rapidly approaching. Departures from reality can persist only so long as the illusions they are based on retain credibility:

Self-evidently, we are now in the cliff-diving phase, but unlike the bounce after the September 2008 financial crisis, there will be no rebound this time around. That is owing to two reasons. First, most of the world is at “peak debt”. That is, the ratio of total credit market debt to current national income ranges between 350% and 500% in every major economy; and that is the limit of what can be serviced even at today’s aberrantly low interest rates. As Milton Friedman famously observed, markets are ultimately not fooled by the money illusion. In this case, the illusion is that today’s sub-economic interest rates will last forever and that debt carrying capacity has been elevated accordingly. Not true.

Short-term interest rates may be temporarily and artificially pegged at the zero bound by central bankers, but at the end of the day debt carrying capacity is tethered by real economics and normalized costs of money and debt. Accordingly, the central banks are now pushing on a string.  The credit channel of monetary transmission is over and done. The only remaining effect of the residual level of money printing still underway is that ZIRP enables carry trade gamblers to drive financial asset prices ever higher, thereby setting up another thundering collapse of the financial bubbles being generated for the third time this century by the world’s central banks.

We are already witnessing the next phase of financial crisis, and the fear-based contagion is already spreading. However, as John Stuart Mill said in 1867, “Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works.” A vast quantity of capital has been so betrayed during the era of monetary profligacy, mispricing and malinvestment that is now coming to an end, and the coming financial reckoning will reveal the extent of that destruction.

After the Commodity Blow-Off…

The monetary supernova sparked an orgy of consumption, fuelling an explosion of demand for commodities of all kinds and a frantic scramble to supply that demand. In the process, huge distortions were created from which considerable consequences will flow now that the blow-off phase is over:

The worldwide economic and industrial boom since the early 1990s was not indicative of sublime human progress or the break-out of a newly energetic market capitalism on a global basis. Instead, the approximate $50 trillion gain in the reported global GDP over the past two decades was an unhealthy and unsustainable economic deformation financed by a vast outpouring of fiat credit and false prices in the capital markets.

For that reason, the radical swings in commodity prices during the last two decades mark the path of a central bank generated macro-economic bubble, not merely the unique local supply and demand factors which pertain to crude oil, copper, iron ore, or the rest….What really happened is that the central bank instigated global macro-economic bubble ripped commodity pricing cycles out of their historical moorings, resulting in a one time eruption of price levels that had no relationship to sustainable supply and demand factors in the mines and petroleum patch. What materialized, instead, was an unprecedented one-time mismatch of commodity production and use that caused pricing abnormalities of gargantuan proportions.

The erstwhile prolonged frenzy of consumption has created the sense that demand for commodities would be eternally insatiable, but that perception is now being profoundly shaken. It has long been clear that commodity demand would fall enormously during the coming period of deflation and depression, but the illusion of perpetual expansion has been slow to release its grip.

In the summer of 2011 we wrote that commodities were peaking and offered a bearish prognosis in Et tu, Commodities?. At the time this was seen as being quite heretical, as contrarian forecasts at peaks always are. Fear of shortages was rampant, but fear causes market participants to bid up the price in advance of what the fundamentals would justify, opening the door to a major price readjustment, as we saw in 2008. At the time, we explained the nature of commodity tops and what inevitably follows:

As an expansion develops, one can generally expect increasing upward pressure on commodity prices, thanks to both demand stimulation and latterly the perception that prices can only continue to increase. The resulting crescendo of fear – of impending shortages –  is accompanied by the parabolic price rise typical of speculative bubbles, as momentum chasing creates a self-fulfilling prophecy. At the point where almost everyone with the capacity to do so has jumped on the bandwagon, and all agree that the upward trend is set in stone, a trend change is typically imminent. 

We find ourselves still near the peak of the largest credit bubble in history. As faith in many of the more spurious ‘asset’ classes devised by ‘financial innovation’ has been shaken, faith in the ever increasing value of commodities has strengthened. However, commodities are not immune to the effects of a shift from credit expansion to credit contraction, despite justifications for endless price rises, such as the apparently bottomly demand from China and the other BRIC countries. 

Every bubble is accompanied by the story that it is different this time, that this time prices are justified by fundamentals which can only propel prices ever upwards. It is never different this time, no matter what rationalizations exist for speculative fervour. BRIC demand only appears to be insatiable if we make our predictions solely by extrapolating past trends, but that approach leaves us blind to trend changes and therefore vulnerable to running off a cliff. Insatiable demand results from seemingly endless cheap credit, given that demand is not what one wants, but what one can pay for. When credit collapses, so will demand, and with it the justification for higher prices. 

While credit expansion (inflation) is a powerful driver of increasing prices, credit contraction (deflation) is a far more powerful driver of decreasing prices. Credit, having no substance, is subject to abrupt fear-driven disappearance. Confidence and liquidity are synonymous….As contraction picks up momentum, the loss of credit will rapidly lead to liquidity crunch, drastically undermining price support for almost everything. With purchasing power in sharp retreat, however, lower prices will not lead to greater affordability. Purchasing power typically falls faster than price under such circumstances, so that almost everything becomes less affordable even as prices fall.

At the time we called it a peak that would stand for a very long time.

There were commodity peaks across the board in 2011, and despite the supposed on-going recovery from that time, price declines have continued.

