Dec 162014
 
 December 16, 2014  Posted by at 4:14 pm Finance Tagged with: , , , , , , , ,  6 Responses »


Arthur Rothstein “Bank that failed. Kansas” May 1936

Few may have noticed it to date, but it’s not like we still live in the same world, just with lower oil prices. We live in a different world altogether, with the changes between the new and old brought about by the (impending) disappearance of a lot of – virtual – money, or credit, give it a name, and the difference between oil at $110 and oil at $50.

And for the same reason Dorothy feels it necessary to point out to Toto where they find themselves, we have to tell people out there who may think they are indeed still in Kansas that no, they’re not. Or, if we play around with the metaphor a bit, they’re in Kansas, but a tornado has passed through and rendered the entire state unrecognizable.

A big problem is that for most people, Kansas is what the state tourist bureau (re: US media) says it is, all generously waving corn and sunshine, not the bleak reality they actually live in. It’s not easy to figure things out when so much rests on you being and remaining ignorant.

But whether we like it or not, and understand it or not, there’s a major reset underway as we speak. The fake impression, the false picture, of the economy, delivered by global central bank stimuli over the past years, is starting to unravel, as I talked about in Will Oil Kill The Zombies?. And the central banks are starting to figure out that doing more of the same may not work anymore to keep up keeping up appearances.

Very early today, WTI oil fell through $55, and Brent through $60. As I write this, they’re living dangerously just below the edge of $54 and $59, respectively. And again, this is not because the dollar is particularly strong; as a matter of fact, the greenback has a temporary weak spell vs the pound and the euro (1.5% in 2 weeks?!). Otherwise the damage to oil prices, counted in dollars, would be even greater, and substantially so.

When the United Arab Emirates energy minister over the weekend said OPEC won’t even cut production if prices reach $40 a barrel, he effectively set a new price (-goal). And let’s not forget that lots of oil already sells far below the WTI or Brent standards. It’s a buyers market out there, with plenty panicked producers/sellers. Because if inertia inherent in longer term delivery contracts, some of the shock will come only later, but it will come.

And oil prices will rise again at some point, but what will be left behind will resemble Kansas after a tornado. Besides, don’t expect a rebound anytime soon: I don’t believe for a moment that demand is not overreported (China,Europe, Japan, emerging markets) and production underreported (panicked producers). This baby has a ways to run yet.

But as I’ve discussed many times already, oil is just the spark that sets the world ablaze. The fuel is energy credit, junk bonds, leveraged loans, collateralized loan obligations. And it will spread to adjacent instruments, and then to just about everything, because shorts and losses will have to be covered with any asset that can be sold, loans called in, margin calls issued, etc. Many of these items will end up being valued at 20-30 cents on the dollar at best, and since the whole edifice was built on leveraged credit, those valuations will in many cases mean a death in the family.

The reason why is relatively easy to find if you just follow the – money – trail.

CNBC has an energy trader talking:

Oil Has Become The New Housing Bubble

The same thing that happened to the housing market in 2000 to 2006 has happened to the oil market from 2009 to 2014, contends well-known trader Rob Raymond of RCH Energy. And he believes that just as we witnessed the popping of the housing bubble, we are in the midst of the popping of the energy bubble. “It’s the outcome of a zero interest rate policy from the Federal Reserve. What’s happened from 2009 to 2014 is, the energy industry has outspent its cash flow by $350 billion to go drill all these wells, and create this supply ‘miracle,’ if you will, in the United States.”

“The issue with this has become, what were houses in Florida and Arizona in 2000 to 2006 became oil wells in North Dakota and Texas in 2009 to 2014, and most of that was funded in the high-yield market and by private equity.” [..] when it comes to the price of a barrel of oil itself, Raymond expects to see a rebound once U.S. production dries up. “We live in a $90 to $100 world,” he said. “We just don’t live in it today.”

Obviously, Rob Raymond expects to return to Kansas one day. The boys at Phoenix, via Tyler Durden, are not so sure, I don’t think. They make the good point that a dollar rally is oil negative, making my earlier point about the dollar’s – relative – weakness these days more poignant. “Oil is just the beginning ..”:

Oil’s Crash Is the Canary In the Coal Mine for a $9 Trillion Crisis

The Oil story is being misinterpreted by many investors. When it comes to Oil, OPEC matters, as does Oil Shale, production cuts, geopolitical risk, etc. However, the reality is that all of these are minor issues against the MAIN STORY: the $9 TRILLION US Dollar carry trade. Drilling for Oil, producing Oil, transporting Oil… all of these are extremely expensive processes. Which means… unless you have hundreds of millions (if not billions) of Dollars in cash lying around… you’re going to have to borrow money.

Borrowing US Dollars is the equivalent of shorting the US dollar. If the US Dollar rallies, then your debt becomes more and more expensive to finance on a relative basis. There is a lot of talk of the “Death of the Petrodollar,” but for now, Oil is priced in US Dollars. In this scheme, a US Dollar rally is Oil negative. Oil’s collapse is predicated by one major event: the explosion of the US Dollar carry trade. Worldwide, there is over $9 TRILLION in borrowed US Dollars that has been ploughed into risk assets.

Energy projects, particularly Oil Shale in the US, are one of the prime spots for this. But it is not the only one. Emerging markets are another. Just about everything will be hit as well. Most of the “recovery” of the last five years has been fueled by cheap borrowed Dollars. Now that the US Dollar has broken out of a multi-year range, you’re going to see more and more “risk assets” (read: projects or investments fueled by borrowed Dollars) blow up. Oil is just the beginning, not a standalone story.

If things really pick up steam, there’s over $9 TRILLION worth of potential explosions waiting in the wings. Imagine if the entire economies of both Germany and Japan exploded and you’ve got a decent idea of the size of the potential impact on the financial system. And that’s assuming NO increased leverage from derivative usage. The story here is not Oil; it’s about a massive bubble in risk assets fueled by borrowed Dollars blowing up.

The last time around it was a housing bubble. This time it’s an EVERYTHING bubble. And Oil is just the canary in the coalmine.

Yves Smith goes so far as to ponder a link to the disgraceful spending bill additions signed off on by Congress and Senate a few days ago. The first but is from Tom Adams via e-mail:

Did Wall Street Need to Win the Derivatives Budget Fight to Hedge Against Oil Plunge?

Why are the proponents pushing so hard, with respect to the Dodd-Frank provision on derivatives pushed out of insured banks, to get this done now? Why not just wait until Republicans have control of the House and Senate? Why is Jamie Dimon calling on members now, rather than just waiting? The timing is weird. Perhaps there are political reasons that give various parties cover they want and that’s all there is to it. On the other hand, I’ve been closely watching the blow up in the oil and energy markets and I wonder if there may be a link to the Cromnibus fight.

Much of the recent energy boom has been financed with junk debt and a good portion of that junk debt ended up in collateralized loan obligations. CLOs are also big users of credit default swaps, which was an important target of the Dodd Frank push-out. In addition, over the past 6 months banks were unable to unload a portion of the junk debt originated and so it remained on bank balance sheets. That debt is now substantially underwater.

To hedge, banks are using CDS. Hedge funds are actively shorting these junk debt financed energy companies using CDS (it’s unclear where the long side of those CDS have ended up – probably bank balance sheets and CLOs). Finally, junk financed energy companies have been trying to offset the falling price of oil by hedging via energy derivatives. As it turns out, energy derivatives are also part of the DF push-out battle.

Conditions in the junk and energy markets are pretty dire right now as a result of the collapse in oil, as you know. I suspect there are some very anxious bank executives looking at their balance sheets right now. Since the derivatives push-out rule of Dodd Frank was scheduled to go into affect in 2015, the potential change in managing their exposure may be causing a lot of volatility for banks now – they need to hedge in large numbers at the best rates possible.

Is it possible that bank concerns (especially Citi and JP Morgan) about the potential energy-related losses are why Dodd Frank has to be changed now?

Then Yves herself explains:

To unpack this for generalists, CLOs or collateralized loan obligations, are used to sell highly leveraged loans, which are typically created when private equity firms take companies private. In the last big takeover boom of 2006-2007, which was again led by private equity buyouts, banks were left with tons of unsold CLO inventory on their balance sheets. The games banks played to underreport losses (such as doing itty bitty trades with each other or friendly hedge funds to justify their valuations) and the magnitude of the damage didn’t get the attention they warranted because all eyes were on the bigger subprime/CDO implosion.

This CLO decay could eventually be more serious than the losses after the 2006-7 buyout boom. This time, the lending was less diversified by industry. Although it hard to get good data, by all account shale gas companies have been heavy junk bond issuers, and energy-related investments have also been disproportionately represented in recent acquisitions. The high representation of energy bonds in junk issuance means they are also the largest single industry exposure in junk bond ETFs, which were wobbly even before oil started taking its one-way wild ride.

Zero Hedge turns again to the high yield (junk bond) energy spread graph(s), and rightly so, because what’s visible here is how extreme the situation has already become. Already, because we’ve barely even left Kansas and started our adventure. There’s a long way to go yet, and there’s no way back. This will have to play out. (BTW, OAS is Option-Adjusted Spread)

Energy High-Yield Credit Spreads Blow Above 1000bps For First Time Ever

For the first time on record, HY Energy OAS has broken above 1000bps – signifying dramatic systemic business risk in that sector (despite a modest rebound today in crude prices). The energy sector is entirely frozen out of the credit markets at this point with desk chatter that there is no bid for this distressed debt at all and air-pockets appear everywhere as each new trade reprices the entire sector. The broad high-yield ‘yield’ and ‘spread’ markets are now under significant pressure – both pushing to the cycle’s worst levels. HY Energy weakness is propagating rapidly into the broad HY markets:

This suggests significant weakness to come for Energy stocks:

This cannot end well (unless the Fed decides monetizing crude in addition to TSYs and E-Minis is part of its wealth preservation, pardon “maximum employment, stable prices, and moderate long-term interest rates” mandate…)

The problem with that last bit, monetizing crude, is as I’ve said, and Zero Hedge quoted me on that a few days ago, that saving the US oil industry that way would also mean bailing out Putin and Maduro, which would seem a political no-go. There’s also the fact that the American people may not appreciate the Fed driving oil prices higher just as they get a chance to spend less on gas while they’re hurting. Another no-go.

I don’t see them do it. If they bail out anyone, it’ll be the banks again if these start bleeding too much from energy stocks, bonds, loans, derivatives and related losses. I’m thinking the oil industry will have to save itself through defaults, mergers and acquisitions. Let Shell buy BP, and let them buy up broke shale companies on the cheap and slowly kill off production. Looks like a plan. America should have gone for financial independence, not energy independence, come to think of it.

As for the American people, to play with the Kansas metaphor a little more, it’s going to feel like the Fed and the Treasury kicked them out of Kansas. Or North Dakota, if you must. And you may be thinking: who cares about living in Kansas, but it’s a metaphor. And Dorothy felt right at home, remember? It was paradise, or at least her comfort zone. In other words, the real question is how you are going to feel about being kicked out cold and hard of your comfort zone. Because that is what this low oil price ‘adventure’ will end up doing to a lot of people.

But do let’s put it in perspective: it doesn’t stand on itself, neither the oil prices nor the financial losses they will engender. We’re watching, in real time, the end of the fake reality created by the central banks.

Dec 132014
 
 December 13, 2014  Posted by at 11:42 am Finance Tagged with: , , , , , , ,  1 Response »


Marjory Collins “Italian girls watching US Army parade on Mott Street, New York” Aug 1942

The Federal Reserve’s Language Lessons (Reuters)
After Years Of Doubts, Americans Turn More Bullish On Economy (Reuters)
Oil Seen Dropping to $55 ($45?) Next Week as Price Rout Deepens (Bloomberg)
US Stocks Tumble to Cap Dow’s Worst Week Since 2011 (Bloomberg)
Oil Rot Spreading in Credit (Bloomberg)
We Have Just Escaped The Earth’s Gravity And Are Now In Space Orbit (Zero Hedge)
U.S. Oil Rigs Drop Most in Two Years, Baker Hughes Says (Bloomberg)
Don’t Vote ‘Wrong’ Way, EU’s Juncker Urges Greeks (Reuters)
Albert Edwards: China Deflation Risks Sparking A Eurozone Break-Up (CNBC)
Would Global Deflation Really Be That Bad? (CNBC)
Falling Oil Threatens Canada’s Bulletproof Banking System (MarketWatch)
How Elizabeth Warren Led The Great Swaps Rebellion of 2014 (Bloomberg)
$303 Trillion In Derivatives US Taxpayers Are Now On The Hook For (Zero Hedge)
Venezuela’s Got $21 Billion. And Owes $21 Billion (Bloomberg)
Japan’s Lemmings March Toward The Cliff Chanting “Abenomics” (David Stockman)
Putin 2000 – 2014, Midterm Interim Economic Results (Awara)
Only ‘Minimal’ Risk Of Default: Ukrainian Official (CNBC)
Ukraine’s Chocolate King President Not Sweet On Keeping Promise (Reuters)
Australia’s Once-Vibrant Auto Industry Crashes in Slow Motion (NY Times)
Did A European Spacecraft Detect Dark Matter? (Christian Science Monitor)
The Chinese Mystery Of Vanishing Foreign Brides (FT)

The financial world caught behind the oil curve: they listen only to Yellen.

The Federal Reserve’s Language Lessons (Reuters)

“Will they or won’t they?” is the question on investors’ minds as the Federal Reserve policy-setting committee meets next week for the last time this year. Markets have followed Fed speakers closely in recent weeks for clues on whether the U.S. central bank will change key language in its post-meeting statement regarding how long it will keep benchmark interest rates near zero. Some expect the Fed to remove the reference to “considerable time” when setting a time frame for near-zero rates and maybe replace it, as it did ahead of the 2004-2005 monetary policy tightening cycle, with a nod to being “patient”. But that belief has been complicated somewhat by the slump in oil prices that has pulled inflation expectations lower and caused the S&P stock index to post its first negative week in eight on Friday.

The expectation of lower inflation could prevent the Fed from changing its current stance. Client notes from Goldman Sachs, Citi and Bank of America/Merrill Lynch this week deal with expectations for the removal of the wording, roughly agreeing that however close the call is, it is more likely than not that the phrase will go away. “They are going to remove it; I don’t think (Fed Chair Janet Yellen) is going to keep it in there just because of what we are seeing with the energy sector,” said Sean McCarthy, regional chief investment officer for Wells Fargo Private Bank in Scottsdale, Arizona. “All the other data has been strong, whether you are looking at construction, at the ISM numbers, and especially the jobs data that she cares about most.”

Indeed, recent statements from Fed officials suggest the language could be changed. Goldman Sachs, in a note, pointed to “widespread use of the word ‘patient'” as a signal that “some participants would prefer to revise the current language.” The lack of consensus on the Fed’s move all but guarantees that whatever the Federal Open Market Committee’s statement says on Wednesday the stock market will be volatile, as it usually is on Fed decision days. “The goal,” said the BofA/Merrill note, “will be to smooth the market’s reaction. The Fed does not intend to signal a fundamental shift in policy, and we expect chair Yellen’s press conference remarks to reinforce this point.”

