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Debt Rattle May 2 2015

May 022015

May 2, 2015 Posted by Raúl Ilargi Meijer at 10:36 am Finance Tagged with: bubble, democracy, house of cards, Iceland, Merkel, murders, NATO, NSA, Odessa, TTP 11 Responses »

NPC National Service Co. front, 1610 14th Street N.W., Washington DC 1920

• Grantham Says Fed “Bound And Determined” To Engineer “Full-Fledged Bubble” (ZH)

• Our Banking System is a Giant House of Cards (Lynn Parramore)

• For China To Start All Over, The Dinosaurs Will Have To Change (Satyajit Das)

• Your No. 1 End-Of-The-World Investing Strategy (Paul B. Farrell)

• How Ben Bernanke Let Down America (MarketWatch)

• Quick Breakthrough At Brussels Group Looks Unlikely (Kathimerini)

• The Coming Defaults Of Greece (Vox.eu)

• FastTrack TPP: The Death of Sovereignty, Separation of Powers and Democracy (JF)

• Iceland Pirate Party Popularity Rivals Government Coalition (RT)

• Angela Merkel’s NSA Nightmare Just Got A Lot Worse (Don Quijones)

• Rioters In Milan Smash Shopfronts, Throw Smoke Bombs As Expo Opens (CNBC)

• Russia Preparing Offensive In Ukraine, NATO General Imagines (Zero Hedge)

• Kiev Is Making No ‘Tangible Steps’ To Investigate Year-Old Odessa Massacre (RT)

• Kim Dotcom Awarded Millions For Legal Bills And Living Expenses (TF)

I think people should stop calling this a ‘market’.

• Grantham Says Fed “Bound And Determined” To Engineer “Full-Fledged Bubble” (ZH)

Back in November, we highlighted the accuracy of Jeremy Grantham’s predictions about the trajectory of the central bank liquidity-fueled equity rally. In terms of how far the market can run before reality and gravity finally reassert themselves, bursting the centrally planned bubble and prompting a 2008-style “correction”, Grantham defined a “full-fledged” bubble as S&P 2250 and warned that a retracement of some 50% was possible depending on how assertive the Fed’s response to its real favorite economic indicator (stocks) turns out to be.

In GMO’s latest quarterly letter, Grantham is out reiterating his view that although US stocks may not have reached their peak in what he accurately calls a “strange, manipulated world” (we prefer “new paranormal”), he’s sticking with the idea that “bubble territory” is likely just around the corner as the Yellen Fed is “bound and determined” to facilitate an inexorable rise in asset prices. He also notes that the Yellen seems no more inclined than her predecessor to take Jeremy Stein’s advice on being careful not to adopt an “implicit policy of inaction” when it comes to bubbles. Here’s more:

The key point here is that in our strange, manipulated world, as long as the Fed is on the side of a strong market there is considerable hope for the bulls. In the Greenspan/Bernanke/Yellen Era, the Fed historically did not stop its asset price pushing until fully- fledged bubbles had occurred, as they did in U.S. growth stocks in 2000 and in U.S. housing in 2006. Both of these were in fact stunning three-sigma events, by far the biggest equity bubble and housing bubble in U.S. history.

Yellen, like both of her predecessors, has bragged about the Fed’s role in pushing up asset prices in order to get a wealth effect. Thus far, she seems to also share their view on feeling no responsibility to interfere with any asset bubble that may form. For me, recognizing the power of the Fed to move assets (although desperately limited power to boost the economy), it seems logical to assume that absent a major international economic accident, the current Fed is bound and determined to continue stimulating asset prices until we once again have a fully-fledged bubble. And we are not there yet.

“We are failing to take simple steps and at the same time undertaking extremely costly steps with doubtful benefits.”

• Our Banking System is a Giant House of Cards (Lynn Parramore)

Anat Admati teaches finance and economics at the Stanford Graduate School of Business and is co-author of The Bankers’ New Clothes, a classic account of the problem of Too Big to Fail banks. Admati warns that we are not doing nearly enough to confront a bloated, inefficient, and dangerous financial system. The system can’t fix itself. Here’s what you need to know.

Lynn Parramore: How would you describe the problem of Too Big to Fail banks. Whey does it matter to an ordinary person?

Anat Admati: Too Big to Fail is a license for recklessness. These institutions defy notions of fairness, accountability, and responsibility. They are the largest, most complex, and most indebted corporations in the entire economy. We all have to be really alarmed by the fact that not only do we still have such institutions, but many of them are ever-larger and more complex and at least as dangerous, if not more so, than they were before the financial crisis. They are too big to manage and control. They take enormous risks that endanger everybody. They benefit from the upside and expose the rest of us to the downside of their decisions. These banks are too powerful politically as well. As they seek profits, they can make wasteful and inefficient loans that harm ordinary people, and at the same time they might refuse to make certain business loans that can help the economy.

They can even break the laws and regulations without the people responsible being held accountable. Effectively we’re hostages because their failure would be so harmful. They’re likely to be bailed out if their risks don’t turn out well. Ordinary people continue to suffer from a recession that was greatly exacerbated or even caused by recklessness in the financial system and failed regulation. But the largest institutions, especially their leaders — even in the failed ones — have suffered the least. They’re thriving again and arguably benefitting the most from efforts to stimulate the economy. So there’s something wrong with this picture. And there’s also increasing recognition that bloated banks and a bloated financial system – these huge institutions—are a drag on the economy.

LP: Have we made any progress in dealing with the problem?

AA: The progress has been totally unfocused and insufficient. Dodd-Frank claims to have solved the problem and it gives plenty of tools to regulators to do what needs to be done (many of these tools they actually already had before). But this law is really complex and the implementation of it is very messy. The lobbying by the financial industry is a large part of the reason that the law has been implemented so poorly and inefficiently with so much difficulty. We are failing to take simple steps and at the same time undertaking extremely costly steps with doubtful benefits. So we’ve had far from enough progress. We are told things are better but they are nowhere near what we should expect and demand. Much more can be done right now.

LP: Banks, compared to other businesses, finance an enormous portion of their assets with borrowed money, or debt – as much as 95%. Yet bankers often claim that this is perfectly fine, and if we make them depend less on debt they will be forced to lend less. What is your view? Would asking banks to rely more on unborrowed money, or equity, somehow hurt the economy?

AA: Sometimes when I don’t have time to unpack everything I use a quote from a book called Payoff: Why Wall Street Always Wins by Jeff Connaughton. He relates something Paul Volcker once said to Senator Ted Kaufman: “You know, just about whatever anyone proposes, no matter what it is, the banks will come out and claim that it will restrict credit and harm the economy…It’s all bullshit.” Here’s one obvious reason such claims are, in Volcker’s vocabulary, bullshit: Lending suffered most when banks didn’t have enough equity to absorb their losses in the crisis — and then we had to bail them out. The loss they suffered on the subprime fiasco was relatively small by comparison to losses to investors when the Internet bubble burst, but there was so much debt throughout the system, and indeed in the housing markets, and so much interconnection that the entire financial system almost collapsed. That’s when lending suffered. So lending and growth suffers when the banks have too little equity, not too much.

Now, banks naturally have some debt, like deposits. But they don’t feel indebted even when they rely on 95% debt to finance their assets. No other healthy company lives like that, and nobody, even banks, needs to live like that — that’s the key. Normally, the market would not allow this to go on; those who are as heavily indebted feel the burden in many ways. The terms of the debt become too burdensome for corporations, and reflect the inefficient investment decisions made by heavily indebted companies. But banks have much nicer creditors, like depositors, and with many explicit and implicit guarantees, banks don’t face trouble or harsh terms. They only have to convince the regulators to let them get away with it. And they do. So the abnormality of this incredible indebtedness is that they get away with it. There’s nothing good about it for society. If they had more equity then they could do everything that they do better —more consistently, more reliably, in a less distorted fashion.

This will not happen, because the leaders themselves are the biggest dinosaurs. And they’re not about to give up their grip on power.

• For China To Start All Over, The Dinosaurs Will Have To Change (Satyajit Das)

Central to China’s agenda of driving growth through economic reform is a shift from debt-driven investment to consumption. Since the 1980s, investment has risen from 35% of GDP to 45 to 50%. China’s annual infrastructure spend is far greater than that of the US and Europe but also of other emerging markets. It is double that of India and around four times that of Latin America. The country’s investment levels are also running at 10 to 15% of GDP – higher than in comparable countries such as Japan and South Korea at the equivalent stages of their development. In recent years, Beijing has sought to rebalance the share of GDP contributed by consumption and investment, but the task is difficult.

First, as the analyst Michael Pettis has repeatedly stated, the level of consumption growth needed to rebalance China is formidable. That rate has not been static, running at around 8% a year over the past decade. But growth in consumer spending has been slower than that in the overall economy and the increase in gross fixed investment – an average annual growth of more than 13%, which resulted in the share of private consumption in GDP falling to 35% from 45 to 50%. If China grows at 8% a year, consumption needs to expand by around 11% (3% above growth) to increase the share of consumption from 35% to 36% of GDP in a year. Assuming a growth rate of 8% and consumption increases of 11%, it would take about five years to increase consumption to 40% of GDP. If growth slows, the difficulty of the task increases.

Second, legacy issues of rapid expansion and excessive investment will need to be managed. Many projects have dubious economics and will not generate sufficient revenues to repay the borrowings used to finance them, resulting in potential losses to lenders.

Third, boosting consumption will reduce savings, affecting the deposit base and cost of funding at Chinese banks, which will reduce their flexibility in managing rising losses on bad loans. It will also require a significant boost in household income, and this will affect the profitability of Chinese companies, which already operate on thin margins.

Fourth, the rebalancing will result in slower growth, at least during the period of transition. A move away from investment-driven growth also requires reform of China’s state-owned enterprises (SOEs). China has around 150,000 SOEs, which control around 50% of industrial assets and employ around 20% of the workforce.

Farrell misses out on the no. 1: people and communities.

• Your No. 1 End-Of-The-World Investing Strategy (Paul B. Farrell)

Quarterly reports are hot news today. Listen: “While the end-of-the-world scenario will be rife with unimaginable horrors,” predicts the CEO of a major Wall Street bank at a shareholders meeting, “we believe that the pre-end period will be filled with unprecedented opportunities for profit.” That message comes from one of Robert Mankoff’s popular New Yorker cartoons, and it accurately captures the winning strategy used by most successful Wall Street bankers. But the real successful strategists have both, balancing the two: short-term opportunities for profit plus a vision of the future, the long-term megatrends that impact returns today as well as tomorrow. Here’s an example of this strategy, hedging long risks while playing a winning short game.

Here’s one strategy based on the 12 megatrends in Jared Diamond’s book “Collapse: How Societies Chose to Fail Or Succeed.” So you’d be building a portfolio that balances short-term opportunities within Diamond’s megatrends structure, picking stocks that fit near-term the best investment parameters for success in a society that’s risking a collapse:

1. Water
Diamond warns: “Most of the world’s freshwater in rivers and lakes is already being used for irrigation, domestic and industrial water,” transportation, dams, fisheries and recreation. Water problems destroyed many earlier civilizations: “Today over a billion people lack access to reliable safe drinking water.” By 2015 two-thirds of the world will live in water-stressed countries. Water will trade like oil futures today. More and more wars will be fought over water and other basic resources concluded a 2003 Pentagon report predicting that “warfare will define human life by 2020.

2. Food
The United Nations says the global food crisis is a “silent tsunami.” Two billion people, mostly poor, depend on fish and other wild foods for protein. Their supplies have “collapsed or are in steep decline,” forcing use of costly animal proteins. The rise in food prices is making it worse for billions living below poverty levels. In “The End of Plenty,” National Geographic warns “synthetic fertilizers, pesticides, and irrigation, supercharged by genetically engineered seeds” is failing. A joint World Bank/UN study “concluded that the immense production increases brought about by science and technology the past 30 years have failed to improve food access for many of the world’s poor.” Time warns that our “addiction to meat” has led to farming that’s “destructive of the soil, the environment and us.”

3. Farmland
Crop soils are “being carried away by water and wind erosion at rates between 10 to 40 times the rates of soil formation.” With forests, the soil-erosion rate is “between 500 and 10,000 times” the replacement rate, a trend accelerated by today’s new age of the 100,000-acre megafires. Ceres and Chess are hedge funds that own many small farms.

4. Forests
We are destroying natural habitats and rain forests at an accelerating rate. Half the world’s original forests have been converted to urban developments. A quarter of what remains will be converted in the next 50 years.

How America lets down Americans.

• How Ben Bernanke Let Down America (MarketWatch)

Don’t say Ben Bernanke didn’t do anything for unemployment. After all, the former Federal Reserve chairman now has three jobs. On Wednesday, Pacific Investment Management Co., or Pimco, announced — via Twitter, of course — that Bernanke had signed on as a senior adviser to the fund company known for its bond investing. Pimco joins the hedge fund Citadel and the Brookings Institution as Bernanke’s post-Fed effort to put food on the table. While Bernanke has sought to underplay or, more accurately, not disclose how much he’s being paid by these firms, it’s highly unlikely he will have to ask for public assistance. Speaking of which, just how good is that unemployment office near the Fed and Treasury Department?

We’re just teasing, of course. Bernanke, like any other public servant, has a right to work after he leaves government. And since the Fed is a quasi-governmental institution and has been accused of serving Wall Street’s interests, is this as much of a radical transition as it may appear at first glance? On the other hand, isn’t this endless pattern, known as the “revolving door” where senior regulators leave to join the firms they regulated only a few months or weeks ago, getting a little tired? Timothy Geithner, a regulator cozy with Wall Street, goes to head the Treasury Department where he’s criticized for bailing out Wall Street and almost no one else, and then leaves public service for a private equity firm, Warburg Pincus, with deep ties to banks.

Get out, you Greeks!

• Quick Breakthrough At Brussels Group Looks Unlikely (Kathimerini)

Greece’s hopes of an emergency Eurogroup being called as early as Monday to confirm the progress in Brussels Group talks, and thereby possibly prompting the European Central Bank to allow Athens to issue more treasury bills to relieve its liquidity problem, appear to be misplaced. Several European Union officials have told Kathimerini that it is unlikely eurozone finance ministers will be in a position to discuss the state of negotiations at the beginning of the week. Greece’s lenders insist that there must be a staff-level agreement on the range of measures being demanded in return for €7.2 billion in bailout funding before the matter can be referred to the Eurogroup.

Athens, though, hopes that there can be an initial agreement on a bare minimum of reforms that would prompt the ECB to increase its €15 billion ceiling on the level of Greek T-bills that can be issued and allow local banks to increase their exposure to this form of debt. The first two days of the Brussels Group deliberations, which began on Thursday, confirmed that there is a substantial distance separating Greece and its lenders. For instance, they differ on macroeconomic projections. Athens still believes growth this year can reach 1.2 to 1.4% and that this would lead to a primary surplus of 1.2%. Creditors see these projections as extremely optimistic.

Also, Athens is willing to go ahead with some but not all of the privatizations planned for this year, bringing in projected revenues of €1.5 billion, which the institutions also see as being overestimated. The target for revenues from sell-offs this year had been €2.2 billion The government looks set to keep the single property tax (ENFIA) this year despite its election pledge to scrap the highly unpopular levy, but there is still a disagreement over the value-added tax increase being demanded by creditors. The institutions believe that between €2 and €3 billion of new fiscal measures will be needed this year for Greece to hit its targets.

“In the longer run, however, a much-depreciated drachma could lift the Greek economy and, of course, the country might appreciate monetary independence..”

• The Coming Defaults Of Greece (Vox.eu)

When thinking about Greece’s dilemma, two facts from Reinhart and Rogoff (2009) research are highly relevant:
• Defaults on public debts are pretty mundane events; and
• Greece is historically the world’s leading serious defaulter.

What makes the coming event interesting is that it will be the first time that a default occurs within a monetary union. The crucial observation is that there is no automatic link between a default and monetary-union membership. As we know from previous experiments of government default within the dollar monetary union – the defaults of Orange County in California and Detroit in Michigan – a sub-central government can default and keep the currency. The unique characteristics of such events are that: 1) an exchange-rate depreciation cannot help shift expenditure to the defaulting region’s production; and 2) there is no local central bank to provide liquidity to both the government and commercial banks during the hard phase of the default. The Greek government might be tempted to recover its own currency but the short-run costs are likely to far exceed the short-run benefits.

An idea of what would await Greece is provided by Levy Yeyati (2011) in his description of how Argentina gave up its currency board link to the US dollar, an easier case given that the national currency was already in place. The Argentinian example should warn the Greek authorities of the political turmoil that could follow a default. In the longer run, however, a much-depreciated drachma could lift the Greek economy and, of course, the country might appreciate monetary independence following its wrenching experience inside the Eurozone. Basically, the trade-off is a major shock and one more year of misery versus the removal of Eurozone membership shackles forever. The balance of benefits is difficult to evaluate since it depends very much on institutional issues that are not clear now.

The key questions are:
• Will Greece be able to finally establish on its own fiscal discipline and will its central bank deliver high-quality monetary policy?
• Will the Eurozone draw all the lessons from a Grexit and amend its policies and governance?

In the short run, after a first default, even a partial one, the Greek government will have to balance its books because no one will lend anything any more. ‘Balancing the books’ can mean different things, however.

• One option is to run an overall balanced budget, thus continuing to service the debt after the initial wave of defaults.

The latest European Commission forecasts for 2015 are for a surplus of 1.1% of GDP, after a deficit of 2.5% last year. This might be optimistic as tax receipts seem to have slowed down. Another option is to balance the primary budget, which means no servicing of the debt.

“..the death of National Sovereignty, State Sovereignty, Separation of Powers, and Democracy..”

• FastTrack TPP: The Death of Sovereignty, Separation of Powers and Democracy (JF)

Ellen Brown has called the TPP “the death of the Republic.” It certainly is that. But, I think I’ve shown that it is the death of National Sovereignty, State Sovereignty, Separation of Powers, and Democracy, as well. These impacts on governance and politics are even more important, I believe, than its economic ones, since it from these that our benefits, both economic and non-economic flow. The elevation of the principle of “expectation of profits” above all other principles including the principles of “public purpose,” “consent of the governed,” “the general welfare,” and “separation of powers,” is tantamount to the overthrow of democracy, preserving its form in national level elections, but emptying its elections of meaningful content in mandating change and in conferring legitimacy on national authorities.

I’ve said previously that the rule of the TPP, even if passed over the mushrooming opposition from all segments of American society except the uncritical globalists, will never be viewed as legitimate in the United States and will also always be viewed as tyranny for as long as we live under it. This problem will become increasingly severe the larger, more frequent, and more outrageous ISDS awards defending the “expectations of profits” of multinational become. That makes those who want to pass the TPP guilty of conspiracy to create tyrannical rule of the international few over the people of the United States and other TPP member nations. Eventually, I believe that a vote for the TPP will be viewed as vote to betray the Constitution and a violation of the oath of office of any who vote that way.

How can there be any other outcome when an action taken in office destroys National Sovereignty, State Sovereignty, Separation of Powers, and Democracy with a single vote.

A sudden surge.

• Iceland Pirate Party Popularity Rivals Government Coalition (RT)

The Pirate Party of Iceland, which has the smallest faction in the national parliament after the 2013 election, is now almost as popular as the two ruling coalition parties combined, the latest opinion poll showed. The party would score 30.1% of votes in Iceland if a general election was held now, the Icelandic National Broadcasting Service (RUV) reports citing a Gallup poll. Iceland’s two ruling parties – the Independent Party and the Progressive Party – have 22.9% and 10.1% support respectively, scoring less than 3% points ahead of the Pirates. The Pirate Party experienced an astounding surge of popularity in Iceland. In 2013, polls indicated it would barely score 5% of votes needed to win parliamentary seats. The party’s approval rating in January was roughly the same.

An early March Gallup poll showed its popularity had grown to over 15%, beating the Bright Future party. In less than two months the Pirate Party doubled its rating. “People are starting to realize that the whole system is corrupt, not just a few politicians,” Helgi Hrafn Gunnarsson, Pirate Party’s chair and one of its three MPs told Vísir news website in March. “They don‘t trust it at all. I think they appreciate it when someone points this out.” Responding to the latest poll, Gunnarsson said he was glad to see such a result but expected it to rebound somewhat in the weeks to come. He added there is still some time to go to the next election in Iceland, which is scheduled for 2017. The same opinion poll showed a 32% approval of the government by Icelanders, compared to 37% in March. Among the latest big decisions of the government is the March withdrawal of its bid to join the European Union.

“The phrase “shameless hypocrisy” comes to mind.”

• Angela Merkel’s NSA Nightmare Just Got A Lot Worse (Don Quijones)

Angela Merkel, Germany’s most successful and popular politician, could be in serious trouble, after revelations that Germany’s national intelligence agency, the BND, has been spying on key European assets on behalf of US intelligence. Those “assets” include top French officials, the EU’s headquarters, the European defense corporation EADS, the helicopter manufacturer Eurocopter and even German companies. To wit, from Der Spiegel:

In 2008, at the latest, it became apparent that NSA selectors were not only limited to terrorist and weapons smugglers… But it was only after the revelations made by whistleblower Edward Snowden that the BND decided to investigate the issue. In October 2013, an investigation came to the conclusion that at least 2,000 of these selectors were aimed at Western European or even German interests.

Today, the German foreign intelligence agency is accused of processing over 40,000 spy requests from the NSA, many of which represent a clear violation of the Memorandum of Agreement that the US and Germany signed in 2002. Washington and Berlin agreed at the time that neither Germans nor Americans — neither people nor companies or organizations — would be among the surveillance targets. The scandal could be particularly damaging for the Minister of Interior Thomas de Maiziere, whose ministry is accused of misleading parliament after claiming, as recently as April 14, to have no knowledge of alleged US economic spying in Europe, and of Germany’s alleged involvement.