Charts: indexmundi.com/commodities

Notice that there was a virtually simultaneous price peak in every case. In some instances it was a secondary peak, following a top in 2008, and in others prices had gone beyond the 2008 levels. Only gold lagged in time, and not by much. This illustrates an important point that we have made before, the prices are not determined by the fundamentals of these industries, but by the ebb and flow of liquidity. Once a sector of the real economy has been thoroughly financialized, it is subject to the boom and bust dynamics of finance, and is no longer driven by it’s own fundamentals. Price swings of huge amplitude are possible in very short timeframes, as in 2008.

Tops in different asset classes can be remarkably co-incident. See for instance this graphic that we have shown before (thanks to Elliottwave.com), demonstrating the ‘All the Same Market” phenomenon with co-incident tops on the same day:

Of course the commodity narrative is also a story of movements in the US dollar. We have always maintained that the dollar was going to see a major rise in a deflationary environment, both as a result of demand for dollars to repay dollar denominated debt, and on a flight to safety into the reserve currency. This position was also contrarian and heretical. US dollar sentiment was extremely bearish in 2011, with the majority seeing only the previous trend and full expecting it to continue. Commentators were calling the dollar toilet paper. That is exactly what one would expect at a bottom. 

The dollar is now receiving additional upward propulsion from the Federal Reserve’s stated goal to raise interest rates, but this is almost certainly less of a factor than a flight to safety, which would occur even at lower rates if driven by sufficient fear. Since interest rates are a risk premium, low rates are a good indication that the asset in question is perceived to be a safe haven. As a flight to safety gets underway in earnest, we should see a flood of money into the USD in a climate of falling interest rates, perhaps even to the point of being marginally negative in nominal terms, at least temporarily. In a climate of extreme fear, investors will pay for the privilege of capital preservation, for so long as the illusion of it lasts. 

Emerging markets, which have collectively borrowed $4.5 trillion USD are going to experience a tremendous squeeze, aggravating the consequences of their bust phase.

Notice that the US dollar began its rise at the same time as commodities, denominated in dollars began to fall. The dollar is part of the all-the-same-markets phenomenon, in that is trend changes coincide with trend changes in other asset classes, but its movements occur in the opposite direction. There are many commentators who therefore regard falling commodity prices purely as a function of a rising dollar, but the situation is not so simple. Correlation is not causation. All values fluctuate relative to one another, and none is a fixed value against which all else can be measured. The dollar is trading on its relatively safe haven status and is therefore increasing, but the commodity decline is by no means simply a dollar story. It is a story of the realization that we have grossly over-built productive and extractive capacity, but that realization is only just beginning to dawn four years after the peak:

Had stockmarkets fallen more than 40% from their peak, the national news bulletins and the mainstream papers would be full of headlines about collapse and calamity….But this is one of the great bear markets. It may seem less important because few people are directly invested in commodities. But in terms of people’s daily lives, commodity prices are very important indeed. The Arab spring started as a response to soaring food prices in North Africa. Rising and falling prices act as a tax rise/cut for western consumers. For commodity producing nations, falling prices mean loss export earnings, lost jobs and currency crises.

Declining Fortunes

Emerging markets and commodity companies are caught in a global economic downdraft, following on from their years of extraordinary boom and consequent over-investment. That misallocation of capital, compounded by the leverage involved, has created an enormous overhang of productive capacity. The sunk costs create an incentive to continue producing and generate at least some revenue, even as a supply glut is already causing prices to collapse. This is a toxic dynamic for a highly leveraged sector, leading to downward spiral of excess inventory and a pancaking debt pyramid:

In the case of the global mining industries, CapEx by the top 40 miners amounted to $18 billion in 2001. During the original boom cycle it soared to $42 billion by 2008, and then after a temporary pause during the financial crisis, reaccelerated once again, reaching a peak of $130 billion in 2013. Owing to the collapse of commodity prices as shown above, new projects and greenfield investments have pretty much ground to a halt in iron ore, met coal, copper and the other principal industrial materials, but there is a catch.

Namely, that big projects which were in the pipeline when commodity prices and profit margins began to roll-over in 2012, are being carried to completion owing to the sunk cost syndrome. This means that available, on-line capacity continues to soar. The poster child for that is the world’s largest iron ore complex at Port Hedland, Australia. The latter set another shipment record in June owing to still rising output in the vast network of iron mines it services——-a record notwithstanding the plunge of iron ore prices from a peak of $190 per ton in 2011 to $47 per ton a present.

In such a climate, commodity company valuations are very vulnerable. They have already fallen substantially, but considering the negative circumstances they face are far closer to their beginning than to their end, it seems highly unlikely that the decline will end any time soon. Talk of capitulation is extremely premature:

Sprott Asset Management’s Rick Rule is one of the smartest guys in the resource investing world — and one of the most reasonable — which has made his interviews of the past few years a little disconcerting. Along with the obligatory positive thoughts on the long-term value of gold and silver and the resulting bright future for the best precious metals miners, he always points out that the sector hasn’t yet endured a capitulation, where everyone just gives up and sells at any price, tanking prices and setting the stage for the next bull market.

Knowing that this kind of existential crisis is still out there has taken the fun out of buying ever-cheaper mining stocks, which of course has been Rule’s point. Just because something is cheap doesn’t mean it can’t get a lot cheaper before its bear market is done….