Read more …

While Americans are not just behind the curve, they positively confirm a top has been reached. If ever you needed a sign, this is it: “Their expectations run quite counter to recent price data.”

After Years Of Doubts, Americans Turn More Bullish On Economy (Reuters)

Pessimism and doubt have dominated how Americans see the economy for many years. Now, in a hopeful sign for the economic outlook, confidence is suddenly perking up. Expectations for a better job market helped power the Thomson Reuters/University of Michigan index of consumer sentiment to a near eight-year high in December, according to data released on Friday. U.S. consumers also saw sharp drops in gasoline prices as a shot in the arm, and the survey added heft to strong November retail sales data that has showed Americans getting into the holiday shopping season with gusto. “Surging expectations signal very strong consumption over the next few months,” said Ian Shepherdson, an economist at Pantheon Macroeconomics.

While improvements in sentiment haven’t always translated into similar spending growth, consumers at the very least are feeling the warmth of several months of robust hiring, including 321,000 new jobs created in November. When asked in the survey about recent economic developments, more consumers volunteered good news than bad news than in any month since 1984, said the poll’s director, Richard Curtin. Moreover, half of all consumers expected the economy to avoid a recession over the next five years, the most favorable reading in a decade, Curtin said. The data bolsters the view that the U.S. economy is turning a corner and that worker wages could begin to rise more quickly, laying the groundwork for the Federal Reserve to begin hiking its benchmark interest rate to keep inflation from eventually rising above the Fed’s 2% target.

Overall, the sentiment index rose to a higher-than-expected 93.8, mirroring levels seen in boom years like 1996 and 2004. Many investors see the Fed raising rates in mid-2015, and policymakers will likely debate at a meeting next week whether to keep a pledge that borrowing costs will stay at rock bottom for a “considerable time.” Consumers see faster inflation ahead. Over the next year, they expect a 2.9% increase in prices, up from 2.8% in November, according to the sentiment survey. Their expectations run quite counter to recent price data. The Labor Department said separately its producer price index dropped 0.2% last month, brought lower by falling gasoline prices. Prices were soft even excluding the drag from gasoline.

Read more …

“The market hasn’t seen the response they’re looking for on the supply side yet ..”

Oil Seen Dropping to $55 ($45?) Next Week as Price Rout Deepens (Bloomberg)

Benchmark U.S. oil prices are poised to test $55 a barrel after a six-month rout pushed crude to the lowest in five years. West Texas Intermediate crude ended below $58 today for the first time since May 2009 after the International Energy Agency cut its global demand forecast for the fourth time in five months. Prices are down 46% from this year’s highest close of $107.26 on June 20. “By taking out $58, oil is moving towards the next target $55,” said Phil Flynn, senior market analyst at Price Futures. “It’s such an emotional selloff, and the even numbers are going to be the magic numbers.” WTI for January delivery dropped $2.14, or 3.6%, to $57.81 a barrel today on the New York Mercantile Exchange. Brent slid $1.83 to $61.85 on the London-based ICE Futures Europe exchange, the lowest since July 2009.

Both benchmarks have collapsed about 20% since Nov. 26, the day before OPEC agreed to leave its production limit unchanged at 30 million barrels a day. U.S. output, already at a three-decade high, will continue to rise in 2015, according to the IEA, which reduced its estimate for oil demand growth in 2015 by 230,000 barrels a day. “We could definitely see $55 next week,” said Tariq Zahir, commodity fund manager at Tyche Capital. “We are probably going to see some violent trading.” Skip York, vice president of energy research at Wood Mackenzie, said the next price target is $45. “The market hasn’t seen the response they’re looking for on the supply side yet,” York said. “We’re now in this environment where I think prices are going to keep drifting down until the market is convinced, until the signal that production growth needs to slow has been received and acted on by operators.”

Read more …

“At first it was just oversupply of oil. But now it’s that, plus fear of a world economy that’s growing too slow.”

US Stocks Tumble to Cap Dow’s Worst Week Since 2011 (Bloomberg)

U.S. stocks sank, with the Dow Jones Industrial Average capping its biggest weekly drop in three years, as oil continued to slide and Chinese industrial data raised concern over a global economic slowdown. Materials stocks declined the most in the Standard & Poor’s 500 Index, losing 2.9% as a group, while energy shares dropped 2.2%. IBM, DuPont and Exxon Mobil sank at least 2.9% to lead declines in all 30 Dow stocks. The S&P 500 lost 1.6% to 2,002.33 at 4 p.m. in New York, extending losses in the final hour to cap a weekly drop of 3.5%. The Dow sank 315.51 points, or 1.8%, to 17,280.83. The Dow slid 3.8% for the week, its biggest decline since November 2011. “Clearly the oil situation is driving things,” Randy Warren at Warren Financial said. “At first it was just oversupply of oil. But now it’s that, plus fear of a world economy that’s growing too slow. Those fears are definitely outweighing the positive signs we’re seeing domestically.”

The selloff picked up speed in the final hour as the Dow average plunged more than 100 points and the S&P 500 ended about 2 points above its average price for the last 50 days, a level monitored by technical analysts. At about 2:50 p.m., March futures on the benchmark gauge for U.S. equities slipped below 2,000 for the first time since Nov. 4. More than $1 trillion was erased from the value of global equities this week as oil prices tumbled, raising concern over the strength of the global economy. Oil extended losses today amid speculation that OPEC’s biggest members will defend market share against U.S. shale producers. The IEA cut its forecast for global oil demand for the fourth time in five months.

Read more …

“Everyone is trying to squeeze through a very small door.”

Oil Rot Spreading in Credit (Bloomberg)

Credit investors are preparing for the worst. They’re cleaning up their portfolios, selling riskier debt that’s harder to trade in bad times and hoarding longer-term government bonds that do best in souring markets. While investors have pruned energy-related holdings in particular as oil prices plunge, they’re also getting rid of other types of corporate bonds, causing yields to surge to the highest in more than a year. “We believe the pervasive nature of the sell-off is more reflective of overall liquidity concerns in the cash market than of fundamental deterioration,” Barclays analysts Jeffrey Meli and Bradley Rogoff wrote in a report today. “The weakness, while certainly most pronounced in the energy sector, has been broad based.”

Rather than waiting around for a trigger to escalate this month’s selloff, investors are pulling out of dollar-denominated corporate debt now, causing a 0.8% decline in the notes this month, according to a Bank of America Merrill Lynch index that includes investment-grade and junk-rated securities. This would be the first month of losses since September. Yields on the debt have surged to 2.21 percentage points more than benchmark rates, the highest premium in 14 months. While the biggest driver of the selling is plummeting oil prices, the selling extends beyond just energy. Bonds of wireless provider Verizon have fallen 1% this month and debt of HCA, a hospital operator, has dropped 1.2%, Bank of America Merrill Lynch index data show.

Even though the global speculative-grade default rate is less than half its historical average at 2.2%, investors are getting ready for sentiment to turn. When that happens, it may be all the more difficult to get out as hoards of other investors try to sell in a market where trading hasn’t kept pace with the growth of outstanding debt. There’s “very little liquidity” in corporate bonds, especially in lower-rated debt, Bill Gross, who joined Janus Capital in September, said today in a Bloomberg Surveillance interview with Tom Keene. “Everyone is trying to squeeze through a very small door.”

Read more …

Just take one look at that energy junk bond chart.

We Have Just Escaped The Earth’s Gravity And Are Now In Space Orbit (Zero Hedge)

Houston, we have a serious problem… With only 20% of US Shale regions remaining economic at these oil price levels, it should not be surprising that the credit risk of the US Energy sector is exploding to near 1000bps… and contagiously infecting the broad HY market… Credit risk in the energy sector is starting to infect the broad HY market – HYG at 2-year yield highs and HYCDX near 15-month wides…

Which signals considerable pain to come for US Energy stocks..

Read more …

“It’s starting ..”

U.S. Oil Rigs Drop Most in Two Years, Baker Hughes Says (Bloomberg)

U.S. oil drillers idled the most rigs in almost two years as they face oil trading below $60 a barrel and escalating competition from suppliers abroad. Rigs targeting oil dropped by 29 this week to 1,546, the lowest level since June and the biggest decline since December 2012, services company Baker Hughes said on its website yesterday. As OPEC resists calls to cut output, U.S. producers including ConocoPhillips and Oasis Petroleum have curbed spending. Chevron put its annual capital spending plan on hold until next year. Rigs targeting U.S. oil are sliding from a record 1,609 after a $50-a-barrel drop in global prices, threatening to slow the shale-drilling boom that has propelled domestic production to the highest level in three decades.

“It’s starting,” Robert Mackenzie, oilfield services analyst at Iberia Capital, said. “We knew this day was going to come. It was only a matter of time before the rig count was going to respond. The holiday is upon us and oil prices are falling through the floor.” ConocoPhillips said Dec. 8 that would cut spending next year by about 20%. The Houston-based company is deferring investment in North American plays including the Permian Basin of Texas and New Mexico and the Niobrara formation in Colorado. Oasis, an exploration and production company based in Houston, said Dec. 10 that it’s cutting 2015 spending 44%.

“Our capex will be lower,” Roger Jenkins, chief executive officer of Murphy Oil, an Arkansas-based exploration company, said during a presentation Dec. 10. “I think this idea of lowering capex around 20% is going to be pretty common in the industry.” Even as producers cut budgets and lay down rigs, domestic production is surging, with the yield from new wells in shale formations including North Dakota’s Bakken and Texas’s Eagle Ford projected to reach records next month, Energy Information Administration data show. Oil output climbed to 9.12 million barrels a day in the week ended Dec. 5, the highest in EIA data going back to 1983, and is projected to increase to 9.3 million barrels a day next year.

Read more …

“I won’t express my own opinion…”

Don’t Vote ‘Wrong’ Way, EU’s Juncker Urges Greeks (Reuters)

The European Union’s chief executive has given Greeks a stark and unusual warning of major problems if they vote the “wrong” way and radicals win an early parliamentary election. Jean-Claude Juncker, the president of the European Commission, stressed in remarks carried late on Thursday by Austrian broadcaster ORF that he was not trying to insert himself into the Greek political process. In general, EU officials take pains to avoid accusations of interference and Juncker’s remarks went beyond the normal reticence. As the government in Athens faces a possible election and defeat by an untried left-wing party that opposes the terms the EU has set on Greece’s financial bailout, Juncker said he was not averse to seeing “familiar faces” remaining in charge. Prime Minister Antonis Samaras said on Thursday that Greece risked a “catastrophic” return to financial crisis if his government fell as a result of a parliamentary vote he has called for this month to elect a head of state.

Juncker, who was closely involved in managing the euro zone debt crisis when he was prime minister of Luxembourg, said he was sure Greek voters understood the risks of an election that polls show could bring to power the left-wing Syriza party. “I assume that the Greeks – who don’t have an easy life, above all the many poor people – know very well what a wrong election result would mean for Greece and the euro zone,” he said. “I won’t express my own opinion. I just wouldn’t like extremist forces to take the wheel. “I would like Greece to be governed by people with an eye on and a heart for the many little people in Greece – and there are many – and also understand the necessity of European processes.” He said he did not view market ructions in Greece of late as a sign that a new Greek crisis was breaking out.

Read more …

“.. the euro zone cannot withstand another full scale recession and will ultimately fracture despite the best efforts of the ECB.”

Albert Edwards: China Deflation Risks Sparking A Eurozone Break-Up (CNBC)

Societe Generale’s uber-bearish strategist Albert Edwards believes that investors are slowly waking up to the idea that the Chinese have a “major deflation problem” and its transition into a more consumer-led economy won’t be a smooth one. Traditionally the country is known for its cheap exports that compete strongly with domestically produced goods around the world. That model is unlikely to change soon, according to Edwards. “The realization that China will be exporting more deflation helps to explain why U.S. inflation expectations continue to plunge despite recent stronger than expected real economy data,” he said in a note on Thursday.

He continues to warn that weakness in emerging markets could seriously impact Germany, the traditional powerhouse for the euro bloc. Germany sees China as one of the biggest buyers of its goods. Edwards said that Germany will eventually have to “walk the walk” and aggressively cut spending as it falls into recession next year. “My own view is that the euro zone cannot withstand another full scale recession and will ultimately fracture despite the best efforts of the ECB,” he said.

Read more …

“I am just not perceiving the global economy on the verge of a boom…the risks look to the downside – especially as the effects of lower oil are factored in.”

Would Global Deflation Really Be That Bad? (CNBC)

The collapse in oil process may only be a few months old, but economists are already debating its long-term effects: will the world be gripped in growth-sapping Japanese-style deflation or will the world economy benefit from a period of lower prices? Deflation is classed as when consumer prices turn negative with the theory being that buyers would hold off from making purchases in the hope of further falls. This raises the fear of a prolonged deflationary spiral with the slump becoming so entrenched that it impacts growth and does little for the potential of wage increases. The price of oil has seen a dramatic 40% fall since June and has weighed on headline inflation figures and is likely to continue to do so next year. Consultancy Capital Economics estimate that the energy component of inflation in advanced economies will fall temporarily to around minus 10% next year. Some consumers see little price reductions at the pump as their governments subsidize the commodity, but in the U.S. many have been cheering the drop in oil which has put more money in their pocket.

Bill Blain, a fixed income strategist at Mint Partners argues that lower oil prices does not necessarily translate into growth, however. “Oil price declines are initially hailed as positive growth drivers – but in an already recessionary environment, perhaps they have become a soporific too far?,” he said in a morning note on Friday. “I am just not perceiving the global economy on the verge of a boom…the risks look to the downside – especially as the effects of lower oil are factored in.” Consumer prices in November rose 0.3% for the euro zone, compared to the year before, and the European Central Bank has regularly downgraded its prospects for the next year as 2015 approaches. In the U.S., annual inflation still remains below the 2% goal given by the Federal Reserve. The Bank of England is expecting the U.K.’s inflation rate to fall below 1% next year and China’s number currently sits at a five-year low.

Read more …

“In this context, the risk to Canadian banks doesn’t stem necessarily from a narrow view of loans to oil companies, but more from a broad macro risk perspective.”

Falling Oil Threatens Canada’s Bulletproof Banking System (MarketWatch)

While the U.S. financial system – as well as many international banks – has gotten hopped up on a wide assortment of financial opiates and stumbled through more than a dozen bank-fueled crises through the decades, Canada boasts a stellar track record of banking sobriety. However, a spectacular death spiral in crude-oil futures – West Texas Intermediate settled Thursday at $59.95, a more than five-year low – threatens to deliver a serious shock to the banking system of the U.S.’s northern neighbor, according a research note published Thursday by Pavilion Global Markets. Canada ranks as one the world’s five largest energy producers and a net exporter of oil, according to the U.S. Energy Information Administration. So, a big drop in oil would pose several risks to Canada’s oil-dependent economy.