For Merkel, it is a dizzying reversal of roles and fortunes. In 2013 she was arguably the most high-profile victim of NSA surveillance when it was revealed that the NSA had targeted her cellphone. When confronted with Edward Snowden’s allegations of US National Security Agency mass surveillance of European citizens, Merkel famously said that “spying on friends is just not on.” According to official accounts, she even placed a “strongly worded phone call” to US President Barack Obama. At the time the scandal was a political boon for Merkel, with 62% of Germans approving of her “harsh reaction”, according to a survey by polling institute YouGov. Now the tables have turned. If Merkel’s government is found to have had prior knowledge of the BND’s spying on the French government, citizens, and companies, its behavior in the wake of the phone-tapping revelations will be cast in a starkly different light. The phrase “shameless hypocrisy” comes to mind.

While the BNS is taking most of the flak, with some pundits even questioning whose interests it serves, questions are being raised about just how much Merkel’s government knew about the surveillance program. “At least since the Snowden revelations in 2013, all those involved at all levels, including the Chancellery, should have been suspicious of the cooperation with the NSA,” Konstantin von Notz, the senior Green Party member on the NSA investigative committee, told Der Spiegel.

Italy hates the Milan Expo. For good reason.

• Rioters In Milan Smash Shopfronts, Throw Smoke Bombs As Expo Opens (CNBC)

Milan has been waiting since 2008 for this day and now it has finally come—but takeoff for the World Expo 2015 looks to be overshadowed by violent protests. The turnstiles and doors officially opened on Friday in Italy’s commercial and fashion capital. But opening day excitement for the six-month-long commercial event wasn’t necessarily present among the crowds on Friday. The wet weather may have dampened the number of visitors to the event on its first day—with noticeably empty entrances and security checkpoints. Meanwhile, thousands of protesters marched through the streets of Milan behind a banner reading “No Expo, Eat the Rich,” according to Reuters. The No-Expo movement has been critical of the amount of money the government has poured into the event, when there are fears of austerity and cuts to public services.

A large anti-expo march through the center of Milan was overtaken by anarchists groups that smashed shopfronts and clashed with police. There were several banks with smashed-in doors and windows and the streets were strewed with detritus. Teargas was used by riot police to try and disperse parts of the crowd. Although most of the march was peaceful, around 200 demonstrators threw rocks, in addition to setting off flare and smoke bombs. A large six-story building was torched, as well as the ground floor of a two-story building. At least six cars were burnt and fire crews were deployed at multiple spots across the city. AP television footage appeared to show police using water cannons on protesters.

Friday is Labor Day, also known as May Day, and is a traditional occasion for anti-capitalist protests. The Expo is bringing together 145 countries from around the world with the theme “Feeding the Planet, Energy for Life.” The organizers are expecting up to 20 million visitors during the length of the Expo and as many as 250,000 on a particularly busy day. However, estimates for attendee numbers on Friday were only in the tens of thousands. Italy is hoping for a big economic boost because of the Expo, which is held every five years in different world location and is designed to showcase innovation. Some say the Milan Expo could generate up to $10 billion. But the event has come under criticism, particularly for skyrocketing costs and a number of corruption scandals.

“Note that Breedlove has managed to pull off what we thought was a linguistic impossibility: his statement is contradictory, vague, and definitive all at once.”

• Russia Preparing Offensive In Ukraine, NATO General Imagines (Zero Hedge)

Just a day after the US Navy said it was prepared to escort US-flagged cargo ships through the Strait of Hormuz as a precautionary measure after Iran supposedly fired on and subsequently seized a ship flying the Marshall Islands flag, we get still more sabre rattling in what has become a global staring match between the US on one side and Russia, Iran, and China on the other, with points of contention ranging from territorial sovereignty in Eastern Europe, to man-made islands in the South China Sea, to nuclear energy, to cyber warfare. This time it’s U.S. Air Force General and NATO supreme allied commander Philip Breedlove ratcheting up the rhetoric (and perhaps suggesting that the Kremlin is correct in its assessment of US foreign policy) by suggesting to the Senate that Russia is planning to shatter what remains of the fragile ceasefire in Ukraine by launching an imminent offensive. Via Reuters:

Russia’s military may be taking advantage of a recent lull in fighting in eastern Ukraine to lay the groundwork for a new military offensive, NATO’s top commander told the U.S. Congress on Thursday. U.S. Air Force General Philip Breedlove, the NATO supreme allied commander, said Russian forces had been seeking to “reset and reposition” while protecting battlefield gains, despite a fragile ceasefire agreed in February.

And while the general had trouble explaining exactly how he came to this conclusion based on the evidence he had observed, he did come prepared with plenty of vague soundbites which, although largely devoid of any real meaning, sounded scary enough to get the attention of the media and will probably play well with the 348 members of the House who not long ago voted to provide lethal aid to Kiev. Here are some excerpts from the DoD press release:

“Many [Russian] actions are consistent with preparations for another offensive,” he added. Russia is aggressive in all elements of national power – diplomatic, informational, economic, and its military, the general said. “It would not make sense to unnecessarily take any of our own tools off the table,” he said about the U.S. possibility of supplying defensive weapons to Ukraine. Russia’s aggression also is destabilizing neighboring states and the region, and its illegal actions are pushing instability closer to NATO’s boundaries, Breedlove told the senators. “We cannot be fully certain what Russia will do next, and we cannot fully grasp [Putin‘s] intent,” Breedlove he said. “What we can do is learn from his actions, and what we see suggests growing Russian capabilities, significant military modernization and an ambitious strategic intent.”

Got it. So summarizing, we cannot be certain about Putin’s intent, but based on his actions, we can be certain that his intent is both ambitious and strategic. Note that Breedlove has managed to pull off what we thought was a linguistic impossibility: his statement is contradictory, vague, and definitive all at once.

Kiev and the west are determined that no-one ever finds out what happened in Odessa, on Maidan Square, with MH-17 etc etc.

• Kiev Is Making No ‘Tangible Steps’ To Investigate Year-Old Odessa Massacre (RT)

Moscow has called on the international community to put pressure on Ukrainian authorities, which are not making any ‘tangible steps’ towards an independent and impartial investigation of last year’s Odessa massacre, Russia’s Foreign Ministry said. “With a deep concern we have to state that one year [since the tragedy], the Ukrainian justice system did not take any tangible steps toward an objective, independent and impartial investigation of this horrific crime in order to bring the perpetrators to justice,” the statement by the Russian Foreign Ministry said, as cited by Sputnik news agency. On May 2 last year, the Ukrainian radicals set fire to the Trade Union House in Odessa, killing 48 and injuring over 200 anti-Kiev activists inside.

“As a result of these barbaric acts of intimidation, several dozen people, whose only fault was that they openly expressed their civic stance against the anti-constitutional coup in February 2014 and outburst of radical ultranationalists, were killed,” the Foreign Ministry’s statement reads. Moscow urged the international community, including human rights NGOs, to “decisively and honestly” demand Kiev stage a fair investigation into the Odessa massacre and correct the “glaring flaws” in Ukrainian judicial system. The ministry stressed that Kiev’s “carelessness” and passiveness in investigating the May 2 events is backed by the stance of its Western backers and some major global media outlets.

The little attention given to the Odessa massacre in European and American news is “yet another manifestation of information warfare and manipulation of the media,” the statement said. Meanwhile, the US also addressed Kiev with an appeal not to delay the investigation of deadly fire. “We reiterate the need for a thorough and transparent investigation so those responsible can ultimately be held accountable. We continue to urge the Ukrainian government to investigate and bring charges against those culpable for the events in Odessa and to do so as quickly as possible,” Marie Harf, US State Department spokeswoman, said on Thursday.

Little bit crazy perhaps? My guess is if this comes out, he’s going to lose a lot of sympathy. Kiwi’s are sort of done with him anyway.

• Kim Dotcom Awarded Millions For Legal Bills And Living Expenses (TF)

Kim Dotcom has succeeded in getting more of his seized funds released by the courts in New Zealand. In addition to millions for legal expenses, the entrepreneur will receive $128K per month including $60K to pay mansion rent, $25,600 to cover staff and security, plus $11,300 for grocery and other expenses.

How much does it cost to enjoy a reasonable standard of living in the modern world? A couple of thousand dollars a month? Three thousand? Four? For Megaupload founder Kim Dotcom, none of these amounts scratch the surface, a problematic situation considering all of his assets were previously seized by the U.S. and New Zealand governments. In February a “broke” and “destitute” Dotcom appeared before Justice Patricia Courtney, asking for living expenses and a massive cash injection to pay historical and current legal fees. Dotcom was previously granted around US$15,000 per month to live on but high costs had left him “penniless”. Following the hearing Justice Courtney’s ruling is largely good news for Dotcom, with the Judge taking into consideration claims by authorities that the entrepreneur has funds in a trust that could help pay his expenses.

“The trust’s major asset is its shareholding in Mega Ltd, said to be worth more than $30m (US$22.6m). In evidence Mr Dotcom said that there were difficulties in selling Mega shares because they were blocked from being sold until the planned listing of Mega, which is now scheduled for late May 2015 (though it is possible that this date will be pushed back). There was no evidence to the contrary,” the Judge’s ruling reads. “I have concluded that Mr Dotcom does not have the ability to meet his legal and reasonable living expenses from trust assets because, on the evidence, those assets are not sufficiently liquid.” Noting that he still owes former lawyers around US$1.5m, the Judge said that Dotcom’s estimate for financing his legal battle against extradition is between US$1.5m and US$3m.

This amount will be released from currently restrained government bonds. Next up was the Dotcom family’s accommodation costs. Rent on the now-famous mansion amounts to US$754,000 per annum under a lease Dotcom signed in February 2013 and which expires in the same month 2016. The Judge decided that terminating that lease would result in additional costs. “If [Dotcom] were to terminate the lease in order to find a more modest home, he would immediately be exposed to a significant contractual liability for the existing rental in addition to the costs of any new accommodation,” the Judge writes.

“Little would be saved by requiring Mr Dotcom to move into more modest accommodation pending the expiry of the lease; it is more likely that the total amount required to house Mr Dotcom and his children and meet his lease commitment would actually prove greater than simply remaining where he is. “I therefore accept that, in the particular circumstances of this case, a figure of $80,000 (US$60,300) per month is reasonable for accommodation.”

Debt Rattle Aug 8 2014: Obama Argentina Italia Ebola Obama

Aug 082014

August 8, 2014 Posted by Raúl Ilargi Meijer at 1:26 pm Finance Tagged with: Argentina, democracy, foreign policy, Italy, Obama, Singer 10 Responses »

Dorothea Lange Family of 4 from Taos Junction, resettled at Bosque Farms, NM Dec 1935

The Nikkei lost 2.98% overnight, European exchanges continue their fall, hundreds of trucks carrying European produce are turned back at the Russian border, and high yield bond funds saw record high outflows in the past week. And in that world, China reports it highest trade balance surplus ever, a ‘fact’ that’s duly parroted by ‘news’ services around the globe.

Meanwhile, the WHO declares the Ebola outbreak an ‘international public health emergency’ and Barack Obama goes on national TV to announce he’s ordered targeted airstrikes in Iraq, ostensibly to prevent a massacre. Is this the US trying to clean up some of the mess and the vacuum it’s left behind?

Don’t bet on it, creating messes, vacuums and chaos is an integral part of American foreign policy. Perhaps seeing ISIS militants take over Iraq’s biggest hydroelectric dam earlier in the week was the proverbial straw. There’s a Pentagon report that says “a failure at the dam could send a 65-foot wave across parts of northern Iraq.”

Talking about Obama, journalist Greg Palast, who knows a thing or two about vulture funds, writes one of the most damning articles about the president that I’ve seen in a while. Palast contends that it would be very easy for Obama to halt Argentina’s default – and the credit event it would result in – by simply invoking one single clause from the US Constitution.

In fact, George W. did just that, and used it against the very same hedge fund that now threatens Argentina. Moreover, the very same judge who rules over the present case was warned over the “Separation of Powers” clause 30 years ago. But Obama hasn’t moved an inch.

How Barack Obama Could End Argentina Debt Crisis

The “vulture” financier now threatening to devour Argentina can be stopped dead by a simple note to the courts from Barack Obama. But the president, while officially supporting Argentina, has not done this one thing that could save Buenos Aires from default. Obama could prevent vulture hedge-fund billionaire Paul Singer from collecting a single penny from Argentina by invoking the long-established authority granted presidents by the US constitution’s “Separation of Powers” clause.

Under the principle known as “comity”, Obama only need inform US federal judge Thomas Griesa that Singer’s suit interferes with the president’s sole authority to conduct foreign policy. Case dismissed. Indeed, President George W Bush invoked this power against the very same hedge fund now threatening Argentina. Bush blocked Singer’s seizure of Congo-Brazzaville’s US property, despite the fact that the hedge fund chief is one of the largest, and most influential, contributors to Republican candidates.

Notably, an appeals court warned this very judge, 30 years ago, to heed the directive of a president invoking his foreign policy powers. In the Singer case, the US state department did inform Judge Griesa that the Obama administration agreed with Argentina’s legal arguments; but the president never invoked the magical, vulture-stopping clause. Obama’s devastating hesitation is no surprise. It repeats the president’s capitulation to Singer the last time they went mano a mano.

It was 2009. Singer, through a brilliantly complex financial manoeuvre, took control of Delphi Automotive, the sole supplier of most of the auto parts needed by General Motors and Chrysler. Both auto firms were already in bankruptcy. Singer and co-investors demanded the US Treasury pay them billions, including $350m (£200m) in cash immediately, or – as the Singer consortium threatened – “we’ll shut you down”. They would cut off GM’s parts. Literally.

GM and Chrysler, with no more than a couple of days’ worth of parts to hand, would have shut down, permanently; forced into liquidation. Obama’s negotiator, Treasury deputy Steven Rattner, called the vulture funds’ demand “extortion” – a characterisation of Singer repeated last week by Argentina President Cristina Fernández de Kirchner. But while Fernández declared “I cannot as president submit the country to such extortion,” Obama submitted within days. Ultimately, the US Treasury quietly paid the Singer consortium a cool $12.9 billion in cash and subsidies from the US Treasury’s auto bailout fund.

I recommend you read the rest of Palast’s piece as well, there are still people in the world who know how to do investigative journalism. Here’s one more paragraph:

In the case of Argentina, Obama certainly has reason to act. The US State Department warned the judge that adopting Singer’s legal theories would imperil sovereign bailout agreements worldwide. Indeed, it is reported that, in 2012, Singer joined fellow billionaire vulture investor Kenneth Dart in shaking down the Greek government for a huge payout during the euro crisis by threatening to create a mass default of banks across Europe.

Best remember who your friends are. Argentina has filed a complaint against the US with the International Court Of Justice, but it may be of little use, since the US doesn’t recognize its jurisdiction (it’s too afraid some former Washington hotshots would be called to stand trial for, among other things, war crimes).

Mario Draghi yesterday reiterated his intention to prepare for launching QE, but that may not just be impossible, it may be too late as well, since even Germany is rumored to be near a recession. What global central banks have pulled out of their hats so far has already resulted in such a distorted marketplace that German and Dutch 10-year bonds yield 1% or less, and the German 2-year even briefly went negative yesterday. Draghi QE would only exacerbate the very situation that has led to this distortion, and we must hope at least some heads are clear enough to recognize that.

But don’t bet on that either. Draghi may have to save his native country first, and urgently:

The ECBs Next Problem: Saving Italy

Since Matteo Renzi grabbed the Italian premiership in February, Rome has fallen off the radar of most crisis watchers. Renzi’s promise to institute sweeping reforms to business and labour markets appeared to be more than hot air following the appointment of Pier Carol Padoan as finance minister. The heavy-hitting former chief economist of the OECD appeared to give the youthful Renzi the intellectual ballast and political clout needed to push through an ambitious agenda.

This narrative was allied to figures showing Italy was already close to achieving a balanced budget and its banks were in better shape than many of France’s famous names. Maybe it is too soon to judge, but figures showing the country has fallen back into recession will dent the new government’s plans along with its image.

Fathom Consulting, run by former Bank of England economist Danny Gabay, warns that Rome may rank as another of Europe’s Black Swans. It has flirted with disaster before and always pulled back. Without an ECB rescue, in the form of large-scale quantitative easing, maybe a full-blown run on its debt is inevitable, possibly next year.

But Mario thinks it’s a good idea to chastise his fellow countrymen, especially new PM Renzi, first. Perhaps his dreams of one day becoming Prime Minister himself have something to do with that.

Draghi Takes Aim at Italy as Recession Scars Euro Area

Mario Draghi says Italy can only blame itself for its third recession since 2008. The day after data showed the euro-area’s third-biggest economy unexpectedly contracted last quarter, the European Central Bank president singled out his country’s lack of structural reform and the disincentive for investment it engenders. [..] “I keep on saying the same thing, really – I mean, of reforms in the labor market, in the product markets, in the competition, in the judiciary, and so on and so forth [..] “These would be the reforms which actually have shown to have a short-term benefit.”

The ECB president’s comments on his homeland are blunter than normal, adding to the contrast with countries such as Spain that have engaged in more structural adjustments. “Draghi made a strong call for structural reforms, noting that there is now ample evidence to suggest that countries that have reformed their economies are showing a stronger economic performance than the rest of the euro zone,” said Riccardo Barbieri [at Mizuho]. “This sounds like a strong rebuttal of the approach taken by Italy’s new prime minister.”

Still, as Wolf Richter states, things are not as easy as an IMF style reform or two here and there. Italy has a hidden pile of debt to suppliers it would rather see go bankrupt.

Italy’s Unrecovery: GDP Negative In 11 Of Last 12 Quarters

In the second quarter, Italy’s economy contracted 0.2% from the first quarter, which surprised economists who’d expected, somehow, more growth now that the Italian economy – in parallel with the grander Eurozone economy – is recovering so nicely. However, reality is not playing along. Crummy exports and a refusal by businesses to pile on inventories were blamed.

Not blamed, of course, was the Italian government, which refuses to pay its suppliers. The arrears, according to the most recent data by the Bank of Italy, amounted to €75 billion ($102 billion). Italy could just issue more bonds to fund what it owes, but that would show to the rest of the world that its debt is actually much higher than the current pretenses. So no way.

Successive politicians have promised for years to pay it, only to push the date when payment would be considered seriously out further and further. So far, no one has forced the government to pay its bills, and so they don’t get paid. The past dues have been sucked out of the working capital of businesses. They strangle the private sector, lead to layoffs, and wreak general havoc in an already very fragile economy. Based on the government’s failure to comply with Europe’s Late Payments Directive, which requires governments to cut payment delays to a maximum of 60 days, the European Commission commenced an infringement procedure against Italy. But that too may just be decoration. The way it looks, it may never be paid.

The (in)famous Martin Armstrong, in his own unique style, takes things a step further:

Italy’s Recession Means ‘The End Of Democracy’

Italy has entered that phase of zero-point growth. Italy’s people have been beaten by Europe and no longer expect recovery. But then, yesterday, the Statistical Office of the economic data for the second quarter of 2014 released economic numbers that froze a dumb look even on the faces of the hardcore pessimists. For the second time this year, Italy experienced a slump of its GDP by 0.3% year on year. The economic data is so bad, not seen for 14 years, that everyone no matter what side of the political fence is whispering or shouting the same world – “Recession!”

The advantage of Italy and its legendary corruption has been its equally inefficient government that has allowed the people to just ignore it and get along with life in the real world of the underground economy. When you look at the numbers at the gross level, one cannot imagine how Italy has functioned economically. However, looking closer one sees the vibrant underground economy that has allowed the people to make their own living and still prices, taxes and debt per capita are much lower than everywhere else in Europe[..] The solution for Italy? The politician’s dream. Brussels wants to take away the right of the Italian people to vote on anything meaningful.

The Senate in Italy was rather unique. All legislation had to go through the Senate which was elected by the people and had the power to dismiss the government. This was actually a very good idea. However, it prevents tyranny from Brussels and this is the real problem. Renzi has succeeded against the resistance of the deputies. The Senate, the second chamber of Parliament, today or at the latest on Friday will decide to self-disempowerment. [..]

Italy is where the Republic was born in 509 BC that sparked a contagion that spread with the overthrow of monarchy giving birth to Democracy in Athens in 508 BC. The land that had inspired the American Revolution against monarchy is now itself surrendering the last vestige of democratic process yield to the growing tyranny of Brussels under the pretense of saving the Euro.

I’ve said it often: the only thing that would actually benefit Italy is for it to leave the Eurozone. But with people like Draghi, Monti and Renzi, plus the very extensive cabal that has held the reins for ages, that will not happen. The country will have to default, and see extensive rioting in the streets, before something fundamental will change. Until then, an ongoing parade of technocrats and bureaucrats will be elected to rule the ruins of the dramatically tragic, and dramatically beautiful, nation.

Whether the old style Senate was as great as Armstrong makes it out to be, I’m not so sure, there’s too many pictures on my retina of 95 year old life long senators soaked in ties to much less than squeaky clean segments of Italian society. Italy needs a truly fresh start, and while it’s hard to see how it will get there, it won’t get it inside the eurozone. As for democracy, Beppe Grillo’s M5S was the single largest party in the last general elections, and the system still manages to ignore him.

As for American democracy, you tell me. Who amongst ordinary Americans is happy with what the US does in Ukraine? The only voice I’ve seen consistently make sense on the topic is Ron Paul. That’s not much. Who wants to see the US go back into Iraq, as Obama has decided it will?

And who’s happy to see the President not use the powers very evidently at his disposition, to call a halt to an attack on yet another sovereign nation, this one from behind desks and courtrooms in New York and Washington? Shouldn’t the President be the one to decide on foreign policy, and is President Obama still the one making those decisions? Is he the one who went looking for a new cold war?

Democracy in America, you tell me. A few last words from Greg Palast:

Singer has certainly earned his vulture feathers. His attack on Congo-Brazzaville in effect snatched the value of the debt relief paid for by US and British taxpayers and, says Oxfam, undermined the nation’s ability to fight a cholera epidemic.

[..] since taking on Argentina, Singer has unlocked his billion-dollar bank account, becoming the biggest donor to New York Republican causes. He is a founder of Restore Our Future, a billionaire boys club, channeling the funds of Bill Koch and other Richie Rich-kid Republicans into a fearsome war-chest dedicated to vicious political attack ads. And Singer recently gave $1 million to Karl Rove’s Crossroads operation, another political attack machine.