….Both metals are now below the production cost of most miners, whose shares are cratering on the prospect of some truly horrendous operating results in the coming year. Which sounds a lot like what Rule is describing.

Commodities priced below the cost of production for most producers is exactly what one would expect in a deflation, as a combination of supply glut and lack of purchasing power drastically undercut price support. Our long term forecast at TAE is for an undershoot proportionate to the scale of the preceding overshoot, meaning a price collapse at least down to the cost of the lowest cost producer. Under such circumstances, there would be no investment in the sector for many years – a long period of under-investment proportionate to the previous over-investment. The attempt to avoid the day of reckoning is only adding to the eventual pain:

And that’s where central bank enabled zombie finance comes in. Production cuts and capacity liquidations in virtually every materials sector are being drastically delayed by the continuing availability of cheap finance. So what “extend and pretend” really means is that prices and margins will be driven even lower than would otherwise be the case in the face of excess capacity. Stated differently, the correlate of zombie finance is flattened profits for an unusually prolonged period of time.

Here’s the thing. During the central bank driven doubled-pumped boom, profits margins rose to historically unprecedented levels because scarcity rents were being captured by producers during most of the past 15 years. Now comes the era of gluts and unrents. The casino is most definitely priced as if scarcity rents were a permanent fixture of economic life——when they were actually a freakish consequence of the central bankers’ reign of bubble finance.

Vulnerable Commodity Exporters

Commodity exporting nations, which were insulated from the effects of the 2008 financial crisis by virtue of their ability to export into a huge commodity boom, are indeed feeling the impact of the trend change in commodity prices. All are uniquely vulnerable now. Not only are their export earnings falling and their currencies weakening substantially, but they and their industries had typically invested heavily in their own productive capacity, often with borrowed money. These leveraged investments now represent a substantial risk during this next phase of financial crisis. Canada, Australia, New Zealand, are all experiencing difficulties:

Known as the Kiwi, Aussie, and Loonie, respectively, all three have tumbled to six-year lows in recent sessions, with year-to-date losses of 10-15%. “Despite the fact that they have already fallen a long way, we expect them to weaken further,” said Capital Economists in a recent note. The three nations are large producers of commodities: energy is Canada’s top export, iron ore for Australia and dairy for New Zealand. Prices for all three commodities have declined significantly over the past year, worsening each country’s terms of trade and causing major currency adjustments.

South Africa and Brazil are similarly affected:

Brazil’s real plummeted to a 12-year low of 3.34 to the dollar, reflecting the country’s heavy reliance on exports of iron ore and other raw materials to China. The devaluation tightens the noose on Brazilian companies saddled with $188bn in dollar debt taken out during the glory days of the commodity boom.

Complacency has been rife in these ‘lucky countries’ which have tended to perceive natural limits as someone else’s problem and to regard themselves as impervious to systemic shocks:

This colossal collapse in wealth is symptomatic of the wider economic problem now facing Australia, which for years has been known as the lucky country due to its preponderance in natural resources such as iron ore, coal and gold. During the boom years of the so-called commodities “super cycle” when China couldn’t buy enough of everything that Australia dug out of the ground, the country’s economy resembled oil-rich Saudi Arabia….

….While the rest of the world suffered from the aftermath of the global financial crisis, Australia’s economy – closely tied to China – appeared impervious, with full employment and a healthy trade surplus. However, a collapse in iron ore and coal prices coupled with the impact of large international mining companies slashing investment has exposed Australia’s true vulnerability. Just like Saudi Arabia, which is now burning its foreign reserves to compensate for falling oil prices, Australia faces a collapse in export revenue.

The greater the extent to which an exporting economy has placed all its eggs in one basket, the greater the vulnerability of its economy:

Australia’s export base has narrowed to levels approaching that of a “banana republic,” a former government adviser says, raising the specter of the country’s economic nadir almost 30 years ago.The concentration of shipments abroad is at the highest level in more than 50 years, according to Andrew Charlton, who counselled former Prime Minister Kevin Rudd on economic policy. The nation’s budget is “hostage” to global iron ore prices, with a $10 drop taking up to A$10 billion from forecast revenue, he said. The global iron ore price has dropped more than $12 in the past month, further exposing Australia’s lack of export alternatives….

….”Even some low-income countries like Nepal, Kenya, and Tanzania have greater export diversity than Australia.” His analysis again raises the question of what Australia will fall back on as the resources tide recedes. Exports have gone backwards as a proportion of the economy over the last 15 years in almost every non-resources industry, and services are now too small to offset mining.

Australia’s national business model has for a long time been ‘dig it up and sell it to China as quickly as possible’, but the success of the mining sector in its heyday caused a large appreciation of the currency (the Dutch Disease), which in turn damaged the international competitiveness of the country’s manufacturing base. Manufacturing was increasingly off-shored, hence the inability to revive it now that the currency is falling. Add to that the fact the global trade takes a major hit in times of economic depression, and it is obvious that alternative exports will struggle to pick up pace. In addition, so much of the focus of the domestic economy has come to centre around real estate during the development of its gigantic property bubble, that interest in out-sized profits from property speculation have easily outweighed interest in the normal profits one could expect from re-establishing manufacturing:

“Australian governments have been operating on the assumption that, once the mining boom passed, low interest rates and a falling dollar would be enough to bring the non-resource sectors dancing out of their graves,” Charlton, now director of consultancy AlphaBeta, said in a research report. “Unfortunately, no such resurrection is occurring.” “Australia watched idly as the rust-belt manufacturing suburbs around Sydney and Melbourne were transformed from red-brick factories into red-hot real estate,” he said.