“The drop in oil prices, as mentioned above, will have wide-ranging implications on the Canadian economy,” Pavilion strategists Pierre Lapointe and Alex Bellefleur said in the note. It’s not just that Canada’s banks will find themselves saddled with souring loans from underwater energy producers. The problem, Pavilion argues, is that Canada’s employment rate could suffer as oil-related businesses are forced to close. Here’s how they put it: “In this context, the risk to Canadian banks doesn’t stem necessarily from a narrow view of loans to oil companies, but more from a broad macro risk perspective. As employment in the oil industry declines, a negative income and wealth shock to many households will take place, impacting a variety of loans (credit card, mortgage) on Canadian bank balance sheets.”

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It’s insane what goes on here. Banks get to write laws, and now out in the open.

How Elizabeth Warren Led The Great Swaps Rebellion of 2014 (Bloomberg)

John Carney couldn’t understand why the vote was so close. The Delaware congressman, a Democratic member of the House Financial Services Committee, had been there when a reform to the Dodd-Frank “swaps push-out” passed—in a 55-6 landslide. He’d joined a veto-proof majority, 292-122, to back the reform in a House bill that was throttled by the Democratic Senate. The bank-friendly Democrat had not expected the reform’s quiet return, as a rider in the must-pass “Cromnibus” spending package, to kick off a revolt. “This passed with nearly 300 votes,” said Carney on Thursday night, after the House had voted on the Cromnibus, and as legislators of both parties congratulated him or wished him Merry Christmas. “It would have been more than 300, like some of the other bills we’ve done, if there wasn’t this toxic description of what it might do. Unfortunately, the world we live in, the political world, is one of perception. I try to deal with the facts.”

“Sometimes that’s at odds with the way we do work here, where you get these political narratives that take on a larger than life part of the discussion.” Put it this way: Carney was not Ready for Warren. For the better part of two days, most of his fellow Democrats approached the Cromnibus—which did not de-fund the president’s immigration order, or the bulk of the Affordable Care Act—as a sell-out of cosmic proportion. This started when Massachusetts Senator Elizabeth Warren gave a Wednesday floor speech challenging her colleagues to restore swaps push-out, which prohibited banks from booking derivatives in their own subsidiaries. “The financial industry spent more than $1 million a day lobbying Congress on financial reform, and a lot of that money went to former elected officials and government employees,” said Warren. “And now we see the fruits of those investments. This provision is all about goosing the profits of the big banks.”

The backlash should have been predictable. As Carney recalled, the original bill to change the swaps rule lost some votes after critical media coverage. More specifically, the New York Times reporters Eric Lipton and Ben Protess noticed that Citigroup had practically written the swaps language; its “recommendations were reflected in more than 70 lines of the House committee’s 85-line bill.” Yet it didn’t become “toxic” until the fight over the “Cromnibus.” Warren made the swaps language infamous. In the House, she found an impromptu whip team led by Illinois Representative Jan Schakowsky and the party’s ranking member on the Financial Services Committee, California Representative Maxine Waters. She found an ally in the Minority Leader, California Representative Nancy Pelosi, who took the floor on Thursday to warn that the swaps rule was exactly the sort of time-bomb that could create another financial crisis in the pattern of 2008.

This rattled the Democrats’ appropriators, some of whom were heading for the exits. Virginia Representative Jim Moran spent a good part of Thursday telling reporters that Warren was “running for president” and drowning Democrats in her ambition. “She obviously has a lot of influence,” said Moran after the votes. “The media listens to everything she says.”

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Here’s what Warren doesn’t like.

$303 Trillion In Derivatives US Taxpayers Are Now On The Hook For (Zero Hedge)

Courtesy of the Cronybus(sic) last minute passage, government was provided a quid-pro-quo $1.1 trillion spending allowance with Wall Street’s blessing in exchange for assuring banks that taxpayers would be on the hook for yet another bailout, as a result of the swaps push-out provision, after incorporating explicit Citigroup language that allows financial institutions to trade certain financial derivatives from subsidiaries that are insured by the Federal Deposit Insurance Corp, explicitly putting taxpayers on the hook for losses caused by these contracts. Recall:

Five years after the Wall Street coup of 2008, it appears the U.S. House of Representatives is as bought and paid for as ever. We heard about the Citigroup crafted legislation currently being pushed through Congress back in May when Mother Jones reported on it. Fortunately, they included the following image in their article:

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And the CIA once again thinks it’s in control of toppling a government.

Venezuela’s Got $21 Billion. And Owes $21 Billion (Bloomberg)

Of all the financial barometers highlighting the crisis in Venezuela, this may be the one that unnerves investors the most as oil sinks: The country’s foreign reserves only cover two years of bond payments. The government and state-run oil company owe $21 billion on overseas bonds by the end of 2016, an amount equal to about 100% of reserves. Those figures explain why derivatives traders aren’t only betting that a default is almost certain but that it will most likely happen within a year. The 48% collapse in crude in the past six months stripped President Nicolas Maduro of the one thing – windfall profits for the country’s No. 1 export – that was preventing a full-blown crisis.

Even before oil started sinking, the OPEC member had depleted 30% of its international reserves in the past six years, the result of billions of dollars of capital flight triggered by the socialist push implemented by Maduro’s mentor and predecessor, the late Hugo Chavez. “These are panic capitulation levels,” Kathryn Rooney Vera, an economist at Bulltick Capital Markets, said in an e-mailed response to questions. “Oil’s continued price decline is ratcheting up risk aversion to exporters, and even more so for an economy already as distorted as that of Venezuela.” The cost to insure Venezuelan debt against non-payment over the next 12 months surged to about 6,928 basis points yesterday in New York, according to CMA data, widening the price gap over five-year protection to a record.

The upfront cost of one-year contracts implies a 65% probability of default by December 2015. Swaps prices show a 94% chance of non-payment by 2019. Venezuela’s benchmark bonds due 2027 have fallen for seven straight days, reaching 41.22 cents on the dollar as of 12:02 p.m. in New York today, the lowest in 16 years. Maduro said Dec. 10 that the government is doing everything it can to boost the price of oil, which he says should be about $100 a barrel. The country advocated unsuccessfully for production cuts at November’s meeting of members OPEC. Yesterday, Maduro said the country could export cement to bring more dollars into the country.

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” .. there is no evidence or honest economic logic to support the proposition that – over any reasonable period of time – a nation can become richer by making its people poorer ..”

Japan’s Lemmings March Toward The Cliff Chanting “Abenomics” (David Stockman)

According to Takahiro Mitani, trashing your currency, destroying your bond market and gutting the real wages of domestic citizens is a sure fire ticket to economic success. Yes, that’s what the man says, “I have no doubt that the economy is in a recovery trend if you look at the long run….” After two years of hoopla and running the BOJ’s printing presses red hot, however, there is not a shred of evidence that Abenomics will lead to any such thing. In fact, after the recent markdown of Q3 GDP even deeper into negative territory, Japan’s real GDP is no higher now than it was the day Abenomics was launched in early 2013; and, in fact, is no higher than it was on the eve of the global financial crisis way back in 2007.

In the meanwhile, the Yen has lost 40% of its value and teeters on the brink of an uncontrolled free fall. Currency depreciation, of course, is supposedly the heart of the primitive Keynesian cure on which Abenomics is predicated, but there is no evidence or honest economic logic to support the proposition that – over any reasonable period of time – a nation can become richer by making its people poorer. That’s especially true in the case at hand, which is to say, a Pacific archipelago of barren rocks. Japan imports virtually 100% of every BTU and every ton of metals and other raw materials consumed by its advanced $5 trillion industrial economy.

Yet thanks to the mad money printer who Prime Minister Abe seconded to the BOJ, Hiroki Kuroda, import prices are up by a staggering 30% since 2012. Even with oil prices now collapsing, the yen price of crude oil imports is still higher than it was two years back. Not surprisingly, input costs for Japan’s legions of small businesses have soared, and the cost of living faced by its legendary salary men has risen far faster than wages. Accordingly, domestic businesses that supply the home market—and that is the overwhelming share of Japan’s output—are being driven to the wall, bankruptcies are at record highs and the real incomes of Japan’s households have now shrunk for 16 consecutive months and are down by 6% compared to 2 years ago.

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A view of Russia we don’t often see here in the west.

Putin 2000 – 2014, Midterm Interim Economic Results (Awara)

A study released today by Awara Group, a Russia-based consulting firm, shows that Russia’s economy is not as dependent on oil and gas as is commonly claimed. Having researched the development of key indicators of the economy from 2000 to 2013, the authors of the study want to debunk the media story that Russia’s governments under Putin have been supposedly exclusively relying on an economic model based on oil and gas rents while neglecting the need to modernize and diversify the economy. It turns out that quite the opposite is true.

The crisis-torn economy battered by years of robber capitalism and anarchy of the 1990’s, which Putin inherited in 2000, has now reached sufficient maturity to justify a belief that Russia can make the industrial breakthrough that the President has announced. “The Russian economy is much more diversified and modernized than critics claim. The contention that it is only about oil and gas is total nonsense”, says Jon Hellevig, chief researcher for the study. “This is why Russia will not only stay afloat under the conditions of sanctions, but actually will make the industrial breakthrough that President Putin has announced”, Hellevig continues. The study reveals a range of impressive indicators on the development of the economy between 2000 and 2013 and the health of the Russian economy:

  1. The share of natural resources rents in GDP (oil, gas, coal, mineral, and forest rents) more than halved between 2000 to 2012 from 44.5% to 18.7%. The actual share of oil and gas was 16%.
  2. Russian industrial production has grown more than 50% while having undergone a total modernization at the same time.
  3. Production of food has grown by 100% in 2000 – 2013.
  4. Production of cars has more than doubled at the same time that all the production has been totally remodeled.
  5. Russian exports have grown by almost 400%, outdoing all major Western countries.
  6. Growth of exports of non-oil & gas goods has been 250%.
  7. Russia’s export growth has more than doubled compared with the competing Western powers.
  8. Oil & gas does not count for over 50% of state revenues as has been claimed, but only 27.4%. Top revenue source is instead payroll taxes.
  9. Russia’s total tax rate at 29.5% is among lowest of developed countries, non-oil & gas total tax rate is half that of the Western countries.
  10. Russia’s GDP has grown more than tenfold from 1999 to 2012.
  11. Public sector share of employment in Russia is not high in comparison with developed economies. State officials make up 17.7% of Russia’s total work force, which situates it in the middle of the pack with global economies.
  12. Russia’s labor productivity is not 40% of the Western standards as is frequently claimed, but rather about 80%.

Far from “relying” on oil & gas, the Russian government is engaged in massive investments in all sectors of the economy, biggest investments going to aviation, shipbuilding, and manufacturing of high-value machinery and technological equipment. Totally contrary to these facts, the Western media, financial analysts, and even leaders such as U.S. President Obama keep parroting the refrain that “Russia only relies on oil and gas” and “Russia does not produce anything”. Clearly, Barack Obama has not been analyzing the Russian economy, so this must mean that those whose job it is to do so are misleading the President.

We strongly believe that everyone benefits from knowing the true state of Russia’s economy, its real track record over the past decade, and its true potential. Having knowledge of the actual state of affairs is equally useful for the friends and foes of Russia, for investors, for the Russian population – and indeed for its government, which has not been very vocal in telling about the real progress. I think there is a great need for accurate data on Russia, especially among the leaders of its geopolitical foes. Correct data will help investors to make a profit. And correct data will help political leaders to maintain peace. Knowing that Russia is not the economic basket case that it is portrayed to be would help to steer the foes from the collision course with Russia they have embarked on.

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Translation: we’re about to go broke.

Only ‘Minimal’ Risk Of Default: Ukrainian Official (CNBC)

Ukraine is at “minimal” risk of defaulting on its debt repayments, according to an official in the country’s recently-appointed government, despite a currency in freefall and an apparent $15-billion black hole in its bailout from the IMF. “We do have economic difficulties, but that is something that is going into the debate with the IMF,” Dmytro Shymkiv, deputy head of presidential administration, told CNBC. “The risk of default is minimal,” he added, arguing that 95% of the country was not suffering as a result of the military conflict in the east of Ukraine. A further $15 billion may be needed to bailout the struggling country, on top of the $17-billion loan package the IMF worked out for the troubled country, and Prime Minister Arseny Yatseniuk appealed for Western help to stop a default on Thursday.

Ukraine’s currency, the hryvnia, has lost over 90% of its value against the U.S. dollar to date this year, as conflict raged on its borders. Inflation is spiralling, and the country is facing a future without cheap gas supplies from neighbor Russia, after their fallout over the deposition of former Ukrainian President Viktor Yanukovych and subsequent emergence of a more pro-European government in Ukraine. The economies of Donetsk and Luhansk, the areas where fighting between the Ukrainian army and pro-Russian separatists is worst, have ground to a halt – but these account for close-to a fifth of the country’s economy, according to Yatseniuk.

There is some hope that negotiations to resolve the conflict may re-open soon, with President Petro Poroshenko saying Friday morning that the country had experienced its first 24 hours of proper ceasefire in seven months. Shymkiv, the former head of Microsoft Ukraine who is now tasked with implementing much-needed administrative, social and economic reforms in the country, said: “We’re trying to bring our knowledge and experience to the development of the country. That’s the only way we can bring it out of the mis-development of the economy.” Asked about potential conflict between Yatseniuk and Poroshenko, he said: “There aren’t conflicts between President and Prime Minister. We have no time to have disputes.”

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He didn’t say he was willing to take any losses …

Ukraine’s Chocolate King President Not Sweet On Keeping Promise (Reuters)

The Chocolate King is finding it difficult to relinquish his throne. Petro Poroshenko, one of Ukraine’s richest men and owner of a sweets empire, made an unusual promise last spring while campaigning to be president – if elected, he would sell most of his business assets. “As president of Ukraine, I only want to concern myself with the good of the country and that is what I will do,” he told an interviewer. Poroshenko won the election, but he hasn’t succeeded yet at keeping his campaign promise. With his country at war with Russian-backed separatists in the east, the economy faltering and its currency weakening, Ukraine’s 49-year-old president hasn’t sold any of his assets, including his most valuable one: a majority stake in Roshen Confectionery Corp, Ukraine’s biggest sweets maker. His promise appears to be a victim of the very problems that face him as president.

Executives at the two financial firms that Poroshenko has hired to help sell his assets caution that deals, particularly in former Soviet republics and eastern Europe, can often take a year or more. But they also concede that their client’s timing is terrible. “It’s clearly not a good time to sell,” said Giovanni Salvetti, managing director of Rothschild CIS, which is trying to sell Roshen. “I hope the situation will improve in the first or second quarter” of 2015. Makar Paseniuk, a managing director at ICU in Kiev, which acts as Poroshenko’s financial adviser, said there is an agreement to sell one of his other assets. He declined to identify it but said the deal has not closed and it’s not clear when or if it will. Besides Roshen, Poroshenko’s portfolio includes numerous other assets, including real estate and investments in a bank, an insurance company and a shipyard in Crimea. He also owns a Ukrainian television station that he has said he will keep.

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Nice little history lesson. Must read, certainly if you don’t know what a ute is.