In other words, there’s a price for crossing Singer. And, unlike the president of Argentina, Obama appears unwilling to pay it.

• How Obama Could End Argentina Debt Crisis, And Why He Doesn’t (Greg Palast)

The “vulture” financier now threatening to devour Argentina can be stopped dead by a simple note to the courts from Barack Obama. But the president, while officially supporting Argentina, has not done this one thing that could save Buenos Aires from default. Obama could prevent vulture hedge-fund billionaire Paul Singer from collecting a single penny from Argentina by invoking the long-established authority granted presidents by the US constitution’s “Separation of Powers” clause. Under the principle known as “comity”, Obama only need inform US federal judge Thomas Griesa that Singer’s suit interferes with the president’s sole authority to conduct foreign policy. Case dismissed. Indeed, President George W Bush invoked this power against the very same hedge fund now threatening Argentina. Bush blocked Singer’s seizure of Congo-Brazzaville’s US property, despite the fact that the hedge fund chief is one of the largest, and most influential, contributors to Republican candidates.

Notably, an appeals court warned this very judge, 30 years ago, to heed the directive of a president invoking his foreign policy powers. In the Singer case, the US state department did inform Judge Griesa that the Obama administration agreed with Argentina’s legal arguments; but the president never invoked the magical, vulture-stopping clause. Obama’s devastating hesitation is no surprise. It repeats the president’s capitulation to Singer the last time they went mano a mano. It was 2009. Singer, through a brilliantly complex financial manoeuvre, took control of Delphi Automotive, the sole supplier of most of the auto parts needed by General Motors and Chrysler. Both auto firms were already in bankruptcy. Singer and co-investors demanded the US Treasury pay them billions, including $350m (£200m) in cash immediately, or – as the Singer consortium threatened – “we’ll shut you down”. They would cut off GM’s parts. Literally.

GM and Chrysler, with no more than a couple of days’ worth of parts to hand, would have shut down, permanently;forced into liquidation. Obama’s negotiator, Treasury deputy Steven Rattner, called the vulture funds’ demand “extortion” – a characterisation of Singer repeated last week by Argentina President Cristina Fernández de Kirchner. But while Fernández declared “I cannot as president submit the country to such extortion,” Obama submitted within days. Ultimately, the US Treasury quietly paid the Singer consortium a cool $12.9bn in cash and subsidies from the US Treasury’s auto bailout fund.

• Argentina Files Legal Action Against US Over Debt Default (Reuters)

Argentina has asked the International Court Of Justice (ICJ) in The Hague to take action against the United States over an alleged breach of its sovereignty as it defaulted on its debt. Argentina defaulted last week after losing a long legal battle with hedge funds that rejected the terms of debt restructurings in 2005 and 2010. A statement issued by the ICJ, the United Nation’s highest court for disputes between nations, said Argentina’s request had been sent to the US government. It added that no action will be taken in the proceedings “unless and until” Washington accepts the court’s jurisdiction.

The US has recognised the court’s jurisdiction in the past, but it was not immediately clear if it would do so in Argentina’s case. The default came after Argentina failed last week to strike a deal with the main holdouts among investors, hedge funds NML Capital and Aurelius Capital Management. Buenos Aires maintains it has not defaulted because it made a required interest payment on one of its bonds due in 2033, but a judge in the US district court in Manhattan blocked that deposit in June, saying it violated an earlier ruling. Argentina said in its application to the court that the United States had “committed violations of Argentinian sovereignty and immunities and other related violations as a result of judicial decisions adopted by US tribunals.”

Any questions?

• Checkers Vs Chess: Why Europe Implodes On ‘Russian’ Sanctions (Zero Hedge)

The West’s leaders are full of lawyers, Putin is ex-KGB. If ever there was an example of him playing chess while the West plays checkers, the following chart is it. Despite Western protestations that its sanctions will hurt Russia more than Europe this morning, one look at Europe’s huge net trade balance with Russia for food and it’s clear who is really going to feel the pain. As Martin Armstrong noted previously, “Putin has responded to [Western] sanctions as any really smart chess-player would – you get the supporters of your adversary to jump-ship.” What better way to crack the ‘stop-Putin’ alliance than to force Europe into trade deficits and squeeze their economies (especially Germany)?

Ban? What ban?

• Russia’s Import Ban Means Big Business For Latin America (RT)

Russia’s 1-year ban on food products from the EU, US, Canada, and Norway will force Russia to increase food imports from Latin America, specifically Ecuador, Brazil, Chile, and Argentina. Russia will ban meat, dairy, fruit, and vegetable imports from countries that have imposed sanctions on Russia over the Ukraine conflict, which opens the door to Russia’s partners on the other side of the world.

Russia will have to fill an 8% gap in its total agricultural imports that it sources from the EU, USA, Canada, Australia, and Norway. The Netherlands, Germany and Poland are currently Russia’s biggest food suppliers in the EU. Meat and dairy products from Ecuador, Chile and Uruguay may appear on Russian supermarket shelves as early as September, said Julia Trofimova, a at Rosselkhoznadzor, Russia’s consumer watchdog. On Wednesday the three countries confirmed they are ready to start supplying Russia with agricultural goods and Moscow will soon hold meetings with ambassadors from Brazil and Argentina.

“NML Capital, a subsidiary of the hedge fund Elliot Management, headed by Paul Singer, spent $48m on bonds in 2008; thanks to Griesa’s ruling, NML Capital should now receive $832m – a return of more than 1,600%.”

• Argentina Default? Griesafault Is Much More Accurate (Stiglitz/Guzman)

On 30 July Argentina’s creditors did not receive their semi-annual payment on the bonds that were restructured after the country’s last default in 2001. Argentina had deposited $539m (£320m) in the Bank of New York Mellon a few days before. But the bank could not transfer the funds to the creditors: US federal judge Thomas Griesa had ordered that Argentina could not pay the creditors who had accepted its restructuring until it fully paid – including past interest – those who had rejected it. It was the first time in history that a country was willing and able to pay its creditors, but was blocked by a judge from doing so. The media called it a default by Argentina, but the Twitter hashtag #Griesafault was much more accurate. Argentina has fulfilled its obligations to its citizens and to the creditors who accepted its restructuring. Griesa’s ruling, however, encourages usurious behaviour, threatens the functioning of international financial markets, and defies a basic tenet of modern capitalism: insolvent debtors need a fresh start.

Sovereign defaults are common events with many causes. For Argentina, the path to its 2001 default started with the ballooning of its sovereign debt in the 1990s, which occurred alongside neoliberal “Washington Consensus” economic reforms that creditors believed would enrich the country. The experiment failed, and the country suffered a deep economic and social crisis, with a recession that lasted from 1998 to 2002. By the end, a record-high 57.5% of Argentinians were in poverty, and the unemployment rate skyrocketed to 20.8%. Argentina restructured its debt in two rounds of negotiations, in 2005 and 2010. More than 92% of creditors accepted the new deal, and received exchanged bonds and GDP-indexed bonds. It worked out well for both Argentina and those who accepted the restructuring. The economy soared, so the GDP-indexed bonds paid off handsomely.

But so-called vulture investors saw an opportunity to make even larger profits. The vultures were neither long-term investors in Argentina nor the optimists who believed that Washington Consensus policies would work. They were simply speculators who swooped in after the 2001 default and bought up bonds for a fraction of their face value from panicky investors. They then sued Argentina to obtain 100% of that value. NML Capital, a subsidiary of the hedge fund Elliot Management, headed by Paul Singer, spent $48m on bonds in 2008; thanks to Griesa’s ruling, NML Capital should now receive $832m – a return of more than 1,600%.

Wow!

• US High Yield Bond Funds See Shocking, Record $7.1B Cash Outflow

Retail-cash outflows from high-yield funds ballooned to a shocking, record $7.07 billion in the week ended Aug. 6, with ETFs representing just 18% of the sum, or roughly $1.28 billion, according to Lipper. The huge redemption blows out past the prior record outflow of $4.63 billion in June 2013. With four straight weeks of outflows from the asset class totaling $12.6 billion, the four-week trailing average expands to negative $3.15 billion per week, from $1.4 billion last week. This reading is also a record, eclipsing a prior record at $2.8 billion, also in June 2013.

The full-year reading is now deeply in the red, at $5.9 billion, with 43% of the withdrawal tied to ETFs. One year ago at this time outflows were $3.9 billion, with 15% linked to the ETF segment. In addition to the huge outflow, the change due to market conditions was negative $1.24 billion, also the greatest negative move dating to June 2013. The change this past week is nearly negative 1% against total assets, which stood at $176.3 billion at the end of the observation period, with 19% tied to ETFs, or $34.1 billion. Total assets are up $6.5 billion in the year to date, reflecting a gain of roughly 4% this year.

• ECB Ready To Pump Cash Into Eurozone As Fears Rise Over Recovery (Guardian)

The European Central Bank is accelerating plans to unleash fresh growth-boosting measures as the eurozone’s recovery loses steam and the risk increases of a geopolitical shock from the Ukraine crisis. Mario Draghi, president of the ECB, said that the Bank had “intensified preparatory work” on quantitative easing as a potential new weapon in its battle against deflation and economic stagnation. He revealed that the eurozone’s policymakers were closer to using QE – which would inject cash into the eurozone by acquiring assets such as bonds from financial institutions – amid worrying signs that weak growth in the 18-member currency bloc is slowing further still. “The recovery remains weak, fragile and uneven. In recent weeks, the data shows growth momentum is slowing down. It is quite clear that if geopolitical risks materialise, the next two quarters will show lower growth.”

Recovery in the region is barely established, with GDP increasing by only 0.2% in the first quarter of the year. Speaking at a press conference in Frankfurt, Draghi said sanctions and counter sanctions between the west and Russia were among the biggest risks facing the eurozone economy, with the potential to drive energy prices higher and depress exports. He stressed it was too early to say what the precise impact sanctions would have on the region. “We are just at the beginning. We are still assessing what impact sanctions might have on the economy. “Geopolitical risks are heightened. And some of them, like the situation in Ukraine and Russia will have a greater impact on the euro area than they … have on other parts of the world.” Earlier, the ECB’s governing council left rates on hold at its July policy meeting, as expected.

• Germany Close To Recession As ECB Admits Recovery Is Weak (AEP)

German bonds yields plunged to a historic low and two-year rates briefly fell below zero on Thursday on fears of widening recession in the eurozone, and a flight to safety as Russian troops massed on the Ukrainian border. Yields on 10-year Bunds dropped to 1.06% after a blizzard of fresh data showed that recovery has stalled across most of the currency bloc, with even Germany now uncomfortably close to recession. Commerzbank warned that the German economy may have contracted by 0.2% in the second quarter and is far too weak to pull southern Europe out of the doldrums. Industrial output fell 1.5% over the three months. The DAX index of equities in Frankfurt has dropped 10% over the past month and is threatening to break through the psychological floor of 9,000.

Mario Draghi, head of the ECB, said the recovery remained “weak, fragile and uneven”, with a marked slowdown in recent weeks on escalating geopolitical worries over Russia and the Middle East. He said the ECB, which on Thursday held benchmark interest rates at 0.15%, “stands ready” to inject money through purchases of asset-backed securities and quantitative easing if needed, but would not take further action yet even though inflation had fallen to 0.4%. The debt markets are pricing in 0.5% inflation in Germany and Italy over the next five years through so-called “break-even” rates, evidence that investors think the ECB is falling far behind the curve. Mr Draghi insisted that a string of measures unveiled in June were starting to work and should be enough to stave off deflation.

The ECB ignored pleas from leading economists for pre-emptive action to bolster the eurozone’s defences before an external shock hit and before the US Federal Reserve tightened monetary policy, an inflection point that risks sending tremors through the global system, according to a paper by the Chicago Fed. Hopes for a swift rebound in Germany are fading. The economics ministry said new orders in manufacturing fell 3.2% in June, with orders from the rest of the eurozone collapsing by 10.4%. “What this shows is that Europe is nowhere close to recovery. Monetary policy has run out of traction,” said Steen Jakobsen from Saxo Bank.

• Draghi Takes Aim at Italy as Recession Scars Euro Area (Bloomberg)

Mario Draghi says Italy can only blame itself for its third recession since 2008. The day after data showed the euro-area’s third-biggest economy unexpectedly contracted last quarter, the European Central Bank president singled out his country’s lack of structural reform and the disincentive for investment it engenders. That followed an opening statement that lamented the region’s “uneven” recovery. “I keep on saying the same thing, really – I mean, of reforms in the labor market, in the product markets, in the competition, in the judiciary, and so on and so forth,” Draghi, the former Bank of Italy governor, said in Frankfurt yesterday after keeping ECB interest rates unchanged at record lows. “These would be the reforms which actually have and have shown to have a short-term benefit.”

The comments may increase pressure on Italian Prime Minister Matteo Renzi to turn around an economy with youth unemployment above 40% and a recession that threatens the 18-nation currency bloc’s nascent revival. The ECB president’s comments on his homeland are blunter than normal, adding to the contrast with countries such as Spain that have engaged in more structural adjustments. “Draghi made a strong call for structural reforms, noting that there is now ample evidence to suggest that countries that have reformed their economies are showing a stronger economic performance than the rest of the euro zone,” said Riccardo Barbieri, the London-based chief European economist at Mizuho International Plc. “This sounds like a strong rebuttal of the approach taken by Italy’s new prime minister.”

• Without ECB Rescue, ‘Full-Blown Run On Italian Debt Is Inevitable’ (Guardian)

Since Matteo Renzi grabbed the Italian premiership in February, Rome has fallen off the radar of most crisis watchers. Renzi’s promise to institute sweeping reforms to business and labour markets appeared to be more than hot air following the appointment of Pier Carol Padoan as finance minister. The heavy-hitting former chief economist of the Organisation of Economic Co-operation and Development (OECD) appeared to give the youthful Renzi the intellectual ballast and political clout needed to push through an ambitious agenda. This narrative was allied to figures showing Italy was already close to achieving a balanced budget and its banks were in better shape than many of France’s famous names. Maybe it is too soon to judge, but figures showing the country has fallen back into recession will dent the new government’s plans along with its image.

Fathom Consulting, run by former Bank of England economist Danny Gabay, warns that Rome may rank as another of Europe’s Black Swans. It has flirted with disaster before and always pulled back. Without a European Central Bank (ECB) rescue, in the form of large-scale quantitative easing, maybe a full-blown run on its debt is inevitable, possibly next year. Mario Draghi, the ECB president, is expected to tell his audience today that he is waiting to see how his previous attempts at offering cheap credit are faring before considering QE. Interest rates will be kept on hold alongside further monetary easing. The view from Draghi’s Frankfurt base is that Italy is one of Europe’s children and must be parented with an iron rod. Any hand-outs or relaxation in tough fiscal constraints will be spent by Rome on the equivalent of sweets and sugary drinks, is his view. And he is not alone. The Germans, Dutch and Brussels elite think the same way.

• Italy’s Unrecovery: GDP Negative In 11 Of Last 12 Quarters (WolfStreet)

In the second quarter, Italy’s economy contracted 0.2% from the first quarter, which surprised economists who’d expected, somehow, more growth now that the Italian economy – in parallel with the grander Eurozone economy – is recovering so nicely. However, reality is not playing along. Crummy exports and a refusal by businesses to pile on inventories were blamed. Not blamed, of course, was the Italian government, which refuses to pay its suppliers. The arrears, according to the most recent data by the Bank of Italy, amounted to €75 billion ($102 billion). Italy could just issue more bonds to fund what it owes, but that would show to the rest of the world that its debt is actually much higher than the current pretenses. So no way.

Successive politicians have promised for years to pay it, only to push the date when payment would be considered seriously out further and further. So far, no one has forced the government to pay its bills, and so they don’t get paid. The past dues have been sucked out of the working capital of businesses. They strangle the private sector, lead to layoffs, and wreak general havoc in an already very fragile economy. Based on the government’s failure to comply with Europe’s Late Payments Directive, which requires governments to cut payment delays to a maximum of 60 days, the European Commission commenced an infringement procedure against Italy. But that too may just be decoration. The way it looks, it may never be paid. Meanwhile, businesses are suffocating. And it shows: over the last 12 quarters, 11 quarters were contractions, with the sole errant quarter being Q1 2014, when the economy booked a tiny growth of 0.1% from the prior quarter and gave rise to an avalanche of hope, now obviated by events.

• Italy’s Recession Means ‘The End Of Democracy’ (Martin Armstrong)

Italy has entered that phase of zero-point growth. Italy’s people have been beaten by Europe and no longer expect recovery. But then, yesterday, the Statistical Office of the economic data for the second quarter of 2014 released economic numbers that froze a dumb look even on the faces of the hardcore pessimists. For the second time this year, Italy experienced a slump of its gross domestic product by 0.3% year on year. The economic data is so bad, to the point it has not been seen for 14 years, that everyone no matter what side of the political fence is whispering or shouting the same world – “Recession!”

The advantage of Italy and its legendary corruption has been its equally inefficient government that has allowed the people to just ignore it and get along with life in the real world of the underground economy. When you look at the numbers at the gross level, one cannot imagine how Italy has functioned economically. However, looking closer one sees the vibrant underground economy that has allowed the people to make their own living and still prices, taxes and debt per capita are much lower than everywhere else in Europe, Italy’s real problem – it joined the Euro which did not benefit the Italians and only increased their national debt in “real terms” as the Euro rallied to excessively high levels in this wave of deflation. The solution for Italy? The politician’s dream. Brussels wants to take away the right of the Italian people to vote on anything meaningful. Prime Minister Matteo Renzi had hoped to celebrate his “epochal success” in the parliamentary reform in practice.

The Senate in Italy was rather unique. All legislation had to go through the Senate which was elected by the people and had the power to dismiss the government. This was actually a very good idea. However, it prevents tyranny from Brussels and this is the real problem. Renzi has succeeded against the resistance of the deputies. The Senate, the second chamber of Parliament, today or at the latest on Friday will decide to self-disempowerment. [..] Italy is where the Republic was born in 509BC that sparked a contagion that spread with the overthrow of monarchy giving birth to Democracy in Athens in 508BC. The land that had inspired the American Revolution against monarchy is now itself surrendering the last vestige of democratic process yield to the growing tyranny of Brussels under the pretense of saving the Euro.

And that’s just the Fed polling.

• Fed Survey Finds 4 in 10 Americans in Financial Stress in 2013 (Bloomberg)

Almost four in 10 Americans were suffering financial stress in September 2013 and more than a third said they were worse off than they were five years earlier, a new Federal Reserve report on U.S. household finances showed today. One-fourth of respondents reported they were “just getting by” financially and another 13% said they were struggling to do so, the Fed said. Thirty-four% were worse off financially than in 2008, 34% were about the same, and 30% were better off, according to the report. “The survey found that many households were faring well, but that sizable fractions of the population were at the same time displaying signs of financial stress,” researchers wrote. “For some, perceived credit availability remains low.”

One-third of those who applied for credit were denied or given less credit than they requested, the survey showed. Twenty-four% reported having education debt of some kind, with an average unpaid balance of $27,840. The central bank said its Report on the Economic Well-Being of U.S. Households is a snapshot of financial and economic well-being of U.S. households to help monitor their recovery from the recession and “identify perceived risks to their financial stability.” It aimed to gather household data not readily available from other sources.

HELOCs will make a big comeback in the news.

• Default Risk Rises on 20% of Boom-Era Home-Equity Loans (Bloomberg)

As much as 20% of home equity lines of credit worth $79 billion are at increased risk of default as their payments jump a decade after the loans were made during the U.S. housing boom, according to TransUnion Corp. Borrowers face rate shocks as payments on the credit lines, known as HELOCs, switch from interest-only to include principal, causing monthly bills to surge more than 50%, according to a report today by the Chicago-based credit information company. The 20% of borrowers most in danger of default are property owners with low credit scores, high debt-to-income ratios and limited home equity, said Ezra Becker, TransUnion’s vice president of research.

Maturing home equity lines, which allow borrowers to use the value of their home as collateral on loans for personal spending, are the last wave of resetting debt from the era of high property values and easy credit before the 2008 financial crisis. The three biggest home equity lenders – Bank of America, Wells Fargo, JPMorgan Chase – held 36% of the $691.5 billion debt as of the first quarter, according to Federal Reserve data. [..] About $23 billion in HELOCs will have payment increases this year as the interest-only phase ends, rising to a projected peak of $56 billion in 2017, according to a June report by the Treasury Department’s Office of the Comptroller of the Currency.

Haha!

• China Trade Balance At Highest Ever – EVER! (Zero Hedge)

Filed in the “are you kidding us” folder… Chinese exports rose an astounding 14.5% YoY in July (the biggest surge since April 2013 and double the 7.0% YoY expectations). Chinese imports plunged 1.6% to 4-month lows, dramatically missing expectations of a 2.6% YoY gain. These miracles of goalseek.xls and fake trade invoicing left the Chinese Trade Balance for July at $47.3 Billion – its highest ever (ever) and almost double the $27.4bn expectations. In the midst of collapsing European economies, plunging Russia, and stumbling ‘hard’ US macro data, the Chinese government would have us believe the world (net) bought the most stuff ever from them in July… Yes, your eyes are not deceiving you…

It would appear – as we noted previously, that China is up to its old tricks… China’s exports have been overstated by Chinese data…

We cannot show just how crazy this data is because US and more importantly Hong Kong imports from China data is not updated to end July yet… but it is noteworthy that the hub of fake invoicing – Hong Kong – saw a 13.3% YoY jump – its most in 16 months… after being totally flat for 4 months

“One figure stands out: the $343 billion these nonbank lenders owe in interest and principal repayments this quarter alone.”

• China’s $343 Billion Q3 Payments Due in the Shadows (Bloomberg)

China’s “trust companies” are a growth industry, notable not for imparting stability to the $9.2 trillion economy, but for the red flags they raise. One figure stands out: the $343 billion these nonbank lenders owe in interest and principal repayments this quarter alone. This topic may not sound very exciting to those far removed from the mechanics of China Inc. and President Xi Jinping’s efforts to rein in credit and investment bubbles. But these nonbank lenders are at the core of the shadow-banking industry that makes China’s financial system both opaque and fragile. The greater the repayment requirements, the greater the risk of a miss and the turmoil that might follow. That’s why the latest report from Hu Yifan of Haitong International Securities, titled “Day of Reckoning for China Trusts,” is so troubling. From now through 2015, Hu says, such repayments will be at elevated levels.