Even erstwhile ‘rock-star economies’ are feeling the pressure to cut interest rates, in the vain hope that beggar-thy-neighbour currency devaluations will be beneficial:

Yesterday, the Reserve Bank of New Zealand slashed borrowing costs for the second time in six weeks even as housing prices continue to skyrocket. A day earlier, its counterpart across the Tasman Sea (already wrestling with an even bigger property bubble of its own) said a third cut this year is “on the table.”

Just one year ago, it seemed unthinkable that officials in Wellington and Sydney, more typically known for their hawkishness and stubborn independence, would join the global race toward zero. But with commodity prices sliding, China slowing and governments reluctant to adopt bold reforms, jittery markets are demanding ever-bigger gestures from central banks. Even those presiding over stable growth feel the need to placate hedge funds, lest asset markets falter. When this dynamic overtakes countries such as New Zealand (growing 2.6%) and Australia (2.3%), it’s hard not to conclude that ultra-low rates will be the global norm for a long, long time.

Contagious instability is spreading from the periphery towards the centre, threatening to convulse the financial world again, with considerable knock-on consequences in the real world:

Less than a decade after a housing/derivatives bubble nearly wiped out the global financial system, a new and much bigger commodities/derivatives bubble is threatening to finish the job. Raw materials are tanking as capital pours out of the most heavily-impacted countries and into anything that looks like a reasonable hiding place. So the dollar is up, Swiss and German bond yields are negative, and fine art is through the roof.

Now emerging market turmoil is spreading to the developed world and the conventional wisdom is shifting from a future of gradual interest rate normalization amid a return to steady growth, to zero or negative rates as far as the eye can see….Indeed, the major monetary powers that are easing — Europe, Japan, Australia and New Zealand — have all suggested rates may stay low almost indefinitely. Those angling to return to normalcy, meanwhile — the Federal Reserve and Bank of England — are pledging to move very slowly. Even nations with rising inflation problems, like India, are hinting at more stimulus….

….So…the central banks will panic. Again. Countries that retain some control over their monetary systems will see their interest rates fall to zero and beyond, while those that don’t will be thrown into some kind of new age hyperinflationary depression. Not 2008 all over again; this is something much stranger.

Stranger indeed, and a far more powerful contractionary impulse than in 2008. While ultra-low rates are characteristic of the current stage, as we stand on the brink, they are not likely to persist into the coming strongly deflationary environment rife with risk. While perceived low risk states may be able to maintain low rates for a while, others will not be so lucky as credit spreads blow out to form self-fulfilling prophecies. In any case, rates may appear low only in nominal terms. In a contractionary environment, where the real rate is the nominal rate minus negative inflation, real interest rates will be high and rising. This will compound the burden imposed by decades of over-leverage, for both companies and countries, to an enormous extent. Indebted ‘lucky countries’ are not going to look so lucky in a few years time.

China – Not Just Another BRIC in the Wall

More than anything, the story of both the phantom recovery and the blow-off phase of the commodity boom, has been a story of China. The Chinese boom has quite simply been an unprecedented blow-out the like of which the world has never seen before: 

China has, for years now, become the engine of global growth. Its building sprees have kept afloat thousands of mines, its consumers have poured billions into the pockets of car manufacturers around the world, and its flush state-owned enterprises (SOEs) have become de facto bankers for energy, agricultural and other development in just about every country. China holds more U.S. Treasuries than any other nation outside the U.S. itself. It uses 46% of the world’s steel and 47% of the world’s copper. By 2010, its import- and export-oriented banks had surpassed the World Bank in lending to developed countries. In 2013, Chinese companies made $90-billion (U.S.) in non-financial overseas investments.

If China catches a cold, the rest of the world won’t be sneezing – it will be headed for the emergency room.

To put China’s construction bonanza in perspective, the country used more cement in 3 years than the USA used in the entire 20th century:

To get a feel for the pace of the development, look at Shanghai’s financial district in 1987 and again in 2013:

The setting is Shanghai’s financial district of Pudong, dominated by the Oriental Pearl Tower at left, and the new 125-story Shanghai Tower, China’s tallest building and the world’s second tallest skyscraper, at 632 meters (2,073 ft) high, scheduled to finish by the end of 2014. Shanghai, the largest city by population in the world, has been growing at a rate of about 10% a year the past 20 years, and now is home to 23.5 million people — nearly double what it was back in 1987.

Photos: Reuters/Stringer, Carlos Barria

Or look into China’s ghost cities, fully equipped with everything, except people:

China’s infrastructure build-out has to be seen to be believed. Fuelled by an exceptional level of corruption in the state-owned enterprise sector, a lack of feedback as to what is and is not a productive investment, perverse incentives for local government to push development and a huge expansion of credit and debt, the boom has created a society of extreme inequality and increasing social pressures:

The richest 70 members of China’s legislature added more to their wealth last year than the combined net worth of all 535 members of the U.S. Congress, the president and his Cabinet, and the nine Supreme Court justices. The net worth of the 70 richest delegates in China’s National People’s Congress, which opens its annual session on March 5, rose to 565.8 billion yuan ($89.8 billion) in 2011, a gain of $11.5 billion from 2010, according to figures from the Hurun Report, which tracks the country’s wealthy. That compares to the $7.5 billion net worth of all 660 top officials in the three branches of the U.S. government.