Australia’s Once-Vibrant Auto Industry Crashes in Slow Motion (NY Times)

There has been a car industry in Australia for about as long as there have been cars. But within two or three years, the last of the continent’s auto plants will go dark. At the turn of the 20th century, while visionaries in the United States and Europe labored on horseless carriages, Australians were also creating them. In 1896 in Melbourne, Herbert Thomson built a steam car for sale using Dunlop pneumatic tires made in Australia. In 1901, Harley Tarrant began selling cars made mostly from Australian parts. Over the next century, American automakers including General Motors, Ford and Chrysler came to dominate the market, turning out cars from factories set up in nearly every Australian state. Toyota, Nissan and Mitsubishi later joined them.

But the end is nigh. Auto plants have been closing, one by one, over five decades. The three remaining carmakers here — Toyota, Ford and the Holden subsidiary of G.M. — are shutting their manufacturing operations over the next few years. Government policy has played a large role in the contraction; the Australian market has gone from one of the world’s most protected to possibly the least-protected among auto-manufacturing nations. The Australian car industry had always benefited from barriers to imported vehicles. Those who bought early Thomson steam cars and gasoline-powered Tarrants were industrialists, wealthy ranchers, bankers and politicians who saw merit in protecting the home industry.

So early adopters in the 1900s who wanted foreign-made cars, and there were plenty of them, could only import the chassis complete with engine, transmission, axles and wheels — and the hood and the grille. The rest of the car had to be manufactured, mostly by hand, by body builders who generally evolved from outfits that had made coaches and buggies for the horse trade. Holden started in the leatherwork and saddlery business in 1856, but by the early 20th century was making motorcycle sidecars and car bodies for chassis from G.M. In 1931, G.M. bought Holden Motor Builders and plans were laid for a distinctly Australian car, which finally arrived after World War II, in 1948.

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If confirmed, this is the biggest discovery in eons.

Did A European Spacecraft Detect Dark Matter? (Christian Science Monitor)

Astronomers may finally have detected a signal of dark matter, the mysterious and elusive stuff thought to make up most of the material universe. While poring over data collected by the European Space Agency’s XMM-Newton spacecraft, a team of researchers spotted an odd spike in X-ray emissions coming from two different celestial objects – the Andromeda galaxy and the Perseus galaxy cluster. The signal corresponds to no known particle or atom and thus may have been produced by dark matter, researchers said. “The signal’s distribution within the galaxy corresponds exactly to what we were expecting with dark matter – that is, concentrated and intense in the center of objects and weaker and diffuse on the edges,” study co-author Oleg Ruchayskiy, of the École Polytechnique Fédérale de Lausanne (EPFL) in Switzerland, said in a statement.

“With the goal of verifying our findings, we then looked at data from our own galaxy, the Milky Way, and made the same observations,” added lead author Alexey Boyarsky, of EPFL and Leiden University in the Netherlands. Dark matter is so named because it neither absorbs nor emits light and therefore cannot be directly observed. But astronomers know dark matter exists because it interacts gravitationally with the “normal” matter we can see and touch. And there is apparently a lot of dark matter out there: Observations of star motion and galaxy dynamics suggest that about 80% of all matter in the universe is “dark,” exerting a gravitational force but not interacting with light.

Researchers have proposed a number of different exotic particles as the constituents of dark matter, including weakly interacting massive particles (WIMPs), axions and sterile neutrinos, hypothetical cousins of “ordinary” neutrinos (confirmed particles that resemble electrons but lack an electrical charge). The decay of sterile neutrinos is thought to produce X-rays, so the research team suspects these may be the dark matter particles responsible for the mysterious signal coming from Andromeda and the Perseus cluster. If the results — which will be published next week in the journal Physical Review Letters — hold up, they could usher in a new era in astronomy, study team members said. “Confirmation of this discovery may lead to construction of new telescopes specially designed for studying the signals from dark matter particles,” Boyarsky said. “We will know where to look in order to trace dark structures in space and will be able to reconstruct how the universe has formed.”

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Weird. Just plain weird.

The Chinese Mystery Of Vanishing Foreign Brides (FT)

Police in central China have launched an investigation into the disappearance of more than 100 Vietnamese women who married local bachelors and had been living in villages around the city of Handan. The women all disappeared at the same time in late November, along with a Vietnamese woman who married a local villager 20 years ago and had introduced most of the brides to local men in recent months in exchange for a fee. Faced with severe gender imbalances as a result of China’s decades-old one-child policy and a traditional preference for male children, many Chinese men are unable to find suitable brides and resort to paying for wives from poorer Asian countries such as Vietnam.

Particularly in more traditional rural parts of China, marriage is highly transactional and men are increasingly expected to provide a house, car, electrical appliances and a steady income before a woman or their family will consider him eligible for marriage. For those who cannot afford the expensive requirements of Chinese brides, paying for a bride from Vietnam or elsewhere in the region can be a much cheaper option. As a consequence of the demand for cheap foreign brides, China has an enormous problem with human trafficking. “My brother worked outside the village and was too poor to afford a local wife so my family paid Rmb100,000 to get a wife from Vietnam through that old Vietnamese woman who came here 20 years ago,” said the brother of Bai Baoxing, a local man whose Vietnamese wife disappeared with the others barely a month after they were married.

Mr Bai’s brother said the new bride spoke decent Mandarin Chinese and he and his family were now wondering whether she was even Vietnamese. Chinese media reports identified the absconded Vietnamese marriage broker as Wu Meiyu. After living in a village on the outskirts of Handan for 20 years, she started offering introductions to Vietnamese brides for a fee at the start of this year. An officer in the local Handan city police office told the Financial Times that provincial police were now handling the case and they could not comment on the ongoing investigation. Chinese media are filled with cases of women from poor rural areas who are abducted and sold into marriage, as well as cases involving foreign brides.

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Dec 042014
 
 December 4, 2014  Posted by at 11:11 am Finance Tagged with: , , , , , , ,  Comments Off on Debt Rattle December 4 2014


Arthur Rothstein Migratory fruit pickers’ camp in Yakima, Washington Jul 1936

Five Reasons Why Markets Are Heading For A Crash (Telegraph)
‘The Minsky Moment Is The Crash’ (Zero Hedge)
Global Company Bond Sales Nearing $4 Trillion Set Annual Record (Bloomberg)
Collapse Of Oil Prices Leads World Economy Into Trouble (Guardian)
Sub-$50 Oil Surfaces in North Dakota As Regional Discounts Swell (Bloomberg)
First U.S. Gas Station Drops Below $2 a Gallon (Bloomberg)
There Are 550,000 Iraqi Barrels Signaling Oil Glut Will Deepen (Bloomberg)
Crushing The “Lower Gas Price = More Spending” Fiction (Zero Hedge)
Energy Junk-Debt Deals Postponed as Falling Oil Saps Demand (Bloomberg)
Canada Gas Project Delay Highlights Oil Plunge’s Wider Risk (Bloomberg)
Norway Seeks to Temper Its Oil Addiction After OPEC Price Shock (Bloomberg)
China Shadow Bank Collapse Exposes Grey-Market Lending Risk (FT)
BlackRock China ETF’s Derivatives Strategy Faltering (Bloomberg)
What The Dollar May Be Saying About Europe (CNBC)
UK Moves To Cut Spending To 1930s Levels (Guardian)
Australia’s Dreadful GDP Figures – Six Things You Need To Know (Guardian)
Putin Accuses West Of ‘Pure Cynicism’ Over Ukraine (CNBC)
One Million Europeans Sign Petition Against EU-US TTIP Talks (BBC)
Xi’s Cultural Revolution Is Doomed to Fail (Bloomberg)
The 8th, And Final, Deadly Sin: Exploiting The Earth (Paul B. Farrell)

“The first reason to worry is the curiously juxtaposed state of asset prices, with generally buoyant equities but falling sovereign bond yields and commodity prices. They cannot both be right. High equity prices are – or at least, should be – indicative of investor confidence and optimism. Low bond yields and falling commodity prices point to the very reverse.”

Five Reasons Why Markets Are Heading For A Crash (Telegraph)

Many stock markets are close to their all-time highs, the oil price is plummeting, delivering a significant boost to Western and Asian economies, the European Central Bank is getting ready for full-scale sovereign QE – or so everyone seems to believe – the American recovery is gaining momentum, Britain is experiencing the highest rate of growth in the G7, God is in his heaven and all’s right with the world. All good, then? No, not good at all. I don’t want to put a dampener on the festive cheer, but here are five reasons to think things are not quite the unadulterated picture of harmony and advancement many stock market pundits would have you believe.

The first reason to worry is the curiously juxtaposed state of asset prices, with generally buoyant equities but falling sovereign bond yields and commodity prices. They cannot both be right. High equity prices are – or at least, should be – indicative of investor confidence and optimism. Low bond yields and falling commodity prices point to the very reverse; they are basically a sign of emerging deflationary pressures and a slowing economy. If demand was really about to roar away, both would be rising along with equities, not falling. The markets have become a kind of push-me-pull-you construct. They look both ways at the same time.

Yet this is no mere anomaly. There is a good reason for these divergent asset prices – pumped up by central bank money printing, abundant cash is desperate for fast vanishing yield, and is chasing it accordingly. Spanish sovereign debt might have looked a good buy a couple of years back, when the yield still factored in the possibility of default. But today, the yield on 10-year Spanish bonds is less than 2pc. In Germany, it’s just 0.7pc, not much more than Japan, which has had 20 years of stagnation and deflation to warp the traditional laws of investment. If it is yield you are after, sovereign debt markets are again exceptionally poor value, barely offering a real rate of return at all. Commodities were the next port of call, but that game too seems to be up.

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“We all are in a Ponzi world right now. Hoping to be bailed out by the next person.”

‘The Minsky Moment Is The Crash’ (Zero Hedge)

BCG senior partner Daniel Stetler was recently interviewed by Portugal’s Janela na web magazine, his insights are significant and worrisome… Some key excerpts: “You have to think about a huge tower of debt on shaky foundations where central banks pump concrete in the foundations in an emergency effort to avoid the building from collapsing and at the same time builders are adding additional floors on top” [..] “Today central banks give money to institutions, which are not solvent, against doubtful collateral for zero interest. This is not capitalism.” [..] “It is the explicit goal of central banks to avoid the tower of debt to crash. Therefore they do everything to make money cheap and allow more speculation and even higher asset values. It is consistent with their thinking of the past 30 years. Unfortunately the debt levels are too high now and their instruments do not work anymore as good. They might bring up financial assets but they cannot revive the real economy.” [..]

“In my view [Piketty] overlook the fact that only growing debt levels make it possible to have such a growth in measured wealth. Summing up, Piketty looks at symptoms – wealth – and not on causes – debt.” “We need to limit credit growth and make it tax-attractive to invest in the real economy not in financial speculation. This will happen automatically if we return to normal interest rates. The key point is, that we as societies should reduce consumption which includes social welfare and rather invest more in the future.” [..] “”We all are in a Ponzi world right now. Hoping to be bailed out by the next person. The problem is that demographics alone have to tell us, that there are fewer people entering the scheme then leaving. More people get out than in. Which means, by definition, that the scheme is at an end. The Minsky moment is the crash. Like all crashes it is easier to explain it afterwards than to time it before. But I think it is obvious that the endgame is near.”

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How ultra-low rates lets companies pretend they’re actually economically viable.

Global Company Bond Sales Nearing $4 Trillion Set Annual Record (Bloomberg)

Global corporate bond sales set an annual record as companies lock in borrowing costs that forecasters say are bound to rise. SoftBank, Amazon.com and Medtronic were among borrowers that helped push issuance to $3.975 trillion, past the previous peak of $3.973 trillion in 2012, according to data compiled by Bloomberg. Sales in the U.S. have already reached an unprecedented $1.5 trillion. Issuance defied predictions of a slowdown made by underwriters from Bank of America Corp. to Barclays Plc as a decline in benchmark costs that no one foresaw pushed yields to record lows. While central banks in Europe and Japan have stepped up their own stimulus efforts, the likelihood the Federal Reserve will boost interest rates has fueled company borrowings worldwide.

“We’ve seen so much issuance just because everybody’s thinking that next year’s going to be the year when rates start rising,” Nathan Barnard, a fixed-income analyst at Portland, Oregon-based Leader Capital Corp., said today in a telephone interview. “It’s cheap financing still so why not do that.” Investors are poised to earn 7.01% on an annualized basis this year on debt from the most creditworthy to the riskiest borrowers worldwide, according to the Bank of America Merrill Lynch Global Corporate and High Yield Index. Those would be the largest gains since a 12.05% return in 2012, the index data show.

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” ..because of how Saudi Arabia uses its oil well to support its entire economy, the country’s budget calls for $90 a barrel to break even, despite that the cost of production is closer to $30.”

Collapse Of Oil Prices Leads World Economy Into Trouble (Guardian)

OPEC, the largest crude-oil cartel in the world, wanted others to feel its pain as oil prices collapsed. “OPEC wanted … to cut off production … and they wanted other non-OPEC [countries], especially in the US and Canada, to feel the pinch they are feeling,” says Abhishek Deshpande, lead oil analyst at Natixis. But in its rush to influence others, OPEC ended up hurting everyone in the process – including itself. Low oil prices, pushed down further by OPEC’s meeting last week,have impacted world economies, energy stocks, and several currencies. From the fate of the Russian rouble to Venezuelan deficits to American mutual funds full of Exxon or Chevron stock, OPEC’s decision was the shot heard round the world for troubled commodities.

So how low could oil go? Standard Chartered analysts expect a “chaotic” quarter ahead, saying OPEC’s decision to keep the production target unchanged is “extremely negative for oil prices for 2015”. The bank slashed its 2015 average price forecast for Brent crude oil by $16 a barrel to $85. Other forecasts are lower. Citi Research estimated an average 2015 price of $72 for WTI and $80 for ICE Brent. Natixis’s Deshpande said their average 2015 Brent forecast is around $74, with WTI around $69. These prices have real-world effects on world economies. Everyone in the sector is smarting. Deshpande said because of how Saudi Arabia uses its oil well to support its entire economy, the country’s budget calls for $90 a barrel to break even, despite that the cost of production is closer to $30.

Other OPEC members have even higher budgetary breakevens. Saudi Arabia is sitting on a “war chest” of money it stockpiled when prices were high, Deshpande said. Citi analysts said Saudi Arabia has about $800bn in cash reserves. Venezuela, on the other hand, is a prime example of a country squandering its riches. Citi said for every $10 drop in oil prices Venezuela loses about $7.5bn in revenues. “Already weak fiscally, this should call for reducing energy subsidies. But domestic politics including the 2015 election makes this nearly impossible,” they said. OPEC countries as a whole could lose $200bn in revenue if Brent prices stay at $80, which is about $600 per capita annually, Citi said.

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“If you’re selling at the wellhead, you’re getting a very low number relative to WTI.”

Sub-$50 Oil Surfaces in North Dakota As Regional Discounts Swell (Bloomberg)

Oil market analysts are debating if oil will fall to $50. In North Dakota, prices are already there. Crude sold at the wellhead in the Bakken shale region in North Dakota fell to $49.69 a barrel on Nov. 28, according to the marketing arm of Plains All American Pipeline LP. That’s down 47% from this year’s peak in June, and 29% less than the $70.15 paid for Brent, the global benchmark. The cheaper price for North Dakota crude underscores how geographic and logistical hurdles can amplify the stress that plunging futures prices have put on drillers in new shale plays that have helped push U.S. oil production to the highest level in 31 years. Other booming areas such as the Niobrara in Colorado and the Permian in Texas have also seen large discounts to Brent and U.S. benchmark West Texas Intermediate.