The odds of missed payments and headline-making credit events is increasing as data suggest government stimulus measures are gaining less traction than in years past. “The brisk development of trust funds is leading to a dead-end,” Hu says. The “uncertainties surrounding their regulatory requirements have led to an accumulation and concentration of risk in this sector.” And even as Chinese regulators try to curb trust-company indebtedness, they find new ways to expand. This “liquidity binge,” Hu says, is fueling excessive leverage and risk in real estate, infrastructure and mining. “Current payment difficulties of trust fund companies are only the tip of the iceberg,” he warns. Here, the reference is to the part of the problem we can see. What’s worrying outside observers, including the IMF, is what we can’t. At the top of any wish list for economists in Washington is discerning China’s true debt profile – national, local and financial.

Until we know for sure, if we even can, the IMF can do little more than urge China to address its “web of vulnerabilities” inherent in its credit-and-investment-fueled growth. Hu’s iceberg comment has me thinking back to Bill Gross’s oft-quoted China analogy about “mystery meat.” “Nobody knows what’s there and there’s a little bit of bologna,” the bond-fund manager said in a Feb. 4 Bloomberg Television interview. “So we’re just going to have to wonder going forward through this year as to the potential problems in China and other emerging markets.” Make that next year, too. The lack of transparency that pervades Beijing makes it harder to know which of Xi’s planned reforms are being carried out and which aren’t. China’s grow-fast-at-any-cost ethos, rampant corruption and the lack of a free press conspire to make second-biggest economy more of a black box than investors like Gross and policy makers at the IMF would prefer.

23 months inventory …

• China Home Glut Worsens as Developers Won’t Sell at Lower Prices (Bloomberg)

The biggest immediate risk facing China’s economy is about to get worse. A reluctance among some developers to sell units at prices lower than they could fetch just months ago threatens to cause a swelling in unsold properties. The worsening glut would extend a slide in construction that’s already put a drag on the world’s second-largest economy, and counter policy makers’ efforts to stimulate the real-estate industry with loosened rules. In Nanjing, eastern China, nine housing projects originally planned for sale in the first half of 2014 were held for later this year, consulting firm Everyday Network Co. says. The number of homes added to the market in July in 21 major cities dropped 25% from June, according to Centaline Group, parent of China’s biggest real-estate brokerage.

“The completed apartments will be in the marketplace sooner or later, and potential buyers will continue to expect prices to fall,” said Hua Changchun, China economist at Nomura Holdings Inc. in Hong Kong. “The property-market weakness hasn’t changed, despite the policy adjustments.” July economic data due over the next week, starting with tomorrow’s trade numbers, will give a sense of how well growth is holding up after accelerating to 7.5% in the second quarter from a year earlier. The statistics bureau releases inflation figures Aug. 9, followed by industrial production, fixed-asset investment and retail sales on Aug. 13. The central bank reports lending and money-supply figures by the middle of August.

China’s broadest measure of new credit rose in June to the highest level for the month since 2009, underscoring the role of debt in supporting expansion. Home-price data for cities are due from the statistics bureau on Aug. 18, after June prices fell from the previous month in 55 of 70 cities tracked by the government. China’s home sales slumped 9.2% in the first half of this year from a year earlier, following a full-year 26.6% increase in 2013, while new-property construction plunged 16.4%. Developers are responding with sales delays and discounts as well as incentives including no-down-payment purchases and buyback guarantees. Developers’ sales delays in the first half were “very widespread” because prospects were poor given weak demand and tight credit conditions, said Donald Yu, a Shenzhen-based analyst at Guotai Junan Securities Co. “Will the increased supply lead to declines in prices in the second half? That for sure will happen.”

But we’ll do it anyway.

• Mining the Bottom of the Ocean Is as Destructive as it Sounds (Vice)

Have you ever wondered how much the ocean floor is worth? The answer is in the trillions. Metals and materials are the foundation of our life, but with seven billion people occupying the earth, supplies are rapidly dwindling. So mining industries have set their sights miles deep under the sea. It’s estimated there are billions of tonnes worth of valuable metals and minerals on the seabed. However, marine biologists and researchers have raised concerns that those doing deep sea mining don’t appreciate the delicate and fragile ecosystem of the deep-ocean, and how their actions could affect it. Andrew Thurber, a researcher at the College of Earth, Ocean and Atmospheric Sciences at Oregon State University, talked to me about the issue. Thurber’s review on the deep sea’s relationship to us on land and our duty to protect it was recently published in Biogeosciences, a journal of the European Geosciences Union.

In their report, Thurber and his colleagues pointed out the many important uses of the deep sea. The deep sea is used as a dumping ground to absorb waste; it contains many life forms, some of which are being looked at for new medicines; and it serves as an environment for fish to breed. I asked Thurber about the implications of deep sea mining. “It’s really not different from clear-cutting a forest of redwoods, except instead of majestic trees there are many small organisms that, together and en masse, gain their importance to the planet,” he said. “We also know that many of the services that are provided by this habitat are connected.”

What else would you expect?

• Massive Toxic Tailings Pond Spill Floods Canadian Waterways (eNews)

A middle-of-the-night breach of the tailings pond for an open-pit copper and gold mine in British Columbia sent a massive volume of toxic waste into several nearby waterways on Monday, leading authorities to issue a water-use ban. Slurry from Mount Polley Mine near Likely, B.C. breached the earthen dam around 3:45 am on Monday, with hundreds of millions of gallons — equivalent to 2,000 Olympic-sized swimming pools, according to Canada’s Global News — gushing into Quesnel Lake, Cariboo Creek, Hazeltine Creek and Polley Lake. An estimated 300 homes, plus visitors and campers, are affected by the ban on drinking and bathing in the area’s water.

Chief Anne Louie of the Williams Lake Indian band told the National Post the breach was a “massive environmental disaster.” With salmon runs currently making their way to their spawning grounds, “Our people are at the river side wondering if their vital food source is safe to eat,” said Garry John, aboriginal activist and member of the board of directors of the Council of Canadians, in a press release.

Not the last word on this.

• WHO Declares Ebola Outbreak ‘International Public Health Emergency’ (DW)

The World Health Organization says the Ebola epidemic in West Africa constitutes a public health emergency of international proportions. More than 900 people have died since the virus broke out earlier this year. In a press conference on Friday, the WHO said the Ebola epidemic required an extraordinary response to stop its spread. “Countries affected to date simply do not have the capacity to manage an outbreak of this size and complexity on their own,” said WHO Director General Dr. Margaret Chan. She called on the international community to provide urgent support to countries affected by the crippling virus. The WHO previously declared similar emergencies for polio in May, and for the swine flu pandemic in 2009. The agency had convened an expert committee this week for an emergency session to assess the severity of the ongoing Ebola epidemic in West Africa. The virus was first identified in Guinea in March, before it spread to Sierra Leone and Liberia. All three countries have already implemented states of emergency.

The WHO has described the current outbreak as unprecedented. So far, it has killed 932 people and infected more than 1,700, with the death rate hovering around 50%. Medical charity Doctors Without Borders has warned that the virus is “out of control,” while US health authorities acknowledges on Thursday that the pathogen’s spread outside Africa was inevitable. The first European Ebola victim, Spanish Roman Catholic priest, Miguel Pajares, was flown out of Liberia on Thursday. Authorities said the 75-year-old’s condition was stable. Meanwhile two Americans who are being treated in Atlanta, Georgia, after being infected in Liberia are showing signs of improvement. Ebola was first discovered in 1976 in what is now the Democratic Republic of Congo. The virus causes severe fever, headaches, vomiting and bleeding, and is spread via bodily fluids.

Debt Rattle May 19 2014: European Democracy Is Roadkill

May 192014

May 19, 2014 Posted by Raúl Ilargi Meijer at 7:11 pm Finance Tagged with: coup, democracy, Europe, Greece, Italy 4 Responses »

Jack Delano Young Negro farm laborer, Stem, North Carolina May 1940

There are two elections coming up this week that have the potential to shake up a lot of things, not least of all the global financial markets, both in their own way and for their own reasons. First of all, the May 22-25 European parliament elections, which as far as I’m concerned should simply be declared illegal in at least a few of the 28 EU member countries they’re held in. I find it unbelievable, and I even tend to find it scary, that not one respected member of the respected press has paid any attention to the story that emerged during the course of last week and that I described this way on Friday:

Europe Imitates The Fall Of The Roman Empire

First, there was a passage from Tim Geithner’s new book. Then, there was a 3-part series ‘How The Euro Was Saved’ by Peter Spiegel for the Financial Times. Together, they deliver the following storyline: EU leaders refused to let Greece have a referendum on its bail-out, and toppled PM Papandreou to kill it. Then, afraid that Italian PM Berlusconi would make good on his threat to return to the lira if they stuck to their bail-out conditions, they toppled him. What this means to Europeans is that if they elect a government for their country, and it subsequently falls out of favor with Brussels, they can expect to see it overthrown, and likely have it replaced by a technocrat handpicked by the EU leadership (as happened in Greece and Italy). Ergo: Europe is not a democracy, and pretending otherwise is foolish. Democratic elections in member states are merely empty lip service exercises, because on important topics governments of member states have no say.

In fact, the only journalist who did pick up on it was Ambrose Evans-Pritchard, also on Friday, and while I understand people’s reservations concerning Ambrose, please don’t forget this: as it became known that the EU leadership has no scruples when it comes to bringing down elected governments of member states, AEP was the only one writing for the mainstream media who brought this ultimate betrayal of European democracy, and hence of all European voters, to light.

• EU Officials Plotted IMF Attack To Bring Rebellious Italy To Its Knees (AEP)

The revelations about EMU skulduggery are coming thick and fast. Tim Geithner recounts in his book Stress Test: Reflections on Financial Crises just how far the EU elites are willing to go to save the euro, even if it means toppling elected leaders and eviscerating Europe’s sovereign parliaments. The former US Treasury Secretary says that EU officials approached him in the white heat of the EMU crisis in November 2011 with a plan to overthrow Silvio Berlusconi, Italy’s elected leader. “They wanted us to refuse to back IMF loans to Italy as long as he refused to go,” he writes. Geithner told them this was unthinkable. The US could not misuse the machinery of the IMF to settle political disputes in this way. “We can’t have his blood on our hands”.

This concurs with what we knew at the time about the backroom manoeuvres, and the action in the bond markets. It is a constitutional scandal of the first order. These officials decided for themselves that the sanctity of monetary union entitled them to overrule the parliamentary process, that means justify the end. It is the definition of a monetary dictatorship. Mr Berlusconi has demanded a parliamentary inquiry. “It’s a clear violation of democratic rules and an assault on the sovereignty of our country. The plot is an extremely serious news which confirms what I’ve been saying for a long time,” he said.

This is no trifle matter, even though one may get that idea because of the deafening silence we’ve been blinded with so far on this topic. As I write, it scares me anew. In three days, elections begin for a region that holds 500 million people. But there is a tiny group, largely unelected, in Europe’s capital Brussels, that find they have the moral right to handpick their favorites and topple non-favorites who were elected in democratic elections. If it reminds me of one thing, it’s how Salvador Allende lost the power his people voted him into, and lost his life, in Chile in 1972, because the CIA and Milton Friedman’s Chicago Schoolboys wanted someone else, who would serve THEIR purpose, not that of the people. That is what happened in both Greece and Italy, and we can now prove it.

And no, there were no bombs and machine gun heli’s involved this time around, but that’s not where we should put the dividing line. A coup is a coup. And any coup in an ostensibly democratic nation is a crime that the perpetrators need to be dragged in front of a judge and jury for, if not court-martialed. Yeah, well, that sounds lovely, but not a word was said or written. I looked earlier today, and there was only one reference I could find, in the English edition of Greek paper Ekathimerini in which Evangelos Venizelos, finance minister under Papandreou, the Greek PM who was ousted under EU auspices because he wanted the Greek people to decide in a referendum whether they wanted Troika austerity or not, an event in which Venizelos did not play a clean role at all, that same Venizelos who is now leader of PASOK, the party that held power for decades but is presently scraping the voters barrel in polls for this week elections, said:

Barroso did not choose PM, says PASOK chief

“Mr Barroso did not have the main role in the discussion and the process,” said the PASOK chief. “Whoever says this does not have an understanding of the international balance of power and of the roles that EU figures have.” Venizelos also said that Papademos had not been first choice to become interim prime minister. Before he was sworn in on November 11, Parliament Speaker Filippos Petsalnikos and PASOK veteran Apostolos Kaklamanis had been suggested for the role, Venizelos claimed. However, Venizelos defended the decision not to proceed with a referendum, which eurozone leaders insisted should only be on whether Greece should remain in the euro. The PASOK leader suggested that proceeding with the vote would have led to a flight of deposits. “Did anyone want the banks to collapse the next day and the country to default?” he said.

Hmm, Evangelos. That’s how we decide these matters, is it? Maybe the question should be: did anyone want democracy? Because if they did, that was no longer an option, was it? How on earth can someone who’s the leader of a party that’s part of a democratic system, and who apparently hopes to be elected as the leader of a democratic nation, defend the toppling of his former boss in such a way? What the f**k is wrong with you? And what the f**k is wrong with all the journalists who have undoubtedly read the accounts of both the Berlusconi and the Papandreou coups, and decided not to write one single word about them while there are elections in just 3 days in which voters are fooled into thinking their vote counts for something?

Parties that are critical of the EU, if not downright against it, may win large victories in France, Holland, the UK, Finland, Norway, Italy and perhaps more countries. We’ll know by Sunday. But what will that mean? The entire mainstream storyline is HOW are we going to do Europe, not IF we’re going to do it. How fast are we going to hand over ever more powers to a cabal of career “civil servants” who have shown they are more than willing to sweep aside any actually elected politician from any of the 28 EU nations who dare stand in their way, and in the way of their dreams of what Europe should be, damn the people, and damn the democratic process?! Maybe this will give everyone a pause for thought:

Greek Selloff Shows Rush for Exit Recalling Crisis

Bondholders in Europe just got a wakeup call. After a four-month rally in euro-region debt, yields on Italian and Spanish bonds had their biggest one-day jump in almost a year last week as a selloff that started in Greece spread. With bids evaporating and prices sliding, traders poured into derivatives as they rushed to protect against losses. Italy’s and Spain’s bonds extended that slump today. [..]

The risk is that speculative traders, who bought debt on the assumption the European Central Bank would support the market, may try to flee at the same time if the outlook darkens. “You only know how wide the door to the exit is when there are a few of you trying to push through at the same time,” Michael Riddell, fund manager at M&G Group, which oversees $417 billion, said on May 16. “I don’t think liquidity has been that great in peripherals at any stage.”

Prices plunged in the wake of opinion polls suggesting the nation’s governing coalition was losing support before local-government votes and European Parliament elections on May 25. Prime Minister Antonis Samaras’s coalition partner Pasok, which dominated Greece’s politics for three decades, was ranked sixth in a poll with 5.5% as voters blamed the party for the country’s economic meltdown. The first round of local and regional elections in Greece ended yesterday with no single party winning enough support to declare a decisive victory. In Italy, Prime Minister Matteo Renzi’s party is facing its first elections since coming to power three months ago, risking a voter backlash amid a sluggish economy and a corruption scandal in Milan.

How much irony is there in thinking that the financial markets are the only hope left for European voters? Democracy is Europe is roadkill until those responsible for toppling Papandreou and Berlusconi have been thrown out, the system has been restructured to ensure no such things can happen again, and the appropriate courts have passed judgment on the guilty parties. None of those things are going to happen, the same old clique that executed the coups will start divvying up the cushy jobs come Sunday night if they haven’t already, and that can only mean one thing: the old continent is morally going going gone. And it’s not just the politicians, or whatever the proper term is for Brussels career wankers, it’s just as much an indictment of the entire world press.

I was going to cover the Ukraine elections this weekend too, but I’ll do that later in the week, Europe’s “monetary dictators” got me riled up plenty for now. And that goes for the entire press corps too. What a bunch of useless parakeets.

• Over-Heating Stock Markets Raise Crash Fears (Telegraph)

Global equity markets are over-heating, the UK’s top professional investors’ body has warned, raising fears that “vulnerable” stocks are poised for a crash. The number of investors who think the world’s leading stock markets such as the S&P 500 and the FTSE 100 are overvalued has reached its highest level yet, according to a survey of professional money managers completed by the CFA Society of the UK. The survey offers a rare insight into the thinking of the investment community, which manages billions of pounds on behalf of pension funds and households. It revealed that 49pc of the 530 stocks experts now believe that developed equity markets are overvalued – signalling rising fears of a correction – up from 39pc just three months earlier.

The number of money managers that felt there were further gains to be made in stock markets fell to its lowest level reported, at just 16pc, down from 50pc at the start of last year. “With both the FTSE and S&P indices hovering around record highs, our data suggests that investors should perhaps be cautious about reaching for yield in developed market equities when investment professionals view that yield premium as vulnerable,” said Will Goodhart, CFA Society chief executive. The UK’s blue chip index soared to a 14-year high last week and markets in the US have gone into uncharted territory.

Goldman Sachs expects the S&P 500 to fall during the next three months from highs of 1,877.9 at the end of last week. “The return potential for the US market is dampened by limited room for valuation and margin expansion given the strong recovery we have seen already,” said the investment bank’s portfolio strategy team. Investors are driving share prices higher in the belief that companies listed in developed markets will benefit as the US and UK economies return to growth, said Dr Stephen Barber, political economist from London South Bank University. “Markets are discounting mechanisms and they are pricing a fairly optimistic view of growth in the both the US and the UK,” he said. “However, the markets can’t price in the fact that these views could be wrong.”

Nasdaq, Russell 2000, all’s tumbling but Dow and S&P. Mom and Pop, check your six.

• Wall of Worry Rebuilt as Nasdaq Rout Sends Cash to 2-Year High (Bloomberg)

Investors are losing their nerve in the stock market amid selling that has sent some industries down the most since 2008. In the past, that’s been a signal to buy. Global money managers raised cash holdings to a two-year high this month and say America is the worst place to invest, a Bank of America Corp. survey published last week shows. Investors have pulled about $10 billion from funds that buy U.S. equity this month, set for the biggest outflows since August, according to data compiled by Bloomberg and the Investment Company Institute.

After embracing stocks last year for the first time since the bull market began, individuals are showing signs of reverting to the skepticism that led them to pull more than $400 billion from mutual funds from 2009 through 2012. While hedge fund manager David Tepper says caution is appropriate now, others consider the lack of exuberance a healthy sign that sets the stage for more gains. “Walls of worry are everywhere,” Robert Doll, who helps oversee $118 billion as chief equity strategist at Nuveen Asset Management in Chicago, told Tom Keene and Michael McKee on Bloomberg Radio’s “Surveillance” on May 14. “This is the least believed bull market that I’ve ever seen. From here it’s earnings, it’s fundamentals, it’s can the economy grow? And my guess is the answer to that question is yes.”

Ouch! Didn’t see this one coming, did you?

• Highway Trust Fund: The Next Big American Economic Crisis (BI)

On Wednesday, President Barack Obama gave his first formal warning about this impending self-inflicted disaster — the Highway Trust Fund, a transportation and infrastructure fund financed by gasoline taxes, is set to run out by the end of the summer. Thus far, Congress has not come up with a solution, and both sides are beginning to dig in. By July, thousands of projects and contracts could be put on hold amid the uncertainty — right in the middle of summer construction season. In one economic analysis released last week, the Obama administration warned 700,000 jobs tied to the fund and its uncertain future are at stake. “Right now, there are more than 100,000 active projects paving roads and rebuilding bridges, modernizing our transit systems,” Obama said Wednesday in remarks near the Tappan Zee Bridge in Tarrytown, New York, where a $3.9 billion effort to replace the current aging structure is underway.

“States might have to choose which ones to put the brake on. Some states are already starting to slow down work because they’re worried Congress won’t untangle the gridlock on time. And that’s something you should remember every time you see a story about a construction project stopped, or machines idled, or workers laid off their jobs.” The fundamental problem is that gasoline taxes alone are no longer enough to finance the Highway Trust Fund, due to declining fuel use across the U.S. However, neither the White House nor Congress wants to raise those taxes, and there is a disagreement about how to fill the fund without them. Simply put, spending on transportation and infrastructure now exceeds gas taxes taken in. During recent testimony before the Senate Finance Committee, Joseph Kile, the assistant director for microeconomic studies at the congressional budget office, laid out two politically painful potential solutions — either cut spending in the fund’s two accounts by 30% and 65%, or raise the gas tax by 10 to 15 cents per gallon.

Good research project. Pity the NYT reports on it.

• House of Debt: The Case Against the Financial Rescue (NY Times)

Atif Mian and Amir Sufi are convinced that the Great Recession could have been just another ordinary, lowercase recession if the federal government had acted more aggressively to help homeowners by reducing mortgage debts. The two men — economics professors who are part of a new generation of scholars whose work relies on enormous data sets — argue in a new book, “House of Debt,” out this month, that the government misunderstood the deepest recession since the 1930s. They are particularly critical of Timothy Geithner, the former Treasury secretary, and Ben Bernanke, the former Federal Reserve chairman, for focusing on preserving the financial system without addressing what the authors regard as the underlying and more important problem of excessive household debt. They say the recovery remains painfully sluggish as a result.

At stake in their debate with Mr. Geithner, whose own account of the crisis was published last week – in a book called “Stress Test” – is not just the judgment of history but also the question of how best to prevent crises. “Our point is very simple,” said Mr. Mian, a professor at Princeton. “Bernanke won. We did save the banks. And yet the United States and Europe both went through terrible downturns.” The focus on preserving banks, he said, “was an insufficient mantra.”Mr. Sufi, at the University of Chicago, said in a separate interview that he was baffled by claims that the government’s efforts were successful. “If you actually look at the argument that people like Mr. Geithner make, they almost always point to financial metrics like risk spreads and interest rates,” he said. “But if you look at the real economy, it just tends to come out in our favor.” Millions of Americans remain unemployed almost five years after the formal end of the recession.