The income gain by NPC members reflects the imbalances in economic growth in China, where per capita annual income in 2010 was $2,425, less than in Belarus and a fraction of the $37,527 in the U.S. The disparity points to the challenges that China’s new generation of leaders, to be named this year, faces in countering a rise in social unrest fuelled by illegal land grabs and corruption. “It is extraordinary to see this degree of a marriage of wealth and politics,” said Kenneth Lieberthal, director of the John L. Thornton China Center at Washington’s Brookings Institution. “It certainly lends vivid texture to the widespread complaints in China about an extreme inequality of wealth in the country now.”….

….Rupert Hoogewerf, chairman and chief researcher for the Hurun Report, estimates that for every Chinese billionaire the company discovers for its list, there is another one it misses, meaning the gap between the wealth of China’s NPC and the U.S. Congress may be greater still. “The prevalence of billionaires in the NPC shows the cozy relationship between the wealthy and the Communist Party,” said Bruce Jacobs, a professor of Asian languages and studies at Monash University in Melbourne, Australia. “In all levels of the system there seem to be local officials in cahoots with entrepreneurs, enriching themselves, and this has led to a lot of the demonstrations.”


China built like there was no tomorrow, thereby guaranteeing that there will not be for the country in its current form. The raw materials demand was simply staggering:

The torrid demand for commodities during this second wave resulted in part from the need to feed cement, steel, copper, aluminum and hydrocarbons into the maw of China’s massive infrastructure, high rise apartment and commercial building projects and similar construction booms in other emerging market economies. And on top of that was another whole layer of demand for the raw materials needed to build the ships, earthmovers, mining machinery, refineries, power plants and steel furnaces and mills that were directly embodied in the capital spending spree.

Stated differently, the torrid demand for construction steel in China indirectly led to demand for more iron ore bulk carriers, which in turn required more plate steel to supply China’s shipyards which were given the contracts to build them. In short, a capital spending boom creates a self-feeding chain of materials demand——especially when its fuelled by cheap capital costs and the economically false rates of return embedded in long-lived capital assets funded by it.

While it is often referred to as an economic miracle, it will prove to be less of a dream and more of a nightmare as the credit hyper-expansion upon which it rests unravels. In July 2012, we described the situation in Meet China’s New Leader : Pon Zi. As the description implies, the boom was built on a massive expansion of credit and debt:

In the case of China, for example, public and private credit outstanding at the end of 2007 amounted to just $7 trillion or about 150% of its GDP. During the next seven years—-owing principally to Beijing’s maniacal stimulus of domestic infrastructure investment designed to replace waning exports——China’s now completely unhinged credit machine generated new debt equal to triple the 2007 amount, thereby bringing credit outstanding to $28 trillion or nearly 300% of GDP at present….

….Taken together, the combination of unprecedented financial repression in developed market capital markets and the prodigious expansion of domestic business credit in China and the emerging markets elicited a tidal wave of capital investment unlike the world has ever witnessed. This put a renewed round of pressure on commodities that caused a second surge of prices which peaked in 2011-2013….

….And therein lies the origins of the deflationary wave now rocking the global commodity markets. Neither the developed market consumer borrowing binge nor the China/emerging market infrastructure and industrial investment spree arose from sustainable real world economics.

They were artifacts of what history will show to be a hideous monetary expansion that left the developed market world stranded at peak household debt and the emerging market world drowning in excess capacity to produce commodities and industrial goods.

Shadow banking, outside of the formal banking system in the form of trusts, “wealth management products” and foreign-currency borrowings, lies at the heart of the Chinese ponzi scheme, as in the rest of the world, only in China it operates at a completely different scale and speed of expansion than elsewhere: 

A study by JP Morgan Bank in 2012 estimated that the shadow banking sector in China grew from only several hundred billions of dollars in total assets under management in 2008, to more than $6 trillion by the end of 2012. In percentage terms, shadow banks assets accelerated 125% in just the second half of 2009, followed by another 75% growth in 2010. Shadow bank assets grew additional 35% and 33% in each of the two years, 2012-13. By 2013 the total had risen to more than $8 trillion, according to the research arm of Japan’s Nomura Securities company.  Shadow bank total assets rose another 14% and $1 trillion in 2014—to more than $9 trillion….

….At the center of shadow bank instability has been the so-called ‘Investment Trusts’.  According to McKinsey Research, Investment Trusts today account for between $1.6-$2.0 trillion (of the roughly $9 trillion) of all shadow bank assets in China. Trusts’ assets grew five-fold between 2010 and 2013.  Approximately 26% of the Trusts provided credit (and therefore generate debt) to local governments for infrastructure spending, another 29% to industrial and commercial enterprises, another 20% to real estate and financial institutions, and other 11% to investors in stock and bond markets. Local government debt in particular has risen by more than 70% in China since 2010. In other words, shadow bank credit has gone mostly to those sectors of China’s economy where debt has accelerated fastest and produced financial bubbles….