“You have gathering fees, trucking, terminaling, pipeline and rail fees,” Andy Lipow, president of Lipow Oil Associates LLC in Houston, said Dec. 2. “If you’re selling at the wellhead, you’re getting a very low number relative to WTI.” Discounted prices at the wellhead have been exacerbated by a 39% drop in Brent futures since June 19 to $69.92 a barrel yesterday. Prices have fallen as global demand growth fails to keep pace with surging oil production from the U.S. and Canada. Much of that new output is coming from areas that are facing steep discounts. Bakken crude was posted at $50.44 a barrel Dec. 2. Crude from Colorado’s Niobrara shale was priced at $54.55, according to Plains. Eagle Ford crude cost $63.25, and oil from the Oklahoma panhandle was $58.25.

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Look for more of this too.

First U.S. Gas Station Drops Below $2 a Gallon (Bloomberg)

$2 gasoline is back in the U.S. An Oncue Express station in Oklahoma City was selling the motor fuel for $1.99 a gallon today, becoming the first one to drop below $2 in the U.S. since July 30, 2010, Patrick DeHaan, a senior petroleum analyst at GasBuddy Organization Inc., said by e-mail from Chicago. “We knew when we saw crude oil prices drop last week that we’d break the $2 threshold pretty soon, but we didn’t know if it would happen in South Carolina, Texas, Missouri or Oklahoma,” said DeHaan, senior petroleum analyst for GasBuddy. “Today’s national average, $2.74, now makes the current price we pay a whopping 51 cents per gallon less than what we paid a year ago.”

Gasoline is sliding after OPEC decided last week not to cut production amid a global glut of oil that has already dragged international oil prices down by 37% in the past five months. Pump prices have fallen by almost a dollar since reaching this year’s high on April 26. 15% of the nation’s gas stations are selling fuel below $2.50 a gallon, “and it may not be long before others join OnCue Express in that exclusive club that’s below $2,” said Gregg Laskoski, another senior petroleum analyst with GasBuddy. Retail gasoline averaged $2.746 a gallon in the U.S. yesterday, data compiled by Florida-based motoring club AAA show. Stations will cut prices by another 15 to 20 cents a gallon as they catch up to the plunge in oil, Michael Green, a Washington-based spokesman for AAA, said by e-mail today.

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“In a global market that neighboring Kuwait estimates is facing a daily oversupply of 1.8 million barrels, the accord stands to deepen crude’s 38% plunge since late June .. ”

There Are 550,000 Iraqi Barrels Signaling Oil Glut Will Deepen (Bloomberg)

Not only is OPEC refraining from cutting oil output to stem the five-month plunge in prices, it’s adding to the supply glut. Just five days after OPEC decided to maintain production levels, Iraq, the group’s second-biggest member, inked an export deal with the Kurds that may add about 300,000 barrels a day to world supplies. In a global market that neighboring Kuwait estimates is facing a daily oversupply of 1.8 million barrels, the accord stands to deepen crude’s 38% plunge since late June. Or as Carsten Fritsch, a Frankfurt-based analyst at Commerzbank AG, put it: There’ll be “even more oil flooding the market that nobody needs.”

Benchmark Brent crude slumped immediately after the deal was signed Dec. 2 in Baghdad, dropping 2.8% to $70.54 a barrel. Prices, which slipped 0.9% yesterday to reach the lowest since 2010, were at $70.38 at 1:30 p.m. Singapore time today. Futures are down about 10% since OPEC’s Nov. 27 decision. The agreement seeks to end months of feuding between the Kurds and officials in Iraq over the right to crude proceeds, a dispute that has hindered their joint effort to push back Islamic State militants. The deal allows for as much as 550,000 barrels a day of crude to be shipped by pipeline from northern Iraq to the Mediterranean port of Ceyhan in Turkey, according to the regional government. The Kurds were already exporting about 220,000 barrels daily, according to data compiled by Bloomberg.

The Kurdish Regional Government expanded its control of Iraq’s oil resources in June when it deployed forces to defend Kirkuk, the largest field in the north of the country, from Islamic militants. The Kurds have been shipping crude through Turkey in defiance of the central government, which took legal action to block the sales, leaving some tankers loaded with Kurdish oil stranded at sea. As much as 300,000 barrels a day of Kirkuk blend will be shipped through the Turkish pipeline under the terms of the deal, according to the KRG. Another 250,000 barrels daily of oil produced in the Kurdish region will be exported through the same route, according to the government in Baghdad.

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“.. if the consumer is struggling to go out and spend on goods and services, or if Americans are simply hesitant to ramp up spending, it could be a very un-merry holiday season for retailers. ..”

Crushing The “Lower Gas Price = More Spending” Fiction (Zero Hedge)

With uncertainty lingering and patience wearing thin after five+ years of still lackluster wage growth, consumers are increasing saving for the future, hedging against a continuation of “more of the same.” Thus, for many, extra savings at the pump as a result of lower gas prices are simply being stored away to help supplement spending needs in the future, ramping up savings, not spending. As of September, consumers increased savings from 5.4% to a 5.6% pace, up from a recent low of 4.3% in November of last year. [..]

Against the backdrop of three consecutive months of aggressive energy price reprieve, retail sales have fallen short. With more than a $0.50 drop in the average cost of a gallon of gasoline, anything less than a minimal 0.5% increase in monthly retail sales highlights just how fragile the U.S. economy remains, particularly the consumer sector. While the weakness in October was dominated by a few categories, there was insufficient demand elsewhere to compensate. Consumers continue to spend, but at a modest level with no sign of further momentum in sight with income growth stubbornly limited, and consumers opting to use savings from lower gas prices to offset rising healthcare and utilities costs.

We are, after all, a consumer based economy, and if the consumer is struggling to go out and spend on goods and services, or if Americans are simply hesitant to ramp up spending, it could be a very un-merry holiday season for retailers. From the Fed’s perspective, if consumer spending continues to disappoint, headline activity is likely to significantly underperform monetary policy officials’ optimistic forecast of +2% in 2014 and circa 3% in 2015.

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Expect a lot of this.

Energy Junk-Debt Deals Postponed as Falling Oil Saps Demand (Bloomberg)

Two energy-related companies are postponing financings after a plunge in oil prices made their high-yield, high-risk debt more difficult to sell. New Atlas, a newly formed unit of oil and gas producer Atlas Energy Group, put on hold a $155 million loan it was seeking to refinance debt, according to five people with knowledge of the deal, who asked not be identified because the decision is private. EnTrans International, a manufacturer of equipment used in fracking, delayed selling a $250 million bond, according to three other people with knowledge of that transaction. Investors in bonds of junk-rated energy companies are facing losses of more than $11 billion as oil prices dropped to a five-year-low of $63.72 a barrel this week. This is deepening concern that the riskiest oil explorers won’t be able to meet their obligations, and sending their borrowing costs to the highest since 2010.

More than half of Cleveland, Tennessee-based EnTrans’s revenue comes from equipment sales to the hydraulic fracturing and the energy industry, Moody’s Investors Service said in a Nov. 17 report. The notes, which were being arranged by Credit Suisse, would have been used to refinance debt. Gary Riley, chief executive officer at EnTrans International, said yesterday in an e-mail commenting on the deal status that “the decision to defer or go forward has not been made.” Riley didn’t respond to questions seeking comment today. Deutsche Bank and Citigroup were managing New Atlas’s financing and had scheduled a meeting with lenders for this morning, according to data compiled by Bloomberg.

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Blowing LNG out of the water.

Canada Gas Project Delay Highlights Oil Plunge’s Wider Risk (Bloomberg)

Petroliam Nasional’s decision to postpone its C$36 billion ($32 billion) liquefied natural gas project in Canada highlights the risks for energy developments around the world from oil’s plunge. Woodside Petroleum’s Browse gas project in Australia and an oil project planned by Santos in Indonesia are among others seen as facing delays with oil trading at the lowest in more than four years. “Unless there is compelling reason to move ahead with approvals, we do expect significant deferrals of capex across the board,” Nik Burns, an analyst at UBS AG, said by phone from Melbourne. “Most investors are looking for greater financial discipline with commodity prices falling.” Oil’s slump threatens to hurt LNG contracts tied to crude prices for suppliers already coping with rising costs and competition from Russian gas commitments to China.

Costs at the Canadian project need to be cut before a decision is made, the Malaysian state-owned company known as Petronas said yesterday. Petronas announced the delay less than a week after Chief Executive Officer Shamsul Azhar Abbas told reporters there were a few “loose ends” to sort out before a final investment decision would be made. Oil fell almost 8% in the days between Shamsul’s comments in Kuala Lumpur and yesterday’s announcement. With BG Group saying in November that it would slow its proposed $16 billion LNG project in Prince Rupert, British Columbia, on concern about competing sources of supply from proposed projects in the U.S., the prospects for the 18 LNG developments on the drawing board in Canada are dimming.

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Lower prices are killing jobs in producer nations. Next up: US.

Norway Seeks to Temper Its Oil Addiction After OPEC Price Shock (Bloomberg)

After the biggest slump in oil prices since the start of the global financial crisis, the prime minister of Norway says western Europe’s largest crude producer must become less reliant on its fossil fuels. “We need new industries, a new tax system and a better climate for investment in Norway,” Prime Minister Erna Solberg said yesterday in an interview in Oslo. The comments follow threats from SAFE, one of Norway’s three main oil unions, which warned this week it will respond with industrial action unless the government acts to stem job losses. Solberg said that far from triggering government support, plunging oil prices should be used by the industry as an opportunity to improve competitiveness.

A 39% slump in oil prices since June is killing jobs in Norway, which relies on fossil fuels to generate more than one-fifth of its gross domestic product. In the past few months, Norway has lost about 7,000 oil jobs and SAFE said this week it was up to the government to reverse that trend. Solberg says protecting oil jobs will ultimately make it harder for the economy to wean itself off its commodities reliance. “We need to lower our cost of production in the development of new fields,” she said. “Oil production is not going to rise, it will slowly fall in Norway.”

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I don’t think people understand the size of the China shadow banks, nor the scale of the risk linked to them, or the prominent position they have in the country.

China Shadow Bank Collapse Exposes Grey-Market Lending Risk (FT)

A sign in parchment above the locked door of Shanxi Platinum Assemblage Investment, written in calligraphy, reads “Honesty is fundamental”. Until recently a police notice below it directed investors to report to the local station to submit evidence against the company. In Taiyuan, capital of the central Chinese province of Shanxi, investors have rushed to branches of Platinum Assemblage in recent days as word spread that the company was unable to meet payouts on maturing investment products that had offered annual interest rates of 14-18%. Meanwhile, rumors swirled that executives had fled and branches in some cities had shut their doors. The incident highlights financial risks lurking in the outer margins of China’s shadow banking system, where high-yielding wealth management products blur into grey-market lending. A financial system in which the government refuses to tolerate defaults has also encouraged moral hazard among investors by creating an expectation that even risky credit carries an implicit guarantee.

“I have no idea where they put the money. I’m not really clear on the guarantee businesses. But they had a business licence on the wall,” said an elderly man surnamed Wang wearing a mechanic’s jacket and knit cap outside the company’s locked doors. State media estimates that more than Rmb100 million ($16 million) may be at risk in the collapse of Platinum Assemblage, a relatively tiny sum. But a series of similar incidents this year suggests China’s slowing economy has created fertile ground for hucksters, as companies become increasingly desperate for funds amid a pullback in lending from banks as well as more mainstream non-bank lenders such as trust companies. In March, depositors in Yancheng city, Jiangsu province, rushed to withdraw funds from rural co-operatives and were told that the institutions — which operate like banks but whose legal status exempt them from liquidity regulations – had lent out all the money. Analysts said many co-ops, which were created to lend to farmers, had in fact been investing in real estate.

It is not known how Platinum Assemblage invested clients’ funds, but a large share of shadow banking funding flows into real estate, one of the few industries that, until recently at least, could deliver rates of return high enough to service loans at interest rates often exceeding 20%. Local media reported that wealth management clients of another guarantee company, Henan Swiftly Soaring Investment, blocked a road in Xinxiang city, Henan province, on Sunday to protest against the lack of payout on similarly structured wealth management products. China Business News, a national newspaper, reported that much of that money was also used for property purchases. Late last year eight government agencies including the banking regulator, the central bank and the commerce ministry released a notice warning of rampant irregularities among non-financial guarantee companies.

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More funds that don’t deliver.

BlackRock China ETF’s Derivatives Strategy Faltering (Bloomberg)

BlackRock’s pioneering China exchange-traded fund is at risk of losing its market-leading status as returns trail its benchmark index and competitors take advantage of reduced government curbs on foreign investors. The $10.1 billion iShares FTSE A50 China Index ETF, the first to track mainland shares when they were inaccessible to most foreigners in 2004, has underperformed its target by 4.6 percentage points this year. The Hong Kong-listed fund is lagging behind as its decade-long strategy of using derivatives proves more expensive for investors than buying shares directly. The fund’s diminished appeal reflects how China’s efforts to remove barriers on its $4.6 trillion stock market are changing the way international investors gain exposure to the world’s second-largest economy. Derivative products are getting replaced by funds that access the Chinese market through the nation’s quota system for foreign institutions and the Shanghai-Hong Kong exchange link that started last month.

“The playing field is changing,” Brendan Ahern, managing director at Krane Fund Advisors in New York, which oversees four Chinese ETFs, said by phone. “The market is gravitating to direct products. Managers have to think about how to adapt to the changes.” Investors are weighing the most efficient ways to access China’s stock market as it rallies from the cheapest levels on record versus global peers. The Shanghai Composite Index has advanced 31% in 2014 and reached a three-year high yesterday amid speculation the nation’s central bank will increase monetary stimulus. The BlackRock fund’s net asset value has climbed 26% this year, versus a 30% gain in the gauge it’s designed to mimic. Shareholder returns have been just 18%, reflecting both the cost of using derivatives and investors’ unwillingness to keep valuing the ETF at a premium to its underlying securities.

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Draghi won’t move.

What The Dollar May Be Saying About Europe (CNBC)

The dollar has been riding high and is looking for another boost Thursday from a dovish European Central Bank. The greenback made new multiyear highs against the yen and euro Wednesday, ahead of the ECB meeting. The dollar has been rising as U.S. monetary policy diverges from that of Japan and the eurozone. The U.S. economy is also stronger, and that is expected to show up in another 200,000 plus jobs report Friday. While the ECB is not expected to take any new steps at its rate meeting Thursday, traders have been anticipating a dovish ECB President Mario Draghi, who holds a briefing after the meeting. “The gist of it is I think Draghi will leave the door wide open for sovereign QE in the first quarter,” said Alan Ruskin, head of G-10 foreign exchange strategy at Deutsche Bank. “I think you’ve heard a number of comments from ECB officials suggesting December is too early, and they want to let some of their past decisions work their way through.”