Christina Romer, who led President Obama’s Council of Economic Advisers during the recession, said the research by Mr. Mian and Mr. Sufi had convinced her that she and other administration officials underestimated the importance of helping homeowners. But she said Mr. Mian and Mr. Sufi, in turn, had underestimated both the economic impact of the financial crisis and the effectiveness of the government’s response.

“123% of almost nothing isn’t much. ”

• And They Call This A Recovery? (Lee Adler)

By now you have heard about Friday’s blockbuster housing starts numbers that blew out conomists’ expectations. Here’s the actual, not seasonally adjusted data. Total starts in April came in at 94,900. That was the strongest April performance since the top of the housing bubble. April starts have risen 123% from the April 2009 low. That sounds impressive, but 123% of almost nothing isn’t much. Percentages don’t mean much in this market. The whole numbers are more illustrative. Total starts have soared by that percentage because an abominable total of only 42,500 units were built in April 2009. Compare that with the nearly 185,000 units built in April 2005 at the peak of the housing bubble. The current level of starts is just over half that number.

The gain in single family starts was less robust, hitting 60,100. That was 8.7% better than last April’s 55,300 units and it’s up a booming 72% from the 2009 low. But that’s only an increase of 25,000 from the tiny number of starts in April 2009, 35,000. Compare the current number with April 2006 when 135,000 units were started. So is the housing market really booming? It’s all a matter of perspective. Total starts are still down 49% from the April 2005 level. Single family starts are still down a whopping 60% from the extremes of the bubble in April 2005 (when I put my house up for auction and successfully sold it in 2 weeks). And the “recovery,” such as it is, may be about to run into real trouble. It’s about supply and demand. They have been growing in tandem, but not this month. In March single family sales fell, but starts rose sharply in both March and April. The divergence creates a record oversupply in the single family market.

The last time sales fell while starts were still rising was in 1986, at the onset of a six year housing recession that few recall because the more recent one was so much worse. But those of us who were working in the housing industry then certainly remember it. It was a disaster. Homebuilders were dropping like flies as sales dried up and prices fell. Maybe the March sales downtick was an aberration due to the weather, as many have claimed. [..] If the March decline was not an aberration and sales do not rebound, the housing industry could be ready to tank again. Not that it ever recovered. New home sales and starts are still approximately 30% below where they were at the bottom of the 1986-92 housing recession. And they call this recovery?

Recovery!

• America’s Homeless: The Rise Of Tent City, USA (CNN)

Homeless encampments known as “tent cities” are popping up across the country. Formed as an alternative to shelters and street-living, these makeshift communities are often set up off of highways, under bridges and in the woods. Some have “mayors” who determine the rules of the camp and who can and can’t join, others are a free-for-all. Some are overflowing with trash, old food, human waste and drug paraphernalia, others are relatively clean and drug-free. The National Law Center on Homelessness & Poverty documented media accounts of tent cities between 2008 and 2013, and estimated that there are more than 100 tent communities in the United States – and it says the encampments are on the rise.

“[T]here have been increasing reports of homeless encampments emerging in communities across the country, primarily in urban and suburban areas and spanning states as diverse as Hawaii, Alaska, California, and Connecticut,” the organization’s study states. Tent cities are most common in areas where shelter space is scarce or housing unaffordable. Yet, many people say they choose to live in a tent even when shelter is an option. And they do so for one big reason: freedom. Shelters typically have strict rules: many require guests to check in and out at certain times that can conflict with work schedules and they often don’t allow couples to stay together. Drug and alcohol use is also prohibited, and some people don’t qualify for the subsidies they need to stay in a shelter because of a prior jail time (for certain crimes), or other reasons. “Shelter is one step away from jail,” said Dave, who lived in a tent city in Camden, N.J., that CNNMoney visited.

The NLCHP found that of the more than 100 camps, only eight were actually considered legal. Ten tent cities weren’t officially recognized, but the city or county wasn’t doing anything to get rid of them. The vast majority of encampments, however, have been shut down and occupants have been evicted. One of the most recent evictions took place in Camden, N.J., this week, when the state, county and city joined forces to shut down multiple tent cities and kick out the residents. While the county worked with the occupants to find them somewhere to go, Camden’s shelters were already full and many people ended up on the streets Instead of evicting people from tent cities, the NLCHP says the root of the issue – unaffordable housing – needs to be addressed.

The bad loan percentage must be beyond comprehension.

• Nomura Warns Of Chinese Post-Bubble Bad Loans (MarketWatch)

Nomura argues — in a new report — there are now many similarities between China’s property market today and Japan’s two decades ago. The obvious parallel is the scale of the property boom. Both Japan and China let property lending race ahead of GDP growth and experienced overheating economic activity, coupled with aggressive bank lending. But perhaps the most important similarity between these two property markets is behavioral: an institutional failure to publicly face up to an ugly bad-loan situation as the market reversed. In Japan’s case, a weak regulatory regime and lax accounting meant there was an unwillingness to impose discipline, and no financial institutions were forced into bankruptcy.

Although direct lending to real estate at the time was less than 20% of the nation’s total loan portfolio, over the next decade Japan’s banks eventually wrote off a cumulative 25% of all outstanding loans, according to Nomura estimates. This period gave rise to Japan’s “zombie banks,” which took much of the blame for the country’s infamous “lost decade” of growth. Likewise in China today, there is widespread skepticism that Chinese banks are revealing anything close to a true picture of their non-performing loans. Between loans regularly rolled over, murky lending to well-connected state-owned entities and the explosion in shadow banking, it all contributes to a similarly opaque environment. Recognizing bad debts effectively becomes a political compromise. Nomura estimates half of Chinese banks’ loans books include some sort of property collateral.

Another similarity they highlight is the levels of hubris. Back then, Japan was the “next big thing” in the global economy — the world’s largest creditor nation, collecting accolades for everything from its economic performance to its corporate management ethos. China meanwhile has been told it is only a matter of time before it overtakes the U.S. to become the world’s largest economy, and it could even one day see the yuan usurp the greenback as the world’s reserve currency. Perhaps then, we shouldn’t worry about ghost cities of uninhabited investment properties, since they will eventually fill up, and all those problematic loans will take care of themselves. The worst Beijing appears to countenance is that GDP growth will slow to 7%.

Tick tick tick goes da bomb.

• China Home Price Growth Slows In More Cities Even As Curbs Ease (Bloomberg)

China’s new-home prices rose in April in the fewest cities in a year and a half as developers offered discounts and the economy slowed, prompting the easing of property curbs in some places. Prices last month climbed in 44 of the 70 cities tracked by the government compared with 56 in March. That was the fewest metropolitan areas with price gains since October 2012 when increases were recorded in only 35 on a monthly basis. After four years of government restrictions to cool the housing market, home sales and property construction are sliding and have become a drag on the country’s economy, which recorded its slowest growth in six quarters in the first three months of the year. The central bank on May 13 called on the biggest lenders to accelerate the granting of mortgages as developers including China Vanke Co. and Greentown China Holdings Ltd. cut property prices to lure homebuyers.

“China’s property market is on a very dangerous brink,” Xu Gao, Beijing-based chief economist at Everbright Securities Co., who formerly worked at the World Bank, said in a phone interview yesterday. “Concerns about the slowing market led to weakening prices and sales, which turned into a vicious circle.” Home-price growth moderated both in first-tier and less affluent cities. Prices in Beijing rose 0.1% from March, the National Bureau of Statistics said in a statement yesterday, the slowest since September 2012, while Shanghai prices increased 0.3%, the smallest gain since November 2012. The eastern city of Hangzhou had the largest decline in April among cities tracked, with prices falling 0.7% from a month earlier.

Hmm. China has no strategic reserve. So-so story by Ambrose.

• China Steps Up Speed Of Oil Stockpiling As Tensions Mount In Asia (AEP)

China is stockpiling oil for its strategic petroleum reserve at a record pace, intervening on a scale large enough to send a powerful pulse through the world crude market. The move comes as tensions mount in the South China Sea, and the West prepares possible oil sanctions against Russia over the crisis in Eastern Ukraine. Analysts believe China is quietly building up buffers against a possible spike in oil prices or disruptions in supply. The International Energy Agency (IEA) said in its latest monthly report that China imported 6.81m barrels a day in April, an all-time high. This is raising eyebrows since China’s economy has been slowing for months, with slump conditions in the steel industry and a sharp downturn in new construction.

The agency estimates that 1.4m b/d was funnelled into China’s fast-expanding network of storage facilities, deeming it “an unprecedented build”. Shipments were heavily concentrated at Chinese ports nearest the new reserve basins at Tianjin and Huangdao. “We think this is a big deal,” said one official. China accounts for 40% of all growth in world oil demand, so any serious boost to its strategic reserves tightens the global supply almost instantly and pushes up the spot price. Michael Lewis, head of commodities at Deutsche Bank, said Chinese officials at Beijing’s Strategic Reserve Bureau are playing the oil market tactically, or “buying the dips” in trader parlance. They add to stocks whenever Brent crude prices fall to key support lines, as occurred earlier this Spring. This is currently around $105.

“It’s is very similar to what they have been doing with copper. Whenever it drops below $7,000 (a tonne), they see it as a buying opportunity. They do the same with agricultural commodities,” he said. China is putting a floor of sorts underneath the global oil market, calling into question predictions by the big oil trading banks that prices will deflate this year as more crude comes on stream from Libya, Iraq, and Iran, and as the US keeps adding supply shale. The strategic buying could go on for a long time since China is rapidly expanding its reserve capacity from 160m barrels to 500m by 2020, with sites scattered across the country. [..] China has stocks to cover 46 days of imports compared to 209 for the US, based on estimates from last year. India is acutely vulnerable to any disruption with just 12 days cover. The minimum safe threshold for OECD states is deemed to be 90 days.

The pipeline’s not there yet. Who’ll fork over the $30 billion or so?

• Gazprom To Sign Monumental Gas Deal With China (RT)

Gazprom, Russia’s largest natural gas producer, and China National Petroleum Corporation (CNPC) are set to sign a gas deal that will send 38 billion cubic meters of natural gas a year eastward to China s burgeoning economy, starting in 2018. The timing is almost flawless as Russia is looking to shield itself from Western sanctions by pivoting towards Asia, and China desperately needs to switch from dirty coal to more environmentally friendly natural gas. The arrangements on export of Russian natural gas to China have nearly been finalized. Their implementation will help Russia to diversify pipeline routes for natural gas supply, and our Chinese partners to alleviate the concerns related to energy deficit and environmental security through the use of clean fuel, President Vladimir Putin said.

The deal has been on the table for over 10 years, as Moscow and Beijing have negotiated back and forth over price, the gas pipeline route, and possible Chinese stakes in Russian projects. The gas price is expected to be agreed at between $350-400 per thousand cubic meters. Of course Russia wants to sell gas and resources at the highest possible prices. But because of the sanctions from European partners, we need to find a partner that can buy our gas long-term, which is why at the moment China looks very attractive to us, Aleksandr Prosviryakov, a partner at Lakeshore International, a Moscow-based asset management firm, told RT at a Confederation of Asia Pacific Chambers of Commerce and Industry (CACCI) in Moscow ahead of the big meeting on Tuesday.

Nervous friends.

• Russia-China Ties At Highest Level In History – Putin (RT)

Transcript of Vladimir Putin’s interview with Chinese Central Television, Xinhua news agency, China News Service, The People’s Daily, China Radio International, and Phoenix Television.

Q: China is consistently making progress towards the “Chinese dream”, i.e. a great national rebirth. Russia has also set a goal of restoring a powerful state. How, in your opinion, could our countries interact and help each other in fulfilling these tasks? What areas can be prioritised in this regard?

VP: Promotion of friendly and good-neighbourly partnership relations is fully consistent with the interests of both Russia and China. We do not have any political issues left which could impede the enhancement of our comprehensive cooperation. Through joint efforts, we have established a truly exemplary collaboration, which should become a model for major world powers. It is based on respect for the fundamental interests of each other and efficient work for the benefit of the peoples of our two countries. Russia and China successfully cooperate in the international arena and closely coordinate their steps to address international challenges and crises. Our positions on the main global and regional issues are similar or even identical.

It is encouraging that both sides are willing to further deepen their cooperation. Both Moscow and Beijing are well aware that our countries have not exhausted their potentials. We have a way to go. The priority areas of collaboration at the current stage include the expansion of economic ties and cooperation in science and high-technology sector. Such pooling of capacities is very helpful in fulfilling the tasks of domestic development of our countries.

Q: Cooperation between China and Russia has been steadily increasing, but uncertainties in global economy persist. The emerging markets are faced with new challenges and slowdown of economic growth. How can our two countries help each other to counter these challenges? How can we ensure steady increase of mutual trade and reciprocal investments?

VP: In the context of turbulent global economy, the strengthening of mutually beneficial trade and economic ties, as well as the increase of investment flows between Russia and China are of paramount importance. This is not just a crucial element of socioeconomic development of our countries, but a contribution to the efforts aimed at stabilising the entire global market. Today, Russia firmly places China at the top of its foreign trade partners. In 2013, the volume of bilateral trade was close to $90 billion, which is far from being the limit. We will try to increase trade turnover to $100 billion by 2015 and up to $200 billion by 2020.

Our countries successfully cooperate in the energy sector. We steadily move towards the establishment of a strategic energy alliance. A large scale project worth over $60 billion is underway to supply China with crude oil via the Skovorodino-Mohe pipeline. The arrangements on export of Russian natural gas to China have been nearly finalised. Their implementation will help Russia to diversify pipeline routes for natural gas supply, and our Chinese partners to alleviate the concerns related to energy deficit and environmental security through the use of “clean” fuel.

This was clear 10 years ago.

• ‘F-35 Joint Strike Fighter A $400 Billion Boondoggle’ (Telegraph)

Britain’s long-delayed £70 million stealth fighter may need to be cancelled because of its poor performance, according to an analysis by a senior American air force officer. The F-35 Joint Strike Fighter being built for British and US forces is based on outdated ideas of air warfare, it is claimed. The aircraft could be unable to evade enemy radar and be too expensive for long campaigns. The critique in the US Air Force’s own journal concludes that the new fighter may even have “substantially less performance” than some existing aircraft. Britain is preparing to buy at least 48 of the Lockheed Martin aircraft to replace its scrapped Harrier jump jets; the US military is expected to order more than 2,400. The £235 billion programme is the most expensive weapons system in history at a time when defence budgets on both sides of the Atlantic are being cut.

The analysis in the Air and Space Power Journal states: “Even if funding were unlimited, reasons might still exist for terminating the F-35. “Specifically, its performance has not met initial requirements, its payload is low, its range is short, and espionage efforts by the People’s Republic of China may have compromised the aircraft long in advance of its introduction.” Advances in Russian and Chinese radar defences mean it is not clear the stealth technology will still work, the analysis warns. “These facts make the risk calculation involved with prioritizing stealth over performance, range, and weapons load out inherently suspect – and the F-35 might well be the first modern fighter to have substantially less performance than its predecessors.” The author, Col Michael Pietrucha, suggests the F-35 programme should be put on hold and the US Air Force should instead look at a mix of fighters for the future.

“A breakdown suggested fears of a nation-wide housing bubble are misplaced … “ Geez kiddo’s, really?

• Average UK House Prices Jump $15,000 In Five Weeks (Telegraph)

The price of an average home increased by nearly £10,000 between April and May, the biggest month-on-month cash increase ever recorded. Figures from Rightmove, the property website, showed house prices jumped by nine% over the past year, pushing up the value of an average home to record levels. The news came as the Bank of England said that people could be stopped taking out mortgages worth many times their salary to buy new homes to cool the market. Asking prices for homes in England and Wales increased by 3.6% or £9,409 – outstripping the previous record of £8,310 in October 2012 – between April 6 and May 10. The increase – the biggest since Rightmove started to collect house price information in 2001 – in the figures means that this month the average property is on sale at a new record high of £272,003.

A breakdown suggested fears of a nation-wide housing bubble are misplaced, with London leading the way with a 16.3% year-on-year increase, compared with a more modest 4.9% in the rest of the country. The average asking price in the city is up by nearly £80,000 so far in 2014, or £4,405 a week, compared with £1,521 a week for the rest of the country. The figures emerged after Mark Carney, the Bank of England’s Governor, said he was considering capping the size of mortgage ratios to salaries to control the market. The Bank was also watching to see if the Government’s Help to Buy scheme – in which the Government gives people taxpayers’ money to cover deposits on homes worth up to £600,000 – was fuelling the increase.

In March the Bank warned that mortgages larger than four times borrowers’ incomes accounted for the highest share of new home since 2005. Mr Carney suggested that the Bank could impose a new “affordability test” for borrowers as well as reining in Help to Buy. He told Sky News’ Murnaghan programme: “We could do more, we could take steps around affordability to test whether or not individuals can test mortgages at much higher interest rates. “We could limit amounts of certain types of mortgages that banks could undertake, we could provide advice – the Chancellor has asked us if we would provide advice on changing the terms of Help to Buy – all those things are possibilities and we will consider them all.”

Now you know where QE is going. Not you.

• 10 Biggest Banks’ Commodities Revenue Rises 26% (Bloomberg)

Commodities revenue at the 10 largest investment banks rose to a two-year high in the first quarter even as companies from JPMorgan to Barclays shrank operations, according to analytics company Coalition Ltd. Raw-materials revenue at Goldman Sachs, Morgan Stanley (and the other companies making up the top 10 banks jumped 26% to $1.8 billion, the highest since the first three months of 2012, Coalition said in a report today. Only commodities showed growth as revenues in other areas from rates to emerging markets declined, the report showed. “The cold winter in North America created volatility and had a positive impact on U.S. power and gas revenues,” London-based Coalition said. “Additionally, investor product performance recovered from a very low base as client activity levels showed some improvement.”

The banks’ employees in commodities declined 9% from last year to 2,098 people, Coalition estimated. Barclays said last month it plans to withdraw from most of its global raw-materials activities, and Deutsche Bank and Bank of America are pulling back as well. JPMorgan and Morgan Stanley are selling units. Goldman Sachs said last month its revenues from commodities were “significantly higher” in the first quarter and Morgan Stanley reported a “strong” performance. Natural gas futures traded in New York touched a five-year high in February amid freezing weather in the U.S. [..] Commodities revenue at the 10 largest banks fell 18% last year amid reduced volatility, Coalition said in February. The Standard & Poor’s GSCI gauge of 24 raw materials had its first drop in five years in 2013 as gold fell the most since 1981 and corn, arabica coffee and wheat slid at least 20%. The GSCI index rose 3.4% so far this year.

Politicians and regulators have pressed banks to cut back their commodities activities. The Federal Reserve has said it’s considering new limits on trading and warehousing of physical commodities. Policy makers are seeking comment on ways to restrict ownership and trading of commodities such as oil, gas and aluminum by deposit-taking banks. New global capital rules also increased the cost to banks of holding commodities. Morgan Stanley still expects to complete the sale of a physical oil business to OAO Rosneft amid U.S. sanctions of Russian leaders, Porat said April 17. JPMorgan agreed in March to sell its physical commodities business to Mercuria Energy Group Ltd. for $3.5 billion. Deutsche Bank is cutting about 200 raw-materials jobs after deciding last year to exit dedicated energy, agriculture, dry-bulk and industrial-metals trading. Bank of America said in January it would dispose of its European power and gas inventory as opportunities shrink and increasing regulation curbs trading.

• EU’s Voters Will Do Little To End The Crisis (Guardian)

Europe goes to the polls this week and the mood is sour. It is sour among voters and it is sour in the markets, where the sell-off at the end of last week was prompted by fears that the election results would open a new chapter in the eurozone crisis. That looks all too likely. Despite all the bullish talk in recent months, the problems of the eurozone have not gone away. The single currency’s weaker members, such as Greece, Spain and Italy, found it easier for a while to sell their bonds at lower interest rates. But that was largely due to the generosity of the Federal Reserve, which flooded the global economy with dollars through its quantitative easing programme.

The QE injection was a godsend to the eurozone, which has so far – but perhaps not for much longer – scorned the idea of turning on the electronic printing presses. US dollars found their way through the global financial system into European bond markets, and this allowed Mario Draghi, the president of the European Central Bank (ECB), to say he would do whatever it took to save the euro, without actually having to back his words with action. This new version of the postwar Marshall plan bought the eurozone some time. What it didn’t do, however, was change the core economic problem of the eurozone’s weak periphery. They are not growing nearly fast enough to prevent their debts becoming more onerous. Generalised austerity has made matters worse, as has the ECB’s lack of sufficient offsetting action.

Unemployment is high and voters are sick of austerity. It would be a mistake though to imagine that much, or indeed anything, will change as a result of the elections to the European parliament. There will be a lot of talk about how Europe needs to deliver for its people, and that will be it. Mainstream parties with their mainstream thinking will still be in charge and life will go on as before. As a result, Europe will condemn itself to an even longer period of economic stagnation, mass unemployment and austerity. Extremism will flourish. There is an alternative to this depressing scenario. Admit that it was a mistake of historic proportions to use the euro as a way of advancing the cause of ever closer union. Accept that and it is possible to avoid Europe becoming the new Japan.

• Greek Government At Risk From EU Elections (Ekathimerini)

Prime Minister Antonis Samaras has convinced investors to buy the story of Greece’s recovery. Now he has to persuade voters. The premier heads into elections for the European Parliament on May 25 on the back of the Greece’s first bond auction in four years and with the economy poised to return to growth later this year. With more than half the country’s youth still without work, polls suggest voters aren’t ready to credit Samaras for the changes just yet. “The euro crisis seems to be over but its causes have not withered away,” said former Prime Minister Costas Simitis of PASOK, the socialist party that dominated Greek politics for three decades. “High unemployment and uncertainty fuel euro-skepticism, while member-states become increasingly reluctant to cede more power to European institutions,” he added, in a written response to questions.