Fictitious, self-feeding private debt growth has become a dominant feature of the Chinese economy for far too long, causing enormous distortions in supply and demand for the pure purpose of continued credit expansion. There is no way that such a huge artificial stimulation of demand could fail to depress demand for almost everything in the years to come:

Zoomlion customers sometimes buy ten concrete mixers when they planned to initially by one or two. They have a perverse incentive to buy more than they need because these concrete trucks are purchased via finance packages supplied by Zoomlion. Then the machines can be garaged and used as collateral to borrow further funds from other lenders. Zoomlion continues to grow while cement sales have plunged. In May, cement output increased 4.3% YoY, down from 19.2% recorded last year.  Zoomlion’s new debt of $22.5B buys roughly 900,000 trucks which could produce enough concrete (at six loads a day) to build over thirty Great Pyramids of Giza a day.

Every sector is infected with these kinds of perverse business practices, steel traders used loans meant for steel projects to speculate in property and stocks, it has been common (apparently) for steel traders to secure loans to buy steel then use this same steel as collateral to borrow funds to invest in property development and the stock market. In many ways this is the steel version of the Zoomlion model.

Lending through the formal banking system is restricted by government’s vain attempts to restrict credit expansion:

During the past two years, 2013-2014, a struggle has been underway between China and its shadow banks….In spring 2013, China tried to slow the asset price bubbles by making loans more expensive, by raising general economy-wide interest rates.  That had unintended, counterproductive effects, however.  It quickly resulted in a credit crunch that slowed the entire economy almost.  Unable to get loans from China’s traditional banks, local governments attempting to continue the infrastructure boom borrowed even more from the shadow banks. Bubbles in housing and infrastructure grew further.

The growth of shadow banking as a means to evade such limits has been greatly enhanced as a result, illustrating the lack of control central governments actually exert of financial expansion and contraction. Where official restrictions exist, credit expansions will find a way to happen anyway, as they have throughout history

Local government is an extremely important player in the infrastructure boom, and consequently in the accumulation of debt, despite persistent central government attempts to rein them in :

Local governments in China take almost exclusive responsibility for urban infrastructure investments and financing. In 2011 China invested the equivalent of 12.5% of GDP in fixed assets for public utilities, infrastructure and facilities. More than 80% of this was sponsored by local governments and their entities. China’s Budget Law imposes strict restrictions on the borrowing powers of local governments. To circumvent this law, local governments have set up around 10,000 Local Government Financing Vehicles (LGFVs) to issue debt and finance infrastructure investment. Local government borrowing rose sharply to finance stimulus packages in the wake of the 2008 financial crisis. By the end of June 2013 the explicit debt load of local governments amounted to RMB 10.9 trillion; local government guaranteed debts, RMB 2.67 trillion; and other contingent debts, RMB 4.3 trillion, with the total around 33% of GDP.

The side-stepping of central government credit control mechanisms has turned local government into a major engine of shadow banking expansion, complete with implicit guarantees that reduce apparent risk despite the dubious nature of many infrastructure projects:

Beijing has tried to contain local-debt growth since at least 2010. But according to IMF estimates, local-government debt reached 36% of GDP in 2013, double its share of GDP in 2008, and will increase to 52% of GDP in 2019. Since the mid-1990s, after some local governments went on borrowing binges to build hotels and golf courses, the central government has banned city halls from selling bonds or borrowing directly from banks. Instead, localities borrow indirectly through so-called local-government-financing vehicles. These entities raise money for local governments to fund roads, subways, airports, housing sites and other projects. Local governments implicitly guarantee the debt, helping the financing firms borrow no matter whether projects make sense.

The exponential growth in the shadow banking in China has been so rapid that in a very few years it has begun to strain the country’s ability to service that debt:

Booming shadow banking growth has pushed China to the outer limits of its ability to keep its economy functioning smoothly. With total leverage in the Chinese economy now topping 280% of gross domestic product, it was clear that credit quality was deteriorating, Primavera Capital Group founder and chairman Fred Hu told delegates at a Fung Global Institute forum….Debt sustainability, the ability to service debts, is a key measure of solvency. Analysis by the McKinsey Global Institute earlier this year showed debt in the Chinese economy had roughly quadrupled between 2007 and the middle of last year to US$28 trillion, leaving it with a debt-to-GDP ratio more than twice that of crisis-wracked Greece.

Authorities recognize the existence of the shadow banking, but, as is the case in the rest of the world, completely fail to understand its significance in terms of systemic risk:

Liu Mingkang, the former chairman of the China Banking Regulatory Commission, told the same forum that time was running out for the government to reform the financial system and liberalise credit markets sufficiently to obviate the need for shadow banking, though he was sanguine on the systemic risks posed….He added that shadow banking must be regarded by policymakers only as a short-term mechanism through which time can be bought to help finance small and medium-sized private enterprises until wholesale reform can be completed to liberalise access to capital markets and bank credit.

Shadow banking is no temporary measure without consequences. It represents a massive build up in unrepayable debt that is already beginning to act as a millstone round the neck of the Chinese economy and will continue to do so for many years, as the momentum towards debt default and economic contraction picks up further. This will be aggravated by the nature of the private debt created during the expansion:

A good deal of that private debt explosion has also taken the form of dangerous short term debt that requires frequent ‘roll over’ and refinancing. By 2014 a third of all new debt created in China was ‘roll over’ refinancing of prior debt. That means that should interest rates rise too far or too fast, many businesses heavily indebted to shadow banks will not be able to roll over that debt, and will have to default. In turn, defaults could result in panic sell offs of financial securities, followed by a general ‘credit crunch’ that will slow the real economy still faster than even at present.