The ECB has embarked on asset purchases as the Fed ended its quantitative easing bond buying, or QE, in October. The ECB is now expected to expand its asset buying with a program to buy sovereign debt. The dollar index, at 89.005 was at the highest level since March, 2009 and the dollar was at a seven-year high against the yen. “There’s this kind of fear that the dollar’s traded very, very well going into this meeting, and that maybe there’s some expectation he will deliver more than he actually will,” said Ruskin. He said even though Draghi is expected to be dovish, if nothing more is announced there’s a chance the dollar could selloff.

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” .. could require cuts in non-protected departments such as police, local government and justice ..”

UK Moves To Cut Spending To 1930s Levels (Guardian)

The chancellor, George Osborne, set out dramatic plans to move Britain from the red into the black that will see public spending as a percentage of GDP fall to its lowest level since the 1930s and could require cuts in non-protected departments such as police, local government and justice amounting to a further £60bn by 2019-20. The plans, according to the Treasury spending watchdog, the Office for Budget Responsibility, also presume the loss of a further one million public sector jobs by 2020, a renewed public sector pay squeeze and a further freeze on tax credits. The scale of the implied spending cuts required to drive the country into a surplus of £23bn by 2019-20 in part prompted the Liberal Democrat business secretary, Vince Cable, to write two weeks ago to ask the OBR to distinguish in its forecasts between the spending plans agreed by the coalition up to 2015-16 and any spending projections after that date which could only be an assumption about tax and spending policy.

Cable described the Osborne plans to bring public spending down to 35 % of GDP as “wholly unrealistic”. Among the measures in a politically-dominated autumn statement was a surprise shakeup of stamp duty, with an increase in rates levied on the most expensive properties designed to trump Labour’s plans for a mansion tax six months before the general election. Osborne claimed 98% of home-buyers would pay less stamp duty as a result of the changes, which, from midnight on Wednesday night, axed the big jumps in tax currently triggered when the cost of a home moves into a higher band. Under the new system, based on income tax bands, home buyers will pay no stamp duty on the first £125,000 of a purchase, then 2% up to £250,000, 5% up to £925,000, 10% up to £1.5m and 12% on everything above £1.5m. Anyone buying an “averagely priced” home worth £275,000 would pay £4,500 less in tax.

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“Real growth is weak; nominal growth is pathetic .. ”

Australia’s Dreadful GDP Figures – Six Things You Need To Know (Guardian)

Well, what a dreadful set of numbers. The September quarter GDP figures released on Wednesday unfortunately confirmed other economic data that shows Australia’s economy is growing at barely walking pace. Let’s break down the figures and to see if there is any sunshine amid the gloom.

1. Real growth is weak; nominal growth is pathetic – In seasonally adjusted terms, the economy grew by just 0.3% in the September quarter, and by 2.7% in the past year. Given average annual growth is around 3.1%, the 0.3% growth is particularly dreadful given that it would annualise to just 1.2%. As you would expect, the news was even more depressing for GDP per capita growth. In trend terms, it didn’t grow at all in the September quarter and, in seasonally adjusted terms, it actually fell 0.13%. Thus any growth we achieved this last quarter came about through population increase. For the budget numbers, the focus always goes onto nominal growth. Measured in current dollars, it gives a better link to taxation revenue than real GDP.

The May budget forecast nominal GDP in 2014-15 to grow by 3%. In the past 12 months it has grown by 2.7%, but most of that growth came in the December 2013 quarter and thus will not be counted from the next quarter onwards. Nominal GDP in the past quarter grew by just 0.2% in trend terms and actually fell by 0.1% in seasonally adjusted terms. All in all this suggests a fairly big hit to the budget bottom line. So yeah, all gloom.

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I’d say that’s putting it mildly.

Putin Accuses West Of ‘Pure Cynicism’ Over Ukraine (CNBC)

Russian President Vladimir Putin accused Western powers of “pure cynicism” over the situation in Ukraine, in a key speech to his country as its economic prospects worsens. The ruble looked set for another record low against the dollar as his speech unfolded on Thursday. With a plummeting ruble and oil price, spiraling inflation, and the prospect of more stringent sanctions from Western powers, Russia’s short-term economic prospects are falling faster than the temperature during a Siberian winter. Putin previously served as Russia’s Prime Minister, and this term coincided with relative economic prosperity for the country, as rising oil and gas prices helped boost Russia’s biggest exports. In 2015, however, the average Russian household’s disposable income will shrink by 2.8%, according to official Russian figures – the first fall since Putin came to power.

As President, his recent focus on defence and nationalism seems to have boosted his approval ratings, but it’s far from clear that this can continue if all Russians – from street-cleaners to oligarchs – feel worse off. “The market will be looking for the new ideas which are going to pull Russia out of the economic stagnation and looming decline which was already evident prior to the crisis in Ukraine and the more recent drop in oil prices,” Timothy Ash, head of emerging markets research at Standard Bank, wrote in a research note. “The pressure is now on Putin to offer a rival vision for a successful economic model for Russia.”

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But who’s going to listen? Think these fold care about a million signatures? Once signed, we won’t get rid of these Frankensteins anymore.

One Million Europeans Sign Petition Against EU-US TTIP Talks (BBC)

A campaign group website says over a million people in the European Union have signed a petition against trade negotiations with the United States. The petition calls on the EU and its member states to stop the talks on the Transatlantic Trade and Investment Partnership or TTIP. It also says they should not ratify a similar deal that has already been done between the EU and Canada. It says some aspects pose a threat to democracy and the rule of law. One of the concerns mentioned in the petition is the idea of tribunals that foreign investors would be able to use in some circumstances to sue governments.

There is a great deal of controversy over exactly what this system, known as Investor State Dispute Settlement, would enable companies to do, but campaigners see it as an opportunity for international business to get compensation for government policy changes that adversely affect them. This kind of provision exists in many bilateral trade and investment agreements. Friends of the Earth have published new research on the impact they have had on EU countries. Information about these cases is not always made public, but the group says that going back to 1994, foreign investors have sought compensation of almost €30bn (£24bn) from 20 states. Where the results are known (a small minority of the total), the tribunals have awarded total compensation of €3.5bn (about £2.8bn).

In Britain, the possible implications of this provision for the National Health Service have been especially controversial. Campaigners believe that the investor tribunals would make it harder to reverse any decisions to contract services out to international healthcare firms. John Hilary of War on Want said: TTIP “will make it impossible for any future government to repeal the Health & Social Care Act and bring the NHS back into public hands”. The petition lists a number of other areas where its signatories believes European standards would suffer if the TTIP negotiations are completed and the Canada deal is ratified: employment, social, environmental, privacy and consumer protection.

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Feels like Mao never left.

Xi’s Cultural Revolution Is Doomed to Fail (Bloomberg)

As Japan and South Korea have shown, the best way for governments to encourage pop culture with global appeal is probably to stay out of the way. China’s President Xi Jinping disagrees. Take Monday’s announcement by China’s top media watchdog. Effective immediately, the government has reserved the right to send film and television actors, directors, writers and producers on all-expenses-paid, involuntary, 30-day sabbaticals to rural mining sites, border areas, and other remote locations. The purpose, according to the directive, is to help Chinese artists “form a correct view of art and create more masterpieces.” The measure is extreme – reminiscent of “sending down” students to the countryside for reeducation during China’s mad Cultural Revolution. But it’s by no means an isolated case. Over the last few months, Xi’s government has issued several directives designed to control the country’s entertainment industries.

They include new restrictions on the streaming of foreign programs, bans on specific types of plots (adulterous affairs, for example, can no longer be portrayed in dramas), shutdowns of independent sites that subtitle foreign programs for Chinese viewers, and even a prohibition on punning. These directives sit awkwardly with Xi’s very public ambition to expand China’s “soft power” – a term that embodies everything from movies to bugle-playing – beyond its borders. The Chinese president is a child of Communist royalty; his formative years were during the Cultural Revolution, when entertainment was viewed as an ideological pursuit whose role was to propagandize. In Xi’s worldview, artists who don’t produce “correct” movies are doing a disservice to the nation and need to be reminded of their duty — say, by spending more time with the hardworking peasants they’re supposed to be championing in their works.

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Farrell again looks beyond the narrow world of investors.

The 8th, And Final, Deadly Sin: Exploiting The Earth (Paul B. Farrell)

“When I look at America,” said Pope Francis during a recent address at a university in Southern Italy, also looking at his “own homeland in South America, so many forests, all cut, have become land … can no longer give life.” “This is our sin, exploiting the Earth and not allowing her to her give us what she has within her. This is one of the greatest challenges of our time: to convert ourselves to a type of development that knows how to respect creation,” the pope told an audience of “students, struggling farmers and laid-off workers.” Challenge? Much worse. The relentless “destruction of nature is a modern sin.” says Pope Francis. Destruction of the planet’s great rain forests is the new sin of today’s humans.

Capitalism has already converted half the world’s original rain forests and natural habitats into urban developments. Another quarter will be rapidly converted by 2050. But for Pope Francis, the real sin is consumerism. In a recent ThinkProgress summary of Pope Francis’s annual letter to the G-20 leaders meeting in Australia, Katie Valentine put it this way: “Pope Francis to World Leaders: Consumerism Represents a ‘Constant Assault’ on the Environment.” The pope relied on several studies, including a Worldwatch report commented on in National Geographic by Gary Gardner: “Most of the environmental issues we see today can be linked to consumption,” warning us that for “humanity to thrive long into the future we’ll need to transform our cultures intentionally and proactively away from consumerism towards sustainability.”

Failure to do so means that “unbridled consumerism will have serious consequences for the world economy.” Pope Francis has called consumerism a “poison.” Earlier this year he warned that “Christians should safeguard Creation,” for if humanity destroys the planet, humans themselves will ultimately be destroyed. He added” ‘Creation is not a property, which we can rule over at will; or, even less, is the property of only a few” capitalists. “Creation is a gift, a wonderful gift that God has given us, so that we care for it and we use it for the benefit of all, with great respect and gratitude.” For exploiting the Earth by destroying forests, especially Amazonian rain forests, is a sin.”

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Oct 212014
 
 October 21, 2014  Posted by at 11:22 am Finance Tagged with: , , , , , , , , , , ,  Comments Off on Debt Rattle October 21 2014


Gottscho-Schleisner L Motors at 175th Street and Broadway, NYC Mar 24 1948

Oil Prices Won’t Recover Above $100 – Russian Finance Ministry (RT)
Oil Collapse Raises Risk Of ‘Profit Recession’ (MarketWatch)
How Cheap Oil Could Become a Real Problem for Airlines (BW)
Bond Market Brightest Turn Oil Analysts as Gyrations Mystify (Bloomberg)
“Ending QE Will Plunge US Into Severe Recession” (Zero Hedge)
They Studied Keynes and They’re Doing This. Why Can’t the Fed See It? (Bloomberg)
China GDP Growth Slowest Since Global Crisis (FT)
China Growth Seen Slowing Sharply Over Next Decade (WSJ)
Why Deflation Is So Scary (Yahoo)
Islamic State Earns $800 Million a Year From Oil Sales (Bloomberg)
A Little Volatility Can Be Good for You (Bloomberg)
Forex-Rigging Fines Could Hit $41 Billion Globally (Bloomberg)
How Goldman’s Libya Case Could Disrupt Derivatives (CNBC)
Bank Of England Payment System Crashes Leaving Homebuyers In Limbo (Guardian)
Fed’s Dudley Warns Banks Must Improve Culture or Be Broken Up (Bloomberg)
IBM Is in Even Worse Shape Than It Seemed (BW)
‘Forward Guidance’ Marches Global Economy Backwards (Satyajit Das)
Ukraine And Russia Agree On $385 Gas Price For Winter (RT)
“Anti-Petrodollar” CEO Of French Giant Total Dies In Moscow Plane Crash (ZH)
The Tragedy Of NATO: “Beware Foreign Entanglements” (Mises Canada)
Hobbit Find Rewrites Human History (BBC)

This contradicts a whole lot of western ‘experts’.

Oil Prices Won’t Recover Above $100 – Russian Finance Ministry (RT)

Decreasing oil prices are “inevitable” and the chance they will exceed $100 per barrel is “unlikely” the Russia’s Finance Ministry said. However, the Russian budget can withstand lower prices. “The market is biased in favor of excess supplies. That is why price reduction is inevitable; it will have a structural character. We are unlikely to see prices higher than $100 per barrel in the near future,” Maksim Oreshkin, the head of the Russian Finance Ministry’s strategic planning department told RBC TV in an interview. “In general, the current downward price movement is structural. Investments in oil production have increased dramatically in the past ten years,” Oreshkin said. Russian officials have stressed there will be no sharp rise in Russia’s budget deficit, but the country’s largest bank, Sberbank, says an oil price of $104 is required to balance the 2015 budget. A drop of prices to $80 per barrel could cost Russia 2% of GDP.

The weak ruble will be a buffer to lower oil prices, since costs are in rubles, but revenue in dollars. “The ruble is down which allows Russia to maneuver a bit by making some extra cash from oil sales, since those are done in dollars,” RT correspondent Egor Piskunov reported from Moscow. The Russian state budget is based on oil prices of $96 per barrel, which both Brent and WTI crude fell below in previous days. Last week prices hit a 4-year low, with Brent futures reaching a critical point of $84 per barrel. Just months ago, at the height of the Iraq turmoil, Brent was trading at $116 per barrel. WTI crude, the main North American blend, hit a four-year low dropping below $80 Thursday. Both blends have been falling for the last four months.

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Glad someone brings it up …

Oil Collapse Raises Risk Of ‘Profit Recession’ (MarketWatch)

American drivers are almost giddy over gasoline prices that are now below $3 a gallon in some areas. Investors, however, might want to check themselves, says David Bianco, Deutsche Bank’s top equity strategist. Light, sweet crude traded on the New York Mercantile Exchange has plunged from around $107 a barrel in June to test two-year lows near $80 a barrel. The collapse has prompted Bianco and his team to cut their forecast for S&P 500 fourth-quarter earnings per share by 50 cents to $30.50 and to drop their forecast for full-year 2015 earnings by $3 to $123 a share. That still points to 2015 earnings per share growth of around 4% on expectations global growth will remain underpinned by U.S. growth, which will be enhanced, in part, by stronger consumption aided by cheaper oil. But lower oil prices (Deutsche Bank is now penciling in a 2015 average price of $85 a barrel), will weigh heavily on the energy sector, Bianco said in a note.

Deutsche Bank slashed its forecast for fourth quarter energy earnings by nearly 10% — accounting for almost all of the cut in the bank’s estimate of fourth quarter S&P 500 EPS. Deutsche now sees energy earnings falling 10% in 2015 as well, versus an earlier forecast for a fall of 2%. While it’s no surprise that the energy sector will bear the brunt, plunging oil is also bad news for the industrials and materials sectors. They’ll suffer as energy firms reduce capital spending in the U.S. and worldwide, Bianco says, noting that a third of S&P 500 capital spending comes from the energy sector. Meanwhile, the boost to consumer sector earnings from the lower oil price is small, Bianco says. So is the S&P 500 in danger of suffering a “profit recession?” Probably not, but much depends on the oil price, Bianco writes. He notes that since 1960 there have been only 10 instances when there was a fall in trailing fourth-quarter earnings per share.