Four years and three prime ministers after Greece’s then premier, George Papandreou, requested an international bailout in return for budget cuts and an economic overhaul that cost him his job, political instability still haunts Greece. That threatens to undo the coalition led by Samaras’s New Democracy and unravel the fragile progress toward stability he has achieved. While New Democracy trails SYRIZA, the opposition group that rejected the terms of the bailout packages, the bigger threat to the government may be the collapse in support for Samaras’s coalition partner PASOK. Papandreou’s PASOK, which dominated Greek politics for three decades, plunged to sixth place with just 5.5 percent of the vote in a recent poll as voters blame the party for the country’s economic meltdown.

Samaras’s governing coalition has 152 lawmakers in the country’s 300-seat legislature. The prospect of the 27 PASOK lawmakers withdrawing their support could deter the foreign investors helping to fuel the recovery, according to Megan Greene, chief economist at Maverick Intelligence and a columnist with Bloomberg View. “If there were snap elections and investors were spooked by the prospect of SYRIZA being the negotiator for Greece, it could really hurt the Greek recovery because it’s so fragile,” she said in a telephone interview.

The ones who already make more than $25 voted it down for the rest. It’s called democracy.

• Swiss Reject World’s Highest Minimum Wage of $25 Per Hour (Bloomberg)

Swiss voters rejected the world’s highest national minimum wage, striking down a proposal for an hourly rate of 22 francs ($25). The initiative was opposed by 76.3% of voters, the government in Bern said yesterday. Polls, including one by gfs.bern, forecast that outcome. “It’s a strong sign to Switzerland as a center of employment,” Economy Minister Johann Schneider-Ammann said at a news conference in Bern. “Accepting the initiative would have led to job cuts in economically weak, rural areas.” With income inequality growing among developed economies, minimum wages are on the table in other countries as well.

In the U.K., Prime Minister David Cameron has increased it to £6.5 ($10.9) per hour, while in the U.S., President Barack Obama is pushing for an increase in the $7.25-an-hour federal minimum to $10.1. In Germany, Chancellor Angela Merkel’s cabinet backed a national minimum of €8.50. Rejection of the Swiss measure, which called for a full-time worker to be paid at least 4,000 francs a month, breaks with a series of plebiscites — including ones on excessive executive compensation and immigration — that companies said make Switzerland a less desirable place to do business. “People are again saying they don’t want the state to meddle,” Swiss trade association director Hans-Ulrich Bigler said. “It’s a vote of confidence by the people in the economy.”

Higher and higher.

• Record High Radiation In Seawater Off Fukushima Plant (Japan Times)

Radiation has spiked to all-time highs at five monitoring points in waters adjacent to the crippled Fukushima No. 1 power station, plant operator Tokyo Electric Power Co. said Friday. The measurements follow similar highs detected in groundwater at the plant. Officials of Tepco, as the utility is known, said the cause of the seawater spike is unknown.Three of the monitoring sites are inside the wrecked plant’s adjacent port, which ships once used to supply it. At one sampling point in the port, between the water intakes for the No. 2 and No. 3 reactors, 1,900 becquerels per liter of tritium was detected Monday, up from a previous high of 1,400 becquerels measured on April 14, Tepco said.

Nearby, also within the port, tritium levels were found to have spiked to 1,400 becquerels, from a previous high of 1,200 becquerels. And at a point between the water intakes for the No. 1 and No. 2 reactors, seawater sampled Thursday was found to contain 840 becquerels of strontium-90, which causes bone cancer, and other beta ray-emitting isotopes, up from a previous record of 540 becquerels. At two monitoring sites outside the port, seawater was found Monday to contain 8.7 becquerels and 4.3 becquerels of tritium. The second site was about 3 km away.

Debt Rattle Mar13 2014: The Demise Of The Ponzi Democracy

Mar 132014

March 13, 2014 Posted by Raúl Ilargi Meijer at 3:06 pm Finance Tagged with: democracy, healthcare, interest rates, pensions, Ponzi 13 Responses »

Carl Mydans Auto transport at Indiana gas station. May 1936

Britain’s Institute of Economic Affairs (IEA) recently issued a report on the future of pensions and healthcare that reads as one big warning sign. But the chances that the warning will be heeded are slim to none, simply because the task is too daunting for both politicians and their voters to even begin to contemplate.

No politician who tells the truth about the report’s contents has a chance in frozen over hell of being elected, and thus the issues, which have been many decades in the making, will simply continue to be ignored by everyone. Until the dam breaks and perhaps the first shot is fired. But then it will be way too late. Not that it isn’t already. It’ll be interesting to see how people across the board claim ignorance and innocence, but it will of course do nothing to even come close to solving anything at all.

And frankly speaking, there are no solutions available within the present political system that could be executed and still let people get away relatively unscathed. We seem to have reached an inherent and built-in boundary and limitation of the democratic system, an event horizon of which we are bound to see a lot more going forward. What some 20 years ago Jay Hanson phrased as

“Democracy only works until people realize they can vote themselves an ever bigger piece of the pie”

IEA program director Philip Booth says in these words:

For too long people have voted themselves benefits to be paid for by the next generation of taxpayers, not by sacrifices that they will make themselves.

It truly is democracy as a Ponzi scheme. A development that has been so carefully and utterly neglected and ignored that bringing it out into the open risks evoking such severe denial that entire societies could be ripped to shreds, with one group teaming up against the other in clashes that can easily turn violent. Or, in Booth’s words:

We have never been in a situation like this before. It is quite possible that we will not find our way through without serious social breakdown and/or mass emigration of the most mobile and productive people.

And it all seemed to be going so well for so long, with cars and smartphones and far away vacations and retirement bungalows in the sun for – almost – everyone. People believed it because they wanted to believe it, and politicians were all too eager to prolong the dream that for the first time in history everyone could live like kings and queens of old. Cheap energy was one leg of the dream, ignoring future consequences of present behavior was another. Booth:

“The underlying problem is that successive governments have made promises which can simply not be honoured from the existing tax base. The electorate is grazing a fiscal commons at the expense of future generations … “

The price must now be paid. There is no more postponing the inevitable. First, retirement age will go to 70, then 75, and then the point will come when there’s no money left for any pensions or other entitlements. We will also return to large numbers of people dying of entirely preventable afflictions, simply because healthcare systems become unaffordable, because the base of people paying taxes shrinks, while the number of those who need care rises exponentially as the population ages.

Here’s the Telegraph article the quotes come from:

UK faces ‘crippling’ tax rises and spending cuts to fund pensions and healthcare

Britain faces “crippling” tax rises and spending cuts if it is to meet the needs of an ageing population, according to the Institute of Economic Affairs. The IEA calculated the Government would need to slash spending by more than a quarter or impose significant tax hikes because official calculations had failed to factor in future pension and healthcare liabilities. “As populations age, tax bases will grow more slowly while government spending rises faster,” the report said.

… the think-tank said Britain faced tax rises equivalent within just two years to more than 17% of GDP – more than £300 billion ($500 billion) – in order to meet all future spending commitments. This is larger than the entire annual NHS budget and would increase taxes from 38% to 55% of national income.[..] … tax increases of this magnitude would be “impossible” to implement “without choking off economic growth and actually reducing tax revenues”.

Can you imagine such tax raises? While the economy is in the doldrums? Me neither. But that would mean:

In the absence of further tax hikes [..] total spending would have to be cut by more than 25% or health and welfare expenditure by 53% compared with the current implied level if all future spending was to be met out of tax revenue.

[..] … it said policies were being implemented too slowly and were “inadequate” on their own [..] … policies to address pension saving and healthcare costs were needed now or the problem would quickly grow out of control. “Without significant changes to spending levels, huge sacrifices will have to be made by future generations either through significantly higher taxes or reduced benefits [..]

The IEA calculated that delaying crucial pension and healthcare reforms by just a few years would dramatically increase the burden because of growing debt interest payments. It said the ratio would increase from 13.7% of GDP in 2010 – already higher than the EU average of 13.5% – to almost 17.1% by 2016 if no policy adjustments were made.

People will be forced to work longer and longer, till they’re 75, 80 and so on. And they’ll be forced to pay a fast growing part of their healthcare bill themselves. And even then both healthcare and pension systems have no chance of surviving in the long run. Because too many people have been promised too much for too long.

And just in case you were thinking that raps her up, here’s another piece of fine news from yesterday:

UK Interest Rates Could Rise Sixfold In Three Years (Telegraph)

Interest rates will rise six-fold by 2017 as Britain’s economy becomes one of the fastest growing in the developed world, the Bank of England Governor said on Tuesday. The increase to more “normal” levels will be welcomed by many savers who have faced record low rates for more than six years, but is likely to plunge many borrowers into financial difficulty. Mark Carney said that Bank rate could reach 3% within three years, six times the current 0.5%.

[..] Industry calculations suggest that an increase of 2.5 percentage points on a typical £150,000 repayment mortgage would push up monthly payments by around £230 a month. For interest-only mortgages, the rise would be even steeper. The cost of servicing an interest-only loan that tracks the Bank rate plus 1% would jump from £188 a month to £500.

Nationwide, one of Britain’s biggest mortgage lenders, said last month that the long period of low rates had left a generation of house- buyers with no experience of higher borrowing costs, leaving some at financial risk. Around 8% of all mortgage- holders currently have to spend more than 35% of their pre-tax income paying off the loan. Bank data suggests that this proportion would double if rates rose by 2.5 percentage points.

Mr Carney said the Bank was now carrying out more research into how many borrowers are “most vulnerable” to higher rates.

Yup. Your taxes will go up, slowly at first because the government will delay dealing with serious issues as long as it can get away it, and faster later when they have no such choice left. Meanwhile, interest rates will rise, which is bad news if you have debt, which is about everyone. And it’s not just your debt: there’s a lot of government debt that will need to be serviced, and guess how we’re going to pay for that? Raise taxes.

This simple pattern is not exclusive to Britain at all of course, but then you know that. This is what will happen in every western – formerly – rich country. And you can therefore safely ignore any proclamations about recovery. The first major hit, developing as we speak, is Japan, where people are more cautious and fearful and perhaps better informed. The Japanese started cutting back on their spending 20 years ago (they stopped buying things they didn’t need), and are now in a deflation that no stimulus will get them out of anymore (it’ll just make it worse).

But at least they have savings. In most formerly rich countries, people have counted on entitlements instead of savings. And now those entitlements turn out to be based on elaborate Ponzi schemes, sanctioned by successive governments that all had one thing in common: short term views.

David Stockman knows a thing or two …

• Yellenomics: The Folly of Free Money (David Stockman)

The Fed and the other major central banks have been planting time bombs all over the global financial system for years, but especially since their post-crisis money printing spree incepted in the fall of 2008. Now comes a new leader to the Eccles Building who is not only bubble-blind like her two predecessors, but is also apparently bubble-mute. Janet Yellen is pleased to speak of financial bubbles as a “misalignment of asset prices,” and professes not to espy any on the horizon.

Let’s see. The Russell 2000 is trading at 85X actual earnings and that’s apparently “within normal valuation parameters.” Likewise, the social media stocks are replicating the eyeballs and clicks based valuation madness of Greenspan’s dot-com bubble. But there is nothing to see there, either–not even Twitter at 35X its current run-rate of sales or the $19 billion WhatsApp deal. Given the latter’s lack of revenues, patents and entry barriers to the red hot business of free texting, its key valuation metric reduces to market cap per employee–which computes out to a cool $350 million for each of its 55 payrollers. Never before has QuickBooks for startups listed, apparently, so many geniuses on a single page of spreadsheet.

Indeed, as during the prior two Fed-inspired bubbles of this century, the stock market is riddled with white-hot mo-mo plays which amount to lunatic speculations. Tesla, for example, has sold exactly 27,000 cars since its 2010 birth in Goldman’s IPO hatchery and has generated $1 billion in cumulative losses over the last six years—–a flood of red ink that would actually be far greater without the book income from its huge “green” tax credits which, of course, are completely unrelated to making cars. Yet it is valued at $31 billion or more than the born-again General Motors, which sells about 27,000 autos every day counting weekends.

Even the “big cap” multiple embedded in the S&P500 is stretched to nearly 19X trailing GAAP earnings—the exact top-of-the-range where it peaked out in October 2007. And that lofty PE isn’t about any late blooming earnings surge. At year-end 2011, the latest twelve months (LTM) reported profit for the S&P 500 was $90 per share, and during the two years since then it has crawled ahead at a tepid 5 percent annual rate to $100.

So now the index precariously sits 20% higher than ever before. Yet embedded in that 19X multiple are composite profit margins at the tippy-top of the historical range. Moreover, the S&P 500 companies now carry an elephantine load of debt—$3.2 trillion to be exact (ex-financials). But since our monetary politburo has chosen to peg interest rates at a pittance, the reported $100 per share of net income may not be all that. We are to believe that interest rates will never normalize, of course, but in the off-chance that 300 basis points of economic reality creeps back into the debt markets,that alone would reduce S&P profits by upwards of $10 per share.

America’s already five-year old business recovery has also apparently discovered the fountain of youth, meaning that recessions have been abolished forever. Accordingly, the forward-year EPS hockey sticks touted by the sell-side can rise to the wild blue yonder—even beyond the $120 per share “ex-items” mark that the Street’s S&P500 forecasts briefly tagged a good while back. In fact, that was the late 2007 expectation for 2008—a year notable for its proof that the Great Moderation wasn’t all that; that recessions still do happen; and that rot builds up on business balance sheets during the Fed’s bubble phase, as attested to by that year’s massive write-offs and restructurings which caused actual earnings to come in on the short side at about $15!

In short, recent US history signifies nothing except that the sudden financial and economic paroxysm of 2008-2009 arrived, apparently, on a comet from deep space and shortly returned whence it came. Nor are there any headwinds from abroad. The eventual thundering crash of China’s debt pyramids is no sweat because the carnage will stay wholly inside the Great Wall; and even as Japan sinks into old-age bankruptcy, it demise will occur silently within the boundaries of its archipelago. No roiling waters from across the Atlantic are in store, either: Europe’s 500 million citizens will simply endure stoically and indefinitely the endless stream of phony fixes and self-serving lies emanating from their overlords in Brussels.

• Russia Said to Ready for Iran-Style Sanctions (Bloomberg)

Russian government officials and businessmen are bracing for sanctions resembling those applied to Iran after what they see as the inevitable annexation of Ukraine’s Crimea region, according to four people with knowledge of the preparations.

Iran-style retaliation from the West, which would include freezing Russia’s foreign reserves, banking assets and halting lending to companies, is being treated as an unlikely worst case, according to the people, who asked not to be identified as talks are confidential. Still, officials are calculating the economic cost of a sanctions war with the West, the people said. “If Russia begins to answer sanctions with sanctions, it will be a pure loss for the country,” Natalia Orlova, chief economist at Alfa Bank in Moscow, said by phone. “More than 40% of consumption is imported goods.”

Some Russian political leaders are hoping that President Vladimir Putin will moderate his response to the crisis, the people said. Putin is consulting with the security forces and military about Ukraine, and some officials are afraid to voice opposition to what they see as a course he’s already chosen, two of the people said. Russia retaliating with sanctions against the West could wipe out 10 years of achievements in financial and monetary policy, one of the people said. Such escalation could erase as much as a third of the ruble’s value, another said.

The ruble has slumped 9.8% against the dollar this year, the worst-performer after Argentina’s peso among 24 emerging-market currencies tracked by Bloomberg. The yield on Russia’s February 2027 ruble bond was unchanged from yesterday’s record-high close of 9.36%.

The Ukraine crisis triggered the worst standoff between Russia and the West since the end of the Cold War after Russian forces seized the Crimean peninsula. German Chancellor Angela Merkel said today Russia risks “massive” political and economic damage, after saying yesterday that a round of European Union sanctions is “unavoidable” if Putin’s government fails to take steps to ease tensions. [..]

The government is in talks with Russian billionaires and state companies about risks they face in case of Western sanctions, the people said. The Kremlin needs to know which companies are most likely to be affected by fallout including loss of access to new foreign loans and the prospect of margin calls, they said.

Business is not yet showing too much concern about the possible sanctions, according to three top executives who took part in the meetings. The EU, Ukraine and Russia are economically dependent on each other in many regards, so strict sanctions will be hard on all sides, Putin has said. “In the modern world, when everything is interconnected and everybody depends on each other one way or another, of course it’s possible to damage each other — but this would be mutual damage,” Putin told reporters March 4.

The Russian economy’s prospects in a “difficult global economic environment” were the topic of a closed meeting between Putin and senior officials yesterday in the Black Sea resort of Sochi, Peskov said by phone. Putin yesterday urged the government to ensure Russia’s “ability to react immediately to internal and external risks.”

The Russian government is also in talks with companies about speeding up state support in the form of guaranteed loans to reduce potential damage from sanctions, said two of the people. Business leaders have asked for a meeting with Russian Prime Minister Dmitry Medvedev to discuss the situation, the people said.

The Truman show meme shows up more frequently, and it’s not a bad analogy.

• Hedge fund managers face up to ‘Truman Show’ markets (FT)

In the Truman Show, the late nineties Hollywood film, the eponymous character lives a seemingly charmed world, snuggled comfortably into an American suburbia of white picket fences and crisply cut lawns. But gradually Truman starts to notice something is not quite right. He is actually trapped inside a film set controlled by hidden directors, and discovers to his horror that he is the unknowing star of the world’s most popular reality TV show.

The question some of the world’s biggest hedge funds are starting to ask is whether overly placid investors will also wake up to discover they are living in a “Truman Show market” – where central bankers’ ultra loose monetary policy has manufactured a fake reality that is bound to end. For Seth Klarman, the manager of the $27bn hedge fund the Baupost Group who recently coined the analogy in a letter to clients, investors have been lulled into a false sense of security that is creating an ever greater risk of a sharp correction.

“All the Trumans – the economists, fund managers, traders, market pundits – know at some level that the environment in which they operate is not what it seems on the surface,” Mr Klarman wrote in his letter, later adding: “But the zeitgeist is so damn pleasant, the days so resplendent, the mood so euphoric, the returns so irresistible, that no one wants it to end.”

But no matter how sceptical hedge fund managers may be, they find themselves in a bind. While the assumption that central bank bond-buying will continue for the foreseeable future has been a boon to broader markets, indiscriminately surging equities have made life frustrating for most specialised stock pickers.

At the same time other hedge fund strategies, such as making bets on interest rates and currencies according to views on the direction of the global economy, have faltered as markets have refused to obey previously presumed iron rules, such as money printing leading to devaluation. Of late these so-called global macro funds have retreated from such trades as their performance has suffered.

“Many hedge funds continue to predict this ongoing drift upwards in asset prices due to an implicit backstop from central banks, who want to believe they are omnipotent, and that when data is bad they can just turn on the taps again and make it go away,” says Anthony Lawler, portfolio manager at GAM, one of the world’s biggest investors in hedge funds. As a result, while many managers feel deeply uneasy with the lofty valuations attached to certain parts of the US stock market, and low returns offered by risky assets such as junk bonds, few are willing to step out just yet.

More recently, encouragement has been taken from falling correlations between assets, meaning some portfolio managers are confident they can start to exploit more effectively the pricing anomalies between better and worse quality securities. “The number of individual stocks mispriced to each other is high, there are some trading on vapour whilst others are still trading on reasonable valuations,” says Luke Ellis, president of Man Group, the world’s largest listed hedge fund. “Are there lots of cheap stocks? No, but on a long short basis there are opportunities.”

“The big question is when this is all going to change. From a purely intellectual point of view, it is interesting how central banks will reverse their policies. From a market point of view, it is uncertain and complicated.”

Sir Michael Hintze, chief executive and founder of CQS, one of Europe’s largest hedge funds, has argued that loose central banks have actually increased the riskiness of markets as a result of their policies forcing too much money into the same assets, meaning any corrections are likely to be sharper than normal. “Everyone is thinking the same and being driven into the same trade,” he wrote in a note to clients. “Shifts when moving from one state to another can be difficult and abrupt. It is not healthy to have a ‘rigged’ market”.

Yet, for now, as long as markets continue to believe in the willingness and ability of central bankers to maintain current conditions, few hedge fund managers are ready to make any big bets against a reversal. “Few argue that equities are cheap on any metric, but the majority of hedge fund managers are opting to remain invested,” says Mr Lawler of GAM. The Truman Show market looks set to continue, even if an increasing number of participants have started to spot the cameras hidden behind the trees.

America must get rid of the Fed and the big banks, or it will turn into a scorched landscape.

• Engine Of Wall Street Profits Sputters In First Quarter (FT)

Wall Street’s once lucrative fixed income divisions are set for their worst start to the year since before the financial crisis, with revenue declines of up to 25% prompting banks to plan more redundancies on top of the tens of thousands of job cuts they have already made.

Citigroup and JPMorgan Chase have warned publicly that fixed income revenues – the engine of most investment banks’ profits since 2000 – will be down by double digits when they report first-quarter earnings next month. But other banks privately warn that their year-on-year declines could exceed 25% after both institutional investors and banks shied away from trading. The first quarter is traditionally a high point for revenues. “Effectively, the casino is empty this quarter,” said Brad Hintz, analyst at AllianceBernstein.

The top 10 banks are expected to make a combined $24.8bn of revenues in fixed income trading, which includes bonds, currencies and commodities, according to Morgan Stanley and Credit Suisse estimates, more than 40% below the first quarter of 2009 when the market rebounded sharply from the crisis.

Two of the top five fixed income divisions told the Financial Times they expected to respond by cutting more jobs because the market is worse than expected, with traders blaming patchy macroeconomic data, interest rate uncertainty, regulation that limits risk taking and worries about the situation in Ukraine. Analysts now expect Goldman Sachs to record its weakest first quarter since 2005 and JPMorgan Chase and Bank of America are forecast to see their lowest revenues since they bought Bear Stearns and Merrill Lynch, respectively, in 2008.

The weakness is expected to be even more severe among European banks such as Deutsche Bank and Credit Suisse, which are looking to meet new capital requirements by shrinking their balance sheets. “Anecdotally it seems Europeans are losing most share in the US itself and so are losing global diversification,” said Huw van Steenis, analyst at Morgan Stanley. Some US banks hope their European rivals will cede market share. “Those outside of the top five will have to think about if they can continue to be in that business,” said James Chappell, analyst at Berenberg.