In addition, the debt to GDP ratio is actually far worse than it appears, since GDP is substantially overstated:

During the course of its mad scramble to become the world’s export factory and then its greatest infrastructure construction site, China’s expansion of domestic credit broke every historical record and has ultimately landed in the zone of pure financial madness. To wit, during the 14 years since the turn of the century China’s total debt outstanding–including its vast, opaque, wild west shadow banking system—soared from $1 trillion to $25 trillion, and from 1X GDP to upwards of 3X.

But these “leverage ratios” are actually far more dangerous and unstable than the pure numbers suggest because the denominator – national income or GDP – has been erected on an unsustainable frenzy of fixed asset investment. Accordingly, China’s so-called GDP of $9 trillion contains a huge component of one-time spending that will disappear in the years ahead, but which will leave behind enormous economic waste and monumental over-investment that will result in sub-economic returns and write-offs for years to come. Stated differently, China’s true total debt ratio is much higher than 3X currently reported due to the unsustainable bloat in its reported national income.

Nearly every year since 2008, in fact, fixed asset investment in public infrastructure, housing and domestic industry has amounted to nearly 50% of GDP. But that’s not just a case of extreme of growth enthusiasm, as the Wall Street bulls would have you believe. It’s actually indicative of an economy of 1.3 billion people who have gone mad digging, building, borrowing and speculating.

The leverage that lifted China so high during the boom will crush it without mercy during the bust. Already, declining marginal productivity of debt is a major problem, meaning that it takes more and more debt to generate ever smaller additions to the over-stated GDP:

China has now become an “economy that is actually worth a lot less than they pretend it’s worth,” Ms. Stevenson Yang says. By her estimate, 60 to 70% of new lending is now going to service old debt. In 2006, $1.20 in new credit could stoke $1 in economic growth. Today, it takes over $3. At that rate, it takes a greater than 20% annual expansion in credit to sustain China’s target 7.5% economic growth. “That just means that the problem itself is getting bigger,” said Jonathan Cornish, managing director for Asian operations at Fitch Ratings.

The bust is already underway despite doomed government attempts to prevent it:

China’s stocks tumbled, with the benchmark index falling the most since February 2007, amid concern a three-week rally sparked by unprecedented government intervention is unsustainable. The Shanghai Composite Index plunged 8.5% to 3,725.56 at the close, with 75 stocks dropping for each one that rose. PetroChina Co., long considered a target of state-linked market support funds, tumbled by a record 9.6%. The rout dented investor confidence from Hong Kong to Taiwan and Indonesia, helping send the MSCI Emerging Markets Index to a two-year low.

Monday’s retreat shattered the sense of calm that had fallen over mainland markets last week and raised questions over the viability of government efforts to prop up prices as the economy slows….“Investors are afraid the Chinese government will withdraw supporting measures from the market,” said Sam Chi Yung, a strategist at Delta Asia Securities Ltd. in Hong Kong. “Once those disappear, the market cannot support itself.”

Government action cannot prevent over-valued markets from crashing. It did not work in the 1930s, and it will not work now. Temporary postponement was all that intervention could achieve, and as always, that postponement came at a price, guaranteeing that the inevitable crash will be worse when it does occur. Central banks are not omnipotent. They may appear to be during an expansion when everything is going in a direction people are happy with, so no one asks difficult questions, but during a contraction that they cannot prevent, their powerlessness will become blindly obvious.

The Chinese government is currently attempting to conceal the extent of the accelerating contraction, but official figures are meaningless. Looking behind the scenes makes it clearer why the contagion from China is spreading a wave of deflationary deleveraging across so many sectors globally:

Much of the economic weakness rippling through emerging markets is “made in China”. A slump in Chinese investment growth has hammered global demand for commodities and some manufactured products, triggering a chain reaction that is depressing emerging market exports, deepening deflationary pressures and even sapping consumer demand….

….The magnitude of China’s investment slump this year is likely to have been much greater than official figures show. Beijing’s official monthly data series tracks “fixed asset investment” (FAI), which grew by 11.4% year on year in June — not the sort of figure that might be expected to elicit alarm. But FAI readings are inflated by several elements — such as sales of land and other assets — that do not add to the country’s productive capital stock. A cleaner measure of how much companies are investing in boosting their productive capacities — and therefore in their futures — is gross fixed capital formation (GFCF), which strips out extraneous items to capture capital goods deployment. By this yardstick, investment is tanking….When viewed from this perspective, China’s slumping demand for iron ore, copper, alumina and other commodity imports from Latin America, Africa and elsewhere is easier to comprehend.

….Local government financing vehicles (LGFVs) — key agents of infrastructure investment at the grassroots level — are reaping an average return on assets on infrastructure projects of around 3%, compared with an average interest rate on loans of around 7%.

Warnings regarding Chinese banking instability and the inevitability of a crash are being made, but remain relatively rare and generally go unheeded even in the face of considerable evidence.

In a country where the banks, even the largest, are not known for openness, Charlene Chu has warned since 2009 about a rapid expansion in lending that has seen something close to $15 trillion (£9.1 trillion) of credit created, fuelling a property and infrastructure boom that has no equal in history.