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They add flights when oil is cheaper …

How Cheap Oil Could Become a Real Problem for Airlines (BW)

Oil futures have been on a torrid plunge in recent weeks, touching lows below $80 per barrel. Great news for airlines, right? Maybe not. For roughly the past 35 years, inexpensive jet fuel has routinely served as a siren call to airline executives. Cheap fuel spurs more flights and wild grabs for whatever business looks attainable in the travel market. Marginal routes become profitable with lower fuel prices, which, in turn, bolsters the argument that new flights can boost revenues with little cost. Cheap fuel also lets an airline experiment more radically with flight schedules in the bid to swipe market share from rivals. “If it keeps trending lower, it totally changes the economics of the industry again,” says Seth Kaplan, managing partner of Airline Weekly, an industry journal. With oil cheaper, Kaplan predicts that many airlines will probably fly their planes in off-peak periods because of the low costs associated with those extra flights. A few additional flights on the weak travel days of Tuesday and Saturday could return to some schedules.

This possibility has some Wall Street analysts in a tizzy, concerned that if oil stays cheap enough for long enough, lower prices will cause airlines to backslide on their new-found religion against deploying too much capacity. “We feel like this industry needs an oil spike now more than ever,” Wolfe Research analyst Hunter Keay wrote last week in a client note. “[C]apacity discipline of late (from some) seems theoretical at best.” Brent crude, the energy index most airline executives monitor for its correlation to jet fuel, has declined 22% this year; settling Friday at $86; a day earlier, the Brent Index scored a four-year-low, under $83. This constitutes a sharp reversal from recent years: After oil spiked to nearly $150 per barrel in July 2008, U.S. airlines radically restructured to try to cope with oil at whatever price it may be. That effort has left high or low oil prices much less important—quick swings either way are now the enemy—while turning expensive oil into somewhat of a barrier for new flying.

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If those guys are the brightest …

Bond Market Brightest Turn Oil Analysts as Gyrations Mystify (Bloomberg)

Following the most turbulent period for U.S. bonds in more than three years, the top strategists are looking less at jobs and manufacturing and more at the price of oil for clues as to what lies ahead. Treasuries gyrated last week, with yields on benchmark 10-year notes at one point falling below 2% for the first time since June 2013, as a tumble in crude sparked concern that the global economy was on the verge of entering a deflationary spiral. Bond traders who wagered that the trillions of dollars in cash pumped into the financial system by major central banks would cause runaway inflation were forced to reverse those bets.

The moves were the latest shock in a year of surprises in the bond market. The consensus estimate among the more than 60 strategists surveyed by Bloomberg in January was for yields to rise in 2014. Instead, they fell. One of the few to get it right was FTN Financial, and its analysts say even after the rally yields are not far from fair value because cheaper energy prices will help curb gains in consumer prices. “There’s a fundamental series of questions about where we go from here,” Jim Vogel, head of interest-rate strategy at Memphis-based FTN, said in an Oct. 16 telephone interview. Vogel, who added that the 21% drop in oil prices since June “took people by surprise,” sent a note to clients last week recommending they “watch for stability in oil positions,” and noting the “strong ties” between the cost of the commodity and the government’s consumer price index.

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Schiff gets a lot more wrong than right, but this is that exception.

“Ending QE Will Plunge US Into Severe Recession” (Zero Hedge)

“Markets are slowly coming to grips with reality is not going to be as easy as everybody thought,” Peter Schiff tells CNBC’s Rick Santelli, noting the pick up in volatility across asset classes recently. What The Fed clearly does not understand, Schiff blasts, is that “you cannot end quantitative easing without plunging the US into a severe recession.” Because of the Fed’s extreme monetary policy and the mal-investment that flows from it, Schiff says, “The US economy is more screwed up now than it’s ever been in history.” Most prophetically, we suspect, Santelli agrees that “a messy exit is a given,” and Schiff believes they know that and that is why QE4 is coming simply “because it hasn’t worked and they can’t admit it’s been a dismal failure.”

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Not sure why Bloomberg picked this title (3rd different one in a row for the same article), but the topic is relevant.

They Studied Keynes and They’re Doing This. Why Can’t the Fed See It? (Bloomberg)

Federal Reserve policy makers are missing a key element as they assess the health of the labor market: data that includes whether those who are employed are overqualified for their job or would like to work more hours. As a result, the “significant underutilization of labor resources” that Fed officials highlighted last month as they renewed a pledge to keep interest rates low for a “considerable period” is probably even more severe than currently estimated. And the information gap means policy makers may have more difficulty gauging the right moment to raise rates off zero. “We have more slack than the official statistics suggest,” said Michelle Meyer, a senior U.S. economist at Bank of America in New York. “Because it’s difficult to measure underutilization, there’s still a lot of uncertainty as to how much slack remains, which means there’s uncertainty as to the appropriate stance of monetary policy.”

The Labor Department can put its finger on how many people are working part-time because full-time jobs aren’t available, or how many are so discouraged that they’re not even looking for employment. Other forms of underemployment — for example the graduate with an English degree who’s working as a barista –are harder to pinpoint though just as important in trying to measure whether the labor market has improved. The data shortfall sparked a discussion at a Peterson Institute for International Economics conference last month in Washington. Erica Groshen, commissioner of the Bureau of Labor Statistics, asked what additional data would be needed to help quantify labor-market slack. Betsey Stevenson, a member of President Barack Obama’s Council of Economic Advisers, pointed out that while it was possible with current data to determine whether people working less than 35 hours a week are underutilized, those putting in a longer workweek fall off the radar.

The BLS considers anyone working at least 35 hours a week to be full-time. The Census Bureau, which surveys households to get the information needed for the Labor Department to crunch the monthly jobs data, doesn’t ask full-timers whether they’d prefer a different job or additional hours. As far as anyone knows, those workers are fully employed and content.

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China’s numbers come straight out of its political agenda.

China GDP Growth Slowest Since Global Crisis (FT)

China’s economy grew last quarter at its slowest pace since the depths of the global financial crisis, raising concerns over global growth prospects and increasing the likelihood Beijing will introduce broader stimulus measures. Gross domestic product in the world’s second-largest economy expanded 7.3% in the third quarter from the same period a year earlier, its weakest performance since the first quarter of 2009, when growth was just 6.6%. But unlike then, when the economy was in freefall as a result of the global financial crisis originating in the US, China’s growth problems this time are largely homegrown. The latest quarterly reading means China’s economy this year is almost certain to register its slowest annual pace since 1990, when the country faced international sanctions in the wake of the 1989 Tiananmen Square massacre.

A correction in China’s property sector, the most important driver of the economy for much of the past decade, is the biggest drag on growth and most analysts expect things to get worse, given huge oversupply across the country. Investment in real estate in the first nine months continued to expand but at a slower pace, rising 12.5% over the same period last year, compared with an increase of 13.2% in the first eight months. Housing sales fell in the first nine months of this year by 10.8% compared with the same period in 2013, suggesting that the property investment slowdown has further to go. Other monthly data released on Tuesday, including industrial production and consumer retail sales, showed a mild rebound in September compared with the previous two months but most analysts expect the slowdown to continue. By the end of September, Chinese factory gate prices had been in deflationary territory for 32 consecutive months, the longest period of producer price inflation in the country in the modern era.

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This looks a whole lot more realistic than official numbers, although projections 10 years into the future don’t look terribly useful in the current economic climate.

China Growth Seen Slowing Sharply Over Next Decade (WSJ)

China’s growth will slow sharply during the coming decade to 3.9% as its productivity nose dives and the country’s leaders fail to push through tough measures to remake the economy, according to a report expected to come out Monday. Such an outcome could batter an already fragile global recovery. But the report by the business-research group the Conference Board also finds that multinational companies in China would benefit. Lean times would give foreign firms more local talent to choose from. Foreign companies and investors could also expect “more hospitable” treatment from Communist Party and government officials and a wider selection of Chinese firms they could acquire, according to the report, which was shared with The Wall Street Journal. Foreign companies should realize that China is in “a long, slow fall in economic growth,” the report said. “The competitive game has changed from one of investment-driven expansion to one of fighting for market share.”

Officials representing China’s State Council, or cabinet, referred questions to its National Bureau of Statistics, which didn’t respond. Senior officials of the Communist Party are gathering in Beijing for a major policy meeting that opens Monday and is expected to discuss the slowdown. The Conference Board forecasts that China’s annual growth will slow to an average of 5.5% between 2015 and 2019, compared with last year’s 7.7%. It will downshift further to an average of 3.9% between 2020 and 2025, according to the report. The outlook for the world’s second-largest economy is one of the most important factors affecting the global economy. For the 30 years through 2011, China grew at an average annual rate of 10.2%, a record unmatched by any major nation since at least World War II. That growth lifted hundreds of millions of Chinese out of poverty and turned the country into a major market for commodity producers in Asia, Latin America and the Middle East, and consumer and capital-goods makers from the U.S., Europe and Japan.

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“Debt gets more expensive over time, because consumer spending power declines. When prices and corporate revenue fall for a sustained period of time, wages inevitably go down, too. That makes fixed-rate debt more expensive, because you have less money instead of more to make the same regular payments.”

Why Deflation Is So Scary (Yahoo)

If the price of a car or an iPhone drops, that’s usually good news for consumers. So it might be puzzling that investors and economists suddenly seem freaked out about the possibility of deflation, or a sustained drop in the level of all prices, on average. Deflation was a concern back in 2010 and it’s a fresh worry now as oil prices plunge, the stock market wavers and consumers put spending plans on hold.  The paradox of deflation is that falling prices on a few items can generally be good for consumers, leaving more money in their pockets for other things. But falling prices on too many things can have ruinous effects on the economy that are hard to reverse. Japan suffered nearly two decades of deflation starting in the early 1990s, and deflation helped prolong the Great Depression in the 1930s. When all prices fall, consumers have a strong incentive to put off purchases – after all, everything will probably be cheaper tomorrow.

Some purchases are hard to delay – food, medical care, gasoline to get to work. But a lot of the things we buy can wait, which is why sales of cars, clothing, and appliances drop sharply when times get tough. In an economy like ours – in which consumer spending accounts for about 70% of total GDP – a powerful incentive to postpone purchases can be disastrous. When spending drops, so does corporate revenue, raising pressure to cut costs, which leads to layoffs and other personnel cutbacks. Companies are likely to freeze salaries or even cut pay for those workers remaining. Dwindling income makes consumers even more leery about spending money, worsening the whole cycle. The other mechanism for deflationary ruin is debt. One big reason lending helps the economy grow is inflation—most loans become easier to pay back over time, because the principal doesn’t grow but income used to pay it down does.

We typically think of inflation as a rise in prices, but it’s usually accompanied by an increase in workers’ wages as well, and as long as wage increases exceed price hikes, ordinary people get ahead. Home buyers, for instance, often “grow into” a mortgage that might seem onerous at first, because their income climbs as they progress through their careers. The mortgage payments on a fixed-rate loan, by contrast, remain constant. So in a typical economic environment, you gradually earn more income to make the same payment every month.

Deflation creates the opposite phenomenon: Debt gets more expensive over time, because consumer spending power declines. When prices and corporate revenue fall for a sustained period of time, wages inevitably go down, too. That makes fixed-rate debt more expensive, because you have less money instead of more to make the same regular payments. The mismatch affects companies and even governments the same way it does consumers, causing cash-flow shortages, liquidity problems and bankruptcy. Each of these ugly outcomes reinforces the others, making a deflationary spiral very hard to pull out of.

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Lower oil prices don’t look very effective vs IS.

Islamic State Earns $800 Million a Year From Oil Sales (Bloomberg)

The Islamic State is earning about $2 million a day, or $800 million a year, selling oil on the black market, IHS Inc. estimated. The terrorist group is producing 50,000 to 60,000 barrels a day, according to an e-mailed release today from the Englewood, Colorado-based information company. It controls as much as 350,000 barrels a day of capacity in Iraq and Syria. Extremist groups typically reply on foreign donations that can be squeezed by sanctions, diplomacy and law enforcement. By tapping the region’s oil wealth, Islamic State, the group that beheaded American journalist James Foley, resembles the Taliban with oil wells. “This is financing and fueling a lot of their activities, military and otherwise,” Bhushan Bahree, a co-author of the report, said today in an interview. “For argument’s sake, let’s say their capacity were cut by half. They’ll still have $400 million coming in. This is many times more than any other source of funding we know of.”

Islamic State consumes about half its production and sells the rest for $25 to $60 a barrel, according to the report. That estimate is in line with those of U.S intelligence officials and anti-terrorism finance experts. Bombing oil-field pump stations may be the best way to cut off the flow of oil since they are stationary and difficult to replace, Bahree said. U.S.-led air strikes haven’t eliminated truck-mounted refineries that Islamic State uses to produce fuel for its war machines and to supply civilians within the territory it controls. Trafficking has encouraged middlemen to buy crude and smuggle it into Turkey, Jordan or Iraq, where it is blended with other oil and sold to unsuspecting buyers, according to the report. “It is very hard to intercept,” Bahree said. “There has probably been smuggling of all sorts of things in this place for thousands of years.” When Iraq’s regional Kurdish government tried to police long-established smuggling routes along a 1,000-kilometer (621-mile) border with what is now Islamic State territory, traffickers found new ones, he said.

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“They blame the shift on new regulations such as higher capital requirements and the Volcker rule”.

A Little Volatility Can Be Good for You (Bloomberg)

Gyrations in financial markets are giving rise to a plaintive cry from investors: Prices are getting more volatile because new regulations are making big banks less willing to buy when others want to sell. Actually, if that’s what’s happening, it would be no bad thing. Following last week’s selloff, investors are complaining about a lack of liquidity, the ability to buy and sell assets (particularly bonds) without moving prices too much. The problem, they say, is that big U.S. banks are pulling back from market making — the buying and selling of assets to meet clients’ needs. They blame the shift on new regulations such as higher capital requirements and the Volcker rule, which aims to limit speculative trading at banks.

Investors are right that something has changed. The big banks are holding much smaller inventories of corporate bonds than they did before the 2008 crisis. In fact, dealers were net sellers of junk bonds in recent weeks, suggesting that they weren’t, in the aggregate, helping clients to unload. From the point of view of an overextended investor needing to sell, this reduction in liquidity can be scary. That said, it’s unclear that regulation is the primary cause. Banks were cutting their inventories long before Congress passed the Dodd-Frank financial reform law in 2010. And liquidity always disappears in bad times, no matter how abundant it seems in good times. Market makers are no more willing to buy than anybody else when prices appear to be in free fall. Last week’s volatility hit some securities, such as U.S. Treasury bonds, to which the Volcker rule doesn’t even apply.

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Not nearly enough.