New regulations such as the Volcker rule – which prohibits proprietary trading – and tougher capital requirements restrict the risk banks can take and are sapping liquidity, bankers say, even though final versions of the rules have not proven as harsh as some feared.

Four years after the outlines of the post-crisis regulation were put into place, traders claim that outstanding areas of uncertainty are hitting activity among big bond traders such as JPMorgan, Citi, Deutsche Bank, Bank of America, Goldman and Barclays. “There’s a significant amount of uncertainty about what the endgame is going to be,” said the head of trading at one bank. “We probably haven’t reached a peak of effort and management time. We’re not turning the page yet on regulation.”

Christian Bolu, analyst at Credit Suisse, estimated that US government bond trading volumes are down about 8% so far this year compared with the same period in 2013. Trading of mortgage-backed securities backed by the US government is down 41%, while corporate bond trading has increased by 12%.

Funny to see how George Soros says Europe is the only place that got it right, while others, like Ambrose Evans-Pritchard here, say it got it terribly wrong.

• Paralysed ECB leaves Europe at the mercy of deflation shock from China (AEP)

Most of western Europe is already in outright deflation. So are the Balkans, the Baltic states and the old Habsburg core. The Continent has left its flank open to an external shock from Asia. There is a high chance that this will occur as China attempts to extricate itself from a $24 trillion credit misadventure by debasing its currency to regain lost competitiveness and bail out its export industry.

The yuan has fallen by nearly 2% against the dollar since early January, and 4% against the euro. For all the talk of weaning China off chronic over-investment, Beijing engineered a record $5 trillion of investment in fixed capital last year – up 20% from the year before, and as much as the US and Europe combined. This has created a vast overhang of excess manufacturing capacity in the global system. It is coming our way in the form of a slow, powerful, deflationary undercurrent.

Europe’s headline price data understate the full deflation risk. Eurostat’s HICP index “at constant taxes” – stripping out the one-off effects of austerity – shows that 23 of the EU’s 28 countries have seen a fall in prices over the past seven months. “The risk of deflation is definitely before us,” said Olivier Blanchard, the International Monetary Fund’s chief economist.

By this measure, inflation since June has been running at a rate of -1% in France, -2% in Holland, Belgium and Slovenia, -4% in Italy, Spain and Portugal, -6% in Greece and -10% in Cyprus. Sweden and Switzerland are also in deflation. Germany rolled over in July. The UK still clings to a little inflation – now a precious commodity – but it too turned negative in September.

This is a nightmare for the debt-stricken states of southern Europe, still trapped in a slump with mass unemployment regardless of whether they manage to eke out the odd quarter of miserable growth. With Germany at zero inflation, they have to go into even deeper deflation to claw back lost competitiveness within EMU under “internal devaluations”.

This, in turn, plays havoc with debt dynamics through the denominator effect. Their debt loads are rising on a base of flat or contracting nominal GDP. It is a key reason why Italy’s public debt has risen from 119% to 133% of GDP since 2010 despite achieving a primary budget surplus, or why Portugal’s debt jumped from 94% to 129% (IMF data).

These countries have an impossible task, damned if they do and damned if they don’t. Mr Blanchard said their gains in competitiveness risk being overwhelmed by a rise in the “real value” of their debt. “The danger is that the second effect dominates the first, leading to lower output and further deflation.”

There is, of course, no magic line when inflation falls below zero. A recent IMF study said the effects become lethal for economies with high public/private debt loads – mostly over 300% of GDP in Club Med – even at “lowflation” rates. The European Central Bank is betting that this downward lurch in prices is a temporary blip due to lower energy costs, insisting that inflation expectations remain “firmly anchored”. The collapse of iron ore and copper prices over recent days – on China jitters – should puncture these illusions.

The ECB’s expectations doctrine is in any case a Maginot Line. “Long-term inflation expectations on the eve of three deflationary episodes in Japan were also reassuringly positive,” said the IMF. Indeed, they were a lagging indicator and therefore useless. “One needs to act forcefully before deflation sets in,” said the Fund, adding that the Bank of Japan was too slow to cut rates and boost the money base. “In the event, it had to resort to ever-increasing stimulus once deflation set in. Two decades on, that effort is still ongoing.”

BoJ governor Yasuo Matsushita said as late as January 1998 that there was “no reason to expect that overall prices will drop sharply and exert deflationary pressure on the entire economy”. As a result of this lordly certitude, Japan suffered shattering effects when the East Asia crisis entered its second and more deadly phase that summer.

The ECB’s Mario Draghi risks going down in history as Europe’s Mr Matsushita, as he continues to insist that EMU inflation today is merely where it was in 2009 (in the post-Lehman mayhem) and therefore benign, and that Euroland is not remotely like Japan. “The ECB has taken decisive action at a very early stage of this crisis,” he said. The proof is in the monetary pudding, and this shows that EMU is already in worse shape than Japan in early 1998 by a large margin. Private lending is contracting at 2.3%, the M3 money supply has ground to a halt and EMU-wide unemployment is stuck at a near-record 12%.

The ECB is by definition ferociously tight. Marcel Fratzscher, head of the German Institute for Economic Research (DIW) in Berlin, is right to berate the bank for betraying its primary duty, demanding €60bn of bond purchases each month before it is too late. “It is high time for the ECB to act. Otherwise Europe risks falling into a dangerous downward spiral,” he said.

Euro Intelligence said failure to act would be “an existential disaster for the eurozone” and a “shocking derogation” of the ECB’s mandate. Mr Draghi has bent over backwards to assuage the hard-money monks at the Bundesbank – much to the fury of one ex-ECB governor who told me he had become the “captive” of Right-wing German elites – judging that it would be too risky for the Latin Bloc and their allies to mobilize their majority voting power and force through a reflation policy.

His task has become even more complicated since the German constitutional court ruled last month in thunderous language that the ECB’s bond rescue plan for Italy and Spain (OMT) “exceeds the ECB’s monetary policy mandate, infringes the powers of the Member States, and violates the prohibition of monetary financing of the budget”. It also said the OMT is probably “Ultra Vires”, meaning that the German Bundesbank may not take part.

The ruling is not final – and does not prohibit ECB bond purchases as such – but it raises the bar for quantitative easing to a punishingly high level. While the Fed and the Bank of England were able to act instantly once it became clear that QE on a huge scale was imperative, the ECB is paralysed by politics, ideology and judges.

There have been dovish mutterings from ECB members over recent days but any action is likely to be confined (for now) to token gestures such as a negative deposit rate or easier collateral rules for banks, not the €1 trillion blast of QE that is so obviously needed immediately. The rise in the euro to €1.39 against the dollar tells us that markets expect nothing of substance.

Europe is left at the mercy of world events. The Fed is pressing ahead with $10bn of tapering each meeting, slowly forcing up the global price of credit and tightening the vice further for emerging markets. The bank has ignored the pleas for mercy from the developing world – still addicted to dollar liquidity – just as it did in the months before the Asian crisis in 1998. The OECD warned this week that the real impact of Fed tapering has “only just begun” and the effects threaten to ricochet back into Europe through trade and banking stress in emerging markets.

China is tightening as well in what amounts to a G2 monetary squeeze. It has been so successful that shadow banking virtually froze in February, prompting the central bank to step back in consternation at its own handiwork. Some have a touching faith that the Communist Party knows what it is doing, even though it is the same body responsible for just having blown the most spectacular credit bubble of modern times, more than a match for the pre-Lehman booms in Greece, Spain or Ireland in character and much greater in scale. I prefer the Chinese metaphor of feeling the stones beneath the water, their way of saying trial and error.

China will not collapse because the banking system is an arm of the state, but it will have to cope with the colossal malinvestments left from a hubristic five-year blow-off. Deflation is already stalking the country. Factory gate inflation has dropped to -2%.

We can be sure that China will seek to pass this deflationary parcel to somebody else, just as the Japanese have already done with their epic devaluation under Abenomics. The package will land in Europe, the one region that lacks a proper central bank and the governing coherence to protect its own interests. The implications for the depression-wracked societies of the Mediterranean are nothing less than calamitous.

• UK faces ‘crippling’ tax rises and spending cuts to fund pensions and healthcare (Telegraph)

Britain faces “crippling” tax rises and spending cuts if it is to meet the needs of an ageing population, according to the Institute of Economic Affairs. The IEA calculated the Government would need to slash spending by more than a quarter or impose significant tax hikes because official calculations had failed to factor in future pension and healthcare liabilities. “As populations age, tax bases will grow more slowly while government spending rises faster,” the report said.

In a stark warning, the think-tank said Britain faced tax rises equivalent within just two years to more than 17% of GDP – more than £300bn – in order to meet all future spending commitments. This is larger than the entire annual NHS budget and would increase taxes from 38% to 55% of national income.

Philip Booth, the IEA’s programme director, said tax increases of this magnitude would be “impossible” to implement “without choking off economic growth and actually reducing tax revenues. “The underlying problem is that successive governments have made promises which can simply not be honoured from the existing tax base. The electorate is grazing a fiscal commons at the expense of future generations,” he said.

In the absence of further tax hikes, Jagadeesh Gokhale, the author of the report, said total spending would have to be cut by more than one quarter or health and welfare expenditure by 53% compared with the current implied level if all future spending was to be met out of tax revenue.

<noframes>Interactive chart: Europe’s hidden debt pile</noframes>

While the IEA said increases to the state pension age would help to soften the blow of future tax rises, it said policies were being implemented too slowly and were “inadequate” on their own. Mr Gokhale said policies to address pension saving and healthcare costs were needed now or the problem would quickly grow out of control. “Without significant changes to spending levels, huge sacrifices will have to be made by future generations either through significantly higher taxes or reduced benefits,” the report said.

The IEA calculated that delaying crucial pension and healthcare reforms by just a few years would dramatically increase the burden because of growing debt interest payments. It said the ratio would increase from 13.7% of GDP in 2010 – already higher than the EU average of 13.5% – to almost 17.1% by 2016 if no policy adjustments were made.

<noframes>Interactive chart: How Britain could balance the books</noframes>

“We have never been in a situation like this before. It is quite possible that we will not find our way through without serious social breakdown and/or mass emigration of the most mobile and productive people,” said Mr Booth. The report also warned that governments would not be able to grow their way out of trouble, and were too often “fixated” on short term growth. It said while the Government’s decision to move assets of the Royal Mail pension fund had reduced short-term debt measures, long-term state pension liabilities had increased.

“The Government took the assets of the Royal Mail pension fund and gave the workers promises of government pensions in return,” the report said. “The explicit government debt was reduced but future government liabilities – in this case contractual – were increased.”

“Without reform, today’s young people are likely to be disappointed, either in terms of higher tax rates or in terms of reduced future benefits provided by government,” said Mr Booth. “The quicker the government changes policy, the more painlessly the situation will be resolved. For too long people have voted themselves benefits to be paid for by the next generation of taxpayers, not by sacrifices that they will make themselves.”

A whole list of China related articles that all keep on pointing to the country’s vulnerability because of all the credit created there off late.

• China premier warns on economic slowdown as data fans stimulus talk (Reuters)

Chinese Premier Li Keqiang warned on Thursday that the economy faces “severe challenges” in 2014 – comments that came as weak data fanned speculation the central bank would relax monetary policy to support stuttering growth. Li, speaking at a news conference on the final day of China’s yearly parliament, hinted Beijing would tolerate slower economic expansion this year while it pushes through reforms aimed at providing longer-term and more sustainable growth.

Data released shortly after his comments suggested that tolerance may face an early test. Growth in investment, retail sales and factory output all slumped to multi-year lows, suggesting a marked slowdown in the first two months of the year. “A storm is coming,” said Gao Yuan, an analyst at Haitong Securities in Shanghai, while Hao Zhou, the China economist for ANZ said “policy easing should be imminent.”

At the carefully orchestrated briefing where questions had to be vetted in advance, Li spent most time discussing the economy. But he also touched upon other topics, including friction in relations with Washington, corruption, pollution, and the disappearance of a Malaysia Airlines aircraft. While acknowledging the economy faced difficulties, Li suggested Beijing would not let growth slip too far. The government has targeted a rise of GDP in 2014 of 7.5% after actual growth last year of 7.7%. “We believe we have the ability, and all the means, to ensure that economic growth will stay within a reasonable range this year,” he said.

He also signaled the government will allow further debt defaults after Shanghai Chaori Solar Energy Science and Technology Co Ltd failed last Friday to pay an interest payment on its five-year bonds. The first default on a domestic bond was hailed by experts as a landmark that will impose more market discipline, a break from the past when bonds enjoyed an implicit guarantee because the government would bailout troubled firms to ensure stability.

Growth in Chinese corporate debt has been unprecedented. A Thomson Reuters analysis of 945 listed medium and large non-financial firms showed total debt soared by more than 260% to 4.74 trillion yuan ($777.3 billion) between December 2008 and September 2013. “We are reluctant to see defaults of financial products, but some cases are hard to avoid,” Li said. “We must enhance oversight and solve problems in a timely way to ensure no systemic and regional risks.” [..]

The signs of a slowdown in the economy this year have raised worries among some investors that China will miss the 7.5% growth target. “The momentum is really quite weak,” Wei Yao, China economist for Societe Generale said after Thursday’s data. “Q1 GDP growth is probably already below 7.5%. The government will probably do some easing.” Yao said she expected the central bank to reduce bank reserve requirements by 50 basis points. Major banks currently have to put aside a fifth of their cash as reserves and such a measure would represent the central bank’s strongest policy easing since 2012.

Li skillfully dodged a question on how far Beijing would let economic growth slip before it steps in with policy measures to support activity. Still, he hinted at tolerance for below-target growth, as long as enough new jobs are created. “The GDP growth target is around 7.5%. ‘Around’ means there is some flexibility and we have some tolerance,” he said, adding that the lower limit on growth must ensure job creation.

• China Data Show Economy Cooling as Indicators Trail Estimates (Bloomberg)

China’s industrial-output, investment and retail-sales growth cooled more than estimated in the first two months of the year, signaling a slowdown in the economy as leaders seek to sustain 7.5% expansion. Factory production rose 8.6% in the January-February period from a year earlier, the National Bureau of Statistics said today in Beijing, compared with the 9.5% median projection of analysts surveyed by Bloomberg News. Retail sales advanced 11.8%, while fixed-asset investment excluding rural households was up 17.9%.

Premier Li Keqiang today said there’s some flexibility around the nation’s growth goal this year and that the government’s key concerns are jobs and livelihoods. Even so, an extended slowdown would add to chances of stimulus and test the Communist Party’s commitment to give market forces a bigger role in the world’s second-largest economy while clamping down on overcapacity, debt and pollution.

The Shanghai Composite Index (SHCOMP) pared gains after the data and was up 0.9% at 1:50 p.m. local time. China combines data for industrial output, retail sales and fixed-asset investment for January and February, citing distortions from the weeklong Lunar New Year holiday, whose timing differs each year.

People in the west will continue to cut their discretionary spending, and that seals China’s fate.

• China Export Prowess Wanes in U.S., Europe (Bloomberg)

The Made in China label is losing traction with its two biggest customers. After three decades of gains, China’s share of U.S. imports has plateaued and in Europe it’s in decline. The steepest losses are in the European Union, where China’s share of imports slumped to 16.5% in the first 11 months of last year, from a 2010 high of 18.5%, according to data compiled by Bloomberg News. In the U.S. the needle has barely moved in the past five years, holding around 19%.

China’s low-cost vantage has been blunted by rising wages and an appreciating currency, with cheaper nations including Vietnam and Bangladesh competing to sell products from T-shirts to shoes. With an unexpected drop in total exports in February compounding the challenges, the trends underscore the need for President Xi Jinping’s government to foster competitiveness in higher-technology items from semiconductor chips to medical-imaging equipment to airplanes.

“It’s a sea change,” said Andrew Tilton, chief Asia economist at Goldman Sachs Group Inc. in Hong Kong, who previously worked for the international office of the U.S. Treasury Department. “China’s period of unusually strong competitive advantage in exports may have run its course.”

The yuan has appreciated about 35% against the dollar since July 2005, wages have tripled in the past decade and China’s labor force has begun to shrink. The currency weakened today for a fourth day to 6.1435 per dollar, while the benchmark Shanghai Composite Index of stocks fell 0.2%.

The nation’s working-age population began declining in 2012, Chinese government data show. The pool of 15- to 39-year-olds — the backbone of factories making clothes and toys — has contracted by 35 million in the past five years, a U.S. estimate indicates. The changes have led global manufacturers to begin shifting production to countries such as Bangladesh and Vietnam, which surpassed China in 2010 as the largest supplier of Nike Inc. footwear. Higher costs and wages in China are prompting some Asian companies to set up manufacturing plans in neighboring countries. Samsung Electronics Co. is building a $2 billion plant in Vietnam that may make 120 million handsets by 2015.

U.S. and European clothing makers are also looking elsewhere. Some 72% of chief purchasing officers who oversee a collective $39 billion in annual purchases for apparel firms expected to shift to lower-cost nations — with Bangladesh, Vietnam and India as the top three destinations for the coming five years, a survey conducted by advisory firm McKinsey & Co. in 2013 shows.

More than a decade ago, China was the darling as it entered the World Trade Organization, with expanding commerce helping it boost growth, which averaged 10.6% in the decade that followed 2001. The nation also reshaped the world economy as China put cheap toys, souvenirs and jeans on shop shelves from New York to London to Paris.

Now, the beneficiaries of China’s slide in developed markets can be found as far away as Mexico. Its share of U.S. imports rose to 12.4% last year from 10.3% in 2008. Before China became a WTO member, Mexico’s proportion was 11.2%. As China’s competitiveness wanes, Mexico is benefiting from its proximity to the U.S. market and lower transportation costs, said Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc in Hong Kong, who formerly worked at the World Bank and the International Monetary Fund.

• China needs to solve its debt crisis, says former Treasury minister (Telegraph)

China’s debt issues are the country’s biggest economic concern and need to be tackled, former Treasury minister and chairman of the China-Britain Business Council Lord Sassoon has said. Lord Sassoon, a former Treasury mandarin as well as Commercial Secretary to the Treasury from 2010 to 2013, told The Telegraph that Chinese debt is a more pressing worry than the recent mixed figures concerning the country’s economic growth rate.

“I think the biggest question I would have, and China itself has in the short term, is the debt issues which they need to resolve. “If there’s something to focus on, it’s around banking, shadow banking, provincial debt and I don’t know where that will all land”, he said.

Last year, China’s local government debt surged to nearly £1.8trn, 67% higher than in 2010. The rise brought China’s total public debt, including money owed by central government, to 58% of its £5.11trn economy. Meanwhile, China’s banks have overseen a rapid expansion of lending that has seen £9.1trn of credit created, and figures released in February showed that under-performing loans made by Chinese banks have risen to the highest level since the financial crisis.

China’s debt overhang has raised concerns about a credit crisis and slowdown of China’s economy. Recent economic figures have shown a decline in manufacturing PMI and exports, but Lord Sassoon said he’s more focused on long-term developments. “I think people can get excessively excited about China’s short term numbers, which have been mixed in recent months. “For me, it’s not so much one month’s, one quarter’s trade figures”, he said.

He went on to say that he believes the Chinese government are prepared and able to tackle the problems, however. “The new Chinese leadership recognise they’ve got a big problem they need to deal with immediately around the overhang of the public sector, particularly provincial, debt. “I think there’s a lot of issues for the Chinese government to work on but they’re not hiding them and they’ve got very good people on the case”, he said.

Lord Sassoon said the Asian super-power’s banks were also prepared to address their own issues. “If you go and talk to the big state-owned banks, the four big Chinese banks are very open and interesting on the subject of loans to sectors where there’s been over-capacity and there are businesses that have failed or failing. “I happen to believe there will be a soft landing because it’s the quality of the people in Beijing who are managing these issues”, he concluded.

• Chinese yuan’s decline leaves observers guessing (Barry Eichengreen)

Since December, when the US Federal Reserve began tapering its monthly purchases of long-term assets, emerging-market currencies have fallen across the board. The main exception until recently was China’s indomitable yuan. But now the yuan, too, has been falling against the dollar. So is this more evidence of the disruptive impact of the Fed’s policy? The yuan’s decline is not large, and whether it will continue is uncertain. But the movement is striking by the standards of what is still a heavily managed currency. And it is in the opposite direction from what everyone has come to expect.

Certainly, the Fed’s tapering of its quantitative-easing policy has had some effect. A standard money-making strategy for investors with access to Chinese financial markets has been to borrow dollars at low interest rates and buy high-yield Chinese assets. But tapering, by auguring higher US interest rates, makes it more expensive to borrow dollars and invest in Chinese assets. As “the carry trade” falls out of fashion, demand for the yuan declines and its exchange rate depreciates.

But, while the Fed has been tapering since December, the weakness of the yuan materialised only in February. Evidently something else is going on. The reality is that China’s tightly controlled currency falls only when the People’s Bank of China wants it to fall. The PBOC, not the Fed, calls the tune to which the yuan dances. So why has it been singing the depreciation song?

One possibility is that a weaker yuan is, paradoxically, part of the Chinese government’s strategy for encouraging its wider international use. China is committed to broadening the yuan’s role for foreign trade and investment-related purposes. Ultimately, it would like to see the yuan achieve an international status comparable to that of the dollar.

To do that, China will have to develop its financial markets and open them to foreign investors. But opening those markets is feasible only if the authorities eliminate the perception that exchange-rate movements are a one-way proposition. So long as investors believe that the yuan can only appreciate, opening the country’s markets will cause it to be flooded by foreign money, with unpleasant financial consequences, not the least of which is inflation.

Foreign investors therefore need to be reminded that the yuan can fall as well as rise. Some observers regard the yuan’s recent slide as an attempt to squeeze the speculators and signal the advent of a more flexible exchange rate. They believe that the PBOC is about to widen the currency’s trading band.

If so, the PBOC’s recent market moves are a good thing. If there is one clear lesson from history, it is that the combination of open financial markets and a rigid exchange rate is a disaster waiting to happen. China has already begun opening its financial markets. Thus, greater exchange-rate flexibility is overdue.