To say her warnings have been unusual is to underestimate quite how important her contributions have been. Chu has explained the creation – from a standing start just five years ago – of a shadow banking industry in China that today is responsible for as many loans in terms of volume as the country’s entire mainstream financial system. Speaking for the first time since her departure from Fitch last year, Chu, who has taken a new job at Autonomous, the respected independent research firm, says she remains adamant that a Chinese banking collapse of some description remains not just an outside chance, but a certainty. “The banking sector has extended $14 trillion to $15 trillion in the span of five years. There’s no way that we are not going to have massive problems in China,” she says.

The inevitable systemic banking crisis will be compounded in its impact by the inevitable contraction of the real economy, with China taking the lead in both areas. It will be a world of knock-on consequences and of cascading system failure. See for instance the excellent example of the Chinese steel industry, which is set not only to collapse domestically, but to propagate economic contraction globally.

Nowhere is this more evident than in China’s vastly overbuilt steel industry, where capacity has soared from about 100 million tons in 1995 to upwards of 1.2 billion tons today. Again, this 12X growth in less than two decades is not just red capitalism getting rambunctious; its actually an economically cancerous deformation that will eventually dislocate the entire global economy.  Stated differently, the 1 billion ton growth of China’s steel industry since 1995 represents 2X the entire capacity of the global steel industry at the time; 7X the size of Japan’s then world champion steel industry; and 10X the then size of the US industry.

Already, the evidence of a thundering break-down of China’s steel industry is gathering momentum. Capacity utilization has fallen from 95% in 2001 to 75% last year, and will eventually plunge toward 60%, resulting in upwards of a half billion tons of excess capacity. Likewise, even the manipulated and massaged financial results from China big steel companies have begin to sharply deteriorate. Profits have dropped from $80-100 billion RMB annually to 20 billion in 2013, and are now in the red; and the reported aggregate leverage ratio of the industry has soared to in excess of 70%.

But these are just mild intimations of what is coming. The hidden truth of the matter is that China would be lucky to have even 500 million tons of annual “sell-through” demand for steel to be used in production of cars, appliances, industrial machinery and for normal replacement cycles of long-lived capital assets like office towers, ships, shopping malls, highways, airports and rails.  Stated differently, upwards of 50% of the 800 million tons of steel produced by China in 2013 likely went into one-time demand from the frenzy in infrastructure spending.

Indeed, the deformations are so extreme that on the margin China’s steel industry has been chasing its own tail like some stumbling, fevered dragon. Thus, demand for plate steel to build dry bulk carriers has soared, but the underlying demand for new bulk carrier capacity was, ironically, driven by bloated demand for the iron ore needed to make the steel to build China’s empty apartments and office towers and unused airports, highways and rails.

In short, when the credit and building frenzy stops, China will be drowning in excess steel capacity and will try to export its way out— flooding the world with cheap steel. A trade crisis will soon ensue, and we will shortly have the kind of globalized import quota system that was imposed on Japan in the early 1980s. Needless to say, the latter may stabilize steel prices at levels far below current quotes, but it will also mean a drastic cutback in global steel production and iron ore demand.

And that gets to the core component of the deformation arising from central bank fueled credit expansion and the drastic worldwide repression of interest rates and cost of capital. The 12X expansion of China’s steel industry was accompanied by an even more fantastic expansion of iron ore production, processing, transportation, port and ocean shipping capacity.

This is only one industrial sector, but the picture painted applies to many others. The flawed state development model in China, like the Japanese counterpart which preceded it in the 1980s, led to credit explosion and consequent mal-investment in over-production on a grand scale. As with Japan, painful consequences will follow, but this time the impact will be truly global.

Caofeidian lies a three-hour drive east of Beijing, a Chinese industrial dream jutting into the sea. A decade ago, it was a pretty coast whose shallow waters were dotted with fishing vessels. Today, it’s a manufacturer’s paradise in the making, its eight-lane roads connecting sprawling factories to a vast port. Named after a former imperial concubine, it was a place of feverish fantasy, where borrowed money fuelled a vast reclamation effort to create 200 square kilometres of land and build something new….

….But the loans that allowed all that spending have just 50% odds of being paid back, says an independent research group that has spent years studying Caofeidian. The stakes are enormous. Caofeidian was a project of national importance for China, a “flagship,” according to Jon Chan Kung, chief researcher at Anbound, a Beijing think tank. “If this project fails, it proves that the major model driving China’s development has also failed.”

A New World Disorder

Our long global boom stands on the brink of a major reversal, the consequences of which will ricochet around the world as the credit pyramid pancakes. The endgame of a monetary supernova is credit implosion, and it does not play out as a slow squeeze. We are going to see some dramatic movements in the financial world, followed by a cascade of similarly dramatic events in the real economy, in the not too distant future. The process begins with the deflation that is already underway, with monetary contraction that leads to falling prices across the board, crushing companies and countries along the way and leading straight into economic depression. 

Deflation and depression are mutually reinforcing, meaning the downward spiral will continue for many years. We have been warning about this dynamic since 2008, and have already seen the liquidity crunch start to play out in many parts of the world. Once it hits critical mass, and it can do so very quickly, momentum will increase greatly. China is the biggest domino about to fall, and from a great height as well, threatening to flatten everything in its path on the way down. This is the beginning of a New World Disorder…