Forex-Rigging Fines Could Hit $41 Billion Globally (Bloomberg)

The cost for banks to settle probes into allegations traders rigged foreign-exchange benchmarks could hit as much as $41 billion, Citigroup analysts said. Deutsche Bank is seen as probably the “most impacted” with a fine of as much as 5.1 billion euros ($6.5 billion), Citigroup analysts led by Kinner Lakhani said yesterday, estimating the Frankfurt-based bank’s settlements could reach 10% of its tangible book value, or its assets’ worth. Using similar calculations, Barclays could face as much as 3 billion pounds ($4.8 billion) in fines and UBS penalties of 4.3 billion Swiss francs ($4.6 billion), they wrote in a note first sent to clients on Oct. 3. Authorities around the world are scrutinizing allegations that dealers traded ahead of their clients and colluded to rig currency benchmarks. Regulators in the U.K. and U.S. could reach settlements with some banks as soon as next month, and prosecutors at the U.S. Department of Justice plan to charge one by the end of the year, people with knowledge of the matter have said.

The Citigroup analysts made their calculations using a Sept. 26 Reuters report that the U.K. Financial Conduct Authority settlements could include fines totaling about 1.8 billion pounds. They derived their estimates for how high fines could go in other investigations from that baseline, using banks’ settlements in the London interbank offered rate manipulation cases as a guide. “Extrapolating European and, more importantly, U.S. penalties from a previous global settlement suggests to us a total potential global settlement on this key issue,” they said in the note. U.K. authorities will probably account about $6.7 billion of fines across all banks, according to the Citigroup analysts. Other European investigations will account for $6.5 billion. Penalties in the U.S. cases could be about four times greater, hitting $28.2 billion.

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Interesting case. If it forces details out into the open.

How Goldman’s Libya Case Could Disrupt Derivatives (CNBC)

A costly legal battle between Goldman Sachs and the Libyan sovereign wealth fund could have more permanent repercussions for the global banking industry, experts have told CNBC. The Libyan Investment Authority has accused Goldman of misleading it and taking advantage of its lack of financial knowledge to make “substantial” profits on a series of derivative trades back in 2008. The bank denies the allegations and a full hearing has been touted to begin in early 2016 after a preliminary hearing was completed earlier in the month. The LIA claims the disputed derivative trades in early 2008 cost $1 billion, and carried a high degree of risk, but lost a substantial amount of value by the end of the year and expired “worthless” in 2011. Court documents allege that Goldman made profits of $350 million were made and a witness statement from a lawyer working for the LIA claims that the usual disclaimers – called non-reliance agreements – were sent after the trades were made and were never signed.

Satyajit Das, an expert on financial derivatives and risk management, told CNBC via telephone that the case has the potential to get “extremely ugly”. “This could be messy for Goldman Sachs and for a whole range of other banks,” he said, adding that this would bring up the issue of opaqueness with these sorts of trades. “It could lead to an investigation into the selling practices at banks and the types of financial products they offer.” Beyond the prospect of an investigation, industry experts are also forecasting further regulation of the complex derivatives market. Anat Admati, a professor of finance and economics at Stanford Graduate School of Business welcomed any new regulation in this space. Without commenting on this particular case, she said that investments in derivatives can be easily misunderstood by untrained investors.

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Egg meet face.

Bank Of England Payment System Crashes Leaving Homebuyers In Limbo (Guardian)

The Bank of England apologised last night after a crucial payments system collapsed, forcing Mark Carney to launch an urgent investigation following the delay of hundreds of thousands of payments, including for homebuyers waiting for money to be transferred to pay for their new homes. The Bank of England governor promised a “thorough, independent review” after MPs demanded answers into how the system which processes payments worth an average £277bn a day had failed for nearly 10 hours. An 88-year-old woman in Sheffield was among those caught up in the collapse of the behind-the-scenes payment mechanism, which failed to open at 6am and remained shut until 3.30pm – usually the cut-off point for money to be transferred for house sales.

The Bank of England did not admit the shutdown had taken place for more than five hours after the system had been due to open, and was later forced to extend opening hours by four hours to 8pm to clear the backlog of 143,000 payments. More than 10 hours after first admitting to the problem with the clearing house automated payment system (Chaps) the Bank of England eventually apologised “for any problems caused by the delays to the settlement system”. While Chaps was down, there were fears that homebuyers and sellers around the country would be left unable to complete purchases on time and that big businesses, which also use the system, would fail to make payments. Only weeks ago the Bank said it had a new contingency plan for the collapse of the payments system. The Bank of England will subject the system to additional monitoring when it reopens at 6am on Tuesday.

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Emptier words were never heard.

Fed’s Dudley Warns Banks Must Improve Culture or Be Broken Up (Bloomberg)

Banks must change the way employees are compensated and take other steps to fix a corporate culture that encourages misdeeds or face being broken up, said William C. Dudley, president of the Federal Reserve Bank of New York. If bad behavior persists, “the inevitable conclusion will be reached that your firms are too big and complex to manage effectively,” Dudley told industry leaders in a speech yesterday at the New York Fed. “In that case, financial stability concerns would dictate that your firms need to be dramatically downsized and simplified so they can be managed effectively.” Dudley’s comments, which follow bank scandals involving Libor and foreign exchange trading, were made at a closed-doors workshop attended by senior bankers at the New York Fed on reforming Wall Street culture and behavior.

Large U.S. banks were widely blamed for taking too much risk leading up to the 2008 financial crisis, which triggered the worst economic downturn since the Great Depression. Lawmakers have since enacted a major overhaul of the rules designed to prevent banks becoming “too big to fail.” Dudley said it was fair to question if the “sheer size, complexity and global scope of large financial firms today have left them ‘too big to manage.’” Barclays Plc Chairman David Walker, who also addressed the gathering, separately said banks should be allowed to overhaul their own culture, rather than have regulators do it for them. Dudley, who has had to defend the New York Fed recently against allegations it was too soft on big Wall Street firms, suggested a number of ways to better align bank employee incentives with the interests of the general public. These include deferred compensation plans that switch emphasis to debt, rather than equity, and a centralized, industry-wide registry for tracking individual offenses.

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Chasing the dodo.

IBM Is in Even Worse Shape Than It Seemed (BW)

Like a driver obeying the commands of a GPS system even as passengers shout that the car is clearly headed toward a ditch, IBM’s chief executive officer, Ginni Rometty, has followed the profit “roadmap” laid out by her predecessor. The company was going to reach $20 in adjusted earnings per share by 2015, damn it, even as nine straight quarters of sinking revenue made that an increasingly untenable feat of financial engineering. IBM laid off workers, fiddled with its tax rate, took on debt, and bought back a staggering number of its own shares to make the math work, even as all that left the company less able to compete with the likes of Amazon.com and Google in cloud computing.

Today Rometty finally abandoned “Roadmap 2015,” announcing that IBM cannot hit the target after all. IBM also said it will pay a chipmaker called GlobalFoundries $1.5 billion to take its chip division off its hands, while also taking a $4.7 billion charge. And IBM reported its third-quarter results—a 10th consecutive period of falling sales, marked by weaker performance in growth markets. “We are disappointed in our performance,” Rometty said in a statement. “We saw a marked slowdown in September in client buying behavior, and our results also point to the unprecedented pace of change in our industry.” In response, shares of IBM were down more than 7% on Monday morning, Oct. 20.

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Does it matter whether there’s forward guidance or not? Isn’t it just plain stupidity anyway? A much bigger problem seems to be the economic and hence political power handed over to central banks.

‘Forward Guidance’ Marches Global Economy Backwards (Satyajit Das)

A paucity of policy options has increased central banks’ reliance on so-called forward guidance, where policy makers telegraph likely future actions. There are two components to forward guidance. First, it communicates clear policies to which the central bank is committed. Second, the commitment is over a medium- to long time horizon. But forward guidance suffers from a number of weaknesses. A fresh batch of eurozone data out next week is likely to confirm that the economy is slowing, with both consumer confidence and flash PMIs forecast to have slumped in October. In the U.K., third-quarter GDP figures and minutes from the Bank of England’s latest policy meeting will give more clues on the health of the country’s economy.

First, a focus on any single or a narrowly based set of indicators is problematic. The Federal Reserve’s commitment to accommodative monetary policy, for example, was based on a target unemployment rate. A single indicator such as unemployment is not meaningful. It can be affected by participation rates or the definition of employment. Levels can be affected by unexpected disruptions including a government shutdown, strikes or natural catastrophes. What is relevant is the nature of employment, such as part- or full-time, and the type of job or income levels. The composition of unemployment, temporary or long-term, age and skill levels of the unemployed, also may be pertinent.

In Japan, meanwhile, the Bank of Japan’s policy targets 2% inflation. It is not entirely clear which inflation indicator is the most relevant. Core inflation ignores the effect of volatile food and energy prices, which are very relevant to Japan. Inflation in domestic goods or imported inflation, such as the result of currency movements, may have different policy implications. Forward guidance relies on the accuracy of forecasts. It implies an automatic rule-based central banking response, which could lead to a sudden and sharp change in interest rate or monetary policy. In reality, guidance is highly conditional. Environmental changes can negate any earlier policy commitment. The Fed, for instance, was forced to clarify that its unemployment target was merely a non-binding indicator. The most damning problem, as Citibank Chief Economist Willem Buiter has argued, is that central bankers have “no skin in the game.” Central banks do not stand to make or lose money from their forward commitments. Central bankers’ tenure or remuneration is also not linked to outcomes.

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Complicated talks.

Ukraine And Russia Agree On $385 Gas Price For Winter (RT)

Moscow and Kiev have confirmed the price of Russian gas to Ukraine until the end of March at $385 per 1,000 cubic meters, according to both Ukrainian President Petro Poroshenko and Russian Foreign Minister Sergey Lavrov. “We have agreed on a price for the next 5 months, and Ukraine will be able to buy as much gas as it needs, and Gazprom is ready to be flexible on the terms,” Lavrov said Monday at a public lecture. Russia’s foreign minister dispelled rumors of two separate prices, one for winter and one for summer. “At the Europe-Asia summit in Milan, there was no talk of summer or winter gas prices, but just about the next 5 months,” the foreign minister said. Included in the $385 price is a $100 discount by Russia. Ukraine is still insisting on a further discount, asking for $325 for ‘summer prices’ after the 5-month winter period.

“We talked about how there should be two prices, like how the European spot market has two prices, a winter price when demand is high, and summer when demand is low. Our joint proposal with the EU was the following: $325 per thousand cubic meters in the summer and $385 per thousand cubic meters in the winter,“ Poroshenko said in an interview on Ukrainian television Saturday. President Poroshenko and Russian President Vladimir Putin reached a preliminary agreement in Milan on Friday for the winter period, but Russia won’t deliver any gas to its neighbor without prepayment.

Gas talks are expected to continue Tuesday in Berlin between the energy ministers of Russia, Ukraine, and the EU. On September 26, the three energy ministers agreed to provide 5 billion cubic meters to Ukraine on a “take-or-pay” contract, to help the country survive the winter months. The so-called winter plan is contingent on Ukraine starting to repay at least $3.1 billion worth of debt to Gazprom. Ukraine is still looking for funding to pay for the gas supplies as well as its $4.5 billion arrears to Russia’s state-owned gas company. Moscow reduced the debt from $5.5 billion to $4.5 billion, calculating in the discount of gas, Putin said on Friday.

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Very bright man, and talking to Russia about grand projects at a time of sanctions. On the other hand, accidents do happen.

“Anti-Petrodollar” CEO Of French Giant Total Dies In Moscow Plane Crash (ZH)

Three months ago, the CEO of Total, Christophe de Margerie, dared utter the phrase heard around the petrodollar world, “There is no reason to pay for oil in dollars”. Today, RT reports the dreadful news that he was killed in a business jet crash at Vnukovo Airport in Moscow after the aircraft hit a snow-plough on take-off. The airport issued a statement confirming “a criminal investigation has been opened into the violation of safety regulations,” adding that along with 3 crewmembers on the plane, the snow-plough driver was also killed.

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I don’t know about the assertion that “NATO has succumbed to the socialist phenomenon”. I think it’s blunt power politics all the way, a protection racket.

The Tragedy Of NATO: “Beware Foreign Entanglements” (Mises Canada)

Mises explained that socialism discourages production while it increases demand. Why produce only to be forced to share with others when one can demand to share in the production of others without regard to having previously produced something of value to those same others? Eventually all altruism vanishes in a sea of cynicism and nothing is produced for anyone to share. The result is a tragedy of the commons fed by moral hazard and socialism. Today we see the above destructive economic forces at work in NATO expansion. When the Soviet Union disintegrated in 1990, the reason for NATO’s existence vanished.

But rather than declare NATO to have been a success in deterring war in Europe, possibly disbanding the alliance and building a new Concert of Europe that would include Russia, NATO bureaucrats set about to expand the alliance to the east. Whereas the Concert of Europe after the Napoleonic Wars had quickly embraced France as an important member, NATO expanded to isolate Russia by absorbing its former satellite nations. The last NATO expansion prior to the disintegration of the Soviet Union had occurred in 1982 when Spain joined the alliance. At that point in time NATO was composed of sixteen nations. Starting in 1999 twelve countries have joined NATO, ten of them former members of the Warsaw Pact.

The other two, Slovenia and Croatia, were previously part of Yugoslavia, officially a non-aligned nation, but a communist dictatorship all the same. With the possible exception of Poland, none of these new members contribute much to the alliance’s military capability, meaning that the older members are shouldering their security burden. Naturally expanding NATO to the east has resulted in isolating and antagonizing Russia, who feels its security threatened. So, NATO has succumbed to the socialist phenomenon by adding new members who demand security without much of an obligation and to the moral hazard phenomenon by adding new members whose territories could be used to house American nuclear weapons, a situation that may yet provoke a major world crisis with Russia, which is precisely what NATO was formed to avoid.

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Interesting angles. 10 years since ‘Hobbit’ was found.

Hobbit Find Rewrites Human History (BBC)

The discovery of a tiny species of human 10 years ago has transformed theories of human evolution. The claim is made by Prof Richard Roberts who was among those to have published details of the “Hobbit”. The early human was thought to have lived as recently as 20,000 years ago and so walked the Earth at the same time as our species. The Hobbit’s discovery confirmed the view that the Earth was once populated by many species of human. It’s a far cry from the old view of a linear progression from knuckle-dragging ape-like creatures to upright modern people. Prof Roberts says the discovery of a completely different species of human on the Indonesian Island of Flores that lived until relatively recently, “put paid to this cosy status quo in one fell swoop”. “It surpassed anything else I’d been involved with because it just kept running. People kept on talking about it and it became part of popular culture and a sign of a new view of anthropology. The days of the old linear models of anthropology were gone.

Dr Henry Gee, the manuscript editor who decided to publish the paper in the journal Nature, said that it gradually dawned on him just how important the discovery was. “It is the biggest paper I have been involved with,” he told BBC News.The publication of the discovery on the Indonesian Island of Flores in October 2004, caused a sensation. The news that another species of human walked among us until relatively recently stunned the world. There were even questions about whether the Hobbit, named Homo floresiensis, still existed somewhere on the island. Perhaps there were other species of humans in other very remote parts of the world yet to be discovered?There are many puzzles that remain about the Hobbit. The female skeleton was 1m (3ft) high and was a very primitive form of human. Her brain was about the size of a chimpanzee, yet there is evidence that she used stone tools.

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