A second, less positive interpretation is that the PBOC is weakening the yuan in order to boost Chinese exports. Reacting against excesses in the country’s property markets and shadow banking system, the PBOC has moved, not unreasonably, to limit the availability of cheap credit. But this may have caused domestic demand growth to slow more rapidly than expected. And boosting exports is, of course, China’s customary response to weaker domestic demand.

This less encouraging interpretation of the yuan’s recent weakening suggests that official efforts to clamp down on the shadow banking system are not going well, and that the effort to engineer a soft economic landing is not on course. If this view is correct, efforts to rebalance the Chinese economy could now be put on hold, which would not bode well for future economic and financial stability.

Moreover, if China is pushing down the yuan in order to goose its exports, its policy will not sit well with its foreign competitors, be they the US or Japan. Complaints about currency manipulation and the associated diplomatic tensions will quickly return.

China is sufficiently opaque that it is hard to know from the outside which interpretation is correct. Future yuan movements will tell the tale. Mainly up-and-down fluctuations would be a sign that the policymakers’ goal is to eliminate one-way bets and advance the cause of yuan internationalisation. A secular decline, by contrast, would indicate that demand in China is weakening and rebalancing has been suspended. For now, the only thing observers can do is to watch closely and hope for the best. And it is the PBOC they should be watching, not the Fed.

Using copper as collateral to buy more copper. Isn’t life wonderful?

• Copper sell-off following China bond default brings market to four-year low (Reuters)

China’s first domestic bond default has shaken the foundations of the copper market, stoking investor worries about the possible unravelling of financing deals that have locked up vast quantities of copper. This anxiety has led to three days of heavy selling in the metal, while having little noticeable effect on other global financial markets.

The Shanghai Futures Exchange’s most-traded copper contract reached its lowest level in more than four years on Tuesday, and the London copper benchmark fell to its lowest in more than three years later in the day. “A lot of that is linked to the financing deals and you start to wonder, ‘are they at risk?’ and I think that is what the market is indeed worried about, and that’s why copper has taken the brunt,” BNP Paribas analyst Stephen Briggs said.

The default on a bond payment by China’s Chaori Solar last week signalled a reassessment of credit risk in a market where even high-yielding debt had been seen as carrying an implicit state guarantee. On Tuesday, solar panel maker and power company Baoding Tianwei Baobian Electric announced a second straight year of net losses, leading to a suspension of its stock and bonds on the Shanghai Stock Exchange and stoking fears that it, too, may default.

The metals markets saw the default as a sign of tighter credit to come for users of metals and for financiers that have used the metal as collateral for borrowing, analysts said. If their loans are not renewed and financing deals start to unravel, the investors could unload their metal supplies on to the market.

Similar financing deals are in place using metals such as zinc and iron ore, but copper has been the preferred choice for the Chinese trade and finance community. “If there are worries in a general sense about financial conditions in China, copper is perhaps more exposed to that than other metals, because we’ve seen a substantial rise in inventories in China this year,” Briggs said.

At least one US scrap copper trader has suffered “large” losses after the Chinese default, one of the first signs that sinking prices and tightening credit are taking a toll on the physical market. Some analysts and traders estimated that 60% to 80% of China’s copper imports in recent years may have been used as collateral, although none of them could give a definitive figure for how much copper is now tied up in deals.

The mainland’s imports of copper products hit a record 536,000 tonnes in January, up 53% year on year, customs data showed. The inflow slowed in February to 379,000 tonnes but was still higher than in February 2013. Copper stocks in warehouses monitored by the Shanghai Futures Exchange are bulging, up 65% since early January to around 200,000 tonnes . Another 745,000 tonnes of the metal is held in bonded warehouses, minerals consultancy CRU estimated. No official figures are available.

“Given rising inventories, a negative arbitrage and a seemingly soft post-Lunar New Year increase in activity, we doubt that real demand lies behind the strong copper numbers,” Credit Suisse said in a research note. Benchmark Shanghai and London Metal Exchange copper prices have been falling steadily this year, mostly because of tepid economic growth in China, which accounts for more than 40 per cent of global demand for the metal.

But after the sharp price drops in recent days following the bond default, would-be importers in China are finding it tough to get credit. “Right now it is very difficult for clients to issue an LC (letter of credit) to import copper because the bank loan is very tight. Also if you import the copper in China, you will lose a lot of money,” one trader in Singapore said. [..]

Want to grow? Get yourself an earthquake!

• New Zealand Raises Key Rate, First Developed Nation to Tighten

New Zealand raised its key interest rate, the first developed nation to exit record-low borrowing costs this year, and said it plans to remove stimulus faster than previously forecast to contain inflation. “It is necessary to raise interest rates toward a level at which they are no longer adding to demand,” Reserve Bank of New Zealand Governor Graeme Wheeler said in a statement in Wellington after increasing the official cash rate by a quarter%age point to 2.75%, as forecast by all 15 economists in a Bloomberg News survey. The Kiwi gained after Wheeler said further increases are likely in coming months and the OCR may rise by a total of 125 basis points this year.

Soaring dairy prices, the NZ$40 billion ($34 billion) rebuild of earthquake-damaged Christchurch and the strongest immigration in 10 years are fueling growth in the South Pacific economy. Wheeler is departing from global peers as surging house prices in the nation’s biggest city of Auckland stoke concerns of a bubble and add to inflationary pressures. “We’re on a different planet,” Stephen Toplis, head of research at Bank of New Zealand Ltd. in Wellington, said in an interview. “New Zealand’s environment is fundamentally different to most of our peers” because of record-high commodity prices and construction, he said.

The RBNZ today lifted its forecast for the 90-day bank bill rate, suggesting borrowing costs will rise more quickly than previously expected. The tightening is set to come in an election year, with Prime Minister John Key seeking a third term in a poll set this week for Sept. 20.

Wheeler will raise rates at his next two opportunities in April and June then pause until December, according to the median forecast in a Bloomberg News survey of 15 economists conducted after today’s decision. Six analysts expect a rise at the Sept. 11 review. “If the economic environment makes it a pre-requisite, then he’ll go, but any central bank governor would prefer to not get involved in the election,” said Toplis.

New Zealand’s dollar rose to its highest since May 1 after the RBNZ decision. It bought 85.59 U.S. cents at 5:36 p.m. in Wellington, up from 84.65 cents immediately before the statement. “The bank does not believe the current level of the exchange rate is sustainable in the long run,” Wheeler said, reiterating that the currency’s strength is a “headwind” for exporters and local manufacturers who compete against imports.

Fonterra’s link to China is painfully strong.

• New Zealand’s Fonterra, World’s Largest Dairy Exporter, In Guilty Plea Over Food Safety (BBC)

New Zealand’s Fonterra has admitted four food-safety violations following a botulism scare last year that led to recalls of milk products in China. Government officials had filed charges against the dairy company, accusing it of processing and exporting dairy products which did not meet standards. Fonterra is also accused of failing to issue notification about its products not being fit for consumption.

The charges come as Fonterra faces civil court action from Danone. Earlier this year, the French company said it was suing Fonterra over recalls which Danone alleged led to the company losing hundreds of millions of dollars in sales. Danone uses Fonterra ingredients in its infant milk formula. Maury Leyland, a Fonterra manager said: “We have accepted all four charges, which are consistent with the findings of our operational review and the Independent Board Inquiry.” The dairy co-operative has since stepped up its quality control procedures.

In August last year Fonterra sparked a worldwide product recall and food-safety scare when it admitted there could be a bacteria in one of its products which could cause botulism, a severe form of food poisoning. The product suspected of containing the bacteria which could cause botulism was commonly used in infant formula. But the bacteria scare turned out to be a false alarm when later tests found another strain, but of a less harmful kind which does not cause food poisoning.

The threat of botulism led to many countries including China blocking imports of dairy products from New Zealand. The import ban was lifted about three weeks after the initial scare. Fonterra is the biggest dairy firm in New Zealand, which is the world’s largest exporter of dairy products.

If only we frack till we drop, we will be saved! Hmm, so shy do Shell just announce it’s getting out of US shale because it can’t manage to make it profitable?

• EU parliament excludes shale gas from environmental code (Guardian)

EU politicians on Wednesday voted for tougher rules on exposing the environmental impact of oil and conventional gas exploration, while excluding shale gas. Member states such as Britain and Poland are pushing hard for the development of shale gas, seen as one way to lessen dependence on Russian gas, as well as to lower energy costs as it has in the United States. The plenary vote of the European Parliament in Strasbourg, France follows a compromise deal on the draft law in December, which was struck only after negotiators agreed to leave out references to shale gas.

Member states are expected to give their endorsement over the coming weeks, after which the law will become final. Under the planned law, assessments of a range of infrastructure projects, as well as oil and gas, will include their impact on biodiversity and climate change, plus measures to ensure authorities granting approval have no conflict of interest. Industry said the new law avoided placing too many restrictions on projects during their early phases when commercial viability is unclear.

While not imposing unnecessary requirements on the upstream oil and gas industry, the new rules will guarantee that any development, including exploration for shale gas, will be subject to strict environmental standards, Roland Festor, director for EU affairs at the International Association of Oil & Gas Producers, said. Shale Gas Europe, which brings together companies such as Chevron, Total and Cuadrilla Resources, also welcomed the law. Shale gas could potentially play an important role in meeting Europe’s acute energy challenges, Marcus Pepperell, spokesman for Shale Gas Europe, said.

Green politicians, however, said the decision to leave out shale gas was a major setback and that the fracking process, which involves using chemicals to extract gas from the shale rock, posed risks to health and the environment. The Greens believe there is already sufficient evidence to ban fracking but ensuring informed permit decisions through the environmental impact assessment procedure must be the absolute minimum, Sandrine Belier, environment spokeswoman for the European Greens, said.

Euan’s conclusion: “We seem set to become increasingly reliant upon Russia for gas supplies that also provides our electricity security”.

• Blackout Britain? (Euan Mearns)

Why is there a perception that the UK faces an ongoing risk of electricity grid failures? At the end of May 2013 the UK had 416 power stations, counting wind farms and hydro dams, ranging in nameplate capacity from 1 to 3870 MW. The combined capacity in 2013, following large combustion plant closures, was 80,514 MW down from 92,044 MW in 2012 (Figure 1). With peak winter demand roughly 55,000 MW there still seems to be ample spare capacity to guarantee electricity supplies (Figure 1). Why then is there so much talk on the media, blogs and from the CEO of National Grid about pending blackouts in Britain? The answer is not what many may presume it to be.

Figure 1 During the 1960s to the 1980s Britain was largely dependent upon coal and nuclear power for electricity supplies. Natural gas (CCGT) was introduced in the early 1990s and expanded year on year until 2004. At the end of that decade a second phase of CCGT building got under way adding a further 9,274 MW of capacity, which with hindsight appears to be an extraordinary investment decision. The closure of 11,530 MW of large combustion plants has resulted in the decline of UK generating capacity. The expansion of wind got underway in the early 21st century. Wind capacity is not varied into the future. It can be expected to grow some, but not at the historic rate since companies are becoming shy of investing in Britain’s chaotic energy market. Data from DECC table dukes5_11.

Britain has 31,637 MW of CCGT capacity (combined cycle gas turbines) but lacks access to sufficient gas to run this fleet at anything close to capacity. During the cold spell at the end of last winter when gas storage was run down to empty the maximum output from the CCGT fleet was 22,000 MW, just 70% of the installed capacity. The closure of 11,530 MW of large combustion plants (coal and oil) has of course created the electricity supply crisis. But given that these power stations are now gone, it is a shortage of gas that creates the current blackout risk.

Figure 2 shows the pattern of electricity demand in the UK for January and July 2009. In 2009, peak demand was 58.9 GW at 6pm on a Tuesday in January and the minimum demand was 22.3 GW at 6 am on a Sunday morning in July. Peak demand is 2.64 times greater than the minimum demand and the electricity delivery system requires the flexibility and controllability to match supply with demand exactly at all times.

Figure 2 UK electricity demand for January and July 2009 shows three cycles in the pattern of demand. The daily cycle has peaks during day time, with maximum demand normally at 6pm, and troughs at night. The weekly cycle shows increased demand Monday to Friday with reduced demand on Saturday and Sunday. The annual cycle shows increased demand in winter compared with summer. This provides a picture of activity and expectations of the society we live in. We like to stay warm in winter, we go to bed at night and we have weekends off work.

For the time being, blackout risk in the UK is confined to the short periods of peak winter demand that invariably occur at 6pm in the winter months. And the blackout risk is hightened towards the end of the winter when our’s and Europe’s gas storage has been run down. Figure 3 shows gas generating capacity curtailed to 22,000 MW which is an approximation for current gas supply limits. Wind, that is not dispatchable, is removed.

Figure 3 An approximation for the deliverability from UK power stations with CCGT curtailed to 22,000 MW and wind power removed. On a calm, cold weekday at the end of a long cold winter, there is a risk of blackouts in the UK and that risk will increase as the decade progresses.

This now shows the nature of the blackout risk that we face. Should we have a cold winter that drains storage and cold weather in February or March and little wind across the UK and near continent then there is a blackout risk, especially if there are outages at nuclear or other generating plant, which is quite common. This risk will increase towards the end of the decade if planned nuclear closures go ahead and if there are further closures of large combustion plants.

At present, understanding the blackout risk in Britain boils down to understanding the security of future gas supplies and that is not a simple task. The hightened blackout risk of March 2013 came about because of LNG Heading East as a consequence of the Fukushima nuclear disaster in Japan. Closer to home, UK supplies may get some relief in the next few years as a number of new projects come on line, and if there are significant shale gas discoveries. Offsetting that are plans in the Netherlands to cut production in the giant Groningen field and the inevitability of a future peak in Norwegian gas production. We seem set to become increasingly reliant upon Russia for gas supplies that also provides our electricity security.

• Tim Berners-Lee on 25 Years of the Web (Spiegel)

In March 1989, Tim Berners-Lee, 58, established a place for himself in the history books by creating the World Wide Web. That month, the Briton, who at the time worked for the European Organization for Nuclear Research (CERN), wrote a paper titled “Information Management — A Proposal.” His research led to the development of the first Web browser and, finally, the World Wide Web. Today, Berners-Lee is a professor at the Massachussetts Institute of Technology (MIT) and the University of Southhampton in England.

SPIEGEL ONLINE: You are considered to be the father of the World Wide Web. When you look at how your idea developed over time, do you view the Web more with pride, disbelief or concern?

Berners-Lee: All of the above. Certainly all the people who have been part the Word Wide Web can be very proud of what has been achieved, and especially about the spirit of collaboration behind this amazing development. That said: All that collaboration and working together is to a certain extent under threat, because the Web has become so powerful, because it has become such an important technology for everyday life and almost everything we do. Therefore there is a strong tendency for governments, big organizations and companies to try to control it.

SPIEGEL ONLINE: It isn’t just China and Iran that are attempting to control the Internet and spy on its users. Intelligence agencies in the country of your birth, Britain, and the United States are acting like hackers, undermining security and even encryption standards. How big is the loss of trust, in your view, and what can be done about it?

Berners-Lee: What that has shown is the lack of oversight over the spying systems both in the United Kingdom and the US. That needs to change. We need a serious overhaul of those social systems around spying. Any country that has a part of the government or the police spying on the Internet to combat crime must demonstrate that they have a very solid level of accountability and that the information they get is never abused. The privacy of the individual must be respected and the data captured cannot be abused for commercial purposes. What’s really great about Edward Snowden revelations is that they raise awareness about these problems and about the Internet and its integrity.

SPIEGEL ONLINE: Some countries and companies want to build regional safe havens for data. For example, Brazil wants to force international companies to store Brazilian customers’ data on servers located inside the country. Germany’s Deutsche Telekom is thinking of a Schengen Net that would keep data inside the EU. What is your take on that?

Berners-Lee: Any division or Balkanization of the Web into segments is a very bad idea. The reason we had this shoot growth of creativity on the Web that got us to where we are now, to this incredible richness, is that the Web has been a non-national, open, universal thing. It initially grew without any reference to national borders. It is only when you try to police the Internet that you need to use laws, and most sets of laws we have are nation-based. So we must be very careful to make sure the Internet remains open.

SPIEGEL ONLINE: You and others are launching a global campaign to ensure the legal protection of Web users’ rights internationally. What would you include in your personal Magna Charta for the Web?

Berners-Lee: First, I would like us to have that conversation together. That is why we created webwewant.org. I want us to use this year to define the values that we as Web users are going to insist on. I would like every country to debate what that means in terms of their existing laws. In what areas must we enhance our regulations to guarantee fundamental rights on the Internet? The right to privacy must be in there, the right not to be spied on and the right not to be blocked. The commercial marketplace should be completely open. You should be able to visit any political website apart from the things that we all agree are illegal, nasty and horrible. Access to the Web is, of course, a fundamental right. As we celebrate the Web’s 25th anniversary, we need to think about the fact that less than half the world’s population uses the Web at all.

SPIEGEL ONLINE: How would you like to change that?

Berners-Lee: The advance of the mobile web has made the problem much easier to address. At best, a poor person in Africa will have a $10 mobile phone that still has no browser. The question now is how we can drive down the price of a basic smartphone with a browser on it. The next question is how we can we create data plans that are affordable and provide enough bandwidth to allow the user to participate in the Information Society. Then we need to them to write, share their creativity and not just read.

SPIEGEL ONLINE: You have suggested that the Web has developed quite well without national regulations. Do you see a role here for governments as well?

Berners-Lee: We started the Alliance for Affordable Internet (A4AI), which sees governments, NGOs and companies working together in order to overcome big drags.

SPIEGEL ONINE: What do you mean by “drags”?

Berners-Lee: Well, often there are seemingly “sweet deals” in which big foreign telecommunications companies offer to connect all schools for free in a certain country on the condition that they become the monopoly provider. That keeps prices high and hinders innovation. A4AI wants to make sure the regulatory landscape is good and to try to get companies to offer low start-up charges and fees for people who want to get onboard for the first time.

SPIEGEL ONLINE: Looking back 25 years, what was one of the most important milestones in the Web’s development?

Berners-Lee: When I first developed the Web technology at CERN in Geneva, there was another system called Gopher. I didn’t think it was as good as the Web, but it started earlier and had more users. At a certain point the University of Minnesota, which had created the Gopher system, said that in the future they would possibly charge a royalty for commercial uses. Gopher traffic immediately dropped off and people moved to the World Wide Web. CERN management then made a commitment — I can still remember the date, April 30, 1993 — that royalties would never be charged for using the Web. That was a very important step because it established a trend.

SPIEGEL ONLINE: So far the Web has been steered, administered and “governed” by many organizations. The US plays a dominate role through the Internet Corporation for Assigned Names and Numbers (ICANN), which manages the allocation of IP addresses and the .com and .net names of sites associated with them. Is this multistakeholder approach the right model for the next 25 years?

Berners-Lee: Nothing is perfect and every multistakeholder solution means hard work and involves a lot of communication. We need to revise how that works, but incrementally. It is also important for the US to formally let go of ICANN. But, yes, I think the solution for the future is a revised version of the existing multistakeholder model.

Almost all animals see UV light. We do not.

• Most Animals Can See UV Light, See Power Lines As Flashing Bands Across The Sky (Guardian)

Power lines are seen as glowing and flashing bands across the sky by many animals, research has revealed. The work suggests that the pylons and wires that stretch across many landscapes are having a worldwide impact on wildlife. Scientists knew many creatures avoid power lines but the reason why was mysterious as they are not impassable physical barriers. Now, a new understanding of just how many species can see the ultraviolet light – which is invisible to humans – has revealed the major visual impact of the power lines.

“It was a big surprise but we now think the majority of animals can see UV light,” said Professor Glen Jeffery, a vision expert at University College London. “There is no reason why this phenomenon is not occuring around the world.” Dr Nicolas Tyler, an ecologist at UIT The Arctic University of Norway and another member of the research team, said: “The flashes occur at random in time and space, so the power lines are not grey and passive, but seen as lines of light flashing.”

He said the discovery has global significance: “The loss and fragmentation of habitat by infrastructure is the principle global threat to biodiversity – it is absolutely major. Roads have always got particular attention but this will push power lines right up the list of offenders.” The avoidance of power lines can interfere with migration routes, breeding grounds and grazing for both animals and birds.

Autopsies on dozens of mammals from zoos and abbatoirs showed their eyes were able to see UV, including cattle, cats, dogs, rats, bats, okapi, red pandas and hedgehogs. Also on the list were reindeer and further work published in the journal Conservation Biology showed these animals, whose eyes are specially adapted to the dark Arctic winters, are particularly sensitive to UV light. UV vision helps reindeer find plants in snow cover, but in the depths of winter their wide irises and sensitive eyes means the power lines appear particularly bright.

The avoidance of power lines had been explained in the past by the corridors cut through forests to accomodate them, where animals would be exposed in the open to predators. But this explanation could not apply in the treeless tundra of northern Norway, where 220,000 reindeer are tended by 7,000 herders from the traditional Sami people. “Right now, there is a plan to build a 186-mile long power line in north Norway,” said Tyler. “This new work will encourage power companies to negotiate with herders about where they put the power lines.”

Around the world, Tyler said: “There are hundred of examples of animals avoiding power lines. Now we know that, not only do these clear-cut corridors mean exposure to predators, at the same time there is this damn thing flashing at you.” Jeffery said burying all power cables would be unrealistically expensive but added that one idea would be to put a non-conducting shield around the cable to screen it from view. The UV light, which is caused by electricity ionising the air around cables, are a major source of inefficiency for electricity companies and also cause the hissing or crackling noises sometimes heard.

Power companies already use helicopter-mounted UV cameras to monitor power cables, because the flashes can be an early sign of conduction problems, but the cameras only record a very narrow range of UV. “Animals see across the range, so the intensity of light seen by them is much more than seen by the helicopter flights,” said Jeffery.

This article addresses just one of the many issues discussed in Nicole Foss’ new video presentation, Facing the Future, co-presented with Laurence Boomert and available from the Automatic Earth Store. Get your copy now, be much better prepared for 2014, and support The Automatic Earth in the process!

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